SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File
For the Quarterly Period Ended March 25, 2000 Number 1-14967
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WICKES INC.
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(Exact name of registrant as specified in its charter)
Delaware 36-3554758
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
706 North Deerpath Drive, Vernon Hills, Illinois 60061
- ------------------------------------------------ --------
(Address of principal executive offices) (Zip Code)
847-367-3400
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months, and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
As of April 28, 2000, the Registrant had 8,247,329 shares of Common Stock,
par value $.01 per share outstanding.
<page 2>
WICKES INC. AND SUBSIDIARIES
INDEX
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<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets --
March 25, 2000 (Unaudited) and December 25, 1999 3
Condensed Consolidated Statements of Operations (Unaudited) --
For the three months ended March 25, 2000 and
March 27, 1999 4
Condensed Consolidated Statements of Cash Flows (Unaudited) --
For the three months ended March 25, 2000 and
March 27, 1999 5
Notes to Condensed Consolidated
Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures about
Market Risk. 20
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 21
</TABLE>
2
<PAGE>3
WICKES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands except share data)
<TABLE>
<CAPTION>
March 25, December 25,
2000 1999
-------- -----------
(UNAUDITED)
ASSETS
<S> <C> <C>
Current assets:
Cash $ 286 $ 450
Accounts receivable (less allowance for doubtful
accounts of $4,105 in 2000 and $4,105 in 1999) 96,842 110,352
Note receivable - 481
Inventory 141,628 120,705
Deferred tax asset 8,826 7,184
Prepaid expenses 3,048 2,663
------- -------
Total current assets 250,630 241,835
Note receivable 458 -
Property, plant and equipment, net 51,738 50,599
Trademark (net of accumulated amortization of
$10,774 in 2000 and $10,718 in 1999) 6,245 6,301
Deferred tax asset 14,695 14,695
Rental equipment (net of accumulated depreciation
of $1,128 in 2000 and $1,010 in 1999) 2,023 1,981
Other assets (net of accumulated amortization of
$11,978 in 2000 and $11,463 in 1999) 18,408 19,225
------- -------
Total assets $ 344,197 $ 334,636
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 66,188 $ 53,817
Accrued liabilities 20,396 25,495
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Total current liabilities 86,584 79,312
Long-term debt 226,297 220,742
Other long-term liabilities 3,593 3,763
Commitments and contingencies (Note 4)
Stockholders' equity:
Preferred stock (no shares issued)
Common stock, $0.01 par (8,245,573 and
8,224,888 shares issued and
outstanding in 2000 and1999, respectively) 82 82
Additional paid-in capital 86,973 86,870
Accumulated deficit (59,332) (56,133)
------- -------
Total stockholders' equity 27,723 30,819
------- -------
Total liabilities and stockholders' equity $ 344,197 $ 334,636
======= =======
</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
------------------
March 25, March 27,
2000 1999
-------- --------
<S> <C> <C>
Net sales $ 215,754 $ 191,110
Cost of sales 162,081 145,203
------- -------
Gross profit 53,673 45,907
Selling, general and administrative expenses 51,456 44,643
Depreciation, goodwill and trademark amortization 1,761 1,432
Provision for doubtful accounts 432 448
Other operating income (808) (889)
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52,841 45,634
------- -------
Income from operations 832 273
Interest expense 5,740 5,302
------- -------
Loss before income tax benefit (4,908) (5,029)
Income tax benefit (1,709) (1,753)
------- -------
Net loss $ (3,199) $ (3,276)
======= =======
Basic loss per common share (Note 6) $ (0.39) $ (0.40)
======= =======
Weighted average common shares - for basic per share data 8,233,434 8,210,179
========= =========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
<PAGE> 5
WICKES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
------------------
March 25, March 27,
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (3,199) $ (3,276)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation expense 1,555 1,315
Amortization of trademark 56 56
Amortization of goodwill 150 61
Amortization of deferred financing costs 352 342
Provision for doubtful accounts 432 448
Gain on sale of assets (41) (29)
Deferred tax benefit (1,642) (1,725)
Changes in assets and liabilities:
Decrease in accounts receivable 13,078 5,407
Decrease in notes receivable 23 232
Increase in inventory (20,923) (23,881)
Increase in accounts payable, accrued liabilities
and other long term liabilities 7,102 8,210
Increase in prepaids and other assets (229) (1,954)
------- -------
NET CASH USED BY OPERATING ACTIVITIES (3,286) (14,794)
------- -------
Cash flows from investing activities:
Purchases of property, plant and equipment (2,608) (2,102)
Proceeds from sales of property, plant and equipment 72 78
------- -------
NET CASH USED BY INVESTING ACTIVITIES (2,536) (2,024)
------- -------
Cash flows from financing activities:
Net borrowings under revolving line of credit 5,555 16,790
Reductions of note payable - (6)
Net proceeds from issuance of common stock 103 16
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NET CASH PROVIDED BY FINANCING ACTIVITIES 5,658 16,800
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NET DECREASE IN CASH (164) (18)
Cash at beginning of period 450 191
------- -------
CASH AT END OF PERIOD $ 286 $ 173
======= =======
Supplemental schedule of cash flow information:
Interest paid $ 2,862 $ 1,794
Income taxes paid $ 233 $ 217
</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
wholly-owned subsidiaries (the "Company"). The Company has determined that
it operates in one business segment, that being the supply and distribution
of lumber and building materials to contractors, repair and remodelers and
do-it-yourself homeowners, 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.
The condensed consolidated financial statements are prepared in
accordance with generally accepted accounting principles, which require
management to make estimates and assumptions regarding certain inventory
valuations, loan loss levels, the potential outcome of litigation and other
matters that affect the financial statements and related disclosures.
Management believes that the estimates utilized in the preparation of the
condensed consolidated financial statements are prudent and reasonable.
Actual results could differ from these 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.
Share Data
----------
The Company issued 1,752 shares of common stock to members of its board
of directors as compensation during the three-months ended March 25, 2000.
In addition, 18,933 shares of common stock were issued upon exercise of
employee stock options.
6
<PAGE>7
WICKES INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED 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.
2. LONG-TERM DEBT
--------------
Long-term debt is comprised of the following at March 25, 2000 (in
thousands):
<TABLE>
<S> <C>
Revolving line of credit $ 126,297
Senior subordinated notes 100,000
--------
Total long-term debt $ 226,297
========
</TABLE>
Under the revolving line of credit, the Company may borrow against
certain levels of accounts receivable and inventory. The unused
availability at March 25, 2000 was $35.4 million.
3. INCOME TAXES
------------
The provision for income taxes for the three-month period ended March
25, 2000 was a benefit of $1,709,000 compared to a benefit of $1,753,000
for the three-month period ended March 27, 1999. An effective federal and
state income tax rate of 38.8% was used to calculate income taxes for the
first three months of 2000, compared with an effective rate of 40.5% for
the first three months of 1999. In addition to the effective income tax
rate, state franchise taxes of $186,000 and $285,000 for the three months
ended March 25, 2000 and March 27, 1999, respectively, were calculated
separately and are included in the provision reported.
4. COMMITMENTS AND CONTINGENCIES
-----------------------------
As of March 25, 2000, the Company had accrued approximately $131,000
(included in accrued liabilities at March 25, 2000) for remediation of
certain environmental and product liability matters, principally
underground storage tank removal.
7
<PAGE>8
WICKES INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Many of the sales and distribution facilities presently and formerly
operated by the Company contained underground petroleum storage tanks. All
such tanks known to the Company located on facilities owned or operated by
the Company have been filled or removed in accordance with applicable
environmental laws in effect at the time. As a result of reviews made in
connection with the sale or possible sale of certain facilities, the
Company has found petroleum contamination of soil and ground water on
several of these sites and has taken, and expects to take, remedial actions
with respect thereto. In addition, it is possible that similar
contamination may exist on properties no longer owned or operated by the
Company the remediation of which the Company could under certain
circumstances be held responsible. Since 1988, the Company has incurred
approximately $2.0 million of costs, net of insurance and regulatory
recoveries, with respect to the filling or removing of underground storage
tanks and related investigatory and remedial actions. Insignificant amounts
of contamination have been found on excess properties sold over the past
four years. The Company currently has reserved approximately $43,000 for
estimated clean up costs at 11 of its locations.
The Company has been identified as having used two landfills which are
now Superfund clean up sites, for which it has been requested to reimburse
a portion of the clean-up costs. Based on the amounts claimed and the
Company's prior experience, the Company has established a reserve of
$28,000 for these matters.
The Company is one of many defendants in two 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 159 actions, each
of which seeks unspecified damages, in various Michigan state courts
against manufacturers and building material retailers by individuals who
claim to have suffered injuries from products containing asbestos. Each of
the plaintiffs in these actions is represented by one of two law firms.
The Company is aggressively defending these actions and does not believe
that these actions will have a material adverse effect on the Company.
Since 1993, the Company has settled 30 similar actions for insignificant
amounts, and another 224 of these actions have been dismissed. As of March
25, 2000 none of these suits have made it to trial.
Losses in excess of the amounts accrued as of March 25, 2000 are
possible but an estimate of these amounts cannot be made.
8
<PAGE>9
WICKES INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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.
The Company's assessment of the matters described in this note and other
forward-looking statements in this Form 10-Q are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995
("Forward-Looking Information") and are inherently subject to uncertainty.
The outcome of the matters described in this note may differ from the
Company's assessment of these matters as a result of a number of factors
including but not limited to: matters unknown to the Company at the
present time, development of losses materially different from the Company's
experience, the Company's ability to prevail against its insurers with
respect to coverage issues to date, the financial ability of those insurers
and other persons from whom the Company may be entitled to indemnity, and
the unpredictability of matters in litigation.
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.
The Company currently is evaluating the effects of this pronouncement.
6. EARNINGS PER SHARE
------------------
The Company calculates earnings per share in accordance with Statement
of Financial Accounting Standards No. 128. 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.
9
<PAGE>10
WICKES INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. 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. In this restructuring, all previously accrued
interest was paid by Riverside Group, Inc. to the Company on March 31, 2000
and 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.
10
<PAGE>11
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
are the following: 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 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 March 25, 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.
11
<PAGE>12
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
------------------
March 25, March 27,
2000 1999
---- ----
<S> <C> <C>
Net sales 100.0% 100.0%
Gross profit 24.9% 24.0%
Selling, general and
Administrative expense 23.9% 23.4%
Depreciation, goodwill and
Trademark amortization 0.8% 0.8%
Provision for doubtful 0.2% 0.2%
accounts
Restructuring and unusual items -- --
Other operating income (0.4)% (0.5)%
Income from operations 0.4% 0.1%
</TABLE>
12
<PAGE>13
Net Earnings
- ------------
The Company's first quarter historically has been adversely affected by
seasonal decreases in building construction activity in the Northeast and
Midwest resulting from winter weather conditions. Weather conditions
during the first quarter of 2000 were comparable to those of the first
quarter of 1999. The first quarter of 2000 generally had favorable
economic conditions for the building materials supply industry with single
family housing starts only 3.4% lower as compared to a very strong first
quarter of 1999.
Net loss for the three months ended March 25, 2000 was $3,199,000
compared with a loss of $3,276,000 for the three months ended March 27,
1999. The reduction in the net loss primarily is the result of increased
sales and gross profit partially offset by increases in selling, general
and administrative ("SG&A") expense, depreciation and interest expense.
Three Months Ended March 25, 2000 Compared
------------------------------------------
with the Three Months Ended March 27, 1999
------------------------------------------
Net Sales
- ---------
Net sales for the first quarter of 2000 increased 12.9% to $215.8
million from $191.1 million for the first quarter of 1999. Same store
sales increased 11.0% compared with the same period last year. Same store
sales to the Company's primary customers, building professionals, increased
17.7% when compared with the first quarter of 1999. Consumer same store
sales decreased by 0.9% for the quarter. As of March 25, 2000 the Company
operated 101 sales and distribution facilities, the same number it operated
at the end of the first quarter of 1999. The Company estimates that
inflation in lumber prices increased total sales for the quarter by
approximately $8.0 million, compared with the 1999 comparable period.
The Company believes that the sales increase results primarily from its
recent investments in its target major market and re-merchandised
conventional market sales and distribution facilities, as well as favorable
economic conditions. Same store sales increased 14.6% in the Company's
nine target major markets, while same store sales increased 1.9% in the
thirteen conventional market building centers the Company remerchandised
during 1997, 1998 and 1999. Single family housing starts were 3.4% lower,
nationally, in the first quarter of 2000 than in the comparable period of
1999. In the Company's primary geographical market, the Midwest, housing
starts were 8.4% higher.
13
<PAGE>14
Sales to building professionals as a percentage of sales increased to
93.2% in the first quarter of 2000 compared with 91.6% in 1999. Lumber and
building materials accounted for 89.2% of sales in the first quarter of
2000, compared with 88.1% for the first quarter of 1999.
Products that exhibited the greatest percentage increase for the quarter
ended March 25, 2000 versus the comparable period in the prior year were
lumber and plywood (14.0%), trusses and wall panels (21.0%), windows and
doors (12.9%) and insulation (21.5%).
Gross Profit
- ------------
Gross profit increased to $53.7 million in the first quarter of 2000
from $45.9 million in the first quarter of 1999, a 17.0% increase. Gross
profit as a percentage of sales increased to 24.9% for the first quarter of
2000 from 24.0% in 1999. The increase in gross profit dollars primarily is
impacted by growth in net sales in the categories listed under the
preceding caption "Net Sales". The increase in gross profit as a
percentage of net sales primarily is attributable to expansion of the
Company's internally manufactured products such as roof trusses, wall
panels and pre-hung doors. In the first quarter of 2000, the Company
increased production of building components to approximately 52% of total
sales of manufactured components from approximately 45% in the prior period
last year.
Selling, General and Administrative Expense ("S,G & A")
- -------------------------------------------------------
S,G & A increased to 23.9% of net sales in the first quarter of 2000
compared to 23.4% in the first quarter of 1999. The $6.8 million increase
primarily is attributable to increases in salaries, wages and benefits;
trucking expenses; and travel expenses. In general, the increased expenses
are driven by revenue growth and by the Company's initiative to increase
internal production of manufactured components.
14
<PAGE>15
Total salaries, wages and benefits for the first quarter of 2000
increased approximately $4.5 million over the first quarter of 1999. On a
combined basis, sales salaries and commissions, trucking labor and sales
center labor increased approximately $2.1 million or 14.5% over the
comparable period last year. This mainly was driven by increased sales
volume. Manufacturing labor grew by approximately $619,000 or 33.7%. This
increase is reflective of the Company's strategic objective to increase the
percentage of internally produced building components which has the overall
effect of increasing margins and profitability. Management and supervisory
salaries (excluding Administrative) increased approximately $707,000 or
17.5% over the prior year as a result of a combination of increased sales
and internally produced building components. Employee taxes and benefits
relating to the above increases in salaries and wages comprised an
additional $660,000 or 10.4% increase over the prior year.
Other areas that increased S, G & A included trucking expenses, which
increased approximately $840,000 or 27.0%, and travel expenses which
increased approximately $395,000 or 40.8%. The increase in trucking
expenses was driven by improved sales and by the significant increase in
fuel prices experienced during the first quarter of 2000. Higher travel
expense was the result of increased sales efforts in the first quarter of
2000 that helped to produce the increased revenue for that period and are
designed to add future revenues for the remainder of the year.
Depreciation, Goodwill and Trademark Amortization
- -------------------------------------------------
Depreciation, goodwill and trademark amortization increased to $1.7
million for the first quarter of 2000 compared with $1.4 million for the
same period in 1999. This increase primarily is due to depreciation on
three component manufacturing facilities acquired since the first quarter
of 1999 as well as capital additions in support of the Company's major
market program.
Provision for Doubtful Accounts
- -------------------------------
The provision for doubtful accounts of approximately $432,000 for the
first quarter of 2000 was comparable to approximately $448,000 in the first
quarter of 1999.
15
<PAGE>16
Other Operating Income
- ----------------------
Other operating income for the first quarter of 2000 was $0.8 million
compared with $0.9 million for the first quarter of 1999. During the first
quarter of 1999 the Company recorded a gain of $0.1 million on the
settlement of a casualty claim. There were no large claims in 2000.
Interest Expense
- ----------------
In the first quarter of 2000 interest expense increased to $5.7 million
from $5.3 million during the first quarter of 1999, primarily resulting
from an increase in average total long-term debt of approximately $21
million. In addition, interest cost on the Company's revolving line of
credit increased as a result of changes in the average prime and LIBOR
rates. This increase was mitigated by the lower interest rates obtained by
the Company under its current bank revolving credit facility compared to
the facility in place prior to February 19, 1999. Approximately 73% of the
Company's first quarter average borrowings on its revolving credit facility
were LIBOR-based, compared to 87% in 1999.
Income Tax Benefit
- ------------------
The Company recorded an income tax benefit of $1.7 million for the first
quarter of 2000 compared with a benefit of $1.8 million in the first
quarter of 1999. An effective federal and state income tax rate of 38.8%
was used to calculate income taxes for the first quarter of 2000, compared
with an effective rate of 40.5% for the first quarter of 1999. In addition
to the effective income tax rate, state franchise taxes of $186,000 and
$285,000 for the three months ended March 25, 2000 and March 27, 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 1995, 1997, and 1998
management believes that it is more likely than not that the Company will
receive full benefit of its deferred tax asset, net of the valuation
allowance. 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
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.
Year 2000
- ---------
The Year 2000 problem related to the possible inability of certain
computer programs and computer hardware to properly handle dates after
December 31, 1999. Potentially, businesses were at risk for miscalculations
and systems failures. 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. To date the Company has not experienced any
significant Year 2000 problems and will continue to monitor its systems
over the next few months.
The Company's total cost for the Year 2000 project was estimated at
$2.7 million. Through March 2000, approximately $2.5 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.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The Company's principal sources of working capital and liquidity are
earnings and borrowings under its revolving credit facility. The Company's
primary need for capital resources is to finance inventory and accounts
receivable.
During the first three months of 2000 net cash used by operating
activities was $3.3 million, $11.5 million less than the $14.8 million used
in the first quarter of 1999. The first three months of the year
historically have generated negative cash flows from operating activities.
With the peak building season historically occurring in the second and
third quarters, the Company normally experiences increases in its inventory
levels during the first quarter to meet the anticipated increase in sales.
17
<PAGE>18
The Company's accounts receivable balance at the end of the first
quarter of 2000 increased $9.4 million when compared to the end of the
first quarter of 1999, an increase of 10.7%. This increase is the result
of increased sales in the first quarter of 2000, when compared with the
first quarter of 1999, of approximately 12.9%.
Inventory at the end of the first quarter of 2000 was $14.0 million, or
11.0%, higher than at the end of the first quarter of 1999. This increase
is largely attributable to the additional inventory necessary to support
the 12.9% increase in first quarter sales and, more importantly, the
anticipated increased sales in the second and third quarters. Categories
of inventory which experienced the most significant increase in the current
period verses the prior year's period, with their related amount of
increases were lumber and plywood ($5.0 million), drywall ($3.2 million),
trusses ($1.5 million), insulation ($1.3 million), tools ($1.3 million),
and windows ($1.2 million). Accounts payable at the end of the first
quarter of 2000 increased approximately $2.0 million, or 3.1% from the
first quarter of 1999. The increase primarily is attributable to the
increase in total inventory.
The Company's capital expenditures consist primarily of the
construction of storage facilities, the remodeling and reformatting of
sales and distribution facilities and component manufacturing facilities,
and the purchase of vehicles, equipment and management information systems
for both existing and new operations. The Company also may make
expenditures to establish or acquire operations to expand or complement its
existing operations, especially in its major markets. In the first three
months of 2000 the Company spent $2.6 million on capital expenditures as
compared to $2.1 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.
At May 1, 2000 the Company operated 101 sales and distribution centers
and 17 component manufacturing facilities, compared with 101 sales and
distribution facilities and 14 component manufacturing facilities at May 1,
1999. Eight additional component manufacturing facilities are located in
existing sales and distribution facilities.
The Company maintained excess availability under its revolving line of
credit throughout the first three months of 2000. At the end of the first
quarter total borrowings under the revolving line of credit were $17.5
million higher than at the end of the first 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 March 25, 2000, $126.3
18
<PAGE>19
million was outstanding under the Company's revolving line of credit, and
the unused availability was approximately $35.4 million. The Company's
assessment of its future funds availability constitutes Forward-Looking
Information made pursuant to the Private Securities Litigation Reform Act
of 1995 and is inherently subject to uncertainty resulting from, among
other things, the factors discussed under "Results of Operations -
Provision for Income Tax Benefit".
On February 17, 1999 the Company entered into a new revolving credit
agreement and repaid all indebtedness under and terminated its old
revolving credit agreement. Among other things, the changes between the
old agreement and this new agreement include (i) an initial 25 basis point
reduction in the Company's LIBOR and prime borrowing rates to 200 basis
points over LIBOR and 50 basis points over prime, and further provisions
for additional decreases in the borrowing rate if certain interest coverage
levels are achieved, (ii) an increase in the maximum credit line from $130
million to $160 million, (iii) a decrease in the unused line fee from 50
basis points to 25 basis points, (iv) elimination of the fixed charge
coverage requirement, (v) extension of the term of the agreement to June of
2003, (vi) increases, subject to the permitted discretion of the agent for
the lenders, in the percent of eligible accounts receivable to 85% from a
range between 80% and 85% and the percent of eligible inventory to 60% from
a range between 50% and 60%. Covenants under the new agreement do require,
among other things, that the Company maintain unused availability under the
new revolving line of credit of at least $15 million (subject to increase
in certain circumstances) and maintain certain levels of tangible capital
funds.
In conjunction with the new revolving credit agreement, the Company
terminated its interest rate swap agreement and entered into a new interest
rate swap agreement. This new agreement effectively fixes the interest rate
at 7.50% (based on the LIBOR plus 1.75% pricing in effect on March 25,
2000), reduced from 8.11% under the old agreement, for three years, on $40
million of the Company's borrowings under its floating rate revolving line
of credit. Unlike the prior agreement, this interest rate swap has no
provisions for termination based on changes in the 30-day LIBOR borrowing
rate.
19
<PAGE>20
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 March 25, 2000
the Company had 89 lumber futures contracts outstanding with a total market
value of $3.2 million and an immaterial net unrealized loss. These
contracts all mature in 2000.
The fair value of the Company's fixed rate debt was $85 million at
December 25, 1999 and March 25, 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 $2.1 million at December 25, 1999 and March 25,
2000, respectively.
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.
20
<PAGE>21
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.
21
<PAGE>22
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
WICKES INC.
By: /s/ J. Steven Wilson
--------------------
J. Steven Wilson
Chairman and Chief Executive Officer
(Principal Executive and Financial Officer)
By: /s/ Russell J. Bonaguidi
-------------------------
Russell J. Bonaguidi
Controller and Principal Accounting
Officer
Date: May 8, 2000
22
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE MARCH
25, 2000 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-25-2000
<PERIOD-END> DEC-30-2000
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<ALLOWANCES> 4105
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<CURRENT-ASSETS> 250630
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<CURRENT-LIABILITIES> 86584
<BONDS> 100000
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<COMMON> 82
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<TOTAL-LIABILITY-AND-EQUITY> 344197
<SALES> 215754
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<INTEREST-EXPENSE> 5740
<INCOME-PRETAX> (4908)
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