Wickes' 110 building centers are located in 24 states, with 70 in the Midwest, 25 in the Northeast and 15 in the South. See "Item 1. Business - Building Materials - Markets." Wickes believes that its facilities generally are in good condition and will meet Wickes' needs in the foreseeable future.
Wickes also owns and leases a large fleet of trucks and other vehicles, including vehicles specialized for the delivery of certain of Wickes' products. As of February 28, 1997, the fleet included approximately 96 heavy duty trucks, 55 of which provide roof-top or second story delivery, 506 medium duty trucks, 433 light duty trucks and automobiles, 531 forklifts, and 85 specialized millwork delivery vehicles.
The following summary of certain consolidated financial data of the company is derived from the Company's Consolidated Financial Statements included elsewhere herein and should be read in conjunction with thise financial statements and notes thereto and "
The following discussion should be read in conjunction with the Consolidated Financial Statements and Notes contained elsewhere herein. Since the operations of Wickes are consolidated with those of the Company and its subsidiaries for the third and fourth quarters of 1996 and accounted for on the equity method for prior periods, comparisons between periods may not be meaningful in certain respects.
The Parent Company's general liquidity requirements consist primarily of funds for payment of debt and related interest, and for operating expenses. 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 operations of WML. Although revenues are increasing for WML the Company currently forecasts that these operations will continue to produce negative cash flows through at least through the second quarter of 1997 and that these operations alone will not provide sufficient funds for the Parent Company's total long-term liquidity needs.
The $10,000,000 principal of the 13% 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 or asset sales.
The ability of WML to attain profitability and provide a positive contribution to the Parent Company's liquidity depends upon a variety of factors, including the ability to attract qualified loan representatives, market acceptance for its services, the maintenance of an adequate interest spread between its cost of borrowing and rates charged on its construction loans, and the ability to keep its operating costs at an acceptable level.
- In June 1996, the completion of the Circle Merger provided net cash of $13.5 million after payment of $18.0 million of bank debt, $2.0 million down payment for real estate, closing expenses and taxes. The Company used $10 million of the proceeds to acquire two million shares of Wickes Common Stock on June 20, 1996 (see Note 3 of Notes to Consolidated Financial Statements included elsewhere herein).
- In October 1996, the Company paid a cash dividend of approximately $.10 per share, or an aggregate of approximately $530,000, to shareholders of record on October 15, 1996. See "Item 5. Market for Registrant's Common Equity and Related Matters."
See Note 10 of Notes to Consolidated Financial Statements included elsewhere for a description of certain contingencies.
FORWARD-LOOKING INFORMATION CAUTIONARY STATEMENT. The discussion above of the Company's future liquidity needs constitutes Forward-Looking Information within the meaning of the Private
Securities Litigation Reform Act of 1995 and is inherently subject to uncertainty as a result of a number of risk factors including, among other things: (i) the future operating results of WML, (ii) the Company's ability to achieve the level of real estate sales required to meet scheduled real estate debt payments, and (iii) the ability of the Company to raise funds through sales of Circle Shares or Wickes Common Stock. The future operating results of WML will depend upon, among other things, the factors discussed above. Future real estate sales depend upon a number of factors, including interest rates, general economic conditions, and conditions in the commercial real estate markets in Atlanta, Georgia, and Jacksonville, Florida. As discussed above, although there is currently pending an agreement that would convert the Circle Shares into approximately $5.3 million in cash there is no assurance that this transaction will be completed or how many Circle Shares will be released from pledge. The Company's ability to sell Wickes Common Stock will depend upon, among other things, the public trading price of Wickes Common Stock and, in light of the relatively low public trading volume for Wickes Common Stock, possibly the Company's ability to find a buyer or buyers for Wickes Common Stock in a private transaction or otherwise.
Wickes' management's focus on improving the balance sheet included making significant improvements in the use of working capital. Accounts receivable at the end of 1996 were $10.6 million, or 12.9%, lower than at year-end 1995. Building centers that were closed at the end of December 1995 and during 1996 account for approximately $6.3 million of this reduction. The remainder is attributed to improved collection practices, especially at building centers that were acquired during 1994, a reduction in the number of accounts with extended terms and improved delinquency. Inventory at the end of 1996 was $10.0 million, or 9.0%, lower than at year-end 1995. The primary reason for the decrease in inventory is the closing of 18 building centers since December of 1995. The amount of Wickes' accounts payable on any balance sheet date may vary from the average accounts payable throughout the period due to the timing of payments and will tend to increase or decease in conjunction with an increase or decrease in inventory.
On June 20, 1996, Wickes sold to the Parent Company 2 million newly-is sued shares of Wickes' Common Stock for $10 million in cash. In accordance with the terms of Wickes' revolving credit agreement, upon completion of this transaction $12 million in real estate was released as collateral required under this agreement. These funds were used to reduce Wickes' borrowings under its revolving credit facility.
Wickes' capital expenditures consist primarily of the construction of storage facilities, the remodeling of building centers and component manufacturing facilities, and the purchase of equipment and management information systems. Wickes may also from time to time make expenditures to establish Limited SKU Facilities or to establish or acquire operations to expand or complement its existing operations. Wickes made $2.9 million in capital expenditures in 1996. Wickes expects to spend between $4 million and $6 million in 1997. These expenditures are expected to be funded by Wickes' borrowings and its internally generated cash flow. At December 28, 1996, there were no material commitments for future capital expenditures.
(2) Subsequent to June 30,1996, the Company consolidated its results of operations with those of Wickes.
(3) Includes net realized investment gains(losses) of $1,674,000, ($234,000), and ($182,000) in 1996, 1995 and 1994, respectively. 1995 includes other income of $600,000 related to the settlement of a disputed financing proposal. 1994 includes other income of $558,000 from the sale of certain of the Company's 13% subordinated notes and a gain on sale of a former subsidiary to Wickes of $613,000. (See Note 12 of Notes to the Consolidated Financial Statements included elsewhere herein.)
For the first six months of 1996, the Company recorded equity in Wickes' losses of $1,714,000. During the second half of 1996, the Company consolidated Wickes' results of operations with those of the Company's other operations. The Company estimates that, after inter-company eliminations, and net of goodwill amortization of approximately $202,000, Wickes contributed earnings of $2,282,000 to the Company's results of operations during the second half of 1996.
The following discussions of Wickes' full year operations for 1994, 1995 and 1996 was obtained from the Wickes 10-K.
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 elsewhere herein.
Wickes' operations, as well as those of the building material industry generally, have reflected substantial fluctuations from period to period as a consequence of various factors, including levels of construction activity, general regional and local economic conditions, prices of commodity wood products, interest rates and the availability of credit, all of which are cyclical in nature. Wickes anticipates that fluctuations from period to period will continue in the future. Because a substantial percentage of Wickes' sales are attributable to building professionals, certain of these factors may have a more significant impact on Wickes than on companies more heavily focused on consumers.
THREE MONTHS ENDED (in millions, except per share data and percentages)
This Item 7 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 Wickes' business and financial results and financial condition to be materially different from those stated in the Forward Looking Statements. Those factors include but are not limited to the seasonal and cyclical factors discussed above in this Item 7 and elsewhere in this report, the effects of Wickes' substantial leverage and competition, the success of Wickes' operational efforts, and the matters discussed in Note 10 of the Notes to Consolidated Financial Statements included elsewhere herein.
Total housing starts in the United States increased 8.8% 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.
The decline in gross profit as a percent of sales is primarily attributed 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 Wickes' sales attributable to professional builders increased to 84.7% for 1996 compared with 81.6% in 1995, and sales attributable to commodity lumber products increased from 50.6% in 1995 to 52.7% in 1996. Wickes anticipates that its continued focus on the professional builder will create additional pressure on gross profit margins. 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.
Wickes experienced a decrease in salaries, wages and employee benefits as a percent of sales by 0.5% from 1995 to 1996. On a same store basis, the number of total employees at the average building center during 1996 was reduced approximately 13% from 1995. In 1996 Wickes successfully recovered $3.7 million in previous year's insurance costs. The recoveries associated with workers compensation insurance reduced salaries, wages and employee benefits by 0.2% of sales, and the balance of the recoveries reduced property and casualty insurance, as a percent of sales, by 0.2% Wickes also experienced decreases from 1995 to 1996 as a percent of sales in postage, communications, office supplies, and marketing expenses which were partially offset by increased delivery costs.
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 Wickes' corporate headquarters in Vernon Hills, Illinois.
PROVISION FOR DOUBTFUL ACCOUNTS. Wickes extends credit, generally due on the 10th day of the month following the sale, to qualified and approved contractors. Wickes' provision for doubtful accounts decreased to $1.1 million or 0.1% of sales for 1996 from $6.5 million or 0.7% of sales for 1995. Much of this decrease is attributable to improved credit policies at centers acquired since 1994 and a more selective customer base. In addition, Wickes significantly increased its efforts to collect previously reserved accounts receivable. The provision attributable to the Gerrity Lumber acquisition centers improved significantly from 1995 to 1996. Historically Wickes' provision for doubtful accounts averages approximately 0.3% of sales.
RESTRUCTURING AND UNUSUAL ITEMS. After extensive review of the 1995 Plan, and changes in business conditions in certain markets in which Wickes operates, Wickes made adjustments to the 1995 Plan and incurred other one time costs resulting in a net $0.7 million charge to results of operations in the fourth quarter of 1996 for restructuring and unusual items. These adjustments included (i) the determination that three of the centers identified in the 1995 Plan for closure will remain open, resulting in a $1.5 million credit to restructuring expense, (ii) the extension of the 1995 plan to include the closing (substantially completed by the end of 1996) of two building centers not previously included, resulting in a $1.3 million charge for the write down of assets and liabilities to their net realizable value and a $0.1 million charge for severance and post-employment benefits, (iii) a $1.1 million charge for impairment in the carrying value of real estate held for sale at closed centers, and (iv) a $0.3 million credit with respect to the resolution of a claim at below the reserved amount.
INTEREST EXPENSE. Wickes' interest expense decreased to $21.8 million in 1996 from $24.4 million in 1995. This decrease was the result of a decrease in average outstanding debt under Wickes' revolving line of credit of $26.8 million partially offset by an increase in the overall effective borrowing rate of 22 basis points. The decrease in average outstanding debt was due primarily to cash provided by operations, proceeds from the sale of additional common stock and the proceeds from the sale of excess real estate and vehicles.
EQUITY IN LOSS OF AFFILIATED COMPANY. During 1996, Wickes' equity in the losses of Riverside International LLC was $3.2 million compared with equity in losses of $3.5 million during 1995. See "Item 1. Business - Building Materials - International Operations" and 2 of Notes to Consolidated Financial Statements included elsewhere herein.
NET INCOME. Wickes' 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.
NET SALES. Wickes' net sales for 1995 decreased $14.3 million, or 1.4%, to $972.6 million from $986.9 million in 1994. The 1994 fiscal year consisted of 53 weeks compared with 52 weeks in 1995. After adjusting for this additional week of sales in 1994, Wickes experienced only a $.3 million sales decline from 1994. Sales for all facilities operated throughout both years decreased 3.8%. After adjusting for the additional week in 1994 the decrease was 2.1%.
GROSS PROFIT. Wickes' gross profit decreased $13.0 million to 22.7% of net sales for 1995 compared with 23.7% of net sales for 1994. Wickes estimates that deflation in lumber prices caused approximately $7.6 million of this decrease, and the additional week of sales in 1994 contributed approximately $3.3 million of additional gross profit in 1994.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE. In 1995, Wickes' SG&A increased as a percent of net sales to 20.0% compared with 19.7% of net sales in 1994. While new residential construction activity slowed during 1995, expenses were not adjusted quickly enough to match the rate of the decline in residential construction. The deflation in lumber prices also affected SG&A as a percent of sales as certain costs tend to increase from year to year, such as delivery, rent and utilities, and are relatively unaffected by lumber deflation.
Wickes' largest single expense, labor costs, remained constant as a percent of sales from 1994 to 1995. Wickes did experience increases from 1994 to 1995, as a percent of sales, in communications, rental, and delivery expense. Wickes also experienced a decrease, as a percent of sales, in marketing and advertising costs. In the second half of 1995, there were significant reductions made in the work force to keep salary and wage costs in line with actual sales volume.
DEPRECIATION, GOODWILL AND TRADEMARK AMORTIZATION. Wickes' depreciation, goodwill and trademark amortization costs increased $1.3 million in 1995 compared with 1994. Depreciation of vehicles and equipment, and amortization of goodwill for acquisitions purchased during the second half of 1994 and first half of 1995 account for all of the increase.
RESTRUCTURING AND UNUSUAL ITEMS. During the fourth quarter of 1995 Wickes committed to the 1995 Plan, which included a reduction in the number of under-performing building centers and the corresponding overhead to support these building centers, and the strengthening of Wickes capital structure. Wickes recorded a $17.8 million charge relating to the 1995 Plan and other unusual items. See "Item 1. Business Background" and Note 2 of Notes to Consolidated Financial Statements included elsewhere herein.
PROVISION FOR INCOME TAXES. In 1995, Wickes recorded current income tax expense of $1.4 million compared with $1.7 million in 1994. The 1995 income tax provision consists of state and local tax liabilities. The 1994 income tax provision consisted of $1.4 million for state and local liabilities and $0.3 million for the alternative minimum federal income tax liability. A deferred tax benefit of $11.8 million was also recorded in 1995. This benefit is 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.
The following discussion relates to the operations of the Parent Company and its subsidiaries, other than Wickes and its former life insurance subsidiaries (the "Parent Group").
consists of non-recurring items, such as settlement proceeds from legal proceedings; therefore, comparisons between periods are not meaningful. Included in other income for 1996 was $355,000 related to WML's operations, and $200,000 received in a settlement relating to the Company's former property and casualty insurance operations. Revenues for 1995 primarily consisted of $600,000 related to a settlement of disputed financing proposal, and approximately $125,000 collected for the administration of a risk management plan for the Parent Company. Revenues for 1994 includes $558,000 from the sale of certain of the Company's 13% subordinated notes and a gain of approximately $613,000 on a sale of a former subsidiary of the Company to Wickes.
Included in the Company's net realized investment gains(losses) for 1996, 1995 and 1994 of $1,672,000 ($234,000) and ($182,000) were net realized gains(losses) on real estate investments of $656,000, $392,000 and ($82,000), respectively.
The following table sets forth comparative information concerning the results of the Company's former property and casualty operations.
Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Impairment is evaluated by comparing future cash flows (undiscounted and without interest charges) expected to result from the use or sale of the asset and its eventual disposition, to the carrying amount of the asset. This accounting principle was effective for the Company fiscal year ending December 31, 1996. Adoption did not have a material impact on the Company's financial position.