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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 26, 1998
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, 1999, the Registrant had 8,210,947 shares of Common
Stock, par value $.01 per share, and no 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 of Common Stock on that date) held by nonaffiliates
was approximately $16,100,000 (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,
1999, 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 41
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 41
PART III
Item 10. Directors and Executive Officers
of the Registrant 42
Item 11. Executive Compensation 42
Item 12. Security Ownership of Certain
Beneficial Owners and Management 42
Item 13. Certain Relationships and Related Transactions 42
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K 43
SIGNATURES 44
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3
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 15, 1999, the Company operated 101 sales and distribution
facilities in 23 states in the Midwest, Northeast, and South and 13
component manufacturing facilities that produce and distribute roof and
floor trusses, framed wall panels, and pre-hung door units.
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.
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
private issuance of 2 million shares of the Company's Common Stock, which
was completed in June 1996.
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. In addition to these actions,
in the first quarter of 1998 the Company closed eight additional building
centers and two component manufacturing facilities and sold two other
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4
building centers, and implemented further headquarters staffing and expense
reductions. The Company record a $5.9 million restructuring charge in the
first and third quarters of 1998 with respect to these activities (the
"1998 Plan"). For further information see "Business Strategy" and Note 3
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 $228.2
billion in 1998. 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 14% of the total market in 1998.
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 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 1.46 million in 1994, 1.35 million
in 1995, 1.48 million in 1996, and 1.47 million in 1997. In 1998, total
U.S. housing starts increased to 1.62 million. The Blue Chip Economic
Indicators Consensus Forecast dated March 10, 1999, projects 1999 housing
starts to be 1.58 million, down slightly from 1998. Housing starts in the
Company's primary geographical market, the Midwest, increased 9.2% in 1998.
The Company's two other geographical markets, the Northeast and South,
experienced increases in 1998 housing starts of 8.6% and 10.5%,
respectively. Nationally, single family housing starts, which generate the
majority of the Company's sales to building professionals, increased by
12.0% from 1.13 million starts in 1997 to 1.27 million starts in 1998.
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5
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 $39.9 billion, or approximately 17% of total 1998
sales of the building material supply industry, while direct sales to
DIYers amounted to $112.2 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 as well as for its Wickes Direct customers.
Major Markets
-------------
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 stock only specific types of
products, for instance lumber and wood related products. Major Markets are
also served by ten of the Company's manufacturing facilities.
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.
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6
Beginning in 1997, the Company initiated Major Markets programs in four
markets: Pensacola, Denver, Louisville, and Raleigh/Charlotte. In 1998,
the Company initiated its Major Markets programs in five additional
markets: Chicago, Cleveland, Detroit, Indianapolis, and
Washington/Baltimore. Other programs are being commenced in three other
Major Markets in 1999. The Company intends to initiate 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
four 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. In 1999 this program will be expanded
to other Major Markets.
The Company's operations in Major Markets contributed approximately 42.0%
of the Company's sales in 1998, compared to 35.0% in 1997, and 32.2% in
1996. The Company anticipates that this percentage will continue to
increase in 1999. For the Major Market programs in place during 1998,
total 1998 sales increased approximately 26.0% over 1997 total sales.
Conventional Markets
--------------------
In addition to Major Markets, the Company operates 70 sales and
distribution facilities 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 thirteen sales and distribution
facilities located in Conventional Markets. The Company has also completed
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7
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 a 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 thirteen Conventional Market facilities that
completed Resets have experienced continued significant sales increases.
The Company intends to perform additional Resets in 1999 and future years.
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.
Manufacturing Operations
------------------------
The Company owns and operates thirteen component manufacturing facilities
(including ten 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. In addition to these facilities, eight of the Company's sales and
distribution facilities, to a lesser extent, do some manufacturing. The
Company's manufacturing operations supplied approximately 32% of the pre-
hung interior doors, 45% of the exterior doors, 36% of the roof and floor
truss systems and 71% of the wall panel systems sold by the Company in
1998.
The Company also has an agreement with a third party manufacturer to
provide manufactured housing components nationwide primarily for the
Company. This agreement requires the Company to make minimum quarterly
purchases of approximately $3 million.
7
8
The Company believes that these pre-assembled products improve customer
service and provide an attractive alternative to job-site construction. As
resources permit, the Company also intends to expand its manufacturing
facilities to supply a greater number of its sales and distribution
facilities with these value-added products.
Other Initiatives
-----------------
Since 1997, the Company has also initiated several other programs to
supplement its Major Market and Conventional Market strategies.
The Company's tool rental program was developed to rent specialized,
professional quality tools and equipment to customers in need of equipment
for unique or short term projects. The program is designed to attract new
customers as well as provide the Company with an opportunity to supply
current customers with a greater portion of their total construction needs.
The program is currently in place in 25 sales and distribution facilities
and will be expanded to additional facilities in 1999.
The Company's installed insulation program consists of specially trained
installation crews using specialized equipment and vehicles to install
blown and batt insulation in new construction or major renovations. The
installed insulation program is currently operating in 39 sales and
distribution facilities and is planned to be expanded to more locations in
1999. Installed insulation is one of the value-added services which the
Company believes it can cost-effectively provide to meet its customers
needs. The Company is evaluating several other product installation
services which may be initiated in 1999.
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."
8
9
During the first quarter of 1998 the Company implemented the 1998 Plan,
which resulted in the closing or consolidation of eight sales and
distribution and two manufacturing facilities in February, the sale of two
sales and distribution facilities in March, and further reductions in
headquarters staffing. As a result of the 1998 Plan, the Company recorded
a restructuring charge of $5.4 million in the first quarter and an
additional charge of $0.5 million in the third quarter. The $5.9 million
charge included $4.1 million in estimated losses on the disposition of
closed facility assets and liabilities, $2.1 million in severance and post
employment benefits related to the 1998 plan, and a benefit of $300,000 for
adjustments to prior years' restructuring accruals.
Markets
- -------
The Company operates in 20 Major Markets, which are served by 31 sales
and distribution facilities and ten 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
Total Distribution Facilities
Households in Conventional Major
Thirty Mile Radius Markets Markets
------------------ ------------ ---------
Under 50,000 16 0
50,000-100,000 17 0
100,000-250,000 21 10
250,000-500,000 13 9
500,000 and over 3 12
--- ---
Total 70 31
=== ===
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
15, 1999:
9
10
Midwest Northeast South
----------------------- -------------------------- ---------------------------
Number of Number of Number of
Sales and Sales and Sales and
Distribution Distribution Distribution
State Facilities State Facilities State Facilities
----- ---------- ----- ---------- ----- ----------
Michigan 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 the first quarter of 1998, as part of the 1998 Plan, the Company
closed or consolidated eight building centers and two component
manufacturing facilities and sold two other building centers, all in
Conventional Markets. For a further description of the 1998 Plan see
"Business Strategy." In 1998, the Company also opened two new component
manufacturing facilities at existing sales and distribution sites, and
purchased a third component manufacturing facility in Indianapolis,
Indiana. In January 1999 the Company purchased the assets of a component
manufacturing facility located in Cookeville, Tennessee, and in March 1999
the Company entered into an agreement to acquire a component manufacturing
facility located in Bear, Delaware.
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, December 26, 1998 and March 15, 1999.
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11
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 -- 2
Acquisition -- 1
Sold (2) --
Closings (7) (2)
Consolidations (1) --
----- -----
As of December 26, 1998 101 12
Acquisition -- 1
----- -----
As of March 15, 1999 101 13
===== =====
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 1998. In 1998, 89% (compared
with 87% in 1997) of the Company's sales were on trade credit, with the
remaining 11% as cash and credit card transactions.
Home Builders
-------------
The Company's primary customers are single-family home builders. In
1998, all home builder customers accounted for 61% of the Company's sales,
compared with 57% in 1997. The majority of the Company's sales to these
customers are of high-volume commodity items, such as lumber, building
materials, and manufactured housing components. The Company will continue
its intense focus on this customer segment, offering new products and
developing additional services to meet their needs.
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12
Commercial / Multi-family Contractors
-------------------------------------
Wickes Direct and Wickes International concentrate on sales to commercial
contractors (primarily those engaged in constructing motels, restaurants,
nursing homes, extended stay facilities, and similar projects) and multi-
family residential contractors. Sales to these customers are made on a
direct ship basis as well as through the Company's sales and distribution
facilities. In 1998, sales to these customers accounted for more than 17%
of the Company's sales, compared with 18% in 1997. As part of the 1998
Plan, the Company has integrated the Wickes Direct domestic program more
closely with its other operations.
Repair & Remodelers
-------------------
In 1998, R&R customers accounted for approximately 10% of the Company's
sales, compared with 12% in 1997. The R&R segment consists of a broad
spectrum of customers, from part-time handymen to large, sophisticated
business enterprises. Some R&R contractors are involved exclusively with
single product application, such as roofing, siding, or insulation, while
some specialize in remodeling jobs, such as kitchen or bathroom remodeling
or the construction of decks, garages, or full room additions. The Company
offers the product and project expertise, special order capability, design
assistance, and credit terms to serve the widely varying needs of this
diverse market.
DIYers
------
Sales to DIYers (both project and convenience) represented about 12% of
the Company's sales in 1998, compared with 13% in 1997. 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 390 outside sales representatives ("OSRs") 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 128 specialty salespeople in its sales and
distribution facilities who provide expert advice to customers in project
design, product selection and applications. A staff of 43 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 76 kitchen and bath specialists.
The Company also employs 9 specialists in other departments.
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14
The Company extends credit, generally due on the 10th day of the month
following the sale, to qualified and approved contractors. Approximately
89% of the Company's sales during 1998 were on credit, with the remaining
11% consisting of cash or credit card sales, including approximately 0.6%
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 .3% of total credit sales in 1998, compared with
.2% in 1997, and .1% in 1996.
The Company owns and leases a fleet of 776 delivery vehicles as of
February 28, 1999, to provide job-site deliveries of building materials
scheduled to coordinate with project progress, including 84 specialized
delivery trucks equipped for roof-top or second story delivery, 91
specialized millwork delivery vehicles, 41 vehicles designed for
installation of blown insulation, and 22 vehicles equipped with truck
mounted forklifts. 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 began an equipment rental program at 25 of its sales
and distribution facilities. Under this program, the Company rents
specialized, professional quality tools and equipment to customers in need
of equipment for unique or short term projects.
In 1997, the Company also began its installed insulation program.
Through the use of specialized equipment and vehicles and its specially
trained installation crews, the Company installs blown and batt insulation
in new or existing construction. There are currently 39 sales and
distribution facilities that offer this service.
The Company's internet site on the world wide web provides information
about Wickes' services and products, facilitates doing business with
customers, allows customers to look up their own transactional information,
and features extensive links to suppliers and other industry references.
The Company's home page can be found at the internet address:
http://www.wickes.com.
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15
The Company advertises in trade journals and produces specialized direct
mail promotional materials designed to attract specific target customers.
The Company does some select newspaper advertising, which may include
circulars and run-of-press advertisements. It also has numerous product
displays in its sales and distribution facilities to highlight special
products and services.
To increase customer loyalty and strengthen customer relationships, the
Company, in many cases with vendor support, sponsors or participates in
numerous special marketing activities, such as trade show events,
informational product seminars, various outings, and professional builder
trips.
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. During 1998 the Company did not
initiate any additional Resets, as it evaluated the large number completed
during 1997. For those centers that completed Resets during 1997, the
Company has experienced sales increases of approximately 20% in the 12-
month period following completion of the Reset. Additional showroom
improvements are contemplated for 1999 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.
15
16
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 5,200 SKUs are typically stocked in a particular sales and
distribution facility.
The Company categorizes 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 44%, 36%, 10% and 10% of the
Company's sales for 1998 and 45%, 35%, 11% and 9%, respectively, of sales
for 1997.
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 1998,
approximately 32% of the Company's sales were of special order items,
compared with 31% in 1997.
Manufacturing
- -------------
The Company owns and operates 13 component manufacturing facilities that
supply the Company's sales and distribution facilities with higher-margin,
value-added products such as pre-hung doors, framed wall panels, and roof
and floor trusses. In addition to these facilities, eight of the Company's
sales and distribution facilities, to a lesser extent, perform some
manufacturing. These manufacturing operations enable the Company to serve
the needs of its professional customers for such quality, custom-made
products. In 1998 the Company's door manufacturing operations supplied
approximately 32% of the pre-hung interior doors and 45% of the exterior
doors sold by the Company. The truss manufacturing operations supplied
approximately 36% of the total roof and floor truss systems and 71% of the
total wall panel systems sold by the Company in 1998. The Company believes
that these pre-assembled products improve customer service and provide an
attractive alternative to job-site construction. The Company has also
entered into an arrangement with a manufacturer that primarily serves the
Company. 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.
16
17
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 1998, and the Company is not
dependent upon any single vendor for any material product. The Company
believes that alternative sources of supply are readily available for
substantially all of the products it offers.
The 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 59 of its sales and distribution
and manufacturing 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."
17
18
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.
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 or
removed in accordance with applicable environmental laws in effect at the
time. As a result of reviews made in connection with the sale or possible
sale of certain facilities, the Company has found petroleum contamination
of soil and ground water on several of these sites and has taken 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 four years.
The Company has been identified as a potential responsible party in two
Superfund landfill clean up sites. Based on the amounts claimed and the
Company's prior experience, it is expected that the Company's liability in
these two matters will be less than $100,000.
18
19
For information concerning certain litigation concerning products
containing asbestos or silica dust, see "Item 3. Legal Proceedings."
The Company has reserved $152,000 towards the cost of these and other
environmental and product liability matters. Although the Company has not
expended material amounts in the past ten years with respect to the
foregoing, and expenditures in the most recent four 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. Certain of the Company's
statements concerning environmental and product liability matters
constitute Forward-Looking Statements. See "Item 3. Legal Proceedings" for
a description of certain factors that may affect the outcome of these
matters.
Employees
- ---------
As of February 28, 1999, the Company had approximately 3,795 employees,
of whom 3,292 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 38,400
square feet. The Company's sales and distribution facilities located in
Major Markets tend to be more specialized. The Company upgraded or Reset
19 of its showrooms in 1997 and 1998. The Company's sales and distribution
facilities are situated on properties ranging from 1.0 to 28.2 acres and
averaging 9.3 acres. The Company also operates 13 component manufacturing
facilities, which have an average of 40,300 square feet under roof on 6.9
acres.
19
20
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 26, 1998,
the Company also held for sale the assets of ten closed facilities with an
aggregate book value of $3.7 million. In addition to its sales and
distribution facilities, the Company operates 13 component manufacturing
plants. Six of these plants are located on sales and distribution facility
sites. Of the remaining seven plants, four are on owned sites and three
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 products. As of February 28, 1999, the fleet included
approximately 156 heavy duty trucks, 84 of which provide roof-top or second
story delivery and 22 other vehicles equipped with truck mounted forklifts,
478 medium duty trucks, 523 light duty trucks and automobiles, 574
forklifts, 91 specialized millwork delivery vehicles, and 41 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 unspecified
damages with respect to the transaction. See Note 9 of Notes to
Consolidated Financial Statements included elsewhere herein. There was no
activity in this suit in 1998.
The Company has been identified as a potential responsible party in two
Superfund landfill clean up sites. In Browning-Ferris Industries, et al. v.
------------------------------------
Richard Ter Maat, et al. v. Wickes Lumber Company, et al., Case No. 92 C
- ---------------------------------------------------------------------------
22059 filed in the United State District Court for the Northern District of
- -----
Illinois, Wickes has been named as a potentially responsible party for
cleanup of the MIG-DeWanne Landfill located in Boone County, Illinois. The
Company has also received notification from the United States Environmental
Protection Agency regarding cleanup of the Adams/Quincy Landfills #2 & #3
located in Quincy, Illinois. Based on the amounts claimed and the
Company's prior experience, it is expected that the Company's liability in
these two matters will be less than $100,000.
20
21
The Company is one of many defendants in two class action suits filed in
August of 1996 by approximately 200 claimants for unspecified damages as a
result of health problems claimed to have been caused by inhalation of
silica dust, a byproduct of concrete and mortar mix, allegedly generated by
a cement plant with which the Company has no connection other than as a
customer. Librado Amador, et al. v. Alamo Concrete Products Limited,
---------------------------------------------------------------
Wickes Lumber Company, et al., Case No. 16696, was filed in the 229th
- -----------------------------------------------
Judicial District Court of Duval County, Texas. Javier Benavides, et al.
-------------------------
v. Magic Valley Concrete, Inc., Wickes Lumber Company, et al., Case No. DC-
- ---------------------------------------------------------------------------
96-89 was filed in the 229th Judicial District Court of Starr County,
- -----
Texas. The Company has entered into a cost sharing agreement with its
insurers, and any liability is expected to be minimal.
The Company is one of many defendants in approximately 100 actions, each
of which seeks unspecified damages, 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.
Since 1993, the Company has settled 16 similar actions for insignificant
amounts, and another 186 of these actions have been dismissed.
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 liquidity.
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 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
22
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 under the trading symbol "WIKS." As of February 28, 1999,
there were 8,210,947 shares outstanding held by approximately 145
shareholders of record.
The following table sets forth for the periods indicated the high and low
sale prices for the Company's Common Stock as reported on the NASDAQ
National Market System. Prices do not include retail markups, markdowns or
commissions.
Three Months Ended High Low
------------------ ------ ------
Fiscal 1998
-----------
March 28 $4.625 $3.00
June 27 10.25 3.938
September 26 6.438 2.50
December 26 5.00 2.50
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
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 26, 1998. 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. 26, Dec. 27, Dec. 28, Dec. 30, Dec. 31,
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
Income Statement Data:
Net sales $910,272 $884,082 $848,535 $972,612 $986,872
Gross profit 216,316 203,026 189,463 220,812 233,831
Selling, general and
administrative expense 186,853 185,385 162,329 194,629 194,586
Depreciation, goodwill and
trademark amortization 5,253 4,863 5,367 5,882 4,543
Provision for doubtful accounts 2,915 1,707 1,067 6,482 2,457
Other operating income 6,837 10,689 6,796 5,831 6,772
Restructuring and unusual
items (1) 5,932 (559) 745 17,798 2,000
Income from operations 22,200 22,319 26,751 1,852 37,017
Interest expense (2) 21,632 21,417 21,750 24,351 21,663
Equity in loss of affiliated
company - 1,516 3,183 3,543 -
Income (loss) before
income taxes 568 (614) 1,818 (26,042) 15,354
Income taxes 1,072 1,099 1,010 1,353 1,660
Deferred tax (benefit)/
expense(3) (53) (153) 300 (11,796) (14,360)
Net (loss) income (451) (1,560) 508 (15,599) 28,054
Ratio of earnings to
fixed charges (4) 1.02 - 1.07 - 1.63
Interest coverage (5) 1.36 1.36 1.61 0.35 2.09
Adjusted interest coverage (6) 1.65 1.33 1.65 1.15 2.19
Per Share Data:
Basic and diluted (loss)
earnings per common share $ (0.06) $ (0.19) $ 0.07 $ (2.54) $ 4.57
Weighted average common
shares outstanding 8,197,542 8,168,257 7,221,082 6,135,610 6,154,770
Operating and Other Data:
EBITDA (7) $27,453 $27,182 $32,118 $ 7,734 $41,560
Adjusted EBITDA (8) 33,385 26,623 32,863 25,532 43,560
Cash interest expense (9) 20,185 20,016 19,969 22,266 19,882
Depreciation and amortization 5,253 4,863 5,367 5,882 4,543
Deferred financing cost
amortization 1,447 1,401 1,781 2,085 1,781
Capital expenditures 5,854 7,758 2,893 7,538 9,760
Same store sales growth (10) 9.0% 4.7% (6.4%) (3.8%) 14.1%
Sales and distribution facilities
open at end of period 101 111 108 110 130
Net cash provided by (used in)
operating activities 2,627 (24,554) 18,710 15,862 1,331
Net cash (used in) provided by
investing activities (1,624) 6,040 2,410 (10,277) (41,777)
Net cash (used in) provided by
financing activities (1,017) 16,660 (19,274) (7,535) 42,480
Balance Sheet data (at period end):
Working capital $136,136 $134,459 $116,771 $139,622 $163,511
Total assets 292,750 283,352 272,842 302,515 319,573
Total long-term debt,
less current maturities 191,961 193,061 176,376 205,221 211,139
Total stockholders' equity 23,662 24,001 25,499 15,129 30,146
23
24
Notes to Selected Consolidated Financial Data
---------------------------------------------
(1) During the first quarter of 1998 the Company implemented the 1998
Plan which resulted in the closing or consolidation of eight sales and
distribution and two manufacturing facilities in February, the sale of
two sales and distribution facilities in March, and further reductions
in headquarters staffing. As a result of the 1998 Plan, the Company
recorded a restructuring charge of $5.4 million in the first quarter
and an additional charge of $0.5 million in the third quarter. 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. See Note 3 of Notes to Consolidated Financial
Statements included elsewhere herein.
(2) Interest expense includes cash interest expense and amortization
of deferred financing costs (See Note 9 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) For purposes of computing this ratio, earnings consist of income
(loss) before income taxes 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 $0.5 million and
$26.0 million for the years ended December 27, 1997 and December 30,
1995, respectively.
(5) For purposes of computing this ratio, earnings consists of EBITDA
(as defined in Note 7 below), which is divided by cash interest
expense (as defined in Note 9 below).
(6) For purposes of computing this ratio, earnings consists of
Adjusted EBITDA (as defined in Note 8 below), which is divided by cash
interest expense (as defined in Note 9 below).
(7) EBITDA represents income (loss) before income taxes, 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 and may not be
comparable to similarly titled measures reported by other companies.
24
25
(8) Adjusted EBITDA represents EBITDA (as defined in Note 7 above)
adjusted to exclude restructuring and unusual items and is used in the
adjusted interest coverage ratio to reflect debt service capability
before the effect of these restructuring and unusual items, and
provides a truer measure of debt service capability for ongoing
operations.
(9) Cash interest expense consists of interest expense less amortization
of deferred financing costs. The following table details interest
expense, cash interest expense, and interest paid for each of the five
years ended December 26, 1998 (in thousands).
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
Interest expense $21,632 $21,417 $21,750 $24,351 $21,663
Less:
Amortization of deferred
financing costs 1,447 1,401 1,781 2,085 1,781
------ ------ ------ ------ ------
Cash interest expense 20,185 20,016 19,969 22,266 19,882
Decrease (increase) in
accrued interest 700 (225) 403 557 (1,105)
------ ------ ------ ------ ------
Interest paid $20,885 $19,791 $20,372 $22,823 $18,777
====== ====== ====== ====== ======
(10) Same store data reflects average sales for sales and distribution
facilities and other facilities that were operated by the company
throughout both the current and previous year. The following table lists,
by year, the number of locations that were included in this calculation:
Year No. of Facilities
---- -----------------
1998 101
1997 107
1996 101
1995 101
1994 122
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.
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. 28, Dec. 27, Dec. 28,
1998 1997 1996
---- ---- ----
Net sales 100.0% 100.0% 100.0%
Gross profit 23.8 23.0 22.3
Selling, general and administrative
expense 20.5 21.0 19.1
Depreciation, goodwill and trademark
amortization .6 .6 .6
Provision for doubtful accounts .3 .2 .1
Restructuring and unusual items .7 (.1) .1
Other operating income (.7) (1.2) (.8)
Income from operations 2.4 2.5 3.2
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. 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. During the first quarter of 1998,
the Company experienced mild winter weather conditions in the Company's
Midwest region, which was partially offset by increased precipitation in
the Northeast and South. Unseasonably warm weather during December of 1998
was followed by excessive snow falls in the Midwest in January of 1999.
26
27
The following table contains selected unaudited quarterly financial data
for the years ended December 26, 1998, December 27, 1997, and December 28,
1996. Quarterly earnings/(loss) per share may not total to year end
earnings/(loss) per share due to the issuance of additional shares of
Common Stock during the course of the year.
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
--------- --------- ------ ---------- ------------
1998
March 28 $168.8 18.5% $41.0 $(6.8) $(.83)
June 27 237.1 26.1 56.1 2.8 .34
September 26 261.1 28.7 61.0 2.8 .34
December 26 243.3 26.7 58.2 0.7 .09
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
In 1998 and 1996 the Company recorded charges of $5.9 million and $0.7
million, respectively, for restructuring and unusual items. In 1997 the
Company recorded a benefit of $0.6 million for 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
27
28
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 quarters of 1998 and
1996, only two and three pieces of real estate were sold for gains of $0.4
million and $0.6 million, respectively. Gains or losses on the sale of
real estate are recorded under other operating income.
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.
1998 Compared with 1997
- -----------------------
Net Sales
---------
Net sales for 1998 increased $26.2 million, or 3.0%, to $910.3 million
from $884.1 million in 1997. Sales for all facilities operated throughout
both years ("same store") increased 9.0%. During 1998, the Company
experienced a 16.2% increase in same store sales to its primary customer
segment, the professional home builder, and a 1.2% increase in same store
sales to commercial builders. Consumer sales declined 3.5% on a same
store basis.
Total housing starts in the United States increased 9.6% in 1998, and
starts in the Company's primary geographical market, the Midwest, increased
approximately 9.2%. The Company's two other geographical markets, the
Northeast and South, experienced increases of 8.6% and 10.5%, respectively.
Nationally, single family housing starts, which generate the majority of
the Company's sales to building professionals, experienced an increase of
12.0% in 1998, from 1.13 million starts in 1997 to 1.27 million starts in
1998.
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The Company has experienced significant sales increases (averaging in
excess of 20%) in its target major markets and at sales and distribution
facilities that completed showroom resets in 1997 and 1998.
During the first quarter, the Company experienced a sales benefit as a
result of mild winter weather conditions in the Company's Midwest region.
This was partially offset by increased precipitation in the Northeast and
South, during the same period. The Company, as a whole, benefited from
unseasonably warm weather during December of 1998. Weather conditions
during 1997 were closer to seasonal averages.
The Company estimates that deflation in lumber prices negatively affected
1998 sales by approximately $28.6 million, when compared with lumber prices
during 1997.
As a result of the 1998 Plan, the Company operated ten fewer sales and
distribution facilities at the end of 1998 than it operated at the end of
1997. The ten sales and distribution facilities that were closed, sold, or
consolidated, as a result of the 1998 Plan, contributed an aggregate of
$4.0 million to 1998 sales and $46.5 million to 1997 sales. See " Item 1.
Business - Business Strategy".
Gross Profit
------------
Gross profit increased $13.3 million to 23.8% of net sales for 1998
compared with 23.0% of net sales for 1997. The increase in gross profit is
primarily due to increased sales, improved product costs and increased
margins on internally manufactured products.
The increase in gross profit as a percent of sales is primarily
attributable to improved margins on internally manufactured products,
improved product costs and improved margins on installed sales. These
improvements were partially offset by the effects of lumber deflation and a
continued increase in the percent of sales attributable to professional
builders. The Company estimates that lumber deflation in 1998, when
compared with 1997 price levels, reduced gross profit by approximately $5.5
million. The percent of Company sales attributable to professional builders
increased to 87.9% for 1998 compared with 86.5% in 1997. 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 1998, selling, general, and administrative expense ("SG&A") decreased
as a percent of net sales to 20.5% compared with 21.0% of net sales in
1997. Much of this reduction is attributable to expense reductions as a
result of the Company's 1998 Plan and the completion of most of the
Company's remerchandising programs during or prior to the end of the second
quarter of 1998.
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30
In the first quarter of 1998, the Company closed eight underperforming
building centers, two component manufacturing facilities and sold its two
sales and distribution facilities in Iowa. For further information,
including the charge taken by the Company in the first quarter of 1998, see
"Restructuring and Unusual Items" and Note 3 of the Notes to Consolidated
Financial Statements included elsewhere herein.
The Company experienced decreases from 1997 to 1998, as a percent of
sales, in maintenance, travel, professional fees, marketing, and general
office expenses which were partially offset by increased real estate rent
and salaries, wages and employee benefits. The Company experienced a
slight increase in salaries, wages and employee benefits as a percent of
sales by 0.2%. On a same store basis, the number of total employees at the
average sales and distribution facility increased approximately 8% from
1997.
Depreciation, Goodwill and Trademark Amortization
-------------------------------------------------
Depreciation, goodwill and trademark amortization costs increased $0.4
million in 1998 compared with 1997. This increase is primarily due to
depreciation on rental equipment and facilities implemented or improved as
a result of the Company's major market and remerchandising programs,
partially offset by reduced depreciation on vehicles. The Company's tool
rental program was initiated during 1997 and no depreciation on rental
equipment was recorded in the first half of 1997.
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 $2.9 million or 0.3% of sales for 1998 from
$1.7 million or 0.2% of sales for 1997. While the Company did experience
several large write-offs during 1998, the results were in line with its
historical average of approximately 0.3% of sales.
Restructuring and Unusual Items
-------------------------------
During the first quarter of 1998 the Company implemented the 1998 Plan
which resulted in the closing or consolidation of eight sales and
distribution and two manufacturing facilities in February, the sale of two
sales and distribution facilities in March, and further reductions in
headquarters staffing. As a result of the 1998 Plan, the Company recorded
a restructuring charge of $5.4 million in the first quarter and an
additional charge of $0.5 million in the third quarter. The $5.9 million
charge included $4.1 million in anticipated losses on the disposition of
closed facility assets and liabilities, $2.1 million in severance and post
employment benefits related to the 1998 plan, and a benefit of $300,000 for
adjustments to prior years' restructuring accruals. The $4.1 million in
anticipated losses includes the write-down of assets (excluding real
estate), to their net realizable value, of $3.4 million and $700,000 in
real estate carrying costs. The $2.1 million in severance and post
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employment benefits covered approximately 250 employees that were released
as a result of reductions in headquarters staffing and the closing or
consolidation of the ten operating facilities. The $300,000 benefit from
prior years was a result of accelerated sales of previously closed
facilities during the fourth quarter of 1997 and first quarter of 1998.
The acceleration of these sales resulted in a change in the estimate of
facility carrying costs for the sold facilities.
Other Operating Income
----------------------
Other operating income decreased to $6.8 million in 1998 from $10.7
million in 1997. The decrease is primarily the result of a decrease in
gains reported on the sale of real estate of closed facilities and excess
vehicles and equipment. In 1998 the company sold nine pieces of real
estate and recorded a gain of $1.6 million, compared with a gain of $6.0
million recorded in 1997 for the sale of 12 facilities. This decrease was
partially offset by approximately $1.0 million in gains as a result of the
difference between insured replacement cost and book value as a result of a
fire and storm damage at certain of the Company's sales and distribution
facilities during 1998.
Interest Expense
----------------
Interest expense increased to $21.6 million in 1998 from $21.4 million in
1997. This increase was the result of a increase in average outstanding
debt under the Company's revolving line of credit of $9.1 million partially
offset by a decrease in the overall effective borrowing rate of 38 basis
points. The increase in average outstanding debt was due primarily to
increases in working capital and increased investment in property, plant
and equipment.
Equity in Loss of Affiliated Company
------------------------------------
The Company's net investment in Riverside International LLC was reduced
to zero as a result of the $1.5 million loss that was recorded in 1997.
Accordingly, the Company recorded no equity in loss of affiliated company
during 1998.
Provision for Income Taxes
--------------------------
In 1998, and 1997, the Company recorded current income tax expense of
$1.1 million and $1.1 million, respectively. Current income tax provisions
for both years consist of state and local tax liabilities.
A deferred tax benefit of $0.1 million was also recorded in 1998. This
compares with a deferred tax benefit of $0.2 million in 1997. The 1998
benefit results from the loss before federal 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
31
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fully these net deferred tax assets. See Note 11 of Notes to Consolidated
Financial Statements included elsewhere herein.
Net Income
----------
The Company recorded a net loss of $0.5 million in 1998, compared with a
net loss of $1.6 million in 1997, an improvement of $1.1 million. The
primary components of this improvement include an increase in gross profit
of $13.3 million and a decrease in losses attributable to Riverside
International LLC of $1.5 million. These improvements were partially
offset by a $6.5 million increase in restructuring and unusual items
expense, a reduction in other income of $3.9 million, and increases in SG&A
expense of $1.5 million and provision for doubtful accounts of $1.2
million.
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. Same store sales 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.
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.
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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.
Selling, General, and Administrative Expense
--------------------------------------------
In 1997, 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.
During 1997, the Company Reset the showrooms of thirteen 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.
33
34
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.
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
-------------------------------
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.
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".
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
34
35
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 certain 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.
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. 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.
35
36
Statements of Financial Accounting Standards
- --------------------------------------------
Recently Issued Accounting Pronouncements
-----------------------------------------
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities," standardizes the accounting
for derivative instruments by requiring that all derivatives be recognized
as assets and liabilities and measured at fair value. The statement is
effective for fiscal years beginning after June 15, 1999. The Company
believes adoption of the statement will not have a material effect on its
financial statements.
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 1998, net cash provided by operating activities amounted to $2.6
million. This compares with cash used in operating activities of $24.6
million in 1997 and cash provided by operating activities of $18.7 million
in 1996. The improvement of $27.2 million is primarily the result of
increases in accounts payable, increased earnings after adjustment for non-
cash expenses, a decrease in notes receivable, decreased capital spending
and smaller increases in inventory and other assets than the increase
recorded in 1997. These improvements were partially offset by a reduction
in the proceeds from the sale of property plant and equipment and a larger
increase in accounts receivable, when compared to the increase in 1997.
The cash generated by operating activities was used for capital
expenditures and to reduce the Company's borrowings on it's revolving line
of credit. The Company decreased its capital expenditures in 1998 to $5.9
million from $7.8 million in 1997.
Accounts receivable at the end of 1998 were $11.1 million, or 13.6%,
higher than at year end 1997 primarily as a result of a $9.2 million
increase in December 1998 credit sales compared with December 1997 and an
increase in accounts with extended terms. Inventory at the end of
December 1998 was $1.0 million higher than at the end of 1997, primarily as
a result of significantly higher sales and continued demand for lumber and
building materials during December, due in part to very favorable weather
conditions. 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.
36
37
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 $5.9 million in capital expenditures in 1998.
Approximately $2.6 million was expended on capital improvements for new
operations, showroom resets and expansion of manufacturing operations. The
Company expects to spend approximately $7 million in 1999. These
expenditures are expected to be funded by the Company's borrowings and its
internally generated cash flow. At December 26, 1998, there were no
material commitments for future capital expenditures.
The Company maintained excess availability under its revolving credit
facility throughout 1998. The Company's receivables and inventory
typically increase in the second and third quarters of the year due to
higher sales in the peak building season. In these same periods, the
Company typically reaches its peak utilization of its revolving credit
facility because of the increased inventory needed for the peak building
season. Except for the third quarter, the Company was in full compliance
with all of the requirements contained in its revolving credit agreement.
At the end of the third quarter the Company was not in compliance with the
fixed charge coverage covenant contained in its revolving line of credit.
The Company's lenders waived the non-compliance.
On February 17, 1999 the Company entered into a new revolving credit
agreement and repaid all indebtedness under and terminated its old
revolving credit agreement. See Note 15 of Notes to Consolidated Financial
Statements included elsewhere herein. Among other things, the changes
between the old agreement and this new agreement include (i) an initial 25
basis point reduction in the Company's LIBOR and prime borrowing rates to
200 basis points over LIBOR and 50 basis points over prime, and further
provisions for additional decreases in the borrowing rate if certain
interest coverage levels are achieved, (ii) an increase in the maximum
credit line from $130 million to $160 million, (iii) a decrease in the
unused line fee from 50 basis points to 25 basis points, (iv) elimination
of the fixed charge coverage requirement, (v) extension of the term of the
agreement to June of 2003, (vi) increases, subject to the permitted
discretion of the agent for the lenders, in the percent of eligible
accounts receivable to 85% from a range between 80% and 85% and the percent
of eligible inventory to 60% from a range between 50% and 60%. Covenants
under the new agreement do require, among other things, that the Company
maintain unused availability under the new revolving line of credit of at
least $15 million (subject to increase in certain circumstances) and
maintain certain levels of tangible capital funds.
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At February 27, 1999, the Company had outstanding borrowings of $100.9
million and unused availability of $29.5 million under its new revolving
credit facility. 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 February 17, 1999, in conjunction with the new revolving credit
agreement, the Company terminated its interest rate swap agreement and
entered into a new interest rate swap agreement. This new agreement
effectively fixed the interest rate at 7.75% (subject to adjustments in
certain circumstances), reduced from 8.11% under the old agreement, for
three years, on $40 million of the Company's borrowings under its floating
rate revolving line of credit. Unlike the prior agreement, this interest
rate swap has no provisions for termination based on changes in the 30-day
LIBOR borrowing rate. At March 1, 1999 the 30-day LIBOR borrowing rate was
4.94%.
The Company's new 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 26, 1998, the Company and its subsidiaries had federal income
tax net operating loss carryforwards ("NOLs") of approximately $43.3
million. The NOLs will expire in the years 2005 to 2018 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
- ---------
The Year 2000 problem relates to the inability of certain computer
programs and computer hardware to properly handle dates after December 31,
1999. As a result businesses may be at risk for miscalculations and
systems failures.
38
39
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. An inventory was developed of all items of
concern including vehicles, manufacturing equipment, and security, heating
and electrical systems. Upon completion of the inventory a plan was
developed to evaluate the importance of each item, the remediation
necessary to make the item compliant (either modification or replacement),
the resources necessary to complete the remediation, and a time frame for
completion. The plan was then reviewed by an outside party for
completeness. The plan also includes the steps the Company is taking to
ensure it is not at risk for problems that may occur at its suppliers or
customers. The Company has surveyed 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. Management is currently reviewing their responses and
evaluating alternatives for those that are not sufficiently addressing the
Year 2000 issue.
The Company is addressing its software, hardware, and equipment issues
through a combination of modifications to existing programs and conversions
to Year 2000 compliant software and equipment. The Company believes that
it is currently 90% complete with hardware and equipment related
remediation or replacement efforts, and 70% complete in software
remediation or replacement. The Company's plan is to be totally compliant
by September of 1999. Certain systems, which have critical dates prior to
September, are scheduled for earlier completion dates or have been
completed. At the present time the remediation process is proceeding as
planned and there are no significant delays expected.
The estimated total cost of the project is expected to be $2.7 million.
$500,000 of this cost is for the replacement of systems and equipment which
was accelerated due to the Year 2000 problem, and which will be capitalized
over the systems estimated useful life. Through February of 1999 the
Company has expended a total of $1.2 million on Year 2000 remediation.
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 Company's greatest risk at this
time is with its store operating and accounts receivable systems and its
inventory suppliers. If the store operating system has problems the
Company could experience disruption in its basic distribution operations.
A problem with the Company's accounts receivable system could cause some
short term working capital and cash flow problems until the issue is
resolved. While the Company has extended efforts to receive assurances
that its product suppliers are adequately addressing this issue, the
Company expects there will be some minimal interruptions in replenishment
from some suppliers, but these should be addressed quickly through
alternative sources.
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40
The Company has evaluated each problem area for various contingency
responses to mitigate any disruption should remediation be incomplete. At
present senior management is reviewing critical items to ensure there is at
least one workable alternative to each of its key processes including
inventory replenishment, sales and accounts receivable, payroll, and
manufacturing and delivery equipment. Milestones for completion of
critical systems are being closely monitored to minimize the chances of a
Year 2000 failure in the key processes. In addition, a plan is being
developed to produce backup documents and reports, of critical information,
at December 31, 1999 and for process and system testing to occur on January
1 and 2, to identify and address any unforeseen issues prior to the opening
of business on January 3.
The most reasonably likely worst case scenario for a Year 2000 failure
would involve a brief interruption of the Company's primary field systems
application. Given the high level of in-house expertise in the development
and maintenance of this system, the expectation is that any such failure
would involve at worst a several day delay in processing. The Company
has, and will continue to spend a great deal of resources to ensure that
this system is compliant and will not be impacted by a Year 2000 failure.
As a contingency for a failure scenario, though, the Company has arranged
for the printing of key documents (sales orders scheduled for the next
week, special orders placed with suppliers, pricing masters, etc.) on
December 31, at each location, which would allow the operations to continue
to operate, on a manual basis, for at least two weeks before there would be
a serious impairment to the business. In addition, key systems and
operating staff will be brought in on January 1 and 2, days on which the
operating facilities are scheduled to be closed, to perform system testing
of the field applications and check operating equipment, utilities and
other systems. The Company can and has applied program changes to all sales
and distribution facilities in a matter of hours.
Item 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
- --------------------------------------------------------
MARKET RISK
-----------
The Company is subject to market risk associated with changes in interest
rates and lumber futures contracts.
On February 17, 1999 the Company entered into a new revolving credit
agreement with a group of financial institutions. The new revolving line
of credit provides for, subject to certain restrictions, up to $160 million
of revolving credit loans and the issuance of up to $10 million of letters
of credit. Until delivery to the lenders of the Company's financial
statements for the period ending June 26, 1999, interest on amounts
outstanding under the new revolving line of credit will bear interest at a
spread above the base rate of BankBoston, N.A. of 0.50%, or 2.00% above the
applicable LIBOR rate. After that time, depending upon the Company's
rolling four-quarter interest coverage ratio, amounts outstanding under the
new revolving line of credit will bear interest at a spread above the base
rate of from 0% to 0.75% or from 1.50% to 2.25% above the applicable LIBOR
40
41
rate. Based on the Company's 1998 average borrowings under it's revolving
credit agreement, subject to the effect of the interest rate swap agreement
described below, a 25 basis point movement in the base rate or LIBOR rate
would result in an approximate $164,000 annualized increase or decrease in
interest expense. See Notes 12 and 15 of Notes to Consolidated Financial
Statements included elsewhere herein.
On February 17, 1999, in conjunction with the Company's new revolving
credit agreement, the Company terminated its interest rate swap agreement
and entered into a new interest rate swap agreement. This new agreement
effectively fixed the interest rate at 7.75% (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. Unlike the
prior agreement, this interest rate swap has no provisions for termination
based on changes in the 30-day LIBOR borrowing rate. At March 1, 1999 the
30-day LIBOR borrowing rate was 4.94%.
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. While lumber futures contracts are entered on a risk management
basis, the Company's hedge positions could show a net gain or loss
depending on prevailing market conditions. At December 26, 1998 the
Company had 22 lumber futures contracts outstanding with a total market
value of $1,397,000 and a net unrealized gain of $1,976. These contracts
all mature in 1999.
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.
41
42
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, 1999.
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, 1999.
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, 1999.
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, 1999.
42
43
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 26, 1998
and December 27, 1997 F-2
Consolidated statements of operations for the years
ended December 26, 1998, December 27, 1997 and
December 28, 1996 F-3
Consolidated statements of changes in common
stockholders' equity for the years ended
December 26, 1998, December 27, 1997 and
December 28, 1996 F-4
Consolidated statements of cash flows for the
years ended December 26, 1998, December 27, 1997
and December 28, 1996 F-5
Notes to consolidated financial statements F-6
(2) Financial Statement Schedules:
- ----------------------------------
Schedule Description
- -------- -----------
Report of Independent Accountants S-1
II. Valuation and Qualifying Accounts S-2
(3) Exhibits
- -------------
See Exhibit Index included elsewhere herein.
(b) Reports on Form 8-K
- ------------------------
None
43
44
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 24, 1999 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 24, 1999
- --------------------
J. Steven Wilson (Principal Executive and Financial Officer)
Director
/s/ Harry T. Carneal Director March 24, 1999
- --------------------
Harry T. Carneal
/s/ Albert Ernest, Jr. Director March 24, 1999
- ---------------------
Albert Ernest, Jr.
/s/ William H. Luers Director March 24, 1999
- --------------------
William H. Luers
/s/ Robert E. Mulcahy III Director March 24, 1999
- -------------------------
Robert E. Mulcahy III
/s/ Frederick H. Schultz Director March 24, 1999
- ------------------------
Frederick H. Schultz
/s/ Robert T. Shaw Director March 24, 1999
- ------------------
Robert T. Shaw
/s/ Claudia B. Slacik Director March 24, 1999
- ---------------------
Claudia B. Slacik
/s/ John M. Lawrence Controller March 24, 1999
- --------------------
John M. Lawrence (Principal Accounting Officer)
44
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
of Wickes Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, changes in stockholders'
equity and cash flows present fairly, in all material respects, the
financial position of Wickes Inc. and its subsidiaries at December 26, 1998
and December 27, 1997, and the results of their operations and their cash
flows for each of the three years ended December 26, 1998, December 27,
1997 and December 28, 1996, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of
these statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable
assurance about whether the 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion
expressed above.
PRICEWATERHOUSECOOPERS LLP
Chicago, Illinois
February 23, 1999
F-1
F-2
WICKES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 26, 1998 and December 27, 1997
(in thousands except share data)
1998 1997
ASSETS ---- ----
Current assets:
Cash $ 65 $ 79
Accounts receivable, less allowance for doubtful
accounts of $4,393 in 1998 and $3,765 in 1997 92,926 81,788
Notes receivable 1,095 3,200
Inventory 103,716 102,706
Deferred tax asset 8,857 8,955
Prepaid expenses 3,652 1,246
------- -------
Total current assets 210,311 197,974
Property, plant and equipment, net 45,830 46,763
Trademark (net of accumulated amortization
of $10,496 in 1998 and $10,274 in 1997) 6,523 6,745
Deferred tax asset 17,205 17,054
Rental equipment (net of accumulated depreciation
of $572 in 1998 and $176 in 1997) 1,883 2,030
Other assets (net of accumulated amortization
of $9,502 in 1998 and $8,053 in 1997) 10,998 12,786
------- -------
Total assets $ 292,750 $ 283,352
======= =======
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 16 $ 46
Accounts payable 54,017 41,190
Accrued liabilities 20,142 22,279
------ ------
Total current liabilities 74,175 63,515
Long-term debt, less current maturities 191,961 193,061
Other long-term liabilities 2,952 2,775
Commitments and contingencies (Note 8)
Stockholders' equity (Note 9):
Preferred stock (no shares issued)
Common stock (8,207,268 shares issued and
outstanding in 1998 and 8,176,205 shares
issued and outstanding in 1997) 82 82
Additional paid-in capital 86,787 86,675
Accumulated deficit (63,207) (62,756)
------ ------
Total stockholders' equity 23,662 24,001
------- -------
Total liabilities & stockholders' equity $ 292,750 $ 283,352
======= =======
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 26, 1998, December 27, 1997, and December 28, 1996
(in thousands, except share data)
1998 1997 1996
---- ---- ----
Net sales $910,272 $884,082 $848,535
Cost of sales 693,956 681,056 659,072
------- ------- -------
Gross profit 216,316 203,026 189,463
------- ------- -------
Selling, general and administrative expense 186,853 185,385 162,329
Depreciation, goodwill and trademark amortization 5,253 4,863 5,367
Provision for doubtful accounts 2,915 1,707 1,067
Restructuring and unusual items 5,932 (559) 745
Other operating income (6,837) (10,689) (6,796)
------- ------- -------
194,116 180,707 162,712
------- ------- -------
Income from operations 22,200 22,319 26,751
Interest expense 21,632 21,417 21,750
Equity in loss of affiliated company - 1,516 3,183
------ ------ ------
Income (loss) before income taxes 568 (614) 1,818
Provision (benefit) for income taxes:
Current 1,072 1,099 1,010
Deferred (53) (153) 300
------ ------ ------
Net (loss) income $ (451) $ (1,560) $ 508
====== ====== ======
Basic and diluted (loss)/income per common share $ (0.06) $ (0.19) $ .07
====== ====== ======
Weighted average common shares - for basic 8,197,542 8,168,257 7,207,761
========= ========= =========
Weighted average common shares - for diluted 8,197,542 8,168,257 7,221,082
========= ========= =========
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 STOCKHOLDERS' EQUITY
For the Years Ended December 28, 1996, December 27, 1997 and December 26, 1998
(in thousands, except for share data)
Common Stock Additional Total
------------ Paid-in Accumulated Stockholders'
Shares Amount Capital Deficit Equity
------ ------ ------- ------- ------
Balance at December 30, 1995 6,143,473 $ 61 $ 76,772 $ (61,704) $ 15,129
Net income - - 508 508
Issuance of common stock, net 2,015,874 21 9,841 - 9,862
--------- --- ------ ------ ------
Balance at December 28, 1996 8,159,347 82 86,613 (61,196) 25,499
Net loss - - (1,560) (1,560)
Issuance of common stock, net 16,858 - 62 - 62
--------- --- ------ ------ ------
Balance at December 27, 1997 8,176,205 82 86,675 (62,756) 24,001
Net loss - - (451) (451)
Issuance of common stock, net 31,063 - 112 - 112
--------- --- ------ ------ ------
Balance at December 26, 1998 8,207,268 $ 82 $ 86,787 $ (63,207) $ 23,662
========= === ====== ====== ======
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 26, 1998, December 27, 1997, and December 28, 1996
(in thousands)
1998 1997 1996
---- ---- ----
Cash flows from operating activities:
Net (loss)/income $ (451) $ (1,560) $ 508
Adjustments to reconcile net (loss)/income to
net cash provided by/(used in) operating activities:
Equity in loss of affiliated company - 1,516 3,183
Depreciation expense 4,785 4,395 4,904
Amortization of trademark 222 222 222
Amortization of goodwill 246 246 242
Amortization of deferred financing costs 1,447 1,401 1,781
Provision for doubtful accounts 2,915 1,707 1,067
Gain on sale of assets (1,834) (6,180) (940)
Deferred tax (benefit)/provision (53) (153) 300
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (14,053) (12,285) 9,515
Decrease (increase) in notes receivable 2,105 (3,200) -
(Increase) decrease in inventory (1,010) (2,034) 9,967
Increase (decrease) in accounts payable
and accrued liabilities 10,867 (4,590) (10,907)
Increase in deferred gain - (670) -
Increase in prepaids and other assets (2,559) (3,369) (1,132)
------ ------ ------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 2,627 (24,554) 18,710
------ ------ ------
Cash flows from investing activities:
Purchases of property, plant and equipment (5,854) (7,758) (2,893)
Proceeds from sales of property, plant and equipment 4,231 13,798 5,303
------ ------ ------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (1,623) 6,040 2,410
------ ------ ------
Cash flows from financing activities:
Net (repayment) borrowing under revolving
line of credit (1,084) 16,732 (28,708)
Reductions of note payable (46) (134) (428)
Net proceeds from issuance of common stock 112 62 9,862
------ ------ ------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (1,018) 16,660 (19,274)
------ ------ ------
NET (DECREASE) INCREASE IN CASH (14) (1,854) 1,846
Cash at beginning of period 79 1,933 87
------ ------ ------
CASH AT END OF PERIOD $ 65 $ 79 $ 1,933
====== ====== ======
Supplemental schedule of cash flow information:
Interest paid $ 20,885 $ 19,791 $ 20,372
Income taxes paid 987 1,344 1,518
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business
- ---------------------------
Wickes Inc. (formerly Wickes Lumber Company), 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 subleases certain real estate to
Wickes Inc.
In June 1997, the FASB issued SFAS Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information." This statement,
effective for financial statements for fiscal years beginning after
December 15, 1997, requires that a public business enterprise report
financial and descriptive information about its reportable operating
segments. Generally, financial information is required to be reported on
the basis that it is used internally for evaluating segment performance and
deciding how to allocate resources to segments. Based on this criteria,
the Company has determined that it operates in one business segment, that
being the supply and distribution of lumber and building materials to
building professionals and do-it-yourself customers, primarily in the
Midwest, Northeast, and South. Thus, all information required by SFAS No.
131 is included in the Company's financial statements. No single customer
represented more than 10% of the Company's total sales in 1998, 1997, and
1996.
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.
F-6
F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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. Leasehold improvements are depreciated
over the life of the lease. 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 statement of operations
as other operating income. Once a facility is closed and the real estate is
held for sale the Company discontinues depreciation on the real estate.
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 to 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 was 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 had 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.
F-7
F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $8,232,000 in outstanding checks in excess of
in-transit cash at December 26, 1998 and $3,273,000 at December 27, 1997.
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.
F-8
F-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Impairment of Long-Lived Assets
- -------------------------------
The Company evaluates assets held for use and assets to be disposed of in
accordance with Statement of 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).
Recently Issued Accounting Pronouncements
- -----------------------------------------
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities," standardizes the
accounting for derivative instruments by requiring that all derivatives be
recognized as assets and liabilities and measured at fair value. The
statement is effective for fiscal years beginning after June 15, 1999. The
Company believes adoption of the statement will not have a material effect
on its financial statements.
F-9
F-10
NOTES TO CONSOLIDATED 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.
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.
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 had significantly improved market conditions and 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 three building centers not previously included,
resulting in a $1.3 million charge for the write down of working capital
assets and liabilities to their net realizable value and a $0.1 million
charge for severance and postemployment benefits for approximately 90
employees, (iii) a $1.1 million charge for impairment in the carrying value
of real estate held for sale at four previously 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. The $1.5 million included approximately $0.9 million for
F-10
F-11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
severance and postemployment benefits for approximately 25 headquarters
employees. The discontinued programs included the Company's mortgage
lending, utilities marketing and certain internet programs. This charge
was offset by a $2.1 million reduction in accrued costs for the Company's
1995 Plan, which was completed. The $2.1 million reversal included four
centers identified in the 1995 Plan for closure that had significantly
improved market conditions and would remain open, as well as a change in
the estimate of facility carrying costs for sold facilities and those
remaining to be sold.
During the first quarter of 1998 the Company implemented a restructuring
plan (the "1998 Plan") which resulted in the closing or consolidation of
eight sales and distribution and two manufacturing facilities in February,
the sale of two sales and distribution facilities in March, and further
reductions in headquarters staffing. As a result of the 1998 Plan, the
Company recorded a restructuring charge of $5.4 million in the first
quarter and an additional charge of $0.5 million in the third quarter. The
$5.9 million charge included $4.1 million in estimated losses on the
disposition of closed facility assets and liabilities, $2.1 million in
severance and postemployment benefits related to the 1998 plan, and a
benefit of $300,000 for adjustments to prior years' restructuring accruals.
The $4.1 million in estimated losses includes the write-down of assets
(excluding real estate), to their net realizable value, of $3.4 million and
$700,000 in real estate carrying costs. The $2.1 million in severance and
postemployment benefits covered approximately 250 employees, 25 of which
were headquarters employees, that were released as a result of reductions
in headquarters staffing and the closing or consolidation of the ten
operating facilities. The $300,000 benefit from prior years was a result
of accelerated sales of previously closed facilities during the fourth
quarter of 1997 and first quarter of 1998. The acceleration of these sales
resulted in a change in the estimate of facility carrying costs for the
sold facilities. At December 26, 1998 the accrued liability for
restructuring had been reduced to zero.
For further information regarding the sale of closed center real estate see
Note 5.
4. Acquisitions
- ----------------
During 1998 the Company acquired the operating assets of Eagle Industries
Inc., a component manufacturer, for a total cost of $1.8 million in cash.
The acquisition was accounted for as a purchase and the cost has been
allocated on the basis of the fair market value of the assets acquired and
liabilities assumed. These operations have been included in the
accompanying consolidated financial statements from their date of
acquisition. The Company had no acquisitions in 1997 or 1996.
F-11
F-12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Property, Plant, and Equipment
- ----------------------------------
Property, plant and equipment is summarized as follows:
December 26, December 27,
1998 1997
---- ----
(in thousands)
Land and improvements $12,115 $12,781
Buildings 26,341 27,584
Machinery and equipment 32,257 30,619
Leasehold improvements 3,059 2,584
Construction in progress 846 844
------ ------
Gross property, plant, and equipment 74,618 74,412
Less: accumulated depreciation (32,661) (31,178)
------ ------
Property, plant, and equipment
in use, net 41,957 43,234
Assets held for sale, net 3,873 3,529
------ ------
Property, plant, and equipment, net $45,830 $46,763
====== ======
Sale of Real Estate
- -------------------
Except for the sale/leaseback of the Company's Succasunna, NJ sales and
distribution facility in 1997, which included a $3,000,000 note receivable
that was collected within 60 days, all sales of real estate have been for
cash.
In 1998, the Company sold nine pieces of real estate, eight of which were
sales and distribution facilities and one an excess parcel of land, for a
net gain of $1.6 million. Eight of the properties sold had been held for
sale since the first quarter of 1998 and had not been previously written
down from their original net book value. The ninth property, which had
been held for sale since 1989, had been previously written down by $709,000
from its original net book value and sold at a net loss of $59,000.
In 1997, the Company sold 12 pieces of real estate for a net gain of $6.0
million. These transactions included the sale/leaseback of the Company's
headquarters and the Succasunna sales and distribution facility and the
sale of nine sales and distribution facilities and one excess parcel of
land. Of the properties sold, one sales and distribution facility was held
for sale since 1989, had been previously written down $99,600 from its
original net book value, and sold at a loss of $100,400. The other 11
properties had not been previously marked down from book value and had been
held for sale since 1992 (2 properties), 1995 (4 properties), 1996 (2
properties) and 1997 (3 properties).
F-12
F13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In 1996, the Company sold six sales and distribution facilities for a net
gain of $1.7 million. None of these properties had been previously written
down from their original net book value. Five had been held for sale since
1995, and one since 1990.
The Company reviews assets held for sale in accordance with Statement of
Financial Accounting Standards No. 121. In 1997 and 1996 the Company
recorded losses of $156,000 and $1,065,000, to report land, land
improvements and buildings held for sale at their fair value. The Company
did not record any impairment to the cost of assets held for sale in 1998.
Fair value is determined by local market real estate values of properties
similar to the Company's excess real estate. These charges are included in
the caption "restructuring and unusual items" on the Consolidated Statement
of Operations. Of the five properties that were revalued in 1997 and 1996
two have sold at a net loss and three are still held for sale.
6. Accrued Liabilities
- ------------------------
Accrued liabilities consist of the following:
December 26, December 27,
1998 1997
---- ----
(in thousands)
Accrued payroll $ 9,498 $ 8,148
Accrued interest 667 1,367
Accrued liability insurance 4,966 4,173
Accrued restructuring charges - 1,348
Other 5,011 7,243
------ ------
Total accrued liabilities $ 20,142 $ 22,279
====== ======
F-13
F-14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Long-Term Debt
- ------------------
Long-term debt obligations are summarized as follows:
December 26, December 27,
1998 1997
---- ----
(in thousands)
Revolving line of credit, interest payable
at .75% above prime or 2.25% over LIBOR,
principal due March 31, 2001 $ 91,961 $ 93,045
Senior subordinated notes, interest payable
at 11-5/8% semi-annually, principal due
December 15, 2003 100,000 100,000
Other 16 62
------- -------
Total long-term debt 191,977 193,107
Less current maturities (16) (46)
------- -------
Total long-term debt less current maturities $ 191,961 $ 193,061
======= =======
Revolving Line of Credit
- ------------------------
At December 26, 1998 the Company had a revolving line of credit, which was
to expire on March 31, 2001. Under this line of credit the Company could
borrow against certain levels of accounts receivable and inventory, up to a
maximum credit limit of $130,000,000. At December 26, 1998, the amount
available for additional borrowing was $32,680,000. A commitment fee of
1/2 of 1% was payable on the unused portion of the commitment. The
weighted-average interest rate for the years ending December 26, 1998 and
December 27, 1997 was approximately 8.2% and 8.8% respectively.
Substantially all of the Company's accounts receivable, inventory, general
intangibles and certain machinery and equipment were pledged as collateral
for the revolving line of credit. Covenants under the related debt
agreements required, among other restrictions, that the Company maintain
certain financial ratios and certain levels of consolidated net worth. In
addition, the debt agreement restricted 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
F-14
F-15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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.
On February 17, 1999 the Company repaid all indebtedness under this line of
credit with the proceeds of a new revolving credit agreement (see Note 15).
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, before giving effect to
the new revolving credit agreement, by fiscal year are as follows:
Year Amount
---- -------
(in thousands)
1999 $ 16
2000 -
2001 91,961
2002 -
2003 100,000
F-15
F-16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Commitments and Contingencies
- ---------------------------------
At December 26, 1998, the Company had accrued approximately $152,000 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. All
such tanks known to the Company located on facilities owned or operated by
the Company have been filled or removed in accordance with applicable
environmental laws in effect at the time. As a result of reviews made in
connection with the sale or possible sale of certain facilities, the
Company has found petroleum contamination of soil and ground water on
several of these sites and has taken, and expects to take, remedial actions
with respect thereto. In addition, it is possible that similar
contamination may exist on properties no longer owned or operated by the
Company the remediation of which the Company could under certain
circumstances be held responsible. Since 1988, the Company has incurred
approximately $2.0 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
four years. The Company has currently reserved $60,000 for estimated clean
up costs at 15 of its locations.
The Company has been identified as having used two landfills which are now
Superfund clean up sites, for which it has been requested to reimburse a
portion of the clean-up costs. Based on the amounts claimed and the
Company's prior experience, the Company has established a reserve of
$45,000 for these matters.
The Company is one of many defendants in two class action suits filed in
August of 1996 by approximately 200 claimants for unspecified damages as a
result of health problems claimed to have been caused by inhalation of
silica dust, a byproduct of concrete and mortar mix, allegedly generated by
a cement plant with which the Company has no connection other than as a
customer. The Company has entered into a cost sharing agreement with its
insurers, and any liability is expected to be minimal.
The Company is one of many defendants in approximately 100 actions, each of
which seeks unspecified damages, 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. Since
1993, the Company has settled 16 similar actions for insignificant amounts,
and another 186 of these actions have been dismissed. As of March 15, 1999
none of these suits have made it to trial.
F-16
F-17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Losses in excess of the $152,000 reserved as of December 26, 1998 are
possible but an estimate of these amounts cannot be made.
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 unspecified damages with respect
to the transaction (see Note 9). There was no activity in this suit in
1998.
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 liquidity.
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 $12,193,000,
$10,616,000, and $10,076,000 for the years ended December 26, 1998,
December 27, 1997, and December 28, 1996, respectively.
Future minimum commitments for noncancelable operating leases are as
follows:
Year Amount
---- ------
(in thousands)
1999 $ 8,821
2000 6,972
2001 5,688
2002 4,745
2003 2,878
Thereafter 24,478
------
Subtotal $ 53,582
Less: Sublease income (10,995)
------
Total $ 42,587
======
F-17
F-18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Stockholders' Equity
- ------------------------
Preferred Stock
- ---------------
As of December 26, 1998 the Company had authorized 3,000,000 shares of
preferred stock, none of which is issued or outstanding.
Common Stock
- ------------
The Company currently has one class of common stock: Common Stock, par
value $.01 per share. In April 1998 all 499,768 outstanding shares on
Class B Non-Voting Common Stock were converted to 499,768 shares of Common
Stock. The Class B Non-Voting Common Stock ceased to be authorized in
April 1998. At December 26, 1998 there were 20,000,000 shares of Common
Stock authorized and 8,207,268 shares issued and outstanding. In addition,
at December 26, 1998, 898,986 shares of Common Stock were reserved for
issuance under the Company's 1993 Long-Term Incentive Plan and 1993
Director Incentive Plan.
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's unexercised outstanding warrants for 3,068 shares of Common
Stock expired in May 1998 and as of December 26, 1998 there were no
warrants outstanding nor Common Stock reserved for issuance under warrants.
Stock Compensation Plans
- ------------------------
As of December 26, 1998, the Company has two stock-based compensation plans
(both fixed option plans), which are described below. Under the 1993 Long-
Term Incentive plan as amended on November 30, 1994, the Company may grant
options and other awards to its employees with respect to up to 835,000
shares of common stock. Under the 1993 Director Incentive plan, the
Company may grant options and other awards to directors with respect to up
to 75,000 shares. The exercise price of grants equals or exceeds the
market price at the date of grant. The options have a maximum term of 10
years. For non-officers, the options generally become exercisable in equal
F-18
F-19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 (in thousands, except
per share data):
Year 1998 1997 1996
- ---- ---- ---- ----
Net (loss) income As reported $(451) $(1,560) $508
Pro forma $(568) $(1,772) $321
Basic and diluted As reported $(.06) $(.19) $.07
(loss) earnings Pro forma $(.07) $(.22) $.04
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 1998, 1997, and 1996, respectively:
dividend yield of 0% for all years, expected volatility of 48%, 43%, and
42%; risk-free interest rates of 5.6%, 6.6%, and 6.2%; and expected lives
of 5.6, 6.6, and 6.5 years.
A summary of the status of the Company's fixed stock option plans as of
December 26, 1998, December 27, 1997, and December 28, 1996 and changes
during the years ended on those dates is presented as follows:
F-19
F-20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1998 1997 1996
---- ---- ----
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Fixed Options Shares Price Shares Price Shares Price
- ------------- ------ ----- ------ ----- ------ -----
Outstanding beginning
of year 668,283 $10.09 612,282 $10.94 446,686 $15.32
Granted 238,750 $ 3.45 108,350 $5.12 264,721 $ 4.60
Exercised (11,014) $ 4.55 - n/a - n/a
Forfeited-nonvested (97,070) $ 9.71 (46,981) $ 8.22 (59,793) $13.18
Forfeited-exercisable (64,686) $ 9.71 (5,168) $22.36 (36,632) $15.32
Expired - n/a - n/a - n/a
Canceled - n/a (200) $15.00 (2,700) $ 5.12
-------- ------- -------
Outstanding end
of year 734,263 $ 7.67 668,283 $10.09 612,282 $10.94
Options exercisable
at year end 256,627 $11.39 214,402 $14.26 146,775 $15.60
Options available for
future grant at
year end 164,723 241,717 297,718
Weighted-average fair value of options granted during the year where:
1998 1997 1996
---- ---- ----
Exercise price equals market price $1.62 $2.77 $2.40
Exercise price exceeds market price n/a n/a n/a
Exercise price is less than market price n/a n/a n/a
The following table summarizes information about fixed stock options
outstanding at December 26, 1998:
Options Outstanding Options Exercisable
--------------------------- ----------------------
Weighted-
Average Weighted- Weighted-
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices at 12/26/98 Life Price at 12/26/98 Price
------ ----------- ---- ----- ----------- -----
$ 3.06 - $ 5.75 503,640 8.47 years $ 4.16 93,304 $ 4.18
$10.95 - $23.25 230,623 5.71 years $15.36 163,323 $15.51
F-20
F-21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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:
1998 1997 1996
---- ---- ----
Numerators:
Net (loss) income - for basic and
diluted EPS $(451,000) $(1,560,000) $ 508,000
======= ========= =======
Denominators:
Weighted average common
shares - for basic EPS 8,197,542 8,168,257 7,207,761
Common shares from warrants - 6,913 10,751
Common shares from options 51,425 13,250 2,570
--------- --------- ---------
Weighted average common
shares - for diluted EPS 8,248,967 8,188,420 7,221,082
========= ========= =========
In years where net losses are incurred, diluted weighted average common
shares are not used in the calculation of diluted EPS as it would have an
anti-dilutive effect on EPS. In addition, options to purchase 348,000,
385,000 and 302,000 weighted average shares of common stock during 1998,
1997 and 1996, respectively, were not included in the diluted EPS as the
options' exercise prices were greater than the average market price.
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 26, 1998, December 27, 1997, and December 28, 1996 were
$1,480,000, $1,606,000, and $1,392,000, respectively.
F-21
F-22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 following tables reconcile the postretirement benefit, the plan's
funded status and actuarial assumptions, as required by Statement of
Financial Accounting Standard No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits."
December 26, December 27,
1998 1997
---- ----
(in thousands)
Change in accumulated postretirement benefit obligation:
Benefit obligation at beginning of year $ 2,578 $ 3,290
Service cost 233 197
Interest cost 170 176
Participant contributions - -
Claims paid (216) (265)
Actuarial gains ( 16) (751)
Plan amendments - (69)
----- -----
Benefit obligation at year end $ 2,749 $ 2,578
===== =====
Change in plan assets:
Fair value of plan assets - -
Reconciliation of funded status:
Funded status $(2,749) $(2,578)
Unrecognized transition obilgation - -
Unrecognized prior service cost (49) (59)
Unrecognized actuarial gain (154) (138)
----- -----
Net amount recognized as other
long-term liabilities $(2,952) $(2,775)
===== =====
Weighted average assumptions as of year end:
Discount rate 6.75% 7.25%
Expected return on assets n/a n/a
Medical trend 6.00% 6.00%
F-22
F-23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 26, December 27, December 28,
1998 1997 1996
---- ---- ----
(in thousands)
Components of net periodic benefit cost:
Service cost $ 233 $ 197 $ 276
Interest cost 171 176 210
Expected return on plan assets n/a n/a n/a
Amortization of transition obligation - - -
Amortization of prior service cost (10) (10) -
Amortization of actuarial loss - - 33
Net periodic benefit cost $ 394 $ 363 $ 519
December 26, December 27, December 28,
1998 1997 1996
---- ---- ----
(in thousands)
Weighted average assumptions used in
computing net periodic benefit cost:
Discount rate 7.25% 7.75% 7.25%
Expected return on plan assets n/a n/a n /a
Medical trend 6.00% 6.00% 6.00%
Health care cost trend sensitivity: 1% Increase 1% Decrease
----------- -----------
Effect on total service cost and
interest cost components $ 17 $ (16)
Effect on postretirement benefit obligation 57 (54)
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 $39,000, $28,000 and $31,000 for the years ended December 26,
1998, December 27, 1997 and December 28, 1996, respectively. The decrease
in benefits is the result of the winding down of a more costly long-term
disability program that was in place prior to April 1993.
F-23
F-24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Income Taxes
- --------------------
The Company and its subsidiaries file a consolidated federal income tax
return. As of December 26, 1998, the Company has net operating loss
carryforwards available to offset income of approximately $43.3 million
expiring in the years 2005 through 2018.
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 26, 1998, approximately $7.5 million of these
loss carryforwards were affected by this limitation.
The income tax provision consists of both current and deferred amounts.
The components of the income tax provision are as follows:
December 26, December 27, December 28,
1998 1997 1996
---- ---- ----
(in thousands)
Taxes currently payable:
State income tax $1,072 $1,099 $1,010
Federal income tax - - -
Deferred (benefit)/expense (53) (153) 300
----- ----- -----
Total income tax expense $1,019 $ 946 $1,310
===== ===== =====
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 26, 1998, December 27, 1997 and December 28, 1996, respectively,
are as follows:
F-24
F-25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 26, December 27, December 28,
1998 1997 1996
---- ---- ----
(in thousands)
Deferred income tax assets:
Trade accounts receivable $ 1,727 $ 1,469 $ 1,676
Inventories 1,813 1,895 1,954
Accrued personnel cost 2,037 2,013 1,936
Other accrued liabilities 6,051 6,743 6,911
Net operating loss 16,874 16,164 16,556
Other 3,337 3,348 2,342
------ ------ ------
Gross deferred income tax assets 31,839 31,632 31,375
Less: valuation allowance (1,542) (1,542) (1,493)
------ ------ ------
Total deferred income tax assets 30,297 30,090 29,882
------ ------ ------
Deferred income tax liabilities:
Property, plant and equipment 1,312 1,394 1,962
Goodwill and trademark 2,923 2,687 2,052
Other accrued income items - - 13
------ ------ ------
Total deferred income tax liabilities 4,235 4,081 4,027
------ ------ ------
Net deferred tax assets $26,062 $26,009 $25,855
====== ====== ======
The deferred tax provision 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 are as follows:
December 26, December 27, December 28,
1998 1997 1996
---- ---- ----
(in thousands)
Change in bad debt reserve $ 258 $ (207) $ (1,517)
Differences in tax and book
inventory (82) (60) (491)
Settlement of deferred
compensation 25 77 86
Change in accrued liabilities (692) (168) (5,130)
(Utilization)/creation of NOL 710 (392) 6,700
AMT credit and capital loss
carryover - 1,006 942
Differences in tax and book
asset basis 82 568 (56)
Differences in book and tax
intangibles (248) (635) (704)
Change in accrued income items - 13 13
(Increase)/decrease in valuation
allowance - (49) (143)
------ ------ ------
Deferred tax benefit/(expense) $ 53 $ 153 $ (300)
====== ====== ======
F-25
F-26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 26, December 27, December 28,
1998 1997 1996
---- ---- ----
(in thousands)
Tax (benefit) computed at
U.S. statutory tax rate $ 199 $ (215) $ 637
State and local taxes 697 714 656
Other 123 398 (126)
Change in valuation allowance - 49 143
------ ------ ------
Total tax provision $ 1,019 $ 946 $ 1,310
====== ====== ======
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.
The estimated fair values of the Company's material financial instruments
are as follows:
Long Term Debt
- --------------
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.
Fair Carrying
Value Value
------ -------
(in thousands)
1998 Financial Liabilities:
Long-term Debt
Revolver $ 91,961 $ 91,961
Senior Subordinated Notes 84,000 100,000
1997 Financial Liabilities:
Long-term Debt
Revolver $ 93,045 $ 93,045
Senior Subordinated Notes 95,000 100,000
F-26
F-27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 26, 1998 the Company had 22 lumber futures contracts outstanding
with a total market value of $1,397,000 and a net unrealized gain of
$1,976. These contracts all mature in 1999.
Interest Rate Swap
- ------------------
At December 26, 1998 the Company had in place an interest rate swap
agreement which effectively fixed the interest rate on $40 million of the
Company's borrowings under its floating rate revolving line of credit at
8.11% (subject to adjustments in certain circumstances), for three years.
This interest rate swap was operative while the 30-day LIBOR borrowing rate
remained below 6.7%. The agreement also included a floor LIBOR rate at
4.6%. At December 23, 1998 the 30-day LIBOR borrowing rate was 5.625%.
The fair value of the interest rate swap agreement, in accordance with SFAS
No. 107, at December 26, 1998 was a negative $400,000.
On February 17, 1999, in conjunction with the Company's new revolving
credit agreement (see Note 15), the Company terminated its interest rate
swap agreement and entered into a new interest rate swap agreement. This
new agreement effectively fixed the interest rate at 7.75% (subject to
adjustments in certain circumstances), reduced from 8.11% under the old
agreement, for three years, on $40 million of the Company's borrowings
under its floating rate revolving line of credit. Unlike the prior
agreement, this interest rate swap has no provisions for termination based
on changes in the 30-day LIBOR borrowing rate.
13. Related Party Transactions
- -------------------------------
In February 1998, as part of the determination made by the Company to
discontinue or sell non-core programs, the Company sold certain operations
to its majority stockholder for a three-year $870,000 unsecured promissory
note and 10% of future net income of these operations (subject to a maximum
of $429,249 plus interest). At December 26, 1998 this stockholder had made
payments of $115,752 under the promissory note and was delinquent with
respect to required payments of approximately $169,474 of principal and
interest.
In 1998, the Company paid approximately $730,000 in reimbursements
primarily to affiliates of the Company's chairman, for costs related to
services provided to the Company during 1998 by certain employees of the
affiliated company and use of a corporate aircraft. Total payments in 1997
and 1996 for similar services were approximately $1,289,000 and $612,000,
respectively.
F-27
F-28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 reimbursed this
affiliate for certain start-up expenses. Reimbursements in 1998, 1997 and
1996 were approximately $115,000, $1,045,000 and $365,000, respectively,
and were expensed as incurred. In late 1997, this affiliate's involvement
in the program ceased.
A former director and executive officer of the Company was during most of
1998, and all of 1997 and 1996, a shareholder of the law firm that is
general counsel to the Company. The Company paid this firm $741,000,
$665,000, and, $430,000 for legal services provided to the Company during
1998, 1997, and 1996, 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.
14. Other Operating Income
- ---------------------------
Other operating income on the Company's Statement of Operations includes
the sale or disposal of property, plant and equipment, service charges
assessed customers on past due accounts receivables and casualty
gains/losses. The sale of property, plant and equipment includes the sale
of 9, 12, and 6 pieces of real estate in 1998, 1997 and 1996, respectively.
In 1998 and 1996, gains of $1.0 million and $0.6 million, respectively,
were recorded as a result of the differences between insured replacement
cost and net book value resulting from fire and storm damage at certain of
the Company's sales and distribution facilities. The following table
summarizes the major components of other operating income by year.
Other Operating Income
Gain/(Loss)
1998 1997 1996
---- ---- ----
(in thousands)
Sale of property, plant and equipment $2,111 $ 6,180 $2,005
Accounts receivable service charges 2,331 2,170 2,064
Casualties 670 (284) 350
Other 1,725 2,623 2,377
----- ------ -----
Total $6,837 $10,689 $6,796
===== ====== =====
F-28
F-29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. Subsequent Events
- ----------------------
New Revolving Credit Agreement
- ------------------------------
On February 17, 1999 the Company entered into a new revolving credit
agreement with a group of financial institutions. The new revolving line
of credit provides for, subject to restrictions discussed below, up to $160
million of revolving credit loans and credits.
A commitment fee of 0.25% is payable on the unused amount of the new
revolving line of credit. Until delivery to the lenders of the Company's
financial statements for the period ending June 26, 1999, interest on
amounts outstanding under the new revolving line of credit will bear
interest at a spread above the base rate of BankBoston, N.A. of 0.50%, or
2.00% above the applicable LIBOR rate. After that time, depending upon the
Company's rolling four-quarter interest coverage ratio, amounts outstanding
under the new revolving line of credit will bear interest at a spread above
the base rate of from 0% to 0.75% or from 1.50% to 2.25% above the
applicable LIBOR rate.
Substantially all of the Company's accounts receivable, inventory and
general intangibles are pledged as collateral for the new revolving line of
credit. Availability is limited to 85% of eligible accounts receivable
plus 60% of eligible inventory, with these percentages subject to change in
the permitted discretion of the agent for the lenders. Covenants under the
related debt documents require, among other things, that the Company
maintain unused availability under the new revolving line of credit of at
least $15 million (subject to increase in certain circumstances) and
maintain certain levels of tangible capital funds. In addition, these
documents restrict, among other things, capital expenditures, the
incurrence of additional debt, asset sales, dividends, investments, and
acquisitions.
In conjunction with the new revolving credit agreement, the Company
terminated its existing interest rate swap agreement and entered into a new
interest rate swap agreement (see Note 12).
F-29
S-1
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
To the Stockholders and Board of Directors
of Wickes Inc.
Our report on the consolidated financial statements of Wickes Inc. is
included as page F-1 of this Form 10-K. In connection with our audits of
such financial statements, we have also audited the related financial
statement schedule listed in Item 14(a)(2) of this Form 10-K. In our
opinion, this financial statement schedule presents fairly, in all material
respects, the information set forth therein when read in conjunction with
the related consolidated financial statements.
PRICEWATERHOUSECOOPERS LLP
Chicago, Illinois
February 23, 1999
S-1
S-2
WICKES INC. AND SUBSIDIARIES
Schedule II - Valuation and Qualifying Accounts
For the Years Ended December 26, 1998, December 27, 1997, and
December 28, 1996
(in thousands)
Col. A Col. B Col. C Col. D Col. E
------- ------ ------ ------ ------
Additions
---------
(1) (2) Balance
Balance at Charged to Charged to at
Beginning Costs and Other End of
Description of Period Expenses(a) Accounts(b) Deductions(c) Period
----------- --------- ----------- ----------- ------------- ------
1998:
Allowance for doubtful
accounts $3,765 $2,915 ($103) $2,184 $4,393
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
(a) Net of reserved and collected accounts.
(b) Allowance for doubtful accounts charged to restructuring reserve.
(c) Reserved accounts written-off.
S-2
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 Registrant's Quarterly Report on Form 10-Q for the period
ended June 1994).
(c)* Second Amendment to Second Amended and Restated Certificate
of Incorporation (incorporated by reference to Exhibit 3.1 to the
Registrant's Quarterly Report on Form 10-Q for the period ended
June 1997).
3.2* By-laws of the Registrant, as amended and restated (incorporated
by reference to Exhibit 3.2 to the Registrant's Annual Report on
Form 10-K (the "1993 Form 10-K") for the year ended December 25,
1993).
4.1** Credit Agreement dated February 17, 1999, among the Registrant,
as Borrower, each of the financial institutions signatory
thereto, BankBoston Business Credit as Administrative Agent and
Issuing Bank, BancBoston Robertson Stephens Inc. as Syndication
Agent, and Nationsbank, N.A. as Documentation Agent.
4.2* Indenture dated as of October 15, 1993 between the Registrant and
Marine Midland Bank, N.A. (incorporated by reference to Exhibit
4.2 to the 1993 Form 10-K).
10.1* Agreement, dated July 21, 1993, between Collins & Aikman Group,
Inc. and the Registrant (incorporated by reference to Exhibit
10.12 to the Form S-1).
10.2(a)* Amended and Restated 1998 Long-Term Incentive Plan of the
Registrant (incorporated by reference to Exhibit 10.8 to the
Registrant's Annual Report on Form 10-K for the year ended
December 1994 (the "1994 Form 10-K")).
(b)* Amendment No. 1 (incorporated by reference to Exhibit
10.8(b) to the Registrant's Annual Report on Form 10-K for the
year ended December 1996).
(c)* Form of Option Agreement (incorporated by reference to
Exhibit 10.22 to the Form S-1).
(d)* Form of Option Agreement (incorporated by reference to
Exhibit 10.8 to the 1994 Form 10-K).
(e)* Form of Long-Term Stock Option Agreement (incorporated by
reference to Exhibit 10.8 to the 1994 Form 10-K).
(f)* Form of Long-Term Performance Bonus Agreement (incorporated
by reference to Exhibit 10.8 to the 1994 Form 10-K).
(g)* Amendment No. 2 (incorporated by reference to Exhibit 10.4
to the 1997 Form 10-K).
(h)* Form of Option Agreement (incorporated by reference to
Exhibit 10.4 to the 1997 Form 10-K).
10.3(a)* Amended and Restated 1993 Director Incentive Plan of
Registrant (incorporated by reference to Exhibit 10.03 to the
Registrant's Quarterly Report on Form 10-Q for the period ended
March 26, 1994).
(b)* Form of Option Agreement (incorporated by reference to
Exhibit 10.24 to the Form S-1).
10.4* Special Severance and Stay Incentive Bonus Plan (incorporated by
reference to Exhibit 10.7 to the Registrant's Annual Report on
Form 10-K for the year ended December 1997 (the "1997 Form 10-
K")).
10.5(a)* Agreement dated November 4, 1997 between the Registrant and
Riverside Group, Inc. (incorporated by reference to Exhibit 10.1
to the Registrant's Quarterly Report on Form 10-Q for the period
ended September 1997).
(b)* Amendment and Closing Agreement to Agreement dated
November 4, 1997 between the Registrant and Riverside Group, Inc.
(incorporated by reference to Exhibit 10.9 to the 1997 Form 10-
K).
21.1** List of Subsidiaries of the Registrant.
23.1** Consent of PricewaterhouseCoopers LLP.
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.