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, 2000 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 12, 2000: $523,539.
Indicate the number of shares outstanding of each of the registrant's
classes of Common Stock, as of July 12, 2000: Common Stock, no par value:
11,162,874.
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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 18
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 18
PART III 19
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 19
Item 11. EXECUTIVE COMPENSATION 21
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT 28
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 29
PART IV 30
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K 30
(a) (1) Financial Statements 30
(a) (2) Financial Statement Schedules 30
(a) (3) Exhibit Index 30
(b) Reports on Form 8-K 36
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PART I
Item 1. BUSINESS
The Company
-----------
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.
Reorganization of the Company
-----------------------------
During the third quarter of fiscal 1998, demand by Asia for wood
products declined dramatically causing lumber prices in North America to
decline. Lumber markets remained weak through the third quarter of fiscal 1999.
The Company incurred significant losses as a result of this protracted period of
weak lumber markets combined with the Company's high level of debt and
substantial preferred stock dividend obligations, and failed to generate
sufficient cash from operations to enable the Company to pay its commitments and
continue operating.
In response to this situation, 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 issues, including the
resolution of disputed claims. Based on the Company's estimates of its unsecured
claims, unsecured creditors would receive up to 90% of their claims under the
Plan. 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.
During fiscal 2000 the equipment at the Philomath and Sedro-Woolley
facilities was auctioned and the land is currently being prepared for sale. The
Company also continues to hold for sale the assets of Burke Lumber Co., Midway
Engineering, and Pacific
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Softwoods. These assets are classified as "Assets Held for Sale" and are carried
at management's estimate of their net realizable value.
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 89% of net sales in fiscal 2000, 87% of net sales in fiscal 1999,
and 89% of net sales in fiscal 1998.
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 7% of net sales in
fiscal 2000, 8% of net sales in fiscal 1999, and 7% of net sales in fiscal 1998.
Distribution and Marketing
--------------------------
The Company markets, distributes, and arranges transportation for its
lumber products through its wholly owned subsidiary and sales agent, TreeSource
Industries, 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, 2000 and 1999 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 2000. 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.
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Timber Supply
-------------
The Company has historically purchased timber and logs in sufficient
quantities to match only the current operating requirements of its mills. During
the past year the Company generally increased the quantity of logs held in
inventory pursuant to its revised procurement 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, 2000, 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
2000 96% 4% -- 279,670 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 and the first quarter of fiscal 2000, three 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 domestic
and export competitors, 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 950 employees at
July 12, 2000. The Company uses bonus programs to motivate its employees. See
Note 10 to Consolidated Financial Statements.
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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 2000, the Company incurred expenditures of
approximately $433,000 for environmental protection measures. Expenditures are
projected to be approximately $900,000 for each of fiscal 2001 and 2002,
including costs to remediate the properties at Sedro-Woolley, Washington, and
Philomath, Oregon 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 and fiscal 1999,
despite reasonable interest rates and strong construction activity in the United
States.
Lumber market conditions improved dramatically in late fiscal 1999 and
through the first quarter of fiscal 2000 as construction activity continued to
be strong. By the second quarter of fiscal 2000 lumber prices began to decline
as mills increased production and by the third quarter of fiscal 2000 lumber
prices had returned to the low levels experienced in fiscal 1998. The general
seasonal spring lumber market upturn did not occur during the fourth quarter of
fiscal 2000 as lumber supply remained greater than lumber demand.
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 2000, demand for pulp and paper products improved as
compared to fiscal 1999 levels, but the relative balance of chip production to
chip consumption caused prices to be essentially flat. 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, fiber
recovery, 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
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<PAGE>
fluctuations in log prices and gives them an advantage over the Company, which
relies on the open log market to supply the bulk of its raw materials
requirements.
The Company's competition also 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. Current discussions between the U.S. and
Canada indicate a general dissatisfaction with the current agreement that is
due to expire in 2001. The lumber industry could be negatively impacted by
either the termination or alteration of the current agreement.
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
<TABLE>
<CAPTION>
MANUFACTURING FACILITIES(1) Thousand Board Feet
---------------------------
Fiscal Est. Annual
2000 Production
Production Capacity(2)
---------- -----------
<S> <C> <C>
Softwood Lumber
---------------
Burke Lumber Co., West Burke, Vermont(3)(4) 24,000 50,000
Central Point Lumber Co., Central Point, Oregon 64,000 120,000
Glide Lumber Products Co., Glide, Oregon 150,000 135,000
Morton Forest Products Co., Morton, Washington 88,000 93,000
North Powder Lumber Co., North Powder, Oregon 52,000 100,000
Pacific Softwoods Co., Philomath, Oregon(5)(6) --- ---
Philomath Forest Products Co., Philomath, Oregon(5)(7) --- ---
Sedro-Woolley Lumber Co., Sedro-Woolley, Washington(5)(7)(8) --- ---
Spanaway Lumber Co., Spanaway, Washington(9) 91,000 110,000
Trask River Lumber Co., Tillamook, Oregon(9) 66,000 137,000
Tumwater Lumber Co., Tumwater, Washington(9) 93,000 107,000
Hardwood Lumber
---------------
Pacific Hardwoods-South Bend Co., South Bend, Washington(9) 18,000 24,000
Fingerjointed Lumber
--------------------
Midway Engineered Wood Products, Inc., Corvallis, Oregon(5)(8)(9) --- ---
</TABLE>
----------
(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 operated during fiscal 2000 and has subsequently ceased operating
and is for sale.
(5) This facility is not operating and is for sale.
(6) This facility is currently operating as a custom drying operation and is
for sale.
(7) The equipment at these facilities has been auctioned and the land is being
prepared for sale.
(8) These subsidiaries lease a substantial portion of their equipment pursuant
to operating leases.
(9) These subsidiaries lease the real property on which the mill is located
pursuant to ground leases.
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During fiscal 2000 the equipment at the Philomath and Sedro-Woolley
facilities was auctioned and the land is currently being prepared for sale. The
Company also continues to hold for sale the assets of Burke Lumber Co., Midway
Engineering, and Pacific Softwoods. These assets are classified as "Assets Held
for Sale" and are carried at management's estimate of their net realizable
value.
Item 3. 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 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: "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 box car 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 company.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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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.OB. 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, 2000 was 564. 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, 2000:
Fiscal Year Ended
April 30, 2000 Low High
----------------- ------- -------
First Quarter $0.3125 $0.4375
Second Quarter $0.0250 $0.3438
Third Quarter $0.0156 $0.0781
Fourth Quarter $0.0625 $0.0781
Fiscal Year Ended
April 30, 1999 Low High
----------------- ------- -------
First Quarter* $0.7500 $1.5630
Second Quarter* $0.5000 $1.0000
Third Quarter $0.3125 $1.0940
Fourth Quarter $0.3125 $0.7187
* Prior to January 7, 1999, prices are as reported on Nasdaq.
The high and low bid quotations shown are those quoted on the OTC
Bulletin Board, 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
1 and 9 to Consolidated Financial Statements.
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Item 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
TREESOURCE INDUSTRIES, INC. AND SUBSIDIARIES
FIVE-YEAR SELECTED FINANCIAL DATA
(In Thousands, Except Per Share Amounts and Ratios)
YEAR ENDED APRIL 30,
-------------------------------------------------------------
2000 1999 1998 1997 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
NET SALES $252,594 $195,390 $242,051 $284,086 $191,964
COST OF SALES 235,800 184,015 231,303 255,068 186,514
--------- --------- --------- --------- ---------
GROSS PROFIT 16,794 11,375 10,748 29,018 5,450
GENERAL, SELLING AND ADMINISTRATIVE EXPENSES 10,888 10,738 11,290 12,529 9,685
IMPAIRMENT AND REORGANIZATION CHARGES 3,028 6,310 4,168 - (409)
--------- --------- --------- --------- ---------
OPERATING INCOME (LOSS) 2,878 (5,673) (4,710) 16,489 (3,826)
INTEREST EXPENSE (2,049) (4,732) (4,682) (5,029) (5,318)
OTHER INCOME (EXPENSE) 283 63 (394) 630 646
--------- --------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES 1,112 (10,342) (9,786) 12,090 (8,498)
PROVISION FOR INCOME TAXES (BENEFIT) 100 (96) 2,364 3,120 (2,454)
--------- --------- --------- --------- ---------
NET INCOME (LOSS) 1,012 (10,246) (12,150) 8,970 (6,044)
PREFERRED DIVIDENDS --- 1,671 2,290 2,228 2,364
--------- --------- --------- --------- ---------
NET INCOME (LOSS) APPLICABLE TO $1,012 ($11,917) ($14,440) $6,742 ($8,408)
COMMON SHAREHOLDERS ========= ========= ========= ========= =========
NET INCOME (LOSS) PER COMMON SHARE, BASIC
- net income (loss) $0.09 ($1.07) ($1.30) $0.61 ($0.76)
Average shares outstanding 11,163 11,161 11,130 11,078 11,077
NET INCOME (LOSS) PER COMMON SHARE, DILUTED
- net income (loss) $0.09 ($1.07) ($1.30) $0.59 ($0.76)
Average shares outstanding 11,163 11,161 11,130 11,385 11,077
CASH DIVIDENDS PER COMMON SHARE -- -- -- -- --
PERIOD END BALANCES
Working capital $27,975 ($24,340) $15,158 $29,475 $25,052
Total assets $57,363 $54,987 $65,311 $86,486 $77,396
Long-term debt, excluding current maturities $183 $324 $36,868 $46,086 $50,310
Stockholders' equity ($6,804) ($7,816) $4,093 $18,434 $11,686
SELECTED FINANCIAL RATIOS
Net income (loss) to average:
Total assets 1.80 % (17.0) % (16.0) % 10.9 % (7.3) %
Stockholders' equity (13.8) % 550.4 % (107.9) % 59.6 % (38.1) %
Average stockholders' equity to average
total assets (13.0) % (3.1) % (14.8) % 18.4 % 19.1 %
</TABLE>
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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 for fiscal 2000 began on a positive note with
several months of successive price increases. Prices peaked in July then
softened during the rest of fiscal 2000. The unit price for the benchmark 2x4
standard and better increased from $324 per unit for fiscal 1999 to an average
of $385 per unit for fiscal 2000, a 19% increase. During the same period, the
unit cost of the #2 fir sawlog - a benchmark for the Company's raw materials
costs - increased from an average of $563 to $634 per unit, a 13% increase. With
lumber prices increasing more than log prices for fiscal 2000, margins improved
and the Company's profits increased. Winter weather conditions throughout the
Pacific Northwest were relatively mild allowing for fewer weather related
logging disruptions and more consistent availability of logs.
Reorganization of the Company
-----------------------------
During the third quarter of fiscal 1998, demand by Asia for wood
products declined dramatically causing lumber prices in North America to
decline. Lumber markets remained weak through the third quarter of fiscal 1999.
The Company incurred significant losses as a result of this protracted period of
weak lumber markets, combined with the Company's high level of debt and
substantial preferred stock dividend obligations, and failed to generate
sufficient cash from operations to enable the Company to pay its commitments and
continue operating.
In response to this situation, 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
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<PAGE>
depend on a number of issues, including the resolution of disputed claims. Based
on the Company's estimates of its unsecured claims, unsecured creditors would
receive up to 90% of their claims under the Plan. 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 costs associated with the reorganization totaled $2,805,000 for
fiscal 2000. Interest expense for the year was approximately $2,668,000 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 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 Note 6 to Consolidated Financial
Statements). 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.
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:
<TABLE>
<CAPTION>
INCOME AND EXPENSE ITEMS AS PERCENTAGE
A PERCENT OF NET SALES INCREASE (DECREASE)
--------------------------------------------- ----------------------------
2000 1999
Year Ended April 30, vs vs
1999 1998
--------------------------------------------- ------------- -------------
2000 1999 1998
------------ ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Net sales 100.0 % 100.0 % 100.0 % 29.3% (19.3)%
Cost of sales 93.4 94.2 95.6 28.1 (20.4)
---------- ---------- ----------
Gross profit 6.6 5.8 4.4 47.6 5.8
Selling, general and administrative expense 4.3 5.5 4.7 1.4 (4.9)
Impairment loss 1.2 3.2 1.7 (52.0) NM
---------- ---------- ----------
Operating income (loss) 1.1 (2.9) (1.9) NM (20.4)
Interest expense (0.8) (2.4) (1.9) (56.7) 1.1
Miscellaneous 0.1 0.0 (0.2) 349.2 NM
--------- ---------- ----------
Income (loss) before income taxes 0.4 (5.3) (4.0) NM (5.7)
Provision for income taxes (benefit) 0.0 (0.0) 1.0 NM NM
Net income (loss) 0.4% (5.2)% (5.0)% NM 15.7
========= ========== ==========
</TABLE>
NM - Not Meaningful
Note - percentages may not add due to rounding.
Comparison of 2000 to 1999
--------------------------
Net sales for the year ended April 30, 2000 increased $57.2 million
(29%) from the year ended April 30, 1999. This increase was principally caused
by a 15% increase in lumber sales volume and an 11% increase in the net sales
average. The increase in lumber shipments in fiscal 2000 as compared to fiscal
1999 reflects the Company's strategy to increase asset utilization by increasing
the number of shifts operated at three facilities.
-12-
<PAGE>
Gross profit for the year ended April 30, 2000 was 6.6% of net sales,
compared to 5.8% of net sales for the year ended April 30, 1999. Lumber sales
average and volume increased by 11% and 15%, respectively, from the year ended
April 30, 1999, while the Company's average log costs increased by 10%. Unit
manufacturing costs in fiscal 2000 decreased by 3% from costs in fiscal 1999,
primarily due to an increase in the number of shifts operated at select
facilities and an increase in productivity at most facilities.
Selling, general and administrative expenses in the year ended April
30, 2000, excluding reorganization and impairment charges, increased by $0.2
million (1.4%) as compared to the year ended April 30, 1999. Impairment charges
for the year ended April 30, 2000 were $0.2 million as compared to $6.3 million
for fiscal 1999. Reorganization charges related to the Company's Chapter 11
filing were $2.8 million in fiscal 2000 and $0 occurred in fiscal 1999.
During fiscal 2000 the equipment at the Philomath and Sedro-Woolley
facilities was auctioned. Due to the results of the auction, the impairment
reserve was adjusted to reflect the Company's estimate of the net realizable
value of the remaining assets held for sale. Three facilities are currently
being held for sale: Burke Lumber Co., Midway Engineering, Pacific Softwoods,
along with the parcels of land associated with Philomath Forest Products, and
Sedro-Woolley Lumber Co. See Note 3 to Consolidated Financial Statements.
As of April 30, 2000, the Company had available approximately $40
million and $28 million, respectively, 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 the twelve months ended
April 30 for both 1999 and 2000. As of April 30, 2000 the Company has a deferred
tax asset of $0.8 million. The Company periodically reviews the above factors
and may change the amount of valuation allowance as facts and circumstances
dictate.
Comparison of 1999 to 1998
--------------------------
Net sales for the year ended April 30, 1999 decreased $46.6 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 5.8% 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 such 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.
-13-
<PAGE>
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. As of
the end of fiscal 1999, five facilities were held for sale: Burke Lumber Co.,
Midway Engineering, Pacific Softwoods, along with the land associated with
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 8 to Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
At April 30, 2000, the Company had net working capital of $28.0 million
as compared to a net working capital deficit of $24.3 million, an increase of
$52.3 million of which $50.0 million is due to the exclusion of Liabilities
Subject to Compromise from current liabilities. See Note 1 and 6 to Consolidated
Financial Statements. Other improvements in working capital resulted primarily
from increases in inventory, accounts receivable, and cash. Cash increased $1.4
million during the year to $3.5 million due primarily to the sale of assets. The
Company currently holds in an escrow account $1.6 million in cash, pending Court
approval for its disposition, from the sale of the equipment at Philomath and
Sedro-Woolley.
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 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 either confirm a plan of
reorganization or 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 already agreed to one such new cash
collateral order during these bankruptcy proceedings.
Cash and cash equivalents decreased by approximately $0.3 million
during the year ended April 30, 2000, to $1.9 million, excluding $1.6 million in
restricted cash generated from the sale of certain assets. Approximately $0.8
million of cash was generated by operations, including accounts receivable,
which increased $2.2 million, inventories which increased by $2.1 million, and
pre-paid expenses which increased $1.2 million. Cash generated from operations
of $0.8 million includes $6.2 million in pre-petition, unsecured accounts
payable and accrued interest for which payment was stayed by the Chapter 11
filing. To conserve cash prior to filing for reorganization, the Company has not
paid interest or principal on its
-14-
<PAGE>
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 the Company's Chapter 11 filing the Company obtained a $16
million debtor-in-possession revolving working line of credit to provide for
day-to-day liquidity and seasonal log inventory increases. As of April 30, 2000
there was a $0.4 million loan balance on the Company's line of credit and $2.9
million in letters of credit outstanding.
For the year ended April 30, 2000, the Company spent $1.7 million for
capital improvements to its facilities. The Company had no material commitments
for capital spending at April 30, 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 and 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 elements that
could cause actual results to differ materially from the forward-looking
statements and should be considered in evaluating any forward-looking
statements.
Uncertain Outcome of Company's Chapter 11 Filing
-------------------------------------------------
The Company filed a proposed Plan of reorganization in May 2000 that
was deferred 120 days. If the Company is unable to confirm this Plan or any
other potential plan the ability of the Company to continue operating is
uncertain. Confirmation of any plan depends on the support of creditors and the
Court. If the Company is unable to demonstrate that it is viable, conformation
of a plan of reorganization is unlikely. Viability may be demonstrated by
showing that a Company is worth more as an operating entity than liquidated.
The worth of a Company is based on a number of factors including but
not limited to: past financial performance; value of the asset; projected future
market conditions and operating configuration; projected capital expenditures;
among other items. The uncertain nature of many of the items on which a
Company's worth is based may result in differing opinions regarding a Company's
worth. Such differences can result in the opposition and possible rejection of
any Plan of reorganization proposed by the Company.
Liquidity and Capital Resources
-------------------------------
On October 5, 1999 the Company obtained a $16 million
debtor-in-possession revolving line of credit ("Revolver"). The Revolver is
secured by accounts receivable and inventory. The Revolver was consented to by
the pre-petition senior secured lenders to whom substantially all of the
Company's assets were pledged. Through the cash collateral
-15-
<PAGE>
order issued by the Bankruptcy Court, the pre-petition senior secured lenders
agreed to the Company's request for a revolving line of credit to fund seasonal
inventory and general corporate needs. From time to time the cash collateral
order expires, if the Company failed to negotiate a new cash collateral order,
there can be no assurance that cash provided by operations will be sufficient to
fund the Company's future operating and capital needs. See Note 7 to
Consolidated Financial Statements.
Adverse Operating Conditions; Fluctuations in Quarterly Results
---------------------------------------------------------------
Unusually robust domestic demand for and supply of lumber in an
environment of increasing interest rates 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. In October
1999 the Company revised it's log procurement strategy to generally increase the
quantity of logs held in inventory to reduce the risk of interrupting mill
production during periods of inclement weather and changes in local log market
conditions. 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.
-16-
<PAGE>
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, the annual harvest levels of
commercial timberland owners, 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. Such swings in gross
margin may be increased by generally higher log inventories maintained by the
Company during the winter period pursuant to the Company's revised log
procurement and inventory strategy. 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 five 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
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<PAGE>
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. 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 30.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
-18-
<PAGE>
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company as of July 12,
2000, are:
Name Age Position
---- --- --------
Scott Christie........... 51 Director
Richard W. Detweiler..... 58 Director
Jess R. Drake............ 59 Director, President, and Chief Executive
Officer
Robert W. Lockwood....... 39 Vice President-Finance, Chief Financial
Officer, and Secretary
Kevin Murray ............ 42 Vice President-Sales and Marketing
William H. Wright........ 63 Director
On July 11, 2000 Larry G. Black, who had been a director of the Company
since October 1997, resigned from the Board of Directors.
The Company currently has seven seats on its Board of Directors, with
three 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, 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, and
the resignation of Larry G. Black in July 2000, a Class 2 director. 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 or until such time as a valid successor is appointed. As a result
of the Company's Chapter 11 filing on September 27, 1999, the Company did not
hold an Annual Meeting of Shareholders in fiscal 2000. Directors whose terms on
the Board of Directors would have expired will continue to serve until a valid
successor is appointed. Mr. Christie's term would have expired 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. Mr. Drake's term would also have expired at the 1999
annual meeting of shareholders. The terms of Class 1 Directors, Messrs. Wright
and Detweiler, will expire at the 2001 Annual Meeting of Shareholders.
Subject to certain conditions, 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 holders
of the Series A Preferred Stock have the right to obtain voting control of the
Company's Board of Directors by electing a majority of the Board of Directors
either through replacement of incumbent directors, or by increasing the size of
the Board. As of April 30, 2000 the Company was in arrears on five consecutive
quarterly dividend payments totaling approximately $2,718,000. In addition, the
Company did not pay a sixth consecutive quarterly dividend payment due May 31,
2000.
-19-
<PAGE>
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.
Kevin P. Murray is vice president-sales and marketing of the Company, a
position he has held since April 2000. Mr. Murray has primary responsibility for
managing all aspects of the Company's lumber sales and transportation. Prior to
joining the Company, Mr. Murray was with Western International Forest Products
for nineteen years, where he managed various lumber sales divisions.
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.
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<PAGE>
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,
2000.
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 $100,000 (the "Named
Executive Officers") for each of the last three fiscal years.
<TABLE>
<CAPTION>
Long-Term
Compensation
Awards
Annual Compensation(1) --------------------
Name and Principal -------------------------------- Number of Securities All Other
Position Year Salary($) Bonus($) Underlying Options Compensation ($)
---------------------------------- ---- --------- --------- -------------------- ----------------
<S> <C> <C> <C> <C> <C>
Jess R. Drake(2) 2000 $ 350,004 $ 157,500 -- $ --
President and Chief 1999 $ 166,668 $ -- 543,295 $ 132,300
Executive Officer 1998 $ -- $ -- -- $ --
Robert W. Lockwood 2000 $ 150,000 $ -- -- $ --
Vice President-Finance, Chief 1999 $ 6,250 $ -- 100,000 $ --
Financial Officer, and Secretary 1998 $ -- $ -- -- $ --
David J. Loftus(3) 2000 $ 101,935 $ -- -- $ --
Treasurer 1999 $ 80,000 $ 9,083 -- $ --
1998 $ 80,000 $ 21,960 -- $ --
</TABLE>
(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, 2000, 1999 and 1998,
respectively.
(2) Mr. Drake took office on November 4, 1998; All Other Compensation for
fiscal 1999 includes a $100,000 signing bonus and $32,300 for
consulting services provided prior to November 4, 1998.
(3) Mr. Loftus resigned from the Company May 12, 2000.
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<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table provides information on option grants for the last
fiscal year to the Named Executive Officers:
<TABLE>
<CAPTION>
Potential
Individual Grants Realizable Value at
-------------------------------------------------------- Assumed Annual Rates
# of % of of Stock Price
Securities Total Options Exercise Appreciation for
Underlying Granted to or Base Option Term(1)
Options Employees in Price Expiration -----------------------------
Name Granted Fiscal Year ($/Share) Date 0%($) 5%($) 10%($)
---------------------- ---------- -------------- --------- ---------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Robert W. Lockwood 50,000(2) 83% $.03825 4/20/2010 $ 338 $1,753 $3,923
</TABLE>
(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 $0.03825 per share to approximately
$0.0733 per share and $0.1167 per share, respectively.
(2) Vesting Schedule: 4/20/00 - 33%; 4/20/01 - 67%; 4/20/02 - 100%. Market
value of the Company's Common Stock on the date of grant was $0.045.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
The following table provides information on option exercises for the
last fiscal year by the Named Executive Officers and the value of their
unexercised options as of April 30, 2000:
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Shares Underlying Unexercised In-the-Money Options
Acquired Options at April 30, 2000 (#) at April 30, 2000 ($)(1)
or ------------------------------- -------------------------------
Name Exercised Exercisable Unexercisable Exercisable Unexercisable
------------------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Jess R. Drake -- 271,648 271,647 0 0
Robert W. Lockwood -- 62,500 87,500 0 0
David J. Loftus(2) -- 31,875 6,125 0 0
</TABLE>
(1) Based on the fair market value of the Common Stock at April 30, 2000 of
$.0625 per share.
(2) Mr. Loftus resigned effective May 12, 2000.
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<PAGE>
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 the 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 his 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, options for the purchase of an additional 50,000 shares were granted
on April 20, 2000, and the remaining 50,000 were granted on May 1, 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 his Employment Contract, up to a maximum of $500,000. See
Exhibits 10.13 and 10.14.
Effective September 8,1999 the Company entered into one-year employment
agreements with eleven corporate and mill managers. The terms of the employment
agreements vary as to the base salaries, but all include a provision for payment
upon termination of twelve months of severance pay plus the previous year's
bonus. The estimated cumulative total potential cost to the Company under the
severance provisions is $813,000.
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.
-23-
<PAGE>
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 2000, no outside directors received option
grants.
Executive Bonuses
------------------
In the second quarter of fiscal 2000, quarterly discretionary bonuses
were paid to the Company's salaried management and administrative employees,
pursuant to the Company's profit sharing bonus plan. The bonuses were based upon
quarterly net pretax profits and were generally allocated according to base
salary level. No bonus payments were made to executive officers under the "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. During the first quarter of fiscal 2000, Mr.
Drake received a bonus based upon the terms of Mr. Drake's employment agreement
and upon his attainment of certain goals. Bonuses paid to the Named Executive
Officers for services rendered to the Company during the year ended April 30,
2000 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.
-24-
<PAGE>
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.
-25-
<PAGE>
In August 1998, the Company changed all salaried bonus programs to
incorporate longer-term measurement and pay-out 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 2000, Robert W. Lockwood, the Company's chief financial
officer and secretary, was awarded options to purchase 50,000 shares of the
Company's common stock pursuant to the terms of his employment agreement. No
option grants were made to other executive officers during fiscal 2000.
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.
-26-
<PAGE>
Mr. Drake's employment with the Company commenced November 4, 1998. Mr.
Drake's cash compensation for fiscal 2000 was $507,504, which includes a bonus
of $157,500. 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 1999/2000, are $280,000 and $89,325, 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.
[GRAPHIC OMITTED]
<TABLE>
<CAPTION>
----------------------------------------- ------------- ------------- ------------ ------------- ------------- ------------
April 1995 April 1996 April 1997 April 1998 April 1999 April 2000
----------------------------------------- ------------- ------------- ------------ ------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
S& P 500 Index 100.00 130.21 162.94 229.85 280.01 308.37
----------------------------------------- ------------- ------------- ------------ ------------- ------------- ------------
TreeSource Industries, Inc. 100.00 39.29 103.57 89.29 25.00 2.57
----------------------------------------- ------------- ------------- ------------ ------------- ------------- ------------
S&P Paper & Forest Products Index 100.00 112.48 112.14 142.63 159.05 130.68
----------------------------------------- ------------- ------------- ------------ ------------- ------------- ------------
</TABLE>
-27-
<PAGE>
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table shows the beneficial ownership as of July 12, 2000
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 %
----------------------------------------- ----------------------- ---------
Phillip K. Stegemoeller(1)
110 West 6th Street 1,000,000 9.0%
Aberdeen, WA 98520
Quinault Corporation(3)
P.O. Box C 1,921,300 17.2%
Aberdeen, WA 98570
Amount and Nature of
Name of Directors and Executive Officers Beneficial Ownership (2) %
----------------------------------------- ----------------------- ---------
Scott Christie 86,250 *
Richard W. Detweiler 56,250 *
Jess R. Drake 271,648 2.4%
Robert W. Lockwood 62,500 *
David J. Loftus 1,000 *
William H. Wright 86,250 *
All directors and executive officers
as a group (6 persons) 563,898 4.8%
----------
* Less than 1%
(1) As determined by reference to the beneficial owner's most recent Form 4
filing dated December 27, 1999.
(2) Includes shares reserved for issuance under options exercisable within 60
days of July 6, 2000 as follows: Mr. Christie 86,250; Mr. Detweiler 56,500;
Mr. Drake 271,648; Mr. Lockwood 62,500; and Mr. Wright 86,500.
(3) Larry G. Black, a director of the Company from October 1997 until his
resignation July 11, 2000, is deemed to beneficially own the shares owned
by Quinault by virtue of being president and sole director of Quinault.
-28-
<PAGE>
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During fiscal 2000, five of the Company's subsidiaries purchased logs
worth approximately $8.1 million from Quinault Logging Company. 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 from October 1997 until his resignation on July 11, 2000, is chief
executive officer of Quinault Logging Company and is president and sole director
of Quinault Corporation, beneficial owner of approximately 17.2% of the
Company's Common Stock.
-29-
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Financial Statements Page
----
The following consolidated financial statements of the
Registrant and its subsidiaries are contained in this report:
Report of Independent Certified Public Accountants 38
Consolidated Statements of Operations for the Years
Ended April 30, 2000, 1999 and 1998 39
Consolidated Balance Sheets at April 30, 2000 and 1999 40
Consolidated Statements of Cash Flows for the Years
Ended April 30, 2000, 1999 and 1998 42
Consolidated Statement of Changes in Stockholders'
Equity for the Years Ended April 30, 2000,
1999 and 1998 43
Notes to Consolidated Financial Statements 44
(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.
(a) (3) Exhibit Index Page
----
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)
-30-
<PAGE>
Page
----
4.1 Debtor-in-Possession Credit Agreement dated as of
October 5, 1999 between Registrant and General
Electric Capital Corporation.
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)
-31-
<PAGE>
Page
----
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)
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.* (24)
-32-
<PAGE>
Page
----
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.* (24)
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.* (24)
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.* (24)
-33-
<PAGE>
Page
----
10.14 Non Qualified Stock Option Agreement dated April 20,
1999 between Robert W. Lockwood and Registrant.* (24)
12.2 Computation of Registrant's Net Income (Loss) to
Average Total Assets. 64
12.3 Computation of Registrant's Net Income (Loss) to
Average Stockholders' Equity. 65
12.4 Computation of Registrant's Average Stockholders'
Equity to Average Total Assets. 66
21.1 Subsidiaries of the Registrant (list updated as of
July 12, 1999). 67
23.1 Consent of Independent Certified Public Accountants. 68
27.1 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.
-34-
<PAGE>
(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.
-35-
<PAGE>
(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.
(24) 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, 1999,
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.
-36-
<PAGE>
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 21, 2000
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 21, 2000.
/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/ Scott Christie
----------------------------------
Scott Christie, Director
/s/ Richard W. Detweiler
----------------------------------
Richard W. Detweiler, Director
/s/ William H. Wright
----------------------------------
William H. Wright, Director
-37-
<PAGE>
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,
2000 and 1999, 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, 2000. 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, 2000 and 1999, and the results
of their operations and their cash flows for each of the years in the three-year
period ended April 30, 2000, in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. As discussed in Note 1 to
the consolidated financial statements, on September 27, 1999, the Company filed
a petition for relief under Chapter 11 of the U.S. Bankruptcy Code and has since
operated as a debtor-in-possession. There can be no assurance that sufficient
cash will be generated by operations and that the Company will be able to gain
acceptance from its creditors and shareholders of a reorganization plan.
The matters referred to in the preceding paragraph raise substantial
doubt as to the Company's ability to continue as a going concern. The
accompanying financial statements do not include all adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts and
classification of liabilities that be necessary should the Company be unable to
continue in existence.
/s/ Moss Adams LLP
------------------
MOSS ADAMS LLP
Beaverton, Oregon
July 12, 2000
-38-
<PAGE>
<TABLE>
<CAPTION>
TREESOURCE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(in Thousands, Except Per-Share Amounts)
YEAR ENDED APRIL 30,
---------------------------------------------------
2000 1999 1998
-------------- ------------- -------------
<S> <C> <C> <C>
NET SALES $ 252,594 $ 195,390 $ 242,051
COST OF SALES 235,800 184,015 231,303
-------------- ------------- -------------
GROSS PROFIT 16,794 11,375 10,748
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 10,888 10,738 11,290
REORGANIZATION CHARGES 2,805 - -
IMPAIRMENT CHARGES 223 6,310 4,168
-------------- ------------- -------------
OPERATING INCOME (LOSS) 2,878 (5,673) (4,710)
OTHER INCOME (EXPENSE)
Interest expense (2,049) (4,732) (4,682)
Miscellaneous 283 63 (394)
-------------- ------------- -------------
209 (4,669) (5,076)
-------------- ------------- -------------
INCOME (LOSS) BEFORE INCOME TAXES 1,112 (10,342) (9,786)
PROVISIONS FOR INCOME TAXES (BENEFIT) 100 (96) 2,364
-------------- ------------- -------------
NET INCOME (LOSS) 1,012 (10,246) (12,150)
PREFERRED DIVIDENDS - 1,671 2,296
-------------- ------------- -------------
NET INCOME (LOSS) APPLICABLE
TO COMMON STOCKHOLDERS $ 1,012 $ (11,917) $ (14,446)
============== ============= =============
NET INCOME (LOSS) PER COMMON SHARE
- BASIC $0.09 ($1.07) ($1.30)
===== ======= =======
- DILUTED $0.09 ($1.07) ($1.30)
===== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
-39-
<PAGE>
<TABLE>
<CAPTION>
TREESOURCE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS
(in Thousands)
APRIL 30,
-------------------------------------
2000 1999
------------- -------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 1,871 $ 2,131
Restricted cash 1,616 --
Accounts receivable, net 12,462 10,210
Inventories 15,800 13,716
Prepaid expenses 2,535 1,320
Income tax refund receivable 86 70
Deferred tax asset -- 750
Assets held for sale 5,433 7,749
Timber, timberlands and timber-related assets 2,196 2,190
------------- -------------
Total current assets 42,000 38,136
NOTES AND ACCOUNTS RECEIVABLE 5 27
PROPERTY, PLANT AND EQUIPMENT, at cost
Land 1,527 1,527
Buildings and improvements 8,673 8,287
Machinery and equipment 47,448 46,521
------------- -------------
57,648 56,335
Less accumulated depreciation 44,385 41,116
------------- -------------
13,263 15,219
Construction in progress 101 324
------------- -------------
13,364 15,543
DEFERRED TAX ASSET 750 --
OTHER ASSETS 1,244 1,281
------------- -------------
$ 57,363 $ 54,987
============= =============
The accompanying notes are an integral part of these consolidated
financial statements.
-40-
<PAGE>
TREESOURCE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
LIABILITIES AND STOCKHOLDERS' EQUITY
(in Thousands, Except Share Information)
April 30,
---------------------------------
2000 1999
------------ -------------
CURRENT LIABILITIES
Accounts payable $ 5,476 $ 10,830
Accrued expenses 7,902 7,744
Timber contracts payable 147 428
Current borrowings 499 43,474
------------ -------------
Total current liabilities 14,025 62,476
LONG-TERM DEBT, less current maturities 183 327
LIABILITIES SUBJECT TO COMPROMISE 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 (56,601) (57,613)
------------ -------------
(6,804) (7,816)
------------ -------------
$ 57,363 $ 54,987
============ =============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
-41-
<PAGE>
<TABLE>
<CAPTION>
TREESOURCE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(in Thousands)
YEAR ENDED APRIL 30,
------------------------------------------------
2000 1999 1998
-------------- -------------- --------------
<S> <C> <C> <C>
CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES:
Net income (loss) $ 1,012 $ (10,246) $ (12,150)
Adjustments to reconcile net income (loss) to
cash provided by operating activities:
Depreciation, depletion and amortization 4,346 4,176 5,571
Deferred income tax -- -- 913
Gain on sale of assets (7) -- --
Impairment loss 223 6,310 4,168
Accounts receivable (2,252) 254 6,366
Inventories (2,076) (205) 3,755
Prepaid expenses (1,215) (125) 622
Timber, timberlands and timber-related assets - current (287) 2,062 (392)
Payables and accruals 1,045 3,119 (3,645)
Income taxes (16) (70) 1,145
-------------- ----------- --------------
Cash provided by operating activities 773 5,275 6,353
-------------- -------------- --------------
CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES:
Notes and accounts receivables 22 76 21
Net reductions of timber and timberlands -- -- 629
Acquisition of property, plant and equipment (1,685) (2,479) (7,807)
Net book value of disposed idle assets -- 458 176
Proceeds from the sale of fixed assets 1,687 -- --
Other investing activities -- 177 51
-------------- -------------- --------------
Cash provided by (used for) investing activities 24 (1,768) (6,930)
-------------- -------------- --------------
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES:
Proceeds from borrowings 598 -- --
Principal payments on long-term debt -- (1,582) (3,190)
Other assets (39) (288) (94)
Dividends paid on Preferred Stock -- (1,672) (2,296)
Issuance of Common Stock -- 9 105
-------------- -------------- -----------
Cash provided by (used for) financing activities 559 (3,533) (5,475)
-------------- -------------- --------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,356 (26) (6,052)
CASH BALANCE AT BEGINNING OF YEAR 2,131 2,157 8,209
-------------- -------------- --------------
CASH BALANCE AT END OF YEAR $ 3,487 $ 2,131 $ 2,157
============== ============== ==============
CASH PAID (REFUNDED) DURING THE YEAR FOR:
Interest $281 $3,268 $4,696
Income taxes $100 ($96) $305
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
-42-
<PAGE>
<TABLE>
<CAPTION>
TREESOURCE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(in Thousands)
SERIES A SERIES B
PREFERRED STOCK PREFERRED STOCK COMMON STOCK RETAINED STOCK-
------------------- ------------------- --------------------- PAID-IN EARNINGS HOLDERS'
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) EQUITY
-------- ---------- -------- ---------- --------- ----------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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)
Net income -- -- -- 1,012 1,012
-------- ---------- -------- ---------- --------- ----------- ---------- ------------ -----------
Balance at April 30, 2000 270 $ 20,688 6 $ 333 11,163 $ 28,761 $ 15 $ (57,613) $ (6,804)
======== ========== ======== ========== ========= =========== ========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
-43-
<PAGE>
TREESOURCE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - CHAPTER 11 PROCEEDINGS
During the third quarter of fiscal 1998, demand by Asia for wood
products declined dramatically causing lumber prices in North America to
decline. Lumber markets remained weak through the third quarter of fiscal 1999.
TreeSource Industries, Inc. and its wholly-owned subsidiaries (the "Company" or
"TreeSource") incurred significant losses as a result of this protracted period
of weak lumber markets, combined with the Company's high level of debt and
substantial preferred stock dividend obligations, and failed to generate
sufficient cash from operations to enable the Company to pay its commitments and
continue operating.
In response to this situation, 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.
As of the petition date, all pending litigation and actions to collect
pre-petition indebtedness are stayed, and other prepetition obligations may not
be enforced against the Company. In addition, TreeSource may assume or reject
executory contracts and lease obligations. In this context, "assumption" means
that the Company agrees to perform its obligations and cure all existing
defaults under the contract or lease and "rejection" means that the Company is
relieved from its obligations to perform further under the contract or lease but
is subject to a claim for damages for the breach thereof. Any damages resulting
from rejection are treated as general unsecured claims in the reorganization.
On April 12, 2000 the Company filed an Amended Joint Plan of
Reorganization (the "Plan") in U.S. Bankruptcy Court (the "Court") that included
reducing the scope of its operations through the elimination of mills which, in
the opinion of management, are not well positioned for future profitability and
restructuring of its prepetition obligations to provide for a restoration of
equity. Management believes these measures will allow the Company to restore
liquidity and meet its future cash flow requirements. The Company's successful
operation is dependent upon several factors which include (i) a supply of raw
materials at prices which allow for reasonable margins to operate profitably,
(ii) the continued ability to utilize the cash collateral authorized by the
Court, and (iii) acceptance by the Company's creditors and shareholders of a
plan of reorganization. The proposed Plan, 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 issues, including the resolution of
-44-
<PAGE>
disputed claims. Based on the Company's estimates of its unsecured claims,
unsecured creditors would receive up to 90% of their claims under the Plan. 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 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 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 either confirm a plan of
reorganization or obtain a new cash collateral order by October 1, 2000, the
Company may not be able to meet its short term liquidity needs.
NOTE 2 - 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. 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, 2000, 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. 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.
-45-
<PAGE>
Cash and cash equivalents - Cash and cash equivalents consist of cash
on hand, deposits in banks, financial instruments with a maturity of three
months or less.
Restricted cash - Restricted cash consists of the net auction proceeds
from the sale of impaired assets during fiscal 2000. These funds are being held
in a non-interest bearing account for payment, subject to court approval, of
certain secured claims.
Accounts receivable - Trade accounts receivable are shown net of
allowances for doubtful accounts and discounts of $160,000 and $142,000 at April
30, 2000 and 1999, 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,
---------------------------------------------
2000 1999
------------------ ------------------
Logs $ 6,571 $ 6,649
Lumber 8,109 6,001
Supplies and Other 1,120 1,066
------------------ ------------------
$ 15,800 $ 13,716
================== ==================
At April 30, 2000 and 1999, $555,000 and $553,000, respectively, of log
inventory was valued at market, which represented a $59,000 reduction from cost.
At April 30, 2000, $7,532,000 of lumber inventory was valued at market, which
represented a $1,111,000 reduction from cost. At April 30, 1999, $4,893,000 of
lumber inventory was valued at market, which represented a $429,000 reduction
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.
-46-
<PAGE>
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 12 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 8
to Consolidated Financial Statements.
Accrued expenses - The following is a summary of the components of
accrued expenses (in thousands):
APRIL 30,
----------------------------------
2000 1999
--------------- -------------
Payroll and related items $ 3,100 $ 3,995
Freight payable 1,018 1,366
Accrued Chapter 11 professional fees 877 --
Other 2,907 2,383
--------------- -------------
$ 7,902 $ 7,744
=============== =============
Since the Court reviews and approves the Chapter 11 professional fees
prior to payment, the related accrued amount is management's estimate of
professional services performed but not billed through April 30, 2000. Because
the Court has the ability to adjust these fees, the actual amounts owed may
differ from management's estimates.
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 $1.6
million and $2.0 million is included in the accompanying fiscal 2000 and 1999
financial statements, respectively. Payments based on actual fiscal 2000 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.
-47-
<PAGE>
NOTE 3 - IMPAIRMENT CHARGES
The Company classified certain property, plant and equipment related to
three facilities as Assets Held for Sale during fiscal 1999. A total of three
facilities and land parcels related to two former 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 fiscal 1998 and three facilities in fiscal 1999. The
resulting adjustments of approximately $6.1 million in fiscal 1999 and $4.2
million in fiscal 1998 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 net realizable 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 appraisal values. The Company initially elected to continue
operating one of these facilities but in July 2000 curtailed production
indefinitely due to the deterioration of the lumber market. The other four
facilities did not operate during fiscal 2000 and are for sale.
During fiscal 2000, substantially all of the machinery and equipment
at two of these locations were sold at auction. The loss on the sale of these
impaired assets of $0.2 million was recorded as additional impairment loss in
fiscal 2000. The proceeds from these sales are held by the Company as restricted
cash. See Note 2 to Consolidated Financial Statements. At April 30, 2000, the
impaired assets have a remaining carrying amount of $5.4 million. Together,
these five facilities recorded net sales of $7.3 million, $12.0 million, and
$74.6 million, and contributed net operating losses of $1.4 million, $5.5
million, and $4.0 million for the years ended April 30, 2000, 1999, and 1998,
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, 2000.
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.
-48-
<PAGE>
The calculations of net income (loss) per share for the years ended
April 30, 2000, 1999 and 1998 are summarized below (in thousands, except
per-share data):
<TABLE>
<CAPTION>
Year Ended April 30,
-------------------------------------------------
2000 1999 1998
-------------- -------------- --------------
<S> <C> <C> <C>
Net income (loss) $ 1,012 $ (10,246) $ (12,150)
Preferred dividends -- 1,671 2,296
-------------- -------------- --------------
Net income (loss) applicable to common shareholders $ 1,012 $ (11,917) $ (14,446)
============== ============== ==============
Weighted average shares outstanding
- Basic 11,163 11,161 11,130
Additional shares assumed from:
- Conversion of Series B Preferred Stock -- -- --
- Exercise of stock options -- -- --
-------------- -------------- --------------
Average number of shares and equivalents outstanding
- Diluted 11,163 11,161 11,130
============== ============== ==============
Net income (loss) per common share
- Basic $ 0.09 $ (1.07) $ (1.30)
============== ============== ==============
- Diluted $ 0.09 $ (1.07) $ (1.30)
============== ============== ==============
</TABLE>
NOTE 5 - TIMBER, TIMBERLANDS AND TIMBER-RELATED ASSETS
The following summarizes the components of timber, timberlands and
timber-related assets (in thousands):
APRIL 30,
----------------------------
2000 1999
------------ ------------
Timber held under contract $ 984 $ 889
Timber, timberlands, and timber deposits 1,049 1,131
Logging roads (at amortized cost) 163 170
------------ ------------
$ 2,196 $ 2,190
============ ============
Timber held under contract is composed of various public and private
timber contracts representing approximately 2.7 million board feet (MMBF) at
April 30, 2000 and 3.4 MMBF at April 30, 1999. Outstanding obligations relating
to these contracts at April 30, 2000 and 1999, were $147,000 and $428,000,
respectively.
-49-
<PAGE>
NOTE 6 - 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 $2.7 million was not
accrued during the year ended April 30, 2000 as management believes these debts
are under-secured. Amounts included under the caption "Current borrowings" at
April 30, 2000 represent draws on a line of credit that was established to
provide additional liquidity during the reorganization process. See Note 7 to
the Consolidated Financial Statements. These 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 April 30, 2000 are the following (in
thousands):
April 30,
2000
----------------
Trade, interest and other miscellaneous
claims to unsecured creditors $ 6,242
Secured notes 261
Unsecured notes 1,007
Senior secured debt 42,449
----------------
$ 49,959
================
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.
-50-
<PAGE>
NOTE 7 - BORROWINGS
<TABLE>
<CAPTION>
Long term debt consists of the following (in thousands):
Year Ended April 30,
------------------------------
2000 1999
------------ ------------
<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. $ 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 April 30, 2000 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
Obligations under capital lease, effective interest rate of 4.9% 243 --
------------ ------------
43,960 43,801
Less current maturities (43,777) (43,474)
------------ ------------
$ 183 $ 327
============ ============
</TABLE>
As discussed in Note 6, the Company is in default on substantially all
of its pre-petition debt agreements as a result of the Company's 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, have been reclassified to "Liabilities Subject to
Compromise."
The Company obtained a $16 million debtor-in-possession working capital
secured revolving line of credit (the "Line of Credit") in October which will
mature 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 is 9.0%. The Line of Credit allows the Company to borrow from
time to time up to $14 million (the remaining $2 million must remain in reserve
pursuant to the terms of the Line of Credit), including up to $5 million of
letters of credit. As of April 30, 2000 there were $438,000 in borrowings on the
Line of Credit and $2,935,000 in letters of credit outstanding.
-51-
<PAGE>
NOTE 8 - PROVISION FOR INCOME TAXES
<TABLE>
<CAPTION>
The federal and state income tax provision consists of the following
(in thousands):
Year Ended April 30,
-----------------------------------------------------------
2000 1999 1998
--------------- --------------- ----------------
<S> <C> <C> <C>
Income (loss) before income taxes $ 1,012 $ (10,342) $ (9,786)
=============== =============== ================
Provision for income taxes (benefit):
Federal $ 100 $ (96) $ 2,115
State 0 0 249
--------------- --------------- ----------------
$ 100 $ (96) $ 2,364
=============== =============== ================
Current $ 100 $ (96) $ 1,451
Deferred 0 0 913
--------------- --------------- ----------------
$ 100 $ (96) $ 2,364
=============== =============== ================
</TABLE>
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):
<TABLE>
<CAPTION>
Year Ended April 30,
--------------------------------------------------------------------------
2000 1999 1998
---------------------- ---------------------- ----------------------
Amount % Amount % Amount %
--------- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Federal statutory income tax
Provision (benefit) $344 34% $(3,516) (34%) $(3,327) (34%)
State statutory income tax provision
(benefit) 40 4 (414) (4) (391) (4)
Change in valuation allowance for
Deferred tax assets (4,385) (433) 3,492 34 7,282 74
Adjustment to available net operating
loss carry-forward 4,101 405
Carry-back (establishment) of net
Operating losses (NOL) in years with
Rates different than statutory rates -- -- -- -- (1,200) (12)
Other -- -- 342 3 -- --
--------- -------- ---------- -------- ---------- --------
Actual income tax provision (benefit) $ 100 10% $ (96) 1% $ 2,364 24%
========= ======== ========== ======== ========== ========
</TABLE>
-52-
<PAGE>
At April 30, 2000 and 1999, deferred tax assets and liabilities were
composed of the following (in thousands):
Year Ended April 30,
-------------------------
2000 1999
---------- ----------
Deferred tax assets:
Vacation accruals $ 241 $ 183
Insurance accruals 672 670
Professional fee amortization and accruals 575 188
Depreciation and capitalization differences
between financial and tax accounting 64 722
Tax benefit of NOL carryforward and
tax credits carryforward 16,602 12,010
Bad debts, discounts and other 255 251
---------- ----------
Net deferred tax assets 18,409 14,024
Valuation allowance (17,659) (13,274)
---------- ----------
Net deferred tax asset reported $ 750 $ 750
========== ==========
Because of the difficult operating environment and the likely delayed
or decreased use of the Company's deferred tax assets to offset future income,
management has elected to record no income tax expense during the current year
related to the income generated, but instead adjusted the reserve on the
deferred tax assets. This, coupled with an adjustment to the usable net
operating loss, resulted in an increase to the valuation reserve of
approximately $4.3 million for the year ended April 30, 2000. The current year
income tax expense of $100,000 is solely attributable to federal income taxes
paid for income that cannot be offset with usable net operating losses in their
entirety. Management periodically reviews the above factors and may change the
amount of valuation allowance as facts and circumstances change.
As of April 30, 2000, the Company has approximately $40 million of
federal NOL and approximately $28 million of state NOL available to offset
future taxable income. These carry-forwards expire in 2007 and 2012.
NOTE 9 - STOCKHOLDERS' EQUITY
Stockholders' equity at April 30, 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 12%
-53-
<PAGE>
coupon. 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. The Company is currently in arrears on six consecutive quarterly
dividend payments as of May 31, 2000 totaling $3,359,000.
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 for both years ended April 30, 2000 and April 30,
1999. 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 11,375,567 shares if
the remaining outstanding Series B Preferred Stock is 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.
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, 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,
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<PAGE>
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.
NOTE 10 - 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, 2000, 1999 and 1998 related only to employees
and directors.
Stock Options
---------------------------
Weighted
Average
Number of Exercise
Shares Price
------------- --------
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 granted 60,000 0.09
Options exercised 0 0.00
Options canceled (131,000) 1.61
-------------
Shares under option at April 30, 2000 1,443,320 $ 1.26
=============
Options exercisable at April 30, 2000 1,032,170 $ 1.47
=============
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<PAGE>
Exercise prices for options outstanding as of April 30, 2000 ranged
from $0.03825 to $3.00. The weighted average remaining contractual life of those
options is 5.7 years and the weighted average exercise price is $1.26
<TABLE>
<CAPTION>
Employee Options Outstanding Options Exercisable
--------------------------------------------------------------------------- ----------------------------------
Weighted Avg.
Number Remaining Weighted Avg. Number Weighted Avg.
Range of Outstanding Contractual Exercise Exercisable Exercise
Exercise Price at 4/30/00 Life Price at 4/30/00 Price
-------------- -------------- ----------------- --------------- -------------- ----------------
<S> <C> <C> <C> <C> <C>
$ 0.95625 15,400 2.7 $ 0.95625 15,400 $ 0.95625
1.50000 340,350 1.8 1.50000 340,350 1.50000
1.51500 218,625 6.0 1.51500 174,122 1.51500
3.00000 165,650 2.3 3.00000 165,650 3.00000
0.79690 543,295 8.5 0.79690 271,648 0.79690
0.31880 100,000 9.0 0.31880 50,000 0.31880
0.37190 10,000 9.1 0.37190 2,500 0.37190
0.03825 50,000 10.0 0.03825 12,500 0.03825
$0.31880-$3.00 1,443,320 5.7 $ 1.26367 1,032,170 $ 1.47245
============== ==============
</TABLE>
Options for 1,046,375 shares remain available for grant under the 1996
Stock Option Plan. 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 granted stock options for the purchase of 543,295 and
200,000 shares of the Company's Common Stock to Jess R. Drake and Robert W.
Lockwood, respectively, pursuant to the terms of their employment contracts. 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.
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 has two additional bonus programs. The first covers
most salaried employees except for senior management, and is a quarterly bonus
program based on pre-tax profits. The second is an annual bonus program covering
senior executives and
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<PAGE>
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 during fiscal 2000 pursuant
to the Company's bonus programs (in thousands):
Year Ended April 30,
--------------------------------
2000 1999 1998
-------- -------- --------
Hourly employee bonus $ 5,300 $ 4,100 $ 5,200
Salaried employee bonus 600 900 1,200
-------- -------- --------
$ 5,900 $ 5,000 $ 6,400
======== ======== ========
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 entitled to matching contributions. During the years ended April
30, 2000, 1999 and 1998, the Company incurred expenses for matching
contributions and plan administration of $291,000; $261,000; and $289,000
respectively. Company contributions to this plan are funded on a current basis.
NOTE 11 - RELATED PARTY TRANSACTIONS
During fiscal 2000, five of the Company's subsidiaries purchased logs
worth approximately $8.1 million from Quinault Logging Company. During fiscal
1999 three of the Company's subsidiaries purchased logs worth approximately $3.9
million from Quinault Logging Company. Mr. Larry G. Black, who was a director of
the Company from October 1997 until his resignation effective July 7, 2000, is
chief executive officer of Quinault Logging Company and is president and sole
director of Quinault Corporation, and the beneficial owner of approximately
17.2% of the Company's Common Stock.
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<PAGE>
NOTE 12 - COMMITMENTS AND CONTINGENCIES
(a) Timber commitments - At April 30, 2000, the Company had contracts
to purchase approximately 25.4 MMBF of timber from the Oregon State Department
of Forestry and others for an estimated stumpage cost of $6,868,000. Deposits
were made on these contracts and additional payments are required as timber is
removed. The expiration dates of the contracts are as follows:
Year Ending Stumpage
April 30, MMBF Cost
----------- -------- -----------
2001 3.9 $ 959,000
2002 9.0 1,883,000
2003 0.0 0
2004 5.0 1,608,000
2005 7.5 2,418,000
-------- -----------
25.4 $6,868,000
======== ===========
(b) Leases - At April 30, 2000, the Company had future minimum rental
commitments for operating leases as follows: 2001 - $940,000; 2002 - $386,000;
2003 - $286,000; 2004 - $124,000; 2005 - $34,000; thereafter - $5,000. In
bankruptcy, the Company may elect to reject certain leases causing a reduction
in the future minimum rental commitments for operating leases.
Total rental expense for all leases was $1,447,000, $1,613,000 and
$1,348,000 for the years ended April 30, 2000, 1999 and 1998, respectively.
Actual rental expense includes short-term rentals and leases shorter than one
year, which are not included in the commitments.
(c) Litigation - On September 27, 1999, the Company filed for voluntary
reorganization under Chapter 11 of the Code. Due to the Company's Chapter 11
filing, all action against the Company is stayed. 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, excluding the Company's Chapter 11 filing, will not have a material
impact upon the Company's consolidated financial condition or results of
operations. A proposed Plan of Reorganization was deferred for consideration for
120 days at the Company's request due to adverse market conditions. Confirmation
by the Court of the Plan or any other potential plan is uncertain.
(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
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<PAGE>
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.
NOTE 13 - UNAUDITED QUARTERLY FINANCIAL INFORMATION
The following quarterly information for the years ended April 30, 2000
and 1999 is unaudited, but includes all adjustments (including the impairment
charges recognized in the fourth quarter of 1999) that management considers
necessary for a fair presentation of such information (in thousands, except
per-share amounts):
<TABLE>
<CAPTION>
Year Ended April 30, 2000
-------------------------------------------------------------------------------------
Quarter
-------------------------------------------------------------------------------------
First Second Third Fourth Total
------------- ------------- ------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Net sales $ 67,633 $ 59,534 $ 60,090 $ 65,338 $ 252,594
Gross profit (loss) $ 10,616 $ 3,560 $ 2,002 $ 617 $ 16,794
Net income (loss) $ 6,346 $ (725) $ (1,539) $ (3,070) $ 1,012
Net income (loss) per
diluted common share $ 0.57 $ (0.07) $ (0.14) $ (0.27) $ 0.09
Year Ended April 30, 1999
-------------------------------------------------------------------------------------
Quarter
-------------------------------------------------------------------------------------
First Second Third Fourth Total
------------- ------------- ------------- -------------- ---------------
Net sales $ 47,661 $ 51,240 $ 44,257 $ 52,232 $ 195,390
Gross profit (loss) $ 3,486 $ 3,381 $ 984 $ 3,524 $ 11,375
Net income (loss) $ (619) $ (324) $ (2,682) $ (6,621) $ (10,246)
Net income (loss) per
diluted common share $ (0.11) $ (0.08) $ (0.29) $ (0.59) $ (1.07)
</TABLE>
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<PAGE>
NOTE 14 - 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,
--------------------------------------
2000 1999 1998
-------- -------- --------
Balance at beginning of year $ 55 $ 39 $ 49
Charged to costs and expenses 82 35 5
Deductions (1) (77) (19) (15)
-------- -------- --------
Balance at end of year $ 60 $ 55 $ 39
======== ======== ========
Allowance for discounts -
deducted from accounts receivable in the balance sheet
Year Ended April 30,
--------------------------------------
2000 1999 1998
-------- -------- --------
Balance at beginning of year $ 87 $ 89 $ 146
Charged to costs and expenses 2,344 1,814 2,296
Deductions(2) (2,331) (1,816) (2,353)
-------- -------- --------
Balance at end of year $ 100 $ 87 $ 89
======== ======== ========
(1) Uncollected receivables written off, net of recoveries.
(2) Discounts taken by customers.
NOTE 15 - REORGANIZATION CHARGES
As a result of the Chapter 11 proceedings, the company has incurred
legal accounting and other professional fees. The following table summarizes the
amounts charged to income through April 30, 2000.
April 30,
2000
-----------
Legal $ 1,806
Consulting 458
Accounting 291
Other 250
-----------
$ 2,805
===========
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CORPORATE INFORMATION
---------------------
Annual Meeting
To be announced.
Investor Contact
TreeSource Industries, Inc.
Investor Relations Department
P.O. Box 5805
Portland, Oregon 97228-5805
10260 S.W. Greenburg Road, Suite 900
Portland, Oregon 97223-5519
Phone: (503) 246-3440
Fax: (503) 205-7605
Web: http://www.treesource.com
Common Stock
TreeSource Industries, Inc.
Common stock is traded on the Bulletin Board (Symbol TRES)
Transfer Agent for Common Stock
ChaseMellon Shareholder Services, L.L.C.
Overpeck Centre
85 Challenger Road
Ridgefield Park, New Jersey 07660
Phone: (800) 522-6645
Fax: (206) 292-3196
Web: http://www.chasemellon.com
Transfer Agent for Series A Preferred Stock and Series B Preferred Stock
TreeSource Industries, Inc.
Stock Transfer Department
P.O. Box 5805
Portland, Oregon 97228-5805
10260 S.W. Greenburg Road, Suite 900
Portland, Oregon 97223-5519
Phone: (503) 246-3440
Fax: (503) 205-7605
Change of address information and questions regarding transfers and conversions
should be directed to the transfer agent.
Trustee for 8% Senior Subordinated Notes due 2005
State Street Bank & Trust Company
Corporate Trust Department
P.O. Box 778
Boston, Massachusetts 02110
Two International Place
Boston, Massachusetts 02110
Phone: (617) 662-1753
Fax: (617) 662-1456
Counsel
Perkins Coie
Portland, Oregon
Auditors
Moss Adams LLP
Beaverton, Oregon
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<PAGE>
BOARD OF DIRECTORS, HEADQUARTERS, AND MILL LOCATIONS
Board of Directors Headquarters
Scott Christie (2) TreeSource Industries, Inc.
General Partner P.O. Box 5805
Christie Capital Management Portland, Oregon 97228-5805
San Francisco, California 10260 S.W. Greenburg Road, Suite 900
Elected 1988 Portland, Oregon 97223-5519
Phone: (503) 246-3440
Richard W. Detweiler (1) Fax: (503) 205-7605
Principal Web: http://www.treesource.com
Carlisle Enterprises
LaJolla, California
Elected 1995 Sales and Marketing
William H. Wright (1)(2) TreeSource, Inc.
President P.O. Box 6316
Heartwood Consulting Service Portland, Oregon 97228-6316
Gresham, Oregon 10260 S.W. Greenburg Road, Suite 900
Elected 1992 Portland, Oregon 97223-5519
Phone: (503) 246-8600
Jess R. Drake (3) Toll free outside Oregon: 1-800-843-5254
President Fax: (503) 245-1483
TreeSource Industries, Inc. Web: http://www.treesource.com
Portland, Oregon
Elected 1998
Timber
(1) Audit Committee Western Timber Co.
(2) Compensation Committee P.O. Box 5805
(3) Executive Committee Portland, Oregon 97228-5805
10260 S.W. Greenburg Road, Suite 900
Portland, Oregon 97223-5519
Phone: (503) 246-3440
Fax: (503) 205-7605
Web: http://www.treesource.com
Operation Locations
Burke Lumber Co.
P.O. Box 210
Route 5
West Burke, Vermont 05871-0210
Phone: (802) 467-3609
Fax: (802) 467-3051
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<PAGE>
Central Point Lumber Co. Pacific Softwoods Co.
P.O. Box 5360 P.O. Box 370
Central Point, Oregon 97502-0054 Philomath, Oregon 97370-0370
594 South Front Street 950 Clemens Mill Road
Central Point, Oregon 97502-2723 Philomath, Oregon 97370
Phone: (541) 664-2646 Phone: (541) 929-2902
Fax: (541) 664-3690 Fax: (541) 929-2916
Glide Lumber Products Co. Philomath Forest Products Co.
P.O. Box 370 P.O. Box 218
Glide, Oregon 97443-0370 Philomath, Oregon 97370-0218
1577 Glide Loop Road 1701 Chapel Road
Glide, Oregon 97443-9711 Philomath, Oregon 97370-9557
Phone: (541) 496-3571
Fax: (541) 496-0373 Sedro-Woolley Lumber Co.
P.O. Box 639
Midway Engineered Wood Products, Inc. Sedro-Woolley, Washington 98284-0639
5700 S.W. Reservoir Avenue 109 Jameson Avenue
Corvallis, Oregon 97333-2936 Sedro-Woolley, Washington 98284-1572
Morton Forest Products Co. Spanaway Lumber Co.
P.O. Box I 19111 38th Avenue East
Morton, Washington 98356-0049 Tacoma, Washington 98446-1189
247 Priest Road Phone: (253) 847-1935
Morton, Washington 98356-9404 Fax: (253) 847-2023
Phone: (360) 496-6666
Fax: (360) 496-6667 Trask River Lumber Co.
5900 Moffett Road
North Powder Lumber Co. Tillamook, Oregon 97141-9621
P.O. Box 169 Phone: (503) 842-4007
North Powder, Oregon 97867-0169 Fax: (503) 842-3178
105 Second Street
North Powder, Oregon 97867 Tumwater Lumber Co.
Phone: (541) 898-2149 P.O. Box 4158
Fax: (541) 898-2817 Tumwater, Washington 98501-0158
8277 Center Street, S.W.
Pacific Hardwoods-South Bend Co. Tumwater, Washington 98501-7227
P.O. Box 185 Phone: (360) 352-1548
South Bend, Washington 98586-0185 Fax: (360) 943-4091
819 Ocean Street
Raymond, Washington 98577-2905
Phone: (360) 942-5525
Fax: (360) 942-5529
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