SECURITIES AND EXCHANGE COMMISSION
Washington, DC. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File
For the Quarterly Period Ended September 27, 2003 Number 1-14967
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WICKES INC.
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(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
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(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 October 31, 2003, the Registrant had 8,307,985 shares of Common Stock, par
value $.01 per share outstanding.
2
WICKES INC. AND SUBSIDIARIES
INDEX
Page
Number
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (Unaudited) September 27,
2003, December 28, 2002, and September 28, 2002 (As Restated) 3
Condensed Consolidated Statements of Operations (Unaudited) for the
three and nine months ended September 27, 2003 and September 28,
2002 (As Restated) 4
Condensed Consolidated Statements of Cash Flows (Unaudited) - for
the nine months ended September 27, 2003 and September 28, 2002 (As
Restated) 5
Notes to Condensed Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 18
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 32
Item 4. Controls and Procedures 32
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 33
Item 2. Changes in Securities and Use of Proceeds 33
Item 6. Exhibits and Reports on Form 8-K 33
3
WICKES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 27, 2003, December 28, 2002 and September 28, 2002
(in thousands except share data)
(UNAUDITED)
September 27, December 28, September 28,
2003 2002 2002
---------------- ---------------- ---------------
ASSETS (As Restated,
see Note 11)
Current assets:
Cash $ 28 $ 40 $ 142
Accounts receivable, less allowance for doubtful
accounts of $1,884 in September 2003, $1,919 in December 2002
and $1,379 in September 2002 57,475 56,094 57,365
Note receivable from affiliate - - 436
Inventory, net 48,998 50,170 60,034
Deferred tax assets - 5,720 5,372
Prepaid expenses and other assets 8,177 5,619 6,774
Assets of discontinued operations - - 61,677
---------------- ---------------- ---------------
Total current assets 114,678 117,643 191,800
---------------- ---------------- ---------------
Property, plant and equipment, net 34,170 37,971 41,182
Trademark - - 5,856
Deferred tax assets - 13,775 16,344
Rental equipment (net of accumulated depreciation of
$1,453 in September 2003, $1,475 in December 2002 and
$1,542 in September 2002) 695 1,021 1,161
Goodwill - - 12,229
Other assets (net of accumulated amortization of $6,992 in September
2003, $5,911 in 2002, and $5,750 in September 2002) 5,910 3,577 4,192
Assets of discontinued operations - - 11,963
---------------- ---------------- ---------------
Total assets $ 155,453 $ 173,987 $ 284,727
================ ================ ===============
LIABILITIES & STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term debt $ 23,373 $ 28,107 $ 10,800
Accounts payable 34,530 23,824 31,807
Accrued liabilities 12,915 16,256 10,264
Liabilities of discontinued operations - - 29,082
---------------- ---------------- ---------------
Total current liabilities 70,818 68,187 81,953
---------------- ---------------- ---------------
Long-term debt, less current maturities 95,380 67,363 173,100
Other long-term liabilities 2,001 2,407 2,472
Liabilities of discontinued operations - - 670
Stockholders' equity (deficit):
Common stock, $0.01 par (8,307,984 at September 2003 and December
2002 and 8,294,171 shares at September 2002 issued and outstanding) 83 83 83
Additional paid-in capital 87,173 87,173 87,164
Accumulated deficit (100,002) (51,226) (60,715)
--------------- ---------------- ---------------
Total stockholders' equity (deficit) (12,746) 36,030 26,532
--------------- ---------------- ---------------
Total liabilties and stockholders' equity (deficit) $ 155,453 $ 173,987 $ 284,727
=============== ================ ===============
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 Nine Months Ended
September 27, September 28 September 27, September 28,
2003 2002 2003 2002
----------- ---------- ----------- -----------
(As Restated, (As Restated,
see Note 11) see Note 11)
Net sales $ 144,061 $ 153,146 $ 372,715 $ 449,086
Cost of sales 116,223 120,484 298,659 354,541
----------- ---------- ----------- ----------
Gross profit 27,838 32,662 74,056 94,545
----------- ---------- ----------- ----------
Selling, general and administrative expenses 26,380 32,116 84,737 92,472
Depreciation 1,061 1,065 2,997 3,320
Provision for doubtful accounts 266 193 704 961
Store closing costs and other charges 570 623 5,590 2,370
Other operating income (760) (501) (2,043) (2,713)
----------- ---------- ----------- ----------
27,517 33,496 91,985 96,410
----------- ---------- ----------- ----------
Income (loss) from continuing operations before interest and taxes 321 (834) (17,929) (1,865)
Interest expense 3,536 2,778 10,666 8,484
----------- --------- ----------- ----------
Loss from continuing operations before income taxes (3,215) (3,612) (28,595) (10,349)
Income tax expense (benefit) 105 (1,390) 19,796 (3,750)
----------- ---------- ----------- ----------
Loss from continuing operations (3,320) (2,222) (48,391) (6,599)
Income (loss) from discontinued operations, net of taxes of $2,159 and
$4,029 for the three and nine months ended in 2002 - 3,345 (385) 6,237
----------- ---------- ----------- ----------
Net (loss) income $ (3,320) $ 1,123 $ (48,776) $ (362)
=========== ========== =========== ==========
Loss from continuing operations per common share-basic and diluted $ (0.40) $ (0.27) $ (5.82) $ (0.80)
=========== ========== =========== ==========
Income (loss) from discontinued operations per common share-basic $ - $ 0.41 $ ( 0.05) $ 0.75
=========== ========== =========== ==========
Income (loss) from discontinued operations per common share-diluted $ - $ 0.39 $ ( 0.05) $ 0.74
=========== ========== =========== ==========
Net (loss) income per common share-basic $ (0.40) $ 0.14 $ (5.87) $ (0.04)
=========== ========== =========== ==========
Net (loss) income per common share-diluted $ (0.40) $ 0.13 $ (5.87) $ (0.04)
=========== ========== =========== ==========
Weighted average common shares-basic 8,307,984 8,293,168 8,307,984 8,288,921
=========== ========== =========== ==========
Weighted average common shares-diluted 8,307,984 8,520,384 8,307,984 8,423,341
=========== ========== =========== ==========
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)
Nine Months Ended
September 27, September 28,
2003 2002
------------- -------------
(As Restated,
see Note 11)
Cash flows from operating activities:
Net loss $ (48,776) $ (362)
Adjustments to reconcile net loss to
net cash (used in) provided by operating activities:
Loss (income) from discontinued operations 385 (6,237)
Depreciation 3,842 4,272
Gain on early retirement of debt (879) -
Amortization of deferred financing costs 1,979 1,166
Provision for doubtful accounts 704 961
Gain on sale of assets and other items (159) (1,253)
Deferred income taxes 19,495 25
Changes in assets and liabilities, net of assets sold
(Increase) decrease in accounts receivable (10,914) 3,061
Decrease in inventory 971 11,482
Increase in accounts payable and accrued liabilities 6,959 108
Increase in prepaids and other assets (2,637) (1,998)
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NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (29,030) 11,225
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Cash flows from investing activities:
Purchases of property, plant and equipment (2,300) (893)
Proceeds from the sale of property, plant and equipment 2,524 4,249
Proceeds from sale of business 8,829 -
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NET CASH PROVIDED BY INVESTING ACTIVITIES 9,053 3,356
----------- -------------
Cash flows from financing activities:
Net borrowings (repayments) under revolving line of credit 30,205 (10,596)
Retirements of long-term debt (4,980) -
Increase in notes receivable - (6)
Term loan repayments (1,063) (7,914)
Debt issuance costs (4,197) (6)
----------- ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 19,965 (18,522)
----------- ------------
NET CASH PROVIDED BY DISCONTINUED OPERATIONS - 3,930
----------- ------------
NET DECREASE IN CASH (12) (11)
Cash at beginning of period 40 153
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CASH AT END OF PERIOD $ 28 $ 142
=========== ============
Supplemental schedule of cash flow information:
Interest paid $ 7,199 $ 10,425
Income taxes paid $ 704 $ 1,726
The accompanying notes are an integral part of the condensed consolidated
financial statements.
6
WICKES INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED 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.
Stock Based Compensation
------------------------
SFAS No. 123, "Accounting for Stock-Based Compensation," encourages, but
does not require, companies to recognize compensation expense for grants of
stock, stock options, and other equity instruments to employees based on the
fair value of such instruments. The pronouncement requires companies that choose
not to adopt the fair value method of accounting to disclose the pro forma net
income and earnings per share under the fair value method. As permitted by SFAS
No. 123, the Company elected to continue the intrinsic value method of
accounting prescribed by APB Opinion No. 25. As required, the Company has
disclosed the pro forma net income (loss) and pro forma income (loss) per share
as if the fair value based accounting methods had been used to account for
stock-based compensation cost. In addition, the following table presents the pro
forma impact (in thousands, except share data) to the Company's financial
statements as if the fair value method had been applied:
7
Three Months Ended Nine Months Ended
September 27, September 28, September 27, September 28,
2003 2002 2003 2002
----------- ---------- ---------- ----------
Loss from continuing operations (as (3,320) (2,222) (48,391) (6,599)
reported)
Add: Stock based compensation cost included
in determination of compensation expense - 9 - 30
Deduct: Stock based compensation under the
fair-value method for all awards, net of
tax 59 33 101 98
Adjusted loss from continuing operations (3,379) (2,246) (48,492) (6,667)
Weighted average common shares-basic 8,307,984 8,293,168 8,307,984 8,288,921
Weighted average common shares-diluted 8,307,984 8,520,384 8,307,984 8,423,341
(Loss) income from discontinued operations - 3,345 (385) 6,237
Net (loss) income (as reported) (3,320) 1,123 (48,776) (362)
Adjusted net (loss) income (3,379) 1,099 (48,877) (430)
Earnings per share:
Basic:
Loss from continuing operations (as
reported) (0.40) (0.27) (5.82) (0.80)
Adjusted loss from continuing operations (0.41) (0.27) (5.84) (0.80)
Income (loss) from discontinued operations - 0.41 (0.05) 0.75
Net income (loss) (as reported) (0.40) 0.14 (5.87) (0.04)
Adjusted net income (loss) (0.41) 0.14 (5.88) (0.05)
Diluted:
Loss from continuing operations (as
reported) (0.40) (0.27) (5.82) (0.80)
Adjusted loss from continuing operations (0.41) (0.27) (5.84) (0.80)
(Loss) income from discontinued operations - 0.39 (0.05) 0.74
Net income (loss) (as reported) (0.40) 0.13 (5.87) (0.04)
Adjusted net income (loss) (0.41) 0.13 (5.88) (0.05)
Share Data
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The Company issued 5,326 and 12,586 shares of Common Stock to members of
its board of directors in lieu of cash compensation during the three and nine
months ended September 28, 2002. The Company did not issue shares of Common
Stock to members of its board of directors in lieu of cash compensation during
the three and nine months ended September 27, 2003.
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.
8
Reclassifications and Eliminations
----------------------------------
Certain reclassifications have been made to prior year amounts to conform
to the current presentation. All significant intercompany balances and
transactions have been eliminated.
2. Going Concern
-------------
The Company's consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. However, due to our liquidity
condition and continuing operating losses, there is substantial doubt about the
Company's ability to continue as a going concern. 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.
The Company does not expect to generate sufficient cash from operations to
pay the principal amount of the Company's 11 5/8% Senior Subordinated Notes due
2003 when they mature on December 15, 2003, and, therefore, the Company has
offered to exchange the Senior Subordinated Note for either (i) cash and 10%
Convertible Notes due 2007 or (ii) 10% Convertible Notes due 2007. If an
insufficient number of holders of Senior Subordinated Notes participate in the
exchange offer, it is likely the Company will not be able to pay the principal
amount and the accrued and unpaid interest due on their maturity date. In that
event, an event of default will have taken place under the indenture governing
the Senior Subordinated Notes, the Company's senior credit facility and the
indenture governing the Company's Senior Secured Notes due 2005, allowing the
Company's senior lenders to immediately accelerate the maturity of the
indebtedness under the Company's senior credit facility, the Company's Senior
Secured Notes and Senior Subordinated Notes. If that were to occur, unless the
Company were able to obtain additional financing to repay the senior credit
facility, the Senior Secured Notes and the outstanding Senior Subordinated Notes
(which the Company believes is highly unlikely), the Company may be forced to
petition for relief under the U.S. Bankruptcy Code, or the Company's creditors
may file an involuntary petition against the Company.
3. 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 sale 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". The standard requires separate
presentation of the results of discontinued operations. As such, the results of
the three and nine month periods ended September 28, 2002 have been reclassified
to conform with this presentation.
9
In the first nine 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. As of September 27, 2003, the
Company has recorded $0.3 million as part of discontinued operations in the
Statement of Operations, which represents the Company's best estimate of
exposure related to these claims.
Sales and income from discontinued operations for the three and nine months
ended September 28, 2002 were as follows:
Three months ended Nine months ended
September 28, September 28,
2002 2002
------------ ------------
Sales $ 84,138 $ 208,632
Income before income taxes 5,501 10,265
Tax provision 2,156 4,029
Income from discontinued operations 3,345 6,237
The Company allocated interest expense of its revolving credit agreement
and Senior Subordinated Notes to discontinued operations based on the cash
proceeds from the sale of these operations required to be used to repay those
obligations. Interest expense allocated to discontinued operations was $1.1
million and $3.9 million for the three months and nine months ended September
28, 2002, respectively.
The major classes of assets and liabilities of discontinued operations were
as follows (in thousands):
September 28,
2002
------------
Cash $ 9
Accounts receivable 29,434
Inventory 29,712
Deferred tax assets 2,295
Prepaid expenses and other assets 227
------------
Total current assets 61,677
------------
Property, plant and equipment 11,268
Deferred tax assets 215
Rental equipment 472
Other assets 8
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Total assets 73,640
-----------
Accounts payable 20,896
Accrued liabilities 8,186
-----------
Total current liabilities 29,082
Other long-term liabilities 670
-----------
Total liabilities 29,752
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Net assets $ 43,888
===========
10
4. LONG-TERM DEBT
--------------
Long-term debt is comprised of the following (in thousands):
September 27, December 28, September 28,
2003 2002 2002
------------ ----------- -----------
Revolving credit facility:
Revolving notes $ 36,719 $ 20,346 $ 86,085
Term notes 23,937 11,168 33,859
Senior subordinated notes 21,123 63,956 63,956
Senior secured notes 36,974 - -
Less current maturities (23,373) (28,107) (10,800)
------------ ---------- ----------
Total long-term debt $ 95,380 $ 67,363 $ 173,100
------------ ---------- ----------
Senior Subordinated Debt
------------------------
On February 26, 2003, the Company completed its offer to exchange 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 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, rank equally
with the Company's senior credit facility but 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 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%.
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. (See Note 10 for discussion regarding the
Company's current offer to exchange the remaining $21.1 million of notes).
11
Revolving Credit Facility
-------------------------
Concurrent with the exchange offer, which closed on February 26, 2003, the
Company completed a refinancing of its Fleet Credit Agreement and term notes
existing under the prior Amended and Restated Credit Agreement dated December
13, 2000 and entered into the new Merrill Credit Agreement dated February 26,
2003. The total commitment was reduced from the original $251.7 million ($200
million revolving line of credit and $51.7 million of term notes) to $125
million ($100 million revolving line of credit and $25 million of term notes).
The commitment on the revolving line was reduced again on May 31, 2003 to $85
million. The Merrill Credit Agreement expires on February 26, 2007, and the term
notes are now due February 26, 2007.
As of December 28, 2002 there was $31.5 million outstanding under the Fleet
Credit Agreement of which $20.3 million was revolving credit and $11.2 million
was term notes. As a result of amendments during the third quarter of fiscal
2003, the spread range on prime rate borrowings under the new agreement
temporarily increased to 1.5% to 2.25% over prime for revolving loans and 2.25%
to 3.0% over prime under the term notes. These rate ranges are up by 25 basis
points from rates negotiated in the original agreement on February 26, 2003. The
spread for LIBOR based borrowing increased by the same 25 basis points, and
ranges from 2.75% to 3.5% over LIBOR for revolving loans and 3.5% to 4.25% over
LIBOR for term notes. These increases were the result of a default caused by the
Company's failure to meet required minimum EBITDA levels.
On August 15, 2003, the lenders agreed to waive the default of the
Company's 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 $1.5 million prepayment of the term loan
by September 30, 2003, less any prepayment from the proceeds of the sale of
certain real estate. Also, it increased interest rate spreads by 25 basis points
and amended the original credit agreement to state that without prior written
consent of required lenders, in no event will the proceeds of the revolving
loans be used to consummate (i) any redemption or purchase of Senior
Subordinated Notes due 2003 or (ii) any voluntary redemption or purchase of
Senior Secured Notes due 2005. In connection with such waiver and amendments,
the Company paid to the lenders a fee of $100,000.
As of September 27, 2003, the Company met the minimum EBITDA levels and the
interest rate ranges from the original agreement entered into on February 26,
2003 have been restored, effective September 28, 2003. However, an event of
default could again increase each of the Company's prime and LIBOR margins by 25
basis points. The spread over the prime or LIBOR rates is determined based upon
the Company's Fixed Charge Coverage Ratio, as defined under the Merrill Credit
Agreement. The Company's base rate, 6.00% at September 27, 2003, 5.00% at
December 28, 2002 and 5.50% at September 28, 2002, included an interest spread
over prime of 2.00%, 0.75% and 0.75%, respectively. The Company's LIBOR
borrowing rate, 4.37% at September 27, 2003, 4.13% at December 28, 2002 and
4.57% at September 28, 2002, included an interest spread over LIBOR of 3.25%,
2.75% and 2.75%, respectively. The Company's weighted average interest rates on
revolver loans were 6.57% and 6.11% for the nine months ended September 27, 2003
and September 28, 2002, respectively.
12
The Merrill Credit Agreement limits the level of capital expenditures for
each annual period, while allowing for reinvestment of proceeds on asset sales.
The Company is also subject to certain minimum levels of EBITDA, as defined
within the Credit Agreement. Availability is generally limited to 85% of
eligible accounts receivable and 60% of eligible inventory. For the remaining
term of the Credit Agreement, minimum availability is required to be $15
million.
Under the Merrill Credit Agreement, a commitment fee of .375% to .5% is
payable on the unused revolving credit amount. Ranges of commitment fees are
determined based upon the aforementioned Fixed Charge Coverage Ratio, as defined
under the Merrill Credit Agreement. As of December 28, 2002 and September 28,
2003, the Company was in compliance with all of its then existing covenants.
On August 27, 2003 the Merrill Credit Agreement was amended (Fifth
Amendment) whereby the lenders agreed to (i) remove the Availability Block
Adjustment Date and Availability Block Table, as defined, resulting in a fixed
availability block, (ii) extend the due date to September 30, 2003 for the
delivery of Deposit Account Control Agreements with respect to certain deposit
accounts maintained by the Company, (iii) reduce each prime rate margin and
LIBOR margin percentage by 25 basis points provided that EBITDA for the third
quarter ended September 27, 2003 and each month thereafter is equal to or
greater than the amount set forth in the amendment. After any such decrease the
first time that EBITDA for any subsequent period set forth is less than the
amount set forth for each such period, effective immediately each prime rate
margin and LIBOR margin percentage will increase by 25 basis points.
As of September 27, 2003 there was $60.7 million outstanding under the
Merrill Credit Agreement of which $36.7 million was revolving credit and $23.9
million was term notes. The Company's unused availability was $27.1 million and,
under the Merrill Credit Agreement as amended, minimum availability is required
to be $15.0 million. Therefore, the Company held $12.1 million of excess
availability as of September 27, 2003 after all reserves and minimums were
deducted.
On September 30, 2003 the Merrill Credit Agreement was amended (Sixth
Amendment) whereby the lenders agreed (i) that the Company submitted
substantially all (as determined by the Agent) of the Deposit Account Control
Agreements and (ii) when the Company made the required $1,500,000 Term Loan
Prepayment on September 30, 2003, the net cash proceeds of the sale of certain
real estate would then be applied to the Senior Secured Note, as previously
defined, with the remaining amounts applied to the Revolving Loan.
13
Aggregate Maturities
--------------------
The Senior Subordinated Notes totaling $21.1 million mature on December 15,
2003. The Senior Secured Notes totaling $37.0 million mature on July 29, 2005.
The term portion of the revolving credit facility requires quarterly principal
payments totaling approximately $0.4 million in fiscal 2003, $2.6 million in
fiscal 2004, $3.4 million in fiscal 2005, $3.5 million in fiscal 2006 and $14.0
in fiscal 2007.
5. INCOME TAXES
------------
Due to the determination in the second quarter of 2003 that there was
substantial doubt related to the Company's ability to continue as a going
concern, the Company recorded a $29.6 million charge to establish a valuation
allowance for its net deferred tax assets including net operating loss
carryforwards.
The Company will maintain a full valuation allowance for its net deferred
tax assets and net operating loss carryforwards until sufficient positive
evidence exists to support reversal of the valuation allowance. Until such time,
except for state and local provisions, the Company will have no reported tax
provision, net of valuation allowance adjustments.
The Company's effective tax rate from continuing operations for the
three-month period ended September 28, 2002 was 38.5% which includes franchise
taxes and non-deductible items of $0.1 million.
Income tax benefit from continuing operations was $3.8 million for the nine
month period ended September 28, 2002, which included franchise taxes and
non-deductible items of $0.3 million. The Company's effective tax rate from
continuing operations for the nine-month period ended September 28, 2002 was
36.2%.
On July 22, 2003, 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 carryforwards.
6. COMMITMENTS AND CONTINGENCIES
-----------------------------
At September 27, 2003 the Company had accrued approximately $475,000 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.
14
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 713 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 535
similar actions for insignificant amounts, and another 367 of these actions have
been dismissed. None of these suits have made it to trial.
Losses in excess of the $475,000 reserved as of September 27, 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.
7. EARNINGS PER SHARE
------------------
The Company calculates earnings per share in accordance with SFAS 128. In
periods where net losses are incurred, dilutive common stock equivalents are not
used in the calculation of diluted EPS as they would have an anti-dilutive
effect on EPS. For the three-month period ended September 27, 2003 common stock
equivalents of 1,083 were excluded in calculating diluted weighted average
shares outstanding as they were anti-dilutive. For the three-month period ended
September 28, 2002 common stock equivalents of 227,216 were included in
calculating diluted weighted average shares outstanding. For the nine-month
periods ended September 27, 2003 and September 28, 2002 common stock equivalents
of 606 and 134,068 shares, respectively were excluded as they were
anti-dilutive. In addition, options to purchase 185,915 and 523,565 weighted
average shares of common stock at September 27, 2003 and September 28, 2002,
respectively, had an exercise price greater than the average market price.
15
8. 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 September 27, 2002, the Company held a promissory note from Riverside of
$436,000 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 nine months ended September 27, 2003, the Company paid
approximately $420,000, compared to approximately $915,000 for the nine months
ended September 28, 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.
9. 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 nine months of 2003. The Company incurred costs of
approximately $3.4 million related to severance benefits paid to senior
executives and an additional 57 headquarters and 43 field personnel. In addition
the Company has incurred $2.2 million in property and other carrying costs that
primarily include insurance, maintenance, repair and lease commitments related
to these facilities. All charges related to the 2003 store closing costs are
anticipated to be paid in subsequent periods. During the first nine months of
2002 the Company sold seven locations, consolidated one location, and closed
two. Employee severance costs for 268 employees and property and other carrying
costs incurred during the first nine months of 2002 were $1.4 million and $0.9
million respectively. All charges related to the 2002 store closing costs were
paid in subsequent periods. The following is a summary of the activity in the
reserve balances from December 29, 2001 through September 28, 2002 and from
December 28, 2002 through September 27, 2003 (in thousands):
16
Employee Property and
Separation Other Carrying
Costs Costs Total
----- ----- -----
Accrual balance at December 28, 2002 $ 385 $ 15 $ 40
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 2,643 1,066 3,709
2nd Qtr Related payments (2,446) (1,039) (3,485)
----- ----- -----
Accrual balance at June 28, 2003 $ 344 $ 72 $ 416
3rd Qtr store closing and other costs 94 476 570
3rd Qtr related payments (94) (510) (604)
----- ----- -----
Accrual balance at September 27, 2003 $ 344 $ 38 $ 382
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
3rd Qtr store closing and other costs 267 356 623
3rd Qtr related payments (267) (396) (663)
----- ----- -----
Accrual balance at September 28, 2002 $ 0 $ 32 $ 32
The costs incurred to liquidate the inventory have 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.
10. SUBSEQUENT EVENT
----------------
Exchange Offer
- --------------
On November 4, 2003 the Company commenced an offer to exchange either (i)
cash and 10% Convertible Notes due 2007 or (ii) 10% Convertible Notes due 2007
for all $21.1 million outstanding 11 5/8 % Senior Subordinated Notes due 2003.
In the exchange offer the Company refers to its existing 11 5/8 % Senior
Subordinated Notes due 2003 as the existing notes, and to its 10% Convertible
Notes due 2007 as the new notes. The Company also has Senior Secured Notes due
2005, as discussed in Note 4, to the financial statements.
17
If an insufficient number of holders of existing notes participate in the
exchange offer, it is likely that the Company will be unable to pay the
principal and interest on the existing notes at their maturity. In that event,
an event of default will have occurred on the Company's obligations under the
indenture governing the existing notes, as well as under all of its other
indebtedness, including its senior credit facility, its Senior Secured Notes due
2005 and, if the exchange offer is completed, the new notes. Therefore, the
principal and accrued interest on the existing notes and other indebtedness,
including the senior credit facility, senior secured notes due 2005 and, if the
exchange offer is completed, the new notes, may be accelerated and become
immediately due and payable. If, as is currently anticipated, the Company is
then unable to obtain immediate financing to pay such amounts, the Company may
seek to file a voluntary petition, or may have an involuntary petition filed
against it by its creditors in a bankruptcy court under the U.S. Bankruptcy
Code.
11. RESTATEMENT
-----------
The Company is in the process of restating its Annual Report on Form 10-K
for the year ended December 28, 2002 and its Quarterly Reports on Form 10-Q for
the quarters ended March 29, 2003 and June 28, 2003, to restate certain
interest, employee benefits, depreciation and manufacturing related expenses
that were not properly classified, and were found subsequent to the issuance of
the Company's consolidated financial statements for those periods. The Form
10-K/A and Forms 10-Q/A will be filed as soon as practicable.
The financial statements relating to the period ended September 28, 2002
included in this Form 10-Q differ from those previously published in the prior
year. These differences result from the treatment of certain operations as
discontinued operations, as more fully described in Note 3 and the
reclassification of items described above. The following table reconciles the
amounts originally reported in the Company's financial statements included in
Form 10-Q for the period ended September 28, 2002 to the amounts which were
restated to give affect to the presentation of discontinued operations to the
amounts restated to reflect the proper classification of the items mentioned in
the preceding paragraph.
Revisions to reflect
discontinued
As previously operations
reported presentation As Restated
------------- -------------------- -----------
Statment of Operations Data
- ---------------------------
(in thousands, except per share data)
September 28, 2002
Nine months ended
Loss from continuing operations - (4,910) (6,599)
Discontinued operations - 4,548 6,237
Net loss (362) (362) (362)
September 28, 2002
Three months ended
Loss from continuing operations - (3,095) (2,222)
Discontinued operations - 4,218 3,345
Net income 1,123 1,123 1,123
Per share data:
- ---------------
September 28, 2002
Nine months ended
Loss from continuing operations per common share-basic and diluted - (0.59) (0.80)
Income from discontinued operations per common share-basic - 0.55 0.75
Income from discontinued operations per common share-diluted - 0.54 0.74
Net loss per common share-basic (0.04) (0.04) (0.04)
Net loss per common share-diluted (0.04) (0.04) (0.04)
September 28, 2002
Three months ended
Loss from continuing operations-basic and diluted - (0.37) (0.37)
Income from discontinued operations-basic - 0.51 0.41
Income from discontinued operations-diluted - 0.50 0.39
Net income per common share-basic 0.14 0.14 0.14
Net income per common share-diluted 0.13 0.13 0.13
Balance sheet data:
(in thousands)
As of September 28, 2002
As previously
reported As Restated
-------------- -----------
Assets of discontinued operations - 61,677
Total current assets 191,800 191,800
Total assets of discontinued operations - 11,963
Total assets 284,727 284,727
Liabilities of discontinued operations - 29,082
Total current liabilities 81,953 81,953
Liabilities of discontinued operations - 670
Total stockholders equity 26,532 26,532
18
WICKES INC. AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company is in the process of restating its Annual Report on Form 10-K
for the year ended December 28, 2002 and its Quarterly Reports on Form 10-Q for
the quarters ended March 30, 2003 and June 28, 2003, to restate certain
interest, employee benefits, depreciation and manufacturing related expenses
that were not properly classified, and were found subsequent to the issuance of
the Company's consolidated financial statements for those periods. The Form
10-K/A and Forms 10-Q/A will be filed as soon as practicable.
The financial statements relating to the period ended September 28, 2002
included in this Form 10-Q differ from those previously published in the prior
year. These differences result from the treatment of certain operations as
discontinued operations, as more fully described in Note 3 and the
reclassification of items described above. The following table reconciles the
amounts originally reported in the Company's financial statements included in
Form 10-Q for the period ended September 28, 2002 to the amounts which were
restated to give affect to the presentation of discontinued operations to the
amounts restated to reflect the proper classification of the items mentioned in
the preceding paragraph.
Revisions to reflect
discontinued
As previously operations
reported presentation As Restated
------------- -------------------- -----------
Statment of Operations Data
- ---------------------------
(in thousands, except per share data)
September 28, 2002
Nine months ended
Loss from continuing operations - (4,910) (6,599)
Discontinued operations - 4,548 6,237
Net loss (362) (362) (362)
September 28, 2002
Three months ended
Loss from continuing operations - (3,095) (2,222)
Discontinued operations - 4,218 3,345
Net income 1,123 1,123 1,123
Per share data:
- ---------------
September 28, 2002
Nine months ended
Loss from continuing operations per common share-basic and diluted - (0.59) (0.80)
Income from discontinued operations per common share-basic - 0.55 0.75
Income from discontinued operations per common share-diluted - 0.54 0.74
Net loss per common share-basic (0.04) (0.04) (0.04)
Net loss per common share-diluted (0.04) (0.04) (0.04)
September 28, 2002
Three months ended
Loss from continuing operations-basic and diluted - (0.37) (0.37)
Income from discontinued operations-basic - 0.51 0.41
Income from discontinued operations-diluted - 0.50 0.39
Net income per common share-basic 0.14 0.14 0.14
Net income per common share-diluted 0.13 0.13 0.13
Balance sheet data:
(in thousands)
As of September 28, 2002
As previously
reported As Restated
-------------- -----------
Assets of discontinued operations - 61,677
Total current assets 191,800 191,800
Total assets of discontinued operations - 11,963
Total assets 284,727 284,727
Liabilities of discontinued operations - 29,082
Total current liabilities 81,953 81,953
Liabilities of discontinued operations - 670
Total stockholders equity 26,532 26,532
The financial statements included herein as of and for the three and nine
month periods ended September 28, 2002, reflect the proper classifications. For
the three month period ended September 28, 2002, the restated loss from
continuing operations was $2.2 million compared to $3.1 million as previously
reported in the Unaudited Quarterly Financial Data Table included in the
Company's Annual Report on Form 10-K for the year ended December 28, 2002. The
restatement did not affect net income or earnings per share.
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.
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 the Notes to the Consolidated
Financial Statements.
The Company's consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. However, due to our liquidity
condition and continuing operating losses, there is substantial doubt about the
Company's ability to continue as a going concern. 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.
19
The Company does not expect to generate sufficient cash from operations to
pay the principal amount of the Company's 11 5/8% Senior Subordinated Notes due
2003 when they mature on December 15, 2003, and, therefore, the Company has
offered to exchange the Senior Subordinated Note for either (i) cash and 10%
Convertible Notes due 2007 or (ii) 10% Convertible Notes due 2007. If an
insufficient number of holders of Senior Subordinated Notes participate in the
exchange offer, it is likely the Company will not be able to pay the principal
amount and the accrued and unpaid interest due on their maturity date. In that
event, an event of default will have taken place under the indenture governing
the Senior Subordinated Notes, the Company's senior credit facility and the
indenture governing the Company's Senior Secured Notes due 2005, allowing the
Company's senior lenders to immediately accelerate the maturity of the
indebtedness under the Company's senior credit facility and the Company's Senior
Secured Notes and the Senior Subordinated Notes. If that were to occur, unless
the Company were able to obtain additional financing to repay the senior credit
facility, the Senior Secured Notes and the outstanding Senior Subordinated Notes
(which the Company believes is highly unlikely), the Company may be forced to
petition for relief under the U.S. Bankruptcy Code, or the Company's creditors
may file an involuntary petition against the Company.
INTRODUCTION
Wickes Inc. and its consolidated subsidiaries ("Wickes" or the "Company")
is a leading supplier of lumber, building materials and manufactured building
components in the United States. The Company sells its products and services
primarily to residential and commercial building professionals, repair and
remodeling contractors and, to a lesser extent, project do-it-yourself consumers
involved in major home improvement projects. At September 27, 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.
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 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.
20
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 nine-month periods
ended September 27, 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 3 to the condensed consolidated financial statements.)
Three Months Ended Nine Months Ended
September 27, September 28, September 27, September 28,
2003 2002 2003 2002
--------- --------- --------- ---------
Net sales 100.0% 100.0% 100.0% 100.0%
Gross profit 19.3% 21.3% 19.9% 21.1%
Selling, general and
administrative expense 18.3% 21.0% 22.7% 20.6%
Depreciation
0.7% 0.7% 0.8% 0.7%
Provision for doubtful accounts 0.2% 0.1% 0.2% 0.2%
Store closing costs 0.4% 0.4% 1.5% 0.5%
Other operating income (0.5)% (0.3)% (0.5)% (0.6)%
Income (loss) from operations
before interest and taxes 0.2% (0.5)% (4.8)% (0.4)%
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 6.57% during the first nine months of
2003 compared to 6.11% for the same period last year. The first nine months
results were negatively affected by lower commodity lumber prices, down 3.1%
from last year. Housing starts nationally were up 5.4% in the first nine months
of 2003, however in the Company's primary markets, the Northeast, Midwest, and
South, starts were down 1.7%, up 5.1% and up 3.0%, from housing starts in the
first nine months of 2002, respectively.
Losses from continuing operations for the nine months ended September 27,
2003 and September 28, 2002 were $48.4 million and $6.6 million, respectively.
21
Three Months Ended September 27, 2003 Compared
with the Three Months Ended September 28, 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 3 to the consolidated
financial statements.)
Net Sales
- ---------
Net sales for the third quarter of 2003 decreased 5.9%, to $144.1 million
compared to $153.1 million for the third quarter of 2002. The sales decrease
primarily was attributable to a combination of a $17.0 million decline in sales
from closed locations (excluding discontinued operations) partially offset by
increases in same store sales. The Company experienced same store sales
increases of 1.4%, 5.6% and 12.0% in July, August and September, respectively,
and a 5.9% overall same store sales increase for the third quarter 2003. Total
sales to building professionals represented 92.3% of total sales in the third
quarter of 2003, compared with 92.4% in 2002. Third quarter 2003 housing starts
in the Company's primary markets, the Northeast, Midwest, and South, were up
5.3%, up 12.7% and up 11.6%, from housing starts in the third quarter of 2002,
respectively. The Company estimates that the effect of lumber inflation for the
third quarter of 2003 increased total sales by approximately $1.5 million
compared with the same period last year. Lumber and building materials accounted
for 87.4% of total sales in the third quarter of 2003 compared with 84.5% in
2002.
Products that exhibited the greatest change in sales dollars for the
quarter ended September 27, 2003 versus the comparable prior year period,
including sales at closed stores were: lumber and plywood (up 4.8%), insulation
(down 15.0%), kitchen & bath hardlines (down 10.5%), and specialty wood products
(down 13.0%).
Gross Profit
- ------------
Gross profit decreased to $27.8 million in the third quarter of 2003 from
$32.7 million in the third quarter of 2002, a $4.8 million or 14.8% decrease.
Gross profit as a percentage of sales declined to 19.3% in the third quarter
compared to a gross profit percentage of 21.3% in the third quarter of 2002. The
Company believes that the decrease in gross profit dollars resulted primarily
from the reduction in sales as discussed above, recent significant cost
increases in commodity prices that causes a compression of margins and increased
costs of internally manufactured products. The Company estimates commodity
lumber costs in the third quarter 2003 rose approximately 43% over the third
quarter of 2002.
22
Selling, General and Administrative Expense ("SG&A")
- ----------------------------------------------------
SG&A expense decreased approximately $5.7 million to $26.4 million in the
third quarter of 2003 from $32.1 million in the third quarter of 2002. As a
percentage of sales, SG&A decreased to 18.3% of net sales in the third quarter
of 2003 compared with 21.0% of net sales in the third quarter of 2002. The
decrease as a percentage of sales primarily is due to the reductions in overhead
costs that were completed late in the second quarter to re-align overhead with
the reduction in the number of 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.
The Company experienced a $4.5 million reduction in salaries, wages and benefits
over the third quarter of 2002, a 16.7% decrease.
Depreciation
- ------------
Depreciation was relatively flat at approximately $1.1 million from the
third quarter of 2003 to the third quarter 2002.
Provision for Doubtful Accounts
- -------------------------------
The provision for doubtful accounts was approximately $0.3 million in the
third quarter of 2003 compared to approximately $0.2 million in the third
quarter of 2002. 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
or third quarter of 2003. However the Company did incur severance costs of
approximately $0.1 million related to severance benefits paid certain field
personnel in a plan to re-align overhead costs with the number of remaining
locations. In addition, the Company incurred approximately $0.5 million in
property and other carrying costs that primarily include insurance, maintenance
/ repair and lease commitments. All charges related to the 2003 store closing
costs are anticipated to be paid in subsequent periods. During the third quarter
of 2002, the Company closed and consolidated one distribution center and one
component plant into nearby locations. These store closing costs were $0.6
million. In addition to these costs, the Company also incurred charges related
to the write down of inventory and receivables to their net realizable value.
All charges related to the 2002 store closing costs were paid in subsequent
periods. The following is a summary of the activity in the reserve balances from
June 28, 2003 through September 27, 2003 and June 29, 2002 through September 28,
2002 (in thousands):
23
Employee Property and
Separation Other Carrying
Costs Costs Total
----- ----- -----
Accrual balance at June 28, 2003 $ 344 $ 72 $ 416
3rd Qtr Store closing and other costs 94 476 570
3rd Qtr Related payments (94) (510) (604)
----- ----- -----
Accrual balance at September 27, 2003 $ 344 $ 38 $ 382
Accrual balance at June 29, 2002 $ 0 $ 72 $ 72
3rd Qtr Store closing and other costs 267 356 623
3rd Qtr Related payments (267) (396) (663)
----- ----- -----
Accrual balance at September 28, 2002 $ 0 $ 32 $ 32
Other Operating Income
- ----------------------
Other operating income for the third quarter of 2003 was income of $0.8
million compared with income of $0.5 million for the third quarter 2002. Other
operating income primarily includes the sales or disposals of property, plant
and equipment, service charges assessed customers on past due accounts
receivables, and casualty gains/losses.
Interest Expense
- ----------------
In the third quarter of 2003, interest expense increased to $3.5 million
from $2.8 million during the third quarter of 2002. The Company's weighted
average rate of interest on all debt increased to 9.6% for the third quarter of
2003 compared to 7.5% for the same period last year. Interest expense was
affected by an increase in the effective interest rate from the exchange of
$42.8 million of the Company's senior subordinated notes for senior secured
notes. The Company's average debt levels decreased by 36.1% from third quarter
2002 to third 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
- ------------
Due to the determination in the second quarter of 2003 that there was
substantial doubt related to the Company's ability to continue as a going
concern, the Company recorded a $29.6 million charge to establish a valuation
allowance for its net deferred tax assets including net operating loss
carryforwards during the second quarter of 2003.
The Company will maintain a full valuation allowance for its net deferred
tax assets and net operating loss carryforwards until sufficient positive
evidence exists to support reversal of the valuation allowance. Until such time,
except for state and local provisions, the Company will have no reported tax
provision, net of valuation allowance adjustments.
The Company's effective tax rate from continuing operations for the
three-month period ended September 28, 2002 was 38.5% which includes franchise
taxes and non-deductible items of $0.1 million.
On July 22, 2003, 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 carryforwards.
24
Nine Months Ended September 27, 2003 Compared
with the Nine Months Ended September 28, 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 3 to the condensed
consolidated financial statements.)
Net Sales
- ---------
Net sales for the first nine months of 2003 decreased $76.4 million, or
17.0%, to $372.7 million from $449.1 million in the first nine months of 2002.
The sales decrease primarily was attributable to a $61.1 million decline in
sales from closed locations (excluding discontinued operations) and a 5.1%
decline in same store sales. For the nine months of 2003, housing starts in the
Company's primary markets, the Northeast, Midwest, and South, were down 1.7%, up
5.1% and up 3.0%, from housing starts in the first nine months of 2002,
respectively. Total sales to building professionals represented 93.3% of total
sales, compared to 93.1% for the same period last year.
The Company believes that sales decreases for the nine months ended
September 27, 2003 primarily resulted from a decline in the number of locations,
late season snow storms in the first quarter, uncertain economic conditions and
internal reorganizations which affected the productivity of the Company's sales
force in the first and second quarter of 2003.
Products that exhibited the greatest change in sales dollars for the nine
months ended September 27, 2003 versus the comparable prior year period were:
lumber and plywood (down 17.0%), doors and windows (down 11.1%), trusses and
engineered wood products (down 9.1%) and roofing (down 19.6%).
Gross Profit
- ------------
Gross profit decreased $20.4 million to $74.1 million or 19.9% of net sales
for 2003 compared with $94.5 million or 21.1% of net sales for 2002. The Company
believes that the decrease in gross profit dollars ($9.3 million) resulted
primarily from the reduction in sales as discussed above, the third quarter's
significant cost increases in commodity prices that caused a compression of
margins, as well as increased cost of sales of internally manufactured products.
25
During the first nine months 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 35.4% of total Company sales, up from
33.8% last year, however, gross margin percentage for these products decreased
to 21.2% from 21.6% last year.
Selling, General, and Administrative Expense
- --------------------------------------------
SG&A expense decreased $7.7 million or 8.4% to $84.7 million in 2003
compared with $92.5 million in 2002. As a percentage of net sales, SG&A
increased to 22.7% in the first nine months of 2003, compared with 20.6% of net
sales in the first nine 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 of 2003
to re-align overhead with the reduction in locations. The Company experienced a
$10.9 million reduction in salaries, wages and benefits over the first nine
months of 2002, a 13.9% decrease. As a percentage of sales, however, salaries,
wages and benefits increased by 70 basis points. 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.
Depreciation
- ------------
Depreciation costs decreased approximately $0.3 million to $3.0 million or
0.8% of sales in the first nine months of 2003, compared with $3.3 million or
0.7% of sales in the first nine months of 2002.
Provision for Doubtful Accounts
- -------------------------------
Provision for doubtful accounts decreased to approximately $0.7 million or
0.2% of sales in the first nine months of 2003 from approximately $1.0 million
or 0.2% of sales for the first nine months of 2002.
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 nine months of 2003. The Company incurred costs of
approximately $3.4 million related to severance benefits paid to senior
executives and an additional 57 headquarters and 49 field personnel. In addition
the Company has incurred $2.2 million in property and other carrying costs that
primarily include insurance, maintenance / repair and lease commitments. All
charges related to the 2003 store closing costs are anticipated to be paid in
subsequent periods. During the first nine months of 2002 the Company closed,
consolidated, or sold eight distribution centers and two component plants. These
store closing costs were $2.4 million. All charges related to the 2002 store
closing costs were paid in subsequent periods. The following is a summary of the
activity in the reserve balances from December 28, 2002 through September 27,
2003 and from December 29, 2001 through September 28, 2002 (in thousands):
26
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 2,643 1,066 3,709
2nd Qtr Related payments (2,446) (1,039) (3,485)
----- ----- -----
Accrual balance at June 28, 2003 $ 344 $ 72 $ 416
3rd Qtr store closing and other costs 94 476 570
3rd Qtr related payments (94) (510) (604)
----- ----- -----
Accrual balance at September 27, 2003 $ 344 $ 38 $ 382
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
3rd Qtr store closing and other costs 267 356 623
3rd Qtr related payments (267) (396) (663)
----- ----- -----
Accrual balance at September 28, 2002 $ 0 $ 32 $ 32
Other Operating Income
- ----------------------
Other operating income decreased to approximately $2.0 million in the first
nine months of 2003, compared with $2.7 million in the first nine months of
2002. Other operating income primarily includes gains on the early retirement of
debt, gains and losses related to the sale or disposal of property, plant and
equipment, service charges assessed customers on past due accounts receivable,
and casualty losses. During the first nine months of 2002, the Company sold
seven facilities for a net gain of $1.3 million, while in the first nine months
of 2003 the Company recorded a $0.9 million gain on the early retirement of debt
partially offset by write-down of certain plant property and equipment to their
net realizable value.
Interest Expense
- ----------------
Interest expense increased to $10.7 million in the first nine months of
2003 from $8.5 million in the first nine 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 10.3%
during this period, compared to 8.0% for the comparable period last year.
Interest expense was affected by the increase in the effective interest rate
from the exchange of $42.8 million of the Company's senior subordinated notes
for senior secured notes. See additional discussion at Note 4 to the
consolidated financial statements and in Liquidity and Capital Resources
included in Managements Discussion and Analysis. In 2003, the Company's average
debt levels decreased by 41.1% from the first nine months of 2002. This decrease
in outstanding debt primarily is due to the use of proceeds from the Lanoga Sale
to pay down the revolving credit facility.
27
Income Taxes
- ------------
Due to the determination in the second quarter of 2003 that there was
substantial doubt related to the Company's ability to continue as a going
concern, the Company recorded a $29.6 million charge to establish a valuation
allowance for its net deferred tax assets including net operating loss
carryforwards during the second quarter of 2003
The Company will maintain a full valuation allowance for its net deferred
tax assets and net operating loss carryforwards until sufficient positive
evidence exists to support reversal of the valuation allowance. Until such time,
except for state and local provisions, the Company will have no reported tax
provision, net of valuation allowance adjustments.
Income tax benefit from continuing operations was $3.8 million for the
first nine months of 2002, which included franchise taxes and non-deductible
items of $0.3 million. The Company's effective tax rate from continuing
operations for the nine-month period ended September 28, 2002 was 36.2%.
On July 22, 2003, 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 carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
The Company's consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. However, due to our liquidity
condition and continuing operating losses, there is substantial doubt about the
Company's ability to continue as a going concern. 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.
The Company does not expect to generate sufficient cash from operations to
pay the principal amount of the Company's 11 5/8% Senior Subordinated Notes due
2003 when they mature on December 15, 2003, and, therefore, the Company has
offered to exchange the Senior Subordinated Note for either (i) cash and 10%
Convertible Notes due 2007 or (ii) 10% Convertible Notes due 2007. If an
insufficient number of holders of Senior Subordinated Notes participate in the
exchange offer, it is likely the Company will not be able to pay the principal
amount and the accrued and unpaid interest due on their maturity date. In that
event, an event of default will have taken place under the indenture governing
the Senior Subordinated Notes, the Company's senior credit facility and the
indenture governing the Company's Senior Secured Notes due 2005, allowing the
Company's senior lenders to immediately accelerate the maturity of the
indebtedness under the Company's senior credit facility and the Company's Senior
Secured Notes and the Senior Subordinated Notes. If that were to occur, unless
the Company were able to obtain additional financing to repay the senior credit
facility, the Senior Secured Notes and the outstanding Senior Subordinated Notes
(which the Company believes is highly unlikely), the Company may be forced to
petition for relief under the U.S. Bankruptcy Code, or the Company's creditors
may file an involuntary petition against the Company.
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 Item 2: Management's Discussion and Analysis.
The Company's primary need for capital resources is to make scheduled debt and
interest payments, finance inventory, accounts receivable, improvements to
plant, property and equipment, and insurance reserves.
During the first nine months of 2003, net cash used in operating activities
was $29.0 million compared with net cash provided by operating activities of
$11.2 for the first nine months of 2002. The increase in cash used in operating
activities primarily is due to net losses for the period and increases in
accounts receivable and prepaids and other assets from December 28, 2002 to
September 27, 2003.
The Company's accounts receivable balance from continuing operations of
$57.5 million was relatively flat compared to the balance at September 28, 2002,
and increased $1.4 million from December 28, 2002. For the first nine months of
2003, accounts receivable turnover decreased slightly to 9.1 from 9.2 during the
same period last year.
28
The Company's inventory balance of $49.0 million at September 27, 2003
decreased $11.0 million or 18.3% when compared to the balance at September 28,
2002 and decreased $1.2 million from December 28, 2002. Inventory turnover
improved to 7.4 for the nine months ended September 27, 2003 from 7.0 for the
nine months ended September 28, 2002. Accounts payable and accrued liabilities
of $34.5 million and 12.9 million, respectively, at September 27, 2003 increased
approximately $5.3 million and $7.4 million from September 28, 2002 and December
28, 2002, respectively.
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 nine months of 2003, the Company spent approximately
$2.3 million on capital expenditures, compared to $0.9 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 September 27, 2003 the Company operated 52 sales and distribution
centers and 11 component manufacturing facilities compared with 90 sales and
distribution facilities and 22 component manufacturing facilities at September
28, 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
September 28, 2003, there were no material commitments to third parties for
future capital expenditures.
The Company maintained excess availability under the Merrill Credit
Agreement throughout the first nine 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 September 27, 2003, the Company had outstanding borrowings under the
Merrill Credit Agreement of $60.7 million, the minimum availability requirement
was $15.0 million and the unused availability was $27.1 million. Therefore, as
of September 27, 2003 after all reserves and minimums, the Company had $12.1
million of excess availability.
29
Senior Subordinated Debt
- ------------------------
On February 26, 2003, the Company completed its offer to exchange 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.
Concurrent with the closing of the exchange offer, the indenture governing
the 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%.
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. (See Note 10 for discussion regarding the
Company's current offer to exchange the remaining $21.1 million of these notes).
Revolving Credit Facility
- -------------------------
Concurrent with the exchange offer, which closed on February 26, 2003, the
Company completed a refinancing of its Fleet Credit Agreement and term notes
existing under the prior Amended and Restated Credit Agreement dated December
13, 2000 and entered into the new Merrill Credit Agreement dated February 26,
2003. The total commitment was reduced from the original $251.7 million ($200
million revolving line of credit and $51.7 million of term notes) to $125
million ($100 million revolving line of credit and $25 million of term notes).
The commitment on the revolving line was reduced again on May 31, 2003 to $85
million. The Merrill Credit Agreement expires on February 26, 2007, and the term
notes are now due February 26, 2007.
As of December 28, 2002 there was $31.5 million outstanding under the Fleet
Credit Agreement of which $20.3 million was revolving credit and $11.2 million
was term notes. As a result of amendments during the third quarter of fiscal
2003, the spread range on prime rate borrowings under the new agreement
temporarily increased to 1.5% to 2.25% over prime for revolving loans and 2.25%
to 3.0% over prime under the term notes. These rate ranges are up by 25 basis
points from rates negotiated in the original agreement on February 26, 2003.The
spread for LIBOR based borrowing increased by the same 25 basis points, now
ranging from 2.75% to 3.5% over LIBOR for revolving loans and 3.5% to 4.25% over
LIBOR for term notes. These increases were the result of a default caused by the
Company's failure to meet required minimum EBITDA levels.
30
On August 15, 2003, the lenders agreed to waive the default of the
Company's 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 30, 2003, less any prepayment from the proceeds of the sale of
certain real estate. Also, it increased interest rate spreads by 25 basis points
and amended the original credit agreement to state that without prior written
consent of required lenders, in no event will the proceeds of the revolving
loans be used to consummate (i) any redemption or purchase of Senior
Subordinated Notes due 2003 or (ii) any voluntary redemption or purchase of
Senior Secured Notes due 2005. In connection with such waiver and amendments,
the Company paid to the lenders a fee of $100,000.
As of September 27, 2003, the Company met the minimum EBITDA levels and the
interest rate ranges from the original agreement entered into on February 26,
2003 have been restored, effective September 28, 2003. However, an event of
default could increase each of the Company's prime and LIBOR margins by 25 basis
points. The spread over the prime or LIBOR rates is determined based upon the
Company's Fixed Charge Coverage Ratio, as defined under the Merrill Credit
Agreement. The Company's base rate, 6.00% at September 27, 2003, 5.00% at
December 28, 2002 and 5.50% at September 28, 2002, included an interest spread
over prime of 2.00%, 0.75% and 0.75%, respectively. The Company's LIBOR
borrowing rate, 4.37% at September 27, 2003, 4.13% at December 28, 2002 and
4.57% at September 28, 2002, included an interest spread over LIBOR of 3.25%,
2.75% and 2.75%, respectively. The Company's weighted average interest rates on
revolver loans were 6.57% and 6.11% for the nine months ended September 27, 2003
and September 28, 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. For the remaining
term of the Merrill Credit Agreement, minimum availability is required to be $15
million.
Under the Merrill Credit Agreement, a commitment fee of .375% to .5% is
payable on the unused revolving credit amount. Ranges of commitment fees are
determined based upon the aforementioned Fixed Charge Coverage Ratio, as defined
under the Credit Agreement. As of December 28, 2002 and September 28, 2003, the
Company was in compliance with all of its then existing covenants.
On August 27, 2003 the Merrill Credit Agreement was amended (Fifth
Amendment) whereby the lenders agreed to (i) remove the Availability Block
Adjustment Date and Availability Block Table, as defined, resulting in a fixed
availability block, (ii) extend the due date to September 30, 2003 for the
delivery of Deposit Account Control Agreements with respect to certain deposit
accounts maintained by the Company, (iii) reduce each prime rate margin and
LIBOR margin percentage by 25 basis points provided that EBITDA for the third
quarter ended September 27, 2003 and each month thereafter, is equal to or
greater than the amount set forth in the amendment. After any such decrease, the
first time that EBITDA for any subsequent period set forth is less than the
amount set forth for each such period, effective immediately each prime rate
margin and LIBOR margin percentage will increase by 25 basis points.
31
As of September 27, 2003 there was $60.7 million outstanding under the
Merrill Credit Agreement of which $36.7 million was revolving credit and $23.9
million was term notes. The Company's unused availability was $27.1 million and,
under the Merrill Agreement as amended, minimum availability is required to be
$15.0 million. Therefore, the Company held $12.1 million of excess availability
as of September 27, 2003 after all reserves and minimums were deducted.
On September 30, 2003 the Merrill Credit Agreement was amended (Sixth
Amendment) whereby the lenders agreed (i) that the Company submitted
substantially all (as determined by the Agent) of the Deposit Account Control
Agreements and (ii) when the Company made the required $1,500,000 Term Loan
Prepayment on September 30, 2003, the net cash proceeds of the sale of certain
real estate would then be applied to the Senior Secured Note, as previously
defined, with the remaining amounts applied to the Revolving Loan.
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 5 to the
financial statements and discussion in Item 2). On July 22, 2003, 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
carry-forwards.
32
WICKES INC. AND SUBSIDIARIES
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 September 27, 2003. There have been no significant changes in
the internal controls or other factors that could significantly affect internal
controls subsequent to September 27, 2003, except as follows:
As more fully described in Note 11 to the condensed consolidated financial
statements, subsequent to the issuance of its financial statements for the year
ended December 28, 2002, the Company determined that certain interest, employee
benefits and manufacturing related expenses related to a discontinued operation
incurred during fiscal years 2002, 2001, and 2000 were not properly classified.
It should be noted that these misclassifications relate to a one-time,
non-recurring transaction. The Company recently implemented additional internal
controls and procedures designed to better monitor unique transactions on an as
needed basis and the Company is considering the establishment of a disclosure
committee to further improve its internal control processes and procedures
around financial reporting and public disclosures.
33
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
--------------------------------
Exhibits
(a) 4.1(n) Waiver and Fifth Amendment to Credit Agreement, dated April 4,
2003 among Registrant and Merrill Lynch Capital as Lender and Agent
for each Lender.
4.1(o) Waiver and Sixth Amendment to Credit Agreement, dated April 4,
2003 among Registrant and Merrill Lynch Capital as Lender and Agent
for each Lender.
10.7 Agreement dated October 1, 2003 with Imagine Investments, Inc.
31.1 Certification of Chief Executive Officer Pursuant to Section 302
of the Sarbanes-Oxley act of 2002
31.2 Certification of Chief Financial Officer Pursuant to Section 302
of the Sarbanes-Oxley act of 2002
32 Certifications of Chief Executive Officer and Chief Financial
Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
A Current Report on Form 8-K dated August 15, 2003 was filed under
Item 7 disclosing that the Company issued a press release announcing
its 2003 second quarter earnings. A copy of the press release,
including unaudited financial information released as a part thereof.
A Current Report on Form 8-K dated August 22, 2003 was filed under
Item 5 disclosing that the Company received a letter from the NASDAQ
stating that, based on the Company's Quarterly Report on Form 10-Q for
the quarter ended June 28, 2003, the Company does not comply with
Marketplace Rule 4310 (c) (2) (B). Therefore the Staff of the NASDAQ
is reviewing the Company's eligibility for continued listing on the
NASDAQ SmallCap market.
A Current Report on Form 8-K dated September 12, 2003 was filed under
Item 5 disclosing that the Company issued a press release announcing
the delisting of its common stock from the NASDAQ SmallCap Market at
the opening of business on September 23, 2003 due to its failure to
comply with the minimum requirements for continued listing.
34
A Current Report on Form 8-K dated October 3, 2003 was filed under
Item 5 disclosing that the Company issued a press release announcing
that Imagine Investments, Inc. has agreed to provide $10.5 million of
financing to enable the Company to make a cash tender offer for its
Senior Subordinated Notes due December 15, 2003.
35
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/ James J. O'Grady
--------------------
James J. O'Grady
President and Chief Executive Officer
By: /s/ James A. Hopwood
--------------------
James A. Hopwood
Senior Vice President and
Chief Financial Officer
Date: November 17, 2003
36
Exhibit 31.1
SECTION 302 CERTIFICATION
I, James J. O'Grady, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Wickes Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused 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 presented 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 fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably 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 functions):
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; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
Date: November 17, 2003 Signature: /s/ James J. O'Grady
------------------ --------------------
President and
Chief Executive Officer
37
Exhibit 31.2
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 report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused 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 presented 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 fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably 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 functions):
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; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
Date: November 17, 2003 Signature: /s/ James A. Hopwood
----------------- --------------------
Senior Vice President and
Chief Financial Officer
38
Exhibit 32
CERTIFICATIONS PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C. SECTION 1350)
In connection with the Quarterly Report of Wickes Inc, a Delaware corporation
(the "Company"), on Form 10-Q for the quarter ended September 27, 2003, as filed
with the Securities and Exchange Commission (the "Report"), James J. O'Grady ,
President and Chief Executive Officer of the Company and James A. Hopwood,
Senior Vice President and Chief Financial Officer of the Company, respectively,
do each hereby certify, pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002
(18 U.S.C. ss. 1350), that to his knowledge:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.
/s/ James J. O'Grady
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James J. O'Grady
President and Chief Executive Officer
November 17, 2003
/s/ James A. Hopwood
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James A. Hopwood
Senior Vice President and Chief Financial Officer
November 17, 2003