Wickes owns eleven component manufacturing facilities, 98 of its building centers and 94 of the sites on which such building centers are located. The remaining twelve building centers and 16 sites are leased. As of December 30, 1995, Wickes also held for sale the assets of 16 closed building centers with an aggregate book value of $4.9 million.
The Company anticipates that the net after-tax cash proceeds of the Life Insurance Reorganization will be approximately $14 million, of which the Company has agreed to utilize $10 million under the Wickes Agreement to acquire an additional two million shares of Wickes Common Stock. See "Item 1. Business - HISTORICAL DEVELOPMENT - Proposed Transactions - Wickes Investment." The Company anticipates that its funds on hand after completion of this investment in Wickes, together with its other sources of funds, will be adequate for the Company's liquidity requirements at least through the second quarter of 1997. In recent years the Company has realized a significant portion of its liquidity requirements through expense reimbursements and other distributions from its insurance subsidiaries. Following completion of the Life Insurance Reorganization these sources of funds will no longer be available. The Company's remaining operations, exclusive of Wickes (which is currently prohibited from paying dividends by reason of restrictions in its debt instruments), will consist primarily of the disposition of certain real estate and the operations of WFSC and the Company's mortgage lending operations, both of which are in the start-up phase and are anticipated to produce significant negative cash flows at least through 1996. The Company will continue to evaluate the prospects and anticipated future cash requirements and contributions of these operations.
significant amount of assets held by the Parent Company and to use the proceeds for Parent Company purposes, which would require the consent of the Company's current bank lenders. The Company believes that should the Circle Agreement for any reason, be terminated the Company would be able to enter into a definitive agreement for a comparable transaction in a reasonable time-frame. Although the Company believes it will complete the Life Insurance Reorganization by late June 1996, there can be no assurance that the Company will continue to have funds sufficient for its needs if the closing of the Life Insurance Reorganization or comparable transaction does not occur or occurs significantly later than expected.
As a result of the decrease during 1995 in the trading value of Wickes and the charges taken in the fourth quarter of 1995 related to the Life Insurance Reorganization, a waiver of certain requirements of the Company's bank credit agreement has been provided and is in the process of being extended. The Company anticipates that this waiver will remain in effect until late June 1996, to allow for completion of the Life Insurance Reorganization. Under the terms of the Life Insurance Reorganization all indebtedness under the Company's bank credit agreement is to be repaid in full by Circle. Circle has informed the Company that it believes, based upon discussions with lenders interested in providing loans to Circle, that it will be able to obtain financing sufficient to retire the Company's bank indebtedness. For a description of the terms of, and certain covenants and restrictions placed upon the Company and AFAC by the Company's bank credit agreement, see Note 6 of Notes to Consolidated Financial Statements included elsewhere herein.
During 1995 and early 1996, material transactions also affecting liquidity are:
- In February 1995, the Parent Company received $600,000 in connection with the settlement of a dispute with respect to a financing proposal to the Company in late 1992.
- In February, April and June of 1995 the Company advanced Wilson Financial Corporation ("Wilson Financial"), the Company's controlling stockholder, an aggregate of $900,000, and Wilson Financial granted the Company an option to acquire (at exercise prices ranging from $5.88 to $6.31 per share) the number of shares of the Company's common stock equal to the amount of such advance and related interest divided by the exercise price. Effective June 30, 1995, the Company elected to exercise this option, acquiring 150,680 shares of its common stock by canceling $918,310 of advances and related interest. In addition the Company purchased from Wilson Financial 23,000 shares of its common stock for an aggregate price of $125,235 in October 1995 and 27,778 common shares for an aggregate price of $125,000 in November of 1995.
See Note 13 of Notes to Consolidated Financial Statements included elsewhere herein for a description of litigation seeking, among other things, rescission of the transaction in which Riverside acquired for approximately $6.5 million an aggregate of 739,198 shares of Wickes common stock.
During 1995, stockholders' equity decreased by a net of $2.7 million due to the losses sustained by Wickes and charges related to the Life Insurance Reorganization which were partially offset by changes in the market value of the Company's invested assets. The ratio of the Company's consolidated total recourse debt to stockholders' equity increased from 113% at December 31, 1994, to 120% at December 31, 1995, as a result of the decline in stockholder's equity.
(3) Includes realized investment gains of $31,000, $91,000 and $7,651,000 in 1995, 1994 and 1993, respectively. 1995 includes a gain on disposal of discontinued property and casualty lines of $2,731,000. 1994 includes $3,500,000 of incurred losses, net of reinsurance, due to unusually adverse loss experience on commercial lines runoff. 1993 includes pre-tax catastrophe losses of $3,200,000 from the severe winter storm of March 1993 and gains resulting from sale of blocks of business of $2,400,000.
(4) See Note 5 of Notes to Consolidated Financial Statements included elsewhere herein.
Wickes net sales for 1995 decreased $14.3 million, or 1.4%, compared to 1994. The 1994 fiscal year consisted of 53 weeks compared to 52 weeks in 1995. After adjusting for the additional week in 1994, Wickes net sales decreased only $.3 million in 1995. Sales for all facilities operating throughout both years decreased 3.8%, 2.1% after adjusting for the additional week in 1994.
In 1995 deflation in lumber prices, of approximately 18%, accounted for an estimated $45 million in lost sales. Housing starts declined in Wickes' primary markets, the Midwest and Northeast, by approximately 12% and 15%, respectively, which also adversely affected sales in 1995. While Wickes added seven new building centers through acquisition and expansion in 1995, it closed or consolidated 26 other building centers (sixteen of these occurred at year-end 1995).
In 1994 gross profit decreased to 23.7% of net sales compared to 24.4% of net sales for 1993. Approximately 66% of the decrease in gross profit percentage for 1994 resulted from the shift in customer mix to emphasize the professional builder.
Net income for Wickes decreased to a loss of $15.6 million in 1995 compared with $28.1 million in income for 1994, a change of $43.7 million. The primary components of the decrease include an increase in restructuring and unusual items of $15.8 million, a decrease in gross profit dollars of $13.0 million, an increase in selling, general and administrative ("S, G & A") expenses of $4.1 million, increased losses of Wickes' Russian operations of $3.1 million and an increase in interest expense of $2.7 million. Wickes also recorded a lower tax benefit in 1995 compared with 1994, increased depreciation and amortization expenses. In the fourth quarter of 1994 Wickes recorded a $1.2 million one-time gain on the sale of its private label credit card portfolio.
Net income increased to $28.1 million in 1994 compared to $8.2 million in 1993. A deferred tax benefit of $14.4 million was recorded due to the reversal of a deferred tax valuation allowance established in a prior year. Other major contributors to the 1994 increase included the increased level of sales, reduced S, G & A expenses as a percentage of sales, reduced trademark amortization and increased other operating income, partially offset by decreased gross profit as a percentage of sales, restructuring and unusual charges and increased interest expense. In 1993 Wickes recorded a one-time extraordinary gain of $1.2 million as a result of its 1993 recapitalization plan.
The decrease in premiums and annuity considerations in 1995 resulted primarily from the sale of Aztec in December 1994. Decreases in 1994 relate to reductions in traditional premium writings.
Policy acquisition expenses were lower in 1995 compared to 1994 due to the reduction in the underlying assets as a result of amounts written off at year-end 1994 and lower commission expenses in 1995 related to the sale of the inforce business of Aztec. Policy acquisition costs were lower in 1994 compared to 1993 due to decreased amortization of deferred acquisition costs as a result of a change in the emergence of gross profits on interest sensitive products.
Decreases in investment income for all years presented result from lower average invested assets and lower investment yields (See "Investment Operations").
Net realized investment gains (losses) for 1995, 1994 and 1993 were ($234,000), ($182,000), and $4,147,000 respectively. Net realized investment losses for 1995 include losses of $1.5 million incurred to write down the entire carrying value of securities of The Atlantic Group, Inc. ("Atlantic"). Directors of the Company beneficially own approximately 75% of Atlantic. On December 31, 1993 as a result of adopting SFAS 115, management segregated certain of the life insurance companies investments in fixed maturities into a separate trading portfolio (Fixed maturities actively managed). These investments were held with the objective of generating incremental returns over those of other alternative fixed income investments within the succeeding year. These investments were liquidated in 1994. Principally as a result of rising interest rates during the first half of 1994, losses realized on the trading portfolio were ($883,000), (($583,000) net of taxes) and partially offset the $903,000 ($596,000 net of taxes) of gains recorded on the trading portfolio in 1993. The gains on the trading portfolio for 1993, net of taxes, are recorded in the consolidated statements of operations as a cumulative effect of change in accounting principles. See Note 5 of Notes to Consolidated Financial Statements included elsewhere herein for further discussion of the investment portfolio.
The Company has $6,008,000 of its investment in real estate in Florida properties, $11,799,000 in Georgia properties, and $72,000 in other states.
Discontinued operations include the Company's property and casualty insurance and mortgage servicing operations.
During 1994, Dependable incurred $3.5 million of net losses from unusually adverse loss experience on its discontinued commercial lines of business. Included in net income (loss) for 1994 is $700,000 in gains related to reinsurance transactions.
The Company's effective income tax rate was 10% in 1995, 25% in 1994 and 13% in 1993. The low effective tax rate for 1995 is due to the inability to fully utilize losses realized on the life insurance reorganization for tax purposes. The low effective tax rate for 1994 and 1993 is due to the recognition of deferred tax assets arising from recapture of tax loss carryforwards.