Item 1. BUSINESS. - -----------------
Wickes Inc. ("Wickes") and its subsidiaries (Wickes and its subsidiaries are collectively referred to as "the Company") are a leading supplier of building materials and manufacturer of building components in the United States. The Company sells its products and services primarily to residential and commercial building professionals, repair and remodeling ("R&R") contractors and, to a lesser extent, project do-it-yourself consumers ("DIY's") involved in major home improvement projects. At December 29, 2001, the Company operated 98 sales and distribution facilities, as well as 26 component manufacturing facilities that produce and distribute roof and floor trusses, framed wall panels, and pre-hung door units principally in the Midwest, Northeast, and Southern regions of the United States.
Background - ----------
The Company was formed in 1987 as a Delaware corporation. In June 1997, the Company changed its corporate name to "Wickes Inc." The Company has and continues to conduct its primary operations under the "Wickes Lumber" name.
In April 1988, the Company completed the acquisition of the Wickes Lumber Company, which opened its first lumber and building materials operations in 1952, from Wickes Companies, Inc. The acquisition included 223 sales and distribution centers and 10 component manufacturing facilities. In subsequent periods the Company modified its operations to reduce its number of sales and distribution centers to the current 98 and to strategically grow its component manufacturing capabilities to 26 locations.
For further information see "Business Strategy".
Industry Overview - -----------------
According to the Home Improvement Research Institute ("HIRI") (an independent research organization for manufacturers, retailers and wholesalers allied to the home improvement industry), sales of home improvement products (defined as lumber, building materials, hardware, paint, plumbing, electrical, tools, floor coverings, glass, wallpaper, and lawn and garden products) associated with the maintenance and repair of residential housing and new home construction were estimated to be $275.6 billion in 2001. Despite some consolidation over the last ten years, particularly in metropolitan areas, the building material industry remains highly fragmented. The Company believes that no building material supplier accounted for more than 19.5% of the total market in 2001.
In general, building material suppliers concentrate their marketing efforts either on building professionals or consumers. Professional-oriented building
material suppliers, such as the Company, tend to focus on single-family residential contractors, R&R contractors, project DIY's and, to some extent, commercial contractors. These suppliers compete principally on the basis of price, service, product assortment, scheduled job-site delivery, manufactured building components and trade credit availability. In contrast, consumer-oriented building material retailers target the mass consumer market, where competition is based principally on price, merchandising, product assortment, location and advertising. Consumer-oriented warehouse and home center retailers typically do not offer as wide a range of services, such as specialist advice, trade credit, manufactured building components, and scheduled job-site delivery, as do professional-oriented building material suppliers.
Industry sales are significantly linked to the level of activity in the residential building industry, which tends to be cyclical and seasonal due to weather. New residential construction is determined largely by household formations, interest rates, housing affordability, availability of mortgage financing, regional demographics, consumer confidence, job growth, and general economic conditions. According to the U.S. Bureau of the Census, U.S. housing starts were 1.47 million in 1997, 1.62 million in 1998, 1.66 million in 1999, 1.57 million in 2000 and 1.60 million in 2001. The Blue Chip Economic Indicators Consensus Forecast, dated March 10, 2002, projects 2002 housing starts to be 1.58 million, down slightly from housing starts in 2001. In 2001, housing starts in the Company's primary geographical market, the Midwest, increased 4.0% over housing starts in that region in 2000. The Company's two other geographical markets, the Northeast and South, experienced a decrease in 2001 housing starts of 3.2% and an increase of 2.5%, respectively, from housing starts in the prior fiscal year. Nationally, single family housing starts, which generate the majority of the Company's sales to building professionals, increased by 3.6% to 1.27 million starts in 2001 from 1.23 million starts in 2000.
Repair and remodeling expenditures tend to be less cyclical than new residential construction. These expenditures generally are undertaken with less regard to economic conditions, but both repair and remodeling projects (including projects undertaken by DIY's) tend to increase with increasing sales of both existing and newly constructed residences. HIRI estimates that sales of home improvement products to repair and remodeling professionals represented $52.7 billion, or approximately 19.1% of total 2001 sales of the building material supply industry, while direct sales to DIY's amounted to $133.1 billion or 48.3% of such sales.
Business Strategy - -----------------
General -------
The Company's mission is to be the premier provider of building materials and services and manufacturer of value-added building components to the professional segments of the building and construction industry.
The Company targets five customer groups: the production or volume builder; the custom builder; the tradesman; the repair and remodeler; and the commercial developer. Its marketing approach encompasses three channels of distribution; large metropolitan areas or "Major Markets", smaller rural and semi-rural areas or "Conventional Markets", and commercial, direct ship and turnkey construction or "Wickes Direct". In Major Markets, the Company serves the national, regional, and large local builder with a total solutions approach and specialized services. In Conventional Markets, the Company provides the smaller builder with tailored products and services. In Wickes Direct, the Company provides materials flow and logistics management services to commercial customers. The Company also serves building professionals through its network of 26 component manufacturing facilities that produce value-added, wood framed wall panels, roof and floor truss systems, and pre-hung interior and exterior doors.
In 1999, the Company introduced its "Build 2003" program that outlined its seven corporate objectives, using 1998 results as a performance baseline. These are: (1) generate a compounded annual sales growth rate of at least 6%; (2) internally manufacture 75% of the Company's wall panels, roof and floor trusses, and pre-hung doors distributed; (3) increase EBITDA (see Part II, Item 6 for the definition of "EBITDA") as a percentage of net sales to a minimum of 4.2%; (4) improve debt-to-equity ratio and achieve 1:1 debt-to-equity by year-end 2003; (5) generate a return on capital employed in excess of the Company's peer group; (6) extend its earnings season; and (7) provide consistency in earnings growth.
In 2001, the Company's management developed a plan to reorganize and improve productivity and performance. The results have shown and are expected to continue to show reductions in administrative expense, marketing expense, headcount and the elimination of non-strategic operating units. As part of this reorganization, the Company has and intends to relaunch a number of its previous initiatives including tool rental, installed products and manufactured components throughout 2002. In addition, the Company will work to implement sales planning tools and technology to support efforts to retain and grow customer relations. Also, management is requiring the operating units to adhere to stricter standards in customer profitability, labor productivity and working asset turnover, that management believes will form the basis for a successful building materials business.
Major Markets -------------
The Company operates in 22 Major Markets, which are served by 32 sales and distribution facilities. In this market group, the Company targets the national top 400 builders, both regional and large local builders with specialized services and a total solutions approach, including its unique "Frame A Home in A Day" program in six markets. These facilities are designed, stocked and staffed to meet the needs of the particular markets in which they are located. Major Markets also are served by all of the Company's manufacturing facilities.
Major Markets generally are large metropolitan areas with favorable growth projections and are characterized by the active presence of national, regional and large local builders. The Company believes that the building supply industry in these Major Markets remains heavily fragmented. The Company's Major Markets programs seek to provide the large builder with specialized products and services that integrate various methods of distribution. The Company provides these programs and services on a "virtual store" basis; that is, products and services may be provided from multiple facilities serving the Major Market on a coordinated basis with centralized customer contact and support. The Company invests significant efforts to redefine and improve customer service with a comprehensive, total solutions package of core building materials, supply chain management, material flow and logistics management.
During 1997 and 1998, the Company researched the levels and types of customer service it would provide as part of its Major Markets strategy. By first understanding the cost drivers, inefficiencies, and needs of the large builders who dominate the more densely populated regions of the country, the Company could focus its strategy on meeting their needs. The outcome of that research was to restructure our Major Markets programs to address a clear opportunity to assist builders in reducing their total cost of production by utilizing the Company's manufacturing and logistics expertise.
The Company initiated a "Target Major Markets" program in 1997. Target Major Markets are those Major Markets that the Company aggressively promotes with updated sales and distribution centers, targeted high volume builders, and concentrated component manufacturing support. Since then, the Company has developed Target Major Markets programs in 14 Major Markets. Management believes that these markets continue to offer opportunities for growth as a traditional building materials supplier, as well as to provide opportunities to grow and introduce new, value-added services and product initiatives.
The Company's value-added manufacturing operations constitute an integral element supporting the Target Major Markets strategy. This support network enables the Company to provide its customers with custom engineered, value-added manufactured framing component systems. For instance, in six markets the Company operates its "Frame a Home in a Day" concept. This initiative allows builders significant cost savings by completely framing and sheathing an average two-story residence in as little as one day, rather than the substantially longer period involved in traditional framing methods.
The Company's operations in Major Markets contributed approximately 42.7% of the Company's net sales in 2001, compared to 42.6% in 2000 and 44.3% in 1999.
Conventional Markets --------------------
At December 29, 2001, the Company operates 66 sales and distribution facilities in small, rural Conventional Markets, where Wickes targets the smaller building professionals such as single-family residential contractors and R&R contractors with tailored products and services. Wickes provides a service offering mix that includes tool rental, specialized delivery, and installation services. The Company typically is the market leader in these fragmented, relatively slow growth markets of populations generally below 100,000. The Company believes it possesses a significant competitive advantage in rural markets and small communities where it primarily competes with local, independent lumberyards and regional building chains.
Since the beginning of 1997, the Company has completed re-merchandising and re-marketing programs ("Resets") in 16 sales and distribution facilities located in Conventional Markets. These programs typically include upgrading of the showroom layout and product presentation; expansion of product assortments, typically adding a significant number of stock keeping units ("SKU's") with a view towards achieving category dominance in the market; and increasing service offerings such as installed sales, tool rental, specialized delivery services and additional in-store sales specialists. The Company's manufacturing operations also provide significant support for the Company's Conventional Market sales activities, particularly through the manufacture of pre-hung interior and exterior doors.
The Company's operations in Conventional Markets contributed approximately 57.3% of the Company's net sales in 2001, compared to 57.4% in 2000 and 55.7% in 1999.
Wickes Direct -------------
Wickes Direct focuses on the large volume needs of commercial builders, much of which are shipped directly from the manufacturer to the customer's job site. This marketing group concentrates on five specific types of commercial wood projects: assisted care facilities, extended care facilities, hotels/motels (three stories and under), restaurants, and multi-family housing selling from both Major Markets and Conventional Markets facilities. In addition to selling building materials and engineered wood components, Wickes Direct provides building design, value-added engineering processes, estimating, logistics, and material delivery services to large customers anywhere in the world, all accomplished without the need for a physical facility close to the customer. Wickes Direct has project sales specialists that focus exclusively on selling building solutions to the commercial developers. Wickes Construction Services, launched in 2000, is a hybrid construction group that provides turnkey framing services, bids, contracts, and takeoffs, and provides installation labor and general contractor services for Wickes Direct customers.
Manufacturing Operations ------------------------
At December 29, 2001, the Company owned and operates 26 component manufacturing facilities that supplied the Company's customers with higher-margin, value-added products such as framed wall panels, roof and floor trusses, and pre-hung interior and exterior doors. One location was closed in 2001. These facilities include 17 stand-alone operations as well as nine additional operations that exist at the Company's sales and distribution facilities. Value-added component manufacturing is an important element supporting the Company's Major Markets, Conventional Markets and Wickes Direct. In Major Markets, manufacturing provides key support to Wickes' position as a value-added partner, including its "Frame A Home In A Day" concept. In Conventional Markets, trusses, panels, and pre-hung doors are sold to local builders. For Wickes Direct, manufactured components, particularly framed wall panels, provide an important value-added element. The Company believes that these engineered products improve customer service and provide an attractive alternative to job-site construction. In 2001, 2000 and 1999, the Company internally manufactured approximately 58.2%, 56.7% and 50.9%, respectively, of its total building components distributed.
Other Initiatives -----------------
Since 1997, the Company has also initiated several other programs to supplement its Major Markets and Conventional Markets.
The Company's tool rental program was developed to rent specialized, professional quality tools and equipment to customers in need of equipment for unique or short-term projects. The program is designed to attract new customers as well as to provide the Company with an opportunity to supply current customers with a greater portion of their total construction needs and to enhance building materials sales from new customers interested in the tool rental program. The program is in place in 30 sales and distribution facilities, and the Company is relaunching this program in 2002 with new operating standards and income benchmarks to enhance profitability.
The Company's installed insulation program consists of specially trained installation crews using specialized equipment and vehicles to install blown and batt insulation in new construction or major renovations. Installed insulation is one of the value-added services that the Company believes it provides on a cost-effective basis to meet its customers' needs. The installed insulation program is operating in 55 sales and distribution facilities at the end of 2001. Also relaunching this program in 2002, the Company will require consistent operating standards and high-income contribution from this value-added program.
In 2000, the Company initiated installed siding and gutter programs to further service its Major Markets and Conventional Markets strategies. Like the installed insulation program, siding and gutters are installed with specially trained crews equipped with specialized tools and vehicles. At the end of 2001, the Company had 11 installed siding and 5 installed gutter locations in operation
The Company currently has in place an Internet and software strategy designed to provide enhanced service levels to its customers. Employed correctly and integrated properly, Internet and software technology will broaden the base of products offered and the ability to service new and existing customers over the long-term. The Company has entered into several agreements with companies providing Internet based services to the construction industry. In addition, in 2000 the Company acquired Tres-Ark Enterprises, Inc., the developer of a software package ("BuilderCentral 2000(TM)") designed to provide professional building contractors an enterprise system to manage their construction projects. (See also Note 4 to the Consolidated Financial Statements).
BuilderCentral 2000 is an integrated software system designed to assist the professional builder in managing its construction business. It consists of four integrated modules representing: (1) construction management, (2) accounting and finance, (3) project estimating capabilities, and (4) on-site hand-held applications. The Company continues to develop and improve interfaces that allow BuilderCentral 2000 to streamline information from the builder to the Wickes distribution facility. In 2001 a new application was introduced to provide a direct Internet link to the builders' customized Wickes bill of materials, pricing and trade account for online ordering.
In March 2000, the Company entered into an agreement with Buildscape, Inc., an entity affiliated with Riverside Group, Inc. and Imagine Investments, Inc., each of which may be deemed an affiliate of the Company. Pursuant to this agreement, the Company and Buildscape, Inc. are jointly conducting an Internet distribution program. Buildscape(R) is an Internet service designed for builders that allows the Company's customers to buy products and materials from Wickes and other suppliers. It provides real-time online access to the professional builders' specific Wickes price list, bill of materials and trade account. It also provides job management tools to help keep projects on time and on budget. Additionally, the system is accessible by wireless devices. Wickes' sales through the Buildscape site were $23.8 million in 2001.
Acquisition Strategy --------------------
The Company intends to complement its existing operations through acquisitions, as attractive opportunities present themselves. The Company made four acquisitions of component facilities during 1999. In January, the Company acquired the assets of a wall panel manufacturer located in Cookeville, Tennessee. In March, the Company acquired the assets of Porter Building Products, a manufacturer of trusses and wall panels located in Bear, Delaware. In October, the Company acquired the assets of Advanced Truss Systems, Inc. of Kings Mountain, North Carolina. Advanced Truss Systems is a manufacturer of engineered wood trusses servicing the greater Charlotte, North Carolina market. In November, the Company acquired the assets of United Building Systems, Inc. of Lexington, Kentucky. United Building Systems is a manufacturer of wall panels and roof and floor trusses in the Lexington market.
There were no acquisitions of component manufacturing operations in 2000. However, there was one plant addition to supplement the Wisconsin market that went into operation at the end of 2000 and the development of wall panel production capabilities at a distribution center earlier in the year.
In addition, in 2000 the Company acquired Tres-Ark Enterprises, Inc., the developer of a software package ("BuilderCentral 2000(TM)") designed to provide professional building contractors with an enterprise system to manage their construction projects.
During 2001, the Company acquired the real estate and other assets of a local lumber distributor in Kenvil, New Jersey. The purpose of the acquisition was to relocate an existing lumber and distribution center from a nearby leased location. In addition, the Company acquired JWatt Construction, a framing contractor for construction of residential and commercial real property. (See also Note 4 to the Consolidated Financial Statements).
Markets - -------
The Company operates in 22 Major Markets, which are served by 32 sales and distribution facilities and 12 manufacturing facilities. The Company also operates 66 building centers in less populous areas, or Conventional Markets. For a further discussion of Major Markets and Conventional Markets see "Business Strategy."
The following table sets forth the distribution of the Company's sales and distribution facilities located in Conventional and Major Markets, as of December 29, 2001 by size of the local market:
Geographical Distribution -------------------------
The Company's 98 sales and distribution facilities are located in 23 states in the Midwest, Northeast and South. The Company's 26 component manufacturing operations also are located in certain of these states and in Delaware. The Company believes that its geographic diversity generally lessens the impact of economic downturns and adverse weather conditions in any one of the Company's geographic markets. The following table sets forth certain information with respect to the locations of the Company's sales and distribution facilities as of December 29, 2001:
Facilities Opened, Closed and Consolidated ------------------------------------------
During 1999 the Company acquired four manufacturing facilities. See "Business Strategy -Acquisition Strategy." There were no acquisitions of component manufacturing operations in 2000. However, there was one plant addition to supplement our Wisconsin market that went into operation at the end of 2000 and the development of wall panel production capabilities at a distribution center earlier in the year. During 2001 the Company closed distribution centers in Allentown, PA and Aurora, IL, closed a plant in Cookeville, TN, closed and consolidated its Niles, MI distribution center into its Mishawauka, IN distribution center and acquired a distribution center in Kenvil, NJ to relocate its Succasunna, NJ distribution center. Through February 28, 2002 the Company has sold 3 distribution centers; Pearl, MS, Pascagoula, MS, Baton Rouge, LA. and one manufacturing plant, Ocean Springs, MS, as well as closed one distribution center in Wilkes Barre, PA.
The following table reconciles the number of sales and distribution facilities and component manufacturing facilities operated by the Company from December 26, 1998 through February 28, 2002.
*As of the fiscal year-end for 2001, 2000 and 1999, respectively, there were nine, nine and eight additional component manufacturing facilities located in existing sales and distribution facilities.
Customers - ---------
The Company has a broad base of customers, with no single customer accounting for more than 1.9% of net sales in 2001. In 2001, 87.1% (compared with 86.9% in 2000) of the Company's sales were on trade credit, with the remaining 12.9% as cash and credit card transactions.
Home Builders -------------
The Company's primary customers are single-family home builders. In 2001, all home builder customers accounted for 63.1% of the Company's sales, compared with 61.8% in 2000. The majority of the Company's sales to these customers are of high-volume commodity items, such as lumber, building materials, and manufactured housing components. The Company will continue its intense focus on this customer segment, offering new products and developing additional services to meet their needs.
Commercial / Multi-family Contractors -------------------------------------
Wickes Direct concentrates on sales to commercial contractors (primarily those engaged in constructing motels, restaurants, nursing homes, extended stay facilities, and similar projects) and multi-family residential contractors. Sales to these customers are made on a direct ship basis, as well as through the Company's sales and distribution facilities. In 2001, sales to these customers accounted for approximately 18.6% of the Company's sales, compared with 19.3% in 2000. The Wickes Direct program is closely integrated with the Company's component manufacturing operations.
Repair & Remodelers -------------------
In 2001, R&R customers accounted for approximately 9.2% of the Company's sales, compared with 9.1% in 2000. The R&R segment consists of a broad spectrum of customers, from part-time handymen to large, sophisticated business enterprises. Some R&R contractors are involved exclusively with single product application, such as roofing, siding, or insulation, while some specialize in remodeling jobs, such as kitchen or bathroom remodeling or the construction of decks, garages, or full room additions. The Company offers the product and project expertise, special order capability, design assistance, and credit terms to serve the widely varying needs of this diverse market.
DIY's -----
Sales to DIY's (both project and convenience) represented about 9.1% of the Company's sales in 2001, compared with 9.7% in 2000. The percentage of sales to DIY's varies widely from one sales and distribution facility to another, based primarily on the degree of local competition from warehouse and home center retailers. The Company's sales and distribution facilities do not have the large retail selling spaces or broad product assortments of the major warehouse or home center retailers. For small purchases, the facilities' showrooms serve as a convenience rather than a destination store. Consequently, the Company's focus on consumer business is toward project DIY's -- customers who are involved in major projects such as building decks and storage buildings or remodeling kitchens and baths.
Sales and Marketing - -------------------
The Company employs a number of marketing initiatives designed to increase sales and to support the Company's goal of being the dominant force in the sale of lumber and other building materials to building professionals in each of its markets.
Building Professional ---------------------
The Company seeks to establish long-term relationships with its professional customers by providing a higher level of customer assistance and services than are generally available at independently-owned building centers or large warehouse and home center retailers.
The Company provides a wide range of customer services to building professionals, including expert assistance, technical support, trade credit, scheduled job-site delivery, manufacture of customized components, installed sales, specialized equipment, logistical and material flow design and support, and other special services. Building professionals generally select building material suppliers based on price, job-site delivery, quality and breadth of product lines, reliability of inventory levels, and the availability of credit.
For a description of the programs designed for and the emphasis being applied to professional customers in Major Markets, see " Business Strategy - Major Markets."
In both Conventional and Major Markets, the Company's primary link to the building professional market is its experienced sales staff. As of February 28, 2002 the Company's 332 outside sales representatives ("OSR's") are commissioned sales persons who work with professional customers on an on-going basis at the contractors' job sites and offices. Typically, a sale to a contractor is made through a competitive bid prepared by the OSR from plans made available by the contractor. From these plans, the OSR or sales support associate prepares and provides to the contractor a bid and a complete list, or "take-off," of the materials required to complete the project. Preparation of a take-off requires significant time and effort by trained and experienced sales representatives and support associates. The Company has equipped most of its sales and distribution facilities with a computerized system that significantly reduces the time required to prepare take-offs. In addition, this system instantly recalculates changes and automatically includes add-on products needed to complete the project, which generally improves productivity, sales and margins. The ability of the OSR to provide prompt and accurate take-offs, to arrange timely deliveries, and to provide additional products or services as necessary is an important element of the Company's marketing strategy and distinguishes the Company from many of its competitors.
As of February 28, 2002 the Company employed 107 specialty salespeople in its sales and distribution facilities who provide expert advice to customers in project design, product selection and applications. A staff of 30 trained R&R sales specialists offer special services to R&R contractors, equivalent to that accorded home builders. In many of its sales and distribution facilities, the Company maintains separate R&R offices. The Company currently has kitchen and bath departments in most of its sales and distribution facilities and has a staff of 72 kitchen and bath specialists. The Company also employs 5 sales specialists in other departments.
The Company extends credit, generally due on the 10th day of the month following the sale, to qualified and approved contractors. Approximately 87.1% of the Company's sales during 2001 were on credit, with the remaining 12.9% consisting of cash or credit card sales. Overall credit policy is established at the corporate level, with each sales and distribution facility manager and a district credit manager responsible for the administration and collection of accounts. The accounts generally are not collateralized, except to the extent the Company is able to take advantage of the favorable materialmen's lien laws of most states applicable in the case of delinquent accounts.
The Company operates a large fleet of trucks and other vehicles, including vehicles specialized for the delivery of certain of the Company's products. As of February 28, 2002, the fleet included approximately 197 heavy duty trucks, 89 of which provide roof-top or second story delivery and 56 other vehicles equipped with truck mounted forklifts. In addition, the Company's fleet includes 448 medium duty trucks, 502 light duty trucks and automobiles, 538 forklifts, 109 specialized millwork delivery vehicles, and 62 vehicles equipped to install blown insulation. The Company will continue to add these specialized vehicles to other markets where there is sufficient demand for such services.
Over the past several years, the Company has installed and will continue to increase its base of computer-aided design hardware and software. These systems include design and take-off software for kitchens, decks, outbuildings, additions and houses. With these tools, sales representatives and specialists are able to provide customers with professional-quality plans, in an efficient manner.
In 1997, the Company began an equipment rental program at 25 of its sales and distribution facilities. Under this program, the Company rents specialized, professional quality tools and equipment to customers in need of equipment for unique or short-term projects. The program is in place in 30 sales and distribution facilities and the Company is relaunching this program in 2002 with new operating standards and income benchmarks to enhance profitability.
In 1997, the Company also began its installed insulation program. Through the use of specialized equipment and vehicles and its specially trained installation crews, the Company installs blown and batt insulation in new or existing construction. There are 55 sales and distribution facilities that offer this service. Also relaunching this program in 2002, the Company will require consistent operating standards and high-income contribution from this value-added program.
In 2000, the Company initiated its installed aluminum siding and gutter programs in several of its sales and distribution centers. Currently, it is operating 11 installed siding and five installed gutter programs with continued plans for expansion.
DIY's -----
Most sales and distribution facilities, primarily building centers located in Conventional Markets, also pursue sales to project DIY's through their staff of specially-trained inside sales representatives and specialists. These representatives provide professional advice to consumers for home improvement projects and assist these customers in designing specific projects with sophisticated computer design software. The sales representatives also can provide a comprehensive list of materials and detailed drawings to assist customers in completing their projects. The Company believes that project DIY's are attracted to its sales and distribution facilities by this high level of service.
The Company's showrooms generally feature product presentations such as kitchen, bath, door and window displays. The showrooms are regularly re-merchandised to reflect product trends, service improvements and market
requirements. During 1999, the Company completed Resets in two facilities; in 2000, two facilities, and in 2001 one facility was completed. Since the beginning of 1997, the Company has completed Resets in 16 sales and distribution facilities located in Conventional Markets. Additional showroom improvements are contemplated for 2002 and future years.
While the Company's product offerings in hardlines generally are more limited than its consumer-oriented competitors, the Company stocks a larger selection of commodity products and offers a special order program for custom or specialty products. The Company emphasizes project packages, which include all materials and detailed instructions for the assembly of the larger projects frequently undertaken by project DIY's.
The Company's internet site on the World Wide Web provides information about Wickes' services and products, facilitates doing business with customers, allows customers to look up their own transactional information, and features extensive links to suppliers and other industry references. The Company's home page can be found on the web at: http://www.wickes.com.
The Company advertises in trade journals and produces specialized direct mail promotional materials designed to attract specific target customers. The Company does some select newspaper advertising, which may include circulars and run-of-press advertisements. It also has numerous product displays in its sales and distribution facilities to highlight special products and services.
To increase customer loyalty and strengthen customer relationships, the Company, in many cases with vendor support, sponsors or participates in numerous special marketing activities, such as trade show events, informational product seminars, various outings, and professional builder trips.
Products - --------
To provide its customers with the quality products needed to build, remodel and repair residential and commercial properties, the Company offers a wide variety of building products and the ability to special order additional products. The Company believes that these special order services are extremely important to its customers, particularly the building professional. In 2001, approximately 37% of the Company's sales were of special order items, compared with 35% in 2000. Each of the Company's sales and distribution facilities tailors its product mix to meet the demands of its local market.
The Company categorizes its product sales (excluding Tool Rental, Installed Programs and other service-related revenues), which aggregate approximately 95%, 96% and 97% of the Company's net sales in 2001, 2000 and 1999, respectively, into four groups. These include Wood Products (lumber, plywood, treated lumber, sheathing, wood siding and specialty lumber); Building Products (roofing, vinyl siding, doors, windows, mouldings, and insulation); Hardlines (hardware
products, paint, tools, kitchen and bathroom cabinets, plumbing products, electrical products, light fixtures and floor coverings); and Manufactured Housing Components (roof and floor trusses, and interior and exterior wall panels). Wood Products, Building Products, Hardlines, and Manufactured Housing Components represented 34.8%, 36.8%, 10.4% and 18.0% of the Company's product sales respectively, for 2001 and 36.7%, 35.6%, 10.5% and 17.2% for 2000, respectively.
Manufacturing - -------------
The Company operates 26 component manufacturing facilities that supply the Company's customers with higher-margin, value-added products such as framed wall panels, roof and floor trusses, and pre-hung interior and exterior doors. These facilities include 17 stand-alone operations as well as nine additional operations that exist at the Company's sales and distribution facilities. These manufacturing operations enable the Company to serve the needs of its professional customers for such quality, custom-made products. In 2001, the Company's manufacturing operations supplied approximately 58.2% of the framed wall panels, roof and floor trusses, and pre-hung doors sold by the Company. The Company believes that these value-added, engineered manufactured products improve customer service and provide an attractive alternative to job-site construction. As resources permit, the Company plans to expand its manufacturing facilities to take advantage of these increased opportunities and to supply a greater number of its sales and distribution facilities with these products.
Suppliers and Purchasing - ------------------------
The Company purchases its products from numerous vendors. The great majority of commodity items are purchased directly from mills and manufacturers, while the remaining products are purchased from a combination of manufacturers, wholesalers and other intermediaries. No single vendor accounted for more than 4.7% of the Company's purchases in 2001 and the Company is not dependent upon any single vendor for any material product. The Company believes that alternative sources of supply are readily available for substantially all of the products it offers.
The majority of the Company's commodity purchases are made on the basis of individual purchase orders rather than longer-term supply contracts. In certain product lines, though, the Company has negotiated some advantageous volume pricing agreements for a portion of the product line's purchases. Because approximately 54% of the Company's annual sales consist of commodity wood products, drywall and manufactured housing components, all of which are subject to price volatility, the Company attempts to match its inventory levels to short-term demand in order to minimize its exposure to price fluctuations. In addition, the Company enters into futures contracts to hedge longer-term pricing commitments. The Company has developed an effective coordinated purchasing program that allows it to minimize costs through volume purchases, and the Company believes that it has greater purchasing power than many of its smaller, local independent competitors. The Company seeks to develop close relationships with its suppliers in order to obtain favorable pricing and service arrangements.
The Company's computerized inventory tracking and forecasting system, as part of its inventory replenishment system, is designed to track and maintain appropriate levels of products at each sales and distribution facility. These systems have increased the Company's operating efficiencies by providing an automated inventory replenishment system.
The Company receives its product by truck and rail. The Company has active rail sidings at 60 of its sales and distribution and manufacturing facilities, enabling suppliers to ship products purchased by the Company directly to these facilities by rail. The Company also utilizes one distribution center owned by a third party, located in Chicago, Illinois, through which approximately 2% of the Company's wood products inventory is delivered.
Seasonality - -----------
Historically, the Company's first quarter and, occasionally, its fourth quarter are adversely affected by weather patterns in the Midwest and Northeast, that 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 weather conditions. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations."
Competition - -----------
The building material industry is highly competitive. Due to the fragmented nature of the industry, the Company's competitive environment varies by location and by customer segment. Reduced levels of construction activity have, in the past, resulted in intense price competition among building material suppliers that has, at times, adversely affected the Company's gross margins.
Within the building professionals market, the Company competes primarily with local independent lumber yards and regional and local building material chains. Building professionals generally select building material suppliers based on price, job site delivery, quality and breadth of product lines, reliability of inventory levels, and the availability of credit. The Company believes that it competes favorably on each of these bases. The Company believes that it has a significant competitive advantage in rural markets and small communities (i.e. Conventional Markets), where it primarily competes with local independent lumber yards and regional building material chains. To a lesser extent, the Company also competes in these markets with national building center chains and warehouse and home center retailers, which generally locate their units in more densely populated areas. In Major Markets, the Company believes that its total package of products and services and its ability to serve the large builder provide it with a competitive advantage.
Environmental and Product Liability Matters - -------------------------------------------
Many of the sales and distribution facilities presently and formerly operated by the Company contained underground petroleum storage tanks. All such tanks known to the Company located on facilities owned or operated by the Company have been decommissioned or removed. As a result of reviews made in connection with the sale or possible sale of certain facilities, the Company has found petroleum contamination of soil and ground water on several of these sites and has taken remedial actions with respect thereto. In addition, it is possible that similar contamination may exist on properties no longer owned or operated by the Company, the remediation of which the Company could, under certain circumstances, be held responsible. Since 1988, the Company has incurred approximately $2.0 million of costs, net of insurance and regulatory recoveries, with respect to the filling or removing of underground storage tanks and related investigatory and remedial actions. Insignificant amounts of contamination have been found on excess properties sold over the past six years.
The Company previously had been identified as a potential responsible party in two Superfund landfill clean up sites. Both of these actions were settled for immaterial amounts.
For information concerning certain litigation concerning products containing asbestos or silica dust, see "Item 3. Legal Proceedings."
Although the Company has not expended material amounts in the past with respect to the foregoing and expenditures in the most recent six years have been significantly reduced, there can be no assurances that these matters will not give rise to additional compliance or other costs that could have a material adverse effect on the Company.
Employees - ---------
As of February 28, 2002, the Company had 3,222 employees, of whom 2,935 were employed on a full-time basis. The number of employees generally fluctuates with the seasonal nature of the Company's business. The Company believes that it has maintained favorable relations with its employees. None of the Company's employees are covered by a collective bargaining agreement.
Safety - ------
Wickes Lumber is committed to the safety and well being of our employees, customers and the communities we serve. One of the cornerstones of our safety program is "Build on Safety," an innovative employee training and awareness program conceived by Wickes' Corporate Safety Committee. "Build on Safety" was launched in April 2001 and has established safety standards and processes for all aspects of our business. It has also provided critical safety training for every manager and employee. "Build on Safety" fosters an environment where responsibility for safety is shared amongst all employees, with each individual
having a duty and responsibility for his or her own safety, as well as for the safety of others. "Build on Safety" has helped integrate safety into our corporate culture, and we believe our commitment to the highest safety standards will be reflected in our overall corporate performance
Trademarks and Patents - ----------------------
The Company has no material patents, trademarks, licenses, franchises, or concessions other than the name "Wickes Lumber" , the "Flying W" trademark, "BuilderCentral2000" and "Frame-A-Home-In-A-Day". _________________________
Forward-looking statements in this Item 1 are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. There are certain important factors that could cause results to differ materially from those anticipated by the forward-looking statements made above. These statements are based on the current plans and expectations of the Company and readers are cautioned that all forward-looking statements involve risks and uncertainty. Among the factors that could cause actual results to differ materially are the effects of seasonality and cyclicality discussed under the headings "Industry Overview" and "Seasonality". Also, there are the effects of competition; interest rates and the Company's ability to service and comply with the terms of its debt; lumber prices; the success of the Company's operational initiatives; and the outcome of the contingencies discussed in Note 8 to the Consolidated Financial Statements included elsewhere herein.
Item 2.
Item 2. PROPERTIES. - -------------------
As of December 29, 2001 the Company's 98 sales and distribution facilities are located in 23 states, with 65 in the Midwest, 16 in the Northeast and 17 in the South. When combined with its 26 component manufacturing operations, the Company operates in 24 states. See "Item 1. Business - Markets." The Company believes that its facilities generally are in good condition and will meet the Company's needs in the foreseeable future.
The Company's Conventional Markets sales and distribution centers generally consist of a showroom averaging 9,600 square feet and covered storage averaging 38,400 square feet. The Company's sales and distribution facilities located in Major Markets tend to be more specialized. Since the beginning of 1997, the Company has completed Resets in 16 sales and distribution facilities located in Conventional Markets. The Company's sales and distribution facilities are situated on properties ranging from 1.0 to 28.2 acres and averaging 9.3 acres. The Company also operates 18 stand-alone component manufacturing facilities, which have an average of 40,300 square feet under roof on 6.9 acres.
The Company owns 82 of its sales and distribution facilities and 80 of the sites on which such facilities are located. The remaining 16 sales and distribution facilities and 18 sites are leased. As of December 29, 2001, the Company also held for sale the assets of 3 closed facilities with a net book
value of $1.5 million. In addition to its sales and distribution facilities, the Company operates 17 stand-alone component manufacturing plants, 12 of which are owned sites and 5 of which are on leased sites. Nine additional plants are located on sales and distribution facility sites. All of the owned properties are pledged as collateral under the Company's Amended and Restated Revolving Credit Agreement.
For further information see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" and Note 7 to the Consolidated Financial Statements.
The Company also owns or leases a large fleet of trucks and other vehicles, including vehicles specialized for the delivery of certain of the Company's products. As of February 28, 2002, the fleet included approximately 197 heavy duty trucks, 89 of which provide roof-top or second story delivery and 56 other vehicles equipped with truck mounted forklifts. In addition, the Company's fleet includes 448 medium duty trucks, 502 light duty trucks and automobiles, 538 forklifts, 109 specialized millwork delivery vehicles, and 62 vehicles equipped to install blown insulation.
The Company leases its corporate headquarters, a portion of which is subleased, located at 706 North Deerpath Drive in Vernon Hills, Illinois.
Item 3.
Item 3. LEGAL PROCEEDINGS. - --------------------------
The Company is one of many defendants in two class action suits filed in August of 1996 by approximately 200 claimants for unspecified damages as a result of health problems claimed by the Company's customer, claimed to have been caused by inhalation of silica dust, a byproduct of concrete and mortar mix, which the Company acquired from a cement plant with which the Company has no connection other than as a customer making purchases for resale. Librado ------- Amador, et al. v. Alamo Concrete Products Limited, Wickes Lumber Company, et - -------------------------------------------------------------------------------- al., Case No. 16696, was filed in the 229th Judicial District Court of Duval - -- County, Texas. Javier Benavides, et al. v. Magic Valley Concrete, Inc., Wickes ----------------------------------------------------------------- Lumber Company, et al., Case No. DC-96-89 was filed in the 229th Judicial - ----------------------- District Court of Starr County, Texas. The Company has entered into a cost-sharing agreement with its insurers, and any liability is not expected to be material.
The Company is one of many defendants in approximately 424 actions, each of which seeks unspecified damages, in various state courts against manufacturers and building material retailers by individuals who claim to have suffered injuries from products containing asbestos. The Company is aggressively defending these actions and does not believe that these actions will have a material adverse effect on the Company. Since 1993, the Company has settled 68 similar actions for insignificant amounts, and another 262 of these actions have been dismissed. None of these suits have made it to trial.
The Company also is involved in various other legal proceedings which are incidental to the conduct of its business. Certain of these proceedings involve potential damages for which the Company's insurance coverage may be unavailable. While the Company does not believe that any of these proceedings will have a
material adverse effect on the Company's financial position, annual results of operations or liquidity, there can be no assurance of this result.
The Company is the defendant in an arbitration claim filed with the American Arbitration Association on July 17, 2001 by David T. Krawczyk, the former President and Chief Operating Officer of the Company. Mr. Krawczyk claims he was constructively terminated by the Company as the result of certain actions and directions given to him which were inconsistent with his position, duties and responsibilities. Mr. Krawczyk claims that as a result of this alleged constructive termination, he is entitled to receive a Special Severance Bonus of $1,000,000 pursuant to the Company's Special Severance and Stay Incentive Bonus Plan (the"Plan"). The Company has defended the action and although it believes that Mr. Krawscyk was not entitled to any Special Severance Bonus, the Company has elected to pay the Special Severance Bonus to Mr. Krawczyk because it believes that the cost associated with the obligation of the Company to pay Mr. Krawczyk's attorneys fees with respect to such litigation could equal or exceed his claim.
The Company's assessment of the matters described in this Item 3 are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and are inherently subject to uncertainty. The outcome of the matters described in this Item 3 may differ from the Company's assessment of these matters as a result of a number of factors including, but not limited to: matters unknown to the Company at the present time, development of losses materially different from the Company's experience, the Company's ability to prevail against its insurers with respect to coverage issues to date, the financial ability of those insurers and other persons from whom the Company may be entitled to indemnity, and the unpredictability of matters in litigation.
Item 4.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS. - ------------------------------------------------------------
None.
PART II -------
Item 5.
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. - ------------------------------------------------------------------------------
The Company's Common Stock is authorized for trading on the Nasdaq National Market under the trading symbol "WIKS." As of February 28, 2002 there were 8,285,026 shares outstanding held by approximately 118 stockholders of record. In addition, the Company believes approximately 2,000 additional stockholders hold their shares in street name at various brokerage houses.
The following table sets forth for the periods indicated the high and low sale prices for the Company's Common Stock as reported on the NASDAQ National Market System. Prices do not include retail markups, markdowns or commissions.
The Company does not declare or pay any dividends on Common Stock due to restrictions included in its revolving credit facility and trust indenture related to the Company's 11-5/8% senior subordinated notes. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 7 to the Consolidated Financial Statements.
Item 6.
Item 6. SELECTED FINANCIAL DATA. - --------------------------------
The following table presents selected financial data derived from the audited consolidated financial statements of the Company for each of the five years in the period ended December 29, 2001. The following selected financial data should be read in conjunction with "Item 7.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS - ------------------------------------------------------------------------------- OF OPERATIONS. --------------
General - -------
The following table sets forth, for the periods indicated, the percentage relationship to net sales of certain expense and income items. All material intercompany balances and transactions have been eliminated. The table and subsequent discussion should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere herein.
The Company's 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, weather, prices of commodity wood products, general regional and local economic conditions, interest rates and the availability of credit, all of which are cyclical or seasonal in nature. The Company anticipates that fluctuations from period to period will continue in the future. Due to a substantial percentage of the Company's sales being attributable to building professionals, certain of these factors may have a more significant impact on the Company than on companies more heavily focused on consumers.
The Company's 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 weather conditions. In December of 2001, the Midwest and Northeast recorded above normal to record warm temperatures with normal to below normal precipitation, while during the second quarter of 2001, the Midwest and South experienced unusually wet conditions. During 2000, the Midwest and Northeast experienced mild winter weather but significant precipitation in the first quarter, and in the fourth quarter these regions experienced a more severe winter with respect to cold temperatures and snow than in the previous four years.
The following table contains selected unaudited quarterly financial data for the years ended December 29, 2001 and December 30, 2000. Quarterly earnings (loss) per share may not total to year-end earnings (loss) per share due to the issuance of additional shares of Common Stock during the course of the year.
Each fiscal quarter in the table above represents a thirteen-week period, with the exception of Quarter 4 in 2000, which was a fourteen-week period.
In the fourth quarter of 2000, the Company recorded an extraordinary gain on the early extinguishment of $36.0 million of its 11-5/8% Senior Subordinated Notes due in 2003. See Note 7 to the Consolidated Financial Statements included elsewhere herein for further description.
The Company historically generates approximately 15% to 20% of its annual revenues during the first quarter of each year and records a significant net loss for this quarter. As a result of these seasonal factors, the Company's inventories and receivables reach peak levels during the second and third quarters and generally are lower during the first and fourth quarters, depending on sales volume and lumber prices. ___________________________
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 the Company's business and financial results and financial condition to be materially different from those stated in the Forward Looking Statements. For a discussion of these matters, see the last paragraph of Item 1 of this report.
2001 Compared with 2000 - -----------------------
Net Sales ---------
Net sales for 2001 decreased $26.6 million, or 2.6%, to $1,001.0 million from $1,027.6 million in 2000. Sales for all facilities operated throughout both years ("same store sales") decreased 1.5%. During 2001, the Company experienced a 0.2% increase in same store sales to its primary customer, the professional home builder, and a 4.8% decrease in same store sales to commercial builders. Consumer sales declined 7.2% on a same store basis.
Sales to building professionals as a percentage of total sales were 63.1% in 2001 compared to 61.8% in 2000. Lumber and building materials accounted for 85.3% of total sales in 2001, compared with 86.2% in 2000.
Total housing starts in the United States increased 2.2% in 2001, and starts in the Company's primary geographical market, the Midwest, increased approximately 4.0%, from such starts in 2000. The Company's two other geographical markets, the Northeast and South, experienced a decrease in 2001 housing starts of 3.2% and an increase of 2.5%, respectively, from such starts in 2000. Nationally, single family housing starts, which generate the majority of the Company's sales to building professionals, increased by 3.6% to 1.27 million starts in 2001 from 1.23 million starts in 2000.
The Company estimates that deflation in lumber and drywall prices negatively impacted 2001 net sales by approximately $10.1 million, when compared with lumber and drywall prices during 2000. Dimensional lumber, panel products and, to an extent, drywall are commodities which cause the Company's costs to fluctuate with changing market conditions, generally tracked using the Random Lengths Framing Composite Average and the Random Lengths Panel Index for dimensional lumber and panel products, respectively. Drywall prices generally fluctuate based on availability and are tracked using producer prices. Increases in commodity prices ("lumber inflation") generally are passed on to the customer with certain lag effects, resulting in higher selling prices, or are fixed in the futures market for dimensional lumber and panel products for a small percentage of longer-term sales contracts. In periods of decreasing commodity prices ("lumber deflation"), selling prices decrease, with certain lag effects.
Products that exhibited the greatest change in sales for the year ended December 29, 2001 versus sales of such products in 2000 were lumber and plywood (down 10.5%), drywall (down 32.5%), windows (up 5.0%), trusses (up 3.2%), and roofing (up 8.0%).
Sales of internally manufactured building components increased to 58.2% of total distributed building components from 56.7% in the prior year. Sales of internally manufactured building components increased in 2001 3.3% from approximately $96.5 million in 2000 to approximately $99.7 million in 2001. As with dimensional lumber, sales of internally manufactured building components are impacted by the effects of lumber deflation.
Gross Profit ------------
Gross profit decreased $11.5 million to $211.6 million or 21.1% of net sales for 2001 compared with $223.1 million or 21.7% of net sales for 2000. The Company believes that deflation in lumber and drywall prices decreased the dollar value of gross profit by approximately $2.6 million for the fiscal year ended December 29, 2001. Commodity wood products, drywall and manufactured building components accounted for approximately 54.0% of sales for the year, compared with 56.1% for 2000. The gross margin for these products declined to 19.0% in 2001 from 19.1% in 2000.
Selling, General, and Administrative Expense --------------------------------------------
Total selling, general, and administrative expense ("SG&A") decreased $5.3 million or 2.6% to $194.6 million in 2001 compared with $199.9 million in 2000. SG&A decreased slightly as a percent of net sales to 19.4% compared with 19.5% of net sales in 2000.
The decrease in SG&A primarily is attributable to reductions in labor that reduced salaries and management incentives by 1.4%, and an increase in co-operative marketing and cost recovery programs of 26.8%. These benefits were partially offset by increases in employee benefits, specifically medical and workers' compensation insurances of 31.4%, and increases in marketing of 60.6%. The Company's believes the management plan developed and put in place in the last half of 2001 to reorganize and improve productivity and performance, has resulted and should continue to result in reductions to administrative expenses, marketing expenses, insurance expenses and other SG&A expense.
Depreciation, Goodwill and Trademark Amortization -------------------------------------------------
Depreciation, goodwill and trademark amortization costs increased approximately $0.6 million or 10.7% to $6.5 million in 2001, compared with $5.9 million in 2000. The increase in depreciation primarily is due to investments in machinery and equipment at the Company's manufacturing facilities and delivery vehicles.
Provision for Doubtful Accounts -------------------------------
Provision for doubtful accounts increased to approximately $1.5 million or 0.1% of sales in 2001 from approximately $1.0 million or 0.1% of sales for 2000. The Company extends credit, generally due on the 10th day of the month following the sale, to qualified and approved contractors.
Severance and Other Items -------------------------
In 2001, the Company's management developed a plan to reorganize and improve productivity and performance. The results have shown and are expected to continue to show reductions in administrative expense, marketing expense, headcount and the elimination of non-strategic operating units. The Company incurred severance and other items of $1.7 million, primarily relating to severance pay and distribution center closing costs. As part of this
reorganization, the Company has and intends to relaunch a number of its previous initiatives including tool rental, installed products and manufactured components throughout 2002. In addition, the Company will work to implement sales planning tools and technology to support efforts to retain and grow customer relations. Also, management is requiring the operating units to adhere to stricter standards in customer profitability, labor productivity and working assets turnover, that management believes will form the basis for a successful building materials business.
Other Operating Income ----------------------
Other operating income increased approximately $1.1 million or 32.0% to $4.3 million in 2001, compared with $3.3 million in 2000. Other operating income primarily includes the sale or disposal of property, plant and equipment, service charges assessed customers on past due accounts receivable, closed center expenses and casualty losses. During 2001, the Company sold four pieces of real estate and various fixed assets for a net gain of approximately $1.2 million. This is compared with three real estate sales and various fixed asset disposals in 2000, for a net gain of approximately $0.3 million.
Interest Expense ----------------
Interest expense decreased to $21.8 million in 2001 from $24.3 million in 2000. The Company's weighted-average interest rate on all outstanding borrowings, excluding amortization of debt issue costs, for the years ended December 29, 2001, December 30, 2000 and December 25, 1999 was approximately 8.87%, 9.96% and 9.34%, respectively.
Income Tax Benefit before Extraordinary Item --------------------------------------------
In 2001, the Company recorded a net income tax benefit of $3.1 million versus a net income tax benefit before extraordinary item of $0.7 million in 2000. An effective federal and state income tax rate of 38.9% was used to calculate income taxes for 2001 and 38.8% for 2000. In addition to the effective income tax rate, state franchise taxes of $1.1 million and $1.4 million were calculated for 2001 and 2000, respectively, and are included in the provision reported.
The Company continues to review future earnings projections to determine that there is sufficient support for its deferred tax assets and valuation allowance. Management believes that it is more likely than not that the Company will receive full benefit of its net deferred tax asset and that the valuation allowance is properly stated.
Net loss before extraordinary item ----------------------------------
The Company recorded a net loss in 2001 of $7.1 million versus a net loss before extraordinary item of $4.0 million in 2000, a decline of $3.1 million. Net loss was negatively impacted by a decrease in gross profit of 5.2%, increased employee benefits, specifically workers compensation and medical costs which rose $5.0 million or 33.2%, as well as additional marketing expenditures,
up $2.2 million. Results were positively impacted by a decrease in management incentives of $1.7 million, decrease in interest expense of $2.5 and an increase in the income tax benefit of $2.4 million.
Extraordinary item ------------------
As further explained in Note 7 to the Consolidated Financial Statements, on November 21, 2000 the Company commenced a cash tender offer for its outstanding 11-5/8% Senior Subordinated Notes due 2003, at a substantial discount from face value. The offer expired on December 20, 2000, and on December 26, 2000, the Company redeemed $36.0 million of notes tendered. As a result of this transaction, the Company recorded a pre-tax gain of $11.1 million, net of costs associated with the transaction. The net gain, after appropriate state and federal income taxes, was $6.8 million.
2000 Compared with 1999 - -----------------------
Net Sales ---------
Net sales for 2000 decreased $59.8 million, or 5.5%, to $1,027.6 million from $1,087.4 million in 1999. Sales for all facilities operated throughout both years ("same store sales") decreased 6.1%. During 2000, the Company experienced a 6.6% decrease in same store sales to its primary type of customer, the professional home builder, and a 0.3% increase in same store sales to commercial builders. Consumer sales declined 10.6% on a same store basis.
Sales to building professionals as a percentage of total sales were 61.8% in 2000 compared to 62.3% in 1999. Lumber and building materials accounted for 86.1% of total sales in 2000 compared with 87.8% in 1999.
Total housing starts in the United States decreased 4.5% in 2000, and starts in the Company's primary geographical market, the Midwest, decreased approximately 7.8%. The Company's two other geographical markets, the Northeast and South, experienced decreases of 1.4% and 4.9%, respectively. Nationally, single family housing starts, which generate the majority of the Company's sales to building professionals, experienced a decrease of 5.5% in 2000, from 1.33 million starts in 1999 to 1.26 million starts in 2000.
Sales for 2000 were positively impacted by investments in new initiatives such as Tool Rental and Installed Programs, sales of which increased 38.8% in 2000 over sales in 1999. However, these increases were offset for the year by the effects of lumber deflation and by weather-related issues in the first and fourth quarters. Dimensional lumber, panel products and, to an extent, drywall are commodities which cause the Company's costs to fluctuate with changing market conditions, generally tracked using the Random Lengths Framing Composite Average and the Random Lengths Panel Index for dimensional lumber and panel products, respectively. Drywall prices generally fluctuate based on availability and are tracked using producer prices. Increases in commodity prices ("lumber
inflation") generally are passed on to the customer with certain lag effects, resulting in higher selling prices, or are fixed in the futures market for dimensional lumber and panel products for a small percentage of longer-term sales contracts. In periods of decreasing commodity prices ("lumber deflation"), selling prices decrease, with certain lag effects. The Company estimates that deflation in lumber and drywall prices negatively impacted 2000 net sales by approximately $74.3 million, when compared with lumber and drywall prices during 1999.
Products that exhibited the greatest change in sales for the year ended December 30, 2000 versus sales of such products in 1999 were lumber and plywood (down 16.0%), drywall (down 19.0%), treated wood (down 7.8%), roofing (down 4.8%), and kitchen and bath (up 6.2%).
For the year, sales of internally manufactured building components increased to 56.7% of total distributed building components from 50.9% in the prior year. The dollar value of sales of internally manufactured building components increased 10.4% from approximately $87.4 million in 1999 to approximately $96.5 million in 2000. As with dimensional lumber, sales of internally manufactured building components are impacted by the effects of lumber deflation.
Gross Profit ------------
Gross profit decreased $1.5 million to $223.1 million or 21.7% of net sales for 2000 compared with $224.6 million or 20.7% of net sales for 1999. The Company believes that deflation in lumber and drywall prices decreased the dollar value of gross profit by approximately $15.2 million for the fiscal year ended December 30, 2000. Commodity wood products, drywall and manufactured building components accounted for approximately 56.1% of sales for the year, compared with 58.9% for 1999. The gross margin for these products improved to 19.1% for 2000 versus 17.5% last year.
The increase in gross profit as a percentage of sales resulted from increased sales and gross profit margins relating to internally manufactured products, improved buying leverage, and the expansion of the Company's other initiatives. These substantially offset the effects of lumber deflation.
As previously noted, sales of internally manufactured building components improved during the fiscal year. The Company's margins from sales of internally manufactured building components typically are higher than the margins on sales of purchased components.
Selling, General, and Administrative Expense --------------------------------------------
In 2000, selling, general, and administrative expense ("SG&A") increased as a percent of net sales to 19.5% compared with 17.1% of net sales in 1999. Total SG&A expense increased $14.0 million or 7.5% from $185.9 million in 1999 to $199.9 million in 2000. Much of this increase is attributable to costs associated with new initiatives such as Tool Rental and Installed Programs. These programs increased salaries, wages and benefits; delivery expense; and other fixed charges. In addition, higher fuel and natural gas prices caused delivery expense and utility costs to increase.
Salaries, wages and benefits increased approximately $7.8 million or 6.1% over the prior year. Higher unit sales volumes, initiatives such as Tool Rental and Installed Programs, and higher administrative compensation and benefits, increased compensation and benefits by approximately $9.6 million or 7.8%. Offsetting these increases was a $1.4 million decrease in management incentives. In addition, the culmination of changes in the administration of vacation pay resulted in a $1.3 million improvement in SG&A expenses for 2000, following a comparable $1.0 million improvement in 1999.
Delivery expense for the year increased approximately $2.4 million or 17.4% over the prior year. The increase was driven by various Company initiatives and by the significant increase in fuel prices over last year. With regard to initiatives, the expansion of Installed Programs, such as insulation, siding and gutters, has caused the Company to incur additional delivery expense through the trucks involved in these programs. As a result, vehicle repair and maintenance, lease costs, and licensing increased approximately $1.4 million or 14.1%. Finally, the effects of increased fuel costs nationwide in 2000, plus expansion of the fleet resulted in additional fuel expense of approximately $1.1 million, a 25.4% increase over the prior year.
Promotional expenses, including travel and entertainment, increased approximately $0.9 million or 12.0%. Fixed expenses, other than depreciation, associated with the operation of the Company's sales and distribution and its headquarters facilities increased approximately $0.8 million or 10.8%.
Depreciation, Goodwill and Trademark Amortization -------------------------------------------------
Depreciation, goodwill and trademark amortization costs increased approximately $0.6 million or 11.0% in 2000, compared with 1999. This increase primarily is due to depreciation on delivery vehicles, equipment used in the Tool Rental program and capital improvements made as a result of the Company's Major Markets and re-merchandising programs, as well as its other initiatives.
Provision for Doubtful Accounts -------------------------------
The Company extends credit, generally due on the 10th day of the month following the sale, to qualified and approved contractors. Provision for doubtful accounts decreased to approximately $1.0 million or 0.1% of sales in 2000 from approximately $1.7 million or 0.2% of sales for 1999.
Other Operating Income ----------------------
Other operating income decreased approximately $1.6 million or 33.3% in 2000 as compared to 1999. The decrease primarily is the result of a reduction in gains reported on the sale of excess property and various fixed assets of approximately $1.5 million. During 1999, the Company sold five pieces of real estate and recorded total gains on the sale of real estate and various fixed assets of approximately $1.8 million. This is compared with three real estate sales and various fixed asset disposals in 2000, resulting in total gains of approximately $0.3 million.
Interest Expense ----------------
Interest expense increased to $24.3 million in 2000 from $23.3 million in 1999. This increase was the result of an increase in the overall effective borrowing rate of 72 basis points as floating interest rates increased over the course of fiscal 2000 compared to 1999, partially offset by a $4.5 million decrease in average outstanding debt.
Income Tax Benefit before Extraordinary Item --------------------------------------------
In 2000, the Company recorded a net income tax benefit before extraordinary item of $0.7 million versus an income tax expense of $5.7 million in 1999. Net operating loss carryforwards were used to substantially offset current income taxes payable in 1999. An effective federal and state income tax rate of 38.8% was used to calculate income taxes for 2000, compared with an effective rate of 38.7% for 1999. In addition to the effective income tax rate, state franchise taxes of $1.4 million and $1.1 million were calculated for 2000 and 1999, respectively, and are included in the provision reported.
The Company continues to review future earnings projections to determine that there is sufficient support for its deferred tax assets and valuation allowance. Management believes that it is more likely than not that the Company will receive full benefit of its net deferred tax asset and that the valuation allowance is properly stated.
Net(loss) income before extraordinary item -------------------------------------------
The Company recorded a net loss before extraordinary item in 2000 of $4.0 million versus net income of $7.6 million in 1999, a decline of $11.5 million. The loss primarily resulted from a reduction of gross profit dollars of approximately $1.5 million; increased salaries, wages and benefits of $7.8 million; increased vehicle maintenance, lease and licensing costs of $1.4 million; a $1.1 million increase in fuel costs; a $1.0 million increase in interest expense and a $1.7 million decline in other income. These decreases were partially offset by a $0.7 million decrease provision for doubtful accounts.
Extraordinary item ------------------
As further explained in Note 7 to the Consolidated Financial Statements, on November 21, 2000 the Company commenced a cash tender offer for its outstanding 11-5/8% Senior Subordinated Notes due 2003, at a substantial discount from face value. The offer expired on December 20, 2000, and on December 26, 2000, the Company redeemed $36.0 million of notes tendered. As a result of this transaction, the Company recorded a pre-tax gain of $11.1 million, net of costs associated with the transaction. The net gain, after appropriate state and federal income taxes, was $6.8 million.
Critical Accounting Policies ----------------------------
Management's Discussion and Analysis discusses the results of operations and financial condition as reflected in the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. As discussed in Note 2 to the Company's Consolidated Financial Statements, the preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates its estimates and judgments, including those related to inventory valuation; the allowance for uncollectible accounts; depreciation, amortization and recoverability of long-lived assets, including intangible assets; self-insurance and other reserves; the calculation of retirement benefits and revenue recognition. Management bases its estimates and judgments on its substantial historical experience and other relevant factors, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. See Note 2 to the Company's Consolidated Financial Statements for a discussion of the Company's significant accounting policies. While the Company believes that the historical experience and other factors considered provide a meaningful basis for the accounting policies applied in the preparation of the consolidated financial statements, the Company cannot guarantee that its estimates and assumptions will be accurate, which could require the Company to make adjustments to these estimates in future periods.
Liquidity and Capital Resources - -------------------------------
The Company's principal sources of working capital and liquidity are cash flows from operations and borrowings under its revolving credit facility. The Company's primary need for capital resources is to finance accounts receivable, inventory, capital expenditures and collateral for self insurance programs.
In 2001, net cash provided by operating activities was $13.2 million. This compares with net cash provided by operating activities of $14.9 million in 2000. The net cash provided by operations in 2001 primarily is due to a decrease in inventory and increases in accounts payables and accrued liabilities, partially offset by an increase in accounts receivable.
Accounts receivable at the end of 2001 were $83.4 million, an increase of $6.7 million or 8.8% from 2000, primarily due to an increase in product sales of 11.9% in the month of December 2001 over last year. Inventory at the end of 2001 was $17.6 million or 14.9% lower than at the end of 2000, primarily as a result of better inventory management. Accounts payable at the end of 2001 was $44.0 million, an increase of $8.7 million or 24% from 2000, primarily due to improved terms with vendors.
During 2001, the Company increased its capital expenditures to $10.3 million compared to $9.7 million. Investing cash flows in both years were partially offset by proceeds on the sale of fixed assets. Net cash used in investing activities in 2001 was $8.0 million compared to $9.2 million in 2000.
The Company's capital expenditures consist primarily of the construction and maintenance of facilities for new and existing operations, the purchase of machinery and equipment for component manufacturing facilities, the remodeling of sales and distribution facilities and the purchase of equipment and management information systems. The Company may also, from time-to-time, make expenditures to establish or acquire operations to expand or complement its existing operations. The credit agreement allows the Company to spend up to $30 million, subject to certain restrictions, for acquisitions. The Company expects to fund capital expenditures through borrowings and its internally generated cash flow.
During 2001, the Company acquired the real estate and other assets of a local lumber distributor in Kenvil, New Jersey for approximately $1.6 million, of which $650,000 was paid in cash and $950,000 in a three-year purchase money mortgage. The purpose of the acquisition is to relocate an existing lumber and distribution center from a nearby leased location. In addition, the Company acquired JWatt Construction, a framing contractor for construction of residential and commercial real property, for an immaterial purchase price. The Company has accrued a liability for payments to be paid over a three-year period.
The Company made one acquisition during 2000, acquiring TresArk Enterprises, Inc. TresArk Enterprises, Inc. is a producer of construction management software designed for lumberyards and their professional contractors and was acquired for $0.8 million, paid for in cash in 2000. The amounts previously classified as goodwill have been reclassified to software. In addition, the Company built a state-of-the-art component manufacturing facility
in Mackville, WI and expanded its facility in Decatur, IL to accommodate the manufacturing of wall panels during 2000.
At December 29, 2001 the Company operated 98 sales and distribution centers and 26 component manufacturing facilities compared with 101 sales and distribution facilities and 27 component manufacturing facilities at December 30, 2000. At December 29, 2001, there were no material commitments to third parties for future capital expenditures.
The Company maintained excess availability under its revolving credit facilities throughout 2001. The Company's receivables and inventory typically increase in the second and third quarters of the year due to higher sales in the peak building season. In these same periods, the Company typically reaches its peak utilization of its revolving credit facility because of the increased inventory and receivables needed for the peak building season. At March 2, 2002, the Company had outstanding working asset borrowings of $84.6 million. The minimum availability requirement was $25.0 million and the unused availability was $31.3 million.
The Company's assessment of its future funds availability constitutes Forward-Looking Information made pursuant to the Private Securities Litigation Reform Act of 1995 and is inherently subject to uncertainty resulting from, among other things, the factors discussed under "Results of Operations - Provision for Income Taxes". The Company anticipates that funds provided by operations and under this facility will be adequate for the Company's future needs.
The Company's amended and restated credit agreement and the trust indenture relating to the Company's 11-5/8% Senior Subordinated Notes contain certain covenants and restrictions. Generally, the agreement and the trust indenture restrict, among other things, capital expenditures, the incurrence of additional debt, asset sales, dividends, investments, acquisitions and other restricted payments. Furthermore, the agreement considers a change in control, as defined, as an event of default. In addition, upon a change in control of the Company, as defined in the trust indenture, the Company must offer to purchase the 11-5/8% Senior Subordinated Notes at 101% of the principal thereof, plus accrued interest.
On May 14, 2001, the Company amended the credit agreement to reduce the level of net worth required on March 31, 2001. On August 13, 2001 the Company amended the credit agreement to remove the net worth covenant, increase the required minimum unused availability from $15 million to $25 million, and to allow for certain corporate structure changes. The amendment also requires the Company to maintain certain average borrowing levels. On February 28, 2002, the Company amended the credit agreement to modify the approved average borrowing levels for the next 12 months, and to reduce the capital spending limit from $9.0 million to $7.0 million for 2002. In March 2002, the Company's bank group waived compliance with sections 9.3, 9.6 and 9.10 of the amended and restated credit agreement to allow a sale-leaseback transaction on the Company's Aurora, CO. property. (See Note 7 to the Consolidated Financial Statements)
As further explained in Note 7 to the Consolidated Financial Statements, on November 21, 2000 the Company commenced a cash tender offer for its outstanding 11-5/8% Senior Subordinated Notes due 2003, at a substantial discount from face value. The offer expired on December 20, 2000 and on December 26, 2000, the Company redeemed $36.0 million of notes tendered. As a result of this transaction, the Company recorded a pre-tax gain of $11.1 million, net of costs associated with the transaction. The net gain, after appropriate state and federal income taxes was $6.8 million.
To provide the funds necessary to complete the Redemption, the Company entered into an amended and restated credit agreement with its existing bank group on December 13, 2000. The amended and restated credit agreement, among other things, increased the total commitment to $251.7 million, removed the seasonal reduction in borrowing capacity provided for in the previous credit agreement, increased both the base rate and LIBOR based borrowing spreads, and extended the final maturity of the revolving credit agreement to June 30, 2005. A portion of the credit facility was provided as a one-time term loan in the principal amount of $51.7 million that requires quarterly principal payments, which began on March 31, 2001. The term loan contains provisions for mandatory principal prepayments in the event that the Company receives cash in connection with certain transactions, as defined.
A commitment fee of 0.38% is payable on the unused amount of the amended and restated credit agreement. Interest on amounts outstanding under the amended and restated credit agreement bear interest at a spread of 0.75% above the base rate of Fleet National Bank (5.50% at December 29, 2001) or 2.50% above the applicable LIBOR rate (4.69% at December 29, 2001). Depending upon the Company's rolling four-quarter interest coverage ratio and unused availability, as defined, amounts outstanding will bear interest at a spread above the base rate from 0.0% to 0.75% or from 2.00% to 2.75% above the applicable LIBOR rate. At December 29, 2001, the Company had designated $21.1 million and $72.0 million as base rate and LIBOR borrowings, respectively. Amounts outstanding at December 29,2001 under the $45.3 million term loan portion bear interest at a spread of 3.00% above the applicable LIBOR rate. All interest is payable monthly.
The Company entered into an interest rate swap agreement that effectively fixes the Company's borrowing cost at 5.75% plus the Company's LIBOR borrowing spread on $40.0 million of the Company's amended and restated line of credit borrowings. The interest rate swap agreement expired in February 2002.
Substantially all of the Company's accounts receivable, inventory and general intangibles are pledged as collateral under the amended and restated credit agreement. In addition, substantially all of the Company's owned real estate assets were provided as additional collateral in connection with the term loan. Availability is limited to 85.0% of eligible accounts receivable plus 60.0% of eligible inventory, with these percentages subject to change at the permitted discretion of the agent for the lenders.
The Company's weighted-average interest rate on all outstanding borrowings, excluding amortization of debt issue costs, for the years ended December 29, 2001, December 30, 2000 and December 25, 1999 was approximately 8.87%, 9.96% and 9.34%, respectively.
Contractual Obligations and Commercial Commitments - --------------------------------------------------
To facilitate an understanding of the Company's contractual obligations and commercial commitments, the following data are provided. Note that approximately $1.1 million of mortgages on real estate included herein are classified as a component of other long-term liabilities in the Company's Balance Sheet.
Other than the operating leases included above, the Company has no other off-balance sheet financing arrangements.
Net Operating Loss Carryforwards - --------------------------------
At December 29, 2001 the Company and its subsidiaries had federal income tax net operating loss carryforwards ("NOLs") of approximately $41.4 million. The NOLs will expire in the years 2006 to 2021 if not previously utilized. See also Note 11 to the Consolidated Financial Statements included elsewhere herein.
The Company continues to review future earnings projections to determine that there is sufficient support for its deferred tax assets and valuation allowance. Management believes that it is more likely than not that the Company will receive full benefit of its net deferred tax asset and that the valuation allowance is properly stated.
Recently Issued Accounting Pronouncements - -----------------------------------------
In October 2001, the Financial Accounting Standards Board issued Statement of Accounting Standards No. 144 ("SFAS 144"), "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS 144 supersedes SFAS 121, and requires that long-lived assets held for use and those to be disposed of be measured for impairment. The standard became effective for fiscal year 2002. The Company is in the process of evaluating the adoption of this statement.
In July 2001, the Financial Accounting Standards Board issued Statement of Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets." SFAS 142 requires companies to assess impairment of goodwill and other intangible assets on at least an annual basis to determine whether the fair value of those intangible assets continues to exceed the book value. Instead of amortization of goodwill, companies are required to record an impairment charge if the fair value is below carrying value. The standard became effective for the Company in fiscal year 2002. Goodwill amortization for the years ended December 29, 2001 and December 30, 2000 was $515,000 and $621,000, respectively. The Company is in the process of evaluating the adoption of this statement. It is possible the Company could incur an impairment charge related to adopting this statement.
On December 31, 2000, the Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended ("SFAS 133"), which establishes accounting and reporting standards for derivative instruments and hedging activities. This standard requires that all derivative instruments, including certain derivative instruments embedded in other contracts, be recognized as assets or liabilities in the balance sheet and measured at fair value. If a derivative is designated as a fair value hedge, changes in the fair value of the derivative and the hedged item will be recognized in earnings. If a derivative is designated as a cash flow hedge, changes in the fair value of the derivative will be recorded in other comprehensive income and will be recognized in the statement of operations when the hedged item affects earnings. For a derivative that does not qualify as a hedge, changes in fair value will be recorded in earnings. As a result of adopting SFAS 133 in 2000, the Company recorded a pre-tax charge of approximately $0.1 million in the year 2000 as a cumulative transition adjustment to other comprehensive income for derivatives designated in cash flow-type hedges prior to adopting SFAS 133. At December 29, 2001 the Company's interest rate swap qualified as a hedge under SFAS 133 which resulted in an adjustment to Other Comprehensive Income of $93,000, net of income taxes of $57,000, and $116,000 interest expense for the year. The Company did not have any commodity hedges open at December 29, 2001.
Item 7a.
Item 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT - -------------------------------------------------------- MARKET RISK. ------------
The Company is subject to market risk primarily associated with changes in interest rates and commodity lumber prices.
Interest Rate Risk ------------------
As discussed in Note 7 to the Consolidated Financial Statements, to provide the funds necessary to complete the redemption of a portion of the Company's 11-5/8% Senior Subordinated Notes due 2003, the Company entered into an amended and restated credit agreement with its existing bank group on December 13, 2000. The amended and restated credit agreement, among other things, increased the total commitment to $251.7 million, removed the seasonal reduction in borrowing capacity provided for in the previous credit agreement, increased both the base rate and LIBOR based borrowing spreads, and extended the final maturity of the revolving credit agreement to June 30, 2005. A portion of the credit facility was provided as a one-time term loan in the principal amount of $51.7 million that requires quarterly principal payments beginning on March 31, 2001. Interest on amounts outstanding under the amended and restated revolving line of credit bear interest at a spread of 0.75% above the base rate of Fleet National Bank (5.50% at December 29, 2001) or 2.75% above the applicable LIBOR rate (4.69% at December 29, 2001). Depending upon the Company's rolling four-quarter interest coverage ratio and unused availability, as defined, amounts outstanding will bear interest at a spread above the base rate from 0.0% to 0.75% or from 2.00% to 2.75% above the applicable LIBOR rate. At December 29, 2001, the Company had designated $21.1 million and $72.0 million as base rate and LIBOR borrowings, respectively. Amounts outstanding at December 29, 2001 under the remaining $45.3 million term loan portion bear interest at a spread of 3.00% above the applicable LIBOR rate.
The Company entered into an interest rate swap agreement that effectively fixes the Company's borrowing cost at 5.75% plus the Company's LIBOR borrowing spread on $40.0 million of the Company's amended and restated line of credit borrowings. The interest rate swap agreement expired in February 2002.
Based on the Company's average borrowings under its revolving credit agreements during 2001, including amounts outstanding under the term loan portion and net of the impact of the interest rate swap agreement described above, a hypothetical 25 basis point movement in the base rate or LIBOR rate would result in an approximate $161,876 annualized increase or decrease in interest expense. (See Note 12 of Consolidated Financial Statements included elsewhere herein).
The fair value of the Company's outstanding 11 5/8% Senior Subordinated Notes was $32.0 million and $38.3 million at December 29, 2001 and December 30, 2000, respectively. As discussed in Note 7 to the Consolidated Financial Statements, the Company redeemed approximately $36.0 million face amount of the notes in December 2000. Assuming a hypothetical 100 basis point decrease in the yield to maturity of the outstanding notes at December 29, 2001, the fair value of the fixed rate debt would have increased by $0.3 million.
Commodity Price Risk --------------------
The Company will from time to time enter into lumber futures contracts to hedge price fluctuations related to anticipated future purchases of commodity lumber. While lumber futures contracts are entered into on a risk management basis, the Company's hedge positions could show a net gain or loss depending on prevailing market conditions. At December 29, 2001, the Company did not have any lumber futures contracts outstanding.
Item 8.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. - -----------------------------------------------------
Financial statements of the Company are set forth herein beginning on page.
Item 9.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND - -------------------------------------------------------------------------------- FINANCIAL DISCLOSURE. ---------------------
Not Applicable.
PART III --------
Item 10.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. - -------------------------------------------------------------
Information required by this Item is incorporated herein by reference to the Sections entitled "Election of Directors" and "Management" in the definitive proxy statement to be filed in connection with the Company's 2001 Annual Meeting of Stockholders tentatively scheduled to be held on May 21, 2002.
Item 11.
Item 11. EXECUTIVE COMPENSATION. - ---------------------------------
Information required by this Item is incorporated herein by reference to the Sections entitled "Executive Compensation", "Board of Directors' Meetings and Compensation" (the last two paragraphs), "Report of the Compensation and Benefits Committee" and "Comparison of Cumulative Total Return" in the definitive proxy statement to be filed in connection with the Company's 2001 Annual Meeting of Stockholders tentatively scheduled to be held on May 21, 2002.
Item 12.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. - -------------------------------------------------------------------------
Information required by this Item is incorporated herein by reference to the Section entitled "Principal Security Holders and Security Ownership of Management" in the definitive proxy statement to be filed in connection with the Company's 2001 Annual Meeting of Stockholders tentatively scheduled to be held on May 21, 2002.
Item 13.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. - ---------------------------------------------------------
Information required by this Item is incorporated herein by reference to the Section entitled "Certain Relationships and Related Transactions" in the definitive proxy statement to be filed in connection with the Company's 2001 Annual Meeting of Stockholders tentatively scheduled to be held on May 21, 2002.
(3) Exhibits - -------------
See Exhibit Index included elsewhere herein.
(b) Reports on Form 8-K - ------------------------ The Company has filed no reports on Form 10-k with the Securities and Exchange Commision during the last quarter of the fiscal year.
(c) See item 14(a)(3) above - -------------------------------- (d) See item 14(a)(2) above - --------------------------------
SIGNATURES ----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
WICKES INC.
Date: March 29, 2002 By: /s/ J. Steven Wilson ------------------------ J. Steven Wilson Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
INDEPENDENT AUDITORS' REPORT ----------------------------
To the Board of Directors and Stockholders of Wickes Inc. Vernon Hills, IL
We have audited the accompanying consolidated balance sheets of Wickes Inc. and subsidiaries (the "Company") as of December 29, 2001 and December 30, 2000, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 29, 2001. Our audits also included the financial statement schedules for each of the three years in the period ended December 29, 2001, listed in the Index at Item 14.