SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended January 31, 2000.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition from________________ to________________
Commission file number 0-16158
TreeSource Industries, Inc.
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Oregon 93-0832150
- ------------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) No.)
10260 S.W. Greenburg Road, Suite 900, Portland, Oregon 97223
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (503) 246-3440
----------------
Indicate by check mark whether the Registrant (1) has filed reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
The number of shares outstanding of Registrant's Common Stock, no par
value, at March 8, 2000 was 11,162,874.
<PAGE>
TREESOURCE INDUSTRIES, INC.
INDEX
Page
Number
------
PART I. FINANCIAL INFORMATION..............................................3
Item 1. Financial Statements.............................................3
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations...........................................14
PART II. OTHER INFORMATION.................................................19
Item 1. Legal Proceedings...............................................19
Item 3. Defaults Upon Senior Securities.................................19
Item 6. Exhibits and Reports on Form 8-K................................20
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
TREESOURCE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(in Thousands, Except Per-Share Amounts)
(Unaudited)
THREE MONTHS NINE MONTHS
ENDED ENDED
JANUARY 31, JANUARY 31,
------------------------ ------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
NET SALES $ 59,546 $ 44,257 $186,148 $ 143,158
COST OF SALES 58,088 43,273 171,079 135,307
---------- ---------- ---------- ----------
GROSS PROFIT 1,458 984 15,069 7,851
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 2,411 2,560 8,276 7,952
REORGANIZATION CHARGES 942 -- 1,819 --
---------- ---------- ---------- ----------
OPERATING INCOME (LOSS) (1,895) (1,576) 4,974 (101)
OTHER INCOME (EXPENSE)
Interest expense (93) (1,143) (1,926) (3,461)
Miscellaneous 450 (80) 1,135 (180)
---------- ---------- ---------- ----------
357 (1,223) (791) (3,641)
---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES (1,538) (2,799) 4,183 (3,742)
PROVISIONS FOR INCOME TAXES (BENEFIT) -- (117) 100 (117)
---------- ---------- ---------- ----------
NET INCOME (LOSS) (1,538) (2,682) 4,083 (3,625)
PREFERRED DIVIDENDS -- 540 -- 1,688
---------- ---------- ---------- ----------
NET INCOME (LOSS) APPLICABLE
TO COMMON STOCKHOLDERS $ (1,538) $ (3,222) $ 4,083 $ (5,313)
========== ========== ========== ==========
NET INCOME (LOSS) PER COMMON SHARE
- BASIC ($0.14) ($0.29) $0.37 ($0.48)
======= ======= ===== =======
- DILUTED ($0.14) ($0.29) $0.37 ($0.48)
======= ======= ===== =======
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
TREESOURCE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS
(in Thousands)
(Unaudited)
JANUARY 31, APRIL 30,
2000 1999
------------- -------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 2,777 $ 2,131
Restricted cash 1,424 --
Accounts receivable, net 14,015 10,210
Inventories 22,499 13,716
Prepaid expenses 7,173 1,320
Income tax refund receivable 70 70
Deferred tax asset 750 750
Assets held for sale 6,019 7,749
Timber, timberlands and timber-related assets 1,951 2,190
------------- -------------
Total current assets 56,678 38,136
NOTES AND ACCOUNTS RECEIVABLE 5 27
PROPERTY, PLANT AND EQUIPMENT, at cost
Land 1,527 1,527
Buildings and improvements 8,528 8,287
Machinery and equipment 47,994 47,462
------------- -------------
58,049 57,276
Less reserve for impairment 941 941
Less accumulated depreciation 44,044 41,116
------------- -------------
13,064 15,219
Construction in progress 694 324
------------- -------------
13,758 15,543
OTHER ASSETS 1,222 1,281
------------- -------------
$ 71,663 $ 54,987
============= =============
The accompanying notes are an integral part of these consolidated
financial statements.
4
<PAGE>
TREESOURCE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
LIABILITIES AND STOCKHOLDERS' EQUITY
(in Thousands, Except Share Information)
(Unaudited)
JANUARY 31, APRIL 30,
2000 1999
------------- -------------
CURRENT LIABILITIES
Accounts payable $ 10,786 $ 10,830
Accrued expenses 7,401 7,744
Timber contracts payable 222 428
Current borrowings 6,817 43,474
------------- -------------
Total current liabilities 25,226 62,476
LONG-TERM DEBT, less current maturities 203 327
LIABILITIES SUBJECT TO COMPROMISE 49,967 --
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred Stock, 10,000,000 shares authorized
Series A, 270,079 shares outstanding 20,688 20,688
Series B, 6,111 shares outstanding 333 333
Common Stock, no par value, 40,000,000 shares authorized,
11,162,874 issued and outstanding 28,761 28,761
Additional paid-in capital 15 15
Retained deficit (53,530) (57,613)
------------- -------------
(3,733) (7,816)
------------- -------------
$ 71,663 $ 54,987
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
TREESOURCE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(in Thousands)
(Unaudited)
NINE MONTHS ENDED JANUARY 31,
---------------------------------
2000 1999
------------- -------------
<S> <C> <C>
CASH FROM OPERATING ACTIVITIES:
Net income (loss) $ 4,083 $ (3,625)
Adjustments to reconcile net income (loss) to
cash provided by operating activities:
Loss on sale of assets 147 --
Depreciation, depletion and amortization 3,242 3,098
Deferred income tax -- --
Impairment Loss
Accounts receivable (3,805) 1,963
Inventories (8,775) 3,218
Prepaid expenses (5,853) (455)
Timber, timberlands and timber-related assets - current 33 2,118
Payables and accruals 5,863 (1,793)
Income taxes -- (236)
------------- -------------
Cash from operating activities (5,065) 4,288
------------- -------------
CASH FROM INVESTING ACTIVITIES:
Notes and accounts receivable 22 --
Acquisition of property, plant and equipment (1,389) (2,089)
Proceeds from the sale of fixed assets 1,583 --
Net book value of retirements -- 268
Net book value of disposed idle assets -- 177
Other investing activities -- 60
------------- -------------
Cash from investing activities 216 (1,584)
------------- -------------
CASH FROM FINANCING ACTIVITIES:
Proceeds from long-term borrowings 6,936 --
Principal payments on long-term debt -- (1,577)
Other assets (17) (294)
Dividends paid on Preferred Stock -- (1,671)
Issuance of common stock -- 9
------------- -------------
Cash from financing activities 6,919 (3,533)
------------- -------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,070 (829)
CASH BALANCE AT BEGINNING OF PERIOD 2,131 2,157
------------- -------------
CASH BALANCE AT END OF PERIOD $ 4,201 $ 1,328
============= =============
CASH PAID DURING THE PERIOD FOR:
Interest $ 147 $ 3,195
Income taxes $ 100 $ (2)
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
6
<PAGE>
TREESOURCE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - SUMMARY OF FINANCIAL STATEMENT PREPARATION
On September 27, 1999, TreeSource Industries, Inc. and certain of its
wholly-owned subsidiaries ("the Company" or "TreeSource"), filed for voluntary
reorganization under chapter 11 of the U.S. Bankruptcy Code (the "Code"). The
Company continues to operate its business as a debtor-in-possession. As a
debtor-in-possession under the Code, the Company is authorized to operate its
business subject to the terms of a cash collateral order, but may not engage in
transactions outside of the ordinary course of business without Court approval.
On October 28, 1999 the Company filed a Plan of Reorganization (the
"Plan") in U.S. Bankruptcy Court (the "Court") that, if confirmed, would result
in the cancellation of the Company's current classes of common and preferred
stock. Any value these equities might have would be eliminated if the proposed
Plan is confirmed by the Court. The senior secured lenders that have a secured
interest in substantially all assets of the Company will convert a portion of
their debt into equity. Unsecured trade creditors would receive up to 90% of
their claims based on the Company's estimate of its unsecured liabilities.
In the opinion of management, the consolidated financial statements of
TreeSource Industries, Inc. and subsidiaries presented herein, assuming
continued operations under chapter 11 , include all adjustments, which are
solely of a normal recurring nature or related to the bankruptcy, necessary for
a fair presentation of the financial position, results of operations and cash
flows for the interim periods presented. Certain reclassifications may have been
made to the prior period results and balances to conform to the current period
classifications. Most obligations outstanding at the time of the chapter 11
filing have been reclassified as non-current liabilities under the caption
"Liabilities Subject to Compromise". No adjustments have been made to reflect
any settlement of obligations resulting from the reorganization proceedings.
The financial statements should be read with reference to "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
contained in this report, and the "Notes to Consolidated Financial Statements"
set forth in the Company's Annual Report on Form 10-K for the year ended April
30, 1999, filed with the Securities and Exchange Commission. The results of
operations for the current interim periods are not necessarily indicative of the
results to be expected for the current year.
7
<PAGE>
Restricted cash represents proceeds from the sale of certain assets
that would normally be remitted to the secured lenders to pay down debt. Because
of the bankruptcy filing, these funds cannot be paid until the Court approves
such payment.
Due to the filing for protection under chapter 11 of the Code, there
exists substantial doubt about the Company's ability to continue as a going
concern. The financial statements do not include any adjustment related to the
carrying value of assets or liabilities should the Company be unable to continue
as a going concern.
NOTE 2 - INVENTORIES
Inventories are valued at the lower of cost or market. Cost is
determined using the average cost and first-in, first-out (FIFO) methods. A
summary of inventory by principal product classification follows (in thousands):
January 31, April 30,
2000 1999
------------ ------------
Logs $ 10,997 $ 6,649
Lumber 10,417 6,001
Supplies and Other 1,085 1,066
------------ ------------
$ 22,499 $ 13,716
============ ============
NOTE 3 - STOCKHOLDERS' EQUITY
Stockholders' equity at January 31, 2000 consists of the following:
Series A Preferred Stock, $100 per share liquidation preference;
500,000 shares authorized; 270,079 shares issued and outstanding, limited voting
rights; cumulative dividends payable quarterly in advance at the prime rate,
with a minimum rate of 6% and a maximum rate of 9%; convertible into Common
Stock at $7.50 per share after April 30, 1999; redeemable at original issue
price plus any accrued dividends at the option of the Board of Directors, in the
form of cash or in exchange for senior unsecured debt with a 12% coupon. Subject
to certain conditions, the holders of the Series A Preferred Stock have the
right to obtain voting control of the Company's Board of Directors in the event
the Company misses three consecutive quarterly dividend payments, four quarterly
dividend payments within twenty-four months or a total of eight quarterly
dividend payments. As of January 31, 2000 the Company was in arrears on four
consecutive quarterly dividend payments totaling approximately $2,147,000. In
addition, because the Company filed for protection under chapter 11 of the Code,
the Company did not pay the quarterly dividend due February 29, 2000. This was
the fifth consecutive dividend payment skipped by the Company.
8
<PAGE>
Series B Preferred Stock, $100 per share liquidation preference;
500,000 shares authorized; 6,111 shares issued and outstanding; limited voting
rights; convertible into 212,693 shares of Common Stock; dividends payable only
if paid on the Company's Common Stock; redeemable at original issue price plus
accrued dividends at the option of the Board of Directors after all Series A
Preferred Stock has been redeemed.
Series C Junior Participating Preferred Stock, $100 per share
liquidation preference; 400,000 shares authorized; no shares issued or
outstanding; each share has 100 votes, voting together with Common Stock;
dividends payable only if paid on the Company's Common Stock at 100 times the
Common Stock dividend rate. This class of Preferred Stock was authorized in
connection with the Shareholder Rights Plan adopted by the Company on March 4,
1998.
Common Stock, no par value; 40,000,000 shares authorized; 11,162,874
shares issued and outstanding. Before giving effect to any shares that might be
issued pursuant to the management incentive Stock Option Plan or conversion of
any Series A Preferred Stock, the total number of common shares would increase
to 11,373,589 shares if the shares of Series B Preferred Stock remaining
outstanding at January 31, 2000 were converted to Common Stock.
NOTE 4 - NET INCOME (LOSS) PER SHARE
The calculations of net income (loss) per share for the three and
nine-month periods ended January 31, 2000 and 1999 are summarized below (in
thousands, except per-share data):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
January 31, January 31,
-------------------------- --------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net income (loss) applicable to common
shareholders $ (1,538) $ (3,222) $ 4,083 $ (5,313)
========== ========== ========== ==========
Weighted average shares outstanding
- Basic 11,163 11,163 11,163 11,163
Additional shares assumed from:
- Conversion of Series B Preferred Stock -- -- -- --
- Exercise of stock options -- -- -- --
---------- ---------- ---------- ----------
Average number of shares and equivalents outstanding
- Diluted 11,163 11,163 11,163 11,163
========== ========== ========== ==========
Net income (loss) per common share
- Basic $ (0.14) $ (0.29) $ 0.37 $ (0.48)
========== ========== ========== ==========
- Diluted $ (0.14) $ (0.29) $ 0.37 $ (0.48)
========== ========== ========== ==========
</TABLE>
9
<PAGE>
NOTE 5 - LIABILITIES SUBJECT TO COMPROMISE
Under the Bankruptcy Code, a claim is treated as secured only to the
extent of such creditor's collateral, and the balance of the claim is treated as
unsecured. Generally, unsecured and under-secured debt does not accrue interest
after the filing, while a fully secured claim continues to accrue interest.
Accordingly, interest expense totaling approximately $1,131,000 was not accrued
during the quarter ended January 31, 2000 as management believes these debts are
under-secured. Amounts included under the caption "Current Borrowings" at
January 31, 2000 represent draws on a line of credit that was established to
provide additional liquidity during the reorganization process. 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 January 31, 2000 are the following (in
thousands):
January 31,
2000
-----------------
Trade, interest and
other miscellaneous claims $ 6,250
Secured notes 261
Unsecured notes 1,007
Senior secured debt 42,449
-----------------
$ 49,967
=================
Unsecured and under-secured claims may be liquidated and discharged at
less than their face value. It is impossible at this time to predict the actual
amount of recovery that each creditor may realize, since the valuation of the
Company's assets and its claims may be subject to adjustment as part of the
bankruptcy proceedings.
As a result of the chapter 11 proceedings, TreeSource Industries, Inc.
and its subsidiaries are in default on substantially all of their debt
agreements. Acceleration of this debt is stayed subject to the chapter 11
proceedings. Such debt cannot be paid or restructured until the conclusion of
the proceedings, unless ordered by the Court.
10
<PAGE>
NOTE 6 - BORROWINGS
Long-term borrowings and the Line of Credit consist of the following
(in thousands):
<TABLE>
<CAPTION>
January 31, 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 January 31, 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 leases 258 -
-------------- --------------
43,975 43,801
Less debt subject to compromise (43,717) -
Less current maturities (55) (43,474)
-------------- --------------
$ 203 $ 327
============== ==============
</TABLE>
As discussed in Note 5, TreeSource Industries, Inc. and its
subsidiaries are in default on substantially all of their debt agreements as a
result of the chapter 11 filing, except for with respect to the $16 million
debtor-in-possession working capital revolver. Acceleration of these debts is
stayed subject to the chapter 11 proceedings. Such debt cannot be paid or
restructured until the conclusion of the chapter 11 proceedings, unless ordered
by the Court. All of the Company's borrowings, with the exception of any
borrowings against the debtor-in-possession, have been reclassified to
"Liabilities Subject to Compromise".
The Company obtained a debtor-in-possession secured revolving line of
credit (the "Line of Credit") in October that matures upon the earliest of April
5, 2001 or the effective date of a final order of reorganization. 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 8.5%.
Borrowings under the Line fluctuate daily based on cash needs and are subject to
customary covenants and collateral reserves. The Line of Credit allows the
Company to borrow from time to time up to $16 million, including up to $5
million of letters of credit. As of January 31, 2000 there were $6,762,000 in
borrowings on the Line of Credit and $2,685,000 in letters of credit
outstanding.
11
<PAGE>
NOTE 7 - PROVISION FOR INCOME TAXES
The income tax provision is based on the estimated effective annual tax rate for
each fiscal year. The provision includes anticipated current income taxes
payable, the tax effect of anticipated differences between the financial
reporting and tax basis of assets and liabilities, and the expected utilization
of net operating loss (NOL) carry-forwards.
The federal and state income tax provision consists of the
following (in thousands):
Nine Months Ended January 31,
-----------------------------
2000 1999
--------- ---------
Income (loss) before income taxes $ 4,183 $ (3,742)
========= =========
Provision for income taxes (benefit):
Federal $ 100 $ (5)
State -- (112)
--------- ---------
$ 100 $ (117)
========= =========
Current $ 100 $ (117)
Deferred -- --
--------- ---------
$ 100 $ (117)
========= =========
The Company's remaining adjusted NOL at April 30, 1999 was
approximately $26 million for federal income tax and $24 million for state
income tax purposes. These carry-forwards expire in 2007 and 2012, respectively.
As discussed in Note 1, the Company has filed for voluntary reorganization under
chapter 11 of the Code, which could impact the availability of the NOLs to be
used to offset future income. The Company expects to utilize approximately $8
million of the available NOLs prior to emerging from bankruptcy due to debt
forgiveness and the conversion of debt to equity proposed in the plan of
reorganization. Due to potential significant limitations of the NOLs associated
with the bankruptcy proceedings and potential reorganization plans, the Company
has fully reserved for its available NOLs at January 31, 2000. The Company's tax
expense relates to current year taxable income not available for offset by NOLs.
Management periodically reviews the above factors and may change the amount of
valuation allowance as facts and circumstances dictate.
12
<PAGE>
NOTE 8 - COMMITMENTS AND CONTINGENCIES
The Company is involved in certain litigation primarily arising in the
normal course of its business. The Company's liability, if any, under such
pending litigation could have a material impact upon the Company's consolidated
financial condition or results of operations. See "Legal Proceedings".
The Company is subject to various federal, state and local regulations
regarding waste disposal and pollution control. Various governmental agencies
have enacted, or are considering, regulations regarding a number of
environmental issues that may require material expenditures in the future. These
include regulations regarding log yard management, disposal of log yard waste,
kiln process waste water, and air emissions from hog fuel fired boilers. The
potential expenditures required for the Company to comply with any such
regulations could have a material adverse impact on its consolidated financial
condition and results of operations.
13
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
- ---------------------
On a quarter-to-quarter basis, the Company's financial results have and
will vary widely, due to seasonal fluctuations and market factors affecting the
demand for logs, lumber, and other wood products. Therefore, past results for
any given year or quarter are not necessarily indicative of future results.
The average price of the industry benchmark green fir 2x4 standard and
better lumber declined 2%, from $374 per unit in the quarter ended October 31,
1999, to $368 per unit in the quarter ended January 31, 2000. The average price
of the industry benchmark #2 fir saw log increased from $631 to $637 per unit
during these periods. The decline in lumber prices with an increase in log costs
caused industry margins and TreeSource profits to decline in the quarter ended
January 31, 2000, as compared to the quarter ended October 31, 1999. The Company
has increased the number of shifts at selected facilities resulting in increased
asset utilization and operating efficiencies. Lumber shipments in the quarter
ended January 31, 2000 are up 2% from the previous quarter and up 19% from the
same period in 1999.
On September 27, 1999, the Company filed for voluntary reorganization
under chapter 11 of the U.S. Bankruptcy Code. The costs associated with the
reorganization totaled $942,000 during the quarter ended January 31, 2000.
Interest expense for the quarter was approximately $1,131,000 lower than it
otherwise would have been due to the filing for reorganization. During the
reorganization period, the Company is allowed relief from payment of interest
charges on all pre-petition debt, but is required to accrue interest expense on
claims that are, in the opinion of management, fully secured. No interest
expense has been recorded since September 27, 1999 on the Company's senior
secured debt or unsecured senior subordinated notes because management believes
these claims are undersecured. (See "Legal Proceedings"). The Company filed for
reorganization in response to a protracted period of weak lumber markets
combined with the Company's high level of debt and substantial preferred stock
dividend obligations. The cash generated by operations was not sufficient to
enable the Company to pay its commitments and continue operating.
On October 28, 1999, the Company filed a Plan of Reorganization (the
"Plan") in U.S. Bankruptcy Court that, if confirmed, will result in the
cancellation of the Company's current classes of common and preferred stock and
eliminate any remaining value in these equity securities. The Company's senior
secured lenders have a security interest in substantially all 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
14
<PAGE>
pursuant to the Plan. Unsecured trade creditors would receive up to 90% of their
claims based on the Company's estimate of its unsecured liabilities. The
percentage paid on unsecured claims depends on a number of factors, including
claim estimates and the outcome of current and potential legal proceedings.
Distributions that may be due to holders of the Company's senior unsecured notes
would be remitted to holders of Series A preferred stock per the terms of the
senior unsecured notes. The Company plans to file an amendment to the Plan.
In November, the Company auctioned the equipment at the Philomath and
Sedro-Woolley mill sites. The assets that were sold in this auction had been
previously written down and are included in the classification of "Assets held
for sale" on the balance sheet. Proceeds from the sale of assets totaling
approximately $1,424,000 have been placed in a separate account and classified
as "restricted cash" on the balance sheet. If the Company's Plan is approved,
proceeds from sales of the assets classified as "Assets held for sale" on the
balance sheet will be remitted to the Company's pre-petition secured debt
holders. The Company has three properties and three other facilities currently
held for sale of which one, Burke, is operating.
The following table sets forth the percentages that certain expenses
bear to net sales, and the period-to-period percentage change for each item:
<TABLE>
<CAPTION>
INCOME AND EXPENSE ITEMS AS PERCENTAGE
A PERCENT OF NET SALES INCREASE (DECREASE)
--------------------------------------------------------------------------
Three Months Nine Months
Three Months Ended Nine Months Ended Ended Ended
January 31, January 31, 1/31/00 1/31/00
-------------------- ---------------------
to to
2000 1999 2000 1999 1/31/99 1/31/99
--------- ---------- ---------- -------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Net sales 100.0 % 100.0 % 100.0 % 100.0 % 34.5 % 30.0 %
Cost of sales 97.6 97.8 91.9 94.5 34.2 26.4
------- -------- -------- -------- -------------- -------------
Gross Profit 2.4 2.2 8.1 5.5 48.2 91.9
Selling, general and
Administrative expense 4.0 5.8 4.4 5.6 (5.8) 4.1
Reorganization charges 1.6 0.0 1.0 0.0 NM NM
------- -------- -------- -------- -------------- -------------
Operating income (loss) (3.2) (3.6) 2.7 0.1 20.2 (5,024.8)
Interest expense (0.2) (2.6) (1.0) (2.4) (91.9) (44.4)
Miscellaneous 0.8 (0.2) 0.6 (0.1) (662.5) (730.6)
------- -------- -------- -------- -------------- -------------
Income (loss) before income taxes (2.6) (6.3) 2.2 (2.6) 45.1 (211.8)
Provision for income taxes
(benefit) 0.0 (0.3) 0.1 (0.1) (100.0) (185.5)
------- -------- -------- -------- -------------- -------------
Net income (loss) (2.6) % (6.1) % 2.2 % (2.5) % 42.7 % (212.6) %
======= ======== ======== ========
NM - Not Meaningful
Note - percentages may not add due to rounding.
</TABLE>
15
<PAGE>
Comparison of Three Months Ended January 31, 2000 and 1999
- --------------------------------------------------------------
Net sales for the three months ended January 31, 2000 increased $15.3
million (35%), as compared to the three months ended January 31, 1999. This
increase was principally caused by an 19% increase in lumber sales volume and a
13% increase in the weighted average net lumber sales price. The Company has
increased sales volume by increasing asset utilization and decreasing costs
through an increase in the number of shifts operated at selected facilities.
Gross profit for the quarter ended January 31, 2000 was 2.4% of net
sales, compared to 2.2% of net sales for the quarter ended January 31, 1999.
Unit manufacturing costs in the three months ended January 31, 2000 decreased 7%
as compared to the three months ended January 31, 1999, primarily due to
increased production volume resulting from an increase in the number of shifts
operated at certain facilities. Repair and maintenance costs at selected
facilities have increased due to the Company's efforts to decrease downtime and
increase productivity at facilities that have deteriorated.
Selling, general and administrative expenses for the quarter ended
January 31, 2000 decreased by (6%) as compared to the quarter ended January 31,
1999, excluding reorganization charges. This decrease has resulted from the
implementation of a number of cost savings measures, such as corporate staff
reductions, reduction in office lease space, and the closure of certain
facilities.
Reorganization charges for the quarter ended January 31, 2000 are
comprised primarily of fees for professional services related to the bankruptcy.
As of January 31, 2000, the Company had available approximately $26
million and $24 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 three months ended
January 31 for both 1999 and 2000. The Company periodically reviews the above
factors and may change the amount of valuation allowance as facts and
circumstances dictate.
Comparison of Nine Months Ended January 31, 2000 and 1999
- ---------------------------------------------------------
Net sales for the nine months ended January 31, 2000 increased $43
million (30%), as compared to the nine months ended January 31, 1999. This
increase was principally caused by a 15% increase in the weighted average net
lumber sales price and a 13% increase in lumber sales volume. The Company has
increased sales volume by increasing asset utilization and decreasing costs
through an increase in the number of shifts operated at selected facilities.
16
<PAGE>
Gross profit for the nine months ended January 31, 2000 was 8.1% of net
sales, compared to 5.5% of net sales for the nine months ended January 31, 1999.
Unit manufacturing costs in the nine months ended January 31, 2000 decreased by
3% from costs in the nine months ended January, 1999, primarily due to an
increase in the hours of operation at several facilities and increases in
productivity.
Selling, general and administrative expenses for the nine months ended
January 31, 2000 increased by $324,000 as compared to the nine months ended
January 31, 1999. This increase consisted primarily of $275,000 in costs related
to obtaining the debtor-in-possession revolving working line of credit and
additional costs related to increased bonus expense due to the comparative
increase in income between the two periods, partially offset by a number of cost
savings measures have been taken such as corporate staff reductions, reduction
in office lease space, and the closure of certain facilities.
Reorganization charges in the nine months ended January 31, 2000 are
comprised primarily of professional services related to the bankruptcy.
As of January 31, 2000, the Company had available approximately $26
million and $24 million, respectively, in 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 net operating income and loss, respectively, generated during
the nine months ended January 31, 1999 and 2000. The tax provision recorded for
the nine months ended January 31, 2000 relates to expenses that cannot be offset
by the NOLs. The Company periodically reviews the above factors and may change
the amount of valuation allowance as facts and circumstances dictate.
Liquidity and Capital Resources
- -------------------------------
The Company is currently operating as a debtor-in-possession under a
cash collateral order approved by the Court, pursuant to a number of conditions.
The cash collateral order allows the Company to use funds from operations and
the revolving working line of credit for normal operating purposes. The cash
collateral order also grants a security interest in substantially all the assets
of the Company to the pre-petition senior secured lenders and post-petition
secured debtor-in-possession lenders. The current cash collateral order expires
May 1, 2000. If the Company is unable to either confirm a plan of reorganization
or obtain a new cash collateral order by May 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.
17
<PAGE>
Cash and cash equivalents increased by approximately $0.6 million
during the nine months ended January 31, 2000, to $2.7 million, excluding $1.4
million in restricted cash generated from the sale of certain assets.
Approximately $5.1 million of cash was used for operations, including prepaid
expenses, which increased by $5.9 million, primarily due to log purchase
deposits and increased inventory levels. Inventory levels have increased $8.8
million since the beginning of the year, with most of the increase occurring
over the past four months, due to a strategy of increasing log inventories
during the winter months to reduce the risk of production downtime. The increase
in payables and accruals by $5.9 million during this period includes $6.3
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
senior secured debt and subordinated debentures, or dividends on its Series A
Preferred Stock since March 1999.
The Company historically has not had a line of credit or working
capital financing available to it, and, therefore, has relied on cash provided
by its operations to fund its working capital needs. In early October, in
connection with filing for voluntary reorganization, the Company obtained a $16
million debtor-in-possession revolving working line of credit to provide for
day-to-day liquidity and seasonal log inventory increases. As of January 31,
2000 there was a $6.8 million loan balance on this line of credit.
For the nine months ended January 31, 2000, the Company spent $1.4
million for capital improvements to its facilities. The Company had no material
commitments for capital spending at January 31, 2000.
The Company does not invest in market risk sensitive instruments.
Factors Affecting Forward-Looking Statements
- ---------------------------------------------
The statements contained in this report that are not statements of
historical fact 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 factors that
could cause actual results to differ materially from the forward-looking
statements and should be considered in evaluating any forward-looking
statements: the outcome of the Company's filing for voluntary reorganization;
the approval of the Company's plan of reorganization; adverse operating
conditions; fluctuations in quarterly results; availability of logs;
technological change; manufacturing risks; federal and state regulations; and
the additional factors listed from time to time in the Company's SEC reports,
including, but not limited to, the Company's annual report on Form 10-K for the
year ended April 30, 1999.
18
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company and its Trask River Lumber subsidiary were named defendants
in a claim for wages and penalties filed in U.S. District Court for the District
of Oregon on February 17, 1999 (Allen, Blount, et al., v. WTD Industries, Inc.,
Trask River Lumber and Bruce L. Engel). The case is currently proceeding and
notice to potential members of the collective class has been authorized.
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).
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.). This action is currently stayed due to the Company's
chapter 11 filing. The suit is being defended by the Company's insurance
carrier.
Item 3. Defaults Upon Senior Securities
Due to the Company's inability to meet certain of its financial
covenants and its filing for reorganization, the Company is not in compliance
with its obligations under its senior secured debt agreement and ceased making
interest and principal payments on its senior secured debt in March 1999. On
September 27, 1999 the Company filed for voluntary reorganization under of the
U.S. Bankruptcy Code in the U.S. District Court of the Western District of
Washington: In re TreeSource Industries, Inc., et al (Case Nos. 99-10932 and
99-10937 through 99-10961). As of March 8, 2000, the Company had not paid five
consecutive quarterly dividend payments due to holders of its Series A Preferred
Stock, totaling approximately $2,718,000, and is in arrears on payment of
approximately $3,117,000 in interest and $4,000,000 in principal on its senior
secured debt. Additionally, the Company is in arrears on payment of
approximately $240,000 in interest on its 8% unsecured senior notes as of March
8, 2000. During the reorganization period, the Company is allowed relief from
payment of interest charges on all pre-petition debt but is required to accrue
interest expense on claims that are, in the opinion of management, fully
secured. No interest expense has been recorded since September 27, 1999 on the
pre-petition senior secured debt or unsecured senior subordinated debt, because
management believes the claims of these debt holders are under-secured.
19
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The Index to Exhibits is located on page 22.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended January
31, 2000.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TreeSource Industries, Inc.
---------------------------
(Registrant)
/s/ Jess R. Drake
---------------------------
Jess R. Drake
President
/s/ Robert W. Lockwood
---------------------------
Robert W. Lockwood
Vice President - Finance
March 14, 2000
21
<PAGE>
TreeSource Industries, Inc.
Index to Exhibits
Sequential
Number
System
Page
Number
3.1 Fourth Restated Articles of Incorporation of Registrant
adopted effective November 27, 1992, as amended(1)
3.2 Second Restated Bylaws of the Registrant adopted effective
November 27, 1992(2)
27 Financial Data Schedule(3)
- ----------
(1) Incorporated by reference to the exhibit of like number to the
Registrant's quarterly report on Form 10-Q for the quarter ended
October 31, 1998.
(2) Incorporated by reference to the exhibit of like number to the
Registrant's annual report on Form 10-K for the year ended April 30,
1993.
(3) This schedule has been submitted in electronic form prescribed by
EDGAR.
22
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM REGISTRANT'S
REPORT ON FORM 10-Q FOR THE FISCAL QUARTER ENDED JANUARY 31, 2000 AND IS
QUALIFIED IN ITS ENTRY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> APR-30-2000
<PERIOD-END> JAN-31-2000
<CASH> 4,201
<SECURITIES> 0
<RECEIVABLES> 14,015
<ALLOWANCES> 0
<INVENTORY> 22,499
<CURRENT-ASSETS> 56,678
<PP&E> 58,743
<DEPRECIATION> 44,044
<TOTAL-ASSETS> 71,663
<CURRENT-LIABILITIES> 25,226
<BONDS> 6,817
0
21,021
<COMMON> 28,761
<OTHER-SE> (53,530)
<TOTAL-LIABILITY-AND-EQUITY> 71,663
<SALES> 186,148
<TOTAL-REVENUES> 186,148
<CGS> 171,079
<TOTAL-COSTS> 171,079
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,926
<INCOME-PRETAX> 4,183
<INCOME-TAX> 100
<INCOME-CONTINUING> 4,083
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,083
<EPS-BASIC> 0.37
<EPS-DILUTED> 0.37
</TABLE>
