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United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the Fiscal Year Ended December 30, 2000
or
[ ] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the Transition Period From ______ To ______
Commission File No. 1-14967
WICKES INC.
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(Exact name of registrant as specified in its charter)
Delaware 36-3554758
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(State of Incorporation) (IRS Employer Identification No.)
706 North Deerpath Drive, Vernon Hills, Illinois 60061
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(Address of principal executive offices)
(847) 367-3400
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(Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12 (b) of the Act:
None
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Securities Registered Pursuant to Section 12 (g) of the Act:
Common Stock, par value of $.01 per share
-----------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
form 10-K. [ ]
As of February 28, 2001, the Registrant had 8,273,685 shares of Common
Stock, par value $.01 per share, outstanding, and the aggregate market value of
outstanding voting stock (based on the last sale price on the Nasdaq National
Market of Common Stock on that date) held by nonaffiliates was approximately
$15,200,000 (includes the market value of all such stock other than shares
beneficially owned by 10% stockholders, executive officers and directors).
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Portions of the Registrant's Proxy Statement in connection with its Annual
Meeting of Stockholders tentatively scheduled to be held on May 23, 2001, are
incorporated by reference into Part III hereof, as more specifically described
herein.
2
TABLE OF CONTENTS
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Page No.
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PART I
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Item 1. Business..........................................3
Item 2. Properties.......................................21
Item 3. Legal Proceedings................................22
Item 4. Submission of Matters To a Vote
of Security Holders.........................23
PART II
-------
Item 5. Market For Registrant's Common Equity
and Related Stockholder Matters.............24
Item 6. Selected Financial Data..........................24
Item 7. Management's Discussion and Analysis
of Financial Condition and Results
of Operations...............................29
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk...........................44
Item 8. Financial Statements and Supplementary Data......45
Item 9. Changes In and Disagreements With Accountants
On Accounting and Financial Disclosure......45
PART III
--------
Item 10. Directors and Executive Officers
of the Registrant...........................46
Item 11. Executive Compensation...........................46
Item 12. Security Ownership of Certain
Beneficial Owners and Management............46
Item 13. Certain Relationships and Related Transactions...46
PART IV
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Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K.....................47
SIGNATURES..................................................48
3
PART I
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Item 1. BUSINESS.
- -----------------
Wickes Inc. ("Wickes") and its subsidiaries (Wickes and its subsidiaries
are referred to as "the Company") are a leading supplier and manufacturer of
building materials in the United States. The Company sells its products and
services primarily to residential and commercial building professionals, repair
and remodeling ("R&R") contractors and, to a lesser extent, project
do-it-yourself consumers ("DIY's") involved in major home improvement projects.
At February 28, 2001, the Company operated 101 sales and distribution
facilities, as well as 27 component manufacturing facilities that produce and
distribute roof and floor trusses, framed wall panels, and pre-hung door units
principally in the Midwest, Northeast, and South regions of the United States.
Background
- ----------
The Company was formed in 1987 as a Delaware corporation under the
corporate name "Wickes Lumber Company." In June 1997, the Company changed its
corporate name to "Wickes Inc." The Company has and continues to conduct its
primary operations under the "Wickes Lumber" name.
In April 1988, the Company completed the acquisition from Wickes Companies,
Inc. of operations that had commenced in 1952. These operations consisted of 223
sales and distribution centers and 10 component manufacturing facilities. In
subsequent periods the Company modified its operations to reduce its number of
sales and distribution centers to the current 101 and to strategically grow its
component manufacturing capabilities to 27 locations.
For further information see "Business Strategy".
Industry Overview
- -----------------
According to the Home Improvement Research Institute ("HIRI") (an
independent research organization for manufacturers, retailers and wholesalers
allied to the home improvement industry), sales of home improvement products
(defined as lumber, building materials, hardware, paint, plumbing, electrical,
tools, floor coverings, glass, wallpaper, and lawn and garden products)
associated with the maintenance and repair of residential housing and new home
construction were estimated to be $266.8 billion in 2000. Despite some
consolidation over the last ten years, particularly in metropolitan areas, the
building material industry remains highly fragmented. The Company believes that
no building material supplier accounted for more than 17.1% of the total market
in 2000.
4
In general, building material suppliers concentrate their marketing efforts
either on building professionals or consumers. Professional-oriented building
material suppliers, such as the Company, tend to focus on single-family
residential contractors, R&R contractors, project DIY's and, to some extent,
commercial contractors. These suppliers compete principally on the basis of
price, service, product assortment, scheduled job-site delivery, manufactured
building components and trade credit availability. In contrast,
consumer-oriented building material retailers target the mass consumer market,
where competition is based principally on price, merchandising, product
assortment, location and advertising. Consumer-oriented warehouse and home
center retailers typically do not offer as wide a range of services, such as
specialist advice, trade credit, manufactured building components, and scheduled
job-site delivery, as do professional-oriented building material suppliers.
Industry sales are linked to a significant degree to the level of activity
in the residential building industry, which tends to be cyclical and seasonal
due to weather. New residential construction is determined largely by household
formations, interest rates, housing affordability, availability of mortgage
financing, regional demographics, consumer confidence, job growth, and general
economic conditions. According to the U.S. Bureau of the Census, U.S. housing
starts were 1.48 million in 1996, 1.47 million in 1997, 1.62 million in 1998,
1.66 million in 1999 and 1.59 million in 2000. The Blue Chip Economic Indicators
Consensus Forecast, dated March 10, 2001, projects 2001 housing starts to be
1.54 million, down slightly from housing starts in 2000. Housing starts in the
Company's primary geographical market, the Midwest, decreased 7.8% housing
starts in that region in 2000. The Company's two other geographical markets, the
Northeast and South, experienced decreases in 2000 housing starts of 1.4% and
4.9%, respectively. Nationally, single family housing starts, which generate the
majority of the Company's sales to building professionals, decreased by 5.5% to
1.26 million starts in 2000 from 1.33 million starts in 1999.
Repair and remodeling expenditures tend to be less cyclical than new
residential construction. These expenditures generally are undertaken with less
regard to economic conditions, but both repair and remodeling projects
(including projects undertaken by DIY's) tend to increase with increasing sales
of both existing and newly constructed residences. HIRI estimates that sales of
home improvement products to repair and remodeling professionals represented
$50.8 billion, or approximately 19.0% of total 2000 sales of the building
material supply industry, while direct sales to DIY's amounted to $127.6 billion
or 47.8% of such sales.
5
Business Strategy
- -----------------
General
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The Company's mission is to be the premier provider of building materials
and services and manufacturer of value-added building components to the
professional segments of the building and construction industry.
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
which it refers to as: Major Markets, Conventional Markets, and Wickes Direct.
In Major Markets, the Company serves the national, regional, and large local
builder with a total solutions approach and specialized services. In
Conventional Markets, the Company provides the smaller builder 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 27 component manufacturing facilities that
produce value-added, wood framed wall panels, roof and floor truss systems, and
pre-hung interior and exterior doors.
In 1999, the Company introduced its "Build 2003" program that outlines its
seven corporate objectives, using 1998 results as a performance baseline. These
are: (1) generate a compounded annual sales growth rate of at least 6%; (2)
internally manufacture 75% of the Company's wall panels, roof and floor trusses,
and pre-hung doors distributed; (3) increase EBITDA (see Part II, Item 6 for the
definition of "EBITDA") as a percentage of net sales to a minimum of 4.2%; (4)
improve debt-to-equity ratio and achieve 1:1 debt-to-equity by year-end 2003;
(5) generate a return on capital employed in excess of the Company's peer group;
(6) extend its earnings season; and (7) provide consistency in earnings growth.
Regarding the "Build 2003" objectives, the Company has had the following
accomplishments, in the order that the objectives are listed above. Sales gains
for 1999 were 19.2%. Although net sales for 2000 were below the prior year by
5.5%, primarily due to "lumber deflation" (see "Item 7. Management`s Discussion
and Analysis of Financial Condition and Results of Operations"), the Company
continues to track ahead of its 6% compound annual sales growth rate objective.
In 2000, the Company improved its production of internally manufactured building
components to 56.7% from 50.9% in 1999, in line with the objective. With regard
to the EBITDA objective, the effects of lumber deflation, higher fuel costs and
other operating factor more fully explained in "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations", the Company was
unable to progress on this objective. Management continues to believe it will
attain this goal by 2003. The redemption of $36.0 million of 11-5/8 Senior
Subordinated Debt helped Wickes to improve its debt to equity ratio to 6.1:1 at
December 30, 2000 from 7.2:1 and 8.3:1 at fiscal years' end for 1999 and 1998,
respectively. For the 2000 fiscal year, Wickes' return on capital employed was
8.2%. Based on the most recently available information for its publicly traded,
6
building materials distribution peer group, the Company continues to exceed
their rolling four quarter average of 5.0%. With regard to extending its
earnings season, the Company achieved positive EBITDA in all four quarters,
despite severe weather and lumber deflation issues which resulted in a
significant decrease in the fourth quarter of 2000, compared to the same period
in the prior year. Finally, as more fully discussed in "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations", the
effects of lumber deflation throughout the year, severe weather in the fourth
quarter of 2000 and other economic factors, such as the effects of higher
interest rates and fuel prices, significantly hampered the Company's efforts to
continue its prior earnings growth trend during 2000.
Major Markets
-------------
The Company operates in 22 Major Markets, which are served by 33 sales and
distribution facilities. In this market group, the Company targets the national
top 400 builders, both regional and large local builders with specialized
services and a total solutions approach, including its unique "Frame A Home in A
Day" program in six markets. These facilities are designed, stocked and staffed
to meet the needs of the particular markets in which they are located. Major
Markets also are served by all of the Company's manufacturing facilities.
Major Markets generally are large metropolitan areas with favorable growth
projections and are characterized by the active presence of national, regional
and large local builders. The Company believes that the building supply industry
in these Major Markets remains heavily fragmented. The Company's Major Markets
programs seek to provide the large builder with specialized products and
services that integrate various methods of distribution. The Company provides
these programs and services on a "virtual store" basis; that is, products and
services may be provided from multiple facilities serving the Major Market on a
coordinated basis with centralized customer contact and support. The Company
invests significant efforts to redefine and improve customer service with a
comprehensive, total solutions package of core building materials, supply chain
management, material flow and logistics management.
During 1997 and 1998, the Company researched the levels and types of
customer service it would provide as part of its Major Markets strategy. By
first understanding the cost drivers, inefficiencies, and needs of the large
builders who dominate the more densely populated regions of the country, the
Company could focus its strategy on meeting their needs. The outcome of that
research was to restructure our Major Markets programs to address a clear
opportunity to assist builders in reducing their total cost of production by
utilizing the Company's manufacturing and logistics expertise.
The Company initiated a "Target Major Markets" program in 1997. Target
Major Markets are those Major Markets that the Company aggressively promotes
with updated sales and distribution centers, targeted high volume builders, and
concentrated component manufacturing support. Since then, the Company has
developed Target Major Markets programs in 14 Major Markets. Over the next three
7
years, the Company will progressively target additional Major Markets.
Management believes that these markets continue to offer opportunities for
growth as a traditional building materials supplier, as well as to provide
opportunities to grow and introduce new, value-added services and product
initiatives.
The Company's value-added manufacturing operations constitute an integral
element supporting the Target Major Markets strategy. This support network
enables the Company to provide its customers with custom engineered, value-added
manufactured framing component systems. For instance, in six markets the Company
operates its "Frame a Home in a Day" concept. This initiative allows builders
significant cost savings by completely framing and sheathing an average
two-story residence in as little as one day, rather than the substantially
longer period involved in traditional framing methods.
The Company's operations in Major Markets contributed approximately 42.6%
of the Company's net sales in 2000, compared to 44.3% in 1999 and 42.2% in 1998.
For the 14 Target Major Market programs in place at the end of 2000, net sales
represented approximately 25.6% of the Company's net sales compared to 26.7% and
25.0% for 1999 and 1998, respectively.
Conventional Markets
--------------------
The Company operates 68 sales and distribution facilities in small, rural
Conventional Markets, where Wickes targets the smaller building professionals
such as single-family residential contractors and R&R contractors with tailored
products and services. Wickes provides a service offering mix that includes tool
rental, specialized delivery, and installation services. The Company typically
is the market leader in these fragmented, relatively slow growth markets of
populations generally below 100,000. The Company believes it possesses a
significant competitive advantage in rural markets and small communities where
it primarily competes with local, independent lumberyards and regional building
chains.
Since the beginning of 1997, the Company has completed re-merchandising and
re-marketing programs ("Resets") in 15 sales and distribution facilities located
in Conventional Markets. These programs typically include upgrading of the
showroom layout and product presentation; expansion of product assortments,
typically adding a significant number of stock keeping units ("SKU's") with a
view towards achieving category dominance in the market; and increasing service
offerings such as installed sales, tool rental, specialized delivery services
and additional in-store sales specialists. The Company intends to perform
additional Resets in 2001 and future years. The Company's manufacturing
operations also provide significant support for the Company's Conventional
Market sales activities, particularly through the manufacture of pre-hung
interior and exterior doors.
8
Wickes Direct
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Wickes Direct focuses on the large volume needs of commercial builders,
much of which are shipped directly from the manufacturer to the customer's job
site. This marketing group concentrates on five specific types of commercial
wood projects: assisted care facilities, extended care facilities, hotels/motels
(three stories and under), restaurants, and multi-family housing. In addition to
selling building materials and engineered wood components, Wickes Direct
provides building design, value-added engineering processes, estimating,
logistics, and material delivery services to large customers anywhere in the
world, all accomplished without the need for a physical facility close to the
customer. Wickes Direct has project sales specialists that focus exclusively on
selling building solutions to the commercial developers. Wickes Construction
Services, launched in 2000, is a hybrid construction group that provides turnkey
framing services, bids, contracts, and takeoffs, and provides installation labor
and general contractor services for Wickes Direct customers.
Manufacturing Operations
------------------------
The Company owns and operates 27 component manufacturing facilities that
supply the Company's customers with higher-margin, value-added products such as
framed wall panels, roof and floor trusses, and pre-hung interior and exterior
doors. Two locations were added in 2000. These facilities include 18 stand-alone
operations as well as nine additional operations that exist at the Company's
sales and distribution facilities. Value-added component manufacturing is an
important element supporting the Company's Major Markets, Conventional Markets
and Wickes Direct. In Target Major Markets, manufacturing provides key support
to Wickes' position as a value-added partner, including its "Frame A Home In A
Day" concept in six Target Markets. In Conventional Markets, trusses, panels,
and pre-hung doors are sold to local builders. For Wickes Direct, manufactured
components, particularly framed wall panels, provide an important value-add. The
Company believes that these engineered products improve customer service and
provide an attractive alternative to job-site construction. In 2000 and 1999,
the Company internally manufactured approximately 56.7% and 50.9%, respectively,
by dollar volume, of its total building components distributed. As resources
permit, the Company intends to expand its manufacturing facilities to supply a
greater number of its sales and distribution facilities with these value-added
products.
Other Initiatives
-----------------
Since 1997, the Company has also initiated several other programs to
supplement its Major Markets and Conventional Markets.
The Company's tool rental program was developed to rent specialized,
professional quality tools and equipment to customers in need of equipment for
unique or short-term projects. The program is designed to attract new customers
9
as well as to provide the Company with an opportunity to supply current
customers with a greater portion of their total construction needs. The program
currently is in place in 31 sales and distribution facilities and will be
expanded to additional facilities in 2001.
The Company's installed insulation program consists of specially trained
installation crews using specialized equipment and vehicles to install blown and
batt insulation in new construction or major renovations. Installed insulation
is one of the value-added services that the Company believes it provides on a
cost-effective basis to meet its customers' needs. The installed insulation
program currently is operating in 59 sales and distribution facilities, having
increased by 9 in 2000. The Company is planning to expand to more locations in
2001.
In 2000, the Company initiated installed siding and gutter programs to
further service its Major Markets and Conventional Markets strategies. Like the
installed insulation program, siding and gutters are installed with specially
trained crews equipped with specialized tools and vehicles. At the end of 2000,
the Company had 13 installed siding and 6 installed gutter locations in
operation. The Company plans to expand the number of locations providing this
value-added service in 2001.
In total, the tool rental and installed programs initiatives represent
approximately 4% of Company net revenues in 2000. However, these represent high
margin programs with strong expansion potential.
The Company currently has in place an Internet and software strategy
designed to provide enhanced service levels to its customers. Employed correctly
and integrated properly, Internet and software technology will broaden the base
of products offered and the ability to service new and existing customers over
the long-term. The Company has entered into several agreements with companies
providing Internet based services to the construction industry. In addition, in
2000 the Company acquired Tres-Ark Enterprises, Inc., the developer of a
software package ("BuilderCentral 2000(TM)") designed to provide professional
building contractors an enterprise system to manage their construction projects.
(See also Note 5 to the Consolidated Financial Statements).
BuilderCentral 2000 is an integrated software system designed to assist the
professional builder in managing its construction business. It consists of four
integrated modules representing: (1) construction management, (2) accounting and
finance, (3) project estimating capabilities, and (4) on-site hand-held
applications. In 2001, a new application will be introduced to provide a direct
Internet link to the builders' customized Wickes bill of materials, pricing and
trade account for online ordering.
Wickes has entered into other strategic alliances to enable the Company to
capitalize on joint marketing efforts and to promote Wickes' value-added
component manufacturing capabilities. While these programs have yet to produce
significant sales results, the Company continues to develop these and to explore
additional opportunities.
10
In March 2000, the Company entered into an agreement with Buildscape, Inc.,
an entity controlled by Riverside Group, Inc. and Imagine Investments, Inc.,
each of which may be deemed an affiliate of the Company. Pursuant to this
agreement, the Company and Buildscape, Inc. are jointly conducting an Internet
distribution program. Buildscape(R) is an Internet service designed for builders
that allows the Company's customers to buy products and materials from Wickes
and other suppliers. It provides real-time online access to the professional
builders' specific Wickes price list, bill of materials and trade account. It
also provides job management tools to help keep projects on time and on budget.
Additionally, the system is accessible by wireless devices. Wickes' sales
through the Buildscape site were not material in 2000.
Acquisition Strategy
- --------------------
The Company intends to complement its existing operations by acquisitions,
as attractive opportunities present themselves. The Company made four
acquisitions of component facilities during 1999. In January, the Company
acquired the assets of a wall panel manufacturer located in Cookeville,
Tennessee. In March, the Company acquired the assets of Porter Building
Products, a manufacturer of trusses and wall panels located in Bear, Delaware.
In October, the Company acquired the assets of Advanced Truss Systems, Inc. of
Kings Mountain, North Carolina. Advanced Truss Systems is a manufacturer of
engineered wood trusses servicing the greater Charlotte, North Carolina market.
In November, the Company acquired the assets of United Building Systems, Inc. of
Lexington, Kentucky. United Building Systems is a manufacturer of wall panels
and roof and floor trusses in the Lexington market.
There were no acquisitions of component manufacturing operations in 2000.
However, there was one plant addition to supplement the Wisconsin market that
went into operation at the end of 2000 and the development of wall panel
production capabilities at a distribution center earlier in the year.
In addition, in 2000 the Company acquired Tres-Ark Enterprises, Inc., the
developer of a software package ("BuilderCentral 2000(TM)") designed to provide
professional building contractors an enterprise system to manage their
construction projects. (See also Note 5 to the Consolidated Financial
Statements).
Markets
- -------
The Company operates in 22 Major Markets, (14 of which are designated
"Target Major Markets"), which are served by 33 sales and distribution
facilities and twelve manufacturing facilities. The Company also operates 68
building centers in less populous areas, or Conventional Markets. For a further
discussion of Major Markets and Conventional Markets see "Business Strategy."
11
The following table sets forth the distribution of the Company's sales and
distribution facilities located in Conventional and Major Markets, as of
February 28, 2001 by size of the local market:
Number of Sales and
Total Distribution Facilities
Households in Conventional Major
Thirty Mile Radius Markets Markets
------------------ ------- -------
Under 50,000 16 0
50,000-100,000 15 2
100,000-250,000 21 10
250,000-500,000 13 9
500,000 and over 3 12
-- --
Total 68 33
== ==
Geographical Distribution
-------------------------
The Company's 101 sales and distribution facilities are located in 23
states in the Midwest, Northeast and South. The Company's 27 component
manufacturing operations also are located in certain of these states and in
Delaware. The Company believes that its geographic diversity generally lessens
the impact of economic downturns and adverse weather conditions in any one of
the Company's geographic markets. The following table sets forth certain
information with respect to the locations of the Company's sales and
distribution facilities as of February 28, 2001:
Midwest Northeast South
- ------------------------------- ----------------------------------- ------------------------------
Number of Number of Number of
Sales and Sales and Sales and
Distribution Distribution Distribution
State Facilities State Facilities State Facilities
----- ------------ ----- ------------- ----- -------------
Michigan 30 Pennsylvania 6 Alabama 3
Wisconsin 14 New York 3 Kentucky 3
Indiana 11 Maine 2 Texas 2
Ohio 5 New Hampshire 2 Florida 2
Illinois 4 Connecticut 1 Mississippi 2
Colorado 3 New Jersey 1 North Carolina 2
---
Massachusetts 1 Georgia 1
Maryland 1 Louisiana 1
---
Tennessee 1
---
Total 67 Total 17 Total 17
== == ==
12
Facilities Opened, Closed and Consolidated
------------------------------------------
During the first quarter of 1998, the Company closed or consolidated eight
building centers and two component manufacturing facilities and sold two other
building centers, all in Conventional Markets. The Company also opened two new
component manufacturing facilities at existing sales and distribution sites, and
purchased a third component manufacturing facility in Indianapolis, Indiana. The
Company also acquired four manufacturing facilities in 1999. See "Business
Strategy - Acquisition Strategy."
There were no acquisitions of component manufacturing operations in 2000.
However, there was one plant addition to supplement our Wisconsin market that
went into operation at the end of 2000 and the development of wall panel
production capabilities at a distribution center earlier in the year.
The following table reconciles the number of sales and distribution
facilities and component manufacturing facilities operated by the Company at
December 27, 1997, December 26, 1998, December 25, 1999 and December 30, 2000.
Sales and Component
Distribution Manufacturing
Facilities Facilities
---------- ----------
As of December 27, 1997 111 11
Expansion -- 2
Acquisition -- 1
Sold (2) --
Closings (7) (2)
Consolidations (1) --
---- ---
As of December 26, 1998 101 12
Expansion 1
Acquisition -- 4
---- ---
As of December 25, 1999 101* 17
Expansion 1
Acquisition -- --
---- ---
As of December 30, 2000 101* 18
==== ===
*As of the fiscal year-end for 2000 and 1999, respectively, there were nine and
eight additional component manufacturing facilities located in existing sales
and distribution facilities.
13
Customers
- ---------
The Company has a broad base of customers, with no single customer
accounting for more than 1.5% of net sales in 2000. In 2000, 86.9% (compared
with 91.4% in 1999) of the Company's sales were on trade credit, with the
remaining 13.1% as cash and credit card transactions.
Home Builders
-------------
The Company's primary customers are single-family home builders. In 2000,
all home builder customers accounted for 61.8% of the Company's sales, compared
with 62.3% in 1999. The majority of the Company's sales to these customers are
of high-volume commodity items, such as lumber, building materials, and
manufactured housing components. The Company will continue its intense focus on
this customer segment, offering new products and developing additional services
to meet their needs.
Commercial / Multi-family Contractors
-------------------------------------
Wickes Direct concentrates on sales to commercial contractors (primarily
those engaged in constructing motels, restaurants, nursing homes, extended stay
facilities, and similar projects) and multi-family residential contractors.
Sales to these customers are made on a direct ship basis, as well as through the
Company's sales and distribution facilities. In 2000, sales to these customers
accounted for approximately 19.6% of the Company's sales, compared with 18.4% in
1999. The Wickes Direct program is closely integrated with the Company's
component manufacturing operations.
Repair & Remodelers
-------------------
In 2000, R&R customers accounted for approximately 9.0% of the Company's
sales, compared with 9.2% in 1999. The R&R segment consists of a broad spectrum
of customers, from part-time handymen to large, sophisticated business
enterprises. Some R&R contractors are involved exclusively with single product
application, such as roofing, siding, or insulation, while some specialize in
remodeling jobs, such as kitchen or bathroom remodeling or the construction of
decks, garages, or full room additions. The Company offers the product and
project expertise, special order capability, design assistance, and credit terms
to serve the widely varying needs of this diverse market.
DIY's
-----
Sales to DIY's (both project and convenience) represented about 9.6% of the
Company's sales in 2000, compared with 10.1% in 1999. The percentage of sales to
DIY's varies widely from one sales and distribution facility to another, based
primarily on the degree of local competition from warehouse and home center
retailers. The Company's sales and distribution facilities do not have the large
retail selling spaces or broad product assortments of the major warehouse or
home center retailers. For small purchases, the facilities' showrooms serve as a
14
convenience rather than a destination store. Consequently, the Company's focus
on consumer business is toward project DIY's -- customers who are involved in
major projects such as building decks and storage buildings or remodeling
kitchens and baths.
Sales and Marketing
- -------------------
The Company employs a number of marketing initiatives designed to increase
sales and to support the Company's goal of being the dominant force in the sale
of lumber and other building materials to building professionals in each of its
markets.
Building Professional
---------------------
The Company seeks to establish long-term relationships with its
professional customers by providing a higher level of customer assistance and
services than are generally available at independently-owned building centers or
large warehouse and home center retailers.
The Company provides a wide range of customer services to building
professionals, including expert assistance, technical support, trade credit,
scheduled job-site delivery, manufacture of customized components, installed
sales, specialized equipment, logistical and material flow design and support,
and other special services. Building professionals generally select building
material suppliers based on price, job-site delivery, quality and breadth of
product lines, reliability of inventory levels, and the availability of credit.
For a description of the programs designed for and the emphasis being
applied to professional customers in Major Markets, see " Business Strategy -
Major Markets."
In both Conventional and Major Markets, the Company's primary link to the
building professional market is its experienced sales staff. As of February 28,
2001 the Company's 383 outside sales representatives ("OSR's") are commissioned
sales persons who work with professional customers on an on-going basis at the
contractors' job sites and offices. Typically, a sale to a contractor is made
through a competitive bid prepared by the OSR from plans made available by the
contractor. From these plans, the OSR or sales support associate prepares and
provides to the contractor a bid and a complete list, or "take-off," of the
materials required to complete the project. Preparation of a take-off requires
significant time and effort by trained and experienced sales representatives and
support associates. The Company has equipped most of its sales and distribution
facilities with a computerized system that significantly reduces the time
required to prepare take-offs. In addition, this system instantly recalculates
changes and automatically includes add-on products needed to complete the
project, which generally improves productivity, sales and margins. The ability
of the OSR to provide prompt and accurate take-offs, to arrange timely
deliveries, and to provide additional products or services as necessary is an
important element of the Company's marketing strategy and distinguishes the
Company from many of its competitors.
15
As of February 28, 2001 the Company employed 118 specialty salespeople in
its sales and distribution facilities who provide expert advice to customers in
project design, product selection and applications. A staff of 34 trained R&R
sales specialists offer special services to R&R contractors, equivalent to that
accorded home builders. In many of its sales and distribution facilities, the
Company maintains separate R&R offices. The Company currently has kitchen and
bath departments in most of its sales and distribution facilities and has a
staff of 78 kitchen and bath specialists. The Company also employs 6 sales
specialists in other departments.
The Company extends credit, generally due on the 10th day of the month
following the sale, to qualified and approved contractors. Approximately 86.9%
of the Company's sales during 2000 were on credit, with the remaining 13.1%
consisting of cash or credit card sales. Overall credit policy is established at
the corporate level, with each sales and distribution facility manager and a
district credit manager responsible for the administration and collection of
accounts. The accounts generally are not collateralized, except to the extent
the Company is able to take advantage of the favorable materialmen's lien laws
of most states applicable in the case of delinquent accounts.
The Company operates a large fleet of trucks and other vehicles, including
vehicles specialized for the delivery of certain of the Company's products. As
of February 28, 2001, the fleet included approximately 217 heavy duty trucks, 92
of which provide roof-top or second story delivery and 56 other vehicles
equipped with truck mounted forklifts. In addition, the Company's fleet includes
541 medium duty trucks, 589 light duty trucks and automobiles, 599 forklifts,
117 specialized millwork delivery vehicles, and 62 vehicles equipped to install
blown insulation. The Company will continue to add these specialized vehicles to
other markets where there is sufficient demand for such services.
Over the past several years, the Company has installed and will continue to
increase its base of computer-aided design hardware and software. These systems
include design and take-off software for kitchens, decks, outbuildings,
additions and houses. With these tools, sales representatives and specialists
are able to provide customers with professional-quality plans, in an efficient
manner.
In 1997, the Company began an equipment rental program at 25 of its sales
and distribution facilities. Under this program, the Company rents specialized,
professional quality tools and equipment to customers in need of equipment for
unique or short-term projects. The program currently is in place in 31 sales and
production facilities and will be expanded to additional facilities in 2001.
In 1997, the Company also began its installed insulation program. Through
the use of specialized equipment and vehicles and its specially trained
installation crews, the Company installs blown and batt insulation in new or
existing construction. There currently are 59 sales and distribution facilities
that offer this service.
16
In 2000, the Company initiated its installed aluminum siding and gutter
programs in several of its sales and distribution centers. Currently, it is
operating 13 installed siding and six installed gutter programs with continued
plans for expansion.
DIY's
-----
Most sales and distribution facilities, primarily building centers located
in Conventional Markets, also pursue sales to project DIY's through their staff
of specially-trained inside sales representatives and specialists. These
representatives provide professional advice to consumers for home improvement
projects and assist these customers in designing specific projects with
sophisticated computer design software. The sales representatives also can
provide a comprehensive list of materials and detailed drawings to assist
customers in completing their projects. The Company believes that project DIY's
are attracted to its sales and distribution facilities by this high level of
service.
The Company's showrooms generally feature product presentations such as
kitchen, bath, door and window displays. The showrooms are regularly
re-merchandised to reflect product trends, service improvements and market
requirements. During 1997 and 1998 the Company completed Resets in five and six,
respectively, of its sales and distribution facilities' showrooms. During 1999,
the Company completed additional Resets in two facilities. In 2000, the Company
completed two more Rests in Conventional Markets, bringing the total to 15
stores. Additional showroom improvements are contemplated for 2001 and future
years.
While the Company's product offerings in hardlines generally are more
limited than its consumer-oriented competitors, the Company stocks a larger
selection of commodity products and offers a special order program for custom or
specialty products. The Company emphasizes project packages, which include all
materials and detailed instructions for the assembly of the larger projects
frequently undertaken by project DIY's.
The Company's internet site on the World Wide Web provides information
about Wickes' services and products, facilitates doing business with customers,
allows customers to look up their own transactional information, and features
extensive links to suppliers and other industry references. The Company's home
page can be found on the web at: http://www.wickes.com.
The Company advertises in trade journals and produces specialized direct
mail promotional materials designed to attract specific target customers. The
Company does some select newspaper advertising, which may include circulars and
run-of-press advertisements. It also has numerous product displays in its sales
and distribution facilities to highlight special products and services.
17
To increase customer loyalty and strengthen customer relationships, the
Company, in many cases with vendor support, sponsors or participates in numerous
special marketing activities, such as trade show events, informational product
seminars, various outings, and professional builder trips.
Products
- --------
To provide its customers with the quality products needed to build, remodel
and repair residential and commercial properties, the Company offers a wide
variety of building products and the ability to special order additional
products. The Company believes that these special order services are extremely
important to its customers, particularly the building professional. In 2000,
approximately 35% of the Company's sales were of special order items, compared
with 32% in 1999. Each of the Company's sales and distribution facilities
tailors its product mix to meet the demands of its local market.
The Company categorizes its product sales (excluding Tool Rental, Installed
Programs and other service-related revenues), which aggregate approximately 96%
and 97% of the Company's net sales in 2000 and 1999, respectively, into four
groups. These include Commodity Wood Products (lumber, plywood, treated lumber,
sheathing, wood siding and specialty lumber); Building Products (roofing, vinyl
siding, doors, windows, mouldings, drywall and insulation); Hardlines (hardware
products, paint, tools, kitchen and bathroom cabinets, plumbing products,
electrical products, light fixtures and floor coverings); and Manufactured
Housing Components (roof and floor trusses, and interior and exterior wall
panels). Commodity Wood Products, Building Products, Hardlines, and Manufactured
Housing Components represented 36.7%, 35.6%, 10.5% and 17.2% of the Company's
product sales respectively, for 2000 and 40.0%, 34.0%, 9.8%, and 16.2% for 1999,
respectively.
Manufacturing
- -------------
The Company operates 27 component manufacturing facilities that supply the
Company's customers with higher-margin, value-added products such as framed wall
panels, roof and floor trusses, and pre-hung interior and exterior doors. These
facilities include 18 stand-alone operations as well as nine additional
operations that exist at the Company's sales and distribution facilities. These
manufacturing operations enable the Company to serve the needs of its
professional customers for such quality, custom-made products. In 2000, the
Company's manufacturing operations supplied approximately 56.7% of the framed
wall panels, roof and floor trusses, and pre-hung doors sold by the Company. The
Company believes that these value-added, engineered manufactured products
improve customer service and provide an attractive alternative to job-site
construction. As resources permit, the Company plans to expand its manufacturing
facilities to take advantage of these increased opportunities and to supply a
greater number of its sales and distribution facilities with these products.
18
Suppliers and Purchasing
- ------------------------
The Company purchases its products from numerous vendors. The great
majority of commodity items are purchased directly from mills and manufacturers,
while the remaining products are purchased from a combination of manufacturers,
wholesalers and other intermediaries. No single vendor accounted for more than
5.0% of the Company's purchases in 2000 and the Company is not dependent upon
any single vendor for any material product. The Company believes that
alternative sources of supply are readily available for substantially all of the
products it offers.
The majority of the Company's commodity purchases are made on the basis of
individual purchase orders rather than longer-term supply contracts. In certain
product lines, though, the Company has negotiated some advantageous volume
pricing agreements for a portion of the product line's purchases. Because
approximately 56% of the Company's annual sales consist of commodity wood
products, drywall and manufactured housing components, all of which are subject
to price volatility, the Company attempts to match its inventory levels to
short-term demand in order to minimize its exposure to price fluctuations. In
addition, the Company enters into futures contracts to hedge longer-term pricing
commitments. The Company has developed an effective coordinated purchasing
program that allows it to minimize costs through volume purchases, and the
Company believes that it has greater purchasing power than many of its smaller,
local independent competitors. The Company seeks to develop close relationships
with its suppliers in order to obtain favorable pricing and service
arrangements.
The Company's computerized inventory tracking and forecasting system, as
part of its inventory replenishment system, is designed to track and maintain
appropriate levels of products at each sales and distribution facility. These
systems have increased the Company's operating efficiencies by providing an
automated inventory replenishment system.
The Company receives its product by truck and rail. The Company has active
rail sidings at 60 of its sales and distribution and manufacturing facilities,
enabling suppliers to ship products purchased by the Company directly to these
facilities by rail. The Company also utilizes one distribution center owned by a
third party, located in Chicago, Illinois, through which approximately 2% of the
Company's wood products inventory is delivered.
19
Seasonality
- -----------
Historically, the Company's first quarter and, occasionally, its fourth
quarter are adversely affected by weather patterns in the Midwest and Northeast,
that result in seasonal decreases in levels of construction activity in these
areas. The extent of such decreases in activity is a function of the severity of
winter weather conditions. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Competition
- -----------
The building material industry is highly competitive. Due to the fragmented
nature of the industry, the Company's competitive environment varies by location
and by customer segment. Reduced levels of construction activity have, in the
past, resulted in intense price competition among building material suppliers
that has, at times, adversely affected the Company's gross margins.
Within the building professionals market, the Company competes primarily
with local independent lumber yards and regional and local building material
chains. Building professionals generally select building material suppliers
based on price, job site delivery, quality and breadth of product lines,
reliability of inventory levels, and the availability of credit. The Company
believes that it competes favorably on each of these bases. The Company believes
that it has a significant competitive advantage in rural markets and small
communities (i.e. Conventional Markets), where it primarily competes with local
independent lumber yards and regional building material chains. To a lesser
extent, the Company also competes in these markets with national building center
chains and warehouse and home center retailers, which generally locate their
units in more densely populated areas. In Major Markets, the Company believes
that its total package of products and services and its ability to serve the
large builder provide it with a competitive advantage.
Environmental and Product Liability Matters
- -------------------------------------------
Many of the sales and distribution facilities presently and formerly
operated by the Company contained underground petroleum storage tanks. Other
than tanks at one acquired facility, which is in compliance with current legal
standards, all such tanks known to the Company 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 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
20
certain circumstances, be held responsible. Since 1988, the Company has incurred
approximately $2.0 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 five years.
The Company previously had been identified as a potential responsible party
in two Superfund landfill clean up sites. Both of these actions were settled for
immaterial amounts.
For information concerning certain litigation concerning products
containing asbestos or silica dust, see "Item 3. Legal Proceedings."
Although the Company has not expended material amounts in the past with
respect to the foregoing and expenditures in the most recent five years have
been significantly reduced, there can be no assurances that these matters will
not give rise to additional compliance or other costs that could have a material
adverse effect on the Company.
Employees
- ---------
As of February 28, 2001, the Company had 4,090 employees, of whom 3,686
were employed on a full-time basis. The number of employees generally fluctuates
with the seasonal nature of the Company's business. The Company believes that it
has maintained favorable relations with its employees. None of the Company's
employees are covered by a collective bargaining agreement.
Trademarks and Patents
- ----------------------
The Company has no material patents, trademarks, licenses, franchises, or
concessions other than the name "Wickes Lumber" and the "Flying W" trademark.
--------------------------
Forward-looking statements in this Item 1 are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995. There
are certain important factors that could cause results to differ materially from
those anticipated by the forward-looking statements made above. These statements
are based on the current plans and expectations of the Company and readers are
cautioned that all forward-looking statements involve risks and uncertainty.
Among the factors that could cause actual results to differ materially are the
effects of seasonality and cyclicality discussed under the headings "Industry
Overview" and "Seasonality". Also, there are the 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 9 to the Consolidated
Financial Statements included elsewhere herein.
21
Item 2. PROPERTIES.
- --------------------
The Company's 101 sales and distribution facilities are located in 23
states, with 67 in the Midwest, 17 in the Northeast and 17 in the South. When
combined with its 27 component manufacturing operations, the Company operates in
24 states. See "Item 1. Business - Markets." The Company believes that its
facilities generally are in good condition and will meet the Company's needs in
the foreseeable future.
The Company's Conventional Markets sales and distribution centers generally
consist of a showroom averaging 9,600 square feet and covered storage averaging
38,400 square feet. The Company's sales and distribution facilities located in
Major Markets tend to be more specialized. Since the beginning of 1997, the
Company has completed Resets in 15 sales and distribution facilities located in
Conventional Markets. The Company's sales and distribution facilities are
situated on properties ranging from 1.0 to 28.2 acres and averaging 9.3 acres.
The Company also operates 18 stand-alone component manufacturing facilities,
which have an average of 40,300 square feet under roof on 6.9 acres.
The Company owns 84 of its sales and distribution facilities and 82 of the
sites on which such facilities are located. The remaining 17 sales and
distribution facilities and 19 sites are leased. As of December 30, 2000, the
Company also held for sale the assets of 3 closed facilities with a net book
value of $1.5 million. In addition to its sales and distribution facilities, the
Company operates 18 stand-alone component manufacturing plants, 12 of which are
owned sites and 6 of which are on leased sites. Nine additional plants are
located on sales and distribution facility sites. All of the owned properties
are pledged as collateral under the Company's Amended and Restated Revolving
Credit Agreement.
For further information see "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations - Liquidity and Capital
Resources" and Note 8 to the Consolidated Financial Statements.
The Company also owns or leases a large fleet of trucks and other vehicles,
including vehicles specialized for the delivery of certain of the Company's
products. As of February 28, 2001, the fleet included approximately 217 heavy
duty trucks, 92 of which provide roof-top or second story delivery and 56 other
vehicles equipped with truck mounted forklifts. In addition, the Company's fleet
includes 541 medium duty trucks, 589 light duty trucks and automobiles, 599
forklifts, 117 specialized millwork delivery vehicles, and 62 vehicles equipped
to install blown insulation.
The Company leases its corporate headquarters, a portion of which is
subleased, located at 706 North Deerpath Drive in Vernon Hills, Illinois.
22
Item 3. LEGAL PROCEEDINGS.
- ---------------------------
The Company previously was identified as a potential responsible party in
two Superfund landfill clean up sites. In Browning-Ferris Industries, et al v.
--------------------------------------
Richard Ter Maat, et al. v. Wickes Lumber Company, et al., Case No. 92 C 22059
- --------------------------------------------------------------------------------
filed in the United State District Court for the Northern District of Illinois,
Wickes was named as a potentially responsible party for cleanup of the
MIG-DeWanne Landfill located in Boone County, Illinois. The Company also was
named by the United States Environmental Protection Agency as a potentially
responsible party regarding cleanup of the Adams/Quincy Landfills #2 & #3
located in Quincy, Illinois. Both of these actions were settled for immaterial
amounts.
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. Librado
-------
Amador, et al. v. Alamo Concrete Products Limited, Wickes Lumber Company, et
- --------------------------------------------------------------------------------
al., Case No. 16696, was filed in the 229th Judicial District Court of Duval
- --
County, Texas. Javier Benavides, et al. v. Magic Valley Concrete, Inc., Wickes
-----------------------------------------------------------------
Lumber Company, et al., Case No. DC-96-89 was filed in the 229th Judicial
- ---------------------------------------------
District Court of Starr County, Texas. 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 300 actions, each of
which seeks unspecified damages, in various Michigan state courts against
manufacturers and building material retailers by individuals who claim to have
suffered injuries from products containing asbestos. Each of the plaintiffs in
these actions is represented by one of two law firms. 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 30 similar actions for insignificant amounts, and another 246 of these
actions have been dismissed. None of these suits have made it to trial.
The Company is a defendant in a lawsuit arising from a 1998 accident
involving an employee truck driver that resulted in personal injuries to a third
party. Plaintiffs seek compensatory damages in an unspecified amount. Recently,
plaintiffs have amended their complaint to include a claim for punitive damages
in an unspecified amount, for which insurance coverage may or may not be
available. While the Company does not believe that any proceedings regarding
this matter will have a material adverse effect on the Company's financial
position, annual results of operations or liquidity, there can be no assurances
of this result.
The Company also is involved in various other legal proceedings which 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.
23
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 assurance of this result.
The Company's assessment of the matters described in this Item 3 are made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995 and are inherently subject to uncertainty. The outcome of the
matters described in this Item 3 may differ from the Company's assessment of
these matters as a result of a number of factors including, but not limited to:
matters unknown to the Company at the present time, development of losses
materially different from the Company's experience, the Company's ability to
prevail against its insurers with respect to coverage issues to date, the
financial ability of those insurers and other persons from whom the Company may
be entitled to indemnity, and the unpredictability of matters in litigation.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
- -------------------------------------------------------------
None.
24
PART II
-------
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
- ------------------------------------------------------------------------------
The Company's Common Stock is authorized for trading on the Nasdaq National
Market under the trading symbol "WIKS." As of February 28, 2001 there were
8,273,685 shares outstanding held by approximately 122 stockholders of record.
In addition, the Company believes approximately 2,000 additional stockholders
hold their shares in street name at various brokerage houses.
The following table sets forth for the periods indicated the high and low
sale prices for the Company's Common Stock as reported on the NASDAQ National
Market System. Prices do not include retail markups, markdowns or commissions.
Three Months Ended High Low
------------------ ------ ------
Fiscal 2000
-----------
March 25 $ 7.500 $ 5.000
June 24 6.500 4.656
September 23 6.438 4.125
December 30 6.188 3.375
Fiscal 1999
-----------
March 27 $ 5.188 $ 3.750
June 26 6.250 3.188
September 25 6.813 4.250
December 25 6.750 4.688
The Company has not declared or paid any dividends on Common Stock in the
past three years and has no present intention to pay cash dividends on Common
Stock in the foreseeable future. The Company's revolving credit facility
prohibits cash dividends on Common Stock, and the trust indenture related to the
Company's 11-5/8% senior subordinated notes restricts cash dividends on Common
Stock. See "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations" and Footnote 8 to the Consolidated Financial
Statements.
Item 6. SELECTED FINANCIAL DATA.
- ---------------------------------
The following table presents selected financial data derived from the
audited consolidated financial statements of the Company for each of the five
years in the period ended December 30, 2000. The following selected financial
data should be read in conjunction with "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Consolidated
Financial Statements and Notes thereto contained elsewhere in this report.
25
WICKES INC. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except ratios and per share data)
Dec. 30, Dec. 25, Dec. 26, Dec. 27, Dec. 28,
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Income Statement Data:
Net sales (1) $ 1,027,604 $ 1,087,402 $ 912,190 $ 885,901 $ 850,131
Gross profit (1) 223,092 224,604 195,119 186,006 176,696
Selling, general and administrative
expense (1) 199,889 185,884 166,420 167,790 148,772
Depreciation, goodwill and trademark
amortization (1) 5,877 5,295 4,513 4,422 5,081
Provision for doubtful accounts 983 1,724 2,915 1,707 1,067
Other operating income 3,292 4,932 6,017 9,673 5,670
Restructuring and unusual items (2) -- -- 5,932 (559) 745
Income from operations 19,635 36,633 21,356 22,319 26,751
Interest expense (3) 24,322 23,302 21,632 21,417 21,750
Equity in loss of affiliated company -- -- -- 1,516 3,183
(Loss) income before income taxes (4,687) 13,331 (276) (614) 1,818
Income tax (benefit) provision (735) 5,743 689 946 1,310
(Loss) income before extraordinary gain (3,952) 7,588 (965) (1,560) 508
Extraordinary gain, net of
taxes of $4,313 (4) 6,806 -- -- -- --
Net income (loss) 2,854 7,588 (965) (1,560) 508
Ratio of earnings to fixed charges (5) -- 1.48 -- -- 1.08
Interest coverage (6) 1.17 1.97 1.32 1.36 1.61
Adjusted interest coverage (7) 1.17 1.97 1.61 1.33 1.65
Per Share Data:
Net loss before extraordinary gain per
common share - basic and diluted ($0.48) -- -- -- --
Net income (loss) per common
share - basic $ 0.35 $ 0.92 ($ 0.12) ($ 0.19) $ 0.07
Net income (loss) per common
share - diluted $ 0.34 $ 0.91 ($ 0.12) ($ 0.19) $ 0.07
Weighted average common
shares -basic 8,249,774 8,216,265 8,197,542 8,168,257 7,207,761
Weighted average common
shares -diluted 8,466,383 8,330,571 8,197,542 8,168,257 7,221,082
Operating and Other Data:
EBITDA (8) $ 26,985 $ 43,106 $ 26,609 $ 27,182 $ 32,118
Adjusted EBITDA (9) 26,985 43,106 32,541 26,623 32,863
Cash interest expense (10) 23,048 21,792 20,185 20,016 19,969
Depreciation and amortization 5,877 5,295 4,513 4,422 5,081
Deferred financing cost amortizatio 1,274 1,510 1,447 1,401 1,781
Capital expenditures 9,734 8,624 5,854 7,758 2,893
Same store sales growth (11) (6.1%) 18.1% 9.0% 4.7% (6.4%)
Sales & distribution centers open at
end of period 101 101 101 111 108
Net cash provided by (used in)
operating activities 14,669 (9,565) 522 (20,455) 19,588
Net cash (used in) provided by
investing activities (9,243) (17,597) (1,623) 6,040 2,410
Net cash (used in) provided by
financing activities (5,255) 27,169 1,087 12,561 (20,152)
Balance Sheet data (at period end):
Working capital $ 141,901 $ 162,523 $ 135,345 $ 134,459 $ 116,771
Total assets 300,936 334,009 292,183 283,352 272,842
Total long-term debt, less
current maturities 200,403 220,742 191,961 193,061 176,376
Total stockholders' equity 33,896 30,819 23,148 24,001 25,499
26
Notes to Selected Consolidated Financial Data
---------------------------------------------
(1) Certain reclassifications have been made to prior year amounts to conform
to the current presentation. One of the Company's strategic goals is to
increase the sales volume of manufactured building components (framed wall
panels, roof and floor trusses, and pre-hung interior and exterior doors)
and to continue to increase the sales of internally manufactured
components. In response to increases, over time, in the volume of
internally manufactured building components sold, the Company has
determined that certain manufacturing costs previously included in Selling,
General and Administrative expense and Depreciation, Goodwill and Trademark
Amortization expense should be classified as Cost of Sales. Therefore,
elements of costs directly associated with manufacturing processes such as
manufacturing labor and related benefits, manufacturing supplies, equipment
depreciation, delivery expenses and other overhead items have been
reclassified for the current and prior periods presented. The amounts
reclassified to Cost of Sales were $36.5 million, $30.6 million, $21.5
million, $18.0 million, and $13.4 million for 2000, 1999, 1998, 1997 and
1996, respectively. In addition to the Manufacturing Expense
reclassification, certain amounts have been reclassified relating to EITF
00-10 and EITF 00-14. These reclassifications had no impact on income from
operations, net income or net assets. See Notes 2 and 3 to the Consolidated
Financial Statements for further description.
(2) During the first quarter of 1998, the Company implemented the 1998 Plan
which resulted in the closing or consolidation of eight sales and
distribution and two manufacturing facilities in February, the sale of two
sales and distribution facilities in March, and further reductions in
headquarters staffing. As a result of the 1998 Plan, the Company recorded a
restructuring charge of $5.4 million in the first quarter and an additional
charge of $0.5 million in the third quarter. In 1997, the Company recorded
a $0.6 million credit as a result of finalizing the 1995 restructuring
plan. In 1996, the Company recorded an additional charge of $0.7 million
relating to its 1995 restructuring plan.
(3) Interest expense includes cash interest expense and amortization of
deferred financing costs (see note 10 below).
(4) As further explained in Note 8 to the Consolidated Financial Statements, on
November 21, 2000 the Company commenced a cash tender offer for its
outstanding 11-5/8% Senior Subordinated Notes due 2003, at a substantial
discount from face value. The offer expired on December 20, 2000 and on
December 26, 2000, the Company redeemed $36.0 million of notes tendered. As
a result of this transaction, the Company recorded a pre-tax gain of $11.1
million, net of costs associated with the transaction. The net gain, after
appropriate state and federal income taxes was $6.8 million.
27
(5) For purposes of computing this ratio, earnings consist of pre-tax income
(loss) before income taxes adjusted for fixed charges. Fixed charges
consist of cash interest expense, amortization of deferred financing costs,
and a portion of operating lease rental expense that is representative of
the interest factor attributable to interest expense. Such earnings were
insufficient to cover fixed charges by $4.7 million, $0.3 million and $0.8
million for the years ended December 30, 2000, December 26, 1998 and
December 27, 1997, respectively.
(6) For purposes of computing this ratio, earnings consist of EBITDA (as
defined in note 8 below), which is divided by cash interest expense (as
defined in note 10 below).
(7) For purposes of computing this ratio, earnings consist of Adjusted EBITDA
(as defined in note 9 below), which is divided by cash interest expense (as
defined in note 10 below).
(8) EBITDA represents income (loss) before income taxes, equity in loss of
affiliated company, interest expense, depreciation and amortization. EBITDA
is not presented herein as an alternative measure of operating results but
rather to provide additional information related to debt service
capability, and does not represent cash flow from operations, as defined by
GAAP and may not be comparable to similarly titled measures reported by
other companies.
(9) Adjusted EBITDA represents EBITDA (as defined in note 8 above) adjusted to
exclude restructuring and unusual items and is used in the adjusted
interest coverage ratio to reflect debt service capability before the
effect of these restructuring and unusual items, and provides an additional
measure of debt service capability for ongoing operations.
(10) Cash interest expense consists of interest expense less amortization of
deferred financing costs. The following table details interest expense,
cash interest expense, and interest paid for each of the five years ended
December 30, 2000 (in thousands).
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Interest expense $ 24,322 $ 23,302 $ 21,632 $ 21,417 $ 21,750
Less:
Amortization of deferred
financing costs 1,274 1,510 1,447 1,401 1,781
------- -------- ------- -------- -------
Cash interest expense 23,048 21,792 20,185 20,016 19,969
Decrease (increase) in
accrued interest 155 (289) 700 (225) 403
------- -------- ------- -------- -------
Interest paid $ 23,203 $ 21,503 $ 20,885 $ 19,791 $ 20,372
======= ======== ======= ======== =======
28
(11) Same store sales growth data reflects average sales for sales and
distribution facilities and other facilities that were operated by the
Company throughout both the current and previous year. In addition to sales
and distribution facilities, component manufacturing plants also make some
direct sales. The following table lists, by year, the number of locations
that were included in this calculation:
Year No. of Facilities
---- -----------------
2000 101
1999 101
1998 101
1997 107
1996 101
29
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS.
--------------
General
- -------
The following table sets forth, for the periods indicated, the percentage
relationship to net sales of certain expense and income items. The table and
subsequent discussion should be read in conjunction with the consolidated
financial statements and notes thereto appearing elsewhere herein.
Years Ended
-----------
Dec 30, Dec. 25, Dec. 26,
2000 1999 1998
------ ------ ------
Net sales 100.0% 100.0% 100.0%
Gross profit 21.7 20.7 21.4
Selling, general and administrative
expense 19.5 17.1 18.2
Depreciation, goodwill and trademark
amortization 0.6 0.5 0.5
Provision for doubtful accounts 0.1 0.2 0.3
Restructuring and unusual items 0.0 0.0 0.7
Other operating income (0.3) (0.5) (0.7)
Income from operations 1.9 3.4 2.3
Certain reclassifications have been made to prior year amounts to conform
to the current presentation. All material intercompany balances and transactions
have been eliminated. See also Notes 2 and 3 to the Consolidated Financial
Statements regarding the reclassification of certain manufacturing expenses and
other items.
The Company's operations, as well as those of the building material
industry generally, have reflected substantial fluctuations from period to
period as a consequence of various factors, including levels of construction
activity, weather, prices of commodity wood products, general regional and local
economic conditions, interest rates and the availability of credit, all of which
are cyclical or seasonal in nature. The Company anticipates that fluctuations
from period to period will continue in the future. Because a substantial
percentage of the Company's sales are attributable to building professionals,
certain of these factors may have a more significant impact on the Company than
on companies more heavily focused on consumers.
The Company's first quarter and, occasionally, its fourth quarter are
adversely affected by weather patterns in the Midwest and Northeast, which
result in seasonal decreases in levels of construction activity in these areas.
The extent of such decreases in activity is a function of the severity of winter
weather conditions. In the first quarter of 2000, the Midwest and Northeast
30
experienced mild winter weather, but significant precipitation. Additionally,
these regions also experienced a more severe winter with respect to cold
temperatures and snow in the fourth quarter of 2000 than in the previous four
years. Weather conditions in 1999 were relatively normal throughout the year.
During the first quarter of 1998, the Company experienced mild winter weather
conditions in the Company's Midwest region, which was partially offset by
increased precipitation in the Northeast and South.
The following table contains selected unaudited quarterly financial data
for the years ended December 30, 2000 and December 25, 1999. Quarterly
earnings/(loss) per share may not total to year-end earnings/(loss) per share
due to the issuance of additional shares of Common Stock during the course of
the year.
QUARTERLY FINANCIAL DATA
(Unaudited)
Fiscal Quarters
---------------
(in millions, except per share data and percentages)
Income (loss) Basic / Diluted
Net Sales as a before Net income (loss)
% of Annual Gross Extraordinary Net Income per share before
Net Sales Net Sales Profit Item (Loss) Extraordinary Item
--------- --------- ------ ---- ------ ------------------
2000
- ----
Quarter 1 $216.5 21.1% $46.0 $(3.2) $(3.2) $(.39)/(.39)
Quarter 2 280.4 27.3 60.1 1.5 1.5 .19/.18
Quarter 3 282.7 27.5 62.6 2.1 2.1 .26/.25
Quarter 4 248.0 24.1 54.4 (4.4) 2.4 (.53)/(.53)
1999
- ----
Quarter 1 $191.7 17.6% $40.6 $(3.3) $(3.3) $(.40)/(.40)
Quarter 2 289.4 26.6 59.0 3.6 3.6 .44 / .43
Quarter 3 326.2 30.0 65.8 5.0 5.0 .61 / .61
Quarter 4 280.1 25.8 59.2 2.2 2.2 .27 / .26
Each fiscal quarter in the table above represents a thirteen-week period,
with the exception of Quarter 4, which was a fourteen-week period.
31
In the fourth quarter 2000, the Company recorded an extraordinary gain on
the early extinguishment of $36.0 million of its 11-5/8% Senior Subordinated
Notes due in 2003. See Note 8 to the Consolidated Financial Statements included
elsewhere herein for further description.
In 1998, the Company recorded a charge of $5.9 million for restructuring
and unusual items. For additional information on the restructuring and unusual
items charge, see Note 4 to the Consolidated Financial Statements included
elsewhere herein. Also, in the fourth quarter of 1998, two pieces of real estate
were sold for gains of $0.4 million. Gains or losses on the sale of real estate
are recorded under other operating income.
The Company historically has generated approximately 15% to 20% of its
annual revenues during the first quarter of each year, and the Company
historically has recorded a significant net loss for this quarter. As a result
of these seasonal factors, the Company's inventories and receivables reach peak
levels during the second and third quarters and generally are lower during the
first and fourth quarters, depending on sales volume and lumber prices.
---------------------------
This Item 7 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. For a discussion of these matters, see the last paragraph of
Item 1 of this report.
2000 Compared with 1999
- -----------------------
Net Sales
---------
Net sales for 2000 decreased $59.8 million, or 5.5%, to $1,027.6 million
from $1,087.4 million in 1999. Sales for all facilities operated throughout both
years ("same store sales") decreased 6.1%. During 2000, the Company experienced
a 6.6% decrease in same store sales to its primary type of customer, the
professional home builder, and a 0.3% increase in same store sales to commercial
builders. Consumer sales declined 10.6% on a same store basis.
Sales to building professionals as a percentage of total sales were 61.8%
in 2000 compared to 62.3% in 1999. Lumber and building materials accounted for
86.1% of total sales in 2000 compared with 87.8% in 1999.
32
Total housing starts in the United States decreased 4.5% in 2000, and
starts in the Company's primary geographical market, the Midwest, decreased
approximately 7.8%. The Company's two other geographical markets, the Northeast
and South, experienced decreases of 1.4% and 4.9%, respectively. Nationally,
single family housing starts, which generate the majority of the Company's sales
to building professionals, experienced a decrease of 5.5% in 2000, from 1.33
million starts in 1999 to 1.26 million starts in 2000. Sales at its Target Major
Markets decreased 9.5% in 2000.
Sales for 2000 were positively impacted by investments in new initiatives
such as Tool Rental and Installed Programs, sales of which increased 38.8% in
2000 over sales in 1999. However, these increases were offset for the year by
the effects of lumber deflation and by weather-related issues in the first and
fourth quarters. Dimensional lumber, panel products and, to an extent, drywall
are commodities which cause the Company's costs to fluctuate with changing
market conditions, generally tracked using the Random Lengths Framing Composite
Average and the Random Lengths Panel Index for dimensional lumber and panel
products, respectively. Drywall prices generally fluctuate based on availability
and are tracked using producer prices. Increases in commodity prices ("lumber
inflation") generally are passed on to the customer with certain lag effects,
resulting in higher selling prices, or are fixed in the futures market for
dimensional lumber and panel products for a small percentage of longer-term
sales contracts. In periods of decreasing commodity prices ("lumber deflation"),
selling prices decrease, with certain lag effects. The Company estimates that
deflation in lumber and drywall prices negatively impacted 2000 net sales by
approximately $74.3 million, when compared with lumber and drywall prices during
1999.
Products that exhibited the greatest change in sales for the year ended
December 30, 2000 versus sales of such products in 1999 were lumber and plywood
(down 16.0%), drywall (down 19.0%), treated wood (down 7.8%), roofing (down
4.8%), and kitchen and bath (up 6.2%).
For the year, sales of internally manufactured building components
increased to 56.7% of total distributed building components from 50.9% in the
prior year. The dollar value of sales of internally manufactured building
components increased 10.4% from approximately $87.4 million in 1999 to
approximately $96.5 million in 2000. As with dimensional lumber, sales of
internally manufactured building components are impacted by the effects of
lumber deflation.
Gross Profit
------------
Gross profit decreased $1.5 million to $223.1 million or 21.7% of net sales
for 2000 compared with $224.6 million or 20.7% of net sales for 1999. The
Company believes that the sales effect of lumber deflation decreased the dollar
value of gross profit by approximately $15.2 million for the fiscal year ended
December 30, 2000. Commodity wood products, drywall and manufactured building
components accounted for approximately 56.1% of sales for the year, compared
with 58.9% for the 1999. The gross margin for these products improved to 19.0%
for 2000 versus 17.5% last year.
33
The increase in gross profit as a percentage of sales resulted from
increased sales and gross profit margins relating to internally manufactured
products, improved buying leverage, and the expansion of the Company's other
initiatives. These substantially offset the effects of lumber deflation.
As previously noted, sales of internally manufactured building components
improved during the fiscal year. The Company's margins from sales of internally
manufactured building components typically are higher than the margins on sales
of purchased components.
Selling, General, and Administrative Expense
--------------------------------------------
In 2000, selling, general, and administrative expense ("SG&A") increased as
a percent of net sales to 19.5% compared with 17.1% of net sales in 1999. Total
SG&A expense increased $14.0 million or 7.5% from $185.9 million in 1999 to
$199.9 million in 2000. Much of this increase is attributable to costs
associated with new initiatives such as Tool Rental and Installed Programs.
These programs increased salaries, wages and benefits; delivery expense; and
other fixed charges. In addition, higher fuel and natural gas prices caused
delivery expense and utility costs to increase.
Salaries, wages and benefits increased approximately $7.8 million or 6.1%
over the prior year. Higher unit sales volumes, initiatives such as Tool Rental
and Installed Programs, and higher administrative compensation and benefits
increased regular compensation and benefits by approximately $9.6 million or
7.8%. Offsetting these increases was a $1.4 million decrease in management
incentives. In addition, the culmination of changes in the administration of
vacation pay resulted in a $1.3 million improvement in SG&A expenses for 2000,
following a comparable $1.0 million improvement in 1999.
Delivery expense for the year increased approximately $2.4 million or 17.4%
over the prior year. The increase was driven by various Company initiatives and
by the significant increase in fuel prices over last year. With regard to
initiatives, the expansion of Installed Programs, such as insulation, siding and
gutters, has caused the Company to incur additional delivery expense through the
trucks involved in these programs. As a result, vehicle repair and maintenance,
lease costs, and licensing increased approximately $1.4 million or 14.1%.
Finally, the effects of increased fuel costs nationwide in 2000, plus expansion
of the fleet resulted in additional fuel expense of approximately $1.1 million,
a 25.4% increase over the prior year.
Promotional expenses, including travel and entertainment, increased
approximately $0.9 million or 12.0%. Fixed expenses, other than depreciation,
associated with the operation of the Company's sales and distribution and its
headquarters facilities increased approximately $0.8 million or 10.8%.
34
Depreciation, Goodwill and Trademark Amortization
-------------------------------------------------
Depreciation, goodwill and trademark amortization costs increased
approximately $0.6 million or 11.0% in 2000, compared with 1999. This increase
primarily is due to depreciation on delivery vehicles, equipment used in the
Tool Rental program and capital improvements made as a result of the Company's
Major Markets and re-merchandising programs, as well as its other initiatives.
Provision for Doubtful Accounts
-------------------------------
The Company extends credit, generally due on the 10th day of the month
following the sale, to qualified and approved contractors. Provision for
doubtful accounts decreased to approximately $1.0 million or 0.1% of sales in
2000 from approximately $1.7 million or 0.2% of sales for 1999.
Other Operating Income
----------------------
Other operating income decreased approximately $1.6 million or 33.3% in
2000 as compared to 1999. The decrease primarily is the result of a reduction in
gains reported on the sale of excess property and various fixed assets of
approximately $1.5 million. During 1999, the Company sold five pieces of real
estate and recorded total gains on the sale of real estate and various fixed
assets of approximately $1.8 million. This is compared with three real estate
sales and various fixed asset disposals in 2000, resulting in total gains of
approximately $0.3 million.
Interest Expense
----------------
Interest expense increased to $24.3 million in 2000 from $23.3 million in
1999. This increase was the result of an increase in the overall effective
borrowing rate of 72 basis points as floating interest rates increased over the
course of fiscal 2000 compared to 1999, partially offset by a $4.5 million
decrease in average outstanding debt.
Income Tax Benefit before Extraordinary Item
--------------------------------------------
In 2000, the Company recorded a net income tax benefit before extraordinary
item of $0.7 million versus an income tax expense of $5.7 million in 1999. Net
operating loss carryforwards were used to substantially offset current income
taxes payable in 1999. An effective federal and state income tax rate of 38.8%
was used to calculate income taxes for 2000, compared with an effective rate of
38.7% for 1999. In addition to the effective income tax rate, state franchise
taxes of $1.4 million and $1.1 million were calculated for 2000 and 1999,
respectively, and are included in the provision reported.
35
The Company continues to review future earnings projections to determine
that there is sufficient support for its deferred tax assets and valuation
allowance. Management believes that it is more likely than not that the Company
will receive full benefit of its net deferred tax asset and that the valuation
allowance is properly stated.
Net (loss) income before extraordinary item
-------------------------------------------
The Company recorded a net loss before extraordinary item in 2000 of $4.0
million versus net income of $7.6 million in 1999, a decline of $11.5 million.
The loss primarily resulted from a reduction of gross profit dollars of
approximately $1.5 million; increased salaries, wages and benefits of $7.8
million; increased vehicle maintenance, lease and licensing costs of $1.4
million; a $1.1 million increase in fuel costs; a $1.0 million increase in
interest expense and a $1.7 million decline in other income. These decreases
were partially offset by a $0.7 million decrease provision for doubtful
accounts.
Extraordinary item
------------------
As further explained in Note 8 to the Consolidated Financial Statements, on
November 21, 2000 the Company commenced a cash tender offer for its outstanding
11-5/8% Senior Subordinated Notes due 2003, at a substantial discount from face
value. The offer expired on December 20, 2000 and on December 26, 2000, the
Company redeemed $36.0 million of notes tendered. As a result of this
transaction, the Company recorded a pre-tax gain of $11.1 million, net of costs
associated with the transaction. The net gain, after appropriate state and
federal income taxes was $6.8 million.
1999 Compared with 1998
- -----------------------
Net Sales
---------
Net sales for 1999 increased $175.2 million, or 19.2%, to $1,087.4 million
from $912.2 million in 1998. Sales for all facilities operated throughout both
years ("same store sales") increased 18.1%. During 1999, the Company experienced
a 22.1% increase in same store sales to its primary type of customer, the
professional home builder, and a 30.8% increase in same store sales to
commercial builders. Consumer sales declined by 0.2% on a same store basis.
Total housing starts in the United States increased 3.0% in 1999, and
starts in the Company's primary geographical market, the Midwest, increased
approximately 7.9%. The Company's two other geographical markets, the Northeast
and South, experienced increases of 3.4% and 2.5%, respectively. Nationally,
single family housing starts, which generate the majority of the Company's sales
to building professionals, experienced an increase of 4.7% in 1999, from 1.27
million starts in 1998 to 1.33 million starts in 1999.
36
The Company estimates that inflation in lumber prices positively affected
1999 sales by approximately $44.3 million, when compared with lumber prices
during 1998.
Gross Profit
------------
Gross profit increased $29.5 million to 20.7% of net sales for 1999
compared with 21.4% of net sales for 1998. The increase in gross profit dollars
is primarily due to increased sales, improved product costs and increased
margins on internally manufactured products. In the third quarter of 1998, the
Company recorded a charge of $0.8 million as a result of an exchange of
clearance merchandise for barter credits. The decline in gross profit percentage
primarily was the result of the effects of rapid lumber inflation that occurred
during the second and third quarters of 1999 as well as a continued shift in
sales mix to professional builders.
The Company estimates that lumber inflation in 1999, when compared with
1998 price levels, increased gross profit dollars by approximately $7.1 million.
The percent of Company sales attributable to professional builders increased to
89.9% for 1999 compared with 87.9% for 1998.
Selling, General, and Administrative Expense
--------------------------------------------
In 1999, selling, general, and administrative expense ("SG&A") decreased as
a percent of net sales to 17.1% compared with 18.2% of net sales in 1998. Much
of this improvement is attributable to expense reductions as a result of the
Company's 1998 restructuring efforts and the completion of most of the Company's
re-merchandising programs during or prior to the end of the second quarter of
1998. In addition, operating leverage achieved as a result of significant sales
growth also contributed to the decline as a percent of sales.
The Company experienced decreases from 1998 to 1999, as a percent of sales,
in salaries and wages, travel, general office expenses, utilities, rent,
marketing, delivery and administrative expenses which were partially offset by
increased maintenance, employee benefits and other insurance costs. Improvements
in the administration of vacation pay resulted in a $1.0 million, or 0.1% of
sales, improvement in SG&A expenses for 1999.
Depreciation, Goodwill and Trademark Amortization
-------------------------------------------------
Depreciation, goodwill and trademark amortization costs increased $0.8
million in 1999 compared with 1998. This increase primarily is due to
depreciation on rental equipment and capital improvements made as a result of
the Company's major market and re-merchandising programs.
37
Provision for Doubtful Accounts
-------------------------------
Provision for doubtful accounts decreased to $1.7 million or 0.2% of sales
from $2.9 million or 0.3% of sales for 1998. While the Company did experience
several large write-offs during 1998 and 1999, the results were in line with its
historical average of approximately 0.3% of sales.
Restructuring and Unusual Items
-------------------------------
During the first quarter of 1998 the Company implemented the 1998 Plan,
which resulted in the closing or consolidation of eight sales and distribution
and two manufacturing facilities in February, the sale of two sales and
distribution facilities in March, and further reductions in headquarters
staffing. As a result of the 1998 Plan, the Company recorded a restructuring
charge of $5.4 million in the first quarter of 1998 and an additional charge of
$0.5 million in the third quarter of 1998. The $5.9 million cumulative charge
included $4.1 million in anticipated losses on the disposition of closed
facility assets and liabilities, $2.1 million in severance and post employment
benefits related to the 1998 plan, offset by a benefit of $300,000 for
adjustments to prior years' restructuring accruals. The $4.1 million in
anticipated losses included the write-down of assets (excluding real estate), to
their net realizable value of $3.4 million and $700,000 in real estate carrying
costs. The $2.1 million in severance and post employment benefits covered
approximately 250 employees that were released as a result of reductions in
headquarters staffing and the closing or consolidation of the ten operating
facilities. The $300,000 benefit from prior years was a result of accelerated
sales of previously closed facilities during the fourth quarter of 1997 and
first quarter of 1998. The acceleration of these sales resulted in a change in
the estimate of facility carrying costs for the sold facilities. At December 26,
1998 the accrued liability for restructuring had been reduced to zero.
Other Operating Income
----------------------
Other operating income decreased to $4.9 million in 1999 from $6.0 million
in 1998. The decrease primarily is the result of a decrease in gains reported on
the sale of real estate of closed facilities, excess vehicles and equipment, and
a decrease in one-time insurance recoveries. During 1999, the Company sold five
pieces of real estate and recorded total gains on the sale of fixed assets of
$1.8 million compared with nine pieces of real estate sold and total gains on
the sale of fixed assets of $2.1 million during 1998. In addition, during 1998
the Company recorded during 1998 approximately $1.0 million in gains as a result
of the difference between insured replacement cost and book value as a result of
fire and storm damage at certain of the Company's sales and distribution
facilities.
38
Interest Expense
----------------
Interest expense increased to $23.3 million in 1999 from $21.6 million in
1998. This increase was the result of an increase in average outstanding debt
under the Company's revolving line of credit of $26 million partially offset by
a decrease in the overall effective borrowing rate of 40 basis points. The
increase in average outstanding debt primarily was due to increases in working
capital and increased investment in property, plant and equipment used to
support the Company's significant growth in sales volume during 1999.
Provision for Income Taxes
--------------------------
In 1999 and 1998, the Company recorded income tax expense of $5.7 million
and $0.7 million, respectively. Net operating loss carryforwards were used to
substantially offset current income taxes payable in 1999.
Net Income
----------
The Company recorded net income of $7.6 million in 1999, compared with a
net loss of $1.0 million in 1998, an improvement of $8.6 million. The primary
elements of this improvement include an increase in gross profit dollars of
$29.5 million, a $5.9 million decrease in restructuring and unusual items, a
1.1% decrease in SG&A as a percentage of net sales and a $1.2 million decrease
in provision for doubtful accounts. These improvements were partially offset by
a $0.8 million increase in depreciation, goodwill and trademark amortization, a
$1.7 million increase in interest expense, a $5.1 million increase in provision
for income taxes and a reduction in other income of $1.1 million.
39
Liquidity and Capital Resources
- -------------------------------
The Company's principal sources of working capital and liquidity are
earnings and borrowings under its revolving credit facility. The Company's
primary need for capital resources is to finance accounts receivable, inventory
and capital expenditures.
In 2000, net cash provided by operating activities was $14.7 million. This
compares with net cash used in operating activities of $9.6 million in 1999. The
net cash provided by operations in 2000 primarily is due to reductions in
receivables and inventory resulting from declining sales and "lumber deflation",
partially offset by decreased current liabilities.
Accounts receivable at the end of 2000 were $76.7 million, a 30.4% decrease
over year end 1999, primarily as a result of an 11.5% decrease in fourth quarter
credit sales compared with 1999. Inventory at the end of December 2000 was $2.8
million lower than at the end of 1999, primarily as a result of declines in the
costs of lumber and building materials throughout the year due to commodity
lumber deflation. The amount of the Company's accounts payable on any balance
sheet date may vary from the average accounts payable throughout the period due
to the timing of payments and will tend to increase or decrease in conjunction
with an increase or decrease in inventory.
During 2000, the Company increased its capital expenditures to $9.7 million
compared to $7.7 million, net of the $.9 million in manufacturing equipment
converted to operating leases in 1999. Investing cash flows in both years were
partially offset by proceeds on the sale of fixed assets.
The Company's capital expenditures consist primarily of the construction of
facilities for new and existing operations, the remodeling of sales and
distribution facilities and component manufacturing facilities, and the purchase
of equipment and management information systems. The Company may also, from
time-to-time, make expenditures to establish or acquire operations to expand or
complement its existing operations, especially in its major markets and
manufacturing. Under the Company's amended and restated credit agreement,
expenditures capitalized for financial statement purposes, excluding
acquisitions and the portion of expenditures reimbursed by insurance proceeds as
a result of casualty losses, and including amounts carried over from previous
years, were limited to $10.8 million during 2000. The Company's actual
expenditures in 2000, as defined by the amended and restated credit agreement,
were $9.7 million. In addition to capital expenditures, the credit agreement
allows the Company to spend up to $30 million, subject to certain restrictions,
for acquisitions. The Company expects to fund capital expenditures through
borrowings and its internally generated cash flow.
The Company made one acquisition during 2000, acquiring TresArk
Enterprises, Inc. TresArk Enterprises, Inc. is a producer of construction
management software designed for lumberyards and their professional contractors
and was acquired for $0.8 million, paid for in cash in 2000. In addition, the
40
Company built a state-of-the-art component manufacturing facility in Mackville,
WI and expanded its facility in Decatur, IL to accommodate the manufacturing of
wall panels during 2000.
During 1999, the Company began, or significantly expanded, the
manufacturing of wall components and/or trusses at seven manufacturing
facilities. In January of 1999, the Company acquired the assets of a wall panel
manufacturer located in Cookeville, Tennessee; in March of 1999, it acquired the
assets of Porter Building Products, a manufacturer of trusses and wall panels
located in Bear, Delaware; and in October of 1999, it acquired the assets of
Advanced Truss Systems, a manufacturer of trusses, located in Kings Mountain,
North Carolina. In November of 1999, the Company also acquired the assets of
United Building Systems, a manufacturer of wall panels in Lexington, Kentucky.
The total purchase price of these acquisitions was $14.3 million, of which $13.8
million was paid in cash in 1999 and 2000, with the remainder payable in 2001 in
cash or stock at the option of the Company.
At December 30, 2000 the Company operated 101 sales and distribution
centers and 27 component manufacturing facilities compared with 101 sales and
distribution facilities and 25 component manufacturing facilities at December
25, 1999. At December 30, 2000, there were no material commitments for future
capital expenditures.
As further explained in Note 8 to the Consolidated Financial Statements, on
November 21, 2000 the Company commenced a cash tender offer for its outstanding
11-5/8% Senior Subordinated Notes due 2003, at a substantial discount from face
value. The offer expired on December 20, 2000 and on December 26, 2000, the
Company redeemed $36.0 million of notes tendered. As a result of this
transaction, the Company recorded a pre-tax gain of $11.1 million, net of costs
associated with the transaction. The net gain, after appropriate state and
federal income taxes was $6.8 million.
To provide the funds necessary to complete the Redemption, the Company
entered into an amended and restated credit agreement with its existing bank
group on December 13, 2000. The amended and restated credit agreement, among
other things, increased the total commitment to $251.7 million, removed the
seasonal reduction in borrowing capacity provided for in the previous credit
agreement, increased both the base rate and LIBOR based borrowing spreads, and
extended the final maturity of the revolving credit agreement to June 30, 2005.
A portion of the credit facility was provided as a one-time term loan in the
principal amount of $51.7 million that requires quarterly principal payments
beginning on March 31, 2001. The term loan contains provisions for mandatory
principal prepayments in the event that the Company receives cash in connection
with certain transactions, as defined.
A commitment fee of 0.38% is payable on the unused amount of the amended
and restated revolving line of credit. Interest on amounts outstanding under the
amended and restated revolving line of credit bear interest at a spread of 0.75%
above the base rate of Fleet National Bank (9.50% at December 30, 2000) or 2.50%
above the applicable LIBOR rate (6.65% at December 30, 2000). Depending upon the
41
Company's rolling four-quarter interest coverage ratio and unused
availability, as defined, amounts outstanding will bear interest at a spread
above the base rate from 0.0% to 0.75% or from 2.00% to 2.75% above the
applicable LIBOR rate. At December 30, 2000, the Company had designated $26.1
million and $65.0 million as base rate and LIBOR borrowings, respectively.
Amounts outstanding under the $51.7 million term loan portion bear interest at a
spread of 3.00% above the applicable LIBOR rate. All interest is payable
monthly.
The Company has entered into an interest rate swap agreement that
effectively fixes the Company's borrowing cost at 5.75% plus the Company's LIBOR
borrowing spread on $40.0 million of the Company's amended and restated line of
credit borrowings. The interest rate swap agreement expires in February 2002.
Substantially all of the Company's accounts receivable, inventory and
general intangibles are pledged as collateral for the amended and restated
revolving line of credit. In addition, substantially all of the Company's owned
real estate assets were provided as additional collateral in connection with the
term loan. Availability is limited to 85.0% of eligible accounts receivable plus
60.0% of eligible inventory, with these percentages subject to change at the
permitted discretion of the agent for the lenders.
Previously, the Company was subject to a revolving line of credit agreement
that was entered into on February 17, 1999 and which was to expire in June 30,
2003. This revolving line of credit provided for, subject to restrictions and
modifications discussed below, up to $160.0 million of revolving credit loans
based on eligible accounts receivable and inventory, as defined. Outstanding
borrowings bore interest at spreads ranging from 0.0% to 0.75% above the
applicable base rate (8.50% at December 25, 1999) or LIBOR rate (5.80% at
December 25, 1999), based upon the Company's rolling four-quarter interest
coverage ratio, as defined. At December 25, 1999, the Company had designated
$15.7 million and $105.0 million as base rate and LIBOR borrowings,
respectively.
During 1999, in order to continue to support its significant sales growth
and the related increase in working capital levels, the previous revolving line
of credit agreement was amended to (1) clarify the definition of unused
availability to allow the full amount of the Company's borrowing base to be
included in the unused availability calculation and (2) provide a seasonal
increase in the total commitment from $160.0 million to $200.0 million from May
15 through November 15 of each year. As a result of these amendments, the
maximum applicable borrowings could be fully utilized.
The Company's weighted-average interest rate on all outstanding borrowings,
excluding amortization of debt issue costs, for the years ended December 30,
2000, December 25, 1999 and December 26, 1998 was approximately 9.95%, 9.34% and
9.80%, respectively.
42
The Company maintained excess availability under its revolving credit
facilities throughout 2000. 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 facility because of the increased
inventory needed for the peak building season. At February 29, 2000, the Company
had outstanding borrowings of $147.3 million and unused availability of $32.0
million under the amended and restated line of credit The Company currently has
excess availability under its revolving credit facility and anticipates that
funds provided by operations and under this facility will be adequate for the
Company's future needs.
The Company's amended and restated credit agreement and the trust indenture
relating to the Company's 11-5/8% Senior Subordinated Notes contain certain
covenants and restrictions. Generally, the agreement and the trust indenture
restrict, among other things, capital expenditures, the incurrence of additional
debt, asset sales, dividends, investments, acquisitions and other restricted
payments. The amended and restated credit agreement requires that the Company
maintain unused availability under the revolving line of credit of at least $15
million (subject to increase in certain circumstances) and maintain certain
levels of net worth, as defined in the amended and restated credit agreement.
Furthermore, the agreement considers a change in control, as defined, as an
event of default. In addition, upon a change in control of the Company, as
defined in the trust indenture, the Company must offer to purchase the 11-5/8%
Senior Subordinated Notes at 101% of the principal thereof, plus accrued
interest. At December 30, 2000 the Company was in compliance with all covenants
under the amended and restated credit agreement and the trust indenture.
Net Operating Loss Carryforwards
- --------------------------------
At December 30, 2000 the Company and its subsidiaries had federal income
tax net operating loss carryforwards ("NOL's") of approximately $32.4 million.
The NOL's will expire in the years 2006 to 2018 if not previously utilized. See
also Note 12 to the Consolidated Financial Statements included elsewhere herein.
The Company continues to review future earnings projections to determine
that there is sufficient support for its deferred tax assets and valuation
allowance. Management believes that it is more likely than not that the Company
will receive full benefit of its net deferred tax asset and that the valuation
allowance is properly stated.
43
Recently Issued Accounting Pronouncements
- -----------------------------------------
On December 31, 2000, the Company adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended ("SFAS 133"), which
establishes accounting and reporting standards for derivative instruments and
hedging activities. This standard requires that all derivative instruments,
including certain derivative instruments embedded in other contracts, be
recognized as assets or liabilities in the balance sheet and measured at fair
value. If a derivative is designated as a fair value hedge, changes in the fair
value of the derivative and the hedged item will be recognized in earnings. If a
derivative is designated as a cash flow hedge, changes in the fair value of the
derivative will be recorded in other comprehensive income and will be recognized
in the statement of operations when the hedged item affects earnings. For a
derivative that does not qualify as a hedge, changes in fair value will be
recorded in earnings.
As a result of adopting SFAS 133, the Company recorded a pre-tax charge of
approximately $0.1 million as a cumulative transition adjustment to other
comprehensive income for derivatives designated in cash flow-type hedges prior
to adopting SFAS 133.
In September 2000, the Emerging Issues Task Force ("EITF") of the Financial
Accounting Standards Board issued EITF Issue No. 00-10, "Accounting for Shipping
and Handling Fees and Costs" in September 2000. This issue requires that
revenues relating to "shipping and handling" be classified as revenues in the
Consolidated Statements of Operations for fiscal years beginning after December
15, 1999. Previously, the Company had recorded shipping and handling fees as a
reduction of Selling, General and Administrative expenses ("SG&A"). The Company
recorded approximately $2.3 million, $2.2 million and $1.9 million of shipping
and handling fees in 2000, 1999 and 1998, respectively. These fees have been
reclassified to Net Sales for all periods presented in the Consolidated
Statements of Operations. Shipping and handling expenses such as vehicle repairs
and maintenance, lease costs, licensing and fuel generally are charged to SG&A
for sales and distribution centers and to Cost of Sales for manufacturing
operations.
In May 2000, EITF Issue No. 00-14, "Accounting for Certain Sales
Incentives" was issued and requires that sales incentives offered by a vendor
that can be used by a customer as a result of an exchange transaction be
recognized as a component of Cost of Goods Sold. Previously, the Company
classified expenses associated with its Wickes Advantage Program as a component
of SG&A. The amount of these expenses was approximately $1.0 million, $0.8
million and $0.3 million for 2000, 1999 and 1998, respectively. Such expenses
have been reclassified to Cost of Goods Sold for all periods presented in the
Consolidated Statements of Operations.
44
Item 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
--------------------------------------------------------------------
The Company is subject to market risk primarily associated with changes in
interest rates and commodity lumber prices.
Interest Rate Risk
- ------------------
As discussed in Note 8 to the Consolidated Financial Statements, to provide
the funds necessary to complete the redemption of a portion of the Company's
11-5/8% Senior Subordinated Notes due 2003, the Company entered into an amended
and restated credit agreement with it's existing bank group on December 13,
2000. The amended and restated credit agreement, among other things, increased
the total commitment to $251.7 million, removed the seasonal reduction in
borrowing capacity provided for in the previous credit agreement, increased both
the base rate and LIBOR based borrowing spreads, and extended the final maturity
of the revolving credit agreement to June 30, 2005. A portion of the credit
facility was provided as a one-time term loan in the principal amount of $51.7
million that requires quarterly principal payments beginning on March 31, 2001.
Interest on amounts outstanding under the amended and restated revolving line of
credit bear interest at a spread of 0.75% above the base rate of Fleet National
Bank (9.50% at December 30, 2000) or 2.50% above the applicable LIBOR rate 6.65%
at December 30, 2000). Depending upon the Company's rolling four-quarter
interest coverage ratio and unused availability, as defined, amounts outstanding
will bear interest at a spread above the base rate from 0.0% to 0.75% or from
2.00% to 2.75% above the applicable LIBOR rate. At December 30, 2000, the
Company had designated $26.1 million and $65.0 million as base rate and LIBOR
borrowings, respectively. Amounts outstanding under $51.7 million the term loan
portion bear interest at a spread of 3.00% above the applicable LIBOR rate.
The Company has entered into an interest rate swap agreement that
effectively fixes the Company's borrowing cost at 5.75% plus the Company's LIBOR
borrowing spread on $40.0 million of the Company's amended and restated line of
credit borrowings. The interest rate swap agreement expires in February 2002.
Based on the Company's average borrowings under its revolving credit
agreements during 2000, including amounts outstanding under the term loan
portion and net of the impact of the interest rate swap agreement described
above, a hypothetical 25 basis point movement in the base rate or LIBOR rate
would result in an approximate $223,600 annualized increase or decrease in
interest expense. (See Note 13 of Consolidated Financial Statements included
elsewhere herein).
The fair value of the Company's outstanding 11 5/8% Senior Subordinated
Notes was $38.3 million and $85.0 million at December 30, 2000 and December 25,
1999, respectively. As discussed in Note 8 to the Consolidated Financial
Statements, the Company redeemed approximately $36.0 million face amount of the
notes in December 2000. Assuming a hypothetical 100 basis point decrease in the
45
yield to maturity of the outstanding notes at December 30, 2000, the fair value
of the fixed rate debt would have increased by $0.7 million.
Commodity Price Risk
- --------------------
The Company enters into lumber futures contracts to hedge price
fluctuations related to anticipated future purchases of commodity lumber. While
lumber futures contracts are entered into on a risk management basis, the
Company's hedge positions could show a net gain or loss depending on prevailing
market conditions. At December 30, 2000, the Company had 41 lumber futures
contracts outstanding with a total contract value of $839,000 and a net
unrealized loss of $106,000. These contracts all mature in 2001. If the market
price of lumber were to increase or decrease, the Company anticipates that the
resulting gain or loss for these purchases would be offset by the lumber futures
contracts.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
- -----------------------------------------------------
Financial statements of the Company are set forth herein beginning on page
F-1.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- --------------------------------------------------------------------------------
FINANCIAL DISCLOSURE.
---------------------
The Company filed a Form 8-K report on December 7, 1999 reporting a change
in the Company's independent accountants.
46
PART III
--------
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
- -------------------------------------------------------------
Information required by this Item is incorporated herein by reference to
the Sections entitled "Election of Directors" and "Management" in the definitive
proxy statement to be filed in connection with the Company's Annual Meeting of
Stockholders tentatively scheduled to be held on May 23, 2001.
Item 11. EXECUTIVE COMPENSATION.
- ---------------------------------
Information required by this Item is incorporated herein by reference to
the Sections entitled "Executive Compensation", "Board of Directors' Meetings
and Compensation" (the last two paragraphs), "Report of the Compensation and
Benefits Committee" and "Comparison of Cumulative Total Return" in the
definitive proxy statement to be filed in connection with the Company's Annual
Meeting of Stockholders tentatively scheduled to be held on May 23, 2001.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
- ------------------------------------------------------------------------
Information required by this Item is incorporated herein by reference to
the Section entitled "Principal Security Holders and Security Ownership of
Management" in the definitive proxy statement to be filed in connection with the
Company's Annual Meeting of Stockholders tentatively scheduled to be held on May
23, 2001.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- ---------------------------------------------------------
Information required by this Item is incorporated herein by reference to
the Section entitled "Certain Relationships and Related Transactions" in the
definitive proxy statement to be filed in connection with the Company's Annual
Meeting of Stockholders tentatively scheduled to be held on May 23, 2001.
47
PART IV
-------
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
- --------------------------------------------------------------------------
(a) List of Documents Filed as a Part of this Report:
- ------------------------------------------------------
(1) Financial Statements: Page No.
------------------------ --------
Independent Auditors' Report F-1
Report of Independent Accountants F-2
Consolidated balance sheets as of December 30, 2000
and December 25, 1999 F-3
Consolidated statements of operations for the years ended
December 30, 2000, December 25, 1999 and December 26, 1998 F-4
Consolidated statements of changes in common stockholders'
equity for the years ended December 30, 2000, December 25,
1999 and December 26, 1998 F-5
Consolidated statements of cash flows for the years ended
December 30, 2000, December 25, 1999 and December 26, 1998 F-6
Notes to consolidated financial statements F-7
(2) Financial Statement Schedules:
- -----------------------------------
Report of Independent Accountants S-1
Schedule II. Valuation and Qualifying Accounts S-2
(3) Exhibits
- -------------
See Exhibit Index included elsewhere herein.
(b) Reports on Form 8-K
- ------------------------
The Company filed a current report on Form 8-K on December 14, 2000
reporting that it had entered into an amended and restated credit facility.
The Company filed a current report on Form 8-K on February 6, 2001
reporting the results of a tender offer for its 11-5/8% Senior Subordinated
Notes due 2003.
The Company filed a current report on Form 8-K on February 9, 2001
referencing the failure of Riverside Group, Inc. to make required payment on its
11% Secured Notes due December 31, 2000 for which approximately 2,000,000 shares
of Wickes Inc. stock were held as collateral.
48
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
WICKES INC.
Date: March 29, 2001 By: /s/ J. Steven Wilson
--------------------
J. Steven Wilson
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
/s/ J. Steven Wilson Chairman and Chief Executive Officer March 29, 2001
- -------------------- (Principal Executive and Financial Officer)
J. Steven Wilson Director
/s/ Harry T. Carneal Director March 29, 2001
- --------------------
Harry T. Carneal
/s/ Albert Ernest, Jr Director March 29, 2001
- ---------------------
Albert Ernest, Jr
/s/ William H. Luers Director March 29, 2001
- --------------------
William H. Luers
/s/ Robert E. Mulcahy III Director March 29, 2001
- -------------------------
Robert E. Mulcahy III
/s/ Frederick H. Schultz Director March 29, 2001
- ------------------------
Frederick H. Schultz
/s/ Robert T. Shaw Director March 29, 2001
- ------------------
Robert T. Shaw
/s/ Claudia B. Slacik Director March 29, 2001
- ---------------------
Claudia B. Slacik
/s/ Russell J. Bonaguidi Vice President - Controller March 29, 2001
- ------------------------ (Principal Accounting Officer)
Russell J. Bonaguidi
F-1
INDEPENDENT AUDITORS' REPORT
----------------------------
To the Board of Directors and Stockholders of
Wickes Inc.
Vernon Hills, IL
We have audited the accompanying consolidated balance sheets of Wickes Inc. and
subsidiaries as of December 30, 2000 and December 25,1999, and the related
consolidated statements of operations, changes in stockholders' equity, and cash
flows for the years then ended. Our audits also included the financial statement
schedules for the years ended December 30, 2000 and December 25, 1999 listed in
the Index at Item 14. These financial statements and the financial statement
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion on the financial statements and financial statement
schedules based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Wickes Inc. and subsidiaries as of
December 30, 2000 and December 25, 1999, and the results of their operations and
their cash flows for the years then ended in conformity with accounting
principles generally accepted in the United States of America. Also, in our
opinion, such financial statement schedules, when considered in relation to the
basic financial statements taken as a whole, present fairly in all material
respects the information set forth therein.
/s/ Deloitte & Touche LLP
Chicago, IL
February 28, 2001
F-2
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
To the Stockholders and
Board of Directors of Wickes Inc.
In our opinion, the accompanying consolidated statements of operations, changes
in stockholders' equity and cash flows present fairly, in all material respects,
the results of Wickes Inc. and its subsidiaries' operations and their cash flows
for the year ended December 26, 1998, in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audit. We
conducted our audit of these statements in accordance with auditing standards
generally accepted in the United States of America which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
As discussed in Note 16 to the 2000 consolidated financial statements (Note 16
in the 1998 consolidated financial statements), Wickes Inc. has restated
previously issued consolidated financial statements to change its accounting for
a barter transaction.
/s/ PricewaterhouseCoopers LLP
Chicago, Illinois
February 23, 1999 except for Note 16 in the 2000 financial statements (Note 16
in the 1998 financial statements), as to which the date is August 31, 1999.
F-3
WICKES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 30, 2000 and December 25, 1999
(in thousands except share data)
2000 1999
---- ----
ASSETS
Current assets:
Cash $ 243 $ 72
Accounts receivable, less allowance for doubtful
accounts of $2,791 in 2000 and $4,105 in 1999 76,659 110,103
Notes receivable from affiliate 201 481
Inventory 117,910 120,705
Deferred tax asset 6,692 7,184
Prepaid expenses 3,405 2,663
-------- --------
Total current assets 205,110 241,208
-------- --------
Notes receivable from affiliate 282 -
Property, plant and equipment, net 54,384 50,599
Trademark (net of accumulated amortization of
$10,940 in 2000 and $10,718 in 1999) 6,079 6,301
Deferred tax asset 12,990 14,695
Rental equipment (net of accumulated depreciation
of $1,582 in 2000 and $1,010 in 1999) 2,296 1,981
Other assets (net of accumulated amortization of
$12,440 in 2000 and $11,463 in 1999) 19,795 19,225
-------- --------
Total assets $ 300,936 $ 334,009
======== ========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 6,339 --
Accounts payable 35,294 53,190
Accrued liabilities 21,576 25,495
-------- --------
Total current liabilities 63,209 78,685
-------- --------
Long-term debt 200,403 220,742
Other long-term liabilities 3,428 3,763
Commitments and contingencies (Note 9)
Stockholders' equity:
Common stock $0.01 par (8,271,313 and 8,224,888
shares issued and outstanding in 2000 and 1999,respectively) 83 82
Additional paid-in capital 87,092 86,870
Accumulated deficit (53,279) (56,133)
-------- ---------
Total stockholders' equity 33,896 30,819
-------- --------
Total liabilities and stockholders' equity $ 300,936 $ 334,009
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
WICKES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 30, 2000, December 25, 1999, and December 26, 1998
(in thousands, except per share data)
2000 1999 1998
---- ---- ----
Net sales $ 1,027,604 $ 1,087,402 $ 912,190
Cost of sales 804,512 862,798 717,071
----------- ----------- -----------
Gross profit 223,092 224,604 195,119
----------- ----------- -----------
Selling, general and administrative expenses 199,889 185,884 166,420
Depreciation, goodwill and trademark amortization 5,877 5,295 4,513
Provision for doubtful accounts 983 1,724 2,915
Restructuring and unusual items -- -- 5,932
Other operating income (3,292) (4,932) (6,017)
----------- ----------- -----------
203,457 187,971 173,763
----------- ----------- -----------
Income from operations 19,635 36,633 21,356
Interest expense 24,322 23,302 21,632
----------- ----------- -----------
(Loss) income before income taxes (4,687) 13,331 (276)
(Benefit) provision for income taxes: (735) 5,743 689
----------- ----------- -----------
(Loss) income before extraordinary items (3,952) 7,588 (965)
Extraordinary gain on early extinguishment
of debt, net of taxes of $4,313 6,806 -- --
----------- ----------- -----------
Net income (loss) $ 2,854 $ 7,588 $ (965)
=========== =========== ===========
(Loss) income before extraordinary gain per
common share - basic $ (0.48) $ 0.92 $ (0.12)
=========== =========== ===========
(Loss) income before extraordinary gain per
common share - diluted $ (0.48) $ 0.91 $ (0.12)
=========== =========== ===========
Net income per common share - basic $ 0.35 $ 0.92 $ (0.12)
=========== =========== ===========
Net income per common share - diluted $ 0.34 $ 0.91 $ (0.12)
=========== =========== ===========
Weighted average common shares - for basic 8,249,774 8,216,265 8,197,542
=========== =========== ===========
Weighted average common shares - for diluted 8,466,383 8,330,571 8,197,542
=========== =========== ===========
The accompanying notes are an integral part of the consolidated
financial statements.
F-5
WICKES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Years Ended December 26,1998,December 25, 1999 and December 30, 2000
(in thousands, except for share data)
Additional Total
Common Stock Paid-in Accumulated Stockholders'
Shares Amount Capital Deficit Equity
------ ------ ------- ------- ------
Balance at December 27, 1997 8,176,205 $ 82 $ 86,675 $ (62,756) $ 24,001
Net loss - - (965) (965)
Issuance of common stock 31,063 - 112 - 112
----------- ------- -------- ----------- --------
Balance at December 26, 1998 8,207,268 82 86,787 (63,721) 23,148
Net income - - 7,588 7,588
Issuance of common stock 17,620 - 83 - 83
----------- ------- --------- ----------- ---------
Balance at December 25, 1999 8,224,888 82 86,870 (56,133) 30,819
Net income 2,854 2,854
Issuance of Common stock 46,425 1 222 - 223
----------- ------ ----------- ----------- -------
Balance at December 30, 2000 8,271,313 $ 83 $ 87,092 $ (53,279) $ 33,896
========= ==== ======= ======== ======
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
WICKES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 30, 2000, December 25, 1999, and December 26, 1998
(in thousands)
2000 1999 1998
-------- -------- --------
Cash flows from operating activities:
Net income (loss) $ 2,854 $ 7,588 $ (965)
Adjustments to reconcile net income (loss) to
net cash from operating activities:
Extraordinary gain (6,806) -- --
Depreciation expense 6,507 5,852 4,785
Amortization of trademark 222 222 222
Amortization of goodwill 621 399 246
Amortization of deferred financing costs 1,274 1,510 1,447
Provision for doubtful accounts 983 1,724 2,915
Gain on sale of assets (146) (1,458) (1,834)
Deferred tax (benefit) provision (2,116) 4,460 (330)
Changes in assets and liabilities:
Decrease / (increase) in accounts receivable 32,461 (16,904) (14,053)
Decrease / (increase) in inventory 2,795 (15,831) (1,010)
(Decrease) / increase in accounts payable and accrued liabilities (22,150) 3,539 10,814
Increase in prepaids and other assets (1,830) (666) (1,715)
-------- -------- --------
NET CASH PROVIDED BY / (USED IN) OPERATING ACTIVITIES 14,669 (9,565) 522
-------- -------- --------
Cash flows from investing activities:
Purchases of property, plant and equipment (9,734) (8,624) (5,854)
Payments for acquisitions (800) (12,999) --
Proceeds from sales of property, plant and equipment 1,291 4,026 4,231
-------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES (9,243) (17,597) (1,623)
-------- -------- --------
Cash flows from financing activities:
(Increase) / decrease in notes receivable (2) 614 2,105
Debt issuance cost (2,595) (2,294) --
Net borrowing / (repayments) under revolving line of credit 22,044 28,782 (1,084)
Reductions of notes payable (24,925) (16) (46)
Net proceeds from issuance of common stock 223 83 112
-------- -------- --------
NET CASH (USED IN) / PROVIDED BY FINANCING ACTIVITIES (5,255) 27,169 1,087
--------- -------- --------
NET (DECREASE) / INCREASE IN CASH 171 7 (14)
Cash at beginning of year 72 65 79
--------- -------- --------
CASH AT END OF YEAR $ 243 $ 72 $ 65
========= ======== ========
Supplemental schedule of cash flow information:
Interest paid $ 23,203 $ 21,503 $ 20,885
Income taxes paid 1,457 1,524 987
Supplemental schedule of non-cash investing and financing activities: The
Company purchased assets in conjunction with acquisitions made during the
period. In connection with these acquisitions, liabilities were assumed as
follows:
Assets acquired $ 800 $ 14,850 $ --
Liabilities assumed $ -- $ 529 $ --
Purchase price payable $ -- $ 1,322 $ --
The accompanying notes are an integral part of the
consolidated financial statements.
F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
1. Description of Business
- ----------------------------
Wickes Inc. (formerly Wickes Lumber Company), through its sales and distribution
facilities, markets lumber and building materials and provides specialized
services primarily to professional contractors, repair and remodelers, and
do-it-yourself home owners, principally in the Midwest, Northeast and Southern
United States. Wickes Inc.'s wholly-owned subsidiaries are: Lumber Trademark
Company ("LTC"), a holding company for the "Flying W" trademark; and GLC
Division, Inc. ("GLC"), which subleases certain real estate to Wickes Inc.
2. Accounting Policies
- ------------------------
Principles of Consolidation
- ---------------------------
The consolidated financial statements present the results of operations,
financial position, and cash flows of Wickes Inc. and all its wholly-owned
subsidiaries (the "Company"). All significant intercompany balances and
transactions have been eliminated in consolidation.
Fiscal Year
- -----------
The Company's fiscal year ends on the last Saturday in December. All periods
presented represent 52-week years with the exception of 2000 being a 53-week
year.
Revenue Recognition
- -------------------
The Company recognizes revenues at the time products are shipped or services are
provided. For contracts that have material or service elements provided over
extended periods of time, revenue generally is recognized, as materials are
delivered, services have been performed and manufactured building components
have been delivered or installed. Prepayments for materials or services are
deferred until such materials have been delivered or services have been
provided.
Cash and Cash Equivalents
- -------------------------
The Company considers all highly liquid investments with a maturity date of
three months or less to be cash equivalents.
F-8
Accounts Receivable
- -------------------
The Company extends credit primarily to qualified professional contractors and
professional repair and remodelers, generally on a non-collateralized basis. The
allowance for doubtful accounts is based on management's assessment of the
amount which may become uncollectable in the future and is estimated using
specific review of problem accounts, overall portfolio quality and current
economic conditions that may effect the borrower's ability to pay, and
historical experience.
Inventory
- ---------
Inventory consists principally of finished goods. The Company utilizes the
first-in, first-out (FIFO) cost flow assumption for valuing its inventory.
Inventory is valued at the lower of cost or market, but not in excess of net
realizable value.
Property, Plant and Equipment
- -----------------------------
Property, plant and equipment are stated at cost and are depreciated under the
straight-line method. Estimated useful lives range from 15 to 39 years for
buildings and improvements. Leasehold improvements are depreciated over the
lesser of the estimated useful life of the asset or the lease term. Machinery
and equipment lives range from 3 to 10 years. Expenditures for maintenance and
repairs are charged to operations as incurred. Gains and losses from
dispositions of property, plant, and equipment are included in the Company's
statement of operations as other operating income.
Rental Equipment
- ----------------
Rental equipment consists of hand tools and power equipment held for rental.
This equipment is depreciated under the straight-line method over a 5 to 10 year
life.
Other Assets
- ------------
Other assets consist primarily of deferred financing costs and goodwill which
are being amortized on the straight-line method, goodwill over 10 to 35 years
and deferred financing costs over the expected terms of the related debt
agreements.
Amortization expense for deferred financing costs is reflected as interest
expense on the Company's Consolidated Statements of Operations.
Trademark
- ---------
The Company's "Flying W" trademark is being amortized over a 40-year period.
F-9
Postretirement Benefits Other Than Pensions
- -------------------------------------------
The Company provides certain health and life insurance benefits for eligible
retirees and their dependents. The Company accounts for the costs of these
postretirement benefits over the employees' working careers in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions."
Postemployment Benefits
- -----------------------
The Company provides certain other postemployment benefits to qualified former
or inactive employees. The Company accounts for the costs of these
postemployment benefits in the period when it is probable that a benefit will be
provided in accordance with SFAS No. 112, "Employers' Accounting for
Postemployment Benefits."
Income Taxes
- ------------
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." Tax provisions and credits are recorded at
statutory rates for taxable items included in the consolidated statements of
operations regardless of the period for which such items are reported for tax
purposes. Deferred income taxes are recognized for temporary differences between
financial statement and income tax bases of assets and liabilities. Deferred tax
assets are reduced by a valuation allowance when the Company cannot make the
determination that it is more likely than not that some portion of the related
tax asset will be realized.
Earnings Per Common Share
- -------------------------
Earnings per common share is calculated in accordance with SFAS No. 128,
"Earnings Per Share." Weighted average shares outstanding have been adjusted for
dilution using the treasury stock method.
Use of Estimates in the Preparation of Financial Statements
- -----------------------------------------------------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from the estimates reported.
F-10
Impairment of Long-Lived Assets
- -------------------------------
The Company evaluates assets held for use and assets to be disposed of in
accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of." This statement requires
that long-lived assets and certain identifiable intangibles held and used by an
entity be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. The
Company historically has reviewed excess property held for sale, and when
appropriate, recorded these assets at the lower of their carrying amount or fair
value (see Note 6).
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 123,
the Company elected to continue the intrinsic value method of accounting
prescribed by APB Opinion 25. As required, the Company has disclosed the pro
forma net income and pro forma earnings per share as if the fair value based
accounting methods had been used to account for stock-based compensation cost
(see Note 10).
Segment Reporting
- -----------------
SFAS Statement No. 131, "Disclosures about Segments of an Enterprise and Related
Information" requires that a public business enterprise report financial and
descriptive information about its reportable operating segments. Generally,
financial information is required to be reported on the basis that it is used
internally for evaluating segment performance and deciding how to allocate
resources to segments. Based on this criteria, the Company has determined that
it operates in one business segment, that being the supply and distribution of
lumber and building materials to building professionals and do-it-yourself
customers, primarily in the Midwest, Northeast, and South. Thus, all information
required by SFAS No. 131 is included in the Company's financial statements. No
single customer represented more than 10% of the Company's total sales in 2000,
1999, and 1998.
Recently Issued Accounting Pronouncements
- -----------------------------------------
On December 31, 2000, the Company adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended ("SFAS 133"), which
establishes accounting and reporting standards for derivative instruments and
hedging activities. This standard requires that all derivative instruments,
including certain derivative instruments embedded in other contracts, be
recognized as assets or liabilities in the balance sheet and measured at fair
F-11
value. If a derivative is designated as a fair value hedge, changes in the fair
value of the derivative and the hedged item will be recognized in earnings. If a
derivative is designated as a cash flow hedge, changes in the fair value of the
derivative will be recorded in other comprehensive income and will be recognized
in the statement of operations when the hedged item affects earnings. For a
derivative that does not qualify as a hedge, changes in fair value will be
recorded in earnings.
As a result of adopting SFAS 133, the Company recorded a pre-tax charge of
approximately $0.1 million as a cumulative transition adjustment to other
comprehensive income for derivatives designated in cash flow-type hedges prior
to adopting SFAS 133.
In September 2000, the Emerging Issues Task Force ("EITF") of the Financial
Accounting Standards Board issued EITF Issue No. 00-10, "Accounting for Shipping
and Handling Fees and Costs" in September 2000. This issue requires that
revenues relating to "shipping and handling" be classified as revenues in the
Consolidated Statements of Operations for fiscal years beginning after December
15, 1999. Previously, the Company had recorded shipping and handling fees as a
reduction of Selling, General and Administrative expenses ("SG&A"). The Company
recorded approximately $2.3 million, $2.2 million and $1.9 million of shipping
and handling fees in 2000, 1999 and 1998, respectively. These fees have been
reclassified to Net Sales for all periods presented in the Consolidated
Statements of Operations. Shipping and handling expenses such as vehicle repairs
and maintenance, lease costs, licensing and fuel generally are charged to SG&A
for sales and distribution centers and to Cost of Sales for manufacturing
operations.
In May 2000, EITF Issue No. 00-14, "Accounting for Certain Sales Incentives" was
issued and requires that sales incentives offered by a vendor that can be used
by a customer as a result of an exchange transaction be recognized as a
component of Cost of Goods Sold. Previously, the Company classified expenses
associated with its Wickes Advantage Program as a component of SG&A. The amount
of these expenses was approximately $1.0 million, $0.8 million and $0.3 million
for 2000, 1999 and 1998, respectively. Such expenses have been reclassified to
Cost of Goods Sold for all periods presented in the Consolidated Statements of
Operations.
Reclassifications and Eliminations
- ----------------------------------
Certain reclassifications have been made to prior year amounts to conform to the
current presentation. All material intercompany balances and transactions have
been eliminated. See also Note 3 regarding the reclassification of certain
manufacturing expenses.
3. Reclassification of Manufacturing Expenses
- ----------------------------------------------
One of the Company's strategic goals is to increase the sales volume of
manufactured building components (framed wall panels, roof and floor trusses,
and pre-hung interior and exterior doors) and to continue to increase the sales
of internally manufactured components. In response to increases, over time, in
F-12
the volume of internally manufactured building components sold, the Company has
determined that certain manufacturing costs previously included in Selling,
General and Administrative expense and Depreciation, Goodwill and Trademark
Amortization expense should be classified as Cost of Sales.
Therefore, elements of costs directly associated with manufacturing
processes such as manufacturing labor and related benefits, manufacturing
supplies, equipment depreciation, delivery expenses and other overhead items
have been reclassified for the current and prior periods presented. This
reclassification had no impact on income from operations, net income or net
assets. The table presented below summarizes the impact of this reclassification
(increase / (decrease) in thousands):
2000 1999 1998
-------- -------- --------
Net sales $ -- $ -- $ --
Cost of sales 36,472 30,586 21,515
-------- -------- --------
Gross profit (36,472) (30,586) (21,515)
-------- -------- --------
Selling, general and administrative expenses (35,002) (29,408) (20,775)
Depreciation, goodwill and
trademark amortization (1,470) (1,178) (740)
-------- -------- --------
(36,472) (30,586) (21,515)
-------- -------- --------
Income from operations $ -- $ -- $ --
======== ======== ========
4. Restructuring and Unusual Charge
- ------------------------------------
During the first quarter of 1998, the Company implemented a restructuring plan
(the "1998 Plan") which resulted in the closing or consolidation of eight sales
and distribution and two manufacturing facilities in February, the sale of two
sales and distribution facilities in March, and further reductions in
headquarters staffing. As a result of the 1998 Plan, the Company recorded a
restructuring charge of $5.9 million. At December 26, 1998, the accrued
liability for restructuring had been reduced to zero.
For further information regarding the sale of closed center real estate see Note
6.
5. Acquisitions
- ----------------
The Company made one acquisition during 2000, acquiring TresArk Enterprises,
Inc. TresArk Enterprises, Inc. is a producer of construction management software
designed for lumberyards and their professional contractors and was acquired for
$800,000, paid for in cash in 2000.
F-13
During 1999, the Company made four acquisitions, all component facilities. The
total purchase price of these acquisitions was $14.3 million, of which $13.8
million was paid in cash in 1999 and 2000, with the remainder payable in 2001 in
cash or stock at the option of the Company. In January 1999, the Company
acquired the assets of a wall panel manufacturer located in Cookeville,
Tennessee. In March 1999, the Company acquired the assets of Porter Building
Products, a manufacturer of trusses and wall panels, located in Bear, Delaware.
In October 1999, the Company acquired the assets of Advanced Truss Systems, Inc.
of Kings Mountain, North Carolina. Advanced Truss Systems is a manufacturer of
engineered wood trusses, servicing the greater Charlotte, North Carolina,
market. In November 1999, the Company acquired the assets of United Building
Systems, Inc. of Lexington, Kentucky. United Building Systems is a manufacturer
of wall panels and roof and floor trusses, in the Lexington, Kentucky, market.
During 1998, the Company acquired the operating assets of Eagle Industries Inc.,
a component manufacturer, for a total cost of $1.8 million paid in cash.
The costs of these acquisitions have been allocated on the basis of the fair
value of the assets acquired and the liabilities assumed. The excess of the
purchase price over the fair value of the net assets acquired resulted in
goodwill, which is being amortized on a straight-line basis. All acquisitions
have been accounted for as purchases. Operations of the companies acquired have
been included in the accompanying consolidated financial statements from their
respective acquisition dates.
The results of all acquisitions were not material to the Company's consolidated
operations.
F-14
6. Property, Plant, and Equipment
- ----------------------------------
Property, plant and equipment is summarized as follows:
December 30, December 25,
2000 1999
---- ----
(in thousands)
Land and improvements $ 14,356 $ 13,607
Buildings 32,997 29,634
Machinery and equipment 39,410 36,905
Leasehold improvements 3,680 3,118
Construction in progress 2,246 1,301
-------- --------
Gross property, plant, and equipment 92,689 84,565
Less: accumulated depreciation (39,822) (36,443)
-------- --------
Property, plant, and equipment
in use, net 52,867 48,122
Assets held for sale, net 1,517 2,477
-------- --------
Property, plant, and equipment, net $ 54,384 $ 50,599
======== ========
Sales of Real Estate
- --------------------
In 2000, the Company sold three pieces of real estate for a net gain $204,000.
One property, which had been held for sale since 1998 had been previously
written down by $119,000 from its original net book value and sold at a net loss
of $72,000. The other two properties, both held for sale since prior to 1996,
had not been previously written down and each were sold for net gains.
In 1999, the Company sold five pieces of real estate for a net gain of $1.4
million. One property, which had been held for sale since the first quarter of
1990, had been previously written down by $200,000 from its original net book
value and sold at a net loss of $23,000. The other four properties, one held for
sale since 1992 and the others since 1998, had not been previously written down
and each were sold for net gains.
In 1998, the Company sold nine pieces of real estate for a net gain of $1.6
million. Eight of the properties sold had been held for sale since the first
quarter of 1998 and had not been previously written down from their original net
book value. The ninth property, which had been held for sale since 1989, had
been previously written down by $709,000 from its original net book value and
sold at a net loss of $59,000.
F-15
The Company reviews assets held for sale in accordance with SFAS No. 121. At
December 30, 2000, the Company held three properties for resale that had been
written down to their estimated fair market values prior to 1998. The Company
did not record any impairment to the cost of assets held for sale in 2000, 1999
or 1998. Certain of these properties are leased to others until such time that
appropriate disposition can be affected.
7. Accrued Liabilities
- ------------------------
Accrued liabilities consist of the following:
December 30, December 25,
2000 1999
---- ----
(in thousands)
Accrued payroll $ 9,038 $11,401
Accrued liability insurance 5,183 5,844
Other 7,355 8,250
------- -------
Total accrued liabilities $21,576 $25,495
======= =======
8. Long-Term Debt
- -------------------
Long-term debt obligations are summarized as follows:
December 30, December 25,
2000 1999
---- ----
(in thousands)
Senior subordinated notes $ 63,956 $100,000
Revolving credit facility:
Revolving notes 91,136 120,742
Term notes 51,650 --
-------- --------
Total long-term debt 206,742 220,742
Less current maturities 6,339 --
-------- --------
Total long-term debt less
current maturities $200,403 $220,742
======== ========
Senior Subordinated Notes
- -------------------------
On October 22, 1993, the Company issued $100.0 million principal amount of
10-year unsecured senior subordinated notes, due December 15, 2003
(collectively, the "Notes"). Interest on the Notes is 11-5/8%, which is payable
semi-annually. Covenants under the related indenture restrict, among other
things, the payment of dividends, the prepayment of certain debt, the incurrence
of additional debt if certain financial ratios are not met, the sale of certain
assets unless the proceeds are applied to the Notes and other restricted
payments. In addition, the Notes require that, upon a change in control of the
Company, as defined, the Company must offer to purchase the Notes at 101% of the
principal thereof, plus accrued interest.
F-16
On November 21, 2000 the Company commenced a cash tender offer for the Notes, at
a substantial discount from face value. The offer expired on December 20, 2000
and on December 26, 2000, the Company redeemed $36.0 million of notes tendered
(the "Redemption"). As a result of this transaction, the Company recorded a
pre-tax gain of $11.1 million, net of costs associated with the transaction. The
net gain, after appropriate state and federal income taxes was $6.8 million.
Revolving Line of Credit / Term Debt
- ------------------------------------
To provide the funds necessary to complete the Redemption, on December 13, 2000
the Company amended and restated its credit agreement entered into on February
17, 1998. The amended and restated credit agreement, among other things,
increased the total commitment to $251.7 million, removed the seasonal reduction
in borrowing capacity provided for in the previous credit agreement, increased
both the base rate and LIBOR based borrowing spreads, and extended the final
maturity of the revolving credit agreement to June 30, 2005. A portion of the
credit facility was provided as a one-time term loan in the principal amount of
$51.7 million that requires quarterly principal payments beginning on March 31,
2001.
A commitment fee of 0.38% is payable on the unused amount of the amended and
restated revolving line of credit. Interest on amounts outstanding under the
amended and restated revolving line of credit bear interest at a spread of 0.75%
above the base rate of Fleet National Bank (9.50% at December 30, 2000) or 2.50%
above the applicable LIBOR rate (6.65% at December 30, 2000). Depending upon the
Company's rolling four-quarter interest coverage ratio and unused availability,
as defined, amounts outstanding will bear interest at a spread above the base
rate from 0.0% to 0.75% or from 2.00% to 2.75% above the applicable LIBOR rate.
At December 30, 2000, the Company had designated $26.1 million and $65.0 million
as base rate and LIBOR borrowings, respectively. Amounts outstanding under the
$51.7 million term loan portion bear interest at a spread of 3.00% above the
applicable LIBOR rate. All interest is payable monthly.
The Company has entered into an interest rate swap agreement that effectively
fixes the Company's borrowing cost at 5.75% plus the Company's LIBOR borrowing
spread on $40.0 million of the Company's amended and restated line of credit
borrowings. The interest rate swap agreement expires in February 2002 (see Note
13).
Substantially all of the Company's accounts receivable, inventory and general
intangibles are pledged as collateral for the amended and restated revolving
line of credit. In addition, substantially all of the Company's owned real
estate assets were provided as additional collateral in connection with the term
loan. Availability is limited to 85.0% of eligible accounts receivable plus
60.0% of eligible inventory, with these percentages subject to change at the
permitted discretion of the agent for the lenders. At December 30, 2000 the
Company had unused availability of $34.4 million.
F-17
Covenants under the amended and restated credit agreement require, among other
things, that the Company maintain unused availability under the revolving line
of credit of at least $15.0 million (subject to increase in certain
circumstances) and maintain certain levels of net worth, as defined in the
agreement. In addition, the agreement restricts, among other things, capital
expenditures, the incurrence of additional debt, asset sales, dividends,
investments, and acquisitions. Furthermore, the amended and restated credit
agreement considers a change in control, as defined, as an event of default. At
December 30, 2000, the Company was in compliance with all such covenants.
Prior to the December 13, 2000 amendment, the Company was subject to a revolving
line of credit agreement that was entered into on February 17, 1999 and which
was to expire in June 30, 2003. This revolving line of credit provided for,
subject to restrictions and modifications discussed below, up to $160 million of
revolving credit loans based on eligible accounts receivable and inventory, as
defined. Outstanding borrowings bore interest at spreads ranging from 0.0% to
0.75% above the applicable base rate (8.50% at December 25, 1999) or LIBOR rate
(5.80% at December 25, 1999), based upon the Company's rolling four-quarter
interest coverage ratio, as defined. At December 25, 1999, the Company had
designated $15.7 million and $105.0 million as base rate and LIBOR borrowings ,
respectively.
During 1999, this revolving line of credit agreement was amended to (1) clarify
the definition of unused availability to allow the full amount of the Company's
borrowing base to be included in the unused availability calculation and (2)
increase the total commitment from $160.0 million to $200.0 million from May 15
through November 15 of each year.
Prior to February 17, 1999, the Company had a revolving line of credit, which
was to expire on March 31, 2000, that provided for borrowings of up to $130.0
million, based on eligible accounts receivable and inventory.
The Company's weighted-average interest rate on all outstanding borrowings,
excluding amortization of debt issue costs, for the years ended December 30,
2000, December 25, 1999 and December 26, 1998 was approximately 9.95%, 9.34% and
9.80%, respectively.
Aggregate Maturities
- --------------------
The remaining outstanding principal balance of the Notes, totaling $64.0
million, matures on December 15, 2003. The amended and restated credit facility
has an expiration date of June 30, 2005. The term loan portion of the revolving
credit facility includes required quarterly principal payments as follows: $2.1
million from March 31, 2001 through December 31, 2001; $2.3 million from March
31, 2002 through December 31, 2002; $3.0 million from March 31, 2003 through
December 31, 2004; $4.7 on March 31, 2005; with the remaining principal balance
F-18
due June 30,2005. In addition, the term loan contains provisions for mandatory
principal prepayments in the event that the Company receives cash in connection
with certain transactions, as defined.
9. Commitments and Contingencies
- ----------------------------------
At December 30, 2000, the Company had accrued approximately $96,000 for
remediation of certain environmental and product liability matters, principally
underground storage tank removal.
Many of the sales and distribution facilities presently and formerly operated by
the Company contained underground petroleum storage tanks. All such tanks known
to the Company 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 $2.0
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 five years. The Company has accrued $18,000
for estimated clean-up costs at 7 of its locations.
The Company previously had been identified as having used two landfills which
are now Superfund clean up sites. Both of these items were settled for
immaterial amounts.
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 300 actions, each of
which seeks unspecified damages, in various Michigan state courts against
manufacturers and building material retailers by individuals who claim to have
suffered injuries from products containing asbestos. Each of the plaintiffs in
these actions is represented by one of two law firms. 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 30 similar actions for insignificant amounts, and another 246 of these
actions have been dismissed. None of these suits have made it to trial.
F-19
Losses in excess of the $96,000 reserved as of December 30, 2000 are possible,
but an estimate of these amounts cannot be made.
The Company is a defendant in a lawsuit arising from a 1998 accident involving
an employee truck driver that resulted in personal injuries to a third party.
Plaintiffs seek compensatory damages in an unspecified amount. Recently,
plaintiffs have amended their complaint to include a claim for punitive damages
in an unspecified amount, for which insurance coverage may or may not be
available. While the Company does not believe that any proceedings regarding
this matter will have a material adverse effect on the Company's financial
position, annual results of operations or liquidity, there can be no assurances
of this result.
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 assurance of this.
Leases
- ------
The Company has entered into operating leases for corporate office space, retail
space, equipment and other items. These leases provide for minimum rents. These
leases generally include options to renew for additional periods. Total rent
expense under all operating leases was $17.4 million, $14.3 million, and $12.5
million for the years ended December 30, 2000, December 25, 1999, and December
26, 1998, respectively.
F-20
Future minimum commitments for noncancelable operating leases are as follows:
Year Amount
---- ------
(in thousands)
2001 $ 15,591
2002 14,221
2003 11,966
2004 9,162
2005 4,217
Thereafter 29,473
--------
Subtotal 84,630
Less sublease income (6,892)
--------
Total $ 77,738
========
10. Stockholders' Equity
- -------------------------
Preferred Stock
- ---------------
As of December 30, 2000, the Company had authorized 3,000,000 shares of
preferred stock, none of which were issued or outstanding.
Common Stock
- ------------
The Company currently has one class of common stock: Common Stock, par value
$.01 per share. At December 30, 2000, there were 20,000,000 shares of Common
Stock authorized and 8,271,313 shares issued and outstanding. In addition, at
December 30, 2000, 855,936 shares of Common Stock were reserved for issuance
under the Company's 1993 Long-Term Incentive Plan and 1993 Director Incentive
Plan.
Stock Compensation Plans
- ------------------------
As of December 30, 2000, the Company has two stock-based compensation plans
(both fixed option plans), which are described below. Under the 1993 Long-Term
Incentive plan as amended on November 30, 1994, the Company may grant options
and other awards to its employees for up to 835,000 shares of common stock.
Under the 1993 Director Incentive plan, the Company may grant options and other
awards to directors for up to 75,000 shares. The exercise price of grants equals
or exceeds the market price at the date of grant. The options have a maximum
term of 10 years. For non-officers, the options generally become exercisable in
equal installments over a three-year period from the date of grant. For officers
the vesting periods can vary by grant.
F-21
Since the Company applies APB Opinion 25 and related interpretations in
accounting for its plans, no compensation cost has been recognized in
conjunction with these plans. Had compensation cost for the Company's
stock-based compensation plans been determined consistent with SFAS 123, the
Company's net income and earnings per share would have been reduced to the pro
forma amounts indicated below (in thousands, except per share data):
2000 1999 1998
---- ---- ----
Income (loss) before
extraordinary gain As reported $(3,952) $7,558 $(965)
Pro forma $(4,158) $7,357 $(1,082)
Net income (loss) As reported $2,854 $7,558 $(965)
Pro forma $2,648 $7,357 $(1,082)
Income (loss) before
extraordinary gain per
share - basic As reported $(.48) $.92 $(.12)
Pro forma $(.50) $.90 $(.12)
Income (loss) before
extraordinary gain per
share - diluted As reported $(.48) $.91 $(.12)
Pro forma $(.50) $.88 $(.12)
Net income (loss) per
share - basic As reported $.35 $.92 $(.12)
Pro forma $.32 $.90 $(.12)
Net income (loss) per
share - diluted As reported $.34 $.91 $(.12)
Pro forma $.31 $.88 $(.12)
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 2000, 1999, and 1998, respectively: dividend
yield of 0% for all years; expected volatility of 60%, 49%, and 48%; risk-free
interest rates of 6.7%, 5.1% and 5.6%; and an expected life of 5.6 years for all
years.
A summary of the status of the Company's fixed stock option plans as of December
30, 2000, December 25, 1999 and December 26, 1998 and changes during the years
ended on those dates is presented as follows:
F-22
2000 1999 1998
---- ---- ----
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Fixed Options Shares Price Shares Price Shares Price
- ------------- ------ ------ ------ ----- ------ -----
Outstanding beginning
of year 788,072 $ 7.22 734,263 $ 7.67 668,283 $ 10.09
Granted 83,500 $ 6.90 121,475 $ 4.85 238,750 $ 3.45
Exercised (39,433) $ 3.68 (3,617) $ 3.91 (11,014) $ 4.55
Forfeited, cancelled
or expired (55,342) $ 9.04 (64,049) $ 8.17 (161,756) $ 9.71
-------- -------- ---------
Outstanding end
of year 776,797 $ 7.23 788,072 $ 7.22 734,263 $ 7.67
Options exercisable
at year end 443,404 $ 8.86 384,720 $10.23 256,627 $ 11.39
Options available for
future grant at
year end 79,139 107,297 164,723
Weighted-average fair value of options granted during the year where:
2000 1999 1998
------ ----- -----
Exercise price equals market price $ 4.02 $2.51 $1.62
Exercise price exceeds market price n/a n/a n/a
Exercise price is less than market price n/a n/a n/a
The following table summarizes information about fixed stock options outstanding
at December 30, 2000:
Options Outstanding Options Exercisable
----------------------------------------- -------------------
Weighted-
Average Weighted- Weighted-
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices at 12/30/00 Life Price at 12/30/00 Price
------ ----------- ---- ----- ----------- -----
$ 3.06 - $ 5.00 480,457 6.9 years $ 4.27 241,564 $ 4.13
$ 5.13 - $ 7.00 112,417 8.1 years $ 6.47 17,917 $ 5.30
$ 10.95 - $ 23.25 183,923 3.7 years $ 15.42 183,923 $ 15.42
F-23
Earnings Per Share
- ------------------
The Company calculates earnings per share in accordance with SFAS No. 128. The
following is the reconciliation of the numerators and denominators used for
basic and diluted earnings per share:
2000 1999 1998
---- ---- ----
Numerators:
Income (loss) before extraordinary
gain - for basic and diluted EPS $(3,952,000) $7,588,000 $(965,000)
============ ========== ==========
Net income (loss) - for basic and
diluted EPS $2,854,000 $7,588,000 $(965,000)
========== ========== ==========
Denominators:
Weighted average common
shares - for basic EPS 8,249,774 8,216,265 8,197,542
Common shares from options 98,885 82,191 -
Other common stock equivalents 117,724 32,115 -
----------- ----------- ---------------
Weighted average common
shares - for diluted EPS 8,466,383 8,330,571 8,197,542
========= ========= =========
In years where net losses are incurred, the dilutive effects of options and
other common stock equivalents are not used in the calculation of diluted EPS,
as they would be anti-dilutive. In addition, options to purchase 278,000,
227,000 and 348,000 weighted-average shares of common stock during 2000, 1999
and 1998 were not included in the calculation of diluted EPS as the options'
exercise prices were greater than the average market price.
11. Employee Benefit Plans
- ---------------------------
401(k) Plan
- -----------
The Company sponsors a defined contribution 401(k) plan covering substantially
all of its full-time employees. Additionally, the Company provides matching
contributions up to a maximum of 2.5% of participating employees' salaries and
wages. Total expenses under the plan for the years ended December 30, 2000,
December 25, 1999, and December 26, 1998 were $2.1 million, $1.8 million and
$1.5 million, respectively.
Postretirement Benefits Other Than Pensions
- -------------------------------------------
The Company provides life and health care benefits to retired employees.
Generally, employees who have attained an age of 60, have rendered 10 years of
service and are currently enrolled in the medical benefit plan are eligible for
postretirement benefits. The Company accrues the estimated cost of retiree
benefit payments during the employee's active service period.
F-24
The following tables reconcile the postretirement benefit, the plan's funded
status and actuarial assumptions, as required by Statement of Financial
Accounting Standard No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits."
December 30, December 25,
2000 1999
---- ----
(in thousands)
Change in accumulated postretirement benefit obligation:
Benefit obligation at beginning of year $ 2,142 $ 2,749
Service cost 263 244
Interest cost 157 151
Participant contributions -- --
Claims paid (317) (241)
Actuarial losses (gains) 2 (761)
Plan amendments -- --
------- -------
Benefit obligation at year-end $ 2,247 $ 2,142
======= =======
Change in plan assets:
Fair value of plan assets n/a n/a
Reconciliation of funded status:
Funded status $(2,247) $(2,142)
Unrecognized transition obilgation -- --
Unrecognized prior service cost (30) (39)
Unrecognized actuarial gain (794) (876)
------- -------
Net amount recognized as other
long-term liabilities $(3,071) $(3,057)
======= =======
Weighted-average assumptions as of year-end:
Discount rate 7.50% 8.00%
Expected return on assets n/a n/a
Medical cost trend 6.00% 6.00%
F-25
December 30, December 25, December 26,
2000 1999 1998
---- ---- ----
(in thousands)
Components of net periodic benefit cost:
Service cost $ 264 $ 244 $ 233
Interest cost 157 151 171
Expected return on plan assets n/a n/a n/a
Amortization of transition obligation - - -
Amortization of prior service cost (10) (10) (10)
Amortization of actuarial gain (80) (39) -
------ ------- -------
Net periodic benefit cost $ 331 $ 346 $ 394
====== ======= =======
December 30, December 25, December 26,
2000 1999 1998
---- ---- ----
(in thousands)
Weighted average assumptions used in
computing net periodic benefit cost:
Discount rate 8.00% 6.75% 7.25%
Expected return on plan assets n/a n/a n/a
Medical cost trend 6.00% 6.00% 6.00%
1% Increase 1% Decrease
----------- -----------
Health care cost trend sensitivity:
Effect on total service cost and
interest cost components $ 22 $ (20)
Effect on postretirement benefit obligation 57 (54)
Postemployment Benefits
- -----------------------
The Company provides certain postemployment benefits to qualified former or
inactive employees who are not retirees. The Company had accrued $152,000 and
$161,000 at December 30, 2000 and December 25, 1999, respectively. These
benefits include salary continuance, severance, and healthcare. Salary
continuance and severance pay are based on normal straight-line compensation and
calculated based on years of service. Additional severance pay is granted to
eligible employees who are 40 years of age or older and have been employed by
the Company five or more years. The Company accrues the estimated cost of
benefits provided to former or inactive employees who have not yet retired over
the employees' service period or as an expense at the date of the event
triggering the benefit.
F-26
12. Income Taxes
- -----------------
The Company and its subsidiaries file a consolidated federal income tax return.
As of December 30, 2000, the Company has net operating loss carryforwards
available to offset future taxable income of approximately $32.4 million
expiring in the years 2006 through 2018.
The income tax provision consists of both current and deferred amounts. The
components of the income tax provision are as follows:
December 30, December 25, December 26,
2000 1999 1998
---- ---- ----
(in thousands)
Taxes currently payable:
State income tax $ 1,372 $1,122 $ 1,019
Federal income tax 9 161 --
Deferred (benefit) expense (2,116) 4,460 (330)
------- ------ -------
Income tax (benefit) expense (735) 5,743 689
Extraordinary expense 4,313 -- --
------- ------ -------
Total income tax expense $ 3,578 $5,743 $ 689
======= ====== =======
An effective federal and state income tax rate of 38.8%, 38.7% and 39.1% was
used to calculate income taxes for 2000, 1999 and 1998, respectively. In
addition to the effective income tax rate, state franchise taxes of $1.4
million, $1.1 million and $1.1 million are included in the provision reported
for 2000, 1999 and 1998, respectively. The following table summarizes
significant differences between the provision for income taxes and the amount
computed by applying the statutory federal income tax rates to income before
taxes:
December 30, December 25, December 26,
2000 1999 1998
---- ---- ----
( in thousands)
Tax/(benefit) computed at
U.S. statutory tax rate $2,251 $ 4,666 $ (96)
State and local taxes 1,020 1,159 662
Alternative minimum tax
Differential 9 161 --
Other 298 (243) 123
------ ------- -----
Total tax provision $3,578 $ 5,743 $ 689
====== ======= =====
F-27
Tax provision and credits are recorded at statutory rates for the taxable items
included in the consolidated statements of operations regardless of the period
for which such items are reported for tax purposes. Deferred income taxes
reflect the net effects of temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used for
income tax purposes. The valuation allowance primarily relates to losses
incurred on certain investments which the Company believes may not be fully
deductible for tax purposes. Management has determined, based on the Company's
positive earnings in 1999 and 2000, and its expectations for the future, that
taxable income of the Company will more likely than not be sufficient to fully
recognize its remaining net deferred tax assets. The components of the deferred
tax assets and liabilities at December 30, 2000 and December 25, 1999 are as
follows:
December 30, December 25,
2000 1999
---- ----
( in thousands )
Deferred income tax assets:
Trade accounts receivable $ 1,139 $ 1,591
Inventories 3,066 2,016
Accrued personnel cost 1,316 1,671
Other accrued liabilities 3,673 4,515
Net operating loss 13,247 13,917
Other 3,622 3,483
-------- --------
Gross deferred income tax assets 26,063 27,193
Less: valuation allowance (1,132) (1,132)
-------- --------
Total deferred income tax assets 24,931 26,061
-------- --------
Deferred income tax liabilities:
Property, plant and equipment 1,537 1,244
Goodwill and trademark 3,083 2,938
Other accrued liabilities 629 --
-------- --------
Total deferred income tax liabilities 5,249 4,182
-------- --------
Net deferred tax assets $ 19,682 $ 21,879
======== ========
F-28
13. Financial Instruments
- --------------------------
The fair value of the Company's cash and cash equivalents, accounts and notes
receivable (including related party amounts) and accounts payable, approximates
the carrying value due to the short maturity of these instruments.
Long-Term Debt
- --------------
The fair value of the Company's long-term debt is estimated based on the quoted
market prices for the same or similar issues or on the current rates offered to
the Company for debt of the same remaining maturities.
Fair Carrying
Value Value
----- -------
(in thousands)
2000 Financial Liabilities:
Long-term Debt-
Revolving Credit Facility:
Revolving Note $ 91,136 $ 91,136
Term Note 51,650 51,650
Senior Subordinated Notes 38,374 63,956
1999 Financial Liabilities:
Long-term Debt-
Revolving Line of Credit $120,742 $120,742
Senior Subordinated Notes 85,000 100,000
Derivative Financial Instruments
- --------------------------------
The Company uses derivative financial instruments in the normal course of
business as a tool to manage its exposure to interest rates and commodity lumber
prices. The Company does not hold or issue derivative financial instruments for
trading purposes. Gains and losses relating to hedging contracts are generally
deferred and recorded in income or as an adjustment to the carrying value of the
related asset or liability at the time the transaction is complete. Payments or
receipts of interest under interest rate swap arrangements are accounted for as
an adjustment to interest expense. The fair value of derivative financial
instruments is determined based upon dealer quotes.
Lumber Futures Contracts
- ------------------------
The Company enters into lumber futures contracts to hedge price fluctuations
related to anticipated future purchases of commodity lumber. While lumber
futures contracts are entered into on a risk management basis, the Company's
hedge positions could show a net gain or loss depending on prevailing market
conditions. At December 30, 2000, the Company had 41 lumber futures contracts
outstanding with a total contract value of $839,000 and a net unrealized loss of
$106,000. These contracts all mature in 2001.
F-29
Interest Rate Swap
- ------------------
At December 26, 1998, the Company had in place an interest rate swap agreement
which effectively fixed the interest rate at 8.11% on $40 million of the
Company's borrowings under its then floating rate revolving line of credit. This
interest rate swap was operative while the 30-day LIBOR borrowing rate remained
below 6.7%. The agreement also included a floor LIBOR rate at 4.6%.
On February 17, 1999, the Company replaced this interest rate swap agreement
with a new agreement that effectively fixes the Company's borrowing cost at
5.75% plus the Company's borrowing spread in effect from time-to-time (as
discussed in Note 8 above) on $40 million of the Company's LIBOR rate borrowings
under the amended and restated revolving line of credit. The interest rate swap
agreement expires in February 2002.
14. Related Party Transactions
- -------------------------------
The Company is approximately 35% owned by Riverside Group, Inc. and 13% owned by
Imagine Investments, Inc.
In March 2000, the Company entered into an agreement with Buildscape, Inc., an
entity controlled by Riverside Group, Inc. and Imagine Investments, Inc., each
of which may be deemed an affiliate of the Company. Pursuant to this agreement,
the Company and Buildscape, Inc. are jointly conducting an Internet distribution
program. Buildscape(R) is an Internet service designed for builders that allows
the Company's customers to buy products and materials from Wickes and other
suppliers. It provides real-time online access to the professional builders'
specific Wickes price list, bill of materials and trade account. Wickes' sales
through the Buildscape site were not material in 2000.
On December 10, 1999 the Company entered into a joint marketing agreement with
ImproveNet, Inc. and Buildscape, Inc. supporting an ImproveNet consumer-oriented
building and remodeling Internet site. At December 30, 2000 Buildscape owed the
Company $100,000 related to this transaction.
In February 1998, as part of the determination made by the Company to
discontinue or sell non-core programs, the Company sold certain operations to
Riverside Group, Inc. In exchange for these assets, the Company received a
three-year $870,000 unsecured promissory note and 10% of future net income of
these operations (subject to a maximum of $429,000 plus interest). In March
2000, the Company extended the terms of its note receivable from Riverside
Group, Inc. Under the revised terms, all previously accrued interest was paid to
the Company by Riverside Group, Inc. on March 31, 2000. Interest accruing
thereafter is paid on a quarterly basis. In addition, repayment of the remaining
principal balance was deferred for one year, with quarterly principal payments
F-30
commencing on April 1, 2001. As of December 30, 2000 the remaining principle
balance was approximately $469,000, with accrued interest of $14,000. Interest
earned for the years ended 2000, 1999 and 1998 was approximately $54,000,
$71,000 and $84,000, respectively.
In 2000, the Company paid approximately $333,000 in reimbursements primarily to
affiliates of the Company's chairman, for costs related to services provided to
the Company during the year by certain employees of the affiliated company and
use of a corporate aircraft. Total payments in 1999 and 1998 for similar
services were approximately $660,000 and $730,000, respectively.
A former director and executive officer of the Company was, during most of 1998,
a shareholder of the law firm that was general counsel to the Company. The
Company paid this firm $741,000 for legal services provided to the Company
during 1998.
15. Other Operating Income
- --------------------------
Other operating income on the Company's Statement of Operations includes
primarily the sale or disposal of property, plant and equipment, service charges
assessed customers on past due accounts receivables and casualty gains/losses.
The sale of property, plant and equipment includes the sale of 3, 5, and 9
pieces of real estate in 2000, 1999 and 1998, respectively. In 1998, casualty
gains of $1.0 million were recorded as a result of the differences between
insured replacement cost and net book value resulting from fire and storm damage
at certain of the Company's sales and distribution facilities. The following
table summarizes the major components of other operating income by year.
Other Operating Income
Gain/(Loss)
2000 1999 1998
---- ---- ----
(in thousands)
Sale of property, plant and equipment $ 345 $ 1,821 $2,111
Accounts receivable service charges 2,409 2,460 2,331
Casualties (559) (556) 670
Other 1,096 1,208 905
------- ------- ------
Total $ 3,292 $ 4,932 $6,017
======= ======= ======
16. Barter Transaction
- -----------------------
At any given time approximately 1% to 2% of the Company's total inventory will
be classified as delete or obsolete merchandise. Delete or obsolete merchandise
consists of inventory that, while in good sellable condition, will be
discontinued for one of several business reasons. This inventory, which may
consist of items from any of the Company's product lines, historically has been
marked down in value by approximately 20% to 30% of its original cost.
F-31
In September of 1998, the Company entered into a transaction in which it
exchanged delete/obsolete merchandise, with an impaired book value of $1.2
million, for barter credits at a stated value of $1.6 million. As part of the
barter transaction the Company had agreed to sell the merchandise for the new
owner, on a clearance basis, and remit the proceeds, up to $350,000, to the
owner. The Company entered into the transaction to free valuable showroom and
storage space for new merchandise. The value of this merchandise had been
previously reduced from its original cost of approximately $1.6 million to $1.2
million, based on the Company's most recent sales information. Initially the
exchange was considered to be a non-monetary exchange, as outlined under APB 29
and EITF 93-11, and no further impairment was recorded at that time. The barter
credits were recorded as a prepaid expense with a value of $1.2 million.
Subsequent to the second quarter of 1999, the Company restated its September
1998 financial statements to account for the barter transaction as a monetary
transaction, upon receiving written confirmation from a second "Big Five"
accounting firm and after careful review and concurrence of its Board of
Directors Audit Committee. A non-cash charge of $844,000 was recorded to reduce
the value of the inventory exchanged, and the resulting book value of the barter
credits, from approximately $1.2 million to $350,000. As a result of this
change, the Company will also record increased future earnings for each dollar
of barter credits used in excess of $350,000.
The following table reconciles the amounts previously reported to the amounts
currently being reported in the condensed consolidated statements of operations
for the year ended December 26, 1998 (amounts in thousands, except per share
data).
Restatement
Previously for Barter
Reported Transaction As Restated
Income (loss) before income taxes $ 568 $ (844) $ (276)
Provision for income taxes 1,019 (330) 689
-------- -------- ---------
Net loss $ (451) $ (514) $ (965)
========= ======= =========
Basic and diluted loss
per common share $ (0.06) $ (0.06) $ (0.12)
17. Selected Quarterly Financial Data (unaudited)
- --------------------------------------------------
The following table contains selected unaudited quarterly financial data for the
years ended December 30, 2000 and December 25, 1999. Quarterly earnings/(loss)
per common share may not total to year end earnings/(loss) per share due to the
issuance of additional shares of Common Stock during the course of the year.
F-32
QUARTERLY FINANCIAL DATA
(Unaudited)
Fiscal Quarters
(in millions, except per share data and percentages)
Income (loss) Basic / Diluted
Net Sales as a before Net income (loss)
% of Annual Gross Extraordinary Net Income per share before
Net Sales Net Sales Profit Item (Loss) Extraordinary Item
--------- --------- ------ ---- ------ ------------------
2000
- ----
Quarter 1 $216.5 21.1% $46.0 $(3.2) $(3.2) $(.39)/(.39)
Quarter 2 280.4 27.3 60.1 1.5 1.5 .19/.18
Quarter 3 282.7 27.5 62.6 2.1 2.1 .26/.25
Quarter 4 248.0 24.1 54.4 (4.4) 2.4 (.53)/(.53)
1999
- ----
Quarter 1 $191.7 17.6% $40.6 $(3.3) $(3.3) $(.40)/(.40)
Quarter 2 289.4 26.6 59.0 3.6 3.6 .44 / .43
Quarter 3 326.2 30.0 65.8 5.0 5.0 .61 / .61
Quarter 4 280.1 25.8 59.2 2.2 2.2 .27 / .26
Each fiscal quarter in the table above represents a thirteen-week period,
with the exception of Quarter 4, which was a fourteen-week period.
S-1
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
To the Stockholders and
Board of Directors of Wickes Inc.
Our report on the 1998 consolidated financial statements of Wickes Inc. is
included as page F-2 of this Form 10-K. In connection with our audits of such
financial statements, we have also audited the related financial statement
schedule listed in Item 14 of this Form 10-K for the year ended December 26,
1998. In our opinion, the information pertaining to the year ended December 26,
1998 in this financial statement schedule presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
Chicago, Illinois
February 23, 1999
S-2
WICKES INC. AND SUBSIDIARIES
Schedule II - Valuation and Qualifying Accounts
For the Years Ended December 30, 2000, December 25, 1999, and
December 26, 1998
(dollars in thousands)
Col. A Col. B Col. C Col. D Col. E
- ------------------------------- -------------- ------------------------------ -------- ------
Additions
---------
(1) (2) Balance
Balance at Charged to Charged to at
Beginning Costs and Other End of
Description of Period Expenses Accounts(a) Deductions(b) Period
----------- --------- -------- ----------- ------------- ------
2000:
Allowance for doubtful
accounts $4,105 $ 983 ($7) $2,290 $2,791
1999:
Allowance for doubtful
accounts $4,393 $1,724 ($40) $1,972 $4,105
1998:
Allowance for doubtful
accounts $3,765 $2,915 ($103) $2,184 $4,393
(a) Net recoveries from previously closed stores credited to restructuring
reserve in 1998, and other operating income in 1999 and 2000.
(b) Reserved accounts written-off.
Exhibit Index
-------------
Exhibit
Number Description
- ------ -----------
3.1(a)* Amended and Restated Certificate of Incorporation of the
Registrant (incorporated by reference to Exhibit 3.1 to the
Registrant's Registration Statement on Form S-1 (the "Form S-1"),
Commission File No. 2-67334).
(b)* First Amendment to Second Amended and Restated Certificate of
Incorporation (incorporated by reference to Exhibit 3.01 to the
Registrant's Quarterly Report on Form 10-Q for the period ended
June 1994).
(c)* Second Amendment to Second Amended and Restated Certificate of
Incorporation (incorporated by reference to Exhibit 3.1 to the
Registrant's Quarterly Report on Form 10-Q for the period ended
June 1997).
3.2* By-laws of the Registrant, as amended and restated (incorporated
by reference to Exhibit 3.2 to the Registrant's Annual Report on
Form 10-K (the "1993 Form 10-K") for the year ended December 25,
1993).
4.1(a)* Credit Agreement dated February 17, 1999, among the Registrant,
as Borrower, each of the financial institutions signatory
thereto, BankBoston Business Credit as Administrative Agent and
Issuing Bank, BancBoston Robertson Stephens Inc. as Syndication
Agent, and Nationsbank, N.A. as Documentation Agent (incorporated
by reference to Exhibit 4.1 of the Registrant's Annual Report on
Form 10-K for the year ended December 26, 1998).
4.1(b)* First Amendment dated July 8, 1999 (incorporated by reference to
Exhibit 4.1 to the Registrant's Report on Form 10-Q for the
period ended June 26, 1999).
4.1(c)* Second Amendment dated September 14, 1999 (incorporated by
reference to Exhibit 4.1 to the Registrant's Quarterly Report on
Form 10-Q for the period ended September 25, 1999).
4.1(d)** Amended and Restated Credit Agreement dated December 13, 2000
among the Registrant, Fleet Retail Financial Inc, and Bank of
America, N.A. as agents and the lendors set forth therein.
4.2* Indenture dated as of October 15, 1993 between the Registrant and
Marine Midland Bank, N.A. (incorporated by reference to Exhibit
4.2 to the 1993 Form 10-K).
10.1* Agreement, dated July 21, 1993, between Collins & Aikman Group,
Inc. and the Registrant (incorporated by reference to Exhibit
10.12 to the Form S-1).
10.2(a)* Amended and Restated 1993 Long-Term Incentive Plan of the
Registrant (incorporated by reference to Exhibit 10.8 to the
Registrant's Annual Report on Form 10-K for the year ended
December 1994 (the "1994 Form 10-K")).
(b)* Amendment No. 1 (incorporated by reference to Exhibit 10.8(b) to
the Registrant's Annual Report on Form 10-K for the year ended
December 1996).
(c)* Form of Option Agreement (incorporated by reference to Exhibit
10.22 to the Form S-1).
(d)* Form of Option Agreement (incorporated by reference to Exhibit
10.8 to the 1994 Form 10-K).
(e)* Form of Long-Term Stock Option Agreement (incorporated by
reference to Exhibit 10.8 to the 1994 Form 10-K).
(f)* Form of Long-Term Performance Bonus Agreement (incorporated by
reference to Exhibit 10.8 to the 1994 Form 10-K).
(g)* Amendment No. 2 (incorporated by reference to Exhibit 10.4 to the
1997 Form 10-K).
(h)* Form of Option Agreement (incorporated by reference to Exhibit
10.4 to the 1997 Form 10-K).
10.3(a)* Amended and Restated 1993 Director Incentive Plan of Registrant
(incorporated by reference to Exhibit 10.03 to the Registrant's
Quarterly Report on Form 10-Q for the period ended March 26,
1994).
(b)* Form of Option Agreement (incorporated by reference to Exhibit
10.24 to the Form S-1).
10.4* Special Severance and Stay Incentive Bonus Plan (incorporated by
reference to Exhibit 10.7 to the Registrant's Annual Report on
Form 10-K for the year ended December 1997 (the "1997 Form
10-K")).
10.5(a)* Agreement dated November 4, 1997 between the Registrant and
Riverside Group, Inc. (incorporated by reference to Exhibit 10.1
to the Registrant's Quarterly Report on Form 10-Q for the period
ended September 1997).
(b)* Amendment and Closing Agreement to Agreement dated November 4,
1997 between the Registrant and Riverside Group, Inc.
(incorporated by reference to Exhibit 10.9 to the 1997 Form
10-K).
10.6* Agreement between the Registrant and Buildscape, Inc.
21.1** List of Subsidiaries of the Registrant.
23.1** Consent of PricewaterhouseCoopers LLP.
23.2** Consent of Deloitte & Touche LLP.
* Incorporated by reference.
** Filed herewith.
There have been omitted certain instruments with respect to long-term debt not
in excess of 10% of the consolidated total assets of the Company. The Company
agrees to furnish copies of any such instruments to the Commission upon request.
Exhibit 21.1
LIST OF SUBSIDIARIES OF REGISTRANT
Name State of Incorporation
- ---- ----------------------
Lumber Trademark Company Illinois
GLC Division, Inc. Delaware
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We consent to the incorporation by reference in the registration statements of
Wickes Inc. on Form S-8 (File Nos. 33-85380, 33-88010 and 33-90240) of our
report dated February 23, 1999 (except for Note 16 in the 2000 financial
statements and Note 16 in the 1998 financial statements as to which the date is
August 31, 1999), on our audit of the consolidated financial statements and
financial statement schedule of Wickes Inc. and Subsidiaries as of December 26,
1998 and for the year then ended, which report is included in this 2000 Annual
Report on Form 10-K.
/s/PRICEWATERHOUSECOOPERS LLP
Chicago, Illinois
March 28, 2001
Exhibit 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statement Nos.
33-85380, 33-88010, 33-90240 on Form S-8 of Wickes Inc. and Subsidiaries of our
report dated February 28, 2001, appearing in this Annual Report on Form 10-K of
Wickes Inc. and subsidiaries for the year ended December 30, 2000.
/s/ DELOITTE & TOUCHE LLP
Chicago, IL
March 28, 2001