WTD INDUSTRIES, INC.
United States Securities and Exchange Commission, Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended Commission file number
April 30, 1998 0-16158
WTD INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Oregon 93-0832150
(State of Incorporation) (I.R.S. Employer Identification No.)
10260 S.W. Greenburg Road, Suite 900 Registrant's telephone number,
Portland, Oregon 97223 including area code: (503) 246-3440
(Address of principal executive offices)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value (Title of Class)
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
---
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 twelve 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
--- ---
State the aggregate market value of the common stock held by
non-affiliates of the registrant, as of July 2, 1998: $6,403,210.
Indicate the number of shares outstanding of each of the registrant's
classes of Common Stock, as of July 2, 1998: Common Stock, no par
value: 11,154,874.
<PAGE>
FORM 10-K TABLE OF CONTENTS
Item No. Page No.
- --------------------------------------------------------------------------------
Part I
1. Business 3
2. Properties 8
3. Legal Proceedings 8
4. Submission of Matters to a Vote of Security Holders 8
Part II
5. Market for the Registrant's Common Stock and
Related Stockholder Matters 9
6. Selected Financial Data 10
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
8. Financial Statements and Supplementary Data 17
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 17
Part III
10. Directors and Executive Officers of the Registrant 18
11. Executive Compensation 21
12. Security Ownership of Certain Beneficial Owners
and Management 28
13. Certain Relationships and Related Transactions 29
Part IV
14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K
(a)(1)Financial Statements 30
(a)(2)Financial Statement Schedules 30
(a)(3)Exhibit Index 30
(b)Reports on Form 8-K 35
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<PAGE>
PART I
Item 1. BUSINESS
WTD Industries, Inc. is a forest products company organized in Oregon
in 1983, which, through its subsidiaries, manufactures softwood and hardwood
lumber and by-products. WTD Industries, Inc. and its subsidiaries are
hereinafter referred to as "WTD" or the "Company." The Company markets its
products primarily in the United States and Canada through its subsidiary,
TreeSource, Inc.
Products and Markets
- --------------------
Softwood Lumber
---------------
The Company manufactures a wide variety of softwood lumber products,
predominantly from Douglas fir, hemlock, and white fir. The Company produces
softwood studs in several species, generally as 2x4 or 2x6 lumber in lengths of
8 to 10 feet. The Company also makes dimension softwood lumber in a wide range
of widths and thicknesses in lengths from 6 to 26 feet. Softwood lumber
accounted for 89% of net sales in fiscal 1998, 89% in fiscal 1997, and 79% in
fiscal 1996.
The Company sells softwood lumber to a large number of customers,
primarily distribution centers, wholesalers and directly to large retailers.
Softwood lumber is used in a variety of applications, including residential and
commercial construction, packaging, and industrial uses.
Other Products
--------------
The Company produces a small quantity of hardwood lumber in sizes
targeted principally for the furniture and cabinet industries. Wood chips, a
by-product of the manufacturing process, are sold principally to pulp and paper
manufacturers. Wood chips and other by-products accounted for 7% of net sales in
fiscal 1998, 6% in fiscal 1997, and 14% in fiscal 1996.
During fiscal 1998, the Company completed construction and commenced
operation of its fingerjointing plant. Fingerjointing is the process of joining,
by applying adhesive to interlocking fingerjoints, shorter segments of wood to
make a longer piece of lumber suitable for use in construction. Fingerjointed
products accounted for less than 1% of net sales in fiscal 1998.
During fiscal 1998, the Company obtained the rights to use and to grant
licenses for others to use, in North America and Mexico, a patented technology
called GREENWELD(R) that enables the gluing of green or unseasoned lumber. The
Company used the GREENWELD(R) process in its fingerjointing operation during
fiscal 1998 and may use it in
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<PAGE>
future fingerjointing operations. Also during fiscal 1998, the Company granted
GREENWELD(R) licenses to third parties but did not generate royalty income.
Distribution and Marketing
- --------------------------
The Company markets, distributes, and arranges transportation for its
lumber products through its wholly owned subsidiary and sales agent, TreeSource,
Inc. Through TreeSource, the production capabilities of individual mills are
coordinated to meet a broad range of customer needs. TreeSource sells primarily
through telephone contacts from its office in Portland, Oregon.
Shipments of wood products are generally made by rail or truck directly
from the mill. Exports do not represent a material portion of the Company's net
sales.
The Company does not attempt to accumulate a large backlog of orders.
WTD's general practice is to maintain an order file representing about two to
four weeks' production. The filling of orders for certain items, however, may
require a substantially longer period of time. The dollar value of the Company's
backlog of orders at April 30, 1998 was $8 million compared to $10 million at
April 30, 1997. Backlog on any particular date may not be indicative of the
Company's average backlog, or net sales or the backlog for any succeeding
period.
No single customer accounted for as much as 10% of the Company's net
sales during fiscal 1998. The loss of any one customer would not, in
management's opinion, have a material adverse impact on the Company and its
subsidiaries taken as a whole.
Timber Supply
- -------------
The Company generally purchases timber and logs in sufficient
quantities to match the current operating requirements of its mills. Management
attempts to maintain log inventories equal to an average of three to four weeks'
operating requirements, except where seasonal or weather factors necessitate
larger volumes. The goals of the Company's procurement strategy are to limit the
speculative aspects of timber purchasing and to maintain the Company's
adaptability to changing lumber market conditions.
Timber and logs comprise the majority of the cost of products sold by
the Company. The Company relies mainly on open market log purchases to supply
its raw materials needs. It also purchases timber-cutting contracts ("timber
contracts"), primarily at public timber sales, and has historically obtained
logs to a minor extent from its own fee timberlands. At April 30, 1998, the
Company owned a small amount of fee timberlands in the vicinity of various
mills. The following table shows the percentages of logs supplied by open market
purchases, public timber contracts and fee timberlands, and total log footage
required:
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<PAGE>
Public
Year Ended Open Timber Fee Log
April 30, Market Contracts Timber Requirements
- ---------- ------ --------- ------ ------------
1994 94% 5% 1% 305,100 MBF
1995 95% 5% -- 317,100 MBF
1996 94% 5% 1% 228,162 MBF
1997 94% 5% 1% 320,507 MBF
1998 94% 6% -- 284,300 MBF
MBF - Thousand Board Feet
During fiscal years 1994 through 1998, the Company operated most of its
mills on a one-shift basis, typically using logs purchased on the open market
from industrial and non-industrial private land owners. The ability to maintain
the present level of operations at the Company's mills depends on a continuing
supply of logs from these private sources.
The availability and cost of timber and logs have been, and should
continue to be, influenced by a variety of factors, including demand by
competitors and exporters, the environmental and harvest policies of federal and
state agencies, and, in the long term, the level of reforestation. For further
discussion of current industry conditions relating to timber supply, see the
section entitled "Factors Affecting Forward-Looking Statements--Availability of
Logs."
Employees
- ---------
The Company and its subsidiaries had approximately 1,100 employees at
July 2, 1998. During fiscal 1998, the Company lawfully withdrew recognition of
the local woodworkers union which had represented workers at the Company's South
Bend facility. The union, in response, conducted a three month strike which was
abandoned on January 29, 1998. The union has filed for a new election but no
date for the election has been scheduled. None of the Company's other employees
are represented by this union. See "Factors Affecting Forward-Looking
Statements--Manufacturing Risks." The Company uses bonus programs to motivate
its workers. See Note 9 to Consolidated Financial Statements.
Environmental Regulation
- ------------------------
The Company is subject to federal, state and local pollution control
regulations, including air, water and noise pollution, which have required, and
are expected to continue to require, additional operating and capital
expenditures. During fiscal 1998, the Company incurred expenditures of
approximately $150,000 for environmental protection. Such expenditures would
have been greater, but certain capital projects were delayed. Expenditures are
projected to be approximately $775,000 for each of fiscal years 1999 and 2000,
including costs to remediate the site at Sedro-Woolley, Washington, in
preparation for sale. Various regulations regarding air and water emissions and
disposal or landfill of log yard debris may require material expenditures in the
future. See "Factors Affecting Forward-Looking Statements--Federal and State
Regulations."
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<PAGE>
Industry Conditions
- -------------------
The United States lumber industry is highly sensitive to the conditions
of the nation's economy and tends to experience poor financial results during
general economic downturns. Although sales traditionally increase in the spring
and summer months and decline during the fall and winter months in response to
seasonal building construction cycles, such seasonal patterns are sometimes
absent. During fiscal 1997, lumber prices were generally strong. During fiscal
1998, the advent of the Asian financial crisis negatively impacted the industry
and the Company. Demand for lumber exports to Asia was down significantly.
Manufacturers in North America that had been producing for the export lumber
market converted production to supply the U.S. market, which caused an
oversupply of lumber and put strong downward pressure on lumber prices for most
of the fiscal year, despite reasonable interest rates and strong construction
activity in the United States.
Due to particular weakness in the wide dimension product prices caused
by industry oversupply, the Company has converted its Sedro-Woolley mill in
Washington from temporary curtailment to long-term shutdown and has designated
that facility for sale. Additionally, the Company is in preliminary discussions
with parties that have expressed interest in purchasing its Trask River Lumber
facility in Tillamook, Oregon. During the fourth quarter, the Company took an
impairment charge in the amount of $4,168,000 to reflect the Company's estimate
of fair value of these facilities. Given the volatility of the lumber market
during fiscal 1998, the Company will continue to review each operation's ability
to contribute to earnings or otherwise fit the Company's longer-term strategies.
See Note 2 to Consolidated Financial Statements.
Wood chip demand and prices are determined by conditions in the pulp
and paper industry and generally are not affected by seasonal business cycles.
During fiscal 1997, reduced demand for pulp and paper products caused pulp and
paper production curtailments and kept chip prices low. Weakness in wood chip
prices continued into fiscal 1998, with higher prices occurring in the last half
of the fiscal year. See "Factors Affecting Forward-Looking Statements" for
further discussion.
Competition
- -----------
The wood products industry is highly competitive and includes a large
number of companies manufacturing relatively standardized products. The
principal means of competition in the lumber industry are log costs, unit
production costs, pricing, product quality, and the ability to satisfy customer
needs promptly. The Company feels it competes effectively based on the foregoing
factors. Some of WTD's competitors are large, integrated companies which have
significantly greater financial, production and marketing resources than the
Company. Some of these competitors have a significant base of low-cost fee
timberlands and timber contracts which protects them from fluctuations in log
prices and may, under certain operating conditions, give them an advantage over
the Company, which relies on the open log market to supply the bulk of its raw
materials requirements.
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<PAGE>
The competition includes lumber manufacturers located in Canada who
benefit from advantageous exchange rates when exporting lumber into the United
States. As a result of U.S. government-initiated trade talks, Canada has agreed
that as of April 1, 1996, for a period of five years, and subject to specific
exceptions, lumber producers in certain provinces will pay export taxes if
pre-established levels of exports to the U.S. are exceeded. The goal of the
trade agreement is to reduce the volume of lumber exported to the U.S. by
Canadian producers. This trade agreement has not had the desired effect.
However, to date, Canadian lumber producers have paid significant export taxes
for exceeding the pre-established levels of exports.
See the sections entitled "Timber Supply", "Management's Discussion and
Analysis of Financial Condition and Results of Operations", and "Factors
Affecting Forward-Looking Statements."
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<PAGE>
Item 2. PROPERTIES
<TABLE>
<CAPTION>
MANUFACTURING FACILITIES(1) Thousand Board Feet
-----------------------------
Fiscal Est. Annual
1998 Production
Softwood Lumber Production Capacity(2)
----------------- ---------- -----------
<S> <C> <C>
Burke Lumber Co., West Burke, Vermont 38,700 50,000
Central Point Lumber Co., Central Point, Oregon 45,600 110,000
Glide Lumber Products Co., Glide, Oregon 93,100 125,000
Morton Forest Products Co., Morton, Washington 52,500 100,000
North Powder Lumber Co., North Powder, Oregon 50,600 90,000
Pacific Softwoods Co., Philomath, Oregon 62,300 80,000
Philomath Forest Products Co., Philomath, Oregon 82,000 245,000
Sedro-Woolley Lumber Co., Sedro-Woolley, Washington(3)(4) 31,200 ---
Spanaway Lumber Co., Spanaway, Washington(5) 57,300 85,000
Trask River Lumber Co., Tillamook, Oregon(5)(6) 46,300 120,000
Tumwater Lumber Co., Tumwater, Washington(5) 60,400 70,000
Hardwood Lumber
---------------
Pacific Hardwoods-South Bend Co., South Bend, Washington(5) ` 17,600 24,000
Fingerjointed Lumber
--------------------
Midway Engineered Wood Products, Inc., Corvallis, Oregon (4)(5) 3,900 13,000
(1) The machinery and equipment of all facilities are subject to the security
interests of certain lenders.
(2) Capacity is generally computed using a two shift-per-day, five day-per-week
operating schedule.
(3) This facility is not operating and is for sale.
(4) These subsidiaries lease a substantial portion of their equipment pursuant
to operating leases.
(5) These subsidiaries lease the real property on which the mill is located
pursuant to ground leases.
(6) This facility is currently operating, but may be sold during fiscal 1999.
</TABLE>
Item 3. LEGAL PROCEEDINGS
On or about January 30, 1991, WTD Industries, Inc. and each of its
subsidiaries filed a voluntary petition for reorganization under Chapter 11 of
the Federal Bankruptcy Code. The proceeding was filed in the United States
Bankruptcy Court for the Western District of Washington in Seattle (the
"Bankruptcy Court"). The jointly administered proceeding is entitled: "In re
Sedro-Woolley Lumber Co., WTD Industries, Inc., TreeSource, Inc., et al.", Case
Numbers 91-00707 through 91-00721, 91-00736 through 91-00741, 91-00752 through
91-00756, 91-00773 through 91-00778, and 91-01140 through 91-01149. The
Company's Second Amended Joint Plan of Reorganization was confirmed by the
Bankruptcy Court on November 23, 1992, effective November 30, 1992. During 1996
and 1997, orders were entered in the Bankruptcy Court closing the Chapter 11
cases of WTD Industries, Inc. and all its subsidiaries.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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<PAGE>
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
Principal Market
- ----------------
Registrant's Common Stock is traded on the Nasdaq Stock Market under
the symbol WTDI in the Nasdaq National Market. The number of holders of record
of WTD Industries, Inc. Common Stock at July 2, 1998 was 602. The Company
estimates that the total number of its direct and beneficial shareholders is
approximately 4,100.
Stock Price and Dividend Information
- ------------------------------------
The following tables show the stock price range for the two years ended
April 30, 1998:
Stock Price Range
Fiscal Year Ended -----------------------
April 30, 1998 Low High
----------------- -------- --------
First Quarter $1-7/8 $4-3/16
Second Quarter $2-1/8 $4-1/8
Third Quarter $1-17/32 $2-3/4
Fourth Quarter $1-3/8 $2
Stock Price Range
Fiscal Year Ended -----------------------
April 30, 1997 Low High
----------------- -------- --------
First Quarter $ 5/8 $1-9/16
Second Quarter $1-5/16 $2-1/16
Third Quarter $1-11/16 $2-3/4
Fourth Quarter $1-3/8 $2-1/4
The share prices shown are those published by Nasdaq and represent
prices between dealers. They do not include retail markups, markdowns, or
commissions. Prior to the Company's October 1986 public stock offering, there
was no public trading market for its Common Stock.
WTD does not pay any cash dividends on its Common Stock. The Company's
various debt instruments restrict the payment of dividends. See Notes 5 and 7 to
Consolidated Financial Statements.
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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
WTD INDUSTRIES, INC. AND SUBSIDIARIES
FIVE-YEAR SELECTED FINANCIAL DATA
(In Thousands, Except Per-Share Amounts and Ratios)
YEAR ENDED APRIL 30,
------------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
NET SALES $242,051 $284,086 $191,964 $274,966 $278,115
COST OF SALES 231,303 255,068 186,514 262,334 253,732
---------- ---------- ---------- ---------- ----------
GROSS PROFIT 10,748 29,018 5,450 12,632 24,383
GENERAL, SELLING AND
ADMINISTRATIVE EXPENSES 11,290 12,529 9,685 10,366 12,423
IMPAIRMENT CHARGES 4,168 -- -- -- --
REORGANIZATION CREDITS -- -- (409) (532) (2,487)
---------- ---------- ---------- ---------- ----------
OPERATING INCOME (LOSS) (4,710) 16,489 (3,826) 2,798 14,447
INTEREST EXPENSE (4,682) (5,029) (5,318) (5,972) (6,541)
OTHER INCOME (EXPENSE) (394) 630 646 1,228 418
---------- ---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES (9,786) 12,090 (8,498) (1,946) 8,324
PROVISION FOR INCOME TAXES (BENEFIT) 2,364 3,120 (2,454) (5,646) 2,024
---------- ---------- ---------- ---------- ----------
NET INCOME (LOSS) (12,150) 8,970 (6,044) 3,700 6,300
PREFERRED DIVIDENDS 2,290 2,228 2,364 2,126 1,616
---------- ---------- ---------- ---------- ----------
NET INCOME (LOSS) APPLICABLE TO
COMMON SHAREHOLDERS ($14,440) $6,742 ($8,408) $1,574 $4,684
========== ========== ========== ========== ==========
NET INCOME (LOSS) PER COMMON SHARE, BASIC
- net income (loss) ($1.30) $0.61 ($0.76) $0.14 $0.49
Average shares outstanding 11,130 11,078 11,077 11,075 9,481
NET INCOME (LOSS) PER COMMON SHARE, DILUTED
- net income (loss) ($1.30) $0.59 ($0.76) $0.14 $0.41
Average shares outstanding 11,130 11,385 11,077 11,491 11,494
CASH DIVIDENDS PER COMMON SHARE -- -- -- -- --
PERIOD END BALANCES
Working capital $15,158 $29,475 $25,052 $33,740 $44,796
Total assets $65,311 $86,486 $77,396 $88,944 $97,100
Long-term debt, excluding current maturities $36,868 $46,086 $50,310 $51,421 $60,587
Stockholders' equity $4,093 $18,434 $11,686 $20,076 $18,512
SELECTED FINANCIAL RATIOS
Net income (loss) to average:
Total assets (16.0) % 10.9 % (7.3) % 4.0 % 6.4 %
Stockholders' equity (107.9) % 59.6 % (38.1) % 19.2 % 39.1 %
Average stockholders' equity to average
total assets 14.8 % 18.4 % 19.1 % 20.7 % 16.3 %
</TABLE>
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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Overview
- --------
On a quarter-to-quarter basis, the Company's financial results have and
will vary widely, due to seasonal fluctuations and market factors affecting the
demand for logs, lumber and other wood products. Therefore, past results for any
given year or quarter are not necessarily indicative of future results.
Lumber market conditions deteriorated during the second quarter of
fiscal year 1998 and remained weak through the fourth quarter, after
approximately 16 months of good conditions. The Company responded to certain
lumber price adjustments by altering product mix and reducing log costs when
possible. During much of the year, there was an oversupply of lumber in the U.S.
market. This was the result of traditional export producers manufacturing for
the U.S. lumber market as exports weakened. Additionally, demand from
California, a major segment of the Company's market, was lower than usual due to
the extraordinarily wet weather which delayed construction projects. Log costs
declined slightly during the year. In response to the generally weak market
conditions, the Company curtailed production at selected mills and reduced the
level of operations at various times during the year.
Yearly Comparisons
- ------------------
The following table compares certain income and expense items as a
percentage of net sales, and the period-to-period percentage change for each
item:
<TABLE>
<CAPTION>
Income and Expense Items as Percentage
Percentage of Net Sales Increase (Decrease)
--------------------------- -------------------
Year Ended April 30, 1998 1997
--------------------------- vs vs
1998 1997 1996 1997 1996
------- ------- -------
<S> <C> <C> <C> <C> <C>
Net sales 100.0 % 100.0 % 100.0 % (14.8)% 48.0 %
Cost of sales 95.6 89.8 97.2 (9.3) 36.8
------- ------- -------
Gross profit 4.4 10.2 2.8 (63.0) 432.4
Selling, general and
administrative expense 4.7 4.4 5.0 (9.9) 29.4
Impairment charges 1.7 0.0 0.0 NM NM
Reorganization credits 0.0 0.0 (0.2) NM NM
------- ------- -------
Operating income (loss) (1.9) 5.8 (2.0) NM NM
Interest expense (1.9) (1.8) (2.8) (6.9) (5.4)
Other income (expense) (0.2) 0.2 0.3 NM (2.5)
------- ------- -------
Income (loss) before Income taxes (4.0) 4.3 (4.4) NM NM
Provision for income taxes (benefit) 1.0 1.1 (1.3) (24.2) NM
------- ------- -------
Net income (loss) (5.0)% 3.2 % (3.1)% NM NM
======= ======= =======
</TABLE>
Note: Percentages may not add precisely due to rounding.
NM: Not meaningful.
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<PAGE>
Comparison of 1998 to 1997
- --------------------------
Net sales for the year ended April 30, 1998 decreased $42.0 million (15
percent) from the year ended April 30, 1997. This was principally caused by a 9
percent decrease in lumber shipments, a 17 percent decrease in chip deliveries,
an 8 percent decrease in lumber prices and a 28 percent decrease in other
by-product revenue, partially offset by a 13 percent increase in chip prices.
The reduced lumber shipments reflect reduced production resulting from a weak
market in the current year compared to a strong market in fiscal 1997. The
reduced lumber shipments also reflect an inadequate supply of rail cars to ship
lumber during much 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) and some trim ends sold to the Company's
fingerjoint plant instead of being chipped.
Gross profit for the year ended April 30, 1998 was 4.4 percent of net
sales, compared to 10.2 percent of net sales for the year ended April 30, 1997.
Lumber prices declined by 8 percent from the year ended April 30, 1997, while
the Company's log costs declined by only 4 percent. Lumber production and
shipments declined compared to levels in the prior year, when production levels
reflected the favorable market, and some production curtailment occurred in
fiscal year 1998 in response to poor lumber prices and inadequate rail service.
Unit manufacturing costs in fiscal year 1998 increased by 3 percent from costs
in fiscal year 1997, partially due to a general wage increase in September 1996
and more production curtailments in fiscal year 1998.
Selling, general and administrative expenses in the year ended April
30, 1998 decreased by $1.2 million (10 percent) from the year ended April 30,
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, Midway Engineered Wood Products, Inc. and Greenweld
North America Co., in the first quarter of fiscal 1998.
During the fourth quarter of fiscal 1998 the Company took an impairment
charge in the amount of $4,168,000 to reflect the Company's estimate of the fair
value of its two facilities for sale, Sedro-Woolley Lumber Co. and Trask River
Lumber Co. See Note 2 to Consolidated Financial Statements.
Interest expense in the year ended April 30, 1998 was $0.3 million
below that incurred in the year ended April 30, 1997. This decrease was the
result of a reduction in the amount of the Company's outstanding debt.
Expenses for the first quarter of fiscal 1999 will reflect payments
made to Bruce L. Engel in connection with his retirement during the period,
which may cause an increase in Other Expense in the first quarter of fiscal 1999
as compared to the same quarter in fiscal 1998.
In the year ended April 30, 1998, the Company recorded a tax provision
equal to 24 percent of its pretax loss, compared to a tax provision of 26
percent of the pretax income for the previous year. During fiscal 1998 the
Company sustained significant operating losses. Because of the difficult
operating environment and the likely delayed or decreased use of the Company's
deferred tax assets to shelter future income, the Company increased its
valuation reserve to approximately $9.8 million, resulting in a charge of $7.3
million in additional income tax expense in the year ended April 30, 1998. The
Company periodically reviews the above factors and may change the amount of
valuation allowance as facts and circumstances dictate. See Note 6 to
Consolidated Financial Statements.
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<PAGE>
Comparison of 1997 to 1996
- --------------------------
Net sales for the year ended April 30, 1997 increased $92.1 million (48
percent) from the year ended April 30, 1996. This increase was caused
principally by a 40 percent increase in lumber shipments, a 36 percent increase
in chip deliveries and a 17 percent increase in lumber prices, partially offset
by a 57 percent decrease in chip prices. The increased lumber and chip
deliveries reflect the Company's increased production resulting from a stronger
lumber market during most of fiscal 1997.
Gross profit for the year ended April 30, 1997 was 10.2 percent of net
sales, compared to 2.8 percent of net sales for the year ended April 30, 1996.
Lumber prices increased by 17 percent from the year ended April 30, 1996, while
the Company's log costs decreased by 6 percent. The higher lumber prices and
shipments were sufficient to more than offset the effect of lower chip prices.
Unit manufacturing costs in fiscal year 1997 increased by 3 percent from costs
in fiscal year 1996. This increase was in part a result of a general increase in
wages in September 1996.
Selling, general and administrative expenses in the year ended April
30, 1997 increased by $2.8 million (29 percent) from the year ended April 30,
1996. This increase primarily reflects higher profit-sharing bonus payments
which were the result of higher pretax profits.
Interest expense in the year ended April 30, 1997 was $0.3 million
below that incurred in the year ended April 30, 1996. This decrease was the
result of a reduction in the amount of the Company's outstanding debt.
In the year ended April 30, 1997, the Company recorded a tax provision
equal to 26 percent of its pretax profit. See Note 6 to Consolidated Financial
Statements.
LIQUIDITY AND CAPITAL RESOURCES
At April 30, 1998, the Company had net working capital of $15.2
million, $14.3 million less than at April 30, 1997. The working capital decrease
was primarily the result of operating losses, capital spending and reduction of
current deferred tax assets, along with principal payments on debt and dividends
paid on the Company's Series A preferred stock.
Cash and cash equivalents decreased by $6.1 million during the year
ended April 30, 1998, to $2.2 million at year-end. Approximately $6.4 million of
cash was provided by operations. About $3.2 million was used to repay various
debt obligations. The Company also paid $2.3 million in dividends to holders of
its Series A preferred stock.
During fiscal 1998, the Company spent $7.8 million for capital
improvements to its facilities. Capital spending for the year ending April 30,
1999 is currently projected to be approximately $2.5 million. The Company had no
material commitments for capital spending at April 30, 1998.
The Company does not have a credit facility for working capital and
therefore 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 operations. Substantially all of the Company's assets are pledged to
secure its primary debt obligation.
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<PAGE>
The Company's Credit and Security Agreement dated as of November 30,
1992 (the "Credit Agreement") contains certain covenants, including the
maintenance of prescribed levels of tangible net worth, working capital, total
liabilities ratio (as defined), adjusted cumulative operating income (as
defined) and collateral coverage (as defined). The fiscal year 1998 results were
such that the Company initiated amendments to the Credit Agreement. The Credit
Agreement was amended as of October 1, 1997, January 1, 1998 and April 1, 1998
with respect to certain financial performance covenants. These amendments follow
similar earlier amendments. Improved operating conditions from those in
existence during fiscal year 1998 will be necessary for the Company to remain in
compliance with the Credit Agreement. See Note 5 to Consolidated Financial
Statements.
At April 30, 1998 the Company's tangible net worth was $3.9 million,
compared to a negative $1.0 million required by the covenant. At that same date,
the Company's working capital was $15.2 million, compared to $9.0 million
required by the covenant. Also, at April 30, 1998, the Company's adjusted
cumulative operating income was $34.1 million, compared to $27.5 million
required. The collateral coverage ratio at April 30, 1998 was 66.3%, compared to
a 50% minimum required level. The total liabilities ratio was 93.7% at April 30,
1998, compared to a maximum allowed of 105%. The required level of tangible net
worth increases to $0 on January 1, 1999, $2.0 million at July 1, 1999, and $4.0
million at July 1, 2000. The required 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 required level of adjusted cumulative operating income
increases to $30.0 million at August 1, 1998, $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 100% on
August 1, 1998, 95% at July 1, 1999, and 85% at July 1, 2000. During the year
ended April 30, 1998, the Company's adjusted cumulative operating income
decreased by $2.7 while showing a loss before taxes of $9.8 million. The Company
continues to be in compliance with all covenants contained in this agreement.
In accordance with the Company's Credit Agreement, additional
prepayments are required if the Company's cumulative operating income exceeds
certain specified amounts. No such prepayment will be required for the year
ended April 30, 1998. In connection with the May 1, 1996 amendment, the Company
agreed to an additional prepayment computed at 30% of quarterly net income.
Payments made during the year ended April 30, 1998 pursuant to this provision
totaled $1.6 million. Proceeds from the sale of its two facilities,
Sedro-Woolley Lumber Co. and Trask River Lumber Co., will be applied to reduce
debt.
The Company has no floating rate debt, but the dividend rate on its
Series A preferred stock varies based on Bank of America's prime rate in effect
at the time the dividends are declared. Based on the prime rate in effect at
July 2, 1998, annual preferred dividends would increase by about $0.1 million
from the amount incurred in the year ended April 30, 1998.
YEAR 2000 COMPLIANCE
The Company is conducting a review of its computer and other systems to
identify those areas that could be affected by the "Year 2000" issue and is
developing an implementation plan to resolve the issue. The Year 2000 issue
exists because many computer systems and applications currently use two-digit
fields to designate a year. This
-14-
<PAGE>
can lead to incorrect results when computer software performs arithmetic
operations, comparisons or data field sorting involving years later than 1999.
The Company presently believes, with modification to existing software and
converting to new software and hardware, the Year 2000 problem will not pose
significant operational problems and is not anticipated to be material to its
financial position or results of operations in any given year.
FACTORS AFFECTING FORWARD-LOOKING STATEMENTS
The statements contained in this report that are not statements of
historical fact may include forward-looking statements (as defined in Section
27A of the Securities Act of 1933, as amended) that involve a number of risks
and uncertainties. Moreover, from time to time the Company may issue other
forward-looking statements. The following factors are among the factors that
could cause actual results to differ materially from the forward-looking
statements and should be considered in evaluating any forward-looking
statements.
Adverse Operating Conditions; Fluctuations in Quarterly Results
- ---------------------------------------------------------------
Lack of demand for lumber exports, particularly to Asia, has caused,
and may continue to cause, adverse operating conditions as lumber manufacturers
convert production from export to domestic markets. Such production conversion
has caused, and may continue to cause, an oversupply of lumber and weakness in
domestic lumber prices.
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 both the availability of, and the demand for, logs and the
demand for 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.
The demand for lumber and wood products is primarily affected by the level of
new residential construction activity which is subject to fluctuations due to
changes in economic conditions, real estate prices, interest rates, credit
availability, property taxes, energy costs, population growth, weather
conditions and general economic conditions, all of which are beyond the control
of the Company. Demand for the Company's products is generally lower in the fall
and winter quarters when activity in the construction, industrial and repair and
remodeling markets is slower and demand is generally higher in the spring and
summer quarters when these markets are more active. Fire danger and excessively
dry or wet conditions temporarily reduce logging activity and may increase open
market log prices. The industry is also affected by timber management policies
which change from time to time and may cause actual or feared shortages in some
areas. These policies change because of environmental concerns, public agency
budget issues and a variety of other reasons. 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 exports from
competing countries, such as Canada, or discourages exports to other countries,
such as Japan. Therefore, past results for any given year or quarter are not
necessarily indicative of future results. The Company believes that period to
period comparisons of its financial results may not be meaningful and should not
be relied upon as indications of future performance.
Availability of Logs
- --------------------
Raw materials comprise the majority of the cost of products sold by the
Company. The Company depends primarily on open market log purchases for its raw
material needs.
-15-
<PAGE>
The Company generally purchases logs in sufficient quantities to match the
current operating requirements for its mills. The availability and cost of logs
are influenced by a variety of factors, including demands by competitors and
exporters, the environmental and harvest policies of federal and state agencies
and, in the long term, the level of reforestation. Various factors, including
environmental and endangered species concerns, particularly regulations relating
to the northern spotted owl, the marbled murrelet, and various species of fish
have limited, and are likely to continue to limit, the amount of timber offered
for sale by certain United States government agencies, which historically have
been major suppliers of timber to the United States forest products industry.
State and private timber supplies may be inadequate to fill the shortfall.
Although the Company does not rely on purchases of federal timber, uncertainty
associated with timber supply issues combined with continued lack of significant
public timber sales activity may contribute to log price volatility. The
availability of logs may also be affected by other factors, including damage by
fire, insect infestation, disease, prolonged drought and natural disasters. Log
and lumber markets may continue to experience rapid changes in values due to
actual and perceived market conditions which may sometimes result in
inconsistent relationships between log and lumber prices. These changes could
result in large swings in the gross margin on lumber produced. There can be no
assurance that sales of logs from the Company's current sources may not be
reduced or that the Company will be able to procure sufficient logs at favorable
prices in order to continue operation of its manufacturing facilities in the
future. The inability of the Company to obtain logs in sufficient quantities
could have a material adverse impact on the Company's business, financial
condition and results of operations.
Federal and State Regulations
- -----------------------------
Laws and regulations dealing with the Company's operations are subject
to change and new laws and regulations are frequently introduced concerning the
timber industry. From time to time, bills are introduced in the state
legislatures and the U.S. Congress which relate to the business of the Company,
including the protection and acquisition of old growth and other timberlands,
endangered species, environmental protection and the restriction, regulation and
administration of timber harvesting practices. The forest products industry
remains subject to potential state or local ballot initiatives and evolving
federal and state case law which could affect timber harvesting practices. It is
impossible to assess the affect of such matters on the future operating results
or financial position of the Company. The Company is also subject to various
federal, state and local regulations regarding waste disposal and pollution
control, including air, water and noise pollution. The cost of remediation at
the Company's site at Sedro-Woolley, Washington may be more expensive than
anticipated and may require the approval of certain regulators. See section
entitled "Environmental Regulation." 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. Such
regulations could have a material adverse impact on the Company.
Manufacturing Risks
- -------------------
The Company manufactures softwood and hardwood lumber and by-products.
As a manufacturer, the Company continually faces risks regarding the
availability and cost of raw materials and labor, the potential need for
additional capital equipment, increases in maintenance costs, plant and
equipment obsolescence, quality control and excess capacity. See section
entitled "Industry Conditions." The Company curtails 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
-16-
<PAGE>
the cost of shutdown. There has been union activity at the Company's hardwood
facility and labor disturbances may also curtail or shut down production. See
section entitled "Employees." The Company may permanently close facilities that
are determined to lack future potential for profit under expected operating
conditions. A disruption in the Company's production or distribution could have
a material adverse impact on the Company's financial results.
Liquidity and Capital Resources
- -------------------------------
The Company does not have a credit facility for working capital and
therefore relies on cash provided by its operations to fund its working capital
needs. The Company's cash flow is affected by numerous factors, including sales
of its products, cost of raw materials and seasonality of its business. There
can be no assurance that cash provided by operations will be sufficient to fund
the Company's future operating and capital needs. Substantially all of the
Company's assets are pledged as security for its primary debt obligation.
Improved operating conditions from those in existence during fiscal 1998 will be
necessary for the Company to remain in compliance with its primary debt
agreement. See Note 5 to Consolidated Financial Statements.
Fingerjointing Plant
- --------------------
Completion of construction and commencement of operations of the
Company's fingerjoint plant occurred in fiscal 1998. The success of the
fingerjointed products will depend on a variety of factors, including cost
effective implementation of manufacturing and assembly processes and effective
sales and marketing efforts. Operations were curtailed in May 1998 in response
to adverse conditions and there can be no assurance as to when operations will
resume.
Licensing of New Technology
- ---------------------------
The Company may use a patented technology known as GREENWELD(R) which
allows the gluing of green or unseasoned lumber in its fingerjointing operation
and to license the technology to other lumber producers in North America and
Mexico. There can be no assurance that the Company will be successful in
licensing this technology to other manufacturers or obtain approval for use of
the technology in Canada or Mexico.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required by this item
are listed in Item 14 of Part IV of this report which begins at page 30.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
-17-
<PAGE>
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company are:
Name Age Position
---- --- --------
Larry G. Black.................... 52 Director
Scott Christie.................... 49 Director
Richard W. Detweiler.............. 56 Director
David J. Loftus................... 56 Treasurer
K. Stanley Martin................ 56 Director, Vice President-Finance and
Chief Financial Officer
Robert J. Riecke................. 48 Director, Vice President-Administration,
General Counsel and Secretary
John C. Stembridge................ 39 Interim Chief Operating Officer and
Vice President-Sales and Marketing
James R. Wilson................... 48 Vice President-Timber
William H. Wright................. 63 Director
The Company currently has seven Board seats, with one position vacant
because of the retirement on July 1, 1998, of Bruce L. Engel, a former Class 3
director and Company president. The Company intends to leave the seat vacant for
now, but may elect to fill it in the future.
Pursuant to the Company's Articles of Incorporation and Bylaws, the
Board is divided into three classes of directors with terms of three years. The
terms of Class 1 Directors, Messrs. Wright and Detweiler, expire at the 1998
Annual Meeting of Shareholders, the terms of Class 2 Directors, Messrs. Black
and Christie, expire at the 1999 Annual Meeting of Shareholders, and the terms
of Class 3 Directors, Messrs. Martin and Riecke, expire at the 2000 Annual
Meeting of Shareholders. Commencing in 1998, and at each annual meeting of
shareholders thereafter, the successors to the class of directors whose terms
expired at that meeting will be elected to hold office for a term of three
years.
In the event the Company fails to make a certain number of scheduled
dividend payments, or if a certain financial ratio covenant violation has
occurred and is continuing, on its Series A preferred stock, holders of such
stock may, under the circumstances and in the manner provided in the Company's
Fourth Restated Articles of Incorporation, elect a majority of the Board of
Directors by replacing incumbent Board members or increasing the size of the
Board.
Larry G. Black was elected for a two year term at the 1997 Annual
Meeting of Shareholders. Mr. Black is president of Quinault Corporation
("Quinault"), owner of approximately 29% of the Company's common stock. Since
its formation in 1985, Mr. Black has been chief executive officer of Quinault
Logging Company, which is in the business of buying timber and selling logs. Mr.
Black has been involved in the timber industry for more than 30 years. See
"Certain Relationships and Related Transactions."
-18-
<PAGE>
Scott Christie has been a director of the Company since March 1988. Mr.
Christie is currently general partner of Christie Capital Management. Since 1987
Mr. Christie has been engaged as an investment advisor for his own account and
the account of other individuals. From 1983 until 1987 Mr. Christie was senior
vice president of Kidder, Peabody & Co. Incorporated, an investment banking
firm. Mr. Christie headed Kidder, Peabody's underwriting team for the Company's
initial public offering and 1987 debenture offering.
Richard W. Detweiler has been a director of the Company since December
1995. Mr. Detweiler is currently a partner of Carlisle Enterprises, an
investment partnership. From 1990 to 1996 Mr. Detweiler was chief executive
officer of Precision Aerotech, a diversified manufacturing company. Mr.
Detweiler has 33 years of manufacturing management experience, including 16
years in general management.
David J. Loftus was appointed treasurer of the Company in October 1993
and continues to serve as vice president-finance of TreeSource, the Company's
marketing subsidiary, a position he has held since May 1986. As treasurer, Mr.
Loftus is primarily responsible for cash management matters and credit and
banking relationships. For the eight years prior to joining TreeSource, Mr.
Loftus served as the assistant treasurer for a publicly-traded company with
operations in the forest products industry.
K. Stanley Martin is vice president-finance of the Company, a position
he has held since September 1983, and has been chief financial officer since
April 1991. Mr. Martin has been a director of the Company since January 1994.
Mr. Martin is responsible for all financial affairs of the Company. For the
eleven years prior to 1983, Mr. Martin served as a financial officer for
publicly-traded companies having all or a substantial portion of their
operations in the forest products industry. Mr. Martin is a certified public
accountant.
Robert J. Riecke became vice president-administration of the Company in
May 1989, has been general counsel of the Company since January 1987, assistant
secretary from March 1983 until January 1994, and a director of the Company
since March 1986. Mr. Riecke was named corporate secretary in January 1994. Mr.
Riecke has primary responsibility for the Company's legal, risk management,
environmental compliance, investor relations, and human resource functions. From
1976 through 1986, Mr. Riecke was in private law practice. Since 1983, Mr.
Riecke has devoted much of his professional endeavors to legal matters relating
to the Company and its subsidiaries. Mr. Riecke is a graduate of the University
of Illinois School of Law.
John C. Stembridge was appointed vice president-sales and marketing of
the Company in February 1995 and was elected interim chief operating officer in
May 1998. Mr. Stembridge joined TreeSource, the Company's marketing subsidiary,
in 1989 and has served as its vice president and general manager since June
1991. Mr. Stembridge has primary responsibility for managing all aspects of the
Company's lumber manufacturing, sales and transportation. For the nine years
prior to joining TreeSource, Mr. Stembridge was involved in domestic and export
lumber sales, primarily with North Pacific Lumber Co.
-19-
<PAGE>
James R. Wilson was appointed vice president-timber of the Company in
October 1993. Mr. Wilson has primary responsibility for the Company's timber
supply program. Prior to his present position, Mr. Wilson served at both mill
and corporate levels of WTD Industries commencing in February 1992. Prior to
1992, Mr. Wilson served as general manager of Estacada Lumber Company, a
division of RSG Forest Products. From 1973 to 1984, Mr. Wilson was involved in
all phases of the wood products industry with Crown Zellerbach Corporation.
William H. Wright has been a director of the Company since April 1992.
Mr. Wright has held a variety of management positions in the forest products
industry since 1957. He is currently president of Heartwood Consulting Service,
which advises forest products clients. From 1989 until 1994 he was president and
chief executive officer of Dee Forest Products Inc., a manufacturer of hardboard
and related products. From 1984 to 1989 Mr. Wright was general manager of
Stevenson Co-Ply Inc., a manufacturer of veneer and plywood.
Section 16(a) Beneficial Ownership Reporting Compliance
- -------------------------------------------------------
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires that the Company's officers, directors and persons who
own more than 10 percent of the common stock file with the Securities and
Exchange Commission ("SEC") initial reports of beneficial ownership on Form 3
and reports of changes in beneficial ownership of common stock and other equity
securities of the Company on Form 4. Officers, directors, and greater than 10
percent shareholders of the Company are required by SEC regulations to furnish
to the Company copies of all Section 16(a) reports that they file. To the
Company's knowledge, based solely on reviews of such reports furnished to the
Company and written representations that no other reports are required, all
Section 16(a) filing requirements applicable to its officers, directors and
greater than 10 percent beneficial owners were complied with during the fiscal
year ended April 30, 1998.
-20-
<PAGE>
Item 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table shows the cash and non-cash compensation paid by
the Company for each of the last three fiscal years to the chief executive
officer and the four other most highly compensated executive officers (the
"Named Executive Officers").
<TABLE>
<CAPTION>
Long Term
Compensation
Awards
--------------------
Annual Compensation(1) Number of Securities
-------------------------------
Name and Principal Position Year Salary($) Bonus($) Underlying Options
------------------------------- ---- ---------- --------- --------------------
<S> <C> <C> <C> <C>
Bruce L. Engel(2) 1998 $ 300,000 $ 68,300 --
President 1997 $ 300,000 $ 171,122 35,000
1996 $ 300,000 $ 23,142 --
K. Stanley Martin 1998 $ 120,000 $ 27,320 --
Vice President-Finance and 1997 $ 120,000 $ 68,447 35,000
Chief Financial Officer 1996 $ 120,000 $ 9,256 --
Robert J. Riecke 1998 $ 132,000 $ 30,052 --
Vice President- 1997 $ 132,000 $ 75,295 35,000
Administration, General 1996 $ 132,000 $ 10,183 --
Counsel and Secretary
John C. Stembridge 1998 $ 100,000 $ 27,448 --
Interim Chief Operating Officer 1997 % 100,000 $ 80,238 35,000
and Vice President-Sales and 1996 $ 100,000 $ 12,197 --
Marketing
James R. Wilson 1998 $ 100,000 $ 22,766 --
Vice President-Timber 1997 $ 100,000 $ 57,040 35,000
1996 $ 100,000 $ 7,714 --
(1) Personal benefits for each executive officer named in the table did not
exceed $50,000 or 10% of such executive officers' total annual salary and
bonus for the fiscal years ended April 30, 1998, 1997 and 1996,
respectively.
(2) Mr. Engel retired effective July 1, 1998.
</TABLE>
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<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
No executive officer named above received option grants during the
fiscal year ended April 30, 1998.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
The following table provides information on option exercises for the
last fiscal year by the named executive officers and the value of such officers'
unexercised options as of April 30, 1998:
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Shares Options at April 30, 1998 (#) at April 30, 1998 ($)(1)
Acquired on ----------------------------- -----------------------------
Name Exercise (#) Exercisable Unexercisable Exercisable Unexercisable
---- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Bruce L. Engel(2) 68,500 332,125 18,375 $ 15,530 $ 873
K. Stanley Martin -- 48,425 18,375 $ 9,737 $ 873
Robert J. Riecke -- 51,625 18,375 $ 11,677 $ 873
John C. Stembridge -- 26,625 18,375 $ 790 $ 873
James R. Wilson -- 26,625 18,375 $ 790 $ 873
(1) Based on the fair market value of the Common Stock at April 30, 1998 of
$1.5625 per share.
(2) Mr. Engel retired effective July 1, 1998.
</TABLE>
EMPLOYMENT AGREEMENTS
On May 27, 1998, the Company entered into Employment Agreements with
each of its executive officers, except Mr. Engel. The Company has agreed to
employ each officer until May 31, 1999. The agreement requires a lump sum
payment equal to 12 times the last monthly base salary plus the total amount of
any bonus compensation awarded in the last 12 months to a terminated officer in
the event that the officer is terminated for reasons other than cause, as
defined, prior to said date. See Exhibit 10.9.
-22-
<PAGE>
Benefits
The Company maintains an Internal Revenue Code ("IRC") Section 401(k)
retirement savings plan under which employees, including executive officers, are
permitted to make salary deferral contributions. Executive officers are not
entitled to employer matching contributions pursuant to this plan.
Compensation of Directors
- -------------------------
Each of the Company's outside directors is paid an annual retainer of
$15,000 for attending up to six Board meetings, plus $750 for each additional
Board meeting or committee meeting attended and $225 for each telephone
conference meeting attended or written consent executed. Directors who are also
employees of the Company do not receive additional compensation for their
services as directors. In fiscal 1998, no outside directors received option
grants.
Executive Bonuses
- -----------------
Monthly discretionary bonuses are paid to the Company's executive
officers, as well as other management and administrative employees, pursuant to
the Company's profit sharing bonus plan. The bonuses are based upon net pretax
profits and are generally allocated according to base salary level. Bonuses paid
to executive officers for services rendered to the Company during the year ended
April 30, 1998 are included in the amounts shown in the "Summary Compensation
Table."
Stock Option Plan
- -----------------
In October 1996 the Company, after receiving shareholder approval,
implemented a Stock Option Plan ("1996 Option Plan") to supersede the 1986
Option Plan, which terminated in July 1996.
The purpose of the 1996 Option Plan is to enhance the long-term value
of the Company by offering opportunities to those employees, directors,
officers, consultants, agents, advisors and independent contractors of the
Company and its subsidiaries who are key to the Company's growth and success,
and to encourage them to remain in the service of the Company and its
subsidiaries and to acquire and maintain stock ownership in the Company.
Subject to adjustment from time to time as provided in the 1996 Option
Plan, a maximum of 525,000 shares of Common Stock are available for issuance
under the 1996 Option Plan. Not more than 50,000 shares of Common Stock, in the
aggregate, may be granted under the 1996 Option Plan to any participant during
any fiscal year of the Company, except for one-time grants of options for up to
100,000 shares may be made to newly hired participants.
Any shares of Common Stock that cease to be subject to an option (other
than by reason of exercise), including, without limitation, in connection with
the cancellation of an award will be available for issuance in connection with
future grants of awards under the 1996 Option Plan.
-23-
<PAGE>
Options granted under the 1996 Option Plan will be "nonqualified stock
options" (that is, options that are not designed to qualify as "incentive stock
options," as defined in IRC Section 422). The option price for each option
granted under the 1996 Option Plan will be determined by the plan administrator,
but will be not less than 85% of the Common Stock's fair market value on the
date of grant. For purposes of the 1996 Option Plan, "fair market value" means
the last reported sales price for the Common Stock as reported by the Nasdaq
National Market for a single trading day.
The option term will be fixed by the plan administrator, but if not so
specified will be ten years. Each option will be exercisable pursuant to a
vesting schedule determined by the plan administrator. If not so established,
the option will vest over four years from the date of grant with 20% of the
shares of underlying Common Stock vesting on the six-month anniversary of the
grant date and an additional 20% of the shares vesting after every successive
year of the optionee's continuous employment or relationship with the Company.
The plan administrator will also determine the circumstances under which an
option will be exercisable in the event the optionee ceases to provide services
to the Company or one of its subsidiaries. If not so established, options
generally will be exercisable for one year after termination of services as a
result of disability or death and for one month after all other terminations. An
option will not be exercisable if the optionee's services are terminated for
cause, as defined in the 1996 Option Plan.
The 1996 Option Plan is administered by the Company's Board of
Directors. The Board may delegate the responsibility for administering the 1996
Option Plan to a committee or committees consisting of two or more members of
the Board of Directors, subject to such limitations as the Board deems
appropriate. Committee members will serve for such term as the Board may
determine, subject to removal by the Board at any time.
Board Compensation Committee Report on Executive Compensation
- -------------------------------------------------------------
The Compensation Committee is composed of two independent non-employee
directors, Mr. Christie and Mr. Wright.
The Compensation Committee is responsible for recommending to the full
Board of Directors, for its approval, the base compensation for all executive
officers. Executive officers who serve on the Company's Board of Directors do
not participate in any deliberations or decisions regarding their own
compensation. The Compensation Committee receives recommendations from the chief
executive officer regarding appropriate levels of base compensation for the
other executive officers, including executive officers who are directors.
The Company's executive officer compensation policies are designed to
attract, motivate and retain senior management by providing an opportunity for
overall competitive compensation based on an adequate base compensation amount
and participation in a profit based bonus system in effect for all salaried
employees of the Company.
-24-
<PAGE>
The profit sharing component of the overall compensation system is
designed to reward all salaried employees, including executive officers, in
relation to the Company's monthly performance and to encourage salaried
employees at all levels of the Company to work together for the common goal of
maximizing profits. Salaried employees at the WTD corporate level (including all
executive officers) receive 10% of monthly consolidated pre-tax profits,
allocated according to base salary level.
It is the Company's practice to participate in and use, as a basis for
comparison, an analysis of executive compensation in the Northwest prepared by
the compensation consulting group of Milliman & Robertson, Inc. This analysis is
useful in establishing base salary levels and monitoring overall compensation
levels as compared to other publicly-traded companies of similar size. Executive
officers' compensation paid during fiscal year 1998, with respect to base
salary, cash bonus and total cash compensation, was below the median levels
published in the 1997/1998 Milliman & Robertson compensation survey of all
industries.
The Company also uses long-term stock-based incentive opportunities in
the form of options to purchase the Company's Common Stock. The Company's 1996
Option Plan provides for the grant of stock options to employees of the Company.
Stock option awards are determined on a discretionary basis by the Board of
Directors. Executive officers who serve on the Company's Board of Directors do
not participate in any deliberations or decisions regarding option awards to
them. The Committee believes that stock-based performance compensation
arrangements are beneficial in aligning management's and shareholders' interests
in the advancement of shareholder value.
No option grants were made to executive officers during the 1998 fiscal
year.
WTD provides the same group life and health insurance coverage to
executive officers as other employees and requires all employees, including
executive officers, to pay approximately 25% of health insurance premiums by
payroll deduction.
The Company allows its executive officers and all other employees to
contribute a percentage of their compensation to the Company-sponsored 401(k)
Retirement Savings Plan. Executive officers and other salaried employees are not
generally entitled to matching contributions.
Neither the executive officers nor other employees are covered by any
other Company-sponsored retirement plans.
All of the policies described above apply to Mr. Engel's compensation.
No additional benefits or requirements specifically apply to the chief executive
officer.
No option grants were made to Mr. Engel during the 1998 fiscal year.
Mr. Engel's base salary for fiscal year 1998 was $300,000. The median
base salary for chief executive officers of comparably sized public companies,
as published by the Milliman & Robertson compensation survey, is $301,634.
-25-
<PAGE>
Mr. Engel received a cash bonus of $68,300 during fiscal year 1998
under the profit sharing plan described above, reflecting profitable operations
during the first part of the fiscal year. Mr. Engel's cash bonus and total cash
compensation amounts were below the published median levels; the published
median levels were $143,590 and $400,000, respectively.
Mr. Engel retired effective July 1, 1998.
Compensation Committee Members
Scott Christie
William H. Wright
-26-
<PAGE>
Stock Performance Graph
- -----------------------
[GRAPH]
<TABLE>
<CAPTION>
Base
Period Return Return Return Return Return
Company/Index Name April 1993 April 1994 April 1995 April 1996 April 1997 April 1998
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
WTD Industries, Inc. 100 108.89 62.23 24.43 64.44 55.55
S&P 500 Index 100 105.32 123.72 161.09 201.58 284.36
Paper & Forest Products-500 100 100.42 120.75 135.81 135.40 172.22
</TABLE>
-27-
<PAGE>
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table shows beneficial ownership as of July 2, 1998 of
the Company's Common Stock by (i) each director, (ii) each beneficial owner of
more than 5 percent of the Common Stock, (iii) the Named Executive Officers, and
(iv) all directors and officers as a group. Except as otherwise specifically
noted, each person noted below has sole investment and voting power with respect
to shares indicated.
<TABLE>
<CAPTION>
Amount and Nature
Name and Address of Beneficial Owner of Beneficial Ownership(1)(2) Percent
------------------------------------------- ----------------------------- -------
<S> <C> <C>
Quinault Corporation
P.O. Box C 3,261,600 29.2%
Aberdeen, WA 98570
Amount and Nature
Name of Directors and Executive Officers of Beneficial Ownership(2)(3) Percent
------------------------------------------- ----------------------------- -------
Larry G. Black(4) 3,261,600 29.2%
Scott Christie 78,750 .7%
Richard W. Detweiler 40,000 .4%
K. Stanley Martin 58,425 .5%
Robert J. Riecke 51,625 .5%
John C. Stembridge 27,925 .2%
James R. Wilson(5) 26,725 .2%
William H. Wright 78,750 .7%
All directors and executive officers as a group
(9 persons) 3,644,425 31.6%
================================================================================
</TABLE>
(1) As determined by reference to the beneficial owner's most recent Form 4 or
13D filing.
(2) Beneficial Ownership is calculated as of July 2, 1998.
(3) Includes shares reserved for issuance under options exercisable within 60
days of July 2, 1998 as follows: Mr. Christie 78,750; Mr. Detweiler
40,000; Mr. Martin 48,425; Mr. Riecke 51,625; Mr. Stembridge 26,625; Mr.
Wilson 26,625; and Mr. Wright 78,750.
(4) Mr. Black, by virtue of being president and sole director of Quinault, is
deemed to beneficially own the shares owned by Quinault.
(5) Mr. Wilson shares with his spouse Christine R. Wilson voting and
investment power as to 100 shares beneficially owned. See Note 3 above for
details of individual option rights.
-28-
<PAGE>
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During fiscal 1998, five of the Company's subsidiaries purchased logs
from Quinault Logging Company in the amount of approximately $2.1 million. Mr.
Larry G. Black, a director of the Company, is president and a director of
Quinault Logging Company and is president and sole director of Quinault, owner
of approximately 29% of the Company's common stock.
The Company, Bruce L. Engel, Quinault and Larry G. Black entered into
an agreement dated as of June 10, 1997 (the "Agreement"). Pursuant to the terms
of the Agreement, the Company and Mr. Engel will have the right of first refusal
with respect to any shares of the Company's Common Stock sold by Quinault prior
to June 15, 1999. In addition, Quinault granted Mr. Engel an option to purchase
shares of the Company's Common Stock such that the amount of the Company's
Common Stock owned by Mr. Engel and his affiliates will equal the number of
shares owned by Quinault, Mr. Black and their affiliates. Pursuant to the
Agreement, Quinault, Mr. Black and their affiliates may not, without the prior
written consent of the Company's Board, act in a manner that would (i) remove
Mr. Engel as an officer or director of the Company or (ii) result in the
liquidation, sale, merger or other combination of the Company. Pursuant to the
Agreement the Company nominated Mr. Black for election as a director at the
Company's 1997 Annual Meeting of Shareholders. The Agreement restricts the
Company from taking certain actions to dilute Quinault's holdings. Pursuant to
the Agreement, the Company recommended the removal of certain voting
restrictions placed on Quinault pursuant to ORS 60.801--816 (the "Control Share
Restrictions") at the 1997 Annual Meeting of Shareholders.
-29-
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements Page
- ------ -------------------- ----
The following consolidated financial statements
of the Registrant and its subsidiaries are contained in
this report:
Report of Independent Certified Public Accountants 37
Consolidated Statements of Operations for the Years
Ended April 30, 1998, 1997 and 1996 38
Consolidated Balance Sheets at April 30, 1998 and 1997 39
Consolidated Statements of Cash Flows for the Years
Ended April 30, 1998, 1997 and 1996 41
Consolidated Statement of Changes in Stockholders'
Equity for the Years Ended April 30, 1998,
1997 and 1996 42
Notes to Consolidated Financial Statements 43
(a)(2) Financial Statement Schedules
- ------ -----------------------------
The schedules called for under Regulation S-X are not submitted because
they are not applicable, are not required, or because the required information
is not material or is included in the financial statements or notes thereto.
(a)(3) Exhibit Index Page
- ------ ------------- ----
2.1 Final form of Registrant's Second Amended
Joint Plan of Reorganization dated October 5,
1992, filed with the United States Bankruptcy
Court for the Western District of Washington. (1)
3.1 Fourth Restated Articles of Incorporation of the
Registrant adopted November 27, 1992, as amended
on March 4, 1998. 60
3.2 Second Restated Bylaws of the Registrant effective
November 27, 1992. (8)
-30-
<PAGE>
Page
----
4.2 Credit and Security Agreement dated as of November 30,
1992, between Registrant and Principal Mutual Life
Insurance Company, Aetna Life Insurance Company, The
Northwestern Mutual Life Insurance Company, Chemical
Bank, Seattle-First National Bank, and Bank of America
Oregon. (2)
4.2.1 Amendment dated as of October 18, 1994 to Credit and
Security Agreement dated as of November 30, 1992,
between Registrant and Principal Mutual Life Insurance
Company, Aetna Life Insurance Company, The Northwestern
Mutual Life Insurance Company, Chemical Bank,
Seattle-First National Bank, and Bank of America Oregon.
(9)
4.2.2 Amendment dated as of January 27, 1995 to Credit and
Security Agreement dated as of November 30, 1992,
between Registrant and Principal Mutual Life Insurance
Company, Aetna Life Insurance Company, The Northwestern
Mutual Life Insurance Company, Chemical Bank,
Seattle-First National Bank, and Bank of America Oregon.
(11)
4.2.3 Amendment dated as of May 1, 1995 to Credit and Security
Agreement dated as of November 30, 1992, between
Registrant and Principal Mutual Life Insurance Company,
Aetna Life Insurance Company, The Northwestern Mutual
Life Insurance Company, Chemical Bank, Seattle-First
National Bank, and Bank of America Oregon. (11)
4.2.4 Amendment dated as of January 1, 1996 to Credit and
Security Agreement dated as of November 30, 1992,
between Registrant and Principal Mutual Life Insurance
Company, Aetna Life Insurance Company, The Northwestern
Mutual Life Insurance Company, Chemical Bank,
Seattle-First National Bank, and Bank of America Oregon.
(12)
4.2.5 Amendment dated as of May 1, 1996 to Credit and Security
Agreement dated as of November 30, 1992, between
Registrant and Principal Mutual Life Insurance Company,
Aetna Life Insurance Company, The Northwestern Mutual
Life Insurance Company, Chemical Bank, Seattle-First
National Bank, and Bank of America Oregon. (13)
4.2.6 Amendment dated as of December 17, 1996 to Credit and
Security Agreement dated as of November 30, 1992,
between Registrant and Principal Mutual Life Insurance
Company, Aetna Life Insurance Company, The Northwestern
Mutual Life Insurance Company, Chemical Bank,
Seattle-First National Bank, and Bank of America Oregon.
(14)
-31-
<PAGE>
Page
----
4.2.7 Amendment dated as of October 1, 1997 to Credit and
Security Agreement dated as of November 30, 1992,
between Registrant and Principal Mutual Life Insurance
Company, Aetna Life Insurance Company, The Northwestern
Mutual Life Insurance Company, Chemical Bank,
Seattle-First National Bank, and Bank of America Oregon.
(17)
4.2.8 Amendment dated as of January 1, 1998 to Credit and
Security Agreement dated as of November 30, 1992,
between Registrant and Principal Mutual Life Insurance
Company, Aetna Life Insurance Company, The Northwestern
Mutual Life Insurance Company, Chemical Bank,
Seattle-First National Bank, and Bank of America Oregon.
(18)
4.2.9 Amendment dated as of April 1, 1998 to Credit and
Security Agreement dated as of November 30, 1992,
between Registrant and Principal Mutual Life Insurance
Company, Aetna Life Insurance Company, The Northwestern
Mutual Life Insurance Company, Chemical Bank,
Seattle-First National Bank, and Bank of America Oregon. 80
4.3 Indenture dated as of November 30, 1992, between
Registrant and State Street Bank and Trust Company, as
Trustee, with respect to 8% Senior Subordinated Notes
due 2005. (3)
10.1 Amended and Restated 1986 Stock Option Plan dated
December 30, 1992.* (4)
10.1.2 Form of Stock Option Agreement for directors of
Registrant.* (8)
10.1.3 Form of Stock Option Agreement for executive officers of
the Registrant.* (8)
10.1.4 1996 Stock Option Plan dated October 21, 1996.* (16)
10.1.5 Form of Stock Option Agreement for directors and
officers of the Registrant.* (19)
10.3 Form of Indemnification Agreement for directors,
officers and certain employees effective January 30,
1991.* (8)
10.4 Description of Management Profit-Sharing Bonus Plan.*
(5)
10.61 WTD Industries, Inc. Retirement Savings Plan and Trust
dated as of May 1, 1989.* (6)
-32-
<PAGE>
Page
----
10.62 Amendment No. 1 to WTD Industries, Inc. Retirement
Savings Plan and Trust Effective May 1, 1989.* (7)
10.63 Amendment No. 2 to WTD Industries, Inc. Retirement
Savings Plan and Trust adopted May 30, 1991.* (7)
10.64 Amendment No. 3 to WTD Industries, Inc. Retirement
Savings Plan and Trust adopted June 26, 1992.* (7)
10.65 Amendment No. 4 to WTD Industries, Inc. Retirement
Savings Plan and Trust adopted April 30, 1993.* (8)
10.66 Amendment No. 5 to WTD Industries, Inc. Retirement
Savings Plan and Trust adopted December 28, 1994.* (10)
10.67 Amendment No. 6 to WTD Industries, Inc. Retirement
Savings Plan and Trust adopted June 10, 1997.* (19)
10.7 Agreement dated effective as of June 10, 1997 among the
Company, Engel, Quinault and Black. (15)
10.8 Amended and Restated Rights Agreement dated as of March
4, 1998, between the Registrant and ChaseMellon
Shareholder Services, as Rights Agent. (20)
10.9 Employment Agreement dated May 27, 1998 between
Registrant and Robert J. Riecke.* *** 85
12.2 Computation of Registrant's Net Income (Loss) to Average
Total Assets. 91
12.3 Computation of Registrant's Net Income (Loss) to Average
Stockholders' Equity. 92
12.4 Computation of Registrant's Average Stockholders' Equity
to Average Total Assets. 93
21.1 Subsidiaries of the Registrant (list updated as of July
2, 1998). 94
23.1 Consent of Independent Certified Public Accountants. 95
27.1 Financial Data Schedule.**
27.2 Restated Financial Data Schedule.**
(1) Incorporated by reference to the exhibit of like number to the
Registrant's report on Form 8-K dated November 23, 1992.
-33-
<PAGE>
(2) Incorporated by reference to the exhibit of like number to the
Registrant's quarterly report on Form 10-Q for the quarter ended October 31,
1992 previously filed with the Commission.
(3) Incorporated by reference to the exhibit of like number to the
Registrant's quarterly report on Form 10-Q for the quarter ended January 31,
1993 previously filed with the Commission.
(4) Incorporated by reference to exhibit 6.0 to the Registrant's
Registration Statement on Form S-8 (No. 33-62714) filed with the Commission on
May 14, 1993.
(5) Incorporated by reference to the exhibit of like number to the
Registrant's Registration Statement on Form S-1 (No. 33-7389) filed with the
Commission on July 21, 1986, as amended by Amendment Nos. 1 through 3 thereto
filed with the Commission on September 3, 1986, October 14, 1986 and October 24,
1986, respectively.
(6) 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, 1989,
previously filed with the Commission.
(7) 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, 1992,
previously filed with the Commission.
(8) 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.
(9) Incorporated by reference to the exhibit of like number to the
Registrant's quarterly report on Form 10-Q for the quarter ended October 31,
1994, previously filed with the Commission.
(10) Incorporated by reference to the exhibit of like number to the
Registrant's quarterly report on Form 10-Q for the quarter ended January 31,
1995, previously filed with the Commission.
(11) 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, 1995,
previously filed with the Commission.
(12) Incorporated by reference to the exhibit of like number to the
Registrant's quarterly report on Form 10-Q for the quarter ended January 31,
1996, previously filed with the Commission.
(13) 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, 1996,
previously filed with the Commission.
(14) Incorporated by reference to exhibit 4.2.4 to the Registrant's
quarterly report on Form 10-Q for the quarter ended January 31, 1997, previously
filed with the Commission.
-34-
<PAGE>
(15) Incorporated by reference to the exhibit of like number to the
Registrant's report on Form 8-K filed with the Commission on June 12, 1997.
(16) Incorporated by reference to exhibit 99.1 to the Registrant's
Registration Statement on Form S-8 (No. 333-15461) filed with the Commission on
November 4, 1996.
(17) Incorporated by reference to the exhibit of like number to the
Registrant's quarterly report on Form 10-Q for the quarter ended October 31,
1997, previously filed with the Commission.
(18) Incorporated by reference to the exhibit of like number to the
Registrant's quarterly report on Form 10-Q for the quarter ended January 31,
1998, previously filed with the Commission.
(19) 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, 1997,
previously filed with the Commission.
(20) Incorporated by reference to exhibit 2.1 to the Registrant's
report on Form 8-A filed with the Commission on March 20, 1998.
* Management contract or compensatory plan or arrangement.
** This schedule has been submitted in the electronic form prescribed
by EDGAR.
*** A schedule attached to this exhibit identifies all other documents
not required to be filed as exhibits because such exhibits are
substantially identical to this exhibit.
Except for instruments already filed as exhibits to this Form 10-K, the
Registrant agrees to furnish the Commission upon request a copy of each
instrument with respect to long-term debt of the Registrant and its consolidated
subsidiaries, the amount of which does not exceed 10% of the total assets of the
Registrant and its subsidiaries on a consolidated basis.
(b) Reports on Form 8-K
--- -------------------
A current report on Form 8-K, describing the Amended and Restated
Rights Agreement between the Registrant and ChaseMellon Shareholder Services, as
Rights Agent, was filed with the Securities and Exchange Commission on March 20,
1998.
-35-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
WTD Industries, Inc.
(Registrant)
By:/s/ Robert J. Riecke
--------------------------
Robert J. Riecke
Vice President-Administration
July 22, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated as of July 22, 1998.
/s/ Robert J. Riecke /s/ K. S. Martin
- ---------------------------------- ----------------------------------
Robert J. Riecke K. Stanley Martin
Vice President-Administration Vice President-Finance (Principal
and Director Financial and Accounting Officer)
and Director
/s/ John C. Stembridge /s/ Larry G. Black
- ---------------------------------- ----------------------------------
John C. Stembridge Larry G. Black, Director
Interim Chief Operating Officer
/s/ Scott Christie /s/ Richard W. Detweiler
- ---------------------------------- ----------------------------------
Scott Christie, Director Richard W. Detweiler, Director
/s/ William H. Wright
- ----------------------------------
William H. Wright, Director
-36-
<PAGE>
[MOSS ADAMS LETTERHEAD]
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders
WTD Industries, Inc.
We have audited the accompanying consolidated balance sheets of WTD Industries,
Inc. and subsidiaries (the "Company") as of April 30, 1998 and 1997, and the
related consolidated statements of operations, cash flows and changes in
stockholders' equity, for each of the years in the three-year period ended April
30, 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of WTD Industries, Inc.
and subsidiaries as of April 30, 1998 and 1997, and the results of operations
and their cash flows for each of the years in the three-year period ended April
30, 1998, in conformity with generally accepted accounting principles.
/s/ Moss Adams LLP
------------------
MOSS ADAMS
Beaverton, Oregon
June 4, 1998
-37-
<PAGE>
WTD INDUSTRIES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
(in Thousands, Except Per-Share Amounts)
YEAR ENDED APRIL 30,
------------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
NET SALES $ 242,051 $ 284,086 $ 191,964
COST OF SALES 231,303 255,068 186,514
------------ ----------- -----------
GROSS PROFIT 10,748 29,018 5,450
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 11,290 12,529 9,685
IMPAIRMENT CHARGES 4,168 -- --
REORGANIZATION CREDITS -- -- (409)
------------ ------------ ------------
OPERATING INCOME (LOSS) (4,710) 16,489 (3,826)
OTHER INCOME (EXPENSE)
Interest expense (4,682) (5,029) (5,318)
Miscellaneous (394) 630 646
------------ ------------ ------------
(5,076) (4,399) (4,672)
------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES (9,786) 12,090 (8,498)
PROVISION FOR INCOME TAXES (BENEFIT) 2,364 3,120 (2,454)
------------ ------------ ------------
NET INCOME (LOSS) (12,150) 8,970 (6,044)
PREFERRED DIVIDENDS 2,290 2,228 2,364
------------ ------------ ------------
NET INCOME (LOSS) APPLICABLE
TO COMMON STOCKHOLDERS $ (14,440) $ 6,742 $ (8,408)
============ ============ ============
NET INCOME (LOSS) PER COMMON SHARE
- BASIC ($1.30) $0.61 ($0.76)
======= ===== =======
- DILUTED ($1.30) $0.59 ($0.76)
======= ===== =======
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
-38-
<PAGE>
WTD INDUSTRIES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
ASSETS
(In Thousands)
APRIL 30,
------------------------------
1998 1997
------------ ------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 2,157 $ 8,209
Accounts receivable, net 10,464 16,830
Inventories 14,005 17,760
Prepaid expenses 1,195 1,817
Income tax refund receivable -- 1,145
Deferred tax asset 750 1,383
Assets held for sale 6,685 361
Timber, timberlands and timber-related assets 4,252 3,936
----------- -----------
Total current assets 39,508 51,441
NOTES AND ACCOUNTS RECEIVABLE 103 124
TIMBER AND TIMBERLANDS -- 629
PROPERTY, PLANT AND EQUIPMENT, at cost
Land 2,849 3,343
Buildings and improvements 11,123 11,194
Machinery and equipment 62,623 70,391
----------- -----------
76,595 84,928
Less accumulated depreciation 52,378 56,557
----------- -----------
24,217 28,371
Construction in progress 225 4,365
----------- -----------
24,442 32,736
DEFERRED TAX ASSET -- 280
OTHER ASSETS 1,258 1,276
----------- -----------
$ 65,311 $ 86,486
=========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
-39-
<PAGE>
WTD INDUSTRIES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
(In Thousands, Except Share Information)
APRIL 30,
------------------------------
1998 1997
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 8,992 $ 9,709
Accrued expenses 6,568 9,644
Timber contracts payable 323 246
Current maturities of long-term debt 8,467 2,367
------------ ------------
Total current liabilities 24,350 21,966
LONG-TERM DEBT, less current maturities 36,868 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 in 1997) 28,752 28,647
Additional paid-in capital 15 15
Retained deficit (45,695) (31,249)
------------ ------------
4,093 18,434
------------ ------------
$ 65,311 $ 86,486
============ ============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
-40-
<PAGE>
WTD INDUSTRIES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
YEAR ENDED APRIL 30,
--------------------------------------------
1998 1997 1996
----------- ----------- ----------
<S> <C> <C> <C>
CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES:
Net income (loss) $ (12,150) $ 8,970 $ (6,044)
Adjustments to reconcile net income (loss) to
cash provided by operating activities:
Depreciation, depletion and amortization 5,571 6,353 4,903
Deferred income tax 913 2,837 (222)
Impairment loss 4,168 -- --
Reorganization credits -- -- (409)
Accounts receivable 6,366 (6,640) 1,214
Inventories 3,755 (3,869) 4,213
Prepaid expenses 622 (249) 2,456
Timber, timberlands and timber-related assets - current (392) 2,031 3,198
Payables and accruals (3,645) 5,399 (587)
Income taxes 1,145 990 (1,632)
----------- ----------- ----------
Cash provided by operating activities 6,353 15,822 7,090
----------- ----------- ----------
CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES:
Notes and accounts receivables 21 40 (75)
Net reductions of timber and timberlands 629 50 26
Acquisition of property, plant and equipment (7,807) (7,450) (3,904)
Net book value of disposed idle assets 176 376 145
Other investing activities 51 142 102
----------- ----------- ----------
Cash used for investing activities (6,930) (6,842) (3,706)
----------- ----------- ----------
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES:
Proceeds from long-term borrowings -- 265 --
Principal payments on long-term debt (3,190) (3,321) (2,379)
Other assets (94) (69) (106)
Dividends paid on preferred stock (2,296) (2,228) (2,346)
Issuance of common stock 105 6 --
----------- ----------- ----------
Cash used for financing activities (5,475) (5,347) (4,831)
----------- ----------- ----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (6,052) 3,633 (1,447)
CASH BALANCE AT BEGINNING OF YEAR 8,209 4,576 6,023
----------- ----------- ----------
CASH BALANCE AT END OF YEAR $ 2,157 $ 8,209 $ 4,576
=========== =========== ==========
CASH PAID (REFUNDED) DURING THE YEAR FOR:
Interest $4,696 $4,940 $3,095
Income taxes $305 ($711) ($598)
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
-41-
<PAGE>
WTD INDUSTRIES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(In Thousands)
SERIES A SERIES B
PREFERRED STOCK PREFERRED STOCK COMMON STOCK RETAINED STOCK
----------------- ----------------- ------------------ PAID-IN EARNINGS HOLDERS'
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) EQUITY
------ ---------- ------ ---------- ------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at April 30, 1995 270 $20,688 6 $333 11,077 $28,641 $15 ($29,601) $20,076
Dividends paid -- -- -- -- -- -- -- (2,346) (2,346)
Net loss -- -- -- -- -- -- -- (6,044) (6,044)
------ ---------- ------ ---------- ------- ---------- ---------- ---------- ----------
Balance at April 30, 1996 270 20,688 6 333 11,077 28,641 15 (37,991) 11,686
Stock options exercised -- -- -- -- 6 6 -- -- 6
Dividends paid -- -- -- -- -- -- -- (2,228) (2,228)
Net income -- -- -- -- -- -- -- 8,970 8,970
------ ---------- ------ ---------- ------- ---------- ---------- ---------- ----------
Balance at April 30, 1997 270 20,688 6 333 11,083 28,647 15 (31,249) 18,434
Stock options exercised -- -- -- -- 71 105 -- -- 105
Dividends paid -- -- -- -- -- -- -- (2,296) (2,296)
Net income -- -- -- -- -- -- -- (12,150) (12,150)
------ ---------- ------ ---------- ------- ---------- ---------- ---------- ----------
Balance at April 30, 1998 270 $20,688 6 $333 11,154 $28,752 $15 ($45,695) $4,093
====== ========== ====== ========== ======= ========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
-42-
<PAGE>
WTD INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation and operations - The consolidated financial
statements include the accounts of WTD Industries, Inc. and its wholly owned
subsidiaries (hereinafter "WTD" or "the Company"). All significant intercompany
accounts and transactions have been eliminated.
The Company operates in one industry segment, the manufacture and sale
of softwood and hardwood lumber products, wood chips and other by-products. Most
lumber products are sold to distributors, wholesalers or directly to large
retailers. The Company's products are used in many applications, including
residential and commercial construction, packaging and industrial uses.
Lumber market conditions deteriorated during the second quarter of
fiscal year 1998 and remained weak through the fourth quarter, after
approximately 16 months of good conditions. The Company responded to certain
lumber price adjustments by altering product mix and reducing log costs when
possible. During much of the year, there was an oversupply of lumber in the U.S.
market. This was the result of traditional export producers manufacturing for
the U.S. lumber market as exports weakened. Additionally, demand from
California, a major segment of the Company's market, was lower than usual due to
the extraordinarily wet weather which delayed construction projects. In response
to the generally weak market conditions, the Company curtailed production at
selected mills and reduced the level of operations at various times during the
year.
The fiscal year 1998 results were such that management initiated
amendments to its primary debt agreement. This debt agreement was amended as of
October 1, 1997, January 1, 1998 and April 1, 1998 with respect to certain
financial performance covenants. These amendments follow similar earlier
amendments, the most recent as of May 1, 1996. Improved operating conditions
from those in existence during fiscal year 1998 will be necessary for the
Company to remain in compliance with its primary debt agreement. See Note 5 to
Consolidated Financial Statements.
The Company's sales are predominately in the United States; export
sales are not material. During the year ended April 30, 1998, the Company had no
customers that accounted for 10% or more of net sales. The loss of any one
customer would not, in the opinion of management, have a material adverse impact
on the financial results of the Company.
Temporary cash investments and trade receivables potentially subject
the Company to concentrations of credit risk. The Company places its temporary
cash investments with high credit-quality financial institutions, and by policy
limits the amount of credit exposure to any one institution. The Company reviews
a customer's credit history before extending credit and continuously evaluates
its accounts receivable for
-43-
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
collectability. Concentrations of credit risk on trade receivables are limited
due to the Company's large number of customers and their widely varying
locations. Generally, the Company does not require collateral or other security
to support its trade receivables.
WTD has from time to time utilized futures contracts to reduce the
Company's exposure to adverse movements in the log and lumber markets. This
activity has not been significant in the past, and the Company had no material
futures position at April 30, 1998.
Cash and cash equivalents - Financial instruments with a maturity of
three months or less are considered to be cash equivalents.
Accounts receivable - Trade accounts receivable are shown net of
allowances for doubtful accounts and discounts of $128,000 and $195,000 at April
30, 1998 and 1997, respectively.
Inventories - Inventories are valued at the lower of cost or market.
Cost is determined using the average cost and first-in, first-out (FIFO)
methods. A summary of inventory by principal product classification follows (in
thousands):
APRIL 30,
----------------------
1998 1997
--------- ----------
Logs $ 3,791 $ 9,054
Lumber 8,635 7,379
Supplies and other 1,579 1,327
--------- ----------
$ 14,005 $ 17,760
========= ==========
At April 30, 1998 and 1997, $642,000 and $179,000, respectively, of log
inventory was valued at market, which approximated cost. At April 30, 1998,
$7,787,000 of lumber inventory was valued at market, which represented a
$1,272,000 reduction from cost. At April 30, 1997, $2,667,000 of lumber
inventory was valued at market, which represented a reduction of $297,000 from
cost.
Property, plant and equipment - Property, plant and equipment of the
Company's facilities are stated at cost. For financial reporting purposes, the
Company uses the units-of-production method for computing depreciation over the
estimated useful lives of assets, ranging from ten to thirty years for buildings
and improvements, and three to ten years for machinery and equipment. When
assets are retired or disposed of, cost and accumulated depreciation are
reversed from the related accounts and any gain or loss is included in the
consolidated statement of operations.
Timber and timberlands - Timber and timberlands are stated at the lower
of aggregate cost or estimated disposal value, less the amortized cost of timber
harvested. The portion of the cost attributable to standing timber is charged
against income as timber
-44-
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
is cut, at rates determined periodically based on the relationship between
unamortized timber value and the estimated volume of recoverable timber. The
costs of roads and land improvements are capitalized and amortized over their
economic lives. The carrying costs of timber, timberlands and timber-related
assets are expensed as incurred. The Company classifies timber and
timber-related assets as current or long-term based upon expected harvest and
disposal plans.
Timber-cutting contracts - The Company purchases timber under various
types of contracts. Certain contracts, for which the total purchase price is
fixed, are recorded as assets along with the related liability at the date
acquired. The remaining contracts, for which the total purchase price depends on
the volume of timber removed, are considered to be commitments and are not
recorded until the timber is removed. See Note 10 to Consolidated Financial
Statements.
Income taxes - Income taxes are provided for transactions in the year
in which they are reflected in earnings, even though they may be reported for
tax purposes in a different year. The resulting difference between taxes charged
to operations and taxes paid is reported as deferred income taxes. Tax credits
are recognized in the year utilized, using the flow-through method. See Note 6
to Consolidated Financial Statements.
Accrued expenses - The following is a summary of the components of
accrued expenses (in thousands):
APRIL 30,
----------------------
1998 1997
--------- ----------
Payroll and related items $ 4,145 $ 5,226
Freight payable 934 1,622
Other 1,489 2,796
--------- -----------
$ 6,568 $ 9,644
========= ==========
Reserves for self-insurance - workers' compensation - Under its
self-insurance plan, the Company accrues the estimated cost of workers'
compensation claims based on prior years' open claims. An accrual of $1.6
million and $2.3 million is included in the accompanying fiscal year 1998 and
1997 financial statements, respectively. Payments based on actual fiscal year
1998 claims ultimately filed could differ materially from these statements.
Use of estimates - The preparation of the financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and the accompanying notes. Actual results could differ materially
from those estimates.
-45-
<PAGE>
NOTE 2 - IMPAIRMENT CHARGES
The Company has classified certain property, plant and equipment
related to two facilities as Assets Held for Sale. In accordance with Statement
of Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of," the Company
recorded an impairment loss associated with these two mills. The resulting
adjustment of approximately $4.2 million to reduce the book value of these
assets was recorded in the fourth quarter ended April 30, 1998. The Company
considers continued operating losses and significant and long-term changes in
industry conditions to be its primary indicators of potential impairment. An
impairment was recognized when the future undiscounted cash flows of each
facility were estimated to be insufficient to recover their related carrying
values. As such, the carrying values of these assets were written down to the
Company's estimates of fair value. Fair value was based on current appraisal
values, or other estimates of fair value such as discounted future cash flows.
Accordingly, actual results could vary significantly from such estimates. At
April 30, 1998, these assets have a remaining carrying amount of $6.5 million.
The Company intends to operate one of these facilities while pursuing
alternatives for its sale. The other facility has been shut down and the Company
intends to sell it. Together, these two facilities recorded net sales of $24.8
million, $36.9 million, and $22.6 million, and contributed net operating losses
of $3.1 million, $.1 million, and $2.4 million for the years ended April 30,
1998, 1997, and 1996, respectively, excluding the impairment charge in the
fourth quarter of fiscal 1998.
The Company continually considers market conditions and changes
occurring in the forest products industry to evaluate the status of its
individual mill facilities, and management believes that all necessary
impairment adjustments have been made at April 30, 1998. However, given the
volatility of the market over the past nine months and the losses incurred
during that fiscal period, management will continue to evaluate impairment
issues.
-46-
<PAGE>
NOTE 3 - NET INCOME (LOSS) PER SHARE
This computation is based on net income (loss) less preferred dividends
for the period, divided by the weighted average number of shares of Common Stock
and equivalents assumed to be outstanding during the period. Anti-dilutive
common stock equivalents consisting of certain employee stock options and
certain convertible preferred stock, are excluded from the calculation.
The calculations of net income (loss) per share for the years ended
April 30, 1998, 1997 and 1996 are summarized below (in thousands, except
per-share data):
<TABLE>
<CAPTION>
Year Ended April 30,
------------------------------------------
1998 1997 1996
------------- ------------ -------------
<S> <C> <C> <C>
Net income (loss) $ (12,150) $ 8,970 $ (6,044)
Preferred dividends 2,290 2,228 2,364
------------- ------------ -------------
Net income (loss) applicable to common shareholders $ (14,440) $ 6,742 $ (8,408)
============= ============ =============
Weighted average shares outstanding
- Basic 11,130 11,078 11,077
Additional shares assumed from:
- Conversion of Series B preferred stock -- 213 --
- Exercise of stock options -- 94 --
------------- ------------ -------------
Average number of shares and equivalents outstanding
- Diluted 11,130 11,385 11,077
============= ============ =============
Net income (loss) per common share
- Basic $ (1.30) $ 0.61 $ (0.76)
============= ============= =============
- Diluted $ (1.30) $ 0.59 $ (0.76)
============= ============= =============
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.
</TABLE>
-47-
<PAGE>
NOTE 4 - TIMBER, TIMBERLANDS AND TIMBER-RELATED ASSETS
The following summarizes the components of timber, timberlands and
timber-related assets (in thousands):
APRIL 30,
------------------------
1998 1997
---------- ----------
Timber held under contract $ 1,270 $ 1,164
Timber, timberlands and timber deposits 2,754 2,531
Logging roads (at amortized cost) 228 241
---------- ----------
$ 4,252 $ 3,936
========== ==========
Timber and timberlands, long-term $ 0 $ 629
========== ==========
Timber held under contract is comprised of various public and
private timber contracts representing approximately 10.0 million board feet
(MMBF) at April 30, 1998 and 10.9 MMBF at April 30, 1997. Outstanding
obligations relating to these contracts at April 30, 1998 and 1997, were
$323,000 and $246,000, respectively.
-48-
<PAGE>
NOTE 5 - LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
APRIL 30,
-----------------------
1998 1997
---------- ----------
<S> <C> <C>
Senior secured debt, bearing interest at 10%; principal
payable in quarterly installments of $225 through December
15, 1997 then quarterly installments of $400 through
December 15, 1998, then quarterly installments of $1,000
beginning March 15, 1999, and a final payment in December
2004; secured by substantially all assets of the
Company. $ 43,744 $ 46,630
Secured notes, interest at 9% and 10%; payable on
various dates; secured by various assets. 373 388
Priority notes, balance payable in fiscal 1998, plus interest
at 8.3%; senior to all other unsecured obligations. -- 17
Unsecured senior subordinated notes, net of discount of
$305 ($329 at April 30, 1997); 8% coupon, effective
interest rate of 13.3%; semi-annual interest payments due
each June 30 and December 31; principal due in full June
30, 2005. 967 943
Other unsecured debt, net of discount of $20 ($66 at April
30, 1997); payable in equal annual installments of $270;
non-interest bearing; effective interest rate of 12.3%. 251 475
---------- ----------
45,335 48,453
Less current maturities (8,467) (2,367)
---------- ----------
$ 36,868 $ 46,086
========== ==========
</TABLE>
The Company has classified $6 million of debt as current related to the
assets held for sale as described in Note 2. The Company's primary debt
agreement calls for proceeds received from the sale of facilities to be used to
pay down 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, total liabilities
ratio (as defined), and collateral coverage (as defined). This agreement also
imposes certain restrictions and limitations on capital expenditures,
investments, dividend payments, new indebtedness, and transactions with
officers, directors, stockholders and affiliates. This debt agreement was most
recently amended as of April 1, 1998, with respect to certain affirmative
financial performance covenants.
-49-
<PAGE>
NOTE 5 - LONG-TERM DEBT (Continued)
At April 30, 1998 the Company's tangible net worth was $3.9 million,
compared to a negative $1.0 million required by the covenant. At that same date,
the Company's working capital was $15.2 million, compared to $9.0 million
required by the covenant. Also, at April 30, 1998, the Company's adjusted
cumulative operating income was $34.1 million, compared to $27.5 million
required. The collateral coverage ratio at April 30, 1998 was 66.3%, compared to
a 50% minimum required level. The total liabilities ratio was 93.7% at April 30,
1998, compared to a maximum allowed of 105%. The required level of tangible net
worth increases to $0 on January 1, 1999, $2.0 million at July 1, 1999, and $4.0
million at July 1, 2000. The required 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 required level of adjusted cumulative operating income
increases to $30.0 million at August 1, 1998, $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 100% on
August 1, 1998, 95% at July 1, 1999, and 85% at July 1, 2000. During the year
ended April 30, 1998, the Company's adjusted cumulative operating income
decreased by $2.7 while showing a loss before taxes of $9.8 million. The Company
continues to be in compliance with all covenants contained in this agreement.
In accordance with the Company's primary debt agreement, additional
prepayments are required if the Company's cumulative operating income exceeds
certain specified amounts. No such prepayment will be required for the year
ended April 30, 1998. In connection with the May 1, 1996 amendment, the Company
agreed to an additional prepayment computed at 30% of quarterly net income.
Payments made during the year ended April 30, 1998 pursuant to this provision
totaled $1.6 million.
Future minimum repayments, including anticipated payment of proceeds
from production facility sales but exclusive of any mandatory prepayments if
certain earnings thresholds are reached, under the terms of all of the Company's
debt are as follows (in thousands):
Fiscal year ending April 30, 1999 $ 8,467
Fiscal year ending April 30, 2000 4,017
Fiscal year ending April 30, 2001 4,017
Fiscal year ending April 30, 2002 4,229
Fiscal year ending April 30, 2003 4,094
Thereafter 20,511
------
$ 45,335
-50-
<PAGE>
NOTE 6 - PROVISION FOR INCOME TAXES
The federal and state income tax provision consists of the following
(in thousands):
<TABLE>
<CAPTION>
Year Ended April 30,
------------------------------------------------
1998 1997 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Income (loss) before income taxes $ (9,786) $ 12,090 $ (8,498)
============== ============== ==============
Provision for income taxes (benefit):
Federal $ 2,115 $ 2,636 $ (2,114)
State 249 484 (340)
-------------- -------------- --------------
$ 2,364 $ 3,120 $ (2,454)
============== ============== ==============
Current $ 1,451 $ 283 $ (2,232)
Deferred 913 2,837 (222)
-------------- -------------- --------------
$ 2,364 $ 3,120 $ (2,454)
============== ============== ==============
</TABLE>
The difference between the actual income tax provision (benefit) and
the tax provision (benefit) computed by applying the statutory federal tax rate
to income (loss) before taxes is attributable to the following (in thousands):
<TABLE>
<CAPTION>
Year Ended April 30,
----------------------------------------------------------
1998 1997 1996
------------------ ------------------ ------------------
Amount % Amount % Amount %
--------- ------- --------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Federal statutory income tax
provision (benefit) $ (3,327) (34%) $ 4,111 34% $(2,889) (34%)
State statutory income tax
provision (benefit) (391) (4) 484 4 (340) (4)
Change in valuation allowance for
deferred tax assets 7,282 74 (414) (3) (32) --
Carryback (establishment) of
net operating losses (NOL) in years
with rates different than statutory rates (1,200) (12) (1,061) (9) 807 9
--------- ------- --------- ------- --------- -------
Actual income tax provision (benefit) $ 2,364 24% $ 3,120 26% $ (2,454) (29%)
===========================================================
</TABLE>
-51-
<PAGE>
NOTE 6 - PROVISION FOR INCOME TAXES (Continued)
At April 30, 1998 and 1997, deferred tax assets and liabilities were
comprised of the following (in thousands):
Year Ended April 30,
----------------------------
1998 1997
------------ ------------
Deferred tax assets:
Vacation accruals $ 248 $ 265
Insurance accruals 860 901
Professional fee amortization and accruals 113 114
Asset impairments not deductible for tax
until realized 1,584 --
Tax benefit of NOL carryforward and
tax credits carryforward 9,862 5,032
Bad debts, discounts and other 73 103
------------ ------------
12,740 6,415
Deferred tax liabilities:
Depreciation and capitalization differences
between financial and tax accounting (2,846) (3,020)
Professional fee amortization and accruals 711 812
Other (73) (44)
------------ ------------
(2,208) (2,252)
------------ ------------
Net deferred tax assets 10,532 4,163
Valuation allowance (9,782) (2,500)
------------ ------------
Net deferred tax asset reported $ 750 $ 1,663
============ ============
During the current year, the Company has sustained significant
operating losses. Because of the difficult operating environment and the likely
delayed or decreased use of the Company's deferred tax assets to shelter future
income, management has increased the Company's valuation reserve to
approximately $9.8 million, resulting in a charge of $7.3 million in additional
income tax expense in the year ended April 30, 1998. Management periodically
reviews the above factors and may change the amount of valuation allowance as
facts and circumstances dictate.
In the quarter ended April 30, 1996, the Company, utilizing available
ten-year carryback provisions of the Internal Revenue Code, carried back its
fiscal year 1995 loss to prior years and also amended and carried back its
fiscal year 1993 tax return loss to fiscal year 1987. These carrybacks resulted
in the Company recording an income tax refund receivable of $2.1 million as of
April 30, 1996, and reducing the available NOL at April 30, 1996 by $7.9
million. As of April 30, 1997, the Company had received $1.1 million of this tax
refund receivable.
-52-
<PAGE>
NOTE 6 - PROVISION FOR INCOME TAXES (Continued)
During the current year, the Company was notified that these amended
tax returns and carryback claims were under review by the Internal Revenue
Service (IRS). During the examination, the IRS and the Company settled the
amount of the claims to approximately $1 million. This has resulted in the
Company removing the remaining receivable from the books as additional income
tax expense during the current year. As part of the IRS's settlement of a
portion of the claim, approximately $4.6 million of NOL that had been previously
utilized in the amended tax returns and carryback claims became available for
future carryforward to offset future taxable income. The Company's remaining
adjusted NOL at April 30, 1998 is approximately $22 million for federal income
tax and $20 million for state income tax purposes. These carryforwards expire in
2007 and 2012.
NOTE 7 - STOCKHOLDERS' EQUITY
Stockholders' equity at April 30, 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 any accrued dividends at the option of the Board of Directors, in the
form of cash or in exchange for senior unsecured debt with 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.
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; 11,154,374
shares issued and outstanding (11,083,474 as of April 30, 1997). Before giving
effect to any shares that might be issued pursuant to the management incentive
stock option
-53-
<PAGE>
NOTE 7 - STOCKHOLDERS' EQUITY (Continued)
plan or conversion of any Series A preferred stock, the total number of common
shares would increase to 11,367,067 shares if the remaining outstanding Series B
preferred stock is converted to Common Stock.
On March 4, 1998, the Board of Directors adopted a Shareholder Rights
Plan (Plan). Under the Plan, the Board declared a distribution of one Preferred
Share Purchase Right (Right) for each outstanding common share of the Company.
The distribution was payable on March 4, 1998 to the shareholders of record on
that day. The Rights are attached to, and automatically trade with, the
outstanding shares of the Company's common stock.
The rights will become exercisable in the event that any person or
group of affiliated persons becomes a holder of 15% or more of the Company's
outstanding common shares or any person or group of affiliated persons, at the
date of the Rights Agreement, beneficially owning 15% or more of the then
outstanding common shares has acquired beneficial ownership of 31% or more of
the outstanding common shares. In addition, the rights will become exercisable
in the event of the commencement of a tender or exchange offer which, if
consummated, would result in that person or group of affiliated persons meeting
the above listed requirements as to ownership of the Company's outstanding
common shares. Once the rights become exercisable they entitle all other
shareholders to purchase, by payment of a $7.50 exercise price, one
one-hundredth of a share of Series C Junior Participating Preferred Stock,
subject to adjustment. In addition, at any time after the above mentioned
criteria have been met and prior to the acquisition of a 50% position, the Board
of Directors may require, in whole or in part, each outstanding Right to be
exchanged for one share of common stock or one one-hundredth of a share of
Series C Junior Participating Preferred Stock. In general, none of the benefits
of the Rights will be available to a holder of the common stock meeting the
above mentioned criteria. The Rights may be redeemed by the Company at a price
of $0.01 per Right at any time prior to their expiration of March 4, 2008.
NOTE 8 - REORGANIZATION CHARGES (CREDITS)
In fiscal 1993, the Company reorganized under Chapter 11 of the Federal
Bankruptcy Code. In conjunction with the restructuring, management reduced the
value of assets associated with certain facilities to their estimated net
realizable value and established certain reserves for expenses related to the
cost of holding and disposing of such facilities. In fiscal year 1996, the
reorganization credits related to the Company's sale of idle assets and
settlement of obligations at amounts which varied from their original estimates.
In fiscal years 1997 and 1998, no reorganization credits or charges were
recognized.
-54-
<PAGE>
NOTE 9 - STOCK OPTIONS AND EMPLOYEE BENEFIT PLANS
Effective December 30, 1992, the Company's 1986 Stock Option Plan
("Option Plan") was amended and restated, and new options were granted. This
Option Plan terminated on July 11, 1996. At the Company's Annual Meeting of
Shareholders held on October 21, 1996, the stockholders approved a 1996 Stock
Option Plan ("1996 Option Plan"). Non-qualified stock options may be granted to
directors, independent contractors, consultants and employees to acquire up to
525,000 shares of Common Stock. Options may be granted for a term not to exceed
10 years and are not transferable other than by will or the laws of descent and
distribution. The 1996 Option Plan provides for incremental vesting based upon
the optionee's period of service with the Company, and is administered by the
Board of Directors. Stock options outstanding at April 30, 1998, 1997 and 1996
related only to employees and directors.
Stock Options
-----------------------
Weighted
Average
Number of Exercise
Shares Price
----------- ----------
Shares under option at April 30, 1996 741,600 $1.92
Options granted 453,000 1.51
Options exercised (6,400) 0.96
Options canceled (23,600) 3.00
-----------
Shares under option at April 30, 1997 1,164,600 1.74
Options exercised (70,900) 1.48
Options canceled (28,400) 2.04
-----------
Shares under option at April 30, 1998 1,065,300 $1.75
===========
Shares exercisable at April 30, 1998 822,790 $1.82
===========
Exercise prices for options outstanding as of April 30, 1998 ranged
from $.95625 to $3.00. The weighted average remaining contractual life of those
options is 6.5 years.
-55-
<PAGE>
NOTE 9 - STOCK OPTIONS AND EMPLOYEE BENEFIT PLANS (Continued)
<TABLE>
<CAPTION>
Employee Options Outstanding Options Exercisable
--------------------------------------------------------------- ------------------------------
Weighted-Avg
Number Remaining Number
Range of Outstanding at Contractual Weighted-Avg Exercisable at Weighted-Avg
Exercise Prices 4/30/98 Life Exercise Price 4/30/98 Exercise Price
----------------- -------------- ------------ -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$0.95625 56,200 4.7 $0.95625 56,200 $0.95625
1.50000 378,850 4.9 1.50000 370,100 1.50000
1.51500 434,600 8.5 1.51500 200,840 1.51500
3.00000 195,650 5.4 3.00000 195,650 3.00000
------------ ------------
$.95625 - $3.00 1,065,300 6.5 1.75292 822,790 $1.82320
============ ============
</TABLE>
Options for 90,400 shares remain available for grant. These options
will have an exercise price of an amount per share determined by the Company's
Board of Directors, but not less than 85 percent of the fair market value of the
Company's Common Stock on the date of grant.
The Company maintains a weekly discretionary bonus program for its mill
workers based on the performance of each production shift at individual mills.
The bonus program for mill workers is designed to reward productivity, safety
and regular attendance. This bonus program is open-ended but designed to attract
good production workers by giving them the reasonable opportunity to reach
high-end pay levels for similar work in the industry when average bonuses are
added to base wages. It is also designed so that manufacturing labor costs, per
unit of lumber produced, go down as the average bonus level goes up.
The Company also has a monthly profit sharing discretionary bonus plan
for all levels of salaried employees, based upon pre-tax profits at each
operating unit. This bonus program, which automatically moves the Company's
total general and administrative expense up or down in cyclical earnings
periods, is vital to the Company's ability to attract desirable salaried
employees at lower than industry average rates and to retain such employees
through cyclical down earnings periods.
The following summarizes the amounts paid pursuant to the Company's
bonus programs (in thousands):
Year Ended April 30,
----------------------------
1998 1997 1996
-------- -------- --------
Hourly employee bonus $ 5,200 $ 4,700 $ 3,800
Salaried employee bonus 1,200 3,600 700
-------- -------- --------
$ 6,400 $ 8,300 $ 4,500
======== ======== ========
The Company maintains a 401(k) Retirement Savings Plan. Under the plan,
eligible participants may contribute 2 to 20 percent of their compensation. The
Company matches contributions of employees participating in the
Production/Safety/Attendance Bonus program on a monthly basis in an amount as
determined from time to time by the Board of Directors. Salaried employees are
not generally entitled to matching
-56-
<PAGE>
NOTE 9 - STOCK OPTIONS AND EMPLOYEE BENEFIT PLANS (Continued)
contributions. During the years ended April 30, 1998, 1997 and 1996, the Company
incurred expenses for matching contributions and plan administration of
$289,000; $235,000; and $214,000; respectively. Company contributions to this
plan are funded on a current basis.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
(a) Timber commitments - At April 30, 1998, the Company had contracts
to purchase approximately 22.6 MMBF of timber from the Oregon State Department
of Forestry and others for an estimated stumpage cost of $5,812,000. Deposits
were made on these contracts and additional payments are required as timber is
removed. Because of the volatility of product prices, the long-term nature of
these contracts and the options of selling logs, or processing them into lumber,
it is not possible to estimate potential losses, if any, that might be incurred
under these contracts at April 30, 1998. The expiration dates of the contracts
are as follows:
Footage Stumpage
Year Ending April 30, MMBF Cost
--------------------- ------- --------------
1999 6.6 $ 1,569,000
2000 3.4 751,000
2001 12.6 3,492,000
---- --------------
22.6 $ 5,812,000
==== ==============
(b) Leases - At April 30, 1998, the Company had future minimum rental
commitments for operating leases as follows: 1999 - $1,397,000; 2000 -
$1,170,000; 2001 - $1,096,000; 2002 - $517,000; 2003 - $351,000; thereafter -
$108,000.
Total rental expense for all leases was $1,348,000, $1,136,000 and
$1,124,000 for the years ended April 30, 1998, 1997 and 1996, respectively.
Actual rental expense includes short-term rentals and leases shorter than one
year, which are not included in the commitments.
(c) Litigation - The Company is involved in certain 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 will
not have a material impact upon the Company's consolidated financial condition
or results of operations.
(d) Environmental compliance - 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.
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NOTE 10 - COMMITMENTS AND CONTINGENCIES (Continued)
(e) Year 2000 compliance - The Company is conducting a review of its
computer and other systems to identify those areas that could be affected by the
"Year 2000" issue and is developing an implementation plan to resolve the issue.
The Company presently believes, with modification to existing software and
converting to new software and hardware, the Year 2000 problem will not pose
significant operational problems and is not anticipated to be material to its
financial position or results of operations in any given year.
NOTE 11 - UNAUDITED QUARTERLY FINANCIAL INFORMATION
The following quarterly information for the years ended April 30, 1998
and 1997 is unaudited, but includes all adjustments (which consist of normal
recurring adjustments) which management considers necessary for a fair
presentation of such information (in thousands, except per-share amounts):
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30, 1998
---------------------------------------------------------------
QUARTER
--------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net sales $ 68,881 $ 67,387 $ 55,951 $ 49,832 $ 242,051
Gross profit (loss) $ 7,040 $ 3,533 $ (1,007) $ 1,182 $ 10,748
Net Income (loss) $ 1,944 $ (198) $ (3,645) $ (10,251) $ (12,150)
Net income (loss) per diluted
common share $ 0.12 $ (0.07) $ (0.38) $ (0.97) $ (1.30)
YEAR ENDED APRIL 30, 1997
---------------------------------------------------------------
QUARTER
--------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
----------- ----------- ----------- ----------- -----------
Net sales $ 66,973 $ 79,206 $ 64,469 $ 73,438 $ 284,086
Gross profit $ 7,662 $ 9,454 $ 4,487 $ 7,415 $ 29,018
Net Income $ 2,094 $ 3,001 $ 449 $ 3,426 $ 8,970
Net income (loss) per diluted
common share $ 0.14 $ 0.21 $ (0.01) $ 0.25 $ 0.59
</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.
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NOTE 12 - VALUATION AND QUALIFYING RESERVES
The following table summarized the activity associated with the
Company's allowance for doubtful accounts and allowance for discounts for the
years ended April 30, 1998, 1997 and 1996 (in thousands):
Allowance for doubtful accounts -
deducted from accounts receivable in the
balance sheet
Year Ended April 30,
-------------------------------
1998 1997 1996
------- ------- -------
Balance at beginning of year $ 49 $ 24 $ 115
Charged (credited) to costs and expenses 5 29 (82)
Deductions (1) (15) (4) (9)
------- ------- -------
Balance at end of year $ 39 $ 49 $ 24
======= ======= =======
Allowance for discounts -
deducted from accounts receivable in the
balance sheet
Year Ended April 30,
-------------------------------
1998 1997 1996
------- ------- -------
Balance at beginning of year $ 146 $ 88 $ 84
Charged to costs and expenses 2,296 2,696 1,688
Deductions (2) (2,353) (2,638) (1,684)
------- ------- -------
Balance at end of year $ 89 $ 146 $ 88
======= ======= =======
(1) Uncollected receivables written off, net of recoveries.
(2) Discounts taken by customers.
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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
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approved by order of the United States Bankruptcy 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
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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. 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.
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<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 onwhich 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
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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 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.
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(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.
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
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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 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
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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 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
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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.
(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.
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(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 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.
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(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.
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.
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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 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.
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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 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,
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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.
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(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).
(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.
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(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 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
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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
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
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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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Exhibit 4.2.9
AMENDMENT
DATED AS OF APRIL 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:
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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 3/31/98 0.57 (57%)
4/1/98 through 6/30/99 0.50 (50%)
7/1/99 and beyond 0.63 (63%)
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."
2. Credit Agreement Section 6.01.D is hereby restated to read as
follows:
D. Tangible Net Worth. Maintain a Tangible Net Worth of not
less than the respective amount set forth below, at all times during
the periods set forth below:
Period Tangible Net Worth
------ ------------------
Effective Date through 7/31/93 $ 6.5 Million
8/1/93 through 4/30/94 $ 8.0 Million
5/1/94 through 4/30/95 $10.0 Million
5/1/95 through 10/31/95 $15.0 Million
11/1/95 through 12/31/95 $13.5 Million
1/1/96 through 6/30/96 $11.0 Million
7/1/96 through 6/30/97 $ 9.0 Million
7/1/97 through 3/31/98 $10.0 Million
4/1/98 through 12/31/98 ($1.0)Million (Negative)
1/1/99 through 6/30/99 $0
7/1/99 through 6/30/00 $ 2.0 Million
7/1/00 and beyond $ 4.0 Million
3. 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
-81-
<PAGE>
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 30
11/1/98 through 6/30/99 34
7/1/99 through 6/30/00 37.5
7/1/00 through 6/30/01 42.5
7/1/01 and beyond 47.5
4. Credit Agreement Section 6.01.I is hereby restated to read as
follows:
I. Total Liabilities Ratio. Maintain a ratio of Borrowers'
Total Liabilities to Total Assets (the "Liabilities Ratio"), not
greater than the Liabilities Ratios set forth below, at all times
during the periods set forth below:
Period Liabilities Ratio
------ -----------------
Effective Date through 7/31/94 0.95 (95%)
8/1/94 through 4/30/95 0.90 (90%)
5/1/95 through 12/31/95 0.85 (85%)
1/1/96 through 10/31/96 0.87 (87%)
11/1/96 through 6/30/97 0.89 (89%)
7/1/97 through 3/31/98 0.87 (87%)
4/1/98 through 7/31/98 1.05 (105%)
8/1/98 through 6/30/99 1.00 (100%)
7/1/99 through 6/30/00 0.95 (95%)
7/1/00 and beyond 0.85 (85%)
5. 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
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<PAGE>
(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 3/31/98 17.5
4/1/98 through 6/30/99 9
7/1/99 through 6/30/00 11.5
7/1/00 through 6/30/02 14
7/1/02 and beyond 16.5
6. Credit Agreement Section 6.02.A is 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 the following sums per fiscal year of Borrowers as set forth
below:
Fiscal Year Ending Millions of Dollars
------------------ -------------------
Effective Date through 4/30/97 $8
4/30/98 $8.5
4/30/99 $3.5
4/30/00 $4.0
4/30/01 $4.5
4/30/02 $5.0
4/30/03 and beyond $6.0
7. In all other respects, the Credit Agreement shall remain unchanged
and in full force and effect.
-83-
<PAGE>
EFFECTIVE DATE: April 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:
---------------------------
Its:
OPPENHEIMER & CO., INC. ---------------------------
(pro rata interest: 13.532675%)
By:
--------------------------- WTD INDUSTRIES, INC
Its:
---------------------------
(pro rata interest: 6.911127%) By:
---------------------------
Its:
FIXED PLUS PARTNERS, Beneficial ---------------------------
Owner of Note Registered in the Name
of Bear Stearns Securities Corp.
By:
---------------------------
Its:
---------------------------
(pro rata interest: 1.994082%)
-84-
<PAGE>
Exhibit 10.9
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") dated as of May 27, 1998, is
between WTD INDUSTRIES, INC. ("Employer") and Robert J. Riecke ("Employee").
RECITALS:
Employer desires to retain Employee as a key senior manager and needs
Employee to stay during what is expected to be a difficult management transition
period.
Employee desires to remain with Employer under the terms set forth below.
NOW, THEREFORE, in consideration of the mutual promises, agreements and
conditions hereinafter set forth, it is agreed as follows.
AGREEMENT
1. Term.
Subject to the termination provisions in this Agreement, Employer
agrees to employ Employee in his present position, and Employee agrees to
continue employment in that position for a one-year term beginning June 1, 1998,
and ending May 31,1999.
2. Compensation and Benefits.
a. Base Salary.
During the term of this Agreement Employee's base salary shall be the
greater of (a) Employee's current base salary or (b) any salary increase made to
Employee after the date of this Agreement. This same base salary shall be used
for the purposes of any payments provided elsewhere in this Agreement.
b. Bonus Programs.
In addition to base salary the Employee will receive the benefit of
all bonus programs offered by the Employer on the same basis as other senior
managers of the Employer.
c. Other Employee Benefits.
Employer agrees to allow Employee to participate in all benefit plans
and programs in accordance with the terms of such plans and programs as Employer
may have in effect from time to time during the period of this Agreement. Such
benefit plans and programs may include, without limitation, health insurance,
life insurance, disability insurance, and retirement plans.
-85-
<PAGE>
3. Termination.
a. For Cause.
Employer may terminate Employee at any time for cause with immediate
effect upon delivering written notice thereof to Employee. For purposes of this
Agreement, "for cause" shall mean:
i. Repeated incompetence in the performance of Employee's duties,
after written warning by Employer, gross negligence, or willful
misconduct;
ii. Embezzlement, theft, larceny, material fraud, or other acts of
dishonesty (including the unauthorized disclosure of
confidential information);
iii. The continued failure of Employee to render services under this
Agreement (including unreasonable absenteeism). Absenteeism
shall not be considered unreasonable if provided for by Federal
Family Medical Leave or similar statutes. In the event of such
failure of Employee to render services, Employer's remedy is
limited to termination;
iv. Aiding an existing or would-be competitor of Employer;
v. Conviction of or entrance of a plea of guilty or nolo
contendere to a felony or other crime that has a material
adverse effect on Employee's ability to carry out his duties
under this Agreement or upon the reputation of Employer;
vi. Conduct involving moral turpitude; or
vii. Repeated material insubordination after written warning by
Employer.
Upon termination for cause, Employer shall pay Employee his base
salary and bonus compensation earned through the date of termination, plus any
employee benefits earned through the date of termination in accordance with
applicable plans. Employee's rights under existing stock option or
indemnification agreements shall be determined by the terms of said agreements.
b. Without Cause.
Employer may terminate Employee at any time without cause upon
written notice. Upon termination without cause, Employer shall pay Employee a
lump sum payment equal to the sum of 12 times Employee's last monthly base
salary plus the total amount of any bonus compensation awarded to Employee in
the last 12 months.
-86-
<PAGE>
Additionally, Employer shall enter into amendments of existing stock option
agreements to extend the exercise of all stock options held by Employee on the
date of termination to the first annual anniversary date of termination and
shall pay Employee's COBRA premiums to continue health benefits for 12 months
following termination of employment.
c. Upon Death.
In the event of Employee's death during the term of this Agreement,
Employer shall pay Employee's estate Employee's base salary and bonus
compensation through the last day of the month in which his death occurs, plus
any employee benefits payable in accordance with applicable plans.
d. Upon Disability.
In the event of disability of Employee during the term of this
Agreement, Employee's salary continuation rights shall be determined by
Employer's short and long term disability plans.
4. Notice.
All requests, demands and other communications required or permitted
hereunder shall be given in writing and shall be sufficient if personally
delivered or mailed to Employee in care of WTD Industries, Inc., Suite 900,
10260 S.W. Greenburg Road, Portland, Oregon 97223, or at the last residence
address set forth in Employee's personnel records maintained by Employer.
5. Successor Liability.
This Agreement automatically shall be binding upon all successors and
assigns of the Employer, including, without limitations, any corporation or
other entity which may hereafter acquire or succeed to all or substantially all
of the business or assets of the Employer by any means whether direct or
indirect, by purchase, merger, consolidation or otherwise.
6. Other Provisions.
a. Attorney Fees.
If any suit or action is filed by any party to enforce this Agreement
or otherwise with respect to the subject matter of this Agreement, the
prevailing party shall be entitled to recover reasonable attorney fees incurred
in preparation or in prosecution or defense of such suit or action as fixed by
the trial court or appellate court.
-87-
<PAGE>
b. Amendments.
This Agreement may be amended only be an instrument in writing
executed by all the parties.
c. Headings.
The headings used in this Agreement are solely for convenience of
reference, are not part of this Agreement, and are not to be considered in
construing or interpreting this Agreement.
d. Entire Agreement.
This Agreement (including the exhibits) sets forth the entire
understanding of the parties with respect to the subject matter of this
Agreement and supersedes any and all prior understandings and agreements,
whether written or oral, between the parties with respect to such subject
matter.
e. Counterparts.
This Agreement may be executed by the parties in separate
counterparts, each of which when executed and delivered shall be an original,
but all of which together shall constitute one and the same instrument.
f. Severability.
If any provision of this Agreement shall be invalid or unenforceable
in any respect, for any reason, the validity and enforceability of any such
provision in any other respect and of the remaining provisions of this Agreement
shall not be in any way impaired.
g. Governing Law and Venue.
This Agreement shall be governed by and construed in accordance with
the laws of the State of Oregon.
If any suit or action is filed by any party to enforce this Agreement
or otherwise with respect to the subject matter of this Agreement, venue shall
be in the federal or state courts in Multnomah County, Oregon.
-88-
<PAGE>
IN WITNESS WHEREOF, this Agreement has been signed by Employer and
Employee.
EMPLOYER: WTD INDUSTRIES, INC.
By
--------------------------------
Its
--------------------------------
EMPLOYEE:
-----------------------------------
Signature
Print Name:
-89-
<PAGE>
Schedule to Exhibit 10.9
Employment Agreements dated May 27, 1998 between Registrant and each of
the following:
David J. Loftus
K. Stanley Martin
John C. Stembridge
James R. Wilson
-90-
<PAGE>
Exhibit 12.2
WTD INDUSTRIES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
COMPUTATION OF REGISTRANT'S NET INCOME (LOSS)
TO AVERAGE TOTAL ASSETS
(In Thousands, Except Ratios)
YEAR ENDED APRIL 30,
---------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
NET INCOME (LOSS) $ (12,150) $ 8,970 $ (6,044) $ 3,700 $ 6,300
============ ============ ============ ============ ============
AVERAGE TOTAL ASSETS
Beginning of period $ 86,486 $ 77,396 $ 88,944 $ 97,100 $ 100,039
End of period 65,311 86,486 77,396 88,944 97,100
Average $ 75,899 $ 81,941 $ 83,170 $ 93,022 $ 98,570
============ ============ ============ ============ ============
RATIO OF NET INCOME (LOSS) TO
AVERAGE TOTAL ASSETS (16.0) % 10.9 % (7.3)% 4.0 % 6.4 %
</TABLE>
-91-
<PAGE>
Exhibit 12.3
WTD INDUSTRIES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
COMPUTATION OF REGISTRANT'S NET INCOME (LOSS)
TO AVERAGE STOCKHOLDERS' EQUITY
(In Thousands, Except Ratios)
YEAR ENDED APRIL 30,
---------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
NET INCOME (LOSS) $ (12,150) $ 8,970 $ (6,044) $ 3,700 $ 6,300
============ ============ ============ ============ ============
AVERAGE STOCKHOLDERS' EQUITY
Beginning of period $ 18,434 $ 11,686 $ 20,076 $ 18,512 $ 13,684
End of period 4,093 18,434 11,686 20,076 18,512
Average $ 11,264 $ 15,060 $ 15,881 $ 19,294 $ 16,098
============ ============ ============ ============ ============
RATIO OF NET INCOME (LOSS) TO
AVERAGE STOCKHOLDERS'
EQUITY (107.9) % 59.6 % (38.1) % 19.2 % 39.1 %
</TABLE>
-92-
<PAGE>
Exhibit 12.4
WTD INDUSTRIES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
COMPUTATION OF REGISTRANT'S AVERAGE STOCKHOLDERS'
EQUITY TO AVERAGE TOTAL ASSETS
(In Thousands, Except Ratios)
YEAR ENDED APRIL 30,
---------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
AVERAGE STOCKHOLDERS' EQUITY
Beginning of period $ 18,434 $ 11,686 $ 20,076 $ 18,512 $ 13,684
End of period 4,093 18,434 11,686 20,076 18,512
Average $ 11,264 $ 15,060 $ 15,881 $ 19,294 $ 16,098
============ ============ ============ ============ ============
AVERAGE TOTAL ASSETS
Beginning of period $ 86,486 $ 77,396 $ 88,944 $ 97,100 $ 100,039
End of period 65,311 86,486 77,396 88,944 97,100
Average $ 75,899 $ 81,941 $ 83,170 $ 93,022 $ 98,570
============ ============ ============ ============ ============
RATIO OF AVERAGE STOCKHOLDERS'
EQUITY TO AVERAGE
TOTAL ASSETS 14.8 % 18.4 % 19.1 % 20.7 % 16.3 %
</TABLE>
-93-
<PAGE>
Exhibit 21.1
WTD Industries, Inc.
Subsidiaries of the Registrant
As of July 2, 1998
Grouped by State/Country of Incorporation
Oregon
- ------
Alturas Lumber Co.
Burke Lumber Co.
Central Point Lumber Co.
Cottage Grove Lumber Co.
Crater Lake Lumber Co.
Custer Lumber Co.
Eugene Wood Products Co.
Glide Lumber Products Co.
Goshen Veneer Co.
Greenweld North America Co.
Halsey Veneer Co.
Judith Gap Lumber Co.
Junction City Lumber Co.
Midway Engineered Wood Products, Inc.
North Powder Lumber Co.
Pacific Softwoods Co.
Philomath Forest Products Co.
Port Westward Pulp Co.
Riverside Lumber Co.
Silverton Forest Products Co.
Trask River Lumber Co.
TreeSource, Inc.
Union Forest Products Co.
Union Rail Enterprises, Inc.
Western Timber Co.
Whitehall Plywood, Inc.
Washington
- ----------
Cle Elum Lake Veneer Co.
Graham Plywood Co.
Morton Forest Products Co.
Olympia Forest Products Co.
Orient Lumber Co.
Pacific Hardwoods-Aberdeen Co.
Pacific Hardwoods-South Bend Co.
Sedro-Woolley Lumber Co.
Spanaway Lumber Co.
Tumwater Lumber Co.
Valley Wood Products Co.
Montana
- -------
Columbia Falls Forest Products, Inc.
Guam
- ----
TreeSource International, Inc.
-94-
<PAGE>
Exhibit 23.1
[MOSS ADAMS LETTERHEAD]
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in the Registration
Statement on Form S-8 pertaining to WTD Industries, Inc. 1996 Stock Option Plan
with respect to the financial statements of WTD Industries, Inc. which appear in
the WTD Industries, Inc. Annual Report on Form 10-K for the year ended April 30,
1998, filed with the Securities and Exchange Commission.
/s/ Moss Adams LLP
------------------
MOSS ADAMS
Beaverton, Oregon
June 4, 1998
-95-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM REGISTRANT'S
REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED APRIL 30, 1998 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-START> MAY-01-1997
<PERIOD-END> APR-30-1998
<CASH> 2,157
<SECURITIES> 0
<RECEIVABLES> 10,464
<ALLOWANCES> 0
<INVENTORY> 14,005
<CURRENT-ASSETS> 39,508
<PP&E> 76,820
<DEPRECIATION> 52,378
<TOTAL-ASSETS> 65,311
<CURRENT-LIABILITIES> 24,350
<BONDS> 36,868
0
21,021
<COMMON> 28,752
<OTHER-SE> (45,680)
<TOTAL-LIABILITY-AND-EQUITY> 65,311
<SALES> 242,051
<TOTAL-REVENUES> 242,051
<CGS> 231,303
<TOTAL-COSTS> 231,303
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,682
<INCOME-PRETAX> (9,786)
<INCOME-TAX> 2,364
<INCOME-CONTINUING> (12,150)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,150)
<EPS-PRIMARY> (1.30)
<EPS-DILUTED> (1.30)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM REGISTRANT'S
REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED APRIL 30, 1997 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1997
<PERIOD-START> MAY-01-1996
<PERIOD-END> APR-30-1997
<CASH> 8,209
<SECURITIES> 0
<RECEIVABLES> 16,830
<ALLOWANCES> 0
<INVENTORY> 17,760
<CURRENT-ASSETS> 51,441
<PP&E> 89,293
<DEPRECIATION> 56,557
<TOTAL-ASSETS> 86,486
<CURRENT-LIABILITIES> 21,966
<BONDS> 46,086
0
21,021
<COMMON> 28,647
<OTHER-SE> (31,234)
<TOTAL-LIABILITY-AND-EQUITY> 86,486
<SALES> 284,086
<TOTAL-REVENUES> 284,086
<CGS> 255,068
<TOTAL-COSTS> 255,068
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,029
<INCOME-PRETAX> 12,090
<INCOME-TAX> 3,120
<INCOME-CONTINUING> 8,970
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,970
<EPS-PRIMARY> .61
<EPS-DILUTED> .59
</TABLE>
