TREESOURCE INDUSTRIES, INC.
United States Securities and Exchange Commission, Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended Commission file number
April 30, 1999 0-16158
TREESOURCE INDUSTRIES, INC., formerly WTD Industries, Inc.
(Exact name of registrant as specified in its charter)
Oregon 93-0832150
(State of Incorporation) (I.R.S. Employer Identification No.)
10260 S.W. Greenburg Road, Suite 900 Registrant's telephone number,
Portland, Oregon 97223 including area code: (503) 246-3440
(Address of principal executive offices)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value (Title of Class)
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes[X] No[ ]
State the aggregate market value of the common stock held by non-affiliates
of the registrant, as of July 6, 1999: $4,534,359.
Indicate the number of shares outstanding of each of the registrant's
classes of Common Stock, as of July 6, 1999: Common Stock, no par value:
11,162,874.
FORM 10-K TABLE OF CONTENTS
Item No. Page No.
PART I 3
Item 1. BUSINESS 3
Item 2. PROPERTIES 7
Item 3. LEGAL PROCEEDINGS 8
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 8
PART II 9
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS 9
Item 6. SELECTED FINANCIAL DATA 10
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 11
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 19
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 19
PART III 20
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 20
Item 11. EXECUTIVE COMPENSATION 23
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT 31
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 32
PART IV 33
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K 33
(a) (1) Financial Statements 33
(a) (2) Financial Statement Schedules 33
(a) (3) Exhibit Index 33
(b) Reports on Form 8-K 39
PART I
Item 1. BUSINESS
TreeSource Industries, Inc. is a corporation organized in Oregon in 1983,
which, through its subsidiaries, manufactures softwood and hardwood lumber and
by-products. TreeSource Industries, Inc. and its subsidiaries are hereinafter
referred to as "TreeSource" or the "Company". The Company changed its name
effective October 27, 1998 from WTD Industries, Inc. to TreeSource Industries,
Inc. The Company markets its products primarily in the United States and Canada.
Products and Markets
- --------------------
Softwood Lumber
---------------
The Company manufactures a variety of softwood lumber products,
predominantly from Douglas fir, hemlock, and white fir. The Company produces
softwood studs in several species, generally as 2x4 or 2x6 lumber in lengths of
8 to 10 feet. The Company also makes dimension softwood lumber in a wide range
of widths and thicknesses in lengths from 6 to 26 feet. Softwood lumber
accounted for 87% of net sales in fiscal 1999, and 89% of net sales in each of
fiscal 1998 and fiscal 1997.
The Company sells softwood lumber to a large number of customers, primarily
distribution centers and wholesalers and directly to large retailers. Softwood
lumber is used in a variety of applications, including residential and
commercial construction, packaging, and industrial uses.
Other Products
--------------
The Company produces a small quantity of hardwood lumber in sizes targeted
principally for the furniture and cabinet industries. Wood chips, a by-product
of the manufacturing process, are sold principally to pulp and paper
manufacturers. Wood chips and other by-products accounted for 8% of net sales in
fiscal 1999, 7% of net sales in fiscal 1998, and 6% of net sales in fiscal 1997.
Beginning in fiscal 1998, the Company produced a small quantity of fingerjointed
products. The Company discontinued operation of its fingerjointing plant in
fiscal 1999, and that facility is for sale. Fingerjointed product accounted for
less than 1% of net sales in fiscal 1999.
The Company is licensed to use, and to grant licenses for others to use, in
North America and Mexico, a patented technology called GREENWELD(R) that enables
the gluing of green or unseasoned lumber. The Company used the GREENWELD(R)
process in its fingerjointing operation during fiscal 1999. During fiscal 1999,
the Company generated income from its licensing activity which accounted for
less than 1% of net sales. The Company's rights to grant licenses for others to
use GREENWELD(R) are for sale.
Distribution and Marketing
- --------------------------
The Company markets, distributes, and arranges transportation for its
lumber products through its wholly owned subsidiary and sales agent, TreeSource,
Inc. Through its centralized sales function, the Company coordinates the
production capabilities of individual mills to meet a broad range of customer
needs. TreeSource sells primarily through telephone contacts from its office in
Portland, Oregon.
Shipments of wood products are generally made by rail or truck directly
from the mill. Exports do not represent a material portion of the Company's net
sales.
The Company does not attempt to accumulate a large backlog of orders.
TreeSource's general practice is to maintain an order file ranging from about
one to four weeks' production. The filling of orders for certain items, however,
may require a substantially longer period of time. The dollar value of the
Company's backlog of orders at both April 30, 1999 and 1998 was $8 million.
Backlog on any particular date may not be indicative of the Company's average
backlog, net sales, or the backlog for any succeeding period.
No single customer accounted for as much as 10% of the Company's net sales
during fiscal 1999. The loss of any one customer would not, in management's
opinion, have a material adverse impact on the Company and its subsidiaries
taken as a whole.
Timber Supply
- -------------
The Company has historically purchased timber and logs in sufficient
quantities to match only the current operating requirements of its mills. The
Company plans to increase the quantity of purchased timber and logs, generally
held in inventory or on contract. The Company has revised its procurement and
inventory strategy to allow it to maintain timber and log supplies to assure
reasonably uninterrupted mill production during periods of inclement weather and
changes in local log market conditions. The goal of the strategy is to allow
mills to increase their hours of operation, more effectively manage both the
price and quality of log purchases during periods of tight supply, and maintain
more stable operating costs.
Timber and logs comprise the majority of the cost of products sold by
the Company. The Company relies mainly on open market log purchases to supply
its raw material needs. It also purchases timber-cutting contracts ("timber
contracts") and has historically obtained logs to a minor extent from its own
fee timberlands. At April 30, 1999, the Company owned a small amount of fee
timberlands in the vicinity of various mills. The following table shows the
percentages of logs supplied by open market purchases, public timber contracts
and fee timberlands, and total log footage required:
Year Ended Open Timber Fee Log
April 30, Market Contracts Timber Requirements
-------------------------------------------------------------
1995 95% 5% -- 317,100 MBF
1996 94% 5% 1% 228,162 MBF
1997 94% 5% 1% 320,507 MBF
1998 94% 6% -- 284,300 MBF
1999 94% 5% 1% 233,501 MBF
MBF - Thousand Board Feet
During fiscal years 1995 through 1999, the Company operated most of its
mills on a one-shift basis, typically using logs purchased on the open market
from industrial and non-industrial private land owners. In the latter half of
fiscal 1999, two mills were moved to a two-shift operating basis, increasing
their annual log consumption. The ability to maintain the present level of
operations at the Company's mills depends on a continuing supply of logs from
these private sources.
The availability and cost of timber and logs have been, and should continue
to be, influenced by a variety of factors, including demand by competitors and
exporters, the environmental and harvest policies of federal and state agencies,
and, in the long term, the acreage of commercial timber land. For further
discussion of current industry conditions relating to timber supply, see the
section titled "Factors Affecting Forward-Looking Statements - Availability of
Logs".
Employees
- ---------
The Company and its subsidiaries had approximately 900 employees at July 6,
1999. During fiscal 1999, the local woodworkers union that briefly represented
workers at the Company's South Bend facility before the union was decertified
and abandoned its request for a new election. See "Factors Affecting
Forward-Looking Statements-Manufacturing Risks". The Company uses bonus programs
to motivate its employees. See Note 9 to Consolidated Financial Statements.
Environmental Regulation
- ------------------------
The Company is subject to federal, state, and local pollution control
regulations, including those regulating air, water, and noise pollution, that
have required, and are expected to continue to require, operating and capital
expenditures. During fiscal 1999, the Company incurred expenditures of
approximately $556,000 for environmental protection measures. Expenditures are
projected to be approximately $1,058,000 for each of fiscal 2000 and 2001,
including costs to remediate the site at Sedro-Woolley, Washington, in
preparation for sale. Additional expenditures will be necessary to remediate
other sites in preparation for sale. Such amounts cannot be estimated at this
time and may be material. Various regulations regarding air and water emissions
and disposal or landfill of log yard debris may require material expenditures in
the future. See "Factors Affecting Forward-Looking Statements-Federal and State
Regulations".
Industry Conditions
- -------------------
The United States lumber industry is highly sensitive to the condition of
the nation's economy and tends to experience poor financial results during
general economic downturns. Although sales traditionally increase in the spring
and summer months and decline during the fall and winter months in response to
seasonal building construction cycles, such seasonal patterns are sometimes
absent. During fiscal 1998, the advent of the Asian financial crisis negatively
impacted the industry and the Company. Demand for lumber exports to Asia
decreased significantly. Manufacturers in North America that had been producing
for the export lumber market converted production to supply the U.S. market,
which caused an oversupply of lumber. The resulting oversupply placed strong
downward pressure on lumber prices for most of fiscal 1998, despite reasonable
interest rates and strong construction activity in the United States.
During fiscal 1999, the lumber market continued to be poor despite strong
domestic demand for lumber. The lumber market hit a low point in the third
quarter of fiscal 1999 and then began slowly improving. Continued strong
domestic construction activity spurred by low interest rates, combined with mill
closures allowed the lumber market to improve throughout the fourth quarter of
fiscal 1999.
During fiscal 1999 the Company took an impairment charge totaling
$6,310,000 to reflect the Company's estimate of the fair value of assets being
held for sale. The facilities currently held for sale are Burke Lumber Co.,
Midway Engineering, Pacific Softwoods, Philomath Forest Products, and
Sedro-Woolley Lumber Co. See Note 3 to Consolidated Financial Statements.
Wood chip demand and prices are determined by conditions in the global pulp
and paper industry and generally are not affected by seasonal business cycles.
During fiscal 1998, reduced demand for pulp and paper products caused pulp and
paper production curtailments and kept chip prices low. Weakness in wood chip
prices continued into fiscal 1999. See "Factors Affecting Forward-Looking
Statements" for further discussion.
Competition
- -----------
The wood products industry is highly competitive and includes a large
number of companies manufacturing relatively standardized products. The
principal means of competition in the lumber industry are log costs, unit
production costs, pricing, product quality, and the ability to satisfy customer
needs promptly. The Company believes it can compete effectively based on the
foregoing factors. Some of TreeSource's competitors are large, integrated
companies that have significantly greater financial, production and marketing
resources than the Company. Some of these competitors have a significant base of
low-cost fee timberlands and timber contracts, which protects them from
fluctuations in log prices and gives them a potential advantage over the
Company, which relies on the open log market to supply the bulk of its raw
materials requirements.
The Company's competition includes lumber manufacturers located in Canada
that benefit from advantageous exchange rates and, in some areas, low-cost
government owned timber when exporting lumber to the United States. As a result
of U.S. government-initiated trade talks, Canada agreed that starting April 1,
1996, for a period of five years, and subject to specific exceptions, lumber
exporters in certain provinces will pay export taxes if pre-established levels
of exports to the U.S. are exceeded. The goal of the trade agreement is to limit
the volume of lumber exported to the U.S. by Canadian producers. This trade
agreement has not fully achieved the desired effect. However, to date, Canadian
lumber producers have paid significant export taxes for exceeding the
pre-established levels of exports.
See the sections titled, "Timber Supply", "Management's Discussion and
Analysis of Financial Condition and Results of Operations", and "Factors
Affecting Forward-Looking Statements".
Item 2. PROPERTIES
MANUFACTURING FACILITIES(1) Thousand Board Feet
------------------------
Fiscal Est. Annual
1999 Production
Softwood Lumber Production Capacity(2)
- ------------------------------------------------------ ---------- ------------
Burke Lumber Co., West Burke, Vermont(3)(4) 19,000 50,000
Central Point Lumber Co., Central Point, Oregon 60,000 120,000
Glide Lumber Products Co., Glide, Oregon 114,000 135,000
Morton Forest Products Co., Morton, Washington 74,000 93,000
North Powder Lumber Co., North Powder, Oregon 52,000 100,000
Pacific Softwoods Co., Philomath, Oregon(5) 19,000 ---
Philomath Forest Products Co., Philomath, Oregon(5) --- ---
Sedro-Woolley Lumber Co., Sedro-Woolley, Washington(5)(6) --- ---
Spanaway Lumber Co., Spanaway, Washington(7) 64,000 95,000
Trask River Lumber Co., Tillamook, Oregon(7) 60,000 137,000
Tumwater Lumber Co., Tumwater, Washington(7) 65,000 107,000
Hardwood Lumber
- ------------------------------------------------------
Pacific Hardwoods-South Bend Co.,
South Bend, Washington(7)(3) 17,000 24,000
Fingerjointed Lumber
- ------------------------------------------------------
Midway Engineered Wood Products, Inc.,
Corvallis, Oregon(5)(6)(7) --- ---
(1) The machinery and equipment of all facilities are subject to the
security interests of certain lenders.
(2) Capacity is generally computed using a two-shift-per-day, five day-per-week
operating schedule.
(3) Capacity is calculated on a one-shift basis.
(4) Facility is currently operating and is for sale.
(5) This facility is not operating and is for sale.
(6) These subsidiaries lease a substantial portion of their equipment pursuant
to operating leases.
(7) These subsidiaries lease the real property on which the mill is located
pursuant to ground leases.
Item 3. LEGAL PROCEEDINGS
On or about January 30, 1991, TreeSource Industries, Inc. and each of its
subsidiaries filed a voluntary petition for reorganization under Chapter 11 of
the Federal Bankruptcy Code. The proceeding was filed in the United States
Bankruptcy Court for the Western District of Washington in Seattle (the
"Bankruptcy Court"). The jointly administered proceeding is titled: "In re
Sedro-Woolley Lumber Co., WTD Industries, Inc., TreeSource, Inc., et al.", Case
Numbers 91-00707 through 91-00721, 91-00736 through 91-00741, 91-00752 through
91-00756, 91-00773 through 91-00778, and 91-01140 through 91-01149. The
Company's Second Amended Joint Plan of Reorganization was confirmed by the
Bankruptcy Court on November 23, 1992, effective November 30, 1992. During 1996
and 1997, orders were entered in the Bankruptcy Court closing the Chapter 11
cases of WTD Industries, Inc. and all its subsidiaries.
The Company has settled all pending allegations of noncompliance with
certain air and water discharge limitations against the Company's South Bend,
Washington facility. On April 14, 1999, the Company entered into a settlement
agreement with respect to the allegation of noncompliance with water discharge
limitations pursuant to which the Company agreed to make minor improvements in
its boiler area, to pay attorneys' fees, and to make a contribution of a
nonmaterial amount. On June 15, 1999, the Company resolved the allegation of
noncompliance with limitations on air discharges by paying a $2,000 fine.
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). The Company has denied
liability. The parties are engaged in preliminary settlement discussions.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Principal Market
- ----------------
Effective January 7, 1999, the Company's Common Stock is quoted on the OTC
Bulletin Board, under the symbol TRES. Before that date, the Company's stock was
quoted on the Nasdaq National Market System under the same symbol (before
October 27, 1998, under the symbol WTDI). The number of holders of record of
TreeSource Industries, Inc. Common Stock at July 6, 1999 was 578. The Company
estimates that the total number of its direct and beneficial shareholders is
approximately 4,100.
Stock Price and Dividend Information
- ------------------------------------
The following tables show the range of reported high and low bid quotations
for the two years ended April 30, 1999:
Fiscal Year Ended
April 30, 1999 Low High
----------------- ---------- ----------
First Quarter $.7500 $1.5630
Second Quarter $.5000 $1.0000
Third Quarter* $.3125 $1.0940
Fourth Quarter* $.3125 $0.7187
Fiscal Year Ended
April 30, 1998 Low High
----------------- ---------- ----------
First Quarter $1-7/8 $4-3/16
Second Quarter $2-1/8 $4-1/8
Third Quarter $1-17/32 $2-3/4
Fourth Quarter $1-3/8 $2
* Effective January 7, 1999, quotes are as reported on the OTC Bulletin Board.
The high and low bid quotations shown are those reported on Nasdaq, except
where noted. They reflect inter-dealer prices, do not include retail markups,
markdowns, or commissions, and may not necessarily represent actual
transactions. Prior to the Company's October 1986 public stock offering, there
was no public trading market for its Common Stock.
TreeSource does not pay any cash dividends on its Common Stock. The
Company's various debt instruments restrict the payment of dividends. See Notes
6 and 8 to Consolidated Financial Statements.
Item 6. SELECTED FINANCIAL DATA
TREESOURCE INDUSTRIES, INC. AND SUBSIDIARIES
FIVE-YEAR SELECTED FINANCIAL DATA
(In Thousands, Except Per Share Amounts and Ratios)
YEAR ENDED APRIL 30,
----------------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
NET SALES $195,012 $242,051 $284,086 $191,964 $274,966
COST OF SALES 184,015 231,303 255,068 186,514 262,334
---------- ---------- ---------- ---------- ----------
GROSS PROFIT 10,997 10,748 29,018 5,450 12,632
GENERAL, SELLING AND
ADMINISTRATIVE EXPENSES 10,738 11,290 12,529 9,685 10,366
IMPAIRMENT CHARGES AND REORGANIZATION CREDIT 6,310 4,168 - (409) (532)
---------- ---------- ---------- ---------- ----------
OPERATING INCOME (LOSS) (6,051) (4,710) 16,489 (3,826) 2,798
INTEREST EXPENSE (4,732) (4,682) (5,029) (5,318) (5,972)
OTHER INCOME (EXPENSE) 441 (394) 630 646 1,228
---------- ---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES (10,342) (9,786) 12,090 (8,498) (1,946)
PROVISION FOR INCOME TAXES (BENEFIT) (96) 2,364 3,120 (2,454) (5,646)
---------- ---------- ---------- ---------- ----------
NET INCOME (LOSS) (10,246) (12,150) 8,970 (6,044) 3,700
PREFERRED DIVIDENDS 1,671 2,290 2,228 2,364 2,126
---------- ---------- ---------- ---------- ----------
NET INCOME (LOSS) APPLICABLE TO COMMON
SHAREHOLDERS ($11,917) ($14,440) $6,742 ($8,408) $1,574
========== ========== ========== ========== ==========
NET INCOME (LOSS) PER COMMON SHARE, BASIC
- - net income (loss) ($1.07) ($1.30) $0.61 ($0.76) $0.14
Average shares outstanding 11,161 11,130 11,078 11,077 11,075
NET INCOME (LOSS) PER COMMON SHARE, DILUTED
- - net income (loss) ($1.07) ($1.30) $0.59 ($0.76) $0.14
Average shares outstanding 11,161 11,130 11,385 11,077 11,491
CASH DIVIDENDS PER COMMON SHARE -- -- -- -- --
PERIOD END BALANCES
Working capital ($24,340) $15,158 $29,475 $25,052 $33,740
Total assets $54,987 $65,311 $86,486 $77,396 $88,944
Long-term debt, excluding current maturities $324 $36,868 $46,086 $50,310 $51,421
Stockholders' equity ($7,816) $4,093 $18,434 $11,686 $20,076
SELECTED FINANCIAL RATIOS Net income (loss) to average:
Total assets (17.0)% (16.0)% 10.9% (7.3)% 4.0%
Stockholders' equity 550.4 % (107.9)% 59.6% (38.1)% 19.2%
Average stockholders' equity to average
Total assets (3.1)% (14.8)% 18.4% 19.1 % 20.7%
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Overview
- --------
On a quarter-to-quarter basis, the Company's financial results have and
will vary widely, due to seasonal fluctuations and market factors affecting the
demand for logs, lumber, and other wood products. Therefore, past results for
any given year or quarter are not necessarily indicative of future results.
Lumber market conditions remained generally weak following the decrease in
demand for North American lumber in Asia that occurred in fiscal 1998. The unit
price for the benchmark 2x4 standard and better declined from $403 per unit for
fiscal 1998 to an average of $324 per unit for fiscal 1999, a 20% reduction.
During the same period, the unit cost of the #2 fir sawlog - a benchmark for the
Company's raw materials costs - fell from an average of $657 to $563 per unit, a
14% reduction. With lumber prices declining more than log prices, margins were
squeezed and profitability reduced. Wet winter weather throughout the Pacific
Northwest further exacerbated market conditions and timber harvest and log
delivery volumes fell below expected levels, which forced spot log prices to
increase as log supply dwindled. Due to its low level of log inventories, the
Company was forced to either bid up the price of logs in order to maintain
supply or to curtail production. Market conditions improved during the fourth
fiscal quarter as lumber demand remained strong, log supply improved, and log
prices eased. The benefit to the Company of these improving conditions was
reduced by the lack of available log inventory and need to re-hire and train
employees at several of the Company's facilities.
Yearly Comparisons
- ------------------
The following table compares certain income and expense items as a
percentage of net sales, and the period-to-period percentage change for each
item:
INCOME AND EXPENSE ITEMS AS PERCENTAGE
A PERCENT OF NET SALES INCREASE (DECREASE)
----------------------------------
1999 1998
Year Ended April 30, vs vs
----------------------------------
1999 1998 1997 1998 1997
-------- -------- -------- -------- --------
Net sales 100.0 % 100.0 % 100.0 % (19.4)% (14.8)%
Cost of sales 94.4 95.6 89.8 (20.4) (9.3)
-------- -------- --------
Gross profit 5.6 4.4 10.2 2.3 (63.0)
Selling, general and
administrative expense 5.5 4.7 4.4 (4.9) (9.9)
Impairment loss 3.2 1.7 0.0 NM NM
-------- -------- --------
Operating income (loss) (3.1) (1.9) 5.8 NM NM
Interest expense (2.4) (1.9) (1.8) 1.1 (6.9)
Miscellaneous 0.2 (0.2) 0.2 NM NM
Income (loss) before income taxes (5.3) (4.0) 4.3 NM NM
Provision for income taxes (benefit) (0.0) 1.0 1.1 (104.1) (24.2)
-------- -------- --------
Net income (loss) (5.3) (5.0) 3.2 % NM NM
NM - Not Meaningful
Note - percentages may not add due to rounding.
Comparison of 1999 to 1998
- --------------------------
Net sales for the year ended April 30, 1999 decreased $47.0 million (19%)
from the year ended April 30, 1998. This decline was principally caused by a 14%
decrease in lumber sales volume and a 6% decrease in the net sales average. The
reduced lumber shipments in fiscal 1999 as compared to fiscal 1998, reflect the
closure of the Philomath, Pacific Softwoods, and Sedro-Woolley mills and weather
related curtailments during the winter in fiscal 1999.
Gross profit for the year ended April 30, 1999 was 5.6% of net sales,
compared to 4.4% of net sales for the year ended April 30, 1998. Lumber sales
declined by 11% from the year ended April 30, 1998, while the Company's log
costs declined by 6%. Unit manufacturing costs in fiscal 1999 decreased by 3%
from costs in fiscal 1998, primarily due to a curtailment of higher cost
operations and an increase in production volume at other operations.
Selling, general and administrative expenses in the year ended April 30,
1999 decreased by $0.6 million (4.9%) as compared to sales expenses for the year
ended April 30, 1998. This decrease reflects reductions in corporate staff and
office lease space as well as the closure of certain facilities.
During the fourth quarter of fiscal 1999, the Company took an impairment
charge in the amount of $6.3 million to reflect the Company's estimate of the
fair value of certain assets that are being held for sale. Five facilities are
currently being held for sale: Burke Lumber Co., Midway Engineering, Pacific
Softwoods, Philomath Forest Products, and Sedro-Woolley Lumber Co. See Note 3 to
Consolidated Financial Statements.
Other expenses for fiscal 1999 reflect payments made to Bruce L. Engel in
connection with his retirement during the first quarter of the fiscal year.
In the year ended April 30, 1999, the Company sustained significant losses.
Because of the difficult operating environment and likely delayed or decreased
use of the Company's deferred tax assets, no income tax benefit was recorded for
the year. The Company periodically reviews the above factors and may change the
amount of valuation allowance as facts and circumstances dictate. See Note 7 to
Consolidated Financial Statements.
Comparison of 1998 to 1997
- --------------------------
Net sales for the year ended April 30, 1998 decreased $42.0 million (15%)
from the year ended April 30, 1997. This was principally caused by a 9% decrease
in lumber shipments, a 17% decrease in chip deliveries, an 8% decrease in lumber
prices, and a 28% decrease in other by-product revenue, partially offset by a
13% increase in chip prices. The reduced lumber shipments reflect reduced
production, which resulted from a weak market in fiscal 1998 compared to a
strong market in fiscal 1997. The reduced lumber shipments also reflect an
inadequate supply of rail cars to ship lumber during much of fiscal 1998. The
reduced chip deliveries reflect not only reduced lumber production but also
improved lumber recovery resulting in fewer chips per thousand board feet (mbf)
and the selling of some trim ends to the Company's fingerjoint plant instead of
their being chipped.
Gross profit for the year ended April 30, 1998 was 4.4% of net sales,
compared to 10.2% of net sales for the year ended April 30, 1997. Lumber prices
declined by 8% from the year ended April 30, 1997, while the Company's log costs
declined by only 4%. Lumber production and shipments declined compared to levels
in the prior year, when production levels reflected the favorable market.
Production curtailment occurred in fiscal year 1998 in response to poor lumber
prices and inadequate rail service. Unit manufacturing costs in fiscal year 1998
increased by 3% from costs in fiscal year 1997, partially because of a general
wage increase in September 1996 and more production curtailments in fiscal year
1998.
Selling, general and administrative expenses in the year ended April 30,
1998 decreased by $1.2 million (10%) from the year ended April 30, 1997. This
decrease reflects reduced profit-sharing bonus payments stemming from lower
pretax profits, partially offset by expenses associated with the start-up of two
WTD subsidiaries, Midway Engineered Wood Products, Inc. and Greenweld North
America Co., in the first quarter of fiscal 1998.
During the fourth quarter of fiscal 1998, the Company took an impairment
charge in the amount of $4,168,000 to reflect the Company's estimate of the fair
value of its two facilities held for sale, Sedro-Woolley Lumber Co. and Trask
River Lumber Co.
Interest expense in the year ended April 30, 1998 was $0.3 million below
that incurred in the year ended April 30, 1997. This decrease was the result of
a reduction in the amount of the Company's outstanding debt.
In the year ended April 30, 1998, the Company recorded a tax provision
equal to 24% of its pretax loss, compared to a tax provision of 26% of the
pretax income for the previous year. During fiscal 1998, the Company sustained
significant operating losses. Because of the difficult operating environment and
the likely delayed or decreased use of the Company's deferred tax assets to
shelter future income, the Company increased its valuation reserve to
approximately $9.8 million, resulting in a charge of $7.3 million in additional
income tax expense in the year ended April 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
At April 30, 1999, the Company had a net working capital deficit of $24.3
million, $39.5 million less than at April 30, 1998. The working capital decrease
resulted primarily from reclassifying most of the Company's long-term debt as
current, and from the Company's operating losses. The debt was reclassified to a
current obligation because of the Company's non-compliance with its loan
covenants.
Cash and cash equivalents decreased by $0.03 million during the year ended
April 30, 1999, to $2.1 million at year end. Approximately $5.3 million of cash
was provided by operations. About $1.6 million was used to repay various debt
obligations. The Company also paid $1.7 million in dividends to holders of its
Series A preferred stock. The Company is currently in arrears on interest and
principal payments and has not paid dividends to holders of Series A preferred
stock for two consecutive quarters. In the event that the Company fails to make
a third consecutive quarterly dividend payment to the holders of the Series A
Preferred Stock, then the holders of such stock will have the right to elect a
majority of the Company's Board of Directors.
During fiscal 1999, the Company spent $2.5 million for capital improvements
to its facilities. Capital spending for the year ending April 30, 2000 is
currently projected to be approximately $5.4 million. The Company had no
material commitments for capital spending at April 30, 1999.
The Company does not have a credit facility for working capital and
therefore relies on cash provided by its operations to fund its working capital
needs. There can be no assurance that such cash will be sufficient to fund the
Company's operations. Substantially all of the Company's assets are pledged to
secure its primary debt obligation.
The Company's fiscal 1999 results of operations were such that the Company
was unable to remain in compliance with certain financial covenants as required
by the company's Credit and Security Agreement dated as of November 30, 1992 as
amended (the "Credit Agreement"). In addition, the Company ceased making
interest and principal payments on its debt in March 1999. The Company is in
non-compliance with the Credit Agreement and is currently in active discussions
with the lenders. Substantially improved operating conditions from those in
fiscal 1999 will be necessary for the Company to comply with the Credit
Agreement. Operating conditions are not expected to improve sufficiently in
fiscal 2000 to enable the Company to comply with its obligations under the
Credit Agreement. See Note 6 to Consolidated Financial Statements.
The Company has initiated discussions with its senior lenders to modify the
terms of the Company's debt structure to better accommodate the cyclical nature
of the Company's business. The Company has engaged a financial consulting firm
to assist in restructuring its existing debt. Although the Company has in the
past been able to work with its senior lenders to achieve modifications of its
Credit Agreement and is currently negotiating with its senior lenders, there can
be no assurance that an agreement will be reached on modified debt terms. Any
debt restructuring is likely to adversely impact the common and preferred
shareholders.
In accordance with the Company's Credit Agreement, prepayments are required
if the Company's cumulative operating income exceeds certain specified amounts.
No such prepayment will be required for the year ended April 30, 1999. In
connection with the May 1, 1996 amendment to this Credit Agreement, the Company
agreed to an additional prepayment computed at 30% of quarterly net income. No
payments were made during the year ended April 30, 1999 pursuant to this
provision. Proceeds from the planned sale of facilities held for sale will be
applied to reduce debt.
The Company has no floating-rate debt, but the dividend rate on its Series
A Preferred Stock varies based on Bank of America's prime rate in effect at the
time the dividends are declared. Based on the prime rate in effect at July 2,
1999, the annual rate on the Series A Preferred Stock would decrease by about
$0.03 million from the rate that was in effect in the year ended April 30, 1999.
The Company does not invest in derivatives or other market risk sensitive
instruments.
YEAR 2000 COMPLIANCE
The Company has conducted a review of its computer and other systems to
identify those areas that could be affected by the "Year 2000" issue, and is
implementing a plan to resolve the issue. The initial phase of the plan, which
has been completed, consisted of testing existing systems to determine which had
"Year 2000" issues. The second phase of the Company's "Year 2000" plan consists
of the replacement or upgrading of hardware and software which has "Year 2000"
issues. The second phase is nearing completion. The remaining work consists of
replacing and upgrading the computer systems at two mills and some ancillary
software upgrades at other locations. The Year 2000 issue exists because many
computer systems and applications currently use two-digit fields to designate a
year. This practice can lead to incorrect results when computer software
performs arithmetic operations, comparisons, or data field sorting involving
years later than 1999. The Company presently believes, with modification to
existing software and conversion to new software and hardware, the "Year 2000"
issue will not create significant operational problems, and the Company does not
anticipate that any such problems will be material to its financial position or
results of operations in any given year.
FACTORS AFFECTING FORWARD-LOOKING STATEMENTS
The statements contained in this report that are not statements of
historical fact may include forward-looking statements (as defined in Section
27A of the Securities Act of 1933, as amended) that involve a number of risks
and uncertainties. Moreover, from time to time the Company may issue other
forward-looking statements. The following factors are among the factors that
could cause actual results to differ materially from the forward-looking
statements and should be considered in evaluating any forward-looking
statements.
Default Under Credit Agreement
- ------------------------------
The Company's fiscal 1999 results of operations were such that the Company
was unable to remain in compliance with certain financial covenants as required
by the Company's Credit Agreement. Substantially improved operating conditions
from those in fiscal 1999 will be necessary for the Company to comply with the
Credit Agreement. Operating conditions are not expected to improve sufficiently
in fiscal 2000 to enable the Company to comply with its obligations under the
Credit Agreement.
The Company ceased making interest and principal payments on its senior
secured debt in March 1999 and remains in arrears on these payments. In
addition, the Company has not paid dividends to the holders of Series A
Preferred Stock for two consecutive quarters. In the event that the Company
fails to make a third consecutive quarterly dividend payment to the holders of
the Series A Preferred Stock, then the holders of such stock will have the right
to elect a majority of the Company's Board of Directors.
The Company has initiated discussions with its senior lenders to modify the
terms of the Company's debt structure to better accommodate the cyclical nature
of the Company's business. The Company has engaged a financial consulting firm
to assist in restructuring its existing debt. Although the Company has in the
past been able to work with its senior lenders to achieve modifications of its
Credit Agreement and is currently negotiating with its senior lenders, there can
be no assurance that an agreement will be reached on modified debt terms. Any
debt restructuring is likely to have a material adverse impact the Company's
common and preferred shareholders.
If the Company is unable to reach an agreement with its senior lenders on
modified debt terms, such failure would have a material adverse effect on the
Company's business, financial condition and results of operations.
Liquidity and Capital Resources
- -------------------------------
The Company does not have a credit facility for working capital and
therefore relies on cash provided by its operations to fund its working capital
needs. The Company's cash flow is affected by numerous factors, including sales
of its products, cost of raw materials and seasonal nature of its business.
There can be no assurance that cash provided by operations will be sufficient to
fund the Company's future operating and capital needs. Substantially all of the
Company's assets are pledged as security for its primary debt obligation. If the
Company is not able to obtain sufficient cash to fund its working capital needs
or for an alternative source of cash, such inability could have a material
adverse impact on the Company's business, financial condition and results of
operation. See Note 6 to Consolidated Financial Statements.
Adverse Operating Conditions; Fluctuations in Quarterly Results
- ---------------------------------------------------------------
Unusually robust domestic demand for lumber and the conversion of
production capacity from export to domestic demand has, and may again cause
adverse operating conditions if domestic demand cools. A decline in lumber
demand to the levels experienced over the past five years may cause an
oversupply of lumber and corresponding weakness in lumber prices.
On a quarter-to-quarter basis, the Company's financial results have varied
widely and will continue to vary due to seasonal fluctuations and market factors
affecting both the availability of, and the demand for, logs and the demand for
lumber and other wood products. The industry is subject to fluctuations in sales
and earnings due to such factors as industry production in relation to product
demand and variations in interest rates and housing starts. The demand for
lumber and wood products is primarily affected by the level of new residential
construction activity, which is subject to fluctuations due to changes in
economic conditions, real estate prices, interest rates, credit availability,
property taxes, energy costs, population growth, weather conditions and general
economic conditions, all of which are beyond the control of the Company. Demand
for the Company's products is generally lower in the fall and winter quarters
when activity in the construction, industrial, and repair and remodeling markets
is slower, demand is generally higher in the spring and summer quarters, when
these markets are more active. Fire danger and excessively dry or wet conditions
temporarily reduce logging activity and may increase open-market log prices. The
industry is also affected by timber management policies, which change from time
to time and may cause actual or feared shortages in some areas. These policies
change because of environmental concerns, public agency budget issues, and a
variety of other reasons. Currency fluctuations affect the industry when
exchange rates spur log exports and drive up domestic log prices, and when a
relatively strong U.S. dollar encourages lumber exports from competing
countries, such as Canada, or discourages exports to other countries, such as
Japan. Therefore, past results for any given year or quarter are not necessarily
indicative of future results. The Company believes that period-to-period
comparisons of its financial results may not be meaningful and should not be
relied upon as indications of future performance.
Availability of Logs
- --------------------
Raw materials comprise the majority of the cost of products sold by the
Company. The Company depends primarily on open-market log purchases for its raw
material needs. In the past the Company generally purchased logs in sufficient
quantities to match the current operating requirements for its mills. To enable
the Company to operate its facilities on a consistent basis, log inventory
levels need to be sufficient to reduce the risk of temporary closures and reduce
or avoid high-cost spot log purchases during periods of adverse weather. The
availability and cost of logs are influenced by a variety of factors, including
demand by competitors and exporters, the environmental and harvest policies of
federal and state agencies, and, in the long term, the quantity of commercial
timberland. Various factors, including environmental and endangered species
concerns, particularly regulations relating to the northern spotted owl, the
marbled murrelet, and various species of fish have limited, and are likely to
continue to limit, the amount of timber offered for sale by certain government
agencies, which historically have been major suppliers of timber to the western
forest products industry. State and private timber supplies may be inadequate to
fill the shortfall. Although the Company does not rely significantly on
purchases of federal timber, uncertainty associated with timber supply issues
combined with continued lack of significant public timber sales activity may
contribute to log supply and price volatility. The availability of logs may also
be affected by other factors, which include damage by fire, insect infestation,
disease, prolonged drought, and other natural disasters. Log and lumber markets
may continue to experience rapid changes in values because of actual and
perceived market conditions that may sometimes result in inconsistent
relationships between log and lumber prices. These changes could result in large
swings in the gross margin realized by the Company on lumber produced. There can
be no assurance that sales of logs from the Company's current sources may not be
reduced or that the Company will be able to procure sufficient logs at favorable
prices in order to continue operation of its manufacturing facilities in the
future. The inability of the Company to obtain logs in sufficient quantities
could have a material adverse impact on the Company's business, financial
condition, and results of operations.
Technological Change
- --------------------
Technology and innovation continually impact the lumber manufacturing
process. Changes are continually being adopted by the industry in general that
cause mills to invest in new capital equipment to remain competitive.
Depreciation has exceeded capital spending at the Company's core facilities. The
technology employed at the mills, generally lags that of the Company's major
competitors, heightening the risk of becoming non-competitive. The Company
believes that the technological advances made over the past 5 years and their
adoption by the Company's competitors will make TreeSource's mills economically
obsolete if capital spending is not increased.
If the Company is not able to increase capital spending to keep pace with
the technological advances adopted by the Company's competitors, such inability
could have a material adverse impact on the Company's business, financial
condition and results of operations.
Manufacturing Risks
- -------------------
The Company manufactures softwood and hardwood lumber and by-products. As a
manufacturer, the Company continually faces risks regarding the availability and
cost of raw materials and labor, the potential need for additional capital
equipment, increases in maintenance costs, plant and equipment obsolescence,
quality control, and excess capacity. See section titled, "Industry Conditions".
The Company curtails production at facilities from time to time because of
conditions that temporarily impair log flow or when imbalances between log costs
and product prices cause the cost of operation to exceed the cost of shutdown.
There has been union activity at the Company's hardwood facility and labor
disturbances may also curtail or shut down production. See section titled,
"Employees". The Company may permanently close facilities that are determined to
lack future potential for profit under expected operating conditions. A
disruption in the Company's production or distribution could have a material
adverse impact on the Company's business, financial condition and results of
operations.
Federal and State Regulations
- -----------------------------
Laws and regulations dealing with the Company's operations are subject to
change and new laws and regulations are frequently introduced concerning the
timber industry.
From time to time, bills are introduced in the state legislatures and the
U.S. Congress that relate to the business of the Company, including the
protection and acquisition of old-growth and other timberlands, endangered
species, environmental protection, and the restriction, regulation, and
administration of timber-harvesting practices. The forest products industry
remains subject to potential state or local ballot initiatives and evolving
federal and state case law that could affect timber-harvesting practices. It is
impossible to assess the effect of such matters on the future operating results
or financial position of the Company. The Company is also subject to various
federal, state, and local regulations regarding waste disposal and pollution
control, including air, water, and noise pollution. The cost of remediation at
the Company's sites at Burke, Vermont; Philomath, Oregon; and Sedro-Woolley,
Washington, may be more expensive than anticipated and may require the approval
of certain regulators. See section titled "Environmental Regulation". Various
governmental agencies have enacted or are considering regulations regarding log
yard management and disposal of log yard waste that may require material
expenditures in the future. Such regulations could have a material adverse
impact on the Company.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required by this item are
listed in Item 14 of Part IV of this report, which begins at page 33.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company as of July 6, 1999, are:
Name Age Position
---------------------- --- ----------------------------------------
Larry G. Black............ 53 Director
Scott Christie............ 50 Director
Richard W. Detweiler...... 57 Director
Jess R. Drake............. 58 Director, President, and Chief Executive
Officer
Robert W. Lockwood........ 39 Vice President-Finance, Chief
Financial Officer, and Secretary
David J. Loftus........... 57 Treasurer
John C. Stembridge........ 40 Vice President-Sales and Marketing
William H. Wright......... 63 Director
The Company currently has seven seats on its Board of Directors, with two
positions vacant because of the resignation in February 1999 of K. Stanley
Martin, a former Class 3 director and the Company's Vice President-Finance, and
the resignation in June 1999 of Robert J. Riecke, also a former Class 3 director
and the Company's General Counsel, Secretary, and Vice President-Administration.
The Company intends to leave these seats vacant for now, but may elect to fill
them in the future.
Pursuant to the Company's Articles of Incorporation and Bylaws, the Board
is divided into three classes of directors, with each class serving a term of
three years. The terms of the Class 2 directors, Messrs. Black and Christie,
expire at the 1999 Annual Meeting of Shareholders. Mr. Drake, a Class 3
director, was elected by the Board in November of 1998 to fill a vacancy created
by the retirement of the Company's former president. If the Company's
shareholders approve Mr. Drake's election at the 1999 Annual Meeting of
Shareholders, Mr. Drake's board term will expire at the 2000 Annual Meeting of
Shareholders. The terms of Class 1 Directors, Messrs. Wright and Detweiler,
expire at the 2001 Annual Meeting of Shareholders.
In the event the Company fails to make three consecutive quarterly dividend
payments, four quarterly dividend payments within twenty-four months, or a total
of eight quarterly dividend payments, or if a certain financial ratio covenant
violation has occurred and is continuing, on its Series A Preferred Stock,
holders of such stock may, under the circumstances and in the manner provided in
the Company's Fourth Restated Articles of Incorporation, elect a majority of the
Board of Directors by replacing incumbent Board members or increasing the size
of the Board. As of July 6, 1999, the Company, to preserve cash for its
operations, has elected not to pay two consecutive dividend payments.
Larry G. Black has been a director since October 1997. Mr. Black is
president of Quinault Corporation ("Quinault"), which owns approximately 29% of
the Company's Common Stock. Mr. Black has been chief executive officer of
Quinault Logging Company, which has been in the business of buying timber and
selling logs since its formation in 1985. Mr. Black has been involved in the
timber industry for more than 30 years. See "Certain Relationships and Related
Transactions".
Scott Christie has been a director of the Company since March 1988. Mr.
Christie is currently general partner of Christie Capital Management. Since
1987, Mr. Christie has been engaged as an investment advisor for his own account
and the account of other individuals. From 1983 until 1987, Mr. Christie was
senior vice president of Kidder, Peabody & Co. Incorporated, an investment
banking firm. Mr. Christie headed Kidder, Peabody's underwriting team for the
Company's initial public offering and 1987 debenture offering.
Richard W. Detweiler has been a director of the Company since December
1995. Mr. Detweiler is currently a partner of Carlisle Enterprises, an
investment partnership. From 1990 to 1996, Mr. Detweiler was chief executive
officer of Precision Aerotech, a diversified manufacturing company. Mr.
Detweiler has 33 years of manufacturing management experience, including 16
years in general management.
Jess R. Drake has been the Company's president and a director since
November 1998. From 1987 to 1998, Mr. Drake was vice president and general
manager of the Northwest Operations of Simpson Timber Company. Mr. Drake has
experience in manufacturing, timberlands, domestic and international sales,
finance, and strategic planning in both the United States and Canada and has
held general management roles for 20 of his more than 30 years in the forest
products industry.
Robert W. Lockwood is chief financial officer and vice president-finance of
the Company, positions he has held since April 1999, and secretary since July
1999. Mr. Lockwood is responsible for all financial affairs of the Company. From
1985 to 1999, Mr. Lockwood was employed by Simpson Investment Company, where he
held financial and strategic planning roles in the timber, wood products, and
pulp and paper industry sectors and most recently was the controller of
Simpson's Northwest region wood products businesses.
David J. Loftus was appointed treasurer of the Company in October 1993 and
continues to serve as vice president-finance of TreeSource, Inc., the Company's
marketing subsidiary, a position he has held since May 1986. As treasurer, Mr.
Loftus is primarily responsible for cash management matters and credit and
banking relationships. For the eight years prior to joining TreeSource, Mr.
Loftus served as the assistant treasurer for a publicly-traded company with
operations in the forest products industry.
John C. Stembridge was appointed vice president-sales and marketing of the
Company in February 1995 and served as interim chief operating officer from May
to November of 1998. Mr. Stembridge joined TreeSource, Inc., the Company's
marketing subsidiary, in 1989 and has served as its vice president and general
manager since June 1991. Mr. Stembridge has primary responsibility for managing
all aspects of the Company's lumber sales and transportation. For the nine years
before joining the Company, Mr. Stembridge was involved in domestic and export
lumber sales, primarily with North Pacific Lumber Co.
William H. Wright has been a director of the Company since April 1992. Mr.
Wright has held a variety of management positions in the forest products
industry since 1957. He is currently president of Heartwood Consulting Service,
which advises forest products clients. From 1989 until 1994, he was president
and chief executive officer of Dee Forest Products Inc., a manufacturer of
hardboard and related products. From 1984 to 1989, Mr. Wright was general
manager of Stevenson Co-Ply Inc., a manufacturer of veneer and plywood.
Section 16(a) Beneficial Ownership Reporting Compliance
- -------------------------------------------------------
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires that the Company's officers, directors and persons who
own more than 10 % of the Company's Common Stock file with the Securities and
Exchange Commission ("SEC") initial reports of beneficial ownership on Form 3
and reports of changes in beneficial ownership of Common Stock and other equity
securities of the Company on Form 4. Officers, directors, and greater than 10%
shareholders of the Company are required by SEC regulations to furnish to the
Company copies of all Section 16(a) reports that they file. To the Company's
knowledge, based solely on reviews of such reports furnished to the Company and
written representations that no other reports are required, all Section 16(a)
filing requirements applicable to its officers, directors, and greater than 10%
beneficial owners were complied with during the fiscal year ended April 30,
1999.
Item 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table shows the annual and other compensation paid by the
Company to its chief executive officer and the four other most highly
compensated executive officers who received in excess of $100,000 (the "Named
Executive Officers") for each of the last three fiscal years.
Long-Term
Compensation
Awards
Name and Principal Position Annual Compensation(1) -------------------- All Other
------------------------------------------------------------------- Number of Securities Compensation
Year Salary($) Bonus($) Underlying Options ($)
---- --------- -------- -------------------- ------------
Jess R. Drake (2)
President and Chief 1999 $166,668 $ 0 543,295 132,300
Executive Officer
Bruce L. Engel (3) 1999 $ 92,323 $ 0 --
President and Chief 1998 $300,000 $ 68,300 -- 400,000(4)
Executive Officer 1997 $300,000 $171,122 35,000
K. Stanley Martin (5) 1999 $109,036 $ 4,589 --
Vice President-Finance and 1998 $120,000 $ 27,320 --
Chief Financial Officer 1997 $120,000 $ 68,447 35,000
Robert J. Riecke (6) 1999 $147,439 $ 5,048 --
Vice President- 1998 $132,000 $ 30,052 --
Administration, General 1997 $132,000 $ 75,295 35,000
Counsel, and Secretary
John C. Stembridge (7) 1999 $158,077 $ 18,166 --
Vice President-Sales and 1998 $100,000 $ 27,448 --
Marketing 1997 $100,000 $ 80,238 35,000
(1) Personal benefits for each executive officer named in the table did not
exceed $50,000 or 10% of such executive officer's total annual salary and
bonus for the fiscal years ended April 30, 1999, 1998 and 1997,
respectively.
(2) Mr. Drake took office on November 4, 1998; All Other Compensation amounts
include a $100,000 signing bonus and $32,300 for consulting services
provided prior to November 4, 1998.
(3) Mr. Engel retired effective July 1, 1998.
(4) Amount paid in connection with Mr. Engel's retirement.
(5) Mr. Martin resigned effective February 15, 1999.
(6) Mr. Riecke resigned effective June 9, 1999.
(7) Mr. Stembridge also served as Interim Chief Operating Officer from May
through November 1998.
OPTION GRANTS IN LAST FISCAL YEAR
The following table provides information on option grants for the last
fiscal year to the Named Executive Officers:
Potential
Individual Grants Realizable Value at
---------------------------------------------------------- Assumed Annual Rates
# of % of of Stock Price
Securities Total Options Exercise Appreciation for
Underlying Granted to or Base Option Term(1)
Options Employees in Price Expiration ----------------------------------
Name Granted Fiscal Year ($/Share) Date 0%($) 5%($) 10%($)
- -------------- ----------- ------------- --------- ---------- ---------- ---------- ----------
Jess R. Drake 543,295(2) 84% $.7969 11/03/2008 $ 76,401 $396,721 $888,156
(1) These assumed appreciation rates are not derived from the historical or
projected prices of the Company's Common Stock or results of operations or
financial condition, and they should not be viewed as a prediction of
possible prices or value for the Company's Common Stock in the future.
These assumed rates of 5% and 10% would result in the Company's Common
Stock price increasing from $0.9375 per share to approximately $1.5270 per
share and $2.4316 per share, respectively.
(2) Vesting Schedule: 11/06/98 - 25%; 11/03/99 - 50%; 11/03/00 - 75%; 11/03/01
- 100%. Market value of the Company's Common Stock on the date of grant was
$0.9375.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
The following table provides information on option exercises for the
last fiscal year by the named executive officers and the value of their
unexercised options as of April 30, 1999:
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Shares Options at April 30, 1999 (#) at April 30, 1999 ($)(1)
Acquired on ----------------------------- ----------------------------
Name Exercise (#) Exercisable Unexercisable Exercisable Unexercisable
- ------------------- ------------- ----------- ------------- ----------- -------------
Jess R. Drake -- 135,824 407,471 0 0
Bruce L. Engel(2) 500 331,625 0 0 0
Robert J. Riecke(3) -- 57,750 12,250 0 0
John C. Stembridge -- 32,750 12,250 0 0
(1) Based on the fair market value of the Common Stock at April 30, 1999 of
$.4375 per share.
(2) Mr. Engel retired effective July 1, 1998.
(3) Mr. Riecke resigned effective June 9, 1999.
EMPLOYMENT AGREEMENTS
Effective November 4, 1998, the Company entered into a three-year
Employment Contract with Jess R. Drake. The Employment Contract provides for an
initial annual base salary of $350,000, with annual increases if provided to
other executive officers, or as deemed appropriate by the Board of Directors.
Additionally, a signing bonus of $100,000 was paid upon execution of the
Employment Contract. The Employment Contract provides for an annual bonus of up
to 180% of the current annual salary if certain financial and non-financial
goals are met or exceeded. The Employment Contract also required the grant of
stock options according to a formula, which resulted in 543,295 options being
awarded to Mr. Drake, with 25% vesting upon grant and 25% vesting annually until
fully vested. These stock options, were issued outside the Company's 1996 Option
Plan. Vesting of the options is accelerated in certain events including a change
of control, as defined, termination of employment for other than cause, as
defined, or upon acceleration of Company's senior secured debt. Additionally, if
the Company terminates Mr. Drake's employment without certain identifiable
causes, before the end of the Employment Contract's term, the Company is
obligated to pay an amount equal to two times Mr. Drake's last base annual
salary and a pro rata share of that year's bonus. The Company's senior secured
lenders have agreed to subordinate their claims to amounts due Mr. Drake under
the Employment Contract, up to a maximum of $1.1 million. See Exhibits 10.11 and
10.12.
Effective April 20, 1999, the Company entered into a three year Employment
Contract with Robert W. Lockwood. The provisions are identical to the terms of
the Employment Contract with Mr. Drake, except that the starting annual salary
for Mr. Lockwood is $150,000, there is no signing bonus, the bonus criteria are
different, and the annual bonus may be up to 80% of Mr. Lockwood's current
annual salary. Mr. Lockwood's Employment Contract also provides for the award of
stock options for 200,000 shares, 100,000 of which were issued on April 20, 1999
and the remaining 100,000 of which will be issued on April 20, 2000. These stock
options were issued outside the Company's 1996 Option Plan. The Company's senior
secured lenders have agreed to subordinate their claims to amounts due Mr.
Lockwood under the Employment Contract, up to a maximum of $500,000. See
Exhibits 10.13 and 10.14.
Benefits
- --------
The Company maintains an Internal Revenue Code ("IRC") Section 401(k)
retirement savings plan under which employees, including executive officers, are
permitted to make salary deferral contributions. Executive officers are not
entitled to employer matching contributions pursuant to this plan.
Compensation of Directors
- -------------------------
Each of the Company's outside directors is paid an annual retainer of
$15,000 for attending up to six Board meetings, plus $750 for each additional
Board meeting or committee meeting attended, and $225 for each telephone
conference meeting attended or written consent executed. Directors who are also
employees of the Company do not receive additional compensation for their
services as directors. In fiscal 1999, no outside directors received option
grants. During fiscal 1999, Mr. Wright was paid consulting fees in the amount of
$11,574 for providing oversight assistance to the Company while a replacement
president was located, and for conducting the search that resulted in the
employment of Mr. Drake.
Executive Bonuses
- -----------------
During the first part of fiscal 1999, monthly discretionary bonuses were
paid to the Company's executive officers, as well as other salaried management
and administrative employees, pursuant to the Company's profit sharing bonus
plan. The bonuses were based upon monthly net pretax profits and were generally
allocated according to base salary level. In August 1998, the Company's profit
sharing bonus plan was changed, with respect to salaried management and
administrative employees, to a program based on quarterly results and paid
quarterly. Executive officers are covered in a "key employee" bonus program
based on fiscal year net profit after tax. Each of the president and vice
president-finance of the Company may receive an annual bonus, if certain
financial and non-financial goals are met, up to a maximum of 180% of current
annual salary for the president, and up to 80% of current annual salary for the
vice president-finance. Bonuses paid to the Named Executive Officers for
services rendered to the Company during the year ended April 30, 1999 are
included in the amounts shown in the "Summary Compensation Table".
Stock Option Plan
- -----------------
In October 1996 the Company implemented a Stock Option Plan ("1996 Option
Plan") to supersede the 1986 Option Plan, which terminated in July 1996. In
October 1998, the Company's shareholders approved an amendment to the 1996
Option Plan pursuant to which the number of shares of Common Stock available for
issuance under the 1996 Option Plan was increased to 1,425,000 shares, subject
to adjustment from time to time as provided in the 1996 Option Plan.
The purpose of the 1996 Option Plan is to enhance the long-term value of
the Company by offering opportunities to those employees, directors, officers,
consultants, agents, advisors and independent contractors of the Company and its
subsidiaries who are key to the Company's growth and success, and to encourage
them to remain in the service of the Company and its subsidiaries and to acquire
and maintain stock ownership in the Company.
Not more than 50,000 shares of Common Stock, in the aggregate, may be
granted under the 1996 Option Plan to any participant during any fiscal year,
except that one-time grants of options for up to 100,000 shares may be made to
newly hired participants.
Any shares of Common Stock that cease to be subject to an option (other
than by reason of exercise), including, without limitation, in connection with
the cancellation of an award, will be available for issuance in connection with
future grants of awards under the 1996 Option Plan.
Options granted under the 1996 Option Plan will be "nonqualified stock
options" (that is, options that are not designed to qualify as "incentive stock
options," as defined in IRC Section 422). The option price for each option
granted under the 1996 Option Plan will be determined by the plan administrator,
but will be not less than 85% of the Common Stock's fair market value on the
date of grant.
The option term will be fixed by the plan administrator, but if not so
specified will be ten years. Each option will be exercisable pursuant to a
vesting schedule determined by the plan administrator. If not so established,
the option will vest over four years from the date of grant, with 20% of the
shares of underlying Common Stock vesting on the six-month anniversary of the
grant date and an additional 20% of the shares vesting on the one-year
anniversary of the option's grant date, and after every successive year of the
optionee's continuous employment or relationship with the Company. The plan
administrator will also determine the circumstances under which an option will
be exercisable in the event the optionee ceases to provide services to the
Company or one of its subsidiaries. If not so established, options generally
will be exercisable for one year after termination of services as a result of
disability or death and for one month after all other terminations. An option
will not be exercisable following an optionee's termination if the optionee's
services are terminated for cause, as defined in the 1996 Option Plan.
The 1996 Option Plan is administered by the Company's Compensation
Committee with respect to option grants to employees. Option grants to others
are administered by the Board of Directors.
Compensation Committee Interlocks
- ---------------------------------
The Compensation Committee is composed of two independent non-employee
directors, Mr. Christie and Mr. Wright.
The Compensation Committee is responsible for recommending to the full
Board of Directors, for its approval, the base compensation for all executive
officers. Executive officers who serve on the Company's Board of Directors do
not participate in any deliberations or decisions regarding their own
compensation. The Compensation Committee receives recommendations from the chief
executive officer regarding appropriate levels of base compensation for the
other executive officers, including executive officers who are directors.
Board Compensation Committee Report on Executive Compensation
- -------------------------------------------------------------
The Company's executive officer compensation policies are designed to
attract, motivate and retain senior management by providing an opportunity for
overall competitive compensation based on an adequate base compensation amount
and participation in an annual bonus system.
During fiscal 1999, the Board of Directors changed the bonus system for
executive officers. During the first part of the fiscal year, all executive
officers and all other salaried employees at the TreeSource corporate level
received 10% of monthly consolidated pre-tax profits, allocated according to
base salary level.
In August 1998, the Company changed all salaried bonus programs to
incorporate longer-term measurement and payout periods. At the mill level,
salaried employees, excluding certain clerical staff, are eligible for a bonus,
to be computed and paid quarterly, based in part on the achievement of certain
manufacturing goals, such as the recovery level of lumber derived from raw
material, and based in part on the mills exceeding quarterly profit targets.
Salaried employees at the corporate level, other than executive officers, may
receive a quarterly bonus based on company-wide quarterly net profits after tax.
Executive officers, participate in a "key employee" bonus program based on the
Company's fiscal year net profit after tax, with the amount paid into the bonus
pool determined by a preset schedule. See Exhibit 10.4.
Each of the president and vice president-finance may receive an annual
bonus, if certain financial and non-financial goals are met, of up to a maximum
of 180% of current annual salary for the president and 80% of current annual
salary for the vice president-finance.
The Company also uses long-term stock-based incentive opportunities in the
form of options to purchase the Company's Common Stock. Executive officers who
serve on the Company's Board of Directors do not participate in any
deliberations or decisions regarding option awards to them. The Committee
believes that stock-based performance compensation arrangements are beneficial
in aligning management's and shareholders' interests in the advancement of
shareholder value.
During fiscal 1999, Jess R. Drake, president and chief executive officer,
was awarded options for 543,295 shares and Robert W. Lockwood, the company's
chief financial officer and vice president-finance, was awarded options for
100,000 shares. No option grants were made to other executive officers during
fiscal 1999.
TreeSource provides the same group life and health insurance coverage to
executive officers as other employees and requires all employees, including
executive officers, to pay approximately 25% of health insurance premiums by
payroll deduction. The president is not currently enrolled in the insurance plan
but the Company does provide to the president a special disability policy to
reflect his higher level of annual compensation.
The Company allows its executive officers and all other employees to
contribute a percentage of their compensation to the Company-sponsored 401(k)
Retirement Savings Plan. Executive officers and other salaried employees are not
generally entitled to matching contributions.
Neither the executive officers nor other employees are covered by any other
Company-sponsored retirement plans.
It is the Company's practice to participate in and use, as a basis for
comparison, an analysis of executive compensation in the Northwest prepared by
the compensation consulting group of Milliman & Robertson, Inc. This analysis is
useful in establishing base salary levels and monitoring overall compensation
levels as compared to other publicly-traded companies of similar size.
Mr. Drake's employment with the Company commenced November 4, 1998. Mr.
Drake's cash compensation for fiscal 1999 was $298,968, which includes a
$100,000 signing bonus paid in connection with the execution of his Employment
Contract and consulting fees. Mr. Drake's annual base salary is $350,000.
The median annual base salary and bonus for chief executive officers of
comparably sized public companies, as published by the Milliman & Robertson
compensation survey for 1997/1998, are $301,634 and $143,590, respectively.
Compensation Committee Members
Scott Christie
William H. Wright
Stock Performance Graph
- -----------------------
The following line graph sets forth the total cumulative total shareholder
return on the Company's Common Stock and the cumulative total return of the
companies listed on the Standard and Poor's 500 Stock Index and the Standard and
Poor's Paper & Forest Products Index, assuming reinvestment of dividends. The
comparisons are not intended to forecast or be indicative of possible future
performance of the Company's Common Stock.
(Graph omitted)
April 1994 April 1995 April 1996 April 1997 April 1998 April 1999
---------- ---------- ---------- ---------- ---------- ----------
S&P 500 Index 100.00 117.47 152.95 191.40 270.00 328.92
TreeSource Industries Inc. 100.00 57.14 22.45 59.18 51.02 14.29
S&P Paper & Forest Products 100.00 120.24 135.24 134.83 171.50 123.38
Index
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table shows the beneficial ownership as of July 6, 1999 of
the Company's Common Stock by (i) each director, (ii) each beneficial owner of
more than 5% of the Common Stock, (iii) the Named Executive Officers, and (iv)
all directors and officers as a group. Except as otherwise specifically noted,
each person noted below has sole investment and voting power with respect to
shares indicated.
Amount and Nature of
Name and Address of Beneficial Owner Beneficial Ownership (1)(2) %
- ---------------------------------------- ------------------------- ---------
Quinault Corporation
P.O. Box C 3,271,300 29.3%
Aberdeen, WA 98570
Amount and Nature of
Name of Directors and Executive Officers Beneficial Ownership (2) %
- ---------------------------------------- ------------------------- ---------
Larry G. Black (3) 3,271,300 29.3%
Scott Christie 82,500 0.5%
Richard W. Detweiler 52,500 0.4%
Jess R. Drake 135,824 1.2%
Bruce L. Engel (4) 331,625 2.9%
K. Stanley Martin(5) -- --
Robert J. Riecke(6) -- --
John C. Stembridge 32,750 0.3%
William H. Wright 82,500 0.7%
All directors and executive officers as a 4,040,749 33.9%
group (8 person)
(1) As determined by reference to the beneficial owner's most recent Form 4
filing dated December 7, 1998.
(2) Includes shares reserved for issuance under options exercisable within 60
days of July 12, 1999 as follows: Mr. Christie 82,500; Mr. Detweiler
52,500; Mr. Drake 135,824; Mr. Engel 331,625; Mr. Loftus 25,750; Mr.
Lockwood 25,000; Mr. Stembridge 32,750; and Mr. Wright 82,500.
(3) Mr. Black, by virtue of being president and sole director of Quinault, is
deemed to beneficially own the shares owned by Quinault.
(4) Bruce L. Engel retired effective July 1, 1998.
(5) K. Stanley Martin resigned effective February 15, 1999.
(6) Robert J. Riecke resigned effective June 9, 1999.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During fiscal 1999, three of the Company's subsidiaries purchased logs
worth approximately $3.9 million from Quinault Logging Company. Mr. Larry G.
Black, director of the Company, is chief executive officer of Quinault Logging
Company and is president and sole director of Quinault Corporation, beneficial
owner of approximately 29.3% of the Company's Common Stock.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Page
----
(a) (1) Financial Statements
The following consolidated financial statements of the
Registrant and its subsidiaries are contained in this report:
Report of Independent Certified Public Accountants 41
Consolidated Statements of Operations for the Years
Ended April 30, 1999, 1998 and 1997 42
Consolidated Balance Sheets at April 30, 1999 and 1998 43
Consolidated Statements of Cash Flows for the Years
Ended April 30, 1999, 1998 and 1997 45
Consolidated Statement of Changes in Stockholders'
Equity for the Years Ended April 30, 1999,
1998 and 1997 46
Notes to Consolidated Financial Statements 47
(a) (2) Financial Statement Schedules
The schedules called for under Regulation S-X are not submitted because
they are not applicable, are not required, or because the required information
is not material or is included in the financial statements or notes thereto.
Page
----
(a) (3) Exhibit Index
2.1 Final form of Registrant's Second Amended
Joint Plan of Reorganization dated October 5,
1992, filed with the United States Bankruptcy
Court for the Western District of Washington.
(1)
3.1 Fourth Restated Articles of Incorporation of
the Registrant adopted November 27, 1992, as
amended on October 26, 1998. (21)
3.2 Second Restated Bylaws of the Registrant
effective November 27, 1992. (8)
Page
----
4.2 Credit and Security Agreement dated as of
November 30, 1992, between Registrant and
Principal Mutual Life Insurance Company,
Aetna Life Insurance Company, The
Northwestern Mutual Life Insurance Company,
Chemical Bank, Seattle-First National Bank,
and Bank of America Oregon. (2)
4.2.1 Amendment dated as of October 18, 1994 to
Credit and Security Agreement dated as of
November 30, 1992, between Registrant and
Principal Mutual Life Insurance Company,
Aetna Life Insurance Company, The
Northwestern Mutual Life Insurance Company,
Chemical Bank, Seattle-First National Bank,
and Bank of America Oregon. (9)
4.2.2 Amendment dated as of January 27, 1995 to
Credit and Security Agreement dated as of
November 30, 1992, between Registrant and
Principal Mutual Life Insurance Company,
Aetna Life Insurance Company, The
Northwestern Mutual Life Insurance Company,
Chemical Bank, Seattle-First National Bank,
and Bank of America Oregon. (11)
4.2.3 Amendment dated as of May 1, 1995 to Credit
and Security Agreement dated as of November
30, 1992, between Registrant and Principal
Mutual Life Insurance Company, Aetna Life
Insurance Company, The Northwestern Mutual
Life Insurance Company, Chemical Bank,
Seattle-First National Bank, and Bank of
America Oregon. (11)
4.2.4 Amendment dated as of January 1, 1996 to
Credit and Security Agreement dated as of
November 30, 1992, between Registrant and
Principal Mutual Life Insurance Company,
Aetna Life Insurance Company, The
Northwestern Mutual Life Insurance Company,
Chemical Bank, Seattle-First National Bank,
and Bank of America Oregon. (12)
4.2.5 Amendment dated as of May 1, 1996 to Credit
and Security Agreement dated as of November
30, 1992, between Registrant and Principal
Mutual Life Insurance Company, Aetna Life
Insurance Company, The Northwestern Mutual
Life Insurance Company, Chemical Bank,
Seattle-First National Bank, and Bank of
America Oregon. (13)
4.2.6 Amendment dated as of December 17, 1996 to
Credit and Security Agreement dated as of
November 30, 1992, between Registrant and
Principal Mutual Life Insurance Company,
Aetna Life Insurance Company, The
Northwestern Mutual Life Insurance Company,
Chemical Bank, Seattle-First National Bank,
and Bank of America Oregon. (14)
Page
----
4.2.7 Amendment dated as of October 1, 1997 to
Credit and Security Agreement dated as of
November 30, 1992, between Registrant and
Principal Mutual Life Insurance Company,
Aetna Life Insurance Company, The
Northwestern Mutual Life Insurance Company,
Chemical Bank, Seattle-First National Bank,
and Bank of America Oregon. (17)
4.2.8 Amendment dated as of January 1, 1998 to
Credit and Security Agreement dated as of
November 30, 1992, between Registrant and
Principal Mutual Life Insurance Company,
Aetna Life Insurance Company, The
Northwestern Mutual Life Insurance Company,
Chemical Bank, Seattle-First National Bank,
and Bank of America Oregon. (18)
4.2.9 Amendment dated as of April 1, 1998 to Credit
and Security Agreement dated as of November
30, 1992, between Registrant and Principal
Mutual Life Insurance Company, Aetna Life
Insurance Company, The Northwestern Mutual
Life Insurance Company, Chemical Bank,
Seattle-First National Bank, and Bank of
America Oregon. (22)
4.3 Indenture dated as of November 30, 1992,
between Registrant and State Street Bank and
Trust Company, as Trustee, with respect to 8%
Senior Subordinated Notes due 2005. (3)
10.1 Amended and Restated 1986 Stock Option Plan
dated December 30, 1992.* (4)
10.1.2 Form of Stock Option Agreement for directors
of Registrant.* (8)
10.1.3 Form of Stock Option Agreement for executive
officers of the Registrant.* (8)
10.1.4 1996 Stock Option Plan dated October 21,
1996.* (16)
10.1.5 Form of Stock Option Agreement for directors
and officers of the Registrant.* (19)
10.1.6 Amendment dated August 7, 1998 to 1996 Stock
Option Plan.* 64
10.3 Form of Indemnification Agreement for
directors, officers and certain employees
effective January 30, 1991.* (8)
10.4 Description of Key Employee Profit-Sharing
Bonus Plan.* 65
Page
----
10.61 WTD Industries, Inc. Retirement Savings Plan
and Trust dated as of May 1, 1989.* (6)
10.62 Amendment No. 1 to WTD Industries, Inc.
Retirement Savings Plan and Trust Effective
May 1, 1989.* (7)
10.63 Amendment No. 2 to WTD Industries, Inc.
Retirement Savings Plan and Trust adopted May
30, 1991.* (7)
10.64 Amendment No. 3 to WTD Industries, Inc.
Retirement Savings Plan and Trust adopted
June 26, 1992.* (7)
10.65 Amendment No. 4 to WTD Industries, Inc.
Retirement Savings Plan and Trust adopted
April 30, 1993.* (8)
10.66 Amendment No. 5 to WTD Industries, Inc.
Retirement Savings Plan and Trust adopted
December 28, 1994.* (10)
10.67 Amendment No. 6 to WTD Industries, Inc.
Retirement Savings Plan and Trust adopted
June 10, 1997.* (19)
10.68 Amendment No. 7 to WTD Industries, Inc.
Retirement Savings Plan and Trust adopted May
18, 1999.* 66
10.8 Amended and Restated Rights Agreement dated
as of March 4, 1998, between the Registrant
and ChaseMellon Shareholder Services, as
Rights Agent. (20)
10.9 Employment Agreement dated May 27, 1998
between Robert J. Riecke and Registrant.* ***
(22)
10.10 Settlement Agreement dated May 15, 1998
between Bruce L. Engel and Registrant.* (23)
10.11 Employment Contract dated October 31, 1998,
between Jess R. Drake and Registrant.* (21)
10.12 Stock Option Letter Agreement dated November
3, 1998 between Jess R. Drake and
Registrant.* (21)
10.13 Employment Contract dated April 6, 1999,
between Robert W. Lockwood and Registrant.* 67
Page
----
10.14 Non Qualified Stock Option Agreement dated
April 20, 1999 between Robert W. Lockwood and
Registrant.* 74
12.2 Computation of Registrant's Net Income (Loss)
to Average Total Assets. 79
12.3 Computation of Registrant's Net Income (Loss)
to Average Stockholders' Equity. 80
12.4 Computation of Registrant's Average
Stockholders' Equity to Average Total Assets. 81
21.1 Subsidiaries of the Registrant (list updated
as of July 12, 1999). 82
23.1 Consent of Independent Certified Public
Accountants. 83
27.1 Financial Data Schedule**
27.2 Restated Financial Data Schedule**
(1) Incorporated by reference to the exhibit of like number to the
Registrant's report on Form 8-K dated November 23, 1992.
(2) Incorporated by reference to the exhibit of like number to the
Registrant's quarterly report on Form 10-Q for the quarter ended October 31,
1992, previously filed with the Commission.
(3) Incorporated by reference to the exhibit of like number to the
Registrant's quarterly report on Form 10-Q for the quarter ended January 31,
1993, previously filed with the Commission.
(4) Incorporated by reference to exhibit 6.0 to the Registrant's
Registration Statement on Form S-8 (No. 33-62714) filed with the Commission on
May 14, 1993.
(5) Incorporated by reference to the exhibit of like number to the
Registrant's Registration Statement on Form S-1 (No. 33-7389) filed with the
Commission on July 21, 1986, as amended by Amendment Nos. 1 through 3 thereto
filed with the Commission on September 3, 1986, October 14, 1986 and October 24,
1986, respectively.
(6) Incorporated by reference to the exhibit of like number to the
Registrant's annual report on Form 10-K for the year ended April 30, 1989,
previously filed with the Commission.
(7) Incorporated by reference to the exhibit of like number to the
Registrant's annual report on Form 10-K for the year ended April 30, 1992,
previously filed with the Commission.
(8) Incorporated by reference to the exhibit of like number to the
Registrant's annual report on Form 10-K for the year ended April 30, 1993,
previously filed with the Commission.
(9) Incorporated by reference to the exhibit of like number to the
Registrant's quarterly report on Form 10-Q for the quarter ended October 31,
1994, previously filed with the Commission.
(10) Incorporated by reference to the exhibit of like number to the
Registrant's quarterly report on Form 10-Q for the quarter ended January 31,
1995, previously filed with the Commission.
(11) Incorporated by reference to the exhibit of like number to the
Registrant's annual report on Form 10-K for the year ended April 30, 1995,
previously filed with the Commission.
(12) Incorporated by reference to the exhibit of like number to the
Registrant's quarterly report on Form 10-Q for the quarter ended January 31,
1996, previously filed with the Commission.
(13) Incorporated by reference to the exhibit of like number to the
Registrant's annual report on Form 10-K for the year ended April 30, 1996,
previously filed with the Commission.
(14) Incorporated by reference to exhibit 4.2.4 to the Registrant's
quarterly report on Form 10-Q for the quarter ended January 31, 1997, previously
filed with the Commission.
(15) Incorporated by reference to the exhibit of like number to the
Registrant's report on Form 8-K filed with the Commission on June 12, 1997.
(16) Incorporated by reference to exhibit 99.1 to the Registrant's
Registration Statement on Form S-8 (No. 333-15461) filed with the Commission on
November 4, 1996.
(17) Incorporated by reference to the exhibit of like number to the
Registrant's quarterly report on Form 10-Q for the quarter ended October 31,
1997, previously filed with the Commission.
(18) Incorporated by reference to the exhibit of like number to the
Registrant's quarterly report on Form 10-Q for the quarter ended January 31,
1998, previously filed with the Commission.
(19) Incorporated by reference to the exhibit of like number to the
Registrant's annual report on Form 10-K for the year ended April 30, 1997,
previously filed with the Commission.
(20) Incorporated by reference to exhibit 2.1 to the Registrant's report on
Form 8-A filed with the Commission on March 20, 1998.
(21) 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, previously filed with the Commission.
(22) 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, 1998,
previously filed with the Commission.
(23) Incorporated by reference to the exhibit of like number to the
Registrant's quarterly report on Form 10-Q for the quarter ended July 31, 1998,
previously filed with the Commission.
* Management contract or compensatory plan or arrangement.
** This schedule has been submitted in the electronic form prescribed by
EDGAR.
*** A schedule attached to this exhibit identifies all other documents not
required to be filed as exhibits because such exhibits are
substantially identical to this exhibit.
Except for instruments already filed as exhibits to this Form 10-K, the
Registrant agrees to furnish the Commission upon request a copy of each
instrument with respect to long-term debt of the Registrant and its consolidated
subsidiaries, the amount of which does not exceed 10% of the total assets of the
Registrant and its subsidiaries on a consolidated basis.
(b) Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
TreeSource Industries, Inc.
(Registrant)
By: /s/ Jess R. Drake
- ----------------------------------
Jess R. Drake
President and Chief Executive Officer
July 26, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated as of July 26, 1999.
/s/ Jess R. Drake /s/ Robert W. Lockwood
- ---------------------------------- ----------------------------------
Jess R. Drake Robert W. Lockwood
President, Chief Executive Officer Vice President-Finance and Chief
and Director Financial Officer (Principal
Financial and Accounting Officer)
/s/ Larry G. Black
- ----------------------------------
Larry G. Black, Director
/s/ Scott Christie
- ----------------------------------
Scott Christie, Director
/s/ Richard W. Detweiler
- ----------------------------------
Richard W. Detweiler, Director
/s/ William H. Wright
- ----------------------------------
William H. Wright, Director
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders
TreeSource Industries, Inc.
We have audited the accompanying consolidated balance sheets of TreeSource
Industries, Inc. and subsidiaries (the "Company") as of April 30, 1999 and 1998,
and the related consolidated statement of operations, stockholders' equity and
cash flows for each of the years in the three-year period ended April 30, 1999.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of TreeSource
Industries, Inc. and subsidiaries as of April 30, 1999 and 1998, and the results
of their operations and their cash flows for each of the years in the three-year
period ended April 30, 1999, in conformity with generally accepted accounting
principals.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note Two to
the financial statements, the Company's operating results were such that the
Company was unable to remain in compliance with certain financial performance
covenants as required by its debt agreements and the Company ceased making
interest and principal payments on its term debt in March 1999. These matters
raise substantial doubt about the Company's ability to continue as a going
concern. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/ Moss Adams LLP
----------------------------
MOSS ADAMS
Beaverton, Oregon
June 4, 1999
TREESOURCE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(in Thousands, Except Per-Share Amounts)
YEAR ENDED APRIL 30,
----------------------------------------------------
1999 1998 1997
--------------- -------------- ---------------
NET SALES $ 195,012 $ 242,051 $ 284,086
COST OF SALES 184,015 231,303 255,068
--------------- -------------- ---------------
GROSS PROFIT 10,997 10,748 29,018
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 10,738 11,290 12,529
IMPAIRMENT CHARGES 6,310 4,168 --
--------------- -------------- ---------------
OPERATING INCOME (LOSS) (6,051) (4,710) 16,489
OTHER INCOME (EXPENSE)
Interest expense (4,732) (4,682) (5,029)
Miscellaneous 441 (394) 630
--------------- -------------- ---------------
(4,291) (5,076) (4,399)
--------------- -------------- ---------------
INCOME (LOSS) BEFORE INCOME TAXES (10,342) (9,786) 12,090
PROVISIONS FOR INCOME TAXES (BENEFIT) (96) 2,364 3,120
--------------- --------------- ---------------
NET INCOME (LOSS) (10,246) (12,150) 8,970
PREFERRED DIVIDENDS 1,671 2,296 2,228
--------------- --------------- ---------------
NET INCOME (LOSS) APPLICABLE
TO COMMON STOCKHOLDERS $ (11,917) $ (14,446) $ 6,742
=============== =============== ==============
NET INCOME (LOSS) PER COMMON SHARE
- BASIC ($1.07) ($1.30) $0.61
======= ======= ======
- DILUTED ($1.07) ($1.30) $0.59
======= ======= ======
The accompanying notes are an integral part of these
consolidated financial statements.
TREESOURCE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS
(in Thousands)
APRIL 30,
-----------------------------
1999 1998
------------- -------------
CURRENT ASSETS
Cash and cash equivalents $ 2,131 $ 2,157
Accounts receivable, net 10,210 10,464
Inventories 13,716 14,005
Prepaid expenses 1,320 1,195
Income tax refund receivable 70 --
Deferred tax asset 750 750
Assets held for sale 7,749 6,685
Timber, timberlands and timber-related assets 2,190 4,252
------------- -------------
Total current assets 38,136 39,508
NOTES AND ACCOUNTS RECEIVABLE 27 103
PROPERTY, PLANT AND EQUIPMENT, at cost
Land 1,527 2,849
Buildings and improvements 8,287 11,123
Machinery and equipment 47,462 62,623
------------- -------------
57,276 76,595
Less reserve for impairment 941 --
Less accumulated depreciation 41,116 52,378
------------- -------------
15,219 24,217
Construction in progress 324 225
------------- -------------
15,543 24,442
OTHER ASSETS 1,281 1,258
------------- -------------
$ 54,987 $ 65,311
============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
TREESOURCE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
LIABILITIES AND STOCKHOLDERS' EQUITY
(in Thousands, Except Share Information)
April 30,
-----------------------------
1999 1998
------------- -------------
CURRENT LIABILITIES
Accounts payable $ 10,830 $ 8,992
Accrued expenses 7,744 6,568
Timber contracts payable 428 323
Current maturities of long-term debt 43,474 8,467
------------- -------------
Total current liabilities 62,476 24,350
LONG-TERM DEBT, less current maturities 327 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 in 1998) 28,761 28,752
Additional paid-in capital 15 15
Retained deficit (57,613) (45,695)
------------- -------------
(7,816) 4,093
------------- -------------
$ 54,987 $ 65,311
============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
TREESOURCE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(in Thousands)
YEAR ENDED APRIL 30,
---------------------------------------
1999 1998 1997
----------- ----------- -----------
CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES:
Net income (loss) $ (10,246) $ (12,150) $ 8,970
Adjustments to reconcile net income (loss) to
cash provided by operating activities:
Depreciation, depletion and amortization 4,176 5,571 6,353
Deferred income tax -- 913 2,837
Impairment loss 6,310 4,168 --
Accounts receivable 254 6,366 (6,640)
Inventories (205) 3,755 (3,869)
Prepaid expenses (125) 622 (249)
Timber, timberlands and timber-related assets - current 2,062 (392) 2,031
Payables and accruals 3,119 (3,645) 5,399
Income taxes (70) 1,145 990
----------- ----------- -----------
Cash provided by operating activities 5,275 6,353 15,822
----------- ----------- -----------
CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES:
Notes and accounts receivables 76 21 40
Net reductions of timber and timberlands -- 629 50
Acquisition of property, plant and equipment (2,479) (7,807) (7,450)
Net book value of disposed idle assets 458 176 376
Other investing activities 177 51 142
----------- ----------- -----------
Cash used for investing activities (1,768) (6,930) (6,842)
----------- ----------- -----------
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES:
Proceeds from long-term borrowings -- -- 265
Principal payments on long-term debt (1,582) (3,190) (3,321)
Other assets (288) (94) (69)
Dividends paid on preferred stock (1,672) (2,296) (2,228)
Issuance of common stock 9 105 6
----------- ----------- -----------
Cash used for financing activities (3,533) (5,475) (5,347)
----------- ----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (26) (6,052) 3,633
CASH BALANCE AT BEGINNING OF YEAR 2,157 8,209 4,576
----------- ----------- -----------
CASH BALANCE AT END OF YEAR $ 2,131 $ 2,157 $ 8,209
=========== =========== ===========
CASH PAID (REFUNDED) DURING THE YEAR FOR:
Interest $3,268 $4,696 $4,940
Income taxes ($96) $305 ($711)
The accompanying notes are an integral part of these
consolidated financial statements.
TREESOURCE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(in Thousands)
SERIES A SERIES B
----------------------------------- RETAINED STOCK
PREFERRED STOCK PREFERRED STOCK COMMON STOCK PAID-IN EARNINGS HOLDERS'
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) EQUITY
------ ------ ------ ------ ------ ------- -------- --------- --------
Balance at April 30, 1996 270 $20,688 6 $ 333 11,077 $28,641 $ 15 $(37,991) $ 11,686
Stock options exercised -- -- -- -- 6 6 -- -- 6
Dividends paid -- -- -- -- -- -- -- (2,228) (2,228)
Net loss -- -- -- -- -- -- -- 8,970 8,970
------ ------ ------ ------ ------ ------- -------- --------- --------
Balance at April 30, 1997 270 20,688 6 333 11,083 28,647 15 (31,249) 18,434
Stock options exercised -- -- -- -- 71 105 -- -- 105
Dividends paid -- -- -- -- -- -- -- (2,296) (2,296)
Net income -- -- -- -- -- -- -- (12,150) (12,150)
------ ------ ------ ------ ------ ------- -------- --------- --------
Balance at April 30, 1998 270 20,688 6 333 11,154 28,752 15 (45,695) 4,093
Stock options exercised -- -- -- -- 9 9 -- -- 9
Dividends paid -- -- -- -- -- -- -- (1,672) (1,672)
Net income -- -- -- -- -- -- -- (10,246) (10,246)
------ ------ ------ ------ ------ ------- -------- --------- --------
Balance at April 30, 1999 270 $20,688 6 $ 333 11,163 $28,761 15 $(57,613) $ (7,816)
====== ====== ====== ====== ====== ======= ======== ========= ========
The accompanying notes are an integral part of these
consolidated financial statements.
TREESOURCE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation and operations - The consolidated financial
statements include the accounts of TreeSource Industries, Inc. (formerly WTD
Industries, Inc.) and its wholly owned subsidiaries (hereinafter "TreeSource" or
"the Company"). All significant inter-company accounts and transactions have
been eliminated.
The Company operates in one industry segment, the manufacture and sale
of softwood and hardwood lumber products, wood chips and other by-products. Most
lumber products are sold to distributors, and wholesalers or directly to large
retailers. The Company's products are used in many applications, including
residential and commercial construction, packaging and industrial uses.
The Company's sales are predominantly in the United States; export
sales are not material. During the year ended April 30, 1999, the Company had no
customers that accounted for 10% or more of net sales.
Temporary cash investments and trade receivables potentially subject
the Company to concentrations of credit risk. The Company places its temporary
cash investments with high credit-quality financial institutions, and by policy
limits the amount of credit exposure to any one institution. The Company reviews
a customer's credit history before extending credit and continually evaluates
its accounts receivable for collectability. Concentrations of credit risk on
trade receivables are limited due to the Company's large number of customers and
their widely varying locations. Generally, the Company does not require
collateral or other security to support its trade receivables.
Cash and cash equivalents - Financial instruments with a maturity of
three months or less are considered to be cash equivalents.
Accounts receivable - Trade accounts receivable are shown net of
allowances for doubtful accounts and discounts of $142,000 and $128,000 at April
30, 1999 and 1998, respectively.
Inventories - Inventories are valued at the lower of cost or market.
Cost is determined using the average cost and first-in, first-out (FIFO)
methods. A summary of inventory by principal product classification follows (in
thousands):
APRIL 30,
------------------------------------------
1999 1998
------------------ -------------------
Logs $ 6,649 $ 3,791
Lumber 6,001 8,635
Supplies and Other 1,066 1,579
------------------ -------------------
$ 13,716 $ 14,005
================== ===================
At April 30, 1999 and 1998, $553,000 and $642,000, respectively, of log
inventory was valued at market, which approximated cost. At April 30, 1999,
$4,893,000 of lumber inventory was valued at market, which represented a
$429,000 reduction from cost. At April 30, 1998, $7,787,000 of lumber inventory
was valued at market, which represented a reduction of $1,272,000 from cost.
Property, plant and equipment - Property, plant and equipment of the
Company's facilities are stated at cost. For financial reporting purposes, the
Company uses the units-of-production method for computing depreciation over the
estimated useful lives of assets, ranging from ten to thirty years for buildings
and improvements, and three to ten years for machinery and equipment. When
assets are retired or disposed of, cost and accumulated depreciation are
reversed from the related accounts and any gain or loss is included in the
consolidated statement of operations.
Timber and timberlands - Timber and timberlands are stated at the lower
of aggregate cost or estimated disposal value, less the amortized cost of timber
harvested. The portion of the cost attributable to standing timber is charged
against income as timber is cut, at rates based on the relationship between
unamortized timber value and the estimated volume of recoverable timber. The
costs of roads and land improvements are capitalized and amortized over their
economic lives. The carrying costs of timber, timberlands and timber-related
assets are expensed as incurred. The Company classifies timber and
timber-related assets as current or long-term based upon expected harvest and
disposal plans.
Timber-cutting contracts - The Company purchases timber under various
types of contracts. Certain contracts, for which the total purchase price is
fixed, are recorded as assets along with the related liability at the date
acquired. The remaining contracts, for which the total purchase price depends on
the volume of timber removed, are considered to be commitments and are not
recorded until the timber is removed. See Note 11 to Consolidated Financial
Statements.
Income taxes - Income taxes are provided for transactions in the year
in which they are reflected in earnings, even though they may be reported for
tax purposes in a different year. The resulting difference between taxes charged
to operations and taxes paid is reported as deferred income taxes. Tax credits
are recognized in the year utilized, using the flow-through method. See Note 7
to Consolidated Financial Statements.
Accrued expenses - The following is a summary of the components of
accrued expenses (in thousands):
APRIL 30,
------------------------------------------
1999 1998
------------------ -------------------
Payroll and related items $ 3,995 $ 4,145
Freight payable 1,366 934
Other 2,383 1,489
------------------ -------------------
$ 7,744 $ 6,568
================== ===================
Reserves for self-insurance - workers' compensation - Under its
self-insurance plan, the Company accrues the estimated cost of workers'
compensation claims based on prior years' open claims. An accrual of $2.0
million and $1.6 million is included in the accompanying fiscal 1999 and 1998
financial statements, respectively. Payments based on actual fiscal 1999 claims
ultimately filed could differ from these statements.
Use of estimates - The preparation of the financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and the accompanying notes. Actual results could differ materially
from those estimates.
NOTE 2 - GOING CONCERN
Market conditions in fiscal 1999 remained generally weak following the
fall off in demand for North American lumber in Asia. The unit price for the
benchmark 2x4 standard and better lumber declined from $403 for fiscal 1998 to
$324 for fiscal 1999, a 20% reduction. During the same period the unit cost of
the raw material, #2 fir saw log, fell from an average of $657 to $563, a 14%
reduction. Because lumber sales values declined more than log prices, margins
were squeezed and profitability reduced. Wet winter weather throughout the
Pacific Northwest further exacerbated market conditions as timber harvest and
log deliveries volumes fell below expected levels, forcing spot log prices to
increase as log supply dwindled. In response, the Company curtailed production
at several operations and reduced log inventories. Conditions improved late in
the fourth quarter of fiscal 1999 as lumber prices strengthened and log
availability improved.
The Company's fiscal 1999 results were such that the Company was unable
to remain in compliance with certain financial performance covenants as required
by the primary debt agreement. Additionally, two consecutive preferred dividend
payments due February 28, 1999 and May 31, 1999 were not made. The Company also
ceased making interest and principal payments on its senior secured debt in
March 1999. Operating conditions are not expected to improve sufficiently in
fiscal 2000 to enable the Company to comply with its primary debt agreement.
The Company has initiated discussions with its senior lenders to modify
the covenants and payment terms associated with its primary debt agreement. The
Company has engaged a financial consulting firm to assist in restructuring its
existing debt. Any debt restructuring is likely to adversely impact the
Company's common and preferred shareholders. Although the Company has in the
past been able to work with its senior lenders to achieve modifications to its
primary debt agreement and is currently negotiating with its senior lenders,
there can be no assurance that an agreement will be reached on modified debt
terms.
Due to the uncertainty related to these negotiations and the senior
lenders' ability to accelerate the repayment of the Company's existing debt,
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 3 - IMPAIRMENT CHARGES
The Company has classified certain property, plant and equipment
related to three facilities as Assets Held for Sale during fiscal 1999. A total
of five facilities are currently so classified. In accordance with Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of," the Company
recorded an impairment loss associated with two facilities in 1998 and three
facilities in 1999. The resulting adjustments of approximately $4.2 million in
1998 and $6.1 million in 1999 were recorded to reduce the book value of these
assets to their estimated fair value. An additional charge of $0.2 million was
taken to adjust the value of inventories and supplies at closed operations to
their estimated fair market value. The Company considers continued operating
losses and significant and long-term changes in industry conditions to be its
primary indicators of potential impairment. An impairment was recognized when
the future undiscounted cash flows of each facility were estimated to be
insufficient to recover their related carrying values. As such, the carrying
values of these assets were written down to the Company's estimates of fair
value. Fair value was based on recent appraisal values. At April 30, 1999, these
assets have a remaining carrying amount of $7.7 million. The Company intends to
operate one of these facilities while pursuing alternatives for its sale. The
other four facilities have been shut down and are for sale. Together, these five
facilities recorded net sales of $12.0 million, $74.6 million, and $105.1
million, and contributed net operating income (losses) of $(5.5) million, $(4.0)
million, and $7.1 million for the years ended April 30, 1999, 1998, and 1997,
respectively, excluding the impairment charges recognized in fiscal 1998 and
1999.
The Company continually considers market conditions and changes
occurring in the forest products industry to evaluate the status of its
individual mill facilities, and management believes that all necessary
impairment adjustments have been made at April 30, 1999.
NOTE 4 - NET INCOME (LOSS) PER SHARE
This computation is based on net income (loss) less preferred dividends
paid during the period, divided by the weighted average number of shares of
Common Stock and equivalents assumed to be outstanding during the period.
Anti-dilutive common stock equivalents consisting of certain employee stock
options and certain convertible preferred stock, are excluded from the
calculation.
The calculations of net income (loss) per share for the years ended
April 30, 1999, 1998 and 1997 are summarized below (in thousands, except
per-share data):
Year Ended April 30,
--------------------------------------------
1999 1998 1997
------------ ------------ ------------
Net income (loss) $ (10,246) $ ( 12,150) $ 8,970
Preferred dividends 1,671 2,296 2,228
------------ ------------ ------------
Net income (loss) applicable to common shareholders $ (11,917) $ (14,446) $ 6,742
============ ============ ============
Weighted average shares outstanding
- - Basic 11,161 11,130 11,078
Additional shares assumed from:
- Conversion of Series B preferred stock - - 213
- Exercise of stock options - - 94
------------ ------------ ------------
Average number of shares and equivalents outstanding
- Diluted 11,161 11,130 11,385
============ ============ ============
Net income (loss) per common share
- Basic $ (1.07) $ (1.30) $ 0.61
============ ============ ============
- Diluted $ (1.07) $ (1.30) $ 0.59
============ ============ ============
Earnings (loss) per share has been recomputed and restated for the
effects of implementing Statement of Financial Accounting Standard Number 128,
"Earnings per Share" as of December 31, 1997.
NOTE 5 - TIMBER, TIMBERLANDS AND TIMBER-RELATED ASSETS
The following summarizes the components of timber, timberlands and
timber-related assets (in thousands):
APRIL 30,
--------------------------------
1999 1998
-------------- --------------
Timber held under contract $ 889 $ 1,270
Timber, timberlands, and timber deposits 1,131 2,754
Logging roads (at amortized cost) 170 228
-------------- --------------
$ 2,190 $ 4,252
============== ==============
Timber held under contract is composed of various public and private
timber contracts representing approximately 3.4 million board feet (MMBF) at
April 30, 1999 and 10.0 MMBF at April 30, 1998. Outstanding obligations relating
to these contracts at April 30, 1999 and 1998, were $428,000 and $323,000,
respectively.
NOTE 6 - LONG-TERM DEBT
Long term debt consists of the following (in thousands):
Year Ended April 30,
--------------------
1999 1998
-------- --------
Senior secured debt, bearing interest at 10%;
principal payable in quarterly installments of
$225 through December 15, 1997 then quarterly
installments of $400 through December 15,
1998, then quarterly installments of $1,000
beginning March 15, 1999, and a final payment
in December 2004; secured by substantially all
assets of the Company. $ 42,449 $ 43,744
Secured notes, interest at 9% and 10%; payable
on various dates; secured by various assets. 359 373
Unsecured senior subordinated notes, net of
discount of $305 ($329 at April 30, 1997);
8% coupon, effective interest rate of 13.3%;
semi-annual interest payments due each
June 30 and December 31; principal due in
full June 30, 2005. 993 967
Other unsecured debt, net of discount of $20
($66 at April 30, 1997); payable in equal
annual installments of $270; non-interest
bearing; effective interest rate of 12.3%. 251
-------- --------
43,803 45,335
Less current maturities (43,474) (8,467)
-------- --------
$ 327 $ 36,868
======== ========
The Company's primary debt agreement includes certain covenants,
including the maintenance of specified levels of adjusted cumulative operating
income (as defined), tangible net worth, working capital, total liabilities
ratio (as defined), and collateral coverage (as defined). This agreement also
imposes certain restrictions and limitations on capital expenditures,
investments, dividend payments, new indebtedness, and transactions with
officers, directors, stockholders and affiliates. This debt agreement was most
recently amended as of April 1, 1998, with respect to certain affirmative
financial performance covenants. As of April 30, 1999, the Company is not in
compliance with the covenant provisions relating to: level of tangible net
worth; total liabilities ratio; minimum level of adjusted working capital; level
of cumulative adjusted earnings (as defined); and the level of minimum operating
income.
As discussed in Note 2, the Company has been unable to maintain
compliance with its debt covenants and ceased making interest and principal
payments on its senior secured debt in March 1999. As of April 30, 1999, the
Company was in arrears on payment of approximately $1,012,000 interest and
$1,000,000 in principal on the senior secured debt. As of June 30, 1999, the
Company was in arrears on payments a total of approximately $1,721,000 in
interest and $2,000,000 of principal on the senior secured debt. Additionally,
the Company is in arrears on payment of approximately $120,000 in interest on
the 8% unsecured senior notes as of June 30, 1999. Due to the terms of the 8%
unsecured senior notes, payment of interest cannot be made if a default in
payment of dividends on the Series A preferred exists. As of July 6, 1999, the
Company has not paid two consecutive quarterly dividends for holders of the
preferred stock. (See Note 2 and Note 8). The Company is currently in
negotiations with its senior lenders to modify the terms of its senior secured
debt agreement. However, given the uncertainty associated with the outcome of
these negotiations and the possible acceleration of the repayment of this debt
by the senior lenders, the entire balance has been classified as a current
obligation in the accompanying financial statements.
Due to provisions relating to the senior secured debt, the unsecured
senior subordinated debt has also been classified as a current obligation in the
accompanying financial statements.
NOTE 7 - PROVISION FOR INCOME TAXES
The federal and state income tax provision consists of the following
(in thousands):
Year Ended April 30,
--------------------------------------------------
1999 1998 1997
-------------- -------------- --------------
Income (loss) before income taxes $ (10,342) $ (9,786) $ 12,090
============== ============== ==============
Provision for income taxes (benefit):
Federal $ (96) $ 2,115 $ 2,636
State 0 249 484
-------------- -------------- --------------
$ (96) $ 2,364 $ 3,120
============== ============== ==============
Current $ (96) $ 1,451 $ 283
Deferred 0 913 2,837
-------------- -------------- --------------
$ (96) $ 2,364 $ 3,120
============== ============== ==============
The difference between the actual income tax provision (benefit) and
the tax provision (benefit) computed by applying the statutory federal tax rate
to income (loss) before taxes is attributable to the following (in thousands):
Year Ended April 30,
---------------------------------------------------------------------
1999 1998 1997
---------------------- --------------------- ----------------------
Amount % Amount % Amount %
----------- --------- ----------- -------- ----------- ---------
Federal statutory income tax provision $(3,516) (34%) $(3,327) (34%) $4,111 34%
(benefit)
State statutory income tax provision (414) (4) (391) (4) 484 4
(benefit)
Change in valuation allowance for deferred 3,492 34 7,282 74 (414) (3)
tax assets
Carryback (establishment) of net operating
losses (NOL) in years with rates different -- -- (1,200) (12) (1,061) (9)
than statutory rates
Other 342 3 -- -- -- --
----------- --------- ----------- -------- ----------- ---------
Actual income tax provision (benefit) $(96) 1% $2,364 24% $3,120 26%
=========== ========= =========== ======== =========== =========
At April 30, 1999 and 1998, deferred tax assets and liabilities were
composed of the following (in thousands):
Year Ended April 30,
--------------------
1999 1998
-------- --------
Deferred tax assets:
Vacation accruals $ 183 $ 248
Insurance accruals 670 860
Professional fee amortization and accruals 188 86
Depreciation and capitalization differences
between financial and tax accounting 722 (597)
Tax benefit of NOL carryforward and
tax credits carryforward 12,010 9,862
Bad debts, discounts and other 251 73
-------- --------
Net deferred tax assets 14,024 10,532
Valuation allowance (13,274) (9,782)
-------- --------
Net deferred tax asset reported $ 750 $ 750
======== ========
During the current year, the Company sustained significant operating
losses. Because of the difficult operating environment and the likely delayed or
decreased use of the Company's deferred tax assets to shelter future income,
management has elected to record no income tax benefit during the current year
related to the losses incurred. This resulted in an increase to the valuation
reserve of approximately $3.7 million for the year ended April 30, 1999. The
current year income tax benefit of $117,000 is solely attributable to federal
income tax refunds received during the current year. Management periodically
reviews the above factors and may change the amount of valuation allowance as
facts and circumstances change.
During fiscal 1998, the Company reevaluated the level of valuation
reserve necessary given the Company's operating performance. Based on this
reevaluation, the Company increased its valuation reserve to approximately $9.8
million, resulting in a charge of $7.3 million in additional income tax expense
in the year ended April 30, 1998.
During fiscal 1996, the Company carried back approximately $7.9 million
of net operating losses ("NOL") to prior years' tax returns, which resulted in
income tax refund receivables of $2.1 million. The Company received $1.1 million
of these refund claims in fiscal 1997. During fiscal 1998, the Company was
notified that these amended tax returns and carryback claims were under review
by the Internal Revenue Service (IRS). During the examination, the IRS and the
Company settled the amount of the claims at approximately $1 million. This
resulted in the Company removing the remaining receivables from the books and
recognizing additional income tax expense in the year ended April 30, 1998. As
part of the IRS settlement, approximately $4.6 million of NOL that had been
previously utilized in the amended tax returns and carryback claims became
available for future carryforward to offset future taxable income.
As of April 30, 1999, the Company has approximately $27 million of
federal NOL and approximately $25 million of state NOL available to offset
future taxable income. These carryforwards expire in 2007 and 2012.
NOTE 8 - STOCKHOLDERS' EQUITY
Stockholders' equity at April 30, 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 any accrued dividends at the option of the Board of Directors, in the
form of cash or in exchange for senior unsecured debt with 12% coupon. The
holders of the Series A preferred stock will be granted voting control of the
Company's Board of Directors in the event the Company misses three consecutive
quarterly dividend payments, four quarterly dividend payments within twenty-four
months or a total of eight quarterly dividend payments. The Company is currently
in arrears on two consecutive quarterly dividend payments as of May 31, 1999
totaling $1,046,000. If the dividend payment due August 31, 1999, is not made,
the Series A preferred stockholders will have the right to elect a majority of
the Company's Board of Directors.
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 (11,154,374 as of April 30, 1998). 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 11,373,589 shares if the remaining
outstanding Series B preferred stock is converted to Common Stock.
On March 4, 1998, the Board of Directors adopted a Shareholder Rights
Plan ("Plan"). Under the Plan, the Board declared a distribution of one
Preferred Share Purchase Right ("Right") for each outstanding share of the
Company's Common Stock. The distribution was payable on March 4, 1998 to the
shareholders of record on that day. The Rights are attached to, and
automatically trade with, the outstanding shares of the Company's Common Stock.
The Rights will become exercisable in the event that any person or group of
affiliated persons becomes a holder of 15% or more of the Company's outstanding
shares of Common Stock or any person or group of affiliated persons who at the
date of the Rights Agreement, beneficially owned 15% or more of the
then-outstanding shares of Common Stock and has acquired beneficial ownership of
31% or more of the outstanding shares of Common Stock. In addition, the Rights
will become exercisable in the event of the commencement of a tender or exchange
offer that, if consummated, would result in that person or group of affiliated
persons meeting the above-listed requirements as to ownership of the Company's
outstanding shares of Common Stock. Once the Rights become exercisable, each
Right entitles its holder to purchase, by payment of a $7.50 exercise price, one
one-hundredth of a share of Series C Junior Participating Preferred Stock,
subject to adjustment. In addition, at any time after the above mentioned
criteria have been met and prior to the acquisition of a 50% position, the Board
of Directors may require each outstanding Right to be exchanged for one share of
Common Stock. In general, none of the benefits of the Rights will be available
to a holder of the Common Stock who meets the above-mentioned criteria. The
Rights may be redeemed by the Company at a price of $0.01 per Right at any time
prior to the above-mentioned criteria being met and to the expiration date of
such Rights on March 4, 2008.
Effective November 4, 1998, the Company granted stock options for the
purchase of 543,295 shares of the Company's Common Stock to Jess R. Drake
pursuant to his employment contract. The term of these options is ten years from
the date of grant and they are not transferable other than by will or the laws
of descent and distribution. The options will vest over a three-year period. The
options granted Mr. Drake are in addition to and not a part of the 1996 Stock
Option Plan.
NOTE 9 - STOCK OPTIONS AND EMPLOYEE BENEFIT PLANS
The Company has in effect a Stock Option Plan ("Option Plan").
Non-qualified stock options may be granted to directors, independent
contractors, consultants and employees to acquire up to 1,425,000 shares of
Common Stock. Options may be granted for a term not to exceed 10 years and are
not transferable other than by will or the laws of descent and distribution. The
Option Plan provides for incremental vesting based upon the optionee's period of
service with the Company, and is administered by the Board of Directors. Stock
options outstanding at April 30, 1999, 1998 and 1997 related only to employees
and directors.
Stock Options
-------------------------
Weighted
Average
Number of Exercise
Shares Price
----------- -----------
Shares under option at April 30, 1997 1,164,600 $1.74
Options granted 0 0
Options exercised (70,900) 1.48
Options canceled (28,400) 2.04
----------- -----------
Shares under option at April 30, 1998 1,065,300 1.75
Options granted 643,295 0.72
Options exercised (8,500) 0.99
Options canceled (185,775) 1.62
----------- -----------
Shares under option at April 30, 1999 1,514,320 $1.34
=========== ===========
Options exercisable at April 30, 1999 923,580 $1.66
=========== ===========
Exercise prices for options outstanding as of April 30, 1999 ranged
from $0.3188 to $3.00. The weighted average remaining contractual life of those
options is 7.11 years, and the weighted average exercise price is $1.34.
Employee Options Outstanding Options Exercisable
- -------------------------------------------------------------- ------------------------------
Weighted Avg
Number Remaining Weighted Avg Number Weighted Avg
Range of Outstanding Contractual Exercise Excercisable Exercise
Exercise Price At 4/30/99 Life Price At 4/30/99 Price
-------------- ------------ ---- ------------- ------------ ------------
$ 0.95625 31,400 3.7 $ 0.95625 31,400 $0.95625
1.50000 359,350 3.9 1.50000 359,350 1.50000
1.51500 304,625 7.5 1.51500 196,356 1.51500
3.00000 175,650 4.4 3.00000 175,650 3.00000
0.79690 543,295 9.5 0.79690 135,824 0.79690
0.31880 100,000 10.0 0.31880 25,000 0.31880
----------- ------------
$0.31880-$3.00 1,514,320 7.11 1.33548 923,580 $1.63461
Options for 1,020,375 shares remain available for grant. These options
will have an exercise price of an amount per share determined by the Company's
Board of Directors, but not less than 85% of the fair market value of the
Company's Common Stock on the date of grant.
The Company maintains a weekly discretionary bonus program for its mill
employees based on the performance of each production shift at individual mills.
The bonus program for mill employees is designed to reward safety, productivity,
and regular attendance. This bonus program is open-ended but designed to attract
good operating employees by providing them the reasonable opportunity to reach
high-end pay levels for similar work in the industry, when average bonuses are
added to base wages. It is also designed so that manufacturing labor costs, per
unit of lumber produced, go down as the average bonus level goes up.
The Company also had a monthly profit-sharing discretionary bonus plan
for all levels of salaried employees, based upon pre-tax profits. This program
was terminated in November 1998 and replaced with two separate bonus programs.
The first covers most salaried employees except for senior management, and is a
quarterly bonus program based on pretax profits. The second is an annual bonus
program covering senior executives and is also based on pre-tax profits. These
programs, which automatically move the Company's total general and
administrative expense up or down in cyclical earnings periods, are vital to the
Company's ability to attract desirable salaried employees at lower than industry
average compensation and benefits; and to retain such employees through cyclical
down-turn in earnings.
The following summarizes the amounts paid pursuant to the Company's
bonus programs (in thousands):
Year Ended April 30,
----------------------------------------------
1999 1998 1997
-------------- -------------- --------------
Hourly employee bonus $ 4,100 $ 5,200 $ 4,700
Salaried employee bonus 900 1,200 3,600
$ 5,000 $ 6,400 $ 8,300
============== ============== ==============
The Company maintains a 401(k) Retirement Savings Plan. Under the plan,
eligible participants may contribute 2 to 20% of their compensation. The Company
matches contributions of employees participating in the
Safety/Production/Attendance Bonus program on a monthly basis in an amount as
determined from time to time by the Board of Directors. Salaried employees are
not generally titled to matching contributions. During the years ended April 30,
1999, 1998 and 1997, the Company incurred expenses for matching contributions
and plan administration of $261,000; $289,000; and $235,000; respectively.
Company contributions to this plan are funded on a current basis.
NOTE 10 - RELATED PARTY TRANSACTIONS
The Company purchased $3.9 million and $2.1 million of logs in fiscal
1999 and 1998, respectively, from Quinault Logging Company. Larry G. Black is a
director and president of Quinault Logging Company as well as a director of
TreeSource Industries, Inc. and owns approximately 30% of the Company's
outstanding Common Stock.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
(a) Timber commitments - At April 30, 1999, the Company had contracts
to purchase approximately 19.5 MMBF of timber from the Oregon State Department
of Forestry and others for an estimated stumpage cost of $4,381,000. Deposits
were made on these contracts and additional payments are required as timber is
removed. The expiration dates of the contracts are as follows:
Stumpage
Year Ending April 30, MMBF Cost
--------------------- --------------------- ---------------------
2000 0.8 $229,000
2001 6.3 1,673,000
2002 12.4 2,479,000
===================== ===================== =====================
19.5 $4,381,000
(b)Leases - At April 30, 1999, the Company had future minimum rental
commitments for operating leases as follows: 2000 - $1,224,000; 2001 -
$1,039,000; 2002 - $676,000; 2003 - $253,000; 2004 - $104,000; thereafter - $0.
Total rental expense for all leases was $1,613,000, $1,348,000 and
$1,136,000 for the years ended April 30, 1999, 1998 and 1997, respectively.
Actual rental expense includes short-term rentals and leases shorter than one
year, which are not included in the commitments.
(c) Litigation - The Company is involved in certain litigation
primarily arising in the normal course of its business. In the opinion of
management, the Company's liability, if any, under such pending litigation will
not have a material impact upon the Company's consolidated financial condition
or results of operations.
(d) Environmental compliance - The Company is subject to various
federal, state and local regulations regarding waste disposal and pollution
control. Various governmental agencies have enacted, or are considering,
regulations regarding 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. The potential expenditures required for
the Company to comply with any such regulations could have a material adverse
impact on its consolidated financial condition and/or results of operations.
However, management believes that the Company will be able to comply with
existing regulations without a material impact on its consolidated financial
condition or results of operations.
(e) Year 2000 compliance - The Company is currently implementing its
plan to address those computer and other systems which could be affected by the
"Year 2000" date problem. The Company presently believes that with modification
to existing software and converting to new software and hardware the Year 2000
problem will not create significant operational difficulties and is not
anticipated to be material to its financial position or results of operations in
any given year.
NOTE 12 - UNAUDITED QUARTERLY FINANCIAL INFORMATION
The following quarterly information for the years ended April 30, 1999
and 1998 is unaudited, but includes all adjustments (including the impairment
charges recognized in the fourth quarters of 1998 and 1999) that management
considers necessary for a fair presentation of such information (in thousands,
except per-share amounts):
Year Ended April 30, 1999
---------------------------------------------------------
Quarter
-----------------------------------------------
First Second Third Fourth Total
---------------------------------------------------------
Net sales $ 47,661 $ 51,240 $ 44,257 $ 51,854 $ 195,012
Gross profit (loss) $ 3,486 $ 3,381 $ 984 $ 3,146 $ 10,997
Net income (loss) $ (619) $ (324) $ (2,682) $ (6,621) $ (10,246)
Net income (loss) per $ (0.11) $ (0.08) $ (0.29) $ (0.59) $ (1.07)
diluted common share
Year Ended April 30, 1998
---------------------------------------------------------
Quarter
-----------------------------------------------
First Second Third Fourth Total
---------------------------------------------------------
Net sales $ 68,881 $ 67,387 $ 55,951 $ 49,832 $ 242,051
Gross profit (loss) $ 7,040 $ 3,533 $ (1,007) $ 1,182 $ 10,748
Net income (loss) $ 1,944 $ (198) $ (3,645) $ (10,251) $ (12,150)
Net income (loss) per $ 0.12 $ (0.07) $ (0.38) $ (0.97) $ (1.30)
diluted common share
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.
NOTE 13- VALUATION AND QUALIFYING RESERVES
The following table summarizes the activity associated with the
Company's allowance for doubtful accounts and allowance for discounts for the
years ended April 30, 1999, 1998 and 1997 (in thousands):
Allowance for doubtful accounts -
deducted from accounts receivable in the
balance sheet
Year Ended April 30,
-----------------------------------
1999 1998 1997
---------- ----------- ----------
Balance at beginning of year $ 39 $ 49 $ 24
Charged to costs and expenses 35 5 29
Deductions (1) (19) (15) (4)
---------- ----------- ----------
Balance at end of year $ 55 $ 39 $ 49
========== =========== ==========
Allowance for discounts -
deducted from accounts receivable in the
balance sheet
Year Ended April 30,
-----------------------------------
1999 1998 1997
---------- ----------- ----------
Balance at beginning of year $ 146 $ 146 $ 88
Charged to costs and expense 1,807 2,296 2,696
Deductions(2) (1,866) (2,353) (2,638)
---------- ----------- ----------
Balance at end of year $ 87 $ 89 $ 146
========== =========== ==========
(1) Uncollected receivables written off, net of recoveries.
(2) Discounts taken by customers.