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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 28, 2002
or
[ ] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Transition Period From To
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Commission File No. 1-14967
WICKES INC.
-----------
(Exact name of registrant as specified in its charter)
Delaware 36-3554758
(State of Incorporation) (IRS Employer Identification No.)
706 North Deerpath Drive, Vernon Hills, Illinois 60061
(Address of principal executive offices)
(847) 367-3400
(Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12 (b) of the Act:
None
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. [ ]
Indicated by check mark whether the registrant is an accelerated filer (as
defined in the Exchange Act Rule 12b-2). Yes [ ] No [X]
As of February 28, 2003, the Registrant had 8,307,984 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 SmallCap
Market of Common Stock on that date) held by nonaffiliates was approximately
$1,310,000 (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 2003
Annual Meeting of Stockholders, are incorporated by reference into Part III
hereof, as more specifically described herein.
2
TABLE OF CONTENTS
----------------- Page No.
PART I --------
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Item 1. Business......................................................................3
Item 2. Properties...................................................................20
Item 3. Legal Proceedings............................................................21
Item 4. Submission of Matters To a Vote
of Security Holders.....................................................22
PART II
-------
Item 5. Market For Registrant's Common Equity
and Related Stockholder Matters.........................................23
Item 6. Selected Financial Data......................................................24
Item 7. Management's Discussion and Analysis
of Financial Condition and Results
of Operations...........................................................28
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk.......................................................45
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 and Related Stockholder Matters..........................46
Item 13. Certain Relationships and Related Transactions...............................46
Item 14. Controls and Procedures......................................................46
PART IV
-------
Item 15. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K.................................................47
SIGNATURES..............................................................................49
3
PART I
------
Item 1. BUSINESS.
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Wickes Inc. ("Wickes") and its subsidiaries (Wickes and its subsidiaries
are collectively referred to as "the Company")are a leading supplier of building
materials and manufacturer of building components 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 December 28, 2002, the Company operated 58 sales and
distribution facilities, as well as 13 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 Southern regions of the
United States.
Background
- ----------
The Company was formed in 1987 as a Delaware corporation. 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 of the Wickes Lumber
Company, which opened its first lumber and building materials operations in
1952, from Wickes Companies, Inc. The acquisition included 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 58 and to strategically grow its component
manufacturing capabilities to 13 locations.
For further information, including information on the sale of assets to
Lanoga Corporation on December 16, 2002, see "Business Strategy". Also see Item
7 for information on the restructuring of the Company's debt.
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 $307.3 billion in 2002. 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 19.0% of the total market
in 2002.
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 significantly linked 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 1.62 million in 1998, 1.66 million in 1999, 1.57 million in 2000 and
1.60 million in 2001, and estimated to be 1.65 million in 2002. The Blue Chip
Economic Indicators Consensus Forecast, dated February 10, 2003, projects 2003
housing starts to be 1.63 million, down approximately 1.2% from housing starts
in 2002. In 2002, housing starts in the Company's primary geographical market,
the Midwest, are estimated to have increased 4.2% over housing starts in that
region in 2001. The Company's two other geographical markets, the Northeast and
South, experienced increases in 2002 housing starts of an estimated 2.3% and
4.4%, respectively, from housing starts in the prior fiscal year. Nationally,
single family housing starts, which generate the majority of the Company's sales
to building professionals, increased by 5.8% to 1.33 million starts in 2002 from
1.27 million starts in 2001.
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
$56.7 billion, or approximately 18.5% of total 2002 sales of the building
material supply industry, while direct sales to DIY's amounted to $144.0 billion
or 46.9% of such sales.
5
Business Strategy
- -----------------
General
-------
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:
large metropolitan areas or "Major Markets", smaller rural and semi-rural areas
or "Conventional Markets", and commercial, direct ship and turnkey construction
or "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. In Wickes Direct, the Company provides materials
flow and logistics management services to commercial customers. The Company also
serves building professionals through its network of 13 component manufacturing
facilities that produce value-added, wood framed wall panels, roof and floor
truss systems, and pre-hung interior and exterior doors.
In the latter part of 2001, the Company's management team developed a
comprehensive strategic plan aimed to reorganize operations, focus on its core
business, improve productivity, reduce debt, and establish a longer term,
sustainable capital structure. This plan was rolled out during fiscal 2002. To
date, management believes the Company made significant progress toward
accomplishing its objectives.
Since the inception of the aforementioned strategic plan, management has
streamlined its operations, improved efficiencies, and sold its non-strategic
assets thereby eliminating a significant amount of its rural retail oriented
locations, which were more vulnerable to competitive pressures. The Company is
now focusing its business on its core professional contractor and volume builder
customers, where Wickes maintains competitive advantages. The successful
implementation of management's plans has enabled the Company to reduce its
long-term debt from approximately $202.4 million as of December 29, 2001, to
approximately $95.5 million as of December 28, 2002.
In 2002, the Company implemented a reorganization initiative that developed
a process of continuous improvement whereby strategic initiatives are monitored
and adjusted over time. Through this process the Company has relaunched a number
of its previous initiatives including tool rental, installed products and
manufactured components. In addition, Wickes' management team has developed and
implemented sales planning tools and technology to support efforts to retain and
6
grow customer relations and to better support its recently reorganized sales
management structure. Wickes' management is also requiring the operating units
to adhere to stricter standards in safety, customer profitability, labor
productivity and working asset turnover, that it believes will form the basis
for a successful building materials business going forward.
On December 16, 2002, the Company successfully completed the sale of
substantially all of the assets of its operations in Wisconsin and Northern
Michigan to Lanoga Corporation (the "Lanoga Sale"), for approximately $104.7
million, including assumed liabilities of approximately $18 million. Included in
the transaction were 14 sales and distribution centers and three component
plants in Wisconsin, and 17 sales and distribution centers and one component
plant in Michigan. This transaction comprised the majority of Wickes'
Conventional Market locations. These sites generated combined net sales of
approximately $272 million in 2002 (see also Note 3 to the Consolidated
Financial Statements). The funds provided by this transaction were primarily
used to pay down a substantial portion of the Company's senior credit
facilities, leaving approximately $31 million outstanding as of December 28,
2002. The Lanoga Sale was part of Wickes' strategic decision to focus on larger
demographic markets, where it can better serve its professional contractor and
volume builder customers. While a portion of the Lanoga Sale served professional
contractors, the locations were more rural, less scalable, and included retail
sales from do-it-yourself consumers. As a result, management concluded that
these locations no longer fit the Company's strategic direction and were more
vulnerable to competitive pressures.
In furtherance of the reorganization initiative, Wickes has redefined its
operational presence from previously independent operating units into customer
focused activities organized by sales and distribution territories. In order to
better execute each activity, the Company has appointed Directors of Sales and
Directors of Distribution for each market area to provide leadership and
execution expertise for each discipline. This has allowed the Company to better
focus its efforts to improve under-performing stores. The primary benefits of
this redefined operating structure include a stronger focus on sales management,
significantly improved efficiency in materials management and distribution,
improved safety awareness, and better use of Company assets, such as better
defined job descriptions and responsibilities, compensation plans, and reporting
relationships. Management believes this new approach is driving work behavior to
a new higher standard where all efforts are directed at strengthening
responsiveness to customers. Management has also piloted centralized estimating
concepts to assist sales representatives in better servicing customers while
taking steps to reengineer its sales activities to promote increased sales force
productivity by reducing time consuming administrative tasks.
7
Major Markets
-------------
The Company operates in 20 Major Markets, which are served by 26 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. 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
program seeks 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.
Conventional Markets
--------------------
At December 28, 2002, the Company operated 32 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.
Wickes Direct
-------------
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 selling from
both Major Markets and Conventional Markets facilities. 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
8
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 Components
------------------------
At December 28, 2002, the Company owned and operated 13 component
manufacturing facilities that supplied 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 12
stand-alone operations as well as one additional operation that shares real
estate with one of 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 Major Markets, manufacturing
provides key support to Wickes' position as a value-added partner. 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-added element. The Company believes that
these engineered products improve customer service and provide an attractive
alternative to job-site construction. In 2002, 2001 and 2000, excluding
discontinued operations, the Company internally manufactured approximately
54.6%, 62.7% and 61.4%, respectively, of its total building components
distributed. Total building components distributed were 9.9%, 10.4%, and 9.9% of
total sales in 2002, 2001, and 2000, respectively, excluding discontinued
operations.
Other Initiatives
-----------------
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
as well as to provide the Company with an opportunity to supply current
customers with a greater portion of their total construction needs and to
enhance building materials sales from new customers interested in the tool
rental program. The program is in place in 18 sales and distribution facilities.
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 is operating in 34 sales and distribution facilities at the end of 2002.
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 2002,
the Company had 13 installed siding and 4 installed gutter locations in
operation.
9
The Company has developed 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 to
provide Internet based services to the construction industry. In addition, the
Company utilizes a software package ("BuilderCentral 2000(TM)"), which is
designed to provide professional building contractors with an enterprise system
to manage their construction projects.
In March 2000, the Company entered into an agreement with Buildscape, Inc.,
an entity then affiliated with Riverside Group, Inc. and Imagine Investments,
Inc. In July 2002, Dow Chemical Company acquired 100% ownership of Buildscape.
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 $13.1 million,
$23.8 million and zero in 2002, 2001, and 2000 respectively.
Markets
- -------
The Company operates in 20 Major Markets, which are served by 26 sales and
distribution facilities and 8 manufacturing facilities. The Company also
operates 32 sales and distribution facilities and 5 manufacturing facilities in
Conventional Markets. For a further discussion of Major Markets and Conventional
Markets see "Business Strategy."
Geographical Distribution
-------------------------
The Company's 58 sales and distribution facilities are located in 19 states
in the Midwest, Northeast and South. The Company's 13 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 December 28, 2002:
10
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 11 Pennsylvania 4 Alabama 3
New York 3 Kentucky 3
Indiana 10 Maine 1
Ohio 5 New Hampshire 2 Florida 2
Illinois 3 Connecticut 1
Colorado 3 New Jersey 1 North Carolina 2
Massachusetts 1 Georgia 1
Maryland 1
Tennessee 1
Total 32 Total 14 Total 12
== == ==
Facilities Opened, Closed and Consolidated
------------------------------------------
In 2000 one plant was added to supplement our Wisconsin market. During 2001
the Company closed distribution centers in Allentown, PA and Aurora, IL, closed
a plant in Cookeville, TN, closed and consolidated its Niles, MI distribution
center into its Mishawauka, IN distribution center and acquired a distribution
center in Kenvil, NJ to relocate its Succasunna, NJ distribution center. In
first quarter 2002, the Company sold 4 distribution centers; Pearl, MS,
Pascagoula, MS, Baton Rouge, LA, Wilkes Barre, PA, and one manufacturing plant,
Ocean Springs, MS, and closed one distribution center in Kokomo, IN. In second
quarter 2002, the Company sold two distribution centers, Harlingen, TX and
McAllen, TX. In third quarter 2002, the Company closed one distribution center
in Grand Rapids, MI, and one manufacturing plant in Indianapolis, IN. In fourth
quarter 2002, the Company sold 31 distribution centers and 4 manufacturing
plants in the Lanoga Sale. In addition the Company sold its distribution
facility in Bangor, ME in the fourth quarter of 2002.
The following table reconciles the number of sales and distribution
facilities and component manufacturing facilities operated by the Company from
December 25, 1999 through February 28, 2003.
11
Sales and Component
Distribution Manufacturing
Facilities Facilities
---------- ------------
As of December 25, 1999 101 18
Expansion 1
Acquisition -- --
----- ----
As of December 30, 2000 101* 19
Acquisition 1 --
Closings (2) (1)
Consolidations (2) --
----- ----
As of December 29, 2001 98* 18
Sold (38) (5)
Closings ( -) --
Consolidations (2) (1)
----- ----
As of December 28, 2002 58* 12
Sold -- --
Closings -- --
Consolidations (6) (1)
----- ----
As of February 28, 2003 52 11
*As of the fiscal year-end for 2002, 2001 and 2000, respectively, there were
one, nine and nine additional component manufacturing facilities located in
existing sales and distribution facilities.
Customers
- ---------
The Company has a broad base of customers, with no single customer
accounting for more than 2.7% of net sales in 2002. In 2002, 87.9% of the
Company's sales, including discontinued operations, were on trade credit, with
the remaining 12.1% as cash and credit card transactions. In 2001 and 2000,
87.1% and 86.9%, of the Company's sales, respectively, were on trade credit.
Home Builders
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The Company's primary customers are single-family home builders. In 2002,
all home builder customers accounted for 66.7% of the Company's net sales,
compared with 64.9% and 62.9% in 2001 and 2000, respectively. 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 focus on this customer group, offering new products and
developing additional services to meet their needs.
12
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 2002, sales to these customers
accounted for approximately 17.6% of the Company's sales, compared with 19.0%
and 20.8% in 2001 and 2000, respectively. The Wickes Direct program is closely
integrated with the Company's component manufacturing operations.
Repair & Remodelers
-------------------
In 2002, R&R customers accounted for approximately 8.8% of the Company's
sales, compared with 8.7% in both 2001 and 2000. 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 6.9% of the
Company's sales in 2002, compared with 7.4% and 7.6% in 2001 and 2000,
respectively. 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 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.
13
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,
2003 the Company's 181 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.
As of February 28, 2003 the Company employed 79 specialty salespeople in
its sales and distribution facilities who provide expert advice to customers in
project design, product selection and applications. A staff of 19 trained R&R
14
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 41 kitchen and bath specialists. The Company also employs 19 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 87.9%
of the Company's sales during 2002 were on credit, with the remaining 12.1%
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, 2003, the fleet included approximately 176 heavy duty trucks, 54
of which provide roof-top or second story delivery and 49 other vehicles
equipped with truck mounted forklifts. In addition, the Company's fleet includes
199 medium duty trucks, 272 light duty trucks and automobiles, 313 forklifts, 72
specialized millwork delivery vehicles, and 44 vehicles equipped to install
blown insulation.
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. This program is currently established in 18 sales
and distribution facilities and is currently undergoing an internal
reengineering to reestablish operating standards and income benchmarks
consistent with overall company objectives.
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. This program is now in place in 34 sales and distribution
facilities and is also being reengineered to reestablish standards and income
benchmarks consistent with overall company objectives.
15
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 four 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.
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.
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.
16
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 2002,
approximately 40% of the Company's sales, including discontinued operations,
were of special order items, compared with 37% in 2001 and 35% in 2000. 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
93.8%, 93.6% and 94.9% of the Company's net sales in 2002, 2001 and 2000,
respectively, into three groups. These include Wood Products (lumber, plywood,
treated lumber, sheathing, wood siding, roof and floor trusses, wall panels and
specialty lumber); Building Products (roofing, vinyl siding, doors, drywall,
windows, mouldings, and insulation); and Hardlines (hardware products, paint,
tools, kitchen and bathroom cabinets, plumbing products, electrical products,
light fixtures and floor coverings). Wood Products, Building Products, and
Hardlines represented 53.3%, 36.5%, and 10.2% of the Company's product sales
respectively, for 2002 and 56.2%, 34.4%, and 9.4% for 2001, respectively.
Manufacturing
- -------------
The Company operates 13 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 12 stand-alone operations and one additional operation that
shares real estate with one of 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 2002, the
Company manufactured approximately (excluding discontinued operations) 54.6% of
the framed wall panels, roof and floor trusses, and pre-hung doors sold by the
Company, compared with 62.7% in 2001 and 61.4% in 2000. The Company believes
that these value-added, engineered manufactured products improve customer
service and provide an attractive alternative to job-site construction.
17
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
6.8% of the Company's purchases in 2002 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 51% 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 periodically 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 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 28 of its sales and distribution and manufacturing facilities,
enabling suppliers to ship products purchased by the Company directly to these
facilities by rail.
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."
18
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 and commodity
price volatility 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 at one time contained underground petroleum storage
tanks. All such tanks known to the Company and located on facilities owned or
operated by the Company have been filled or removed in accordance with
applicable environmental laws in effect at the time. As a result of reviews made
in connection with the sale or possible sale of certain facilities, the Company
has found petroleum contamination of soil and ground water on several of these
sites and has taken, and expects to take, remedial actions with respect thereto.
In addition, it is possible that similar contamination may exist on properties
no longer owned or operated by the Company, the remediation of which the Company
could, under certain circumstances, be held responsible. Since 1988, the Company
has incurred approximately $2.1 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
six years.
The Company is one of many defendants in two class action suits filed in
August of 1996 by approximately 200 claimants for unspecified damages as a
result of health problems claimed to have been caused by inhalation of silica
dust, a byproduct of concrete and mortar mix, allegedly generated by a cement
plant with which the Company has no connection other than as a customer. The
Company has entered into a cost-sharing agreement with its insurers, and any
liability is not expected to be material.
19
The Company is one of many defendants in approximately 794 actions, each of
which seeks unspecified damages, in various 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 284
similar actions for insignificant amounts, and another 353 of these actions have
been dismissed. None of these suits have made it to trial.
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.
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 six 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, 2003, the Company had 1,991 employees, of whom 1,889
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 satisfactory relations with its employees. None of the Company's
employees are covered by a collective bargaining agreement.
Safety
- ------
Wickes is committed to the safety and well being of its employees,
customers and the communities it serves. One of the cornerstones of the
Company's safety program is "Build on Safety," an innovative employee training
and awareness program, launched in April 2001, that established safety standards
and processes for all aspects of the Company's business. The program has also
provided critical safety training for every manager and employee. "Build on
Safety" has helped integrate safety into Wickes' corporate culture.
20
Trademarks and Patents
- ----------------------
The Company has no material patents, trademarks, licenses, franchises, or
concessions other than the name "Wickes Lumber", the "Flying W" trademark,
"BuilderCentral2000" and "Frame-A-Home-In-A-Day".
-----------------------
This report contains or may incorporate by reference statements that constitute
"forward-looking statements". The words "expect," "estimate," "anticipate,"
"predict," "believe," and similar expressions and variations of such words are
intended to identify forward-looking statements. Such statements appear in a
number of places in this report and include statements regarding intent, belief
or current expectations with respect to, among other things:
o the effects of seasonality and cyclicality;
o the effects of competition;
o interest rates and the Company's ability to service and comply with the
terms of its debt covenants;
o lumber prices;
o the success of the Company's operational initiatives; and
o the outcome of current and future legal proceedings involving the
Company.
Readers are cautioned not to place undue reliance on such forward-looking
statements. Such forward-looking statements are not guarantees of our future
performance and involve risks and uncertainties. Readers should carefully review
the factors discussed in this report and the documents that are incorporated by
reference into this report.
Item 2. PROPERTIES.
- --------------------
As of December 28, 2002 the Company's 58 sales and distribution facilities
are located in 19 states, with 32 in the Midwest, 14 in the Northeast and 12 in
the South. When combined with its 13 component manufacturing operations, the
Company operates in 20 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 sales and distribution centers generally consist of a
showroom averaging 8,800 square feet and covered storage averaging 37,800 square
feet. The Company's sales and distribution facilities are situated on properties
ranging from 1.0 to 21.3 acres and averaging 9.0 acres. The stand-alone
component manufacturing facilities average 42,100 square feet on properties
averaging 9.1 acres.
21
As of December 28, 2002, the Company owns 47 of its sales and distribution
facilities; the remaining 11 sales and distribution facilities are leased. The
Company also held for sale the assets of four closed facilities with a net book
value of $1.5 million. In addition to its sales and distribution facilities, the
Company operates 12 stand-alone component manufacturing plants, nine of which
are owned sites and three of which are on leased sites. One additional plant is
located on a sales and distribution facility site. All of the owned properties
are pledged as collateral under the Company's Credit Agreement dated February
26, 2003 and under the Company's senior secured notes.
For further information see "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations - Liquidity and Capital
Resources" and Note 9 to the Consolidated Financial Statements.
The Company leases its corporate headquarters, a portion of which is
subleased, located at 706 North Deerpath Drive in Vernon Hills, Illinois.
Item 3. LEGAL PROCEEDINGS.
- --------------------------
The Company is one of many defendants in two class action suits filed in
August of 1996. These cases involve approximately 200 claimants for unspecified
damages as a result of health problems claimed by the Company's customer,
claimed to have been caused by inhalation of silica dust, a byproduct of
concrete and mortar mix, which the Company acquired from a cement plant with
which the Company has no connection other than as a customer making purchases
for resale. 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 794 actions, each of
which seeks unspecified damages, in various 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 284
similar actions for insignificant amounts, and another 353 of these actions have
been dismissed. None of these suits have made it to trial.
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.
22
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.
23
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 SmallCap
Market under the trading symbol "WIKS." As of February 28, 2003 there were
8,307,984 shares outstanding held by approximately 120 stockholders of record.
In addition, the Company believes approximately 926 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 SmallCap
Market System after October 3, 2002, and on the Nasdaq National Market System
prior to that date. Prices do not include retail markups, markdowns or
commissions.
Three Months Ended High Low
------------------ ---- ---
Fiscal 2002
-----------
March 30 $3.28 $2.35
June 29 2.75 0.83
September 28 1.80 0.17
December 28 0.94 0.28
Fiscal 2001
-----------
March 31 $5.00 $3.00
June 30 4.57 4.00
September 29 4.44 2.67
December 29 3.08 2.37
On October 11, 2002 the Company received notice from Nasdaq that the
Company's common stock has not maintained the minimum per share requirement for
continued inclusion under Marketplace Rule 4310(c)(4). Therefore, in accordance
with Marketplace Rule 4310(c)(8)(D), the Company has been provided 180 calendar
days, or until April 9, 2003, to regain compliance. If at anytime before April
9, 2003, the bid price of the Company's common stock closes at $1.00 per share
or more for a minimum of 10 consecutive trading days, Nasdaq will provide
written notification that the Company complies with the Rule.
If compliance with this Rule cannot be demonstrated by April 9, 2003,
Nasdaq will determine whether the Company meets the initial listing criteria for
the Nasdaq SmallCap Market under Marketplace Rule 431(c)(2)(A). If it meets the
initial listing criteria, Nasdaq will notify the Company that it has granted an
additional 180 calendar day grace period to demonstrate compliance. Otherwise,
Nasdaq will provide written notification that the Company may appeal Nasdaq's
determination to delist its securities to a Listing Qualifications Panel. The
Company believes Nasdaq will grant the additional 180 calendar day grace period
to demonstrate compliance.
24
The Company did not declare or pay any dividends on Common Stock during the
two fiscal years ended December 28, 2002. There are restrictions included in its
revolving credit facility and trust indenture related to the Company's 11-5/8%
senior secured notes relating to the payment of dividends. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Note 9 to the Consolidated Financial Statements.
The following table summarizes the number of stock options issued, the
weighted-average exercised price, and the number of securities remaining to be
issued under all outstanding equity compensation plans as of December 28, 2002.
Equity Compensation Plan Information
-------------------------------------
No. of securities
No. of securities to Weighted avg. available for future
Plan be issued upon exercise price of issuance under equity
Category exercise of outstanding compensation plans
outstanding options, options, warrants (excluding securities
warrants, etc. etc. reflected in column (a))
----------------------- ---------------------- --------------------- --------------------------
(a) (b) (c)
Equity compensation
plans approved by
security holders 525,866 6.28 330,070
Equity compensation
plans not approved by
security holders 0 0 0
Total 525,866 6.28 330,070
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 28, 2002. 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. The
table reflects business sold as part of the Lanoga Sale as a component of
discontinued operations due to an exit from a marketplace.
25
WICKES INC. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except ratios and per share data)
Dec. 28, Dec. 29, Dec. 30, Dec. 25, Dec. 26,
2002 2001 2000 1999 1998
----------- ------------ ------------ ----------- -----------
Income Statement Data:
Net sales 577,731 710,000 726,375 777,244 631,209
Gross profit 114,013 145,614 149,563 153,775 127,625
Selling, general and administrative expense 112,884 143,587 145,193 132,976 116,791
Depreciation and amortization 4,301 5,239 4,710 4,764 3,860
Provision for doubtful accounts 1,281 916 727 1,331 2,402
Impairments (1) 12,894 - - - -
Store closing costs and other charges (2 & 3) 3,554 1,744 - - 5,932
Other operating income (4) (2,941) (3,421) (13,163) (3,682) (4,415)
(Loss) income from continuing operations (17,960) (2,451) 12,096 18,386 3,055
Interest expense (5) 16,029 21,787 24,322 23,302 21,632
Loss from continuing operations before
income taxes (33,989) (24,238) (12,226) (4,916) (18,577)
Income tax (benefit) provision (13,503) (8,648) (3,745) (1,418) (6,494)
Loss from continuing operations (20,486) (15,590) (8,481) (3,498) (12,083)
Income from discontinued operations 29,613 8,516 11,335 11,086 11,118
Net income(loss) 9,127 (7,074) 2,854 7,588 (965)
Per Share Data:
Loss from continuing operations per common share
basic and diluted (2.47) (1.88) (1.03) (0.43) (1.47)
Income from discontinued operations per
common share-basic 3.57 1.03 1.37 1.35 1.36
Income from discontinued operations per
common share-diluted 3.52 1.01 1.34 1.33 1.35
Net income (loss) per common share-basic 1.10 (0.85) 0.35 0.92 (0.12)
Net income (loss) per common share-diluted 1.08 (0.85) 0.34 0.91 (0.12)
Weighted average common shares - basic 8,293,261 8,277,190 8,249,774 8,216,265 8,197,542
Weighted average common shares - diluted 8,416,481 8,403,742 8,466,383 8,330,571 8,248,967
Operating Data:
Depreciation and amortization 4,301 5,239 4,710 4,764 3,860
Deferred financing cost amortization 1,586 1,449 1,274 1,510 1,447
Capital expenditures 1,883 9,222 7,898 7,216 4,446
Net cash provided by (used in)
operating activities 28,459 (453) 22 (15,372) (5,450)
Net cash provided by (used in)
investing activities 81,624 (7,397) (7,486) (16,281) (274)
Net cash (used in) provided by
financing activities (107,626) (4,860) (5,478) 27,086 975
Net cash (used in) provided by
discontinued operation (2,570) 12,662 13,091 4,574 4,738
Balance Sheet data (at period end):
Working capital-continuing operations (11) 49,456 93,075 107,655 125,751 104,921
Total assets 173,987 297,073 300,936 334,009 292,183
Total long-term debt, less current maturities 67,363 193,253 200,403 220,742 191,961
Total stockholders' equity 36,030 26,771 33,896 30,819 23,148
Other Data:
Ratio of earnings to fixed charges (6) (0.69) 0.09 0.81 0.82 0.26
Interest coverage (7) (0.86) 0.23 0.31 1.12 0.38
EBITDA (8) (12,417) 4,737 7,157 24,328 7,655
Cash interest expense (9) 14,443 20,338 23,048 21,792 20,185
Same store sales growth (10) -9.4% -2.4% -7.4% 22.1% 8.5%
Building centers open at end of period 58 98 101 101 101
26
Notes to Selected Consolidated Financial Data
(1) The Company has recorded an impairment charge of $12.9 million related
to goodwill and other intangible assets. (See additional discussion in
Note 4 to the consolidated financial statements.)
(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
(3) During 2002 and 2001, the Company incurred store closing costs and
other charges related to management's reorganization initiatives that
resulted in charges of $3.6 million and $1.7 million, respectively,
relating to distribution center closing costs and other charges. (See
additional discussion in Item 7. Management's Discussion and Analysis
and Note 16 to the consolidated financial statements.)
(4) As further explained in Note 9 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. As required by SFAS No. 145 the
Company has changed the presentation of its gains on debt
extinguishment from extraordinary items to other operating income.
While not required until fiscal 2003, the Company has elected to early
adopt the provision of this statement as encouraged by the Financial
Accounting Standards Board. (See additional discussion in Note 2 to
the consolidated financial statements.)
(5) Interest expense includes cash interest expense and amortization of
deferred financing costs. (See note 9 below.)
(6) 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
$34.0 million, $24.2 million, $5.4 million, $4.9 million and $18.6
million for the years ended December 28, 2002, December 29, 2001,
December 30, 2000, December 25, 1999 and December 26, 1998,
respectively.
27
(7) 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 9 below).
(8) EBITDA represents income (loss) from continuing operations before
income taxes, 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) 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 in the period ended December 28, 2002 (in thousands).
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Interest expense $16,029 $21,787 $24,322 $23,302 $21,632
Less:
Amortization of deferred
financing costs 1,586 1,449 1,274 1,510 1,447
--------- --------- --------- --------- ---------
Cash interest expense 14,443 20,338 23,048 21,792 20,185
Decrease (increase) in
accrued interest 1,117 (880) 155 (289) 700
--------- --------- --------- --------- ---------
Interest paid $15,560 $19,458 $22,203 $21,503 $20,885
========= ========= ========= ========= =========
(10) 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
---- -----------------
2002 58
2001 98
2000 101
1999 101
1998 101
(11) Working capital presented excludes the assets and liabilities of
discontinued operations.
28
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- --------------------------------------------------------------------------
RESULTS OF OPERATIONS.
- ----------------------
General
- -------
As of December 30, 2001 the Company adopted the requirements of Statement
of Financial Accounting Standards No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets". As described earlier in this Form 10-K, the
Company sold 31 distribution centers and 4 component plants to Lanoga
Corporation (the "Lanoga Sale") which constituted an asset group, as defined by
the standard. The distribution centers and component plants have been treated as
a disposal of a component of the consolidated Company, which under the standard,
requires the Company to report the results of these operations as discontinued
operations. The results of these operations have been reported as discontinued
operations for the year ended December 28, 2002. The results of operations for
the years ended December 29, 2001 and December 30, 2000 have been reclassified
as discontinued operations to conform to the requirements of this standard. Net
sales from discontinued operations were $271.8 million, $291.0 million, and
$301.2 million in 2002, 2001, and 2000, respectively. Income from discontinued
operations was $7.3 million, $8.5 million, and $11.3 million, respectively.
Additionally, the Company recognized a $22.4 million gain, net of taxes, on the
Lanoga Sale as of December 28, 2002. In addition to the Lanoga Sale, the Company
closed, consolidated or sold an additional 11 facilities in 2002 and 5 in 2001
that were not considered discontinued operations and therefore the results of
these operations are reported in continuing operations.
The following table sets forth, for the periods indicated, the percentage
relationship to net sales of certain expense and income items. All material
intercompany balances and transactions have been eliminated. The table below has
been adjusted to exclude discontinued operations. (See additional discussion in
Note 3 to the consolidated financial statements.) This table and subsequent
discussion should be read in conjunction with the consolidated financial
statements and notes thereto appearing elsewhere herein.
Years Ended
-----------
Dec 28, Dec. 29, Dec. 30,
2002 2001 2000
---- ---- ----
Net sales 100.0% 100.0% 100.0%
Gross profit 19.7 20.5 20.6
Selling, general and administrative
expenses 19.5 20.2 20.0
Depreciation and amortization 0.7 0.7 0.6
Provision for doubtful accounts 0.2 0.1 0.1
Impairments 2.2 - -
Store closing costs and other charges 0.6 0.2 0.0
Other operating income (0.5) (0.5) (1.8)
(Loss)Income from continuing operations (3.5) (0.3) 0.1
29
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. Due to a substantial
percentage of the Company's sales being attributable to building professionals,
certain of these factors may have a more significant impact on the Company than
on companies that are more heavily focused on consumers.
The Company's first quarter, and occasionally its fourth quarter, is
typically 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. During 2002, the Midwest and Northeast of the country
had fairly normal temperatures and precipitation. By comparison, in December
2001 these regions recorded above normal to record warm temperatures with normal
to below normal precipitation, while during the second quarter of 2001, the
Midwest and South regions experienced more precipitation than normal. In the
first quarter of 2000, the Midwest and Northeast experienced mild winter weather
but significant precipitation, while the fourth quarter these regions
experienced more severe winter weather than in the previous years. The Company's
year-to-date weighted-average interest rate decreased in 2002 to 7.95% compared
to a weighted-average interest rate of 8.93% in 2001 and 10.07% in 2000.
Commodity lumber prices decreased 4.0% from last year, negatively affecting 2002
results. Housing starts nationally were up 5.1% in 2002 and in the Company's
primary markets, the Northeast, Midwest, and South, starts were up 2.3%, 4.2%
and 4.4% respectively. By comparison, 2001 housing starts nationally increased
2.2% over 2000. During 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.
Losses from continuing operations increased to $20.5 million for the year
ended December 28, 2002, from $15.6 million and $8.5 million for the years ended
December 29, 2001 and December 30, 2000, respectively.
The following table contains selected unaudited quarterly financial data
for the years ended December 28, 2002 and December 29, 2001. Quarterly income
(loss) per share may not total to year-end income (loss) per share due to the
issuance of additional shares of Common Stock during the course of the year.
30
QUARTERLY FINANCIAL DATA
Fiscal Quarters
(in millions, except per share data and percentages)
2002 2002 2002 2002
Quarter 1 Quarter 2 Quarter 3 Quarter 4
------------ ------------ ------------ ------------
Net sales from continuing operations $ 135.3 $ 160.4 $ 153.2 $ 128.8
% of annual net sales 23.4% 27.8% 26.5% 22.3%
Gross Profit 25.8 32.3 30.7 25.2
Income (loss) from continuing operations (2.8) (0.6) (3.1) (14.0)
Income (loss) from discontinued operations (1.0) 2.9 4.2 23.5
------------ ------------ ------------ ------------
Net (loss) income (3.8) 2.3 1.1 9.5
Basic earnings (loss) per common share:
Income (loss) from continuing operations $ (0.34) $ (0.07) $ (0.37) $ (1.69)
Income (loss) from discontinued operations (0.12) 0.35 0.51 2.83
------------ ------------ ------------ ------------
Net (loss) income (0.46) 0.28 0.14 1.14
Diluted earnings (loss) per common share:
Income (loss) from continuing operations (0.34) (0.07) (0.37) (1.69)
Income (loss) from discontinued operations (0.12) 0.35 0.50 2.79
------------ ------------ ------------ ------------
Net (loss) income $ (0.46) $ 0.28 $ 0.13 $ 1.10
2001 2001 2001 2001
Quarter 1 Quarter 2 Quarter 3 Quarter 4
------------ ------------ ------------ ------------
Net sales from continuing operations $ 135.4 $ 194.5 $ 206.9 $ 173.2
% of annual net sales 19.1% 27.4% 29.1% 24.4%
Gross Profit 30.1 40.1 41.9 33.5
Income (loss) from continuing operations (4.8) (3.1) (4.0) (3.7)
Income (loss) from discontinued operations (1.7) 4.1 4.7 1.4
------------ ------------ ------------ ------------
Net Income (loss) (6.5) 1.0 0.7 (2.3)
Basic earnings (loss) per common share:
Income (loss) from continuing operations $ (0.58) $ (0.37) $ (0.48) $ (0.45)
Income (loss) from discontinued operations (0.20) 0.50 0.56 0.18
------------ ------------ ------------ ------------
Net (loss) income (0.78) 0.12 0.08 (0.27)
Diluted earnings (loss) per common share:
Income (loss) from continuing operations (0.58) (0.37) (0.48) (0.45)
Income (loss) from discontinued operations (0.20) 0.49 0.56 0.17
------------ ------------ ------------ ------------
Net (loss) income $ (0.78) $ 0.12 $ 0.08 $ (0.28)
Each fiscal quarter in the table above represents a thirteen-week period.
31
In the fourth quarter of 2002, the Company recorded a gain of $22.4
million, net of taxes, on the Lanoga Sale.
---------------------------
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.
2002 Compared with 2001
- -----------------------
The following discussion is based on the results of continuing operations
of the Company. See section above and Note 3 to the consolidated financial
statements regarding the Lanoga Sale, which is treated as discontinued
operations of the Company.
Net Sales
---------
Net sales for 2002 decreased $132.3 million, or 18.6%, to $577.7 million
from $710.0 million in 2001. In addition to the Lanoga Sale mentioned above,
which is treated as discontinued operations, the Company closed, consolidated or
sold an additional 11 facilities which contributed approximately $126.7 million
in sales in 2001. The sales for all facilities operated throughout both years
("same store sales") decreased 9.4%. During 2002, the Company experienced a 4.4%
decrease in same store sales to its primary customer, the professional home
builder, and an 18.0% decrease in same store sales to commercial builders.
Repair and Remodel and Consumer same store sales declined 11.1% and 15.5%
respectively. Sales to building professionals as a percentage of total sales
were 93.1% in 2002 compared to 92.6% in 2001, while sales to consumers were 6.9%
in 2002 compared to 7.4% in 2001.
Total housing starts nationally were up 5.1% in 2002 and in the Company's
primary markets, the Northeast, Midwest, and South starts were up 2.3%, 4.2% and
4.4% respectively. Nationally, single family housing starts, which generate the
majority of the Company's sales to building professionals, increased by 5.8% to
1.33 million starts in 2002 from 1.26 million starts in 2001.
The Company estimates that deflation in lumber and drywall prices
negatively impacted 2002 net sales by approximately $9.3 million, when compared
with lumber and drywall prices during 2001. Dimensional lumber, panel products,
32
and to an extent, drywall are commodities (which are generally tracked using the
Random Lengths Framing Composite Average and the Random Lengths Panel Index for
dimensional lumber and panel products, respectively) which cause the Company's
costs and retails to fluctuate with changing market conditions. 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's commodity wood products, including drywall (excluding
discontinued operations) accounted for approximately 54.3% of sales for the
year, compared with 57.3% for 2001.
Products that exhibited the greatest change in sales for the year ended
December 28, 2002 versus sales of such products in 2001 were lumber and plywood
(down 27.1%), trusses (down 12.4%), roofing (down 21.2%), treated wood products
(down 22.3%), specialty wood products (down 20.8%) and insulation (down 18.5%).
These products account for 56.7% of the total Company sales in 2002, and 68.7%
of the change in sales from last year.
Sales of internally manufactured building components, excluding the effects
of discontinued operations, decreased to 54.6% of total distributed building
components from 62.7% in the prior year. Sales of internally manufactured
building components decreased 22.4% to approximately $57.2 million in 2002 from
approximately $73.8 million in 2001. As with dimensional lumber, sales of
internally manufactured building components are impacted by the effects of
lumber deflation.
Gross Profit
------------
Gross profit decreased $31.6 million to $114.0 million or 19.7% of net
sales for 2002 compared with $145.6 million or 20.5% of net sales for 2001. The
Company believes that deflation in lumber and drywall prices decreased the
dollar value of gross profit by approximately $1.6 million for the fiscal year
ended December 28, 2002. During 2002, the Company sold or consolidated 11
facilities and recorded a charge to gross profit of $1.4 million for inventory
liquidation costs. Of the Company's major product lines, building materials
accounted for approximately 37.5% of total company gross profit, up from 34.8%
last year; however, gross margin percentage for these products decreased to
21.6% from 22.2% last year.
Selling, General, and Administrative Expense
--------------------------------------------
Total selling, general, and administrative expense ("SG&A") decreased $30.7
million or 21.4% to $112.9 million in 2002 compared with $143.6 million in 2001.
SG&A also decreased as a percent of net sales to 19.5% compared with 20.2% of
net sales in 2001.
33
The decrease in SG&A primarily is attributable to labor management that
reduced salaries and wages by $18.6 million or 19.0%. In addition the Company
experienced a reduction in benefit costs, particularly in its self-insured
medical costs which decreased by $3.7 million or 33.4% over last year, as well
as smaller reductions in marketing and delivery expenses. The Company believes
the management plan developed and put in place in the last half of 2001 to
reorganize and improve productivity and performance, and to reduce certain
overhead programs and under-performing assets, has resulted and should continue
to result in reductions to labor expenses, administrative expenses, marketing
expenses, insurance expenses and other SG&A expense.
Depreciation and Amortization
-----------------------------
Depreciation and amortization costs decreased approximately $0.9 million to
$4.3 million in 2002, compared with $5.2 million in 2001. As a percentage of
sales, depreciation and amortization costs compared to last year were flat.
Provision for Doubtful Accounts
-------------------------------
Provision for doubtful accounts increased to approximately $1.3 million or
0.2% of sales in 2002 from approximately $0.9 million or 0.1% of sales for 2001.
Included in the 2002 provision is the reserve of approximately $0.4 million
against a note issued by Riverside Group, Inc. that was not paid on the December
28, 2002 due date (see additional discussion in Note 15 to the consolidated
financial statements).
Impairments
-----------
In accordance with SFAS No.142, "Goodwill and Other Intangible Assets", the
Company has recorded an impairment charge of $12.9 million (see additional
discussion in Note 4 to the consolidated financial statements).
Store Closing Costs and Other Charges
-------------------------------------
In 2001, the Company's management developed a plan to reorganize and
improve productivity and performance. The results were reductions in
administrative expense, marketing expense, headcount and the elimination of
non-strategic operating units. As a result, the Company recorded charges of $1.2
million related to severance, $0.5 million related to property carrying costs
and other costs.
Pursuant to certain initiatives to improve performance and reduce
under-performing assets, from January through November 2002, the Company closed,
consolidated, or sold nine distributions centers and two component plants. These
closings resulted in termination of approximately 300 employees that worked at
these locations. Another 27 employees were transferred to surrounding locations.
Store closing costs associated with these activities typically include employee
termination costs, non-cancelable lease obligations and other exit costs
34
incurred as a direct result of closing facilities. As a result, the Company
recorded charges of $1.8 million of severance and $1.7 million of property and
other carrying costs. Also included in the $1.8 million of severance was
$385,000 in severance related to a plan to reduce headquarters and field
administration by 23 associates. In addition, the Company recorded a write down
of inventory of approximately $1.4 million. The following is a summary of the
activity in the reserve balances from 2001 through December 28, 2002 (in
thousands):
Employee Property and
Separation Other Carrying
Costs Costs Total
----- ----- -----
2001 Store closing and other costs $1,223 $ 521 $1,744
2001 Related payments 1,084 235 1,319
------------- ------------------ ------------
Accrual balance at December 29, 2001 139 286 425
2002 Store closing and other costs 1,895 1,658 3,553
2002 Related payments 1,649 1,929 3,578
------------- ------------------ ------------
Accrual balance at December 28, 2002 $ 385 $ 15 $400
Other Operating Income
----------------------
Other operating income decreased approximately $0.5 million to $2.9 million
in 2002, compared with $3.4 million in 2001. This primarily includes the sale or
disposal of property, plant and equipment, service charges assessed customers on
past due accounts receivable, and casualty losses. During 2002, the Company sold
eight pieces of real estate and various fixed assets for a net gain of
approximately $1.8 million, offset by an impairment of $0.9 million charged for
the 2003 sale of real estate in Aurora, CO. This is compared with four real
estate sales and various fixed asset disposals in 2001, for a net gain of
approximately $1.2 million.
Interest Expense
----------------
Interest expense decreased to $16.0 million in 2002 from $21.8 million in
2001. The Company's weighted-average interest rate on all outstanding
borrowings, excluding amortization of debt issue costs, for the years ended
December 28, 2002 and December 29, 2001 was approximately 7.95% and 8.93%,
respectively.
The Company's 2002 average debt levels decreased significantly, down $43.2
million or 19.1% over the comparable period in 2001. In 2002, approximately
85.9% of the Company's average borrowing on its revolving credit facility was
LIBOR-based as compared with 94.2% in 2001.
Income Tax Benefit before Discontinued Operations
-------------------------------------------------
In 2002, the Company recorded a net income tax benefit for continuing
operations of $13.5 million versus a net income tax benefit of $8.6 million in
2001. The Company's effective tax rate was 39.7% for 2002 compared to 35.7% for
35
2001. Included in the Company's tax provision from continuing operations were
state franchise taxes and non-deductible items. State franchise taxes were $0.4
million and $0.7 million for 2002 and 2001, respectfully.
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 from Continuing Operations
-----------------------------------
The Company recorded a net loss from continuing operations in 2002 of $20.5
million versus a loss of $15.6 million in 2001, an increase of $4.9 million.
Results of operations were negatively impacted by an impairment of intangible
assets of $12.9 million, a decrease in sales, down 18.6%, a decrease in gross
profit percent, down 80 basis points, an increase in store closing and other
items, up 103.8%, and a decrease in other income, down 14.0%. These items were
partially offset by a decrease in selling general and administrative expenses,
down 21.4%.
Discontinued operations
-----------------------
As part of the Company's reorganization initiative, on December 16, 2002,
the Company successfully completed the sale of substantially all of the assets
of its operations in Wisconsin and Northern Michigan to Lanoga Corporation's UBC
division (the "Lanoga Sale"). Included in the transaction were 14 distribution
centers and three component plants in Wisconsin, and 17 distribution centers and
one component plant in Michigan. See additional discussion in Note 3 to the
consolidated financial statements.
2001 Compared with 2000
- -----------------------
Net Sales
---------
Net sales for 2001 decreased $16.4 million, or 2.3%, to $710.0 million from
$726.4 million in 2000. The Company closed or consolidated 5 facilities during
2001 which contributed approximately $23.8 million in sales during the prior
year. Sales for all facilities operated throughout both years ("same store
sales") decreased 2.4%. During 2001, the Company experienced a 0.4% increase in
same store sales to its primary customer, the professional home builder, and a
10.2% decrease in same store sales to commercial builders. Consumer sales
declined 4.8% on a same store basis.
36
Sales to building professionals as a percentage of total sales were 64.9%
in 2001 compared to 62.9% in 2000. Lumber and building materials accounted for
84.8% of total sales in 2001, compared with 86.0% in 2000.
Total housing starts in the United States increased 2.2% in 2001, and
starts in the Company's primary geographical market, the Midwest, increased
approximately 4.0%, from such starts in 2000. The Company's two other
geographical markets, the Northeast and South, experienced a decrease in 2001
housing starts of 3.2% and an increase of 2.5%, respectively, from such starts
in 2000. Nationally, single family housing starts, which generate the majority
of the Company's sales to building professionals, increased by 3.6% to 1.27
million starts in 2001 from 1.23 million starts in 2000.
The Company estimates that deflation in lumber and drywall prices
negatively impacted 2001 net sales by approximately $15.7 million, when compared
with lumber and drywall prices during 2000. 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.
Products that exhibited the greatest change in sales for the year ended
December 29, 2001 versus sales of such products in 2000 were lumber and plywood
(down 10.1%), drywall (down 33.7%), windows (up 7.0%), and trusses (up 4.2%).
These products account for 53.2% of the total Company sales in 2001.
Sales of internally manufactured building components, excluding
discontinued operations, increased to 62.7% of total distributed building
components from 61.4% in the prior year. Sales of internally manufactured
building components increased 2.4% to approximately $73.8 million in 2001 from
approximately $72.0 million in 2000. As with dimensional lumber, sales of
internally manufactured building components are impacted by the effects of
lumber deflation.
37
Gross Profit
------------
Gross profit decreased $3.9 million to $145.6 million or 20.5% of net sales
for 2001 compared with $149.6 million or 20.6% of net sales for 2000. The
Company believes that deflation in lumber and drywall prices decreased the
dollar value of gross profit by approximately $3.6 million for the fiscal year
ended December 29, 2001. Commodity wood products, drywall and manufactured
building components accounted for approximately 57.3% of sales for the year,
compared with 59.5% for 2000.
Selling, General, and Administrative Expense
--------------------------------------------
Total selling, general, and administrative expense ("SG&A") decreased $1.6
million or 1.1% to $143.6 million in 2001 compared with $145.2 million in 2000.
SG&A increased slightly as a percent of net sales to 20.2% in 2001, compared
with 20.0% of net sales in 2000.
The increase in SG&A primarily is attributable to increases in employee
benefits, specifically medical and workers' compensation insurances and
increases in marketing expenditures. These increases were partially offset by
reductions in labor that reduced salaries and management incentives, and an
increase in co-operative marketing and cost recovery programs.
Depreciation and Amortization
-----------------------------
Depreciation and amortization costs increased approximately $0.5 million or
11.2% to $5.2 million in 2001, compared with $4.7 million in 2000. The increase
in depreciation primarily is due to investments in machinery and equipment at
the Company's manufacturing facilities and delivery vehicles.
Provision for Doubtful Accounts
-------------------------------
Provision for doubtful accounts increased to approximately $0.9 million or
0.1% of sales in 2001 from approximately $0.7 million or 0.1% of sales for 2000.
The Company extends credit, generally due on the 10th day of the month following
the sale, to qualified and approved contractors.
Store Closing Costs and Other Charges
-------------------------------------
In 2001, the Company's management developed a plan to reorganize and
improve productivity and performance. The results were reductions in
administrative expense, marketing expense, headcount and the elimination of
non-strategic operating units. As a result, the Company recorded charges of $1.2
million related to severance, $0.5 million related to property carrying costs
and other costs. Of these charges, the Company paid $1.1 million related to
severance, leaving an accrual balance at December 29, 2001 of $0.4 million.
38
Other Operating Income
----------------------
Other operating income decreased approximately $9.7 million to $3.4 million
in 2001, compared with $13.2 million in 2000. Other operating income primarily
includes the gains on the early extinguishment of debt, the sale or disposal of
property, plant and equipment, service charges assessed customers on past due
accounts receivable, closed center expenses and casualty losses. During 2001,
the Company sold four pieces of real estate and various fixed assets for a net
gain of approximately $1.2 million. This is compared with three real estate
sales and various fixed asset disposals in 2000, for a net gain of approximately
$0.3 million. Additionally, as part of the adoption of SFAS No. 145, the Company
reclassified its gains on debt extinguishment from extraordinary items to other
operating income (see additional discussion in Note 2 to the consolidated
financial statements.) While not required until fiscal 2003, the Company has
elected to early adopt the provision of this statement as encouraged by the
Financial Accounting Standards Board. The pretax gain of $11.1 million has been
reclassified to other operating income for the fiscal year ended December 30,
2000.
Interest Expense
----------------
Interest expense decreased to $21.8 million in 2001 from $24.3 million in
2000. The Company's weighted-average interest rate on all outstanding
borrowings, excluding amortization of debt issue costs, for the years ended
December 29, 2001 and December 30, 2000 was approximately 8.93% and 10.07%,
respectively. The Company's 2001 average debt levels decreased by $2.5 million
or 1.1% over the comparable period in 2000.
Income Tax Benefit
------------------
In 2001, the Company recorded a net income tax benefit for continuing
operations of $8.6 million versus a net income tax benefit of $3.7 million in
2000. The effective tax rate was 35.7% for 2001 compared to 30.6% for 2000. The
Company's provision includes state franchise taxes and other non-deductible
items. State franchise taxes were $0.7 million and $1.0 million for 2001 and
2000, 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.
Net Loss from Continuing Operations
-----------------------------------
The Company recorded a net loss from continuing operations in 2001 of $15.6
million versus a net loss from continuing operations of $8.5 million in 2000, an
increase of $7.1 million. Results of operations were negatively impacted by a
decline in sales of 2.3%, increased employee benefit costs, specifically workers
compensation and medical costs, as well as additional marketing expenditures.
Results were positively impacted by a decrease in management incentives and a
decrease in interest expense.
39
Critical Accounting Policies
- ----------------------------
Management's Discussion and Analysis discusses the results of operations
and financial condition as reflected in the Company's consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America. As discussed in Note 2 to
the Company's Consolidated 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 reported
amounts of revenues and expenses during the reporting period. Actual results may
differ from these estimates. Management believes that any reasonable deviations
from these estimates would not have a material impact on the consolidated
financial statements.
On an ongoing basis, management evaluates its estimates and judgments,
including those related to the allowance for uncollectible accounts, inventory
valuation, long-lived assets, and self-insurance and other reserves. Management
bases its estimates and judgments on its substantial historical experience and
other relevant factors, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily
apparent from other sources.
The Company's allowance for doubtful accounts is based on historical
write-off experience net of recoveries and management's assessment of the
collectibility of amounts due. Management's estimate considers overall portfolio
quality and current economic conditions that may affect the borrower's ability
to pay.
The Company utilizes the first-in, first-out (FIFO) cost flow assumption
for valuing its inventory. Estimates are made for obsolescence and unmarketable
inventory to ensure inventory is valued at the lower of cost or market, but not
in excess of net realizable value. The Company also records a reserve for
estimated inventory shrinkage, based on previous years actual physical inventory
result, for the periods between physical inventories.
40
The Company primarily is self-insured for medical, workers compensation,
automotive, general and product liability claims. Self-insurance claims incurred
but not reported and those reported but unpaid are accrued based on management's
estimates, which are based on actuarial assumptions provided by outside parties
and historical claims experience.
Long-lived assets, including intangible assets, are reviewed when facts and
circumstances indicate that the carrying value of the asset may not be
recoverable. When necessary, impaired assets are written down to estimated fair
value based on the best information available. Fair value is determined by
estimated future cash flows and appraised value of the assets.
Liquidity and Capital Resources
- -------------------------------
The Company's principal sources of working capital and liquidity are cash
flows from operations and borrowings under its revolving credit facility. The
Company's primary need for capital resources is to finance accounts receivable,
inventory, capital expenditures and collateral for self-insurance programs.
In 2002, net cash provided by operating activities was $28.5 million. This
compares with net cash used in operating activities of $0.5 million in 2001. The
increase in cash flow from operations primarily is driven by reductions in
accounts receivable and inventory, partially offset by a decrease in accounts
payable and accrued liabilities.
Accounts receivable at the end of 2002 was $56.1 million, a decrease of
$5.3 million or 8.6% from 2001. Inventory at the end of 2002 was $50.2 million,
a decrease of $21.7 million or 30.2% from 2001. Excluding the sale of assets in
the Lanoga Sale, accounts receivable and inventory decreases are due to the
Company's efforts to improve the management of both. Accounts payable at the end
of 2002 was $23.8 million, a decrease of $6.8 million or 22.2% from 2001.
During 2002, the Company decreased its capital expenditures to $1.9 million
compared to $9.2 million in 2001. Net cash provided by investing activities was
$81.6 million in 2002, compared to net cash used in investing activities in 2001
of $7.4 million. Proceeds from the sale of discontinued operations and other
facilities in 2002 were $83.5 million, compared to proceeds of $2.6 million in
2001.
The Company's capital expenditures consist primarily of the construction
and maintenance of facilities for new and existing operations, the purchase of
machinery and equipment for component manufacturing facilities, the remodeling
of sales and distribution 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. The new senior credit agreement, described below, will
allow the company to spend $6.0 million on capital expenditures. The Company
expects to fund capital expenditures through borrowings and its internally
generated cash flow.
41
At December 28, 2002 the Company operated 58 sales and distribution centers
and 13 component manufacturing facilities compared with 98 sales and
distribution facilities and 26 component manufacturing facilities at December
29, 2001. The reduction in facilities is due to the Lanoga Sale as well as other
sales and consolidation of facilities that took place during the year. At
December 28, 2002, there were no material commitments to third parties for
future capital expenditures.
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 December 28,
2002, the Company had outstanding borrowings under its previous revolving credit
agreement of $31.5 million, the minimum availability requirement was $25.0
million and the unused availability was $38.8 million.
Senior Subordinated Debt
- ------------------------
During 2002, management undertook an initiative to restructure its debt and
improve liquidity. As part of that initiative, on February 26, 2003, the Company
completed its offer to exchange its new Senior Secured Notes due 2005 for any
and all of its outstanding 11 5/8% Senior Subordinated Notes due 2003. The
Company accepted for the exchange all $42.8 million of Senior Subordinated Notes
validly tendered in exchange for an equal principal amount of Senior Secured
Notes. The tendered notes represent approximately 67% of the Senior Subordinated
Notes outstanding as of December 28, 2002. The Senior Secured Notes, which bear
interest at 11 5/8% per annum from the date of issuance through December 15,
2003 and at 18% per annum thereafter, are secured by liens on the Company's
owned real estate and equipment. These liens are junior to the liens securing
amounts payable under the Company's new senior credit facility.
Concurrent with the closing of the exchange offer, the indenture governing
the outstanding Senior Subordinated Notes was amended to remove or modify many
of the restrictive covenants. Those restrictions included (but were not limited
to) certain limitations on transactions with affiliates, dividend payments,
changes in control, and sales of assets. In addition, the new notes permit the
Company to call the notes, at its option, at declining discounts starting at
15%.
The Company continues to carry outstanding old notes of approximately $21.2
million. These notes are due in full on December 15, 2003. Sufficient liquidity
to meet these obligations when they come due is contingent on a number of risk
factors, as discussed in Item 1 of this Form 10-K.
42
Revolving Credit Facility
- -------------------------
Concurrent with the Exchange Offer, on February 26, 2003, the Company
completed a refinancing of its Fleet Credit Agreement and term notes existing
under the prior Amended and Restated Credit Agreement dated December 13, 2000
and entered into the new Merrill Credit Agreement dated February 26, 2003. The
total commitment was reduced from the original $251.7 million ($200 million
revolving line of credit and $51.7 million of term notes) to $125 million ($100
million revolving line of credit and $25 million of term notes). The Merrill
Credit Agreement expires on February 26, 2007, and the term notes are now due
February 26, 2007.
As of December 28, 2002 there was $31.5 million outstanding under the Fleet
Credit Agreement of which $20.3 million was revolving credit and $11.2 million
was term notes. The spread on prime rate borrowings under the new agreement
ranges from 1.25% to 2% over prime for revolving loans and 2% to 2.75% over
prime under the term notes. The spread for LIBOR based borrowing ranges from
2.5% to 3.25% over LIBOR for revolving loans and 3.25% to 4% over LIBOR for term
notes. The spread over the prime or LIBOR rates is determined based upon the
Company's Fixed Charge Coverage Ratio, as defined under the Merrill Credit
Agreement. The Company's base rate, 5.00% at December 28, 2002 and 5.50% at
December 29, 2001, included an interest spread over prime of 0.75% and 0.75%,
respectively. The Company's LIBOR borrowing rate, 4.13% at December 28, 2002 and
4.69% at December 29, 2001, included an interest spread over LIBOR of 2.75% and
2.75%, respectively. The Company's weighted average interest rates were 7.95%,
8.93%, and 10.07% as of December 28, 2002, December 29, 2001, and December 30,
2000, respectively.
The Merrill Credit Agreement limits the level of capital expenditures for
each annual period, while allowing for reinvestment of proceeds on asset sales.
The company is also subject to certain minimum levels of EBITDA, as defined
within the Credit Agreement. Availability is generally limited to 85% of
eligible accounts receivable and 60% of eligible inventory. For the first six
months from inception of this agreement, minimum availability is required to be
$15 million. As of March 22, 2003 unused availability was $37.2 million.
Under the Merrill Credit Agreement, a commitment fee of .375% to .5% is
payable on the unused revolving credit amount. Ranges of fees are determined
based upon the aforementioned Fixed Charge Coverage Ratio, as defined under the
Credit Agreement. As of December 28, 2002, the Company was in compliance with
all of its then existing covenants.
The maturity schedule in the Contractual Obligations and Commercial
Commitments Table within the Liquidity and Capital Resources section of the MD&A
has been adjusted to reflect the current repayment requirements of the Merrill
Credit Agreement dated February 26, 2003.
As a result of (i) the Company's failure to deliver to the lenders its
fiscal 2002 audited financial statements by March 28, 2003 and (ii) as of April
4, 2003, Riverside Group Inc. and J. Steven Wilson ceasing between them to own
at least 25% of the Company's outstanding common stock and Imagine Investments,
Inc. owning a greater percentage of such shares than Riverside and Mr. Wilson,
certain events of default arose under the Merrill Credit Agreement. Such
defaults were simultaneously waived by the lenders and the Credit Agreement was
amended in certain respects, including the addition of a provision which permits
the Company to make the severance payment to Mr. Wilson. In connection with such
waiver and amendments, the Company paid to the lenders a fee of $312,500.
43
Contractual Obligations and Commercial Commitments
- --------------------------------------------------
To facilitate an understanding of the Company's contractual obligations and
commercial commitments, the following data is provided. Note that approximately
$0.6 million of mortgages on real estate included herein are classified as a
component of other long-term liabilities in the Company's Balance Sheet.
Payments Due by Period
-----------------------
Within 2 - 3 4 - 5 After 5
Thousands Total 1 year years years years
-------------- ------------ ------------- ------------- ------------
Contractual Obligations
-----------------------
Long-Term Debt and Other Liabilities $ 96,027 $ 28,518 $ 43,120 $ 24,389 $ -
Operating Leases 43,125 9,651 10,431 3,021 20,022
-------------- ------------ ------------- ------------- ------------
Total Contractual Cash Obligations $ 139,152 $ 38,169 $ 53,551 $ 27,410 $ 20,022
============== ============ ============= ============= ============
Other than the operating leases included above, the Company has no other
off-balance sheet financing arrangements.
Net Operating Loss Carryforwards
- --------------------------------
At December 28, 2002 the Company and its subsidiaries had income tax net
operating loss carryforwards ("NOLs") of approximately $22.4 million. The NOLs
will expire in the years 2011 to 2021 if not previously utilized. See also Note
13 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.
Recently Issued Accounting Pronouncements
- -----------------------------------------
In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock-Based
Compensation --Transition and Disclosure, an amendment of FASB Statement No.
123". This standard provides transitional guidance for applying the fair
value-based method of accounting for stock options. It also requires additional
proforma disclosures for interim periods beginning after December 15, 2003. The
44
company will continue to apply the intrinsic value based method of accounting as
prescribed by APB Opinion No. 25. As such, management does not expect the
adoption of this pronouncement to have a material effect on its financial
statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 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 No. 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.
In April 2002, the FASB issued SFAS No. 145, "Rescission of SFAS No's, 4,
44, and 64, Amendment of SFAS No. 13, and Technical Corrections." SFAS No. 145
modifies the treatment of sale-leaseback transactions and extinguishment of
debt. Part of its provisions change the presentation of extraordinary gain /
loss on extinguishment of debt to a component of continuing operations and
requires reclassification of prior periods. While not required until fiscal
2003, the Company has elected to early adopt the provision of this statement. A
pretax gain of $11.1 million has been reclassified to other operating income for
the fiscal year ended December 30, 2000. The income tax provision and net loss
from continuing operations have been adjusted to reflect this reclassification.
In September 2002, the Emerging Issues Task Force ("EITF") issued EITF
Issue No. 02-16 "Accounting by a Reseller for Cash Consideration Received from a
Vendor". This consensus requires cash consideration received from vendors to be
classified as a reduction of costs of the customer product cost unless a
customer incurs a specific incremental cost to promote that vendor's products
for which it is being reimbursed or is providing a service for which the
consideration represents the consideration for the fair value of those services
being performed. This consensus is effective to the Company for the fiscal year
ended December 27, 2003. Currently, allowances that are reimbursements of costs
to promote vendors products are offset against those costs in the statements of
operations. Rebates that are associated with purchasing volumes are considered
reductions of the costs of products are recognized as revenues when those
products are sold.
45
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
- ------------------
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources" for a description of
the Company's outstanding indebtedness.
The Company had an interest rate swap agreement that expired in February
2002. This interest rate swap agreement had 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 Fleet Credit Agreement.
Based on limited and infrequent trading information, management estimates
that the fair value of the Company's outstanding 11 5/8% Senior Subordinated
Notes was $35.8 million and $32.0 million at December 28, 2002 and December 29,
2001, respectively. As discussed in Note 9 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
yield to maturity of the outstanding notes at December 28, 2002, the fair value
of the fixed rate debt would have increased by $0.2 million.
Commodity Price Risk
--------------------
The Company will from time to time enter 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 28, 2002, the Company did not have any
lumber futures contracts outstanding.
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.
- ---------------------
Not Applicable.
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 2003 Annual Meeting
of Stockholders.
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 2003
Annual Meeting of Stockholders.
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 2003 Annual Meeting of Stockholders.
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 2003
Annual Meeting of Stockholders.
Item 14. CONTROLS AND PROCEDURES.
- ---------------------------------
The Company has performed an evaluation under the supervision and with the
participation of management, including the Members of the Executive Management
Committee (Co-Principal Executive Officers) and Chief Financial Officer ("CFO"),
of the effectiveness of the design and operation of the disclosure controls and
procedures. Based on that evaluation, the Members of the Executive Management
Committee and CFO concluded that the disclosure controls and procedures were
effective as of December 28, 2002. There have been no significant changes in the
internal controls or other factors that could significantly affect internal
controls subsequent to December 28, 2002.
47
PART IV
-------
Item 15. 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
Consolidated balance sheets as of December 28, 2002
and December 29, 2001 F-2
Consolidated statements of operations for the years ended
December 28, 2002, December 29, 2001 and December 30, 2000 F-3
Consolidated statements of changes in stockholders'
equity for the years ended December 28, 2002, December 29,
2001 and December 30, 2000 F-4
Consolidated statements of cash flows for the years ended
December 28, 2002, December 29, 2001 and December 30, 2000 F-5
Notes to consolidated financial statements F-6
(2) Financial Statement Schedules:
- ----------------------------------
Schedule II. Valuation and Qualifying Accounts S-1
(3) Exhibits
- ------------
See Exhibit Index included elsewhere herein.
(b) Reports on Form 8-K
-------------------
The Company filed a current report of Form 8-K on December 31, 2002
reporting that the Company released unaudited pro forma condensed
consolidated financial information which reflects the Company's disposition
of thirty-five of its sales and distribution facilities and plants, and
other facilities and assets in Wisconsin and Michigan to Lanoga Corporation
for the nine-month period ended September 28, 2002 and for the years ended
December 29, 2001 and December 30, 2000.
The Company filed a current report of Form 8-K on December 20, 2002
reporting that the Company announced that it had commenced an offer to
exchange an equal principal amount of its new Senior Secured Notes due July
29, 2005, for any and all of its $63,956,000 aggregate principal amount of
outstanding 11 5/8 percent Senior Subordinated Notes due December 15, 2003.
48
The Company filed a current report of Form 8-K on December 18, 2002
reporting that on December 16, 2002, the Company sold thirty-five of its
sales and distribution facilities and plants, and other facilities and
assets in Wisconsin and Michigan to Lanoga Corporation, pursuant to an
Asset Purchase and Sale Agreement between Lanoga Corporation and Wickes
dated as of October 30, 2002 (the "Asset Purchase Agreement").
The Company filed a current report of Form 8-K on December 6, 2002
reporting that the Company has agreed to make a transfer, which may
constitute a bulk transfer under W.S.A. 406 et seq, of its thirty-five of
its sales and distribution facilities and plants, and other facilities in
Wisconsin and Michigan to Lanoga Corporation.
The Company filed a current report of Form 8-K on November 6, 2002
reporting that on November 4, 2002, Standard & Poor's Ratings Services
lowered its corporate credit rating on Wickes Inc. to `CCC' from `CCC+'.
The Company filed a current report of Form 8-K on November 1, 2002
reporting that on October 30, 2002, the Company announced the signing of a
definitive agreement for the sale of substantially all of the assets of its
operations in Wisconsin and Northern Michigan to Lanoga Corporation.
The Company filed a current report of Form 8-K on October 18, 2002
reporting that on October 11, 2002, the Company received notice from NASDAQ
that the Company's common stock has not maintained the minimum per share
requirement for continued inclusion under Marketplace Rule 4310(c)(4).
(c) See item 15(a)(3) above
-----------------------
(d) See item 15(a)(2) above
-----------------------
23.1 Independent Auditors' Consent
----------------------------------
49
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: April 7, 2003 By: /s/ James A. Hopwood
--------------------
James A. Hopwood
Senior Vice President, Chief Financial
Officer and Member of the Executive
Management Committee
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/ James A. Hopwood Senior Vice President, Chief Financial April 7, 2003
- --------------------
James A. Hopwood Officer and Member of the Executive
Management Committee (Co-Principal
Executive Officer and Principal Accounting Officer)
/s/ Robert E. Mulcahy III Chairman of the Board and Director April 7, 2003
- -------------------------
Robert E. Mulcahy III
/s/ William H. Luers Director April 7, 2003
- --------------------
William H. Luers
/s/ Frederick H. Schultz Director April 7, 2003
- ------------------------
Frederick H. Schultz
/s/ Claudia B. Slacik Director April 7, 2003
- ---------------------
Claudia B. Slacik
/s/ Jimmie J. Frank Senior Vice President of Merchandising April 7, 2003
- -------------------
Jimmie J. Frank and Sales and Member of the
Executive Management Committee
(Co-Principal Executive Officer)
/s/ James R. Detmer Senior Vice President of Distribution and April 7, 2003
- -------------------
James R. Detmer Manufacturing and Member of the Executive
Management Committee (Co-Principal
Executive Officer)
50
SECTION 302 CERTIFICATION
-------------------------
I, Jimmie J. Frank, certify that:
1. I have reviewed this annual report on Form 10-K of Wickes Inc.;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual 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 annual 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
annual 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: April 7, 2003 Signature: /s/ Jimmie J. Frank
------------- ---------------------
Senior Vice President of Merchandising and
Sales and Member of the Executive Management
Committee
(Co-Principal Executive Officer)
51
SECTION 302 CERTIFICATION
-------------------------
I, James R. Detmer, certify that:
1. I have reviewed this annual report on Form 10-K of Wickes Inc.;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual 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 annual 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
annual 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: April 7, 2003 Signature: /s/ James R. Detmer
------------- ---------------------
Senior Vice President of Distribution and
Manufacturing and Member of the Executive
Management Committee
(Co-Principal Executive Officer)
52
SECTION 302 CERTIFICATION
-------------------------
I, James A. Hopwood, certify that:
1. I have reviewed this annual report on Form 10-K of Wickes Inc.;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual 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 annual
report (the "Evaluation Date"); and
c) presented in this annual 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
annual 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: April 7, 2003 Signature: /s/ James A. Hopwood
------------- ----------------------
Senior Vice President, Chief Financial
Officer, and Member of the Executive
Management Committee
(Co-Principal Executive Officer)
F-1
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
INDEPENDENT AUDITORS' REPORT
----------------------------
To the Board of Directors and Stockholders of Wickes, Inc.
Vernon Hills, Illinois
We have audited the accompanying consolidated balance sheets of Wickes, Inc. and
subsidiaries (the "Company") as of December 28, 2002 and December 29, 2001, and
the related consolidated statements of operations, changes in stockholders'
equity, and cash flows for each of the three years in the period ended December
28, 2002. Our audits also included the financial statement schedules for each of
the three years in the period ended December 28, 2002, listed in the Index at
Item 15. These consolidated financial statements and financial statement
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion on the consolidated 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 consolidated
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 28, 2002 and December 29, 2001, and the results of their operations and
their cash flows for each of the three years in the period ended December 28,
2002, 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 consolidated financial statements taken
as a whole, present fairly in all material respects the information set forth
therein.
As discussed in Notes 3, 4, and 17, respectively, to the consolidated financial
statements, in 2002 the Company adopted new Statements of Financial Accounting
Standards that required it to (i) classify the 2002 sale of a portion of the
business as discontinued operations, (ii) record a 2002 charge for impairment of
goodwill and other intangible assets, and (iii) reclassify a 2000 gain on the
early retirement of debt from extraordinary to operating income.
/s/ Deloitte & Touche LLP
Chicago, Illinois
March 27, 2003 except for Notes 9 and 19, as to which the date is April 4, 2003
F-2
WICKES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 28, 2002 and December 29, 2001
(in thousands except share data)
December 28, December 29,
2002 2001
--------------- ---------------
ASSETS
Current assets:
Cash $ 40 $ 153
Accounts receivable, less allowance for doubtful
accounts of $1,919 in 2002, $2,119 in 2001 56,094 61,387
Notes receivable from affiliate - 430
Inventory, net 50,170 71,880
Deferred tax assets 5,720 5,399
Prepaid expenses and other assets 5,619 4,995
Assets of discontinued operations - 52,404
--------------- ---------------
Total current assets 117,643 196,648
--------------- ---------------
Property, plant and equipment, net 37,971 47,138
Trademark - 5,856
Deferred tax assets 13,775 16,342
Rental equipment (net of accumulated depreciation of $1,475 in
2002, $2,186 in 2001) 1,021 1,752
Goodwill - 6,788
Other assets (net of accumulated amortization of $13,320 in
2002, $11,881 in 2001) 3,577 4,806
Assets of discontinued operations - 17,743
--------------- ---------------
Total assets $ 173,987 $ 297,073
=============== ===============
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 28,107 $ 9,157
Accounts payable 23,824 30,622
Accrued liabilities 16,256 11,390
Liabilities of discontinued operations - 22,507
--------------- ---------------
Total current liabilities 68,187 73,676
--------------- ---------------
Long-term debt, less current maturities 67,363 193,253
Other long-term liabilities 2,407 2,709
Liabilities of discontinued operations - 664
Stockholders' equity:
Common stock, $0.01 par (8,307,984, 8,281,585,
shares issued and outstanding respectively) 83 83
Accumulated other comprehensive loss - (93)
Additional paid-in capital 87,173 87,134
Accumulated deficit (51,226) (60,353)
--------------- ---------------
Total stockholders' equity 36,030 26,771
--------------- ---------------
Total liabilties and stockholders' equity $ 173,987 $ 297,073
=============== ===============
The accompanying notes are an integral part of the consolidated financial statements.
F-3
WICKES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 28, 2002, December 29, 2001, and December 30, 2000
(in thousands, except per share data)
2002 2001 2000
----------- ----------- -----------
Net sales $ 577,731 $ 710,000 $ 726,375
Cost of sales 463,718 564,386 576,812
----------- ----------- -----------
Gross profit 114,013 145,614 149,563
----------- ----------- -----------
Selling, general and administrative expenses 112,884 143,587 145,193
Depreciation and amortization 4,301 5,239 4,710
Provision for doubtful accounts 1,281 916 727
Impairments 12,894 - -
Store closing costs and other charges 3,554 1,744 -
Other operating income (2,941) (3,421) (13,163)
----------- ----------- -----------
131,973 148,065 137,467
----------- ----------- -----------
(Loss) Income from continuing operations (17,960) (2,451) 12,096
Interest expense 16,029 21,787 24,322
----------- ----------- -----------
Loss from continuing operations before income taxes (33,989) (24,238) (12,226)
Income tax benefit (13,503) (8,648) (3,745)
----------- ----------- -----------
Loss from continuing operations (20,486) (15,590) (8,481)
Discontinued operations:
Income, net of taxes 7,263 8,516 11,335
Gain on disposal, net of taxes of $14,356 22,350 - -
----------- ----------- -----------
Income from discontinued operations 29,613 8,516 11,335
----------- ----------- -----------
Net income (loss) $ 9,127 $ (7,074)$ 2,854
=========== =========== ===========
Loss from continuing operations per common share-basic and diluted $ (2.47) $ (1.88)$ (1.03)
=========== =========== ===========
Income from discontinued operations per common share-basic $ 3.57 $ 1.03 $ 1.37
=========== =========== ===========
Income from discontinued operations per common share-diluted $ 3.52 $ 1.01 $ 1.34
=========== =========== ===========
Net income (loss) per common share-basic $ 1.10 $ (0.85)$ 0.35
=========== =========== ===========
Net income (loss) per common share-diluted $ 1.08 $ (0.85)$ 0.34
=========== =========== ===========
Weighted average common shares-for basic 8,293,261 8,277,190 8,249,774
=========== =========== ===========
Weighted average common shares-for diluted 8,416,481 8,403,742 8,466,383
=========== =========== ===========
The accompanying notes are an integral part of the consolidated financial statements.
F-4
WICKES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Years Ended December 30, 2000, December 29, 2001 and December 28, 2002
(in thousands, except for share data)
Accumulated
Additional Other
Common Stock Paid-in Accumulated Comprehensive Total
Shares Amount Capital Deficit Loss Equity
------ ------ ------- ------- ---- ------
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
Net loss (7,074) (7,074)
Change in fair value of swap
(93) (93)
--------
Total comprehensive loss - - (7,167)
Issuance of common stock 10,272 - 42 - 42
----------- ------ -------- ----------- -------- ----------
Balance at December 29, 2001 8,281,585 83 87,134 (60,353) (93) 26,771
Net income 9,127 9,127
Reclassification of swap fair
value to earnings 93 93
--------
Total comprehensive income 9,220
Issuance of Common stock 26,399 - 39 - 39
----------- ------ ---------- ------------ ------- -------
Balance at December 28, 2002 8,307,984 $ 83 $ 87,173 $ (51,226) - $ 36,030
========= ==== ======= ======== ==== ======
The accompanying notes are an integral part of the consolidated financial statements.
F-5
WICKES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years ended December 28, 2002, December 29, 2001, and December 30, 2000
(in thousands)
2002 2001 2000
-------------- --------------- ---------------
Cash flows from operating activities:
Net income (loss) $ 9,127 $ (7,074) $ 2,854
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Income from discontinued operations (7,263) (8,516) (11,335)
Gain on extinguishment of debt - - (6,806)
Depreciation expense 6,731 6,450 5,437
Amortization of trademark - 222 222
Amortization of goodwill - 515 621
Impairment of intangibles and other items 13,846 - -
Amortization of deferred financing costs 1,586 1,449 1,274
Provision for doubtful accounts 1,281 916 727
(Gain) loss on sale of assets and other items (1,841) (1,223) 116
(Gain) on sale of discontinued operations, net of taxes (22,350) - -
Deferred income taxes 2,246 (4,576) (1,615)
Changes in assets and liabilities, net of assets sold
and liabilities assumed:
Decrease (increase) in accounts receivable 13,305 (6,071) 25,974
Decrease in inventory 13,520 13,070 796
(Decrease) increase in accounts payable and accrued liabilities (1,493) 3,796 (16,576)
(Increase) decrease in prepaids and other assets (236) 589 (1,667)
-------------- --------------- ---------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 28,459 (453) 22
-------------- --------------- ---------------
Cash flows from investing activities:
Purchases of property, plant and equipment (1,883) (9,222) (7,898)
Payments for acquisitions - (760) (800)
Proceeds from sale of business 83,507 2,585 1,212
-------------- --------------- ---------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 81,624 (7,397) (7,486)
-------------- --------------- ---------------
Cash flows from financing activities:
Net (repayments) borrowings under revolving line of credit (81,900) (4,332) 22,044
Decrease (increase) in notes receivable - 53 (2)
Repayments of term loan (25,040) - (24,925)
Debt issuance cost (686) (581) (2,595)
-------------- --------------- ---------------
NET CASH USED IN FINANCING ACTIVITIES (107,626) (4,860) (5,478)
-------------- --------------- ---------------
NET CASH (USED IN) PROVIDED BY DISCONTINUED OPERATIONS (2,570) 12,662 13,091
-------------- --------------- ---------------
NET INCREASE (DECREASE) IN CASH 2,457 (12,710) (12,942)
Cash at beginning of period 153 201 52
-------------- --------------- ---------------
CASH AT END OF PERIOD $ 40 $ 153 $ 201
============== =============== ===============
Supplemental schedule of cash flow information:
Interest paid $ 15,560 $ 19,458 $ 22,203
Income taxes paid $ 634 $ 1,141 $ 1,457
The accompanying notes are an integral part of the consolidated financial statements.
F-6
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 of 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.
Cash and Cash Equivalents
- -------------------------
The Company considers all highly liquid investments with a maturity date of
three months or less to be cash equivalents.
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 historical write-off experience
net of recoveries and management's assessment of the collectibility of amounts
due. Management's estimate considers overall portfolio quality and current
economic conditions that may affect the borrower's ability to pay.
Inventory
- ---------
Inventory consists principally of finished goods. The Company utilizes the
first-in, first-out (FIFO) cost flow assumption for valuing its inventory.
Estimates are made for obsolescence and unmarketable inventory to ensure
F-7
inventory is valued at the lower of cost or market, but not in excess of net
realizable value. The Company also records a reserve for estimated inventory
shrinkage, based on previous year's actual physical inventory results, for the
periods between physical inventories.
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, which includes software, has useful lives ranging 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 using the straight-line method over a 3 to
7 year life.
Other Assets
- ------------
Other assets, primarily consisting of deferred financing costs, are being
amortized 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.
Goodwill and Other Intangible Assets
- ------------------------------------
Effective at the beginning of fiscal 2002, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible
Assets". Upon adoption, the Company determined that its trademark had an
indefinite life. As required by SFAS No. 142, the Company ceased amortizing
goodwill and the trademark. The Company determined that it has only one
reporting unit under SFAS No. 142.
The Company completed the transitional impairment test required by SFAS No.
142 during the first quarter of 2002. The Company's analysis indicated that
there were not indications of impairment as of the date of adoption. The
Company's policy is to perform the annual impairment test required by SFAS No.
142 in the fourth quarter. Because of the sale of a significant part of the
Company's operations and the resulting changes in the Company's net assets and
market capitalization, and other factors, the Company determined that impairment
indicators existed and, therefore, the Company was required to estimate the fair
value of the Company's goodwill and trademark.
F-8
The Company has determined, based on its step two analysis, which indicated
the Company's estimated real estate market value was significantly greater than
book value, that the implied fair value of the goodwill and trademark is zero as
of December 28, 2002. Therefore, the Company has recorded an impairment charge
of $12.9 million to fully write-off the net book value of these assets.
Approximately $5.4 million of goodwill was allocated to discontinued operations
and is included in the determination of the gain on disposal. See discussion in
Note 4 to the Consolidated Financial Statements.
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 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 of the related tax asset will
be realized.
Revenue Recognition
- -------------------
The Company earns revenue by providing goods or performing services in the
normal course of business. Customer's creditworthiness is determined, through a
standard credit application, before performance occurs to determine whether the
sale is to be made on a cash or credit basis. The Company recognizes revenues,
net of estimated returns, at the time products are delivered to the customer,
when the customer takes possession, or as services are provided. Estimated
returns are based on an analysis of historical returns, applied as a percentage
of sales. For contracts that have material or service elements provided over
extended periods of time, revenue is recognized as materials are delivered or
services have been performed. Prepayments for materials or services are deferred
until such materials have been delivered or services have been provided.
F-9
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.
Shipping & Handling Expenses
- ----------------------------
The Company presents costs associated with shipping and handling its
products as a component of selling, general and administrative expenses. These
costs, from continuing operations, were $11.1 million, $13.9 million and $14.3
million for the fiscal years ended December 28, 2002, December 29, 2001, and
December 30, 2000, respectively.
Vendor Allowances
- -----------------
The company recognizes allowances received from vendors in accordance with
its arrangements with its vendors. Allowances that are reimbursements of costs
to promote vendors products are offset against those costs in the statements of
operations. Rebates that are associated with purchasing volumes are considered
reductions of the costs of products and are recognized when those products are
sold.
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.
Impairment of Long-Lived Assets
- -------------------------------
Long-lived assets, including intangible assets, are reviewed when facts and
circumstances indicate that the carrying value of the asset may not be
recoverable. When necessary, impaired assets are written down to estimated fair
value based on the best information available. Fair value is determined by
estimated future cash flows and appraised value of the assets (see Note 4).
F-10
Stock-Based Compensation
- ------------------------
SFAS No. 123, "Accounting for Stock-Based Compensation," encourages, but
does not require, companies to recognize compensation expense for grants of
stock, stock options, and other equity instruments to employees based on the
fair value of such instruments. The pronouncement requires companies that choose
not to adopt the fair value method of accounting to disclose the pro forma net
income and earnings per share under the fair value method. As permitted by SFAS
No. 123, the Company elected to continue the intrinsic value method of
accounting prescribed by APB Opinion No. 25. As required, the Company has
disclosed the pro forma net income (loss) and pro forma income (loss) per share
as if the fair value based accounting methods had been used to account for
stock-based compensation cost (see Note 11). In addition, the following table
presents the pro forma impact (in thousands, except share data) to the Company's
financial statements as if the fair value method had been applied:
2002 2001 2000
---- ---- ----
Loss from continuing operations (as reported) $ (20,486) $ (15,590) $ (8,481)
Add: Stock based compensation cost included
in determination of compensation expense 39 43 41
Deduct: Stock based compensation under the
fair-value method for all awards, net of tax (130) (121) (205)
-------- -------- -------
Adjusted loss from continuing operations $ (20,577) $ (15,668) $ (8,645)
Income from discontinued operations 29,613 8,516 11,335
Net income (loss) (as reported) 9,127 (7,074) 2,854
Adjusted net income (loss) 9,036 (7,152) 2,690
Earnings per share:
Basic:
Loss from continuing operations (as reported) $ (2.47) $ (1.88) $ (1.03)
Adjusted loss from continuing operations (2.48) (1.89) (1.05)
Income from discontinued operations 3.57 1.03 1.37
Net income (loss) (as reported) 1.10 (0.85) 0.35
Adjusted net income (loss) 1.09 (0.86) 0.33
Diluted:
Loss from continuing operations (as reported) $ (2.47) $ (1.88) $ (1.03)
Adjusted loss from continuing operations (2.48) (1.89) (1.05)
Income from discontinued operations 3.52 1.01 1.34
Net income (loss) (as reported) 1.08 (0.85) 0.34
Adjusted net income (loss) 1.07 (0.86) 0.32
F-11
Segment Reporting
- -----------------
SFAS 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 reportable 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. In addition, the table below reflects net revenues for each of the
Company's major product categories (amounts in thousands):
2002 2001 2000
---- ---- ----
Wood Products $ 289,060 $ 373,517 $ 395,446
Building Materials 197,948 228,747 229,412
Hardlines 55,049 62,308 64,774
Other 35,674 45,428 36,743
------- ------- -------
Total Sales $ 577,731 $ 710,000 $ 726,375
======= ======= =======
No single customer represented more than 10% of the Company's total net sales in
2002, 2001 and 2000.
Recently Issued Accounting Pronouncements
- -----------------------------------------
In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock-Based
Compensation --Transition and Disclosure, an amendment of FASB Statement No.
123". This standard provides transitional guidance for applying the fair
value-based method of accounting for stock options. It also requires additional
proforma disclosures for interim periods beginning after December 15, 2003. The
company will continue to apply the intrinsic value based method of accounting as
prescribed by APB No. 25. As such, management does not expect the adoption of
this pronouncement to have a material effect on the Company's financial
statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 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 No. 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.
In April 2002, the FASB issued SFAS No. 145, "Rescission of SFAS No's, 4,
44, and 64, Amendment of SFAS No. 13, and Technical Corrections." SFAS No. 145
F-12
modifies the treatment of sale-leaseback transactions and extinguishment of
debt. Part of its provisions change the presentation of extraordinary gains or
losses on extinguishment of debt to a component of continuing operations and
requires reclassification of prior periods. While not required until fiscal
2003, the Company has elected to early adopt the provisions of this statement as
encouraged by the Financial Accounting Standards Board. A pretax gain of $11.1
million related to an early extinguishment of debt has been reclassified to
other operating income for the fiscal year ended December 30, 2000. The income
tax provision and net loss from continuing operations have been adjusted to
reflect this reclassification.
In September 2002, the Emerging Issues Task Force ("EITF") issued EITF
Issue No. 02-16 "Accounting by a Reseller for Cash Consideration Received from a
Vendor". This consensus requires cash consideration received from vendors to be
classified as a reduction of costs of the customer product cost unless a
customer incurs a specific incremental cost to promote that vendor's products
for which it is being reimbursed or is providing a service for which the
consideration represents the consideration for the fair value of those services
being performed. This consensus is effective to the Company for the fiscal year
ended December 27, 2003. Currently, allowances that are reimbursements of costs
to promote vendors products are offset against those costs in the statements of
operations. Rebates that are associated with purchasing volumes are considered
reductions of the costs of products are recognized as revenues when those
products are sold.
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.
3. Discontinued Operations
- ---------------------------
As of December 30, 2001 the Company adopted the requirements of Statement
of Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This standard establishes accounting and
reporting standards for the impairment and disposal of long-lived assets and
discontinued operations. On December 16, 2002 the Company successfully completed
the sale of substantially all of the assets of its operations in Wisconsin and
Northern Michigan to Lanoga Corporation's UBC Division (the "Lanoga Sale") for a
sales price of $104.7 million including the assumption of liabilities. These
operations have been treated as discontinued operations in accordance with this
standard. In addition to the Lanoga Sale, the Company closed, consolidated or
sold an additional 11 facilities in 2002 and 5 in 2001 that were not considered
discontinued operations and therefore the results of these operations are
reported in continuing operations.
F-13
The Company recorded a gain, net of tax, of $22.4 million, which included
approximately $0.6 million related to a curtailment of the Company's
post-employment benefit obligation. Included in the transaction were 14
distribution centers and three component plants in Wisconsin, and 17
distribution centers and one component plant in Michigan. The funds provided by
this transaction were primarily used to pay down a substantial portion of the
Company's senior credit facilities, leaving approximately $31 million
outstanding as of December 28, 2002. The Lanoga Sale was part of Wickes'
strategic decision to focus on larger demographic markets, where it can better
serve its professional contractor and volume builder customers. As a result,
management concluded that these locations no longer fit the Company's strategic
direction and were more vulnerable to competitive pressures.
Sales and income from discontinued operations were as follows (in
thousands):
2002 2001 2000
---- ---- ----
Sales $271,763 $290,999 $301,230
Income before income taxes 11,927 14,018 18,658
Tax provision 4,664 5,502 7,323
Net income from discontinued operations 7,263 8,516 11,335
The major classes of assets and liabilities of discontinued operations sold
were as follows (in thousands):
As sold on
December 16 December 29,
2002 2001
---- ----
Cash $ - $ 45
Accounts receivable 23,725 21,982
Inventory 23,010 28,239
Deferred tax assets - 2,075
Prepaid expenses and other assets - 63
------ ------
Total current assets 46,735 52,404
Property, plant and equipment 11,119 12,087
Deferred tax assets - 215
Goodwill 5,441 5,441
------ ------
Total assets 63,295 70,147
Accounts payable 15,789 13,334
Accrued liabilities 2,364 9,837
------ ------
Total current liabilities 18,153 22,507
Other long-term liabilities - 664
------ ------
Total current liabilities 18,153 23,171
------ ------
Net assets $ 45,142 $ 46,976
====== ======
F-14
4. Impairment of Goodwill and Trademark
- ---------------------------------------------
Effective at the beginning of fiscal 2002, the Company adopted SFAS No.
142, "Goodwill and Other Intangible Assets". Upon adoption, the Company
determined that its trademark had an indefinite life. As required by SFAS No.
142, the Company ceased amortizing goodwill and the trademark. The Company
determined that it has only one reporting unit under SFAS No. 142.
The Company completed the transitional impairment test required by SFAS No.
142 during the first quarter of 2002. The Company's analysis indicated that
there were not indications of impairment as of the date of adoption. The
Company's policy is to perform the annual impairment test required by SFAS No.
142 in the fourth quarter. Because of the sale of a significant part of the
Company's operations and the resulting changes in the Company's net assets and
market capitalization, and other factors, the Company determined that impairment
indicators existed and therefore the Company was required to estimate the fair
value of the Company's goodwill and trademark.
The Company has determined, based on its step two analysis which indicated
the Company's estimated real estate market value was significantly greater than
book value, that the implied fair value of the goodwill and trademark is zero as
of December 28, 2002. Therefore, the Company has recorded an impairment charge
of $12.9 million to fully write-off the net book value of these assets.
Approximately $5.4 million of goodwill was allocated to discontinued operations
and is included in the determination of the gain on disposal. As required under
SFAS No. 142 the following table provides income (loss) and per share data
adjusted for the effect of amortization of goodwill and other indefinite lived
intangible assets.
2002 2001 2000
---- ---- ----
Loss from continuing operations (as reported) $ (20,486) $ (15,590) $ (8,481)
Goodwill amortization - 515 621
Trademark amortization - 222 222
-------- -------- --------
Adjusted loss from continuing operations $ (20,486) $ (14,853) $ (7,638)
Income from discontinued operations 29,613 8,516 11,335
Net income (loss) (as reported) 9,127 (7,074) 2,854
Adjusted net income (loss) 9,127 (6,337) 3,697
Earnings per share:
Basic:
Loss from continuing operations (as reported) $ (2.47) $ (1.88) $ (1.03)
Adjusted loss from continuing operations (2.47) (1.79) (0.93)
Income from discontinued operations 3.57 1.03 1.37
Net income (loss) (as reported) 1.10 (0.85) 0.35
Adjusted net income (loss) 1.10 (0.77) 0.45
Diluted:
Loss from continuing operations (as reported) $ (2.47) $ (1.88) $ (1.03)
Adjusted loss from continuing operations (2.47) (1.79) (0.93)
Income from discontinued operations 3.52 1.01 1.34
Net income (loss) (as reported) 1.08 (0.85) 0.34
Adjusted net income (loss) 1.08 (0.77) 0.44
5. Other Comprehensive Income
- -------------------------------
The components of comprehensive income (loss) for the years ended December
28, 2002 and December 29, 2001 are as follows (in thousands):
Dec 28, Dec 29,
2002 2001
---- ----
Net income (loss) $ 9,127 $ (7,074)
Change in fair value of interest rate
swap, net of tax of $57 (93)
Reclassification of swap fair value
to earnings 93 -
------- -------
Comprehensive income (loss) $ 9,220 $ (7,167)
======= =======
6. Acquisitions
- -----------------
During 2001, the Company acquired the real estate and other assets of a
local lumber distributor in Kenvil, New Jersey for approximately $1.6 million,
of which $650,000 was paid in cash and $950,000 in a three-year purchase money
mortgage. The purpose of the acquisition was to relocate an existing lumber and
distribution center from a nearby leased location. In addition, the Company
acquired JWatt Construction, a framing contractor for construction of
residential and commercial real property, for an immaterial purchase price.
The costs of this acquisition 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 tested for impairment at least annually. Operations of the
companies acquired have been included in the accompanying consolidated financial
statements from their respective acquisition dates.
F16
7. Property, Plant, and Equipment
- ---------------------------------
Property, plant and equipment is summarized, in thousands, as follows:
December 28, December 29,
2002 2001
---- ----
Land and Improvements $ 10,107 $ 11,659
Buildings 24,329 26,250
Machinery and equipment 28,191 33,798
Leasehold improvements 2,262 3,315
Construction in progress 1,964 3,081
-------- --------
Gross property, plant & equipment 66,853 78,103
Less: Accumulated depreciation (30,356) (32,469)
-------- --------
Property, plant & equipment in use, net 36,497 45,634
Assets held for sale, net 1,474 1,504
-------- --------
Property, plant & equipment, net $ 37,971 $ 47,138
======== ========
Assets Held for Sale
- --------------------
Pursuant to certain initiatives to reduce under-performing assets, the
Company has four properties held for sale as of December 28, 2002. These
properties are held at the lower of book value or fair market value. Management
believes these properties are recoverable at the net book value of $1.5 million.
At December 29, 2001 the Company held three properties for sale for a net book
value of $1.5 million.
Sales of Real Estate
- --------------------
Throughout 2002, the Company sold eight pieces of real estate for a gain of
$1.8 million. These properties were not previously held for sale, but were sold
as on-going businesses. See additional discussion in Note 3 regarding sales of
properties to Lanoga.
In 2001, the Company sold four pieces of real estate for a net gain of $1.2
million. One property, which had been held since first quarter 1996, was sold at
a net loss of $10,000. The other three properties were not previously held for
sale and were sold for net gains. Of the three properties, one was an easement
of property, one was a result of relocation to a larger facility, and one was a
result of closing a center and selling the property.
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.
F-17
8. Accrued Liabilities
- ------------------------
Accrued liabilities consist of the following (in thousands):
Dec 28, Dec 29,
2002 2001
---- ----
Accrued payroll $ 5,797 $ 5,163
Accrued liability insurance 2,667 3,514
Other 7,792 2,713
------- -------
Total accrued liabilities $ 16,256 $ 11,390
====== ======
9. Long-Term Debt
- -------------------
Long-term debt obligations are summarized, in thousands, as follows:
December 28, December 29,
2002 2001
---- ----
Senior subordinated notes $ 63,956 $ 63,956
Revolving credit facility:
Revolving notes 20,346 93,143
Term notes 11,168 45,311
-------- --------
Total long-term debt 95,470 202,410
Less current maturities (28,107) (9,157)
-------- --------
Total long-term debt less current maturities $ 67,363 $ 193,253
======== ========
Aggregate Maturities
- --------------------
The Senior subordinated notes totaling $21.2 million mature on December 15,
2003. The remaining outstanding principal balance of $42.8 million matures on
July 29, 2005. The term portion of the revolving credit facility requires
quarterly principal payments as follows: $1.5 million from May 31, 2003 through
February 29, 2004; $3.0 million from May 31, 2004 through February 28, 2005;
$6.1 million from May 31, 2005 through November 30, 2006; with the remaining
principal balance due February 26, 2007.
F-18
Senior Subordinated Debt
- ------------------------
During 2002, management undertook an initiative to restructure its debt and
improve liquidity. As part of that initiative, on February 26, 2003, the Company
completed its offer to exchange its new Senior Secured Notes due 2005 for any
and all of its outstanding 11 5/8% Senior Subordinated Notes due 2003. The
Company accepted for exchange all $42.8 million of Senior Subordinated Notes
validly tendered in exchange for an equal principal amount of Senior Secured
Notes. The tendered notes represent approximately 67% of the Senior Subordinated
Notes outstanding as of December 28, 2002. The Senior Secured Notes, which bear
interest at 11 5/8% per annum from the date of issuance through December 15,
2003 and at 18% per annum thereafter, are secured by liens on the Company's
owned real estate and equipment. These liens are junior to the liens securing
amounts payable under the Company's new senior credit facility.
Concurrent with the closing of the exchange offer, the indenture governing
the outstanding Senior Subordinated Notes was amended to remove or modify many
of the restrictive covenants. Those restrictions included (but were not limited
to) certain limitations on transactions with affiliates, dividend payments,
changes in control, and sales of assets. In addition, the new notes permit the
Company to call the notes, at its option, at declining discounts starting at
15%.
The Company continues to carry outstanding old notes of approximately $21.2
million. These notes are due in full on December 15, 2003. Sufficient liquidity
to meet these obligations when they come due is dependent on a number of risk
factors as discussed in Item 1 of this Form 10-K.
On November 21, 2000, the Company commenced a cash tender offer for the old
notes at a discount from face value. On December 26, 2000, the Company redeemed
$36 million of the 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 as a component of other operating income. See
discussion in Note 2 to the consolidated financial statements regarding the
Company's adoption of SFAS No. 145.
Revolving Credit Facility
- -------------------------
Concurrent with the Exchange Offer, on February 26, 2003, the Company
completed a refinancing of its Fleet Credit Agreement and term notes existing
under the prior Amended and Restated Credit Agreement dated December 13, 2000
and entered into the new Merrill Credit Agreement dated February 26, 2003. The
total commitment was reduced from the original $251.7 million ($200 million
revolving line of credit and $51.7 million of term notes) to $125 million ($100
million revolving line of credit and $25 million of term notes). The Merrill
Credit Agreement expires on February 26, 2007, and the term notes are now due
February 26, 2007. The current portion of the Company's $11.2 million note has
been adjusted to reflect current maturities under the Merrill Credit Agreement.
F-19
As of December 28, 2002 there was $31.5 million outstanding under the Fleet
Credit Agreement of which $20.3 million was revolving credit and $11.2 million
was term notes. The spread on prime rate borrowings under the Merrill agreement
ranges from 1.25% to 2% over prime for revolving loans and 2% to 2.75% over
prime under the term notes. The spread for LIBOR based borrowing ranges from
2.5% to 3.25% over LIBOR for revolving loans and 3.25% to 4% over LIBOR for term
notes. The spread over the prime or LIBOR rates is determined based upon the
Company's Fixed Charge Coverage Ratio, as defined under the Merrill Credit
Agreement. The Company's base rate, 5.00% at December 28, 2002 and 5.50% at
December 29, 2001, included an interest spread over prime of 0.75% and 0.75%,
respectively. The Company's LIBOR borrowing rate, 4.13% at December 28, 2002 and
4.69% at December 29, 2001, included an interest spread over LIBOR of 2.75% and
2.75%, respectively. The Company's weighted average interest rates were 7.95%,
8.93%, and 10.07% as of December 28, 2002, December 29, 2001, and December 30,
2000, respectively.
The Merrill Credit Agreement limits the level of capital expenditures for
each annual period, while allowing for reinvestment of proceeds on asset sales.
The company is also required to achieve certain levels of EBITDA, as defined
within the Credit Agreement. Availability is generally limited to 85% of
eligible accounts receivable and 60% of eligible inventory. For the first six
months from inception of this agreement, minimum availability is required to be
$15 million. As of March 22, 2003 unused availability was $37.2 million.
Under the Merrill Credit Agreement, a commitment fee of .375% to .5% is
payable on the unused revolving credit amount. Ranges of fees are determined
based upon the aforementioned Fixed Charge Coverage Ratio, as defined under the
Credit Agreement. As of December 28, 2002, the Company was in compliance with
all of its then existing covenants.
As a result of (i) the Company's failure to deliver to the lenders its
fiscal 2002 audited financial statements by March 28, 2003 and (ii) as of April
4, 2003, Riverside Group Inc. and J. Steven Wilson ceasing between them to own
at least 25% of the Company's outstanding common stock and Imagine Investments,
Inc. owning a greater percentage of such shares than Riverside and Mr. Wilson,
certain events of default arose under the Merrill Credit Agreement. Such
defaults were simultaneously waived by the lenders and the Credit Agreement was
amended in certain respects, including the addition of a provision which permits
the Company to make the severance payment to Mr. Wilson. In connection with such
waiver and amendments, the Company paid to the lenders a fee of $312,500.
F-20
10. Commitments and Contingencies
- --------------------------------------
At December 28, 2002, the Company had accrued approximately $199,000 for
remediation of certain environmental and product liability matters.
Many of the sales and distribution facilities presently and formerly
operated by the Company at one time contained underground petroleum storage
tanks. All such tanks known to the Company and located on facilities owned or
operated by the Company have been filled or removed in accordance with
applicable environmental laws in effect at the time. As a result of reviews
made in connection with the sale or possible sale of certain facilities, the
Company has found petroleum contamination of soil and ground water on several of
these sites and has taken, and expects to take, remedial actions with respect
thereto. In addition, it is possible that similar contamination may exist on
properties no longer owned or operated by the Company, the remediation of which
the Company could, under certain circumstances, be held responsible. Since 1988,
the Company has incurred approximately $2.1 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 six years.
The Company is one of many defendants in two class action suits filed in
August of 1996 by approximately 200 claimants for unspecified damages as a
result of health problems claimed to have been caused by inhalation of silica
dust, a byproduct of concrete and mortar mix, allegedly generated by a cement
plant with which the Company has no connection other than as a customer. The
Company has entered into a cost-sharing agreement with its insurers, and any
liability is not expected to be material.
The Company is one of many defendants in approximately 794 actions, each of
which seeks unspecified damages, in various 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 284
similar actions for insignificant amounts, and another 353 of these actions have
been dismissed. None of these suits have made it to trial.
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.
F-21
Losses in excess of the $199,000 reserved as of December 28, 2002 are
possible, but an estimate of these amounts cannot be made.
Leases
- ------
The Company has entered into operating leases for corporate office space,
distribution center 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 $16.1 million, $18.5
million, and $17.4 million for the years ended December 28, 2002, December 29,
2001, and December 30, 2000, respectively.
Future minimum commitments for noncancelable operating leases are as follows:
Year Amount
---- ------
(in thousands)
2003 $ 9,651
2004 7,188
2005 3,244
2006 1,608
2007 1,413
Thereafter 20,022
--------
Subtotal 43,125
Less sublease income (6,385)
--------
Total $36,740
=======
11. Stockholders' Equity
- --------------------------
Preferred Stock
- ---------------
As of December 28, 2002, the Company had authorized 3,000,000 shares of
preferred stock, none of which were issued or outstanding.
Common Stock
- ------------
The Company has one class of common stock: Common Stock, par value $.01 per
share. At December 28, 2002, there were 20,000,000 shares of Common Stock
authorized and 8,307,984 shares issued and outstanding. In addition, at December
28, 2002, there were options to purchase 525,886 shares of Common Stock under
the Company's 1993 Long-Term Incentive Plan and 1993 Director Incentive Plan.
F-22
Stock Compensation Plans
- ------------------------
As of December 28, 2002, 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. No more than 835,000 shares of common stock
may be issued under the Incentive Plan. Under the 1993 Director Incentive Plan,
the Company may grant options and other awards and issue shares in lieu of
directors fees to directors. No more than 75,000 shares may be issued under
options or other awards under the Director Plan. 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.
Since the Company applies APB Opinion No. 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 the fair-value
based method described in SFAS No.123, the Company's net income (loss) and
income (loss) per share would have been reduced to the pro forma amounts
indicated below (in thousands, except per share data):
2002 2001 2000
---- ---- ----
(Loss) from
continuing operations As reported $(20,486) $(15,590) $(8,481)
Pro forma $(20,616) $(15,711) $(8,686)
Income from discontinued operations
As reported $29,613 $8,516 $11,335
Pro forma $29,613 $8,516 $11,335
Net income (loss) As reported $ 9,127 $(7,074) $ 2,854
Pro forma $ 8,997 $(7,195) $ 2,649
(Loss) from continuing operations
per share
basic and diluted As reported $(2.47) $(1.88) $(1.03)
Pro forma $(2.49) $(1.90) $(1.05)
Income from
discontinued operations
per share-basic As reported $ 3.57 $1.03 $1.37
Pro forma $ 3.57 $1.03 $1.37
Income from
discontinued operations
per share-diluted As reported $ 3.52 $1.01 $1.34
Pro forma $ 3.52 $1.01 $1.34
F-23
Net income (loss)
basic As reported $ 1.10 $(0.85) $0.35
Pro forma $ 1.08 $(0.87) $0.32
Net income (loss)
diluted As reported $ 1.08 $(0.85) $0.34
Pro forma $ 1.07 $(0.87) $0.31
Weighted Average Shares - basic 8,293,261 8,277,190 8,249,774
Weighted Average Shares - diluted 8,416,481 8,403,742 8,466,383
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 2002, 2001, and 2000, respectively: dividend
yield of 0% for all years; expected volatility of 233%, 169%, and 170%;
risk-free interest rates of 4.5%, 4.9% and 6.7%; and an expected life of 5.6,
5.5 and 5.6 years.
A summary of the status of the Company's fixed stock option plans as of
December 28, 2002, December 29, 2001, and December 30, 2000, and changes during
the years ended on those dates is presented as follows:
2002 2001 2000
---- ---- ----
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Fixed Options Shares Price Shares Price Shares Price
- ------------- ------ ------ ------ ----- ------ -----
Outstanding beginning
of year 653,297 $ 7.68 776,797 $ 7.23 788,072 $ 7.22
Granted 135,000 $ 2.18 75,500 $ 4.49 83,500 $ 6.90
Exercised - (39,433) $ 3.68
Forfeited, cancelled
or expired (262,431) $(6.32) (199,000) $ 4.72 (55,342) $ 9.04
--------- -------- --------
Outstanding end
of year 525,866 $ 6.28 653,297 $ 7.68 776,797 $ 7.23
Options exercisable
at year end 381,214 $ 7.57 526,532 $ 8.26 443,404 $ 8.86
Options available for
future grant at
year end 330,070 202,639 79,139
F-24
Weighted-average fair value of options granted during the year where:
2002 2001 2000
---- ---- ----
Exercise price equals market price $ 1.97 $ 2.84 $4.02
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 28, 2002:
Options Outstanding Options Exercisable
------------------- -------------------
Weighted-
Average Weighted- Weighted-
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices at 12/28/02 Life Price at 12/28/02 Price
------ ----------- ------ ----- ----------- -----
$ 1.74 - $ 5.00 352,897 4.5 years $ 2.36 220,244 $ 2.38
$ 5.13 - $ 7.00 67,034 0.7 years $ 0.79 55,035 $ 0.87
$ 10.95 - $23.25 105,935 0.3 years $ 3.13 105,935 $ 4.32
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 (in thousands except per share data):
Numerators: 2002 2001 2000
---- ---- ----
(Loss) from continuing operations -
for basic and diluted EPS $ (20,486) $ (15,590) $ (8,481)
Income from discontinued operations $ 29,613 $ 8,516 $ 11,335
Net income (loss) - for basic and
diluted EPS $ 9,127 $ (7,074) $ 2,854
Denominators:
Weighted average common shares - basic 8,293,261 8,277,190 8,249,774
Common shares from options - 12,749 98,885
Other common stock equivalents 123,220 113,803 117,724
----------- ---------- ----------
Weighted average common shares - for
diluted EPS 8,416,481 8,403,742 8,466,383
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 526,000,
544,000 and 278,000 weighted-average shares of common stock during 2002, 2001
and 2000 were not included in the calculation of diluted EPS as the options'
exercise prices were greater than the average market price.
F-25
12. 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
28, 2002, December 29, 2001 and December 30, 2000 were $1.8, million, $2.0
million and $2.1 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. As part of the
Company's Lanoga Sale, the Company recorded a curtailment gain of approximately
$0.6 million related to its post-employment benefit obligation.
The following tables reconcile the postretirement benefit, the plan's
funded status and actuarial assumptions, as required by SFAS No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits."
Postretirement Welfare Benefits
December 28, December 29,
2002 2001
---- ----
(in thousands)
Change in accumulated postretirement benefit obligation
Benefit obligation at beginning of year $ 2,384 $ 2,247
Service cost 371 336
Interest cost 186 179
Participant contributions - -
Claims paid (517) (703)
Actuarial losses 540 325
Plan amendments - -
Curtailments (745) -
-------- --------
Benefit obligation at end of year $ 2,219 $ 2,384
Change in plan assets
Fair value of plan assets at end of year $ - $ -
F-26
Reconciliation of funded status
Funded status $ (2,219) $ (2,384)
Unrecognized transition obligation / (asset) - -
Unrecognized prior service cost (7) (20)
Unrecognized actuarial loss / (gain) - (442)
--------- --------
Net amount recognized $ (2,226) $ (2,846)
Amounts recognized in statements of financial position consist of:
Prepaid benefit cost $ - $ -
Accrued benefit liability (2,226) (2,846)
Intangible asset N/A N/A
Accumulated other comprehensive income - -
---------- ---------
Net amount recognized $ (2,226) $ (2,846)
Weighted average assumptions as of December 31
Discount rate 6.50% 7.25%
Expected return on assets N/A N/A
Medical trend 10.0% * 6.00%
* Graded rates from 10% in 2003 to 5% in 2009 and after
Postretirement Welfare Benefits
2002 2001 2000
---- ---- ----
(in thousands)
Components of net periodic benefit cost
Service cost $ 371 $ 336 $ 264
Interest cost 185 179 157
Expected return on assets NA NA NA
Amortization of transition obligation / (asset) - - -
Amortization of prior service cost (10) (10) (10)
Amortization of actuarial loss / (gain) - (27) (80)
---- ---- ----
Net periodic benefit cost $ 546 $ 478 $ 331
Other comprehensive income $ - $ - $ -
Special termination benefits $ - $ - $ -
Weighted average assumptions used in computing net periodic benefit
cost
Discount rate 7.25% 7.50% 8.00%
Expected return on assets N/A N/A N/A
Medical trend 6.00% 6.00% 6.00%
1 % Increase 1 % Decrease
------------- -------------
Health care cost trend sensitivity
Effect on total of service cost and
interest cost components $ 31 $ (29)
Effect on postretirement benefit obligation 66 $ (62)
F-27
Post-employment Benefits
- ------------------------
The Company provides certain post-employment benefits to qualified former
or inactive employees who are not retirees. The Company had accrued $173,000 and
$219,000 at December 28, 2002 and December 29, 2001, respectively. These
benefits include salary continuance, severance, and healthcare. Salary
continuance and severance pay are based on compensation and 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.
13. Income Taxes
- -----------------
The Company and its subsidiaries file a consolidated federal income tax
return. As of December 28, 2002, the Company has net operating loss
carryforwards available to offset future taxable income of approximately $22.4
million expiring in the years 2011 through 2021.
The income tax provision consists of both current and deferred amounts. The
components of the income tax provision for continuing operations are as follows:
December 28, December 29, December 30,
2002 2001 2000
---- ---- ----
(in thousands)
Taxes currently payable:
State income tax $ 417 $ 731 $ 982
Federal income tax - - -
Deferred benefit (13,920) (9,379) (4,727)
----------- ----------- -----------
----------- ----------- -----------
Income tax benefit $(13,503) $ (8,648) $ (3,745)
=========== =========== ===========
The Company's effective tax rates were 39.7%, 35.7% and 30.6% for 2002,
2001 and 2000, respectfully. The Company's provision includes franchise taxes
and other non-deductible items. State franchise taxes of $0.4 million, $0.7
million and $1.0 million were reported for 2002, 2001 and 2000, 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 for continuing operations:
F-28
December 28, December 29, December 30,
2002 2001 2000
---- ---- ----
(in thousands)
Tax/(benefit) computed assets:
U.S. statutory tax rate $ (11,896) $ (8,483) $ (4,279)
State and local taxes (967) (464)
(1,397)
Other (210) 802 998
---------------- ------------------- -------------------
Total tax provision $(13,503) $ (8,648) $ (3,745)
================ =================== ===================
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 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 28, 2002 and December 29, 2001 are as follows:
December 28, December 29,
2002 2001
---- ----
( in thousands )
Deferred income tax assets:
Trade accounts receivable $ 793 $ 446
Inventories 1,437 2,040
Accrued personnel cost 991 982
Other accrued liabilities 4,687 4,325
Net operating loss 7,825 14,487
Goodwill and trademark 3,364 (3,104)
Other 2,687 6,132
--------------- ----------------
Gross deferred income tax assets 21,784 25,308
Less: valuation allowance (349) (1,190)
--------------- ----------------
Total deferred income tax assets 21,435 24,118
--------------- ----------------
F-29
Deferred income tax liabilities:
Property, plant and equipment 899 1,189
Other accrued liabilities 1,041 1,188
--------------- ----------------
Total deferred income tax liabilities 1,940 2,377
--------------- ----------------
Net deferred tax assets $19,495 $21,741
=============== ================
14. 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
limited and infrequent trading information for the same or similar issues or on
the current rates offered to the Company for debt of the same remaining
maturities.
Fair Value Carrying Value
---------- --------------
(in thousands)
2002 Financial Liabilities
Long-term Debt-
Revolving Credit Facility
Revolving Notes $ 20,346 $ 20,346
Term Notes 11,168 11,168
Senior Subordinated Notes 35,815 63,956
2001 Financial Liabilities
Long-term Debt-
Revolving Credit Facility
Revolving Notes $ 93,143 $ 93,143
Term Notes 45,311 45,311
Senior Subordinated Notes 31,978 63,956
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
F-30
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 28, 2002, the Company did not have any lumber
futures contracts outstanding.
Interest Rate Swap
- ------------------
The Company entered into an interest rate swap agreement on February 17,
1999 that effectively fixed the Company's borrowing cost at 5.75% plus the
Company's LIBOR borrowing spread (as discussed in 9 above) on $40.0 million of
the Company's amended and restated line of credit borrowings. The interest rate
swap agreement expired in February 2002.
15. Related Party Transactions
- -------------------------------
As of December 28, 2002, approximately 34% of the Company's outstanding
shares of common stock were owned by Riverside Group, Inc. and approximately 13%
owned by Imagine Investments, Inc. and its parent, Stone Investments, Inc. As of
December 28, 2002, the Chairman and CEO of the Company was also the Chairman and
CEO of Riverside Group, Inc.
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. Interest earned for the years ended 2002, 2001 and
2000 was approximately $41,000, $40,000 and $54,000, respectively. As of
December 28, 2002 the Company had not received payment for the principal and
accrued interest, and therefore provided a reserve for the outstanding balance
of approximately $445,000.
F-31
In 2002, the Company paid approximately $1,192,000 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 2001 and 2000 for
similar services were approximately $953,000 and $333,000, respectively.
The Company has been informed that on April 4, 2003 Imagine Investments,
Inc. acquired 2,797,743 shares of common stock from Riverside Group Inc. and an
option to purchase an additional 53,700 shares. As of such date, Imagine and its
affiliates beneficially owned approximately 51% of the Company's outstanding
common stock. In connection with this transaction, J. Steven Wilson resigned as
the Chairman and Chief Executive Officer of the Company effective immediately
and entered into an agreement with the Company which provides for the payment to
him of certain compensation.
16. Store Closing Costs and Other Charges
- -----------------------------------------
In 2001, the Company's management developed a plan to reorganize and
improve productivity and performance. The results were reductions in
administrative expense, marketing expense, headcount and the elimination of
non-strategic operating units. As a result, the Company recorded charges of $1.2
million related to severance, $0.5 million related to property carrying costs
and other costs.
Pursuant to certain initiatives to improve performance and reduce
under-performing assets, from January through November 2002, the Company closed,
consolidated, or sold nine distributions centers and two component plants. These
closings resulted in termination of approximately 300 employees that worked at
these locations. Another 27 employees were transferred to surrounding locations.
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. As a result, the Company
recorded charges of $1.8 million of severance and $1.7 million of property and
other carrying costs. Also included in the $1.8 million of severance was
$385,000 in severance related to a plan to reduce headquarters and field
administration by 23 associates. In addition, the Company recorded a write down
of inventory of approximately $1.4 million. The following is a summary of the
activity in the reserve balances from 2001 through December 28, 2002 (in
thousands):
F-32
Employee Property and
Separation Other Carrying
Costs Costs Total
----- ----- -----
2001 Store closing and other costs $1,223 $ 521 $1,744
2001 Related payments (235) (1,319)
(1,084)
--------- ----------- --------
Accrual balance at December 29, 2001 139 286 425
2002 Store closing and other costs 1,895 1,658 3,553
2002 Related payments (1,649) (1,929) (3,578)
--------- ----------- ---------
Accrual balance at December 28, 2002 $ 385 $ 15 $400
17. Other Operating Income
- --------------------------
Other operating income on the Company's Statement of Operations primarily
includes gains on the early extinguishment of debt , the sale or disposal of
property, plant and equipment, service charges assessed customers on past due
accounts receivable and casualty gains/losses. Other operating income was $2.9
million in 2002, as compared to $3.4 million in 2001 and $13.2 million in 2000.
During 2002, the Company sold eight pieces of real estate and various fixed
assets for a net gain of approximately $1.8 million. This is compared with four
real estate sales and various fixed asset disposals in 2001 for a net gain of
approximately $1.2 million, and three real estate sales and various fixed assets
disposals in 2000 for a net gain of approximately $0.3 million. In addition, the
Company recorded an impairment of $0.9 million for the subsequent sale of real
estate in Aurora, Co. Additionally, as part of the adoption of SFAS No. 145 the
Company has changed the presentation of its gains on debt extinguishment from
extraordinary items to other operating income. While not required until fiscal
2003, the Company has elected to early adopt the provision of this statement.
The pretax gain of $11.1 million has been reclassified to other operating income
for the fiscal year ended December 30, 2000. The following table summarizes the
major components of other operating income, in thousands, by year.
Other Operating Income (Loss)
2002 2001 2000
---- ---- ----
Sale of property, plant & equipment $ 937 $ 1,310 $ 345
Accounts receivable service charges 1,515 1,562 2,409
Casualty Losses (342) (270) (559)
Gain on Debt Extinguishment - - 11,119
Other 831 819 (151)
------ ------ ------
Total $ 2,941 $ 3,421 $ 13,163
===== ===== ======
18. Selected Quarterly Financial Data (unaudited)
- --------------------------------------------------
The following table contains selected unaudited quarterly financial data
for the years ended December 28, 2002 and December 29, 2001. Quarterly income
(loss) per common share may not total to year end income (loss) per share due to
the issuance of additional shares of Common Stock during the course of the year.
F-33
QUARTERLY FINANCIAL DATA
(Unaudited)
Fiscal Quarters
(in millions, except per share data and percentages)
2002 2002 2002 2002
Quarter 1 Quarter 2 Quarter 3 Quarter 4
------------ ------------ ------------ ------------
Net sales from continuing operations $ 135.3 $ 160.4 $ 153.2 $ 128.8
% of annual net sales 23.4% 27.8% 26.5% 22.3%
Gross Profit 25.8 32.3 30.7 25.2
Income (loss) from continuing operations (2.8) (0.6) (3.1) (14.0)
Income (loss) from discontinued operations (1.0) 2.9 4.2 23.5
------------ ------------ ------------ ------------
Net (loss) income (3.8) 2.3 1.1 9.5
Basic earnings (loss) per common share:
Income (loss) from continuing operations $ (0.34) $ (0.07) $ (0.37) $ (1.69)
Income (loss) from discontinued operations (0.12) 0.35 0.51 2.83
------------ ------------ ------------ ------------
Net (loss) income (0.46) 0.28 0.14 1.14
Diluted earnings (loss) per common share:
Income (loss) from continuing operations (0.34) (0.07) (0.37) (1.69)
Income (loss) from discontinued operations (0.12) 0.35 0.50 2.79
------------ ------------ ------------ ------------
Net (loss) income $ (0.46) $ 0.28 $ 0.13 $ 1.10
2001 2001 2001 2001
Quarter 1 Quarter 2 Quarter 3 Quarter 4
------------ ------------ ------------ ------------
Net sales from continuing operations $ 135.4 $ 194.5 $ 206.9 $ 173.2
% of annual net sales 19.1% 27.4% 29.1% 24.4%
Gross Profit 30.1 40.1 41.9 33.5
Income (loss) from continuing operations (4.8) (3.1) (4.0) (3.7)
Income (loss) from discontinued operations (1.7) 4.1 4.7 1.4
------------ ------------ ------------ ------------
Net Income (loss) (6.5) 1.0 0.7 (2.3)
Basic earnings (loss) per common share:
Income (loss) from continuing operations $ (0.58) $ (0.37) $ (0.48) $ (0.45)
Income (loss) from discontinued operations (0.20) 0.50 0.56 0.18
------------ ------------ ------------ ------------
Net (loss) income (0.78) 0.12 0.08 (0.27)
Diluted earnings (loss) per common share:
Income (loss) from continuing operations (0.58) (0.37) (0.48) (0.45)
Income (loss) from discontinued operations (0.20) 0.49 0.56 0.17
------------ ------------ ------------ ------------
Net (loss) income $ (0.78) $ 0.12 $ 0.08 $ (0.28)
Each fiscal quarter in the table above represents a thirteen-week period.
F-34
19. Subsequent Events (unaudited)
- ----------------------------------
The Company has been informed that on April 4, 2003 Imagine Investments,
Inc. acquired 2,797,743 shares of common stock from Riverside Group Inc. and an
option to purchase an additional 53,700 shares. As of such date, Imagine and its
affiliates beneficially owned approximately 51% of the Company's outstanding
common stock. In connection with this transaction, J. Steven Wilson resigned as
the Chairman and Chief Executive Officer of the Company effective immediately
and entered into an agreement with the Company which provides for the payment of
$1.0 million in severance to Mr. Wilson.
As a result of (i) the Company's failure to deliver to the lenders its
fiscal 2002 audited financial statements by March 28, 2003 and (ii) as of April
4, 2003, Riverside Group Inc. and J. Steven Wilson ceasing between them to own
at least 25% of the Company's outstanding common stock and Imagine Investments,
Inc. owning a greater percentage of such shares than Riverside and Mr. Wilson,
certain events of default arose under the Merrill Credit Agreement. Such
defaults were simultaneously waived by the lenders and the Credit Agreement was
amended in certain respects, including the addition of a provision which permits
the Company to make the severance payment to Mr. Wilson. In connection with such
waiver and amendments, the Company paid to the lenders a fee of $312,500.
S-1
WICKES INC. AND SUBSIDIARIES
Schedule II - Valuation and Qualifying Accounts
For the Years Ended December 28, 2002, December 29, 2001, and
December 30, 2000
(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
----------- --------- ---------- ---------- ------------- ------
2002:
Allowance for doubtful
accounts $2,119 $1,570 ($434) ($1,336) $1,919
2001:
Allowance for doubtful
accounts $2,791 $1,470 $197 ($2,339) $2,119
2000:
Allowance for doubtful
accounts $4,105 $983 ($7) ($2,290) $2,791
(a) Net (recoveries) charges from previously closed stores (credited) debited to
other operating income.
(b) Reserved accounts written-off.
Exhibit Index
-------------
Exhibit
Number Description
- ------- -----------
2.1(a)* Asset Purchase and Sale Agreement, dated as of October 30,
2002, by and between the Registrant and Lanoga Corporation
(incorporated by reference to Exhibit 2 to the Form 8-K
filed as of December 18, 2002).***
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).***
(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).***
(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).***
(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 (incorporated by reference to Exhibit 4.1 to the
Registrant's Annual Report on Form 10-K for the year ended
December 29,2000).***
(e)* Amended and Restated Credit Agreement dated May 14, 2000
among the Registrant, Fleet Retail Financial Inc, and Bank
of America, N.A. as agents and the lendors set forth
therein. (incorporated by reference to Exhibit 4.1(e) to
Registrant's Annual Report on Form 10-K for the year ended
December 29, 2001 ("2001 Form 10-K))***
(f)* Amended and Restated Credit Agreement dated August 13, 2000
among the Registrant, Fleet Retail Financial Inc, and Bank
of America, N.A. as agents and the lendors set forth
therein. (incorporated by reference to Exhibit 4.1(f) to the
2001 Form 10-K)***
(g)* Amended and Restated Credit Agreement dated February 28,
2000 among the Registrant, Fleet Retail Financial Inc, and
Bank of America, N.A. as agents and the lendors set forth
therein. (incorporated by reference to Exhibit 4.1(g) to the
2001 Form 10-k)***
(h)* Credit Agreement, dated as of February 26, 2003, among the
Registrant, Merrill Lynch Capital and the Additional Lenders
thereto (incorporated by Reference to Exhibit 1 to the Form
8-K filed as of March 5, 2003).***
(i)* Indenture, dated as of February 26, 2003, between Registrant
and HSBC Bank USA (incorporated by reference to Exhibit 2 to
the Form 8-K filed as of March 5, 2003).***
(j)* Supplemental Indenture, dated as of February 26, 2003,
between the Registrant and HSBC Bank USA (incorporated by
reference to Exhibit 3 to the Form 8-K filed as of March 5,
2003).***
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 Registrant's Annual Report on Form 10-K for the year
ended December 27, 1997 ("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** Stay Incentive Bonus Plan
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.
(incorporated by reference to Exhibit 10.6 to the
Registrant's Annual Report on Form 10-K for the year ended
December 25, 1999). ***
21.1** List of Subsidiaries of the Registrant.
23.1** Consent of Deloitte & Touche LLP.
99.1** Certification of Co-Principal Executive Officer
99.2** Certification of Co-Principal Executive Officer
99.3** Certification of Co-Principal Executive Officer
and Chief Financial Officer
* Incorporated by reference.
** Filed herewith.
*** SEC File No. 1-14967
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
INDEPENDENT AUDITORS' CONSENT
- -----------------------------
We consent to the incorporation by reference in Registration Statement Nos.
33-85380, 33-88010, 33-90240 of Wickes Inc. and subsidiaries on Form S-8 of our
report dated March 27, 2003 except for Notes 9 and 19, as to which the date is
April 4, 2003 (which report expresses an unqualified opinion and includes an
explanatory paragraph relating to the Company's adoption of new Statements of
Financial Accounting Standards that required it to (i) classify the 2002 sale of
a portion of the business as discontinued operations, (ii) record a 2002 charge
for impairment of goodwill and other intangible assets, and (iii) reclassify a
2000 gain on the early retirement of debt from extraordinary to operating
income), appearing in the Annual Report on Form 10-K of Wickes Inc. and
subsidiaries for the year ended December 28, 2002.
Chicago, Illinois
April 10, 2003
Exhibit 10.4
WICKES INC.
-----------
STAY INCENTIVE BONUS PLAN
-------------------------
This STAY INCENTIVE BONUS PLAN (the "Plan") was adopted by the Board of
Directors of Wickes Inc. (the "Company") on March 30, 2003, to provide certain
cash bonus awards to selected key employees of the Company.
1. Definitions
--------------
For the purpose of this Plan, the following terms shall have the
meaning shown:
Affiliate. As defined in the rules and regulations adopted by the
---------- Securities and Exchange Commission under the Securities
Exchange Act of 1934, as amended.
Associate. Any person (i) with respect to a corporation, any officer
----------
or director thereof or any Subsidiary (as defined in Securities
Exchange Act of 1934, as amended) thereof, or any Beneficial Owner (as
defined herein) of 10% or more of any class of equity security
thereof, (ii) with respect to an association, any officer or director
thereof or of a Subsidiary thereof, (iii) with respect to a
partnership, any general partner thereof or any limited partner
thereof who is, directly or indirectly, the Beneficial Owner of a 10%
ownership interest therein, (iv) with respect to a business trust, any
officer or trustee thereof or of any Subsidiary thereof, (v) with
respect to any other trust or an estate, any trustee, executor or
similar fiduciary or any person who has a 15% or greater interest as a
beneficiary in the income from or principal of such trust or estate,
(vi) with respect to a natural person, any relative or spouse of such
person, or any relative of such spouse, who has the same home as such
person, and (vii) any Affiliate of such person.
Base Compensation. The greater of (i) the amount of "deemed base
-------------------
compensation" shown by a Participant's name on his Schedule 1 hereto
(which may be different than a Participant's actual base compensation)
or (ii) the highest annual rate of base compensation to which a
Participant becomes entitled to receive from the Company or any
Company Related Entity at any time after the date hereof and on or
before the Group Transfer Date or Change of Control Date.
Beneficial Ownership. The beneficial ownership, directly or
-----------------------
indirectly, for purposes of Section 13(d) of the Securities Exchange
Act of 1934, as amended, and Regulations 13D and 13G thereunder (or
any comparable or successor law or regulation), in each case as in
effect as of the Effective Date, of any securities by any person or
any of such person's Affiliates or Associates (and correlative terms
shall have correlative meanings).
Bonus Period. The period commencing on the date hereof and ending on
-------------
the earliest to occur of (i) 12:00 Midnight Eastern Time on March 31,
2004, (ii) a Group Transfer Date or (iii) a Change of Control Date;
provided, that if the Company or a third party shall on or before
12:00 Midnight Eastern Time on March 31, 2004 have publicly announced,
or entered into a letter of intent or definitive agreement with
respect to, a transaction that would effect a Group Transfer or Change
of Control and such Group Transfer or Change of Control has not been
completed by 12:00 Midnight Eastern Time on March 31, 2004, the Bonus
Period shall be extended and shall end immediately after the
occurrence of any of the following (w) the public announcement by the
Company or third party that such transaction or agreement has been
abandoned or terminated, (x) completion of the Group Transfer or
Change of Control contemplated by the agreement, letter of intent or
announcement, (y) the date six months after the date of such
announcement or letter of intent if a definitive agreement with
respect to the transaction has not been entered into or (z) one year
after the date a definitive agreement with respect to the transaction
is entered into.
Bonus Percentage. The Bonus Percentage for a Participant shown on his
-----------------
Schedule 1 hereto.
Cause.
(i) The willful misconduct of a Participant, including without
limitation, (a) the intentional diversion by a Participant of a
corporate opportunity to himself, (b) the intentional
misappropriation of the assets of Company, (c) the acceptance for
his own personal use of cash or other property from any person or
entity other than the Company as an inducement to take any
material action, or to refrain from taking any such material
action, in his capacity as an employee of the Company, (d) the
commission by a Participant of any other fraud against the
Company;
(ii) the refusal of a Participant to follow or observe a decision
or policy of the directors or officers of the Company senior to
such Participant;
(iii) the failure by a Participant substantially to perform his
duties as a Company Employee (including any failure attributable
to physical or mental incapacity) other than as a result of
termination of employment by a Participant under any of the
circumstances described under the heading "Constructive
Termination" below; or
(iv) the failure of a Participant to accept employment requested
by the Company as a Transferee Employee in connection with a
Group Transfer.
Change of Control. The occurrence of any one of the following:
------------------
(i)individuals who, as of December 31, 2002, constitute the Board
of Directors of the Company (the "Incumbent Board") cease for any
reason to constitute at least a majority of the Board of
Directors of the Company; provided, however, that any individual
becoming a director subsequent to December 31, 2002 whose
election, or nomination for election by the Company's
stockholders, was approved by a vote of at least a majority of
the directors then comprising the Incumbent Board shall be
considered as though such individual were a member of the
Incumbent Board, but excluding for this purpose, any such
individual whose initial assumption of office occurs as a result
of an actual or threatened election contest with respect to the
election or removal of directors or other actual or threatened
solicitation of proxies or consents by or on behalf of a Person
other than the Board of Directors of the Company;
(ii)consummation of a reorganization, merger or consolidation or
sale or other disposition of all or substantially all of the
assets of the Company, other than in a transaction with Riverside
(a "Business Combination"), in each case, unless, following such
Business Combination, (a) no Person acquires or gains Beneficial
Ownership, directly or indirectly, of 50% or more of the combined
voting power of the then outstanding voting securities of the
Company or the corporation resulting from such Business
Combination (including, without limitation, a corporation that as
a result of such transaction owns all or substantially all of the
Company's assets) and (b) at least a majority of the members of
the board of directors of the Company or such corporation
resulting from such Business Combination were members of the
Incumbent Board at the time of the execution of the initial
agreement, or of the action of the Board of Directors of the
Company, providing for such Business Combination; or (iii)the
acquisition or gaining of Beneficial Ownership (including,
without limitation, power to vote) of more than 50% of the
Company's then outstanding voting securities entitled to vote on
a regular basis for a majority of the Company's Board of
Directors, by any Person (other than Riverside).
Change of Control Date. The time at which a Change of Control is
--------------------------
effected. Company. Wickes Inc.
Company Employee. A person who is an employee of the Company, one or
-----------------
more Company Related Entities, or the Company and one or more Company
Related Entities.
Company Severance Plan. Any severance plan or arrangement of the
-------------------------
Company or any Company Related Entity or any employment or severance
agreement or arrangement between a Participant and the Company or any
Company Related Entity.
Company Related Entity. A subsidiary of the Company within the meaning
-----------------------
of the Securities Exchange Act of 1934, as amended.
Disability. As used herein, "Disability" shall have the same meaning
-----------
as under the appropriate provisions of the long-term disability plan
maintained for the benefit of employees of the Company who are
regularly employed on a salaried basis, or, if there shall be no such
plan, as reasonably determined by the Company.
Election Form. The election form attached hereto as Schedule 2 with
---------------
respect to a Stay Incentive Bonus payable under Section 2.
Group Transfer. Any transfer by the Company or any Company Related
----------------
Entity of the operations of more than one building center or
manufacturing facility, or both, in connection with which transfer a
Participant is offered employment by the transferee with compensation
and non-severance benefits substantially similar to those provided by
the Company or such Company Related Entity immediately prior to the
Group Transfer Date and the Company or such Company Related Entity
requests a Participant to accept such offer of employment and thereby
to cease being a Company Employee.
Group Transfer Date. The time at which a Group Transfer is effected.
----------------------
Participants. Those key employees of the Company and any Company
-------------
Related Entity selected by the Board of Directors of the Company or by
a committee designated by the Board of Directors of the Company (the
"Committee") and who shall have received and executed a Schedule 1
hereto signed on behalf of the Company.
Person. An individual, entity or group (within the meaning of Section
-------
13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as
amended).
Riverside. Riverside Group, Inc. or Wilson Financial, Inc.
----------
Stay Incentive Bonus. The amount determined as set forth under the
-----------------------
heading "Stay Incentive Bonus" below.
Transferee Employee. A Participant who becomes an employee of the
---------------------
transferee in a Group Transfer, one or more Transferee Related
Entities, or such transferee and one or more Transferee Related
Entities.
Transferee Related Entity. A corporation, partnership or other entity
--------------------------
that is an Affiliate of the transferee in a Group Transfer.
2. Stay Incentive Bonus
-----------------------
(a) If a Participant shall have remained a Transferee Employee or a
Company Employee from the date hereof through six months after any
Group Transfer Date or Change of Control Date, as appropriate, that
occurs during the Bonus Period, or if a Participant ceases to be a
Transferee Employee or Company Employee from the date hereof through
six months after any Group Transfer Date or Change of Control Date, as
appropriate, that occurs during the Bonus Period as a result of the
termination of his employment for any reason (excluding any
termination for Cause or by reason of the Participant's Disability,
death or voluntary termination (unless such termination was a
Constructive Termination)) a Participant may elect to receive either:
(i) subject to the limitations set forth below in this Section 2, a
Stay Incentive Bonus equal to the product obtained by multiplying the
Participant's Bonus Percentage by the amount of the Participant's Base
Compensation or (ii) any severance benefits for which a Participant is
then otherwise eligible under any Company Severance Plan (other than
this Plan).
(b) The Company shall give a Participant notice of his right to make
such election, and shall provide the Participant with an Election
Form, within ten business days after six months after the Group
Transfer Date or Change of Control Date, as appropriate, or upon such
earlier termination of employment as described in the above paragraph.
In order to elect to receive the Stay Incentive Bonus, a Participant
must (i) complete, sign and deliver to the Company an Election Form
within twenty-one days of his receipt of notice from the Company; (ii)
waive all rights to receive any other severance benefits under any
Company Severance Plan (other than this Plan) if within one year after
the Group Transfer Date or Change of Control Date the Participant
ceases to be a Transferee Employee or Company Employee because of
termination of his employment for any reason (excluding any
termination for Cause or by reason of the Participant's Disability,
death or voluntary termination (unless such termination was a
Constructive Termination)), and in such event the Participant must
release the Company from employment-related claims as set forth on the
Election Form; and (iii) not revoke his or her election within the
time period provided for on the Election Form.
(c) If a Participant shall not have made such election within such
----------------------------------------------------------------------
time period, he shall be deemed to have DECLINED to receive the Stay
----------------------------------------------------------------------
Incentive Bonus, in which event he shall retain the right to any
----------------------------------------------------------------------
severance benefits for which he is then otherwise eligible under any
----------------------------------------------------------------------
Company Severance Plan (other than this Plan).
----------------------------------------------
(d) If a Participant elects to receive a Stay Incentive Bonus,
one-half of such Stay Incentive Bonus shall be paid by the Company in
one lump sum in cash promptly after the revocation period provided for
in the Election Form if such election is not revoked, and in any event
within 20 business days after receipt by the Company of the
Participant's election if such election is not revoked.
(e) The remaining one-half of the Stay Incentive Bonus shall be paid
by the Company in one lump sum in cash on the date one year after the
Group Transfer Date or Change of Control Date, as appropriate, or
promptly after the date of such earlier termination of employment
described in clause (ii) of this paragraph if and only if: (i) a
Participant remains a Transferee Employee or Company Employee on the
date one year after the Group Transfer Date or Change of Control Date,
as appropriate or (ii) a Participant ceases to be a Transferee
Employee or Company Employee one year after the Group Transfer Date or
Change of Control Date, as appropriate, because of termination of his
employment for any reason (excluding any termination for Cause or by
reason of the Participant's Disability, death or voluntary termination
(unless such termination was a Constructive Termination)).
3. Constructive Termination.
----------------------------
(a) Constructive Termination shall mean, for purposes of determining
whether a Stay Incentive Bonus is payable under this Plan to a
Participant listed as an Officer on his Schedule 1, a Participant's
resignation within 90 days following the expiration of a 30-day period
during which the Company or Transferee Related Entity fails to cure or
otherwise correct any of the following events or conditions which
occurred or was not done with the Participant's written consent:
(i) a Participant shall have been assigned any duties materially
inconsistent with a Participant's position (including status,
offices, titles and reporting requirements), authority, duties or
responsibilities as in effect on the date hereof, or any other
action shall have been taken by the Company or Transferee Related
Entity that results in a material diminution in such position,
authority, duties or responsibilities;
(ii) a reduction by the employer in a Participant's compensation
and benefits as in effect on the date hereof or as the same may
be increased from time to time, unless a similar reduction is
made with respect to similarly-situated employees;
(iii) the Company or Transferee Related Entity shall have
required a Participant to be based at any office or location
other than in the greater metropolitan area in which the
Participant is based on December 31, 2002 or if a Participant
commences his employment with the Company after December 31,
2002, at any other location than the greater metropolitan area in
which a Participant is based upon the commencement of his
employment with the Company; or
(iv) the Company or Transferee Related Entity shall have required
a Participant to travel on Company business to a substantially
greater extent than required immediately prior to the date hereof
without a change in the business operations of the Company that
would in good faith justify such requirement.
(b) Constructive Termination shall mean, for purposes of determining
whether a Stay Incentive Bonus is payable under this Plan to a
Participant not listed as an Officer on his Schedule 1 hereto, a
Participant's resignation within 90 days following the expiration of a
30-day period during which the Company or Transferee Related Entity
fails to cure or otherwise correct the following event which occurred
or was not done with the Participant's written consent: a reduction by
the employer in a Participant's compensation and benefits as in effect
on the date hereof or as the same may be increased from time to time,
unless a similar reduction is made with respect to similarly-situated
employees or unless such reduction is justified by the performance of
the Participant.
4. Mandatory Reduction of Payments in Certain Events
----------------------------------------------------
Anything in this Plan to the contrary notwithstanding, in the event it
shall be determined that any payment or distribution by the Company to
or for the benefit of a Participant (whether paid or payable or
distributed or distributable pursuant to the terms of this Plan or
otherwise) (a "Payment") would be subject to the excise tax imposed by
Section 4999 of the Internal Revenue Code, as amended (the "Excise
Tax"), then, the amount of any Stay Incentive Bonus shall be reduced
to the maximum amount payable without subjecting any Payment to the
Excise Tax. The determination of whether the Excise Tax would be
imposed and the determination of the amount of the reduction referred
to in the immediately preceding sentence shall be made by the
Company's regular independent accounting firm at the expense of the
Company or, at the election and expense of a Participant, another
nationally recognized independent accounting firm (the "Accounting
Firm"), which shall provide detailed supporting calculations. Any
determination by the Accounting Firm shall be binding upon the Company
and a Participant.
5. Miscellaneous Provisions
---------------------------
Reorganization, etc. The existence of this Stay Incentive Bonus Plan
---------------------
shall not affect in any way the right or power of the Board of
Directors or the stockholders of the Company to make or authorize any
adjustment, recapitalization, reorganization or other change in the
Company's capital structure or its business, any merger or
consolidation of the Company, any issue of debt or equity securities
ahead of or affecting Common Stock or the rights thereof, the
dissolution or liquidation of the Company or any sale, lease, exchange
or other disposition of all or any part of its assets or business or
any other corporate act or proceeding.
Taxes. The Company shall, to the extent permitted by law, have the
------
right to deduct from any payment of any kind otherwise due to a
Participant any federal, state or local income taxes of any kind
required by law to be withheld with respect to any Stay Incentive
Bonus. The Company, as a condition of the payment of any Stay
Incentive Bonus, may require the payment (through withholding from a
Participant's salary or other compensation) of cash by a Participant.
No Effect on Employment. Nothing contained in this Plan or related
-------------------------
hereto or referred to herein shall affect, or be construed as
affecting, the terms of employment of a Participant, or shall impose,
or be construed as imposing, an obligation on (i) the Company or any
Company Related Entity to continue the employment of a Participant or
(ii) a Participant to remain in the employ of the Company or any
Company Related Entity.
No Third-Party Beneficiaries. This Plan shall not confer any rights or
-----------------------------
remedies upon any person other than the parties and their respective
successors and permitted assigns upon whom this Plan shall be binding.
Entire Plan; Effect on Company Severance Plans. This Plan supersedes
-------------------------------------------------
any prior understandings, agreements, or representations by or among
the Company and any Participant, written or oral, to the extent they
related in any way to the subject matter hereof. This Plan is,
however, not intended to affect any other agreement, if any, that may
be or have been entered into by a Participant and the Company, except
for the effect on Company Severance Plans set forth herein.
Transfer. No interest in any Stay Incentive Bonus or this Plan may be
---------
assigned, transferred (except by will or the laws of descent and
distribution), pledged or hypothecated in any way by a Participant
(whether by operation of law or otherwise), and no such interest shall
be subject to execution, attachment or similar proceeding. Any
attempted assignment, transfer, pledge, hypothecation or other
disposition of such an interest contrary to the provisions hereof or
of the Plan and the levy of any attachment or similar proceeding upon
any such interest, shall be null and void and without effect.
Headings. The headings contained in this Plan are inserted for
---------
convenience only and shall not affect in any way the meaning or
interpretation of this Plan.
Governing Law. This Plan shall be governed by, interpreted, and
---------------
enforced in accordance with Illinois law without giving effect to the
principles of conflicts of laws thereof.
Arbitration; WAIVER OF JURY TRIAL. Any dispute or claim concerning
-----------------------------------
this Plan (to the extent permitted by law), including whether such
dispute or claim is attributable, will be settled by binding
arbitration at Chicago, Illinois, in accordance with the National
Rules for the Resolution of Employment Disputes of the American
Arbitration Association; and judgment upon the award rendered by the
arbitrator may be entered in any court having jurisdiction. All costs
of the arbitration shall be borne by the Company except to the extent
otherwise determined by the arbitrator. IN THE EVENT FOR ANY REASON
ARBITRATION IS NOT AVAILABLE OR NOT USED, THEN THE COMPANY AND EACH
PARTICIPANT WHO ELECTS TO RECEIVE A STAY INCENTIVE BONUS HEREUNDER
HEREBY WAIVE TRIAL BY JURY IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM
BROUGHT WITH RESPECT TO THIS PLAN.
Attorney Fees and Costs. In any arbitration or litigation involving a
------------------------
Participant's right to a Stay Incentive Bonus, a Participant shall
provide a bill to the Company of his attorney's fees on a monthly
basis in reasonable detail, and the Company shall reimburse a
Participant for his reasonable legal fees and costs (including without
limitation fees and costs on appeal) upon the entry of a final,
unappealable order in favor of a Participant for payment of benefits
under this Plan.
Amendment. The Committee may amend or supplement this Plan but any
----------
such amendment or supplement shall have no effect on persons who are
Participants at the time of such amendment or supplement without their
written consent.
Sever ability. Any term or provision of this Plan that is invalid or
---------------
unenforceable in any situation in any jurisdiction shall not affect
the validity or enforceability of the remaining terms and provisions
hereof or the validity or enforceability of the offending term or
provision in any other situation or in any other jurisdiction.
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, Jimmie J. Frank, Senior Vice President of Merchandising and
Manufacturing and Member of the Executive Management Committee (Co-Principal
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 Annual Report on Form 10-K for the period ending December 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.
Date: April 7, 2003 Signature: /s/ Jimmie J. Frank
------------- ---------------------
Senior Vice President of Merchandising and
Manufacturing and Member of the Executive
Management Committee
(Co-Principal Executive Officer)
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 R. Detmer, Senior Vice President of Distribution and Logistics and
Member of the Executive Management Committee (Co-Principal 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 Annual Report on Form 10-K for the period ending December 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.
Date: April 7, 2003 Signature: /s/ James R. Detmer
------------- ---------------------
Senior Vice President of Distribution and
Manufacturing and Member of the Executive
Management Committee
(Co-Principal Executive Officer)
Exhibit 99.3
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 Annual Report on Form 10-K for the period ending December 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.
Date: April 7, 2003 Signature: /s/ James A. Hopwood
------------- ----------------------
Senior Vice President, Chief Financial
Officer, and Member of the Executive
Management Committee
(Co-Principal Executive Officer)