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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED May 25, 2002 OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
------------------ TO -----------------
Commission file number 0-24390
WOODWORKERS WAREHOUSE, INC.
(formerly Trend-Lines, Inc.)
-------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 04-3579658
------------------------------- --------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
126 Oxford Street, Lynn, Massachusetts 01901
- --------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
(781) 853 - 0900
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes ______ No X
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes X No_____
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Upon the Company's reorganization and emergence from bankruptcy on October 29,
2001, all of the Company's Class A and Class B common stock, treasury stock,
preferred stock and outstanding stock options under the 1993 Employee Stock
Option Plan and the 1994 Non-Qualified Stock Option Plan for Non-Employee
Directors were cancelled. A total of 7,500,000 shares, par value $0.01 per
share, of common stock have been authorized and the Company is required to issue
5,280,000 shares as payment for pre-petition liabilities and 360,000 shares to
management. As of the date of this Form 10-Q, these shares had not yet been
issued, were unable to trade, and thus no aggregate market value can be
determined at this time. When the shares are issued, they will be deemed to have
been issued as of October 29, 2001.
WOODWORKERS WAREHOUSE, INC.
INDEX
Page
----
Part I - Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
May 25, 2002 (Unaudited) and February 23, 2002 3
Consolidated Statements of Operations
Three Months Ended May 25, 2002 (Unaudited) (Successor) and
May 26, 2001 (Unaudited) (Predecessor) 4
Consolidated Statements of Cash Flows
Three Months Ended May 25, 2002 (Unaudited) (Successor) and
May 26, 2001 (Unaudited) (Predecessor) 5
Notes to Consolidated Financial Statements 6-11
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations 12-17
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
Part II - Other Information
Item 1. Legal Proceedings 18
Item 2. Changes in Securities and Use of Proceeds 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
WOODWORKERS WAREHOUSE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(Unaudited)
May 25 February 23,
2002 2002
---------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 222 $ 519
Accounts receivable, net 2,322 3,823
Inventories 32,352 29,586
Prepaid expenses and other current assets 930 1,051
-------- --------
Total current assets 35,826 34,979
PROPERTY AND EQUIPMENT, NET 3,664 3,958
LEASE INTEREST, NET 1,524 1,602
OTHER ASSETS 828 871
-------- --------
$ 41,842 $ 41,410
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank credit facility $ 23,918 $ 20,878
Current portion of capital lease obligations 1,111 1,252
Post-Petition accounts payable 8,023 8,941
Pre-Petition accounts payable 2,000 2,000
Accrued expenses 3,132 3,125
Deferred liabilities 961 1,243
Other current liabilities 230 514
-------- --------
Total current liabilities 39,375 37,953
-------- --------
CAPITAL LEASE OBLIGATIONS, NET OF CURRENT PORTION 1,888 2,083
-------- --------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value -7,500,000 shares authorized and 56 56
5,640,000 shares outstanding
Additional paid-in capital 1,432 1,432
Accumulated deficit (909) (114)
-------- --------
Total stockholders' equity 579 1,374
-------- --------
$ 41,842 $ 41,410
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
3
WOODWORKERS WAREHOUSE, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(Unaudited)
Three Months Ended
Predecessor Company
May 25, 2002 May 26, 2001
------------ ------------
Net sales $ 27,995 $ 27,083
Cost of sales 19,024 19,000
----------- -----------
Gross profit 8,971 8,083
Selling, general and administrative expenses 9,438 10,575
Reorganization expense - 2,825
----------- -----------
Loss from operations (467) (5,317)
Interest expense, net 328 999
----------- -----------
Loss before provision for income taxes
and discontinued operations (795) (6,316)
Provision for income taxes - -
----------- -----------
Loss from continuing operations (795) (6,316)
Loss from discontinued operations - (55)
----------- -----------
Net loss $ (795) $ (6,371)
=========== ===========
Basic and diluted loss per share
Loss before discontinued operations $ (0.14) *
Discontinued operations - *
----------- -----------
Net loss $ (0.14) *
=========== ===========
Weighted average shares outstanding
Basic and diluted 5,640,000 *
=========== ===========
* EPS for the Predecessor Company is not meaningful.
See notes to consolidated financial statements.
4
WOODWORKERS WAREHOUSE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(Unaudited)
Three Months Ended
Predecessor Company
May 25, 2002 May 26, 2001
------------ --------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (795) $ (6,371)
Add: loss from discontinued operations - 55
-------- --------
Net loss from continuing operations (795) (6,316)
-------- --------
Adjustments to reconcile net loss to net cash
Provided by (used in) operating activities:
Depreciation and amortization 439 1,633
Reorganizational expenses - 2,825
Changes in current assets and liabilities:
Accounts receivable 1,501 965
Inventories (2,766) 4,587
Prepaid expenses and other current assets 121 168
Post-petition accounts payable (918) (374)
Pre-petition accounts payable - 96
Accrued expenses 7 (647)
Deferred liabilities (282) (609)
Other current liabilities (284) (76)
-------- --------
Net cash from operating activities (2,977) 2,252
Net cash from discontinued operations - 297
-------- --------
Net cash from operating activities (before
reorganization expenses) (2,977) 2,549
Operating cash flows from reorganization expenses:
Professional fees paid for services rendered in bankruptcy - (1,079)
Interest income received - 149
Other reorganization expenses paid - (1,895)
-------- --------
Net cash used by reorganization items - (2,825)
-------- --------
Net cash used in operating activities (2,977) (276)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (67) -
Other assets 43 122
-------- --------
Net cash from investing activities (24) 122
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) under bank credit facilities 3,040 (5,000)
Principle payments on capital lease obligations (336) (79)
-------- --------
Net cash from financing activities 2,704 (5,079)
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (297) (5,233)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 519 18,338
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 222 $ 13,105
======== ========
See notes to consolidated financial statements.
5
WOODWORKERS WAREHOUSE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
Woodworkers Warehouse, Inc. (the "Company" or the "Successor") is a specialty
retailer of woodworking tools and accessories sold through its nationally
distributed mail-order catalog and its 98 retail stores located in the New
England and Mid-Atlantic regions.
With respect to the unaudited consolidated financial statements, it is the
Company's opinion that all necessary adjustments (consisting of normal and
recurring adjustments) have been included to present a fair statement of results
for the interim periods. Certain prior-year amounts have been reclassified to
conform to this year's presentation.
These statements should be read in conjunction with the Company's financial
statements (Form 10-K) for the fiscal year ended February 23, 2002 ("fiscal
2001"). Due to the seasonal nature of the Company's business, operating results
for the interim periods are not necessarily indicative of results that may be
expected for the fiscal year ending February 22, 2003 ("fiscal 2002"). Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted, pursuant to the general rules and regulations promulgated
by the Securities and Exchange Commission (the "SEC").
On August 11, 2000, Trend-Lines Inc. (the "Predecessor") filed for bankruptcy
under Chapter 11 of the United States Bankruptcy Code. The Predecessor operated
its business as a debtor-in-possession subject to the jurisdiction of the United
States Bankruptcy Court for the District of Massachusetts Eastern Division (the
"Bankruptcy Court") until October 29, 2001. The First Amended Joint
Reorganization Plan of Trend-Lines, Inc. and the Official Committee of Unsecured
Creditors (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 following 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 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 credit facility was paid in
full in connection with the closing of a new senior secured revolving
credit facility (see note 4).
6
Class 2 - Other Secured Claims
o These secured claims consist of claims by various vendors who 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.
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 on the Effective Date. See note 7 for
detail of total new shares issued. Due to delays in the processing and
settlement of certain unsecured claims and restrictions under the
credit 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 credit 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 As of the Company's emergence from bankruptcy, all common stock equity
interests in it 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.
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
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.
7
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.
2. New Accounting Pronouncements
In April 2002, the FASB issued SFAS 145, Rescission of FASB Statements 4, 44 and
64, Amendment to FASB Statement 13, and Technical Corrections. One of the major
changes of this statement is to alter the accounting for the classification of
gains and losses from the extinguishment of debt. Upon adoption, the Company
will follow APB 30, Reporting the Results of Operations--Reporting the Effects
of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions in determining whether such
extinguishment of debt may be classified as extraordinary. The provisions of
this statement related to the rescission of FASB Statement 4 shall be applied in
fiscal years beginning after May 15, 2002 with early application encouraged. The
Company believes that the adoption of SFAS 145 will not have a material impact
on it's financial statements.
3. Cash Flow Information
Supplemental cash flow information is as follows for the three months ended May
25, 2002, and May 26, 2001:
Successor Predecessor
----------- ------------
Three Month Three Months
Ended Ended
May 25, May 26,
2002 2001
Cash paid during the year for interest $ 358 $1,047
Cash paid during the year for income taxes 36 -
4. 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.
8
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. All fresh start adjustments were
reflected as of October 27, 2001.
Reorganization Items - The Predecessor provided for or incurred the following
(income) expense items during the three months ended May 26, 2001, directly
associated with the Chapter 11 reorganization proceedings (in thousands):
Three Months
Ended
May 26,
2001
------------
Bonuses for retention of key employees $ 201
Professional fees 1,079
Loss on disposal of Post Tool 1,675
Miscellaneous expense 19
Interest income (149)
------
Total reorganization charge $2,825
======
5. Discontinued Operations
On August 11, 2000, the Predecessor disposed of its golf business. The
consolidated financial statements of the Predecessor have been presented to
reflect the disposition of the golf business in accordance with APB Opinion No.
30. The net operating losses of the golf division were $55,000 for the first
quarter ended May 26, 2001 and have been reported as "net loss from discontinued
operations" in the accompanying consolidated Statements of Operations.
9
6. Bank Credit Facility
Pursuant to the Plan discussed in note 1, on October 29, 2001, the Company
entered into a $30,000,000 Senior Secured Revolving Credit Facility with the
Bank of America. At May 25, 2002 the Company had approximately $23,918,000 of
borrowings outstanding and approximately $15,200 of letters of credit
outstanding. The credit facility is secured by all of the Company's assets and
bears interest equal to LIBOR plus 3.25% (5.10% at May 25, 2002) or the bank
reference rate plus 1.00% (5.75% at May 25, 2002) at the Company's option.
Through March 31, 2002, the Company's borrowing base under the credit line
commitment is based on the following formula: 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 30 days and $2.0
million thereafter with amortization of $166,667 per month beginning
February 28, 2002.
After March 31, 2002, 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 total availability at May
25, 2002 was approximately $1,209,487. The agreement was subsequently 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 the same 65% advance rate. The credit facility contains a financial covenant
of a fixed charge coverage and other non-financial covenants. In addition, the
credit 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 credit
facility 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.
7. 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, the Company is
required to issue new common stock; however, as of July 1, 2002 the new common
stock shares had not been issued. The delay in issuance of the new shares is
because 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
credit facility. The Company does not expect to pay dividends in the foreseeable
future.
10
8. Selected Information By Business Segment
Information as to the operations of the different business segments with respect
to sales and operating income is set forth below for the three months ended May
25, 2002 and May 26, 2001 (in thousands):
Three Months Ended
--------------------------------
(Successor) (Predecessor)
----------- -------------
May 25, May 26,
2002 2001
----------- --------------
Net sales
Retail $ 26,658 $ 25,548
Catalog 1,337 1,535
-------- --------
$ 27,995 $ 27,083
-------- --------
Income (loss) from continuing operations
Retail $ 951 $ (840)
Catalog 211 (416)
General corporate expenses (1,957) (5,060)
-------- --------
$ (795) $ (6,316)
-------- --------
The Company sells its products through its Woodworkers Warehouse retail stores
and its catalog. These businesses have been aggregated into their respective
reportable segments based on the management reporting structure.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CRITICAL ACCOUNTING POLICIES
We believe the most critical accounting policies are Revenue Recognition,
Inventories, Prepaid Catalog Expenses, Lease 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 $65,000 has been recorded as of May 25,
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 $2,211,000 write-down of inventory at October 27, 2001 to record the
balance at its estimated net realizable value. The balance at May 25, 2002 in
our total lower of cost or market reserve was $56,000. If actual market
conditions are less favorable than those projected by 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 May 25,
2002 was $26,323.
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 $244,413 at May 25,
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.
12
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 list is not intended to be a comprehensive list of all of our
accounting policies. In many cases, the accounting treatment of a particular
transaction is specifically dictated by generally accepted accounting
principles, with no need for management's judgment in their application. There
are also areas in which management's judgment in selecting any available
alternative would not produce a materially different result.
Fresh start reporting required us to restate our assets and liabilities to
reflect their reorganization value, which 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. Our
calculated value was based on a variety of estimates and assumptions about
future circumstances and events. Such estimates and assumptions are inherently
subject to significant economic and competitive uncertainties beyond our
control.
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 following 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 three months ended May 25, 2002 and May
26, 2001 Consolidated Statement of Operations and Cash Flows are not comparable.
13
Results of Operations
Net sales for the first quarter of fiscal 2002 increased by $912,000, or 3.4%,
from $27,083,000 for the first quarter of fiscal 2001 to $27,995,000. Comparable
retail sales of Woodworkers Warehouse stores for the first quarter of fiscal
2002 increased $4,427,000 or 20.0% from $22,109,000 for the first quarter of
fiscal 2001 to $26,536,000. This was offset by a decrease from $1,086,000 to
zero sales for Post Tool stores closed or sold in first quarter of fiscal 2001.
Catalog sales for the first quarter of fiscal 2002 decreased $198,000, or 12.9%,
from $1,535,000 for the first quarter of fiscal 2001 to $1,337,000. The catalog
sales decrease was attributable to diminishing orders received on older catalogs
in current quarter.
Gross profit for the first quarter of fiscal 2002 increased $888,000, or 11.0%,
from $8,083,000 for the first quarter of fiscal 2001 to $8,971,000. As a
percentage of net sales, gross profit increased 2.2% from 29.8% of net sales for
the first quarter of fiscal 2001 to 32.0% of net sales in the first quarter of
fiscal 2002. The primary reasons for the increase in gross margin are the change
in sales mix, the change in capitalized vendor rebates and distribution cost
based on inventory turns, and the reclass of vendor rebates and distribution
costs to cost of sales for the change to full absorption accounting implemented
under fresh start accounting.
Selling, general and administrative expenses for the first quarter of fiscal
2002 decreased $1,137,000, or 10.8%, from $10,575,000 for the first quarter of
fiscal 2001 to $9,438,000 for the first quarter of fiscal 2002. 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 expenses resulted in a net charge of $2,825,000 or 10.4% of net
sales for the first quarter of fiscal 2001. These amounts related directly to
the Chapter 11 proceedings and associated restructuring of our operations
including professional fees of $1,079,000 and loss on disposal of Post Tool of
$1,675,000. There were no reorganization expenses for the first quarter of
fiscal 2002.
Due to the impact of the results described above, our operating loss decreased
from $5,317,000 for the first quarter of Fiscal 2001 to $467,000 for the first
quarter of Fiscal 2002, a decrease of $4,850,000.
Interest expense for the first quarter of fiscal 2002, net of interest income,
decreased by $671,000 from $999,000 in the first quarter of fiscal 2001 to
$328,000 in the first quarter of fiscal 2002. The decrease in interest expense
is attributable to the decrease in the amount outstanding under our bank credit
facility and reduction in interest rates.
The net loss for the first quarter of Fiscal 2002 was $795,000 compared to a net
loss of $6,371,000 for the first quarter of Fiscal 2001, a decrease of
$5,576,000.
Liquidity and Capital Resources
Our working capital deficiency increased by $575,000, from $2,974,000 as of
February 23, 2002 to $3,549,000 as of May 26, 2002. The increase resulted
primarily from a decrease in accounts receivable of $1,501,000, an increase in
inventory of $2,766,000, offset by an increase in the bank credit facility of
$3,040,000 and a decrease in post-petition accounts payable of $918,000.
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During the three month period ended May 25, 2002, the cash used by operating
activities was $2,977,000. The primary use of cash was the increase in inventory
of $2,766,000.
The net cash used in investing activities was $24,000 from purchases of property
and equipment offset by a decrease in other assets.
The net cash provided by financing activities was approximately $2,704,000 and
was primarily attributable to the increase in borrowings on our bank credit
facility of $3,040,000.
At May 25, 2002, we had approximately $23,918,000 of borrowings outstanding and
approximately $15,200 of letters of credit outstanding.
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, taxes, depreciation and amortization over fixed charges,
defined as interest on our long term debt plus capital expenditures) 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 May 25, 2002 was approximately
$1,209,487. 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 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 a subjective acceleration
clause and an agreement to maintain blocked account arrangements.
Under the Plan, we are required to pay 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
credit 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 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.
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New Accounting Pronouncements
In April 2002, the FASB issued SFAS 145, Rescission of FASB Statements 4, 44 and
64, Amendment to FASB Statement 13, and Technical Corrections. One of the major
changes of this statement is to change the accounting for the classification of
gains and losses from the extinguishment of debt. Upon adoption, we will follow
APB 30, Reporting the Results of Operations--Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions in determining whether such extinguishment of
debt may be classified as extraordinary. The provisions of this statement
related to the rescission of FASB Statement 4 shall be applied in fiscal years
beginning after May 15, 2002 with early application encouraged. We believe that
the adoption of SFAS 145 will not have a material impact on our financial
statements.
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.
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
Statements included in this report that do not relate to present or historical
conditions are "forward-looking statements" within the meaning of the Safe
Harbor provisions of the Private Securities Litigation Reform Act of 1995.
Additional oral or written forward-looking statements may be made by us from
time to time, and such statements may be included in documents other than this
report that are filed with the Securities and Exchange Commission. Such
forward-looking statements involve risks and uncertainties that could cause
results or outcomes to differ materially from those expressed in such
forward-looking statements. Forward-looking statements in this report and
elsewhere may include without limitation, statements relating to our plans,
strategies, objectives, expectations, intentions and adequacy of resources and
are intended to be made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Words such as "believes," "forecasts,"
"intends," "possible," "expects," "estimates," "anticipates," or "plans" and
similar expressions are intended to identify forward-looking statements.
Investors are cautioned that such forward-looking statements involve risks and
uncertainties including, without limitation, the following:
o Our ability to attract, train and retain highly-qualified associates to
staff both existing and new stores, as well as middle and senior
management.
o General economic conditions, which affect consumer confidence and home
improvement and home-building spending, including interest rates, the
overall level of economic activity, the availability of consumer credit
and mortgage financing and unemployment rates.
o The impact of competition, including competition for customers,
locations and products and in other important aspects of our business.
Our primary competitors include electrical, plumbing and building
materials supply houses, lumber yards, home improvement stores and
other local, regional or national hardware stores, as well as discount
department stores and any other channel of distribution that offer
products that we sell. Our business is highly competitive and may face
new types of competitors as it 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.
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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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to interest rate risk primarily through our borrowing activities.
Our short-term borrowings bear interest at variable rates primarily based on
either the prime rate or LIBOR. The effect of a 10% change in the prime or LIBOR
would not have a material impact on our financial results. In seeking to
minimize the risks from interest rate fluctuations, we manage exposures through
our regular operating and financing activities. We do not use financial
instruments for trading or other speculative purposes and are not party to any
leveraged financial instruments.
17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities and Use of Proceeds
Upon our reorganization and emergence from bankruptcy on October 29, 2001,
all of our Class A and Class B common stock, treasury stock, preferred
stock and outstanding stock options under the 1993 Employee Stock Option
Plan and the 1994 Non-Qualified Stock Option Plan for Non-Employee
Directors were cancelled. A total of 7,500,000 shares, par value $0.01 per
share, of common stock have been authorized and we are required to issue
5,280,000 shares as payment for pre-petition liabilities and 360,000 shares
to management. As of the date of this Form 10-Q, these shares had not yet
been issued, were unable to trade, and thus no aggregate market value can
be determined at this time. When the shares are issued, they will be deemed
to have been issued as of October 29, 2001.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
Exhibits
(a) 99.1 Certification of Chief Executive Officer
(b) 99.2 Certification of Chief Financial Officer
Reports on Form 8-K
(a) The registrant filed a current report on Form 8-K dated April 17, 2002,
reporting a change in registrant's certifying accountant.
(b) The registrant filed a current report on Form 8-K dated April 10, 2002,
reporting a change in registrant's certifying accountant.
(c) The registrant filed a current report on Form 8-K dated August 13, 2002
reporting other events.
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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
Date: 8/27/02 By: /s/ Rick C. Welker
----------- -------------------------------------
Rick C. Welker,
Vice President
and Chief Financial Officer
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