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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED August 24, 2002
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
------------------ TO -----------------
Commission file number 0-24390
WOODWORKERS WAREHOUSE, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-3579658
----------------------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
126 Oxford Street, Lynn, Massachusetts 01901
-----------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(781) 853-0900
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 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 ____
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes X No_____
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Upon the Company's reorganization and emergence from bankruptcy on October 29,
2001, all of the Company's Class A and Class B common stock, treasury stock,
preferred stock and outstanding stock options under the 1993 Employee Stock
Option Plan and the 1994 Non-Qualified Stock Option Plan for Non-Employee
Directors were cancelled. A total of 7,500,000 shares, par value $0.01 per
share, of common stock have been authorized and the Company is required to issue
5,280,000 shares as payment for pre-petition liabilities and 360,000 shares to
management. As of the date of this Form 10-Q, these shares had not yet been
issued, were unable to trade, and thus no aggregate market value can be
determined at this time. When the shares are issued, they will be deemed to have
been issued as of October 29, 2001.
WOODWORKERS WAREHOUSE, INC.
INDEX
Page
------
Part I - Financial Information
Item 1. Financial Statements
Condensed Consolidated Statements of Operations
Three and Six Months Ended August 24, 2002 (Unaudited) (Successor) and
August 25, 2001 (Unaudited) (Predecessor) 3
Condensed Consolidated Balance Sheets
August 24, 2002 (Unaudited) (Successor) and February 23, 2002 (Successor) 4
Condensed Consolidated Statements of Cash Flows
Six Months Ended August 24, 2002 (Unaudited) (Successor) and
August 25, 2001 (Unaudited) (Predecessor) 5
Notes to Condensed Consolidated Financial Statements 6-8
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations 9-12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 12
Item 4. Controls and Procedures 12
Part II - Other Information
Item 1. Legal Proceedings 12
Item 2. Changes in Securities and Use of Proceeds 12
Item 3. Defaults Upon Senior Securities 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 13
WOODWORKERS WAREHOUSE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
Three Months Ended Six Months Ended
Successor Predecessor Successor Predecessor
August 24, 2002 August 25, 2001 August 24,2002 August 25, 2001
--------------- --------------- -------------- ---------------
Net sales $ 24,963 $ 23,126 $ 52,958 $ 50,209
Cost of sales 17,231 16,193 36,255 35,193
----------- ----------- ----------- -----------
Gross profit 7,732 6,933 16,703 15,016
Selling, general and administrative expenses 9,666 8,598 19,104 19,173
Reorganization items -- (3,064) -- (239)
----------- ----------- ----------- -----------
(Loss) income from operations (1,934) 1,399 (2,401) (3,918)
Interest expense, net 315 848 643 1,847
----------- ----------- ----------- -----------
(Loss) income before provision for income taxes
and discontinued operations (2,249) 551 (3,044) (5,765)
Provision for income taxes -- -- -- --
----------- ----------- ----------- -----------
(Loss) income from continuing operations (2,249) 551 (3,044) (5,765)
Loss from discontinued operations -- (169) -- (224)
----------- ----------- ----------- -----------
Net (loss) income $ (2,249) $ 382 $ (3,044) $ (5,989)
=========== =========== =========== ===========
Basic and diluted loss per share:
Loss before discontinued operations $ (0.40) * $ (0.54) *
Discontinued operations -- * -- *
----------- ----------- ----------- -----------
Net loss per share $ (0.40) * $ (0.54) *
=========== ----------- ----------- -----------
Weighted average shares outstanding
Basic and diluted 5,640,000 * 5,640,000 *
=========== =========== =========== ===========
* EPS for the Predecessor Company is not meaningful.
See notes to condensed consolidated financial statements.
3
WOODWORKERS WAREHOUSE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(Unaudited)
August 24, February 23,
2002 2002
-------- --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 189 $ 519
Accounts receivable, net 2,706 3,823
Inventories 31,297 29,586
Prepaid expenses and other current assets 841 1,051
-------- --------
Total current assets 35,033 34,979
PROPERTY AND EQUIPMENT, NET 3,386 3,958
LEASE INTERESTS, NET 1,446 1,602
OTHER ASSETS 888 871
-------- --------
$ 40,753 $ 41,410
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Bank credit facility $ 22,249 $ 20,878
Current portion of capital lease obligations 1,052 1,252
Post-Petition accounts payable 10,921 8,941
Pre-Petition accounts payable 2,000 2,000
Accrued expenses 3,181 3,125
Deferred liabilities 950 1,243
Other current liabilities 421 514
-------- --------
Total current liabilities 40,774 37,953
CAPITAL LEASE OBLIGATIONS, NET OF CURRENT PORTION 1,649 2,083
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock 56 56
Additional paid-in capital 1,432 1,432
Accumulated deficit (3,158) (114)
-------- --------
Total stockholders' equity (deficit) (1,670) 1,374
-------- --------
$ 40,753 $ 41,410
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
WOODWORKERS WAREHOUSE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Six Months Ended
Successor Predecessor
August 24, 2002 August 25, 2001
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,044) $ (5,989)
Add: loss from discontinued operations -- (224)
-------- --------
Net loss from continuing operations (3,044) (5,765)
Adjustments to reconcile net loss to net cash from operating activities:
Depreciation and amortization 842 2,323
Reorganization items -- (239)
Changes in current assets and liabilities:
Accounts receivable 1,117 (2,773)
Inventories (1,711) 10,398
Prepaid expenses and other current assets 210 364
Post-petition accounts payable 1,980 (660)
Pre-petition accounts payable -- 122
Accrued expenses (56) (407)
Deferred liabilities (293) (869)
Other current liabilities (93) (102)
-------- --------
Net cash from operating activities (936) 2,392
Net cash from discontinued operations -- 133
-------- --------
Net cash from operating activities (before reorganization expenses) (936) 2,525
Operating cash flows from reorganization expenses:
Professional fees paid for services rendered in bankruptcy -- (1,719)
Interest income received -- 283
Lease asset sale proceeds -- 4,562
Loss on disposal of Post Tool (1,845)
Other reorganization expenses paid -- (1,042)
-------- --------
Net cash from reorganization items -- 239
-------- --------
Net cash from operating activities (936) 2,764
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (114) --
Other assets (17) (178)
-------- --------
Net cash from investing activities (131) (178)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) under bank credit facilities 1,371 (4,937)
Principal payments on capital lease obligations (634) (218)
-------- --------
Net cash from financing activities 737 (5,155)
NET DECREASE IN CASH AND CASH EQUIVALENTS (330) (2,569)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 519 18,338
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 189 $ 15,769
======== ========
See notes to condensed consolidated financial statements.
5
WOODWORKERS WAREHOUSE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
Woodworkers Warehouse, Inc. (the "Company" or the "Successor") is a specialty
retailer of woodworking tools and accessories sold through its 98 retail stores
located in the New England and Mid-Atlantic regions, nationally distributed
mail-order catalogs and web site (www.woodworkerswarehouse.com).
With respect to the unaudited consolidated financial statements, it is the
Company's opinion that all necessary adjustments (consisting of normal and
recurring adjustments) have been included to present a fair statement of results
for the interim periods. Certain prior-year amounts have been reclassified to
conform to this year's presentation.
These statements should be read in conjunction with the Company's financial
statements (Form 10-K) for the fiscal year ended February 23, 2002 ("fiscal
2001"). Due to the seasonal nature of the Company's business, operating results
for the interim periods are not necessarily indicative of results that may be
expected for the fiscal year ending March 1, 2003 ("fiscal 2002"). Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted, pursuant to the general rules and regulations promulgated
by the Securities and Exchange Commission (the "SEC").
On August 11, 2000, Trend-Lines Inc. (the "Predecessor") filed for bankruptcy
under Chapter 11 of the United States Bankruptcy Code. The Predecessor operated
its business as a debtor-in-possession subject to the jurisdiction of the United
States Bankruptcy Court for the District of Massachusetts Eastern Division (the
"Bankruptcy Court") until October 29, 2001. The First Amended Joint
Reorganization Plan of Trend-Lines, Inc. and the Official Committee of Unsecured
Creditors dated as of September 7, 2001, as modified (the "Plan") was confirmed
by the Bankruptcy Court on October 17, 2001. The effective date of the Plan was
October 29, 2001 (the "Effective Date"). For financial reporting purposes,
October 27, 2001 was considered the emergence date. On the Effective Date, the
Predecessor merged into its wholly owned subsidiary, Woodworkers Warehouse,
Inc., with Woodworkers Warehouse, Inc. being the surviving corporation emerging
from bankruptcy. Pursuant to the Plan, new directors and new officers were
appointed for the Successor.
Upon emergence from bankruptcy, the Company adopted fresh start accounting. The
financial statements of the Company have been prepared in accordance with the
American Institute of Certified Public Accountants Statement of Position 90-7:
"Financial Reporting by Entities in Reorganization Under the Bankruptcy Code"
("SOP 90-7"). The purchase method of accounting was used to record the fair
value of assets and assumed liabilities of the reorganized Company at October
27, 2001.
The Company's ability to meet its financial obligations will depend on the
Company's future operating performance, which will be subject to financial,
economic and other factors affecting the business and operations of the Company,
including factors beyond its control. Provided the holders of the $2 million
claim, which the Company is obligated to pay under the Plan, continue to permit
the deferral of payment and the Company receives the waiver and amendment
described below, management believes the availability under its Facility (Note
6), together with available cash and expected cash flows from fiscal 2002
operations and beyond, and other sources of financing will enable the Company to
continue as a going concern.
The Company is not currently in compliance with the financial covenant (Note 6)
under the Facility and is seeking a waiver of that covenant for the second
quarter of fiscal 2002 and an amendment to adjust the covenant requirements for
the third and fourth quarters. The Company is currently in negotiations with its
lenders but there is no guarantee that the waiver and amendment will be
obtained. The Company will attempt to obtain an alternate financing facility if
the waiver and amendment are not obtained from its current lenders and there
have been preliminary discussions with other lending sources but there can be no
assurance that an agreement will be reached with another lender in the event the
waiver and amendment are not obtained.
2. New Accounting Pronouncements
In April 2002, the FASB issued SFAS 145, "Rescission of FASB Statements 4, 44
and 64, Amendment to FASB Statement 13, and Technical Corrections". One of the
major changes of this Statement is to alter the accounting for the
classification of gains and losses from the extinguishment of debt. Upon
adoption, the Company will follow APB 30, Reporting the Results of
Operations--Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions in
determining whether such extinguishment of debt may be classified as
extraordinary. The provisions of this Statement related to the rescission of
FASB Statement 4 shall be applied in fiscal years beginning after May 15, 2002
with early application encouraged. The Company believes that the adoption of
SFAS 145 will not have a material impact on its financial statements.
In June, 2002, the FASB issued SFAS 146 "Accounting for Costs Associated With
Exit or Disposal Activities". This Statement addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force (EITF) Issue No. 94-3 "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." This Statement requires
that a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred. The provisions of this Statement are
effective for exit or disposal activities that are initiated after December 31,
2002, with early application encouraged. The Company believes that the adoption
of SFAS 146 will not have a material impact on its financial statements.
6
3. Cash Flow Information
Supplemental cash flow information is as follows (in thousands):
Successor Predecessor
------------- -------------
Six Months Six Months
Ended Ended
August 24, August 25,
2002 2001
------------- -------------
Cash paid during the period for interest $729 $1,917
Cash paid during the period for income taxes 49 --
4. Reorganization and Fresh Start Reporting
As discussed above, the Plan was confirmed on October 17, 2001 and the Company
emerged from Chapter 11 as Woodworkers Warehouse, Inc. on October 29, 2001.
Pursuant to SOP 90-7, the Successor adopted fresh start reporting in the
accompanying condensed consolidated balance sheet as of October 27, 2001 to give
effect to the reorganization as of such date.
Fresh start reporting required the Successor to restate its assets and
liabilities to reflect their reorganization value, which approximates fair value
at the date of the reorganization. In so restating, SOP 90-7 required the
Successor to allocate its reorganization value to its assets based upon their
estimated fair values. Each liability other than deferred taxes, existing on the
date the Plan was confirmed by the Bankruptcy Court, was stated at the present
value of the amounts to be paid.
The Company's reorganization value of $1,488,000 was less than the fair value of
its net assets. In accordance with the purchase method of accounting, the excess
of the revalued net assets over the reorganization value (negative goodwill) of
approximately $400,000 was allocated to reduce proportionately the value
assigned to noncurrent assets. The calculated reorganization value was based on
a variety of estimates and assumptions about future circumstances and events.
Such estimates and assumptions are inherently subject to significant economic
and competitive uncertainties beyond the control of management. Net deferred tax
assets are not recorded in the accompanying financial statements due to the
uncertainty regarding future operating results. Finally, any accounting
principle changes required to be adopted in the financial statements within the
twelve months following the adoption of fresh start reporting were adopted at
the time fresh start reporting was adopted. All fresh start adjustments were
reflected as of October 27, 2001.
Reorganization items - The Predecessor provided for or incurred the following
(income) expense items during the three and six months ended August 25, 2001,
directly associated with the Chapter 11 reorganization proceedings (in
thousands):
Three Months Six Months
Ended Ended
August 25, August 25,
2001 2001
------------ ----------
Bonuses for retention of key employees $ 146 $ 347
Professional fees 640 1,719
Occupancy and other store closing costs 257 257
Relocation costs 521 521
Loss on disposal of Post Tool 170 1,845
Net asset/liability write-offs (78) (78)
Gain on sale of lease (4,562) (4,562)
Miscellaneous income (34) (34)
Miscellaneous expenses 9 28
Interest income (134) (283)
------- ------
Total reorganization income $(3,064) $ (239)
======= ======
5. Discontinued Operations
On August 11, 2000, the Predecessor disposed of its golf business. The
consolidated financial statements of the Predecessor have been presented to
reflect the disposition of the golf business in accordance with APB Opinion No.
30. The net operating losses of the golf division were $169,000 and $224,000 for
the three and six months ended August 25, 2001, respectively, and have been
reported as "Loss from discontinued operations" in the accompanying condensed
consolidated statements of operations.
6. Bank Credit Facility
Pursuant to the Plan discussed in Note 1, on October 29, 2001, the Company
entered into a $30 million Senior Secured Revolving Credit Facility, with the
Bank of America as agent (the "Facility"). At August 24, 2002, the Company had
approximately $22.2 million of borrowings outstanding and $15,200 of letters of
credit outstanding. The credit facility is secured by all of the Company's
assets and bears interest equal to LIBOR plus 3.25% (5.08% at August 24, 2002)
or the bank reference rate plus 1.00% (5.75% at August 24, 2002) at the
Company's option.
7
The borrowing base under the Facility is based on the following formula: the
lesser of 65% of the cost of eligible store and warehouse inventory or 85% of
the orderly liquidated value of the inventory from an appraiser acceptable to
Bank of America, plus 50% of the value of inventory covered by merchandise
letters of credit, plus 85% of the value of eligible credit card and trade
accounts receivable, plus $600,000 through October 31, 2002 and $500,000
thereafter against the value of the Successor's Seabrook, NH facility until the
facility is sold, plus an overadvance availability of $1,167,000 through October
31, 2002, at which time the overadvance availability will decrease monthly by
$233,000 until the overadvance availability is reduced to zero. The net
availability under the Facility at August 24, 2002 was approximately $1.7
million. An orderly liquidated valuation of inventory was done as of March 4,
2002 resulting in the same 65% advance rate.
The Facility contains a financial covenant of a fixed-charge coverage ratio and
certain non-financial covenants. In addition, the Facility requires that the
Company have $3.0 million of availability after payment of $2.0 million to
settle pre-petition general unsecured claims. The Company is not currently in
compliance with the fixed-charge coverage covenant for the second quarter of
fiscal 2002 and is seeking a waiver of that covenant for the second quarter and
an amendment to the covenant for the third and fourth quarters of fiscal 2002.
The Facility matures on October 29, 2003. The Facility is classified as a
current liability because the Facility includes a subjective acceleration clause
and an agreement to maintain blocked account arrangements.
7. Stockholders' Equity
Pursuant to the Plan, the Predecessor's common stock, treasury stock and
preferred stock were cancelled along with outstanding stock options.
A total of 7,500,000 shares, par value $0.01 per share, of new common stock have
been authorized under the plan with 5,280,000 shares to be issued as settlement
for pre-petition liabilities and 360,000 shares to be issued to the Company's
CEO and former CFO. The Company has not yet issued the new shares due to delays
in the processing and settlement of certain unsecured claims and the Bankruptcy
Court has not yet issued a final decree. There are 1,500,000 shares reserved for
stock option grants. Based on the performance of the Company, under agreements
with the above officers, there is a potential grant to them of an additional
132,500 shares. Each holder of new common stock has one vote per share and is
entitled to dividends when and if declared by the Board of Directors, however
dividend payments are restricted under the terms of the Facility. The Company
does not expect to pay dividends in the foreseeable future.
8. Selected Information By Business Segment
Information as to the operations of the Company's business segments with respect
to sales and operating income (loss) is set forth below for the three and six
months ended August 24, 2002 and August 25, 2001 (in thousands):
Three Months Ended Six Months Ended
(Successor) (Predecessor) (Successor) (Predecessor)
----------- ------------- ----------- -------------
August 24, August 25, August 24, August 25,
2002 2001 2002 2001
----------- ------------- ----------- -------------
Net sales
Stores $ 24,358 $ 21,801 $ 51,016 $ 47,349
Catalogs/Internet 605 1,325 1,942 2,860
-------- -------- -------- --------
Totals $ 24,963 $ 23,126 $ 52,958 $ 50,209
======== ======== ======== ========
Income (loss) from continuing operations
Stores $ 270 $ (421) 1,221 (1,207)
Catalogs/Internet 202 336 413 752
General corporate (expenses) income (2,721) 636 (4,678) (5,310)
-------- -------- -------- --------
Totals $ (2,249) $ 551 $ (3,044) $ (5,765)
======== ======== ======== ========
The Company sells its products through its retail stores and through its
catalogs and web site. These businesses have been aggregated into their
respective reportable segments based on the Company's management reporting
structure.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CRITICAL ACCOUNTING POLICIES
We believe the most critical accounting policies are Revenue Recognition,
Inventories, Prepaid Catalog Expenses, Lease Interests, and Income Taxes. Our
financial statements are prepared in accordance with accounting principles
generally accepted in the United States of America ("US GAAP"). The application
of US GAAP relative to our critical accounting policies requires us to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and financial statement disclosures concerning contingent assets and
liabilities and revenue and expenses during the reporting periods. We review
estimates and assumptions used in the application of US GAAP on a regular basis.
However, it is possible that these estimates and assumptions may change and such
a change could be material to our financial position. We base our estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of certain assets and liabilities
that are not readily apparent from other sources.
Revenue Recognition
Revenue from our retail store operations is recognized at the time of sale.
Revenue from catalog and internet sales is recognized upon shipment to the
customer. Allowance for sales returns, a component of net sales, is booked in
the period in which the related sales are recorded. An allowance of $65,000 was
recorded as of August 24, 2002. Income received from memberships sold to our
catalog customers is deferred over the period of the related memberships.
Inventories
Merchandise inventories are carried at the lower of cost or market with cost
determined on a weighted average cost method. If actual market conditions are
less favorable than those projected by management, or if liquidation of the
inventory is more difficult than anticipated, inventory write-downs may be
required. As of August 24, 2002, a lower of cost or market reserve was not
required.
Prepaid Catalog Expenses
We capitalize direct costs relating to the production and distribution of our
mail-order catalogs. These costs are charged to operations over the period
during which revenues are derived from the mailings, which is predominately one
year or less from the date of mailing. There were no prepaid catalog expenses as
of August 24, 2002.
Lease Interests
Lease interests represent the fair values assigned to our lease rights under
fresh start accounting and are being amortized as a charge to rent expense over
the remaining lease terms. Accumulated amortization was $322,587 at August 24,
2002. The recoverability of the carrying value of our lease interests is
dependent on our ability to generate sufficient future cash flows from
operations at each leased site, or in the case of a sale or disposition of a
lease or leases, the continuation of similar favorable market rents.
Accordingly, recoverability of this asset could be significantly affected by
future economic market and competitive factors and is subject to the inherent
uncertainty associated with estimates.
Income Taxes
We account for income taxes under Statement of Financial Standards No. 109
"Accounting for Income Taxes." Accordingly, we record a valuation allowance to
reduce our deferred tax assets to an amount that is more likely than not to be
realized.
OVERVIEW
The above list is not intended to be a comprehensive list of all of our
accounting policies. In many cases, the accounting treatment of a particular
transaction is specifically dictated by generally accepted accounting
principles, with no need for management's judgment in their application. There
are also areas in which management's judgment in selecting any available
alternative would not produce a materially different result.
Fresh start reporting required us to restate our assets and liabilities to
reflect their reorganization value, which approximated fair value at the date of
our reorganization. In so restating, we were required to allocate reorganization
value to our assets based upon their estimated fair values. Each liability
existing on the date the Plan was confirmed by the Bankruptcy Court, other than
deferred taxes, was stated at the present value of the amount to be paid.
Our reorganization value of $1,488,000 was $400,000 less than the fair value of
our net assets. In accordance with the purchase method of accounting, the excess
of the revalued net assets over the reorganization value (negative goodwill) was
allocated to reduce proportionately the value assigned to noncurrent assets. Our
calculated reorganization value was based on a variety of estimates and
assumptions about future circumstances and events. Such estimates and
assumptions are inherently subject to significant economic and competitive
uncertainties beyond our control.
Due to the adoption of SOP 90-7 as of October 29, 2001 (Note 1), the financial
statements of the Company are not comparable in certain material respects to the
financial statements of the Predecessor. In our discussion of the results of
operations, we have attempted to indicate any material changes affecting the
comparability of our second-quarter and year-to-date results.
9
Results of Operations
Net sales for the three months ended August 24, 2002 (second quarter of fiscal
2002) increased by $1.8 million or 7.9% from the second quarter of fiscal 2001.
Comparable store sales for the second quarter increased 20.8% due primarily to
increased promotional activities and improved advertising productivity.
Catalog/internet sales for the second quarter decreased $0.7 million or 54.3%
from the second quarter of fiscal 2001. The catalog/internet sales decrease was
primarily attributable to diminishing orders received on older catalogs because
only one catalog was mailed in fiscal 2001.
Net sales for the six months ended August 24, 2002 (year-to-date) increased by
$2.7 million or 5.5% from the six months ended August 25, 2001. Year-to-date
comparable store sales increased 20.4% due primarily to the same factors
mentioned above for the second quarter. The year-to-date store sales increase
was partially offset by a $1.1 million drop in sales due to the Post Tool stores
closed or sold in the first quarter of fiscal 2001. Post Tool was a wholly-owned
subsidiary of the Predecessor. Year-to-date catalog/internet sales decreased
$0.9 million or 32.1% from the prior year-to-date period due primarily to the
same factors mentioned above for the second quarter.
Gross profit for the second quarter of fiscal 2002 increased $0.8 million or
11.5% from the second quarter of fiscal 2001. As a percentage of net sales,
gross profit increased 1.0% from 30.0% of net sales for the second quarter of
fiscal 2001 to 31.0% of net sales in the second quarter of fiscal 2002. The
primary reason for the increase in the gross profit rate was the
reclassification of vendor rebates and allowances and distribution costs to cost
of sales resulting from the change to full-absorption accounting implemented
under fresh start accounting, partially offset by promotional discounts on our
proprietary credit card sales.
Year-to-date gross profit increased $1.7 million or 11.2% from the prior
year-to-date period. As a percentage of net sales, gross profit increased 1.6%
from 29.9% of net sales to 31.5% of net sales. The primary reason for the
increase in the gross profit rate was the same as mentioned above for the second
quarter.
Selling, general and administrative expenses for the second quarter of fiscal
2002 increased $1.1 million or 12.4% from the second quarter of fiscal 2001. The
increase in selling, general and administrative expenses was primarily due to
higher payroll, benefits and advertising expenses, severance and recruiting
costs, and professional fees, and the impact of the full-absorption accounting
change discussed above. In addition, we converted fixture and equipment leases
from operating leases to capital leases under fresh start accounting. As a
result, operating lease expense decreased.
Year-to-date selling, general and administrative expenses decreased $0.1 million
or 0.4% from the prior year-to-date period. The decrease in selling, general and
administrative expenses was primarily due to the lease conversions discussed
above offset by the items mentioned above for the second quarter increase,
including higher payroll, benefits and advertising expenses, severance and
recruiting costs and professional fees and the impact of the full-absorption
accounting change.
The Predecessor incurred reorganization items as described in Note 4 that
resulted in credits of $3.1 million in the second quarter of fiscal 2001 and
$0.2 million in the prior year-to-date period.
The loss from operations for the second quarter of fiscal 2002 was $1.9 million
compared to income from operations for the second quarter of fiscal 2001 of $1.4
million (due primarily to the prior-year reorganization credit).
The year-to-date loss from operations was $2.4 million compared to a prior
year-to-date loss from operations of $3.9 million.
Interest expense for the second quarter of fiscal 2002, net of interest income,
decreased by $0.5 million from the second quarter of fiscal 2001. For the
year-to-date period, net interest expense decreased by $1.2 million from the
prior year-to-date period. These decreases in interest expense were primarily
attributable to the decrease in the amounts outstanding under our bank credit
facilities.
We do not expect to record a provision for income taxes this year.
The losses from discontinued Golf Day operations were approximately $0.2 million
for the three and six months ended August 25, 2001. These losses were primarily
due to real estate and equipment lease expenses partially offset by lease sale
proceeds.
The net loss for the second quarter of 2002 was $2.2 million compared to net
income of $0.4 million for the second quarter of 2001 (due primarily to the
prior-year reorganization credit).
The year-to-date net loss was $3.0 million compared to a prior year-to-date loss
of $6.0 million.
Liquidity and Capital Resources
Our working capital deficiency as of August 24, 2002, increased by $2.8 million
from February 23, 2002. The increased deficiency resulted primarily from a
decrease in accounts receivable of $1.1 million, an increase in amounts owed
under the bank credit facility of $1.4 million, and an increase in post-petition
accounts payable of $2.0 million, partially offset by a $1.7 million increase in
inventory and a $0.4 million decrease in deferred and other current liabilities.
During the six-month period ended August 24, 2002, cash used by operating
activities was $0.9 million. The primary use of cash was the net loss of $3.0
million and the increase in inventory of $1.7 million, partially offset by the
decrease in accounts receivable of $1.1 million and the increase in accounts
payable of $2.0 million.
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Net cash used in investing activities was immaterial.
Net cash provided by financing activities was approximately $0.7 million due
primarily to the increase in borrowings under our bank credit facility. At
August 24, 2002, we had approximately $22.2 million of borrowings outstanding
under the Facility (Note 6). The net availability under the Facility at August
24, 2002 was approximately $1.7 million.
Under the Plan (Note 1), we are required to pay general unsecured creditors
their pro rata share of $2 million in addition to 5,280,000 shares of new common
stock. Due to delays in the processing and settlement of certain unsecured
claims and restrictions under the facility, we have, after consultation with the
holders of a majority in dollar value of the claims, deferred making this
payment and can make no assurance as to when or if we will make such payment.
Even if we settled the remaining unsecured claims, we would not be able to make
any payments to these creditors because of availability restrictions under the
Facility.
Provided we can obtain the waiver and amendment of the fixed-charge coverage
ratio under the Facility discussed in Note 6 and provided the holders of the $2
million of claims continue to permit deferral of their payment, we anticipate we
will be able to satisfy our working capital requirements, planned capital
expenditures, and debt service requirements with proceeds from cash flows from
operations, borrowings under the Facility and other sources of financing. We
expect to generate adequate cash flows from operating activities to sustain
current levels of operations. We are in the process of closing two
underperforming stores whose leases are expiring and we will continue to
evaluate the performance of each store and close or relocate any other
underperforming stores that do not respond sufficiently to remedial action. We
will attempt to obtain an alternate financing facility if the waiver and
amendment are not obtained from our current lenders and there have been
preliminary discussions with other lending sources but there can be no assurance
that an agreement will be reached with another lender in the event the waiver
and amendment are not obtained.
New Accounting Pronouncements
In April 2002, the FASB issued SFAS 145, Rescission of FASB Statements 4, 44 and
64, Amendment to FASB Statement 13, and Technical Corrections. One of the major
changes of this statement is to change the accounting for the classification of
gains and losses from the extinguishment of debt. Upon adoption, we will follow
APB 30, Reporting the Results of Operations--Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions in determining whether such extinguishment of
debt may be classified as extraordinary. The provisions of this statement
related to the rescission of FASB Statement 4 shall be applied in fiscal years
beginning after May 15, 2002 with early application encouraged. We believe that
the adoption of SFAS 145 will not have a material impact on our financial
statements.
In June, 2002, the FASB issued SFAS 146 "Accounting for Costs Associated With
Exit or Disposal Activities". This Statement addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force (EITF) Issue No. 94-3 "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." This Statement requires
that a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred. The provisions of this Statement are
effective for exit or disposal activities that are initiated after December 31,
2002, with early application encouraged. The Company believes that the adoption
of SFAS 146 will not have a material impact on its financial statements.
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
Statements included in this report that do not relate to present or historical
conditions are "forward-looking statements" within the meaning of the Safe
Harbor provisions of the Private Securities Litigation Reform Act of 1995.
Additional oral or written forward-looking statements may be made by us from
time to time, and such statements may be included in documents other than this
report that are filed with the Securities and Exchange Commission. Such
forward-looking statements involve risks and uncertainties that could cause
results or outcomes to differ materially from those expressed in such
forward-looking statements. Forward-looking statements in this report and
elsewhere may include without limitation, statements relating to our plans,
strategies, objectives, expectations, intentions and adequacy of resources and
are intended to be made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Words such as "believes," "forecasts,"
"intends," "possible," "expects," "estimates," "anticipates," or "plans" and
similar expressions are intended to identify forward-looking statements.
Investors are cautioned that such forward-looking statements involve risks and
uncertainties including, without limitation, the following:
o Our ability to attract, train and retain highly-qualified associates to
staff both existing and new stores, as well as middle and senior
management.
o General economic conditions, which affect consumer confidence and home
improvement and home-building spending, including interest rates, the
overall level of economic activity, the availability of consumer credit and
mortgage financing and unemployment rates.
o The impact of competition, including competition for customers, locations
and products and in other important aspects of our business. Our primary
competitors include electrical, plumbing and building materials supply
houses, lumber yards, home improvement stores and other local, regional or
national hardware stores, as well as discount department stores and any
other channel of distribution that offer products that we sell. Our
business is highly competitive and we may also face new types of
competitors if we enter new markets or lines of business.
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o Changes in laws and regulations, including changes in accounting standards,
tax statutes or regulations and environmental and land use regulations, and
uncertainties of litigation.
o The receipt of a waiver and amendment of the fixed-charge coverage ratio
discussed in Note 6 and our compliance with the financial covenants under
our bank credit facility as such covenants may be amended.
o Continued cooperation by the holders of $2 million of claims as to which we
have deferred payment.
o Our ability to achieve our plans and strategies of growth will be dependent
on maintaining adequate bank and other financing.
o Possible closure of additional underperforming stores.
o Other risks and uncertainties indicated from time to time in our filings
with the Securities and Exchange Commission.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to interest rate risk primarily through our borrowing activities.
Our short-term borrowings bear interest at variable rates primarily based on
either the prime rate or LIBOR. The effect of a 10% change in the prime or LIBOR
would not have a material impact on our financial results. In seeking to
minimize the risks from interest rate fluctuations, we manage exposures through
our regular operating and financing activities. We do not use financial
instruments for trading or other speculative purposes and are not party to any
leveraged financial instruments.
ITEM 4. CONTROLS AND PROCEDURES
There were no significant changes to the Company's internal controls, or in
other factors that could significantly affect these controls, since the date of
evaluation in connection with our most recent annual audit.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities and Use of Proceeds
Upon our reorganization and emergence from bankruptcy on October 29, 2001, all
of our Class A and Class B common stock, treasury stock, preferred stock and
outstanding stock options under the 1993 Employee Stock Option Plan and the 1994
Non-Qualified Stock Option Plan for Non-Employee Directors were cancelled. A
total of 7,500,000 shares, par value $0.01 per share, of common stock have been
authorized and we are required to issue 5,280,000 shares as payment for
pre-petition liabilities and 360,000 shares to management. As of the date of
this Form 10-Q, these shares had not yet been issued, were unable to trade, and
thus no aggregate market value can be determined at this time. When the shares
are issued, they will be deemed to have been issued as of October 29, 2001.
Item 3. Defaults Upon Senior Securities
The Company is not currently in compliance with a fixed-charge coverage ratio
contained in its bank credit facility (see Note 6) and is currently seeking a
waiver of this covenant for the second quarter and an amendment of this covenant
for the third and fourth quarters. Although the Company is currently in
negotiation with its lenders for the waiver and amendment, there can be no
assurance that the waiver and amendment will be obtained.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. As reported in the Company's Form 8-K filed on August 13, 2002, as of
August 1, 2002, Rick C. Welker replaced Ronald Franklin as the Company's
Chief Financial Officer.
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Item 6. Exhibits and Reports on Form 8-K
Exhibits
(a) 99.1 Certification of Chief Executive Officer
(b) 99.2 Certification of Chief Financial Officer
Reports on Form 8-K
(a) The registrant filed a current report on Form 8-K dated August 13,
2002, reporting other events.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
WOODWORKERS WAREHOUSE, INC.
Date: October 8, 2002 By: /s/ Walter S. Spokowski
---------------------------
Walter S. Spokowski,
President and Chief
Executive Officer
Date: October 8, 2002 By: /s/ Rick C. Welker
----------------------
Rick C. Welker,
Vice President and Chief
Financial Officer
CERTIFICATION
I, Walter S. Spokowski, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Woodworkers
Warehouse, Inc. (the "Company").
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report.
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Company as of, and for, the periods presented in
this quarterly report.
Dated: October 8, 2002 By: /s/ Walter S. Spokowski
---------------------------
Walter S. Spokowski, President & CEO
CERTIFICATION
I, Rick C. Welker, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Woodworkers
Warehouse, Inc. (the "Company").
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report.
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Company as of, and for, the periods presented in
this quarterly report.
Dated: October 8, 2002 By: /s/ Rick C. Welker
----------------------
Rick C. Welker, Vice President & CFO
13