SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File
For the Quarterly Period Ended September 25, 1999 Number 0-22468
------------------ -------
WICKES INC.
-----------
(Exact name of registrant as specified in its charter)
Delaware 36-3554758
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
706 North Deerpath Drive, Vernon Hills, Illinois 60061
- ------------------------------------------------ --------
(Address of principal executive offices) (Zip Code)
847-367-3400
------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months, and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
-----
As of October 31, 1999, the Registrant had 8,221,271 shares of Common
Stock, par value $.01 per share outstanding.
<PAGE> 2
WICKES INC. AND SUBSIDIARIES
INDEX
-----
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
September 25, 1999 and December 26, 1998 (Unaudited) 3
Condensed Consolidated Statements of Operations
For the three months and nine months ended
September 25, 1999 and September 26, 1998 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows
For the nine months ended September 25, 1999 and
September 26, 1998 (Unaudited) 5
Notes to Condensed Consolidated
Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 25
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 26
</TABLE>
2
<PAGE> 3
WICKES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands except share data)
<TABLE>
<CAPTION>
September 25, December 26,
1999 1998
-------- --------
ASSETS
<S> <C> <C>
Current assets:
Cash $ 72 $ 65
Accounts receivable, less allowance for doubtful
accounts of $4,231 in 1999 and $4,393 in 1998 134,537 92,926
Notes receivable 474 1,095
Inventory 131,250 103,716
Deferred tax asset 8,857 8,857
Prepaid expenses 3,181 2,808
-------- --------
Total current assets 278,371 209,467
-------- --------
Property, plant and equipment, net 49,580 45,830
Trademark (net of accumulated amortization of
$10,663 in 1999 and $10,496 in 1998) 6,357 6,523
Deferred tax asset 17,482 17,482
Rental equipment (net of accumulated depreciation
of $899 in 1999 and $572 in 1998) 2,083 1,883
Other assets (net of accumulated amortization of
$10,937 in 1999 and $9,502 in 1998) 14,879 10,998
-------- --------
Total assets $ 368,752 $ 292,183
======== ========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 0 $ 16
Accounts payable 61,589 54,017
Accrued liabilities 30,655 20,089
-------- --------
Total current liabilities 92,244 74,122
-------- --------
Long-term debt, less current maturities 244,893 191,961
Other long-term liabilities 3,060 2,952
Commitments and contingencies (Note 4)
Stockholders' equity:
Preferred stock (no shares issued)
Common stock (8,218,417 shares issued and
outstanding in 1999 and 8,207,268 shares
issued and outstanding in 1998) 82 82
Additional paid-in capital 86,839 86,787
Accumulated deficit (58,366) (63,721)
-------- --------
Total stockholders' equity 28,555 23,148
-------- --------
Total liabilities & stockholders' equity $ 368,752 $ 292,183
======== ========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
<PAGE> 4
WICKES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands except share and per share data)
[CAPTION]
<TABLE>
Three Months Ended Nine Months Ended
------------------ -----------------
Sept. 25, Sept. 26, Sept. 25, Sept. 26,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $ 325,362 $ 261,137 $ 805,222 $ 667,024
Cost of sales 251,559 200,925 619,187 509,740
--------- -------- -------- --------
Gross profit 73,803 60,212 186,035 157,284
--------- -------- -------- --------
Selling, general and administrative expenses 58,566 49,516 157,989 135,935
Depreciation, goodwill and trademark amortization 1,620 1,296 4,668 3,846
Provision for doubtful accounts 467 551 873 1,760
Restructuring and unusual items - 501 - 5,932
Other operating income (1,315) (1,240) (4,375) (5,045)
-------- -------- -------- --------
59,338 50,624 159,155 142,428
-------- -------- -------- --------
Income from operations 14,465 9,588 26,880 14,856
Interest expense 5,877 5,571 17,137 16,482
-------- -------- -------- --------
Income (loss) before income taxes 8,588 4,017 9,743 (1,626)
Provision (benefit) for income taxes 3,544 1,721 4,388 91
-------- -------- -------- --------
Net income (loss) $ 5,044 $ 2,296 $ 5,355 $ (1,717)
======== ======== ======== ========
Basic income (loss) per common share $ 0.61 $ 0.28 $ .65 $ (0.21)
======== ======== ======== ========
Diluted income (loss) per common share $ 0.61 $ 0.28 $ .65 $ (0.21)
======== ======== ======== ========
Weighted average common shares - for basic 8,217,777 8,201,710 8,214,118 8,194,446
========= ========= ========= =========
Weighted average common shares - for diluted 8,331,816 8,251,097 8,280,861 8,194,446
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
<PAGE> 5
WICKES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
-----------------
September 25, September 26,
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 5,355 $ (1,717)
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation expense 4,246 3,495
Amortization of trademark 167 167
Amortization of goodwill 255 184
Amortization of deferred financing costs 1,142 1,127
Provision for doubtful accounts 873 1,760
Gain on sale of assets (1,435) (1,574)
Deferred tax benefit - (305)
Changes in assets and liabilities:
Increase in accounts receivable (40,727) (24,807)
Decrease in notes receivable 621 1,979
Increase in inventory (26,984) (10,421)
Increase in accounts payable and accrued liabilities 18,105 6,534
Increase in other assets (3,347) (838)
-------- --------
NET CASH USED IN OPERATING ACTIVITIES (41,729) (24,416)
-------- --------
Cash flows from investing activities:
Purchases of property, plant and equipment (6,644) (3,184)
Payments for acquisitions (7,196) -
Proceeds from sales of property, plant and equipment 2,608 3,629
-------- --------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (11,232) 445
-------- --------
Cash flows from financing activities:
Net borrowing under revolving line of credit 52,932 24,481
Reductions of notes payable (16) (40)
Net proceeds from issuance of common stock 52 96
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 52,968 24,537
-------- --------
NET INCREASE (DECREASE) IN CASH 7 566
Cash at beginning of period 65 79
-------- --------
CASH AT END OF PERIOD $ 72 $ 645
======== ========
Supplemental schedule of cash flow information:
Interest paid $ 12,666 $ 12,919
Income taxes paid 876 769
Supplemental schedule of non-cash investing and financing activities:
The Company purchased capital stock and assets in conjunction with
acquisitions made during the period. In connection with these
acquisitions, liabilities were assumed as follows:
Purchase Price of assets acquired $ 7,337 $ -
Cash paid (7,196) -
-------- --------
Liabilities assumed $ 141 $ -
======== ========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
5
<PAGE> 6
WICKES INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
Restatement
-----------
The condensed consolidated balance sheet as of December 26, 1998 has
been restated to reflect an after-tax charge of $514,000 related to a
barter transaction entered into in the third quarter of 1998, see Note 10.
Barter Transaction.
Basis of Financial Statement Presentation
-----------------------------------------
The condensed consolidated financial statements present the results of
operations, financial position, and cash flows of Wickes Inc. and its
consolidated subsidiaries (the "Company"). The Company has determined that
it operates in one business segment, that being the supply and distribution
of lumber and building materials to building professionals and do-it-
yourself customers, primarily in the Midwest, Northeast, and South. All
information required by SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", is included in the Company's financial
statements.
The condensed consolidated balance sheet as of September 25, 1999, the
condensed consolidated statements of operations and the condensed
consolidated statements of cash flows for the three-month and nine-month
periods ended September 25, 1999 and September 26, 1998 have been prepared
by the Company without audit. In the opinion of management, all
adjustments (which include only normal recurring adjustments) necessary to
present fairly the financial position, results of operations and cash flows
at September 25, 1999 and for all periods presented have been made. The
results for the three-month and nine-month periods ended September 25, 1999
are not necessarily indicative of the results to be expected for the full
year or for any interim period.
The year-end condensed consolidated balance sheet data was derived from
audited financial statements, but does not include all disclosures required
by generally accepted accounting principles. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted. It is suggested that these condensed consolidated
financial statements be read in conjunction with the financial statements
and notes thereto included in the Company's Annual Report on Form 10-K for
the year ended December 26, 1998, filed with the Securities and Exchange
Commission.
6
<PAGE> 7
Share Data
----------
The Company issued 11,149 shares of Common Stock to members of its board
of directors as compensation during the nine months ended September 25,
1999.
2. ACQUISITIONS
------------
The Company made two acquisitions during the first nine months of
1999, both component facilities, for a total cost of $7.2 million. In
January the Company acquired the assets of a wall panel manufacturer
located in Cookeville, Tennessee and at the end of March the Company
acquired the assets of Porter Building Products, a manufacturer of trusses
and wall panels, located in Bear, Delaware. The costs of these acquisitions
have been allocated on the basis of the fair market value of the assets
acquired and the liabilities assumed. The excess of the purchase price over
the fair value of the net assets acquired for one of the acquisitions
resulted in goodwill, which is being amortized over a 20-year period on a
straight-line basis. Both acquisitions have been accounted for as
purchases. Operations of the companies acquired have been included in the
accompanying consolidated financial statements from their respective
acquisition dates.
3. LONG-TERM DEBT
--------------
Long-term debt is comprised of the following at September 25, 1999 (in
thousands):
<TABLE>
<S> <C>
Revolving line of credit $ 144,893
Senior subordinated notes 100,000
Less current maturities (0)
--------
Total long-term debt $ 244,893
========
</TABLE>
Under the revolving line of credit, the Company may borrow against
certain levels of accounts receivable and inventory. The unused amount
available for borrowing at September 25, 1999 was $41.7 million.
On February 17, 1999 the Company entered into a new revolving credit
agreement with a group of financial institutions. On July 8, 1999, the
Company entered into a first amendment to this revolving credit agreement
that modified the definition of "unused availability." As modified,
"unused availability" means the borrowing base less the total of
outstanding loans and credits. On September 9, 1999, the Company entered
into a second amendment that increased the maximum borrowing from $160
million to $200 million during the seasonal period form May 15 to November
15 of each year. Before these amendments, the maximum borrowing was $145
million.
7
<PAGE> 8
4. INCOME TAXES
------------
The provision for income taxes for the nine-month period ended September
25, 1999 was $4,388,000 compared to a provision of $91,000 for the nine-
month period ended September 26, 1998. An effective federal and state
income tax rate of 38.8% was used to calculate income taxes for the first
nine months of 1999, compared with an effective rate of 39.0% for the first
nine months of 1998. In addition to the effective income tax rate, state
franchise taxes were calculated separately and are included in the
provision reported.
5. COMMITMENTS AND CONTINGENCIES
-----------------------------
At September 25, 1999, the Company had accrued approximately $132,000
(included in accrued liabilities at September 25, 1999) for remediation of
certain environmental and product liability matters, principally
underground storage tank removal.
Many of the sales and distribution facilities presently and formerly
operated by the Company contained underground petroleum storage tanks. All
such tanks known to the Company located on facilities owned or operated by
the Company have been filled or removed in accordance with applicable
environmental laws in effect at the time. As a result of reviews made in
connection with the sale or possible sale of certain facilities, the
Company has found petroleum contamination of soil and ground water on
several of these sites and has taken, and expects to take, remedial actions
with respect thereto. In addition, it is possible that similar
contamination may exist on properties no longer owned or operated by the
Company the remediation of which the Company could under certain
circumstances be held responsible. Since 1988, the Company has incurred
approximately $2.0 million of costs, net of insurance and regulatory
recoveries, with respect to the filling or removing of underground storage
tanks and related investigatory and remedial actions. Insignificant amounts
of contamination have been found on excess properties sold over the past
four years. The Company has currently reserved $42,500 for estimated clean-
up costs at 11 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
$28,000 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
8
<PAGE> 9
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 132 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 23 similar actions for insignificant
amounts, and another 188 of these actions have been dismissed. As of
October 31, 1999 none of these suits have made it to trial.
Losses in excess of the $132,000 reserved as of September 25, 1999 are
possible but an estimate of these amounts cannot be made.
The Company is involved in various other legal proceedings which are
incidental to the conduct of its business. The Company does not believe
that any of these proceedings will have a material adverse effect on the
Company's financial position, results of operations or liquidity.
The Company's assessment of the matters described in this note and other
forward-looking statements in this Form 10-Q are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995
("Forward-Looking Information") and are inherently subject to uncertainty.
The outcome of the matters described in this note may differ from the
Company's assessment of these matters as a result of a number of factors
including but not limited to: matters unknown to the Company at the
present time, development of losses materially different from the Company's
experience, the Company's ability to prevail against its insurers with
respect to coverage issues to date, the financial ability of those insurers
and other persons from whom the Company may be entitled to indemnity, and
the unpredictability of matters in litigation.
6. 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, 2000. The Company
believes adoption of the statement will not have a material effect on its
financial statements.
9
<PAGE> 10
7. EARNINGS PER SHARE
------------------
The Company calculates earnings per share in accordance with Statement
of Financial Accounting Standards No. 128. The following is the
reconciliation of the numerators and denominators of the basic and diluted
earnings per share:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
Sept. 25, Sept. 26, Sept. 25, Sept. 26,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Numerators:
Net income (loss)-for basic
and diluted EPS $5,044,000 $2,296,000 $5,355,000 $(1,717,000)
========= ========= ========= =========
Denominators:
Weighted average common
shares - for basic EPS 8,217,777 8,201,710 8,214,118 8,194,446
Common shares from options 114,039 49,387 66,743 54,370
--------- --------- --------- ---------
Weighted average common
shares - for diluted EPS 8,331,816 8,251,097 8,280,861 8,248,816
========= ========= ========= =========
</TABLE>
In periods where net losses are incurred, diluted weighted average
common shares are not used in the calculation of diluted EPS as it would
have an anti-dilutive effect on EPS. In addition, options to purchase
250,240 and 411,320 weighted average shares of common stock during the nine
months of 1999 and 1998, respectively, were not included in the diluted EPS
as the options' exercise prices were greater than the average market price.
In June 1999 the Company revised its calculation of diluted earnings per
share to include the income tax benefit that would be realized if options
were exercised with no effect on diluted earnings per share for the
reported period.
8. RESTRUCTURING
-------------
During the first quarter of 1998 the Company implemented a restructuring
plan which resulted in the closing or consolidation of eight sales and
distribution and two manufacturing facilities in February, the sale of two
sales and distribution facilities in March, and further reductions in
headquarters staffing. As a result of the 1998 Plan, the Company recorded
a restructuring charge of $5.4 million in the first quarter. The $5.4
million charge included $3.7 million in estimated losses on the disposition
of closed facility assets and liabilities, $2.0 million in severance and
postemployment benefits related to the 1998 plan, and a benefit of $300,000
for adjustments to prior years' restructuring accruals. In the third
quarter of 1998, the Company recorded $501,000 in additional restructuring
expense as a result of certain facility carrying costs and severance costs,
unknown at the time the plan was announced, but incurred as a result of the
Plan.
10
<PAGE> 11
9. SUBSEQUENT EVENTS
-----------------
On October 19, 1999 the Company completed the purchase of the assets of
Advanced Truss Systems, Inc. of Kings Mountain, North Carolina. Advanced
Truss Systems is a manufacturer of engineered wood trusses, with annual
sales of approximately $3.5 million, servicing the greater Charlotte,
North Carolina market.
On November 1, 1999 the Company purchased the assets of United Building
Systems, Inc. of Lexington, Kentucky. United Building Systems is a
manufacturer of wall panels and roof and floor trusses, in the Lexington,
Kentucky market, with annual sales of approximately $4.1 million.
10. BARTER TRANSACTION
------------------
In September of 1998, the Company entered into a one-time 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.
The following table reconciles the amounts previously reported to the
amounts currently being reported in the condensed consolidated statements
of operations for the three months ended September 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 $ 4,861 $ (844) $ 4,017
Provision for income taxes 2,051 (330) 1,721
-------- -------- --------
Net income (loss) $ 2,810 $ (514) $ 2,296
======== ======== ========
Basic and diluted income (loss)
per common share $ 0.34 $ (0.06) $ 0.28
======== ======== ========
</TABLE>
11
<PAGE> 12
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
The following discussion should be read in conjunction with the
Condensed Consolidated Financial Statements and Notes thereto contained
elsewhere herein and in conjunction with the Consolidated Financial
Statements and Notes thereto and Management's Discussion and Analysis of
Financial Condition and Results of Operations contained in the Company's
Annual Report on Form 10-K for the year ended December 26, 1998.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the
percentage relationship to net sales of certain expense and income items.
This information includes the results from all sales and distribution and
component manufacturing facilities operated by the Company, including those
closed or sold during the period.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
Sept. 25, Sept. 26, Sept. 25, Sept. 26,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Sales 100.0% 100.0% 100.0% 100.0%
Gross profit 22.7% 23.1% 23.1% 23.6%
Selling, general and
administrative expense 18.0% 19.0% 19.6% 20.4%
Depreciation, goodwill
and trademark amortization 0.5% 0.5% 0.6% 0.6%
Provision for doubtful accounts 0.2% 0.2% 0.1% 0.3%
Restructuring and unusual items -- 0.2% -- 0.9%
Other operating income (0.4)% (0.5)% (0.5)% (0.8)%
Income from operations 4.4% 3.7% 3.3% 2.2%
</TABLE>
Net Earnings
- ------------
Weather conditions during the first nine months of 1999 were relatively
close to seasonal averages. In the first quarter of 1998 the Company's
largest region, the Midwest, experienced a very mild winter, which allowed
for favorable building conditions, which was partially offset by increased
precipitation in the Northeast and South. The third quarter of 1998 and
first nine months of 1999 had favorable economic conditions for the
building materials supply industry. Single family housing starts in 1999
were 1.6% and 6.1% higher during the third quarter and first nine months of
1999, respectively, than during the comparable periods of 1998.
12
<PAGE> 13
Net income for the three months ended September 25, 1999 was $5.0
million compared with a net income of $2.3 million for the three months
ended September 26, 1998. The increase in net income for the three-month
period is primarily the result of increased sales, gross profit, and other
operating income as well as a decrease in restructuring charges and the
provision for doubtful accounts. The positive impact of these changes was
partially offset by increases in selling, general and administrative
("SG&A"), depreciation and interest expenses.
Net income for the first nine months of 1999 was $5.4 million compared
with a loss of $1.7 million for the first nine months of 1998. The
increase in net income for the nine-month period is primarily the result of
increased sales and gross profit, and reductions in restructuring charges
and the provision for doubtful accounts. The positive impact of these
changes was partially offset by increases in SG&A, depreciation and
interest expenses as well as a reduction in other operating income.
Three Months Ended September 25, 1999 Compared
----------------------------------------------
with the Three Months Ended September 26, 1998
----------------------------------------------
Net Sales
- ---------
Net sales for the third quarter of 1999 increased 24.6% to $325.4
million from $261.1 million for the third quarter of 1998. Same store
sales increased 23.0% compared with the same period last year. Same store
sales to the Company's primary customers, building professionals, also
increased 27.8% when compared with the third quarter of 1998. Consumer
same store sales increased by 0.9% for the quarter. As of September 25,
1999 the Company operated 101 sales and distribution facilities, the same
number it operated at the end of the third quarter of 1998.
The Company estimates that inflation in lumber prices increased total
sales for the quarter by approximately $23.9 million, compared with the
1998 comparable period.
The Company believes that the sales increase results primarily from its
recent investments in its target major markets, re-merchandised
conventional market sales and distribution facilities, recent acquisitions
of component manufacturing facilities as well as favorable economic
conditions. Sales increased 40.3% in the Company's nine target major
markets, while sales increased 26.7% in the 13 conventional market
building centers the Company has remerchandised since 1997. Component
manufacturing facilities acquired since the third quarter of 1998 account
for $3.2 million of the third quarter 1999 sales increase. Single family
housing starts were 1.6% higher, nationally, in the third quarter of
1999 than in the comparable period of 1998. In the Company's primary
geographical market, the Midwest, single family housing starts were
8.7% higher during this same period.
13
<PAGE> 14
Gross Profit
- ------------
1999 third quarter gross profit increased to $73.8 million from $60.2
million for the third quarter of 1998, a 22.6% increase. Gross profit as a
percentage of sales decreased to 22.7% for the third quarter of 1999 from
23.1% in 1998. The decrease in gross profit as a percentage of sales is
primarily attributable to an increased percentage of sales to building
professionals, an increased percentage of sales attributable to lumber
products combined with lumber price volatility, and the expansion of the
Company's installed sales programs, partially offset by increased sales
and gross profit margins on internally manufactured products.
The Company believes that inflation in lumber prices increased gross
profit by approximately $3.7 million in the quarter. Sales to building
professionals as a percentage of sales increased to 89.0% in the third
quarter of 1999 compared with 86.5% in 1998. Lumber and related products
accounted for 57.9% of sales in the third quarter of 1999, compared with
54.2% for the third quarter of 1998.
Selling, General and Administrative Expense
- -------------------------------------------
SG&A expense decreased to 18.0% of net sales in the third quarter of
1999 compared with 19.0% of net sales in the third quarter of 1998. Much
of the decrease is attributable to operating leverage achieved through
increased sales volume.
The Company experienced decreases, as a percentage of sales, in
salaries, wages and benefits, equipment rental, marketing expenses,
professional fees and maintenance expenses. Salaries, wages and employee
benefits decreased as a percentage of sales by 0.2%. As of September 25,
1999, the Company had 4,565 full time and part time employees, an increase
of 15.6% from September 26, 1998.
Depreciation, Goodwill and Trademark Amortization
- -------------------------------------------------
Depreciation, goodwill and trademark amortization increased to $1.6
million for the third quarter of 1999 compared with $1.3 million for the
same period in 1998. This increase is primarily due to depreciation on
three component manufacturing facilities acquired since the second quarter
of 1998 and capital additions as a result of the Company's expansion of its
internal manufacturing operations and other strategic initiatives.
14
<PAGE> 15
Restructuring and Unusual Items
- -------------------------------
In February of 1998, the Company announced a restructuring plan, the
"1998 Plan", which included the closing or consolidation of eight sales and
distribution facilities and two component manufacturing facilities in
February, the sale of two additional sales and distribution facilities in
March, and further reductions in headquarters staffing. The Company
recorded a restructuring charge of $5.4 million, which included $3.7
million in anticipated losses on the disposition of closed center assets
and liabilities, $2.0 million in severance and post employment benefits
related to the 1998 Plan, and a benefit of $300,000 for adjustments to
prior years' restructuring accruals.
In the third quarter of 1998, the Company recorded additional
restructuring expense as a result of certain facility carrying costs and
severance costs, unknown at the time the plan was announced, but incurred
as a result of the Plan.
No restructuring or unusual items were recorded in the third quarter of
1999.
Provision for Doubtful Accounts
- -------------------------------
The provision for doubtful accounts for the third quarter of 1999 was
slightly lower than the expense recorded in the third quarter of 1998. In
the third quarter, the Company recorded a $467,000 provision for doubtful
accounts, compared with $551,000 in the third quarter of 1998.
Other Operating Income
- ----------------------
Other operating income for the third quarter of 1999 was $1.3 million
compared with $1.2 million for the third quarter of 1998. During the third
quarters of 1999 and 1998 there were no significant sales of excess real
estate.
Interest Expense
- ----------------
In the third quarter of 1999 interest expense increased to $5.9 million
from $5.6 million during the third quarter of 1998, resulting primarily
from an increase in average total long-term debt of approximately $33.9
million. This was partially offset by a decrease in the effective
borrowing rate on total long-term debt of approximately 95 basis points.
The decrease in the effective borrowing rate is primarily due to a
reduction in interest rate on the Company's revolving line of credit as a
result of decreases in the average prime and LIBOR rates as well as a 25
basis point reduction in the Company's borrowing spreads, effective with
the Company's new revolving credit agreement in February of 1999.
Approximately 98% of the Company's third quarter average borrowings on its
revolving credit facility were LIBOR-based.
15
<PAGE> 16
Provision for Income Taxes
- --------------------------
The Company recorded income tax expense of $3.5 million for the third
quarter of 1999 compared with expense of $1.7 million in the third quarter
of 1998. An effective federal and state income tax rate of 38.7% was used
to calculate income taxes for the third quarter of 1999, compared with an
effective rate of 39.0% for the third quarter of 1998. In addition to the
effective income tax rate, state franchise taxes were calculated separately
and are included in the provision reported for both years.
The Company continues to review future earnings projections to determine
that there is sufficient support for its deferred tax assets and valuation
allowance. In spite of the losses incurred during 1995, 1997, and 1998,
management believes that it is more likely than not that the Company will
receive full benefit of its deferred tax asset and that the valuation
allowance is properly stated. This assessment constitutes Forward-Looking
Information made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995 and is inherently subject to
uncertainty and dependent upon the Company's future profitability, which in
turn depends upon a number of important risk factors including but not
limited to: the effectiveness of the Company's operational efforts,
cyclicality and seasonality of the Company's business, the effects of the
Company's substantial leverage and competition.
Nine Months Ended September 25, 1999 Compared
--------------------------------------------
with the Nine Months Ended September 26, 1998
---------------------------------------------
Net Sales
- ---------
Net sales for the first nine months of 1999 increased 20.7% to $805.2
million from $667.0 million for the first nine months of 1998. Same store
sales increased 20.0% compared with the same period last year. Same store
sales to the Company's primary customers, building professionals, increased
23.0% when compared with the first nine months of 1998. Consumer same
store sales increased 1.7% for the same period. As of September 25, 1999
the Company operated 101 sales and distribution facilities, the same number
it operated at the end of the first nine months of 1998. Sales of
approximately $4.0 million were recorded, in the first quarter of 1998, for
the 10 sales and distribution facilities that were sold or closed during
that quarter.
The Company estimates that inflation in lumber prices increased total
sales for the first nine months by approximately $31.5 million, compared
with the 1998 comparable period.
16
<PAGE> 17
The Company believes that the sales increase results primarily from its
recent investments in its target major market, re-merchandised conventional
market sales and distribution facilities, recent acquisitions of component
manufacturing facilities as well as favorable economic conditions. Sales
increased 29.2% in the Company's nine target major markets, while sales
increased 23.9% in the 13 conventional market building centers the
Company has remerchandised since 1997. Component manufacturing facilities
acquired since the second quarter of 1998 account for $8.5 million of the
nine month 1999 sales increase. Single family housing starts were 6.1%
higher, nationally, in the first nine months of 1999 than in the comparable
period of 1998. In the Company's primary geographical market, the Midwest,
single family housing starts were 9.0% higher.
Gross Profit
- ------------
Gross profit for the first nine months of 1999 increased to $186.0
million from $157.3 million for the first nine months of 1998, a 18.3%
increase. Gross profit as a percentage of sales decreased to 23.1% for the
first nine months of 1999 from 23.6% in 1998. The decrease in gross profit
as a percentage of sales is primarily attributable to rising lumber prices,
increased percentage of sales to building professionals, an increased
percentage of sales attributable to lumber products combined with lumber
price volatility, and the expansion of the Company's installed sales programs,
partially offset by increased sales and gross profit margins on internally
manufactured products.
The Company believes that while inflation in lumber prices did increase
gross profit by approximately $4.7 million in the first nine months of
1999, gross profit as a percent of sales decreased due to significant and
rapid cost increases, primarily during the second quarter, which could not
be passed on to customers as quickly. Lumber and related products
accounted for 56.5% of sales in the first nine months of 1999, compared
with 54.3% for the same period in 1998. Sales to building professionals as
a percentage of sales increased to 89.7% in the first nine months of 1999
compared with 87.8% in 1998.
Selling, General and Administrative Expense
- -------------------------------------------
SG&A expense decreased to 19.6% of net sales in the first nine months of
1999 compared with 20.4% of net sales in the first nine months of 1998.
Much of the decrease is attributable to operating leverage achieved through
increased sales volume, expense reductions achieved as a result of the 1998
first quarter restructuring and reduced spending on major market expansion
programs in 1999.
17
<PAGE> 18
The Company experienced decreases, as a percentage of sales, in
salaries, wages and benefits, equipment rental, employee relocation, and
headquarters administrative expense. Salaries, wages and employee benefits
decreased as a percentage of sales by 0.5%.
Depreciation, Goodwill and Trademark Amortization
- -------------------------------------------------
Depreciation, goodwill and trademark amortization increased to $4.7
million for the first nine months of 1999 compared with $3.8 million for
the same period in 1998. This increase is primarily due to depreciation on
three component manufacturing facilities acquired since the third quarter
of 1998 as well as capital additions as a result of the Company's major
market program and expansion of the Company's manufacturing operations.
Provision for Doubtful Accounts
- -------------------------------
The provision for doubtful accounts decreased to $0.9 million for the
first nine months of 1999 from $1.8 million in the first nine months of
1998. The primary reasons for the decrease are improved delinquency on
1999 outstanding accounts and increased expense in the first quarter of
1998 as a result of the delinquency of a major account.
Restructuring and Unusual Items
- -------------------------------
In February of 1998, the Company announced and completed a plan for
additional restructuring activities, which included the closing or
consolidation of eight building centers and two component manufacturing
facilities in February, the sale of two additional building centers in
March, and further reductions in headquarters staffing. The Company
recorded a restructuring charge of $5.4 million, which included $3.7
million in anticipated losses on the disposition of closed center assets
and liabilities, $2.0 million in severance and post employment benefits
related to the 1998 Plan, and a benefit of $300,000 for adjustments to
prior years' restructuring accruals. In the third quarter of 1998, the
Company recorded $501,000 in additional restructuring expense as a result
of certain facility carrying costs and severance costs, unknown at the time
the plan was announced, but incurred as a result of the Plan.
No restructuring or unusual items were recorded in the first nine months
of 1999.
18
<PAGE> 19
Other Operating Income
- ----------------------
Other operating income for the first nine months of 1999 was $4.4
million compared with $5.0 million for the first nine months of 1998. In
the first nine months of 1999 the Company recorded gains of approximately
$1.7 million on the sale of excess real estate and equipment compared with
$1.8 million in 1998. In 1999, the Company recorded costs of $339,000 for
carrying costs of closed operations and $471,000 for casualty losses,
including a fire at one of its component manufacturing facilities. In 1998
the Company recorded no closed operation carrying costs and recorded a gain
of $35,000 for casualty losses. The gain on casualty losses was a result of
a $180,000 gain on the difference between insured replacement cost and book
value of inventory, as a result of a fire at one of its sales and
distribution facilities.
Interest Expense
- ----------------
In the first nine months of 1999 interest expense increased to $17.1
million from $16.5 million during the first nine months of 1998, resulting
primarily from an increase in average total long-term debt of approximately
$21.5 million. This was partially offset by a decrease in the effective
borrowing rate on total long-term debt of approximately 53 basis points.
The decrease in the effective borrowing rate is primarily due to a
reduction in interest rate on the Company's revolving line of credit as a
result of decreases in the average prime and LIBOR rates as well as a 25
basis point reduction in the Company's borrowing spreads, effective with
the Company's new revolving credit agreement in February of 1999.
Approximately 93% of the Company's average borrowings on its revolving
credit facility, during the first nine months of 1999, were LIBOR-based.
Provision for Income Taxes
- --------------------------
The Company recorded income tax expense of $4.4 million for the first
nine months of 1999 compared with $91,000 in the first nine months of 1998.
An effective federal and state income tax rate of 38.8% was used to
calculate income taxes for the first nine months of 1999, compared with an
effective rate of 39.0% for the first nine months of 1998. In addition to
the effective income tax rate, state franchise taxes were calculated
separately and are included in the provision reported for both years.
For a discussion of the Company's deferred tax assets and valuation
allowance, see "Provision for Income Tax Benefit" in the discussion above
of the comparative results for the three months.
19
<PAGE> 20
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, 2000. The Company
believes adoption of the statement will not have a material effect on its
financial statements.
Year 2000
- ---------
The Year 2000 problem relates to the inability of certain computer
programs and computer hardware to properly handle dates after December 31,
1999. As a result businesses may be at risk for miscalculations and
systems failures.
In response to the Year 2000 issue, the Company initiated a project in
early 1997 to identify, evaluate and implement changes to its existing
computerized business systems. An inventory was developed of all items of
concern including vehicles, manufacturing equipment, and security, heating
and electrical systems. Upon completion of the inventory a plan was
developed to evaluate the importance of each item, the remediation
necessary to make the item compliant (either modification or replacement),
the resources necessary to complete the remediation, and a time frame for
completion. The plan was then reviewed by an outside party for
completeness. The plan also includes the steps the Company is taking to
ensure it is not at risk for problems that may occur at its suppliers or
customers. The Company has surveyed, and continues to query, 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 continues to review their
responses and evaluate alternatives for those that are not sufficiently
addressing the Year 2000 issue.
The Company has addressed 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
all of its mission critical systems and hardware are now Year 2000 ready.
As of October 30, only a few non-critical software/system issues remained
to be resolved, and are expected to be compliant by the end of November.
The Company will continue to perform additional system testing through mid-
December to help insure all systems operate smoothly into the year 2000.
The Company has completed pre-event contingency plans as well as post-event
testing programs for all key systems in its operating units, in order to
identify and address any unforeseen issues prior to opening for business on
January 3. Post-event testing of central systems will be completed by mid-
December, and the Company continues to evaluate each problem area for
various contingency responses to mitigate any disruption should remediation
be incomplete.
20
<PAGE> 21
The estimated total cost of the project is $2.7 million. $800,000 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 September of 1999 the
Company has expended a total of $2.2 million on Year 2000 remediation.
If modifications and conversions, by the Company and those it conducts
business with, are not completed in a timely manner, the Year 2000 issue
may have a material adverse effect on the Company's business, financial
condition, and results of operations. The Company's greatest risk at this
time is with its store operating and accounts receivable systems and its
inventory suppliers. If the store operating system has problems the
Company could experience disruption in its basic distribution operations.
A problem with the Company's accounts receivable system could cause some
short term working capital and cash flow problems until the issue is
resolved. While the Company has extended efforts to receive assurances
that its product suppliers are adequately addressing this issue, the
Company expects there will be some minimal interruptions in replenishment
from some suppliers, but these should be addressed quickly through
alternative sources.
The 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, certain 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 equipment, utilities and other systems.
The Company can and has applied program changes to all sales and
distribution facilities in a matter of hours.
21
<PAGE> 22
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, accounts
receivable, and acquisitions.
During the first nine months of 1999 net cash used in operating
activities was $41.7 million, $17.3 million more than the $24.4 million
used in the first nine months of 1998. With the peak building season
historically occurring in the second and third quarters, the Company
normally experiences increases in its inventory levels during the first
quarter to meet the anticipated increase in sales, and in the second
quarter, increases in accounts receivable occur as a result of the
increased sales activity. The third quarter historically provides cash
through operating income and reductions in inventory as the Company begins
its seasonal adjustments. In the third quarter of 1999, these positive
cash flows were partially offset by an increase in accounts receivable, the
net result was a positive cash flow from operations of $1.3 million for the
quarter.
The Company's accounts receivable balance at the end of the third
quarter of 1999 increased $29.7 million when compared to the end of the
third quarter of 1998, an increase of 28.3%. This increase is primarily
the result of a $17.0 increase in credit sales in September of 1999, when
compared with September 1998 and a increase in sales to larger accounts
with extended payment terms.
Inventory at the end of the third quarter of 1999 was $18.1 million, or
16.0%, higher than at the end of the third quarter of 1998. This increase
is largely attributable to the additional inventory necessary to support
the 24.6% increase in third quarter sales. Significant inflation in
lumber, drywall and insulation has also had a significant impact on
increasing inventory in 1999. Accounts payable at the end of the second
quarter of 1999 increased approximately $13.8 million, or 29.0% from the
third quarter of 1998. The increase is primarily attributable to the
increase in total inventory.
The Company's capital expenditures consist primarily of the construction
of storage facilities, the remodeling and reformatting of sales and
distribution facilities and component manufacturing facilities, and the
purchase of vehicles, equipment and management information systems for both
existing and new operations. The Company may also from time to time make
expenditures to establish or acquire operations to expand or complement its
existing operations, especially in its major markets. In the first nine
months of 1999 the Company spent $6.6 million on capital expenditures for
existing operations as compared to $3.2 million for the same period in
1998. The Company expects to spend approximately $7.5 million for all of
1999. In addition, $7.2 million was spent in the first nine months of
1999 for the acquisition of two component manufacturing facilities. Under
the Company's new bank revolving credit agreement, capital expenditures
during 1999 are limited to $8.5 million. In addition to capital
22
<PAGE> 23
expenditures, this revolving credit agreement allows the Company to spend
up to $30 million, subject to certain restrictions, for acquisitions. The
Company expects to fund capital expenditures through borrowings and its
internally generated cash flow.
In January of 1999, the Company acquired the assets of a wall panel
manufacturer located in Cookeville, Tennessee; in March it acquired the
assets of Porter Building Products, a manufacturer of trusses and wall
panels located in Bear, Delaware, and in October it acquired the assets of
Advanced Truss Systems, a manufacturer of trusses, located in Kings
Mountain, North Carolina. In November, the Company also acquired the
assets of United Building Systems, a manufacturer of wall panels in
Lexington Kentucky. The Company will consolidate its existing panel
operations in Lexington with the new acquisition.
In 1999, the Company began, or significantly expanded, the manufacturing
of wall components and/or trusses at seven manufacturing facilities located
with the Company's sales and distribution facilities in Hopedale, MA;
Elyria, OH; Lexington, KY; Denton, NC; Elletsville, IN; Grand Rapids, MI
and Jackson, TN. At November 1, 1999 the Company operated 101 sales and
distribution centers and 22 component manufacturing facilities compared
with 101 sales and distribution facilities and 12 component manufacturing
facilities at November 1, 1998. In addition, the Company does a small
amount of door and window assembly out of three sales and distribution
facilities. The following table reconciles the number of sales and
distribution facilities and component manufacturing facilities operated by
the Company, through November 1, 1999:
<TABLE>
<CAPTION>
Sales and Component
Distribution Manufacturing
Facilities Facilities
---------- ----------
<S> <C> <C>
As of December 26, 1998 101 12
Expansion - 7
Acquisition - 4
Closings - -
Consolidation - (1)
---- ----
As of November 1, 1999 101 22
==== ====
</TABLE>
At September 25, 1999, $144.9 million was outstanding under the
Company's revolving line of credit, and the unused availability was
approximately $41.7 million. Total borrowings under the revolving line of
credit were $27.4 million higher than at the end of the third quarter of
1998. Due primarily to significant increases in sales, on several
occasions during the third quarter of 1999, the Company did utilize nearly
all the borrowing available under its revolving line of credit. On
September 9, 1999, in order to continue to support its significant sales
growth and related increase in working asset levels, the Company entered
into a Second Amendment to Credit Agreement with its bank lenders. This
amendment provides for a seasonal increase in the maximum borrowing under
23
<PAGE> 24
the revolving line of credit from $160 million to $200 million, from May 15
through November 15. During this same period, the Company must maintain a
minimum unused availability of $20 million, compared with $15 million in
excess availability required from November 16 through May 14. On July 8,
1999, the Company entered into a First Amendment to Credit Agreement with
its bank lenders. Pursuant to this amendment, the definition of unused
availability contained in the Company's revolving line of credit agreement
was modified. Formerly, "unused availability" was defined as the lesser of
$160 million or the borrowing base, less the total of outstanding loans and
credits. As modified, "unused availability" means the borrowing base less
the total of outstanding loans and credits. As a result, the maximum
applicable borrowing under the revolving credit agreement of $160 million
or $200 million can now be fully utilized. Under the former definition the
maximum was limited to $145 million. The Company believes this amended
agreement will provide sufficient funds for its anticipated operations and
capital expenditures. The Company's assessment of its future funds
availability constitutes Forward-Looking Information made pursuant to the
Private Securities Litigation Reform Act of 1995 and is inherently subject
to uncertainty resulting from, among other things, the factors discussed
under "Results of Operations - Provision for Income Tax Benefit".
On February 17, 1999 the Company entered into a new revolving credit
agreement and repaid all indebtedness under and terminated its old
revolving credit agreement. Among other things, the changes between the
old agreement and this new agreement include (i) an initial 25 basis point
reduction in the Company's LIBOR and prime borrowing rates to 200 basis
points over LIBOR and 50 basis points over prime, and further provisions
for additional decreases in the borrowing rate if certain interest coverage
levels are achieved, (ii) an increase in the maximum credit line from $130
million to $160 million, (iii) a decrease in the unused line fee from 50
basis points to 25 basis points, (iv) elimination of the fixed charge
coverage requirement, (v) extension of the term of the agreement to June of
2003, (vi) increases, subject to the permitted discretion of the agent for
the lenders, in the percent of eligible accounts receivable to 85% from a
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 (defined
as the amount by which the borrowing base exceeds outstanding loans and
credits) under the new revolving line of credit of at least $15 million
(subject to increase in certain circumstances) and maintain certain levels
of tangible capital funds.
In conjunction with the new revolving credit agreement, the Company
terminated its interest rate swap agreement and entered into a new interest
rate swap agreement. This new agreement effectively fixed the interest rate
at 5.75% plus the Company's current LIBOR borrowing spread, 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.
24
<PAGE> 25
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
The Company is subject to market risk associated with changes in interest
rates and lumber futures contracts. The following discussion includes
"forward-looking statements" that involve risk and uncertainties. Actual
results could differ materially from those projected in the forward-looking
statements.
The Company's revolving line of credit provides for, subject to certain
restrictions, up to $200 million of revolving credit loans and the issuance
of up to $10 million of letters of credit. 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. The rate is adjusted quarterly upon delivery to the lenders of the
Company's most recent quarterly financial statements. Interest on amounts
outstanding under the revolving line of credit will bear interest,
beginning in November of 1999, at a spread above the base rate of
BankBoston, N.A. of 0.25%, or 1.75% above the applicable LIBOR rate. This
is 25 basis points below the rate that has been in effect since inception
of the line of credit in February, 1999. Based on the Company's average
borrowings for the first nine months of 1999 under its revolving credit
agreement, subject to the effect of the interest rate swap agreement
described below, a 25 basis point movement in the base rate or LIBOR rate
would result in an approximate $220,000 annualized increase or decrease in
interest expense.
In conjunction with the Company's revolving credit agreement, the
Company entered into an interest rate swap agreement. This agreement
effectively fixed the interest rate at 5.75% plus the Company's current
LIBOR borrowing spread (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. At November 1, 1999 the 30-day
LIBOR borrowing rate was 5.41%.
The Company enters into lumber futures contracts as a hedge against
future lumber price fluctuations. All futures contracts are purchased to
protect long-term pricing commitments on specific future customer
purchases. While lumber futures contracts are entered on a risk management
basis, the Company's hedge positions could show a net gain or loss
depending on prevailing market conditions. At September 25, 1999 the
Company had 57 lumber futures contracts outstanding with a total market
value of $1,483,416 and a net unrealized loss of $186,883. These contracts
mature at various times through March of 2000.
25
<PAGE> 26
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
4.1 Second Amendment to the Credit Agreement dated
September 14, 1999 among the Company, Bank Boston, N.A. and
Nationsbank, N.A. as agents, and the lenders set forth
therein.
27.1 Financial data schedule (SEC use only).
(b) Reports on Form 8-K
None.
26
<PAGE> 27
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
WICKES INC.
By: /s/ J. Steven Wilson
--------------------
J. Steven Wilson
Chairman and Chief Executive Officer
Principal Executive and Financial Officer
By: /s/ John M. Lawrence
--------------------
John M. Lawrence
Controller and Principal Accounting
Officer
Date: November 8, 1999
27
Exhibit 4.1
SECOND AMENDMENT TO CREDIT AGREEMENT
------------------------------------
This Second Amendment to Credit Agreement (this "Amendment") is
entered into as of September 9, 1999, among Wickes Inc. (the "Borrower"),
Bank Boston, N.A., as Administrative Agent (the "Agent"), as Issuing Bank
and as a Lender, Bank of America, N.A. (formerly NationsBank, N.A.), as
Documentation Agent and as a Lender, and the other Lenders set forth on the
signature pages hereto.
W I T N E S S E T H
WHEREAS, the parties hereto are parties to that certain Credit
Agreement dated as of February 17, 1999 (as previously amended, the "Credit
Agreement"; capitalized terms used herein and not otherwise defined herein
shall have the meanings ascribed to such terms in the Credit Agreement);
WHEREAS, the Borrower has requested that the Credit Agreement be
amended in certain respects.
NOW, THEREFORE, in consideration of the mutual agreements,
provisions and covenants contained herein, the parties hereto agree as
follows:
1. Amendments to Credit Agreement. Subject to the satisfaction
of the conditions set forth in Section 2 below, the Credit Agreement is
amended as follows:
(a) The definition of "Commitment" in Section 1.1 of the Credit
Agreement is amended to read as follows:
Commitment of any Lender shall mean (a) for any date
from and including May 15 of each year to and including
November 15 of such year, such Lender's Seasonal
Commitment, and (b) for any date from and including
November 16 of any year to and including May 14 of the
following year, such Lender's Non-Seasonal Commitment.
(b) The definition of "Majority Lenders" in Section 1.1 of the
Credit Agreement is amended to read as follows:
Majority Lenders shall mean, at any time, those Lenders
(i) then owed or holding in the aggregate at least
$102,000,000 of Seasonal Commitments or (ii) if the
Commitments are terminated, those Lenders then owed or
holding in the aggregate at least fifty-one percent
(51%) of the outstanding principal amount of Revolving
Loans (or if the Commitments are terminated and no
Revolving Loans are outstanding, those Lenders then
holding at least fifty-one percent (51%) of the
aggregate participation interests in Letters of Credit
then outstanding).
(c) Second 1.1 of the Credit Agreement is amended to add the
following defined terms in proper alphabetical order:
Non-Seasonal Commitment of any Lender shall mean the
amount set forth opposite such Lender's name on Annex
I, as such Annex may be amended from time to time,
under the heading "Non-Seasonal Commitment", as such
amount may be reduced from time to time pursuant to the
terms of this Credit Agreement
Required Available Amount means (a) for any date from
and including May 15 of each year to and including
November 15 of such year, $20,000,000 and (b) for any
date from and including November 16 of any year to and
including May 14 of the following year, $15,000,000.
Seasonal Commitment of any Lender shall mean the amount
set forth opposite such Lender's name on Annex I, as
such Annex may be amended from time to time, under the
heading "Seasonal Commitment", as such amount may be
reduced from time to time pursuant to the terms of this
Credit Agreement.
(d) The definition of "Total Commitments" in Section 1.1 of the
Credit Agreement is amended to read as follows:
Total Commitments shall mean the Commitments of all the
Lenders, which shall not exceed (a) $200,000,000 for any
date from and including May 15 of each year to and including
November 15 of such year, and (b) $160,000,000 for any date
from and including November 16 of any year to and including
May 14 of the following year.
(e) Section 2.4(a) of the Credit Agreement is amended by adding
the following sentence at the end thereof:
The amount of Revolving Loans and the amount of each
Lender's Proportionate Share of Revolving Loans shall also
be computed on each of May 14 and November 15 of each year
(which dates shall also be Settlement Dates), to take into
account the increase, or decrease, of each Lender's
Commitment on such date, and each Lender's Proportionate
Share of Revolving Loans shall be adjusted upward or
downward, as applicable, on each such Settlement Date.
(f) Section 8.1 of the Credit Agreement is amended by deleting
"$15,000,000" and inserting in its place "the Required Available Amount".
(g) Annex I is amended and restated to read as set forth on
Annex I attached hereto.
2. Conditions. The effectiveness of this Amendment is
conditioned on the prior satisfaction of the following conditions:
(a) Borrower and each other Person listed on the signature pages
hereto shall have executed and delivered a counterpart of this Amendment to
the Agent;
(b) Agent shall have received resolutions of the board of
directors of Borrower regarding the contents of this Amendment (certified
by Borrower's secretary), an opinion of counsel to Borrower regarding the
contents of this Amendment and a consent of each guarantor of the
Obligations, all in form and substance satisfactory to Agent;
(c) Each Lender having a Seasonal Commitment in excess of such
Lender's Non-Seasonal Commitment shall have received an amended and
restated Revolving Note to reflect such Lender's additional Seasonal
Commitment; and
(d) No Default or Event of Default shall exist or will be caused
by the consummation of the transactions contemplated hereby.
3. Miscellaneous.
(a) Governing Law. This Amendment shall be a contract made
under and governed by the internal laws of the State of Massachusetts.
(b) Counterparts. This Amendment may be executed in any number
of counterparts, and by the parties hereto on the same or separate
counterparts, and each such counterpart, when executed and delivered, shall
be deemed to be an original, but all such counterparts shall together
constitute one and the same Amendment.
(c) Reference to Credit Agreement. Each reference in the Credit
Agreement to "this Agreement," "hereunder," "hereof," "herein" or words of
like import, and each reference to the Credit Agreement in any other Credit
Documents, or other agreements, documents or other instruments executed and
delivered pursuant to the Credit Agreement, shall mean and be a reference
to the Credit Agreement, as amended by this Amendment.
(d) Costs and Expenses. The Borrower agrees to pay on demand
all costs and expenses (including the reasonable fees and disbursements of
counsel and other professionals) paid or incurred by the Agent in
connection with this Amendment.
IN WITNESS WHEREOF, the parties hereto have caused this Credit
Agreement to be duly executed and delivered by their duly authorized
officers as of the day and year first above written.
BORROWER:
WICKES INC.,
a Delaware corporation
By /s/ John Lawrence
-------------------
Its Assistant Vice President
-------------------------
AGENT:
BANKBOSTON, N.A.,
as Agent
By /s/ Michael J. McDermott
-------------------------
Its Managing Director
-------------------------
DOCUMENTATION AGENT:
BANK OF AMERICA, N.A.
(formerly NationsBank, N.A.),
as Documentation Agent
By /s/ R.J. Walker
-----------------
Its Senior Vice President
-----------------------
ISSUING BANK:
BANKBOSTON, N.A.
By /s/ Michael J. McDermott
-------------------------
Its Managing Director
-------------------------
LENDERS:
BANKBOSTON, N.A.
By /s/ Michael J. McDermott
--------------------------
Its Managing Director
--------------------------
FOOTHILL CAPITAL CORPORATION
By /s/ Todd Nakamoto
-------------------------
Its Vice President
-------------------------
BANK OF AMERICA, N.A.
(formerly NationsBank, N.A.)
By /s/ R.J. Walker
-------------------------
Its Senior Vice President
-------------------------
LASALLE BANK NATIONAL ASSOCIATION
By /s/ John Mostafi
-------------------------
Its Senior Vice President
-------------------------
THE CIT GROUP/BUSINESS CREDIT, INC.
By /s/ Bond Harberts
-------------------------
Its Assistant Vice President
-------------------------
FLEET CAPITAL CORPORATION
By /s/ Art Pesavento
-------------------------
Its Vice President
-------------------------
CONGRESS FINANCIAL CORPORATION
(CENTRAL)
By /s/ Brett Mook
-------------------------
Its Vice President
-------------------------
AMERICAN NATIONAL BANK AND TRUST
COMPANY OF CHICAGO
By /s/ Donna H. Evans
-------------------------
Its Vice President
-------------------------
ANNEX I
LENDERS AND COMMITMENT AMOUNTS
Non-Seasonal Seasonal
Name and Address of Lender Commitment Commitment
-------------------------- ----------- ----------
BANKBOSTON, N.A. $30,000,000 $30,000,000
Domestic Lending Office:
100 Federal Street
Boston, Massachusetts 02110
Eurodollar Lending Office:
100 Federal Street
Boston, Massachusetts 02110
Address for Notices:
BankBoston, N.A.
Asset Based Finance
100 Federal Street
Mail Stop MA BOS 01-09-08
Boston, Massachusetts 02110
Attention: Mark J. Forti
Facsimile: (617) 434-2309
Non-Seasonal Seasonal
Name and Address of Lender Commitment Commitment
-------------------------- ---------- ----------
FOOTHILL CAPITAL CORPORATION $25,000,000 $30,000,000
Domestic Lending Office:
11111 Santa Monica Boulevard
Suite 1500
Los Angeles, California 90025
Eurodollar Lending Office:
11111 Santa Monica Boulevard
Suite 1500
Los Angeles, California 90025
Address for Notices:
Foothill Capital Corporation
11111 Santa Monica Boulevard
Suite 1500
Los Angeles, California 90025
Attention: Michael Baronowski
Facsimile: (310) 479-8952
Non-Seasonal Seasonal
Name and Address of Lender Commitment Commitment
-------------------------- ---------- ----------
BANK OF AMERICA, N.A. (formerly $25,000,000 $33,332,000
NationsBank, N.A.)
Domestic Lending Office:
600 Peachtree Street
13th Floor
Atlanta, Georgia 30308
Eurodollar Lending Office:
600 Peachtree Street
13th Floor
Atlanta, Georgia 30308
Address for Notices:
NationsBank, N.A.
600 Peachtree Street
13th Floor
Atlanta, Georgia 30308
Attention: Robert J. Walker
Facsimile: (404) 607-6281
Non-Seasonal Seasonal
Name and Address of Lender Commitment Commitment
-------------------------- ---------- ----------
LASALLE BANK NATIONAL ASSOCIATION $17,500,000 $24,167,000
(formerly LaSalle National Bank)
Domestic Lending Office:
135 South LaSalle Street
Chicago, Illinois 60603
Eurodollar Lending Office:
135 South LaSalle Street
Chicago, Illinois 60603
Address for Notices:
LaSalle National Bank
135 South LaSalle Street
Chicago, Illinois 60603
Attention: Christopher G. Clifford
Facsimile: (312) 904-6450
Non-Seasonal Seasonal
Name and Address of Lender Commitment Commitment
-------------------------- ---------- ----------
THE CIT GROUP/BUSINESS CREDIT, INC. $17,500,000 $24,167,000
Domestic Lending Office:
10 South LaSalle Street
22nd Floor
Chicago, Illinois 60603
Eurodollar Lending Office:
10 South LaSalle Street
22nd Floor
Chicago, Illinois 60603
Address for Notices:
The CIT Group/Business Credit, Inc.
10 South LaSalle Street
22nd Floor
Chicago, Illinois 60603
Attention: Martha Gay
Facsimile: (312) 443-0139
Non-Seasonal Seasonal
Name and Address of Lender Commitment Commitment
-------------------------- ---------- ----------
FLEET CAPITAL CORPORATION $15,000,000 $15,000,000
Domestic Lending Office:
20800 Swenson Drive
Suite 350
Waukesha, Wisconsin 53186
Eurodollar Lending Office:
20800 Swenson Drive
Suite 350
Waukesha, Wisconsin 53186
Address for Notices:
Fleet Capital Corporation
One North Franklin
Suite 3600
Chicago, Illinois 60606
Attention: Arthur Pesavento
Facsimile: (312) 346-6360
Non-Seasonal Seasonal
Name and Address of Lender Commitment Commitment
-------------------------- ---------- ----------
CONGRESS FINANCIAL CORPORATION $15,000,000 $21,667,000
(CENTRAL)
Domestic Lending Office:
150 South Wacker Drive
Suite 2200
Chicago, Illinois 60603
Eurodollar Lending Office:
150 South Wacker Drive
Suite 2200
Chicago, Illinois 60603
Address for Notices:
Congress Financial Corporation
(Central)
150 South Wacker Drive
Suite 2200
Chicago, Illinois 60603
Attention: Brett Mook
Facsimile: (312) 332-0424
Non-Seasonal Seasonal
Name and Address of Lender Commitment Commitment
-------------------------- ---------- ----------
AMERICAN NATIONAL BANK AND TRUST $15,000,000 $21,667,000
COMPANY OF CHICAGO
Domestic Lending Office:
120 South LaSalle Street
Chicago, Illinois 60603
Eurodollar Lending Office:
120 South LaSalle Street
Chicago, Illinois 60603
Address for Notices:
American National Bank and Trust
Company of Chicago
120 South LaSalle Street
Chicago, Illinois 60603
Attention: Donna Evans
Facsimile: (312) 661-6929
Total Commitments: $160,000,000 $200,000,000
CONSENT AND REAFFIRMATION
Each of the undersigned (each, a "Guarantor") hereby (i)
acknowledges receipt of a copy of the foregoing Second Amendment to Credit
Agreement; (ii) consents to Borrower's execution and delivery thereof;
(iii) agrees to be bound thereby; (iv) affirms that nothing contained
therein shall modify in any respect whatsoever its guaranty of the
obligations of Borrower pursuant to the terms of a certain Corporate
Guaranty dated February 17, 1999 (the "Guaranty"); and (v) reaffirms that
each of the Guaranty and the other Credit Documents executed by it is and
shall continue to remain in full force and effect. Although each Guarantor
has been informed of the matters set forth herein and has acknowledged and
agreed to same, each Guarantor understands that Agent and Lenders have no
obligation to inform any Guarantor of such matters in the future or to seek
any Guarantor's acknowledgment or agreement to future amendments or
waivers, and nothing herein shall create such a duty.
IN WITNESS WHEREOF, each of the undersigned has executed this
Consent and Reaffirmation on and as of the date of such Amendment.
LUMBER TRADEMARK COMPANY
By /s/ James A. Hopwood
--------------------
Its Vice President
--------------------
GLC DIVISION INC.
By /s/ James A. Hopwood
--------------------
Its Vice President
--------------------
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SEPTEMBER 25, 1999 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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