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United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the Fiscal Year Ended December 27, 1997
or
[ ] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Transition Period From ______ To ______
Commission File No. 0-22468
WICKES INC.
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(Exact name of registrant as specified in its charter)
Delaware 36-3554758
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(State of Incorporation) (IRS Employer Identification No.)
706 North Deerpath Drive, Vernon Hills, Illinois 60061
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(Address of principal executive offices)
(847) 367-3400
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(Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12 (b) of the Act:
None
Securities Registered Pursuant to Section 12 (g) of the Act:
Common Stock, par value of $.01 per share
-----------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this form 10-K or any amendment to this
form 10-K. [ ]
As of February 28, 1998, the Registrant had 7,682,666 shares of Common Stock,
par value $.01 per share, and 499,768 shares of Class B Non-Voting Common Stock,
par value $.01 per share, outstanding, and the aggregate market value of
outstanding voting stock (based on the last sale price on the NASDAQ National
Market System of Common Stock on that date) held by nonaffiliates was
approximately $16,500,000 (includes the market value of all such stock other
than shares beneficially owned by 10% stockholders, executive officers and
directors).
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Portions of the Registrant's Proxy Statement in connection with its Annual
Meeting of Shareholders tentatively scheduled to be held on May 18, 1998, are
incorporated by reference into Part III hereof, as more specifically described
herein.
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TABLE OF CONTENTS
Page No.
PART I
Item 1. Business 3
Item 2. Properties 19
Item 3. Legal Proceedings 20
Item 4. Submission of Matters To a Vote
of Security Holders 21
PART II
Item 5. Market For Registrant's Common Equity
and Related Stockholder Matters 22
Item 6. Selected Financial Data 22
Item 7. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 26
Item 7A. Quantitative and Qualitative Disclosures
about Market Risk 40
Item 8. Financial Statements and Supplementary Data 40
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 40
PART III
Item 10. Directors and Executive Officers
of the Registrant 41
Item 11. Executive Compensation 41
Item 12. Security Ownership of Certain
Beneficial Owners and Management 41
Item 13. Certain Relationships and Related Transactions 41
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K 42
SIGNATURES 43
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PART I
Item 1. BUSINESS
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Wickes Inc. ("Wickes" or the "Company") is a major supplier and distributor of
building materials. The Company sells its products and services primarily to
residential and commercial building professionals, repair and remodeling ("R&R")
contractors and, to a lesser extent, project do-it-yourselfers ("DIYers")
involved in major home improvement projects. At March 24, 1998, the Company
operated 101 sales and distribution facilities in 23 states in the Midwest,
Northeast, and South and 10 component manufacturing facilities that produce and
distribute pre-hung door units, roof and floor trusses, and framed wall panels.
Background
- ----------
The Company was formed in 1987 as a Delaware corporation named "Wickes Lumber
Company." In June 1997, the Company changed its corporate name to "Wickes Inc."
The Company continues to conduct its primary operations under the "Wickes
Lumber" name.
In April 1988 the Company completed the acquisition (the "1988 Acquisition")
of operations that had commenced in 1952. These operations consisted of 223
building centers and 10 component manufacturing facilities. From 1988 through
1993, the Company reduced the number of its building centers to 124 and the
number of its component manufacturing facilities to six.
On October 22, 1993, the Company completed a plan of recapitalization pursuant
to which the Company retired all outstanding indebtedness incurred in connection
with the 1988 Acquisition, restructured its previously existing classes of
capital stock, and completed the initial public offering of 2,800,000 shares of
its common stock.
In 1994 and 1995, the Company acquired 15 building centers and five component
manufacturing facilities. For further information, see Note 4 of Notes to
Consolidated Financial Statements included elsewhere herein.
During the fourth quarter of 1995 the Company committed to and began
implementing a plan (the "1995 Plan") to reduce the number of under-performing
building centers, the corresponding overhead to support these building centers,
and to strengthen its capital structure. Pursuant to the 1995 Plan, the Company
consolidated or closed 21 building centers and three component manufacturing
facilities. The 1995 Plan also included the modification and extension of the
Company's bank revolving credit agreement, which was completed on March 12,
1996, and the private sale of 2 million newly-issued shares of the Company's
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Common Stock for $10 million, which occurred on June 20, 1996. In connection
with the 1995 Plan, and other unusual items, the Company recorded a $17.8
million charge in the fourth quarter of 1995. See Note 3 of Notes to
Consolidated Financial Statements included elsewhere herein.
In the fourth quarter of 1997, the Company announced and began to implement a
plan to streamline operations, to focus on the Company's core professional
builder business, and to eliminate overhead costs and programs not directly
supporting this core business. For further information, see "Business
Strategy."
On February 23, 1998, the Company announced that, in addition to the actions
begun in the fourth quarter of 1997, it had closed eight additional building
centers and two component manufacturing facilities, planned to sell two building
centers located in Eastern Iowa, and had implemented further headquarters
staffing and expense reductions. The Company expects to record a $5.4 million
restructuring charge in the first quarter of 1998 with respect to these
activities (the "1998 Plan"). For further information see "Business Strategy"
and Note 14 of Notes to Consolidated Financial Statements included elsewhere
herein.
Industry Overview
- -----------------
According to the Home Improvement Research Institute ("HIRI"), sales of home
improvement products (defined as lumber, building materials, hardware, paint,
plumbing, electrical, tools, floor coverings, glass, wallpaper, and lawn and
garden products) associated with the maintenance and repair of residential
housing and new home construction were estimated to be $212.7 billion in 1997.
Despite some consolidation over the last ten years, particularly in metropolitan
areas, the building material industry remains highly fragmented. The Company
believes that no building material supplier accounted for more than 12% of the
total market in 1997.
In general, building material suppliers concentrate their marketing efforts
either on building professionals or consumers. Professional-oriented building
material suppliers, such as the Company, tend to focus on single-family
residential contractors, repair and remodeling ("R&R") contractors, project
DIYers and to some extent commercial contractors. These suppliers compete
principally on the basis of service, product assortment, price, scheduled job-
site delivery and trade credit availability. In contrast, consumer-oriented
building material retailers target the mass consumer market, where competition
is based principally on price, merchandising, location and advertising.
Consumer-oriented warehouse and home center retailers typically do not offer as
wide a range of services, such as specialist advice, trade credit, manufactured
components, and scheduled job-site delivery, as do professional-oriented
building material suppliers.
Industry sales are linked to a significant degree to the level of activity in
the residential building industry, which tends to be cyclical and seasonal. New
residential construction is determined largely by household formations, interest
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rates, housing affordability, availability of mortgage financing, regional
demographics, consumer confidence, job growth, and general economic conditions.
According to the U.S. Bureau of the Census, U.S. housing starts totaled 1.29
million in 1993, 1.46 million in 1994, 1.35 million in 1995, and 1.48 million in
1996. In 1997, housing starts were relatively unchanged at 1.47 million. There
was a decrease, however, in 1997 housing starts in the Company's primary
geographical market, the Midwest, of approximately 5.5%. The Company's two
other geographical markets, the Northeast and South, experienced increases in
1997 housing starts of 3.5% and 1.3%, respectively. Nationally, single family
housing starts, which generate the majority of the Company's sales to building
professionals, experienced a decrease of 2.4% from 1.16 million starts in 1996
to 1.13 million starts in 1997. The Blue Chip Economic Indicators Consensus
Forecast dated March 10, 1998, projects 1998 housing starts to be 1.48 million,
relatively unchanged from 1997 and 1996.
Repair and remodeling expenditures tend to be less cyclical than new
residential construction. These expenditures are generally undertaken with less
regard to economic conditions, but both repair and remodeling projects
(including projects undertaken by DIYers) tend to increase with increasing sales
of both existing and newly-constructed residences. The HIRI estimates the sales
of home improvement products to repair and remodeling professionals represented
$40.7 billion, or approximately 19% of total 1997 sales of the building material
supply industry, while direct sales to DIYers amounted to $101.7 billion.
Business Strategy
- -----------------
General
-------
The Company's mission is to be the premier provider of building materials and
specialized services to the professional segments of the building and
construction industry.
In order to better serve its customers and markets, the Company has organized
and streamlined its operations into three channels of distribution: Major
Markets, Conventional Markets, and Wickes Direct/Wickes International. These
channels are supported by the Company's Manufacturing operations. In Major
Markets the Company serves the national, regional, and large local builder in
larger markets with specialized services and a total solutions approach. In
Conventional Markets the Company provides the smaller building professional in
less-populous markets with tailored products and services. Wickes Direct/Wickes
International provides another distribution alternative to supply the needs of
its commercial customers. The Company's Manufacturing operations produce value-
added products (such as pre-hung interior and exterior doors, framed wall
panels, and roof and floor trusses) for the Company's customers in both Major
Markets and Conventional Markets and for its Wickes Direct customers.
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Major Markets
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The Company operates in 20 Major Markets, which are served by 31 sales and
distribution facilities. These facilities are designed, stocked and staffed to
meet the needs of the particular markets in which they are located and vary from
facilities similar to the Company's Conventional Market building centers to
facilities that only stock specific types of products, for instance lumber and
wood related products. In addition, two of these facilities are Wickes
Contractor Supply ("WCS") facilities which stock a wide variety of building
materials (no lumber or hardlines) designed to meet the demands of home builder
and R&R customers for roofing, drywall, insulation and related accessories.
Major Markets are also served by seven of the Company's manufacturing facilities
and two other manufacturing facilities operated by third parties exclusively or
primarily for the Company.
These Major Markets are generally large metropolitan areas with favorable
growth projections and are characterized by the active presence of national,
regional and large local builders. The Company believes that the building
supply industry in these Major Markets remains heavily fragmented.
Beginning in 1997, the Company initiated Major Markets programs in four
markets: Pensacola, Denver, Louisville, and Raleigh/Charlotte. Other programs
are being commenced in five other Major Markets. The Company plans additional
Major Markets Programs as opportunities and resources permit.
The Company's Major Markets programs seek to provide the large builder with
specialized programs and services that integrate various methods of
distribution. The Company provides these programs and services on a "virtual
store" basis; that is, products and services may be provided from multiple
facilities serving the Major Market on a coordinated basis with centralized
customer contact and support. The Company devotes significant efforts to
redefine and improve the customer's and its own supply chain management,
material flow and logistics.
The Company's Manufacturing operations constitute an integral part of the
Major Markets programs. These operations provide the Company with the
capability to provide its customers with custom engineered, value-added products
such as manufactured framing component systems. For instance, in two Major
Markets the Company has begun its "Frame a Home in a Day" concept. This
program, which allows a large builder to complete the entire process of framing
and sheathing an average two-story residence in as little as one day, rather
than the substantially longer period involved in traditional stick framing
methods, is now being expanded to two other Major Markets.
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The Company's operations in Major Markets contributed approximately 35.0% of
the Company's sales in 1997, compared to 32.2% in 1996, and the Company
anticipates that this percentage will continue to increase in 1998. For the
four Major Market programs initiated in 1997, total 1997 sales increased 34.0%
over 1996 total sales.
Conventional Markets
--------------------
In addition to Major Markets, the Company operates 70 building centers in
smaller, or Conventional Markets. The Company's Conventional Markets are
generally less populous and the majority of customers are generally the smaller
single-family residential contractor, the R&R contractor and the project DIYer.
The Company believes that competition in the building supply industry is more
limited in Conventional Markets compared to Major Markets but that there is
generally less opportunity for growth within a given Conventional Market.
Since the beginning of 1997, the Company has completed remerchandising and
remarketing programs ("Resets") in 13 building centers located in Conventional
Markets. The Company has also completed Resets in six sales and distribution
facilities in Major Markets. These programs include upgrading of the showroom
layout and product presentation, expansion of product assortment (typically
adding a significant number of stock keeping units, or "SKUs") with the view
towards achieving category dominance in the market, and increasing service
offerings such as installed sales, tool rental, specialized delivery services
and additional in-store sales specialists. The Company is currently evaluating
the results of these Resets and if favorable the Company will expand the program
to additional Conventional Markets as resources permit. The Company's
Manufacturing operations also provide significant support for the Company's
Conventional Market sales activities, particularly through the manufacture of
pre-hung interior and exterior doors.
Wickes Direct/Wickes International
----------------------------------
In an effort to increase its business to non-traditional customers and out-of-
market trade areas, the Company formed the Commercial Sales Division in 1993 and
added a national builder accounts sales team in 1996. In late 1996, these two
groups were combined to form "Wickes Direct," the Company's wholesale
distribution channel, which is also operated internationally as "Wickes
International." Through Wickes Direct, the Company focuses on large volume
orders from both commercial and residential builders, much of which is to be
shipped directly from the manufacturer to the customer's job-site. In addition
to lumber and building materials, Wickes Direct provides estimating, logistics,
and material delivery services to large customers anywhere in the world, all
accomplished without the need for a physical facility close to the customer.
Wickes Direct also provides leads and sales support to the Company's sales and
distribution facilities.
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Manufacturing Operations
------------------------
The Company owns and operates ten component manufacturing facilities
(including seven located in Major Markets) that supply the Company's customers
with higher-margin, value-added products such as pre-hung interior and exterior
doors, framed wall panels, and roof and floor trusses. These operations
supplied approximately 48% of the pre-hung interior doors, 65% of the metal
exterior doors, 38% of the roof and floor truss systems and 56% of the wall
panel systems sold by the Company in 1997.
The Company also has agreements with two third party manufacturers to provide
manufactured housing components in two Major Markets exclusively or primarily
for the Company.
The Company believes that these pre-assembled products improve customer
service and provide an attractive alternative to job-site construction as labor
costs rise. As resources permit, the Company also plans to expand its
manufacturing facilities to supply a greater number of its sales and
distribution facilities with these value added products.
Recent Restructurings and Operational Efforts
---------------------------------------------
Beginning with the formulation and adoption of the 1995 Plan in late 1995, the
Company has continuously reviewed its assets and operations in the effort to
eliminate under-performing facilities and the corresponding overhead, to reduce
other costs, and to focus its efforts on its target customers.
At the time the 1995 Plan was adopted, the Company operated 126 building
centers and 12 component manufacturing facilities. From that time through the
end of 1997, the Company closed or consolidated 21 building centers and
consolidated three component manufacturing facilities. During this time, the
Company also devoted substantial efforts to control costs. Beginning in early
1997, the Company made a determination to increase expenditures related to sales
efforts and to initiate the Major Market programs and Conventional Market
remerchandising programs discussed above. See "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations."
In the fourth quarter of 1997, the Company announced and began to implement a
plan to streamline operations further and to focus on the Company's core
professional builder business. The principal feature of this plan was to
eliminate costs and programs not directly related to the Company's core
operations. In furtherance of this plan, the Company has, among other things,
ceased its involvement in utilities marketing and internet operations (other
than those directly related to its building supply business) through the
transfer of these programs to an affiliate. Also, the Company transferred its
mortgage and construction lending program to an unrelated financial institution
that intends to expand this program on a no-cost basis to the Company. In
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addition, in the fourth quarter of 1997, the Company wrote-off its remaining
investment in Russian logging and sawmill operations. For the twelve months
ended December 27, 1997, the Company's results of operations included more than
$1.5 million in selling, general and administrative ("SG&A") costs related to
these discontinued non-core programs and $1.5 million in losses on its
investment in the Russian operations.
Also in the fourth quarter of 1997, the Company completed a further review of
its administrative structure and reorganized certain functions for increased
efficiency, resulting in an estimated $2.0 million in future annual SG&A
savings.
On February 23, 1998, the Company announced that, in addition to the actions
begun in the fourth quarter of 1997, it had closed eight additional building
centers and two component manufacturing facilities, planned to sell two building
centers located in Eastern Iowa, and had implemented further headquarters
staffing and expense reductions. The Company anticipates that the headquarters
reductions, together with those implemented in the fourth quarter of 1997, will
result in overall reduction in administrative staffing levels of 25% and
approximately $6.0 million of future annual SG&A savings. The Company expects
to record a $5.4 million restructuring charge in the first quarter of 1998 with
respect to the 1998 Plan.
Markets
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The Company operates in 20 Major Markets, which are served by 31 sales and
distribution facilities and seven manufacturing facilities. The Company
also operates 70 building centers in less populous areas, or Conventional
Markets. For a further discussion of Major Markets and Conventional Markets see
"Business Strategy".
The following table sets forth the distribution of the Company's sales and
distribution facilities located in Conventional and Major Markets by size of the
local market:
Number of Sales and
Owner-Occupied Distribution Facilities
Households in Conventional Major
Thirty Mile Radius Markets Markets
------------------ ------------ -------
Under 50,000 21 0
50,000-100,000 19 7
100,000-250,000 25 9
250,000-500,000 3 10
500,000 and over 2 5
-- --
Total 70 31
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Geographical Distribution
-------------------------
The Company's 101 sales and distribution facilities are located in 23 states
in the Midwest, Northeast and South. The Company believes that its geographic
diversity generally lessens the impact of economic downturns and adverse weather
conditions in any one of the Company's geographic markets. The following table
sets forth certain information with respect to the locations of the Company's
sales and distribution facilities as of March 24, 1998:
Midwest Northeast South
------- --------- -----
Number of Number of Number of
Sales and Sales and Sales and
Distribution Distribution Distribution
State Facilities State Facilities State Facilities
- ----- ------------ ----- ------------ ----- ------------
Michigan 30 Pennsylvania 6 Alabama 3
Wisconsin 14 New York 3 Kentucky 3
Indiana 11 Maine 2 Texas 2
Ohio 5 New Hampshire 2 Florida 2
Illinois 4 Connecticut 1 Mississippi 2
Colorado 3 New Jersey 1 North Carolina 2
-- Massachusetts 1 Georgia 1
Maryland 1 Louisiana 1
-- Tennessee 1
--
Total 67 Total 17 Total 17
== == ==
Facilities Opened, Closed and Consolidated
------------------------------------------
During 1997, the Company opened six new sales and distribution facilities.
Five new facilities were in Major Markets: Aurora, Illinois; Colorado Springs
and Denver, Colorado; Denton, North Carolina (Raleigh/Charlotte area); and a
second facility in Pensacola, Florida. The new Niles, Michigan building center
is in a Conventional market. A new component manufacturing facility was also
opened in Denver, Colorado. During 1997, the Company also closed or
consolidated three sales and distribution facilities and two component
manufacturing facilities, all but one sales and distribution facility were
located in Conventional Markets.
During the first two months of 1998, as part of the 1998 Plan, the Company
closed or consolidated eight building centers and two component manufacturing
facilities, all in Conventional Markets. For a further description of the 1998
Plan see "Business Strategy" and Note 14 of Notes to Consolidated Financial
Statements included elsewhere herein.
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The following table reconciles the number of sales and distribution facilities
and component manufacturing facilities operated by the Company at December 31,
1994, December 30, 1995, December 28, 1996, December 27, 1997, and March 24,
1998.
Sales and Component
Distribution Manufacturing
Facilities Facilities
------------ ------------
As of December 31, 1994 130 10
Acquisitions 5 2
Expansion 2 --
Closings (10) --
Consolidations (17) (1)
---- ----
As of December 30, 1995 110 11
Expansion -- 1
Consolidations (2) --
---- ----
As of December 28, 1996 108 12
Expansion 6 1
Closings (2) --
Consolidations (1) (2)
---- ----
As of December 27, 1997 111 11
Expansion -- 1
Sold (2) --
Closings (7) (2)
Consolidations (1) --
---- ----
As of March 24, 1998 101 10
Customers
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The Company has a broad base of customers, with no single customer accounting
for more than 1.0% of net sales in 1997. In 1997, 87% (the same percent as in
1996) of the Company's sales were on trade credit, with the remaining 13% as
cash and credit card transactions.
Home Builders
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The Company's primary customers are single-family home builders. In 1997, all
home builder customers accounted for 57% of the Company's sales, the same as in
1996. The majority of the Company's sales to these customers are of high-volume
commodity items, such as lumber, building materials, and manufactured housing
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components. The Company will continue its intense focus on this customer
segment, offering new products and developing additional services to meet their
needs.
Commercial / Multi-family Contractors
--------------------------------------
Wickes Direct and Wickes International concentrate on sales to commercial
contractors (primarily those engaged in constructing motels, restaurants,
nursing homes and extended stay facilities, and similar projects) and multi-
family residential contractors. Sales to these customers are made on a direct
ship basis as well as through the Company's sales and distribution facilities.
In 1997, sales to these customers accounted for more than 18% of the Company's
sales, compared with 16% of the Company's sales in 1996. As part of the 1998
Plan, the Company has integrated the Wickes Direct domestic program more closely
with its other operations.
Repair & Remodelers
-------------------
In 1997, R&R customers accounted for approximately 12% of the Company's sales,
the same as in 1996. The R&R segment consists of a broad spectrum of customers,
from part-time handymen to large, sophisticated business enterprises. Some
contractors are involved exclusively with single product application, such as
roofing, siding, or insulation, while some specialize in remodeling jobs, such
as kitchen or bathroom remodeling or the construction of decks, garages, or full
room additions. The Company offers the product and project expertise, special
order capability, design assistance, and credit terms to serve the widely
varying needs of this diverse market.
DIYers
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Sales to DIYers (both project and convenience) represented about 13% of the
Company's sales in 1997, compared with 15% in 1996. The percentage of sales to
DIYers varies widely from one sales and distribution facility to another, based
primarily on the degree of local competition from warehouse and home center
retailers. The Company's sales and distribution facilities do not have the
large showrooms or broad product assortments of the major warehouse or home
center retailers. For small purchases, the showrooms serve as a convenience
rather than a destination store. Consequently, the Company's focus on consumer
business is toward project DIYers -- customers who are involved in major
projects such as building decks or storage buildings or remodeling kitchens or
baths.
Sales and Marketing
- -------------------
The Company employs a number of marketing initiatives designed to increase
sales and to support the Company's goal of being the dominant force in the sale
of lumber and other building materials to building professionals in each of its
markets.
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Building Professional
---------------------
The Company seeks to establish long-term relationships with its professional
customers by providing a higher level of customer assistance and services than
are generally available at independently-owned building centers or large
warehouse and home center retailers.
The Company provides a wide range of customer services to building
professionals, including expert assistance, technical support, trade credit,
scheduled job-site delivery, manufacture of customized components, installed
sales, specialized equipment, logistical and material flow design and support,
and other special services. Building professionals generally select building
material suppliers based on price, job-site delivery, quality and breadth of
product lines, reliability of inventory levels, and the availability of credit.
For a description of the programs designed for and the emphasis being applied
to professional customers in Major Markets, see " Business Strategy - Major
Markets."
In both Conventional and Major Markets, the Company's primary link to the
building professional market is its experienced sales staff. The Company's
approximately 400 outside sales representatives ("OSR's") are commissioned sales
persons who work with professional customers on an on-going basis at the
contractors' job sites and offices. Typically, a sale to a contractor is made
through a competitive bid prepared by the OSR from plans made available by the
contractor. From these plans, the OSR or sales support associate prepares and
provides to the contractor a bid and a complete list, or "take-off," of the
materials required to complete the project. Preparation of a take-off requires
significant time and effort by trained and experienced sales representatives and
support associates. The Company has equipped most of its sales and distribution
facilities with a computerized system which significantly reduces the time
required to prepare take-offs. In addition, this system instantly recalculates
changes and automatically includes add-on products needed to complete the
project, which generally improves productivity, sales and margins. The ability
of the sales representative to provide prompt and accurate take-offs, to arrange
timely deliveries, and to provide additional products or services as necessary
is an important element of the Company's marketing strategy and distinguishes
the Company from many of its competitors.
The Company currently employs 148 specialty salespeople in its sales and
distribution facilities who provide expert advice to customers in project
design, product selection and applications. A staff of 60 trained R&R sales
specialists offer special services to R&R contractors equivalent to that
accorded home builders. In many of its sales and distribution facilities, the
Company maintains separate R&R offices. The Company currently has kitchen and
bath departments in most of its sales and distribution facilities and has a
staff of 80 kitchen and bath specialists. The Company also employs 8
specialists in other departments.
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The Company extends credit, generally due on the 10th day of the month
following the sale, to qualified and approved contractors. Approximately 87% of
the Company's sales during 1997 were on credit, with the remaining 13%
consisting of cash or credit card sales, including approximately 1% of sales on
the Company's private label credit card. Overall credit policy is established
at the corporate level, with each sales and distribution facility manager and a
district credit manager responsible for the administration and collection of
accounts. The accounts are generally not collateralized, except to the extent
the Company is able to take advantage of the favorable materialmen's lien laws
of most states applicable in the case of delinquent accounts. The Company's
credit practices have resulted in a bad debt expense of .2% of total credit
sales in 1997, compared with .1% in 1996, .8% in 1995 and .3% in both 1994 and
1993. Much of the increase in 1995 was attributable to the conversion of
accounts at the Gerrity Lumber facilities, acquired in 1994, to the Company's
credit practices.
The Company owns and leases a fleet of 770 delivery vehicles as of February
28, 1998, to provide job-site deliveries of building materials scheduled to
coordinate with project progress, including 68 specialized delivery trucks
equipped for roof-top or second story delivery, 90 specialized millwork delivery
vehicles, and 28 vehicles designed for installation of blown insulation. The
Company will continue to add these specialized vehicles to other markets where
there is sufficient demand for such services.
Over the past several years, the Company has installed and will continue to
increase its base of computer-aided design hardware and software. These systems
include design and take-off software for kitchens, decks, outbuildings,
additions and houses. With these tools, sales representatives and specialists
are able to provide customers with professional-quality plans more efficiently.
In 1997, the Company rolled out an equipment rental program at 25 of its sales
and distribution facilities. This program rents specialized, professional
quality tools and equipment to customers in need of equipment for unique or
short term projects.
The Company's internet site on the world wide web provides information about
Wickes' services and products, facilitates doing business with customers, allows
customers to look up their own transactional information, and features extensive
links to suppliers and other industry references. The home page can be found at
the internet address: http://www.wickes.com/.
The Company advertises in trade journals and produces specialized direct mail
promotional materials designed to attract specific target customers. The
Company does some select newspaper advertising, which may include circulars and
run-of-press advertisements. It also has numerous product displays in its sales
and distribution facilities to highlight special products and services.
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To increase customer loyalty and strengthen customer relationships, the
Company, in many cases with vendor support, sponsors or participates in numerous
special marketing activities, such as trade show events, informational product
seminars, various outings, and professional builder trips.
DIYers
------
Most sales and distribution facilities, primarily building centers located in
Conventional Markets, also pursue sales to project DIYers through their staff of
specially-trained inside sales representatives and specialists. These
representatives provide professional advice to consumers for home improvement
projects and assist these customers in designing specific projects with
sophisticated computer design software. The sales representatives can also
provide a comprehensive list of materials and detailed drawings to assist
customers in completing their projects. The Company believes that project
DIYers are attracted to its sales and distribution facilities by this high level
of service.
The Company's showrooms generally feature product presentations such as
kitchen and bath and door and window displays. The showrooms are regularly re-
merchandised to reflect product trends, service improvements and market
requirements. During 1997, the Company made significant investments to improve
the appearance and merchandising of 19 of its sales and distribution facilities'
showrooms. For the first six Resets, completed prior to the end of the third
quarter of 1997, the average sales increase over 1996 has exceeded 15%. While
the Company has no current Resets in progress, additional showroom improvements
are scheduled for 1998 and future years.
While the Company's product offerings in hardlines are generally more limited
than its consumer-oriented competitors, the Company stocks a larger selection of
commodity products and offers a special order program for custom or specialty
products. The Company emphasizes project packages, which include all materials
and detailed instructions for the assembly of the larger projects frequently
undertaken by project DIYers.
Products
- --------
The Company stocks a wide variety of building products, totaling approximately
63,000 SKUs Company-wide, to provide its customers with the quality products
needed to build, remodel and repair residential and commercial properties. Each
of the Company's sales and distribution facilities tailors its product mix to
meet the demands of its local market. Approximately 5,500 SKUs is typically
stocked in each sales and distribution facility.
15
16
The Company separates its products into four groups: Commodity Wood Products
- -- lumber, plywood, treated lumber, sheathing, wood siding and specialty lumber;
Building Products -- roofing, vinyl siding, doors, windows, mouldings, drywall
and insulation; Hardlines -- hardware products, paint, tools, kitchen and
bathroom cabinets, plumbing products, electrical products, light fixtures and
floor coverings; and Manufactured Housing Components -- roof and floor trusses,
and interior and exterior wall panels. Commodity Wood Products, Building
Products, Hardlines, and Manufactured Housing Components represented 45%, 35%,
11% and 9% of the Company's sales for 1997 and 45%, 36%, 12% and 7%,
respectively, of sales for 1996.
In addition to stock items, the Company also fills special orders, either from
its own manufacturing facilities or through outside suppliers. The Company
believes that these special order services are extremely important to its
customers, particularly the building professional. In 1997, approximately 31%
of the Company's sales were of special order items, compared with 30% in 1996.
Manufacturing
- -------------
The Company owns and operates ten component manufacturing facilities that
supply the Company's sales and distribution facilities with certain higher-
margin, value-added products such as pre-hung doors, framed wall panels, and
roof and floor trusses. These manufacturing facilities enable the Company to
serve the needs of its professional customers for such quality, custom-made
products. In 1997 the door manufacturing operations supply approximately 48% of
the pre-hung interior doors and 65% of the metal exterior doors sold by the
Company. The truss manufacturing operations supplied approximately 38% of the
total roof and floor truss systems and 56% of the total wall panel systems
sold by the Company in 1997. The Company believes that these pre-assembled
products improve customer service and provide an attractive alternative to job-
site construction as labor costs rise. The Company has also entered into
arrangements with two manufacturers that exclusively or primarily serve the
Company and as resources permit the Company plans to expand its manufacturing
facilities to take advantage of these increased opportunities and to supply a
greater number of its sales and distribution facilities with these products.
Suppliers and Purchasing
- ------------------------
The Company purchases its products from numerous vendors. The great majority
of commodity items are purchased directly from manufacturers, while the
remaining products are purchased from a combination of manufacturers,
wholesalers and other intermediaries. No single vendor accounted for 5% of the
Company's purchases in 1997, and the Company is not dependent upon any single
vendor for any material product. The Company believes that alternative sources
of supply are readily available for substantially all of the products it offers.
16
17
The great majority of the Company's commodity purchases are made on the basis
of individual purchase orders rather than supply contracts. In certain product
lines, though, the Company has negotiated some advantageous volume pricing
agreements for a portion of the product line's purchases. Because approximately
32% of the Company's average inventory consists of commodity wood products and
manufactured housing components, which are subject to price volatility, the
Company attempts to match its inventory levels to short-term demand in order to
minimize its exposure to price fluctuations. The Company has developed an
effective coordinated purchasing program that allows it to minimize costs
through volume purchases, and the Company believes that it has greater
purchasing power than many of its smaller, local independent competitors. The
Company seeks to develop close relationships with its suppliers in order to
obtain favorable pricing and service arrangements.
The Company's computerized inventory tracking and forecasting system, as part
of its inventory replenishment system, is designed to track and maintain
appropriate levels of products at each sales and distribution facility. These
systems have increased the Company's operating efficiencies by providing an
automated inventory replenishment system.
The Company has active rail sidings at 47 of its sales and distribution
facilities enabling suppliers to ship products purchased by the Company directly
to these facilities by rail. The Company also utilizes two distribution centers
owned by third parties, located in Chicago, Illinois and Allentown,
Pennsylvania, through which approximately 4% of the Company's wood products
inventory is delivered.
Seasonality
- -----------
Historically, the Company's first quarter and, occasionally, its fourth
quarter are adversely affected by weather patterns in the Midwest and Northeast,
which result in seasonal decreases in levels of construction activity in these
areas. The extent of such decreases in activity is a function of the severity
of winter conditions. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Competition
- -----------
The building material industry is highly competitive. Due to the fragmented
nature of this industry, the Company's competitive environment varies by
location and by customer segment. Reduced levels of construction activity have,
in the past, resulted in intense price competition among building material
suppliers that has at times adversely affected the Company's gross margins.
17
18
Within the professional market, the Company competes primarily with local
independent lumber yards and regional and local building material chains.
Building professionals generally select building material suppliers based on
price, job-site delivery, quality and breadth of product lines, reliability of
inventory levels, and the availability of credit. The Company believes that it
competes favorably on each of these bases. The Company believes that it has a
significant competitive advantage in rural markets and small communities, where
it competes primarily with local independent lumber yards, regional building
material chains, and, to a lesser extent, with national building center chains
and warehouse and home center retailers, which generally locate their units in
more densely populated areas. In Major Markets the Company believes that its
total package of services and ability to serve the large builder provides it
with a competitive advantage.
Environmental and Product Liability Matters
- -------------------------------------------
Many of the sales and distribution facilities presently and formerly operated
by the Company contained underground petroleum storage tanks. Other than tanks
at one acquired facility, recently installed and in compliance with modern
standards, all such tanks known to the Company located on facilities owned or
operated by the Company have been filled, removed, or are scheduled to be
removed in accordance with applicable environmental laws in effect at the time.
As a result of reviews made in connection with the sale or possible sale of
certain facilities, the Company has found petroleum contamination of soil and
ground water on several of these sites and has taken remedial actions with
respect thereto. In addition, it is possible that similar contamination may
exist on properties no longer owned or operated by the Company the remediation
of which the Company could, under certain circumstances, be held responsible.
Since 1988, the Company has incurred approximately $2.0 million of costs, net of
insurance and regulatory recoveries, with respect to the filling or removing of
underground storage tanks and related investigatory and remedial actions, and
the Company has reserved $0.5 million towards the cost of these and other
environmental and product liability matters. Sales of excess properties over
the past three years have resulted in only minimal findings.
Although the Company has not expended material amounts in the past nine years
with respect to the foregoing, and expenditures in the most recent three years
have been significantly reduced, there can be no assurances that these matters
will not give rise to additional compliance and other costs that could have a
material adverse effect on the Company.
For information concerning certain litigation concerning products containing
asbestos, see "Item 3. Legal Proceedings."
18
19
Employees
- ---------
As of February 28, 1998, the Company had approximately 3,766 employees, of
whom 3,270 were employed on a full-time basis. The Company believes that it has
maintained favorable relations with its employees. None of the Company's
employees are covered by a collective bargaining agreement.
Trademarks and Patents
- ----------------------
The Company has no material patents, trademarks, licenses, franchises, or
concessions other than the name "Wickes Lumber" and the "Flying W" trademark.
Item 2. PROPERTIES.
- --------------------
The Company's 101 sales and distribution facilities are located in 23 states,
with 67 in the Midwest, 17 in the Northeast and 17 in the South. See "Item 1.
Business - Markets." The Company believes that its facilities generally are in
good condition and will meet the Company's needs in the foreseeable future.
The Company's Conventional Market building centers generally consist of a
showroom averaging 9,600 square feet and covered storage averaging 38,500 square
feet. The Company's sales and distribution facilities located in Major Markets
tend to be more specialized. Included among these facilities are two WCS
facilities, which stock little or no commodity wood products and therefore have
no traditional lumber storage yard, as well as facilities that stock primarily
commodity wood products and therefore have no showroom, as well as facilities
similar to the Company's Conventional Market building centers. The Company
upgraded or Reset 19 of its showrooms in 1997. The Company's sales and
distribution facilities are situated on properties ranging from 1.0 to 28.2
acres and averaging 9.4 acres. The Company also operates ten component
manufacturing facilities which have an average of 40,000 square feet under roof
on 7.1 acres.
The Company owns 84 of its sales and distribution facilities and 82 of the
sites on which such facilities are located. The remaining 17 sales and
distribution facilities and 19 sites are leased. As of December 27, 1997, the
Company also held for sale the assets of nine closed facilities and one other
property with an aggregate book value of $3.5 million. In addition to its sales
and distribution facilities, the Company operates ten component manufacturing
plants. Four of these plants are located on sales and distribution facility
sites. Of the remaining six plants, four are on owned sites and two are on
leased properties.
The Company also owns or leases a large fleet of trucks and other vehicles,
including vehicles specialized for the delivery of certain of the Company's
19
20
products. As of February 28, 1998, the fleet included approximately 129 heavy
duty trucks, 68 of which provide roof-top or second story delivery, 523 medium
duty trucks, 516 light duty trucks and automobiles, 571 forklifts, 90
specialized millwork delivery vehicles, and 28 vehicles equipped to install
blown insulation.
The Company leases its corporate headquarters, a portion of which is
subleased, located at 706 North Deerpath Drive in Vernon Hills, Illinois.
Item 3. LEGAL PROCEEDINGS.
- ---------------------------
On November 3, 1995, a complaint styled Morris Wolfson v. J. Steven Wilson,
------------------------------------
Kenneth M. Kirschner, Albert Ernest, Jr., Claudia B. Slacik, Jon F. Hanson,
- --------------------------------------------------------------------------------
Robert E. Mulcahy, Frederick H. Schultz, Wickes Lumber Company and Riverside
- --------------------------------------------------------------------------------
Group, Inc. was filed in the Court of Chancery of the State of Delaware in and
- ------------
for New Castle County (C.A. No. 14678). As amended, this complaint alleges,
among other things, that the sale by the Company in 1996 of 2 million newly-
issued shares of the Company's Common Stock to Riverside Group, Inc., the
Company's largest stockholder, was unfair and constituted a waste of assets and
that the Company's directors in connection with the transaction breached their
fiduciary duties. The amended complaint, among other things, seeks on behalf of
a purported class of the Company's shareholders equitable relief or to obtain
damages with respect to, the transaction. See "Item 1. Business - Background"
and Note 9 of Notes to Consolidated Financial Statements included elsewhere
herein. There was no activity in this suit in 1997.
The Company is one of many defendants in approximately 100 actions, each of
which seeks unspecified damages, brought since 1993 in various Michigan state
courts against manufacturers and building material retailers by individuals who
claim to have suffered injuries from products containing asbestos. Each of the
plaintiffs in these actions is represented by one of two law firms. The Company
is aggressively defending these actions and does not believe that these actions
will have a material adverse effect on the Company.
The Company is involved in various other legal proceedings which are
incidental to the conduct of its business. The Company does not believe that
any of these proceedings will have a material adverse effect on the Company.
The Company's assessment of the matters described in this Item 3 and other
forward-looking statements ("Forward-Looking Statements") in this report are
made pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995 and are inherently subject to uncertainty. The outcome of
the matters described in this Item 3 may differ from the Company's assessment of
these matters as a result of a number of factors including but not limited to:
matters unknown to the Company at the present time, development of losses
20
21
materially different from the Company's experience, the Company's ability to
prevail against its insurers with respect to coverage issues to date, the
financial ability of those insurers and other persons from whom the Company may
be entitled to indemnity, and the unpredictability of matters in litigation.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
- -------------------------------------------------------------
None.
21
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PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
- ----------------------------------------------------------
STOCKHOLDER MATTERS.
--------------------
The Company's Common Stock is authorized for trading on the NASDAQ National
Market System under the trading symbol "WIKS." As of February 28, 1998, there
were 7,682,666 shares outstanding held by approximately 153 shareholders of
record. There was also outstanding 499,768 shares of Class B Non-Voting Common
Stock, which are not publicly traded.
The following table sets forth for the periods indicated the high and low last
sale prices for the Company's Common Stock as reported on the NASDAQ National
Market System. Prices do not include retail markups, markdowns or commissions.
Three Months Ended High Low
------------------ ---- ---
Fiscal 1997
-----------
March 29 $6.50 $3.125
June 28 6.25 3.00
September 27 6.25 4.00
December 27 5.125 3.00
Fiscal 1996
-----------
March 30 $6.625 $4.00
June 29 5.50 4.75
September 28 5.25 4.00
December 28 4.875 3.375
The Company has not declared or paid any dividends on Common Stock in the past
three years and has no present intention to pay cash dividends on Common Stock
in the foreseeable future. The Company's revolving credit facility prohibits
cash dividends on Common Stock, and the trust indenture related to the Company's
11-5/8% senior subordinated notes restricts cash dividends on Common Stock. See
"Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Item 6. SELECTED FINANCIAL DATA.
- ---------------------------------
The following table presents selected financial data derived from the audited
consolidated financial statements of the Company for each of the five years in
the period ended December 27, 1997. The following selected financial data
should be read in conjunction with "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Consolidated
Financial Statements and Notes thereto contained elsewhere in this report.
22
23
WICKES INC. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except ratios and per share data)
Dec. 27, Dec. 28, Dec. 30, Dec. 31, Dec. 25,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Income Statement Data:
Net sales $884,082 $848,535 $972,612 $986,872 $846,842
Gross profit 203,026 189,463 220,812 233,831 206,558
Selling, general and administrative expense 185,385 162,329 194,629 194,586 174,889
Depreciation, goodwill and trademark amortization 4,863 5,367 5,882 4,543 5,782
Provision for doubtful accounts 1,707 1,067 6,482 2,457 1,942
Other operating income 10,689 6,796 5,831 6,772 4,575
Income from operations before restructuring
and unusual items 21,760 27,496 19,650 39,017 28,520
Restructuring and unusual items (1) (559) 745 17,798 2,000 53
Income from operations 22,319 26,751 1,852 37,017 28,467
Interest expense (2) 21,417 21,750 24,351 21,663 20,298
Equity in loss of affiliated company 1,516 3,183 3,543 -- --
(Loss) income before income taxes, and
extraordinary gain (614) 1,818 (26,042) 15,354 8,169
Income taxes 1,099 1,010 1,353 1,660 1,227
Deferred tax (benefit)/expense(3) (153) 300 (11,796) (14,360) --
(Loss) income before extraordinary gain (1,560) 508 (15,599) 28,054 6,942
Extraordinary gain (4) -- -- -- -- 1,241
Net (loss) income (1,560) 508 (15,599) 28,054 8,183
Dividends applicable to redeemable
preferred stock -- -- -- -- (872)
(Loss) income applicable to common shares (1,560) 508 (15,599) 28,054 7,311
Ratio of earnings to fixed charges (5) 0.98 1.07 -- 1.63 1.37
Interest coverage (6) 1.36 1.61 0.35 2.09 2.08
Adjusted interest coverage (7) 1.33 1.65 1.15 2.19 2.09
Per Share Data: (8)
Basic and diluted (loss) earnings per common
share (per pro forma share in 1993) (9) ($0.19) $0.07 ($2.54) $4.57 $1.34
Weighted average common shares outstanding
(pro forma in 1993) (9) 8,188,420 7,221,082 6,150,619 6,154,770 6,099,985
Operating and Other Data:
EBITDA (10) $27,182 $32,118 $ 7,734 $41,560 $34,249
Adjusted EBITDA (11) 26,623 32,863 25,532 43,560 34,302
Cash interest expense (12) 19,791 19,969 22,266 19,882 16,435
Depreciation and amortization 4,863 5,367 5,882 4,543 5,782
Deferred financing cost amortization 1,401 1,781 2,085 1,781 1,840
Capital expenditures 7,758 2,893 7,538 9,760 4,289
Same store sales growth (13) 4.7% (6.4%) (3.8%) 14.1% 14.3%
Sales and distribution facilities open
at end of period 111 108 110 130 124
Net cash (used in) provided by operating activities (24,554) 18,710 15,862 1,331 (21,269)
Net cash provided by (used in) investing activities 6,040 2,410 (10,277) (41,777) 5,323
Net cash provided by (used in) financing activities 16,660 (19,274) (7,535) 42,480 15,944
Balance Sheet data (at period end):
Working capital $134,459 $116,771 $139,622 $163,511 $104,089
Total assets 283,352 272,842 302,515 319,573 248,015
Total long-term debt, less current maturities 193,061 176,376 205,221 211,139 167,883
Total stockholders' equity 24,001 25,499 15,129 30,146 1,818
23
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Notes to Selected Consolidated Financial Data
(1) In 1997, the Company recorded a $0.6 million credit as a result of
finalizing the 1995 Restructuring Plan. In 1995, the Company recorded a
$17.8 million charge relating to a plan to reduce the number of operating
building centers, the corresponding overhead to support those centers
identified, strengthen its capital structure, and other unusual items. The
1995 restructuring plan was adjusted in 1996 by an additional charge of
$0.7 million. In 1994, the Company recorded a $2.0 million charge primarily
as a result of its headquarters cost reduction plan.
(2) Interest expense includes cash interest expense, amortization of
deferred financing costs and accretion of note discount (See note 12
below).
(3) The deferred tax benefit recorded in 1994 includes a $21.0 million
reduction of the Company's valuation allowance for deferred tax assets.
(4) During the year ended December 25, 1993, the Company completed a
recapitalization plan (the "Recapitalization Plan"). As a result of the
Recapitalization Plan, the early extinguishment of debt, the retirement of
supplemental retirement benefits and the expensing of unamortized 1988
Acquisition costs, the Company recorded an extraordinary gain of $1.2
million, net of income taxes of $0.2 million.
(5) For purposes of computing this ratio, earnings consist of income
(loss) before income taxes, extraordinary gain and fixed charges. Fixed
charges consist of cash interest expense, amortization of deferred
financing costs, and a portion of operating lease rental expense that is
representative of the interest factor attributable to interest expense.
Such earnings were insufficient to cover fixed charges by $26.0 million for
the year ended December 30, 1995.
(6) For purposes of computing this ratio, earnings consists of EBITDA (as
defined in Note 10 below), which is divided by cash interest expense (as
defined in Note 12 below).
(7) For purposes of computing this ratio, earnings consists of Adjusted
EBITDA (as defined in Note 11 below), which is divided by cash interest
expense (as defined in Note 12 below).
(8) All per share data reflect a 21.73-for-1 stock split declared October
1993, immediately prior to the consummation of the Recapitalization Plan.
(9) For 1993, earnings per share is based upon the pro forma 6,099,985
weighted average number of common shares outstanding giving effect to the
Recapitalization Plan. 1993 historical earnings per common share were
$2.55, based on 2,871,091 weighted average common shares outstanding. Both
historical and weighted average common shares have been adjusted per SFAS
128 requirements.
24
25
(10) EBITDA represents income (loss) before income taxes, extraordinary
gain, equity in loss of affiliated company, interest expense, depreciation
and amortization. EBITDA is not presented herein as an alternative measure
of operating results but rather to provide additional information related
to debt service capability, and does not represent cash flow from
operations, as defined by GAAP.
(11) Adjusted EBITDA represents EBITDA (as defined in Note 10 above)
adjusted to exclude restructuring and unusual items.
(12) Cash interest expense consists of interest expense less amortization
of deferred financing costs and accretion of subordinated note discount.
The following table details interest expense, cash interest expense, and
interest paid for each of the five years ended December 27, 1997.
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
Interest expense $21,417 $21,750 $24,351 $21,663 $20,298
Less:
Amortization of deferred
financing costs 1,401 1,781 2,085 1,781 1,840
Accretion of note discount -- -- -- -- 2,023
------- ------- ------- ------- -------
Cash interest expense 20,016 19,969 22,266 19,882 16,435
Decrease (increase) in
accrued interest (225) 403 557 (1,105) 8,863
------- ------- ------- ------- -------
Interest paid $19,791 $20,372 $22,823 $18,777 $25,298
------- ------- ------- ------- -------
13) For 1997, same store data reflects average sales from 107 sales and
distribution facilities and other facilities that were operated by the
company throughout 1997 and 1996. In 1996, the company includes 101
building centers and other facilities in same store data averages. Same
store data for 1995 reflects average sales from 101 building centers and
other facilities. The sixteen lumber centers closed on December 29, 1995
were excluded from the 1995 same store figures, and two centers that were
consolidated with another Wickes center, in early 1995, were included in
1995 same store results. For 1994 same store data reflects average sales
from the 122 building centers and other facilities that were operated by
the Company throughout 1994 and 1993. 1993 data reflects 124 building
centers and other facilities operated throughout the period 1992 through
1993.
25
26
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- -------------------------------------------------------------------------
RESULTS OF OPERATIONS.
- ----------------------
General
- -------
The following table sets forth, for the periods indicated, the percentage
relationship to net sales of certain expense and income items. The table and
subsequent discussion should be read in conjunction with the financial
statements and notes thereto appearing elsewhere herein.
Years Ended
-----------
Dec. 27, Dec. 28, Dec. 30,
1997 1996 1995
-------- -------- --------
Net sales 100.0% 100.0% 100.0%
Gross profit 23.0 22.3 22.7
Selling, general and administrative
expense 21.0 19.1 20.0
Depreciation, goodwill and trademark
amortization .6 .6 .6
Provision for doubtful accounts .2 .1 .7
Restructuring and unusual items (.1) .1 1.8
Other operating income (1.2) (.8) (.6)
Income from operations 2.5 3.2 .2
The Company's operations, as well as those of the building material industry
generally, have reflected substantial fluctuations from period to period as a
consequence of various factors, including levels of construction activity,
general regional and local economic conditions, weather, prices of commodity
wood products, interest rates and the availability of credit, all of which are
cyclical in nature. The Company anticipates that fluctuations from period to
period will continue in the future. Because a substantial percentage of the
Company's sales are attributable to building professionals, certain of these
factors may have a more significant impact on the Company than on companies more
heavily focused on consumers.
The Company's first quarter and, occasionally, its fourth quarter are
adversely affected by weather patterns in the Midwest and Northeast, which
result in seasonal decreases in levels of construction activity in these areas.
The extent of such decreases in activity is a function of the severity of winter
conditions. While the Company experienced relatively mild weather during the
first quarter of 1995, record setting snow falls throughout the Midwest and
Northeast in January of 1996, adversely affected construction activity in the
first quarter of 1996. Weather conditions in 1997 were relatively normal
throughout the year.
26
27
The following table contains selected unaudited quarterly financial data for
the years ended December 27, 1997, December 28, 1996, and December 30, 1995.
QUARTERLY FINANCIAL DATA
------------------------
Three Months Ended
(in millions, except per share data and percentages)
Basic and Diluted
Net Sales as a Net Earnings/
% of Annual Gross Net Income (Loss) per
Net Sales Net Sales Profit /(Loss) Common Share
--------- --------- --------- --------- ------------
1997
March 29 $159.3 18.0% $36.9 $(5.2) $(.63)
June 28 237.3 26.9 54.3 1.3 .16
September 27 266.3 30.1 60.3 1.8 .22
December 27 221.1 25.0 51.5 0.5 .06
1996
March 30 $152.5 18.0% $34.9 $(6.2) $(1.00)
June 29 228.8 27.0 51.2 1.9 .29
September 28 255.6 30.1 55.5 2.8 .35
December 28 211.7 24.9 47.9 2.0 .24
1995
April 1 $191.7 19.7% $45.6 $(4.6) $(.75)
July 1 272.8 28.0 63.9 2.5 .40
September 30 284.5 29.3 62.9 1.9 .31
December 30 223.6 23.0 48.4 (15.4) (2.50)
Net income/(loss) in the fourth quarter of 1995 was negatively affected by a
$17.8 million charge for restructuring and unusual items. In 1997 and 1996 the
Company recorded a benefit of $0.6 million and a charge of $0.7 million,
respectively, as restructuring and unusual items. For additional information on
the restructuring and unusual items charge see Note 3 of Notes to Consolidated
Financial Statements included elsewhere herein. In addition, in 1996 the
Company received insurance premium adjustments from a former insurance carrier
in the amount of $2.2 million and reversed an accrual of $1.5 million for other
disputed insurance premiums with this carrier. Accordingly selling, general and
administrative expenses were reduced by $1.0 million during the first three
quarters of 1996 and by $2.7 million in the fourth quarter of 1996. In the
fourth quarter of 1997, the Company recorded a gain of $4.5 million on the sale
of six pieces of real estate. In the fourth quarter of 1996, only three pieces
of real estate were sold with a net gain of $0.6 million. Gains or losses on
the sale of real estate are recorded under other operating income.
27
28
The Company has historically generated approximately 15% to 20% of its annual
revenues during the first quarter of each year, and the Company has historically
recorded a significant net loss for this quarter. As a result of these seasonal
factors, the Company's inventories and receivables reach peak levels during the
second and third quarters and are generally lower during the first and fourth
quarters, depending on sales volume and lumber prices.
This Item 7 contains statements which, to the extent that they are not
recitations of historical fact, constitute Forward Looking Statements that are
made pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995 and are inherently subject to uncertainty. A number of
important factors could cause the Company's business and financial results and
financial condition to be materially different from those stated in the Forward
Looking Statements. Those factors include but are not limited to the seasonal
and cyclical factors discussed above in this Item 7 and elsewhere in this
report, the effects of the Company's substantial leverage and competition, the
success of the Company's operational efforts, and the matters discussed in Note
8 of the Notes to Consolidated Financial Statement included elsewhere herein.
1997 Compared with 1996
- -----------------------
Net Sales
---------
Net sales for 1997 increased $35.5 million, or 4.2%, to $884.1 million from
$848.5 million in 1996. Sales for all facilities operated throughout both years
("same store") increased 4.7%. During 1997, the Company experienced a 4.1%
increase in same store sales to its primary customer segment, the professional
home builder, and a 16.4% increase in same store sales to commercial builders.
Consumer same store sales were down 6.8% for the year.
The Company believes that the following matters contributed to the 1997 sales
increase. Throughout most of 1997, the Company operated three more sales and
distribution facilities than it operated during 1996. Also, the Company
believes that showroom Resets at 19 of its sales and distribution facilities in
1997, sales training, and big builder initiatives also had a positive effect on
sales. Finally, weather conditions in the Northeast during the first quarter of
1997 were more favorable compared with the record snowfalls recorded in the
first quarter of 1996. The Company believes that inflation/deflation in lumber
prices had negligible impact on total sales.
In February 1998, the Company announced that it had closed an additional eight
facilities and intended to sell its two locations in Iowa. See "Item 1.
Business - Business Strategy". These facilities contributed an aggregate of
$46.5 million to 1997 sales.
28
29
Total housing starts in the United States were relatively unchanged in 1997
compared with 1996. Starts in the Company's primary geographical market, the
Midwest, decreased approximately 5.5%. The Company's two other geographical
markets, the Northeast and South, experienced increases in 1997 housing starts
of 3.5% and 1.3%, respectively. Nationally, single family housing starts, which
generate the majority of the Company's sales to building professionals,
experienced a decrease of 2.4%, from 1.16 million starts in 1996 to 1.13 million
starts in 1997.
Gross Profit
------------
Gross profit increased $13.6 million to 23.0% of net sales for 1997 compared
with 22.3% of net sales for 1996. The increase in gross profit is primarily due
to increases in sales, reductions in product costs, and increases in sales of
manufactured products.
The increase in gross profit as a percent of sales is primarily attributable
to reduced cost of sales as a result of a concerted effort to obtain the best
pricing available. The Company also expanded its sales of higher margin
internally manufactured products by approximately 27% from 1996 to 1997, and
experienced a reduction in costs associated with physical inventory count
adjustments. These increases were partially offset by increased percent of
sales attributable to professional builders and an increase in the percent of
sales attributable to lower margin commodity lumber products. The percent of
Company sales attributable to professional builders increased to 86.5% for 1997
compared with 84.7% in 1996. The Company anticipates that its continued focus
on the professional builder will create additional pressure on gross profit
margins.
Selling, General, and Administrative Expense
--------------------------------------------
In 1997, selling, general, and administrative expense ("SG&A") increased as a
percent of net sales to 21.0% compared with 19.1% of net sales in 1996,
primarily as a result of the Company's increase in sales and distribution
facility employees in an effort to increase sales and market share, expenses
associated with showroom remerchandisings in 19 facilities in 1997, expenses
associated with expansion of the Company's Major Market program in 1997, and
insurance recoveries recorded in 1996 with respect to prior years.
Compared to 1996, on a same store basis, the average number of employees at
the Company's sales and distribution facilities in 1997 increased by
approximately 5%. The Company also experienced an increase in salaries and
wages in its non-core operations. Both were major factors in the 1.0% increase,
as a percentage of sales, of the Company's salaries, wages and employee
benefits. The Company also experienced increases as a percentage of sales in
travel, office supplies, professional and marketing expenses.
29
30
During 1997, the Company Reset the showrooms of 13 Conventional Market
building centers and six Major Market sales and distribution facilities. Also
during 1997, the Company continued its efforts to expand its Major Markets
program. See "Item 1. Business - Business Strategy". Expenses associated with
these Resets and expansion of the Major Markets program totaled approximately
$1.8 million in 1997 and accounted for approximately $1.3 million of the SG&A
increase.
In 1996, the Company recorded $3.7 million of insurance recoveries for prior
years' casualty insurance programs. During 1997, the Company recorded $0.3
million in prior year insurance recoveries.
In October 1997, the Company announced plans to streamline operations and to
focus on core operations. In accordance with these plans, the Company
discontinued or sold non-core operations that contributed approximately $1.5
million of SG&A during 1997. In addition, the Company effected headquarters
staffing reductions beginning in October 1997, and increased the amount of these
reductions pursuant to a determination announced in February 1998. The Company
expects these headquarters reductions to result in approximately $6 million
annually in future SG&A savings. Also, the Company announced in February 1998
that it had closed eight additional underperforming building centers and planned
to sell its two Iowa building centers. For further information, including the
charge expected to be taken by the Company in the first quarter of 1998, see
"Item 1. Business - Business Strategy" and Note 14 of the Notes to Consolidated
Financial Statement included elsewhere herein.
Depreciation, Goodwill and Trademark Amortization
-------------------------------------------------
Depreciation, goodwill and trademark amortization costs decreased $0.5 million
in 1997 compared with 1996. The primary reason for this decrease is that most
of the Company-owned delivery vehicles were fully depreciated in 1997. Since
1993 the Company's new vehicles have been obtained primarily through operating
leases.
Provision for Doubtful Accounts
-------------------------------
The Company extends credit, generally due on the 10th day of the month
following the sale, to qualified and approved contractors. Provision for
doubtful accounts increased to $1.7 million or 0.2% of sales for 1997 from $1.1
million or 0.1% of sales for 1996. Historically the Company's provision for
doubtful accounts averages approximately 0.3% of sales. The results achieved in
1996 were a result of increased efforts to collect previously reserved accounts
receivable, especially those attributable to the Gerrity Lumber acquisition
centers.
30
31
Restructuring and Unusual Items
-------------------------------
During 1997 the Company completed its 1995 Plan. As a result, it recorded a
reduction in accrued costs and a benefit to restructuring and unusual charges of
approximately $2.1 million. This benefit was partially offset by a $1.5 million
restructuring charge for severance and postemployment benefits and anticipated
losses on the disposal of discontinued non-core programs and related reductions
in headquarters staffing which was announced by the Company in October of 1997.
The non-core programs affected by these reductions included the sale or closing
of the Company's mortgage lending, utilities marketing, and internet service
programs not directly related to the building supply business. See "Item 1.
Business - Business Strategy". The company expects to record a $5.4 million
restructuring charge in the first quarter of 1998 with respect to facilities
closings and staffing reductions announced in February 1998. See Note 14 of the
Notes to Consolidated Financial Statement included elsewhere herein.
Other Operating Income
----------------------
Other operating income increased to $10.7 million in 1997, compared with $6.8
million in 1996. The increase resulted from gains reported on the sale of
facilities and excess equipment of approximately $6.3 million, an increase of
$4.3 million from the $2.0 million recorded in 1996. The approximately $0.7
million gain on the sale of the Company's headquarters in Vernon Hills,
Illinois, is being amortized over a 15-year period consistent with the Company's
lease of the facility. This increase was partially offset by a $0.6 million
gain recorded in 1996 as a result of the difference between insured replacement
cost and book value as a result of a fire and storm damage at several of the
Company's building centers.
Interest Expense
----------------
Interest expense decreased to $21.4 million in 1997 from $21.8 million in
1996, as a result of a decrease in Company's overall effective borrowing rate of
21 basis points, partially offset by an increase in average outstanding debt
under the Company's revolving line of credit of $4.5 million. The increase in
average outstanding debt was due primarily to reduced net cash flow from
operating activities and increased investment in property, plant and equipment.
Equity in Loss of Affiliated Company
------------------------------------
During 1997, the Company's equity in the losses of Riverside International LLC
was $1.5 million compared with $3.2 million during 1996. The $1.5 million loss
in 1997 reduced the Company's net investment to zero. See Notes 2 and 13 of
Notes to Consolidated Financial Statements included elsewhere herein.
31
32
Provision for Income Taxes
--------------------------
In 1997 the Company recorded current income tax expense of $1.1 million
compared with $1.0 million in 1996. Current income tax provisions for both
years consist of state and local tax liabilities.
A deferred tax benefit of $0.2 million was also recorded for 1997. This
compares with a deferred tax expense of $0.3 million in 1996. The 1997 benefit
results from the loss before income taxes and the establishment of a deferred
tax asset, in accordance with FAS 109. Management has determined (based on the
Company's positive earnings growth from 1992 through 1994 and its expectations
for the future) that operating income of the Company will more likely than not
be sufficient to recognize fully these net deferred tax assets. See Note 11 of
Notes to Consolidated Financial Statements included elsewhere herein.
Net Income
----------
The Company experienced a net loss of $1.6 million in 1997 compared with net
income of $0.5 million in 1996, a change of $2.1 million. The primary
components of this change consist of an increase in SG&A expense of $23.1
million and an increase in provision for doubtful accounts of $0.6 million.
These unfavorable changes were partially offset by increases in gross profit of
$13.6 million and other operating income of $3.9 million, as well as decreases
in losses attributable to Riverside International LLC of $1.7 million,
restructuring and unusual items of $1.3 million, and depreciation, goodwill and
trademark amortization of $0.5 million.
Had the program eliminations, facilities closings and expense reductions
announced in October 1997 and February 1998 been implemented prior to the
beginning of 1997, the Company estimates that 1997 pro forma net income would
have been $6.0 million, before the $6.9 million estimated charge with respect to
these restructuring activities. See "Item 1. Business - Business Strategy" and
Note 14 of Notes to Consolidated Financial Statements included elsewhere herein.
1996 Compared with 1995
- -----------------------
Net Sales
---------
Net sales for 1996 decreased $124.1 million, or 12.8%, to $848.5 million from
$972.6 million in 1995. Same store sales decreased 6.4%. During 1996, the
Company experienced a 2.1% decrease in same store sales to its primary customer
segment, the professional home builder, and a 3.2% increase in same store sales
to commercial builders.
32
33
The reduction in the number of under-performing building centers pursuant to
the restructuring plan committed to in December of 1995 was the major cause of
the 1996 total sales decline. Pursuant to this plan, the Company closed or
consolidated 16 building centers in December 1995 and two during 1996. During
1995, these closed or consolidated building centers contributed an aggregate of
$86.7 million to total net sales.
Severe weather conditions in the first quarter of 1996, together with mild
weather in the first quarter of 1995, and a 17.5% decrease in same store sales
staff as part of the Company's efforts to better align its costs to its sales
volume, were the major factors contributing to the 1996 same store sales
decline. The decrease in same store sales occurred most heavily during the
first nine months of 1996. For this period, same store sales were down 8.8%,
while fourth quarter same store sales were up slightly from the fourth quarter
of 1995.
Total housing starts in the United States increased 9.6% in 1996, and starts
in the Company's primary markets, the Midwest and Northeast, increased
approximately 10.6% and 11.2%, respectively. Nationally, single family housing
starts, which generate the majority of the Company's sales to building
professionals, experienced an increase of 7.8% in 1996, from 1.07 million starts
in 1995 to 1.16 million starts in 1996. In 1996 inflation in lumber prices had
a negligible effect on sales.
Gross Profit
------------
Gross profit decreased $31.3 million to 22.3% of net sales for 1996 compared
with 22.7% of net sales for 1995. The primary reason for the decrease in gross
profit was the reduction in total sales as a result of the Company's program to
reduce the number of under-performing building centers.
The decline in gross profit as a percent of sales was primarily attributable
to the Company's continued emphasis on sales to the professional builder,
resulting in an increase in the portion of the Company's sales comprised of
lower margin commodity products, and to a lesser extent a program to reduce the
amount of excess and slow moving inventory. The percent of Company sales
attributable to professional builders increased to 84.7% for 1996 compared with
81.6% in 1995, and sales attributable to commodity lumber products and
manufactured housing components increased from 50.6% in 1995 to 52.7% in 1996.
The decline in gross profit as a percent of sales was partially offset by a
decrease in the cost associated with physical inventory count adjustments.
Selling, General, and Administrative Expense
--------------------------------------------
In 1996, SG&A decreased as a percent of net sales to 19.1% compared with 20.0%
of net sales in 1995. In 1996, the Company focused substantial efforts on
better aligning its SG&A expenses to sales volumes and improving the
productivity of its existing sales staff in order to improve profitability. As
33
34
a result of the Company's 1995 Plan and several cost reduction initiatives
implemented in the second half of 1995 and early 1996 the Company was able to
reduce its total SG&A expense by 16.6%, which is proportionately greater than
the 12.8% total sales decline for the year.
The Company experienced a decrease in salaries, wages and employee benefits as
a percent of sales by 0.5% from 1995 to 1996. On a same store basis, the number
of total employees at the average building center during 1996 was reduced
approximately 13% from 1995. In 1996 the Company successfully recovered $3.7
million in previous years' insurance costs. The recoveries associated with
workers compensation insurance reduced salaries, wages and employee benefits by
0.2% of sales, and the balance of the recoveries reduced property and casualty
insurance, as a percent of sales, by 0.2%. The Company also experienced
decreases from 1995 to 1996 as a percent of sales in postage, communications,
office supplies, and marketing expenses which were partially offset by increased
delivery costs.
In addition to the reductions in SG&A directly related to building center
closings, other cost reduction initiatives included a reduction in vehicles and
other equipment at continuing operations and various programs to reduce costs
associated with the corporate headquarters in Vernon Hills, Illinois.
Depreciation, Goodwill and Trademark Amortization
-------------------------------------------------
Depreciation, goodwill and trademark amortization costs decreased $0.5 million
in 1996 compared with 1995. The primary reasons for this decrease were a
program initiated in early 1996 to reduce excess vehicles and equipment and the
closing and sale of facilities in conjunction with the 1995 Plan.
Provision for Doubtful Accounts
-------------------------------
Provision for doubtful accounts decreased to $1.1 million or 0.1% of sales for
1996 from $6.5 million or 0.7% of sales for 1995. Much of this decrease was
attributable to improved credit policies at centers acquired since 1994 and a
more selective customer base. In addition, the Company significantly increased
its efforts to collect previously reserved accounts receivable. The provision
attributable to the Gerrity Lumber acquisition centers improved significantly
from 1995 to 1996.
Restructuring and Unusual Items
-------------------------------
After extensive review of the 1995 Plan, and changes in business conditions in
certain markets in which the Company operates, the Company made adjustments to
the 1995 Plan and incurred other one time costs resulting in a net $0.7 million
charge to results of operations in the fourth quarter of 1996 for restructuring
and unusual items. These adjustments included (i) the determination that three
of the centers identified in the 1995 Plan for closure will remain open,
resulting in a $1.5 million credit to restructuring expense, (ii) the extension
34
35
of the 1995 plan to include the closing (substantially completed by the end of
1996) of two building centers not previously included, resulting in a $1.3
million charge for the write down of assets and liabilities to their net
realizable value and a $0.1 million charge for severance and post-employment
benefits, (iii) a $1.1 million charge for impairment in the carrying value of
real estate held for sale at closed centers, and (iv) a $0.3 million credit with
respect to the resolution of a claim at below the reserved amount.
Other Operating Income
----------------------
Other operating income increased to $6.8 million in 1996 from $5.8 million in
1995. The increase was the result of an increase in gains reported on the sale
of closed facilities, excess vehicles and equipment of approximately $1.9
million when compared with 1995. The Company also reported a $0.6 million gain
as the result of the difference between insured replacement cost and book value
as a result of a fire and storm damage at several of the Company's building
centers. These gains were partially offset by decreases in services charges for
overdue credit accounts of approximately $0.9 million and closed center rental
income and other miscellaneous revenues of $0.7 million.
Interest Expense
----------------
Interest expense decreased to $21.8 million in 1996 from $24.4 million in
1995. This decrease was the result of a decrease in average outstanding debt
under the Company's revolving line of credit of $26.8 million partially offset
by an increase in the overall effective borrowing rate of 22 basis points. The
decrease in average outstanding debt was due primarily to cash provided by
operations, proceeds from the sale of additional common stock (See Note 9 of
Notes to Consolidated Financial Statements included elsewhere herein) and the
proceeds from the sale of excess real estate and vehicles.
Equity in Loss of Affiliated Company
------------------------------------
During 1996, the Company's equity in the losses of Riverside International LLC
was $3.2 million compared with equity in losses of $3.5 million during 1995.
See Note 2 of Notes to Consolidated Financial Statements included elsewhere
herein.
Provision for Income Taxes
--------------------------
In 1996, the Company recorded current income tax expense of $1.0 million
compared with $1.4 million in 1995. The 1996 and 1995 current income tax
provisions consist of state and local tax liabilities.
35
36
A deferred tax expense of $0.3 million was also recorded in 1996. This
expense results from temporary differences in the recognition of certain items
of revenue and expense for tax and financial reporting purposes. In 1995 a
deferred tax benefit of $11.8 million was recorded primarily due to the
recording of a deferred tax asset as a result of the operating loss experienced
during 1995, in accordance with FAS 109. See Note 11 of Notes to Consolidated
Financial Statements included elsewhere herein.
Net Income
----------
Net income was $0.5 million in 1996, compared with a net loss of $15.6 million
in 1995, an improvement of $16.1 million. The primary components of this
improvement include a decrease in SG&A expense of $32.3 million, a decrease in
restructuring and unusual items expense of $17.1 million, a decrease in
provision for doubtful accounts of $5.4 million, a decrease in interest expense
of $2.6 million, and an increase in other income of $1.0 million. These
improvements were partially offset by a decrease in gross profit of $31.3
million and an increase in the provision for income taxes of $11.8 million.
Statements of Financial Accounting Standards
- --------------------------------------------
Recently Issued Accounting Pronouncements
-----------------------------------------
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income," establishes standards for reporting and display of comprehensive
income and its components in a full set of general-purpose financial statements.
The term comprehensive income is defined as the change in a business's equity.
Comprehensive income includes net income as well as other components (revenues,
expenses, gains and losses) that under generally accepted accounting principals
are excluded from net income but effect equity. The statement is effective for
fiscal years beginning after December 15, 1997. The Company believes adoption
of the statement will not have a material effect on its financial statements.
Statement of Financial Accounting Standards No. 131, "Disclosure about
Segments of an Enterprise and Related Information," changes SFAS 14 by requiring
a new framework for segment reporting and includes the disclosure of financial
information related to each segment. The statement is effective for fiscal
years beginning after December 15, 1997. Since the Company currently operates
as one business segment, the adoption of this statement is not expected to have
an impact on the Company's financial statements.
36
37
Liquidity and Capital Resources
- -------------------------------
The Company's principal sources of working capital and liquidity are earnings
and borrowings under its revolving credit facility. The Company's primary need
for capital resources is to finance inventory and accounts receivable.
In 1997, net cash used in operating activities amounted to $24.6 million.
This compares with cash provided by operating activities of $18.7 million in
1996 and $15.9 million in 1995. The change of $43.3 million is primarily the
result of increases in accounts and notes receivable, inventory, and other
assets, as well as decreased earnings after adjustment for non-cash expenses. A
smaller decrease in accounts payable and accrued liabilities than the decrease
recorded in 1996 helped to offset a portion of the change in net cash used in
operating activities. The primary sources of cash for operating activities were
borrowings on the Company's revolving credit agreement and proceeds from the
sales of property, plant, and equipment. The Company also increased its capital
expenditures in 1997 to $7.8 million from $2.9 million in 1996.
Accounts receivable at the end of 1997 were $10.6 million, or 14.9%, higher
than at year end 1996 primarily as a result of a $5.5 million increase in
December 1997 credit sales compared with December 1996, an increase in accounts
with extended terms, a reduction in allowance for doubtful accounts, and
a receivable established for a property insurance loss. Inventory at the end
of December 1997 was $2.0 million higher than at the end of 1996, primarily as
a result of an increase in the number of sales and distribution centers. The
amount of the Company's accounts payable on any balance sheet date may vary from
the average accounts payable throughout the period due to the timing of
payments and will tend to increase or decrease in conjunction with an
increase or decrease in inventory. The Company's use of funds of approximately
$3.4 million in other assets was primarily the purchase of $2.2 million in
rental equipment to establish rental programs at 25 of its sales and
distribution facilities and $0.9 million in additional transaction costs to
amend and restate the Company's revolving credit agreement on April 11, 1997.
In 1997, the Company completed two significant sale leaseback transactions
that resulted in net proceeds of approximately $9.6 million, one of these being
the Company's headquarters in Vernon Hills, Illinois. The $0.7 million gain on
the sale of the headquarters facility is being amortized over the term of the
lease.
The Company's capital expenditures consist primarily of the construction of
facilities for new and existing operations, the remodeling of sales and
distribution facilities and component manufacturing facilities, and the purchase
of equipment and management information systems. The Company may also from time
to time make expenditures to establish or acquire operations to expand or
complement its existing operations, especially in its major markets. The
Company made $7.8 million in capital expenditures in 1997. Approximately $4.1
million was expended on capital improvements for new operations, showroom Resets
and expansion of manufacturing operations. The Company expects to spend between
37
38
$4 million and $5 million in 1998. These expenditures are expected to be funded
by the Company's borrowings and its internally generated cash flow. At December
27, 1997, there were no material commitments for future capital expenditures.
The Company maintained excess availability under its revolving credit facility
throughout 1997. 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 the first and second quarters of each year, the Company
typically reaches its peak utilization of its revolving credit facility because
of the inventory build-up needed for the peak building season. At all times
during 1997 the Company was in full compliance with all of the requirements
contained in its revolving credit agreement. Availability under the revolving
credit facility is limited, in the aggregate, to the lesser of $130 million and
a "borrowing base amount," which is the sum of (i) between 80% and 85% of
eligible accounts receivable plus (ii) between 50% and 60% of eligible
inventory. At February 28, 1998, the Company had outstanding borrowings of
$95.4 million and unused availability of $17.4 million under its revolving
credit facility.
A second amendment and restatement of the Company's revolving credit agreement
was completed on April 11, 1997. Among other things, this amendment and
restatement (i) extended the life of the facility to March 2001, (ii) reduced
the interest rate premiums over LIBOR and over prime by 75 basis points, (iii)
included provisions for further interest rate premium reductions if certain
performance levels are achieved, (iv) modified certain covenants, and (v)
provided for increases in the amount of capital expenditures allowed by the
agreement equal to the proceeds received from the sale of certain excess real
estate. On December 24, 1997, the second amended and restated revolving credit
agreement was amended to incorporate, among other things, a reduction in the
fixed charge and net worth levels for the fourth quarter of 1997 and first
quarter of 1998. A third amendment which, among other things, further reduced
the fixed charge ratio requirement for the first three quarters of 1998 and
allowed the Company to proceed with its 1998 Restructuring plan, was completed
in March of 1998. See Note 14 of Notes to Consolidated Financial Statements
included elsewhere herein. The Company currently has excess availability under
its revolving credit facility and anticipates that funds provided by operations
and under this facility will be adequate for the Company's future needs.
On June 16, 1997 the Company entered into an interest rate swap agreement
which effectively fixed the interest rate at 8.11% (subject to adjustments in
certain circumstances), for three years, on $40 million of the Company's
borrowings under its floating rate revolving line of credit. This interest rate
swap is operative while the 30 day LIBOR borrowing rate remains below 6.7%. At
February 27, 1998 the 30 day LIBOR borrowing rate was 5.69%.
38
39
The revolving credit facility and the trust indenture relating to the
Company's 11-5/8% Senior Subordinated Notes contain certain covenants and
restrictions. Among other things, the revolving credit facility prohibits non-
stock dividends, certain investments and other "restricted payments" by the
Company. The trust indenture generally restricts non-stock dividends and other
restricted payments by the Company to 50% of "cumulative consolidated net
income," or if cumulative consolidated net income is a loss, minus 100% of such
loss, of the Company earned subsequent to October 22, 1993, plus the proceeds of
the sale of certain equity securities after such date. In addition, the trust
indenture prohibits non-stock dividends and limits other restricted payments
while (as at present) the Company's fixed charge coverage ratio is less than or
equal to 2.0.
Net Operating Loss Carryforwards
- --------------------------------
At December 27, 1997, the Company and its subsidiaries had federal income tax
net operating loss carryforwards ("NOLs") of approximately $41 million. The
NOLs will expire in the years 2004 to 2012 if not previously utilized. The
Company's ability to use certain of the NOLs carried forward, approximately $7.5
million, will be subject to the limitations of Section 382 of the Internal
Revenue Code. See Note 11 of Notes to Consolidated Financial Statements
included elsewhere herein.
Year 2000
- ---------
In response to the Year 2000 issue, the Company initiated a project in early
1997 to identify, evaluate and implement changes to its existing computerized
business systems. The Company is addressing the issue through a combination of
modifications to existing programs and conversions to Year 2000 compliant
software. In addition, the Company is communicating with its customers,
suppliers, and other service providers to determine whether they are actively
involved in projects to ensure that their products and business systems will be
Year 2000 compliant. If modifications and conversions by the Company and those
it conducts business with are not made in a timely manner, the Year 2000 issue
may have a material adverse effect on the Company's business, financial
condition, and results of operations. The total cost associated with the
required modifications is not expected to be material to the Company's
consolidated results of operations and financial position, and is being expensed
as incurred.
39
40
Item 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
- --------------------------------------------------------
MARKET RISK
-----------
Not applicable.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
- -----------------------------------------------------
Financial statements of the Company are set forth herein beginning on page F-
1.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
- ---------------------------------------------------------
ACCOUNTING AND FINANCIAL DISCLOSURE.
- ------------------------------------
None.
40
41
PART III
--------
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
- -------------------------------------------------------------
Information required by this Item is incorporated herein by reference from the
definitive proxy statement to be filed in connection with the Company's Annual
Meeting of Stockholders tentatively scheduled to be held on May 18, 1998.
Item 11. EXECUTIVE COMPENSATION.
- ---------------------------------
Information required by this Item is incorporated herein by reference from the
definitive proxy statement to be filed in connection with the Company's Annual
Meeting of Stockholders tentatively scheduled to be held on May 18, 1998.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
- --------------------------------------------------------------------------------
MANAGEMENT.
- -----------
Information required by this Item is incorporated herein by reference from the
definitive proxy statement to be filed in connection with the Company's Annual
Meeting of Stockholders tentatively scheduled to be held on May 18, 1998.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- ---------------------------------------------------------
Information required by this Item is incorporated herein by reference from the
definitive proxy statement to be filed in connection with the Company's Annual
Meeting of Stockholders tentatively scheduled to be held on May 18, 1998.
41
42
PART IV
-------
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
- ----------------------------------------------------------------
FORM 8-K.
- ---------
(a) List of Documents Filed as a Part of this Report:
- ------------------------------------------------------
(1) Financial Statements: Page No.
- -------------------------- --------
Report of Independent Accountants F-1
Consolidated balance sheets as of December 27, 1997
and December 28, 1996 F-2
Consolidated statements of operations for the years ended December 27,
1997, December 28, 1996 and December 30, 1995 F-3
Consolidated statements of changes in common stockholders' equity for
the years ended December 27, 1997, December 28, 1996 and
December 30, 1995 F-4
Consolidated statements of cash flows for the years ended December 27,
1997, December 28, 1996 and December 30, 1995 F-5
Notes to consolidated financial statements F-6
(2) Financial Statement Schedules:
- -----------------------------------
Schedule Description
- -------- -----------
II. Valuation and Qualifying Accounts S-1
(3) Exhibits
- -------------
See Exhibit Index included elsewhere herein.
(b) Reports on Form 8-K
- ------------------------
None
42
43
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
WICKES INC.
-----------
Date: March 25, 1998 By: /s/ J. Steven Wilson
--------------------
J. Steven Wilson
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
/s/ J. Steven Wilson Chairman and Chief Executive Officer March 25, 1998
- --------------------
J. Steven Wilson (Principal Executive Officer), Director
/s/ Albert Ernest, Jr. Director March 25, 1998
- ----------------------
Albert Ernest, Jr.
/s/ Kenneth M. Kirschner Vice Chairman March 25, 1998
- ------------------------
Kenneth M. Kirschner (Principal Financial Officer), Director
/s/ William H. Luers Director March 25, 1998
- --------------------
William H. Luers
/s/ Robert E. Mulcahy III Director March 25, 1998
- -------------------------
Robert E. Mulcahy III
/s/ Frederick H. Schultz Director March 25, 1998
- ------------------------
Frederick H. Schultz
/s/ Claudia B. Slacik Director March 25, 1998
- ---------------------
Claudia B. Slacik
/s/ John M. Lawrence Controller March 25, 1998
- --------------------
John M. Lawrence (Principal Accounting Officer)
43
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
To The Stockholders and Board of Directors
Wickes Inc.
We have audited the accompanying consolidated balance sheets of Wickes Inc.
and Subsidiaries (the "Company", formerly Wickes Lumber Company) and
Subsidiaries, as of December 27, 1997 and December 28, 1996, and the related
consolidated statements of operations, changes in common stockholders' equity
and cash flows for the years ended December 27, 1997 and December 28, 1996, and
December 30, 1995. We have also audited the financial statement schedule of
valuation and qualifying accounts. These financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and this
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Wickes Inc. and Subsidiaries as of December 27, 1997 and December 28, 1996, and
the consolidated results of their operations and cash flows for the years ended
December 27, 1997, December 28, 1996, and December 30, 1995, in conformity with
generally accepted accounting principles. In addition, in our opinion, the
financial statement schedule referred to above, when considered in relation to
the basic financial statements taken as a whole, presents fairly, in all
material respects, the information required to be included therein.
/s/ Coopers & Lybrand L.L.P.
----------------------------
COOPERS & LYBRAND L.L.P.
Chicago, Illinois
February 23, 1998
F-1
F-2
WICKES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 27, 1997 and December 28, 1996
(in thousands except share data)
1997 1996
-------- --------
ASSETS
Current assets:
Cash $ 79 $ 1,933
Accounts receivable, less allowance
for doubtful accounts of $3,765
in 1997 and $4,289 in 1996 81,788 71,210
Notes Receivable 3,200 --
Inventory 102,706 100,672
Deferred tax asset 8,955 10,331
Prepaid expenses 1,246 915
-------- --------
Total current assets 197,974 185,061
-------- --------
Property, plant and equipment, net 46,763 50,171
Trademark (net of accumulated
amortization of $10,274 in 1997
and $10,052 in 1996) 6,745 6,948
Deferred tax asset 17,054 15,525
Rental Equipment (net of
depreciation of $176 in 1997) 2,030 --
Other assets (net of accumulated
amortization of $8,053 in 1997
and $6,487 in 1996) 12,786 15,137
-------- --------
$ 283,352 $ 272,842
======== ========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 46 $ 133
Accounts payable 41,190 41,039
Accrued liabilities 22,279 27,118
-------- --------
Total current liabilities 63,515 68,290
-------- --------
Long-term debt, less current maturities 193,061 176,376
Other long-term liabilities 2,775 2,677
Commitments and contingencies (Note 8)
Common stockholders' equity (Note 9):
Preferred Stock (no shares issued)
Common stock (8,176,205 shares issued
and outstanding in 1997 and 8,159,498
shares issued and outstanding in 1996) 82 82
Additional paid-in capital 86,675 86,613
Accumulated deficit (62,756) (61,196)
-------- --------
Total common stockholders' equity 24,001 25,499
-------- --------
$ 283,352 $ 272,842
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
F-2
F-3
WICKES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 27, 1997, December 28, 1996, and December 30, 1995
(in thousands, except share data)
1997 1996 1995
-------- -------- --------
Net sales $ 884,082 $ 848,535 $ 972,612
Cost of sales 681,056 659,072 751,800
-------- -------- --------
Gross profit 203,026 189,463 220,812
-------- -------- --------
Selling, general and
administrative expense 185,385 162,329 194,629
Depreciation, goodwill and
trademark amortization 4,863 5,367 5,882
Provision for doubtful accounts 1,707 1,067 6,482
Restructuring and unusual items (559) 745 17,798
Other operating income (10,689) (6,796) (5,831)
-------- -------- --------
180,707 162,712 218,960
-------- -------- --------
Income from operations 22,319 26,751 1,852
Interest expense 21,417 21,750 24,351
Equity in loss of affiliated company 1,516 3,183 3,543
-------- -------- --------
(Loss) income before income taxes (614) 1,818 (26,042)
Provision (benefit) for income taxes:
Current 1,099 1,010 1,353
Deferred (153) 300 (11,796)
-------- -------- --------
Net (loss) income $ (1,560) $ 508 $ (15,599)
======== ======== ========
Basic and Diluted (loss)/income
per common share $ (0.19) $ 0.07 $ (2.54)
======== ======== ========
Weighted average common
shares - for basic 8,168,257 7,207,761 6,135,610
========= ========= =========
Weighted average common
shares - for diluted 8,188,420 7,221,082 6,150,619
========= ========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
F-4
WICKES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCKHOLDERS' EQUITY
For the Years Ended December 30, 1995, December 28, 1996 and December 27, 1997
(in thousands)
Total
Additional Common
Common Paid-in Accumulated Stockholders'
Stock Capital Deficit Equity
--------- ---------- ---------- ------------
Balance at January 1, 1995 $ 61 $ 76,190 $ (46,105) $ 30,146
Net loss -- -- (15,599) (15,599)
Issuance of common stock, net -- 582 -- 582
--------- ---------- ---------- ------------
Balance at December 30, 1995 61 76,772 (61,704) 15,129
Net income -- -- 508 508
Issuance of common stock, net 21 9,841 -- 9,862
--------- ---------- ---------- ------------
Balance at December 28, 1996 82 86,613 (61,196) 25,499
Net loss -- -- (1,560) (1,560)
Issuance of common stock, net -- 62 -- 62
--------- ---------- ---------- ------------
Balance at December 27, 1997 $ 82 $ 86,675 $ (62,756) $ 24,001
========= ========== ========== ============
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
F-5
WICKES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Years Ended December 27, 1997, December 28, 1996, and December 30, 1995
(in thousands)
1997 1996 1995
---------- ---------- ----------
Cash flows from operating activities:
Net (loss)/income $ (1,560) $ 508 $ (15,599)
Adjustments to reconcile net (loss)/income to
net cash (used in)/provided by operating activities:
Equity in loss of affiliated company 1,516 3,183 3,543
Depreciation expense 4,395 4,904 5,391
Amortization of trademark 222 222 222
Amortization of goodwill 246 242 270
Amortization of deferred financing costs 1,401 1,781 2,085
Provision for doubtful accounts 1,707 1,067 6,482
Gain on sale of assets (6,180) (940) (71)
Deferred tax (benefit)/provision (153) 300 (11,795)
Changes in assets and liabilities net of effects
from acquisitions:
(Increase) decrease in accounts receivable (12,285) 9,515 9,355
(Increase) decrease in notes receivable (3,200) -- --
(Increase) decrease in inventory (2,034) 9,967 20,697
(Decrease) increase in accounts payable and (4,590) (10,907) 2,377
accrued liabilities
Increase in deferred gain (670) -- --
Increase in other assets (3,369) (1,132) (7,095)
---------- ---------- ----------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (24,554) 18,710 15,862
---------- ---------- ----------
Cash flows from investing activities:
Purchases of property, plant and equipment (7,758) (2,893) (4,111)
Payments for acquisitions -- -- (8,686)
Proceeds from sales of property, plant and equipment 13,798 5,303 2,520
---------- ---------- ----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 6,040 2,410 (10,277)
---------- ---------- ----------
Cash flows from financing activities:
Net borrowing/(repayment) under revolving line of credit 16,732 (28,708) (5,760)
Reductions of note payable (134) (428) (2,357)
Net proceeds from issuance of common stock 62 9,862 582
---------- ---------- ----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 16,660 (19,274) (7,535)
---------- ---------- ----------
NET (DECREASE) INCREASE IN CASH (1,854) 1,846 (1,950)
Cash at beginning of period 1,933 87 2,037
---------- ---------- ----------
CASH AT END OF PERIOD $ 79 $ 1,933 $ 87
========== ========== ==========
Supplemental schedule of cash flow information:
Interest paid $ 19,791 $ 20,372 $ 22,823
Income taxes paid 1,344 1,518 1,987
Supplemental schedule of non-cash investing and
financing activities:
The Company purchased capital stock and assets
in conjunction with acquisitions made during the
period. In connection with these acquisitions,
liabilities were assumed as follows:
Fair value of assets acquired $ 12,387
Cash paid (8,686)
----------
Liabilities assumed $ 3,700
==========
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
F-6
1. Description of Business
- ---------------------------
Wickes Inc. and Subsidiaries, formerly Wickes Lumber Company and Subsidiaries,
through its sales and distribution facilities, markets lumber, building
materials and services primarily to professional contractors, repair and
remodelers and do-it-yourself home owners, principally in the Midwest,
Northeast and Southern United States. Wickes Inc.'s wholly-owned subsidiaries
are: Lumber Trademark Company ("LTC"), a holding company for the "Flying W"
trademark, and GLC Division, Inc. ("GLC"), which operates the Gerrity Lumber
business.
2. Accounting Policies
- -----------------------
Principles of Consolidation
- ---------------------------
The consolidated financial statements present the results of operations,
financial position, and cash flows of Wickes Inc. and all its wholly-owned
subsidiaries (the "Company"). All significant intercompany balances have been
eliminated.
Fiscal Year
- -----------
The Company's fiscal year ends on the last Saturday in December.
Cash and Cash Equivalents
- -------------------------
The Company considers all highly liquid investments with a maturity date of
three months or less to be cash equivalents.
Accounts Receivable
- -------------------
The Company extends credit primarily to qualified contractors. The accounts
receivable balance excludes consumer receivables, as such receivables are sold
on a nonrecourse basis. The remaining accounts and notes receivable represent
credit extended to professional contractors and professional repair and
remodelers, generally on a non-collateralized basis.
Inventory
- ---------
Inventory consists principally of finished goods. The Company utilizes the
first-in, first-out (FIFO) cost flow assumption for valuing its inventory.
Inventory is valued at the lower of cost or market, but not in excess of net
realizable value.
F-6
F-7
Property, Plant and Equipment
- -----------------------------
Property, plant and equipment are stated at cost and are depreciated under the
straight-line method. Estimated lives used range from 15 to 39 years for
buildings and improvements and leasehold improvements. Machinery and equipment
lives range from 3 to 10 years. Expenditures for maintenance and repairs are
charged to operations as incurred. Gains and losses from dispositions of
property, plant, and equipment are included in the Company's results of
operations as other operating income. During 1997 the Company disposed of
property and equipment for a net gain of $6,180,000, of which $5,989,000 was
from the sale of properties held for sale.
Rental Equipment
- ----------------
Rental equipment consists of hand tools and power equipment held for rental.
This equipment is depreciated under the straight line method over a 5 or 10 year
life.
Other Assets
- ------------
Other assets consist primarily of deferred financing costs and goodwill which
are being amortized on the straight line method, goodwill over 30 to 35 years
and deferred financing costs over the expected terms of the related debt
agreements.
The Company's investment in an international operation is recorded under the
equity method. The Company's share of losses is reflected as equity in loss of
affiliated company on the Consolidated Statements of Operations. As of December
27, 1997 the Company's investment has been reduced to zero and there is no
obligation to make additional investments.
Amortization expense for deferred financing costs is reflected as interest
expense on the Company's Consolidated Statements of Operations.
Trademark
- ---------
The Company's "Flying W" trademark is being amortized over a 40-year period.
Accounts Payable
- ----------------
The Company includes outstanding checks in excess of in-transit cash in accounts
payable. There was $3,273,000 in outstanding checks in excess of in-transit
cash at December 27, 1997 and none at December 28, 1996.
F-7
F-8
Postretirement Benefits Other Than Pensions
- -------------------------------------------
The Company provides certain health and life insurance benefits for eligible
retirees and their dependents. The Company accounts for the costs of these
postretirement benefits over the employees' working careers in accordance with
Statement of Financial Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions."
Postemployment Benefits
- -----------------------
The Company provides certain other postemployment benefits to qualified former
or inactive employees. The Company accounts for the costs of these
postemployment benefits in the period when it is probable that a benefit will be
provided in accordance with Statement of Financial Accounting Standards No. 112,
"Employers' Accounting for Postemployment Benefits."
Income Taxes
- ------------
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." Tax provisions and
credits are recorded at statutory rates for taxable items included in the
consolidated statements of operations regardless of the period for which such
items are reported for tax purposes. Deferred income taxes are recognized for
temporary differences between financial statement and income tax bases of assets
and liabilities for which income tax benefits will be realized in future years.
Deferred tax assets are reduced by a valuation allowance when the Company cannot
make the determination that it is more likely than not that some portion of the
related tax asset will be realized.
Earnings Per Common Share
- -------------------------
Earnings per common share is calculated in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings Per Share." Weighted average
shares outstanding have been adjusted for common shares underlying options and
warrants.
Use of Estimates in the Preparation of Financial Statements
- -----------------------------------------------------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from the estimates reported.
F-8
F-9
Significant estimates made by the Company include accrued compensation liability
and medical claims, accrued postemployment and postretirement benefits, accrued
restructuring charges, accrued environmental liabilities and valuation
allowances for accounts receivable, inventory and deferred tax assets. Accrued
compensation liability and medical claims involve the determination of reserves
for incurred but not reported claims. Accrued postemployment and postretirement
benefits involve the use of actuarial assumptions, including selection of
discount rates (see Note 10). Accrued restructuring charges involve an
estimation of what the market will bring and specific costs incurred relating to
the liquidation of certain Company assets using actual historical results (see
Note 3). Accrued environmental costs involve estimated remediation costs
probable at facilities with underground storage tanks removed. Determination of
the valuation allowances for accounts receivable and inventory involve
assumptions related to current market conditions and historical market trends.
While the valuation allowance for the deferred tax assets considers estimates of
projected taxable income (see Note 11), it is reasonably possible that the
Company's estimates for such items could change in the near term.
Impairment of Long-Lived Assets
- -------------------------------
The Company evaluates assets held for use and assets to be disposed of in
accordance with Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
This statement requires that long-lived assets and certain identifiable
intangibles held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. There was no impairment of the Company's long-lived and
intangible assets other than assets held for sale which has been provided for.
The Company has historically reviewed excess property held for sale and when
appropriate recorded these assets at the lower of their carrying amount or fair
value (see Note 5).
Stock-Based Compensation
- ------------------------
Statement of Financial Accounting Standards 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 fair value accounting rules. Although expense
recognition for employee stock based compensation is not mandatory, the
pronouncement requires companies that choose not to adopt the fair value
accounting to disclose the pro-forma net income and earnings per share under the
new method. The Company elected not to adopt Statement of Financial Accounting
Standards No. 123, but to continue to apply APB Opinion 25. As required, the
Company has disclosed the pro forma net income and pro forma earnings per share
as if the fair value based accounting methods in this Statement had been used to
account for stock-based compensation cost (see Note 9).
F-9
F-10
Recently Issued Accounting Pronouncements
- -----------------------------------------
Reporting Comprehensive Income. Statement of Financial Accounting Standards No.
- ------------------------------
130, "Reporting Comprehensive Income," establishes standards for reporting and
display of comprehensive income and its components in a full set of general-
purpose financial statements. The term comprehensive income is defined as the
change in the equity of a business. Comprehensive income includes net income as
well as other components (revenues, expenses, gains, and losses) that under
generally accepted accounting principles are excluded from net income but
affect equity. The statement is effective for fiscal years beginning after
December 15, 1997. The Company believes adoption of the statement will not have
a material effect on its financial statements.
Disclosure about Segments. Statement of Financial Accounting Standards No. 131,
- -------------------------
"Disclosure about Segments of an Enterprise and Related Information," changes
Statement of Financial Accounting Standards No. 14 by requiring a new framework
for segment reporting and includes the disclosure of financial information
related to each segment. The statement is effective for fiscal years beginning
after December 15, 1997. Since the Company currently operates as one business
segment, the adoption of this statement is not expected to have an impact on the
Company's financial statements.
3. Restructuring and Unusual Charges
- -------------------------------------
During the fourth quarter of 1995, the Company committed to and began
implementing a restructuring plan ("1995 Plan") to improve return on assets by
closing or consolidating under-performing operating centers, decreasing the
corresponding overhead to support these building centers, and initiating actions
to strengthen its capital structure. The costs for closing these building
centers were based on management estimates of costs to exit these markets and
actual historical experience. Included in 1995 results of operations is a $17.8
million charge, including $12.6 million in anticipated losses on the disposition
of closed center assets and liabilities and $2.2 million in severance and
postemployment benefits, relating to the 1995 Plan and other one time costs.
The major components of this charge include the write-down of assets to their
net realizable value, liabilities associated with closed building centers held
for sale, postemployment benefits to qualified former employees as a result of
the center closings, and other charges related to the strengthening of the
Company's capital structure. Also included was a charge for unusual employment
related claims expensed in the fourth quarter of 1995.
F-10
F-11
During 1996, the Company continued executing the 1995 Plan, through the
consolidation and closing of 18 building centers and the improvement of its
overall capital structure through the issuance of new shares and the
modification of its bank revolving credit agreement (see Notes 7 and 9).
After extensive review of the 1995 Plan, and changes in business conditions in
certain markets in which the Company operates, the Company made adjustments to
the 1995 Plan and incurred other one time costs resulting in a net $0.7 million
charge to results of operations in the fourth quarter of 1996 for restructuring
and unusual items. These adjustments included (i) the determination that three
of the centers identified in the 1995 Plan for closure would remain open,
resulting in a $1.5 million credit to restructuring expense, (ii) the extension
of the 1995 plan to include the closing (substantially completed by the end of
1996) of two building centers not previously included, resulting in a $1.3
million charge for the write down of assets and liabilities to their net
realizable value and a $0.1 million charge for severance and post-employment
benefits, (iii) a $1.1 million charge for impairment in the carrying value of
real estate held for sale at closed centers, and (iv) a $0.3 million credit with
respect to the resolution of a claim below the reserved amount.
During 1997, the Company recorded a $1.5 million restructuring charge for
discontinued programs and reductions in its corporate headquarters workforce.
This charge was offset by a $2.1 million reduction in accrued costs for the
Company's 1995 Plan, which is now complete.
4. Acquisitions
- ----------------
All acquisitions have been accounted for as purchases. Operations of the
companies and businesses acquired have been included in the accompanying
consolidated financial statements from their respective dates of acquisition.
The excess of the purchase price over fair value of the net assets acquired is
included in goodwill. The fair market value of the assets acquired in 1995 was
approximately $12.4 million. The Company had no acquisitions in 1997 or 1996.
During 1995 the Company acquired five building material centers for a total cost
of $11.8 million, $8.1 million in cash and $3.7 million in liabilities assumed.
An additional $0.6 million was recorded for the 1994 Gerrity acquisition. The
cost of the acquisitions have been allocated on the basis of the fair market
value of the assets acquired and the liabilities assumed. This allocation
resulted in goodwill for one of the acquired businesses which is being amortized
over a 30-year period on a straight line basis.
F-11
F-12
5. Property, Plant, and Equipment
- ----------------------------------
Property, plant and equipment is summarized as follows:
December 27, December 28,
1997 1996
------------ ------------
(in thousands)
Land and improvements $ 12,781 $ 12,391
Buildings 27,584 25,169
Machinery and equipment 30,619 26,068
Leasehold improvements 2,584 2,701
Construction in progress 844 90
------------ ------------
Gross property, plant, and equipment 74,412 66,419
Less: accumulated depreciation (31,178) 27,322
------------ ------------
Property, plant, and equipment
in use, net 43,234 39,097
Assets held for sale, net 3,529 11,074
------------ ------------
Property, plant, and equipment, net $ 46,763 $ 50,171
============ ============
The Company reviews assets held for sale in accordance with Statement of
Financial Accounting Standards No. 121. In 1997 the Company recorded a loss of
$156,000 to report land, land improvements and buildings held for sale at their
fair value. This charge is reflected under "restructuring and unusual items" on
the Consolidated Statement of Operations.
6. Accrued Liabilities
- -----------------------
Accrued liabilities consist of the following:
December 27, December 28,
1997 1996
------------ ------------
(in thousands)
Accrued payroll $ 8,148 $ 6,564
Accrued interest 1,367 1,142
Accrued liability insurance 4,173 4,572
Accrued restructuring charges 1,348 6,199
Other 7,243 8,641
------------ ------------
Total accrued liabilities $ 22,279 $ 27,118
============ ============
F-12
F-13
7. Long-Term Debt
- ------------------
Long-term debt obligations are summarized as follows:
December 27, December 28,
1997 1996
------------ ------------
(in thousands)
Revolving line of credit, interest payable
at 1.5% above prime or 3.0% over LIBOR,
principal due March 31, 2001 $ 93,045 $ 76,313
Senior subordinated notes, interest payable
at 11-5/8% semi-annually, principal due
December 15, 2003 100,000 100,000
Other 62 196
------------ ------------
Total long-term debt 193,107 176,509
Less current maturities (46) (133)
------------ ------------
Total long-term debt less current maturities $ 193,061 $ 176,376
============ ============
Revolving Line of Credit
- ------------------------
Under the revolving line of credit, which expires in March 31, 2001, the Company
may borrow against certain levels of accounts receivable and inventory, up to a
maximum credit limit of $130,000,000. At December 27, 1997, the amount
available for additional borrowing was $21,064,000. A commitment fee of 1/2 of
1% is payable on the unused portion of the commitment. The weighted-average
interest rate for the years ending December 27, 1997 and December 28, 1996 was
approximately 8.8% and 9.0% respectively.
Substantially all of the Company's accounts receivable, inventory, general
intangibles and certain machinery and equipment are pledged as collateral for
the revolving line of credit. Covenants under the related debt agreements
require, among other restrictions, that the Company maintain certain financial
ratios and certain levels of consolidated net worth. In addition, the debt
agreement restricts among other things, capital expenditures, the incurrence of
additional debt, asset sales, dividends, investments, and acquisitions without
prior approval from the lender.
The revolving credit agreement was amended and restated on April 11,1997. Among
other things, the amendment and restatement (i) extended the term of the
facility to March 2001, (ii) reduced the interest rate premiums over LIBOR and
over prime by 75 basis points, (iii) included provisions for further interest
rate premium reductions if certain performance levels are achieved, (iv)
modified certain covenants, and (v) provided for increases in the amount of
F-13
F-14
capital expenditures allowed by the agreement equal to the proceeds received
from the sale of certain excess real estate.
On June 16, 1997 the Company entered into an interest rate swap agreement which
effectively fixed the interest rate at 8.11% (subject to adjustments in certain
circumstances), for three years, on $40 million of the Company's borrowings
under its floating rate revolving line of credit (See Note 12).
On December 24, 1997, the second amended and restated revolving credit agreement
was amended to incorporate, among other things, a reduction in the fixed charge
and net worth levels for the fourth quarter of 1997 and first quarter of 1998.
Senior Subordinated Notes
- -------------------------
On October 22, 1993, the Company issued $100,000,000 in principal amount of 10-
year unsecured senior subordinated notes. Interest on the notes is 11-5/8%,
payable semi-annually. Covenants under the related indenture restrict among
other things, the payment of dividends, the prepayment of certain debt, the
incurrence of additional debt if certain financial ratios are not met, and the
sale of certain assets unless the proceeds are applied to the notes. In
addition, the notes require that, upon a change in control of the Company, the
Company must offer to purchase the notes at 101% of the principal thereof, plus
accrued interest.
Aggregate Maturities
- --------------------
The aggregate amounts of long-term debt maturities by fiscal year are as
follows:
Year Amount
---- ------
(in thousands)
1998 $ 46
1999 16
2000 --
2001 93,045
2002 --
Thereafter 100,000
Fair Value
- ----------
The fair value of the Company's long-term debt, in accordance with SFAS No. 107,
is estimated based on the quoted market prices for the same or similar issues or
on the current rates offered to the Company for debt of the same remaining
maturities. The estimated fair values of the Company's material financial
instruments at December 27, 1997 and December 28, 1996 are as follows:
F-14
F-15
Fair Carrying
Value Value
---------- ----------
(in thousands)
1997 Financial Liabilities:
Long-term Debt
Revolver $ 93,045 $ 93,045
Senior Subordinated Notes 95,000 100,000
1996 Financial Liabilities:
Long-term Debt
Revolver $ 76,313 $ 76,313
Senior Subordinated Notes 77,000 100,000
8. Commitments and Contingencies
- ---------------------------------
At December 27, 1997, the Company had accrued approximately $500,000 for
remediation of certain environmental and product liability matters, principally
underground storage tank removal.
Many of the sales and distribution facilities presently and formerly operated by
the Company contained underground petroleum storage tanks. Other than tanks at
one acquired facility, recently installed and in compliance with modern
standards, all such tanks known to the Company located on facilities owned or
operated by the Company have been filled, removed, or are scheduled to be
removed in accordance with applicable environmental laws in effect at the time.
As a result of reviews made in connection with the sale or possible sale of
certain facilities, the Company has found petroleum contamination of soil and
ground water on several of these sites and has taken, and expects to take,
remedial actions with respect thereto. In addition, it is possible that similar
contamination may exist on properties no longer owned or operated by the Company
the remediation of which the Company could under certain circumstances be held
responsible. Since 1988, the Company has incurred approximately $2.0 million of
costs, net of insurance and regulatory recoveries, with respect to the filling
or removing of underground storage tanks and related investigatory and remedial
actions. Insignificant amounts of contamination have been found on excess
properties sold over the past three years.
The Company is one of many defendants in approximately 100 actions, each of
which seeks unspecified damages, brought since 1993 in various Michigan state
courts against manufacturers and building material retailers by individuals who
claim to have suffered injuries from products containing asbestos. Each of the
plaintiffs in these actions is represented by one of two law firms. The Company
is aggressively defending these actions and does not believe that these actions
will have a material adverse effect on the Company's financial position, results
of operations or liquidity.
F-15
F-16
On November 3, 1995, a complaint was filed against the Company, its directors
and Riverside Group, Inc. seeking to enjoin or to obtain damages with respect to
the Company's agreement to issue 2,000,000 newly-issued shares of common stock
to Riverside Group, Inc. for $10 million (see Note 9).
The Company is involved in various other legal proceedings which are incidental
to the conduct of its business. The Company does not believe that any of these
proceedings will have a material adverse effect on the Company's financial
position, results of operations or liquity.
The Company's assessment of the matters described in this note and other forward
looking statements ("Forward-Looking Statements") in these notes are made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995 and are inherently subject to uncertainty. The outcome of
the matters in this note may differ from the Company's assessment of these
matters as a result of a number of factors including but not limited to:
matters unknown to the Company at the present time, development of losses
materially different from the Company's experience, the Company's ability to
prevail against its insurers with respect to coverage issues to date, the
financial ability of those insurers and other persons from whom the Company may
be entitled to indemnity, and the unpredictability of matters in litigation.
Leases
- ------
The Company has entered into operating leases for corporate office space, retail
space, equipment and other items. These leases provide for minimum rents.
These leases generally include options to renew for additional periods. Total
rent expense under all operating leases was $10,616,000, $10,076,000, and
$10,501,000 for the years ended December 27, 1997, December 28, 1996, and
December 30, 1995, respectively.
Future minimum commitments for noncancelable operating leases are as follows:
Year Amount
---- ------
(in thousands)
1998 $ 8,259
1999 6,834
2000 4,792
2001 3,277
2002 2,345
Thereafter 17,022
----------
Subtotal $ 42,529
Less: Sublease income (6,301)
----------
Total $ 36,228
==========
F-16
F-17
9. Stockholders' Equity
- ------------------------
Preferred Stock
- ---------------
As of December 27, 1997 the Company had authorized 3,000,000 shares of preferred
stock, none of which is issued or outstanding.
Common Stock
- ------------
The Company has two classes of common stock: Common Stock, par value $.01 per
share, and Class B Non-Voting Common Stock, par value $.01 per share. At
December 27, 1997 there were 20,000,000 shares of Common Stock authorized and
7,676,437 shares issued and outstanding, and there were 1,200,000 shares of
Class B Non-Voting Common authorized and 499,768 shares issued and outstanding.
In addition, at December 27, 1997, 910,000 shares of Common Stock were reserved
for issuance under the Company's 1993 Long Term Incentive Plan and 1993 Director
Incentive Plan. Another 6,913 shares of Common Stock were reserved for issuance
under outstanding warrants. Class B Non-Voting Common Stock is generally
equivalent to Common Stock, except that shares of Class B Non-Voting Common
Stock may not be voted except on certain matters regarding merger,
consolidation, recapitalization and reorganization, and as otherwise provided by
law. Class B Non-Voting Common Stock is convertible into Common Stock on a
share-for-share basis in certain circumstances.
Private Sale of Common Stock
- ----------------------------
On June 20, 1996, pursuant to a stock purchase agreement dated January 11, 1996,
the Company sold 2,000,000 newly-issued shares of its Common Stock to Riverside
Group, Inc., the Company's largest stockholder, for $10 million in cash. Prior
to the sale the terms of the stock purchase agreement were reviewed and
recommended to the boards of directors of both companies by committees comprised
of the independent directors of each company.
Warrants
- --------
The Company has outstanding warrants for 6,913 shares of Common Stock,
exercisable through April 29, 1998, at a nominal exercise price.
F-17
F-18
Stock Compensation Plans
- ------------------------
As of December 27, 1997, the Company has two stock-based compensation plans
(both fixed option plans), which are described below. Under the 1993 Long Term
Incentive plan, the Company may grant options and other awards to its employees
up to 835,000 shares of common stock. Under the 1993 Director Incentive plan,
the Company may grant options and other awards to directors on up to 75,000
shares. For grants after 1995, the exercise price generally equals the market
price at the date of grant. For grants prior to 1996, the exercise price
generally equals the greater of $15 or the market price at the date of grant.
The options have a maximum term of 10 years. For non-officers, the options
generally become exercisable in equal installments over a three year period from
the date of grant. For officers, the vesting periods are based on graded
calendar year schedules, which can vary by officer.
Since the Company applies APB Opinion 25 and related interpretations in
accounting for its plans, no compensation cost has been recognized in
conjunction with these plans. Had compensation cost for the Company's stock-
based compensation plans been determined consistent with FASB Statement 123, the
Company's net income and earnings per share would have been reduced to the pro
forma amounts indicated below:
Year 1997 1996 1995
- ---- ---- ---- ----
Net (loss) income As reported $ (1,560) $ 508 $(15,599)
Pro forma $ (1,772) $ 321 $(15,920)
Basic and diluted As reported $ (.19) $ .07 $ (2.54)
(loss) earnings Pro forma $ (.22) $ .04 $ (2.59)
per share
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1997, 1996, and 1995, respectively: dividend
yield of 0% for all years, expected volatility of 43%, 42%, and 40%; risk-free
interest rates of 6.6%, 6.2%, and 7.7%; and expected lives of 6.6, 6.5, and 6.1
years.
A summary of the status of the Company's fixed stock option plans as of December
27, 1997, December 28, 1996, and December 30, 1995 and changes during the years
ended on those dates is presented as follows:
F-18
F-19
1997 1996 1995
---- ---- ----
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Fixed Options Shares Price Shares Price Shares Price
- -------------- ------- ------ ------- ------ ------- ------
Outstanding beginning
of year 612,282 $10.94 446,686 $15.32 286,716 $15.72
Granted 108,350 $5.12 264,721 $4.60 193,867 $14.90
Exercised 0 n/a 0 n/a 0 n/a
Forfeited-nonvested (46,981) $8.22 (59,793) $13.18 (19,817) $15.99
Forfeited-exercisable (5,168) $22.36 (36,632) $15.32 (7,713) $16.46
Expired 0 n/a 0 n/a 0 n/a
Canceled (200) $15.00 (2,700) $5.12 (6,367) $17.12
------- ------- -------
Outstanding end
of year 668,283 $10.09 612,282 $10.94 446,686 $15.32
Options exercisable
at year-end 210,402 $14.26 146,775 $15.60 107,662 $15.52
Options available for
future grant at
year-end 392,344 304,411 471,482
Weighted-average fair value of options granted during the year where:
1997 1996 1995
---- ---- ----
Exercise price equals
market price $2.77 $2.40 $6.94
Exercise price exceeds
market price n/a n/a $6.26
Exercise price is less
than market price n/a n/a n/a
F-19
F-20
The following table summarizes information about fixed stock options outstanding
at December 27, 1997:
Options Outstanding Options Exercisable
------------------- -------------------
Weighted-
Average Weighted- Weighted-
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices at 12/27/97 Life Price at 12/27/97 Price
- -------- ----------- ----------- -------- ----------- ---------
$4.13 -
$10.95 335,530 6.7 years $4.84 29,644 $5.28
$15 -
$23.25 332,753 7.8 years $15.40 180,758 $15.73
$4.13 -
$23.25 668,283 7.9 years $10.09 210,402 $14.26
Earnings Per Share
- ------------------
The Company calculates earnings per share in accordance with Statement of
Financial Accounting Standards No. 128. As required by this statement the
Company has adopted the new standards for computing and presenting earnings per
share for 1997, and for all prior period earnings per share data presented. The
following is the reconciliation of the numerators and denominators of the basic
and diluted earnings per share:
1997 1996 1995
---- ---- ----
Numerators:
Net (loss) income - for basic and
diluted EPS $(1,560,000) $508,000 $(15,599,000)
============ ========= =============
Denominators:
Weighted average common
shares - for basic EPS 8,168,257 7,207,761 6,135,610
Common share from warrants 6,913 10,751 14,589
Common shares from options 13,250 2,570 420
Weighted average common
shares - for diluted EPS 8,188,420 7,221,082 6,150,619
============ ========= =========
In addition, options to purchase of 385,000, 302,000 and 278,000 weighted
average shares of common stock during 1997, 1996 and 1995, respectively, were
not included in the diluted EPS as the options' exercise prices were greater
than the average market price and the effect would be antidilutive.
F-20
F-21
10. Employee Benefit Plans
- ---------------------------
401(k) Plan
- -----------
The Company sponsors a defined contribution 401(k) plan covering substantially
all of its full-time employees. Additionally, the Company provides matching
contributions up to a maximum of 2.5% of participating employees' salaries and
wages. Total expenses under the plan for the years ended December 27, 1997,
December 28, 1996, and December 30, 1995 were $1,606,000, $1,392,000, and
$1,700,000, respectively.
Postretirement Benefits Other than Pensions
- -------------------------------------------
The Company provides life and health care benefits to retired employees.
Generally, employees who have attained an age of 60, have rendered 10 years of
service and are currently enrolled in the medical benefit plan are eligible for
postretirement benefits. The Company accrues the estimated cost of retiree
benefit payments, other than pensions, during the employee's active service
period.
The plan's funded status is as follows:
December 27, December 28,
1997 1996
---- ----
(in thousands)
Accumulated postretirement benefit obligation-
Retirees and their dependents $1,033 $1,259
Active employees fully eligible to retire
and receive benefits 637 682
Active employees not fully eligible 908 1,349
----- -----
Total accumulated postretirement benefit
obligations 2,578 3,290
Plan's assets at fair value -0- -0-
----- -----
Accumulated postretirement benefit obligation
in excess of plan's assets 2,578 3,290
Unrecognized prior service cost 59 -0-
Unrecognized net loss 138 (613)
----- ------
Accrued postretirement health care cost $2,775 $2,677
===== =====
F-21
F-22
Actuarial assumptions used were as follows:
December 27, December 28,
1997 1996
---- ----
(in thousands)
Projected health care costs trend rate 6.0% 6.0%
Ultimate trend rate 6.0% 6.0%
Year ultimate trend rate achieved n/a n/a
Effect of a 1% point increase in the health
care cost trend rate on the postretirement
benefit obligation $ 49 $ 77
Effect of a 1% point increase in the health
care cost trend rate on the aggregate of
service and interest cost $ 19 $ 21
Discount rate 7.25% 7.75%
Postemployment Benefits
- -----------------------
The Company provides certain postemployment benefits to qualified former or
inactive employees who are not retirees. These benefits include salary
continuance, severance, and healthcare. Salary continuance and severance pay is
based on normal straight-line compensation and is calculated based on years of
service. Additional severance pay is granted to eligible employees who are 40
years of age or older and have been employed by the Company five or more years.
The Company accrues the estimated cost of benefits provided to former or
inactive employees who have not yet retired over the employees' service period
or as an expense at the date of the event triggering the benefit. The Company
incurred postemployment benefit income of $28,000 and $31,000 for the years
ended December 27, 1997 and December 28, 1996, and expense of $160,000
(exclusive of amounts included in its restructuring liability, see Note 3) for
the year ended December 30, 1995.
11. Income Taxes
- --------------------
The Company and its subsidiaries file a consolidated Federal income tax return.
As of December 27, 1997, the Company has US net operating loss carryforwards
available to offset income of approximately $41.4 million expiring in the years
2004 through 2012. Capital loss carryovers of $1.5 million were fully utilized
in 1997 before their expiration.
On October 22, 1993, the Company completed a recapitalization plan which created
an ownership change as defined by Section 382 of the Internal Revenue Code of
1996. As a result, certain of the loss carryforwards of the company are limited
to an annual limitation of approximately $2.6 million a year. At December 27,
1997, approximately $7.5 million of these loss carryforwards were affected by
this limitation.
F-22
F-23
Income tax provision for 1997 consists of both current and deferred amounts.
The components of the income tax provision are as follows:
December 27, December 28, December 30,
1997 1996 1995
---- ---- ----
(in thousands)
Taxes currently payable:
State income tax $ 1,099 $ 1,010 $ 1,353
Federal income tax -- -- --
Deferred (benefit)/expense (153) 300 (11,796)
------- ------- -------
Total income tax expense/(benefit) $ 946 $ 1,310 $(10,443)
======= ======= =======
Tax provisions and credits are recorded at statutory rates for taxable items
included in the consolidated statements of operations regardless of the period
for which such items are reported for tax purposes. Deferred income taxes
reflect the net effects of temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used for
income tax purposes. Management has determined, based on the Company's positive
earnings growth from 1992 through 1994 and its expectations for the future, that
operating income of the Company will more likely than not be sufficient to
recognize fully its net deferred tax assets. The components of the deferred tax
assets and liabilities at December 27, 1997, December 28, 1996 and December 30,
1995, respectively, are as follows:
December 27, December 28, December 30,
1997 1996 1995
---- ---- ----
(in thousands)
Deferred income tax assets:
Trade accounts receivable $ 1,469 $ 1,676 $ 3,193
Inventories 1,895 1,954 2,446
Accrued personnel cost 2,013 1,936 1,850
Other accrued liabilities 6,743 6,911 12,042
Net operating loss 16,164 16,556 9,856
Other 3,348 2,342 1,399
------- ------- -------
Gross deferred income tax assets 31,632 31,375 30,786
Less: valuation allowance (1,542) (1,493) (1,350)
------- ------- -------
Total deferred income tax assets 30,090 29,882 29,436
------- ------- -------
Deferred income tax liabilities:
Property, plant and equipment 1,394 1,962 1,906
Goodwill and trademark 2,687 2,052 1,348
Other accrued income items -- 13 26
------- ------- -------
Total deferred income tax liabilities 4,081 4,027 3,280
Net deferred tax assets $ 26,009 $ 25,855 $ 26,156
======= ======= =======
F-23
F-24
The deferred tax expense recorded in the current year results from temporary
differences in the recognition of certain items of revenue and expense for tax
and financial reporting purposes. The sources of these differences and the tax
effect of each were as follows:
December 27, December 28, December 30,
1997 1996 1995
---- ---- ----
(in thousands)
Change in bad debt reserve $ (207) $(1,517) $ 1,377
Differences in tax and book
inventory (60) (491) (806)
Settlement of deferred
compensation 77 86 (303)
Change in accrued liabilities (168) (5,130) 3,324
(Utilization)/creation of NOL (392) 6,700 4,216
AMT credit and capital loss
carryover 1,006 942 (604)
Differences in tax and book
asset basis 568 (56) 3,188
Differences in book and tax
intangibles (635) (704) (658)
Change in accrued income items 13 13 (9)
(Increase)/decrease in valuation
allowance (49) (143) 2,071
------- -------- -------
Deferred tax benefit/(expense) $ 153 $ (300) $ 11,796
======= ======== =======
The following table summarizes significant differences between the provision for
income taxes and the amount computed by applying the statutory federal income
tax rates to income before taxes:
December 27, December 28, December 30,
1997 1996 1995
---- ---- ----
(in thousands)
(Benefit) taxes computed at
U.S. statutory tax rate $ (215) $ 637 $ (9,115)
State and local taxes 714 656 894
Other 398 (126) (151)
Change in valuation allowance 49 143 (2,071)
------- ------- --------
Total tax provision $ 946 $ 1,310 $(10,443)
======= ======= ========
F-24
F-25
12. Financial Instruments
- -----------------------------
The Company uses financial instruments in its normal course of business as a
tool to manage its assets and liabilities. The Company does not hold or issue
financial instruments for trading purposes. Gains and losses relating to
hedging contracts are deferred and recorded in income or as an adjustment to the
carrying value of the asset at the time the transaction is complete. Payments or
receipts of interest under the interest rate swap arrangement are accounted for
as an adjustment to interest expense. The fair value of such financial
instruments is determined through dealer quotes.
Lumber Futures Contracts
- ------------------------
The Company enters into lumber futures contracts as a hedge against future
lumber price fluctuations. All futures contracts are purchased to protect long-
term pricing commitments on specific future customer purchases. At December 27,
1997 the Company had 79 lumber futures contracts outstanding with a total market
value of $2,028,000 and a net unrealized loss of $42,480. These contracts all
mature in 1998.
Interest Rate Swap
- ------------------
The Company has entered into an interest rate swap agreement which effectively
fixed the interest rate at 8.11% (subject to adjustments in certain
circumstances), for three years. The swap agreement is on $40 million of the
Company's borrowings under its floating rate revolving line of credit. This
interest rate swap is operative while the 30 day LIBOR borrowing rate remains
below 6.7%. The agreement also includes a floor LIBOR rate at 4.6%. At
December 28, 1997 the 30 day LIBOR borrowing rate was 6.0%. The fair value of
the interest rate swap agreement, in accordance with SFAS No. 107, at December
27, 1997 was $47,129.
13. Related Party Transactions
- -------------------------------
In 1997, the Company paid approximately $1,289,000 in reimbursements primarily
to affiliates of the Company's chairman, for costs related to services provided
to the Company during 1997 by certain employees of the affiliated company and
use of a corporate aircraft. Total payments in 1996 and 1995 for similar
services were approximately $612,000 and $613,000, respectively.
In June of 1996, the Company entered into a mortgage lending agreement with an
affiliate of the Company's chairman. In exchange for providing home
construction loans to the Company's customers the Company has reimbursed this
affiliate for certain start-up expenses. Reimbursements in 1997 and 1996 were
approximately $1,045,000 and $365,000, respectively. In late 1997, this
affiliate's involvement in the program, and the Company's reimbursement
obligation, ceased.
F-25
F-26
A director and executive officer of the Company was during 1997, 1996 and 1995 a
shareholder of the law firm that is general counsel to the Company. The Company
paid this firm $665,050, $430,000, and $394,000 for legal services provided to
the Company during 1997, 1996, and 1995, respectively.
For a description of the sale of 2,000,000 newly-issued shares by the Company to
Riverside Group, Inc. in 1996, see Note 9.
On July 31, 1994, the Company acquired Riverside International Corporation
("RIC"), from Riverside Group, Inc., the Company's majority stockholder, for
$895,000. The acquisition was accounted for as a purchase. In December 1995,
voting rights to 66 2/3% of RIC's voting stock were assigned to Riverside Group,
Inc.
14. Subsequent Events (Unaudited)
- ----------------------------------
Restructuring Plan
- ------------------
In February of 1998, the Company announced a plan for additional restructuring
activities to be completed in the first quarter of 1998 (the "1998 Plan"). This
1998 Plan includes the closing or consolidation of eight building centers and
two component manufacturing facilities, the sale of two additional building
centers, and further reductions in headquarters staffing. The eight building
centers and two component manufacturing facilities were closed in the beginning
of February, the sale of the two building centers was completed in March, and
the headquarters reductions have been implemented. The Company anticipates that
it will incur, in the first quarter, a restructuring charge of $5.4 million,
including $3.6 million in anticipated losses on the disposition of closed center
assets and liabilities and $1.8 million in severance and post employment
benefits.
In March of 1998, as contemplated by the 1998 Plan, the Company sold the assets
of its two Iowa centers to another building center chain for an amount greater
than current book value. The sale and transfer of the assets and operations was
completed at the end of March 1998.
Sale of Internet and Utilities Marketing Programs
- -------------------------------------------------
In November of 1997, the Company entered into an agreement to sell its internet
and utilities marketing operations to its majority stockholder. The disposition
of these operations was part of the determination made by the Company to
discontinue or sell non-core operations. In February of 1998, this sale was
completed and the Company received compensation of approximately $870,000 in the
form of a three-year unsecured promissory note. In addition, the Company's
stockholder agreed to pay ten percent of the future net income of these
operations, subject to a maximum of $429,249 plus interest. The terms of the
F-26
F-27
transaction were approved by a committee of the disinterested members of the
Company's board of directors.
Third Amendment to Bank Agreement
- ---------------------------------
On March 20, 1998 the Company and its lenders entered into a third amendment to
the Company's revolving credit agreement. This amendment includes a
modification to the fixed charge ratio covenant to reflect the restructuring
recently announced by the Company and includes the lenders' consent to the
Company's sale of its Iowa facilities and its internet and utilities marketing
operations.
F-27
S-1
WICKES INC. AND SUBSIDIARIES
Schedule II - Valuation and Qualifying Accounts
For the Years Ended December 27, 1997, December 28, 1996, and December 30, 1995
(in thousands)
Col. A Col. B Col. C Col. D Col. E
------ ------ ------ ------ ------
Additions
---------
(1) (2)
Balance at Charged to Charged to Balance at
Beginning Costs and Other End of
Description of Period Expenses(a) Accounts(b) Deductions(c) Period
----------- --------- ----------- ----------- ------------- ----------
1997:
Allowance for doubtful
accounts $4,289 $1,707 ($190) $2,041 $3,765
1996:
Allowance for doubtful
accounts $8,208 $1,067 -- $4,986 $4,289
1995:
Allowance for doubtful
accounts $4,657 $6,482 -- $2,931 $8,208
(a) Net of reserved and collected accounts.
(b) Allowance for doubtful accounts charged to restructuring reserve.
(c) Reserved accounts written-off.
S-1
44
Exhibit Index
-------------
Exhibit
Number Description
- ------- -----------
3.1 (a)* Amended and Restated Certificate of Incorporation of the
Registrant (incorporated by reference to Exhibit 3.1 to the
Registrant's Registration Statement on Form S-1 (the "Form S-1"),
Commission File No. 2-67334).
(b)* First Amendment to Second Amended and Restated Certificate of
Incorporation (incorporated by reference to Exhibit 3.01 to the June
1994 Form 10-Q).
(c)* Second Amendment to Second Amended and Restated Certificate of
Incorporation (incorporated by reference to Exhibit 3.1 to the June
1997 Form 10-Q).
3.2* By-laws of the Registrant, as amended and restated (incorporated by
reference to Exhibit 3.2 to the Registrant's Annual Report on Form 10-
K (the "1993 Form 10-K") for the year ended December 25, 1993).
4.1 (a)* Second Amended and Restated Credit Agreement dated April 11,
1997, among the Registrant, as Borrower, each of the financial
institutions signatory thereto, BT Commercial Corporation, as Agent,
Nations Bank of Georgia N.A. as Syndication Agent, and Bankers Trust
Company, as Issuing Bank (incorporated by reference to Exhibit 4.1 to
the March 1997 Form 10-Q).
(b)* First Amendment to Second Amended and Restated Credit Agreement
(incorporated by reference to Exhibit 4.1 to the June 1997 Form 10-Q).
(c)** Second Amendment to Second Amended and Restated Credit
Agreement.
(d)** Third Amendment to Credit Agreement.
4.2* Indenture dated as of October 15, 1993 between the Registrant and
Marine Midland Bank, N.A. (incorporated by reference to Exhibit 4.2 to
the 1993 Form 10-K).
10.1* Trademark Agreement, dated April 29, 1988, between Wickes Companies,
Inc. and the Registrant (incorporated by reference to Exhibit 10.2 to
the Form S-1).
44
45
10.2* Agreement, dated July 21, 1993, between Collins & Aikman Group, Inc.
and the Registrant (incorporated by reference to Exhibit 10.12 to the
Form S-1).
10.3* Form of Employee Warrant to purchase Common Stock of the Registrant
(incorporated by reference to Exhibit 10.16 to the Form S-1).
10.4 (a)* Amended and Restated 1998 Long-Term Incentive Plan of the
Registrant (incorporated by reference to Exhibit 10.8 to the 1994 Form
10-K).
(b)* Amendment No. 1 (incorporated by reference to Exhibit 10.8(b) to
the 1996 Form 10-K).
(c)* Form of Option Agreement (incorporated by reference to Exhibit
10.22 to the Form S-1).
(d)* Form of Option Agreement (incorporated by reference to Exhibit
10.8 to the 1994 Form 10-K).
(e)* Form of Long-Term Stock Option Agreement (incorporated by
reference to Exhibit 10.8 to the 1994 Form 10-K).
(f)* Form of Long-Term Performance Bonus Agreement (incorporated by
reference to Exhibit 10.8 to the 1994 Form 10-K).
(g)**Amendment No. 2.
(h)**Form of Option Agreement.
10.5 (a)* Amended and Restated 1993 Director Incentive Plan of Registrant
(incorporated by reference to Exhibit 10.03 to the Registrant's
Quarterly Report on Form 10-Q (the "March 1994 Form 10-Q") for the
period ended March 26, 1994).
(b)* Form of Option Agreement (incorporated by reference to Exhibit
10.24 to the Form S-1).
10.6* Employment Agreement between George A. Bajalia and the Registrant
(incorporated by reference to Exhibit 10.02 to the March 1994 Form 10-
Q).
10.7** Special Severance and Stay Incentive Bonus Plan.
45
46
10.8* Mortgage Lending Agreement between Wickes Lumber Company, Inc. and
Wickes Mortgage Lending, Inc. dated as of June 30, 1996 (incorporated
by reference to Exhibit 10.01 to the Registrant's Quarterly Report on
Form 10-Q for the period ended June 29, 1996).
10.9 (a)* Agreement dated November 4, 1997 between the Registrant and
Riverside Group, Inc. (incorporated by reference to Exhibit 10.1 to
the September 1997 Form 10-Q).
(b)**Amendment and Closing Agreement to Agreement dated November
4, 1997 between the Registrant and Riverside Group, Inc.
21.1** List of Subsidiaries of the Registrant.
23.1** Consent of Coopers & Lybrand L.L.P.
27.1** Financial data schedule (SEC use only).
* Incorporated by reference.
** Filed herewith.
There have been omitted certain instruments with respect to long-term debt not
in excess of 10% of the consolidated total assets of the Company. The Company
agrees to furnish copies of any such instruments to the Commission upon request.
46