<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
(Amendment No. 1 )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[X] Preliminary Proxy Statement
[_] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[_] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Materials Pursuant to Section 240.14a-11(c) of
Section 240.14a-12
ALASKA NORTHWEST PROPERTIES INC.
---------------
(Name of Registrant as Specified In Its Charter)
ALASKA NORTHWEST PROPERTIES INC.
---------------
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[_] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2) or
Item 22(a)(2) of Schedule 14A.
[_] $500 per each party to the controversy pursuant to Exchange Act Rule 14a-
6(i)(3).
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
Amount of proposed cash payment and other property to be transferred to security
holders:
$22,200,000
Multiplied by 1/50th of 1% pursuant to rule 0-11(c)(1)
Filing fee: $4,440
[X] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
2) Form, Schedule or Registration Statement No.:
<PAGE>
ALASKA NORTHWEST PROPERTIES INC.
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To approve the Merger of
UNDER THE RADAR, INC.
with and into
ALASKA NORTHWEST PROPERTIES INC.
To the Record Holders of Common Shares
of Alaska Northwest Properties Inc.:
NOTICE IS HEREBY GIVEN pursuant to Sections 10.06.410 and 10.06.544 of the
Alaska Corporations Code (the "ACC") that on March __, 1997 a special
meeting (the "Meeting") of holders of shares of common stock, par value $1.00
(the "Shares") of Alaska Northwest Properties Inc., an Alaska corporation
("Company"), of record on February __, 1997 (the "Record Date"), will be
held at the offices of Preston Gates & Ellis LLP, 701 Fifth Avenue, Suite 5000,
Seattle, Washington 98104 at 10:00 a.m., Seattle, Washington time, to consider:
(i) the adoption and approval of (A) the merger (the "Merger") of Under
the Radar, Inc., an Alaska corporation ("UTR"), into Company, as
contemplated by that certain Agreement and Plan of Reorganization by and
among Company, UTR, ANP, LLC, a Washington limited liability company
("LLC") and James H. and Bobbie Jannard ("Jannard"), dated November 18,
1996 (the "Reorganization Agreement"), and (B) the Articles of Merger and
Plan of Merger between UTR and Company (the "Merger Agreement"). (Pursuant
to the Merger, if effectuated, each shareholder will receive approximately
$410 per Share; and
(ii) such other matters as may properly be brought before the Meeting.
It is anticipated that the Merger will be effected on March __, 1997,
or as soon thereafter as practicable.
In the event that the Merger is approved and the other conditions set forth
in the Reorganization Agreement are satisfied or waived, prior to the effective
time of the Merger, pursuant to a certain Agreement and Plan of Distribution
dated December 11, 1996 (the "Plan of Distribution"), Company will distribute
all of Company's assets and liabilities, other than the Island, as well as the
Additional Properties received from Jannard (See "THE SPIN-OFF DISTRIBUTION") to
LLC in exchange for all of the interests of LLC (the "LLC Interests") (the
"Spin-Off"). After effecting the Spin-Off, the Board of Directors will then
declare a dividend of the LLC Interests at the rate of one LLC Interest for each
50 Shares of Company, or cash in lieu of fractional LLC Interests (the "Spin-Off
Distribution"). Although
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under Alaska law no vote of Company shareholders is required, or is being
requested, in connection with the Spin-Off Distribution, A VOTE IN
FAVOR OF THE MERGER WILL HAVE THE EFFECT OF CAUSING THE SPIN-OFF AND
DISTRIBUTION OF LLC INTERESTS TO OCCUR WHICH WILL RESULT IN SHAREHOLDERS
RECIEVING INTERESTS IN THE LLC AND/OR THE CASH EQUVALENT VALUE OF SUCH LLC
INTERESTS. AS DESCRIBED IN THE PROXY STATEMENT THE LLC WILL DIFFER FROM COMPANY
AS TO THE COMPOSITION OF ITS ASSETS, ITS GOVERNANCE AND TAX CONSEQUENCES. (SEE
"THE SPIN OFF DISTRIBUTION" AND "ANP, LLC")
The Board of Directors has fixed the close of business on the Record Date
for the determination of shareholders entitled to notice of and to vote at the
Meeting or any adjournment thereof. Only shareholders of record at the close of
business on the Record Date are entitled to notice of the Meeting and only
holders of record of Shares at the close of business on the Record Date are
entitled to vote at the Meeting. A complete list of such shareholders will be
available for examination at the offices of Company located at 19048 37th Avenue
South, Seattle, Washington 98188 during normal business hours by any Company
shareholder, for any purpose germane to the Meeting, for a period of 10 days
prior to the Meeting.
SHAREHOLDERS ARE URGED, WHETHER OR NOT THEY PLAN TO ATTEND THE MEETING, TO SIGN,
DATE, AND MAIL THE ENCLOSED PROXY OR VOTING INSTRUCTION CARD IN THE POSTAGE-PAID
ENVELOPE PROVIDED.
If a shareholder who has returned a proxy attends the meeting in person,
such shareholder may revoke the proxy by notifying Company's Secretary in
writing at 19048 37th Avenue South, Seattle, Washington 98188, or by delivering
a written notice to Company's Secretary at the meeting prior to the time the
vote is taken on the Merger, and then either executing a new proxy, or voting or
in person on all matters submitted at the meeting.
If the Merger is approved, the combined effect of the Merger and Spin-Off
Distribution is that holders of less than 50 Shares will receive approximately
$822 per Share ($410 per Share for the Merger and $412 per Share as a
Fractional LLC Cash Payment). Holders of fifty (50) or more Shares will receive
approximately $410 per Share for the Merger and one (1) LLC Interest per
integral of fifty (50) Shares owned. A Fractional LLC Cash Payment at the rate
of $412 per Share will be paid to these holders for the Shares not comprising an
even integral of fifty (50) Shares. For example:
<TABLE>
<CAPTION>
Shares $410/Share from Fractional Total Cash
Owned in Merger LLC Interests Received LLC Cash Payment Received
- ------ --------------- ---------------------- ---------------- ----------
<S> <C> <C> <C> <C>
35 $14,350 0 $14,420 $28,770
100 41,000 2 0 41,000
110 45,100 2 4,120 49,220
</TABLE>
ALL ABOVE AMOUNTS SET FORTH ARE CONSERVATIVE APPROXIMATIONS AND WILL BE
FINALIZED AT THE CLOSING. YOUR BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE
REORGANIZATION AND MERGER
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AGREEMENTS AND HAS DETERMINED THAT THE MERGER IS FAIR TO AND IN THE BEST
INTERESTS OF THE SHAREHOLDERS OF COMPANY.
By order of the Board of Directors
Michael W. Shimasaki
President
Date
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<PAGE>
ALASKA NORTHWEST PROPERTIES INC.
Proxy Statement
Special Meeting of Shareholders
This Proxy Statement is being furnished to the holders of common stock, par
value $1.00 (the "Shares") of Alaska Northwest Properties Inc., an Alaska
corporation ("Company"), as of February ___, 1997 (the "Record Date"), in
connection with the proposed merger (the "Merger") of Under the Radar, Inc., an
Alaska corporation ("UTR"), into Company, as contemplated by that certain
Agreement and Plan of Reorganization by and among Company, UTR, ANP, LLC ("LLC")
and James H. and Bobbie Jannard ("Jannard"), dated November 18, 1996 (the
"Reorganization Agreement"). The Merger will be consummated on the terms and
subject to the conditions set forth in the Reorganization Agreement which
includes Articles of Merger and a Plan of Merger (collectively, the "Merger
Agreement"). The Reorganization Agreement has been attached as Exhibit A to
this Proxy Statement. Pursuant to and as a result of the Merger Agreement, at
the effective time of the Merger (the "Effective Time"): (i) Company will
continue as the surviving corporation (the "Surviving Corporation") and (ii)
each of the issued and outstanding Shares (other than "Dissenting Shares" held
by Dissenting Shareholders, as defined below) will be converted into the right
to receive approximately $410 net per Share in cash, without interest (the "Per
Share Obligation"). The exact amount of the Per Share Obligation will be
determined at the Closing. In the event that the Merger and Merger Agreement
are approved, and the other conditions to Closing of the Reorganization
Agreement have been satisfied, immediately prior to the Effective Time of the
Merger, Company will distribute certain assets and liabilities to LLC in
exchange for all of the interests of LLC (the "LLC Interests"). Company will
then effect a dividend of the LLC Interests, or cash in lieu of fractional LLC
Interests, to Company shareholders on February ___, 1997 (the "Spin-Off Record
Date") (the "Spin-Off Distribution"). The Spin-Off Distribution will be
effected pursuant to the terms of a certain Agreement and Plan of Distribution
between Company and LLC dated December 11, 1996 (the "Plan of Distribution").
The Plan of Distribution has been attached as Exhibit B to this Proxy Statement.
A special meeting (the "Meeting") of the shareholders of Company of record on
the Record Date will be held at the offices of Preston Gates & Ellis LLP, 701
Fifth Avenue, Suite 5000, Seattle, Washington 98104 at 10:00 a.m., Seattle,
Washington time, on March __, 1997 to consider approval and adoption of
the Merger and the Merger Agreement.
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION (OR THE "COMMISSION") NOR HAS THE COMMISSION PASSED UPON THE
FAIRNESS OR MERITS OF SUCH TRANSACTION OR UPON THE ACCURACY OR ADEQUACY OF THE
INFORMATION CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS
UNLAWFUL.
The date of this Proxy Statement is February __, 1997. This Proxy
Statement and the accompanying form of proxy are being furnished by Company and
were first mailed on or
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<PAGE>
about February __, 1997 to shareholders of Company as of the close of business
on the Record Date.
THE BOARD OF DIRECTORS OF COMPANY (THE "BOARD" OR THE "BOARD OF
DIRECTORS"), BY THE UNANIMOUS VOTE OF ALL OF THE MEMBERS OF THE BOARD OF
DIRECTORS, HAS APPROVED THE MERGER, PURSUANT TO THE MERGER AGREEMENT AND
REORGANIZATION AGREEMENT, AND DETERMINED THAT THE TERMS OF THE MERGER ARE
FAIR TO, ON BOTH A SUBSTANTIVE AND PROCEDURAL BASIS, AND IN THE BEST INTERESTS
OF ALL OF THE SHAREHOLDERS OF COMPANY. Under the Alaska Corporations Code
(the "ACC"), adoption of any plan of merger or consolidation of Company must
be approved by Company's Board of Directors and by the vote of the holders of
two-thirds (2/3) of the outstanding Shares entitled to vote thereon.
Furthermore, the Reorganization Agreement requires approval by a majority of
the shareholders who will not receive LLC Interests and who vote at the
meeting. The Board has also agreed that it will not proceed with the Merger
unless it is also approved by a majority of shareholders who vote at the
Meeting and who are not affiliated with the directors, officers and principal
shareholders of Company, or members of their families.
IF THE MERGER IS CONSUMMATED, LLC HAS AGREED TO ACT AS COMPANY'S PAYING
AGENT (THE "PAYING AGENT"). TO RECEIVE PAYMENT AFTER THE MERGER OF THE PER
SHARE OBLIGATION IN CASH (WITHOUT INTEREST), HOLDERS OF SHARES MUST DELIVER
CERTIFICATES EVIDENCING SUCH SHARES ALONG WITH A PROPERLY COMPLETED LETTER OF
TRANSMITTAL, TO THE PAYING AGENT AT THE ADDRESS SPECIFIED IN THE LETTER OF
TRANSMITTAL. THE LETTER OF TRANSMITTAL WILL BE MAILED AS SOON AS PRACTICABLE
AFTER THE EFFECTIVE TIME OF THE MERGER.
Any holder of Shares who does not wish to accept the Per Share Obligation
for his Shares has the right under the ACC to dissent to the Merger and seek
payment for the fair cash value of his Shares. Holders of Shares seeking such
payments are referred to herein as "Dissenting Shareholders." To perfect this
right, a Dissenting Shareholder must (i) make written demand for such payment to
Company before the taking of the vote on the Merger and (ii) not vote in favor
of the Merger. A failure to vote against the Merger will not constitute a
waiver of a shareholder's right to dissent under the ACC and a vote against the
Merger is not sufficient to perfect such rights under the ACC. Dissenting
Shareholders are urged to carefully review this Proxy Statement and the Exhibits
hereto in their entirety in considering whether to seek payment pursuant to the
ACC. See "DISSENTERS' RIGHTS" and Exhibit F to this Proxy Statement.
As of the Record Date, there were issued and outstanding 29,668 Shares.
Holders of record of Shares at the close of business on the Record Date are
entitled to one vote per share held on all matters submitted to a vote of
shareholders. Subsequent to the consummation of the Merger, the registration of
the Shares under the Securities Exchange Act of 1934, as amended (the "Exchange
Act") will be terminated and there will be no public trading market for the LLC
Interests, and the Shares will be owned solely by Jannard.
The information contained in this Proxy Statement concerning UTR has been
furnished to Company by UTR, and Company assumes no responsibility for the
accuracy or completeness of such information.
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<PAGE>
AVAILABLE INFORMATION
Company is subject to the informational requirements of the Exchange Act
and in accordance therewith files periodic reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission"). All
such reports, proxy statements and other information, may be inspected and
copied at the public reference facilities maintained by the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
Regional Offices of the Commission located at 7 World Trade Center, Suite 1300,
New York, New York 10048 and at 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such material also can be obtained from the Commission
at prescribed rates by addressing written requests for such copies to the Public
Reference Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549. The Commission maintains a World Wide Web
site on the Internet at http://www.sec.gov that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission. In addition, Company's periodic reports,
proxy statements and other information concerning Company should also be
available for inspection at the offices of the National Association of
Securities Dealers, Inc. Reports Section, 1735 K Street, N.W., Washington, D.C.
20006.
The Shares are currently traded in the over-the counter market and
registered under the Exchange Act. Following the Merger, there will be no
public trading of the Shares or the LLC Interests. Accordingly, registration of
the Shares will be terminated upon application of Company to the Commission and
trading of the Shares in the over-the-counter market will cease when the Merger
is consummated.
TABLE OF CONTENTS
PAGE
AVAILABLE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . 3
INTRODUCTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
THE SPECIAL MEETING . . . . . . . . . . . . . . . . . . . . . . . . . . 6
General. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Vote Required. . . . . . . . . . . . . . . . . . . . . . . . . . . 7
THE TRANSACTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
PROPOSAL: THE MERGER . . . . . . . . . . . . . . . . . . . . . . . . . 9
Special Factors. . . . . . . . . . . . . . . . . . . . . . . . . . 9
Purpose of Merger . . . . . . . . . . . . . . . . . . . . . . 9
Plans for Company . . . . . . . . . . . . . . . . . . . . . . 9
Effects of the Merger . . . . . . . . . . . . . . . . . . . . 10
Recommendation of the Board and Reasons for the Merger. . . . 10
Tax Consequences of the Merger. . . . . . . . . . . . . . . . 13
Interest of Certain Persons in the Merger . . . . . . . . . . 14
Interest in Securities of Company . . . . . . . . . . . . . . 15
Information Concerning Company . . . . . . . . . . . . . . . . . . 16
Information Concerning UTR and Jannard . . . . . . . . . . . . . . 17
Background of the Merger . . . . . . . . . . . . . . . . . . . . . 17
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<PAGE>
Structure of the Merger. . . . . . . . . . . . . . . . . . . . . . 20
Accounting Treatment of the Merger . . . . . . . . . . . . . . . . 20
Financing the Acquisition. . . . . . . . . . . . . . . . . . . . . 20
Sale of the Additional Properties. . . . . . . . . . . . . . . . . 21
The Reorganization Agreement . . . . . . . . . . . . . . . . . . . 21
DISSENTERS' RIGHTS. . . . . . . . . . . . . . . . . . . . . . . . . . . 27
THE SPIN-OFF DISTRIBUTION . . . . . . . . . . . . . . . . . . . . . . . 29
Purpose of the Spin-Off Distribution . . . . . . . . . . . . . . . 29
The Spin-Off Distribution. . . . . . . . . . . . . . . . . . . . . 30
Tax Consequences of the Spin-Off Distribution . . . . . . . . 32
ANP, LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
General. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
The LLC Agreement. . . . . . . . . . . . . . . . . . . . . . . . . 35
Income Tax Consequences of Being an Interest Holder or Member
of LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
COMPARISON OF CORPORATION LAWS OF ALASKA AND LIMITED LIABILITY
COMPANY LAWS IN WASHINGTON. . . . . . . . . . . . . . . . . . . . . . . 52
MARKET PRICES OF AND DIVIDENDS ON STOCK . . . . . . . . . . . . . . . . 53
SELECTED FINANCIAL INFORMATION CONCERNING COMPANY . . . . . . . . . . . 54
ALASKA NORTHWEST PROPERTIES INC.: MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . 55
Three Years Ended December 31, 1993, 1994, and 1995. . . . . . . . 55
Real Estate and Note Collection Activities. . . . . . . . . . 55
Results of Operations . . . . . . . . . . . . . . . . . . . . 56
Investment Activities . . . . . . . . . . . . . . . . . . . . 57
Liquidity and Capital Resources . . . . . . . . . . . . . . . 58
Effect of Recently Issued Accounting Standards. . . . . . . . 58
Nine Months Ended September 30, 1995 and 1996. . . . . . . . . . . 58
Real Estate and Note Collection Activities. . . . . . . . . . 58
Results of Operations . . . . . . . . . . . . . . . . . . . . 59
Liquidity and Capital Resources . . . . . . . . . . . . . . . 59
INDEPENDENT PUBLIC ACCOUNTANTS. . . . . . . . . . . . . . . . . . . . . 60
SHAREHOLDERS' PROPOSALS . . . . . . . . . . . . . . . . . . . . . . . . 60
COMPANY FINANCIAL INFORMATION AND PRO FORMA FINANCIAL
INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
EXHIBITS:
EXHIBIT A Agreement and Plan of Reorganization
EXHIBIT B Agreement and Plan of Distribution
EXHIBIT C Pro Forma Closing Schedule
EXHIBIT D Dissenters' Rights
EXHIBIT E Limited Liability Company Agreement of ANP, LLC
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<PAGE>
INTRODUCTION
This Proxy Statement is being furnished to Company's shareholders as of the
Record Date in connection with the solicitation of proxies from holders of
Shares by the Board of Directors of Company for use at the Meeting to consider
the proposed Merger of UTR with and into Company pursuant to the Merger
Agreement. The Merger will be consummated on the terms and subject to the
conditions set forth in the Reorganization and Merger Agreements, as a result of
which, at the Effective Time (i) Company will continue as the Surviving
Corporation (owned solely by the shareholder(s) of UTR), and (ii) each Share
issued and outstanding (other than Dissenting Shares) will be converted into the
right to receive the Per Share Obligation (approximately $410 per Share) in
cash, without interest.
The Meeting will be held on __________ __, 1997 at the offices of Preston
Gates & Ellis LLP, 701 Fifth Avenue, Suite 5000, Seattle, Washington 98104 at
10:00 a.m., Seattle, Washington time.
The purpose of the Meeting is to consider and vote upon: (i) a proposal to
approve and adopt the Merger Agreement, and (ii) such other matters as may
properly be brought before the Meeting.
Only holders of record of Shares at the close of business on the Record
Date are entitled to vote at the Meeting. On such date, there were 29,668
Shares outstanding, each of which will be entitled to one vote on each matter to
be acted upon at the Meeting. All shareholders of Company are entitled to
notice of the Meeting.
TO RECEIVE PAYMENT AFTER THE MERGER OF THE PER SHARE OBLIGATION (WITHOUT
INTEREST) PER SHARE, HOLDERS OF SHARES MUST DELIVER CERTIFICATES EVIDENCING SUCH
SHARES ALONG WITH A PROPERLY COMPLETED LETTER OF TRANSMITTAL TO THE PAYING AGENT
AT THE ADDRESS SPECIFIED IN THE LETTER OF TRANSMITTAL.
In the event that the Merger and Merger Agreement are approved, and the
other conditions to Closing of the Reorganization Agreement have been satisfied,
immediately prior to the Effective Time of the Merger and subject to the
conditions of the Plan of Distribution, the Spin-Off Distribution. Pursuant to
the Plan of Distribution, Company will distribute certain assets and liabilities
to LLC in exchange for all of the LLC Interests. Company will then effect a
dividend of the LLC Interests, and/or cash in lieu of fractional LLC Interests,
to Company shareholders on February __, 1997 (the "Spin-Off Record Date"). No
vote of Company shareholders is required, or is being requested, in connection
with the Spin-Off Distribution.
Company expects that the Spin-Off Distribution and the Merger will be
consummated as promptly as practicable after the Meeting, assuming that the
conditions to the Spin-Off Distribution, as set forth in the Plan of
Distribution, have been satisfied and that the conditions to the Merger, as set
forth in the Reorganization Agreement, have been satisfied. (See "PROPOSAL: THE
MERGER: The Reorganization Agreement--The Merger" and "THE SPIN-OFF
DISTRIBUTION").
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<PAGE>
Any Dissenting Shareholder has the right under the ACC to seek an appraisal
of and be paid the fair value of his Shares, together with a fair rate of
interest, if any, to be paid thereon. In order to perfect such right of
payment, a Dissenting Shareholder must (i) make a written demand for such
payment to Company before the taking of the vote on the Merger and (ii) not vote
his Shares in favor of the Merger. Such demand must be sent to Company at 19048
37th Avenue South, Seattle, Washington 98188, Attention: Corporate Secretary. A
failure to vote against the Merger will not constitute a waiver of a
shareholder's right to dissent under the ACC and a vote against the Merger is
not sufficient to perfect such rights under the ACC. (See "DISSENTERS' RIGHTS"
and Exhibit D to this Proxy Statement).
The accompanying Notice of Special Meeting of Shareholders constitutes the
notice to Dissenting Shareholders required by Section 10.06.576(c) of the ACC.
Dissenting Shareholders are urged to carefully review this Proxy Statement
and the Exhibits hereto in their entirety in considering whether to seek any
payment pursuant to the ACC. If a Dissenting Shareholder does not perfect his
right to payment with respect to his Shares before the taking of the vote on the
Merger, such Shares will be converted into the right to receive the Per Share
Obligation at the Effective Time. (See "DISSENTERS' RIGHTS" and Exhibit D to
this Proxy Statement).
The Shares are currently traded on the over-the-counter market and
registered under the Exchange Act. Following the Merger, there will be no
public trading of the Shares or the LLC Interests. Accordingly, registration of
the Shares will be terminated upon application of Company to the Commission and
the ability to trade the Shares in the over-the-counter market will cease when
the Merger is consummated.
THE SPECIAL MEETING
GENERAL
The Meeting will be held at 10:00 a.m., local time, on ________ __, 1997,
at the offices of Preston Gates & Ellis LLP, 701 Fifth Avenue, Suite 5000,
Seattle, Washington 98104, for the purpose of approving and adopting the Merger
Agreement, as required under Alaska law.
Only holders of record of Shares outstanding at the close of business on
the Record Date (______________, 1997) are entitled to vote at the Meeting.
On the Record Date, there were approximately 705 holders of record of
Shares, with 29,668 Shares issued and outstanding. Each Share entitles the
holder thereof to one vote on each matter submitted for shareholder approval. On
the Record Date, the directors and executive officers of Company held 14,747
Shares or 49.7% of the Shares.
The presence, in person or by proxy, at the Meeting of the holders of a
majority of the Shares outstanding and entitled to vote at the Meeting is
necessary to constitute a quorum at the meeting. Under the ACC, the affirmative
vote of the holders of two-thirds (2/3) of the Shares outstanding and entitled
to vote thereon at the Meeting is required to approve the Merger and the
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<PAGE>
Merger Agreement. In determining whether the Merger Agreement has received the
requisite number of affirmative votes, abstentions and broker non-votes will
have the same effect as a vote against the Merger and the Merger Agreement.
At the date of this Proxy Statement, the Board of Directors of Company do
not know of any business to be presented at the Meeting other than as set forth
in the notice accompanying this Proxy Statement. If any other matters should
properly come before the Meeting in accordance with the Bylaws of Company, it is
intended that the Shares represented by proxies will be voted with respect to
such matters in accordance with the judgment of the persons voting such proxies.
All properly executed proxies that are not revoked will be voted at the
Meeting in accordance with the instructions contained therein. If a holder of
Shares executes and returns a proxy and does not specify otherwise, the Shares
represented by such proxy will be voted "for" approval and adoption of the
Merger Agreement in accordance with the recommendation of the Board of Directors
of Company. A holder of Shares who has executed and returned a proxy may revoke
it at any time before it is voted at the Meeting by: (i) executing and
returning a proxy bearing a later date, (ii) filing written notice of such
revocation with the Corporate Secretary of Company, stating that the proxy is
revoked, or (iii) attending the Meeting and voting in person.
In addition to solicitation by mail, the directors, officers, employees and
agents of Company may solicit proxies from their shareholders by personal
interview, telephone, telegram or otherwise. Company will bear the costs of the
solicitation of proxies from its shareholders. Arrangements will also be made
with brokerage firms and other custodians, nominees and fiduciaries who hold of
record securities of Company for the forwarding of solicitation materials to the
beneficial owners thereof. Company will reimburse such brokers, custodians,
nominees and fiduciaries for the reasonable out-of-pocket expenses incurred by
them in connection therewith.
VOTE REQUIRED
The ACC requires that the adoption of any plan of merger or consolidation
of Company must be approved by Company's Board of Directors and by the vote of
the holders of two-thirds (2/3) of the outstanding Shares entitled to vote
thereon. Therefore, the Merger Agreement and Merger will be approved by the
shareholders upon the affirmative vote of two-thirds (2/3) of the Shares
represented at the Meeting.
Company's Board of Directors has unanimously approved the Merger, as
contemplated by the Merger Agreement and the Reorganization Agreement, and the
only further action of Company required to approve the Merger will be the
approval by the requisite vote of shareholders described above.
A CONDITION PRECEDENT TO THE PLAN OF DISTRIBUTION IS THE APPROVAL UNDER
ALASKA LAW BY THE SHAREHOLDERS OF THE MERGER AND MERGER AGREEMENT. IN THE EVENT
THAT THE MERGER AND MERGER AGREEMENT ARE NOT APPROVED, THE SPIN-OFF
DISTRIBUTION, AS CONTEMPLATED IN THE PLAN OF DISTRIBUTION, WILL NOT BE
EFFECTUATED.
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<PAGE>
THE TRANSACTION
James H. and Bobbie Jannard (collectively "Jannard") are interested in
acquiring the principal asset of Company, Spieden Island, an Island in the San
Juan Archipelago located in San Juan County, Washington (the "Island"). The
agreed purchase price is $20.0 million in cash plus properties having an agreed
value of $2.2 million (the "Additional Properties"). In addition to the Island,
Company owns a variety of other properties and assets that Jannard is not
interested in acquiring. Therefore, in structuring the transaction, the parties
determined that the most cost and tax effective method to transfer ownership of
the Island to Jannard would be in the form of a cash merger of UTR, a
corporation organized and wholly owned by Jannard for such a purpose, with and
into Company. Since Jannard was not interested in the assets of Company other
than the Island, prior to the effectiveness of the Merger, Company agreed to
cause the other properties and assets, including the Additional Properties, to
be removed from Company.
The transaction recommended by the Board contemplates a contribution of all
of Company's assets and liabilities, other than the Island and a note payable by
Company to Jannard in the amount of $2.2 million (the "Note") and including the
Additional Properties, into a newly created limited liability company, LLC. In
exchange for such assets, LLC will issue all of its LLC Interests to Company.
Such LLC Interests, or cash in lieu of fractional LLC Interests, will, if the
Merger is approved, then be distributed to Company shareholders in the form of a
dividend. After consummation of the Spin-Off Distribution, the Merger with UTR,
a company wholly owned by Jannard, will then be consummated.
The purpose of the transaction as currently structured is to provide
liquidity and to maximize the amount of cash received by each Company
shareholder upon the sale of Company's primary asset, the Island. The Board
also evaluated an asset sale of the Island followed by a distribution of the
proceeds to shareholders. This alternative would have involved both a taxable
gain for Company and a taxable dividend for the shareholders of Company on
receipt of the net distribution. Accordingly, the Board concluded that the
proposed structure, which was also acceptable to UTR and Jannard, would provide
the optimal amount of cash to each Company shareholder with the least amount of
tax impact.
The transaction was undertaken by the Board at this time due to: (i) the
immense personal wealth created by the current level of the stock market which
has generally increased the number of qualified buyers, (ii) the increased sales
activities of large, unique and private parcels of land in San Juan County by
wealthy individuals, and (iii) the record sales prices offered for such unique
and private parcels of land in San Juan County by one such wealthy individual.
It is a condition of Company and LLC to the Closing of the Merger that a
majority of the shareholders who pursuant to the Spin-Off Distribution will
not receive any units of the LLC and vote at the Meeting shall have approved
the Merger. The Board has also agreed that it will not proceed with either
the Spin-Off Distribution or the Merger if the Merger is not approved by a
majority of the shareholders who are not "Affiliates" (i.e. the directors,
principal shareholders, officers of Company, and members of their families)
who vote at the Meeting.
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Shareholders who do not vote in favor of the Merger may exercise dissenters
rights. (See "DISSENTERS' RIGHTS".)
PROPOSAL: THE MERGER
SPECIAL FACTORS
PURPOSE OF MERGER
The purpose of the Merger is to enable UTR to acquire the entire equity
interest in Company after all assets and liabilities other than the Island and
the Note have been removed from Company. Pursuant to the Merger Agreement, each
outstanding Share, other than Shares held by any Dissenting Shareholders, will
be converted into the right to receive the Per Share Obligation.
PLANS FOR COMPANY
It is expected that prior to the Merger, the business and operations of
Company other than the Island will be transferred to LLC. Thereafter, the
operations of LLC will be continued, other than as to the Island, substantially
as they are being conducted by Company prior to the Merger. (See "ANP, LLC").
Company, as the surviving corporation, intends to use the Island for the
personal use of the shareholder of the surviving corporation.
If the Merger is consummated, the Shares will cease to be registered under
the Exchange Act, transactions in Shares will not be reported in the over-the-
counter market or any national stock exchange or quotation system, and the
Shares will not be available for use as collateral for loans made by brokers and
others. The LLC Interests will not be registered under the Exchange Act, traded
in any market, or treated as a marketable security for purposes of establishing
collateral for loans.
Potential Detriments of Merger and Spin-Off Distribution
As a result of the Merger and the Spin-Off Distribution, the principal
asset of the Company, the Island, will be owned by Jannard as the sole
shareholder of the Surviving Corporation. Any future appreciation in the value
of the Island would not be enjoyed by Company's shareholders prior to the
Merger, who will in exchange for their Shares, only receive the Per Share
Obligation.
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For those receiving LLC Interests pursuant to the Spin-Off Distribution,
LLC has agreed in the Reorganization Agreement to indemnify Company, as the
surviving corporation, against certain liabilities relating to the Merger. In
the event that such indemnification is sought and realized by Jannard, as the
sole shareholder of the Surviving Corporation, Interest Holders of LLC could
suffer considerable dilution to the value of their LLC Interests. However,
since the contingent liabilities against which LLC has agreed to indemnify are
the liabilities (known and unknown) that Company has incurred as of the Closing
Date, the only difference in the potential liabilities to LLC Interest Holders
is that they will bear a proportionately greater share since shareholders owning
less than 50 Shares will receive all cash in the Spin-Off Distribution. (See
"PROPOSAL: THE MERGER - The Reorganization Agreement - Indemnification" and
"ANP, LLC")
For those receiving LLC Interests pursuant to the Spin-Off Distribution,
there is no guarantee that LLC will be able to successfully liquidate its assets
in a profitable manner. As Interest Holders, any gains or losses on the sales
of such properties will be allocated among the Interest Holders in proportion to
their interests pursuant to the terms of the LLC Agreement (as defined below)
and attached as Exhibit E hereto. (See "ANP, LLC")
EFFECTS OF THE MERGER
The Merger will have the effect of eliminating the Shares of Company
shareholders by converting such Shares into the right to receive the Per
Share Obligation. Under Alaska law, however, shareholders who have filed
timely notices of intent to dissent and who exercise dissenters' rights
pursuant to Sections 10.06-576 through 10.06-582 of the ACC, will have
certain rights under the ACC to dissent to the proposed Merger and receive
payment of the "fair value" of their Shares. Such rights to dissent, if
statutory procedures are complied with, could result in judicial
determination of the fair value of the Shares required to be paid to
Dissenting Shareholders. A copy of the provisions of 10.06-576 through
10.06-582 of the ACC is attached as Exhibit D to this Proxy Statement.
According to Company's 10-K for the fiscal year ended December 31, 1995,
Company's Shareholders' Equity was $9,381,203 as of December 31, 1995, and
Company had a net loss of $98,190 for the twelve months ended December 31,
1995. As a result of the consummation of the Merger, Company shareholders
will not have the opportunity to participate in the future earnings (if any),
and profits and growth of the Surviving Corporation and will not have a right
to vote on corporate matters. Jannard, as the sole shareholder of the
Surviving Corporation after the Merger, will own a 100% interest in the book
value and earnings of the Surviving Corporation and will benefit from any
increase in the value of the Surviving Corporation following the Merger and
will bear the risk of any decrease in the value of the Surviving Corporation
after the Merger. Shareholders who own fifty (50) or more Shares will
participate in the assets and liabilities of Company, other than the Island,
to the extent spun-off prior to the effectiveness of the Merger. (See "The
Spin-Off Distribution" and "ANP, LLC").
If the Merger is consummated, the Shares will cease to be registered under
the Exchange Act, transactions in Shares will not be reported on any national
stock exchange or quotation system, and the Shares will not be available for use
as collateral for loans made by brokers and others.
RECOMMENDATION OF THE BOARD AND REASONS FOR THE MERGER
In approving the Reorganization Agreement and recommending that
shareholders approve the Merger, the Board considered a number of factors,
and (such factors are described in detail following this summary), including:
(a) the financial and other terms and conditions of the
Reorganization Agreement. The total consideration of $22.2 million ($20
million in cash) subject to minimal conditions was viewed as extremely
attractive compared to a carrying cost for the Island of approximately $3.0
million;
(b) the possible alternatives to the Merger, including, without
limitation, continuing to operate Company as an independent entity, and the
risks and opportunities associated therewith. There was no evidence or
persuasive argument that continuing business as usual would result in a
better opportunity given the substantial risk of losing the opportunity
presented by the Merger;
(c) the premium represented by the difference between the approximate
value of $822 per Share (in cash and LLC Interests or cash) and recent and
historical trading prices of the Shares. Prior to the announcement of the
transaction, the most recent bid price for a Share was $220 and the
highest bid ever was $275 per Share which occurred in the third quarter
of 1996. The $822 value per Share receivable upon consummation of the
transaction thus represents an approximate 300% increase in value per
Share.(See "MARKET PRICES OF AND DIVIDENDS ON STOCK");
(d) the relative illiquidity of the Island and the current
marketplace for sales of large, unique and private parcels of land in San
Juan County. Although real estate activity in San Juan County is at an all
time high, the sale of a property such as the Island is still a very time
consuming and uncertain process;
(e) the favorable tax impact on Company shareholders from the
proposed structure of the transaction. The proposed structure results
in a single long term capital gain for most shareholders instead of a
corporate tax and a dividend taxable at ordinary rates which would apply
in a conventional sale and distribution by Company (See " -- Tax
Consequences of the Merger" below);
(f) the estimated value placed on the Island by Mr. Wally Gudgell of
Gudgell Properties of $15-$18 million. The negotiated value of $22.2
million was substantially above this estimate as well as the assessed value
of the Island of approximately $8.15 million;
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(g) the fact that the terms of the Reorganization Agreement would
not unduly discourage other third parties from making bona fide proposals
to acquire Company subsequent to the execution of the Reorganization
Agreement and, if any such proposals were made, the Board, in the exercise
of its fiduciary duties, could, for a thirty day period after the date of
the public announcement of the transaction, determine to provide
information to and engage in negotiations with any such third party subject
to the terms and conditions of the Reorganization Agreement;
(h) the Merger and related transactions will provide holders the
opportunity to convert their Shares into cash or cash plus ownership in LLC
without the usual transaction costs associated with open-market sales or
the potential resulting depressing effect on the market price of Shares due
to the limited trading volume for Shares. (See "MARKET PRICES OF AND
DIVIDENDS ON STOCK" for a discussion of the very limited historical trading
volume of the Shares);
(i) that the $22.2 million price, and a per Share value after the
transaction of approximately $822 represents a considerable appreciation on
the net book value per Share of $318; and
(j) the lack of interest of any other individuals contacted
informally regarding the sale of the Island, prior to negotiations with
Jannard and UTR.
The Board did not assign relative weights to the factors or determine
that any factor was of particular importance. Rather, the Board viewed its
position and recommendation as based on the totality of the information
presented to and considered by it. After a careful review of the
transaction, including the above described factors, the Board concluded that
the transaction is fair to both the unaffiliated and affiliated shareholders
of Company. Both the Reorganization Agreement and the Spin-Off Distribution
were approved by all of the Board members, including Messrs. Maulding and
Kennedy who have no employment relationship with Company. With regard to
unaffiliated shareholders of Company, the Board determined that the
transaction as currently structured is favorable and in the best interest of
the unaffiliated shareholders because, since a majority of the unaffiliated
shareholders will not receive Interests in LLC, most of the unaffiliated
shareholders will, at the Closing be entitled to receive the full cash value
per Share of approximately $822 per Share, a price which represents an
increase of over 300% from the last reported bid per Share prior to the
announcement of the transaction. Such determination takes into account the
factors described above, including the essential lack of a market for the
Shares prior to the announcement of the Merger. All shareholders, affiliated
and unaffiliated, are being treated on the same basis, both procedurally and
substantively.
The Board did not undertake an appraisal of the Island for several
reasons: (i) the Island is a one-of-a-kind, very unique piece of land that
has been held by Company for almost 20 years and as a result its value in an
arm lengths transaction is not readily ascertainable; (ii) the Board felt
that a formal appraisal could have the effect of establishing a maximum price
for the Island that, under the circumstances, the Company was unwilling to
accept; and (iii) the existence of few, if any, individuals or entities
qualified to conduct such an appraisal.
Since Company is in business primarily to receive the best return on the
sales of its assets, the transaction presented allows Company to dispose of its
primary asset for a price more than
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two times the book value of all of Company's assets, as discussed above. If,
instead of entering into the Merger and Spin- Off Distribution, the Board
instead decided to immediately liquidate its assets, the liquidation value, and
related tax consequences related to such a liquidation, would not be in the best
interest of the shareholders since it would have resulted in both a tax at the
corporate level and a taxable dividend to most shareholders. The proposed
transactions will result in a single tax at the shareholder level, which for
most shareholders, will be in the form of a long-term capital gain. See
"PROPOSAL: THE MERGER - Tax Consequences of the Merger" and "THE SPIN-OFF
DISTRIBUTION - Tax Consequences of the Spin-Off Distribution").
In making its decision to approve the Reorganization Agreement and
the Plan of Distribution the Board does not believe that there were any
actual conflicts of interests since all shareholders are being treated on the
same basis. In the Plan of Distribution all shareholders will receive one
LLC Interest for each 50 Shares of Company. To the extent that either the
largest or the smallest shareholder owns an integral of less than 50 Shares
(e.g., between 1 and 49 Shares) each will receive the same cash payment
(presently estimated at $ 412) per Share. No shareholder will receive more
than $20,188 (49 x $412) in cash. Shareholders who own less than 50 Shares
will receive all cash and no LLC Interests and will not be subject to risks
of losses that the LLC may incur from indemnification, operations or sales of
the remaining assets, but also will not participate in possible gains. In
addition, any shareholder holding less than fifty (50) Shares can participate
in the LLC as an Interest Holder or Member by purchasing that number of
Shares in the open market, prior to the Spin-Off Record Date, such that they
own at least fifty (50) Shares on the Spin-Off Record Date (February __,
1997). Likewise, a shareholder who owns more than 50 Shares could sell
enough Shares so as to receive all cash or a combination of cash and LLC
Interests. No outside legal or financial representative was retained by
Company to represent unaffiliated shareholders. The Board justification for
this decision was based on the fact that: (i) all shareholders will receive
similar value (in cash and LLC Interests or cash) for each of their Shares,
(ii) a majority of the unaffiliated shareholders will in fact receive a full
cash payment for the value of their Shares, liquidating their entire
ownership interest before those who will receive LLC Interests in the
Spin-Off Distribution, and (iii) in light of the forgoing reasons, the
additional expense to retain such independent representatives, in the
business judgment of the Board, was neither advisable nor could it be
justified. Furthermore, Alaska law does not require retention of separate
counsel or financial representatives for unaffiliated shareholders and the
retention of such representatives would have made the negotiations with
Jannard and UTI impossible given the brief time periods available. See
"PROPOSAL: THE MERGER - Background of the Merger." Unaffiliated shareholders
who wish to do so may pursue their statutory dissenters rights. (See
"DISSENTERS' RIGHTS")
The Board did not make a separate determination as to the "going concern"
value due to the nature of Company's business and the fact that it has been
in a liquidation mode for several years.
For the reasons discussed above, the Board believes that the values to
be received in the Merger and the Spin-Off Distribution (especially on an
after tax basis) substantially exceed the value that would be received if
Company was to sell all of its assets and distribute the proceeds.
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TAX CONSEQUENCES OF THE MERGER
The following subsection was prepared by Preston Gates & Ellis LLP, counsel
and tax counsel to Company. In the opinion of tax counsel, such information is,
as of the date of this Proxy Statement, correct in all material respects.
The receipt of cash pursuant to the Merger will be a taxable transaction
for federal income tax purposes under the Internal Revenue Code of 1986, as
amended (the "Code"), and may also be a taxable transaction under applicable
state, local or foreign income or other tax laws. Generally, for U.S. federal
income tax purposes, a shareholder will recognize gain or loss equal to the
difference between the amount of cash received by the shareholder pursuant to
the Merger and the aggregate tax basis in his Shares converted in the Merger.
Prior to the Merger, the tax basis of the Shares held by any shareholder will be
reduced to the extent that a portion of the Spin-Off Distribution constitutes a
return of capital. (See "The Spin-Off Distribution" and "ANP, LLC".) Gain or
loss will be calculated separately for each block of Shares converted in the
Merger.
If Shares are held by a shareholder as capital assets, gain or loss
recognized by the shareholder will be capital gain or loss, which will be long-
term capital gain or loss if the shareholder's holding period for the Shares
exceeds one year. Under present law, long-term capital gains recognized by an
individual shareholder will generally be taxed at a maximum federal marginal tax
rate of 28%, and long-term capital gains recognized by a corporate shareholder
will be taxed at a maximum federal marginal tax rate of 35%.
A shareholder (other than certain exempt shareholders including, among
others, all corporations and certain foreign individuals and entities) may be
subject to 31% backup
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withholding unless the shareholder provides its tax identification number
("TIN") to the Paying Agent and certifies that such number is correct or
properly certifies that it is awaiting a TIN, unless an exemption applies. A
shareholder that does not furnish its TIN may be subject to a penalty imposed by
the Internal Revenue Service ("IRS").
If backup withholding applies to a shareholder, the Paying Agent is
required to withhold 31% from payments to such shareholder. Backup withholding
is not an additional tax. Rather, the amount of the backup withholding can be
credited against the federal income tax liability of the person subject to the
backup withholding, provided that the required information is given to the IRS.
If backup withholding results in an overpayment of tax, a refund can be obtained
by the shareholder upon filing an income tax return.
THE FOREGOING DISCUSSION MAY NOT BE APPLICABLE WITH RESPECT TO HOLDERS OF
SHARES WHO ARE SUBJECT TO SPECIAL TAX TREATMENT UNDER THE CODE, SUCH AS NON-U.S.
PERSONS, LIFE INSURANCE COMPANIES, TAX-EXEMPT ORGANIZATIONS AND FINANCIAL
INSTITUTIONS, AND MAY NOT APPLY TO A HOLDER OF SHARES IN LIGHT OF INDIVIDUAL
CIRCUMSTANCES. THE FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS INCLUDED
FOR GENERAL INFORMATION ONLY AND IS BASED ON EXISTING TAX LAW AS OF THE DATE OF
THIS PROXY STATEMENT. DUE TO THE INDIVIDUAL NATURE OF TAX CONSEQUENCES,
SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS TO DETERMINE THE
PARTICULAR TAX CONSEQUENCES WHICH MAY BE PRESENTED DUE TO SPECIFIC
CIRCUMSTANCES APPLICABLE TO THEM (INCLUDING THE APPLICATION AND EFFECT OF ANY
STATE, LOCAL OR FOREIGN INCOME AND OTHER TAX LAWS) OF THE MERGER.
INTEREST OF CERTAIN PERSONS IN THE MERGER
Listed in the following table are the only known beneficial owners as of
the Record Date of more than five percent of Company's outstanding Shares.
Company knows of no other person or "group", as that term is used in Section
13(d)(3) of the Exchange Act, that is the beneficial owner of more than five
percent of Company's Shares.
Name and Address of Amount and Nature of Percent of
Beneficial Owner Beneficial Ownership Class (a)
------------------- -------------------- ---------
Ronald F. Cosgrave
P.O. Box 68934
Seattle, WA 98168 13,720 (b) 44.03
Bruce R. Kennedy
16430 Ambaum Blvd. S.
Seattle, WA 98148 4,206 (c) 13.50
(a) Except as otherwise indicated, beneficial ownership represents sole
voting and sole investment power with respect to the Shares.
(b) Includes 300 Shares Mr. Cosgrave has the right to acquire under stock
options which are presently exercisable.
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(c) Does not include 56 shares owned by Mr. Kennedy's spouse. Mr. Kennedy
disclaims any beneficial interest in the 56 shares.
If the Merger and the Plan of Distribution are consummated, Mr. Cosgrave
would receive approximately $5,625,200 in cash, 274 LLC Interests and $8,240 in
cash in lieu of fractional LLC Interests. In addition, Mr. Cosgrave is the
Executive Manager of LLC, and accordingly will be responsible for management of
the day to day operation of LLC following the Effective Time of the Merger.
(See "The Spin-Off Distribution" and "ANP, LLC").
If the Merger and the Plan of Distribution are consummated, Mr. Kennedy
would receive approximately $1,724,460 in cash, 84 LLC Interests and $2,472 in
cash in lieu of fractional LLC Interests. Mr. Kennedy will be only an interest
holder or member of LLC and accordingly will not be involved in its management.
INTEREST IN SECURITIES OF COMPANY
None of Company's directors, officers or employees have effected any
transaction in any equity security of Company during the past 60 days.
Except as described in this Proxy Statement, including, but not limited to,
the information disclosed in the section entitled "Interest of Certain Persons
in the Merger" as of the date hereof: (i) there have not been any contacts,
transactions or negotiations between UTR and/or Jannard and Company and/or LLC
that are required to be disclosed pursuant to the rules and regulations of the
Commission, and (ii) neither UTR nor Jannard has any contract, arrangement,
understanding or relationship with any person with respect to any securities of
Company.
The Commission has adopted Rule 13e-3 under the Exchange Act which is
applicable to certain "going private" transactions and which may be applicable
to the Merger. Pursuant to the requirements of Section 13(e) of the Exchange
Act and Rule 13e-3 promulgated thereunder, Company, as issuer of the class of
equity securities that is the subject of the Merger, and Ronald F. Cosgrave,
Bruce R. Kennedy, and James H. Jannard have filed with the Commission a Schedule
13E-3, as amended (the "Schedule 13E-3"), relating to the transactions
contemplated by the Merger, on the assumption that Section 13(e) and Rule 13e-3
are applicable to the Merger. The information and disclosures of Company, LLC
and UTR are required to make under Rule 13e-3 are contained in this Proxy
Statement or in the Schedule 13e-3. With the exception of James H. Jannard, all
of the individuals filing the Schedule 13E-3 adopt the Board's analysis of the
fairness of the transaction as their own.
INFORMATION CONCERNING COMPANY
Company is an Alaska corporation with its principal executive offices
located at 19048 37th Avenue South, Seattle, Washington 98188. The telephone
number of such offices is (206) 433-0730.
The principal business of Company is real estate investment and operations.
Company holds for investment purposes several parcels of undeveloped land in the
vicinity of Fairbanks, Alaska, as well as the Island. The primary operating
properties include a facility building at the
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Fairbanks International Airport, a condominium unit in Honolulu, Hawaii, and
lodging facilities on the Island. The lodging facilities along with the Island
will be transferred in the Merger.
In December 1996, the Board concluded that certain properties having
depreciated values should be sold for tax reasons. In anticipation of the
Merger and Spin-Off Distribution, Company, through an independent real estate
broker, conducted a sealed bid auction for Company's leasehold interest in
the airport facilities building located in Fairbanks, Alaska (the "Airport
Building") and for other miscellaneous undeveloped properties owned by
Company in and around Fairbanks, Alaska. The only offer for any of these
properties was a cash offer of $250,000 in cash for the Airport Building.
Since this price was considerably below the assessed value of the Airport
Building, the Board rejected the offer. On December 31, 1996, Company sold
the Airport Building to Michael Shimasaki, a Director of Company and its
President, for $450,000. This price was based on the amount Company would
receive for the Airport Building if it were sold at its assessed value, less
ten percent (10%). No commission was paid on the sale of the Airport
Building. As a result of the sale of the Airport Building, Company
recognized a gain of $262,435 which was offset by existing current net
operating losses. If this sale had not been consummated prior to December 31,
1996, Company would have lost the benefit of the net operating loss.
Furthermore, a sale in 1997 would have created "earnings and profits" for
Company which would cause the Spin-Off Distribution to be taxable for most
shareholders at a higher rate applicable to dividends rather than the long
term capital gains rates which will apply to most shareholders. As part of
the agreement with Mr. Shimasaki, Company or its successor in interest (LLC)
will divide any gain received by Mr. Shimasaki if the Airport Building is
sold by Mr. Shimasaki for more than $450,000. This sale was unanimously
approved by all of the directors including the non-employee directors. The
Board concluded that the use of assessed value (less 10%), and the agreement
to share any subsequent gain, resulted in a fair price. This price, compared
with the tax benefits that would have been lost, resulted in a transaction
that was clearly in the best interest of all shareholders.
Going forward and prior to the Closing of the Merger and the Spin-Off
Distribution, Company will continue to attempt to sell its assets, with an
emphasis on depreciated assets, which will result in a loss recognized in the
year of the Spin-Off Distribution. See "PROPOSAL: The Merger - Tax
Consequences of the Merger" above and "THE SPIN-OFF DISTRIBUTION - Tax
Consequences of the Spin-Off Distribution" below.
Set forth below under "SELECTED FINANCIAL INFORMATION CONCERNING COMPANY"
is certain financial information with respect to Company. The information
regarding Company is excerpted from the information contained in Company's
Annual Report on Form 10-K for the year ended December 31, 1995 and its
Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, both as
filed with the Commission. More comprehensive financial information is included
in the section below entitled "COMPANY FINANCIAL STATEMENTS AND PRO FORMA
FINANCIAL INFORMATION". Additional non-financial information regarding Company
is set forth below in the section "ALASKA NORTHWEST PROPERTIES INC.:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS."
INFORMATION CONCERNING UTR AND JANNARD
UTR is an Alaska corporation. It was organized November 15, 1996 for the
sole express purpose of the Merger and has not conducted any unrelated
activities since its organization. The principal office of UTR is located at
Post Office Box 1707, Eastsound, WA 98245. Its telephone number is (360) 376-
6355. All outstanding shares of capital stock of UTR are owned by James H.
Jannard.
James H. Jannard, is the founder of Oakley, Inc., a Washington corporation
("Oakley"), an innovation-driven designer, manufacturer and distributor of high-
performance sunglasses and
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goggles. Mr. Jannard has been Chairman of the Board and President of Oakley
since its inception in 1975. Mr. Jannard's address and telephone number are the
same as that of UTR.
Bobbie Jannard is the spouse of James H. Jannard's. Her address and
telephone number are the same as that of UTR.
BACKGROUND OF THE MERGER
Since approximately 1980, Company has worked to consolidate and gain total
ownership of the Island believing that it would have considerable appreciation
potential do to its uniqueness and the popularity of the San Juan Archipelagos.
Over the years, Company has continued to maintain the Island in its natural
state while generating enough income through rentals to cover operating and
carrying costs associated with the Island.
During the 1990's, several privately held islands and large parcels of
waterfront property in San Juan County were sold to individuals, indicating
increasing values and a demand for large, unique, and private parcels of land.
In April 1996, the Board of Directors of Company instructed management to
prepare a list of potential buyers of the Island who would be willing and able
to pay a premium over the market value for such a unique parcel such as the
Island. The Board's decision was spurred on by the tremendous wealth and
disposable income generated by the stock market and by recent sales activities
of large parcels in the San Juan Islands.
In June 1996, Company distributed to representatives of William H. Gates
III, Paul Allen, Orin Edson, Frank Pritt, and Scott Oki a photo journal and
other information regarding the Island. These individuals have contacts to the
Pacific Northwest and based on publicly available information were believed to
be financially qualified to acquire as unique a property as the Island. In the
following months, none of the individuals that received a photo journal
demonstrated any significant interest in purchasing the Island, and no offers,
formal or informal, were made for the purchase of the Island. Other than James
H. Jannard, none of the individuals who have filed the Schedule 13E-3 had any
other contacts or negotiations relating to the sale of the Island.
On September 25, 1996, management met with Robert Whitman, a
representative of CB Commercial brokers of San Francisco, California. Mr.
Whitman advised Company that he had been involved with many high valued and
unique real estate transactions all over the United States. Company
initially approached Mr. Whitman in order to evaluate whether to engage him
on the marketing of the Island. The parties discussed the marketing of the
Island, the use of a "sealed bid" procedure to sell the Island, and the
existence of several "unnamed" potential buyers in California. None of these
potential buyers ever came forward with an offer, formal or informal for the
Island or Company. Because of the subsequent developments discussed below, the
Company never retained Mr. Whitman to assist it in the marketing of the Island.
The Company did discuss with Mr. Whitman the procedure whereby Company would
accept offers during the 30 day "market check" period discussed below,
however no formal or informal offers were received during this period.
On October 3, 1996, Mr. Michael W. Shimasaki, President of Company, met
with Mr. Wally Gudgell of Gudgell Properties. Mr. Gudgell, who was not retained
by Company in its attempts to sell the Island, is an independent real estate
agent with over 20 years of experience
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selling properties in and around the San Juan Islands, including the highest
priced sale ($8 million) in San Juan County in 1995. Prior to this meeting,
Company had no other contacts with Mr. Gudgell, but was aware of his
reputation and knowledge of properties in San Juan County. At the meeting,
Mr. Gudgell stated, based on his experience with the sales of unique, large
parcels of property, including islands, and on other recent sales of
properties in the San Juan Islands, that he believed the Island was worth
between $15 and $18 million. Mr. Gudgell was not asked to nor did he prepare
a formal opinion or appraisal. The parties discussed the potential sale of
the Island and commissions, if any, to be received by Gudgell Properties as a
result of such a sale. At the meeting, Mr. Gudgell noted that James H.
Jannard had bought various properties in San Juan County, in which Mr. Gudgell
had served as a broker, and could be interested in the Island.
On October 8, 1996, Mr. Gudgell informed Company of Jannard's interest in
the Island and Jannard's desire to visit the Island.
On October 15, 1996, Jannard visited the Island along with Mr. Shimasaki
and Mr. Gudgell.
On October 18, 1996, Mr. Shimasaki met with counsel to discuss the
potential transaction, the disclosure obligations relating to such a
transaction, and the possible structures to such a transaction.
On October 20, 1996, Jannard visited the Island again.
On October 21, 1996, Jannard offered to purchase the Island for $12 million
in cash pursuant to a real estate purchase and sale agreement. This offer
contained a provision that Jannard would pay up to $15 million for the Island,
if an appraisal indicated that the value of the Island was greater than $12
million. No appraisal was undertaken primarily because the Board was not
willing to sell the Island even if the appraised market value was determined to
be at the high end of the perceived range. Furthermore, in the Board's judgment
such appraisal could be detrimental to the negotiation process since it could be
perceived as setting a price the Board was unwilling to accept or be viewed by
prospective purchasers as setting a ceiling on what they should offer.
On October 23, the Board of Directors of Company met to discuss the October
21 offer by Jannard. After considering the potential $15 million price, the
Board determined that it was not in the best interests of Company and its
shareholders to accept Jannard's offer. On October 25, the offer expired by its
terms. The Board, along with input from management and counsel, then considered
its options and agreed that Company should submit a counter-offer that was
higher than Jannard's October 21 expired offer. This counter offer would be in
the form of a proposed letter of intent to engage in a merger which would result
in the transfer of the Island to Jannard.
On October 26, 1996, management of Company, with Board approval,
delivered a letter of intent for Jannard's consideration (the "Letter of
Intent"). The Letter of Intent provided that Company would, prior to the
closing of the Merger, transfer all of its assets into a newly formed limited
liability company (LLC), the LLC Interests would then be distributed to
Company's shareholders, and Company would then merge with a newly formed
corporation owned by Jannard. The proposed asking price was $24.5 million.
By its terms, the Letter of Intent would expire if not executed by the
parties, November 1, 1996. The $24.5 million counter-offer was based on
several factors, including the
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fact that the Board believed that the current market value (as defined by the
$12-$15 million offer by Jannard) was too low for such an unique and one of a
kind property. While there was some concern that the $24.5 might not be the
best price, there was even greater concern that delay or insisting on higher
price or an auction could result in the loss of the most attractive offer
that was likely to be available in the forseeable future. However, Company
was able to negotiate the inclusion of a "market check" provision in the
Reorganization Agreement whereby Company could, during a thirty day period
beginning the day the transaction was publicly announced, accept an offer
that exceeded the price to be paid by Jannard.
On October 28, 1996, after considerable negotiations between the
parties, Jannard delivered a response to the Letter of Intent whereby Jannard
would pay $20 million in cash and $2.2 million in other properties (the
Additional Properties). On October 29, the Board of Directors met via
teleconference to consider Jannard's counter-offer. After due consideration,
the Board determined that the $22.2 purchase price was fair and in the best
interests of the shareholders of Company, particularly for the reasons
discussed above in the preceeding paragraph, and especially because of the
presence of the 30 day "market check", which would allow higher offers to be
pursued. The Board then instructed counsel to begin negotiating a definitive
agreement that would provide for a sale of the Island to Jannard for the
$22.2 million.
On October 30, 1996, the parties executed a Confidentiality Agreement (the
"Confidentiality Agreement") relating to all information exchanged by the
parties concerning the negotiations for the sale of the Island to Jannard. The
Confidentiality Agreement provided that the terms of the Letter of Intent are
confidential and for the parties consideration only.
On October 31, 1996, Mr. Shimasaki met with James and Bobbie Jannard and
Mr. Gudgell on the Island to inspect the runway on the Island and other
facilities of the Island.
On November 5, 1996, counsel to Company delivered to Jannard the initial
draft of the Reorganization Agreement. Over the next several days, Company,
Jannard and their respective counsels negotiated the terms and conditions of the
Reorganization Agreement.
On November 15, 1996, by unanimous consent, the Board of Directors approved
the Reorganization Agreement and a draft of the Plan of Distribution and
instructed management to execute such agreements and to do any and all things
necessary to effectuate the transactions contemplated by the Reorganization
Agreement and Plan of Distribution.
On November 18, 1996 Company, UTR, LLC and Jannard executed the
Reorganization Agreement. In addition, Jannard and Company executed a Real
Estate Purchase and Sale Agreement relating to the Additional Properties. The
same day, Company issued a press release (the "Press Release") announcing that
Company had agreed to sell the Island and, in a transaction relating to the sale
of the Island, spin-off its assets not relating to the Island.
The Reorganization Agreement provided that within thirty (30) days of the
issuance of the Press Release, if Company receives an offer for the Island or
Company, along with a non-refundable $10,000,000 cash deposit, the Board of
Directors of Company may determine that such offer is more favorable to, and in
the best interests of, the shareholders of Company. UTR would then have three
days (3) from the receipt of notice of such an offer to make a matching offer.
On November 27, 1996, Company was notified by Robert Whitman, of CB Commercial
that certain unnamed parties could be interested in making such an offer. Mr.
Whitman inquired
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as to the procedure for submitting such an offer to Company. Company responded
to Mr. Whitman and described the procedures for such an offer as they are
described above. However no offers, formally or informally were submitted by
Mr. Whitman.
On December 18, 1996, the thirty day period during which the Board could
consider another offer for the Island expired.
On December 11, 1996, Company and LLC executed the Plan of Distribution.
STRUCTURE OF THE MERGER
In the Merger, each outstanding Share will be converted into the right to
receive the Per Share Obligation in cash, without interest. This amount is
expected to be approximately $410 per Share, but will be finalized at the
Closing of the Merger. Each share of common stock of UTR issued and outstanding
immediately prior to the Effective Time will be converted into and become one
Share in the Merger. Company will thereupon have one shareholder, James H.
Jannard.
The acquisition of the Shares is structured as a cash merger, with Company
as the Surviving Corporation, to ensure that Jannard will acquire all
outstanding Shares from all public holders thereof.
ACCOUNTING TREATMENT OF THE MERGER
The Merger will be accounted for under the "purchase" method of accounting,
whereby the purchase price for Company will be allocated to the identifiable
assets and liabilities of Company based on their respective fair values.
FINANCING THE ACQUISITION
UTR has estimated that the total amount of consideration required by UTR to
consummate the Merger and to pay related fees and expenses will be approximately
$22.7 million, of which approximately $500,000 will be allocated for estimated
fees, commissions, expenses and other items surrounding the transaction.
Of the $22.2 million UTR has agreed to pay Company in the Merger, $20
million will be in cash and $2.2 million will be in property. UTR will fund the
$20.0 million from funds provided by the Jannards. The $2.2 million in
properties (the "Additional Properties") will be transferred to Company by
Jannard, the sole shareholder of UTR, who owns or controls ownership of the
entities that own the Additional Properties.
SALE OF THE ADDITIONAL PROPERTIES
Simultaneous with the execution of the Reorganization Agreement, Jannard
and Company entered into a Real Estate Purchase and Sale Agreement that provides
for the transfer from Jannard to Company, immediately prior to the Spin-Off
Distribution, of the Additional Properties. In exchange for the Additional
Properties, Company will execute a note payable to Jannard for
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$2.2 million (the "Note"). The Note is payable December 31, 1998, and bears
interest at the rate of 8% per annum. As contemplated by the Spin-Off
Distribution, the Additional Properties will then be distributed to LLC prior
to the Merger. After the Effective Time, Company, as the Surviving
Corporation, will then owe the $2.2 million, represented by the Note, to
Jannard, who will be Company's sole shareholder. Accordingly, the present
shareholders will have no liability for the Note, either directly or
indirectly, through LLC.
The Additional Properties consist of five parcels of land located in the
San Juan Islands:
The "Schoen Property" is a parcel containing approximately 58 acres of
woods, pasture, and orchard along the east side of West Sound on Orcas
Island, Washington. The property includes 800 feet of shoreline with view
property. Orcas Island is located in San Juan County, Washington. The
assessed value of the Schoen Property is $1.358 million.
The "Lookout Mountain Property" is approximately 3.4 acres of view
property located on the top of Lookout Mountain on Orcas Island,
Washington. Orcas Island is located in San Juan County, Washington. The
assessed value of the Lookout Mountain Property is $240,000.
The "Crane Island Lots" are three separate lots all approximately 1
acre in size with waterfront and view property. One of the lots contains a
1,500 square foot house. Crane Island is located in San Juan County,
Washington. The assessed value of the three Crane Island Lots are,
$283,000, $181,000, and $184,600 respectively.
The $2.2 million dollar value placed on the Additional Properties was
based on the price paid for all of such properties in arms length
transactions by Jannard, or an affiliate of Jannard, less ten percent (10%)
of such price. Members of the Board viewed the properties and concluded,
regardless of their resale value, the total consideration offered by Jannard
was very attractive for all of the reasons discussed above.
THE REORGANIZATION AGREEMENT
Set forth below is a description of the principal terms of the
Reorganization Agreement which are of continuing applicability. This
description is qualified in its entirety by reference to the Reorganization
Agreement, which is attached as Exhibit A hereto and incorporated herein by this
reference. The Merger Agreement is attached as Exhibit 1.1 (A) and (B) to the
Reorganization Agreement. Capitalized terms used within this section and not
defined herein shall have that meaning as given in the Reorganization Agreement.
THE MERGER
GENERAL. The Reorganization Agreement provides that at the Effective Time,
UTR will be merged with and into Company.
At the Effective Time, upon the filing with the Commissioner of Commerce
and Economic Development of Alaska (the "Commissioner") of the Articles of
Merger and a Plan of Merger and the issuance of a Certificate of Merger by the
Commissioner (or at such time thereafter as is provided in the Merger
Documents), UTR will be merged into Company in accordance with the applicable
provisions of the ACC. At the Effective Time, (a) each then-remaining
outstanding Share (other than Dissenting Shares) will be converted into the
right to receive the Per Share Obligation in cash, without interest; (b) all
then-outstanding common shares of UTR will be
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canceled; and (c) all outstanding Dissenting Shares will not be converted into
the right to receive the Per Share Obligation pursuant to the Merger, but will
be entitled to receive payment of the fair value of such Shares in accordance
with the provisions of the ACC. From and after the Effective Time, all
outstanding Shares shall no longer be outstanding and shall automatically be
canceled and retired and shall cease to exist, and the holders of certificates
formerly representing Shares shall cease to have any rights with respect thereto
other than to receive the Per Share Obligation or dissenter's rights they have
perfected under the ACC.
At the Closing, the parties will deliver a "Closing Schedule" which shall
detail the payments to be made by the parties in connection with the Closing
prior to the Effective Time. The Per Share Obligation shall be determined as
follows:
The $20,000,000 payment to be made in connection with the Merger (the
"Merger Consideration") shall be adjusted immediately prior to Closing in the
following manner to arrive at the "Net Merger Consideration":
(a) Debit (an increase) or Credit (a decrease) the Merger
Consideration to the extent that the final agreed value of the
Additional Properties is less than or exceeds $2,200,000.
(b) Credit the Merger Consideration for the $100,000 payment to
be made by Company for the repair or replacement of the submarine
cable, or in lieu of such repair or replacement, as described below in
Section 8.2.3 of the Reorganization Agreement.
(c) Debit the Merger Consideration for the cost of repairs to
the Additional Properties up to $100,000 as designated by Company
pursuant to Section 7.7 of the Reorganization Agreement.
(d) Debit the Merger Consideration for any Closing expenses
payable by UTR as set forth in Section 7.4.2 and 7.4.3 of the
Reorganization Agreement which expenses shall be paid at Closing by
LLC or a mutually acceptable escrow agent to the appropriate third
party.
As set forth on the Closing Schedule, the net amount distributable by
Company to its shareholders in the Merger (the "Net Distributable Amount"),
shall be the Net Merger Consideration adjusted as follows:
(x) Credit the Net Merger Consideration for an amount as
determined by the Board of Directors of Company to be sufficient to
cover the cost of the fractional interest of LLC and to provide LLC
with sufficient working capital.
(y) Credit the Net Merger Consideration for any expenses payable
by Company and UTR as set forth in Section 7.4.1, 7.4.2 and 7.4.3 of
the Reorganization Agreement which expenses shall be paid at Closing
by LLC or a mutually acceptable escrow agent to the appropriate third
party.
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(z) Credit the Net Merger Consideration for any additional
expenses payable by Company prior to the establishment of the Per
Share Obligation and for a reserve for contingencies assumed by the
LLC, including, without limitation, the estimated 1997 tax liability
arising under the transaction to be assumed and paid by LLC under
Section 7.4.1 of the Reorganization Agreement.
The Per Share Obligation shall then be determined by dividing the number of
outstanding Company Common Share Equivalents by the Net Distributable Amount.
"Company Common Share Equivalents" consist of all of the outstanding Company
Common Shares and such shares that are reserved for the exercise of outstanding
stock options. Any disputes over an item of the Closing Schedule are to be
resolved first by good faith negotiations of the parties and then by arbitration
as provided in Section 11.9 of the Reorganization Agreement.
The reserve for contingencies is approximately $310,000. Such amount is
to be reserved for the payment of any tax liability at the state or federal
level due or tax liability arising under the transaction as well as for other
unknown liabilities for which LLC is responsible for pursuant to the
Reorganization Agreement. This amount reduces the Per Share Obligation by
approximately $10 per Share. Although the Per Share Obligation is subject to
adjustment at Closing as described above, no adjustment will be made after
the Closing in the event actual liabilities are more of less than the reserve.
A pro forma version of the Closing Schedule, which is subject to further
adjustment, is attached to this Proxy Statement as Exhibit C. The Closing
Schedule will be adjusted and finalized immediately prior to the Effective Time.
ADDITIONAL PROVISIONS OF THE REORGANIZATION AGREEMENT
CONDITIONS OF THE MERGER. The Reorganization Agreement provides that the
obligations of Company and UTR to consummate the Merger are, among other things,
subject to the satisfaction of the following conditions: (a) the Merger shall
have been approved by two-thirds (2/3) of the shareholders of Company; (b) no
provision of any applicable law or regulation and no judgment, injunction, order
or decree shall prohibit or restrain the consummation of the Merger; (c) all
Governmental Approvals, if any, shall have been obtained, with such exceptions
as would not, individually or in the aggregate, have a material adverse effect
on UTR or Company's business; (d) the Additional Properties shall have been
transferred to Company by Jannard, and (e) the Spin-Off Distribution shall have
been consummated.
The obligations of UTR and Jannard to consummate the Merger are, among
other things, subject to the satisfaction of the following conditions unless
waived by UTR and Jannard: (a) Company shall have paid $100,000 to repair the
submarine cable that services the Island, or have paid Jannard $100,000 in lieu
of such repair or replacement, and (b) Company shall have caused a title
insurance company to issue a title insurance policy relating to the Island.
The obligations of Company and LLC to consummate the Merger are, among
other things, subject to the satisfaction of the following conditions unless
waived by Company and LLC: (a) Jannard shall have made certain repairs to the
Additional Properties as described in Section 7.7 of the Reorganization
Agreement; (b) a majority of the holders of record who, pursuant to the Spin-Off
Distribution, will not receive any LLC Interests shall have approved the Merger,
(c) no more than five percent (5%) of the outstanding Shares shall have filed
written objections to the Merger
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and otherwise effected any right to dissent and have the rights provided under
the ACC; and (d) Company shall have received from the Department of Revenue of
the State of Washington a letter ruling as to the real estate excise tax,
including the Land Bank tax payable with respect to the transactions
contemplated by the Reorganization Agreement.
INTERIM OPERATIONS OF COMPANY. The Reorganization Agreement provides that,
until the Effective Time, Company and LLC have agreed to carry on their
respective businesses as they relate to the Island in the usual, regular and
ordinary course in substantially the same manner as previously conducted.
Company has agreed to promptly notify UTR of any event or occurrence or
emergency not in the ordinary course of business of Company that is material and
adverse to the Island. Prior to the Effective Time, Company has agreed not to,
without the prior written consent of UTR, or except as specifically contemplated
by the Reorganization Agreement: (a) amend its Articles of Incorporation or
Bylaws; (b) authorize for issuance, issue, deliver or sell any additional
Shares, or securities convertible into Shares, or issue or grant any rights,
options or other commitments for the issuance of Shares or such convertible
securities; (c) dispose of or acquire any material properties or assets except
in the ordinary course of business; (d) engage in any activities or transactions
that are outside the ordinary course of Company's business other than certain
permitted activities under the Reorganization Agreement; or (e) incur any
indebtedness for borrowed money by way of direct loan, sale of debt securities,
purchase money obligation, conditional sale, guarantee, or otherwise, except in
the ordinary course of business consistent with prior practice.
INDEMNIFICATION. LLC has agreed to defend, indemnify, and hold the
Surviving Corporation (reference to which shall for the purposes of the
Reorganization Agreement include claims naming Jannard, Company and UTR to the
extent covered by Article IX of the Reorganization Agreement) harmless from and
against, and to reimburse the Surviving Corporation with respect to, any and all
losses, damages, liabilities, claims, judgments, settlements, fines, costs, and
expenses of every nature whatsoever incurred by the Surviving Corporation by
reason of or arising out of or in connection with: (i) a breach of a
representation or warranty of Company and/or LLC contained in the Reorganization
Agreement or in any certificate or other document executed and delivered to UTR
pursuant to the provisions of the Reorganization Agreement, (ii) the failure,
partial or total, of LLC or Company to perform any agreement or covenant
required by the Reorganization Agreement to be performed by it or them, (iii)
any liabilities of Company which accrue prior to the Effective Time, or (iv) any
tax liabilities of Company accruing prior to Closing and for which payment
thereof is not otherwise contemplated by the Reorganization Agreement.
The Surviving Corporation has agreed to defend, indemnify, and hold LLC
harmless from and against, and to reimburse LLC with respect to, any and all
losses, damages, liabilities, claims, judgments, settlements, fines, costs, and
expenses of every nature whatsoever incurred by LLC and/or its members by reason
of or arising out of or in connection with: (i) any breach, or any claim
(including claims by parties other than LLC) that if true, would constitute a
breach, by UTR of any representation or warranty of UTR contained in the
Reorganization Agreement or in any certificate or other document executed and
delivered to Company or LLC pursuant to the provisions of the Reorganization
Agreement, and (ii) the failure, partial or total, of UTR to perform any
agreement or covenant required by the Reorganization Agreement to be performed
by it.
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REPRESENTATIONS AND WARRANTIES. In the Reorganization Agreement, Company
and LLC have made customary representations and warranties to UTR and Jannard
with respect to, among other things: (a) that Company and LLC are each duly
organized and validly existing corporations or limited liability companies in
good standing under the laws of the state of their respective incorporation; (b)
that subject to approval of the Merger Agreement and Merger, and the Spin-Off
Distribution, they have the requisite corporate power to enter into and carry
out the terms of the Reorganization Agreement; (c) that Company and LLC are each
qualified to do business as a foreign corporation in the jurisdictions where
failure to do so would have a material adverse affect on the business; (d) that
the execution and delivery of the Reorganization Agreement has been duly
authorized by Company and LLC; (e) that the Reorganization Agreement constitutes
the legal and binding obligation of Company and LLC; (f) that the execution and
delivery by Company of the Reorganization Agreement does not violate any
provision of Company's Articles of Incorporation or Bylaws or LLC's Limited
Liability Company Agreement, or any Governmental Approvals obtained by Company
and/or LLC, require the consent of any third party, or violate any material
contract, agreement or judgment to which either Company or LLC is bound; (g)
regarding Company's capitalization; (h) that Company's Financial Statements have
been prepared in accordance with applicable rules and regulations; (i) regarding
defaults or violation of any term, condition or provision of: Company or LLC's
governing documents, any judgment, decree or order applicable to Company or LLC;
or any loan or credit agreement, note, bond, mortgage, indenture, contract,
agreement, lease, license or other instrument to which Company or LLC is now a
party or by which it or any of its properties or assets may be bound, except for
defaults and violations which, individually or in the aggregate, would not have
a material adverse effect on the Business Condition of Company; (j) that neither
Company nor LLC is a party to, nor threatened with, any legal action or other
proceeding or investigation before any court, any arbitrator of any kind or any
government agency, and to the best of Company and LLC's knowledge, neither
Company nor LLC is subject to any potential action, proceeding, investigation or
claim, which if adversely determined, would have a material adverse effect on
the Business Condition of Company or the Island; (k) that Company has complied
with relevant rules and regulations promulgated pursuant to ERISA; (l) that
since December 31, 1995, there has not occurred: any material adverse change
in the Business Condition of Company or the Island or any development or
combination of developments of which management of Company or LLC has knowledge
which is reasonably likely to result in such a change; or any damage,
destruction or loss, whether or not covered by insurance, materially and
adversely affecting the Business Condition of Company or the Island, except in
the ordinary course of business consistent with Company and LLC's past practice;
(m) regarding environmental matters pertaining to the Island, and (n) that
neither Company nor LLC have retained any brokers or consultants entitled to be
paid commissions other than as disclosed to UTR and Jannard.
In addition, specifically relating to the Island, Company has represented
to UTR and Jannard that: (a) to the best of Company's knowledge, there are no
parties or trespassers in possession or which have a right to possession of all
or any portion of the Island, and there are no leases or licenses affecting the
Properties; (b) Company has received no notice of any pending condemnation or
similar proceeding or assessment affecting the Island, or any part thereof; (c)
no person or entity has any right of first refusal or option to acquire any
interest in the Island or any part thereof, and Company has not sold or
contracted to sell the Island or any portion thereof or
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interest therein other than to UTR; and (d) no labor, material or services have
been furnished in, on or about the Island or any part thereof as a result of
which any enforceable mechanics', laborer's or materialmen's liens or claims
might arise.
TERMINATION. The Reorganization Agreement and the Merger Agreement may be
terminated at any time prior to the Effective Time, whether before or after
approval by the shareholders of Company:
(a) By mutual consent evidenced in writing by the Boards of Directors of
Company and UTR;
(b) By the Board of Directors of Company: (i) if the Effective Time has
not occurred on or before March 15, 1997; (ii) if UTR shall have failed, in
any material respect, to perform or comply with its obligations under the
Reorganization Agreement within ten (10) days after notice thereof has been
given to UTR; or (iii) if Company receives an Offer (the "Offer"), as
defined in Section 7.9 of the Reorganization Agreement, prior to December
18, 1996 to effect an Acquisition Proposal, as defined in Section 7.9 of
the Reorganization Agreement, and the Board of Directors of Company
determines that such Offer is more favorable to, and in the best interests
of, the shareholders of Company and UTR elects not to make a Matching
Offer, as defined in Section 7.9 of the Reorganization Agreement;
(c) By the Board of Directors of UTR: (i) if the Effective Time has not
occurred on or before March 15, 1997; or (ii) if Company and/or LLC shall
have failed, in any material respect, to perform or comply with its
obligations under the Reorganization Agreement within ten (10) days after
notice thereof has been given to Company.
In the event UTR elects not to exercise its right to match the Offer,
Company shall upon Closing of the transaction contemplated by the Offer pay to
UTR a "break-up fee" of $222,000.00.
The affirmative vote of holders of two-thirds (2/3) of the Shares entitled
to vote at the meeting is required to approve the Merger. If the Merger is not
approved by the shareholders, the parties will neither consummate the Merger as
contemplated by the Reorganization Agreement nor the Spin-Off Distribution as
contemplated by the Plan of Distribution. THE BOARD OF DIRECTORS OF COMPANY
BELIEVE THAT THE MERGER, MADE IN CONNECTION WITH THE SPIN-OFF DISTRIBUTION, IS
FAIR AND IN THE BEST INTERESTS OF THE SHAREHOLDERS. ACCORDINGLY, THE BOARD OF
DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE MERGER AND MERGER AGREEMENT.
DISSENTERS' RIGHTS
Dissenting Shareholders who hold Dissenting Shares of record as of the
Effective Time of the Merger are entitled to appraisal rights under Sections
10.06.574 through 10.06.582 of the ACC (the "Alaska Dissenters' Rights
Provisions"). A copy of the Alaska Dissenters' Rights Provisions is reprinted
in its entirety in Exhibit D to this Proxy Statement. All references in the
Alaska Dissenters' Rights Provisions and in this discussion to a "shareholder"
are to the record
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holder of Dissenting Shares as to which dissenters' rights are asserted. A
person having a beneficial interest in Dissenting Shares that are held of record
in the name of another person, such as a broker or nominee, must act promptly to
cause the record holder to follow the steps summarized below properly and in a
timely manner to perfect whatever dissenters' rights the beneficial owner may
have.
The following discussion is not a complete statement of the law relating to
dissenters' rights and is qualified in its entirety by reference to Exhibit D.
This discussion and Exhibit D should be reviewed carefully by any Dissenting
Shareholder who wishes to exercise statutory dissenters' rights or who wishes to
preserve the right to do so, since failure to comply with the procedures set
forth herein or therein will result in the loss of dissenters' rights. BECAUSE
OF THE COMPLEXITY OF THE PROCEDURES FOR ENFORCING THESE RIGHTS, SHAREHOLDERS WHO
CONSIDER EXERCISING SUCH RIGHTS SHOULD SEEK THE ADVICE OF COUNSEL.
Dissenting Shareholders of record who desire to exercise their dissenters'
rights must satisfy the following conditions. Dissenting Shareholders must: (i)
file a written objection to the Merger (the "Objection") before the taking of
the vote on the Merger, (such demand must be delivered to Company at 19048 37th
Avenue South, Seattle, Washington 98188, Attention: Corporate Secretary), and
(ii) not vote in favor of the Merger. Such Objection may also be delivered at
the Meeting. The Objection must specify: (i) an election to dissent, (ii) the
Dissenting Shareholder's name and mailing address, (iii) the number of
Dissenting Shares for which payment is demanded, and (iv) a demand for payment
of the fair value of the Shares if the Merger is consummated. In order to
constitute a valid exercise of rights to payment, the written demand must be
received by Company before the taking of the vote on the Merger. The failure to
vote for the Merger or a vote against the Merger by a holder of Shares will not
be deemed to satisfy such notice requirement. The Objection must be executed
by or for the Dissenting Shareholder of record, fully and correctly, as such
Dissenting Shareholder's name appears on the certificate or certificates
representing his Dissenting Shares. If the Dissenting Shares are owned of
record in a fiduciary capacity, such as by a trustee, guardian, or custodian,
such Objection must be executed by the fiduciary. If the Dissenting Shares are
owned of record by more than one person, as in a joint tenancy or tenancy in
common, such Objection must be executed by all record owners. An authorized
agent, including an agent for two or more record owners, may execute the
Objection for a shareholder of record; however, the agent must identify the
record owner and expressly disclose the fact that, in exercising the Objection,
such person is acting as agent for the record owner.
A record owner, such as a broker, who holds Dissenting Shares as a nominee
for others, may exercise dissenters' rights with respect to the Dissenting
Shares held for all or less than all beneficial owners of Dissenting Shares as
to which such person is the record owner. In such case, the Objection must set
forth the number of Dissenting Shares covered by such Objection. Where the
number of Dissenting Shares is not expressly stated, the Objection will be
presumed to cover all Dissenting Shares outstanding in the name of such record
owner. Beneficial owners who are not record owners and who intend to exercise
appraisal rights should instruct their record owners to comply strictly with the
statutory requirements with respect to the exercise of appraisal rights, before
the taking of the vote on the Merger.
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At the time of the filing the Objection, or within thirty (30) days after
the filing of the Objection, the Dissenting Shareholder shall submit to Company
the certificates representing the Shares for which payment is claimed, if
certificates have been issued. Company will note conspicuously on the
certificates, or on a separate document if certificates have not been issued for
the Shares, that an Objection has been filed, and shall return the certificates,
or the separate document indicating the Objection, to the Dissenting Shareholder
or to that person submitting on behalf of the Dissenting Shareholder.
Within fifteen (15) days after the expiration of the period that
shareholders may file their notice of election to dissent, or within fifteen
(15) days after the Effective Time, whichever is later, Company will make a
written offer (the "Offer") to pay each dissenting Shareholder who properly
delivered an Objection the amount Company estimates to be the fair value of the
Dissenting Shareholders' Shares. Such an Offer will be accompanied by: (i)
Company's balance sheet as of December 31, 1996, (ii) a profit and loss
statement for the fiscal year ended December 31, 1996, (iii) a statement of the
total number of Shares with respect to which Objections have been received and
the total number of holders of these Shares, (iv) and a copy of Sections
10.06.578 and 10.06.580 of the ACC.
Company will send along with the Offer an advance payment (the "Advance
Payment"), in the amount offered in the Offer, to each Dissenting Shareholder
who submitted its Shares to Company, or to whom notice was sent if the Shares
were certificateless. In the alternative, if the Dissenting Shareholder has not
submitted its Share certificates, if certificates were issued for the Shares,
Company shall include an advance payment notice (the "Advance Payment Notice")
of the amount that will be sent upon receipt of the Share certificates. Any
Advance Payment or Advance Payment Notice shall contain advice to the Dissenting
Shareholder that acceptance of the payment does not constitute a waiver of the
Dissenting Shareholder's right to dissent.
In the event the Dissenting Shareholder is dissatisfied with the Offer, the
Dissenting Shareholder may, within thirty (30) days of the mailing of the Offer
by Company, deliver to Company an objection to the Offer in writing (the "Offer
Objection"). In the absence of an Offer Objection, Company may assume that a
Dissenting Shareholder has agreed that the amount in the Offer represents the
fair value of the Shares. Such a Dissenting Shareholder will then have no
interest in any litigation begun pursuant Section 10.06.580.
In the event that a Dissenting Shareholder delivers an Offer Objection
within thirty (30) days of Company mailing such Offer, Company shall, within
twenty (20) days from the expiration of such a thirty (30) day period, file an
action in the Superior Court in Juneau, Alaska, requesting that the fair value
of the Shares be determined. The court shall then establish the value of the
Shares. Pursuant to Section 10.06.580 of the ACC, the value of the Shares shall
be the fair value of the Shares on the close of business prior to the day of the
Meeting, plus accrued interest.
Dissenting Shareholders owning Shares considering seeking payment should
consider that the fair value of their Dissenting Shares determined under Alaska
Dissenters' Rights Provisions could be more than, the same as, or less than the
consideration they are to receive pursuant to the terms of the Reorganization
and Merger Agreements. Moreover, Company may argue in an appraisal proceeding
that, for purposes of such a proceeding, the fair value of the Shares is less
than the Per Share Obligation received in the Merger. (See Exhibit D to this
Proxy Statement for
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further information regarding the procedures required for perfecting appraisal
rights in connection with the Merger).
The costs of the appraisal proceeding shall be paid as incurred by the
parties to the proceeding, except that the court may assess the costs, expenses
or fees incurred by Company against all or some of the Dissenting Shareholders,
in the amount the court finds that the refusal to accept Company's Offer was
arbitrarily, vexatious, or otherwise in bad faith. Similarly, the court may, in
its discretion, apportion or assess all or a part of the costs, expenses or fees
incurred by one or more of the Dissenting Shareholders if the court finds that:
(i) the fair value of the Shares materially exceeds the amount Company offered
to pay in the Offer, (ii) an Offer or required Advance Payment (or Advance
Payment Notice) was not delivered, (iii) Company failed to institute the court
action as required by statute and described above, or (iv) the action of Company
in complying with the Alaska Dissenters' Rights Provisions was arbitrary,
vexatious, or otherwise in bad faith.
THE SPIN-OFF DISTRIBUTION
PURPOSE OF THE SPIN-OFF DISTRIBUTION
The purpose of the Spin-Off Distribution is to transfer, prior to the
Merger, ownership of all of Company's assets and liabilities, including the
Additional Properties but other than the Island and the Note, to an entity other
than Company so that upon effectiveness of the Merger, Company, as the Surviving
Corporation, will own only the Island and the Note as an obligation to Jannard.
Under Alaska law, the Board may issue a dividend to its shareholders,
without the approval of such shareholders to its shareholders unless, as a
result of such dividend, the sum of the assets of the corporation would be less
than one and one-fourth times its liabilities, and the current assets of the
corporation would be less than its current liabilities. Since immediately after
the Spin-Off Distribution, the assets of Company (the Island) will exceed by
more than one and one forth times its current liabilities, and since the current
assets would exceed Company's current liabilities, such a distribution to
Company's shareholders is allowed under Alaska law. No vote of Company
shareholders is required, or is being requested, in connection with the Spin-Off
Distribution.
THE SPIN-OFF DISTRIBUTION
As provided in the Plan of Distribution, in the event that the Merger is
approved and the other conditions set forth in the Reorganization Agreement are
satisfied or waived, immediately prior to the Effective Time of the Merger,
Company will contribute to LLC the Additional Properties and all of its assets
and liabilities, not including the Note, not related to the Island. In
exchange, LLC will issue to Company all of its LLC Interests other than certain
Preferred Interests currently issued for the sole purpose of forming LLC and all
of which will be redeemed pursuant to the Plan of Distribution. Immediately
after the consummation of this exchange, Company's only assets will be the
Island and the LLC Interests, and its only liability will be the Note.
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In connection with and immediately following the above described exchange,
Company will distribute in the form of a dividend, on a pro rata basis to
holders of Shares on February __, 1997 (the "Spin-Off Record Date"), including
those holders who have exercised their rights as Dissenting Shareholders to the
Merger: one (1) LLC Interest for every fifty (50) Shares owned on the Spin-Off
Record Date. For every increment of Shares less than fifty (50) Shares held on
the Spin-Off Record Date, shareholders will receive cash in lieu of LLC
Interests (approximately $412 per Share) in an amount to be determined at
Closing (the "Fractional LLC Cash Payment"). For example, a holder of ten (10)
Shares would receive, in addition to any Per Share Obligation received in the
Merger, approximately $4,120 in cash. A holder of sixty (60) Shares would
receive, in addition to any Per Share Obligation received in the Merger, one (1)
LLC Interest and approximately $4,120 in cash.
In establishing the $412 cash amount for the Fractional LLC Cash
Payment, Company considered all of the properties, including the Additional
Properties, to be spun off pursuant to the Spin-Off Distribution. Company's
existing properties consist of a wide variety of parcels including everything
from undeveloped acreage in Alaska to a condominium unit in Hawaii. Th Board
concluded that in the limited time available, it was neither feasible nor
necessary to prepare formal appraisals. Accordingly, Company representatives
contacted several real estate appraisers and brokers familiar with such
properties and asked them to compare the value of the properties to their
current assessed values. The real estate brokers and appraisers confirmed
that the value of such properties was equal to the assessed value of such
properties. No written confirmation of such opinion was prepared.
Accordingly, the $412 value is based on the assessed value of the properties
to be spun off pursuant to the Spin-Off Distribution.
A number of factors led the Board to conclude that the 50-1 ratio for
the dividend of LLC Interests was in the best interest of all of Company's
shareholders. With the sale of the Island, Company's largest asset, and the
planned reorganization, Company will take a major step towards its goal of
liquidation. Owning a small number of shares in a thinly traded entity such
as Company is very inefficient due to commission structures which normally
assess a premium on trades of less than 100 shares. In addition, Company (and
the shareholders indirectly) incur all the cost of an entity registered
under the Securities Exchange Act of 1934. For the following reasons, it was
therefore determined to be desirable within the same transaction to cash out
as many shareholders as possible: (i) the 50-1 ratio will enable Company to
pay cash to over 80% of the current shareholders who together own less than
20% of Company's at a price per Share representing over a 300% increase on
the most recent price per Share prior to the announcement of the transaction;
(ii) such a ratio will allow the very small shareholders, of which there are
a substantial number, to realize the entire cash value of their Shares in one
transaction, as opposed to owning a very small percentage of LLC, a privately
held limited liability company whose Interests will be substantially less
liquid than the Shares, and whose interests will be subject to diminution in
value either as a result of sales of the remaining assets at less than
anticipated values or from possible indemnification claims of UTR; and (iii)
as a result of the Spin-Off, LLC will have approximately thirty (30) Interest
Holders, and as a result, should not be classified as a "Publicly Traded
Partnership". This is critical to avoid the inefficiencies of double
taxation generally applicable to a corporation and to becoming a pass through
entity such as an LLC so that gains on liquidation will be borne by a single
tax. See also "PROPOSAL: THE MERGER - Recommendation of the Board and
Reasons for the Merger'; "ANP, LLC - THE LLC AGREEMENT"; AND "ANP, LLC -
Income Tax Consequences of Being an Interest Holder or Member of LLC".
The Board decided that going forward, a privately held limited liability
company was more desirable as a liquidating entity since it would not be subject
to double taxation on the impending sales of its properties, and in addition, as
a private company with only 30 Interest Holders, the costs associated with the
reporting requirements of the Securities and Exchange Act of 1934 would be
avoided.
SHAREHOLDERS WHO OWN MORE THAN FIFTY (50) SHARES WILL RECEIVE AT LEAST ONE
LLC INTEREST AND ACCORDINGLY BECOME AN INTEREST HOLDER OF LLC. PURSUANT TO THE
REORGANIZATION AGREEMENT, LLC HAS AGREED TO INDEMNIFY THE SURVIVING CORPORATION
FOR CERTAIN LIABILITIES THAT ARISE RELATING TO THE SPUN-OFF ASSETS (OTHER THAN
THE ADDITIONAL PROPERTIES) AND THE ISLAND, OR AS A RESULT OF ANY BREACHES OF
REPRESENTATIONS OR WARRANTIES BY COMPANY OR LLC UNDER THE REORGANIZATION
AGREEMENT. THEREFORE, THOSE SHAREHOLDERS WHO BECOME HOLDERS OF LLC INTERESTS ARE
SUBJECT TO THE RISK OF LOSING ALL OR SUBSTANTIALLY ALL OF THEIR INVESTMENT IN
LLC IN THE EVENT A CLAIM RELATING TO AN INDEMNIFIABLE AMOUNT (AS DEFINED IN THE
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REORGANIZATION AGREEMENT) ARISES. (SEE "PROPOSAL: THE MERGER -- THE
REORGANIZATION AGREEMENT -- INDEMNIFICATION"; AND "ANP, LLC").
LLC INTEREST HOLDERS WILL ALSO HAVE THE POSSIBLE DETRIMENT OF POTENTIAL
LOSSES IF PROPERTIES ARE SOLD FOR LESS THAN VALUES USED IN ESTABLISHING THE
CASH VALUE OF THE LLC INTERESTS. LLC INTEREST HOLDERS WILL RECEIVE A POSSIBLE
BENEFIT IF THE REMAINING PROPERTIES ARE SOLD FOR MORE THAN SUCH VALUES.
SHAREHOLDERS RECEIVING LLC INTERESTS WHO WISH TO PARTICIPATE AS A MEMBER OF
LLC WILL BE REQUIRED TO EXECUTE A JOINDER AGREEMENT (THE "JOINDER AGREEMENT")
WITH LLC WHICH PROVIDES THAT THE INTEREST HOLDER CONSENTS TO BEING BOUND BY THE
TERMS OF A CERTAIN LIMITED LIABILITY COMPANY AGREEMENT DATED DECEMBER 11, 1996
(THE "LLC AGREEMENT"). AN INTEREST HOLDER WHO DOES NOT EXECUTE THE JOINDER
AGREEMENT WILL NOT BE ABLE TO PARTICIPATE IN LLC AS A MEMBER, BUT INSTEAD WILL
BE ONLY AN INTEREST HOLDER OF LLC. INTEREST HOLDERS HAVE IDENTICAL ECONOMIC
RIGHTS IN LLC AS DO MEMBERS, BUT DO NOT HAVE A RIGHT TO PARTICIPATE IN
MANAGEMENT OF LLC. THE LLC AGREEMENT PROVIDES THAT A MEMBER MAY PARTICIPATE IN
THE MANAGEMENT OF LLC BY PARTICIPATING IN THE CALLING OF MEETINGS OF THE MEMBERS
AND BY VOTING ON MATTERS THAT COME BEFORE THE MEMBERS, INCLUDING, WITHOUT
LIMITATION, THE REMOVAL OF THE EXECUTIVE MANAGER PURSUANT TO THE TERMS OF THE
LLC AGREEMENT. THE LLC AGREEMENT IS ATTACHED AS EXHIBIT E HERETO. A COPY OF
THE JOINDER AGREEMENT WILL BE PROVIDED FOR ALL INTEREST HOLDERS IN THE SAME
PACKAGE AS THE LETTER OF TRANSMITTAL. THIS PACKAGE WILL BE MAILED AS SOON AS
PRACTICABLE AFTER THE EFFECTIVE TIME. (SEE "ANP, LLC").
SHAREHOLDERS WHO OWN LESS THAN FIFTY (50) SHARES BUT WISH TO PARTICIPATE IN
OWNERSHIP OF LLC AS AN INTEREST HOLDER OR MEMBER SHOULD, PRIOR TO THE SPIN-OFF
RECORD DATE, PURCHASE THAT NUMBER OF SHARES ON THE OPEN MARKET SO THAT
SHAREHOLDER OWNS AT LEAST 50 SHARES.
SHAREHOLDERS WHO DO NOT WISH TO RECEIVE LLC INTERESTS SHOULD CONSIDER THE
POSSIBLE SALE OF EITHER ALL OF THEIR SHARES OR A SUFFICIENT NUMBER SO THAT THEY
OWN LESS THAN FIFTY SHARES AND WILL RECEIVE CASH IN LIEU OF SUCH SHARES. THE
SHARES ARE TRADED IN THE OVER-THE-COUNTER MARKET UNDER THE SYMBOL ANWP.
The Spin-Off Distribution is subject to certain conditions, including
approval of the Shareholders of the Merger and Merger Agreement.
Based upon the Shares outstanding as of the Record Date, 570 LLC Interests
will be issued to approximately 29 of the current 705 shareholders of record. As
a result of the Spin-Off Distribution, Company estimates that 676 of the
shareholders of record will nor receive any LLC Interests and will accordingly
be "cashed out". The following table summarizes the number of Interests to be
owned by Company's directors, affiliates, and executive officers immediately
upon the consummation of the Spin-Off Distribution:
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<TABLE>
<CAPTION>
NAME POSITION NUMBER OF LLC INTERESTS PERCENTAGE OWNERSHIP OF LLC
---- -------- ----------------------- ---------------------------
<S> <C> <C> <C>
Ronald F. Cosgrave Chairman of the Board 274 48.07%
Bruce R. Kennedy 84 14.73%
Keith J. Kennedy Director 17 2.98%
Barry C. Maulding Director 6 1.05%
Michael W. Shimasaki President, Director 20 3.51%
Michael K. Chung Secretary 5 .87%
Extended Family
Members of Directors,
Officers, and Principal
Shareholders (7 Shareholders) 12 1.70%
Subtotal (of above) 418 73.33%
All Directors and 322 56.50%
Officers as a Group (5
persons)
All Unaffiliated 162 26.67%
Shareholders
</TABLE>
TAX CONSEQUENCES OF THE SPIN-OFF DISTRIBUTION
The following subsection was prepared by Preston Gates & Ellis LLP, counsel
and tax counsel to Company. In the opinion of tax counsel, such information is,
as of the date of this Proxy Statement, correct in all material respects.
The distribution of the LLC Interests and cash in respect of fractional LLC
Interests to the shareholders of Company will be treated as a distribution with
respect to such shareholders' Shares for federal income tax purposes.
Generally, a distribution by a corporation with respect to its stock of cash or
property is taxed as a dividend to its shareholders to the extent of the
"current or accumulated earnings and profits" of the corporation. The "current
earnings and profits" of a corporation may be defined as the earnings in the
year in which a distribution takes place. The "accumulated earnings and
profits" of a corporation are approximately equal to the retained earnings of
such corporation. Even if a corporation has no accumulated earnings and profits
(or has a deficit in accumulated earnings and profits), but has current earnings
and profits, a distribution will be treated as a dividend to the extent of its
current earnings and profits.
For purposes of determining the taxable income and earnings and profits of
a corporation, a distribution of appreciated property by a corporation to its
shareholders is treated under the Code as though the corporation had sold such
property for its fair market value. (The distribution of LLC Interests by
Company is effectively treated for purposes of determining gain or loss of
Company as if the property held by LLC was distributed.) No loss may be
recognized on such a distribution. Accordingly, a corporation is required to
recognize gain on such a distribution to the extent that the fair market value
of any item of property exceeds such property's adjusted basis. Although such
gain may be sheltered by net operating losses of the corporation for purposes of
computing taxable income, it will nevertheless give rise to current earnings and
profits of the corporation. As noted above, a distribution by a corporation
will be treated as a dividend to the extent of current OR accumulated earnings
or profits.
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If Company realizes gain in respect of the distribution of the LLC
Interests in a year in which it does not have losses from operations or
otherwise as distinguished from net operating loss or capital loss carryovers to
shelter the gain, it will generate current earnings and profits, causing at
least a portion of the distribution of the LLC Interests and cash in respect of
fractional interests to be taxable to Company's shareholders as a dividend.
Company is in the process of taking steps to minimize the likelihood that
any distribution of the LLC Interests and cash in respect of fractional LLC
Interests to its shareholders will give rise to taxable dividend income to the
shareholders of Company. In this regard, Company is taking steps to sell, in
the year of the Spin-Off Distribution, properties that have depreciated in value
so that the losses recognized on the sale of such properties may offset any gain
recognized on a distribution of the LLC Interests. To the extent that losses
could be recognized in the year of the Spin-Off Distribution equal to all gains
realized as a result of the Spin-Off Distribution, no portion of the Spin-Off
Distribution would be treated as a taxable dividend. (SEE "PROPOSAL: THE
MERGER - Information Concerning Company").
However, there can be no assurance that Company will be able to dispose of
properties giving rise to losses in the year of the Spin-Off Distribution of LLC
Interests that will offset any gain recognized on the distribution. Further, it
is possible that the Internal Revenue Service could challenge the valuations of
the properties held by LLC and attempt to adjust the amount of the gain
recognized on the distribution with the result that additional dividend income
could be recognized by the shareholders.
Distributions in excess of the current and accumulated earnings and profits
of a corporation are treated as a return of capital to the shareholders to the
extent of their basis in the stock of the corporation and then as capital gains
income so long as the Shares are held as capital assets. To the extent that any
part of the distribution by Company of LLC Interests and cash in respect of
fractional interests is not taxed as a dividend, it will be treated as a return
of capital to the shareholders, reducing on a dollar for dollar basis their tax
basis in their shares. This will result in increased gain realized and thus
increased tax on the merger transaction. Any amounts of the Spin-Off
Distribution in excess of the allocable current and accumulated earnings and
profits and of tax basis of such Shares will be treated as capital gain income,
which will constitute long term capital gain if the Shares are held as capital
assets and have been held by the shareholder for more than one year.
While gain is recognized on the distribution of appreciated property by a
corporation, no loss may be recognized on a non-liquidating distribution of
depreciated property. (Separate parcels of property are considered on an
individual basis for this purpose.) Despite the fact that no loss is recognized
to the corporation, the tax basis of property which is distributed is equal to
its fair market value after the distribution. Thus, if any of the property held
by the LLC is depreciated in value, Company will not be permitted to claim a
loss, but the tax basis of the property will be reduced to its fair market
value.
THE FOREGOING DISCUSSION MAY NOT BE APPLICABLE WITH RESPECT TO HOLDERS OF
SHARES WHO ARE SUBJECT TO SPECIAL TAX TREATMENT UNDER THE CODE, SUCH AS NON-U.S.
PERSONS, LIFE
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INSURANCE COMPANIES, TAX-EXEMPT ORGANIZATIONS AND FINANCIAL INSTITUTIONS, AND
MAY NOT APPLY TO A HOLDER OF SHARES IN LIGHT OF INDIVIDUAL CIRCUMSTANCES. THE
FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL
INFORMATION ONLY AND IS BASED ON EXISTING TAX LAW AS OF THE DATE OF THIS PROXY
STATEMENT. DUE TO THE INDIVIDUAL NATURE OF TAX CONSEQUENCES, SHAREHOLDERS ARE
URGED TO CONSULT THEIR OWN TAX ADVISORS TO DETERMINE THE PARTICULAR TAX
CONSEQUENCES TO THEM (INCLUDING THE APPLICATION AND EFFECT OF ANY STATE, LOCAL
OR FOREIGN INCOME AND OTHER TAX LAWS) OF THE SPIN-OFF DISTRIBUTION.
ANP, LLC
After the Effective Time, former Company shareholders who receive LLC
Interests will be interest holders of ANP, LLC ("Interest Holders"), a
Washington limited liability company ("LLC"). It is anticipated that the LLC
Interests will not be registered under the Exchange Act. Instead, the LLC will
be a private limited liability company, and the rights of LLC Interest holders
will be governed by the Washington Limited Liability Company Act, Chapter 25.15
of the Revised Code of Washington (the "Act") and by the terms of a certain
Limited Liability Company Agreement dated December 9, 1996 (the "LLC
Agreement"). The following summary discusses the material provisions of the LLC
Agreement as well as certain of the federal income tax consequences that result
from being an interest holder or member of LLC.
GENERAL
After the Effective Time, it is intended that LLC will be operated with the
same business objectives of Company prior to the Effective Time: primarily real
estate investment and operations of the properties owned by LLC, but with an
enhanced emphasis on completing an orderly liquidation of all of its properties.
LLC will, as Company did prior to the Merger and Spin-Off Distribution, focus on
the disposition of all of its properties with the goal of maximizing the value
of such properties for Interest Holders and/or Members of LLC. It is expected
that this process could take three to five years due to the variety of
properties, particularly those located in Alaska. The character of the assets
held by LLC will be substantially the same as that of Company prior to the
Merger, with the exception of the Island and with the addition of the Additional
Properties. Pursuant to the LLC Agreement, discussed below, Company is required
to distribute its entire "cash flows" (as defined in the LLC Agreement) from
operations, including those generated in the sales of LLC's properties, to the
Interest Holders as provided in the LLC Agreement and discussed below. It is
expected that such distributions along with applicable exemptions will enable
LLC to be administered in a manner which will avoid any compliance problems with
the Investment Company Act of 1940.
THE LLC AGREEMENT
The following is a summary of the material provisions of the LLC Agreement.
Capitalized terms used in this section and not defined herein have the meaning
as defined in the LLC Agreement, which is attached hereto as Exhibit E:
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MANAGEMENT
The LLC Agreement provides that the management of LLC is to be undertaken
by the Executive Manager. The business and affairs of LLC are to be managed
under the direction and control of the Executive Manager, and all powers of LLC
are to be exercised by or under the authority of the Executive Manager. Ronald
F. Cosgrave, Chairman of Company is the Executive Manager of LLC. No other
Person has any right or authority to act for or bind LLC except as permitted in
the LLC Agreement or as required by law.
Under the LLC Agreement, the Executive Manager has the full power to
execute and deliver, for and on behalf of LLC, any and all documents and
instruments which may be necessary or desirable to carry on the business of LLC,
including, without limitation, (i) any and all deeds, contracts, leases,
mortgages, deeds of trust, promissory notes, security agreements, and financing
statements pertaining to LLC's assets or obligations, (ii) trading or investing
in securities, options, commodities, commodity futures, or other financial
instruments, and (iii) to authorize the confession of judgment against LLC. No
person dealing with the Executive Manager need inquire into the validity or
propriety of any document or instrument executed in the name of LLC by the
Executive Manager, or as to the authority of the Executive Manager in executing
the same.
If any one or more of the following events occurs, the Members may remove
the Executive Manager, and elect a new Executive Manager: (i) the Executive
Manager's willful or intentional violation or reckless disregard of the
Executive Manager's duties to LLC; or (ii) the Executive Manager's Involuntary
Withdrawal. The determination of whether one or more of such events exist shall
be made by those Members other than the Executive Manager holding two-thirds
(2/3) of the Percentages then held by Members other than the Executive Manager.
MEMBERS
After the consummation of the Spin-Off Distribution, former Company
shareholders who received LLC Interests will be Interest Holders of LLC. Each of
the Interest Holders will have the opportunity to become Members of LLC by
executing a joinder agreement (the "Joinder Agreement"). The Joinder Agreement
provides that the Interest Holder agrees to be bound by the terms of the LLC
Agreement, and will be distributed after the Effective Time to all Interest
Holders in the same package as the Letter of Transmittal. Under the LLC
Agreement, every Member is an Interest Holder, but not every Interest Holder is
a Member; Interest Holders who are not Members do not have the right to vote on
any LLC matters.
Under the LLC Agreement, Members may remove the Executive Manager and may
vote on any other matters at a meeting of Members called by those Members
holding more than 51% of the Percentages then held by the Members. Interest
Holders have no such membership rights, but their economic interest in profits,
losses and other distributions by LLC are identical to those of Members.
ALLOCATION OF PROFITS AND LOSSES
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The LLC Agreement provides that for any taxable year of LLC, and with the
exception of the Special Allocations of Section 4.3 of the LLC Agreement, Profit
or Loss is to be allocated to the Interest Holders in proportion to their
Percentages. (See "Income Tax Consequences of Being an Interest Holder or
Member of an LLC -- ALLOCATIONS OF PROFITS AND LOSSES").
DISTRIBUTIONS OF CASH FLOW FROM OPERATIONS
"Cash Flow", as defined below, for each taxable year of LLC shall be
distributed to the Interest Holders in proportion to their percentages no later
than 75 days after the end of the taxable year.
LIQUIDATION AND DISSOLUTION
If LLC is liquidated, the assets of LLC are to be distributed to the
Interest Holders in accordance with the balances in their respective Capital
Accounts, after taking into account the allocations of Profit or Loss as
provided in the LLC Agreement, if any, and distributions, if any, of cash or
property pursuant to the LLC Agreement. No Interest Holder shall be obligated
to restore a Negative Capital Account. (See "Income Tax Consequences of Being
an Interest Holder or Member of an LLC -- DISSOLUTION AND LIQUIDATION OF LLC").
DISTRIBUTIONS IN GENERAL
The timing and amount of all distributions are to be determined by the
Executive Manager subject to the requirement that all cash flow from a taxable
year shall be distributed to all Interest holders no later than 75 days after
the end of such year.
If any assets of LLC are distributed in kind to the Interest Holders, those
assets shall be valued on the basis of their fair market value, and any Interest
Holder entitled to any interest in those assets shall receive that interest as a
tenant-in-common with all other Interest Holders so entitled. The fair market
value of the assets shall be determined by an independent appraiser who shall be
selected by the Executive Manager. The Profit or Loss for each unsold asset
shall be determined as if the asset had been sold at its fair market value, and
the Profit or Loss shall be allocated as provided in the LLC Agreement and shall
be properly credited or charged to the Capital Accounts of the Interest Holders
prior to the distribution of the assets in liquidation. All Profit and Loss
shall be allocated, and all cash flow distributions shall be made, to the
Persons shown on the records of LLC to have been Interest Holders as of the last
day of the taxable year for which the allocation or distribution is to be made.
The LLC Agreement provides that the Executive Manager, upon the advice of
LLC's tax counsel, may amend the LLC Agreement to comply with the Code and the
Regulations promulgated under Section 704(b) of the Code; provided, however,
that no amendment shall materially affect distributions to an Interest Holder
without the Interest Holder's prior written consent. (See "Income Tax
Consequences of Being an Interest Holder or Member of an LLC -- ALLOCATIONS OF
PROFITS AND LOSSES").
TRANSFERS OF LLC INTERESTS
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No Person may Transfer all or any portion of or any interest or rights in
the Person's Membership Rights or Interest unless: (i) the Transfer will not
require registration of Interests or Membership Rights under any federal or
state securities laws; (ii) the Executive Manager determines that the Transfer
creates no risk of the LLC being treated as a publicly traded partnership; (iii)
the transferee delivers to LLC a written agreement to be bound by all the terms
of the LLC Agreement; (iv) the Transfer will not result in the termination of
LLC pursuant to Section 708 of the Code; (v) the Transfer will not result in LLC
being subject to the Investment Company Act of 1940, as amended; and (vi) the
transferor or the transferee delivers the following information to LLC: (a) the
transferee's taxpayer identification number, and (b) the transferee's initial
tax basis in the Transferred Interest; in addition, LLC may require that the
transferor obtain, at the transferor's expense, and deliver to LLC, an opinion
of legal counsel acceptable to LLC, confirming that the all of the above
conditions of transfer have been satisfied.
If all of the above Conditions of Transfer are satisfied, then a Member or
Interest Holder may Transfer all or any portion of that Person's Interest. The
transferee shall be entitled to receive, to the extent transferred, only the
distributions to which the transferor would be entitled. The Transfer of an
Interest pursuant to the LLC Agreement shall not result, however, in the
Transfer of any of the transferor's other Membership Rights, if any, and the
transferee of the Interest shall have no right to: (i) become a Member, or
(ii) exercise any Membership Rights other than those specifically pertaining to
the ownership of an Interest without the unanimous consent of the members which
may be withheld for any reason. (See "Income Tax Consequences of Being an
Interest Holder or Member of an LLC -- SALES OF LLC INTERESTS").
RIGHT OF FIRST REFUSAL
In addition to the Conditions of Transfer, transfer of an LLC Interest is
further limited by a right of first refusal. The LLC Agreement provides for a
right of first refusal (the "Right of First Refusal") which may first be
exercised first by LLC, and then by the other Members. Such right of first
refusal must be exercised by either LLC or by another Member within forty-five
(45) days of the receipt by LLC and the Members of the Transfer Notice, as it is
defined in the LLC Agreement. The LLC Agreement provides that the price to be
paid by LLC or by a Member for the Interest to be sold is the same price as
previously offered by the third party for the Interest.
The transferee of all or any portion of or any interest or rights in any
Membership Rights or Interest shall not be entitled to become a Member or
exercise any rights of a Member, and the transferee shall not be admitted as a
Member unless the Members unanimously consent. (See "Income Tax Consequences of
Being an Interest Holder or Member of an LLC -- SALES OF LLC INTERESTS").
INCOME TAX CONSEQUENCES OF BEING AN INTEREST HOLDER OR MEMBER OF LLC
The following discussion is intended to summarize the principal federal
income tax considerations material to being an Interest Holder of LLC. The
subsection was prepared by Preston Gates & Ellis LLP, counsel and tax counsel to
Company. In the opinion of tax counsel,
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such information is, as of the date of this Proxy Statement, correct in all
material respects. This summary is based upon the Code, Treasury Regulations
(including Temporary and Proposed Regulations) promulgated thereunder
("Regulations"), current positions of the Internal Revenue Service (the "IRS")
contained in revenue rulings and revenue procedures, other current
administrative positions of the IRS and existing judicial decisions in effect as
of the date of this Prospectus. Potential Interest Holders should note that it
is not feasible to comment on all aspects of federal, state and local tax laws
that may affect each Interest Holder in LLC. The federal income tax
considerations discussed below are necessarily general in nature, and their
application may vary depending upon an Interest Holder's particular
circumstances. No representations are made as to any other tax consequences
including foreign, state and local tax. Further, LLC does not intend to request
a ruling from the IRS with respect to any of the federal income tax matters
discussed below, and on certain matters no ruling could be obtained even if
requested.
Interest Holders should also note that a great deal of uncertainty exists
with respect to certain recently enacted and amended provisions of the Code.
There can be no assurance that the present federal income tax laws applicable to
Interest Holders and the operation of LLC will not be further changed
prospectively or retroactively by additional legislation, by new Regulations, by
judicial decisions or by administrative interpretations, any of which could
adversely affect an Interest Holder, nor is there any assurance that there will
not be a difference of opinion as to the interpretation or application of
current federal income tax laws as discussed herein.
FOR THE FOREGOING REASONS, EACH PROSPECTIVE INTEREST HOLDER IS URGED TO
CONSULT WITH HIS OR HER OWN TAX ADVISOR WITH RESPECT TO THE FEDERAL, STATE AND
LOCAL INCOME OR OTHER TAX CONSEQUENCES, SPECIFIC TO EACH INDIVIDUAL OR ENTITY,
OF BEING AN INTEREST HOLDER OR MEMBER OF LLC. NOTHING IN THIS PROXY STATEMENT
IS OR SHOULD BE CONSTRUED AS LEGAL OR TAX ADVICE TO A POTENTIAL INTEREST HOLDER
OF LLC. SHAREHOLDERS WHO HOLD MORE THAN 50 SHARES ON THE SPIN- OFF RECORD DATE,
AND, ACCORDINGLY WILL BECOME AN INTEREST HOLDER OR MEMBER OF LLC, SHOULD BE
AWARE THAT THE IRS MAY NOT AGREE WITH ALL TAX POSITIONS TAKEN BY LLC AND THAT
LEGISLATIVE, ADMINISTRATIVE OR JUDICIAL DECISIONS MAY REDUCE OR ELIMINATE
ANTICIPATED TAX BENEFITS OF LLC.
The discussion below is directed primarily to individual taxpayers who are
citizens of the United States. Accordingly, persons who are trusts, corporate
investors or tax exempt entities and any potential Interest Holder who is not a
United States citizen are cautioned to consult their own personal tax advisors.
PARTNERSHIP STATUS GENERALLY
The ability to obtain the federal income tax benefits anticipated from LLC
depends upon the classification of LLC as a partnership for federal income tax
purposes and not as an association taxable as a corporation. Neither Company
nor LLC intends to request a ruling from the IRS as to the classification of LLC
as a partnership for such purposes.
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The current Regulations provide that an organization that qualifies as a
limited liability company under state law such as LLC will be classified as a
partnership unless it has more corporate characteristics than noncorporate
characteristics. For this purpose, four major corporate characteristics are
identified in applicable Regulations. Of these major corporate characteristics,
LLC will have the corporate characteristic of limited liability; however, it
should not be deemed to have the corporate characteristics of: (i) continuity of
life (because the death, expulsion or bankruptcy of the Executive Manager will
cause a dissolution of LLC unless a majority in interest of the remaining
Members elect to continue the business of LLC); (ii) free transferability of
interests (because the LLC Agreement contains substantial restrictions on the
transferability of the LLC Interests, which are intended to avoid termination or
reclassification of LLC, to effect compliance with federal and state securities
laws and to facilitate administration of LLC's affairs) and (iii) centralized
management (because the Executive Manager will have a significant ownership
interest in LLC).
Based upon the current Regulations, IRS rulings and judicial decisions
under Section 7701(a) of the Code, all of which are subject to change, and based
upon certain representations of LLC and Company and other assumptions, LLC will
more likely than not be treated as a partnership for federal income tax purposes
and not as an association taxable as a corporation, if such issue were
challenged by the IRS, litigated and judicially decided.
The IRS has issued proposed regulations regarding entity classification
which would supersede the current Regulations regarding partnership tax status
upon which this conclusion is based. The proposed regulations define a
partnership for tax purposes to include any business entity that has at least
two members and that is not required to be classified as a corporation. The
proposed regulations apply to LLCs in existence when the regulations become
final. The proposed regulations, if they become final, should permit an LLC to
continue to be taxed as a partnership for federal income tax purposes, provided
LLC is not taxed as a corporation pursuant to the application of the "publicly
traded partnership" rules discussed below.
In the event that LLC, for any reason, were to be treated for federal
income tax purposes as an association taxable as a corporation, the Interest
Holders of LLC would be treated as stockholders of a corporation with the
following results, among others: (i) LLC would become a taxable entity subject
to the federal income tax imposed on corporations; (ii) items of income, gain,
loss, deduction and credit would be accounted for by LLC on its federal income
tax return and would not flow through to LLC Interest Holders; and (iii)
distributions of cash would generally be treated as dividends taxable to LLC
Interest Holders at ordinary income rates, to the extent of current or
accumulated earnings and profits, and would not be deductible by LLC in
computing its income tax.
The remaining summary of federal income tax consequences in this Section
assumes that LLC will be classified as a partnership for federal income tax
purposes, and references to a partnership include references to a limited
liability company, such as LLC, treated as a partnership for tax purposes.
PUBLICLY TRADED PARTNERSHIPS
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Classification of LLC as a "publicly traded partnership" could result in
(a) LLC being taxable as a corporation (see "PARTNERSHIP STATUS GENERALLY"
above), or (b) the treatment of net income of LLC as portfolio income rather
than passive income (see "PASSIVE LOSS LIMITATIONS" below).
A publicly traded partnership is generally defined under Section 7704 of
the Code as any partnership whose interests are traded on an established
securities market or are readily tradeable on a secondary market or the
substantial equivalent thereof. On November 29, 1995, the IRS issued final
Regulations (the "Section 7704 Regulations") effective for taxable years of a
partnership beginning after 1995 which would apply to LLC.
The Section 7704 Regulations contain definitions of what constitutes an
established securities market and a secondary market or the substantial
equivalent thereof and what transfers may be disregarded in determining
whether such definitions are satisfied with respect to the activities of a
partnership or limited liability company. The Section 7704 Regulations
further provide certain safe harbors (the "secondary market safe harbors")
which, after taking into consideration all transfers other than those deemed
disregarded, may be satisfied in order to avoid classification of such
transfers as being made on a secondary market or the substantial equivalent
thereof. One of the secondary market safe harbors provides that interests in
a partnership will not be considered tradeable on a secondary market or the
substantial equivalent thereof if the sum of the partnership interests
transferred during any taxable year, other than certain disregarded
transfers, does not exceed 2% of the total interest in the partnership
capital or profits. Disregarded transfers include, among other things,
transfers by gift, transfers at death, transfers between family members,
distributions from a qualified retirement plan and block transfers, which are
defined as transfers by a partner during any 30 calendar day period of
partnership units representing more than 2% of the total interest in
partnership capital or profits. Another safe harbor from the definition of a
publicly traded partnership dealing with redemption and repurchase agreements
is also provided in the Section 7704 Regulations. The Section 7704
Regulations provide that the failure to satisfy a safe harbor provision under
the Regulations will not cause a partnership to be treated as a publicly
traded partnership if, after taking into account all facts and circumstances,
partners are not readily able to buy, sell or exchange their partnership
interests in a manner that is comparable, economically, to trading on an
established securities market. Finally, the Section 7704 Regulations do not
by their terms apply to an LLC (i) all of the interests of which were issued
in a transaction not required to be registered under the Securities Act of
1933 and (ii) which has 100 or fewer members (the "Private Placement Test").
The terms of the LLC Agreement provide that the Executive Manager will not
permit a transfer if such transfer would cause LLC to be treated as publicly
traded.
LLC does not intend to cause the LLC Interests to be traded on an
established securities market or a secondary market in the future. Further, it
is anticipated that LLC will initially qualify under the Private Placement Test.
Even if LLC were deemed to be a publicly traded partnership, Section
7704(c) of the Code provides an exception to taxation of an entity as a
corporation if 90% or more of the gross income of such entity for each taxable
year consists of "qualifying income." Qualifying income includes interest, real
property rents and gain from the sale or other disposition of real property.
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Qualifying income does not include real property rents which are contingent
on the profits or income of the lessees or income from the rental or lease of
personal property. LLC intends to conduct its operations in such a manner as
to qualify for the 90% qualifying income exception. Potential Interest
Holders or Members should note, however, that even if LLC satisfies the
qualifying income exception, being deemed to be a publicly traded partnership
would result in certain other material adverse tax consequences to LLC
Interest Holders, including the treatment of net income of LLC as portfolio
income rather than passive income. (See "PASSIVE LOSS LIMITATIONS" below).
GENERAL PRINCIPLES OF PARTNERSHIP TAXATION
Under the Code, no federal income tax is paid by a partnership.
Accordingly, if as anticipated, LLC is treated as a partnership for federal
income tax purposes, LLC will not be treated as a separate taxable entity
subject to federal income tax, but instead each Interest Holder will be required
to report on said Interest Holder's federal income tax return for each year the
Interest Holder's distributive share of LLC's items of income, gain, loss,
deduction or credit for that year, without regard to whether any actual cash
distributions have been made to the Interest Holder. POTENTIAL INTEREST HOLDERS
SHOULD NOTE THAT THEIR RESPECTIVE SHARE OF THE TAXABLE INCOME OF LLC, AND THEIR
INCOME TAX LIABILITY RESULTING THEREFROM, MAY EXCEED CASH DISTRIBUTIONS FROM
LLC.
LLC will furnish to each Interest Holder and any assignee of Interests on
an annual basis the information necessary for preparation of the Interest
Holder's federal income tax return. Potential Interest Holders should note that
information returns filed by LLC will be subject to audit by the IRS and that
the Commissioner of the IRS has announced that the IRS will devote greater
attention to the proper application of the tax laws to partnerships and limited
liability companies. (See "AUDITS" below).
ANTI-ABUSE RULES
As noted under "GENERAL PRINCIPLES OF PARTNERSHIP TAXATION" above,
partnerships as such are not liable for income taxes imposed by the Code. In
December 1994, however, the IRS adopted final Regulations setting forth "anti-
abuse" rules under the Code provisions applicable to LLC, which rules authorize
the Commissioner of Internal Revenue to recast transactions involving the use of
a partnership either to reflect the underlying economic arrangement or to
prevent the use of a partnership to circumvent the intended purpose of any
provision of the Code. These rules generally apply to all transactions relating
to a partnership occurring on or after May 12, 1994, and thus would be
applicable to LLC's activities. If any of the transactions entered into by LLC
were to be recharacterized under these rules, or LLC, itself, were to be recast
as a taxable entity under these rules, material adverse tax consequences to all
of the Interest Holders would occur as otherwise described herein. In this
regard, neither LLC nor Company is aware of any fact or circumstance which could
cause the IRS to exercise its authority under these rules to recast any of the
transactions to be entered into by LLC or to recharacturize LLC itself.
BASIS LIMITATIONS
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An Interest Holder may not deduct the Interest Holder's share of LLC losses
and deductions in excess of the adjusted basis of the Interest Holder's LLC
interest determined as of the end of the taxable year. Although losses which
exceed an Interest Holder's basis are not allowed, they may be carried over
indefinitely and claimed as a deduction in a subsequent year to the extent that
such Interest Holder's adjusted basis in his or her Interests has increased
above zero. An Interest Holder's adjusted basis in his or her Interests will
initially be equal to the fair market value of the LLC Interests received in the
Spin-Off Distribution along with his or her pro rata share of any LLC
liabilities as to which no Interest Holder is personally liable. An Interest
Holder's basis in his or her interests will be increased by the Interest
Holder's distributive share of LLC's taxable income and decreased (but not below
zero) by his or her distributive share of LLC's losses and by the amount of any
cash distributions which are made to the Interest Holder. A cash distribution
to an Interest Holder will generally constitute a return of capital to the
extent of the basis of his or her Interests but, in the event that an Interest
Holder has no remaining basis in his or her Interests, will generally be taxable
to the Interest Holder as gain from the sale of his or her Interests. (See
"SALES OF LLC INTERESTS" below).
PASSIVE LOSS LIMITATIONS
The Code substantially restricts the ability of many taxpayers (including
individuals, estates, trusts, certain closely-held corporations and certain
personal service corporations) to deduct losses derived from so-called "passive
activities." Passive activities generally include any activity involving the
conduct of a trade or business in which the taxpayer does not materially
participate (including the activity of a limited liability company in which the
taxpayer is an interest holder) and certain rental activities (including the
rental of real estate). It is more likely than not that an Interest Holder's
interest in LLC will be treated as a passive activity, if such issue were
challenged by the IRS, litigated and judicially decided. Accordingly, income
and loss of LLC, other than interest or other similar income earned on temporary
investments and working capital reserves (which would constitute portfolio
income), will constitute passive activity income and passive activity loss, as
the case may be, to Interest Holders.
Generally, losses from passive activities are deductible only to the extent
of a taxpayer's income or gains from passive activities and will not be allowed
as an offset against other income, including salary or other compensation for
personal services, active business income or "portfolio income," which includes
nonbusiness income derived from dividends, interest, royalties, annuities and
gains from the sale of property held for investment. Passive activity losses
that are not allowed in any taxable year are suspended and carried forward
indefinitely and allowed in subsequent years as an offset against passive
activity income in future years.
Upon a taxable disposition of a taxpayer's entire interest in a passive
activity to an unrelated party, suspended losses with respect to that activity
will then be allowed as a deduction against: (i) first, any remaining income or
gain from that activity including gain recognized on such disposition; then (ii)
net income or gain for the taxable year from other passive activities; and
finally, (iii) any other non-passive income or gain. Temporary Regulations
provide, however, that similar undertakings which are under common control and
owned by pass-through entities such as partnerships are generally aggregated
into a single activity. Accordingly, it is unlikely that suspended passive
activity losses derived from a specific LLC asset would be available to Interest
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Holders to offset non-passive income from other sources until the sale or other
disposition of all LLC assets or the Interest Holder's entire interest in LLC
has been consummated.
The Code provides that the passive activity loss rules will be applied
separately with respect to items attributable to each publicly traded
partnership. Accordingly, if LLC were deemed to be a publicly traded
partnership, LLC losses, if any, would be available only to offset future non-
portfolio income of LLC. In addition, if LLC were deemed to be a publicly
traded partnership which is not treated as a corporation because of the
qualifying income exception, LLC income would generally be treated as portfolio
income rather than passive income. (See "PUBLICLY TRADED PARTNERSHIPS" above).
AT RISK LIMITATIONS
The deductibility of LLC losses is limited further by the "at risk"
limitations in the Code. Interest Holders who are individuals, estates, trusts
and certain closely-held corporations are not allowed to deduct LLC losses in
excess of the amounts which such Interest Holders are determined to have "at
risk" at the close of LLC's taxable year. Generally, an Interest Holder's
amount "at risk" will include the amount of the Interest Holder's share of cash
and properties transferred to LLC as well as their share of qualified non-
recourse debt. An Interest Holder's amount "at risk" will be reduced by the
Interest Holder's allocable share of LLC losses and by LLC distributions and
increased by the Interest Holder's allocable share of LLC income. Any
deductions which are disallowed under this limitation may be carried forward
indefinitely and utilized in subsequent years to the extent that an Interest
Holder's amount "at risk" is increased in those years. Distributions by LLC to
an Interest Holder, and certain other events, that cause the Interest Holder's
amount "at risk" to be less than zero may result in gross income to the Interest
Holder even though such distribution or other event would not otherwise be a
taxable event.
ALLOCATIONS OF PROFITS AND LOSSES
Allocations of profit and loss are described above in the Section entitled
"DISTRIBUTIONS OF CASH FLOW FROM OPERATIONS" AND "DISTRIBUTIONS IN GENERAL" AND
"ALLOCATION OF PROFITS AND LOSSES". Potential Interest Holders should note in
this regard that the LLC Agreement defines the terms "Profit" and "Loss" to mean
the net income or loss realized or recognized by LLC for a fiscal year, as
determined for federal income tax purposes, including any income exempt from
tax, and calculated based on the book value of LLC assets.
Generally, LLC items of income, gain, loss, deduction and credit are
allocated among the Interest Holders as set forth in the LLC Agreement pursuant
to Section 704(a) of the Code. Section 704(b) of the Code provides, however,
that if an allocation to an Interest Holder of income, gain, loss, deduction or
credit (or items thereof) under the LLC Agreement does not have substantial
economic effect, such allocation will instead be made in accordance with the
Interest Holder's interest in LLC (determined by taking into account all facts
and circumstances).
LLC has not received an advance ruling with respect to whether its
allocations of profits and losses will be respected for federal income tax
purposes, and the IRS may attempt to challenge the allocations of profits and
losses made by LLC, which challenge, if successful, could adversely affect the
Interest Holders by changing their respective shares of taxable income or loss.
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No assurance can be given that the IRS will not challenge one or more of the
allocation provisions contained in the LLC Agreement.
Regulations under Section 704(b) of the Code (the "Section 704(b)
Regulations") provide complex rules for determining whether allocations will be
deemed to have economic effect, whether the economic effect of allocations will
be deemed to be substantial, and whether allocations not having substantial
economic effect will be deemed to be made in accordance with an Interest
Holder's interest in LLC.
The relevant portions of the Section 704(b) Regulations provide generally
that an allocation will be considered to have economic effect if: (i) Interest
Holders' capital accounts are determined and maintained in accordance with the
Regulations; (ii) upon the liquidation of LLC, liquidating distributions are
made in accordance with the positive capital account balances of the Interest
Holders after taking into account all capital account adjustments for the year
during which such liquidation occurs; and (iii) the LLC Agreement contains a
"qualified income offset" provision and the allocation in question does not
cause or increase a deficit balance in a Interest Holder's capital account at
the end of LLC's taxable year. A limited liability company agreement contains a
"qualified income offset" if it provides that an Interest Holder who
unexpectedly receives an adjustment, allocation or distribution of certain items
which causes a deficit or negative capital account balance (which means
generally that the sum of losses allocated and cash distributed to a Interest
Holder exceeds the sum of the Interest Holder's capital contributions to LLC and
any income allocated to such Interest Holder) will be allocated items of income
and gain in an amount and manner sufficient to eliminate the deficit balance as
quickly as possible.
The LLC Agreement (i) provides for the determination and maintenance of
Capital Accounts pursuant to the Section 704(b) Regulations, (ii) provides that
liquidation proceeds are to be distributed in accordance with positive Capital
Account balances, and (iii) contains a qualified income offset provision. (See
"ALLOCATION OF PROFITS AND LOSSES"). The qualified income offset provision in
the LLC Agreement has the effect of prohibiting an Interest Holder from being
allocated items of loss or deduction which would cause his or her Capital
Account to be reduced below zero. (An Interest Holder's Capital Account will be
increased by certain debt of LLC allocated to the Interest Holder for this
purpose)
Even if the allocations of profits and losses of LLC are deemed to have
economic effect under the Section 704(b) Regulations, however, an allocation
will not be respected unless the economic effect of such allocation is
"substantial." In this regard, the Section 704(b) Regulations generally provide
that the economic effect of an allocation is "substantial" if there is a
reasonable possibility that the allocation will affect substantially the dollar
amounts to be received by Interest Holders from a limited liability company
taxed as a partnership, independent of tax consequences. The economic effect of
an allocation is presumed not to be substantial if the net adjustments to the
Interest Holders' capital accounts for any taxable year do not differ
substantially from the net adjustments which would have been made for such year
in the absence of such allocation and the total tax liability of the Interest
Holders for such year is less than it would have been in the absence of such
allocations. The economic effect will also be presumed not to be substantial
where: (i) the LLC Agreement provides for the possibility that one or more
allocations will be largely offset by one or more other allocations; (ii) the
net
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adjustments to the Interest Holders' capital accounts for the taxable years to
which the allocations relate do not differ substantially from the net
adjustments which would have been recorded in such Interest Holders' respective
capital accounts for such years if the original allocations and the offsetting
allocations were not contained in the LLC Agreement; and (iii) the total tax
liability of the Interest Holders for such years is less than it would have been
in the absence of such allocations. With respect to the foregoing provision,
the Section 704(b) Regulations state that original allocations and offsetting
allocations will not be deemed to not be substantial if, at the time the
allocations become part of the LLC Agreement, there is a strong likelihood that
the offsetting allocations will not, in large part, be made within five years
after the original allocations are made. The Section 704(b) Regulations further
state that for purposes of testing substantiality, the adjusted tax basis of
LLC's assets will be presumed to be the fair market value of such property, and
adjustments to the adjusted tax basis of LLC's assets (such as depreciation or
cost recovery deductions) will be presumed to be matched by corresponding
changes in the property's fair market value.
If the allocations of profits and losses set forth in the LLC Agreement are
deemed not to have substantial economic effect, the allocations are then to be
made in accordance with the Interest Holders' interests in LLC as determined by
taking into account all facts and circumstances. The Section 704(b) Regulations
provide in this regard that an Interest Holder's interest in LLC will be
determined by taking into account all facts and circumstances relating to the
economic arrangement of the Interest Holders, including: (i) the Interest
Holders' relative contributions to LLC; (ii) the interests of the Interest
Holders in economic profits and losses (if different from those in taxable
income or loss); (iii) the interests of the Interest Holders in cash flow and
other nonliquidating distributions; and (iv) the rights of the Interest Holders
to distributions of capital upon liquidation.
Since the LLC Agreement: (i) provides for the determination and maintenance
of Capital Accounts in accordance with the Section 704(b) Regulations; (ii)
provides that liquidation proceeds will be distributed to the Interest Holders
in accordance with positive Capital Account balances; and (iii) contains a
qualified income offset provision, assuming the allocations of deductions for
depreciation, amortization and cost recovery to such Interest Holders were
matched by corresponding reductions in the fair market value of LLC's Property
and assuming the accuracy of the representations of the Executive Manager,
including that LLC will be operated strictly in accordance with the terms of the
LLC Agreement, it is more likely than not that allocations of LLC items of
income, gain, loss, deduction and credit in accordance with the terms of the LLC
Agreement will have a substantial economic effect.
CONTRIBUTIONS OF APPRECIATED PROPERTY
Section 704(c) of the Code provides that items of taxable income, gain,
loss and deduction with respect to property contributed by an Interest Holder
must be shared among the Interest Holders so as to take account of the variation
between the tax basis of the property to LLC and its fair market value at the
time of the contribution. To the extent that an Interest Holder contributes
property to LLC with an adjusted tax basis different from its book value, the
contributing Interest Holder must be allocated any taxable gain or loss
recognized with respect to such property to take account of such difference.
Regulations under Section 704(c) of the Code (the "Section 704(c) Regulations")
permit LLC to use any reasonable method that is
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consistent with the purposes of Section 704(c) of the Code to allocate the tax
burdens and benefits with respect to the contributed property to the
contributing Interest Holder. An allocation method is not reasonable if the
contribution of property and the corresponding allocation of tax items with
respect to the property are made with a view to shifting the tax consequences of
built-in gain or loss among the Interest Holders in a manner that substantially
reduces the present value of the Interest Holders' aggregate tax liability.
Because the Assets held by LLC will have a tax basis equal to their fair
market value (due to the distribution of such assets in connection with the
Spin-Off Distribution), the provisions of Section 704(c) of the Code should not
apply to such properties.
RISK OF TAXABLE INCOME WITHOUT CASH DISTRIBUTIONS
An Interest Holder of LLC is required to report his or her allocable share
of LLC's taxable income on the Interest Holder's personal income tax return
regardless of whether or not he or she has received any cash distributions from
LLC. For example, an Interest Holder will be allocated his or her share of the
Profit on the sale of LLC Property even though such Interest Holder may receive
no cash distributions from LLC. The LLC Agreement also provides for a
"qualified income offset," as described hereinabove, which could result in the
allocation of income or gain to an Interest Holder in the absence of cash
distributions from LLC. There are no assurances that an Interest Holder will
not be allocated items of LLC income or gain in an amount which gives rise to an
income tax liability in excess of cash, if any, received from LLC for the tax
year in question, and investors are urged to consult with their personal tax
advisors in this regard.
DEPRECIATION AND COST RECOVERY
It is currently anticipated that the real property improvements acquired or
constructed by LLC and any personal property acquired by LLC will be depreciated
for tax purposes using the Modified Accelerated Cost Recovery System, i.e.,
residential real property improvements on a straight-line basis over a recovery
period of 27.5 years and non-residential real property over a period of 39
years, and most personal property acquired by LLC over various recovery periods
over various periods on a double declining balance basis switching to the
straight line basis when such method will result in a larger depreciation
deduction. Land is not subject to depreciation.
ACTIVITIES NOT ENGAGED IN FOR PROFIT
Section 183 of the Code provides for the disallowance of deductions
attributable to activities "not engaged in for profit." The term "not engaged
in for profit" is defined as any activity other than an activity that
constitutes a trade or business or an activity that is engaged in for the
production or collection of income. In general, an activity will be considered
as entered into for profit where there is a reasonable expectation of profit in
the future. The determination of whether an activity is engaged in for profit
is based upon the facts and circumstances of each case.
LLC will be operated in a business-like manner in all material respects and
strictly in accordance with the LLC Agreement, and assuming the determination as
to whether the activities of LLC are activities entered into for profit under
Section 183 of the Code is made at LLC level,
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it is more likely than not that the activities contemplated by LLC will be
considered activities entered into for profit by LLC, if such issue were
challenged by the IRS, litigated and judicially decided. However, the IRS may
also apply Section 183 of the Code to Interest Holders notwithstanding any
determination made with respect to LLC in this regard, and since the test of
whether an activity is deemed to be engaged in for profit is based upon facts
and circumstances that exist from time to time, no assurance can be given that
Section 183 of the Code may not be applied in the future to disallow deductions
allocable to Interest Holders from LLC operations. Potential Interest Holders
should consult with their own tax advisors regarding the impact of Section 183
of the Code on their particular situations.
SALES OF LLC'S PROPERTIES
Upon the sale of LLC's properties, LLC will recognize gain or loss to the
extent that the amount realized is more or less than the adjusted basis of LLC
Property sold. The amount realized upon the sale of an LLC Property will
generally be equal to the sum of the cash received plus the amount of
indebtedness encumbering the property, if any, assumed by the purchaser or to
which the property remains subject upon the transfer of the property to the
purchaser. The adjusted basis of LLC Property will in general be equal to the
value of the property at the time of the Spin-Off Distribution, less
depreciation and cost recovery allowances allowed to LLC with respect to such
property.
Assuming that LLC is not deemed to be a dealer with respect to its
properties, such gain or loss will generally be taxable under Section 1231 or
1221 of the Code to the extent it applies to depreciable property and otherwise
is treated as capital gain or loss. An Interest Holder's share of the gains or
losses resulting from the sale of LLC Properties taxable under Section 1231 of
the Code would generally be combined with any other Section 1231 gains or losses
realized by the Interest Holder in that year from sources other than LLC, and
the net Section 1231 gain or loss is generally treated as long-term capital gain
(subject to depreciation or cost recovery allowance recapture, if any) or
ordinary loss, as the case may be. Potential Interest Holders should be aware
that the amount of taxable gain allocated to an Interest Holder with respect to
the sale of a LLC Property may exceed the cash proceeds received by such
Interest Holder with respect to such sale.
SALES OF LLC INTERESTS
An Interest Holder may be unable to sell any of his or her Interests by
reason of the nonexistence of any market therefor. In the event that Interests
are sold pursuant to the procedures described above in "Transfer of LLC
Interests", however, the selling Interest Holder will realize gain or loss equal
to the difference between the gross sale price or proceeds received from sale
and the Interest Holder's adjusted tax basis in his or her Interests. Assuming
the Interest Holder is not a "dealer" with respect to such Interests and has
held the Interests for more than one year, the Interest Holder's gain or loss
will be long-term capital gain or loss, except for that portion of any gain
attributable to such Interest Holder's share of LLC's "unrealized receivables"
and "substantially appreciated inventory," as defined in Section 751 of the Code
("Section 751 Property"), which would be taxable as ordinary income. Any
recapture of cost recovery allowance taken previously by LLC with respect to
personal property associated with Company Properties will be treated as
"unrealized receivables" for this purpose. Potential Interest Holders
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<PAGE>
should note in this regard that the Code requires LLC to report any sale of
Interests to the IRS if any portion of the gain realized upon such sale is
attributable to the transferor's share of LLC's Section 751 Property.
DISSOLUTION AND LIQUIDATION OF LLC
The dissolution and liquidation of LLC will involve the distribution to the
Interest Holders of the cash remaining after the sale of its assets, if any, and
after payment of all LLC's debts and liabilities. If an Interest Holder
receives cash and/or certain marketable securities, taken into account at their
value on the date of distribution, in excess of the basis of his or her
Interests, such excess will be taxable as a gain. If an Interest Holder were to
receive only cash upon dissolution and liquidation, he would recognize a loss to
the extent, if any, that the adjusted basis of his Interests exceeded the amount
of cash received. No loss would be recognized if an Interest Holder were to
receive property other than money, unrealized receivables and substantially
appreciated inventory (as defined in Section 751 of the Code). There are a
number of exceptions to these general rules, including but not limited to, the
effect of a special basis election under Section 732(d) of the Code for an
Interest Holder who may have acquired an interest in LLC within the two years
prior to the dissolution, and the effects of a disproportionate distribution of
Section 751 Property as determined under Section 751(b) of the Code.
ELECTION FOR BASIS ADJUSTMENTS
LLC will elect, under Section 754 of the Code, to adjust the basis of LLC
property upon the transfer of an interest in LLC so that the transferee of an
LLC interest will be treated for purposes of calculating depreciation and
realizing gain as though he had acquired a direct interest in LLC's assets.
Accordingly, if LLC's Properties depreciate in value, it may make it more
difficult to dispose of an Interest in LLC since the transferee will not be
permitted the benefit of depreciation deductions based on LLC's cost but rather
depreciation based on the price paid for the Interests acquired by the
Transferee. Conversely, if LLC's Properties appreciate, the Section 754
election will be beneficial to transferees of LLC Interests since the
depreciation deductions available to them will be based on the cost paid for the
Interests rather than the lower cost of LLC's assets.
ALTERNATIVE MINIMUM TAX
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Alternative minimum tax is payable to the extent that a taxpayer's
alternative minimum tax exceeds his regular federal income tax liability for the
taxable year. Alternative minimum tax for individual taxpayers is a percentage
of "alternative minimum taxable income" ("AMTI") in excess of certain exemption
amounts. The first $175,000 of AMTI in excess of the exemption amount is taxed
currently at 26%, and any additional such excess is taxed currently at 28%.
Alternative minimum taxable income is generally computed by adding what are
called "tax preference items" to the taxpayer's regular taxable income, with
certain adjustments. While it is not anticipated that an investment in LLC will
give rise to any specific tax preference items, the amount of alternative
minimum tax imposed depends upon various factors unique to each particular
taxpayer. Accordingly, each Interest Holder should consult with the Interest
Holder's own personal tax advisor regarding the possible application of the
alternative minimum tax.
PENALTIES
Under Section 6662 of the Code, a 20% penalty is imposed on any portion of
an underpayment of tax attributable to a "substantial understatement of income
tax." In general, a "substantial understatement of income tax" will exist if
the actual income tax liability of the taxpayer exceeds the income tax liability
shown on the taxpayer's return by the greater of 10% of the actual income tax
liability or $5,000. Unless the understatement is attributable to a "tax
shelter," the amount of an understatement is reduced by any portion of such
understatement which is attributable to (i) the income tax treatment of any item
shown on the return if there is "substantial authority" for the taxpayer's
treatment of such item on the taxpayer's return or (ii) any item with respect to
which the taxpayer adequately discloses on the taxpayer's return the relevant
facts affecting the item's income tax treatment as long as there is a
"reasonable basis" for the taxpayer's treatment of such item. In the case of a
"tax shelter," which is defined in Section 6662 of the Code as a partnership or
other entity that has as its principal purpose the avoidance or evasion of
federal income tax, this reduction in the understatement only will apply in
cases where, in addition to having "substantial authority" for treatment of the
item in question, the taxpayer reasonably believed that the income tax treatment
of that item was more likely than not the proper treatment.
Although LLC is not intended to be a so-called "tax shelter," it is
possible that it may be considered a tax shelter for purposes of Section 6662 of
the Code and that certain LLC tax items could be considered tax shelter items
within the meaning of Section 6662. The Regulations under Section 6662 provide
that an entity will be deemed to be a tax shelter if the tax avoidance or
evasion motive exceeds all other motives. Based on the business objectives of
LLC, LLC believes there are substantial grounds for a determination that LLC
does not constitute a tax shelter; however, because the issue is dependent upon
facts relating to future LLC operations, the acquisition and disposition of
LLC's properties, and other factual determinations which are not known at this
time, the possibility remains that LLC could be deemed to be a "tax shelter" for
purposes of Section 6662 of the Code.
In addition to the substantial understatement penalty, Section 6662 of the
Code also imposes a 20% penalty on any portion of an underpayment of tax (i)
attributable to any substantial valuation misstatement (generally where the
value or adjusted basis of a property claimed on a return is 200% or more of the
correct value or adjusted basis), or (ii) attributable to negligence,
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defined as any failure to make a reasonable attempt to comply with the Code, or
a careless, reckless or intentional disregard of federal income tax rules or
regulations.
TAX-SHELTER REGISTRATION
Any entity deemed to be a "tax shelter," as defined in Section 6111 of the
Code, is required to register with the IRS. Regulations under Section 6111
define a "tax shelter" as an investment in connection with which an investor can
reasonably infer from the representations made that the "tax shelter ratio" may
be greater than 2 to 1 as of the close of any of the first five years ending
after the date on which the investment is offered for sale. The "tax shelter
ratio" is generally determined by dividing the investor's share of the aggregate
deductions derived from the investment, determined without regard to income, by
the amount of the investor's capital contributions.
LLC is not intended to constitute a "tax shelter." In the absence of
events which are unlikely to occur, the aggregate amount of deductions derived
from any Interest Holder's investment in LLC, determined without regard to
income, will not exceed twice the amount of any such Interest Holder's
investment in LLC as of the close of any year in LLC's first five calendar
years.
In the absence of events which are unlikely to occur, the "tax shelter
ratio" with respect to an investment in LLC will not exceed 2 to 1 for any
Interest Holder as of the close of any year in LLC's first five calendar years,
it is more likely than not LLC is not currently required to register as a tax
shelter with the IRS under Section 6111 of the Code.
AUDITS
The IRS has recently undertaken an intensified audit program with respect
to partnerships and partnership returns.
In the event of an audit of LLC's tax return, the Executive Manager, on
behalf of LLC, will take primary responsibility for contesting federal income
tax adjustments proposed by the IRS, to extend the statute of limitations as to
all Interest Holders and, in certain circumstances, to bind the Interest Holders
to such adjustments. Although the Executive Manager will attempt to inform each
Interest Holder of the commencement and disposition of any such audit or
subsequent proceedings, Interest Holders should be aware that their
participation in administrative or judicial proceedings relating to LLC items
will be substantially restricted. An audit of LLC could result in substantial
legal and accounting fees required to be paid to substantiate the reporting
positions taken, and any such fees would reduce the cash otherwise available for
distribution to the Interest Holders. Any such audit may result in adjustments
to the tax returns of LLC which would require adjustments to each Interest
Holder's personal income tax return and may require such Interest Holders to pay
additional taxes plus interest, compounded daily. In addition, any audit of an
Interest Holder's return could result in adjustments of other items of income
and deductions not related to LLC.
PROPOSED TAX LEGISLATION AND REGULATORY PROPOSALS
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Legislative proposals have been made which could significantly change the
federal income tax laws as they relate to an investment in LLC. It is
impossible at this time, however, to predict whether or in what form any such
legislation will be enacted. EACH PROSPECTIVE INTEREST HOLDER IS URGED TO
CONSULT HIS OR HER OWN TAX ADVISOR WITH RESPECT TO THE INTEREST HOLDER'S OWN TAX
SITUATION, THE EFFECT OF ANY LEGISLATIVE, REGULATORY OR ADMINISTRATIVE
DEVELOPMENTS, OR OTHER POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
STATE AND LOCAL TAXES
In addition to the federal income tax aspects described above, prospective
Interest Holders should consider potential state and local tax consequences of
owning an LLC Interest. This Proxy Statement makes no attempt to summarize the
state and local tax consequences to an Interest Holder in those states in which
LLC may own properties or carry on activities, and each potential Interest
Holder is urged to consult his or her own tax advisor on all matters relating to
state and local taxation, including the following: (i) whether the state in
which the Interest Holder resides will impose a tax upon the Interest Holder's
share of the taxable income of LLC, (ii) whether an income tax or other return
must also be filed in those states where LLC will own properties, and (iii)
whether the Interest Holder will be subject to state income tax withholding in
states where LLC will own properties.
Because LLC will conduct its activities and own properties in different
taxing jurisdictions, the Interest Holder may have the obligation to file annual
tax returns in a number of different states or localities, as well as the
obligation to pay taxes to a number of different states or localities.
Additional costs incurred in having to prepare various state and local tax
returns, as well as the additional state and local tax which may be payable,
should be considered by prospective Interest Holders.
It should be noted that many states have implemented or are in the process
of implementing programs to require limited liability companies to withhold and
pay state income taxes owed by non-resident Interest Holders relating to income-
producing properties located in their states. In the event that LLC is required
to withhold state taxes from cash distributions otherwise payable to Interest
Holders, the amount of the Cash Flow otherwise payable to such Interest Holders
would likely be reduced. In addition, such collection and filing requirements
at the state level may result in increases in LLC's administrative expenses,
which would likely have the effect of reducing returns to the Interest Holders.
EACH PROSPECTIVE INTEREST HOLDER IS URGED TO CONSULT WITH HIS OR HER OWN
TAX ADVISOR WITH RESPECT TO THE IMPACT OF APPLICABLE STATE AND LOCAL TAXES ON
THE POTENTIAL INTEREST HOLDER'S INVESTMENT IN LLC.
COMPARISON OF CORPORATION LAWS OF ALASKA AND LIMITED LIABILITY
COMPANY LAWS IN WASHINGTON
Upon consummation of the Spin-Off Distribution and the Merger, shareholders
of Company who own fifty (50) or more Shares as of the Spin-Off Record Date
will, by virtue of the
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Spin-Off Distribution, become Interest Holders of LLC, a Washington limited
liability company. In addition, as a result of the Merger, their Shares will be
converted into the right to receive cash, and they will no longer be
shareholders of Company, an Alaska corporation. The LLC was selected because it
will facilitate the continuing liquidation of Company's assets while avoiding
corporate tax liabilities and the administrative costs of continuing as a public
company subject to compliance requirements of the Securities Exchange Act of
1934. LLC will continue the business activities of Company and will have its
principal offices in Seattle, Washington and accordingly formation of a limited
liability company under Washington law was determined to be the most practical
choice since it will avoid the need to qualify to do business as a foreign
entity. Company was incorporated in Alaska for historical reasons which are no
longer applicable.
The purpose of this section is to describe the material substantive and
procedural differences between the ACC and the Washington Limited Liability
Company Act, RCW 25.15 (the "Washington LLC Act"). For a detailed description
of the tax effects of being a member of a limited liability company, see "ANP,
LLC" above.
<TABLE>
<CAPTION>
Effect of Being a Shareholder of Effect of Being an Interest Holder of
Company Under the ACC (Alaska ANP, LLC Under the Washington
Corporations Code) LLC Act and the LLC Agreement(1)
------------------ --------------------------------
<S> <C> <C>
Governing Documents Articles of Incorporation and Bylaws LLC Agreement
Management Board of Directors, Executive Officers Executive Manager
Election of Board of Directors or Executive By Annual Shareholder Vote None; LLC Agreement provides for
Manager Executive Manager to manage LLC until
resignation or removal
Removal of Board of Directors or Executive Shareholder Vote at Annual or Special By two-thirds of the Percentages held
Manager Meeting by Members other than Executive Manager
and only then in certain defined
circumstances
Transferability of Interests Yes, Public Company Limited, governed by LLC Agreement
Personal Liability for Liabilities of Entity No No
Frequency of Meetings Annually No requirement
Ability to Call Special Meetings 10% of the Outstanding Shares 51% of Percentages Held by Members
Dissenters' Rights Merger, Consolidation, Exchange, Sale Only in the Event of a Merger
of all or Substantially all of Assets
- ------------------------------
(1) See also "ANP, LLC" above.
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Periodic Reporting Quarterly 10-Q, Annually 10-K, and Annually (Within 75 Days of End of
Currently for Material Events 8-K Year) "Annual Compilation Report"
consisting of information prepared by
LLC's independent accountants
conforming with the standards issued by
the American Institute of Certified
Public Accountants
Amendment to Governing Documents Majority of Outstanding Shares 51% of the Percentages of all Members
Distributions of Cash to Shareholders/Interest Dividend by Order of Board of Directors Subject to certain provisions in LLC
Holders Agreement, all Cash Flow is to be
distributed to Interest Holders within
75 Days of End of Year.
Taxation (See also "ANP, LLC - Income Tax Federal and state income taxes apply to Members of LLC are subject to federal
Consequences of Being an Interest Holder or both the Company and certain and state income taxes on pro rata
Member of LLC" above) distributions to shareholders share of taxable income of LLC
regardless of amounts distributed
Potential Duration of Entity Perpetual January 1, 2036
</TABLE>
MARKET PRICES OF AND DIVIDENDS ON STOCK
Company's common stock is traded in the over-the-counter market under the
NASDAQ symbol "ANWP." The following table indicates high and low bid prices of
the Common Stock:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
High Bid Low Bid High Bid Low Bid High Bid Low Bid
------------------- ------------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
First Quarter* $525.00 $525.00 $242.00 $238.00 $229.00 $214.00
Second Quarter 250.00 225.00 235.50 231.00
Third Quarter 275.00 220.00 235.00 219.00
Fourth Quarter* 330.00 220.00 242.00 233.00
</TABLE>
- -----------------
* High and low bids for the First Quarter of 1997 are through January 8, 1996
The high and low prices for each quarter are the high and low bids as
reported by certain market makers, which are those quoted by dealers to each
other, exclusive of markups, markdowns or commissions, and do not necessarily
represent actual transactions. Over the years, the Shares have not been widely
traded. In fact, from November 1995 to October 1996, the average volume of sales
of Shares was only 190 Shares per month.
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As of the Record Date, there were 29,668 Shares issued and outstanding.
The number of shareholders of record on the Record Date was 705. Company paid
no dividends in 1996 and 1995.
On November 15, 1996, the last full trading day before the first public
announcement of the planned Merger, the last reported bid quotation of the
Shares on over-the-counter market was $220.00 per Share. On February __, 1997,
the last reported sale quotation of the Shares on over-the-counter market was
$________ per Share.
SELECTED FINANCIAL INFORMATION CONCERNING COMPANY
The following selected financial data relating to Company has been taken or
derived from the financial statements and other records of Company. Such
selected financial data are qualified in their entirety by, and should be read
in conjunction with, the information set forth in the section entitled "COMPANY
FINANCIAL STATEMENTS AND PRO FORMA FINANCIAL INFORMATION" AND "ALASKA NORTHWEST
PROPERTIES INC.: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS". The interim financial information has been derived
from Company's unaudited interim financial statements which include all
adjustments, consisting only of normal recurring adjustments considered
necessary for a fair presentation of the financial condition and results of
operations for these periods. Operating results for the 1996 interim period are
not necessarily indicative of the results that might be expected for the entire
year.
ALASKA NORTHWEST PROPERTIES INC.
SELECTED CONSOLIDATED FINANCIAL INFORMATION
YEAR ENDED DECEMBER 31,
<TABLE>
<CAPTION>
Nine Months
Year Ended December 31, Ended September 30,
----------------------- -------------------
Summary of Operations 1995 1994 1993 1992 1991 1996 1995
- --------------------- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $323,619 $326,253 $407,589 $553,205 $523,355 $280,000 $258,000
Expenses (619,698) (712,045) (792,645) (917,756) (754,045) (433,000) (475,000)
Net Loss from Operations (296,079) (385,792) (385,056) (364,551) (230,690) (153,000) (217,000)
Other Income (Expense)
Gain on Sale of Real
Estate(1) 509,298 58,633 18,888 25,000 (3,173) 260,000 46,000
Net Realized and
Unrealized Gain
(Loss) on
Investments(2) (311,409) 3,163 170,753 (29,751) (60,031) (235,000) (207,000)
-------- --------- --------- --------- --------- --------- ---------
Net Loss $(98,190) $(323,996) $(195,415) $(369,302) $(293,894) $(128,000) $(378,000)
-------- --------- --------- --------- --------- --------- ---------
-------- --------- --------- --------- --------- --------- ---------
Net Loss per Share $ (3.39) $ (11.28) $ (6.83) $ (13.01) $ (10.36) $ (4.36) $ (13.00)
Book Value per Share 323.49 328.55 340.04 350.22 363.74 315.61 312.99
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Cash Dividends per
Share 0.00 0.00 1.00 2.00 2.00 0.00 0.00
Total Assets $9,754,270 $9,699,213 $10,012,914 $10,252,446 $10,637,313 $9,862,000 $9,310,000
Notes Payable 111,706 160,813 226,094 228,881 262,384 66,000 125,000
Shareholders' Equity 9,381,203 9,437,973 9,735,989 9,943,150 10,316,006 9,862,000 9,310,000
</TABLE>
__________________________
(1) As more fully described in Note 2 to Company's financial statements,
includes $424,402 recognized in 1995 relating to a 1993 sale of real estate
from which a portion of consideration received included buyer notes
receivable.
(2) As more fully described in Note 5 to Company's financial statements,
includes approximately $319,000 of net realized and unrealized losses
recognized in 1995 relating to derivative financial instruments.
ALASKA NORTHWEST PROPERTIES INC.: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE YEARS ENDED DECEMBER 31, 1993, 1994, AND 1995
REAL ESTATE AND NOTE COLLECTION ACTIVITIES
Real Estate and Note Collection Activities. As a result of continued
additional investment on the part of the buyer of a 37 room motel in Fairbanks,
Alaska, to whom Company sold the property in 1993 and from whom Company has a
note receivable, Company recognized the remaining deferred gain of $424,402
under the full accrual method of accounting for real estate sales during the
fourth quarter of 1995. Until the debtor's investment represented a substantial
initial and continuing investment, Company recognized revenue on the installment
method in amounts of $43,166, $11,503, and $72,240 in 1995, 1994 and 1993,
respectively.
Also during 1995, a portion (one of three apartment buildings) of the
collateral securing a 9% note receivable, was destroyed in a fire in Fairbanks,
Alaska. The debtor received an initial insurance disbursement of $50,000 and
applied half of the proceeds to the mortgage, as required by Company, in an
agreement dated September 8, 1995. Subsequent to December 31, 1995, Company
reached an agreement with the debtor on an additional allocation of insurance
proceeds in the amount of $337,667. Under an agreement dated February 23, 1996,
the debtor applied $262,667 to the mortgage on the note receivable, while
retaining the remaining $75,000 for improvements to the remaining collateral.
Prior Year Real Estate and Note Collection Activities. During 1994, the
lease expired between Company and Westmark Hotels Inc., the tenant in the
37-room motel in Fairbanks, Alaska. The motel was previously repossessed and
resold in 1993, as explained below. The Golden Nugget Hotel (formerly Pacific
Cove Corporation) assumed full control of the building at the termination of the
lease on April 1, 1994.
On March 31, 1993, the lease between the debtor on the $1,275,153 note and
the lessee of the collateral property, Westmark Hotels, Inc., expired and was
not extended. Subsequently, the debtor declared bankruptcy and relinquished the
collateral securing the note. Company subsequently executed a lease with
Westmark Hotels which expired March 31, 1994, as described above. The
collateral had a $531,751 net carrying value (before the repossession) due to a
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$743,402 deferred gain. Company did not incur any losses as a result of the
repossession as the fair market value of the collateral was in excess of the
carrying value.
On December 30, 1993, Company sold the 37-room motel for the price of
$1,144,755. The terms of the sale included a $150,000 cash down payment, a
$820,490, 7.5% note receivable, and a $174,265, 3% note receivable, which
mirrors the terms of Company's note payable with the Small Business
Administration. Company incurred selling costs of $60,747 in connection with the
sale. The initial payment of interest and principal commenced on June 1, 1994.
The $551,311 gain on sale was recognized on the installment basis in accordance
with FAS 66. Interest began occurring on the $820,490 note receivable on April,
1, 1994, the day the debtor assumed full control of the building.
An apartment building in Fairbanks, that was repossessed on June 10, 1992,
was sold on April 20, 1993. The terms of the sale included a $50,000 down
payment and a $716,040, 8% note receivable that is performing according to the
agreement. This transaction, which resulted in a deferred gain of $102,872 at
December 31, 1993, provided for a four month delay in the commencement of
interest and principal payments on the note. In exchange, the debtor made
substantial capital improvements to the collateral in the approximate amount of
$83,900, which has strengthened the buyer's ability to keep the note current and
increased the value of the property. The transaction is accounted for under the
cost recovery method in accordance with FAS 66, which requires the deferral of
gain and interest income until total payments received exceed the carrying value
of the property.
RESULTS OF OPERATIONS
Company has reported net losses over the past five (5) years. This is
primarily due to the carrying costs on Company's real estate portfolio held for
long term appreciation. The rental income on operating properties, investment
income, and sales of appreciated properties have and are expected to continue to
provide the liquidity to meet Company's long term objectives.
Company recognized a net loss in 1995 of $98,190 compared to a net loss of
$323,996 for 1994. Total revenues, combined with gains on sales of real estate,
increased over the past year to $832,917 in 1995 from $384,886 in 1994,
primarily as a result of the 1995 gain recognition of $442,402 on the December
30, 1993, sale of a motel in Fairbanks, Alaska. Interest income in 1995
increased by $20,092 over 1994 due to an increase in the prime interest rate
affecting various notes receivable. Operating expenses decreased 6%, primarily
due to a decrease in property taxes and depreciable assets. In 1995, Company
had gains of $41,730 on the cash sales of three residential lots and a portion
of a commercial lot in Fairbanks, Alaska. There were no real estate sales in
1994.
Company recognized a net loss of $323,996 for 1994 compared to a net loss
of $195,415 for the prior year. Total revenues, combined with gains on real
estate sales, decreased to $384,886 in 1994 from $426,477 in 1993. Although the
net difference in total revenue is only 10%, its components reflect significant
changes between the two years, primarily related to the prior year's sales of
various operating properties in Fairbanks, Alaska and the increase in interest
income on the notes receivable related to the sales. Rental income decreased to
$227,839 in 1994
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<PAGE>
from $330,304 in 1993, a 31% reduction. Conversely, interest income increased
43% to $68,684 in 1994 from $47,849 in 1993. Operating expenses continued to
decline, falling to $402,759 in 1994 from $495,441 in 1993, representing a 19%
change. This is a result of a decrease in maintenance costs related to the sale
of the apartments.
INVESTMENT ACTIVITIES
During the years ended December 31, 1995 and 1994, Company recorded net
realized and unrealized losses from its commodities and financial instrument
investment activities of approximately $311,000 and $3,000, respectively.
During the year ended December 31, 1993, Company recorded a net realized and
unrealized gain of approximately $171,000. The primary reasons for fluctuations
in investment activities' results relate to changes in the underlying value of
investment securities and, commencing in late 1994, an increase in amounts
invested.
Prior to 1995, Company had maintained an investment position in physical
holdings of precious metals. During 1995, Company sold its physical holdings
and, in all material respects, replaced such investment position by entering
into precious metals futures and options contracts. Additionally, commencing in
late 1994, Company established a trading position in stock index futures and
options contracts. Company's futures and futures options contracts are
relatively short-term, generally 6 months to less than 2 years. At December 31,
1995, contract amounts of unsettled futures options contracts approximated
$900,000 and $1.5 million relating to precious metals and stock index
derivatives, respectively.
Company's investment portfolio includes financial instruments which have
off-balance-sheet risk. These financial instruments include options written and
futures contracts that involve, to varying degrees, elements of credit and
market rate risk in excess of the amount recognized in the financial statements.
These contracts were entered into for the potential investment return to
Company. Company controls the credit and market risk of its futures and option
contracts through credit approvals, limits, and monitoring procedures.
LIQUIDITY AND CAPITAL RESOURCES
Management anticipates that the current level of available liquidity is
adequate to satisfy its known future working capital and capital expenditure
requirements. Company has no commitments other than normal operating costs
which would require the use of capital resources. Company met its liquidity
requirements from investing, financing, and operating activities in 1995 as
outlined below:
Operations. As presented in more detail in the accompanying statements of
cash flows, cash used by operating activities was $103,568 in 1995 as compared
to $147,627 in 1994. Company incurred a net loss of $98,190 in 1995, which
included non-cash charges for depreciation of $140,831 and realized and
unrealized investment losses of $311,409 and non-cash gain recognition on real
estate sales of $509,298.
Investing. Net cash provided by investing activities totaled $236,422.
Cash was generated from the purchase and sale of other assets in the amount of
$116,904, which includes the net difference in the purchase and sale of
commodities, futures and option contracts. Other
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sources of investment cash included the sale of land held for investment in the
amount of $82,292 and proceeds from the disposal of assets of $15,396. Uses of
funds included $47,557 from purchases of Government Securities, net of
maturities and addition of property and equipment of $43,653.
EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS
Recently issued accounting standards having relevant applicability to
Company consist primarily of Statement of Financial Accounting Standards No. 121
("SFAS No. 121"), which establishes accounting standards for, among other
things, the impairment of long-lived assets and certain identifiable intangibles
and Statement of Financial Accounting Standard No. 123 ("SFAS No. 123"), which
establishes standards for accounting for stock-based compensation. SFAS No. 121
will be effective for financial statements having fiscal years beginning after
December 15, 1995, and is not expected to have a significant effect, if any, on
Company's financial condition or results of operation. SFAS No. 123 will be
effective for financial statements for fiscal years beginning after December 15,
1995, and required pro forma disclosures will be included in such statements.
It is not expected that Company will adopt the "fair value based method" of
accounting for stock options, which is encouraged by SFAS No. 123, but rather
will continue to account for such, utilizing the "intrinsic value based method"
as is allowed by that statement.
NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
REAL ESTATE AND NOTE COLLECTION ACTIVITIES
In the third quarter of 1996, the State of Alaska Department of
Transportation (DOT) began construction on a highway improvement project
adjacent to Company's largest commercial property in Fairbanks, Alaska.
Eventually, this project should enhance the value of Company's property by
allowing direct access from the highway. In the fourth quarter of 1995, the DOT
purchased a 14,000 square foot parcel from Company for an additional
right-of-way.
During the second quarter, payments commenced under a mortgage reduction
agreement reached in the first quarter on a 9% note receivable, as discussed
below. To date, all payment have been received in a timely manner.
In the first quarter, Company reached an agreement with a debtor on an
allocation of insurance proceeds totaling $337,667, received when one of three
apartment buildings, securing a 9% note receivable, was destroyed in a fire in
Fairbanks, Alaska. Under an agreement dated February 23, 1996, the debtor
applied $262,667 to the mortgage on the note receivable, while retaining the
remaining $75,000 for improvements to the remaining collateral. In addition,
Company agreed to release the portion of the collateral that was damaged to the
debtor and reduce the related monthly payment from $5,800 to $3,365. During
1995, the debtor received an initial insurance disbursement of $50,000 and
applied half of the proceeds to the mortgage, as required by Company. As a
result of continued additional investment on the part of the debtor, to whom
Company sold the property in 1993, Company recognized the remaining deferred
gain of $260,731, under the full accrual method of accounting for real estate
sales in accordance with FAS 66. Also in the first quarter, Company decided
that it was not in its best interest to disburse dividends in 1996.
-58-
<PAGE>
RESULTS OF OPERATIONS
For the nine months ended September 30, 1996, a net loss of $128,000 was
recognized by Company, as compared to a net loss of $378,000 for the same period
in 1995. During the nine months ended September 30, 1996, Company recognized a
gain on the sale of real estate of $260,000 as compared to a gain of $46,000
during the corresponding prior year period.
For the nine months ended September 30, 1996, total revenues increased
approximately $32,000 from same period of the previous year, primarily due to an
increase in interest income from notes and securities. Cost and Expenses for the
nine months ended September 30, 1996, including interest expense, decreased
$42,000, primarily as a result of a decrease of operating expenses.
LIQUIDITY AND CAPITAL RESOURCES
Management anticipates that the current level of available liquidity is
adequate to satisfy its known future working capital and capital expenditure
requirements. Company has no commitments other than normal operating costs
which would require the use of capital resources. Company met its liquidity
requirements from investing, financing, and operating activities as of September
30, 1996, as outlined below:
Operations. As presented in more detail in the accompanying statement of
cash flows, cash used in operating activities was $68,000. Company has incurred
a net loss of $128,000 in 1996, which included non-cash charges for depreciation
of $74,000, realized and unrealized investment losses of $235,000 and non-cash
gain recognition on real estate sales of $260,000.
Investing. Net cash provided by investing activities have totaled $39,000.
Cash was paid resulting from the purchase and sale of other assets in the amount
of $100,000, which includes the net difference in the purchase and sale of
futures and futures options contracts. Other uses of investment cash include
$146,000 from the purchase of Government Securities, net of maturities.
Subsequent to September 30, 1996, on November 18, 1996, Company executed
the Reorganization Agreement. On December 11, 1996, Company executed the Plan
of Distribution. (See "PROPOSAL: THE MERGER: The Reorganization
Agreement--The Merger" and "THE SPIN-OFF DISTRIBUTION").
INDEPENDENT PUBLIC ACCOUNTANTS
It is not expected that representatives of BDO Seidman, LLP ("BDO") will be
present at the Meeting.
Clark Nuber, P.S. ("Clark Nuber") is Company's predecessor auditors.
Effective August 29, 1995, Clark Nuber was not re-engaged to audit the financial
statements for Company. The opinion of Clark Nuber noted in the principal
accountant's report in Company's 1994 and 1993 10-K financial statement did not
contain an adverse opinion or a disclaimer of opinion, and was not qualified or
modified as to uncertainty, audit scope, or accounting principles. In
connection
-59-
<PAGE>
with the audits of the Company's 1994 and 1993 financial statement, through
August 29, 1995, there were no disagreements with Clark Nuber on any matter of
accounting principles or practices, financial statement disclosure, or audit
scope or procedure.
The decision to change accountants was approved by the Board on August 29,
1995. Beginning with the year ended December 31, 1995, BDO was engaged as
Company's independent accountants. At no time prior to the selection of BDO did
Company consult with BDO with respect to the application of accounting
principles on any specific transactions, or inquire as to the type of audit
opinion that BDO might issues with respect to Company's financial statements.
On August 31, 1995, Company filed a current report on Form 8-K containing
the above described information relating to their change of independent
accountant. In the report, Clark Nuber issued a letter confirming their
agreement with the disclosures made by Company in the Form 8-K.
SHAREHOLDERS' PROPOSALS
If the Merger is not consummated, any proposals of holders of Shares
intended to be presented at the Annual Meeting of Shareholders of Company to be
held in 1997 must be received by Company, addressed to the Corporate Secretary,
P.O. Box 68934 Seattle, WA 98168, no later than March 1, 1997 to be considered
for inclusion in the proxy statement and form of proxy relating to that meeting.
If the Merger is approved at the Special Meeting, no Annual Meeting of Company
will be held in 1997. Pursuant to the LLC Agreement, LLC may, but is under no
obligation to hold regular annual meetings, and as a privately held entity will
not be subject to the proxy rules of the Securities Exchange Act of 1934.
-60-
<PAGE>
COMPANY FINANCIAL STATEMENTS AND PRO FORMA FINANCIAL INFORMATION
Index to Financial Statements
Page
For the year ended December 31, 1995
Balance Sheets. . . . . . . . . . . . . . . . . . . . . . . F-1
Statements of Operations. . . . . . . . . . . . . . . . . . F-2
Statements of Shareholders' Equity. . . . . . . . . . . . . F-3
Statements of Cash Flows. . . . . . . . . . . . . . . . . . F-4
Notes to Financial Statements . . . . . . . . . . . . . . . F-5
Reports of Independent Certified Public Accountants . . . . F-14
For the nine months ended September 30, 1996
Balance Sheets. . . . . . . . . . . . . . . . . . . . . . . F-16
Statements of Operations. . . . . . . . . . . . . . . . . . F-17
Statements of Shareholders' Equity. . . . . . . . . . . . . F-18
Statements of Cash Flows. . . . . . . . . . . . . . . . . . F-19
Notes to Financial Statements . . . . . . . . . . . . . . . F-20
ANP, LLC: Pro Forma Financial Data . . . . . . . . . . . . . . . . F-21
-61-
<PAGE>
ALASKA NORTHWEST PROPERTIES INC.
BALANCE SHEETS
AS OF DECEMBER 31, 1995 AND 1994
ASSETS 1995 1994
---- ----
OPERATING PROPERTY AND EQUIPMENT, at cost:
Buildings $942,445 $942,446
Furniture, fixtures and equipment 126,546 178,707
Leasehold costs and other 218,351 218,351
--------- ---------
1,287,342 1,339,504
Less accumulated depreciation and amortization (879,801) (862,370)
--------- ---------
407,541 477,134
LAND HELD FOR INVESTMENT, at cost
(Net of accumulated amortization of $340,382 and
$294,997, respectively) 4,362,716 4,457,662
INVESTMENT IN SPIEDEN ISLAND
(Net of accumulated depreciation of $614,546 and
$588,808, respectively) 3,057,837 3,055,434
NOTES RECEIVABLE (net of deferred gain of
$247,440 and $654,183, respectively) 1,368,120 1,065,418
CASH AND CASH EQUIVALENTS 147,819 111,214
RESTRICTED CASH (Note 5) 88,110 0
U.S. GOVERNMENT SECURITIES (Note 5) 217,960 170,403
OTHER ASSETS 104,167 91,856
INVESTMENTS IN COMMODITIES 0 270,092
--------- ---------
TOTAL ASSETS $9,754,270 $9,699,213
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
NOTES PAYABLE $ 111,706 $ 160,813
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES 58,322 69,338
LIABILITY FOR UNSETTLED FUTURES AND
OPTION CONTRACTS (Note 5) 203,039 31,089
--------- ---------
TOTAL LIABILITIES 373,067 261,240
--------- ---------
COMMITMENTS (Note 5, 8, & 9)
SHAREHOLDERS' EQUITY:
Common stock $1.00 par value, authorized 50,000
shares, issued 47,641 476,409 476,409
Capital in excess of par value 14,755,812 14,755,812
Treasury stock, at cost
(Note 8) (1995 - 18,554 shares;
1994 - 18,798 shares) (5,005,117) (5,046,537)
Accumulated deficit (845,901) (747,711)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 9,381,203 9,437,973
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $9,754,270 $9,699,213
---------- ----------
---------- ----------
The accompanying notes are an integral part of these financial statements.
F-1
<PAGE>
ALASKA NORTHWEST PROPERTIES INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
REVENUES
Interest Income $88,776 $68,684 $47,849
Building and Land Rents 223,757 227,839 330,304
Other Income 11,086 29,730 29,436
------- ------- -------
323,619 326,253 407,589
------- ------- -------
EXPENSES
Operating Expenses 376,114 402,759 495,441
General & Administrative Expenses 238,352 302,115 278,338
Interest Expense 5,232 7,171 18,866
------- ------- -------
619,698 712,045 792,645
------- ------- -------
OTHER INCOME (EXPENSE)
Gain on real estate (Note 2) 509,298 58,633 18,888
Gain (loss) on sale of investments (Note 5) (225,110) 163,042 (4,149)
Increase (decrease) in unrealized appreciation
(depreciation) on investments (Note 5) (86,299) (159,879) 174,902
------- ------- -------
197,889 61,796 189,641
------- ------- -------
NET LOSS $(98,190) $(323,996) $(195,415)
-------- --------- ---------
-------- --------- ---------
AVERAGE SHARES OUTSTANDING 29,000 28,726 28,632
------- ------- -------
------- ------- -------
NET LOSS PER COMMON SHARE $(3.39) $(11.28) $(6.83)
------- ------- -------
------- ------- -------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
ALASKA NORTHWEST PROPERTIES INC.
STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
<TABLE>
<CAPTION>
COMMON STOCK
-----------------------
Capital in
$1.00 Par Excess of Retained
Value Par Value Treasury Stock Earnings
---------- ------------ -------------- --------
<S> <C> <C> <C> <C>
BALANCES AT
DECEMBER 31, 1992 $476,409 $14,755,812 $(5,087,516) $(199,705)
Net loss (195,415)
Treasury shares:
Purchased (44,101)
Sold 59,100
Dividends Paid @ $1 per share (28,595)
---------- ----------- ---------- ----------
BALANCES AT
DECEMBER 31, 1993 476,409 14,755,812 (5,072,517) (423,715)
Net loss (323,996)
Treasury shares:
Purchased (2,520)
Sold 28,500
---------- ----------- ---------- ----------
BALANCES AT
DECEMBER 31, 1994 476,409 14,755,812 (5,046,537) (747,711)
Net loss (98,190)
Treasury shares:
Purchased
Sold (1,080)
42,500
---------- ----------- ---------- ----------
BALANCES AT
DECEMBER 31, 1995 $476,409 $14,755,812 $(5,005,117) $(845,901)
---------- ----------- ---------- ----------
---------- ----------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
ALASKA NORTHWEST PROPERTIES INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(98,190) $(323,996) $(195,415)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization 140,831 161,808 184,537
Gain on sale of real estate (509,298) (58,633) (18,888)
(Gain) loss on sale of investments 225,110 (163,042) 4,149
Increase (decrease) in unrealized depreciation (appreciation) on investments 86,299 159,879 (174,902)
Increase in restricted cash (88,110) 0 0
Increase in deferred interest income 60,826 58,633 25,109
Other (9,146) 17,724 63,675
-------- -------- --------
Net cash used in operating activities (191,678) (147,627) (111,735)
-------- -------- --------
Cash flows from investing activities:
Proceeds from disposal of assets 15,396 150 372,791
Collection of notes receivable 113,040 54,311 7,684
Maturing U.S. Government securities 364,456 270,289 167,650
Acquisition of U.S. Government securities (412,013) (317,548) (241,539)
Addition to property and equipment (43,653) (6,205) (78,464)
Sale of land held for investment 82,292 0 0
Sale (Purchase) of other assets - net 116,904 98,948 (103,390)
-------- -------- --------
Net cash provided by investing activities 236,422 99,945 124,732
-------- -------- --------
Cash flows from financing activities:
Treasury stock sales and purchases 40,968 25,908 14,172
Increase in long term debt 0 0 24,000
Decrease in long term debt (49,107) (65,281) (26,787)
Dividends paid 0 0 (28,595)
-------- -------- --------
Net cash used in financing activities (8,139) (39,373) (17,210)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 36,605 (87,055) (4,213)
Cash and cash equivalents:
Beginning of period 111,214 198,269 202,482
-------- -------- --------
End of period $147,819 $111,214 $198,269
-------- -------- --------
-------- -------- --------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
ALASKA NORTHWEST PROPERTIES INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
OPERATIONS: The principal business of Company is real estate investment
and operations. Company holds for investment purposes several parcels of
undeveloped land in the vicinity of Fairbanks, Alaska, as well as Spieden
Island, a 500 acre island in San Juan County, Washington. The primary operating
properties include a facility building at the Fairbanks International Airport, a
condominium unit in Honolulu, Hawaii, and lodging facilities on Spieden Island.
ACCOUNTING ESTIMATES: The preparation of financial statements in
conformity with generally accepted accounting principles (GAAP) 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 reported period.
OPERATING PROPERTY AND DEPRECIATION: Operating property and equipment
acquired through purchase is carried at cost. Operating property and equipment
are depreciated by the straight-line method over the estimated useful lives of
the assets as follows:
Buildings 25-40 years
Furniture, fixtures & equipment 5-15 years
Leasehold costs and other 5-20 years
Land improvements 15 years
LAND HELD FOR INVESTMENT: Interest on debt and real estate taxes related
to land held for investment are charged to expense as incurred. Land held for
investment includes land and under-water breakwater improvements that are
amortized by the straight-line method over the estimated useful lives of the
improvements. Land Held for Investment purchased is carried at cost or if
acquired through foreclosure or repossession is carried at the lower of
management's estimate of fair market value less estimated selling costs or the
carrying value of the investment at the date of acquisition.
CASH AND CASH EQUIVALENTS: Company considered all highly liquid
investments with an initial maturity of three months or less at the date of
purchase to be cash equivalents.
INVESTMENTS AND OTHER ASSETS: Investments and other assets (including
futures and options contracts) primarily represent trading securities, which are
reported in the balance sheet at fair value at the reporting date utilizing
quoted market prices. Realized gains and losses are recognized during the
period in which sales occur or futures and options contracts closed.
Unrealized gains and losses are recognized and reported in the statements of
operations as increase (decrease) in unrealized appreciation or (depreciation)
during the period in which the changes in market value occur.
F-5
<PAGE>
INCOME TAXES: Income taxes, when material, are provided regardless of the
period when such taxes will be paid in accordance with Financial Accounting
Standards Board Statement No. 109 "Accounting for Income Taxes."
TREASURY STOCK: Treasury stock is accounted for under the cost method.
COMMON SHARES OUTSTANDING AND LOSS PER COMMON SHARE: Loss per common share
data has been computed based upon the average number of shares of common stock
outstanding during the period. Stock options did not impact loss per share as
they were antidilutive.
INCOME RECOGNITION: Income from sales of real estate properties and land
held for investment is generally recorded when the buyer's financial commitment
is sufficient to provide economic substance to the transaction, and when other
criteria of Financial Accounting Standards Statement No. 66 "Accounting for
Sales of Real Estate" (FAS 66) are satisfied. Interest on each note is
recognized in income as it accrues during the period it is outstanding with the
exception of interest income on notes receivable for real estate transactions
accounted for on the cost recovery method. However, if an uncertainty exists
about the collectibility of a note, Company may establish a reserve for
uncollected interest earned and recognize income only when cash is received.
Company may also establish a reserve for doubtful accounts on notes receivable
based on management's evaluation of the recoverability of the note. The
evaluation of recoverability is made through comparison of the carrying value of
the asset with its estimated net realizable value. See Note 2.
FINANCIAL STATEMENT PRESENTATION: Certain reclassifications have been made
to prior years' financial statements to conform to the current format.
EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS: Recently issued accounting
standards having relevant applicability to Company consist primarily of
Statement of Financial Accounting Standards No. 121 ("SFAS No. 121"), which
establishes accounting standards for, among other things, the impairment of
long-lived assets and certain identifiable intangibles and Statement of
Financial Accounting Standard No. 123 ("SFAS No. 123"), which establishes
standards for accounting for stock-based compensation. SFAS No. 121 will be
effective for financial statements having fiscal years beginning after December
15, 1995, and is not expected to have a significant effect, if any, on Company's
financial condition or results of operation. SFAS No. 123 will be effective for
financial statements for fiscal years beginning after December 15, 1995, and
required pro forma disclosures will be included in such statements. It is not
expected that Company will adopt the "fair value based method" of accounting for
stock options, which is encouraged by SFAS No. 123, but rather will continue to
account for such, utilizing the "intrinsic value based method" as is allowed by
that statement.
NOTE 2 - OPERATING PROPERTY AND LAND HELD FOR INVESTMENT
Company had three operating properties at December 31, 1995 and 1994. The
properties consist of a commercial facility at the Fairbanks Airport in the
State of Alaska, a condominium in the State of Hawaii, and lodging facilities on
Spieden Island in the San Juan Islands, Washington. Each property was acquired
by purchase and is carried at cost less accumulated depreciation. There are no
material mortgages, liens or encumbrances against these properties and no
proposed
F-6
<PAGE>
programs for significant renovation or improvement at this time. The properties
are covered under a comprehensive insurance policy. The properties are held for
operating as well as investment purposes. The Fairbanks Airport building is
leased to a single tenant as disclosed in Notes 4 and 9. The Hawaii condominium
is leased on an annual, biannual, and month-to-month basis, while the island
facilities are leased on a month-to-month and daily basis. During 1995, Company
had no purchases or repossessions of operating properties or land held for
investment, and had land held for investment cash sales of three residential
lots and a portion of a commercial lot in Fairbanks, Alaska, for a total pretax
gain of $41,730.
In 1994, Company had no purchases, repossessions or sales of operating
properties or land held for investment.
During 1993, Company sold two properties that were previously acquired by
repossession through the foreclosure process. The significant details of the
two properties are as follows:
TANANA VILLAGE APARTMENTS (TVA): This property has been sold, repossessed
and resold twice (repossessed and resold in 1986, repossessed in 1992 and resold
in 1993). In 1986, this 36 unit apartment building was sold for $735,000. In
June 1992, Company repossessed TVA, which secured a $680,000, 9.5% promissory
note and another related $68,299, 13% note. Company accounted for the
repossessed properties by recording the basis in the property at the remaining
balance outstanding on the notes receivable, plus accrued interest receivable,
net of deferred gains. The $613,643 net carrying value of the notes was lower
than management's estimate of the fair market value less estimated selling costs
as demonstrated by the subsequent resale described below. Tanana Village
Apartments was resold on April 20, 1993, for $752,000. The terms of the sale
included a $50,000 cash down payment and a $716,040 note receivable, adjusted
annually to the prime rate plus 2% (See Note 3). Included in the note balance
was $14,040 of delayed interest for the four months before the first payment
date on August 20, 1993. Selling and other costs of $46,921 were incurred
leaving a gain of $102,872 that was deferred in accordance with FAS 66 under the
cost recovery method. Interest income is also deferred under the cost recovery
method until the debtor's commitment exceeds Company's cost basis at the date of
sale. Deferred interest income totaled $60,826, $58,633, and $25,109 in 1995,
1994 and 1993, respectively,
GOLDEN NUGGET MOTEL: This 37 room motel was sold in 1978 for $1,420,000.
In June 1993, Company repossessed the motel, which was collateral for a note
receivable, with a remaining balance of $1,268,947. The carrying value of the
note, net of deferred gain of $743,404 was $531,972. The property was recorded
at the net carrying value of the note as the amount was lower than the market
value less estimated selling costs as demonstrated by the subsequent resale
described below. The motel was resold on December 30, 1993, for $1,144,755.
The terms of the sale include a $150,000 cash down payment, a $820,490, 7.5%
note receivable and a $174,265, 3% note receivable matching the terms of an
underlying note payable with the SBA (See Note 6). Selling costs of $60,747
were incurred leaving a $551,311 gain that was deferred at the time of the 1993
sale under the installment method in accordance with FAS 66.
During 1995, 1994, and 1993, Company recognized $43,166, $11,503 and
$72,240, respectively, of gains on the sale of real estate under the installment
method in accordance with FAS 66. As a result of the debtor's continued
additional investment, to such extent that there exists a substantial initial
and continuing investment, Company recognized the remaining deferred gain of
$424,402 under the full accrual method in accordance with FAS 66 in 1995.
F-7
<PAGE>
At December 31, 1995 and 1994, land held for investment consisted of
properties that were zoned as follows:
General commercial or multifamily $3,080,323 $3,097,576
Single family residence 594,454 626,763
Multifamily residence 1,028,321 1,028,321
---------- ----------
4,703,098 4,752,660
Less accumulated depreciation (340,382) (294,998)
---------- ----------
$4,362,716 $4,457,662
---------- ----------
---------- ----------
NOTE 3 - NOTES RECEIVABLE
At December 31, 1995 and 1994, long-term, non-recourse notes receivable
from sales of real estate and other properties consisted of the following:
1995 1994
---- ----
7.5% note receivable with monthly
installments of $6,610 beginning
6-1-94 until paid in full, secured
by a second mortgage on a motel
and restaurant in the State of Alaska. $793,325 $813,248
9% note receivable (adjusted annually
to the prime rate plus 2%) with
monthly installments of $5,800 until
paid in full. Secured by a building
in the State of Alaska. 673,896 707,606
3% note receivable with variable
monthly installments. The note
receivable terms match the Note
Payable to the SBA in Note 6. 87,985 135,023
8.5% note receivable with monthly
installments of $543 until paid in
full. Secured by a duplex in the
State of Alaska. 60,355 63,724
---------- ----------
1,615,561 1,719,601
Less deferred gain and deferred interest income (247,441) (654,183)
---------- ---------
Total $1,368,120 $1,065,418
---------- ---------
---------- ---------
Principal payments on the above are expected as follows for the next five
years:
F-8
<PAGE>
1996 $75,266
1997 71,111
1998 34,480
1999 745,178
2000 15,078
Thereafter 674,448
-------
$1,615,561
----------
----------
Subsequent to December 31, 1995, the debtor on the 9% note receivable
agreed to apply $262,667 in insurance proceeds to the outstanding balance on the
note. In addition, Company agreed to release the portion of the collateral that
was damaged to the debtor and reduce the related monthly payment from $5,800 to
$3,365. This payment is not reflected in the five year summary above.
NOTE 4 - CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS
Financial instruments that potentially subject Company to concentration of
credit risk consist primarily of notes receivable secured by real estate from
debtors in the Fairbanks, Alaska region. It is Company's policy to require
collateral sufficient to provide for full realization of a note receivable's net
carrying value in any transactions where a note is accepted as consideration.
Company's exposure in the event of nonperformance of the debtors is represented
by the contractual amount of these notes.
Company has considered the effect of the general downturn in economic
activity in Fairbanks, Alaska over the past decade and the effect on individual
debtors and collateral value of properties securing notes receivable. The
primary impact of the economic conditions has been a decreased demand for vacant
lots and other commercial properties. This decreased demand indirectly affects
note receivable collection activities as the debtors are frequently involved in
enterprises affected by these market factors. Management has specifically
evaluated the value of the underlying collateral and credit history of
individual debtors for each note and has determined that no allowance for
doubtful accounts is necessary based upon the sufficiency of the collateral and
credit information about each debtor.
During 1995 and 1994, approximately 95% and 85% respectively, of total
interest income, including amounts deferred under the cost recovery method of
accounting was received from two debtors. During both 1995 and 1994, one major
tenant of the Fairbanks Airport operating property accounted for 46% of rent
income (see Note 9).
NOTE 5 - FUTURES, OPTIONS, AND OTHER ASSETS
Company's investment portfolio includes financial instruments which have
off-balance-sheet risk. These financial instruments include options written and
futures contracts which involve, to varying degrees, elements of credit and
market risk in excess of the amount recognized in the financial statements.
These contracts were entered into for the potential investment return to
Company. Company controls the credit and market risk of its futures and option
contracts through credit approvals, limits, and monitoring procedures.
F-9
<PAGE>
Company maintains trading positions in precious metals and stock index
derivative financial instruments that are comprised of futures and futures
options contracts. Futures contracts are forward-based contracts to make or
take delivery of a specified financial instrument or commodity at a specified
future date or during a specified period. The risk associated with futures
contracts arises from the market movements in the underlying commodities or
securities value. Option contracts allow, but do not require, the holder to buy
or sell (or purchaser to call or put) a specified financial instrument or
commodity at a specified price during a specified period. At the inception of
an option contract, the seller charges a fee in exchange for assuming the risk
of an unfavorable change in the price of the underlying security. Premiums
received are deferred until contracts close or expire. Futures and futures
options are standardized contracts traded on an organized exchange. To ensure
an orderly market, the exchange specifies maximum daily price fluctuations for
each type of contract.
Brokers require both buyers and sellers of futures and futures options
contracts to deposit assets (such as cash or government securities) when
contracts are initiated and require additional (or release) collateral on a
daily basis as contracts are marked to market. At December 31, 1995,
approximately $90,000 and $115,000 of Company's cash and government securities,
respectively, are pledged as security for open contracts and are accordingly
restricted as to withdrawal.
The estimated fair value of open futures and futures options contracts
represents amounts that Company would pay, or receive, to terminate the
contracts at the reporting date, taking into account unrealized gains or losses
of open contracts and premiums received from writing options. The negative fair
value is reported in the accompanying balance sheets as liability for unsettled
futures and options contracts. The liability for unsettled futures and options
contracts approximated $203,000 and $31,000 at December 31, 1995 and 1994,
respectively. The average negative fair values during the years ended December
31, 1995 and 1994 did not vary materially from the respective year end values.
Company's futures and futures options contracts are relatively short-term,
generally 6 months to less than 2 years. At December 31, 1995, notional (or
contract) amounts of unsettled futures and futures options contracts
approximated $900,000 and $1.5 million, relating to precious metals and stock
index derivatives, respectively. The contract amounts do not represent amounts
exchanged, and thus, are not a measure of Company's exposure though its use of
such financial instruments.
During the years ended December 31, 1995 and 1994, recorded net realized
and unrealized losses relating to derivative financial instruments are
approximately as follows:
Class of Derivative Instrument: 1995 1994
---- ----
Commodities $(19,000) $(11,000)
Stock Index (300,000) 7,000
-------- --------
$(319,000) $(4,000)
--------- --------
--------- --------
During the year ended December 31, 1995, Company sold the physical
quantities of precious metals that it owned and recorded a net gain of
approximately $1,400.
F-10
<PAGE>
NOTE 6 - NOTES PAYABLE
At December 31, 1995 and 1994, Company's notes payable consisted of the
following:
1995 1994
---- ----
3% Small Business Administration note
secured by a motel, payable in monthly
installments through 1997. $87,985 $134,958
7% mortgage secured by building, payable
in monthly installments through 2004. 23,721 25,855
------- --------
Total $111,706 $160,813
-------- --------
-------- --------
Principal payments on the above are due as follows:
1996 $51,001
1997 41,727
1998 2,631
1999 2,788
2000 2,956
thereafter 10,603
------
$111,706
--------
--------
Cash paid for interest in 1995, 1994, and 1993 was $5,300, $7,328, and $8,629,
respectively.
NOTE 7 - INCOME TAXES
Company accounts for income taxes utilizing the liability method required
by the Financial Accounting Standards Board Statement of Financial Accounting
Standards No. 109 (FAS 109), "Accounting for Income Taxes". Under this method,
deferred tax assets and liabilities are determined based on tax carry forwards
and the differences between financial reporting and the tax basis of assets and
liabilities. These tax assets and liabilities are measured using the enacted
tax rates and laws that will be in effect when the differences are expected to
reverse.
Company has considered available evidence supporting the realization of net
deferred tax assets including future reversal of temporary differences and
future taxable income exclusive of temporary differences in the carry forward
period of loss and credit carry forwards. At December 31, 1995 and 1994,
Company had net operating loss carry forwards totaling approximately $1.3
million and $1 million, respectively, that may be offset against future taxable
income and start expiring in the year 2004. Additionally, Company has capital
loss carryforwards totaling $240,000 that may be offset against future capital
gains through the year 2000. On the basis of these factors and Company's recent
loss history, Company has provided a valuation allowance for the full amount of
the deferred tax asset at December 31, 1995 and 1994 with no effect on net
F-11
<PAGE>
income for the current and prior period. The valuation allowance will be
reevaluated on a quarterly basis.
Company's deferred tax liabilities and deferred tax assets relate to tax
loss carryforwards and temporary differences in the basis of real estate assets
and notes receivable and differences in the timing of recognition of gains on
sales of real estate for financial and tax return purposes and are presented
below:
December 31, December 31,
1995 1994
---- ----
Deferred tax liabilities $ 197,000 $ 88,000
Deferred tax assets 435,000 365,000
Valuation Allowance 238,000 277,000
NOTE 8 - TREASURY STOCK AND STOCK OPTIONS
On June 17, 1987, a 1 for 10 reverse stock split became effective and the
outstanding shares were reduced to approximately 29,428 shares of new common
stock. A liability was recorded for the fractional shares outstanding after the
reverse stock split. During 1995 and 1994, total purchases of fractional shares
amounted to $452 and $72 respectively. As of December 31, 1995 and 1994,
Company had 29,087 and 28,843 shares of common stock outstanding and a $34,324
and $34,776 liability for fractional shares yet to be purchased. Total common
stock issued and authorized, treasury stock, outstanding shares, amounts per
share and stock options were adjusted to an equivalent reverse stock split
basis.
During 1995 and 1994, Company purchased 8 and 14 shares, respectively, of
its own common stock from various unaffiliated stockholders and sold 250 and 170
shares, respectively, of treasury stock via the exercise of stock options.
During 1993, Company purchased 248 shares of its own common stock from various
unaffiliated stockholders as part of a tender offer to shareholders with less
than 5 shares and sold 354 shares of treasury stock via the exercise
of stock options.
The Board of Directors has granted five-year non-qualified stock options to
directors, officers and certain key employees which were exercisable on the date
of grant and expire in 1996 and 1997. The option prices were determined using
the average of the bid and ask prices of Company's stock on the date of grant.
Stock option information is summarized as follows:
1995 1994 1993
---- ---- ----
End of year:
Options outstanding 795 1,045 1,415
During the year:
Options exercised 250 170 354
Options forfeited 0 200 0
Average prices per share:
Options outstanding $190.00 $185.22 $176.71
Options exercised 170.00 167.65 166.95
F-12
<PAGE>
NOTE 9 - LEASE COMMITMENTS, RENT INCOME & RENT EXPENSE
Company owns a facility building in Fairbanks, Alaska which is located on
land leased from the State of Alaska until year 2004. Company, as lessor, has
entered into a long-term sub-lease with the major tenant of this property,
Northern Air Cargo. The lease, which has been extended through February 1997,
provides for minimum annual rental income of $104,640. The terms of the
agreement provide that the tenant is responsible for all operating expenses
except property taxes. Company also owns a condominium unit in Honolulu,
Hawaii, which is subject to a land lease through 1997 and has been leased to a
private party through June of 1996. The lease and related sub-lease in effect
at December 31, 1995, for the Fairbanks Airport Building and the Hawaii Condo
provide for the following minimum annual rental commitments and sub-lease
income:
Gross Less sublease Net
Commitments rental income Commitments
----------- ------------- -----------
1996 $ 20,800 $ (121,020) $ (100,220)
1997 20,800 (17,440) 3,360
1998 20,280 0 20,280
1999 20,280 0 20,280
2000 20,280 0 20,280
2001-2004 70,995 0 70,995
------ ---------- ------
Total Lease
Payments $173,435 $(138,460) $34,975
-------- --------- -------
-------- --------- -------
Company has rent income from other operating properties that are leased or
rented on a month to month basis. Total lease and rental income on all
operating properties aggregated $224,000, $228,000, and $330,000, respectively
in 1995, 1994 and 1993.
Company incurred total lease and rent expenses of $38,824, $38,824 and
$41,519 in 1995, 1994, and 1993, respectively.
F-13
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
Alaska Northwest Properties Inc.
We have audited the accompanying balance sheet of Alaska Northwest
Properties Inc. (the Company) as of December 31, 1995 and the related statements
of operations, stockholders' equity and cash flows for the year then ended.
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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Alaska Northwest Properties
Inc. at December 31, 1995, and the results of its operations and its cash flows
for the year then ended in conformity with generally accepted accounting
principles.
BDO Seidman, LLP
Seattle, Washington
February 15, 1996
F-14
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
Alaska Northwest Properties Inc.
Seattle, Washington
We have audited the accompanying balance sheet of Alaska Northwest
Properties Inc. as of December 31, 1994 and the related statements of
operations, cash flows, and shareholders' equity, for each of the years in the
two-year period ended December 31, 1994. These financial statements are the
responsibility of the company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Alaska Northwest Properties
Inc. as of December 31, 1994, and the results of its operations and its cash
flows for each of the years in the two-period ended December 31, 1994 in
conformity with generally accepted accounting principles.
Clark Nuber P.S.
Certified Public Accountants
Bellevue, Washington
February 10,1995
F-15
<PAGE>
INTERIM FINANCIAL DATA
ALASKA NORTHWEST PROPERTIES INC.
BALANCE SHEETS (UNAUDITED)
(dollars in thousands)
<TABLE>
<CAPTION>
ASSETS 9/30/96 12/31/95
------- --------
<S> <C> <C>
OPERATING PROPERTY AND EQUIPMENT, as cost:
Land and land improvements $ 393 $ 393
Buildings 1,318 1,318
Furniture, fixtures and equipment 234 195
Leasehold costs and other 218 218
-------- --------
2,163 2,124
Less accumulated depreciation and amortization (1,365) (1,311)
798 813
LAND HELD FOR INVESTMENT, at cost
(net of accumulated depreciation of $543 and $523,
respectively) 6,995 7,015
NOTES RECEIVABLE (net of deferred
gain of $0 and $247, respectively) 1,292 1,368
CASH AND CASH EQUIVALENTS 183 148
RESTRICTED CASH 130 88
U.S. GOVERNMENT SECURITIES, at cost 364 218
OTHER ASSETS 100 104
-------- --------
TOTAL ASSETS $9,862 $9,754
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
NOTES PAYABLE $66 $112
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES 94 58
LIABILITY FOR UNSETTLED FUTURES AND OPTIONS
CONTRACTS 338 203
-------- --------
TOTAL LIABILITIES 498 373
-------- --------
SHAREHOLDERS' EQUITY:
Common stock $1.00 par value, authorized 50,000 shares,
issued 47,641 476 476
Capital in excess of par value 14,756 14,756
Treasury stock, at cost (1996 - 17,973; 1995 - 18,554
shares) (4,895) (5,005)
Retained deficit (973) (846)
TOTAL SHAREHOLDERS' EQUITY 9,364 9,381
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 9,862 $ 9,754
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-16
<PAGE>
ALASKA NORTHWEST PROPERTIES INC.
STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
1996 1995
---- ----
REVENUES
Interest Income $86 $69
Building and Land Rents 191 183
Other Income 3 6
------- ---------
280 258
------- ---------
EXPENSES
Operating Expenses 245 279
General and Administrative Expenses 185 192
Interest Expense 3 4
------- ---------
433 475
------- ---------
OTHER INCOME (EXPENSE)
Gain on sale of real estate 260 46
Loss on sale of investments (251) (115)
Increase (decrease) in unrealized appreciation
(depreciation) on investments 16 (92)
------- ---------
25 (161)
------- ---------
LOSS FROM OPERATIONS BEFORE INCOME TAXES (128) (378)
PROVISION FOR INCOME TAXES 0 0
------- ---------
NET LOSS $(128) $(378)
------ ------
------ ------
AVERAGE SHARES OUTSTANDING 29,379 29,088
------ ------
------ ------
NET LOSS PER COMMON SHARE: $(4.36) $(13.00)
------- --------
------- --------
The accompanying notes are an integral part of these financial statements.
F-17
<PAGE>
ALASKA NORTHWEST PROPERTIES INC.
STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(DOLLARS IN THOUSANDS)
Common Stock
------------------------------
Capital in
$1.00 Par Excess of Retained
Value Par Value Treasury Stock Deficit
----- --------- -------------- -------
BALANCES AT DECEMBER
31, 1995 $476 $14,756 $(5,005) $(846)
Net loss (127)
Treasury shares:
Purchased (2)
Sold 112
------- ---------- --------- -------
BALANCES AT
SEPTEMBER 30, 1996 $476 $14,756 $(4,895) $(973)
---- ------- -------- ------
---- ------- -------- ------
The accompanying notes are an integral part of these financial statements.
F-18
<PAGE>
ALASKA NORTHWEST PROPERTIES INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(AMOUNTS IN THOUSANDS)
Net increase (decrease) in cash
1996 1995
---- ----
Cash flows from operating activities:
Net loss $(127) $(378)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation and amortization 74 108
Gain on sale of real estate (260) (46)
Loss on sale of investments 251 115
Increase (decrease) in unrealized depreciation
(appreciation) on investments (16) 92
Increase in accounts payable 36 12
Other (26) 30
------- -------
Net cash used in operating activities (68) (67)
------- -------
Cash flows from investing activities:
Proceeds from disposal of assets 0 15
Collection of notes receivable 323 86
Maturing U.S. Government securities 315 316
Acquisition of U.S. Government securities (461) (363)
Addition to property and equipment (38) (44)
Sale of land held for investment 0 36
(Purchase) Sale of other assets (100) 45
------- -------
Net cash provided by investing activities 39 91
------- -------
Cash flows from financing activities:
Treasury stock sales and purchases 109 42
Decrease in long term debt (45) (36)
Unclaimed dividends 0 2
------- -------
Net cash provided by financing activities 64 8
------- -------
Net increase in cash and cash equivalents 35 32
Cash and cash equivalents:
Beginning of period 148 111
End of period $183 $143
------- -------
------- -------
The accompanying notes are an integral part of these financial statements.
F-19
<PAGE>
ALASKA NORTHWEST PROPERTIES INC.
NOTES TO FINANCIAL STATEMENTS
1. The 1995 Annual Report on Form 10-K of Company includes a summary of
significant accounting policies and should be read in conjunction with these
interim financial statements. The financial statements presented herein include
all adjustments (consisting only of normal recurring adjustments) which are, in
the opinion of management, necessary to present fairly the operating results for
the interim periods reported. The results of operations for the nine months
ended September 30, 1996 and 1995, are not necessarily indicative of the results
of operations for the entire year. These financial statements are unaudited,
condensed and do not contain all information required by generally accepted
accounting principles to be included in a full set of annual financial
statements. Certain reclassification's have been made to prior year's financial
statements to conform to the current format.
2. Company reached an agreement with a debtor on an allocation of insurance
proceeds totaling $337,667, received when one of three apartment buildings,
securing a 9% note receivable, was destroyed in a fire in Fairbanks, Alaska.
The debtor received an initial insurance disbursement of $50,000 and applied
half of the proceeds to the mortgage, as required by Company, in an agreement
dated September 8, 1995. Under the agreement dated February 23, 1996, the
debtor applied $262,667 to the mortgage on the note receivable, while retaining
the remaining $75,000 for improvements to the remaining collateral. As a result
of continued additional investment on the part of the debtor, to whom Company
sold the property in 1993, Company recognized a real estate gain of $260,731,
including $13,290 in deferred interest income in the first quarter, under the
full accrual method of accounting for real estate sales in accordance with FAS
66. During the second quarter, payments commenced under a mortgage reduction
agreement and have been received in a timely manner.
3. Company's futures and futures options contracts are relatively short-term,
generally 6 months to less than 2 years. At September 30, 1996, notional (or
contract) amounts of unsettled futures and futures options contracts
approximated $900,000 and $700,000, relating to precious metals and stock index
derivatives, respectively. The notional amounts do not represent amounts
exchanged, and thus, are not a measure of Company's exposure through its use of
such financial instruments. Company realized a gain of approximately $12,000
from the termination of futures and futures options contracts for the third
quarter of 1996, compared to a realized loss of approximately $117,000 for the
same period in 1995. At September 30, 1996, an increase in the unrealized
appreciation on investments, primarily futures and futures options, was
approximately $16,000, compared to an increase in the unrealized depreciation of
approximately $92,000 at September 30, 1995. The liability for unsettled
futures and options contracts approximated $338,000 and $203,000 at September
30, 1996, and December 31, 1995, respectively.
4. Earnings per share are computed using the weighted-average number of common
shares outstanding.
F-20
<PAGE>
PRO FORMA CONDENSED FINANCIAL INFORMATION
The following unaudited pro forma condensed financial information has been
prepared in accordance with guidelines established by regulations promulgated by
the Securities and Exchange Commission.
The accompanying unaudited pro forma balance sheet of Alaska Northwest
Properties, Inc. ("Company") presents the balance sheet of the Company at
September 30, 1996 and gives effect to: (i) the acquisition of Additional
Properties in exchange for the Note, (ii) the receipt of $20 million cash from
UTR, (iii) the Spin-Off Distribution of all Company assets and liabilities,
excluding the Island and the Note and including the Additional Properties and
the $20 million cash, to ANP, LLC ("LLC"), and (vii) the merger of UTR with
and into Company. After consummation of transactions contemplated by the
merger, Company will be 100% owned by its sole shareholder and will own, as its
sole significant asset, the Island and will have a capital structure comprised
of a $2.2 million Note payable to its new shareholder and $20 million of capital
stock.
The accompanying unaudited pro forma balance sheet of LLC presents the
balance sheet of LLC at September 30, 1996 after giving effect to: (i) the
distribution to LLC of Company assets and liabilities, excluding the Island
and the Note and including the Additional Properties, (ii) receipt of
$20 million cash, (iii) the distribution of cash in lieu of fractional LLC
Interests to former Company shareholders, (iv) payment of the Per Share
Obligation to former Company shareholders, and (v) payment of related
transaction costs and expenses. The unaudited pro forma statements of
operations of LLC for the year ended December 31, 1995 and for the nine
months ended September 30, 1996 include the results of operations of Company
for the respective periods, exclusive of operating results relating to the
Island. In accordance with guidelines established by the Securities and
Exchange Commission, pro forma results of operations do not give effect to
imputed earnings on net cash received by the LLC which remains from the $20
million cash proceeds after distributions to former Company shareholders.
F-21
<PAGE>
ALASKA NORTHWEST PROPERTIES INC.
Unaudited Pro Forma Condensed Balance Sheet
September 30, 1996
(dollars in thousands)
<TABLE>
<CAPTION>
ASSETS Historical Adjustments Proforma
----------- ------------- ----------
<S> <C> <C> <C>
Properties $ 7,793 $ 2,200(a) $ 23,030
(6,963)(c)
20,000(c)
Notes Receivable 1,292 (1,292)(c) --
Cash, Investments and Other Assets 777 (772)(c) 5
20,000(b)
(20,000)(c)
---------------------------------------------------
$ 9,862 $ 13,173 $ 23,035
---------------------------------------------------
---------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY Historical Adjustments Proforma
----------- ------------ ---------
Notes Payable $ 66 $ (66)(c) $ --
Note Payable to Shareholder -- 2,200(a) 2,200
Accounts Payable and Other Accrued Liabilities 432 (421)(c) 11
Shareholders' Equity 9,364 (8,540)(c) 20,824
20,000(b)
---------------------------------------------------
$ 9,862 $ 13,173 $ 23,035
---------------------------------------------------
---------------------------------------------------
</TABLE>
See Accompanying Notes to Pro Forma Financial Information.
F-22
<PAGE>
ANP, LLC
Unaudited Pro Forma Condensed Balance Sheet
September 30, 1996
(dollars in thousands)
<TABLE>
<CAPTION>
ASSETS Historical Adjustments Proforma
----------- ------------- ----------
<S> <C> <C> <C>
Operating Property and Equipment $ -- $ 408 (d) $ 408
Land Held for Investment -- 6,555 (d) 6,555
Notes Receivable -- 1,292 (d) 1,292
Cash and Cash Equivalents -- 178 (d) 4,293
-- 20,000 (d)
(13,410)(f)
(2,475)(e)
Investments and Other Assets -- 594 (d) 594
---------------------------------------------------
$ -- $ 13,142 $ 13,142
---------------------------------------------------
---------------------------------------------------
LIABILITIES AND MEMBERS' EQUITY Historical Adjustments Proforma
----------- ------------- ----------
Notes Payable $ -- $ 66 (d) $ 66
Accounts Payable and Other Accrued Liabilities -- 421 (d) 421
Payable for Per Share Obligation 12,410 (d)
(12,410)(f)
Payable for Transaction Costs 1,000 (d)
(1,000)(f)
Members' Equity -- 15,130 (d) 12,655
-- (2,475)(e)
---------------------------------------------------
$ -- $ 13,142 $ 13,142
---------------------------------------------------
---------------------------------------------------
</TABLE>
See Accompanying Notes to Pro Forma Financial Information.
F-23
<PAGE>
ANP, LLC
Unaudited Pro Forma Condensed Statement of Operations
For the Nine Months Ended September 30, 1996
(dollars in thousands)
<TABLE>
<CAPTION>
REVENUES Historical Adjustments Proforma
------------ ------------ ---------
<S> <C> <C> <C>
Interest Income $86 $86
Building and Land Rents 191 $(83)(g) 108
Other Income 3 3
---------- ------------ ---------
280 (83) 197
---------- ------------ ---------
EXPENSES
Operating Expenses 245 (75)(g) 170
General & Administrative 185 (4)(g) 181
Interest Expense 3 3
---------- ------------ ---------
433 (79) 354
---------- ------------ ---------
OTHER INCOME (EXPENSE)
Gain on sale of real estate 260 260
Loss on sale of investment (251) (251)
Increase (decrease) in unrealized appreciation
(depreciation) on investments 16 16
---------- ------------ ---------
25 25
---------- ------------ ---------
LOSS FROM OPERATIONS BEFORE TAXES (128) (4) (132)
PROVISION FOR INCOME TAXES -- --
---------- ------------ ---------
NET LOSS $(128) $(4) $(132)
---------- ------------ ---------
---------- ------------ ---------
</TABLE>
_____________________
See Accompanying Notes to Pro Forma Financial Information.
F-24
<PAGE>
ANP, LLC
Unaudited Pro Forma Condensed Statement of Operations
For the Year Ended December 31, 1995
(dollars in thousands)
<TABLE>
<CAPTION>
REVENUES Historical Adjustments Proforma
---------- ------------ ---------
<S> <C> <C> <C>
Interest Income $ 89 $ 89
Building and Land Rents 224 $ (84)(g) 140
Other Income 11 11
---------- ------------ ---------
324 (84) 240
---------- ------------ ---------
EXPENSES
Operating Expenses 376 (112)(g) 264
General & Administrative 239 (3)(g) 236
Interest Expense 5 5
---------- ------------ ---------
620 (115) 505
---------- ------------ ---------
OTHER INCOME (EXPENSE)
Gain on sale of real estate 509 509
Loss on sale of investment (225) (225)
Increase (decrease) in unrealized appreciation
(depreciation) on investments (86) (86)
---------- ------------ ---------
198 -- 198
---------- ------------ ---------
LOSS FROM OPERATIONS BEFORE TAXES (98) 31 (67)
PROVISION FOR INCOME TAXES -- --
---------- ------------ ---------
NET LOSS $ (98) $31 $ (67)
---------- ------------ ---------
---------- ------------ ---------
</TABLE>
_____________________
See Accompanying Notes to Pro Forma Financial Information.
F-25
<PAGE>
ALASKA NORTHWEST PROPERTIES INC.
NOTES TO PRO FORMA FINANCIAL INFORMATION
a. To record the Company's acquisition of the Additional Properties having a
fair value of $2.2 million in exchange for a $2.2 million note payable (the
"Note").
b. To record the pro forma receipt of $20 million cash.
c. To record the Spin Off Distribution of all Company assets and liabilities,
excluding the Island and the Note and including the Additional Properties
and the $20 million cash, from the Company to LLC, and record the cash paid
as an increase in the Company's cost basis of the Island.
d. To record the LLC's assignment and assumption of the Spin Off Distribution
of all Company assets and liabilities, excluding the Island and the Note
and including the Additional Properties and the $20 million cash, and
record the liabilities for payments of the Per Share Obligation and related
transaction costs.
e. To record distribution of cash for fractional LLC interests of
approximately $2.5 million.
f. To record payment of the estimated Per Share Obligation of approximately
$12.5 million and related transaction costs, primarily commissions and
taxes, of approximately $1 million.
g. To record elimination of operating results related to the Island.
F-26
<PAGE>
Exhibits
A. Agreement and Plan of Reorganization (Incorporated by Reference to Exhibit
A of the Preliminary Proxy Statement of Company filed December 13, 1996)
B. Agreement and Plan of Distribution (Incorporated by Reference to Exhibit B
of the Preliminary Proxy Statement of Company filed December 13, 1996)
C. Pro Forma Closing Schedule
D. Dissenters' Rights (Incorporated by Reference to Exhibit D of the
Preliminary Proxy Statement of Company filed December 13, 1996)
E. Limited Liability Company Agreement (Incorporated by Reference to Exhibit E
of the Preliminary Proxy Statement of Company filed December 13, 1996)
<PAGE>
[FRONT]
PROXY
ALASKA NORTHWEST PROPERTIES INC.
SPECIAL MEETING OF SHAREHOLDERS - ___________ __, 1997
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Ronald F. Cosgrave and Michael W.
Shimasaki, and each of them, the attorneys and proxies of the undersigned,
each with full power of substitution, to vote all the shares of Common Stock
of Alaska Northwest Properties Inc. which the undersigned is entitled to vote
at the Special Meeting of Shareholders of Company to be held on __________ __,
1997 at the offices of Preston Gates & Ellis LLP, 701 Fifth Avenue,
Suite 5000, Seattle, Washington 98104 at 10:00 a.m., Seattle, Washington
time, and at any adjournment or adjournments thereof, and authorizes and
instructs said proxies to vote in the manner directed below. A VOTE IN FAVOR
OF THE MERGER WILL HAVE THE EFFECT OF CAUSING THE SPIN-OFF AND DISTRIBUTION
OF LLC INTERESTS TO OCCUR WHICH WILL RESULT IN SHAREHOLDERS RECIEVING
INTERESTS IN THE LLC AND/OR THE CASH EQUIVALENT VALUE OF SUCH LLC INTERESTS.
AS DESCRIBED IN THE PROXY STATEMENT THE LLC WILL DIFFER FROM COMPANY AS TO
THE COMPOSITION OF ITS ASSETS, ITS GOVERNANCE AND TAX CONSEQUENCES:
1. On the Proposal to Approve and Adopt the Merger and Merger Agreement as
described in the accompanying Proxy Statement:
/ / FOR / / ABSTAIN / / AGAINST
2. In their discretion, the proxies are authorized to vote upon such other
business as may properly come before the meeting, or any adjournment thereof,
upon matters incident to the conduct of the meeting.
<PAGE>
[REVERSE]
This proxy when properly signed will be voted and will be voted in the manner
directed herein by the undersigned shareholder. IF NO DIRECTION IS MADE, THIS
PROXY WILL BE VOTED FOR THE APPROVAL AND ADOPTION OF THE MERGER AND THE MERGER
AGREEMENT.
------------------------------
Signature
------------------------------
Signature, if held jointly
Dated: , 1997
--------------------
IMPORTANT - PLEASE SIGN AND RETURN PROMPTLY.
When shares are held by joint tenants, both
should sign. When signing as attorney,
executor, administrator, trustee, or
guardian, please give full title as such. If
a corporation, please sign in full corporate
name by President or other authorized
officer. If a partnership, please sign in
partnership name by an authorized person.
<PAGE>
EXHIBIT C
PRO FORMA CLOSING SCHEDULE
<TABLE>
<CAPTION>
Approximate Debit Approximate Credit
(Increase) (decrease)
----------------------------------------
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------
MERGER CONSIDERATION: $20,000,000
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
To the extent Additional Properties
value exceeds or is less than $2.2
million $0 $0
- -----------------------------------------------------------------------------------------------
Submarine Cable $0 $100,000
- -----------------------------------------------------------------------------------------------
Cost of repairs to Additional
Properties $100,000 $0
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
NET MERGER CONSIDERATION $20,000,000
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
Fractional LLC Interest Payments
and LLC Working Capital $6,275,000
- -----------------------------------------------------------------------------------------------
Expenses payable at Closing by LLC $1,300,000
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
NET DISTRIBUTABLE AMOUNT $12,425,000
- -----------------------------------------------------------------------------------------------
RECEIVED FOR OPTION EXERCISES $368,000
- -----------------------------------------------------------------------------------------------
NET DISTRIBUTABLE AMOUNT (AS
ADJUSTED) $12,793,000
- -----------------------------------------------------------------------------------------------
PER SHARE OBLIGATION (29,568
SHARES AND 1,495 OPTIONS
OUTSTANDING) $410.52
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
</TABLE>
