Wickes' 101 sales and distribution facilities are located in 23 states, with 67 in the Midwest, 17 in the Northeast and 17 in the South. See "Item 1. Business - Markets". Wickes believes that its facilities generally are in good condition and will meet Wickes' needs in the foreseeable future.
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 1997 and 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 Company reported results of operations for the years ended December 31, 1997, 1996 and 1995 as follows (in thousands):
(2) Subsequent to June 30, 1996, the Company consolidated its results of operations with those of Wickes.
(4) Includes a $10,970,000 charge on reorganization of life insurance subsidiaries primarily resulting from the write off of intangible assets in 1995.
The Company estimates that after inter-company eliminations, and net of goodwill amortization of approximately $534,000, Wickes contributed losses of $1,297,000 to the Company's results of operations in 1997. 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 discussion of Wickes' full year operations for 1997, 1996 and 1995 was obtained from the Wickes 10-K.
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, weather, 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.
The following table contains selected unaudited quarterly financial data for the years ended December 27, 1997, December 28, 1996, and December 30, 1995.
QUARTERLY FINANCIAL DATA 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 11 of the Notes to Consolidated Financial Statement included elsewhere herein.
Net sales for 1997 increased $35.5 million, or 4.2%, to $884.1 million from $848.5 million in 1996. Sales for all facilities operated throughout both years ("same store") increased 4.7%. During 1997, Wickes experienced a 4.1% increase in same store sales to its primary customer segment, the professional home builder, and a 16.4% increase in same store sales to commercial builders. Consumer same store sales were down 6.8% for the year.
Wickes believes that the following matters contributed to the 1997 sales increase. Throughout most of 1997, Wickes operated three more sales and distribution facilities than it operated during 1996. Also, Wickes believes that showroom Resets at 19 of its sales and distribution facilities in 1997, sales training, and big builder initiatives also had a positive effect on sales. Finally, weather conditions in the Northeast during the first quarter of 1997 were more favorable compared with the record snowfalls recorded in the first quarter of 1996. Wickes believes that inflation/deflation in lumber prices had negligible impact on total sales.
Gross profit increased $13.6 million to 23.0% of net sales for 1997 compared with 22.3% of net sales for 1996. The increase in gross profit is primarily due to increases in sales, reductions in product costs, and increases in sales of manufactured products.
In 1997, selling, general, and administrative expense ("SG&A") increased as a percent of net sales to 21.0% compared with 19.1% of net sales in 1996, primarily as a result of Wickes' increase in sales and distribution facility employees in an effort to increase sales and market share, expenses associated with showroom remerchandisings in 19 facilities in 1997, expenses associated with expansion of Wickes' Major Market program in 1997, and insurance recoveries recorded in 1996 with respect to prior years.
Depreciation, goodwill and trademark amortization costs decreased $0.5 million in 1997 compared with 1996. The primary reason for this decrease is that most of Wickes-owned delivery vehicles were fully depreciated in 1997. Since 1993 Wickes' new vehicles have been obtained primarily through operating leases.
During 1997 Wickes completed its 1995 Plan. As a result, it recorded a reduction in accrued costs and a benefit to restructuring and unusual charges of approximately $2.1 million. This benefit was partially offset by a $1.5 million restructuring charge for severance and postemployment benefits and anticipated losses on the disposal of discontinued non-core programs and related reductions in headquarters staffing which was announced by Wickes in October of 1997. The non-core programs affected by these reductions included the sale or closing of Wickes' mortgage lending, utilities marketing, and internet service programs not directly related to the building supply business. See "Item 1. Business - Business Strategy". Wickes expects to record a $5.4 million restructuring charge in the first quarter of 1998 with respect to facilities closings and staffing reductions announced in February 1998. See Note 16 of the Notes to Consolidated Financial Statement included elsewhere herein.
In 1997 Wickes recorded current income tax expense of $1.1 million compared with $1.0 million in 1996. Current income tax provisions for both years consist of state and local tax liabilities.
Wickes experienced a net loss of $1.6 million in 1997 compared with net income of $0.5 million in 1996, a change of $2.1 million. The primary components of this change consist of an increase in SG&A expense of $23.1 million and an increase in provision for doubtful accounts of $0.6 million. These unfavorable changes were partially offset by increases in gross profit of $13.6 million and other operating income of $3.9 million, as well as decreases in losses attributable to Riverside International LLC of $1.7 million, restructuring and unusual items of $1.3 million, and depreciation, goodwill and trademark amortization of $0.5 million.
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 the 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.
Severe weather conditions in the first quarter of 1996, together with mild weather in the first quarter of 1995, and a 17.5% decrease in same store sales staff as part of Wickes' efforts to better align its costs to its sales volume, were the major factors contributing to the 1996 same store sales decline. The decrease in same store sales occurred most heavily during the first nine months of 1996. For this period, same store sales were down 8.8%, while fourth quarter same store sales were up slightly from the fourth quarter of 1995.
In 1996, 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.
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 years' 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.
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.
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 was 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.
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.
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.
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 Note 1 of Notes to Consolidated Financial Statements included elsewhere herein.
Operating income after tax of $1,003,000 was generated for 1996; however, this was adjusted to a net income amount of $329,000 by recording additional amortization of deferred acquisition costs to reflect the net economic benefit accrued pursuant to the terms of the Circle Merger Agreement.
Revenues of the Parent Group (excluding investment income) for 1997, 1996 and 1995 were approximately $630,000, $493,000, and $1,057,000, respectively. The Parent Group's income primarily has consisted of non- recurring items, such as settlement proceeds from legal proceedings; therefore, comparisons between periods are not meaningful. Included in other income for 1997 was $598,000 received in a settlement relating to the Company's former property and casualty insurance operations. Revenues for 1996 included $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 settlement of a disputed financing proposal and other non-recurring items.
Revenues and expenses for 1998 are anticipated to increase significantly as a result of the acquisition and expansion of the Parent Company's internet, telephony and utilities marketing operations. The Company intends to monitor carefully the progress of its internet, telephony and utilities marketing operations and may expand or curtail any or all of them, depending upon operating results achieved.
On December 1, 1997, the Company completed the sale of its mortgage lending operations to an unrelated third party. The Company did not realize any gain or loss from the transaction, but did agree to indemnify the purchaser against losses on the construction loan portfolio that was transferred. The Company currently has 250,000 shares of its Wickes common stock pledged as collateral for this indemnification obligation. As the construction loan portfolio decreases, the shares held as collateral will be released. The Company believes that these indemnities will not have a material adverse effect on the Company's financial position on results of operations.
The following table sets forth comparative information concerning the results of the Company's former mortgage lending operations.
The following table sets forth information concerning the results of the Company's former property and casualty operations.
The Company's effective income tax rate was 23% in 1997, 5% in 1996, and 14% in 1995. 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.
The Parent Company's general liquidity requirements consist primarily of funds for payment of debt and related interest and for operating expenses and overhead.
On December 31, 1997, Riverside disposed of its investment in Circle (see "Item 1. Business - Life Insurance Operations") for an aggregate of approximately $5.4 million in cash. Of this amount: (i) approximately $1.2 million was utilized to repay in full the Parent Company's bank line of credit and (ii) as of March 31, 1998, $1.4 million remains in pledge to secure the Parent Company's $16 million real estate indebtedness to American Founders. At March 31, 1998, after the payment of the regularly scheduled semiannual interest on the Company's 13% subordinated notes due 1999 ("the 1999 Notes") and the remaining balance of Riverside's secured obligation to a third party, the Parent Company had approximately $800,000 in cash on hand.
For a description of a $1.5 million demand bank line of credit obtained by the Company on May 1, 1997 and repaid on December 31, 1997, see Note 10 of Notes to Consolidated Financial Statements included elsewhere herein.
In late September and early October 1997, the Company sold an aggregate of 64,875 shares of Wickes common stock to Kenneth M. Kirschner, Vice Chairman, director of the Company, and an executive officer of Wickes, and Frederick H. Schultz, a director of the Company. The aggregate purchase price was $290,000, or $4.47 per share, which equaled the 30-day average closing bid price for Wickes common stock on the NASDAQ National Stock Market prior to the sales.
In the fourth quarter of 1997, J. Steven Wilson, the Company's Chairman, President and Chief Executive Officer advanced $160,000 to the Company, which at March 31, 1998 the Company had not repaid.
During 1997, stockholders' equity decreased by a net of $6.0 million. This decrease is primarily a result of Wickes' net loss and the Parent Company's interest and operating expenses.
FORWARD-LOOKING INFORMATION CAUTIONARY STATEMENT. The discussion above of the Company's future liquidity needs and sufficiency 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 Company's ability to achieve the level of real estate sales required to meet scheduled real estate debt payments, (ii) the release of cash collateral from pledge under the Company's real estate debt, which depends upon, among other things, the level of real estate sales and values and the trading prices of Wickes common stock, (iii) the level of positive or negative cash flow generated by the Parent Company's internet, telephony and utilities marketing operations, (iv) the Company's ability to borrow, which may depend upon, among other things, the trading price of Wickes common stock and the Parent Company's internet, telephony and utilities marketing operations and (v) the ability of the Company to raise funds through sales of Wickes common stock. 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. The Company's ability to sell Wickes common stock would depend upon, among other things, the trading price of Wickes common stock and, in light of the relatively low 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' 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 receivable.
Wickes' capital expenditures consist primarily of the construction of facilities for new and existing operations, the remodeling of sales and distribution facilities and component manufacturing facilities, and the purchase of equipment and management information systems. Wickes may also from time to time make expenditures to establish or acquire operations to expand or complement its existing operations, especially in its major markets. Wickes made $7.8 million in capital expenditures in 1997. Approximately $4.1 million was expended on capital improvements for new operations, showroom Resets and expansion of manufacturing operations. Wickes expects to spend between $4 million and $5 million in 1998. These expenditures are expected to be funded by Wickes' borrowings and its internally generated cash flow. At December 27, 1997, there were no material commitments for future capital expenditures.
On June 16, 1997 Wickes entered into an interest rate swap agreement which effectively fixed the interest rate at 8.11% (subject to adjustments in certain circumstances), for three years, on $40 million of Wickes' borrowings under its floating rate revolving line of credit. This interest rate swap is operative while the 30 day LIBOR borrowing rate remains below 6.7%. At November 3, 1997 the 30 day LIBOR borrowing rate was 5.65%.
The revolving credit facility and the trust indenture relating 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 is 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.
Statement of Financial Accounting Standards No. 128, "Earnings Per Share", revises the disclosure requirements and increases the comparability of earnings per share data on an international basis by simplifying the existing computational guidelines in APB Opinion No. 15. The pronouncement requires dual presentation of basic and diluted earnings per share on the Company's Statements of Operations and 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.
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income", establishes standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. The term comprehensive income is defined as the change in a business' equity. Comprehensive income includes net income, as well as other components (revenues, expenses, gains and losses) that, under generally accepted accounting principles, are excluded from net income, but effect equity. The statement is effective for fiscal years beginning after December 15, 1997. The Company believes adoption of the statement will not have a material effect on its financial statements.
Statement of Financial Accounting Standards No. 131, "Disclosure About Segments of an Enterprise and Related Information", changes SFAS 14 by requiring a new framework for segment reporting and includes the disclosure of financial information related to each segment. The statement is effective for fiscal years beginning after December 15, 1997.
In response to the Year 2000 issue, the Company initiated a project in early 1997 to identify, evaluate and implement changes to its existing computerized business systems. The Company is addressing the issue through a combination of modifications to existing programs and conversions to Year 2000 compliant software. In addition, The Company is communicating with its customers, suppliers, and other service providers to determine whether they are actively involved in projects to ensure that their products and business systems will be Year 2000 compliant. If modifications and conversions by the Company and those it conducts business with are not made in a timely manner, the Year 2000 issue may have a material adverse effect on The Company's business, financial condition, and results of operations. The total cost associated with the required modifications is not expected to be material to The Company's consolidated results of operations and financial position, and is being expensed as incurred.
Item 7.A Quantitative and Quantitative Disclosures About Market Risk. - ----------------------------------------------------------------------