SECURITIES AND EXCHANGE COMMISSION
Washington, DC. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File
For the Quarterly Period Ended June 28, 2003 Number 1-14967
------------------------ ---------------
WICKES INC.
-----------------------------------
(Exact name of registrant as specified in its charter)
Delaware 36-3554758
- --------------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
706 North Deerpath Drive, Vernon Hills, Illinois 60061
- ------------------------------------------------ ----------
(Address of principal executive offices) (Zip Code)
847-367-3400
------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes_X_ No __
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act) Yes ___ No _X_
As of July 31, 2003, the Registrant had 8,307,984 shares of Common Stock, par
value $.01 per share outstanding.
2
WICKES INC. AND SUBSIDIARIES
INDEX
-----
Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (Unaudited) June 28, 2003,
December 28, 2002, and June 29, 2002 3
Condensed Consolidated Statements of Operations (Unaudited) for the
three and six months ended June 28, 2003 and June 29, 2002 4
Condensed Consolidated Statements of Cash Flows (Unaudited) - for the
six months ended June 28, 2003 and June 29, 2002 5
Notes to Condensed Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 19
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 34
Item 4. Controls and Procedures 34
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 35
Item 2. Changes in Securities and Use of Proceeds 35
Item 6. Exhibits and Reports on Form 8-K 35
3
WICKES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 28, 2003, December 28, 2003 and June 29, 2002
(in thousands except per share data)
(UNAUDITED)
June 28, December 28, June 29,
2003 2002 2002
------------ ----------- ------------
ASSETS
Current assets:
Cash $ 30 $ 40 $ 161
Accounts receivable, less allowance for doubtful
accounts of $1,854 in June 2003, $1,919 in December 2002
and $1,403 in June 2002 55,426 56,094 62,486
Note receivable from affiliate - - 425
Inventory, net 52,918 50,170 62,292
Deferred tax assets - 5,720 8,457
Prepaid expenses and other assets 7,361 5,619 5,934
Assets of discontinued operations - - 58,478
------------ ----------- ------------
Total current assets 115,735 117,643 198,233
------------ ----------- ------------
Property, plant and equipment, net 35,417 37,971 42,472
Trademark - - 5,856
Deferred tax assets - 13,775 16,344
Rental equipment (net of accumulated depreciation of $1,465 in June
2003, $1,475 in December 2002 and $1,587 in June 2002) 774 1,021 1,250
Goodwill - - 12,229
Other assets (net of accumulated amortization of $6,446 in June
2003, $5,911 in 2002, and $5,357 in June 2002) 6,020 3,577 4,783
Assets of discontinued operations - - 11,989
------------ ----------- ------------
Total assets $ 157,946 $ 173,987 $ 293,156
============ =========== ============
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 22,998 $ 28,107 $ 10,096
Accounts payable 30,134 23,824 34,062
Accrued liabilities 12,392 16,256 12,174
Liabilities of discontinued operations - - 23,766
------------ ----------- ------------
Total current liabilities 65,524 68,187 80,098
------------ ----------- ------------
Long-term debt, less current maturities 99,539 67,363 184,391
Other long-term liabilities 2,310 2,407 2,587
Liabilities of discontinued operations - - 680
Stockholders' equity:
Common stock, $0.01 par (8,307,984 at June 2003 and December 2002,
and 8,288,845 shares at June 2002 issued and outstanding) 83 83 83
Additional paid-in capital 87,173 87,173 87,155
Accumulated deficit (96,683) (51,226) (61,838)
------------ ----------- ------------
Total stockholders' (deficit) equity (9,427) 36,030 25,400
------------ ----------- ------------
Total liabilties and stockholders' (deficit) equity $ 157,946 $ 173,987 $ 293,156
============ =========== ============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
WICKES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands except share and per share data)
Three Months Ended Six Months Ended
June 28, June 29, June 28, June 29,
2003 2002 2003 2002
--------- -------- -------- ---------
Net sales $ 127,605 $ 160,546 $ 228,654 $ 295,940
Cost of sales 101,962 126,268 182,436 234,057
--------- -------- -------- ---------
Gross profit 25,643 34,278 46,218 61,883
--------- -------- -------- ---------
Selling, general and administrative expenses 30,005 30,765 58,365 58,947
Depreciation 969 1,064 1,934 2,283
Provision for doubtful accounts 259 320 438 766
Store closing costs and other charges 3,709 785 5,015 1,747
Other operating income (117) (1,784) (1,284) (2,212)
--------- -------- -------- ---------
34,825 31,150 64,468 61,531
--------- -------- -------- ---------
(Loss) income from continuing operations before interest and taxes (9,182) 3,128 (18,250) 352
Interest expense 3,673 4,115 7,131 8,491
--------- -------- -------- ---------
Loss from continuing operations before income taxes (12,855) (987) (25,381) (8,139)
Income tax expense (benefit) 24,491 (225) 19,691 (2,909)
--------- -------- -------- ---------
Loss from continuing operations (37,346) (762) (45,072) (5,230)
(Loss) income from discontinued operations, net of taxes of $2,004 and
$2,419 for the three and six months ended in 2002 (385) 3,102 (385) 3,745
--------- -------- -------- ---------
Net (loss) income $ (37,731) $ 2,340 $ (45,457) $ (1,485)
========= ======== ======= =======
Loss from continuing operations per common share-basic and diluted $ (4.50) $ (0.09) $ ( 5.43) $ (0.63)
========= ======== ======= ========
(Loss) income from discontinued operations per common share-basic and diluited $ (0.04) $ 0.37 $ (0.04) $ 0.45
========= ======== ======= ========
Net (loss) income per common share-basic and diluted $ (4.54) $ 0.28 $ (5.47) $ (0.18)
========= ======== ======= ========
Weighted average common shares-basic 8,307,984 8,288,761 8,307,984 8,286,837
========= ========= ========= =========
Weighted average common shares-diluted 8,307,984 8,459,051 8,307,984 8,402,471
========= ========= ========= =========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
5
WICKES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
Six Months Ended
----------------
June 28, June 29,
2003 2002
------------ ------------
Cash flows from operating activities:
Net loss $ (45,457) $ (1,485)
Adjustments to reconcile net loss to
net cash (used in) provided by operating activities:
Loss (income) from discontinued operations 385 (3,745)
Depreciation 2,467 2,938
Gain on early retirement of debt (879) -
Amortization of deferred financing costs 1,354 772
Provision for doubtful accounts 438 766
Loss (gain) on sale of assets and other items 231 (1,261)
Deferred income taxes 19,347 (641)
Changes in assets and liabilities, net of assets sold
Increase in accounts receivable (8,599) (1,866)
(Increase) decrease in inventory (2,885) 9,423
Increase (decrease) in accounts payable and accrued liabilities 2,349 (1,400)
Increase in prepaids and other assets (1,833) (1,439)
------------ ------------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (33,082) 2,062
------------ ------------
Cash flows from investing activities:
Purchases of property, plant and equipment (2,033) (488)
Proceeds from the sale of property, plant and equipment 1,983 3,909
Proceeds from sale of business 8,829 -
------------ ------------
NET CASH PROVIDED BY INVESTING ACTIVITIES 8,779 3,421
------------ ------------
Cash flows from financing activities:
Net borrowings (repayments) under revolving line of credit 33,301 (5,574)
Retirements of long-term debt (4,980) -
Term loan repayments (375) (2,349)
Debt issuance costs (3,653) -
------------ ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 24,293 (7,923)
------------ ------------
NET CASH PROVIDED BY DISCONTINUED OPERATIONS - 2,448
------------ ------------
NET DECREASE IN CASH (10) (2,440)
Cash at beginning of period 40 153
------------ ------------
CASH AT END OF PERIOD $ 30 $ 161
============ ============
Supplemental schedule of cash flow information:
Interest paid $ 5,262 $ 8,341
Income taxes paid $ 670 $ 469
The accompanying notes are an integral part of the condensed consolidated
financial statements.
6
WICKES INC. AND SUBSIDIARIES
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
Basis of Financial Statement Presentation
The condensed consolidated financial statements present the results of
operations, financial position, and cash flows of Wickes Inc. and its
consolidated subsidiaries (the "Company"). The condensed consolidated financial
statements are prepared in accordance with accounting principles generally
accepted in the United States of America, which require management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
The condensed consolidated financial statements should be read in
conjunction with the Company's consolidated financial statements and notes
thereto included in the Company's Annual Report on Form 10-K (the "Form 10-K")
for the fiscal year ended December 28, 2002. The condensed consolidated
financial statements reflect all adjustments (consisting only of normal
recurring adjustments) which are, in the opinion of management, necessary for
the fair presentation of the financial results for the interim period. The
results of operations for interim periods are not necessarily indicative of
results for the entire year.
The Company has determined that it operates in one business segment, that
being the supply and distribution of lumber, building materials and manufactured
components to building professionals and do-it-yourself customers, principally
in the Midwest, Northeast, and Southern United States. All information required
by Statement of Financial Accounting Standards ("SFAS") 131, "Disclosures about
Segments of an Enterprise and Related Information", is included in the Company's
consolidated financial statements.
The Company's consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. Management is
instituting and executing a series of plans and actions designed to improve the
Company's operating results and cash flows and to strengthen the Company's
financial position. These plans include cost reductions resulting from store
closures and headcount reductions at headquarters, targeted reductions in
operating expenses and optimization of the Company's real estate portfolio. In
addition, the Company may seek to secure the necessary funds through the sale of
additional equity, through borrowings, or through an exchange or restructuring
of the Company's existing debt obligations.
7
Management believes that implementation of its plans to improve operations
and cash flows, coupled with the amendments of the financial covenants
contained in the Credit Agreement and the securing of additional funds or
exchange or restructuring of its existing debt obligations, will allow the
Company to comply with its required financial covenants, meet its
obligations as they come due and provide adequate liquidity to operate the
business for the next twelve months. However, there can be no assurance in
this regard. Furthermore, there can be no assurance that the Company's
lenders will waive any future violations of the Credit Agreement that may
occur or agree to future amendments of the Credit Agreement or that the
Company can obtain additional funding from beyond that noted above or any
other external source.
Under certain scenarios, the Company may not generate sufficient cash from
operations to pay the principal amount of the Senior Subordinated Notes
when due and , therefore, the Company may seek to secure such funds through
the sale of additional equity, through borrowings, or through an exchange
or restructuring of the Company's existing debt obligations, as noted
above. There is no assurance that the Company will be able to obtain such
funds or whether such funds can be obtained on terms acceptable to the
Company, or whether an exchange or restructuring is feasible, which raises
doubt about the Company's ability to continue as a going concern. Except
for a valuation allowance against the Company's deferred tax assets, these
financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount
and classification of liabilities that could result should the Company be
unable to continue as a going concern.
In addition, the Company was not in compliance with certain of its
financial and informational covenants contained in the Merrill Credit
Agreement dated February 26, 2003 (the "Credit Agreement") which provides
for a term loan facility and revolving credit agreement (See additional
discussion in Note 3 to the condensed consolidated financial statements).
The Company has obtained limited waivers of non-compliance with such
financial and informational covenants from the requisite lenders under the
Credit Agreement. The amendments to the Credit Agreement waived such
defaults and among other things, revised and set as applicable, financial
covenant targets for fiscal years 2003 - 2006.
Stock Based Compensation
------------------------
The Company accounts for stock-based compensation under the intrinsic value
method, as prescribed by Accounting Principles Board (APB) Opinion No. 25
"Accounting for Stock Issued to Employees". As required by SFAS No. 148
"Accounting for Stock-Based Compensation - Transition and Disclosure, an
amendment of SFAS No. 123" the Company has included the following pro-forma
financial information demonstrating the difference in the Company's results, had
the fair-value based method been applied:
8
Three Months Ended Six Months Ended
June 28, June 29, June 28, June 29,
2003 2002 2003 2002
----------- ----------- ---------- ----------
Loss from continuing operations (as reprted) (37,346) (762) (45,072) (5,230)
Add: Stock based compensation cost included
in determination of compensation expense 10 21
Deduct: Stock based compensation under the
fair-value method for all awards, net of tax (21) (33) (42) (65)
----------- ----------- ---------- ----------
Adjusted loss from continuing operations (37,367) (785) (45,114) (5,274)
(Loss) income from discontinued operations (385) 3,102 (385) 3,745
Net (loss) income (as reported) (37,731) 2,340 (45,457) (1,485)
Adjusted net (loss) income (37,752) 2,317 (45,499) (1,530)
Earnings per share:
Basic:
Loss from continuing operations (as reported) (4.50) (0.09) (5.43) (0.63)
Adjusted loss from continuing operations (4.50) (0.09) (5.43) (0.64)
Income (loss) from discontinued operations (0.04) 0.37 (0.04) 0.45
Net income (loss) (as reported) (4.54) 0.28 (5.47) 0.18
Adjusted net income (loss) (4.54) 0.28 (5.48) 0.18
Diluted:
Loss from continuing operations (as reported) (4.50) (0.09) (5.43) (0.63)
Adjusted loss from continuing operations (4.50) (0.09) (5.43) (0.64)
(Loss) income from discontinued operations (0.04) 0.37 (0.04) 0.45
Net income (loss) (as reported) (4.54) 0.28 (5.47) 0.18
Adjusted net income (loss) (4.54) 0.27 (5.48) 0.18
Share Data
----------
The Company issued 7,260 shares of Common Stock to members of its board of
directors in lieu of cash compensation during the six months ended June 29,
2002. The Company did not issue shares of Common Stock to members of its board
of directors in lieu of cash compensation during the six months ended June 28,
2003.
9
Stock Options
-------------
The Company periodically grants stock options to key personnel.
Compensation cost on these options is measured at the date of grant by comparing
the quoted market price of the Company's stock to the price the employee has to
pay to acquire the stock. Any resulting compensation cost would be recognized
over the employee's vesting period.
Reclassifications and Eliminations
----------------------------------
Certain reclassifications have been made to prior year amounts to conform
to the current presentation. All material intercompany balances and transactions
have been eliminated.
2. Discontinued Operations
-----------------------
On December 16, 2002 the Company sold substantially all of the assets of
its operations in Wisconsin and Northern Michigan to Lanoga Corporation (the
"Lanoga Sale") for a sales price of $104.7 million. These operations were
considered discontinued operations under SFAS No. 144 "Accounting for the
Impairment or Disposal of Long-lived Assets".
In the first six months of 2003, the Company received additional proceeds
of $8.8 million related to the settlement of amounts held in escrow as of
December 28, 2002. The remaining escrow amounts of $1.8 million are expected to
be settled by June 2004.
The Company is subject to indemnification claims for certain environmental
issues related to the properties sold to Lanoga. The Company's exposure in these
claims ranges from $0.3 to $0.4 million. As of June 28, 2003, the Company has
recorded $0.3 million as part of discontinued operations in the Statement of
Operations. It is the Company's position that the amount of exposure should be
at the low end of the range and it will vigorously pursue this position.
Sales and income from discontinued operations for the three and six months
ended June 29, 2002 were as follows:
Three months ended Six months ended
June 29, June 29,
2002 2002
-------- --------
Sales $ 74,064 $ 124,494
Income before income taxes 5,106 6,164
Tax provision 2,004 2,419
Income from discontinued operations 3,102 3,745
10
The major classes of assets and liabilities of discontinued operations sold
were as follows (in thousands):
June 29,
2002
-----
Cash $ 11
Accounts receivable 26,451
Inventory 31,858
Deferred tax assets (227)
Prepaid expenses and other assets 385
------
Total current assets 58,478
------
Property, plant and equipment 11,331
Deferred tax assets 215
Rental equipment 445
Other assets (2)
------
Total assets 70,467
------
Accounts payable 19,870
Accrued liabilities 3,896
-------
Total current liabilities 23,766
Other long-term liabilities 680
------
Total liabilities 24,446
------
Net assets $ 46,021
======
3. LONG-TERM DEBT
--------------
Long-term debt is comprised of the following (in thousands):
June 28, June 29,
2003 2002
----- -----
Revolving credit facility:
Revolving notes $ 39,815 $ 94,324
Term notes 24,625 36,207
Senior subordinated notes 21,123 63,956
Senior secured notes 36,974 -
Less current maturities (22,998) (10,096)
------ ------
Total long-term debt $ 99,539 $ 184,391
------ ------
11
Senior Subordinated Debt
------------------------
On February 26, 2003, the Company completed its offer to exchange
("Exchange Offer') its Senior Secured Notes due 2005 for any and all of its
outstanding 11 5/8% Senior Subordinated Notes due 2003. The Company accepted for
the exchange all $42.8 million of Senior Subordinated Notes validly tendered in
exchange for an equal principal amount of Senior Secured Notes. The tendered
notes represented approximately 67% of the Senior Subordinated Notes outstanding
as of February 26, 2003. The Senior Secured Notes, which bear interest at 11
5/8% per annum from the date of issuance through December 15, 2003 and at 18%
per annum thereafter, are secured by subordinated liens on the Company's owned
real estate and equipment. These liens are junior to the liens securing amounts
payable under the Company's senior credit facility (see "Revolving Credit
Facility" below).
Concurrent with the closing of the exchange offer, the indenture governing
the outstanding Senior Subordinated Notes was amended to remove or modify many
of the restrictive covenants. Those restrictions included (but were not limited
to) certain limitations on transactions with affiliates, dividend payments,
changes in control, and sales of assets. In addition, the Senior Secured Notes
permit the Company to call the senior secured notes, at its option, at declining
discounts starting at 15% on December 15, 2003.
In March 2003, the Company redeemed outstanding Senior Secured Notes
aggregating $5.9 million face value for $5.0 million. The resulting gain of $0.9
million was recorded in other operating income on the Company's Statement of
Operations.
The Company continues to carry Senior Subordinated Notes due in December
2003 of approximately $21.1 million. Sufficient liquidity to meet these
obligations and the interest obligations on the Senior Secured Notes when they
come due is contingent on a number of risk factors, as discussed in Item 1 of
the Company's 2002 Form10-K. The Company does not believe it will generate
sufficient cash from operations to pay the principal amount of the Senior
Subordinated Notes when due. The Company may seek to secure the necessary funds
through the sale of additional equity, through borrowings or both. There is no
assurance that the Company will be able to obtain such funds or whether such
funds can be obtained on terms acceptable to the Company. If the Company secures
additional funds through the issuance of additional equity securities, the
Company's existing stockholders will likely experience dilution of their present
equity ownership position and voting rights. Depending on the number of shares
and the terms and conditions of the issuance, any new equity securities could
have rights, preferences, or privileges senior to those of the Company's common
stock. If the Company secured funds through additional borrowings, the terms and
conditions of such borrowings could be more onerous to the Company than the
terms and conditions of the Company's existing senior subordinated notes or
other existing borrowings. The Company also believes that even if the principal
amount of the Senior Subordinated Notes are paid it will need to increase
revenues to generate sufficient cash to pay the increase in interest in its
Senior Secured Notes to 18%, effective December 15, 2003. In addition, the
Company has retained an investment bank, Brown Gibbons Lang & Company, to assist
in finalizing the Company's plans to improve its capital structure with the
objective of providing longer term sustainability.
12
Revolving Credit Facility
-------------------------
Concurrent with the Exchange Offer, on February 26, 2003, the Company
completed a refinancing of its Fleet Credit Agreement and term notes and entered
into the new Credit Agreement dated February 26, 2003 with Merrill Lynch
("Merrill Credit Agreement"). The total commitment was reduced from the original
$251.7 million ($200 million revolving line of credit and $51.7 million of term
notes) to $125 million ($100 million revolving line of credit and $25 million of
term notes). The Merrill Credit Agreement expires on February 26, 2007, and the
term notes are now due February 26, 2007, with quarterly repayments beginning
May 31, 2003.
On March 28, 2003, the Company requested the lenders to extend the due date
for delivery of certain Deposit Account Control Agreements, as defined by the
Merrill Credit Agreement with certain local bank deposit accounts maintained by
the Company. The lenders agreed to amend (First Amendment) the Credit Agreement
to extend delivery of these agreements until May 31, 2003.
As a result of (i) the Company's failure to deliver to the lenders its
fiscal 2002 audited financial statements by March 30, 2003 and (ii) as of April
4, 2003, Riverside Group Inc. and J. Steven Wilson ceasing between them to own
at least 25% of the Company's outstanding common stock and Imagine Investments,
Inc. owning a greater percentage of such shares than Riverside and Mr. Wilson,
certain events of default arose under the Merrill Credit Agreement. Such
defaults were simultaneously waived by the lenders and the Credit Agreement was
amended (Second Amendment) in certain respects, including the addition of a
provision which permitted the Company to make a severance payment to Mr. Wilson
and placed a limitation on the Company's ability to repurchase, redeem or retire
Senior Subordinated Notes. In connection with such waiver and amendments, the
Company paid to the lenders a fee of $312,500.
On May 31, 2003 the Merrill Credit Agreement was again amended (Third
Amendment) whereby the lenders agreed to (i) to reduce the revolving loan
commitment by $15.0 million and (ii) extend the due date to August 31, 2003 for
the delivery of Deposit Account Control Agreements with respect to certain
deposit accounts maintained by the Company. The Company received a refund of
$112,500 of the original closing fees pursuant to this amendment.
As of June 28, 2003, the Company was in compliance with its bank covenants
with the exception of its minimum EBITDA requirement. On August 15, 2003, the
lenders agreed to waive the default of its minimum EBITDA requirement and amend
the levels of EBITDA as defined within the Credit Agreement (Fourth Amendment).
In addition, it amended the original credit agreement to include a prepayment of
term loan of $1.5 million by September 20, 2003, less any prepayment from the
proceeds of the sale of certain real estate. Further, the agreement requires
that the Company maintain minimum availability of $15 million for the remainder
of the agreement and a 25 basis point increase in interest spreads. In
connection with such waiver and amendments, the Company paid to the lenders a
fee of $100,000.
13
As of June 28, 2003 there was $64.4 million outstanding under the Merrill
Credit Agreement of which $39.8 million was revolving credit and $24.6 million
was term notes. The spread on prime rate borrowings under the Merrill agreement
ranges from 1.25% to 2.00% over prime for revolving loans and 2.00% to 2.75%
over prime under the term notes. The spread for LIBOR based borrowing ranges
from 2.50% to 3.25% over LIBOR for revolving loans and 3.25% to 4.00% over LIBOR
for term notes. The spread over the prime or LIBOR rates is determined based
upon the Company's Fixed Charge Coverage Ratio, as defined under the Merrill
Credit Agreement. However, an event of default could increase each of the
Company's prime and LIBOR margins by 25 basis points. The Company's base rate on
revolving loans, 6.00% at June 28, 2003 and 5.50% at June 29, 2002, included an
interest spread over prime of 1.75% and 0.75%, respectively. The Company's LIBOR
borrowing rate on revolving loans, 4.12% at June 28, 2003 and 4.58% at June 29,
2002, included an interest spread over LIBOR of 3.00% and 2.75%, respectively.
The Company's weighted average interest rates on revolver loans were 7.23% and
6.45% for the six months ended June 28, 2003 and June 29, 2002, respectively.
The Merrill Credit Agreement limits the level of capital expenditures for
each annual period, while allowing for reinvestment of proceeds on asset sales.
The Company is also subject to certain minimum levels of EBITDA, as defined
within the Credit Agreement. Availability is generally limited to 85% of
eligible accounts receivable and 60% of eligible inventory. As of June 28, 2003
unused availability was $27.7 million and, under the Merrill Agreement as
amended, minimum availability is required to be $15 million for the remainder of
the agreement. Therefore, the Company held $12.7 million of excess availability
as of June 28, 2003 after all reserves and minimums were deducted.
Under the Merrill Credit Agreement, a commitment fee of .375% to .5% is
payable on the unused revolving credit amount. Ranges of fees are determined
based upon the aforementioned Fixed Charge Coverage Ratio, as defined under the
Credit Agreement.
14
Aggregate Maturities
--------------------
The Senior Subordinated Notes totaling $21.1 million mature on December 15,
2003. The Senior Secured Note totaling $37.0 million mature on July 29, 2005.
The term portion of the revolving credit facility requires quarterly principal
payments totaling approximately $0.8 million in fiscal 2003, $2.6 million in
fiscal 2003, $3.4 million in fiscal 2005, $3.5 million in fiscal 2006 and $14.4
in fiscal 2007.
4. INCOME TAXES
------------
The Company recorded a $29.6 million charge to establish a valuation
allowance for its net deferred tax assets including net operating loss carry
forwards during the second quarter of 2003. These conclusions were reached
largely due to the uncertainty around the Company's ability to utilize certain
operating loss carry forwards based on the Company's operating results in the
most recent three-year period and doubt about the Company's ability to continue
as a going concern, which represented negative evidence sufficient to require a
full valuation allowance under the provisions of SFAS 109 "Accounting for Income
Taxes".
The Company will be required to maintain a full valuation allowance for its
net deferred tax assets and net operating loss carry forwards until sufficient
positive evidence exists to support reversal of the remaining reserve. Until
such time, except for state and local provisions, the Company will have no
reported tax provision, net of valuation allowance adjustments.
The income tax expense from continuing operations for the three-month
period ended June 28, 2003 was $24.5 million, which is comprised of $29.6
million disclosed above offset by the impact of a $5.1 million benefit generated
during the second quarter, which was fully provided for. Income tax expense from
continuing operations for the three month period ended June 29, 2002 was $0.2
million. The Company's effective tax rate from continuing operations for the
three-month period ended June 29, 2002 was 22.8% which includes franchise taxes
and non-deductible items of $0.1 million.
Income tax expense from continuing operations for the six-month period
ended June 28, 2003 was $19.7 million, which is comprised of the $29.6 million
charge and a benefit of $9.9 million. Income tax expense from continuing
operations was $2.9 million for the same period in the prior year, which
included franchise taxes and non-deductible items of $0.1 million. The Company's
effective tax rate from continuing operations for the six-month period ended
June 29, 2002 was 35.7%.
On July 22, 2003, as a result of Bradco Supply and its affiliates
increasing their common stock holdings in the Company above 15% of total shares
outstanding, an ownership change occurred as per Internal Revenue Code Section
382. A change in control, for tax purposes, could limit the Company's ability to
utilize its net operating loss carry-forwards.
15
5. COMMITMENTS AND CONTINGENCIES
-----------------------------
At June 28, 2003, the Company had accrued approximately $425,000 for
remediation of certain environmental and product liability matters.
Many of the sales and distribution facilities presently and formerly
operated by the Company at one time contained underground petroleum storage
tanks. All such tanks known to the Company and located on facilities owned or
operated by the Company have been filled or removed in accordance with
applicable environmental laws in effect at the time. As a result of reviews made
in connection with the sale or possible sale of certain facilities, the Company
has found petroleum contamination of soil and ground water on several of these
sites and has taken, and expects to take, remedial actions with respect thereto.
In addition, it is possible that similar contamination may exist on properties
no longer owned or operated by the Company, the remediation of which the Company
could, under certain circumstances, be held responsible. Since 1988, the Company
has incurred approximately $2.3 million of costs, net of insurance and
regulatory recoveries, with respect to the filling or removing of underground
storage tanks and related investigatory and remedial actions. Insignificant
amounts of contamination have been found on excess properties sold over the past
six years.
The Company is one of many defendants in two class action suits filed in
August of 1996 by approximately 200 claimants for unspecified damages as a
result of health problems claimed to have been caused by inhalation of silica
dust, a byproduct of concrete and mortar mix, allegedly generated by a cement
plant with which the Company has no connection other than as a customer. The
Company has entered into a cost-sharing agreement with its insurers, and any
liability is not expected to be material.
The Company is one of many defendants in approximately 670 actions, each of
which seeks unspecified damages, primarily in Michigan state courts against
manufacturers and building material retailers by individuals who claim to have
suffered injuries from products containing asbestos. The Company is aggressively
defending these actions and does not believe that these actions will have a
material adverse effect on the Company. Since 1993, the Company has settled 522
similar actions for insignificant amounts, and another 362 of these actions have
been dismissed. None of these suits have made it to trial.
16
Losses in excess of the $425,000 reserved as of June 28, 2003 are possible,
but a reasonable estimate of these amounts cannot be made.
The Company is involved in various other legal proceedings that are
incidental to the conduct of its business. Certain of these proceedings involve
potential damages for which the Company's insurance coverage may be unavailable.
While the Company does not believe that any of these proceedings will have a
material adverse effect on the Company's financial position, annual results of
operations or liquidity, there can be no such assurance of this result.
6. EARNINGS PER SHARE
------------------
The Company calculates earnings per share in accordance with SFAS 128. In
periods where net losses are incurred, dilutive common stock equivalents are not
used in the calculation of diluted EPS as they would have an anti-dilutive
effect on EPS. For the three and six month periods ended June 29, 2002, common
stock equivalents of approximately 116,000 shares were included in calculating
diluted weighted average shares outstanding. Common stock equivalents for the
same periods of 1,282 were excluded from earnings per share as they were
anti-dilutive. In addition, options to purchase 255,532 and 440,000 shares of
common stock at June 28, 2003 and June 29, 2002, respectively, had an exercise
price greater than the average market price.
7. RELATED PARTY TRANSACTIONS
--------------------------
At March 29, 2003, approximately 34% of the Company's outstanding shares of
common stock were owned by Riverside Group, Inc. and approximately 13% was owned
by Imagine Investments, Inc. and its parent, Stone Investments, Inc. On April 4,
2003, Imagine Investments, Inc. acquired 2,797,743 common shares of Wickes Inc.
previously owned by Riverside Group, Inc. and an option to purchase an
additional 53,700 shares. As of this date, Imagine Investments, Inc. and its
affiliates beneficially owned approximately 47.3% of the Company's outstanding
common stock.
At June 29, 2002, the Company held a promissory note from Riverside of
$425,000 including accrued interest. As of December 28, 2002 the Company had not
received payment for the principal and accrued interest, and therefore provided
a reserve for the outstanding balance.
For the six months ended June 28, 2003, the Company paid approximately
$420,000, compared to approximately $547,000 for the six months ended June 29,
2002, in reimbursements to affiliates of the Company's former Chairman of the
Board and President primarily for use of a corporate aircraft as well as office
space and office support services.
17
8. STORE CLOSINGS
--------------
Pursuant to certain initiatives to improve performance and reduce
under-performing assets, the Company has closed or consolidated seven locations
during the first six months of 2003. The Company incurred costs of approximately
$3.2 million related to severance benefits paid to senior executives and an
additional 66 headquarters and 86 field personnel. In addition the Company has
incurred $1.8 million in property and other carrying costs that primarily
include insurance, maintenance / repair and lease commitments. During the first
six months of 2002 the Company sold seven locations and consolidated one
location. Employee severance costs for 74 employees and property and other
carrying costs incurred during the first six months of 2002 were $1.0 million
and $0.7 million respectively. The following is a summary of the activity in the
reserve balances from December 29, 2001 through June 29, 2002 and from December
28, 2002 through June 28, 2003 (in thousands):
Employee Property and
Separation Other Carrying
Costs Costs Total
------ ------ ------
Accrual balance at December 28, 2002 $ 385 $ 15 $ 400
1st Qtr Store closing and other costs 610 701 1,311
1st Qtr Related payments (848) (671) (1,519)
------ ------ -----
Accrual balance at March 29, 2003 $ 147 $ 45 $ 192
2nd Qtr Store closing and other costs 2,550 1,066 3,616
2nd Qtr Related payments (2,353) (1,039) (3,392)
------ ------ ------
Accrual balance at June 28, 2003 $ 344 $ 72 $ 416
Accrual balance at December 29, 2001 139 286 425
1st Qtr Store closing and other costs 763 199 962
1st Qtr Related payments (827) (363) (1,190)
------ ------ ------
Accrual balance at March 30, 2002 $ 75 $ 122 $ 197
2nd Qtr Store closing and other costs 252 533 785
2nd Qtr Related payments (327) (583) (910)
------ ------ ------
Accrual balance at June 29, 2002 $ 0 $ 72 $ 72
The costs incurred to liquidate the inventory has been included in cost of
sales on the Company's financial statements. The costs of reserving for bad
debt, write-offs and subsequent collections, has been included in provision for
doubtful accounts. All other costs are included in store closing costs.
18
9. SUBSEQUENT EVENTS
-----------------
On July 22, 2003, as a result of Bradco Supply and its affiliates
increasing their common stock holdings in the Company above 15% of total shares
outstanding, an ownership change occurred as per Internal Revenue Code Section
382. A change in control, for tax purposes, may limit the Company's ability to
utilize its net operating loss carry-forwards. The Company is in the process of
determining the impact of this event, if any, to the financial statements.
As of June 28, 2003, the Company was in compliance with its bank covenants
with the exception of its minimum EBITDA requirement. On August 15, 2003, the
lenders agreed to waive the default of its minimum EBITDA requirement and amend
the levels of EBITDA as defined within the Credit Agreement. In addition, it (1)
amended the original credit agreement to include a prepayment of term loan of
$1.5 million by September 20, 2003, less any prepayment from the proceeds of the
sale of certain real estate and(2)increased the interest rate on the Company's
revolving loans by 25 basis points. In connection with such waiver and
amendments, the Company paid to the lenders a fee of $100,000.
19
WICKES INC. AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Condensed
Consolidated Financial Statements and Notes thereto contained elsewhere herein
and in conjunction with the Annual Consolidated Financial Statements and Notes
thereto and Management's Discussion and Analysis of Financial Condition and
Results of Operations contained in the Company's Annual Report on Form 10-K for
the fiscal year ended December 28, 2002.
This Discussion and Analysis contains statements which, to the extent that
they are not recitations of historical fact, constitute Forward Looking
Statements that are made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995 and are inherently subject to
uncertainty. A number of important factors could cause the Company's business
and financial results and financial condition to be materially different from
those stated in the Forward Looking Statements.
Among the factors that could cause actual results to differ materially are
the following: effects of seasonality and cyclicality; effects of competition;
interest rates and the Company's ability to service and comply with the terms of
its debt; lumber prices; the success of the Company's operational initiatives
and the outcome of the contingencies discussed in Note 5.
Under certain scenarios, the Company may not generate sufficient cash from
operations to pay the principal amount of the Senior Subordinated Notes when due
and, therefore, the Company may seek to secure such funds through the sale of
additional equity, through borrowings, or through an exchange or restructuring
of the Company's existing debt obligations, as noted above. There is no
assurance that the Company will be able to obtain such funds or whether such
funds can be obtained on terms acceptable to the Company, or whether an exchange
or restructuring is feasible, which raises doubt about the Company's ability to
continue as a going concern. Except for a valuation allowance against the
Company's deferred tax assets, these financial statements do not include any
adjustments relating to the recoverability and classification of asset carrying
amounts or the amount and classification of liabilities that could result should
the Company be unable to continue as a going concern.
INTRODUCTION
Wickes Inc. and its consolidated subsidiaries ("Wickes" or the "Company")
is a leading supplier of lumber, building materials and manufactured building
components in the United States. The Company sells its products and services
primarily to residential and commercial building professionals, repair and
remodeling contractors and, to a lesser extent, project do-it-yourself consumers
involved in major home improvement projects. At June 28, 2003, the Company
operated 52 sales and distribution facilities and 11 component manufacturing
facilities in 19 states in the Midwest, Northeast, and South.
The Company's mission is to be the premier provider of building materials
and services and manufactured building components to the professional segments
of the building and construction industry.
20
The Company focuses on the professional builder and contractor market. The
Company targets five customer groups: the production or volume builder; the
custom builder; the tradesman; the repair and remodeler; and the commercial
developer. Its marketing approach encompasses three channels of distribution:
large metropolitan markets, smaller rural markets, and Wickes Direct. These
channels are supported by the Company's network of building component
manufacturing facilities. In large metropolitan markets, the Company serves the
national, regional, and large local builder in larger markets with a total
solutions approach and specialized services. In smaller rural markets, the
Company provides the smaller building professional in less-populous markets with
tailored products and services. Wickes Direct provides materials flow and
logistics management services to commercial customers. The Company also serves
building professionals through its network of 11 component manufacturing
facilities that produce value-added, wood framed wall panels, roof and floor
truss systems, and pre-hung interior and exterior doors.
RESULTS OF OPERATIONS
In fiscal 2002, the Company sold 31 distribution centers and 4 component
plants to Lanoga Corporation (the "Lanoga Sale"). The operations included in the
transaction were treated as discontinued operations in accordance with statement
of Financial Accounting Standards No. 144 "Accounting for the Impairment or
Disposal of Long-lived Assets." The results of these operations have been
reclassified as discontinued operations for the three and six-month periods
ended June 28, 2002.
The following table sets forth, for the periods indicated, the percentage
relationship to net sales of certain expense and income items. Certain
reclassifications have been made to prior year amounts to conform to the current
presentation. All material intercompany balances and transactions have been
eliminated. The table below, and the subsequent discussion of the results of
operations, has been adjusted to exclude those operations reclassified as
discontinued operations that were part of the Lanoga Sale. (See additional
discussion in Note 2 to the condensed consolidated financial statements.)
Three Months Ended Six Months Ended
------------------ ----------------
June 28, June 29, June 28, June 29,
2003 2002 2003 2002
---- ---- ---- ----
Net sales 100.0% 100.0% 100.0% 100.0%
Gross profit 20.1% 21.4% 20.2% 20.9%
Selling, general and
administrative expense 23.5% 19.2% 25.5% 19.9%
Depreciation 0.8% 0.7% 0.8% 0.8%
Provision for doubtful accounts 0.2% 0.2% 0.2% 0.3%
Store closing costs 2.9% 0.5% 2.2% 0.6%
Other operating income (0.1)% (1.1)% (0.6)% (0.7)%
(Loss) income from operations
before interest and taxes (7.2)% 1.9% (8.0)% 0.1%
21
The Company's results of operations are historically affected by, among
other factors, interest rates, lumber prices, housing starts and weather
conditions. In general, this year's weather conditions were comparable with last
year with the exception of late season snow storms this year which the Company
believes postponed sales activity in the first quarter and severely damaged one
of the Company's component facilities. The Company's weighted average rate of
interest on revolver loans increased to 7.23% during the first six months of
2003 compared to 6.45% for the same period last year. The first six months
results were negatively affected by lower commodity lumber prices, down 3.1%
from last year. Housing starts nationally were up 2.2% in the first half of
2003, however in the Company's primary markets, the Northeast, Midwest, and
South, starts were down 6.2%, up 0.4% and down 1.3%, from housing starts in the
first half of 2002, respectively.
Losses from continuing operations for the six months ended June 28, 2003
and June 29, 2002 were $45.1 million and $5.2 million, respectively.
22
Three Months Ended June 28, 2003 Compared
with the Three Months Ended June 29, 2002
The following discussion is based on the results of continuing operations
of the Company. The Lanoga Sale, which is treated as discontinued operations,
has been excluded from prior year's results. (See Note 2 to the consolidated
financial statements.)
Net Sales
---------
Net sales for the second quarter of 2003 decreased 20.5%, to $127.6 million
compared to $160.5 million for the second quarter of 2002. The sales decrease
primarily was attributable to a $21.9 million decline in sales from closed
locations (excluding discontinued operations) and a 9.0% decline in same store
sales. Total sales to building professionals represented 93.5% of total sales in
the second quarter of 2003, compared with 93.3% in 2002. Housing starts in the
Company's primary markets, the Northeast, Midwest, and South, starts were down
6.5%, up 4.6% and down 2.8%, from housing starts in the second quarter of 2002,
respectively.
The Company believes that sales decreases for the three months ended June
28, 2003 primarily resulted from a decline in the number of locations, uncertain
economic conditions and lumber deflation. The Company estimates that the effect
of lumber deflation for the second quarter of 2003 decreased total sales by
approximately $2.1 million compared with the same period last year. Lumber and
building materials increased to 85.9% of total sales in the second quarter of
2003 compared with 84.2% in 2002.
Products that exhibited the greatest change in sales dollars for the
quarter ended June 28, 2003 versus the comparable prior year period were: lumber
and plywood (down 25.2%), doors and windows (down 13.5%), trusses and engineered
wood products (down 13.4%), roofing (down 22.3%) and mouldings (down 23.7%).
Gross Profit
------------
Gross profit decreased to $25.6 million in the second quarter of 2003 from
$34.3 million in the second quarter of 2002, an $8.6 million or 25.2% decrease.
Gross profit as a percentage of sales declined to 20.1% in the second quarter
compared to a gross profit percentage of 21.4% in the second quarter of 2002.
The Company believes that the decrease in gross profit dollars resulted
primarily from the reduction in sales as discussed above. Of the Company's major
product lines, building materials accounted for approximately 34.8% of total
Company sales, up from 32.4% last year, however, gross margin percentage for
these products decreased to 19.6% from 21.9% last year.
Selling, General and Administrative Expense ("SG&A")
----------------------------------------------------
SG&A expense decreased approximately $0.8 million to $30.0 million in the
second quarter of 2003 from $30.8 million in the second quarter of 2002. As a
percentage of sales, SG&A increased to 23.5% of net sales in the second quarter
of 2003 compared with 19.2% of net sales in the second quarter of 2002. The
increase as a percentage of sales primarily is due to the decrease in sales as
well as overhead costs which remained high until reductions were completed late
in the second quarter to re-align overhead with the reduction in locations.
Reductions in labor costs and other overhead costs were partially offset by the
Company's move from co-operative marketing and cost recovery programs to
purchase based rebate programs in 2003, professional fees due to the company's
exchange offer, and an accrual for certain anticipated litigation costs. As a
percentage of sales, salaries, taxes and benefits increased by 140 basis points,
elimination of a cost recovery rebate program resulted in an increase of 80
basis points and office and professional fees increased 120 basis points.
23
Depreciation
------------
Depreciation decreased to $1.0 million for the second quarter of 2003
compared to $1.1 million for the same period in 2002.
Provision for Doubtful Accounts
-------------------------------
The provision for doubtful accounts was basically unchanged at
approximately $0.3 million in the second quarter of 2003. The Company continues
to strive to improve its collection efforts and reduce credit exposure and bad
debts.
Store Closing Costs
-------------------
Pursuant to certain initiatives to improve performance and reduce
under-performing assets, the Company consolidated seven sales and distribution
centers during the first quarter of 2003. There were no closings in the second
quarter of 2003, however the Company did incur severance costs of approximately
$2.6 million related to severance benefits paid to senior executives and an
additional 57 headquarters and 43 field personnel in a plan to re-align overhead
costs with the number of remaining locations. In addition, the Company incurred
approximately $1.1 million in property and other carrying costs that primarily
include insurance, maintenance / repair and lease commitments. During the second
quarter of 2002, the Company sold two distributions centers and incurred $0.3
million and $0.5 million related to severing ten employees and property and
other carrying costs, respectively. The following is a summary of the activity
in the reserve balances from March 29, 2003 through June 28, 2003 and March 30,
2002 through June 29, 2002 (in thousands):
Employee Property and
Separation Other Carrying
Costs Costs Total
------ ------ ------
Accrual balance at March 29, 2003 $ 147 $ 45 $ 192
2nd Qtr Store closing and other costs 2,550 1,066 3,616
2nd Qtr Related payments (2,353) (1,039) (3,392)
------ ------ ------
Accrual balance at June 28, 2003 $ 344 $ 72 $ 416
Accrual balance at March 30, 2002 $ 75 $ 122 $ 197
2nd Qtr Store closing and other costs 252 533 785
2nd Qtr Related payments (327) (583) (910)
------ ------ ------
Accrual balance at June 29, 2002 $ 0 $ 72 $ 72
24
Other Operating Income
----------------------
Other operating income for the second quarter of 2003 was income of $0.1
million compared with income of $1.8 million for the second quarter 2002. Other
operating income primarily includes gains on early retirement of debt, the sales
or disposals of property, plant and equipment, service charges assessed
customers on past due accounts receivables, and casualty gains/losses. The
decrease in 2003 primarily is due to a $0.2 million write-down of certain assets
to their net realizable value, compared to a gain in 2002 from the sale of real
estate that resulted in a gain of approximately $1.3 million.
Interest Expense
----------------
In the second quarter of 2003, interest expense decreased to $3.6 million
from $4.1 million during the second quarter of 2002. The Company's weighted
average rate of interest on all debt increased to 10.3% during the second
quarter of 2003 compared to 7.7% for the same period last year. The weighted
average rate of interest increased as a result of using an effective or average
interest rate of 16.5% for the Senior Secured Notes issued in February of 2003.
See additional discussion at Note 4 to the consolidated financial statements and
in Liquidity and Capital Resources included in Managements Discussion and
Analysis. The Company's average debt levels decreased by 39.6% from second
quarter 2002 to second quarter 2003. This decrease in outstanding debt primarily
is due to the use of proceeds from the Lanoga Sale to pay down the revolving
credit facility.
Income Taxes
------------
The Company recorded a $29.6 million charge to establish a valuation
allowance for its net deferred tax assets including net operating loss carry
forwards during the second quarter of 2003. These conclusions were reached
largely due to the uncertainty around the Company's ability to utilize certain
operating loss carry forwards based on the Company's operating results in the
most recent three-year period and doubt about the Company's ability to continue
as a going concern, which represented negative evidence sufficient to require a
full valuation allowance under the provisions of SFAS 109 "Accounting for Income
Taxes".
The Company will be required to maintain a full valuation allowance for its
net deferred tax assets and net operating loss carry forwards until sufficient
positive evidence exists to support reversal of the remaining reserve. Until
such time, except for state and local provisions, the Company will have no
reported tax provision, net of valuation allowance adjustments.
25
The income tax expense from continuing operations for the three-month
period ended June 28, 2003 was $24.5 million, which differs from the $29.6
million disclosed above due to the impact of a $5.1 million benefit generated
during the second quarter, which was fully provided for. Income tax expense from
continuing operations for the three month period ended June 29, 2002 was $0.2
million. The Company's effective tax rate from continuing operations for the
three-month period ended June 29, 2002 was 22.8% which includes franchise taxes
and non-deductible items of $0.1 million.
Six Months Ended June 28, 2003 Compared
with the Six Months Ended June 29, 2002
The following discussion is based on the results of continuing operations
of the Company. The Lanoga Sale, which is treated as discontinued operations,
has been excluded from prior year's results. (See Note 2 to the condensed
consolidated financial statements.)
Net Sales
---------
Net sales for the first six months of 2003 decreased $67.3 million, or
22.7%, to $228.7 million from $295.9 million in the first six months of 2002.
The sales decrease primarily was attributable to a $43.3 million decline in
sales from closed locations (excluding discontinued operations) and a 12.3%
decline in same store sales. Total sales to building professionals represented
93.9% of total sales, compared to 93.6% for the same quarter last year. Housing
starts in the Company's primary markets, the Northeast, Midwest, and South,
starts were down 6.2%, up 0.4% and down 1.3%, from housing starts in the first
half of 2002, respectively.
The Company believes that sales decreases for the six months ended June 28,
2003 primarily resulted from a decline in the number of locations, late season
snow storms in the first quarter, uncertain economic conditions, internal
reorganizations and lumber deflation. The Company estimates that the effect of
lumber deflation for the first six months of 2003 decreased total sales by
approximately $4.8 million compared with the same period last year. Lumber and
building materials increased to 85.8% of total sales in the first six months of
2003 compared with 84.0% for the same period in 2002.
Products that exhibited the greatest change in sales dollars for the six
months ended June 28, 2003 versus the comparable prior year period were: lumber
and plywood (down 28.0%), doors and windows (down 15.7%), trusses and engineered
wood products (down 13.8%) and roofing (down 26.4%).
26
Gross Profit
------------
Gross profit decreased $15.6 million to $46.2 million or 20.2% of net sales
for 2003 compared with $61.9 million or 20.9% of net sales for 2002. The Company
believes that deflation in lumber and drywall prices decreased the dollar value
of gross profit by approximately $1.0 million for the six months ended June 28,
2003. During the first half of 2003, the Company closed or consolidated seven
facilities and recorded a charge to gross profit of $0.5 million for inventory
liquidation costs. Of the Company's major product lines, building materials
accounted for approximately 36.2% of total Company sales, up from 33.5% last
year, however, gross margin percentage for these products decreased to 20.4%
from 21.7% last year.
Selling, General, and Administrative Expense
--------------------------------------------
SG&A expense decreased $0.6 million or 1.0% to $58.4 million in 2003
compared with $58.9 million in 2002. As a percentage of net sales, SG&A
increased to 25.5% in the first six months of 2003, compared with 19.9% of net
sales in the first six months of 2002. The increase as a percentage of sales
primarily is due to the decrease in sales as well as overhead costs which
remained high until reductions were completed late in the second quarter to
re-align overhead with the reduction in locations. In addition, the Company
moved from co-operative marketing and cost recovery programs to purchase based
rebate programs in 2003 and has accrued for certain anticipated litigation
costs. As a percentage of sales, salaries, taxes and benefits increased by 220
basis points, change to purchase base rebate program increased SG&A expense by
105 basis points and office and professional fees increased 117 basis points.
Depreciation
------------
Depreciation costs decreased approximately $0.4 million to $1.9 million in
the first six months of 2003, compared with $2.3 million in the first six months
of 2002. As a percentage of sales, depreciation costs compared to last year were
flat.
Provision for Doubtful Accounts
-------------------------------
Provision for doubtful accounts decreased to approximately $0.4 million or
0.2% of sales in the first six months of 2003 from approximately $0.8 million or
0.3% of sales for the first six months of 2002. Approximately $64,000 of
provision for doubtful accounts related to closed locations in this period,
compared to $168,000 for the same period last year.
27
Store Closing Costs and Other Charges
-------------------------------------
Pursuant to certain initiatives to improve performance and reduce
under-performing assets, the Company has closed or consolidated seven locations
during the first six months of 2003. The Company incurred costs of approximately
$3.2 million related to severance benefits paid to senior executives and an
additional 66 headquarters and 86 field personnel. In addition the Company has
incurred $1.8 million in property and other carrying costs that primarily
include insurance, maintenance / repair and lease commitments. During the first
six months of 2002 the Company sold seven locations and consolidated one
location. Employee severance costs for 74 employees and property and other
carrying costs incurred during the first six months of 2002 were $1.0 million
and $0.7 million respectively. The following is a summary of the activity in the
reserve balances from December 29, 2001 through June 29, 2002 and from December
28, 2002 through June 28, 2003 (in thousands):
Employee Property and
Separation Other Carrying
Costs Costs Total
------ ------ ------
Accrual balance at December 28, 2002 $ 385 $ 15 $ 400
1st Qtr Store closing and other costs 610 701 1,311
1st Qtr Related payments 848 671 1,519
------ ------ ------
Accrual balance at March 29, 2003 $ 147 $ 45 $ 192
2nd Qtr Store closing and other costs 2,550 1,066 3,616
2nd Qtr Related payments 2,353 1,039 3,392
------ ------ ------
Accrual balance at June 28, 2003 $ 344 $ 72 $ 416
Accrual balance at December 29, 2001 139 286 425
1st Qtr Store closing and other costs 763 199 962
1st Qtr Related payments 827 363 1,190
------ ------ ------
Accrual balance at March 30, 2002 $ 75 $ 122 $ 197
2nd Qtr Store closing and other costs 252 533 785
2nd Qtr Related payments 327 583 910
------ ------ ------
Accrual balance at June 29, 2002 $ 0 $ 72 $ 72
Other Operating Income
----------------------
Other operating income decreased to approximately $1.3 million in the first
six months of 2003, compared with $2.2 million in the first six months of 2002.
Other operating income primarily includes the gain on the early retirement of
debt, sale or disposal of property, plant and equipment, service charges
assessed customers on past due accounts receivable, and casualty losses. During
the first six months of 2002, the Company sold seven facilities for a net gain
of $1.3 million, while in the first six months of 2003 the Company recorded a
$0.9 million gain on the early retirement of debt partially offset by write-down
of certain assets to their net realizable value.
28
Interest Expense
----------------
Interest expense decreased to $7.1 million in the first six months of 2003
from $8.5 million in the first six months of 2002. Interest expense in 2003
includes a charge for the write-off of a portion of debt issue costs related to
the Fleet Credit Agreement of $0.5 million. The Company's weighted-average
interest rate on all outstanding borrowings increased to 10.7% during this
period, compared to 8.2% for the comparable period last year. The weighted
average interest rate was affected by the increase in the effective or average
interest rate of 16.5% attributed to the Senior Secured Notes issued in February
2003. See additional discussion at Note 4 to the consolidated financial
statements and in Liquidity and Capital Resources included in Managements
Discussion and Analysis. The Company's average debt levels decreased by 43.5%
from first half of 2002 to first half 2003. This decrease in outstanding debt
primarily is due to the use of proceeds from the Lanoga Sale to pay down the
revolving credit facility.
Income Taxes
------------
The Company recorded a $29.6 million charge to establish a valuation
allowance for its net deferred tax assets including net operating loss carry
forwards during the second quarter of 2003. These conclusions were reached
largely due to the uncertainty around the Company's ability to utilize certain
operating loss carry forwards based on the Company's operating results in the
most recent three-year period and doubt about the Company's ability to continue
as a going concern, which represented negative evidence sufficient to require a
full valuation allowance under the provisions of SFAS 109 "Accounting for Income
Taxes".
The Company will be required to maintain a full valuation allowance for its
net deferred tax assets and net operating loss carry forwards until sufficient
positive evidence exists to support reversal of the remaining reserve. Until
such time, except for state and local provisions, the Company will have no
reported tax provision, net of valuation allowance adjustments.
The income tax expense from continuing operations for the six-month period
ended June 28, 2003 was $19.7 million, which differs from the $29.6 million
disclosed above due to the impact of a $9.9 million benefit generated during the
six month period, which was fully provided for. Income tax expense from
continuing operations for the six-month period ended June 29, 2002 was $2.9
million which included franchise taxes and non-deductible items of $0.1 million.
The Company's effective tax rate from continuing operations for the six-month
period ended June 29, 2002 was 35.7%.
This assessment constitutes Forward-Looking Information made pursuant to
the safe harbor provisions of the Private Securities Litigation Reform Act of
1995 and is inherently subject to uncertainty and dependent upon the Company's
future profitability, which in turn depends upon a number of important risk
factors including, but not limited to, the effectiveness of the Company's
operational efforts, the sale of certain assets, cyclicality and seasonality of
the Company's business, the effects of the Company's substantial leverage, and
competition.
29
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of working capital and liquidity are income
from operations and borrowings under its credit facility. The Company's
assessment of its future funds availability constitutes Forward-Looking
Information made pursuant to the Private Securities Litigation Reform Act of
1995 and is inherently subject to uncertainty resulting from, among other
things, the factors discussed in paragraph three of Item 2: Management
Discussion and Analysis. The Company's primary need for capital resources is to
finance inventory, accounts receivable, improvements to plant property and
equipment, insurance reserves and debt service.
During the first six months of 2003, net cash used in operating activities
was $33.1 million compared with net cash provided by operating activities of
$2.1 for the first six months of 2002. The increase in cash used in operating
activities primarily is due to net losses for the period and increases in
inventory and accounts receivable from December 28, 2002 to June 28, 2003.
The Company's accounts receivable from continuing operations at June 28,
2003 increased $8.6 million. This increase primarily is the result of the
seasonal increase in sales.
The Company's inventory balance at June 28, 2003 increased $2.9 million or
5.5% when compared to the balance at December 28, 2002. This increase primarily
is also the result of the seasonal increase in sales. Accounts payable and
accrued liabilities at June 28, 2003 increased approximately $2.3 million from
December 28, 2002.
The Company's capital expenditures consist primarily of the construction of
product storage facilities, the remodeling and reformatting of sales and
distribution facilities and component manufacturing facilities, and the purchase
of vehicles, equipment and management information systems for both existing and
new operations. The Company also may make expenditures to establish or acquire
operations to expand or complement its existing operations, especially in its
major markets. In the first six months of 2003, the Company spent approximately
$2.0 million on capital expenditures, compared to $0.5 million for the same
period in 2002. Under the Merrill Credit Agreement, capital expenditures during
2003 are currently limited to $6.0 million. The Company expects to fund capital
expenditures through borrowings and its internally generated cash flow.
At June 28, 2003 the Company operated 52 sales and distribution centers and
11 component manufacturing facilities compared with 91 sales and distribution
facilities and 24 component manufacturing facilities at June 29, 2002. The
reduction in facilities is due to the Lanoga Sale as well as other facility
sales and consolidations that took place during this period. At June 28, 2003,
there were no material commitments to third parties for future capital
expenditures.
30
The Company maintained excess availability under the Merrill Credit
Agreement throughout the first six months of 2003. The Company's receivables and
inventory typically increase in the second and third quarters of the year due to
higher sales in the peak building season. In these same periods, the Company
typically reaches its peak utilization of its revolving credit agreement because
of the increased inventory and receivables needed for the peak building season.
At June 28, 2003, the Company had outstanding borrowings under the Merrill
Credit Agreement of $64.4 million, the minimum availability requirement was
$15.0 million and the unused availability was $27.7 million. Therefore, as of
June 28, 2003 after all reserves and minimums, the Company had $12.7 million of
excess availability
Senior Subordinated Debt
------------------------
On February 26, 2003, the Company completed its offer to exchange its 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 represented
approximately 67% of the Senior Subordinated Notes outstanding as of February
26, 2003. The Senior Secured Notes, which bear interest at 11 5/8% per annum
from the date of issuance through December 15, 2003 and at 18% per annum
thereafter, are secured by subordinated liens on the Company's owned real estate
and equipment. These liens are junior to the liens securing amounts payable
under the Company's senior credit facility.
Concurrent with the closing of the exchange offer, the indenture governing
the outstanding Senior Subordinated Notes was amended to remove or modify many
of the restrictive covenants. Those restrictions included (but were not limited
to) certain limitations on transactions with affiliates, dividend payments,
changes in control, and sales of assets. In addition, the Senior Secured notes
permit the Company to call the senior secured notes, at its option, at declining
discounts starting at 15% on December 15, 2003.
In March 2003, the Company redeemed outstanding Senior Secured Notes
aggregating $5.9 million face value for $5.0 million. The resulting gain of $0.9
million was recorded in other operating income on the Company's Statement of
Operations.
31
The Company continues to carry Senior Subordinated Notes due in December
2003 of approximately $21.1 million. Sufficient liquidity to meet these
obligations and the interest obligations on the Senior Secured Notes when they
come due is contingent on a number of risk factors, as discussed in Item 1 of
the Company's 2002 Form10-K. The Company does not believe it will generate
sufficient cash from operations to pay the principal amount of the Senior
Subordinated Notes when due. The Company may seek to secure the necessary funds
through the sale of additional equity, through borrowings or both. There is no
assurance that the Company will be able to obtain such funds or whether such
funds can be obtained on terms acceptable to the Company. If the Company secures
additional funds through the issuance of additional equity securities, the
Company's existing stockholders will likely experience dilution of their present
equity ownership position and voting rights. Depending on the number of shares
and the terms and conditions of the issuance, any new equity securities could
have rights, preferences, or privileges senior to those of the Company's common
stock. If the Company secured funds through additional borrowings, the terms and
conditions of such borrowings could be more onerous to the Company than the
terms and conditions of the Company's existing senior subordinated notes or
other existing borrowings. The Company also believes that even if the principal
amount of the Senior Subordinated Notes are paid it will need to increase
revenues to generate sufficient cash to pay the increase in interest in its
Senior Secured Notes to 18%, effective December 15, 2003. In addition, the
Company has retained an investment bank, Brown Gibbons Lang & Company, to assist
in finalizing the Company's plans to improve its capital structure with the
objective of providing longer term sustainability.
Revolving Credit Facility
-------------------------
Concurrent with the Exchange Offer, on February 26, 2003, the Company
completed a refinancing of its Credit Agreement with Fleet and term notes and
entered into the new Credit Agreement dated February 26, 2003 with Merrill Lynch
("Merrill Credit Agreement"). The total commitment was reduced from the original
$251.7 million ($200 million revolving line of credit and $51.7 million of term
notes) to $125 million ($100 million revolving line of credit and $25 million of
term notes). The Merrill Credit Agreement expires on February 26, 2007, and the
term notes are now due February 26, 2007, with quarterly repayments beginning
May 31, 2003.
On March 28, 2003, the Company requested the lenders to extend the due date
for delivery of certain deposit account control agreements with certain local
bank deposit accounts maintained by the borrow. The lenders agreed to amend
(First Amendment) the Credit Agreement to extend delivery of these agreements
until May 31, 2003.
32
As a result of (i) the Company's failure to deliver to the lenders its
fiscal 2002 audited financial statements by March 30, 2003 and (ii) as of April
4, 2003, Riverside Group Inc. and J. Steven Wilson ceasing between them to own
at least 25% of the Company's outstanding common stock and Imagine Investments,
Inc. owning a greater percentage of such shares than Riverside and Mr. Wilson,
certain events of default arose under the Merrill Credit Agreement. Such
defaults were simultaneously waived by the lenders and the Credit Agreement was
amended (Second Amendment) in certain respects, including the addition of a
provision which permitted the Company to make a severance payment to Mr. Wilson
and placed a limitation on the Company's ability to repurchase, redeem or retire
Senior Subordinated Notes. In connection with such waiver and amendments, the
Company paid to the lenders a fee of $312,500.
On May 31, 2003 the Merrill Credit Agreement was again amended (Third
Amendment) whereby the lenders agreed to (i) amend the Credit Agreement in order
to reduce the revolving loan commitment by $15.0 million and (ii) extend the due
date to August 31, 2003 for the delivery of Deposit Account Control Agreements
with respect to certain deposit accounts maintained by the Company. The Company
received a refund of $112,500 of the original closing fees pursuant to this
amendment.
As of June 28, 2003, the Company was in compliance with its bank covenants
with the exception of its minimum EBITDA requirement. On August 15, 2003, the
lenders agreed to waive the default of its minimum EBITDA requirement and amend
the levels of EBITDA as defined within the Credit Agreement (Fourth Amendment).
In addition, it amended the original credit agreement to include a prepayment of
term loan of $1.5 million by September 20, 2003, less any prepayment from the
proceeds of the sale of certain real estate. Further, the agreement requires
that the Company maintain minimum availability of $15 million throughout the
remainder of the agreement and a 25 basis point increase in interest spreads. In
connection with such waiver and amendments, the Company paid to the lenders a
fee of $100,000.
As of June 28, 2003 there was $64.4 million outstanding under the Merrill
Credit Agreement of which $39.8 million was revolving credit and $24.6 million
was term notes. The spread on prime rate borrowings under the Merrill agreement
ranges from 1.25% to 2.00% over prime for revolving loans and 2.00% to 2.75%
over prime under the term notes. The spread for LIBOR based borrowing ranges
from 2.50% to 3.25% over LIBOR for revolving loans and 3.25% to 4.00% over LIBOR
for term notes. The spread over the prime or LIBOR rates is determined based
upon the Company's Fixed Charge Coverage Ratio, as defined under the Merrill
Credit Agreement. However, an event of default could increase each of the
Company's prime and LIBOR margins by 25 basis points. The Company's base rate on
revolving loans, 6.00% at June 28, 2003 and 5.50% at June 29, 2002, included an
interest spread over prime of 1.75% and 0.75%, respectively. The Company's LIBOR
33
borrowing rate on revolving loans, 4.12% at June 28, 2003 and 4.58% at June 29,
2002, included an interest spread over LIBOR of 3.00% and 2.75%, respectively.
The Company's weighted average interest rates on revolver loans were 7.23% and
6.45% for the six months ended June 28, 2003 and June 29, 2002, respectively.
The Merrill Credit Agreement limits the level of capital expenditures for
each annual period, while allowing for reinvestment of proceeds on asset sales.
The Company is also subject to certain minimum levels of EBITDA, as defined
within the Credit Agreement. Availability is generally limited to 85% of
eligible accounts receivable and 60% of eligible inventory. As of June 28, 2003
unused availability was $27.7 million and, under the Merrill Agreement as
amended, minimum availability is required to be $15 million for the remainder of
the agreement. Therefore, the Company held $12.7 million of excess availability
as of June 28, 2003 after all reserves and minimums were deducted.
Under the Merrill Credit Agreement, a commitment fee of .375% to .5% is
payable on the unused revolving credit amount. Ranges of fees are determined
based upon the aforementioned Fixed Charge Coverage Ratio, as defined under the
Credit Agreement.
Net Operating Loss Carryforwards
--------------------------------
Though fully provided for, the Company has net operating loss carryforwards
available to offset future taxable income of approximately $22.4 million as of
December 28, 2002 expiring in the years 2011 through 2021 (see Note 4 to the
financial statements and discussion in Item 2). On July 22, 2003, as a result of
Bradco Supply and its affiliates increasing their common stock holdings in the
Company above 15% of total shares outstanding, an ownership change occurred as
per Internal Revenue Code Section 382. A change in control of the Company, for
tax purposes, may limit the Company's ability to utilize these carryforwards.
34
WICKES INC. AND SUBSIDIARIES
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For information of the Company's Quantitative and Qualitative Disclosures
About Market Risk, please see the Company's Annual Report on Form 10-K for the
fiscal year ended December 28, 2002. There have been no material changes in the
Company's quantitative or qualitative exposure to market risk since the end of
fiscal 2002.
Item 4. CONTROLS AND PROCEDURES
The Company has performed an evaluation under the supervision and with the
participation of management, including the Chief Executive Officer ("CEO") and
Chief Financial Officer ("CFO"), of the effectiveness of the design and
operation of the disclosure controls and procedures. Based on that evaluation,
the CEO and CFO concluded that the disclosure controls and procedures were
effective as of June 28, 2003. There have been no significant changes in the
internal controls or other factors that could significantly affect internal
controls subsequent to June 28, 2003.
35
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
Item 2. Changes in Securities and Use of Proceeds
-----------------------------------------
(a) None
(b) None
(c) None
(d) None
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
4.1(j) Waiver and First Amendment to Credit Agreement, dated April 4,
2003 among Registrant and Merrill Lynch Capital as Lender and Agent
for each Lender
4.1(k) Waiver and Second Amendment to Credit Agreement, dated April 4,
2003 among Registrant and Merrill Lynch Capital as Lender and Agent
for each Lender.
4.1(l) Consent and Third Amendment to Credit Agreement, dated May 31,
2003 among Registrant and Merrill Lynch Capital as Lender and Agent
for each Lender.
4.1(m) Waiver and Fourth Amendment to Credit Agreement dated August
15, 2003 among Registrant and Merrill Lynch Capital as Lender and
Agent for each Lender.
99.1 Certification of Chief Executive Officer
99.2 Certification of Chief Financial Officer
(b) Reports on Form 8-K
A Current Report on Form 8-K dated April 3, 2003 was filed under Item
5 disclosing that the Company confirmed receiving an unsolicited
proposal from Bradco Supply Corporation to acquire all shares of
Wickes common stock not owned by Bradco and its affiliate for $1.12
per share.
A Current Report on Form 8-K dated April 7, 2003 was filed under Item
5 disclosing the acquisition of Wickes common stock by Imagine
Investments, Inc. and the resignation of J. Steven Wilson as Chairman
and Chief Executive Officer of Wickes. The acquisition resulted in 51%
ownership of the Company's outstanding common stock. In addition,
Albert Ernest, Jr., a director of Wickes since 1993, resigned from the
Company's Board of Directors.
36
A Current Report on Form 8-K dated April 16, 2003 was filed under Item
5 disclosing that the Company received notice from Nasdaq that the
Company has not regained compliance in accordance with Marketplace
Rule 4310 (c) (8) (D). The notice stated that the Company meets
initial listing requirements fro the Nasdaq SmallCap Market under
Marketplace Rule 4310 (c) (2) (A).
A Current Report on Form 8-K dated April 21, 2003 was filed under Item
1 disclosing that Imagine Investments, Inc. and its affiliates as
current beneficiary owners of 4,308,443 shares of Wickes common stock,
or approximately 51.9% of the Company's outstanding shares and,
therefore, may be deemed to control Wickes. The item also stated that
Robert E. Mulcahy III, a director since 1988, has been appointed
Chairman of Wickes Inc., and that the Wickes Board of Directors
established an Executive Management Committee to oversee the Company's
operations on a day-to-day basis.
A Current Report on Form 8-K dated April 28, 2003 was filed under Item
5 disclosing the election of Jim O'Grady as the new President and
Chief Executive Officer of Wickes Lumber.
A Current Report on Form 8-K dated June 13, 2003 was filed under Item
5 disclosing that the Company was notified by Nasdaq that it has
regained compliance with Marketplace Rule 42.10 (c) (4), which
requires a minimum bid price of $1.00 per share and that this
compliance matter is closed.
A Current Report on Form 8-K dated July 15, 2003 was filed under Item
5 disclosing the resignation of Frederick H. Schultz from his
positions on the Company's Board of Directors.
37
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
WICKES INC.
By: /s/ Jim O'Grady
---------------
Jim O'Grady
President and Chief Executive Officer
By: /s/ James A. Hopwood
--------------------
James A. Hopwood
Senior Vice President and
Chief Financial Officer
Date: August 15, 2003
38
SECTION 302 CERTIFICATION
-------------------------
I, Jim O'Grady, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Wickes Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 report;
4. The registrant's other certifying officer 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, or cause such disclosure
controls and procedures to be designed under our supervision, 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 report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures and present in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal control over
financial reporting that occurred during the registrant's most recent fiscal
quarter (the registrant's fourth quarter in the case of an annual report) that
has materially affected, or is reasonable likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, 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 and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information;
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls.
Date: August 15, 2003 Signature: /s/ Jim O'Grady
--------------- ---------------
President and
Chief Executive Officer
39
SECTION 302 CERTIFICATION
-------------------------
I, James Hopwood, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Wickes Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 report;
4. The registrant's other certifying officer 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:
b) designed such disclosure controls and procedures, or cause such disclosure
controls and procedures to be designed under our supervision, 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 report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures and present in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal control over
financial reporting that occurred during the registrant's most recent fiscal
quarter (the registrant's fourth quarter in the case of an annual report) that
has materially affected, or is reasonable likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, 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 and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information;
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls.
Date: August 15, 2003 Signature: /s/ James A. Hopwood
--------------- --------------------
Senior Vice President and
Chief Financial Officer
40
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, Jim O'Grady, President and Chief Executive Officer of Wickes Inc. (the
"Registrant") hereby certify, pursuant to 18 U.S.C.ss. 1350, as adopted by
Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
(1) the Quarterly Report on Form 10-Q for the period ending June 28, 2003
as filed with/submitted to the U.S. Securities and Exchange Commission (the
"Report"), fully complies with the requirements of Section 13(a) of the
Securities Exchange Act of 1934, as amended; and
(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Registrant.
Dated: August 15, 2003
/s/ Jim O'Grady
---------------
Jim O'Grady,
President and Chief Executive Officer
A signed original of this written statement required by Section 906 has
been provided to Wickes Inc. and will be retained by Wickes Inc. and furnished
to the Securities and Exchange Commission or its staff upon request.
41
Exhibit 99.2
CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED BY SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, James A. Hopwood, Senior Vice President and Chief Financial Officer of
Wickes Inc. (the "Registrant") hereby certify, pursuant to 18 U.S.C.ss. 1350, as
adopted by Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
(1) the Quarterly Report on Form 10-Q for the period ending June 28, 2003
as filed with/submitted to the U.S. Securities and Exchange Commission (the
"Report"), fully complies with the requirements of Section 13(a) of the
Securities Exchange Act of 1934, as amended; and
(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Registrant.
Dated: August 15, 2003
/s/ James A. Hopwood
--------------------
James A. Hopwood,
Senior Vice President and
Chief Financial Officer
A signed original of this written statement required by Section 906 has
been provided to Wickes Inc. and will be retained by Wickes Inc. and furnished
to the Securities and Exchange Commission or its staff upon request.