Circle has entered into a definitive merger agreement with an unrelated third party pursuant to which the Circle Shares are to be converted into an aggregate of approximately $5.3 million in cash. Currently, all of the Circle Shares are pledged to secure the Company's real estate indebtedness to American Founders, and only the merger proceeds of Circle Shares that are released from pledge at the time of the merger and merger proceeds that are subsequently released from pledge would, without American Founders' consent, be available to the Parent Company. The amount of required collateral for this indebtedness is adjusted quarterly and the amount of any excess collateral released. The Company anticipates that Circle Shares that are to be converted into approximately $2.5 million in this merger will be released at March 31, 1997, and depending upon certain factors, including the market value of the Wickes Common Stock and the timing and amount of sales of the real estate securing this indebtedness, a significant additional number of Circle Shares or the merger proceeds thereof could be released in the future. In addition, the Company is currently holding discussions with American Founders concerning the release of additional Circle Shares or merger proceeds in exchange for the pledge of additional shares of Wickes Common Stock. If this merger is completed on its current terms, and if all of the merger proceeds of the Circle Shares are available to the Company, the Company anticipates that it would have sufficient liquidity for its projected needs without additional asset sales or financing through 1998. There can be no assurance, however, that this merger will be completed or concerning the amount of the merger proceeds that will be available to the Company.
(1) Includes ($3.8) million in 1995 related to restructuring charges and $4.2 million of tax benefits in 1994 related to reversal of a deferred tax valuation allowance established in a prior year.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE. In 1996, Wickes' SG&A decreased as a percent of net sales to 19.1% compared with 20.0% of net sales in 1995. In 1996, Wickes focused substantial efforts on better aligning its SG&A expenses to sales volumes and improving the productivity of its existing sales staff in order to improve profitability. As a result of Wickes' 1995 Plan and several cost reduction initiatives implemented in the second half of 1995 and early 1996 Wickes was able to reduce its total SG&A expense by 16.6%, which is proportionately greater than the 12.8% total sales decline for the year.
The Company's effective income tax rate was 6% in 1996, 10% in 1995 and 25% in 1994. The current income tax provision consists of state and local tax liabilities for Wickes. The low effective tax rate for 1996 is attributable to the reduction in valuation allowance allowing previously deferred tax benefits to be recognized currently. It is management's determination that future profitability of Wickes and recognition of potential gains on real estate sales will allow realization of the previously recorded deferred tax assets. This determination is based on Wickes' positive earnings growth from 1992 to 1994, and its expectations for the future that operating income of Wickes will more likely than not be sufficient to fully utilize these deferred tax assets. See Note 13 of Notes to Consolidated Financial Statements included elsewhere herein.