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 March 27, 1999 Number 0-22468
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WICKES INC.
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(Exact name of registrant as specified in its charter)
Delaware 36-3554758
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
706 North Deerpath Drive, Vernon Hills, Illinois 60061
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(Address of principal executive offices) (Zip Code)
847-367-3400
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months, and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
---
As of April 30, 1999, the Registrant had 8,214,776 shares of Common Stock,
par value $.01 per share outstanding.
<PAGE> 2
WICKES INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
March 27, 1999 and December 26, 1998 (unaudited) 3
Condensed Consolidated Statements of Operations
For the three months ended March 27, 1999 and
March 28, 1998 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows
For the three months ended March 27, 1999 and
March 28, 1998 (Unaudited) 5
Notes to Condensed Consolidated
Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
</TABLE>
2
<PAGE> 3
WICKES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands except share data)
<TABLE>
<CAPTION>
March 27, December 26,
1999 1998
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ASSETS
<S> <C> <C>
Current assets:
Cash $ 65 $ 65
Accounts receivable, less allowance for doubtful
accounts of $4,524 in 1999 and $4,393 in 1998 86,769 92,926
Notes receivable 863 1,095
Inventory 127,597 103,716
Deferred tax asset 10,582 8,857
Prepaid expenses 3,298 3,652
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Total current assets 229,174 210,311
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Property, plant and equipment, net 46,679 45,830
Trademark (net of accumulated amortization of
$10,552 in 1999 and $10,496 in 1998) 6,468 6,523
Deferred tax asset 17,205 17,205
Rental equipment (net of accumulated depreciation
of $684 in 1999 and $572 in 1998) 1,866 1,883
Other assets (net of accumulated amortization of
$9,905 in 1999 and $9,502 in 1998) 12,808 10,998
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Total assets $314,200 $292,750
======= =======
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 10 $ 16
Accounts payable 63,429 54,017
Accrued liabilities 18,620 20,142
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Total current liabilities 82,059 74,175
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Long-term debt, less current maturities 208,751 191,961
Other long-term liabilities 2,988 2,952
Commitments and contingencies (Note 4)
Stockholders' equity:
Preferred stock (no shares issued)
Common stock (8,210,947 shares issued and
outstanding in 1999 and 8,207,268 shares
issued and outstanding in 1998) 82 82
Additional paid-in capital 86,803 86,787
Accumulated deficit (66,483) (63,207)
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Total stockholders' equity 20,402 23,662
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Total liabilities & stockholders' equity $314,200 $292,750
======= =======
</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
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March 27, March 28,
1999 1998
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<S> <C> <C>
Net sales $ 191,110 $ 168,746
Cost of sales 145,203 127,763
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Gross profit 45,907 40,983
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Selling, general and administrative expenses 44,643 40,595
Depreciation, goodwill and trademark amortization 1,432 1,266
Provision for doubtful accounts 448 1,333
Restructuring and unusual items - 5,431
Other operating income (889) (2,386)
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45,634 46,239
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Income (loss) from operations 273 (5,256)
Interest expense 5,302 5,422
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Loss before income tax benefit (5,029) (10,678)
Provision for income tax benefit (1,753) (3,879)
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Net loss $ (3,276) $ (6,799)
======= =======
Basic and diluted loss per common share $ (0.40) $ (0.83)
======= =======
Weighted average common shares - for basic & diluted 8,210,179 8,181,850
========= =========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
<PAGE> 5
WICKES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
------------------
March 27, March 28,
1999 1998
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<S> <C> <C>
Cash flows from operating activities:
Net loss $ (3,276) $ (6,799)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation expense 1,315 1,149
Amortization of trademark 56 56
Amortization of goodwill 61 61
Amortization of deferred financing costs 342 538
Provision for doubtful accounts 448 1,333
Gain on sale of assets (29) (1,399)
Deferred tax benefit (1,725) (4,166)
Changes in assets and liabilities:
Decrease in accounts receivable 5,709 5,630
Decrease in notes receivable 232 2,138
Increase in inventory (23,881) (11,959)
Increase in accounts payable, accrued liabilities
and other long term liabilities 7,926 8,099
Increase in other assets (1,954) (491)
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NET CASH USED IN OPERATING ACTIVITIES (14,776) (5,810)
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Cash flows from investing activities:
Purchases of property, plant and equipment (2,102) (799)
Proceeds from sales of property, plant and equipment 78 2,724
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NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (2,024) 1,925
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Cash flows from financing activities:
Net borrowings under revolving line of credit 16,790 3,877
Reductions of note payable (6) (15)
Net proceeds from issuance of common stock 16 16
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NET CASH PROVIDED BY FINANCING ACTIVITIES 16,800 3,878
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NET DECREASE IN CASH - (7)
Cash at beginning of period 65 79
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CASH AT END OF PERIOD $ 65 $ 72
======= =======
Supplemental schedule of cash flow information:
Interest paid $ 1,794 $ 2,159
Income taxes paid $ 217 $ 82
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
5
<PAGE> 6
WICKES INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 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. All
information required by SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", is included in the Company's financial
statements.
The condensed consolidated balance sheet as of March 27, 1999, the
condensed consolidated statements of operations and the condensed
consolidated statements of cash flows for the three-month periods ended
March 27, 1999 and March 28, 1998 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 March 27, 1999 and for
all periods presented have been made. The results for the three-month
period ended March 27, 1999 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 26, 1998, filed with the Securities and Exchange
Commission.
Share Data
----------
The Company issued 3,679 shares of Common Stock to members of its board
of directors as compensation during the three-months ended March 27, 1999.
2. LONG-TERM DEBT
- -------------------
Long-term debt is comprised of the following at March 27, 1999 (in
thousands):
<TABLE>
<S> <C>
Revolving line of credit $ 108,751
Senior subordinated notes 100,000
Other 10
Less current maturities (10)
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Total long-term debt $ 208,751
=======
</TABLE>
6
<PAGE> 7
WICKES INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 March 27, 1999 was $33.9 million.
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 up to $160 million of revolving credit loans and
credits.
3. INCOME TAXES
- -----------------
The provision for income taxes for the three-month period ended March
27, 1999 was a benefit of $1.8 million compared to a benefit of $3.9
million for the three-month period ended March 28, 1998. An effective
federal and state income tax rate of 40.5% was used to calculate income
taxes for the first three months of 1999, compared with an effective rate
of 39.0% for the first three months of 1998. In addition to the effective
income tax rate, state franchise taxes were calculated separately and are
included in the provision reported.
4. COMMITMENTS AND CONTINGENCIES
- ---------------------------------
At March 27, 1999, the Company had accrued approximately $152,000
(included in accrued liabilities at March 27, 1999) 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.
7
<PAGE> 8
WICKES INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 April
30, 1999 none of these suits have made it to trial.
Losses in excess of the $152,000 reserved as of March 27, 1999 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 alleged, 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. In March 1999, by stipulation
among the parties, this complaint was dismissed without prejudice.
The Company is involved in various other legal proceedings which are
incidental to the conduct of its business. The Company does not believe
that any of these proceedings will have a material adverse effect on the
Company.
The Company's assessment of the matters described in this note and other
forward-looking statements in this Form 10-Q are made pursuant to the safe
8
<PAGE> 9
WICKES INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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
- ---------------------------------------------
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.
6. EARNINGS PER SHARE
- ----------------------
The Company calculates earnings per share in accordance with Statement
of Financial Accounting Standards No. 128. The following is the
reconciliation of the numerators and denominators of the basic and diluted
earnings per share:
<TABLE>
<CAPTION>
Three Months Ended
------------------
March 27, March 28,
1999 1998
---------- ----------
<S> <C> <C>
Numerators:
Net loss - for basic and
diluted EPS $(3,276,000) $(6,799,000)
---------- ----------
Denominators:
Weighted average common
shares - for basic EPS 8,210,179 8,181,850
Common share from warrants - 5,375
Common shares from options 65,933 -
---------- ----------
Weighted average common
shares - for diluted EPS 8,276,112 8,187,225
</TABLE>
9
<PAGE> 10
WICKES INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In periods 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 379,732 and
668,283 weighted average shares of common stock during the first quarter of
1999 and 1998, respectively, were not included in the diluted EPS as the
options' exercise prices were greater than the average market price.
7. RESTRUCTURING
- -----------------
During the first quarter of 1998 the Company implemented a restructuring
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. The $5.4
million charge included $3.7 million in estimated losses on the disposition
of closed facility assets and liabilities, $2.0 million in severance and
postemployment benefits related to the 1998 plan, and a benefit of $300,000
for adjustments to prior years' restructuring accruals.
8. SUBSEQUENT EVENTS
- ----------------------
On March 29, 1999, the Company announced the acquisition of Porter
Building Products, a building components manufacturer based in Delaware
with 1998 reported sales of $10.8 million. Porter Building Products
produces roof trusses, floor trusses, and wall panels and has served the
builders in the Delaware, eastern Pennsylvania, southern New Jersey and
northern Maryland markets for more than 20 years.
10
<PAGE> 11
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 26, 1998.
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>
<cation>
Three Months Ended
------------------
March 27, March 28,
1999 1998
<S> <C> <C>
Net sales 100.0% 100.0%
Gross profit 24.0% 24.3%
Selling, general and
Administrative expense 23.4% 24.1%
Depreciation, goodwill and
Trademark amortization 0.8% 0.7%
Provision for doubtful 0.2% 0.8%
accounts
Restructuring and unusual items - 3.2%
Other operating income (0.5)% (1.4)%
Income from operations 0.1% (3.1)%
</TABLE>
Net Earnings
- ------------
The Company's first quarter has historically been adversely affected by
seasonal decreases in building construction activity in the Northeast and
Midwest resulting from winter weather conditions. Weather conditions
during the first quarter of 1999 were relatively close to seasonal
averages, whereas in the first quarter of 1998 the Company's largest
region, the Midwest, experienced a very mild winter. The first quarter of
1999 had favorable economic conditions for the building materials supply
industry, single family housing starts were up 14.2% over the first quarter
of 1998.
11
<PAGE> 12
Net loss for the three months ended March 27, 1999 was $3,276,000
compared with a loss of $6,799,000 for the three months ended March 28,
1998. The reduction in the net loss is primarily the result of there being
no charge for restructuring and unusual items during the first quarter of
1999, increased sales and gross profit, and reductions in provision for
doubtful accounts and interest expense. The positive impact of these
changes were partially offset by increases in selling, general and
administrative ("SG&A") expense and depreciation and a reduction in other
operating income.
Three Months Ended March 27, 1999 Compared
------------------------------------------
with the Three Months Ended March 28, 1998
------------------------------------------
Net Sales
- ---------
Net sales for the first quarter of 1999 increased 13.3% to $191.1
million from $168.7 million for the first quarter of 1998. Same store
sales increased 15.1% compared with the same period last year. Same store
sales to the Company's primary customers, building professionals, also
increased 16.5% when compared with the first quarter of 1998. Consumer
same store sales decreased by 3.1% for the quarter. As of March 27, 1999
the Company operated 101 sales and distribution facilities, the same number
it operated at the end of the first quarter of 1998. Sales of
approximately $4.0 million were recorded, in January of 1998, for the 10
sales and distribution facilities that were sold or closed during the first
quarter of 1998. The Company estimates that deflation in lumber prices
reduced total sales for the quarter by approximately $1.3 million, compared
with the 1998 comparable period.
The Company believes that the sales increase results primarily from its
recent investments in its target major market and re-merchandised
conventional market sales and distribution facilities, as well as favorable
economic conditions. Same store sales increased 16% in the Company's nine
target major markets, while same store sales increased 14.4% in the eleven
conventional market building centers the Company remerchandised during 1997
and 1998. Single family housing starts were 14.2% higher, nationally, in
the first quarter of 1999 than in the comparable period of 1998. In the
Company's primary geographical market, the Midwest, single family housing
starts were 10.7% higher.
12
<PAGE> 13
Gross Profit
- ------------
1999 first quarter gross profit increased to $45.9 million from $41.0
million for the first quarter of 1998, a 12.0% increase. Gross profit as a
percentage of sales decreased to 24.0% for the first quarter of 1999 from
24.3% in 1998. The decrease in gross profit as a percentage of sales is
primarily attributable to increased percent of sales to building
professionals, rising lumber prices and the expansion of the the Company's
installed sales programs, partially offset by increased margins on internally
manufactured products. Sales to building professionals as a percentage
of sales increased to 91.6% in the first quarter of 1999 compared with 89.6%
in 1998. Lumber and building materials accounted for 88.1% of sales in the
first quarter of 1999, compared with 87.4% for the first quarter of 1998.
Selling, General and Administrative Expense
- -------------------------------------------
SG&A expense decreased to 23.4% of net sales in the first quarter of
1999 compared with 24.1% of net sales in the first quarter of 1998. Much
of the decrease is attributable to operating leverage achieved through
increased sales volume, expense reductions achieved as a result of the 1998
first quarter restructuring and reduced spending on major market expansion
programs in 1999.
Decreases as a percentage of sales in salaries, wages and benefits,
employee relocation and equipment rental expense were partially offset by
increases in professional fees, marketing and maintenance expense.
Salaries, wages and employee benefits decreased as a percentage of sales by
0.6%. As of March 27, 1999, the Company had 3,907 full time and part time
employees, an increase of 10.1% from March 28, 1998.
Depreciation, Goodwill and Trademark Amortization
- -------------------------------------------------
Depreciation, goodwill and trademark amortization increased to $1.4
million for the first quarter of 1999 compared with $1.3 million for the
same period in 1998. This increase is primarily due to depreciation on two
component manufacturing facilities acquired since the first quarter of 1998
as well as capital additions as a result of the Company's major market
program.
Provision for Doubtful Accounts
- -------------------------------
The provision for doubtful accounts decreased to $0.4 million for the
first quarter of 1999 from $1.3 million in the first quarter of 1998. The
primary reasons for the decrease are improved delinquency on 1999
outstanding accounts and increased expense in the first quarter of 1998 as
a result of the delinquency of a major account.
13
<PAGE> 14
Restructuring and Unusual Items
- -------------------------------
In February of 1998, the Company announced and completed a plan for
additional restructuring activities, which included the closing or
consolidation of eight building centers and two component manufacturing
facilities in February, the sale of two additional building centers 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. No restructuring or unusual items
were recorded in the first quarter of 1999.
Other Operating Income
- ----------------------
Other operating income for the first quarter of 1999 was $0.9 million
compared with $2.4 million for the first quarter of 1998. During the first
quarter of 1999 the Company did not sell any excess real estate and
recorded gains of only $29,000 on the sale of excess equipment. In the
first quarter of 1998, the Company recorded gains of approximately $1.4
million on the sale of its two Iowa centers, two other closed building
centers, and excess equipment. The Company also recorded less income as a
result of service charges collected on delinquent accounts receivable as a
result of improved delinquency in the first quarter of 1999.
Interest Expense
- ----------------
In the first quarter of 1999 interest expense decreased to $5.3 million
from $5.4 million during the first quarter of 1998, resulting primarily
from a decrease in the effective borrowing rate on total long term debt of
approximately 24 basis points, partially offset by an increase in average
total long term debt of approximately $7.9 million. The decrease in the
effective borrowing rate is primarily due to a reduction in interest rate
on the Company's revolving line of credit as a result of decreases in the
average prime and LIBOR rates as well as a 25 basis point reduction in the
Company's borrowing spreads, effective with the Company's new revolving
credit agreement in February of 1999. Approximately 87% of the Company's
first quarter average borrowings on its revolving credit facility were
LIBOR-based.
14
<PAGE> 15
Provision for Income Tax Benefit
- --------------------------------
The Company recorded an income tax benefit of $1.8 million for the first
quarter of 1999 compared with a benefit of $3.9 million in the first
quarter of 1998. An effective federal and state income tax rate of 40.5%
was used to calculate income taxes for the first quarter of 1999, compared
with an effective rate of 39.0% for the first quarter of 1998. In addition
to the effective income tax rate, state 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, 1997, and 1998
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.
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.
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.
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
15
<PAGE> 16
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 March of 1999 the Company
has expended a total of $1.3 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.
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.
16
<PAGE> 17
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.
17
<PAGE> 18
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 three months of 1999 net cash used in operating
activities was $14.8 million, $9.0 million more than the $5.8 million used
in the first quarter of 1998. The first three months of the year
historically have generated 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 the anticipated increase in sales.
The Company's accounts receivable balance at the end of the first
quarter of 1999 increased $11.9 million when compared to the end of the
first quarter of 1998, an increase of 16.0%. This increase is the result
of increased credit sales in March of 1999, when compared with March 1998,
of approximately $17.3 million partially offset by approximately $3.9
million in insurance and real estate escrow receivables at the end of the
first quarter of 1998, that have since been collected.
Inventory at the end of the first quarter of 1999 was $12.9 million, or
11.3%, higher than at the end of the first quarter of 1998. This increase
is largely attributable to the additional inventory necessary to support
the 13.3% increase in first quarter sales. Roofing, plywood, insulation,
and doors and windows account for $7.9 million of the increase in
inventory. Accounts payable at the end of the first quarter of 1999
increased approximately $14.4 million, or 29.4% from the first quarter of
1998. The increase is primarily attributable to the increase in total
inventory.
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. 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. In the first three
months of 1999 the Company spent $2.1 million on capital expenditures as
compared to $0.8 million for the same period in 1998. The Company expects
to spend approximately $7.0 million for all of 1999. Under the Company's
new bank revolving credit agreement, capital expenditures during 1999 are
limited to $8.5 million. In addition to capital expenditures, this
revolving credit agreement allows the Company to spend up to $30 million,
subject to certain restrictions, for acquisitions. The Company expects to
fund capital expenditures through borrowings and its internally generated
cash flow.
18
<PAGE> 19
In January of 1999, the Company acquired the assets of a wall panel
manufacturer located in Cookeville, Tennessee and at the end of March the
Company acquired the assets of Porter Building Products, a manufacturer of
trusses and wall panels, located in Bear, Delaware. At May 1, 1999 the
Company operated 101 sales and distribution centers and 14 component
manufacturing facilities compared with 101 sales and distribution
facilities and 10 component manufacturing facilities at May 1, 1998. The
following table reconciles the number of sales and distribution facilities
and component manufacturing facilities operated by the Company, through May
1, 1999:
Sales and Component
Distribution Manufacturing
Facilities Facilities
---------- ----------
As of December 26, 1998 101 12
Expansion - -
Acquisition - 2
Closings - -
Consolidation - -
---- ----
As of May 1, 1999 101 14
==== ====
The Company maintained excess availability under its revolving line of
credit throughout the first three months of 1999. At the end of the first
quarter total borrowings under the revolving line of credit were $11.8
million higher than at the end of the first quarter of 1998. 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 March 27, 1999, $108.8
million was outstanding under the Company's revolving line of credit, and
the unused availability was approximately $33.9 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 February 17, 1999 the Company entered into a new revolving credit
agreement and repaid all indebtedness under and terminated its old
revolving credit agreement. 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
19
<PAGE> 20
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.
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%, 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.
20
<PAGE> 21
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
- ---------------------------
In March 1999, by stipulation among the parties, the action 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 dismissed
- -----------------------------------------------------------
without prejudice.
Item 5. Other Information
- ---------------------------
On March 29, 1999, the Company announced the acquisition of Porter
Building Products, a building components manufacturer based in Delaware
with 1998 reported sales of $10.8 million. Porter Building Products
produces roof trusses, floor trusses, and wall panels and has served the
builders in the Delaware, eastern Pennsylvania, southern New Jersey and
northern Maryland markets for more than 20 years.
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.
21
<PAGE> 22
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
(Principal Executive and Financial Officer)
By: /s/ John M. Lawrence
--------------------
John M. Lawrence
Controller and Principal Accounting
Officer
Date: May 10, 1999
22
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE MARCH
27, 1999 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-25-1999
<PERIOD-END> MAR-27-1999
<CASH> 65
<SECURITIES> 0
<RECEIVABLES> 91,293
<ALLOWANCES> 4,524
<INVENTORY> 127,597
<CURRENT-ASSETS> 229,174
<PP&E> 80,982
<DEPRECIATION> 34,303
<TOTAL-ASSETS> 314,200
<CURRENT-LIABILITIES> 82,059
<BONDS> 100,000
0
0
<COMMON> 82
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 314,200
<SALES> 191,110
<TOTAL-REVENUES> 191,110
<CGS> 145,203
<TOTAL-COSTS> 145,203
<OTHER-EXPENSES> 45,186
<LOSS-PROVISION> 448
<INTEREST-EXPENSE> 5,302
<INCOME-PRETAX> (5,029)
<INCOME-TAX> (1,753)
<INCOME-CONTINUING> (3,276)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,276)
<EPS-PRIMARY> (0.40)
<EPS-DILUTED> (0.40)
</TABLE>
