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As Filed with the Securities and Exchange Commission on June 2, 1998
File No. 0-24079
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10/A-1
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR 12(g) OF THE
SECURITIES EXCHANGE ACT OF 1934
ANDERSON-TULLY COMPANY
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(Exact Name of Registrant as
Specified in Its Charter)
Mississippi 62-0115690
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1242 North Second Street
P.O. Box 28
Memphis, TN 38101
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(Address of Principal (ZIP Code)
Executive Offices)
Registrant's telephone number, including area code: (901) 576-1400
Securities to be registered pursuant to Section 12(b) of the Act:
Not Applicable Not Applicable
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Title of each class Name of each exchange on which
to be so registered each class is to be registered
Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock
par value, $2,000.00 per share
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(Title of class)
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Certain statements in "Management's Discussion and Analysis of Financial
Condition and Results of Operations," the Pro Forma Condensed Consolidated
Financial Information and elsewhere in this Registration Statement contain or
may contain information that is forward-looking, including, without limitation:
statements regarding the effect of the Merger (as defined herein); the Company's
future financial performance; the attempt of the Company to qualify as a real
estate investment trust (a "REIT") and the effect of government regulations.
Actual results may differ materially from those described in the forward-looking
statements and will be affected by a variety of risks and factors including,
without limitation: national and local economic conditions; the terms of
governmental regulations that affect the Company and its subsidiaries and
interpretations of those regulations; the competitive environment in which the
Company and its subsidiaries operate; and possible environmental regulations. In
addition, the Company's continued qualification as a REIT involves the
application of highly technical and complex provisions of the Internal Revenue
Code. Readers should carefully review this Registration Statement in its
entirety, including but not limited to the Consolidated Financial Statements of
the Company and the Pro Forma Condensed Consolidated Financial Information and
the notes thereto, as well as the risk factors described herein.
ITEM 1. DESCRIPTION OF BUSINESS
OVERVIEW
Anderson-Tully Company, a Mississippi corporation (the "Company"), was
formed in 1889 and owns high quality hardwood timberlands in North America. The
timberlands, which are located along the Mississippi River primarily in
Mississippi, Arkansas, Louisiana and Tennessee, include approximately 324,000
fee acres of hardwood timberlands (the "Timberlands"). See "Operations--Timber
and Wood Products Segment--The Timberlands."
The Company is principally engaged in the business of managing its
timberlands and having its standing timber harvested by Anderson-Tully Timber
Company, a Mississippi corporation ("AT Timber"), pursuant to a timber cutting
contract that qualifies for special treatment under Section 631(b) of the
Internal Revenue Code of 1986, as amended (the "Code"). In addition, the Company
owns approximately 8,000 acres of farmland that it leases and interests in six
commercial real estate properties. The Company also owns 100% of the non-voting
preferred stock in two corporations and has a wholly owned subsidiary which is
the general partner of and a limited partner in a limited partnership, which
controls entities engaged in the harvesting, production and sale of timber and
wood products (including hardwood lumber, rotary veneer, logs and pulpwood) and
the river construction business. The Company will elect to be taxed as a REIT
effective as of January 1, 1998. As a REIT, the Company, except to the extent
described below, will not be subject to Federal corporate income taxes to the
extent that its income is distributed to shareholders of the Company
("Shareholders"). See "Taxation of the Company."
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CORPORATE STRUCTURE AND CONSOLIDATION METHOD
After giving effect to the 1997 Restructuring Transactions described below,
the Company owns 100% of the non-voting preferred stock representing 82.2% of
the economic interest in AT Timber, which harvests the Company's standing timber
from the Company pursuant to the Timber Harvest Agreement (as described herein)
and resells logs and pulpwood, and 100% of the non-voting preferred stock
representing 95% of the economic interest in Anderson-Tully Lumber Company, a
Mississippi corporation ("AT Lumber"), which manufactures and sells hardwood
lumber. A wholly owned subsidiary of the Company owns a 1% general partnership
interest and a 0.3% limited partnership interest in Anderson-Tully Veneers, L.P.
("Veneers"), which was formed in 1995 to enter the market to produce and sell
hardwood rotary veneer. Veneers owns 100% of the common stock of Anderson-Tully
Management Services LLC ("AT Management"), which provides administrative and
management services to all related entities, and 100% of the common stock of
Patton-Tully Transportation LLC ("PT Transportation"), which is engaged in the
river construction business formerly conducted by PT Transportation prior to the
1997 Restructuring Transactions. AT Management owns (i) 100% of the common stock
representing 17.87% of the economic interest in AT Timber and (ii) 100% of the
common stock representing 5% of the economic interest in AT Lumber. Shareholders
of the Company currently hold, in the aggregate, a 98.7% interest in Veneers as
limited partners. The limited partners of Veneers (the "Limited Partners") have
the exclusive voting authority for the common stock of AT Lumber and AT Timber.
An organizational chart of the significant operating entities is presented on
the following page.
Prior to the 1997 Restructuring Transactions, the Company controlled the
operations of Veneers as managing general partner and guaranteed Veneers'
indebtedness. Accordingly, Veneers' assets, liabilities and results of
operations were included in the consolidated financial statements of the
Company, with appropriate recognition of the Limited Partners' 98.7% minority
interest. After the 1997 Restructuring Transactions, a wholly owned subsidiary
of the Company controls the operations of Veneers as managing general partner,
the Company possesses a substantial majority of the economic interest of AT
Timber and AT Lumber, and the Company guarantees collection of all indebtedness
of Veneers and its subsidiaries. Accordingly, the assets, liabilities and
results of operations for Veneers, AT Timber, AT Lumber, AT Management and PT
Transportation will continue to be included in the consolidated financial
statements of the Company with appropriate recognition of the Limited Partners'
98.7% minority interest.
THE 1997 RESTRUCTURING TRANSACTIONS
In December 1997, the Limited Partners approved certain amendments to
the Limited Partnership Agreement of Veneers (the "Partnership Agreement") and
certain other matters (collectively, the "1997 Restructuring Transactions") in
connection with the restructuring of the Company, Veneers and certain of their
respective subsidiaries and affiliates (the "Restructuring"). The 1997
Restructuring Transactions included the following principal transactions: (i)
the contribution by the Company of a substantial portion of its non-real estate
assets to Veneers,
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[AN ORGANIZATIONAL CHART OF THE COMPANY AND ITS
SIGNIFICANT OPERATING ENTITIES IS PRESENTED
ON THIS PAGE.]
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AT Timber and AT Lumber in exchange for limited partner interests in Veneers
("LP Interests") and all of the shares of non-voting preferred stock in AT
Timber and AT Lumber; (ii) the formation by the Company of Anderson-Tully GP
Company (the "New General Partner") ; (iii) the contribution by the Company to
the New General Partner of the Company's general partner and limited partner
interests in Veneers; (iv) transfer by the Company to the New General Partner of
all of the Company's rights to vote the partnership percentage interests of
Permitted Transferees; (v) the amendment of the Partnership Agreement to reflect
the admission of the New General Partner as the managing general partner of
Veneers; (vi) the contribution by Veneers of certain timber production and
related assets to AT Timber and AT Lumber in exchange for shares of the common
stock in AT Timber and AT Lumber; (vii) contribution by Veneers of the common
stock in AT Timber and AT Lumber in exchange for 100% of the total number of
authorized membership interests in AT Management and (viii) the assumption by
Veneers, AT Lumber and AT Timber of certain indebtedness incurred by the
Company, or the incurrence of certain indebtedness by Veneers, in either case
with collection of such indebtedness guaranteed in full by the Company. The 1997
Restructuring Transactions also eliminated provisions contained in the Company's
Bylaws and in the Partnership Agreement that shares of Common Stock may only be
transferred in tandem with limited partnership interests in light of the
Company's intention to qualify as a REIT.
The purpose of the Restructuring was to effect the separation of the
Company's timberlands, farmland and commercial real estate holdings from its
other operations, including the harvesting of timber and the production,
marketing and sale of wood products and river construction and transportation
operations. The 1997 Restructuring Transactions were designed to permit the
Company to satisfy the REIT qualification tests concerning the nature of a
REIT's income and assets.
The Company anticipates deriving a substantial portion of its income from
the harvesting of standing timber pursuant to timber cutting contracts that
qualify for special treatment under Section 63l(b) of the Code. The Company
currently has its standing timber harvested pursuant to a single timber cutting
contract with AT Timber. See "Timber Harvest Agreement with AT Timber." The
income derived by the Company from the qualifying timber cutting contract
generally will be characterized as long-term capital gains for Federal income
tax purposes. As a REIT, the Company generally will be able to pass through
such long-term capital gains to Shareholders. See "Taxation of the Company -
Income Tests."
THE MERGER AND THE ASSET SALE
On February 9, 1998, the Company entered into an Agreement and Plan of
Merger, dated as of February 9, 1998 (the "Merger Agreement"), with Potlatch
Corporation ("Potlatch"), Timberland Growth Corporation ("Newco"), a company
newly organized by Potlatch, and Beaver Acquisition Corporation, a newly formed
wholly owned subsidiary of Newco ("Newsub"). The Merger Agreement provides for
the merger (the "Merger") of the Company with Newsub. If the Merger is
completed, each outstanding share of Common Stock (excluding shares of the
Common Stock held in the Company's treasury, or held by the Company's
subsidiaries and Shareholders who validly perfect dissenters' rights) will be
canceled and converted into the right to receive an amount of cash per share
determined by a formula set forth in the Merger Agreement.
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A chart illustrating the ownership of the Company as of the date of this
Registration Statement and as of immediately following the consummation of the
Merger is set forth on the following page.
Simultaneously with and conditioned upon completion of the Merger,
Potlatch will acquire for cash substantially all of the assets of and will
assume certain liabilities of Veneers relating to its veneer operations, and of
AT Management, including the Common Stock of AT Timber and AT Lumber, pursuant
to an Asset Purchase Agreement, dated as of February 9, 1998 (the "Asset
Purchase Agreement"), among Potlatch, Veneers and AT Management (such
transactions are referred to as the "Asset Sale").
The transactions contemplated by the Merger Agreement were approved by the
Board of Directors on February 9, 1998 and the Shareholders of the Company on
March 31, 1998. The transactions contemplated by the Asset Purchase Agreement
were approved by the Limited Partners of Veneers on April 7, 1998 and the Board
of Directors of the New General Partner and the Board of Managers of AT
Management on February 9, 1998. Following approval of the Merger by
Shareholders, neither the Company nor any of its subsidiaries may, directly or
indirectly, participate in any discussions with respect to, or accept any
proposal or offer from any person relating to (i) any acquisition of a
substantial amount of assets of the Company or any of its subsidiaries (other
than in the ordinary course of business) or any of the outstanding capital stock
of the Company or (ii) an offer to purchase outstanding shares of capital stock
of the Company or any of its subsidiaries or (iii) merger, consolidation,
business, combination, sale of substantially all of the assets,
recapitalization, liquidation or similar transaction involving the Company or
any of its subsidiaries, other than the transactions contemplated by the Merger
Agreement.
There can be no assurance that the Merger and the Asset Sale will be
completed. The Merger and the Asset Sale are conditioned upon the completion of
one another. In addition, both the Merger and the Asset Sale are conditioned
upon the completion of an initial public offering by Newco, the expiration or
earlier termination of the applicable waiting period under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR Act"), and the
inapplicability or satisfaction of the requirements of the Mississippi River
Timberlands Act of 1991 (the "Timberlands Act") to the Merger. Notice of early
termination of the applicable waiting period under the HSR Act was received on
April 21, 1998.
INDUSTRY CONDITIONS
TIMBER SUPPLY. Nationwide, timber supplies have tightened relative to
demand over the last decade. Particularly in the western United States, the
supply of timber has been significantly affected by reductions in timber sales
by the United States government, which owns approximately 20% of all domestic
timberland acreage, and by state governments. For example, federal timber under
contract in the United States declined from 25.9 BBF in 1986 to 5.9 BBF in 1997.
These reductions have been caused primarily by increasingly stringent
environmental and endangered species laws and by a change in the emphasis of
domestic governmental policy toward habitat preservation, conservation and
recreation, and away from timber management. Because most timberlands in the
southeastern United States are privately owned, changes in sales of publicly
owned timber affect local timber supplies and prices in the Southeast less
immediately than in the western United States and other regions with large
proportions of public timber ownership.
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[A CHART ILLUSTRATING THE OWNERSHIP OF
THE COMPANY IS PRESENTED ON THIS PAGE]
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More locally, timber supplies can fluctuate depending upon factors such as
changes in weather conditions and harvest strategies of local forest products
industry participants, as well as occasionally high timber salvage efforts due
to unusual pest infestations or fires. Local timber supplies also change in
response to prevailing timber prices. Rising timber prices often lead to
increased harvesting on private timberlands, including lands not previously made
available for commercial timber operations.
DEMAND. The demand for timber and wood products is dependent upon the
markets for lumber, furniture, panel products, paper and other pulp-based
products, which are affected by changes in domestic and international economic
conditions, global population growth and other demographic factors, and the
value of the U.S. dollar in relation to foreign currencies. The end uses for
timber vary widely, depending on species, size and quality. As described below,
hardwoods and softwoods are utilized in different markets, although their usage
overlaps to some extent. For example, most paper products use a blend of
softwood and hardwood fiber. Historically, timber demand has experienced
cyclical fluctuations, although sometimes at different times and rates within
the markets for solid woods and pulpwood. Locally, timber demand also
fluctuates due to the expansion or closure of individual conversion facilities.
Substantially all of the Company's business involves hardwoods, with
softwood timber comprising less than 2% of total timber quantities. Hardwoods
and softwoods are targeted at different customers and experience different
market dynamics. Higher quality hardwoods, such as those managed by the
Company, depend primarily upon the market for furniture, flooring, cabinets and
architectural moldings. Softwoods such as pine are used primarily for
residential construction, industrial uses and pulp. Accordingly, the demand for
softwoods is significantly dependent upon the level of residential construction
and remodeling activity, which is affected by interest rates and other economic
and demographic factors. Reductions in residential construction and remodeling
activities are generally followed by declining softwood lumber prices, which are
usually followed by declining log prices within two or three months. While tied
to housing starts and home remodeling activity to some extent, the end uses for
hardwoods are not as directly dependent on construction activities as softwoods,
and thus are generally less susceptible to seasonal downturns in construction.
SOUTHEASTERN REGION. All of the Company's operations are currently located
in the southeastern United States, which is a major timber producing region.
The Company's holdings are primarily in Mississippi, Arkansas, Louisiana and
Tennessee. Mississippi and Arkansas are heavily wooded states, with a high
percentage of privately owned timberlands. In Mississippi, the forest products
industry owns approximately 18% of all timberlands, other private owners hold
72%, and government agencies own the remaining 10%. In Arkansas, the forest
products industry currently owns approximately 25% of all timberland and other
private owners hold 57%, with the balance owned by government agencies. The
forest products industry in the southeastern United States supports a variety of
hardwood and softwood sawmills, veneer and plywood plants, pulp mills and other
conversion facilities.
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BUSINESS SEGMENTS
The Company, Veneers, AT Timber, AT Lumber and PT Transportation primarily
operate in three industry segments - Timber and Wood Products, River
Construction and Commercial Real Estate. Information relating to the amounts of
revenue, income from operations and identifiable assets for each of the
Company's industry segments for the fiscal years ended July 31, 1995, 1996, 1997
and the five month period ended December 31, 1997 are presented in Note 10 to
the Consolidated Financial Statements set forth beginning at page F-1 of this
Registration Statement.
OPERATIONS - TIMBER AND WOOD PRODUCTS SEGMENT
THE TIMBERLANDS
The Company currently owns and manages approximately 324,000 fee acres (of
which 36,000 acres includes roads, right-of-ways and other non-productive
acreage) of timberland located primarily in Mississippi, Arkansas, Louisiana and
Tennessee containing a total estimated merchantable sawtimber volume of
approximately 1.6 BBF, as well as approximately 11.8 million tons of pulpwood.
Approximately 70% of the Timberlands acreage consists of relatively flat
bottomland sites within the Mississippi River basin, and the remainder consists
of upland sites with more diverse terrain. Historically, the Company managed its
timberlands with the principal goal of increasing stocking levels of desired
species. As a result, the Timberlands are densely stocked with an average
volume of approximately 5,500 BF per timbered acre. The Timberlands also
benefit from excellent growing conditions, including rich soils, warm climate,
long growing season and ample moisture. These stocking levels and growing
conditions combine to produce annual growth of approximately 230 BF per acre,
which is more than three times greater than recent averages on all hardwood
timberlands available for commercial harvesting in the Company's operating
region, based on USFS data. The Company believes that these lands produce
premium quality hardwoods. The Company estimates that over 40% of its hardwood
sawtimber is USFS #1 grade, which is more than four times the recent averages on
all hardwood timberlands available for commercial harvesting in the Company's
operating region, based on USFS data. ln addition, approximately two-thirds of
the Company's hardwood sawtimber is in trees with diameter at breast height of
at least 21 inches, compared to recent averages of approximately 22% on all
hardwood timberlands for commercial harvesting in the Company's operating
region, based on USFS data. The superior grade and size of the Company's
hardwood sawtimber results in better yields of wide lumber and lumber with
minimal appearance defects, which is more suitable for high-end uses such as
furniture and commands premium prices.
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TIMBER QUANTITIES
Estimated timber quantities set forth below are based upon estimates derived
from the Company's most recent continuous forest inventory system measurement
concluded as of January 31, 1998. All of the timber quantities shown in this
Registration Statement are approximations developed by Company personnel, from
which actual quantities of timber may differ.
The following table sets forth the Company's estimated merchantable
sawtimber quantities by species within the Timberlands.
MERCHANTABLE SAWTIMBER
QUANTITIES BY SPECIES
<TABLE>
<CAPTION>
Species MMBF Percent
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<S> <C> <C>
Cottonwood 343 21.5%
Oaks 325 20.4%
Hackberry 181 11.3%
Pecan/Hickory 138 8.7%
Gum 134 8.4%
Ash 94 5.9%
Other/(a)/ 380 23.8%
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Total 1,595 100.0%
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</TABLE>
(a) Includes sycamore, willow, yellow poplar, cypress, loblolly pine and
others.
The Company's timber quantity also includes 11.8 million tons of hardwood
pulpwoods.
BUSINESS STRATEGY - TIMBER
The Company's primary objective is to maximize long-term cash flow per
share by managing its Timberlands to improve their long-term sustainable yield
while practicing sound environmental stewardship. The Company's strategy is to
manage its Timberlands in a manner designed to optimize the balance among
current cash flow and prudent environmental management in order to achieve
optimal levels of sustainable yield. The Company believes that opportunities
exist to enhance its lands' productivity and yield. The Company intends to
continue to manage the Timberlands to maximize sustainable yield over the long
term, although the Company may choose to have its timber harvested from time to
time at levels above or below its then-current estimate of sustainability for
various reasons, including to improve the productivity of certain timber stands.
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The Company pursues sound environmental stewardship and active involvement
in federal, state and local policymaking to maximize its assets' long-term
value. The Company's uneven-aged timber management practices, by their nature,
are environmentally sensitive and sustain ecological and wildlife diversity.
Harvest operations may require the Company to leave a mix of green and dead
trees at the harvest site, including some large trees, snags and downed logs, to
enrich and protect the soil for successive generations of trees and to provide
habitats for a variety of wildlife species. The Company also uses prudent
logging practices to minimize site damage, and to abide by environmental laws
and sustainable forestry practices when the Company lands are harvested.
TIMBER MANAGEMENT PRACTICES
An individual tree's value changes over time as it progresses through its
life cycle. Beginning as unmerchantable seedlings, trees become increasingly
valuable as they attain merchantable size and quality. They continue to add
volume as they mature, although eventually at declining rates. If not harvested,
trees will ultimately decline in volume and quality due to age and disease.
Although all trees undergo the same basic pattern of growth and decay,
growth rates vary depending on species, location, weather conditions, age and
forestry practice. The average annual growth rates of merchantable timber for
the Company's hardwoods has historically exceeded 4%. The Company believes it
can improve the Timberlands' long-term growth rates by continuing the
accelerated harvesting of large-diameter hardwood timber that the Company began
in 1997. The Company currently believes that the optimal harvest cycle, or
"rotation," for its hardwoods is approximately 40 to 80 years, depending on
species and other factors.
The Company intends to manage its timberlands on an "uneven-aged" basis.
Under the uneven-aged approach, trees of varying sizes are removed selectively
and more frequently than under the "even - aged" approach, often every five to
ten years, thus requiring more intensive harvest planning but reducing
regeneration costs because hardwoods will regenerate naturally. The Company's
foresters select and mark individual trees for harvest under this approach.
Harvest plans are based on projections of weather, timber growth rates,
regulatory constraints and other assumptions, many of which are beyond the
Company's control and there can be no assurance that Company will be able to
have the volumes projected or the specific stands designated in the Company's
harvest plans harvested.
ACCESS AND LIMITATIONS ON ACCESS
Substantially all of the Timberlands are accessible by a system of
established roadways, low-maintenance roads and by the Mississippi River.
Hunting clubs maintain substantially all of the Company's roadways under the
terms of some of the Company's hunting leases. Access to the Timberlands is
affected to some extent by weather conditions and regulatory factors. The
loading of logs from certain bottomlands adjacent to the Mississippi River onto
barges require permits from the United States Department of the Army Corps of
Engineers. Among other things, these permits
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may require compliance with certain water quality and other environmental
standards when loading and unloading logs.
TIMBER HARVEST AGREEMENT WITH AT TIMBER
In the years preceding the Restructuring, substantially all of the
sawtimber harvested from Company lands was consumed in the Company's sawmills
and pulpwood was sold to local area pulp and paper mills. Sales of logs to
outsiders were generally less than 10% of total logs harvested from Company
lands and purchased from the outside. As a result of the Restructuring, the
Company no longer operates sawmills, harvests its own timber or sells pulpwood
to third parties.
On January 1, 1998, the Company entered into a one-year timber harvest
agreement with AT Timber (the "Timber Harvest Agreement"). Pursuant to the
Timber Harvest Agreement, AT Timber has agreed to purchase and harvest in 1998
110 MMBF of standing sawtimber and 660,000 tons of standing pulpwood. AT Timber
intends to sell logs to AT Lumber, Veneers and other third parties including
sawmills, veneer mills and log exporters and to sell pulpwood to area pulp and
paper manufacturers.
The purpose of the Timber Harvest Agreement is to secure a supply of
merchantable standing timber to AT Timber in order for it to meet the needs of
its customers, AT Lumber, Veneers and others and to secure to the Company,
during the term of the Timber Harvest Agreement, treatment pursuant to Section
631(b) of the Code and to harvest the Company's merchantable timber. Federal
income tax treatment of gains derived by the Company from the Timber Harvest
Agreement is governed by Section 631(b) of the Code. The initial term of the
Timber Harvest Agreement commenced on January 1, 1998, and will expire on
December 31, 1998. AT Timber is obligated to pay the Company the "fair market
price" of the standing timber, determined by considering relevant data
including, but not limited to, third party stumpage sales. The Company
anticipates renewing its Timber Harvest Agreement. Volumes to be sold to AT
Timber will be determined by balancing the silvicultural needs of the forest and
the strength of the current timber and wood products markets.
WOOD PRODUCTS
Major wood products historically produced and sold by the Company (prior to
the Restructuring) and Veneers include logs, pulpwood, lumber, veneer and
laminated truck trailer flooring.
LOGS AND PULPWOOD: Substantially all of the sawtimber harvested by AT
Timber is sold as logs to AT Lumber and Veneers and converted into hardwood
lumber and rotary veneer although certain veneer quality and other logs are sold
to third party sawmills, veneer mills and log exporters. In addition, AT Timber
sells pulpwood to pulp and paper mills in the operating area. AT Timber
utilizes outside independent logging contractors to harvest timber. Timber
harvested within approximately 50 to 75 miles of the log yard in Vicksburg is
transported by truck by third parties. Timber harvested outside a 50 to 75 mile
radius from AT Timber's log yard is transported via the
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Mississippi River utilizing AT Timber's towboat and fleet of barges. AT Timber
also uses river transportation to transport pulpwood to customers with
operations near the Mississippi River.
AT Timber competes primarily in the southern United States market with
other pulpwood and log suppliers, including numerous private land and timber
owners, some of whom have significantly greater financial resources than AT
Timber. Competitive factors with respect to logs and pulpwood generally include
price, specie, grade, proximity to customer processing facilities and ability to
meet delivery requirements.
Timber harvest operations are typically impacted during the November to
April time period due to rain and the seasonal rise of the Mississippi River.
However, AT Timber's river transportation capabilities and the Company's diverse
mix of upland and bottomland timberlands enable AT Timber to access certain
lands that are inaccessible to others and continue harvesting operations year
round. AT Timber maintains a log yard with capacity to store over 10 MMBF of
logs (including up to 7.5 MMBF in water storage) which enables it to build up
inventories of logs to ensure availability in the winter and spring when log
supplies in the operating area decrease. AT Timber believes that the large
geographic area in which the Timberlands are located, the ability to access the
Timberlands year round and the ability to transport timber using efficient river
transportation, and the superior quality and diverse species mix of the timber
enables AT Timber to provide an assured supply of logs and pulpwood year round
and command superior prices.
LUMBER: AT Lumber produces green, kiln dried and air dried hardwood
lumber, which is sold both domestically and internationally to distributors and
manufacturers of end products. Lumber produced and sold is ultimately converted
into, among other things, millwork, moldings, cabinets, furniture, caskets,
flooring, pallets and containers. AT Lumber produces and sells a broad
assortment of lumber to meet customer specifications. Over 20 species are
produced of which eight (cottonwood, red oak, white oak, hackberry, sweet gum,
pecan/hickory, ash and sycamore) comprise over 80% of lumber sales. All of AT
Lumber's logs are currently purchased from AT Timber.
AT Lumber competes with numerous other hardwood lumber manufacturers some
of whom have greater financial resources than the Company. For hardwood lumber,
At Lumber's share of the market is not significant. Competitive factors for
hardwood lumber include grade, quality, ability to assure continuous supply and
pricing. The demand for hardwood lumber is generally dependent on the markets
for furniture, residential construction and home remodeling and repair.
AT Lumber believes that its ability to provide its customers an assured
supply of lumber and the superior quality and diverse specie mix of the
Company's sawtimber, which provides for better yields of wide lumber and lumber
with minimal appearance defects which is more suitable for high end uses, allows
AT Lumber to command superior prices.
VENEERS: In May 1995, the Company formed Veneers to enter the market for
the production and sale of rotary veneer used in three-ply laminated hardwood
flooring. The veneer mill was completed and operations commenced in November
1996. In the first calendar year over 90% of
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Veneer's production was sold to one customer. All of Veneer's logs (primarily
red oak) are currently purchased from AT Timber.
Demand for both solid and laminated hardwood flooring is generally
dependent on the level of residential construction, home remodeling and repair.
Over the last several years laminated wood flooring has achieved better market
acceptance and an increased share of the wood flooring market due to its ease of
installation and generally lower price compared to solid wood flooring.
Veneers competes with numerous other producers of veneer including other
flooring manufacturers none of whom have a long term assured supply of timber.
A wholly owned subsidiary of the Company holds, in the aggregate, a 1.3%
interest in Veneers (comprised of a 1% general partner and a .3% limited
partnership interest), with the remaining interests held by the Limited
Partners.
LAMINATED TRAILER FLOORING: Historically the Company sold laminated
flooring produced in its Memphis facility to truck trailer manufacturers. On
December 31, 1997, the Company sold certain assets related to the laminated
trailer flooring and discontinued that product line.
OPERATIONS - RIVER CONSTRUCTION SEGMENT
PT Transportation, a wholly owned subsidiary of Veneers, is primarily
engaged in the construction of levees, dikes and revetments along the
Mississippi River and its tributary rivers, as well as other private marine
construction, salvage and fleeting that was formerly conducted by a wholly owned
subsidiary of the Company. A majority of its revenues are derived from US Army
Corps of Engineers (the "Corps") contracts awarded by competitive bid. River
construction operations are dependent on the nature and extent of river
construction, work let by the Corps and seasonal factors, including Mississippi
River levels.
In April 1998, PT Transportation contributed certain of its river
construction assets and a wholly owned subsidiary of Veneers assigned a quarry
lease to a Missouri limited liability company in exchange for a 50% interest
therein. APAC-Tennessee, a company engaged in the road construction business,
contributed cash in exchange for the remaining 50% interest. The new company
will be engaged in the production, transportation and sale of stone from the
quarry suitable for use in road construction. PT Transportation also will
continue to conduct river construction and other operations.
Prior to the 1997 Restructuring Transactions, the river construction
operations were held in a wholly owned subsidiary of the Company. After the 1997
Restructuring Transactions, the Company holds, in the aggregate, an indirect
1.3% interest in PT Transportation through its partnership interests in Veneers,
with the remaining interest held indirectly by the Limited Partners of Veneers.
Prior to the consummation of the Merger, the Company intends to make a pro rata
distribution to Shareholders of its wholly owned subsidiary, the New General
Partner, which holds a 1.3% partnership interest in Veneers, and, after
consummation of the Merger, the Company will no longer be engaged in the River
Construction Segment.
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OPERATIONS - COMMERCIAL REAL ESTATE SEGMENT
The Company has investments in six commercial real estate properties all
located in the Memphis, Tennessee area consisting of four shopping centers and
two commercial warehouses. Three of the four shopping centers are strip centers
with major grocery, drug and discount merchandise retailers as anchor tenants.
The other shopping center is a specialty center with upscale clothing, dining
and other retailers. The Company's commercial real estate is currently fully
leased.
OTHER OPERATIONS
The Company's other operations consist primarily of revenues derived from
leasing timberlands for hunting and leasing 8,000 acres of farm lands for
agricultural use.
The Company believes the ecological and wildlife diversity of the
Timberlands provide high quality recreational experiences. The Company leases
the Timberlands to approximately 275 hunting clubs, generally under one year
leases. Annual revenues from such hunting leases total approximately $1.5
million. Substantially all hunting leases are renewed annually as demand for
land for hunting greatly exceeds its availability. The Company has
approximately 6,000 acres of high quality irrigated farmland of which 60% is
precision leveled and approximately 2,000 acres of other farmland adjacent to
the Timberlands. The Company leases its farmland under one year crop share and
per acre leases, with annual revenues totaling approximately $600,000.
FEDERAL AND STATE REGULATION
BACKGROUND AND APPROACH
The operations of the Company, Veneers, AT Timber, AT Lumber and PT
Transportation are subject to numerous federal, state and local laws and
regulations, including those relating to the environment, endangered species,
the Company's forestry activities, and health and safety. Due to the
significance of regulation to its business, the Company attempts to integrate
wildlife, habitat and watershed management into its resource management
practices. It also takes an active approach to regulatory developments by
participating in standard-setting where possible. For example, the Company
works cooperatively with regulators to address environmental concerns while
preserving the Company's ability to operate its Timberlands efficiently. The
Company also seeks to maintain a favorable public reputation for environmental
stewardship. The Company has pursued a variety of wildlife conservation and
other environmental stewardship programs, such as co-founding a committee of
governmental agencies, environmentalists and industry participants dedicated to
the conservation of black bear habitat.
For many years, the Company has implemented an integrated approach to
timberland stewardship in order to positively affect the policy and regulation
processes. The Company has adopted comprehensive stewardship principles, and
will continue to implement water and wildlife resource programs consisting of
research, education, habitat restoration and monitoring, and active
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participation in the development of environmental partnerships. The Company
believes that these activities enhance its credibility and facilitate
participation in the policymaking and regulatory process.
Despite the Company's active participation in governmental policymaking and
regulatory standard-setting, there can be no assurance that endangered species,
environmental and other laws will not restrict the Company's operations or
impose significant costs, damages, penalties and liabilities on the Company. In
particular, the Company anticipates that endangered species and environmental
laws will generally become increasingly stringent.
ENDANGERED SPECIES LAWS
The Federal Endangered Species Act and similar state laws and regulations
protect species threatened with possible extinction. A number of species
indigenous to the Timberlands have been and in the future may be protected under
these laws and regulations, including the Louisiana black bear and bald eagle.
The presence of protected species on or near the Timberlands may restrict or
prohibit timber harvesting, road building and other silvicultural activities on
portions of the Company's lands that contain the affected species or abut their
habitats. In addition, the Timberlands may be affected by regulatory
requirements relating to habitats for threatened and endangered aquatic species.
Harvesting activities near streams containing threatened or endangered aquatic
species may be limited or prohibited due to the perceived impact on
sedimentation and water quality.
The Company is aware of three bald eagle nests, two of which are active, on
the Timberlands, as well as the presence of Louisiana black bear and certain
other threatened or endangered species on its lands, none of which currently
imposes a significant constraint on the Company's operations.
Consistent with its overall goal of good environmental stewardship, the
Company evaluates each tract of timber designated for harvesting or other
silvicultural operations in order to determine whether to conduct a field
inspection before permitting operations to commence. These inspections are
designed to monitor the status of existing wildlife sites, identify areas
suitable for endangered species and determine if areas previously identified as
containing suitable habitat are, in fact, supporting threatened or endangered
species. The Company investigates reported sightings of threatened or
endangered species and takes reasonable precautions against damage to
environmentally sensitive areas and to comply with applicable environmental
laws.
The Company believes that it is managing the harvesting of its Timberlands
in the areas affected by protected species in substantial compliance with
applicable federal and state regulations, and that the presence of such species
on its lands will not materially adversely affect the Company's ability to
proceed with its current harvest plans. There can be no assurance, however,
that additional species on or around the Timberlands will not receive protected
status under the Endangered Species Act or similar state laws, or that currently
protected species may not be discovered on or around the Timberlands.
Additionally, there can be no assurance that future legislative, administrative
or judicial activities related to protected species will not adversely affect
the Company, its ability to
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continue its operations as currently conducted or its ability to implement its
business strategy. Any such changes could materially and adversely affect the
Company's financial condition and results of operations.
FORESTRY REGULATIONS
The operation of the Timberlands is subject to specialized statutes and
regulations governing forestry operations. These laws address many growing,
harvesting and processing activities on forest lands. For example,
Mississippi's Forest Harvesting Law imposes post-harvest seed tree retention and
re-entry requirements. The Company follows local "best management practices"
developed by state agencies in consultation with industry and environmental
groups, which address matters such as harvesting practices near visually
sensitive areas. Operations in states in which the Timberlands are located are
currently subject to similar voluntary practices.
ENVIRONMENTAL LAWS
Some or all of the operations of the Company, Veneers, AT Timber, AT Lumber
and PT Transportation involve the use and storage of various hazardous materials
such as herbicides, pesticides, fertilizers, gasoline and other chemicals and
result in air emissions or discharges of certain materials into streams and
other bodies of water. Accordingly, all of these operations are subject to
federal, state and local environmental laws and regulations relating to the
protection of the environment. Environmental laws and regulations have changed
substantially and rapidly over the last 20 years, and the Company anticipates
that they will become increasingly stringent. Although each of the Company,
Veneers, AT Timber, AT Lumber and PT Transportation believes that it is in
substantial compliance with these requirements, there can be no assurance that
these increasingly burdensome laws and regulations will not lead to significant
costs, penalties and liabilities, including those related to claims for damages
to property or natural resources, as well as restrictions on timber harvesting,
other silvicultural activities, manufacturing and construction. As of the date
of this Registration Statement, the Company is not aware of any pending
legislative, administrative or judicial action relating to the protection of the
environment that could materially and adversely affect the Company, Veneers, AT
Timber, AT Lumber or PT Transportation.
The Federal Clean Air Act and Federal Clean Water Act, and comparable state
equivalents, may affect the operations of the Company, Veneers, AT Timber, AT
Lumber and PT Transportation through restrictions and controls on site
preparation and harvest activities and regulatory programs designed to reduce
nonpoint source pollution discharged into bodies of water and air emissions and
discharges into bodies of water from manufacturing operations. For example, the
Environmental Protection Agency and its state counterparts have designated
certain bodies of water as "water quality impaired," triggering a requirement to
establish Total Maximum Daily Loads ("TMDLs") for such bodies of water. The
TMDL process could result in additional limitations being placed on the
Company's activities in some or all of the states where the Company, Veneers, AT
Timber, AT Lumber and PT Transportation operate.
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In addition, the operations of the Company, Veneers, AT Timber, AT Lumber
and PT Transportation are affected by federal and state laws designed to protect
wetlands. The Federal Clean Water Act authorizes the regulation of "wetland"
areas. Access to timberlands located within a protected wetlands area may be
limited, and the Company may be required to expend substantial sums for the
protection of such wetland areas.
Some environmental statutes impose strict liability, regardless of the
negligence or fault on the part of the person held liable. Under various laws
and regulations, an owner or operator of real property may become liable for the
costs of removal or remediation of certain hazardous substances released on or
in its property, often without regard to whether the owner or operator knew of,
or was responsible for, the release of such substances. The presence of such
substances, or the failure to remediate such substances properly, may adversely
affect the owner's ability to sell such real estate or to use such real estate
as collateral. Although the Company is not aware of any activities by the
Company or any conditions on its properties that would likely result in the
Company being named a potentially responsible party, there can be no assurance
that the Company, or an owner or operator of any lands adjacent to the
Company's, has not created a material environmental condition on the Company's
lands without the Company's knowledge. In addition, there can be no assurance
that the operations of the Company, Veneers, AT Timber, AT Lumber and PT
Transportation will not result in material liabilities, fines, costs and
restrictions on the Company pursuant to current or future environmental laws and
regulations.
PRODUCT LIABILITY AND REGULATION
All of the states in the United States and several foreign jurisdictions in
which AT Lumber sells its products have, through some combination of legislation
and jurisdictional decision, provided for the liability of the manufacturer and
supplier of defective materials for resulting personal injury and property
damage. The operations of Veneers and AT Lumber entail exposure to product
liability in connection with its sales.
REGULATORY LIMITATIONS ON ACCESS TO TIMBERLANDS
Currently, logs from the Company's timberlands along the Mississippi River
may be loaded onto barges only pursuant to permits issued by the United States
Department of the Army-Corps of Engineers. These permits may impose various
environmental and other restrictions on log loading activities. In addition,
depending upon the location and scope of future acquisitions, the Timberlands
may include sections of land that are intermingled with or adjacent to sections
of land managed by federal and state agencies. Removal of trees from those
portions of the Timberlands may require additional permits and reciprocal
rights-of-way across public lands, the availability of which cannot be assured.
Among other things, federal agencies may be required to consult with each other
and to consider environmental and other factors in granting or renewing such
permits and rights-of-way.
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OTHER REGULATORY MATTERS
The Timberlands operations are subject to various other federal and state
regulations. For example, the Federal Insecticide, Fungicide, and Rodenticide
Act regulates the use of pesticides that may be used in forestry practices. The
operations of the Company, Veneers, AT Timber, AT Lumber and PT Transportation
also are subject to the requirements of the Federal Occupational Safety and
Health Act ("OSHA") and comparable state statutes relating to the health and
safety of their respective employees. The Company believes that it is in
compliance with OSHA regulations, including general industry standards,
permissible exposure levels for toxic chemicals and record-keeping requirements.
LEGAL PROCEEDINGS
Although the Company may, from time to time, be involved in litigation and
claims arising out of its operations in the normal course of business, the
Company is not presently a party to any material legal proceedings.
EMPLOYEES
As of June 1, 1998, the Company's operations had approximately 24
employees and Veneers, AT Lumber, AT Timber and PT Transportation had
approximately 601 employees. The Company believes that it has a good
relationship with its employees.
YEAR 2000 ISSUE
The Company has developed plans, utilizing internal resources, to ensure its
information systems are capable of properly utilizing dates beyond December 31,
1999 (the "Year 2000" issue). During the past year, the Company has upgraded or
replaced its principal computer systems, including the conversion to new
software which is Year 2000 compliant. The Company is seeking to work with its
relevant customers, suppliers and other service providers to ensure that their
systems are Year 2000 compliant. The impact on the Company caused by the failure
of its significant customers, suppliers and other service providers to achieve
Year 2000 compliance in a timely and effective manner is uncertain.
RISK FACTORS
An investment in the shares of Common Stock involves a high degree of risk.
Prospective purchasers of the Common Stock should carefully consider the
following risk factors, as well as the other information presented in this
Registration Statement. Each of these factors could adversely affect the
Company's results of operations and ability to make anticipated distributions to
stockholders. All statements other than statements of historical fact included
in this Registration Statement, including, without limitation, statements
regarding the Company's business strategy, harvest plans and the other
estimates, plans, intentions and objectives of management of the Company, are
forward-looking statements that involve risks and uncertainties. Important
factors that could cause actual results to differ materially from the Company's
estimates, plans, intentions and objectives are disclosed below and elsewhere in
this Registration Statement.
VOLATILITY OF TIMBER AND WOOD PRODUCT PRICES
The Company's results of operations and cash flow are, and will continue to
be, affected by the volatile nature of timber and wood product prices. The
demand for and supply of standing timber, lumber and pulp products have been and
are expected to be subject to cyclical and other fluctuations, which often
result in significant variations in prices. The demand for softwood sawtimber
and lumber is primarily affected by the level of new residential construction
activity and, to a lesser extent, home repair and remodeling activity and
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to a lesser extent, home repair and remodeling activity and other industrial
uses of wood fiber, which are subject to fluctuations due to changes in economic
conditions, interest rates, population growth, weather conditions and other
factors. The demand for hardwood sawtimber, lumber and veneers depends on the
markets for furniture and other products made from hardwoods, as well as the
foregoing factors. The demand for pulpwoods is also cyclical, and tends to
fluctuate based on changes in the demand for paper, tissue and similar products,
as well as conversion capacity in the relevant region. Reductions in residential
construction activity and other events reducing the demand for standing timber
could have a material adverse effect on the Company's results of operations and
cash flow.
The Company's results of operations and cash flow will also be affected by
changes in timber availability at the local and national level. Increases in
timber supply could adversely affect the prices that the Company receives for
standing timber and wood products. The Company's operations are currently
concentrated in the southeastern United States, where most timberlands are
privately owned. Historically, increases in timber prices have often resulted
in substantial increases in harvesting on private timberlands, including lands
not previously made available for commercial timber operations, causing a short-
term increase in supply that has tended to moderate price increases.
In the last decade, environmental concerns and other factors have limited
timber sales by government agencies, which historically have been major
suppliers of timber to the United States forest products industry, particularly
in the West. Any reversal of policy that substantially increases public timber
sales could materially adversely affect the Company's results of operations and
cash flow, as the increased availability of timber in the West and other regions
with significant public timber ownership would depress prices for timber and
converted wood products in other regions, including the Southeast. More locally,
timber supplies can fluctuate depending upon factors such as changes in weather
conditions and harvest strategies of local forest products industry
participants, as well as occasionally high timber salvage efforts due to unusual
pest infestations or fires. Furthermore, increased imports of wood products
could reduce the prices that the Company receives for its standing timber. Over
the longer term, the development and application of silvicultural techniques and
genetic improvements on forest products industry lands have also tended to
expand the overall supply of timber.
Due to the foregoing factors, timber prices have historically been volatile
and frequently experience significant monthly and quarterly fluctuations. The
Company's results of operations and cash flow will be substantially dependent
upon the market price for standing timber in its operating regions and,
accordingly, are expected to fluctuate.
RISK OF UNINSURED LOSSES
The volume and value of standing timber that can be harvested from the
Company's lands, and therefore, its operating results and cash flow, may be
limited by natural disasters such as fire, insect infestation, disease, ice
storms, windstorms, flooding and other weather conditions, and other
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causes. As is typical in the industry, the Company does not maintain insurance
for any loss to its standing timber from natural disasters or other causes.
REGULATION
The operations of the Company, Veneers, AT Timber, AT Lumber and PT
Transportation are subject to numerous federal, state and local laws and
regulations, including those relating to the environment, threatened and
endangered species, the Company's forestry activities, and health and safety. In
particular, the Company anticipates that laws and regulations intended to
protect threatened and endangered species, and other environmental laws and
regulations, will generally become increasingly stringent. A number of species
indigenous to the Timberlands, such as the Louisiana black bear and the bald
eagle, have been and in the future may be protected under the Federal Endangered
Species Act and similar state laws. The presence of protected species on or
near the Timberlands may restrict timber harvesting, road building and other
activities on its lands. The Company's operations will also be subject to
specialized statutes and regulations governing forestry operations, and to other
environmental laws, some of which impose strict liability. The Company's lands,
particularly its bottomlands along the Mississippi River, may become subject to
laws and regulations designed to protect wetlands, which may in the future
restrict harvesting, road building and other activities. There can be no
assurance that current and future laws and regulations will not cause the
Company to incur significant costs, damages, penalties and liabilities, or that
they will not materially and adversely affect harvesting operations on the
Timberlands.
REAL ESTATE INVESTMENT TRUST QUALIFICATION
The Company intends to elect to be taxed as, and to operate so as to
qualify as, a REIT under Sections 856 through 860 of the Code, effective as of
January 1, 1998. Although the Company believes that it will be able to operate
in such a manner, no assurance can be given that the Company will qualify or
remain qualified as a REIT. Qualification as a REIT involves the application of
highly technical and complex provisions of the Code and the tax regulations
promulgated thereunder (the "Treasury Regulations") for which there are only
limited judicial or administrative interpretations. The determination of
various factual matters and circumstances not entirely within the Company's
control may affect its ability to qualify as a REIT. In addition, no assurance
can be given that legislation, new regulations, administrative interpretations
or court decisions will not significantly change the tax laws with respect to
qualification as a REIT or the Federal income tax consequences of such
qualification.
Timber REITs and their activities present issues under Federal income tax
law, including the characterization for purposes of the REIT gross income tests
of income derived from the harvesting of timber pursuant to a contract that
qualifies for special treatment under Section 631(b) of the Code, and the
application of the tax on Built-in Gains (as defined below) to such income. If
the income that the Company derives under the Timber Harvesting Agreement were
to be treated as other than qualifying income for purposes of the REIT gross
income tests, the Company would not qualify as a REIT. See "Certain Federal
Income Tax Considerations."
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Skadden, Arps, Slate, Meagher & Flom LLP has acted as counsel to the
Company in connection with the Company's election to be taxed as a REIT. On
December 31, 1997, Skadden, Arps, Slate, Meagher & Flom LLP issued its opinion
that, commencing with the Company's taxable year ending December 31, 1998, the
Company will be organized in conformity with the requirements for qualification
as a REIT, and the Company's proposed method of operation will enable it to meet
the requirements for qualification and taxation as a REIT provided that (i)
certain elections and other procedural steps are completed in a timely fashion
and (ii) the Company operates in accordance with various assumptions and factual
representations made by the Company concerning their organization, business,
properties and operations. The opinion was expressed based upon facts,
representations and assumptions as of its date, and Skadden, Arps, Slate,
Meagher & Flom LLP has no obligation to advise Shareholders of any subsequent
change in the matters stated, represented or assumed or any subsequent change in
applicable law. No assurance can be given that the Company currently has met or
will meet these requirements in the future, and an opinion of counsel is not
binding on the Internal Revenue Service (the "Service"). To maintain REIT
status, the Company must meet a number of organizational and operational
requirements. As a REIT, the Company generally will not be subject to Federal
income tax on net income that it distributes to its stockholders.
If the Company were to fail to qualify as a REIT in any taxable year, the
Company would not be allowed a deduction for distributions to stockholders in
computing taxable income and would be subject to Federal income tax on its
taxable income at regular corporate rates. Unless entitled to relief under
certain statutory provisions, the Company would also be disqualified from
treatment as a REIT for the four taxable years following the year during which
qualification was lost. As a result, the funds available for distribution to
the Company's stockholders would be materially reduced for each of the years
involved. Although the Company currently intends to operate in a manner
designed to qualify as a REIT, it is possible that future economic, market,
legal, tax or other considerations may cause the Company to fail to qualify as a
REIT or may cause the Board of Directors to revoke the Company's REIT election.
See "Certain Federal Income Tax Considerations."
FACTORS LIMITING CHANGES IN CONTROL
In order for the Company to maintain its qualification as a REIT, not more
than 50% of the value of its outstanding shares may be owned, directly or
constructively, by five or fewer individuals or entities (as set forth in the
Code). This test must be satisfied by the Company for all periods beginning on
June 30, 1999 (i.e., the last half of a REIT's second taxable year). The
Company does not currently meet this requirement. Accordingly, the Company will
be required to take appropriate action, including the issuance of additional
shares or the redemption of certain shares, in order to comply with this
requirement. In addition, the Company intends to propose that the Company's
Articles of Incorporation be amended to prohibit the direct or constructive
ownership of shares representing more than a certain percentage of the combined
total of outstanding shares of the Company by any person (the "Ownership
Limit"). The Ownership Limit is determined after application of certain
constructive ownership and attribution rules under the Code. The constructive
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ownership and attribution rules are complex and may cause shares of the Company
owned directly or constructively by a group of related individuals or entities
to be constructively owned by one individual or entity. Under the amendment,
the Company intends to propose that the Company's Board of Directors may permit
greater ownership of outstanding shares of the Company by a particular
shareholder if it is satisfied, based upon the advice of tax counsel or other
evidence or undertaking acceptable to it, that ownership in excess of the limit
will not jeopardize the Company's status as a REIT. In addition, under the
amendment, transfer of shares to a person who, as a result of the transfer,
violates the Ownership Limit may be void under some circumstances or may be
transferred to a trust, for the benefit of one or more qualified charitable
organizations designated by the Company, with the intended transferee having
only a right to share (to the extent of the transferee's original purchase price
for such shares) in proceeds from the trust's sale of such shares.
SEASONALITY
The Company's operating results and cash flow may fluctuate due to seasonal
factors. Rainfall from November to April typically impacts harvest volumes to
some extent, due in part to the seasonal rise in the Mississippi River. The
Company's revenues and cash flow may be reduced during the foregoing periods.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following summary discusses the Federal income tax considerations
reasonably anticipated to be material to a Shareholder of the Company in
connection with his or her ownership of shares of Common Stock. The discussion
is for general information only, and is not tax advice. The discussion addresses
only tax consequences to "U.S. persons" and does not address the tax
consequences that may be relevant to a particular Shareholder subject to special
treatment under certain Federal income tax laws, such as dealers in securities,
banks, insurance companies, tax-exempt organizations or non-United States
person. This discussion does not address any consequences arising under the
laws of any state, locality or foreign jurisdiction.
The information in this section is based on current provisions of the Code,
existing, temporary and currently proposed Treasury Regulations thereunder, the
legislative history of the Code, existing administrative interpretations and
practices of the Service, and judicial decisions, all of which are subject to
change either prospectively or retroactively. No assurance can be given that
future legislation, Treasury Regulations, administrative interpretations or
judicial decisions will not significantly change the current law or adversely
affect existing interpretations of current law. Thus, no assurance can be
provided that the statements set forth herein (which do not bind the Service or
the courts) will not be challenged by the Service or will be sustained by a
court if so challenged.
EACH SHAREHOLDER IS ADVISED TO CONSULT WITH HIS OR HER TAX ADVISOR
REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OR HER OF THE OWNERSHIP AND
DISPOSITION OF SHARES OF COMMON STOCK IN LIGHT OF HIS OR
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HER SPECIFIC TAX AND INVESTMENT SITUATIONS AND THE SPECIFIC FEDERAL, STATE,
LOCAL AND FOREIGN TAX LAWS APPLICABLE TO THE SHARES.
TAXATION OF THE COMPANY
GENERAL
The Company plans to make an election to be taxed as a REIT under Sections
856 through 860 of the Code, beginning with its taxable year commencing January
1, 1998. The Company believes that, effective as of January 1, 1998, it will be
organized and will operate in such a manner as to qualify for taxation as a
REIT. The Company intends to operate in such a manner as to qualify for
taxation as a REIT under Sections 856 through 860 of the Code for each of its
tax years ending subsequent to December 31, 1998. No assurance can be given,
however, that the Company will operate in a manner so as to qualify, or remain
qualified, as a REIT.
The sections of the Code and the corresponding Treasury Regulations
relating to the taxation of REITs and their stockholders are highly technical
and complex. The following sets forth the material aspects of the rules that
govern the Federal income tax treatment of a REIT and its stockholders. This
summary is qualified in its entirety by the applicable Code provisions, rules
and regulations promulgated thereunder, and administrative and judicial
interpretations thereof.
The Company has submitted a request for rulings from the Service
concerning, among other issues, the following: (i) whether gains derived by the
Company pursuant to the Timber Harvest Agreement will qualify as gains from the
sale or exchange of real property for purposes of the REIT gross income tests
(see discussion under " - Income Tests" below), (ii) whether any such gains will
be subject to the tax on Built-in Gains under Notice 88-19 (see discussion
below), and (iii) whether the Company's timberlands, including the standing
timber thereon, will qualify as "real property" for purposes of the REIT asset
tests (see discussion under "- Assets Tests" below). The Company's
qualification to elect REIT status is not conditioned upon its receipt of a
favorable ruling from the Service with respect to any of the foregoing issues.
Skadden, Arps, Slate, Meagher & Flom LLP has acted as special tax counsel
to the Company in connection with the Company's election to be taxed as a REIT
beginning with its taxable year commencing on January 1, 1998. On December 31,
1997, Skadden, Arps, Slate, Meagher & Flom LLP issued its opinion that
commencing with the Company's tax year beginning on January 1, 1998, the Company
will be organized in conformity with the requirements for qualification as a
REIT, and the Company's proposed method of operation will enable it to meet the
requirements for qualification and taxation as a REIT provided that (i) the
elections and other procedural steps described in this discussion of "Certain
Federal Income Tax Considerations" are completed in a timely fashion and (ii)
the Company operates in accordance with various assumptions and factual
representations made by the Company concerning its organization, business,
properties and operations. The opinion was expressed as of December 31, 1997
and was based upon facts, representations and assumptions as
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of such date, and Skadden, Arps, Slate, Meagher & Flom LLP has no obligation to
advise Shareholders of any change in the matters stated, represented or assumed,
or any change in applicable law subsequent to the date of such opinion.
Moreover, qualification and taxation as a REIT depend upon the Company's ability
to meet on a ongoing basis (through actual annual operating results,
distribution levels and diversity of share ownership) the various qualification
tests imposed under the Code discussed below, the results of which will not be
reviewed by Skadden, Arps, Slate, Meagher & Flom LLP on a continuing basis. No
assurance can be given that the actual results of the Company's operations for
any particular taxable year currently satisfy or will satisfy such requirements
in the future. Further, the anticipated income tax treatment described herein
may be changed, perhaps retroactively, by legislative, administrative or
judicial action at any time. See "--Failure of the Company to Qualify as a
REIT."
If the Company qualifies for taxation as a REIT, it generally will not be
subject to Federal corporate income taxes on that portion of its ordinary income
or capital gain that is currently distributed to Shareholders. The REIT
provisions of the Code generally allow a REIT to deduct dividends paid to its
Shareholders. This deduction for dividends substantially eliminates the "double
taxation" (at the corporate and Shareholder levels) that generally results from
investment in a regular corporation. However, the Company will be subject to
Federal income tax as follows: First, the Company will be taxed at regular
corporate rates on any undistributed REIT taxable income, including
undistributed net capital gains. See, however, "Annual Distribution
Requirements" with respect to the Company's ability to elect to treat as having
been distributed to its Shareholders certain of its capital gains upon which the
Company has paid taxes, in which event so much of the taxes as have been paid by
the Company with respect to such income would also be treated as having been
distributed to Shareholders. Second, under certain circumstances, the Company
may be subject to the "alternative minimum tax" on certain of its items of tax
preference. Third, if the Company has (i) net income from the sale or other
disposition of "foreclosure property" which is described in Section 1221(1) of
the Code (generally, property held primarily for sale to customers in the
ordinary course of the Company's trade or business) or (ii) other nonqualifying
income from foreclosure property, the Company will be subject to tax at the
highest corporate rate on such income. Fourth, if the Company has net income
from prohibited transactions (which are, in general, certain sales or other
dispositions of property described in Section 1221(1) of the Code), such income
will be subject to a 100% tax. Fifth, if the Company should fail to satisfy the
75% gross income test or the 95% gross income test (as discussed below), but has
nonetheless maintained its qualification as a REIT because certain other
requirements have been met, the Company will be subject to a 100% tax on an
amount equal to (i) the gross income attributable to the greater of the amount
by which the Company fails the 75% or 95% test multiplied by (ii) a fraction
intended to reflect the Company's profitability. Sixth, if the Company should
fail to distribute during each calendar year at least the sum of (i) 85% of its
REIT ordinary income for such year, (ii) 95% of its REIT capital gain net income
for such year (other than capital gain income the Company elects to retain and
pay tax on) and (iii) any undistributed taxable income from prior periods (other
than capital gains from such years which the Company elected to retain and pay
tax on), the Company would be subject to a 4% excise tax on the excess of such
required distribution over the amounts actually distributed. Seventh, with
respect to any asset (a "Built-in Gain Asset") held by the Company on
January 1, 1998 or acquired by the Company from a corporation
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which is or has been a C corporation (i.e., generally a corporation subject to
full corporate-level tax) in a transaction in which the basis of the Built-in
Gain Asset in the hands of the Company is determined by reference to the basis
of the asset in the hands of the C corporation, if the Company recognizes gain
on the disposition of such asset during the ten-year period (the "Recognition
Period") beginning on the date on which such asset was acquired by the Company,
then pursuant to regulations that have not yet been promulgated, to the extent
of the Built-in Gain (i.e., the excess of (a) the fair market value of such
asset over (b) the Company's adjusted basis in such asset, determined as of the
beginning of the Recognition Period), such gain will be subject to tax at the
highest regular corporate rate.
The results described above with respect to the recognition of Built-in-
Gain assume that the Company will make an election pursuant to Notice 88-19
issued by the Service. The Company expects to file an election under Notice 88-
19 with its first REIT tax return. Shareholders should be aware that there is
currently no controlling authority concerning the applicability of Notice 88-19
to gains derived by the Company from the disposal of standing timber pursuant to
an agreement which qualifies for treatment under Section 631(b) of the Code.
The Service, however, has concluded in a number of private letter rulings that
Notice 88-19 and the tax on Built-in Gains do not apply to such transactions.
The rationale for this conclusion was given in a recent technical advice
memorandum in which the Service reasoned that Congress did not intend the Built-
in Gains tax to apply to gains derived pursuant to transactions that qualify for
treatment under Section 631(b) of the Code because such an application would
contradict the beneficial treatment that Congress intended to bestow upon such
transactions. Although private letter rulings are not binding precedent, they
offer insight into the Service's current position on a particular issue.
Skadden, Arps, Slate, Meagher & Flom LLP has issued its opinion that, although
there is no binding authority directly on point and the matter is not entirely
free from doubt, gain derived by the Company from the disposal of standing
timber pursuant to an agreement that qualifies for treatment under Section
631(b) of the Code during the Recognition Period should not be subject to tax on
Built-in Gains under Notice 88-19.
REQUIREMENTS FOR QUALIFICATION
To qualify as a REIT, the Company must elect to be so treated and must meet
the requirements, discussed below, relating to the Company's organization,
sources of income, nature of assets and distributions of income.
ORGANIZATIONAL REQUIREMENTS
The Code defines a REIT as a corporation, trust or association (i) which is
managed by one or more trustees or directors; (ii) the beneficial ownership of
which is evidenced by transferable shares or by transferable certificates of
beneficial interest; (iii) which would be taxable as a domestic corporation but
for Sections 856 through 859 of the Code; (iv) which is neither a financial
institution nor an insurance company subject to certain provisions of the Code;
(v) the beneficial ownership of which is held by 100 or more persons, and (vi)
during the last half of each taxable year not more than
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50% in value of the outstanding stock of which is owned, directly or indirectly
through the application of certain attribution rules, by five or fewer
individuals (as defined in the Code to include certain entities). In addition,
certain other tests, described below, regarding the nature of its income and
assets must also be satisfied. The Code provides that conditions (i) to (iv)
above, inclusive, must be met during the entire taxable year and that condition
(v) must be met during at least 335 days of a taxable year of twelve months, or
during a proportionate part of a taxable year of less than twelve months.
Conditions (v) and (vi) will not apply until after the first taxable year for
which an election is made to be taxed as a REIT.
Condition (vi) must be satisfied by the Company for all periods beginning
on June 30, 1999 (i.e., the last half of Company's second taxable year as a
REIT). The Company does not currently meet this requirement. Accordingly, the
Company will be required to take appropriate action, including the issuance of
additional shares or the redemption of certain shares, in order to comply with
this requirement. In addition, the Company intends to propose that the
Company's Articles of Incorporation be amended to prohibit the direct or
constructive ownership of shares representing more than a certain percentage of
the combined total of outstanding shares of the Company by any person (the
"Ownership Limit"). The Ownership Limit is determined after application of
certain constructive ownership and attribution rules under the Code. The
constructive ownership and attribution rules are complex and may cause shares of
the Company owned directly or constructively by a group of related individuals
or entities to be constructively owned by an individual or entity. Under the
amendment that the Company intends to propose, the Company's Board of Directors
may permit greater ownership of outstanding shares of the Company by a
particular shareholder if it is satisfied, based upon the advice of tax counsel
or other evidence or undertaking acceptable to it, that ownership in excess of
the limit will not jeopardize the Company's status as a REIT. Under the
amendment, the Company intends to propose transfer of shares to a person who, as
a result of the transfer, violates the Ownership Limit may be void under some
circumstances or may be transferred to a trust, for the benefit of one or more
qualified charitable organizations designated by the Company, with the intended
transferee having only a right to share (to the extent of the transferee's
original purchase price for such shares) in the proceeds from the trust's sale
of such shares.
In addition, a corporation may not elect to become a REIT unless its
taxable year is the calendar year. The Company has requested from the Service a
change to a calendar taxable year.
In order to qualify as a REIT, the Company cannot have at the end of any
taxable year any undistributed "earnings and profits" that are attributable to a
"C corporation" taxable year. If the Company has any accumulated "earnings
and profits" from a "C" corporation taxable year which is not distributed by the
end of its first tax year, it will fail to qualify as a REIT. The Company
believes that it distributed all of its "C corporation earnings and profits" on
or prior to December 31, 1997. There can be no assurance, however, that the
Service would not contend otherwise on a subsequent audit of the Company.
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In the event that the Company were determined not to qualify as a REIT, the
Company would not be eligible to elect REIT status for up to five years after
the year in which it first failed to qualify as a REIT, unless it qualified for
certain limited relief.
In the case of a REIT which is a partner in a partnership, Treasury
Regulations provide that the REIT will be deemed to own its proportionate share
of the assets of the partnership and will be deemed to be entitled to the income
of the partnership attributable to such share. In addition, the character of
the assets and gross income of the partnership shall retain the same character
in the hands of the REIT for purposes of Section 856 of the Code, including
satisfying the gross income tests and the asset tests.
INCOME TESTS
In order to maintain qualification as a REIT, the Company annually must
satisfy two gross income requirements. First, at least 75% of the Company's
gross income (excluding gross income from prohibited transactions) for each
taxable year must be derived directly or indirectly from investments relating to
real property or mortgages on real property (including "rents from real
property" and "gain from the sale or other disposition of real property" other
than property described in Section 1221(1) of the Code) or from certain types of
temporary investments. Second, at least 95% of the Company's gross income
(excluding gross income from "prohibited transactions") for each taxable year
must be derived from such real property investments, dividends, interest and
gain from the sale or disposition of stock or securities (or from any
combination of the foregoing).
The Company believes that the income it will receive under the Timber
Harvest Agreement will be characterized for Federal income tax purposes as gain
from the sale or other disposition of real property which is not property
described in Section 1221(1) of the Code. In the opinion of Skadden, Arps,
Slate, Meagher & Flom LLP, income realized by the Company from the disposal of
standing timber held for more than one year pursuant to the Timber Harvest
Agreement: (i) will be characterized as gain from the sale or other disposition
of real property, and (ii) will not constitute income from the sale or other
disposition of property described in Section 1221(1) of the Code, provided that:
(a) the Company complies with the terms and conditions of the Timber Harvest
Agreement and (b) the Company operates in accordance with various assumptions
and factual representations made by the Company. Shareholders should be aware
that there are no controlling Treasury Regulations, published rulings or
judicial decisions involving agreements with terms substantially the same as the
Timber Harvest Agreement that discuss whether income from such an agreement will
be characterized as gain from the sale or other disposition of real property
which is not described in Section 1221(1) of the Code. The opinion of Skadden,
Arps, Slate, Meagher & Flom LLP discussed above is based on all of the facts and
circumstances and upon legislative history, judicial decisions, rulings,
regulations and other regulatory pronouncements involving analogous situations.
In particular, the Service has issued a number of private letter rulings
addressing the identical issue under an analogous provision of the Code. The
Service concluded in such rulings that gains derived from the disposal of
standing timber in a transaction that qualifies for treatment under Section
631(b) of the Code are not gains from the disposition of property
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described in Section 1221(1) of the Code. Although private rulings are not
binding precedent, they offer insight into the Service's current position on a
particular issue. Opinions of counsel are not binding upon the Service or any
court, and there can be no complete assurance that the Service will not
successfully assert a contrary position. If the income realized by the Company
from the disposal of timber held for more than one year pursuant to the Timber
Harvest Agreement is not characterized as gain from the sale or other
disposition of real property, or if such income is considered to be income from
the sale or other disposition of property described in Section 1221(1) of the
Code, then the Company may not be able to satisfy either the 75% or the 95%
gross income tests and, as a result, may lose its REIT status.
Rents received by the Company will qualify as "rents from real property" in
satisfying the gross income requirements for a REIT described above only if
several conditions are met. First, the amount of rent must not be based in
whole or in part on the income or profits of any person. However, an amount
received or accrued generally will not be excluded from the term "rents from
real property" solely because it is based on a fixed percentage or percentages
of receipts or sales. Second, rents received from a tenant will not qualify as
"rents from real property" in satisfying the gross income tests if the REIT, or
an actual or constructive owner of 10% or more of the REIT, actually or
constructively owns 10% or more of such tenant (a "Related Party Tenant").
Third, if rent attributable to personal property, leased in connection with a
lease of real property, is greater than 15% of the total rent received under the
lease, then the portion of rent attributable to such personal property will not
qualify as "rents from real property." Finally, for rents received to qualify
as "rents from real property," the REIT generally must not operate or manage the
property or furnish or render services to the tenants of such property, other
than through an independent contractor from whom the REIT derives no revenue.
The REIT may, however, directly perform certain services that are "usually or
customarily rendered" in connection with the rental of space for occupancy only
and are not otherwise considered "rendered to the occupant" of the property. To
the extent that services (other than those customarily furnished or rendered in
connection with the rental of real property) are rendered to the tenants of the
property by an independent contractor, the cost of the services must be borne by
the independent contractor. The Company does not and will not (i) charge rent
for any property that is based in whole or in part on the income or profits of
any person (except by reason of being based on a percentage of receipts or
sales, as described above), (ii) rent any property to a Related Party Tenant
(unless the Board determines in its discretion that the rent received from such
Related Party Tenant is not material and will not jeopardize the Company's
status as a REIT), (iii) derive rental income attributable to personal property
(other than personal property leased in connection with the lease of real
property, the amount of which is less than 15% of the total rent received under
the lease), or (iv) perform services considered to be rendered to the occupant
of the property, other than through an independent contractor from whom the
Company derives no revenue.
The Company anticipates that the only rental income it will receive will be
from certain farmlands, commercial properties and from certain hunting leases.
The Company believes that the income from such hunting leases and properties
will constitute "rents from real property" under the rules discussed above.
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If the Company fails to satisfy one or both of the 75% or 95% gross income
tests for any taxable year, it may nevertheless qualify as a REIT for such year
if it is entitled to relief under certain provisions of the Code. These relief
provisions will generally be available if the Company's failure to meet such
tests was due to reasonable cause and not due to willful neglect, the Company
attaches a schedule of the sources of its income to its Federal income tax
return, and any incorrect information on the schedule was not due to fraud with
intent to evade tax. It is not possible, however, to state whether in all
circumstances the Company would be entitled to the benefit of these relief
provisions. As discussed above in "--General," even if these relief provisions
apply, a tax would be imposed with respect to the excess net income.
Any net income realized by the Company from the sale or other disposition
of property described in Section 1221(1) of the Code (including the Company's
share of any such gain realized by Veneers) will be treated as income from a
"prohibited transaction" and will be subject to a 100% penalty tax. Property is
described in Section 1221(1) of the Code if it is held as reserves or primarily
for sale to customers in the ordinary course of a trade or business. Such
prohibited transaction income may also have an adverse effect upon the Company's
ability to satisfy the income tests for qualification as a REIT. Under existing
law, whether property is held as reserves or primarily for sale to customers in
the ordinary course of a trade or business is a question of fact that depends on
all the facts and circumstances with respect to the particular transaction.
As discussed above in "--Income Tests," in the opinion of Skadden, Arps,
Slate, Meagher & Flom LLP, income from the disposal of standing timber pursuant
to the Timber Harvest Agreement will not constitute income from the sale or
other disposition of property described in Section 1221(1) of the Code, provided
that: (a) the Company complies with the terms and conditions of the Timber
Harvest Agreement and (b) the Company operates in accordance with various
assumptions and factual representations made by the Company. Opinions of
counsel are not binding upon the Service or any court, and there can be no
complete assurance that the Service will not successfully assert a contrary
position. If the income realized by the Company from the disposal of timber
pursuant to the Timber Harvest Agreement is considered to be income from the
sale or other disposition of property described in Section 1221(1) of the Code,
then the Company would be subject to the 100% penalty tax on such income and, as
noted above, in such a situation the Company may not be able to satisfy the 75%
or 95% of income tests necessary for it to quality as a REIT.
The Company intends to hold its timberlands and its other properties for
investment with a view to long-term appreciation, to engage in the business of
acquiring, developing, owning and operating its timberlands and its other
properties and to permit harvesting of its timberlands or its other properties
as are consistent with the Company's investment objectives. There can be no
assurance, however, that the Service might not contend that one or more of such
transactions is a prohibited transaction and subject to the 100% penalty tax.
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ASSET TESTS
The Company, at the close of each quarter of its taxable year, must satisfy
three tests relating to the nature of its assets. First, at least 75% of the
value of the Company's total assets must be represented by real estate assets,
including (i) its allocable share of real estate assets held by partnerships in
which the Company owns an interest, (ii) stock of real estate investment trusts,
(iii) stock or debt instruments held for not more than one year purchased with
the proceeds of a stock offering or long-term (at least five years) debt
offering of the Company, and (iv) cash, cash items and government securities.
Second, not more than 25% of the Company's total assets may be represented by
securities other than those in the 75% asset class. Third, other than equity
securities of real estate investment trusts, of the investments included in the
25% asset class, the value of any one issuer's securities owned by the Company
may not exceed 5% of the value of the Company's total assets, and the Company
may not own more than 10% of any one issuer's outstanding voting securities.
The Company believes that, at all times, substantially more than 75% of the
assets owned by the Company, and any "qualified REIT Subsidiary" (as defined
below), will consist of fee ownership of timberland. Accordingly, the Company
believes that it should be able to meet the 75% test described above on a going
forward basis. The Company's indirect interest in certain properties will be
held through a wholly owned corporate subsidiary of the Company, Tenarc
Construction Corporation, which will be operated as a "qualified REIT
subsidiary" within the meaning of the Code. Qualified REIT subsidiaries are not
treated as separate entities from their parent REIT for Federal income tax
purposes. Instead, all assets, liabilities and items of income, deduction and
credit of each qualified REIT subsidiary are treated as assets, liabilities and
items of the Company. A qualified REIT subsidiary of the Company therefore will
not be subject to Federal corporate income taxation, although it may be subject
to state or local taxation.
The Company will directly, and indirectly through Veneers, own interests in
AT Timber and AT Lumber. As set forth above, the ownership of more than 10% of
the voting securities or more than 5% in value of any one issuer by a REIT is
prohibited by the REIT asset tests. The Company believes that its indirect
ownership interests in AT Timber and AT Lumber will qualify under these rules.
Skadden, Arps, Slate, Meagher & Flom LLP, in rendering its opinion on December
31, 1997 as to the qualification of the Company as a REIT, relied upon
representations of the Company as to the value of the Company's direct and
indirect interests in AT Timber and AT Lumber. While the Company has sought
advice of experts in reaching its conclusions, no independent appraisals have
been sought. Accordingly, there can be no assurance that the Service will not
contend that the Company's ownership interest in AT Timber and AT Lumber
disqualifies the Company from treatment as a REIT.
The 5% test described above must generally be met for any quarter in which
the Company acquires securities of the issuer. Although the Company plans to
take steps to ensure that it satisfies the 5% value test for any quarter with
respect to which testing will occur, there can be no assurance
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that such steps will always be successful or will not require a reduction in the
Company's overall interest in AT Timber, AT Lumber, or both.
If the Company should fail to satisfy the asset tests at the end of a
calendar quarter, such a failure would not cause it to lose its REIT status if
(i) it satisfied all of the asset tests at the close of the preceding calendar
quarter and (ii) the discrepancy between the value of the Company's assets and
the asset requirements either did not exist immediately after the acquisition of
any particular asset or was not wholly or partly caused by such an acquisition
(i.e., the discrepancy arose from changes in the market values of its assets).
If the condition described in clause (ii) of the preceding sentence were not
satisfied, the Company could still avoid disqualification by eliminating any
discrepancy within 30 days after the close of the quarter in which it arose.
ANNUAL DISTRIBUTION REQUIREMENTS
In order to qualify as a REIT, the Company is required to distribute
dividends (other than capital gain dividends) to its Shareholders in an amount
at least equal to (i) the sum of (a) 95% of the Company's "REIT taxable income"
(computed without regard to the dividends paid deduction and the Company's net
capital gain) and (b) 95% of the net income (after tax), if any, from
foreclosure property, minus (ii) the sum of certain items of noncash income.
Such distributions must be paid in the taxable year to which they relate, or in
the following taxable year if declared before the Company timely files its tax
return for such year and if paid on or before the first regular dividend payment
date after such declaration. To the extent that the Company does not distribute
(or is not treated as having distributed) all of its net capital gain or
distributes (or is treated as having distributed) at least 95%, but less than
100%, of its "REIT taxable income," as adjusted, it will be subject to tax
thereon at regular ordinary and capital gain corporate tax rates. If the
Company should fail to distribute during each calendar year at least the sum of
(i) 85% of its REIT ordinary income for such year, (ii) 95% of its REIT capital
gain income for such year (other than capital gain income which the Company
elects to retain and pay tax on as provided for below) and (iii) any
undistributed taxable income from prior periods (other than capital gains from
such years which the Company elected to retain and pay tax on), the Company
would be subject to a 4% excise tax on the excess of such required distribution
over the amounts actually distributed. Pursuant to recently enacted
legislation, the Company may elect to retain rather than distribute its net
long-term capital gains. The effect of such an election is that (i) the Company
is required to pay the tax on such gains at regular corporate tax rates, (ii)
its Shareholders, while required to include their proportionate share of the
undistributed long-term capital gain in income, will receive a credit or refund
for their share of the tax paid by the Company, and (iii) the basis of a
Shareholder's stock would be increased by the amount of the undistributed long-
term capital gains (minus the amount of capital gains tax paid by the Company)
included in income by such Shareholder. In addition, if the Company disposes of
any Built-In Gain Asset during the applicable Recognition Period, the Company
will be required, pursuant to guidance issued by the Service, to distribute at
least 95% of the Built-In Gain (after tax), if any, recognized on the
disposition of such asset. The Company intends to make timely distributions
sufficient to satisfy these annual distribution requirements.
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It is possible that the Company, from time to time, may not have sufficient
cash or other liquid assets to meet these distribution requirements due to
timing or other differences between (i) the actual receipt of income and actual
payment of deductible expenses and (ii) the inclusion of such income and
deduction of such expenses in arriving at taxable income of the Company. If
such differences occur, in order to meet the distribution requirements, the
Company may find it necessary to arrange for short or possibly long-term
borrowings, equity issuances or asset sales to pay dividends in the form of
taxable stock dividends (if it is practicable to do so), or elect to retain and
pay tax on a portion of Its net long-term capital gains in the manner provided
for in the preceding paragraph.
Under certain circumstances, the Company may be able to rectify a failure
to meet the distribution requirement for a year by paying "deficiency dividends"
to Shareholders in a later year, which may be included in the Company's
deduction for dividends paid for the earlier year. Thus, the Company may be
able to avoid being taxed on amounts distributed as deficiency dividends;
however, the Company will be required to pay interest based upon the amount of
any deduction taken for deficiency dividends.
ABSENCE OF EARNINGS AND PROFITS
The Code provides that, in the case of a corporation such as the Company
that was formerly a taxable C corporation, it may qualify as a REIT for a
taxable year only if, as of the close of such year, it has no "earnings and
profits" accumulated in any non-REIT year. The Company believes it has satisfied
this requirement.
Any adjustment to the Company's taxable income for taxable years ending on
or before the effective date of its REIT election, including as a result of an
examination of its returns by the Service, could affect the calculation of its
earnings and profits as of the appropriate measurement date. Furthermore, the
determination of earnings and profits requires the resolution of certain
technical tax issues with respect to which there is no authority directly on
point and, consequently, the proper treatment of these issues for earnings and
profits purposes is not free from doubt. There can be no assurance that the
Service will not examine the tax returns of the Company for prior years and
propose adjustments to increase its taxable income. In this regard, the Service
can consider all taxable years of a corporation as open for review for purposes
of determining the amount of such earnings and profits.
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FAILURE OF THE COMPANY TO QUALIFY AS A REIT
If the Company fails to qualify for taxation as a REIT in any taxable year
and if the relief provisions do not apply, the Company will be subject to tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Distributions to Shareholders in any year in which the
Company fails to qualify as a REIT will not be deductible by the Company nor
will they be required to be made. As a result, the cash available for
distribution by the Company to its Shareholders would be significantly reduced.
In addition, if the Company fails to qualify as a REIT, all distributions to
Shareholders will be taxable as ordinary income, to the extent of the Company's
current and accumulated earnings and profits, and, subject to certain
limitations of the Code, corporate distributees may be eligible for the
dividends received deduction. Unless entitled to relief under specific
statutory provisions, the Company also will be disqualified from taxation as a
REIT for the four taxable years following the year during which such
qualification was lost. It is not possible to state whether in all
circumstances the Company would be entitled to such statutory relief.
TAXATION OF SHAREHOLDERS OF THE COMPANY
DISTRIBUTIONS BY THE COMPANY
As long as the Company qualifies as a REIT, distributions made by the
Company out of its current or accumulated earnings and profits (and not
designated as capital gain dividends) will constitute dividends taxable to its
taxable Shareholders as ordinary income. Such distributions will not be
eligible for the dividends received deduction in the case of Shareholders that
are corporations. Distributions made by the Company that are properly designated
by the Company as capital gain dividends will be taxable to taxable Shareholders
as long-term capital gains (to the extent that they do not exceed the Company's
actual net capital gain for the taxable year) without regard to the period for
which a Shareholder has held his Common Stock. Shareholders that are
corporations may, however, be required to treat up to 20% of certain capital
gain dividends as ordinary income pursuant to Section 291(d) of the Code.
Individuals are generally subject to differing rates of tax on various
transactions giving rise to long-term capital gains or losses. In general, the
long-term capital gains rate is (i) 28% on capital gain from the sale or
exchange of assets held more than one year but not more than 18 months, (ii) 20%
on capital gain from the sale or exchange of assets held for more than 18
months, and (iii) 25% on capital gain from the sale or exchange of certain
depreciable real estate otherwise eligible for the 20% rate, up to the amount of
depreciation deductions previously taken with respect to such real estate.
Subject to certain limitations concerning the classification of the Company's
long-term capital gains, the Company may designate a capital gain dividend as a
28% rate distribution, a 25% rate distribution or a 20% rate distribution.
The Company anticipates that a substantial portion of its income will be
derived from having its timber harvested pursuant to the Timber Harvest
Agreement and that such income will be characterized as long-term capital gains.
Accordingly, the Company anticipates that a substantial portion of any dividend
distribution will be designated as a capital gain dividend. If the Company
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elects to retain capital gains rather than distribute them, a Shareholder will
be deemed to receive a capital gain dividend equal to the amount of such
retained capital gains. Such gains are subject to apportionment among the three
rate groups set forth above. In such a case, a Shareholder will receive certain
tax credits and basis adjustments reflecting the deemed distribution and deemed
payment of taxes by the Shareholder. To the extent that the Company makes
distributions in excess of its current and accumulated earnings and profits,
such distributions will be treated first as a tax-free return of capital to each
Shareholder, reducing the adjusted basis which such Shareholder has in its
Common Stock for tax purposes by the amount of such distribution (but not below
zero), with distributions in excess of a Shareholder's adjusted basis in its
Common Stock taxable as capital gains (provided that the Common Stock has been
held as a capital asset). Dividends declared by the Company in October,
November, or December of any year and payable to a Shareholder of record on a
specified date in any such month shall be treated as both paid by the Company
and received by the Shareholder on December 31 of such year, provided that the
dividend is actually paid by the Company on or before January 31 of the
following calendar year. Shareholders may not include in their own income tax
returns any net operating losses or capital losses of the Company. The Company
will notify each Shareholder after the close of the Company's taxable year as to
the portions of the distributions attributable to that year which constitute
ordinary income, capital gain or a return of capital.
The Company will be treated as having sufficient earnings and profits to
treat as a dividend any distribution by the Company up to the amount required to
be distributed in order to avoid imposition of the 4% excise tax discussed under
"--Taxation of the Company--General" and "--Taxation of the Company--Annual
Distribution Requirements." As a result, Shareholders may be required to treat
as taxable dividends certain distributions that would otherwise result in tax-
free returns of capital. Moreover, any "deficiency dividend" will be treated as
a "dividend" (an ordinary dividend or a capital gain dividend, as the case may
be), regardless of the Company's earnings and profits.
Distributions made by the Company and gain arising from the sale or
exchange by a Shareholder of Common Stock will not be treated as passive
activity income, and, as a result, Shareholders generally will not be able to
apply any "passive losses" against such income or gain. Dividends from the
Company (to the extent they do not constitute a capital gain dividend or a
return of capital) will generally be treated as investment income for purposes
of the investment interest limitation. Net capital gain from the sale or other
disposition of shares of Common Stock and capital gain dividends will generally
not be considered investment income for purposes of the investment interest
limitation.
SALE OF COMMON STOCK
Upon any sale or other disposition of Common Stock, a Shareholder will
recognize gain or loss for Federal income tax purposes in an amount equal to the
difference between (i) the amount of cash and the fair market value of any
property received on such sale or other disposition and (ii) the Shareholder's
adjusted basis in such Common Stock for tax purposes. Such gain or loss will be
34
<PAGE>
capital gain or loss if the Common Stock has been held by the Shareholder as a
capital asset and will be long-term gain or loss if such Common Stock has been
held for more than one year. In general, any loss recognized by a Shareholder
upon the sale or other disposition of Common Stock that has been held for six
months or less (after applying certain holding period rules) will be treated as
a long-term capital loss to the extent of distributions received by such
Shareholder from the Company which were required to be treated as long-term
capital gains.
AT TIMBER/AT LUMBER
Neither AT Lumber nor AT Timber will qualify as a REIT, and such entities
will be subject to federal, state and local income taxes on their respective
taxable income at normal corporate rates. As described above, the value of the
Company's interests in the securities of AT Timber and AT Lumber cannot exceed
5% of the value of the Company's total assets at the end of any calendar quarter
in which the Company acquires such securities or increases its interest in such
securities (including as a result of the Company increasing its interest in
Veneers). This limitation may restrict the ability of AT Timber and AT Lumber
to increase the size of their respective businesses, or may cause the Company to
sell all or a portion of its stock in AT Timber and AT Lumber, unless the value
of the assets of the Company is increasing at a commensurate rate.
UNCERTAIN IMPACT OF CLINTON BUDGET PROPOSALS
Recent Clinton Administration budget proposals contained a number of
provisions which, if adopted as proposed, could affect REITs in general and the
Company in particular. The proposals included the following four changes to the
rules applicable to REITs. The proposed legislation would, among other things,
(i) restrict the ability of any person (including any corporation) from owning
more than 50% of the vote or value of all classes of equity securities of a
REIT, effective for companies electing REIT status for tax years beginning on or
after the date of "first committee action" on the budget bill, (ii) subject to
limited grandfathering rules, restrict the ability of REIT to own more than 10%
of the vote or value of all equity securities of a corporation (in contrast to
current rules, which provide that a REIT may not own more than 10% of the vote
of all equity securities of a corporation), effective for acquisitions of stock
on or after the date of "first committee action" on the budget bill, and (iii)
require the immediate taxation of all built-in-gains on the conversion of a
subchapter C corporation into a REIT (excluding conversions where the
corporation at issue had a value of $5 million or less), effective for
conversions after January 1, 1999. The proposals, in their current form,
including the proposed effective dates, could have a material adverse impact on
the Company if it were passed in substantially the same form as proposed. The
Company cannot with certainty predict whether the Clinton Administration
proposals will pass, what form any final legislative language will take if so
passed, or the effective date of any such legislation.
35
<PAGE>
OTHER TAXES
The Company, any of its subsidiaries or the Company's Shareholders may be
subject to foreign, state and local tax in various countries, states and
localities, including those countries, states and localities in which it or they
transact business, own property, or reside. The state, local or foreign tax
treatment of the Company and the Shareholders in such jurisdictions may differ
from the Federal income tax treatment described above. Consequently,
prospective Shareholders should consult their tax advisors regarding the effect
of foreign, state and local tax laws upon an investment in the Common Stock.
ITEM 2. FINANCIAL INFORMATION
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The selected consolidated financial information as of July 31, 1995, 1996
and 1997, and for the fiscal years then ended, and as of December 31, 1997 and
for the five months then ended, set forth below under the captions "Income
Statement Data" and "Balance Sheet Data" has been derived from audited financial
statements of the Company. The Company's consolidated financial statements for
the three months ended March 31, 1997 and 1998, for the five months ended
December 31, 1997 have been audited by Deloitte & Touche LLP, independent
auditors, whose report with respect to such consolidated financial statements
appears elsewhere in this Registration Statement. The Company's consolidated
financial statements for the three months ended March 31, 1997 and 1998, for the
five months ended December 31, 1996 and for the years ended July 31, 1994 and
1993 have not been audited by independent auditors. However, in the opinion of
the Company's management, the selected financial data for such periods include
all adjustments (which include only normal recurring adjustments) necessary for
a fair presentation of the data.
The following selected consolidated financial information of the Company
will not be comparable to the results of operations and cash flow the Company
will derive in future periods. FURTHERMORE, THE HISTORICAL CONSOLIDATED RESULTS
OF OPERATIONS FOR ALL PERIODS PRESENTED PRIOR TO THE THREE MONTHS ENDED MARCH
31, 1998 DO NOT REFLECT THE CORPORATE ORGANIZATION, ECONOMIC AND INCOME TAX
IMPACTS ON THE COMPANY'S RESULTS OF OPERATIONS THAT RESULTED FROM THE 1997
RESTRUCTURING TRANSACTIONS COMPLETED IN DECEMBER 1997 AND THE PLANNED REIT
ELECTION AS DESCRIBED UNDER "THE 1997 RESTRUCTURING TRANSACTIONS." THIS SELECTED
CONSOLIDATED FINANCIAL INFORMATION SHOULD BE READ IN CONJUNCTION WITH
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS," THE CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY AND THE PRO
FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION INCLUDED HEREIN. THE RESULTS
OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1998 ARE NOT NECESSARILY
INDICATIVE OF THE RESULTS TO BE EXPECTED FOR THE FULL FISCAL YEAR.
36
<PAGE>
<TABLE>
<CAPTION>
(in thousands, except per share data)
Five Months Three Months
============
Year Ended July 31, Ended Dec. 31, Ended Mar 31,
=============
--------- -------- -------- -------- -------- -------- ---------- ------------------
1993 1994 1995 1996 1997 1996 1997(1) 1997 1998
==== ====
--------- -------- -------- -------- -------- -------- ---------- ------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Total revenues, net................. $ 79,376 $86,626 $ 91,246 $ 87,745 $ 96,488 $ 35,612 $ 52,222 $23,361 $25,377
======= ======= ======== ======== ======== ======== ========= ======= =======
Total costs and expenses............ 71,402 75,588 77,717 76,620 84,635 32,881 45,232 20,595 19,305
======= ======= ======== ======== ======== ======== ======== ======= =======
--------- --------- ---------- ---------- ---------- ---------- ---------- --------- ---------
Income from operations.............. 7,974 11,038 13,529 11,125 11,853 2,731 6,990 2,766 6,072
===== ======
Interest expense, net............... 702 863 1,491 2,368 2,911 931 2,339 855 1,564
===== ======
Income before minority interest..... 9,525 8,157 7,661 6,087 7,470 1,452 64 2,209 4,508
===== ======
Net earnings (loss)................. $ 9,525 $ 8,157 $ 7,661 $ 6,087 $ 5,650 $ 962 $ (1,316) $ 1,757 $ 4,443
======= =======
Per share:
Net Earnings (loss).............. $ 16,335 $14,022 $ 13,174 $ 10,479 $ 9,749 $ 1,660 $ (2,271) $ 3,032 $ 7,666
============ = ======= = ======== = = = ======= =======
Cash dividends declared.......... $ 4,250 $ 5,000 $ 5,250 $ 6,230 $ 6,250 $ 6,250 $101,190 --- $ 1,308
= ======= = = = = ======== == =======
BALANCE SHEET DATA
Timber and timberlands, net......... $11,165 $10,912 $ 11,951 $ 11,343 $ 9,968 $ 10,367 $ 9,281 $10,239 $ 9,224
======= = ======= =======
Total assets........................ 74,710 83,297 101,640 121,184 136,486 125,012 132,099 128,109 131,786
======= ======= ======== ======== ======== ======== ======== ======= =======
Total debt.......................... 10,057 14,455 27,906 44,609 51,170 44,358 104,143 48,147 102,501
======= ======= ======== ====== =======
Total stockholders' equity
(deficit)........................... 40,430 45,647 50,026 52,345 54,373 49,685 (5,877) 51,442 (2,192)
======= ======= ======== ======== ====== =======
</TABLE>
_________________________
(1) Results of operations for the five months ended December 31, 1997
include a $5.1 million loss on the sale of assets primarily associated with
the laminated flooring plant.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
OVERVIEW
Prior to January 1, 1998, the Company was an integrated hardwood forest
products company with approximately 324,000 acres of hardwood timber located
along the Mississippi River primarily in Mississippi, Arkansas, Louisiana and
Tennessee. The Company also operated facilities in Vicksburg, Mississippi that
convert sawtimber into premium hardwood lumber used in furniture, cabinets,
architectural moldings and flooring, and sold pulpwood and other sawtimber to
third parties. The Company and its wholly owned subsidiaries also operated
other businesses not vertically integrated with its hardwood forests, including
PT Transportation, a river construction and transportation business and a
laminated truck flooring facility in Memphis, Tennessee. The laminated truck
flooring facility was sold as of December 31, 1997. In addition, the Company
holds interests in commercial real estate and farmland.
In May 1995, Veneers was formed to construct and operate a state-of-the-art
rotary veneer converting facility which would purchase certain grades of oak
sawtimber from the Company, with the Company holding a 1% interest as managing
general partner and the shareholders of the Company holding the remaining 99% as
Limited Partners. Veneers operations commenced in November 1996. Presently, a
wholly owned subsidiary of the Company is the sole general partner in Veneers
and the Company therefore indirectly controls Veneers' operations. Accordingly,
Veneers' assets, liabilities and results of operations are included in the
consolidated financial statements of the Company with appropriate recognition of
the Limited Partners' approximate 99% minority interest.
37
<PAGE>
Prior to January 1, 1998, the Company completed a series of transactions
designed to separate the Company's timberlands and other real estate holdings
from its converting and other operations in order to enable the Company to
qualify as a REIT effective January 1, 1998. As a result of those transactions,
the Company contributed a substantial portion of its non-real estate assets (i)
to Veneers in exchange for LP Interests and (ii) to AT Timber and AT Lumber in
exchange for all of the shares of non-voting preferred stock in AT Timber and AT
Lumber. Veneers, directly and through its wholly owned subsidiaries, assumed
controlling ownership interests in all non-real estate operations. THE
HISTORICAL RESULTS OF OPERATIONS OF THE COMPANY FOR ALL PERIODS PRIOR TO THE
THREE MONTHS ENDED MARCH 31, 1998 PRESENTED IN THE CONSOLIDATED FINANCIAL
STATEMENTS INCLUDED IN THIS REGISTRATION STATEMENT DO NOT REFLECT THE 1997
RESTRUCTURING TRANSACTIONS DESCRIBED ABOVE. THE PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997 PRESENT THE
EFFECTS OF THE 1997 RESTRUCTURING TRANSACTIONS AND THE SALE OF THE LAMINATED
TRUCK FLOORING PLANT AS IF BOTH HAD OCCURRED AS OF JANUARY 1, 1997. THE
ANTICIPATED EFFECTS OF THE 1997 RESTRUCTURING TRANSACTIONS ON FUTURE
CONSOLIDATED RESULTS OF OPERATIONS INCLUDE (i) ELIMINATION OF CORPORATE LEVEL
INCOME TAXES ON THE COMPANY'S INCOME DERIVED FROM HAVING ITS STANDING TIMBER
HARVESTED AND COMMERCIAL REAL ESTATE, FARM AND HUNTING LEASE INCOME TO THE
EXTENT SUCH INCOME IS DISTRIBUTED TO THE SHAREHOLDERS, (ii) REDUCTION IN THE
COMPANY'S CONTROLLING 100% ECONOMIC INTEREST IN THE TIMBER HARVESTING, LUMBER
CONVERTING AND RIVER CONSTRUCTION OPERATIONS TO NONCONTROLLING 82.2%, 95% AND
1.3% ECONOMIC INTERESTS, RESPECTIVELY, AND (iii) INCREASED INTEREST EXPENSE
RELATED TO ADDITIONAL BORROWINGS INCURRED TO FUND THE $57.9 MILLION DIVIDEND.
THE EFFECTS OF THE 1997 RESTRUCTURING TRANSACTIONS ON THE COMPANY'S CONSOLIDATED
FINANCIAL POSITION ARE PRESENTED IN THE BALANCE SHEETS AS OF DECEMBER 31, 1997
AND MARCH 31, 1998 INCLUDED IN THIS REGISTRATION STATEMENT.
BUSINESS AND RESOURCE MANAGEMENT OBJECTIVES
The Company's operating results have fluctuated due to changes in the
Company's business objectives and resource management practices and timber
harvest levels. The Company was formed in 1889 and, throughout most of its
history, its business objective has been to enhance the asset value of its
timber resources by maximizing the growing stock volume of desirable species in
good condition for the production of high quality hardwood sawtimber. Only in
the last ten years have the demand and market prices for hardwood pulpwood
reached levels allowing the harvest of pulpwood to be commercially practicable.
As a result, the Company's historical resource management practice was to remove
trees from stands that were not likely to enhance the value of the stand or had
reached economic maturity in order to improve the quality of the remaining stand
and to promote the natural regeneration of desirable species. From the mid-
1960s through the early 1990s, the average annual harvest was less than 50 MMBF,
or less than 70% of annual growth. Because of this resource management practice,
the Company purchased outside timber and logs in order to meet the species mix
and volume requirements of its timber converting facilities.
In the mid-1990s, the Company achieved its resource management goals for
quality and growing stock volume. Based on timber productivity data accumulated
for approximately 30 years, the Company concluded that it could increase its
timber growth rates by reducing the stocking levels of large-diameter trees
through an increased overall harvest for several years. Accordingly, in January
1997 the Company shifted its business objective from enhancing the asset value
of its timber resources to maximizing the productivity of its timber resources
and cash flow and began an increased overall harvest with attention given to
reducing the stocking of large diameter trees. As a result, the Company has
reduced its purchases of timber and logs from third parties.
38
<PAGE>
TIMBERLANDS REVIEW
The Company's harvest and timber acquisition volumes for the periods
presented are as follows:
<TABLE>
<CAPTION>
FIVE MONTHS ENDED THREE MONTHS ENDED
YEARS ENDED JULY 31, DECEMBER 31, MARCH 31
--------------------------- ----------------- -----------------
1995 1996 1997 1996 1997 1997 1998
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
SAWTIMBER (MBF)
The Company lands...... 54,546 52,068 80,721 29,121 40,439 17,339 20,943
Purchased timber....... 9,800 10,583 2,852 2,814 1,907 4 ---
Purchased logs......... 15,321 5,123 6,207 1,312 3,738 888 669
------- ------- ------- ------- ------- ------- -------
Total............... 79,667 67,774 89,780 33,247 46,084 18,231 21,612
PULPWOOD (TONS)
Total...............209,725 277,302 363,540 141,554 274,781 82,709 121,190
</TABLE>
The increase in harvest volumes for the year ended July 31, 1997, the
five months ended December 31, 1997 and the three months ended March 31, 1998
compared to the corresponding periods in the previous year is due to the
implementation of the Company's new resource management objective. The increase
in pulpwood volumes harvested in these periods also reflects increases in
pulpwood demand and is in response to higher pulpwood prices. Sawtimber volumes
harvested for the year ended July 31, 1996 decreased compared to the previous
year due to reduced lumber production resulting from start-up inefficiencies
associated with a lumber conversion facility modernization program begun in 1995
and completed in mid-1996.
THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED) COMPARED TO THREE MONTHS ENDED
MARCH 31, 1997 (UNUADITED)
Net revenues for the three months ended March 31, 1998 were $25.4 million,
an increase of 9% from revenues of $23.4 million for the three months ended
March 31, 1997. The increase was due to an 11% increase in timber and wood
products revenues from increased volumes shipped in all product lines of timber
and wood products except laminated truck flooring. Net revenues in all other
business segments for the three months ended March 31, 1998 were substantially
the same as the comparable period in the previous year.
Total costs and expenses for the three months ended March 31, 1998 were
$19.3 million, a decrease of 6% from total costs and expenses of $20.6 million
for the three months ended March 31, 1997. Timber and wood products expenses
were $14.2 million for the three months ended March 31, 1998, a decrease of 4%
compared to $14.7 million for the comparable period in the previous year. The
decrease, despite an increase in revenues, is due to reduced costs resulting
from the disposal of the laminated truck flooring operations. Lumber and veneer
manufacturing costs were substantially the same in both periods despite a
combined 11% increase in volume of lumber and veneer shipped due to reduced
manufacturing downtime and improved production rates. Logging and log
transportation expenses increased 35% in the three months ended March 31, 1998
due to a comparable increase in timber volume harvested. Costs and expenses in
all other business segments in the three months ended March 31, 1998 were
substantially the same as the comparable period in the previous year.
Interest expense for the three months ended March 31, 1998 was $1.6
million, an increase of 78% from interest expense of $0.9 million for the three
months ended March 31, 1997. The increase is due to $54 million in additional
debt remaining from the approximately $60 million borrowed in September 1997 to
fund the dividend paid in connection with the Company's qualification as a
REIT.
No income tax expense was incurred for the three months ended March 31,
1998, compared to $1.0 million in income tax expense for the three months ended
March 31, 1997. Federal income taxes are not payable by, nor provided for, the
Company due to the Company's anticipated election to be treated as a REIT as of
January 1, 1998. In addition, Veneers is generally not subject to federal
income tax as a partnership. AT Timber and AT Lumber, included in the Company's
consolidated financial statements, will be subject to income taxes but had no
earnings for the three months ended March 31, 1998.
Income before minority interest in Veneers for the three months ended March
31, 1998 was $4.5 million compared to $2.2 million for the comparable period in
1997. Net income for the three months ended March 31, 1998 was $4.4 million
($7,666 per share) compared to $1.6 million ($3,032 per share) for the
comparable period in the previous year. The increases are due to increased
timber harvest volumes, increased wood product sales volumes, decreased
manufacturing costs as described above and reduced income tax expense as a
result of the Company's anticipated election to be taxed as a REIT.
FIVE MONTHS ENDED DECEMBER 31, 1997 COMPARED TO FIVE MONTHS ENDED DECEMBER 31,
1996 (UNAUDITED)
Net revenues for the five months ended December 31, 1997 were $52.2
million, an increase of 47% from revenues of $35.6 million for the five months
ended December 31, 1996. The increase was primarily due to a 51% increase in
timber and wood products revenues, which resulted from increased volumes shipped
in all categories of timber and wood products, including lumber, pulpwood, logs
and laminated truck flooring, as well as increased volumes of veneer shipped
resulting from five months of operations at full capacity in 1997 compared to
only three months of start-up operations in 1996. In addition, river
construction revenues increased to $11.7 million in the five months ended
December 31, 1997 from $7.6 million in the comparable period in the previous
year due to favorable Mississippi River levels extending beyond the normal
season.
Total costs and expenses for the five months ended December 31, 1997 were
$45.2 million, an increase of 38% from the $32.9 million incurred in the five
months ended December 31, 1996. Timber and wood products expenses were $29.3
million for the five months ended December 31,
39
<PAGE>
1997, an increase of 28% compared to $22.9 million for the comparable period in
the previous year. The increase is primarily due to increased logging and log
transportation costs resulting from an increased harvest level, increased veneer
manufacturing costs resulting from five months of operations at full capacity
and increased laminated flooring costs resulting from increased production and
sales volume. Lumber manufacturing costs were approximately the same in both
periods despite a 29% increase in lumber volume shipped due to improved
production rates and reduced downtime. River construction expenses were $11.0
million in the five months ended December 31, 1997, an increase of 73% compared
to $6.3 million for the comparable period in the previous year, due to the
increase in river construction revenues described above.
Interest expense for the five months ended December 31,1997 was $2.4
million, an increase of 80% from the interest expense of $1.3 million incurred
in the five months ended December 31, 1996. The increase is due to increased
borrowings of approximately $60.0 million to fund the dividend paid in September
1997 to enable the Company to qualify as a REIT. Loss on sales of assets for
the five months ended December 31, 1997 was $5.2 million compared to a gain of
$0.3 million in the comparable period of the previous year. In late 1997, the
Company decided to dispose of the laminated truck flooring operations since
there were no vertical synergies with its timberlands. On December 31,1997,
assets related to the laminated truck flooring plant were sold for $0.1 million
in cash and a $4.9 million note receivable, which accounts for substantially all
of the loss incurred.
The Company recorded an income tax benefit for the five months ended
December 31,1997 of $0.6 million compared to a $0.5 million expense for the five
months ended December 31, 1996. The effective income tax rate for the five-month
periods in 1997 and 1996 reflect $0.5 million and $0.2 million benefits,
respectively, of the absence of Federal income taxes payable on net earnings
from Veneers.
Income before minority interest in Veneers for the five months ended
December 31,1997 was $0.1 million, compared to income of $1.5 million for the
comparable period in 1996. Net income (loss) for the five months ended December
31,1997 was ($1.3) million ($2,271) per share compared to income of $1.0 million
($1,660 per share) for the comparable period in the previous year. The decrease
in both is due primarily to the loss on the sale of the laminated truck flooring
assets and increased interest expense offset by the increase in income from
operations as described above.
FISCAL YEAR ENDED JULY 31, 1997 COMPARED TO FISCAL YEAR ENDED JULY 31, 1996
Net revenues for the fiscal year ended July 31,1997 were $96.5 million, an
increase of 10% from revenues of $87.7 million for the fiscal year ended July
31,1996. The increase was primarily due to the commencement of the veneer
operations in October 1996, which contributed $8.5 million in revenues in fiscal
1997. Increased volumes shipped and revenues from lumber, pulpwood and logs
were also experienced in fiscal 1997 due to increased lumber production and
increased timber harvest levels but were partially offset by decreases in
laminated trailer flooring sales due to lower volumes of trailers produced and
decreases in river construction revenues due to unfavorable river levels for
extended periods.
40
<PAGE>
Total costs and expenses for the fiscal year ended July 31,1997 were $84.6
million, an increase of 10% from total costs and expenses of $76.6 million for
the fiscal year ended July 31,1996. Timber and wood products expenses were
$60.8 million for fiscal 1997, an increase of 22% compared to $49.7 million for
fiscal 1996. The increase was attributable to the veneer start-up, lumber
operations and timber sales. PT Transportation expenses were $15.1 million in
fiscal 1997, a decrease of 22% compared to $19.2 million in fiscal 1996. The
decrease was attributable to decreased PT Transportation revenues for the same
periods.
Interest expense for the fiscal year ended July 31,1997 was $3.4 million,
an increase of 28% from interest expense of $2.6 million in the year ended July
31,1996. The increase was due to increased borrowings primarily for the
construction of the new veneer mill, lumber manufacturing equipment improvements
and the acquisition of commercial real estate. Gain on sales of assets for
fiscal 1997 was $2.4 million compared to $0.4 million for fiscal 1996 due to
sales in fiscal 1997 of certain farm and commercial properties.
The effective income tax rate for the fiscal year ended July 31,1997 was
34.2% compared to 33.2% for the fiscal year ended July 31,1996. The effective
income tax rate for fiscal 1997 reflects $0.6 million benefit of no Federal
income taxes payable on net earnings from Veneers.
Income before a minority interest in Veneers for 1997 was $7.5 million, an
increase of 23% from $6.1 million in 1996. The increase was due primarily to
the earnings from the veneer operations. Net income for fiscal 1997 was $5.7
million ($9,749 per share), a decrease of 7% from $6.1 million ($10,479 per
share) in 1996.
FISCAL YEAR ENDED JULY 31, 1996 COMPARED TO FISCAL YEAR ENDED JULY 31, 1995
Net revenues for the fiscal year ended July 31,1996 were $87.7 million, a
decrease of 4% from revenues of $91.2 million for the fiscal year ended July
31,1995. The decrease was due primarily to lower lumber sales from decreased
lumber production that occurred because of start-up inefficiencies associated
with the lumber facility modernization program begun in 1995 and completed in
spring 1996.
Total costs and expenses for the fiscal year ended July 31,1996 were $76.6
million, a decrease of 1% from total costs and expenses of $77.7 million for the
fiscal year ended July 31,1995. Timber and wood products expenses were $49.7
million for fiscal 1996, a decrease of 4% compared to $52.0 million for fiscal
1996. The decrease is attributable to the net effect of lower labor costs and
higher depreciation expense due to the lumber facility modernization program.
River construction expenses were $19.2 million in fiscal 1996, an increase of 6%
compared to $18.1 million in fiscal 1995. The increase is due to the 1%
increase in river construction revenues for the same period.
Interest expense for the fiscal year ended July 31,1996 was $2.6 million,
an increase of 65% from interest expense of $1.6 million in the fiscal year
ended July 31, 1995. The increase was due
41
<PAGE>
to increased borrowings primarily for the construction of the new veneer mill,
the lumber facility modernization program and the acquisition of river
construction equipment.
The effective income tax rate for the fiscal year ended July 31, 1996 was
33.2% compared to 34.5% for the fiscal year ended July 31, 1995.
Net income for fiscal 1996 was $6.1 million ($10,479 per share) a decrease
of 21% from $7.7 million ($13,174 per share) in fiscal 1995. The decrease is due
primarily to the decrease in timber and wood products operating income resulting
from the start-up inefficiencies associated with the lumber facility
modernization program.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by the Company's operating activities for the three months
ended March 31, 1998 and 1997 was $4.2 million and $0.4 million, respectively.
The increase is due to increased net earnings and reduced inventory levels. Cash
provided by the Company's operating activities for the five months ended
December 31,1997 and 1996 was $9.2 million and $7.1 million, respectively, and
was $18.4 million, $14.2 million and $9.8 million, respectively, for the fiscal
years ended July 31, 1997, 1996 and 1995. Cash provided by operations for these
periods has increased despite decreases in net income in each of the fiscal
years presented because a higher percentage of total expenses are non-cash
expenses including depreciation, depletion and amortization, deferred income
taxes and minority interest in earnings.
The Company's capital expenditures for the five months ended December
31,1997 and 1996 were $2.7 million and $6.3 million, respectively, and were
$31.1 million, $29.8 million and $19.8 million, respectively, for the fiscal
years ended July 31,1997, 1996 and 1995. Capital expenditures were related to
constructing the veneer plant, modernizing the lumber and laminated trailer
flooring facilities, and acquiring river construction equipment and commercial
real estate. Over half of these capital expenditures were funded from cash flow
from operations and the proceeds from the sales of assets and commercial real
estate, with the remainder funded by the issuance of long term debt and
borrowings under line of credit facilities. The reduction in capital
expenditures in the five months ended December 31,1997 is due to the completion
of the projects described above. Capital expenditures necessary to maintain the
Company's current facilities and capacities in future years are currently
expected to be less than $4.0 million per year.
In September 1997, the Company declared a special $100,000 per share
dividend to distribute all of its accumulated earnings and profits to enable the
Company to qualify as a REIT effective January 1,1998. This dividend was
financed by a $50.0 million note payable to Potlatch Corporation plus additional
line of credit borrowings. As of March 31, 1998, the Company had two lines
of credit totaling $16.5 million of which $8.2 million was available for future
borrowing. All outstanding borrowings as of such date are either the direct
obligation of, or are guaranteed by, the Company. Management of the Company
believes that cash flow from operations and access to capital under the
Company's lines of credit would be adequate to fund the Company's required REIT
distributions, debt service and capital expenditure needs in the foreseeable
future.
42
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL INFORMATION
The following Pro Forma Condensed Consolidated Statement of Operations for
the year ended December 31, 1997 presents unaudited pro forma operating results
of the Company as if the 1997 Restructuring Transactions (see Note 12 to the
Consolidated Financial Statements) and the sale of the laminated truck flooring
plant (see Note 3 to the Consolidated Financial Statements) had occurred as of
January 1, 1997.
The unaudited consolidated balance sheet as of March 31, 1998 and the
unaudited consolidated statement of operations for the three months then ended
present the Company's financial position and results of operations give effect
to the 1997 Restructuring Transactions. Accordingly, a pro forma balance sheet
and statement of operations as of March 31, 1998 and for the three months then
ended are not presented.
The Pro Forma Condensed Consolidated Financial Information does not purport
to represent what the Company's financial position or results of operations
actually would have been had these transactions, in fact, occurred on the dates
indicated, or to project the Company's results of operations at any future date
or for any future period.
The Pro Forma Condensed Consolidated Financial Information should be read
in conjunction with the Company's historical consolidated financial statements,
which are included elsewhere herein.
43
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL(a) ADJUSTMENTS PRO FORMA
<S> <C> <C> <C> <C>
NET REVENUES $113,098 $(8,246) (b) $104,852
COSTS AND EXPENSES 96,986 (9,095) (b) 87,891
-------- ------- --------
INCOME FROM OPERATIONS 16,112 849 16,961
OTHER INCOME (EXPENSE) (7,374) 2,973 (c) (4,401)
-------- ------- --------
INCOME BEFORE INCOME TAX EXPENSE
AND MINORITY INTEREST 8,738 3,822 12,560
INCOME TAX EXPENSE 2,656 (2,656) (d)
-------- ------- --------
INCOME BEFORE MINORITY INTEREST 6,082 6,478 12,560
MINORITY INTEREST (2,710) 2,710 (e)
-------- ------- --------
NET INCOME $ 3,372 $ 9,188 $ 12,560
======== ======= ========
EARNINGS PER SHARE $ 5,818 $ 21,672
======== ========
</TABLE>
- ------------------------
(a) The following schedule presents the calculation of the Company's operating
results for the year ended December 31, 1997.
<TABLE>
<CAPTION>
SUBTRACT ADD FIVE
FIVE MONTHS MONTHS
YEAR ENDED ENDED ENDED YEAR ENDED
JULY 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1997 1997
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET REVENUES $96,488 $35,612 $52,222 $113,098
COSTS AND EXPENSES 84,635 32,881 45,232 96,986
------- ------- ------- --------
INCOME FROM OPERATIONS 11,853 2,731 6,990 16,112
OTHER INCOME (EXPENSE) (492) (673) (7,555) (7,374)
------- ------- ------- --------
INCOME (LOSS) BEFORE
INCOME TAX EXPENSE
AND MINORITY INTEREST 11,361 2,058 (565) 8,738
INCOME TAX EXPENSE (BENEFIT) 3,891 606 (629) 2,656
------- ------- ------- --------
INCOME BEFORE MINORITY INTEREST 7,470 1,452 64 6,082
MINORITY INTEREST (1,820) (490) (1,380) (2,710)
------- ------- ------- --------
NET INCOME $ 5,650 $ 962 $(1,316) $ 3,372
EARNINGS PER SHARE $ 9,749 $ 1,660 $(2,271) $ 5,818
</TABLE>
________________
(b) To eliminate the sales, costs, and expenses of the laminated truck flooring
plant.
(c) To adjust interest expense to reflect a full year of
interest on borrowings incurred by the Company to fund
the stockholder dividend of $57,954 paid on September
22, 1997. Such dividend was paid in order for the
Company to qualify as a REIT. The interest rates used
to calculate the additional interest expense
were a fixed rate of 6% on $50,000 of new borrowings and
variable rate of 7.13% on $7,954 drawn on the line of
credit. The variable rate reflects the average rate
applicable to the line of credit for 1997. A 1/8% change
in the variable rate would have resulted in a net income
impact of $10. $(2,600)
To reflect the elimination of the loss on the sale of the
laminated truck flooring assets. 5,573
-------
Total $ 2,973
=======
(d) To eliminate income tax expense as a result of REIT status.
(e) In connection with the changes in corporate structure at December 31, 1997,
river construction, logging and timber conversion assets and approximately
$29,000 in debt were transferred to Veneers and its subsidiaries. The
additional depreciation and interest expense resulting from these transfers
reduce the income from Veneers to nil. Accordingly, the minority interest
in income of Veneers is reduced to nil.
44
<PAGE>
ITEM 3. DESCRIPTION OF PROPERTIES
TIMBERLANDS
The Company's Timberlands are described above under "Business Segments -
Operations - Timber and Wood Products Segment - The Timberlands" in Item 1.
WOOD PRODUCTS MANUFACTURING FACILITIES
AT Lumber operates lumber manufacturing facilities including two sawmills,
a lumber yard, dry kilns and an inspection station and Veneers operates a rotary
veneer mill all in Vicksburg, Mississippi. The veneer mill began operations in
the fall of 1996 and the lumber manufacturing facilities were modernized
beginning in 1995. In December 1997, the Company sold the assets related to the
production of laminated truck flooring. The following table summarizes the
annual production and capacity of the wood products manufacturing facilities as
of December 31, 1997. Amounts presented are MBF of logs consumed.
<TABLE>
<CAPTION>
Production Five Months Ended
Capacity December 31, 1997 Years Ended July 31
---------- ----------------- -------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C> <C> <C>
Lumber Manufacturing 78,000 32,438 75,191 63,203 72,964
Veneer Manufacturing 11,000 3,651 5,835 N/A N/A
</TABLE>
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
At June 1, 1998, there were approximately 166 holders of record of Common
Stock, which is the only class of capital stock of the Company outstanding.
The following table sets forth the beneficial ownership of shares of Common
Stock as of June 1, 1998 by (i) directors of the Company, (ii) the Chief
Executive Officer and each of the four other most highly compensated executive
officers of the Company (collectively the "Named Executive Officers"), (iii) the
directors and executive officers of the Company as a group and (iv) each person
who is a Shareholder of the Company holding more than a 5% interest in the
Company. Unless otherwise indicated in the footnotes, all of such interests are
owned directly, and the indicated person or entity has sole voting and
disposition power. The number of shares of Common Stock represents (a) the
number of shares of Common Stock the person beneficially owns plus (b) the
number of shares of Common Stock issuable upon exercise of currently outstanding
options.
45
<PAGE>
<TABLE>
<CAPTION>
Name and Address of Amount & Nature of Percentage
Beneficial Owner (1) Beneficial Ownership of Class
- --------------------- -------------------- -----------
<S> <C> <C>
Directors and Executive Officers
Parnell S. Lewis, Jr. 31.6500(2) 5.5%
Bart C. Tully, Jr. 16.0500(3) 2.8%
Russell E. Bloodworth 25.5500(4) 4.4%
John H. Dicken, Jr. 8.4625(5) 1.5%
Claude Tully Hall 24.9000(6) 4.3%
Linus Parker Hall, Jr. 18.2500(7) 3.1%
Kathleen Bushing Pierce 24.7000(8) 4.3%
E.D. Coombs, Jr. 0.7375 *
Paul M. Jepson, M.D. 23.9499(9) 4.1%
Charles R. Dickinson, Jr. 8.4875(10) 1.5%
All Directors and Executive Officers
as a Group 167.6499 28.9%
5% or greater Shareholders
J.T. Graves Trust 45.3000 7.8%
1 Commerce Square
Memphis, TN 38101
</TABLE>
_________
* Less than 1%
(1) The mailing address for each person listed is that of the Company unless
otherwise indicated.
(2) Includes 4.5 shares held by trusts for the benefit of Mr. Lewis' children.
(3) Includes 4.25 shares held by Mr. Tully's wife and 8.0 shares held by a trust
for the benefit of Mr. Tully's wife.
(4) Includes 8.0 shares held by Mr. Bloodworth's wife and 17.55 shares held by
trusts for the benefit of Mr. Bloodworth's children.
(5) Includes 6.4625 shares held by Mr. Dicken's wife and 2.0 shares held by a
trust for the benefit of Mr. Dicken's children of which Mr. Dicken is
trustee.
(6) Includes 1.2 shares held by Mr. C.T. Hall's wife and 17.0 shares held by
trusts for the benefit of Mr. L.P. Hall during his life, of which Mr. C.T.
Hall is a trustee and in which the children of Mr. L.P. Hall, including Mr.
C.T. Hall, have a remainder interest.
(7) Includes 17.0 shares held by trusts for the benefit of Mr. L.P. Hall during
his life, of which Mr. C.T. Hall is a trustee and in which the children of
Mr. L.P. Hall, including Mr. C.T. Hall, have a remainder interest.
(8) Includes 7.0 shares held by a trust for the benefit of Ms. Pierce and 3.7
shares owned by Ms. Pierce and her brother as tenants in common.
(9) Includes 20.3499 shares held in trust for Dr. Jepson and his wife, 2.1
shares held by a profit sharing plan f/b/o Dr. Jepson and 1.5 shares held by
Dr. Jepson as custodian for his children.
(10) All shares are held by Mr. Dickinson's wife.
46
<PAGE>
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names and positions of all directors and
executive officers of the Company. All directors hold office until the next
annual meeting of Shareholders and until their successors have been duly elected
and qualified. Officers are appointed annually by the Board of Directors and
serve at the discretion of the Board of Directors. A brief discussion of the
business experience of each director and executive officer during the past five
years is set forth following the table.
<TABLE>
<CAPTION>
Name Age Position Director/Office Since
- ---- --- -------- ---------------------
<S> <C> <C> <C>
Parnell S. Lewis, Jr. 50 Chairman of the Board, Chief Executive 1979
Officer and President
John H. Dicken, Jr. 38 Director 1993
Bart C. Tully, Jr. 79 Director 1936
Russell E. Bloodworth 52 Director 1986
Claude Tully Hall 50 Director 1968
Linus Parker Hall, Jr. 81 Director 1956
Kathleen Bushing Pierce 67 Director 1991
E.D. Coombs, Jr. 52 Director and Treasurer 1977
Paul M. Jepson, M.D. 55 Director 1989
Charles R. Dickinson, Jr. 38 Vice President 1995
John D. Hodges 61 Vice President 1997
Marye Helen Owen 42 General Counsel and Secretary 1996
</TABLE>
No director, officer, affiliate or promoter of the Company has, within the
past five years, filed any bankruptcy petition, nor was a receiver, fiscal agent
or similar officer appointed for the business or property of such person or any
partnership in which he was a general partner or any corporation or business
association of which has was an executive officer within two years before the
time of such filing. No director, officer, affiliate or promoter has been
convicted in or been the subject of any pending criminal proceedings, nor is any
such person the subject of any order, judgment or decree involving the violation
of any state or Federal securities laws or otherwise enjoining or limiting his
activities in any business practice, whether related to securities and
commodities activities or otherwise.
Parnell S. Lewis has been President of the Company since 1993, and has
served as a director of the Company since 1979. Before joining the Company, Mr.
Lewis was a Vice President with National Guard Products from 1982 to 1987. He
was employed by Union Planters National Bank from 1971 to 1987, holding several
positions, including Vice President and Senior Loan Officer.
47
<PAGE>
Mr. Lewis received his B.B.A. from Memphis State University. He is also a
director of Union Planters Corporation. Mr. Lewis is also a director of the New
General Partner and the Company's subsidiaries, including AT Timber and AT
Lumber in addition to serving on the Board of Managers of AT Management. Mr.
Lewis also serves as President and Chief Executive Officer of AT Management.
John H. Dicken, Jr. has served as a director of the Company since 1993.
Mr. Dicken has been the owner of Dicken Commodities since 1993 where he serves
as a commodity trader. Mr. Dicken also serves on the Board of Managers of AT
Management.
Bart C. Tully, Jr. has served as director of the Company since 1936. Mr.
Tully began working for PT Transportation in 1936 and was elected President of
PT Transportation and President of the Company in 1967. Mr. Tully also serves
on the Board of Managers of AT Management.
Russell E. Bloodworth has served as a director of the Company since 1986.
Mr. Bloodworth is employed by various entities such as Boyle Investment Company
where he has served as Executive Vice President since 1984. He is also a
director of Boyle North Company, L.L.C., Financial Federal Savings Bank and the
Crook Trust. Mr. Bloodworth also serves on the Board of Managers of AT
Management.
Claude Tully Hall joined the Company as a full time employee in 1968 as a
forester. He was elected as a director in 1978 and Vice President of the
Company in 1980. His most recent position with the Company was Executive Vice
President-Log and Forest Unit. He is currently the President and a director of
AT Timber and on the Board of Managers of AT Management.
Linus Parker Hall has served as a director of the Company since 1956. Mr.
Hall was first employed with the Company in 1946 and was promoted to Vice
President of Sales from 1956 until his retirement in 1984. Mr. Hall also serves
on the Board of Managers of AT Management.
Kathleen Bushing Pierce has served as a director of the Company since 1991.
Ms. Pierce also serves on the Board of Managers of AT Management.
E. D. Coombs, Jr. has served as a director of the Company since 1977. Mr.
Coombs has held several different positions since being hired by the Company in
1977, including Chief Accountant, Assistant Controller, Controller and,
presently, Treasurer of the Company, the New General Partner, AT Management, AT
Timber and AT Lumber. In addition, Mr. Coombs is an officer and also serves on
the Board of Managers of AT Management and on the Board of Directors of the New
General Partner and several other subsidiaries of the Company, including AT
Timber and AT Lumber.
Paul M. Jepson, M.D., has served as a director of the Company since 1989.
Dr. Jepson has been a self-employed physician since 1975 and served as Chief of
Surgery of the Ukiah Valley Medical Center during 1996 and 1997. Dr. Jepson
also serves on the Board of Managers of AT Management.
48
<PAGE>
Charles R. Dickinson, Jr. has served as Vice President of the Company since
1995. Prior to his employment with the Company, Mr. Dickinson worked for Ernst
& Young, LLP, where he provided accounting, auditing and consulting services to
various clients. Mr. Dickinson is also Vice President of the New General
Partner, AT Management, AT Timber and AT Lumber and on the Board of Directors of
the New General Partner and several other subsidiaries of the Company, including
AT Timber and AT Lumber.
John D. Hodges has served as Vice President of Land Management since
January 1997. Prior to being employed by the Company, Mr. Hodges was a
professor of Lumber Production at Mississippi State University from 1975 to
1996.
Marye Helen Owen has served as General Counsel and Secretary of the Company
since January 1996. Prior to joining the Company, Ms. Owen was a partner in the
Memphis law firm of Black, Bobango & Morgan, a Professional Corporation. Ms.
Owen is a secretary of the New General Partner, AT Management, AT Timber and AT
Lumber and on the Board of Directors of the New General Partner and several
other subsidiaries of the Company, including AT Timber and AT Lumber.
FAMILY RELATIONSHIPS
Parnell S. Lewis, Jr. is related by blood or marriage to Bart C. Tully,
Jr., Russell E. Bloodworth, Charles R. Dickinson, Jr. and John H. Dicken, Jr.
Bart C. Tully, Jr. is the father-in-law of Russell E. Bloodworth and is
related by blood or marriage to Parnell S. Lewis, Jr., Charles R. Dickinson,
Jr., and John H. Dicken, Jr.
Russell E. Bloodworth in the son-in-law of Bart C. Tully, Jr. and is
related by marriage to Parnell S. Lewis, Jr., Charles R. Dickinson, Jr. and John
H. Dicken, Jr.
Linus Parker Hall, Jr. is the father of Claude Tully Hall.
Claude Tully Hall is the son of Linus Parker Hall, Jr.
Charles R. Dickinson, Jr. is related by marriage to Parnell S. Lewis, Jr.,
Bart C. Tully, Jr., Russell E. Bloodworth and John H. Dicken, Jr.
John H. Dicken, Jr. is related by marriage to Parnell S. Lewis, Jr.,
Bart C. Tully, Jr., Russell E. Bloodworth and Charles R. Dickinson, Jr.
49
<PAGE>
COMPENSATION OF DIRECTORS
Beginning January 1, 1997, non-employee directors are paid an annual
retainer at the beginning of each calendar year of $7,500. Members of
committees of the Board of Directors are paid an additional annual retainer of
$5,000 per year. In addition, those directors who do not reside in the Memphis
area and who are not employees of the Company are allowed a per diem of two days
at $500 a day for travel related expenses.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors currently has a Salary and Benefits Committee which
has authority to, among other things, confer and consult regarding salary
arrangements for directors, officers, managers and other employees of the
Company, adopt and amend employment agreements for officers and other employees
of the Company. Members of the Salary and Benefits Committee currently include
three members, Messrs. Bloodworth, Dicken and Jepson, none of whom are employees
of the Company. The Salary and Benefits Committee approved the Change in
Control Agreements and the amendments thereto.
50
<PAGE>
ITEM 6. EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation
earned by the Company's Chief Executive Officer and each of the four other most
highly paid executive officers of the Company (the CEO and such officers,
collectively, the "Named Executives") for services rendered to the Company
during its three most recently completed fiscal years.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation
---------------------------------------
Name and Current All Other
Principal Position Year Salary($) Bonus($) Compensation(1)
- ------------------ ---- --------- -------- ---------------
<S> <C> <C> <C> <C>
Parnell S. Lewis, Jr. 1997 304,063 125,000 4,750
Chairman of the Board, 1996 300,000 100,000 4,750
Chief Executive Officer 1995 259,162 120,000 4,750
and President of the
Company
E. D. Coombs, Jr. 1997 168,000 75,000 4,750
Treasurer of the Company 1996 168,000 68,500 4,750
1995 163,338 68,000 4,620
Martin S. Lewis 1997 126,870 76,558 4,750
Managing Director, 1996 116,865 50,000 4,750
Veneers 1995 108,125 45,000 4,620
Tony R. Parks 1997 128,760 72,500 3,863
President, 1996 116,150 50,000 3,485
AT Lumber 1995 108,125 45,000 3,243
Claude T. Hall 1997 119,373 72,500 4,750
President, 1996 116,150 49,000 4,750
AT Timber 1995 108,125 45,000 3,641
</TABLE>
_________
(1) Amounts shown represent employer matching contributions under the
Company's Profit Sharing Retirement Plan and Trust.
CHANGE IN CONTROL AND EMPLOYMENT AGREEMENTS
CHANGE IN CONTROL AGREEMENTS
In order to align more closely the interests of the executive officers with
those of Shareholders, to provide economic incentives to executive officers to
maximize the return to Shareholders and to secure the performance of such
officers in connection with preparing for a change in control in
51
<PAGE>
the event of a transaction that would constitute a change in control of the
Company, the Salary and Benefits Committee (which consists solely of nonemployee
directors) of the Board of Directors approved and the Company entered into
Change in Control Agreements with certain of its executive officers. Pursuant to
the Change in Control Agreements, the executive officer agrees to remain
employed by the Company or its successor following a change in control for one
year, if so requested in writing by the Company or its successor and not to
compete or attempt to compete with the Company or Veneers during employment and
for one year thereafter. In consideration for such continued employment, the
Company or its successor agrees to (i) maintain such officer's base salary and
any other compensation agreements and plans at no less than the level prevailing
at the Company prior to the change in control for a period of one year following
the change in control; (ii) require of the officer only duties of commensurate
responsibility to those required immediately prior to the change in control and
(iii) not require any change in the place of such officer's employment more than
25 miles from the place at which the officer was employed immediately prior to
the change in control. Upon the occurrence of a change in control, the officer,
if then employed by the Company or terminated without cause in anticipation of
such change in control, will be entitled to receive in cash a certain percentage
(as set forth in the Change in Control Agreements) of the total consideration
received by Shareholders (the "Total Shareholder Consideration Paid") and
Limited Partners of Veneers. In the event that any payments received by an
officer in connection with a change in control whether under the Change in
Control Agreement or otherwise become subject to the excise tax ("Excise Tax")
assessed under Section 4999 of the Code, the Company will make additional
payments to such officer sufficient to make such individuals whole with respect
to the Excise Tax.
In December 1997, the Company amended the Change in Control Agreements by
adopting two separate agreements: the Supplemental and Clarifying Agreement (the
"Clarifying Agreement"), which applies to those officers who continue to be
employed by the Company following the 1997 Restructuring Transactions, and the
Supplemental and Amending Agreement (the "Amending Agreement"), which applies to
former employees of the Company who, after the 1997 Restructuring Transactions,
will be employed by AT Timber, AT Lumber and Veneers (defined therein as "New
Employer").
The Clarifying Agreement amends, among other things, the definition of Total
Shareholder Consideration Paid provided in the Change in Control Agreements to
include (i) any consideration paid or received, directly or indirectly, by the
Limited Partners of Veneers and the value of any retained assets of Veneers in
the event the Company or any subsidiary of the Company is a general partner of
Veneers at the time of a change in control; and (ii) any distribution, other
than ordinary dividends, to Shareholders made within 18 months prior to a change
in control, if at the time of the change in control the Company has taken any
action looking toward qualification as a REIT, including without limitation, the
distribution of $100,000 per share paid in September 1997 to Shareholders of the
Company, as voted by the Board of Directors on September 22, 1997.
The Amending Agreement amends, among other things, the section of the Change
in Control Agreements providing for payment in the event of a change in control
by including payments for
52
<PAGE>
officers employed by the New Employer or terminated without cause by the New
Employer in anticipation of a change in control. In addition, the Amending
Agreement also amends the definition of Total Shareholder Consideration Paid
contained therein in the same manner as the Clarifying Agreement.
EMPLOYMENT AGREEMENTS
The Company is also a party to Employment Agreements with certain of its
executive officers. The Employment Agreements do not guarantee employment to
such officers, but do provide for certain benefits payable in the event of
termination that would be payable in addition to the Total Benefits provided
under the Change in Control Agreements. Unless such termination is (i) because
of the officer's death or retirement; (ii) by the Company for cause, such as
willful and continued failure to perform duties; or (iii) by the officer other
than for good reason (as defined in the Employment Agreements), such officer
will receive certain benefits, including full base salary, plus credit for
earned vacation days, continued health benefits and a specific severance pay
provision which provides for a lump sum of cash in an amount equal to the
product of the officer's average annual compensation paid by the Company and
includible in his gross income for Federal income tax purposes during the five
most recent taxable years before the date of his termination multiplied by
three, with special provisions intended to avoid adverse tax consequences.
PENSION PLANS
The following table presents the annual pension benefits estimated to be
payable under the Company's Salaried Employees' Pension Plan (the "Salaried
Pension Plan") at age 65 to a person having the average annual earnings and
years of credited service shown.
PENSION PLAN TABLE
<TABLE>
<CAPTION>
Credited Years of Service
Average --------------------------------------------------
Annual Earnings 15 20 25 30 35
--------------------------------------------------
<S> <C> <C> <C> <C> <C>
$100,000 $33,900 $35,196 $36,504 $37,800 $39,096
$110,000 $37,872 $39,504 $41,124 $42,756 $44,376
$120,000 $41,856 $43,800 $45,756 $47,700 $49,656
$130,000 $45,828 $48,096 $50,376 $52,656 $54,924
$140,000 $49,800 $52,404 $54,996 $57,600 $60,204
$150,000 $53,772 $56,700 $59,628 $62,556 $65,472
$160,000 $57,756 $60,996 $64,248 $67,500 $70,752
</TABLE>
53
<PAGE>
Maximum compensation taken into account for purposes of calculating
benefits under the pension plan is $160,000. The pension plan covers regular
compensation (excluding bonus) which, in the case of the Named Executives, is
the compensation shown under the heading "Salary" on the Summary Compensation
Table. The benefit amounts are the annual payments that would be made to the
participant at retirement at age 65 based on completion of the scheduled years
of service just prior to retirement. The annual amounts are calculated taking
into consideration integration with Social Security.
Estimated credited years of service for the Named Executives under the
Salaried Pension Plan are as follows: Mr. Lewis, 10; Mr. Coombs, 26; Mr. Lewis,
16; Mr. Parks, 24; and Mr. Hall, 29.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Russell E. Bloodworth, Jr., a director of the Company, is also an Executive
Vice President and director of Boyle Investment Company ("Boyle"). The Company
and Boyle as tenants in common own a warehouse located in Shelby County,
Tennessee. The Company, Boyle and an affiliate of Boyle are also general
partners in BTE Partners, a Tennessee general partnership that owns and operates
a shopping center in Memphis, Tennessee. Boyle is also the manager of both
projects. The Company's share of the operating results of the warehouse for
the calendar year ended December 31, 1997 was net income of $33,782 and from the
shopping center was net loss of $13,655.
ITEM 8. LEGAL PROCEEDINGS
Although the Company may, from time to time, be involved in litigation and
claims arising out of its operations in the normal course of business, the
Company is not presently a party to any material legal proceedings.
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
There is no established public trading market for the Common Stock (the
class of securities registered under this Form 10) or any other securities of
the Company. As of June 1, 1998, there were 579.5441 shares of Common Stock
issued and outstanding. Distributions of $1,250 were made on December 1, 1996,
March 1, 1997, June 1, 1997 and September 1, 1997, and a distribution of $2,500
was made on December 1, 1997. A special distribution of $100,000 per share was
paid to Shareholders in September 1997.
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES
There have been no sales of Common Stock within the past three years.
54
<PAGE>
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED
The following summary description of the capital stock of the Company is
qualified in this reference to the form of the Articles of Incorporation and the
Bylaws of the Company, a copy of each of which is filed as an exhibit to the
Registration Statement.
GENERAL
The Articles of Incorporation of the Company provide that the Company may
issue up to 1,200 shares of Common Stock, par value $2,000 per share. As of
June 1, 1998, 579.5441 shares of Common Stock were issued and outstanding.
COMMON STOCK
All shares of Common Stock will be of one class and will have equal voting
and other rights. Shareholders have no preemptive rights to acquire additional
or treasury shares of Common Stock.
Dividends may be declared by the Board of Directors at any regular or
special meeting and may be paid in cash or in property or in shares of the
Common Stock. The Company commenced quarterly distributions on its Common Stock
on December 1, 1996, and intends to continue making quarterly distributions on
the outstanding shares of Common Stock.
Each outstanding share of Common Stock entitles the holder to one vote on
all matters submitted to a vote of Shareholders, including the election of
directors. Fractional shares issued and outstanding will be entitled to
fractional votes. There is no cumulative voting in the election of directors,
which means that the holders of a plurality of the outstanding Common Stock can
elect all of the directors then standing for election and the holders of the
remaining Common Stock will not be able to elect any directors.
The Mississippi Business Corporations Act (the "MBCA") requires the
affirmative vote of at least two-thirds of all issued and outstanding classes of
stock having voting rights to approve any of the following: (i) the adoption of
a plan of merger with any other corporation, domestic or foreign, other than a
subsidiary corporation; (ii) the sale, lease, exchange, pledge or other
disposition of all or substantially all of the property and assets, with or
without the good will, if not made in the usual and regular course of business;
and (iii) the voluntary dissolution of the Company. The Articles of
Incorporation provide that these provisions and required percentages are adopted
as a part of the charter of the corporation surviving the Merger, and no
amendment to the MBCA allowing a lesser percentage may affect the requirement of
the affirmative vote of at least two-thirds of all issued and outstanding
classes of stock having voting rights.
55
<PAGE>
RESTRICTIONS ON TRANSFER OF COMMON STOCK
The Company is currently classified as a "river timberlands company" under
the Timberlands Act, which is an expression of the public policy of the State of
Mississippi with regard to companies which are incorporated in Mississippi and
own, either directly or through subsidiaries, 80,000 or more acres of land in
the state that is substantially forested and located within fifteen miles of the
thalweg of the Mississippi River. The Timberlands Act is designed to allow a
form of public control over transactions in the voting stock of such
corporations so that parties who seek to obtain a controlling or influential
interest in the voting stock, together with their controlling and affiliated
persons and their backgrounds and plans for the use and management of river
timberlands, will be subject to review in the public interest. For example, the
Timberlands Act provides that no person shall acquire, directly or indirectly,
or enter into any agreement to acquire any of the outstanding voting securities
of a river timberlands company, if (i) such person would then become the owner
of ten percent or more of the voting stock of the company, either individually
or in conjunction with any affiliate or (ii) the voting securities of the
company so proposed to be acquired constitute ten percent or more of the
outstanding voting securities, unless the person has filed with the Secretary of
State of the State of Mississippi (the "Secretary of State") and sent to the
Company notice required under the Timberlands Act and the Secretary of State has
approved the acquisition and such approval is in effect. Public review of
transactions in certain publicly traded securities are exempt from the
Timberlands Act. The Timberlands Act exempts from its provisions companies that
are registered under Section 12(g) of the Exchange Act. By filing this
Registration Statement, the Company intends to cause the Timberlands Act to
become inapplicable to the Merger. Such registration would become effective
immediately prior to the Merger. If the Merger Agreement is terminated, the
Company would withdraw this Registration Statement.
In the event that the Company is unable to register its Common Stock under
the Exchange Act or, despite its reasonable best efforts, is otherwise unable to
cause the Timberlands Act to be inapplicable to the Merger, then Potlatch,
Newco, Newsub and the Company are required to use their commercially reasonable
efforts to make all appropriate filings under the Timberlands Act with respect
to the transactions contemplated by the Merger Agreement, cooperate with each
other in such filings and in the prosecution of an order of approval by the
Secretary of State, and furnish such additional information and take such
additional actions as shall be requested by the Secretary of State. The
applicable fees under the Timberlands Act will be paid by Potlatch.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Bylaws require the Company to indemnify its directors and
officers (each an "Indemnitee") to the fullest extent authorized by the MBCA
against all liability and loss and reasonable expense reasonably incurred by
such Indemnitee in connection with any action, suit or proceeding, including
attorneys' fees, judgments, fines, excise taxes with respect to any employee
benefits plan, or amounts paid in settlement. Such indemnification continues
after the Indemnitee ceases to be a director or officer. The right to
indemnification includes the right to be paid by the
56
<PAGE>
Company the expenses incurred in defending any proceeding in advance of its
final disposition upon the delivery of an undertaking by or on behalf of the
Indemnitee to repay all amounts advanced if a final judicial decision is
rendered that such Indemnitee did not meet the standard of conduct permitting
indemnification under the MBCA or the Bylaws. If a claim for indemnification is
not paid in full by the Company within 60 days after it has been received in
writing by the Company, except in the case of a claim for an advancement of
expenses in which case the applicable period is 20 days, the Indemnitee may
bring suit against the Company to recover the amount of the claim. If any
Indemnitee is successful in such suit against the Company, or in a suit brought
by the Company to recover an advancement of expenses, the Indemnitee will be
entitled to be paid the expenses of prosecuting or defending such suit.
The Company maintains insurance, at its expense, to protect against any
liability or loss, regardless of whether any director or officer is entitled to
indemnification under the MBCA or the Bylaws.
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is contained in the Consolidated
Financial Statements of the Company set forth beginning at page F-1 of this
Registration Statement.
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS IN ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no changes in or disagreements with the Company's
accountants regarding accounting and financial disclosure during the Company's
two most recent fiscal years.
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements. See Index to Financial Statements beginning at
page F-1 of this Registration Statement.
(b) Exhibits.
Exhibit No. Description
- ----------- -----------
2.1 Agreement and Plan of Merger, dated as of February 9, 1998
among the Registrant, Potlatch Corporation, Timberland Growth
Corporation and Beaver Acquisition Corporation.*
3.1 Restated Articles of Incorporation of the Registrant.*
3.2 Revised and Restated Bylaws of the Registrant.*
57
<PAGE>
10.1 Asset Purchase Agreement, dated as of February 9, 1998, by
and among Potlatch Corporation, Anderson-Tully Veneers, L.P.
and Anderson-Tully Management Services, LLC.*
10.2 Sawmills Subsidiary Asset Purchase Agreement, dated as of
February 9, 1998, by and among Potlatch Corporation and
Anderson-Tully Lumber Company.*
10.3 Logging Subsidiary Asset Purchase Agreement, dated as of
February 9, 1998, between Potlatch Corporation and Anderson-
Tully Timber Company.*
10.4 Timber Harvest Agreement between Anderson-Tully Timber
Company and the Registrant dated January 1, 1998.*
10.5 Employment Agreement, dated March 28, 1994 between the
Registrant and Parnell S. Lewis, Jr., Change in Control
Agreement dated December 10, 1996 between the Registrant and
Parnell S. Lewis, Jr. and Supplemental and Clarifying
Agreement, dated December 31, 1997, between the Registrant
and Parnell S. Lewis, Jr.*
10.6 Employment Agreement, dated July 10, 1987 between the
Registrant and E. D. Coombs, Jr., Change in Control
Agreement dated December 11, 1996 between the Registrant
and E. D. Coombs, Jr. and Supplemental and Clarifying
Agreement, dated December 31, 1997, between the Registrant
and E. D. Coombs, Jr.*
10.7 Change in Control Agreement dated January 11, 1997 between
the Registrant and Tony R. Parks and Supplemental and
Amending Agreement, dated December 31, 1997, between the
Registrant and Tony R. Parks.*
10.8 Change in Control Agreement dated May 6, 1997 between the
Registrant and Claude Tully Hall and Supplemental and
Amending Agreement, dated December 31, 1997, between the
Registrant and Claude Tully Hall.*
10.9 Change in Control Agreement dated June 10, 1997 between the
Registrant and Martin S. Lewis and Supplemental and Amending
Agreement, dated as of December 31, 1997, between the
Registrant and Martin S. Lewis.*
58
<PAGE>
10.10 Change in Control Agreement dated December 11, 1996
between the Registrant and Charles Robert Dickinson, Jr. and
Supplemental and Clarifying Agreement, dated as of December
31, 1997, between the Registrant and Charles Robert
Dickinson Jr.*
10.11 Change in Control Agreement dated December 10, 1996
between the Registrant and Marye Helen Owen and Supplemental
and Clarifying Agreement, dated as of December 31, 1997,
between the Registrant and Marye Helen Owen.*
10.12 Change in Control Agreement dated December 12, 1996
between the Registrant and Bartlett Tully Lewis and
Supplemental and Amending Agreement, dated as of December
31, 1997, between the Registrant and Bartlett Tully
Lewis.*
21.1 Subsidiaries of the Registrant.*
27.1 Financial Data Schedule.
- ------------------
* Previously filed with the initial filing of this Registration Statement on
April 23, 1998.
59
<PAGE>
ANDERSON-TULLY COMPANY AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
PAGE
<S> <C>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-2
CONSOLIDATED BALANCE SHEETS AS OF JULY 31, 1996 AND 1997 AND DECEMBER 31, 1997 F-3
CONSOLIDATED STATEMENTS OF OPERATIONS FOR EACH OF THE YEARS
ENDED JULY 31, 1995, 1996, AND 1997 AND THE FIVE-MONTH PERIOD ENDED
DECEMBER 31, 1997 F-4
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR EACH OF THE
YEARS ENDED JULY 31, 1995, 1996, AND 1997 AND THE FIVE-MONTH PERIOD
ENDED DECEMBER 31, 1997 F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR EACH OF THE YEARS
ENDED JULY 31, 1995, 1996, AND 1997 AND THE FIVE-MONTH PERIOD ENDED
DECEMBER 31, 1997 F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-7
CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 1998 AND DECEMBER 31,
1997 (UNAUDITED) F-20
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED
MARCH 31, 1998 AND 1997 (UNAUDITED) F-21
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) FOR THE
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED) F-22
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED
MARCH 31, 1998 AND 1997 (UNAUDITED) F-23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) F-24
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors,
Anderson-Tully Company
We have audited the accompanying consolidated balance sheets of Anderson-Tully
Company (the "Company") and its subsidiaries as of July 31, 1996 and 1997 and
December 31, 1997 and the related consolidated statements of operations,
stockholders' equity (deficit), and cash flows for each of the three years in
the period ended July 31, 1997 and the five-month period ended December 31,
1997. 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, such consolidated financial statements present fairly, in all
material respects, the financial position of Anderson-Tully Company and its
subsidiaries at July 31, 1996 and 1997 and December 31, 1997 and the results of
their operations and their cash flows for each of the three years in the period
ended July 31, 1997 and the five-month period ended December 31, 1997, in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Memphis, Tennessee
February 10, 1998
F-2
<PAGE>
ANDERSON-TULLY COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JULY 31,
------------------ DECEMBER 31,
1996 1997 1997
-------- -------- ------------
<S> <C> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents................... $ 188 $ 1,749 $ 1,711
Certificates of deposit..................... 100 100 117
Accounts receivable......................... 6,783 9,684 11,049
Notes receivable............................ 4,899
Inventories................................. 6,341 4,783 5,408
Deferred income taxes....................... 1,229 1,076 1,258
Prepaid expenses............................ 885 1,339 1,190
Refundable income taxes..................... 685
-------- -------- --------
Total current assets...................... 16,211 18,731 25,632
TIMBERLAND AND TIMBER--At cost................ 29,942 28,183 27,858
Less accumulated depletion.................. (18,599) (18,215) (18,577)
-------- -------- --------
Timberland and timber--net................ 11,343 9,968 9,281
PLANT PROPERTY--NET........................... 68,693 75,474 64,300
COMMERCIAL REAL ESTATE........................ 22,385 30,007 29,801
OTHER ASSETS.................................. 2,552 2,306 3,085
-------- -------- --------
TOTAL......................................... $121,184 $136,486 $132,099
======== ======== ========
LIABILITIES AND STOCKHOLDERS'
-----------------------------
EQUITY (DEFICIT)
----------------
CURRENT LIABILITIES:
Accounts payable............................ $ 4,346 $ 5,532 $ 7,326
Current portion of long-term debt........... 1,805 4,826 7,356
Accrued expenses:
Wages, insurance, and other................. 3,074 3,105 3,474
Dividends payable........................... 695 723
Taxes other than income..................... 905 1,053 1,585
Income and franchise taxes.................. 239 1,826 2,191
-------- -------- --------
Total accrued expenses.................... 4,913 6,707 7,250
Deferred revenues............................. 917
-------- -------- --------
Total current liabilities................. 11,064 17,065 22,849
DEFERRED INCOME TAXES......................... 13,519 15,955 13,971
LONG-TERM LIABILITIES......................... 1,177 1,171 1,507
LONG-TERM DEBT, Less current portion.......... 42,804 46,344 96,787
MINORITY INTEREST IN EQUITY OF CONSOLIDATED
LIMITED PARTNERSHIP.......................... 275 1,578 2,862
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT):
Capital stock--$2,000 par value; 1,200
shares authorized; 579.54 shares
outstanding................................ 1,159 1,159 1,159
Retained earnings (deficit)................. 51,186 53,214 (7,036)
-------- -------- --------
Total stockholders' equity (deficit)...... 52,345 54,373 (5,877)
-------- -------- --------
TOTAL......................................... $121,184 $136,486 $132,099
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
ANDERSON-TULLY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
FIVE MONTH
YEARS ENDED JULY 31, PERIOD ENDED
-------------------------------- DECEMBER 31,
1995 1996 1997 1997
<S> <C> <C> <C> <C>
NET REVENUES:
Timber and wood products $63,148 $59,137 $74,262 $ 37,710
River construction 22,797 23,108 16,688 11,691
Commercial real estate 2,276 1,959 1,803 905
Equity in earnings of commercial
real estate investments 604 663 704 224
Other 2,421 2,878 3,031 1,692
------- ------- ------- --------
Total 91,246 87,745 96,488 52,222
COSTS AND EXPENSES:
Timber and wood products 51,976 49,724 60,825 29,341
River construction 18,102 19,221 15,097 11,003
Commercial real estate 1,327 1,373 1,181 404
Selling, administrative, and general 5,575 5,526 6,026 3,059
Other 737 776 1,506 1,425
------- ------- ------- --------
Total 77,717 76,620 84,635 45,232
INCOME FROM OPERATIONS 13,529 11,125 11,853 6,990
OTHER INCOME (EXPENSE):
Interest income 110 266 469 35
Interest expense (1,601) (2,634) (3,380) (2,374)
Gain (loss) on sales of assets (335) 353 2,419 (5,216)
------- ------- ------- --------
Total other expense - net (1,826) (2,015) (492) (7,555)
------- ------- ------- --------
INCOME (LOSS) BEFORE INCOME TAX (EXPENSE) BENEFIT AND
MINORITY INTEREST 11,703 9,110 11,361 (565)
INCOME TAX (EXPENSE) BENEFIT (4,042) (3,023) (3,891) 629
------- ------- ------- --------
INCOME BEFORE MINORITY INTEREST 7,661 6,087 7,470 64
MINORITY INTEREST IN INCOME OF CONSOLIDATED
LIMITED PARTNERSHIP (1,820) (1,380)
------- ------- ------- --------
NET INCOME (LOSS) $ 7,661 $ 6,087 $ 5,650 $(1,316)
======= ======= ======= ========
BASIC EARNINGS PER SHARE $13,174 $10,479 $ 9,749 $(2,271)
======= ======= ======= ========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 581.54 580.88 579.54 579.54
======= ======= ======= ========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
ANDERSON-TULLY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED JULY 31, 1995, 1996, AND 1997 AND FIVE-MONTH PERIOD ENDED DECEMBER
31,1997
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK
---------------- RETAINED
NUMBER EARNINGS
OF SHARES AMOUNT (DEFICIT) TOTAL
--------- ------ --------- --------
<S> <C> <C> <C> <C>
BALANCES AT JULY 31, 1994................ 581.54 $1,163 $ 44,484 $ 45,647
Cash dividends declared ($5,250 per
share)................................ (3,053) (3,053)
Dividend of shares of Anderson-Tully
Veneers, L.P.......................... (229) (229)
Net income............................. 7,661 7,661
------ ------ -------- --------
BALANCES AT JULY 31, 1995................ 581.54 1,163 48,863 50,026
Cash dividends declared ($6,230 per
share)................................ (3,618) (3,618)
Repurchase and retirement of common
stock................................. (2.00) (4) (146) (150)
Net income............................. 6,087 6,087
------ ------ -------- --------
BALANCES AT JULY 31, 1996................ 579.54 1,159 51,186 52,345
Cash dividends declared ($6,250 per
share)................................ (3,622) (3,622)
Net income............................. 5,650 5,650
------ ------ -------- --------
BALANCES AT JULY 31, 1997................ 579.54 1,159 53,214 54,373
Cash dividends declared ($101,190 per
share)................................ (58,645) (58,645)
Dividend of assets to Anderson-Tully
Veneers, L,P.......................... (289) (289)
Net loss............................... (1,316) (1,316)
------ ------ -------- --------
BALANCES AT DECEMBER 31, 1997............ 579.54 $1,159 $ (7,036) $ (5,877)
====== ====== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
ANDERSON-TULLY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FIVE MONTH
YEARS ENDED JULY 31, PERIOD ENDED
---------------------------- DECEMBER 31,
1995 1996 1997 1997
-------- -------- -------- ------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss).................. $ 7,661 $ 6,087 $ 5,650 $ (1,316)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization..... 4,026 5,107 7,401 3,425
Depletion......................... 1,200 1,915 1,359 1,054
Deferred income taxes............. 72 2,275 2,589 (2,166)
Minority interest in earnings of
consolidated limited partnership. 1,820 1,380
(Gain) loss on sale of assets..... 335 (353) (2,419) 5,216
Changes in assets and liabilities:
Accounts receivable............... (747) 1,980 (2,900) (1,365)
Inventories....................... (2,639) 669 1,559 (624)
Other assets...................... (561) (926) (284) (680)
Accounts payable and accrued
expenses......................... 991 (211) 1,365 2,693
Accrued and refundable income
taxes............................ 1,119 (1,427) 2,272 366
Deferred revenues................. (998) (792) 917
Long-term liabilities............. (697) (149) (6) 336
-------- -------- -------- --------
Net cash provided by operating
activities..................... 9,762 14,175 18,406 9,236
CASH FLOWS FROM INVESTING
ACTIVITIES:
Proceeds from sales of plant
property.......................... 2,256 1,086 1,130 250
Purchases of plant property........ (17,538) (28,339) (14,148) (2,366)
Proceeds from sales of timber and
timberland........................ 1,077
Purchases of timber and timberland. (2,239) (1,307) (10) (368)
Proceeds from sales of commercial
real estate....................... 9,604
Purchases of commercial real
estate............................ (28) (197) (16,940)
Collections of notes receivable.... 1,750
Proceeds from maturities of short-
term investments.................. 200 200 200 100
Purchases of short-term
investments....................... (200) (200) (200) (117)
-------- -------- -------- --------
Net cash used in investing
activities...................... (17,549) (27,007) (19,287) (2,501)
CASH FLOWS FROM FINANCING
ACTIVITIES:
Dividends paid..................... (3,282) (3,504) (3,594) (59,368)
Distributions to limited partners.. (524) (379)
Purchases of treasury stock........ (150)
Net proceeds from (principal
payments on) lines of credit...... 2,629 2,996 (3,750) 4,222
Proceeds from issuance of long-term
debt.............................. 9,820 14,467 13,636 96,500
Principal payments of long-term
debt.............................. (2,169) (1,154) (3,326) (47,748)
-------- -------- -------- --------
Net cash provided by (used in)
financing activities............ 6,998 12,655 2,442 (6,773)
-------- -------- -------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................... (789) (177) 1,561 (38)
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD.......................... 1,154 365 188 1,749
-------- -------- -------- --------
CASH AND CASH EQUIVALENTS, END OF
PERIOD............................. $ 365 $ 188 $ 1,749 $ 1,711
======== ======== ======== ========
SUPPLEMENTAL INFORMATION:
Income taxes paid during the
period............................ $ 2,734 $ 2,173 $ 108 $ 1,174
Interest paid during the period.... 1,379 2,978 3,517 1,713
</TABLE>
NON-CASH INVESTING AND FINANCING ACTIVITIES:
The Company acquired plant property with a total cost of $3,271 in 1995 and
$444 in 1996 by incurring capitalized lease obligations of $1,320 and $444,
respectively, and a note payable of $1,951 in 1995.
During the five-month period ended December 31, 1997, the Company allowed the
payor on its note receivable with a principal balance totalling $7,218 plus
interest to satisfy its obligation by rolling the balance over to a new note
with a principal balance of $7,225.
As of December 31, 1997, the Company sold its inventories and plant property
associated with its Memphis, Tennessee laminated flooring plant for
consideration consisting of $100 cash and notes receivable totalling $4,900.
See notes to consolidated financial statements.
F-6
<PAGE>
ANDERSON-TULLY COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JULY 31, 1995, 1996, AND 1997
AND FIVE-MONTH PERIOD ENDED DECEMBER 31 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
1. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation--The consolidated financial statements include the
accounts of Anderson-Tully Company (the "Company"), its wholly-owned
subsidiaries, Patton-Tully Transportation Company, Tenarc Construction Company
("Tenarc"), Biomass Management Corporation ("Biomass"), and Brickeys Stone
Company, and a limited partnership, Anderson-Tully Veneers, L.P. ("AT Veneers"
or the "Partnership") (collectively, the "Companies"). All material
intercompany transactions have been eliminated. (Also see Note 12.)
The Company serves as managing general partner of the Partnership, holding
an approximate one percent interest in such. Remaining partnership capital is
held in the form of limited partnership interests. The Company, as managing
general partner, controls the operations of the Partnership and guarantees the
Partnership's debt; accordingly, the financial statements of the Partnership
are included in the Company's accompanying consolidated financial statements.
Minority interest is recognized for the limited partners' interest in the
financial position and operations of the Partnership.
Cash and Cash Equivalents--Highly liquid debt instruments purchased with
original maturities of three months or less from the date of purchase are
considered to be cash equivalents.
Inventories--Wood products and supplies inventories are stated primarily at
cost (first-in, first-out method). Costs applicable to growing crops are
capitalized. Lumber and log inventories are stated at cost (last-in, first-out
cost method).
Timber and Timberland--Timber and timberland are recorded at cost. The
Company does not capitalize timber carrying costs. Depletion of timber costs
is provided on footages cut at rates based on estimated recoverable timber in
each tract (cost depletion).
Plant Property--Plant property is stated at cost. Depreciation is provided
over estimated useful lives using the straight-line method.
Commercial Real Estate--The Company accounts for its 20% to 50% undivided
interests in commercial real estate using the equity method. Depreciation of
buildings is provided over their estimated useful lives, generally forty years.
The partnership interest is carried on the equity method.
Income Taxes--Current income taxes reflect taxes provided for and payable on
the earnings of the Company and its subsidiaries. Deferred income taxes
reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes of the Company and its subsidiaries.
Federal income taxes are not payable by, or provided for, the Partnership;
partners are taxed individually on their share of partnership earnings.
Earnings Per Share--Basic earnings per share have been computed by dividing
net income applicable to common shareholders by the weighted average number of
common shares outstanding. The Company has a simple capital structure;
accordingly, the adoption of Statement of Financial Accounting Standards No.
128, Earnings Per Share, had no effect on the amounts presented.
Change of Year-End--In 1997 the Board of Directors approved a change in the
Company's fiscal year-end from July 31 to December 31. Fiscal years presented
and referred to in these financial statements are on a July 31 fiscal year
basis unless otherwise indicated.
F-7
<PAGE>
ANDERSON-TULLY COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED JULY 31, 1995, 1996, AND 1997 AND
FIVE-MONTH PERIOD ENDED DECEMBER 31, 1997
(IN THOUSANDS)
Revenue Recognition--Revenues from product sales (timber and wood products
operations) are recognized upon shipment of product; provision for estimated
sales returns is not deemed necessary based on historical returns rates and
current business conditions.
Revenues from river construction contracts are recognized using the
percentage-of-completion method measured by the percentage of costs incurred
to date to total estimated costs for each contract. Contract costs include all
direct material and labor costs and those indirect costs related to contract
performance. Provisions for estimated losses on uncompleted contracts are made
in the period in which such losses are determined.
Regarding commercial real estate, shopping center space is generally leased
to retail tenants under short- and intermediate-term leases which are
accounted for as operating leases. The warehouse leases are similar in nature,
except that the tenants are generally manufacturers and/or distributors of
products. Minimum rents are recognized on an accrual basis as earned, the
result of which do not differ materially from the straight-line method.
Percentage rents, common area maintenance ("CAM"), and other recoveries are
recognized on an accrual basis as earned.
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments--In accordance with the requirements of
FASB No. 107, "Disclosures About Fair Value of Financial Instruments," the
estimated fair value of the Companies' financial instruments has been
determined by the Company using available market information. However,
considerable judgment is necessarily required in interpreting market data to
develop the estimates of fair value. Accordingly, the fair values are not
necessarily indicative of the amounts that the Company could realize in a
current market exchange. The use of different market assumptions may have a
material effect on the estimated fair value amounts. The carrying amounts of
cash, certificates of deposit, accounts receivable, accounts payable, and
long-term debt are considered to be a reasonable estimate of their fair value.
Concentration of Credit Risk--Financial instruments which potentially
subject the Companies to a concentration of credit risk principally consist of
cash, certificates of deposit, trade accounts receivable, and notes
receivable. The Companies maintain their cash balances and certificates of
deposit with large regional or national financial institutions and have not
experienced losses related to these items. The Companies' sales are
principally to U.S. governmental entities (as to river construction) and to
customers in the furniture manufacturing, distribution, and residential
flooring industries in the United States and overseas. No additional credit
risk beyond amounts provided for collection losses is believed inherent in the
Companies' trade accounts receivable balances.
Effect of Recently Issued Accounting Standards--In June 1997, the Financial
Accounting Standards Board issued Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which is required to be
adopted during the Company's first fiscal year beginning after December 15,
1997. At that time, the Company will be required to conform its method of
reporting
F-8
<PAGE>
ANDERSON-TULLY COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED JULY 31, 1995, 1996, AND 1997 AND
FIVE-MONTH PERIOD ENDED DECEMBER 31, 1997
(IN THOUSANDS)
industry segment data to new standards and, if necessary, to restate all prior
periods. Under the new requirements, industry segment data will be reported
according to internal reporting segments utilized by management in running the
Company's operations. Statement No. 131 is expected to result in the reporting
of additional segregation of data for the Company's timber and wood products
operations than are currently presented in Note 10.
2. INVENTORIES
Inventories consist of the following at July 31, 1996 and 1997 and December
31, 1997:
<TABLE>
<CAPTION>
JULY 31,
------------- DECEMBER 31,
1996 1997 1997
------ ------ ------------
<S> <C> <C> <C>
Lumber............................................ $3,869 $2,040 $1,663
Wood products..................................... 209 947 774
Logs.............................................. 1,099 606 1,883
Supplies.......................................... 930 857 778
Growing crops..................................... 234 333 310
------ ------ ------
Total........................................... $6,341 $4,783 $5,408
====== ====== ======
</TABLE>
The LIFO reserve related to the lumber and log inventories totalled $5,159,
$4,692, and $3,825 at July 31, 1996 and 1997 and December 31, 1997,
respectively. In the five months ended December 31, 1997, the liquidation of
LIFO inventories decreased cost of sales and, therefore, increased income
before taxes by $377.
3. PLANT PROPERTY
Plant property consists of the following at July 31, 1996 and 1997 and
December 31, 1997:
<TABLE>
<CAPTION>
JULY 31,
---------------- DECEMBER 31,
1996 1997 1997
------- ------- ------------
<S> <C> <C> <C>
Land.......................................... $ 1,203 $ 1,439 $ 1,155
Buildings..................................... 10,441 11,854 10,495
Machinery and equipment....................... 84,766 105,207 85,495
Computer equipment under capital leases....... 1,764 1,764 1,764
Construction in progress...................... 10,395 885 1,784
------- ------- -------
Total....................................... 108,569 121,149 100,693
Less accumulated depreciation................. (39,876) (45,675) (36,393)
------- ------- -------
Plant property--net........................... $68,693 $75,474 $64,300
======= ======= =======
</TABLE>
On December 31, 1997 the Company sold the assets related to its laminated
truck flooring plant for cash of $100 and notes receivable of $4,900. The
notes receivable bear interest at the prime rate and mature June 30, 1998. The
sale resulted in a loss of approximately $5,100.
F-9
<PAGE>
ANDERSON-TULLY COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED JULY 31, 1995, 1996, AND 1997 AND
FIVE-MONTH PERIOD ENDED DECEMBER 31, 1997
(IN THOUSANDS)
4.EMPLOYEE BENEFIT PLANS
The Companies have two defined benefit pension plans covering substantially
all hourly and salaried employees. The benefits under the hourly plan are
based on fixed benefit rates and years of service. The benefits under the
salary plan are based on years of service and the employee's highest average
compensation for any five years of service. The Company's funding policy for
each plan is to make at least the minimum contribution required by the
Employee Retirement Income and Security Act of 1974. Contributions provide for
current benefits as well as expected future benefits. The investments of the
plans consist principally of general investment accumulated funds administered
by the trustees.
Net expense for the years ended July 31, 1995, 1996, and 1997 and the five-
month period ended December 31, 1997 included the following:
<TABLE>
<CAPTION>
JULY 31,
------------------ DECEMBER 31,
1995 1996 1997 1997
---- ------ ---- ------------
<S> <C> <C> <C> <C>
Service cost................................ $318 $ 330 $336 $139
Interest cost............................... 814 786 796 330
Actual return on plan assets................ (279) (1,637) (900) (125)
Net amortization and deferral............... (322) 1,061 204 63
---- ------ ---- ----
Net periodic pension cost................. $531 $ 540 $436 $407
==== ====== ==== ====
</TABLE>
Assumptions used in the computations are as follows:
<TABLE>
<CAPTION>
JANUARY 1,
---------------------
1995 1996 1997
---- ---- ---------
<S> <C> <C> <C>
Assumed discount rate.................................... 7.0% 6.5% 6.5%-7.5%
Rates of increase in compensation levels for salaried
employees............................................... 5.0% 5.0% 5.0%
Expected long-term rate of return on assets.............. 7.0% 6.5% 6.5%
</TABLE>
The following table sets forth the plans' funded status and amounts
recognized in the Company's balance sheets as of July 31, 1996 and 1997. A
separate actuarial valuation was not prepared for the December 31, 1997
transition period; however, amounts are not expected to differ significantly
from those shown below.
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Actuarial present value of accumulated plan benefits:
Vested benefits......................................... $10,100 $10,354
Nonvested benefits...................................... 129 114
------- -------
Accumulated benefit obligation........................ $10,229 $10,468
======= =======
Projected benefit obligation.............................. $11,357 $11,755
Plan assets at fair value................................. 10,896 11,214
------- -------
Excess of projected benefit obligation over fair value
of plan assets....................................... (461) (541)
Unrecognized net gain..................................... (579) (365)
Unrecognized prior service cost........................... 59 55
------- -------
Accrued pension cost.................................. $ (981) $ (851)
======= =======
</TABLE>
F-10
<PAGE>
ANDERSON-TULLY COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED JULY 31, 1995, 1996, AND 1997 AND
FIVE-MONTH PERIOD ENDED DECEMBER 31, 1997
(IN THOUSANDS)
5. COMMERCIAL REAL ESTATE
Commercial real estate consists of the following at July 31, 1996 and 1997
and December 31, 1997:
<TABLE>
<CAPTION>
JULY 31,
--------------- DECEMBER 31,
1996 1997 1997
------- ------- ------------
<S> <C> <C> <C>
Undeveloped commercial land.................... $ 536
Partnership interest of 24% in a shopping cen-
ter complex................................... 1,837 $ 1,786 $ 1,773
Undivided interests of 25% in two shopping cen-
ters.......................................... 4,986 4,883 4,839
Undivided interests of 100% in shopping cen-
ters.......................................... 13,940 5,484 5,433
Undivided interest of 50% in one warehouse..... 1,086 1,055 1,042
Undivided interest of 100% in one warehouse.... 9,581 9,489
Note receivable, secured by a deed of trust on
a warehouse, interest at prime, maturing
December 31, 1998............................. 7,218 7,225
------- ------- -------
Commercial real estate....................... $22,385 $30,007 $29,801
======= ======= =======
</TABLE>
Minimum future rentals to be received on non-cancelable leases for the
wholly-owned shopping centers and warehouse in each of the years ended December
31, are as follows:
<TABLE>
<S> <C>
1998 $ 1,529
1999 1,495
2000 1,447
2001 1,425
2002 844
Thereafter 6,052
-------
Total $12,792
=======
</TABLE>
6. LINE OF CREDIT ARRANGEMENTS
At December 31, 1997, the Companies had two unsecured lines of credit
totalling $16,500 under which borrowings of $9,119 were outstanding, leaving
$7,381 available for unrestricted usage. Each of the lines is a direct
obligation of or unconditionally guaranteed by the Company. Borrowings are at
floating rates of 30- to 90-day LIBOR plus 1.2%--1.5%, totalling 7.17%--7.48%
at December 31, 1997. One of the lines of credit, totalling $7,500, expires
November 30, 1998; the other, totalling $9,000, expires January 1, 1999.
7. LONG-TERM DEBT AND CAPITALIZED LEASES
Long-term debt, all of which is a direct obligation of or unconditionally
guaranteed by the Company, consists of the following at July 31, 1996 and 1997
and December 31, 1997:
<TABLE>
<CAPTION>
JULY 31,
------------- DECEMBER 31,
1996 1997 1997
------ ------ ------------
<S> <C> <C> <C>
Note payable to corporation, 6%, due on demand
beginning June 1, 1999 or, if not demanded
previously, due October 1, 2002, unsecured.... $50,000
Notes payable bank line of credit, due November
30, 1998, with variable interest rates (7.48%
at December 31, 1997). The notes are
unsecured..................................... $1,000 $4,000 2,000
Notes payable bank line of credit, due January
1, 1999, with variable interest rates (7.17%
at December 31, 1997). The notes are
unsecured..................................... 7,646 897 7,119
</TABLE>
F-11
<PAGE>
ANDERSON-TULLY COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED JULY 31, 1995, 1996, AND 1997 AND
FIVE-MONTH PERIOD ENDED DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
JULY 31,
---------------- DECEMBER 31,
1996 1997 1997
------- ------- ------------
<S> <C> <C> <C>
Notes payable finance institutions, due in
varying amounts to September 2009, with in-
terest ranging from 7.56% to 9.875%. The
notes are collateralized by a 25% interest
in two shopping centers and a 100% interest
in one shopping center..................... $ 8,713 $ 8,465 $ 8,378
Notes payable bank, due in monthly
installmentsof $86 through June 2002, with
the remaining balance due July 2002, at
floating rates (6.92% at December 31,
1997). The note is collateralized by a 100%
interest in an industrial warehouse........ 9,514 9,387
Note payable finance institution, due in
monthly installments of $22 through Septem-
ber 2000, and the remaining unpaid balance
due October 2000, with an interest rate of
10%. The note is collateralized by a 50%
interest in an industrial warehouse........ 1,198 1,185 1,180
Note payable finance institution, due in
monthly installments of $5 through February
2000, with an interest rate of 7.50%. The
note is collateralized by machinery........ 140 119
Notes payable individuals, due in annual in-
stallments of $316 principal and interest
through September 2004, with an interest
rate of 7.25%.............................. 2,126 1,941 1,745
Notes payable finance institution, due in
varying monthly installments through March
2005 at floating rates (7.17% at December
31, 1997). The notes are collateralized by
machinery and equipment.................... 11,000 10,953 10,934
Notes payable finance institution, due in
monthly installments of $29 through Septem-
ber 2002, with an interest rate of 7.3%.
The note is collataralized by a motor ves-
sel........................................ 1,706 1,423 1,362
Notes payable finance institution, due in
total on September 22, 1997, prime rate,
collateralized by a shopping center........ 1,000
Loan payable, city, due in annual install-
ments of $100 principal plus interest
through December 2010, with interest at
2.00%. The loan is secured by an irrevoca-
ble standby letter of credit issued by a
bank (see Note 11)......................... 1,500 1,400 1,300
Loan payable, state agency, due in
monthlyinstallments of principal and inter-
est approximating $153 through June 2006,
with variable interest rates (7.17% at De-
cember 31, 1997). The loan is unsecured.... 7,359 10,256 9,744
Capitalized lease obligations due in varying
monthly installments through February 2000,
with interest rates of 7.78% to 9.47%...... 1,361 996 875
------- ------- -------
Total....................................... 44,609 51,170 104,143
Less current portion........................ (1,805) (4,826) (7,356)
------- ------- -------
Long-term debt.............................. $42,804 $46,344 $96,787
======= ======= =======
</TABLE>
F-12
<PAGE>
ANDERSON-TULLY COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED JULY 31, 1995, 1996, AND 1997 AND
FIVE-MONTH PERIOD ENDED DECEMBER 31, 1997
(IN THOUSANDS)
Principal payments due in each of the next five years ended December 31 and
thereafter are as follows:
<TABLE>
<CAPTION>
CAPITALIZED NOTES AND TOTAL
LEASE OBLIGATIONS LOANS PAYABLE LONG-TERM DEBT
----------------- ------------- --------------
<S> <C> <C> <C>
1998.......................... $387 $ 6,969 $ 7,356
1999.......................... 417 62,092 62,509
2000.......................... 71 5,149 5,220
2001.......................... 5,816 5,816
2002.......................... 11,639 11,639
Thereafter.................... 11,603 11,603
---- -------- --------
Total....................... $875 $103,268 $104,143
==== ======== ========
</TABLE>
For certain of its debt obligations, the Company is subject to covenants
obligating it to maintain specified ratios of cash flows to interest expense
and of total liabilities to adjusted timber value, all terms as defined in the
relevant agreements. The Company was in compliance with these ratios at
December 31, 1997. In addition, during 1998 the Company will become subject to
a fixed charge coverage ratio covenant for its operations from January 1, 1998
forward.
Interest expense related to the notes collateralized by real estate totalled
$854, $873, $970, and $682 for the years ended July 31, 1995, 1996, and 1997
and the five-month period ended December 31, 1997, respectively. Interest
costs totalling $301 and $211 for the years ended July 31, 1996 and 1997,
respectively, were incurred in conjunction with the Partnership's construction
of its plant property and have been capitalized as a part of its cost.
The Company is lessee of certain computer equipment under capital leases
expiring February 20, 2000. The assets and liabilities under capital leases
are recorded at the present value of the minimum lease payments, which
approximates fair value of the assets. The assets are amortized over the lower
of their related lease terms or their estimated productive lives. Amortization
of assets under capital leases is included in depreciation expense in the
accompanying financial statements.
8. INCOME TAXES
The components of income tax expense (benefit), attributable to the Company
and its wholly-owned subsidiaries, consisted of the following for the years
ended July 31, 1995, 1996, and 1997 and the five-month period ended December
31, 1997:
<TABLE>
<CAPTION>
JULY 31,
-------------------- DECEMBER 31,
1995 1996 1997 1997
------ ------ ------ ------------
<S> <C> <C> <C> <C>
Current.................................... $3,970 $ 748 $1,302 $1,537
Deferred................................... 72 2,275 2,589 (2,166)
------ ------ ------ ------
Total income tax expense (benefit)....... $4,042 $3,023 $3,891 $ (629)
====== ====== ====== ======
</TABLE>
F-13
<PAGE>
ANDERSON-TULLY COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED JULY 31, 1995, 1996, AND 1997 AND
FIVE-MONTH PERIOD ENDED DECEMBER 31, 1997
(IN THOUSANDS)
A reconciliation of the Company's actual income taxes for the years ended
July 31, 1995, 1996, and 1997 and the five-month period ended December 31,
1997 to that obtained by applying the U.S. federal statutory income tax rate
against income before income taxes and minority interest is as follows:
<TABLE>
<CAPTION>
JULY 31,
---------------------- DECEMBER 31,
1995 1996 1997 1997
------ ------ ------ ------------
<S> <C> <C> <C> <C>
Federal income tax expense (benefit),
at U.S. federal statutory rate........ $4,096 $3,189 $3,976 $(198)
Effect of state income taxes, net of
federal benefit....................... 361 213 372 (76)
Effect of usage of alternative energy
source credits........................ (384) (450)
Effect of consolidated minority inter-
est not subject to federal income tax
(related to the Partnership's income). (627) (485)
Other differences...................... (31) 71 170 130
------ ------ ------ -----
Income tax expense (benefit)......... $4,042 $3,023 $3,891 $(629)
====== ====== ====== =====
</TABLE>
Deferred income taxes result from temporary differences between the carrying
amounts of assets and liabilities for income tax and financial reporting
purposes for the Company and its wholly-owned subsidiaries. The tax effects of
significant items comprising the Company's deferred taxes as of July 31, 1996
and 1997 and December 31, 1997 are as follows:
<TABLE>
<CAPTION>
JULY 31,
------------------ DECEMBER 31,
1996 1997 1997
-------- -------- ------------
<S> <C> <C> <C>
Deferred tax assets:
Uniform capitalization of inventory...... $ 424 $ 331 $ 291
Pension plans and deferred compensation.. 685 569 341
Vacation pay............................. 119 128 17
Workers' compensation and hospitalization
insurance reserves...................... 479 524 731
Alternative minimum tax credit and other
carryforwards........................... 343 469
All other................................ 292 138 73
-------- -------- --------
Total deferred tax assets.............. 1,999 2,033 1,922
Deferred tax liabilities--differences
between financial reporting and income
tax bases of:
Plant property........................... (6,851) (8,982) (6,773)
Commercial real estate................... (7,438) (7,930) (7,862)
-------- -------- --------
Total deferred tax liabilities......... (14,289) (16,912) (14,635)
-------- -------- --------
Net deferred tax liability............. $(12,290) $(14,879) $(12,713)
======== ======== ========
</TABLE>
Federal income taxes are not payable by, or provided for, the Partnership.
F-14
<PAGE>
ANDERSON-TULLY COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED JULY 31, 1995, 1996, AND 1997 AND
FIVE-MONTH PERIOD ENDED DECEMBER 31, 1997
(IN THOUSANDS)
9. CONTRACTS IN PROGRESS
Amounts with respect to river construction contracts in progress as of July
31, 1996 and 1997 and December 31, 1997, which are included in accounts
receivable in the accompanying financial statements, are as follows:
<TABLE>
<CAPTION>
JULY 31,
------------- DECEMBER 31,
1996 1997 1997
------ ------ ------------
<S> <C> <C> <C>
Costs incurred on contracts in progress and es-
timated earnings on contracts in progress..... $5,919 $4,816 $6,954
Less billings to date on contracts in progress. 5,903 4,905 6,766
------ ------ ------
Net.......................................... $ 16 $ (89) $ 188
====== ====== ======
Costs and estimated earnings in excess of bill-
ings on uncompleted contracts................. $ 35 $ 90 $ 188
Billings in excess of costs and estimated earn-
ings on uncompleted contracts................. 19 179
------ ------ ------
Net.......................................... $ 16 $ (89) $ 188
====== ====== ======
</TABLE>
As of December 31, 1997, the Company had a contractual obligations backlog,
consisting of revenues to be recognized on signed contracts, of approximately
$2,090.
10. INDUSTRY SEGMENT DATA AND MAJOR CUSTOMERS
The Company principally operates in three industries: timber and wood
products operations, river construction contract operations, and commercial
real estate operations. Timber and wood product operations consist of the
management of the Company's forested lands and acquisition of logging rights
to other lands, contracting for the logging thereon, and the sale and/or
processing of the logs into lumber and wood products. River construction
contracts are performed principally for U.S. governmental entities, with
revenues from these entities totalling $16,269, $15,723, $8,017, and $8,954
for the years ended July 31, 1995, 1996, and 1997, and for the five-month
period ended December 31, 1997, respectively. Commercial real estate
operations consist principally of the Company's ownership of varying
percentages of undivided interests in shopping centers or warehouses, or of
partnerships owning these, with revenues being received from occupying
tenants.
F-15
<PAGE>
ANDERSON-TULLY COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED JULY 31, 1995, 1996, AND 1997 AND
FIVE-MONTH PERIOD ENDED DECEMBER 31, 1997
(IN THOUSANDS)
Financial information, summarized by industry segment, is as follows:
<TABLE>
<CAPTION>
COMMERCIAL
YEAR ENDED TIMBER AND RIVER REAL
JULY 31, 1995 WOOD PRODUCTS CONSTRUCTION ESTATE OTHER ELIMINATIONS CONSOLIDATED
------------- ------------- ------------ ---------- ------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Total revenues:
Unaffiliated customers:
Domestic............. $50,884 $22,797 $ 2,880 $2,421 $ 78,982
Export............... 12,264 12,264
Intersegment sales..... 1,179 $(1,179)
------- ------- ------- ------ ------- --------
Total................. $63,148 $23,976 $ 2,880 $2,421 $(1,179) $ 91,246
======= ======= ======= ====== ======= ========
Income from operations.. $ 7,184 $ 3,254 $ 1,345 $1,746 $ 13,529
------- ------- ------- ------ --------
Identifiable assets..... $57,566 $13,145 $22,941 $ 820 $ 94,472
------- ------- ------- ------
Corporate assets........ 7,168
--------
Total assets.......... $101,640
========
Depreciation and
amortization expense... $ 2,707 $ 852 $ 394 $ 73 $ 4,026
------- ------- ------- ------ --------
Capital expenditures.... $18,030 $ 1,590 $ 40 $ 145 $ 19,805
------- ------- ------- ------ --------
<CAPTION>
COMMERCIAL
YEAR ENDED TIMBER AND RIVER REAL
JULY 31, 1996 WOOD PRODUCTS CONSTRUCTION ESTATE OTHER ELIMINATIONS CONSOLIDATED
------------- ------------- ------------ ---------- ------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Total revenues:
Unaffiliated customers:
Domestic............. $48,914 $23,108 $ 2,622 $2,878 $ 77,522
Export............... 10,223 10,223
Intersegment sales..... 1,003 $(1,003)
------- ------- ------- ------ ------- --------
Total................. $59,137 $24,111 $ 2,622 $2,878 $(1,003) $ 87,745
======= ======= ======= ====== ======= ========
Income from operations.. $ 5,602 $ 2,399 $ 1,056 $2,068 $ 11,125
------- ------- ------- ------ --------
Identifiable assets..... $73,765 $13,865 $22,636 $1,433 $111,699
------- ------- ------- ------
Corporate assets........ 9,485
--------
Total assets.......... $121,184
========
Depreciation and
amortization expense... $ 3,646 $ 973 $ 402 $ 86 $ 5,107
------- ------- ------- ------ --------
Capital expenditures.... $25,143 $ 3,809 $ 298 $ 593 $ 29,843
------- ------- ------- ------ --------
<CAPTION>
COMMERCIAL
YEAR ENDED TIMBER AND RIVER REAL
JULY 31, 1997 WOOD PRODUCTS CONSTRUCTION ESTATE OTHER ELIMINATIONS CONSOLIDATED
------------- ------------- ------------ ---------- ------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Total revenues:
Unaffiliated customers:
Domestic............. $66,691 $16,688 $ 2,507 $3,031 $ 88,917
Export............... 7,571 7,571
Intersegment sales..... 1,028 $(1,028)
------- ------- ------- ------ ------- --------
Total................. $74,262 $17,716 $ 2,507 $3,031 $(1,028) $ 96,488
======= ======= ======= ====== ======= ========
Income from operations.. $ 8,250 $ 426 $ 1,123 $2,054 $ 11,853
------- ------- ------- ------ ========
Identifiable assets..... $79,006 $15,636 $30,167 $1,769 $126,578
------- ------- ------- ------
Corporate assets........ 9,908
--------
Total assets.......... $136,486
========
Depreciation and
amortization expense... $ 5,757 $ 1,111 $ 432 $ 101 $ 7,401
------- ------- ------- ------ --------
Capital expenditures.... $11,637 $ 2,168 $16,987 $ 306 $ 31,098
------- ------- ------- ------ --------
</TABLE>
F-16
<PAGE>
ANDERSON-TULLY COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED JULY 31, 1995, 1996, AND 1997 AND
FIVE-MONTH PERIOD ENDED DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
FIVE MONTH
PERIOD ENDED COMMERCIAL
DECEMBER 31, TIMBER AND RIVER REAL
1997 WOOD PRODUCTS CONSTRUCTION ESTATE OTHER ELIMINATIONS CONSOLIDATED
------------ ------------- ------------ ---------- ------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Total revenues:
Unaffiliated customers:
Domestic............. $33,083 $11,691 $ 1,129 $1,692 $ 47,595
Export............... 4,627 4,627
Intersegment sales..... 553 $(553)
------- ------- ------- ------ ----- --------
Total................. $37,710 $12,244 $ 1,129 $1,692 $(553) $ 52,222
======= ======= ======= ====== ===== ========
Income from operations.. $ 6,195 $ (19) $ 645 $ 169 $ 6,990
======= ======= ======= ====== ========
Identifiable assets..... $76,502 $16,950 $29,801 $1,667 $124,920
======= ======= ======= ======
Corporate assets........ 7,179
--------
Total assets.......... $132,099
========
Depreciation and
amortization expense... $ 2,668 $ 532 $ 200 $ 25 $ 3,425
======= ======= ======= ====== ========
Capital expenditures.... $ 2,285 $ 431 $ --- $ 18 $ 2,734
======= ======= ======= ====== ========
</TABLE>
11. COMMITMENTS AND CONTINGENCIES
Operating Leases--The Company leases certain equipment used in its
operations under operating leases. Payments made under these operating leases
totalled $37, $382, $630, and $225 for the years ended July 31, 1995, 1996,
and 1997 and for the five-month period ended December 31, 1997, respectively.
Operating lease payments due in each of the years ended December 31 are as
follows:
<TABLE>
<S> <C>
1998.................................................................. $ 796
1999.................................................................. 608
2000.................................................................. 368
2001.................................................................. 123
------
Total............................................................... $1,895
======
</TABLE>
Guarantee--The Company owns a 24% undivided interest in a partnership which
owns a shopping center complex. The partners guaranteed the construction and
permanent financing of the project. The Company's contingent liability
currently approximates $2,425 and will be reduced to $480 when the operating
property becomes profitable.
Litigation, Claims, and Assessments--The Companies are subject to certain
claims and litigation, including unasserted claims, in the normal course of
business. While it is not possible to predict with certainty the outcome of
these matters, it is management's opinion that the ultimate outcome will not
have a material adverse effect on the financial statements of the Companies.
Irrevocable Standby Letters of Credit--As of December 31, 1997, the
Companies have outstanding irrevocable standby letters of credit issued
related to their loan payable, city (see Note 7), and for insurance purposes,
totalling $1,894.
F-17
<PAGE>
ANDERSON-TULLY COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED JULY 31, 1995, 1996, AND 1997 AND
FIVE-MONTH PERIOD ENDED DECEMBER 31, 1997
(IN THOUSANDS)
12. CHANGE IN CORPORATE STRUCTURE
As of the close of business on December 31, 1997, in order for the Company
to have a corporate structure of an allowable nature to qualify as a real
estate investment trust (a "REIT"), significant liquidations, transfers, and
exchanges were effected. The result is that the Company retains ownership of
the timberland and timber, the commercial real estate, and the farmland that
it previously owned. The logging and timber conversion related assets,
previously owned by the Company, are now owned by new companies, of which the
Company owns 100% of their preferred stock, representing 95% of their economic
value, and of which AT Veneers owns 100% of their common stock. The river
construction and management services related assets, previously owned by the
Company or its wholly-owned subsidiaries, are now owned by new companies which
are wholly-owned by AT Veneers. The approximate 1% ownership interest in AT
Veneers, previously owned by the Company, now rests with a new company which
is a wholly-owned subsidiary of the Company. The accompanying December 31,
1997 balance sheet gives effect to these transactions which have occurred
within the Company's consolidated group.
The consolidated group at December 31, 1997 consists of the Company, its
wholly-owned subsidiaries, Tenarc and Anderson-Tully GP Company ("AT GP") and
its 100% preferred stock ownership of Anderson-Tully Timber Company ("AT
Timber") and Anderson-Tully Lumber Company ("AT Lumber"). AT GP owns an
approximate 1% ownership interest in AT Veneers, which in turn directly or
indirectly owns 100% of the common stock of Anderson-Tully Management Services
LLC, AT Timber, AT Lumber, Patton-Tully Transportation LLC, and Brickeys Stone
LLC.
13. SUBSEQUENT EVENTS
On February 9, 1998, the Board of Directors of Anderson-Tully Company voted
to submit to the shareholders for their approval and adoption of a merger
agreement whereby Timberland Growth Corporation would acquire all of the
outstanding common stock of Anderson-Tully Company. Also on that date, the
Board of Directors of AT GP Company voted to submit to the limited partners of
AT Veneers for their approval and adoption of an agreement to sell to Potlatch
Corporation assets relating to the veneer operations, and the Board of
Managers of Anderson-Tully Management Services LLC approved an agreement to
sell to Potlatch Corporation all of its assets including the common stock of
AT Timber and AT Lumber. Patton-Tully Transportation LLC and Brickeys Stone
LLC and certain other assets will be retained by AT Veneers. Under the terms
of these agreements the shareholders and AT Veneers will receive, in the
aggregate, approximately $470 million, subject to certain working capital
adjustments, less outstanding debt at closing and transaction costs.
Shareholder and limited partner approval is required to consummate these
transactions; in addition, certain events must also occur, some of which are
beyond the control of the Company, to effect these transactions. In
anticipation of these transactions legal, accounting, and investment banking
fees totalling $935 as of December 31, 1997 have been deferred and recorded as
other assets in the accompanying financial statements.
The Board also voted to empower the officers of the Company to take the
actions necessary to register its stock under Section 12(g) of the Securities
Exchange Act of 1934.
F-18
<PAGE>
ANDERSON-TULLY COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED JULY 31, 1995, 1996, AND 1997 AND
FIVE-MONTH PERIOD ENDED DECEMBER 31, 1997
(IN THOUSANDS)
14. COMPARATIVE RESULTS OF OPERATIONS FOR THE FIVE MONTHS ENDED DECEMBER 31,
1996 (UNAUDITED)
The following unaudited results of operations for the five months ended
December 31, 1996 are presented for comparative purposes. It is management's
opinion that this information includes all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the results of
operations for the five months ended December 31, 1996.
<TABLE>
<S> <C>
Net revenues........................................................ $35,612
Costs and expenses.................................................. 32,881
-------
Income from operations.............................................. 2,731
Other expense, net.................................................. (673)
-------
Income before income tax expense and minority interest.............. 2,058
Income tax expense.................................................. (606)
-------
Income before minority interest..................................... 1,452
Minority interest in income of consolidated limited partnership..... (490)
-------
Net income........................................................ $ 962
=======
Basic earnings per share............................................ $ 1,660
=======
</TABLE>
F-19
<PAGE>
<TABLE>
<CAPTION>
ANDERSON-TULLY COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE DATA)
- ------------------------------------------------------------------------------------------------------------------------------------
MARCH 31, DECEMBER 31,
ASSETS 1998 1997
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 2,743 $ 1,711
Certificates of deposit 117 117
Accounts receivable 11,202 11,049
Notes receivable 4,059 4,899
Inventories 4,549 5,408
Deferred income taxes 1,258 1,258
Prepaid expenses 1,026 1,190
-------- --------
Total current assets 24,954 25,632
TIMBERLAND AND TIMBER - At cost 27,924 27,858
Less accumulated depletion (18,700) (18,577)
-------- --------
Timberland and timber - net 9,224 9,281
PLANT PROPERTY - NET 64,154 64,300
COMMERCIAL REAL ESTATE 29,628 29,801
OTHER ASSETS 3,826 3,085
-------- --------
TOTAL ASSETS $131,786 $132,099
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 6,063 $ 7,326
Current portion of long-term debt 13,629 7,356
Accrued expenses:
Wages, insurance, and other 4,088 3,474
Taxes other than income 812 1,585
Income and franchise taxes 2,160 2,191
Deferred revenues 576 917
-------- --------
Total current liabilities 27,328 22,849
DEFERRED INCOME TAXES 13,971 13,971
LONG-TERM LIABILITIES 880 1,507
LONG-TERM DEBT, Less current portion 88,872 96,787
MINORITY INTEREST IN EQUITY OF CONSOLIDATED LIMITED PARTNERSHIP 2,927 2,862
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Capital stock - $2,000 par value; 1,200 shares authorized; 579.54 shares outstanding 1,159 1,159
Retained deficit (3,351) (7,036)
-------- --------
Total stockholders' deficit (2,192) (5,877)
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $131,786 $132,099
======== ========
</TABLE>
See notes to consolidated financial statements.
F-20
<PAGE>
<TABLE>
<CAPTION>
ANDERSON-TULLY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE DATA)
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997
NET REVENUES:
<S> <C> <C>
Timber and wood products $ 20,541 $ 18,537
River construction 3,672 3,794
Commercial real estate 579 498
Equity in earnings of commercial real estate investments 177 153
Other 408 379
-------- --------
Total 25,377 23,361
COSTS AND EXPENSES:
Timber and wood products 14,158 14,712
River construction 3,358 3,478
Commercial real estate 267 395
Selling, administrative, and general 1,351 1,699
Other 171 311
-------- --------
Total 19,305 20,595
INCOME FROM OPERATIONS 6,072 2,766
OTHER INCOME (EXPENSE):
Interest income 35 42
Interest expense (1,599) (897)
Gain on sales of assets 1,327
-------- --------
Total other income (expense) - net (1,564) 472
-------- --------
INCOME BEFORE INCOME TAX EXPENSE AND MINORITY INTEREST 4,508 3,238
INCOME TAX EXPENSE (1,029)
-------- --------
INCOME BEFORE MINORITY INTEREST 4,508 2,209
MINORITY INTEREST IN INCOME OF CONSOLIDATED LIMITED PARTNERSHIP (65) (452)
-------- --------
NET INCOME $ 4,443 $ 1,757
======== ========
BASIC EARNINGS PER SHARE $ 7,666 $ 3,032
======== ========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 579.54 579.54
======== ========
</TABLE>
See notes to consolidated financial statements.
F-21
<PAGE>
<TABLE>
<CAPTION>
ANDERSON-TULLY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------------------------------------------------------
COMMON STOCK
-------------------- RETAINED
NUMBER EARNINGS
OF SHARES AMOUNT (DEFICIT) TOTAL
<S> <C> <C> <C> <C>
1997
BALANCES AT DECEMBER 31, 1996 579.54 $1,159 $ 48,526 $ 49,685
Net income 1,757 1,757
--------- ------- --------- ---------
BALANCES AT MARCH 31, 1997 579.54 $1,159 $ 50,283 $ 51,442
========= ======= ========= =========
1998
BALANCES AT DECEMBER 31, 1997 579.54 $1,159 $ (7,036) $ (5,877)
Cash dividends declared ($1,308 per share) (758) (758)
Net income 4,443 4,443
--------- ------- --------- ---------
BALANCES AT MARCH 31, 1998 579.54 $1,159 $ (3,351) $ (2,192)
========= ======= ========= =========
</TABLE>
See notes to consolidated financial statements.
F-22
<PAGE>
<TABLE>
<CAPTION>
ANDERSON-TULLY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED) (IN THOUSANDS)
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,443 $ 1,757
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 1,753 2,358
Depletion 123 105
Deferred income taxes 646
Minority interest in earnings of consolidated limited partnership 65 452
(Gain) loss on sale of assets (1,327)
Changes in assets and liabilities:
Accounts receivable (153) (2,291)
Inventories 859 1,073
Other assets (432) 276
Accounts payable and accrued expenses (1,422) (2,883)
Accrued and refundable income taxes (31) 570
Deferred revenues (341) (368)
Long-term liabilities (627) (3)
------- -------
Net cash provided by operating activities 4,237 365
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of plant property 320
Purchases of plant property (1,579) (3,639)
Proceeds from sales of timber and timberland 1,023
Purchases of timber and timberland (66)
Purchases of commercial real estate (1,032)
Collections of notes receivable 840
Proceeds from maturities of short-term investments 100 100
Purchases of short-term investments (100) (100)
------- -------
Net cash used in investing activities (805) (3,328)
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (758) (806)
Net proceeds from (principal payments on) lines of credit (846) 2,392
Proceeds from issuance of long-term debt 2,268
Principal payments of long-term debt (796) (871)
------- -------
Net cash provided by (used in) financing activities (2,400) 2,983
------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,032 20
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,711 92
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,743 $ 112
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Income taxes paid during the period $ Nil $ 49
Interest paid during the period 849 666
See notes to consolidated financial statements.
</TABLE>
F-23
<PAGE>
ANDERSON-TULLY COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED)(IN THOUSANDS)
- --------------------------------------------------------------------
1. FINANCIAL STATEMENT PRESENTATION
The consolidated balance sheet as of March 31, 1998 and the consolidated
statements of operations, stockholders' equity (deficit), and cash flows for
the three months ended March 31, 1998 and 1997 have been prepared by the
Company, without audit. It is management's opinion that these statements
include all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the financial position, results of operations,
and cash flows as of March 31, 1998 and for all periods presented. The
results for the periods presented are not necessarily indicative of the
results that may be expected for the full year.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. It is suggested that these
consolidated financial statements be read in conjunction with the audited
consolidated financial statements and notes thereto of the Company included
elsewhere in this Prospectus.
2. EARNINGS PER SHARE
Basic earnings per share have been computed by dividing net income applicable
to common shareholders by the weighted average number of common shares
outstanding.
3. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
<S> <C> <C>
Lumber $ 1,496 $ 1,663
Wood products 900 774
Logs 1,046 1,883
Supplies 785 778
Growing crops 322 310
------- -------
Inventories, net $ 4,549 $ 5,408
======= =======
</TABLE>
The LIFO reserve related to the lumber and log inventories totaled $3,409 and
$3,825 at March 31, 1998 and December 31, 1997, respectively.
F-24
<PAGE>
4. INCOME TAXES
In conjunction with the Company's anticipated election to be treated as a
real estate investment trust (a "REIT") as of January 1, 1998, federal income
taxes are no longer payable by, nor provided for, the Company on its income
from continuing operations from this date. Also, federal income taxes are
not payable by, nor provided for, the Partnership or the limited liability
companies (the "LLCs"); the partners and owners are taxed on their share of
the earnings of these entities. Income taxes will be provided on earnings of
the Company's "C corporation" subsidiaries, as their future income will be
taxable. As these subsidiaries did not have earnings during the quarter
ended March 31, 1998, no income taxes were provided during this period.
Previously recorded deferred taxes related to assets and liabilities which
remain within the Company net to a liability of approximately $5,750 and will
be eliminated when the Company elects to be taxed as a REIT upon the filing
of its 1998 federal income tax return.
5. SIGNIFICANT OCCURRENCES AND SUBSEQUENT EVENTS
On March 31, 1998, the shareholders approved and adopted the "Agreement and
Plan of Merger" dated as of February 9, 1998 for the merger of the Company
into Beaver Acquisition Corporation, a wholly owned subsidiary of Timberland
Growth Corporation. The consummation of the merger is subject to certain
conditions including the successful completion of the initial public offering
by Timberland Growth Corporation. In anticipation of the transactions
described above, legal and accounting fees totalling $1,693 as of March 31,
1998 have been deferred and are recorded as other assets in the accompanying
financial statements.
F-25
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the Registrant has duly caused this registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized.
ANDERSON-TULLY COMPANY
Date: June 2, 1998 By: /s/ Parnell S. Lewis, Jr.
-------------------------------
Name: Parnell S. Lewis, Jr.
Title: Chief Executive Officer
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
2.1 Agreement and Plan of Merger, dated as of February 9, 1998
among the Registrant, Potlatch Corporation, Timberland
Growth Corporation and Beaver Acquisition Corporation.*
3.1 Restated Articles of Incorporation of the Registrant.*
3.2 Revised and Restated Bylaws of the Registrant.*
10.1 Asset Purchase Agreement, dated as of February 9, 1998, by
and among Potlatch Corporation, Anderson-Tully Veneers, L.P.
and Anderson-Tully Management Services, LLC.*
10.2 Sawmills Subsidiary Asset Purchase Agreement, dated as of
February 9, 1998, by and among Potlatch Corporation and
Anderson-Tully Lumber Company.*
10.3 Logging Subsidiary Asset Purchase Agreement, dated as of
February 9, 1998, between Potlatch Corporation and Anderson-
Tully Timber Company.*
10.4 Timber Harvest Agreement between Anderson-Tully Timber
Company and the Registrant dated January 1, 1998.*
10.5 Employment Agreement, dated March 28, 1994 between the
Registrant and Parnell S. Lewis, Jr., Change in Control
Agreement dated December 10, 1996 between the Registrant and
Parnell S. Lewis, Jr. and Supplemental and Clarifying
Agreement, dated December 31, 1997, between the Registrant
and Parnell S. Lewis, Jr.*
10.6 Employment Agreement, dated July 10, 1987 between the
Registrant and E. D. Coombs, Jr., Change in Control
Agreement dated December 11, 1996 between the Registrant
and E. D. Coombs, Jr. and Supplemental and Clarifying
Agreement, dated December 31, 1997, between the Registrant
and E. D. Coombs, Jr.*
10.7 Change in Control Agreement dated January 11, 1997 between
the Registrant and Tony R. Parks and Supplemental and
Amending Agreement, dated December 31, 1997, between the
Registrant and Tony R. Parks.*
<PAGE>
10.8 Change in Control Agreement dated May 6, 1997 between the
Registrant and Claude Tully Hall and Supplemental and
Amending Agreement, dated December 31, 1997, between the
Registrant and Claude Tully Hall.*
10.9 Change in Control Agreement dated June 10, 1997 between the
Registrant and Martin S. Lewis and Supplemental and Amending
Agreement, dated as of December 31, 1997, between the
Registrant and Martin S. Lewis.*
10.10 Change in Control Agreement dated December 11, 1996
between the Registrant and Charles Robert Dickinson, Jr. and
Supplemental and Clarifying Agreement, dated as of December
31, 1997, between the Registrant and Charles Robert
Dickinson Jr.*
10.11 Change in Control Agreement dated December 10, 1996
between the Registrant and Marye Helen Owen and Supplemental
and Amending Agreement, dated as of December 31, 1997,
between the Registrant and Marye Helen Owen.*
10.12 Change in Control Agreement dated December 12, 1996
between the Registrant and Bartlett Tully Lewis and
Supplemental and Amending Agreement, dated as of December
31, 1997, between the Registrant and Bartlett Tully
Lewis.*
21.1 Subsidiaries of the Registrant.*
27.1 Financial Data Schedule.
- ---------------------
* Previously filed with the initial filing of this Registration Statement on
April 23, 1998.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED JULY 31, 1997 AND
THE FIVE MONTHS ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR 5-MOS 3-MOS
<FISCAL-YEAR-END> JUL-31-1997 DEC-31-1997 DEC-31-1998
<PERIOD-START> AUG-01-1996 AUG-01-1997 JAN-01-1998
<PERIOD-END> JUL-31-1997 DEC-31-1997 MAR-31-1998
<CASH> 1,749 1,711 2,743
<SECURITIES> 0 0 0
<RECEIVABLES> 9,684 15,948 15,261
<ALLOWANCES> 0 0 0
<INVENTORY> 4,783 5,408 4,549
<CURRENT-ASSETS> 18,731 25,632 24,954
<PP&E> 121,149 100,693 102,272
<DEPRECIATION> (45,675) (36,393) (38,118)
<TOTAL-ASSETS> 136,486 132,099 131,786
<CURRENT-LIABILITIES> 17,065 22,849 27,328
<BONDS> 46,344 96,787 88,872
0 0 0
0 0 0
<COMMON> 1,159 1,159 1,159
<OTHER-SE> 0 0 0
<TOTAL-LIABILITY-AND-EQUITY> 136,486 132,099 131,786
<SALES> 92,753 50,306 24,792
<TOTAL-REVENUES> 96,488 52,222 25,377
<CGS> 77,103 40,748 17,783
<TOTAL-COSTS> 84,635 45,232 19,305
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 2,419 (5,216) 0
<INTEREST-EXPENSE> (3,380) (2,374) (1,599)
<INCOME-PRETAX> 11,361 (565) 4,508
<INCOME-TAX> 3,891 (629) 0
<INCOME-CONTINUING> 7,470 64 4,508
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 5,650 (1,316) 4,443
<EPS-PRIMARY> 9,749 (2,271) 7,666
<EPS-DILUTED> 9,749 (2,271) 7,666
</TABLE>
