SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 1997
----------------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition from to
---------------------- --------------------
Commission file number 0-16158
WTD Industries, Inc.
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Oregon 93-0832150
- ------------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10260 S.W. Greenburg Road, Suite 900, Portland, Oregon 97223
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (503) 246-3440
----------------------
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 (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark whether the Registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities and
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes X No
--- ---
The number of shares outstanding of Registrant's Common Stock, no par
value, at November 30, 1997 was 11,154,374.
<PAGE>
WTD INDUSTRIES, INC.
--------------------
INDEX
Page
Number
------
PART I. Financial Information (Unaudited)
Item 1. Financial Statements
Consolidated Statements of Operations -
Three Months and Six Months Ended October 31, 1997 and 1996 3
Consolidated Balance Sheets -
October 31, 1997 and April 30, 1997 4
Consolidated Statements of Cash Flows -
Six Months Ended October 31, 1997 and 1996 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 11
PART II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 6. Exhibits and Reports on Form 8-K 15
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
WTD INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per-Share Amounts)
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
OCTOBER 31, OCTOBER 31,
----------------------- -----------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
NET SALES $ 67,387 $ 79,206 $ 136,268 $ 146,179
COST OF SALES 63,854 69,752 125,695 129,063
---------- ---------- ---------- ----------
GROSS PROFIT 3,533 9,454 10,573 17,116
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 2,903 3,404 6,133 6,487
---------- ---------- ---------- ----------
OPERATING INCOME 630 6,050 4,440 10,629
OTHER INCOME (EXPENSE)
Interest Expense (1,182) (1,281) (2,393) (2,578)
Miscellaneous 35 72 136 167
---------- ---------- ---------- ----------
(1,147) (1,209) (2,257) (2,411)
---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES (517) 4,841 2,183 8,218
PROVISION FOR INCOME TAXES (BENEFIT) (319) 1,840 437 3,123
---------- ---------- ---------- ----------
NET INCOME (LOSS) (198) 3,001 1,746 5,095
PREFERRED DIVIDENDS 573 557 1,142 1,114
---------- ---------- ---------- ----------
NET INCOME (LOSS) APPLICABLE
TO COMMON STOCKHOLDERS $ (771) $ 2,444 $ 604 $ 3,981
========== ========== ========== ==========
NET INCOME (LOSS) PER COMMON SHARE
PRIMARY ($0.07) $0.21 $0.05 $0.35
======= ===== ===== =====
FULLY DILUTED ($0.07) $0.21 $0.05 $0.35
======= ===== ===== =====
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
3
<PAGE>
WTD INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
(In Thousands)
OCTOBER 31, APRIL 30,
1997 1997
----------- -----------
CURRENT ASSETS (Unaudited)
Cash and cash equivalents $ 2,710 $ 8,209
Accounts receivable, net 12,394 16,830
Inventories 20,226 17,760
Prepaid expenses 2,279 1,817
Income tax refund receivable 1,145 1,145
Deferred tax asset 1,471 1,383
Assets held for sale 361 361
Timber, timberlands and timber-related assets 4,462 3,936
----------- -----------
Total current assets 45,048 51,441
NOTES AND ACCOUNTS RECEIVABLE 113 124
TIMBER AND TIMBERLANDS 631 629
PROPERTY, PLANT AND EQUIPMENT, at cost
Land 3,343 3,343
Buildings and improvements 12,677 11,194
Machinery and equipment 76,193 70,391
----------- -----------
92,213 84,928
Less accumulated depreciation 59,214 56,557
----------- -----------
32,999 28,371
Construction in progress 3,059 4,365
----------- -----------
36,058 32,736
DEFERRED TAX ASSET -- 280
OTHER ASSETS 1,270 1,276
----------- -----------
$ 83,120 $ 86,486
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
WTD INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
(In Thousands, Except Share Information)
OCTOBER 31, APRIL 30,
1997 1997
----------- -----------
CURRENT LIABILITIES (Unaudited)
Accounts payable $ 9,645 $ 9,709
Accrued expenses 7,333 9,644
Timber contracts payable 738 246
Current maturities of long-term debt 1,723 2,367
-------- ---------
Total current liabilities 19,439 21,966
LONG-TERM DEBT, less current maturities 44,544 46,086
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, 10,000,000 shares authorized
Series A, 270,079 shares outstanding 20,688 20,688
Series B, 6,111 shares outstanding 333 333
Common stock, no par value, 40,000,000 shares
authorized, 11,154,374 issued and outstanding
(11,083,474 at April 30, 1997) 28,752 28,647
Additional paid-in capital 15 15
Retained deficit (30,651) (31,249)
----------- -----------
19,137 18,434
----------- -----------
$ 83,120 $ 86,486
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
<TABLE>
<CAPTION>
WTD INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
SIX MONTHS ENDED OCTOBER 31,
---------------------------------
1997 1996
------------- -------------
CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 1,746 $ 5,095
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation, depletion and amortization 2,968 3,315
Deferred income tax 192 2,889
Accounts receivable 4,436 (3,990)
Inventories (2,466) (9,795)
Prepaid expenses (462) (185)
Timber, timberlands and timber-related assets - current (611) 1,788
Payables and accruals (1,840) 2,498
Income taxes -- 905
------------- -------------
Cash provided by operating activities 3,963 2,520
------------- -------------
CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES:
Net reductions of (additions to) timber and timberlands (2) 50
Acquisition of property, plant and equipment (6,152) (1,313)
Other investing activities 12 57
------------- -------------
Cash used for investing activities (6,142) (1,206)
------------- -------------
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES:
Principal payments on long-term debt (2,228) (1,240)
Other assets (49) (34)
Dividends paid on preferred stock (1,148) (1,114)
Issuance of common stock 105 --
------------- -------------
Cash used for financing activities (3,320) (2,388)
------------- -------------
DECREASE IN CASH AND CASH EQUIVALENTS (5,499) (1,074)
CASH BALANCE AT BEGINNING OF PERIOD 8,209 4,576
------------- -------------
CASH BALANCE AT END OF PERIOD $ 2,710 $ 3,502
============= =============
CASH PAID (REFUNDED) DURING THE PERIOD FOR:
Interest $2,351 $2,523
Income taxes $244 ($706)
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
6
<PAGE>
WTD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - SUMMARY OF FINANCIAL STATEMENT PRESENTATION
In the opinion of management, the consolidated financial statements of WTD
Industries, Inc. and subsidiaries ("WTD" or "the Company") presented herein
include all adjustments, which are solely of a normal recurring nature,
necessary for a fair presentation of the financial position, results of
operations and cash flows for the interim periods presented. Certain
reclassifications may have been made to the prior period results and balances to
conform to the current period classifications. The financial statements should
be read with reference to "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contained in this report, and the "Notes to
Consolidated Financial Statements" set forth in the Company's Annual Report on
Form 10-K for the year ended April 30, 1997, filed with the Securities and
Exchange Commission. The results of operations for the current interim periods
are not necessarily indicative of the results to be expected for the current
year.
NOTE 2 - INVENTORIES
Inventories are valued at the lower of cost or market. The amounts included
in inventories at October 31, 1997 and April 30, 1997 are as follows (in
thousands):
October 31, April 30,
1997 1997
----------- -----------
Logs $ 9,410 $ 9,054
Lumber 9,304 7,379
Supplies and other 1,512 1,327
----------- -----------
$ 20,226 $ 17,760
=========== ===========
NOTE 3 - LONG-TERM DEBT
The Company's primary debt agreement includes certain covenants, including
the maintenance of specified levels of adjusted cumulative operating income (as
defined), tangible net worth, working capital, collateral coverage (as defined)
and total liabilities ratio (as defined). This agreement also imposes certain
restrictions and limitations on capital expenditures, investments, dividend
payments, new indebtedness, and transactions with officers, directors,
shareholders and affiliates. This debt agreement was most recently amended as of
October 1, 1997, with respect to reducing until July 1, 1998, the minimum
working capital required to be maintained.
7
<PAGE>
NOTE 3 - LONG-TERM DEBT (Continued)
At October 31, 1997 the Company's tangible net worth was $18.9 million,
compared to $10 million required by the covenant. At that same date, the
Company's working capital was $25.6 million, compared to $21.5 million required
by the covenant. Also, at October 31, 1997, the Company's adjusted cumulative
operating income was $38 million, compared to $27.5 million required. The
collateral coverage ratio at October 31, 1997 was 73%, compared to a 60% minimum
required level. The total liabilities ratio was 77% at October 31, 1997,
compared to a maximum allowed of 87%. The required level of tangible net worth
increases to $12 million at May 1, 1998 and $14.5 million at May 1, 1999. The
required level of working capital increases to $25 million on July 1, 1998. The
required level of adjusted cumulative operating income increases to $40 million
at May 1, 1998, $52.5 million at May 1, 1999 and $67.5 million at May 1, 2000.
The minimum required collateral coverage ratio increases to 65% at May 1, 1998.
The maximum allowed total liabilities ratio drops to 85% at May 1, 1998. During
the quarter ended October 31, 1997, the Company's adjusted cumulative operating
income decreased by $2.3 million while showing a loss before taxes of $0.5
million. The Company continues to be in compliance with all covenants contained
in this agreement.
In addition, this debt agreement requires prepayments if the Company's
cumulative operating income exceeds certain specified amounts. No such
prepayment was required for the year ended April 30, 1997. In connection with
the May 1, 1996 amendment, the Company agreed to an additional prepayment
computed at 30% of quarterly net income. No such prepayment is required for the
quarter ended October 31, 1997.
NOTE 4 - STOCKHOLDERS' EQUITY AND COMMON SHARES OUTSTANDING
Stockholders' equity at October 31, 1997 consists of the following:
Series A preferred stock, $100 per share liquidation preference;
500,000 shares authorized; 270,079 shares issued and outstanding;
limited voting rights; cumulative dividends payable quarterly in
advance at the prime rate, with a minimum rate of 6% and a maximum rate
of 9%; convertible into common stock at $7.50 per share after April 30,
1999; redeemable at original issue price plus accrued dividends at the
option of the Board of Directors, in the form of cash or in exchange
for senior unsecured debt with a 12% coupon. The holders of the Series
A preferred stock will be granted voting control of the Company's Board
of Directors in the event the Company misses three consecutive
quarterly dividend payments, four quarterly dividend payments within
twenty-four months or a total of eight quarterly dividend payments. The
Company has not missed any dividend payments on the Series A preferred
stock.
Series B preferred stock, $100 per share liquidation preference;
500,000 shares authorized; 6,111 shares issued and outstanding; limited
voting rights; convertible into 212,693 shares of common stock;
dividends payable only if paid on the Company's common stock;
redeemable at original issue price plus accrued dividends at the option
of the Board of Directors after all Series A preferred stock has been
redeemed.
8
<PAGE>
NOTE 4 - STOCKHOLDERS' EQUITY AND COMMON SHARES OUTSTANDING
(Continued)
Common stock, no par value; 40,000,000 shares authorized; 11,154,374
shares issued and outstanding. Before giving effect to any shares that
might be issued pursuant to the exercise of any stock options or
conversion of any Series A preferred stock, the total number of common
shares would increase to 11,367,067 shares if remaining Series B
preferred stock outstanding at October 31, 1997 is converted to common
stock.
NOTE 5 - NET INCOME (LOSS) PER SHARE
The calculations of net income (loss) per share for the three-month and
six-month periods ended October 31, 1997 and 1996 are summarized below (in
thousands, except per-share data):
Three Months Ended Six Months Ended
October 31, October 31,
------------------ ------------------
1997 1996 1997 1996
-------- -------- -------- --------
NET INCOME (LOSS) APPLICABLE TO
COMMON SHAREHOLDERS $ (771) $ 2,444 $ 604 $ 3,981
======== ======== ======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING 11,143 11,077 11,128 11,077
ADDITIONAL SHARES ASSUMED FROM:
Conversion of Series B
preferred stock -- 213 213 213
Exercise of stock options -- 103 450 20
-------- -------- -------- --------
AVERAGE NUMBER OF SHARES AND
EQUIVALENTS OUTSTANDING
- PRIMARY BASIS 11,143 11,393 11,791 11,310
ADDITIONAL SHARES ASSUMED FROM
EXERCISE OF STOCK OPTIONS -- 38 100 108
-------- -------- -------- --------
AVERAGE NUMBER OF SHARES AND
EQUIVALENTS OUTSTANDING
- FULLY DILUTED 11,143 11,431 11,891 11,418
======== ======== ======== ========
NET INCOME (LOSS) PER COMMON SHARE
- PRIMARY BASIS ($0.07) $0.21 $0.05 $0.35
======= ======= ======= =======
- FULLY DILUTED ($0.07) $0.21 $0.05 $0.35
======= ======= ======= =======
9
<PAGE>
NOTE 6 - INCOME TAXES
The income tax provision is based on the estimated effective annual tax
rate for each fiscal year. The provision includes anticipated current income
taxes payable, the tax effect of anticipated differences between the financial
reporting and tax basis of assets and liabilities, and the expected utilization
of net operating loss (NOL) carryforwards.
The federal and state income tax provision consists of the following (in
thousands):
Three Months Ended Six Months Ended
October 31, October 31,
------------------ ------------------
1997 1996 1997 1996
-------- -------- -------- --------
Income (loss) before income taxes $ (517) $ 4,841 $ 2,183 $ 8,218
======== ======== ======== ========
Income tax provision (benefit):
Federal $ (298) $ 1,646 $ 350 $ 2,794
State (21) 194 87 329
-------- -------- -------- --------
$ (319) $ 1,840 $ 437 $ 3,123
======== ======== ======== ========
Current $ 182 $ 139 $ 245 $ 234
Deferred (501) 1,701 192 2,899
-------- -------- -------- --------
$ (319) $ 1,840 $ 437 $ 3,123
======== ======== ======== ========
Deferred tax assets increased during the quarter ended October 31, 1997,
principally the result of additional net operating loss carryforwards stemming
from pretax losses and a reduction of the valuation reserve against the deferred
tax asset.
Management anticipates some reductions in its valuation reserve in fiscal
1998. These reductions should result in a lowering of the Company's effective
tax rate to approximately 20% in fiscal 1998.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
The Company is involved in various litigation primarily arising in the
normal course of its business. In the opinion of management, the Company's
liability, if any, under such pending litigation would not have a material
adverse impact upon the Company's consolidated financial condition or results of
operations.
The Company is subject to various federal, state and local regulations
regarding waste disposal and pollution control. Various governmental agencies
have enacted, or are considering, regulations regarding log yard management and
disposal of log yard waste that may require material expenditures in the future.
Management believes that the Company will be able to comply with any final
regulations in this area without a material adverse impact on its consolidated
financial condition or results of operations.
10
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
- ---------------------
On a quarter-to-quarter basis, the Company's financial results have varied
widely, and will continue to vary, due to seasonal fluctuations and market
factors affecting the demand for logs, lumber and other wood products. The
industry is subject to fluctuations in sales and earnings due to such factors as
industry production in relation to product demand and variations in interest
rates and housing starts. Currency fluctuations affect the industry when
exchange rates spur log exports and drive up domestic log prices, and when a
relatively strong U.S. dollar encourages lumber imports from competing
countries. Trade policies and agreements between the United States and other
countries, such as Canada, can also significantly affect log and lumber prices
in the Company's markets.
The industry is also affected by weather conditions and changing timber
management policies. Fire danger and excessively dry or wet conditions
temporarily reduce logging activity and may increase open market log prices.
Timber management policies of governmental agencies change from time to time,
causing actual or feared shortages in some areas periodically. These policies
change because of environmental concerns, public agency budget issues, and a
variety of other reasons. Therefore, past results for any given year or quarter
are not necessarily indicative of future results.
It is generally the Company's practice to curtail production at facilities
from time to time due to conditions which temporarily impair log flow, or when
imbalances between log costs and product prices cause the cost of operation to
exceed the cost of shutdown. Management believes its labor practices and
compensation systems, as well as a relatively low capital cost in relation to
production capacity, give it the flexibility to efficiently curtail operations
and resume production as conditions warrant.
Raw materials comprise the majority of the cost of products sold by the
Company. The Company depends principally on open market log purchases for its
raw materials needs. WTD's log inventory policy is to maintain, where possible,
a supply equal to three to four weeks of production.
Lumber prices were substantially weaker during the quarter ended October
31, 1997. Lumber usage and demand continue to be strong and the Company has
responded to certain lumber price adjustments by altering product mix and
reducing log costs where possible. There is currently an oversupply of lumber in
the U.S. market, caused in part by weakness in the export lumber market,
particularly exports to Japan, and some export producers manufacturing for the
domestic lumber market. Log costs were relatively stable during the first half.
Quarterly results were negatively impacted by the inability of the Union
Pacific Railroad to provide adequate service to the Company and its other
customers. Although the Company has been able to make alternative shipping
arrangements in many instances, there have not been enough railcars to satisfy
demand.
11
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
There can be no assurance that the margins recently experienced by the
Company will continue or improve.
A labor strike at the Company's hardwood mill located in South
Bend/Raymond, Washington, commenced on October 29, 1997. The Company has
continued to operate the facility, although at a lower rate of production, with
employees that are not participating in the strike, replacement workers, and
salaried personnel. In June of 1997 the Company had reached an impasse in
negotiations with the local Woodworkers Union. In October the Company withdrew
recognition of the Union as the bargaining agent of the employees based on
notification by a majority of the employees at the mill that they no longer
wanted to be represented by the Union. No other WTD employees are represented by
this Union. No meetings with the Union have been scheduled.
The following table sets forth the percentages which certain expenses and
income items bear to net sales, and the period-to-period percentage change in
each item:
<TABLE>
<CAPTION>
Income and Expense Items as Percentage
a Percentage of Net Sales Increase (Decrease)
------------------------------------- ------------------------
Three Months Six Months
Three Months Ended Six Months Ended Ended Ended
October 31, October 31, 10/31/97 10/31/97
1997 1996 1997 1996 to to
------ ------ ------ ------ 10/31/96 10/31/96
-------- --------
<S> <C> <C> <C> <C> <C> <C>
Net sales 100.0 % 100.0 % 100.0 % 100.0 % (14.9)% (6.8)%
Cost of sales 94.8 88.1 92.2 88.3 (8.5) (2.6)
------ ------ ------ ------
Gross profit 5.2 11.9 7.8 11.7 (62.6) (38.2)
Selling, general and
administrative expense 4.3 4.3 4.5 4.4 (14.7) (5.5)
------ ------ ------ ------
Operating income 0.9 7.6 3.3 7.3 (89.6) (58.2)
Interest expense (1.8) (1.6) (1.8) (1.8) (7.7) (7.2)
Miscellaneous 0.1 0.1 0.1 0.1 (51.4) (18.6)
------ ------ ------ ------
Income (loss) before income taxes (0.8) 6.1 1.6 5.6 NM (73.4)
Provision for income taxes (benefit) (0.5) 2.3 0.3 2.1 NM (86.0)
------ ------ ------ ------
Net income (loss) (0.3) % 3.8 % 1.3 % 3.5 % NM (65.7)%
====== ====== ====== ======
</TABLE>
Note: Percentages may not add precisely due to rounding.
NM: Not Meaningful
Comparison of Three Months Ended October 31, 1997 and 1996
- ----------------------------------------------------------
Net sales for the three months ended October 31, 1997 decreased $11.8
million (15%) from the three months ended October 31, 1996. This was principally
caused by a 10% decrease in lumber shipments, a 16% decrease in chip deliveries,
a 7% decrease in lumber prices, a 4% decrease in chip prices, and a 37% decrease
in other by-product prices. The reduced lumber shipments reflect reduced
production resulting from a weak market in the current quarter compared to a
strong market in the
12
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
second quarter of fiscal 1997. The reduced lumber shipments also reflect an
inadequate supply of railcars to ship lumber. The reduced chip deliveries
reflect not only reduced lumber production but also improved lumber recovery
resulting in fewer chips per thousand board feet (mbf).
Gross profit for the quarter ended October 31, 1997 was 5.2% of net sales,
compared to 11.9% of net sales for the quarter ended October 31, 1996. Lumber
prices declined by 7% from the second quarter of fiscal 1997, while the
Company's log costs declined by only 3%. Production declined compared to levels
in the prior year, when production levels reflected the favorable market, and
some production curtailment occurred in the present year in response to poor
lumber prices and inadequate rail service. Unit manufacturing costs increased by
7% from the quarter ended October 31, 1996, partially due to a general wage
increase in September 1996.
Selling, general and administrative expenses in the three months ended
October 31, 1997 decreased by $0.5 million (15%) from the three months ended
October 31, 1996. This decrease reflects reduced profit-sharing bonus payments
stemming from lower pretax profits, partially offset by expenses associated
with the start-up of two WTD subsidiaries in the first quarter of fiscal 1998.
In the quarter ended October 31, 1997, the Company recorded a tax benefit
equal to 62% of its pretax loss. In the quarter ended October 31, 1996, the
Company recorded a tax provision equal to 38% of its pretax profit. See Note 6
to Consolidated Financial Statements.
Comparison of Six Months Ended October 31, 1997 and 1996
- --------------------------------------------------------
Net sales for the six months ended October 31, 1997 decreased $9.9 million
(7%) from the six months ended October 31, 1996. This was principally caused by
a 5% decrease in lumber shipments, an 11% decrease in chip deliveries, a 2%
decrease in lumber prices, a 10% decrease in chip prices, and a 37% decrease in
other by-product prices. The reduced lumber shipments reflect reduced production
resulting from a weak market in the second quarter compared to a strong market
in the first half of fiscal 1997. The reduced lumber shipments also reflect an
inadequate supply of railcars to ship lumber in the second quarter. The reduced
chip deliveries reflect not only reduced lumber production but also improved
lumber recovery resulting in fewer chips per mbf.
Gross profit for the six months ended October 31, 1997 was 7.8% of net
sales, compared to 11.7% of net sales for the six months ended October 31, 1996.
Lumber prices declined by 2% from the six months ended October 31, 1996, while
the Company's log costs declined by only 1%. Production declined compared to
levels in the prior year, when production levels reflected the favorable market,
and some production curtailment occurred in the present year in response to poor
lumber prices and inadequate rail service in the second quarter. Unit
manufacturing costs increased by 6% from the six months ended October 31, 1996,
partially due to a general wage increase in September 1996.
Selling, general and administrative expenses in the six months ended
October 31, 1997 decreased by $0.35 million (5%) from the six months ended
October 31, 1996. This decrease reflects reduced profit-sharing bonus payments
stemming from lower pretax profits, partially offset by expenses associated
with the start-up of two WTD subsidiaries in the first quarter of fiscal 1998.
13
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
In the six months ended October 31, 1997, the Company recorded a tax
provision equal to 20% of its pretax profit. In the six months ended October 31,
1996, the Company recorded a tax provision equal to 38% of its pretax profit.
See Note 6 to Consolidated Financial Statements.
Liquidity and Capital Resources
- -------------------------------
The Company relies on cash provided by its operations to fund its working
capital needs. There can be no assurance that such cash will be sufficient to
fund the Company's future operations. Substantially all of the Company's assets
are pledged as security for its primary debt obligation.
At October 31, 1997, the Company had net working capital of $25.6 million,
$3.9 million less than at April 30, 1997. The working capital decrease was
primarily the result of capital spending, along with principal payments on debt
and dividends paid on the Company's Series A preferred stock.
During the six months ended October 31, 1997, the Company's cash and cash
equivalents decreased by $5.5 million to $2.7 million at October 31.
Approximately $4.0 million of cash was provided by operations. About $2.2
million was used to repay various debt obligations and $6.2 million for
acquisition of property, plant and equipment. The Company also paid $1.1 million
in dividends to holders of its Series A preferred stock.
Capital spending in the first six months of fiscal 1998 was $6.2 million.
Capital spending for the balance of the fiscal year is currently forecast to be
approximately $1.7 million. The Company had commitments of approximately $0.7
million for capital spending at October 31, 1997.
The Company's Credit and Security Agreement dated as of November 30, 1992
contains certain covenants, including the maintenance of prescribed levels of
collateral coverage (as defined), tangible net worth, working capital, adjusted
cumulative operating income (as defined) and total liabilities ratio (as
defined). This debt agreement was most recently amended as of October 1, 1997,
with respect to reducing until July 1, 1998, the minimum working capital
required to be maintained. See Note 3 to Consolidated Financial Statements.
Forward-Looking Information
- ---------------------------
Certain statements in this Form 10-Q contain "forward-looking" information
(as defined in Section 27A of the Securities Act of 1933, as amended) that
involve risks and uncertainties, including, but not limited to, the impact of
general economic conditions, increased interest rates, the impact of competitive
products and pricing, availability and cost of raw materials, availability of
adequate transportation to get product to market, inadequate cash reserves,
labor strikes, changes in environmental and other regulations, the ability to
get necessary approvals for marketing the GREENWELD(R) process in Canada,
changes in the Company's ability to use its net operating loss carryforward and
the risk factors listed from time to time in the Company's SEC reports,
including, but not limited to, the report on Form 10-K for the fiscal year ended
April 30, 1997 (Part II, Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations").
14
<PAGE>
WTD INDUSTRIES, INC.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
On October 7, 1997, the Company held its Annual Meeting of
Shareholders. Directors Richard W. Detweiler and William H. Wright were
elected to one-year terms. Larry G. Black and Scott Christie were
elected to two-year terms. Bruce L. Engel, K. Stanley Martin and Robert
J. Riecke were elected to three-year terms. The number of votes cast
for each nominated Director was as follows:
Against or
For Withheld
----------- -----------
Black 9,661,769 72,570
Christie 9,675,209 59,130
Detweiler 9,670,409 63,930
Engel 9,665,655 68,684
Martin 9,665,009 69,330
Riecke 9,659,109 75,230
Wright 9,668,809 65,530
The firm of Moss Adams LLP was re-appointed as the Company's auditors.
The vote for re-appointment of Moss Adams LLP was 9,656,765 for, 46,436
against or withheld, and 31,138 abstentions.
The shareholders also approved the restoration of control share voting
rights under the Oregon Control Share Act, for Quinault Corporation
(Quinault). Mr. Black, by virtue of being president and sole director
of Quinault, may be deemed to beneficially own the shares owned by
Quinault. The vote was 6,763,736 for, 261,488 against or withheld, and
53,250 abstentions.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The Index to Exhibits is located on page 17.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
October 31, 1997.
15
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
WTD INDUSTRIES, INC.
-----------------------
(Registrant)
By: /s/ Bruce L. Engel
-----------------------
Bruce L. Engel
President
By: /s/ K. Stanley Martin
-----------------------
K. Stanley Martin
Vice President-Finance
December 12, 1997
16
<PAGE>
WTD INDUSTRIES, INC.
INDEX TO EXHIBITS
Sequential
Number
System
Page
Number
3.1 Fourth Restated Articles of Incorporation of Registrant
adopted effective November 27, 1992(1)
3.2 Second Restated Bylaws of the Registrant adopted
effective November 27, 1992(2)
4.2.7 Amendment dated as of October 1, 1997 to Credit and 18
Security Agreement dated as of November 30, 1992, between
Registrant and Principal Mutual Life Insurance Company,
Aetna Life Insurance Company, The Northwestern Mutual
Life Insurance Company, Chemical Bank, Seattle-First
National Bank, and Bank of America Oregon
19 Other reports furnished to securities holders with 20
respect to the quarter ended October 31, 1997:
President's letter excerpted from Interim Report to
Shareholders for the second quarter of fiscal 1998
27 Financial Data Schedule(3)
- --------
(1)Incorporated by reference to the exhibit of like number to the
Registrant's report on Form 8-K dated November 23, 1992, previously filed with
the Commission.
(2)Incorporated by reference to the exhibit of like number to the
Registrant's annual report on Form 10-K for the year ended April 30, 1993,
previously filed with the Commission.
(3)This schedule has been submitted in the electronic form prescribed by
EDGAR.
- ----------
All other required Exhibits are listed in the Company's Annual Report on
Form 10-K for the year ended April 30, 1997.
17
Exhibit 4.2.7
AMENDMENT
DATED AS OF OCTOBER 1, 1997
TO
CREDIT AND SECURITY AGREEMENT
DATED AS OF NOVEMBER 30, 1992
Reference is hereby made to that certain Credit and Security Agreement
("Credit Agreement") dated as of November 30, 1992 among Principal Mututual Life
Insurance Company, Aetna Life Insurance Company, The Northwestern Mutual Life
Insurance Company, Chemical Bank, Seattle-First National Bank and Bank of
America Oregon, and WTD Industries, Inc. and its Affiliates and the Term Notes
issued by the Borrowers in connection with the Credit Agreement. Capitalized
terms used herein shall have the same meaning ascribed thereto in the Credit
Agreement.
The Term Notes currently are held by the following entities in the
proportions set forth herein:
Principal Mututal Life
Insurance Company 57.111632%
The Northwestern Mutual Life
Insurance Company 20.450484%
Foothill Group, Inc. 13.532675%
Oppenheimer & Co., Inc. 6.911127%
Fixed Plus Partners, beneficial owner
of Note registered in the name of
Bear Stearns Securities Corp. 1.994082%
The Credit Agreement is hereby modified as follows:
1. Credit Agreement Section 6.01.J is hereby restated to read as
follows:
J. Minimum Working Capital. Maintain minimum working capital,
at all times during the periods set forth below, calculated as Current
Assets minus Current Liabilities; provided, for the purpose of
computing Current Assets under this Section 6.01.J, the portion of
Current Assets which consists of Timber and Timberlands Current or
contract rights relating thereto shall be included only up to an amount
equal to (x) on or before January 31, 1993, forty-five percent (45%)
and (y) thereafter, forty percent (40%), of the amount of Borrowers'
overall Current Assets determined in accordance with GAAP:
Period Millions of Dollars
------ -------------------
Effective Date through 12/31/95 25
1/1/96 through 6/30/96 19
7/1/96 through 6/30/97 22.5
7/1/97 through 9/30/97 25
10/1/97 through 6/30/98 21.5
7/1/98 and beyond 25
18
<PAGE>
2. In all other respects, the Credit Agreement shall remain unchanged
and in full force and effect.
EFFECTIVE DATE: October 1, 1997
PRINCIPAL MUTUAL LIFE THE NORTHWESTERN MUTUAL LIFE
INSURANCE COMPANY INSURANCE COMPANY
By: By:
------------------------------ ------------------------------
Its: Its:
------------------------------ ------------------------------
(pro rata interest: 20.450484%)
By:
------------------------------ FOOTHILL GROUP, INC.
Its:
------------------------------
(pro rata interest: 57.111632%) By:
------------------------------
Its:
OPPENHEIMER & CO., INC. ------------------------------
(pro rata interest: 13.532675%)
By:
------------------------------
Its: WTD INDUSTRIES, INC.
------------------------------
(pro rata interest: 6.911127%)
By:
------------------------------
Its:
------------------------------
FIXED PLUS PARTNERS, Beneficial
Owner of Note Registered in the Name
of Bear Stearns Securities Corp.
By:
------------------------------
Its:
------------------------------
(pro rata interest: 1.994082%)
19
Report from The President Exhibit 19
Dear WTD Shareholders:
For our second fiscal quarter which ended October 31, 1997, WTD
Industries incurred a net loss of $198,000 or $.07 per share, compared to net
income of $3,001,000 or $.21 per share for the same period in 1996. Second
quarter net sales were $67.4 million, down 15 percent from the $79.2 million in
the comparable period last year.
For the six months ended October 31, 1997, the Company reported net
income of $1,746,000 or $.05 per share, compared to net income of $5,095,000 or
$.35 per share for the same period last year. Net sales were $136.3 million for
the six months compared to $146.2 million in the prior year, down 7 percent.
Lumber prices are substantially weaker than they were during the same
quarter a year ago. Although lumber usage remains strong, reflecting the healthy
economy and reasonable and stable interest rates, the domestic lumber market
still suffers from overproduction, brought on in part by diminished export
lumber and log markets.
Also negatively impacting our second quarter sales has been the
inability of the Union Pacific Railroad to provide adequate service to WTD and
its other customers. We have been able to make alternate shipping arrangements
in many instances, but shipments are lower than ordinary because of the
inability to get enough railcars to satisfy demand.
The labor strike at the Company's hardwood mill located in South
Bend/Raymond, Washington, which commenced on October 29, 1997, remains in
effect. The Company has continued to operate the facility, although at a lower
rate of production, with employees that are not participating in the strike,
replacement workers, and salaried personnel. In June of 1997 the Company had
reached an impasse in negotiations with the local Woodworkers Union and in
October the Company withdrew recognition of the Union as the bargaining agent of
the employees based on notification by a majority of the employees at the mill
that they no longer wanted to be represented by the Union. No other WTD
employees are represented by this Union. No meetings with the Union have been
scheduled.
On the positive side, chip prices are now up substantially compared to
a year ago. We continue to make progress developing our GREENWELD(R) line of
business. We have now signed up our second licensee in the United States and our
fingerjoint facility has received approval for horizontal applications in the
United States for lumber made with the GREENWELD(R) process. We are now focused
on obtaining the appropriate approvals for horizontal applications in Canada.
During our Annual Meeting of Shareholders held on October 7, 1997, all
three proposals voted on were approved. The recommended slate of directors was
reelected, Moss Adams was ratified as independent auditors, and voting rights
for certain control shares held by Quinault Corporation were restored. We
appreciate your continued support.
Bruce L. Engel
President
20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
REGISTRANT'S REPORT ON FORM 10-Q FOR THE PERIOD ENDED OCTOBER 31, 1997
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-START> MAY-01-1997
<PERIOD-END> OCT-31-1997
<CASH> 2,710
<SECURITIES> 0
<RECEIVABLES> 12,394
<ALLOWANCES> 0
<INVENTORY> 20,226
<CURRENT-ASSETS> 45,048
<PP&E> 95,272
<DEPRECIATION> 59,214
<TOTAL-ASSETS> 83,120
<CURRENT-LIABILITIES> 19,439
<BONDS> 44,544
0
21,021
<COMMON> 28,752
<OTHER-SE> (30,636)
<TOTAL-LIABILITY-AND-EQUITY> 83,120
<SALES> 136,268
<TOTAL-REVENUES> 136,268
<CGS> 125,695
<TOTAL-COSTS> 125,695
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,393
<INCOME-PRETAX> 2,183
<INCOME-TAX> 437
<INCOME-CONTINUING> 1,746
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,746
<EPS-PRIMARY> .05
<EPS-DILUTED> .05
</TABLE>
