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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For fiscal year ended: February 23, 2002
[ ] 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
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Woodworkers Warehouse, Inc.
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(Exact name of Registrant as Specified in Its Charter)
Delaware 04-357958
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
126 Oxford Street, Lynn, Massachusetts 01901
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(Address of Principal Executive Offices) (Zip Code)
(781) 853-0900
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(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
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 No X
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Indicate by check mark if disclosure of delinquent filers pursuant to
Rule 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 the Form 10-K.
---
State the aggregate market value of the voting and non-voting common
equity held by non-affiliates of the registrant and indicate the number of
shares outstanding of each of the registrant's shares of common stock, as of the
latest practicable date: On 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-K, 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.
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.......
DOCUMENTS INCORPORATED BY REFERENCE
None.
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ITEM 1. BUSINESS
Except for the historical information contained herein, the discussion
in this Report and any document incorporated herein by reference contains
certain forward-looking statements that involve risks and uncertainties, such as
statements of our plans, strategies, objectives, expectations and intentions.
The cautionary statements made in the Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Safe Harbor Statement under the
Private Securities Litigation Reform Act of 1995 should be read as being
applicable to all forward-looking statements wherever they appear. Our actual
results could differ materially from those discussed or incorporated herein.
Factors that could cause or contribute to such differences include those
discussed in Management's Discussion and Analysis of Financial Condition and
Results of Operations as well as those discussed elsewhere herein or the
documents incorporated herein by reference.
Introduction
Woodworkers Warehouse, Inc. ("We" or the "Company") emerged from
Chapter 11 bankruptcy on October 29, 2001 following a reorganization which
included the sale of certain non-core businesses and a merger with Trend-Lines,
Inc. in which we were the surviving entity. At that time, we changed our name
from Trend-Lines, Inc. to Woodworkers Warehouse, Inc. to emphasize our focus on
our Woodworkers Warehouse stores and catalogs. For financial reporting purposes,
October 27, 2001 was considered the emergence date as it was a period end and
activity for the two days was immaterial.
Bankruptcy Reorganization
On August 11, 2000, we filed petitions in the United States Bankruptcy
Court for the District of Massachusetts under Chapter 11 of the United States
Bankruptcy Code. The First Amended Joint Reorganization Plan of Trend-Lines,
Inc. and the Official Committee of Unsecured Creditors, as modified by the Joint
Motion to Approve Nonmaterial Modification to the First Amended Joint
Reorganization Plan of Trend-Lines, Inc. and the Official Committee of Unsecured
Creditors (the "Plan") was confirmed by the Bankruptcy Court on October 17, 2001
and we emerged from bankruptcy on October 29, 2001. Pursuant to the Plan, on
October 29, 2001, Trend-Lines, Inc. merged with and into its wholly owned
subsidiary Woodworkers Warehouse, Inc. and Woodworkers Warehouse, Inc. became
the surviving corporation. In connection with the reorganization, on the date we
emerged from bankruptcy, all of Trend-Lines' shares of Class A Common Stock,
Class B Common Stock, preferred stock, treasury 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. Under the Plan we
are required to issue new shares of our common stock to certain unsecured
creditors to pay pre-petition liabilities and to management, as of October 29,
2001. As of the date of this Form 10-K, we have not yet issued the shares of new
common stock. The Bankruptcy Court has not yet issued a final decree, and such
decree is delayed by, among other things, the fact that we have not issued the
shares of common stock to our unsecured creditors as a result of several claims
that remain pending.
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History
We are a specialty retailer of power and hand tools and accessories. We
were initially incorporated in Massachusetts in 1981, under the name
Trend-Lines, Inc., and in 1983 we began mailing our Trend-Lines catalog and
opened a Woodworkers Warehouse outlet store in our distribution center. Our
principal executive offices are located at 126 Oxford Street, Lynn,
Massachusetts, 01901 and our telephone number is (781) 853-0900.
We opened our first Woodworkers Warehouse retail store in 1986 and, as
of February 23, 2002, we operated 98 Woodworkers Warehouse stores. Our
Woodworkers Warehouse retail stores are located in the New England and
Mid-Atlantic regions.
In January 1995, we expanded our retail operations by acquiring 17 Post
Tool stores and a distribution center for those stores. On February 27, 2001, we
rejected leases for 13 existing Post Tool retail stores and a distribution
center for these stores and consolidated the inventory into our operations. On
April 19, 2001 we sold the leasehold rights and furniture, fixtures and
equipment and inventory with respect to seven of the Post Tool stores, and all
of the automotive inventory located at the Post Tool distribution center. The
total sales price for these assets was approximately $1,350,000. As of April 19,
2001, we no longer operated any Post Tool stores.
We purchased the Golf Day name and mailing list in 1989, mailed our
first Golf Day catalog in 1990 and opened a Golf Day outlet store in our
distribution center in January 1991. In January 1998, we expanded our golf
retail operations by acquiring 13 Nevada Bob's franchised stores located in New
England, which we converted to Golf Day stores. As part of our reorganization
strategy, we disposed of our Golf Day retail stores, Golf Day mail order catalog
and GolfDay.com web site during the third and fourth quarters of the fiscal year
ended February 24, 2001 ("Fiscal 2000") and did not operate any Golf Day stores
in the fiscal year ended February 23, 2002 ("Fiscal 2001").
Payments to Bank of America
From the date we filed for bankruptcy through our reorganization and
emergence from bankruptcy, we paid Bank of America $39,343,753 which sum is
comprised of the following:
(i) $20,773,000 from the proceeds generated from the liquidation
of the Golf Day inventory;
(ii) $6,070,753 in interim payments; and
(iii) $12,500,000 as additional payments from cash on hand in Fiscal
2001.
As part of our reorganization, upon emerging from bankruptcy, we
entered into a $30 million Senior Secured Credit Facility with Bank of America,
which matures on October 30, 2003. (See Item 7, Management Discussion and
Analysis: Liquidity and Capital Resources.)
Summary of Reorganization Plan
As discussed above, we reorganized and emerged from bankruptcy on
October 29, 2001, pursuant to the Plan. Under the Plan, we treated our creditors
as follows:
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Class 1: Bank of America Bank Credit Facility
On October 29, 2001, we paid the outstanding balance on our
debtor-in-possession financing in connection with our entering into a new $30
million senior secured revolving credit facility with Bank of America.
Class 2: Other Secured Claims
These secured claims consisted of various vendors from whom we leased
furniture, fixtures and equipment for retail stores and corporate offices. These
stakeholders received (a) some or all of the collateral securing their
respective leases, (b) cash in an amount equal to the proceeds received from the
sale of the collateral or (c) such other treatment as was agreed upon by us, the
creditors committee and the respective holder. If the value of the collateral
securing a Class 2 claim was less than the total amount of the claim, we treated
the difference as a Class 5 general unsecured claim.
Class 3: Other Priority Claims
These claims are claims other than administrative, professional fee or
priority tax claims entitled to priority pursuant to Section 507(a) of the
Bankruptcy Code. All of the administrative and professional fee claims and most
of the priority tax claims were paid in Fiscal 2001. Some priority tax claims
have been paid in the current fiscal year and some claims remain unpaid.
Class 4: Convenience Claims
These claims are claims that would otherwise be a Class 5 general
unsecured claim but they were equal to or less than $2,000 or were reduced to
$2,000 pursuant to the election by the holder of the Claim. Each holder of a
Class 4 claim will receive cash in an amount equal to 25% of such claim.
Class 5: General Unsecured Claims
These claims are pre-petition trade claims, reclamation claims and
other general unsecured claims and were deemed to be impaired by the Plan. Each
holder of a Class 5 claim was to receive in full satisfaction of such allowed
claims, its pro rata share, based on the principal amount of each holder's
claim, of $2,000,000 on January 15, 2002 and 5,280,000 shares of new common
stock of the reorganized company as of October 29, 2001. After consultation with
claimants representing a majority of the dollar value of the claims, we deferred
payment of the $2,000,000. As of the date hereof we have not made any payments
to settle the Class 5 claims and have not issued any shares of the new common
stock due to delays in the processing and settlement of certain unsecured
claims. Even if we settled the remaining unsecured claims, at this time we would
not be able to make any payments to these creditors because of restrictions
under our bank facility.
Class 6: Common Stock Equity Interest and Claims
As of our emergence from bankruptcy, all common stock equity interests
in us were extinguished and the certificates and all other documents
representing such common stock equity interests were deemed cancelled and of no
force or effect. The holders of the common stock equity interests of
Trend-Lines, Inc. did not receive or retain any interest or property under the
Plan.
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The forgoing description is qualified in its entirety by the Plan, as filed as
an exhibit to the Form 8-K of Woodworkers Warehouse, Inc., the successor of
Trend-Lines, Inc., on October 31, 2001, and included as an exhibit hereto by
reference.
The Woodworking Tool Industry
According to the "Woodworking in America"(TM) survey sponsored in 1998
by the American Woodworker Magazine (the "Woodworking Survey"), approximately
11% of the United States adult population, or nearly 20.5 million people, are
involved in woodworking activities, spending more than $7.8 billion annually on
equipment and accessories used specifically for woodworking projects. Major
items in this category include power tools; wood finishes; hand tools; blades,
bits and cutters; glue and adhesives; abrasives; sharpening equipment; books and
other equipment and supplies. Approximately 43% of the total amount spent, or
$3.3 billion, is spent on power tools.
Woodworkers range from home workshop enthusiasts to professionals
involved in a wide variety of activities, including home construction and
remodeling, cabinet and furniture making and other woodworking projects. More
advanced woodworkers participate in activities that require a greater skill
level, such as cabinet making, architectural woodworking, furniture making,
millwork and veneering. According to the Woodworking Survey, woodworkers have
been involved in woodworking an average of approximately fifteen years, and the
typical woodworker spends an average of more than six hours per week in the
workshop. Further, as interest and/or skill level increases, factors such as a
wide variety and selection of merchandise and availability of hard-to-find items
and well-known brand name products become more important to the woodworking
customer.
Current Business Strategy
Our business strategy is now focused on our Woodworkers Warehouse
stores and catalog. We are seeking to enhance our position and to maximize our
future growth as a leading specialty retailer of power and hand tools and
accessories. The key elements of our business strategy are as follows:
Selected net expansion of retail store operations. We intend to
continue to focus our retail store openings in existing markets or markets in
close proximity to those in which we currently operate to take advantage of our
centralized distribution system. While we are not currently opening any new
stores, we anticipate opening new stores in the future, although we can make no
assurances as to when or if we will open any such stores. Under our credit
facility we are limited to net store openings, and we may relocate stores from
time to time.
Complementary store and catalog operations. The strong name recognition
of our Woodworkers Warehouse catalog, combined with the customer base and market
knowledge that have resulted from our catalog operations, is expected to
facilitate the expansion of our retail stores. We use catalog information to,
among other things, identify new store markets and determine the appropriate
product mix for our retail stores.
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Cost-effective operations. We strive to have low costs of operations.
By eliminating non-core businesses, establishing a single distribution center
for our catalog and retail store business, concentrating our market penetration
in the New England and Mid-Atlantic regions, consolidating the management of our
catalog and retail business, and sharing within divisions parallel information,
telemarketing and distribution systems, we have increased our operating
efficiency. We believe the changes will allow us to put competitively priced
products on the market.
Breadth and depth of product selection. We offer a breadth and depth of
product selection, including many hard-to-find items, and high quality brand
name and private label merchandise.
Low prices and matching product/price guarantee. Our competitive
pricing strategy features everyday low prices, special sales and promotions, and
a guarantee to match competitor prices.
Expert customer service. We train our employees to explain and
demonstrate to customers the use and operation of our merchandise and to develop
good salesmanship. Their skills are further developed through on-the-job
training combined with the use of Company-developed manuals. Sales personnel
attend in-house training sessions conducted by experienced sales people or
manufacturers' representatives and receive sales, product and other information
in periodic meetings with managers.
Customer convenience. We strive to maximize convenience to our retail
store customers by providing ample parking and fast in-and-out service.
Products and Merchandising
We offer our customers breadth and depth of product selection,
including many hard-to-find items, high quality brand name and private label
merchandise, everyday low prices, a matching product/price guarantee, expert
customer service and convenience. By offering these services, we believe we are
able to compete successfully against major home centers, mass merchandisers and
hardware stores.
Our Woodworkers Warehouse stores have been successful particularly when
located near home center stores such as Home Depot, Home Quarters, and Lowes.
Our stores primarily carry woodworking power and hand tools and
accessories. We select products based on quality, value, durability, historic
product demand, safety and customer appeal. We constantly monitor our customers'
product preferences through inventory and sales data provided by our computer
system and catalog operations.
Our stores and catalog each serve a wide range of woodworking tool
customers, from home workshop enthusiasts to professionals. Our customers are
seeking hand and power tools to help them with a wide variety of activities,
including home construction and remodeling, cabinet and furniture making and
other woodworking projects. Our customers are generally experienced in
woodworking and carpentry and desire high quality brand name tools. We attract
professionals who are buying tools for use in their trade. To all our customers
we offer professional tools, knowledgeable sales people and fast in-and-out
service. We also offer tool repair that we contract out to an outside service
company.
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Business Segments
Retail Operations
We design our stores to be destination stores and maximize convenience
to our customers by providing ample parking and fast in-and-out service.
Ninety-six of our stores are located in strip malls and two are in free-standing
buildings.
At February 23, 2002, we operated 98 Woodworkers Warehouse stores
located as follows: 26 in New York, 13 in Pennsylvania, 17 in Massachusetts, 13
in New Jersey, nine in New Hampshire, seven in Connecticut, seven in Maine,
three in Delaware, two in Rhode Island, and one in Vermont.
We train our store employees to explain and demonstrate to customers
the use and operation of our merchandise and to develop good salesmanship.
Skills are enhanced through on-the-job training and Company-developed manuals.
Sales personnel attend in-house training sessions conducted by experienced
salespeople or manufacturer representatives and receive sales, product and other
information in periodic meetings with managers.
Catalog Operations
Until Fiscal 1999, we produced four versions of each of the Trend-Lines
and Golf Day catalogs annually. After filing for bankruptcy, in Fiscal 2000, we
produced one version of each of the Trend-Lines and Golf Day catalogs, and
mailed approximately 8 million copies of our Trend-Lines catalog and
approximately 5 million copies of our Golf Day catalog. In Fiscal 2001, we
renamed our catalog Woodworkers Warehouse, produced only one version of our
catalog and mailed it to 1.2 million customers. As of February 23, 2002, our
catalog mailing list totaled approximately 2.2 million customers (comprised of
selected previous buyers), and is supplemented with various rented lists. We
mail catalogs to prospective purchasers throughout the United States.
We send catalogs to persons on our mailing list, persons who have
requested them, and persons on lists which we rent from or exchange with
compatible companies. We continually prospect for new customers by testing new
mailing lists, media and other programs to cost-effectively increase the size of
our proprietary customer mailing lists. We also strive to generate more
incremental revenue from existing customers. We analyze what we sell at our
retail stores and in our catalog, and based on this analysis and through our
merchandising and inventory system we monitor the mix of products to maximize
profitability and satisfy our customers' needs.
We maintain a sophisticated call management distribution system via our
incoming toll-free "800" numbers. This system distributes catalog orders and
customer inquiries to trained customer service representatives, and provides
detailed call reporting and analysis. Currently, we use an outside fulfillment
center to receive and transmit catalog orders. We also provide technical
assistance to our customers, on a toll-call basis. We usually ship orders within
48 hours after receipt, and offer express delivery. We design our catalogs
in-house with desk top publishing equipment.
For Financial Information on our segments please see note 15 of our
Financial Statements which are attached as an exhibit to the Form 10-K.
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Marketing and Advertising
We track the results of all advertising to determine future advertising
programs and expenditures.
We promote retail store sales primarily through special store
promotions, direct mail circulars, geographically concentrated newspaper and
radio advertising, and point-of-sale materials posted and distributed in our
stores. We use extensive special product promotions and sales, combination
offers, coupons, and other devices to attract customers. We promote catalog
sales by catalog mailings.
E-Commerce
We launched our WoodworkersWarehouse.com, GolfDay.com and
Trend-Lines.com websites in Fiscal 1999. In Fiscal 2000, we discontinued the
GolfDay.com and Trend-Lines.com websites. Our WoodworkersWarehouse.com website
augments our other promotional activities and demonstrates our e-commerce
capabilities. We take orders and make sales on our website, but website sales
are not material to our operations.
Suppliers
The power and hand tool and accessory business relies on major vendors
with well-known brand names, as well as smaller specialty vendors. In Fiscal
2001, one of our vendors accounted for approximately 31.5% of our purchases. We
believe our vendor relationships are satisfactory.
In Fiscal 2001, we purchased approximately 6.0% of our products from
overseas vendors. A substantial portion of the tool products sold under our
private labels are purchased from overseas vendors, a majority of which are from
Taiwan and, to a lesser extent, Korea, China, England, Hong Kong, Sweden, Japan
and Germany. This portion of our business is subject to the risks generally
associated with conducting business abroad, including adverse fluctuations in
currency rates, changes in import duties or quotas, the imposition of taxes or
other charges on imports, and disruptions or delays in shipment or
transportation. To date, these factors have not had a material adverse impact on
our operations.
Product Distribution
During Fiscal 2000 and for much of Fiscal 2001, our primary
distribution facility was a leased 286,000 square foot center in Revere,
Massachusetts, which is just outside of Boston. The facility also housed our
corporate offices and customer service operation during Fiscal 2000. In August
2001, we terminated the Revere lease and moved our corporate offices to Lynn,
Massachusetts and our distribution center to a 99,000 square foot center in
Amesbury, Massachusetts. The distribution center serves both our catalog and
retail stores. We have located our distribution center near our stores to reduce
labor and freight costs. We maintain and restock inventories promptly and
efficiently from our new distribution center.
Two prior leases, one in Chelsea, Massachusetts for 51,000 square feet
and one for a 48,000 square foot distribution center in Hayward, California for
our Post Tool stores, were terminated before our emergence from bankruptcy as
part of our reorganization.
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Management Information Systems
We have invested significant resources in our management information
systems. These systems, based in our headquarters, consist of a full range of
retail, financial and merchandising systems and include inventory distribution
and control, order fulfillment and inventory replenishment, staffing, sales and
marketing analyses and financial and merchandise reporting. We also have an
in-store point-of-sale computer system which provides operational data to
management on a daily basis that we use to track sales and forecast inventory
requirements and an inventory control system which provides for automated
replenishment of merchandise to each of our stores. Our inventory control system
allows us to consider store sales through the close of business of the previous
day when processing weekly store replacement.
We also have a catalog management information system which supports our
entire catalog cycle from purchasing merchandise and planning, through
merchandise sales and delivery to customers' homes. The system allows us to
manage our catalog customer database of approximately two million customers.
By tracking and analyzing our catalog database we can:
o focus our catalog mailings on persons more likely to purchase
our products;
o analyze merchandise trends and buying patterns; and
o track the effectiveness of customer promotional merchandising.
Competition
We experience competition in all aspects of our business operations,
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 offers
products that we sell. Our business is highly competitive, and we may face new
types of competitors if we enter new markets or lines of business.
Many of our competitors are substantially larger and have greater
financial and other resources. The entrance of new competitors or the expansion
of operations by existing competitors in our market areas could have a material
adverse effect on our results of operations.
We believe we can compete effectively on the basis of price, selection
and service, all of which allow us to attract customers to our stores. We
believe we differentiate ourselves from most of our competitors through our
innovative and intelligent customer service system and the breadth and depth of
our product selection.
Registered Trademarks and Service Marks
We have registered the following trademark: Woodworkers Warehouse(R).
We intend to continue to register, when we deem it appropriate, trademarks,
trade names and service marks.
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Regulatory Matters
Our catalog business is subject to the Merchandise Mail Order Rule and
related regulations promulgated by the Federal Trade Commission, which prohibit
unfair methods of competition and unfair or deceptive acts or practices in
connection with mail order sales, and require sellers of mail order merchandise
to conform to certain rules of conduct with respect to shipping dates and
shipping delays. Management believes we are in compliance with such regulations.
Employees
We rely on many part-time, flex-time and seasonal employees to meet our
needs. At February 23, 2002, we employed 604 persons, of whom 412 were full-time
and 192 were part-time. We consider our employee relations to be satisfactory.
Subsequent Events
On July 29, 2002 we named Rick C. Welker as our new chief financial
officer replacing Ronald Franklin. As of August 1, 2002, Mr. Franklin is no
longer with us.
ITEM 2. PROPERTIES
New Corporate Headquarters and Distribution Center
On June 29, 2001 we assigned the lease of our then principal executive
offices and distribution center in Revere, Massachusetts for $4,500,000, and the
assumption of some of our outstanding obligations. The Revere lease was for an
aggregate of approximately 286,000 square feet.
At the same time, we leased property for both a new warehouse and
distribution center and a new corporate headquarters. We entered into a lease
for a location in Amesbury, Massachusetts for our new warehouse and distribution
center, and a lease with for a location in Lynn, Massachusetts for our new
corporate headquarters. The fiscal 2002 annualized rent, square footage and
expiration of the term of these leases are set forth in the following table.
Lease Square Footage Fiscal Year 2002 Expiration of Term
Annualized Rent
Amesbury, MA 99,000 $420,756 August 31, 2006
Lynn, MA 11,700 $169,650 November 30, 2006
Two leases, one for a 51,000 square foot warehouse in Chelsea,
Massachusetts and one for a 48,000 square foot distribution center in Hayward,
California for our Post Tool stores, were terminated prior to our emergence from
bankruptcy as part of our reorganization in Fiscal 2001.
We currently own property located at 1 Batchelder Road, Seabrook, New
Hampshire (the "Seabrook Property"). The Seabrook Property is a 9,070 square
foot building. A portion of the premises was formerly used as a Golf Day store.
Approximately 5,000 square feet of the premises continues to be used as a
Woodworkers Warehouse store. Bank of America has a mortgage on the Seabrook
Property as security for amounts due to it under our credit facility.
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At February 23, 2002, we operated 98 stores, all but one of which were
leased. The typical lease provides for an initial term of five to ten years,
with renewal options permitting us to extend the term. In each case, we pay
fixed annual rent. Ninety percent of our leases provide for an increase in
annual fixed rental payments during the lease term and allow us to terminate the
lease before the end of the term without penalty if we give proper notice. Most
leases require us to pay real estate taxes, maintenance and repair costs,
insurance, utilities and, in shopping center locations, to make contributions
toward common area operating costs. At February 23, 2002, our leases, excluding
lease renewal options, were scheduled to expire as follows:
Calendar Number of Store Leases
Year Lease Terms Expire Expiring
2002 6
2003-2004 29
2005-2006 33
2007 and later 30
ITEM 3. LEGAL PROCEEDINGS
We filed a petition in the United States Bankruptcy Court for the
District of Massachusetts under Chapter 11 of the United States Bankruptcy Code
on August 11, 2000. 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 by the Joint Motion to Approve Nonmaterial Modification to the
First Amended Joint Reorganization Plan of Trend-Lines, Inc. and the Official
Committee of Unsecured Creditors was confirmed by the Bankruptcy Court on
October 17, 2001, with an effective date of October 29, 2001. On the effective
date, we emerged from bankruptcy and merged into our wholly-owned subsidiary,
Woodworkers Warehouse, Inc. Woodworkers Warehouse, Inc. became the surviving
corporation. A final decree has not been entered at this time, and such a decree
is delayed by, among other things, the fact that we have not issued the shares
of common stock to our unsecured creditors as a result of several claims that
remain pending.
Management believes that except for the bankruptcy, any other legal
actions that are pending against the Company have arisen in the ordinary course
of business and that the liability which may result from any such action would
not have a material adverse impact on our consolidated financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Price
Until September 12, 2000, our Class A Common Stock was included in the
Nasdaq National Market under the symbol "TRND." Prior to June 23, 1994, there
was no public market for the Class A Common Stock. On September 12, 2000 our
Class A Common Stock was delisted because we did not meet the listing
requirements of the Nasdaq National Market.
On our reorganization and emergence from bankruptcy on October 29,
2001, all of our Class A Common Stock, as well as our 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. Under the plan, we are required to issue
5,280,000 shares of new common stock pro rata to our general unsecured creditors
to pay pre-petition liabilities and 360,000 shares of new common stock to
management. As of the date of this Form 10-K, these shares had not yet been
issued. When the shares are issued they will be deemed to have been issued as of
October 29, 2001.
The table which follows sets forth the high and low sales prices for
our Class A Common Stock for the periods prior to October 29, 2002 and for our
new Common Stock after October 29, 2001. Since October 29, 2001 our stock has
not traded. Quotations listed for periods after September 12, 2000 were quoted
by a dealer participating in the over-the-counter market and may not reflect
actual retail sales. Quotations listed for periods prior to September 12, 2000
are as reported by the Nasdaq National Market.
For the above reasons, we do not believe that the historical results in
the table which follow are indicative of the future performance of our common
stock when such stock is issued.
High Low
Fiscal Year Ended February 23, 2002
First Quarter $.01 $.01
Second Quarter $.01 $.01
Third Quarter prior to October 29, 2002 $.01 $.01
Third Quarter after October 29, 2002 * *
Fourth Quarter * *
Fiscal Year Ended February 24, 2001
First Quarter $2.09 $1.19
Second Quarter $1.63 $0.31
Third Quarter $0.13 $0.02
Fourth Quarter $0.07 $0.02
Fiscal Year Ended February 26, 2000
First Quarter $3.06 $1.88
Second Quarter $3.06 $1.88
Third Quarter $2.41 $1.44
Fourth Quarter $2.25 $1.28
* There has been no active market for our common stock since our emergence from
bankruptcy.
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At August 1, 2002 there were no shares of our common stock issued and
outstanding. Under the Plan, we are required to issue 5,280,000 shares of common
stock to our general unsecured creditors and 360,000 shares of common stock to
management, effective as of October 29, 2001. We do not at this time know how
many holders of record there will be when we issue our common stock.
Dividends
We intend to retain our earnings to finance the development of our
business and for working capital purposes, and therefore we do not anticipate
paying any cash dividends in the foreseeable future. We have never declared or
paid any dividends. In addition, our current credit facility restricts our
ability to pay cash dividends.
Equity Compensation Plan Information
(a) (b) (c)
Number of Securities to Weighted-average Number of Securities
be issued upon exercise exercise price of remaining available for
of outstanding options outstanding options, future issuance under
warrants and rights equity compensation
plans (excluding
securities reflected in
Column (a))
Equity Compensation plans
approved by stockholders --- --- ---
Equity Compensation plans
not approved by
stockholders 1,102,600 $ 0.26 397,400
Total 1,102,600 $ 0.26 397,400
Effective November 27, 2001, we established a long term incentive plan
("Incentive Plan") which provides for the granting of stock options, stock
appreciation rights and restricted stock. We reserved 1,500,000 shares of common
stock for awards under the Incentive Plan. The Incentive Plan and the shares
reserved for issuance under the Incentive Plan were approved by the Bankruptcy
Court. Under the Incentive Plan, stock options are granted at 100% of the fair
market value of the common stock on the date of the grant. We determined that
our fair market value was $0.26 per share for each share we are required to
issue under the Plan. The per share value is equal to our value as determined by
an independent third party after a valuation performed in conjunction with our
emergence from bankruptcy. All options thus far granted vest over three years
with 33% vesting on each anniversary of the grant. All vested options shall be
exercisable for a period of ten years from date of grant. As of July 1, 2002
there were no currently exercisable options.
14
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain financial data with respect to the
Company for each of the last five fiscal years.
We emerged from Chapter 11 bankruptcy on October 29, 2001 following a
reorganization which included the sale of certain non-core businesses and a
merger with Trend-Lines, Inc., our sole parent, in which we were the surviving
entity. For financial reporting purposes, October 27, 2001 was considered the
emergence date as it was a period end and activity for the two days was
immaterial. For financial reporting purposes, Fiscal 2001 has been segregated
into two periods: the four months ended February 23, 2002 for the "successor
company" and the eight months ended October 27, 2001 for the "predecessor
company". Upon our emergence from bankruptcy, we adopted fresh start accounting.
Our financial statements 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").
SOP 90-7 required us to use the purchase method of accounting and therefore, we
recorded the fair value of assets and assumed liabilities of the reorganized
company at October 27, 2001. Accordingly, the accompanying balance sheet as of
February 23, 2002 is not comparable in certain material respects to such balance
sheet as of any prior period since the balance sheet as of February 23, 2002 is
that of a reorganized entity.
15
Selected Financial Data
(in thousands, except for: per share amounts, number of shares and number
of stores)
Successor Predecessor Predecessor Predecessor Predecessor Predecessor
Four Months Eight Months Fiscal Year Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended Ended Ended Ended
February 23, October 27, February 24, February 26, February 27, February 28,
2002 2001 2001 2000 1999 1998
Net sales $ 44,822 $ 66,294 $ 154,709 $ 178,183 $ 176,388 $ 167,451
Cost of sales 30,998 47,096 110,998 123,823 124,461 117,924
------------ -------------- -------------- ------------ ------------ ------------
Gross profit 13,824 19,198 43,711 54,360 51,927 49,527
Selling, general and
administrative expenses 13,466 25,368 58,510 49,684 53,732 42,849
Reorganization charges - 1,645 2,292 - - -
------------ -------------- -------------- ------------ ------------ ------------
Operating income
(loss) 358 (7,815) (17,091) 4,676 (1,805) 6,678
Interest expense, net 472 2,298 5,171 4,771 3,474 2,351
------------ -------------- -------------- ------------ ------------ ------------
(Loss) income before income
taxes, discontinued
operations and
extraordinary items (114) (10,113) (22,262) (95) (5,279) 4,327
Provision for income taxes - - - (25) 1,723 (1,688)
------------ -------------- -------------- ------------- ------------ -------------
(Loss) income before
discontinued operations
and extraordinary items (114) (10,113) (22,262) (120) (3,556) 2,639
Discontinued operations:
Loss on disposal - (279) (21,854) - - -
(Loss) income from
discontinued
operations - - (8,975) (7,466) (3,855) 1,809
------------ -------------- --------------- ------------- ------------- ------------
Loss before extraordinary
items (114) (10,392) (53,091) (7,586) (7,411) 4,448
Extraordinary gain -
cancellation of debt - 38,607 - - - -
------------ -------------- -------------- ------------ ------------ ------------
Net (loss) income $ (114) $ 28,215 $ (53,091) $ (7,586) $ (7,411) $ 4,448
============= ============== =============== ============= ============= ============
Basic and diluted loss
per share:
Loss before discontinued
operations and
extraordinary items $ (0.02) * * * * *
Discontinued operations - * * * * *
Extraordinary gain - * * * * *
------------ -------------- -------------- ------------ ------------ ------------
Net Loss $ (0.02) * * * * *
============= ============== =============== ============= ============= ============
Weighted average shares
outstanding - basic and
diluted 5,640,000 * * * * *
============= ============== =============== ============= ============= ============
*EPS for the Predecessor
Company is not meaningful.
Balance Sheet Data:
Total assets $ 41,410 $ 71,543 $ 80,942 $ 148,908 $ 146,787 $ 127,803
Current liabilities $ 37,953 $ 100,872 $ 101,176 $ 115,859 $ 105,533 $ 79,034
Long-term liabilities $ 2,083 $ 1,293 $ - $ 193 $ 808 $ 1,012
Net Assets $ 1,374 $ (30,622) $ (20,234) $ 32,856 $ 40,446 $ 47,757
Working Capital $ (2,974) $ (41,280) $ (34,132) $ (5,011) $ 2,339 $ 44,342
Operating Data:
Number of stores at end of
period 98 99 131 148 149 133
Net store sales $ 42,534 $ 63,266 $ 140,917 $ 156,903 $ 148,444 $ 133,000
Net catalog sales $ 2,288 $ 2,668 $ 13,792 $ 21,280 $ 27,944 $ 34,451
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CRITICAL ACCOUNTING POLICIES
Our accounting policies are provided on pages F-8 through F-12 of this Form
10-K. We believe the most critical accounting policies are Revenue Recognition,
Inventories, Prepaid Catalog Expenses, Lease Interest, 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 amount of assets and
liabilities, financial statement disclosure concerning contingent assets and
liabilities and revenue and expenses during the reporting period. 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 this
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 assets and liabilities that are
not readily apparent from other sources.
Revenue Recognition
Revenue from retail operations is recognized at the time of sale. Revenue from
catalog 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 $70,000 has been recorded as of February 23,
2002. Income received from memberships sold to our catalog customers is deferred
over the period of the related membership.
Inventories
Merchandise inventories are carried at the lower of cost or market with cost
determined on a weighted average cost method. Under fresh start accounting, we
recorded a $2.2 million write-down of inventory at October 27, 2001 to record
the balance at its estimated net realizable value. The balance at February 23,
2002 in our total lower of cost or market reserve was $0.6 million. If actual
market conditions are less favorable than those projected by our management, or
if liquidation of the inventory is more difficult than anticipated, additional
inventory write-downs may be 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. The prepaid catalog balance at February
23, 2002 was $267,297.
Lease Interest
Lease interest represents the fair value assigned to our lease rights under
fresh start accounting and is being amortized as a charge to rent expense over
the remaining lease terms. Accumulated amortization was $166,239 at February 23,
2002. The recoverability of the carrying value of lease interest 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.
17
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.
The above listing 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.
Fresh start reporting required us to restate our assets and liabilities to
reflect their reorganization value, which approximates 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
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. The
calculated value of the reorganized company 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.
Overview
We adopted fresh start accounting pursuant to the American Institute of
Certified Public Accountant's Statement of Position 90-7, "Financial Reporting
by Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7"), during
the third quarter of Fiscal 2001. The adoption resulted in a change in the basis
of accounting in our underlying assets and liabilities as of October 29, 2001,
the date of our emergence from Bankruptcy. On October 29, 2001, Trend-Lines,
Inc. (the "Predecessor Company") merged into its wholly owned subsidiary,
Woodworkers Warehouse, Inc., with Woodworkers Warehouse, Inc. being the
surviving corporation emerging from bankruptcy (for purposes of reflecting the
financial reporting period following our emergence from bankruptcy, the
"Successor Company"). For financial reporting purposes, October 27, 2001 was
considered the emergence date as it was a period end and activity for the two
days was immaterial. Fresh start reporting required us to restate our assets and
liabilities to reflect their reorganization value, which approximates their fair
value at the date of the reorganization. In so restating, SOP 90-7 required us
to allocate our reorganization value to our assets based upon their estimated
fair values. Accordingly, the Fiscal 2001 and Fiscal 2000 financial statements
are not comparable. For financial reporting purposes, Fiscal 2001 has been
segregated into two periods: the eight months ended October 27, 2001 (the
"Predecessor Company Period") and the four months ended February 23, 2002 (the
"Successor Company Period"). For purposes of our Management's Discussion and
Analysis, we have combined the actual results of operations for the Predecessor
Company and the Successor Company, as pro forma combined 2001 ("Pro Forma
Combined Fiscal 2001") operating results to present a more meaningful
comparative analysis to prior fiscal year operating results. The Predecessor
Company and Successor Company financial information is from our Consolidated
Financial Statements and no additional adjustments have been made to the Pro
Forma Combined Fiscal Year 2001 financial information. In addition to the basis
in accounting differences noted above, our operating results for Pro Forma
Combined Fiscal 2001, Fiscal 2000 and Fiscal 1999 were significantly impacted by
items associated with our bankruptcy including extraordinary debt forgiveness,
and restructuring activities.
18
Successor Predecessor
Company Company Predecessor
Four Months Eight Months Pro Forma Predecessor Company
Ended Ended Combined Company Fiscal Year
February 23, October 27, Fiscal Year 2001 Fiscal Year 2000 1999
2002 2001
Net sales $ 44,822 $ 66,294 $ 111,116 $ 154,709 $ 178,183
Cost of sales 30,998 47,096 78,094 110,998 123,823
----------- ------------ ------------- ------------- ------------
Gross profit 13,824 19,198 33,022 43,711 54,360
Selling, general and administrative expenses 13,466 25,368 38,834 58,510 49,684
Reorganization charges - 1,645 1,645 2,292 -
----------- ------------ ------------- ------------- ------------
Operating income (loss) 358 (7,815) (7,457) (17,091) 4,676
Interest expense, net 472 2,298 2,770 5,171 4,771
----------- ------------ ------------- ------------- ------------
Loss before income taxes, discontinued
operations and extraordinary items (114) (10,113) (10,227) (22,262) (95)
Provision for income taxes - - - - (25)
----------- ------------ ------------- ------------- ------------
Loss before discontinued operations and
extraordinary items (114) (10,113) (10,227) (22,262) (120)
Discontinued operations:
Loss on disposal - (279) (279) (21,854) -
Loss from discontinued operations - - - (8,975) (7,466)
----------- ------------ ------------- ------------- ------------
Loss before extraordinary items (114) (10,392) (10,506) (53,091) (7,586)
Extraordinary gain - cancellation of debt - 38,607 38,607 - -
----------- ------------ ------------- ------------- ------------
Net (loss) income $ (114) $ 28,215 $ 28,101 $ (53,091) $ (7,586)
=========== ============ ============= ============= =============
Results of Operation
Pro Forma Combined Fiscal 2001 compared to Fiscal 2000
All references to Fiscal 2001 numbers are to numbers derived from Pro
Forma Combined Fiscal 2001 detailed above. Fiscal 2001 ended on February 23,
2002; Fiscal 2000 ended on February 24, 2001; Fiscal 1999 ended on February 26,
2000.
Net sales for Fiscal 2001 decreased by $43.6 million or 28.2% from
$154.7 million for Fiscal 2000 to $111.1 million for Fiscal 2001. Net retail
sales for Fiscal 2001 decreased $34.7 million or 24.6% from $140.9 for Fiscal
2000 to $106.2 million for Fiscal 2001. Net catalog sales for Fiscal 2001
decreased $8.8 million or 63.8% from $13.8 million for Fiscal 2000 to $5.0
million for Fiscal 2001. Decrease in revenue of retail stores is attributable to
planned reduction in the number of retail stores and various adversities due to
our bankruptcy proceedings, including the closing of 13 Woodworkers Warehouse
Stores and the discontinuance of our Post Tool operations. The decrease in net
catalog sales was attributable to a decrease in the number of catalogs mailed
from $1.2 million in Fiscal 2000 to $0.8 million in Fiscal 2001.
19
Gross profit for Fiscal 2001 decreased by $10.7 million or 24.5% from
$43.7 million for Fiscal 2000 to $33.0 million for Fiscal 2001. This decrease is
a result of our shedding non-core businesses, closing 13 Woodworkers Warehouse
stores, and reducing the number of catalogs we mail. In addition, under fresh
start accounting, we adopted full absorption accounting for distribution cost
and vendor rebates directly related to inventory purchases. As a result of this
adoption, we increased our cost of goods sold for distribution costs and
reduced our costs of goods sold for vendor rebates which resulted in a net
increase of $0.8 to costs of goods sold. We capitalized a portion of these costs
and rebates to inventory based upon inventory turns.
As a percentage of net sales, gross profit increased from 28.3% for
Fiscal 2000 to 29.7% for Fiscal 2001. During Fiscal 2000 we maintained an
aggressive promotional selling strategy to maximize cash and inventory levels,
to enhance product mix in the stores, and to increase turns. The gross margin
percentage increase was negatively impacted by reduced catalog sales which
traditionally have higher gross margin than retail sales.
Selling, general and administrative expenses for Fiscal 2001 decreased
$19.7 million or 33.7% from $58.5 million for Fiscal 2000 to $38.8 million for
Fiscal 2001. As a percentage of net sales, selling, general and administrative
expenses decreased 2.9%, from 37.8% of net sales in Fiscal 2000 to 34.9% of net
sales in Fiscal 2001. The decrease in selling, general and administrative
expenses was primarily due to the reduction of expenses in connection with our
reorganization and the change to recording distribution cost and vendor rebates
in costs of goods sold under fresh start accounting. In addition, we converted
fixture and equipment leases from operating leases to capital leases. As a
result, operating lease expense decreased substantially.
Reorganization charges were $1.6 million for Fiscal 2001 compared to
$2.3 million for Fiscal 2000, a decrease of $0.7 million. The reorganization
charges were directly associated with the Chapter 11 proceedings including
professional fees, the loss on disposal of Post Tool offset by the sale of
leased assets. There were no additional expenses related to the Chapter 11
reorganization proceedings after the emergence date of October 29, 2001.
Due to the impact of the results described above, our operating loss
decreased from $17.1 million in Fiscal 2000 to $7.5 million in Fiscal 2001, a
decrease of $9.6 million.
Interest expense, net of interest income, for Fiscal 2001 decreased by
46.2% or $2.4 million from $5.2 million in Fiscal 2000 to $2.8 million in Fiscal
2001. The change in interest expense was attributable to the decrease in the
average amount outstanding under our credit facility.
On August 11, 2000, we disposed of our golf business resulting in a
loss on disposal of $21.8 million and we recorded a loss from discontinued
operations of $9.0 million in Fiscal 2000. In Fiscal 2001, an additional
loss on disposal of Golf Day of $0.3 million was recorded.
20
In Fiscal 2001, we had an extraordinary gain of $38.6 million as a
result of cancellation of debt related to the reorganization plan.
The net income for Fiscal 2001 was $28.1 million compared to a net loss
of $53.1 million for Fiscal 2000, an increase of $81.2 million.
Fiscal 2000 versus Fiscal 1999
Net sales for Fiscal 2000 decreased by $23.4 million, or 13.2%, from
$178.2 million for Fiscal 1999 to $154.7 million for Fiscal 2000. Net retail
sales for Fiscal 2000 decreased $16.0 million, or 10.2%, from $156.9 million for
Fiscal 1999 to $140.9 million for Fiscal 2000. Net catalog sales for Fiscal 2000
decreased $7.6 million, or 35.6%, from $21.3 million for Fiscal 1999 to $13.7
million for Fiscal 2000. The decrease in revenue of retail stores is
attributable to various adversities due to our bankruptcy proceedings. The
decrease in net catalog sales was attributable to a decrease in the number of
catalogs mailed during the year from 9.7 million in Fiscal 1999 to 1.2 million
in Fiscal 2000.
Gross profit for Fiscal 2000 decreased $10.7 million, or 20%, from
$54.4 million for Fiscal 1999 to $43.7 million for Fiscal 2000. As a percentage
of net sales, gross profit decreased from 31% for Fiscal 1999 to 28% for Fiscal
2000. This is primarily a result of our changing sales mix, and a decrease in
gross profit percentage in both the retail and catalog business.
Selling, general and administrative expenses for Fiscal 2000 increased
$8.8 million, or 17.8%, from $49.7 million for Fiscal 1999 to $58.5 million for
Fiscal 2000. As a percentage of net sales, selling, general and administrative
expenses increased 9.9% from 27.9% of net sales in Fiscal 1999 to 37.8% of net
sales in Fiscal 2000. The increases in selling, general and administrative
expenses are primarily due to a reduction in cooperative advertising income in
Fiscal 2000.
Reorganization charges resulted in net charges of $2.3 million or 1.5%
of net sales in Fiscal 2000. These net charges relate directly to our Chapter 11
proceedings and associated restructuring of operations and are discussed in Note
3 to the Consolidated Financial Statements.
Due to the impact of the results described above, our operating income
decreased from $4.7 million in Fiscal 1999 to a loss of $17.1 million in Fiscal
2000, a decrease of $21.8 million.
Interest expense, net of interest income, for Fiscal 2000 increased by
$0.4 million from $4.8 million in Fiscal 1999 to $5.2 million in Fiscal 2000.
The change in interest expense was attributable to the increase in the average
amount outstanding under our bank credit facility.
21
On August 11, 2000, we disposed of our golf business. The consolidated
financial statements of the Predecessor Company have been presented to reflect
the disposition of the golf business in accordance with APB Opinion No. 30.
Accordingly, revenues, expenses, and cash flows of the golf division have been
excluded from the respective captions in the accompanying consolidated
statements of operations and consolidated statements of cash flows. The net
liabilities of the golf business have been reported as "Net current liabilities
of discontinued operations" in the accompanying consolidated balance sheets; the
net operating losses of the golf division have been reported as "Net loss from
discontinued operations" in the accompanying consolidated statements of
operations; the net loss from the disposal of the golf division has been
presented as "Net loss on disposal"; and the net cash flows of the golf division
have been reported as "Net cash used in discontinued operations" in the
accompanying consolidated statements of cash flows. Net sales for the golf
division were approximately $55,189,000 and $92,448,000 for Fiscal 2000 and
Fiscal 1999.
The net loss for Fiscal 1999 was $7.6 million compared to a net loss of
$53.1 million for Fiscal 2000.
22
Liquidity and Capital Resources
All References to Fiscal 2001 numbers are to numbers derived from Pro
Forma Combined Fiscal 2001 detailed below.
Successor Predecessor
Company Company
Four Months Eight Months Pro Forma
Ended Ended Combined
February 23, October 27, Fiscal Year Fiscal Fiscal
2002 2001 2001 Year 2000 Year 1999
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (114) $ 28,215 $ 28,101 $ (53,091) $ (7,586)
Add: Loss from discontinued operations - 279 279 8,975 7,466
Loss on disposal of discontinued operations - - - 21,854 -
Extraordinary gain - cancellation of debt - (38,607) (38,607) - -
----------- ----------- ----------- ---------- ----------
Net loss from continuing operations (114) (10,113) (10,227) (22,262) (120)
----------- ----------- ----------- ---------- ----------
Net cash from operating activities 3,293 9,805 13,098 28,674 (3,188)
Net cash from discontinued operations - (1,089) (1,089) 5,885 (6,894)
---------- ----------- ----------- --------- ----------
Net cash from operating activities
(before reorganization expenses) 3,293 8,716 12,009 34,559 (10,082)
---------- ---------- ---------- --------- ----------
Operating cash flows from reorganization items:
Professional fees paid by services rendered in
bankruptcy - (2,502) (2,502) (1,658) -
Interest income received - 332 332 462 -
Other reorganization expenses paid - 525 525 (1,096) -
----------- ----------- ----------- ---------- ----------
Net cash used by reorganization items - (1,645) (1,645) (2,292) -
----------- ----------- ----------- ---------- ----------
Net cash from operating activities 3,293 7,071 10,364 32,267 (10,082)
---------- ---------- ---------- --------- ----------
Net cash from investing activities (323) (201) (524) (636) (3,585)
----------- ----------- ----------- ---------- ----------
Net cash from financing activities (15,311) (12,348) (27,659) (14,347) 14,181
----------- ----------- ----------- ---------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (12,341) (5,478) (17,819) 17,284 514
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 12,860 18,338 18,338 1,054 540
---------- ---------- ---------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 519 $ 12,860 $ 519 $ 18,338 $ 1,054
========== ========== ========== ========= =========
Our primary ongoing cash requirements are for seasonal and new store
inventory purchases and capital expenditures. Our primary sources of funds for
our business activities are cash flow from operations and borrowings under our
revolving credit facility.
Our working capital deficit decreased by $31.1 million, from a deficit
of $34.1 million as of February 24, 2001 to a deficit of $3.0 million as of
February 23, 2002. The increase in working capital resulted primarily from the
cancellation of debt under the plan, the reduction in inventory as a result of
store closings and improved inventory turns and revaluation of fixed assets
under fresh start accounting.
Cash flow generated from store operations provides a source of
liquidity. Cash provided by operating activities was $10.4 million for Fiscal
2001 as compared to $32.3 million for Fiscal 2000. The primary provider of the
cash in Fiscal 2001 was a $12.6 million decrease in inventories, and a $7.9
million increase in post petition accounts payable. We also offset a $10.1
million increase in pre-petition accounts payable by a $9.8 million increase in
accounts receivable (we classified approximately $8.9 million in vendor rebates
receivable as accounts payable at February 24, 2001, which we wrote off as part
of our cancellation of debt upon our emergence from bankruptcy). Our cash was
offset by a net loss from continuing operations of $10.3 million.
23
The net cash used in investing activities was approximately $0.5
million in Fiscal 2001 compared to $0.6 million in Fiscal 2000. The main use of
cash for investment in Fiscal 2001 was primarily for the purchase of equipment
required for relocation of our headquarters and distribution center.
Capital expenditures include costs for the relocation of our
headquarters and distribution center, new store openings, store remodels and
other basic capital needs. These expenditures fluctuate from year to year
primarily as a result of the timing of new store capital spending and the number
of stores remodeled. Our capital expenditures were $0.5 million during Fiscal
2001, $0.6 million during Fiscal 2000 and $3.8 million during Fiscal 1999. We
expect total capital expenditures for Fiscal 2002 to be approximately $0.5
million. This estimate includes store remodeling spending as well as base
capital needs.
The net cash used in financing activities was approximately $27.6
million in Fiscal 2001 and $14.3 million in Fiscal 2000, primarily attributable
to reduced net borrowings under bank credit facilities. During Fiscal 2001 we
made principal payments on our old bank credit facility of $5.0 million and $7.5
million on April 2, 2001 and September 17, 2001. In addition, upon emergence
from bankruptcy we paid off the old bank credit facility and entered into the
new facility resulting in a decrease in principal of $12.3 million.
We maintain a $30 million senior secured revolving credit line with
Bank of America. The borrowing base under the credit line commitment 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. The credit facility is secured by
substantially all of our assets. Amounts borrowed under the credit line bear
interest at an annual rate equal to LIBOR plus 3.25% (5.08% at July 2, 2002) or
the bank reference rate plus 1.00% (5.75% at July 2, 2002) at our option. We may
select the rate every month. The amount available at July 1, 2002, based on the
borrowing base under the credit line was $24.4 million, of which $23.5 million
was drawn. The agreement requires us to maintain a fixed charge coverage (our
income before interest, depreciation, amortization and taxes over fixed charges
defined as interest on our long term debt) ratio of .75:1.00 for the three
fiscal quarters ending August 2002 and .90:1.00 for the four fiscal quarters
ending November 2002 and other non financial covenants. As of August 1, 2002, we
were in compliance with all the covenants. We are also required to have $3.0
million of availability under the facility after we pay the $2.0 million that we
are required to pay to settle pre-petition general unsecured claims. The total
availability at February 23, 2002 was approximately $3,800,000. The agreement
was amended on August 22, 2002 to fix the overadvance portion of the
availability at $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 credit facility currently has an expiration
date of, and the outstanding balance matures on, October 29, 2003. The credit
facility is classified as a current liability due to the agreement including a
subjective acceleration clause and an agreement to maintain blocked account
arrangements.
24
Under the Plan, we are required to pay to general unsecured creditors
their pro rata share of $2,000,000 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 our credit 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 our bank facility. We are actively seeking a new credit facility, in part
to increase our borrowing base so that we may make this deferred payment, but
cannot guarantee that we will be able to obtain one and that if we do obtain a
new credit facility that it will be on terms favorable to us.
Provided the holders of the $2,000,000 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 our
$30 million revolving credit facility and other sources of financing. We expect
to generate adequate cash flows from operating activities to sustain current
levels of operations.
Contractual Cash Obligations
Less than 1-3 Years More than 3 Total
1 Year Years
Credit Facility $20,878,000 -- -- $20,878,000
Capital Leases $1,421,000 $1,910,000 $416,000 $3,747,000
Operating Leases (including rent) $6,485,000 $12,072,000 $52,286,000 $70,843,000
Payments to Unsecured Creditors $2,000,000 -- -- $2,000,000
----------- ----------- ----------- -----------
Total $30,784,000 $13,982,000 $52,702,000 $97,468,000
=========== =========== =========== ===========
New Accounting Pronouncements
On February 25, 2001, we adopted Statement of Financial Accounting
Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities," which provides accounting and reporting standards for derivatives,
including those embedded in other instruments or contracts. Adoption of SFAS No.
133 did not have a significant impact on the consolidated financial position or
the results of operations.
In July 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141, "Business Combinations," which was effective for business
combinations initiated after June 30, 2001. We did not acquire any entity
subsequent to June 2001, however the principles of SFAS No. 141 were applied in
accordance with fresh start accounting.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142"). SFAS No. 142 provides for cessation of
amortization of goodwill and other intangible's considered to have indefinite
lives and includes requirements for periodic tests of goodwill and indefinitely
lived intangible assets for impairment. We are required to adopt SFAS No. 142 in
fiscal 2003. We adopted SFAS 142 as part of our fresh start accounting.
25
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 requires that one
accounting model be used for impairments of long-lived assets to be either used
in a business or disposed of by sale, and broadens the presentation of
discontinued operations to encompass more discrete components of a business
enterprise than were included under previous standards. We adopted SFAS No.144
as part of our fresh start accounting.
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.
Impact of Inflation
We do not believe inflation has had a material impact on our net sales
or results of operations.
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.
26
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 face new types of competitors as we
enter new markets or lines of business.
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 Our continued compliance with the financial covenants under
our bank credit facility.
o Continued cooperation by the holders of $2,000,000 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 Other risks and uncertainties indicated from time to time in
our filings with the Securities and Exchange Commission.
CERTAIN RISK FACTORS
In addition to the risks related to the factors listed above in the section
titled "Safe Harbor Statement under the Private Securities Litigation Reform Act
of 1995", investing in our common stock involves a high degree of risk. These
risks and uncertainties are not the only ones we face. Unknown additional risks
and uncertainties, or ones that we currently consider immaterial, may also
impair our business operations. If any of these risks or uncertainties actually
occur, our business, financial condition or results of operations could be
materially adversely affected.
Our revised business operations provide limited information upon which to base
an investment decision. Our principal operations have consisted of only
Woodworkers Warehouse stores and catalogs since the corporate reorganization in
October 2001. Therefore, we have limited historical financial information about
us upon which to base an evaluation of our performance. Given our limited
operating history and our unproven potential to generate revenue and profits,
there is no assurance we will be able to compete successfully in the retail and
catalog power tool and accessory sale business.
We must establish, maintain and strengthen the Woodworkers Warehouse brand to
attract users and generate revenue from existing and new businesses. To
successfully implement our business plan, we must establish, maintain and
continually strengthen the Woodworkers Warehouse brand. For us to be successful
in establishing Woodworkers Warehouse, users of power and hand tools must
perceive it as a desirable, efficient and cost effective shopping source, which
provides a wide range of quality products. If our marketing efforts are not
productive or if we cannot strengthen our brand, our efforts to establish and
maintain our brand will be unsuccessful, and we may lose customers and be unable
to attract new business.
27
Our competitors may be able to raise money and exploit opportunities more
rapidly and extensively than we can. We have limited financial and other
resources and limited access to capital. We compete or may compete against
entities that are much larger than we are, have more extensive resources than we
do and have an established reputation. Because of their size, resources,
reputation, history and other factors, certain of our competitors may have
better access to capital and other significant resources than we do and, as a
result, may be able to exploit acquisition and development opportunities more
rapidly, easily or thoroughly than we can.
We face intense competition and will have to compete for market share. There can
be no assurance our products will achieve or maintain a competitive advantage.
There are currently a number of companies who compete in the catalog and retail
store power tool business. We face competitive pressures from numerous actual
and potential competitors, both online and offline, and catalog and retail, many
of which have longer operating histories, greater brand name recognition, larger
customer bases and significantly greater financial, technical and marketing
resources than we do. We cannot assure you that the catalog and retail tool
stores maintained by our existing and potential competitors will not be
perceived by potential customers as being superior to ours.
The terms of our indebtedness impose restrictions on us that limit the
discretion of our management in operating our business and that may limit our
ability to obtain additional financing. Our working capital facility contains
various restrictive covenants that limit our management's discretion in
operating our business. In particular, these covenants limit our ability to,
among other things:
o incur additional indebtedness;
o issue additional stock;
o make restricted payments (including redeeming or repurchasing
our capital stock);
o make investment or acquisitions;
o grant liens on our assets;
o engage in transactions with affiliates;
o liquidate or dissolve;
o sell our assets;
o enter into any sale and lease back transactions; and
o amend our Plan of Reorganization.
A breach of any of these covenants could result in an event of default under the
facility, in which case the lender could elect to declare all amounts borrowed,
together with unpaid accrued interest, to be immediately due and payable.
We have deferred payment of $2,000,000 of claims that are due and payable. This
deferral was made after consultation with the holders of a majority of the
dollar value of the claims; however, the deferral was not formally approved and
claim holders could seek payment of their claims at any time. As a result of
restrictions under our credit facility, we do not have funds available to pay
these claims at this time.
28
We are dependent on cash flows from operations and our credit facility to meet
our working capital needs. Assuming continued cooperation by the holders of
$2,000,000 of deferred claims, we believe projected cash flows from operations
in combination with our credit facility are sufficient to meet our working
capital needs through the end of fiscal 2002 and debt payments. Achievement of
projected cash flows from operations, however, will be dependent upon our
attainment of sales, gross profit, expense and trade support levels that are
consistent with our financial plans. Such operating performance will be subject
to financial, economic and other factors affecting the industry and our
operations, including factors beyond our control, and there can be no assurance
our plans will be achieved. Failure to achieve our plans could have a material
adverse effect on our financial condition.
We are dependent on cash flows from operations to pay our debt which payments
may increase if interest rates rise. We borrow funds on a variable rate basis
and continued compliance with loan covenants under our credit facility is
partially dependent on relative interest rate stability. If projected cash flows
from operations are not realized, or if there are significant increases in
interest rates, then we may have to explore alternate financing sources,
including obtaining further modification to our existing lending arrangements or
attempting to locate additional sources of financing. We can make no assurance
that we will be able to obtain such new or additional financing, or that if we
do obtain such financing it will be on terms that are favorable to us.
We have never paid cash dividends on our common stock, and we are currently
restricted from declaring and paying cash dividends. We have never declared or
paid any cash dividends on our common stock, and we do not expect to declare any
such dividends in the foreseeable future. Payment of any future cash dividends
will depend upon our earnings and capital requirements, our debt facilities and
other factors that our board of directors may deem appropriate. We intend to
retain earnings, if any, to finance the development and expansion of our
business, and therefore we do not anticipate paying dividends in the foreseeable
future. In addition, the terms of our outstanding indebtedness restrict the
payment of cash dividends on our common stock.
Our failure to manage the reorganization of our operations and infrastructure
could disrupt our operations and adversely affect our revenues. We have
reorganized, shed non-core businesses, and focused our business on our
Woodworkers Warehouse brand. The reorganization has placed, and any growth as a
result is likely to further place, a significant strain on our resources. Our
ability to achieve and maintain profitability will depend on our ability to
manage this reorganization effectively, to implement, improve and expand
operational and customer support systems, and to hire additional personnel. We
may not be able to augment or improve existing systems and controls or implement
new systems and controls to respond to any future change. In addition, future
change may result in increased responsibilities for management personnel, which
may limit their ability to effectively manage our business.
We are dependent on the continued contributions of our key personnel. We are
currently dependent on our senior management and board of directors. The loss of
their services, or the services of any other individual upon whom we currently
rely, may significantly adversely affect our performance and our ability to
carry out the successful development and implementation of our business plan. We
maintain employment contracts with certain members of management. Failure to
retain management, directors and advisors or to attract and retain other key
employees could have an adverse effect on our growth and our ability to achieve
and maintain profitability.
29
We may not be able to hire and retain a sufficient number of qualified employees
and, as a result, we may not be able to grow as we expect or maintain the
quality of our services. Our success will depend on our ability to hire, train,
and retain highly skilled technical, marketing and sales, and customer support
personnel. Competition for these people is intense, especially for trained
service personnel, and we may be unable to successfully attract sufficiently
qualified personnel. There can be no assurance we will be able to hire, train
and retain a sufficient number of qualified employees. If we were unable to
recruit and retain a sufficient number of employees, we would be forced to limit
our growth or possibly curtail our operations.
The restrictions, additional costs and burdens imposed by penny stock
regulations may decrease the liquidity of our common stock. The Securities
Enforcement and Penny Stock Reform Act of 1990 requires additional disclosure
relating to penny stocks. Generally a penny stock is any equity security that
has a market price of less than $5.00 per share. In addition, broker/dealers who
recommend our common stock to persons other than established customers and
accredited investors must make a determination of the suitability of the
purchaser and receive the purchaser's written agreement to the investment before
a sale.
Our common stock will be quoted on the "pink sheets" or the OTC Bulletin Board
and does not currently qualify for listing on The Nasdaq Stock Market and we do
not foresee that we will qualify for such a listing in the foreseeable future.
If our common stock is quoted on the OTC Bulletin Board, or is traded in what
are commonly referred to as the "pink sheets", there would likely not be an
active trading market for our common stock, and our investors would find it more
difficult to see, or to quickly and accurately obtain, pricing information for
our common stock. The Nasdaq Stock Market establishes listing qualifications for
companies wishing to have their securities quoted on the Nasdaq SmallCap Market.
In addition to minimum bid price and public float requirements, among the other
listing requirements for a security to be quoted on the Nasdaq SmallCap Market,
the issuer must have minimum stockholders' equity of at least $5,000,000. We
currently do not meet these requirements.
ITEM 7A. 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 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated Financial Statements and Supplementary Data of the
Company are listed under Part IV, Item 14, in this Report.
30
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On April 5, 2002, the Company dismissed Arthur Andersen LLP as its
independent public accountants. On April 12, 2002, the Company retained Deloitte
& Touche LLP as the Company's independent public accountants.
Arthur Andersen's reports on the Company's consolidated financial
statements for the Company's Fiscal 2001 and Fiscal 2000 did not contain an
adverse opinion or disclaimer of opinion, nor were they qualified or modified as
to uncertainty, audit scope or accounting principles.
During Fiscal 2001 and Fiscal 2000 and through April 5, 2002, there
were no disagreements with Arthur Andersen on any matter of accounting principle
or practice, financial statement disclosure, or auditing scope or procedure
which, if not resolved to Arthur Andersen's satisfaction, would have caused them
to make reference to the subject matter in connection with their report on the
Company's consolidated financial statements for such years; and there were no
reportable events as defined in Item 304(a)(1)(v) of Regulation S-K.
31
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Directors
The following information is provided concerning the directors of the
Company as of August 1, 2002:
Name Age Position Director Since(1)
---- --- -------- -----------------
Bruce Berg 53 Director 2001
Ronald A. Kaplan 58 Director 2001
Richard A. Mandell 60 Director 2001
Walter S. Spokowski 45 President, Chief Executive Officer 2001
and Director
Gary A. Nacht 47 Director 2001
Joseph Nusim 68 Co-Chairman of the Board of 2001
Directors
Edward D. Solomon 71 Co-Chairman of the Board of 2001
Directors
(1) Upon the Company's reorganization and emergence from bankruptcy a new Board
of Directors and new officers were appointed. If a director of the Company had
served on the Board of Directors of Trend-Lines, Inc. prior to the Company's
emergence from bankruptcy, the information is provided in the disclosure which
follows.
Bruce W. Berg has been a Director since October 2001. From 1984 to his
retirement in 1998, Mr. Berg worked for Home Depot, as Vice President,
Merchandising from 1984 to 1991 and from 1991 to 1998, as Second Divisional
President, and then President, of the Southeast Division, the largest division
and the only division to have two separate entities under one President.
Ronald Kaplan has been a Director since October 2001. He is a graduate
of the University of Pennsylvania, Wharton School of Finance and Commerce. From
1969 to 1997 Mr. Kaplan held many management positions including President/COO
of Levitz Furniture Corporation. From 1997 to November 1998, he was chairman of
Kaplan Consulting. From November 1998 to November 1999 he was CEO of Room Plus.
Mr. Kaplan worked at Staubach Retail Services from December 1999 to December
2001 and is currently Senior Vice President Retail of Julius Feinblum Real
Estate since December 2001.
Richard Mandell has been a Director since October 2001. Mr. Mandell was a
director of Trend-Lines from October 1995 to October 2001. Since February 1998
Mr. Mandell has been an independent financial consultant. From January 1996 to
February 1998, Mr. Mandell was a Vice President- Private Investments of Clariden
Asset Management (NY) Inc. a subsidiary of Clariden Bank, a private Swiss bank.
Mr. Mandell is also a director of Encore Capital Group, Inc. and Sbarro, Inc.
32
Walter S. Spokowski has been Chief Executive Officer and a Director
since October 2001. He was a director of Trend-Lines from October 1999 through
October 2001 and was Chief Executive Officer from December 2000 to October 2001.
From October 2000 until December 2000 he served as President of Trend-Lines and
prior to that he served as Trend-Lines' Executive Vice President, Merchandising
from the time he joined the Company in March 1997.
Gary A. Nacht has been a Director since October 2001. Since June 1996, Mr.
Nacht has been Executive Vice President and Investment Principal in York
Management Services, Inc., a private investment and management advisory services
company. Mr. Nacht currently serves on various boards, including Gemini
Industries, Inc. and Northern Group Retail Limited, and has previously been an
investor in and served on the boards of K-Mart Canada Ltd., and Strauss Discount
Auto.
Joseph Nusim has been a Director since October 2001. Mr. Nusim is the
chairman of Nusim Group, a retail consulting organization. He is co-chairman of
the Board of Loehman's Stores. Mr. Nusim also serves on the Advisory Board of
Wells Fargo and Gordon Brothers, real estate division. Mr. Nusim serves on the
board of the International Mass Retailing Association and acts as retail
consultant to Kimco Realty Corp and the Creditors Committee of Frank's
Nurseries.
Edward D. Solomon has been a Director since October 2001. Mr. Solomon has
owned and operated Edward D. Solomon & Co. Consulting Services since January
1994. Mr. Solomon currently serves on the board of Bennett Footwear Group and
The Dress Barn, Inc. and has served on the boards of the Butler Group, Inc.,
Channel Home Centers and HRT Industries, Inc.
Committees of the Board of Directors
Since the Company's reorganization on October 29, 2001, the Company has
formed two committees, an Audit Committee comprised of Messrs. Mandell, Nacht,
and Solomon and a Compensation Committee comprised of Messrs. Berg, Kaplan, and
Nusim.
Compensation of Directors
Currently, each director who is not employed by the Company receives an
annual retainer of $20,000 plus $1,000 for each meeting of the Board or any
committee thereof attended in person, including reimbursement of expenses
incurred in connection with attending such meeting, and $500 for each meeting
held by telephonic board meeting. Joseph Nusim and Edward D. Solomon received an
additional annual fee of $5,000 as compensation for serving as Co-Chairmen of
the Boards.
Pursuant to the 2001 Woodworkers Warehouse, Inc. Long-Term Incentive
Plan, (the "Incentive Plan"), each director who is not employed by the Company
received upon his appointment to the Board an option to purchase up to 50,000
shares of common stock at the fair market price of the common stock on the date
of grant. Except as set forth in the immediately following sentence, one-third
of such option becomes exercisable on each January 2 following the grant date.
In the event a non-employee director fails to attend at least 75% of the Board
meetings in any calendar year, that director automatically forfeits the right to
exercise that portion of the option that would otherwise have become exercisable
on the next following January 2, and which portion ceases to have any force or
effect. There were no forfeitures under this provision in Fiscal 2001. Also
pursuant to the Incentive Plan, at January 2 of each year, except for January 2,
2002, each non-employee director is entitled to receive an immediately
exercisable option to purchase such number of shares of common stock to be
determined by the compensation committee at an exercise price equal to the fair
market price of the common stock on the date of grant.
33
The exercise price of options granted to the non-employee directors in
Fiscal 2001 was $0.26 per share. The Company determined that its fair market
value was $0.26 per share for each share it is required to issue under the Plan.
The per share value is equal to its value as determined by an independent third
party after a valuation performed in conjunction with its emergence from
bankruptcy. Options granted to directors under the Incentive Plan generally
expire and cease to be of any force or effect on the earlier of the tenth
anniversary of the date any such grant or the first anniversary of the date on
which an optionee ceases to be a member of the Board.
Reporting Under Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's executive officers, directors and persons who own more than 10% of the
Company's Common Stock, to file reports of ownership and changes in ownership on
Forms 3, 4 and 5 with the Securities and Exchange Commission and the Nasdaq
Stock Market. Executive officers, directors and greater than 10% stockholders
are required to furnish the Company with copies of all Forms 3, 4 and 5 they
file.
Based solely on the Company's review of the copies of such Forms it has
received, except for Form 3s for William Kearney and Jerry Juszak, which were
filed late, the Company believes that all of its officers, directors and greater
than 10% stockholders complied with all Section 16(a) filing requirements
applicable to them during the Company's fiscal year ended February 23, 2002.
Executive Officers of the Company
The following information is provided concerning the executive officers
of the Company as of August 1, 2002:
Name Age Position
---- --- --------
Walter S. Spokowski(1) 45 President and Chief Executive Officer
Rick C. Welker 42 Vice President and Chief Financial Officer
Jack Bransfield 49 Vice President Distribution and Information
Systems
Jerry Juszak 53 Vice President and General Merchandise Manager
William Kearney 43 Vice President Store Operations
(1) Information concerning Mr. Spokowski's biography is contained in this Item
10, in the section titled "Directors."
34
Rick C. Welker has been the Company's Vice President and Chief
Financial Officer since July 29, 2002. From November 2000 to July 2002, Mr.
Welker was Senior Vice President, Secretary and Chief Financial Officer of rue
21, a 174-store junior sportswear chain based in Warrendale, Pennsylvania. From
1995 to November 2000, he was Vice President and Controller of Bradlees Stores,
Inc.
John Bransfield has been the Company's Vice President Distribution and
Information Systems since January 16, 2002. He has been with the Company since
1995, serving as Vice President Inventory Planning and Distribution from July
2001 until May 2002, Director of Inventory Planning from May 1999 to July 2001
and Director of Purchasing and Product Manager from January 1995 to May 1999.
Jerry Juszak has been the Company's Vice President General Merchandise
Manager since May 6, 2002. From 1982 through April 2002, Mr. Juszak was with ABC
Supply Company, Inc., where he held various positions including Director of
Education, General Manager - Catalog Tool Division and Regional Manager - Branch
Operations.
William Kearney has been the Company's Vice President Store Operations
since March 25, 2002. From September 2001 to March 2002, he was District Store
Manager for Sixth Avenue Electronics. From October 1997 to July 2001, Mr.
Kearney was Vice President of Stores of Utrecht Art Supply.
35
ITEM 11. EXECUTIVE COMPENSATION
I. Summary Compensation Table for Annual Compensation
The following table shows, for the Company's Chief Executive Officer
and each of the other three most highly compensated executive officers
(collectively, the "named executive officers"), information concerning
compensation earned for services in all capacities during Fiscal 2001, as well
as compensation earned by each such person for the previous two years:
36
Long-Term Compensation
Awards
Restricted Securities All Other
Fiscal Annual Other Annual Stock Underlying Compensation
Year(1) Salary ($) Bonus ($) Compensation Awards Options ($)(2)
------- ---------- ----------- ------------ ---------- ------- ------
Walter S. Spokowski 2001 238,392 110,000(3) 62,400(4) -- 0 3,305
Chief Executive Officer 2000 178,273 0 -- -- 10,000(5) 3,002
President 1999 142,019 0 -- -- 0 1,958
Ronald. L. Franklin, 2001 171,269 80,000(3) 31,200(6) -- 0 4,183
Executive Vice 2000 155,039 0 -- -- 0 3,788
President, Finance, 1999 125,648 0 -- -- 0 3,755
Chief Financial Officer
Barry Cady, Vice 2001 85,401 20,757(3) -- -- 30,000 2,562
President Retail 2000 75,809 0 -- -- 0 2,250
Administration 1999 66,427 0 -- -- 0 2,030
John Bransfield, Vice 2001 83,178 21,462(3) -- -- 30,000 2,495
President Distribution 2000 72,203 0 -- -- 0 2,216
and Information Systems 1999 68,207 0 -- -- 0 2,117
(1) The information provided for Fiscal 2001 is comprised of the executive
compensation for the audited periods of the four months ended February 23,
2002 and the eight months ended October 27, 2001. The information provided
for the eight months ended October 27, 2001, Fiscal 2000 and Fiscal 1999
is for compensation earned as a named executive officer of Trend-Lines,
Inc.
(2) These amounts represent contributions by the Company to the Company's
401(k) Plan for the benefit of the named executive officers.
(3) The annual bonus payments were paid in Fiscal 2001 pursuant to Company's
"Key Employee Retention Program" ("KERP"), which was approved by the
Bankruptcy Court in October 2000. Pursuant to the KERP, Executive
Employees and Middle Management Employees of the Company were to be paid
50% and 25% of their annual salary in effect at the time that the payment
was due, in a lump sum, less applicable withholding taxes, at the earlier
of: (i) one year from the Petition Date; (ii) confirmation of a Plan of
Reorganization; or (iii) dismissal of the employee, other than for cause.
(4) Represents a grant of 240,000 shares of the Company's Common Stock on
October 29, 2001 with a fair market value of $0.26 per share on that date.
The Company determined that its fair market value was $0.26 per share for
each share it is required to issue under the Plan. The per share value is
equal to its value as determined by an independent third party after a
valuation performed in conjunction with its emergence from bankruptcy.
(5) These options were options to purchase shares of Class A Common Stock of
Trend-Lines, Inc. and all rights granted pursuant to such options were
extinguished upon the Company's emergence from bankruptcy on October 29,
2001.
(6) Represent a grant of 120,000 shares of the Company's Common Stock on
October 29, 2001 with a fair market value of $0.26 per share on that date.
The Company determined that its fair market value was $0.26 per share for
each share it is required to issue under the Plan. The per share value is
equal to its value as determined by an independent third party after a
valuation performed in conjunction with its emergence from bankruptcy.
37
II. Option/SAR Grants Table
The table which follows includes information concerning individual grants of
stock options made during Fiscal 2001(1) to each named executive officer.
Number of
Securities Percent of
Underlying Total Options Exercises of Grant Date
Options to Employees Base Price Present
Granted in Fiscal Year ($/Sh) Expiration Date Value ($)
------- -------------- ------ --------------- ---------
Walter S. Spokowski
Chief Executive Officer and 0 -- -- -- --
President
Ronald S. Franklin
Executive Vice President, 0 -- -- -- --
Treasurer and Chief Financial
Officer
Barry Cady
Vice President Retail 30,000 3.74% $0.26 January 01, 2012 $0.18
Administration
John Bransfield
Vice President Distribution and 30,000 3.74% $0.26 January 01, 2012 $0.18
IS Operations
(1) The information provided for Fiscal 2001 is comprised of the executive
compensation for the audited periods of the four months ended February 23,
2002 and the eight months ended October 27, 2001.
38
III. Aggregated Option Exercises in Fiscal 2001 and Fiscal Year-End Option
Values
The table which follows includes information concerning individual
exercises of stock options made during Fiscal 2001 by each named executive
officer and the fiscal year-end value of unexercised options held by such
officers.
Value of Unexercised
Number of Securities In the Money Options
Underlying Unexercised at FY-End
Options at FY-End
($)
Shares
Acquired on Value Exercisable/ Exercisable/
Name and Principal Position Exercise Realized Unexercisable Unexercisable
- --------------------------- -------- -------- ------------- -------------
Walter S. Spokowski Executive 0 0 0 0
Vice President, Merchandising
Ronald. L. Franklin, Executive 0 0 0 0
Vice President, Finance and
Chief Financial Officer
Barry Cady, Vice President, 0 0 0/30,000 0/0
Retail Administration
John Bransfield, Vice 0 0 0/30,000 0/0
President Distribution and
Information Systems
Employment Contracts
The Company and Mr. Spokowski are parties to an employment agreement
that expires on October 29, 2004. The employment agreement automatically renews
for successive one year terms following the agreement's expiration unless the
Company or Mr. Spokowski provides the other party with 90 days written notice
prior to the expiration of the current term. Mr. Spokowski currently receives an
annual base salary of $250,000, and he is entitled to receive an annual bonus
from the Company based on the performance of the Company as determined by the
board of directors. Under the agreement, on October 29, 2001 the Company granted
to Mr. Spokowski 240,000 shares of issued and outstanding Company common stock,
which represents 4% of the Company's issued and outstanding common stock as of
the date of its emergence from bankruptcy. The Company may also grant up to
another 2% of the Company's stock to Mr. Spokowski over a four year period as
determined by the board of directors in its sole discretion. The employment
agreement may be terminated by either party at any time under certain
circumstances. If the employment agreement is terminated by the Company without
cause or by Mr. Spokowski for good reason, Mr. Spokowski will be entitled to his
base salary, the balance of any earned bonus and a lump sum payment equal to 12
months of his base salary. Mr. Spokowski will generally be subject to certain
non-compete restrictions following a termination of his employment with the
Company.
39
The Company entered into an Agreement and General Release with Ronald
L. Franklin, its former Executive Vice President and Chief Financial Officer,
which terminated Mr. Franklin's employment with the Company as of August 1,
2002. Pursuant to the agreement, among other things, Mr. Franklin agreed to
waive his right to receive a lump sum payment of $175,000 from the Company. In
exchange, the Company agreed to provide Mr. Franklin with employee benefits
until the earlier of August 1, 2003 and the date on which he obtains employee
benefit coverage from another Company. In lieu of the lump sum payment, the
Company agreed to pay Mr. Franklin (1) $72,916.67 on the Company's first payroll
date after August 1, 2002, and (2) $6,380.21 on a bi-weekly basis commencing on
November 1, 2002 and ending on May 30, 2003. Mr. Franklin agreed to release the
Company and its directors, officers, shareholders, attorneys, agents and other
affiliates from any claims he may have against any of them. This agreement
terminated the employment agreement between the Company and Mr. Franklin
effective as of August 1, 2002.
The Company and Mr. Welker are parties to an employment agreement dated
June 21, 2002. Pursuant to the agreement, Mr. Welker receives an annual base
salary of $170,000. Mr. Welker is also entitled to annual bonus based on the
performance of the Company, Mr. Welker is also guaranteed a minimum bonus of
$51,000 under the annual at the end of this fiscal year. He also received a
$37,000 bonus on starting with the Company. In the event that Mr. Welker is
terminated by the Company for any reason other than cause then the Company must
continue his base salary and insurance coverage for six months from the date of
termination. Mr. Welker is also entitled to receive 25,000 shares of common
stock to vest in equal amounts over three years.
Compensation Committee Interlocks and Insider Participation
Prior to our emergence from bankruptcy on October 29, 2001 we did not
have a Compensation Committee in Fiscal 2001. After October 29, 2001 the
Compensation Committee was comprised of Messrs. Berg, Kaplan, and Nusim. No
member of the Compensation Committee was at any time an officer or employee of
the Company or any of its subsidiaries.
Compensation Committee Report On Executive Compensation
The Board believes that increasing the value of the Company to its
stockholders is the Board's most important objective and should be the key
measure of management performance. The Board also believes that executive
compensation should be objectively determined. For this reason, the Compensation
Committee, which is made up of directors who are not employees of the Company,
is responsible for determining the compensation packages of the Company's
executives.
The Company is focused on achieving consistent earnings growth and
increasing returns to its stockholders. While the Company is cautious about near
term results due to challenging business conditions, the following are its
longer-term financial goals: Increase compounded earnings per diluted share and
increase our return on average equity.
The executive compensation program is designed to accomplish the
Board's objectives. The program is based upon the following principles:
executive performance should be judged and compensated primarily on the basis of
the Company's earnings and the strength of the Company's financial position;
long-term appreciation in stockholder value is the most appropriate measure of
the Company's financial performance; and the most effective approach to
promoting the financial success of the Company is to align the stockholders' and
the executives' interests. This alignment is best accomplished through a
compensation strategy emphasizing long-term stock ownership. As a result, the
program is designed to increase the proportion of long-term compensation tied to
increases in the Company's earnings, financial position and appreciation in
stockholder value. The annual cash compensation for executive officers is
primarily in the form of base salary, which is being maintained at levels
consistent with competitive market compensation practices, and annual cash
incentives based on objectives tied to the Company's financial performance.
Annual cash compensation is supplemented with long-term incentive compensation,
primarily in the form of stock incentives, intended to link executive
compensation to changes in stockholders' value. The Compensation Committee
intends that the application of these principles will result in total executive
compensation and capital accumulation potential above competitive levels for
superior stockholder returns and below competitive levels for average or lesser
returns.
40
There are three components to the Company's compensation program for
executive officers: base salary, annual cash incentives and long-term stock
incentives. Each of these components is discussed in detail below.
Base Salary
Base salaries for the annual period ended on and as of Fiscal 2001 were
established under agreements for certain officers. Factors considered in setting
these salaries include the responsibilities of the position, compensation of
executives in companies of similar size or in the same industry and external
market conditions. All base salary compensation for officers for Fiscal 2001 was
approved by the bankruptcy court.
Annual Cash Incentives
The stated goal of the Compensation Committee is to structure executive
compensation that focuses the efforts of senior management on achieving the
above stated business goals of the Company. An annual cash incentive is utilized
to compensate management for achieving consistent and increasing earnings growth
over several periods. The annual cash payments for each executive and management
are based upon achieving certain sales objectives and earnings objectives.
The bonuses paid for Fiscal 2001 were based on the Company's "Key
Employee Retention Program" ("KERP"), which was approved by the Bankruptcy Court
in October 2000. Pursuant to the KERP, executive employees and middle management
employees of the Company were to be paid 50% and 25%, respectively, of their
annual salary in effect at the time that the payment was due, in a lump sum,
less applicable withholding taxes, at the earlier of: (i) one year from the
Petition Date; (ii) confirmation of a Plan of Reorganization; or (iii) dismissal
of the employee, other than for cause.
Long-Term Stock Incentives
The Compensation Committee believes that long-term changes in
stockholder value are an important measure of the Company's performance. The
Compensation Committee uses stock incentives (primarily stock options) to align
the interests of the Company's stockholders and executives.
41
Compensation of Chief Executive Officer
Mr. Spokowski received total compensation amounting to $348,392 in
Fiscal 2001 (which sum includes 240,000 shares of common stock granted to him at
a fair market value of $0.26 per share), of which $110,000 was KERP bonus. The
Compensation Committee considers Mr. Spokowski's compensation to be in line with
industry and market size standards and to be consistent with Company performance
objectives. Mr. Spokowski's compensation for Fiscal 2001 was approved by the
bankruptcy court.
This report was presented to and approved by the Board.
Bruce Berg Ronald Kaplan Joseph Nusim
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Upon our reorganization and emergence from bankruptcy on October 29,
2001, all of the interest of the holders of the Class A and Class B common
stock, the treasury stock, preferred stock and the outstanding stock options
under the 1993 Employee Stock Option Plan and the 1994 Non-Qualified Stock
Option Plan for Non-Employee Directors were cancelled. The Company has
authorized 7,500,000 shares of Common Stock, par value $0.01 per share, and are
required to issue 5,280,000 shares of Common Stock to general unsecured
creditors as payment for pre-petition liabilities and 360,000 shares of Common
Stock to management. An additional 180,000 shares have been reserved for
issuance to management. As of the date of this Form 10-K, due to unresolved
claims issues, no shares have been issued, and they cannot be issued until the
issues surrounding these unresolved claims are settled. When they are issued
they will be deemed to have been issued as of October 29, 2001.
The Company's four largest unsecured creditors as of October 29, 2001
were Porter Cable Corporation, Delta International Machinery Corp., Taylor
Made-Addidas, and Makita USA, Inc. These creditors will, on issuance of the
shares, be the four largest shareholders of the Company.
The 360,000 shares of common stock issued to management were
distributed as follows: 240,000 shares to Walter Spokowski, Chief Executive
Officer of the Company, and 120,000 shares to Ronald Franklin, the former Chief
Financial Officer of the Company.
Each non-employee director currently beneficially owns 16,667 shares of
common stock which are issuable on the exercise of currently exercisable options
at $0.26 per share.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
ITEM 14. EXHIBITS and FINANCIAL STATEMENT SCHEDULES
42
DELOITTE & TOUCHE
WOODWORKERS WAREHOUSE, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Independent Auditors' Reports F-2
Consolidated Balance Sheets as of February 23, 2002 and
February 24, 2001 F-5
Consolidated Statements of Operations for the Four Months Ended
February 23, 2002, Eight Months Ended October 27, 2001,
Fiscal Periods Ended February 24, 2001 and February 26, 2000 F-6
Consolidated Statements of Stockholders' Equity (Deficit) for the Four Months
Ended February 23, 2002, Eight Months Ended October 27, 2001, Fiscal
Periods Ended February 24, 2001 and February 26, 2000 F-7
Consolidated Statements of Cash Flows for the Four Months Ended February 23,
2002, Eight Months Ended October 27, 2001, Fiscal Periods Ended
February 24, 2001 and February 26, 2000 F-8
Notes to Consolidated Financial Statements F-9
F-1
INDEPENDENT AUDITORS' REPORT
To the Shareholders of Woodworkers Warehouse, Inc.
We have audited the accompanying balance sheet of Woodworkers Warehouse, Inc.
(the "Company") as of February 23, 2002 (Successor Company balance sheet), and
the related statements of operations, stockholders' equity (deficit), and cash
flows for the four months ended February 23, 2002 (Successor Company operations)
and for the eight months ended October 27, 2001 (Predecessor Company
operations). These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As discussed in Note 1 to the financial statements, on September 7, 2001, the
Bankruptcy Court entered an order confirming the plan of reorganization which
became effective after the close of business on October 29, 2001. Accordingly,
the accompanying financial statements have been prepared in conformity with
American Institute of Certified Public Accountants Statement of Position 90-7,
"Financial Reporting for Entities in Reorganization Under the Bankruptcy Code,"
for the Successor Company as a new entity with assets, liabilities, and a
capital structure having carrying values not comparable with prior periods as
described in Note 3.
In our opinion, the Successor Company financial statements present fairly, in
all material respects, the financial position of Woodworkers Warehouse, Inc. as
of February 23, 2002, and the results of its operations and its cash flows for
the four months ended February 23, 2002, in conformity with accounting
principles generally accepted in the United States of America. Further, in our
opinion, the Predecessor Company financial statements referred to above present
fairly, in all material respects, the results of its operations and its cash
flows for the eight months ended October 27, 2001 in conformity with accounting
principles generally accepted in the United States of America.
Deloitte & Touche LLP
June 8, 2002
Boston, Massachusetts
F-2
This is a copy of a report previously issued by Arthur Andersen LLP. This report
has not been reissued by Arthur Andersen LLP nor has Arthur Andersen provided a
consent to the inclusion of its report in the annual report on Form 10-K.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Trend-Lines, Inc.:
We have audited the accompanying consolidated balance sheets of Trend-Lines,
Inc. (a Massachusetts corporation) and subsidiary as of February 24, 2001 and
February 26, 2000, and the related consolidated statements of operations,
stockholders' equity and cash flows for the years ended February 24, 2001,
February 26, 2000 and February 27, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Trend-Lines, Inc. and
subsidiary as of February 24, 2001 and February 26, 2000, and the results of
their operations and their cash flows for the years ended February 24, 2001,
February 26, 2000 and February 27, 1999 in conformity with accounting principles
generally accepted in the United States.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedule listed in the
index at item 14(a)(2) is the responsibility of the Company's management and is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic consolidated financial
statements. The schedule has been subjected to the auditing procedures applied
in our audits of the basic consolidated financial statements and, in our
opinion, fairly states, in all material respects, the financial data required to
be set forth therein in relation to the basic consolidated financial statements
taken as a whole.
As described more fully in Note 3 to the financial statements, on August 11,
2000, the Company filed a voluntary petition under Chapter XI of the U.S.
Bankruptcy Code and operated its business as debtor-in-possession under control
of the Bankruptcy Court until October 17, 2001, when it received confirmation
from the Bankruptcy Court after having fulfilled all requirements of the
Reorganization Plan which was approved by the Bankruptcy Court and the Company's
creditors.
F-3
The accompanying financial statements have been prepared on a going-concern
basis on accounting which contemplates continuity of operations and realization
of assets and liquidation of liabilities in the ordinary course of business. The
Company has incurred significant operating losses during the fiscal years ended
February 24, 2001 and February 26, 2000, which raise substantial doubts about
its ability to continue as a going concern. Realization of the carrying amounts
of the Company's assets and the classification of its liabilities is dependent
on the success of future operations. The financial statements do not include any
adjustments that might result from this uncertainty.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
August 3, 2001
(except for matters discussed in Notes 4, 5, and 17
as to which the date is October 29, 2001)
F-4
WOODWORKERS WAREHOUSE, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
- --------------------------------------------------------------------------------
Successor Predecessor
Company Company
February 23, February 24,
2002 2001
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 519 $ 18,338
Accounts receivable, net 3,823 2,948
Inventories 29,586 44,102
Prepaid expenses and other current assets 1,051 1,656
---------- ------------
Total current assets 34,979 67,044
PROPERTY AND EQUIPMENT, Net 3,958 12,999
LEASE INTEREST, Net 1,602 -
OTHER ASSETS 871 899
---------- ------------
TOTAL ASSETS $ 41,410 $ 80,942
========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Bank credit facility $ 20,878 $ 47,566
Note payable to officer - 3,500
Current portion of capital lease obligations 1,252 218
Post-petition accounts payable 8,941 1,060
Pre-petition accounts payable 2,000 25,090
Accrued expenses 3,125 5,897
Deferred liabilities 1,243 2,448
Other current liabilities 514 1,355
Net current liabilities of discontinued operations - 14,042
---------- ------------
Total current liabilities 37,953 101,176
CAPITAL LEASE OBLIGATIONS, NET OF CURRENT PORTION 2,083 -
COMMITMENTS AND CONTINGENCIES (NOTE 12)
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock (new), $.01 par value - 7,500,000 shares authorized and
5,640,000 shares outstanding (Note 10) 56 -
Common stock (old), $.01 par value:
Class A - no shares authorized, issued and outstanding
at February 23, 2002 and 20,000,000 authorized with 6,510,411 shares
issued and outstanding at February 24, 2001 - 65
Class B - no shares authorized issued and outstanding at February 23, 2002,
5,000,000 shares authorized and 4,641,082 shares issued and outstanding at
February 24, 2001 - 47
Additional paid-in capital 1,432 41,626
Accumulated deficit (114) (59,512)
Treasury stock - no shares at February 23, 2002 and 500,000 Class A shares
at February 24, 2001 - (2,460)
---------- ------------
Total stockholders' equity (deficit) 1,374 (20,234)
---------- ------------
TOTAL LIABILITIES AND ADJUSTED STOCKHOLDERS' EQUITY (DEFICIT) $ 41,410 $ 80,942
========== ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
WOODWORKERS WAREHOUSE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
- --------------------------------------------------------------------------------
Successor Predecessor Company
Company
Four Months Eight Months Fiscal Year Fiscal Year
Ended Ended Ended Ended
February 23, October 27, February 24, February 26,
2002 2001 2001 2000
Net sales $ 44,822 $ 66,294 $ 154,709 $ 178,183
Cost of sales 30,998 47,096 110,998 123,823
----------- ---------- ---------- ---------
Gross profit 13,824 19,198 43,711 54,360
Selling, general and administrative expenses 13,466 25,368 58,510 49,684
Reorganization charges - 1,645 2,292 -
----------- ---------- ---------- ---------
Operating income (loss) 358 (7,815) (17,091) 4,676
Interest expense, net 472 2,298 5,171 4,771
----------- ---------- ---------- ---------
Loss before income taxes, discontinued operations
and extraordinary items (114) (10,113) (22,262) (95)
Provision for income taxes - - - (25)
----------- ---------- ---------- ---------
Loss before discontinued operations and extraordinary items (114) (10,113) (22,262) (120)
Discontinued operations:
Loss on disposal - (279) (21,854) -
Loss from discontinued operations - - (8,975) (7,466)
----------- ---------- ---------- ---------
Loss before extraordinary items (114) (10,392) (53,091) (7,586)
Extraordinary gain - cancellation of debt - 38,607 - -
----------- ---------- ---------- ---------
Net (loss) income $ (114) $ 28,215 $ (53,091) $ (7,586)
=========== ========== ========== =========
Basic and diluted loss per share:
Loss before discontinued operations
and extraordinary items $ (0.02) * * *
Discontinued operations - * * *
Extraordinary gain - * * *
----------- ---------- ---------- ---------
Net loss $ (0.02) * * *
=========== ========== ========== =========
Weighted average shares outstanding (Note 10) -
basic and diluted 5,640,000 * * *
=========== ========== ========== =========
* EPS for the Predecessor Company is not meaningful.
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
WOODWORKERS WAREHOUSE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(In thousands, except for share amounts)
- --------------------------------------------------------------------------------
Class A Class B
Common Stock Common Stock Common stock
Number Number Number
of Shares Amount of Shares Amount of Shares Amount
Predecessor Company
BALANCE, FEBRUARY 27, 1999 6,469,553 $ 64 4,681,082 $ 47 -- $ --
Conversion of Class B shares to Class
A shares 40,000 -- (40,000) -- -- --
Proceeds from exercise of stock options 858 1 -- -- -- --
Net loss -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
BALANCE, FEBRUARY 26, 2000 6,510,411 65 4,641,082 47 -- --
Net loss -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
BALANCE, FEBRUARY 24, 2001 6,510,411 65 4,641,082 47 -- --
Net income -- -- -- -- -- --
Cancellation of former equity under
plan of Reorganization (6,510,411) (65) (4,641,082) (47) -- --
----------- ----------- ----------- ----------- ----------- -----------
BALANCE, October 27, 2001 $ -- $ -- $ -- $ -- $ -- $ --
=========== =========== =========== =========== =========== ===========
Successor Company
Issuance of new common stock (Note 10) -- -- -- -- 5,640,000 56
Net loss -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
BALANCE, FEBRUARY 23, 2002 -- $ -- -- $ -- 5,640,000 $ 56
=========== =========== =========== =========== =========== ===========
Retained
Additional Earnings Treasury Stock Stockholders'
Paid-in (Accumulated Number Equity
Capital Deficit) of Shares Amount (Deficit)
Predecessor Company
BALANCE, FEBRUARY 27, 1999 $ 41,625 $ 1,165 $ 500,000 $ (2,460) $ 40,441
Conversion of Class B shares to Class
A shares -- -- -- -- --
Proceeds from exercise of stock options 1 -- -- -- 2
Net loss -- (7,586) -- -- (7,586)
----------- ----------- ----------- ----------- -----------
BALANCE, FEBRUARY 26, 2000 41,626 (6,421) 500,000 (2,460) 32,857
Net loss -- (53,091) -- -- (53,091)
BALANCE, FEBRUARY 24, 2001 41,626 (59,512) 500,000 (2,460) (20,234)
Net income -- 28,215 -- -- 28,215
Cancellation of former equity under
plan of Reorganization (41,626) 31,297 (500,000) 2,460 (7,981)
----------- ----------- ----------- ----------- -----------
BALANCE, OCTOBER 27, 2001 $ -- $ -- $ -- $ -- $ --
=========== =========== =========== =========== ===========
Successor Company
Issuance of new common stock (Note 10) 1,432 -- -- -- 1,488
Net loss -- (114) -- -- (114)
----------- ----------- ----------- ----------- -----------
BALANCE, FEBRUARY 23, 2002 $ 1,432 $ (114) $ -- $ -- $ 1,374
=========== =========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
WOODWORKERS WAREHOUSE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Successor
Company Predecessor Company
------------ ---------------------------------------------
Four Months Eight Months Fiscal Year Fiscal Year
Ended Ended Ended Ended
February October 27, February 24, February 26,
23, 2001 2001 2000
2002
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (114) $ 28,215 $ (53,091) $ (7,586)
----------- ------------ ------------ ------------
Add: Loss from discontinued operations - 279 8,975 7,466
Loss on disposal of discontinued operations - - 21,854 -
Extraordinary gain - cancellation of debt - (38,607) - -
----------- ------------ ------------ ------------
Net loss from continuing operations (114) (10,113) (22,262) (120)
----------- ------------ ------------ ------------
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:
Depreciation and amortization 663 2,086 2,126 3,866
Reorganization expenses 1,645 2,292 -
Loss on disposal of fixed assets 889 - -
Changes in operating assets and liabilities:
Accounts receivable (638) (9,145) 118 7,103
Inventories 851 11,779 60,183 (22,594)
Prepaid expenses and other current assets 930 (660) 787 2,196
Post-petition accounts payable 4,470 3,411 1,060 -
Pre-petition accounts payable - 10,136 (20,122) 7,192
Accrued expenses (2,646) 1,600 2,102 (646)
Deferred liabilities 375 (1,580) 1,625 (205)
Other current liabilities (598) (243) 765 20
----------- ------------ ----------- -----------
Net cash from operating activities 3,293 9,805 28,674 (3,188)
Net cash from discontinued operations - (1,089) 5,885 (6,894)
----------- ------------ ----------- -----------
Net cash from operating activities
(before reorganization expenses) 3,293 8,716 34,559 (10,082)
----------- ------------ ----------- -----------
Operating cash flows from reorganization items:
Professional fees paid for services rendered in bankruptcy - (2,502) (1,658) -
Interest income received - 332 462 -
Other reorganization expenses paid - 525 (1,096) -
----------- ------------ ----------- -----------
Net cash used by reorganization items - (1,645) (2,292) -
----------- ------------ ----------- -----------
Net cash from operating activities 3,293 7,071 32,267 (10,082)
----------- ------------ ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (167) (385) (552) (3,770)
Decrease in other assets (156) 184 (84) 185
----------- ------------ ----------- -----------
Net cash from investing activities (323) (201) (636) (3,585)
----------- ------------ ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under bank credit facilities (14,680) (12,008) (17,444) 15,112
Principal payments on capital lease obligations (631) (340) (403) (665)
Increase (decrease) in other noncurrent liabilities - - - (268)
Note payable officer - - 3,500 -
Proceeds from exercise of stock options - - - 2
----------- ------------ ----------- -----------
Net cash from financing activities (15,311) (12,348) (14,347) 14,181
----------- ------------ ----------- -----------
NET DECREASE (INCREASE) IN CASH AND CASH EQUIVALENTS (12,341) (5,478) 17,284 514
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 12,860 18,338 1,054 540
----------- ------------ ----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 519 $ 12,860 $ 18,338 $ 1,054
=========== ============ ============ ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
WOODWORKERS WAREHOUSE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED FEBRUARY 23, 2002 AND FEBRUARY 24, 2001
- --------------------------------------------------------------------------------
1. OPERATIONS AND BASIS OF PRESENTATION
Woodworkers Warehouse, Inc. (the "Company" or the "Successor") is a
specialty retailer, primarily of woodworking tools and accessories sold
through its nationally distributed mail-order catalog and through its 98
retail stores located in the New England and Mid-Atlantic regions.
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 Sates 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 (the "Plan") dated as of
September 7, 2001, as modified by the Joint Motion to Approve Nonmaterial
Modification to the First Amended Joint Reorganization Plan of
Trend-Lines, Inc. and the Official Committee of Unsecured Creditors, 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 as
it was a period end and activity for the two days was immaterial. 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 to the Successor.
The following is a brief summary of how the Plan categorized and treated
certain liabilities:
Class 1 - Bank of America Bank Credit Facility
o The Bank Credit Facility issued to the Predecessor by the Bank of
America was a secured claim and was impaired under the Plan. As part
of the Plan, the outstanding balance under the Bank Credit Facility
was paid in full in connection with the closing of a new senior
secured revolving credit facility referred to as the "Facility" (see
note 8).
Class 2 - Other Secured Claims
o These secured claims consist of claims by various vendors which
leased furniture, fixtures and equipment for retail stores and the
corporate offices of the Predecessor. These holders received (a)
some or all of the collateral, securing the leases, (b) cash in an
amount equal to the proceeds received from the sale of the
collateral or (c) such other treatment as was agreed upon by the
Predecessor and the Bankruptcy Committee and the holder. In the
event the value of the collateral securing a Class 2 claim was less
than the total amount of the claim, the difference was treated as a
Class 5 General Unsecured Claim.
F-9
1. OPERATIONS AND BASIS OF PRESENTATION (CONTINUED)
Class 3 - Other Priority Claims
o These claims are claims, other than administrative, professional fee
or priority tax claims, entitled to priority pursuant to Section
507(a) of the Bankruptcy Code and were deemed to be unimpaired by
the Plan. These claims were entitled to payment in full.
Class 4 - Convenience Claims
o These claims consist of claims that would otherwise be a Class 5
General Unsecured Claim that are equal to or less than $2,000 or
reduced to $2,000 pursuant to the election by the holder of the
Claim. These claims were deemed to be impaired by the Plan. Each
holder of a Class 4 claim will receive cash in an amount equal to
25% of such claim.
Class 5 - General Unsecured Claims
o These claims are general unsecured, pre-petition trade claims,
reclamation claims, lease rejection claims and any deficiency claims
of Bank of America and the other general unsecured claims. The
Predecessor estimated the total amount of Class 5 claims to be
$52,500,000. Each holder of a claim in Class 5 was to receive in
full satisfaction of such allowed claims, its pro rata share, based
on the principal amount of each holder's claim, of $2,000,000 on
January 15, 2002 and 5,280,000 shares of common stock of Woodworkers
Warehouse, Inc., par value $.01 per share (the "New Common Stock")
on the Effective Date. See note 10 for details of total new shares
issued. Due to delays in the processing and settlement of certain
unsecured claims and restrictions under the Facility, the Company
has, 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 it will make such payment. Even if the
Company settled the remaining unsecured claims it would not be able
to make any payments to these creditors because of availability
restrictions under the Facility. The Company is actively seeking a
new credit facility, in part to increase its borrowing base so that
it may make this deferred payment, but cannot guarantee that it will
be able to obtain one and that if it does obtain a Facility that it
will be on terms favorable to it.
Class 6 - Common Stock Equity Interest and Claims
o On the Effective Date, all common stock equity interests of the
Predecessor were extinguished and the certificates and all other
documents representing such old common stock equity interests were
deemed cancelled and of no force or effect. The holders of the old
common stock equity interest did not receive or retain any interest
or property under the Plan.
Upon the 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 ("SOP") 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.
Accordingly, the accompanying balance sheet as of February 23, 2002 is not
comparable in certain material respects to such balance sheet as of any
prior period since the balance sheet as of February 23, 2002 is that of a
reorganized entity.
F-10
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.
Management believes, provided the holders of the $2,000,000 claim continue
to permit the deferral of payment, the availability under its Facility,
together with available cash and expected cash flows from 2002 operations
and beyond, and other sources of financing will enable the Company to
continue as a going concern.
F-11
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation - The accompanying Predecessor consolidated
financial statements include the accounts of the Predecessor and Post
Tool, Inc. ("Post Tool"), its wholly-owned subsidiary. All significant
intercompany balances and transactions were eliminated in consolidation.
During the eight months ended October 27, 2001, Post Tool was disposed of,
therefore upon emergence from bankruptcy the Company did not include any
subsidiaries. The results of Post Tool were included in continuing
operations as this subsidiary was not deemed a separate segment under
Accounting Principles Board, (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." The sales of Post Tool for the year ended February 23,
2002, February 24, 2001 and February 26, 2000 were $1,085,612, $24,520,144
and $28,800,636, respectively, and the net loss was $2,235,688, $3,591,378
and $182,252, respectively.
Fiscal Year - The Company's fiscal year end is the Saturday closest to the
last day of February. Fiscal year 2001 ended on February 23, 2002, fiscal
year 2000 ended on February 24, 2001, and fiscal year 1999 ended on
February 26, 2000. For financial reporting purposes, fiscal year 2001 has
been segregated into two periods; the Successor Company four months ended
February 23, 2002 and the Predecessor Company eight months ended October
27, 2001. For interim reporting purposes, the Company closes its books on
the Saturday of the thirteenth week of the fiscal quarter.
Use of Estimates - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting
period. Significant estimates include inventories, sales return, allowance
for doubtful accounts, and lives of long-lived assets. Actual results
could differ from those estimates.
Cash and Cash Equivalents - The Company considers all highly liquid
investments with original maturities of three months or less to be cash
equivalents.
Revenue Recognition - Revenue from retail operations is recognized at the
time of sale. Revenue from catalog 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. Membership
income is deferred over the period of the related membership.
Shipping and Handling - Shipping and handling revenue is included with net
sales. The cost associated with shipping and handling revenue of
approximately $284,900, $261,700, $1,261,800 and $1,187,300 for the four
months ended February 23, 2002, the eight months ended October 27, 2001,
fiscal year 2000 and fiscal year 1999, respectively, is reported in
selling, general and administrative expenses.
F-12
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Inventories - The Company values inventories, which consist of merchandise
held for resale, at the lower of cost (weighted average) or market. Vendor
rebates directly related to inventory purchases are recorded when earned
and such allowances reduce the inventoriable product costs based on
inventory turns. The capitalization of vendor rebates and the
capitalization of distribution costs under a full absorption policy were
adopted upon the emergence from bankruptcy under fresh start accounting.
Also under fresh start accounting, the Company adopted a policy whereby
capitalized store supplies are expensed when distributed to the stores.
Prepaid Catalog Expenses - The Company capitalizes direct costs relating
to the production and distribution of its 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.
Advertising Expense - Advertising and promotional costs, which include
flyers, newspapers, television, radio and other media advertising, are
expensed as incurred and were $1,499,453, $2,881,782, $6,532,751 and
$7,015,485 for the four months ended February 23, 2002, eight months ended
October 27, 2001, fiscal year 2000 and fiscal year 1999, respectively.
Other Assets - Other assets consist mainly of security deposits and bank
fees related to the new Facility which is being amortized over the life of
the agreement. Accumulated amortization of deferred financing costs was
$59,152 for the Successor Company. The deferred financing credit
pertaining to the bank credit facility pertaining to the Predecessor
Company was written off within the fresh-start accounting.
Store Preopening Costs - The Company expenses, as incurred, all preopening
costs related to each new retail store location, in accordance with SOP
98-5, "Reporting on Cost of Start-up Activities."
Accounts Receivable - Customer accounts receivables are classified as
current assets and include some which are due after one year, consistent
with industry practice. Accounts receivable are shown net of an allowance
for uncollectible accounts. The Company provides an allowance for
uncollectible accounts based on impaired accounts, historical charge-off
patterns and management judgment. (Note 5).
Property and Equipment - Property and equipment are stated at cost. When
property is disposed of or sold, the asset and related accumulated
depreciation are removed from the accounts and any gain or loss is
reflected in earnings. Depreciation and amortization are provided on the
straight-line method over the following estimated useful asset lives:
Asset Classification Estimated Useful Lives
Equipment 5 - 10 years
Equipment under capital leases Life of lease or life of asset,
whichever is shorter
Furniture and fixtures 10 years
Building 39.5 years
Leasehold improvements Initial lease term or life of
asset, whichever is shorter
F-13
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Leases - Properties leased by the Company determined to be capital leases
are stated at an amount equal to the present value of the minimum lease
payments during the lease term, less accumulated amortization. The
properties under capital leases and leasehold improvements under operating
leases are amortized on the straight-line method over the shorter of their
useful lives or the related lease terms. The provision for amortization of
leased properties is included in depreciation and amortization expense.
Lease Interest - Lease interest represents the fair values assigned to
the Company's lease rights under fresh start accounting and is being
amortized as a charge to rent expense over the remaining lease terms.
Accumulated amortization was $166,239 at February 23, 2002.
The recoverability of the carrying value of lease interest is dependent
upon the Company's 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.
Customer Prepayments - Advance payments received from customers are
included in accrued expenses in the accompanying consolidated balance
sheets and are recognized as revenue upon shipment.
Concentration of Credit Risk - Financial instruments that subject the
Company to credit risk consist primarily of cash and cash equivalents and
trade accounts receivable. The Company places its cash and cash
equivalents in highly rated financial institutions. The Company's accounts
receivable credit risk is not limited to any particular customer. The
Company maintains an allowance for potential credit losses. There are no
customers which represent over 10% of revenue or which account for over
10% of accounts receivable.
Fair Value of Financial Instruments - The Company's financial instruments
consist mainly of cash and cash equivalents, accounts receivable, accounts
payable and its bank credit facility. The carrying amounts of the
Company's financial instruments approximate fair value. The bank credit
facility bears interest at variable market rates; therefore, the carrying
amount approximates fair value.
Credit Card Policy - The Company extends credit to customers through
third-party credit cards, including its private-label credit card. Credit
under these accounts is extended by third parties, and accordingly, the
Company bears minimal financial risk from credit card fraud under these
agreements. The Company's agreements with third-party credit companies
provide for the electronic processing of credit approvals and electronic
submission of transactions. Upon the submission of these transactions to
the credit card companies, payment is transmitted directly to the
Company's bank account usually within two to four days of the sales
transaction. Amounts relating to fiscal year sales not received by the
Company before year-end are included in accounts receivable in the
accompanying consolidated balance sheets. Fees incurred on credit card
sales are included in selling, general and administrative expenses.
F-14
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income Taxes - Income taxes are provided using the asset and liability
method of accounting. A deferred tax asset or liability is recorded for
all temporary differences between financial and tax reporting. Deferred
tax expense (benefit) results from the net change during the year of
deferred tax assets and liabilities.
(Loss) Earnings Per Share - Basic loss/earnings per share is computed by
dividing the net income (loss) available to common shareholders by the
weighted average number of shares of common stock outstanding (Note 10).
For the purposes of calculating diluted earnings per share, the
denominator includes both the weighted average number of common stock
outstanding and the dilutive effect of common stock equivalents, such as
stock options and warrants. Diluted net loss per share equals basic net
loss per share as the inclusion of the common stock equivalents would have
an anti-dilutive impact as a result of the net loss incurred in each of
those years. Net loss/earnings per share for the eight months ended
October 27, 2001 and years ended February 24, 2001 and February 26, 2000
were not presented because such presentation would not be meaningful, as
the Class A and Class B stock was cancelled under the plan of
reorganization and the new stock was not issued until consummation.
Impairment of Long-Lived Assets - The Company reviews the carrying value
of its long-lived assets whenever events or changes in circumstances
indicate that the historical cost-carrying value of an asset may no longer
be appropriate. The Company assesses recoverability of the carrying value
of the asset by estimating the future net cash flows expected to result
from the asset, including eventual disposition. If the future net cash
flows are less than the carrying value of the asset, an impairment loss is
recorded equal to the difference between the asset's carrying value and
fair value.
During fiscal year 2000, the balance of goodwill was determined to be
impaired and was written off. Goodwill represented the excess of the
purchase price over the fair market value of identified net assets
acquired. Goodwill was being amortized using the straight-line method over
a period of 20 years, the estimated useful life. Accordingly, the Company
recognized $1,426,952 (including the impairments) and $351,588 of goodwill
amortization during fiscal years 2000 and 1999, respectively.
Comprehensive (Loss) Income - Comprehensive (loss) income equals net
(loss) income for all periods presented.
New Accounting Pronouncements - On February 25, 2001, the Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities," which provides
accounting and reporting standards for derivatives, including those
embedded in other instruments or contracts. Adoption of SFAS No. 133 did
not have a significant impact on the consolidated financial position or
the results of operations.
In July 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141, "Business Combinations," which was effective for business
combinations initiated after June 30, 2001. The Company did not acquire
any entity subsequent to June 2001, however the principles of SFAS No. 141
were applied in accordance with fresh start accounting.
F-15
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 142"). SFAS No. 142 provides for cessation of amortization
of goodwill and other intangible's considered to have indefinite lives and
includes requirements for periodic tests of goodwill and indefinitely
lived intangible assets for impairment. The Company is required to adopt
SFAS No. 142 in fiscal 2003. The Company adopted SFAS 142 as part of its
fresh-start accounting.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 requires that
one accounting model be used for impairments of long-lived assets to be
either used in a business or disposed of by sale, and broadens the
presentation of discontinued operations to encompass more discrete
components of a business enterprise than were included under previous
standards. The Company adopted SFAS No.144 as part of its fresh start
accounting.
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, 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.
Cash Flow Information - Supplemental cash flow information is as follows
for the years ended February 26, 2000, February 24, 2001, and the eight
months ended October 27, 2001 and the four months ended February 23, 2002:
Successor Predecessor
---------------- ---------------------------------------------
Four Months Eight Months Fiscal Year Fiscal Year
Ended Ended Ended Ended
February 23, October 27, February 24, February 26,
2002 2001 2001 2000
Cash paid during the year for interest $ 675 $ 2,454 $ 7,160 $ 6,793
Cash paid during the year for income taxes 46 - - 435
Property acquired under capital lease obligations - 2,920 - 83
Reclassifications - Certain amounts reported in the prior year financial
statements have been reclassified to conform to the current year
presentation.
F-16
3. REORGANIZATION PLAN 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 existing on the date the Plan
was confirmed by the Bankruptcy Court, other than deferred taxes, is 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 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.
F-17
3. REORGANIZATION PLAN AND FRESH START REPORTING (CONTINUED)
Adjustments to the Predecessor's balance sheet as of October 27, 2001 to
reflect the forgiveness of debt and fresh start reporting adjustments are
presented in the following table (in thousands):
Predecessor Forgiveness Fresh- Successor
of Debt Start
CURRENT ASSETS:
Cash and cash equivalents $ 12,860 $ -- $ -- $ 12,860
Accounts receivable, net 12,093 (8,907) (a) -- $ 3,186
Inventories 32,323 -- (1,886) (b) 30,437
Prepaid expenses and other current assets 2,316 -- (335) (c) 1,981
--------- --------- ---------- ----------
Total current assets 59,592 (8,907) (2,221) 48,464
PROPERTY AND EQUIPMENT, Net 11,236 -- (6,949) (d) 4,287
LEASE INTEREST, Net -- -- 1,769 (d) 1,769
OTHER ASSETS 715 -- -- 715
--------- --------- ---------- ----------
TOTAL ASSETS $ 71,543 $ (8,907) $ (7,401) $ 55,235
========= ========= ========== ==========
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
CURRENT LIABILITIES:
Bank credit facility $ 35,558 $ -- $ -- $ 35,558
Note payable to officer 3,500 (3,500) (a) -- --
Current portion of capital lease
obligations 364 -- 896 (d) 1,260
Post-petition accounts payable 4,471 -- 4,471
Pre-petition accounts payable 35,224 (33,224) (a) -- 2,000
Accrued expenses 9,477 -- (1,725) (e) 7,752
Net current liabilities of
discontinued operations 12,278 (12,278) (a) -- --
--------- --------- ---------- ----------
Total current liabilities 100,872 (49,002) (829) 51,041
--------- --------- ---------- ----------
CAPITAL LEASE OBLIGATIONS, NET
OF CURRENT PORTION 1,293 -- 1,413 (d) 2,706
STOCKHOLDERS' (DEFICIT) EQUITY:
Common stock (old), $.01 par value:
Class A 65 -- (65) (a) 0
Class B 46 (46) (a) (0)
Common stock (new), $.01 par value -- 56 (a) -- 56
Additional paid-in capital 41,631 1,432 (a) (41,631) (a) 1,432
Retained (deficit) Equity (69,904) 38,607 (a) 31,297 (a) --
Less: 500,000 Class A shares held in treasury (2,460) -- 2,460 (a) --
--------- --------- ---------- ----------
Total stockholders' (deficit) equity (30,622) 40,095 (7,985) 1,488
--------- --------- ---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS'
(DEFICIT) EQUITY $ 71,543 $ (8,907) $ (7,401) $ 55,235
========= ========= ========== ==========
(a) Reflects the settlement of liabilities with offsetting receivables and the
cancellation of the old equity in exchange for a deferred payment of
$2,000,000 and 5,640,000 shares of new common stock valued at $1,488,000.
The net liability settlements resulted in an extraordinary gain on debt
discharge of $38.6 million.
(b) Represents revaluation of inventories to estimated fair value as of
October 27, 2001.
(c) Represents write-off of permanent supply inventory.
(d) Reflects fair value adjustment as of October 27, 2001 in accordance with
fresh start reporting.
(e) Represents reclassification of the vendor rebate reserve and inventory
reserves.
F-18
3. REORGANIZATION PLAN AND FRESH START REPORTING (CONTINUED)
Pro Forma Combining Statements of Operations - The following unaudited pro
forma combining statements of operations present the pro forma combined
results of the operations of the Successor and Predecessor companies for
the fifty-two weeks ended February 23, 2002 and have been adjusted to
reflect: the implementation of fresh-start reporting as of October 27,
2001, elimination of the effects of non-recurring transactions resulting
from the reorganization included in the results of the Predecessor, and
forgiveness of debt creditors pursuant to the Plan as of October 27, 2001
($ in thousands):
Pro Forma
Successor Predecessor Fiscal Year
Four Months Eight Months Ended
Ended Ended Pro Forma February 23,
February 23, October 27, Adjustments 2002
2002 2001 (unaudited) (unaudited)
Net sales $ 44,822 $ 66,294 $ - $ 111,116
Cost of sales 30,998 47,096 1,800 (a) 79,894
---------- ----------- --------- ----------
Gross profit 13,824 19,198 (1,800) 31,222
Selling, general and administrative
expenses 13,466 25,368 (1,664) (b) 37,170
Reorganization charges - 1,645 (1,645) (c) -
---------- ----------- --------- ----------
Operating (loss) income 358 (7,815) 1,509 (5,948)
Interest expense, net 472 2,298 (1,458) (d) 1,312
Income (loss) before income taxes,
discontinued operations and extraordinary
items (114) (10,113) 2,967 (7,260)
---------- ----------- --------- ----------
(Loss) income before discontinued
operations and extraordinary items (114) (10,113) 2,967 (7,260)
Discontinued operations:
Loss on disposal - (279) 279 (c) -
Loss from discontinued operations - - - -
---------- ----------- --------- ----------
(Loss) income before extraordinary items (114) (10,392) 3,246 (7,260)
Extraordinary gain - cancellation of debt - 38,607 (38,607) (c) -
---------- ----------- --------- ----------
Net (loss) income $ (114) $ 28,215 $ (35,361) $ (7,260)
========== =========== ========= ==========
(a) Reflects full absorption accounting for distribution costs and vendor
rebates directly related to inventory purchases (see Inventories under
Note 2).
(b) Reflects the impact of the conversion of fixture and equipment operating
leases to capital leases and the revaluation and/or the change in the
related estimated remaining useful lives of property and equipment,
property under capital leases, and leasehold interest in connection with
fresh start reporting.
(c) Reflects elimination of reorganization items, loss on disposal of
discontinued operations, and extraordinary gain on debt discharge.
(d) Reflects interest expense on the Facility.
F-19
3. REORGANIZATION PLAN AND FRESH START REPORTING (CONTINUED)
Reorganization Items - The Predecessor provided for or incurred the
following income (expense) items during the eight months ended October 27,
2001, directly associated with the Chapter 11 reorganization proceedings
(in thousands):
Eight Months
Ended
October 27,
2001
Bonuses for retention of key employees $ 347
Professional fees 2,502
Occupancy and other store closing costs 41
Relocation costs 609
Loss on disposal of Post Tool 2,020
Net asset/liabilities written off 910
Lease asset sale proceeds (4,562)
Miscellaneous income (34)
Miscellaneous expense 144
Interest income (332)
-----------
Total reorganization charge $ 1,645
=========
As the Successor applied fresh start accounting, there were no additional
expenses related to the Chapter 11 reorganization proceedings during the
four months ended February 23, 2002.
4. 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. Accordingly, revenues, expenses, and cash flows of the
golf division have been excluded from the respective captions in the
accompanying consolidated statements of operations and consolidated
statements of cash flows. The net liabilities of the golf business have
been reported as "net current liabilities of discontinued operations" in
the accompanying consolidated balance sheets; the net operating losses of
the golf division have been reported as "net loss from discontinued
operations" in the accompanying consolidated statements of operations; the
net loss from the disposal of the golf division has been presented as "net
loss on disposal"; and the net cash flows of the golf division have been
reported as "net cash used in discontinued operations" in the accompanying
consolidated statements of cash flows. Net sales for the golf division
were approximately $55,189,000 and $92,448,000 for fiscal years 2000 and
1999, respectively.
F-20
4. DISCONTINUED OPERATIONS (CONTINUED)
Net liabilities of discontinued operations were as follows (in thousands):
Predecessor
February 24,
2001
Accounts receivable, net $ 2,607
Pre-petition accounts payable (13,620)
Post-petition accounts payable (7)
Accrued expenses (2,571)
Deferred liabilities
(451)
-----------
$ (14,042)
===========
5. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following (in thousands):
Successor Predecessor
February 23, February 24,
2002 2001
Credit card receivables $ 1,285 $ 1,048
Vendor rebates 1,418 -
Other 998 1,527
Trade receivables 428 813
Allowance for doubtful accounts (306) (440)
---------- ----------
$ 3,823 $ 2,948
========== ==========
Balance, Charged to
Beginning of Costs and Balance,
Period Expenses Deductions End of Period
Allowance For Doubtful Accounts
February 26, 2000, Predecessor $175 $ 71 $ 7 $239
February 24, 2001, Predecessor $239 $201 $ - $440
October 27, 2001, Predecessor $440 $ - $134 $306
February 23, 2002, Successor $306 $ - $ - $306
F-21
6. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consist of the following (in
thousands):
Successor Predecessor
February 23, February 24,
2002 2001
Other $ 581 $1,475
Prepaid advertising 416 145
Prepaid rent 54 36
------ ------
$1,051 $1,656
====== ======
7. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
Successor Predecessor
February 23, February 24,
2002 2001
Land $ 175 $ 186
Building 527 672
Furniture and fixtures 262 6,150
Equipment 123 15,253
Equipment under capital lease 2,920 2,453
Leasehold improvements 449 5,094
------- --------
4,456 29,808
------- --------
Less - accumulated depreciation and amortization 498 16,809
------- --------
$ 3,958 $ 12,999
======= ========
Property under capital leases totaled $2,920,000 at February 23, 2002 and
$2,453,000 at February 24, 2002. At February 23, 2002 and February 24,
2001, the accumulated depreciation associated with equipment under capital
lease was approximately $440,000 and $1,826,000, respectively.
Depreciation expense, including amortization of assets under capital
leases, was $497,000 $2,086,000 $2,126,000 and $3,866,000 for the four
months ended February 23, 2002, eight months ended October 27, 2001, the
year ended February 24, 2001 and the year ended February 26, 2002.
F-22
8. DEBT
Bank Credit Facility - Pursuant to the Plan discussed in Note 3, on
October 29, 2001, the Company entered into a $30,000,000 Senior Secured
Revolving Credit Facility with Bank of America (the "Facility"). At
February 23, 2002 the Company had approximately $20,878,000 of borrowings
outstanding and approximately $15,200 of letters of credit outstanding.
The Facility is secured by all of the Company's assets and bears interest
equal to LIBOR plus 3.25% (4.99% at February 23, 2002) or the bank
reference rate plus 1.00% (5.75% at February 23, 2002) at the Company's
option. Under the Facility, the Company's borrowing base through March 31,
2002 is 65% of the cost value of eligible store and warehouse inventory,
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 $500,000 against the value of the Company's Seabrook, NH
facility plus an over advance availability equal to $3.0 million for 60
days from the Effective Date, $2.5 million for the next thirty days and
$2.0 million thereafter with amortization of $166,667 per month beginning
February 28, 2002.
After March 31, 2002 the Company's borrowing base is equal to 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. The total availability at February 23, 2002
was approximately $3,800,000. The agreement was subsequenty amended on
August 22, 2002 to fix the overadvance availability at $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. An orderly liquidated valuation of inventory was done as
of March 4, 2002 resulting in same 65% advance rate. The Facility contains
a financial covenant of a fixed charge coverage and other 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 (see Note 1). The Company was in
compliance with all the covenants. The Facility matures on October 29,
2003. The Facility is classified as a current liability due to the
agreement including a subjective acceleration clause and an agreement to
maintain blocked account arrangements.
F-23
9. INCOME TAXES
The components of the (benefit) provision for income taxes shown in the
consolidated statements of operations are as follows (in thousands):
Successor Predecessor
---------------------------------- ----------------------------------
Four Months Eight Months Fiscal Year Fiscal Year
Ended Ended Ended Ended
February 23, October 27, February 24, February 26,
2002 2001 2001 2000
Current:
Federal $ -- $ -- $ -- $ --
State -- -- -- --
----- ----- ------ -----
Total $ -- $ -- $ -- $ --
===== ===== ====== =====
Deferred:
Federal $ 301 $(185) $ -- $ 3
State 82 (50) -- 22
Valuation Allowance (383) 235 -- --
----- ----- ------ -----
Total $ -- $ -- $ -- $ (25)
===== ===== ====== =====
The reconciliation of the federal statutory rate to the benefit for income
taxes is as follows:
Successor Predecessor
-------------------------- -----------------------------
Four Months Eight Fiscal Year Fiscal
Ended Months Ended Year
February 23, Ended February 24, Ended
2002 October 27, 2001 February 26,
2001 2000
Income tax benefit at federal
statutory rate 34% 34% 34% 34%
State taxes, net of federal benefit 9 9 6 6
Increase in valuation allowance (43) (43) (40) (40)
---- ---- ---- ----
0% 0% 0% 0%
==== ==== ==== ====
F-24
9. INCOME TAXES (CONTINUED)
Significant items giving rise to deferred tax assets and deferred tax
liabilities at February 23, 2002 and February 24, 2001 are as follows:
Successor Predecessor
Company Company
February 23, February 24,
2002 2001
Inventories $452 $ 931
Prepaid catalog (1,181) -
State operating loss carryforward 6,523 6,523
Federal operating loss carryforward 9,048 17,046
Other nondeductible reserves and accruals 1,894 2,148
Depreciation and amortization 426 (337)
---
Net 17,162 26,311
Valuation Allowance (17,162) (26,311)
------- -------
Net asset $ - $ -
======= =======
At February 23, 2002, the Company had in excess of $2,600,000 of federal
loss carry-forwards, which are subject to review by the Internal Revenue
Service. The reorganization which occurred during the bankruptcy
proceedings resulted in an ownership change (within the meaning of IRC
Section 382). This change may result in further limitations on the
company's ability to utilize these loss carryforwards in the event that
the company elects out of certain exceptions available to it under Section
382 of the code.
As a result of the bankruptcy proceedings, the company realized certain
cancellation of indebtedness income. This income was excluded from the
Company's gross income for federal income tax purposes; however the
Company was required to reduce the amount of certain tax attributes
including current year losses and net operating loss carry-forwards by the
amount of that cancellation of indebtedness pursuant to Section 108 of the
code. Future financial statement benefit of the net operating losses will
be recognized as realized. A valuation allowance is established if it is
more likely than not that all or a portion of the deferred tax assets will
not be realized. Accordingly, because of the Company's limited operating
history, management has provided a valuation allowance for the full amount
of the deferred tax asset due to the uncertainty of realization.
At February 24, 2001, the Company had in excess of $40,000,000 of federal
loss carry-forwards, which are subject to review by the Internal Revenue
Service. The reorganization of the Company may result in an ownership
change (within the meaning of IRC Section 382). This will result in
limitations on the Company's ability to utilize the loss
carry-forwards. In addition, the Company expects to realize
cancellation of indebtedness income in connection with the
reorganization, which will serve to further reduce or limit the use of
loss carry-forwards. Future financial statement benefit of the net
operating losses will be recognized as realized.
F-25
10. STOCKHOLDERS' EQUITY
Pursuant to the Plan, upon emergence from bankruptcy all shares of the
Class A and Class B common stock, treasury stock and preferred stock were
cancelled along with the outstanding stock options under the 1993 Employee
Stock Option Plan (the "Option Plan") and the 1994 Non-Qualified Stock
Option Plan for Non-Employee Directors (the "Director Plan").
A total of 7,500,000 shares, par value $0.01 per share, of new common
stock have been authorized with 5,280,000 shares to be issued as payment
for pre-petition liabilities and 360,000 shares to management. Under the
Plan we are required to issue new common stock, however, as of February
23, 2002 the new common stock shares had not been issued. The delay in the
issuance of the new shares is that the Bankruptcy Court has not yet issued
a final decree. There are 1,500,000 shares reserved for stock option
grants. Based on performance of the Company, under employment agreements
with certain officers, there is a potential grant of 180,000 shares to
management. 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.
Effective November 27, 2001, the Company established a long term incentive
plan ("Incentive Plan") which provides for the granting of stock, stock
options, stock appreciation rights and restricted shares to employees,
officers, directors and consultants of the Company. Stock options are
granted at 100% of the fair market value of the common stock on the date
of the grant. Options granted to employees vest over three years with 33%
vesting on each anniversary of the grant. Options granted to Board members
who are not employees and continue as a member of the Board vest over
three years with 33% vesting beginning on January 2, 2002. In the event
that a non-employee director fails to attend at least 75% of the Board
meetings in any calendar year, commencing in calendar year 2002, such
person shall automatically forfeit his right to exercise that portion of
the options that are exercisable. All vested options shall be exercisable
for a period of ten years from the date of grant.
F-26
10. STOCKHOLDERS' EQUITY (CONTINUED)
Activity under the previous plans (the Option Plan and the Director Plan)
and the Incentive Plan is summarized as follows:
Successor Plan
--------------------------------
Long-Term Incentive Plan
Exercise
Price
Number Per
of Shares Share
Outstanding, February 24, 2001 -- --
Cancelled -- --
----------- -----------
Outstanding, October 27, 2001 --
=========== ===========
Granted 1,102,600 0.26
Terminated --
Exercised -- --
----------- -----------
Outstanding, February 23, 2002 1,102,600 0.26
=========== ===========
Exercisable, February 23, 2002 100,000 0.26
=========== ===========
Weighted Average Fair Value -- 0.26
=========== ===========
Predecessor Plans
-------------------------------------------------------------------
Option Plan Director Plan
Exercise Exercise
Price Price
Number Per Number Per
of Shares Share of Shares Share
Outstanding, February 24, 2001 1,354,495 $ -- 42,000 $ --
Cancelled (1,354,495) -- (42,000) --
----------- ----------- ----------- -----------
Outstanding, October 27, 2001 -- -- -- --
=========== =========== =========== ===========
Granted -- -- -- --
Terminated -- -- -- --
Exercised -- -- -- --
----------- ----------- ----------- -----------
Outstanding, February 23, 2002 -- -- -- --
=========== =========== =========== ===========
Exercisable, February 23, 2002 -- -- -- --
=========== =========== =========== ===========
Set forth below is a summary of options outstanding and exercisable as of
February 23, 2002.
Options Outstanding Options Exercisable
Weighted Weighted
Range of Average Average Weighted
Exercise Exercise Contract Average
Shares Prices Price Life Shares Exercise Price
1,102,600 $0.26 $ 0.26 4.87 100,000 $ 0.26
F-27
10. STOCKHOLDERS' EQUITY (CONTINUED)
The Company accounts for its stock-based compensation plans under the
intrinsic value method prescribed in APB Opinion No. 25, Accounting for
Stock Issued to Employees. The Company has computed the pro forma
disclosures required under SFAS No. 123, "Accounting for Stock-Based
Compensation," for all stock options granted as of February 23, 2002 using
the Black-Scholes option-pricing model.
The assumptions used and the weighted average information for the four
months ended February 23, 2002 are as follows:
February 23,
2002
Risk-free interest rate 4.16 - 4.32%
Expected dividend yield 0%
Expected lives 5 years
Expected volatility 85%
Weighted average grant-date fair value of options granted
during the period $0.26
Weighted average exercise price of options
Outstanding $0.26
Weighted average remaining contractual life of options
Outstanding 4.87 years
The Black Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions. In the
Company's opinion, because the Company's stock-based compensation awards
have characteristics significantly different from traded options and
because changes in the subjective assumptions can materially affect the
fair value estimate, the results obtained from the valuation model do not
necessarily provide a reliable single measure of the value of its
stock-based compensation awards.
The effect of accounting for stock-based compensation under the fair value
method prescribed in SFAS No. 123 would be as follows (in thousands,
except per share amounts):
Successor
Four Months Ended
February 23,
2002
As reported net loss $ (114)
Pro forma net loss $ (119)
Pro forma basic and diluted net loss per share $ (.02)
The Company applied the fresh start accounting thereby eliminating the
Predecessor's equity. Accordingly, the prior periods are not comparable
with the Successor's four months ended February 23, 2002.
F-28
11. TRANSACTIONS WITH RELATED PARTIES AND STOCKHOLDERS
The Predecessor had a lease arrangement with Mystic United Realty Trust
(Mystic), for warehouse space at its Chelsea, Massachusetts, facility (the
Chelsea facility) under a non-cancelable lease through 2005. The chief
executive officer/principal stockholder of the Predecessor was a trustee
and beneficiary of Mystic. Under the lease, the Predecessor was required
to pay to Mystic, in the form of additional rent, all insurance, real
estate taxes, maintenance and operating cost related to the leased
premises, which approximate $0.4 million annually. This lease was
terminated in December 2000.
During the fourth quarter of fiscal year 1999, the Predecessor's chief
executive officer/principal stockholder and his spouse, who was also a
principal stockholder of the Predecessor, made interest-free, unsecured
demand loans to the Predecessor in the aggregate amount of $3,000,000. All
these loans were repaid at February 26, 2000.
During the second quarter of fiscal 2000, the Predecessor's chief
executive officer/principal stockholder made interest-free unsecured loans
to the Predecessor in the aggregate amount of $3.5 million. These loans
are presented as note payable to the officer in the accompanying
consolidated balance sheet as of February 24, 2001. Pursuant to the Plan
the $3.5 million loan was forgiven.
12. COMMITMENTS AND CONTINGENCIES
The Company leases retail space, office space, and warehouse space, under
operating leases with various expirations dates through July, 2029.
Renewal options from five to 15 years exist on the majority of retail
properties. Rent and related expenses charged to operations during the
four months ended February 23, 2002, the eight months ended October 27,
2001, fiscal year 2000 and fiscal year 1999 were approximately $3,002,000,
$6,329,000, $12,100,000 and $19,100,000, respectively.
In addition, the Company has several lease agreements for computers and
equipment that qualify for capitalized treatment under SFAS No. 13,
Accounting for Leases. These agreements require monthly payments including
interest at rates ranging from 8.0% to 9.0% and expire at various dates
through April 2006.
Future minimum lease payments under capital and operating leases in excess
of one year through all option periods, unless management intends not to
renew at such point in time, are as follows:
Capital Operating
Fiscal Year Leases Leases
2002 $ 1,421 $ 6,485
2003 1,096 6,085
2004 814 5,988
2005 356 5,920
2006 60 5,718
Thereafter -- 40,648
-------- --------
Total minimum lease payments 3,747 $ 70,844
========
Less amounts representing interest 412
--------
Present value of total minimum lease payments 3,334
Less current portion (1,252)
--------
Long term portion $ 2,083
========
F-29
12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Litigation - The Company is party to various types of litigation in the
ordinary course of business. The Company believes it has meritorious
defenses to all claims, and, in its opinion, all litigation currently
pending or threatened will not have a material effect on the Company's
financial position or results of operations.
13. PROFIT SHARING PLAN
The Company maintains a profit sharing plan that provides for tax deferred
employee benefits under Section 401(k) of the Internal Revenue Code. The
profit sharing plan allows employees to make contributions, a portion of
which will be matched by the Company, up to the lesser of 3% of an
employee's salary or the minimum amount allowed by law, as defined. The
Company may elect to make an additional discretionary contribution in any
profit sharing plan year. There were no discretionary company
contributions made during the fiscal years ended February 23, 2002,
February 24, 2001, and February 26, 2000. The Company's contributions vest
at a rate of 20% per year, beginning after one year of employment. The
Company has made matching contributions of approximately $33,000 for the
four month period ended February 23, 2002, $97,000 for the eight month
period ended October 27, 2001, $200,000 for the fiscal year ended February
24, 2001, and $300,000 for the fiscal year ended February 26, 2000. The
Company pays the administrative costs of the profit sharing plan.
14. SIGNIFICANT VENDOR
Purchases from the Company's largest single supplier were 31.5%, 16.1% and
8.8% of total purchases for the years ended February 23, 2002, February
24, 2001 and February 26, 2000, respectively.
15. SELECTED INFORMATION BY BUSINESS SEGMENTS
The Company reports segment information according to SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information."
SFAS No. 131 requires disclosures about operating segments in annual
financial statements and requires selected information about operating
segments in interim financial statements. Operating segments are defined
as components of an enterprise about which separate financial information
is available which is evaluated regularly by the chief operating decision
maker, or decision makers, in deciding how to allocate resources and in
assessing performance. The Company's chief operating decision maker is the
chief executive officer.
The Company sells its products through its Woodworkers Warehouse retail
stores and its catalogs. These businesses have been aggregated into their
respective reportable segments based on the management reporting
structure. The accounting policies of the business segments are the same
as those described in the summary of significant accounting policies. This
information excludes financial data related to the discontinued golf
business.
F-30
15. SELECTED INFORMATION BY BUSINESS SEGMENTS (CONTINUED)
Information as to the operations of the different continuing business
segments is set forth below (in thousands):
Successor Predecessor
Four Months Eight Months Fiscal Year Fiscal Year
Ended Ended Ended Ended
February 23, October 27, February 24, February 26,
2002 2001 2001 2000
Net sales
Retail $ 42,534 $ 63,626 $ 140,917 $ 156,903
Catalog 2,288 2,668 13,792 21,280
----------- ------------ ---------- ----------
$ 44,822 $ 66,294 $ 154,709 $ 178,183
=========== ============ ========== ==========
Income (loss) from
continuing operations:
Retail $ 2,838 $ (1,382) $ (3,710) $ 10,476
Catalog (253) 266 (876) 3,840
General corporate (2,699) (8,997) (17,676) (14,436)
----------- ------------ ---------- ----------
$ (114) $ (10,113) $ (22,262) $ (120)
=========== ============ ========== ==========
Identifiable assets:
Retail $ 34,591 * $ 67,007 $ 118,698
Catalog 1,967 * 2,123 10,994
General corporate 4,852 * 11,812 19,216
----------- ------------ ---------- ----------
$ 41,410 * $ 80,942 $ 148,908
=========== ============ ========== ==========
Depreciation and amortization
Retail $ 619 $ 1,448 $ 1,134 $ 3,009
Catalog 5 39 80 140
General corporate 39 599 912 717
----------- ------------ ---------- ----------
$ 663 $ 2,086 $ 2,126 $ 3,866
=========== ============ ========== ==========
Capital expenditures
Retail $ 139 $ 255 $ 552 $ 695
Catalog 7 11 - 39
General corporate 21 119 - 3,036
----------- ------------ ---------- ----------
$ 167 $ 385 $ 552 $ 3,770
=========== ============ ========== ==========
* Identifiable assets for the Predecessor Company are not meaningful.
The Company operates from a single distribution center for its Woodworkers
Warehouse operations and utilizes common labor pools, common management at
the corporate level and a single telemarketing sales force. As a result,
many of the expenses of the Company are shared between the business
segments and are reflected as general corporate expenses.
F-31
16. QUARTERLY RESULTS OF OPERATIONS (UNADUITED)
The following summarized unaudited results of operations for fiscal years
2001 and 2000 have been accounted for using principles generally accepted
in the United States of America for interim reporting purposes and include
adjustments (consisting of normal recurring adjustments) that the Company
considered necessary for the fair presentation of results for the interim
periods shown below. (In thousands, except per share amounts):
Predecessor Predecessor Predecessor Successor Successor
First Second Two Months End One Months End Fourth
Quarter Quarter October 27, 2001 November 24, 2001 Quarter
Fiscal year 2001
Net sales $ 27,083 $ 23,126 $ 16,085 $ 9,150 $ 35,672
Gross profit 8,083 6,933 4,182 2,632 11,192
Loss from continuing operations (6,316) 551 (4,352) (553) 439
Loss on discontinued operations (55) -- -- -- --
Loss on disposal of discontinued operations -- (169) $ (50) -- --
Extraordinary gain -- -- 38,607 -- --
Net (loss) income (6,371) 382 34,205 (553) 439
Basic and diluted loss per share:
Loss before discontinued operations and
extraordinary items * * * (0.10) $ 0.08
Discontinued operations * * * -- --
Extraordinary gain * * * -- --
---------- ------------ ----------- ---------- ----------
Net loss * * * $ (0.10) $ 0.08
========== ============ =========== ========== ==========
Weighted average shares outstanding
(Note 10) - basic and diluted * * * 5,640,000 5,640,000
========== ============ =========== ========== ==========
Predecessor Predecessor Predecessor Predecessor
First Second Third Fourth
Quarter Quarter Quarter Quarter
Fiscal year 2000
Net sales $ 44,132 $ 34,475 $ 34,982 $ 41,120
Gross profit 12,003 8,655 10,647 12,406
Loss on discontinued operations (2,608) (5,789) (578) -
Loss on disposal of discontinued operations - (22,087) 16 217
Net loss (3,814) (37,676) (4,805) (6,796)
Basic and diluted loss per share:
Loss before discontinued operations and
extraordinary items * * * *
Discontinued operations * * * *
Extraordinary gain * * * *
Net loss ---------- --------- ------------- --------------
* * * *
Weighted average shares outstanding - basic and diluted ========== ========= ============= ==============
* * * *
F-32
(b) EXHIBITS
Exhibit Number Reference
-------------- ---------
2.1 Order Confirming First Amended Joint Reorganization
Plan of Trend-Lines, Inc. and the Official Committee
of Unsecured Creditors, dated as of October 17, 2001. A
2.2 First Amended Joint Reorganization Plan of
Trend-Lines, Inc. and the Official Committee of
Unsecured Creditors, dated as of September 7, 2001. A
2.3 Joint Motion to Approve Nonmaterial Modification
to First Amended Joint Reorganization Plan of
Trend-Lines, Inc. and Official Committee of
Unsecured Creditors dated as of October 11, 2001. A
2.4 First Amended Disclosure Statement with Respect to
First Amended Joint Reorganization Plan of
Trend-Lines, Inc. and the Official Committee of
Unsecured Creditors, dated as of September 7, 2001. A
3.01 Certificate of Incorporation B
3.02 By-Laws B
10.01 Woodworkers Warehouse 2001 Long Term Incentive
Plan C
10.02 Employment Agreement dated October 29, 2001,
between Walter S. Spokowski and the Company. C
10.03 Employment Agreement dated June 21, 2002,
between Rick C. Welker and the Company. C
10.04 Credit Agreement dated October 29, 2001 Bank of
America and the Company. C
10.05 Amendment No. 2 to the Credit Agreement dated
August 2002, between Bank of America and the
Company. C
10.06 Severance Agreement dated July 24, 2002 between the
Company and Ronald Franklin. C
99.1 Certificate of Chief Executive Officer. C
99.2 Certificate of Chief Financial Officer. C
- ---------------
A Filed with the Securities and Exchange Commission as an exhibit to the
registrant's Form 8-K as filed with the Securities and Exchange
Commission on October 31, 2001 and incorporated herein by reference.
B Filed with the Securities and Exchange Commission as an exhibit to the
registrant's Form 8-A as filed with the Securities and Exchange
Commission on October 30, 2001 (File Number 000-33289) and incorporated
herein by reference.
C. Filed Herewith
II-1
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: 8/27/02 By: /s/ Walter S. Spokowski
--------- --------------------------------------------
Walter S. Spokowski, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ Walter S. Spokowski
_______________________ Director, President and Chief 8/27/02
Walter S. Spokowski Executive Officer
/s/ Rick C. Welker
_______________________ Vice President and Chief Financial 8/27/02
Rick C. Welker Officer
/s/ Richard Mandell
_______________________ Director 8/27/02
Richard Mandell
/s/ Joseph Nusim
_______________________ Director 8/27/02
Joseph Nusim
/s/ Gary A. Nacht
_______________________ Director 8/27/02
Gary A. Nacht
/s/ Edward Solomon
_______________________ Director 8/27/02
Edward Solomon
/s/ Bruce Berg
_______________________ Director 8/27/02
Bruce Berg
/s/ Ronald A. Kaplan
_______________________ Director 8/27/02
Ronald A. Kaplan
II-2