10-Q/A 1 a10q2nd.txt AMENDED 10Q 2ND Q 2003 SECURITIES AND EXCHANGE COMMISSION Washington, DC. 20549 FORM 10-Q / A AMENDMENT NO. 1 QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File For the Quarterly Period Ended June 28, 2003 Number 1-14967 ------------------------ ------- WICKES INC. ----------------------------------- (Exact name of registrant as specified in its charter) Delaware 36-3554758 --------------------------------------- -------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 706 North Deerpath Drive, Vernon Hills, Illinois 60061 ------------------------------------------------ ---------- (Address of principal executive offices) (Zip Code) 847-367-3400 ------------ (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, and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act) Yes No X As of July 31, 2003, the Registrant had 8,307,984 shares of Common Stock, par value $.01 per share outstanding. Explanatory Note This amendment No. 1 to Form 10-Q filed on Form 10-Q/A for the quarterly period ended June 28, 2003, is being filed to restate various reclassifications in the condensed consolidated financial statements of Part 1 Items 1 and Notes to the Condensed Consolidated Financial Statements and Part 1 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations. All information contained herein is as originally reported, except as set forth in Management's Discussion and Analysis; Going Cocern, Recent Developments, and Notes 2 and 10 to the Condensed Consolidated Financial Statements. 2 WICKES INC. AND SUBSIDIARIES INDEX ----- Page Number ------ PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets (Unaudited) June 28, 2003, December 28, 2002, and June 29, 2002 (As Restated) 3 Condensed Consolidated Statements of Operations (Unaudited) for the three and six months ended June 28, 2003 and June 29, 2002 (As Restated) 4 Condensed Consolidated Statements of Cash Flows (Unaudited) - for the six months ended June 28, 2003 and June 29, 2002 (As Restated) 5 Notes to Condensed Consolidated Financial Statements (Unaudited) 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 20 Item 3. Quantitative and Qualitative Disclosures about Market Risk 37 Item 4. Controls and Procedures 37 PART II. OTHER INFORMATION Item 1. Legal Proceedings 38 Item 2. Changes in Securities and Use of Proceeds 38 Item 6. Exhibits and Reports on Form 8-K 38

3 WICKES INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS June 28, 2003, December 28, 2002 and June 29, 2002 (in thousands except share data) (UNAUDITED) June 28, December 28, June 29, 2003 2002 2002 ------------ ----------- ------------ ASSETS (As restated, see Note 11) Current assets: Cash $ 30 $ 40 $ 161 Accounts receivable, less allowance for doubtful accounts of $1,854 in June 2003, $1,919 in December 2002 and $1,403 in June 2002 55,426 56,094 62,486 Note receivable from affiliate - - 425 Inventory, net 52,918 50,170 62,292 Deferred tax assets - 5,720 6,038 Prepaid expenses and other assets 7,361 5,619 5,934 Assets of discontinued operations - - 60,897 ------------ ----------- ------------ Total current assets 115,735 117,643 198,233 ------------ ----------- ------------ Property, plant and equipment, net 35,417 37,971 42,472 Trademark - - 5,856 Deferred tax assets - 13,775 16,344 Rental equipment (net of accumulated depreciation of $1,465 in June 2003, $1,475 in December 2002 and $1,587 in June 2002) 774 1,021 1,250 Goodwill - - 12,229 Other assets (net of accumulated amortization of $6,446 in June 2003, $5,911 in 2002, and $5,357 in June 2002) 6,020 3,577 4,783 Assets of discontinued operations - - 11,989 ------------ ----------- ------------ Total assets $ 157,946 $ 173,987 $ 293,156 ============ =========== ============ LIABILITIES & STOCKHOLDERS' (DEFICIT) EQUITY Current liabilities: Current maturities of long-term debt $ 22,998 $ 28,107 $ 10,096 Accounts payable 30,134 23,824 34,062 Accrued liabilities 12,392 16,256 10,304 Liabilities of discontinued operations - - 25,636 ------------ ----------- ------------ Total current liabilities 65,524 68,187 80,098 ------------ ----------- ------------ Long-term debt, less current maturities 99,539 67,363 184,391 Other long-term liabilities 2,310 2,407 2,587 Liabilities of discontinued operations - - 680 Stockholders' (deficit) equity: Common stock, $0.01 par (8,307,984 at June 2003 and December 2002, and 8,288,845 shares at June 2002 issued and outstanding) 83 83 83 Additional paid-in capital 87,173 87,173 87,155 Accumulated deficit (96,683) (51,226) (61,838) ------------ ----------- ----------- Total stockholders' (deficit) equity (9,427) 36,030 25,400 ------------ ----------- ----------- Total liabilties and stockholders' (deficit) equity $ 157,946 $ 173,987 $ 293,156 ============ =========== ===========

The accompanying notes are an integral part of the condensed consolidated financial statements. 4 WICKES INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (in thousands except share and per share data) Three Months Ended Six Months Ended June 28, June 29, June 28, June 29, 2003 2002 2003 2002 ----------- ----------- ----------- ----------- (As restated, (As restated, see Note 11) see Note 11) Net sales $ 127,605 $ 160,546 $ 228,654 $ 295,940 Cost of sales 101,962 126,268 182,436 234,057 ----------- ----------- ----------- ----------- Gross profit 25,643 34,278 46,218 61,883 ----------- ----------- ----------- ----------- Selling, general and administrative expenses 30,005 31,562 58,365 60,356 Depreciation 969 1,084 1,934 2,255 Provision for doubtful accounts 259 320 438 768 Store closing costs and other charges 3,709 785 5,015 1,747 Other operating income (117) (1,784) (1,284) (2,212) ----------- ----------- ----------- ----------- 34,825 31,967 64,468 62,914 ----------- ----------- ----------- ----------- (Loss) income from continuing operations before interest and taxes (9,182) 2,311 (18,250) (1,031) Interest expense 3,673 2,816 7,131 5,706 ----------- ----------- ----------- ----------- Loss from continuing operations before income taxes (12,855) (505) (25,381) (6,737) Income tax expense (benefit) 24,491 (37) 19,691 (2,360) ----------- ----------- ----------- ----------- Loss from continuing operations (37,346) (468) (45,072) (4,377) (Loss) income from discontinued operations, net of taxes of $1,816 and $1,870 for the three and six months ended June 29, 2002 (385) 2,808 (385) 2,892 ----------- ----------- ----------- ----------- Net (loss) income $ (37,731) $ 2,340 $ (45,457) $ (1,485) =========== =========== =========== =========== Loss from continuing operations per common share-basic and diluted $ (4.50) $ (0.06) $ (5.43) $ (0.53) =========== =========== =========== =========== (Loss) income from discontinued operations per common share-basic $ (0.04) $ 0.34 $ (0.04) $ 0.35 =========== =========== =========== =========== (Loss) income from discontinued operations per common share-diluted $ (0.04) $ 0.33 $ (0.04) $ 0.34 =========== =========== =========== =========== Net (loss) income per common share-basic and diluted $ (4.54) $ 0.28 $ (5.47) $ (0.18) =========== =========== =========== =========== Weighted average common shares-basic 8,307,984 8,288,761 8,307,984 8,286,837 =========== =========== =========== =========== Weighted average common shares-diluted 8,307,984 8,459,051 8,307,984 8,402,471 =========== ========== =========== ===========

The accompanying notes are an integral part of the condensed consolidated financial statements. 5 WICKES INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (in thousands) Six Months Ended June 28, June 29, 2003 2002 ------------- ------------- (As restated, see Note 11) Cash flows from operating activities: Net loss $ (45,457) $ (1,485) Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Loss (income) from discontinued operations 385 (2,892) Depreciation 2,467 2,938 Gain on early retirement of debt (879) - Amortization of deferred financing costs 1,354 772 Provision for doubtful accounts 438 768 Loss (gain) on sale of assets and other items 231 (1,263) Deferred income taxes 19,495 (641) Changes in assets and liabilities, net of assets sold Increase in accounts receivable (8,599) (1,861) (Increase) decrease in inventory (2,885) 9,423 Increase in accounts payable and accrued liabilities 2,349 2,415 Increase in prepaids and other assets (1,833) (1,439) ------------- ------------- NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (32,934) 6,735 ------------- ------------- Cash flows from investing activities: Purchases of property, plant and equipment (2,033) (488) Proceeds from the sale of property, plant and equipment 1,835 3,909 Proceeds from sale of business 8,829 - ------------- ------------- NET CASH PROVIDED BY INVESTING ACTIVITIES 8,631 3,421 ------------- ------------- Cash flows from financing activities: Net borrowings (repayments) under revolving line of credit 33,301 (5,574) Retirements of long-term debt (4,980) - Term loan repayments (375) (2,349) Debt issuance costs (3,653) - ------------- ------------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 24,293 (7,923) ------------- ------------- NET CASH PROVIDED BY DISCONTINUED OPERATIONS - (2,225) ------------- ------------- NET (DECREASE) INCREASE IN CASH (10) 2,233 Cash at beginning of period 40 153 ------------- ------------- CASH AT END OF PERIOD $ 30 $ 161 ============= ============= Supplemental schedule of cash flow information: Interest paid $ 5,262 $ 8,341 Income taxes paid $ 670 $ 469

The accompanying notes are an integral part of the condensed consolidated financial statements. 6 WICKES INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ------------------------------------------ Basis of Financial Statement Presentation ----------------------------------------- The condensed consolidated financial statements present the results of operations, financial position, and cash flows of Wickes Inc. and its consolidated subsidiaries (the "Company"). The condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America, which require 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. Actual results could differ from those estimates. The condensed consolidated financial statements should be read in conjunction with the Company's consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K/A (the "Form 10-K/A")for the fiscal year ended December 28, 2002. The condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for the fair presentation of the financial results for the interim period. The results of operations for interim periods are not necessarily indicative of results for the entire year. The Company has determined that it operates in one business segment, that being the supply and distribution of lumber, building materials and manufactured components to building professionals and do-it-yourself customers, principally in the Midwest, Northeast, and Southern United States. All information required by Statement of Financial Accounting Standards ("SFAS") 131, "Disclosures about Segments of an Enterprise and Related Information", is included in the Company's consolidated financial statements. Stock Based Compensation ------------------------ SFAS No. 123, "Accounting for Stock-Based Compensation," encourages, but does not require, companies to recognize compensation expense for grants of stock, stock options, and other equity instruments to employees based on the fair value of such instruments. The pronouncement requires companies that choose not to adopt the fair value method of accounting to disclose the pro forma net income and earnings per share under the fair value method. As permitted by SFAS No. 123, the Company elected to continue the intrinsic value method of accounting prescribed by APB Opinion No. 25. As required, the Company has disclosed the pro forma net income (loss) and pro forma income (loss) per share as if the fair value based accounting methods had been used to account for stock-based compensation cost. In addition, the following table presents the pro forma impact (in thousands, except share data) to the Company's financial statements as if the fair value method had been applied. 7 Three Months Ended Six Months Ended June 28, June 29, June 28, June 29, 2003 2002 2003 2002 ----------- ----------- ---------- ---------- Loss from continuing operations (as reported) (37,346) (468) (45,072) (4,377) Add: Stock based compensation cost included in determination of compensation expense 10 21 Deduct: Stock based compensation under the fair-value method for all awards, net of tax (21) (33) (42) (65) Adjusted loss from continuing operations (37,367) (491) (45,114) (4,421) (Loss) income from discontinued operations (385) 2,808 (385) 2,892 Net (loss) income (as reported) (37,731) 2,340 (45,457) (1,485) Adjusted net (loss) income (37,752) 2,317 (45,499) (1,529) Earnings per share: Basic: Loss from continuing operations (as reported) (4.50) (0.06) (5.43) (0.53) Adjusted loss from continuing operations (4.50) (0.06) (5.43) (0.53) Income (loss) from discontinued operations (0.04) 0.34 (0.04) 0.35 Net income (loss) (as reported) (4.54) 0.28 (5.47) (0.18) Adjusted net income (loss) (4.54) 0.28 (5.48) (0.18) Diluted: Loss from continuing operations (as reported) (4.50) (0.06) (5.43) (0.53) Adjusted loss from continuing operations (4.50) (0.06) (5.43) (0.53) (Loss) income from discontinued operations (0.04) 0.33 (0.04) 0.34 Net income (loss) (as reported) (4.54) 0.28 (5.47) (0.18) Adjusted net income (loss) (4.54) 0.27 (5.48) (0.18)

Share Data ---------- The Company issued 3,818 and 7,260 shares of Common Stock to members of its board of directors in lieu of cash compensation during the three and six months ended June 29, 2002. The Company did not issue shares of Common Stock to members of its board of directors in lieu of cash compensation during the three and six months ended June 28, 2003. Stock Options ------------- The Company periodically grants stock options to key personnel. Compensation cost on these options is measured at the date of grant by comparing the quoted market price of the Company's stock to the price the employee has to pay to acquire the stock. Any resulting compensation cost would be recognized over the employee's vesting period. 8 Reclassifications and Eliminations ---------------------------------- Certain reclassifications have been made to prior year amounts to conform to the current presentation. All significant intercompany balances and transactions have been eliminated. 2. Going Concern ------------- The Company's consolidated financial statements have been prepared assuming that the Company will continue as a going concern. However, due to the Company's liquidity condition and continuing operating losses, there is substantial doubt about the Company's ability to continue as a going concern. These financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that could result should the Company be unable to continue as a going concern. The Company does not expect to generate sufficient cash from operations to pay the principal amount of the Company's 11 5/8% Senior Subordinated Notes due 2003 when they mature on December 15, 2003, and, therefore, the Company has offered to exchange the Senior Subordinated Notes for either (i) cash and new 10% Convertible Notes due 2007 (the "New Notes") or (ii) New Notes. If an insufficient number of holders of Senior Subordinated Notes participate in the exchange offer, it is likely the Company will not be able to pay the principal amount and the accrued and unpaid interest due on their maturity date. In that event, an event of default will have taken place under the indenture governing the Senior Subordinated Notes, the Company's senior credit facility and the indenture governing the Company's Senior Secured Notes due 2005, allowing the Company's senior lenders to immediately accelerate the maturity of the indebtedness under the Company's senior credit facility and the Company's Senior Secured Notes. If that were to occur, unless the Company were able to obtain additional financing to repay the senior credit facility, the Senior Secured Notes and the outstanding Senior Subordinated Notes (which the Company believes is highly unlikely), the Company may be forced to petition for relief under the U.S. Bankruptcy Code, or the Company's creditors may file an involuntary petition against the Company (see Note 10 for further discussion). 3. Discontinued Operations ----------------------- On December 16, 2002 the Company sold substantially all of the assets of its operations in Wisconsin and Northern Michigan to Lanoga Corporation (the "Lanoga Sale") for a sale price of $104.7 million. These operations were considered discontinued operations under SFAS No. 144 "Accounting for the Impairment or Disposal of Long-lived Assets". The standard requires seperate presentation of the results of discontinued operations. As such, the results of the three and six months ended June 29, 2002 have been reclassified to confrom with this presentation. In the first six months of 2003, the Company received additional proceeds of $8.8 million related to the settlement of amounts held in escrow as of December 28, 2002. The remaining escrow amounts of $1.8 million are expected to be settled by June 2004. 9 The Company is subject to indemnification claims for certain environmental issues related to the properties sold to Lanoga. As of June 28, 2003, the Company has recorded $0.3 million as part of discontinued operations in the Statement of Operations, which represents the Company's best estimate of exposure related to these claims. Sales and income from discontinued operations for the three and six months ended June 29, 2002 were as follows: Three months ended Six months ended June 29, June 29, 2002 2002 -------- -------- Sales $ 74,064 $ 124,494 Income before income taxes 4,626 4,764 Tax provision 1,818 1,872 Income from discontinued operations 2,808 2,892 The Company allocated interest expense of its revolving credit agreement and Senior Secured Notes to discontinued operations based on the cash proceeds required to be used to repay those obligations. Interest expense allocated to discontinued operations was $1.3 million and $2.8 million for the three months and six months ended June 29, 2002, respectively. The major classes of assets and liabilities of discontinued operations sold were as follows (in thousands): June 29, 2002 ------ Cash $ 11 Accounts receivable 26,451 Inventory 31,858 Deferred tax assets 2,192 Prepaid expenses and other assets 385 ------ Total current assets 60,897 ------ Property, plant and equipment 11,331 Deferred tax assets 215 Rental equipment 445 Other assets (2) ------ Total assets 72,886 ------ Accounts payable 19,870 Accrued liabilities 5,766 ------ Total current liabilities 25,636 Other long-term liabilities 680 ------ Total liabilities 26,316 ------ Net assets $ 46,570 ======

10 4. LONG-TERM DEBT -------------- Long-term debt is comprised of the following (in thousands): June 28, Dec 28, June 29, 2003 2002 2002 ------ ------ ------ Revolving credit facility: Revolving notes $ 39,815 $ 20,346 $ 94,324 Term notes 24,625 11,168 36,207 Senior subordinated notes 21,123 63,956 63,956 Senior secured notes 36,974 - - Less current maturities (22,998) (28,107) (10,096) ------ ------ ------ Total long-term debt $ 99,539 $ 67,363 $ 184,391 ------ ------ ------

Senior Subordinated Debt ------------------------ On February 26, 2003, the Company completed its offer to exchange its Senior Secured Notes due 2005 for any and all of its outstanding 11 5/8% Senior Subordinated Notes due 2003. The Company accepted for the exchange all $42.8 million of Senior Subordinated Notes validly tendered in exchange for an equal principal amount of Senior Secured Notes. The tendered notes represented approximately 67% of the Senior Subordinated Notes outstanding as of February 26, 2003. The Senior Secured Notes, which bear interest at 11 5/8% per annum from the date of issuance through December 15, 2003 and at 18% per annum thereafter, rank equally with the Company's senior credit facility but are secured by subordinated liens on the Company's owned real estate and equipment. These liens are junior to the liens securing amounts payable under the Company's senior credit facility (see "Revolving Credit Facility" below). Concurrent with the closing of the exchange offer, the indenture governing the Senior Subordinated Notes was amended to remove or modify many of the restrictive covenants. Those restrictions included (but were not limited to) certain limitations on transactions with affiliates, dividend payments, changes in control, and sales of assets. In addition, the Senior Secured Notes permit the Company to call the senior secured notes, at its option, at declining discounts starting at 15% on December 15, 2003. In March 2003, the Company redeemed outstanding Senior Secured Notes aggregating $5.9 million face value for $5.0 million. The resulting gain of $0.9 million was recorded in other operating income on the Company's Statement of Operations. 11 The Company continues to carry Senior Subordinated Notes due in December 2003 of approximately $21.1 million. The Company does not believe it will generate sufficient cash from operations to pay the principal amount of the Senior Subordinated Notes when due. The Company may seek to secure the necessary funds through the sale of additional equity, through borrowings or both. There is no assurance that the Company will be able to obtain such funds or whether such funds can be obtained on terms acceptable to the Company. If the Company secures additional funds through the issuance of additional equity securities, the Company's existing stockholders will likely experience dilution of their present equity ownership position and voting rights. Depending on the number of shares and the terms and conditions of the issuance, any new equity securities could have rights, preferences, or privileges senior to those of the Company's common stock. If the Company secured funds through additional borrowings, the terms and conditions of such borrowings could be more onerous to the Company than the terms and conditions of the Company's existing senior subordinated notes or other existing borrowings. The Company also believes that even if the principal amount of the Senior Subordinated Notes are paid it will need to increase revenues to generate sufficient cash to pay the increase in interest in its Senior Secured Notes to 18%, effective December 15, 2003. In addition, the Company has retained an investment bank, Brown Gibbons Lang & Company, to assist in finalizing the Company's plans to improve its capital structure with the objective of providing longer term sustainability. (See additional discussion at Note 10 to the financial statements.) Revolving Credit Facility ------------------------- Concurrent with the Exchange Offer, on February 26, 2003, the Company completed a refinancing of its Fleet Credit Agreement and term notes and entered into the new Credit Agreement dated February 26, 2003 with Merrill Lynch ("Merrill Credit Agreement"). The total commitment was reduced from the original $251.7 million ($200 million revolving line of credit and $51.7 million of term notes) to $125 million ($100 million revolving line of credit and $25 million of term notes). The Merrill Credit Agreement expires on February 26, 2007, and the term notes are now due February 26, 2007, with quarterly repayments beginning May 31, 2003. On March 28, 2003, the Company requested the lenders to extend the due date for delivery of certain Deposit Account Control Agreements, as defined by the Merrill Credit Agreement with certain local bank deposit accounts maintained by the Company. The lenders agreed to amend (First Amendment) the Credit Agreement to extend delivery of these agreements until May 31, 2003. As a result of (i) the Company's failure to deliver to the lenders its fiscal 2002 audited financial statements by March 30, 2003 and (ii) as of April 4, 2003, Riverside Group Inc. and J. Steven Wilson ceasing between them to own at least 25% of the Company's outstanding common stock and Imagine Investments, Inc. owning a greater percentage of such shares than Riverside and Mr. Wilson, certain events of default arose under the Merrill Credit Agreement. Such defaults were simultaneously waived by the lenders and the Merrill Credit Agreement was amended (Second Amendment) in certain respects, including the addition of a provision which permitted the Company to make a severance payment to Mr. Wilson and placed a limitation on the Company's ability to repurchase, redeem or retire Senior Subordinated Notes. In connection with such waiver and amendments, the Company paid to the lenders a fee of $312,500. 12 On May 31, 2003 the Merrill Credit Agreement was again amended (Third Amendment) whereby the lenders agreed to (i) to reduce the revolving loan commitment by $15.0 million and (ii) extend the due date to August 31, 2003 for the delivery of Deposit Account Control Agreements with respect to certain deposit accounts maintained by the Company. The Company received a refund of $112,500 of the original closing fees pursuant to this amendment. As of June 28, 2003, the Company was in compliance with its bank covenants with the exception of its minimum EBITDA requirement. On August 15, 2003, the lenders agreed to waive the default of its minimum EBITDA requirement and amend the levels of EBITDA as defined within the Merrill Credit Agreement (Fourth Amendment). In addition, it amended the original credit agreement to include a $1.5 million prepayment of the term loan by September 20, 2003, less any prepayment from the proceeds of the sale of certain real estate. Also, it amended the original credit agreement to state that without the prior written consent of required lenders, in no event will the proceeds of the revolving loans be used to consummate (i) any redemption or purchase of Senior Subordinated Notes due 2003 or (ii) any voluntary redemption or purchase of Senior Secured Notes due 2005. Further, the agreement requires that the Company maintain minimum availability of $15 million for the remainder of the agreement and a 25 basis points increase in interest spreads. In connection with such waiver and amendments, the Company paid to the lenders a fee of $100,000. As of June 28, 2003 there was $64.4 million outstanding under the Merrill Credit Agreement of which $39.8 million was revolving credit and $24.6 million was term notes. The spread on prime rate borrowings under the Merrill Credit Agreement ranges from 1.25% to 2.00% over prime for revolving loans and 2.00% to 2.75% over prime under the term notes. The spread for LIBOR based borrowing ranges from 2.50% to 3.25% over LIBOR for revolving loans and 3.25% to 4.00% over LIBOR for term notes. The spread over the prime or LIBOR rates is determined based upon the Company's Fixed Charge Coverage Ratio, as defined under the Merrill Credit Agreement. However, an event of default could increase each of the Company's prime and LIBOR margins by 25 basis points. The Company's base rate on revolving loans, 6.00% at June 28, 2003 and 5.00% at December 28, 2002, included an interest spread over prime of 1.75% and 0.75%, respectively. The Company's LIBOR borrowing rate on revolving loans, 4.12% at June 28, 2003 and 4.13% at December 28, 2002, included an interest spread over LIBOR of 3.00% and 2.75%, respectively. The Company's weighted average interest rates on revolver loans were 7.23% and 6.45% for the six months ended June 28, 2003 and June 29, 2002, respectively. The Merrill Credit Agreement limits the level of capital expenditures for each annual period, while allowing for reinvestment of proceeds on asset sales. The Company is also subject to certain minimum levels of EBITDA, as defined within the Merrill Credit Agreement. Availability is generally limited to 85% of eligible accounts receivable and 60% of eligible inventory. As of June 28, 2003 unused availability was $27.7 million and, under the Merrill Credit Agreement as amended, minimum availability is required to be $15 million for the remainder of the agreement. Therefore, the Company held $12.7 million of excess availability as of June 28, 2003 after all reserves and minimums were deducted. 13 Under the Merrill Credit Agreement, a commitment fee of .375% to .5% is payable on the unused revolving credit amount. Ranges of fees are determined based upon the aforementioned Fixed Charge Coverage Ratio, as defined under the Merrill Credit Agreement. Aggregate Maturities -------------------- The Senior Subordinated Notes totaling $21.1 million mature on December 15, 2003. The Senior Secured Notes totaling $37.0 million mature on July 29, 2005. The term portion of the revolving credit facility requires quarterly principal payments totaling approximately $0.8 million in fiscal 2003, $2.6 million in fiscal 2003, $3.4 million in fiscal 2005, $3.5 million in fiscal 2006 and $14.3 in fiscal 2007. 5. INCOME TAXES ------------ The Company recorded a $29.6 million charge to establish a valuation allowance for its net deferred tax assets including net operating loss carryforwards during the second quarter of 2003. These conclusions were reached largely due to the uncertainty around the Company's ability to utilize certain operating loss carryforwards based primarily on the substantial doubt about the Company's ability to continue as a going concern. The Company will maintain a full valuation allowance for its net deferred tax assets and net operating loss carryforwards until sufficient positive evidence exists to support reversal of the valuation allowance. Until such time, except for state and local provisions, the Company will have no reported tax provision, net of valuation allowance adjustments. The income tax expense from continuing operations for the three-month period ended June 28, 2003 was $24.5 million, which is comprised of $29.6 million disclosed above offset by the impact of a $5.1 million benefit generated during the second quarter, which was fully provided for. Income tax benefit from continuing operations for the three month period ended June 29, 2002 was $37,000. The Company's effective tax rate from continuing operations for the three-month period ended June 29, 2002 was 7.3% which includes franchise taxes and non-deductible items of $0.1 million. Income tax expense from continuing operations for the six-month period ended June 28, 2003 was $19.7 million, which is comprised of the $29.6 million charge and a benefit of $9.9 million. Income tax benefit from continuing operations was $2.4 million for the same period in the prior year, which included franchise taxes and non-deductible items of $0.1 million. The Company's effective tax rate from continuing operations for the six-month period ended June 29, 2002 was 35.0%. 14 On July 22, 2003, an ownership change occurred as per Internal Revenue Code Section 382. A change in control, for tax purposes, could limit the Company's ability to utilize its net operating loss carry-forwards. 6. COMMITMENTS AND CONTINGENCIES ----------------------------- At June 28, 2003, the Company had accrued approximately $425,000 for remediation of certain environmental and product liability matters. Many of the sales and distribution facilities presently and formerly operated by the Company at one time contained underground petroleum storage tanks. All such tanks known to the Company and located on facilities owned or operated by the Company have been filled or removed in accordance with applicable environmental laws in effect at the time. As a result of reviews made in connection with the sale or possible sale of certain facilities, the Company has found petroleum contamination of soil and ground water on several of these sites and has taken, and expects to take, remedial actions with respect thereto. In addition, it is possible that similar contamination may exist on properties no longer owned or operated by the Company, the remediation of which the Company could, under certain circumstances, be held responsible. Since 1988, the Company has incurred approximately $2.3 million of costs, net of insurance and regulatory recoveries, with respect to the filling or removing of underground storage tanks and related investigatory and remedial actions. Insignificant amounts of contamination have been found on excess properties sold over the past six years. The Company is one of many defendants in two class action suits filed in August of 1996 by approximately 200 claimants for unspecified damages as a result of health problems claimed to have been caused by inhalation of silica dust, a byproduct of concrete and mortar mix, allegedly generated by a cement plant with which the Company has no connection other than as a customer. The Company has entered into a cost-sharing agreement with its insurers, and any liability is not expected to be material. The Company is one of many defendants in approximately 670 actions, each of which seeks unspecified damages, primarily in Michigan state courts against manufacturers and building material retailers by individuals who claim to have suffered injuries from products containing asbestos. The Company is aggressively defending these actions and does not believe that these actions will have a material adverse effect on the Company. Since 1993, the Company has settled 522 similar actions for insignificant amounts, and another 362 of these actions have been dismissed. None of these suits have made it to trial. 15 Losses in excess of the $425,000 reserved as of June 28, 2003 are possible, but a reasonable estimate of these amounts cannot be made. The Company is involved in various other legal proceedings that are incidental to the conduct of its business. Certain of these proceedings involve potential damages for which the Company's insurance coverage may be unavailable. While the Company does not believe that any of these proceedings will have a material adverse effect on the Company's financial position, annual results of operations or liquidity, there can be no such assurance of this result. 7. EARNINGS PER SHARE ------------------ The Company calculates earnings per share in accordance with SFAS 128. In periods where net losses are incurred, dilutive common stock equivalents are not used in the calculation of diluted EPS as they would have an anti-dilutive effect on EPS. For the three and six month periods ended June 29, 2002, common stock equivalents of 170,290 and 115,634 shares, respectively, were included in weighted average shares outstanding. used to calculate earnings per share. For the three and six month periods ended June 28, 2003, common stock equivalents of 1,282 and 388 shares, respectively, were excluded from weighted average shares outstanding as they were anti-dilutive. In addition, options to purchase 378,532 shares of common stock for both the three and six month periods ended June 28, 2003 had an exercise price greater than the average market price , compared to 439,651 shares of common stock for both the three and six month periods ended June 29, 2002, respectively,. 8. RELATED PARTY TRANSACTIONS -------------------------- At March 29, 2003, approximately 34% of the Company's outstanding shares of common stock were owned by Riverside Group, Inc. and approximately 13% was owned by Imagine Investments, Inc. and its parent, Stone Investments, Inc. On April 4, 2003, Imagine Investments, Inc. acquired 2,797,743 common shares of Wickes Inc. previously owned by Riverside Group, Inc. and an option to purchase an additional 53,700 shares. As of this date, Imagine Investments, Inc. and its affiliates beneficially owned approximately 47.3% of the Company's outstanding common stock. At June 29, 2002, the Company held a promissory note from Riverside of $425,000 including accrued interest. As of December 28, 2002 the Company had not received payment for the principal and accrued interest, and therefore provided a reserve for the outstanding balance. For the three and six months ended June 28, 2003, the Company paid approximately $57,000 and $420,000, respectively, compared to approximately $293,000 and $547,000 for the three and six months ended June 29, 2002, respectively, in reimbursements to affiliates of the Company's former Chairman of the Board and President primarily for use of a corporate aircraft as well as office space and office support services. 16 9. STORE CLOSINGS -------------- Pursuant to certain initiatives to improve performance and reduce under-performing assets, the Company has closed or consolidated seven locations during the first six months of 2003. The Company incurred costs of approximately $3.2 million related to severance benefits paid to senior executives and an additional 66 headquarters and 86 field personnel for the six month period ended June 28, 2003. In addition, for the same period, the Company has incurred $1.8 million in property and other carrying costs that primarily include insurance, maintenance, repair and lease commitments. During the first six months of 2002 the Company sold seven locations and consolidated one location. Employee severance costs for 74 employees and property and other carrying costs incurred during the first six months of 2002 were $1.0 million and $0.7 million respectively. The following is a summary of the activity in the reserve balances from December 29, 2001 through June 29, 2002 and from December 28, 2002 through June 28, 2003 (in thousands): Employee Property and Separation Other Carrying Costs Costs Total ----- ----- ----- Accrual balance at December 28, 2002 $385 $15 $400 1st Qtr Store closing and other costs 605 701 1,306 1st Qtr Related payments (843) (671) (1,514) ----- ----- ----- Accrual balance at March 29, 2003 $147 $45 $192 2nd Qtr Store closing and other costs 2,643 1,066 3,709 2nd Qtr Related payments (2,446) (1,039) (3,485) ----- ----- ----- Accrual balance at June 28, 2003 $344 $72 $416 Accrual balance at December 29, 2001 139 286 425 1st Qtr Store closing and other costs 763 199 962 1st Qtr Related payments (827) (363) (1,190) ----- ----- ----- Accrual balance at March 30, 2002 $75 $122 $197 2nd Qtr Store closing and other costs 252 533 785 2nd Qtr Related payments (327) (583) (910) ----- ----- ----- Accrual balance at June 29, 2002 $- $72 $72

The costs incurred to liquidate the inventory has been included in cost of sales on the Company's financial statements. The costs of reserving for bad debt, write-offs and subsequent collections, has been included in provision for doubtful accounts. All other costs are included in store closing costs. 17 10. SUBSEQUENT EVENTS ----------------- Stock Listing ------------- Effective September 23, 2002, the Company's stock was delisted from the NASDAQ SmallCap Market System and is currently listed on the NASDAQ OTC Bulletin Board. Credit Facility Amendments -------------------------- Subsequent to the issuance of the condensed consolidated financial statements as of June 28, 2003, the Company has undergone several amendments to its Merrill Credit Agreement dated February 26, 2003. A summary of those amendments is outlined below. As a result of amendments during the third quarter of fiscal 2003, the spread range on prime rate borrowings under the new agreement temporarily increased to 1.5% to 2.25% over prime for revolving loans and 2.25% to 3.0% over prime under the term notes. These rate ranges are up by 25 basis points from rates negotiated in the original agreement on February 26, 2003. The spread for LIBOR based borrowing increased by the same 25 basis points, now ranging from 2.75% to 3.5% over LIBOR for revolving loans and 3.5% to 4.25% over LIBOR for term notes. These increases were the result of the default caused by the Company's failure to meet required minimum EBITDA levels described in Note 4. On August 27, 2003 the Merrill Credit Agreement was amended (Fifth Amendment) whereby the lenders agreed to (i) remove the Availability Block Adjustment Date and Availability Block Table, resulting in a fixed availability block, (ii) extend the due date to September 30, 2003 for the delivery of Deposit Account Control Agreements with respect to certain deposit accounts maintained by the Company. 18 On September 30, 2003 the Merrill Credit Agreement was amended (Sixth Amendment) whereby the lenders agreed (i) that the Company submitted substantially all (as determined by the Agent) of the Deposit Account Control Agreements and (ii) when the Company made the required $1,500,000 Term Loan Prepayment on September 30, 2003, the net cash proceeds of the sale of certain real estate would then be applied to the Senior Secured Note, as previously defined, with the remaining amounts applied to the Revolving Loan. Exchange Offer -------------- On November 4, 2003 the Company commenced an offer to exchange either (i) cash and 10% Convertible Notes due 2007 or (ii) 10% Convertible Notes due 2007 for all $21,123,000 principal amount of outstanding 11 5/8 % Senior Subordinated Notes due 2003. The Company refers to its existing 11 5/8 % Senior Subordinated Notes due 2003 as the existing notes, and to its 10% Convertible Notes due 2007 as the new notes. The Company also has Senior Secured Notes due 2005, as discussed in Note 4, to the financial statements. If an insufficient number of holders of existing notes participate in the exchange offer, it is likely that the Company will be unable to pay the principal and interest on the existing notes at their maturity. Further, it is possible that even if all the conditions to the exchange are satisfied or waived, the Company may not obtain consent from its lenders to repay any excess amounts outstanding, or the Company may not have sufficient availability under its Merrill Credit Agreement to pay remaining amounts due, if any. In that event, an event of default will have occurred on its obligations under the indenture governing the existing notes, as well as under all of its other indebtedness, including its senior credit facility, its Senior Secured Notes due 2005 and, if the exchange offer is completed, the new notes. Therefore, the principal and accrued interest on the existing notes and other indebtedness, including the senior credit facility, Senior Secured Notes due 2005 and, if the exchange offer is completed, the new notes, may be accelerated and become immediately due and payable. If, as is currently anticipated, the Company is then unable to obtain immediate financing to pay such amounts, the Company may seek to file a voluntary petition, or may have an involuntary petition filed against it by its creditors in a bankruptcy court under the U.S. Bankruptcy Code. 11. RESTATEMENT ----------- Subsequent to the issuance of the Company's condensed consolidated financial statements for the three and six months ended June 28, 2003, the Company determined that certain interest, employee benefits and depreciation expense incurred during the first and second quarters of 2002 were not properly classified. As a result, the Company has restated the condensed consolidated financial statements for the three and six months ended June 29, 2002. 19 A summary of the effects of the restatement is as follows: Three Months Ended Six Months Ended June 29, June 29, June 29, June 29, 2002 2002 2002 2002 ----------- ----------- ----------- ----------- As As As As Reported Restated Reported Restated ----------- ----------- ----------- ----------- Selling, general and administrative expenses 30,765 31,562 58,947 60,356 Depreciation 1,064 1,084 2,283 2,255 Income (loss) from continuing operations before interest and taxes 3,128 2,311 352 (1,031) Interest expense 4,115 2,816 8,491 5,706 Loss from continuing operations before income taxes (987) (505) (8,139) (6,737) Income tax benefit (225) (37) (2,909) (2,360) Loss from continuing operations (762) (468) (5,230) (4,377) Discontinued operations: Income from discontinued operations 3,102 2,808 3,745 2,892 Net income (loss) $ 2,340 $ 2,340 $ (1,485) $ (1,485) =========== =========== =========== =========== Loss from continuing operations per common share-basic and diluted $ (0.09) $ (0.06) $ (0.63) $ (0.53) =========== =========== =========== =========== Income from discontinued operations per common share-basic $ 0.37 $ 0.34 $ 0.45 $ 0.35 =========== =========== =========== =========== Income from discontinued operations per common share-diluted $ 0.37 $ 0.33 $ 0.45 $ 0.34 =========== =========== =========== =========== Net income (loss) per common share-basic $ 0.28 $ 0.28 $ (0.18) $ (0.18) =========== =========== =========== =========== Net income (loss) per common share-diluted $ 0.28 $ 0.28 $ (0.18) $ (0.18) =========== =========== =========== =========== Weighted average common shares-for basic 8,288,761 8,288,761 8,286,837 8,286,837 =========== =========== =========== =========== Weighted average common shares-for diluted 8,459,051 8,459,051 8,402,471 8,402,471 =========== =========== =========== =========== Six Months Ended June 29, June 29, 2002 2002 ----------- ----------- Balance Sheet Data As As (in thousands) Reported Restated ----------- ----------- Deferred tax assets $ 8,457 $ 6,038 Assets of discontinued operations 58,478 60,897 ----------- ----------- Total current assets $ 198,233 $ 198,233 =========== =========== Accrued liabilities $ 12,174 $ 10,304 Liabilities of discontinued operations 23,766 25,636 ----------- ----------- Total current liabilities $ 80,098 $ 80,098 =========== ===========

20 WICKES INC. AND SUBSIDIARIES Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Subsequent to the issuance of the Company's condensed consolidated financial statements for the three and six months ended June 28, 2003, the Company determined that certain interest, employee benefits and depreciation expense incurred during the first and second quarters of 2002 were not properly classified. As a result, the Company has restated the condensed consolidated financial statements for the three and six months ended June 29, 2002. (See Note 11 to the condensed consolidated financial statements). A summary of the effects of the restatement is as follows: Three Months Ended Six Months Ended June 29, June 29, June 29, June 29, 2002 2002 2002 2002 ----------- ----------- ----------- ----------- As As As As Reported Restated Reported Restated ----------- ----------- ----------- ----------- Selling, general and administrative expenses 30,765 31,562 58,947 60,356 Depreciation 1,064 1,084 2,283 2,255 Income (loss) from continuing operations before interest and taxes 3,128 2,311 352 (1,031) Interest expense 4,115 2,816 8,491 5,706 Loss from continuing operations before income taxes (987) (505) (8,139) (6,737) Income tax benefit (225) (37) (2,909) (2,360) Loss from continuing operations (762) (468) (5,230) (4,377) Discontinued operations: Income from discontinued operations 3,102 2,808 3,745 2,892 Net income (loss) $ 2,340 $ 2,340 $ (1,485) $ (1,485) =========== =========== =========== =========== Loss from continuing operations per common share-basic and diluted $ (0.09) $ (0.06) $ (0.63) $ (0.53) =========== =========== =========== =========== Income from discontinued operations per common share-basic $ 0.37 $ 0.34 $ 0.45 $ 0.35 =========== =========== =========== =========== Income from discontinued operations per common share-diluted $ 0.37 $ 0.33 $ 0.45 $ 0.34 =========== =========== =========== =========== Net income (loss) per common share-basic $ 0.28 $ 0.28 $ (0.18) $ (0.18) =========== =========== =========== =========== Net income (loss) per common share-diluted $ 0.28 $ 0.28 $ (0.18) $ (0.18) =========== =========== =========== =========== Weighted average common shares-for basic 8,288,761 8,288,761 8,286,837 8,286,837 =========== =========== =========== =========== Weighted average common shares-for diluted 8,459,051 8,459,051 8,402,471 8,402,471 =========== =========== =========== =========== Six Months Ended June 29, June 29, 2002 2002 ----------- ----------- Balance Sheet Data As As (in thousands) Reported Restated ----------- ----------- Deferred tax assets $ 8,457 $ 6,038 Assets of discontinued operations 58,478 60,897 ----------- ----------- Total current assets $ 198,233 $ 198,233 =========== =========== Accrued liabilities $ 12,174 $ 10,304 Liabilities of discontinued operations 23,766 25,636 ----------- ----------- Total current liabilities $ 80,098 $ 80,098 ========== ==========

The following Management Discussion and Analysis gives effect to this restatement. The following discussion should be read in conjunction with the Condensed Consolidated Financial Statements and Notes thereto contained elsewhere herein and in conjunction with the Annual Consolidated Financial Statements and Notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in the Company's Annual Report on Form 10-K/A for the fiscal year ended December 28, 2002. This Discussion and Analysis contains statements which, to the extent that they are not recitations of historical fact, constitute Forward Looking Statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and are inherently subject to uncertainty. A number of important factors could cause the Company's business and financial results and financial condition to be materially different from those stated in the Forward Looking Statements. 21 Among the factors that could cause actual results to differ materially are the following: effects of seasonality and cyclicality; effects of competition; interest rates and the Company's ability to service and comply with the terms of its debt; lumber prices; the success of the Company's operational initiatives and the outcome of the contingencies discussed in Note 6 to the condensed consolidated financial statements. The Company's consolidated financial statements have been prepared assuming that the Company will continue as a going concern. However, due to the Company's liquidity condition and continuing operating losses, there is substantial doubt about the Company's ability to continue as a going concern. These financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that could result should the Company be unable to continue as a going concern. The Company does not expect to generate sufficient cash from operations to pay the principal amount of the Company's 11 5/8% Senior Subordinated Notes due 2003 when they mature on December 15, 2003, and, therefore, the Company has offered to exchange the Senior Subordinated Notes for either (i) cash and new 10% Convertible Notes due 2007 (the "New Notes") or (ii) New Notes. If an insufficient number of holders of Senior Subordinated Notes participate in the exchange offer, it is likely the Company will not be able to pay the principal amount and the accrued and unpaid interest due on their maturity date. In that event, an event of default will have taken place under the indenture governing the Senior Subordinated Notes, the Company's senior credit facility and the indenture governing the Company's Senior Secured Notes due 2005, allowing the Company's senior lenders to immediately accelerate the maturity of the indebtedness under the Company's senior credit facility and the Company's Senior Secured Notes. If that were to occur, unless the Company were able to obtain additional financing to repay the senior credit facility, the Senior Secured Notes and the outstanding Senior Subordinated Notes (which the Company believes is highly unlikely), the Company may be forced to petition for relief under the U.S. Bankruptcy Code, or the Company's creditors may file an involuntary petition against the Company (see Note 10 to the condensed consolidated financial statements for further discussion). INTRODUCTION Wickes Inc. and its consolidated subsidiaries ("Wickes" or the "Company") is a leading supplier of lumber, building materials and manufactured building components in the United States. The Company sells its products and services primarily to residential and commercial building professionals, repair and remodeling contractors and, to a lesser extent, project do-it-yourself consumers involved in major home improvement projects. At June 28, 2003, the Company operated 52 sales and distribution facilities and 11 component manufacturing facilities in 19 states in the Midwest, Northeast, and South. 23 The Company's mission is to be the premier provider of building materials and services and manufactured building components to the professional segments of the building and construction industry. The Company focuses on the professional builder and contractor market. The Company targets five customer groups: the production or volume builder; the custom builder; the tradesman; the repair and remodeler; and the commercial developer. Its marketing approach encompasses three channels of distribution: large metropolitan markets, smaller rural markets, and Wickes Direct. These channels are supported by the Company's network of building component manufacturing facilities. In large metropolitan markets, the Company serves the national, regional, and large local builder in larger markets with a total solutions approach and specialized services. In smaller rural markets, the Company provides the smaller building professional in less-populous markets with tailored products and services. Wickes Direct provides materials flow and logistics management services to commercial customers. The Company also serves building professionals through its network of 11 component manufacturing facilities that produce value-added, wood framed wall panels, roof and floor truss systems, and pre-hung interior and exterior doors. RESULTS OF OPERATIONS In fiscal 2002, the Company sold 31 distribution centers and 4 component plants to Lanoga Corporation (the "Lanoga Sale"). The operations included in the transaction were treated as discontinued operations in accordance with Statement of Financial Accounting Standards No. 144 "Accounting for the Impairment or Disposal of Long-lived Assets." The results of these operations have been reclassified as discontinued operations for the three and six-month periods ended June 28, 2002. The following table sets forth, for the periods indicated, the percentage relationship to net sales of certain expense and income items. Certain reclassifications have been made to prior year amounts to conform to the current presentation. All significant intercompany balances and transactions have been eliminated. The table below, and the subsequent discussion of the results of operations, has been adjusted to exclude those operations reclassified as discontinued operations that were part of the Lanoga Sale. (See additional discussion in Note 3 to the condensed consolidated financial statements.) Three Months Ended Six Months Ended ------------------- ---------------- June 28, June 29, June 28, June 29, 2003 2002 2003 2002 ---- ---- ---- ---- Net sales 100.0% 100.0% 100.0% 100.0% Gross profit 20.1% 21.4% 20.2% 20.9% Selling, general and administrative expense 23.5% 19.7% 25.5% 20.4% Depreciation 0.8% 0.7% 0.8% 0.8% Provision for doubtful accounts 0.2% 0.2% 0.2% 0.3% Store closing costs 2.9% 0.5% 2.2% 0.6% Other operating income (0.1)% (1.1)% (0.6)% (0.7)% (Loss) income from operations before interest and taxes (7.2)% 1.4% (8.0)% (0.3)%

24 The Company's results of operations are historically affected by, among other factors, interest rates, lumber prices, housing starts and weather conditions. In general, this year's weather conditions were comparable with last year with the exception of late season snow storms this year which the Company believes postponed sales activity in the first quarter and severely damaged one of the Company's component facilities. The Company's weighted average rate of interest on revolver loans increased to 7.23% during the first six months of 2003 compared to 6.45% for the same period last year. The first six months results were negatively affected by lower commodity lumber prices, down 3.1% from last year. Housing starts nationally were up 2.2% in the first half of 2003, however in the Company's primary markets, the Northeast, Midwest, and South, starts were down 6.2%, up 0.4% and down 1.3%, from housing starts in the first half of 2002, respectively. Losses from continuing operations for the six months ended June 28, 2003 and June 29, 2002 were $45.1 million and $4.4 million, respectively. Three Months Ended June 28, 2003 Compared with the Three Months Ended June 29, 2002 The following discussion is based on the results of continuing operations of the Company. The Lanoga Sale, which is treated as discontinued operations, has been excluded from prior year's results. (See Note 3 to the condensed consolidated financial statements.) Net Sales --------- Net sales for the second quarter of 2003 decreased 20.5%, to $127.6 million compared to $160.5 million for the second quarter of 2002. The sales decrease primarily was attributable to a $21.9 million decline in sales from closed locations (excluding discontinued operations) and a 9.0% decline in same store sales. Total sales to building professionals represented 93.5% of total sales in the second quarter of 2003, compared with 93.3% in 2002. Housing starts in the Company's primary markets, the Northeast, Midwest, and South, starts were down 6.5%, up 4.6% and down 2.8%, from housing starts in the second quarter of 2002, respectively. The Company believes that sales decreases for the three months ended June 28, 2003 primarily resulted from a decline in the number of locations, uncertain economic conditions and lumber deflation. The Company estimates that the effect of lumber deflation for the second quarter of 2003 decreased total sales by approximately $2.1 million compared with the same period last year. Lumber and building materials increased to 85.9% of total sales in the second quarter of 2003 compared with 84.2% in 2002. 25 Products that exhibited the greatest change in sales dollars for the quarter ended June 28, 2003 versus the comparable prior year period were: lumber and plywood (down 25.2%), doors and windows (down 13.5%), trusses and engineered wood products (down 13.4%), roofing (down 22.3%) and mouldings (down 23.7%). Gross Profit ------------ Gross profit decreased to $25.6 million in the second quarter of 2003 from $34.3 million in the second quarter of 2002, an $8.6 million or 25.2% decrease. Gross profit as a percentage of sales declined to 20.1% in the second quarter compared to a gross profit percentage of 21.4% in the second quarter of 2002. The Company believes that the decrease in gross profit dollars resulted primarily from the reduction in sales as discussed above. Of the Company's major product lines, building materials accounted for approximately 34.8% of total Company sales, up from 32.4% last year, however, gross margin percentage for these products decreased to 19.6% from 21.9% last year. Selling, General and Administrative Expense ("SG&A") ---------------------------------------------------- SG&A expense decreased approximately $1.6 million to $30.0 million in the second quarter of 2003 from $31.6 million in the second quarter of 2002. As a percentage of sales, SG&A increased to 23.5% of net sales in the second quarter of 2003 compared with 19.7% of net sales in the second quarter of 2002. The increase as a percentage of sales primarily is due to the decrease in sales as well as overhead costs, which remained high until reductions were completed late in the second quarter to re-align overhead with the reduction in locations. Reductions in labor costs and other overhead costs were partially offset by the Company's move from co-operative marketing and cost recovery programs to purchase based rebate programs in 2003, professional fees due to the company's exchange offer, and an accrual for certain anticipated litigation costs. As a percentage of sales, salaries, taxes and benefits increased by 140 basis points, elimination of a cost recovery rebate program resulted in an increase of 80 basis points and office and professional fees increased 120 basis points. Depreciation ------------ Depreciation decreased to $1.0 million for the second quarter of 2003 compared to $1.1 million for the same period in 2002. Provision for Doubtful Accounts ------------------------------- The provision for doubtful accounts was basically unchanged at approximately $0.3 million in the second quarter of 2003. The Company continues to strive to improve its collection efforts and reduce credit exposure and bad debts. 26 Store Closing Costs ------------------- Pursuant to certain initiatives to improve performance and reduce under-performing assets, the Company consolidated seven sales and distribution centers during the first quarter of 2003. There were no closings in the second quarter of 2003, however the Company did incur severance costs of approximately $2.6 million related to severance benefits paid to senior executives and an additional 57 headquarters and 43 field personnel in a plan to re-align overhead costs with the number of remaining locations. In addition, the Company incurred approximately $1.1 million in property and other carrying costs that primarily include insurance, maintenance / repair and lease commitments. During the second quarter of 2002, the Company sold two distributions centers and incurred $0.3 million and $0.5 million related to severing ten employees and property and other carrying costs, respectively. The following is a summary of the activity in the reserve balances from March 29, 2003 through June 28, 2003 and March 30, 2002 through June 29, 2002 (in thousands): Employee Property and Separation Other Carrying Costs Costs Total ----- ----- ----- Accrual balance at March 29, 2003 $147 $45 $192 2nd Qtr Store closing and other costs 2,643 1,066 3,709 2nd Qtr Related payments (2,446) (1,039) (3,485) ----- ----- ----- Accrual balance at June 28, 2003 $344 $72 $416 Accrual balance at March 30, 2002 $75 $122 $197 2nd Qtr Store closing and other costs 252 533 785 2nd Qtr Related payments (327) (583) (910) ----- ----- ----- Accrual balance at June 29, 2002 $0 $72 $72

Other Operating Income ---------------------- Other operating income for the second quarter of 2003 was income of $0.1 million compared with income of $1.8 million for the second quarter 2002. Other operating income primarily includes gains on early retirement of debt, the sales or disposals of property, plant and equipment, service charges assessed customers on past due accounts receivables, and casualty gains/losses. The decrease in 2003 primarily is due to a $0.2 million write-down of certain assets to their net realizable value, compared to a gain in 2002 from the sale of real estate that resulted in a gain of approximately $1.3 million. Interest Expense ---------------- In the second quarter of 2003, interest expense increased to $3.7 million from $2.8 million during the second quarter of 2002. The Company's weighted average rate of interest on all debt increased to 10.3% during the second quarter of 2003 compared to 7.7% for the same period last year. The weighted average rate of interest was affected by an increase in the effective interest rate resulting from the bond refinancing in the first quarter. See additional discussion at Note 4 to the consolidated financial statements and in Liquidity and Capital Resources included in Managements Discussion and Analysis. The Company's average debt levels decreased by 39.6% from second quarter 2002 to second quarter 2003. This decrease in outstanding debt primarily is due to the use of proceeds from the Lanoga Sale to pay down the revolving credit facility. 27 Income Taxes ------------ The Company recorded a $29.6 million charge to establish a valuation allowance for its net deferred tax assets including net operating loss carryforwards during the second quarter of 2003. These conclusions were reached largely due to the uncertainty around the Company's ability to utilize certain operating loss carryforwards based primarily on the substantial doubt about the Company's ability to continue as a going concern. The Company will maintain a full valuation allowance for its net deferred tax assets and net operating loss carryforwards until sufficient positive evidence exists to support reversal of the valuation allowance. Until such time, except for state and local provisions, the Company will have no reported tax provision, net of valuation allowance adjustments. The income tax expense from continuing operations for the three-month period ended June 28, 2003 was $24.5 million, which differs from the $29.6 million disclosed above due to the impact of a $5.1 million benefit generated during the second quarter, which was fully provided for. Income tax expense from continuing operations for the three month period ended June 29, 2002 was $37,000. The Company's effective tax rate from continuing operations for the three-month period ended June 29, 2002 was 7.3% which includes franchise taxes and non-deductible items of $0.1 million. Six Months Ended June 28, 2003 Compared with the Six Months Ended June 29, 2002 The following discussion is based on the results of continuing operations of the Company. The Lanoga Sale, which is treated as discontinued operations, has been excluded from prior year's results. (See Note 3 to the condensed consolidated financial statements.) 28 Net Sales --------- Net sales for the first six months of 2003 decreased $67.3 million, or 22.7%, to $228.7 million from $295.9 million in the first six months of 2002. The sales decrease primarily was attributable to a $43.3 million decline in sales from closed locations (excluding discontinued operations) and an 12.3% decline in same store sales. Total sales to building professionals represented 93.9% of total sales, compared to 93.6% for the same quarter last year. Housing starts in the Company's primary markets, the Northeast, Midwest, and South, starts were down 6.2%, up 0.4% and down 1.3%, from housing starts in the first half of 2002, respectively. The Company believes that sales decreases for the six months ended June 28, 2003 primarily resulted from a decline in the number of locations, late season snow storms in the first quarter, uncertain economic conditions, internal reorganizations and lumber deflation. The Company estimates that the effect of lumber deflation for the first six months of 2003 decreased total sales by approximately $4.8 million compared with the same period last year. Lumber and building materials increased to 85.8% of total sales in the first six months of 2003 compared with 84.0% for the same period in 2002. Products that exhibited the greatest change in sales dollars for the six months ended June 28, 2003 versus the comparable prior year period were: lumber and plywood (down 28.0%), doors and windows (down 15.7%), trusses and engineered wood products (down 13.8%) and roofing (down 26.4%). Gross Profit ------------ Gross profit decreased $15.6 million to $46.2 million or 20.2% of net sales for 2003 compared with $61.9 million or 20.9% of net sales for 2002. The Company believes that deflation in lumber and drywall prices decreased the dollar value of gross profit by approximately $1.0 million for the six months ended June 28, 2003. During the first half of 2003, the Company closed or consolidated seven facilities and recorded a charge to gross profit of $0.5 million for inventory liquidation costs. Of the Company's major product lines, building materials accounted for approximately 36.2% of total Company sales, up from 33.5% last year, however, gross margin percentage for these products decreased to 20.4% from 21.7% last year. Selling, General, and Administrative Expense -------------------------------------------- SG&A expense decreased $2.0 million or 3.3% to $58.4 million in 2003 compared with $60.4 million in 2002. As a percentage of net sales, SG&A increased to 25.5% in the first six months of 2003, compared with 20.4% of net sales in the first six months of 2002. The increase as a percentage of sales primarily is due to the decrease in sales as well as overhead costs which remained high until reductions were completed late in the second quarter to re-align overhead with the reduction in locations. In addition, the Company moved from co-operative marketing and cost recovery programs to purchase based rebate programs in 2003 and has accrued for certain anticipated litigation costs. As a percentage of sales, salaries, taxes and benefits increased by 226 basis points, change to purchase base rebate program increased SG&A expense by 105 basis points and office and professional fees increased 117 basis points. 29 Depreciation ------------ Depreciation costs decreased approximately $0.4 million to $1.9 million in the first six months of 2003, compared with $2.3 million in the first six months of 2002. As a percentage of sales, depreciation costs compared to last year were flat. Provision for Doubtful Accounts ------------------------------- Provision for doubtful accounts decreased to approximately $0.4 million or 0.2% of sales in the first six months of 2003 from approximately $0.8 million or 0.3% of sales for the first six months of 2002. Approximately $64,000 of provision for doubtful accounts related to closed locations in this period, compared to $168,000 for the same period last year. Store Closing Costs and Other Charges ------------------------------------- Pursuant to certain initiatives to improve performance and reduce under-performing assets, the Company has closed or consolidated seven locations during the first six months of 2003. The Company incurred costs of approximately $3.2 million related to severance benefits paid to senior executives and an additional 66 headquarters and 86 field personnel for the six month period ended June 28, 2003. In addition, for the same period, the Company has incurred $1.8 million in property and other carrying costs that primarily include insurance, maintenance, repair and lease commitments. During the first six months of 2002 the Company sold seven locations and consolidated one location. Employee severance costs for 74 employees and property and other carrying costs incurred during the first six months of 2002 were $1.0 million and $0.7 million respectively. The following is a summary of the activity in the reserve balances from December 29, 2001 through June 29, 2002 and from December 28, 2002 through June 28, 2003 (in thousands): Employee Property and Separation Other Carrying Costs Costs Total ----- ----- ----- Accrual balance at December 28, 2002 $385 $15 $400 1st Qtr Store closing and other costs 605 701 1,306 1st Qtr Related payments (843) (671) (1,514) ----- ----- ----- Accrual balance at March 29, 2003 $147 $45 $192 2nd Qtr Store closing and other costs 2,643 1,066 3,709 2nd Qtr Related payments (2,446) (1,039) (3,485) ----- ----- ----- Accrual balance at June 28, 2003 $344 $72 $416 Accrual balance at December 29, 2001 139 286 425 1st Qtr Store closing and other costs 763 199 962 1st Qtr Related payments (827) (363) (1,190) ----- ----- ----- Accrual balance at March 30, 2002 $75 $122 $197 2nd Qtr Store closing and other costs 252 533 785 2nd Qtr Related payments (327) (583) (910) ----- ----- ----- Accrual balance at June 29, 2002 $- $72 $72

30 Other Operating Income ---------------------- Other operating income decreased to approximately $1.3 million in the first six months of 2003, compared with $2.2 million in the first six months of 2002. Other operating income primarily includes the gain on the early retirement of debt, sale or disposal of property, plant and equipment, service charges assessed customers on past due accounts receivable, and casualty losses. During the first six months of 2002, the Company sold seven facilities for a net gain of $1.3 million, while in the first six months of 2003 the Company recorded a $0.9 million gain on the early retirement of debt partially offset by write-down of certain assets to their net realizable value. Interest Expense ---------------- Interest expense increased to $7.1 million in the first six months of 2003 from $5.7 million in the first six months of 2002. Interest expense in 2003 includes a charge for the write-off of a portion of debt issue costs related to the Fleet Credit Agreement of $0.5 million. The Company's weighted-average interest rate on all outstanding borrowings increased to 10.7% during this period, compared to 8.2% for the comparable period last year. The weighted average interest rate was affected by an increase in the effective interest rate resulting from the bond refinancing in the first quarter. See additional discussion at Note 4 to the condensed consolidated financial statements and in Liquidity and Capital Resources included in Managements Discussion and Analysis. The Company's average debt levels decreased by 43.5% from first half of 2002 to first half 2003. This decrease in outstanding debt primarily is due to the use of proceeds from the Lanoga Sale to pay down the revolving credit facility. Income Taxes ------------ The Company recorded a $29.6 million charge to establish a valuation allowance for its net deferred tax assets including net operating loss carryforwards during the second quarter of 2003. These conclusions were reached largely due to the uncertainty around the Company's ability to utilize certain operating loss carryforwards based primarily on the substantial doubt about the Company's ability to continue as a going concern. The Company will maintain a full valuation allowance for its net deferred tax assets and net operating loss carryforwards until sufficient positive evidence exists to support reversal of the valuation allowance. Until such time, except for state and local provisions, the Company will have no reported tax provision, net of valuation allowance adjustments. The income tax expense from continuing operations for the six-month period ended June 28, 2003 was $19.7 million, which differs from the $29.6 million disclosed above due to the impact of a $9.9 million benefit generated during the six month period, which was fully provided for. Income tax expense from continuing operations for the six-month period ended June 29, 2002 was $2.4 million which included franchise taxes and non-deductible items of $0.1 million. The Company's effective tax rate from continuing operations for the six-month period ended June 29, 2002 was 35.0%. 31 This assessment constitutes Forward-Looking Information made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and is inherently subject to uncertainty and dependent upon the Company's future profitability, which in turn depends upon a number of important risk factors including, but not limited to, the effectiveness of the Company's operational efforts, the sale of certain assets, cyclicality and seasonality of the Company's business, the effects of the Company's substantial leverage, and competition. LIQUIDITY AND CAPITAL RESOURCES The Company's consolidated financial statements have been prepared assuming that the Company will continue as a going concern. However, due to the Company's liquidity condition and continuing operating losses, there is substantial doubt about the Company's ability to continue as a goign concern. These financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that could result should the Company be unable to continue as a going ceoncern. The Company does not expect to generate sufficient cash from operations to pay the principal amount of the Company's 11 5/8% Senior Subordinated Notes due 2003 when they mature on December 15, 2003, and, therefore, the Company has offered to exchange the Senior Subordinated Notes for either (i) cash and new 10% Convertible Notes due 2007 (the "New Notes") or (ii) New Notes. If an insufficient number of holders of Senior Subordinated Notes participate in the exchange offer, it is likely the Company will not be able to pay the principal amount and the accrued and unpaid interest due on their maturity date. In that event, an event of default will have taken place under the indenture, the Company's senior credit facility and the indenture governing the Company's Senior Secured Notes due 2005, allowing the Company's senior lenders to immediately accelerate the maturity of the indebtedness under the Company's senior credit facility and the Company's Senior Secured Notes . If that were to occur, unless the Company were able to obtain additional financing to repay the senior credit facility, the Senior Secured Notes and the outstanding Senior Subordinated Notes (which the Company believes is highly unlikely), the Company may be forced to petition for relief under the U.S. Bankruptcy Code, or the Company's creditors may file an involuntary petition against the Company (see Note 11 for further discussion). The Company's principal sources of working capital and liquidity are income from operations and borrowings under its credit facility. The Company's assessment of its future funds availability constitutes Forward-Looking Information made pursuant to the Private Securities Litigation Reform Act of 1995 and is inherently subject to uncertainty resulting from, among other things, the factors discussed in Item 2: Management's Discussion and Analysis. The Company's primary need for capital resources is to finance inventory, accounts receivable, improvements to plant property and equipment, insurance reserves and debt service. During the first six months of 2003, net cash used in operating activities was $32.9 million compared with net cash provided by operating activities of $6.7 for the first six months of 2002. The increase in cash used in operating activities primarily is due to net losses for the period and increases in inventory and accounts receivable from December 28, 2002 to June 28, 2003. The Company's accounts receivable from continuing operations at June 28, 2003 increased $8.6 million. This increase primarily is the result of the seasonal increase in sales. The Company's inventory balance at June 28, 2003 increased $2.7 million or 5.5% when compared to the balance at December 28, 2002. This increase primarily is also the result of the seasonal increase in sales. Accounts payable and accrued liabilities at June 28, 2003 increased approximately $2.4 million from December 28, 2002. The Company's capital expenditures consist primarily of the construction of product storage facilities, the remodeling and reformatting of sales and distribution facilities and component manufacturing facilities, and the purchase of vehicles, equipment and management information systems for both existing and new operations. The Company also may make expenditures to establish or acquire operations to expand or complement its existing operations, especially in its major markets. In the first six months of 2003, the Company spent approximately $2.0 million on capital expenditures, compared to $0.5 million for the same period in 2002. Under the Merrill Credit Agreement, capital expenditures during 2003 are currently limited to $6.0 million. The Company expects to fund capital expenditures through borrowings and its internally generated cash flow. 32 At June 28, 2003 the Company operated 52 sales and distribution centers and 11 component manufacturing facilities compared with 91 sales and distribution facilities and 24 component manufacturing facilities at June 29, 2002. The reduction in facilities is due to the Lanoga Sale as well as other facility sales and consolidations that took place during this period. At June 28, 2003, there were no material commitments to third parties for future capital expenditures. The Company maintained excess availability under the Merrill Credit Agreement throughout the first six months of 2003. The Company's receivables and inventory typically increase in the second and third quarters of the year due to higher sales in the peak building season. In these same periods, the Company typically reaches its peak utilization of its revolving credit agreement because of the increased inventory and receivables needed for the peak building season. At June 28, 2003, the Company had outstanding borrowings under the Merrill Credit Agreement of $64.4 million, the minimum availability requirement was $15.0 million and the unused availability was $27.7 million. Therefore, as of June 28, 2003 after all reserves and minimums, the Company had $12.7 million of excess availability. Senior Subordinated Debt ------------------------ On February 26, 2003, the Company completed its offer to exchange its Senior Secured Notes due 2005 for any and all of its outstanding 11 5/8% Senior Subordinated Notes due 2003. The Company accepted for the exchange all $42.8 million of Senior Subordinated Notes validly tendered in exchange for an equal principal amount of Senior Secured Notes. The tendered notes represented approximately 67% of the Senior Subordinated Notes outstanding as of February 26, 2003. The Senior Secured Notes, which bear interest at 11 5/8% per annum from the date of issuance through December 15, 2003 and at 18% per annum thereafter, are secured by subordinated liens on the Company's owned real estate and equipment. These liens are junior to the liens securing amounts payable under the Company's senior credit facility. Concurrent with the closing of the exchange offer, the indenture governing the outstanding Senior Subordinated Notes was amended to remove or modify many of the restrictive covenants. Those restrictions included (but were not limited to) certain limitations on transactions with affiliates, dividend payments, changes in control, and sales of assets. In addition, the Senior Secured Notes permit the Company to call the senior secured notes, at its option, at declining discounts starting at 15% on December 15, 2003. 33 In March 2003, the Company redeemed outstanding Senior Secured Notes aggregating $5.9 million face value for $5.0 million. The resulting gain of $0.9 million was recorded in other operating income on the Company's Statement of Operations. The Company continues to carry Senior Subordinated Notes due in December 2003 of approximately $21.1 million. The Company does not believe it will generate sufficient cash from operations to pay the principal amount of the Senior Subordinated Notes when due. The Company may seek to secure the necessary funds through the sale of additional equity, through borrowings or both. There is no assurance that the Company will be able to obtain such funds or whether such funds can be obtained on terms acceptable to the Company. If the Company secures additional funds through the issuance of additional equity securities, the Company's existing stockholders will likely experience dilution of their present equity ownership position and voting rights. Depending on the number of shares and the terms and conditions of the issuance, any new equity securities could have rights, preferences, or privileges senior to those of the Company's common stock. If the Company secured funds through additional borrowings, the terms and conditions of such borrowings could be more onerous to the Company than the terms and conditions of the Company's existing senior subordinated notes or other existing borrowings. The Company also believes that even if the principal amount of the Senior Subordinated Notes are paid it will need to increase revenues to generate sufficient cash to pay the increase in interest in its Senior Secured Notes to 18%, effective December 15, 2003. In addition, the Company has retained an investment bank, Brown Gibbons Lang & Company, to assist in finalizing the Company's plans to improve its capital structure with the objective of providing longer term sustainability. (See additional discussion at Note 10 to the financial statements). Revolving Credit Facility ------------------------- Concurrent with the Exchange Offer, on February 26, 2003, the Company completed a refinancing of its Fleet Credit Agreement and term notes and entered into the new Credit Agreement dated February 26, 2003 with Merrill Lynch ("Merrill Credit Agreement"). The total commitment was reduced from the original $251.7 million ($200 million revolving line of credit and $51.7 million of term notes) to $125 million ($100 million revolving line of credit and $25 million of term notes). The Merrill Credit Agreement expires on February 26, 2007, and the term notes are now due February 26, 2007, with quarterly repayments beginning May 31, 2003. On March 28, 2003, the Company requested the lenders to extend the due date for delivery of certain Deposit Account Control Agreements, as defined by the Merrill Credit Agreement with certain local bank deposit accounts maintained by the Company. The lenders agreed to amend (First Amendment) the Merrill Credit Agreement to extend delivery of these agreements until May 31, 2003. 34 As a result of (i) the Company's failure to deliver to the lenders its fiscal 2002 audited financial statements by March 30, 2003 and (ii) as of April 4, 2003, Riverside Group Inc. and J. Steven Wilson ceasing between them to own at least 25% of the Company's outstanding common stock and Imagine Investments, Inc. owning a greater percentage of such shares than Riverside and Mr. Wilson, certain events of default arose under the Merrill Credit Agreement. Such defaults were simultaneously waived by the lenders and the Merrill Credit Agreement was amended (Second Amendment) in certain respects, including the addition of a provision which permitted the Company to make a severance payment to Mr. Wilson and placed a limitation on the Company's ability to repurchase, redeem or retire Senior Subordinated Notes. In connection with such waiver and amendments, the Company paid to the lenders a fee of $312,500. On May 31, 2003 the Merrill Credit Agreement was again amended (Third Amendment) whereby the lenders agreed to (i) to reduce the revolving loan commitment by $15.0 million and (ii) extend the due date to August 31, 2003 for the delivery of Deposit Account Control Agreements with respect to certain deposit accounts maintained by the Company. The Company received a refund of $112,500 of the original closing fees pursuant to this amendment. As of June 28, 2003, the Company was in compliance with its bank covenants with the exception of its minimum EBITDA requirement. On August 15, 2003, the lenders agreed to waive the default of its minimum EBITDA requirement and amend the levels of EBITDA as defined within the Merrill Credit Agreement (Fourth Amendment). In addition, it amended the original credit agreement to include a 1.5 million prepayment of term loan by September 20, 2003, less any prepayment from the proceeds of the sale of certain real estate. Also, it amended the original credit agreement to state that without the prior written consent of required lenders, in no event will the proceeds of the revolving loans be used to consummate (i) any redemption or purchase of Senior Subordinated Notes due 2003 or (ii) any voluntary redemption or purchase of Senior Secured Notes due 2005. Further, the agreement requires that the Company maintain minimum availability of $15 million for the remainder of the agreement and a 25 basis points increase in interest spreads. In connection with such waiver and amendments, the Company paid to the lenders a fee of $100,000. As of June 28, 2003 there was $64.4 million outstanding under the Merrill Credit Agreement of which $39.8 million was revolving credit and $24.6 million was term notes. The spread on prime rate borrowings under the Merrill Credit Agreement ranges from 1.25% to 2.00% over prime for revolving loans and 2.00% to 2.75% over prime under the term notes. The spread for LIBOR based borrowing ranges from 2.50% to 3.25% over LIBOR for revolving loans and 3.25% to 4.00% over LIBOR for term notes. The spread over the prime or LIBOR rates is determined based upon the Company's Fixed Charge Coverage Ratio, as defined under the Merrill Credit Agreement. However, an event of default could increase each of the Company's prime and LIBOR margins by 25 basis points. The Company's base rate on revolving loans, 6.00% at June 28, 2003 and 5.00% at December 28, 2002, included an interest spread over prime of 1.75% and 0.75%, respectively. The Company's LIBOR borrowing rate on revolving loans, 4.12% at June 28, 2003 and 4.13% at December 28, 2002, included an interest spread over LIBOR of 3.00% and 2.75%, respectively. The Company's weighted average interest rates on revolver loans were 7.23% and 6.45% for the six months ended June 28, 2003 and June 29, 2002, respectively. 35 The Merrill Credit Agreement limits the level of capital expenditures for each annual period, while allowing for reinvestment of proceeds on asset sales. The Company is also subject to certain minimum levels of EBITDA, as defined within the Merrill Credit Agreement. Availability is generally limited to 85% of eligible accounts receivable and 60% of eligible inventory. As of June 28, 2003 unused availability was $27.7 million and, under the Merrill Agreement as amended, minimum availability is required to be $15 million for the remainder of the agreement. Therefore, the Company held $12.7 million of excess availability as of June 28, 2003 after all reserves and minimums were deducted. Under the Merrill Credit Agreement, a commitment fee of .375% to .5% is payable on the unused revolving credit amount. Ranges of fees are determined based upon the aforementioned Fixed Charge Coverage Ratio, as defined under the Credit Agreement. Net Operating Loss Carryforwards -------------------------------- Though fully provided for, the Company has net operating loss carryforwards available to offset future taxable income of approximately $22.4 million as of December 28, 2002 expiring in the years 2011 through 2021 (see discussion in Item 2 Management's Discussion and Analysis). On July 22, 2003, as a result of Bradco Supply and its affiliates increasing their common stock holdings in the Company above 15% of total shares outstanding, an ownership change occurred as per Internal Revenue Code Section 382. A change in control of the Company, for tax purposes, may limit the Company's ability to utilize these carryforwards. Recent Developments ------------------- Stock Listing ------------- Effective September 23, 2002, the Company's stock was delisted from the NASDAQ SmallCap Market System and is currently listed on the NASDAQ OTC Bulletin Board. Credit Facility Amendments -------------------------- Subsequent to the issuance of the condensed consolidated financial statements as of June 28, 2003, the Company has undergone several amendments to its Merrill Credit Agreement dated February 26, 2003. A summary of those amendments is outlined below. As a result of amendments during the third quarter of fiscal 2003, the spread range on prime rate borrowings under the new agreement temporarily increased to 1.5% to 2.25% over prime for revolving loans and 2.25% to 3.0% over prime under the term notes. These rate ranges are up by 25 basis points from rates negotiated in the original agreement on February 26, 2003. The spread for LIBOR based borrowing increased by the same 25 basis points, now ranging from 2.75% to 3.5% over LIBOR for revolving loans and 3.5% to 4.25% over LIBOR for term notes. These increases were the result of the default caused by the Company's failure to meet required minimum EBITDA levels described in Note 4. 36 On August 27, 2003 the Merrill Credit Agreement was amended (Fifth Amendment) whereby the lenders agreed to (i) remove the Availability Block Adjustment Date and Availability Block Table, resulting in a fixed availability block, (ii) extend the due date to September 30, 2003 for the delivery of Deposit Account Control Agreements with respect to certain deposit accounts maintained by the Company. As of September 27, 2003, the Company met the minimum EBITDA levels and the interest rate ranges from the original agreement entered into on February 26, 2003 have been restored, effective September 28, 2003. However, a future event of default could increase each of the Company's prime and LIBOR margins by 25 basis points The Company's base rate on revolving loans, 6.00% at September 27, 2003 and 5.50% at September 28, 2002, included an interest spread over prime of 2.00% and 0.75%, respectively. The Company's LIBOR borrowing rate on revolving loans, 4.37% at September 27, 2003 and 4.57% at September 28, 2002, included an interest spread over LIBOR of 3.25% and 2.75%, respectively. As of September 27, 2003 there was $60.7 million outstanding under the Merrill Credit Agreement of which $36.7 million was revolving credit and $23.9 million was term notes. The Company's unused availability was $27.1 million and, under the Merrill Agreement as amended, minimum availability is required to be $15.0 million for the remainder of the agreement. Therefore, the Company held $12.1 million of excess availability as of September 27, 2003 after all reserves and minimums were deducted. On September 30, 2003 the Merrill Credit Agreement was amended (Sixth Amendment) whereby the lenders agreed (i) that the Company submitted substantially all (as determined by the Agent) of the Deposit Account Control Agreements and (ii) when the Company made the required $1,500,000 Term Loan Prepayment on September 30, 2003, the net cash proceeds of the sale of certain real estate would then be applied to the Senior Secured Note, as previously defined, with the remaining amounts applied to the Revolving Loan. Exchange Offer -------------- On November 4, 2003 the Company commenced an offer to exchange either (i) cash and 10% Convertible Notes due 2007 or (ii) 10% Convertible Notes due 2007 for all $21,123,000 principal amount of outstanding 11 5/8 % Senior Subordinated Notes due 2003. The Company refers to its existing 11 5/8 % Senior Subordinated Notes due 2003 as the existing notes, and to its 10% Convertible Notes due 2007 as the new notes. The Company also has Senior Secured Notes due 2005, as discussed in Note 10, to the financial statements. 37 If an insufficient number of holders of existing notes participate in the exchange offer, it is likely that the Company will be unable to pay the principal and interest on the existing notes at their maturity. Further, it is possible that even if all the conditions to the exchange are satisfied or waived, the Company may not obtain consent from its lenders to repay any excess amounts outstanding, or the Company may not have sufficient availability under its Credit Agreement to pay remaining amounts due, if any. In that event, an event of default will have occurred on its obligations under the indenture governing the existing notes, as well as under all of its other indebtedness, including its senior credit facility, its Senior Secured Notes due 2005 and, if the exchange offer is completed, the new notes. Therefore, the principal and accrued interest on the existing notes and other indebtedness, including the senior credit facility, Senior Secured Notes due 2005 and, if the exchange offer is completed, the new notes, may be accelerated and become immediately due and payable. If, as is currently anticipated, the Company is then unable to obtain immediate financing to pay such amounts, the Company may seek to file a voluntary petition, or may have an involuntary petition filed against it by its creditors in a bankruptcy court under the U.S. Bankruptcy Code. WICKES INC. AND SUBSIDIARIES Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK For information of the Company's Quantitative and Qualitative Disclosures About Market Risk, please see the Company's Annual Report on Form 10-K/A for the fiscal year ended December 28, 2002. There have been no material changes in the Company's quantitative or qualitative exposure to market risk since the end of fiscal 2002. Item 4. CONTROLS AND PROCEDURES The Company has performed an evaluation under the supervision and with the participation of management, including the Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), of the effectiveness of the design and operation of the disclosure controls and procedures. Based on that evaluation, the CEO and CFO concluded that the disclosure controls and procedures were effective as of June 28, 2003. There have been no significant changes in the internal controls or other factors that could significantly affect internal controls subsequent to June 28, 2003, except as follows: 38 As more fully described in Note 11 to the consolidated financial statements, subsequent to the issuance of its financial statements for the year ended December 28, 2002, the Company determined that certain interest, employee benefits, depreciation, and manufacturing related expenses related to a discontinued operation incurred during fiscal years 2002, 2001, and 2000 were not properly classified. It should be noted that these misclassifications relate to a one-time, non-recurring transaction. The Company recently implemented additional internal controls and procedures designed to better monitor unique transactions on an as needed basis and the Company is considering the establishment of a disclosure committee to further improve its internal control processes and procedures around financial reporting and public disclosures. 39 PART II OTHER INFORMATION Item 1. Legal Proceedings ----------------- Item 2. Changes in Securities and Use of Proceeds ----------------------------------------- (a) None (b) None (c) None (d) None Item 6. Exhibits and Reports on Form 8-K -------------------------------- (a) Exhibits 4.1(j)* Waiver and First Amendment to Credit Agreement, dated April 4, 2003 among Registrant and Merrill Lynch Capital as Lender and Agent for each Lender. 4.1(k)* Waiver and Second Amendment to Credit Agreement, dated April 4, 2003 among Registrant and Merrill Lynch Capital as Lender and Agent for each Lender. 4.1(l)* Consent and Third Amendment to Credit Agreement, dated May 31, 2003 among Registrant and Merrill Lynch Capital as Lender and Agent for each Lender. 4.1(m)* Waiver and Fourth Amendment to Credit Agreement dated August 15, 2003 among Registrant and Merrill Lynch Capital as Lender and Agent for each Lender. Exhibit 31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Exhibit 31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Exhibit 32 Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (b) Reports on Form 8-K A Current Report on Form 8-K dated April 3, 2003 was filed under Item 5 disclosing that the Company confirmed receiving an unsolicited proposal from Bradco Supply Corporation to acquire all shares of Wickes common stock not owned by Bradco and its affiliates for $1.12 per share. 40 A Current Report on Form 8-K dated April 7, 2003 was filed under Item 5 disclosing the acquisition of Wickes common stock by Imagine Investments, Inc. and the resignation of J. Steven Wilson as Chairman and Chief Executive Officer of Wickes. The acquisition resulted in 51% ownership of the Company's outstanding common stock. In addition, Albert Ernest, Jr., a director of Wickes since 1993, resigned from the Company's Board of Directors. A Current Report on Form 8-K dated April 16, 2003 was filed under Item 5 disclosing that the Company received notice from Nasdaq that the Company has not regained compliance in accordance with Marketplace Rule 4310 (c) (8) (D). The notice stated that the Company meets initial listing requirements fro the Nasdaq SmallCap Market under Marketplace Rule 4310 (c) (2) (A). A Current Report on Form 8-K dated April 21, 2003 was filed under Item 1 disclosing that Imagine Investments, Inc. and its affiliates as current beneficiary owners of 4,308,443 shares of Wickes common stock, or approximately 51.9% of the Company's outstanding shares and, therefore, may be deemed to control Wickes. The item also stated that Robert E. Mulcahy III, a director since 1988, has been appointed Chairman of Wickes Inc., and that the Wickes Board of Directors established an Executive Management Committee to oversee the Company's operations on a day-to-day basis. A Current Report on Form 8-K dated April 28, 2003 was filed under Item 5 disclosing the election of Jim O'Grady as the new President and Chief Executive Officer of Wickes Lumber. A Current Report on Form 8-K dated June 13, 2003 was filed under Item 5 disclosing that the Company was notified by Nasdaq that it has regained compliance with Marketplace Rule 42.10 (c) (4), which requires a minimum bid price of $1.00 per share and that this compliance matter is closed. A Current Report on Form 8-K dated July 15, 2003 was filed under Item 5 disclosing the resignation of Frederick H. Schultz from his positions on the Company's Board of Directors. A Current Report on Form 8-K dated August 15, 2003 was filed under Item 7 disclosing that the Company issued a press release announcing its 2003 second quarter earnings. A copy of the press release, including unaudited financial information released as a part thereof. A Current Report on Form on Form 8-K dated August 22, 2003 was filed under Item 5 disclosing that the Company received a letter from the NASDAQ stating that, based on the Company's Quarterly Report on Form 10-Q for the quarter ended June 28, 2003, the Company does not comply with Marketplace Rule 4310 (c) (2) (B). Therefore the Staff of the NASDAQ is reviewing the Company's eligibility for continued listing on the NASDAQ SmallCap market. 41 A Current Report on Form 8-K dated September 12, 2003 was filed under Item 5 disclosing that the Company issued a press release announcing the delisting of its common stock from the NASDAQ SmallCap Market at the opening of business on September 23, 2003 due to its failure to comply with the minimum requirements for continued listing. A Current Report on Form 8-K dated October 3, 2003 was filed under Item 5 disclosing that the Company issued a press release announcing that Imagine Investments, Inc. has agreed to provide $10.5 million of financing to enable the Company to make a cash tender offer for its Senior Subordinated Notes due December 15, 2003. * Previously filed with Form 10-Q for the quarterly period ended June 28, 2003 dated August 15, 2003. 42 SIGNATURES Pursuant to the requirements 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. WICKES INC. By: /s/ James J. O'Grady -------------------------------- James J. O'Grady President and Chief Executive Officer By: /s/ James A. Hopwood ------------------------------ James A. Hopwood Senior Vice President and Chief Financial Officer Date: November 21, 2003

WICKES INC 10-Q/A