SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 1998
-------------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition from to
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Commission file number 0-16158
TreeSource Industries, Inc.
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(Exact name of Registrant as specified in its charter)
Oregon 93-0832150
- ------------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10260 S.W. Greenburg Road, Suite 900, Portland, Oregon 97223
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(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (503) 246-3440
----------------------
WTD Industries, Inc.
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(Former Name, Former Address and Former Fiscal Year, if
Changed Since Last Report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
The number of shares outstanding of Registrant's Common Stock, no par
value, at November 30, 1998 was 11,162,874.
TREESOURCE INDUSTRIES, INC.
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INDEX
Page
Number
------
PART I. Financial Information (Unaudited)
Item 1. Financial Statements
Consolidated Statements of Operations -
Three Months and Six Months Ended October 31, 1998 and 1997 3
Consolidated Balance Sheets -
October 31, 1998 and April 30, 1998 4
Consolidated Statements of Cash Flows -
Six Months Ended October 31, 1998 and 1997 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 11
PART II. Other Information
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TREESOURCE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per-Share Amounts)
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
OCTOBER 31, OCTOBER 31,
--------------------------- ---------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
NET SALES $ 51,240 $ 67,387 $ 98,901 $ 136,268
COST OF SALES 47,859 63,854 92,034 125,695
----------- ----------- ----------- -----------
GROSS PROFIT 3,381 3,533 6,867 10,573
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 2,628 2,903 5,392 6,133
----------- ----------- ----------- -----------
OPERATING INCOME 753 630 1,475 4,440
OTHER INCOME (EXPENSE)
Interest Expense (1,158) (1,182) (2,318) (2,393)
Miscellaneous 81 35 (100) 136
----------- ----------- ----------- -----------
(1,077) (1,147) (2,418) (2,257)
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES (324) (517) (943) 2,183
PROVISION FOR INCOME TAXES (BENEFIT) -- (319) -- 437
----------- ----------- ----------- -----------
NET INCOME (LOSS) (324) (198) (943) 1,746
PREFERRED DIVIDENDS 574 573 1,148 1,142
----------- ----------- ----------- -----------
NET INCOME (LOSS) APPLICABLE
TO COMMON STOCKHOLDERS $ (898) $ (771) $ (2,091) $ 604
=========== =========== =========== ===========
NET INCOME (LOSS) PER COMMON SHARE
BASIC ($0.08) ($0.07) ($0.19) $0.05
------- ------- ------- -----
DILUTED ($0.08) ($0.07) ($0.19) $0.05
------- ------- ------- -----
The accompanying notes are an integral part of these consolidated financial statements.
3
TREESOURCE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
(In Thousands)
OCTOBER 31, APRIL 30,
1998 1998
--------- ---------
CURRENT ASSETS (Unaudited)
Cash and cash equivalents $ 3,734 $ 2,157
Accounts receivable, net 8,482 10,464
Inventories 13,310 14,005
Prepaid expenses 1,624 1,195
Income tax refund receivable 119 --
Deferred tax asset 750 750
Assets held for sale 5,959 6,685
Timber, timberlands and timber-related assets 2,544 4,252
--------- ---------
Total current assets 36,522 39,508
NOTES AND ACCOUNTS RECEIVABLE 45 103
PROPERTY, PLANT AND EQUIPMENT, at cost
Land 2,848 2,849
Buildings and improvements 10,614 11,123
Machinery and equipment 62,530 62,623
--------- ---------
75,992 76,595
Less accumulated depreciation 52,843 52,378
--------- ---------
23,149 24,217
Construction in progress 633 225
--------- ---------
23,782 24,442
OTHER ASSETS 1,291 1,258
--------- ---------
$ 61,640 $ 65,311
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
4
TREESOURCE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
(In Thousands, Except Share Information)
OCTOBER 31, APRIL 30,
1998 1998
--------- ---------
CURRENT LIABILITIES (Unaudited)
Accounts payable $ 7,769 $ 8,992
Accrued expenses 7,051 6,568
Timber contracts payable 346 323
Current maturities of long-term debt 9,684 8,467
--------- ---------
Total current liabilities 24,850 24,350
LONG-TERM DEBT, less current maturities 34,779 36,868
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, 10,000,000 shares authorized
Series A, 270,079 shares outstanding 20,688 20,688
Series B, 6,111 shares outstanding 333 333
Common stock, no par value, 40,000,000 shares
authorized, 11,162,874 issued and outstanding
(11,154,374 at April 30, 1998) 28,761 28,752
Additional paid-in capital 15 15
Retained deficit (47,786) (45,695)
--------- ---------
2,011 4,093
--------- ---------
$ 61,640 $ 65,311
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
5
TREESOURCE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
SIX MONTHS ENDED OCTOBER 31,
1998 1997
--------- ---------
CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES:
Net income (loss) $ (943) $ 1,746
Adjustments to reconcile net income (loss) to
cash provided by operating activities:
Depreciation, depletion and amortization 2,156 2,968
Deferred income tax -- 192
Accounts receivable 1,982 4,436
Inventories 695 (2,466)
Prepaid expenses (429) (462)
Timber, timberlands and timber-related assets - current 1,708 (611)
Payables and accruals (688) (1,840)
Income taxes (119) --
--------- ---------
Cash provided by operating activities 4,362 3,963
CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES:
Acquisition of property, plant and equipment (1,153) (6,152)
Net book value of retirements 260 1
Net book value of disposed idle assets 177 --
Other investing activities 58 9
--------- ---------
Cash used for investing activities (658) (6,142)
--------- ---------
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES:
Principal payments on long-term debt (901) (2,228)
Other assets (87) (49)
Dividends paid on preferred stock (1,148) (1,148)
Issuance of common stock 9 105
--------- ---------
Cash used for financing activities (2,127) (3,320)
--------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,577 (5,499)
CASH BALANCE AT BEGINNING OF PERIOD 2,157 8,209
--------- ---------
CASH BALANCE AT END OF PERIOD $ 3,734 $ 2,710
========= =========
CASH PAID (REFUNDED) DURING THE PERIOD FOR:
Interest $2,056 $2,351
Income taxes ($2) $244
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 PRESENTATION
In the opinion of management, the consolidated financial statements of
TreeSource Industries, Inc. and subsidiaries ("TreeSource" or "the Company")
presented herein include all adjustments, which are solely of a normal recurring
nature, necessary for a fair presentation of the financial position, results of
operations and cash flows for the interim periods presented. Certain
reclassifications may have been made to the prior period results and balances to
conform to the current period classifications. The financial statements should
be read with reference to "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contained in this report, and the "Notes to
Consolidated Financial Statements" set forth in the Company's Annual Report on
Form 10-K for the year ended April 30, 1998, filed with the Securities and
Exchange Commission. The results of operations for the current interim periods
are not necessarily indicative of the results to be expected for the current
year.
NOTE 2 - INVENTORIES
Inventories are valued at the lower of cost or market. The amounts included
in inventories at October 31, 1998 and April 30, 1998 are as follows (in
thousands):
October 31, April 30,
1998 1998
------------- -------------
Logs $ 5,237 $ 3,791
Lumber 6,629 8,635
Supplies and other 1,444 1,579
------------- -------------
$ 13,310 $ 14,005
============= =============
NOTE 3 - LONG-TERM DEBT
The Company's primary debt agreement includes certain covenants, including
the maintenance of specified levels of adjusted cumulative operating income (as
defined), tangible net worth, working capital, collateral coverage (as defined)
and total liabilities ratio (as defined). This agreement also imposes certain
restrictions and limitations on capital expenditures, investments, dividend
payments, new indebtedness, and transactions with officers, directors,
shareholders and affiliates. This debt agreement was most recently amended as of
April 1, 1998, with respect to certain affirmative financial performance
covenants.
7
NOTE 3 - LONG-TERM DEBT (Continued)
At October 31, 1998 the Company's tangible net worth was $1.9 million,
compared to a minimum of negative $1.0 million required by the covenant. At that
same date, the Company's working capital was $11.7 million, compared to $9.0
million required by the covenant. Also, at October 31, 1998, the Company's
adjusted cumulative operating income was $36.7 million, compared to $30.0
million required. The collateral coverage ratio at October 31, 1998 was 62.5%,
compared to a 50% minimum required level. The total liabilities ratio was 96.7%
at October 31, 1998, compared to a maximum allowed of 100%. The minimum level of
tangible net worth increases to $0 at January 1, 1999, $2.0 million at July 1,
1999, and $4.0 million at July 1, 2000. The minimum level of working capital
increases to $11.5 million at July 1, 1999, $14.0 million at July 1, 2000 and
$16.5 million at July 1, 2002. The minimum level of adjusted cumulative
operating income increases to $34.0 million at November 1, 1998, $37.5 million
at July 1, 1999, $42.5 million at July 1, 2000, and $47.5 million at July 1,
2001. The minimum required collateral coverage ratio increases to 63% at July 1,
1999. The maximum allowed total liabilities ratio drops to 95% at July 1, 1999
and 85% at July 1, 2000. During the quarter ended October 31, 1998, the
Company's adjusted cumulative operating income increased by $1.0 million while
the quarter showed a loss before taxes of $0.3 million. The Company continues to
be in compliance with all covenants contained in the debt agreement, although
operating conditions must improve from current levels for the Company to remain
in compliance with this agreement.
The debt agreement requires prepayments if the Company's cumulative
operating income exceeds certain specified amounts. No such prepayment was
required for the year ended April 30, 1998. In connection with the May 1, 1996
amendment, the Company agreed to additional prepayments computed at 30% of
quarterly net income. No such prepayment is required for the quarter ended
October 31, 1998.
NOTE 4 - STOCKHOLDERS' EQUITY AND COMMON SHARES OUTSTANDING
Stockholders' equity at October 31, 1998 consists of the following:
Series A preferred stock, $100 per share liquidation preference;
500,000 shares authorized; 270,079 shares issued and outstanding;
limited voting rights; cumulative dividends payable quarterly in
advance at the prime rate, with a minimum rate of 6% and a maximum rate
of 9%; convertible into common stock at $7.50 per share after April 30,
1999; redeemable at original issue price plus accrued dividends at the
option of the Board of Directors, in the form of cash or in exchange
for senior unsecured debt with a 12% coupon. The holders of the Series
A preferred stock will be granted voting control of the Company's Board
of Directors in the event the Company misses three consecutive
quarterly dividend payments, four quarterly dividend payments within
twenty-four months or a total of eight quarterly dividend payments. The
Company has not missed any dividend payments on the Series A preferred
stock.
Series B preferred stock, $100 per share liquidation preference;
500,000 shares authorized; 6,111 shares issued and outstanding; limited
voting rights; convertible into 212,693 shares of common stock;
dividends payable only if paid on the Company's common stock;
redeemable
8
NOTE 4 - STOCKHOLDERS' EQUITY AND COMMON SHARES OUTSTANDING
(Continued)
at original issue price plus accrued dividends at the option of the
Board of Directors after all Series A preferred stock has been
redeemed.
Series C junior participating preferred stock, $100 per share
liquidation preference; 400,000 shares authorized; no shares issued or
outstanding; each share has 100 votes, voting together with Common
Stock; dividends payable only if paid on the Company's Common Stock at
100 times the Common Stock dividend rate. This class of preferred stock
was authorized in connection with the shareholder rights plan adopted
by the Company on March 4, 1998.
Common stock, no par value; 40,000,000 shares authorized; 11,162,874
shares issued and outstanding. Before giving effect to any shares that
might be issued pursuant to the exercise of any stock options or
conversion of any Series A preferred stock, the total number of common
shares would increase to 11,375,567 shares if remaining Series B
preferred stock outstanding at October 31, 1998 is converted to common
stock.
NOTE 5 - NET INCOME (LOSS) PER SHARE
The calculations of net income (loss) per share for the three-month and
six-month periods ended October 31, 1998 and 1997 are summarized below (in
thousands, except per-share data):
Three Months Ended Six Months Ended
October 31, October 31,
--------------------- ---------------------
1998 1997 1998 1997
--------- --------- --------- ---------
NET INCOME (LOSS) APPLICABLE TO
COMMON SHAREHOLDERS $ (898) $ (771) $ (2,091) $ 604
========= ========= ========= =========
WEIGHTED AVERAGE SHARES OUTSTANDING
-BASIC 11,163 11,129 11,159 11,130
ADDITIONAL SHARES ASSUMED FROM:
Conversion of Series B
preferred stock -- -- -- 213
Exercise of stock options -- -- -- 450
--------- --------- --------- ---------
AVERAGE NUMBER OF SHARES AND
EQUIVALENTS OUTSTANDING
- DILUTED 11,163 11,129 11,159 11,793
========= ========= ========= =========
NET INCOME (LOSS) PER COMMON SHARE
- BASIC ($0.08) ($0.07) ($0.19) $0.05
======= ======= ======= =======
- DILUTED ($0.08) ($0.07) ($0.19) $0.05
======= ======= ======= =======
Earnings (loss) per share have been recomputed and restated for the effects
of implementing Statement of Financial Accounting Standard Number 128, "Earnings
per Share," as of December 31, 1997.
9
NOTE 6 - INCOME TAXES
The income tax provision is based on the estimated effective annual tax
rate for each fiscal year. The provision includes anticipated current income
taxes payable, the tax effect of anticipated differences between the financial
reporting and tax basis of assets and liabilities, and the expected utilization
of net operating loss (NOL) carryforwards.
The federal and state income tax provision (benefit) consists of the
following (in thousands):
Three Months Ended Six Months Ended
October 31, October 31,
--------------------- ---------------------
1998 1997 1998 1997
--------- --------- --------- ---------
Income (loss) before income taxes $ (324) $ (517) $ (943) $ 2,183
========= ========= ========= =========
Income tax provision:
Federal $ -- $ (298) $ -- $ 350
State -- (21) -- 87
--------- --------- --------- ---------
$ -- $ (319) $ -- $ 437
========= ========= ========= =========
Current $ -- $ 182 $ -- $ 245
Deferred -- (501) -- 192
--------- --------- --------- ---------
$ -- $ (319) $ -- $ 437
========= ========= ========= =========
The Company's remaining adjusted NOL at April 30, 1998 was approximately $22
million for federal income tax and $20 million for state income tax purposes.
These carryforwards expire in 2007 and 2012. Because of the difficult operating
environment and the likely delayed or decreased use of the Company's NOL
carryforwards, the Company has provided for a valuation reserve against any
benefits created from the current period operating loss. Management periodically
reviews the above factors and may change the amount of valuation allowance as
facts and circumstances dictate.
In the quarter and six months ended October 31, 1998, the Company did not
record any tax provision or benefit.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
The Company is involved in various litigation primarily arising in the
normal course of its business. Additionally, the Company has received notices in
connection with potential environmental litigation. See "Legal Proceedings."
The Company is subject to various federal, state and local regulations
regarding waste disposal and pollution control. Various regulations regarding
air and water emissions, log yard management, and disposal or landfill of log
yard debris may require material expenditures in the future. The expenditures
required for the Company to comply with any such regulations may have a material
adverse impact on the Company's consolidated financial condition or results of
operations.
10
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
- ---------------------
On a quarter-to-quarter basis, the Company's financial results have varied
widely, and will continue to vary, due to seasonal fluctuations and market
factors affecting the demand for logs, lumber and other wood products. The
industry is subject to fluctuations in sales and earnings due to such factors as
industry production in relation to product demand and variations in interest
rates and housing starts. Currency fluctuations affect the industry when
exchange rates spur log exports and drive up domestic log prices, and when a
relatively strong U.S. dollar encourages lumber imports from competing
countries. Trade policies and agreements between the United States and other
countries, such as Canada, can also significantly affect log and lumber prices
in the Company's markets.
The industry is also affected by weather conditions and changing timber
management policies. Fire danger and excessively dry or wet conditions
temporarily reduce logging activity and may increase open market log prices.
Timber management policies of governmental agencies change from time to time,
causing actual or feared shortages in some areas periodically. These policies
change because of environmental concerns, public agency budget issues, and a
variety of other reasons. Therefore, past results for any given year or quarter
are not necessarily indicative of future results.
It is generally the Company's practice to curtail production at
facilities from time to time due to conditions which temporarily impair log
flow, or when imbalances between log costs and product prices cause the cost of
operation for some period of time to exceed the cost of shutdown and restarting
the facility.
Raw materials comprise the majority of the cost of products sold by the
Company. The Company depends principally on open market log purchases for its
raw materials needs.
Fiscal year 1999 started off with weak lumber prices. Prices strengthened
through the end of the first quarter and into the early part of the second
quarter, whereupon they reversed direction and went down through most of the
second quarter. The Company has been unable to reduce its log costs enough to
maintain profitable operations for the quarter or six months ended October 31,
1998. The Company has added hours of production at certain locations to optimize
results of these operations. The margins recently experienced by the Company may
not continue or improve, and may even decline further. During much of fiscal
year 1998 and through the first six months of fiscal year 1999, there was an
oversupply of lumber in the U.S. market. This oversupply principally resulted
from North American producers redistributing to the U.S. market a substantial
portion of their historic level of shipments to offshore markets. Chip prices
are up substantially from a year ago, while lumber prices and log costs have
declined.
11
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
The following table sets forth the percentages which certain expenses and
income items bear to net sales, and the period-to-period percentage change in
each item:
Income and Expense Items as Percentage
a Percentage of Net Sales Increase (Decrease)
------------------------------------------ ---------------------------------
Three Months Ended Six Months Ended Three Months Six Months
October 31, October 31, Ended Ended
------------------ ------------------ 10/31/98 10/31/98
to to
1998 1997 1998 1997 10/31/97 10/31/97
------- ------- ------- ------- -------------- --------------
Net sales 100.0 % 100.0 % 100.0 $ 100.0 % (24.0) % (27.4)
Cost of sales 93.4 94.8 93.1 92.2 (25.0) (26.8)
------- ------- ------- -------
Gross profit 6.6 5.2 6.9 7.8 (4.3) (35.1)
Selling, general and
administrative expense 5.1 4.3 5.5 4.5 (9.5) (12.1)
------- ------- ------- -------
Operating income 1.5 0.9 1.5 3.3 19.5 (66.8)
Interest expense (2.3) (1.8) (2.3) (1.8) (2.0) (3.1)
Miscellaneous 0.2 0.1 (0.1) 0.1 131.4 NM
------- ------- ------- -------
Income (loss) before income taxes (0.6) (0.8) (1.0) 1.6 (37.3) NM
Provision for income taxes (benefit) 0.0 (0.5) 0.0 0.3 NM NM
------- ------- ------- -------
Net income (loss) (0.6) % (0.3) % (1.0) % 1.3 % 63.6 NM
======= ======= ======= =======
Note: Percentages may not add precisely due to rounding.
NM: Not Meaningful
Comparison of Three Months Ended October 31, 1998 and 1997
- ----------------------------------------------------------
Net sales for the three months ended October 31, 1998 decreased $16.1
million (24%) from the three months ended October 31, 1997. This was principally
caused by a 16% decrease in lumber shipments, a 13% decrease in chip deliveries,
and a 15% decrease in lumber prices; partially offset by a 35% increase in chip
prices. The reduced lumber shipments reflect reduced production resulting from a
weak market for certain products in the current quarter compared to a stronger
market during much of the second quarter of fiscal 1998. The reduced chip
deliveries reflect not only reduced lumber production but also improved lumber
recovery resulting in fewer chips per thousand board feet ("mbf") of lumber
produced.
Gross profit for the quarter ended October 31, 1998 was 6.6% of net sales,
compared to 5.2% of net sales for the quarter ended October 31, 1997. Lumber
prices declined by 15% from the second quarter of fiscal 1998, while the
Company's log costs also declined by 15%. Unit manufacturing costs decreased by
8% from the quarter ended October 31, 1997, principally reflecting more
efficient production levels at several locations and the curtailment of a
facility with relatively higher production costs.
12
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Selling, general and administrative expenses in the three months ended
October 31, 1998 decreased by $0.3 million (9%) from the three months ended
October 31, 1997. This decrease reflects the results of cost-cutting measures
taken by the Company and the operation of fewer facilities in the recent
quarter.
In the quarter ended October 31, 1998, the Company did not record a tax
provision or benefit. In the quarter ended October 31, 1997, the Company
recorded a tax benefit equal to 62% of its pre-tax loss. See Note 6 to
Consolidated Financial Statements.
Comparison of Six Months Ended October 31, 1998 and 1997
- ---------------------------------------------------------
Net sales for the six months ended October 31, 1998 decreased $37.4 million
(27%) from the six months ended October 31, 1997. This was principally caused by
a 16% decrease in lumber shipments, an 18% decrease in chip deliveries, and an
18% decrease in lumber prices; partially offset by a 42% increase in chip
prices. The reduced lumber shipments reflect reduced production resulting from a
weak market for certain products during the most recent period compared to a
stronger market in the first half of fiscal 1998. The reduced chip deliveries
reflect not only reduced lumber production but also improved lumber recovery
resulting in fewer chips per mbf.
Gross profit for the six months ended October 31, 1998 was 6.9% of net
sales, compared to 7.8% of net sales for the six months ended October 31, 1997.
Lumber prices declined by 18% from the six months ended October 31, 1997, while
the Company's log costs declined by 17%. Production declined compared to levels
in the prior year, when production levels reflected the more favorable market.
Unit manufacturing costs decreased by 2% from the six months ended October 31,
1997, principally reflecting more efficient production levels at several
facilities.
Selling, general and administrative expenses in the six months ended
October 31, 1998 decreased by $0.7 million (12%) from the six months ended
October 31, 1997. This decrease reflects the results of cost-cutting measures
taken by the Company and the operation of fewer facilities in the more recent
period.
In the six months ended October 31, 1998, the Company did not record a tax
provision or benefit. In the six months ended October 31, 1997, the Company
recorded a tax provision equal to 20% of its pretax profit. See Note 6 to
Consolidated Financial Statements.
Liquidity and Capital Resources
- -------------------------------
The Company relies on cash provided by its operations to fund its working
capital needs. Such cash may not be sufficient to fund the Company's future
operations. Substantially all of the Company's assets are pledged as security
for its primary debt obligation.
At October 31, 1998, the Company had net working capital of $11.7 million,
$3.5 million less than at April 30, 1998. The working capital decrease was
primarily the result of operating losses, capital spending, principal payments
on debt, and dividends paid on the Company's Series A preferred stock.
13
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
During the six months ended October 31, 1998, the Company's cash and cash
equivalents increased by $1.6 million to $3.7 million at October 31.
Approximately $4.4 million of cash was provided by operations. About $0.9
million was used to repay various debt obligations and $1.2 million was used for
capital expenditures. The Company also paid $1.1 million in dividends to holders
of its Series A preferred stock.
Capital spending in the first six months of fiscal 1999 was $1.2 million.
Capital spending for the balance of the fiscal year is currently forecast to be
approximately $0.6 million. The Company had no material commitments for capital
spending at October 31, 1998.
The Company's Credit and Security Agreement dated as of November 30, 1992
contains certain covenants, including the maintenance of prescribed levels of
collateral coverage (as defined), tangible net worth, working capital, adjusted
cumulative operating income (as defined) and total liabilities ratio (as
defined). This debt agreement was most recently amended as of April 1, 1998,
with respect to certain affirmative financial performance covenants. The Company
continues to be in compliance with all covenants contained in this agreement,
although operating conditions must improve from current levels for the Company
to remain in compliance with this agreement. See Note 3 to Consolidated
Financial Statements.
Forward - Looking Information
- -----------------------------
Certain statements in this Form 10-Q contain "forward-looking" information
(as defined in Section 27A of the Securities Act of 1933, as amended) that
involve risks and uncertainties, including, but not limited to, the impact of
foreign and domestic economic conditions, increased interest rates, the impact
of competitive products and pricing, availability and cost of raw materials,
inadequate cash reserves or liquidity, changes in environmental and other
regulations, additional expenditures necessary to comply with environmental
regulations (see "Legal Proceedings"), changes in the Company's ability to use
its net operating loss carryforward and the risk factors listed from time to
time in the Company's SEC reports, including, but not limited to, the report on
Form 10-K for the fiscal year ended April 30, 1998 (Part II, Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations").
14
TREESOURCE INDUSTRIES, INC.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company's South Bend facility has received a Notice of Noncompliance
with effluent permit terms from the Washington Department of Ecology. The
Company has received a Notice of Intent to sue under the Clean Water Act from a
citizen's group based on the Notice of Noncompliance.
The Company has made modifications to the plant's boiler system to address
the alleged noncompliance and settlement discussions are continuing.
Item 2. Changes in Securities and Use of Proceeds
(c) Recent Sales of Unregistered Securities
On November 3, 1998, the Company granted to Jess R. Drake options to
purchase 543,295 shares of the Company's Common Stock at an exercise price of
$.7969 per share, subject to certain vesting and other conditions, pursuant to
the terms of that certain Employment Contract between Mr. Drake and the Company.
In issuing these securities, the Company relied upon an exemption from
registration pursuant to Section 4(2) of the Securities Act of 1933, as amended.
Item 4. Submission of Matters to a Vote of Security Holders
On October 26, 1998, the Company held its Annual Meeting of Shareholders,
at which directors Richard W. Detweiler and William H. Wright were elected to
three-year terms. The number of votes cast for each nominated Director was as
follows:
Against or
For Withheld
----------- -----------
Detweiler 9,251,624 463,331
Wright 9,251,104 463,851
A proposal to amend the Company's Stock Option Plan to increase the number
of shares reserved for issuance under the plan was approved. The vote was
4,902,799 for, 710,912 against, and 83,987 abstentions.
A proposal to amend the Company's Articles of Incorporation to change the
Company name to TreeSource Industries, Inc. was approved. The vote was 6,037,255
for, 3,634,880 against, and 42,820 abstentions.
The appointment of Moss Adams LLP as the Company's independent auditors was
ratified. The vote was 6,114,966 for, 290,799 against, and 3,309,190
abstentions.
15
Item 5. Other Information
On October 31, 1998, the Company entered into an Employment Contract with
Jess R. Drake, pursuant to which Mr. Drake became, on November 4, 1998, the
Company's President and Chief Executive Officer, and was elected to fill a
vacancy on the Company's Board of Directors. Mr. Drake will serve out two years
remaining on a three-year term, subject to the approval of the Company's
shareholders at the 1999 annual meeting. On November 3, 1998, the Company
entered into a Stock Option Letter Agreement with Mr. Drake, pursuant to which
the Company awarded Mr. Drake options to purchase the Common Stock of the
Company, subject to vesting and other conditions.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The Index to Exhibits is located on page 18.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
October 31, 1998.
16
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
TREESOURCE INDUSTRIES, INC.
------------------------------
(Registrant)
By: /s/ Jess R. Drake
------------------------------
Jess R. Drake
President
By: /s/ K. Stanley Martin
------------------------------
K. Stanley Martin
Vice President-Finance
December 15, 1998
17
TREESOURCE INDUSTRIES, INC.
INDEX TO EXHIBITS
Sequential
Number
System
Page
Number
3.1 Fourth Restated Articles of Incorporation of Registrant adopted
effective November 27, 1992, as amended 19
3.2 Second Restated Bylaws of the Registrant adopted effective
November 27, 1992(1)
10.11 Employment Contract dated October 31, 1998, between
Jess R. Drake and Registrant(2) 38
10.12 Stock Option Letter Agreement dated November 3, 1998, between
Jess R. Drake and Registrant(2) 46
19 Other reports furnished to securities holders with respect to the
quarter ended October 31, 1998: Management's letter excerpted from
Interim Report to Shareholders for the second quarter of fiscal 1999 55
27 Financial Data Schedule(3)
- --------------------------------------------------------------------------------
(1)Incorporated by reference to the exhibit of like number to the
Registrant's annual report on Form 10-K for the year ended April 30, 1993,
previously filed with the Commission.
(2)Management contract or compensatory plan or arrangement.
(3)This schedule has been submitted in the electronic form prescribed by
EDGAR.
- --------------------------------------------------------------------------------
All other required Exhibits are listed in the Company's Annual Report on
Form 10-K for the year ended April 30, 1998.
18