Wickes' Conventional Market building centers generally consist of a showroom averaging 9,600 square feet and covered storage averaging 38,500 square feet. Wickes' sales and distribution facilities located in
Major Markets tend to be more specialized. Included among these facilities are two WCS facilities, which stock little or no commodity wood products and therefore have no traditional lumber storage yard, as well as facilities that stock primarily commodity wood products and therefore have no showroom, as well as facilities similar to Wickes' Conventional Market building centers. Wickes upgraded or Reset 19 of its showrooms in 1997. Wickes' sales and distribution facilities are situated on properties ranging from 1.0 to 28.2 acres and averaging 9.4 acres. Wickes also operates ten component manufacturing facilities which have an average of 40,000 square feet under roof on 7.1 acres.
Wickes owns 84 of its sales and distribution facilities and 82 of the sites on which such facilities are located. The remaining 17 sales and distribution facilities and 19 sites are leased. As of December 27, 1997, Wickes also held for sale the assets of nine closed facilities and one other property with an aggregate book value of $3.5 million. In addition to its sales and distribution facilities, Wickes operates ten component manufacturing plants. Four of these plants are located on sales and distribution facility sites. Of the remaining six plants, four are on owned sites and two are on leased properties.
Wickes also owns or leases a large fleet of trucks and other vehicles, including vehicles specialized for the delivery of certain of Wickes' products. As of February 28, 1998, the fleet included approximately 129 heavy duty trucks, 68 of which provide roof-top or second story delivery, 523 medium duty trucks, 516 light duty trucks and automobiles, 571 forklifts, 90 specialized millwork delivery vehicles, and 28 vehicles equipped to install blown insulation.
Wickes leases its corporate headquarters, a portion of which is subleased, located at 706 North Deerpath Drive in Vernon Hills, Illinois.
Management's Discussion and Analysis of Financial Condition and - ------------------------------------------------------------------------- Results of Operations. ----------------------
(3) Includes net realized investment gains(losses) of $897,000, $1,672,000, and ($234,000), in 1997, 1996 and 1995, respectively. 1995 includes other income of $600,000 related to the settlement of a disputed financing proposal.
(5) Includes a benefit of $0.6 million in 1997 and a charge of $0.7 million in 1996, for restructuring and unusual items for Wickes.
The following table sets forth, for the periods indicated, the percentage relationship to net sales of certain expense and income items. The table and subsequent discussion should be read in conjunction with the financial statements and notes thereto appearing in the Wickes' 10-K.
Wickes' first quarter and, occasionally, its fourth quarter are adversely affected by weather patterns in the Midwest and Northeast, which result in seasonal decreases in levels of construction activity in these areas. The extent of such decreases in activity is a function of the severity of winter conditions. While Wickes' experienced relatively mild weather during the first quarter of 1995, record setting snow falls throughout the Midwest and Northeast in January of 1996, adversely affected construction activity in the first quarter of 1996. Weather conditions in 1997 were relatively normal throughout the year.
Net income/(loss) in the fourth quarter of 1995 was negatively affected by a $17.8 million charge for restructuring and unusual items. In 1997 and 1996 Wickes recorded a benefit of $0.6 million and a charge of $0.7 million, respectively, as restructuring and unusual items. For additional information on the restructuring and unusual items charge see Note 2 of Notes to Consolidated Financial Statements included elsewhere herein. In addition, in 1996 Wickes received insurance premium adjustments from a former insurance carrier in the amount of $2.2 million and reversed an accrual of $1.5 million for other disputed insurance premiums with this carrier. Accordingly selling, general and administrative expenses were reduced by $1.0 million during the first three quarters of 1996 and by $2.7 million in the fourth quarter of 1996. In the fourth quarter of 1997, Wickes recorded a gain of $4.5 million on the sale of six pieces of real estate. In the fourth quarter of 1996, only three pieces of real estate were sold with a net gain of $0.6 million. Gains or losses on the sale of real estate are recorded under other operating income.
In February 1998, Wickes announced that it had closed an additional eight facilities and intended to sell its two locations in Iowa. See "Item 1. Business - Business Strategy". These facilities contributed an aggregate of $46.5 million to 1997 sales.
The increase in gross profit as a percent of sales is primarily attributable to reduced cost of sales as a result of a concerted effort to obtain the best pricing available. Wickes also expanded its sales of higher
margin internally manufactured products by approximately 27% from 1996 to 1997, and experienced a reduction in costs associated with physical inventory count adjustments. These increases were partially offset by increased percent of sales attributable to professional builders and an increase in the percent of sales attributable to lower margin commodity lumber products. The percent of Company sales attributable to professional builders increased to 86.5% for 1997 compared with 84.7% in 1996. Wickes anticipates that its continued focus on the professional builder will create additional pressure on gross profit margins.
Compared to 1996, on a same store basis, the average number of employees at Wickes' sales and distribution facilities in 1997 increased by approximately 5%. Wickes also experienced an increase in salaries and wages in its non-core operations. Both were major factors in the 1.0% increase, as a percentage of sales, of Wickes' salaries, wages and employee benefits. Wickes also experienced increases as a percentage of sales in travel, office supplies, professional and marketing expenses.
During 1997, Wickes Reset the showrooms of 13 Conventional Market building centers and six Major Market sales and distribution facilities. Also during 1997, Wickes continued its efforts to expand its Major Markets program. See Item 1."Business - Business Strategy". Expenses associated with these Resets and expansion of the Major Markets program totaled approximately $1.8 million in 1997 and accounted for approximately $1.3 million of the SG&A increase.
In October 1997, Wickes announced plans to streamline operations and to focus on core operations. In accordance with these plans, Wickes discontinued or sold non-core operations that contributed approximately $1.5 million of SG&A during 1997. In addition, Wickes effected headquarters staffing reductions beginning in October 1997, and increased the amount of these reductions pursuant to a determination announced in February 1998. Wickes expects these headquarters reductions to result in approximately $6 million annually in future SG&A savings. Also, Wickes announced in February 1998 that it had closed eight additional under performing building centers and planned to sell its two Iowa building centers. For further information, including the charge expected to be taken by Wickes in the first quarter of 1998, see "Item 1. Business - Business Strategy" and Note 16 of the Notes to Consolidated Financial Statement included elsewhere herein.
Wickes extends credit, generally due on the 10th day of the month following the sale, to qualified and approved contractors. Provision for doubtful accounts increased to $1.7 million or 0.2% of sales for 1997 from $1.1 million or 0.1% of sales for 1996. Historically Wickes' provision for doubtful accounts averages approximately 0.3% of sales. The results achieved in 1996 were a result of increased efforts to collect previously reserved accounts receivable, especially those attributable to the Gerrity Lumber acquisition centers.
Other operating income increased to $10.7 million in 1997, compared with $6.8 million in 1996. The increase resulted from gains reported on the sale of facilities and excess equipment of approximately $6.3 million, an increase of $4.3 million from the $2.0 million recorded in 1996. The approxi- mately $0.7 million gain on the sale of Wickes' headquarters in Vernon Hills, Illinois, is being amortized over a 15-year period consistent with Wickes' lease of the facility. This increase was partially offset by a $0.6 million gain recorded in 1996 as a result of the difference between insured replacement cost and book value as a result of a fire and storm damage at several of Wickes' building centers.
Interest expense decreased to $21.4 million in 1997 from $21.8 million in 1996, as a result of a decrease in Company's overall effective borrowing rate of 21 basis points, partially offset by an increase in average outstanding debt under Wickes' revolving line of credit of $4.5 million. The increase in average outstanding debt was due primarily to reduced net cash flow from operating activities and increased investment in property, plant and equipment.
During 1997, Wickes' equity in the losses of Riverside International LLC was $1.5 million compared with $3.2 million during 1996. The $1.5 million loss in 1997 reduced Wickes' net investment to zero. See Note 1 of Notes to Consolidated Financial Statements included elsewhere herein.
A deferred tax benefit of $0.2 million was also recorded for 1997. This compares with a deferred tax expense of $0.3 million in 1996. The 1997 benefit results from the loss before income taxes and the establishment of a deferred tax asset, in accordance with FAS 109. Management has determined (based on Wickes' positive earnings growth from 1992 through 1994 and its expectations for the future) that operating income of Wickes will more likely than not be sufficient to recognize fully these net deferred tax assets. See Note 13 of Notes to Consolidated Financial Statements included elsewhere herein.
Had the program eliminations, facilities closings and expense reductions announced in October 1997 and February 1998 been implemented prior to the beginning of 1997, Wickes estimates that 1997 pro forma net income would have been $6.0 million, before the $6.9 million estimated charge with respect to these restructuring activities. See "Item 1. Business - Business Strategy" and Note 16 of Notes to Consolidated Financial Statements included elsewhere herein.
Net sales for 1996 decreased $124.1 million, or 12.8%, to $848.5 million from $972.6 million in 1995. Same store sales decreased 6.4%. During 1996, Wickes experienced a 2.1% decrease in same store sales to its primary customer segment, the professional home builder, and a 3.2% increase in same store sales to commercial builders.
Total housing starts in the United States increased 9.6% in 1996, and starts in Wickes' primary markets, the Midwest and Northeast, increased approximately 10.6% and 11.2%, respectively. Nationally, single family housing starts, which generate the majority of Wickes' sales to building professionals, experienced an increase of 7.8% in 1996, from 1.07 million starts in 1995 to 1.16 million starts in 1996. In 1996 inflation in lumber prices had a negligible effect on sales.
Gross profit decreased $31.3 million to 22.3% of net sales for 1996 compared with 22.7% of net sales for 1995. The primary reason for the decrease in gross profit was the reduction in total sales as a result of Wickes' program to reduce the number of under-performing building centers.
The decline in gross profit as a percent of sales was primarily attributable to Wickes' continued emphasis on sales to the professional builder, resulting in an increase in the portion of Wickes' sales comprised of lower margin commodity products, and to a lesser extent a program to reduce the amount of excess and slow moving inventory. The percent of Company sales attributable to professional builders increased to 84.7% for 1996 compared with 81.6% in 1995, and sales attributable to commodity lumber products and manufactured housing components increased from 50.6% in 1995 to 52.7% in 1996. The decline in gross profit as a percent of sales was partially offset by a decrease in the cost associated with physical inventory count adjustments.
In addition to the reductions in SG&A directly related to building center closings, other cost reduction initiatives included a reduction in vehicles and other equipment at continuing operations and various programs to reduce costs associated with the corporate headquarters in Vernon Hills, Illinois.
In 1996, Wickes recorded current income tax expense of $1.0 million compared with $1.4 million in 1995. The 1996 and 1995 current income tax provisions consist of state and local tax liabilities.
A deferred tax expense of $0.3 million was also recorded in 1996. This expense results from temporary differences in the recognition of certain items of revenue and expense for tax and financial reporting purposes. In 1995 a deferred tax benefit of $11.8 million was recorded primarily due to the recording of a deferred tax asset as a result of the operating loss experienced during 1995, in accordance with FAS 109. See Note 13 of Notes to Consolidated Financial Statements included elsewhere herein.
Net income was $0.5 million in 1996, compared with a net loss of $15.6 million in 1995, an improvement of $16.1 million. The primary components of this improvement include a decrease in SG&A expense of $32.3 million, a decrease in restructuring and unusual items expense of $17.1 million, a decrease in provision for doubtful accounts of $5.4 million, a decrease in interest expense of $2.6 million, and an increase in other income of $1.0 million. These improvements were partially offset by a decrease in gross profit of $31.3 million and an increase in the provision for income taxes of $11.8 million.
The Company's Consolidated Statements of Operations include the operations of its former life insurance subsidiaries through June 6, 1996, the date of the Circle Merger. The following table sets forth financial information with respect to the Company's former life insurance operations through June 6, 1996:
The Parent Group's non-interest operating expenses for 1997 increased 46% to $2,769,000 compared to $1,898,000 in 1996. The primary reasons for the increase include approximately $673,000 of expenses relating to the acquisition of certain operations that Riverside acquired from Wickes that Wickes had determined to discontinue as a result of Wickes' plan to streamline its operations and focus primarily on its core professional builder business. The operations transferred include internet, telephony and utilities marketing. Other increases to the Parent Group's non-interest operating expenses include expenses that were no longer allocable to Riverside's life insurance operations. Other increases include a reserve of approximately $434,000 Riverside established in 1997 with respect to a receivable from an affiliate of Mr. Wilson. This affiliate provides the Company use of an airplane for its travel. During 1997, the Company's use of this airplane was primarily by Wickes (see Note 15 of Notes to Consolidated Financial Statements - "Related Party Transactions"). These increases were offset by savings from the restructuring of the Wickes Financial Service Centers, Inc. program. In addition, in 1996, Riverside charged off certain deferred bank costs as a result of the Circle Merger.
The Parent Group's non-interest operating expenses for 1996 decreased 29% to $1,898,000 compared to $2,679,000 in 1995. The primary reason for the decrease was savings made to the Wickes Financial Service Centers, Inc. program in 1996. This savings was partially offset by non-recurring expenses including bank debt costs amortized as a result of the Circle Merger, and expenses that were no longer allowable to Riverside's life insurance operations.
Interest expense for 1997, 1996, and 1995 was $3,108,000, $3,093,000, and $3,280,000, respectively. In 1997, interest expense consisted of $1,473,000 on the Parent Company's subordinated notes, $167,000 on the Parent Company's other bank debt and $1,468,000 on the Parent Company's real estate mortgage debt. In 1996, interest expense consisted of $1,449,000 on the Parent Company's subordinated notes, $112,000 on the Parent Company's other bank debt, $867,000 on the Parent Company's real estate mortgage debt, $665,000 on a note to a bank repaid in June 1996, in connection with the reorganization of Riverside's former life insurance subsidiaries. Interest expense on the Parent Company's real estate debt will continue to decrease as a result of real estate sales. In 1997, the principal balance on the mortgage debt was reduced by $1.5 million.
Included in the Company's net realized investment gains(losses) for 1997, 1996 and 1995 were net realized gains(losses) on real estate investments of $897,000, $656,000 and $392,000, respectively.
(1) Net of reimbursements of $955,000 and $396,000 received during 1997 and 1996, respectively, by the Parent Company on behalf of its mortgage Lending Operations, from Wickes.
Operations, exclusive of Wickes (which is currently prohibited from paying dividends by reason of restrictions in debt instruments), consist primarily of real estate sales and the Parent Company's internet, telephony and utilities marketing operations. The Parent Company's internet, telephony and utilities marketing operations are in the start-up phase and are expected to be net users of cash at least through August of 1998. Also, real estate sales proceeds are required to be applied to real estate debt reduction and are not available to the Parent Company for other purposes.
The Parent Company believes that its cash on hand will not be sufficient to support its operations and overhead and to service its indebtedness until such time as the Parent Company's internet, telephony and utilities marketing operations have begun to generate significant positive cash flow. Therefore, the Parent Company will need to obtain significant additional funds through asset sales or additional borrowings or other financing. The principal asset that could be sold by the Parent Company would be its shares of Wickes common stock.
As discussed above, $1.4 million in cash, together with real estate and 1.4 million shares of Wickes common stock, are pledged to secure the Parent Company's $16 million of real estate indebtedness. The amount of required collateral for this indebtedness is adjusted quarterly, and cash collateral will be released in the event there is any excess collateral at any quarterly valuation date, which would depend upon factors including the market value of Wickes' common stock and the timing and amount of real estate sales.
For a description of the modification by the Company of an existing obligation to a third party in the approximate amount of $900,000 in June 1997, which the Company plans to repay in full on March 31, 1998, see Note 10 of Notes to Consolidated Financial Statements included elsewhere herein.
The $10,000,000 principal of the Company's 13% Subordinated Notes is due in September 1999. The Company anticipates that to repay this indebtedness it will need to obtain additional funds through borrowings, issuance of debt or equity securities, asset sales, or funds provided by operations.
In 1997, net cash used in operating activities amounted to $24.6 million. This compares with cash provided by operating activities of $18.7 million in 1996 and $15.9 million in 1995. The change of $43.3 million is primarily the result of increases in accounts and notes receivable, inventory, and other assets, as well as decreased earnings after adjustment for non-cash expenses. A smaller decrease in accounts payable and accrued liabilities than the decrease recorded in 1996 helped to offset a portion of the change in net cash used in operating activities. The primary sources of cash for operating activities were borrowings on Wickes' revolving credit agreement and proceeds from the sales of property, plant, and equipment. Wickes also increased its capital expenditures in 1997 to $7.8 million from $2.9 million in 1996.
In 1997 Wickes completed two significant sale leaseback transactions that resulted in net proceeds of approximately $9.6 million, one of these being Wickes' headquarters in Vernon Hills, Illinois. The $0.7 million gain on the sale of the headquarters facility is being amortized over the term of the lease.
Wickes maintained excess availability under its revolving credit facility throughout 1997. Wickes' receivables and inventory typically increase in the second and third quarters of the year due to higher sales in the peak building season. In the first and second quarters of each year, Wickes typically reaches its peak utilization of its revolving credit facility because of the inventory build-up needed for the peak building season. At all times during 1997 Wickes was in full compliance with all of the requirements contained in its revolving credit agreement. Availability under the revolving credit facility is limited, in the aggregate, to the lesser of $130 million and a "borrowing base amount", which is the sum of (i) between 80% and 85% of eligible accounts receivable plus (ii) between 50% and 60% of eligible inventory. At February 28, 1998, Wickes had outstanding borrowings of $95.4 million and unused availability of $17.4 million under its revolving credit facility.
Statement of Financial Accounting Standards No. 129, "Disclosures of Information About Capital Structure", establishes standards for disclosing information about an entity's capital structure. The new accounting principle is effective for the Company's fiscal year ending December 27, 1997. The adoption of this statement did not have a material impact on the Company's financial statements.