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, 1998
-------------------------
[ ] 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
TreeSource 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
----------------------
WTD Industries, Inc.
- --------------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year, if
Changed Since Last Report)
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
--- ---
The number of shares outstanding of Registrant's Common Stock, no par
value, at November 30, 1998 was 11,162,874.
<PAGE>
TREESOURCE 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, 1998 and 1997 3
Consolidated Balance Sheets -
October 31, 1998 and April 30, 1998 4
Consolidated Statements of Cash Flows -
Six Months Ended October 31, 1998 and 1997 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 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TREESOURCE INDUSTRIES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per-Share Amounts)
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
OCTOBER 31, OCTOBER 31,
--------------------------- ---------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
NET SALES $ 51,240 $ 67,387 $ 98,901 $ 136,268
COST OF SALES 47,859 63,854 92,034 125,695
----------- ----------- ----------- -----------
GROSS PROFIT 3,381 3,533 6,867 10,573
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 2,628 2,903 5,392 6,133
----------- ----------- ----------- -----------
OPERATING INCOME 753 630 1,475 4,440
OTHER INCOME (EXPENSE)
Interest Expense (1,158) (1,182) (2,318) (2,393)
Miscellaneous 81 35 (100) 136
----------- ----------- ----------- -----------
(1,077) (1,147) (2,418) (2,257)
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES (324) (517) (943) 2,183
PROVISION FOR INCOME TAXES (BENEFIT) -- (319) -- 437
----------- ----------- ----------- -----------
NET INCOME (LOSS) (324) (198) (943) 1,746
PREFERRED DIVIDENDS 574 573 1,148 1,142
----------- ----------- ----------- -----------
NET INCOME (LOSS) APPLICABLE
TO COMMON STOCKHOLDERS $ (898) $ (771) $ (2,091) $ 604
=========== =========== =========== ===========
NET INCOME (LOSS) PER COMMON SHARE
BASIC ($0.08) ($0.07) ($0.19) $0.05
------- ------- ------- -----
DILUTED ($0.08) ($0.07) ($0.19) $0.05
------- ------- ------- -----
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
3
<PAGE>
TREESOURCE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
(In Thousands)
OCTOBER 31, APRIL 30,
1998 1998
--------- ---------
CURRENT ASSETS (Unaudited)
Cash and cash equivalents $ 3,734 $ 2,157
Accounts receivable, net 8,482 10,464
Inventories 13,310 14,005
Prepaid expenses 1,624 1,195
Income tax refund receivable 119 --
Deferred tax asset 750 750
Assets held for sale 5,959 6,685
Timber, timberlands and timber-related assets 2,544 4,252
--------- ---------
Total current assets 36,522 39,508
NOTES AND ACCOUNTS RECEIVABLE 45 103
PROPERTY, PLANT AND EQUIPMENT, at cost
Land 2,848 2,849
Buildings and improvements 10,614 11,123
Machinery and equipment 62,530 62,623
--------- ---------
75,992 76,595
Less accumulated depreciation 52,843 52,378
--------- ---------
23,149 24,217
Construction in progress 633 225
--------- ---------
23,782 24,442
OTHER ASSETS 1,291 1,258
--------- ---------
$ 61,640 $ 65,311
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
TREESOURCE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
(In Thousands, Except Share Information)
OCTOBER 31, APRIL 30,
1998 1998
--------- ---------
CURRENT LIABILITIES (Unaudited)
Accounts payable $ 7,769 $ 8,992
Accrued expenses 7,051 6,568
Timber contracts payable 346 323
Current maturities of long-term debt 9,684 8,467
--------- ---------
Total current liabilities 24,850 24,350
LONG-TERM DEBT, less current maturities 34,779 36,868
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, 11,162,874 issued and outstanding
(11,154,374 at April 30, 1998) 28,761 28,752
Additional paid-in capital 15 15
Retained deficit (47,786) (45,695)
--------- ---------
2,011 4,093
--------- ---------
$ 61,640 $ 65,311
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
TREESOURCE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED OCTOBER 31,
1998 1997
--------- ---------
CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES:
<S> <C> <C>
Net income (loss) $ (943) $ 1,746
Adjustments to reconcile net income (loss) to
cash provided by operating activities:
Depreciation, depletion and amortization 2,156 2,968
Deferred income tax -- 192
Accounts receivable 1,982 4,436
Inventories 695 (2,466)
Prepaid expenses (429) (462)
Timber, timberlands and timber-related assets - current 1,708 (611)
Payables and accruals (688) (1,840)
Income taxes (119) --
--------- ---------
Cash provided by operating activities 4,362 3,963
CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES:
Acquisition of property, plant and equipment (1,153) (6,152)
Net book value of retirements 260 1
Net book value of disposed idle assets 177 --
Other investing activities 58 9
--------- ---------
Cash used for investing activities (658) (6,142)
--------- ---------
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES:
Principal payments on long-term debt (901) (2,228)
Other assets (87) (49)
Dividends paid on preferred stock (1,148) (1,148)
Issuance of common stock 9 105
--------- ---------
Cash used for financing activities (2,127) (3,320)
--------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,577 (5,499)
CASH BALANCE AT BEGINNING OF PERIOD 2,157 8,209
--------- ---------
CASH BALANCE AT END OF PERIOD $ 3,734 $ 2,710
========= =========
CASH PAID (REFUNDED) DURING THE PERIOD FOR:
Interest $2,056 $2,351
Income taxes ($2) $244
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
TREESOURCE 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
TreeSource Industries, Inc. and subsidiaries ("TreeSource" 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, 1998, 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, 1998 and April 30, 1998 are as follows (in
thousands):
October 31, April 30,
1998 1998
------------- -------------
Logs $ 5,237 $ 3,791
Lumber 6,629 8,635
Supplies and other 1,444 1,579
------------- -------------
$ 13,310 $ 14,005
============= =============
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
April 1, 1998, with respect to certain affirmative financial performance
covenants.
7
<PAGE>
NOTE 3 - LONG-TERM DEBT (Continued)
At October 31, 1998 the Company's tangible net worth was $1.9 million,
compared to a minimum of negative $1.0 million required by the covenant. At that
same date, the Company's working capital was $11.7 million, compared to $9.0
million required by the covenant. Also, at October 31, 1998, the Company's
adjusted cumulative operating income was $36.7 million, compared to $30.0
million required. The collateral coverage ratio at October 31, 1998 was 62.5%,
compared to a 50% minimum required level. The total liabilities ratio was 96.7%
at October 31, 1998, compared to a maximum allowed of 100%. The minimum level of
tangible net worth increases to $0 at January 1, 1999, $2.0 million at July 1,
1999, and $4.0 million at July 1, 2000. The minimum level of working capital
increases to $11.5 million at July 1, 1999, $14.0 million at July 1, 2000 and
$16.5 million at July 1, 2002. The minimum level of adjusted cumulative
operating income increases to $34.0 million at November 1, 1998, $37.5 million
at July 1, 1999, $42.5 million at July 1, 2000, and $47.5 million at July 1,
2001. The minimum required collateral coverage ratio increases to 63% at July 1,
1999. The maximum allowed total liabilities ratio drops to 95% at July 1, 1999
and 85% at July 1, 2000. During the quarter ended October 31, 1998, the
Company's adjusted cumulative operating income increased by $1.0 million while
the quarter showed a loss before taxes of $0.3 million. The Company continues to
be in compliance with all covenants contained in the debt agreement, although
operating conditions must improve from current levels for the Company to remain
in compliance with this agreement.
The 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, 1998. In connection with the May 1, 1996
amendment, the Company agreed to additional prepayments computed at 30% of
quarterly net income. No such prepayment is required for the quarter ended
October 31, 1998.
NOTE 4 - STOCKHOLDERS' EQUITY AND COMMON SHARES OUTSTANDING
Stockholders' equity at October 31, 1998 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
8
<PAGE>
NOTE 4 - STOCKHOLDERS' EQUITY AND COMMON SHARES OUTSTANDING
(Continued)
at original issue price plus accrued dividends at the option of the
Board of Directors after all Series A preferred stock has been
redeemed.
Series C junior participating preferred stock, $100 per share
liquidation preference; 400,000 shares authorized; no shares issued or
outstanding; each share has 100 votes, voting together with Common
Stock; dividends payable only if paid on the Company's Common Stock at
100 times the Common Stock dividend rate. This class of preferred stock
was authorized in connection with the shareholder rights plan adopted
by the Company on March 4, 1998.
Common stock, no par value; 40,000,000 shares authorized; 11,162,874
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 11,375,567 shares if remaining Series B
preferred stock outstanding at October 31, 1998 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, 1998 and 1997 are summarized below (in
thousands, except per-share data):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
October 31, October 31,
--------------------- ---------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
NET INCOME (LOSS) APPLICABLE TO
COMMON SHAREHOLDERS $ (898) $ (771) $ (2,091) $ 604
========= ========= ========= =========
WEIGHTED AVERAGE SHARES OUTSTANDING
-BASIC 11,163 11,129 11,159 11,130
ADDITIONAL SHARES ASSUMED FROM:
Conversion of Series B
preferred stock -- -- -- 213
Exercise of stock options -- -- -- 450
--------- --------- --------- ---------
AVERAGE NUMBER OF SHARES AND
EQUIVALENTS OUTSTANDING
- DILUTED 11,163 11,129 11,159 11,793
========= ========= ========= =========
NET INCOME (LOSS) PER COMMON SHARE
- BASIC ($0.08) ($0.07) ($0.19) $0.05
======= ======= ======= =======
- DILUTED ($0.08) ($0.07) ($0.19) $0.05
======= ======= ======= =======
</TABLE>
Earnings (loss) per share have been recomputed and restated for the effects
of implementing Statement of Financial Accounting Standard Number 128, "Earnings
per Share," as of December 31, 1997.
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 (benefit) consists of the
following (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
October 31, October 31,
--------------------- ---------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Income (loss) before income taxes $ (324) $ (517) $ (943) $ 2,183
========= ========= ========= =========
Income tax provision:
Federal $ -- $ (298) $ -- $ 350
State -- (21) -- 87
--------- --------- --------- ---------
$ -- $ (319) $ -- $ 437
========= ========= ========= =========
Current $ -- $ 182 $ -- $ 245
Deferred -- (501) -- 192
--------- --------- --------- ---------
$ -- $ (319) $ -- $ 437
========= ========= ========= =========
</TABLE>
The Company's remaining adjusted NOL at April 30, 1998 was approximately $22
million for federal income tax and $20 million for state income tax purposes.
These carryforwards expire in 2007 and 2012. Because of the difficult operating
environment and the likely delayed or decreased use of the Company's NOL
carryforwards, the Company has provided for a valuation reserve against any
benefits created from the current period operating loss. Management periodically
reviews the above factors and may change the amount of valuation allowance as
facts and circumstances dictate.
In the quarter and six months ended October 31, 1998, the Company did not
record any tax provision or benefit.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
The Company is involved in various litigation primarily arising in the
normal course of its business. Additionally, the Company has received notices in
connection with potential environmental litigation. See "Legal Proceedings."
The Company is subject to various federal, state and local regulations
regarding waste disposal and pollution control. Various regulations regarding
air and water emissions, log yard management, and disposal or landfill of log
yard debris may require material expenditures in the future. The expenditures
required for the Company to comply with any such regulations may have a material
adverse impact on the Company's 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 for some period of time to exceed the cost of shutdown and restarting
the facility.
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.
Fiscal year 1999 started off with weak lumber prices. Prices strengthened
through the end of the first quarter and into the early part of the second
quarter, whereupon they reversed direction and went down through most of the
second quarter. The Company has been unable to reduce its log costs enough to
maintain profitable operations for the quarter or six months ended October 31,
1998. The Company has added hours of production at certain locations to optimize
results of these operations. The margins recently experienced by the Company may
not continue or improve, and may even decline further. During much of fiscal
year 1998 and through the first six months of fiscal year 1999, there was an
oversupply of lumber in the U.S. market. This oversupply principally resulted
from North American producers redistributing to the U.S. market a substantial
portion of their historic level of shipments to offshore markets. Chip prices
are up substantially from a year ago, while lumber prices and log costs have
declined.
11
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
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 Ended Six Months Ended Three Months Six Months
October 31, October 31, Ended Ended
------------------ ------------------ 10/31/98 10/31/98
to to
1998 1997 1998 1997 10/31/97 10/31/97
------- ------- ------- ------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Net sales 100.0 % 100.0 % 100.0 $ 100.0 % (24.0) % (27.4)
Cost of sales 93.4 94.8 93.1 92.2 (25.0) (26.8)
------- ------- ------- -------
Gross profit 6.6 5.2 6.9 7.8 (4.3) (35.1)
Selling, general and
administrative expense 5.1 4.3 5.5 4.5 (9.5) (12.1)
------- ------- ------- -------
Operating income 1.5 0.9 1.5 3.3 19.5 (66.8)
Interest expense (2.3) (1.8) (2.3) (1.8) (2.0) (3.1)
Miscellaneous 0.2 0.1 (0.1) 0.1 131.4 NM
------- ------- ------- -------
Income (loss) before income taxes (0.6) (0.8) (1.0) 1.6 (37.3) NM
Provision for income taxes (benefit) 0.0 (0.5) 0.0 0.3 NM NM
------- ------- ------- -------
Net income (loss) (0.6) % (0.3) % (1.0) % 1.3 % 63.6 NM
======= ======= ======= =======
</TABLE>
Note: Percentages may not add precisely due to rounding.
NM: Not Meaningful
Comparison of Three Months Ended October 31, 1998 and 1997
- ----------------------------------------------------------
Net sales for the three months ended October 31, 1998 decreased $16.1
million (24%) from the three months ended October 31, 1997. This was principally
caused by a 16% decrease in lumber shipments, a 13% decrease in chip deliveries,
and a 15% decrease in lumber prices; partially offset by a 35% increase in chip
prices. The reduced lumber shipments reflect reduced production resulting from a
weak market for certain products in the current quarter compared to a stronger
market during much of the second quarter of fiscal 1998. The reduced chip
deliveries reflect not only reduced lumber production but also improved lumber
recovery resulting in fewer chips per thousand board feet ("mbf") of lumber
produced.
Gross profit for the quarter ended October 31, 1998 was 6.6% of net sales,
compared to 5.2% of net sales for the quarter ended October 31, 1997. Lumber
prices declined by 15% from the second quarter of fiscal 1998, while the
Company's log costs also declined by 15%. Unit manufacturing costs decreased by
8% from the quarter ended October 31, 1997, principally reflecting more
efficient production levels at several locations and the curtailment of a
facility with relatively higher production costs.
12
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Selling, general and administrative expenses in the three months ended
October 31, 1998 decreased by $0.3 million (9%) from the three months ended
October 31, 1997. This decrease reflects the results of cost-cutting measures
taken by the Company and the operation of fewer facilities in the recent
quarter.
In the quarter ended October 31, 1998, the Company did not record a tax
provision or benefit. In the quarter ended October 31, 1997, the Company
recorded a tax benefit equal to 62% of its pre-tax loss. See Note 6 to
Consolidated Financial Statements.
Comparison of Six Months Ended October 31, 1998 and 1997
- ---------------------------------------------------------
Net sales for the six months ended October 31, 1998 decreased $37.4 million
(27%) from the six months ended October 31, 1997. This was principally caused by
a 16% decrease in lumber shipments, an 18% decrease in chip deliveries, and an
18% decrease in lumber prices; partially offset by a 42% increase in chip
prices. The reduced lumber shipments reflect reduced production resulting from a
weak market for certain products during the most recent period compared to a
stronger market in the first half of fiscal 1998. 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, 1998 was 6.9% of net
sales, compared to 7.8% of net sales for the six months ended October 31, 1997.
Lumber prices declined by 18% from the six months ended October 31, 1997, while
the Company's log costs declined by 17%. Production declined compared to levels
in the prior year, when production levels reflected the more favorable market.
Unit manufacturing costs decreased by 2% from the six months ended October 31,
1997, principally reflecting more efficient production levels at several
facilities.
Selling, general and administrative expenses in the six months ended
October 31, 1998 decreased by $0.7 million (12%) from the six months ended
October 31, 1997. This decrease reflects the results of cost-cutting measures
taken by the Company and the operation of fewer facilities in the more recent
period.
In the six months ended October 31, 1998, the Company did not record a tax
provision or benefit. In the six months ended October 31, 1997, the Company
recorded a tax provision equal to 20% 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. Such cash may not 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, 1998, the Company had net working capital of $11.7 million,
$3.5 million less than at April 30, 1998. The working capital decrease was
primarily the result of operating losses, capital spending, principal payments
on debt, and dividends paid on the Company's Series A preferred stock.
13
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
During the six months ended October 31, 1998, the Company's cash and cash
equivalents increased by $1.6 million to $3.7 million at October 31.
Approximately $4.4 million of cash was provided by operations. About $0.9
million was used to repay various debt obligations and $1.2 million was used for
capital expenditures. 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 1999 was $1.2 million.
Capital spending for the balance of the fiscal year is currently forecast to be
approximately $0.6 million. The Company had no material commitments for capital
spending at October 31, 1998.
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 April 1, 1998,
with respect to certain affirmative financial performance covenants. The Company
continues to be in compliance with all covenants contained in this agreement,
although operating conditions must improve from current levels for the Company
to remain in compliance with this agreement. 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
foreign and domestic economic conditions, increased interest rates, the impact
of competitive products and pricing, availability and cost of raw materials,
inadequate cash reserves or liquidity, changes in environmental and other
regulations, additional expenditures necessary to comply with environmental
regulations (see "Legal Proceedings"), 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, 1998 (Part II, Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations").
14
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TREESOURCE INDUSTRIES, INC.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company's South Bend facility has received a Notice of Noncompliance
with effluent permit terms from the Washington Department of Ecology. The
Company has received a Notice of Intent to sue under the Clean Water Act from a
citizen's group based on the Notice of Noncompliance.
The Company has made modifications to the plant's boiler system to address
the alleged noncompliance and settlement discussions are continuing.
Item 2. Changes in Securities and Use of Proceeds
(c) Recent Sales of Unregistered Securities
On November 3, 1998, the Company granted to Jess R. Drake options to
purchase 543,295 shares of the Company's Common Stock at an exercise price of
$.7969 per share, subject to certain vesting and other conditions, pursuant to
the terms of that certain Employment Contract between Mr. Drake and the Company.
In issuing these securities, the Company relied upon an exemption from
registration pursuant to Section 4(2) of the Securities Act of 1933, as amended.
Item 4. Submission of Matters to a Vote of Security Holders
On October 26, 1998, the Company held its Annual Meeting of Shareholders,
at which directors Richard W. Detweiler and William H. Wright were elected to
three-year terms. The number of votes cast for each nominated Director was as
follows:
Against or
For Withheld
----------- -----------
Detweiler 9,251,624 463,331
Wright 9,251,104 463,851
A proposal to amend the Company's Stock Option Plan to increase the number
of shares reserved for issuance under the plan was approved. The vote was
4,902,799 for, 710,912 against, and 83,987 abstentions.
A proposal to amend the Company's Articles of Incorporation to change the
Company name to TreeSource Industries, Inc. was approved. The vote was 6,037,255
for, 3,634,880 against, and 42,820 abstentions.
The appointment of Moss Adams LLP as the Company's independent auditors was
ratified. The vote was 6,114,966 for, 290,799 against, and 3,309,190
abstentions.
15
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Item 5. Other Information
On October 31, 1998, the Company entered into an Employment Contract with
Jess R. Drake, pursuant to which Mr. Drake became, on November 4, 1998, the
Company's President and Chief Executive Officer, and was elected to fill a
vacancy on the Company's Board of Directors. Mr. Drake will serve out two years
remaining on a three-year term, subject to the approval of the Company's
shareholders at the 1999 annual meeting. On November 3, 1998, the Company
entered into a Stock Option Letter Agreement with Mr. Drake, pursuant to which
the Company awarded Mr. Drake options to purchase the Common Stock of the
Company, subject to vesting and other conditions.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The Index to Exhibits is located on page 18.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
October 31, 1998.
16
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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.
TREESOURCE INDUSTRIES, INC.
------------------------------
(Registrant)
By: /s/ Jess R. Drake
------------------------------
Jess R. Drake
President
By: /s/ K. Stanley Martin
------------------------------
K. Stanley Martin
Vice President-Finance
December 15, 1998
17
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TREESOURCE INDUSTRIES, INC.
INDEX TO EXHIBITS
Sequential
Number
System
Page
Number
3.1 Fourth Restated Articles of Incorporation of Registrant adopted
effective November 27, 1992, as amended 19
3.2 Second Restated Bylaws of the Registrant adopted effective
November 27, 1992(1)
10.11 Employment Contract dated October 31, 1998, between
Jess R. Drake and Registrant(2) 38
10.12 Stock Option Letter Agreement dated November 3, 1998, between
Jess R. Drake and Registrant(2) 46
19 Other reports furnished to securities holders with respect to the
quarter ended October 31, 1998: Management's letter excerpted from
Interim Report to Shareholders for the second quarter of fiscal 1999 55
27 Financial Data Schedule(3)
- --------------------------------------------------------------------------------
(1)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.
(2)Management contract or compensatory plan or arrangement.
(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, 1998.
18
Exhibit 3.1
FOURTH RESTATED ARTICLES OF INCORPORATION
OF
WTD INDUSTRIES, INC.
These Fourth Restated Articles of Incorporation of WTD Industries, Inc.
are adopted pursuant to the Oregon Business Corporation Act and supersede any
previous Articles of Incorporation or amendments thereto.
ARTICLE 1. NAME
The name of the corporation is WTD Industries, Inc.
ARTICLE 2. DURATION
The period of the corporation's duration shall be perpetual.
ARTICLE 3. PURPOSES AND POWERS
The purpose for which the corporation is organized is to engage in any
business, trade or activity which may lawfully be conducted by corporation
organized under the Oregon Business Corporation Act.
The corporation shall have the authority to engage in any and all such
activities as are incidental or conducive to the attainment of the purposes of
the corporation and to exercise any and all powers authorized or permitted under
any laws that may be now or hereafter applicable or available to the
corporation.
ARTICLE 4. SHARES
4.1 Authorized Capital.
The corporation is authorized to issue two classes of stock to be
designated, respectively, "Common Stock" and "Preferred Stock." The total number
of shares of stock which the corporation shall have authority to issue shall be
fifty million (50,000,000), consisting of forty million (40,000,000) shares of
Common Stock, having no par value, and ten million (10,000,000) shares of
Preferred Stock, having no par value.
4.2 Common Stock.
Subject to any preferential or other rights granted to any series of
Preferred Stock, the holders of shares of the Common Stock shall be entitled to
receive dividends out of funds of the corporation legally available therefor, at
the rate and at the time or times as may be provided by the Board of Directors
and shall be entitled to receive distributions legally payable to shareholders
on the liquidation of the corporation. Unless otherwise provided by the
corporation's articles of incorporation or by the corporation's Plan of
Reorganization (together with the documents attached as Exhibits thereto, the
"Plan"), as approved by order of the United States Bankruptcy
19
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Court for the Western District of Washington, the holders of shares of Common
Stock, on the basis of one vote per share, shall have the right to vote for the
election of members of the Board of Directors of the corporation and the right
to vote on all other matters, except where a separate class or series of the
corporation's shareholders vote by class or series.
4.3 Preferred Stock.
4.3.1 Issuance of Preferred Stock in Series.
The Preferred Stock authorized by these Fourth Restated Articles of
Incorporation shall be issued from time to time in series. The initial two
series of Preferred Stock shall be designated "Series A Preferred Stock" and
"Series B Preferred Stock." The rights, preferences, privileges, restrictions
granted to and imposed on the Series A Preferred Stock, which series shall
consist of five hundred thousand (500,000) shares, and the Series B Preferred
Stock, which series shall consist of five hundred thousand (500,000) shares, are
as set forth below in this Article 4 and in the Plan. Except as to the Series A
and Series B Preferred Stock and except as otherwise provided in the
corporation's articles of incorporation, the Board of Directors of this
corporation is hereby authorized to fix the number of shares, and determine the
designation of each series of Preferred Stock and may determine or alter the
rights, preferences, privileges and restrictions granted to or imposed on any
wholly unissued series of Preferred Stock. The Series A and Series B Preferred
Stock are sometimes hereinafter referred to collectively as the "Series
Preferred Stock."
4.3.2 Dividends.
The holders of shares of Series Preferred Stock shall be entitled to
receive dividends, out of any assets legally available therefor, prior and in
preference to any declaration or payment of any dividend (payable other than in
Common Stock of this corporation) on the Common Stock of this corporation. The
holders of shares of Series A Preferred Stock shall be entitled to receive
dividends, out of any assets legally available therefor, prior and in preference
to any declaration or payment of any dividend on shares of any other series of
Preferred Stock, including, without limitation, shares of the Series B Preferred
Stock of this corporation. Holders of shares of Series A Preferred Stock shall
be entitled to receive dividends at a rate equal to the Dividend Rate (as
hereinafter defined) multiplied by the Series A Original Issue Price (as
hereinafter defined) per share of the Series A Preferred Stock then outstanding,
payable in cash out of the assets of the corporation legally available therefor,
quarterly in advance beginning on November 30, 1992 (each such quarterly date
being a "Dividend Date"). "Dividend Rate" shall mean a rate of interest per
annum equal to the "base" or "prime" rate of Bank (as hereinafter defined) which
rate is in effect on the date that is five business days prior to the Dividend
Date and which serves as the basis upon which effective rates of interest are
calculated for those loans making reference thereto; provided that,
notwithstanding the foregoing, in no event shall the Dividend Rate be less than
6% per annum, nor more than 9% per annum. "Bank" shall mean Bank of America,
N.A., or in the event that such bank shall no longer publicly announce a "base"
or "Prime" rate, Wells Fargo Bank, N.A. Notwithstanding the foregoing, from the
date the corporation receives any payment blockage notice described in Section
3.2(g) of the Plan (a "Blockage Notice"), which Blockage Notice remains in
effect (such effective period being the "Blockage Period"), the corporation
shall cease to pay dividends to the holders of shares of Series A Preferred
Stock.
20
<PAGE>
During the Blockage Period, the corporation shall deposit the dividends
that would otherwise be payable to the holders of Series A Preferred Stock (the
"Escrowed Dividends") with any bank, trust company or other financial
institution that provides trust services in the regular course of its business,
in any case having aggregate capital and surplus in excess of $100,000,000, as
escrow agent (the "Escrow Agent"), upon the terms described in the Plan. Subject
to the provisions of the Plan, and provided that the Escrowed Dividends have not
previously been applied to the corporation's obligations to any other party
pursuant to the Plan, the Escrow Agent shall be required, under the terms of the
escrow, to pay the Escrowed Dividends to the record holders of Series A Stock to
which the dividends would have been paid if timely, upon the expiration or
termination of all Blockage Periods then in effect.
4.3.3 Liquidation Preference
(a) In the event of any liquidation, dissolution or winding up of the
corporation, either voluntary or involuntary, the assets of the corporation
available for distribution shall be distributed in the following order and
amount:
(i) First, the holders of the Series A Preferred Stock then
outstanding shall be entitled to receive an amount equal to $100 for
each outstanding share of such Series A Preferred Stock, appropriately
adjusted for any stock dividend, split, combination or similar
recapitalization of such Series A Preferred Stock (the "Series A
Original Issue Price") and, in addition, an amount equal to any
dividends accrued but not paid on each such share, subject to
subsection 4.3.3(b) hereof.
(ii) Second, the holders of the Series B Preferred Stock then
outstanding shall be entitled to receive an amount equal to $100 for
each outstanding share of such Series B Preferred Stock, appropriately
adjusted for any stock dividend, split, combination or similar
recapitalization of such Series B Preferred Stock (the "Series B
Original Issue Price") and, in addition, an amount equal to any
dividends accrued but not paid on each such share, subject to
subsection 4.3.3(c) hereof.
(iii) After setting apart or paying in full the preferential
amounts due the holders of the Series A Preferred Stock and the Series
B Preferred Stock, as provided above, if assets available for
distribution remain in the corporation, the holders of the
corporation's Common Stock shall be entitled to share ratably in the
remaining assets of the corporation.
(b) If, upon the occurrence of any liquidation, dissolution or winding
up of the corporation and the distribution of the corporation's assets pursuant
to subsection 4.3.3(a)(i), such assets available for distribution shall be
insufficient to permit the payment to the holders of the Series A Preferred
Stock of the full preferential amounts to which they may be entitled, then the
entire assets of the corporation legally available for distribution shall be
distributed ratably among the holders of shares of the Series A Preferred Stock.
21
<PAGE>
(c) If, upon the occurrence of any liquidation, dissolution or winding
up of the corporation and the distribution of the corporation's assets pursuant
to subsection 4.3.3(a)(ii), such assets available for distribution shall be
insufficient to permit the payment to the holders of the Series B Preferred
Stock of the full preferential amounts to which they may be entitled, then the
entire assets of the corporation legally available for distribution to the
holders of the Series B Preferred Stock shall be distributed ratably among the
holders of shares of the Series B Preferred Stock.
(d) Whenever a distribution of assets provided for in this Section
4.3.3 shall be payable in property other then cash, the value of such
distribution shall be the fair market value of such property as determined in
good faith by the Board of Directors of the corporation.
4.3.4 Redemption.
(a) The corporation may, at any time it may lawfully do so, at the
option of the Board of Directors, redeem in whole or in part the shares of
Series A Preferred Stock by paying therefor a sum equal to the Series A Original
Issue Price for each such share to be redeemed plus the sum of all unpaid
dividends accrued with respect thereto, as adjusted for stock splits, stock
dividends or similar recapitalizations (the "Series A Redemption Price"). The
corporation may, at the option of the Board of Directors, pay the Series A
Redemption Price in cash or in the form of senior unsecured indebtedness, on the
terms described in Section 4.3.5. Unless otherwise provided by the Plan, if less
than all shares of the Series A Preferred Stock are to be redeemed, the shares
of Series A Preferred Stock shall be redeemed pro rata from the holders of the
Series A Preferred Stock. The corporation may at any time it may lawfully do so,
(i) after all shares of Series A Preferred Stock have been redeemed pursuant to
this subsection 4.3.4(a), and (ii) if any shares of Series A Preferred Stock
have been redeemed pursuant to this subsection 4.3.4(a) in exchange for senior
unsecured indebtedness on the terms described in Section 4.3.5, after such
senior unsecured indebtedness has been paid in full, at the option of the Board
of Directors, redeem in whole or in part the shares of Series B Preferred Stock
by paying therefor a cash sum equal to the Series B Original Issue Price for
each such share to be redeemed plus the sum of all unpaid dividends accrued with
respect thereto, as adjusted for stock splits, stock dividends or similar
recapitalizations (the "Series B Redemption Price"). If less than all shares of
the Series B Preferred Stock are to be redeemed, the shares of Series B
Preferred Stock shall be redeemed pro rata from the holders of the Series B
Preferred Stock.
(b) (i) At least 30 but no more than 60 days prior to the date fixed
for any redemption of Series Preferred Stock (the "Series Redemption
Date"), written notice shall be mailed, postage prepaid, to each holder
of record (at the close of business on the business day next preceding
the day on which notice is given) of the Series Preferred Stock to be
redeemed, at the address last shown on the records of this corporation
for such holder or given by the holder to this corporation for the
purpose of notice, notifying such holder of the redemption to be
effected, specifying the series Redemption Date, the Series Redemption
Price, the form of payment, the place at which payment may be obtained
and the date on which such holder's conversion rights (as set forth in
Section 4.3.6) as to such shares terminate and calling upon such holder
to surrender to this corporation, in the manner and at the place
designated, such holder's certificate or certificates representing the
shares to be redeemed (the "Series Redemption Notice"). Except as
provided in subparagraph 4.3.4(b)(ii), on or after the Series
Redemption Date, each holder of Series
22
<PAGE>
Preferred Stock to be redeemed shall surrender to this corporation the
certificate or certificates representing such shares, in the manner and
at the place designated in the Series Redemption Notice, and thereupon
the Series Redemption Price of such shares shall be payable in the form
determined by the Board of Directors pursuant to subsection 4.3.4(a),
to the person whose name appears on such certificate or certificates as
the owner thereof and each surrendered certificate shall be cancelled.
In the event less than all the shares represented by any such
certificate are redeemed, a new certificate shall be issued
representing the unredeemed shares.
(ii) From and after the Series Redemption Date, all dividends
on the Series Preferred Stock designated for redemption in the Series
Redemption Notice shall cease to accrue, all rights of the holders of
such shares as holders of Series Preferred Stock (except the right to
receive the series Redemption Price in the form determined by the Board
of Directors pursuant to subsection 4.3.4(a), upon surrender of their
certificate or certificates) shall cease with respect to such shares,
and such shares shall not thereafter be transferred on the books of
this corporation or be deemed to be outstanding for any purpose
whatsoever.
(iii) In the event that the Series Redemption Price is
determined by the Board of Directors pursuant to subsection 4.3.4(a) to
be paid in cash, the following provisions of this subsection
4.3.4(b)(iii) shall apply: Three days prior to the Series Redemption
Date, this corporation shall deposit the Series Redemption Price of all
outstanding shares of Series Preferred Stock designated for redemption
in the Series Redemption Notice, and not yet redeemed or converted,
with a bank or trust company having aggregate capital and surplus in
excess of $50,000,000 as a trust fund for the benefit of the respective
holders of the shares designated for redemption and not yet redeemed.
Simultaneously, this corporation shall deposit irrevocable instructions
and authority to such bank or trust company to publish the notice of
redemption thereof (or to complete such publication if theretofore
commenced) and to pay, on and after the date fixed for redemption or
prior thereto, the Series Redemption Price of each share to the holders
thereof upon surrender of their certificates. Any monies deposited by
this corporation pursuant hereto for the redemption of shares which are
thereafter converted into shares of Common Stock pursuant to Section
4.3.6 hereof no later than the Series Redemption Date shall be returned
to this corporation forthwith upon such conversion. The balance of any
monies deposited by this corporation pursuant hereto remaining
unclaimed at the expiration of one year following the Series Redemption
Date shall thereafter be returned to this corporation upon its request
expressed in a resolution of its Board of Directors, provided that the
shareholder to which such monies would be payable hereunder shall be
entitled, upon proof of its ownership of the Series Preferred Stock and
payment of any bond requested by the corporation, to receive such
monies but without interest from the Series Redemption Date.
(iv) The rights contained in this Section 4.3.4 are in
addition to any other rights of this corporation under law to
repurchase part or all of the Series Preferred Stock.
23
<PAGE>
4.3.5 Exchange.
The terms of the senior unsecured indebtedness shall be as set forth in
a Senior Indebtedness Agreement which shall include, but not be limited to, the
following terms: Such indebtedness will bear interest at 12 percent per annum,
be payable quarterly in arrears in cash, and will mature on the date that is 10
years after the exchange was effected. The indebtedness shall be required to be
repaid prior to maturity in installments of 20 percent of the original principal
amount per year, beginning at the end of the sixth year after the exchange has
been effected. Such Senior Indebtedness Agreement shall be the obligation of the
corporation and each of its subsidiaries (as defined in the Plan) and contain
affirmative and negative covenants (excluding financial covenants) and such
terms of default and default remedies as are customary in commercial lending
transactions involving borrowers of financial position and condition comparable
to that of the corporation at the time of such redemption. Unless and until
agreement is reached on all terms of the Senior Indebtedness Agreement, the
corporation shall not redeem the Series A Preferred Stock other than for cash,
and if such agreement is not reached prior to a Series Redemption Date, the
corporation will withdraw any Series A Redemption Notice immediately prior to
the Series A Redemption Date specified therein to the extent the redemption is
to be made other than for cash.
4.3.6 Conversion.
The holders of the Series Preferred Stock shall have conversion rights
as follows (the "Conversion Rights"):
(a) (i) Each share of Series A Preferred Stock shall be convertible at
the option of the holder thereof at any time after April 30, 1999, and
prior to the close of business on any Series Redemption Date as may
have been fixed in any series Redemption Notice with respect to such
share, into such number of fully paid and nonassessable shares of
Common Stock as are equal to the product obtained by multiplying the
number of shares of Series A Preferred Stock being converted by the
Series A Conversion Rate (determined under subsection 4.3.6(c)). Each
share of Series B Preferred Stock shall be convertible at the option of
the holder thereof at any time prior to the close of business on any
Series Redemption Date as may have been fixed in any Series Redemption
Notice with respect to such share, into such number of fully paid and
nonassessable shares of Common Stock as are equal to the product
obtained by multiplying the number of shares of Series B Preferred
Stock being converted by the Series B Conversion Rate (determined under
subsection 4.3.6(c)).
(ii) In the event of a call for redemption of any shares of
Series Preferred Stock pursuant to Section 4.3.4 hereof, the Conversion
Rights shall terminate as to the shares designated for redemption at
the close of business on the Series Redemption Date, unless default is
made in payment of the Series Redemption Price.
(iii) Each share of Series A Preferred Stock may, at the option
of the corporation's Board of Directors, automatically be converted
into the number of shares of Common Stock (determined pursuant to
subsection 4.3.6(a)(i)) into which such Series A Preferred Stock is
then convertible if, at any time, the Common Stock is then listed or
admitted to unlisted trading privileges on a national securities
exchange or is admitted for
24
<PAGE>
quotation under the National Association of Securities Dealers
Automated Quotations System ("NASDAQ") or similar automated quotation
system and the average market price (as hereinafter defined) over a
period of 20 consecutive trading days is 120 percent of the Series A
Conversion Price (determined under subsection 4.3.6(c)); provided, that
all accrued but unpaid dividends with respect to each share of Series A
Preferred Stock, as adjusted for stock splits, stock dividends or
similar recapitalizations, shall be paid upon the effective date of the
conversion of such shares, to the persons entitled to receive shares of
Common Stock upon such conversion. Each share of Series B Preferred
Stock may, at the option of the corporation's Board of Directors,
automatically be converted into the number of shares of Common Stock
(determined pursuant to subsection 4.3.6(a)(i)) into which such Series
B Preferred Stock is then convertible if, at any time, the Common Stock
is then listed or admitted to unlisted trading privileges on a national
securities exchange or is admitted for quotation under the NASDAQ or
similar automated quotation system and the average market price (as
hereinafter defined) over a period of 20 consecutive trading days is
120 percent of the Series B Conversion Price (determined under
subsection 4.3.6(c)). The "market price" for each trading day shall be
(A) if the Common Stock shall at the time be listed or admitted to
unlisted trading privileges on the New York Stock Exchange, the last
reported sale price regular way of the Common Stock on the composite
tape (or if the Common Stock at the time be not so listed or admitted
to unlisted trading privileges on the New York Stock Exchange but be
listed or admitted to unlisted trading privileges on another national
securities exchange, on the basis of the last reported sale price
regular way on the securities exchange on which the Common Stock is at
the time listed or admitted to unlisted trading privileges) on each
such trading day upon which such a sale shall have been effected (or if
no sale takes place on any such day on such exchange, the mean between
the closing bid and asked prices on such day as officially quoted on
such exchange), or (B) if the Common Stock is not at the time so listed
or admitted to unlisted trading privileges on a national securities
exchange, the last quoted sales price or, if not so quoted, the mean
between the highest reported bid and lowest reported asked prices of
the Common Stock in the over-the-counter market on each such business
day, each as reported by NASDAQ or similar organization if NASDAQ is no
longer reporting such information.
(b) Before any holder of Series Preferred Stock shall be entitled to
convert the same into shares of Common Stock, such holder shall surrender the
certificate or certificates therefor, duly endorsed, at the office of this
corporation or of any transfer agent for such stock, and shall give written
notice by mail, postage prepaid, to this corporation at its principal corporate
office, of the election to convert the same and shall state therein the name or
names in which the certificate or certificates for shares of Common Stock are to
be issued; provided, however, that in the event of an automatic conversion
pursuant to subsection 4.3.6(a)(iii), the outstanding shares of Series A
Preferred Stock or Series B Preferred Stock, as applicable, shall be converted
automatically without any further action by the holders of such shares and
whether or not the certificates representing such shares are surrendered to the
corporation or its transfer agent, and provided further that the corporation
shall not be obligated to issue certificates evidencing the shares of Common
Stock issuable upon such automatic conversion unless the certificate evidencing
such shares of Series A Preferred Stock or Series B Preferred Stock, as
applicable, are either delivered to the corporation or its transfer agent, or
the holder notifies the corporation or
25
<PAGE>
its transfer agent that such certificates have been lost, stolen or destroyed
and executes an agreement satisfactory to the corporation to indemnify the
corporation from any loss incurred by it in connection with such certificates.
In the case of any conversion provided herein, (i) the corporation shall, as
soon as practicable thereafter, issue and deliver at such office to such holder,
or to the nominee or nominees of such holder, a certificate or certificates for
the number of shares of Common Stock to which such holder shall be entitled as
aforesaid, and (ii) such conversion shall be deemed to have been made
immediately prior to the close of business on the date of such surrender of the
shares to be converted, and the person or persons entitled to receive the shares
of Common Stock issuable upon such conversion shall be treated for all purposes
as the record holder or holders of such shares of Common Stock as of such date.
(c) The conversion rate for the Series A Preferred Stock in effect at
any time (the "Series A Conversion Rate") shall equal the Series A original
Issue Price divided by the Series A Conversion Price, as defined herein. The
conversion rate for the Series B Preferred Stock in effect at any time (the
"Series B Conversion Rate") shall equal the Series B original issue Price
divided by the Series B Conversion Price, as defined herein. The conversion
price for the Series A Preferred Stock in effect from time to time, except as
adjusted in accordance with subsection 4.3.6(d), shall be $7.50 (the "Series A
Conversion Price"). The conversion price for the Series B Preferred Stock in
effect from time to time, except as adjusted in accordance with subsection
4.3.6(d), shall be $2.873 (the "Series B Conversion Price").
(d) The Series A Conversion Price and the Series B conversion Price
shall be subject to adjustment from time to time as follows:
(i) In the event the corporation should at any time or from
time to time after the earliest date on which shares of Series
Preferred Stock are issued (the "Purchase Date") fix a record date for
the effectuation of a split or subdivision of the outstanding shares of
Common Stock or the determination of holders of Common Stock entitled
to receive a dividend or other distribution payable in additional
shares of Common Stock or other securities or rights convertible into,
or entitling the holder thereof to receive directly or indirectly,
additional shares of Common Stock (hereinafter referred to as "Common
Stock Rights") without payment of any consideration by such holder for
the additional shares of Common Stock or the Common Stock Rights
(including the additional shares of Common Stock issuable upon
conversion or exercise thereof), then, as of such record date (or the
date of such dividend, distribution, split or subdivision if no record
date is fixed), the Series A Conversion Price and the Series B
Conversion Price shall be appropriately decreased so that the number of
shares of Common Stock issuable on conversion of each share of such
series shall be increased in proportion to such increase of outstanding
shares.
(ii) If the number of shares of Common Stock outstanding at
any time after the Purchase Date is decreased by a combination of the
outstanding shares of Common Stock, then, following the record date of
such combination, the Series A Conversion Price and the Series B
Conversion Price shall be appropriately increased so that the number of
shares of Common Stock issuable on conversion of each share of such
series shall be decreased in proportion to such decrease in outstanding
shares.
26
<PAGE>
(e) In the event this corporation shall declare a distribution payable
in securities of other persons, evidences of indebtedness issued by this
corporation or other persons, assets (excluding cash dividends) or options or
rights not referred to in Section 4.3.2 or subsection 4.3.6(d)(i) hereof, then,
in each such case for the purpose of this subsection 4.3.6(e), the holders of
the Series A Preferred Stock and the Series B Preferred Stock shall be entitled
to a proportionate share of any such distribution as though they were the
holders of the number of shares of Common Stock of the corporation into which
their shares of such Series A Preferred Stock or Series B Preferred Stock,
respectively, are convertible as of the record date fixed for the determination
of the holders of Common Stock of the corporation entitled to receive such
distribution.
(f) If at any time or from time to time there shall be a
recapitalization of the Common Stock (other than a subdivision, combination or
merger or sale of assets transaction provided for elsewhere in Sections 4.3.3 or
4.3.6), provision shall be made so that the holders of the Series A Preferred
Stock and the Series B Preferred Stock shall thereafter be entitled to receive
upon conversion of the Series A Preferred Stock and the Series B Preferred
Stock, respectively, the number of shares of stock or other securities or
property of the Company or otherwise, to which a holder of Common Stock
deliverable upon conversion would have been entitled on such recapitalization.
In any such case, appropriate adjustment shall be made in the application of the
provisions of this Section 4.3.6 with respect to the rights of the holders of
the Series A Preferred Stock and the Series B Preferred Stock after the
recapitalization to the end that the provisions of this Section 4.3.6 (including
adjustment of the Series A Conversion Price and the Series B Conversion Price
then in effect and the number of shares purchasable upon conversion of the
Series A Preferred Stock and the Series B Preferred Stock) shall be applicable
after that event as nearly equivalent as may be practicable.
(g) This corporation will not, by amendment of these Articles of
Incorporation or through any reorganization, recapitalization, transfer of
assets, consolidation, merger, dissolution, issue or sale of securities or any
other voluntary action, avoid or seek to avoid the observance or performance of
any of the terms to be observed or performed hereunder by this corporation, but
will at all times in good faith assist in the carrying out of all the provisions
of this Section 4.3.6 and in the taking of all such action as may be necessary
or appropriate in order to protect the conversion rights as provided herein of
the holders of the Series Preferred Stock against impairment.
(h) (i) No fractional shares shall be issued upon conversion of the
Series A Preferred Stock and the Series B Preferred Stock and the
number of shares of Common Stock to be issued shall be rounded to the
nearest whole share, determined on the basis of the total number of
shares of the Series A Preferred Stock and the Series B Preferred
Stock, respectively, the holder is at the time converting into Common
Stock and the number of shares of Common Stock issuable upon such
aggregate conversion.
(ii) Upon the occurrence of each adjustment or readjustment of
the Series A Conversion Price or the Series B Conversion Price pursuant
to this
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Section 4.3.6, this corporation, at its expense, shall promptly compute
such adjustment or readjustment in accordance with the terms hereof and
prepare and furnish to each holder of Series A Preferred Stock and
Series B Preferred Stock, as appropriate, a certificate setting forth
such adjustment or readjustment and showing in detail the facts upon
which such adjustment or readjustment is based. This corporation shall,
upon the written request at any time of any holder of Series A
Preferred Stock or Series B Preferred Stock, furnish or cause to be
furnished to such holder a like certificate setting forth (A) such
adjustment and readjustment, and (B) the Series A Conversion Price or
the Series B Conversion Price at the time in effect for such series of
Series Preferred Stock.
(i) In the event of any taking by this corporation of a record of the
holders of any class of securities for the purpose of determining the holders
thereof who are entitled to receive any dividend (other than a cash dividend) or
other distribution, any right to subscribe for, purchase or otherwise acquire
any shares of stock of any class or any other securities or property, or to
receive any other right, this corporation shall mail to each holder of Series
Preferred Stock, at least 20 days prior to the date specified therein, a notice
specifying the date on which any such record is to be taken for the purpose of
such dividend, distribution or right, and the amount and character of such
dividend, distribution or right.
(j) This corporation shall at all times reserve and keep available out
of its authorized but unissued shares of Common Stock solely for the purpose of
effecting the conversion of shares of Series Preferred Stock, such number of its
shares of Common Stock as shall from time to time be sufficient to effect the
conversion of all outstanding shares of Series Preferred Stock; and if at any
time the number of authorized but unissued shares of Common Stock shall not be
sufficient to effect the conversion of all then outstanding shares of Series
Preferred Stock, this corporation will take such corporate action as may, in the
opinion of its counsel, be necessary to increase its authorized but unissued
shares of Common Stock to such number of shares as shall be sufficient for such
purposes.
(k) Any notice required by the provisions of this Section 4.3.6 to be
given to the holders of shares of Series Preferred Stock shall be deemed given
if deposited in the United States mail, postage prepaid, return receipt
requested and addressed to each holder of record at his address appearing on the
books of this corporation.
(1) At any time, in the event of any consolidation or merger of the
corporation with or into another corporation or other entity or person, or any
other corporate reorganization or other transaction or series of related
transactions by the corporation, in any such case, in which more than 50 percent
of the voting power of the corporation is transferred, then holders of the
Series Preferred Stock shall receive the number of shares of stock or other
securities or property (including cash) which a holder of the number of shares
of Common Stock deliverable upon conversion of such Series Preferred Stock would
have been entitled on such consolidation, merger, reorganization or other
transaction.
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4.3.7 Voting Rights.
(a) The holders of outstanding shares of each series of Series
Preferred Stock shall have the right to vote as a separate voting group, on the
basis of one vote for each share of Common Stock into which such holders' shares
of such series of Series Preferred Stock could then be converted (with any
fractional share determined on an aggregate conversion basis being rounded up to
the next highest whole share), on any amendment to these Articles of
Incorporation which (A) increases or decreases the aggregate number of
authorized shares of such series of Series Preferred Stock, (B) effects an
exchange or reclassification of all or part of the shares of such series of
Series Preferred Stock into shares of another class, (C) effects an exchange or
reclassification, or creates the right of exchange, of all or part of the shares
of another class into shares of such series of Series Preferred Stock, (D)
changes the designation, rights, preferences or limitations of all or part of
the shares of such series of Series Preferred Stock, (E) changes the shares of
all or part of such series of Series Preferred Stock into a different number of
shares of the same class, (F) creates a new class of shares having rights or
preferences with respect to distributions or to dissolution that are prior,
superior or substantially equal to the shares of such series of Series Preferred
Stock, (G) increases the rights, preferences or number of authorized shares of
any class that, after giving effect to the amendment, have rights or preferences
with respect to distributions or to dissolution that are prior, superior, or
substantially equal to the shares of such series of Series Preferred Stock, (H)
limits or denies an existing preemptive right of all or part of the shares of
such series of Series Preferred Stock, or (I) cancels or otherwise affects
rights to distributions or dividends that have accumulated but not yet been
declared on all or part of the shares of such series of Series Preferred Stock,
and with respect to such vote, shall be entitled, notwithstanding any provision
hereof, to notice of any shareholders' meeting in accordance with the bylaws of
this corporation.
(b) If a Covenant Violation (as hereinafter defined) shall have
occurred and be continuing or if dividends payable on the Series A Preferred
Stock shall have been in arrears and not paid, or deemed to have been paid
pursuant to the next sentence, in full for (i) three consecutive quarters, (ii)
any four quarters during any consecutive twenty-four month period, or (iii) any
eight quarters (any such series of arrearages described in clauses (i) through
(iii) being an "Arrearage Event"), the holders of the Series A Preferred Stock
shall have the exclusive right to elect that number of persons to the Board of
Directors of the corporation such that such number of persons shall constitute a
majority of the Board of Directors of the corporation, by replacing the
incumbent Directors, by adding new members to the Board of Directors, or through
any combination of the above. Notwithstanding the foregoing, if a dividend has
not been paid in full (a) for a particular quarter and the corporation makes
such payment on or before the next scheduled dividend payment date, and timely
pays the next dividend on its scheduled dividend payment date or (b) during any
Blockage Period and the corporation (x) deposits the amount payable with respect
to such dividend into escrow in accordance with Section 4.3.2 when due or within
the time provided in clause (a) above of this subsection 4.3.7(b), and (y) makes
such payment through the release of Escrowed Dividends within five days after
the expiration or termination of all Blockage Periods then in effect or as
otherwise provided by the Plan, then, in either such case, such nonpayment shall
be deemed to be timely paid and shall not be counted for purposes of clauses (i)
through (iii) above. The rights of the holders of the Series A Preferred Stock
pursuant to this Subsection 4.3.7(b) shall terminate on the date that (i) less
than 25 percent
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of the originally issued Series A Preferred Stock remains outstanding or (ii)
the Covenant Violation or Arrearage Event is no longer continuing or has been
cured. On any such date (the "Board Recovery Date"), the term of any Director
then in office elected by the holders of Series A Preferred Stock pursuant to
this Section 4.3.7 shall terminate and each such Director shall be replaced by a
Director that is appointed by the corporation's management. As soon as
practicable, but in any event not more than 90 days following the Board Recovery
Date, the Board of Directors shall call a meeting of the corporation's
shareholders for the purposes of electing all members of the Board of Directors.
The Directors elected at such shareholders' meeting shall then remain in place
until the next annual meeting of the corporation's shareholders or as otherwise
provided by the corporation's bylaws or articles of incorporation. A "Covenant
Violation" shall be deemed to have occurred on the date that the corporation
creates or incurs any liabilities resulting from borrowings, loans or advances,
whether secured or unsecured, other than those permitted by Section 6.02 B. of
the Secured Loan Agreement (as such term is defined in the Plan) if on such date
or after giving effect to such creation or incurrence, the corporation's long
term debt (less current maturities and deferred taxes) exceeds 40 percent of the
aggregate of the corporation's long term debt (less current maturities and
deferred taxes) and stockholder's equity.
(c) Except as otherwise provided in this Section 4.3.7 or as required
by the Oregon Business Corporation Act, the holders of the Series Preferred
Stock shall have no right to vote on any matter coming before any meeting of the
shareholders of the corporation.
ARTICLE 5. REGISTERED OFFICE AND AGENT
The name of the initial registered agent of the corporation and the
address of its registered office are as follows:
Lawco of Oregon, Inc.
111 S.W. Fifth Avenue, Suite 2500
Portland, Oregon 97204
The agent has consented to the appointment.
ARTICLE 6. DIRECTORS
From the effective date of the corporation's Plan, the number of
directors constituting the Board of Directors of the corporation shall be seven,
with three directors (as designated in the Plan) to stand for election at the
annual meeting of shareholders held in calendar year 1995 and with four
directors (as designated in the Plan) to stand for election at the annual
meeting of shareholders held in calendar year 1996. Thereafter, the number of
directors constituting the Board of Directors of the corporation, and the method
of electing such directors, shall be determined pursuant to the Bylaws of the
Corporation; provided however, in the event the Board sets the number of
Directors to be six (6) or more, the Board shall be divided into three classes,
with each class to be as nearly equal in number as possible, with the members of
each class to be determined by the Board of Directors and with the terms of such
classes to be as follows: at least two directors shall be elected for a term of
one year, at least two directors shall be elected for a term of two years and at
least two directors shall be elected for a term of three years and at each
annual shareholders' meeting thereafter the term of directors whose terms expire
on that date shall
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<PAGE>
be elected for a term of three years. Unless otherwise provided for in these
Fourth Restated Articles of Incorporation, any vacancy of the Board of Directors
to be filled by reason of an increase in the number of directors or otherwise
may be filled only by the affirmative vote of a majority of the directors then
in office, though less than a quorum, or by a sole remaining director, and the
directors so chosen shall hold office until the next annual election, or until
their successors are duly elected and qualified, or until their earlier
resignation or removal.
ARTICLE 7. LIMITATION OF DIRECTOR LIABILITY
To the fullest extent that the Oregon Business Corporation Act, as it
exists on the date hereof or may hereafter be amended, permits the limitation or
elimination of the liability of directors, a director of the corporation shall
not be liable to the corporation or its shareholders for any monetary damages
for conduct as a director. Any amendment to or repeal of this Article 7 or
amendment to the Oregon Business Corporation Act shall not adversely effect any
right or protection of a director of the corporation for or with respect to any
acts or omissions of such director occurring prior to such amendment or repeal.
ARTICLE 8. INDEMNIFICATION
To the fullest extent not prohibited by law, the corporation: (i) shall
indemnify any person who is made, or threatened to be made, a party to an
action, suit or proceeding, whether civil, criminal, administrative,
investigative, or otherwise (including an action, suit or proceeding by or in
the right of the corporation), by reason of the fact that the person is or was a
director or officer of the corporation, and (ii) may indemnify any person who is
made, or threatened to be made, a party to an action, suit or proceeding,
whether civil, criminal, administrative, investigative, or otherwise (including
an action, suit or proceeding by or in the right of the corporation), by reason
of the fact that the person is or was an employee or agent of the corporation,
or a fiduciary (within the meaning of the Employee Retirement Income Security
Act of 1974), with respect to any employee benefit plan of the corporation, or
serves or served at the request of the corporation as a director or officer of,
or as a fiduciary (as defined above) of an employee benefit plan of, another
corporation, partnership, joint venture, trust or other enterprise. This Article
8 shall not be deemed exclusive of any other provisions for the indemnification
of directors, officers, employees, or agents that may be included in any
statute, bylaw, agreement, resolution of shareholders or directors or otherwise,
both as to action in any official capacity and action in any other capacity
while holding office, or while an employee or agent of the corporation. For
purposes of this Article 8, "corporation" shall mean the corporation
incorporated hereunder and any successor corporation thereof.
ARTICLE 9. NO PREEMPTIVE RIGHTS
No shareholder shall have preemptive rights to acquire additional
shares of stock which may be issued by the corporation, pursuant to the Oregon
Business Corporation Act.
The name and telephone number of the person to contact about this
filing are:
Robert J. Riecke
10260 SW Greenburg Road, Suite 900
Portland, OR 97223
(503) 246-3440
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ARTICLES OF AMENDMENT
OF
WTD INDUSTRIES, INC.
Pursuant to the provisions of ORS 57.370, the undersigned corporation
executes the following Articles of Amendment to its Fourth Restated Articles of
Incorporation:
1. The name of the corporation is WTD Industries, Inc. (the
"Company").
2. Effective upon filing these Articles of Amendment with the
Secretary of State of the State of Oregon, Article 4 of the Fourth Restated
Articles of Incorporation of the Company is amended to add a new Subsection 4.4
as set forth on the amendment attached hereto.
3. The amendment was duly adopted by the Board of Directors of
the corporation on March 4, 1998 and shareholder approval was not required.
4. The amendment does not provide for the exchange,
reclassification or cancellation of issued shares.
These Articles of Amendment are executed by the Company by its duly
authorized officer.
DATED: March 4, 1998.
WTD INDUSTRIES, INC.
By:
------------------------------------------------
Robert J. Riecke
Vice President - Administration
and Secretary
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4.4 Designation of Rights and Preferences of Series C Junior
Participating Preferred Stock
The following series of Preferred Stock is hereby designated, which
series shall have the rights, preferences, privileges and limitations as set
forth below:
4.4.1. Designation of Series C Junior Participating Preferred Stock and
Amount. The shares of such series shall be designated as "Series C Junior
Participating Preferred Stock" (the "Series C Preferred Stock") and the number
of shares constituting the Series C Preferred Stock shall be 400,000. Such
number of shares may be increased or decreased by resolution of the Board of
Directors; provided, however, that no decrease shall reduce the number of shares
of Series C Preferred Stock to a number less than the number of shares then
outstanding plus the number of shares reserved for issuance upon the exercise of
outstanding options, rights or warrants or upon the conversion of any
outstanding securities issued by the corporation convertible into Series C
Preferred Stock.
4.4.2. Dividends and Distributions.
(A) Subject to the rights of the holders of any shares of any
series of Preferred Stock (or any similar stock) ranking prior and superior to
the Series C Preferred Stock with respect to dividends, the holders of shares of
Series C Preferred Stock, in preference to the holders of Common Stock, no par
value per share (the "Common Stock"), of the corporation, and of any other
junior stock, shall be entitled to receive, when, as and if declared by the
Board of Directors out of funds legally available for the purpose, quarterly
dividends payable in cash on the first day of March, June, September and
December in each year (each such date being referred to herein as a "Quarterly
Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date
after the first issuance of a share or fraction of a share of Series C Preferred
Stock, in an amount per share (rounded to the nearest cent) equal to 100 times
the aggregate per share amount of all cash dividends, and 100 times the
aggregate per share amount (payable in kind) of all non-cash dividends or other
distributions, subject to the provision for adjustment hereinafter set forth,
other than a dividend payable in shares of Common Stock or a subdivision of the
outstanding shares of Common Stock (by reclassification or otherwise), declared
on the Common Stock since the immediately preceding Quarterly Dividend Payment
Date or, with respect to the first Quarterly Dividend Payment Date, since the
first issuance of any share or fraction of a share of Series C Preferred Stock.
In the event the corporation shall at any time declare or pay any dividend on
the Common Stock payable in shares of Common Stock, or effect a subdivision or
combination or consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in shares of Common
Stock) into a greater or lesser number of shares of Common Stock, then in each
such case the amount to which holders of shares of Series C Preferred Stock were
entitled immediately prior to such event under clause (ii) of the preceding
sentence shall be adjusted by multiplying such amount by a fraction, the
numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.
(B) The corporation shall declare a dividend or distribution
on the Series C Preferred Stock as provided in paragraph (A) of this Section
4.4.2 immediately after it declares a dividend or distribution on the Common
Stock (other than a dividend payable in shares of Common Stock).
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(C) Dividends shall begin to accrue and be cumulative on
outstanding shares of Series C Preferred Stock from the Quarterly Dividend
Payment Date next preceding the date of issue of such shares, unless the date of
issue of such shares is prior to the record date for the first Quarterly
Dividend Payment Date, in which case dividends on such shares shall begin to
accrue from the date of issue of such shares, or unless the date of issue is a
Quarterly Dividend Payment Date or is a date after the record date for the
determination of holders of shares of Series C Preferred Stock entitled to
receive a quarterly dividend and before such Quarterly Dividend Payment Date, in
either of which events such dividends shall begin to accrue and be cumulative
from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall
not bear interest. Dividends paid on the shares of Series C Preferred Stock in
an amount less than the total amount of such dividends at the time accrued and
payable on such shares shall be allocated pro rata on a share-by-share basis
among all such shares at the time outstanding. The Board of Directors may fix a
record date for the determination of holders of shares of Series C Preferred
Stock entitled to receive payment of a dividend or distribution declared
thereon, which record date shall be not more than 60 days prior to the date
fixed for the payment thereof.
4.4.3. Voting Rights. The holders of shares of Series C Preferred Stock
shall have the following voting rights:
(A) Subject to the provision for adjustment hereinafter set
forth, each share of Series C Preferred Stock shall entitle the holder thereof
to 100 votes on all matters submitted to a vote of the shareholders of the
corporation. In the event the corporation shall at any time declare or pay any
dividend on the Common Stock payable in shares of Common Stock, or effect a
subdivision or combination or consolidation of the outstanding shares of Common
Stock (by reclassification or otherwise than by payment of a dividend in shares
of Common Stock) into a greater or lesser number of shares of Common Stock, then
in each such case the number of votes per share to which holders of shares of
Series C Preferred Stock were entitled immediately prior to such event shall be
adjusted by multiplying such number by a fraction, the numerator of which is the
number of shares of Common Stock outstanding immediately after such event and
the denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
(B) Except as otherwise provided herein, in any other Articles
of Amendment creating a series of Preferred Stock or any similar stock, or by
law, the holders of shares of Series C Preferred Stock and the holders of shares
of Common Stock and any other capital stock of the corporation having general
voting rights shall vote together as one class on all matters submitted to a
vote of shareholders of the corporation.
(C) Except as set forth herein, or as otherwise provided by
law, holders of Series C Preferred Stock shall have no special voting rights and
their consent shall not be required (except to the extent they are entitled to
vote with holders of Common Stock as set forth herein) for taking any corporate
action.
4.4.4. Certain Restrictions.
(A) Whenever quarterly dividends or other dividends or
distributions payable on the Series C Preferred Stock as provided in Section
4.4.2 are in arrears, thereafter and until all
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<PAGE>
accrued and unpaid dividends and distributions, whether or not declared, on
shares of Series C Preferred Stock outstanding shall have been paid in full, the
corporation shall not:
(i) declare or pay dividends, or make any other
distributions, on any shares of stock ranking junior (either as to
dividends or upon liquidation, dissolution or winding up) to the Series
C Preferred Stock;
(ii) declare or pay dividends, or make any other
distributions, on any shares of stock ranking on a parity (either as to
dividends or upon liquidation, dissolution or winding up) with the
Series C Preferred Stock, except dividends paid ratably on the Series C
Preferred Stock and all such parity stock on which dividends are
payable or in arrears in proportion to the total amounts to which the
holders of all such shares are then entitled;
(iii) redeem or purchase or otherwise acquire for consideration
shares of any stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series C Preferred
Stock, provided that the corporation may at any time redeem, purchase
or otherwise acquire shares of any such junior stock in exchange for
shares of any stock of the corporation ranking junior (either as to
dividends or upon dissolution, liquidation or winding up) to the Series
C Preferred Stock; or
(iv) redeem or purchase or otherwise acquire for consideration
any shares of Series C Preferred Stock, or any shares of stock ranking
on a parity with the Series C Preferred Stock, except in accordance
with a purchase offer made in writing or by publication (as determined
by the Board of Directors) to all holders of such shares upon such
terms as the Board of Directors, after consideration of the respective
annual dividend rates and other relative rights and preferences of the
respective series and classes, shall determine in good faith will
result in fair and equitable treatment among the respective series or
classes.
(B) The corporation shall not permit any subsidiary of the
corporation to purchase or otherwise acquire for consideration any shares of
stock of the corporation unless the corporation could, under paragraph (A) of
this Section 4.4.4, purchase or otherwise acquire such shares at such time and
in such manner.
4.4.5. Reacquired Shares. Any shares of Series C Preferred
Stock purchased or otherwise acquired by the corporation in any manner
whatsoever shall be retired and cancelled promptly after the acquisition
thereof. All such shares shall upon their cancellation become authorized but
unissued shares of Preferred Stock and may be reissued as part of a new series
of Preferred Stock subject to the conditions and restrictions on issuance set
forth herein, in the Fourth Restated Articles of Incorporation, or in any other
Articles of Amendment creating a series of Preferred Stock or any similar stock
or as otherwise required by law.
4.4.6. Liquidation, Dissolution or Winding Up. Upon any
liquidation, dissolution or winding up of the corporation, no distribution shall
be made (a) to the holders of shares of stock ranking junior (either as to
dividends or upon liquidation, dissolution or winding up) to the Series C
Preferred Stock unless, prior thereto, the holders of shares of Series C
Preferred Stock shall have received $100 per share, plus an amount equal to
accrued and unpaid dividends and distributions thereon, whether or not declared,
to the date of such payment, provided that the holders of shares of Series C
Preferred Stock shall be entitled to receive an aggregate amount per share,
subject to the provision for adjustment hereinafter set forth, equal to 100
times the aggregate amount to be
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<PAGE>
distributed per share to holders of shares of Common Stock, or (b) to the
holders of shares of stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series C Preferred Stock,
except distributions made ratably on the Series C Preferred Stock and all such
parity stock in proportion to the total amounts to which the holders of all such
shares are entitled upon such liquidation, dissolution or winding up. In the
event the corporation shall at any time declare or pay any dividend on the
Common Stock payable in shares of Common Stock, or effect a subdivision or
combination or consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in shares of Common
Stock) into a greater or lesser number of shares of Common Stock, then in each
such case the aggregate amount to which holders of shares of Series C Preferred
Stock were entitled immediately prior to such event under the proviso in clause
(a) of the preceding sentence shall be adjusted by multiplying such amount by a
fraction the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is the
number of shares of Common Stock that were outstanding immediately prior to such
event.
4.4.7. Consolidation, Merger, etc. In case the corporation shall enter
into any consolidation, merger, combination or other transaction in which the
shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such case each share of
Series C Preferred Stock shall at the same time be similarly exchanged or
changed into an amount per share, subject to the provision for adjustment
hereinafter set forth, equal to 100 times the aggregate amount of stock,
securities, cash and/or any other property (payable in kind), as the case may
be, into which or for which each share of Common Stock is changed or exchanged.
In the event the corporation shall at any time declare or pay any dividend on
the Common Stock payable in shares of Common Stock, or effect a subdivision or
combination or consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in shares of Common
Stock) into a greater or lesser number of shares of Common Stock, then in each
such case the amount set forth in the preceding sentence with respect to the
exchange or change of shares of Series C Preferred Stock shall be adjusted by
multiplying such amount by a fraction, the numerator of which is the number of
shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
4.4.8. No Redemption. The shares of Series C Preferred Stock shall not
be redeemable.
4.4.9. Rank. The Series C Preferred Stock shall rank, with respect to
the payment of dividends and the distribution of assets, junior to all series of
any other class of the corporation's Preferred Stock.
4.4.10. Amendment. The Fourth Restated Articles of Incorporation of the
corporation shall not be amended in any manner that would materially alter or
change the powers, preferences or special rights of the Series C Preferred Stock
so as to affect them adversely without the affirmative vote of the holders of at
least two-thirds of the outstanding shares of Series C Preferred Stock, voting
together as a single class.
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Articles of Amendment of WTD Industries, Inc.
1. NAME OF CORPORATION PRIOR TO AMENDMENT: WTD Industries, Inc.
2. STATE THE ARTICLE NUMBER AND SET FORTH THE ARTICLE AS IT IS AMENDED TO READ.
"FOURTH RESTATED ARTICLES OF INCORPORATION OF TREESOURCE
INDUSTRIES, INC."
"ARTICLE 1. NAME The name of the corporation is TreeSource Industries,
Inc."
3. THE AMENDMENT WAS ADOPTED ON: October 26, 1998
4. Shareholder action was required to adopt the amendment. The vote was as
follows:
Class or Number of Number of Number of Number of
series of shares votes entitled to votes cast votes cast
shares outstanding be cast FOR AGAINST
------ ----------- ----------- ----------- -----------
COMMON 11,162,874 11,162,874 6,037,255 3,564,916
5. EXECUTION
Printed Name Signature Title
Robert J. Riecke /s/ Robert J. Riecke Secretary
FILED OCTOBER 27, 1998 OREGON SECRETARY OF STATE
37
Exhibit 10.11
EMPLOYMENT CONTRACT
BETWEEN: TreeSource Industries, Inc.
(formerly WTD Industries, Inc.), an Oregon corporation
Employer
AND: Jess R. Drake, an individual Employee
DATE: October 31, 1998
AGREEMENT
1. Employment Term. The term of employment under this Agreement shall begin on
the 4th day of November, 1998, and continue until the third anniversary thereof,
unless earlier terminated as provided in paragraph 6.1 herein.
2. Employment Duties. During the term of this Agreement, Employee shall be the
President and Chief Executive Officer of Employer, and, subject to shareholder
approval, a voting member of the Board of Directors, and shall:
2.1 Devote Employee's full business time and attention to performing
services on behalf of Employer as may be assigned to Employee from time to time
by the Board of Directors.
2.2 Comply with the policies, standards and regulations established by
Employer from time to time.
3. Compensation.
3.1 Base Compensation. Employer shall pay Employee an initial base
compensation of $350,000 per year payable in equal monthly installments. Each
year thereafter Employee shall receive a reasonable annual increase in base
compensation if such an increase is provided generally to other executive
employees of the company, or as deemed appropriate by the Board of Directors.
3.2 Bonus. Employee shall receive a signing bonus of $100,000 upon
execution hereof by Employer and Employee. In addition, Employee shall receive
annual bonuses as follows:
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3.2.1 At the end of Employer's fiscal year, Employee shall
receive an annual bonus conditioned upon his performance against performance
objectives and target goal, which target goal and objectives shall be
achievable, realistic, reasonable, and mutually established in good faith by
Employer and Employee.
3.2.2 If Employee meets the target goal mutually set at the
beginning of each year, he shall receive, within ninety (90) days after the end
of each fiscal year, a bonus equal to 60% (the "target bonus") of his then
current annual salary (Employee's "base"). If Employee exceeds the target goal
he shall receive a correspondingly greater bonus, up to three times the target
bonus amount. The goals and objectives to be applied in determining Employee's
eligibility for a bonus during the first three full fiscal years of employment
shall be developed in accordance with the following criteria:
(a) From the date of hire through April 30, 2000, (i) the
target bonus shall be based solely upon non-financial goals, (ii) any bonus with
respect to an additional 60% of Employee's base shall be based upon equally
weighted non-financial and financial goals, and (iii) any bonus with respect to
the third 60% of Employee's base shall be based solely upon financial goals.
Within ninety (90) days of the commencement of Employer's next fiscal year, May
1, 1999, Employee shall be eligible to receive a prorated bonus for work
performed from the date of hire to that time.
(b) During the fiscal year ending April 30, 2001, (i) the
target bonus shall be based solely upon non-financial goals, (ii) any bonus with
respect to an additional 60% of Employee's base shall be based 75% upon
financial goals and 25% upon non-financial goals, and (iii) any bonus with
respect to the third 60% of Employee's base shall be based solely upon financial
goals.
(c) During the fiscal year ending April 30, 2002, (i) the
target bonus shall be based 80% upon financial goals and 20% upon non-financial
goals, and (ii) any bonus with respect to the second and third 60% of Employee's
base shall be based solely upon financial goals.
3.3 Stock Options. Upon execution hereof by the parties, and subject to
any corporate or shareholder action required to permit such issuance, Employee
shall receive stock options in a number sufficient to represent a potential $5.0
million gain based upon a stock price of $10.00 per share and an option exercise
price equal to 85% of the common stock's value as of the date of the grant,
which shares, except as hereafter provided, shall vest according to the
following schedule: (1) one-fourth upon execution hereof; (2) an additional
one-fourth on each anniversary of this
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agreement. In the event that a senior lender under Employer's Credit and
Security Agreement declares Employer in default and accelerates, or there is a
change in control (as defined herein), or Employer terminates Employee, except
under paragraphs 6.1.4 or 6.1.5 or under circumstances where Employee has been
grossly negligent or has exhibited willful misconduct in the performance of his
duties, the stock options will immediately vest. Nothing herein shall be
construed to preclude Employee from receiving additional grants of stock
options, to the extent deemed appropriate by the Board, if Employer provides
other senior management employees such grants. Employee shall be eligible to
receive such other grants on a non-discriminatory basis. A change of control is
defined as any sale, transfer or disposition of all or substantially all the
assets of Employer or the merger of Employer with another company that results
in the shareholders of Employer obtaining less than 50% of the voting equity of
the resulting company, or an individual or company in any manner acquires or
controls more than 50% of the voting equity of Employer.
3.4 Other Benefits. Base compensation and bonus compensation paid to
Employee shall be in addition to any contribution made by the Employer for the
benefit of Employee to any qualified pension plan or 401k plan maintained by
Employer for the exclusive benefit of its employees or employee. Employer shall
provide to Employee and Employee's spouse and dependent children, if any, at
least the same coverage and participation that the Employer provides to other
management personnel and their families with respect to accident insurance and
disability insurance. If such insurance is available at standard rates or
better, Employer shall provide Employee extended disability insurance coverage
in the amount equal to 60% of Employee's annual base salary. Employer shall
provide Employee with four weeks of paid vacation and such sick leave benefits
that Employer provides to other management employees. The Employee will not be
eligible for any medical, dental or life insurance coverage.
4. Relationship Is Employer-Employee. The relationship between Employer and
Employee is that of employer-employee. Employer shall have the authority to
determine the assignment of work and specific duties to be performed by
Employee.
5. Expenses. Employee shall be entitled to reimbursement from Employer for all
actual documented expenses incurred by Employee in the performance of Employee's
duties under this Agreement in accordance with Employer's policies for executive
employees. In addition, Employee's reasonable actual expenses associated with
his relocation shall be paid by Employer. Such expenses include reasonable costs
associated with the sale of his home, including real estate commissions, costs
associated with temporary living quarters not to exceed six months, the search
for suitable housing, the closing costs incurred on account of the purchase of a
home, and reasonable costs associated with the move of his furniture and
furnishings, and storage, if any.
6. Termination.
6.1 Reasons for Termination. Employee's employment with Employer shall
terminate only upon occurrence of any of the following events:
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6.1.1 Mutual written agreement between Employer and Employee;
6.1.2 Employee's death;
6.1.3 Employee shall suffer a permanent disability. For purposes
of this Agreement, "permanent disability" shall be defined as Employee's
inability due to physical or mental illness or other cause, to perform the
majority of Employee's usual duties for a period of six (6) months or more;
6.1.4 Employee's willful and continual failure and refusal to
comply with the reasonable express directives of the Board of Directors of
Employer;
6.1.5 Conviction of a felony or any crime involving fraud or
dishonesty in the performance of, or that reflects upon Employee's ability to
perform, Employee's duties on behalf of Employer;
6.1.6 Upon forty-five (45) days' prior written notice by Employer
or Employee to the other.
6.2 Payment Upon Termination.
6.2.1 If Employee's employment is terminated pursuant to the
terms of paragraphs 6.1.4 or 6.1.5, or if Employee terminates his employment
pursuant to paragraph 6.1.6, and paragraph 6.3 does not otherwise apply, the
base compensation payable to Employee pursuant to paragraph 3.1 shall be
prorated to the date of such termination and shall be payable on the first day
of the month following such termination date.
6.2.2 If Employer terminates Employee's employment pursuant to
paragraph 6.1.6, Employee shall receive the following:
(a) Employer shall pay Employee payments as provided
herein. If Employee is terminated prior to the scheduled expiration of this
Agreement, an amount equal to two times Employee's last base annual salary and a
pro-rata share of that year's target bonus amount, to the extent earned at the
date of termination, based upon Employee's length of service that year, within
thirty (30) days of the date of Employee's termination.
(b) Within thirty (30) days of the date of Employee's
termination, Employer shall pay Employee all of Employee's accrued vacation.
(c) To the extent permitted under Employer's benefit
plans, Employer shall continue to provide Employee with the same accident, basic
disability insurance, and additional disability insurance which was provided to
Employee during the term of Employee's employment. Employer shall, to the extent
permitted, continue to
41
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provide those benefits until Employee finds other employment, or for a one year
period, whichever date first occurs.
6.3 In the event Employee is demoted or his title or position is
otherwise materially adversely changed by Employer, Employee is removed as a
voting member of the Board of Directors (other than by shareholder action),
Employer reduces Employee's annual salary or reduces Employee's bonus potential
to less than three times target (60% of annual salary), Employee, at his option,
may give notice to the board of his intention to terminate as provided in
paragraph 6.1.6 and receive the benefits provided in paragraph 6.2.2. In such
event the sums to be paid to Employee pursuant to said paragraph 6.2.2 shall be
placed by Employer in an escrow account within 15 days of said notice by
Employee with escrow instructions to release said sums to Employee at the end of
the 45-day notice period.
6.4 Employer agrees and represents that it has obtained agreements from
its lenders to subordinate their claims to those of Employee, so that Employee's
claims for payment of any kind provided for hereunder would receive first
priority over theirs, and to except from any contractual restrictions on
Employer its agreements with Employee as provided for herein. Copies of those
agreements are attached as Exhibit A hereto.
7. Confidentiality. Employee acknowledges that during the course of his
employment by Employer he may be exposed to or have disclosed to him or may
develop information which is proprietary to the Employer ("Confidential
Information"). Confidential Information may include, without limitation,
information concerning trade secrets, source code, designs, licenses, costs,
customer lists, profits, markets, marketing plans, price data and any other
information of a similar nature to the extent not generally known within the
trade. Employee shall not make use of any Confidential Information except in the
performance of his duties for Employer, he shall maintain such information in
confidence and he shall not use any of such information in connection with any
other employment.
8. Nonsolicitation. During the severance period, Employee will not within the
United States of America solicit any employee to work for a direct competitor of
Employer. Nothing herein shall be construed to prevent Employee from hiring
persons who respond to advertisements of general circulation, or whose names are
independently developed by an employment firm, or who initiate contacts with
Employee about employment with Employee. Employee shall not be prevented from
providing a reference for any Employer employee seeking a position with any
company or offering advice to that company about said employee if requested.
9. Confidentiality and Nonsolicitation After Termination of Employment. All of
the terms of paragraphs 7 and 8 shall remain in full force and effect for a
period of two (2) years after the termination of Employee's employment if all
payments as provided herein have been timely made to Employee.
10. Notice. Any notices permitted or required under this Agreement shall be
given in writing and may be delivered and served personally upon Employee or
upon an officer of
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Employer, or alternatively, may be deposited in the United States mail, postage
prepaid by certified or registered mail, addressed to the parties at their last
known address. Such notice, if mailed within the state of Oregon, shall be
deemed delivered upon the second day following the date postmarked. If mailed
outside the state of Oregon, the notice shall be deemed delivered upon the fifth
day following the date postmarked.
11. Waiver of Breach. The waiver by either Employer or Employee of a breach of
any provision of this Agreement shall not operate or be construed as a waiver of
any other provision or of any subsequent breach of the same provision by either
Employer or Employee.
12. Binding Effect and Assignment. This Agreement shall be binding upon and
inure to the benefit of both Employer and Employee and their respective
successors, heirs and legal representatives, but neither this Agreement nor any
rights hereunder may be assigned by either Employer or Employee without the
prior written consent of the other party.
13. Amendment. No amendment or variation of the terms and conditions of this
Agreement shall be valid unless the same is in writing and signed by both
Employer and Employee.
14. Integration. This Agreement embodies the entire agreement of the parties
with respect to Employee's employment with Employer. There are no promises,
terms, conditions or obligations other than those contained herein. This
Agreement shall supersede all prior communications, representations or
agreements, either verbal or written, between the parties.
15. Paragraph Headings. The paragraph headings appearing in this Agreement are
not to be construed as interpretations of the text, but are inserted for
convenience of and reference by the reader only.
16. Interpretation. This Employment Contract shall be interpreted according to
the laws of the state of Oregon.
EMPLOYER: EMPLOYEE:
TREESOURCE INDUSTRIES, INC.
By: /s/ Robert J. Riecke /s/ Jess R. Drake
-------------------------------- --------------------------------
Title:Vice President-Administration
------------------------------
Date: 11/3/98 Date: 10/31/98
------------------------------- -------------------------------
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Exhibit A
Consent and Subordination
THE UNDERSIGNED LENDER is one of the secured creditors of TreeSource
Industries, Inc. (formerly WTD Industries, Inc.), pursuant to a Credit and
Security Agreement dated as of November 30,1992. Lender agrees as follows:
1. Lender has reviewed the Employment Contract (in the form attached
hereto as Exhibit A and without any subsequent amendment or modification, the
"Employment Contract"), by and between TreeSource Industries, Inc. (the
"Employer") and Jess R. Drake (the Employee").
2. Lender hereby consents to the provisions of the Employment Contract
and agrees that the same shall be exempt from any contractual restrictions set
forth in the Credit and Security Agreement.
3. Upon the occurrence of an event entitling employee to give notice
pursuant to paragraph 6.3 or a breach by Employer of the Employment Contract
("Trigger Event") and following written notice of such Trigger Event provided to
Lenders, the Lenders agree that Employee shall be entitled to receive any
amounts owed under Section 6 of the Employment Contract up to a maximum amount
not to exceed $1,100,000, prior to any payment to the Lenders on their claims
under the Credit and Security Agreement. The Lenders shall be subrogated to the
rights of Employee to receive payment from Employer to the extent of any payment
or distribution made to Employee under this paragraph to which Lenders would
otherwise be entitled. No payment or distribution made to Employee, directly or
indirectly, of any cash, property or securities (including, without limitation,
any proceeds of Lenders' collateral under the Credit and Security Agreement)
pursuant to this paragraph, to which Lender would otherwise be entitled shall be
deemed a payment or distribution by Employer to Lenders on account of their
claims under the Credit and Security Agreement. Nothing contained in this
paragraph is intended to or shall: (a) impair, as among Employer, its creditors
other than Employee, and the Lenders, the obligations owed by Employer to the
Lenders; (b) affect the relative rights, as against Employer and the collateral
under the Credit and Security Agreement, of the Lenders and the creditors of
Employer other than Employee; or (c) prevent the Lenders from exercising all
rights and remedies otherwise permitted under applicable law and the Credit and
Security Agreement, subject only to the rights of Employee under this paragraph,
if any, to receive payment otherwise payable to the Lenders. The failure of
Employer to comply with the terms of the Employment Contract shall constitute an
Event of Default under Section 7.01E of the Credit and Security Agreement.
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<PAGE>
4. This Consent and Subordination shall become effective upon receipt
by Employer of identical agreements executed by each of Employer's Lenders under
the Credit and Security Agreement.
Dated this 29 day of October, 1998.
----
- -----------------------
By:
--------------------
Its:
-------------------
45
Exhibit 10.12
TREESOURCE INDUSTRIES, INC.
STOCK OPTION LETTER AGREEMENT
To: Jess R. Drake
On November 3, 1998, in connection with that certain Employment
Contract between you and TreeSource Industries, Inc. (the "Company"), dated
effective November 4, 1998 (the "Employment Contract"), the Board of Directors
of the Company has awarded you stock options for the purchase of 543,295 shares
of the Company's common stock at an exercise price of $.7969 per share, subject
to your agreement with the terms and conditions set forth below.
1. Term
The term of your option is ten (10) years from date of grant, unless
sooner terminated.
2. Exercise
During your lifetime only you can exercise the option. The personal
representative of your estate or the beneficiary thereof may exercise the option
following your death.
To exercise your option, you must deliver to the Company written notice
of your intention to exercise in the form attached hereto, specifying the number
of shares as to which you desire to exercise the option and the date on which
you desire to complete the transaction.
Unless the Board of Directors or any committee authorized by the Board
of Directors to administer stock options granted by the Company (the Board of
Directors or any such committee is referred to herein as the "Board of
Directors") determines otherwise, on or before the date specified for completion
of the purchase of shares pursuant to your option, you must have paid the
Company the full purchase price of such shares. No shares shall be issued until
full payment for the shares has been made.
After exercise of your option, immediately upon notification of the
amount due, if any, you shall pay to the Company in cash amounts necessary to
satisfy any applicable federal, state and local tax withholding requirements. If
additional withholding is or becomes required beyond any amount deposited before
delivery of the certificates, you shall pay such amount to the Company on
demand. If you fail to pay the amount demanded, the Company may withhold that
amount from other amounts payable by the Company to you, including salary,
subject to applicable law. With the consent of the Board of Directors, you may
satisfy this obligation, in whole or in part, by having the Company withhold
amounts due or by delivering to the Company common stock shares that would
satisfy the withholding amount.
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3. Payment for Shares
The option may be exercised by the delivery of cash (including, with
the consent of the Board of Directors, cash that may be the proceeds of a loan
from the Company), and, unless the Board of Directors at any time determines
otherwise, personal check, bank certified or cashier's check or, with the
consent of Board of Directors, in whole or in part, in common stock of the
Company valued at fair market value, promissory notes and other forms of
consideration.
With the consent of the Board of Directors, you may request the Company
to apply automatically the shares to be received upon the exercise of a portion
of the option (even though stock certificates have not yet been issued) to
satisfy the purchase price for additional portions of the option. If and so long
as the common stock is registered under Section 12(b) or 12(g) of the Exchange
Act, such cashless exercise may be accomplished by delivery of a properly
executed exercise notice, together with irrevocable instructions, to (i) a
brokerage firm designated by the Company to deliver promptly to the Company the
aggregate amount of sale proceeds to pay the option exercise price and any
withholding tax obligations that may arise in connection with the exercise and
(ii) the Company to deliver the certificates for such purchased shares directly
to such brokerage firm, all in accordance with the regulations of the Federal
Reserve Board.
4. Termination
In the event your employment or service with the Company or a
subsidiary terminates for any reason other than for cause (as defined below),
physical disability or death, or any reason that results in the Company's being
obligated to provide the payments and benefits specified in Section 6.2.2 of the
Employment Contract, your option may only be exercised within one month after
the date of such termination of your employment or services, but in no event
later than the remaining term of the option. In the event that your employment
is terminated under any provision of the Employment Contract that results in the
Company's being obligated to provide the payments and benefits specified in
Section 6.2.2 of the Employment Contract, your option may be exercised at any
time within two (2) years after the date of such termination of your employment,
but in no event later than the remaining term of the option. For the purposes of
this letter agreement "cause" shall consist of the following: (i) your willful
and continual failure and refusal to comply with the reasonable express
directives of the Company's Board of Directors; (ii) your conviction for a
felony or any crime involving fraud or dishonesty in the performance of, or that
reflects upon your ability to perform, your duties on behalf of the Company; or
(iii) circumstances where you have been grossly negligent or have exhibited
willful misconduct in the performance of your duties.
In the event of the termination of your employment or service for
cause, your option shall automatically terminate on the date you are first
notified by the Company of such termination, unless the Board of Directors
determines otherwise.
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In the event of the termination of your employment or service because
of permanent disability, your option may be exercised only within one year after
such termination, but in no event later than the remaining term of the option.
The term "permanent disability" means a mental or physical impairment that is
expected to result in death or that has lasted or is expected to last for a
continuous period of six (6) months or more and that causes you to be unable, in
the opinion of the Company and two independent physicians, to perform the
majority of your usual duties as an employee, director, officer or consultant of
the Company. Permanent disability shall be deemed to have occurred on the first
day after the Company and the two independent physicians have furnished their
opinion of permanent disability to the Company.
In the event of your death while employed by or providing service to
the Company or a subsidiary, your option may be exercised at any time within one
year after the date of death, but in no event later than the remaining term of
your option, and only if and to the extent you were entitled to exercise the
option at the date of death, and only by the person or persons to whom your
rights under the option shall pass by your will or by the laws of descent and
distribution of estate or country of domicile at the time of death.
Your option may be exercised only if and to the extent you were
entitled to exercise such option at the date of such termination. To the extent
that your option is not exercised within the applicable period, all further
rights to purchase shares pursuant to such option shall cease and terminate. In
no event may this option be exercised later than its remaining term.
5. Transfer of Option
Your option is not transferable except by will or by the applicable
laws of descent and distribution of the state or county of your domicile at the
time of death or pursuant to a qualified domestic relations order as defined
under the Internal Revenue Code or Title I of the Employee Income Security Act
of 1974, as amended.
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6. Vesting
Your option shall vest and become exercisable according to the
following schedule:
Number of shares
Date on and after which for which option
option is exercisable is exercisable
Upon execution of this letter agreement ........................ 25%
On November 3, 1999--the first anniversary of your
Employment Contract ........................................... 50%
On November 3, 2000--the second anniversary of your
Employment Contract ........................................... 75%
On November 3, 2001--the third anniversary of your
Employment Contract ........................................... 100%
7. Holding Periods:
7.1 Securities and Exchange Act Section 16
Shares of common stock obtained upon the exercise of your option may
not be sold by a person subject to Section 16 of the Exchange Act until six
months after the date such option was granted.
7.2 Taxation of Stock Options
Tax advice should be obtained when exercising any option and prior to
the disposition of the shares issued upon the exercise of any option.
8. Date of Grant
The date of grant of the option is November 3, 1998.
9. Acceleration in Certain Events
Notwithstanding any other provisions of this letter agreement, all
options outstanding under this letter agreement shall immediately become
exercisable in full at any time when any one of the following events has taken
place:
(a) The Company undergoes a change of control, which for the purposes
of this option is defined as any sale, transfer or disposition of all or
substantially all of the assets of the Company, or the merger of the Company
with another entity that results in the shareholders of the Company obtaining
less than 50% of the voting equity of the resulting company, or an individual or
company in any manner acquires or controls more than 50% of the voting equity of
the Company;
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<PAGE>
(b) The Company receives notice from a senior lender under the
Company's Credit and Security Agreement that such senior lender has declared
that the Company is in default on its loan obligations and that the loan
obligations are being accelerated; or
(c) The Company terminates your employment with the Company other than
for cause.
10. Adjustments
10.1 Adjustment of Shares
The aggregate number and class of shares for which this option has been
granted and the exercise price per share thereof (but not the total price) shall
be proportionately adjusted for any increase or decrease in the number of issued
shares of common stock resulting from a split-up or consolidation of shares or
any like capital adjustment, or the payment of any stock dividend.
10.2 Conversion of Options on Stock for Stock Exchange
Except as provided in Section 9(a), if the shareholders of the Company
receive capital stock of another corporation ("Exchange Stock") in exchange for
their shares of common stock in any transaction involving a merger,
consolidation, acquisition of property or stock, separation or reorganization,
the option granted hereunder shall be converted into an option to purchase
shares of Exchange Stock. The amount and price of a converted option shall be
determined by adjusting the amount and price of the option granted hereunder in
the same proportion as used for determining the number of shares of Exchange
Stock the holders of the shares of common stock receive in such merger,
consolidation, acquisition of property or stock, separation or reorganization.
10.3 Fractional Shares
In the event of any adjustment in the number of shares covered by this
option, any fractional shares resulting from such adjustment shall be
disregarded and the option shall cover only the number of full shares resulting
from such adjustment.
10.4 Determination of Board to Be Final
All Section 10 adjustments shall be made by the Board of Directors of
the Company, and its determination as to what adjustments shall be made, and the
extent thereof, shall be presumed to be correct unless such determination is
inconsistent with the other terms and requirements of this Section 10 or the
terms and requirements of the Employment Contract. Should any conflict exist
between the terms of this letter agreement and the terms of the Employment
Contract, the terms of the Employment Contract shall govern.
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10.5 Further Adjustment of Awards
Subject to Sections 9(a) and 10.2, the Board of Directors shall have
the discretion, exercisable at any time before a sale, merger, consolidation,
reorganization, liquidation or change in control of the Company, as defined by
the Board of Directors, to take such further action as it determines to be
necessary or advisable, and fair and equitable to you, (but shall not be limited
to) establishing, amending or waiving the type, terms, conditions or duration
of, or restrictions on, the option so as to provide for earlier, later, extended
or additional time for exercise and other modifications. The Board of Directors
may take such actions before or after any public announcement with respect to
such sale, merger, consolidation, reorganization, liquidation or change in
control that is the reason for such action.
10.6 Limitations
The grant of this option will in no way affect the Company's right to
adjust, reclassify, reorganize or otherwise change its capital or business
structure or to merge, consolidate, dissolve, liquidate or sell or transfer all
or any part of its business or assets.
11. Approvals
The Company agrees to register for offering or resale, or to qualify
for exemption, under the Securities Act, and to register or qualify under state
securities laws, any shares of common stock issued to you upon exercise of this
option, and to continue in effect any such registrations or qualifications.
12. Rights as a Stockholder
As a holder of an option issued pursuant to this option agreement, you
have no rights as a stockholder with respect to any common stock until the date
of issue to you of a stock certificate for such shares. Except as otherwise
expressly provided herein, no adjustment shall be made for dividend or other
rights for which the record date occurs prior to the date such stock certificate
is issued.
Please execute the Acceptance and Acknowledgment set forth below on the
enclosed copy of this letter agreement and return it to the undersigned.
Very truly yours,
TREESOURCE INDUSTRIES, INC.
/s/ Robert J. Riecke
----------------------------------------
By: Robert J. Riecke
Its: Vice President-Administration
and Secretary
51
<PAGE>
STOCK OPTION LETTER AGREEMENT
ACCEPTANCE AND ACKNOWLEDGMENT
I, a resident of the State of Washington, accept the stock option described
above, and acknowledge receipt of a copy of this Stock Option Letter Agreement
("Agreement"). I have read and understand this Agreement. I acknowledge that,
except as set forth in this Agreement and that certain Employment Contract with
the undersigned, the Company has no obligation to sell or otherwise issue to me
any stock or other equity or ownership interest in the Company.
Dated: November 6, 1998
###-##-#### /s/ Jess R. Drake
- ------------------------------------- -----------------------------
Taxpayer I.D. Number Jess R. Drake
Address:
By his or her signature below, the spouse of the Optionee, if such Optionee
is legally married as of the date of his or her execution of this Agreement,
acknowledges that he or she has read this Agreement and is familiar with the
terms and provisions thereof, and agrees to be bound by all the terms and
conditions of this Agreement.
Dated: November 6, 1998
/s/ Sandra Kay Drake
---------------------------
Spouse's Signature
Sandra Kay Drake
---------------------------
Printed Name
By his or her signature below, the Optionee represents that he or she is
not legally married as of the date of execution of this Agreement.
Dated:
---------------------------
Optionee's Signature
52
<PAGE>
NOTICE OF EXERCISE OF STOCK OPTION
To: TreeSource Industries, Inc. Board of Directors
I, a resident of the State of , hereby exercise my stock
option granted by TreeSource Industries, Inc. (the "Company") on ,
, subject to all the terms and provisions thereof, and notify the Company of
my desire to purchase shares of common stock of the Company (the
"Securities") at the exercise price of $ per share that were offered to me
pursuant to said option.
I hereby represent and warrant that (1) I have been furnished with a
copy of all information that I deem necessary to evaluate the merits and risks
of the purchase of the Securities; (2) I have had the opportunity to ask
questions and receive answers concerning the information received about the
Securities and the Company; and (3) I have been given the opportunity to obtain
any additional information I deem necessary to verify the accuracy of any
information obtained concerning the Securities and the Company.
Dated:
--------------------
- ------------------------- ------------------------
Taxpayer I.D. Number Jess R. Drake
Address
53
<PAGE>
RECEIPT
TreeSource Industries, Inc. hereby acknowledges receipt from Jess R. Drake
in payment for shares of common stock of TreeSource Industries, Inc.,
an Oregon corporation, of $ in the form of:
[ ] Cash
[ ] Check (personal, cashier's or bank certified)
[ ] Other (specify)
TREESOURCE INDUSTRIES, INC.
Date: For:
-------------- -------------------------
54
Exhibit 19
Dear TreeSource Shareholders:
For the second quarter of Fiscal 1999, TreeSource(R) incurred a net
loss of $324,000, compared to a net loss of $198,000 for the same period in
1997. The net loss applicable to common shareholders was $.08 per share for the
quarter ended October 31, 1998 compared to $.07 per share in the second quarter
last year. Second quarter net sales were $51.2 million, down 24 percent from
$67.4 million in the comparable period last year.
For the six months ended October 31, 1998, the Company reported a net
loss of $943,000 compared to net income of $1,746,000 for the same period last
year. The net loss applicable to common shareholders was $.19 per share for the
six months ended October 31, 1998 compared to net income applicable to common
shareholders of $.05 per share for the same period last year. Net sales were
$98.9 million for the six months compared to $136.3 million in the prior year,
down 27 percent.
The second fiscal quarter started off profitably, but lumber prices
slid as the quarter progressed. During the quarter some product prices fell as
much as 30%, and compared to last year, product prices overall were off
significantly. Despite the low lumber prices, the Company's operating results
were slightly better than the same quarter last year.
In spite of strong domestic demand, weak export markets resulted in
too much of the industry's output to be directed to the US market. The chip
market is also weak because of the negative impact of the Asian flu on pulp and
paper producers. Although the lumber and chip market softness has caused a
decline in log costs, the reductions at this point have not been enough to allow
consistently profitable operations.
Short term, we are running our most efficient facilities and
concentrating on improving our lumber business by more tightly integrating log
acquisition, mill operations, and sales activities with rigorous financial and
operational analyses to maximize results. We also intend to sell certain
non-strategic assets.
The delisting proceedings with Nasdaq are still pending and a decision
is expected this month.
During our Annual Meeting of Shareholders held on October 26, 1998,
Directors Richard W. Detweiler and William H. Wright were re-elected to three
year terms and Moss Adams LLP was re-appointed as the Company's auditors. Also
during the meeting, proposals to change the Company name to TreeSource(R)
Industries, Inc. and to amend the Company's Stock Option Plan were approved.
Jess R. Drake
President
55
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<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM REGISTRANT'S
REPORT ON FORM 10-Q FOR THE PERIOD ENDED OCTOBER 31, 1998 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<PERIOD-END> OCT-31-1998
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<PP&E> 76,625
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21,021
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<INTEREST-EXPENSE> 2,318
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