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, 1999
----------------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition from to
Commission file number 0-16158
TreeSource Industries, Inc.
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Oregon 93-0832150
- ------------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10260 S.W. Greenburg Road, Suite 900, Portland, Oregon 97223
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (503) 246-3440
----------------------
WTD Industries, Inc.
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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 February 28, 1999 was 11,162,874.
TREESOURCE INDUSTRIES, INC.
---------------------------
INDEX
Page
Number
------
PART I. Financial Information (Unaudited)
Item 1. Financial Statements
Consolidated Statements of Operations -
Three Months and Nine Months Ended January 31, 1999 and 1998 3
Consolidated Balance Sheets -
January 31, 1999 and April 30, 1998 4
Consolidated Statements of Cash Flows -
Nine Months Ended January 31, 1999 and 1998 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 16
Item 3. Default Upon Senior Securities 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 NINE MONTHS ENDED
JANUARY 31, JANUARY 31,
1999 1998 1999 1998
---------- ---------- ---------- ----------
NET SALES $ 44,257 $ 55,951 $ 143,158 $ 192,219
COST OF SALES 43,273 56,958 135,307 182,653
---------- ---------- ---------- ----------
GROSS PROFIT (LOSS) 984 (1,007) 7,851 9,566
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 2,560 2,588 7,952 8,721
---------- ---------- ---------- ----------
OPERATING INCOME (LOSS) (1,576) (3,595) (101) 845
OTHER INCOME (EXPENSE)
Interest Expense (1,143) (1,165) (3,461) (3,558)
Miscellaneous (80) (486) (180) (350)
---------- ---------- ---------- ----------
(1,223) (1,651) (3,641) (3,908)
---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES (2,799) (5,246) (3,742) (3,063)
PROVISION FOR INCOME TAXES (BENEFIT) (117) (1,601) (117) (1,164)
---------- ---------- ---------- ----------
NET INCOME (LOSS) (2,682) (3,645) (3,625) (1,899)
PREFERRED DIVIDENDS 540 574 1,688 1,716
---------- ---------- ---------- ----------
NET INCOME (LOSS) APPLICABLE
TO COMMON STOCKHOLDERS $ (3,222) $ (4,219) $ (5,313) $ (3,615)
========== ========== ========== ==========
NET INCOME (LOSS) PER COMMON SHARE
BASIC ($0.29) ($0.38) ($0.48) ($0.33)
======= ======= ======= =======
DILUTED ($0.29) ($0.38) ($0.48) ($0.33)
======= ======= ======= =======
The accompanying notes are an integral part of these consolidated financial statements.
3
TREESOURCE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
(In Thousands)
JANUARY 31, APRIL 30,
1999 1998
-------- --------
CURRENT ASSETS (Unaudited)
Cash and cash equivalents $ 1,328 $ 2,157
Accounts receivable, net 8,501 10,464
Inventories 10,787 14,005
Prepaid expenses 1,650 1,195
Income tax refund receivable 236 --
Deferred tax asset 750 750
Assets held for sale 6,592 6,685
Timber, timberlands and timber-related assets 2,607 4,252
-------- --------
Total current assets 32,451 39,508
NOTES AND ACCOUNTS RECEIVABLE 43 103
PROPERTY, PLANT AND EQUIPMENT, at cost
Land 2,236 2,849
Buildings and improvements 10,590 11,123
Machinery and equipment 64,698 62,623
-------- --------
77,524 76,595
Less reserve for impairment 941 --
Less accumulated depreciation 53,945 52,378
-------- --------
22,638 24,217
Construction in progress 546 225
-------- --------
23,184 24,442
OTHER ASSETS 972 1,258
-------- --------
$ 56,650 $ 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 (DEFICIT)
(In Thousands, Except Share Information)
JANUARY 31, APRIL 30,
1999 1998
-------- --------
CURRENT LIABILITIES (Unaudited)
Accounts payable $ 7,261 $ 8,992
Accrued expenses 6,535 6,568
Timber contracts payable 251 323
Current maturities of long-term debt 43,470 8,467
-------- --------
Total current liabilities 57,517 24,350
LONG-TERM DEBT, less current maturities 327 36,868
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT)
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 (50,991) (45,695)
-------- --------
(1,194) 4,093
-------- --------
$ 56,650 $ 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)
NINE MONTHS ENDED JANUARY 31,
------------------------------
1999 1998
-------- --------
CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES:
Net income (loss) $ (3,625) $ (1,899)
Adjustments to reconcile net income (loss) to
cash provided by operating activities:
Depreciation, depletion and amortization 3,098 4,426
Deferred income tax 0 (1,435)
Accounts receivable 1,963 8,052
Inventories 3,218 364
Prepaid expenses (455) 387
Timber, timberlands and timber-related assets - current 2,118 (138)
Payables and accruals (1,793) (3,322)
Income taxes (236) --
-------- --------
Cash provided by operating activities 4,288 6,435
-------- --------
CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES:
Acquisition of property, plant and equipment (2,089) (7,557)
Net book value of retirements 268 41
Net book value of disposed idle assets 177 173
Other investing activities 60 90
-------- --------
Cash used for investing activities (1,584) (7,253)
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES:
Principal payments on long-term debt (1,577) (2,783)
Other assets (294) (68)
Dividends paid on preferred stock (1,671) (1,722)
Issuance of common stock 9 105
-------- --------
Cash used for financing activities (3,533) (4,468)
-------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (829) (5,286)
CASH BALANCE AT BEGINNING OF PERIOD 2,157 8,209
-------- --------
CASH BALANCE AT END OF PERIOD $ 1,328 $ 2,923
======== ========
CASH PAID (REFUNDED) DURING THE PERIOD FOR:
Interest $3,195 $3,151
Income taxes ($2) $270
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 January 31, 1999 and April 30, 1998 are as follows (in
thousands):
January 31, April 30,
1999 1998
------------- -------------
Logs $ 4,677 $ 3,791
Lumber 4,630 8,635
Supplies and other 1,480 1,579
------------- -------------
$ 10,787 $ 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. At January 31, 1998, the Company was out of compliance with tangible
net worth, working capital and total liabilities ratio (as defined) covenants in
its primary debt agreement.
7
NOTE 3 - LONG-TERM DEBT (Continued)
As a cash savings measure, the Company has ceased making payments of
principal and interest under the primary debt agreement. The Company has
initiated discussions with its senior lenders to modify the covenants as well as
payment terms associated with its primary debt agreement. In that regard, the
Company has engaged a financial consulting firm to work with management and the
Company's senior lender representatives to restructure its existing debt
agreement. Although the Company has in the past been able to work with its
senior lenders to achieve modification to its primary debt agreement and the
Company is currently having positive discussions with its senior lenders, there
can be no assurance that an agreement will be reached on modified debt terms.
Because the primary debt agreement is in default and the balances due
thereunder are subject to possible acceleration by the Company's senior lenders,
the Company has chosen to classify the entire obligation as current.
NOTE 4 - STOCKHOLDERS' EQUITY AND COMMON SHARES OUTSTANDING
Stockholders' equity at January 31, 1999 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 have the right to elect a majority 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 missed one dividend payment on the
Series A preferred stock, which otherwise would have been paid on
February 26, 1999.
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.
8
NOTE 4 - STOCKHOLDERS' EQUITY AND COMMON SHARES OUTSTANDING
(Continued)
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 January 31, 1999 is converted to common
stock.
NOTE 5 - NET INCOME (LOSS) PER SHARE
The calculations of net income (loss) per share for the three-month and
nine-month periods ended January 31, 1999 and 1998 are summarized below (in
thousands, except per-share data):
Three Months Ended Nine Months Ended
January 31, January 31,
---------------------- ----------------------
1999 1998 1999 1998
--------- --------- --------- ---------
NET INCOME (LOSS) APPLICABLE TO
COMMON SHAREHOLDERS $ (3,222) $ (4,219) $ (5,313) $ (3,615)
========= ========= ========= =========
WEIGHTED AVERAGE SHARES OUTSTANDING
-BASIC 11,163 11,154 11,160 11,122
ADDITIONAL SHARES ASSUMED FROM:
Conversion of Series B preferred stock -- -- -- --
Exercise of stock options -- -- -- --
--------- --------- --------- ---------
AVERAGE NUMBER OF SHARES AND
EQUIVALENTS OUTSTANDING
- DILUTED 11,163 11,154 11,160 11,122
========= ========= ========= =========
NET INCOME (LOSS) PER COMMON SHARE
- BASIC ($0.29) ($0.38) ($0.48) ($0.33)
========= ========= ========= =========
- DILUTED ($0.29) ($0.38) ($0.48) ($0.33)
========= ========= ========= =========
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.
9
NOTE 6 - INCOME TAXES (Continued)
The federal and state income tax provision (benefit) consists of the
following (in thousands):
Three Months Ended Nine Months Ended
January 31, January 31,
----------------------- -----------------------
1999 1998 1999 1998
--------- --------- --------- ---------
Income (loss) before income taxes $ (2,799) $ (5,246) $ (3,742) $ (3,063)
========= ========= ========= =========
Income tax provision:
Federal $ (5) $ (1,391) $ (5) $ (1,041)
State (112) (210) (112) (123)
--------- --------- --------- ---------
$ (117) $(1,601) $ (117) $(1,164)
========= ========= ========= =========
Current $ (117) $ 26 $ (117) $ 271
Deferred -- (1,627) -- (1,435)
--------- --------- --------- ---------
$ (117) $(1,601) $ (117) $(1,164)
========= ========= ========= =========
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 nine months ended January 31, 1999, the Company recorded
a tax benefit of $117,000. This is principally the result of income tax refund
receivables.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
The Company is involved in various litigation primarily arising in the
normal course of its business. The Company has received notices in connection
with potential environmental litigation. Additionally, the Company is a
defendant in wage claim litigation arising out of the operation of its Trask
facility. 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.
Results of operations are impacted by which facilities the Company chooses
to operate. The Company has engaged Agincourt Consulting of Tacoma, Washington
to assist the management team in developing a new strategic direction and
revised business plan. As a result of this work, the Company has decided to sell
its Philomath Forest Products, Pacific Softwoods, and Burke Lumber facilities.
Although the previously announced sale of the Sedro-Woolley, Midway,
GREENWELD(R) and Central Point businesses to the Encore Group failed for lack of
financing, the Company intends to seek buyers for Sedro-Woolley, Midway and
GREENWELD(R), and will entertain offers for its Central Point facility. The work
on the Company's strategic approach and business plan is continuing.
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. Prices stayed low into the third quarter until some improvement
began in mid-December. The costs associated with curtailed facilities and the
inability to adequately reduce log costs in relation to lumber prices have
combined to prevent the Company from achieving overall profitable operations for
the quarter or nine months ended January 31, 1999. 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 much of the
first nine months of fiscal year 1999, there was an oversupply of lumber in the
U.S. market.
11
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
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. During the third quarter chip prices went up
from a year ago, while lumber prices and log costs have declined.
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 Nine Months Ended Three Months Nine Months
January 31, January 31, Ended Ended
----------------- ----------------- 01/31/99 01/31/99
to to
1999 1998 1999 1998 01/31/98 01/31/98
------- ------- ------- ------- -------- --------
Net sales 100.0 % 100.0 % 100.0 % 100.0 % (20.9)% (25.5)%
Cost of sales 97.8 101.8 94.5 95.0 (24.0) (25.9)
------- ------- ------- -------
Gross profit 2.2 (1.8) 5.5 5.0 NM (17.9)
Selling, general and
administrative expense 5.8 4.6 5.6 4.5 (1.1) 8.8
------- ------- ------- -------
Operating income (3.6) (6.4) (0.1) 0.4 (56.2) NM
Interest expense (2.6) (2.1) (2.4) (1.9) (1.9) (2.7)
Miscellaneous (0.2) (0.9) (0.1) (0.2) (83.5) (48.6)
------- ------- ------- -------
Income (loss) before income taxes (6.3) (9.4) (2.6) (1.6) (46.6) 22.2
Provision for income taxes (benefit) (0.3) (2.9) (0.1) (0.6) (92.7) (89.9)
------- ------- ------- -------
Net income (loss) (6.1) % (6.5) % (2.5) % (1.0)% (26.4) 90.9
====== ====== ====== ======
Note: Percentages may not add precisely due to rounding.
NM: Not Meaningful.
Comparison of Three Months Ended January 31, 1999 and 1998
- ----------------------------------------------------------
Net sales for the three months ended January 31, 1999 decreased $11.7
million (21%) from the three months ended January 31, 1998. This was principally
caused by a 16% decrease in lumber shipments, a 9% decrease in chip deliveries,
and a 9% decrease in lumber prices; partially offset by a 16% increase in chip
prices. The reduced lumber shipments reflect reduced production resulting from a
weak market for products in the current quarter compared to a stronger market
during much of the third 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 January 31, 1999 was 2.2% of net sales,
compared to a negative 1.8% of net sales for the quarter ended January 31, 1998.
Lumber prices declined by 9% from the third quarter of fiscal 1998, while the
Company's log costs also declined by 12%. Unit
12
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
manufacturing costs decreased by 1% from the quarter ended January 31, 1998,
principally reflecting more efficient production levels at several locations and
the curtailment of a facility with relatively higher production costs.
Selling, general and administrative expenses in the three months ended
January 31, 1999 decreased by $0.03 million (1%) from the three months ended
January 31, 1998. 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 January 31, 1999, the Company recorded a tax benefit
equal to 4% of its pre-tax loss. In the quarter ended January 31, 1998, the
Company recorded a tax benefit equal to 30.5% of its pre-tax loss. See Note 6 to
Consolidated Financial Statements.
Comparison of Nine Months Ended January 31, 1999 and 1998
- ---------------------------------------------------------
Net sales for the nine months ended January 31, 1999 decreased $49.1
million (25.5%) from the nine months ended January 31, 1998. This was
principally caused by a 16% decrease in lumber shipments, a 16% 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 products during the most recent period compared
to a stronger market in the first three quarters of fiscal 1998. The reduced
chip deliveries reflect not only reduced lumber production but also improved
lumber recovery resulting in fewer chips per mbf.
Gross profit for the nine months ended January 31, 1999 was 5.5% of net
sales, compared to 5.0% of net sales for the nine months ended January 31, 1998.
Lumber prices declined by 15% from the nine months ended January 31, 1998, while
the Company's log costs declined by 15%. 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 nine months ended January 31,
1998, principally reflecting more efficient production levels at several
facilities.
Selling, general and administrative expenses in the nine months ended
January 31, 1999 decreased by $0.8 million (9%) from the nine months ended
January 31, 1998. 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 nine months ended January 31, 1999, the Company recorded a tax
benefit equal to 3% of its pre-tax loss. In the nine months ended January 31,
1998, the Company recorded a tax benefit equal to 38% of its pre-tax loss. See
Note 6 to Consolidated Financial Statements.
13
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
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.
During the nine months ended January 31, 1999, the Company's cash and cash
equivalents decreased by $0.8 million to $1.3 million at January 31.
Approximately $4.3 million of cash was provided by operations. About $1.6
million was used to repay various debt obligations and $2.1 million was used for
capital expenditures. The Company also paid $1.7 million in dividends to holders
of its Series A preferred stock. In order to improve the Company's cash
reserves, the Company has elected not to declare and pay the dividend on its
Series A preferred stock that otherwise would have been paid on February 26,
1999. In addition, the Company has ceased making payments of principal and
interest on its primary debt agreement while it negotiates with its senior
lenders to restructure the Company's senior debt.
Capital spending in the first nine months of fiscal 1999 was $2.1 million.
Capital spending for the balance of the fiscal year is currently forecast to be
approximately $0.2 million. The Company had no material commitments for capital
spending at January 31, 1999.
The Company's Credit and Security Agreement dated as of November 30, 1992
("Agreement") 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. [See Note 3 to Consolidated Financial Statements.]
Due to poor lumber market conditions in the summer and fall of 1998 and the
resulting poor financial performance of the Company, it was not in compliance
with three financial covenants under the Agreement at quarter-end.
The Company has engaged Seneca Financial Group of Greenwich, Connecticut to
work with management in negotiations with its senior secured lenders with a goal
of restructuring its financial structure to better accommodate the cyclical
nature of the Company's business. In the interim and as a cash savings measure,
the Company has ceased making payments of principal and interest under the
Agreement. The lenders have been supportive of the Company and previously
consented to modifications to the Agreement and the Company is currently having
positive discussions with the lenders, although there can be no assurance that
lenders will agree to the requested changes or that lenders will refrain from
exercising their remedies under the Agreement. Remedies available to the
Company's lenders include seizing all assets including cash necessary for
operations. Because the Agreement is in default and the balances due thereunder
are subject to acceleration, the entire obligation has been reclassified as
current. [See Note 3 to Consolidated Financial Statements.]
14
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
In the event of acceleration by lenders and seizure of assets, the Company
would not have the cash necessary to continue operations. Under such
circumstances, the Company would consider all options available to it, including
liquidation of the Company or seeking protection from its creditors under
applicable laws.
At January 31, 1999, the Company had net working capital of negative $25.1
million, $40.2 million less than at April 30, 1998. The working capital decrease
was primarily the result of operating losses, capital spending, principal
payments on debt, dividends paid on the Company's Series A preferred stock, and
reclassification of debt under the Agreement.
The Company has engaged Agincourt Consulting to assist the management team
in developing a new strategic direction and revised business plan. As a result
of this work, the Company has decided to sell its Philomath Forest Products,
Pacific Softwoods, and Burke Lumber facilities. Although the previously
announced sale of the Sedro-Woolley, Midway, GREENWELD(R) and Central Point
businesses to the Encore Group failed for lack of financing, the Company intends
to seek buyers for Sedro-Woolley, Midway and GREENWELD(R), and will entertain
offers for its Central Point facility. Under the existing terms of the
Agreement, the bulk of the proceeds from the sale of such facilities would be
paid to the Company's secured lenders to reduce debt.
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, acceleration of
debt and seizure of all cash and other assets of the Company by its senior
lenders, inadequate cash reserves or liquidity, changes in environmental and
other regulations, additional expenditures necessary to comply with
environmental regulations or adverse outcomes in pending litigation (see "Legal
Proceedings"), the impact of foreign and domestic economic conditions, increased
interest rates, the impact of competitive products and pricing, availability and
cost of raw materials, 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").
15
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, and a
Notice of Noncompliance with air permit terms from the Olympic Air Pollution
Control Authority. The Company has received a Notice of Intent to sue under the
Clean Water Act from a citizen's group based on the effluent Notice of
Noncompliance.
The Company has made modifications to the plant's boiler system to address
the alleged effluent noncompliance and a tentative settlement has been reached.
The Company is investigating the alleged air noncompliance.
The Company and its Trask River 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., v. WTD Industries, Inc., Trask
River Lumber Company, Inc., and Bruce L. Engel. Plaintiffs seek class
certification. The Company has denied liability.
Item 3. Default Upon Senior Securities
Due to poor lumber market conditions in the summer and fall of 1998 and the
resulting poor financial performance of the Company, it was not in compliance
with three financial covenants of its primary debt agreement at quarter-end.
Additionally, as a cash saving measure while the Company renegotiates the terms
of its senior debt to better accommodate the cyclical nature of its business,
the Company has elected not to make payments of principal and interest on its
senior debt. Amounts that otherwise would be paid through March 17, 1999 total
approximately $1.326 million.
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
January 31, 1999.
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/ David J. Loftus
---------------------
David J. Loftus
Chief Accounting Officer
March 15, 1999
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
3.2 Second Restated Bylaws of the Registrant adopted effective
November 27, 1992(1)
19 Other reports furnished by securities holders with respect
to the quarter ended January 31, 1999; March 2, 1999 press
release 19
27 Financial Data Schedule(2)
- --------------------------------------------------------------------------------
(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)This schedule has been submitted in the electronic form prescribed
by EDGAR.
- --------------------------------------------------------------------------------
All other required Exhibits are listed in the Company's Annual Report
on Form 10-K for the year ended April 30, 1998.
18
EXHIBIT 19
TREESOURCE REPORTS THIRD QUARTER RESULTS
Portland, Ore. -- March 2, 1999 -- TreeSource Industries, Inc.
(OTCBB:TRES) reported today a net loss of $2.7 million for the quarter ended
January 31, 1999, compared to a net loss of $3.6 million for the same period in
1998. The net loss applicable to common shareholders was $.29 per share for the
quarter ended January 31, 1999, compared to a net loss of $.38 per share in the
third quarter last year. Third quarter net sales were $44.3 million, down 21
percent from $56 million in the comparable period last year.
For the nine months ended January 31, 1999, the Company reported a net
loss of $3.6 million, compared to a net loss of $1.9 million for the same period
last year. The net loss applicable to common shareholders was $.48 per share for
the nine months ended January 31, 1999, compared to a net loss applicable to
common shareholders of $.33 per share for the same period last year. Net sales
were $143.2 million for the nine months compared to $192.2 million in the prior
year, down 25 percent.
"As we started our third quarter, lumber prices were well below those
which existed at the beginning of our third quarter for each of the last five
years. In mid-December lumber prices began to improve as curtailments by lumber
producers in Canada created improved sales opportunities for domestic producers.
The lumber price increases, however, were not enough to allow profitable
operations overall, " said Jess Drake, president of TreeSource Industries.
"As we start our fourth quarter, lumber prices are now better than they
were a year ago. Lumber demand is good, but overproduction and its effect on
lumber prices are still a concern. There has been only a slight improvement in
the export lumber market. In large part it was the decline in the export lumber
market that sent domestic lumber prices sliding as North American manufacturers
diverted more lumber production into the U.S. market. Continued softness in the
paper and pulp markets also has put significant downward pressure on wood chip
prices. Compared to this time last year, chip prices are now off approximately
20%.
On the positive side, the economy, housing starts, and retail building
material sales all continue to show real strength, causing some economic
forecasters to raise their forecasts for 1999. The lumber market continues to
exhibit strength as well, and our sales organization is increasingly optimistic
about the lumber market for 1999. Unfortunately, the weather has played havoc
with log supply, limiting availability and resulting in higher log costs. We are
hopeful that improved weather and moving into the logging season will help
mitigate these issues.
The improving conditions have allowed us to go to two shifts at our
Glide facility and to increase hours of operation at some other facilities. We
continue to explore opportunities to more fully utilize our facilities as
seasonal log flow increases occur.
A strategic review has been completed in order to reposition the
Company to be more successful in the future. As a result of this review we have
decided to proceed with the sale of a
19
number of operations in order to focus our resources on our operations with the
greatest long-term potential. While The Encore Group failed to secure its
financing to close on the purchase of several businesses, our efforts to sell
Sedro-Woolley, the Midway fingerjointing operation and the GREENWELD(R) glue
technology business will continue. Also, we have decided to sell Philomath
Forest Products, Pacific Softwoods and Burke Lumber. In addition, we will
entertain offers on Central Point. Our resources will be concentrated in our
remaining operations in order to more fully utilize them in the near-term and
modernize them over time to ensure their long-term success. So, although fewer
lumber mills will be operated, those mills will operate more hours than they
have historically.
We have also taken a number of steps to reduce our costs and cash
needs. Since last year we have reduced our corporate and sales staff by over 40%
and are streamlining our organizational structure. Our focus is to maximize cash
for use in operations. As a result, the Board of Directors decided not to
declare the quarterly dividend on the Series A Preferred Stock which would
otherwise have been paid at the end of February. The Company can skip two
consecutive quarterly dividend payments, three quarterly dividend payments
within twenty-four months, or a total of seven quarterly dividend payments.
Prior to this action the Company has not missed any dividend payments on its
Series A preferred stock.
Due to the poor lumber market in the summer and fall of 1998, the
Company is not in compliance with three financial covenants under its secured
credit agreement. Additionally, as further cash saving measures, we have elected
not to make payments under the Company's secured debt while we work with our
secured lenders to modify the terms of the debt structure in order to better
accommodate the cyclical nature of our business. We are currently having
positive discussions with our senior lenders which are moving forward regarding
a timetable for development of a new business plan and a revised capital
structure along with a forbearance on interest and principal during the period.
The Company is also considering a possible equity infusion," concluded Mr.
Drake.
The Company disclosed that it has retained Seneca Financial Group, Inc.
of Greenwich, Connecticut to advise it in connection with its strategic options.
Seneca is a merchant bank founded by James W. Harris, a former Managing Director
of Lehman Brothers.
The Company further disclosed that K. Stanley Martin resigned his
employment with the Company effective February 15, 1999, to take another
position outside the industry. Mr. Martin had been the Company's Vice
President-Finance and Chief Financial Officer. A search is underway for his
successor. In the interim, Mr. Martin's duties have been allocated to existing
finance department personnel.
TreeSource Industries, Inc. operates facilities in Oregon, Washington
and Vermont, producing softwood and hardwood lumber products. TreeSource's
lumber is marketed domestically and internationally under the TreeSource brand
name.
TreeSource Industries, Inc. can be seen at its web site
http://www.treesource.com. For more information contact Robert J. Riecke via
telephone (503) 246-3440 or facsimile (503) 245-7773.
20