PRT Forest Regeneration Income Fund

PRT Forest Regeneration Income Fund

April 16, 2007 09:00 ET

Trustees of PRT Forest Regeneration Income Fund Release Details on the Current Debate Respecting the Strategic Direction of the Fund

VANCOUVER, BRITISH COLUMBIA--(CCNMatthews - April 16, 2007) - The Board of Trustees of PRT Forest Regeneration Income Fund (the "Fund") (TSX:PRT.UN) today released a letter which is being sent to all Unitholders of the Fund. The letter (see attached) provides background and details on the current process respecting the strategic direction of the Fund. PRT Management Inc. ("PMI"), the manager and administrator of the Fund and its operating subsidiary, together with C.A. Bancorp, a Toronto-based merchant bank, is proposing to shift the strategic direction of the Fund towards a rapid "growth-through-diversification strategy". Other Unitholders, focused on yield, would like to maintain the Fund's current emphasis on organic growth and targeted acquisitions within the forest seedling industry.

The Trustees, for their part, have not been prepared to endorse a change in strategy, in part because they believe that the existing management arrangements, which were designed to apply to the operation of the Fund's seedling business, do not provide an appropriate allocation of risks and rewards in the context of a new strategy of aggressive growth through diversification. The letter to Unitholders provides background and details on the issues, including details of the PMI/Bancorp proposal, and of the views of the Trustees.

PMI has asked the Trustees not to stand for re-election at the upcoming annual meeting of Unitholders and the Trustees have deferred the meeting until June 26, 2007 to provide time for a process of consultation with advisor's and Unitholders. Based on the responses and options which develop, the Trustees will take such further action as may be appropriate and in the best interests of Unitholders.

The Fund is an open ended, single purpose trust created to own all the common shares and subordinated notes of Pacific Regeneration Technologies Inc. PRT is the largest producer of container grown forest seedlings in North America, operating 15 nurseries in Canada and the USA. The Fund's units are listed for trading on the Toronto Stock Exchange under the symbol PRT.UN.

Forward-Looking Statements

Forward-looking statements in this press release and in the accompanying Unitholder letter are based on the opinions and estimates of the Trustees or of the other parties to which they are attributed at the date the statements are made, and are subject to a variety of risks and uncertainties and other factors that could cause actual events or results to differ materially from those projected in the forward-looking statements. These factors include the inherent risks involved in the forest seedling business and in a shift in the strategic focus of the Fund to a more aggressive growth-through-diversification strategy. Risks applicable to the Fund and its operations are disclosed in the MD&A portion of the annual reports filed by the Fund with the relevant securities regulators. The Fund undertakes no obligation to update forward-looking statements if circumstances or estimates or opinions should change.

V6C 2Z7
PHONE: 604.443.2687
April 16, 2007

Dear PRT Unitholder:

RE: Important Information About the Strategic Direction of Your Fund

PRT Forest Regeneration Income Fund is at a strategic cross-roads.

Your Fund has an enviable 10-year history of stable cash distributions, coupled with sustained and focused growth in the forest seedlings sector. Many investors favour staying this course while others, including some of the Fund's significant investors, are demanding that the Fund shift its strategic focus to a more aggressive growth by diversification strategy.

PRT Management Inc. ("PMI"), the manager of the Fund's operating subsidiary, Pacific Regeneration Technologies Inc. ("PRT"), together with C.A. Bancorp, a Toronto-based merchant bank, are proposing a shift in the strategic direction of the Fund, enabling it to grow in a diversified manner and at a more rapid pace. We, as your Trustees, have not been prepared to endorse this change in strategy and our disagreement over the future direction of the Fund has led, as announced on April 3, 2007, to PMI, backed by two significant investors, asking us not to stand for re-election at the 2007 Annual General Meeting of the Fund.

We have been actively considering the options available to the Fund and its Unitholders with our advisors over the past two weeks. There are critical issues, and the outcome of this process could significantly impact the future strategic direction and risk profile of the Fund, which in turn may affect PRT's profits and your distributions. It also raises some serious conflict of interest concerns. Your Board of Trustees believe that it is important to bring you up to date on this important matter.


In mid-2006, PMI advised the Trustees that they had received an offer from C.A. Bancorp to acquire a 50% interest in PMI with the objective of shifting the strategic direction of the Fund towards a rapid growth and diversification strategy. Consent of the Trustees, on behalf of the Fund's Unitholders, is necessary to proceed with this proposal.

The Trustees reviewed the proposal and concluded that, while it was clearly in the interests of the PMI shareholders, it was less so to Unitholders. Specifically, the proposed arrangement would increase the risk profile of the Fund from that of a conservative seedling business with a very high and fairly stable cash payout to a higher risk and perhaps less predictable collection of businesses.

Your Trustees felt that this proposed change in strategy was untenable, given the Fund's external management arrangements, and incentive fee structure(1). This incentive structure was put in place in the context of the Fund's business as described in the original Fund prospectus and, we believe, was designed to reward the past owners and current employees and management of the seedling business if, through their knowledge and expertise in the business, they were able to provide Unitholders with exceptional returns. However, it was clear to the Trustees that, as part of the diversification proposal, PMI was expecting to participate in incentive fees in the future if higher risk acquisitions resulted in some good payout years even if there were shortfalls and volatility in distributed cash in the interim as acquisitions in new businesses were consolidated and nurtured. The Trustees advised PMI that they could not accept the proposal without amending the incentive fee to cause PMI to accept some of the risks of diversification. This was not acceptable to PMI.

Some ten months later on March 26, 2007 PMI advised the Trustees that Bancorp, with PMI's encouragement, had discussed its growth by diversification proposal with two of the Fund's large investors who agreed to support their plan. We were also advised that Bancorp had acquired about five percent of the Fund's Units. PMI requested the three Trustees step down in favor of a new slate of trustees to be chosen by PMI and supportive of the Bancorp proposal.

The Trustees contacted the two investors who confirmed they were supportive of the proposal and that they together owned over 28% of the Units. Additional investors were contacted who were not so inclined, though they were anxious to receive more information.

The Trustees were advised by counsel that their fiduciary duties required that they ensure an informed and transparent process, fair to all Unitholders and that, accordingly, the 2007 Annual General Meeting should be postponed to provide time for the Trustees to seek advice, consider the issues and communicate with Unitholders.

The trustees met with PMI on March 30 and described the process which was about to unfold. It was suggested this would likely not be positive for PRT, its Unitholders, management or the Trustees. The Trustees suggested that the PMI agreement was the basis for the Bancorp proposal and that Unitholders must be given a reasonable opportunity to decide for themselves whether they wished to approve this proposal.

An attempt by the Trustees to find some middle ground was not successful.

We sent out a press releases on April 3, 2007 advising that the 2007 Annual General had been postponed to June 26 and on April 10, 2007 advising that changes had been enacted to the Fund's Declaration of Trust and to the charter of PRT in order to better ensure the ability of the Fund's Unitholders to maintain oversight over the management and direction of the Fund.

Details of the Diversification Proposal

The key elements of the PMI/Bancorp diversification proposal include the following:

- The Fund would replace its strategy of focused and disciplined growth in the forest seedlings sector with a policy of rapidly-paced growth and diversification in areas not directly related to the reforestation industry.

- Bancorp would acquire a 50% interest in PMI.

- Bancorp would identify and investigate new acquisition targets and would be responsible for negotiations, due diligence, legal issues, structure and pricing.

- Existing PRT management would remain responsible for the forest regeneration business. Bancorp, through PMI, would submit acquisition proposals to the PRT Directors for approval. Management with the appropriate skill sets would be hired, as required, to operate businesses beyond the expertise of the existing management team.

- New businesses which the Fund might pursue would include alternative energy, fiber and newsprint recycling, reclamation, controlled environment based agriculture and forestry industry services, including helicopter cutting and fire fighting. A pro forma income statement assumes four accretive non specific acquisitions over a two year period valued at approximately $170 million.

- The current Trustees would resign and be replaced with nominees more sympathetic to the proposed "growth-through-diversification" strategy.

In advocating this proposal, Bancorp and PMI have expressed their belief that, while the management of PRT had been successful growing the seedling business through acquisitions, including the acquisition of its largest Canadian competitor, there are few remaining acquisition opportunities in the Canadian forest seedling market; and no US acquisitions appear to be available on acceptable terms. They are also concerned about the health and continued viability of the forest industry. Accordingly they reason, it is important for PRT to expand its operations and capital base by diversification beyond its traditional areas of expertise into new industries.

The Views of Your Trustees

Your Trustees have resisted the diversification proposal, preferring instead to maintain the Fund's commitment to focus on organic growth and targeted acquisitions within the nursery related experience of the Fund's management team and which it believes will be accretive to pre-tax cash flow.

We have a number of concerns respecting the PMI/Bancorp rapid growth and diversification proposal, include the following:

- Such a strategy, while growing the size of the Fund, may result in lower cash distributions per unit at a time when a large portion of our Unitholders, focused on yield, would prefer that we strive to maintain our stable distributions and high payout ratio for at least the balance of the four year grandfathered 'tax-free' period under the new trust tax legislation.

- PMI management's collective experience is in the forest seedling and nursery business and that is what the Fund engaged them to manage. If the Unitholders wish to see their Fund diversify into other businesses, perhaps they would prefer specific opportunities be brought to them for approval rather than delegate diversification to PMI and Bancorp.

- The existing Management Agreement between PMI and PRT was put in place to govern the management of PRT's seedling nursery business by PMI and does not provide an appropriate allocation of risks and rewards in the context of a new strategy of aggressive growth through diversification. All costs and risk of new ventures are borne by PRT. PMI puts nothing at risk. The existing escalating incentive fee becomes effective when distributed cash from the Fund exceeds $1.10 per annum and accelerates to 50% of incremental distributable cash over $1.40 per annum.

- Because the mandate of the Fund since its inception has been to distribute virtually all its available cash, PRT has no cash reserves to maintain a steady distribution stream while acquisitions are integrated into PRT. At the present time, if things go wrong in the operations of a newly acquired seedling business, PRT can immediately send in its nursery experts to help fix it and this often happens. However, in unrelated businesses this is much more difficult and Bancorp is not bringing operating expertise to PMI.

- The Fund's governance structure relies upon the Fund's Unitholders being represented by three trustees who are independent of PMI and its shareholders. The nomination of a slate of trustees by PMI raises obvious concerns over conflicts of interest.

The Road Ahead

Our sense, as Trustees of your Fund, is that there are two distinct constituencies within the Fund's Unitholder base, each with its own investment objectives. Many Unitholders have purchased their Units with a view to ongoing participation in stable cash distributions generated through the Fund's participation in and expansion within the forest seedling business. Another group, including some of the Fund's largest investors, believes that the Fund's current strategy no longer accords with their growth objectives. The Fund is not large, and it is thinly traded; and the market does not afford these investors the opportunity to easily sell their Units. One alternative is to use their voting power to change the Fund's strategic direction.

There are arguments in favour of both positions. We continue to believe that there are attractive opportunities to operate and expand as a seedling company. The pine beetle infestation problem in British Columbia and Alberta should assure strong seedling demand in that market area over the next few years. Also, while the timing of acquisition opportunities in the seedling business is not easily predicted, we believe that PRT's success, diligence and reputation as a consolidator should help to insure PRT will get a look at most opportunities in our market area. In addition there are four remaining years of tax free status ahead for PRT under the recent Federal budget implementing the new trust tax.

We have been unwilling to embark on a new and risky strategy for the Fund without a restructuring of existing arrangements to ensure that the interests of PMI are aligned with the interests of the Fund's Unitholders. We have tried to resolve the above and other issues by negotiating with PMI for the termination of the management agreement before its term expires in 2017, but we have been unable to settle on mutually acceptable terms.

It appears that PMI has now secured the endorsement of its diversification strategy from the Fund's two largest Unitholders, which serves to buttress the request by PMI and Bancorp that at the 2007 Annual Meeting we be replaced by PMI nominees.

Your Trustees have no vested interest in remaining in office, and will certainly not take steps to entrench our position in the face of clear investor opposition. At the same time, however, we have no intention of resigning absent a clear indication from the Fund's Unitholders that there is consensus that the Fund should take a new strategic direction and assume the attendant risks.
Accordingly, we have delayed the Fund's Annual Meeting to June 26, 2007, started a process of consultation with advisors and have spoken with the Fund's principal Unitholders. We also had a productive meeting with representatives from Bancorp.

At this early stage in the process, it looks like Unitholders may be asked at that meeting to choose between the status quo or a new strategic direction by voting for either one of two slates of trustees. However, based upon the responses and options which develop, we will, with the help of our advisors, take appropriate action in the interest of Unitholders.

We will, of course, keep you informed of future developments. In the meantime, we welcome your comments and questions.


Colin A.C. Dobell, George C. Stevens, Allan D. Laird,
Trustee Trustee Trustee

By: "Colin A.C. Dobell"

Colin A.C. Dobell, Chairman

(1) By way of background, since its initial public offering in 1997 the Fund has had an external management structure. Management and administration of the Fund and PRT are provided by PMI at cost, with an accelerating incentive fee applicable in any year when Unitholder distributions exceed $1.10 per unit. Under the applicable agreements PMI ownership is restricted to the current and past employees and management of PRT. While PRT has had a history of stable distributions, no incentive fee has been earned by PMI in the first 10 years of the 20 year contract. As with the external management structures of other income trusts, conflicts of interest have developed, resulting in unproductive use of management and trustee time and Unitholder expense. The Trustees and PMI have attempted to negotiate the cancellation of these agreements without success.

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