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 January 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
WTD Industries, Inc.
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Oregon 93-0832150
- -------------------------------------- --------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10260 S.W. Greenburg Road, Suite 900, Portland, Oregon 97223
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (503) 246-3440
----------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
The number of shares outstanding of Registrant's Common Stock, no par
value, at February 28, 1998 was 11,154,374.
<PAGE>
WTD INDUSTRIES, INC.
INDEX
Page
Number
------
PART I. Financial Information (Unaudited)
Item 1. Financial Statements
Consolidated Statements of Operations -
Three Months and Nine Months Ended January 31, 1998 and 1997 3
Consolidated Balance Sheets -
January 31, 1998 and April 30, 1997 4
Consolidated Statements of Cash Flows -
Nine Months Ended January 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 6. Exhibits and Reports on Form 8-K 15
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
WTD INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per-Share Amounts)
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
JANUARY 31, JANUARY 31,
------------------------ ------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
NET SALES $ 55,951 $ 64,469 $ 192,219 $ 210,648
COST OF SALES 56,958 59,982 182,653 189,045
---------- ---------- ---------- ----------
GROSS PROFIT (LOSS) (1,007) 4,487 9,566 21,603
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 2,588 2,767 8,721 9,254
---------- ---------- ---------- ----------
OPERATING INCOME (LOSS) (3,595) 1,720 845 12,349
OTHER INCOME (EXPENSE)
Interest Expense (1,165) (1,250) (3,558) (3,828)
Miscellaneous (486) 248 (350) 415
---------- ---------- ---------- ----------
(1,651) (1,002) (3,908) (3,413)
---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES (5,246) 718 (3,063) 8,936
PROVISION FOR INCOME TAXES (BENEFIT) (1,601) 269 (1,164) 3,392
---------- ---------- ---------- ----------
NET INCOME (LOSS) (3,645) 449 (1,899) 5,544
PREFERRED DIVIDENDS 574 557 1,716 1,671
---------- ---------- ---------- ----------
NET INCOME (LOSS) APPLICABLE
TO COMMON STOCKHOLDERS $ (4,219) $ (108) $ (3,615) $ 3,873
========== ========== ========== ==========
NET INCOME (LOSS) PER COMMON SHARE
BASIC ($0.38) ($0.01) ($0.33) $0.35
======= ====== ======= =====
DILUTED ($0.38) ($0.01) ($0.33) $0.34
======= ====== ======= =====
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
WTD INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
(In Thousands)
JANUARY 31, APRIL 30,
1998 1997
-------------- --------------
<S> <C> <C>
CURRENT ASSETS (Unaudited)
Cash and cash equivalents $ 2,923 $ 8,209
Accounts receivable, net 8,778 16,830
Inventories 17,396 17,760
Prepaid expenses 1,430 1,817
Income tax refund receivable 1,145 1,145
Deferred tax asset 3,098 1,383
Assets held for sale 188 361
Timber, timberlands and timber-related assets 4,002 3,936
-------------- --------------
Total current assets 38,960 51,441
NOTES AND ACCOUNTS RECEIVABLE 107 124
TIMBER AND TIMBERLANDS 556 629
PROPERTY, PLANT AND EQUIPMENT, at cost
Land 3,343 3,343
Buildings and improvements 13,557 11,194
Machinery and equipment 78,887 70,391
-------------- --------------
95,787 84,928
Less accumulated depreciation 60,577 56,557
-------------- --------------
35,210 28,371
Construction in progress 771 4,365
-------------- --------------
35,981 32,736
DEFERRED TAX ASSET -- 280
OTHER ASSETS 1,261 1,276
-------------- --------------
$ 76,865 $ 86,486
============== ==============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
WTD INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
(In Thousands, Except Share Information)
JANUARY 31, APRIL 30,
1998 1997
-------------- --------------
<S> <C> <C>
CURRENT LIABILITIES (Unaudited)
Accounts payable $ 8,597 $ 9,709
Accrued expenses 6,988 9,644
Timber contracts payable 634 246
Current maturities of long-term debt 1,860 2,367
-------------- --------------
Total current liabilities 18,079 21,966
LONG-TERM DEBT, less current maturities 43,868 46,086
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, 10,000,000 shares authorized
Series A, 270,079 shares outstanding 20,688 20,688
Series B, 6,111 shares outstanding 333 333
Common stock, no par value, 40,000,000 shares
authorized, 11,154,374 issued and outstanding
(11,083,474 at April 30, 1997) 28,752 28,647
Additional paid-in capital 15 15
Retained deficit (34,870) (31,249)
-------------- --------------
14,918 18,434
-------------- --------------
$ 76,865 $ 86,486
============== =============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
WTD INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
NINE MONTHS ENDED JANUARY 31,
----------------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES:
Net income (loss) $ (1,899) $ 5,544
Adjustments to reconcile net income (loss) to
cash provided by operating activities:
Depreciation, depletion and amortization 4,426 4,896
Deferred income tax (1,435) 3,149
Accounts receivable 8,052 (2,681)
Inventories 364 (5,586)
Prepaid expenses 387 54
Timber, timberlands and timber-related assets - current (138) 1,912
Payables and accruals (3,322) 2,926
Income taxes -- 990
-------------- --------------
Cash provided by operating activities 6,435 11,204
-------------- --------------
CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES:
Net reductions of timber and timberlands 73 50
Acquisition of property, plant and equipment (7,557) (2,282)
Other investing activities 231 126
-------------- --------------
Cash used for investing activities (7,253) (2,106)
-------------- --------------
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES:
Principal payments on long-term debt (2,783) (2,721)
Other assets (68) (52)
Dividends paid on preferred stock (1,722) (1,671)
Issuance of common stock 105 --
-------------- --------------
Cash used for financing activities (4,468) (4,444)
-------------- --------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (5,286) 4,654
CASH BALANCE AT BEGINNING OF PERIOD 8,209 4,576
-------------- --------------
CASH BALANCE AT END OF PERIOD $ 2,923 $ 9,230
============== ==============
CASH PAID (REFUNDED) DURING THE PERIOD FOR:
Interest $3,151 $3,781
Income taxes $270 ($751)
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
6
<PAGE>
WTD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - SUMMARY OF FINANCIAL STATEMENT PRESENTATION
In the opinion of management, the consolidated financial statements of WTD
Industries, Inc. and subsidiaries ("WTD" or "the Company") presented herein
include all adjustments, which are solely of a normal recurring nature,
necessary for a fair presentation of the financial position, results of
operations and cash flows for the interim periods presented. Certain
reclassifications may have been made to the prior period results and balances to
conform to the current period classifications. The financial statements should
be read with reference to "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contained in this report, and the "Notes to
Consolidated Financial Statements" set forth in the Company's Annual Report on
Form 10-K for the year ended April 30, 1997, filed with the Securities and
Exchange Commission. The results of operations for the current interim periods
are not necessarily indicative of the results to be expected for the current
year.
NOTE 2 - INVENTORIES
Inventories are valued at the lower of cost or market. The amounts included
in inventories at January 31, 1998 and April 30, 1997 are as follows (in
thousands):
January 31, April 30,
1998 1997
----------- -----------
Logs $ 8,020 $ 9,054
Lumber 7,696 7,379
Supplies and other 1,680 1,327
----------- -----------
$ 17,396 $ 17,760
=========== ===========
NOTE 3 - LONG-TERM DEBT
The Company's primary debt agreement includes certain covenants, including
the maintenance of specified levels of adjusted cumulative operating income (as
defined), tangible net worth, working capital, collateral coverage (as defined)
and total liabilities ratio (as defined). This agreement also imposes certain
restrictions and limitations on capital expenditures, investments, dividend
payments, new indebtedness, and transactions with officers, directors,
shareholders and affiliates. This debt agreement was most recently amended as of
January 1, 1998. Such amendments include modifications with respect to the
minimum working capital required to be maintained, the collateral coverage ratio
required to be maintained and the required level of adjusted cumulative
operating income.
7
<PAGE>
NOTE 3 - LONG-TERM DEBT (Continued)
At January 31, 1998 the Company's tangible net worth was $14.7 million,
compared to $10 million required by the corresponding covenant. At that same
date, the Company's working capital was $20.9 million, compared to $17.5 million
required by the covenant. Also, at January 31, 1998, the Company's adjusted
cumulative operating income was $34.7 million, compared to $27.5 million
required. The collateral coverage ratio at January 31, 1998 was 64.1%, compared
to a 57% minimum required level. The total liabilities ratio was 80.6% at
January 31, 1998, compared to a maximum allowed of 87%. The required level of
tangible net worth increases to $12 million at May 1, 1998 and $14.5 million at
May 1, 1999. The required level of working capital increases to $20 million on
November 1, 1998. The required level of adjusted cumulative operating income
increases to $32.5 million at August 1, 1998, $40 million at November 1, 1998,
$52.5 million at May 1, 1999 and $67.5 million at May 1, 2000. The minimum
required collateral coverage ratio increases to 60% at August 1, 1998 and 65% at
February 1, 1999. The maximum allowed total liabilities ratio drops to 85% at
May 1, 1998. During the quarter ended January 31, 1998, the Company's adjusted
cumulative operating income decreased by $3.3 million while showing a loss
before taxes of $5.25 million. The Company continues to be in compliance with
all covenants contained in this agreement.
In addition, this debt agreement requires prepayments if the Company's
cumulative operating income exceeds certain specified amounts. No such
prepayment was required for the year ended April 30, 1997. In connection with
the May 1, 1996 amendment, the Company agreed to an additional prepayment
computed at 30% of quarterly net income. No such prepayment is required for the
quarter ended January 31, 1998.
NOTE 4 - STOCKHOLDERS' EQUITY AND COMMON SHARES OUTSTANDING
Stockholder's equity at January 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 at original issue price plus accrued dividends at the option
of the Board of Directors after all Series A preferred stock has been
redeemed.
8
<PAGE>
NOTE 4 - STOCKHOLDERS' EQUITY AND COMMON SHARES OUTSTANDING
(Continued)
Common stock, no par value; 40,000,000 shares authorized; 11,154,374
shares issued and outstanding. Before giving effect to any shares that
might be issued pursuant to the exercise of any stock options or
conversion of any Series A preferred stock, the total number of common
shares would increase to 11,367,067 shares if remaining Series B
preferred stock outstanding at January 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
nine-month periods ended January 31, 1998 and 1997 are summarized below (in
thousands, except per-share data):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
January 31, January 31,
------------------------ ------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
NET INCOME (LOSS) APPLICABLE TO
COMMON SHAREHOLDERS $ (4,219) $ (108) $ (3,615) $ 3,873
========== ========== ========== ==========
WEIGHTED AVERAGE SHARES OUTSTANDING
- BASIC 11,154 11,077 11,122 11,077
ADDITIONAL SHARES ASSUMED FROM:
Conversion of Series B preferred stock -- -- -- 213
Exercise of stock options -- -- -- 72
---------- ---------- ---------- ----------
AVERAGE NUMBER OF SHARES AND
EQUIVALENTS OUTSTANDING
- DILUTED 11,154 11,077 11,122 11,362
========== ========== ========== ==========
NET INCOME (LOSS) PER COMMON SHARE
- BASIC ($0.38) ($0.01) ($0.33) $0.35
======= ======= ======= =======
- DILUTED ($0.38) ($0.01) ($0.33) $0.34
======= ======= ======= =======
</TABLE>
Earnings (loss) per share have been recomputed and restated for the effects
of implementing SFAS 128 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 consists of the following (in
thousands):
<TABLE>
<CAPTION>
Three months ended Nine months ended
January 31, January 31,
------------------- -------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Income (loss) before income taxes $(5,246) $ 718 $(3,063) $ 8,936
======== ======== ======== ========
Income tax provision (benefit):
Federal $(1,391) $ 244 $(1,041) $ 3,038
State (210) 25 (123) 354
-------- -------- -------- --------
$(1,601) $ 269 $(1,164) $ 3,392
======== ======== ======== ========
Current $ 26 $ 9 $ 271 $ 243
Deferred (1,627) 260 (1,435) 3,149
-------- -------- -------- --------
$(1,601) $ 269 $(1,164) $ 3,392
======== ======== ======== ========
</TABLE>
Deferred tax assets increased during the quarter ended January 31, 1998,
principally the result of additional net operating loss carryforwards stemming
from pretax losses.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
The Company is involved in various litigation primarily arising in the
normal course of its business. In the opinion of management, the Company's
liability, if any, under such pending litigation would not have a material
adverse impact upon the Company's consolidated financial condition or results of
operations.
The Company is subject to various federal, state and local regulations
regarding waste disposal and pollution control. Various governmental agencies
have enacted, or are considering, regulations regarding log yard management and
disposal of log yard waste that may require material expenditures in the future.
Management believes that the Company will be able to comply with any final
regulations in this area without a material adverse impact on its consolidated
financial condition or results of operations.
10
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
- ---------------------
On a quarter-to-quarter basis, the Company's financial results have varied
widely, and will continue to vary, due to seasonal fluctuations and market
factors affecting the demand for logs, lumber and other wood products. The
industry is subject to fluctuations in sales and earnings due to such factors as
industry production in relation to product demand and variations in interest
rates and housing starts. Currency fluctuations affect the industry when
exchange rates spur log exports and drive up domestic log prices, and when a
relatively strong U.S. dollar encourages lumber imports from competing
countries. Trade policies and agreements between the United States and other
countries, such as Canada, can also significantly affect log and lumber prices
in the Company's markets.
The industry is also affected by weather conditions and changing timber
management policies. Fire danger and excessively dry or wet conditions
temporarily reduce logging activity and may increase open market log prices.
Timber management policies of governmental agencies change from time to time,
causing actual or feared shortages in some areas periodically. These policies
change because of environmental concerns, public agency budget issues, and a
variety of other reasons. Therefore, past results for any given year or quarter
are not necessarily indicative of future results.
It is generally the Company's practice to curtail production at facilities
from time to time due to conditions which temporarily impair log flow, or when
imbalances between log costs and product prices cause the cost of operation to
exceed the cost of shutdown. Management believes its labor practices and
compensation systems, as well as a relatively low capital cost in relation to
production capacity, give it the flexibility to efficiently curtail operations
and resume production as conditions warrant.
Raw materials comprise the majority of the cost of products sold by the
Company. The Company depends principally on open market log purchases for its
raw materials needs. WTD's log inventory policy is to maintain, where possible,
a supply equal to three to four weeks of production.
Lumber prices were substantially weaker during the quarter ended January
31, 1998, compared to the prior six quarters. The Company has responded to
certain lumber price adjustments by altering product mix and reducing log costs
where possible. There is currently an oversupply of lumber in the U.S. market,
caused in part by weakness in the export lumber market, particularly exports to
Japan, and some traditional export producers manufacturing for the U.S. lumber
market, adding to the oversupply. Additionally, demand from California, a major
segment of our market, has been lower than usual due to the extraordinarily wet
weather which has delayed construction projects. Chip prices are up
substantially compared to a year ago. Log costs were relatively stable
throughout the nine month period.
Quarterly results were negatively impacted by the inability of the Union
Pacific Railroad to provide adequate service to the Company and its other
customers. Although during the third quarter there was a gradual improvement in
the shortage of rail cars, the transportation of lumber remains a problem due to
a recent worsening of the Union Pacific's rail traffic congestion. The Company
has
11
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
been able to make alternative shipping arrangements in many instances, but there
have not been enough railcars to satisfy demand.
There can be no assurance that the margins recently experienced by the
Company will continue or improve.
The strike which existed during the third quarter at the Company's hardwood
mill in Raymond and South Bend, Washington was abandoned on January 26, 1998,
after the Union learned of preliminary findings by the regional office of the
National Labor Relations Board that the Union's claim of improper
decertification by the Company was not supported by the evidence. The Union has
stated its intention to continue to seek representation of the employees at the
hardwood facility. This union currently does not represent any WTD employees.
During the strike the Company operated the facility at a lower rate of
production and incurred additional security costs which negatively impacted
third quarter results.
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 Nine Months
Three Months Ended Nine Months Ended Ended Ended
January 31, January 31, 1/31/98 1/31/98
------------------ ------------------ to to
1998 1997 1998 1997 1/31/97 1/31/97
------- ------- ------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0% (13.2)% (8.7)%
Cost of sales 101.8 93.0 95.0 89.7 (5.0) (3.4)
------- ------- ------- -------
Gross profit (loss) (1.8) 7.0 5.0 10.3 NM (55.7)
Selling, general and
administrative expense 4.6 4.3 4.5 4.4 (6.5) (5.8)
------- ------- ------- -------
Operating income (loss) (6.4) 2.7 0.4 5.9 NM (93.2)
Interest expense (2.1) (1.9) (1.9) (1.8) (6.8) (7.1)
Miscellaneous (0.9) 0.4 (0.2) 0.2 NM NM
------- ------- ------- -------
Income (loss) before income taxes (9.4) 1.1 (1.6) 4.2 NM NM
Provision for income taxes (benefit) (2.9) 0.4 (0.6) 1.6 NM NM
------- ------- ------- -------
Net income (loss) (6.5)% 0.7% (1.0)% 2.6% NM NM
======= ======= ======= =======
</TABLE>
Note: Percentages may not add precisely due to rounding.
NM: Not Meaningful
Comparison of Three Months Ended January 31, 1998 and 1997
- ----------------------------------------------------------
Net sales for the three months ended January 31, 1998 decreased $8.5
million (13.2%) from the three months ended January 31, 1997. This was
principally caused by a 5% decrease in lumber shipments, a 17% decrease in chip
deliveries, an 11% decrease in lumber prices, and a 66% decrease in other
by-product revenue, partially offset by an 8% increase in chip prices. The
reduced lumber
12
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
shipments reflect reduced production resulting from a weak market in the current
quarter compared to a strong market in the third quarter of fiscal 1997. The
reduced lumber shipments also reflect an inadequate supply of railcars to ship
lumber. The reduced chip deliveries reflect not only reduced lumber production
but also improved lumber recovery resulting in fewer chips per thousand board
feet (mbf) and some trim ends now sold to the fingerjoint plant instead of being
chipped.
Gross loss for the quarter ended January 31, 1998 was 1.8% of net sales,
compared to gross profit of 7.0% of net sales for the quarter ended January 31,
1997. Lumber prices declined by 11% from the third quarter of fiscal 1997, while
the Company's log costs declined by only 5%. Lumber production and shipments
decreased compared to levels in the prior year, when production levels reflected
the favorable market, and some production curtailment occurred in the present
year in response to poor lumber prices and inadequate rail service. Unit
manufacturing costs remained relatively constant.
Selling, general and administrative expenses in the three months ended
January 31, 1998 decreased by $0.2 million (6.5%) from the three months ended
January 31, 1997. This decrease reflects reduced profit-sharing bonus payments
stemming from lower pretax profits, partially offset by expenses associated
with the start-up of two WTD subsidiaries in the first quarter of fiscal 1998.
In the quarter ended January 31, 1998, the Company recorded a tax benefit
equal to 30.5% of its pretax loss. In the quarter ended January 31, 1997, the
Company recorded a tax provision equal to 37.5% of its pretax profit. See Note 6
to Consolidated Financial Statements.
Comparison of Nine Months Ended January 31, 1998 and 1997
- ---------------------------------------------------------
Net sales for the nine months ended January 31, 1998 decreased $18.4
million (8.7%) from the nine months ended January 31, 1997. This was principally
caused by a 5% decrease in lumber shipments, a 13% decrease in chip deliveries,
a 5% decrease in lumber prices, a 5% decrease in chip prices, and a 36% decrease
in other by-product prices. The reduced lumber shipments reflect reduced
production resulting from a weak market in the second and third quarters of
fiscal 1998 compared to a strong market in the first three quarters of fiscal
1997. The reduced lumber shipments also reflect an inadequate supply of railcars
to ship lumber in the second and third quarters of fiscal 1998. The reduced chip
deliveries reflect not only reduced lumber production but also improved lumber
recovery resulting in fewer chips per mbf and some trim ends now sold to the
fingerjoint plant instead of being chipped.
Gross profit for the nine months ended January 31, 1998 was 5.0% of net
sales, compared to 10.3% of net sales for the nine months ended January 31,
1997. Lumber prices declined by 5% from the nine months ended January 31, 1997,
while the Company's log costs declined by only 2%. Production declined compared
to levels in the prior year, when production levels reflected the favorable
market, and some production curtailment occurred in the present year in response
to poor lumber prices and inadequate rail service in the second and third
quarters. Unit manufacturing costs increased by 4% from the nine months ended
January 31, 1997, partially due to a general wage increase in September 1996.
13
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Selling, general and administrative expenses in the nine months ended
January 31, 1998 decreased by $0.5 million (5.8%) from the nine months ended
January 31, 1997. This decrease reflects reduced profit-sharing bonus payments
stemming from lower pretax profits, partially offset by expenses associated
with the start-up of two WTD subsidiaries in the first quarter of fiscal 1998.
In the nine months ended January 31, 1998, the Company recorded a tax
benefit equal to 38% of its pretax loss. In the nine months ended January 31,
1997, the Company recorded a tax provision equal to 38% of its pretax profit.
See Note 6 to Consolidated Financial Statements.
Liquidity and Capital Resources
- -------------------------------
The Company relies on cash provided by its operations to fund its working
capital needs. There can be no assurance that such cash will be sufficient to
fund the Company's future operations. Substantially all of the Company's assets
are pledged as security for its primary debt obligation.
At January 31, 1998, the Company had net working capital of $20.9 million,
$8.6 million less than at April 30, 1997. The working capital decrease was
primarily the result of operating losses and capital spending, along with
principal payments on debt and dividends paid on the Company's Series A
preferred stock.
During the nine months ended January 31, 1998, the Company's cash and cash
equivalents decreased by $5.3 million to $2.9 million at January 31.
Approximately $6.4 million of cash was provided by operations. About $2.8
million was used to repay various debt obligations and $7.6 million for
acquisition of property, plant and equipment. The Company also paid $1.7 million
in dividends to holders of its Series A preferred stock.
Capital spending in the first nine months of fiscal 1998 was $7.6 million.
Capital spending for the balance of the fiscal year is currently forecast to be
approximately $0.3 million. The Company had no material commitments for capital
spending at January 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 January 1, 1998.
Such amendments include modifications with respect to the minimum working
capital required to be maintained, the collateral coverage ratio required to be
maintained and the required level of adjusted cumulative operating income. See
Note 3 to Consolidated Financial Statements.
Forward-Looking Information
- ---------------------------
Certain statements in this Form 10-Q contain "forward-looking" information
(as defined in Section 27A of the Securities Act of 1933, as amended) that
involve risks and uncertainties, including, but not limited to, the impact of
general economic conditions, increased interest rates, the impact of competitive
products and pricing, availability and cost of raw materials, availability of
adequate transportation to get product to market, inadequate cash reserves,
labor strikes, changes in environmental and other regulations, the ability to
get necessary approvals for marketing the GREENWELD(R) process in Canada,
changes in the Company's ability to use its net operating loss carryforward and
the risk factors listed from time to time in the Company's SEC reports,
including, but not limited to, the report on Form 10-K for the fiscal year ended
April 30, 1997 (Part II, Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations").
14
<PAGE>
WTD INDUSTRIES, INC.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The Index to Exhibits is located on page 17.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
January 31, 1998.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
WTD INDUSTRIES, INC.
-----------------------
(Registrant)
By: /s/ Bruce L. Engel
--------------------
Bruce L. Engel
President
By: /s/ K. Stanley Martin
----------------------
K. Stanley Martin
Vice President-Finance
March 13, 1998
16
<PAGE>
WTD INDUSTRIES, INC.
INDEX TO EXHIBITS
Sequential
Number
System
Page
Number
3.1 Fourth Restated Articles of Incorporation of Registrant adopted
effective November 27, 1992(1)
3.2 Second Restated Bylaws of the Registrant adopted effective
November 27, 1992(2)
4.2.8 Amendment dated as of January 1, 1998 to Credit and Security 18
Agreement dated as of November 30, 1992, between Registrant
and Principal Mutual Life Insurance Company, Aetna Life
Insurance Company, The Northwestern Mutual Life Insurance
Company, Chemical Bank, Seattle-First National Bank, and Bank
of America Oregon
19 Other reports furnished to securities holders with respect to the 21
quarter ended January 31, 1998: President's letter excerpted from
Interim Report to Shareholders for the third quarter of fiscal 1998
27 Financial Data Schedule(3)
- ----------
(1) Incorporated by reference to the exhibit of like number to the
Registrant's report on Form 8-K dated November 23, 1992, previously filed with
the Commission.
(2) Incorporated by reference to the exhibit of like number to the
Registrant's annual report on Form 10-K for the year ended April 30, 1993,
previously filed with the Commission.
(3) This schedule has been submitted in the electronic form prescribed by
EDGAR.
- ----------
All other required Exhibits are listed in the Company's Annual Report
on Form 10-K for the year ended April 30, 1997.
17
Exhibit 4.2.8
AMENDMENT
DATED AS OF JANUARY 1, 1998
TO
CREDIT AND SECURITY AGREEMENT
DATED AS OF NOVEMBER 30, 1992
Reference is hereby made to that certain Credit and Security Agreement
("Credit Agreement") dated as of November 30, 1992 among Principal Mutual Life
Insurance Company, Aetna Life Insurance Company, The Northwestern Mutual Life
Insurance Company, Chemical Bank, Seattle-First National Bank and Bank of
America Oregon, and WTD Industries, Inc. and its Affiliates and the Term Notes
issued by the Borrowers in connection with the Credit Agreement. Capitalized
terms used herein shall have the same meaning ascribed thereto in the Credit
Agreement.
The Term Notes currently are held by the following entities in the
proportions set forth herein:
Principal Mutual Life
Insurance Company 57.111632%
The Northwestern Mutual Life
Insurance Company 20.450484%
Foothill Group, Inc. 13.532675%
Oppenheimer & Co., Inc. 6.911127%
Fixed Plus Partners, beneficial owner
of Note registered in the name of
Bear Stearns Securities Corp. 1.994082%
The Credit Agreement is hereby modified as follows:
1. Credit Agreement Section 6.01.C is hereby restated to read as
follows:
C. Collateral Coverage Ratio. Maintain a ratio of Borrower's
Current Collateral to the outstanding balance of the Term Loan (the
"Collateral Ratio"), not less than the Collateral Ratio set forth
below, at all times during the periods set forth below:
Period Collateral Ratio
Effective Date through 4/30/95 0.55 (55%)
5/1/95 through 12/31/95 0.60 (60%)
1/1/96 through 2/29/96 0.54 (54%)
3/1/96 through 3/31/96 0.55 (55%)
4/1/96 through 6/30/96 0.56 (56%)
7/1/96 through 12/31/97 0.60 (60%)
1/1/98 through 7/31/98 0.57 (57%)
8/1/98 through 1/31/99 0.60 (60%)
2/1/99 and beyond 0.65 (65%)
As used herein, "Current Collateral" means for Borrowers, on a
consolidated basis, all in accordance with GAAP, (i) all Current Assets, less
(ii) the sum of (x) Borrower's current assets which are classified on Borrowers'
consolidated balance sheet as "prepaid expenses", excluding the amount of
interest prepaid on the Term Notes, and otherwise included in prepaid expenses,
(y) Borrowers' current liabilities which are classified on Borrowers'
consolidated balance sheet as "accounts payable", and (z) all of Borrowers'
current liabilities which are classified on Borrowers' consolidated balance
sheet as "timber contracts payable."
18
<PAGE>
2. Credit Agreement Section 6.01.G is hereby restated to read as follows:
G. Minimum Cumulative Adjusted EBITDA. Maintain a minimum
EBITDA (calculated from and including the first day of the first
calendar month following the Effective Date) minus (a) actual Capital
Expenditures, minus (b) Timber and Timberlands Expenditures
Non-Current, of not less than the respective amount set forth below, at
all times during the periods set forth below:
Period Millions of Dollars
Effective Date through 4/30/93 0
5/1/93 through 7/31/93 2
8/1/93 through 1/31/94 5
2/1/94 through 7/31/94 10
8/1/94 through 12/31/95 20
1/1/96 through 6/30/96 19
7/1/96 through 12/31/96 22.5
1/1/97 through 6/30/97 25
7/1/97 through 7/31/98 27.5
8/1/98 through 10/31/98 32.5
11/1/98 through 4/30/99 40
5/1/99 through 4/30/00 52.5
5/1/00 and beyond 67.5
3. Credit Agreement Section 6.01.J is hereby restated to read as
follows:
J. Minimum Working Capital. Maintain minimum working capital,
at all times during the periods set forth below, calculated as Current
Assets minus Current Liabilities; provided, for the purpose of
computing Current Assets under this Section 6.01.J, the portion of
Current Assets which consists of Timber and Timberlands Current or
contract rights relating thereto shall be included only up to an amount
equal to (x) on or before January 31, 1993, forty-five percent (45%)
and (y) thereafter, forty percent (40%), of the amount of Borrowers'
overall Current Assets determined in accordance with GAAP:
Period Millions Of Dollars
Effective Date through 12/31/95 25
1/1/96 through 6/30/96 19
7/1/96 through 6/30/97 22.5
7/1/97 through 9/30/97 25
10/1/97 through 12/31/97 21.5
1/1/98 through 10/31/98 17.5
11/1/98 and beyond 20
4. Credit Agreement Section 6.01.K is hereby restated to read as
follows:
K. Minimum Operating Income. In no fiscal quarter of
Borrowers, incur an operating loss in excess of Three Million Dollars
($3,000,000), calculated as EBIT, except that with respect to
Borrowers' fiscal quarter ending January 31, 1998, said operating loss
shall not exceed Three Million Five Hundred Thousand Dollars
($3,500,000), calculated as EBIT.
19
<PAGE>
5. Credit Agreement Section 6.02.A is hereby restated to read as
follows:
A. Capital Expenditures. Make Capital Expenditures and Timber
and Timberlands Expenditures Non-Current in an aggregate amount in
excess of Eight Million Dollars ($8,000,000) per fiscal year of
Borrowers, except that for Borrowers' fiscal year ending April 30, 1998
said expenditures shall not exceed Eight Million Five Hundred Thousand
Dollars ($8,500,000).
6. In all other respects, the Credit Agreement shall remain unchanged
and in full force and effect.
EFFECTIVE DATE: January 1, 1998
PRINCIPAL MUTUAL LIFE THE NORTHWESTERN MUTUAL LIFE
INSURANCE COMPANY INSURANCE COMPANY
By: By:
------------------------------ -------------------------------
Its: Its:
------------------------------ -------------------------------
(pro rata interest: 20.450484%)
By:
------------------------------
Its:
------------------------------ FOOTHILL GROUP, INC.
(pro rata interest: 57.111632%)
By:
-------------------------------
OPPENHEIMER & CO., INC. Its:
-------------------------------
(pro rata interest: 13.532675%)
By:
------------------------------
Its:
------------------------------ WTD INDUSTRIES, INC.
(pro rata interest: 6.911127%)
By:
-------------------------------
FIXED PLUS PARTNERS, Beneficial Its:
Owner of Note Registered in the Name -------------------------------
of Bear Stearns Securities Corp.
By:
------------------------------
Its:
------------------------------
(pro rata interest: 1.994082%)
20
Exhibit 19
Report from The President
Dear WTD Shareholders:
For our third fiscal quarter which ended January 31, 1998, WTD
Industries incurred a net loss of $3,645,000 or $.38 per share, compared to a
net income of $449,000 or a $.01 per share loss for the same period in 1997.
Third quarter net sales were $56.0 million, down 13 percent from the $64.5
million net sales in the comparable period last year.
For the nine months ended January 31, 1998, the Company reported a net
loss of $1,899,000 or $.33 per share, compared to net income of $5,544,000 or
$.34 per share (diluted) during the same period last year. Sales were $192.2
million for the nine months, compared to $210.6 million in the comparable prior
year period, a decrease of nine percent.
During the entire third quarter, we suffered from declining lumber
prices that were significantly below prices during the same period last fiscal
year.
The steep lumber market decline was fueled in part by continuing
overproduction. The export lumber market has been negatively impacted by the
Asian financial crisis and some manufacturers that had been producing for the
export market instead diverted production to the U.S. market, adding to the
available lumber supply. For example, at the end of January 1998, prices for
green Douglas fir 2 x 10 lumber was off $177 per thousand board feet or 34
percent compared to last year.
Additionally, demand from California, a major segment of our market,
has been lower than usual due to the extraordinarily wet weather which has
delayed construction projects.
Although during the third quarter we saw a gradual improvement in the
shortage of rail cars, the transportation of lumber is still a problem due to a
recent worsening of the Union Pacific's rail traffic congestion.
On the positive side, chip prices remain up substantially compared to a
year ago. We have seen, very recently, significant production curtailments,
particularly in British Columbia, Canada. Since the end of our third quarter,
some lumber prices have increased as winter weather begins to wane and
construction increases. Log supply is adequate and log prices have softened as
seasonal log flow increases occur.
The strike which existed during the third quarter at the Company's
hardwood mill in Raymond and South Bend, Washington was abandoned on January 26,
1998, after the Union learned of preliminary findings by the regional office of
the National Labor Relations Board that the Union's claim of improper
decertification by the Company was not supported by the evidence. The Union has
stated its intention to continue to seek representation of the employees at the
hardwood facility. This union currently does not represent any WTD employees.
During the strike the Company operated the facility at a lower rate of
production and incurred additional security costs which negatively impacted
third quarter results.
We hope that spring will bring stronger lumber prices and better
operating conditions.
Bruce L. Engel
President
21
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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 JANUARY 31, 1998 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<PERIOD-START> MAY-01-1997
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<CASH> 2,923
<SECURITIES> 0
<RECEIVABLES> 8,778
<ALLOWANCES> 0
<INVENTORY> 17,396
<CURRENT-ASSETS> 38,960
<PP&E> 96,558
<DEPRECIATION> 60,577
<TOTAL-ASSETS> 76,865
<CURRENT-LIABILITIES> 18,079
<BONDS> 43,868
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21,021
<COMMON> 28,752
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<TOTAL-LIABILITY-AND-EQUITY> 76,865
<SALES> 192,219
<TOTAL-REVENUES> 192,219
<CGS> 182,653
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