SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended January 31, 2001
----------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition from________________ to________________
Commission file number 0-16158
TreeSource Industries, Inc.
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Oregon 93-0832150
- ------------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) No.)
10260 S.W. Greenburg Road, Suite 900, Portland, Oregon 97223
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (503) 246-3440
------------------
Indicate by check mark whether the Registrant (1) has filed reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
The number of shares outstanding of Registrant's Common Stock, no par
value, at February 28, 2001 was 11,162,874.
1
TREESOURCE INDUSTRIES, INC.
---------------------------
INDEX
Page
Number
------
PART I. FINANCIAL INFORMATION................................................3
Item 1. Financial Statements...............................................3
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................15
PART II. OTHER INFORMATION...................................................21
Item 1. Legal Proceedings.................................................21
Item 3. Defaults Upon Senior Securities...................................21
Item 6. Exhibits and Reports on Form 8-K..................................22
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
TREESOURCE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(in Thousands, Except Per-Share Amounts)
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
JANUARY 31, JANUARY 31,
---------------------- ----------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
NET SALES $ 30,933 $ 60,094 $ 117,105 $ 187,262
COST OF SALES 31,466 58,088 118,832 171,079
---------- ---------- ---------- ----------
GROSS PROFIT (LOSS) (533) 2,006 (1,727) 16,183
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 2,406 2,411 7,820 8,276
REORGANIZATION CHARGES 6 942 1,287 1,819
IMPAIRMENT CHARGE 4,956 -- 4,956 --
---------- ---------- ---------- ----------
OPERATING INCOME (LOSS) (7,901) (1,347) (15,790) 6,088
OTHER INCOME (EXPENSE)
Interest expense (27) (93) (84) (1,926)
Miscellaneous 116 (98) 264 21
---------- ---------- ---------- ----------
89 (191) 180 (1,905)
---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES (7,812) (1,538) (15,610) 4,183
PROVISIONS FOR INCOME TAXES (BENEFIT) 750 -- 750 100
---------- ---------- ---------- ----------
NET INCOME (LOSS) (8,562) (1,538) (16,360) 4,083
---------- ---------- ---------- ----------
PREFERRED DIVIDENDS -- -- -- --
---------- ---------- ---------- ----------
NET INCOME (LOSS) APPLICABLE
TO COMMON STOCKHOLDERS $ (8,562) $ (1,538) $ (16,360) $ 4,083
========== ========== ========== ==========
NET INCOME (LOSS) PER COMMON SHARE
- BASIC ($0.77) ($0.14) ($1.47) $0.37
======= ======= ======= =====
- DILUTED ($0.77) ($0.14) ($1.47) $0.37
======= ======= ======= =====
DIFFERENCE BETWEEN ACTUAL INTEREST
EXPENSE AND ACCRUED INTEREST -- -- -- 147
The accompanying notes are an integral part of these consolidated
financial statements.
3
TREESOURCE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS
(in Thousands)
(Unaudited)
JANUARY 31, APRIL 30,
2001 2000
------------ -------------
CURRENT ASSETS
Cash and cash equivalents $ 1,591 $ 1,871
Restricted cash 1,436 1,616
Accounts receivable, net 5,211 12,462
Inventories 8,571 15,800
Prepaid expenses 3,088 2,535
Income tax refund receivable -- 86
Assets held for sale 7,060 5,433
Timber, timberlands and timber-related assets 2,235 2,196
------------ -------------
Total current assets 29,192 42,000
NOTES AND ACCOUNTS RECEIVABLE 3 5
PROPERTY, PLANT AND EQUIPMENT, at cost
Land 510 1,527
Buildings and improvements 4,553 8,673
Machinery and equipment 26,113 47,448
------------ -------------
31,176 57,648
Less accumulated depreciation 25,710 44,385
------------ -------------
5,466 13,263
Construction in progress 337 101
------------ -------------
5,803 13,364
DEFERRED TAX ASSET -- 750
OTHER ASSETS 1,706 1,244
------------ -------------
$ 36,704 $ 57,363
============ =============
The accompanying notes are an integral part of these consolidated
financial statements.
4
TREESOURCE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
LIABILITIES AND STOCKHOLDERS' EQUITY
(in Thousands, Except Share Information)
(Unaudited)
JANUARY 31, APRIL 30,
2001 2000
------------ -------------
CURRENT LIABILITIES
Accounts payable $ 4,906 $ 5,476
Accrued expenses 5,654 7,902
Timber contracts payable -- 147
Current borrowings 66 499
------------ -------------
Total current liabilities 10,626 14,025
LONG-TERM DEBT, less current maturities 132 183
LIABILITIES SUBJECT TO COMPROMISE 49,110 49,959
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' EQUITY
Preferred Stock, 10,000,000 shares authorized
Series A, 270,079 shares outstanding 20,688 20,688
Series B, 6,111 shares outstanding 333 333
Common Stock, no par value, 40,000,000 shares
authorized,
11,162,874 issued and outstanding 28,761 28,761
Additional paid-in capital 15 15
Retained deficit (72,961) (56,601)
------------ -------------
(23,164) (6,804)
------------ -------------
$ 36,704 $ 57,363
============= =============
The accompanying notes are an integral part of these consolidated
financial statements.
5
TREESOURCE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(in Thousands)
(Unaudited)
NINE MONTHS ENDED JANUARY 31,
-------------------------------
2001 2000
------------ -----------
CASH FROM OPERATING ACTIVITIES:
Net income (loss) $ (16,360) $ 4,083
Adjustments to reconcile net income (loss) to
cash provided by operating activities:
Loss (gain) on sale of assets 10 147
Depreciation, depletion and amortization 1,753 3,242
Deferred income tax 750 --
Impairment loss 4,956 --
Accounts receivable 7,752 (3,805)
Inventories 6,586 (8,775)
Prepaid expenses (553) (5,853)
Timber, timberlands and timber-related assets - current (177) 33
Payables and accruals (2,410) 7,219
Reorganization payables and accruals (519) (1,356)
Income taxes 86 --
------------ -----------
Cash from operating activities 1,874 (5,065)
------------ -----------
CASH FROM INVESTING ACTIVITIES:
Notes and accounts receivable 2 22
Acquisition of property, plant and equipment (855) (1,389)
Proceeds from the sale of fixed assets 136 1,583
------------ -----------
Cash from investing activities (717) 216
------------ -----------
CASH FROM FINANCING ACTIVITIES:
Proceeds (payments) from borrowings (458) 6,936
Principal payments on long-term debt (763) --
Other assets (396) (17)
------------ -----------
Cash from financing activities (1,617) 6,919
------------ -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (460) 2,070
CASH BALANCE AT BEGINNING OF PERIOD 3,487 2,131
------------ -----------
CASH BALANCE AT END OF PERIOD $ 3,027 $ 4,201
============ ===========
CASH PAID DURING THE PERIOD FOR:
Interest $ 73 $ 147
Income taxes $ -- $ 100
The accompanying notes are an integral part of these consolidated
financial statements.
6
TREESOURCE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - SUMMARY OF FINANCIAL STATEMENT PREPARATION
On September 27, 1999 the Company filed for voluntary reorganization
under chapter 11 of the U.S. Bankruptcy Code (the "Code"). The Company continues
to operate its business as a debtor-in-possession. As a debtor-in-possession
under the Code, the Company is authorized to operate its business subject to the
terms of a cash collateral order, but may not engage in transactions outside of
the ordinary course of business without Court approval.
On April 12, 2000 the Company filed an Amended Joint Plan of
Reorganization (the "Plan") in U.S. Bankruptcy Court (the "Court") that, if
confirmed by the Court, would result in the cancellation of the Company's
current classes of common and preferred stock and eliminate any value remaining
in these equity securities. The Company's senior secured lenders have a security
interest in substantially all the assets of the Company. Under the proposed
Plan, these senior secured lenders would exchange a portion of their claims
against the Company for new equity securities to be issued by the Company
pursuant to the Plan. The proposed Plan also sets up a defined pool of funds
from which unsecured trade creditors would be paid. The percentage recovery for
unsecured trade creditors would depend on a number of factors, including the
resolution of disputed claims. On May 17, 2000 the Company successfully
petitioned the Court to delay the Plan confirmation hearing for 120 days due to
poor lumber market conditions. No date has been set for a confirmation hearing.
On December 22, 2000 the Court approved an extension, through March 31, 2001, of
the period of exclusivity (the time in which the Company has the sole right to
present a plan of reorganization). The period of exclusivity is subject to
certain actions that allow the pre-petition senior secured lenders to end
exclusivity from January 31, 2001 forward. No such termination in the period of
exclusivity has occurred. The Company continues to negotiate with its senior
secured lenders and is assessing available strategic alternatives, including the
possible sale of its operations. The outcome of these negotiations and any
potential sale are likely to adversely impact pre-petition unsecured creditors.
It is unlikely, in any event, that the Company's current classes of common and
preferred stock will have any value upon conclusion of the bankruptcy
proceedings.
In the opinion of management, the consolidated financial statements of
TreeSource Industries, Inc. and subsidiaries presented herein, assuming
continued operations under chapter 11, includes all adjustments, which are
solely of a normal recurring nature or related to the bankruptcy, necessary for
a fair presentation of the financial position, results of operations and cash
flows for the interim periods presented. Certain reclassifications may have been
made to the prior period results and balances to conform to the current period
classifications. Most obligations outstanding at the time of the chapter 11
filing have been reclassified as non-current liabilities under the caption
"Liabilities Subject to Compromise". No adjustments,
7
other than the Court approved settlement in July 2000 with CIT, have been made
to reflect any settlement of obligations resulting from the reorganization
proceedings.
The financial statements should be read with reference to "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
contained in this report, and the "Notes to Consolidated Financial Statements"
set forth in the Company's Annual Report on Form 10-K for the year ended April
30, 2000 filed with the Securities and Exchange Commission. The results of
operations for the current interim periods are not necessarily indicative of the
results to be expected for the current year.
Restricted cash represents proceeds from the sale of certain assets
that would normally be remitted to the secured lenders to pay down debt. Due to
a Court order, these funds cannot be paid until approved by the Court.
Assets held for sale represents the fair value of the long-lived
assets, less the estimated cost of sale, of Burke, Central Point, Midway,
Morton, North Powder, Pacific Hardwoods, Pacific Softwoods, Philomath, and
Sedro-Woolley. During the past quarter the Company has categorized the assets of
Central Point, Morton, North Powder, and Pacific Hardwoods as impaired and is
evaluating a possible sale of its other operations, but no additional assets
have been included in the classification of Assets held for sale as a result of
this possibility.
Due to the filing for protection under chapter 11, there exists
substantial doubt about the Company's ability to continue as a going concern.
The financial statements do not include any adjustment related to the carrying
value of assets or liabilities should the Company be unable to continue as a
going concern.
NOTE 2 - 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):
January 31, April 30,
2001 2000
---------- -----------
Logs $ 4,782 $ 6,571
Lumber 3,331 8,109
Supplies and Other 1,018 1,120
---------- -----------
$ 9,131 $ 15,800
========== ===========
8
NOTE 3 - STOCKHOLDERS' EQUITY
Stockholders' equity at January 31, 2001 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 a 12% coupon. Subject
to certain conditions, the holders of the Series A Preferred Stock have the
right to obtain 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. As of January 31, 2001 the Company was in arrears on eight
consecutive quarterly dividend payments totaling approximately $4,541,000.
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; 11,162,874
shares issued and outstanding. Before giving effect to any shares that might be
issued pursuant to the management incentive Stock Option Plan or conversion of
any Series A Preferred Stock, the total number of common shares would increase
to 11,375,567 shares if the shares of Series B Preferred Stock remaining
outstanding at January 31, 2001 were converted to Common Stock.
If the proposed Plan is confirmed by the Court, the Company's current
classes of common and preferred stock will be cancelled and any value remaining
in these equity securities will be eliminated. It is unlikely, in any event,
that the Company's current classes of common and preferred stock will have any
value upon conclusion of the bankruptcy proceedings.
9
NOTE 4 - NET INCOME (LOSS) PER SHARE
The calculations of net income (loss) per share for the three- and
nine-month periods ended January 31, 2001 and 2000 are summarized below (in
thousands, except per-share data):
Three Months Ended Nine Months Ended
January 31, January 31,
-------------------------- ----------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Net income (loss) applicable to common shareholders $ (8,562) $ (1,538) $ (16,360) $ 4,083
=========== =========== =========== ===========
Weighted average shares outstanding
- Basic 11,163 11,163 11,163 11,163
Additional shares assumed from:
- Conversion of Series B Preferred Stock -- -- -- --
- Exercise of stock options -- -- -- --
----------- ----------- ----------- -----------
Average number of shares and equivalents outstanding
- Diluted 11,163 11,163 11,163 11,163
=========== =========== =========== ===========
Net income (loss) per common share
- Basic $ (0.77) $ (0.14) $ (1.47) $ 0.37
=========== =========== =========== ===========
- Diluted $ (0.77) $ (0.14) $ (1.47) $ 0.37
=========== =========== =========== ===========
NOTE 5 - LIABILITIES SUBJECT TO COMPROMISE
Under the Code, a claim is treated as secured only to the extent of
such creditor's collateral, and the balance of the claim is treated as
unsecured. Generally, unsecured and under-secured debt does not accrue interest
after a chapter 11 filing, while a fully secured claim continues to accrue
interest. Accordingly, interest expense totaling approximately $1,077,000 was
not accrued during the quarter ended January 31, 2001 as management believes
these debts are under-secured. See Note 6 for additional information.
Amounts included under the caption "Liabilities Subject to Compromise"
represent claims that are unsecured or where, in the opinion of management, the
value of the corresponding collateral is estimated to be less than the amount of
the debt. Included under this caption at January 31, 2001, and April 30, 2000,
are the following (in thousands):
January 31, April 30,
2001 2000
---------------- ----------------
Trade, interest and
other miscellaneous claims $ 6,131 $ 6,242
Secured notes 261 261
Unsecured notes 1,007 1,007
Senior secured debt 41,711 42,449
---------------- ----------------
$ 49,110 $ 49,959
================ ================
10
Unsecured and under-secured claims may be liquidated and discharged at
less than their face value. It is impossible at this time to predict the actual
amount of recovery that each creditor may realize, since the valuation of the
Company's assets and its claims may be subject to adjustment as part of the
bankruptcy proceedings.
As a result of the chapter 11 proceedings, TreeSource Industries, Inc.
and its subsidiaries are in default on substantially all of their pre-petition
debt agreements. Acceleration of this debt is stayed subject to the chapter 11
proceedings. Such debt cannot be paid or restructured until the conclusion of
the proceedings, unless ordered by the Court.
NOTE 6 - BORROWINGS
Long-term borrowings and the Line of Credit consist of the following
(in thousands):
January 31, April 30,
2001 2000
------------- -------------
Senior secured debt, bearing interest at 10%; principal $ 41,711 $ 42,449
payable in quarterly installments of $1 million beginning
March 15, 1999, and a final payment in December 2004; secured
by substantially all assets of the Company.
Secured notes, interest at 9% and 10%; payable on
various dates; secured by various assets. 261 261
Unsecured senior subordinated notes, net of discount of
$264 thousand at January 31, 2001 and April 30, 2000;
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. 1,007 1,007
Obligations under capital leases. 198 243
------------- -------------
43,177 43,960
Less current maturities. (66) (60)
Less liabilities subject to compromise. (42,979) (43,717)
------------- -------------
$ 132 $ 183
============= =============
As discussed in Note 5, TreeSource Industries, Inc. and its
subsidiaries are in default on substantially all of their pre-petition debt
agreements as a result of the chapter 11 filing. Acceleration of these debts is
stayed subject to the chapter 11 proceedings. Such debt cannot be paid or
restructured until the conclusion of the chapter 11 proceedings, unless ordered
by the Court. All of the Company's borrowings, with the exception of any
borrowings against the debtor-in-possession working capital secured revolving
line of credit (the "Line of Credit") and certain capital lease obligations,
have been reclassified as "Liabilities Subject to Compromise".
11
The Company obtained a $16 million Line of Credit in October 1999 that
matures upon the earliest of April 5, 2001 or the effective date of a final
order of reorganization. Borrowings under the Line of Credit fluctuate daily
based on cash needs and are subject to customary covenants and collateral
reserves. The weighted average rate of interest on outstanding short-term
borrowings on the Line of Credit was 9%. The Line of Credit allows the Company
to borrow from time to time up to $14 million (the remaining $2 million is
reserved pursuant to the terms of the Line of Credit), including up to $5
million in letters of credit. As of January 31, 2001 there were no borrowings on
the Line of Credit and $1,650,000 in letters of credit outstanding.
The Company may be unable to meet its liquidity needs if it is unable
to confirm a plan of reorganization by, extend the maturity date of its Line of
Credit beyond, or obtain alternate financing by, April 4, 2001. The Company has
received an offer to extend the Line of Credit and is currently negotiating the
terms of such extension.
NOTE 7 - PROVISION FOR INCOME TAXES
The income tax provision is based on the estimated effective annual tax
rate for each fiscal year. The provision includes anticipated current income
taxes payable, the tax effect of anticipated differences between the financial
reporting and tax basis of assets and liabilities, and the expected utilization
of net operating loss ("NOL") carry-forwards. The federal and state income tax
provision consists of the following (in thousands):
Nine Months Ended January 31,
----------------------------
2001 2000
------------ -----------
Income (loss) before income taxes $ (15,610) $ 4,183
============ ===========
Provision for income taxes:
Federal $ 750 $ 100
State -- --
------------ -----------
$ 750 $ 100
============ ===========
Current $ -- $ 100
Deferred 750 --
------------ -----------
$ 750 $ 100
============ ===========
12
The Company's remaining adjusted NOLs at April 30, 2000 were
approximately $40 million for federal income tax and $28 million for state
income tax purposes. These carry-forwards expire in 2007 and 2012, respectively.
As discussed in Note 1, the Company has filed for voluntary reorganization under
chapter 11 of the Code, which could impact the availability of the NOLs to be
used to offset future income. Due to the continued operating losses incurred by
the Company, the uncertain outcome of the Company's efforts to reorganize, and
potentially significant limitations on the use of the NOLs if the Company does
reorganize, the Company has fully reserved for its available NOLs at January 31,
2001. Management has also reduced to zero any deferred tax asset as a result of
the continued operating losses. Management periodically reviews the above
factors and may change the amount of valuation allowance as facts and
circumstances dictate.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
The Company is involved in certain litigation primarily arising in the
normal course of its business. The Company's liability, if any, under such
pending litigation would be treated as part of a plan of reorganization. See
"Legal Proceedings".
The Company is subject to many federal, state and local regulations
regarding waste disposal and pollution control at all production facilities.
Various governmental agencies have enacted, or are considering, regulations
regarding a number of environmental issues that may require material
expenditures in the future. These include regulations regarding log yard
management, disposal of log yard waste, kiln process waste water, and air
emissions from hog fuel fired boilers.
In accordance with the Company's accounting practice, environmental
liabilities are recorded when the Company's liability is probable and the costs
are reasonably estimable. In many cases, however, investigations are not yet at
a stage where the Company has been able to determine whether it is liable or, if
liability is probable, to reasonably determine a probable course and cost of
correction.
Estimates of the Company's liability are further subject to
uncertainties regarding the nature and extent of site contamination, the range
of remediation alternatives available, evolving remediation standards, imprecise
engineering evaluations and estimates, appropriate cleanup technology, the
extent of corrective actions required, the number and financial condition of
other potential responsible parties, as well as the extent of their
responsibility for the remediation. Accordingly, as investigation and
remediation of these sites proceeds, it is likely that adjustments in the
Company's accruals will be necessary to reflect new information. The amounts of
any such adjustments could have a material adverse effect on the Company's
results of operations in a given period, but the amount, and the possible range
of loss in excess of the amounts accrued, are not reasonably estimable.
13
Based on currently available information, management does not believe
that future environmental costs in excess of those accrued with respect to sites
with which the Company has been identified are likely to have a material adverse
effect on the Company's financial condition or results of operations. However,
the resolution in any reporting period of one or more of these matters could
have a material adverse effect on the Company's results of operations for that
period. In addition, there can be no assurance that additional future
developments, administrative actions or liabilities relating to environmental
matters will not have a material adverse effect on the Company's financial
condition or results of operations.
14
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
- ---------------------
On a quarter-to-quarter basis, the Company's financial results have 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 remained weak during the third quarter of
fiscal 2001 due to a continued oversupply of lumber caused by a slow down in
construction activity. The average price of the industry benchmark green fir 2x4
standard and better lumber increased 1%, from $290 per unit in the quarter ended
October 31, 2000, to $294 per unit in the quarter ended January 31, 2001. The
average price of the industry benchmark #2 fir saw log also increased 3% from
$540 to $554 per unit during these same periods. Because the increase in log
costs exceeded the increase in lumber prices, industry margins and the Company's
gross profit declined.
Prolonged weak lumber market conditions and uncertainty surrounding the
outcome of the Company's bankruptcy have caused management to evaluate
substantially all its long-lived assets for financial impairment. The Company
evaluates the recoverability of long-lived assets by measuring the carrying
amount of the assets against the estimated undiscounted future cash flows
associated with them. At the time such evaluations indicate that the future
undiscounted cash flows of long-lived assets are not sufficient to recover the
carrying value of such assets, the assets are considered impaired and values
reduced. The value of the assets the Company intends to sell are adjusted to
reflect management's estimate of their fair value less the cost of sale. Fair
value is determined using appraisals, comparative sales, and other methods.
Based on these evaluations, there was an additional impairment loss recognized
in the amount of $5 million during the quarter ended January 31, 2001, for the
mills in: Central Point, Oregon; North Powder, Oregon; Morton, Washington; South
Bend, Washington; and for the previously impaired Pacific Softwoods mill in
Philomath, Oregon. Production at Central Point, North Powder, and Morton was
curtailed in the second quarter and production at South Bend is currently being
curtailed. These four facilities, which collectively had net sales of $21.2
million through January 31, 2001, and $75.9 million, $66.4 million, and $54.7
million in fiscal years ended 2000, 1999, and 1998, respectively, are being
offered for sale.
On September 27, 1999, the Company filed for voluntary reorganization
under chapter 11 of the U.S. Bankruptcy Code (the "Code"). The Company continues
to operate its business as a debtor-in-possession. As a debtor-in-possession
under the Code, the Company is authorized to operate its business subject to the
terms of a cash collateral order, but may not engage in transactions outside of
the ordinary course of business without Court approval. Interest expense for the
quarter was approximately $1,077,000 lower than it otherwise would have been due
to the filing
15
for reorganization. During the reorganization period, the Company is allowed
relief from payment of interest charges on all pre-petition debt, but is
required to accrue interest expense on claims that are, in the opinion of
management, fully secured. No interest expense has been recorded since September
27, 1999 on the Company's senior secured debt or unsecured senior subordinated
notes because management believes these claims are under-secured. (See "Defaults
Upon Senior Securities"). The Company filed for reorganization in response to a
protracted period of weak lumber markets combined with the Company's high level
of debt and substantial preferred stock dividend obligations. The cash generated
by operations was not sufficient to enable the Company to pay its commitments
and continue operating.
On April 12, 2000 the Company filed an Amended Joint Plan of
Reorganization (the "Plan") in U.S. Bankruptcy Court (the "Court") that if
confirmed by the Court, would result in the cancellation of the Company's
current classes of common and preferred stock and eliminate any value remaining
in these equity securities. The Company's senior secured lenders have a security
interest in substantially all the assets of the Company. Under the proposed
Plan, these senior secured lenders would exchange a portion of their claims
against the Company for new equity securities to be issued by the Company
pursuant to the Plan. The proposed Plan also sets up a defined pool of funds
from which unsecured trade creditors would be paid. The percentage recovery for
unsecured trade creditors would depend on a number of issues, including the
resolution of disputed claims.
On May 17, 2000 the Company successfully petitioned the Court to delay
the Plan confirmation hearing for 120 days due to poor lumber market conditions.
No hearing date for a confirmation hearing has been set. On December 22, 2000
the Court approved an extension, through March 31, 2001, of the period of
exclusivity (the time in which the Company has the sole right to present a plan
of reorganization). The period of exclusivity is subject to certain actions that
allow the pre-petition senior secured lenders to end exclusivity from January
31, 2001 forward. No such termination in the period of exclusivity has occurred.
The Company is currently negotiating with its senior secured lenders and
evaluating a potential sale of its operations. The outcome of these negotiations
and any potential sale are likely to adversely impact pre-petition unsecured
creditors. It is unlikely, in any event, that the Company's current classes of
common and preferred stock will have any value upon conclusion of the bankruptcy
proceedings.
Because of the Company's request to extend the Plan confirmation
hearing, administrative costs in connection with the reorganization proceedings
dropped substantially below expected levels. Since these charges are remitted
directly to the Court and are paid by the Company every four months upon notice
from the Court, management over accrued for these expenses in the previous
quarter. As a result, although the actual amount paid during the quarter ended
January 31, 2001, was $519,000, the expenses that appear on the Consolidated
Statement of Operations associated with the reorganization totaled only $6,000.
As of January 31, 2001, $500,000 of restricted cash is held in a
certificate of deposit with a 60-day maturity from the date of purchase. The
remaining balance is held as cash on deposit in a money market account at the
Company's financial
16
institution. Restricted cash is stated at cost plus accrued interest, which
approximates market value. The Company's practice is to invest cash with
financial institutions that meet certain minimum capital surplus and credit
rating requirements. Receipts from sales of the assets classified as Assets held
for sale on the balance sheet will be held as "restricted cash" until either a
plan of reorganization is confirmed or until their disbursement is ordered by
the Court.
The following table sets forth the percentages that certain expenses
bear to net sales, and the period-to-period percentage change for each item:
INCOME AND EXPENSE ITEMS AS PERCENTAGE
A PERCENT OF NET SALES INCREASE (DECREASE)
------------------------------------------- -------------------------------
Three Months Nine Months
Three Months Ended Nine Months Ended Ended Ended
January 31, January 31, 1/31/01 1/31/01
--------------------- --------------------- To To
2001 2000 2001 2000 1/31/00 1/31/00
-------- -------- -------- -------- --------- ---------
Net sales 100.0 % 100.0 % 100.0 % 100.0 % (48.5) % (37.5) %
Cost of sales 101.7 96.7 101.5 91.4 (45.8) (30.5)
-------- -------- -------- -------- --------- ---------
Gross Profit (Loss) (1.7) 3.3 (1.5) 8.6 NM NM
Selling, general and
Administrative expense 7.8 4.0 6.7 4.4 (0.2) (5.5)
Reorganization charges 0.0 1.6 1.1 1.0 (99.4) (29.2)
Impairment charges 16.0 0.0 4.2 0.0 NM NM
-------- -------- -------- -------- --------- ---------
Operating income (loss) (25.5) (2.2) (13.5) 3.3 486.6 NM
Interest expense (0.1) (0.2) (0.1) (1.0) (71.0) (95.6)
Miscellaneous 0.4 (0.2) 0.2 0.0 NM 1157.1
-------- -------- -------- -------- --------- ---------
Income (loss) before income taxes (25.3) (2.6) (13.3) 2.2 407.9 NM
Provision for income taxes
(benefit) 0.0 0.2 0.0 0.1 NM 650.0
-------- -------- -------- -------- --------- ---------
Net income (loss) (27.7) % (2.6) % (14.0) % 2.2 % 456.7 % NM %
======== ======== ======== ======== ========= =========
NM - Not Meaningful
Note - percentages may not add due to rounding.
Comparison of Three Months Ended January 31, 2001 and 2000
- --------------------------------------------------------------
Net sales for the three months ended January 31, 2001 decreased $29.1
million (49%), as compared to the three months ended January 31, 2000. This
decrease was principally caused by a 44% decrease in lumber sales volume and a
9% decrease in the weighted average net lumber sales price. The decrease in
lumber sales volume was largely the result of curtailing production at the
Central Point, Morton, and North Powder facilities during the quarter.
Gross profit for the quarter ended January 31, 2001 was (1.7)% of net
sales, compared to 3.3% of net sales for the quarter ended January 31, 2000.
Unit manufacturing costs in the three months ended January 31, 2001 increased 2%
as compared to the three months ended January 31, 2000, primarily due to
market-related production curtailments.
17
Selling, general and administrative expenses for the quarter ended
January 31, 2001 decreased by 0.2% as compared to the quarter ended January 31,
2000, excluding reorganization and impairment charges. This decrease resulted
from the production curtailments at certain facilities.
Reorganization charges for the quarter ended January 31, 2001 are
comprised primarily of fees for professional services related to the bankruptcy.
Because of the changes in the lumber market and in the economy,
management evaluated substantially all its long-lived assets for financial
impairment. Based on these evaluations, there was an additional impairment loss
recognized in the amount of $5 million during the quarter ended January 31,
2001.
As of January 31, 2001, the Company had available an estimated $57
million in federal net operating losses ("NOLs") and $45 million in state NOLs
to offset future taxable income. Due to the bankruptcy, substantial doubt exists
regarding the Company's ability to fully utilize these NOLs. As a result, the
Company fully reserved for the NOLs generated during the three months ended
January 31, 2001 and 2000. The Company's deferred tax asset was also reduced to
zero as a result of the continued operating losses. The Company periodically
reviews the above factors and may change the amount of valuation allowance as
facts and circumstances dictate.
Comparison of Nine Months Ended January 31, 2001 and 2000
- ---------------------------------------------------------
Net sales for the nine months ended January 31, 2001 decreased $70
million (38%), as compared to the nine months ended January 31, 2000. This
decrease was principally caused by a 31% decrease in lumber sales volume and a
9% decrease in the weighted average net lumber sales price. The decrease in
lumber sales volume resulted primarily from curtailing production at the Burke,
Central Point, Morton, and North Powder facilities.
Gross profit for the nine months ended January 31, 2001 was (1.5%) of
net sales, compared to 8.6% of net sales for the nine months ended January 31,
2000. Unit manufacturing costs for the nine months ended January 31, 2001
increased 2% as compared to the nine months ended January 31, 2000, primarily
due to market-related production curtailments.
Selling, general and administrative expenses for the nine months ended
January 31, 2001 decreased by 5.5% as compared to the nine months ended January
31, 2000, excluding reorganization charges and impairment charges. This decrease
resulted primarily from the curtailment and closure of certain facilities.
Reorganization charges for the nine months ended January 31, 2001 are
comprised primarily of fees for professional services related to the bankruptcy.
18
Because of changes in the lumber market and general economy, management
evaluated substantially all its long-lived assets for financial impairment.
Based on these evaluations, there was an additional impairment loss recognized
in the amount of $5 million during the nine months ended January 31, 2001.
As of January 31, 2001 the Company had available an estimated $57
million in federal NOLs and $45 million in state NOLs to offset future taxable
income. Due to the bankruptcy, substantial doubt exists regarding the Company's
ability to fully utilize these NOLs. As a result, the Company fully reserved for
the NOLs generated during the nine months ended January 31, 2001 and 2000. The
Company's deferred tax asset was also reduced to zero as a result of the
continued operating losses. The Company periodically reviews the above factors
and may change the amount of valuation allowance as facts and circumstances
dictate.
Liquidity and Capital Resources
- -------------------------------
Cash and cash equivalents decreased by approximately $4.0 million
during the three months ended January 31, 2001 to $1.6 million, excluding $1.4
million in restricted cash. The decrease in cash resulted primarily from
continued operating losses, a $1.5 million increase in inventories and prepaid
assets related to the build up of inventories in the operating facilities from
seasonally low levels, and a $2 million decrease in trade payables and accrued
liabilities offset by a $1.7 million decrease in accounts receivable associated
with the curtailment of operations at certain mills.
For the nine months ended January 31, 2001, the Company spent $0.4
million for capital improvements to its facilities. The Company had no material
commitments for capital spending at January 31, 2001.
The Company is currently operating as a debtor-in-possession under a
cash collateral order approved by the Court, pursuant to a number of conditions.
The cash collateral order allows the Company to use funds from operations and
its $16 million debtor-in-possession working capital secured revolving line of
credit (the "Line of Credit") for normal operating purposes. The cash collateral
order also grants a security interest in substantially all assets of the Company
to the pre-petition senior secured lenders and post-petition secured
debtor-in-possession lenders. The current cash collateral order expires March
31, 2001. If the Company is unable to obtain a new cash collateral order by
April 1, 2001, the Company may not be able to meet its short term liquidity
needs. The Company's pre-petition senior secured creditors have in the past
agreed to such a new cash collateral order during these bankruptcy proceedings.
However, there is no guarantee the pre-petition secured creditors will agree to
a new cash collateral order.
The Company historically has not had a line of credit or working
capital financing available to it, and, therefore, has relied on cash provided
by its operations to fund its working capital needs. In October of 1999, in
connection with filing for voluntary reorganization, the Company obtained the
Line of Credit, which will mature upon the earlier of April 4, 2001 or the
effective date of a final order of reorganization, to provide for day-to-day
liquidity and seasonal log inventory increases. As of
19
January 31, 2001 there were no borrowings on the Line of Credit and $1,650,000
in letters of credit outstanding. The Company may be unable to meet its
liquidity needs if it is unable to confirm a plan of reorganization by, extend
the maturity date of its Line of Credit beyond, or obtain alternate financing
by, April 4, 2001. The Company has received an offer to extend the Line of
Credit, and is currently negotiating the terms of such extension.
The Company does not invest in market risk sensitive instruments.
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: the uncertain outcome of the Company's chapter 11 filing; court
approval of a new cash collateral order; renewal and court approval of a
revolving line of credit; adverse operating conditions; the ability of the
Company to obtain buyers of its assets and factors affecting the valuation of,
and market for, those assets; the approval of the Company's plan of
reorganization; fluctuations in quarterly results; availability of logs;
technological change; manufacturing risks; federal and state regulations;
ability to utilize the NOLs; and the additional factors listed from time to time
in the Company's SEC reports, including, but not limited to, the Company's
annual report on Form 10-K for the year ended April 30, 2000.
20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On September 27, 1999, TreeSource Industries, Inc. and a majority of
its subsidiaries filed a voluntary petition for reorganization under chapter 11
of the U.S. Bankruptcy Code. The proceeding was filed in the U.S. Bankruptcy
Court for the Western District of Washington in Seattle (the "Bankruptcy
Court"). The jointly administered proceeding is titled: "TreeSource Industries,
Inc., et al.", Case Numbers 99-10932, 99-10937 through 99-10961.
The Company and its Trask River Lumber subsidiary were named defendants
in a claim for wages and penalties filed in U.S. District Court for the District
of Oregon on February 17, 1999 (Allen, Blount, et al., vs. WTD Industries, Inc.,
Trask River Lumber and Bruce L. Engel). Although the case was stayed by the
Company's chapter 11 filing, the plaintiffs filed a class Proof of Claim. The
Court has agreed to certify a class and the parties have agreed to a settlement
of the class member's wage claims. The Court has allowed claims for penalties
and attorney fees. Those claims allowed will be treated in accordance with the
terms of the Company's chapter 11 plan of reorganization.
The Company and its Central Point Lumber subsidiary were named
defendants in a claim for damages filed in Circuit Court of the State of Oregon
for Jackson County on August 27, 1999. The plaintiff alleges retaliatory
wrongful discharge and loss of wages as a result of filing a worker's
compensation claim. (Donald D. Leiter II vs. TreeSource Industries, Inc. and
Central Point Lumber). This action is currently stayed due to the Company's
chapter 11 filing.
Item 3. Defaults Upon Senior Securities
Due to the Company's inability to meet certain of its financial
covenants and its filing for reorganization, the Company is not in compliance
with its obligations under its senior secured debt agreement and ceased making
interest and principal payments on its senior secured debt in March 1999. On
September 27, 1999 the Company filed for voluntary reorganization under chapter
11 of the U.S. Bankruptcy Code in the U.S. District Court of the Western
District of Washington: In re TreeSource Industries, Inc., et al (Case Nos.
99-10932 and 99-10937 through 99-10961). As of February 28, 2001, the Company
has not paid nine consecutive quarterly dividend payments due to holders of its
Series A Preferred Stock, totaling approximately $5,115,000 and is in arrears on
payment of approximately $8,770,000 in interest on its senior secured debt.
Additionally, the Company is in arrears on payment of approximately $203,000 in
interest to non-affiliated parties on its 8% unsecured senior notes as of
February 28, 2001. During the reorganization period, the Company is allowed
relief from payment of interest charges on all pre-petition debt. No interest
expense has been recorded since September 27, 1999 on the pre-petition senior
secured debt or unsecured senior subordinated debt, because management believes
the claims of these debt holders are under-secured.
21
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The Index to Exhibits is located on page 24.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended January
31, 2001.
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TreeSource Industries, Inc.
-----------------------------------
(Registrant)
/s/ Jess R. Drake
-----------------------------------
Jess R. Drake
President, Chief Executive Officer
and Director
/s/ Robert W. Lockwood
-----------------------------------
Robert W. Lockwood
Vice President - Finance and Chief
Financial Officer
March 14, 2001
23
TreeSource Industries, Inc.
Index to Exhibits
Sequential
Number
System
Page
Number
3.1 Fourth Restated Articles of Incorporation of Registrant
adopted effective November 27, 1992, as amended(1)
3.2 Second Restated Bylaws of the Registrant adopted effective
November 27, 1992(2)
(1) 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, 1998.
(2) Incorporated by reference to the exhibit of like number to the
Registrant's annual report on Form 10-K for the year ended April 30,
1993.
24