SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended October 31, 1999.
----------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition from________________ to________________
Commission file number 0-16158
TreeSource Industries, Inc.
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Oregon 93-0832150
- ------------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) No.)
10260 S.W. Greenburg Road, Suite 900, Portland, Oregon 97223
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (503) 246-3440
--------------------
Indicate by check mark whether the Registrant (1) has filed reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
The number of shares outstanding of Registrant's Common Stock, no par
value, at November 30, 1999 was 11,162,874
TREESOURCE INDUSTRIES, INC.
---------------------------
INDEX
Page
Number
------
PART I. FINANCIAL INFORMATION 3
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
PART II. OTHER INFORMATION 19
Item 1. Legal Proceedings 19
Item 3. Defaults Upon Senior Securities 19
Item 6. Exhibits and Reports on Form 8-K 20
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
TREESOURCE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(in Thousands, Except Per-Share Amounts)
(Unaudited)
THREE MONTHS ENDED SIX MONTHS
OCTOBER 31, ENDED
OCTOBER 31,
------------------------- ---------------------------
1999 1998 1999 1998
------------ ------------ ------------ -------------
NET SALES $ 59,313 $ 51,240 $ 126,601 $ 98,901
COST OF SALES 55,974 47,859 112,991 92,034
------------ ------------ ------------ -------------
GROSS PROFIT 3,339 3,381 13,610 6,867
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 2,624 2,628 5,866 5,392
REORGANIZATION CHARGES 877 -- 877 --
------------ ------------ ------------ -------------
OPERATING INCOME (LOSS) (162) 753 6,867 1,475
OTHER INCOME (EXPENSE)
Interest expense (718) (1,158) (1,832) (2,318)
Miscellaneous 255 81 686 (100)
------------ ------------ ------------ -------------
(463) (1,077) (1,146) (2,418)
------------ ------------ ------------ -------------
INCOME (LOSS) BEFORE INCOME TAXES (625) (324) 5,721 (943)
PROVISIONS FOR INCOME TAXES (BENEFIT) 100 -- 100 --
------------ ------------ ------------ -------------
NET INCOME (LOSS) (725) (324) 5,621 (943)
PREFERRED DIVIDENDS -- 574 -- 1,148
------------ ------------ ------------ -------------
NET INCOME (LOSS) APPLICABLE
TO COMMON STOCKHOLDERS $ (725) $ (898) $ 5,621 $ (2,091)
============ ============ ============ =============
NET INCOME (LOSS) PER COMMON SHARE
- BASIC ($0.06) ($0.08) $0.50 ($0.19)
======= ======= ===== =======
- DILUTED ($0.06) ($0.08) $0.50 ($0.19)
======= ======= ===== =======
The accompanying notes are an integral part of these
consolidated financial statements.
3
TREESOURCE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS
(in Thousands)
(Unaudited)
OCTOBER 31, APRIL 30,
1999 1999
----------- -----------
CURRENT ASSETS
Cash and cash equivalents $ 2,971 $ 2,131
Accounts receivable, net 11,249 10,210
Inventories 16,734 13,716
Prepaid expenses 5,160 1,320
Income tax refund receivable 70 70
Deferred tax asset 750 750
Assets held for sale 7,749 7,749
Timber, timberlands and timber-related assets 2,279 2,190
----------- -----------
Total current assets 46,962 38,136
NOTES AND RECEIVABLE 9 27
PROPERTY, PLANT AND EQUIPMENT, at cost
Land 1,527 1,527
Buildings and improvements 8,395 8,287
Machinery and equipment 47,250 47,462
----------- -----------
57,172 57,276
Less reserve for impairment 941 941
Less accumulated depreciation 42,646 41,116
----------- -----------
13,585 15,219
Construction in progress 374 324
----------- -----------
13,959 15,543
OTHER ASSETS 1,225 1,281
----------- -----------
$ 62,155 $ 54,987
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
4
TREESOURCE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
LIABILITIES AND STOCKHOLDERS' EQUITY
(in Thousands, Except Share Information)
(Unaudited)
OCTOBER 31, APRIL 30,
1999 1999
---------- ----------
CURRENT LIABILITIES
Accounts payable $ 7,003 $ 10,830
Accrued expenses 5,688 7,744
Timber contracts payable -- 428
Current borrowings 190 43,474
---------- ----------
Total current liabilities 12,881 62,476
LONG-TERM DEBT, less current maturities -- 327
LIABILITIES SUBJECT TO COMPROMISE 51,469 --
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred Stock, 10,000,000 shares authorized
Series A, 270,079 shares outstanding 20,688 20,688
Series B, 6,111 shares outstanding 333 333
Common Stock, no par value, 40,000,000 shares authorized,
11,162,874 issued and outstanding 28,761 28,761
Additional paid-in capital 15 15
Retained deficit (51,992) (57,613)
---------- ----------
(2,195) (7,816)
---------- ----------
$ 62,155 $ 54,987
========== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
5
TREESOURCE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(in Thousands)
(Unaudited)
SIX MONTHS ENDED OCTOBER 31,
-------------------------------------
1999 1998
-------------- --------------
CASH FROM OPERATING ACTIVITIES:
Net income (loss) $ 5,621 $ (943)
Adjustments to reconcile net income (loss) to
cash provided by operating activities:
Depreciation, depletion and amortization 2,197 2,156
Deferred income tax -- --
Impairment loss -- --
Accounts receivable (1,039) 1,982
Inventories (3,018) 695
Prepaid expenses (3,840) (429)
Timber, timberlands and timber-related assets - current (177) 1,708
Payables and accruals 1,529 (688)
Income taxes -- (119)
-------------- --------------
Cash from operating activities 1,273 4,362
-------------- --------------
CASH FROM INVESTING ACTIVITIES:
Notes and receivables 18 --
Net reductions of timber and timberlands -- --
Acquisition of property, plant and equipment (569) (1,153)
Net book value of retirements 7 260
Net book value of disposed idle assets -- 177
Other investing activities -- 58
-------------- --------------
Cash from investing activities (544) (658)
-------------- --------------
CASH FROM FINANCING ACTIVITIES:
Proceeds from long-term borrowings 106 --
Principal payments on long-term debt -- (901)
Other assets 5 (87)
Dividends paid on Preferred Stock -- (1,148)
Issuance of common stock -- 9
-------------- --------------
Cash from financing activities 111 (2,127)
-------------- --------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 840 1,577
CASH BALANCE AT BEGINNING OF PERIOD 2,131 2,157
-------------- --------------
CASH BALANCE AT END OF PERIOD $ 2,971 $ 3,734
============== ==============
CASH PAID DURING THE PERIOD FOR:
Interest $ 10 $ 2,056
Income taxes $ 100 $ (2)
The accompanying notes are an integral part of these
consolidated financial statements.
6
TREESOURCE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - SUMMARY OF FINANCIAL STATEMENT PREPARATION
On September 27, 1999, TreeSource Industries, Inc. and certain of its
wholly-owned subsidiaries ("the Company" or "TreeSource"), filed for voluntary
reorganization under chapter 11 of the U.S. Bankruptcy Code (the "Code"). The
Company continues to operate its business as a debtor-in-possession. As a
debtor-in-possession under the Code, the Company is authorized to operate its
business subject to the terms of a cash collateral order, but may not engage in
transactions outside of the ordinary course of business without Court approval.
On October 28, 1999 the Company filed a Plan of Reorganization (the
"Plan") in U.S. Bankruptcy Court that, if confirmed, would result in the
cancellation of the Company's current Common and Preferred Stock. Any value
these equities might have would be eliminated if the proposed Plan is confirmed
by the Court. The senior secured lenders, that have a secured interest in
substantially all assets of the Company, would convert a portion of their debt
into equity. Unsecured [trade] creditors would receive up to 90% of their claim
based on the Company's estimate of its unsecured liabilities.
In the opinion of management, the consolidated financial statements of
TreeSource Industries, Inc. and subsidiaries presented herein, assuming
continued operations under chapter 11, include all adjustments, which are solely
of a normal recurring nature or related to the bankruptcy, necessary for a fair
presentation of the financial position, results of operations and cash flows for
the interim periods presented. Certain reclassifications may have been made to
the prior period results and balances to conform to the current period
classifications. Most obligations outstanding at the time of the chapter 11
filing have been reclassified as non-current liabilities under the caption
"liabilities subject to compromise". No adjustments have been made to reflect
any settlement of obligations resulting from the reorganization proceedings.
The financial statements should be read with reference to "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
contained in this report, and the "Notes to Consolidated Financial Statements"
set forth in the Company's Annual Report on Form 10-K for the year ended April
30, 1999, filed with the Securities and Exchange Commission. The results of
operations for the current interim periods are not necessarily indicative of the
results to be expected for the current year.
7
Due to the filing for protection under chapter 11 of the Code, there
exists substantial doubt about the Company's ability to continue as a going
concern. The financial statements do not include any adjustment related to the
carrying value of assets or liabilities should the Company be unable to continue
as a going concern.
NOTE 2 - INVENTORIES
Inventories are valued at the lower of cost or market. Cost is
determined using the average cost and first-in, first-out (FIFO) methods. A
summary of inventory by principal product classification follows (in thousands):
October 31, 1999 April 30, 1999
--------------- ---------------
Logs $ 7,277 $ 6,649
Lumber 8,453 6,001
Supplies and Other 1,004 1,066
--------------- ---------------
$ 16,734 $ 13,716
=============== ===============
NOTE 3 - STOCKHOLDERS' EQUITY
Stockholders' equity at October 31, 1999 consists of the following:
Series A Preferred Stock, $100 per share liquidation preference;
500,000 shares authorized; 270,079 shares issued and outstanding, limited voting
rights; cumulative dividends payable quarterly in advance at the prime rate,
with a minimum rate of 6% and a maximum rate of 9%; convertible into Common
Stock at $7.50 per share after April 30, 1999; redeemable at original issue
price plus any accrued dividends at the option of the Board of Directors, in the
form of cash or in exchange for senior unsecured debt with a 12% coupon. Subject
to certain conditions, the holders of the Series A Preferred Stock have the
right to obtain voting control of the Company's Board of Directors in the event
the Company misses three consecutive quarterly dividend payments, four quarterly
dividend payments within twenty-four months or a total of eight quarterly
dividend payments. As of October 31, 1999 the Company was in arrears on three
consecutive quarterly dividend payments totaling approximately $1,586,000. In
addition, because the Company filed for protection under chapter 11 of the U.S.
Bankruptcy Code, the Company did not pay the quarterly dividend due November 30,
1999. This was the fourth consecutive dividend skipped by the Company.
8
Series B Preferred Stock, $100 per share liquidation preference;
500,000 shares authorized; 6,111 shares issued and outstanding; limited voting
rights; convertible into 212,693 shares of Common Stock; dividends payable only
if paid on the Company's Common Stock; redeemable at original issue price plus
accrued dividends at the option of the Board of Directors after all Series A
Preferred Stock has been redeemed.
Series C Junior Participating Preferred Stock, $100 per share
liquidation preference; 400,000 shares authorized; no shares issued or
outstanding; each share has 100 votes, voting together with Common Stock;
dividends payable only if paid on the Company's Common Stock at 100 times the
Common Stock dividend rate. This class of Preferred Stock was authorized in
connection with the Shareholder Rights Plan adopted by the Company on March 4,
1998.
Common Stock, no par value; 40,000,000 shares authorized; 11,162,874
shares issued and outstanding. Before giving effect to any shares that might be
issued pursuant to the management incentive Stock Option Plan or conversion of
any Series A Preferred Stock, the total number of common shares would increase
to 11,373,589 shares if the shares of Series B Preferred Stock remaining
outstanding at October 31, 1999 were converted to Common Stock.
NOTE 4 - NET INCOME (LOSS) PER SHARE
The calculations of net income (loss) per share for the three and six
month periods ended October 31, 1999 and 1998 are summarized below (in
thousands, except per-share data):
Three Months Ended October Six Months Ended October 31,
31,
-------------------------- ----------------------------
1999 1988 1999 1988
----------- ----------- ----------- -----------
Net income (loss) applicable to common shareholders $ (725) $ (898) $ 5,621 $ (2,091)
=========== =========== =========== ===========
Weighted average shares outstanding
- Basic 11,163 11,163 11,163 11,163
Additional shares assumed from:
- Conversion of Series B Preferred Stock -- -- 212 --
- Exercise of stock options -- -- -- --
----------- ----------- ----------- -----------
Average number of shares and equivalents outstanding
- Diluted 11,163 11,163 11,375 11,163
=========== =========== =========== ===========
Net income (loss) per common share
- Basic $ (0.06) $ (0.08) $ 0.50 $ (0.19)
=========== =========== =========== ===========
- Diluted $ (0.06) $ (0.08) $ 0.49 $ (0.19)
=========== =========== =========== ===========
9
NOTE 5 - LIABILITIES SUBJECT TO COMPROMISE
Under the Bankruptcy Code, a claim is treated as secured only to the
extent of such creditor's collateral, and the balance of the claim is treated as
unsecured. Generally, unsecured and under-secured debt does not accrue interest
after the filing, while a fully-secured claim continues to accrue interest.
Accordingly, interest expense totaling approximately $407,000 was not accrued
during the quarter ended October 31, 1999 as management believes these debts are
under-secured. Amounts included under the caption "current borrowings" at
October 31, 1999 represent draws on a line of credit that was established to
provide additional liquidity during the reorganization process and the current
portion of any long-term debt. The amounts are not subject to compromise.
Amounts included under the caption "liabilities subject to compromise"
represent claims that are unsecured or where, in the opinion of management, the
value of the corresponding collateral is estimated to be less than the amount of
the debt. Included under this caption at October 31, 1999 are the following (in
thousands):
October 31,
1999
-----------
Trade, interest and
other miscellaneous claims $ 7,752
Secured notes 261
Unsecured notes 1,007
Senior secured debt 42,449
-----------
$ 51,469
===========
Unsecured and under-secured claims may be liquidated and discharged at
less than their face value. It is impossible at this time to predict the actual
amount of recovery that each creditor may realize, since the valuation of the
Company's assets and its claims may be subject to adjustment as part of the
bankruptcy proceedings.
As a result of the chapter 11 proceedings, TreeSource Industries, Inc.
and its subsidiaries are in default on substantially all of their debt
agreements. Acceleration of this debt is stayed subject to the chapter 11
proceedings. Such debt cannot be paid or restructured until the conclusion of
the chapter 11 proceedings, unless ordered by the Court.
10
NOTE 6 - BORROWINGS
Long-term borrowings and the Line of Credit consist of the following
(in thousands):
October 31, April 30,
1999 1999
------------ ------------
Senior secured debt, bearing interest at 10%; principal
payable in quarterly installments of $1,000,000
beginning March 15, 1999, and a final payment in
December 2004; secured by substantially all assets of
the Company. $ 42,449 $ 42,449
Secured notes, interest at 9% and 10%; payable on
various dates; secured by various assets. 261 359
Unsecured senior subordinated notes, net of discount
of $264 and $278 at October 31, 1999 and April 30, 1999,
respectively; 8% coupon, effective interest rate
of 13.3%; semi-annual interest payments
due each June 30 and December 31; principal due in
full June 30, 2005. 1,007 993
------------ ------------
43,717 43,801
Less debt subject to compromise (43,717) -
Less current maturities - (43,474)
------------ ------------
$ - $ 327
============ ============
As discussed in Note 5, TreeSource Industries, Inc. and its
subsidiaries are in default on substantially all of their debt agreements as a
result of the chapter 11 filing except for with respect to the $16 million
debtor-in-possession working capital revolver. Acceleration of these debts is
stayed subject to the chapter 11 proceedings. Such debt cannot be paid or
restructured until the conclusion of the chapter 11 proceedings, unless ordered
by the Court. All of the Company's borrowings, with the exception of any
borrowings against the debtor-in-possession, have been reclassified to
"liabilities subject to compromise".
The Company obtained a debtor-in-possession secured revolving line of
credit (the "Line of Credit") in October that matures upon the earliest of April
5, 2001 or the effective date of a final order of reorganization. The Line of
Credit bears interest at a floating rate (8.25% as of October 31, 1999).
Borrowings under the line fluctuate daily based on cash needs and are subject to
customary covenants and collateral reserves. The Line of Credit allows the
Company to borrow from time to time up to $16 million, including up to $5
million of letters of credit. As of October 31, 1999 there were $190,000 in
borrowings on the Line of Credit and $525,000 in letters of credit outstanding.
11
NOTE 7 - PROVISION FOR INCOME TAXES
The income tax provision is based on the estimated effective annual tax
rate for each fiscal year. The provision includes anticipated current income
taxes payable, the tax effect of anticipated differences between the financial
reporting and tax basis of assets and liabilities, and the expected utilization
of net operating loss (NOL) carryforwards. The federal and state income tax
provision consists of the following (in thousands):
Six Months Ended October 31,
-------------------------------
1999 1998
------------ ------------
Income (loss) before income taxes $ (625) $ (943)
=========== ===========
Provision for income taxes (benefit):
Federal $ 100 $ --
State -- --
------------ ------------
$ 100 $ --
=========== ===========
Current $ 100 $ --
Deferred -- --
------------ ------------
$ 100 $ --
=========== ===========
The Company's remaining adjusted NOL at April 30, 1999 was
approximately $26 million for federal income tax and $24 million for state
income tax purposes. These carry-forwards expire in 2007 and 2012, respectively.
As discussed in Note 1, the Company has filed for voluntary reorganization under
chapter 11 of the Code, which could impact the availability of the NOLs to be
used to offset future income. The Company expects to utilize approximately $8
million of the available NOLs prior to emerging from bankruptcy. Due to
potential significant limitations of the NOLs associated with the bankruptcy
proceedings and potential reorganization plans, the Company has fully reserved
for its available NOLs at October 31, 1999. During the current quarter, the
Company has utilized its existing NOL to offset 90% of its current taxable
income. The Company's tax expense relates to current year taxable income not
available for offset by NOLs. Management periodically reviews the above factors
and may change the amount of valuation allowance as facts and circumstances
dictate.
12
NOTE 8 - COMMITMENTS AND CONTINGENCIES
The Company is involved in certain litigation primarily arising in the
normal course of its business. The Company's liability, if any, under such
pending litigation could have a material impact upon the Company's consolidated
financial condition or results of operations. See "Legal Proceedings".
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 results of operations.
13
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
- ---------------------
On a quarter-to-quarter basis, the Company's financial results have and
will vary widely, due to seasonal fluctuations and market factors affecting the
demand for logs, lumber, and other wood products. Therefore, past results for
any given year or quarter are not necessarily indicative of future results.
The average price of the industry benchmark green fir 2x4 standard and
better lumber declined 17%, from $449 per unit, in the quarter ended July 31,
1999, to $374 per unit in the quarter ended October 31, 1999. The average price
of the industry benchmark #2 fir saw log increased slightly from $627 to $631
per unit during the same periods. The decline in lumber prices, with no
corresponding decrease in log costs, caused industry margins and TreeSource
profits to decline in the quarter ended October 31, 1999 as compared to the
quarter ended July 31, 1999. The Company's efforts to increase asset utilization
and decrease costs by increasing the number of shifts operated at selected
facilities is proving successful with lumber shipments up 11.4% in the quarter
ended October 31, 1999 as compared to the same period in 1998.
On September 27, 1999, the Company filed for voluntary reorganization
under chapter 11 of the U.S. Bankruptcy Code. The costs associated with the
reorganization totaled $877,000 during the quarter ended October 31, 1999.
Interest expense for the quarter was approximately $407,000 lower than it
otherwise would have been due to the filing for reorganization. During the
reorganization period, the Company is allowed relief from payment of interest
charges on all pre-petition debt but is required to accrue interest expense on
claims which are, in the opinion of management, fully secured. No interest
expense has been recorded since September 27, 1999 on all pre-petition debt as
management believes the claims of all pre-petition debt holders are
under-secured. (See Legal Proceedings.) The Company filed for reorganization in
response to a protracted period of weak markets combined with the Company's high
level of debt and preferred stock dividend obligations. The cash generated by
operations was not sufficient to enable the Company to pay its commitments and
continue operating. The proposed plan, if confirmed, would result in the
cancellation of the Company's current classes of common and preferred stock.
Proceeds from the sale of assets will be used to pay down the secured debt and a
significant portion of the debt would be converted to equity.
On October 28, 1999, the Company filed a Plan of Reorganization (the
"Plan") in U.S. Bankruptcy Court that, if confirmed, would result in the
cancellation of the Company's current Common and Preferred Stock. Any value
these equities might have would be eliminated if the proposed Plan is confirmed
by the Court. The senior secured lenders, that have a secured interest in
substantially all assets of the
14
Company, would convert a portion of their debt into equity. Unsecured [trade]
creditors would receive up to 90% of their claim based on the Company's estimate
of its unsecured liabilities.
In November, the Company auctioned the equipment at the Philomath and
Sedro-Woolley mill sites. The assets had been previously written down and are
included in the classification of "Assets held for sale" on the balance sheet.
Proceeds from the sale of assets will be used to pay down the Company's secured
debt. The Company has three properties and three other facilities currently held
for sale of which one, Burke, is operating.
The following table sets forth the percentages that certain expenses
bear to net sales, and the period-to-period percentage change for each item:
INCOME AND EXPENSE ITEMS AS PERCENTAGE
A PERCENT OF NET SALES INCREASE (DECREASE)
------------------------------------------ ------------------------------
Three Months Six Months
Three Months Ended Six Months Ended Ended Ended
October 31, October 31, 10/31/99 10/31/99
-------------------- ---------------------
to to
1999 1998 1999 1998 10/31/98 10/31/98
--------- ---------- ---------- ---------- ---------------- -------------
Net sales 100.0 % 100.0 % 100.0 % 100.0 % 15.8 % 28.0 %
Cost of sales 94.3 93.4 89.2 93.1 17.0 22.8
------- -------- -------- -------- -------------- -----------
Gross Profit 5.6 6.6 10.8 6.9 (1.2) 98.2
Selling, general and
Administrative expense 4.4 5.1 4.6 5.5 (0.2) 8.8
Reorganization charges 1.5 0.0 0.7 0.0 NM NM
------- -------- -------- -------- -------------- -----------
Operating income (loss) (0.3) 1.5 5.4 1.5 (121.5) 365.6
Interest expense (1.2) (2.3) (1.4) (2.3) (38.0) (21.0)
Miscellaneous 0.4 0.2 0.5 (0.1) 214.8 (786.0)
------- -------- -------- -------- -------------- -----------
Income (loss) before income taxes (1.1) (0.6) 4.5 (1.0) 92.9 (706.7)
Provision for income taxes (benefit) 0.2 0.0 0.1 0.0 NM NM
-------------- -----------
------- -------- -------- --------
Net income (loss) (1.2) % (0.6) % 4.4 % (1.0) % 123.8 % (696.1) %
======= ======== ======== ========
NM - Not Meaningful
Note - percentages may not add due to rounding.
Comparison of Three Months Ended October 31, 1999 and 1998
- ----------------------------------------------------------
Net sales for the three months ended October 31, 1999 increased $8.1
million (16%), as compared to the three months ended October 31, 1998. This
increase was principally caused by an 11% increase in the weighted average net
sales price and a 4% increase in lumber sales volume. Although the number of
sawmills operated by the Company in the three months ended October 31, 1999 has
decreased from the prior year, the Company's lumber shipments increased over the
same period due to increases in productivity and the number of shifts operated
at three facilities.
15
Gross profit for the quarter ended October 31, 1999 was 5.6% of net
sales, compared to 6.6% of net sales for the quarter ended October 31, 1998.
Unit manufacturing costs in the three months ended October 31, 1999 increased
3.5% as compared to the three months ended October 31, 1998, primarily due to
higher maintenance and repair costs at two facilities and a decrease in
production volume at Pacific Hardwoods. The increase in repair and maintenance
costs at selected facilities has resulted from the Company's efforts to decrease
downtime and increase productivity at facilities that have deteriorated.
Selling, general and administrative expenses for the quarter ended
October 31, 1999 were almost unchanged from the quarter ended October 31, 1998.
While a number of cost savings measures have been taken such as corporate staff
reductions, reduction in office lease space, and the closure of certain
facilities, the Company incurred approximately $225,000 in costs related to
obtaining the debtor-in possession revolving working line of credit.
Reorganization charges in the quarter ended October 31, 1999 are
comprised primarily of fees for professional services related to the bankruptcy.
As of October 31, 1999, the Company had available approximately $20.6
million and $18.6 million in net operating losses ("NOLs") for federal and state
income tax purposes. Due to the bankruptcy, substantial doubt exists regarding
the Company's ability to fully utilize these NOLs. As a result, the Company
fully reserved for the NOLs generated during both the quarters ended October 31,
1998 and 1999. The tax provision recorded for the quarter ended October 31, 1999
relates to expenses that cannot be offset by the NOLs. The Company periodically
reviews the above factors and may change the amount of valuation allowance as
facts and circumstances dictate.
Comparison of Six Months Ended October 31, 1999 and 1998
- --------------------------------------------------------
Net sales for the six months ended October 31, 1999 increased $27.7
million (28%), as compared to the six months ended October 31, 1998. This
increase was principally caused by a 16% increase in the weighted average net
sales price and 10% increase in lumber sales volume. Although the number of
sawmills operated by the Company in the six months ended October 31, 1999
decreased as compared to the same period in the prior year, due to the closure
of Pacific Softwoods, Philomath, and Sedro-Woolley, the Company's lumber
shipments increased over the same period resulting from increases in
productivity and the number of shifts operated at three facilities.
Gross profit for the six months ended October 31, 1999 was 10.8% of net
sales, compared to 6.9% of net sales for the six months ended October 31, 1998.
Unit manufacturing costs in the six months ended October 31, 1999 decreased by
4% from costs in the six months ended October 31, 1998, primarily due to an
increase in the hours of operation at several facilities and increases in
productivity.
16
Selling, general and administrative expenses for the six months ended
October 31, 1999 increased by $474,000 as compared to the six months ended
October 31, 1998. While a number of cost savings measures have been taken such
as corporate staff reductions, reduction in office lease space, and the closure
of certain facilities, these expenses increase primarily because the Company
incurred approximately $225,000 in costs related to obtaining the
debtor-in-possession revolving working line of credit and additional costs
related to increased bonus expense due to the comparative increase in income
between the two periods.
Reorganization charges in the six months ended October 31, 1999 are
comprised primarily of professional services related to the bankruptcy.
As of October 31, 1999, the Company had available approximately $20.6
million and $18.6 million in net operating losses for federal and state income
tax purposes. Due to the bankruptcy, substantial doubt exists regarding the
Company's ability to fully utilize these NOLs. As a result, the Company fully
reserved for the net operating losses generated during the six months ended
October 31 for both 1998 and 1999. The tax provision recorded for the quarter
ended October 31, 1999 relates to expenses that cannot be offset by the NOLs.
The Company periodically reviews the above factors and may change the amount of
valuation allowance as facts and circumstances dictate.
Liquidity and Capital Resources
- -------------------------------
The Company is currently operating as a debtor-in-possession under a
cash collateral order approved by the Court, pursuant to a number of conditions.
The cash collateral order allows the Company to use funds from operations and
the revolving working line of credit for normal operating purposes. The cash
collateral order also grants a security interest in substantially all the assets
of the Company to the pre-petition senior secured lenders and post-petition
secured debtor-in-possession lenders.
Cash and cash equivalents increased by approximately $0.8 million
during the six months ended October 31, 1999 to $3.0 million. During the same
period, prepaid expenses increased $3.8 million primarily due to log purchase
deposits. Approximately $1.3 million of cash was provided by operations
including the increase in prepaid expenses and $3.0 million increase in
inventories. To conserve cash prior to filing for reorganization, the Company
has not paid interest or principal on its senior secured debt and subordinated
debentures, or dividends on its Series A Preferred Stock since March 1999.
The Company historically has not had a line of credit or working
capital financing available to it, and, therefore, has relied on cash provided
by its operations to fund its working capital needs. In early October, in
connection with filing for voluntary reorganization, the Company obtained a $16
million debtor-in-possession revolving working line of credit to provide for day
to day liquidity and seasonal log
17
inventory increases. As of October 31, 1999 there was a $190,000 loan balance
on this line of credit.
For fiscal year 2000, through October 31, 1999, the Company spent $0.6
million for capital improvements to its facilities. The Company had no material
commitments for capital spending at October 31, 1999.
The Company does not invest in market risk sensitive instruments.
Year 2000 Compliance
- --------------------
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 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 issues identified. 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, which consists of
the replacement or upgrading of hardware and software that has "Year 2000"
issues, is nearing completion. The remaining tasks for completing the second
phase consist of replacing and upgrading the computer systems at two mills and
some ancillary software upgrades at other locations.
The Company presently believes the "Year 2000" issue will not have a
material adverse effect on the Company's financial condition or results of
operations.
Factors Affecting Forward-Looking Statements
- ---------------------------------------------
The statements contained in this report that are not statements of
historical fact may include forward-looking statements (as defined in Section
27A of the Securities Act of 1933, as amended) that involve a number of risks
and uncertainties. Moreover, from time to time the Company may issue other
forward-looking statements. The following factors are among the factors that
could cause actual results to differ materially from the forward-looking
statements and should be considered in evaluating any forward-looking
statements: the outcome of the Company's filing for voluntary reorganization;
the approval of the Company's plan of reorganization; adverse operating
conditions; fluctuations in quarterly results; availability of logs;
technological change; manufacturing risks; federal and state regulations; and
the additional factors listed from time to time in the Company's SEC reports,
including, but not limited to, the Company's annual report on Form 10-K for the
year ended April 30, 1999.
18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company and its Trask River Lumber subsidiary were named defendants
in a claim for wages and penalties filed in U.S. District Court for the District
of Oregon on February 17, 1999 (Allen, Blount, et al., v. WTD Industries, Inc.,
Trask River Lumber and Bruce L. Engel). The case is currently pending waiting
class certification. Earlier settlement negotiations were unsuccessful.
The Company and its Central Point Lumber subsidiary were named
defendants in a claim for damages filed in Circuit Court of the State of Oregon
for Jackson County on August 27, 1999. The plaintiff alleges retaliatory
wrongful discharge and loss of wages as a result of filing a worker's
compensation claim. (Donald D. Leiter II vs. TreeSource Industries, Inc. and
Central Point Lumber).
Item 3. Defaults Upon Senior Securities
Due to the Company's inability to meet certain of its financial
covenants and its filing for reorganization, the Company is not in compliance
with its obligations under its senior secured debt agreement and ceased making
interest and principal payments on its senior secured debt in March 1999. On
September 27, 1999 the Company filed for voluntary reorganization under chapter
11 of the U.S. Bankruptcy Code in the U.S. District Court of the Western
District of Washington: In re TreeSource Industries, Inc., et al (Case 99-10932
and 99-10937 through 99-10961). As of November 30, 1999, the Company had not
paid four consecutive quarterly dividend payments due to holders of its Series A
Preferred Stock, totaling approximately $2,161,000, and is in arrears on payment
of approximately $3,163,000 in interest and $3,000,000 in principal on its
senior secured debt. Additionally, the Company is in arrears on payment of
approximately $179,000 in interest on its 8% unsecured senior notes as of
November 30, 1999. During the reorganization period, the Company is allowed
relief from payment of interest charges on all pre-petition debt but is required
to accrue interest expense on claims which are, in the opinion of management,
fully-secured. No interest expense has been recorded since September 27, 1999 on
all pre-petition debt as management believes the claims of all pre-petition debt
holders are under-secured.
19
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The Index to Exhibits is located on page 22.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended October
31, 1999.
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TreeSource Industries, Inc.
----------------------------------
(Registrant)
/s/ Jess R. Drake
----------------------------------
Jess R. Drake
President
/s/ Robert W. Lockwood
----------------------------------
Robert W. Lockwood
Vice President - Finance
December 7, 1999
21
TreeSource Industries, Inc.
Index to Exhibits
Sequential
Number
System
Page
Number
3.1 Fourth Restated Articles of Incorporation of Registrant
adopted effective November 27, 1992, as amended(1)
3.2 Second Restated Bylaws of the Registrant adopted effective
November 27, 1992(2)
4.1 Debtor-in-Possession Credit Agreement dated as of October 5, 1999,
Between Registrant and General Electric Capital Corporation.
27 Financial Data Schedule(3)
(1) Incorporated by reference to the exhibit of like number to the
Registrant's quarterly report on Form 10-Q for the quarter ended
October 31, 1998.
(2) Incorporated by reference to the exhibit of like number to the
Registrant's annual report on Form 10-K for the year ended April
30, 1993.
(3) This schedule has been submitted in electronic form prescribed by
EDGAR.
22