Back to GetFilings.com

Table of Contents

Index to Financial Statements

U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended September 30, 2003

OR

For the transition period from              to             

Commission file number: 1-9083

TREECON RESOURCES, INC.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (936) 634-3365

Securities Registered Pursuant to Section 12(b) of the Act:

Securities Registered Pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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  ¨    No  x

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.  ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Securities Act of 1934, as amended).    Yes  ¨    No  x.

The aggregate market value of voting stock held by non-affiliates of the registrant, based on the closing price of such stock on the last business day of the registrant’s second fiscal quarter ended March 31, 2003, was approximately $201,000. For purposes of these computations, all executive officers, directors and 10% beneficial owners of the registrant are deemed to be affiliates. Such determination should not be deemed an admission that such executive officers, directors and 10% beneficial owners are affiliates. As of July 14, 2004, the registrant had issued and outstanding 18,615,464 shares of common stock, $.01 par value.

Table of Contents

Index to Financial Statements

TREECON RESOURCES, INC.

2003 FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS

i

Table of Contents

Index to Financial Statements

PART I

The nature of the Company’s operations, and the environment in which we operate, subject us to changing economic, competitive, regulatory and technological conditions, risks and uncertainties. In connection with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, we note the following factors, which among others could cause future results to differ materially from the forward-looking statements, expectations and assumptions expressed or implied herein. Forward-looking statements contained in this document include the amount of future capital expenditures and the possible uses of proceeds from any future borrowings under our currently effective credit facilities. Factors which could cause results to differ include, but are not limited to, changes in our business environment, including actions of competitors and changes in customer preferences; changes in governmental laws and regulations, including income taxes; market demand for new and existing products; and equipment manufacturers’ and timber pricing. See also “Forward Looking Statements” and “Risk Factors Related to Our Business and Industry.”

ITEM 1. Business.

General

TreeCon Resources, Inc., formerly Overhill Corporation and formerly Polyphase Corporation (the “Company”), incorporated in 1963 and now a Nevada corporation, is a holding company that, through our subsidiaries, currently operates in two industry segments: the equipment, parts and service segment, which distributes, leases and provides financing for industrial and logging equipment and the timber and wood products segment, which includes sawmill operations and the treatment and sale of lumber products.

Our food segment, which previously had been included as a separate operating segment is classified as a discontinued operation due to the spin-off of our subsidiary, Overhill Farms, Inc. (“Overhill Farms”), to our shareholders, which was completed, with lender consent, effective October 29, 2002. The results of operations of Overhill Farms for the one month we owned them during fiscal 2003 were not significant, and are included as a discontinued operation in these financial statements.

In June 1994, we acquired all of the outstanding capital stock of Texas Timberjack from Mr. Harold Estes, current President of TTI as well as a director and major shareholder of the Company. The capital stock of TTI was acquired from Mr. Estes for consideration of approximately $4.0 million in cash, a $10.0 million promissory note payable to the order of Mr. Estes, and 100,000 shares of the Company’s Series A Preferred Stock, which were subsequently converted into 2.0 million shares of common stock. Subsequent to June 1994, the Company and Mr. Estes have modified, renewed and extended the promissory note payable to Mr. Estes on several occasions. As of September 30, 2003, the promissory note had a balance of approximately $24.3 million (including accrued and unpaid interest), which matures in October 2003 and has been renewed through October 2004.

With the exception of our note payable and accrued interest payable to Mr. Estes described above, we believe that the funds available to us from operations and existing capital resources will be adequate for our operating and capital requirements for the next twelve months. Our note payable to Mr. Harold Estes matured on October 31, 2003. Subsequent to October 31, 2003, we agreed with Mr. Estes to a further extension of the maturity date to October 31, 2004, under substantially the same terms and conditions except for a reduction of the interest rate from 9% to 5%. Interest payable to Mr. Estes as of October 31, 2003, totaling approximately $2.1 million, will be added to the principal of the refinanced note. As the collateral pledged against the note payable to Mr. Estes represents all of our ownership of our only

1

Table of Contents

Index to Financial Statements

continuing operation, Mr. Estes’ foreclosure on such collateral upon maturity or thereafter would have a material adverse effect on our ability to continue as a going concern. In the future, we intend to seek further extension of our note payable to Mr. Estes, though no assurances can be made that such extension will be granted on favorable terms and conditions, if at all. If we are not successful in obtaining an extension of the maturity date of this note payable, we do not currently expect to otherwise have the resources necessary to satisfy this obligation. Accordingly, until there is a satisfactory resolution of this uncertainty, substantial doubt exists with respect to our ability to continue as a going concern. Such substantial doubt has also been reflected in the Reports of Independent Auditors related to the Company’s financial statements for the fiscal year ended September 30, 2003 (See Item 8. “Financial Statements” and Item 16. “Exhibits, Financial Statement Schedules and Reports on Form 8-K”).

In fiscal 1998, TTI acquired a majority interest in a timber and sawmill operation. In fiscal 2000, TTI acquired a non-operating refinery and assumed a note payable to Mr. Estes. In February 2003, TTI exchanged its ownership in the refinery for the remaining minority ownership in the timber and sawmill operation.

To diversify our operations, TTI became a dealer in New Holland construction equipment during fiscal 2000. We opened a TTI/New Holland dealership in Houston, Texas during fiscal 2001. However, the New Holland construction line failed to meet our profitability expectations, and the Houston store was closed during the fourth quarter of 2003. The remaining New Holland equipment inventory was returned to the manufacturer during fiscal 2003.

Disposition

In August 2001, our Board of Directors approved a plan to spin off all of the Company’s shares of Overhill Farms to the holders of our common stock. Overhill Farms, which produces high quality entrees, plated meals, meal components, soups, sauces and poultry, meat and fish specialties, previously comprised the Company’s Food Group. The transaction to effect the spin-off, expected to be tax-free, was completed on October 29, 2002 and resulted in the issuance to our stockholders, of one share of Overhill Farms common stock for every two shares of our common stock owned as of the close of business on September 30, 2002. The assets, liabilities and operations of Overhill Farms have been reported as discontinued in our consolidated financial statements.

Business Strategy

We continue to operate in a difficult market. Although sales have improved in both our operating units, margins have not improved due mostly to competitive pressures. In an effort to offset declining profit margins in our equipment operations, we have continued our efforts to reduce expenses and reduce debt. We will continue to review long-term strategies and alternatives for TTI and our subsidiaries in order to maximize shareholder value.

To achieve future growth we have identified the following basic initiatives:

2

Table of Contents

Index to Financial Statements

Operating Segments

The following table sets forth business segment information with respect to the percentage of net sales and operating income contributed by each segment for the years ended September 30, 2003, 2002 and 2001.

Reference is made to Note 18 to the Company’s consolidated financial statements for revenues, operating profits or losses and identifiable assets attributable to each industry segment for each of the last three years.

Products and Services

We, through TTI and its majority-owned subsidiaries, are a distributor of industrial and logging equipment with investments in related timber and sawmill operations. TTI has four locations in eastern Texas. TTI’s headquarters are located in Lufkin, with smaller satellite stores and repair facilities located in Jasper, Cleveland, and Atlanta, Texas. Timberjack’s Houston store was closed during the fourth quarter of fiscal 2003 due to our decision to discontinue selling construction equipment. TTI carries several lines of industrial and logging equipment, including Timberjack (an unrelated manufacturer) and Blount. TTI is involved in the sale, leasing and financing of the equipment it distributes as well as the servicing of all major brands of related equipment. TTI’s operations are primarily concentrated in the forested areas of eastern Texas although its market extends into western Louisiana. TTI operates in a fragmented industry where its major competition is from distributors and dealers of Caterpillar and John Deere equipment. TTI estimates that in eastern Texas it currently holds approximately 68% of the market for shears (machines that cut timber), 52% of the market for skidders (machines that transport logs out of the forest to a loader) and over 75% of the market for loaders (machines that stack logs onto trucks).

TTI, through its subsidiary Southern Forest Products, LLC (“SFP”), produces pine decking lumber and timbers at its sawmill in Bon Wier, Texas. SFP also treats its decking and timbers, as well as other customers’ lumber, at its treating facility in Houston, Texas. SFP’s operations are primarily concentrated in Texas, although its market extends into the Midwest and Southeast United States. SFP estimates that in Texas, it currently holds approximately 70% of the market for larger, longer length timbers and a negligible share of the market for decking.

Sales and Marketing

Timberjack currently maintains sales and distribution offices in Lufkin, Jasper, Cleveland, and Atlanta, Texas primarily to serve eastern Texas and western Louisiana. Sales are generated through repeat customers, advertisements in various trade publications and direct marketing calls on companies located in the area. A general sales manager and several branch managers supply technical and operational

3

Table of Contents

Index to Financial Statements

support, while six salesmen have direct responsibility for customer relationships. TTI meets customers’ orders for new equipment and replacement parts out of existing inventory or through purchase orders placed with the manufacturers TTI currently represents.

SFP maintains sales offices in Bon Wier and Houston, Texas, primarily to serve Texas, as well as certain parts of the Midwest and Southeast United States. Sales are generated primarily through repeat customers and marketing calls on companies throughout SFP’s market. SFP has one salesperson in Bon Wier and one salesperson in Houston, each of who have direct responsibility for customer relationships.

Approximately 35% of TTI’s revenues during fiscal 2003 were from new equipment sold to companies involved in the forestry and construction industries. Additional equipment-related revenues are derived from sales of used equipment (13%), servicing of equipment (4%), sales of parts (15%) and financing equipment sales (1%). The remaining 32% of TTI’s revenues is derived from the sale of finished timber products through its timber and sawmill operations. No single customer accounts for more than 10% of TTI’s sales. Equipment sales financed by TTI are typically for periods ranging from 12 to 24 months at interest rates ranging from 8% to 18% per annum.

Approximately 89% of SFP’s revenues during fiscal 2003 were from lumber sales and related by-product sales. The remaining 11% of revenues were from treating sales.

Backlog

As a dealer, servicer and financier of forestry equipment, TTI does not maintain a backlog of orders. Equipment ordered that is not in inventory takes approximately ninety days to be shipped from the manufacturer or another distributor.

Typically, SFP does not maintain a significant backlog of orders. Decking or timbers that are not in inventory take approximately one to two weeks to be manufactured and shipped.

Product Development

TTI does not develop products for sale to the public. TTI relies primarily upon its suppliers (Timberjack, Blount and previously New Holland) for a majority of its new units and parts.

SFP does not develop new products for sale to the public.

Competition

Competition in the forestry industry is highly fragmented in the eastern Texas and western Louisiana areas where TTI principally operates. Because of its lengthy historical presence in these regions, TTI believes it has established a strong local identity in its field with a proven record of delivering equipment on a timely basis, providing satisfactory financing and strong customer support and service. TTI is one of only a few distributors of Timberjack and Blount forestry equipment in its operating areas. TTI has the added advantage of being a leading seller and financier of various makes and models of used logging equipment. Principal competitors include local John Deere and Caterpillar distributors.

SFP’s competition in the decking market is very strong, as several mills in Texas and the Southeastern United States produce this type of lumber. However, SFP’s mill produces a high quality premium grade decking which has helped it gain market share against its competition. SFP believes it has an advantage in the pine timber market because of the relatively few sawmills in the United States that produce the same size of pine timbers, up to 40 feet in length, that SFP can produce.

4

Table of Contents

Index to Financial Statements

Patents, Trademarks and Copyrights

We do not have patents or patent applications pending on any of our products, although we may file such patent applications in the future.

Regulation

We are required to comply with various governmental regulations and requirements concerning the discharge of materials into the environment or otherwise relating to the protection of the environment. Compliance with the current applicable federal, state and local environmental regulations has not had, and we do not believe that in the future such compliance will have, a material effect on our financial position, results of operations, expenditures or competitive position.

We take all reasonable precautions to ensure that our operations and facilities operate in a safe, sanitary and environmentally sound manner. However, events beyond our control, such as the adoption by the government of more stringent environmental regulations, could adversely affect our operations. We believe that we are in substantial compliance with all applicable laws and regulations relating to the operation of our facilities.

Employees

As of September 30, 2003, we had approximately 145 full time employees at TTI and SFP. The corporate office was closed in April 2003. TTI presently provides a group health plan for its employees and pays a portion of the costs associated with the plan. TTI also maintains a profit sharing plan for its employees.

ITEM 2. Properties.

Timberjack

TTI owns three buildings in Lufkin, Texas, two buildings in Jasper, Texas and a building in Cleveland, Texas and leases a building in Atlanta, Texas. TTI’s largest building in Lufkin has 38,500 square feet, which is used for TTI’s administrative offices, showroom, parts sales and service areas. The remaining buildings have 3,600 and 4,200 square feet, respectively. The Jasper, Cleveland, and Atlanta buildings have approximately 11,000, 6,700, and 7,500 square feet, respectively, which are used for sales offices, parts sales and shop areas.

Prior to September 30, 2002, TTI leased six buildings on 68 acres in Bon Wier, Texas for its sawmill operation. The sawmill was leased at a basic rent of $19,000 per month, which included certain equipment, with an option to purchase the land, buildings and equipment. Effective September 30, 2002, TTI exercised its option to purchase the sawmill for total consideration of $856,000, represented by a promissory note in that amount issued jointly by TTI and Mr. Estes. (See Notes 9 and 14 to the Company’s consolidated financial statements.)

As of September 30, 2002, SFP, through its subsidiary Quantum Fuel and Refining, Inc. (“Quantum”), owned a non-operating crude oil refining and blending facility, together with related buildings and administrative office space, situated on approximately 120 acres of land in Egan, Louisiana. Quantum was sold in February 2003 (See Note 3 to the Company’s consolidated financial statements).

5

Table of Contents

Index to Financial Statements

Corporate Headquarters

In prior years, we leased an approximately 4,000 square foot facility located in Addison, Texas that served as our corporate headquarters. Following the spin-off of Overhill Farms, we relocated our corporate headquarters to the Texas Timberjack facilities in Lufkin, Texas.

ITEM 3. Legal Proceedings.

During fiscal 1997, five substantially identical complaints were filed in the United States District Court for the District of Nevada against the Company and certain of its officers and directors. The lawsuits each sought certification as a class action and asserted liability based on alleged misrepresentations that the plaintiffs claimed resulted in the market price of the Company’s stock being artificially inflated. The defendants filed motions to dismiss in each of the lawsuits. Without certifying the cases as class actions, the District Court consolidated several of the cases into a single action.

In March 2000, the District Court dismissed the plaintiffs’ claims against one of the Company’s officers and directors and restricted the plaintiffs from pursuing a number of their claims against the other defendants. In November 2000, the District Court granted motions for summary judgment, disposing of all of the claims asserted by the plaintiffs. The plaintiffs appealed those decisions to the United States Court of Appeals for the Ninth Circuit.

On June 5, 2002, the Ninth Circuit rendered a decision that affirmed several of the trial court’s rulings, but reversed other rulings and remanded portions of the case for further proceedings in the District Court. On remand, the case was set for trial to commence in March 2003. In the days immediately prior to the scheduled trial date, the defendants offered to settle all claims advanced in the litigation in consideration of an aggregate payment of $13,000. In June 2003, the defendants paid $13,000 to the plaintiffs collectively, and the lawsuit was dismissed with prejudice.

The Company and its subsidiaries are involved in certain legal actions and claims arising in the ordinary course of business. However, we believe (based, in part, on advice of legal counsel) that such litigation and claims will be resolved without material effect on the Company’s financial condition, results of operations or cash flows.

ITEM 4. Submission of Matters to a Vote of Security Holders.

No matters were submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the quarter ended September 30, 2003.

6

Table of Contents

Index to Financial Statements

PART II

ITEM 5. Market for Registrant’s Common Equity and Related Stockholder Matters.

Prior to October 30, 2002, our common stock was listed on the American Stock Exchange and traded under the symbol “OVH.” In connection with the spin-off of Overhill Farms, we changed our name to TreeCon Resources, Inc., and trading in our common stock on the American Stock Exchange was voluntarily suspended on October 29, 2002. As of October 30, 2002, our common stock began quotation on the OTC Bulletin Board under the trading symbol “TCRS.” The following table sets forth the range of high and low sales prices for the common stock on the American Stock Exchange or the OTC Bulletin Board for the periods indicated:

We have never paid cash dividends on its common stock and do not anticipate doing so in the foreseeable future. Rather, we intend to utilize any earnings for the payment of our obligations. Such policy is subject to change based on current industry and market conditions as well as other factors beyond our control. In addition, our ability to pay dividends is restricted by the Company’s and TTI’s arrangements with their creditors.

As of May 26, 2004, we had 199 stockholders of record.

As of September 30, 2003, we did not have any outstanding options to purchase our common stock. As of September 30, 2003, 775,000 shares were available for grant under our 1994 Employee Stock Option Plan (as amended), which had previously been approved by our stockholders. Our 1994 Employee Stock Option Plan (as amended) expired following the September 30, 2003 fiscal year end.

7

Table of Contents

Index to Financial Statements

ITEM 6. Selected Financial Data

The following table sets forth selected financial data for the Company for each of the fiscal years ended September 30, 2003, 2002, 2001, 2000 and 1999. This information should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and Notes included elsewhere herein.

8

Table of Contents

Index to Financial Statements

ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Statements contained in this Form 10-K that are not historical facts, including, but not limited to, any projections contained herein, are forward-looking statements and involve a number of risks and uncertainties. The actual results of the future events described in such forward-looking statements in this Form 10-K could differ materially from those stated in such forward-looking statements. Among the factors that could cause actual results to differ materially are adverse economic conditions, industry competition and other competitive factors, government regulation and possible future litigation.

Fiscal Year Ended September 30, 2003 Compared to Fiscal Year Ended September 30, 2002

Net Revenues - For the year ended September 30, 2003, our revenues increased $2,647,000 (6.8%) to $41,347,000 as compared to $38,700,000 for the fiscal year ended September 30, 2002.

Our Equipment segment’s net revenues were $28,386,000 for fiscal 2003 as compared to $27,579,000 for fiscal 2002, an increase of $807,000 (2.9%). The increase in sales was a result of a $2,229,000 increase in unit sales, which was partially offset by slight declines in parts, service, and interest income from sales contracts. The increase in unit sales was due to an improvement in the overall timber market. As a result of the war with Iraq and an improvement in the US economy, the demand for timber products – plywood, dimension lumber, and Oriented Strand Board (OSB)increased.

Timber net revenues were $12,961,000 for fiscal 2003 as compared to $11,121,000 for fiscal 2002, an increase of $1,840,000 (16.5%). As a result of improvement in our targeted timber market, SFP increased its production to meet demand, resulting in a 16.5% increase in timber revenue.

Gross Profit - For the year ended September 30, 2003, our gross profit decreased $1,719,000 to $5,766,000 as compared to $7,485,000 for the fiscal year ended September 30, 2002. Gross profit as a percentage of net revenues for the fiscal year ended September 30, 2003 was 13.9% compared to 19.3% in the prior year. This decline is due to a decline at our Equipment unit, which was offset slightly by an increase in gross profit at our Timber unit. The Equipment unit’s gross profit margin declined $1,761,000 to $3,870,000 for fiscal 2003 from $5,632,000 for fiscal 2002. During fiscal 2003, we made a decision to wholesale most of our slower moving inventory, which contributed to the decline in the Equipment unit’s gross profit margins. Competitive pressures also contributed to the decline in the Equipment Unit’s gross profit. The Timber unit’s gross profit increased slightly $43,000 to $1,896,000 for fiscal 2003 from $1,853,000 for fiscal 2002 as a result of an improvement in production efficiencies.

Selling, General and Administrative Expenses - Selling general and administrative expenses, decreased $272,000 (3.6%) to $7,335,000 in 2003 from $7,607,000 in 2002. Due to a concerted effort to reduce personnel and operating expenses, SG&A declined approximately $90,000 in the operating units during the twelve month period, when compared with the same period in 2002. In addition, parent company SG&A decreased $183,000 from the same period in 2002. The parent company decrease is primarily due to savings experienced due to the closing of the corporate office in Addison, Texas and the assignment of the investor relation function to Texas Timberjack, Inc.’s existing personnel. These savings were partially offset by legal expenses incurred in connection with the defense of our class action lawsuit during the first quarter fiscal 2003. Also, in connection with the completion of the spin-off of Overhill Farms, we provided for a $48,000 collectibility reserve against the notes receivable from Messrs. Buck and Schrader, who were directors of the Company until March, 2004. Additionally, we established a $216,000 reserve against a note receivable from an attorney who performed services for the Company and Overhill Farms, Inc.

9

Table of Contents

Index to Financial Statements

Other Expenses/Income – Total other expenses/income improved $957,000 to $1,278,000 net expense in 2003 from $2,234,000 net expense in 2002. This improvement is primarily attributable to a decrease in recorded losses of $597,000 related to Timberjack’s 49.9% investment in a construction company accounted for on the equity method. The operations of this company were substantially reduced during the latter part of fiscal 2002. See “Item 13—Certain Relationships and Related Transactions.” In addition, TTI recognized a gain on sale of timber and land of $845,000 during the third quarter of 2003. TTI purchased approximately 27,000 acres of land and timber from Louisiana Pacific Corporation for approximately $19,415,000 and sold the same property to an unrelated party on the same day. After closing costs and other expenses, TTI recorded a gain of $845,000 on this transaction. This gain was partially offset by a $213,000 net decline in the sale of other certain real estate assets from 2002 to 2003. A significant reduction in borrowings together with lower interest rates resulted in decreased interest expense to unrelated parties of $340,000. An increase in principal on the due to refinancing on the note to Mr. Estes increased interest expense by $596,000.

Income Taxes – Income tax expense (benefit) was $0 in 2003 as compared to ($271,000) in 2002. The income tax benefit in 2002 was primarily recorded as a result of utilizing net operating loss carryforwards to reduce taxable income generated by discontinued operations. In 2003, discontinued operations had a small loss, resulting in no income tax expense or benefit.

Fiscal Year Ended September 30, 2002 Compared to Fiscal Year Ended September 30, 2001

Net Revenues - - For the year ended September 30, 2002, our revenues decreased $4,596,000 (10.6%) to $38,700,000 as compared to $43,296,000 for the fiscal year ended September 30, 2001. During the current fiscal year, net revenues from our equipment segment decreased $5,013,000 from 2001 due primarily to a continued softness in the East Texas timber market. Revenues from the timber segment increased $417,000 in 2002 due primarily to increased demand for our treated timber products and higher overall production at our sawmill operation as compared to the previous fiscal year.

Gross Profit - For the year ended September 30, 2002, our gross profit decreased $415,000 to $7,485,000 as compared to $7,900,000 for the fiscal year ended September 30, 2001. Gross profit as a percentage of net revenues for the fiscal year ended September 30, 2002 was 19.3% compared to 18.2% in the prior year. The gross profit in our Equipment segment increased to 25.6% of revenues in 2002 from 20.6% in 2001, due primarily to a change in the sales mix from the lower margin sales of major units to the higher margin sales of used equipment. The gross profit in our timber segment increased to 16.6% of revenues in 2002 from 12.2% in 2001, which is primarily attributable to efficiency and productivity increases in our timber segment.

Selling, General and Administrative Expenses - Selling general and administrative expenses for the fiscal year ended September 30, 2002 decreased $411,000 (5.1%) to $7,607,000 in 2002 from $8,018,000 in 2001. This decrease is primarily attributable to a decline in salaries and wages due to personnel reductions in our equipment segment and to the discontinuance of goodwill amortization during 2002 as compared to $283,000 of goodwill amortization in fiscal 2001.

Goodwill Impairment – We adopted the provisions of SFAS No. 142, “Goodwill and Intangible Assets” effective October 1, 2001 and, accordingly, ceased amortization of goodwill. In connection with the requirements of SFAS No. 142, we performed an annual goodwill impairment test as of September 30, 2002. Primarily due to the continued softness in the East Texas forestry equipment market and the impact of an overall depressed economy, we recorded an impairment charge of $3.6 million to write-off all remaining goodwill during the fourth quarter of the fiscal year ended September 30, 2002.

10

Table of Contents

Index to Financial Statements

Other Expenses - Other expenses increased $592,000 to $2,234,000 in 2002 from $1,642,000 in 2001. This increase is primarily attributable to recorded losses of $1,013,000 related to Timberjack’s 49.9% investment in a construction company accounted for on the equity method. The operations of this company were substantially reduced during the latter part of fiscal 2002. See “Item 13--Certain Relationships and Related Transactions.” This loss was partially offset by a $379,000 decrease in interest expense due to a significant reduction in borrowings together with lower interest rates.

Income Taxes – Income tax expense (benefit) was ($271,000) in 2002 as compared to $860,000 in 2001. The income tax benefit in 2002 was primarily recorded as a result of utilizing net operating loss carryforwards to reduce taxable income generated by discontinued operations. In 2001, taxable income generated by discontinued operations was significantly higher, resulting in an offsetting income tax benefit related to continuing operations being recorded of approximately $1.3 million. However, during the fourth quarter of 2001, in connection with the planned spin-off of its Overhill Farms, Inc. subsidiary, we also recorded an additional $2.1 million valuation allowance against it