SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File
For the Quarterly Period Ended June 24, 2000 Number 1-14967
------------- -------
WICKES INC.
-------------------
(Exact name of registrant as specified in its charter)
Delaware 36-3554758
------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
706 North Deerpath Drive, Vernon Hills, Illinois 60061
------------------------------------------------ -----
(Address of principal executive offices) (Zip Code)
847-367-3400
------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months, and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ----
As of July 31, 2000, the Registrant had 8,247,829 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
June 24, 2000 (Unaudited), December 25, 1999 and
June 26, 1999 (Unaudited) 3
Condensed Consolidated Statements of Operations (Unaudited)-
For the three months and six months ended
June 24, 2000 and June 26, 1999 4
Condensed Consolidated Statements of Cash Flows (Unaudited)-
For the six months ended June 24, 2000 and
June 26, 1999 5
Notes to Condensed Consolidated
Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 23
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 24
</TABLE>
2
<PAGE>3
WICKES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands except share data)
<TABLE>
<CAPTION>
June 24, December 25, June 26,
2000 1999 1999
------ ------ ------
ASSETS (UNAUDITED) (UNAUDITED)
<S>
Current assets: <C> <C> <C>
Cash $ 355 $ 450 $ 510
Accounts receivable, less allowance for doubtful
accounts of $3,173 in 2000, $4,105 in December 1999
and $4,128 in June 1999. 112,181 110,352 126,566
Notes receivable from affiliate 214 481 835
Inventory 137,085 120,705 133,637
Deferred tax asset 8,003 7,184 8,857
Prepaid expenses 3,820 2,663 2,940
------- ------- -------
Total current assets 261,658 241,835 273,345
Notes Receivable from affiliate 265 - -
Property, plant and equipment, net 53,301 50,599 48,591
Trademark (net of accumulated amortization of
$10,830 in 2000, $10,718 in December 1999
and $10,607 in June 1999) 6,190 6,301 6,412
Deferred tax asset 14,695 14,695 17,482
Rental equipment (net of accumulated depreciation
of $1,278 in 2000, $1,010 in December 1999
and $804 in June 1999) 2,194 1,981 2,032
Other assets (net of accumulated amortization of
$12,439 in 2000, $11,463 in December 1999
and $10,414 in June 1999) 17,590 19,225 15,334
-------- -------- --------
Total assets $355,893 $334,636 $363,196
======== ======== ========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ - $ - $ 4
Accounts payable 53,941 53,817 72,616
Accrued liabilities 19,235 25,495 20,206
------- ------- -------
Total current liabilities 73,176 79,312 92,826
Long-term debt, less current maturities 249,847 220,742 243,856
Other long-term liabilities 3,604 3,763 3,024
Commitments and contingencies (Note 3)
Stockholders' equity:
Preferred stock (no shares issued)
Common stock, $0.01 par (8,247,329, 8,224,888
and 8,214,776 shares issued and
outstanding, respectively) 82 82 82
Additional paid-in capital 86,984 86,870 86,818
Accumulated deficit (57,800) (56,133) (63,410)
------- ------- -------
Total stockholders' equity 29,266 30,819 23,490
------- ------- -------
Total liabilities & stockholders' equity $355,893 $334,636 $363,196
======= ======= =======
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
<page 4>
WICKES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands except share and per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ------------------
June 24, June 26, June 24, June 26,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 279,703 $ 288,764 $ 495,479 $ 479,934
Cost of sales 210,386 222,425 372,467 367,628
--------- -------- --------- ---------
Gross profit 69,317 66,339 123,012 112,306
Selling, general and administrative expenses 59,290 54,810 110,746 99,480
Depreciation, goodwill and trademark amortization 1,827 1,616 3,588 3,048
Provision for doubtful accounts 71 (42) 503 406
Other operating income (917) (2,187) (1,703) (3,043)
--------- -------- --------- ---------
60,271 54,197 113,134 99,891
Income from operations 9,046 12,142 9,878 12,415
Interest expense 6,273 5,958 12,013 11,260
--------- -------- --------- ---------
Income (loss) before income taxes 2,773 6,184 (2,135) 1,155
Provision (benefit) for income taxes 1,241 2,597 (468) 844
--------- -------- --------- ---------
Net income (loss) $ 1,532 $ 3,587 $ (1,667) $ 311
========= ========= ========= =========
Basic income (loss) per common share (Note 5) $ 0.19 $ 0.44 $ (0.20) $ 0.04
========= ========= ========= =========
Diluted income (loss) per common share (Note 5) $ 0.18 $ 0.43 $ 0.04
========= ========= =========
Weighted average common shares - for basic 8,246,769 8,214,397 8,240,101 8,212,288
========= ========= ========= =========
Weighted average common shares - for diluted 8,506,004 8,266,817 8,263,784
========= ========= =========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
<PAGE>5
WICKES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
-----------------
June 24, June 26,
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (1,667) $ 311
Adjustments to reconcile net (loss) income to
net cash used in operating activities:
Depreciation expense 3,193 2,779
Amortization of trademark 111 111
Amortization of goodwill 284 158
Amortization of deferred financing costs 667 729
Provision for doubtful accounts 503 406
Gain on sale of assets (64) (1,427)
Deferred tax benefit (819) -
Changes in assets and liabilities:
Increase in accounts receivable (2,332) (31,908)
Increase in inventory (16,380) (29,371)
(Decrease) increase in accounts payable and accrued liabilities (6,295) 18,139
Increase in prepaids and other assets (1,286) (2,898)
-------- --------
NET CASH USED IN OPERATING ACTIVITIES (24,085) (42,971)
-------- --------
Cash flows from investing activities:
Decrease in notes receivable 2 260
Purchases of property, plant and equipment (4,631) (4,208)
Payments for acquisitions (800) (7,214)
Proceeds from sales of property, plant and equipment 200 2,538
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (5,229) (8,624)
-------- --------
Cash flows from financing activities:
Net borrowing under revolving line of credit 29,105 51,895
Reductions of notes payable - (12)
Net proceeds from issuance of common stock 114 31
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 29,219 51,914
-------- --------
NET (DECREASE) INCREASE IN CASH (95) 319
Cash at beginning of period 450 191
-------- --------
CASH AT END OF PERIOD $ 355 $ 510
======= ========
Supplemental schedule of cash flow information:
Interest paid $ 11,613 $ 9,947
Income taxes paid $ 759 $ 577
Supplemental schedule of non-cash investing and financing activities:
The Company purchased net assets in conjunction with acquisitions
made during the period. In connection with these acquisitions,
liabilities were assumed as follows:
Assets acquired $ 800 $ 7,355
Liabilities assumed $ - $ 141
Cash paid $ 800 $ 7,214
</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
------------------------------------------
Basis of Financial Statement Presentation
-----------------------------------------
The condensed consolidated financial statements present the results of
operations, financial position, and cash flows of Wickes Inc. and its
consolidated subsidiaries (the "Company"). The condensed consolidated
financial statements are prepared in accordance with generally accepted
accounting principles, which require management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of 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 those
estimates.
The condensed consolidated financial statements should be read in
conjunction with the Company's consolidated financial statements and notes
thereto included in the Company's Annual Report on Form 10-K (the "Form 10-
K") for the fiscal year ended December 25, 1999. The condensed
consolidated financial statements reflect all adjustments (consisting only
of normal recurring adjustments) which are, in the opinion of management,
necessary for the fair statement of the results for the interim period.
The results of operations for interim periods are not necessarily
indicative of results for the entire year.
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, principally in the
Midwest, Northeast, and Southern United States. All information required
by SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information", is included in the Company's financial statements.
Share Data
----------
The Company issued 3,508 shares of Common Stock to members of its board
of directors as compensation during the six-months ended June 24, 2000. In
addition, 18,933 shares of common stock were issued upon exercise of
employee stock options.
Reclassifications and Eliminations
----------------------------------
Certain reclassifications have been made to prior year amounts to
conform to the current presentation. All material intercompany balances
and transactions have been eliminated.
6
<PAGE>7
WICKES INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2. LONG-TERM DEBT
--------------
Long-term debt is comprised of the following at June 24, 2000 (in
thousands):
<TABLE>
<S> <C>
Revolving line of credit $ 149,847
Senior subordinated notes 100,000
Less current maturities (0)
---------
Total long-term debt $ 249,847
=========
</TABLE>
Under the revolving line of credit, the Company may borrow against
certain levels of accounts receivable and inventory. The unused
availability at June 24, 2000 was $22.1 million.
3. COMMITMENTS AND CONTINGENCIES
-----------------------------
As of June 24, 2000, the Company had accrued approximately $131,000
(included in accrued liabilities at June 24, 2000) 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, or 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
five years. The Company currently has reserved approximately $43,000 for
estimated clean up costs at 11 of its locations.
In prior periods, the Company had been identified as having used two
landfills which are now Superfund clean up sites for which requests for
reimbursement of a portion of the clean-up costs were submitted. These
issues have been settled and the Company has been relieved of
responsibility.
7
<PAGE>8
WICKES INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Company is one of many defendants in two multi-plaintiff 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 196 actions, each
seeking unspecified damages, in various Michigan state courts. These
actions are aimed at 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 24 similar actions for
insignificant amounts, and another 224 of these actions have been
dismissed. As of June 24, 2000 none of these suits have made it to trial.
Losses in excess of the amounts accrued as of June 24, 2000 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. Certain of these proceedings
involve potential damages for which the Company's insurance coverage may be
unavailable. While the Company does not believe that any of these
proceedings will have a material adverse effect on the Company's financial
position, annual results of operations or liquidity, there can be no
assurance of this result.
4. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
-----------------------------------------
SFAS 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. In June 1999, SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities-Deferral of the Effective
Date of SFAS No. 133," was issued amending SFAS No. 133 by deferring the
effective date for one year, to fiscal years beginning after June 15, 2000.
The Company currently is evaluating the effects of this pronouncement.
8
<PAGE>9
WICKES INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
5. 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 Six Months Ended
------------------ ----------------
June 24, June 26, June 24, June 26,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Numerators:
Net income (loss)-for basic
and diluted EPS $ 1,532,000 $ 3,587,000 $(1,667,000) $ 311,000
---------- ---------- ---------- ----------
Denominators:
Weighted average common
shares - for basic EPS 8,246,769 8,214,397 8,240,101 8,212,288
Common shares from options 259,235 52,420 0 51,496
---------- ---------- ---------- ----------
Weighted average common
shares - for diluted EPS 8,506,004 8,266,817 8,240,101 8,263,784
---------- ---------- ---------- ----------
</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
236,281 and 415,003 weighted average shares of common stock during the
first half of 2000 and 1999, respectively, were not included in the diluted
EPS as the options' exercise prices were greater than the average market
price.
6. RELATED PARTY TRANSACTIONS
--------------------------
The Company is approximately 37% owned by Riverside Group, Inc.
In March 2000, the Company entered into an agreement with Buildscape,
Inc., an entity controlled by Riverside Group, Inc. and Imagine
Investments, Inc., each of which may be deemed an affiliate of the Company.
Pursuant to this agreement, the Company and Buildscape, Inc. are jointly
conducting a pilot Internet distribution program.
In March 2000, the Company extended the terms of its note receivable
from Riverside Group, Inc. Under the revised terms, all previously accrued
interest was paid by Riverside Group, Inc. to the Company on March 31,
2000. Interest accruing thereafter is to be paid on a quarterly basis. In
addition, repayment of the remaining principal balance was deferred for one
year, with quarterly principal payments commencing on April 1, 2001.
9
<PAGE>10
WICKES INC. AND SUBSIDIARIES
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 fiscal year ended December 25, 1999.
This Discussion and Analysis 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.
Among the factors that could cause actual results to differ materially
include the effects of seasonality and cyclicality; effects of competition;
interest rates and the Company's ability to service and comply with the
terms of its debt; lumber prices; the success of the Company's operational
initiatives; and the outcome of the contingencies discussed in Note 3 of
the Company's Consolidated Financial Statements included elsewhere herein.
INTRODUCTION
Wickes Inc. ("Wickes" or the "Company") is a leading supplier and
manufacturer of building materials in the United States. The Company sells
its products and services primarily to residential and commercial building
professionals, repair and remodeling contractors and, to a lesser extent,
project do-it-yourself consumers involved in major home improvement
projects. At June 24, 2000, the Company operated 101 sales and
distribution facilities in 23 states in the Midwest, Northeast, and South.
In addition, the Company operated 25 component manufacturing facilities, 8
of which are located in sales and distribution facilities, that produce and
distribute roof and floor trusses, framed wall panels, and pre-hung door
units.
The Company's mission is to be the premier provider of building
materials and services and manufacturer of value-added building components
to the professional segments of the building and construction industry.
10
<PAGE>11
The Company focuses on the professional builder and contractor market.
The Company targets five customer groups: the production or volume builder;
the custom builder; the tradesman; the repair and remodeler; and the
commercial developer. Its marketing approach encompasses three channels of
distribution: Major Markets, Conventional Markets, and Wickes Direct.
These channels are supported by the Company's network of building
components manufacturing operations. In Major Markets, the Company serves
the national, regional, and large local builder in larger markets with a
total solutions approach and specialized services. In Conventional
Markets, the Company provides the smaller building professional in less-
populous markets with tailored products and services. Wickes Direct
provides materials flow and logistics management services to commercial
customers. The Company also serves building professionals through its
network of 25 component manufacturing facilities that produce value-added,
wood framed wall panels, roof and floor truss systems, and pre-hung
interior and exterior doors.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the
percentage relationship to net sales of certain expense and income items.
This information includes the results from all sales and distribution and
component manufacturing facilities operated by the Company, including those
closed or sold during the period.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
June 24, June 26, June 24, June 26,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Gross profit 24.8% 23.0% 24.8% 23.4%
Selling, general and
administrative expense 21.2% 19.0% 22.4% 20.7%
Depreciation, goodwill and
trademark amortization 0.7% 0.6% 0.7% 0.6%
Provision for doubtful accounts 0.0% 0.0% 0.1% 0.1%
Other operating income (0.3)% (0.8)% (0.3)% (0.6)%
Income from operations 3.2% 4.2% 2.0% 2.6%
</TABLE>
11
<PAGE>12
Net Earnings
------------
The Company's results of operations historically are affected by, among
other factors, weather conditions, interest rates, lumber prices, housing
starts and other external economic factors. Weather conditions during the
first six months of 2000 were relatively comparable to the prior year.
However, the Company's largest region, the Midwest, experienced extremely
wet conditions in May and June which tends to adversely impact sales. The
second quarter and first half of 2000 showed continuing trends of higher
interest rates, which many builders took as a sign to slow down production
and test demand. As a result of these factors, housing starts for the
second quarter of 2000 were down from the second quarter of 1999 a combined
5.4% in the Midwest and Northeast regions of the United States (5.3% and
5.4%, respectively). The Midwest and Northeast represented approximately
79.0% of the Company's sales in the second quarter of 2000 versus 76.4% in
the comparable period in 1999. When combined with the South, housing
starts for the second quarter of this year were flat in all regions served
by Wickes over the same period last year. On a year-to-date basis, actual
housing starts are relatively comparable to last year. In addition to the
affects of the foregoing, escalating fuel prices and higher interest rates
also have adversely impacted the Company's earnings.
Dimensional lumber and panel products are commodities which cause the
Company's costs to fluctuate with changing market conditions, generally
tracked using the Random Lengths Framing Composite Average and the Random
Lengths Panel Index. Increases in lumber prices ("lumber inflation")
generally are passed on to the customer in the short term, with certain lag
effects, or are fixed in the futures market for a small percentage of long-
term sales contracts. The converse is true in periods of decreasing lumber
prices ("lumber deflation"). In both cases, competition generally dictates
that the Company maintains its margin on a percentage basis. Sales and
gross profit generally benefit from lumber inflation and are adversely
impacted by lumber deflation.
Net income for the three months ended June 24, 2000 was $1.5 million
compared with a net income of $3.6 million for the three months ended June
26, 1999. The decrease in net income for the three-month period primarily
is the result of increased selling, general and administrative ("SG&A")
expenses, interest and depreciation expenses, as well as a reduction in
other operating income, all of which offset higher gross margin.
Net loss for the first six months of 2000 was $1.7 million compared with
net income of $311,000 for the first six months of 1999. The decrease in
net income for the six-month period primarily is the result of increases in
SG&A, depreciation and interest expenses, as well as a reduction in other
operating income, all of which offset higher gross margin.
12
<PAGE>13
Three Months Ended June 24, 2000 Compared
-----------------------------------------
with the Three Months Ended June 26, 1999
-----------------------------------------
Net Sales
---------
Net sales for the second quarter of 2000 decreased 3.1% to $279.7
million from $288.8 million for the second quarter of 1999. Same store
sales decreased 3.4% compared with the same period last year. Same store
sales to the Company's primary customers, building professionals, decreased
by 2.0% when compared with the second quarter of 1999. Consumer same-store
sales decreased by 8.1% for the quarter. As of June 24, 2000 the Company
operated 101 sales and distribution facilities, the same number it operated
during the second quarter of 1999.
The Company estimates that lumber deflation decreased total sales for
the second quarter of 2000 by approximately $20.7 million versus the
comparable period in 1999. This estimate is based on 2000 unit volume at
the corresponding 1999 estimated prices, determined using two indices
indicative of lumber price variance from period to period. Evidencing
lumber deflation for the period, the Random Lengths Framing Composite
Average decreased an average of 19.1% and the Random Lengths Panel Index
declined an average of 17.7%.
Sales for the second quarter of 2000 were positively impacted by
investments in its target major markets and by new initiatives such as Tool
Rental and Installed Programs. However, these were offset by the effects
of lumber deflation on sales. Same store sales decreased 6.5% in the
Company's nine target major markets, primarily driven by lumber deflation.
Sales to building professionals as a percentage of total sales increased
to 88.0% in the second quarter of 2000 compared with 86.9% in 1999. Lumber
and building materials accounted for 87.2% of total sales in the second
quarter of 2000 compared with 88.1% in 1999.
Products that exhibited the greatest change in sales for the quarter
ended June 24, 2000 versus the comparable quarter in the prior year were
lumber and plywood (down 9.8%), panels and trusses (up 4.0%), drywall (down
15.4%), roofing and roofing materials (down 9.2%), and treated wood (down
7.0%).
Gross Profit
------------
Gross profit increased to $69.3 million in the second quarter of 2000
from $66.3 million for the second quarter of 1999, a 4.5% increase. Gross
profit as a percentage of sales increased to 24.8% for the second quarter
13
<PAGE>14
of 2000 from 23.0% in 1999. The increase in gross profit as a percentage
of sales resulted from increased sales and gross profit margins on
internally manufactured products, the effects of lumber deflation, improved
buying leverage due to volume, and the expansion of the Company's installed
sales programs.
For the quarter, sales of internally manufactured building components
increased to 48.9% of total distributed building components from 47.2% in
the prior year. The dollar value of internally manufactured building
components increased 6.8%, despite the effects of lumber deflation. The
Company believes that while the sales effect of lumber deflation did
decrease the dollar value of gross profit by approximately $3.9 million in
the quarter, gross profit as a percent of sales increased due to
significant and rapid lumber cost declines over the quarter. Commodity
lumber accounted for 39.5% of sales in the second quarter of 2000, compared
with 41.8% for the second quarter of 1999. The gross margin for commodity
lumber improved 2.0% for the quarter ended June 24, 2000 versus the same
period last year.
Selling, General and Administrative Expense ("SG&A")
----------------------------------------------------
SG&A expense increased to 21.2% of net sales in the second quarter of
2000 compared with 19.0% of net sales in the second quarter of 1999. The
$4.5 million increase primarily is attributable to increases in salaries,
wages and benefits, as well as delivery expense. On an overall basis, the
Company's initiative to increase its production of internally manufactured
building components and to expand and develop installed programs impacted
each of these categories.
Total salaries, wages and benefits for the second quarter of 2000
increased approximately $2.5 million or 6.6% over the second quarter of
1999. On a combined basis, sales salaries, commissions, trucking labor and
sales center labor exhibited an increase of approximately $1.3 million or
6.3% over the comparable period last year. This mainly was driven by sales
volume and product mix. Manufacturing labor grew by approximately $274,000
or 10.3%. This increase is reflective of the Company's strategic objective
to increase the percentage of internally manufactured building components,
which has the overall effect of increasing margins and profitability. In
the second quarter of 2000, the Company increased production of building
components to approximately 48.9% of total manufactured building components
distributed up from approximately 47.2% in the comparable period last year.
Management and supervisory salaries (including administrative salaries)
increased approximately $263,000 or 3.2% over the prior year as a result of
normal annual increases as well as support for new initiatives. Employee
taxes and benefits relating to the above increases in salaries and wages
comprised an additional $645,000 or 10.1% increase over the prior year. As
of June 24, 2000, the Company had 4,412 full time and part time employees,
an increase of 0.7% from June 26, 1999.
14
<PAGE>15
Delivery expense for the quarter increased approximately $1.0 million
or 29.6% over the prior year. The increase was driven by various Company
initiatives and by the significant increase in fuel prices experienced
during the second quarter of 2000. With regard to initiatives, internally
manufactured building component programs include a delivery expense factor.
When the Company purchases these components from external sources, the
vendor generally is responsible for site delivery. This is included in
their pricing and becomes part of the Company's cost of sales. For
internally manufactured building components, Wickes bears the cost of
delivery. Additionally, the expansion of installed programs, such as
insulation, siding and gutters, has caused the Company to incur additional
delivery expense through the trucks involved in these programs. Wickes has
incurred additional vehicle repair and maintenance, lease costs, fuel and
other costs of operation for both of these programs. Finally, the Company
estimates that the dramatic increases in fuel costs nationwide in the
second quarter of 2000 cost Wickes approximately $480,000 in additional
fuel expense versus the second quarter last year.
Depreciation, Goodwill and Trademark Amortization
-------------------------------------------------
Depreciation, goodwill and trademark amortization increased to $1.8
million for the second quarter of 2000 compared with $1.6 million for the
same period in 1999. This increase is primarily due to depreciation on
three component manufacturing facilities acquired since the second quarter
of 1999 as well as capital additions to support the Company's major market
program and manufacturing of building components.
Provision for Doubtful Accounts
-------------------------------
The provision for doubtful accounts was an expense of $71,000 in the
second quarter of 2000, compared with a benefit of $42,000 in the second
quarter of 1999.
Other Operating Income
----------------------
Other operating income for the second quarter of 2000 was $917,000
compared with $2.2 million for the second quarter of 1999. During the
second quarter of 1999 the Company sold four pieces of excess real estate
and recorded gains of $1.4 million. There were no sales of excess real
estate in the second quarter of 2000. The Company also recorded $347,000
in expenses related to casualty losses during the second quarter of 1999,
including a fire at one of its component manufacturing facilities.
15
<PAGE>16
Interest Expense
----------------
In the second quarter of 2000 interest expense increased to $6.3 million
from $6.0 million during the second quarter of 1999. This increase results
primarily from an increase in average total long-term debt of approximately
$5.8 million, as well as a 22 basis point increase in the Company's
effective borrowing costs. Approximately 90% of the Company's second
quarter average borrowings on its revolving credit facility were LIBOR-
based.
Provision for Income Taxes
--------------------------
The Company recorded income tax expense of $1.2 million for the second
quarter of 2000 compared with expense of $2.6 million in the second quarter
of 1999. An effective federal and state income tax rate of 38.6% was used
to calculate income taxes for the second quarter of 2000, compared with an
effective rate of 39.1% for the second quarter of 1999. In addition to the
effective income tax rate, state franchise taxes of $280,000 and $232,000
for the second quarter of 2000 and 1999, respectively, were calculated
separately and are included in the provision reported.
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 1997 and 1998 management
believes that it is more likely than not that the Company will receive full
benefit of its net 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.
16
<PAGE>17
Six Months Ended June 24, 2000 Compared
---------------------------------------
with the Six Months Ended June 26, 1999
---------------------------------------
Net Sales
---------
Net sales for the first six months of 2000 increased 3.2% to $495.5
million from $479.9 million for the first six months of 1999. Same store
sales increased 2.4% compared with the same period last year. Same store
sales to the Company's primary customers, building professionals, increased
4.7% when compared with the first six months of 1999. Consumer same store
sales decreased 6.5% for the same period. For the six months ended June 24,
2000 the Company operated 101 sales and distribution facilities, the same
number it operated during the first six months of 1999.
The Company estimates that the net effect of first quarter lumber
inflation and second quarter lumber deflation decreased total sales by
approximately $18.4 million compared with the 1999 comparable period.
The Company believes that the sales increase for the six months ended
June 24, 2000 primarily results from investments in its target major
markets and by new initiatives such as Tool Rental and Installed Sales.
However, these were offset by the net effects of lumber deflation on sales.
Same store sales in the Company's nine target major markets for this period
increased 3.4% over the same period last year, with first quarter gains
partially offset by second quarter lumber deflation.
Housing starts in the first six months of 2000 were relatively flat
(down .7%), nationally, in comparison to 1999. In the Company's primary
geographical markets, the Midwest and Northeast, housing starts were down
1.1% over the comparable period last year, while in the South housing
starts were up 0.6%.
Sales to building professionals as a percentage of total sales increased
to 89.2% in the first half of 2000 compared with 87.9% in 1999. Lumber and
building materials accounted for 86.8% of total sales in the first half of
2000 compared with 87.5% in 1999.
Products that exhibited the greatest change in sales for the six months
ended June 24, 2000 versus the comparable period in the prior year were
panels and trusses (up 10.7%), drywall (down 4.6%), roofing and roofing
materials (down 8.8%), treated wood (down 1.2%), windows and doors (up
7.6%), and lumber and plywood (down 0.6%).
17
<PAGE>18
Gross Profit
------------
Gross profit for the first six months of 2000 increased to $123.0
million from $112.3 million for the first six months of 1999, a 9.5%
increase. Gross profit as a percentage of sales increased to 24.8% for the
first six months of 2000 from 23.4% in 1999. The increase in gross profit
as a percentage of sales results from increased sales and gross profit
margins on internally manufactured products, the effects of lumber prices,
improved buying leverage due to increased volume, and the expansion of the
Company's installed sales programs.
For the six months ended June 24, 2000, sales of internally manufactured
building components increased to 50.2% of total distributed building
components from 46.5% in the prior year. The dollar value of internally
manufactured building components increased 21.3%. During the first six
months of Fiscal 2000, the Company experienced both lumber inflation and
deflation. The net effect of lumber prices on sales for the six-month
period was a reduction of approximately $18.4 million, which had the effect
of reducing gross margin by approximately $3.4 million. Commodity lumber
accounted for 38.9% of sales in the first six months of 2000, compared with
40.4% in the first six months of 1999. The gross margin on commodity
lumber improved 1.3% for the six months ended June 24, 2000 versus the same
period last year.
Selling, General and Administrative Expense
-------------------------------------------
SG&A expense increased to 22.4% of net sales in the first six months of
2000 compared with 20.7% of net sales in the first six months of 1999. The
$11.3 million increase primarily is attributable to increases in salaries,
wages and benefits; delivery expense; and travel. On an overall basis, the
Company's initiative to increase its production of internally manufactured
building components and to expand and develop installed programs impacted
each of these categories.
Total salaries, wages and benefits for the first six months of 2000
increased approximately $7.4 million or 10.7% over the first six months of
1999. On a combined basis, sales salaries, commissions, trucking labor and
sales center labor increased approximately $3.7 million or 10.0% over the
comparable period last year. This mainly was driven by sales volume and
product mix. Manufacturing labor grew by approximately $894,000 or 19.9%.
This increase is reflective of the Company's strategic objective to
increase the percentage of internally manufactured building components,
which has the overall effect of increasing margins and profitability. In
the first half of 2000, the Company increased production of building
components to approximately 50.2% of total sales of manufactured building
components from approximately 46.5% in the comparable period last year.
Management and supervisory salaries (including administrative salaries)
increased approximately $1.3 million or 9.0% over the prior year as a
result of a normal annual increases and support for new initiatives.
18
<PAGE>19
Employee taxes and benefits relating to the above increases in salaries and
wages comprised an additional $1.3 million or 10.1% increase over the prior
year. As of June 24, 2000, the Company had 4,412 full time and part time
employees, an increase of 0.7% from June 26, 1999.
Delivery expense for the six months ended June 24, 2000 increased
approximately $1.8 million or 29.0% over the same period in 1999. The
increase was driven by various initiatives and by the increase in fuel
prices which began in the first quarter of 2000 and significantly escalated
during the second quarter. The expansion of installed programs, such as
insulation, siding and gutters, has caused the Company to incur additional
delivery expense through the trucks involved in these programs. Wickes has
incurred additional vehicle repair and maintenance, lease costs, fuel and
other costs of operation as a result of these initiatives.
Travel expense increased approximately $600,000 or 28.3% in the first
half of 2000 versus the comparable period last year. This travel reflects
efforts to increase sales and support new initiatives.
Depreciation, Goodwill and Trademark Amortization
-------------------------------------------------
Depreciation, goodwill and trademark amortization increased to $3.6
million for the first six months of 2000 compared with $3.0 million for the
same period in 1999. This increase is primarily due to depreciation on
three component manufacturing facilities acquired since the first quarter
of 1999 as well as capital additions as a result of the Company's major
market program and manufacturing of building components.
Provision for Doubtful Accounts
-------------------------------
The provision for doubtful accounts increased to $503,000 for the first
six months of 2000 from $406,000 in the first six months of 1999.
Other Operating Income
----------------------
Other operating income for the first six months of 2000 was $1.7 million
compared with $3.0 million for the first six months of 1999. In the first
six months of 2000 and 1999, the Company recorded gains of approximately
$0.2 million and $1.6 million respectively on the sale of excess real
estate and equipment. In 1999, the Company recorded costs of $269,000 for
carrying costs of closed operations and $317,000 for casualty losses,
including a fire at one of its component manufacturing facilities.
19
<PAGE>20
Interest Expense
----------------
In the first six months of 2000 interest expense increased to $12.0
million from $11.3 million during the first six months of 1999, resulting
primarily from an increase in average total long-term debt of approximately
$14.1 million. Approximately 80% of the Company's average borrowings on
its revolving credit facility, during the first six months of 2000, were
LIBOR-based.
Provision for Income Taxes
--------------------------
The Company recorded income tax benefit of $468,000 for the first six
months of 2000 compared with a provision of $844,000 in the first six
months of 1999. An effective federal and state income tax rate of 38.8%
was used to calculate income taxes for the first six months of 2000,
compared with an effective rate of 39.1% for the first six months of 1999.
In addition to the effective income tax rate, state franchise taxes of
$466,000 and $517,000 for the first six months of 2000 and 1999,
respectively, were calculated separately and are included in the provision
reported.
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
currently is evaluating the effects of this pronouncement.
Year 2000
---------
To date the Company has not experienced any significant Year 2000
problems. The Year 2000 problem related to the possible inability of
certain computer programs and computer hardware to properly handle dates
after December 31, 1999. In response to the Year 2000 issue, the Company
initiated a plan in early 1997 to identify, evaluate and implement changes
to its existing computerized business systems. The plan also included
steps to ensure the Company was not at risk for problems that may occur at
its suppliers or customers.
The Company's total cost for the Year 2000 project was estimated at
$2.7 million. Through June 2000, approximately $2.6 million has been
spent, of which approximately $0.9 million is for the replacement of
systems and equipment which was accelerated due to the Year 2000 problem
and has been capitalized over the systems' estimated useful lives.
20
<PAGE>21
Liquidity and Capital Resources
-------------------------------
The Company's principal sources of working capital and liquidity are
earnings and borrowings under its revolving credit facility. The Company's
primary need for capital resources is to finance inventory and accounts
receivable.
During the first six months of 2000 net cash used in operating
activities was $24.1 million, $18.9 million less than the $43.0 million
used in the first six months of 1999. The first six months of the year
historically have generated negative cash flows from operating activities.
With the peak building season historically occurring in the second and
third quarters, the Company normally experiences increases in its inventory
levels during the first quarter to meet the anticipated increase in sales,
and in the second quarter increases in accounts receivable occur as a
result of the increased sales activity.
The Company's accounts receivable balance at the end of the second
quarter of 2000 decreased $14.4 million when compared to the end of the
second quarter of 1999, a decrease of 11.4%. This difference primarily
results from the overall sales decrease in the second quarter of 2000.
Inventory at the end of the second quarter of 2000 was $3.4 million, or
2.6%, higher than at the end of the second quarter of 1999. This increase
largely is attributable to the additional inventory required to support
anticipated third quarter sales and on-going construction projects.
Accounts payable at the end of the second quarter of 2000 decreased
approximately $18.7 million, or 25.7% from the second quarter of 1999. The
decrease primarily is attributable to improved cash flows from operations.
The Company's capital expenditures consist primarily of the construction
of storage facilities; the remodeling and reformatting of sales and
distribution facilities; expansion of component manufacturing facilities;
and the purchase of vehicles, equipment and management information systems
for both existing and new operations. The Company also may make
expenditures to establish or acquire operations and to expand or complement
its existing operations, especially in its major markets. In the first six
months of 2000 the Company spent $4.6 million on capital expenditures as
compared to $4.2 million for the same period in 1999. Under the Company's
bank revolving credit agreement, capital expenditures during 2000 are
currently limited to $7.2 million. In the event capital expenditure needs
exceed the limit set in the Company's new revolving credit agreement, the
Company will seek an amendment to allow increased capital spending during
2000. In addition to capital expenditures, this revolving credit agreement
allows the Company to spend up to $30 million, subject to certain
restrictions, for acquisitions. The Company expects to fund capital
expenditures through borrowings and its internally generated cash flow.
21
<PAGE>22
The Company maintained excess availability under its revolving line of
credit throughout the first six months of 2000. At the end of the second
quarter total borrowings under the revolving line of credit were $6.0
million higher than at the end of the second quarter of 1999. Under the
current terms of the Company's bank revolving credit agreement the Company
believes that it will continue to have sufficient funds available for its
anticipated operations and capital expenditures. At June 24, 2000, $149.8
million was outstanding under the Company's revolving line of credit, and
the unused availability was approximately $22.1 million.
22
<PAGE>23
WICKES INC. AND SUBSIDIARIES
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 Company enters into lumber futures contracts as a hedge against
future lumber price fluctuations. All futures contracts are purchased to
protect long-term pricing commitments on specific future customer
purchases. While lumber futures contracts are entered on a risk management
basis, the Company's hedge positions could show a net gain or loss
depending on prevailing market conditions. At December 25, 1999 the
Company had 15 lumber futures contracts outstanding with a total market
value of $552,000 and an immaterial net unrealized loss. At June 24, 2000
the Company had 45 lumber futures contracts outstanding with a total market
value of $1.3 million and an approximate net unrealized loss of $240,000.
These contracts all mature in 2000.
The fair value of the Company's fixed rate debt was $85 million at
December 25, 1999 and $80 million at June 24, 2000. Assuming a 100 basis
point decrease in the yield to maturity, the fair value of the fixed rate
debt would have increased $2.4 million and $1.9 million at December 25,
1999 and June 24, 2000, respectively.
The Company's revolving line of credit provides for, subject to certain
restrictions, up to $160 million of revolving credit loans and the issuance
of up to $10 million of letters of credit. 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, during
the third quarter of 1999, at a spread above the base rate of Fleet Retail
Finance Inc. of 0.25%, or 1.75% above the applicable LIBOR rate. Based on
the Company's average borrowings for the first six months of 2000 under its
revolving credit agreement, subject to the effect of the interest rate swap
agreement, a 25 basis point movement in the base rate or LIBOR rate would
result in an approximate $235,000 annualized increase or decrease in
interest expense.
For additional discussion, reference is made to information contained in
Item 7A, Quantitative and Qualitative Disclosures About Market Risk, filed
as part of the Company's Form 10K as of December 25, 1999.
23
<PAGE>24
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
------------------------------------------
(a) Exhibits
27.1 Financial data schedule (SEC use only).
(b) Reports on Form 8-K
None.
24
<PAGE>25
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/ Russell J. Bonaguidi
------------------------
Russell J. Bonaguidi
Vice President & Controller
(Principal Accounting Officer)
Date: August 8, 2000
25
