Riverside's executive offices are in leased space in Jacksonville, Florida. In addition, WML leases five offices in various states. See "Item 1. Business - Other Operations - Financial Services to Builders."
Wickes' building centers generally consist of a showroom averaging 9,700 square feet and covered storage averaging 42,800 square feet. Wickes' building centers are situated on properties ranging from 1.3 to 40.0 acres and averaging 10.2 acres. Wickes also operates twelve component manufacturing facilities which have an average of 37,700 square feet under roof on 7.8 acres.
Wickes owns 96 of its building centers and 92 of the sites on which such building centers are located. The remaining 14 building centers and eighteen sites are leased. As of December 28, 1996, Wickes also held for sale the assets of eight closed building centers and three other properties with an aggregate book value of $11.1 million. In addition to its building centers, Wickes operates twelve component manufacturing plants. Six of these plants are located on building center sites. Of the remaining six plants, four are on owned sites and two are on leased properties.
As a consequence, the Parent Company will need to obtain significant additional funds through asset sales (other than sales of real estate, the proceeds of which are required to be utilized to reduce real estate debt) or additional financing to support its operations and service its indebtedness. The principal assets that could be sold by the Parent Company are its shares of Circle common and preferred stock (the "Circle Shares") and Wickes Common Stock.
At March 20, 1997, the Parent Company had $795,000 in cash and short-term investments. After payment of the $650,000 interest payment due on March 31, 1997 with respect to its 13% subordinated notes due 1999, and pending disposition of the Circle Shares in the merger described
above, the Company intends to sell Wickes Common Stock from time to time in sufficient amounts to fund its operating cash needs not supplied by additional financing or from other sources.
At December 31,1996, the principal amount of the Company's real estate debt to American Founders was $17,583,000, and the Company estimates that principal and interest payment on this debt will be approximately $1,899,000 during 1997 and $1,896,000 during 1998. The Company anticipates that it will complete sufficient sales of the real estate securing this debt to make the required payments. Sales in excess of the required amount are required to be applied to reduction of future amounts payable under this debt.
- In August 1996, the Company announced that its Board of Directors approved a plan to acquire in open market transactions from time to time, up to 100,000 shares of the Company's common stock. The Company purchased and retired 15,000 shares of its common stock during the third quarter of 1996. In addition, the Company purchased and retired 9,000 shares during the first quarter of 1997. The Company will continue to review the plan in 1997.
During 1996, stockholders' equity decreased by a net of $5.28 million primarily as a result of decreases in market value of invested assets of the life insurance subsidiaries of $4.4 million and the dividend of $.5 million paid to shareholders on October 31, 1996.
Wickes' principal sources of working capital and liquidity are earnings and borrowings under its revolving credit facility. Wickes' primary need for capital resources is to finance inventory and accounts receivabl
In 1996, net cash provided by Wickes' operating activities amounted to $18.7 million. This compares favorably with cash provided by operating activities of $15.9 million in 1995 and $1.3 million in 1994. This increase is primarily the result of decreases in accounts receivable and inventory as well as earnings after adjustment for non-cash expenses. A decrease in accounts payable and accrued liabilities partially offset these increases. These funds were used primarily to reduce Wickes' net borrowings under its revolving credit facility.
Wickes maintained excess availability under its revolving credit facility throughout 1996. 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 1996 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 March 1, 1997, Wickes had outstanding borrowings of $79.1 million and unused availability of $27.7 million under its revolving credit facility. A second amendment and restatement of the revolving credit agreement, which would include among other things (i) extension of the life facility until March 2001, (ii) 75 basis points reductions in the interest rate premiums over LIBOR and over prime, (iii) modifications to certain financial covenants, and (iv) a provision for further interest rate premium reductions if certain performance levels are achieved, is expected to be completed in March or early April 1997. Wickes currently has excess availability under its revolving credit facility and anticipates that funds provided by operations and under this facility will be adequate for Wickes' future needs.
The revolving credit facility and the trust indenture related to Wickes' 11-5/8% Senior Subordinated Notes contain certain covenants and restrictions. Among other things, the revolving credit facility prohibits non-stock dividends, certain investments and other "restricted payments" by Wickes. The trust indenture generally restricts non-stock dividends and other restricted payments by Wickes to 50% of "cumulative consolidated net income," or if cumulative consolidated net income shall be a loss, minus 100% of such loss, of Wickes earned subsequent to October 22, 1993, plus the proceeds of the sale of certain equity securities after such date. In addition, the trust indenture prohibits non-stock dividends and limits other restricted payments while (as at present) Wickes' fixed charge coverage ratio is less than or equal to 2.0.
The Company reported results of operations for the years ended December 31, 1996, 1995 and 1994 as follows (in thousands):
(4) Includes a $10,970,000 charge on reorganization of life insurance subsidiaries primarily resulting from the write off of intangible assets.
(5) Includes realized investment gains of $31,000 and $91,000 in 1995 and 1994, 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.
Wickes' first quarter and, frequently, 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 a relatively mild first quarter in 1995, severe ice storms in the Northeast in 1994, and record setting snow falls throughout the Midwest and Northeast in January of 1996, have adversely affected construction activity in the first quarter of these years. The following table contains selected unaudited quarterly financial data for the years ended December 28, 1996, December 30, 1995 and December 31, 1994.
Net income/(loss) in the fourth quarter of 1995 was negatively affected by a $17.8 million charge for restructuring and unusual items. In 1996 and 1994 Wickes recorded charges of $0.7 million and $2.0 million, respectively, as restructuring and unusual items. For additional information on the restructuring and unusual items charge see "1995 Compared with 1994" and 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 ("SG&A) 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.
Wickes has historically generated approximately 15% to 20% of its annual revenues during the first quarter of each year, and Wickes has historically recorded a significant net loss for this quarter. As a result of these seasonal factors, Wickes' inventories and receivables reach peak levels during the second and third quarters and are generally lower during the first and fourth quarters, depending on sales volume and lumber prices.
NET SALES. Wickes' net sales for 1996 decreased $124.1 million, or 12.8%, to $848.5 million from $972.6 million in 1995. Sales for all facilities operated throughout both years ("same store") 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.
The reduction in the number of under-performing building centers pursuant to the restructuring plan committed to in December of 1995 was the major cause of Wickes' 1996 total sales decline. Pursuant to this plan, Wickes closed or consolidated 16 building centers in December 1995 and two during 1996. During 1995, these closed or consolidated building centers contributed an aggregate of $86.7 million to total net sales.
GROSS PROFIT. Wickes' 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.
DEPRECIATION, GOODWILL AND TRADEMARK AMORTIZATION. Wickes' depreciation, goodwill and trademark amortization costs decreased $0.5 million in 1996 compared with 1995. The primary reasons for this decrease were a program initiated in early 1996 to reduce excess vehicles and equipment and the closing and sale of facilities in conjunction with the 1995 Plan.
OTHER OPERATING INCOME. Wickes' other operating income increased to $6.8 million in 1996 from $5.8 million in 1995. The increase was the result of an increase in gains reported on the sale of closed facilities, excess vehicles and equipment of approximately $1.9 million when compared with 1995. Wickes also reported a $0.6 million gain as the 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. These gains were partially offset by decreases in services charges for overdue credit accounts of approximately $0.9 million and closed center rental income and other miscellaneous revenues of $0.7 million.
PROVISION FOR INCOME TAXES. 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. Management has determined, based on the 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.
In 1995 deflation in lumber prices amounted to approximately 18% as a result of increased production in Canadian mills, generated by demand for wood pulp, and a decrease in demand for construction lumber in both the United States and foreign markets. Wickes estimates the decline in wood prices accounted for $45 million in lost sales for 1995, or approximately a 4.6% decline. A decline in housing starts in the United States also adversely affected sales. U.S. Bureau of the Census data indicated a nation-wide decline of approximately 7.5% and declines in Wickes' primary markets, the Midwest and Northeast, of approximately 12.1% and 15.1%, respectively. Nationally, single family housing starts experienced a larger decline of 10.8% in 1995, from 1.20 million starts in 1994 to 1.07 million starts in 1995. While Wickes added seven new building
centers through acquisition and expansion during 1995, it also closed or consolidated 26 other building centers (sixteen of these occurred on December 29, 1995).
Wickes experienced a 6.2% increase in sales to its primary customer segment, the professional home builder, and a 45.8% increase in sales to commercial builders.
Wickes' continued emphasis on sales to professional builders and the resulting increased sales of lower margin wood products also contributed to the change. Wickes believes that approximately 50% of the decrease in gross profit percentage was the result of the shift in customer mix from 22% consumer and 78% professional in 1994 to 18% consumer and 82% professional in 1995. An increase in the percent of sales attributable to commodity lumber and building materials along with customer pricing issues, accounted for the remainder of the variance.
PROVISION FOR DOUBTFUL ACCOUNTS. In 1995, Wickes' provision for doubtful accounts increased as a percentage of net sales to 0.7% compared with 0.3% in 1994. Approximately $3.1 million of the $4.0 million increase is attributable to the Gerrity Lumber centers. During the integration of the Gerrity Lumber centers these centers experienced significant credit losses as they converted to Wickes' more controlled credit policies.
OTHER OPERATING INCOME. Wickes' other operating income decreased to $5.8 million in 1995 from $6.8 million in 1994. The primary reasons for this decline were two unusual gains recorded in 1994, a $1.2 million gain on the sale of Wickes' private label credit card portfolio and a $0.7 million gain as the result of the difference between insured replacement cost and book value as the result of storm related damage to one of Wickes' building centers. Service charges for overdue credit accounts increased to $3.0 million in 1995 compared with $2.5 million in 1994. Wickes also experienced an increase in rental income, interest earned, and miscellaneous revenues of $0.5 in 1995 compared with 1994.
EQUITY IN LOSS OF AFFILIATED COMPANY. During 1995, Wickes' equity in the losses of Riverside International LLC operations was $3.5 million. During 1994, the results of the Riverside International LLC operations were consolidated with those of Wickes and contributed a loss of approximately $0.4 million (pre-tax). See "Items 1. Business - Building Materials - International Operations" and 2 of Notes to Consolidated Financial Statements included elsewhere herein.
NET INCOME. Wickes experienced a net loss of $15.6 million in 1995 compared with $28.1 million of net income for 1994, a change of $43.7 million. The primary components of the change 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 SG&A of $4.1 million, increased losses of the operations of Riverside International LLC 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 expense, and in the fourth quarter of 1994, the Wickes recorded a $1.2 million one time gain on the sale of its private label credit card portfolio.
The Company's Consolidated Statements of Operations includes 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. (in thousands):
(1) Includes the operations through June 6, 1996, the date of the Circle Merger.
In December 1994, the Company sold all in force policies of Aztec to Guardian Insurance and Annuity Company for $8.2 million in cash at a net loss of $.2 million. The Company estimates that the sale of the Aztec business generated a decrease in profits from life insurance operations of approximately $2.5 million during 1995.
The Parent Group's non-interest operating expenses were $3,205,000, $1,955,000 and $2,453,000 in 1996, 1995, and 1994, respectively. Increased operating expenses for 1996 were primarily due to the expansion of WML's operations, which accounted for approximately $1,307,000 of the increase. Other increases included expenses resulting from non-recurring expenses including bank debt costs amortized as a result of the Circle Merger, and expenses that were no longer allocable to the Life Insurance Group. The increase in expenses was partially offset by savings of approximately $436,000 from improvements made to the WFSC program in 1996.
Interest expense for 1996, 1995, and 1994 was $3,158,000, 3,280,000 and $3,040,000, respectively. Interest expense for 1996 was relatively unchanged when compared to 1995.
The Company's real estate investments consist of $10,954,000 in Georgia properties, $5,828,000 in Florida properties and $72,500 in other states.
On September 15, 1995, the Company completed the sale of its property and casualty insurance operations, which had been discontinued in 1992. The Company realized a gain upon disposal of these operations of $2.7 million, including an additional payment received in 1996 of $.2 million for the acquisition of certain tax benefits by the purchaser. Under terms of the sale, the Company provided indemnification for certain losses on various categories of liabilities. Terms of the indemnities provided by the Company vary in regards to time limits and maximum amounts. The Company believes that these indemnities will not have a material adverse effect on the Company's financial position on results of operations.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," encourages, but does not require, companies to recognize compensation expense for grants of stock, stock options, and other equity instruments to employees based on new fair value accounting rules. Although expense recognition for employee stock based compensation is not mandatory, the pronouncement requires companies that choose not to adopt the new fair value accounting, to disclose the pro-forma net income and earnings per share under the new method. This new accounting principle was effective for the Company fiscal year ending December 31, 1996, and did not have a material impact on its financial position as the Company did not adopt the new fair value accounting, but instead implemented the disclosure requirements.
Statement of Financial Accounting Standard No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities", addresses accounting for transactions including securitizations, transfers of securities with recourse, repurchase agreements, securities-lending arrangements, pledges of collateral, financial assets subject to prepayment risk, servicing of financial assets, and extinguishment of liabilities. The Company did not have any transaction during 1996 addressed by this statement.
Statement of Financial Accounting Standards No. 128, "Earnings Per Share," revises the disclosure requirements and increases the comparability of EPS data on an international basis by simplifying the existing computational guidelines in APB Opinion No. 15. The pronouncement will require dual presentation of basic and diluted EPS on the Company Statement of Operations and is effective the Company fiscal year ending
December 31, 1997. The Company believe that adoption will not have a material impact on its financial statements.
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 fiscal year ending December 31, 1997. The Company believes that adoption will not have a material impact on its current disclosures.