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SECURITIES AND EXCHANGE COMMISSION
Washington, DC. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File
For the Quarterly Period Ended September 28, 2002 Number 1-14967
------------------ -------
WICKES INC.
---------------
(Exact name of registrant as specified in its charter)
Delaware 36-3554758
-------- -----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
706 North Deerpath Drive, Vernon Hills, Illinois 60061
- ------------------------------------------------ -----
(Address of principal executive offices) (Zip Code)
847-367-3400
------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---
As of October 31, 2002, the Registrant had 8,308,109 shares of Common Stock, par
value $.01 per share outstanding.
2
WICKES INC. AND SUBSIDIARIES
INDEX
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Page
Number
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
September 28, 2002 (Unaudited), December 29, 2001 and
September 29, 2001 (Unaudited) 3
Condensed Consolidated Statements of Operations (Unaudited)-
For the three months and nine months ended
September 28, 2002 and September 29, 2001 4
Condensed Consolidated Statements of Cash Flows (Unaudited)-
For the nine months ended September 28, 2002 and September 29, 2001 5
Notes to Condensed Consolidated
Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 28
Item 4. Controls and Procedures 28
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 29
Item 6. Exhibits and Reports on Form 8-K 29
3
WICKES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 28, 2002, December 29, 2001 and September 29, 2001
(in thousands except share data)
September 28, December 29, September 29,
2002 2001 2001
ASSETS ------------- ------------- -------------
(UNAUDITED) (UNAUDITED)
Current assets:
Cash $ 151 $ 198 $ 203
Accounts receivable, less allowance for doubtful
accounts of $2,381 in 2002, $2,119 in December
2001, and $1,975 in September 2001 86,799 83,369 107,633
Note receivable from affiliate 436 430 356
Inventory 89,746 100,118 127,493
Deferred tax asset 7,667 7,474 9,254
Prepaid expenses and other assets 7,001 5,058 5,269
------------- ------------- -------------
Total current assets 191,800 196,647 250,208
------------- ------------- -------------
Note receivable from affiliate - - 67
Property, plant and equipment, net 52,450 58,690 57,337
Trademark (net of accumulated amortization of
$11,163 in 2002 and December 2001, $11,108
in September 2001) 5,856 5,856 5,912
Deferred tax asset 16,559 16,559 12,990
Rental equipment (net of accumulated depreciation of
$2,122 in 2002, $2,186 in December 2001, and
$2,076 in September 2001) 1,633 2,287 2,480
Goodwill (net of accumulated amortization of $2,575 in
2002 and December 2001, $2,431 in September 2001) 12,229 12,229 12,373
Other assets (net of accumulated amortization of
$13,025 in 2002, $11,181 in December 2001, and
$11,496 in September 2001) 4,200 4,805 7,878
------------- ------------- -------------
Total assets $ 284,727 $ 297,073 $ 349,245
============= ============= =============
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 10,800 $ 9,157 $ 8,922
Accounts payable 52,703 43,956 61,449
Accrued liabilities 18,450 20,563 21,311
------------- ------------- -------------
Total current liabilities 81,953 73,676 91,682
------------- ------------- -------------
Long-term debt, less current maturities 173,100 193,253 224,721
Other long-term liabilities 3,142 3,373 3,904
Stockholders' equity:
Common stock, $0.01 par (8,294,171, 8,281,585,
8,278,400 shares issued and outstanding, respectively) 83 83 83
Other comprehensive loss - (93) (177)
Additional paid-in capital 87,164 87,134 87,124
Accumulated deficit (60,715) (60,353) (58,092)
------------- ------------- -------------
Total stockholders' equity 26,532 26,771 28,938
------------- ------------- -------------
Total liabilties and stockholders' equity $ 284,727 $ 297,073 $ 349,245
============= ============= =============
4
WICKES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands except share and per share data)
Three Months Ended Nine Months Ended
------------------ ------------------
September 28, September 29, September 28, September 29,
2002 2001 2002 2001
----------- ----------- ----------- -----------
Net sales $ 237,284 $ 295,307 $ 657,718 $ 754,226
Cost of sales 185,609 234,055 517,012 592,406
----------- ----------- ----------- -----------
Gross profit 51,675 61,252 140,706 161,820
----------- ----------- ----------- -----------
Selling, general and administrative expenses 44,215 53,331 124,117 148,200
Depreciation, goodwill and trademark amortization 1,293 1,570 4,036 4,675
Provision for doubtful accounts 483 159 1,101 802
Store closing costs 623 - 2,370 -
Other operating income (772) (710) (3,267) (1,823)
----------- ----------- ----------- -----------
45,842 54,350 128,357 151,854
----------- ----------- ----------- -----------
Income from operations 5,833 6,902 12,349 9,966
Interest expense 3,941 5,417 12,432 16,811
----------- ----------- ----------- -----------
Income (loss) before taxes 1,892 1,485 (83) (6,845)
Income tax expense (benefit) 769 796 279 (2,032)
----------- ----------- ----------- -----------
Net income (loss) $ 1,123 $ 689 $ (362) $ (4,813)
=========== =========== =========== ===========
Net income (loss) per common share- basic $ 0.14 $ 0.08 $ (0.04) $ (0.58)
=========== =========== =========== ===========
Net income (loss) per common share- diluted $ 0.13 $ 0.08 $ (0.04) $ (0.58)
=========== =========== =========== ===========
Weighted average common shares- basic 8,293,168 8,278,347 8,288,921 8,275,737
=========== =========== =========== ===========
Weighted average common shares- diluted 8,520,384 8,448,300 8,288,921 8,275,737
=========== =========== =========== ===========
The accompanying notes are an integral part of the consolidated financial statements.
5
WICKES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
Nine Months Ended
September 28, September 29,
2002 2001
--------------- ---------------
Cash flows from operating activities:
Net loss $ (362) $ (4,813)
Adjustments to reconcile net loss to
net cash provided by (used in) operating activities:
Depreciation expense 5,198 5,443
Amortization of trademark - 167
Amortization of goodwill - 516
Amortization of deferred financing costs 1,166 1,078
Provision for doubtful accounts 1,101 802
Gain on sale of assets and other items (1,277) (13)
Deferred tax benefit (193) (2,452)
Changes in assets and liabilities:
(Increase) in accounts receivable (4,531) (31,749)
Decrease (increase) in inventory 10,247 (9,747)
Increase in accounts payable and accrued liabilities 6,496 25,049
(Increase) in prepaids and other assets (2,197) (4,591)
--------------- ---------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 15,648 (20,310)
--------------- ---------------
Cash flows from investing activities:
Purchases of property, plant and equipment (1,263) (6,320)
Proceeds from sales of property, plant and equipment 4,090 907
Payments for acquisitions - (759)
(Increase) decrease in notes receivable (6) 60
--------------- ---------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 2,821 (6,112)
Cash flows from financing activities:
Net (repayments) borrowings under revolving line of credit (10,596) 31,127
Repayments of term loan (7,914) (4,226)
Debt issuance costs (6) (519)
--------------- ---------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (18,516) 26,382
--------------- ---------------
NET DECREASE IN CASH (47) (40)
Cash at beginning of period 198 243
--------------- ---------------
CASH AT END OF PERIOD $ 151 $ 203
=============== ===============
Supplemental schedule of cash flow information:
Interest paid $ 10,425 $ 13,104
Income taxes paid $ 1,726 $ 853
Supplemental non-cash operating and investing activities: The Company purchased
net assets in conjunction with acquisitions made during the period. In
connection with these acquisitions, assets and liabilities were assumed as
follows:
Assets acquired $ - $ 1,789
Liabilities assumed $ - $ 1,030
Cash paid $ - $ 759
The accompanying notes are an integral part of the consolidated financial statements.
6
WICKES INC. AND SUBSIDIARIES
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
Basis of Financial Statement Presentation
-----------------------------------------
The condensed consolidated financial statements present the results of
operations, financial position, and cash flows of Wickes Inc. and its
consolidated subsidiaries (the "Company"). The condensed consolidated financial
statements are prepared in accordance with accounting principles generally
accepted in the United States of America, which require management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
The condensed consolidated financial statements should be read in conjunction
with the Company's consolidated financial statements and notes thereto included
in the Company's Annual Report on Form 10-K (the "Form 10-K") for the fiscal
year ended December 29, 2001. The condensed consolidated financial statements
reflect all adjustments (consisting only of normal recurring adjustments) which
are, in the opinion of management, necessary for the fair presentation of the
financial results for the interim period. The results of operations for interim
periods are not necessarily indicative of results for the entire year.
The Company has determined that it operates in one business segment, that being
the supply and distribution of lumber, building materials and manufactured
components to building professionals and do-it-yourself customers, principally
in the Midwest, Northeast, and Southern United States. All information required
by Statement of Financial Accounting Standards ("SFAS") 131, "Disclosures about
Segments of an Enterprise and Related Information", is included in the Company's
consolidated financial statements.
Share Data
----------
The Company issued 12,586 shares of Common Stock to members of its board of
directors in lieu of cash compensation during the nine months ended September
28, 2002 pursuant to the Company's 1993 Director Incentive Plan.
7
WICKES INC. AND SUBSIDIARIES
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Stock Options
-------------
The Company periodically grants stock options to key personnel. Generally,
compensation cost on these options is measured at the date of grant by comparing
the quoted market price of the Company's stock to the price the employee has to
pay to acquire the stock. Any resulting compensation cost would be recognized
over the employee's vesting period.
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.
2. IMPLEMENTATION OF NEW ACCOUNTING STANDARDS
------------------------------------------
Effective at the beginning of fiscal 2002, the Company adopted SFAS 142,
"Goodwill and Other Intangible Assets". Upon adoption of SFAS 142, goodwill
amortization ceased. In addition, the Company has determined that its trademark
life is indefinite and also ceased related amortization. Intangible assets are
now subject to fair-value based impairment tests performed on an annual basis.
The Company has determined that it has only one reporting unit as defined in
accordance with SFAS 142. The fair value of the reporting unit was primarily
estimated using the expected present value of associated future cash flows and
market values of comparable businesses, where available. The Company determined,
based upon its assessment of fair value, that no impairment of the Company's
intangible assets exists. The Company's net book value of goodwill is $12.2
million and other intangible assets are $5.9 million. An annual impairment test
will be performed of the goodwill and other intangible assets in each year in
the fourth quarter. As required under SFAS 142 the following table provides net
earnings (losses) and per share data adjusted for the effect of amortization of
goodwill and other indefinite lived intangible assets.
8
WICKES INC. AND SUBSIDIARIES
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Three Months Ended Nine Months Ended
------------------ -----------------
Sept 28, Sept 29, Sept 28, Sept 29,
2002 2001 2002 2001
------- ------- -------- --------
Reported net income (loss) $ 1,123 $ 689 $ (362) $ (4,813)
Goodwill amortization - 167 - 516
Trademark amortization - 56 - 167
--------- ---------- ----------- -----------
Adjusted net income (loss) 1,123 912 (362) (4,130)
--------- ---------- ----------- -----------
Net income (loss) per
common share -
Basic: $ 0.14 $ 0.08 $ (0.04) $ (0.58)
Diluted: $ 0.13 $ 0.08 $ (0.04) $ (0.58)
Goodwill amortization - 0.02 - 0.06
Trademark amortization - 0.01 - 0.02
--------- ---------- ----------- -----------
Adjusted net income (loss)
Basic: $ 0.14 $ 0.11 $ (0.04) $ (0.50)
Diluted: $ 0.13 $ 0.11 $ (0.04) $ (0.50)
In August 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS 144
resolves certain implementation issues related to SFAS 121, establishes a single
accounting model for long-lived assets to be disposed of by sale, and revises
the requirements for discontinued operations presentation. SFAS 144 was adopted
by the Company at the beginning of 2002. The adoption of this standard did not
have a material impact on the Company's financial statements.
3. EFFECT OF ACCOUNTING STANDARDS NOT ADOPTED
------------------------------------------
In April 2002, the FASB issued SFAS 145, "Rescission of SFAS No's, 4, 44, and
64, Amendment of SFAS 13, and Technical Corrections." SFAS 145 modifies the
treatment of sale-leaseback transactions and extinguishment of debt allowing
gains and losses to be treated as comprehensive income in most circumstances.
SFAS 145 is effective for the fiscal year beginning December 29, 2002. The
Company does not believe the initial adoption of this standard will have a
material impact on the Company's financial statements.
In July 2002, the FASB issued SFAS 146, "Accounting for Costs Associated with
Exit or Disposal Activities." SFAS 146 requires companies to recognize costs
associated with exit or disposal activities when they are incurred rather than
at the date of commitment to a plan. SFAS 146 is effective for any exit plans
commencing after December 29, 2002. The Company does not believe that the
initial adoption of this standard will have a material impact on the Company's
financial statements.
9
WICKES INC. AND SUBSIDIARIES
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
4. COMPREHENSIVE INCOME (LOSS)
--------------------------
The components of comprehensive income (loss) are as follows (in thousands):
Three Months Ended Nine Months Ended
------------------ -----------------
Sept 28, Sept 29, Sept 28, Sept 29,
2002 2001 2002 2001
------- ------- ------- -------
Reported net income (loss) $ 1,123 $ 689 $ (362) $ (4,813)
Effect of adoption of
SFAS 133, net of tax of $55 and $95 (88) (155)
Change in fair value of
Interest rate swap, net of tax of (89) (177)
$55 and $110
Reclassifications to earnings 88 155
------------ ------------ ------------ -----------
Comprehensive income (loss) $ 1,123 $ 600 $ (362) $ (4,990)
------------ ------------ ------------ -----------
5. LONG-TERM DEBT
--------------
Long-term debt is comprised of the following (in thousands):
Sept 28, Dec 29, Sept 29,
2002 2001 2001
------- ------- --------
Revolving credit facility:
Revolving notes $ 86,085 $ 93,143 $ 122,263
Term notes 33,859 45,311 47,424
Senior subordinated notes 63,956 63,956 63,956
Less current maturities (10,800) (9,157) (8,922)
------------ ---------- ------------
Total long-term debt $ 173,100 $ 193,253 $ 224,721
------------ ---------- ------------
Under the Company's revolving credit agreement, the Company may borrow against
certain levels of accounts receivable and inventory. Unused availability under
the revolving credit agreement at September 28, 2002 was $28.7 million. The
Company was in compliance with all covenants as of September 28, 2002.
10
WICKES INC. AND SUBSIDIARIES
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
6. INCOME TAXES
------------
The provision for income taxes for the three-month period ended September 28,
2002 was $0.8 million as it was for the same period in the prior year. An
effective federal and state income tax rate of 39.1% was used to calculate
income taxes for the three-month period ended September 28, 2002 compared to
38.7% for the same period in the prior year. The calculated tax rate in the
financial statements of 40.6% for the three-month period ended September 28,
2002 compared to 53.6% for the same period in the prior year, differs from the
effective federal and state income tax rate primarily due to state franchise
taxes and non-deductible items. State franchise taxes were $0.2 million for the
three-month period ended September 28, 2002 compared to $0.3 million for the
same period in the prior year.
The provision for income taxes for the nine-month period ended September 28,
2002 was $0.3 million compared to a benefit of $2.0 million for the same period
in the prior year. An effective federal and state income tax rate of 39.1% was
used to calculate income taxes for the nine-month period ended September 28,
2002 compared to 38.7% for the same period in the prior year. The calculated tax
rate in the financial statements of 336.1% for the nine-month period ended
September 28, 2002 compared to 30.0% for the same period in the prior year,
differs from the effective federal and state income tax rate primarily due to
state franchise taxes and non-deductible items. State franchise taxes were $0.6
million for the nine-month period ended September 28, 2002 compared to $0.8
million for the same period in the prior year.
7. COMMITMENTS AND CONTINGENCIES
-----------------------------
At September 28, 2002, the Company had accrued approximately $132,000 for
remediation of certain environmental and product liability matters.
Many of the sales and distribution facilities presently and formerly operated by
the Company at one time contained underground petroleum storage tanks. All such
tanks known to the Company and located on facilities owned or operated by the
Company have been filled or removed in accordance with applicable environmental
laws in effect at the time. As a result of reviews made in connection with the
sale or possible sale of certain facilities, the Company has found petroleum
contamination of soil and ground water on several of these sites and has taken,
and expects to take, remedial actions with respect thereto. In addition, it is
possible that similar contamination may exist on properties no
11
WICKES INC. AND SUBSIDIARIES
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
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 $2.1 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 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 547 actions, each of
which seeks unspecified damages, primarily in Michigan state courts against
manufacturers and building material retailers by individuals who claim to have
suffered injuries from products containing asbestos. The Company is aggressively
defending these actions and does not believe that these actions will have a
material adverse effect on the Company. Since 1993, the Company has settled 190
similar actions for insignificant amounts, and another 293 of these actions have
been dismissed. None of these suits have made it to trial.
Losses in excess of the $132,000 reserved as of September 28, 2002 are possible,
and though an estimate of these amounts cannot be made, based on the Company's
past experience management believes the reserve is adequate.
The Company is involved in various other legal proceedings that are incidental
to the conduct of its business. Certain of these proceedings involve potential
damages for which the Company's insurance coverage may be unavailable. While the
Company does not believe that any of these proceedings will have a material
adverse effect on the Company's financial position, annual results of operations
or liquidity, there can be no such assurance.
12
WICKES INC. AND SUBSIDIARIES
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
8. EARNINGS PER SHARE
------------------
The Company calculates earnings per share in accordance with SFAS 128. In
periods where net losses are incurred, dilutive common stock equivalents are not
used in the calculation of diluted EPS as they would have an anti-dilutive
effect on EPS. For the three-month periods ended September 28, 2002 and
September 29, 2001, common stock equivalents of 227,000 and 170,000 shares,
respectively, were included in calculating diluted weighted average shares
outstanding. For the nine-month periods ended September 28, 2002 and September
29, 2001 common stock equivalents of 134,000 and 165,000 shares, respectively
were excluded as they were anti-dilutive. In addition, options to purchase
524,000 and 617,000 weighted average shares of common stock at September 28,
2002 and September 29, 2001, respectively, had an exercise price greater than
the average market price.
9. RELATED PARTY TRANSACTIONS
--------------------------
Approximately 34% of the Company's outstanding shares of common stock is owned
by Riverside Group, Inc. and approximately 13% is owned by Imagine Investments,
Inc. and its parent, Stone Investments, Inc.
In February 2002, the Company entered into an agreement with Cybermax, Inc.
("Cybermax"), a wholly-owned subsidiary of Riverside Group, Inc. The agreement
calls for Cybermax to design, develop and support a web based system that will
aid the Company in marketing and selling product. For the nine months ended
September 28, 2002, the Company paid approximately $59,000 to Cybermax.
In March 2000, the Company entered into an agreement with Buildscape, Inc.
("Buildscape"), an entity then affiliated with Riverside Group, Inc. and Imagine
Investments, Inc. Pursuant to this agreement, the Company and Buildscape are
jointly conducting an Internet distribution program. Buildscape 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 paid Buildscape approximately $367,000 in
the nine months ended September 28, 2002. In July 2002, Dow Chemical Company
acquired 100% ownership of Buildscape. The Company will continue to use the
Buildscape internet distribution program to sell products to its customers.
13
WICKES INC. AND SUBSIDIARIES
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
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. Repayment of the
remaining principal balance was deferred for one year, with quarterly principal
payments commencing on April 1, 2001 and ending June 30, 2002. On December 28,
2001 the Company amended the terms of its note receivable with Riverside Group,
Inc. in an agreement that extended the payment of principal and interest, due in
full, on December 28, 2002. As of September 28, 2002 the remaining principal
balance was approximately $402,000, with accrued interest of approximately
$33,000.
For the nine months ended September 28, 2002, the Company paid approximately
$846,000 in reimbursements to affiliates of the Company's Chairman of the Board
and President primarily for use of a corporate aircraft as well as office space
and office support services.
10. STORE CLOSINGS
--------------
Pursuant to certain initiatives to improve performance and reduce
under-performing assets, the Company has closed, consolidated or sold ten
locations this year. The Company sold four locations in January (Pearl, MS,
Baton Rouge, LA, Pascagoula, MS, and Ocean Springs, MS), one location in
February (Wilkes-Barre, PA), and two locations in April (Harlingen, TX and
McAllen, TX). In addition, the Company has closed and consolidated three
operations, one in March (Kokomo, IN) and two in July (Grand Rapids, MI and
Indianapolis Component, IN). These closings resulted in termination of
approximately 268 employees that worked at these locations. Another 27
employees were transferred to surrounding locations. The costs associated with
the closing of these operations are as follows:
Third Year-to-
Quarter Date
------- -------
Employee separation costs $ 411 $ 1,425
Inventory liquidation costs 312 1,350
Property carrying costs 213 1,148
Other (158) (191)
------------- ------------
Total store closing $ 778 $ 3,732
============= ============
14
WICKES INC. AND SUBSIDIARIES
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
The costs incurred to liquidate the inventory has been included in cost of sales
on the Company's financial statements. The costs of reserving for bad debt,
write-offs and subsequent collections, has been included in provision for
doubtful accounts. All other costs are included in store closing costs. Revenues
for these locations were approximately $57.8 million for the period ended
September 29, 2001. The Company has accrued in current liabilities approximately
$32,000 for estimated unpaid costs associated with these closings.
11. SUBSEQUENT EVENTS
-----------------
On October 30, 2002, the Company announced the signing of a definitive agreement
for the sale of substantially all of the assets of the Company's operations in
Wisconsin and Northern Michigan to Lanoga Corporation. The final purchase price
will be determined at closing, which is tentatively scheduled for December 16,
2002. The expected proceeds approximates a minimum of $55 million for property
plus additional proceeds to be determined based on the final amounts of
inventory and accounts receivable. The Company expects to record a gain from
this transaction. The funds provided by this transaction will be used to pay
down the Company's revolving credit. Included in the transaction are 14
distribution facilities and three component plants in Wisconsin, and 17
distribution facilities and one component plant in Michigan. These facilities
generated combined sales of approximately $300 million in fiscal 2001. The
Company will retain its operations in the southern half of the lower-peninsula
of Michigan, including all of its operations in Coldwater, Davison, Grand Blanc,
Grand Rapids, Owosso, Port Huron, Romeo, Mason, Rochester, Monroe, Jackson and
Kalamazoo.
The transaction will require approval under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976 and is subject to other contingencies common in similar
transactions.
15
WICKES INC. AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
------------------------------------------------------------------------
OF OPERATIONS
- -------------
The following discussion should be read in conjunction with the Condensed
Consolidated Financial Statements and Notes thereto contained elsewhere herein
and in conjunction with the Consolidated Financial Statements and Notes thereto
and Management's Discussion and Analysis of Financial Condition and Results of
Operations contained in the Company's Annual Report on Form 10-K for the fiscal
year ended December 29, 2001.
This Discussion and Analysis contains statements which, to the extent that they
are not recitations of historical fact, constitute Forward Looking Statements
that are made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995 and are inherently subject to uncertainty. A
number of important factors could cause the Company's business and financial
results and financial condition to be materially different from those stated in
the Forward Looking Statements.
Among the factors that could cause actual results to differ materially are the
following: effects of seasonality and cyclicality; effects of competition;
interest rates and the Company's ability to service and comply with the terms of
its debt; lumber prices; the success of the Company's operational initiatives;
the outcome of the contingencies discussed in Note 7 and the outcome of the sale
of assets to Lanoga Corporation discussed in Note 11 of the Notes to Condensed
Consolidated Financial Statements included elsewhere herein.
INTRODUCTION
------------
Wickes Inc. and its consolidated subsidiaries ("Wickes" or the "Company") is a
leading supplier of lumber, building materials and manufactured building
components in the United States. The Company sells its products and services
primarily to residential and commercial building professionals, repair and
remodeling contractors and, to a lesser extent, project do-it-yourself consumers
involved in major home improvement projects. At September 28, 2002, the Company
operated 90 sales and distribution facilities and 22 component manufacturing
facilities in 22 states in the Midwest, Northeast, and South.
The Company's mission is to be the premier provider of building materials and
services and manufactured building components to the professional segments of
the building and construction industry.
16
The Company focuses on the professional builder and contractor market. The
Company targets five customer groups: the production or volume builder; the
custom builder; the tradesman; the repair and remodeler; and the commercial
developer. Its marketing approach encompasses three channels of distribution:
Major Markets, Conventional Markets, and Wickes Direct. These channels are
supported by the Company's network of building component manufacturing
facilities. In Major Markets, the Company serves the national, regional, and
large local builder in larger markets with a total solutions approach and
specialized services. In Conventional Markets, the Company provides the smaller
building professional in less-populous markets with tailored products and
services. Wickes Direct provides materials flow and logistics management
services to commercial customers. The Company also serves building professionals
through its network of 22 component manufacturing facilities that produce
value-added, wood framed wall panels, roof and floor truss systems, and pre-hung
interior and exterior doors.
RESULTS OF OPERATIONS
---------------------
The following table sets forth, for the periods indicated, the percentage
relationship to net sales of certain expense and income items. This information
includes the results from all sales and distribution and component manufacturing
facilities operated by the Company, including those closed or sold during the
period.
Three Months Ended Nine Months Ended
------------------ -----------------
September September September September
28, 29, 28, 29,
2002 2001 2002 2001
------ ------- -------- --------
Net sales 100.0% 100.0% 100.0% 100.0%
Gross profit 21.8% 20.7% 21.4% 21.5%
Selling, general and
administrative expense 18.6% 18.1% 18.9% 19.7%
Depreciation, goodwill and
trademark amortization 0.5% 0.5% 0.6% 0.6%
Provision for doubtful accounts 0.2% 0.1% 0.2% 0.1%
Store closing costs 0.3% - 0.4% -
Other operating income (0.3)% (0.2)% (0.4)%
(0.2)%
Income from operations 2.5% 2.3% 1.9% 1.3%
Certain reclassifications have been made to prior year amounts to conform to the
current presentation. All material intercompany balances and transactions have
been eliminated.
17
The Company's results of operations are historically affected by, among other
factors, weather conditions, interest rates, lumber prices, and housing starts.
In general, this year's weather conditions in the Company's markets have not had
any significant impact to sales. The Company's average rate of interest
decreased to 7.52% during the third quarter compared to 8.55% for the same
period last year. The year-to-date weighted-average interest rate decreased to
8.04% compared to 8.58% for the same period last year. The third quarter and
year-to-date results were negatively affected by lower commodity lumber prices,
down 9.1% and 3.2%, respectively, from last year. Housing starts in the
Company's primary market, the Midwest, were up 5.5% year-to-date and 15.0% in
the third quarter compared to the same periods last year. During the nine months
of 2002, the Company experienced reductions in selling, general and
administrative ("SG&A") expense and gains on the sale of assets as a direct
result of a plan to reduce certain overhead programs and under-performing
assets.
Net income for the third quarters ended September 28, 2002 and September 29,
2001 was $1.1 million and $0.7 million, respectively. Net losses for the
nine-months ended September 28, 2002 and September 29, 2001 were $0.4 million
and $4.8 million, respectively.
Three Months Ended September 28, 2002 Compared
----------------------------------------------
with the Three Months Ended September 29, 2001
----------------------------------------------
Net Sales
- ---------
Net sales for the third quarter of 2002 decreased 19.6%, to $237.3 million
compared to $295.3 million for the third quarter of 2001. Since the beginning of
the year, the Company has closed, consolidated or sold a total of ten locations.
Same store sales decreased 12.5% from the comparable quarter last year. To the
Company's primary building professional customers: same store sales decreased
6.7% to the new home builder, decreased 23.9% to the commercial developer, and
decreased 15.1% to the repair and remodeler. The new home builder represented
65.0% of total sales compared to 62.6% in the same quarter last year. Total
sales to building professionals represented 90.2% of total sales compared to
89.8% in the same quarter last year. As of September 28, 2002, the Company
operated 90 sales and distribution facilities, compared to 99 at the end of the
third quarter of 2001.
18
The Company believes that sales decreases for the three months ended September
28, 2002 primarily resulted from the decline in the number of locations and
lumber deflation. The Company estimates that the effect of lumber deflation for
the third quarter of 2002 decreased total sales by approximately $7.5 million
compared with the same period last year. Lumber and building materials accounted
for 85.4% of total sales in the third quarter of 2002 compared with 85.9% in
2001. In the Company's primary market, the Midwest, housing starts were up 15.0%
in the third quarter of 2002 compared with 2001.
Products that exhibited the greatest change in sales dollars for the quarter
ended September 28, 2002 versus the comparable prior year period were: lumber
and plywood (down 29.2%), trusses and engineered wood products (down 15.9%),
treated wood (down 19.0%), roofing and roofing material (down 17.6%) and doors
and windows (down 9.5%).
Gross Profit
- ------------
Gross profit decreased to $51.7 million in the third quarter of 2002 from $61.3
million in the third quarter of 2001, a 15.6% decrease. Gross profit as a
percentage of sales increased in the third quarter of 2002 to 21.8% from 20.7%
in the third quarter of 2001. The increase in gross profit as a percentage of
sales primarily is attributed to increased margins related to direct ship sales
and internally manufactured components sales, which combined represent
approximately 26% of the Company's gross profit dollars. The Company believes
that the decrease in gross profit dollars resulted primarily from the reduction
in the number of facilities, and lower margins on lumber products (down 20 basis
points). Using "Random Length Price Indices" and other commodity price
measurements, the Company estimates that deflation in commodity lumber prices
decreased gross profit for the third quarter of 2002 by approximately $1.4
million when compared with commodity lumber price levels experienced during the
third quarter of 2001.
Selling, General and Administrative Expense ("SG&A")
- ----------------------------------------------------
SG&A expense increased to 18.6% of net sales in the third quarter of 2002
compared with 18.1% of net sales in the third quarter of 2001. This increase
primarily is due to salary and wage expense increasing to 13.0% of net sales in
the third quarter of 2002 from 12.7% of net sales in the third quarter of 2001.
SG&A dollars decreased to $44.2 million in the third quarter of 2002 from $53.3
million in the third quarter of 2001, a decrease of $9.1 million or 17.1%.
Reductions in SG&A expenses are due to decreases in salaries and benefits (down
20%), decreases in marketing expenses (down 58%), and decreased
19
delivery expenses (down 17%). These reductions are the result of both a
reduction in the number of facilities as well as the Company's initiatives to
reduce SG&A costs. On a same store basis, SG&A decreased by 5.9%.
Depreciation, Goodwill and Trademark Amortization
- -------------------------------------------------
Depreciation, goodwill and trademark amortization decreased to $1.3 million for
the third quarter of 2002 compared to $1.6 million for the same period in 2001.
The decrease primarily is due to the implementation of SFAS 142, which reduced
amortization expense by $0.2 million (see Note 2 to the Condensed Financial
Statements).
Provision for Doubtful Accounts
- -------------------------------
The provision for doubtful accounts was $0.5 million in the third quarter of
2002, compared with $0.2 million in the third quarter of 2001.
Store Closing Costs
- -------------------
In July of 2002, the Company closed and consolidated into nearby locations one
distribution center and one component plant. Store closing costs associated with
these activities typically include employee termination costs, non-cancelable
lease obligations and other exit costs incurred as a direct result of closing or
selling facilities. These store closing costs for the third quarter of 2002 were
$0.6 million. In addition to the costs above, the Company also incurred charges
related to the write down of inventory and receivables to their net realizable
value. These charges have been recorded in cost of sales and provision for
doubtful accounts. The Company has accrued in current liabilities approximately
$32,000 for estimated unpaid costs associated with these closings.
Other Operating Income
- ----------------------
Other operating income for the third quarter of 2002 was $0.8 million compared
with $0.7 million for the third quarter 2001. Other operating income primarily
includes the sale or disposal of property, plant and equipment, service charges
assessed customers on past due accounts receivable, and casualty gains/losses.
No properties were sold in the third quarter of 2002, and only one parcel of
land was sold for an immaterial gain in 2001.
20
Interest Expense
- ----------------
In the third quarter of 2002, interest expense decreased to $3.9 million from
$5.4 million during the third quarter of 2001. The Company's weighted average
rate of interest decreased to 7.52% during the third quarter of 2002 compared to
8.55% for the same period last year.
The Company's 2002 third quarter average debt levels decreased significantly,
down $51.7 million or 21.5% over the comparable period in 2001. The Company
continues to maximize its use of LIBOR contracts to minimize its overall
interest expense. In the third quarter of 2002, approximately 90.0% of the
Company's average borrowing on its revolving credit facility was LIBOR-based as
compared with 92.2% during the third quarter of 2001.
Provision for Income Taxes
- --------------------------
The Company recorded income tax expense of $0.8 million for the third quarter of
2002 compared with expense of $0.8 million in the third quarter of 2001. An
effective federal and state income tax rate of 39.1% was used to calculate
income taxes for the third quarter of 2002, compared with an effective rate of
38.7% for the third quarter of 2001. The calculated tax rate in the financial
statements of 40.6% for the third quarter of 2002 compared to 53.6% for the
third quarter of 2001, differs from the effective federal and state income tax
rate primarily due to state franchise taxes and non-deductible items. State
franchise taxes were $0.2 million and $0.3 million for the third quarter of 2002
and 2001, respectively.
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.
This assessment constitutes Forward-Looking Information made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995
and is inherently subject to uncertainty and dependent upon the Company's future
profitability, which in turn depends upon a number of important risk factors
including but not limited to: the effectiveness of the Company's operational
efforts, the sale of certain assets, cyclicality and seasonality of the
Company's business, the effects of the Company's substantial leverage, and
competition.
21
Nine Months Ended September 29, 2002 Compared
---------------------------------------------
with the Nine Months Ended September 29, 2001
---------------------------------------------
Net Sales
- ---------
Net sales for the nine months of 2002 decreased 12.8% to $657.7 million from
$754.2 million for the nine months of 2001. Since the beginning of the year, the
Company has closed, consolidated or sold a total of ten locations. Same store
sales decreased 6.2% from the comparable period last year. To the Company's
primary building professional customers: same store sales decreased 0.1% to the
new home builder, decreased 17.5% to the commercial developer, and decreased
8.3% to the repair and remodeler. The new home builder represented 65.5% of
total sales compared to 62.9% last year. Total sales to these building
professionals represented 91.3% of total sales compared to 90.9% last year. As
of September 28, 2002, the Company operated 90 sales and distribution
facilities, compared to 99 at September 29, 2001.
The Company believes that sales decreases for the nine months ended September
28, 2002 primarily resulted from the decline in the number of locations and
lumber deflation. The Company estimates that the net effect of lumber deflation
for the nine months of 2002 decreased total sales by approximately $14.8 million
compared with the same period last year. Lumber and building materials accounted
for 84.5% of total sales this year compared with 85.4% last year.
Products that exhibited the greatest change in sales dollars for the nine months
of 2002 versus the comparable period in the prior year were: lumber and plywood
(down 22.1%), truss and engineered wood products (down 10.4%), treated wood
products (down 15.4%), specialty wood products (down 16.0%), roofing and roofing
materials (down 13.2%), and insulation (down 12.2%).
Gross Profit
- ------------
Gross profit for the nine months of 2002 decreased to $140.7 million from $161.8
million for the nine months of 2001, a 13.0% decrease. Gross profit as a
percentage of sales decreased slightly to 21.4% for the nine months of 2002 from
21.5% in 2001. The Company believes that the decrease in gross profit dollars
resulted primarily from the reduction in the number of facilities, and lower
margins on lumber products (down 35 basis points). The Company estimates that
deflation in commodity lumber prices decreased gross profit for the nine months
of 2002 by approximately $14.8 million when compared with lumber commodity price
levels experienced during the nine months of 2001. In addition, a change in the
nature of the Company's co-operative marketing programs with its vendors from
primarily purchase based programs to primarily co-operative marketing and cost
recovery programs also resulted in lowering both gross profit and selling,
general and administrative expense.
22
Selling, General and Administrative Expense
- -------------------------------------------
SG&A expense decreased to 18.9% of net sales in the nine months of 2002 compared
with 19.7% of net sales in the nine months of 2001. SG&A dollars decreased to
$124.1 million in the nine months of 2002 from $148.2 million in the nine months
of 2001, a decrease of $24.1 million or 16.2%. Reductions in SG&A expense are
due to decreases in salaries (down 15.8%), decreases in marketing expenses (down
48.4%) and decreased delivery expenses (down 16.4%). These decreases are the
result of both a reduction in the number of facilities as well as the Company's
initiatives to reduce SG&A costs. On a same store basis, SG&A decreased by 4.3%.
Depreciation, Goodwill and Trademark Amortization
- -------------------------------------------------
Year to date 2002, depreciation, goodwill and trademark amortization is $4.0
million compared to $4.7 million for 2001. The decrease primarily is due to the
implementation of SFAS 142, which reduced amortization expense by $0.7 million
(see Note 2 to the Condensed Financial Statements).
Provision for Doubtful Accounts
- -------------------------------
The provision for doubtful accounts was approximately $1.1 million, or 0.2% of
net sales for the nine months of 2002 compared with $0.8 million, or 0.1% of net
sales for the nine months of 2001.
Store Closing Costs
- -------------------
During the nine months of 2002, the Company closed, consolidated, or sold eight
distributions centers and two component plants. Store closing costs associated
with these activities typically include employee termination costs,
non-cancelable lease obligations and other exit costs incurred as a direct
result of closing facilities. These store closing costs for the nine months of
2002 were $2.4 million. In addition to the costs above, the Company also
incurred charges related to the write down of inventory and receivables to their
net realizable value. These charges have been recorded in cost of sales and
provision for doubtful accounts. The Company has accrued in current liabilities
approximately $32,000 for estimated future costs associated with these closings.
23
Other Operating Income
- ----------------------
Other operating income for the nine months of 2002 was $3.3 million compared
with $1.8 million for the nine months of 2001. Other operating income primarily
includes the sale or disposal of property, plant and equipment, service charges
assessed customers on past due accounts receivable, and casualty gains/losses.
The increase in operating income primarily is due to the sale of seven
facilities during the nine months of 2002 for a net gain of $1.3 million, while
one center and one parcel of land was sold for an immaterial gain during the
same period in 2001.
Interest Expense
- ----------------
In the nine months of 2002, interest expense decreased to $12.4 million from
$16.8 million during the nine months of 2001. Interest expense in the nine
months of 2001 included a charge of approximately $232,000 for the decline in
the fair value of an interest rate swap that did not qualify for hedge
accounting under SFAS 133. The Company benefited from a favorable change in the
swap value and recorded a $116,000 credit to interest expense in the nine months
of 2002. The interest rate swap agreement expired in February 2002.
The Company's year-to-date weighted-average interest rate decreased to 8.04%
compared to 8.58% last year. Average debt levels decreased significantly, down
$37.5 million or 16.4% over the comparable period in 2001. The Company continues
to maximize its use of LIBOR contracts to minimize its overall interest expense.
In the nine months of 2002, approximately 90.4% of the Company's average
borrowing on its revolving credit facility was LIBOR-based as compared with
94.2% during the nine months of 2001.
Provision for Income Taxes
- --------------------------
The Company recorded an income tax expense of $0.3 million for the nine months
of 2002 compared with a benefit of $2.0 million for the same period in the prior
year. An effective federal and state income tax rate of 39.1% was used to
calculate income taxes for the first nine months of 2002, compared to 38.7% for
the same period in the prior year. The calculated tax rate in the financial
statements of 336.1% for the nine months of 2002 compared to 30.0% for the same
period in the prior year differs due to state franchise taxes and non-deductible
items. State franchise taxes were $0.6 million and $0.8 million for the nine
months of 2002 and 2001, respectively.
The Company continues to review future earnings projections to determine that
there is sufficient support for its deferred tax assets and valuation allowance.
24
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. This assessment constitutes Forward-Looking
Information made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995 and is inherently subject to
uncertainty and dependent upon the Company's future profitability, which in turn
depends upon a number of important risk factors including but not limited to:
the effectiveness of the Company's operational efforts, sale of certain assets,
cyclicality and seasonality of the Company's business, the effects of the
Company's substantial leverage, and competition.
Recently Issued Accounting Pronouncements
- -----------------------------------------
In April 2002, the FASB issued SFAS 145, "Rescission of SFAS No's, 4, 44, and
64, Amendment of SFAS 13, and Technical Corrections." SFAS 145 modifies the
treatment of sale-leaseback transactions and extinguishment of debt allowing
gains and losses to be treated as comprehensive income in most circumstances.
SFAS 145 is effective for the fiscal year beginning December 29, 2002. The
Company does not believe the initial adoption of this standard will have a
material impact on the Company's financial statements.
In July 2002, the FASB issued SFAS 146, "Accounting for Costs Associated with
Exit or Disposal Activities." SFAS 146 requires companies to recognize costs
associated with exit or disposal activities when they are incurred rather than
at the date of commitment to a plan. SFAS 146 is effective for any exit plans
commencing after December 29, 2002. The Company does not believe that the
initial adoption of this standard will have a material impact on the Company's
financial statements.
25
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The Company's principal sources of working capital and liquidity are earnings
and borrowings under its credit facility. The Company's assessment of its future
funds availability constitutes Forward-Looking Information made pursuant to the
Private Securities Litigation Reform Act of 1995 and is inherently subject to
uncertainty resulting from, among other things, the factors discussed under
"Results of Operations - Provision for Income Taxes". The Company anticipates
that funds provided by operations and under this facility will be adequate for
the Company's future needs. The Company's primary need for capital resources is
to finance inventory, accounts receivable, improvements to plant property and
equipment and insurance reserves.
During the nine months of 2002, net cash provided by operating activities was
$15.6 million compared with net cash used in operating activities of $20.3 for
the nine months of 2001. The improvement made this year was the result of the
Company's plan to improve performance through a reduction in facilities and
improvements in managing its inventory and accounts receivable.
The Company's accounts receivable balance at September 28, 2002 decreased $20.8
million or 19.4% when compared to the balance at September 29, 2001. This
decrease primarily is the result of a reduction in the number of distribution
facilities from 99 to 90, a 12.2% reduction in credit sales, and improved
collection efforts.
The Company's inventory balance at September 28, 2002 decreased $37.7 million or
29.6% when compared to the balance at September 29, 2001. This decrease
primarily is related to the Company's goal to improve inventory management,
increasing turnover for the nine months of 2002 to 7.0 from 6.2 for the same
period last year. As mentioned above, the number of distribution facilities
declined from 99 to 90 between September 28, 2002 and September 29, 2001.
Accounts payable at September 28, 2002 decreased approximately $8.7 million or
14.2% from September 29, 2001.
26
The Company's capital expenditures consist primarily of the construction of
product storage facilities, the remodeling and reformatting of sales and
distribution facilities and component manufacturing facilities, and the purchase
of vehicles, equipment and management information systems for both existing and
new operations. The Company also may make expenditures to establish or acquire
operations to expand or complement its existing operations, especially in its
major markets. In the nine months of 2002, the Company spent approximately $1.3
on capital expenditures, compared to $6.3 million for the same period in 2001.
Under the Company's bank revolving credit agreement, capital expenditures during
2002 are currently limited to $7.0 million. In addition to capital expenditures,
this revolving 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.
On October 30, 2002, the Company announced the signing of a definitive agreement
for the sale of substantially all of the assets of the Company's operations in
Wisconsin and Northern Michigan to Lanoga Corporation. The final purchase price
will be determined at closing, which is tentatively scheduled for December 16,
2002. The expected proceeds approximates a minimum of $55 million for property
plus additional proceeds to be determined based on the final amounts of
inventory and accounts receivable. The Company expects to record a gain from
this transaction. The funds provided by this transaction will be used to pay
down the Company's revolving credit. Included in the transaction are 14
distribution facilities and three component plants in Wisconsin, and 17
distribution facilities and one component plant in Michigan. These facilities
generated combined sales of approximately $300 million in fiscal 2001. The
Company will retain its operations in the southern half of the lower-peninsula
of Michigan, including all of its operations in Coldwater, Davison, Grand Blanc,
Grand Rapids, Owosso, Port Huron, Romeo, Mason, Rochester, Monroe, Jackson and
Kalamazoo.
The transaction will require approval under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976 and is subject to other contingencies common in similar
transactions.
The Company maintained excess availability under its revolving credit agreement
throughout 2002. The Company's receivables and inventory typically increase in
the second and third quarters of the year due to higher sales in the peak
building season. In these same periods, the Company typically reaches its peak
utilization of its revolving credit agreement because of the increased inventory
and receivables needed for the peak building season. At September 28, 2002, the
Company had outstanding borrowings under its revolving credit agreement of $86.1
million, the minimum availability requirement was $25.0 million and the unused
availability was $28.7 million.
27
The Company's revolving 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, certain
asset sales, dividends, investments, acquisitions and other restricted payments.
Furthermore, the credit 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.
A commitment fee of 0.38% is payable on the unused amount of the revolving
credit agreement. Interest on amounts outstanding under the amended and restated
credit agreement bear interest at a spread of 0.75% above the base rate of Fleet
National Bank (5.50% at September 28, 2002) or 2.75% above the applicable LIBOR
rate (4.57% at September 28, 2002). 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 September
28, 2002, the Company had designated $12.1 million and $74.0 million as base
rate and LIBOR borrowings, respectively. Amounts outstanding at September 28,
2002 under the $33.9 million term loan portion bear interest at a spread of
3.00% above the applicable LIBOR rate. All interest is payable monthly.
The Company previously entered into an interest rate swap agreement that
effectively fixed 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 expired in February 2002.
Substantially all of the Company's accounts receivable, inventory and general
intangibles are pledged as collateral under the revolving credit agreement. In
addition, substantially all of the Company's owned real estate assets were
provided as additional collateral in connection with the term loan entered into
in December 2000. 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.
The Company's weighted-average interest rate on all outstanding borrowings,
excluding amortization of debt issue costs, for the nine months ended September
28, 2002 and September 30, 2001 was approximately 8.04% and 8.58%, respectively.
28
WICKES INC. AND SUBSIDIARIES
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
For information of the Company's Quantitative and Qualitative Disclosures About
Market Risk, please see the Company's Annual Report on Form 10-K for the fiscal
year ended December 29, 2001. There have been no material changes in the
Company's quantitative or qualitative exposure to market risk since the end of
fiscal 2001.
Item 4. CONTROLS AND PROCEDURES
-----------------------
The Company has performed an evaluation under the supervision and with the
participation of management, including the Chief Executive Officer ("CEO") and
Chief Financial Officer ("CFO"), of the effectiveness of the design and
operation of the disclosure controls and procedures. Based on that evaluation,
the CEO and CFO concluded that the disclosure controls and procedures were
effective as of September 28, 2002. There have been no significant changes in
the internal controls or other factors that could significantly affect internal
controls subsequent to September 28, 2002.
29
PART II
-------
OTHER INFORMATION
-----------------
Item 2. Changes in Securities and Use of Proceeds
-----------------------------------------
(a) None
(b) None
(c) Under the Company's Director Incentive Plan, directors may make an
annual irrevocable election to receive up to 100% of the annual
retainer and committee fees, payable quarterly, in the form of stock.
On July 17, 2002, the Company issued an aggregate of 5,367 shares of
common stock in lieu of $9,340 of such fees in reliance upon the
exemption afforded by Section 4(2) of the Securities Act of 1933,
as amended.
(d) None
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
Exhibit 99.1 Certification of Chief Executive Officer
Exhibit 99.2 Certification of Chief Financial Officer
(b) Reports on Form 8-K
A Current Report on Form 8-K dated October 18, 2002 was filed
under Item 5 disclosing a notice from NASDAQ.
A Current Report on Form 8-K dated October 30, 2002 was filed
under Item 5 disclosing the execution of an agreement to sell certain
of the Company's facilities.
A Current Report on Form 8-K dated November 4, 2002 was filed
under Item 5 disclosing a change in the Company's credit rating by
Standard and Poor's.
30
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
WICKES INC.
-----------
By: /s/ J. Steven Wilson
--------------------
J. Steven Wilson
Chairman of the Board, President
and Chief Executive Officer
By: /s/ James A. Hopwood
--------------------
James A. Hopwood
Senior Vice President and
Chief Financial Officer
Date: November 12, 2002
-----------------
31
SECTION 302 CERTIFICATION
-------------------------
I, J Steve Wilson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Wickes Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 12, 2002 Signature: /s/ J. Steven Wilson
----------------- --------------------
Chairman of the Board, President and
Chief Executive Officer
32
SECTION 302 CERTIFICATION
-------------------------
I, James Hopwood, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Wickes Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 12, 2002 Signature: /s/ James A. Hopwood
----------------- --------------------
Vice President and
Chief Financial Officer
33
Exhibit 99.1
CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED BY SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, J. Steven Wilson, Chairman of the Board, President and Chief Executive
Officer of Wickes Inc. (the "Registrant") hereby certify, pursuant to 18
U.S.C.ss. 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of
2002, that to my knowledge:
(1) the Quarterly Report on Form 10-Q for the period ending September 28,
2002 as filed with/submitted to the U.S. Securities and Exchange Commission
(the "Report"), fully complies with the requirements of Section 13(a) of
the Securities Exchange Act of 1934, as amended; and
(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Registrant.
Dated: November 12, 2002
-----------------
/s/ J. Steven Wilson
--------------------
J. Steven Wilson,
Chairman of the Board, President
and Chief Executive Officer.
34
Exhibit 99.2
CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED BY SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, James A. Hopwood, Senior Vice President and Chief Financial Officer of
Wickes Inc. (the "Registrant") hereby certify, pursuant to 18 U.S.C.ss.
1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002, that to
my knowledge:
(1) the Quarterly Report on Form 10-Q for the period ending September 28,
2002 as filed with/submitted to the U.S. Securities and Exchange Commission
(the "Report"), fully complies with the requirements of Section 13(a) of
the Securities Exchange Act of 1934, as amended; and
(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Registrant.
Dated: November 12, 2002
-----------------
/s/ James A. Hopwood
--------------------
James A. Hopwood,
Senior Vice President and
Chief Financial Officer