Which leases does Stock want to cancel? See map and spreadsheet.
Which branches will close next? See map and list
What Stock's filings reveal about itself. Story

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Stock Building Supply envisions eliminating another 2,200 jobs--close to a third of its remaining workers--as part of the recovery plan that began Wednesday, May 6, with it getting a new 51% owner, a court document submitted as part of Stock's Chapter 11 filing indicates.

The information was part of Stock's first-day motions and applications that it filed on Wednesday in U.S. Bankruptcy Court in Wilmington, Del., when it sought protection from creditors under Chapter 11 of the federal bankruptcy code. Stock's motion says it had to make the Chapter 11 as part of the requirements that The Gores Group, a Los Angeles-based private equity group, set in buying 51% of Stock from Wolseley Plc and setting up a joint venture with the British LBM conglomerate.

Late Thursday, a federal bankruptcy judge issued several orders designed to let Stock, America's second-biggest LBM operation, continue operating normally while it 's under Chapter 11 protection. Late Friday, May 8, Judge Mary F. Walrath scheduled a hearing at 10:30 a.m. ET May 28 to consider what is likely to be one of the most contentious parts of the Chapter 11 process: Stock's request to reject more than 200 unexpired leases on land Stock had rented--typically from owners of lumberyards it had acquired. Walrath also has scheduled a hearing at 4 p.m. ET June 15 to hear more from attorneys about Stock's reorganization plan and set deadlines for filing objections.

The first-day motions filing and related reports show that Stock has spiraled downward quickly in recent years. According to Stock's ProSales 100 survey report for 2007, the Raleigh, N.C.-based company said it had 363 branches and 13,120 employees. For 2008, this week's ProSales 100 report found, Stock said it had 208 locations and 8,761 workers. Now the bankruptcy court filing says that, as of March 31, Stock had 199 branches and 7,220 employees.

Despite those cuts, Stock's filing said, the company recorded operating losses of $744 million, including restructuring and impairment provisions of more than $430 million, in the fiscal year ended July 31, 2008. That's from sales of roughly $3.5 billion. When Wolseley reported its annual results for the year ended July 31, it said Stock incurred a trading loss of $246 million was reported for the year, excluding exceptional restructuring costs of $13 million relating to 36 branch closures and headcount reductions. It made no mention of the $430 million in restructuring and impairment provisions.

The filiing didn't give updated numbers, but Wolseley has reported that in the six months through Jan. 31, the first half of its current fiscal year, Stock's revenue fell 25.5% to $1.34 billion, leading the company to record an operating loss of $129 million.

That flow of red ink led Wolseley to declare it would either get a joint venture partner or exit Stock by Aug. 1. That search ended Wednesday when Wolseley announced it had entered into joint venture with an affiliate of The Gores Group of Los Angeles in which Gores, a private equity firm, would take a 51% interest in Stock, invest $75 million in Stock and provide a $125 million revolving credit bridge facility. The Gores Group also required that Stock enter Chapter 11.

"The Debtors [i.e. Stock] believe that, without the recapitalization contemplated by the [recovery] Plan and the additional investments to be provided by Gores Holdings, the Business would not be able to continue to operate as a going concern," Stock's filing says. "The additional investments are necessary to continue to fund the operating needs of the Business and to preserve the approximately 5,000 jobs that are associated with the locations of the Business that will continue to operate after the restructuring."

Stock hasn't identified which of its 199 locations will close. On a Frequently Asked Questions page for Stock customers, the company states: "Stock senior management has presented The Gores Group with a financial plan which requires us to take the hard actions this housing downturn dictates. We will be exiting or reducing capacity in some markets. In the coming days and weeks, we will be determining the best way to exit these locations, which may involve either a sale or orderly wind down of the operations. We are in the process of communicating this to our effected locations and associates and are not sharing any other information at this time. We will release more information after the process is complete."

On the other hand, one Stock filing refers to "Marked for Closure" store leases. See map and list

Stock's first-day filings document notes that the company has closed approximately 150 branches since October 2006 (eliiminating roughly 11,000 jobs), and it has 210 leases at locations "where the Debtors have ceased or planned to cease operations." Its filings listed lease roughly 155 lease agreements.

Companies that seek Chapter 11 protection from creditors typically do so in part to slow or halt paying their bills while they reorganize. But in a Q&A document posted on Stock's website, the company stressed that all vendors will be paid at the very least at the end of the Chapter 11 process for any deliveries they made prior to May 5." We fully expect the court to allow payment of vendors for pre-filing deliveries during the Chapter 11," Stock's statement adds. "All post-filing deliveries will be paid in the ordinary course. Wolseley has made available to Stock up to $100 million of debtor-in-possession ("DIP") financing to ensure it is business as usual through our 45- to 60-day recapitalization period."

Indeed, among the bankruptcy judge's actions on Thursday was a set of orders that, among other things, enable but do not require Stock to pay up to a total of $70 million in general claims made to debtors as they come due, plus a total of $4.2 million worth of obligations to customers that were incurred before it filed for bankruptcy on Wednesday. Other orders will let Stock pay up to $22 million in employee wages and benefits, contribute to employee benefit programs, pay up to $11.7 million in taxes imposed before its filing, and bar utilitiy companies from altering or cutting off service. Another order permitted the continued maintenance of Stock's existing bank accounts, continued use of Stock's cash management system, the continuation of certain intercompany deals and setoff rights, administrative status to make intercompany transactions, and continued use of business forms. Walrath's order also waives for 60 days the usual investment and deposit requirements. By that time, Stock expects it will be out of Chapter 11 status.

The Gore Group's financial injection "is intended to ensure a stable ongoing business model as well as permit the company to pay all of its creditors their claims in full as allowed by the bankruptcy laws," Stock said in a statement on Wednesday. "Integral to the pre-packaged plan is the stipulation that all trade creditors, suppliers, customers and employees will receive the full allowed amounts owed to them. As a result, creditors are not required to vote on the plan."

Given Stock's determination to keep paying its bills and keep up normal operations, it appears that cancellation of the leases is one of the major reasons why Stock entered Chapter 11. According to the filing: "Without the restructring and relief [i.e., the lease cancellations] provided by the Plan and the additional investments into the Business, Stock likely faces a liquidation, which would result in the closing of additional locations, the loss of additional jobs and the impairment of additional classes of creditors."

Meanwhile, the effect on Wolseley may be deeper than originally reported. Builders Merchant Journal, a U.K.-based trade journal, noted Wednesday that Wolseley's next statement will include a pre-tax exceptional loss of 175 million pounds ($262 milllion) as a result of the deal. But Stock's filing also points out that one requirement that the Gores Group set for acquiring 51% of Stock was for Wolseley to cancel all but $100 million of the $700 million in existing loans that the parent had made to its subsidiary. Wolseley officials were not immediately available for comments that might clarify whether the $600 million in canceled loans were related to the pre-tax loss the company plans to take.

The filing also noted that Stock is getting $100 million in debtor-in-possession financing from Wolseley because the credit market is so tight that nobody else could offer terms of any kind, and neither came close to doing what Wolseley could provide. "[A] credit facility of the type needed in these chapter 11 cases could not have been obtained on an unsecured basis," the filing says. "Potential source of the post-petition financing needed by the Debtors, obtainable on an expedited basis and on reasonable terms, were extremely limited."

Related Stories and Links

  • Bankruptcy Court Lets Stock Keep Running During Chapter 11 Story
  • Stock's New Majority Owner Looks to Grow Story
  • Stock: Expect More Store Closures Story
  • Chapter 11 filings and notices Link
  • Information page on Stock's website Link
  • Timeline of Stock's acquisitions since 1985 Link
  • Wolseley Takes $262mln Hit on Stock Deal Story
  • 51% of Stock Sold; Dealer Files Ch. 11 Story