SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended October 31, 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 November 30, 2000 was 11,162,874.
1
<PAGE>
TREESOURCE INDUSTRIES, INC.
INDEX
Page
Number
PART I. FINANCIAL INFORMATION...........................................3
Item 1. Financial Statements.........................................3
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................14
PART II. OTHER INFORMATION..............................................20
Item 1. Legal Proceedings...........................................20
Item 3. Defaults Upon Senior Securities.............................20
Item 6. Exhibits and Reports on Form 8-K............................21
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
TREESOURCE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(in Thousands, Except Per-Share Amounts)
(Unaudited)
THREE MONTHS SIX MONTHS
ENDED ENDED
OCTOBER 31, OCTOBER 31,
--------------------- --------------------
2000 1999 2000 1999
--------- --------- --------- ---------
NET SALES $ 40,040 $ 59,535 $ 86,172 $ 127,168
COST OF SALES 39,347 55,974 87,366 112,991
--------- --------- --------- ---------
GROSS PROFIT (LOSS) 693 3,561 (1,194) 14,177
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 2,547 2,624 5,414 5,866
REORGANIZATION CHARGES 629 877 1,281 877
--------- --------- --------- ---------
OPERATING INCOME (LOSS) (2,483) 60 (7,889) 7,434
OTHER INCOME (EXPENSE)
Interest expense (27) (718) (57) (1,832)
Miscellaneous 61 33 148 119
--------- --------- --------- ---------
34 (685) 91 (1,713)
--------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES (2,449) (625) (7,798) 5,721
PROVISIONS FOR INCOME TAXES (BENEFIT) -- 100 -- 100
--------- --------- --------- ---------
NET INCOME (LOSS) (2,449) (725) (7,798) 5,621
PREFERRED DIVIDENDS -- -- -- --
--------- --------- --------- ---------
NET INCOME (LOSS) APPLICABLE
TO COMMON STOCKHOLDERS $ (2,449) $ (725) $ (7,798) $ 5,621
========= ========= ========= ========
NET INCOME (LOSS) PER COMMON SHARE
- BASIC ($0.22) $0.06 ($0.70) $0.50
======= ====== ======= =====
- DILUTED ($0.22) $0.06 ($0.70) $0.49
======= ====== ======= =====
The accompanying notes are an integral part of these
consolidated financial statements.
3
<PAGE>
TREESOURCE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS
(in Thousands)
(Unaudited)
OCTOBER 31, APRIL 30,
2000 2000
------------ ------------
CURRENT ASSETS
Cash and cash equivalents $ 6,110 $ 1,871
Restricted cash 930 1,616
Accounts receivable, net 6,895 12,462
Inventories 8,224 15,800
Prepaid expenses 2,431 2,535
Income tax refund receivable -- 86
Assets held for sale 4,967 5,433
Timber, timberlands and timber-related assets 2,698 2,196
------------ ------------
Total current assets 32,255 42,000
NOTES AND ACCOUNTS RECEIVABLE 4 5
PROPERTY, PLANT AND EQUIPMENT, at cost
Land 1,507 1,527
Buildings and improvements 8,633 8,673
Machinery and equipment 48,568 47,448
------------ ------------
58,708 57,648
Less accumulated depreciation 46,497 44,385
------------ ------------
12,211 13,263
Construction in progress 159 101
------------ ------------
12,370 13,364
DEFERRED TAX ASSET 750 750
OTHER ASSETS 1,683 1,244
------------ ------------
$ 47,062 $ 57,363
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE>
TREESOURCE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
LIABILITIES AND STOCKHOLDERS' EQUITY
(in Thousands, Except Share Information)
(Unaudited)
OCTOBER 31, APRIL 30,
2000 2000
------------ ------------
CURRENT LIABILITIES
Accounts payable $ 4,969 $ 5,476
Accrued expenses 7,351 7,902
Timber contracts payable -- 147
Current borrowings 65 499
------------ ------------
Total current liabilities 12,385 14,025
LONG-TERM DEBT, less current maturities 148 183
LIABILITIES SUBJECT TO COMPROMISE 49,131 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 (64,399) (56,601)
------------ ------------
(14,602) (6,804)
------------ ------------
$ 47,062 $ 57,363
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
5
<PAGE>
TREESOURCE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(in Thousands)
(Unaudited)
<TABLE>
SIX MONTHS ENDED OCTOBER 31,
----------------------------
2000 1999
------------ ------------
<S> <C> <C>
CASH FROM OPERATING ACTIVITIES:
Net income (loss) $ (7,798) $ 5,621
Adjustments to reconcile net income (loss) to
cash provided by operating activities:
Loss (gain) on sale of assets 10 --
Depreciation, depletion and amortization 1,343 2,197
Accounts receivable 6,068 (1,039)
Inventories 7,493 (3,018)
Prepaid expenses 104 (3,840)
Timber, timberlands and timber-related assets - current (643) (177)
Payables and accruals (1,148) 1,529
Income taxes 86 --
------------ ------------
Cash from operating activities 5,515 1,273
------------ ------------
CASH FROM INVESTING ACTIVITIES:
Notes and accounts receivable 1 18
Acquisition of property, plant and equipment (488) (569)
Proceeds from the sale of fixed assets 127 --
Net book value of retirements -- 7
------------ ------------
Cash from investing activities (360) (544)
------------ ------------
CASH FROM FINANCING ACTIVITIES:
Proceeds (payments) from borrowings (458) 106
Principal payments on long-term debt (748) --
Other assets (396) 5
------------ ------------
Cash from financing activities (1,602) 111
------------ ------------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 3,553 840
CASH BALANCE AT BEGINNING OF PERIOD 3,487 2,131
------------ ------------
CASH BALANCE AT END OF PERIOD $ 7,040 $ 2,971
============ ============
CASH PAID DURING THE PERIOD FOR:
Interest $ 56 $ 10
Income taxes $ -- $ 100
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
6
<PAGE>
TREESOURCE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - SUMMARY OF FINANCIAL STATEMENT PREPARATION
On September 27, 1999 the Company filed for voluntary reorganization under
chapter 11 of the U.S. Bankruptcy Code (the "Code"). The Company continues to
operate its business as a debtor-in-possession. As a debtor-in-possession under
the Code, the Company is authorized to operate its business subject to the terms
of a cash collateral order, but may not engage in transactions outside of the
ordinary course of business without Court approval.
On April 12, 2000 the Company filed an Amended Joint Plan of Reorganization
(the "Plan") in U.S. Bankruptcy Court (the "Court") that, if confirmed by the
Court, would result in the cancellation of the Company's current classes of
common and preferred stock and eliminate any value remaining in these equity
securities. The Company's senior secured lenders have a security interest in
substantially all the assets of the Company. Under the proposed Plan, these
senior secured lenders would exchange a portion of their claims against the
Company for new equity securities to be issued by the Company pursuant to the
Plan. The proposed Plan also sets up a defined pool of funds from which
unsecured trade creditors would be paid. The percentage recovery for unsecured
trade creditors would depend on a number of factors, including the resolution of
disputed claims. On May 17, 2000 the Company successfully petitioned the Court
to delay the Plan confirmation hearing for 120 days due to poor lumber market
conditions. The Company is currently negotiating a revised plan of
reorganization with the secured lenders that may result in significant changes
in the Plan. On November 30, 2000 the Company petitioned the Court to extend
through March 31, 2001 the period of exclusivity (the time period in which the
Company has the sole right to present a plan of reorganization), which otherwise
expired on November 30, 2000. The Company's motion to extend the period of
exclusivity is scheduled to be heard by the Court on December 22, 2000.
In the opinion of management, the consolidated financial statements of
TreeSource Industries, Inc. and subsidiaries presented herein, assuming
continued operations under chapter 11, includes 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, other than the Court
approved settlement in July 2000 with CIT, have been made to reflect any
settlement of obligations resulting from the reorganization proceedings.
7
<PAGE>
The financial statements should be read with reference to "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
contained in this report, and the "Notes to Consolidated Financial Statements"
set forth in the Company's Annual Report on Form 10-K for the year ended April
30, 2000 filed with the Securities and Exchange Commission. The results of
operations for the current interim periods are not necessarily indicative of the
results to be expected for the current year.
Restricted cash represents proceeds from the sale of certain assets that
would normally be remitted to the secured lenders to pay down debt. Due to the
bankruptcy filing, these funds cannot be paid until the Court approves such
payment.
Due to the filing for protection under chapter 11, there exists substantial
doubt about the Company's ability to continue as a going concern. The financial
statements do not include any adjustment related to the carrying value of assets
or liabilities should the Company be unable to continue as a going concern.
NOTE 2 - INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined
using the average cost and first-in, first-out (FIFO) methods. A summary of
inventory by principal product classification follows (in thousands):
October 31, April 30,
2000 2000
------------ ------------
Logs $ 2,455 $ 6,571
Lumber 4,764 8,109
Supplies and Other 1,005 1,120
------------ ------------
$ 8,224 $ 15,800
============ ============
8
<PAGE>
NOTE 3 - STOCKHOLDERS' EQUITY
Stockholders' equity at October 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 October 31, 2000 the Company was in arrears on seven
consecutive quarterly dividend payments totaling approximately $3,933,000.
Series B Preferred Stock, $100 per share liquidation preference; 500,000
shares authorized; 6,111 shares issued and outstanding; limited voting rights;
convertible into 212,693 shares of Common Stock; dividends payable only if paid
on the Company's Common Stock; redeemable at original issue price plus accrued
dividends at the option of the Board of Directors after all Series A Preferred
Stock has been redeemed.
Series C Junior Participating Preferred Stock, $100 per share liquidation
preference; 400,000 shares authorized; no shares issued or outstanding; each
share has 100 votes, voting together with Common Stock; dividends payable only
if paid on the Company's Common Stock at 100 times the Common Stock dividend
rate. This class of Preferred Stock was authorized in connection with the
Shareholder Rights Plan adopted by the Company on March 4, 1998.
Common Stock, no par value; 40,000,000 shares authorized; 11,162,874 shares
issued and outstanding. Before giving effect to any shares that might be issued
pursuant to the management incentive Stock Option Plan or conversion of any
Series A Preferred Stock, the total number of common shares would increase to
11,375,567 shares if the shares of Series B Preferred Stock remaining
outstanding at October 31, 2000 were converted to Common Stock.
If the proposed Plan is confirmed by the Court the Company's current
classes of common and preferred stock will be cancelled and any value remaining
in these equity securities will be eliminated.
9
<PAGE>
NOTE 4 - NET INCOME (LOSS) PER SHARE
The calculations of net income (loss) per share for the three and six-month
periods ended October 31, 2000 and 1999 are summarized below (in thousands,
except per-share data):
<TABLE>
Three Months Ended Six Months Ended
October 31, October 31,
---------------------------- ----------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income (loss) applicable to common shareholders $ (2,449) $ (725) $ (7,798) $ 5,621
=========== =========== =========== ===========
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 $ (0.22) $ (0.06) $ (0.70) $ 0.50
=========== =========== =========== ===========
- Diluted $ (0.22) $ (0.06) $ (0.70) $ 0.49
=========== =========== =========== ===========
</TABLE>
NOTE 5 - LIABILITIES SUBJECT TO COMPROMISE
Under the Code, a claim is treated as secured only to the extent of such
creditor's collateral, and the balance of the claim is treated as unsecured.
Generally, unsecured and under-secured debt does not accrue interest after a
chapter 11 filing, while a fully secured claim continues to accrue interest.
Accordingly, interest expense totaling approximately $1,076,000 was not accrued
during the quarter ended October 31, 2000 as management believes these debts are
under-secured. See Note 6 for additional information.
Amounts included under the caption "Liabilities Subject to Compromise"
represent claims that are unsecured or where, in the opinion of management, the
value of the corresponding collateral is estimated to be less than the amount of
the debt. Included under this caption at October 31, 2000, and April 30, 2000,
are the following (in thousands):
October 31, April 30,
2000 2000
------------ ------------
Trade, interest and
other miscellaneous claims $ 6,152 $ 6,242
Secured notes 261 261
Unsecured notes 1,007 1,007
Senior secured debt 41,711 42,449
------------ ------------
$ 49,131 $ 49,959
============ ==============
10
<PAGE>
Unsecured and under-secured claims may be liquidated and discharged at less
than their face value. It is impossible at this time to predict the actual
amount of recovery that each creditor may realize, since the valuation of the
Company's assets and its claims may be subject to adjustment as part of the
bankruptcy proceedings.
As a result of the chapter 11 proceedings, TreeSource Industries, Inc. and
its subsidiaries are in default on substantially all of their pre-petition debt
agreements. Acceleration of this debt is stayed subject to the chapter 11
proceedings. Such debt cannot be paid or restructured until the conclusion of
the proceedings, unless ordered by the Court.
NOTE 6 - BORROWINGS
Long-term borrowings and the Line of Credit consist of the following (in
thousands):
<TABLE>
October 31, April 30,
2000 2000
------------ ------------
<S> <C> <C>
Senior secured debt, bearing interest at 10%; principal
payable in quarterly installments of $1 million beginning
March 15, 1999, and a final payment in December
2004; secured by substantially all assets of the
Company. $ 41,711 $ 42,449
Secured notes, interest at 9% and 10%; payable on
various dates; secured by various assets. 261 261
Unsecured senior subordinated notes, net of discount
of $264 thousand at October 31, 2000 and April 30, 2000;
8% coupon, effective interest rate of 13.3%; semi-
annual interest payments due each June 30 and
December 31; principal due in full June 30, 2005. 1,007 1,007
Obligations under capital leases. 213 243
------------ ------------
43,192 43,960
Less current maturities. (65) (60)
Less liabilities subject to compromise. (42,979) (43,717)
------------ ------------
$ 148 $ 183
============ ============
</TABLE>
As discussed in Note 5, TreeSource Industries, Inc. and its subsidiaries
are in default on substantially all of their pre-petition debt agreements as a
result of the chapter 11 filing. Acceleration of these debts is stayed subject
to the chapter 11 proceedings. Such debt cannot be paid or restructured until
the conclusion of the chapter 11 proceedings, unless ordered by the Court. All
of the Company's borrowings, with the exception of any borrowings against the
debtor-in-possession working capital secured revolving line of credit (the "Line
of Credit") and certain capital lease obligations, have been reclassified as
"Liabilities Subject to Compromise".
11
<PAGE>
The Company obtained a $16 million Line of Credit in October 1999 that
matures upon the earliest of April 5, 2001 or the effective date of a final
order of reorganization. Borrowings under the Line of Credit fluctuate daily
based on cash needs and are subject to customary covenants and collateral
reserves. The weighted average rate of interest on outstanding short-term
borrowings on the Line of Credit was 9.5%. The Line of Credit allows the Company
to borrow from time to time up to $14 million (the remaining $2 million is
reserved pursuant to the terms of the Line of Credit), including up to $5
million in letters of credit. As of October 31, 2000 there were no borrowings on
the Line of Credit and $1,850,000 in letters of credit outstanding.
The Company may be unable to meet its liquidity needs if it is unable to
confirm a plan of reorganization by, extend the maturity date of its Line of
Credit beyond, or obtain alternate financing by, April 4, 2001.
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):
SIX MONTHS ENDED OCTOBER 31,
----------------------------
2000 1999
------------ ------------
Income (loss) before income taxes $ (7,798) $ 5,721
============ ============
Provision for income taxes:
Federal $ -- $ 100
State -- --
------------ ------------
$ -- $ 100
============ ============
Current $ -- $ 100
Deferred -- --
------------ ------------
$ -- $ 100
============ ============
12
<PAGE>
The Company's remaining adjusted NOLs at April 30, 2000 were approximately
$40 million for federal income tax and $28 million for state income tax
purposes. These carry-forwards expire in 2007 and 2012, respectively. As
discussed in Note 1, the Company has filed for voluntary reorganization under
chapter 11 of the Code, which could impact the availability of the NOLs to be
used to offset future income. The Company may use a substantial portion of the
NOLs prior to emerging from bankruptcy due to debt forgiveness and the
conversion of debt to equity proposed in the Plan. Due to the potential
limitations of the NOLs associated with the bankruptcy and potential
reorganization plans, the Company has fully reserved for its available NOLs at
October 31, 2000. Management periodically reviews the above factors and may
change the amount of valuation allowance as facts and circumstances dictate.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
The Company is involved in certain litigation primarily arising in the
normal course of its business. The Company's liability, if any, under such
pending litigation could have a material impact upon the Company's consolidated
financial condition or results of operations. See "Legal Proceedings".
The Company is subject to many federal, state and local regulations
regarding waste disposal and pollution control. Various governmental agencies
have enacted, or are considering, regulations regarding a number of
environmental issues that may require material expenditures in the future. These
include regulations regarding log yard management, disposal of log yard waste,
kiln process waste water, and air emissions from hog fuel fired boilers. The
potential expenditures required for the Company to comply with any such
regulations could have a material adverse impact on its consolidated financial
condition and results of operations.
13
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
---------------------
On a quarter-to-quarter basis, the Company's financial results have and
will vary widely, due to seasonal fluctuations and market factors affecting the
demand for logs, lumber, and other wood products. Therefore, past results for
any given year or quarter are not necessarily indicative of future results.
Lumber market conditions remained generally weak during the second quarter
of fiscal 2001 due to the oversupply of lumber in the North American market. The
average price of the industry benchmark green fir 2x4 standard and better lumber
decreased 2%, from $296 per unit in the quarter ended July 31, 2000, to $290 per
unit in the quarter ended October 31, 2000. The average price of the industry
benchmark #2 fir saw log also decreased 12% from $612 to $540 per unit during
these same periods. Because the decrease in log costs exceeded the decrease in
lumber prices, industry margins and the Company's gross profit improved. In
response to the prolonged weak lumber market, particularly for kiln dried
hemlock and other whitewood species, the Company reduced operating hours and
took downtime at most facilities and curtailed production and reduced staffing
to low levels at its facilities in Morton, Washington, and North Powder, Oregon.
The Company anticipates restarting these two facilities when market conditions
become more economically favorable. The Company also curtailed production
indefinitely at, and is currently seeking to sell, its Central Point, Oregon
mill, which had net sales of $3.4 million through October 31, 2000, and $20.5
million, $17.4 million, and $13.2 million in fiscal years ended 2000, 1999, and
1998, respectively.
On September 27, 1999, the Company filed for voluntary reorganization under
chapter 11 of the U.S. Bankruptcy Code (the "Code"). The Company continues to
operate its business as a debtor-in-possession. As a debtor-in-possession under
the Code, the Company is authorized to operate its business subject to the terms
of a cash collateral order, but may not engage in transactions outside of the
ordinary course of business without Court approval. The costs associated with
the reorganization totaled $629,000 during the quarter ended October 31, 2000.
Interest expense for the quarter was approximately $1,076,000 lower than it
otherwise would have been due to the filing for reorganization. During the
reorganization period, the Company is allowed relief from payment of interest
charges on all pre-petition debt, but is required to accrue interest expense on
claims that are, in the opinion of management, fully secured. No interest
expense has been recorded since September 27, 1999 on the Company's senior
secured debt or unsecured senior subordinated notes because management believes
these claims are under-secured. (See "Defaults Upon Senior Securities"). 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.
14
<PAGE>
The cash generated by operations was not sufficient to enable the Company to pay
its commitments and continue operating.
On April 12, 2000 the Company filed an Amended Joint Plan of Reorganization
(the "Plan") in U.S. Bankruptcy Court (the "Court") that if confirmed by the
Court, would result in the cancellation of the Company's current classes of
common and preferred stock and eliminate any value remaining in these equity
securities. The Company's senior secured lenders have a security interest in
substantially all the assets of the Company. Under the proposed Plan, these
senior secured lenders would exchange a portion of their claims against the
Company for new equity securities to be issued by the Company pursuant to the
Plan. The proposed Plan also sets up a defined pool of funds from which
unsecured trade creditors would be paid. The percentage recovery for unsecured
trade creditors would depend on a number of issues, including the resolution of
disputed claims. On May 17, 2000 the Company successfully petitioned the Court
to delay the Plan confirmation hearing for 120 days due to poor lumber market
conditions. The Company is currently negotiating a revised plan of
reorganization with the secured lenders, which may result in significant changes
in the Plan. On November 30, 2000 the Company petitioned the Court to extend the
period of exclusivity (the time period in which the Company has the sole right
to present a plan of reorganization), which expired on November 30, 2000. The
Company's motion to extend the period of exclusivity is scheduled to be heard by
the Court on December 22, 2000.
In October, the Company auctioned the equipment at its Burke mill site. The
assets that were sold in this auction had been previously written down and are
included in "Assets held for sale" on the balance sheet. Proceeds from the sale
of assets totaling approximately $501,000 were received on November 3, 2000, and
are held as "restricted cash". As of October 31, 2000, $500,000 of restricted
cash is held in a certificate of deposit with a 60-day maturity from the date of
purchase. The remaining balance is held as cash on deposit in a money market
account at the Company's financial institution. Restricted cash is stated at
cost plus accrued interest, which approximates market value. The Company's
practice is to invest cash with financial institutions that meet certain minimum
capital surplus and credit rating requirements. Receipts from sales of the
assets classified as "Assets held for sale" on the balance sheet will be held as
"restricted cash" until either a plan of reorganization is confirmed or until
their disbursement is ordered by the Court.
15
<PAGE>
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>
INCOME AND EXPENSE ITEMS AS PERCENTAGE
A PERCENT OF NET SALES INCREASE (DECREASE)
------------------------------------------- -----------------------------
Three Months Six Months
Three Months Ended Six Months Ended Ended Ended
October 31, October 31, 10/31/00 10/31/00
--------------------- ---------------------
to to
2000 1999 2000 1999 10/31/99 10/31/99
---------- ---------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net sales 100.0 % 100.0 % 100.0 % 100.0 % (32.7) % (32.2) %
Cost of sales 98.3 94.0 101.4 88.9 (29.7) (22.7)
---------- ---------- ---------- ---------- ------------ ------------
Gross Profit (Loss) 1.7 6.0 (1.4) 11.1 (80.5) NM
Selling, general and
Administrative expense 6.4 4.4 6.3 4.6 (2.9) (7.7)
Reorganization charges 1.6 1.5 1.5 0.7 (28.3) 46.1
---------- ---------- ---------- ---------- ------------ ------------
Operating income (loss) (6.2) 0.1 (9.2) 5.8 NM NM
Interest expense (0.1) (1.2) (0.1) (1.4) (96.2) (96.9)
Miscellaneous 0.2 0.1 0.2 0.1 84.8 24.4
---------- ---------- ---------- ---------- ------------ ------------
Income (loss) before income taxes (6.1) (1.0) (9.0) 4.5 291.8 NM
Provision for income taxes (benefit) 0.0 0.2 0.0 0.1 (100.0) (100.0)
---------- ---------- ---------- ---------- ------------ ------------
Net income (loss) (6.1) % (1.2) % (9.0) % 4.4 % 237.8 % NM %
========== ========== ========== ==========
NM - Not Meaningful
Note - percentages may not add due to rounding.
</TABLE>
Comparison of Three Months Ended October 31, 2000 and 1999
--------------------------------------------------------------
Net sales for the three months ended October 31, 2000 decreased $19.5
million (33%), as compared to the three months ended October 31, 1999. This
decrease was principally caused by a 27% decrease in lumber sales volume and an
8% decrease in the weighted average net lumber sales price.
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Gross profit for the quarter ended October 31, 2000 was 1.7% of net sales,
compared to 6.0% of net sales for the quarter ended October 31, 1999. Unit
manufacturing costs in the three months ended October 31, 2000 increased 1% as
compared to the three months ended October 31, 1999, primarily due to
market-related production curtailments.
Selling, general and administrative expenses for the quarter ended October
31, 2000 decreased by 2.9% as compared to the quarter ended October 31, 1999,
excluding reorganization charges. This decrease has resulted from cost-saving
measures, which include the closure of certain facilities.
Reorganization charges for the quarter ended October 31, 2000 are comprised
primarily of fees for professional services related to the bankruptcy.
As of October 31, 2000, the Company had available an estimated $48 million
in federal net operating losses ("NOLs") and $36 million in state NOLs to offset
future taxable income. Due to the bankruptcy, substantial doubt exists regarding
the Company's ability to fully utilize these NOLs. As a result, the Company
fully reserved for the NOLs generated during the three months ended October 31,
2000 and 1999. The Company periodically reviews the above factors and may change
the amount of valuation allowance as facts and circumstances dictate.
Comparison of Six Months Ended October 31, 2000 and 1999
----------------------------------------------------------
Net sales for the six months ended October 31, 2000 decreased $41 million
(32%), as compared to the six months ended October 31, 1999. This decrease was
principally caused by a 25% decrease in lumber sales volume and a 10% decrease
in the weighted average net lumber sales price.
Gross profit for the six months ended October 31, 2000 was (1.4%) of net
sales, compared to 11% of net sales for the six months ended October 31, 1999.
Unit manufacturing costs for the six months ended October 31, 2000 increased 3%
as compared to the six months ended October 31, 1999, primarily due to
market-related production curtailments.
Selling, general and administrative expenses for the six months ended
October 31, 2000 decreased by 7.7% as compared to the six months ended October
31, 1999, excluding reorganization charges. This decrease has resulted from
cost-saving measures, which include the closure of certain facilities.
17
<PAGE>
Reorganization charges for the six months ended October 31, 2000 are
comprised primarily of fees for professional services related to the bankruptcy.
As of October 31, 2000, the Company had available an estimated $48 million
in federal NOLs and $36 million in state NOLs to offset future taxable income.
Due to the bankruptcy, substantial doubt exists regarding the Company's ability
to fully utilize these NOLs. As a result, the Company fully reserved for the
NOLs generated during the six months ended October 31, 2000 and 1999. The
Company periodically reviews the above factors and may change the amount of
valuation allowance as facts and circumstances dictate.
Liquidity and Capital Resources
-------------------------------
Cash and cash equivalents increased by approximately $3.5 million during
the six months ended October 31, 2000 to $6.1 million, excluding $0.9 million in
restricted cash. The increase in cash, despite substantial operating losses,
resulted primarily from the combined $13.5 million decrease in inventories and
accounts receivable from both the curtailment of operations at the Company's
Burke, Central Point, Morton, and North Powder facilities and a general decrease
in inventories at the Company's other locations. In addition 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.
For the six months ended October 31, 2000, the Company spent $0.5 million
for capital improvements to its facilities. The Company had no material
commitments for capital spending at October 31, 2000.
The Company is currently operating as a debtor-in-possession under a cash
collateral order approved by the Court, pursuant to a number of conditions. The
cash collateral order allows the Company to use funds from operations and its
$16 million debtor-in-possession working capital secured revolving line of
credit (the "Line of Credit") for normal operating purposes. The cash collateral
order also grants a security interest in substantially all the assets of the
Company to the pre-petition senior secured lenders and post-petition secured
debtor-in-possession lenders. The current cash collateral order expires December
31, 2000. If the Company is unable to obtain a new cash collateral order by
January 1, 2001, the Company may not be able to meet its short term liquidity
needs. The Company's pre-petition senior secured creditors have in the past
agreed to such a new cash collateral order during these bankruptcy proceedings.
However, there is no guarantee the pre-petition secured creditors will agree to
a new cash collateral order.
The Company historically has not had a line of credit or working capital
financing available to it, and, therefore, has relied on cash provided by its
operations to fund its working capital needs. In October of 1999, in connection
with filing for voluntary reorganization, the Company obtained the Line of
Credit, which will mature upon the earlier of April 4, 2001 or the effective
date of a final order of reorganiation, to provide for day-to-day liquidity and
seasonal log inventory increases. As of October 31, 2000 there were no
borrowings on the Line of Credit and $1,850,000 in letters of credit
outstanding.
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The Company may be unable to meet its liquidity needs if it is unable to confirm
a plan of reorganization by, extend the maturity date of its Line of Credit
beyond, or obtain alternate financing by, April 4, 2001.
The Company does not invest in market risk sensitive instruments.
Factors Affecting Forward-Looking Statements
---------------------------------------------
The statements contained in this report that are not statements of
historical fact may include forward-looking statements (as defined in Section
27A of the Securities Act of 1933, as amended) that involve a number of risks
and uncertainties. Moreover, from time to time the Company may issue other
forward-looking statements. The following factors are among the factors that
could cause actual results to differ materially from the forward-looking
statements and should be considered in evaluating any forward-looking
statements: the uncertain outcome of the Company's chapter 11 filing; the
approval of the Company's plan of reorganization; adverse operating conditions;
fluctuations in quarterly results; availability of logs; court approval of a new
cash collateral order; renewal and court approval of a revolving line of credit;
technological change; manufacturing risks; federal and state regulations;
ability to utilize the NOLs; and the additional factors listed from time to time
in the Company's SEC reports, including, but not limited to, the Company's
annual report on Form 10-K for the year ended April 30, 2000.
19
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On September 27, 1999, TreeSource Industries, Inc. and a majority of its
subsidiaries filed a voluntary petition for reorganization under chapter 11 of
the U.S. Bankruptcy Code. The proceeding was filed in the U.S. Bankruptcy Court
for the Western District of Washington in Seattle (the "Bankruptcy Court"). The
jointly administered proceeding is titled: "TreeSource Industries, Inc., et
al.", Case Numbers 99-10932, 99-10937 through 99-10961.
The Company and its Trask River Lumber subsidiary were named defendants in
a claim for wages and penalties filed in U.S. District Court for the District of
Oregon on February 17, 1999 (Allen, Blount, et al., vs. WTD Industries, Inc.,
Trask River Lumber and Bruce L. Engel). Although the case was stayed by the
Company's chapter 11 filing, the plaintiffs filed a class Proof of Claim. The
Court has agreed to certify a class and the parties have agreed to a settlement
of the class member's wage claims. Any claims allowed by the Court will be
treated in accordance with the terms of the Company's chapter 11 plan of
reorganization.
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.
Item 3. Defaults Upon Senior Securities
Due to the Company's inability to meet certain of its financial covenants
and its filing for reorganization, the Company is not in compliance with its
obligations under its senior secured debt agreement and ceased making interest
and principal payments on its senior secured debt in March 1999. On September
27, 1999 the Company filed for voluntary reorganization under chapter 11 of the
U.S. Bankruptcy Code in the U.S. District Court of the Western District of
Washington: In re TreeSource Industries, Inc., et al (Case Nos. 99-10932 and
99-10937 through 99-10961). As of November 30, 2000, the Company has not paid
eight consecutive quarterly dividend payments due to holders of its Series A
Preferred Stock, totaling approximately $4,541,000 and is in arrears on payment
of approximately $7,700,000 in interest on its senior secured debt.
Additionally, the Company is in arrears on payment of approximately $178,000 in
interest to non-affiliated parties on its 8% unsecured senior notes as of
November 30, 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.
20
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The Index to Exhibits is located on page 23.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended October
31, 2000.
21
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TreeSource Industries, Inc.
(Registrant)
/s/ Jess R. Drake
-----------------------------------
Jess R. Drake
President, Chief Executive Officer
and Director
/s/ Robert W. Lockwood
-----------------------------------
Robert W. Lockwood
Vice President - Finance and Chief
Financial Officer
December 14, 2000
22
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TreeSource Industries, Inc.
Index to Exhibits
Sequential
Number
System
Page
Number
3.1 Fourth Restated Articles of Incorporation of Registrant
adopted effective November 27, 1992, as amended(1)
3.2 Second Restated Bylaws of the Registrant adopted effective
November 27, 1992(2)
27 Financial Data Schedule(3)
(1) Incorporated by reference to the exhibit of like number to the
Registrant's quarterly report on Form 10-Q for the quarter ended
October 31, 1998.
(2) Incorporated by reference to the exhibit of like number to the
Registrant's annual report on Form 10-K for the year ended April 30,
1993.
(3) This schedule has been submitted in electronic form prescribed by
EDGAR.
