<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File
For Quarter Ended September 30, 1997 Number 0-9209
---------------------- -------
RIVERSIDE GROUP, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Florida 59-1144172
- ------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
7800 Belfort Parkway, Jacksonville, Florida 32256
- ------------------------------------------- ----------
(Address of principal executive Offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code number
904-281-2200
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Indicate by a check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
On November 10, 1997, there were 5,287,123 shares of the Registrant's common
stock outstanding.
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RIVERSIDE GROUP, INC.
INDEX
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<CAPTION>
Page
PART I. FINANCIAL INFORMATION Number
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<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
September 30, 1997 (Unaudited)
and December 31, 1996 3
Condensed Consolidated Statements of Operations
For the three months and nine months ended
September 30, 1997 and 1996 (Unaudited) 4
Condensed Consolidated Statement
of Common Stockholders' Equity
For the nine months ended
September 30, 1997 (Unaudited) 5
Condensed Consolidated Statements of
Cash Flows
For the nine months ended
September 30, 1997 and 1996 (Unaudited) 6
Notes to Condensed Consolidated
Financial Statements (Unaudited) 7
Item 2. Management's Discussion and Analysis 12 of Financial Condition
and Results of Operations 12
PART II.
Item 5. Other Information 25
Item 6. Exhibits and Reports on Form 8-K 25
</TABLE>
2
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RIVERSIDE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands except share data)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
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<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 459 $ 3,100
Accounts receivable, less allowance for doubtful
accounts of $3,358 in 1997 and $4,318 in 1996 104,360 71,743
Inventory 117,970 100,672
Construction and permanent loans 10,872 4,169
Deferred tax asset 10,910 10,331
Prepaid expenses 2,269 1,023
-------------- -------------
Total current assets 246,840 191,038
Investment in real estate 14,811 16,854
Investment in Circle Investors, Inc. 5,345 5,345
Property, plant and equipment, net 46,070 50,245
Trademark (net of accumulated amortization of $10,218 in 1997 6,801 6,948
and $10,052 in 1996)
Deferred tax asset 18,831 18,831
Excess of cost over fair value of assets acquired 15,972 16,463
Other assets (net of accumulated amortization of
$8,388 in 1997 and $6,983 in 1996) 6,112 8,106
-------------- -------------
Total assets 360,782 $ 313,830
============== =============
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 13,290 $ 4,861
Accounts payable 51,653 41,318
Income tax payable 25 25
Accrued liabilities 29,434 28,000
-------------- -------------
Total current liabilities 94,402 74,204
Long-term debt, less current maturities 219,890 186,142
Mortgage debt, related party 16,053 17,416
Other long-term liabilities 3,062 2,985
-------------- -------------
Total liabilities 333,407 280,747
Minority interest 11,567 12,308
Commitments and contigencies (Note 2)
COMMON STOCKHOLDERS' EQUITY :
Common stock, $.10 par value; 20,000,000 shares authorized; 529 530
5,287,123 issued and outstanding in 1997 and 5,296,123
issued and outstanding in 1996
Additional paid in capital 16,711 16,728
Retained Earnings (Deficit) (1,432) 3,517
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Total common stockholders' equity 15,808 20,775
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Total liabilities and common stockholders' equity $ 360,782 $ 313,830
=============== =============
</TABLE>
The accompanying notes are an integral part of the Condensed
Consolidated Financial Statements.
3
<PAGE> 4
RIVERSIDE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- -----------------------------
1997 1996 1997 1996
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<S> <C> <C> <C> <C>
REVENUES:
Sales and service revenues $ 266,324 $ 255,575 $ 662,978 $ 255,575
Insurance premiums and annuity considerations -- -- -- 3,224
Net investment income (loss) (79) 164 (132) 6,357
Net realized investment gains 126 10 798 1,227
Other operating income 2,383 1,775 5,509 1,971
------------- ------------- ------------- -------------
268,754 257,524 669,153 268,354
------------- ------------- ------------- -------------
COSTS AND EXPENSES:
Cost of sales 206,048 200,118 511,448 200,118
Provision for doubtful accounts 309 339 892 339
Depreciation, goodwill and trademark amortization 1,360 1,642 4,085 1,642
Income realized on reorganization of
life insurance subsidiaries -- -- -- (431)
Selling, general and administrative expenses 51,386 44,895 137,759 47,247
Interest expense 6,662 6,256 18,893 7,812
Policyholder benefits -- -- -- 5,805
Policy acquisition expenses -- -- -- 2,026
------------- ------------- ------------- -------------
265,765 253,250 673,077 264,558
------------- ------------- ------------- -------------
EARNINGS (LOSS)BEFORE INCOME TAXES, EQUITY IN RELATED PARTIES,
AND MINORITY INTEREST 2,989 4,274 (3,924) 3,796
Current income tax expense (1,817) (2,365) (531) (2,365)
Equity in losses of Wickes Inc. -- -- -- (1,715)
Equity in losses of related parties (704) (322) (1,470) (322)
Minority interest (885) (1,372) 976 (1,372)
------------- ------------- ------------- -------------
NET INCOME (LOSS) $ (417) $ 215 $ (4,949) $ (1,978)
============= ============= ============= =============
EARNINGS (LOSS) PER SHARE:
Income (loss) per common share $ (0.08) $ 0.03 $ (0.95) $ (0.37)
============= ============= ============= =============
Weighted average number of common stock
used in computing earnings per share 5,193,833 5,307,373 5,193,972 5,309,864
</TABLE>
The accompanying notes are an integral part of the Condensed
Consolidated Financial Statements.
4
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RIVERSIDE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF COMMON STOCKHOLDERS' EQUITY
(in thousands)
(unaudited)
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<CAPTION>
TOTAL
ADDITIONAL COMMON
COMMON PAID-IN RETAINED STOCKHOLDERS'
STOCK CAPITAL EARNINGS EQUITY
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<S> <C> <C> <C> <C>
Balance, December 31, 1996 $ 530 $ 16,728 $ 3,517 $20,775
Net loss, nine months ended September 30, 1997 (4,949) (4,949)
Purchase and retirement of 9,000 shares of (1) (17) (18)
common stock, at cost
------- -------- ------- -------
Balance, September 30, 1997 $ 529 $ 16,711 $(1,432) $15,808
======= ======== ======= =======
</TABLE>
The accompanying notes are an integral part of the Condensed
Consolidated Financial Statements.
5
<PAGE> 6
RIVERSIDE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
----------------------
SEPT 30, SEPT 30,
CASH FLOWS FROM OPERATING ACTIVITIES 1997 1996
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<S> <C> <C>
Net loss $ (4,949) $ (1,978)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Gain on Life Insurance Reorganization -- (431)
Depreciation expense 3,214 1,263
Amortization expense 1,898 882
Net change in deferred acquisition costs -- 49
Provision for doubtful accounts 891 3,533
Gain on sale of fixed assets (1,379) (183)
Net realized investment gains (798) (1,227)
Provision for deferred income taxes (579) --
Equity in losses of unconsolidated subsidiaries 1,470 1,715
Minority interest (976) 1,372
Interest on policyholder's funds -- 3,469
Change in other assets and liabilities:
Increase in accounts receivable (33,463) (7,770)
(Increase)/decrease in inventory (17,298) 2,197
(Increase) /decrease in other assets (1,954) 214
Accrued investment income -- 197
Premiums receivable and unearned premiums -- 80
Increase in accounts payable and accrued liabilities 11,147 4,121
Reserve for unpaid claims, policy benefits and
recoverable on paid losses from reinsurers and others -- (504)
Net liabilities of other liabilities and current income taxes (3) 910
-------- --------
NET CASH PROVIDED (USED IN) OPERATING ACTIVITIES (42,779) 7,909
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of investments:
Property, plant and equipment (4,980) (600)
Fixed maturities available for sale -- (36,867)
Equity securities -- (8,602)
Investment real estate (493) (139)
Mortgage, construction and policy loans (23,780) (10,756)
Securities of Wickes Inc. -- (10,000)
Net Assets of Life Insurance Reorganization -- (28,202)
Sale, maturity, and principal reductions of investments: --
Property, plant and equipment 7,946 935
Fixed maturities available for sale -- 41,675
Equity securities -- 8,643
Investment real estate 3,351 604
Mortgage, construction and policy loans 17,216 2,294
Life Insurance Reorganization proceeds -- 35,000
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NET CASH USED IN INVESTING ACTIVITIES (740) (6,015)
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings(repayment) under revolving line of credit 33,974 (9,972)
Repayment of debt (13,041) (20,726)
Increase in borrowings 19,756 18,767
Purchase and retirement of treasury shares (18) (46)
Net proceeds from sale of Wickes Inc. 160 --
Net proceeds from issuance of common stock 47 --
Deposits of policyholders' funds -- 192
Withdrawal of policyholders' funds -- (8,665)
-------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 40,878 (20,450)
NET DECREASE IN CASH AND EQUIVALENTS (2,641) (18,556)
Cash and equivalents at beginning of period 3,100 23,682
-------- --------
Cash and equivalents at end of period $ 459 $ 5,126
======== ========
</TABLE>
Cash paid during the period for interest was $13,814,000 and $4,387,000
for the nine months ended September 30, 1997 and 1996, respectively.
Cash paid during the period for income taxes was $832,000 and $0 for
the nine months ended September 30, 1997 and 1996, respectively.
The accompanying notes are an integral part of the Condensed
Consolidated Financial Statements.
6
<PAGE> 7
RIVERSIDE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Financial Statement Presentation
The condensed consolidated financial statements present the financial
position, results of operations, and cash flows of Riverside Group, Inc. and its
wholly-owned and majority-owned subsidiaries (the "Company").
The condensed consolidated balance sheets as of September 30, 1997, the
condensed consolidated statements of operations for the nine months ended
September 30, 1997 and 1996, the condensed consolidated statement of common
stockholders' equity for the nine months ended September 30, 1997 and the
condensed consolidated statements of cash flows for the nine months ended
September 30, 1997 and 1996, have been prepared by the Company without audit. In
the opinion of management, all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial position, results of
operations and cash flows at September 30, 1997, and for all periods presented
have been made. The results of operations for the nine months period ended
September 30, 1997 are not necessarily indicative, if annualized, of those to be
expected for the full year.
Certain information and footnote disclosures normally included in
consolidated financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. It is suggested that these
condensed consolidated financial statements be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1996 filed with the
Securities and Exchange Commission.
Earnings Per Share
Earnings per share are based on the weighted average number of shares
of common stock outstanding during each period (5,193,972 shares in 1997 and
5,309,864 shares in 1996). The Company purchased and retired 9,000 shares of its
common stock during the first nine months of 1997.
Reclassifications
Reclassifications have been made to the third quarter condensed
consolidated balance sheet and condensed consolidated statement of cash flows to
more appropriately reflect purchase rebates in accounts payable rather than as
accounts receivable. No reclassification was made to periods prior to the first
quarter of 1997 as the amounts are immaterial.
2. COMMITMENTS AND CONTINGENCIES
On June 30, 1997, Wickes Inc. ("Wickes") completed the sale leaseback
of its 72,000 square foot corporate headquarters in Vernon Hills, Illinois. The
sale price was approximately $7.3 million (which was utilized to reduce debt),
and a gain of approximately $600,000 will be amortized over the life of the
lease. Wickes will be master leasing the entire building for a 15- year term
(with options to extend), at market rates and has subleased over 20,000 square
feet. Based on Wickes' current borrowings rates, this transaction is expected to
have a favorable impact on Wickes' future net earnings with the increase in rent
expense (selling, general and administrative expenses) more than offset by
reduced interest expense.
At September 27, 1997, Wickes had accrued approximately $1.0 million
for remediation of certain environmental and product liability matters,
principally underground storage tank removal.
Many of the building center facilities presently and formerly operated
by Wickes contained underground petroleum storage tanks. Other than tanks at one
acquired facility recently installed in compliance with modern
<PAGE> 8
standards, all such tanks known to Wickes located on facilities owned or
operated by Wickes have been filled, removed, or are scheduled to be removed in
accordance with applicable environmental laws in effect at the time. As a result
of reviews made in connection with the sale or possible sale of certain
facilities, Wickes has found petroleum contamination of soil and ground water on
several of these sites and has taken, and expects to take, remedial actions with
respect thereto. In addition, it is possible that similar contamination may
exist on properties no longer owned or operated by Wickes the remediation of
which Wickes could under certain circumstances be held responsible. Since 1988,
Wickes has incurred approximately $ 2.0 million of net costs with respect to the
filling or removing of underground storage tanks and related investigatory and
remedial actions.
Wickes is one of many defendants in approximately 114 actions, each of
which seeks unspecified damages, brought in 1993, in various Michigan state
courts against manufacturers and building material retailers by individuals who
claim to have suffered injuries from products containing asbestos. Each of the
plaintiffs in these actions is represented by one of two law firms. Wickes is
aggressively defending these actions and does not believe that these actions
will have a material adverse effect on the Company.
On November 3, 1995, a complaint was filed against Wickes, its directors
and the Company seeking to enjoin or to obtain damages with respect to Wickes'
agreement to issue two million newly-issued shares of common stock to the Parent
Company for $10 million in June 1996.
The Company and Wickes are involved in various other legal proceedings
which are incidental to the conduct of their businesses. The Company does not
believe that any of these proceedings will have a material adverse effect on the
Company.
The Company's assessment of the matters described in this note and other
forward-looking statements ("Forward-Looking Statements") in these notes 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 in this note 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, Wickes' ability to prevail against its insurers
with respect to coverage issues to date, the financial ability of those insurers
and other persons from whom Wickes may be entitled to indemnity, and the
unpredictability of matters in litigation.
3. LONG TERM AND MORTGAGE DEBT
Consolidated long-term and mortgage debt is comprised of the following at
September 30, 1997 (in thousands):
<TABLE>
<CAPTION>
THE PARENT GROUP
<S> <C>
LONG-TERM DEBT
Subordinated Notes $ 9,579
Warehouse line of credit for construction and permanent loans 10,838
Other 2,395
Less: current maturities (13,233)
--------
Total Company long-term debt less current maturities $ 9,579
--------
MORTGAGE DEBT
Mortgage debt, non-recourse, related party $ 16,053
Less: current maturities -
--------
The Company long term mortgage debt,
less current maturities $ 16,053
--------
WICKES
Revolving line of credit $110,287
Senior subordinated notes 100,000
Other 81
Less: current maturities (57)
--------
Total Wickes' long-term debt less current maturities $210,311
--------
Total long-term and mortgage debt
less current maturities $235,943
========
</TABLE>
<PAGE> 9
THE PARENT GROUP
On May 1, 1997, the Company obtained a $1.5 million demand bank line of
credit secured by 800,000 shares of Wickes common stock and 2,330 shares of
preferred stock of Circle Investors, Inc. ("Circle"). Borrowings under this line
of credit bear interest payable monthly at two percent above the lender's
standard rate, and principal is payable upon demand and is designed to be paid
with the cash proceeds of the pledged Circle shares in a pending transaction.
Monthly principal payments of $125,000 per month are required beginning November
1, 1997 if the principal has not otherwise been demanded or paid. The demand
bank line of credit contains certain affirmative and negative covenants,
including among others, prohibitions on mergers and the like, on the incurrence
of indebtedness to parties other than the lender, on loans to related parties,
on the payment of dividends, on the issuance of stock, on the disposition of
assets (other than real estate assets, the Circle shares and the shares of
pledged Wickes common stock), on the acquisition of assets or the making of
capital expenditures, and on the increase in compensation of the Company's chief
executive officer above the 1996 level. The demand bank line of credit also
requires the Company to pledge additional shares of Wickes common stock if the
value of the shares of Wickes common stock held as collateral falls below $4
million.
On June 24, 1997, the Company modified its existing obligation to a third
party in the approximate amount of $900,000. As modified, the terms of this
obligation call for monthly principal payments of $101,150 commencing October 1,
1997 with the balance due July 15, 1998, with earlier payments required from
proceeds of the Circle merger in excess of $2.5 million released from pledge
under the Company's real estate indebtedness. On November 7, 1997, the Company
executed a reinstatement agreement following the Company's default under the
obligation. The terms of the reinstatement provide for, among other things,
deferral of the scheduled payments for October and November 1997 and a waiver
of the default. The Company has made the October payment and the November
payment is due on November 30, 1997. The Company is currently in compliance
under the reinstatement agreement.
WICKES
A second amendment and restatement of Wickes' revolving credit agreement
was completed on April 11, 1997. Among other things, this amendment and
restatement (i) extended the life of the facility to March 2001, (ii) reduced
the interest rate premiums over the London InterBank Offered Rate ("LIBOR") and
over prime by 75 basis points, (iii) included provisions for further interest
rate premium reductions if certain performance levels are achieved, (iv)
modified certain covenants, and (v) provided for increases in the amount of
capital expenditures allowed by the agreement equal to the proceeds received
from the sale of certain excess real estate.
Under the revolving line of credit, Wickes may borrow against certain
levels of accounts receivable and inventory. The unused amount available for
borrowing, at September 30, 1997, was $19.4 million.
On June 16, 1997, Wickes entered into an interest rate swap agreement which
effectively fixed the interest rate at 8.11% (subject to reduction in certain
circumstances), for three years, on $40 million of Wickes' borrowings under its
floating rate revolving line of credit. This interest rate swap is operative
while the 30 day LIBOR borrowing rate remains below 6.7%. At November 3, 1997,
the 30 day LIBOR borrowing rate was 5.65%.
4. INCOME TAXES
The percentage ownership of Wickes by the Company does not allow
consolidation for federal income tax
<PAGE> 10
filing purposes. Thus, each company will continue to separately determine its
income tax liabilities. The Company's effective tax rate, excluding Wickes', was
0% for the nine months ended September 30, 1997 and 1996.
Wickes' provision for income taxes for the nine month period ended
September 27, 1997 was $.5 million, compared to $.9 million for the nine month
period ended September 27, 1996. An effective tax rate of 39.1% was used to
calculate federal income taxes for the nine months of 1997, compared with an
effective rate of 38.5% for the nine month period of 1996. In addition to the
effective rate used, state income and franchise taxes were calculated separately
and are included in the provision reported.
5. SUBSEQUENT EVENTS
On November 4, 1997, the Company entered into a agreement with Wickes to
acquire on or before December 31, 1997, certain operations of Wickes that Wickes
has decided to discontinue from Wickes as a result of Wickes' plan to streamline
its operations and focus primarily on its core professional builder business.
These operations include internet, among other things, and utilities marketing
services. This agreement is subject to the Company's ability to obtain adequate
financing.
In November 1997, the Company entered into a letter of intent to sell
Wickes Mortgage Lending, Inc. ("WML") to an unrelated party. This transaction
would allow Wickes to continue to make available construction loans to its
builder customers, with no additional costs to Wickes or to the Company.
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Condensed
Consolidated Financial Statements and Notes thereto contained elsewhere herein
and in conjunction with the Consolidated Financial Statements and Notes thereto
and Management's Discussion and Analysis of Financial Condition and Results of
Operations contained in the Company's Annual report on Form 10-K for the year
ended December 31, 1996.
RESULTS OF OPERATIONS
GENERAL
The Company reported results of operations for the three months and nine
months ended September 30, 1997 and 1996, as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
(unaudited) (unaudited)
--------------------- ---------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Equity in earnings(losses)
of Wickes (1) $ -- $ $ -- $ (1,715)
Earnings(losses) before
income taxes, equity
in related parties,
and minority interest (2) 2,989 4,274 (3,924) 3,796
Net earnings(loss) $ (417) $ 215 $(4,949) $ (1,978)
</TABLE>
(1) The Company accounted for its investment in Wickes on the equity method
through June 30, 1996.
(2) Includes realized investment gains of $126,000 and $10,000 for the three
months ended September 30, 1997 and 1996, respectively, and $798,000 and
$1,227,000 for the nine months ended September 30, 1997 and 1996,
respectively.
WICKES
The Company estimates that the Company's results of operations include
profits attributable to Wickes of $848,000 and $1,420,000 for the third quarter
of 1997 and 1996, respectively. The Company estimates that its results of
operations include losses of $1,347,000 and $294,000 attributable to Wickes, for
the first nine months ended September 30, 1997 and 1996, respectively.
The following discussion was obtained from Wickes' third quarter 1997
Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission.
The following table sets forth, for the periods indicated, the percentage
relationship to net sales of certain expense and income items. This information
includes the results from all building centers and component manufacturing
facilities operated by Wickes, including those subsequently closed or sold.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------- -------------------------
(unaudited) (unaudited)
Sept. 27, Sept. 28, Sept. 27, Sept. 28,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Gross profit 22.6% 21.7% 22.8% 22.2%
Selling, general and
administrative expense 19.2% 17.3% 20.5% 19.1%
Depreciation, goodwill and
trademark amortization 0.4% 0.5% 0.5% 0.6%
Provision for doubtful accounts 0.1% 0.1% 0.1% 0.2%
Other operating income (0.8)% (0.5)% (0.7)% (0.6)%
Income from operations 3.7% 4.3% 2.4% 2.9%
</TABLE>
<PAGE> 12
Net Earnings
Net income for the three months ended September 27, 1997 was $1,833,000
compared with $2,843,000 for the three months ended September 28, 1996. The net
loss for the nine months ended September 27, 1997 was $2,015,000 compared with a
loss of $1,450,000 for the nine months ended September 28, 1996. The decrease in
net income for the three-month period primarily results from increases in
selling, general and administrative expenses ("SG&A") and equity in loss of
affiliated company partially offset by increased sales and gross profit,
increased other operating income, and decreases in depreciation, goodwill and
trademark amortization, and provision for income taxes. The decrease in net
income for the nine-month period primarily results from an increase in SG&A
partially offset by increased sales and gross profit, increased other operating
income, and decreases in provision for doubtful accounts, interest expense,
equity in loss of affiliated company, depreciation, goodwill and trademark
amortization, and provision for income taxes.
Operational Restructuring
For information concerning an operational restructuring announced by
Wickes on October 17, 1997, that involves segmentation of Wickes' core
business, the closing of several building material centers, the sale of several
non-core programs and the reduction of headquarters staffing levels, see "Item
5. Other Events" and Wickes' press release included herein as Exhibit 99.1 and
incorporated herein by this reference.
<PAGE> 13
THREE MONTHS ENDED SEPTEMBER 27, 1997 COMPARED
WITH THE THREE MONTHS ENDED SEPTEMBER 28, 1996
Net Sales
Net sales for the third quarter of 1997 increased 4.2% to $266.3 million
from $255.6 million for the third quarter of 1996. Same store sales increased
4.9% compared with the same period last year. Same store sales to Wickes'
primary customers, building professionals, increased 5.9% when compared with the
third quarter of 1996. Consumer same store sales were down 5.9% for the quarter.
As of September 27, 1997, Wickes operated 111 building centers, one more than it
operated at the end of the third quarter of 1996. Wickes estimates that
deflation in lumber prices reduced total sales for the quarter by approximately
$1.9 million, compared with the 1996 comparable period.
Gross Profit
1997 third quarter gross profit increased to $60.3 million from $55.5
million for the third quarter of 1996, a 8.6% increase. Gross profit as a
percent of sales increased to 22.6% for the third quarter of 1997 from 21.7% in
1996. The increase in gross profit as a percent of sales is primarily
attributable to improved product costs. Sales to building professionals, as a
percent of total sales, increased to 84.7% for the third quarter of 1997 from
83.1% for the same period in 1996. Lumber and building materials accounted for
89.0% of the materials sold in the third quarter of 1997, compared with 89.6% of
the materials sold in the third quarter of 1996.
Selling, General and Administrative Expense
SG&A expense increased to 19.2% of net sales in the third quarter of 1997
compared with 17.3% of net sales in the third quarter of 1996. Much of the
increase is attributable to market expansion programs and Wickes' decision to
remerchandise certain facilities and invest in programs to support sales
improvement. Costs associated with pre-opening expenses for new facilities and
remerchandising of existing showrooms amounted to $500,000 for the quarter. The
showrooms in four facilities were remerchandised and Wickes opened two new
building centers and one component manufacturing facility during the third
quarter. Another four building centers and one component facility were also
opened during the first half of the year. Total SG&A expense attributable to
these new start-up operations amounted to $3.0 million during the third quarter
of 1997.
The discontinued programs and staffing reductions discussed in the
operation restructuring, announced by Wickes on October 17, 1997, account for
approximately $2.1 million in third quarter SG&A expense. See Item 5. "Other
Information" for a more detailed description of this plan.
Increases as a percent of sales in salaries and wages, maintenance, travel,
professional fees, supplies, employee relocation, casualty insurance, rental
expense and marketing were partially offset by reductions in health insurance
costs. Salaries, wages and employee benefits increased, as a percent of sales,
by 0.9%. As of September 27, 1997, Wickes had 4,168 full time and part time
employees, up 292 from September 28, 1996.
Depreciation, Goodwill and Trademark Amortization
Depreciation, goodwill and trademark amortization decreased to $1.1 million
for the third quarter of 1997 compared with $1.3 million for the same period in
1996. This decrease is primarily due to the sale or disposal of excess
facilities, vehicles and equipment during 1996 and the first half of 1997, and
the replacement of owned delivery vehicles with new, leased equipment.
Provision for Doubtful Accounts
The provision for doubtful accounts remained relatively the same for the
third quarters of 1997 and 1996, an expense of $0.3 million.
<PAGE> 14
Other Operating Income
Other operating income for the third quarter of 1997 was $2.1 million, or
0.8% of sales. During the third quarter of 1996, other operating income was $1.4
million or 0.5% of sales. Wickes recorded a gain of approximately $700,000 on
the sale of previously closed building centers during the third quarter of 1997.
There were no significant gains on the sale of excess real estate recorded in
the third quarter of 1996.
Interest Expense
In the third quarter of 1997 interest expense was relatively unchanged when
compared with the third quarter of 1996 at approximately $5.5 million. Wickes
did experience an increase in average total long term debt of approximately
$17.9 million which was offset by a decrease in the effective borrowing rate on
total long term debt for the third quarter of 57 basis points, when compared
with the third quarter of 1996. The decrease in the effective borrowing rate is
primarily due to a reduction in interest rate on Wickes' revolving line of
credit, effective April 11, 1997, see "Note 3, Long-Term Debt" of Notes to
Condensed Consolidated Financial Statements included elsewhere herein.
Approximately 94% of Wickes' third quarter average borrowings on its revolving
credit facility were LIBOR-based.
Equity in Loss of Affiliated Company
In the third quarter of 1997, Wickes recorded a loss of $0.7 million, under
the equity method, with respect to its investment in its affiliate engaged in
operations in Russia. In the third quarter of 1996, Wickes recorded a loss of
$0.3 million.
NINE MONTHS ENDED SEPTEMBER 27, 1997 COMPARED
WITH THE NINE MONTHS ENDED SEPTEMBER 28, 1996
Net Sales
Net sales for the first nine months of 1997 increased 4.1% to $663.0
million from $636.9 million for the first nine months of 1996. Same store sales
increased 4.6% compared with the same period last year. Same store sales to
Wickes' primary customers, building professionals, increased 5.8% when compared
with the first nine months of 1996. Consumer same store sales were down 6.4% for
the first nine months. As of September 27, 1997, Wickes' operated 111 building
centers, one more than it operated at the end of the first nine months of 1996.
Wickes estimates that inflation in lumber prices accounted for approximately
$8.5 million of the sales increase for the first nine months of 1997, compared
with the 1996 comparable period. Also, weather conditions in the Northeast
during the first quarter of 1997 were more favorable compared with the record
snowfalls recorded in the first quarter of 1996.
Gross Profit
Gross profit for the first nine months of 1997 increased to $151.5 million
from $141.6 million for the first nine months of 1996, a 7.0% increase. Gross
profit as a percent of sales increased to 22.8% for the first nine months of
1997 from 22.2% in 1996. The increase in gross profit as a percent of sales is
primarily attributable to improved product costs and increased lumber prices.
Sales to the building professionals, as a percent of total sales, increased to
86.2% for the first nine months of 1997 from 84.4% for the same period in 1996.
Lumber and building materials accounted for 88.8% of the materials sold in the
first nine months of 1997, compared with 88.1% of the materials sold in the
first nine months of 1996.
Selling, General and Administrative Expense
SG&A expense increased to 20.5% of net sales in the first nine months of
1997 compared with 19.1% of net sales in the first nine months of 1996. Much of
the increase is attributable to market expansion programs and
<PAGE> 15
Wickes' decision to remerchandise certain facilities and invest in programs to
support sales improvement. The showrooms in four facilities were remerchandised
and Wickes opened six new building centers and two component manufacturing
facilities in the first nine months of 1997. Costs associated with pre-opening
expenses for new facilities and remerchandising of existing showrooms amounted
to $1.1 million during the first nine months of 1997. Total SG&A expense
attributable to these new start-up operations amounted to approximately $4.7
million during the first nine months of 1997. Wickes has also expended $500,000
on new sales training programs through the first nine months of 1997.
The discontinued programs and staffing reductions discussed in the Core
Business Plan account approximately $6.4 million of SG&A expense through the
first nine months of 1997. See Item 5. "Other Information" for a more detailed
description of this plan.
Increases, as a percent of sales, in salaries and wages, maintenance,
travel, professional fees, training costs, office supplies and marketing were
partially offset by reductions in health an casualty insurance costs, utilities
and delivery expense. Total salaries and wages increased, as a percent of sales,
by 0.7%. As of September 27, 1997, Wickes had 4,168 full time and part time
employees, up 292 from September 28, 1996.
Depreciation, Goodwill and Trademark Amortization
Depreciation, goodwill and trademark amortization decreased to $3.5 million
for the first nine months of 1997 compared with $4.1 million for the same period
in 1996. This decrease is primarily due to the sale or disposal of excess
facilities, vehicles and equipment during 1996 and the first half of 1997, and
the replacement of owned delivery vehicles with new, leased equipment.
Provision for Doubtful Accounts
Provision for doubtful accounts decreased to $0.9 million or 0.1% of sales
for the first nine months of 1997 compared with $1.1 million or 0.2 % of sales
for the same period in 1996. This decrease is the result of a more selective
customer base and improved credit policies at centers acquired since 1994, and
increased efforts in collecting previously reserved accounts receivable.
Other Operating Income
Other operating income for the first nine months of 1997 was $4.5 million,
or 0.7% of sales. Other operating income for the first nine months of 1996 was
$3.9 million or 0.6% of sales. During 1997, Wickes recorded gains of
approximately $1.3 million on the sale of previously closed building centers. In
the first nine months of 1996, Wickes did not experience any significant gains
on the sale of excess real estate but did record a gain of approximately
$500,000 on the difference between insured replacement cost and book value, as a
result of a fire at one of its building centers.
Interest Expense
In the first nine months of 1997, interest expense decreased 4.5% to $15.9
million compared with $16.6 million in the first nine months of 1996. This
reduction reflects a decrease in Wickes' effective borrowing rate on total
long-term debt of 23 basis points. Average borrowings on Wickes' revolving
credit facility were relatively unchanged for the first nine months of 1997 from
the first nine months of 1996. Approximately 90% of Wickes' first nine months
average borrowings on its revolving credit facility were LIBOR-based.
<PAGE> 16
Equity in Loss of Affiliated Company
In the first nine months of 1997, Wickes recorded a loss of $1.5 million,
under the equity method, with respect to its investment in its affiliate engaged
in operations in Russia. In the first nine months of 1996, Wickes recorded a
loss of $2.3 million. In May of 1997, additional third party equity was invested
and Wickes' ownership decreased from 46% to 38%.
PARENT COMPANY AND OTHER SUBSIDIARIES
The following discussion relates to the operations of the Parent Company
and its subsidiaries, other than Wickes and the Parent Company's former life
insurance subsidiaries (the "Parent Group").
In April 1997, the Company determined that Wickes Mortgage Lending, Inc.
("WML") would not be able to attain sufficient profitability in the near term if
it continued to emphasize origination of permanent loans through loan
representatives located in branch offices. Accordingly, WML terminated the
employment of all of its permanent loan representatives in the field and focused
primarily on construction loans under its marketing agreement with Wickes. In
October 1997, the Company determined that due to the high cost of funds, the
Parent Company should cease construction loan operations. The Company has
entered a letter of intent to sell WML to an unrelated third party. (See Note 5.
Subsequent Events of Notes to Condensed Consolidated Financial Statements
included elsewhere herein).
The Parent Group's non-interest operating expenses for the three months
ended September 30, 1997, decreased to $451,000 from $1,012,000 for the same
period in 1996. The primary reason for the reduction in expenses is due to the
termination of WML's branch offices and the restructuring of the Wickes
Financial Service Center, Inc. Program.
The Parent Group's non-interest operating expenses for the first nine
months of 1997 and 1996 were $2,883,000 and $2,235,000, respectively. Savings of
approximately $389,000 from the restructuring of the Wickes Financial Services
Center, Inc. Program were offset by certain expenses no longer being allocable
to the former insurance subsidiaries.
Gains on sales of investment real estate for the three months ended
September 30, 1997, were $143,000 compared to $164,000 for the three months
ended September 30, 1996. Gains on sales of investment real estate for the first
nine months of 1997 and 1996 were $829,000 and $362,000, respectively.
In the third quarter of 1997, interest expense increased 30.9% to
$1,008,000 from $771,000 in the third quarter of 1996. This change is primarily
due to the Parent Company's real estate mortgage and the borrowings on WML's
warehouse line of credit. In the third quarter of 1997, interest expense
consisted of $419,000 on the Parent Company's subordinated notes and other debt;
$366,000 on the Parent Company's real estate mortgage debt; and $223,000 on
WML's warehouse line of credit. In 1996, interest expense consisted of $389,000
on the Parent Company's subordinated notes and other debt and $381,000 on the
Parent Company's real estate mortgage debt.
The Parent Group's interest expense for the first nine months were
$2,829,000 and $2,331,000 for 1997 and 1996, respectively. This change is
primarily due to the Parent Company's real estate mortgage and the borrowings on
WML's warehouse line of credit. In the first nine months of 1997, interest
expense consisted of $1,200,000 on the Parent Company's subordinated notes and
other debt; $1,110,000 on the Parent Company's real estate mortgage debt; and
$509,000 on WML's warehouse line of credit. In 1996, interest expense consisted
of $1,175,000 on the Parent Company's subordinated notes and other debt;
$481,000 on the Parent Company's real estate mortgage debt; $10,000 on WML's
warehouse line of credit; and $665,000 on a note to a bank repaid in June 1996
in connection with the reorganization of the Company's former life insurance
subsidiaries.
<PAGE> 17
LIFE INSURANCE OPERATIONS
The Company's Condensed Consolidated Statements of Operations include the
operations of its former life insurance subsidiaries through June 6, 1996, the
date of the Life Insurance Reorganization.
During the first six months of 1996, the operations (other than WML) of
the Company's life insurance subsidiaries generated income after taxes of
$1,635,000. However, based on an evaluation of the life operations profits and
the benefits to the Company of these operations, additional deferred
acquisition cost amortization was recorded reducing life insurance income to a
net of $961,000.
INCOME TAXES
The Company does not consolidate with Wickes for income tax filing
purposes. Thus, each company will continue to separately determine its income
tax liability. The Company's effective tax rate, excluding Wickes', was 0% for
the nine months ended September 30, 1997 and 1996. The Company's equity in
losses of Wickes has reduced the Company's GAAP basis in its investment in
Wickes creating deferred tax benefits which will be realized upon sale or
subsequent increase in GAAP basis of this investment.
Wickes recorded an income tax expense of $.5 million for the third quarter
of 1997 compared with expense of $.9 million in the third quarter of 1996. An
effective federal income tax rate 39.1% was used to calculate federal income
taxes for the third quarter of 1997, compared with an effective rate of 38.5%
for the third quarter of 1996. In addition to the effective federal tax rate
used, state income and franchise taxes were calculated separately and are
included in the benefit reported for both years.
The Company continues to review future earnings projections to determine
that there is sufficient support for its deferred tax assets and valuation
allowance. In spite of the losses incurred during 1995, management believes
that it is more likely than not that the Company will receive full benefit of
its deferred tax asset and that the valuation allowance is properly stated.
This assessment constitutes Forward-Looking Information made pursuant to the
Private Securities Litigation Reform Act of 1995 and is inherently subject to
the uncertainties discussed under the heading "Income Taxes" in the comparative
discussion of third quarter operations.
LIQUIDITY AND CAPITAL RESOURCES
THE PARENT GROUP
The Parent Company's general liquidity requirements consist primarily of
funds for payment of debt and related interest and for operating expenses and
overhead.
Operations, exclusive of Wickes (which is currently prohibited from paying
dividends by reason of restrictions in debt instruments), currently consist
primarily of real estate sales. During the third quarter of 1997, the Company
discontinued the mortgage origination activities of WML. The Company has entered
into an agreement with Wickes, subject to the obtaining by the Company of
adequate financing, to acquire on or before December 31, 1997, certain
operations of Wickes that Wickes has determined to discontinue. Although the
Company anticipates that these operations would contribute positive earnings and
cash flow in the future, these operations currently do not generate positive
cash flow and the Company does not anticipate that these operations will be a
significant contributor to liquidity in the near future. Real estate sales
proceeds are required to be applied to real estate debt reduction and are not
available to the Parent Company for other purposes. Accordingly, the Parent
Company's principal source of funds for the foreseeable future is anticipated to
be sales of non-real estate assets and additional borrowings.
A significant source of liquidity for the Parent Company is anticipated
from the proposed merger of Circle Investors, Inc. ("Circle") with an unrelated
third party (the "Circle Merger") pursuant to which the Company's interest in
Circle is to be converted into an aggregate of approximately $5.3 million in
cash. Although Circle previously anticipated that the Circle Merger would be
completed by September 30, 1997, Circle has informed the Company that it now
hopes to complete the Circle Merger before the end of 1997. There can be,
however, no assurance when or whether the Circle Merger will occur. The Company
anticipates that the proceeds of the Circle Merger would be utilized as follows:
(i) approximately $1.4 million would be utilized to repay in full the Company's
demand bank line of credit, (ii) approximately $700,000 would become unpledged
and available to the Company for specified purposes including payment of
operating expenses and debt service, and (iii) the $3.2 million balance would,
until released, remain in pledge to secure the Company's $16 million real estate
indebtedness to American Founders Life Insurance Company. The amount of required
collateral for this real estate indebtedness is adjusted quarterly and Circle
Merger proceeds would be released in the event there is any excess collateral at
any quarterly valuation date, which would depend upon factors including the
market value of Wickes common stock and the timing and amount of real estate
sales.
The Company believes that the cash proceeds of the Circle Merger
anticipated to be available to it described
<PAGE> 18
above, together with certain anticipated recoveries related to the Company's
discontinued insurance operations and other funds available to the Company,
would be sufficient for general liquidity purposes and debt requirements through
the remainder of 1997. Until completion of the Circle Merger, the Parent Company
may need, and to service its indebtedness thereafter, the Parent Company will
need, to obtain additional funds through other non-real estate asset sales or
additional financing. The principal non-real estate asset that could be sold by
the Parent Company would be its shares of Wickes common stock.
On May 1, 1997, the Company obtained from a bank, a $1.5 million demand
line of credit. For further information, see Note 3 of Notes to Condensed
Consolidated Financial Statements included elsewhere herein.
On June 24, 1997, the Company modified and collateralized its existing
obligation to a third party in the approximate amount of $900,000. For further
information, see Note 3 of Notes to Condensed Consolidated Financial Statements
included elsewhere herein.
In late September and early October 1997, the Company sold an aggregate of
64,875 shares of Wickes common stock to Kenneth M. Kirschner, Vice Chairman and
a director of the Company, Frederick H. Schultz, a director of the Company, and
an executive officer of Wickes. The aggregate purchase price was $290,000, or
$4.47 per share, which equaled the 30-day average closing bid price for Wickes
common stock on the NASDAQ National Stock Market prior to the sales.
The $10,000,000 principal of the Company's 13% Subordinated Notes is due in
September 1999. The Company anticipates that to repay this indebtedness, it will
need to obtain additional funds through borrowings, issuance of debt or equity
securities, asset sales, or funds provided by operations in which the Company
may become engaged in the future.
During the first nine months of 1997, stockholders' equity decreased by a
net of $4,940,000. This decrease is primarily a result of Wickes' operating
losses of $1,347,000 and interest expense at the parent group of $3,000,000.
During the first three months of 1997, the Company recorded losses in Wickes of
$2,789,000. This loss was offset with earnings during the second and third
quarters of 1997 of $594,000 and $848,000, respectively. Wickes' results of
operations have historically been adversely affected by seasonal weather factors
during the first three months of the year.
FORWARD-LOOKING INFORMATION CAUTIONARY STATEMENT. The discussion above
of the Company's future liquidity needs and sufficiency constitutes
Forward-Looking Information within the meaning of the Private Securities
Litigation Reform Act of 1995 and is inherently subject to uncertainty as a
result of a number of risk factors including, among other things: (i) the
absence of a repayment demand, under the Company's demand bank line of credit,
(ii) the Company's ability to complete real estate sales sufficient to meet
scheduled real estate debt payments, and (iii) the ability of the Company to
raise funds through sales of Shares of Circle Stock or Wickes common stock.
Future real estate sales depend upon a number of factors, including interest
rates, general economic conditions, and conditions in the commercial real estate
markets in Atlanta, Georgia, and Jacksonville, Florida. As discussed above,
although the Circle merger would convert the Company's interest in Circle into
approximately $5.3 million in cash, there is no assurance that this transaction
will be completed or how much of the merger proceeds will be available to the
Company over what time period. The Company's ability to sell Wickes common stock
will depend upon, among other things, the public trading price of Wickes common
stock and in light of the relatively low public trading volume for Wickes common
stock, possibly the Company's ability to find a buyer or buyers for Wickes
Common Stock in a private transaction or otherwise.
<PAGE> 19
WICKES
Wickes' principal sources of working capital and liquidity are earnings and
borrowings under its revolving credit facility. Wickes' primary need for capital
resources is to finance inventory and accounts receivable.
During the first nine months of 1997, Wickes had generated negative cash
flows from operating activities of $38.7 million. With the peak building season
historically occurring in the second and third quarters, Wickes normally
experiences increases in its accounts receivable and inventory levels during the
first quarter to meet the anticipated increase in sales and in the second
quarter as a result of increased sales activity. The third quarter traditionally
provides cash through operating income and reductions in inventory as Wickes
begins its seasonal adjustments. Wickes did experience positive cash flow from
both activities during the third quarter of 1997, but an increase in accounts
receivable and reductions in accounts payable resulted in negative cash flow of
$5.5 million for the quarter.
Wickes' accounts receivable balance at the end of the third quarter of 1997
increased $12.6 million when compared to the end of the third quarter of 1996,
an increase of 13.9%. Approximately $8.2 million of this increase is
attributable to increased credit sales during September of 1997, when compared
with September of 1996.
Inventory at the end of the third quarter of 1997 was $9.5 million, or 8.8%
higher than at the end of the third quarter of 1996. This increase is largely
attributable to special buys on commodity building materials to support new
programs and remerchandised showrooms, as well as the start-up of six new
building centers and two component manufacturing facilities. Roofing, drywall,
insulation and vinyl siding account for $9.3 million of the inventory increase.
Accounts payable at the end of the third quarter of 1997 were down approximately
$3.1 million from the third quarter of 1996, primarily from an increase in
accrued purchase rebates from inventory suppliers of approximately $3.3 million.
For information concerning the sale leaseback of Wickes' 72,000 square foot
corporate headquarters in Vernon Hills, Illinois, completed June 30, 1997, see
"Note 2. Commitments and Contingencies" of Notes to Condensed Consolidated
Financial Statements included elsewhere herein.
Wickes' capital expenditures consist primarily of the construction of
storage facilities, the remodeling and reformation of building centers and
component manufacturing facilities, and the purchase of vehicles, equipment and
management information systems for both existing and new operations. In the
first nine months of 1997, Wickes' spent $5.0 million on capital expenditures as
compared to $2.6 million for the same period in 1996. Wickes expects to spend
approximately $8.0 million for all of 1997. Under Wickes' bank revolving credit
agreement, as amended, capital expenditures during 1997 are limited to $6.0
million plus the proceeds from the sale of certain excess real estate plus the
portion of 1996's capital expenditures that were not spent. Wickes expects to
fund capital expenditures through borrowings and its internally generated cash
flow.
Through the first nine months of 1997, Wickes has begun operations in six
start-up building center facilities located in Aurora, Illinois; Colorado
Spring, Colorado; Denton, North Carolina; Denver, Colorado; Niles, Michigan, and
a second facility in Pensacola, Florida. Wickes has also opened a new door and
wall panel manufacturing facility in Denver, Colorado, and a wall panel
manufacturing facility in Denton, North Carolina. The Pensacola and Niles
facilities are located in previously closed facilities owned by Wickes. The
remaining facilities are leased. Since the beginning of the year, Wickes has
also closed or consolidated three building centers and two component
manufacturing facilities. The following table reconciles the number of building
centers and component manufacturing facilities operated by Wickes through
October 30, 1997:
<TABLE>
<CAPTION>
Component
Building
Centers Facilities
-------- ----------
<S> <C> <C>
As of December 28, 1996 108 12
Expansion 4 1
Consolidation - (1)
As of June 28, 1997 112 12
Expansion 2 1
Consolidation (1) (1)
Closing (2) -
--- ---
As of September 27, 1997 111 12
</TABLE>
<PAGE> 20
Wickes maintained excess availability under its revolving line of credit,
throughout the first nine months of 1997. At the end of the first nine months of
1997, total borrowings under the revolving line of credit were $20.9 million
higher than at the end of the first nine months of 1996. Under the current terms
of Wickes' bank revolving credit agreement, Wickes believes that it will
continue to have sufficient funds available for its anticipated operations and
capital expenditures. At September 27, 1997, $110.3 million was outstanding
under Wickes' revolving line of credit, and the unused availability was
approximately $19.4 million. Wickes' assessment of its future funds availability
constitutes Forward-Looking Information made pursuant to the Private Securities
Litigation Reform Act of 1996, and is inherently subject to uncertainty
resulting from, among other things, the factors discussed under "Results of
Operations - Provision for Income Taxes".
For a description of the April 11, 1997 amendment to Wickes' revolving line
of credit agreement, that, among other things, reduces Wickes' effective
interest rate, provides for additional reductions should certain goals be
achieved, extends the length of the agreement, and modifies or eliminates
certain covenants, see "Note 3. Long-Term Debt" of Notes to Condensed
Consolidated Financial Statements included elsewhere herein.
PART II
OTHER INFORMATION
ITEM 5. OTHER INFORMATION
On October 17, 1997, Wickes announced a plan to streamline
operations, reduce SG&A expense, and focus on its core professional builder
business. In addition to the closing of several building material centers,
Wickes expects to sell or close several non-core programs, such as its mortgage
lending program and its internet and utilities marketing operations, and to
write-off its remaining investment in its Russian affiliate by the end of 1997
The Company has entered into an agreement with Wickes, pursuant to which
the Company proposes, subject to obtaining adequate financing, to acquire
certain of these non-core operations from Wickes. This agreement was approved by
a committee comprised of the independent members of Wickes' Board of Directors.
Wickes also announced it was reducing its headquarters staffing by approximately
15%. These programs and eliminated positions accounted for approximately $8.5
million in SG&A expense and net losses of approximately $4.4 million, over the
most recent 12 month period. It is expected that most of these reductions will
be completed by the end of 1997.
For further information, see the press release issued by Wickes on October
17, 1997, included herein as Exhibit 99.1 and incorporated herein by this
reference.
For information concerning the proposed sale of WML to an unrelated party,
see Note 5. Subsequent Event" of Notes to Condensed Consolidated Financial
Statements included.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule (SEC Use Only)
99.1 Press Release Issued by Wickes Inc. On October
17, 1997.
(b) Reports on Form 8-K
None
<PAGE> 21
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.
RIVERSIDE GROUP, INC.
By /s/ J. Steven Wilson Date: November 14, 1997
- -----------------------------
J. Steven Wilson
Chairman of the Board,
President and
Chief Executive Officer
By /s/ Catherine J. Gray Date: November 14, 1997
- -----------------------------
Catherine J. Gray
Vice President and Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF RIVERSIDE GROUP, INC. AND SUBSIDIARIES CONDENSED
CONSOLIDATED BALANCE SHEET AND CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 459
<SECURITIES> 0
<RECEIVABLES> 107,916
<ALLOWANCES> 3,359
<INVENTORY> 117,970
<CURRENT-ASSETS> 250,396
<PP&E> 77,634
<DEPRECIATION> 31,565
<TOTAL-ASSETS> 364,337
<CURRENT-LIABILITIES> 97,871
<BONDS> 109,579
0
0
<COMMON> 529
<OTHER-SE> 15,278
<TOTAL-LIABILITY-AND-EQUITY> 15,807
<SALES> 662,978
<TOTAL-REVENUES> 669,153
<CGS> 511,448
<TOTAL-COSTS> 511,448
<OTHER-EXPENSES> 137,759
<LOSS-PROVISION> 892
<INTEREST-EXPENSE> 18,893
<INCOME-PRETAX> (4,418)
<INCOME-TAX> (531)
<INCOME-CONTINUING> (4,949)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,949)
<EPS-PRIMARY> (.93)
<EPS-DILUTED> (.93)
</TABLE>
<PAGE> 1
NEWS WICKES INC.
BULLETIN 706 NORTH DEERPATH DRIVE
VERNON HILLS, IL 60061
TRADED: NASDAQ
FROM: SYMBOL: WIKS
FRB
The Financial Relations Board, Inc.
FOR FURTHER INFORMATION:
AT THE COMPANY: AT THE FINANCIAL RELATIONS BOARD:
George Bajalia, CFO Jeff Wescott -- General Inquiries
(847) 367-3551 875 N. Michigan Avenue
Jim Hopwood Chicago, IL 60611
(847) 367-3552 (312) 266-7800
FOR IMMEDIATE RELEASE
FRIDAY, OCTOBER 17, 1997
WICKES ANNOUNCES MAJOR OPERATIONAL RESTRUCTURING;
EXPECTS TO REPORT THIRD QUARTER REVENUE AND MARGIN IMPROVEMENTS
VERNON HILLS, IL, OCTOBER 17, 1997 -- WICKES INC. (NASDAQ: WIKS) today
announced a major operational restructuring to streamline operations and focus
on its core professional builder business. Wickes will divide its operations
into four segments; 18 Major Markets, 79 Conventional Markets, Wickes Direct,
and Manufacturing. Each of these distribution channels offer different services
and in some cases different products. Overhead costs and programs not directly
tied to supporting these business segments will either be sold or discontinued
by year-end. For the twelve months ended June 28, 1997, these expenses and
discontinued operations reduced operating income by more than $4.5 million and
contributed $4.4 million, or $0.54 per share, in net losses.
"The pro forma effects of these major restructuring actions are substantial,"
said J. Steven Wilson, Chairman and Chief Executive Officer. "We believe these
cost and program reductions will allow the Company to focus better on its core
builder business and improve its operating performance. Our current major
market program, remerchandised conventional market program, direct sales and
value added manufacturing operations will continue to be key components of our
business."
The Company also indicated that it expects to report continued revenue and
gross margin gains when it publishes third quarter results later in the month.
Operating and net income for the third quarter are expected to be positive but
lower than the third quarter of 1996 due to continued investments in its store
reset, new market initiatives and other pilot programs.
Included in the Company's non-core programs expected to be sold are: the
Company's mortgage lending program, the Company's utilities marketing
operations and its internet operations not directly related to its building
supply business. In addition, the Company's remaining investment in its Russian
timber and logging operations will be written off by year-end. For the twelve
months ended June 28, 1997, the Company's results of operations included more
than $1.5 million in SG&A spending related to these programs and $2.0 million
in losses on its equity investment in Russia which contributed a combined $2.2
million, or $0.27 per share, in net losses during this twelve month period.
-MORE-
<PAGE> 2
WICKES INC.
ADD 1
The Company has further reviewed its administrative structure and has
reorganized certain functions for increased efficiency and is implementing an
overall 15% reduction in headquarters staffing levels. These changes will
result in approximately $2.0 million in SG&A savings on an annualized basis.
For the twelve months ended June 28, 1997, the Company's results included
approximately $1.9 million in SG&A spending for these eliminated positions and
$1.1 million, or $0.135 per share, in net losses.
Underperforming centers recently closed are Gurnee, IL; North Haven, CT and
South Haven, MI. In addition, the manufacturing operation located in Mansfield,
OH is being combined with manufacturing sites throughout the Company. For the
twelve months ended June 28, 1997, these operations reported combined operating
losses of $1.1 million and contributed $1.1 million, or $0.135 per share, in
net losses.
"We are pleased with the continued improvement in our strategy to serve the
professional segment," added Wilson. "Our professional mix has grown to 86%
through the third quarter of 1997 compared to 84% and 81% in 1996 and 1995,
respectively. We have also been successful expanding our product mix and
manufacturing margins resulting in higher overall gross margins."
Beginning in 1997, the Company increased its emphasis on Major Markets which
serve the large national builder by expanding in three of these high growth
markets. Through the first half of 1997, sales in these three Major Markets
have increased 30%, or $6.5 million, over the same period last year. In the
third quarter, sales growth continued -- increasing 46.1%, or $5.1 million over
last year's third quarter. The Company stated that the startup costs and
capitalized investments of these three Major Market expansions were $346,000
and $297,000, respectively, through the second quarter ended June 28, 1997. "We
are very pleased with this initial growth," stated Mr. Wilson. "We remain
committed to and confident in the market potential of this business segment and
are in the beginning stages of rolling out this program into two additional
markets."
The 79 Conventional Markets or "Reset Centers" are located in smaller markets
and serve small to medium builders and R&R contractors. The Company has
completed remerchandising and remarketing programs in four Reset Centers to
better support the dominant professional customer segments, the repair and
remodel contractor and the custom homebuilder. An additional four centers will
be reset by October 31, 1997. Tool rental operations are now present in 15 of
these centers and represent a very profitable opportunity for the Company in
future quarters.
Second quarter sales (of the two Reset Centers) increased 51.1% over last
year's second quarter and third quarter sales (of the four Reset Centers)
increased 16.8% over the comparable period last year. Mr. Wilson added,
"Management will focus on improving the overall operating and marketing plans
of the eight completed Reset Centers during the winter months to perfect the
strategy. We will then continue the reset of other conventional market centers
in the spring." Through the second quarter ended Jun 28, 1997, the Company has
invested $239,000 in pre-opening reformat costs and inventory liquidations and
$129,000 in capitalized investments to support these Reset Center efforts.
Wickes Direct, the Company's direct ship division, complements the other Wickes
operations where direct shipment provides added services and value to our
customers and gives the company the ability to expand economically into new
markets not currently being served as well as internationally. Sales in this
division have grown substantially, with increases of 166.0%, or $3.1 million,
and 283.0%, or $7.7 million, in the second and third quarters, respectively,
over comparable periods in the prior year.
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<PAGE> 3
WICKES INC.
ADD 2
To complement the expansion of center operations in major markets, Wickes has
greatly expanded its manufacturing operations, which are now a core focus of
the Company. These expanded manufacturing operations will allow value-added
products and services to be provided to Wickes' customers in these markets. By
year end, the Company will have an annual capacity to panelize 15,000 houses,
manufacture 15,000 truss packages and pre-hang over 300,000 interior and
exterior doors. Start-up expenses and capitalized costs associated with the
expansion, a portion of which are included in the major market totals, were
$248,00 and $453,000, respectively through June 28, 1997.
Wickes Lumber Company is headquartered in Vernon Hills, Illinois. Wickes is one
the largest suppliers of building materials in the United States and had over
$848 million in sales in 1996. Serving builders, trade contractors, remodelers
and serious-do-it-yourselfers, Wickes distributes materials nationally and
internationally, and operates building centers in 24 states in the Midwest,
Northeast and South. Wickes' component manufacturing facilities produce
pre-hung door units, window assemblies, roof and floor trusses and framed wall
panels. Further information and services can be located at the Wickes Web site,
http://www.wickes.com.
Safe Harbor For Forward-Looking Statements
Statements contained herein which are not historical facts are
forward-looking statements within the meaning of the Securities Act of 1933 and
the Securities Exchange Act of 1934 which are intended to be covered by the
safe harbors created thereby. For a summary of important facts which could
cause the Company's actual results to differ materially from those included in,
or inferred by, the forward-looking statements, refer to the Company's Form
10-K and other documents, which are on file with the Securities and Exchange
Commission.
FOR MORE INFORMATION ON WICKES INC. VIA FACSIMILE AT NO COST,
SIMPLY DIAL 1-800-PRO-INFO AND ENTER THE TICKER SYMBOL WIKS
- TABLES TO FOLLOW -
<PAGE> 4
WICKES INC.
ADD 3
The pro forma impact of this major restructuring is as follows:
<TABLE>
<CAPTION>
Six Months Ended 6/28/97 Twelve Months Ended 6/28/97
------------------------------------- -------------------------------------
Discontinued Discontinued
Operations Operations
and Staffing Pro and Staffing Pro
Actual Reductions Forma Actual Reductions Forma
------------------------------------- -------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net sales 396,654 (8,939) 387,715 863,909 (22,949) 840,960
Cost of sales 305,400 (7,427) 297,973 669,331 (18,632) 650,699
--------- --------- --------- --------- --------- ---------
Gross profit 91,254 (1,512) 89,742 194,578 (4,317) 190,261
Selling, general and
administrative expense 84,689 (4,363) 80,326 169,026 (8,677) 160,349
Depreciation, goodwill
and trademark amortization 2,417 (73) 2,344 5,014 (163) 4,851
Provision for doubtful accounts 583 (65) 518 759 (32) 727
Other operating income (2,478) 11 (2,467) (5,672) 32 (5,640)
--------- --------- --------- --------- --------- ---------
Income from operations 6,043 2,978 9,021 25,451 4,523 29,974
Interest expense 10,411 (274) 10,137 20,989 (627) 20,362
Equity in loss of affiliated company 766 (766) -- 2,018 (2,018) --
--------- --------- --------- --------- --------- ---------
Income (Loss) before income taxes (5,134) 4,018 (1,116) 2,444 7,168 9,612
Provision for income taxes (1,286) 1,568 282 1,490 2,796 4,286
--------- --------- --------- --------- --------- ---------
Net income (loss) (3,848) 2,450 (1,398) 954 4,372 5,326
========= ========= ========= ========= ========= =========
Per share data:
Net income (loss) per common share (0.47) 0.30 (0.17) 0.12 0.54 0.65
Weighted average common and
common equivalent shares outstanding 8,175,138 8,175,138 8,175,138 8,171,670 8,171,670 8,171,670
EBITDA 8,460 2,905 11,365 30,465 4,360 34,825
</TABLE>
Summary of Growth Programs
Quarters Ended
<TABLE>
<CAPTION>
3/29/97 3/30/96 6/28/97 6/29/96 9/27/97 9/28/96
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
MAJOR MARKETS (A)
- -----------------
Sales $ 12,729 10,065 15,277 11,481 16,190 11,081
Growth % 26.5% 33.1% 46.1%
Pre-opening costs through 6/28/97 (c) 346
Capitalized investment through 6/28/97 297
(a) includes results for operations in Denver, CO; Raleigh/Charlotte, NC and Pensacola, FL.
CONVENTIONAL MARKET RESETS (B)
- ------------------------------
Sales $ 5,251 3,475 7,973 6,825
Growth % 51.1% 16.8%
Pre-opening costs through 6/28/97 (c) 239
Capitalized investment through 6/28/97 129
(b) includes results of two centers reset in the second quarter and the results of four centers in the third quarter.
(c) third quarter pre-opening costs and capital investments will be reported with the third quarter financial release.
</TABLE>
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