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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 1-12147
DELTIC TIMBER CORPORATION
(Exact name of registrant as specified in its charter)
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Delaware 71-0795870
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification Number)
210 East Elm Street, P.O. Box 7200, El Dorado, Arkansas 71731- 7200
(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code: (870) 881-9400
Securities registered pursuant to Section 12(b) of the Act:
Name of each
Title of each class exchange on which registered
Common Stock, $.01 Par Value New York Stock Exchange, Inc.
Series A Participating Cumulative New York Stock Exchange, Inc.
Preferred Stock Purchase Rights
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes X No ____.
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the Common Stock held by non-affiliates of the
registrant, based on the average of the high and low prices of the Common Stock
on the New York Stock Exchange on February 29, 1999, was $164,201,717. For
purposes of this computation, all officers, directors, and 5% beneficial owners
of the registrant (as indicated in Item 12) are deemed to be affiliates. Such
determination should not be deemed an admission that such directors, officers,
or 5% beneficial owners are, in fact, affiliates of the registrant.
Number of shares of Common Stock, $.01 Par Value, outstanding at February 29,
2000, was 12,373,529.
Documents incorporated by reference:
The Registrant's definitive Proxy Statement relating to the Annual Meeting of
Stockholders on April 27, 2000.
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TABLE OF CONTENTS - 1999 FORM 10-K REPORT
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Page
Numbers
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PART I
Item 1. Business 3
Item 2. Properties 12
Item 3. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of Security Holders 13
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters 14
Item 6. Selected Financial Data 15
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 16
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 27
Item 8. Financial Statements and Supplementary Data 28
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 53
PART III
Item 10. Directors and Executive Officers of the Registrant 54
Item 11. Executive Compensation 54
Item 12. Security Ownership of Certain Beneficial Owners and Management 54
Item 13. Certain Relationships and Related Transactions 54
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 55
Signatures 57
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PART I
Item 1. Business
Introduction
Deltic Timber Corporation ("Deltic" or the "Company") is a natural
resources company engaged in the growing and harvesting of timber and the
manufacture and marketing of lumber. The Company owns approximately 442,000
acres, primarily in Arkansas and north Louisiana, including 395,000 acres of
timberland (the "timberlands"). Sawmill operations consist of two mills, one at
Ola in central Arkansas and another at Waldo in south Arkansas.
In addition to its timber and lumber operations, Deltic is engaged in
real estate development projects in central Arkansas and owns approximately
37,000 acres of farmland in northeast Louisiana. The Company also holds a 50
percent interest in Del-Tin Fiber L.L.C. ("Del-Tin Fiber"), a joint venture to
manufacture and market medium density fiberboard ("MDF").
The timberlands consist primarily of Southern Pine and include 100,000
acres of pine plantations. Estimated pine sawtimber inventory as of December 31,
1999, was 9,914,000 tons. Management considers the timberlands to be the
Company's most valuable asset and the harvest of stumpage to be its most
significant source of income. Deltic actively manages its timberlands in order
to increase productivity and maximize the long-term value of its timber assets.
The Company harvests timber from the timberlands in accordance with its harvest
plans and sells timber in the domestic market or converts timber to lumber in
its sawmills. In 1999, Deltic harvested 500,442 tons of pine sawtimber from its
timberlands.
The Company implemented a timberland acquisition program in late 1996.
This ongoing program will enable the Company to continue to increase harvest
levels, while expanding its timber inventory. The Company intends to focus its
acquisition program on timberland in the southern U.S. Unlike other
timber-producing areas of North America, most of the timberland in the southern
U.S. is privately held, making it potentially available for acquisition.
The Company's two sawmills employ modern technology in order to improve
efficiency, reduce labor costs, maximize utilization of the timber resource, and
maintain high quality standards of production. In addition, each mill is
strategically located near significant portions of the timberlands. The Ola Mill
is equipped for maximum utilization of smaller diameter logs, while the Waldo
Mill can process both smaller and larger diameter logs. The mills produce a
variety of products, including dimension lumber, boards, timbers, decking, and
secondary products such as finger-jointed studs. The lumber is sold primarily to
wholesalers and treaters in the South and Midwest and is used in residential
construction, roof trusses, laminated beams, and remanufactured items. Combined
annual capacity of the two mills at December 31, 1999, was 226 million board
feet ("MMBF"). The Company's total lumber production in 1999 was 186 MMBF.
The Company's real estate operations were started in 1985 to add value
to former timberland strategically located in the growth corridor of west Little
Rock, Arkansas. Since that time, the Company has been developing Chenal Valley,
a 4,800-acre upscale planned community, centered around a Robert Trent Jones,
Jr. designed golf course at Chenal Country Club. The property is being developed
in stages, and real estate sales to date have consisted primarily of residential
lots sold to builders or individuals and commercial tracts. In addition to
Chenal Valley, Deltic is developing Chenal Downs, a 400-acre equestrian
development located just outside of Chenal Valley, and Red Oak Ridge, an
800-acre development near Hot Springs, Arkansas.
The Company owns 37,000 acres of farmland in northeast Louisiana.
Approximately 26,000 acres of the total are farmed by Deltic, while the majority
of the remaining 11,000 acres is rented to third parties. Crops grown on
Company-farmed acreage in 1999 were soybeans and corn.
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A significant initiative, announced during the fourth quarter of 1999,
was Deltic's decision to pursue the exchange of its agricultural land in
northeast Louisiana for Southern Pine timberland in a tax-efficient manner. This
initiative, should it become a reality, is anticipated to provide the Company a
significant and unique opportunity to advance its strategy of growing its core
forest products business.
The Del-Tin Fiber plant is located near El Dorado, Arkansas.
Construction of the plant commenced in mid-1996 and initial production began in
April 1998. Construction cost of the facility was $104 million. The plant is
designed to have an annual capacity of 150 million square feet ("MMSF"), on a
3/4-inch basis, making it one of the largest plants of its type in the world.
MDF, which is used primarily in the furniture, flooring, and molding industries,
is manufactured from sawmill residuals such as chips, shavings, and sawdust,
held together by an adhesive bond.
Forest Products Industry
The demand for, and prices of, timber and manufactured wood products,
including lumber, are affected primarily by the cyclical supply and demand
factors of the forest products industry. Among these factors are general
economic conditions, interest rates, residential construction and remodeling
activity, the availability of raw materials, North American lumber production,
lumber imports and exports, and weather conditions. The major factors affecting
the industry in 1999 were strong domestic economic growth and construction
activity, including the highest level of housing starts since 1986. These
factors led to an increase in both lumber consumption and prices.
The supply of timber, and therefore lumber, is significantly affected
by the availability of timber from public lands, particularly in the Pacific
Northwest. In recent years, the U.S. government has dramatically reduced the
amount of timber offered for sale in response to environmental concerns. This
has resulted in increased demand for timber in the southern U.S., as well as
increased lumber imports from Canada.
The southern U.S., in which all of the Company's operations are
located, is a major timber and lumber producing region. There are an estimated
209 million acres of timberland in the region, of which approximately 91 million
acres contain softwood, predominately Southern Pine. Unlike other major
timber-producing areas in North America, most of this acreage is privately held.
The estimated breakdown of ownership of softwood timberland in the southern U.S.
is 89 percent private, seven percent national forest, and four percent other
public. Although there can be no assurance, management anticipates that the
southern U.S. timber resource will be subject to strong demand for the
foreseeable future and also believes that the South will have a strategic
advantage over other U.S. timber-producing regions due to regulatory,
geographic, and other factors.
Woodlands
The Company owns approximately 395,000 acres of timberland, primarily
in Arkansas and north Louisiana, stocked principally with Southern Pine.
Management considers the timberlands to be Deltic's most valuable asset and the
harvest of this stumpage to be the Company's most significant source of income.
The breakdown of the Company's timberland acreage at year-end 1999
consisted of the following:
Acres
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Pine forest.............................. 240,000
Pine plantation ......................... 100,000
Hardwood forest.......................... 24,000
Other.................................... 31,000
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Total.................................... 395,000
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The Company's timberlands are well diversified by age class. The
timberland classified as pine forests is managed on an all-aged basis and
contains mature timber that is ready to be harvested over the next several
years. The Company's 100,000 acres of pine plantations are generally less than
25 years old, with the majority ranging in age from 10 to 20 years. Because pine
timber does not reach sawtimber size until it is at least 20 to 25 years of age,
most of the plantations are not yet included in the Company's pine sawtimber
inventory.
Timber Inventory. The Company's estimated standing timber inventory is
calculated for each tract by utilizing growth formulas based on representative
sample tracts and tree counts for various diameter classifications. The
calculation of pine inventory is subject to periodic adjustments based on sample
cruises and actual volumes harvested. The hardwood inventory shown in the
following table is only an approximation, so the physical quantity of such
timber may vary significantly from this approximation. Estimated inventory of
standing timber as of December 31, 1999, consisted of the following:
Estimated
Volume
(Tons)
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Pine timber
Sawtimber.......................... 9,913,700
Pulpwood........................... 4,708,200
Hardwood timber
Sawtimber.......................... 1,011,027
Pulpwood........................... 1,235,696
The Company's pine sawtimber is either used in its sawmills or sold to
third parties. Products manufactured from this resource include dimension
lumber, boards, timbers, decking, and secondary products, used primarily in
residential construction. Deltic's hardwood sawtimber is sold to third parties
and is primarily used in the production of railroad ties, flooring, and pallets.
Pulpwood consists of logs with a diameter of less than nine inches. Both pine
and hardwood pulpwood are sold to third parties for use primarily in the
manufacture of paper.
Timber Growth. Timber growth rate is an important variable for forest
products companies since it ultimately determines how much timber can be
harvested. A higher growth rate permits larger annual harvests as replacement
timber regenerates. Growth rates vary depending on species, location, age, and
forestry management practices. The growth rate, net of mortality, for Deltic's
Southern Pine averages five to six percent of standing inventory per annum. The
Company considers a 30 to 35 year rotation optimal for most of the timberlands.
Timberland Management. Forestry practices vary by geographic region and
depend on factors such as soil productivity, weather, terrain, and timber
species, size, age, and stocking. The Company actively manages its timberlands
based on these factors and other relevant information to increase productivity
and maximize the long- term value of its timber assets. In general, the
Company's timberland management involves harvesting and thinning operations,
reforestation, cull timber release programs, and the introduction of genetically
improved seedlings.
Deltic has developed and operates its own seed orchard. Seeds from the
orchard are grown by third parties to produce genetically improved seedlings for
planting. These seedlings are developed through selective cross-pollination to
produce trees with preferred characteristics, including higher growth rates,
fewer limbs, straighter trunks, and greater resistance to disease. The seedlings
are planted in all-aged stands or a site is completely replanted in the case of
a regeneration harvest. During 1999, 5,000 acres were planted, primarily using
seedlings grown from seeds produced at the orchard facility. This level is
expected to increase significantly with approximately 9,000 acres scheduled to
be planted in 2000, as the Company continues to reforest recently acquired,
understocked tracts. The Company meets or exceeds, in all material respects, the
reforestation recommendations of the Arkansas Forestry Commission's Best
Management Practices.
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The Company actively utilizes commercial thinning practices. Thinning
operations consist of the selective removal of trees within a stand, usually a
plantation, and improve overall productivity by enhancing the growth of the
remaining trees while generating revenues. Deltic has increased its pine
pulpwood harvests over the past several years as its plantations have matured
and required thinning.
The Company's cull timber release program is designed to control
undesirable, competitive vegetation in its forests and increase pine growth
rates and reproduction. The program was expanded in 1999 to 19,800 acres from
14,800 acres in 1998.
Harvest Plans. Management views the timberlands as assets with
substantial inherent value apart from the sawmills and intends to manage the
timberlands on a basis that permits regeneration of the timberlands over time.
The Company intends to continue to manage the timberlands on a sustainable-yield
basis and has no plans to harvest timber at levels that exceed growth. In 1999,
the Company harvested 500,442 tons of pine sawtimber from its timberlands. Under
the current plan, Deltic intends to harvest 525,000 tons of pine sawtimber in
2000.
The Company's harvest plans are generally designed to project
multi-year harvest schedules. In addition, harvest plans are updated at least
annually and reviewed on a monthly basis to monitor performance and to make any
necessary modifications to the plans in response to changing forestry
conditions, market conditions, contractual obligations, regulatory limitations,
and other relevant factors.
Since harvest plans are based on projections of demand, price,
availability of timber from other sources, and other factors that may be outside
of the Company's control, actual harvesting levels may vary. Management believes
that the Company's harvest plans are sufficiently flexible to permit
modification in response to fluctuations in the markets for logs and lumber.
Access. Substantially all of the timberlands are accessible by a system
of low impact and low maintenance roads. Deltic generally uses third-party road
crews to conduct construction and maintenance of these roads, and the Company
regularly exchanges access easements and cooperates with other area forest
products companies and the U.S. Forest Service.
Wildlife Management. The Company has an active wildlife management
program. Deltic leased 386,000 acres and 369,000 acres for hunting purposes in
1999 and 1998, respectively. The Company's wildlife biologist has conducted
white-tailed deer management clinics throughout Arkansas. In addition, Deltic
cooperates with federal, state, and private agencies in various wildlife
studies.
Client-Land Management. In addition to managing its own timberlands,
Deltic also manages timberlands owned by others under management contracts with
one-year renewable terms. This program provides harvest planning, silvicultural
improvements, and maintenance work for approximately 70,500 acres.
Timberland Acquisitions. The Company implemented a timberland
acquisition program in late 1996. This ongoing program is designed to enable the
Company to continue to increase harvest levels, while expanding its timber
inventory. In addition, it will allow the Company to maintain or increase the
volume of logs supplied to its sawmills from its own timberlands, when
economically feasible.
The Company intends to continue to focus its acquisition program on
timberlands in the southern U.S. that range from fully-stocked to cutover
tracts. Unlike other timber-producing areas of North America, most of the
timberland in the southern U.S. is privately held, making it potentially
available for acquisition. There can be no assurance that timber properties
suitable for acquisition will be identified by the Company, or that once
identified, such properties will ultimately be acquired by the Company.
Deltic formed an acquisition team to implement its timberland
acquisition program. Lands considered for purchase are evaluated based on
location, site index, timber stocking, and growth potential. Approximately
65,000 acres of strategically located pine timberland have been added since the
inception of the program. Individual land purchases have ranged from two acres
to 16,300 acres.
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Mills
The Company's two sawmills are located at Ola in central Arkansas and
at Waldo in south Arkansas, near significant portions of the timberlands. The
mills employ modern technology in order to improve efficiency, reduce labor
costs, maximize utilization of the timber resource, and maintain high quality
standards of production. Logs processed into lumber are obtained from the
timberlands and from public and private landowners. The Company selects logs for
processing in its mills based on size, grade, and the prevailing market price.
The Ola Mill is equipped for maximum utilization of smaller diameter logs, while
the Waldo Mill can process both smaller and larger diameter logs. The mills
produce a variety of products, including dimension lumber, boards, timbers,
decking, and secondary products such as finger-jointed studs. The lumber is sold
primarily to wholesalers and treaters in the South and Midwest and is used in
residential construction, roof trusses, laminated beams, and remanufactured
items.
Combined annual capacity of the two mills at December 31, 1999, was 226
MMBF. The Company's total lumber production in 1999 was 186 MMBF and is expected
to increase to 194 MMBF in 2000. Deltic has invested significant capital in its
sawmills in recent years to increase production capacity, decrease costs, and
expand the product mix.
Ola Mill. Major capital projects completed at the Ola Mill over the
past several years include: the addition of a boiler system and steam dry kilns
to increase mill capacity and provide the capability to produce higher value
lumber; the construction of a small log processing system which extracts small
diameter logs from pulpwood, thus reducing log costs; replacement of the
existing planermill with a high-speed planermill and automated sorting system to
increase mill output; and the installation of an optimized edger system to
increase lumber recovery.
Waldo Mill. At the Waldo Mill, major capital projects completed over
the past several years include: the construction of a new high speed planermill
and automated sorting system that provide the finishing capacity necessary to
operate two shifts at the sawmill, the addition of finger-jointing and
remanufacturing facilities which add value to existing production, and the
installation of a log optimization system to improve lumber recovery.
Raw Materials. In 1999, the Company's two sawmills processed 918,203
tons of logs, obtained from either the timberlands or purchased from public and
private landowners. The timberlands supplied 31 percent, or 283,851 tons, of the
mills' raw material requirements, while the mills processed 57 percent of the
500,442 tons of pine sawtimber harvested from the timberlands.
Various factors, including environmental and endangered species
concerns, have limited, and will likely continue to limit, the amount of timber
offered for sale by U.S. government agencies. Because of this reduced
availability of federal timber for harvesting, the Company believes that its
supply of timber from the timberlands is a significant competitive advantage.
Deltic has historically supplied a significant portion of the timber processed
in the sawmills from its timberlands.
In order to operate its sawmills economically, the Company relies on
purchases of timber from third parties to supplement its own timber harvests
from the timberlands. The Company has an active timber procurement department
for each of its sawmills. As of December 31, 1999, the Company had under
contract 319,558 tons of timber on land owned by other parties, including the
U.S. Forest Service, which is expected to be harvested over the next four years.
During 1999, the Company harvested third-party stumpage and purchased logs from
third parties totaling 620,718 tons. Of this volume, purchases from the U.S.
Forest Service during this period represented 19 percent. The balance of such
volume was acquired from private lands.
As a result of the reduced availability of federal timber, demand for
privately owned timber has increased, along with prices; and the Company has
increased and foresees further increases in its harvesting and purchasing
activities from private timberlands. Due to this increased demand and higher
timber prices, private timber sources have been prompted to sell their timber
commercially. As a result, Deltic's sources of private timber are many and
diverse. The key factors in a landowner's determination of whether to sell
timber to the
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Company are price, the Company's relationships with logging contractors, and the
ability of the Company to demonstrate the quality of its logging practices to
landowners. As a result, a landowner will be more likely to sell timber to a
forest products company whose own land has been responsibly managed and
harvested. There is a substantial amount of other private timber acreage in
proximity to each of Deltic's sawmills.
Residual Wood Products. The Company pursues waste minimization
practices at both of its sawmills. Wood chips are usually sold to paper mills or
Del-Tin Fiber, and bark is frequently sold for use as fuel. Bark, sawdust,
shavings, and wood chips that cannot be sold are used as "hog fuel" to fire the
boilers that heat the drying kilns. In the future, the Company expects to
continue to sell a significant portion of its Waldo Mill's residual wood chip
production to Del-Tin Fiber pursuant to a fiber supply agreement.
Transportation. Each mill facility has the capability to ship its
lumber by truck or rail.
Cyclical Market. While the cyclicality of the lumber market may
occasionally require the interruption of operations at one or both of the
Company's sawmills, suspension of milling activities is unusual. Management is
not currently anticipating any interruption of operations at either of Deltic's
sawmills, but no assurance can be given that market conditions or other factors
will not render such an action economically advisable in the future.
Real Estate
The Company's real estate operations were started in 1985 to add value
to former timberland strategically located in the growth corridor of west Little
Rock, Arkansas. Since that time the Company has been developing Chenal Valley, a
4,800-acre upscale planned community, centered around a Robert Trent Jones, Jr.
designed golf course. The golf course was completed in 1990. The property has
been developed in stages, and real estate sales to date have consisted primarily
of residential lots sold to builders or individuals and commercial tracts.
Residential Development. Residential sales in Chenal Valley began in
1987. To date, 1,255 lots have been developed in 15 neighborhoods and 1,078 lots
have been sold, with about 950 residences constructed or under construction.
When fully developed, Chenal Valley will include approximately 4,700 homesites.
The Company has developed lots in a wide variety of market segments. Lot size
has ranged from 0.2 acre to 1 acre and lot price has ranged from $25,000 per lot
to over $150,000 per lot.
Commercial Development. Commercial development began in 1996 with the
construction of a Company-owned, 50,000-square-foot office building, which is
currently fully leased. Commercial activity consisted of the sale of 26 acres
for multi-family development in 1997 and eight acres in 1998. In 1999, sales
increased to 74 acres, including a 72-acre site which will be developed as a
retirement village by the Arkansas Teacher Retirement System. When fully
developed, Chenal Valley will include 625 acres of commercial development.
The completion of construction of Rahling Road, a major connector
street, in 1998 provides greater access to Chenal Valley's commercial acreage.
Located at the center of this commercial property is a Company-owned
35,000-square-foot retail center. The retail center was completed in early 2000
and offers retail space for lease.
Infrastructure. Infrastructure and other improvements to support the
development and sale of residential and commercial property are funded directly
by the Company and/or through real property improvement districts. Such
properties are developed only when sufficient demand exists and substantially
all infrastructure is completed. Future infrastructure investments are necessary
only for the development and sale of additional property.
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Chenal Country Club. In connection with its Chenal Valley development,
the Company developed Chenal Country Club, consisting of the above-described
golf course, a clubhouse, and related facilities for use by club members. The
club membership originally agreed to purchase Chenal Country Club with payments
to be made on specified terms through 1999. During 1997, the agreement was
restructured in order to return ownership of Chenal Country Club to the Company
with the club members making ongoing membership fee payments. In connection with
the restructuring, Deltic agreed to undertake substantial remodeling and
expansion of the clubhouse, which was completed during 1999. (For additional
information, see Note 4 to the consolidated financial statements in Item 8,
"Financial Statements and Supplementary Data", of Part II of this report.)
Annexation. After ten years of growth, Chenal Valley remains the
premier upscale residential and commercial development in the Little Rock real
estate market. The Little Rock City Board of Directors voted in November 1999 to
approve Deltic's request for the annexation of almost 1,200 acres located west
of the existing Chenal Valley neighborhoods. This annexation, which represents
the fourth and final phase of Deltic's long-term development plan in west Little
Rock, includes land for additional residential neighborhoods and a second golf
course at Chenal Country Club. Also included is a 100-acre tract owned by
Wildwood Park for the Performing Arts and a 14-acre school site to be donated by
Deltic to either Little Rock or Pulaski County.
Future Development. A number of factors have added significant value to
the undeveloped portion of Chenal Valley. Such factors include: the overall
success of Chenal Valley as a residential development and its image as one of
the premier developments in central Arkansas, the continued westward growth of
Little Rock, the Company's investment in infrastructure in the area, and the
established residential base which is now large enough to support commercial
development. Management expects the undeveloped portion of Chenal Valley to
provide growth and development opportunities in the future.
Undeveloped Acreage. The success of the Chenal Valley development has
also increased the value of Deltic-owned lands in the areas near Chenal Valley.
Sales of these undeveloped acres amounted to 213 acres in 1999 and generated
sales revenues of $2.2 million, compared to 96 acres for $.7 million in 1998.
Other Developments. In addition to Chenal Valley, Deltic is developing
Chenal Downs, located just outside of Chenal Valley, and Red Oak Ridge, near Hot
Springs, Arkansas. Chenal Downs is a 400-acre equestrian development with
controlled access, featuring secluded, five-acre lots. The first phase of the
development was opened in December 1997, with 29 of the 44 available lots sold
by the end of 1999. Red Oak Ridge, Deltic's first development outside the Little
Rock area, is an 800-acre upscale community designed for residential, resort, or
retirement living. The first two neighborhoods in this development, offering a
choice of either estate-sized homesites, with many overlooking one of two lakes,
or garden-home lots, were offered for sale in late 1998. Following the
completion of the development's infrastructure and its first homes late in 1999,
Red Oak Ridge is expected to contribute significantly to residential sales
activity in 2000.
Agriculture
Deltic owns 37,000 acres of farmland in northeast Louisiana.
Approximately 26,000 acres of the total are farmed by Deltic, while the majority
of the remaining 11,000 acres are rented to third parties. Crops grown on
Company-farmed acreage in 1999, and planned for 2000, were soybeans and corn.
The 7,200 acres of corn planted in 1999 experienced favorable weather
conditions during the critical periods of pollination and ear filling, with no
extended periods of heat and moisture stress. These favorable weather conditions
led to a record yield of 130 bushels per acre. However, due to 25-year lows in
corn prices, the majority of the 1999 harvest was not sold and was retained in
storage at year-end in Company-owned bins or commercial elevators, to be sold as
commodity prices improve.
Deltic planted 25,600 acres of herbicide-resistant soybeans in 1999.
The utilization of these soybean varieties allowed Deltic to reduce weed control
costs by 41 percent in 1999 when compared to the previous five-year average. As
a result of 27-year lows in soybean prices, over 70 percent of the 1999 harvest
was held at year-end in storage at commercial elevators in anticipation of
higher commodity prices.
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A significant initiative, announced during the fourth quarter of 1999,
was Deltic's decision to pursue the exchange of its agricultural land in
northeast Louisiana for Southern Pine timberland in a tax-efficient manner. This
initiative, should it become a reality, is anticipated to provide the Company a
significant and unique opportunity to advance its strategy of growing its core
forest products business.
Del Tin Fiber
Deltic owns 50 percent of the membership interest of Del-Tin Fiber, a
joint venture to manufacture and market MDF. The Del-Tin Fiber plant is located
near El Dorado, Arkansas. Construction of the plant commenced in mid-1996 and
initial production began in April 1998. Construction cost of the facility was
$104 million. The plant is designed to have an annual capacity of 150 MMSF, on a
3/4-inch basis, making it one of the largest plants of its type in the world.
Medium Density Fiberboard. MDF, which is used primarily in the
furniture, flooring, and molding industries, is manufactured from sawmill
residuals such as chips, shavings, and sawdust, held together by an adhesive
bond. Although the technology has existed for decades, recent improvements in
the manufacture of MDF have increased both the quality and consistency of the
product. MDF, with its "real wood" appearance and the ability to be finely
milled and accept a variety of finishes, competes primarily with lumber.
Production. The plant produced 98 MMSF of MDF in 1999. Both typical
start-up difficulties and operational problems with the plant's press and heat
energy system limited production to levels significantly below capacity. The
problems with the press were corrected in mid-1999; however, efforts to
permanently solve the problems with the heat energy system are ongoing.
Raw Materials. The Del-Tin plant adds value to Deltic's operations by
providing an additional outlet for wood chip production from the Waldo Mill.
Pursuant to a fiber supply agreement, the Company has agreed to sell, and
Del-Tin Fiber to buy, substantially all residual wood chips from the Waldo Mill.
In addition, Del-Tin Fiber has an option to purchase residual wood chips from
the Ola Mill and pulpwood chips, shavings, and sawdust from the Waldo Mill.
During 1999, Deltic sold approximately $4,343,000 of these lumber manufacturing
by-products to Del-Tin Fiber.
Products and Competition
The Company's principal forest products are timber; lumber products,
primarily finished lumber; residual wood products; and real estate.
Timber. Timber harvested from the timberlands is utilized by the
Company's sawmills or sold to third parties. The Company's timber sales to third
parties accounted for approximately 14 percent, 16 percent, and ten percent of
consolidated net sales in 1997, 1998, and 1999, respectively.
The Company competes in the domestic timber market with numerous
private industrial and non-industrial land and timber owners. Competitive
factors with respect to the domestic timber market generally include price,
species and grade, proximity to wood consuming facilities, and accessibility.
Lumber Products. The Company's sawmills produce a wide variety of
products, including dimension lumber, boards, timbers, decking, and secondary
products such as finger-jointed studs. Lumber is sold primarily to wholesalers
and treaters in the South and Midwest and is used in residential construction,
roof trusses, laminated beams, and remanufactured items. During 1997, 1998, and
1999, lumber sales as a percentage of consolidated net sales were approximately
57 percent, 52 percent, and 59 percent, respectively.
10
<PAGE>
The forest products market is highly competitive with respect to price
and quality of products. In particular, competition in the commodity-grade
lumber market in which the Company competes is primarily based on price. Deltic
competes with other publicly held forest products companies operating in
Arkansas, many of which have significantly greater financial resources than the
Company, as well as privately held lumber producers. In addition, Deltic's
management expects the Company's products to experience additional increased
competition from engineered wood products and other substitute products. Due to
the geographic location of Deltic's timberlands and its high-quality timber, in
addition to the Company's active timber management program, strategically
located and efficient sawmill operations, and highly motivated workforce; Deltic
has been able to compete effectively.
Residual Wood Products. The Company's sawmills produce wood chips,
shavings, sawdust, and bark as by-products of the conversion process. During
1997, 1998, and 1999, sales of these residual products accounted for eight
percent, nine percent, and nine percent, respectively, of Deltic's consolidated
net sales. Wood chips are the primary source of residual sales and are typically
sold to Del-Tin Fiber or to paper mills. In 1999, Deltic's sawmills produced
331,214 tons of wood chips. In the future, the Company expects to continue to
sell a significant portion of its wood chip production to Del-Tin Fiber for use
in the production of MDF.
Real Estate. The Company develops and sells residential lots and
commercial sites. Deltic generally provides the supporting infrastructure.
Residential lots are sold to homebuilders and individuals, while commercial
sites are sold to developers and businesses. The Company also sells undeveloped
acreage. During 1997, 1998, and 1999, the sales of residential lots, commercial
sites, and undeveloped acreage as a percentage of consolidated net sales were
eight percent, 11 percent, and 14 percent, respectively. The sale of commercial
property can have a significant impact on the Company's sales, but is
unpredictable and irregular.
Seasonality
The Company's operating segments are subject to variances in financial
results due to several seasonal factors. The majority of timber sales are
typically generated in the first half of the year due primarily to weather
conditions and historically stronger timber prices. Increased housing starts
during the spring usually push lumber prices up and, in turn, can result in
higher timber prices. Forestry operations generally incur expenses related to
silvicultural treatments which are applied during the fall season to achieve
maximum effectiveness. Farming operations generally do not generate significant
sales and operating income until crops are harvested and sold in the second half
of the year.
Business Segment Data
Information concerning net sales, operating income, and identifiable
assets attributable to each of the Company's business segments is set forth in
Item 7, "Management's Discussion and Analysis"; and Note 20 to the consolidated
financial statements in Item 8, "Financial Statements and Supplementary Data",
of Part II of this report.
Decline in Availability of Federal Timber
Various factors, including environmental and endangered species
concerns, have limited, and will likely continue to limit, the amount of timber
offered for sale by certain U.S. government agencies, which historically have
been major suppliers of timber to the U.S. forest products industry. During
1999, the Company acquired approximately 32 percent of its timber supply for its
Ola Mill from federal sources, primarily the Ouachita and Ozark National
Forests. Any future decline in the availability of timber from federally owned
lands will require that the Company, in order to supply the Ola Mill, rely more
heavily on harvests from the Company's timberlands, including harvests from
timberlands acquired in the future to the extent that suitable opportunities
arise, and on the acquisition of timber from other sources, such as private
timber owners. The Company's Waldo Mill does not currently process any timber
acquired from federal sources.
11
<PAGE>
Environmental Matters
The Company is subject to extensive and changing federal, state, and
local environmental laws and regulations relating to the protection of human
health and the environment, including laws relating to air and water emissions,
the use of pesticides and herbicides on the farm and timberlands, regulation of
"wetlands", and the protection of endangered species. Environmental legislation
and regulations, and the interpretation and enforcement thereof, are expected to
become increasingly stringent. The Company has made, and will continue to make,
expenditures to comply with such requirements in the ordinary course of its
operations. Historically, these expenditures have not been material and the
Company expects that this will continue to be the case. Liability under certain
environmental regulations may be imposed without regard to fault or the legality
of the original actions, and may be joint and several with other responsible
parties. As a result, in addition to ongoing compliance costs, the Company may
be subject to liability for activities undertaken on its properties prior to its
ownership or operation and by third parties, including tenants. The Company
currently leases the rights to drill for oil and gas on some of its lands to
third parties. Pursuant to these leases, the lessee indemnifies the Company from
environmental liability relating to the lessee's operations. Based on its
present knowledge, including the fact that the Company is not currently aware of
any facts that indicate that the Company will be required to incur any material
costs relating to environmental matters, and currently applicable laws and
regulations, the Company believes that environmental matters are not likely to
have a material adverse effect on the Company's financial condition, results of
operations, or liquidity.
In addition, the federal "Endangered Species Act" protects species
threatened with possible extinction and restricts timber harvesting activities
on private and federal lands. Certain of the Company's timberlands are subject
to such restrictions due to the presence on the lands of the red cockaded
woodpecker, a species protected under the Act. There can be no assurance that
the presence of this species or the discovery of other protected species will
not subject the Company to future harvesting restrictions. However, based on the
Company's knowledge of its timberlands, the Company does not believe that its
ability to harvest its timberlands will be materially adversely effected by the
protection of endangered species.
Employees
As of February 29, 2000, the Company had 519 employees.
Item 2. Properties
The Company's properties, primarily located in Arkansas and north
Louisiana, consist principally of fee timber and timberlands, purchased stumpage
inventory, two sawmills, land held for residential and commercial development
and sale, and farmland. As of December 31, 1999, the Company's gross investment
in timber and timberlands; gross property, plant, and equipment; and investment
in real estate held for development and sale consisted of the following:
(Thousands of dollars)
Timberlands $ 62,287
Fee timber and logging facilities 127,493
Purchased stumpage inventory 10,597
Real estate held for development and sale 35,210
Land and land improvements 8,486
Buildings and structures 4,946
Machinery and equipment 71,234
--------
$320,253
========
12
<PAGE>
"Timberlands" consist of the historical cost of land on which fee
timber is grown and related land acquisitions stated at acquisition cost. "Fee
timber" consists of the historical cost of company standing timber inventory,
including capitalized reforestation costs, and related timber acquisitions
stated at acquisition cost. "Logging facilities" consist primarily of the costs
of roads constructed and other land improvements. "Purchased stumpage inventory"
consists of the purchase price paid for unharvested third party timber. "Real
estate held for development and sale" consist primarily of the unamortized
costs, including amenities, incurred to develop the real estate for sale, as
well as a commercial office building and a retail service center held for sale.
"Land and land improvements" consist primarily of the farmland. "Buildings and
structures" and "Machinery and equipment" primarily consist of the sawmill
buildings and equipment and farming structures and equipment.
The Company owns all of the properties discussed above. Other than
approximately $68 thousand of timber notes payable for certain investments in
timber and $.7 million of owner-financed acquisitions of real estate acreage and
timberland, the Company's properties are not subject to mortgages or other forms
of debt financing. (For further information on the location and type of the
Company's properties, see the descriptions of the Company's operations in Item
1.)
Item 3. Legal Proceedings
From time to time, the Company is involved in litigation incidental to
its business. Currently, there are no material legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Executive Officers of the Registrant
The age (at January 1, 2000), present corporate office, and length of
service in office of each of the Company's executive officers and persons chosen
to become officers are reported in the following listing. Executive officers are
elected annually but may be removed from office at any time by the Board of
Directors.
Robert C. Nolan - Age 58; Chairman of the Board effective December 17,
1996. For the past 28 years, Mr. Nolan has been Managing Partner of Munoco
Company, an Arkansas partnership principally engaged in the exploration for and
production of oil and gas. In addition, Mr. Nolan has over 27 years experience
in timberland management.
Ron L. Pearce - Age 58; President and Chief Executive Officer and a
director of the Company effective December 17, 1996. From June 1993 to December
1996, Mr. Pearce was President of Deltic Farm & Timber Co., Inc. ("Deltic Farm &
Timber"), the predecessor corporation of the Company. Prior to such time, Mr.
Pearce was Manager of Operations and Planning for Deltic Farm & Timber, a
position he held beginning in February, 1991.
Emily R. Evers - Age 49; Controller from 1989 for the Company and its
predecessor.
W. Bayless Rowe - Age 47; General Counsel and Secretary effective
January 1, 1997. From 1988 to December 1996, Mr. Rowe was Secretary and General
Attorney of Murphy Oil Corporation ("Murphy Oil").
Clefton D. Vaughan - Age 58; Vice President and Treasurer effective
January 1, 1997. From October 1994 to December 1996, Mr. Vaughan was Vice
President of Murphy Oil, a position he also held from 1989 through October 1992.
From October 1992 to October 1994, Mr. Vaughan was Vice President of Murphy
Exploration & Production Company.
13
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Common Stock of Deltic Timber Corporation is traded on the New York Stock
Exchange under the symbol DEL. The following table sets forth the high, low, and
ending prices, along with the quarterly dividends declared, for each of the
quarters indicated:
<TABLE>
<CAPTION>
Sales Prices/1/ Dividend per
-----------------------------------------
High Low Close/2/ Common Share
---------- -------- ---------- ------------
<S> <C> <C> <C> <C>
1999
First Quarter $ 25-5/8 21-3/16 23-3/4 .0625
Second Quarter $ 28-1/2 22-13/16 26-15/16 .0625
Third Quarter $ 26-13/16 22-3/8 22-3/4 .0625
Fourth Quarter $ 27-1/16 19-7/8 21-7/8 .0625
1998
First Quarter $ 30-1/16 26-1/4 29-5/16 .0625
Second Quarter $ 30-1/16 25 25-1/16 .0625
Third Quarter $ 25 18 18 .0625
Fourth Quarter $ 24-15/16 18 20-3/8 .0625
</TABLE>
/1/ Daily closing price.
/2/ At period end.
Common stock dividends were declared for each quarter during 1999 and
1998. As of February 29, 2000, there were approximately 2,240 stockholders of
record of Deltic's Common Stock.
14
<PAGE>
Item 6. Selected Financial Data
The following table presents certain selected consolidated financial
data for each of the years in the five-year period ended December 31, 1999:
<TABLE>
<CAPTION>
(Thousands of dollars, except per share amounts) 1999 1998 1997 1996 1995
---------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Results of Operations for the Year
Net sales........................................... $ 124,212 106,957 104,208 86,498 80,662
Operating income.................................... $ 28,081 18,278 25,609 17,940 13,343
Income before income taxes.......................... $ 17,050 13,777 27,252 21,933 15,894
Net income.......................................... $ 10,920 8,474 16,574 13,161 10,016
Earnings per Common share*
Basic........................................... $ .69 .48 1.29 1.03 N/A
Assuming dilution............................... $ .69 .48 1.29 1.03 N/A
Cash dividends declared per Common share............ $ .25 .25 .25 N/A N/A
Net cash provided/(required) by
Operating activities............................ $ 32,608 26,987 23,917 21,731 16,865
Investing activities............................ $ (27,949) (85,517) (37,124) (4,581) (16,134)
Financing activities............................ $ (8,037) 35,645 26,090 (419) (1,644)
Percentage return on
Average stockholders' equity.................... 5.8 4.7 9.6 7.8 6.1
Average borrowed and invested capital........... 6.1 4.3 9.5 7.9 6.2
Average total assets............................ 3.9 3.5 8.7 7.2 5.7
Capital Expenditures for the Year
Woodlands....................................... $ 8,541 59,839 16,380 2,754 563
Mills........................................... 7,949 7,918 11,506 2,927 2,149
Real Estate..................................... 11,475 11,531 6,378 6,669 4,638
Agriculture..................................... 527 721 1,000 272 245
Corporate....................................... 124 524 574 1,512 1,538
-----------------------------------------------------------
$ 28,616 80,533 35,838 14,134 9,133
===========================================================
Financial Condition at Year-End
Working capital................................. $ 20,691 16,539 37,971 25,758 6,822
Current ratio................................... 5.3 to 1 3.5 to 1 5.9 to 1 5.3 to 1 1.9 to 1
Total assets.................................... $ 277,898 272,544 225,375 180,078 185,247
Long-term debt ................................. $ 55,570 45,198 1,093 2,685 2,817
Redeemable preferred stock ..................... $ 30,000 30,000 30,000 - -
Stockholders' equity............................ $ 178,408 183,134 179,996 166,708 170,289
Long-term debt to stockholders' equity ratio.... .311 to 1 247 to 1 .006 to 1 .016 to 1 .017 to 1
</TABLE>
* 1996 amounts are presented on a pro forma basis. The distribution of the
Company's Common Stock did not occur until December 31, 1996.
15
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Overview
Deltic Timber Corporation ("Deltic" or the "Company") is a natural
resources company engaged primarily in the growing and harvesting of timber and
the manufacture and marketing of lumber. The Company owns approximately 395,000
acres of timberland, primarily in Arkansas and north Louisiana. The Company's
sawmill operations are located at Ola in central Arkansas (the "Ola Mill") and
at Waldo in south Arkansas (the "Waldo Mill"). In addition to its timber and
lumber operations, the Company is engaged in real estate development in central
Arkansas and owns approximately 37,000 acres of farmland in northeast Louisiana.
The Company also holds a 50 percent interest in Del-Tin Fiber L.L.C. ("Del-Tin
Fiber"), a joint venture to manufacture and market medium density fiberboard,
which began production in April 1998.
On November 11, 1996, the Board of Directors of Murphy Oil Corporation
("Murphy Oil") declared a dividend payable to holders of record of Murphy Oil
common stock at the close of business on December 2, 1996 (the "Record Date"),
of one share of Deltic common stock for every 3.5 shares of Murphy Oil common
stock owned of record on the Record Date. As a result, 100 percent of the
outstanding shares of Company common stock was distributed to Murphy Oil
shareholders on December 31, 1996 (the "Distribution Date"). Prior to the
Distribution Date, the Company was operated as a subsidiary of Murphy Oil.
The Company's results of operations are affected primarily by the
cyclical supply and demand factors of the forest products industry and their
impact on timber and lumber prices. Among these factors are general economic
conditions, interest rates, residential construction and remodeling activity,
the availability of raw materials, North American lumber production, and weather
conditions. The major factors affecting the Company's forest products segments
in 1999 were strong domestic economic growth and construction activity,
including the highest level of housing starts since 1986. These factors led to
an increase in both lumber consumption and prices. Higher lumber prices,
combined with lower timber prices, resulted in improved financial performance by
Deltic's Mills segment. While timber prices have declined from the high levels
of early 1998, prices remain at profitable levels.
Results of Operations
For 1999, Deltic's consolidated net income was $10.9 million, $.69 a
share, an increase of 29 percent when compared to $8.5 million, $.48 a share in
1998. The increase was due primarily to higher operating income of Deltic's
Mills and Real Estate segments. The Company earned $16.6 million, $1.29 a share,
in 1997.
Deltic's net sales and results of operations for the three years ended
December 31, 1999, are presented by segment in the following tables. A review of
the information presented follows the tables.
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------
(Millions of dollars) 1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net sales
Woodlands $ 28.4 26.6 22.6
Mills 83.5 65.8 67.7
Real Estate 21.6 15.9 11.6
Agriculture 2.6 6.5 9.5
Eliminations (11.9) (7.8) (7.2)
------- ----- -----
Net sales $ 124.2 107.0 104.2
======= ===== =====
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------
(Millions of dollars) 1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Operating income and net income
Woodlands $ 18.9 20.5 18.0
Mills 6.5 (2.8) 7.4
Real Estate 8.4 5.0 3.2
Agriculture .3 .8 2.8
Corporate (5.8) (5.0) (5.2)
Eliminations (.2) (.2) (.6)
------ ------ ------
Operating income 28.1 18.3 25.6
Equity in loss of Del-Tin Fiber (8.9) (4.6) -
Interest income .2 1.1 .7
Interest and other debt expense (4.1) (1.4) (.4)
Other income/(expense) 1.7 .4 1.4
Income tax expense (6.1) (5.3) (10.7)
------ ------ ------
Net income $ 10.9 8.5 16.6
====== ====== ======
</TABLE>
Operating income increased $9.8 million during 1999 to $28.1 million.
The Woodlands segment decreased $1.6 million as the result of a ten percent
decrease in the average sales price for pine sawtimber and an increase in the
cost of fee timber harvested. The Mills segment's operating results increased
$9.3 million due primarily to a $40 per thousand board feet ("MBF") increase in
the average sales price of lumber, a 17 percent increase in sales volume, and a
four percent reduction in the production cost per MBF sold. The Company's Real
Estate operations increased $3.4 million because of significantly higher
commercial development and undeveloped acreage sales. The Agriculture segment's
earnings decreased $.5 million and were impacted by depressed commodity prices.
During 1998, operating income decreased $7.3 million to $18.3 million.
The Woodlands segment increased $2.5 million due primarily to a 21 percent
increase in pine sawtimber harvest levels, partially offset by a four percent
decrease in the average price for pine sawtimber sold. The Mills segment's
operating results decreased $10.2 million as the result of a $53 per MBF drop in
average lumber sales price and a five percent higher cost of production per MBF
sold, which caused a negative margin per MBF. Real Estate operations increased
$1.8 million and benefited from a 55 percent increase in the number of
residential lots sold. The Agriculture segment decreased $2 million as the
result of reduced sales prices for soybeans and corn in 1998, combined with 1997
benefiting from the timing of sales of soybeans grown during 1996.
Woodlands
Deltic's Woodlands operations generated net sales of $28.4 million in
1999, $26.6 million in 1998, and $22.6 million in 1997. Operating income for
this segment was $18.9 million in 1999, $20.5 million in 1998, and $18 million
in 1997.
Selected financial and statistical data for the Woodlands segment is
shown in the following table.
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net sales (millions of dollars)
Pine sawtimber $ 23.2 22.1 18.9
Pine pulpwood $ 1.6 1.4 .5
Hardwood sawtimber $ 1.3 1.1 1.4
Hardwood pulpwood $ .8 .6 .4
Sales volume (thousands of tons)
Pine sawtimber 500 432 356
Pine pulpwood 286 201 77
Hardwood sawtimber 34 24 22
Hardwood pulpwood 165 106 63
</TABLE>
17
<PAGE>
1999 1998 1997
---- ---- ----
Sales price (per ton)
Pine sawtimber $ 46 51 53
Pine pulpwood 6 7 7
Hardwood sawtimber 40 7 64
Hardwood pulpwood 5 5 7
Net sales were $28.4 million in 1999, an increase of $1.8 million seven
percent, when compared to 1998. Sales of pine sawtimber increased $1.1 million
over 1998, which reflects the impact of a $3.2 million increase from higher
sales volume, partially offset by a $2.1 million decrease attributable lower
average sales price. Pine sawtimber harvest level increased 16 percent 1999 to
500,442 tons which compares to 431,556 tons in 1998. The Company's acquisition
program has added approximately 65,000 acres of timberland since its inception
in late 1996 which, along with biological growth of the Company's existing
timber, has facilitated the increase in harvest levels. Average sales price for
Deltic's pine sawtimber was $46 per ton in 1999 versus $51 per ton in 1998, a
ten percent decline. The decrease was due primarily to the prior year benefiting
from wet weather conditions in the first quarter of 1998, which decreased supply
and increased prices for pine sawtimber during that period. Pine pulpwood and
hardwood sales increased $.6 million in 1999 due to increased harvest levels,
but at lower sales prices. Other net sales for this segment increased slightly.
During 1998, net sales increased $4 million, 18 percent, to $26.6
million. Pine sawtimber sales increased $3.2 million in 1998 which reflects the
impact of a $3.8 million increase attributable to higher sales volume, partially
offset by a $.7 million decrease due to lower average sales price. The Company
harvested 431,556 tons of pine sawtimber in 1998, an increase of 21 percent when
compared to 356,480 tons in 1997. Average sales price for Deltic's pine
sawtimber was $51 per ton in 1998 versus $53 per ton in 1997, a decrease of four
percent. Pine pulpwood sales increased $.9 million due to increased harvest
levels as the Company thinned its maturing pine plantations. Sales of hardwood
sawtimber decreased $.3 million from $1.4 million, primarily as the result of a
decrease in sales price. Other net sales for Woodlands increased slightly.
Woodlands' operating income decreased $1.6 million to $18.9 million in
1999 due mainly to a $2.8 million increase in the cost of fee timber harvested,
partially offset by increased net sales. The increase in the cost of fee timber
harvested in 1999 was due to a combination of higher harvest levels and an
increase in the rate per ton harvested, a result of recent timberland
acquisitions. Expense for the Company's cull timber release program was $.4
million greater than in 1998, resulting from increased acreage.
Operating income of $20.5 million for 1998 was $2.5 million more than
in 1997 due primarily to the increase in net sales discussed above. The cost of
fee timber harvested increased $.8 million in 1998 due to the increase in timber
harvested and to higher rates for fee timber harvested, which are the result of
acquiring timberland. An increase in cull timber release expense of $.3 million
resulted from the increase in the Company's timberland acreage.
Mills
Net sales for the Company's Mills segment were $83.5 million in 1999,
compared to $65.8 million in 1998 and $67.7 million in 1997. Operating income
was $6.5 million in 1999, while an operating loss of $2.8 million was recorded
in 1998. During 1997, this segment's operating income was $7.4 million.
Selected financial and statistical data for the Mills segment is shown
in the following table.
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net sales (millions of dollars)
Lumber $ 72.4 55.7 59.2
Residual products $ 11.1 9.6 8.5
Lumber
Finished production (MMBF) 186 160 147
Sales volume (MMBF) 189 162 149
Sales price (per MBF) $ 383 343 396
</TABLE>
18
<PAGE>
Compared to 1998, net sales increased by $17.7 million to $83.5
million. Increases in both sales price and volume combined to produce a $16.7
million increase in lumber sales, $6.4 million due to price and $10.3 million
due to sales volume. Average sales price of $383 per MBF was $40 per MBF more
than in 1998, and sales volume increased 17 percent from 162.2 million board
feet ("MMBF") in 1998 to 189 MMBF in 1999. Residual product sales rose $1.5
million.
In 1998, net sales decreased $1.9 million when compared to $65.8
million in 1997. Although lumber sales volume increased nine percent to 162.2
MMBF in 1998, a $53 per MBF decrease in average sales price to $343 per MBF
caused a decrease in net sales of $3.5 million. The decrease in lumber sales
reflects the impact of a $7.9 million decrease due to lower price, partially
offset by a $4.4 million increase resulting from higher sales volume. Sawmill
residual product sales increased $1.1 million in 1998. During 1998, the Company
recorded a $.5 million settlement of the business interruption claim filed as a
result of a fire at the Ola Mill during 1997.
Operating income of $6.5 million for 1999 was $9.3 million more than
for 1998, primarily attributable to a 12 percent increase in sales price for
lumber coupled with a 26.8 MMBF increase in sales volume. A decrease in the unit
cost of logs used in the Company's sawmills more than offset increased
depreciation expense.
A loss from operations of $2.8 million during 1998 compared to
operating income of $7.4 million in 1997. The decrease was primarily the result
of the drop in net sales combined with a five percent increase in the production
cost per MBF sold, partially offset by the previously mentioned business
interruption claim settled during 1998. The increase in the cost of lumber
produced resulted from increases in log cost and depreciation expense.
Real Estate
The Company's Real Estate operations generated net sales of $21.6
million in 1999, $15.9 million in 1998, and $11.6 million in 1997. This
segment's operating income was $8.4 million in 1999, which compares to $5
million in 1998 and $3.2 million in 1997.
Selected financial and statistical data for the Real Estate segment is
shown in the following table.
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net sales (millions of dollars)
Residential lots $ 10.0 9.7 5.9
Commercial sites $ 5.0 1.3 2.4
Undeveloped acreage $ 2.2 .7 .2
Sales volume
Residential lots 196 175 113
Commercial acres 74 8 26
Undeveloped acres 213 96 10
Average sales price (thousands of dollars)
Residential lots $ 51 56 52
Commercial acres $ 67 158 91
Undeveloped acres $ 10 7 20
</TABLE>
In 1999, net sales of $21.6 million were $5.7 million more than in
1998, an increase of 36 percent. Commercial sales revenue increased $3.7 million
due to the sale of almost 74 acres at an average price per acre of $67,000,
compared to 1998 sales of about eight acres averaging $158,100 per acre. Sales
of residential lots increased by 12 percent, from 175 lots in 1998 to 196 lots
in 1999, with a decrease in average sales price from $55,600 to $50,800 per lot
due to sales mix. During 1999, 115 lots were developed and offered for sale in
three neighborhoods in the Chenal Valley development, located in west Little
Rock, Arkansas. These lot offerings were made in early December 1999 and
resulted in 82 sales contracts, with 25 closings recorded by year-end. Sales
totaling $2.2 million for approximately 213 acres of undeveloped real estate
were recorded in 1999, compared to sales of about 96 acres for $.7 million in
1998. Net sales from Chenal Country Club, the amenity
19
<PAGE>
around which Chenal Valley is centered, were $3.8 million in 1999 versus $3.3
million in 1998, an increase of $.5 million.
Net sales in 1998 increased $4.3 million, 37 percent, from $11.6
million in 1997. Residential lot sales increased by 62 lots to 175 with the
average sales price up six percent over 1997 due to sales mix, from $52,400 per
lot to $55,600. During 1998, 325 lots were developed and offered for sale in
Chenal Valley and Red Oak Ridge, Deltic's real estate development near Hot
Springs, Arkansas. Sales of approximately 96 acres of undeveloped real estate
acreage for $.7 million in 1998 compared to the sale of 9.5 acres for $.2
million during 1997. Commercial sales revenue decreased $1.1 million due to the
sale of approximately 26 acres at an average price per acre of $90,900 in 1997,
which compared to sales of about eight acres for $158,100 per acre in 1998. Net
sales from the Company's Chenal Country Club operation were $3.3 million for
1998 versus $2.3 million for the eight months of 1997 following the acquisition
of the club by Deltic.
Real Estate operating income of $8.4 million for 1999 increased $3.4
million, 68 percent, when compared to 1998, due primarily to the same factors
impacting net sales. In 1998, operating income for this segment was $5 million,
$1.8 million more than in 1997, as a result of a $1.9 million increase in the
margin realized on sales of real estate.
Agriculture
Net sales for Deltic's Agriculture operations totaled $2.6 million in
1999, compared to $6.5 million in 1998 and $9.5 million in 1997. This segment's
operating income was $.3 million for 1999, $.8 million for 1998, and $2.8
million for 1997.
Net sales for the Agriculture segment were down $3.9 million, to $2.6
million in 1999, due primarily to depressed commodity prices. As a result,
approximately 70 percent of crop production volume was held in inventory at
year-end. In 1999, crop yield for soybeans was up slightly to 34 bushels per
acre, but the sales price was down 21 percent. Although corn harvested was a
record 130 bushels per acre, sales prices were 19 percent lower than in 1998.
Operating income was $.3 million in 1999, a decrease of $.5 million when
compared to 1998. Although net sales decreased in 1999, crop cost per unit of
production were reduced as well.
During 1998, net sales of $6.5 million decreased $3 million from 1997.
The decrease was the result of lower commodity prices and soybean yields,
combined with the year of 1997 benefiting from the sale of products which were
grown during 1996. Operating income of $.8 million was down $2 million from 1997
and was negatively impacted by an increase in harvesting costs for corn due to
an outbreak of Aflatoxin, a toxin-producing fungus, in addition to lower net
sales discussed earlier. In 1998, soybean yield per acre decreased nine percent
and the sales price was 19 percent lower than in 1997. Although corn yield per
acre increased four percent, sales prices were down ten percent in 1998.
Corporate
Corporate operating expense of $5.8 million for 1999 compares to $5
million for 1998 and $5.2 million for 1997. The Company's general and
administrative expenses increased $.8 million during 1999, due primarily to
higher professional fees and higher costs of awards under the Company's
incentive plans. For 1998, these expenses decreased $.4 million.
Eliminations
Intersegment sales of timber from Deltic's Woodlands segment to the
Mills' segment were $11.9 million in 1999, compared to $7.8 million in 1998 and
$7.2 million in 1997. The $4.1 million increase during 1999 was due primarily to
an increase in log requirements at the Company's manufacturing facilities,
coupled with the previously mentioned increase in harvest levels from Deltic's
timberland. In 1998, intersegment timber sales increased $.6 million.
Elimination of intersegment profit in mill inventories was $.2 million
in both 1999 and 1998, and $.6 million in 1997.
20
<PAGE>
Equity in Del-Tin Fiber
In 1999, the Company recorded equity in the loss of Del-Tin Fiber, a 50
percent owned joint venture, totaling $8.9 million compared to 1998's equity
loss of $4.6 million. Production of medium density fiberboard ("MDF") began at
Del-Tin Fiber in late April 1998, with initial board sales beginning in June
1998. Results of Del-Tin Fiber's operations were recorded on a one-month lag
basis during 1998; however, this method was changed in 1999. Consequently,
Deltic's equity in Del-Tin Fiber for the year of 1999 includes 13 months of
operating results. The plant's MDF production and sales volumes for 1999 total
98 million square feet ("MMSF") and 100 MMSF, respectively. For 1998, production
volume was 24.7 MMSF and sales volume totaled 19.6 MMSF. Average sales price for
1999 was $324 per thousand square feet ("MSF"), an increase of nine percent when
compared to $298 per MSF for 1998. During a plant shutdown in June 1999,
modifications were made to critical equipment, including the press and heat
energy system. While problems with the press have been corrected, efforts
continue to effect a permanent solution to the heat energy system's failure to
perform as specified. As a result, production costs have been higher and
production volume has been lower than anticipated. In addition, sales price for
MDF has been lower than expected. Therefore, financial results have continued to
be unsatisfactory. As Del-Tin Fiber's operations are able to increase production
levels closer to the plant's capacity of 150 MMSF per year, average
manufacturing cost per MSF is expected to decrease as the fixed costs for the
facility are allocated to increased production.
The preceding "forward-looking statements" were made in reliance upon
the safe harbor provisions of the Private Securities Reform Act of 1995. Such
statements reflect the Company's current expectations and involve risks and
uncertainties. Actual results could differ materially from those included in
such forward-looking statements.
Interest Income/Expense
Interest income during 1999 was $.2 million, compared to $1.1 million
in 1998 and $.7 million in 1997. In 1999, interest and other debt expense was
$4.1 million, versus $1.4 million in 1998 and $.4 million in 1997. The Company's
timberland acquisition program, stock repurchase plan, and other capital
projects required use of available cash and additional borrowings, which
resulted in decreased interest income and increased interest expense during
1999. In addition, settlement of an IRS audit for years prior to being spun off
from Murphy Oil resulted in payment of interest of $.5 million during 1999. The
$1 million increase in interest and other debt expense during 1998 was due
primarily to increased borrowings required for Deltic's land acquisition
program.
Other Income
In 1999, other income was $1.7 million which compares to $.4 million in
1998 and $1.4 million in 1997. The sale of 7,162 acres of non-strategic
timberland during 1999 resulted in a pretax gain of $1.1 million. During 1997,
the Company realized a $1.2 million gain on settlement of a physical damage
insurance claim which was the result of a fire that destroyed the Ola Mill
lumber planer.
Income Tax Expense
The Company's income tax expense was $6.1 million for 1999 versus $5.3
million for 1998 and $10.7 million for 1997. The effective income tax rate was
36 percent, 38 percent, and 39 percent in 1999, 1998, and 1997, respectively.
The increase of $.8 million during 1999 was due to higher pretax income,
partially offset by lower state income taxes and recording income tax accrual
adjustments relating to prior periods. The Company's income tax expense declined
$5.4 million in 1998 due primarily to lower pretax earnings.
21
<PAGE>
Liquidity and Capital Resources
Cash Flows and Capital Expenditures
During the year ended December 31, 1999, the Company's net cash
provided by operating activities totaled $32.6 million, compared with $27
million in 1998 and $23.9 million in 1997. Changes in operating working capital,
other than cash and cash equivalents, required cash of $4.6 million in 1999, $.2
million in 1998, and $.5 million in 1997. Deltic's accompanying Consolidated
Statements of Cash Flows identify other differences between net income and cash
provided by operating activities of each of those years.
Capital expenditures required cash of $27.9 million in 1999, $80.1
million in 1998, and $35.7 million in 1997. Other owner-financed capital
expenditures, not requiring cash, included timberland acquisitions of $.7
million in 1999, $.4 million in 1998, and $.1 million in 1997. Total capital
expenditures are presented by segment in the following table for the years ended
December 31, 1999, 1998, and 1997.
<TABLE>
<CAPTION>
(Millions of dollars) 1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Woodlands $ 8.5 59.9 16.4
Mills 8.0 7.9 11.5
Real Estate 11.5 11.5 6.4
Agriculture .5 .7 1.0
Corporate .1 .5 .5
------ ----- -----
Total capital expenditures 28.6 80.5 35.8
Owner-financed expenditures (.7) (.4) (.1)
------ ----- -----
Expenditures requiring cash $ 27.9 80.1 35.7
====== ===== =====
</TABLE>
Capital expenditures for Woodlands included timberland acquisitions of
approximately 6,400 acres at a cost of $6.8 million in 1999, approximately
30,400 acres at a cost of $59.1 million in 1998, and approximately 25,100 acres
at a cost of $15.9 million in 1997. During 1999, expenditures for reforestation
planting and site preparation amounted to $1.1 million, compared to $.4 million
in 1998 and $.2 million in 1997. The increase of $.7 million for 1999 was a
result of expanding the planting program due to timberland additions.
At the Company's Ola Mill, $2.2 million was expended in 1999 and $3.5
million in 1998 to replace the planermill. The project, which was completed and
placed in service in May 1999, is expected to increase average hourly output by
approximately 90 percent. Completion of an optimized edger system during 1999,
requiring capital expenditures of $2.1 million in 1999 and $.3 million in 1998,
has improved log recovery. Sawmill building improvements needed for installation
of the new edger system and other future projects were completed at a cost of
$.5 million in 1999. The installation of a new boiler system and an additional
kiln, which increased annual drying capacity by 30 MMBF, required $1.6 million
in 1998 and $3 million in 1997. A small log processing deck, enabling the mill
to extract small diameter logs from pulpwood, required expenditures of $.4
million in 1998 and $1.4 million in 1997. During 1999, an extension of the Waldo
Mill's green lumber sorter and a new lumber stacker required expenditures of $.8
million. When completed, this project will allow sorting without mixing lengths,
which improves lumber grade and increases volume throughput in the kilns and
planer. An optimized log bucking system, which is expected to increase log
recovery up to five percent and increase the average width of lumber produced,
required expenditures of $.9 million in 1999 and is scheduled for completion in
the first quarter of 2000. At the Waldo Mill, $.5 million was expended in 1998
and $1.6 million in 1997 to install a secondary manufacturing operation, which
expanded the Mill's product mix to include products such as finger- jointed
studs. Completion of a planermill upgrade at Waldo in 1997 required capital
expenditures of $4.1 million.
Real Estate capital expenditures which related to the cost of lot
development totaled $3.6 million in 1999, $5.1 million in 1998, and $2.1 million
in 1997. Construction of the Company's 35,000-square-foot retail center, The
Village at Rahling Road, required expenditures of $2.9 million in 1999 and is
scheduled for completion during the first half of 2000. Site work for the retail
center and adjacent outparcel sites totaled $.3 million in 1999, $.4 million in
1998, and $.6 million in 1997. During 1999, infrastructure construction required
$.2 million compared to $.8 million in 1998 and $1.3 million in 1997. Chenal
Country Club's clubhouse expansion project
22
<PAGE>
was completed during 1999 at a total cost of $5.3 million, consisting of $1.7
million in 1999, $3 million in 1998, and $.6 million in 1997. Other expenditures
were primarily for various amenity improvements.
Capital expenditures for Agriculture operations included purchases of
harvesting combines totaling $.1 million in 1999 and $.4 million for both 1998
and 1997. During 1997, two continuous-flow grain drying systems were installed
at the Company's storage facilities for a total of $.4 million. Other capital
requirements were mainly for replacement of various machinery and equipment.
Corporate operations had capital expenditures for the purchase of an
additional investment in a consolidated entity of $.4 million in 1998.
Expenditures in 1997 of $.5 million were primarily for the purchase of office
furniture and computer equipment, including software, required when the
Company's offices were relocated after being spun off from Murphy Oil.
At December 31, 1999, Deltic had commitments of $7 million for capital
projects in progress, including $.6 million for reforestation planting, $.8
million for timberland acquisitions, $1.5 million for improvements at the Waldo
Mill, and $3.7 million related to residential lot and commercial site
development and amenity improvements at the Company's Chenal Valley real estate
development. The Waldo Mill's commitments included $.9 million for completion of
the log optimizer, $.2 million for completion of the sorter extension, and $.2
million for a board edger infeed table.
The net change in purchased stumpage inventory provided cash of $2.6
million in 1999, but required cash of $2.7 million in 1998 and $2.9 million in
1997. Proceeds from the sales of assets provided cash of $3.5 million in 1999,
primarily from the sale of 7,162 acres of non-strategic timberland, and $.4
million in 1998. In 1997, cash of $1.4 million was provided from the sales of
assets, due primarily to the involuntary conversion of the Ola Mill's planer
which was destroyed by fire. During 1999, Deltic purchased $.9 million of U.S.
government securities with maturities in excess of three months. Additional net
cash investment in Del-Tin Fiber by the Company amounted to $5.8 million, $3.9
million, and $.3 million in 1999, 1998, and 1997, respectively.
In 1999, borrowing under the Company's revolving credit facility
provided $26 million, with repayments amounting to $16 million. In addition,
$1.1 million was required for repayment of owner-financed debt incurred for land
purchases. Purchases of treasury stock during 1999 required cash of $10.4
million. During 1998, the Company borrowed $48 million under its revolving
credit facility, primarily to finance timberland acquisitions. (Refer to Note 9
to the consolidated financial statements.) Upon issuance of $40 million of
privately placed, fixed- interest rate, long-term senior notes with a financial
institution in December 1998, the Company used the proceeds, net of $1.3 million
in prepaid interest and debt issuance costs, to make repayment against its
revolving credit facility. In addition, upon securing financing for its
facility, Del-Tin Fiber repaid $3 million to Deltic which was applied to the
Company's revolving credit facility commitment. During 1997, the Company issued
600,000 shares of redeemable preferred stock, proceeds of which were $29.6
million, net of issuance costs. (Refer to Note 10 to the consolidated financial
statements.) In addition, borrowings under Deltic's revolving credit facility in
1997 provided $3 million, which were also repaid during the year. Cash required
to repay long-term debt arising from installment payments on notes used to
finance a portion of the Company's timber requirements amounted to $.3 million
in 1999 and $1.8 million in both 1998 and 1997. The Company paid dividends on
common stock of $3.1 million in 1999 and $3.2 million in both 1998 and 1997.
During 1999 and 1998, cash required to pay preferred stock dividends totaled
$2.3 million in each year.
Financial Condition
Year-end working capital totaled $20.7 million in 1999 and $16.5
million in 1998. Cash and cash equivalents at the end of 1999 were $4.8 million,
compared to $8.2 million at the end of 1998. During 1999, total indebtedness of
the Company increased $9.2 million. Deltic's working capital ratio at December
31, 1999, was 5.3 to 1, compared to 3.5 to 1 at the end of 1998.
23
<PAGE>
Liquidity
The primary sources of the Company's liquidity are internally generated
funds, access to outside financing, and working capital. The Company's current
strategy for growth continues to emphasize a significant timberland acquisition
program, which has facilitated an increase in harvest levels, in addition to
expanding lumber production and developing both residential and commercial
properties at Chenal Valley and Red Oak Ridge.
To facilitate these growth plans, the Company has an agreement with a
group of banks which provides a revolving credit facility totaling $100 million.
The agreement will expire on December 31, 2001. As of December 31, 1999, $85
million was available under this facility. Current financing arrangements are
set forth in Note 9 to the consolidated financial statements.
On February 23, 2000, the Company's Board of Directors authorized a
stock repurchase program of up to $10 million of Deltic common stock. During
1999, the Company announced the authorization of its initial share repurchase
program, which was completed during the second quarter with the purchase of
419,542 shares of common stock at an average cost of $24.68 per share.
Deltic's management believes that cash provided from its operations and
the remaining amount available under its credit facility will be sufficient to
meet its expected cash needs and planned expenditures, including those of the
Company's continued timberland acquisition program, for the foreseeable future.
Other Matters
Impact of Inflation
General inflation has not had a significant effect on the Company's
operating results during the three years ended December 31, 1999. The Company's
timber operations are more significantly impacted by the forces of supply and
demand in the southern United States than by changes in inflation. Lumber
manufacturing operations are affected by the supply of lumber available in the
North American market and by the demand for lumber by both the North American
and foreign export markets. Sales of real estate are affected by changes in the
general economy and long-term interest rates. Agriculture operations are
impacted by the worldwide supply of the commodities which are grown by the
Company and the demand for farm commodities by the North American and foreign
export markets.
Market Risk
Market risk represents the potential loss resulting from adverse
changes in the value of financial instruments, either derivative or
non-derivative, caused by fluctuations in interest rates, foreign exchange
rates, commodity prices, and equity security prices. The Company handles market
risks in accordance with its established policies; however, Deltic does not
enter into derivatives or other financial instruments for trading or speculative
purposes. The Company does enter into financial instruments to manage and reduce
the impact of changes in interest rates. The counterparties in these financial
instruments are normally major financial institutions. Deltic held various
financial instruments at December 31, 1999 and 1998, consisting of financial
assets and liabilities reported in the Company's Consolidated Balance Sheets and
off-balance sheet exposures resulting from letters of credit issued by Deltic,
primarily in connection with its purchased stumpage procurement and real estate
operations. (For additional information regarding these financial instruments,
refer to Note 13 to the consolidated financial statements.)
Interest Rate Risk - The Company is subject to interest rate risk from
the utilization of financial instruments, such as term debt and other
borrowings. The fair market value of long-term, fixed-interest rate debt is
subject to interest rate risk. Generally, the fair value of fixed-interest rate
debt will increase as interest rates fall and will decrease as interest rates
rise. Conversely, for floating rate debt, interest rate changes generally do not
affect the instruments' fair value, but do impact future earnings and cash
flows, assuming other factors are held constant. The estimated fair values of
the Company's long-term debt, including current maturities;
24
<PAGE>
redeemable preferred stock; and letters of credit at December 31, 1999, were
$54.6 million, $30.5 million, and $2 million, respectively.
A one percentage-point increase in prevailing interest rates would
result in decreases in the estimated fair value of long-term debt of $3.4
million and redeemable preferred stock of $.9 million, while the fair value of
the Company's letters of credit would be unchanged. Initial fair values were
determined using the current rates at which the Company could enter into
comparable financial instruments with similar remaining maturities. The
estimated earnings and cash flows impact for 1999 resulting from a one
percentage-point increase in interest rates would be approximately $.1 million,
holding other variables constant.
Foreign-Exchange Rate Risk - The Company currently has no exposure to
foreign-exchange rate risk because all of its financial instruments are
denominated in U.S. dollars.
Commodity Price Risk - The Company has no financial instruments subject
to commodity price risk.
Equity Security Price Risk - None of the Company's financial
instruments have potential exposure to equity security price risk.
The preceding discussion of the Company's estimated fair value of its
financial instruments and the sensitivity analyses resulting from hypothetical
changes in interest rates are "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. Such statements reflect
the Company's current expectations and involve uncertainties. These
forward-looking market risk disclosures are selective in nature and only address
the potential impact from financial instruments. They do not include other
potential effects which could impact Deltic's business as a result of changes in
interest rates, foreign-exchange rates, commodity prices, or equity security
prices.
Impact of Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") 133, Accounting for Derivative
Instruments and Hedging Activities. This standard establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. SFAS 133 is
effective for all fiscal quarters for fiscal years beginning after June 15, 2000
and will not require retroactive restatement of prior period financial
statements. This statement requires the recognition of all derivative
instruments as either assets or liabilities, measured at fair value, in the
statement of financial position. Generally, increases or decreases in the fair
value of derivative instruments will be recognized as gains or losses in
earnings in the period of change. If certain conditions are met, where the
derivative instrument has been designated as a fair value hedge, the hedged item
may also be marked to market through earnings, thus creating an offset. If the
derivative is designated and qualifies as a cash flow hedge, the changes in fair
value of the derivative instrument may be recorded in comprehensive income, as
defined by SFAS 130, Reporting Comprehensive Income. The impact of SFAS 133 on
the Company's financial statements when adopted, if any, will depend on a
variety of factors, including future interpretive guidance from the FASB, the
level of utilization of derivative instruments, the types of hedging instruments
used, and the effectiveness of any such instruments. However, the Company's
management does not believe the effect of adopting SFAS 133 will be material to
its financial position or results of operations, based on the Company's current
level of derivative and hedging activities.
Exchange of Farmland
On November 16, 1999, Deltic announced its intentions to pursue the
exchange of its agricultural land for Southern Pine timberland in a
tax-efficient manner. The Company has engaged an agricultural land consulting
and brokerage firm, Capital Agricultural Property Services, Inc., to act as
advisors in evaluating and marketing over 48,000 acres (about 37,000 acres net
to Deltic) of farmland located in northeast Louisiana. Upon completion of the
valuation, a marketing plan will be presented to Deltic's Board of Directors for
approval.
25
<PAGE>
Year 2000 Issue
The Year 2000 issue involved the inability of a significant percentage
of the world's computers, application software, and embedded semiconductor chips
to cope with the change of the year from 1999 to 2000, unless corrected. The
problem could have affected the computers, software, and other equipment used by
the Company, as well as those used by its suppliers, customers, banks, etc.
The Company's business is substantially dependent upon the operation of
computer systems and as such, Deltic established a Year 2000 Committee to
evaluate the status of the Company's Year 2000 readiness and to remediate any
area with deficiencies. Members of the Committee completed the assessment of the
Company's compliance and supervised the completion of all corrective measures
required. All remediation efforts were completed prior to December 31, 1999.
To date, Deltic has not experienced problems with either its internal
computerized systems or its operational facilities' systems or equipment. In
addition, the expenditures incurred to facilitate the current position of the
Company's Year 2000 readiness was less than $50 thousand. Deltic has not been
negatively impacted by any inability of either suppliers or customers to conduct
normal business operations. Therefore, the Company does not expect the financial
cost of any remaining impact of Year 2000 related problems, if any, to be
material. However, the Company can give no assurance that significant problems
resulting from the Year 2000 issue will not occur with either its internal
systems or operational facilities or those of critical suppliers or customers.
The discussion of the Company's efforts, and management's expectations,
relating to Year 2000 compliance are "forward-looking statements" within the
meaning of the federal securities laws. Such statements reflect the Company's
current expectations and involve risks and uncertainties. Actual results could
differ materially from those included in such forward-looking statements.
Environmental Matters
Deltic is committed to protecting the environment and has certain
obligations based on federal, state, and local laws for the protection of the
environment. Costs of compliance through 1999 have not been material and the
Company's management currently has no reason to believe that such costs will
become material for the foreseeable future.
Outlook
Pine sawtimber harvested from Deltic's fee lands is projected to
increase annually through 2001, depending on the Company's ability to increase
timber inventory through biological growth and timberland acquisitions. Lumber
production is also projected to increase over this period as the Company
continues to expand the capacity of its manufacturing facilities. Deltic expects
the number of residential lots and commercial acres sold to remain at high
levels, barring declines in economic growth or residential construction activity
in central Arkansas. The Company announced in late 1999 its intention to divest
its agricultural properties. Based on the current divestiture schedule, it is
likely Deltic will continue to operate the farmland in 2000. Current plans are
to plant soybeans and corn again in 2000, with the results subject to a number
of factors including weather conditions, insect infestation, crop disease, and
crop prices. The Company expects Del-Tin Fiber's medium density fiberboard
production to increase significantly in 2000, as capacity utilization continues
to increase following the remediation of operating problems encountered since
start-up.
Deltic's capital expenditure budget for the year of 2000, which was
prepared during the fall of 1999, provides for expenditures of $42 million. The
Woodlands capital budget includes $10.8 million for timberland acquisitions,
which will be dependent on the availability of acreage at prices that meet the
Company's criterion for timber stocking, growth potential, site index, and
location. Expenditures for sawmill projects are budgeted at $10.8 million for
2000. At the Ola Mill, replacement of the existing sawing gang with a curve
sawing gang at a cost of $5.3 million will increase production about 6,000 board
feet per hour; allow for processing small, curved logs more efficiently; and
decrease the Mill's loss factor by sawing with the grain, thereby reducing
warping during drying. The Waldo Mill is planning an $.8 million upgrade to its
edger system in order to increase
26
<PAGE>
production and improve lumber recovery. Depending on market conditions,
expenditures for residential lot development totaling $6.5 million are projected
to add over 200 lots to available inventory. Completion of the retail center and
outparcel sites in The Village at Rahling Road in 2000 is expected to cost $1.8
million. Construction of Chenal Country Club's second golf course is scheduled
to begin in 2000, with completion the following year, and is estimated at a
total cost of $7.3 million. This project will enable club membership to increase
and will allow future development of residential lots surrounding the golf
course. Capital and other expenditures are under constant review, and these
budgeted amounts may be adjusted to reflect changes in the Company's estimated
cash flows from operations, borrowings under credit facilities, or general
economic conditions.
Certain statements contained in this report that are not historical in
nature constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Words such as "expects",
"anticipates", "intends", "plans", "estimates", or variations of such words and
similar expressions are intended to identify such forward-looking statements.
These statements reflect the Company's current expectations and involve certain
risks and uncertainties, including those disclosed elsewhere in this report.
Therefore, actual results could differ materially from those included in such
forward-looking statements.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
Information with respect to quantitative and qualitative disclosures
about market risk of the Company is set forth under the caption "Other Matters -
Market Risk" in Item 7 of Part II of this report.
27
<PAGE>
Item 8. Financial Statements and Supplementary Data
DELTIC TIMBER CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1999 and 1998
----------------------------
(Thousands of dollars)
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 4,782 8,160
U.S. government securities 936 -
Trade accounts receivable - net 4,648 3,995
Other receivables 1,341 1,328
Inventories 9,411 5,851
Prepaid expenses and other current assets 4,396 3,882
--------- ---------
Total current assets 25,514 23,216
Investment in real estate held for development and sale 35,210 27,295
Investment in Del-Tin Fiber 3,727 6,699
Timber and timberlands - net 164,740 166,588
Property, plant, and equipment - net 44,312 44,104
Deferred charges and other assets 4,395 4,642
--------- ---------
Total assets $ 277,898 272,544
========= =========
Liabilities and Stockholders' Equity
Current liabilities
Current maturities of long-term debt $ 203 990
Notes payable 13 387
Trade accounts payable 2,928 2,164
Accrued taxes other than income taxes 1,162 1,025
Bank overdraft 6 817
Other accrued liabilities 511 1,294
--------- ---------
Total current liabilities 4,823 6,677
Long-term debt 55,570 45,198
Deferred credits and other noncurrent liabilities 9,097 7,535
Redeemable preferred stock 30,000 30,000
Stockholders' equity
Preferred stock - -
Common stock 128 128
Capital in excess of par value 68,808 68,808
Retained earnings 120,033 114,498
Unamortized restricted stock awards (205) (300)
Treasury stock (10,356) -
--------- ---------
Total stockholders' equity 178,408 183,134
--------- ---------
Total liabilities and stockholders' equity $ 277,898 272,544
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE>
DELTIC TIMBER CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Income
For the Years Ended December 31, 1999, 1998, and 1997
-----------------------------------------------------
(Thousands of dollars, except per share amounts)
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Net sales $ 124,212 106,957 104,208
--------- --------- ---------
Costs and expenses
Cost of sales 78,895 75,656 67,625
Depreciation, amortization, and
cost of fee timber harvested 10,688 7,331 4,912
General and administrative expenses 6,548 5,692 6,062
--------- --------- ---------
Total costs and expenses 96,131 88,679 78,599
--------- --------- ---------
Operating income 28,081 18,278 25,609
Equity in loss of Del-Tin Fiber (8,936) (4,657) -
Interest income 254 1,122 646
Interest and other debt expense (4,124) (1,387) (370)
Other income/(expense) 1,775 421 1,367
--------- --------- ---------
Income before income taxes 17,050 13,777 27,252
Income taxes (6,130) (5,303) (10,678)
--------- --------- ---------
Net income $ 10,920 8,474 16,574
========= ========= =========
Earnings per common share
Basic $ .69 .48 1.29
========= ========= =========
Assuming dilution $ .69 .48 1.29
========= ========= =========
Dividends declared per common share $ .25 .25 .25
========= ========= =========
Average common shares outstanding (thousands) 12,503 12,812 12,798
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
29
<PAGE>
DELTIC TIMBER CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1999, 1998, and 1997
-----------------------------------------------------
(Thousands of dollars)
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Operating activities
Net income $ 10,920 8,474 16,574
Adjustments to reconcile above income to
net cash provided/(required) by operating activities
Depreciation, amortization, and cost of
fee timber harvested 10,688 7,331 4,912
Deferred and noncurrent income taxes 1,189 1,255 (65)
(Gains)/losses from sales of assets (1,487) (77) (1,449)
Real estate costs recovered upon sale 6,439 4,993 3,732
Equity in loss of Del-Tin Fiber 8,936 4,657 -
(Increase)/decrease in operating working
capital other than cash and cash equivalents (4,620) (184) (503)
Other 543 538 716
-------- -------- --------
Net cash provided/(required) by operating activities 32,608 26,987 23,917
-------- -------- --------
Investing activities
Capital expenditures requiring cash (27,920) (80,124) (35,729)
Net change in purchased stumpage inventory 2,613 (2,665) (2,924)
Proceeds from sales of assets 3,525 374 1,359
Purchases of U.S. government securities (936) - -
Investment in and advances to Del-Tin Fiber - net (5,795) (3,860) (299)
Other - net 564 758 469
-------- -------- --------
Net cash provided/(required) by investing activities (27,949) (85,517) (37,124)
-------- -------- --------
Financing activities
Proceeds from issuance of redeemable preferred
stock, net of issuance cost of $395 - - 29,605
Proceeds from long-term borrowings 26,000 88,072 3,000
Repayments of long-term debt (17,485) (44,993) (4,794)
Treasury stock purchases (10,356) - -
Prepaid interest and debt issuance costs -
long-term borrowings - (1,307) -
Increase/(decrease) in bank overdraft (811) (662) 1,479
Preferred stock dividends paid (2,262) (2,262) -
Common stock dividends paid (3,123) (3,203) (3,200)
-------- -------- --------
Net cash provided/(required) by financing activities (8,037) 35,645 26,090
-------- -------- --------
Net increase/(decrease) in cash and cash equivalents (3,378) (22,885) 12,883
Cash and cash equivalents at beginning of year 8,160 31,045 18,162
-------- -------- --------
Cash and cash equivalents at end of year $ 4,782 8,160 31,045
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE>
DELTIC TIMBER CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
For the Years Ended December 31, 1999, 1998, and 1997
-----------------------------------------------------
(Thousands of dollars)
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Cumulative preferred stock - $.01 par, authorized
20,000,000 shares, 600,000 shares issued as
redeemable preferred stock at end of year
(See Note 10 - Redeemable Preferred Stock) $ - - -
--------- --------- ---------
Common stock - $.01 par, authorized 50,000,000
shares; 12,813,879, 12,813,879, and 12,798,323
shares issued at end of 1999, 1998, and 1997,
respectively 128 128 128
--------- --------- ---------
Capital in excess of par value
Balance at beginning of year 68,808 68,372 68,372
Exercise of stock options - 58 -
Restricted stock awards - 378 -
--------- --------- ---------
Balance at end of year 68,808 68,808 68,372
--------- --------- ---------
Retained earnings
Balance at beginning of year 114,498 111,496 98,208
Net income 10,920 8,474 16,574
Preferred stock dividends accrued (2,262) (2,269) (86)
Common stock dividends declared, $.25 per share (3,123) (3,203) (3,200)
--------- --------- ---------
Balance at end of year 120,033 114,498 111,496
--------- --------- ---------
Unamortized restricted stock awards
Balance at beginning of year (300) - -
Stock awards - (378) -
Amortization to expense 95 78 -
--------- --------- ---------
Balance at end of year (205) (300) -
--------- --------- ---------
Treasury stock
Balance at beginning of year - - -
Shares purchased (10,356) - -
--------- --------- ---------
Balance at end of year - 419,544 shares of
common stock at end of 1999, at cost (10,356) - -
--------- --------- ----------
Total stockholders' equity $ 178,408 183,134 179,996
========= ========= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
31
<PAGE>
DELTIC TIMBER CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
Note 1 - Significant Accounting Policies
Principles of Consolidation -- The consolidated financial statements include
the accounts of Deltic and all majority-owned subsidiaries after
elimination of significant intercompany transactions and accounts.
Use of Estimates -- In the preparation of financial statements of the
Company in conformity with generally accepted accounting principles,
management has made a number of estimates and assumptions related to the
reporting of assets and liabilities and the disclosure of contingent
assets and liabilities. Actual results may differ from those estimates.
Cash Equivalents -- Cash equivalents include U.S. government securities that
have a maturity of three months or less from the date of purchase.
Allowance for Doubtful Accounts -- The Company provides an allowance for
doubtful accounts based on a review of the specific receivables
outstanding. At December 31, 1999 and 1998, the balance in the allowance
account was $247,000 and $189,000, respectively.
Inventories -- Inventories of logs, lumber, agricultural products, and
supplies are stated at the lower of cost or market, primarily using the
average cost method. Log costs include harvest and transportation cost as
appropriate. Lumber costs include materials, labor, and production
overhead.
Investment in Real Estate Held for Development and Sale -- Real estate held
for development and sale is stated at the lower of cost or net realizable
value, and includes direct costs of land and land development and
indirect costs, including amenities, less amounts charged to cost of
sales. These costs are allocated to individual lots or acreage sold based
on relative sales value. Direct costs are allocated on a specific
neighborhood basis, while indirect costs for the Company's three
development areas -- Chenal Valley, Chenal Downs, and Red Oak Ridge --
are allocated to neighborhoods over the entire respective development
area.
Investment in Del-Tin Fiber -- Investment in Del-Tin Fiber L.L.C. ("Del-Tin
Fiber"), the 50 percent owned limited liability company, is carried at
cost and is being adjusted for the Company's proportionate share of its
undistributed earnings or losses.
Timber and Timberlands -- Timber and timberlands, which includes purchased
stumpage inventory and logging facilities, is stated at acquisition cost
less cost of fee timber harvested and accumulated depreciation of logging
facilities. The cost of fee timber harvested is based on the volume of
timber harvested in relation to the estimated volume of timber
recoverable. Logging facilities, which consist primarily of the cost of
roads constructed and other land improvements, are depreciated by using
the straight-line method over a ten-year estimated life. The Company
estimates its fee timber inventory using statistical information and data
obtained from physical measurements and other information gathering
techniques. The cost of timber and timberland purchased and reforestation
costs are capitalized. Fee timber carrying costs are expensed as
incurred.
Property, Plant, and Equipment -- Property, plant, and equipment is stated
at cost less accumulated depreciation. Depreciation of buildings,
equipment, and other depreciable assets is primarily determined by using
the straight-line method. Property, plant, and equipment assets are
evaluated for possible impairment on a specific asset basis or in groups
of similar assets, as applicable. Expenditures that substantially improve
and/or increase the useful life of facilities and equipment are
capitalized. Maintenance and repair costs are expensed as incurred. Gains
and losses on disposals or retirements are included in income as they
occur.
32
<PAGE>
DELTIC TIMBER CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
Revenue Recognition -- Revenue from the sale of lumber, wood by-products,
and agricultural commodities is generally recorded at the time of
shipment. Revenue from the sale of timber-cutting rights to third parties
is recorded when legal title passes to the purchaser. Revenue from
intersegment timber sales is recorded when the timber is harvested; such
intersegment sales, which are made at market prices, are eliminated in
the consolidated financial statements. Revenue from real estate sales is
recorded when the sale is closed and legal title is transferred.
Income Taxes -- The Company uses the asset and liability method of
accounting for income taxes. Under this method, the provision for income
taxes includes amounts currently payable and amounts deferred as tax
assets and liabilities, based on differences between the financial
statement carrying amounts and the tax bases of existing assets and
liabilities, and is measured using the enacted tax rates that are assumed
will be in effect when the differences reverse.
Stock-Based Compensation -- The Company applies the accounting measurement
provisions of Accounting Principles Board Opinion ("APB") 25 to account
for stock-based compensation. Cost of options granted are accrued over
applicable vesting periods and adjusted for subsequent changes in the
market value per share of the Company's common stock.
Capital Expenditures -- Capital expenditures include additions to Investment
in Real Estate Held for Development and Sale; Timber and Timberlands; and
Property, Plant, and Equipment.
NetChange in Purchased Stumpage Inventory -- Purchased stumpage inventory
consists of timber-cutting rights purchased from third parties
specifically for use in the Company's sawmills. Depending on the timing
of acquisition and usage of this acquired stumpage inventory, the net
change in inventory can either be a source or use of funds in the
Company's Consolidated Statements of Cash Flows.
Earnings per Common Share -- Earnings per share ("EPS") amounts presented
were calculated under the provisions of SFAS 128, Earnings per Share.
Basic earnings per share is computed based on earnings available to
common shareholders (net income less accrued preferred dividends) and the
weighted average number of common shares outstanding. The earnings per
share assuming dilution amounts presented are computed based on earnings
available to common shareholders and the weighted average number of
common shares outstanding, including shares assumed to be issued under
the Company's stock option plan. (For a reconciliation of amounts used in
per share computations, see Note 18 - Earnings per Share.)
Reclassifications -- Certain prior year amounts have been reclassified to
conform with the 1999 presentation format.
Note 2 - Spin-off from Murphy Oil Corporation
On December 31, 1996, Deltic Timber Corporation became an independent,
public company when Murphy Oil, the Company's former parent, surrendered 100
percent of the outstanding shares of Deltic common stock, which were
distributed to Murphy Oil's shareholders as a dividend. Murphy Oil personnel
historically performed certain administrative and financial services on
behalf of the Company. These services included, among others, cash
management and consultation related to certain personnel, employee benefit,
and income tax matters. During 1997, Murphy Oil continued to provide, or
caused to be provided, certain specified services for a transitional period
ending June 30, 1997. Deltic personnel have assumed responsibility for all
functions previously provided by Murphy Oil. The Company recorded charges of
$427,000 in 1997 for these services which were included in General and
Administrative Expenses in the 1997 Consolidated Statement of Income.
33
<PAGE>
DELTIC TIMBER CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
Note 3 - Inventories
Inventories at December 31 consisted of the following:
<TABLE>
<CAPTION>
(Thousands of dollars) 1999 1998
----- -----
<S> <C> <C>
Logs $ 2,170 1,942
Finished products 6,966 3,616
Materials and supplies 275 293
------- ------
$ 9,411 5,851
======= ======
</TABLE>
Note 4 - Acquisition of Chenal Country Club, Inc.
During 1997, the Company acquired the net assets of Chenal Country Club, the
entity that had operated the club amenity around which Deltic's Chenal
Valley real estate development is centered. The cost of the clubhouse and
golf course facilities acquired is being accounted for as an additional
amenity for the Chenal Valley development. The acquisition was accomplished
by exchanging an interest-bearing receivable from the club membership, which
had been previously held by Deltic, in the amount of $5,600,000, for the
clubhouse and golf course facilities and an investment in 100 percent of the
stock of Chenal Country Club, Inc., a wholly owned subsidiary formed, at the
time of the acquisition, to continue the daily operating activities of the
club. The operating assets of the former Chenal Country Club, excluding the
clubhouse and golf course facilities, were transferred to this subsidiary.
Deltic had previously constructed the clubhouse and golf course and
purchased the original operational assets of the club amenity and sold them
to the club membership in exchange for the original interest-bearing
receivable. Chenal Country Club, Inc. continued to operate the club for the
remainder of 1997 and the entire years of 1998 and 1999. The results of
operations of Chenal Country Club, Inc., since the date of the acquisition,
are included in the accompanying financial statements. However, upon the
exchange of the interest-bearing receivable for the acquisition, Deltic
ceased to earn interest income related to the receivable as of April 30,
1997.
The acquisition was recorded using the purchase method of accounting for
business combinations. Operating income of Chenal Country Club, Inc.
included in the amounts reported in the Consolidated Statement of Income for
1997 was $104,000, and was comprised of net sales of $2,277,000, cost of
sales of $2,065,000, and depreciation expense of $108,000. Due to the
approximately break-even level for operating income of Chenal Country Club,
Inc., Deltic's financial statements would not have been materially impacted
had the operations of this new subsidiary been included for the entire year
of 1997. Interest income on the receivable from the club membership prior to
the acquisition was $173,000 in 1997.
Note 5 - Investment in Del-Tin Fiber
Deltic owns 50 percent of the membership interest of Del-Tin Fiber, which
completed construction and commenced production operations of a medium
density fiberboard ("MDF") plant near El Dorado, Arkansas, in April 1998.
The cost to construct the plant was approximately $104,000,000. Each of
Del-Tin Fiber's two owners recorded an initial investment of approximately
$12,000,000, with the remainder financed by Del-Tin Fiber with a combination
of borrowings and issuance of interest-bearing bonds. Separate project
financing for the plant was finalized during 1998.
34
<PAGE>
DELTIC TIMBER CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
Each owner has agreed to a contingent equity contribution agreement with
Del-Tin Fiber and the group of banks from whom the project financing was
obtained. Under this agreement, each owner has agreed to fund any deficiency
in contributions to either Del-Tin Fiber's bond sinking fund or debt service
reserve, if any, up to $17,500,000. Del-Tin Fiber's project financing
agreement does not require sinking fund or debt reserve contributions until
2000. In addition, each owner has committed to a production support
agreement, under which each owner has agreed to make support obligation
payments to Del-Tin Fiber to provide, on the occurrence of certain events,
additional funds for payment of debt service if the plant is unable to
successfully complete a minimum production test, planned for 2000. Both
owners of Del-Tin Fiber have also pledged their respective membership
interest in the joint venture as collateral under the project financing
agreement.
Under the operating agreement, Del-Tin Fiber's employees operate the plant.
Deltic has committed to provide a portion of the plant's fiber and wood fuel
supply at market prices. During 1999 and 1998, Deltic sold Del-Tin Fiber
approximately $4,343,000 and $2,126,000, respectively, of these lumber
manufacturing by-products. As of December 31, 1999, the Company had a
receivable from Del-Tin Fiber of $36,000.
Del-Tin Fiber's financial position at year-end 1999 and 1998 and results of
operations for years of 1999 and 1998 consisted of the following:
<TABLE>
<CAPTION>
(Thousands of dollars) 1999 1998
---------- ----------
<S> <C> <C>
Condensed Balance Sheet Information
Current assets $ 7,354 7,943
Property, plant, and equipment - net 98,492 98,147
Other noncurrent assets 4,108 7,446
---------- ----------
Total assets $ 109,954 113,536
========== ==========
Current liabilities $ 12,356 10,805
Long-term debt 89,000 89,000
Other noncurrent liabilities 10 -
Members' capital/(deficit) 8,588 13,731
---------- ----------
Total liabilities and members' capital/(deficit) $ 109,954 113,536
========== ==========
Condensed Income Statement Information
Net sales $ 30,472 7,365
---------- ----------
Costs and expenses
Cost of sales 33,893 12,940
Depreciation 4,151 1,473
General and administrative expenses 2,625 671
---------- ----------
Total costs and expenses 40,669 15,084
---------- ----------
Operating income/(loss) (10,197) (7,719)
Interest income 271 105
Interest and other debt expense (6,807) (2,564)
---------- ----------
Net income/(loss) $ (16,733) (10,178)
========== ==========
</TABLE>
At December 31, 1999 and 1998, the Company's share of the underlying net
assets of Del-Tin Fiber exceeded its investment by $567,000 and $167,000,
respectively. The excess relates primarily to interest received by the
Company from Del-Tin Fiber prior to plant start-up, which was capitalized by
Deltic as a reduction of its investment and is being amortized into income
using the straight-line method over a 60-month period.
35
<PAGE>
DELTIC TIMBER CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
The Company accounts for its investment in Del-Tin Fiber under the equity
method. Accordingly, the investment in Del-Tin Fiber is carried at cost,
adjusted for the Company's proportionate share of undistributed earnings or
losses. Prior to December 1999, Deltic recorded its equity in the operating
results of Del-Tin Fiber on a one-month lag basis. However, as of December
31, 1999, equity in Del-Tin Fiber's results through December 31, 1999, were
recorded by the Company. Therefore, the amount reported in the 1999
Consolidated Statement of Income as Equity in Loss of Del-Tin Fiber reflects
Deltic's share of operating results for Del-Tin Fiber for the 13-month
period beginning December 1, 1998.
Note 6 - Timber and Timberlands
Timber and timberlands at December 31 consisted of the following:
<TABLE>
<CAPTION>
(Thousands of dollars) 1999 1998
--------- ---------
<S> <C> <C>
Purchased stumpage inventory $ 10,597 13,210
Timberlands 62,287 54,710
Fee timber 125,851 128,242
Logging facilities 1,642 1,610
--------- ---------
200,377 197,772
Less accumulated cost of fee timber harvested
and facilities depreciation (35,637) (31,184)
--------- ---------
$ 164,740 166,588
========= =========
</TABLE>
Cost of fee timber harvested amounted to $4,397,000 in 1999, $1,800,000 in
1998, and $1,404,000 in 1997. Depreciation of logging facilities was
$56,000, $73,000, and $84,000 for the years 1999, 1998, and 1997,
respectively.
The Company obtains a portion of its sawmill log requirements by acquiring
purchased stumpage inventory through cutting contracts with various private
and governmental landowners. These contracts have terms ranging from a few
months to several years. At December 31, 1999, the Company's total
commitment under such contracts amounted to approximately $5,036,000. Based
on lumber prices at December 31, 1999, management estimated the fair value
of stumpage under such contracts to be approximately $3,988,000. Depending
on the market value of this stumpage at time of harvest, the Company's
sawmills may experience favorable or unfavorable log supply costs. By
February 3, 2000, the lumber market had improved to the point that the
estimated fair value of timber under these contracts had increased to
approximately $4,256,000.
Note 7 - Property, Plant, and Equipment
Property, plant, and equipment at December 31 consisted of the following:
<TABLE>
<CAPTION>
Range of
(Thousands of dollars) Useful Lives 1999 1998
------------ --------- ---------
<S> <C> <C> <C>
Land N/A $ 4,425 4,425
Land improvements 10-20 years 4,061 4,046
Buildings and structures 10-20 years 4,946 8,573
Machinery and equipment 3-15 years 71,234 62,949
--------- ---------
84,666 79,993
Less accumulated depreciation (40,354) (35,889)
--------- ---------
$ 44,312 44,104
========= =========
</TABLE>
36
<PAGE>
DELTIC TIMBER CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
Depreciation expense charged to operations was $5,676,000, $5,087,000, and
$3,508,000 in 1999, 1998, and 1997, respectively.
Gains/(losses) on disposals or retirements of assets included in income were
$1,487,000 in 1999 ($1,423,000 from the sale of 7,336 acres of timberland),
$77,000 in 1998, and $1,449,000 in 1997 ($1,196,000 for involuntary
conversion of the Ola planermill due to fire and $186,000 from the sale of
9.5 acres of undeveloped real estate acreage).
Note 8 - Indebtedness
The Company's indebtedness at December 31 consisted of the following:
<TABLE>
<CAPTION>
(Thousands of dollars) 1999 1998
-------- --------
<S> <C> <C>
Short-term notes, 5.0% $ 13 387
Installment timber notes payable, 1.2%*,
due 2000-2001 68 394
Note payable, 8%, due 1999 - 750
Note payable, 6.5%, due 2001 15,000 5,000
Senior notes payable, 6.7%, due 2008 40,000 40,000
Other notes payable, 4.7%*, due 2000-2001 705 44
-------- --------
55,786 46,575
Less: Short-term notes (13) (387)
Current maturities of long-term debt (203) (990)
-------- --------
Long-term debt at December 31 $ 55,570 45,198
======== ========
</TABLE>
*Weighted average interest rate at December 31, 1999.
During 1998, the Company successfully completed negotiation of the private
placement of $40,000,000 of senior notes with Pacific Coast Farm Credit
Services, ACA. These unsecured notes have a fixed stated interest rate of
6.7 percent and mature on December 18, 2008. No installment payments are
required, but the terms allow for prepayments at the option of the Company.
The agreement contains certain restrictive financial covenants, including a
minimum consolidated tangible net worth of the sum of $135,000,000, plus 25
percent of cumulative consolidated adjusted net income from October 1, 1998,
and a maximum funded debt/capitalization ratio of .6 to 1. The Company
incurred $226,000 of costs related to the issuance of these notes, which was
deferred and is being amortized as additional interest expense over the term
of the underlying debt.
In anticipation of issuance of these notes, the Company entered into and
settled an interest rate hedge contract. Upon settlement of this contract in
December 1998, the Company paid $1,081,000, which was deferred and is being
amortized as other debt expense over the term of the underlying debt,
resulting in an effective interest rate for these notes of approximately 6.9
percent.
The scheduled maturities of long-term debt for the next five years are
$203,000 in 2000, $15,161,000 in 2001, $136,000 in 2002, $137,000 in 2003,
and $136,000 in 2004. (For additional information regarding financial
instruments, see Note 9 - Credit Facilities and Note 13 - Fair Value of
Financial Instruments.)
37
<PAGE>
DELTIC TIMBER CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
Note 9 - Credit Facilities
In 1996, Deltic entered into an agreement with NationsBank, N.A. and other
domestic banks which provides an unsecured, committed revolving credit
facility totaling $100,000,000. The agreement will expire on December 31,
2001. As of December 31, 1999, $85,000,000 of committed credit was available
in excess of all borrowings outstanding under or supported by the facility.
Borrowings under the agreement bear interest based upon prime or other
various cost of funds options. Fees associated with this revolving credit
facility include a commitment fee of .15 to .35 percent per annum on the
unused portion of the commitment balance. The revolving credit agreement
contains certain restrictive financial covenants, including a maximum funded
debt/capitalization ratio of .5 to 1, which is to be maintained throughout
the term of the credit agreement.
The Company may also borrow up to $5,000,000 under a short-term credit
facility with First National Bank of El Dorado. The agreement expires May 8,
2000, with renewal annually. The amount available to the Company under this
facility is reduced by any outstanding letters of credit issued by Deltic.
As of December 31, 1999, letters of credit amounting to $768,000 were
committed, resulting in $4,232,000 available to the Company. Borrowings bear
interest based upon the New York Prime and the facility carries a commitment
fee of .1 percent per annum on the unused amount of the facility.
In addition, Deltic entered into an agreement with Regions Bank of Little
Rock which provides a $1,750,000 credit facility used primarily to support
letters of credit issued in connection with the Company's purchased stumpage
procurement and real estate development operations. The agreement, which is
renewable annually, carries no facility fees and borrowings bear interest
based upon prime. Amounts available to Deltic under the facility are reduced
by any outstanding letters of credit, which amounted to $1,249,000 at
December 31, 1999, leaving $501,000 available to the Company. (For
additional information regarding these financial instruments, see Note 13 -
Fair Value of Financial Instruments.)
Note 10 - Redeemable Preferred Stock
During 1997, the Company issued 600,000 shares of its authorized preferred
stock having a par value of $.01 per share. Redemption of these shares,
designated by the Company as Cumulative Mandatory Redeemable Preferred
Stock, 7.54% Series, is mandatory on December 31, 2002 ("Mandatory
Redemption Date"). These redeemable preferred shares have no voting rights,
except if at any time, cumulative dividends payable for these shares become
in arrears for an amount equal to dividends payable for six quarterly
dividends or the shares are not redeemed in full on the Mandatory Redemption
Date. If either occurs, the holders of the redeemable preferred shares shall
have the right to elect a director to the Board of Directors, which would be
in addition to the current number of directors. This right shall continue
until such time that all cumulative unpaid dividends have been paid or the
redeemable preferred shares are redeemed.
38
<PAGE>
DELTIC TIMBER CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
Note 11 - Income Taxes
The components of income tax expense/(benefit) for the three years ended
December 31, 1999, 1998, and 1997 consisted of the following:
<TABLE>
<CAPTION>
(Thousands of dollars) 1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Federal
Current $ 4,856 3,388 9,143
Deferred and noncurrent 729 1,255 (65)
--------- --------- ---------
5,585 4,643 9,078
State
Current 85 660 1,600
Deferred 460 - -
--------- --------- ---------
Total $ 6,130 5,303 10,678
========= ========= =========
</TABLE>
A reconciliation of the U.S. statutory income tax rate to the Company's
effective rates on income before income taxes consisted of the following:
<TABLE>
<CAPTION>
1999 1998 1997
------ ----- -----
<S> <C> <C> <C>
Statutory income tax rate 35% 35% 35%
State income taxes, net of federal income tax benefit 2 4 4
Other (1) (1) -
------ ----- -----
Effective income tax rate 36% 38% 39%
====== ===== =====
</TABLE>
An analysis of the Company's deferred tax assets and deferred tax
liabilities at December 31, 1999 and 1998, showing the tax effects of
significant temporary differences, consisted of the following:
<TABLE>
<CAPTION>
(Thousands of dollars) 1999 1998
--------- ---------
<S> <C> <C>
Deferred tax assets
Investment in real estate held for development and sale $ 4,992 2,803
Postretirement and other employee benefits 371 260
Other deferred tax assets 641 704
--------- ---------
Total deferred tax assets 6,004 3,767
--------- ---------
Deferred tax liabilities
Investment in Del-Tin Fiber (3,719) (344)
Timber and timberlands (634) (217)
Property, plant, and equipment (3,927) (4,367)
Other deferred tax liabilities (212) (158)
--------- ---------
Total deferred tax liabilities (8,492) (5,086)
--------- ---------
Net deferred tax assets/(liabilities) $ (2,488) (1,319)
========= =========
</TABLE>
Net long-term deferred tax liabilities of $2,885,000 at December 31, 1999,
and $1,701,000 at December 31, 1998, are included in the Consolidated
Balance Sheets in Deferred Credits and Other Noncurrent Liabilities for the
respective years. In addition, short-term deferred tax assets of $397,000 at
December 31, 1999, and $382,000 at December 31, 1998, are included in the
Consolidated Balance Sheets in Prepaid Expenses and Other Current Assets for
the respective years.
In management's judgment, the Company's deferred tax assets at December 31,
1999, will more likely than not be realized as reductions of future taxable
income or by utilizing available tax planning strategies. There were no
valuation allowances for deferred tax assets at the end of each year in the
three years ended December 31, 1999.
39
<PAGE>
DELTIC TIMBER CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
Note 12 - Stockholders Rights Plan
The Company has a Stockholders Rights Plan, which provides for each eligible
common shareholder to receive a dividend of one preferred stock purchase
right ("Right") for each outstanding share of the Company's common stock
held. The Rights will expire on December 31, 2006, unless earlier exchanged
or redeemed. The Rights will detach from the common stock and become
exercisable: (1) following a specified period of time after the date of the
first public announcement that a person or group of affiliated or associated
persons ("Acquiring Person"), other than certain persons, has become the
beneficial owner of 15 percent or more of the Company's common stock or (2)
following a specified amount of time of the commencement of a tender or
exchange offer by any Acquiring Person, other than certain persons, which
would, if consummated, result in such persons becoming the beneficial owner
of 15 percent or more of the Company's common stock. In either case, the
detachment of the Rights from the common stock is subject to extension by a
majority of the directors of the Company. The Rights have certain
antitakeover effects and will cause substantial dilution to any Acquiring
Person that attempts to acquire the Company without conditioning the offer
on a substantial number of Rights being acquired. The Rights are not
intended to prevent a takeover, but rather are designed to enhance the
ability of the Board of Directors of the Company to negotiate with an
acquiror on behalf of all shareholders. Other terms of the Rights are set
forth in, and the foregoing description is qualified in its entirety by, the
Rights Agreement between the Company and Harris Trust and Savings Bank, as
Rights Agent.
Note 13 - Fair Value of Financial Instruments
The following table presents the carrying amounts and estimated fair values
of financial instruments held by the Company at December 31, 1999 and 1998.
The fair value of a financial instrument is the amount at which the
instrument could be exchanged in a current transaction between willing
parties. The table excludes financial instruments included in current assets
and liabilities, except current maturities of long-term debt, all of which
have fair values approximating carrying values.
<TABLE>
<CAPTION>
1999 1998
---------------------------- -----------------------------
Carrying or Estimated Carrying or Estimated
Notional Fair Notional Fair
(Thousands of dollars) Amount Value Amount Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Financial liabilities
Long-term debt, including
current maturities $ (55,773) (54,640) (46,188) (46,218)
Redeemable preferred stock $ (30,000) (30,508) (30,000) (31,224)
Off-balance sheet exposures
Letters of credit $ (2,017) (2,017) (3,505) (3,505)
</TABLE>
Long-term debt, including current maturities -- The fair value is estimated
based on current rates at which the Company could borrow funds with
similar remaining maturities.
Redeemable preferred stock -- The fair value is based on the redemption
amount for the stock, discounted using the Company's estimated borrowing
rate for debt instruments with similar remaining maturities.
Letters of credit -- The fair value is based on the estimated cost to settle
these obligations.
40
<PAGE>
DELTIC TIMBER CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
Note 14 - Concentration of Credit Risks
Financial instruments which potentially subject the Company to credit risk
are trade accounts receivable. These receivables normally arise from the
sale of wood products, primarily lumber. Concentration of credit with
respect to these trade accounts receivable is limited due to the large
number of customers comprising the Company's customer base. No single
customer accounted for a significant amount of the Company's sales of timber
or wood products in 1999, 1998 or 1997. There were no significant accounts
receivable from a single customer at December 31, 1999; however, at December
31, 1998, one timber sale customer's receivable accounted for approximately
12 percent of the Company's consolidated trade accounts receivable amount.
Within the Agriculture segment, the Company is exposed to a minimal level of
credit risk in that the majority of farm crops grown are delivered to a
small number of grain elevators and these elevators are limited to the
geographic area in which the Company's agriculture operations are located.
However, receipt of payment from these elevators usually occurs at the time
of delivery. At December 31, 1999 and 1998, the Company had no significant
accounts receivable outstanding in this area.
Note 15 - Employee and Retiree Benefits
The Company provides retirement plans and other postretirement benefits to
the majority of its employees. Reconciliations of benefit obligations, plan
assets, and funded status of the plans consisted of the following:
<TABLE>
<CAPTION>
Other
Retirement Postretirement
Plans Benefits
---------------------- ----------------------
(Thousands of dollars) 1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Change in benefit obligation
Benefit obligation at January 1 $ 9,074 7,033 3,322 2,602
Service cost 675 428 191 155
Interest cost 641 481 214 190
Participant contributions - - 17 7
Actuarial (gain)/loss (1,186) 1,150 (412) 403
Benefits paid (59) (18) (47) (35)
-------- -------- -------- --------
Benefit obligation at December 31 $ 9,145 9,074 3,285 3,322
======== ======== ======== ========
Change in plan assets
Fair value of plan assets at January 1 $ 10,498 9,884 - -
Actual return on plan assets 1,025 632 - -
Employer contributions - - 31 28
Participant contributions - - 16 7
Benefits paid (59) (18) (47) (35)
-------- -------- -------- --------
Fair value of plan assets at
December 31/1/ $ 11,464 10,498 - -
======== ======== ======== ========
</TABLE>
41
<PAGE>
DELTIC TIMBER CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
<TABLE>
<CAPTION>
Other
Retirement Postretirement
Plans Benefits
---------------------- ----------------------
(Thousands of dollars) 1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Reconciliation of funded status of
plans
Funded status of plans $ 2,319 1,899 (3,285) (3,322)
Unrecognized actuarial (gain)/loss (739) 591 126 533
Unrecognized net asset from transition
to SFAS 87/2/ (183) (233) - -
Unrecognized prior service cost 599 216 - -
-------- -------- -------- --------
Prepaid/(accrued) benefit cost/3/ $ 1,996 2,473 (3,159) (2,789)
======== ======== ======== ========
Assumptions
Weighted average discount rate 7.25% 6.50% 7.25% 6.50%
Expected return on plan assets 8.50% 8.50% N/A N/A
Rate of compensation increase 4.60% 4.60% N/A N/A
</TABLE>
/1/Primarily includes listed stocks and bonds, government securities, and
U.S. agency bonds.
/2/Being amortized over a period of 15 years.
/3/Included in the Consolidated Balance Sheets in Deferred Charges and
Other Assets/Deferred Credits and Other Noncurrent Liabilities.
Components of net periodic retirement expense/(expense reduction) and other
postretirement benefits expense consisted of the following:
<TABLE>
<CAPTION>
(Thousands of dollars) 1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Retirement plans
Service cost $ 675 428 354
Interest cost 641 481 389
Expected return on plan assets (891) (839) (692)
Amortization of prior service cost 92 25 25
Amortization of transitional asset (49) (49) (49)
Recognized actuarial (gain)/loss 9 - -
-------- -------- --------
Net retirement expense/(expense reduction) $ 477 46 27
======== ======== ========
Other postretirement benefits
Service cost $ 191 156 132
Interest cost 214 190 159
Recognized actuarial (gain)/loss 13 1 -
-------- -------- --------
Other postretirement benefits expense $ 418 347 291
======== ======== ========
</TABLE>
42
<PAGE>
DELTIC TIMBER CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
Retirement Plans -- The Company has noncontributory, defined benefit
retirement plans that cover substantially all employees. Benefits are
based on years of service, including those with Murphy Oil, and final
career-average-pay formulas as defined by the plans.
Thrift Plan -- Employees of the Company may participate in its thrift plan
by allotting up to a specific percentage of their base pay. The Company
matches contributions at a stated percentage of each employee's
allotment, based on length of participation in the plan. Company
contributions to this plan were $259,000 in 1999, $262,000 in 1998, and
$112,000 in 1997.
Postretirement Benefits -- The Company sponsors a plan that provides
comprehensive health care benefits (supplementing Medicare benefits for
those eligible) and life insurance benefits for retired employees. Costs
are accrued for this plan during the service lives of covered employees.
Retirees contribute a portion of the self-funded cost of health care
benefits; the Company contributes the remainder. The Company pays
premiums for life insurance coverage, arranged through an insurance
company. The health care plan is funded on a pay-as-you-go basis. The
Company retains the right to modify or terminate the benefits and/or cost
sharing provisions.
In determining the accumulated benefit obligation for health care, at
December 31, 1999 and 1998, health care inflation cost was assumed to
increase at an annual rate of 6.5 percent in 1999 and 7.5 percent for 1998,
decreasing one percent per year to 4.5 percent in 2002 and thereafter. A one
percentage-point increase in the assumed health care cost trend rate would
increase the aggregate service and interest cost components of periodic
benefit cost for 1999 by $44,000 and the benefit obligation by $301,000,
while a one percentage-point decrease in the assumed rate would decrease the
1999 cost components by $40,000 and the benefit obligation by $280,000.
Note 16 - Incentive Plans
Stock Incentive Plan
The Company's 1996 Stock Incentive Plan ("the Plan") permits annual awards
of shares of the Company's common stock to executives and other key
employees. Under the Plan, the Executive Compensation Committee ("the
Committee") is authorized to grant: (1) stock options, nonqualified or
incentive; (2) stock appreciation rights; and (3) restricted stock awards.
Total annual options granted, excluding any replacement options issued due
to the spin-off from Murphy Oil, may not exceed .5 percent of common shares
issued and outstanding as of the date of issuance of the options. In
subsequent years, the Committee may award up to one percent of common shares
issued and outstanding at the end of the preceding year; any allowed shares
not granted may be available for grant in subsequent years. The Company
applies APB 25 to account for stock-based compensation plans. Cost of
options are accrued over the vesting periods and adjusted for subsequent
changes in fair market value of the shares.
Stock Options -- For each option granted under the Plan, the Committee fixes
the option price at no less than fair market value on the date of the
grant and the option term, not to exceed 10 years from date of grant.
Replacement options granted were for 10 years from original grant date
and nonqualified. New options granted since 1997 were for 10 years and
primarily incentive. All options have an option price no less than the
fair market value on the grant date, with a range in option prices of
$9.90 to $28.03 per share, and each grantee is permitted to surrender
options for equivalent value of stock at the date of surrender. For
options granted in 1999 and 1998, half may be exercised or surrendered
after one year and the remainder after three years. For options granted
in 1997, exclusive of replacement options, half may be exercised or
surrendered after two years and the remainder after three years.
43
<PAGE>
DELTIC TIMBER CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
Changes in options outstanding, including replacement options, consisted of
the following:
Number Average
of Exercise
Options Price
-------- -----
Outstanding at January 1, 1997 - N/A
Granted 103,355 $ 20.38
Surrendered - N/A
-------
Outstanding at December 31, 1997 103,355 $ 20.38
Granted 50,950 $ 28.03
Surrendered (6,250) $ 13.01
-------
Outstanding at December 31, 1998 148,055 $ 23.33
Granted 69,800 $ 24.97
Surrendered - N/A
-------
Outstanding at December 31, 1999 217,855 $ 23.86
=======
Exercisable at December 31, 1997 9,375 $ 12.78
=======
Exercisable at December 31, 1998 17,875 $ 13.01
=======
Exercisable at December 31, 1999 86,967 $ 21.77
=======
Additional information about stock options outstanding at December 31, 1999,
consisted of the following:
Options Outstanding Options Exercisable
--------------------------- -------------------
Range of Number Average Average Number Average
Exercise of Life Exercise of Exercise
Prices Options in Years Price Options Price
----- ------- -------- ----- ------- -----
$ 9.90 to $13.90 25,875 5.5 $ 12.83 25,875 $ 12.83
$ 23.19 to $28.03 191,980 8.0 $ 25.35 61,092 $ 25.56
------- --------
$ 9.90 to $28.03 217,855 7.1 $ 23.86 86,967 $ 21.77
======= ========
Stock Appreciation Rights -- Stock appreciation rights may be granted in
conjunction with, or independent of, stock options. The Committee determines
when these rights may be exercised and the price. No stock appreciation rights
have been granted.
Restricted Stock -- The Committee may award restricted stock to selected
employees, with conditions to vesting for each grant established by the
Committee. During the vesting period, the grantee may vote and receive
dividends on the shares, but shares are subject to transfer restrictions and
are all, or partially, forfeited if a grantee terminates, depending on the
reason. The grantee may be reimbursed by the Company for personal income tax
liability on the value of stock awarded.
During 1998, grants of 13,500 shares of restricted stock were awarded by the
Committee. The fair value per share of restricted stock granted was $28.03.
Unearned compensation was charged for the market value of the restricted
shares. The unearned compensation is shown as a reduction of shareholders'
equity in the Consolidated Balance Sheets as Unamortized Restricted Stock
Awards, and is being amortized to expense over the four-year restricted
period.
44
<PAGE>
DELTIC TIMBER CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
Stock-based compensation reflected in income was a charge of $89,000 in 1999
and a benefit of $163,000 in 1998. Had cost of the Company's stock-based
compensation plans been determined based on the fair value of the instruments
at the grant dates using the provisions of SFAS 123, the Company's net income
and earnings per share would be the following pro forma amounts.
(Thousands of dollars, except per share amounts) 1999 1998 1997
---- ---- ----
Net income
As reported $ 10,920 8,474 16,574
Pro forma $ 10,305 7,833 16,378
Basic earnings per share
As reported $ .69 .48 1.29
Pro forma $ .64 .43 1.27
Dilutive earnings per share
As reported $ .69 .48 1.29
Pro forma $ .64 .43 1.27
For the pro forma net income calculation in the preceding table, the fair
value of each option on the date of grant was estimated using the Black-
Scholes option-pricing model and the following assumptions for awards in 1999,
1998, and 1997, respectively: dividend yields of 1.01 percent, .70 percent,
and .90 percent; expected volatility of 37.99 percent, 25.22 percent, and
26.39 percent; risk-free interest rates of 5.06 percent, 5.74 percent, and
6.38 percent; and expected lives of five years. Using these assumptions, the
weighted average grant-date fair value per share of options granted in 1999,
1998, and 1997 were $9.42, $8.62, and $6.65, respectively.
Incentive Compensation Plan
Cash Awards -- The Company has an Incentive Compensation Plan that provides
for annual cash awards to officers, directors, and key employees based on
actual results for a year compared to objectives established by the
Executive Compensation Committee, which administers the Plan, at the
beginning of that year. Initial awards under the Plan were granted in 1998,
based on 1997 results of operations. Provisions for cash incentive awards of
$575,000, $270,000, and $425,000 were recorded in 1999, 1998 and 1997,
respectively.
Note 17 - Supplemental Cash Flows Disclosures
Income taxes paid, net of refunds, were $5,770,000, $5,753,000, and
$11,159,000 in 1999, 1998, and 1997, respectively. Interest paid, net of
amounts capitalized, was $4,074,000, $1,285,000, and $449,000 in 1999, 1998,
and 1997, respectively.
Noncash investing and financing activities excluded from the Consolidated
Statements of Cash Flows were assumptions of owner-financed debt in the amount
of $696,000 in 1999, $410,000 in 1998, and $496,000 in 1997 related to
acquisitions of land and timber-cutting rights.
45
<PAGE>
DELTIC TIMBER CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
(Increases)/decreases in operating working capital, other than cash and cash
equivalents, for each of the three years ended December 31 consisted of the
following:
<TABLE>
<CAPTION>
(Thousands of dollars) 1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Trade accounts receivable $ (652) (224) (137)
Other receivables (13) (1,031) 2,532
Inventories (3,560) 2,744 (2,998)
Prepaid expenses and other current assets (513) (1,822) 342
Trade accounts payable 764 (377) 413
Accrued liabilities (646) 526 (655)
------- ------- -------
$ (4,620) (184) (503)
======= ======= =======
</TABLE>
Note 18 - Earnings per Share
The amounts used in computing earnings per share and the effect on income
and weighted average number of shares outstanding of dilutive potential
common stock consisted of the following:
<TABLE>
<CAPTION>
(Thousands of dollars) 1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Net income $ 10,920 8,474 16,574
Less preferred dividends (2,262) (2,269) (86)
------- ------- -------
Income available to common shareholders $ 8,658 6,205 16,488
======= ======= =======
Weighted average number of common shares
used in basic EPS 12,503 12,812 12,798
Effect of dilutive stock options 16 18 27
------- ------- -------
Weighted average number of common shares
and dilutive potential common stock used in
EPS assuming dilution 12,519 12,830 12,825
======= ======= =======
Earnings per common share
Basic $ .69 .48 1.29
======= ======= =======
Assuming dilution $ .69 .48 1.29
======= ======= =======
</TABLE>
Options on 141,480 and 122,180 shares of common stock were not included in
computing dilutive EPS for 1999 and 1998, respectively, because their
effects were antidilutive.
Note 19 - Commitments and Contingencies
Commitments -- Commitments for capital expenditures at December 31, 1999,
were approximately $825,000 for timber and timberlands; $1,344,000 for
property, plant, and equipment; $3,708,000 for investment in real estate
held for development and sale; and $232,000 for the purchase of an
additional ownership percentage in a consolidated entity.
Contingencies -- The Company is involved in litigation incidental to its
business from time to time. Currently, there are no material legal
proceedings outstanding.
46
<PAGE>
DELTIC TIMBER CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
Note 20 - Business Segments
In June 1997, the Financial Accounting Standards Board issued SFAS 131,
Disclosures about Segments of an Enterprise and Related Information. SFAS
131 superseded and/or amended the business segment disclosures required
under various preceding pronouncements, effective for fiscal years beginning
after December 15, 1997, with earlier application encouraged. This standard
defines additional information to be disclosed for each reportable segment
and requires that each operating segment for which an enterprise's chief
operating decision maker regularly assesses performance be disclosed as a
reportable segment. As a result, the Company has determined that its
previous Forest Products segment should be divided into two separate
reporting segments, Woodlands and Mills. Deltic elected to adopt SFAS 131
effective for the first quarter of 1998. All 1997 business segment
information has been restated for comparative purposes.
The Company's five reporting segments consist of Deltic's four operating
business units and its corporate function. Each reporting entity has a
separate management team and infrastructure that offers different products
and/or services.
Woodlands operations manage the Company's Southern Pine timberlands located
primarily in Arkansas and north Louisiana and derive revenue from the
harvest of timber from the timberlands, in accordance with its harvest
plans, and either sells timber to third parties in the domestic market or to
the Company's Mills segment for conversion into lumber.
The Mills segment consists of Deltic's two sawmills which convert timber,
purchased from third parties or the Company's Woodlands segment, into
lumber. These mills produce a variety of products, including dimension
lumber, boards, timbers, decking, and secondary manufacturing products, such
as finger-jointed studs. These products are sold primarily to wholesalers
and lumber treaters in the South and Midwest and used in residential
construction, roof trusses, laminated beams, and remanufactured items.
Real Estate operations, which currently include three separate real estate
developments, add value to former timberland by developing it into upscale,
planned residential and commercial developments. These developments, each of
which is, or will be, centered around a core amenity, are being developed in
stages. To- date, real estate sales have consisted primarily of residential
lots sold to builders or individuals, commercial site sales, and sales of
undeveloped acreage. In addition, this segment currently leases office and
retail space to third parties in two buildings constructed by the Company,
and held for sale, in one of its developments. This segment also manages a
real estate brokerage subsidiary which currently generates commission
revenue by reselling existing homesites in one of the Company developments.
The Agriculture segment operates the Company's farmland in northeast
Louisiana. The majority of farmland acreage is farmed by Deltic, while most
of the remaining acreage is rented to third parties. Crops grown on
Company-farmed acreage in 1999 were soybeans and corn. This business unit
derives the majority of its revenues from sales of farm crops grown to grain
elevators and from rents received from third-party farmland renters.
Corporate operations consist primarily of the planning, accounting,
information systems, human resources, treasury, income tax, and legal staff
functions that provide support services to the operating business units. The
Company currently does not allocate the cost of maintaining these support
functions to its operating units.
The accounting policies of the reportable segments are the same as those
described in Note 1 - Significant Accounting Policies. The Company evaluates
the performance of its segments based on operating income before equity in
the results of Del-Tin Fiber, an equity method investee; interest income and
expense; other nonoperating income or expense; and income taxes.
Intersegment revenues consist primarily of timber sales from the Woodlands
segment to the Mills operations.
47
<PAGE>
DELTIC TIMBER CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
Information about the Company's business segments consisted of the following:
<TABLE>
<CAPTION>
Thousands of dollars) 1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net sales
Woodlands $ 28,355 26,569 22,579
Mills 83,490 65,857 67,688
Real Estate 21,631 15,879 11,550
Agriculture 2,623 6,484 9,509
Eliminations/1/ (11,887) (7,832) (7,118)
-------- ------- -------
$124,212 106,957 104,208
======== ======= =======
Income before income taxes
Operating income
Woodlands $ 18,882 20,447 17,995
Mills 6,500 (2,784) 7,381
Real Estate 8,468 5,032 3,266
Agriculture 260 758 2,778
Corporate (5,836) (5,004) (5,231)
Eliminations (193) (171) (580)
-------- ------- -------
Operating income 28,081 18,278 25,609
Equity in loss of Del-Tin Fiber (8,936) (4,657) -
Interest income 254 1,122 646
Interest and other debt expense (4,124) (1,387) (370)
Other income/(expense) 1,775 421 1,367
-------- ------- -------
$ 17,050 13,777 27,252
======== ======= =======
Total assets at year-end
Woodlands $165,790 167,364 109,167
Mills 41,377 36,996 38,212
Real Estate 39,450 34,223 27,278
Agriculture 13,860 12,397 11,517
Corporate/2/ 17,421 21,564 39,201
-------- ------- -------
$277,898 272,544 225,375
======== ======= =======
Depreciation, amortization, and
cost of fee timber harvested
Woodlands $ 5,258 2,481 1,598
Mills 4,162 3,673 2,369
Real Estate 416 420 365
Agriculture 576 514 468
Corporate 276 243 112
-------- ------- -------
$ 10,688 7,331 4,912
======== ======= =======
Capital expenditures
Woodlands $ 8,541 59,839 16,380
Mills 7,949 7,918 11,506
Real Estate 11,475 11,531 6,378
Agriculture 527 721 1,000
Corporate 124 524 574
-------- ------- --------
$ 28,616 80,533 35,838
======== ======= ========
</TABLE>
/1/ Intersegment sales of timber from Woodlands to Mills.
/2/ Includes investment in Del-Tin Fiber, an equity method investee, of
$3,727,000 and $6,699,000 at December 31, 1999 and 1998, respectively. (For
additional information regarding the financial position and results of
operations of Del-Tin Fiber, see Note 5 - Investment in Del-Tin Fiber.)
48
<PAGE>
DELTIC TIMBER CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
Note 21 - Financial Results by Quarter (Unaudited)
(Thousands of dollars, except per share amounts)
<TABLE>
<CAPTION>
1999
-----------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net sales $ 31,325 31,061 33,086 28,740 124,212
Operating income $ 8,769 6,944 6,035 6,333 28,081
Net income $ 3,895 3,102 2,354 1,569 10,920
Earnings per common share
Basic $ .26 .20 .14 .08 .69
Assuming dilution $ .26 .20 .14 .08 .69
Dividends per common share $ .0625 .0625 .0625 .0625 .25
Market price per common share
High $ 25-5/8 28-1/2 26-13/16 27-1/16 28-1/2
Low $ 21-3/16 22-13/16 22-3/8 19-7/8 19-7/8
Close, at period-end $ 23-3/4 26-15/16 22-3/4 21-7/8 21-7/8
1998
----------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- --------
Net sales $ 27,008 26,211 29,088 24,650 106,957
Operating income $ 6,389 3,919 2,987 4,983 18,278
Net income $ 3,806 2,077 936 1,655 8,474
Earnings per common share
Basic $ .25 .12 .03 .09 .48
Assuming dilution $ .25 .12 .03 .09 .48
Dividends per common share $ .0625 .0625 .0625 .0625 .25
Market price per common share
High $ 30-1/16 30-1/16 25 24-15/16 30-1/16
Low $ 26-1/4 25 18 18 18
Close, at period-end $ 29-5/16 25-1/16 18 20-3/8 20-3/8
</TABLE>
Note 22 - Subsequent Event
On February 23, 2000, the Company announced that its Board of Directors had
authorized the repurchase of up to $10,000,000 of its common stock. Under the
program, the Company can purchase shares through the open market and privately
negotiated transactions at prices deemed appropriate by management.
49
<PAGE>
REPORT OF MANAGEMENT
---------------------
The Shareholders
Deltic Timber Corporation:
The management of Deltic Timber Corporation has prepared and is responsible for
the Company's consolidated financial statements. The statements are prepared in
conformity with generally accepted accounting principles appropriate in the
circumstances. In preparing the financial statements, management has, when
necessary, made judgments and estimates with consideration given to materiality.
The Company maintains internal control systems and related policies and
procedures designed to provide reasonable assurance that assets are safeguarded
against loss or unauthorized use, that the accounting records accurately reflect
business transactions, and that the transactions are in accordance with
management's authorization. The design, monitoring, and revision of the systems
of internal control involve, among other things, our judgment with respect to
the relative cost and expected benefits of specific control measures. The
Company has engaged an outside accounting firm to provide internal audit
services in order to monitor the effectiveness of the controls, while
independently and systematically evaluating and formally reporting on the
adequacy and effectiveness of components of the system.
The Company's consolidated financial statements have been audited by KPMG LLP,
independent certified public accountants, who have expressed their opinion with
respect to the fairness of the consolidated financial statements. Their audit
was conducted in accordance with generally accepted auditing standards, which
include the consideration of the Company's internal controls to the extent
necessary to form an independent opinion on the consolidated financial
statements prepared by management. The Board of Directors appoints the
independent auditors; ratification of the appointment is solicited annually from
the shareholders.
The Audit Committee of the Board of Directors is composed of directors who are
not officers or employees of the Company. The Committee meets periodically with
the independent certified public accountants, the firm providing internal audit
services, and representatives of management to review the Company's internal
controls, the quality of its financial reporting, and the scope and results of
audits. The independent auditors have unrestricted access to the Committee,
without management's presence, to discuss audit findings and other financial
matters.
Clefton D. Vaughan
Vice President and Chief Financial Officer
February 4, 2000
50
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
The Board of Directors
Deltic Timber Corporation:
We have audited the accompanying consolidated balance sheets of Deltic Timber
Corporation and Subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the years in the three-year period ended December 31, 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Deltic Timber
Corporation and Subsidiaries as of December 31, 1999 and 1998, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1999, in conformity with generally accepted accounting
principles.
KPMG LLP
Shreveport, Louisiana
February 4, 2000
51
<PAGE>
AUDIT COMMITTEE CHAIRMAN'S LETTER
---------------------------------
The Shareholders
Deltic Timber Corporation:
The members of the Company's Audit Committee ("the Committee") are selected by
the Board of Directors. The Committee consists of five outside directors and met
twice during 1999.
The Audit Committee oversees the financial reporting process on behalf of the
Board of Directors. As part of that responsibility, the Committee recommended to
the Board of Directors, subject to shareholder approval, the selection of the
Company's independent auditors. The Committee discussed the overall scope and
specific plans for audit services with the outside accounting firm that provides
the Company's internal audit services and with KPMG LLP, the Company's
independent auditors. The Committee also reviewed and discussed the Company's
audited consolidated financial statements and the Company's internal controls
currently in place. In addition, the Committee met with the internal auditors
and KPMG LLP, without management present, to discuss the results of their
respective audits, their consideration of the Company's internal controls, and
the overall quality of the Company's financial reporting. The meetings were also
designed to facilitate any private communication with the Committee desired by
the internal audit firm or the Company's independent auditors.
Based upon these reviews and discussions, the Audit Committee approved the
accompanying audited financial statements for inclusion in the annual report on
Form 10-K filed with the Securities and Exchange Commission.
John C. Shealy
Chairman, Audit Committee
February 29, 2000
52
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None
53
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant.
The sections entitled "Nominees For Election as Directors" and "Directors
Whose Term of Office Continues" appearing in the Registrant's proxy statement
for the annual meeting of shareholders to be held on April 27, 2000, sets forth
certain information with respect to the directors of the registrant and is
incorporated herein by reference. Certain information with respect to persons
who are or may be deemed to be executive officers of the Registrant is set forth
under the caption "Executive Officers of the Registrant" in Part I of this
report.
Item 11. Executive Compensation
The information required by Item 11 is incorporated by reference to the
definitive form of the Proxy Statement which was filed with the SEC on March 20,
2000.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by Item 12 is incorporated by reference to the
definitive form of the Proxy Statement which was filed with the SEC on March 20,
2000.
Item 13. Certain Relationships and Related Transactions
The information required by Item 13 is incorporated by reference to the
definitive form of the Proxy Statement which was filed with the SEC on March 20,
2000.
54
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
a. Financial Statements, Schedules and Exhibits.
1. Consolidated Financial Statements.
Consolidated Balance Sheets - December 31, 1999 and 1998.
Consolidated Statements of Income for the Years Ended December 31,
1999, 1998, and 1997.
Consolidated Statements of Cash Flows for the Years Ended December
31, 1999, 1998, and 1997.
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1999, 1998, and 1997.
Notes to Consolidated Financial Statements, including Consolidated
Quarterly Income Information (unaudited).
Independent Auditors' Report on Consolidated Financial Statements.
2. Financial Statement Schedules.
Financial Statements of Del-Tin Fiber L.L.C., an affiliate
accounted for by the equity method, which constituted a significant
subsidiary for the years ended January 1, 2000 and December 31,
1998.
All other financial statement schedules are omitted because either
they are not applicable or the required information is included in
the consolidated financial statements or notes thereto.
3. Exhibits.
3 Articles of Incorporation and Bylaws.
3.1 Amended and Restated Certificate of Incorporation of Deltic
Timber Corporation as of December 17, 1996 (incorporated by
reference to Exhibit 3.1 to Registrant's Annual Report on
Form 10-K for the year ended December 31, 1996).
3.2 Amended and Restated Bylaws of Deltic Timber Corporation
(incorporated by reference to Exhibit 3.2 to Registrant's
Annual Report on Form 10-K for the year ended December 31,
1996).
4 Instruments Defining the Rights of Security Holders.
4.1 Rights Agreement dated as of December 11, 1996, between
Deltic Timber Corporation and Harris Trust and Savings Bank,
as Rights Agent (incorporated by reference to Exhibit 4 to
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1996).
10 Material contracts
10.1 Deltic Timber Corporation 1996 Stock Incentive Plan
(incorporated by reference to Exhibit 10.1 to Registrant's
Annual Report on Form 10-K for the year ended December 31,
1996).
55
<PAGE>
10.2 Distribution Agreement (incorporated by reference to Exhibit
10.2 to Registrant's Annual Report on Form 10-K for the year
ended December 31, 1996).
10.3 Tax Sharing Agreement (incorporated by reference to Exhibit
10.3 to Registrant's Annual Report on Form 10-K for the year
ended December 31, 1996).
10.4. Credit facility dated December 19, 1996 (incorporated by
reference to Exhibit 10.4 to Registrant's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1997).
10.5 Certificate of Designation of the Cumulative Redeemable
Preferred Stock, 7.54% Series ($.01 Par Value), of Deltic
Timber Corporation (incorporated by reference to Exhibit
10.5 to Registrant's Annual Report on Form 10-K for the year
ended December 31, 1997).
10.6 Fiber Supply Agreement dated February 21, 1995, with Del-Tin
Fiber L.L.C. (incorporated by reference to Exhibit 10.2 to
Registrant's Registration of Securities Report on Form 10).
10.7 Note Purchase Agreement dated December 18, 1998
(incorporated by reference to Exhibit 10.7 to Registrant's
Annual Report on Form 10-K for the year ended December 31,
1998).
10.8 Selective Sections of Del-Tin Fiber L.L.C.'s Project Credit
Agreement dated November 23, 1998 (incorporated by reference
to Exhibit 10.8 to Registrant's Annual Report on Form 10-K
for the year ended December 31, 1998).
21 Subsidiaries of the Registrant, included elsewhere herein.
23 Independent Auditors' Consents.
23.1 Independent auditors' consent related to report on financial
statements of Deltic Timber Corporation, included elsewhere
herein.
23.2 Independent auditors' consent related to report on financial
statements of Del-Tin Fiber, L.L.C., included elsewhere
herein.
27 Financial Data Schedule for 1999 (electronic filing only),
included elsewhere herein.
99 Form 11-K, Annual Report for the fiscal year ended December
31, 1999, covering Thrift Plan of Deltic Timber Corporation.
To be filed as an amendment of this Annual Report on Form
10-K, not later than 180 days after December 31, 1999.
Exhibits other than those listed above have been omitted since they
either are not required or are not applicable.
b. Reports on Form 8-K.
The following item was reported in the Form 8-K dated November 16,
1999:
Item 5. Other Events - Press release announcing Deltic's intent to
pursue the exchange of its agricultural land into Southern Pine
timber.
56
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
DELTIC TIMBER CORPORATION
By: /s/ Ron L. Pearce Date: March 27, 2000
------------------------------------- -----------------------------
Ron L. Pearce, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below on March 27, 2000 by the following persons on behalf of
the registrant and in the capacities indicated.
/s/ Robert C. Nolan /s/ William L. Rosoff
- ----------------------------------------- ----------------------------------
Robert C. Nolan, Chairman and Director William L. Rosoff, Director
/s/ Ron L. Pearce /s/ O. H. Darling, Jr.
- ----------------------------------------- ----------------------------------
Ron L. Pearce, President and Chief O. H. Darling, Jr., Director
Executive Officer and Director
(Principal Executive Officer)
/s/ R. Madison Murphy /s/ John C. Shealy
- ----------------------------------------- ----------------------------------
R. Madison Murphy, Director John C. Shealy, Director
/s/ R. Hunter Pierson, Jr. /s/ Clefton D. Vaughan
- ----------------------------------------- ----------------------------------
R. Hunter Pierson, Jr., Director Clefton D. Vaughan, Vice
President, Finance and
Administration (Principal
Financial Officer)
/s/ Christoph Keller, III /s/ Emily R. Evers
- ----------------------------------------- ----------------------------------
Christoph Keller, III, Director Emily R. Evers, Controller
(Principal Accounting Officer)
/s/ Alex R. Lieblong
- -----------------------------------------
Alex R. Lieblong, Director
57
<PAGE>
FINANCIAL STATEMENT SCHEDULE
PURSUANT TO ITEM 14(a)2
DEL-TIN FIBER L.L.C.
Financial Statements
January 1, 2000 and December 31, 1998
(With Independent Auditors' Report Thereon)
58
<PAGE>
Independent Auditors' Report
----------------------------
The Board of Managers
Del-Tin Fiber L.L.C.:
We have audited the accompanying balance sheets of Del-Tin Fiber L.L.C. as of
January 1, 2000 and December 31, 1998, and the related statements of operations,
cash flows, and members' capital for each of the fiscal years in the three-year
period ended January 1, 2000. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Del-Tin Fiber L.L.C. as of
January 1, 2000 and December 31, 1998, and the results of its operations and its
cash flows for each of the fiscal years in the three-year period ended January
1, 2000, in conformity with generally accepted accounting principles.
KPMG LLP
Shreveport, Louisiana
January 26, 2000
59
<PAGE>
DEL-TIN FIBER L.L.C.
Balance Sheets
At year-end 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
---------------- ----------------
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 993,384 1,747,451
Trade accounts receivable 1,845,554 1,049,667
Other receivables 1,104,163 1,474,628
Inventories 3,327,767 3,597,488
Prepaid expenses and other current assets 83,280 73,897
---------------- ----------------
Total current assets 7,354,148 7,943,131
Debt service reserve funds 2,635,250 2,484,000
Funds held by trustee - 3,323,059
Property, plant, and equipment - net 98,491,679 98,146,794
Deferred debt costs 1,472,440 1,638,722
---------------- ----------------
Total assets $ 109,953,517 113,535,706
================ ================
Liabilities and Members' Capital/(Deficit)
Current liabilities
Accounts payable $ 5,254,942 5,280,305
Accrued expenses 1,100,659 524,088
Notes payable 6,000,000 5,000,000
---------------- ----------------
Total current liabilities 12,355,601 10,804,393
Long-term debt 89,000,000 89,000,000
Other noncurrent liabilities 9,577 -
---------------- ----------------
Total liabilities 101,365,178 99,804,393
Members' capital/(deficit) 8,588,339 13,731,313
---------------- ----------------
Total liabilities and members' capital/(deficit) $ 109,953,517 113,535,706
================ ================
</TABLE>
See accompanying notes to financial statements.
60
<PAGE>
DEL-TIN FIBER L.L.C.
Statements of Operations
For the years 1999, 1998, and 1997
<TABLE>
<CAPTION>
1999 1998 1997
---------------- ---------------- ----------------
<S> <C> <C> <C>
Net sales $ 30,472,126 7,364,998 -
---------------- ---------------- ----------------
Costs and expenses
Cost of sales 33,893,417 12,940,061 -
Depreciation 4,150,633 1,473,448 10,508
Selling, general, and administrative expenses 2,625,046 670,739 269,085
---------------- ---------------- ----------------
Total costs and expenses 40,669,096 15,084,248 279,593
---------------- ---------------- ----------------
Loss from operations (10,196,970) (7,719,250) (279,593)
Interest income 271,279 105,221 -
Interest and other debt expense (6,807,283) (2,563,676) -
Gain/(loss) on sales of assets - - 4,337
---------------- ---------------- ----------------
Net loss $ (16,732,974) (10,177,705) (275,256)
================ ================ ================
</TABLE>
See accompanying notes to financial statements.
61
<PAGE>
DEL-TIN FIBER L.L.C.
Statements of Cash Flows
For the years 1999, 1998, and 1997
<TABLE>
<CAPTION>
1999 1998 1997
-------------- -------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities
Net loss $ (16,732,974) (10,177,705) (275,256)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation expense 4,150,633 1,473,448 10,508
Amortization of debt issuance cost 244,601 - -
(Gains)/losses on dispositions of assets - - (4,337)
Changes in current assets and liabilities,
other than cash and cash equivalents
(Increase)/decrease in trade accounts
receivable (795,887) (1,049,667) -
(Increase)/decrease in other receivables 370,465 (1,301,316) (173,312)
(Increase)/decrease in inventories 269,721 (3,230,928) (366,560)
(Increase)/decrease in prepaid assets
and other current assets (9,383) (73,897) -
Increase/(decrease) in accounts payable (25,363) 1,231,894 -
Increase/(decrease) in retainage payable - (17,832) -
Increase/(decrease) in accrued expenses 576,571 272,777 251,311
Other 9,577 17,832 -
-------------- -------------- ---------------
Net cash used in operating activities (11,942,039) (12,855,394) (557,646)
-------------- -------------- ---------------
Cash flows from investing activities
Capital expenditures requiring cash (4,495,518) (26,043,275) (69,545,831)
Proceeds from dispositions of assets - - 11,104
Net (increase)/decrease in funds held by trustee 3,323,059 6,617,122 (9,940,181)
-------------- -------------- ---------------
Net cash used in investing activities (1,172,459) (19,426,153) (79,474,908)
-------------- -------------- ---------------
Cash flows from financing activities
Proceeds from issuance of notes payable 6,000,000 13,000,000 52,100,000
Proceeds from issuance of bonds - 60,000,000 29,000,000
Advances from Deltic Timber Corporation - 2,000,000 8,100,000
Repayments of notes payable (5,000,000) (60,100,000) -
Repayments of advances from Deltic Timber
Corporation - (5,600,000) -
Net (increase)/decrease in debt service reserve
funds (151,250) (2,484,000) -
Payment of debt issuance costs (78,319) (459,128) -
Capital contributions by members 11,590,000 18,500,000 4,680
-------------- -------------- ---------------
Net cash provided by financing activities 12,360,431 24,856,872 89,204,680
-------------- -------------- ---------------
Net increase/(decrease) in cash and cash
equivalents (754,067) (7,424,675) 9,172,126
Cash and cash equivalents at beginning of period 1,747,451 9,172,126 -
-------------- -------------- ---------------
Cash and cash equivalents at the end of period $ 993,384 1,747,451 9,172,126
============== ============= ===============
</TABLE>
See accompanying notes to financial statements.
62
<PAGE>
DEL-TIN FIBER L.L.C.
Statements of Members' Capital
For the years 1999, 1998, and 1997
Balance at January 1, 1997 $ -
Net loss (275,256)
Capital contributions 4,680
------------
Balance at January 1, 1998 (270,576)
Net loss (10,177,705)
Capital contributions 24,179,594
------------
Balance at December 31, 1998 13,731,313
Net loss (16,732,974)
Capital contributions 11,590,000
------------
Balance at January 1, 2000 $ 8,588,339
============
See accompanying notes to financial statements.
63
<PAGE>
DEL-TIN FIBER L.L.C.
Notes to Financial Statements
January 1, 2000
Note 1 - Summary of Significant Accounting Policies
Description of Business
Del-Tin Fiber L.L.C. ("Del-Tin" or the "Company") is an Arkansas limited
liability company organized in February 1995 and is equally owned by
Temple-Inland Forest Products Corporation ("Temple- Inland"), a Delaware
corporation, and Deltic Timber Corporation ("Deltic"), a Delaware
corporation. Del-Tin is to exist until December 31, 2024 unless the Company
is earlier dissolved in accordance with either the provisions of the
Operating Agreement or the Arkansas Small Business Entity Tax Pass Through
Act. The business of the Company is to manufacture, distribute, and sell
medium density fiberboard ("MDF") under the trade name "Solidium." Within
the United States, MDF is sold primarily to manufacturers and distributors
of laminated flooring, furniture, cabinets, fixtures, and molding.
Under the terms of a separate Fiber Supply Agreement, Deltic will be the
preferred supplier of wood fiber, consisting of sawdust, shavings, and
chips. Del-Tin will purchase the majority of residual chips produced by
Deltic's Waldo, Arkansas sawmill, at a delivered price that approximates
the weighted average delivered price of like-kind residual chips available
to Del-Tin from third parties in the area. Del-Tin will also have first
call on residual chips from Deltic's sawmill in Ola, Arkansas.
Under the terms of a separate MDF Marketing Agreement, Temple-Inland will
serve as the exclusive marketing agent for all MDF produced at the facility
for a period of five years from the first day of production of MDF. The MDF
Marketing Agreement shall be automatically extended for successive five
year periods unless either party elects not to extend.
Accounting Period
During 1999, the Company's Board of Managers approved the change of Del-
Tin's accounting period from a calendar year to a fiscal year. The
Company's fiscal year is the 52 or 53-week period ending the Saturday
closest to December 31. Fiscal year 1999 ended on January 1, 2000.
Reference to years in these financial statements relate to fiscal years
rather than calendar year.
Cash and Cash Equivalents
The Company considers short-term investments with a remaining maturity of
three months or less at the date of purchase to be cash equivalents.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
using the weighted average method for all inventories, other than spare
parts. For spare parts, which are carried at cost excluding freight and
sales tax which are expensed as incurred, the specific identification
method is used.
Debt Service Reserve Funds
Debt service reserve funds consists of cash account balances, restricted
under the Company's permanent credit facility, to be used solely to pay
debt service to the extent sufficient funds are not available for such
scheduled debt service payments in the Company operating account.
64
<PAGE>
DEL-TIN FIBER L.L.C.
Notes to Financial Statements
January 1, 2000
Property, Plant, and Equipment
Property, plant, and equipment is stated at cost less accumulated
depreciation. Depreciation of buildings, machinery and equipment, and
other depreciable assets is calculated over the estimated useful lives of
the assets by using the units of production method for machinery and
equipment and the straight-line method for all other depreciable assets.
The estimated useful lives for property, plant, and equipment, excluding
machinery and equipment, are as follows:
Buildings 40 years
Land improvements 20 years
Vehicles 3 to 5 years
Routine maintenance and repairs are charged to operating expense, while
costs of equipment upgrades and replacements are capitalized. When an
asset is retired or sold, its cost and related accumulated depreciation
are removed from the accounts and the difference between the net book
value of the asset and proceeds from disposition is recognized as a gain
or loss.
Long-lived assets are accounted for under Statement of Financial
Accounting Standards ("SFAS") No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of, and
accordingly the Company will record impairment losses on long-lived
assets used in operations when events and circumstances indicate that the
assets might be impaired and the estimated undiscounted cash flows to be
generated by those assets are less than the carrying amounts of those
assets. The Company recorded no such impairment in 1999, 1998, or 1997.
Deferred Debt Costs
Deferred debt costs consists of various costs related to obtaining the
Company's permanent credit facility ("the Credit Facility"), the issuance
of the Union County, Arkansas Taxable Industrial Development Bonds
(Del-Tin Fiber Project) 1998 Series (the "Taxable Bonds"), and the
substitution of the letters of credit supporting the Union County,
Arkansas Solid Waste Disposal Revenue Bonds (Del-Tin Fiber Project) 1997
Series A & B (the "Tax Exempt Bonds"). (The Taxable Bonds and the Tax
Exempt Bonds are collectively called the "Bonds".) Such costs are stated
on the Balance Sheet at original issuance cost, net of amortization on a
straight-line basis over the life of the Credit Facility. (For additional
information regarding the Company's financing arrangements, see Note 4 -
Indebtedness and Financing Arrangements.)
Revenue Recognition
Revenue from the sale of products is generally recognized upon passage of
title to the customer, which is generally at the time of shipment.
Start-up Costs
The Company expensed all costs related to start-up, all of which were
incurred in 1997 and 1998.
Income Taxes
Because the Company is a limited liability company, it has the option of
being taxed as a partnership or a corporation. The Company elected to be
taxed as a partnership and as such is not subject to income taxes at the
Company level. All taxes are recognized by the members of the Company.
65
<PAGE>
DEL-TIN FIBER L.L.C.
Notes to Financial Statements
January 1, 2000
Use of Estimates
Management of the Company has made a number of estimates and assumptions,
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities, to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results
could differ from those estimates.
Reclassifications
Certain prior year amounts have been reclassified to conform with the 1999
presentation format.
Note 2 - Inventories
Inventories at year-end consisted of the following:
1999 1998
----------- -----------
Raw materials $ 494,418 286,802
Work in progress / finished goods 804,125 1,595,988
Spare parts 1,952,964 1,714,698
Operating materials and supplies 76,260 -
----------- -----------
$ 3,327,767 3,597,488
=========== ===========
Note 3 - Property, Plant, and Equipment
Property, plant, and equipment at year-end consisted of the following:
1999 1998
------------ -------------
Land $ 331,789 331,789
Buildings 7,507,438 7,420,797
Land improvements 2,544,454 2,667,676
Machinery and equipment 90,347,402 89,188,955
Vehicles 11,038 11,024
Construction-in-progress 3,373,638 -
------------ -------------
104,115,759 99,620,241
Less accumulated depreciation (5,624,080) (1,473,447)
------------ -------------
$ 98,491,679 98,146,794
============ =============
Depreciation expense totaled $4,150,633, $1,473,448, and zero for 1999,
1998, and 1997, respectively.
During the construction period of the Company's primary plant facility,
applicable interest expense was capitalized, net of interest income on
invested debt proceeds. Such amounts capitalized during 1998 were
$4,863,715.
66
<PAGE>
DEL-TIN FIBER L.L.C.
Notes to Financial Statements
January 1, 2000
Note 4 - Indebtedness and Financing Arrangements
Long-term debt at year-end consisted of the following:
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
Union County, Arkansas Taxable Industrial
Development Revenue Bonds
(Del-Tin Fiber Project) 1998 Series,
due October 1, 2027 $ 60,000,000 60,000,000
Union County, Arkansas Solid Waste
Disposal Revenue Bonds
(Del-Tin Fiber Project) 1997 Series A,
due October 1, 2027 14,500,000 14,500,000
Union County, Arkansas Solid Waste
Disposal Revenue Bonds
(Del-Tin Fiber Project) 1997 Series B,
due October 1, 2027 14,500,000 14,500,000
Notes payable 6,000,000 5,000,000
------------- -------------
95,000,000 94,000,000
Less: Notes payable (6,000,000) (5,000,000)
Current maturities of long-term debt - -
------------- -------------
Long-term debt, excluding current
installments $ 89,000,000 89,000,000
============= =============
</TABLE>
The scheduled maturities of required debt sinking fund deposits for the
next five years are zero in 2000, $1,045,750 in 2001, $4,972,875 in 2002,
and $7,676,250 in 2003, and $8,955,625 in 2004. (For additional information
regarding financial instruments, see Note 6 - Fair Value of Financial
Instruments.)
The Permanent Credit Facility
In 1998, the Company entered into the Credit Facility with several
major banking institutions (the "Lenders") having a stated maturity of
December 17, 2005 (the "Stated Maturity Date"). The Credit Facility
provides a working capital commitment of $10,000,000 (the "Working
Capital Commitment Amount") and a letter of credit commitment of
$91,225,000 (the "Letter of Credit Commitment Amount") for a total
commitment of $101,225,000. Both the working capital and the letter of
credit commitments terminate on December 17, 2001 (the "Termination
Date"), but the Termination Date for either or both commitments may be
annually extended if the Company so requests and all the Lenders agree.
In any case, the Termination Date may not be extended beyond the Stated
Maturity Date.
The Working Capital Commitment -- The Company may from time to time
receive working capital loans from the Lenders, and the amount so
loaned may be borrowed, repaid, and reborrowed at the Company's
discretion. However, the aggregate amount of working capital loans
outstanding must not be more than (1) the Working Capital Commitment
Amount at any time and (2) zero ($0) for 30 consecutive days in each
year of the working capital commitment following 1999. During 1999,
the Working Capital Commitment had to be no
67
<PAGE>
DEL-TIN FIBER L.L.C.
Notes to Financial Statements
January 1, 2000
more than $5 million for 30 consecutive days. Any unpaid principal
and interest on working capital loans is due and payable at the
termination of the working capital loan commitment. At January 1,
2000, there was one working capital loan outstanding in the amount
of $6,000,000, bearing interest at a rate of 7.9 percent.
The Letter of Credit Commitment -- Three letters of credit have
been issued pursuant to the Credit Facility in the aggregate stated
amount of $89,824,657 as of January 1, 2000. The letters of credit
have a stated expiration of December 17, 2001. Under the Credit
Facility, the letters of credit may be extended to the extent that
the Termination Date of the letter of credit commitment is
extended. If the letters of credit expire before the Stated
Maturity Date and are not renewed or replaced, the Lenders will
make loans to the Company to purchase the Bonds. Any such loans
would be finally due and payable at the Stated Maturity Date.
The three letters of credit provide a payment mechanism for the
Bonds and security for the Bondholders. Two of the letters of
credit were issued to replace letters of credit supporting the Tax
Exempt Bonds previously issued under the Interim Credit Facilities
(described below) and the third was issued to provide initial
letter of credit support for the Taxable Bonds. On January 1, 2000,
the maximum amount available to be drawn was $14,639,041 under each
of the two letters of credit supporting the Tax Exempt Bonds and
$60,546,575 under the letter of credit supporting the Taxable
Bonds. The maximum amount available to be drawn under the letters
of credit cover the principal amount of the relevant Bonds, plus an
additional amount to cover interest.
Security for the Permanent Credit Facility -- Substantially all of
the Company's assets are pledged to the Lenders as security for the
Credit Facility. The Credit Facility requires the Company to
maintain debt service reserve funds in an amount equal to six
months' debt service. The debt service to be reserved against
includes all required payments for principal (other than for
working capital loans), interest, and fees under both the Credit
Facility and the Bonds. The funds in the debt service reserve bank
accounts may be withdrawn solely to pay debt service to the extent
sufficient funds are not available in the Company's operating
account. The total amount in the debt service reserve funds as of
January 1, 2000 was $2,635,250 and has been classified as
noncurrent on the Balance Sheet due to the restriction placed on
the funds.
The Credit Facility requires the Company to make quarterly deposits
into two sinking funds beginning in December of 2001. Failure to
make such deposits is a default under the Credit Facility. The
amount of the required deposits increases over the term of the
Credit Facility, from $1,045,750 per quarter in December 2001, to
$3,115,000 per quarter beginning in December 2005. In September
2006, the Company must deposit $49,662,000 into the sinking funds.
The Company may not withdraw amounts deposited in the sinking funds
during the term of the Credit Facility.
As further security for the Credit Facility, each member has agreed
(1) to provide to the Company up to $17,500,000 (for a combined
total of $35,000,000) in the form of additional cash equity
contributions or subordinated loans, if and to the extent, that the
Company is in default under the Credit Facility; or a deficiency
exists in the Credit Facility debt service reserve funds or sinking
funds; and (2) to pay to the Company in the form of additional cash
68
<PAGE>
DEL-TIN FIBER L.L.C.
Notes to Financial Statements
January 1, 2000
equity contributions or subordinated loans, the member's prorata
portion of the difference between the Company's projected operating
cash flow at 90 percent of rated capacity, and the Company's
projected operating cash flow at the production rate actually
achieved by the Company (the "Operating Cash Flow Variance"), if,
and to the extent that, the Company still does not have sufficient
funds to pay debt service. The members will no longer be obligated
to pay the Operating Cash Flow Variance once the plant successfully
completes a minimum production test, planned during 2000.
In connection with the Credit Facility, and with the issuance of the
Bonds, the Company incurred approximately $1,639,000 in related costs.
Such costs are included in the Balance Sheet in Deferred Debt Costs
and are being amortized on a straight-line basis over the life of the
Credit Facility.
Effective March 2, 1999, the Company entered into an interest rate
swap agreement which converts $60,000,000 of its long-term debt into
fixed-rate obligations with an effective rate of 5.655 percent. This
swap agreement expires on March 1, 2002.
The Bonds
The Bonds were issued by Union County, Arkansas, to finance the
completion of the construction of the Company's MDF plant, as well as
the acquisition, construction, and improvement of certain sewerage and
solid waste disposal facilities related to the Company's MDF plant.
Neither the State of Arkansas nor Union County, Arkansas have any
liability under the Bonds. The Bonds are payable solely from the
proceeds of the letters of credit issued to support the respective
Bonds and from Company payments under the Loan Agreement and the Lease
Agreement (both described below) with Union County, Arkansas. The
Company has also unconditionally guaranteed the payment of all amounts
owing under the Bonds to the bondholders. The Company's indebtedness
has been presented in these financial statements as though the Company
was directly liable for the Bonds.
The Bonds currently bear interest at a variable rate determined weekly
by the remarketing agent of the respective Bonds. Interest is due on
the first business day of the month, and all unpaid interest and all
principal is due on October 1, 2027. The maximum interest rate for the
Tax Exempt Bonds is ten percent and 9.5 percent for the Taxable Bonds.
The interest rate on the Tax Exempt Bonds at year-end 1999 and 1998
was 5.6 percent and 4.2 percent, respectively. The interest rate on
the Taxable Bonds at year-end 1999 and 1998 was 6.6 percent and 5.7
percent, respectively.
The Company has the right to convert the interest rate payable on the
Bonds to either a flexible daily, term, or fixed rate, as defined in
the trust indentures for the respective Bonds.
Union County issued the Tax Exempt Bonds in October 1997 which were
issued in two series, Series A and Series B, each in the amount of
$14,500,000. In conjunction with this bond issuance, the Company and
Union County entered into a loan agreement (the "Loan Agreement")
which obligates the Company to make loan payments in the amount
required to pay the debt service on the Tax Exempt Bonds. As described
above, two letters of credit were issued under the Credit Facility to
support the Tax Exempt Bonds.
69
<PAGE>
DEL-TIN FIBER L.L.C.
Notes to Financial Statements
January 1, 2000
In December 1998, Union County issued the Taxable Bonds, in the amount
of $60,000,000. The Company and Union County contemporaneously entered
into a lease agreement (the "Lease Agreement") that obligates the
Company to make lease payments in an amount necessary to fund the debt
service on the Taxable Bonds. As described above, a letter of credit
was issued under the Credit Facility to support the Taxable Bonds.
The Interim Credit Facilities
Prior to the funding of the Credit Facility, the Company was a party
to three interim credit facilities (the "Interim Credit Facilities").
The payment terms and fees and interest payable under each interim
credit facility were identical. Borrowings bore interest based upon
prime or other various cost of funds options. Facility fees accrued at
.05 percent per annum for the unused commitment balances and .20
percent per annum for letters of credit and were payable quarterly.
After December 17, 1998, no amounts were outstanding, and no letters
of credit were issued, against any Interim Credit Facility.
Note 5 - Funds Held by Trustee
At December 31, 1998, the Company had funds held by the trustee related
to the Union County, Arkansas Solid Waste Disposal Bonds Project 1997
Series A and B that were restricted for construction purposes and could
have been released for payment upon the submission of qualified
construction expenditures. At December 31, 1998, the funds consisted of
money market funds totaling $23,059 and investments in New York City
municipal bonds totaling $3,300,000. The bonds were variable rate and
reset weekly, with a maturity date of February 15, 2016. The balance was
classified as noncurrent due to the restriction placed on the funds.
During 1999, sufficient qualified construction expenditures were
submitted to enable release of all funds held by the trustee. Therefore,
the balance had been reduced to zero as of January 1, 2000.
Note 6 - Fair Value of Financial Instruments
The following table presents the carrying amounts and estimated fair
values of the Company's financial instruments at year-end 1999 and 1998.
The fair value of a financial instrument is the amount at which the
instrument could be exchanged in a current transaction between willing
parties.
<TABLE>
<CAPTION>
1999 1998
---------------------------- ---------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents $ 993,384 993,384 1,747,451 1,747,451
Trade accounts receivable $ 1,845,554 1,845,554 1,049,667 1,049,667
Other receivables $ 1,104,163 1,104,163 1,474,628 1,474,628
Debt service reserve funds $ 2,635,250 2,635,250 2,484,000 2,484,000
Funds held by trustee $ - - 3,323,059 3,323,059
Financial liabilities
Accounts payable $ 5,254,942 5,254,942 5,280,305 5,280,305
Accrued expenses $ 1,100,659 1,100,659 524,088 524,088
Notes payable $ 6,000,000 6,000,000 5,000,000 5,000,000
Long-term debt $ 89,000,000 75,218,374 89,000,000 89,000,000
</TABLE>
70
<PAGE>
DEL-TIN FIBER L.L.C.
Notes to Financial Statements
January 1, 2000
The carrying amounts shown in the table are included in the Balance
Sheets under the indicated captions.
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments:
. Cash and Cash Equivalents, Trade Accounts Receivable, Other
Receivables, Accounts Payable, Accrued Expenses, and Notes Payable
-- The carrying amounts approximate fair value because of the short
maturity of these instruments.
. Debt Service Reserve Funds -- The carrying amount approximates fair
value since the interest earned on these deposits fluctuates with
changes in current market rates.
. Funds Held by Trustee -- The balance at December 31, 1998,
consisted of money market funds and New York City municipal bonds.
The money market funds are cash equivalents and the carrying amount
approximated fair value. The fair value of the bonds was based on
quoted market prices.
. Long-term debt, including current maturities -- The fair value at
year-end 1999 is estimated based on current rates at which the
Company could borrow funds with similar remaining maturities. At
year-end 1998, the carrying amount approximated fair value based on
variable rates offered that approximated current market rates.
Note 7 - Lease Commitments
The Company is obligated under noncancelable operating leases for various
equipment.
As of January 1, 2000, future minimum lease commitments under
noncancelable operating leases consisted of the following:
2000 $ 187,846
2001 $ 94,559
2002 $ 25,886
Rent expense for all operating leases was $244,950 in 1999, $195,430 in
1998, and zero in 1997.
Note 8 - Related-Party Transactions
The Company is assessed a fee for marketing services provided by
Temple-Inland personnel. This expense amounted to $959,160 in 1999,
$227,036 during 1998, and zero in 1997, and is included in Selling,
General, and Administrative Expenses in the accompanying Statements of
Operations. In addition, Del-Tin reimburses Temple-Inland for advertising
arranged on behalf of the Company's Solidium brand and for a portion of
expenses that Temple-Inland incurs for general advertising for MDF. These
costs amounted to $252,418 during 1999 and zero in 1998 and 1997, and are
included in Selling, General, and Administrative Expenses in the
accompanying Statements of Operations. The Company is also assessed a fee
for computer services by Temple-Inland. This fee amounted to $75,000,
$62,500, and zero in 1999, 1998, and 1997, respectively, and is included
in Selling, General, and Administrative Expenses in the accompanying
Statements of Operations. As of January 1, 2000, the Company's balance
due Temple-Inland totaled $301,888.
71
<PAGE>
DEL-TIN FIBER L.L.C.
Notes to Financial Statements
January 1, 2000
The Company purchases raw materials from Deltic. Total purchases of bark
and chips amounted to $4,287,411 for the year of 1999, $2,126,000 during
1998, and zero in 1997. In relation to these purchases, the Company had
an outstanding balance payable to Deltic of $18,880 at January 1, 2000.
The Company had sales of MDF to Temple-Inland totaling $410,181 for the
year of 1999, $49,567 for 1998, and zero in 1997, which is included in
Net Sales in the accompanying Statements of Operations. In relation to
these sales, Del-Tin had a receivable of $22,209 from Temple-Inland at
January 1, 2000.
Note 9 - Supplemental Cash Flows Disclosures
Interest paid, net of amounts capitalized, was $6,270,375 in 1999,
$2,548,434 in 1998, and zero in 1997. Noncash investing and financing
activities, excluded from the Statements of Cash Flows, were: (1)
assumptions of accounts payable of $4,048,411 in 1998 and $13,060,741 in
1997 related to capital expenditures for additions of property, plant,
and equipment and (2) non-cash capital contributions by the members for
payment of debt amounting to $4,500,000 and for debt costs paid on behalf
of the Company during 1998 of $1,179,594.
72
<PAGE>
EXHIBIT 21
Deltic Timber Corporation
Subsidiaries of the Registrant
As of December 31, 1999
State of
Subsidiaries Incorporation
- --------------------------------------------------------------------------------
Deltic Timber Purchasers, Inc. Arkansas
Deltic Southwest Timber Company Arkansas
Deltic Real Estate Investment Company Delaware
Chenal Properties, Inc. Arkansas
Chenal Country Club, Inc. Arkansas
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
-----------------------------
The Board of Directors
Deltic Timber Corporation:
We consent to the incorporation by reference in the Registration Statement (No.
333-34317) on Form S-8 of Deltic Timber Corporation of our report dated February
4, 2000, relating to the consolidated balance sheets of Deltic Timber
Corporation and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the years in the three-year period ended December 31, 1999, which report
appears in the December 31, 1999 annual report on Form 10-K of Deltic Timber
Corporation.
KPMG LLP
Shreveport, Louisiana
March 27, 2000
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
-----------------------------
The Board of Directors
Deltic Timber Corporation:
We consent to the use of our report dated January 26, 2000, relating to the
financial statements of Del-Tin Fiber L.L.C. as of January 1, 2000 and December
31, 1998 and for each of the fiscal years in the three-year period ended January
1, 2000, included herein.
KPMG LLP
Shreveport, Louisiana
March 27, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 4,782
<SECURITIES> 936
<RECEIVABLES> 6,236
<ALLOWANCES> 247
<INVENTORY> 9,411
<CURRENT-ASSETS> 25,514
<PP&E> 84,667
<DEPRECIATION> 40,354
<TOTAL-ASSETS> 277,898
<CURRENT-LIABILITIES> 4,823
<BONDS> 0
30,000
0
<COMMON> 128
<OTHER-SE> 178,280
<TOTAL-LIABILITY-AND-EQUITY> 277,898
<SALES> 124,212
<TOTAL-REVENUES> 126,241
<CGS> 78,895
<TOTAL-COSTS> 89,583
<OTHER-EXPENSES> 8,936
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,124
<INCOME-PRETAX> 17,050
<INCOME-TAX> 6,130
<INCOME-CONTINUING> 10,920
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,920
<EPS-BASIC> 0.69
<EPS-DILUTED> 0.69
</TABLE>
