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 July 31, 2000.
[ ] 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 August 31, 2000 was 11,162,874.
1
<PAGE>
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................................................18
Item 1. Legal Proceedings..............................................18
Item 3. Defaults Upon Senior Securities................................18
Item 6. Exhibits and Reports on Form 8-K...............................19
2
<PAGE>
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
JULY 31,
---------------------------------
2000 1999
----------- -------------
NET SALES $ 46,132 $ 67,633
COST OF SALES 48,019 57,017
----------- ------------
GROSS PROFIT (LOSS) (1,887) 10,616
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 2,867 3,241
REORGANIZATION CHARGES 652 --
----------- ------------
OPERATING INCOME (LOSS) (5,406) 7,375
OTHER INCOME (EXPENSE)
Interest expense (30) (1,114)
Miscellaneous 87 86
----------- ------------
57 (1,028)
----------- ------------
INCOME (LOSS) BEFORE INCOME TAXES (5,349) 6,347
PROVISIONS FOR INCOME TAXES (BENEFIT) -- --
----------- ------------
NET INCOME (LOSS) (5,349) 6,347
PREFERRED DIVIDENDS -- --
----------- ------------
NET INCOME (LOSS) APPLICABLE
TO COMMON STOCKHOLDERS $ (5,349) $ 6,347
=========== ============
NET INCOME (LOSS) PER COMMON SHARE
- BASIC ($0.48) $0.57
======= =====
- DILUTED ($0.48) $0.57
======= =====
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
<TABLE>
<CAPTION>
TREESOURCE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS
(in Thousands)
(Unaudited)
JULY 31, APRIL 30,
2000 2000
----------- -----------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 3,437 $ 1,871
Restricted cash 840 1,616
Accounts receivable, net 6,465 12,462
Inventories 13,086 15,800
Prepaid expenses 2,795 2,535
Income tax refund receivable -- 86
Assets held for sale 5,490 5,433
Timber, timberlands and timber-related assets 3,145 2,196
----------- -----------
Total current assets 35,258 42,000
NOTES AND ACCOUNTS RECEIVABLE 4 5
PROPERTY, PLANT AND EQUIPMENT, at cost
Land 1,527 1,527
Buildings and improvements 8,673 8,673
Machinery and equipment 48,336 47,448
----------- -----------
58,536 57,648
Less accumulated depreciation 45,904 44,385
----------- -----------
12,632 13,263
Construction in progress 206 101
----------- -----------
12,838 13,364
DEFERRED TAX ASSET 750 750
OTHER ASSETS 1,265 1,244
----------- -----------
$ 50,115 $ 57,363
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
TREESOURCE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
LIABILITIES AND STOCKHOLDERS' EQUITY
(in Thousands, Except Share Information)
(Unaudited)
JULY 31, APRIL 30,
2000 2000
----------- -----------
CURRENT LIABILITIES
Accounts payable $ 5,436 $ 5,476
Accrued expenses 7,333 7,902
Timber contracts payable 147 147
Current borrowings 64 499
----------- -----------
Total current liabilities 12,980 14,025
LONG-TERM DEBT, less current maturities 159 183
LIABILITIES SUBJECT TO COMPROMISE 49,129 49,959
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' EQUITY
Preferred Stock, 10,000,000 shares authorized
Series A, 270,079 shares outstanding 20,688 20,688
Series B, 6,111 shares outstanding 333 333
Common Stock, no par value, 40,000,000 shares authorized,
11,162,874 issued and outstanding 28,761 28,761
Additional paid-in capital 15 15
Retained deficit (61,950) (56,601)
----------- -----------
(12,153) (6,804)
----------- -----------
$ 50,115 $ 57,363
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
<TABLE>
<CAPTION>
TREESOURCE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(in Thousands)
(Unaudited)
THREE MONTHS ENDED JULY 31,
----------------------------
2000 1999
----------- -----------
<S> <C> <C>
CASH FROM OPERATING ACTIVITIES:
Net income (loss) $ (5,349) $ 6,347
Adjustments to reconcile net income (loss) to
cash provided by operating activities:
Loss (gain) on sale of assets (15) --
Depreciation, depletion and amortization 714 1,141
Accounts receivable 5,997 (866)
Inventories 2,714 (2,660)
Prepaid expenses (260) (529)
Timber, timberlands and timber-related assets - current (946) 186
Payables and accruals (700) 1,526
Income taxes 86 --
----------- -----------
Cash from operating activities 2,241 5,145
----------- -----------
CASH FROM INVESTING ACTIVITIES:
Notes and accounts receivable 1 14
Acquisition of property, plant and equipment (291) (325)
Proceeds from the sale of fixed assets 37 21
----------- -----------
Cash from investing activities (253) (290)
----------- -----------
CASH FROM FINANCING ACTIVITIES:
Proceeds (payments) from borrowings (459) --
Principal payments on long-term debt (738) (5)
Other assets (1) 5
----------- -----------
Cash from financing activities (1,198) --
----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 790 4,855
CASH BALANCE AT BEGINNING OF PERIOD 3,487 2,131
----------- -----------
CASH BALANCE AT END OF PERIOD $ 4,277 $ 6,986
=========== ===========
CASH PAID DURING THE PERIOD FOR:
Interest $ 36 $ --
Income taxes $ -- $ --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
TREESOURCE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - SUMMARY OF FINANCIAL STATEMENT PREPARATION
On September 27, 1999 the Company filed for voluntary reorganization
under chapter 11 of the U.S. Bankruptcy Code (the "Code"). The Company continues
to operate its business as a debtor-in-possession. As a debtor-in-possession
under the Code, the Company is authorized to operate its business subject to the
terms of a cash collateral order, but may not engage in transactions outside of
the ordinary course of business without Court approval.
On April 12, 2000 the Company filed an Amended Joint Plan of
Reorganization (the "Plan") in U.S. Bankruptcy Court (the "Court") that, if
confirmed by the Court, would result in the cancellation of the Company's
current classes of common and preferred stock and eliminate any value remaining
in these equity securities. The Company's senior secured lenders have a security
interest in substantially all the assets of the Company. Under the proposed
Plan, these senior secured lenders would exchange a portion of their claims
against the Company for new equity securities to be issued by the Company
pursuant to the Plan. The proposed Plan also sets up a defined pool of funds
from which unsecured trade creditors would be paid. The percentage recovery for
unsecured trade creditors would depend on a number of factors, including the
resolution of disputed claims. On May 17, 2000, the Company successfully
petitioned the Court to delay the Plan confirmation hearing for 120 days due to
current lumber market conditions. The Company may, at its option, further amend
or withdraw the Plan.
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, 2000, filed with the Securities and Exchange Commission. The results of
operations for the current
7
<PAGE>
interim periods are not necessarily indicative of the results to be expected for
the current year.
Restricted cash represents proceeds from the sale of certain assets
that would normally be remitted to the secured lenders to pay down debt. Because
of the bankruptcy filing, these funds cannot be paid until the Court approves
such payment. On July 18, 2000, $738 thousand in proceeds from the equipment
sale at Sedro-Woolley were paid from restricted cash to the secured pre-petition
lenders as ordered by the Court.
Due to the filing for protection under chapter 11, there exists
substantial doubt about the Company's ability to continue as a going concern.
The financial statements do not include any adjustment related to the carrying
value of assets or liabilities should the Company be unable to continue as a
going concern.
NOTE 2 - INVENTORIES
Inventories are valued at the lower of cost or market. Cost is
determined using the average cost and first-in, first-out (FIFO) methods. A
summary of inventory by principal product classification follows (in thousands):
July 31, April 30,
2000 2000
---------- ----------
Logs $ 6,618 $ 6,571
Lumber 5,343 8,109
Supplies and Other 1,125 1,120
---------- ----------
$ 13,086 $ 15,800
========== ===========
8
<PAGE>
NOTE 3 - STOCKHOLDERS' EQUITY
Stockholders' equity at July 31, 2000 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 July 31, 2000 the Company was in arrears on six
consecutive quarterly dividend payments totaling approximately $3,325,000.
Series B Preferred Stock, $100 per share liquidation preference;
500,000 shares authorized; 6,111 shares issued and outstanding; limited voting
rights; convertible into 212,693 shares of Common Stock; dividends payable only
if paid on the Company's Common Stock; redeemable at original issue price plus
accrued dividends at the option of the Board of Directors after all Series A
Preferred Stock has been redeemed.
Series C Junior Participating Preferred Stock, $100 per share
liquidation preference; 400,000 shares authorized; no shares issued or
outstanding; each share has 100 votes, voting together with Common Stock;
dividends payable only if paid on the Company's Common Stock at 100 times the
Common Stock dividend rate. This class of Preferred Stock was authorized in
connection with the Shareholder Rights Plan adopted by the Company on March 4,
1998.
Common Stock, no par value; 40,000,000 shares authorized; 11,162,874
shares issued and outstanding. Before giving effect to any shares that might be
issued pursuant to the management incentive Stock Option Plan or conversion of
any Series A Preferred Stock, the total number of common shares would increase
to 11,373,589 shares if the shares of Series B Preferred Stock remaining
outstanding at July 31, 2000 were converted to Common Stock.
The Company's current classes of common and preferred stock will be
cancelled and any value remaining in these equity securities will be eliminated
if the proposed Plan is confirmed by the Court.
9
<PAGE>
NOTE 4 - NET INCOME (LOSS) PER SHARE
The calculations of net income (loss) per share for the three-month
period ended July 31, 2000 and 1999 are summarized below (in thousands, except
per-share data):
Three Months Ended July 31,
---------------------------
2000 1999
--------- ---------
Net income (loss) applicable to common shareholders $ (5,349) $ 6,347
========= =========
Weighted average shares outstanding
- Basic 11,163 11,163
Additional shares assumed from:
- Conversion of Series B Preferred Stock -- --
- Exercise of stock options -- --
--------- ---------
Average number of shares and equivalents outstanding
- Diluted 11,163 11,163
========= =========
Net income (loss) per common share
- Basic $ (0.48) $ 0.57
========= =========
- Diluted $ (0.48) $ 0.57
========= =========
NOTE 5 - LIABILITIES SUBJECT TO COMPROMISE
Under the Code, a claim is treated as secured only to the extent of
such creditor's collateral, and the balance of the claim is treated as
unsecured. Generally, unsecured and under-secured debt does not accrue interest
after the filing, while a fully secured claim continues to accrue interest.
Accordingly, interest expense totaling approximately $1,102,000 was not accrued
during the quarter ended July 31, 2000 as management believes these debts are
under-secured. See Note 6 for additional information.
Amounts included under the caption "Liabilities Subject to Compromise"
represent claims that are unsecured or where, in the opinion of management, the
value of the corresponding collateral is estimated to be less than the amount of
the debt. Included under this caption at July 31, 2000, and April 30, 2000, are
the following (in thousands):
July 31, April 30,
2000 2000
--------- ---------
Trade, interest and
other miscellaneous claims $ 6,150 $ 6,242
Secured notes 261 261
Unsecured notes 1,007 1,007
Senior secured debt 41,711 42,449
--------- ---------
$ 49,129 $ 49,959
========= =========
10
<PAGE>
Unsecured and under-secured claims may be liquidated and discharged at
less than their face value. It is impossible at this time to predict the actual
amount of recovery that each creditor may realize, since the valuation of the
Company's assets and its claims may be subject to adjustment as part of the
bankruptcy proceedings.
As a result of the chapter 11 proceedings, TreeSource Industries, Inc.
and its subsidiaries are in default on substantially all of their pre-petition
debt agreements. Acceleration of this debt is stayed subject to the chapter 11
proceedings. Such debt cannot be paid or restructured until the conclusion of
the proceedings, unless ordered by the Court.
NOTE 6 - BORROWINGS
Long-term borrowings and the Line of Credit consist of the following
(in thousands):
<TABLE>
<CAPTION>
July 31, April 30,
2000 2000
----------- -----------
<S> <C> <C>
Senior secured debt, bearing interest at 10%; principal
payable in quarterly installments of $1 million beginning
March 15, 1999, and a final payment in December 2004;
secured by substantially all assets of the Company. $ 41,711 $ 42,449
Secured notes, interest at 9% and 10%; payable on
various dates; secured by various assets. 261 261
Unsecured senior subordinated notes, net of discount
of $264 at July 31, 2000 and April 30, 2000;
8% coupon, effective interest rate of 13.3%; semi-
annual interest payments due each June 30 and
December 31; principal due in full June 30, 2005. 1,007 1,007
Obligations under capital leases. 223 243
----------- ------------
43,202 43,960
Less current maturities. (64) (60)
Less liabilities subject to compromise. (42,979) (43,717)
----------- ------------
$ 159 $ 183
=========== ============
</TABLE>
As discussed in Note 5, TreeSource Industries, Inc. and its
subsidiaries are in default on substantially all of their pre-petition debt
agreements as a result of the chapter 11 filing. Acceleration of these debts is
stayed subject to the chapter 11 proceedings. Such debt cannot be paid or
restructured until the conclusion of the chapter 11 proceedings, unless ordered
by the Court. All of the Company's borrowings, with the exception of any
borrowings against the debtor-in-possession working capital secured revolving
line of credit (the "Line of Credit") and certain capital lease obligations,
have been reclassified to "Liabilities Subject to Compromise".
11
<PAGE>
The Company obtained a $16 million Line of Credit in October 1999 that
matures upon the earliest of April 5, 2001 or the effective date of a final
order of reorganization. Borrowings under the Line of Credit fluctuate daily
based on cash needs and are subject to customary covenants and collateral
reserves. The weighted average rate of interest on outstanding short term
borrowings on the Line of Credit was 9.5%. The Line of Credit allows the Company
to borrow from time to time up to $14 million (the remaining $2 million is
reserved pursuant to the terms of the Line of Credit), including up to $5
million in letters of credit. As of July 31, 2000 there were no borrowings on
the Line of Credit and $2,225,000 in letters of credit outstanding.
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 (the "NOL") carry forwards.
The federal and state income tax provision consists of the following
(in thousands):
Three Months Ended July 31,
---------------------------
2000 1999
---------- ----------
Income (loss) before income taxes $ (5,349) $ 6,347
========== ==========
Provision for income taxes:
Federal $ -- $ --
State -- --
---------- ----------
$ -- $ --
========== ==========
Current $ -- $ --
Deferred -- --
---------- ----------
$ -- $ --
========== ==========
The Company's remaining adjusted NOL at April 30, 2000 was
approximately $40 million for federal income tax and $28 million for state
income tax purposes. These carry forwards expire in 2007 and 2012, respectively.
As discussed in Note 1, the Company has filed for voluntary reorganization under
chapter 11 of the Code, which could impact the availability of the NOLs to be
used to offset future income. The Company may use a substantial portion of the
NOLs prior to emerging from bankruptcy due to debt forgiveness and the
conversion of debt to equity proposed in the plan of reorganization. Due to
potential significant limitations of the NOLs associated with the bankruptcy and
potential reorganization plans, the Company has fully reserved for its available
NOLs at July 31, 2000. Management periodically
12
<PAGE>
reviews the above factors and may change the amount of valuation allowance as
facts and circumstances dictate.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
The Company is involved in certain litigation primarily arising in the
normal course of its business. The Company's liability, if any, under such
pending litigation could have a material impact upon the Company's consolidated
financial condition or results of operations. See "Legal Proceedings".
The Company is subject to many 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
<PAGE>
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.
Domestic lumber market conditions continued to weaken during the first
quarter of fiscal 2001 due to industry overproduction and the decline in U.S.
housing starts. The average price of the industry benchmark green fir 2x4
standard and better lumber decreased 11%, from $333 per unit in the quarter
ended April 30, 2000, to $296 per unit in the quarter ended July 31, 2000. The
average price of the industry benchmark #2 fir saw log also decreased 4% from
$640 to $612 per unit during these periods. Because the decrease in lumber
prices outpaced the decrease in log costs, industry margins and the Company's
profits decreased. In response to the deterioration of the market, the Company
curtailed production indefinitely at its facility in Burke, Vermont, which had
net sales of $0.3 million, $7.3 million, and $4.6 million in fiscal years ending
2001, 2000, and 1999, respectively.
On September 27, 1999, the Company filed for voluntary reorganization
under chapter 11 of the U.S. Bankruptcy Code ("the Code"). The Company continues
to operate its business as a debtor-in-possession. As a debtor-in-possession
under the Code, the Company is authorized to operate its business subject to the
terms of a cash collateral order, but may not engage in transactions outside of
the ordinary course of business without Court approval. The costs associated
with the reorganization totaled $652,000 during the quarter ended July 31, 2000.
Interest expense for the quarter was approximately $1,102,000 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 that are, in the opinion of management, fully secured. No interest
expense has been recorded since September 27, 1999 on the Company's senior
secured debt or unsecured senior subordinated notes because management believes
these claims are under-secured. (See "Legal Proceedings"). The Company filed for
reorganization in response to a protracted period of weak lumber markets
combined with the Company's high level of debt and substantial preferred stock
dividend obligations. The cash generated by operations was not sufficient to
enable the Company to pay its commitments and continue operating.
On April 12, 2000 the Company filed an Amended Joint Plan of
Reorganization (the "Plan") in U.S. Bankruptcy Court (the "Court") that if
confirmed by the Court, would result in the cancellation of the Company's
current classes of
14
<PAGE>
common and preferred stock and eliminate any value remaining in these equity
securities. The Company's senior secured lenders have a security interest in
substantially all the assets of the Company. Under the proposed Plan, these
senior secured lenders would exchange a portion of their claims against the
Company for new equity securities to be issued by the Company pursuant to the
Plan. The proposed Plan also sets up a defined pool of funds from which
unsecured trade creditors would be paid. The percentage recovery for unsecured
trade creditors would depend on a number of issues, including the resolution of
disputed claims. On May 17, the Company successfully petitioned the Court to
delay the Plan confirmation hearing for 120 days due to current lumber market
conditions. The Company may, at its option, further amend or withdraw the Plan.
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 PERCENTAGE
AS INCREASE
A PERCENT OF NET SALES (DECREASE)
--------------------------- ---------------
Three
Three Months Ended Months
July 31, Ended
--------------------------- ------------
2000 1999 7/31/00
to
7/31/99
-------------- ------------ ------------
Net sales 100.0 % 100.0 % (31.8) %
Cost of sales 104.1 84.3 (15.8)
----------- ---------- ------------
Gross Profit (4.1) 15.7 (117.8)
Selling, general and
administrative expense 6.2 4.8 (11.5)
Reorganization charges 1.4 0.0 NM
----------- ---------- ------------
Operating income (loss) (11.7) 10.9 (173.3)
Interest expense (0.1) (1.6) (97.3)
Miscellaneous 0.2 0.1 1.2
----------- ---------- ------------
Income (loss) before income taxes (11.6) 9.4 (184.3)
Provision for income taxes 0.0 0.0 NM
----------- ---------- ------------
Net income (loss) (11.6) % 9.4 % (184.3) %
=========== ========== ============
NM - Not Meaningful
Note - percentages may not add due to rounding.
15
<PAGE>
Comparison of Three Months Ended July 31, 2000 and 1999
--------------------------------------------------------
Net sales for the three months ended July 31, 2000 decreased $21.5
million (32%), as compared to the three months ended July 31, 1999. This
decrease was principally caused by an 18% decrease in lumber sales volume and a
16% decrease in the weighted average net lumber sales price. In response to the
relativley weak lumber market during the three months ended July 31, 2000, the
Company either reduced operating hours or took extended downtime at most
facilities.
Gross profit for the quarter ended July 31, 2000 was (4.1%) of net
sales, compared to 15.7% of net sales for the quarter ended July 31, 1999. Unit
manufacturing costs in the three months ended July 31, 2000 increased 4% as
compared to the three months ended July 31, 1999, primarily due to
market-related production curtailments.
Selling, general and administrative expenses for the quarter ended July
31, 2000 decreased by (11.5%) as compared to the quarter ended July 31, 1999,
excluding reorganization charges. This decrease has resulted from the
implementation of a number of cost-saving measures, such as corporate staff
reductions, reduction in office lease space, and the closure of certain
facilities.
Reorganization charges for the quarter ended July 31, 2000 are
comprised primarily of fees for professional services related to the bankruptcy.
As of July 31, 2000, the Company had available an estimated $45 million
in federal net operating losses and $33 million in state net operating losses to
offset future taxable income. Due to the bankruptcy, substantial doubt exists
regarding the Company's ability to fully utilize these NOLs. As a result, the
Company fully reserved for the NOLs generated during the three months ended July
31, 2000 and 1999. 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
its $16 million debtor-in-possession working capital secured revolving line of
credit (the "Line of Credit") for normal operating purposes. The cash collateral
order also grants a security interest in substantially all the assets of the
Company to the pre-petition senior secured lenders and post-petition secured
debtor-in-possession lenders. The current cash collateral order expires
September 30, 2000. If the Company is unable to obtain a new cash collateral
order by October 1, 2000, the Company may not be able to meet its short term
liquidity needs. The Company's pre-petition senior secured creditors have in the
past agreed to such a new cash collateral order during these bankruptcy
proceedings. However, there is no guarantee the pre-petition secured creditors
will agree to a new court collateral order.
16
<PAGE>
Cash and cash equivalents increased by approximately $1.6 million
during the three months ended July 31, 2000, to $3.4 million, excluding $0.8
million in restricted cash. On July 18, 2000, the $738 thousand in proceeds from
the equipment sale at Sedro-Woolley were paid from restricted cash to the
secured pre-petition lenders as ordered by the Court. Approximately $2.2 million
of cash was generated from operations due to the continued reduction in both
accounts receivable and inventory from seasonal adjustments and curtailments of
certain operations. The decrease in payables and accruals of $0.7 million
resulted from the deterioration of the domestic lumber market. 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 October of 1999, in
connection with filing for voluntary reorganization, the Company obtained the
Line of Credit provide for day-to-day liquidity and seasonal log inventory
increases. As of July 31, 2000 there was no borrowings on the Line of Credit and
$2,225,000 in letters of credit outstanding.
For the three months ended July 31, 2000, the Company spent $0.3
million for capital improvements to its facilities. The Company had no material
commitments for capital spending at July 31, 2000.
The Company does not invest in market risk sensitive instruments.
Factors Affecting Forward-Looking Statements
---------------------------------------------
The statements contained in this report that are not statements of
historical fact may include forward-looking statements (as defined in Section
27A of the Securities Act of 1933, as amended) that involve a number of risks
and uncertainties. Moreover, from time to time the Company may issue other
forward-looking statements. The following factors are among the factors that
could cause actual results to differ materially from the forward-looking
statements and should be considered in evaluating any forward-looking
statements: the uncertain outcome of the Company's chapter 11 filing; the
approval of the Company's plan of reorganization; court approval of a new cash
collateral order; adverse operating conditions; fluctuations in quarterly
results; availability of logs; technological change; manufacturing risks;
federal and state regulations; ability to utilize the NOLs; and the additional
factors listed from time to time in the Company's SEC reports, including, but
not limited to, the Company's annual report on Form 10-K for the year ended
April 30, 2000.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On September 27, 1999, TreeSource Industries, Inc. and a majority of
its subsidiaries filed a voluntary petition for reorganization under chapter 11
of the U.S. Bankruptcy Code. The proceeding was filed in the U.S. Bankruptcy
Court for the Western District of Washington in Seattle (the "Bankruptcy
Court"). The jointly administered proceeding is titled: "TreeSource Industries,
Inc., et al.", Case Numbers 99-10932, 99-10937 through 99-10961.
The Company and its Trask River Lumber subsidiary were named defendants
in a claim for wages and penalties filed in U.S. District Court for the District
of Oregon on February 17, 1999 (Allen, Blount, et al., vs. WTD Industries, Inc.,
Trask River Lumber and Bruce L. Engel). Although the case was stayed by the
Company's chapter 11 filing, the plaintiffs filed a class Proof of Claim. The
Court granted limited relief from stay to allow plaintiffs to attempt to certify
their class and, if successful, to liquidate their claim in the District Court.
The Company and its Central Point Lumber subsidiary were named
defendants in a claim for damages filed in Circuit Court of the State of Oregon
for Jackson County on August 27, 1999. The plaintiff alleges retaliatory
wrongful discharge and loss of wages as a result of filing a worker's
compensation claim. (Donald D. Leiter II vs. TreeSource Industries, Inc. and
Central Point Lumber). This action is currently stayed due to the Company's
chapter 11 filing.
The Company was named as a defendant in a claim for damages filed in
U.S. District Court for Eastern District of Louisiana on January 26, 2000. The
plaintiff is an employee of one of the Company's customers who alleges that he
was injured while unloading a boxcar of lumber. (Alvin Robertson vs. TreeSource
Industries, Inc., et al.). The suit, which was being defended by the Company's
insurance carrier, has been settled by the insurance carrier.
Item 3. Defaults Upon Senior Securities
Due to the Company's inability to meet certain of its financial
covenants and its filing for reorganization, the Company is not in compliance
with its obligations under its senior secured debt agreement and ceased making
interest and principal payments on its senior secured debt in March 1999. On
September 27, 1999 the Company filed for voluntary reorganization under chapter
11 of the U.S. Bankruptcy Code in the U.S. District Court of the Western
District of Washington: In re TreeSource Industries, Inc., et al (Case Nos.
99-10932 and 99-10937 through 99-10961). As of August 31, 2000, the Company had
not paid seven consecutive quarterly dividend payments due to holders of its
Series A Preferred Stock, totaling approximately $3,933,000 and is in arrears on
payment of approximately $6,800,000 in interest on its senior secured debt.
Additionally, the Company is in arrears
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on payment of approximately $397,000 in interest on its 8% unsecured senior
notes as of August 31, 2000. During the reorganization period, the Company is
allowed relief from payment of interest charges on all pre-petition debt but is
required to accrue interest expense on claims that are, in the opinion of
management, fully secured. No interest expense has been recorded since September
27, 1999 on the pre-petition senior secured debt or unsecured senior
subordinated debt, because management believes the claims of these debt holders
are under-secured.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The Index to Exhibits is located on page 21.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended July
31, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TreeSource Industries, Inc.
-----------------------------------
(Registrant)
/s/ Jess R. Drake
-----------------------------------
Jess R. Drake
President, Chief Executive Officer
and Director
/s/ Robert W. Lockwood
-----------------------------------
Robert W. Lockwood
Vice President - Finance and Chief
Financial Officer
September 14, 2000
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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)
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.
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