United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/AA
(Amendment No. 2)
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Fiscal Year Ended December 26, 1998
or
[ ] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Transition Period From ______ To ______
Commission File No. 0-22468
WICKES INC.
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(Exact name of registrant as specified in its charter)
Delaware 36-3554758
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(State of Incorporation) (IRS Employer Identification No.)
706 North Deerpath Drive, Vernon Hills, Illinois 60061
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(Address of principal executive offices)
(847) 367-3400
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(Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12 (b) of the Act:
None
----
Securities Registered Pursuant to Section 12 (g) of the Act:
Common Stock, par value of $.01 per share
-----------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this form
10-K or any amendment to this form 10-K. [ ]
As of February 28, 1999, the Registrant had 8,210,947 shares of Common
Stock, par value $.01 per share, and no shares of Class B Non-Voting Common
Stock, par value $.01 per share, outstanding, and the aggregate market
value of outstanding voting stock (based on the last sale price on the
Nasdaq National Market of Common Stock on that date) held by nonaffiliates
was approximately $16,100,000 (includes the market value of all such stock
other than shares beneficially owned by 10% stockholders, executive
officers and directors).
<PAGE> 2
TABLE OF CONTENTS
Page No.
PART II
Item 6. Selected Financial Data 3
Item 7. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 7
Item 8. Financial Statements and Supplementary Data 21
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K 22
SIGNATURES 23
2
<PAGE> 3
PART II
Item 6. SELECTED FINANCIAL DATA.
- --------------------------------
The following table presents selected financial data derived from the
audited consolidated financial statements of the Company for each of the
five years in the period ended December 26, 1998. The following selected
financial data should be read in conjunction with "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and the Consolidated Financial Statements and Notes thereto contained
elsewhere in this report.
In September of 1999, the Company amended this filing as a result of a
change in the accounting for a barter transaction which occured in September
of 1998. For a description of the transaction and the resulting changes see
Note 16 of Notes to Consolidated Financial Statements included elsewhere
herein.
3
<PAGE> 4
<TABLE>
<CAPTION>
WICKES INC. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except ratios and per share data)
Dec. 26, Dec. 27, Dec. 28, Dec. 30, Dec. 31,
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Net sales $910,272 $884,082 $848,535 $972,612 $986,872
Gross profit 215,472 203,026 189,463 220,812 233,831
Selling, general and
administrative expense 186,853 185,385 162,329 194,629 194,586
Depreciation, goodwill and
trademark amortization 5,253 4,863 5,367 5,882 4,543
Provision for doubtful accounts 2,915 1,707 1,067 6,482 2,457
Other operating income 6,837 10,689 6,796 5,831 6,772
Restructuring and unusual
items (1) 5,932 (559) 745 17,798 2,000
Income from operations 21,356 22,319 26,751 1,852 37,017
Interest expense (2) 21,632 21,417 21,750 24,351 21,663
Equity in loss of affiliated
company - 1,516 3,183 3,543 -
Income (loss) before
income taxes (276) (614) 1,818 (26,042) 15,354
Income taxes 1,019 1,099 1,010 1,353 1,660
Deferred tax (benefit)/
expense(3) (330) (153) 300 (11,796) (14,360)
Net (loss) income (965) (1,560) 508 (15,599) 28,054
Ratio of earnings to
fixed charges (4) 1.00 - 1.07 - 1.63
Interest coverage (5) 1.32 1.36 1.61 0.35 2.09
Adjusted interest coverage (6) 1.61 1.33 1.65 1.15 2.19
Per Share Data:
Basic and diluted (loss)
earnings per common share $ (0.12) $ (0.19) $ 0.07 $ (2.54) $ 4.57
Weighted average common
shares outstanding 8,197,542 8,168,257 7,221,082 6,135,610 6,154,770
Operating and Other Data:
EBITDA (7) $26,609 $27,182 $32,118 $ 7,734 $41,560
Adjusted EBITDA (8) 32,541 26,623 32,863 25,532 43,560
Cash interest expense (9) 20,185 20,016 19,969 22,266 19,882
Depreciation and amortization 5,253 4,863 5,367 5,882 4,543
Deferred financing cost
amortization 1,447 1,401 1,781 2,085 1,781
Capital expenditures 5,854 7,758 2,893 7,538 9,760
Same store sales growth (10) 9.0% 4.7% (6.4%) (3.8%) 14.1%
Sales and distribution facilities
open at end of period 101 111 108 110 130
Net cash provided by (used in)
operating activities 2,627 (24,554) 18,710 15,862 1,331
Net cash (used in) provided by
investing activities (1,623) 6,040 2,410 (10,277) (41,777)
Net cash (used in) provided by
financing activities (1,018) 16,660 (19,274) (7,535) 42,480
Balance Sheet data (at period end):
Working capital $135,345 $134,459 $116,771 $139,622 $163,511
Total assets 292,183 283,352 272,842 302,515 319,573
Total long-term debt,
less current maturities 191,961 193,061 176,376 205,221 211,139
Total stockholders' equity 23,148 24,001 25,499 15,129 30,146
</TABLE>
4
<PAGE> 5
Notes to Selected Consolidated Financial Data
---------------------------------------------
(1) During the first quarter of 1998 the Company implemented the 1998
Plan which resulted in the closing or consolidation of eight sales and
distribution and two manufacturing facilities in February, the sale of
two sales and distribution facilities in March, and further reductions
in headquarters staffing. As a result of the 1998 Plan, the Company
recorded a restructuring charge of $5.4 million in the first quarter
and an additional charge of $0.5 million in the third quarter. In
1997, the Company recorded a $0.6 million credit as a result of
finalizing the 1995 restructuring plan. In 1995, the Company recorded
a $17.8 million charge relating to a plan to reduce the number of
operating building centers, the corresponding overhead to support
those centers identified, strengthen its capital structure, and other
unusual items. The 1995 restructuring plan was adjusted in 1996 by an
additional charge of $0.7 million. In 1994, the Company recorded a
$2.0 million charge primarily as a result of its headquarters cost
reduction plan. See Note 3 of Notes to Consolidated Financial
Statements included elsewhere herein.
(2) Interest expense includes cash interest expense and amortization
of deferred financing costs (See Note 9 below).
(3) The deferred tax benefit recorded in 1994 includes a $21.0
million reduction of the Company's valuation allowance for deferred
tax assets.
(4) For purposes of computing this ratio, earnings consist of income
(loss) before income taxes and fixed charges. Fixed charges consist
of cash interest expense, amortization of deferred financing costs,
and a portion of operating lease rental expense that is representative
of the interest factor attributable to interest expense. Such
earnings were insufficient to cover fixed charges by $0.5 million and
$26.0 million for the years ended December 27, 1997 and December 30,
1995, respectively.
(5) For purposes of computing this ratio, earnings consists of EBITDA
(as defined in Note 7 below), which is divided by cash interest
expense (as defined in Note 9 below).
(6) For purposes of computing this ratio, earnings consists of
Adjusted EBITDA (as defined in Note 8 below), which is divided by cash
interest expense (as defined in Note 9 below).
(7) EBITDA represents income (loss) before income taxes, equity in
loss of affiliated company, interest expense, depreciation and
amortization. EBITDA is not presented herein as an alternative
measure of operating results but rather to provide additional
information related to debt service capability, and does not represent
cash flow from operations, as defined by GAAP and may not be
comparable to similarly titled measures reported by other companies.
5
<PAGE> 6
(8) Adjusted EBITDA represents EBITDA (as defined in Note 7 above)
adjusted to exclude restructuring and unusual items and is used in the
adjusted interest coverage ratio to reflect debt service capability
before the effect of these restructuring and unusual items, and
provides a truer measure of debt service capability for ongoing
operations.
(9) Cash interest expense consists of interest expense less amortization
of deferred financing costs. The following table details interest
expense, cash interest expense, and interest paid for each of the five
years ended December 26, 1998 (in thousands).
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Interest expense $21,632 $21,417 $21,750 $24,351 $21,663
Less:
Amortization of deferred
financing costs 1,447 1,401 1,781 2,085 1,781
------ ------ ------ ------ ------
Cash interest expense 20,185 20,016 19,969 22,266 19,882
Decrease (increase) in
accrued interest 700 (225) 403 557 (1,105)
------ ------ ------ ------ ------
Interest paid $20,885 $19,791 $20,372 $22,823 $18,777
====== ====== ====== ====== ======
</TABLE>
(10) Same store data reflects average sales for sales and distribution
facilities and other facilities that were operated by the company
throughout both the current and previous year. The following table lists,
by year, the number of locations that were included in this calculation:
Year No. of Facilities
---- -----------------
1998 101
1997 107
1996 101
1995 101
1994 122
The sixteen lumber centers closed on December 29, 1995 were excluded
from the 1995 same store figures, and two centers that were
consolidated with another Wickes center, in early 1995, were included
in 1995 same store results.
6
<PAGE> 7
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ---------------------------------------------------------------------------
RESULTS OF OPERATIONS.
---------------------
General
- -------
In September of 1999, the Company amended this filing as a result of a change
in the accounting for a barter transaction which occured in September of 1998.
For a description of the transaction and the resulting changes see Note 16 of
Notes to Consolidated Financial Statements included elsewhere herein.
The following table sets forth, for the periods indicated, the percentage
relationship to net sales of certain expense and income items. The table
and subsequent discussion should be read in conjunction with the financial
statements and notes thereto appearing elsewhere herein.
<TABLE>
<CAPTION>
Years Ended
----------------------------
Dec. 28, Dec. 27, Dec. 28,
1998 1997 1996
---- ---- ----
<C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Gross profit 23.7 23.0 22.3
Selling, general and administrative
expense 20.5 21.0 19.1
Depreciation, goodwill and trademark
amortization .6 .6 .6
Provision for doubtful accounts .3 .2 .1
Restructuring and unusual items .7 (.1) .1
Other operating income (.7) (1.2) (.8)
Income from operations 2.3 2.5 3.2
</TABLE>
The Company's operations, as well as those of the building material
industry generally, have reflected substantial fluctuations from period to
period as a consequence of various factors, including levels of
construction activity, general regional and local economic conditions,
weather, prices of commodity wood products, interest rates and the
availability of credit, all of which are cyclical in nature. The Company
anticipates that fluctuations from period to period will continue in the
future. Because a substantial percentage of the Company's sales are
attributable to building professionals, certain of these factors may have a
more significant impact on the Company than on companies more heavily
focused on consumers.
7
<PAGE> 8
The Company's first quarter and, occasionally, its fourth quarter are
adversely affected by weather patterns in the Midwest and Northeast, which
result in seasonal decreases in levels of construction activity in these
areas. The extent of such decreases in activity is a function of the
severity of winter conditions. Record setting snow falls throughout the
Midwest and Northeast in January of 1996, adversely affected construction
activity in the first quarter of 1996. Weather conditions in 1997 were
relatively normal throughout the year. During the first quarter of 1998,
the Company experienced mild winter weather conditions in the Company's
Midwest region, which was partially offset by increased precipitation in
the Northeast and South. Unseasonably warm weather during December of 1998
was followed by excessive snow falls in the Midwest in January of 1999.
The following table contains selected unaudited quarterly financial data
for the years ended December 26, 1998, December 27, 1997, and December 28,
1996. Quarterly earnings/(loss) per share may not total to year end
earnings/(loss) per share due to the issuance of additional shares of
Common Stock during the course of the year.
<TABLE>
<CAPTION>
QUARTERLY FINANCIAL DATA
Three Months Ended
(in millions, except per share data and percentages)
Basic and Diluted
Net Sales as a Net Earnings
% of Annual Gross Net Income /(Loss) per
Net Sales Net Sales Profit /(Loss) Common Share
--------- --------- ------ ---------- ------------
<S> <C> <C> <C> <C> <C>
1998
March 28 $168.8 18.5% $41.0 $(6.8) $(.83)
June 27 237.1 26.1 56.1 2.8 .34
September 26 261.1 28.7 60.2 2.3 .28
December 26 243.3 26.7 58.2 0.7 .09
1997
March 29 $159.3 18.0% $36.9 $(5.2) $(.63)
June 28 237.3 26.9 54.3 1.3 .16
September 27 266.3 30.1 60.3 1.8 .22
December 27 221.1 25.0 51.5 0.5 .06
1996
March 30 $152.5 18.0% $34.9 $(6.2) $(1.00)
June 29 228.8 27.0 51.2 1.9 .29
September 28 255.6 30.1 55.5 2.8 .35
December 28 211.7 24.9 47.9 2.0 .24
</TABLE>
8
<PAGE> 9
In 1998 and 1996 the Company recorded charges of $5.9 million and $0.7
million, respectively, for restructuring and unusual items. In 1997 the
Company recorded a benefit of $0.6 million for restructuring and unusual
items. For additional information on the restructuring and unusual items
charge see Note 3 of Notes to Consolidated Financial Statements included
elsewhere herein. In addition, in 1996 the Company received insurance
premium adjustments from a former insurance carrier in the amount of $2.2
million and reversed an accrual of $1.5 million for other disputed
insurance premiums with this carrier. Accordingly selling, general and
administrative expenses were reduced by $1.0 million during the first three
quarters of 1996 and by $2.7 million in the fourth quarter of 1996. In the
fourth quarter of 1997, the Company recorded a gain of $4.5 million on the
sale of six pieces of real estate. In the fourth quarters of 1998 and
1996, only two and three pieces of real estate were sold for gains of $0.4
million and $0.6 million, respectively. Gains or losses on the sale of
real estate are recorded under other operating income.
The Company has historically generated approximately 15% to 20% of its
annual revenues during the first quarter of each year, and the Company has
historically recorded a significant net loss for this quarter. As a result
of these seasonal factors, the Company's inventories and receivables reach
peak levels during the second and third quarters and are generally lower
during the first and fourth quarters, depending on sales volume and lumber
prices.
This Item 7 contains statements which, to the extent that they are not
recitations of historical fact, constitute Forward Looking Statements that
are made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995 and are inherently subject to uncertainty. A
number of important factors could cause the Company's business and
financial results and financial condition to be materially different from
those stated in the Forward Looking Statements. Those factors include but
are not limited to the seasonal and cyclical factors discussed above in
this Item 7 and elsewhere in this report, the effects of the Company's
substantial leverage and competition, the success of the Company's
operational efforts, and the matters discussed in Note 8 of the Notes to
Consolidated Financial Statement included elsewhere herein.
1998 Compared with 1997
- -----------------------
Net Sales
---------
Net sales for 1998 increased $26.2 million, or 3.0%, to $910.3 million
from $884.1 million in 1997. Sales for all facilities operated throughout
both years ("same store") increased 9.0%. During 1998, the Company
experienced a 16.2% increase in same store sales to its primary customer
segment, the professional home builder, and a 1.2% increase in same store
sales to commercial builders. Consumer sales declined 3.5% on a same
store basis.
9
<PAGE> 10
Total housing starts in the United States increased 9.6% in 1998, and
starts in the Company's primary geographical market, the Midwest, increased
approximately 9.2%. The Company's two other geographical markets, the
Northeast and South, experienced increases of 8.6% and 10.5%, respectively.
Nationally, single family housing starts, which generate the majority of
the Company's sales to building professionals, experienced an increase of
12.0% in 1998, from 1.13 million starts in 1997 to 1.27 million starts in
1998.
The Company has experienced significant sales increases (averaging in
excess of 20%) in its target major markets and at sales and distribution
facilities that completed showroom resets in 1997 and 1998.
During the first quarter, the Company experienced a sales benefit as a
result of mild winter weather conditions in the Company's Midwest region.
This was partially offset by increased precipitation in the Northeast and
South, during the same period. The Company, as a whole, benefited from
unseasonably warm weather during December of 1998. Weather conditions
during 1997 were closer to seasonal averages.
The Company estimates that deflation in lumber prices negatively affected
1998 sales by approximately $28.6 million, when compared with lumber prices
during 1997.
As a result of the 1998 Plan, the Company operated ten fewer sales and
distribution facilities at the end of 1998 than it operated at the end of
1997. The ten sales and distribution facilities that were closed, sold, or
consolidated, as a result of the 1998 Plan, contributed an aggregate of
$4.0 million to 1998 sales and $46.5 million to 1997 sales. See " Item 1.
Business - Business Strategy".
Gross Profit
------------
Gross profit increased $12.4 million to 23.7% of net sales for 1998
compared with 23.0% of net sales for 1997. The increase in gross profit is
primarily due to increased sales, improved product costs and increased
margins on internally manufactured products.
The increase in gross profit as a percent of sales is primarily
attributable to improved margins on internally manufactured products,
improved product costs and improved margins on installed sales. These
improvements were partially offset by the effects of lumber deflation and a
continued increase in the percent of sales attributable to professional
builders. The Company estimates that lumber deflation in 1998, when
compared with 1997 price levels, reduced gross profit by approximately $5.5
million. The percent of Company sales attributable to professional builders
increased to 87.9% for 1998 compared with 86.5% in 1997. The Company
anticipates that its continued focus on the professional builder will
create additional pressure on gross profit margins. The Company also recorded
10
<PAGE> 11
a charge of $844,000 in the third quarter of 1998 as the result of an exchange
of clearance merchandise for barter credits, see Note 16 of Notes to
Consolidated Financial Statements included elsewhere herein.
Selling, General, and Administrative Expense
--------------------------------------------
In 1998, selling, general, and administrative expense ("SG&A") decreased
as a percent of net sales to 20.5% compared with 21.0% of net sales in
1997. Much of this reduction is attributable to expense reductions as a
result of the Company's 1998 Plan and the completion of most of the
Company's remerchandising programs during or prior to the end of the second
quarter of 1998.
In the first quarter of 1998, the Company closed eight underperforming
building centers, two component manufacturing facilities and sold its two
sales and distribution facilities in Iowa. For further information,
including the charge taken by the Company in the first quarter of 1998, see
"Restructuring and Unusual Items" and Note 3 of the Notes to Consolidated
Financial Statements included elsewhere herein.
The Company experienced decreases from 1997 to 1998, as a percent of
sales, in maintenance, travel, professional fees, marketing, and general
office expenses which were partially offset by increased real estate rent
and salaries, wages and employee benefits. The Company experienced a
slight increase in salaries, wages and employee benefits as a percent of
sales by 0.2%. On a same store basis, the number of total employees at the
average sales and distribution facility increased approximately 8% from
1997.
Depreciation, Goodwill and Trademark Amortization
-------------------------------------------------
Depreciation, goodwill and trademark amortization costs increased $0.4
million in 1998 compared with 1997. This increase is primarily due to
depreciation on rental equipment and facilities implemented or improved as
a result of the Company's major market and remerchandising programs,
partially offset by reduced depreciation on vehicles. The Company's tool
rental program was initiated during 1997 and no depreciation on rental
equipment was recorded in the first half of 1997.
Provision for Doubtful Accounts
-------------------------------
The Company extends credit, generally due on the 10th day of the month
following the sale, to qualified and approved contractors. Provision for
doubtful accounts increased to $2.9 million or 0.3% of sales for 1998 from
$1.7 million or 0.2% of sales for 1997. While the Company did experience
several large write-offs during 1998, the results were in line with its
historical average of approximately 0.3% of sales.
11
<PAGE> 12
Restructuring and Unusual Items
-------------------------------
During the first quarter of 1998 the Company implemented the 1998 Plan
which resulted in the closing or consolidation of eight sales and
distribution and two manufacturing facilities in February, the sale of two
sales and distribution facilities in March, and further reductions in
headquarters staffing. As a result of the 1998 Plan, the Company recorded
a restructuring charge of $5.4 million in the first quarter and an
additional charge of $0.5 million in the third quarter. The $5.9 million
charge included $4.1 million in anticipated losses on the disposition of
closed facility assets and liabilities, $2.1 million in severance and post
employment benefits related to the 1998 plan, and a benefit of $300,000 for
adjustments to prior years' restructuring accruals. The $4.1 million in
anticipated losses includes the write-down of assets (excluding real
estate), to their net realizable value, of $3.4 million and $700,000 in
real estate carrying costs. The $2.1 million in severance and post
employment benefits covered approximately 250 employees that were released
as a result of reductions in headquarters staffing and the closing or
consolidation of the ten operating facilities. The $300,000 benefit from
prior years was a result of accelerated sales of previously closed
facilities during the fourth quarter of 1997 and first quarter of 1998.
The acceleration of these sales resulted in a change in the estimate of
facility carrying costs for the sold facilities.
Other Operating Income
----------------------
Other operating income decreased to $6.8 million in 1998 from $10.7
million in 1997. The decrease is primarily the result of a decrease in
gains reported on the sale of real estate of closed facilities and excess
vehicles and equipment. In 1998 the company sold nine pieces of real
estate and recorded a gain of $1.6 million, compared with a gain of $6.0
million recorded in 1997 for the sale of 12 facilities. This decrease was
partially offset by approximately $1.0 million in gains as a result of the
difference between insured replacement cost and book value as a result of a
fire and storm damage at certain of the Company's sales and distribution
facilities during 1998.
Interest Expense
----------------
Interest expense increased to $21.6 million in 1998 from $21.4 million in
1997. This increase was the result of a increase in average outstanding
debt under the Company's revolving line of credit of $9.1 million partially
offset by a decrease in the overall effective borrowing rate of 38 basis
points. The increase in average outstanding debt was due primarily to
increases in working capital and increased investment in property, plant
and equipment.
12
<PAGE> 13
Equity in Loss of Affiliated Company
------------------------------------
The Company's net investment in Riverside International LLC was reduced
to zero as a result of the $1.5 million loss that was recorded in 1997.
Accordingly, the Company recorded no equity in loss of affiliated company
during 1998.
Provision for Income Taxes
--------------------------
In 1998, and 1997, the Company recorded current income tax expense of
$1.0 million and $1.1 million, respectively. Current income tax provisions
for both years consist of state and local tax liabilities.
A deferred tax benefit of $0.3 million was also recorded in 1998. This
compares with a deferred tax benefit of $0.2 million in 1997. The 1998
benefit results from the loss before federal income taxes and the
establishment of a deferred tax asset, in accordance with FAS 109.
Management has determined (based on the Company's positive earnings growth
from 1992 through 1994 and its expectations for the future) that operating
income of the Company will more likely than not be sufficient to recognize
fully these net deferred tax assets. See Note 11 of Notes to Consolidated
Financial Statements included elsewhere herein.
Net Income
----------
The Company recorded a net loss of $1.0 million in 1998, compared with a
net loss of $1.6 million in 1997, an improvement of $0.6 million. The
primary components of this improvement include an increase in gross profit
of $12.4 million, a decrease in losses attributable to Riverside
International LLC of $1.5 million and a reduction in the provision for
income taxes of $0.3 million. These improvements were partially offset by
a $6.5 million increase in restructuring and unusual items expense, a
reduction in other income of $3.9 million, and increases in SG&A expense of
$1.5 million and provision for doubtful accounts of $1.2 million.
1997 Compared with 1996
- -----------------------
Net Sales
---------
Net sales for 1997 increased $35.5 million, or 4.2%, to $884.1 million
from $848.5 million in 1996. Same store sales increased 4.7%. During
1997, the Company experienced a 4.1% increase in same store sales to its
primary customer segment, the professional home builder, and a 16.4%
increase in same store sales to commercial builders. Consumer same store
sales were down 6.8% for the year.
13
<PAGE> 14
The Company believes that the following matters contributed to the 1997
sales increase. Throughout most of 1997, the Company operated three more
sales and distribution facilities than it operated during 1996. Also, the
Company believes that showroom Resets at 19 of its sales and distribution
facilities in 1997, sales training, and big builder initiatives also had a
positive effect on sales. Finally, weather conditions in the Northeast
during the first quarter of 1997 were more favorable compared with the
record snowfalls recorded in the first quarter of 1996. The Company
believes that inflation/deflation in lumber prices had negligible impact on
total sales.
Total housing starts in the United States were relatively unchanged in
1997 compared with 1996. Starts in the Company's primary geographical
market, the Midwest, decreased approximately 5.5%. The Company's two other
geographical markets, the Northeast and South, experienced increases in
1997 housing starts of 3.5% and 1.3%, respectively. Nationally, single
family housing starts, which generate the majority of the Company's sales
to building professionals, experienced a decrease of 2.4%, from 1.16
million starts in 1996 to 1.13 million starts in 1997.
Gross Profit
------------
Gross profit increased $13.6 million to 23.0% of net sales for 1997
compared with 22.3% of net sales for 1996. The increase in gross profit is
primarily due to increases in sales, reductions in product costs, and
increases in sales of manufactured products.
The increase in gross profit as a percent of sales is primarily
attributable to reduced cost of sales as a result of a concerted effort to
obtain the best pricing available. The Company also expanded its sales of
higher margin internally manufactured products by approximately 27% from
1996 to 1997, and experienced a reduction in costs associated with physical
inventory count adjustments. These increases were partially offset by
increased percent of sales attributable to professional builders and an
increase in the percent of sales attributable to lower margin commodity
lumber products. The percent of Company sales attributable to professional
builders increased to 86.5% for 1997 compared with 84.7% in 1996.
Selling, General, and Administrative Expense
--------------------------------------------
In 1997, SG&A increased as a percent of net sales to 21.0% compared with
19.1% of net sales in 1996, primarily as a result of the Company's increase
in sales and distribution facility employees in an effort to increase sales
and market share, expenses associated with showroom remerchandisings in 19
facilities in 1997, expenses associated with expansion of the Company's
Major Market program in 1997, and insurance recoveries recorded in 1996
with respect to prior years.
Compared to 1996, on a same store basis, the average number of employees
at the Company's sales and distribution facilities in 1997 increased by
approximately 5%. The Company also experienced an increase in salaries and
wages in its non-core operations. Both were major factors in the 1.0%
increase, as a percentage of sales, of the Company's salaries, wages and
employee benefits. The Company also experienced increases as a percentage
of sales in travel, office supplies, professional and marketing expenses.
14
<PAGE> 15
During 1997, the Company Reset the showrooms of thirteen Conventional
Market building centers and six Major Market sales and distribution
facilities. Also during 1997, the Company continued its efforts to expand
its Major Markets program. See "Item 1. Business - Business Strategy".
Expenses associated with these Resets and expansion of the Major Markets
program totaled approximately $1.8 million in 1997 and accounted for
approximately $1.3 million of the SG&A increase.
In 1996, the Company recorded $3.7 million of insurance recoveries for
prior years' casualty insurance programs. During 1997, the Company
recorded $0.3 million in prior year insurance recoveries.
In October 1997, the Company announced plans to streamline operations and
to focus on core operations. In accordance with these plans, the Company
discontinued or sold non-core operations that contributed approximately
$1.5 million of SG&A during 1997. In addition, the Company effected
headquarters staffing reductions beginning in October 1997, and increased
the amount of these reductions pursuant to a determination announced in
February 1998.
Depreciation, Goodwill and Trademark Amortization
-------------------------------------------------
Depreciation, goodwill and trademark amortization costs decreased $0.5
million in 1997 compared with 1996. The primary reason for this decrease
is that most of the Company-owned delivery vehicles were fully depreciated
in 1997. Since 1993 the Company's new vehicles have been obtained
primarily through operating leases.
Provision for Doubtful Accounts
-------------------------------
Provision for doubtful accounts increased to $1.7 million or 0.2% of
sales for 1997 from $1.1 million or 0.1% of sales for 1996. Historically
the Company's provision for doubtful accounts averages approximately 0.3%
of sales. The results achieved in 1996 were a result of increased efforts
to collect previously reserved accounts receivable, especially those
attributable to the Gerrity Lumber acquisition centers.
Restructuring and Unusual Items
-------------------------------
During 1997 the Company completed its 1995 Plan. As a result, it
recorded a reduction in accrued costs and a benefit to restructuring and
unusual charges of approximately $2.1 million. This benefit was partially
offset by a $1.5 million restructuring charge for severance and
postemployment benefits and anticipated losses on the disposal of
discontinued non-core programs and related reductions in headquarters
15
<PAGE> 16
staffing which was announced by the Company in October of 1997. The non-
core programs affected by these reductions included the sale or closing of
the Company's mortgage lending, utilities marketing, and internet service
programs not directly related to the building supply business. See "Item
1. Business - Business Strategy".
Other Operating Income
----------------------
Other operating income increased to $10.7 million in 1997, compared with
$6.8 million in 1996. The increase resulted from gains reported on the
sale of facilities and excess equipment of approximately $6.3 million, an
increase of $4.3 million from the $2.0 million recorded in 1996. The
approximately $0.7 million gain on the sale of the Company's headquarters
in Vernon Hills, Illinois, is being amortized over a 15-year period
consistent with the Company's lease of the facility. This increase was
partially offset by a $0.6 million gain recorded in 1996 as a result of the
difference between insured replacement cost and book value as a result of a
fire and storm damage at certain of the Company's building centers.
Interest Expense
----------------
Interest expense decreased to $21.4 million in 1997 from $21.8 million in
1996, as a result of a decrease in Company's overall effective borrowing
rate of 21 basis points, partially offset by an increase in average
outstanding debt under the Company's revolving line of credit of $4.5
million. The increase in average outstanding debt was due primarily to
reduced net cash flow from operating activities and increased investment in
property, plant and equipment.
Equity in Loss of Affiliated Company
------------------------------------
During 1997, the Company's equity in the losses of Riverside
International LLC was $1.5 million compared with $3.2 million during 1996.
The $1.5 million loss in 1997 reduced the Company's net investment to zero.
Provision for Income Taxes
--------------------------
In 1997 the Company recorded current income tax expense of $1.1 million
compared with $1.0 million in 1996. Current income tax provisions for both
years consist of state and local tax liabilities.
A deferred tax benefit of $0.2 million was also recorded for 1997. This
compares with a deferred tax expense of $0.3 million in 1996. The 1997
benefit results from the loss before income taxes and the establishment of
a deferred tax asset, in accordance with FAS 109. See Note 11 of Notes to
Consolidated Financial Statements included elsewhere herein.
16
<PAGE> 17
Net Income
----------
The Company experienced a net loss of $1.6 million in 1997 compared with
net income of $0.5 million in 1996, a change of $2.1 million. The primary
components of this change consist of an increase in SG&A expense of $23.1
million and an increase in provision for doubtful accounts of $0.6 million.
These unfavorable changes were partially offset by increases in gross
profit of $13.6 million and other operating income of $3.9 million, as well
as decreases in losses attributable to Riverside International LLC of $1.7
million, restructuring and unusual items of $1.3 million, and depreciation,
goodwill and trademark amortization of $0.5 million.
Statements of Financial Accounting Standards
- --------------------------------------------
Recently Issued Accounting Pronouncements
-----------------------------------------
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities," standardizes the accounting
for derivative instruments by requiring that all derivatives be recognized
as assets and liabilities and measured at fair value. The statement is
effective for fiscal years beginning after June 15, 1999. The Company
believes adoption of the statement will not have a material effect on its
financial statements.
Liquidity and Capital Resources
- -------------------------------
The Company's principal sources of working capital and liquidity are
earnings and borrowings under its revolving credit facility. The Company's
primary need for capital resources is to finance inventory and accounts
receivable.
In 1998, net cash provided by operating activities amounted to $2.6
million. This compares with cash used in operating activities of $24.6
million in 1997 and cash provided by operating activities of $18.7 million
in 1996. The improvement of $27.2 million is primarily the result of
increases in accounts payable, increased earnings after adjustment for non-
cash expenses, a decrease in notes receivable, decreased capital spending
and smaller increases in inventory and other assets than the increase
recorded in 1997. These improvements were partially offset by a reduction
in the proceeds from the sale of property plant and equipment and a larger
increase in accounts receivable, when compared to the increase in 1997.
The cash generated by operating activities was used for capital
expenditures and to reduce the Company's borrowings on it's revolving line
of credit. The Company decreased its capital expenditures in 1998 to $5.9
million from $7.8 million in 1997.
17
<PAGE> 18
Accounts receivable at the end of 1998 were $11.1 million, or 13.6%,
higher than at year end 1997 primarily as a result of a $9.2 million
increase in December 1998 credit sales compared with December 1997 and an
increase in accounts with extended terms. Inventory at the end of
December 1998 was $1.0 million higher than at the end of 1997, primarily as
a result of significantly higher sales and continued demand for lumber and
building materials during December, due in part to very favorable weather
conditions. The amount of the Company's accounts payable on any balance
sheet date may vary from the average accounts payable throughout the period
due to the timing of payments and will tend to increase or decrease in
conjunction with an increase or decrease in inventory.
The Company's capital expenditures consist primarily of the construction
of facilities for new and existing operations, the remodeling of sales and
distribution facilities and component manufacturing facilities, and the
purchase of equipment and management information systems. The Company may
also from time to time make expenditures to establish or acquire operations
to expand or complement its existing operations, especially in its major
markets. The Company made $5.9 million in capital expenditures in 1998.
Approximately $2.6 million was expended on capital improvements for new
operations, showroom resets and expansion of manufacturing operations. The
Company expects to spend approximately $7 million in 1999. These
expenditures are expected to be funded by the Company's borrowings and its
internally generated cash flow. At December 26, 1998, there were no
material commitments for future capital expenditures.
The Company maintained excess availability under its revolving credit
facility throughout 1998. The Company's receivables and inventory
typically increase in the second and third quarters of the year due to
higher sales in the peak building season. In these same periods, the
Company typically reaches its peak utilization of its revolving credit
facility because of the increased inventory needed for the peak building
season. Except for the third quarter, the Company was in full compliance
with all of the requirements contained in its revolving credit agreement.
At the end of the third quarter the Company was not in compliance with the
fixed charge coverage covenant contained in its revolving line of credit.
The Company's lenders waived the non-compliance.
On February 17, 1999 the Company entered into a new revolving credit
agreement and repaid all indebtedness under and terminated its old
revolving credit agreement. See Note 15 of Notes to Consolidated Financial
Statements included elsewhere herein. Among other things, the changes
between the old agreement and this new agreement include (i) an initial 25
basis point reduction in the Company's LIBOR and prime borrowing rates to
200 basis points over LIBOR and 50 basis points over prime, and further
provisions for additional decreases in the borrowing rate if certain
interest coverage levels are achieved, (ii) an increase in the maximum
credit line from $130 million to $160 million, (iii) a decrease in the
unused line fee from 50 basis points to 25 basis points, (iv) elimination
of the fixed charge coverage requirement, (v) extension of the term of the
agreement to June of 2003, (vi) increases, subject to the permitted
18
<PAGE> 19
discretion of the agent for the lenders, in the percent of eligible
accounts receivable to 85% from a range between 80% and 85% and the percent
of eligible inventory to 60% from a range between 50% and 60%. Covenants
under the new agreement do require, among other things, that the Company
maintain unused availability under the new revolving line of credit of at
least $15 million (subject to increase in certain circumstances) and
maintain certain levels of tangible capital funds.
At February 27, 1999, the Company had outstanding borrowings of $100.9
million and unused availability of $29.5 million under its new revolving
credit facility. The Company currently has excess availability under its
revolving credit facility and anticipates that funds provided by operations
and under this facility will be adequate for the Company's future needs.
On February 17, 1999, in conjunction with the new revolving credit
agreement, the Company terminated its interest rate swap agreement and
entered into a new interest rate swap agreement. This new agreement
effectively fixed the interest rate at 7.75% (subject to adjustments in
certain circumstances), reduced from 8.11% under the old agreement, for
three years, on $40 million of the Company's borrowings under its floating
rate revolving line of credit. Unlike the prior agreement, this interest
rate swap has no provisions for termination based on changes in the 30-day
LIBOR borrowing rate. At March 1, 1999 the 30-day LIBOR borrowing rate was
4.94%.
The Company's new revolving credit facility and the trust indenture
relating to the Company's 11-5/8% Senior Subordinated Notes contain certain
covenants and restrictions. Among other things, the revolving credit
facility prohibits non-stock dividends, certain investments and other
"restricted payments" by the Company. The trust indenture generally
restricts non-stock dividends and other restricted payments by the Company
to 50% of "cumulative consolidated net income," or if cumulative
consolidated net income is a loss, minus 100% of such loss, of the Company
earned subsequent to October 22, 1993, plus the proceeds of the sale of
certain equity securities after such date. In addition, the trust
indenture prohibits non-stock dividends and limits other restricted
payments while (as at present) the Company's fixed charge coverage ratio is
less than or equal to 2.0.
Net Operating Loss Carryforwards
- --------------------------------
At December 26, 1998, the Company and its subsidiaries had federal income
tax net operating loss carryforwards ("NOLs") of approximately $44.0
million. The NOLs will expire in the years 2005 to 2018 if not previously
utilized. The Company's ability to use certain of the NOLs carried
forward, approximately $7.5 million, will be subject to the limitations of
Section 382 of the Internal Revenue Code. See Note 11 of Notes to
Consolidated Financial Statements included elsewhere herein.
19
<PAGE> 20
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
projects to ensure that their products and business systems will be Year
2000 compliant. Management is currently reviewing their responses and
evaluating alternatives for those that are not sufficiently addressing the
Year 2000 issue.
The Company is addressing its software, hardware, and equipment issues
through a combination of modifications to existing programs and conversions
to Year 2000 compliant software and equipment. The Company believes that
it is currently 90% complete with hardware and equipment related
remediation or replacement efforts, and 70% complete in software
remediation or replacement. The Company's plan is to be totally compliant
by September of 1999. Certain systems, which have critical dates prior to
September, are scheduled for earlier completion dates or have been
completed. At the present time the remediation process is proceeding as
planned and there are no significant delays expected.
The estimated total cost of the project is expected to be $2.7 million.
$500,000 of this cost is for the replacement of systems and equipment which
was accelerated due to the Year 2000 problem, and which will be capitalized
over the systems estimated useful life. Through February of 1999 the
Company has expended a total of $1.2 million on Year 2000 remediation.
If modifications and conversions, by the Company and those it conducts
business with, are not made in a timely manner, the Year 2000 issue may
have a material adverse effect on the Company's business, financial
condition, and results of operations. The Company's greatest risk at this
time is with its store operating and accounts receivable systems and its
inventory suppliers. If the store operating system has problems the
Company could experience disruption in its basic distribution operations.
A problem with the Company's accounts receivable system could cause some
20
<PAGE> 21
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.
The most reasonably likely worst case scenario for a Year 2000 failure
would involve a brief interruption of the Company's primary field systems
application. Given the high level of in-house expertise in the development
and maintenance of this system, the expectation is that any such failure
would involve at worst a several day delay in processing. The Company
has, and will continue to spend a great deal of resources to ensure that
this system is compliant and will not be impacted by a Year 2000 failure.
As a contingency for a failure scenario, though, the Company has arranged
for the printing of key documents (sales orders scheduled for the next
week, special orders placed with suppliers, pricing masters, etc.) on
December 31, at each location, which would allow the operations to continue
to operate, on a manual basis, for at least two weeks before there would be
a serious impairment to the business. In addition, key systems and
operating staff will be brought in on January 1 and 2, days on which the
operating facilities are scheduled to be closed, to perform system testing
of the field applications and check operating equipment, utilities and
other systems. The Company can and has applied program changes to all sales
and distribution facilities in a matter of hours.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
- ----------------------------------------------------
Financial statements of the Company are set forth herein beginning on
page F-1.
21
<PAGE> 22
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
- ----------------------------------------------------------------
FORM 8-K.
--------
(a) List of Documents Filed as a Part of this Report:
- -----------------------------------------------------
(1) Financial Statements: Page No.
- ------------------------- --------
Report of Independent Accountants F-1
Consolidated balance sheets as of December 26, 1998
and December 27, 1997 F-2
Consolidated statements of operations for the years
ended December 26, 1998, December 27, 1997 and
December 28, 1996 F-3
Consolidated statements of changes in common
stockholders' equity for the years ended
December 26, 1998, December 27, 1997 and
December 28, 1996 F-4
Consolidated statements of cash flows for the
years ended December 26, 1998, December 27, 1997
and December 28, 1996 F-5
Notes to consolidated financial statements F-6
(3) Exhibits
- -------------
23.1 Consent of PricewaterhouseCoopers LLP.
27.1 Financial data schedule (SEC use only).
22
<PAGE> 23
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Amendment No. 2
to be signed on its behalf by the undersigned, thereunto duly authorized.
WICKES INC.
Date: October 1, 1999 By: /s/ J. Steven Wilson
--------------------
J. Steven Wilson
Chairman and Chief Executive Officer
By: /s/ John M. Lawrence
------------------------
John M. Lawrence
Controller
(Principal Accounting Officer)
23
<PAGE> F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
of Wickes Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, changes in stockholders'
equity and cash flows present fairly, in all material respects, the
financial position of Wickes Inc. and its subsidiaries at December 26, 1998
and December 27, 1997, and the results of their operations and their cash
flows for each of the three years ended December 26, 1998, December 27,
1997 and December 28, 1996, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of
these statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion
expressed above.
As discussed in Note 16 to the consolidated financial statements, Wickes Inc.
has restated previously issued consolidated financial statements to change its
accounting for a barter transaction.
PRICEWATERHOUSECOOPERS LLP
Chicago, Illinois
February 23, 1999 except for Note 16, as to which the date is August 31, 1999.
F-1
<PAGE> F-2
WICKES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 26, 1998 and December 27, 1997
(in thousands except share data)
<TABLE>
<CAPTION>
1998 1997
ASSETS ---- ----
<S> <C> <C>
Current assets:
Cash $ 65 $ 79
Accounts receivable, less allowance for doubtful
accounts of $4,393 in 1998 and $3,765 in 1997 92,926 81,788
Notes receivable 1,095 3,200
Inventory 103,716 102,706
Deferred tax asset 8,857 8,955
Prepaid expenses 2,808 1,246
------- -------
Total current assets 209,467 197,974
Property, plant and equipment, net 45,830 46,763
Trademark (net of accumulated amortization
of $10,496 in 1998 and $10,274 in 1997) 6,523 6,745
Deferred tax asset 17,482 17,054
Rental equipment (net of accumulated depreciation
of $572 in 1998 and $176 in 1997) 1,883 2,030
Other assets (net of accumulated amortization
of $9,502 in 1998 and $8,053 in 1997) 10,998 12,786
------- -------
Total assets $ 292,183 $ 283,352
======= =======
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 16 $ 46
Accounts payable 54,017 41,190
Accrued liabilities 20,089 22,279
------ ------
Total current liabilities 74,122 63,515
Long-term debt, less current maturities 191,961 193,061
Other long-term liabilities 2,952 2,775
Commitments and contingencies (Note 8)
Stockholders' equity (Note 9):
Preferred stock (no shares issued)
Common stock (8,207,268 shares issued and
outstanding in 1998 and 8,176,205 shares
issued and outstanding in 1997) 82 82
Additional paid-in capital 86,787 86,675
Accumulated deficit (63,721) (62,756)
------ ------
Total stockholders' equity 23,148 24,001
------- -------
Total liabilities & stockholders' equity $ 292,183 $ 283,352
======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-2
<PAGE> F-3
WICKES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 26, 1998, December 27, 1997, and December 28, 1996
(in thousands, except share data)
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net sales $910,272 $884,082 $848,535
Cost of sales 694,800 681,056 659,072
------- ------- -------
Gross profit 215,472 203,026 189,463
------- ------- -------
Selling, general and administrative expense 186,853 185,385 162,329
Depreciation, goodwill and trademark amortization 5,253 4,863 5,367
Provision for doubtful accounts 2,915 1,707 1,067
Restructuring and unusual items 5,932 (559) 745
Other operating income (6,837) (10,689) (6,796)
------- ------- -------
194,116 180,707 162,712
------- ------- -------
Income from operations 21,356 22,319 26,751
Interest expense 21,632 21,417 21,750
Equity in loss of affiliated company - 1,516 3,183
------ ------ ------
(Loss)income before income taxes (276) (614) 1,818
Provision (benefit) for income taxes:
Current 1,019 1,099 1,010
Deferred (330) (153) 300
------ ------ ------
Net (loss) income $ (965) $ (1,560) $ 508
====== ====== ======
Basic and diluted (loss)/income per common share $ (0.12) $ (0.19) $ .07
====== ====== ======
Weighted average common shares - for basic 8,197,542 8,168,257 7,207,761
========= ========= =========
Weighted average common shares - for diluted 8,197,542 8,168,257 7,221,082
========= ========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE> F-4
WICKES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Years Ended December 28, 1996, December 27, 1997 and December 26, 1998
(in thousands, except for share data)
<TABLE>
<CAPTION>
Common Stock Additional Total
------------ Paid-in Accumulated Stockholders'
Shares Amount Capital Deficit Equity
------ ------ ------- ------- ------
<S> <C> <C> <C> <C> <C>
Balance at December 30, 1995 6,143,473 $ 61 $ 76,772 $ (61,704) $ 15,129
Net income - - 508 508
Issuance of common stock, net 2,015,874 21 9,841 - 9,862
--------- --- ------ ------ ------
Balance at December 28, 1996 8,159,347 82 86,613 (61,196) 25,499
Net loss - - (1,560) (1,560)
Issuance of common stock, net 16,858 - 62 - 62
--------- --- ------ ------ ------
Balance at December 27, 1997 8,176,205 82 86,675 (62,756) 24,001
Net loss - - (965) (965)
Issuance of common stock, net 31,063 - 112 - 112
--------- --- ------ ------ ------
Balance at December 26, 1998 8,207,268 $ 82 $ 86,787 $ (63,721) $ 23,148
========= === ====== ====== ======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE> F-5
WICKES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Years Ended December 26, 1998, December 27, 1997, and December 28, 1996
(in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss)/income $ (965) $ (1,560) $ 508
Adjustments to reconcile net (loss)/income to
net cash provided by/(used in) operating activities:
Equity in loss of affiliated company - 1,516 3,183
Depreciation expense 4,785 4,395 4,904
Amortization of trademark 222 222 222
Amortization of goodwill 246 246 242
Amortization of deferred financing costs 1,447 1,401 1,781
Provision for doubtful accounts 2,915 1,707 1,067
Gain on sale of assets (1,834) (6,180) (940)
Deferred tax (benefit)/provision (330) (153) 300
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (14,053) (12,285) 9,515
Decrease (increase) in notes receivable 2,105 (3,200) -
(Increase) decrease in inventory (1,010) (2,034) 9,967
Increase (decrease) in accounts payable
and accrued liabilities 10,814 (4,590) (10,907)
Increase in deferred gain - (670) -
Increase in prepaids and other assets (1,715) (3,369) (1,132)
------ ------ ------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 2,627 (24,554) 18,710
------ ------ ------
Cash flows from investing activities:
Purchases of property, plant and equipment (5,854) (7,758) (2,893)
Proceeds from sales of property, plant and equipment 4,231 13,798 5,303
------ ------ ------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (1,623) 6,040 2,410
------ ------ ------
Cash flows from financing activities:
Net (repayment) borrowing under revolving
line of credit (1,084) 16,732 (28,708)
Reductions of note payable (46) (134) (428)
Net proceeds from issuance of common stock 112 62 9,862
------ ------ ------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (1,018) 16,660 (19,274)
------ ------ ------
NET (DECREASE) INCREASE IN CASH (14) (1,854) 1,846
Cash at beginning of period 79 1,933 87
------ ------ ------
CASH AT END OF PERIOD $ 65 $ 79 $ 1,933
====== ====== ======
Supplemental schedule of cash flow information:
Interest paid $ 20,885 $ 19,791 $ 20,372
Income taxes paid 987 1,344 1,518
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE> F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Restatement
- -----------
The Company has restated the condensed consolidated balance sheets as of
December 26, 1998 and the condensed consolidated statements of operations
for the year ended December 26, 1998 to reflect a pre-tax non-cash charge
of approximately $844,000 for a one time barter transaction (see Note 16).
1. Description of Business
- ---------------------------
Wickes Inc. (formerly Wickes Lumber Company), through its sales and
distribution facilities, markets lumber, building materials and services
primarily to professional contractors, repair and remodelers and do-it-
yourself home owners, principally in the Midwest, Northeast and Southern
United States. Wickes Inc.'s wholly-owned subsidiaries are: Lumber
Trademark Company ("LTC"), a holding company for the "Flying W" trademark,
and GLC Division, Inc. ("GLC"), which subleases certain real estate to
Wickes Inc.
In June 1997, the FASB issued SFAS Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information." This statement,
effective for financial statements for fiscal years beginning after
December 15, 1997, requires that a public business enterprise report
financial and descriptive information about its reportable operating
segments. Generally, financial information is required to be reported on
the basis that it is used internally for evaluating segment performance and
deciding how to allocate resources to segments. Based on this criteria,
the Company has determined that it operates in one business segment, that
being the supply and distribution of lumber and building materials to
building professionals and do-it-yourself customers, primarily in the
Midwest, Northeast, and South. Thus, all information required by SFAS No.
131 is included in the Company's financial statements. No single customer
represented more than 10% of the Company's total sales in 1998, 1997, and
1996.
2. Accounting Policies
- ------------------------
Principles of Consolidation
- ---------------------------
The consolidated financial statements present the results of operations,
financial position, and cash flows of Wickes Inc. and all its wholly-owned
subsidiaries (the "Company"). All significant intercompany balances have
been eliminated.
Fiscal Year
- -----------
The Company's fiscal year ends on the last Saturday in December.
Cash and Cash Equivalents
- -------------------------
The Company considers all highly liquid investments with a maturity date of
three months or less to be cash equivalents.
F-6
<PAGE> F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accounts Receivable
- -------------------
The Company extends credit primarily to qualified contractors. The
accounts receivable balance excludes consumer receivables, as such
receivables are sold on a nonrecourse basis. The remaining accounts and
notes receivable represent credit extended to professional contractors and
professional repair and remodelers, generally on a non-collateralized
basis.
Inventory
- ---------
Inventory consists principally of finished goods. The Company utilizes the
first-in, first-out (FIFO) cost flow assumption for valuing its inventory.
Inventory is valued at the lower of cost or market, but not in excess of
net realizable value.
Property, Plant and Equipment
- -----------------------------
Property, plant and equipment are stated at cost and are depreciated under
the straight-line method. Estimated lives used range from 15 to 39 years
for buildings and improvements. Leasehold improvements are depreciated
over the life of the lease. Machinery and equipment lives range from 3 to
10 years. Expenditures for maintenance and repairs are charged to
operations as incurred. Gains and losses from dispositions of property,
plant, and equipment are included in the Company's statement of operations
as other operating income. Once a facility is closed and the real estate is
held for sale the Company discontinues depreciation on the real estate.
Rental Equipment
- ----------------
Rental equipment consists of hand tools and power equipment held for
rental. This equipment is depreciated under the straight line method over
a 5 to 10 year life.
Other Assets
- ------------
Other assets consist primarily of deferred financing costs and goodwill
which are being amortized on the straight line method, goodwill over 30 to
35 years and deferred financing costs over the expected terms of the
related debt agreements.
The Company's investment in an international operation was recorded under
the equity method. The Company's share of losses is reflected as equity in
loss of affiliated company on the Consolidated Statements of Operations.
As of December 27, 1997 the Company's investment had been reduced to zero
and there is no obligation to make additional investments.
Amortization expense for deferred financing costs is reflected as interest
expense on the Company's Consolidated Statements of Operations.
F-7
<PAGE> F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Trademark
- ---------
The Company's "Flying W" trademark is being amortized over a 40-year
period.
Accounts Payable
- ----------------
The Company includes outstanding checks in excess of in-transit cash in
accounts payable. There was $8,232,000 in outstanding checks in excess of
in-transit cash at December 26, 1998 and $3,273,000 at December 27, 1997.
Postretirement Benefits Other Than Pensions
- -------------------------------------------
The Company provides certain health and life insurance benefits for
eligible retirees and their dependents. The Company accounts for the costs
of these postretirement benefits over the employees' working careers in
accordance with Statement of Financial Accounting Standards No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions."
Postemployment Benefits
- -----------------------
The Company provides certain other postemployment benefits to qualified
former or inactive employees. The Company accounts for the costs of these
postemployment benefits in the period when it is probable that a benefit
will be provided in accordance with Statement of Financial Accounting
Standards No. 112, "Employers' Accounting for Postemployment Benefits."
Income Taxes
- ------------
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes." Tax
provisions and credits are recorded at statutory rates for taxable items
included in the consolidated statements of operations regardless of the
period for which such items are reported for tax purposes. Deferred income
taxes are recognized for temporary differences between financial statement
and income tax bases of assets and liabilities for which income tax
benefits will be realized in future years. Deferred tax assets are reduced
by a valuation allowance when the Company cannot make the determination
that it is more likely than not that some portion of the related tax asset
will be realized.
Earnings Per Common Share
- -------------------------
Earnings per common share is calculated in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings Per Share." Weighted
average shares outstanding have been adjusted for common shares underlying
options and warrants.
F-8
<PAGE> F-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Use of Estimates in the Preparation of Financial Statements
- -----------------------------------------------------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from the estimates reported.
Impairment of Long-Lived Assets
- -------------------------------
The Company evaluates assets held for use and assets to be disposed of in
accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of." This statement requires that long-lived
assets and certain identifiable intangibles held and used by an entity be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. There was no
impairment of the Company's long-lived and intangible assets other than
assets held for sale which has been provided for. The Company has
historically reviewed excess property held for sale and when appropriate
recorded these assets at the lower of their carrying amount or fair value
(see Note 5).
Stock-Based Compensation
- ------------------------
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation," encourages, but does not require companies to
recognize compensation expense for grants of stock, stock options, and
other equity instruments to employees based on fair value accounting rules.
Although expense recognition for employee stock-based compensation is not
mandatory, the pronouncement requires companies that choose not to adopt
the fair value accounting to disclose the pro forma net income and earnings
per share under the new method. The Company elected not to adopt Statement
of Financial Accounting Standards No. 123, but to continue to apply APB
Opinion 25. As required, the Company has disclosed the pro forma net
income and pro forma earnings per share as if the fair value based
accounting methods in this Statement had been used to account for stock-
based compensation cost (see Note 9).
Recently Issued Accounting Pronouncements
- -----------------------------------------
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities," standardizes the
accounting for derivative instruments by requiring that all derivatives be
recognized as assets and liabilities and measured at fair value. The
statement is effective for fiscal years beginning after June 15, 1999. The
Company believes adoption of the statement will not have a material effect
on its financial statements.
F-9
<PAGE> F-10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Restructuring and Unusual Charges
- -------------------------------------
During the fourth quarter of 1995, the Company committed to and began
implementing a restructuring plan ("1995 Plan") to improve return on assets
by closing or consolidating under-performing operating centers, decreasing
the corresponding overhead to support these building centers, and
initiating actions to strengthen its capital structure. The costs for
closing these building centers were based on management estimates of costs
to exit these markets and actual historical experience. Included in 1995
results of operations is a $17.8 million charge, including $12.6 million in
anticipated losses on the disposition of closed center assets and
liabilities and $2.2 million in severance and postemployment benefits,
relating to the 1995 Plan and other one time costs.
The major components of this charge include the write-down of assets to
their net realizable value, liabilities associated with closed building
centers held for sale, postemployment benefits to qualified former
employees as a result of the center closings, and other charges related to
the strengthening of the Company's capital structure. Also included was a
charge for unusual employment related claims expensed in the fourth quarter
of 1995.
During 1996, the Company continued executing the 1995 Plan, through the
consolidation and closing of 18 building centers and the improvement of its
overall capital structure through the issuance of new shares and the
modification of its bank revolving credit agreement.
After extensive review of the 1995 Plan, and changes in business conditions
in certain markets in which the Company operates, the Company made
adjustments to the 1995 Plan and incurred other one time costs resulting in
a net $0.7 million charge to results of operations in the fourth quarter of
1996 for restructuring and unusual items. These adjustments included (i)
the determination that three of the centers identified in the 1995 Plan for
closure had significantly improved market conditions and would remain open,
resulting in a $1.5 million credit to restructuring expense, (ii) the
extension of the 1995 plan to include the closing (substantially completed
by the end of 1996) of three building centers not previously included,
resulting in a $1.3 million charge for the write down of working capital
assets and liabilities to their net realizable value and a $0.1 million
charge for severance and postemployment benefits for approximately 90
employees, (iii) a $1.1 million charge for impairment in the carrying value
of real estate held for sale at four previously closed centers, and (iv) a
$0.3 million credit with respect to the resolution of a claim below the
reserved amount.
During 1997, the Company recorded a $1.5 million restructuring charge for
discontinued programs and reductions in its corporate headquarters
workforce. The $1.5 million included approximately $0.9 million for
F-10
<PAGE> F-11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
severance and postemployment benefits for approximately 25 headquarters
employees. The discontinued programs included the Company's mortgage
lending, utilities marketing and certain internet programs. This charge
was offset by a $2.1 million reduction in accrued costs for the Company's
1995 Plan, which was completed. The $2.1 million reversal included four
centers identified in the 1995 Plan for closure that had significantly
improved market conditions and would remain open, as well as a change in
the estimate of facility carrying costs for sold facilities and those
remaining to be sold.
During the first quarter of 1998 the Company implemented a restructuring
plan (the "1998 Plan") which resulted in the closing or consolidation of
eight sales and distribution and two manufacturing facilities in February,
the sale of two sales and distribution facilities in March, and further
reductions in headquarters staffing. As a result of the 1998 Plan, the
Company recorded a restructuring charge of $5.4 million in the first
quarter and an additional charge of $0.5 million in the third quarter. The
$5.9 million charge included $4.1 million in estimated losses on the
disposition of closed facility assets and liabilities, $2.1 million in
severance and postemployment benefits related to the 1998 plan, and a
benefit of $300,000 for adjustments to prior years' restructuring accruals.
The $4.1 million in estimated losses includes the write-down of assets
(excluding real estate), to their net realizable value, of $3.4 million and
$700,000 in real estate carrying costs. The $2.1 million in severance and
postemployment benefits covered approximately 250 employees, 25 of which
were headquarters employees, that were released as a result of reductions
in headquarters staffing and the closing or consolidation of the ten
operating facilities. The $300,000 benefit from prior years was a result
of accelerated sales of previously closed facilities during the fourth
quarter of 1997 and first quarter of 1998. The acceleration of these sales
resulted in a change in the estimate of facility carrying costs for the
sold facilities. At December 26, 1998 the accrued liability for
restructuring had been reduced to zero.
For further information regarding the sale of closed center real estate see
Note 5.
4. Acquisitions
- ----------------
During 1998 the Company acquired the operating assets of Eagle Industries
Inc., a component manufacturer, for a total cost of $1.8 million in cash.
The acquisition was accounted for as a purchase and the cost has been
allocated on the basis of the fair market value of the assets acquired and
liabilities assumed. These operations have been included in the
accompanying consolidated financial statements from their date of
acquisition. The Company had no acquisitions in 1997 or 1996.
F-11
<PAGE> F-12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Property, Plant, and Equipment
- ----------------------------------
Property, plant and equipment is summarized as follows:
<TABLE>
<CAPTION>
December 26, December 27,
1998 1997
---- ----
(in thousands)
<S> <C> <C>
Land and improvements $12,115 $12,781
Buildings 26,341 27,584
Machinery and equipment 32,257 30,619
Leasehold improvements 3,059 2,584
Construction in progress 846 844
------ ------
Gross property, plant, and equipment 74,618 74,412
Less: accumulated depreciation (32,661) (31,178)
------ ------
Property, plant, and equipment
in use, net 41,957 43,234
Assets held for sale, net 3,873 3,529
------ ------
Property, plant, and equipment, net $45,830 $46,763
====== ======
</TABLE>
Sale of Real Estate
- -------------------
Except for the sale/leaseback of the Company's Succasunna, NJ sales and
distribution facility in 1997, which included a $3,000,000 note receivable
that was collected within 60 days, all sales of real estate have been for
cash.
In 1998, the Company sold nine pieces of real estate, eight of which were
sales and distribution facilities and one an excess parcel of land, for a
net gain of $1.6 million. Eight of the properties sold had been held for
sale since the first quarter of 1998 and had not been previously written
down from their original net book value. The ninth property, which had
been held for sale since 1989, had been previously written down by $709,000
from its original net book value and sold at a net loss of $59,000.
In 1997, the Company sold 12 pieces of real estate for a net gain of $6.0
million. These transactions included the sale/leaseback of the Company's
headquarters and the Succasunna sales and distribution facility and the
sale of nine sales and distribution facilities and one excess parcel of
land. Of the properties sold, one sales and distribution facility was held
for sale since 1989, had been previously written down $99,600 from its
original net book value, and sold at a loss of $100,400. The other 11
properties had not been previously marked down from book value and had been
held for sale since 1992 (2 properties), 1995 (4 properties), 1996 (2
properties) and 1997 (3 properties).
F-12
<PAGE> F13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In 1996, the Company sold six sales and distribution facilities for a net
gain of $1.7 million. None of these properties had been previously written
down from their original net book value. Five had been held for sale since
1995, and one since 1990.
The Company reviews assets held for sale in accordance with Statement of
Financial Accounting Standards No. 121. In 1997 and 1996 the Company
recorded losses of $156,000 and $1,065,000, to report land, land
improvements and buildings held for sale at their fair value. The Company
did not record any impairment to the cost of assets held for sale in 1998.
Fair value is determined by local market real estate values of properties
similar to the Company's excess real estate. These charges are included in
the caption "restructuring and unusual items" on the Consolidated Statement
of Operations. Of the five properties that were revalued in 1997 and 1996
two have sold at a net loss and three are still held for sale.
6. Accrued Liabilities
- ------------------------
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
December 26, December 27,
1998 1997
---- ----
(in thousands)
<S> <C> <C>
Accrued payroll $ 9,498 $ 8,148
Accrued interest 667 1,367
Accrued liability insurance 4,966 4,173
Accrued restructuring charges - 1,348
Other 4,958 7,243
------ ------
Total accrued liabilities $ 20,089 $ 22,279
====== ======
</TABLE>
F-13
<PAGE> F-14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Long-Term Debt
- ------------------
Long-term debt obligations are summarized as follows:
<TABLE>
<CAPTION>
December 26, December 27,
1998 1997
---- ----
(in thousands)
<S> <C> <C>
Revolving line of credit, interest payable
at .75% above prime or 2.25% over LIBOR,
principal due March 31, 2001 $ 91,961 $ 93,045
Senior subordinated notes, interest payable
at 11-5/8% semi-annually, principal due
December 15, 2003 100,000 100,000
Other 16 62
------- -------
Total long-term debt 191,977 193,107
Less current maturities (16) (46)
------- -------
Total long-term debt less current maturities $ 191,961 $ 193,061
======= =======
</TABLE>
Revolving Line of Credit
- ------------------------
At December 26, 1998 the Company had a revolving line of credit, which was
to expire on March 31, 2001. Under this line of credit the Company could
borrow against certain levels of accounts receivable and inventory, up to a
maximum credit limit of $130,000,000. At December 26, 1998, the amount
available for additional borrowing was $32,680,000. A commitment fee of
1/2 of 1% was payable on the unused portion of the commitment. The
weighted-average interest rate for the years ending December 26, 1998 and
December 27, 1997 was approximately 8.2% and 8.8% respectively.
Substantially all of the Company's accounts receivable, inventory, general
intangibles and certain machinery and equipment were pledged as collateral
for the revolving line of credit. Covenants under the related debt
agreements required, among other restrictions, that the Company maintain
certain financial ratios and certain levels of consolidated net worth. In
addition, the debt agreement restricted among other things, capital
expenditures, the incurrence of additional debt, asset sales, dividends,
investments, and acquisitions without prior approval from the lender.
The revolving credit agreement was amended and restated on April 11,1997.
Among other things, the amendment and restatement (i) extended the term of
the facility to March 2001, (ii) reduced the interest rate premiums over
LIBOR and over prime by 75 basis points, (iii) included provisions for
F-14
<PAGE> F-15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
further interest rate premium reductions if certain performance levels are
achieved, (iv) modified certain covenants, and (v) provided for increases
in the amount of capital expenditures allowed by the agreement equal to the
proceeds received from the sale of certain excess real estate.
On June 16, 1997 the Company entered into an interest rate swap agreement
which effectively fixed the interest rate at 8.11% (subject to adjustments
in certain circumstances), for three years, on $40 million of the Company's
borrowings under its floating rate revolving line of credit (see Note 12).
On December 24, 1997, the second amended and restated revolving credit
agreement was amended to incorporate, among other things, a reduction in
the fixed charge and net worth levels for the fourth quarter of 1997 and
first quarter of 1998.
On February 17, 1999 the Company repaid all indebtedness under this line of
credit with the proceeds of a new revolving credit agreement (see Note 15).
Senior Subordinated Notes
- -------------------------
On October 22, 1993, the Company issued $100,000,000 in principal amount of
10-year unsecured senior subordinated notes. Interest on the notes is 11-
5/8%, payable semi-annually. Covenants under the related indenture
restrict among other things, the payment of dividends, the prepayment of
certain debt, the incurrence of additional debt if certain financial ratios
are not met, and the sale of certain assets unless the proceeds are applied
to the notes. In addition, the notes require that, upon a change in
control of the Company, the Company must offer to purchase the notes at
101% of the principal thereof, plus accrued interest.
Aggregate Maturities
- --------------------
The aggregate amounts of long-term debt maturities, before giving effect to
the new revolving credit agreement, by fiscal year are as follows:
<TABLE>
<CAPTION>
Year Amount
---- -------
(in thousands)
<S> <C>
1999 $ 16
2000 -
2001 91,961
2002 -
2003 100,000
</TABLE>
F-15
<PAGE> F-16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Commitments and Contingencies
- ---------------------------------
At December 26, 1998, the Company had accrued approximately $152,000 for
remediation of certain environmental and product liability matters,
principally underground storage tank removal.
Many of the sales and distribution facilities presently and formerly
operated by the Company contained underground petroleum storage tanks. All
such tanks known to the Company located on facilities owned or operated by
the Company have been filled or removed in accordance with applicable
environmental laws in effect at the time. As a result of reviews made in
connection with the sale or possible sale of certain facilities, the
Company has found petroleum contamination of soil and ground water on
several of these sites and has taken, and expects to take, remedial actions
with respect thereto. In addition, it is possible that similar
contamination may exist on properties no longer owned or operated by the
Company the remediation of which the Company could under certain
circumstances be held responsible. Since 1988, the Company has incurred
approximately $2.0 million of costs, net of insurance and regulatory
recoveries, with respect to the filling or removing of underground storage
tanks and related investigatory and remedial actions. Insignificant amounts
of contamination have been found on excess properties sold over the past
four years. The Company has currently reserved $60,000 for estimated clean
up costs at 15 of its locations.
The Company has been identified as having used two landfills which are now
Superfund clean up sites, for which it has been requested to reimburse a
portion of the clean-up costs. Based on the amounts claimed and the
Company's prior experience, the Company has established a reserve of
$45,000 for these matters.
The Company is one of many defendants in two class action suits filed in
August of 1996 by approximately 200 claimants for unspecified damages as a
result of health problems claimed to have been caused by inhalation of
silica dust, a byproduct of concrete and mortar mix, allegedly generated by
a cement plant with which the Company has no connection other than as a
customer. The Company has entered into a cost sharing agreement with its
insurers, and any liability is expected to be minimal.
The Company is one of many defendants in approximately 100 actions, each of
which seeks unspecified damages, in various Michigan state courts against
manufacturers and building material retailers by individuals who claim to
have suffered injuries from products containing asbestos. Each of the
plaintiffs in these actions is represented by one of two law firms. The
Company is aggressively defending these actions and does not believe that
these actions will have a material adverse effect on the Company. Since
1993, the Company has settled 16 similar actions for insignificant amounts,
and another 186 of these actions have been dismissed. As of March 15, 1999
none of these suits have made it to trial.
F-16
<PAGE> F-17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Losses in excess of the $152,000 reserved as of December 26, 1998 are
possible but an estimate of these amounts cannot be made.
On November 3, 1995, a complaint styled Morris Wolfson v. J. Steven Wilson,
Kenneth M. Kirschner, Albert Ernest, Jr., Claudia B. Slacik, Jon F. Hanson,
Robert E. Mulcahy, Frederick H. Schultz, Wickes Lumber Company and
Riverside Group, Inc. was filed in the Court of Chancery of the State of
Delaware in and for New Castle County (C.A. No. 14678). As amended, this
complaint alleges, among other things, that the sale by the Company in 1996
of 2 million newly-issued shares of the Company's Common Stock to Riverside
Group, Inc., the Company's largest stockholder, was unfair and constituted
a waste of assets and that the Company's directors in connection with the
transaction breached their fiduciary duties. The amended complaint, among
other things, seeks on behalf of a purported class of the Company's
shareholders equitable relief or to obtain unspecified damages with respect
to the transaction (see Note 9). There was no activity in this suit in
1998.
The Company is involved in various other legal proceedings which are
incidental to the conduct of its business. The Company does not believe
that any of these proceedings will have a material adverse effect on the
Company's financial position, results of operations or liquidity.
Leases
- ------
The Company has entered into operating leases for corporate office space,
retail space, equipment and other items. These leases provide for minimum
rents. These leases generally include options to renew for additional
periods. Total rent expense under all operating leases was $12,193,000,
$10,616,000, and $10,076,000 for the years ended December 26, 1998,
December 27, 1997, and December 28, 1996, respectively.
Future minimum commitments for noncancelable operating leases are as
follows:
<TABLE>
<CAPTION>
Year Amount
---- ------
(in thousands)
<C> <C>
1999 $ 8,821
2000 6,972
2001 5,688
2002 4,745
2003 2,878
Thereafter 24,478
------
Subtotal $ 53,582
Less: Sublease income (10,995)
------
Total $ 42,587
======
</TABLE>
F-17
<PAGE> F-18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Stockholders' Equity
- ------------------------
Preferred Stock
- ---------------
As of December 26, 1998 the Company had authorized 3,000,000 shares of
preferred stock, none of which is issued or outstanding.
Common Stock
- ------------
The Company currently has one class of common stock: Common Stock, par
value $.01 per share. In April 1998 all 499,768 outstanding shares on
Class B Non-Voting Common Stock were converted to 499,768 shares of Common
Stock. The Class B Non-Voting Common Stock ceased to be authorized in
April 1998. At December 26, 1998 there were 20,000,000 shares of Common
Stock authorized and 8,207,268 shares issued and outstanding. In addition,
at December 26, 1998, 898,986 shares of Common Stock were reserved for
issuance under the Company's 1993 Long-Term Incentive Plan and 1993
Director Incentive Plan.
Private Sale of Common Stock
- ----------------------------
On June 20, 1996, pursuant to a stock purchase agreement dated January 11,
1996, the Company sold 2,000,000 newly-issued shares of its Common Stock to
Riverside Group, Inc., the Company's largest stockholder, for $10 million
in cash. Prior to the sale the terms of the stock purchase agreement were
reviewed and recommended to the boards of directors of both companies by
committees comprised of the independent directors of each company.
Warrants
- --------
The Company's unexercised outstanding warrants for 3,068 shares of Common
Stock expired in May 1998 and as of December 26, 1998 there were no
warrants outstanding nor Common Stock reserved for issuance under warrants.
Stock Compensation Plans
- ------------------------
As of December 26, 1998, the Company has two stock-based compensation plans
(both fixed option plans), which are described below. Under the 1993 Long-
Term Incentive plan as amended on November 30, 1994, the Company may grant
options and other awards to its employees with respect to up to 835,000
shares of common stock. Under the 1993 Director Incentive plan, the
Company may grant options and other awards to directors with respect to up
to 75,000 shares. The exercise price of grants equals or exceeds the
market price at the date of grant. The options have a maximum term of 10
years. For non-officers, the options generally become exercisable in equal
F-18
<PAGE> F-19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
installments over a three year period from the date of grant. For
officers, the vesting periods are based on graded calendar year schedules,
which can vary by officer.
Since the Company applies APB Opinion 25 and related interpretations in
accounting for its plans, no compensation cost has been recognized in
conjunction with these plans. Had compensation cost for the Company's
stock-based compensation plans been determined consistent with FASB
Statement 123, the Company's net income and earnings per share would have
been reduced to the pro forma amounts indicated below (in thousands, except
per share data):
<TABLE>
<CAPTION>
Year 1998 1997 1996
- ---- ---- ---- ----
<S> <C> <C> <C>
Net (loss) income As reported $ (965) $(1,560) $508
Pro forma $(1,082) $(1,772) $321
Basic and diluted As reported $ (.12) $ (.19) $.07
(loss) earnings Pro forma $ (.13) $ (.22) $.04
per share
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1998, 1997, and 1996, respectively:
dividend yield of 0% for all years, expected volatility of 48%, 43%, and
42%; risk-free interest rates of 5.6%, 6.6%, and 6.2%; and expected lives
of 5.6, 6.6, and 6.5 years.
A summary of the status of the Company's fixed stock option plans as of
December 26, 1998, December 27, 1997, and December 28, 1996 and changes
during the years ended on those dates is presented as follows:
F-19
<PAGE> F-20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Fixed Options Shares Price Shares Price Shares Price
- ------------- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding beginning
of year 668,283 $10.09 612,282 $10.94 446,686 $15.32
Granted 238,750 $ 3.45 108,350 $5.12 264,721 $ 4.60
Exercised (11,014) $ 4.55 - n/a - n/a
Forfeited-nonvested (97,070) $ 9.71 (46,981) $ 8.22 (59,793) $13.18
Forfeited-exercisable (64,686) $ 9.71 (5,168) $22.36 (36,632) $15.32
Expired - n/a - n/a - n/a
Canceled - n/a (200) $15.00 (2,700) $ 5.12
-------- ------- -------
Outstanding end
of year 734,263 $ 7.67 668,283 $10.09 612,282 $10.94
Options exercisable
at year end 256,627 $11.39 214,402 $14.26 146,775 $15.60
Options available for
future grant at
year end 164,723 241,717 297,718
</TABLE>
Weighted-average fair value of options granted during the year where:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Exercise price equals market price $1.62 $2.77 $2.40
Exercise price exceeds market price n/a n/a n/a
Exercise price is less than market price n/a n/a n/a
</TABLE>
The following table summarizes information about fixed stock options
outstanding at December 26, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------- ----------------------
Weighted-
Average Weighted- Weighted-
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices at 12/26/98 Life Price at 12/26/98 Price
------ ----------- ---- ----- ----------- -----
<S> <C> <C> <C> <C> <C>
$ 3.06 - $ 5.75 503,640 8.47 years $ 4.16 93,304 $ 4.18
$10.95 - $23.25 230,623 5.71 years $15.36 163,323 $15.51
</TABLE>
F-20
<PAGE> F-21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Earnings Per Share
- ------------------
The Company calculates earnings per share in accordance with Statement of
Financial Accounting Standards No. 128. As required by this statement the
Company has adopted the new standards for computing and presenting earnings
per share for 1997, and for all prior period earnings per share data
presented. The following is the reconciliation of the numerators and
denominators of the basic and diluted earnings per share:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Numerators:
Net (loss) income - for basic and
diluted EPS $(965,000) $(1,560,000) $ 508,000
======= ========= =======
Denominators:
Weighted average common
shares - for basic EPS 8,197,542 8,168,257 7,207,761
Common shares from warrants - 6,913 10,751
Common shares from options 51,425 13,250 2,570
--------- --------- ---------
Weighted average common
shares - for diluted EPS 8,248,967 8,188,420 7,221,082
========= ========= =========
</TABLE>
In years where net losses are incurred, diluted weighted average common
shares are not used in the calculation of diluted EPS as it would have an
anti-dilutive effect on EPS. In addition, options to purchase 348,000,
385,000 and 302,000 weighted average shares of common stock during 1998,
1997 and 1996, respectively, were not included in the diluted EPS as the
options' exercise prices were greater than the average market price.
10. Employee Benefit Plans
- ---------------------------
401(k) Plan
- -----------
The Company sponsors a defined contribution 401(k) plan covering
substantially all of its full-time employees. Additionally, the Company
provides matching contributions up to a maximum of 2.5% of participating
employees' salaries and wages. Total expenses under the plan for the years
ended December 26, 1998, December 27, 1997, and December 28, 1996 were
$1,480,000, $1,606,000, and $1,392,000, respectively.
F-21
<PAGE> F-22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Postretirement Benefits Other than Pensions
- -------------------------------------------
The Company provides life and health care benefits to retired employees.
Generally, employees who have attained an age of 60, have rendered 10 years
of service and are currently enrolled in the medical benefit plan are
eligible for postretirement benefits. The Company accrues the estimated
cost of retiree benefit payments, other than pensions, during the
employee's active service period.
The following tables reconcile the postretirement benefit, the plan's
funded status and actuarial assumptions, as required by Statement of
Financial Accounting Standard No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits."
<TABLE>
<CAPTION>
December 26, December 27,
1998 1997
---- ----
(in thousands)
<S> <C> <C>
Change in accumulated postretirement benefit obligation:
Benefit obligation at beginning of year $ 2,578 $ 3,290
Service cost 233 197
Interest cost 170 176
Participant contributions - -
Claims paid (216) (265)
Actuarial gains ( 16) (751)
Plan amendments - (69)
----- -----
Benefit obligation at year end $ 2,749 $ 2,578
===== =====
Change in plan assets:
Fair value of plan assets - -
Reconciliation of funded status:
Funded status $(2,749) $(2,578)
Unrecognized transition obilgation - -
Unrecognized prior service cost (49) (59)
Unrecognized actuarial gain (154) (138)
----- -----
Net amount recognized as other
long-term liabilities $(2,952) $(2,775)
===== =====
Weighted average assumptions as of year end:
Discount rate 6.75% 7.25%
Expected return on assets n/a n/a
Medical trend 6.00% 6.00%
</TABLE>
F-22
<PAGE> F-23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
December 26, December 27, December 28,
1998 1997 1996
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Components of net periodic benefit cost:
Service cost $ 233 $ 197 $ 276
Interest cost 171 176 210
Expected return on plan assets n/a n/a n/a
Amortization of transition obligation - - -
Amortization of prior service cost (10) (10) -
Amortization of actuarial loss - - 33
---- ---- ----
Net periodic benefit cost $ 394 $ 363 $ 519
==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
December 26, December 27, December 28,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Weighted average assumptions used in
computing net periodic benefit cost:
Discount rate 7.25% 7.75% 7.25%
Expected return on plan assets n/a n/a n /a
Medical trend 6.00% 6.00% 6.00%
</TABLE>
<TABLE>
<CAPTION>
1% Increase 1% Decrease
----------- -----------
(in thousands)
<S> <C> <C>
Health care cost trend sensitivity:
Effect on total service cost and
interest cost components $ 17 $ (16)
Effect on postretirement benefit obligation 57 (54)
</TABLE>
Postemployment Benefits
- -----------------------
The Company provides certain postemployment benefits to qualified former or
inactive employees who are not retirees. These benefits include salary
continuance, severance, and healthcare. Salary continuance and severance
pay is based on normal straight-line compensation and is calculated based
on years of service. Additional severance pay is granted to eligible
employees who are 40 years of age or older and have been employed by the
Company five or more years. The Company accrues the estimated cost of
benefits provided to former or inactive employees who have not yet retired
over the employees' service period or as an expense at the date of the
event triggering the benefit. The Company incurred postemployment benefit
income of $39,000, $28,000 and $31,000 for the years ended December 26,
1998, December 27, 1997 and December 28, 1996, respectively. The decrease
in benefits is the result of the winding down of a more costly long-term
disability program that was in place prior to April 1993.
F-23
<PAGE> F-24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Income Taxes
- --------------------
The Company and its subsidiaries file a consolidated federal income tax
return. As of December 26, 1998, the Company has net operating loss
carryforwards available to offset income of approximately $44.0 million
expiring in the years 2005 through 2018.
On October 22, 1993, the Company completed a recapitalization plan which
created an ownership change as defined by Section 382 of the Internal
Revenue Code of 1996. As a result, certain of the loss carryforwards of
the company are limited to an annual limitation of approximately $2.6
million a year. At December 26, 1998, approximately $7.5 million of these
loss carryforwards were affected by this limitation.
The income tax provision consists of both current and deferred amounts.
The components of the income tax provision are as follows:
<TABLE>
<CAPTION>
December 26, December 27, December 28,
1998 1997 1996
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Taxes currently payable:
State income tax $1,019 $1,099 $1,010
Federal income tax - - -
Deferred (benefit)/expense (330) (153) 300
----- ----- -----
Total income tax expense $ 689 $ 946 $1,310
===== ===== =====
</TABLE>
Tax provisions and credits are recorded at statutory rates for taxable
items included in the consolidated statements of operations regardless of
the period for which such items are reported for tax purposes. Deferred
income taxes reflect the net effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Management has determined,
based on the Company's positive earnings growth from 1992 through 1994 and
its expectations for the future, that operating income of the Company will
more likely than not be sufficient to recognize fully its net deferred tax
assets. The components of the deferred tax assets and liabilities at
December 26, 1998, December 27, 1997 and December 28, 1996, respectively,
are as follows:
F-24
<PAGE> F-25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
December 26, December 27, December 28,
1998 1997 1996
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Deferred income tax assets:
Trade accounts receivable $ 1,727 $ 1,469 $ 1,676
Inventories 1,813 1,895 1,954
Accrued personnel cost 2,037 2,013 1,936
Other accrued liabilities 6,051 6,743 6,911
Net operating loss 17,151 16,164 16,556
Other 3,337 3,348 2,342
------ ------ ------
Gross deferred income tax assets 32,116 31,632 31,375
Less: valuation allowance (1,542) (1,542) (1,493)
------ ------ ------
Total deferred income tax assets 30,574 30,090 29,882
------ ------ ------
Deferred income tax liabilities:
Property, plant and equipment 1,312 1,394 1,962
Goodwill and trademark 2,923 2,687 2,052
Other accrued income items - - 13
------ ------ ------
Total deferred income tax liabilities 4,235 4,081 4,027
------ ------ ------
Net deferred tax assets $26,339 $26,009 $25,855
====== ====== ======
</TABLE>
The deferred tax provision results from temporary differences in the
recognition of certain items of revenue and expense for tax and financial
reporting purposes. The sources of these differences and the tax effect of
each are as follows:
<TABLE>
<CAPTION>
December 26, December 27, December 28,
1998 1997 1996
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Change in bad debt reserve $ 258 $ (207) $ (1,517)
Differences in tax and book
inventory (82) (60) (491)
Settlement of deferred
compensation 25 77 86
Change in accrued liabilities (692) (168) (5,130)
(Utilization)/creation of NOL 987 (392) 6,700
AMT credit and capital loss
carryover - 1,006 942
Differences in tax and book
asset basis 82 568 (56)
Differences in book and tax
intangibles (248) (635) (704)
Change in accrued income items - 13 13
(Increase)/decrease in valuation
allowance - (49) (143)
------ ------ ------
Deferred tax benefit/(expense) $ 330 $ 153 $ (300)
====== ====== ======
</TABLE>
F-25
<PAGE> F-26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes significant differences between the
provision for income taxes and the amount computed by applying the
statutory federal income tax rates to income before taxes:
<TABLE>
<CAPTION>
December 26, December 27, December 28,
1998 1997 1996
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Tax (benefit) computed at
U.S. statutory tax rate $ (96) $ (215) $ 637
State and local taxes 662 714 656
Other 123 398 (126)
Change in valuation allowance - 49 143
------ ------ ------
Total tax provision $ 689 $ 946 $ 1,310
====== ====== ======
</TABLE>
12. Financial Instruments
- --------------------------
The Company uses financial instruments in its normal course of business as
a tool to manage its assets and liabilities. The Company does not hold or
issue financial instruments for trading purposes. Gains and losses
relating to hedging contracts are deferred and recorded in income or as an
adjustment to the carrying value of the asset at the time the transaction
is complete. Payments or receipts of interest under the interest rate swap
arrangement are accounted for as an adjustment to interest expense. The
fair value of such financial instruments is determined through dealer
quotes.
The estimated fair values of the Company's material financial instruments
are as follows:
Long Term Debt
- --------------
The fair value of the Company's long-term debt, in accordance with SFAS No.
107, is estimated based on the quoted market prices for the same or similar
issues or on the current rates offered to the Company for debt of the same
remaining maturities.
<TABLE>
<CAPTION>
Fair Carrying
Value Value
------ -------
(in thousands)
<S> <C> <C>
1998 Financial Liabilities:
Long-term Debt
Revolver $ 91,961 $ 91,961
Senior Subordinated Notes 84,000 100,000
1997 Financial Liabilities:
Long-term Debt
Revolver $ 93,045 $ 93,045
Senior Subordinated Notes 95,000 100,000
</TABLE>
F-26
<PAGE> F-27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Lumber Futures Contracts
- ------------------------
The Company enters into lumber futures contracts as a hedge against future
lumber price fluctuations. All futures contracts are purchased to protect
long-term pricing commitments on specific future customer purchases. At
December 26, 1998 the Company had 22 lumber futures contracts outstanding
with a total market value of $1,397,000 and a net unrealized gain of
$1,976. These contracts all mature in 1999.
Interest Rate Swap
- ------------------
At December 26, 1998 the Company had in place an interest rate swap
agreement which effectively fixed the interest rate on $40 million of the
Company's borrowings under its floating rate revolving line of credit at
8.11% (subject to adjustments in certain circumstances), for three years.
This interest rate swap was operative while the 30-day LIBOR borrowing rate
remained below 6.7%. The agreement also included a floor LIBOR rate at
4.6%. At December 23, 1998 the 30-day LIBOR borrowing rate was 5.625%.
The fair value of the interest rate swap agreement, in accordance with SFAS
No. 107, at December 26, 1998 was a negative $400,000.
On February 17, 1999, in conjunction with the Company's new revolving
credit agreement (see Note 15), the Company terminated its interest rate
swap agreement and entered into a new interest rate swap agreement. This
new agreement effectively fixed the interest rate at 7.75% (subject to
adjustments in certain circumstances), reduced from 8.11% under the old
agreement, for three years, on $40 million of the Company's borrowings
under its floating rate revolving line of credit. Unlike the prior
agreement, this interest rate swap has no provisions for termination based
on changes in the 30-day LIBOR borrowing rate.
13. Related Party Transactions
- -------------------------------
In February 1998, as part of the determination made by the Company to
discontinue or sell non-core programs, the Company sold certain operations
to its majority stockholder for a three-year $870,000 unsecured promissory
note and 10% of future net income of these operations (subject to a maximum
of $429,249 plus interest). At December 26, 1998 this stockholder had made
payments of $115,752 under the promissory note and was delinquent with
respect to required payments of approximately $169,474 of principal and
interest.
In 1998, the Company paid approximately $730,000 in reimbursements
primarily to affiliates of the Company's chairman, for costs related to
services provided to the Company during 1998 by certain employees of the
affiliated company and use of a corporate aircraft. Total payments in 1997
and 1996 for similar services were approximately $1,289,000 and $612,000,
respectively.
F-27
<PAGE> F-28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In June of 1996, the Company entered into a mortgage lending agreement with
an affiliate of the Company's chairman. In exchange for providing home
construction loans to the Company's customers the Company reimbursed this
affiliate for certain start-up expenses. Reimbursements in 1998, 1997 and
1996 were approximately $115,000, $1,045,000 and $365,000, respectively,
and were expensed as incurred. In late 1997, this affiliate's involvement
in the program ceased.
A former director and executive officer of the Company was during most of
1998, and all of 1997 and 1996, a shareholder of the law firm that is
general counsel to the Company. The Company paid this firm $741,000,
$665,000, and, $430,000 for legal services provided to the Company during
1998, 1997, and 1996, respectively.
For a description of the sale of 2,000,000 newly-issued shares by the
Company to Riverside Group, Inc. in 1996, see Note 9.
14. Other Operating Income
- ---------------------------
Other operating income on the Company's Statement of Operations includes
the sale or disposal of property, plant and equipment, service charges
assessed customers on past due accounts receivables and casualty
gains/losses. The sale of property, plant and equipment includes the sale
of 9, 12, and 6 pieces of real estate in 1998, 1997 and 1996, respectively.
In 1998 and 1996, gains of $1.0 million and $0.6 million, respectively,
were recorded as a result of the differences between insured replacement
cost and net book value resulting from fire and storm damage at certain of
the Company's sales and distribution facilities. The following table
summarizes the major components of other operating income by year.
<TABLE>
<CAPTION>
Other Operating Income
Gain/(Loss)
1998 1997 1996
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Sale of property, plant and equipment $2,111 $ 6,180 $2,005
Accounts receivable service charges 2,331 2,170 2,064
Casualties 670 (284) 350
Other 1,725 2,623 2,377
----- ------ -----
Total $6,837 $10,689 $6,796
===== ====== =====
</TABLE>
F-28
<PAGE> F-29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. Subsequent Events
- ----------------------
New Revolving Credit Agreement
- ------------------------------
On February 17, 1999 the Company entered into a new revolving credit
agreement with a group of financial institutions. The new revolving line
of credit provides for, subject to restrictions discussed below, up to $160
million of revolving credit loans and credits.
A commitment fee of 0.25% is payable on the unused amount of the new
revolving line of credit. Until delivery to the lenders of the Company's
financial statements for the period ending June 26, 1999, interest on
amounts outstanding under the new revolving line of credit will bear
interest at a spread above the base rate of BankBoston, N.A. of 0.50%, or
2.00% above the applicable LIBOR rate. After that time, depending upon the
Company's rolling four-quarter interest coverage ratio, amounts outstanding
under the new revolving line of credit will bear interest at a spread above
the base rate of from 0% to 0.75% or from 1.50% to 2.25% above the
applicable LIBOR rate.
Substantially all of the Company's accounts receivable, inventory and
general intangibles are pledged as collateral for the new revolving line of
credit. Availability is limited to 85% of eligible accounts receivable
plus 60% of eligible inventory, with these percentages subject to change in
the permitted discretion of the agent for the lenders. Covenants under the
related debt documents require, among other things, that the Company
maintain unused availability under the new revolving line of credit of at
least $15 million (subject to increase in certain circumstances) and
maintain certain levels of tangible capital funds. In addition, these
documents restrict, among other things, capital expenditures, the
incurrence of additional debt, asset sales, dividends, investments, and
acquisitions.
In conjunction with the new revolving credit agreement, the Company
terminated its existing interest rate swap agreement and entered into a new
interest rate swap agreement (see Note 12).
16. Barter Transaction
- --------------------------
In September of 1998, the Company entered into a transaction in which
it exchanged clearance merchandise, with a book value of $1.2 million, for
barter credits at a stated value of $1.6 million. No effect to earnings was
recorded at that time and the barter credits were recorded as a prepaid expense
with a value of $1.2 million. The Company has restated its September 1998
financial statements upon receiving written confirmation from a second "Big
Five" accounting firm and after careful review and concurrence of its Board of
Directors Audit Committee. A non-cash charge of $844,000 has now been recorded
to reduce the value of the inventory exchanged, and the resulting book value of
the barter credits, from $1.2 million to $350,000. As a result of this change,
the Company would record increased future earnings for each dollar of barter
credits used in excess of $350,000.
F-29
<PAGE> F-30
The following table reconciles the amounts previously reported to the amounts
currently being reported in the condensed consolidated statements of operations
for the year ended December 26, 1998 (amounts in thousands, except per
share data).
<TABLE>
<CAPTION>
Restatement
Previously for Barter
Reported Transaction As Restated
-------- ----------- -----------
<S> <C> <C> <C>
Income (loss) before income taxes $ 568 $ (844) $ (276)
Provision for income taxes 1,019 (330) 689
----- ----- -----
Net loss $ (451) $ (514) $ (965)
===== ===== =====
Basic and diluted loss
per common share $ (0.06) $ (0.06) $ (0.12)
===== ===== =====
</TABLE>
F-30
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements
of Wickes Inc. on Form S-8 (File Nos. 33-85380, 33-88010 and 33-90240) of our
report dated February 23, 1999 (except for Note 16 as to which the date is
August 31, 1999), on our audits of the consolidated financial statements and
financial statement schedule of Wickes Inc. and Subsidiaries as of December
26, 1998 and December 27, 1997, and for the years ended December 26, 1998,
December 27, 1997 and December 28, 1996, which reports are included in this
Annual Report on Form 10-K/AA (Amendment No. 2).
PRICEWATERHOUSECOOPERS LLP
Chicago, Illinois
October 1, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER
26, 1998 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-26-1998
<PERIOD-END> DEC-26-1998
<CASH> 65
<SECURITIES> 0
<RECEIVABLES> 97,319
<ALLOWANCES> 4,393
<INVENTORY> 103,716
<CURRENT-ASSETS> 209,467
<PP&E> 79,144
<DEPRECIATION> 33,314
<TOTAL-ASSETS> 292,183
<CURRENT-LIABILITIES> 74,122
<BONDS> 100,000
0
0
<COMMON> 82
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 292,183
<SALES> 910,272
<TOTAL-REVENUES> 910,272
<CGS> 694,800
<TOTAL-COSTS> 694,800
<OTHER-EXPENSES> 191,201
<LOSS-PROVISION> 2,915
<INTEREST-EXPENSE> 21,632
<INCOME-PRETAX> (276)
<INCOME-TAX> 689
<INCOME-CONTINUING> (965)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (965)
<EPS-BASIC> (0.12)
<EPS-DILUTED> (0.12)
</TABLE>
