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Deltic Timber 10-Q 2005

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32
  5. Ex-32
FORM 10-Q
Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

FORM 10-Q

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2005

 

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission file number 1-12147

 

DELTIC TIMBER CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware   71-0795870
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification Number)
210 East Elm Street, P. O. Box 7200, El Dorado, Arkansas   71731-7200
(Address of principal executive offices)   (Zip Code)

 

Registrant’s telephone number, including area code: (870) 881-9400

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class


 

Name of each exchange on which registered


Common Stock, $.01 Par Value

  New York Stock Exchange, Inc.

Series A Participating Cumulative

Preferred Stock Purchase Rights

  New York Stock Exchange, Inc.

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨.

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).    Yes  x    No  ¨.

 

Number of shares of Common Stock, $.01 Par Value, outstanding at June 30, 2005, was 12,250,494.

 



Table of Contents

 

TABLE OF CONTENTS - SECOND QUARTER 2005 FORM 10-Q REPORT

 

          Page
Number


PART I - Financial Information     

Item 1.

  

Financial Statements

   3

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   17

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

   31

Item 4.

  

Controls and Procedures

   31
PART II - Other Information     

Item 1.

  

Legal Proceedings

   33

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

   33

Item 3.

  

Defaults Upon Senior Securities

   33

Item 4.

  

Submission of Matters to a Vote of Security Holders

   34

Item 5.

  

Other Information

   34

Item 6.

  

Exhibits and Reports on Form 8-K

   34

Signatures

   35

 

2005 Restatement

 

As described in the Company’s Annual Report on Form 10-K/A-1 for the year ended December 31, 2004, Deltic has restated its financial statements and other information for the years 2002 through 2004, for the third quarter of 2002, and for each quarter in 2003 and 2004.

 

For further discussion of the effects of the 2005 restatement on the periods covered by this report, see Part 1, Item 1. Financial Statements, Note 1 to consolidated financial statements, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Item 4. Controls and Procedures.

 

2


Table of Contents

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Consolidated Balance Sheets

(Thousands of dollars)

 

     June 30,
2005


    Dec. 31,
2004


 
     (unaudited)        

Assets

              

Current assets

              

Cash and cash equivalents

   $ 2,631     859  

Trade accounts receivable

     8,379     6,508  

Allowance for doubtful accounts

     (22 )   (26 )

Other receivables

     22     660  

Inventories

     6,949     5,566  

Prepaid expenses and other current assets

     1,513     1,786  
    


 

Total current assets

     19,472     15,353  

Investment in real estate held for development and sale

     35,484     37,418  

Investment in Del-Tin Fiber

     5,364     3,858  

Investments and noncurrent receivables

     2,141     1,829  

Timber and timberlands - net

     213,610     212,666  

Property, plant, and equipment - net

     38,806     35,767  

Deferred charges and other assets

     564     689  
    


 

Total assets

   $ 315,441     307,580  
    


 

Liabilities and Stockholders’ Equity

              

Current liabilities

              

Current maturities of long-term debt

   $ 32     32  

Trade accounts payable

     4,869     4,080  

Accrued taxes other than income taxes

     1,846     1,293  

Income taxes payable

     761     —    

Deferred revenues and other accrued liabilities

     3,089     3,467  
    


 

Total current liabilities

     10,597     8,872  

Long-term debt

     84,008     85,724  

Deferred tax liabilities - net

     13,079     14,272  

Guarantee of indebtedness of Del-Tin Fiber

     2,933     3,278  

Other noncurrent liabilities

     12,760     11,343  

Stockholders’ equity

              

Cumulative preferred stock - $.01 par, authorized 20,000,000 shares, none issued

     —       —    

Common stock - $.01 par, authorized 50,000,000 shares, 12,813,879 shares issued

     128     128  

Capital in excess of par value

     72,132     71,483  

Retained earnings

     134,577     127,188  

Unamortized restricted stock awards

     (1,945 )   (924 )

Treasury stock

     (12,816 )   (13,772 )

Accumulated other comprehensive income

     (12 )   (12 )
    


 

Total stockholders’ equity

     192,064     184,091  
    


 

Total liabilities and stockholders’ equity

   $ 315,441     307,580  
    


 

 

See accompanying notes to consolidated financial statements.

 

3


Table of Contents

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Consolidated Statements of Income (Unaudited)

(Thousands of dollars, except per share amounts)

 

     Three Months Ended
June 30,


    Six Months Ended
June 30,


 
     2005

    2004

    2005

    2004

 
           (Restated)           (Restated)  

Net sales

   $ 45,980     33,997     85,415     61,808  
    


 

 

 

Costs and expenses

                          

Cost of sales

     29,896     22,566     56,718     40,697  

Depreciation, amortization, and cost of fee timber harvested

     2,881     2,690     5,838     5,603  

General and administrative expenses

     3,107     2,961     6,431     5,770  
    


 

 

 

Total costs and expenses

     35,884     28,217     68,987     52,070  
    


 

 

 

Operating income

     10,096     5,780     16,428     9,738  

Equity in Del-Tin Fiber

     738     260     23     26  

Interest income

     135     60     160     118  

Interest and other debt expense

     (1,457 )   (1,517 )   (2,860 )   (3,100 )

Other income/(expense)

     (3 )   (1 )   (3 )   (5 )
    


 

 

 

Income/(loss) before income taxes

     9,509     4,582     13,748     6,777  

Income taxes

     (3,136 )   (1,833 )   (4,828 )   (2,710 )
    


 

 

 

Net income/(loss)

   $ 6,373     2,749     8,920     4,067  
    


 

 

 

Earnings per common share

                          

Basic

   $ .52     .23     .73     .34  

Assuming dilution

   $ .52     .23     .72     .34  

Dividends declared per common share

   $ .0625     .0625     .1250     .1250  
    


 

 

 

Average common shares outstanding (thousands)

     12,249     12,120     12,238     12,071  
    


 

 

 

 

See accompanying notes to consolidated financial statements.

 

4


Table of Contents

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)

Six Months Ended June 30,

(Thousands of dollars)

 

     2005

    2004

 
           (Restated)  

Operating activities

              

Net income

   $ 8,920     4,067  

Adjustments to reconcile net income to net cash provided/(required) by operating activities

              

Depreciation, amortization, and cost of fee timber harvested

     5,838     5,603  

Deferred income taxes

     (1,264 )   267  

Real estate costs recovered upon sale

     5,932     3,799  

Timberland costs recovered upon sale

     7     192  

Equity in Del-Tin Fiber

     (23 )   (26 )

Net increase/(decrease) in provisions for pension and other postretirement benefits

     395     1,415  

(Increase)/decrease in operating working capital other than cash and cash equivalents

     (507 )   1,657  

Other - net

     1,359     20  
    


 

Net cash provided/(required) by operating activities

     20,657     16,994  
    


 

Investing activities

              

Capital expenditures requiring cash

     (14,445 )   (10,419 )

Net change in purchased stumpage inventory

     (429 )   102  

Advances to Del-Tin Fiber

     (3,228 )   (516 )

Distributions from Del-Tin Fiber

     1,400     —    

(Increase)/decrease in funds held by trustee

     —       4,396  

Other - net

     760     901  
    


 

Net cash provided/(required) by investing activities

     (15,942 )   (5,536 )
    


 

Financing activities

              

Proceeds from borrowings

     6,000     —    

Repayments of notes payable and long-term debt

     (7,716 )   (13,032 )

Common stock dividends paid

     (1,531 )   (1,508 )

Proceeds from stock option exercises

     246     3,294  

Other

     58     —    
    


 

Net cash provided/(required) by financing activities

     (2,943 )   (11,246 )
    


 

Net increase/(decrease) in cash and cash equivalents

     1,772     212  

Cash and cash equivalents at January 1

     859     1,687  
    


 

Cash and cash equivalents at June 30

   $ 2,631     1,899  
    


 

 

See accompanying notes to consolidated financial statements.

 

5


Table of Contents

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity (Unaudited)

Six Months Ended June 30,

(Thousands of dollars)

 

     2005

    2004

 
           (Restated)  

Cumulative preferred stock - $.01 par, authorized 20,000,000 shares, none issued

   $ —       —    
    


 

Common stock - $.01 par, authorized 50,000,000 shares, 12,813,879 shares issued at end of period in 2005 and 2004

     128     128  
    


 

Capital in excess of par value

              

Balance at beginning of year

     71,483     69,459  

Exercise of stock options

     58     629  

Tax benefits on stock options

     45     292  

Restricted stock awards

     546     414  
    


 

Balance at end of period

     72,132     70,794  
    


 

Retained earnings

              

Balance at beginning of year

     127,188     119,124  

Net income

     8,920     4,067  

Common stock dividends declared

     (1,531 )   (1,508 )
    


 

Balance at end of period

     134,577     121,683  
    


 

Unamortized restricted stock awards

              

Balance at beginning of year

     (924 )   (14 )

Stock awards

     (1,292 )   (1,182 )

Amortization to expense

     271     137  
    


 

Balance at end of period

     (1,945 )   (1,059 )
    


 

Treasury stock

              

Balance at beginning of year – 605,401 and 845,600 shares, respectively

     (13,772 )   (19,103 )

Shares purchased – 7,052 shares in 2004

     —       (254 )

Shares issued for incentive plans – 42,016 and 172,355 shares, respectively

     956     3,895  
    


 

Balance at end of period – 563,385 and 680,297 shares, respectively

     (12,816 )   (15,462 )
    


 

Accumulated other comprehensive income

     (12 )   (124 )
    


 

Total stockholders’ equity

   $ 192,064     175,960  
    


 

 

See accompanying notes to consolidated financial statements.

 

6


Table of Contents

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2005

(Unaudited, except for December 31, 2004)

 

Note 1 – Interim Financial Statements

 

The interim financial information included herein is unaudited; however, such information reflects all adjustments which are, in the opinion of management, necessary for a fair presentation of the Company’s financial position, results of operations, and cash flows for the interim periods. All such adjustments are of a normal, recurring nature. The results of operations for the first six months of the year are not necessarily indicative of the results of operations which might be expected for the entire year.

 

The financial statements in Deltic’s 2004 annual report on Form 10-K/A-1 include a summary of significant accounting policies of the Company and should be read in conjunction with this Form 10-Q. Certain prior period amounts have been reclassified to conform with the 2005 presentation format.

 

2005 Restatement

 

As described in the Company’s Annual Report on Form 10-K/A-1 for the year ended December 31, 2004, Deltic has restated its financial statements and other information for the years 2002 through 2004, for the third quarter of 2002, and for each quarter in 2003 and 2004. The restatement related to the correction of an overstatement of the carrying value of the Company’s inventory of third-party purchases of standing timber inventory used to supply its Ola sawmill. The effect of the restatement on Deltic’s Consolidated Balance Sheet at the end of the reported periods is immaterial and the restatement has no effect on the Company’s net cash flows.

 

In order to operate its two sawmills economically, the Company relies on purchases of timber (raw material) from third parties to supplement its own timber harvests from Company owned timberlands. Deltic has an active timber procurement function for each of its sawmills. Sawmill inventory of third-party purchases of standing timber is comprised of timber purchased by the sawmill from third parties that has not yet been harvested and delivered to the mill. When these types of purchases are made by the Company’s procurement function, ownership of the timber located on the designated tract of land transfers to the Company, however, ownership of the land itself does not transfer. The carrying value of this purchased stumpage inventory is grouped with the Company’s wholly-owned timberlands and reported as the line item Timber and Timberlands on Deltic’s Consolidated Balance Sheet. Over the past five years, such purchased stumpage inventory has represented 2.3 percent to 5.5 percent of the total Timber and Timberlands line- item balance.

 

At the time that a tract of procurement timber is purchased, an inventory amount based on the cash payment and an estimated volume derived from estimates made by the procurement foresters are established. An estimated average cost per ton is obtained by dividing the original cost of the purchased timber on the tract by the original estimated volume of that timber. As the timber is harvested and brought into the mill, reductions in the purchased timber carrying balance are recorded using the calculated average cost per ton. Once all harvestable timber is removed from a tract the procurement personnel communicate the closing of the tract to the accounting function. Upon this notification, a final adjustment is made to mill log cost based on any amount remaining in inventory (increase in the case of undercut or decrease in the case of overcut).

 

In mid-July 2005, the Company’s procurement manager for its Ola sawmill disclosed to senior management that the volume of certain tracts of third-party purchased standing timber inventory for the Ola mill was overstated. The Ola Mill procurement manager largely controlled the information being received by Deltic’s accounting personnel. The overstatement arose from his failure to timely report to Deltic’s accounting personnel and his having concealed from accounting personnel the differences between actual harvest volumes and the original estimates of timber volume, determined when the tracts were acquired.

 

7


Table of Contents

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2005

(Unaudited, except for December 31, 2004)

 

Note 1 – Interim Financial Statements (cont.)

 

The following table sets forth the effects of the 2005 restatement on certain line items within the Company’s previously reported Consolidated Statements of Income for the quarter and six months ended June 30, 2004.

 

Quarterly Information (Unaudited)    Three months ended
June 30, 2004


    Six months ended
June 30, 2004


 
(Thousands of dollars, except per share amounts)    As
previously
reported


    As
restated


    As
previously
reported


    As
restated


 

Consolidated Statement of Income

                          

Cost of sales

   $ 22,565     22,566     40,762     40,697  

Total costs and expenses

     28,216     28,217     52,135     52,070  

Operating income

     5,781     5,780     9,673     9,738  

Income/(loss) before income taxes

     4,583     4,582     6,712     6,777  

Income taxes

     (1,833 )   (1,833 )   (2,687 )   (2,710 )

Net income/(loss)

     2,750     2,749     4,025     4,067  

Earnings per common share

                          

Basic

   $ .23     .23     .33     .34  

Assuming dilution

     .23     .23     .33     .34  

 

Note 2 – Impact of Recently Effective Accounting Pronouncements

 

In December 2004, the FASB issued a revision to SFAS 123, Accounting for Stock-Based Compensation. This revision will require the Company to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. This revised statement was to be effective as of the beginning of the first interim or annual reporting period that begins after June 15, 2005. In April, 2005 the Securities and Exchange Commission announced the adoption of a new rule that amends the compliance dates for SFAS 123 (Revised) and allows for the implementation of SFAS 123 (Revised) at the beginning of the first fiscal year that begins after June 15, 2005. Accordingly, the Company has elected to adopt the revised statement effective for its first quarter 2006 financial statements as opposed to the third quarter 2005 financial statements as previously disclosed.

 

In March 2005, the FASB issued Financial Accounting Standards Board Interpretation (“FIN”) No. 47, Accounting for Conditional Asset Retirement Obligations. This interpretation clarifies the term “conditional asset retirement obligation” as used in SFAS 143, Accounting for Asset Retirement Obligations, and is effective no later than the end of fiscal years ending after December 15, 2005. The Company does not expect the adoption of FIN 47 to have a material effect on its consolidated financial statements.

 

8


Table of Contents

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2005

(Unaudited, except for December 31, 2004)

 

Note 2 – Impact of Recently Effective Accounting Pronouncements (cont.)

 

In May 2005, the FASB issued SFAS 154, Accounting Changes and Error Corrections. This statement requires all changes in accounting principles to be accounted for by retrospective application to the financial statements for prior periods unless it is impracticable to do so. SFAS 154 carries forward previously issued guidance with respect to accounting for changes in estimates, changes in the reporting entity and the correction of errors. This statement is effective for accounting changes made in fiscal years beginning after December 15, 2005. The Company does not expect the adoption of SFAS 154 to have a material effect on its consolidated financial statements.

 

Note 3 – Earnings per Common Share

 

The amounts used in computing earnings per share consisted of the following:

 

     Three Months Ended
June 30,


   Six Months Ended
June 30,


(Thousands, except per share amounts)    2005

   2004

   2005

   2004

          (Restated)         (Restated)

Net income

   $ 6,373    2,749    8,920    4,067
    

  
  
  

Weighted average number of common shares used in basic EPS

     12,249    12,120    12,238    12,071

Effect of dilutive stock options

     55    64    70    69
    

  
  
  

Weighted average number of common shares and dilutive potential common stock used in EPS assuming dilution

     12,304    12,184    12,308    12,140
    

  
  
  

Earnings per common share

                     

Basic

   $ .52    .23    .73    .34

Assuming dilution

   $ .52    .23    .72    .34

 

9


Table of Contents

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2005

(Unaudited, except for December 31, 2004)

 

Note 4 – Stock-Based Compensation

 

Deltic has a stock-based compensation plan for which the Company applies the recognition and measurement principles of APB 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for those plans. Stock-based employee compensation expense is accrued for the intrinsic value, if any, of stock options or restricted stock granted over the applicable vesting periods using the straight-line method. Grants of restricted stock subject to predefined performance criteria are accounted for in accordance with variable-plan accounting. Options granted by the Company have an exercise price equal to the market value of the underlying common stock on the date of grant.

 

The effect on net income/(loss) and earnings per share if the Company had applied the fair value recognition provisions of the Financial Accounting Standards Board’s Statement of Financial Accounting Standards (“SFAS”) 123, Accounting for Stock-Based Compensation, consisted of the following:

 

     Three Months Ended
June 30,


    Six Months Ended
June 30,


 
(Thousands, except per share amounts)    2005

    2004

    2005

    2004

 
           (Restated)           (Restated)  

Net income, as reported

   $ 6,373     2,749     8,920     4,067  

Plus total stock-based compensation expense determined under the intrinsic value method for awards, net of related tax effects, included in the determination of net income

     147     95     263     258  

Less pro forma total stock-based compensation expense determined under the fair value method for all awards, net of related tax effects

     (212 )   (172 )   (399 )   (452 )
    


 

 

 

Pro forma net income

   $ 6,308     2,672     8,784     3,873  
    


 

 

 

Basic earnings per share

                          

As reported

   $ .52     .23     .73     .34  

Pro forma

   $ .51     .22     .72     .32  

Dilutive earnings per share

                          

As reported

   $ .52     .23     .72     .34  

Pro forma

   $ .51     .22     .71     .32  

 

For the pro forma net income calculation in the preceding table, the fair value of each option on the date of grant was estimated using the Black-Scholes option-pricing model and the following assumptions for awards in 2005 and 2004, respectively: dividend yields of .81 percent and .90 percent; expected volatilty of 31.54 percent and 30.00 percent; risk-free interest rates of 3.83 percent and 4.10 percent; and expected lives of five years. Using these assumptions, the weighted average grant-date fair value per share of options granted in 2005 and 2004 was $15.35 and $9.50, respectively.

 

10


Table of Contents

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2005

(Unaudited, except for December 31, 2004)

 

Note 5 – Inventories

 

Inventories at the balance sheet dates consisted of the following:

 

(Thousands of dollars)    June 30,
2005


   Dec. 31,
2004


Logs

   $ 2,897    1,005

Lumber

     3,689    4,253

Materials and supplies

     363    308
    

  
     $ 6,949    5,566
    

  

 

Note 6 – Investment in Del-Tin Fiber

 

Deltic owns 50 percent of the membership of Del-Tin Fiber, which completed construction and commenced production operations of a medium density fiberboard (“MDF”) plant near El Dorado, Arkansas, during 1998.

 

Prior to August 26, 2004, the Company had agreed to a contingent equity contribution agreement with Del-Tin Fiber and the group of banks from whom Del-Tin Fiber had obtained its $89,000,000 credit facility. Under this agreement, Deltic and the other 50 percent owner of the joint venture had agreed to fund any deficiency in contributions to either Del-Tin Fiber’s required sinking fund or debt service reserve, up to a cumulative total of $17,500,000 for each owner. In addition, each owner had committed to a production support agreement, under which each owner had agreed to make support obligation payments to Del-Tin Fiber to provide, on the occurrence of certain events, additional funds for payment of debt service until the plant was able to successfully complete a minimum production test. Both owners had also agreed, in a series of one-year term commitments, to fund any operating working capital needs until the facility was able to consistently generate sufficient funds to meet its cash requirements.

 

On August 26, 2004, Del-Tin Fiber refinanced its existing long-term debt by entering into a credit agreement consisting of a letter of credit and term loan with multiple lending institutions. The funds provided from this credit agreement were used, together with the existing balance in Del-Tin Fiber’s debt service reserve and bond sinking fund accounts, to redeem $60,000,000 of its $89,000,000 industrial revenue bonds. Under the new credit agreement, the lenders, on September 1, 2004, loaned Del-Tin Fiber $30,000,000 which will be repayable over five years in equal quarterly installments, beginning December 31, 2004, and issued on Del-Tin Fiber’s behalf, a letter of credit in the amount of $29,689,000 to support the remaining industrial revenue bonds originally issued in 1998 by Union County, Arkansas. Concurrent with this event, on August 26, 2004, Deltic executed a guarantee agreement in connection with the refinancing of the debt of Del-Tin Fiber. Under Deltic’s guarantee agreement, Deltic unconditionally guarantees the due and punctual payment of 50 percent ($27,595,000 at June 30, 2005) of Del-Tin’s obligations under its credit agreement. This new credit agreement of Del-Tin Fiber fully replaces Del-Tin Fiber’s prior credit facility, resulting in Deltic’s previous contingent equity contribution agreement of $17,500,000, the production support agreement, and the need for the series of one-year operating working capital commitments being fully extinguished.

 

11


Table of Contents

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2005

(Unaudited, except for December 31, 2004)

 

Note 6 – Investment in Del-Tin Fiber (cont.)

 

The Company has adopted the provisions of FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34 (“FIN 45”). In accordance with FIN 45, Deltic estimated the fair value of its guarantee of Del-Tin Fiber’s credit agreement to be $3,450,000 and included this non-cash amount in the Company’s Consolidated Balance Sheet as a long-term liability with an offsetting increase in the Company’s investment in Del-Tin Fiber. Deltic is reducing this liability systematically over the life of the credit agreement, as the Company is released from risk under the guarantee. Simultaneously, the offsetting amount which represents the difference between the Company’s recorded investment in Del-Tin Fiber and its underlying equity in the net assets of the joint venture is being amortized over the same period as the guarantee. The amortization of the guarantee and the basis difference are netted for purposes of financial reporting and result in no net income statement effect. At June 30, 2005, Deltic’s remaining liability regarding the guarantee was $2,933,000.

 

The financial position for Del-Tin Fiber as of the balance sheet dates and results of operations for the periods ended June 30 consisted of the following:

 

(Thousands of dollars)   

June 30,

2005


  

Dec. 31,

2004


Condensed Balance Sheet Information

           

Current assets

   $ 9,371    7,107

Property, plant, and equipment - net

     92,579    93,201

Other noncurrent assets

     472    528
    

  

Total assets

   $ 102,422    100,836
    

  

Current liabilities

   $ 11,430    10,616

Long-term debt

     48,500    51,500

Members’ capital/(deficit)

     42,492    38,720
    

  

Total liabilities and members’ capital/(deficit)

   $ 102,422    100,836
    

  

 

12


Table of Contents

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2005

(Unaudited, except for December 31, 2004)

 

Note 6 – Investment in Del-Tin Fiber (cont.)

 

     Three Months Ended
June 30,


    Six Months Ended
June 30,


 
(Thousands of dollars)    2005

    2004

    2005

    2004

 

Condensed Income Statement

                          

Information

                          

Net sales

   $ 15,659     15,746     25,640     30,616  
    


 

 

 

Costs and expenses

                          

Cost of sales

     11,185     12,293     19,820     24,397  

Depreciation

     1,599     1,554     2,709     3,090  

General and administrative expenses

     648     638     1,162     1,256  

Gain on involuntary conversion of assets

     76     —       875     —    
    


 

 

 

Total costs and expenses

     13,508     14,485     24,566     28,743  
    


 

 

 

Operating income/(loss)

     2,151     1,261     1,074     1,873  

Interest income

     6     72     10     134  

Interest and other debt expense

     (698 )   (783 )   (1,354 )   (1,565 )

Other income/(loss)

     18     (31 )   316     (96 )
    


 

 

 

Net income/(loss)

   $ 1,477     519     46     346  
    


 

 

 

 

Note 7 – Timber and Timberlands

 

Timber and timberlands at the balance sheet dates consisted of the following:

 

(Thousands of dollars)    June 30,
2005


    Dec. 31,
2004


 

Purchased stumpage inventory

   $ 5,378     4,949  

Timberlands

     79,891     79,650  

Fee timber

     199,105     196,406  

Logging facilities

     1,778     1,778  
    


 

       286,152     282,783  

Less accumulated costs of fee timber harvested and facilities depreciation

     (72,542 )   (70,117 )
    


 

     $ 213,610     212,666  
    


 

 

13


Table of Contents

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2005

(Unaudited, except for December 31, 2004)

 

Note 8 – Property, Plant, and Equipment

 

Property, plant, and equipment at the balance sheet dates consisted of the following:

 

(Thousands of dollars)    June 30,
2005


    Dec. 31,
2004


 

Land

   $ 125     125  

Land improvements

     4,424     4,268  

Buildings and structures

     5,603     5,402  

Machinery and equipment

     80,437     74,572  
    


 

       90,589     84,367  

Less accumulated depreciation

     (51,783 )   (48,600 )
    


 

     $ 38,806     35,767  
    


 

 

Note 9 – Employee and Retiree Benefit Plans

 

The components of net periodic retirement expense and other postretirement benefits expense for the periods ended June 30 consisted of the following:

 

     Three Months Ended June 30,

     Retirement
Plans


    Other
Postretirement
Benefits


(Thousands of dollars)    2005

    2004

    2005

   2004

Service cost

   $ 200     207     93    98

Interest cost

     305     291     124    136

Expected return on plan assets

     (242 )   (234 )   —      —  

Amortization of transition amount

     —       —       —      —  

Amortization of prior service cost

     13     13     4    —  

Amortization of net (gain)/loss

     34     47     16    44
    


 

 
  

Net periodic benefit cost

     310     324     237    278

Cost of special termination benefits

     —       325     —      —  
    


 

 
  

Total expense

   $ 310     649     237    278
    


 

 
  

 

14


Table of Contents

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2005

(Unaudited, except for December 31, 2004)

 

Note 9 – Employee and Retiree Benefit Plans (cont.)

 

     Six Months Ended June 30,

     Retirement
Plans


    Other
Postretirement
Benefits


(Thousands of dollars)    2005

    2004

    2005

   2004

Service cost

   $ 400     403     186    198

Interest cost

     610     567     248    275

Expected return on plan assets

     (484 )   (458 )   —      —  

Amortization of transition amount

     —       —       —      —  

Amortization of prior service cost

     26     25     8    —  

Amortization of net (gain)/loss

     68     91     32    89
    


 

 
  

Net periodic benefit cost

     620     628     474    562

Cost of special termination benefits

     —       475     —      —  
    


 

 
  

Total expense

   $ 620     1,103     474    562
    


 

 
  

 

Note 10 – Supplemental Cash Flow Disclosures

 

Income taxes paid, net of refunds, were $4,307,000 and $1,207,000 in the 2005 and 2004 periods, respectively. Interest paid, net of amounts capitalized, was $2,776,000 and $2,979,000 in the first six months of 2005 and 2004, respectively.

 

(Increases)/decreases in operating working capital, other than cash and cash equivalents, for the six months ended June 30 consisted of the following:

 

(Thousands of dollars)    2005

    2004

 
           (Restated)  

Trade accounts receivable

   $ (1,875 )   (1,255 )

Other receivables

     638     165  

Inventories

     (1,383 )   1,468  

Prepaid expenses and other current assets

     344     (61 )

Trade accounts payable

     790     (877 )

Accrued taxes other than income taxes

     553     594  

Income taxes payable

     806     1,232  

Deferred revenues and other accrued liabilities

     (380 )   391  
    


 

     $ (507 )   1,657  
    


 

 

15


Table of Contents

DELTIC TIMBER CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2005

(Unaudited, except for December 31, 2004)

 

Note 11 – Business Segments

 

Information about the Company’s business segments consisted of the following:

 

     Three Months Ended
June 30,


    Six Months Ended
June 30,


 
(Thousands of dollars)    2005

    2004

    2005

    2004

 
           (Restated)           (Restated)  

Net sales

                          

Woodlands

   $ 9,201     7,230     18,939     15,424  

Mills

     31,810     25,610     62,048     46,122  

Real Estate

     10,060     5,161     15,094     8,991  

Eliminations*

     (5,091 )   (4,004 )   (10,666 )   (8,729 )
    


 

 

 

     $ 45,980     33,997     85,415     61,808  
    


 

 

 

Income/(loss) before income taxes

                          

Operating income

                          

Woodlands

   $ 6,615     4,481     13,455     9,930  

Mills

     3,058     2,854     4,797     3,211  

Real Estate

     3,458     663     4,478     1,255  

Corporate

     (2,855 )   (2,720 )   (5,889 )   (5,290 )

Eliminations

     (180 )   502     (413 )   632  
    


 

 

 

Operating income

     10,096     5,780     16,428     9,738  

Equity in Del-Tin Fiber

     738     260     23     26  

Interest income

     135     60     160     118  

Interest and other debt expense

     (1,457 )   (1,517 )   (2,860 )   (3,100 )

Other income/(expense)

     (3 )   (1 )   (3 )   (5 )
    


 

 

 

     $ 9,509     4,582     13,748     6,777  
    


 

 

 

Depreciation, amortization, and cost of fee timber harvested

                          

Woodlands

   $ 1,261     1,109     2,578     2,482  

Mills

     1,438     1,401     2,885     2,750  

Real Estate

     141     138     287     292  

Corporate

     41     42     88     79  
    


 

 

 

     $ 2,881     2,690     5,838     5,603  
    


 

 

 

Capital expenditures

                          

Woodlands

   $ 1,962     3,433     3,081     6,019  

Mills

     3,362     1,210     6,054     1,374  

Real Estate

     3,692     1,867     5,236     2,878  

Corporate

     20     80     74     148  
    


 

 

 

     $ 9,036     6,590     14,445     10,419  
    


 

 

 

 

* Intersegment sales of timber from Woodlands to Mills

 

16


Table of Contents
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

2005 Restatement

 

As discussed in the 2005 Restatement section on page 2 and further described in Note 1 to the consolidated financial statements, the Company has restated its financial statements and other information for the years 2002 through 2004, for the third quarter of 2002, and for each quarter in 2003 and 2004.

 

Executive Overview

 

The Company recorded net income of $6.4 million for the second quarter of 2005 compared to $2.8 million for the same period of 2004. Once again, all three operating segments of the Company – Woodlands, Mills, and Real Estate – contributed to the current quarter earnings. Deltic’s Woodlands segment continued its role as the established core operation of the Company during the second quarter, providing $6.6 million in operating income. Deltic’s sawmills have continued to benefit from the combination of increased production efficiencies and the current market conditions for softwood lumber products. The Real Estate segment reported operating income for the second quarter of $3.5 million, which is five times that of the same period last year. In addition, continued strong demand for the Company’s residential offerings was once again confirmed by our successful offering of 72 residential lots in Chenal Valley during the month of June. Our 50 percent-owned joint venture, Del-Tin Fiber, returned to profitability during the second quarter after the fire-related temporary production curtailment experienced during the first quarter of 2005.

 

With the exception of its diversification in real estate development, Deltic is primarily a wood products producer operating in a commodity-based business environment. This environment is affected by a number of factors, including general economic conditions, interest rates, imports, foreign exchange rates, housing starts, residential repair and remodeling, commercial construction, industry capacity and production levels, the availability of raw material, and weather conditions. Despite recent steady increases by the Federal Reserve in the Federal Funds Rate, U.S. mortgage interest rates have remained flat through the second quarter of 2005. Consequently, housing starts in the U.S., fueled by the continuation of these relatively low mortgage interest rates, remained strong during the second quarter of 2005. In fact, many analysts have revised their current year housing outlooks upward with forecasts now being reported at levels equal to 2004’s historic performance. Consequently, the high demand for softwood lumber products experienced in 2004, has continued thus far in 2005, resulting in the retention of appropriate pricing levels within the industry. Given its relative size and the nature of most commodity markets, the Company has little or no control over pricing levels for its wood products. Therefore, the Company will continually seek to wring controllable costs and expenses from its manufacturing process. Sales of real estate are affected by general economic conditions and interest rates, specifically as such factors are manifested in the Company’s operating area of central Arkansas.

 

For the second quarter of 2005, pine sawtimber harvest levels increased 24,417 tons, to 155,840 tons, when compared to the second quarter of 2004. Pine sawtimber harvest levels for the six months ending June 30, 2005, increased 11 percent to 355,042 tons when compared to the same period of last year. The Company’s plan to keep 2005’s total pine sawtimber harvest volume comparable to the level in 2004 remains in place. However, sawmills within the segment’s geographic operating area have yet to fully recover from their over-depletion of log inventories, caused by delayed logging operations that were hindered by higher than normal levels of rainfall at the start of the year. This extended the increased demand and corresponding price for pine sawtimber logs within the region into the second quarter, and Deltic again increased harvesting activities during the period to take full advantage of these premium prices. Ultimately, the Company’s ability to sell pine sawtimber at acceptable prices in the future will be dependent upon the size or existence of markets for manufactured lumber and other wood products.

 

17


Table of Contents

Activities to sell timberland identified as having a higher and better use or as being non-strategic remain in place. However, Deltic continues to consider these sales only to the extent that the returns on these transactions meet increased expectations. Consequently, there were limited timberland sales during the second quarter of 2005. Timberland designated as higher and better use consists of tracts with market values that exceed the land’s worth as a timber growing platform. Non-strategic timberland consist primarily of tracts too small to allow efficient timber management, those geographically isolated from other Company fee lands, and acreage otherwise not deemed strategic to Deltic’s operations or growth.

 

The Company remains pleased with the growing efficiencies within its sawmills, which combined during the second quarter with the current sellers’ market for softwood lumber products resulting in our Mills segment’s continuation of quarterly operating income. As with any commodity market, the Company expects the historical volatility of lumber prices to continue in the future. The segment achieved record volume levels of quarterly lumber production and sales during the second quarter of 2005. The Company continues to anticipate that a significant percentage of logs supplied to both of its sawmills will come from strategically located Company fee timberlands.

 

The Real Estate segment closed the sale of 90 residential lots during the second quarter at an almost 40 percent higher average sales price per lot when compared to the same quarter of last year. The reported average sales price for residential lots for a specific period is largely dependent upon the mix of lot sales closed in that period. Deltic’s lot development plans provide for a mix of lot offerings that represent most real estate market segments for planned communities. Sales activity levels for the Company’s real estate developments are affected by economic conditions that influence the level of housing starts in the central Arkansas region, including general economic conditions and interest rates. As previously mentioned, relatively low mortgage interest rates continued into the second quarter of 2005 and demand for residential lots in the Company’s Chenal Valley development remains high. During the second quarter, our Real Estate segment reaped a majority portion of the benefit of our successful January 20th offering of 138 residential lots for sale in two Chenal Valley neighborhoods. The Little Rock real estate market continues to indicate its sustained demand for our developed holdings which was evidenced in June, 2005, by our second successful residential offering of the year, consisting of 72 lots in a single Chenal Valley neighborhood. Our current plans are to develop approximately 300 more lots within Chenal Valley by the end of 2005. In Deltic’s other two active developments, Red Oak Ridge and Chenal Downs, a total of 5 lots were sold, leaving 39 developed lots in Red Oak Ridge and 24 in Chenal Downs uncommitted as of June 30, 2005. While Chenal Downs is fully developed, Deltic plans to develop approximately 40 additional lots within Red Oak Ridge in 2005. Future annual development activity will be dependent upon the demand for the Company’s residential lots, which is expected to remain strong as long as mortgage interest rates remain at or near current levels.

 

During 2004, the Company disclosed plans for a 1,170-acre upscale residential development, The Ridges at Nowlin Creek, on a portion of its large land holdings located west of Chenal Valley. Construction activity at this site has not yet begun. A portion of the development is located within the watershed of Lake Maumelle, a principal source of drinking water for Little Rock. Due to this environmentally sensitive locale, the Company intends to implement the most modern and proven best management practices to create a low impact development in order to protect water quality in the lake. The Company continues to finalize environmental and civil engineering features of the development and attempt to reach an accord with local utilities and government agencies that the development will be fully protective of water quality. The local water utility has commissioned preparation of a new watershed management plan which the Company hopes will reflect current scientific principles that will be compatible with the Company’s low impact development plans. However, at a meeting held July 14, 2005, the utility’s commissioners directed its staff: to explore a resolution with Deltic that among other things would set the value of that portion of the Company’s development located within the lake’s watershed (approximately 665 acres) by agreement in the event the utility determines to acquire such property at a later date; to report back to the commission on September 8, 2005; and, if no reasonable resolution is reached with Deltic, to pursue previously adopted authority to commence a condemnaton action to acquire the lands. The Company is engaged in discussions with the utility in an effort to reach an accord as to value or to another effective alternative to address the utility’s stated concerns.

 

18


Table of Contents

Commercial real estate sales activity is by nature less predictable than residential activity. No commercial sales occurred in the second quarter of 2005 or 2004. With the number of residents in Chenal Valley, and other west Little Rock areas, growing steadily and momentum created from previous sales of commercial acreage in the development, interest in the Company’s remaining commercial acreage remains strong. On April 6, 2004, RED Development LLC announced plans for “The Promenade at Chenal”, a 48-acre, open-air, lifestyle shopping center. The sales contract regarding this site remains in its feasibility period, and originally was scheduled to close before the end of 2004. However, as is the inherent unpredictable nature of commercial real estate sales, the initial contract has been extended and is now scheduled to close later in 2005. Some extensions of similar contracts in the past have been followed by the termination of the commercial sale. No commercial acreage is included in the Chenal Downs or the planned Ridges at Nowlin Creek developments. Red Oak Ridge is planned to include approximately 80 acres of commercial property. The Company may begin to develop and offer commercial sites as this development’s population density increases.

 

Operating results for Del-Tin Fiber are affected by the overall MDF market and the plant’s operating performance, and both experienced significant improvements during the recently ended year of 2004. However, the facility’s 2005 operations were hindered by a temporary production curtailment caused by a fire sustained at the plant during the first quarter. The presence of the unscheduled downtime caused by the fire has forced the facility to reduce its 2005 projected total production volume. However, the efficiencies and improved key manufacturing components established during 2004, which are still present at the plant, should allow the joint venture to once again estimate its production near its designed capacity of 150 million square feet for 2005. Del-Tin Fiber returned to profitability during the second quarter of 2005. Deltic’s focus remains on the continuation of the facility’s recent operating and financial improvements throughout the remainder of 2005.

 

Results of Operations

 

Three Months Ended June 30, 2005 Compared with Three Months Ended

June 30, 2004

 

In the following tables, Deltic’s net sales and results of operations are presented for the quarters ended June 30, 2005 and 2004. Explanations of significant variances and additional analyses for the Company’s consolidated and segmental operations follow the tables.

 

     Quarter Ended June 30,

 
(Millions of dollars, except per share amounts)    2005

    2004

 
           (Restated)  

Net sales

              

Woodlands

   $ 9.2     7.2  

Mills

     31.8     25.6  

Real Estate

     10.1     5.2  

Eliminations

     (5.1 )   (4.0 )
    


 

Net sales

   $ 46.0     34.0  
    


 

Operating income/(loss) and net income/(loss)

              

Woodlands

   $ 6.6     4.4  

Mills

     3.1     3.0  

Real Estate

     3.5     .7  

Corporate

     (2.9 )   (2.7 )

Eliminations

     (.2 )   .5  
    


 

Operating income

     10.1     5.9  

 

19


Table of Contents
     Quarter Ended June 30,

 
(Millions of dollars, except per share amounts)    2005

    2004

 
           (Restated)  

Equity in Del-Tin Fiber

     .7     .2  

Interest income

     .2     —    

Interest and other debt expense

     (1.5 )   (1.5 )

Other income/(expense)

     —       —    

Income taxes

     (3.1 )   (1.8 )
    


 

Net income

   $ 6.4     2.8  
    


 

Earnings per common share

              

Basic

   $ .52     .23  

Assuming dilution

   $ .52     .23  

 

Consolidated

 

The $3.6 million increase in net income was the result of improved financial results for the Company’s Woodlands, Mills, and Real Estate segments, as well as improved financial results of Del-Tin Fiber. Each of Deltic’s operating segments experienced increases in sales volumes and pricing levels within key business drivers of their operations when compared to the second quarter of 2004.

 

Operating income increased $4.2 million. The Woodlands segment increased $2.2 million due primarily to an increased pine sawtimber harvest level and an increased average per-ton pine sawtimber price. Deltic’s Mills segment operations improved $.1 million due mainly to a 19 percent increase in finished lumber sales volume at a slightly higher average lumber sales price, offset by increased raw material costs. Real Estate operating income increased $2.8 million, primarily the result of a 76 percent increase in the number of residential lots sold at a higher average price per lot. Corporate operating expense was essentially unchanged, increasing $.2 million due to higher general and administrative expenses.

 

Woodlands

 

Selected financial and statistical data for the Woodlands segment is shown in the following table.

 

     Quarter Ended June 30,

     2005

   2004

Net sales (millions of dollars)

           

Pine sawtimber

   $ 7.3    5.1

Pine pulpwood

     .7    .4

Hardwood sawtimber

     .2    —  

Hardwood pulpwood

     .1    .1

Sales volume (thousands of tons)

           

Pine sawtimber

     155.8    131.4

Pine pulpwood

     72.1    66.3

Hardwood sawtimber

     2.5    1.0

Hardwood pulpwood

     13.8    18.9

Sales price (per ton)

           

Pine sawtimber

   $ 47    39

Pine pulpwood

     9    7

Hardwood sawtimber

     60    28

Hardwood pulpwood

     8    5

 

20


Table of Contents
     Quarter Ended June 30,

     2005

   2004

Timberland

           

Net sales (millions of dollars)

   $ .2    .5

Sales volume (acres)

     18    479

Sales price (per acre)

   $ 8,546    1,117

 

Total net sales increased $2 million, which was driven almost entirely by the increase in sales volume of pine sawtimber at a higher average sales price. Total revenues from the sale of other timber species increased as well during the second quarter of 2005, however, these were virtually offset by the segment’s reduction in timberland sales. Operating income increased $2.2 million primarily as a result of the increased sales of pine sawtimber combined with only a 16 percent increase in the cost of fee timber harvested due mainly to the mix of pine sawtimber harvest volume by company.

 

Mills

 

Selected financial and statistical data for the Mills segment is shown in the following table.

 

     Quarter Ended June 30,

     2005

   2004

Net sales (millions of dollars)

           

Lumber

   $ 26.7    22.0

Residual by-products

     3.8    2.8

Lumber

           

Finished production (MMBF)

     67.5    55.6

Sales volume (MMBF)

     69.3    58.3

Sales price (per MBF)

     385    377

 

Total net sales increased $6.2 million, or 24 percent, due to the segment’s record level of finished lumber sales volume combined with slightly higher average sales prices. The improvement in operating results of $.1 million was due primarily to the increase in net sales, offset by increased log costs.

 

Real Estate

 

Selected financial and statistical data for the Real Estate segment is shown in the following table.

 

     Quarter Ended June 30,

     2005

   2004

Net sales (millions of dollars)

           

Residential lots

   $ 8.0    3.2

Commercial sites

     —      —  

Undeveloped acreage

     —      —  

Chenal Country Club

     1.9    1.8

Sales volume

           

Residential lots

     90    51

Commercial acres

     —      —  

Undeveloped acreage

     —      —  

 

21


Table of Contents
     Quarter Ended June 30,

     2005

   2004

Average sales price (thousands of dollars)

           

Residential lots

   $ 88    64

Commercial acres

     —      —  

Undeveloped acreage

     —      —  

 

Total net sales increased $4.9 million or 94 percent. The number of residential lots sold increased by 76 percent due primarily to closings resulting from the lots offered for sale at the end of January 2005, with a 39 percent increase in average sales price per lot due to sales mix. The increase in the Real Estate segment’s operating income was due primarily to the same factors impacting net sales.

 

Corporate

 

Operating expense for Corporate functions remained relatively flat, increasing just $.2 million due primarily to increased professional fees.

 

Eliminations

 

Intersegment sales of timber from Deltic’s Woodlands to the Mills segment increased $1.1 million to $5.1 million. The increase was due to increases in both the volume and price of logs coming into Deltic’s sawmills from the Company’s fee timberlands. Logs supplied by the Woodlands segment to the Company’s sawmills are transferred at prices that approximate market.

 

Equity in Del-Tin Fiber

 

For the second quarter of 2005, equity in Del-Tin Fiber improved $.5 million due to the improvements in MDF prices and plant operating performance when compared to the second quarter of 2004.

 

Additional selected financial and statistical data for Del-Tin Fiber is shown in the following table.

 

     Quarter Ended June 30,

     2005

   2004

Net sales (millions of dollars)

   $ 15.7    15.7

Finished production (MMSF)

     39.4    38.9

Board sales (MMSF)

     37.6    39.9

Sales price (per MSF)

   $ 416    394

 

Average sales price increased six percent due to the improvements in the MDF market and to a change in product mix to include a greater percentage of thin board and an increase in premium-grade production. Manufacturing cost per MSF sold was down two percent due to the lowering of certain variable costs of manufacturing and the spreading of the plant’s fixed costs to the increased production volume.

 

Income Taxes

 

The effective income tax rate was 33 percent and 40 percent in the 2005 and 2004 periods, respectively. The decrease was primarily due to lower effective rates for state income taxes caused by a reduction in the estimated valuation allowance related to state tax loss carryforwards as it is now more likely than not that a greater portion of these state net operating losses will be utilized.

 

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Six Months Ended June 30, 2005 Compared with Six Months Ended

June 30, 2004

 

In the following tables, Deltic’s net sales and results of operations are presented for the six-month periods ended June 30, 2005 and 2004. Explanations of significant variances and additional analyses for the Company’s consolidated and segmental operations follow the tables.

 

     Six Months Ended June 30,

 
(Millions of dollars, except per share amounts)    2005

    2004

 
           (Restated)  

Net sales

              

Woodlands

   $ 18.9     15.4  

Mills

     62.0     36.1  

Real Estate

     15.1     9.0  

Eliminations

     (10.6 )   (8.7 )
    


 

Net sales

   $ 85.4     61.8  
    


 

Operating income/(loss) and net income/(loss)

              

Woodlands

   $ 13.4     9.9  

Mills

     4.8     3.3  

Real Estate

     4.5     1.3  

Corporate

     (5.9 )   (5.3 )

Eliminations

     (.4 )   .6  
    


 

Operating income

     16.4     9.8  

Equity in Del-Tin Fiber

     —       —    

Interest income

     .2     .1  

Interest and other debt expense

     (2.9 )   (3.1 )

Other income/(expense)

     —       —    

Income taxes

     (4.8 )   (2.7 )
    


 

Net income

   $ 8.9     4.1  
    


 

Earnings per common share

              

Basic

   $ .73     .34  

Assuming dilution

   $ .72     .34  

 

Consolidated

 

The $4.8 million increase in net income was the result of improved financial results for the Company’s Woodlands, Mills, and Real Estate segments. Each of Deltic’s operating segments experienced increases in sales volumes and pricing levels within key business drivers of their operations when compared to the six months ended June 30, 2004.

 

Operating income increased $6.6 million. The Woodlands segment increased $3.5 million due primarily to an increased pine sawtimber harvest level and an increased average per-ton pine sawtimber price. Deltic’s Mills segment operations improved $1.5 million due mainly to a 25 percent increase in finished lumber sales volume at a six percent higher average lumber sales price, offset by increased raw material costs. Real Estate operating income increased $3.2 million, primarily the result of a 55 percent increase in the number of residential lots sold at a higher average price per lot. Corporate operating expense increased $.6 million due to increased general and administrative expenses.

 

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Woodlands

 

Selected financial and statistical data for the Woodlands segment is shown in the following table.

 

     Six Months Ended June 30,

     2005

   2004

Net sales (millions of dollars)

           

Pine sawtimber

   $ 15.0    11.6

Pine pulpwood

     1.4    .9

Hardwood sawtimber

     .2    .1

Hardwood pulpwood

     .2    .2

Sales volume (thousands of tons)

           

Pine sawtimber

     335.0    302.2

Pine pulpwood

     132.4    133.8

Hardwood sawtimber

     2.6    3.0

Hardwood pulpwood

     23.4    41.8

Sales price (per ton)

           

Pine sawtimber

   $ 45    38

Pine pulpwood

     10    6

Hardwood sawtimber

     60    30

Hardwood pulpwood

     8    5

Timberland

           

Net sales (millions of dollars)

   $ .2    .8

Sales volume (acres)

     18    717

Sales price (per acre)

   $ 8,546    1,076

 

Total net sales increased $3.5 million, which was driven almost entirely by the increase in sales volume of pine sawtimber at a much higher average sales price. Total revenues from the sale of other timber species increased as well during the first six months of 2005, however, these were virtually offset by the segment’s reduction in timberland sales. Operating income increased $3.5 million primarily as a result of the increased sales of pine sawtimber, combined with only a 5 percent increase in the cost of fee timber harvested due mainly to the mix of pine sawtimber harvest volume by company.

 

Mills

 

Selected financial and statistical data for the Mills segment is shown in the following table.

 

     Six Months Ended June 30,

     2005

   2004

Net sales (millions of dollars)

           

Lumber

   $ 52.2    39.7

Residual by-products

     7.6    5.2

Lumber

           

Finished production (MMBF)

     130.6    107.4

Sales volume (MMBF)

     138.0    110.8

Sales price (per MBF)

     378    358

 

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Total net sales increased $15.9 million, or 35 percent, due to the segment’s record level of finished lumber sales volume combined with six percent higher average sales prices. The improvement in operating results of $1.5 million was due primarily to the increase in net sales, partially offset by increased log costs.

 

Real Estate

 

Selected financial and statistical data for the Real Estate segment is shown in the following table.

 

     Six Months Ended June 30,

     2005

   2004

Net sales (millions of dollars)

           

Residential lots

   $ 10.6    5.5

Commercial sites

     .6    .3

Undeveloped acreage

     .4    —  

Chenal Country Club

     3.0    2.8

Sales volume

           

Residential lots

     127    82

Commercial acres

     .99    2

Undeveloped acreage

     6.7    —  

Average sales price (thousands of dollars)

           

Residential lots

   $ 84    67

Commercial acres

     633    152

Undeveloped acreage

     64    —  

 

Total net sales increased $6.1 million or 68 percent. The number of residential lots sold increased by 55 percent which combined with a 24 percent increase in average sales price per lot due to sales mix. The increase in the Real Estate segment’s operating income was due primarily to the same factors impacting net sales.

 

Corporate

 

The increase in operating expense for Corporate functions of $.6 million was due primarily to increased professional fees.

 

Eliminations

 

Intersegment sales of timber from Deltic’s Woodlands to the Mills segment increased $1.9 million to $10.6 million. The increase was due to increases in both the volume and price of logs coming into Deltic’s sawmills from Company fee timberlands. Logs supplied by the Woodlands segment to the Company’s sawmills are transferred at prices that approximate market.

 

Equity in Del-Tin Fiber

 

For the first six months of 2005 and 2004, equity in Del-Tin Fiber was at break-even results. Both 2005 and 2004 experienced profitable second quarters which were essentially offset by first quarter losses reported by the joint venture. The facility’s first quarter of 2005, operations were hindered by a temporary production curtailment caused by a fire sustained at the plant.

 

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Table of Contents

Additional selected financial and statistical data for Del-Tin Fiber is shown in the following table.

 

     Six Months Ended June 30,

     2005

   2004

Net sales (millions of dollars)

   $ 25.6    30.6

Finished production (MMSF)

     62.9    76.9

Board sales (MMSF)

     62.0    80.1

Sales price (per MSF)

   $ 414    382

 

Average sales price increased eight percent due to the improvements in the MDF market and to a change in product mix to include a greater percentage of thin board and an increase in premium-grade production. Manufacturing cost per MSF sold was up eight percent due to decreased production volume and costs related to repair damage from the first quarter fire in the plant.

 

Income Taxes

 

The effective income tax rate was 35 percent and 40 percent in the 2005 and 2004 periods, respectively. The decrease was primarily due to lower effective rates for state income taxes caused by a reduction in the estimated valuation allowance related to state tax loss carryforwards as it is now more likely than not that a greater portion of these state net operating losses will be utilized.

 

Liquidity and Capital Resources

 

Cash Flows and Capital Expenditures

 

Net cash provided by operating activities totaled $20.7 million for the first half of 2005 compared to $17 million for the same period in 2004. Changes in operating working capital, other than cash and cash equivalents, required cash of $.5 million in the 2005 period and provided cash of $1.6 million in 2004. The Company’s accompanying Consolidated Statements of Cash Flows identify other differences between net income/(loss) and cash provided by operating activities for each reporting period.

 

Capital expenditures required cash of $14.4 million in the current-year period and $10.4 million a year ago. Capital expenditures by segment consisted of the following:

 

    

Six Months

Ended June 30,


     2005

   2004

(Thousands of dollars)

           

Woodlands

   $ 3,081    6,019

Mills

     6,054    1,374

Real Estate

     5,236    2,878

Corporate

     74    148
    

  

Capital expenditures

   $ 14,445    10,419
    

  

 

The net change in purchased stumpage inventory to be utilized in the Company’s sawmill operations required cash of $.4 million in 2005, but provided cash of $.2 million in 2004. The Company made advances to Del-Tin Fiber of $3.2 million during the current period, which increased $2.7 million from the corresponding period of 2004 due to cost to repair fire damage in the plant during the first quarter and to the production curtailment at the facility resulting from downtime due to the fire. In 2005, the Company received cash distributions from Del-Tin Fiber of $1.4 million during the second quarter to reimburse the Company for a portion of the fire-related advances with no such distributions occurring

 

26


Table of Contents

during the first half of 2004. During 2004, $4.4 million of proceeds from sales of timberland that were previously held by a trustee were used to acquire timberland designated as “replacement property” for income tax purposes, as required for tax-deferred exchanges. In 2005, Deltic borrowed $6 million and made repayments of debt of $7.7 million. During 2004, Deltic made repayments of previous borrowings under its revolving credit facility of $13 million. Deltic paid dividends on common stock of $1.5 million during the current period, consistent with the $1.5 million dividend payments in 2004. In 2005, proceeds from stock option exercises amounted to $.2 million, a decrease of $3.1 million when compared to 2004.

 

Financial Condition

 

Working capital totaled $8.9 million at June 30, 2005, and $6.5 million at December 31, 2004. Deltic’s working capital ratio at June 30, 2005, was 1.84 to 1, compared to 1.73 to 1 at the end of 2004. Cash and cash equivalents at the end of the second quarter of 2005 were $2.6 million compared to $.9 million at the end of 2004. During the first half of 2005, total indebtedness of the Company decreased $1.7 million to $84 million. Deltic’s long-term debt to stockholders’ equity ratio was .434 to 1 at June 30, 2005, compared to .462 to 1 at year-end 2004.

 

Liquidity

 

The primary sources of the Company’s liquidity are internally generated funds, access to outside financing, and working capital. The Company’s current strategy for growth continues to emphasize its timberland acquisition program, in addition to expanding lumber production as market conditions allow and developing real estate at Chenal Valley, Red Oak Ridge and The Ridges at Nowlin Creek.

 

To facilitate these growth plans, the Company has an agreement with a group of banks which provides an unsecured, committed revolving credit facility totaling $125 million, inclusive of a $50 million letter of credit feature. The agreement will expire on July 15, 2007. As of June 30, 2005, $111 million was available in excess of all borrowings outstanding under or supported by the facility. The credit agreement contains restrictive covenants, including limitations on the incurrence of debt and requirements to maintain certain financial ratios.

 

In December 2000, the Company’s Board of Directors authorized a stock repurchase program of up to $10 million of Deltic common stock. As of June 30, 2005, the Company had expended $2.1 million under this program, with the purchase of 96,206 shares at an average cost of $22.34 per share; no shares have been purchased in 2005 under this program. In its two previously completed repurchase programs, Deltic purchased 479,601 shares at an average cost of $20.89 and 419,542 shares at a $24.68 per share average cost, respectively.

 

Off-Balance Sheet Arrangements, Contractual Obligations, and Commitments

 

Prior to August 26, 2004, the Company had agreed to a contingent equity contribution agreement with Del-Tin Fiber and the group of banks from whom Del-Tin Fiber had obtained its $89 million credit facility. Under this agreement, Deltic and the other 50 percent owner of the joint venture had agreed to fund any deficiency in contributions to either Del-Tin Fiber’s required sinking fund or debt service reserve, up to a cumulative total of $17.5 million for each owner. In addition, each owner had committed to a production support agreement, under which each owner had agreed to make support obligation payments to Del-Tin Fiber to provide, on the occurrence of certain events, additional funds for payment of debt service until the plant was able to successfully complete a minimum production test. Both owners had also agreed, in a series of one-year term commitments, to fund any operating working capital needs until the facility was able to consistently generate sufficient funds to meet its cash requirements.

 

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Table of Contents

On August 26, 2004, Del-Tin Fiber refinanced its existing long-term debt by entering into a credit agreement consisting of a letter of credit and term loan with multiple lending institutions. The funds provided from this credit agreement were used, together with the existing balance in Del-Tin Fiber’s debt service reserve and bond sinking fund accounts, to redeem $60 million of its $89 million industrial revenue bonds. Under the new credit agreement, the lenders, on September 1, 2004, loaned Del-Tin Fiber $30 million which will be repayable over five years in equal quarterly installments, beginning December 31, 2004, and issued on Del-Tin Fiber’s behalf, a letter of credit in the amount of $29.7 million to support the remaining industrial revenue bonds originally issued in 1998 by Union County, Arkansas. Concurrent with this event, on August 26, 2004, Deltic executed a guarantee agreement in connection with the refinancing of the debt of Del-Tin Fiber. Under Deltic’s guarantee agreement, Deltic unconditionally guarantees the due and punctual payment of 50 percent ($27.6 million at June 30, 2005) of Del-Tin’s obligations under its credit agreement. This credit agreement of Del-Tin Fiber fully replaces Del-Tin Fiber’s prior credit facility, resulting in Deltic’s previous contingent equity contribution agreement of $17.5 million, the production support agreement, and the one-year commitment being fully extinguished.

 

The Company has adopted the provisions of FASB Interpretation (“FIN”) No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34. In accordance with FIN 45, Deltic initially estimated the fair value of its guarantee of Del-Tin Fiber’s credit agreement to be $3.5 million and included this non-cash amount in the Company’s Consolidated Balance Sheet as a long-term liability with an offsetting increase in the Company’s investment in Del-Tin Fiber. Deltic is reducing this liability systematically over the life of the credit agreement, as the Company is released from risk under the guarantee. At June 30, 2005, Deltic’s remaining liability regarding the guarantee was $2.9 million.

 

The Company has both funded and unfunded noncontributory defined benefit retirement plans that cover the majority of its employees. The plans provide defined benefits based on years of service and final average salary. Deltic also has other postretirement benefit plans covering substantially all of its employees. The health care plan is contributory with participants’ contributions adjusted as needed; the life insurance plan is noncontributory. (For information about material assumptions underlying the accounting for these plans and other components of the plans, refer to Note 13 to the consolidated financial statements included in the Company’s 2004 annual report on Form 10-K/A-1.)

 

Tabular summaries of the Company’s contractual cash payment obligations and other commercial commitment expirations as of June 30, 2005, by period, are presented in the following tables.

 

(Millions of dollars)    Total

   During
2005


   2006
to 2007


   2008
to 2009


   After
2009


Contractual cash payment obligations

                          

Real estate development infrastructure

   $ 2.3    1.7    .6    —      —  

Long-term debt

     84.0    —      14.0    50.0    20.0

Interest on debt1

     23.0    5.1    9.9    5.9    2.1

Retirement plans

     3.5    .3    1.4    1.8    —  

Other postretirement benefits

     6.9    .2    .8    1.1    4.8

Other long-term liabilities

     2.4    .1    .4    .4    1.5
    

  
  
  
  
     $ 122.1    7.4    27.1    59.2    28.4
    

  
  
  
  

 

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Table of Contents
(Millions of dollars)    Total

   During
2005


   2006
to 2007


   2008
to 2009


   After
2009


Other commercial commitment expirations

                          

Guarantee of indebtedness of Del-Tin Fiber

   $ 27.6    1.5    20.9    5.2    —  

Timber cutting agreements

     .6    .2    .4    —      —  

Operating leases

     .2    —      .1    .1    —  

Letters of credit

     .9    .3    .4    .2    —  
    

  
  
  
  
     $ 29.3    2.0    21.8    5.5    —  
    

  
  
  
  

 

1 Interest commitments are estimated using the Company’s current interest rates for the respective debt agreements over their remaining terms to expiration.

 

Outlook

 

Deltic’s management believes that cash provided from its operations and the remaining amount available under its credit facility will be sufficient to meet its expected cash needs and planned expenditures, including those of the Company’s continued timberland acquisition and stock repurchase programs, additional advances to Del-Tin Fiber, and capital expenditures, for the foreseeable future.

 

Critical Accounting Policies and Estimates

 

Critical accounting policies are defined as those that are reflective of significant judgements and uncertainties and potentially result in materially different results under different assumptions and conditions. The Company has prepared its consolidated financial statements in conformity with accounting principles generally accepted in the United States, which require management to make estimates and assumptions that affect the reported amounts in these financial statements and accompanying notes. Actual results could differ from those estimates under different assumptions or conditions. The Company has disclosed its critical accounting policies in its 2004 annual report on Form 10-K/A-1, and this disclosure should be read in conjunction with this Form 10-Q. There have been no changes in these identified critical policies, nor have there been any initially adopted accounting policies having a material impact on reported financial results.

 

Impact of Recently Effective Accounting Pronouncements

 

(For information regarding the impact of recently effective accounting pronouncements, refer to Note 2 to the consolidated financial statements.)

 

Outlook

 

Pine sawtimber harvest levels are expected to be 120,000 to 140,000 tons in the third quarter of 2005 and 550,000 to 575,000 tons for the year. Significant sales of timberland identified to have a higher and better use or to be non-strategic are not anticipated, but may reach 100 to 250 acres for the year. Finished lumber production and sales volume will continue to be subject to market conditions, and is estimated at 65 to 75 million board feet for the third quarter and 275 to 285 million board feet for the year. Residential lot sales are projected to be 15 to 20 lots and 290 to 310 lots for the third quarter and the year, respectively.

 

29


Table of Contents

Certain statements contained in this report that are not historical in nature constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as “expects”, “anticipates”, “intends”, “plans”, “estimates”, or variations of such words and similar expressions are intended to identify such forward-looking statements. These statements reflect the Company’s current expectations and involve certain risks and uncertainties, including those disclosed elsewhere in this report. Therefore, actual results could differ materially from those included in such forward-looking statements.

 

30


Table of Contents
Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

The Company’s market risk has not changed significantly from that set forth under the caption “Quantitative and Qualitative Disclosures About Market Risk”, in Item 7A of Part II of its 2004 annual report on Form 10-K/A-1. Those disclosures should be read in conjunction with this Form 10-Q.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Deltic Timber Corporation (“Deltic” or “the Company”) has established disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to the officers who certify the Company’s financial reports and to other members of senior management and the Board of Directors.

 

Based on their evaluation as of June 30, 2005, the Chief Executive Officer and Chief Financial Officer of the Company have concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) were not effective to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms because of the following material weaknesses in internal control over financial reporting related to accounting for third-party purchased stumpage timber inventory:

 

    a lack of segregation of duties related to the timber procurement function, in that the procurement manager calculated the estimated volumes on purchased tracts of third-party standing timber, approved purchases of tracts of third-party standing timber up to the level of his approval authority, monitored logging activity on all procured tracts, reported such logging activity to accounting personnel, maintained the records of expiration dates for logging rights for all procured tracts, obtained extensions to original expiration dates for all procured tracts, and determined the timing of reporting to accounting personnel that logging activities on procured tracts had been completed;

 

    a lack of frequent and comprehensive review of status updates for each respective tract of third- party standing timber;

 

    a lack of established procedures requiring adjustment in the carrying value of procured tracts when there are no current reports of logging activity reported to accounting personnel, unless an affirmative justification is timely presented and approved; and

 

    a lack of training and education designed to ensure that all relevant personnel involved in third-party purchased standing timber inventory transactions understand and apply the proper accounting procedures.

 

As of the date of this report, the Company’s management plans and intends to implement and thoroughly test new policies and procedures that are intended to fully remediate the material weaknesses in internal control over financial reporting with respect to accounting for third-party purchased standing timber inventory. These remedial actions include:

 

    Substantially increasing the segregation of duties related to the acquisition of and accounting for third-party purchased standing timber inventory, including a reduction in the expenditure authority levels of mill procurement personnel to increase involvement of management in acquisitions;

 

31


Table of Contents
    institution of new requirements in connection with third-party purchased standing timber inventory for the creation and wider distribution of records and documentation beginning with the original estimation process prior to acquisition of tracts of third-party purchased standing timber inventory and continuing through the final harvest and volume reconciliation for each tract;

 

    imposition of more frequent and comprehensive status updates for each respective tract of third- party purchased standing timber inventory with active participation by both procurement and accounting personnel;

 

    establishment of default procedures that require adjustments in the carrying value of respective tracts where no current reports of logging activity are being made by procurement personnel to accounting personnel, unless an affirmative justification is timely presented and approved;

 

    additional training and education designed to ensure that all relevant personnel involved in the transactions understand and apply the proper accounting for third-party purchased standing timber inventory; and

 

    extension of the Company’s sub-certification requirements relating to information supplied which may form a part of the Company’s accounting books and records to include all procurement managers and supervisors.

 

Changes in Internal Control Over Financial Reporting

 

There was no change in the Company’s internal control over financial reporting during the quarter ended June 30, 2005, that materially affected, or is reasonably likely to materially affect, such internal control over financial reporting. However, subsequent to June 30, 2005, Deltic began implementation of the remedial actions described above.

 

32


Table of Contents

PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings

 

From time to time, the Company is involved in litigation incidental to its business. Currently, there are no material legal proceedings.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

Issuer Purchase of Equity Securities

 

Period


   Total Number
of Shares
Purchased


   Average
Price Paid
Per Share


   Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs


   Maximum Approximate Dollar
Value of Shares that May Yet
Be Purchased Under the
Plans or Programs1


April 1 through April 30, 2005

   —      —      —      $ 7,851,000

May 1 through May 31, 2005

   —      —      —      $ 7,851,000

June 1 through June 30, 2005

   —      —      —      $ 7,851,000

 

1 In December 2000, the Company’s Board of Directors authorized a stock repurchase plan of up to $10 million of Deltic common stock. There is no stated expiration date regarding this authorization.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

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Table of Contents
Item 4. Submission of Matters to a Vote of Security Holders

 

The annual meeting of the stockholders of Deltic Timber Corporation (“Deltic” or “the Company”) was held on April 28, 2005. Pursuant to the Company’s Amended and Restated Certificate of Incorporation, its Board of Directors consists of three classes who hold office for staggered terms of three years. Set forth below is a listing of the directors elected at the April 28, 2005, annual meeting, the results of such election and the names of directors whose term of office continued after the meeting.

 

Director


 

Votes for


 

Votes Withheld


O. H. Darling, Jr.

  11,607,529   142,399

Christoph Keller, III

  11,038,991   710,937

R. Madison Murphy

  11,034,878   715,050

Alex R. Lieblong

  (Term expires in 2006)    

Robert C. Nolan

  (Term expires in 2006)    

Ray C. Dillon

  (Term expires in 2006)    

R. Hunter Pierson, Jr.

  (Term expires in 2007)    

J. Thurston Roach

  (Term expires in 2007)    

John C. Shealy

  (Term expires in 2007)    

 

In addition to the election of three Class II directors at the April 28, 2005 annual meeting, stockholders were requested to ratify the prior appointment of KPMG LLP by the Board of Directors as Deltic’s independent auditors for 2005. Stockholders ratified the appointment of KPMG LLP by a vote of 11,627,639 shares in favor and 122,289 shares against or withheld.

 

Item 5. Other Information

 

None.

 

Item 6. Exhibits

 

  (a) Exhibits

 

31.1    Chief Executive Officer Certification Required by Section 302 of the Sarbanes- Oxley Act of 2002.
31.2    Chief Financial Officer Certification Required by Section 302 of the Sarbanes- Oxley Act of 2002.
32       Certification Required by Section 906 of the Sarbanes-Oxley Act of 2002.

 

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Table of Contents

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

DELTIC TIMBER CORPORATION

       

By:

  /s/    RAY C. DILLON              

Date:

  August 12, 2005
    Ray C. Dillon, President            
    (Principal Executive Officer)            
/s/    CLEFTON D. VAUGHAN              

Date:

  August 12, 2005
    Clefton D. Vaughan, Vice President,            
    Finance and Administration            
    (Principal Financial Officer)            
/s/    KENNETH D. MANN              

Date:

  August 12, 2005
    Kenneth D. Mann, Controller            
    (Principal Accounting Officer)            

 

35

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