SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File
For the Quarterly Period Ended June 27, 1998 Number 0-22468
--------------- -------
WICKES INC.
--------------------------------
(Exact name of registrant as specified in its charter)
Delaware 36-3554758
- --------------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
706 North Deerpath Drive, Vernon Hills, Illinois 60061
- ------------------------------------------------ --------
(Address of principal executive offices) (Zip Code)
847-367-3400
------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
-----
As of July 31, 1998, the Registrant had 8,202,264 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.
<PAGE> 2
<TABLE>
<CAPTION>
WICKES INC. AND SUBSIDIARIES
INDEX
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Page
Number
--------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
June 27, 1998 and December 27, 1997 (unaudited) 3
Condensed Consolidated Statements of Operations
For the three months and six months ended
June 27, 1998 and June 28, 1997 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows
For the six months ended June 27, 1998 and
June 28, 1997 (Unaudited) 5
Notes to Condensed Consolidated
Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
PART II. OTHER INFORMATION
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 23
</TABLE>
2
<PAGE> 3
WICKES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands except share data)
<TABLE>
<CAPTION>
June 27, December 27,
1998 1997
--------- ---------
ASSETS
<S> <C> <C>
Current assets:
Cash $ 68 $ 79
Accounts receivable, less allowance
for doubtful accounts of $3,936 in
1998 and $3,765 in 1997 98,917 81,788
Notes Receivable 969 3,200
Inventory 117,023 102,706
Deferred tax asset 11,156 8,955
Prepaid expenses 1,857 1,246
------- -------
Total current assets 229,990 197,974
------- -------
Property, plant and equipment, net 44,575 46,763
Trademark (net of accumulated amortization
of $10,385 in 1998 and $10,274 in 1997) 6,635 6,745
Deferred tax asset 17,054 17,054
Rental Equipment (net of accumulated
depreciation of $371 in 1998 and
$176 in 1997) 2,015 2,030
Other assets (net of accumulated
amortization of $8,765 in 1998 and
$8,053 in 1997) 12,038 12,786
------- -------
$ 312,307 $ 283,352
======= =======
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 28 $ 46
Accounts payable 58,818 41,190
Accrued liabilities 18,043 22,279
------- -------
Total current liabilities 76,889 63,515
Long-term debt, less current maturities 212,510 193,061
Other long-term liabilities 2,857 2,775
Commitments and contingencies (Note 4)
Common stockholders' equity:
Common stock (8,195,658 shares issued and
outstanding in 1998 and 8,176,205 shares
issued and outstanding in 1997) 82 82
Additional paid-in capital 86,738 86,675
------- -------
Accumulated deficit (66,769) (62,756)
Total common stockholders' equity 20,051 24,001
------- -------
$ 312,307 $ 283,352
======= =======
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
<PAGE> 4
WICKES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands except share and per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
June 27, June 28, June 27, June 28,
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales $ 237,141 $ 237,335 $ 405,887 $ 396,654
Cost of sales 181,052 183,028 308,815 305,400
------- ------- ------- -------
Gross profit 56,089 54,307 97,072 91,254
------- ------- ------- -------
Selling, general and
administrative expenses 45,824 46,907 86,419 84,689
Depreciation, goodwill and
trademark amortization 1,284 1,229 2,550 2,417
Provision for doubtful accounts (124) (463) 1,209 583
Restructuring and unusual items - - 5,431 -
Other operating income (1,419) (1,634) (3,805) (2,478)
------- ------- ------- -------
45,565 46,039 91,804 85,211
------- ------- ------- -------
Income from operations 10,524 8,268 5,268 6,043
Interest expense 5,489 5,259 10,911 10,411
Equity in loss of affiliated
company - 213 - 766
------- ------- ------- -------
Income (loss) before income
taxes 5,035 2,796 (5,643) (5,134)
Provision (benefit) for income
taxes 2,249 1,454 (1,630) (1,286)
------- ------- ------- -------
Net income (loss) $ 2,786 $ 1,342 $ (4,013) $ (3,848)
======= ======= ======= =======
Basic income (loss) per
common share $ 0.34 $ 0.16 $ (0.49) $ (0.47)
======= ======= ======= =======
Diluted income (loss) per
common share $ 0.33 $ 0.16 $ (0.49) $ (0.47)
======= ======= ======= =======
Weighted average common
shares - for basic 8,192,806 8,166,500 8,187,328 8,164,665
========= ========= ========= =========
Weighted average common
shares - for diluted 8,383,984 8,202,096 8,259,929 8,188,140
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
<PAGE> 5
WICKES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
----------------
June 27, June 28,
1998 1997
------ ------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (4,013) $ (3,848)
Adjustments to reconcile net loss to
net cash used in operating activities:
Equity in loss of affiliated company - 766
Depreciation expense 2,316 2,183
Amortization of trademark 111 111
Amortization of goodwill 123 123
Amortization of deferred financing costs 833 729
Provision for doubtful accounts 1,209 583
Gain on sale of assets (1,501) (569)
Deferred tax benefit (2,201) (2,007)
Changes in assets and liabilities:
Increase in accounts receivable (18,338) (25,027)
Decrease in notes receivable 2,231 -
Increase in inventory (14,317) (28,899)
Increase in accounts payable and accrued
liabilities 13,474 24,155
Increase in other assets (1,000) (1,541)
------ ------
NET CASH USED IN OPERATING ACTIVITIES (21,073) (33,241)
Cash flows from investing activities:
Purchases of property, plant and equipment (1,984) (2,679)
Proceeds from sales of property, plant and
equipment 3,549 6,439
------ ------
NET CASH PROVIDED BY INVESTING ACTIVITIES 1,565 3,760
Cash flows from financing activities:
Net borrowing under revolving line of credit 19,463 27,668
Reductions of notes payable (29) (73)
Net proceeds from issuance of common stock 63 31
------ ------
NET CASH PROVIDED BY FINANCING ACTIVITIES 19,497 27,626
------ ------
NET DECREASE IN CASH (11) (1,855)
Cash at beginning of period 79 1,933
------ ------
CASH AT END OF PERIOD $ 68 $ 78
====== ======
Supplemental schedule of cash flow information:
Interest paid $ 10,444 $ 9,869
Income taxes paid $ 422 $ 832
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
5
<PAGE> 6
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
Basis of Financial Statement Presentation
-----------------------------------------
The condensed consolidated financial statements present the results of
operations, financial position, and cash flows of Wickes Inc. and its
consolidated subsidiaries (the "Company").
The condensed consolidated balance sheet as of June 27, 1998, the condensed
consolidated statements of operations for the three-month and six-month periods
ended June 27, 1998 and June 28, 1997 and the condensed consolidated statements
of cash flows for the six-month periods ended June 27, 1998 and June 28, 1997
have been prepared by the Company without audit. In the opinion of management,
all adjustments (which include only normal recurring adjustments) necessary to
present fairly the financial position, results of operations and cash flows at
June 27, 1998 and for all periods presented have been made. The results for the
three-month and six-month periods ended June 27, 1998 are not necessarily
indicative of the results to be expected for the full year or for any interim
period.
The year-end condensed consolidated balance sheet data was derived from
audited financial statements, but does not include all disclosures required by
generally accepted accounting principles. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted.
It is suggested that these condensed consolidated financial statements be read
in conjunction with the financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 27, 1997, filed
with the Securities and Exchange Commission.
Reclassifications
-----------------
Reclassifications have been made to the 1997 condensed consolidated balance
sheet and condensed consolidated statement of cash flows to reflect, more
appropriately, purchase rebates receivable as a reduction of accounts payable
rather than as accounts receivable. The amount previously recorded as accounts
receivable in the second quarter of 1997 was $2.1 million.
6
<PAGE> 7
Share Data
----------
During the six-month period ended June 27, 1998 the Company issued 8,604
shares of Common Stock to members of its board of directors as compensation and
10,849 shares of Common stock upon exercise of employee warrants and options.
As of May 1998 unexercised warrants for 3,068 shares of the Company's common
stock have expired.
On April 13, 1998, all 499,768 outstanding shares of Class B Non-Voting
Common Stock, par value $.01 per share, were converted to 499,768 shares of
Common Stock, par value $.01 per share.
2. LONG-TERM DEBT
--------------
Long-term debt is comprised of the following at June 27, 1998 (in thousands):
<TABLE>
<S> <C>
Revolving line of credit $ 112,505
Senior subordinated notes 100,000
Other 33
Less current maturities (28)
-------
Total long-term debt $ 212,510
=======
</TABLE>
Under the revolving line of credit, the Company may borrow against certain
levels of accounts receivable and inventory. The unused amount available for
borrowing at June 27, 1998 was $17.1 million.
On March 20, 1998, the Company and its lenders entered into a third amendment
to the Company's revolving credit agreement. This amendment includes a
modification to the fixed charge ratio covenant to reflect the restructuring
announced by the Company in February 1998 and includes the lenders' consent to
the Company's sale of its Iowa facilities and its internet and utilities
marketing operations.
3. INCOME TAXES
------------
The provision for income taxes for the six-month period ended June 27, 1998
was a benefit of $1.6 million compared to a benefit of $1.3 million for the six-
month period ended June 28, 1997. An effective federal income tax rate of 39.0%
7
<PAGE> 8
was used to calculate federal income taxes for the first six months of 1998,
compared with an effective rate of 39.1% for the first six months of 1997. In
addition to the effective federal tax rate, state income and franchise taxes
were calculated separately and are included in the provision reported.
4. COMMITMENTS AND CONTINGENCIES
-----------------------------
At June 27, 1998, the Company had accrued $500,000 (included in accrued
liabilities at June 27, 1998) 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, removed, or are scheduled to be removed in accordance with applicable
environmental laws in effect at the time. As a result of reviews made in
connection with the sale or possible sale of certain facilities, the Company has
found petroleum contamination of soil and ground water on several of these sites
and has taken, and expects to take, remedial actions with respect thereto. In
addition, it is possible that similar contamination may exist on properties no
longer owned or operated by the Company the remediation of which the Company
could under certain circumstances be held responsible. Since 1988, the Company
has incurred approximately $1.9 million of net costs with respect to the filling
or removing of underground storage tanks and related investigatory and remedial
actions.
The Company is one of many defendants in approximately 80 actions, each of
which seeks unspecified damages, brought since 1993, in various Michigan state
courts against manufacturers and building material retailers by individuals who
claim to have suffered injuries from products containing asbestos. All of the
plaintiffs in these actions are 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.
On November 3, 1995, a complaint was filed against the Company, its directors
and Riverside Group, Inc. seeking to enjoin or to obtain damages with respect to
the Company's agreement to issue two million newly-issued shares of common stock
to Riverside Group, Inc. for $5 per share.
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.
8
<PAGE> 9
The Company's assessment of the matters described in this note and other
forward-looking statements in this Form 10-Q are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995
("Forward-Looking Information") and are inherently subject to uncertainty. The
outcome of the matters described in this note may differ from the Company's
assessment of these matters as a result of a number of factors including but not
limited to: matters unknown to the Company at the present time, development of
losses materially different from the Company's experience, the Company's ability
to prevail against its insurers with respect to coverage issues to date, the
financial ability of those insurers and other persons from whom the Company may
be entitled to indemnity, and the unpredictability of matters in litigation.
5. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
-----------------------------------------
Reporting Comprehensive Income. Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income," establishes standards for reporting
and display of comprehensive income and its components in a full set of general-
purpose financial statements. The term comprehensive income is defined as the
change in the equity of a business. Comprehensive income includes net income as
well as other components (revenues, expenses, gains, and losses) that under
generally accepted accounting principles are excluded from net income but
affect equity. The statement was effective for fiscal years beginning after
December 15, 1997, however, as the Company has no items of other comprehensive
income, this statement is not applicable to the Company.
Disclosure about Segments. Statement of Financial Accounting Standards No.
131, "Disclosure about Segments of an Enterprise and Related Information,"
changes Statement of Financial Accounting Standards No. 14 by requiring a new
framework for segment reporting and includes the disclosure of financial
information related to each segment. The statement was effective for fiscal
years beginning after December 15, 1997, however, adoption of this statement is
not required in interim statements in the initial year of application. The
Company is currently evaluating the effects of this pronouncement.
Employers' Disclosures About Pensions and Other Postretirement Benefits.
Statement of Financial Accounting Standards No. 132, "Employers' Disclosures
About Pensions and Other Postretirement Benefits," standardizes the disclosure
requirements for pensions and other postretirement benefits, requires additional
information on changes in the benefit obligation and fair values of plan assets
and eliminates certain disclosures that are no longer useful. This statement is
effective for fiscal years beginning after December 15, 1997. The Company
believes that the adoption of this statement will not have a significant impact
on its financial statements.
9
<PAGE> 10
6. 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 standard for computing and presenting earnings per
share, 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:
<TABLE>
<CAPTION>
Six Months Ended
----------------
June 27, June 28,
1998 1997
-------- --------
<S> <C> <C>
Numerators:
Net loss - for basic and
diluted EPS $(4,013,000) $(3,848,000)
--------- ---------
Denominators:
Weighted average common
shares - for basic EPS 8,187,328 8,164,665
Common share from warrants - 9,982
Common shares from options 72,601 13,493
--------- ---------
Weighted average common
shares - for diluted EPS 8,259,929 8,188,140
</TABLE>
Options to purchase 413,637 additional weighted average shares of common
stock during the first half of 1998 and 1997 were not included in the diluted
EPS as the options' exercise prices were greater than the average market price
and the effect would be antidilutive.
7. OPERATIONAL RESTRUCTURING
-------------------------
In the first quarter of 1998, the Company announced and completed a plan for
additional restructuring activities (the "1998 Plan"). The 1998 Plan included
the closing or consolidation of eight building centers and two component
manufacturing facilities, the sale of two additional building centers, and
further reductions in headquarters staffing. The Company recorded a
restructuring charge of $5.4 million with respect to the 1998 Plan, consisting
of $3.7 million in anticipated losses on the disposition of closed center assets
10
<PAGE> 11
and liabilities, $2.0 million in severance and post employment benefits, and a
benefit of $300,000 for adjustments to prior years' restructuring accruals.
8. SUBSEQUENT EVENT
----------------
On July 16, 1998, the Company announced an agreement in principle to acquire
Eagle Industries Inc., an Indianapolis, Indiana component manufacturer with 1997
sales of $10.5 million. Eagle Industries manufactures and distributes roof
trusses, wall panels and other building materials to the home building industry.
The transaction is expected to be complete by the end of the third quarter.
11
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
The following discussion should be read in conjunction with the Condensed
Consolidated Financial Statements and Notes thereto contained elsewhere herein
and in conjunction with the Consolidated Financial Statements and Notes thereto
and Management's Discussion and Analysis of Financial Condition and Results of
Operations contained in the Company's Annual Report on Form 10-K for the year
ended December 27, 1997.
RESULTS OF OPERATIONS
---------------------
The following table sets forth, for the periods indicated, the percentage
relationship to net sales of certain expense and income items. This information
includes the results from all sales and distribution and component manufacturing
facilities operated by the Company, including those closed or sold during the
period.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
June 27, June 28, June 27, June 28,
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Gross profit 23.6% 22.9% 23.9% 23.0%
Selling, general and
administrative expense 19.3% 19.8% 21.3% 21.4%
Depreciation, goodwill
and trakemark amortization 0.5% 0.5% 0.6% 0.6%
Provision for doubtful accounts 0.0% (0.2)% 0.3% 0.1%
Restructuring and unusual items - - 1.3% -
Other operating income (0.6)% (0.7)% (0.9)% (0.6)%
Income from operations 4.4% 3.5% 1.3 % 1.5%
</TABLE>
Net Earnings
- ------------
The first half of 1998 presented favorable economic conditions for the
building materials supply industry. Single family housing starts were up 9.6%
over the first half of 1997. During the first quarter of 1998, the positive
effects of the mild winter in the Company's Midwest region, the Company's
primary region, were partially offset by increased precipitation in the
Northeast and South. Weather conditions during the first quarter of 1997 were
closer to historical seasonal averages.
12
<PAGE> 13
Net income for the three months ended June 27, 1998 was $2,786,000 compared
with income of $1,342,000 for the three months ended June 28, 1997. The
increase in the net income for the three month period is primarily the result of
increased gross profit dollars, reductions in selling, general and
administrative ("SG&A") expense, and the elimination of equity in losses of an
affiliated company. The impact of these changes were partially offset by
increases in provision for doubtful accounts, interest expense, and reductions
in other operating income.
Net loss for the first six months of 1998 was $4,013,000 compared with a loss
of $3,848,000 for the first six months of 1997. The decrease in net income is
primarily the result of a $5.4 million charge for restructuring and unusual
items and increases in SG&A expense, provision for doubtful accounts, and
interest expense. The impact of these changes were partially offset by
increases in sales, gross profit, and other operating income and the elimination
of equity in losses of an affiliated company.
Operational Restructuring
- -------------------------
In the first quarter of 1998, the Company announced and completed a plan for
additional restructuring activities (the "1998 Plan"). The 1998 Plan included
the closing or consolidation of eight building centers and two component
manufacturing facilities, the sale of two additional building centers, and
further reductions in headquarters staffing. During the first quarter, the
Company recorded a restructuring charge of $5.4 million with respect to the 1998
Plan, consisting of $3.7 million in anticipated losses on the disposition of
closed center assets and liabilities, $2.0 million in severance and post
employment benefits, and a benefit of $300,000 for adjustments to prior years'
restructuring accruals.
In March 1998, as contemplated by the 1998 Plan, the Company sold the assets
of its two Iowa building centers to another building center chain for
approximately $3.9 million, resulting in a gain of approximately $700,000.
Three Months Ended June 27, 1998 Compared
-----------------------------------------
with the Three Months Ended June 28, 1997
-----------------------------------------
Net Sales
- ----------
Although net sales for the second quarter of 1998 were relatively unchanged
at $237.1 million compared with $237.3 million for the second quarter of 1997,
same store sales increased 7.0% compared with the same period last year, despite
deflation in lumber prices which the Company estimates reduced sales by
approximately $9.1 million, or approximately 3.8%, compared with 1997 comparable
period pricing. Same store sales to the Company's primary customers, building
professionals, also increased 9.3% when compared with the second quarter of
1997. Consumer same store sales decreased 10.2% for the quarter. As of June
13
<PAGE> 14
27, 1998 the Company operated 101 sales and distribution facilities, 11 less
than it operated at the end of the second quarter of 1997.
The Company believes that its investments in its target major markets and re-
merchandised conventional market sales and distribution facilities, as well as
favorable economic conditions have offset the reduction in operating facilities
and commodity lumber deflation. Same store sales increased 27% in the Company's
nine target major markets, while same store sales increased 19% in the 11 sales
and distribution facilities which the Company had finished remerchandising by
the end of the second quarter of 1998. Single family housing starts were
approximately 10.4% higher, nationally, in the second quarter of 1998 than in
the comparable period of 1997. In the Company's primary geographical market,
the Midwest, single family housing starts were up 4.2%.
Gross Profit
- -------------
1998 second quarter gross profit increased to $56.1 million from $54.3
million for the second quarter of 1997, a 3.3% increase. Gross profit as a
percentage of sales increased to 23.6% for the second quarter of 1998 from 22.9%
in 1997. The increase in gross profit as a percentage of sales is primarily
attributable to improved product costs and a reduction in costs associated with
physical inventory count adjustments. These improvements were partially offset
by the effects of lumber deflation. Sales to building professionals, as a
percentage of total sales, increased to 87.8% for the second quarter of 1998
from 85.5% for the same period in 1997. Lumber and building materials accounted
for 89.6% of sales in the second quarter of 1998, compared with 89.4% in the
second quarter of 1997.
Selling, General and Administrative Expense
- -------------------------------------------
SG&A expense decreased to 19.3% of net sales in the second quarter of 1998
compared with 19.8% of net sales in the second quarter of 1997. Much of the
reduction can be attributed to expense reductions as part of the Company's
operational restructuring and the completion of most of the Company's
remerchandising programs during or prior to the end of the second quarter of
1998.
Decreases as a percentage of sales in general office, travel, marketing,
professional fees, and maintenance expenses were partially offset by increases
in salaries and wages, employee relocation and real estate rent expense.
Salaries, wages and employee benefits increased as a percentage of sales by
0.2%. As of June 27, 1998, the Company had 3,865 full time and part time
employees, a decrease of 5.3% from June 28, 1997.
14
<PAGE> 15
Depreciation, Goodwill and Trademark Amortization
- -------------------------------------------------
Depreciation, goodwill and trademark amortization increased to $1.3 million
for the second quarter of 1998 compared with $1.2 million for the same period in
1997. This increase is primarily due to depreciation on rental equipment. The
Company's tool rental program was initiated during late 1997 and no depreciation
on rental equipment was recorded in the second quarter of 1997.
Provision for Doubtful Accounts
- -------------------------------
The Company recorded a benefit from the provision for doubtful accounts of
$0.1 million in the second quarter of 1998, compared with a benefit of $0.5
million in the second quarter of 1997. Increased construction activity in the
Northeast and Midwest, during the second quarter results in improved collections
on previously reserved accounts and lower delinquency levels. Collections
during the second quarter of 1997 were very high.
Other Operating Income
- ----------------------
Other operating income for the second quarter of 1998 was $1.4 million
compared with $1.6 million for the second quarter of 1997. During the second
quarter of 1998, the Company recorded a gain of approximately $180,000 on the
difference between insured replacement cost and book value of inventory, as a
result of a fire at one of its sales and distribution facilities. In the second
quarter of 1997 the Company recorded a gain of approximately $500,000 on the
sale of a previously closed sales and distribution facility.
Interest Expense
- -----------------
In the second quarter of 1998 interest expense increased to $5.5 million from
$5.3 million for the second quarter of 1997, resulting primarily from an
increase in average total long term debt of approximately $13.1 million,
partially offset by a decrease in the effective borrowing rate on total long
term debt of approximately 20 basis points. The decrease in the effective
borrowing rate is primarily due to a reduction in the interest rate on the
Company's revolving line of credit, effective April 11, 1997 and a small
reduction in the LIBOR rate. Approximately 93% of the Company's second quarter
average borrowings on its revolving credit facility were LIBOR-based.
15
<PAGE> 16
Equity in Loss of Affiliated Company
- ------------------------------------
In the second quarter of 1997 the Company recorded equity in loss of
affiliated company of $200,000. The Company's net equity in this affiliate was
reduced to zero at December 31, 1997 thus no additional equity losses for this
affiliate were recorded in 1998.
Provision for Income Taxes
- --------------------------
The Company recorded income tax expense of $2.2 million for the second
quarter of 1998 compared with an expense of $1.5 million in the second quarter
of 1997. An effective federal income tax rate of 39.0% was used to calculate
federal income taxes for the first quarter of 1998, compared with an effective
rate of 39.1% for the first quarter of 1997. In addition to the effective
federal tax rate, state income and franchise taxes were calculated separately
and are included in the provision reported for both years.
The Company continues to review future earnings projections to determine that
there is sufficient support for its deferred tax assets and valuation allowance.
In spite of the losses incurred during 1995 and 1997, management believes that
it is more likely than not that the Company will receive full benefit of its
deferred tax asset and that the valuation allowance is properly stated. This
assessment constitutes Forward-Looking Information made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995 and is
inherently subject to uncertainty and dependent upon the Company's future
profitability, which in turn depends upon a number of important risk factors
including but not limited to: the effectiveness of the Company's operational
efforts, cyclicality and seasonality of the Company's business, the effects of
the Company's substantial leverage and competition.
Six Months Ended June 27, 1998 Compared
---------------------------------------
with the Six Months Ended June 28, 1997
---------------------------------------
Net Sales
- ----------
Although net sales for the first half of 1998 increased 2.3% to $405.9
million from $396.7 million for the first half of 1997, same store sales
increased 7.9% compared with the same period last year, despite deflation in
lumber prices which the Company estimates reduced sales by approximately $15.0
million, or approximately 3.8%, compared with 1997 comparable period pricing.
Same store sales to the Company's primary customers, building professionals,
also increased 9.2% when compared with the first half of 1997. Consumer same
store sales decreased 5.4% for the first half. As of June 27, 1998 the Company
operated 101 sales and distribution facilities, 11 less than it operated at the
end of the second quarter of 1997.
16
<PAGE> 17
The Company believes that its investments in its target major markets and re-
merchandised conventional market sales and distribution facilities, as well as
favorable economic and weather conditions have offset the reduction in operating
facilities and commodity lumber deflation. Same store sales increased 28% in
the Company's nine target major markets, while same store sales increased 23% in
the 11 sales and distribution facilities the Company finished remerchandising by
the end of the second quarter of 1998. Single family housing starts were 9.6%
higher, nationally, in the first half of 1998 than in the comparable period of
1997. In the Company's primary geographical market, the Midwest, single family
housing starts were up 7.7%. During the first quarter of 1998, the positive
effects of the mild winter in the Company's Midwest region, the Company's
primary region, were partially offset by increased precipitation in the
Northeast and South. Weather conditions during the first quarter of 1997 were
closer to historical seasonal averages.
Gross Profit
- ------------
Gross profit during the first half of 1998 increased to $97.1 million from
$91.3 million for the first half of 1997, a 6.4% increase. Gross profit as a
percentage of sales increased to 23.9% for the first half of 1998 from 23.0% in
1997. The increase in gross profit as a percentage of sales is primarily
attributable to improved product costs, increased margins on internally
manufactured products and a reduction in costs associated with physical
inventory count adjustments. These improvements were partially offset by the
effects of lumber deflation. Sales to building professionals, as a percentage
of total sales, increased to 88.5% for the first half of 1998 from 87.2% for the
same period in 1997. Lumber and building materials accounted for 88.6% of sales
in the first half of 1998, relatively unchanged from the first half of 1997.
Selling, General and Administrative Expense
- -------------------------------------------
SG&A expense decreased slightly, to 21.3% of net sales in the first half of
1998 compared with 21.4% of net sales in the first half of 1997. Increased
expenses attributable to major market expansion programs and remerchandising of
sales and distribution facilities were more than offset through reductions in
other areas, primarily the reduction of costs anticipated under the Company's
operational restructuring plan, implemented in the first quarter of 1998.
Decreases as a percentage of sales in professional fees, marketing, travel
and general office expense were partially offset by increases in salaries and
wages, employee relocation and real estate rental expenses. Salaries, wages and
employee benefits for the first half of 1998, increased as a percentage of sales
by 0.4% when compared with the first half of 1997.
17
<PAGE> 18
Depreciation, Goodwill and Trademark Amortization
- -------------------------------------------------
Depreciation, goodwill and trademark amortization increased to $2.6 million
for the first half of 1998 compared with $2.4 million for the same period in
1997. This increase is primarily due to depreciation on rental equipment. 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 provision for doubtful accounts increased to $1.2 million for the first
half of 1998 from $0.6 million in the first half of 1997. The primary reason
for the increase is the better than historical collection performance achieved
during the first half of 1997, expense of only 0.1% of total sales.
Restructuring and Unusual Items
- -------------------------------
In February of 1998, the Company announced the 1998 Plan which included the
closing or consolidation of eight sales and distribution facilities and two
component manufacturing facilities in February, the sale of two additional sales
and distribution facilities in March, and further reductions in headquarters
staffing. The Company recorded a restructuring charge of $5.4 million, which
included $3.7 million in anticipated losses on the disposition of closed center
assets and liabilities, $2.0 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. By the end of the second quarter the 1998 Plan
was virtually complete. No restructuring or unusual items were recorded in the
first half of 1997.
Other Operating Income
- ----------------------
Other operating income for the first half of 1998 was $3.8 million compared
with $2.5 million for the first half of 1997. During the first half of 1998,
the Company recorded a gain of approximately $1.6 million on the sale of two
sales and distribution facilities located in Iowa, two other closed facilities,
and excess equipment. A gain of $180,000 on the difference between insured
replacement cost and book value of inventory, as a result of a fire at one of
its sales and distribution facilities was also recorded in the first half of
1998. In the first half of 1997, the Company recorded a gain of approximately
$500,000 on the sale of a previously closed sales and distribution facility.
18
<PAGE> 19
Interest Expense
- ------------------
In the first half of 1998, interest expense increased to $10.9 million from
$10.4 million during the first half of 1997, resulting primarily from an
increase in average total long term debt of approximately $14.2 million,
partially offset by a decrease in the effective borrowing rate on total long
term debt of approximately 22 basis points. The decrease in the effective
borrowing rate is primarily due to a reduction in the interest rate on the
Company's revolving line of credit, effective April 11, 1997. Approximately 93%
of the Company's first half average borrowings on its revolving credit facility
were LIBOR-based.
Equity in Loss of Affiliated Company
- ------------------------------------
In the first half of 1997 the Company recorded equity in loss of affiliated
company of $766,000. The Company's net equity in this affiliate was reduced to
zero at December 31, 1997 thus no additional equity losses for this affiliate
were recorded in 1998.
Provision for Income Taxes
- --------------------------
The Company recorded an income tax benefit of $1.6 million for the first half
of 1998 compared with a benefit of $1.3 million in the first half of 1997. An
effective federal income tax rate of 39.0% was used to calculate federal income
taxes for the first half of 1998, compared with an effective rate of 39.1% for
the first half of 1997. In addition to the effective federal tax rate, state
income and franchise taxes were calculated separately and are included in the
provision reported for both years.
The Company continues to review future earnings projections to determine that
there is sufficient support for its deferred tax assets and valuation allowance.
In spite of the losses incurred during 1995 and 1997, management believes that
it is more likely than not that the Company will receive full benefit of its
deferred tax asset and that the valuation allowance is properly stated. This
assessment constitutes Forward-Looking Information made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995 and is
inherently subject to uncertainty and dependent upon the Company's future
profitability, which in turn depends upon a number of important risk factors
including but not limited to: the effectiveness of the Company's operational
efforts, cyclicality and seasonality of the Company's business, the effects of
the Company's substantial leverage and competition.
19
<PAGE> 20
Recently Issued Accounting Pronouncements
- -----------------------------------------
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income," establishes standards for reporting and display of comprehensive
income and its components in a full set of general-purpose financial statements.
The term comprehensive income is defined as the change in the equity of a
business. Comprehensive income includes net income as well as other components
(revenues, expenses, gains, and losses) that under generally accepted accounting
principles are excluded from net income but affect equity. The statement was
effective for fiscal years beginning after December 15, 1997, however, as the
Company has no items of other comprehensive income this statement is not
applicable to the Company.
Statement of Financial Accounting Standards No. 131, "Disclosure about
Segments of an Enterprise and Related Information," changes Statement of
Financial Accounting Standards No. 14 by requiring a new framework for segment
reporting and includes the disclosure of financial information related to each
segment. The statement was effective for fiscal years beginning after December
15, 1997, however, adoption of this statement is not required in interim
statements in the initial year of application. The Company is currently
evaluating the effects of this pronouncement.
Statement of Financial Accounting Standards No. 132, "Employers' Disclosures
About Pensions and Other Postretirement Benefits," standardizes the disclosure
requirements for pensions and other postretirement benefits, requires additional
information on changes in the benefit obligation and fair values of plan assets
and eliminates certain disclosures that are no longer useful. This statement is
effective for fiscal years beginning after December 15, 1997. The Company
believes that the adoption of this statement will not have a significant impact
on its financial statements.
Year 2000
- ---------
In response to the Year 2000 issue, the Company initiated a project in early
1997 to identify, evaluate and implement changes to its existing computerized
business systems. The Company is addressing the issue through a combination of
modifications to existing programs and conversions to Year 2000 compliant
software. In addition, the Company is communicating with its customers,
suppliers, and other service providers to determine whether they are actively
involved in projects to ensure that their products and business systems will be
Year 2000 compliant. If modifications and conversions by the Company, and those
it conducts business with, are not made in a timely manner, the Year 2000 issue
may have a material adverse effect on the Company's business, financial
condition, and results of operations. The total cost associated with the
required modifications is not expected to be material to the Company's
consolidated results of operations and financial position, and is being expensed
as incurred.
20
<PAGE> 21
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.
During the first six months of 1998 net cash used in operating activities was
$21.1 million, $12.1 million less than the $33.2 million used in the first six
months of 1997. The first six months of the year historically generates
negative cash flows from operating activities. With the peak building season
historically occurring in the second and third quarters, the Company normally
experiences increases in its inventory levels during the first quarter to meet
anticipated sales increases, and in the second quarter increases in accounts
receivable occur as a result of the increased sales activity.
The Company's accounts receivable balance at the end of the second quarter of
1998 increased $3.3 million when compared to the end of the second quarter of
1997, an increase of 3.4%. Approximately $2.9 million of this increase is
attributable to increased credit sales during June 1998, compared with June
1997.
Inventory at the end of the second quarter of 1998 was $12.5 million, or
9.7%, lower than at the end of the second quarter of 1997. Approximately $13.0
million in inventory reduction is attributable to the closing, consolidation, or
sale of 10 sales and distribution facilities and two manufacturing facilities
during the first quarter of 1998. Increases in same store inventory in building
materials and hardlines are nearly offset by deflation in commodity lumber
inventory of approximately $3.8 million. Accounts payable at the end of the
second quarter of 1998 decreased approximately $8.9 million, or 13.1% from the
second quarter of 1997. This change is primarily attributable to special buys
on commodity building materials, (roofing, drywall, insulation) which included
extended accounts payable terms, which occurred during the second quarter of
1997, increasing accounts payable at the end of that quarter. These special
buys occurred during the first quarter of 1998.
The Company's capital expenditures consist primarily of the construction of
storage facilities, the remodeling and reformatting of sales and distribution
facilities and component manufacturing facilities, and the purchase of vehicles,
equipment and management information systems for both existing and new
operations. In the first six months of 1998 the Company spent $2.0 million on
capital expenditures compared to $2.7 million for the same period in 1997. The
Company expects to spend approximately $4.0 million for all of 1998. Under the
Company's bank revolving credit agreement, as amended, capital expenditures
during 1998 are limited to $6.0 million plus the proceeds from the sale of
certain excess real estate plus the portion of 1997's capital expenditures that
were not spent. The Company expects to fund capital expenditures through
borrowings and its internally generated cash flow.
21
<PAGE> 22
During the first three months of 1998, the Company closed, consolidated, or
sold ten sales and distribution facilities and two component manufacturing
facilities. At August 1, 1998 the Company operated 101 sales and distribution
facilities and 10 component manufacturing facilities compared with 112 sales and
distribution facilities and 12 component manufacturing facilities at August 1,
1997. The following table reconciles the number of sales and distribution
facilities and component manufacturing facilities operated by the Company,
through August 1, 1998:
<TABLE>
<CAPTION>
Sales and Component
Distribution Manufacturing
Facilities Facilities
--------- ---------
<S> <C> <C>
As of December 27, 1997 111 11
Expansion - 1
Sold (2) -
Closings (7) (2)
Consolidation (1) -
--------- ---------
As of August 1, 1998 101 10
</TABLE>
On July 16, 1998, the Company announced an agreement in principle to acquire
Eagle Industries Inc., an Indianapolis, Indiana component manufacturer with 1997
sales of $10.5 million. Eagle Industries manufactures and distributes roof
trusses, wall panels and other building materials to the home building industry.
The transaction is expected to be complete by the end of the third quarter.
The Company maintained excess availability under its revolving line of credit
throughout the first six months of 1998. At the end of the second quarter total
borrowings under the revolving line of credit were $8.5 million higher than at
the end of the second quarter of 1997. Under the current terms of the Company's
bank revolving credit agreement the Company believes that it will continue to
have sufficient funds available for its anticipated operations and capital
expenditures. At June 27, 1998, $112.5 million was outstanding under the
Company's revolving line of credit, and the unused availability was
approximately $17.2 million. The Company's assessment of its future funds
availability constitutes Forward-Looking Information made pursuant to the
Private Securities Litigation Reform Act of 1995 and is inherently subject to
uncertainty resulting from, among other things, the factors discussed under
"Results of Operations - Provision for Income Tax Benefit".
On March 20, 1998, the Company and its lenders entered into a third amendment
to the Company's revolving credit agreement. This amendment includes a
modification to the fixed charge ratio covenant to reflect the restructuring
announced by the Company in February 1998 and includes the lenders' consent to
the Company's sale of its Iowa facilities and its internet and utilities
marketing operations.
22
<PAGE> 23
PART II
OTHER INFORMATION
-----------------
Item 5. Other Information
- ---------------------------
On April 13, 1998, all 499,768 outstanding shares of Class B Non-Voting
Common Stock, par value $.01 per share, were converted to 499,768 shares of
Common Stock, par value $.01 per share.
Item 6. Exhibits and Reports on Form 8-K
- ------------------------------------------
(a) Exhibits
27.1 Financial data schedule (SEC use only).
(b) Reports on Form 8-K
None.
23
<PAGE> 24
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.
By: /s/ J. Steven Wilson
-------------------------------
J. Steven Wilson
Chairman and Chief Executive
Officer
By: /s/ Kenneth M. Kirschner
-------------------------------
Kenneth M. Kirschner
Vice Chairman and Principal Financial
Officer
By: /s/ John M. Lawrence
-------------------------------
John M. Lawrence
Controller and Principal Accounting
Officer
Date: August 10, 1998
24
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE JUNE 27,
1998 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-26-1998
<PERIOD-END> JUN-27-1998
<CASH> 68
<SECURITIES> 0
<RECEIVABLES> 102,853
<ALLOWANCES> 3,936
<INVENTORY> 117,023
<CURRENT-ASSETS> 229,990
<PP&E> 76,301
<DEPRECIATION> 31,725
<TOTAL-ASSETS> 312,307
<CURRENT-LIABILITIES> 76,889
<BONDS> 100,000
0
0
<COMMON> 82
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 312,307
<SALES> 405,887
<TOTAL-REVENUES> 405,887
<CGS> 308,815
<TOTAL-COSTS> 308,815
<OTHER-EXPENSES> 90,595
<LOSS-PROVISION> 1,209
<INTEREST-EXPENSE> 10,911
<INCOME-PRETAX> (5,643)
<INCOME-TAX> (1,630)
<INCOME-CONTINUING> (4,013)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,013)
<EPS-PRIMARY> (0.49)
<EPS-DILUTED> 0
</TABLE>
