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 23, 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 October 31, 2000, the Registrant had 8,271,313 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 23, 2000 (Unaudited), December 25, 1999 and
September 25, 1999 (Unaudited) 3
Condensed Consolidated Statements of Operations (Unaudited)-
For the three months and nine months ended
September 23, 2000 and September 25, 1999 4
Condensed Consolidated Statements of Cash Flows (Unaudited)-
For the nine months ended September 23, 2000 and
September 25, 1999 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
(in thousands except share data)
<TABLE>
<CAPTION>
September 23, December 25, September 25,
2000 1999 1999
------------ ----------- ------------
(UNAUDITED) (UNAUDITED)
ASSETS
<S> <C> <C> <C>
Current assets:
Cash $ 153 $ 450 $ 621
Accounts receivable, less allowance for doubtful
accounts of $3,741 in 2000, $4,105 in December 1999
and $4,231 in September 1999 106,440 110,352 135,610
Notes receivable from affiliate 134 481 474
Inventory 123,016 120,705 131,250
Deferred tax asset 7,184 7,184 8,857
Prepaid expenses 4,285 2,663 3,181
------- ------- -------
Total current assets 241,212 241,835 279,993
Notes receivable from affiliate 349 - -
Property, plant and equipment, net 53,080 50,599 49,580
Trademark (net of accumulated amortization of
$10,885 in 2000, $10,718 in December 1999
and $10,663 in September 1999) 6,134 6,301 6,357
Deferred tax asset 14,695 14,695 17,482
Rental equipment (net of accumulated depreciation
of $1,441 in 2000, $1,010 in December 1999
and $899 in September 1999) 2,210 1,981 2,083
Other assets (net of accumulated amortization of
$12,918 in 2000, $11,463 in December 1999
and $10,937 in September 1999) 17,385 19,225 14,879
------- ------- -------
Total assets $335,065 $334,636 $370,374
======= ======= =======
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 62,705 $ 53,817 $ 63,211
Accrued liabilities 23,596 25,495 30,655
------- ------- -------
Total current liabilities 86,301 79,312 93,866
Long-term debt (Note 2) 213,797 220,742 244,893
Other long-term liabilities 3,552 3,763 3,060
Commitments and contingencies (Note 4)
Stockholders' equity:
Preferred stock (no shares issued)
Common stock, $0.01 par (shares issued and outstanding
of 8,249,597 in 2000, 8,224,888 in December 1999 and
8,218,417 in September 1999) 82 82 82
Additional paid-in capital 86,997 86,870 86,839
Accumulated deficit (55,664) (56,133) (58,366)
------- ------- -------
Total stockholders' equity 31,415 30,819 28,555
------- ------- -------
Total liabilities & stockholders' equity $335,065 $334,636 $370,374
======== ======== ========
</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 Nine Months Ended
------------------ -----------------
Sept. 23, Sept. 25, Sept. 23, Sept. 25,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 281,942 $ 325,371 $ 777,421 $ 805,305
Cost of sales 219,707 259,916 609,818 641,108
------- ------- ------- -------
Gross profit 62,235 65,455 167,603 164,197
Selling, general and administrative expenses 50,829 50,524 144,645 136,997
Depreciation, goodwill and trademark amortization 1,455 1,336 4,329 3,827
Provision for doubtful accounts 860 467 1,363 873
Other operating income (937) (1,337) (2,640) (4,380)
------ ------ ------- -------
52,207 50,990 147,697 137,317
Income from operations 10,028 14,465 19,906 26,880
Interest expense 6,163 5,877 18,176 17,137
------ ------ ------- -------
Income before income taxes 3,865 8,588 1,730 9,743
Provision for income taxes 1,729 3,544 1,261 4,388
------ ------ ------ ------
Net income $ 2,136 $ 5,044 $ 469 $ 5,355
====== ====== ====== ======
Basic income per common share (Note 6) $ 0.26 $ 0.61 $ 0.06 $ 0.65
====== ====== ====== ======
Diluted income per common share (Note 6) $ 0.25 $ 0.61 $ 0.06 $ 0.65
====== ====== ====== ======
Weighted average common shares - for basic 8,248,643 8,217,777 8,242,949 8,214,118
========= ========= ========= =========
Weighted average common shares - for diluted 8,476,023 8,331,816 8,501,410 8,280,861
========= ========= ========= =========
</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
-----------------
Sept. 23, Sept. 25,
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 469 $ 5,355
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Depreciation expense 4,799 4,246
Amortization of trademark 167 167
Amortization of goodwill 446 255
Amortization of deferred financing costs 970 1,142
Provision for doubtful accounts 1,363 873
Loss / (gain) on sale of assets 60 (1,435)
Changes in assets and liabilities:
Decrease / (increase) in accounts receivable 2,549 (41,419)
Increase in inventory (2,311) (26,984)
Increase in accounts payable and accrued liabilities 6,778 19,220
Increase in prepaids and other assets (2,188) (3,347)
------- -------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 13,102 (41,927)
------- -------
Cash flows from investing activities:
(Increase) / decrease in notes receivable (2) 621
Purchases of property, plant and equipment (6,666) (6,644)
Payments for acquisitions (800) (7,196)
Proceeds from sales of property, plant and equipment 887 2,608
------- -------
NET CASH USED IN INVESTING ACTIVITIES (6,581) (10,611)
------- -------
Cash flows from financing activities:
Net (repayments) borrowing under revolving line of credit (6,945) 52,932
Reductions of notes payable - (16)
Net proceeds from issuance of common stock 127 52
------- -------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (6,818) 52,968
------- -------
NET (DECREASE) INCREASE IN CASH (297) 430
Cash at beginning of period 450 191
------- -------
CASH AT END OF PERIOD $ 153 $ 621
======= =======
Supplemental schedule of cash flow information:
Interest paid $ 14,720 $ 12,666
Income taxes paid $ 1,054 $ 876
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 $ 7,337
Liabilities assumed $ - $ 141
Cash paid $ 800 $ 7,196
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
5
<PAGE> 6
WICKES INC. AND SUBSIDIARIES
NOTES TO CONDENSED 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 5,276 shares of Common Stock to members of its board
of directors as compensation during the nine-months ended September 23,
2000. In addition, 19,433 shares of common stock were issued upon exercise
of employee stock options.
6
<PAGE> 7
WICKES INC. AND SUBSIDIARIES
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
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. See also Note 3 regarding the
reclassification of certain manufacturing expenses.
2. LONG-TERM DEBT
--------------
Long-term debt is comprised of the following at September 23, 2000 (in
thousands):
<TABLE>
<S> <C>
Revolving line of credit $ 113,797
Senior subordinated notes 100,000
Less current maturities (0)
---------
Total long-term debt $ 213,797
=========
</TABLE>
Under the revolving line of credit, the Company may borrow against
certain levels of accounts receivable and inventory. The unused
availability, as defined in the Company's credit agreement, at September
23, 2000 was $45.2 million.
3. RECLASSIFICATION OF MANUFACTURING EXPENSES
------------------------------------------
One of the Company's strategic goals is to increase the sales
volume of manufactured building components (roof trusses, wall panels,
floor joists, etc.) and to continue to increase the sales of internally
manufactured components. In response to increases, over time, in the
volume of internally manufactured building components sold, the Company has
determined that certain manufacturing costs previously included in Selling,
General and Administrative expense should be classified as Cost of Sales.
Therefore, elements of costs directly associated with manufacturing
processes such as manufacturing labor and related benefits, manufacturing
supplies, equipment depreciation, delivery expenses and other overhead
items have been reclassified for the current and prior periods presented.
This reclassification had no impact on income from operations, net income
or net assets. The table presented below summarizes the impact of this
reclassification (increase / (decrease) in thousands):
7
<PAGE> 8
WICKES INC. AND SUBSIDIARIES
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Nine Months
------------ -----------
Sept. 23, Sept. 25, Sept. 23, Sept. 25,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 0 $ 0 $ 0 $ 0
Cost of sales 9,242 8,357 26,886 21,921
----- ----- ------ ------
Gross profit (9,242) (8,357) (26,886) (21,921)
----- ----- ------ ------
Selling, general and
administrative expenses (8,873) (8,073) (25,803) (21,080)
Depreciation, goodwill and
trademark amortization (369) (284) (1,083) (841)
----- ----- ------ ------
(9,242) (8,357) (26,886) (21,921)
----- ----- ------ ------
Income from operations $ 0 $ 0 $ 0 $ 0
===== ====== ====== ======
</TABLE>
4. COMMITMENTS AND CONTINGENCIES
-----------------------------
As of September 23, 2000, the Company had accrued approximately $98,000
(included in accrued liabilities at September 23, 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,
8
<PAGE> 9
WICKES INC. AND SUBSIDIARIES
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
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 properties sold
over the past five years.
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.
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 200 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 30 similar actions for
insignificant amounts, and another 245 of these actions have been
dismissed. As of September 23, 2000 none of these suits have made it to
trial.
Losses in excess of the amounts accrued as of September 23, 2000 are
possible but an estimate of these amounts cannot be made.
The Company is a defendant in a lawsuit arising from a 1998 accident
involving an employee truck driver that resulted in personal injuries to a
third party. Plaintiffs seek compensatory damages in an unspecified
amount. Recently, plaintiffs have amended their complaint to include a
claim for punitive damages in an unspecified amount, for which insurance
coverage may or may not be available.
The Company also 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
9
<PAGE> 10
WICKES INC. AND SUBSIDIARIES
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
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.
5. 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.
In June 2000, SFAS No. 138 amends certain provisions to clarify the
implementation on SFAS No. 133. The Company currently is evaluating the
effects of SFAS No. 133, as amended by SFAS 138.
The Emerging Issues Task Force ("EITF") of the Financial Accounting
Standards Board has issued EITF Issue No. 00-10, "Accounting for Shipping
and Handling Fees and Costs." Currently, the EITF has agreed that, for
years beginning after December 15, 1999 revenues relating to "shipping and
handling" will be classified as revenues in the Income Statement. The
Company expects to adopt this EITF in the fourth quarter of fiscal 2000.
Currently, the Company classifies the charges as a reduction of Selling,
General and Administrative expense. Through the Third Quarter, Wickes has
recorded approximately $1.8 million and $1.6 million of such fees for 2000
and 1999, respectively.
6. EARNINGS PER SHARE
------------------
The Company calculates earnings per share in accordance with Statement
of Financial Accounting Standards No. 128. The following is the
reconciliation of the numerators and denominators of the basic and diluted
earnings per share:
10
<PAGE> 11
WICKES INC. AND SUBSIDIARIES
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
Sept. 23, Sept. 25, Sept. 23, Sept. 25,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Numerators:
Net income -for basic
and diluted EPS $2,136,000 $5,044,000 $ 469,000 $5,355,000
--------- --------- ------- ---------
Denominators:
Weighted average common
shares - for basic EPS 8,248,643 8,217,777 8,242,949 8,214,118
Common shares from options 227,380 114,039 258,461 66,743
--------- --------- --------- ---------
Weighted average common
shares - for diluted EPS 8,476,023 8,331,816 8,501,410 8,280,861
--------- --------- --------- ---------
</TABLE>
In periods where net losses are incurred, certain common stock
equivalents are not used in the calculation of diluted EPS as they would
have an anti-dilutive effect on EPS. In addition, options to purchase
219,325 and 250,240 shares of common stock during the first nine months of
2000 and 1999, respectively, were not included in the diluted EPS as the
options' exercise prices were greater than the average market price.
7. RELATED PARTY TRANSACTIONS
--------------------------
The Company is approximately 35% 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 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.
11
<PAGE> 12
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; commodity lumber
prices; effects of competition; interest rates and the Company's ability to
service and comply with the terms of its debt; the success of the Company's
operational initiatives; and the outcome of the contingencies discussed in
Note 4 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 September 23, 2000, the Company operated in 24 states in the
Midwest, Northeast, and South. The Company operated 101 sales and
distribution facilities and 26 component manufacturing facilities that
produce and distribute roof and floor trusses, framed wall panels, floor
decks and joists, and pre-hung door units, 9 of which are located in sales
and distribution facilities.
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.
12
<PAGE> 13
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 component
manufacturing operations. In Major Markets, the Company serves the
national, regional, and large local builder with a total solutions approach
and specialized services. In Conventional Markets with lower population,
the Company provides the smaller building professional 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 26 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.
(See Note 3 to the financial statements for the effects of certain
reclassifications from SG&A to cost of sales.) 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. 23, Sept. 25, Sept. 23, Sept. 25,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Gross profit 22.1% 20.1% 21.6% 20.4%
Selling, general and
administrative expense 18.0% 15.5% 18.6% 17.0%
Depreciation, goodwill
and trademark amortization 0.5% 0.4% 0.6% 0.5%
Provision for doubtful
accounts 0.3% 0.2% 0.2% 0.1%
Other operating income (0.3)% (0.4)% (0.4)% (0.5)%
Income from operations 3.6% 4.4% 2.6% 3.3%
</TABLE>
13
<PAGE> 14
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 nine months of 2000 were relatively comparable to the prior year.
However, the Company's largest region, the Midwest, experienced wetter than
normal conditions in May, June and July 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. In addition to these factors, housing starts
for the third quarter of 2000 were down from the third quarter of 1999 a
combined 9.4% in the Midwest and Northeast regions of the United States
(11.0% and 5.9%, respectively). The Midwest and Northeast represented
approximately 82.0% of the Company's sales in the third quarter of 2000
versus 79% in the comparable period in 1999. When combined with the South,
housing starts for the third quarter of this year were down 10.2% from the
third quarter of 1999. On a year-to-date basis, actual housing starts are
down 3.5% nationally from the third quarter of 1999. 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 commodity lumber prices ("lumber
inflation") generally are passed on to the customer with certain lag
effects, resulting in higher selling prices, or are fixed in the futures
market for a small percentage of longer term sales contracts. In periods
of decreasing commodity lumber prices ("lumber deflation"), selling prices
for lumber decrease, with certain lag effects.
Net income for the three months ended September 23, 2000 was $2.1
million compared with a net income of $5.0 million for the three months
ended September 25, 1999. The decrease in net income for the three-month
period primarily is the result of decreased sales and gross margin
generally resulting from lumber deflation; increased selling, general and
administrative ("SG&A") expenses driven by higher fuel costs; an increase
in the provision for doubtful accounts; and higher interest costs.
Net income for the first nine months of 2000 was $0.5 million compared
with net income of $5.4 million for the first nine months of 1999. The
decrease in net income for the nine-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.
14
<PAGE> 15
Three Months Ended September 23, 2000 Compared
----------------------------------------------
with the Three Months Ended September 25, 1999
----------------------------------------------
Net Sales
---------
Net sales for the third quarter of 2000 decreased 13.3% to $281.9
million from $325.4 million for the third quarter of 1999. Same store
sales decreased 13.8% compared with the same period last year. Same store
sales to the Company's primary customers, building professionals, decreased
by 13.9% when compared with the third quarter of 1999. Consumer same-store
sales also decreased by 13.9% for the quarter.
The Company estimates that lumber deflation decreased total sales for
the third quarter of 2000 by approximately $33.2 million versus the
comparable period in 1999. Evidencing lumber deflation for the period, the
Random Lengths Framing Composite Average decreased from the prior year an
average of 30.6% and the Random Lengths Panel Index declined an average of
35.6% from the comparable period last year.
Sales for the third quarter of 2000 were positively impacted by
investments in new initiatives such as Tool Rental and Installed Programs,
sales of which increased 25.9%. However, these increases were offset by the
effects of lumber deflation on sales. Same store sales decreased 19.5% in
the Company's nine target major markets, primarily driven by lumber
deflation.
Sales to building professionals as a percentage of total sales remained
unchanged from the same quarter last year at 87.5%. Lumber and building
materials accounted for 86.9% of total sales in the third quarter of 2000
compared with 88.8% in 1999.
Products that exhibited the greatest change in sales for the quarter
ended September 23, 2000 versus the comparable quarter in the prior year
were lumber and plywood (down 28.5%), drywall (down 28.7%), treated wood
(down 12.4%), panels and trusses (down 10.7%), and kitchen and bath (up
6.9%).
For the quarter, sales of internally manufactured building components
increased to 55.7% of total distributed building components from 49.8% in
the prior year. The dollar value of sales of internally manufactured
building components decreased 1.1% from approximately $25.1 million in 1999
to approximately $24.8 million in 2000 as a result of the effects of lumber
deflation.
Gross Profit
------------
Gross profit decreased to $62.2 million in the third quarter of 2000
from $65.5 million for the third quarter of 1999, a 4.9% decrease. Gross
profit as a percentage of sales increased to 22.1% for the third quarter of
15
<PAGE> 16
2000 from 20.1% in 1999. The increase in gross profit as a percentage of
sales resulted from increased sales and gross profit margins relating to
internally manufactured products, improved buying leverage, and the
expansion of the Company's installed sales programs. (See Note 3 to the
financial statements for the effects of certain reclassifications from SG&A
to cost of sales.)
The Company believes that while the sales effect of lumber deflation did
decrease the dollar value of gross profit by approximately $6.8 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 36.9% of sales in the third quarter of 2000, compared
with 42.1% for the third quarter of 1999. The gross margin for commodity
lumber improved 3.7% for the quarter ended September 23, 2000 versus the
same period last year.
Selling, General and Administrative Expense ("SG&A")
----------------------------------------------------
SG&A expense increased to 18.0% of net sales in the current quarter
compared with 15.5% of net sales for the comparable quarter last year. The
percentage increase for the quarter is more attributable to decreased sales
resulting from lumber deflation than from increased expenses. The $300,000
increase in SG&A primarily is attributable to increased delivery,
promotional, and fixed expenses; offset by reductions in salaries, wages
and benefits. (See Note 3 to the financial statements for the effects of
certain reclassifications from SG&A to cost of sales.)
Delivery expense for the quarter increased approximately $475,000 or
14.3% over the prior year. The increase was driven by various Company
initiatives and by the significant increase in fuel prices over the
comparable quarter last year. With regard to initiatives, 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 these
programs. Finally, the Company estimates that increases in fuel costs
nationwide in the third quarter of 2000 resulted in approximately $304,000
in additional fuel expense versus the third quarter last year.
Promotional expenses including travel and entertainment, increased
approximately $387,000 as a result of expanded emphasis on various
initiatives including manufactured building components, tool rental and
installation programs. Fixed expenses, other than depreciation, associated
with the operations of the stores increased approximately $189,000.
Offsetting the other increases in SG&A was a decrease in total
salaries, wages and benefits of approximately $1.3 million. Manager
salaries, center labor, trucking, overtime, benefits, and sales salaries
and commissions generally were flat with the prior year, reflecting
emphasis on expense control. Management bonus accruals declined $1.1
million during the period, as a result of lower operating income.
16
<PAGE> 17
Depreciation, Goodwill and Trademark Amortization
-------------------------------------------------
Depreciation, goodwill and trademark amortization increased to $1.5
million for the third quarter of 2000 compared with $1.3 million for the
same period in 1999. This increase primarily is 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 $860,000 in the
third quarter of 2000, compared with $467,000 in the last year.
Other Operating Income
----------------------
Other operating income for the third quarter of 2000 was $937,000
compared with $1.3 million for the third quarter of 1999. During the third
quarter of 2000, the Company had a net loss on the sale of assets of
approximately $121,000 compared to a net gain of approximately $81,000 last
year. The Company also recorded $217,000 in expenses related to casualty
losses in the current quarter compared to $154,000 in the same quarter last
year. Other operating income also included approximately $706,000 of net
service charge income in the current quarter (amounts charged to customers
as late charges on delinquent balances) compared to approximately $823,000
in the same quarter last year.
Interest Expense
----------------
In the third quarter of 2000, interest expense increased to $6.2 million
from $5.9 million during the third quarter of 1999. Although the average
total long-term debt decreased by approximately $16.2 million from the
third quarter 1999, there was a 100 basis point increase in the Company's
LIBOR and prime based borrowing costs. This increase in the effective
borrowing costs was the primary cause for the relative increase in the
third quarter interest expense over last year. Approximately 96% of the
Company's third quarter average borrowings on its revolving credit facility
were LIBOR-based.
17
<PAGE> 18
Provision for Income Taxes
--------------------------
The Company recorded income tax expense of $1.7 million for the third
quarter of 2000 compared with expense of $3.5 million in the third quarter
of 1999. An effective federal and state income tax rate of 38.8% was used
to calculate income taxes for the third quarter of 2000, compared with an
effective rate of 38.7% for the third quarter of 1999. In addition to the
effective income tax rate, state franchise taxes of $308,000 and $292,000
for the third 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.
18
<PAGE> 19
Nine Months Ended September 23, 2000 Compared
---------------------------------------------
with the Nine Months Ended September 25, 1999
---------------------------------------------
Net Sales
---------
Net sales for the first nine months of 2000 decreased 3.5% to $777.4
million from $805.3 million for the first nine months of 1999. Same store
sales decreased 4.1% compared with the same period last year. Same store
sales to the Company's primary customers, building professionals, decreased
2.8% when compared with the first nine months of 1999. Consumer same store
sales decreased 9.7% for the same period. Same store sales in the Company's
nine target major markets for this period decreased 5.7% over the same
period last year, with first and second quarter gains offset by the third
quarter as a result of lumber deflation.
The Company believes that the sales decrease for the nine months ended
September 23, 2000 primarily results from the net effects of lumber
deflation on sales. The Company estimates that the net effect of first
quarter lumber inflation combined with second and third quarter lumber
deflation decreased total sales by approximately $52.1 million compared
with the 1999 comparable period.
Housing starts in the first nine months of 2000 were down 3.5%
nationally, in comparison to 1999. In the Company's primary geographical
markets, the Midwest and Northeast, housing starts were down 3.7% over the
comparable period last year, and in the South housing starts were down
4.0%.
Sales to building professionals as a percentage of total sales increased
to 88.6% in the nine months of 2000 compared with 87.7% in 1999. Lumber
and building materials accounted for 86.8% of total sales in the first nine
months of 2000 compared with 88.0% for the same period in 1999.
Products that exhibited the greatest change in sales for the nine months
ended September 23, 2000 versus the comparable period in the prior year
were lumber and plywood (down 12.2%), drywall (down 13.6%), kitchen and
bath (up 6.6%), windows and doors (up 3.3%), roofing and roofing materials
(down 4.7%), and treated wood (down 5.8%).
For the nine months ended September 23, 2000, sales of internally
manufactured building components increased to $71.8 million or 56.5% of
total distributed building components from $63.2 million or 51.2% in the
prior year. The dollar value of internally manufactured building
components increased 13.6%.
19
<PAGE> 20
Gross Profit
------------
Gross profit for the first nine months of 2000 increased to $167.6
million from $164.2 million for the first nine months of 1999, a 2.1%
increase. Gross profit as a percentage of sales increased to 21.6% for the
first nine months of 2000 from 20.4% 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 net effects of lumber
prices, improved buying leverage, and the expansion of the Company's
installed sales programs. (See Note 3 to the financial statements for the
effects of certain reclassifications from SG&A to cost of sales.)
During the first nine months of Fiscal 2000, the Company experienced
both lumber inflation and deflation. The estimated net effect of lumber
prices on sales for the nine-month period was a reduction of approximately
$52.1 million, which had the effect of reducing gross margin by
approximately $7.7 million. Commodity lumber accounted for 38.2% of sales
in the first nine months of 2000, compared with 41.4% in the first nine
months of 1999. The gross margin on commodity lumber improved 2.2% for the
nine months ended September 23, 2000 versus the same period last year.
Selling, General and Administrative Expense
-------------------------------------------
SG&A expense increased to 18.6% of net sales in the first nine months
of 2000 compared with 17.0% of net sales in the first nine months of 1999.
The $7.6 million increase primarily is attributable to increases in
salaries, wages and benefits; delivery expense; and travel. (See Note 3 to
the financial statements for the effects of certain reclassifications from
SG&A to cost of sales.)
Total salaries, wages and benefits for the first nine months of 2000
increased approximately $3.6 million or 3.8% over the first nine months of
1999. On a combined basis, sales salaries, commissions, trucking labor and
sales center labor increased approximately $2.8 million or 5.0% over the
comparable period last year. This mainly was driven by sales volume and
product mix (center labor and trucking) and higher gross margin dollars
(sales commissions). Management and supervisory salaries (including
administrative salaries) increased approximately $2.1 million or 11.2% over
the prior year as a result of a normal annual increases and support for new
initiatives. Accrued management bonuses declined $1.9 million as a result
of lower operating income. Employee taxes and benefits declined
approximately $640,000 or 4.1% over the prior year. As of September 23,
2000, the Company had 4,410 full time and part time employees, an increase
of 2.1% from September 25, 1999.
Delivery expense for the nine months ended September 23, 2000
increased approximately $1.7 million or 18.9% 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
20
<PAGE> 21
through the third 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 $620,000 or 27.8% in the nine
months 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 $4.3
million for the first nine months of 2000 compared with $3.8 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 $1.4 million for the
first nine months of 2000 from $0.9 million in the first nine months of
1999.
Other Operating Income
----------------------
Other operating income for the first nine months of 2000 was $2.6
million compared with $4.4 million for the first nine months of 1999. In
the first nine months of 2000 and 1999, the Company recorded gains of
approximately $0.1 million and $1.7 million, respectively, on the sales of
real estate and equipment.
Interest Expense
----------------
In the first nine months of 2000, interest expense increased to $18.2
million from $17.1 million during the first nine months of 1999, resulting
primarily from an increase in the average effective borrowing rate of 50
basis points over the comparable period last year. Approximately 85% of the
Company's average borrowings on its revolving credit facility, during the
first nine months of 2000, were LIBOR-based.
21
<PAGE> 22
Provision for Income Taxes
--------------------------
The Company recorded an income tax provision of $1,261,000 for the first
nine months of 2000 compared with a provision of $4,388,000 in the first
nine months of 1999. An effective federal and state income tax rate of
38.8% was used to calculate income taxes for the first nine months of 2000,
compared with an effective rate of 38.8% for the first nine months of 1999.
In addition to the effective income tax rate, state franchise taxes of
$774,000 and $809,000 for the first nine months of 2000 and 1999,
respectively, were calculated separately and are included in the provision
reported.
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.
In June 2000, SFAS No. 138 amends certain provisions to clarify the
implementation on SFAS No. 133. The Company currently is evaluating the
effects of SFAS No. 133, as amended by SFAS 138.
The Emerging Issues Task Force ("EITF") of the Financial Accounting
Standards Board has issued EITF Issue No. 00-10, "Accounting for Shipping
and Handling Fees and Costs." Currently, the EITF has agreed that, for
years beginning after December 15, 1999 revenues relating to "shipping and
handling" will be classified as revenues in the Income Statement. The
Company expects to adopt this EITF in the fourth quarter of fiscal 2000.
Currently, the Company classifies the charges as a reduction of Selling,
General and Administrative expense. Through the Third Quarter, Wickes has
recorded approximately $1.8 million and $1.6 million of such fees for 2000
and 1999, respectively.
22
<PAGE> 23
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 nine months of 2000 net cash provided by operating
activities was $13.1 million, $55.0 million more than the $41.9 million
used in the first nine months of 1999. 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. For the nine months ended September 23, 2000
positive cash flows from operations and the improvement from the prior year
primarily came from reductions in both inventory and accounts receivable.
The Company's accounts receivable balance at the end of the third
quarter of 2000 decreased $29.2 million when compared to the end of the
third quarter of 1999, a decrease of 21.5%. This difference primarily
results from the overall sales decrease in the third quarter of 2000.
Inventory at the end of the third quarter of 2000 was $8.2 million, or
6.3%, lower than at the end of the third quarter of 1999. This decrease
largely is attributable to the lower cost of inventory resulting from
lumber deflation. Accounts payable at the end of the third quarter of 2000
decreased approximately $0.5 million, or 0.8% from the third quarter of
1999. The decrease primarily is attributable to the decrease in inventory.
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
nine months of 2000 the Company spent $6.7 million on capital expenditures
as compared to $6.6 million for the same period in 1999. Under the
Company's revolving credit agreement as amended August 21, 2000, capital
expenditures during 2000 are currently limited to $10.2 million. In
addition to capital expenditures, this revolving credit agreement allows
the Company to spend up to $30 million, subject to certain restrictions,
for acquisitions. The Company expects to fund capital expenditures through
borrowings and its internally generated cash flow.
23
<PAGE> 24
The Company maintained excess availability under its revolving line of
credit throughout the first nine months of 2000. At the end of the third
quarter total borrowings under the revolving line of credit were $31.1
million lower than at the end of the third 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 September 23, 2000,
$113.8 million was outstanding under the Company's revolving line of
credit, and the unused availability, as defined, was approximately $45.2
million.
24
<PAGE> 25
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 September 23,
2000 the Company had 25 lumber futures contracts outstanding with a total
market value of $0.5 million and an immaterial net loss. These contracts
mature in November 2000 and January 2001.
The fair value of the Company's fixed rate debt was $85 million at
December 25, 1999 and $60 million at September 23, 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 $1.1 million at December
25, 1999 and September 23, 2000, respectively.
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. Amounts outstanding
under the revolving line of credit will bear interest, during the fourth
quarter of 2000, at a spread above the base rate of Fleet Retail Finance
Inc. of 0.50% or 2.00% above the applicable LIBOR rate. Based on the
Company's average borrowings for the first nine 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 $234,000 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.
25
<PAGE> 26
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
----------------------------------------
(a) Exhibits
4.1 Third Amendment to Credit Agreement among Wickes Inc.,
As borrower and Fleet Retail Finance, Inc., as
Administrative
Agent , and as a Lender, Bank of America, N.A., and other
Lenders as set forth on the signatory thereto.
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/ Russell J. Bonaguidi
------------------------
Russell J. Bonaguidi
Vice President & Controller
(Principal Accounting Officer)
Date: November 7, 2000
27
