<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended
December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-9209
December 31, 1997
RIVERSIDE GROUP, INC.
(Exact Name of Registrant as Specified in its Charter)
Florida 59-1144172
------- ----------
(State of Incorporation) (IRS Employer Identification No.)
7800 Belfort Parkway, Jacksonville, Florida 32256
(Address of Principal Executive Offices)
(904) 281-2200
--------------
(Registrant's Telephone Number)
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value of $.10 per share
-----------------------------------------
Indicate by 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 (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-
K or any amendment to this Form 10-K. [ X ]
As of March 23, 1998, the Registrant had 5,287,123 shares of common
stock, par value $.10 per share, outstanding, and the aggregate market value
of outstanding voting stock (based on the last sale price on the NASDAQ
SmallCap Stock Market) held by nonaffiliates was approximately $3.7 million
(includes the market value of all such stock other than shares beneficially
owned by officers and directors and the Registrant's Employee Stock Ownership
Plan and Trust).
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement in connection with its
Annual Meeting of Shareholders scheduled May 18, 1998 are incorporated by
reference into Part III hereof, as more specifically described herein.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page No.
PART I
<S> <C> <C>
Item 1. Business . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2. Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Item 4. Submission of Matters To a Vote of Security-Holders. . . . . . . . . . . . . . . . . . 18
PART II
Item 5. Market For Registrant's Common Equity
and Related Stockholder Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Item 6. Selected Financial Data. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . . . . . . . . . . . . . . . 22
Item 7A. Quantitative and Qualitative Disclosure About Market Risk. . . . . . . . . . . . . . . 38
Item 8. Financial Statements and Supplementary Data. . . . . . . . . . . . . . . . . . . . . . 38
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . 38
PART III
Item 10. Directors and Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . 38
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Item 12. Security Ownership of Certain Beneficial Owners and Management. . . . . . . . . . . . .39
Item 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . 39
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K . . . . . . . . . . . 40
(a) List of Financial Statements and Schedules Filed as a Part ofthis Report. . . . . 40
(b) Reports on Form 8-K - None . . . . . . . . . . . . . . . . . . . . . . . . . . . .40
Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .40
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F - 1
FINANCIAL STATEMENT SCHEDULES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .F - 2
</TABLE>
<PAGE>
PART I
Item 1. Business.
- -----------------
Riverside Group, Inc., a Florida corporation formed in 1965
("Riverside" also "Parent Company"), is a holding company engaged through its
51%-owned subsidiary Wickes Inc. ("Wickes") in the supply and distribution of
building materials.
Through a 100%-owned subsidiary, the Company also engages in internet,
telephony and utilities marketing.
Unless the context indicates otherwise, the term "the Company" as used
herein refers to Riverside and its subsidiaries.
Historical Development
----------------------
Riverside obtained its initial investment in Wickes in 1990 through
the acquisition of American Founders Life Insurance Company ("American
Founders"), which at the time of its acquisition owned approximately 10% of
Wickes common stock. In 1993, as part of a Wickes recapitalization plan,
including an initial public common stock offering, Riverside increased its
beneficial ownership of Wickes' common stock to approximately 36%. On June
20, 1996, Riverside purchased from Wickes 2,000,000 newly-issued shares of
Wickes' common stock for $10,000,000 in cash. Riverside beneficially owns
4,152,415 shares of Wickes' common stock, which constitutes 51% of Wickes'
outstanding voting and non-voting common stock. See "Building Materials."
From 1986 through the first half of 1996, Riverside also conducted
life and property and casualty insurance operations. The property and
casualty insurance operations were discontinued in 1993 and sold in September
1995. Riverside began disposing of its life insurance operations at the end
of 1994 and in June 1996 completed a merger of its remaining life insurance
operations with a third party that resulted in the ownership by Riverside of
a non-controlling interest in the third party. Riverside disposed of this
interest on December 31, 1997. See "Life Insurance Operations."
In January 1998, Riverside formed various operating subsidiaries,
which acquired certain internet, telephony and utilities marketing operations
from Wickes. See " Other Operations - Marketing."
Lines of Business
-----------------
Lines of Business
- -----------------
The following table sets forth certain financial data for the past
three years of the Company's building materials, life insurance and other
segments. Wickes' operations are consolidated with those of the Company and
its subsidiaries for 1997 and the third and fourth quarters of 1996 and
accounted for under the equity method for prior periods. Accordingly, the
following table presents only revenues, income and identifiable assets of
Wickes at the net amount recorded on the Company's books for the year ending
1995. "Other" includes real estate, parent company, financial services, and
discontinued operations and all eliminating entries for inter-company
transactions.
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<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1997 1996 1995
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Revenues:
Building Materials $894,771 $471,515 $ 492
Life Insurance -- 9,800 25,245
Other 1,474 1,997 (1,668)
-------- -------- -------
Total $896,245 $483,312 $24,069
======== ======== =======
Earnings before income taxes, equity in
related parties, minority interest and
discontinued operations:
Building Materials $ 462 $ 5,058 $ (1,408)
Life Insurance - 4,944 (10,530)
Other (4,524) (3,779) (1,968)
-------- ------- ---------
Total $ (4,062) $ 6,223 $(13,906)
======== ======= ========
Identifiable Assets:
Building Materials $271,642 $281,398 $ 11,358
Life Insurance - 5,661 297,804
Other 42,229 22,755 (8,437)
-------- -------- --------
Total $313,871 $309,814 $300,725
======== ======== ========
</TABLE>
Building Materials Operations
-----------------------------
The Company retails and distributes building materials through its
51%-owned subsidiary, Wickes.
The information concerning Wickes contained in this report was
obtained from Wickes Annual Report on Form 10-K for the fiscal year ended
December 27, 1997 (the "Wickes Form 10-K"), filed by Wickes with the
Securities and Exchange Commission (the "Commission"). For further
information concerning Wickes, reference is made to the Wickes Form 10-K and
the periodic reports and other information filed by Wickes with the
Commission.
Wickes Inc. is a major supplier and distributor of building materials.
Wickes 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-yourselfers ("DIYers") involved in
major home improvement projects. At March 24, 1998, Wickes operated 101
sales and distribution facilities in 23 states in the Midwest, Northeast, and
South and 10 component manufacturing facilities that produce and distribute
pre-hung door units, roof and floor trusses, and framed wall panels.
Background
Wickes was formed in 1987 as a Delaware corporation named "Wickes Lumber
Company." In June 1997, Wickes changed its corporate name to " Wickes Inc."
Wickes continues to conduct its primary operations under the "Wickes Lumber"
name.
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In April 1988 Wickes completed the acquisition (the "1988 Acquisition") of
operations that had commenced in 1952. These operations consisted of 223
building centers and 10 component manufacturing facilities. From 1988
through 1993, Wickes reduced the number of its building centers to 124 and
the number of its component manufacturing facilities to six.
On October 22, 1993, Wickes completed a plan of recapitalization pursuant
to which Wickes retired all outstanding indebtedness incurred in connection
with the 1988 Acquisition, restructured its previously existing classes of
capital stock, and completed the initial public offering of 2,800,000 shares
of its common stock.
In 1994 and 1995, Wickes acquired 15 building centers and five component
manufacturing facilities. For further information, see Note 3 of Notes to
Consolidated Financial Statements included elsewhere herein.
During the fourth quarter of 1995 Wickes committed to and began
implementing a plan (the "1995 Plan" ) to reduce the number of under-performing
building centers, the corresponding overhead to support these building
centers, and to strengthen its capital structure. Pursuant to the 1995 Plan,
Wickes consolidated or closed 21 building centers and three component
manufacturing facilities. The 1995 Plan also included the modification and
extension of Wickes' bank revolving credit agreement, which was completed on
March 12, 1996, and the private sale of two million newly-issued shares of
Wickes' common stock for $10 million, which occurred on June 20, 1996. In
connection with the 1995 Plan, and other unusual items, Wickes recorded a
$17.8 million charge in the fourth quarter of 1995. See Note 2 of Notes to
Consolidated Financial Statements included elsewhere herein.
In the fourth quarter of 1997, Wickes announced and began to implement a
plan to streamline operations, to focus on Wickes' core professional builder
business, and to eliminate overhead costs and programs not directly
supporting this core business. For further information, see "Business
Strategy."
On February 23, 1998, Wickes announced that, in addition to the actions
begun in the fourth quarter of 1997, it had closed eight additional building
centers and two component manufacturing facilities, planned to sell two
building centers located in Eastern Iowa, and had implemented further
headquarters staffing and expense reductions. Wickes expects to record a
$5.4 million restructuring charge in the first quarter of 1998 with respect
to these activities (the "1998 Plan" ). For further information see "Business
Strategy" and Note 16 of Notes to Consolidated Financial Statements included
elsewhere herein.
Industry Overview
- -----------------
According to the Home Improvement Research Institute ("HIRI" ), 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 $212.7
billion in 1997. Despite some consolidation over the last ten years,
particularly in metropolitan areas, the building material industry remains
highly fragmented. Wickes believes that no building material supplier
accounted for more than 12% of the total market in 1997.
In general, building material suppliers concentrate their marketing
efforts either on building professionals or consumers. Professional-oriented
building material suppliers, such as Wickes, tend to focus on single-family
residential contractors, repair and remodeling ("R&R" ) contractors, project
DIYers and to some extent commercial contractors. These suppliers compete
principally on the basis of service, product assortment, price, scheduled
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<PAGE> 4
job-site delivery and trade credit availability. In contrast, consumer-
oriented building material retailers target the mass consumer market, where
competition is based principally on price, merchandising, 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 components, and scheduled job-site delivery, as do
professional-oriented building material suppliers.
Industry sales are linked to a significant degree to the level of activity
in the residential building industry, which tends to be cyclical and
seasonal. 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 totaled 1.29 million in 1993, 1.46 million in 1994, 1.35
million in 1995, and 1.48 million in 1996. In 1997, housing starts were
relatively unchanged at 1.47 million. There was a decrease, however, in 1997
housing starts in Wickes' primary geographical market, the Midwest, of
approximately 5.5%. Wickes' two other geographical markets, the Northeast
and South, experienced increases in 1997 housing starts of 3.5% and 1.3%,
respectively. Nationally, single family housing starts, which generate the
majority of Wickes' sales to building professionals, experienced a decrease
of 2.4% from 1.16 million starts in 1996 to 1.13 million starts in 1997. The
Blue Chip Economic Indicators Consensus Forecast dated March 10, 1998,
projects 1998 housing starts to be 1.48 million, relatively unchanged from
1997 and 1996.
Repair and remodeling expenditures tend to be less cyclical than new
residential construction. These expenditures are generally undertaken with
less regard to economic conditions, but both repair and remodeling projects
(including projects undertaken by DIYers) tend to increase with increasing
sales of both existing and newly-constructed residences. The HIRI estimates
the sales of home improvement products to repair and remodeling professionals
represented $40.7 billion, or approximately 19% of total 1997 sales of the
building material supply industry, while direct sales to DIYers amounted to
$101.7 billion.
Business Strategy
- -----------------
General
-------
Wickes' mission is to be the premier provider of building materials and
specialized services to the professional segments of the building and
construction industry.
In order to better serve its customers and markets, Wickes has organized
and streamlined its operations into three channels of distribution: Major
Markets, Conventional Markets, and Wickes Direct/Wickes International. These
channels are supported by Wickes' Manufacturing operations. In Major Markets
Wickes serves the national, regional, and large local builder in larger
markets with specialized services and a total solutions approach. In
Conventional Markets Wickes provides the smaller building professional in
less-populous markets with tailored products and services. Wickes
Direct/Wickes International provides another distribution alternative to
supply the needs of its commercial customers. Wickes' Manufacturing
operations produce value-added products (such as pre-hung interior and
exterior doors, framed wall panels, and roof and floor trusses) for Wickes'
customers in both Major Markets and Conventional Markets and for its Wickes
Direct customers.
Major Markets
-------------
Wickes operates in 20 Major Markets, which are served by 31 sales and
distribution facilities. These facilities are designed, stocked and staffed
to meet the needs of the particular markets in which they are located and
vary from facilities similar to Wickes' Conventional Market building centers
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<PAGE> 5
to facilities that only stock specific types of products, for instance lumber
and wood related products. In addition, two of these facilities are Wickes
Contractor Supply ("WCS" ) facilities which stock a wide variety of building
materials (no lumber or hardlines) designed to meet the demands of home
builder and R&R customers for roofing, drywall, insulation and related
accessories. Major Markets are also served by seven of Wickes' manufacturing
facilities and two other manufacturing facilities operated by third parties
exclusively or primarily for Wickes.
These Major Markets are generally large metropolitan areas with favorable
growth projections and are characterized by the active presence of national,
regional and large local builders. Wickes believes that the building supply
industry in these Major Markets remains heavily fragmented.
Beginning in 1997, Wickes initiated Major Markets programs in four
markets: Pensacola, Denver, Louisville, and Raleigh/Charlotte. Other
programs are being commenced in five other Major Markets. Wickes plans
additional Major Markets Programs as opportunities and resources permit.
Wickes' Major Markets programs seek to provide the large builder with
specialized programs and services that integrate various methods of
distribution. Wickes 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. Wickes devotes significant efforts to redefine
and improve the customer's and its own supply chain management, material flow
and logistics.
Wickes' Manufacturing operations constitute an integral part of the Major
Markets programs. These operations provide Wickes with the capability to
provide its customers with custom engineered, value-added products such as
manufactured framing component systems. For instance, in two Major Markets
Wickes has begun its "Frame a Home in a Day" concept. This program, which
allows a large builder to complete the entire process of framing and
sheathing an average two-story residence in as little as one day, rather than
the substantially longer period involved in traditional stick framing
methods, is now being expanded to two other Major Markets.
Wickes' operations in Major Markets contributed approximately 35.0% of
Wickes sales in 1997, compared to 32.2% in 1996, and Wickes anticipates that
this percentage will continue to increase in 1998. For the four Major Market
programs initiated in 1997, total 1997 sales increased 34.0% over 1996 total
sales.
Conventional Markets
--------------------
In addition to Major Markets, Wickes operates 70 building centers in
smaller, or Conventional Markets. Wickes/Conventional Markets are generally
less populous and the majority of customers are generally the smaller single-
family residential contractor, the R&R contractor and the project DIYer.
Wickes believes that competition in the building supply industry is more
limited in Conventional Markets compared to Major Markets but that there is
generally less opportunity for growth within a given Conventional Market.
Since the beginning of 1997, Wickes has completed remerchandising and
remarketing programs ("Resets" ) in 13 building centers located in Conventional
Markets. Wickes has also completed Resets in six sales and distribution
facilities in Major Markets. These programs include upgrading of the
showroom layout and product presentation, expansion of product assortment
(typically adding a significant number of stock keeping units, or "SKUs" ) with
the view towards achieving category dominance in the market, and increasing
service offerings such as installed sales, tool rental, specialized delivery
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<PAGE> 6
services and additional in-store sales specialists. Wickes is currently
evaluating the results of these Resets and if favorable Wickes will expand
the program to additional Conventional Markets as resources permit. Wickes'
Manufacturing operations also provide significant support for Wickes'
Conventional Market sales activities, particularly through the manufacture of
pre-hung interior and exterior doors.
Wickes Direct/Wickes International
----------------------------------
In an effort to increase its business to non-traditional customers and
out-of-market trade areas, Wickes formed the Commercial Sales Division in
1993 and added a national builder accounts sales team in 1996. In late 1996,
these two groups were combined to form "Wickes Direct," Wickes' wholesale
distribution channel, which is also operated internationally as " Wickes
International." Through Wickes Direct, Wickes focuses on large volume orders
from both commercial and residential builders, much of which is to be shipped
directly from the manufacturer to the customer's job-site. In addition to
lumber and building materials, Wickes Direct provides 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 also provides leads and sales support to Wickes' sales and
distribution facilities.
Manufacturing Operations
------------------------
Wickes owns and operates ten component manufacturing facilities ("including
seven located in Major Markets") that supply Wickes' customers with higher-
margin, value-added products such as pre-hung interior and exterior doors,
framed wall panels, and roof and floor trusses. These operations supplied
approximately 48% of the pre-hung interior doors, 65% of the metal exterior
doors, 38% of the roof and floor truss systems and 56% of the wall panel
systems sold by Wickes in 1997.
Wickes also has agreements with two third party manufacturers to provide
manufactured housing components in two Major Markets exclusively or primarily
for Wickes.
Wickes believes that these pre-assembled products improve customer service
and provide an attractive alternative to job-site construction as labor costs
rise. As resources permit, Wickes also plans to expand its manufacturing
facilities to supply a greater number of its sales and distribution
facilities with these value added products.
Recent Restructurings and Operational Efforts
---------------------------------------------
Beginning with the formulation and adoption of the 1995 Plan in late 1995,
Wickes has continuously reviewed its assets and operations in the effort to
eliminate under-performing facilities and the corresponding overhead, to
reduce other costs, and to focus its efforts on its target customers.
At the time the 1995 Plan was adopted, Wickes operated 126 building
centers and 12 component manufacturing facilities. From that time through
the end of 1997, Wickes closed or consolidated 21 building centers and
consolidated three component manufacturing facilities. During this time,
Wickes also devoted substantial efforts to control costs. Beginning in early
1997, Wickes made a determination to increase expenditures related to sales
efforts and to initiate the Major Market programs and Conventional Market
remerchandising programs discussed above. See Item 7. " Management's
Discussion and Analysis of Financial Condition and Results of Operations."
In the fourth quarter of 1997, Wickes announced and began to implement a
plan to streamline operations further and to focus on Wickes' core
professional builder business. The principal feature of this plan was to
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eliminate costs and programs not directly related to Wickes' core operations.
In furtherance of this plan, Wickes has, among other things, ceased its
involvement in utilities marketing and internet operations (other than those
directly related to its building supply business) through the transfer of
these programs to an affiliate. Also, Wickes transferred its mortgage and
construction lending program to an unrelated financial institution that
intends to expand this program on a no-cost basis to Wickes. In addition, in
the fourth quarter of 1997, Wickes wrote-off its remaining investment in
Russian logging and sawmill operations. For the twelve months ended December
27, 1997, Wickes' results of operations included more than $1.5 million in
selling, general and administrative ("SG&A" ) costs related to these
discontinued non-core programs and $1.5 million in losses on its investment
in the Russian operations.
Also in the fourth quarter of 1997, Wickes completed a further review of
its administrative structure and reorganized certain functions for increased
efficiency, resulting in an estimated $2.0 million in future annual SG&A
savings.
On February 23, 1998, Wickes announced that, in addition to the actions
begun in the fourth quarter of 1997, it had closed eight additional building
centers and two component manufacturing facilities, planned to sell two
building centers located in Eastern Iowa, and had implemented further
headquarters staffing and expense reductions. Wickes anticipates that the
headquarters reductions, together with those implemented in the fourth
quarter of 1997, will result in overall reduction in administrative staffing
levels of 25% and approximately $6.0 million of future annual SG&A savings.
Wickes expects to record a $5.4 million restructuring charge in the first
quarter of 1998 with respect to the 1998 Plan.
Markets
- -------
Wickes operates in 20 Major Markets, which are served by 31 sales and
distribution facilities and seven manufacturing facilities. Wickes also
operates 70 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 Wickes' sales and
distribution facilities located in Conventional and Major Markets by size of
the local market:
<TABLE>
<CAPTION>
Number of Sales and
Owner-Occupied Distribution Facilities
Households in Conventional Major
Thirty Mile Radius Markets Markets
------------------ ------- -------
<S> <C> <C>
Under 50,000 21 0
50,000-100,000 19 7
100,000-250,000 25 9
250,000-500,000 3 10
500,000 and over 2 5
-- --
Total 70 31
</TABLE>
Geographical Distribution
-------------------------
Wickes' 101 sales and distribution facilities are located in 23 states
in the Midwest, Northeast and South. Wickes believes that its geographic
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diversity generally lessens the impact of economic downturns and adverse
weather conditions in any one of Wickes' geographic markets. The following
table sets forth certain information with respect to the locations of Wickes'
sales and distribution facilities as of March 24, 1998:
<TABLE>
<CAPTION>
Midwest Northeast South
- ------------------------------- -------------------- --------------------------
Number of Number of Number of
Sales and Sales and Sales and
Distribution Distribution Distribution
State Facilities State Facilities State Facilities
----- ------------ ----- ---------- ----- ------------
<S> <C> <C> <C> <C> <C>
Michigan 30 Pennsylvania 6 Alabama 3
Wisconsin 14 New York 3 Kentucky 3
Indiana 11 Maine 2 Texas 2
Ohio 5 New Hampshire 2 Florida 2
Illinois 4 Connecticut 1 Mississippi 2
Colorado 3 New Jersey 1 North Carolina 2
-- Massachusetts 1 Georgia 1
Maryland 1 Louisianna 1
__ Tennessee 1
--
Total 67 Total 17 Total 17
== == ==
</TABLE>
Facilities Opened, Closed and Consolidated
------------------------------------------
During 1997, Wickes opened six new sales and distribution facilities.
Five new facilities were in Major Markets: Aurora, Illinois; Colorado Springs
and Denver, Colorado; Denton, North Carolina (Raleigh/Charlotte area); and a
second facility in Pensacola, Florida. The new Niles, Michigan building
center is in a Conventional market. A new component manufacturing facility
was also opened in Denver, Colorado. During 1997, Wickes also closed or
consolidated three sales and distribution facilities and two component
manufacturing facilities, all but one sales and distribution facility were
located in Conventional Markets.
During the first two months of 1998, as part of the 1998 Plan, Wickes
closed or consolidated eight building centers and two component manufacturing
facilities, all in Conventional Markets. For a further description of the
1998 Plan see "Business Strategy" and Note 16 of Notes to Consolidated
Financial Statements included elsewhere herein.
The following table reconciles the number of sales and distribution
facilities and component manufacturing facilities operated by Wickes at
December 31, 1994, December 30, 1995, December 28, 1996, December 27, 1997,
and March 24, 1998.
<TABLE>
<CAPTION>
Sales and Component
Distribution Manufacturing
Facilities Facilities
----------- ------------
<S> <C> <C>
As of December 31, 1994 130 10
Acquisitions 5 2
Expansion 2 --
Closings (10) --
Consolidations (17) (1)
------ -----
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As of December 30, 1995 110 11
Expansion -- 1
Consolidations (2) --
----- -----
As of December 28, 1996 108 12
Expansion 6 1
Closings (2) --
Consolidations (1) (2)
----- -----
As of December 27, 1997 111 11
Expansion -- 1
Sold (2) --
Closings (7) (2)
Consolidations (1) --
----- -----
As of March 24, 1998 101 10
===== =====
</TABLE>
Customers
- ---------
Wickes has a broad base of customers, with no single customer
accounting for more than 1.0% of net sales in 1997. In 1997, 87% (the same
percent as in 1996) of Wickes' sales were on trade credit, with the remaining
13% as cash and credit card transactions.
Home Builders
-------------
Wickes' primary customers are single-family home builders. In 1997,
all home builder customers accounted for 57% of Wickes' sales, the same as in
1996. The majority of Wickes' sales to these customers are of high-volume
commodity items, such as lumber, building materials, and manufactured housing
components. Wickes 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 and Wickes International concentrate on sales to
commercial contractors (primarily those engaged in constructing motels,
restaurants, nursing homes and 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 Wickes' sales and distribution
facilities. In 1997, sales to these customers accounted for more than 18% of
Wickes' sales, compared with 16% of Wickes' sales in 1996. As part of the
1998 Plan, Wickes has integrated the Wickes Direct domestic program more
closely with its other operations.
Repair & Remodelers
-------------------
In 1997, R&R customers accounted for approximately 12% of Wickes'
sales, the same as in 1996. The R&R segment consists of a broad spectrum of
customers, from part-time handymen to large, sophisticated business
enterprises. Some contractors are involved exclusively with single product
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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. Wickes offers the product and
project expertise, special order capability, design assistance, and credit
terms to serve the widely varying needs of this diverse market.
DIYers
------
Sales to DIYers (both project and convenience) represented about 13%
of Wickes' sales in 1997, compared with 15% in 1996. The percentage of sales to
DIYers varies widely from one sales and distribution facility to another,
based primarily on the degree of local competition from warehouse and home
center retailers. Wickes' sales and distribution facilities do not have the
large showrooms or broad product assortments of the major warehouse or home
center retailers. For small purchases, the showrooms serve as a convenience
rather than a destination store. Consequently, Wickes' focus on consumer
business is toward project DIYers -- customers who are involved in major
projects such as building decks or storage buildings or remodeling kitchens
or baths.
Sales and Marketing
- -------------------
Wickes employs a number of marketing initiatives designed to increase
sales and to support Wickes' 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
---------------------
Wickes 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.
Wickes 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, Wickes' primary link to the
building professional market is its experienced sales staff. Wickes
approximately 400 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. Wickes has equipped most of
its sales and distribution facilities with a computerized system which
10
<PAGE> 11
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 sales representative 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 Wickes' marketing strategy and distinguishes Wickes from many of its
competitors.
Wickes currently employs 148 specialty salespeople in its sales and
distribution facilities who provide expert advice to customers in project
design, product selection and applications. A staff of 60 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,
Wickes maintains separate R&R offices. Wickes currently has kitchen and bath
departments in most of its sales and distribution facilities and has a staff
of 80 kitchen and bath specialists. Wickes also employs 8 specialists in
other departments.
Wickes extends credit, generally due on the 10th day of the month
following the sale, to qualified and approved contractors. Approximately 87% of
Wickes' sales during 1997 were on credit, with the remaining 13% consisting
of cash or credit card sales, including approximately 1% of sales on Wickes'
private label credit card. 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 are generally not collateralized, except to the
extent Wickes is able to take advantage of the favorable materialmen's lien
laws of most states applicable in the case of delinquent accounts. Wickes'
credit practices have resulted in a bad debt expense of .2% of total credit
sales in 1997, compared with .1% in 1996, .8% in 1995 and .3% in both 1994
and 1993. Much of the increase in 1995 was attributable to the conversion of
accounts at the Gerrity Lumber facilities, acquired in 1994, to Wickes
credit practices.
Wickes owns and leases a fleet of 770 delivery vehicles as of
February 28, 1998, to provide job-site deliveries of building materials
scheduled to coordinate with project progress, including 68 specialized delivery
trucks equipped for roof-top or second story delivery, 90 specialized millwork
delivery vehicles, and 28 vehicles designed for installation of blown
insulation. Wickes will continue to add these specialized vehicles to other
markets where there is sufficient demand for such services.
Over the past several years, Wickes 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
more efficiently.
In 1997, Wickes rolled out an equipment rental program at 25 of its
sales and distribution facilities. This program rents specialized, professional
quality tools and equipment to customers in need of equipment for unique or
short term projects.
Wickes' 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 home page
can be found at the internet address: http://www.wickes.com/.
Wickes advertises in trade journals and produces specialized direct
mail promotional materials designed to attract specific target customers.
Wickes 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,
Wickes, 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.
11
<PAGE> 12
DIYers
------
Most sales and distribution facilities, primarily building centers
located in Conventional Markets, also pursue sales to project DIYers 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 can also provide a comprehensive list of materials and
detailed drawings to assist customers in completing their projects. Wickes
believes that project DIYers are attracted to its sales and distribution
facilities by this high level of service.
Wickes' showrooms generally feature product presentations such as
kitchen and bath and door and window displays. The showrooms are regularly re-
merchandised to reflect product trends, service improvements and market
requirements. During 1997, Wickes made significant investments to improve
the appearance and merchandising of 19 of its sales and distribution
facilities' showrooms. For the first six Resets, completed prior to the end
of the third quarter of 1997, the average sales increase over 1996 has
exceeded 15%. While Wickes has no current Resets in progress, additional
showroom improvements are scheduled for 1998 and future years.
While Wickes' product offerings in hardlines are generally more
limited than its consumer-oriented competitors, Wickes stocks a larger selection
of commodity products and offers a special order program for custom or specialty
products. Wickes emphasizes project packages, which include all materials
and detailed instructions for the assembly of the larger projects frequently
undertaken by project DIYers.
Products
- --------
Wickes stocks a wide variety of building products, totaling approxi-
mately 63,000 SKUs Company-wide, to provide its customers with the quality
products needed to build, remodel and repair residential and commercial
properties. Each of Wickes' sales and distribution facilities tailors its
product mix to meet the demands of its local market. Approximately 5,500 SKUs
is typically stocked in each sales and distribution facility.
Wickes separates its products into four groups: Commodity Wood
Products -- lumber, plywood, treated lumber, sheathing, wood siding and
specialty lumber; Building Products -- roofing, vinyl siding, doors, windows,
mouldings, drywall 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. Commodity Wood Products,
Building Products, Hardlines, and Manufactured Housing Components represented
45%, 35%, 11% and 9% of Wickes' sales for 1997 and 45%, 36%, 12% and 7%,
respectively, of sales for 1996.
In addition to stock items, Wickes also fills special orders, either
from its own manufacturing facilities or through outside suppliers. Wickes
believes that these special order services are extremely important to its
customers, particularly the building professional. In 1997, approximately
31% of Wickes sales were of special order items, compared with 30% in 1996.
12
<Page 13>
Manufacturing
- -------------
Wickes owns and operates ten component manufacturing facilities that
supply Wickes' sales and distribution facilities with certain higher-margin,
value-added products such as pre-hung doors, framed wall panels, and roof and
floor trusses. These manufacturing facilities enable Wickes to serve the needs
of its professional customers for such quality, custom-made products. In 1997
the door manufacturing operations supplied approximately 48% of the pre-hung
interior doors and 65% of the metal exterior doors sold by Wickes. The truss
manufacturing operations supplied approximately 38% of the total roof and
floor truss systems and 56% of the total wall panel systems sold by Wickes in
1997. Wickes believes that these pre-assembled products improve customer
service and provide an attractive alternative to job-site construction as
labor costs rise. Wickes has also entered into arrangements with two
manufacturers that exclusively or primarily serve Wickes and as resources
permit Wickes 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
- ------------------------
Wickes purchases its products from numerous vendors. The great
majority of commodity items are purchased directly from manufacturers, while the
remaining products are purchased from a combination of manufacturers,
wholesalers and other intermediaries. No single vendor accounted for 5% of
Wickes' purchases in 1997, and Wickes is not dependent upon any single vendor
for any material product. Wickes believes that alternative sources of supply
are readily available for substantially all of the products it offers.
The great majority of Wickes' commodity purchases are made on the
basis of individual purchase orders rather than supply contracts. In certain
product lines, though, Wickes has negotiated some advantageous volume pricing
agreements for a portion of the product line's purchases. Because
approximately 32% of Wickes' average inventory consists of commodity wood
products and manufactured housing components, which are subject to price
volatility, Wickes attempts to match its inventory levels to short-term
demand in order to minimize its exposure to price fluctuations. Wickes has
developed an effective coordinated purchasing program that allows it to
minimize costs through volume purchases, and Wickes believes that it has
greater purchasing power than many of its smaller, local independent
competitors. Wickes seeks to develop close relationships with its suppliers
in order to obtain favorable pricing and service arrangements.
Wickes' 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 Wickes' operating efficiencies by providing an
automated inventory replenishment system.
Wickes has active rail sidings at 47 of its sales and distribution
facilities enabling suppliers to ship products purchased by Wickes directly
to these facilities by rail. Wickes also utilizes two distribution centers
owned by third parties, located in Chicago, Illinois and Allentown,
Pennsylvania, through which approximately 4% of Wickes' wood products
inventory is delivered.
Seasonality
- -----------
Historically, Wickes' 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 conditions. See Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
13
<PAGE> 14
Competition
- -----------
The building material industry is highly competitive. Due to the
fragmented nature of this industry, Wickes' 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 Wickes gross
margins.
Within the professional market, Wickes 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. Wickes believes that it
competes favorably on each of these bases. Wickes believes that it has a
significant competitive advantage in rural markets and small communities,
where it competes primarily with local independent lumber yards, regional
building material chains, and, to a lesser extent, with national building
center chains and warehouse and home center retailers, which generally locate
their units in more densely populated areas. In Major Markets Wickes
believes that its total package of services and ability to serve the large
builder provides it with a competitive advantage.
Environmental and Product Liability Matters
- -------------------------------------------
Many of the sales and distribution facilities presently and formerly
operated by Wickes contained underground petroleum storage tanks. Other than
tanks at one acquired facility, recently installed and in compliance with
modern 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 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 costs, net of
insurance and regulatory recoveries, with respect to the filling or removing
of underground storage tanks and related investigatory and remedial actions,
and Wickes has reserved $0.5 million towards the cost of these and other
environmental and product liability matters. Sales of excess properties over
the past three years have resulted in only minimal findings.
Although Wickes has not expended material amounts in the past nine
years with respect to the foregoing, and expenditures in the most recent three
years have been significantly reduced, there can be no assurances that these
matters will not give rise to additional compliance and other costs that
could have a material adverse effect on Wickes.
For information concerning certain litigation concerning products
containing asbestos, see Item 3. "Legal Proceedings".
Trademarks and Patents
- ----------------------
Wickes has no material patents, trademarks, licenses, franchises, or
concessions other than the name "Wickes Lumber" and the "Flying W" trademark.
14
<PAGE> 15
Life Insurance Operations
-------------------------
Prior to the completion of the Circle Merger (as defined below),
Riverside conducted life insurance operations through its former American
Founders subsidiary.
On June 6, 1996, Riverside merged (the "Circle Merger") its life
insurance operations with those of Circle Investors, Inc. ("Circle"). In the
Circle Merger, Riverside's former life insurance subsidiaries became wholly-
owned by Circle, and Riverside received, among other things, $35,000,000 in cash
and certain securities of Circle. Also, in connection with the Circle Merger,
951,486 shares of Wickes common stock and certain other assets formerly held
by American Founders were distributed to Riverside, and Riverside purchased
certain real estate from American Founders. See Note 4 of Notes to the
Consolidated Financial Statements included elsewhere herein.
On December 31, 1997, Circle was acquired by a third party. In the
acquisition, Riverside disposed of its interest in Circle for $5,419,000 in
cash. See Note 4 of Notes to the Consolidated Financial Statements included
elsewhere herein.
Other Operations
----------------
Marketing
- ---------
Effective January 15, 1998, Riverside acquired certain operations
of Wickes that Wickes had determined to discontinue as a result of Wickes'
plan to streamline its operations and focus primarily on its core
professional builder business. The operations transferred include internet,
telephony and utilities marketing. The consideration given or to be given by
Riverside to Wickes in the transaction consists of Riverside's three-year
$871,844 unsecured promissory note and future payments of ten percent of the
transferred operations' net income (subject to a maximum of $430,000).
In connection with this acquisition, Riverside established
various operating subsidiaries to conduct the businesses acquired from
Wickes, as well as related businesses. The subsidiaries conduct internet
marketing, both directly and through a multi-level marketing distribution
system, as well as internet web page hosting and other related services. In
February of 1998, in an effort to escalate the operations, the Parent Company
acquired the assets of Cybermax Communications, Inc. ("Cybermax"). Cybermax
is an internet service provider, with over 750 residential customers and over
75 commercial customers. WIXX Energy Company markets natural gas and related
services. Building Materials.net, Inc. is establishing an internet
"cybermall" that will market products and services offered by third parties,
including Wickes, related to the construction industry.
As of March 31, 1998 these operations were in the start-up phase
and had not generated significant revenues. The Company intends to monitor
carefully the progress of these operations and may expand or curtail any or
all of them, depending upon operating results achieved.
Financial Services to Builders
- ------------------------------
Beginning in 1995, Riverside marketed construction and permanent
mortgage loans to and through the professional building customers of Wickes.
In early 1997, Riverside began to reduce the extent of mortgage operations.
Construction and permanent loans closed in 1997 were approximately $28
million compared to $11 million in 1996. In December, 1997, Riverside
completed the sale of its remaining mortgage operations to a third party,
which continues to market mortgage loans through Wickes. From 1993 through
the fourth quarter of 1996, Riverside also marketed insurance products
through Wickes.
15
<PAGE> 16
Real Estate Operations
- ----------------------
As of December 31, 1997, Riverside's investment in real estate
includes $13,877,000 of land held for sale, $387,000 of commercial rental
property, and $65,000 of investments in real estate joint ventures.
Land Held for Sale
------------------
Included in the investment in land held for sale is approximately
197 acres of land located within Highlands Park in Smyrna, Georgia, and 22
acres of land located within Belfort Park in Jacksonville, Florida, referred
to as "Highlands" and "Belfort", respectively. In June 1996, in connection
with the Circle Merger, Riverside purchased these properties from American
Founders.
Highlands. Highlands originally consisted of 1,000 acres and
---------
has been an active development since 1983 with approximately 767 acres being
sold over the last 12 years. Highlands is a planned industrial development
just outside of Atlanta, Georgia. The land is subdivided into numerous
parcels planned for commercial, office and light industrial use.
In its current state, the property has road frontage and access
to County water, sewer, electrical, gas and telephone. In addition, many of
the properties have been graded.
During 1997, Riverside completed the sale of 30 acres for
approximately $2.3 million. Currently, 54 acres are under contract for sale
for an aggregate purchase price of approximately $2.7 million.
Belfort. Belfort originally consisted of approximately 28 acres
-------
of vacant and unimproved commercial land. 21 of the 28 acre parcel are
designated for office use. During 1997, Riverside completed the sale of a 6
acre parcel designed for office use for approximately $1.1 million.
Currently, 5.8 acres are under contract for sale for approximately $1.3
million.
Employees
---------
As of February 28, 1998, Riverside had 39 full-time employees.
As of the same date, Wickes had 3,766 employees, of whom 3,720 were employed
on a full-time basis. The Company believes that it has maintained favorable
relations with its employees. None of Riverside's or Wickes' employees is
represented by a union or covered by a collective bargaining agreement.
Item 2. Properties.
- -------------------
Riverside's executive offices are in leased space in
Jacksonville, Florida.
Wickes' 101 sales and distribution facilities are located in 23
states, with 67 in the Midwest, 17 in the Northeast and 17 in the South. See
"Item 1. Business - Markets". Wickes believes that its facilities generally
are in good condition and will meet Wickes' needs in the foreseeable future.
Wickes' Conventional Market building centers generally consist
of a showroom averaging 9,600 square feet and covered storage averaging
38,500 square feet. Wickes' sales and distribution facilities located in
16
<PAGE> 17
Major Markets tend to be more specialized. Included among these facilities
are two WCS facilities, which stock little or no commodity wood products and
therefore have no traditional lumber storage yard, as well as facilities that
stock primarily commodity wood products and therefore have no showroom, as
well as facilities similar to Wickes' Conventional Market building centers.
Wickes upgraded or Reset 19 of its showrooms in 1997. Wickes' sales and
distribution facilities are situated on properties ranging from 1.0 to 28.2
acres and averaging 9.4 acres. Wickes also operates ten component
manufacturing facilities which have an average of 40,000 square feet under
roof on 7.1 acres.
Wickes owns 84 of its sales and distribution facilities and 82
of the sites on which such facilities are located. The remaining 17 sales
and distribution facilities and 19 sites are leased. As of December 27,
1997, Wickes also held for sale the assets of nine closed facilities and one
other property with an aggregate book value of $3.5 million. In addition to
its sales and distribution facilities, Wickes operates ten component
manufacturing plants. Four of these plants are located on sales and
distribution facility sites. Of the remaining six plants, four are on owned
sites and two are on leased properties.
Wickes also owns or leases a large fleet of trucks and other
vehicles, including vehicles specialized for the delivery of certain of
Wickes' products. As of February 28, 1998, the fleet included approximately
129 heavy duty trucks, 68 of which provide roof-top or second story delivery,
523 medium duty trucks, 516 light duty trucks and automobiles, 571 forklifts,
90 specialized millwork delivery vehicles, and 28 vehicles equipped to
install blown insulation.
Wickes leases its corporate headquarters, a portion of which is
subleased, located at 706 North Deerpath Drive in Vernon Hills, Illinois.
Item 3. Legal Proceedings.
- --------------------------
On November 3, 1995, a complaint styled Morris Wolfson v. J.
--------------------
Steven Wilson, Kenneth M. Kirschner, Albert Ernest, Jr., Claudia B. Slacik,
- ---------------------------------------------------------------------------
Jon F. Hanson, Robert E. Mulcahy, Frederick H. Schultz, Wickes Lumber Company
- -----------------------------------------------------------------------------
and Riverside Group, Inc. was filed in the Court of Chancery of the State of
- -------------------------
Delaware in and for New Castle County (C.A. No. 14678). As amended, this
complaint alleges, among other things, that the sale by Wickes in 1996 of two
million newly-issued shares of Wickes' common stock to Riverside, Wickes'
largest stockholder, was unfair and constituted a waste of assets and that
Wickes' directors in connection with the transaction breached their fiduciary
duties. The amended complaint, among other things, seeks on behalf of a
purported class of Wickes shareholders equitable relief or to obtain damages
with respect to, the transaction. See "Item 1. Business - Background". There
was no activity in this suit in 1997.
Wickes is one of many defendants in approximately 100 actions,
each of which seeks unspecified damages, brought since 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 Wickes.
Wickes and the Company are involved in various other legal
proceedings which are incidental to the conduct of its business. 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 Item
3 and other forward-looking statements ("Forward-Looking Statements") in this
report are made pursuant to the safe harbor provisions of the Private
17
<PAGE> 18
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 assessments 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.
Item 4. Submission of Matters To a Vote of Security Holders.
- ---------------------------------------------------------------
None.
Item 5. Market For Registrant's Common Equity and Related Stockholder
- --------------------------------------------------------------------------
Matters.
--------
The Company's common stock trades over-the-counter and is quoted
on the NASDAQ SmallCap Stock Market under the trading symbol "RSGI." Prior
to July 28, 1997, the Company's common stock was traded on the NASDAQ
National Stock Market. As of March 25, 1998, there were 5,287,123 shares
outstanding held by approximately 1,741 shareholders of record.
The Company has been notified by the NASD that the Company is not
in compliance with the NASD's new requirements for continued listing and that
the Company's common stock is scheduled for delisting from the NASDAQ
SmallCap Stock Market. The Company has requested continued listing
notwithstanding these new requirements, and the NASD has agreed to stay the
delisting action pending review by a NASD panel during the week of April 13,
1998. Should the Company's common stock be delisted from the NASD SmallCap
Stock Market, the Company anticipates but can give no assurances that
quotations would be available on the NASD s electronic OTC Bulletin Board.
The following table sets forth, for the periods indicated, the
high and low closing sale prices for the Company's common stock as reported
on NASDAQ SmallCap Stock Market (or, for periods prior to July 28, 1997,
NASDAQ National Market System). Prices do not include retail markups,
markdowns or commissions.
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
Calendar Quarter
1996:
First Quarter.........................$4.000 $3.000
Second Quarter.........................3.875 2.875
Third Quarter..........................3.500 2.875
Fourth Quarter.........................3.000 1.563
1997:
First Quarter.........................$3.250 $1.750
Second Quarter.........................2.875 1.875
Third Quarter..........................3.000 1.750
Fourth Quarter.........................2.250 1.000
</TABLE>
On October 1, 1996, the Company declared a cash dividend of $.10
per share, payable on October 31, 1996, to shareholders of its common stock
of record on October 15, 1996. The Company did not pay any other cash
dividends on its common stock during the last two fiscal years. The Company
18
<PAGE> 19
may continue to evaluate the option of future payments of dividends but does
not anticipate declaring any dividends in the near future. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations." Payment of dividends in the future is subject to the discretion
of the Board of Directors of the Company and is dependent upon the Company's
overall financial condition, capital requirements, compliance with
contractual requirements, earnings, and such other factors as the Board of
Directors may deem relevant.
The Company is dependent on dividends from its subsidiaries to
pay cash dividends to its shareholders. Wickes has not declared or paid any
dividends on common stock in the past three years and has no present
intention to pay cash dividends on its common stock in the foreseeable
future. Wickes' revolving credit facility prohibits cash dividends on
Wickes common stock, and the trust indenture related to Wickes' 11-5/8%
senior subordinated notes restricts cash dividends on Wickes' common stock.
See "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations."
19
<PAGE> 20
Item 6. Selected Financial Data.
- -------------------------------
The following summary of certain consolidated financial data of the
company is derived from the Company's Consolidated Financial Statements included
elsewhere herein and should be read in conjunction with thise financial
statements and notes thereto and "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
Years Ended December 31.
----------------------------------------
(in thousands, except per share amounts)
-----------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Sales and service revenues (1) $ 884,082 $ 467,254 $ --- $ --- $ ---
Insurance premiums and annuity
considerations (2) --- 3,224 8,298 18,657 21,704
Net investment income(2) (31) 6,325 14,492 17,523 20,735
Net realized investment gains (losses) 897 1,672 (234) (182) 4,147
Other operating income 11,297 4,837 1,513 1,512 5,989
--------- -------- --------- --------- --------
Total revenues (1) 896,245 483,312 24,069 35,998 46,586
Equity in earnings (losses) of
Wickes Inc. (1)(3) --- (1,714) (5,849) 8,274 1,525
Minority interest (1) 703 (2,318) --- --- ---
Reorganization of life insurance
subsidiaries (2) --- --- (9,062) --- ---
Earnings (loss) from continuing operations
before cumulative effect of change in
accounting principles (5,821) 618 (17,845) 8,850 4,043
Loss from discontinued operations (388) (1,024) (1,086) (4,405) (1,988)
Gain on disposal of discontinued operations --- --- 2,731 --- ---
Cumulative effect of change in accounting
principles --- --- --- --- 596
--------- -------- --------- ----------- --------
Net earnings (loss) $ (6,209) $ (406) $ (16,200) $ 4,445 $ 2,651
--------- -------- --------- --------- --------
Earnings (loss) per common share, after
deducting preferred stock dividends and
accretion:
Earnings (loss) from continuing operations
before cumulative effect of change in
accounting principles (1.12) 0.12 (3.38) 1.61 0.50
Loss from discontinued operations (0.07) (0.20) (0.21) (0.82) (0.37)
Gain on disposal of discontinued operations --- --- 0.52 --- ---
Cumulative effect of change in accounting
principles --- --- --- --- 0.11
--------- --------- --------- --------- ---------
Net earnings (loss) per share (1.19) (0.08) (3.07) 0.79 0.24
--------- --------- --------- --------- ---------
Balance Sheet data (at period end):
Total investments (2) $ 14,329 $ 22,199 $ 233,441 $ 258,971 $ 306,942
Total assets (1)(2) 313,871 309,814 300,725 353,370 390,731
Total debt and redeemable preferred
stock 219,426 204,511 31,215 45,198 49,949
Total common stockholders' equity $ 14,620 $ 20,775 $ 26,056 $ 29,103 $ 38,397
Common shares outstanding 5,287,123 5,296,123 5,311,123 5,465,781 5,294,940
Book value per common share $ 2.77 $ 3.92 $ 4.91 $ 5.32 $ 7.25
Cash dividend declared per common share $ --- $ 0.10 $ --- $ --- $ ---
===========================================================================================================================
</TABLE>
20
<PAGE> 21
(1) The Company accounted for its investment in Wickes on the equity
method through June 30, 1996 and on a consolidated basis
thereafter.
(2) At the end of 1994, Riverside disposed of certain of its life
insurance operations. In June 1996, Riverside merged its
remaining life insurance operations with those of Circle;
thereafter, Riverside accounted for its investment in Circle on
the equity method through December 30, 1997.
(3) In 1995, Wickes recorded a $17.8 million charge relating to a
plan to reduce the number of operating building centers and
other unusual items. In 1994, Wickes recorded $4.2 million of
tax benefits related to the renewal of a deferred tax valuation
allowance established in a prior year. Cumulative effect of
adopting SFAS No. 109 "Accounting for Income Taxes."
21
<PAGE> 22
Item 7. Management's Discussion and Analysis of Financial Condition and
- -------------------------------------------------------------------------
Results of Operations.
----------------------
The following discussion should be read in conjunction with the
Consolidated Financial Statements and Notes contained elsewhere herein.
Since the operations of Wickes are consolidated with those of the Company and
its subsidiaries for 1997 and the third and fourth quarters of 1996 and
accounted for on the equity method for prior periods, comparisons between
periods may not be meaningful in certain respects.
Results of Operations
---------------------
The Company reported results of operations for the years ended
December 31, 1997, 1996 and 1995 as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Equity in earnings(losses) of Wickes(1)(2) $ - $(1,714) $ (5,849)
Earnings(loss) before income taxes, minority interest,
equity in related parties, loss on life insurance
reorganization, and discontinued operations(3)(4)(5) (3,972) 6,223 (13,906)
Earnings(loss) before discontinued operations (5,821) 618 (17,845)
Earnings(loss) from discontinued operations (388) (1,024) 1,645
-------- -------- ---------
Net earnings(loss) $ (6,209) $ (406) $ (16,200)
======== ======== =========
==========================================================================================================
</TABLE>
(1) Includes ($3.8) million in 1995 related to restructuring
charges.
(2) Subsequent to June 30, 1996, the Company consolidated its results
of operations with those of Wickes.
(3) Includes net realized investment gains(losses) of $897,000,
$1,672,000, and ($234,000), in 1997, 1996 and 1995,
respectively. 1995 includes other income of $600,000 related to
the settlement of a disputed financing proposal.
(4) Includes a $10,970,000 charge on reorganization of life
insurance subsidiaries primarily resulting from the write off of
intangible assets in 1995.
(5) Includes a benefit of $0.6 million in 1997 and a charge of $0.7
million in 1996, for restructuring and unusual items for Wickes.
22
<PAGE> 23
Wickes
- ------
The Company estimates that after inter-company eliminations, and
net of goodwill amortization of approximately $534,000, Wickes contributed
losses of $1,297,000 to the Company's results of operations in 1997. For
the first six months of 1996, the Company recorded equity in Wickes' losses
of $1,714,000. During the second half of 1996, the Company consolidated
Wickes' results of operations with those of the Company's other operations.
The Company estimates that, after inter-company eliminations, and net of
goodwill amortization of approximately $202,000, Wickes contributed earnings
of $2,282,000 to the Company's results of operations during the second half
of 1996.
The following discussion of Wickes' full year operations for
1997, 1996 and 1995 was obtained from the Wickes 10-K.
The following table sets forth, for the periods indicated, the
percentage relationship to net sales of certain expense and income items.
The table and subsequent discussion should be read in conjunction with the
financial statements and notes thereto appearing in the Wickes' 10-K.
<TABLE>
<CAPTION>
Years Ended
Dec. 27, Dec. 28, Dec. 30,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Gross profit 23.0 22.3 22.7
Selling, general and administrative
expense 21.0 19.1 20.0
Depreciation, goodwill and trademark
amortization .6 .6 .6
Provision for doubtful accounts .2 .1 .7
Restructuring and unusual items (.1) .1 1.8
Other operating income (1.2) (.8) (.6)
Income from operations 2.5 3.2 .2
</TABLE>
Wickes' operations, as well as those of the building material industry
generally, have reflected substantial fluctuations from period to period as
a consequence of various factors, including levels of construction activity,
general regional and local economic conditions, weather, prices of commodity
wood products, interest rates and the availability of credit, all of which
are cyclical in nature. Wickes anticipates that fluctuations from period to
period will continue in the future. Because a substantial percentage of
Wickes' sales are attributable to building professionals, certain of these
factors may have a more significant impact on Wickes than on companies more
heavily focused on consumers.
Wickes' 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
conditions. While Wickes' experienced relatively mild weather during the
first quarter of 1995, record setting snow falls throughout the Midwest and
Northeast in January of 1996, adversely affected construction activity in the
first quarter of 1996. Weather conditions in 1997 were relatively normal
throughout the year.
23
<PAGE> 24
The following table contains selected unaudited quarterly financial
data for the years ended December 27, 1997, December 28, 1996, and December 30,
1995.
QUARTERLY FINANCIAL DATA
Three Months Ended
(in millions, except per share data and percentages)
<TABLE>
<CAPTION>
Basic and Diluted
Net Sales as a Net Earnings
% of Annual Gross Net Income /(Loss)per
Net Sales Net Sales Profit /(Loss) Common Share
--------- -------- ------ ---------- ------------
<S> <C> <C> <C> <C> <C>
1997
March 29 $159.3 18.0% $36.9 $(5.2) $(.63)
June 28 237.3 26.9 54.3 1.3 .16
September 27 266.3 30.1 60.3 1.8 .22
December 27 221.1 25.0 51.5 0.5 .06
1996
March 30 $152.5 18.0% $34.9 $(6.2) $(1.00)
June 29 228.8 27.0 51.2 1.9 .29
September 28 255.6 30.1 55.5 2.8 .35
December 28 211.7 24.9 47.9 2.0 .24
1995
April 1 $191.7 19.7% $45.6 $(4.6) $(.75)
July 1 272.8 28.0 63.9 2.5 .40
September 30 284.5 29.3 62.9 1.9 .31
December 30 223.6 23.0 48.4 (15.4) (2.50)
</TABLE>
Net income/(loss) in the fourth quarter of 1995 was negatively
affected by a $17.8 million charge for restructuring and unusual items. In 1997
and 1996 Wickes recorded a benefit of $0.6 million and a charge of $0.7 million,
respectively, as restructuring and unusual items. For additional information
on the restructuring and unusual items charge see Note 2 of Notes to
Consolidated Financial Statements included elsewhere herein. In addition, in
1996 Wickes received insurance premium adjustments from a former insurance
carrier in the amount of $2.2 million and reversed an accrual of $1.5 million
for other disputed insurance premiums with this carrier. Accordingly
selling, general and administrative expenses were reduced by $1.0 million
during the first three quarters of 1996 and by $2.7 million in the fourth
quarter of 1996. In the fourth quarter of 1997, Wickes recorded a gain of
$4.5 million on the sale of six pieces of real estate. In the fourth quarter
of 1996, only three pieces of real estate were sold with a net gain of $0.6
million. Gains or losses on the sale of real estate are recorded under other
operating income.
Wickes has historically generated approximately 15% to 20% of its
annual revenues during the first quarter of each year, and Wickes has
historically recorded a significant net loss for this quarter. As a result of
these seasonal factors, Wickes' inventories and receivables reach peak levels
during the second and third quarters and are generally lower during the first
and fourth quarters, depending on sales volume and lumber prices.
24
<PAGE> 25
This Item 7 contains statements which, to the extent that they are not
recitations of historical fact, constitute Forward Looking Statements that
are made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995 and are inherently subject to uncertainty. A
number of important factors could cause Wickes' business and financial
results and financial condition to be materially different from those stated
in the Forward Looking Statements. Those factors include but are not limited
to the seasonal and cyclical factors discussed above in this Item 7 and
elsewhere in this report, the effects of Wickes' substantial leverage and
competition, the success of Wickes' operational efforts, and the matters
discussed in Note 11 of the Notes to Consolidated Financial Statement
included elsewhere herein.
1997 Compared with 1996
- -----------------------
Net Sales
---------
Net sales for 1997 increased $35.5 million, or 4.2%, to $884.1 million
from $848.5 million in 1996. Sales for all facilities operated throughout both
years ("same store") increased 4.7%. During 1997, Wickes experienced a 4.1%
increase in same store sales to its primary customer segment, the
professional home builder, and a 16.4% increase in same store sales to
commercial builders. Consumer same store sales were down 6.8% for the year.
Wickes believes that the following matters contributed to the 1997
sales increase. Throughout most of 1997, Wickes operated three more sales and
distribution facilities than it operated during 1996. Also, Wickes believes
that showroom Resets at 19 of its sales and distribution facilities in 1997,
sales training, and big builder initiatives also had a positive effect on
sales. Finally, weather conditions in the Northeast during the first quarter
of 1997 were more favorable compared with the record snowfalls recorded in
the first quarter of 1996. Wickes believes that inflation/deflation in
lumber prices had negligible impact on total sales.
In February 1998, Wickes announced that it had closed an additional
eight facilities and intended to sell its two locations in Iowa. See "Item 1.
Business - Business Strategy". These facilities contributed an aggregate of
$46.5 million to 1997 sales.
Total housing starts in the United States were relatively unchanged
in 1997 compared with 1996. Starts in Wickes' primary geographical market, the
Midwest, decreased approximately 5.5%. Wickes' two other geographical
markets, the Northeast and South, experienced increases in 1997 housing
starts of 3.5% and 1.3%, respectively. Nationally, single family housing
starts, which generate the majority of Wickes' sales to building
professionals, experienced a decrease of 2.4%, from 1.16 million starts in
1996 to 1.13 million starts in 1997.
Gross Profit
------------
Gross profit increased $13.6 million to 23.0% of net sales for 1997
compared with 22.3% of net sales for 1996. The increase in gross profit is
primarily due to increases in sales, reductions in product costs, and
increases in sales of manufactured products.
The increase in gross profit as a percent of sales is primarily
attributable to reduced cost of sales as a result of a concerted effort to
obtain the best pricing available. Wickes also expanded its sales of higher
25
<PAGE> 26
margin internally manufactured products by approximately 27% from 1996 to
1997, and experienced a reduction in costs associated with physical inventory
count adjustments. These increases were partially offset by increased
percent of sales attributable to professional builders and an increase in the
percent of sales attributable to lower margin commodity lumber products. The
percent of Company sales attributable to professional builders increased to
86.5% for 1997 compared with 84.7% in 1996. Wickes anticipates that its
continued focus on the professional builder will create additional pressure
on gross profit margins.
Selling, General, and Administrative Expense
--------------------------------------------
In 1997, selling, general, and administrative expense ("SG&A")
increased as a percent of net sales to 21.0% compared with 19.1% of net sales in
1996, primarily as a result of Wickes' increase in sales and distribution
facility employees in an effort to increase sales and market share, expenses
associated with showroom remerchandisings in 19 facilities in 1997, expenses
associated with expansion of Wickes' Major Market program in 1997, and
insurance recoveries recorded in 1996 with respect to prior years.
Compared to 1996, on a same store basis, the average number of
employees at Wickes' sales and distribution facilities in 1997 increased by
approximately 5%. Wickes also experienced an increase in salaries and wages
in its non-core operations. Both were major factors in the 1.0% increase, as
a percentage of sales, of Wickes' salaries, wages and employee benefits.
Wickes also experienced increases as a percentage of sales in travel, office
supplies, professional and marketing expenses.
During 1997, Wickes Reset the showrooms of 13 Conventional Market
building centers and six Major Market sales and distribution facilities. Also
during 1997, Wickes continued its efforts to expand its Major Markets program.
See Item 1."Business - Business Strategy". Expenses associated with these
Resets and expansion of the Major Markets program totaled approximately $1.8
million in 1997 and accounted for approximately $1.3 million of the SG&A
increase.
In 1996, Wickes recorded $3.7 million of insurance recoveries for
prior years' casualty insurance programs. During 1997, Wickes recorded $0.3
million in prior year insurance recoveries.
In October 1997, Wickes announced plans to streamline operations and
to focus on core operations. In accordance with these plans, Wickes
discontinued or sold non-core operations that contributed approximately $1.5
million of SG&A during 1997. In addition, Wickes effected headquarters
staffing reductions beginning in October 1997, and increased the amount of
these reductions pursuant to a determination announced in February 1998.
Wickes expects these headquarters reductions to result in approximately $6
million annually in future SG&A savings. Also, Wickes announced in February
1998 that it had closed eight additional under performing building centers
and planned to sell its two Iowa building centers. For further information,
including the charge expected to be taken by Wickes in the first quarter of
1998, see "Item 1. Business - Business Strategy" and Note 16 of the Notes to
Consolidated Financial Statement included elsewhere herein.
Depreciation, Goodwill and Trademark Amortization
-------------------------------------------------
Depreciation, goodwill and trademark amortization costs decreased $0.5
million in 1997 compared with 1996. The primary reason for this decrease is
that most of Wickes-owned delivery vehicles were fully depreciated in 1997.
Since 1993 Wickes' new vehicles have been obtained primarily through
operating leases.
26
<PAGE> 27
Provision for Doubtful Accounts
-------------------------------
Wickes extends credit, generally due on the 10th day of the month
following the sale, to qualified and approved contractors. Provision for
doubtful accounts increased to $1.7 million or 0.2% of sales for 1997 from $1.1
million or 0.1% of sales for 1996. Historically Wickes' provision for
doubtful accounts averages approximately 0.3% of sales. The results achieved
in 1996 were a result of increased efforts to collect previously reserved
accounts receivable, especially those attributable to the Gerrity Lumber
acquisition centers.
Restructuring and Unusual Items
-------------------------------
During 1997 Wickes completed its 1995 Plan. As a result, it recorded
a reduction in accrued costs and a benefit to restructuring and unusual charges
of approximately $2.1 million. This benefit was partially offset by a $1.5
million restructuring charge for severance and postemployment benefits and
anticipated losses on the disposal of discontinued non-core programs and
related reductions in headquarters staffing which was announced by Wickes in
October of 1997. The non-core programs affected by these reductions included
the sale or closing of Wickes' mortgage lending, utilities marketing, and
internet service programs not directly related to the building supply
business. See "Item 1. Business - Business Strategy". Wickes expects to
record a $5.4 million restructuring charge in the first quarter of 1998 with
respect to facilities closings and staffing reductions announced in February
1998. See Note 16 of the Notes to Consolidated Financial Statement included
elsewhere herein.
Other Operating Income
----------------------
Other operating income increased to $10.7 million in 1997, compared
with $6.8 million in 1996. The increase resulted from gains reported on the
sale of facilities and excess equipment of approximately $6.3 million, an
increase of $4.3 million from the $2.0 million recorded in 1996. The approxi-
mately $0.7 million gain on the sale of Wickes' headquarters in Vernon Hills,
Illinois, is being amortized over a 15-year period consistent with Wickes'
lease of the facility. This increase was partially offset by a $0.6 million
gain recorded in 1996 as a result of the difference between insured
replacement cost and book value as a result of a fire and storm damage at
several of Wickes' building centers.
Interest Expense
----------------
Interest expense decreased to $21.4 million in 1997 from $21.8 million
in 1996, as a result of a decrease in Company's overall effective borrowing rate
of 21 basis points, partially offset by an increase in average outstanding
debt under Wickes' revolving line of credit of $4.5 million. The increase in
average outstanding debt was due primarily to reduced net cash flow from
operating activities and increased investment in property, plant and
equipment.
Equity in Loss of Affiliated Company
------------------------------------
During 1997, Wickes' equity in the losses of Riverside International
LLC was $1.5 million compared with $3.2 million during 1996. The $1.5 million
loss in 1997 reduced Wickes' net investment to zero. See Note 1 of Notes to
Consolidated Financial Statements included elsewhere herein.
27
<PAGE> 28
Provision for Income Taxes
--------------------------
In 1997 Wickes recorded current income tax expense of $1.1 million
compared with $1.0 million in 1996. Current income tax provisions for both
years consist of state and local tax liabilities.
A deferred tax benefit of $0.2 million was also recorded for 1997.
This compares with a deferred tax expense of $0.3 million in 1996. The 1997
benefit results from the loss before income taxes and the establishment of a
deferred tax asset, in accordance with FAS 109. Management has determined
(based on Wickes' positive earnings growth from 1992 through 1994 and its
expectations for the future) that operating income of Wickes will more likely
than not be sufficient to recognize fully these net deferred tax assets. See
Note 13 of Notes to Consolidated Financial Statements included elsewhere
herein.
Net Income
----------
Wickes experienced a net loss of $1.6 million in 1997 compared with
net income of $0.5 million in 1996, a change of $2.1 million. The primary
components of this change consist of an increase in SG&A expense of $23.1
million and an increase in provision for doubtful accounts of $0.6 million.
These unfavorable changes were partially offset by increases in gross profit
of $13.6 million and other operating income of $3.9 million, as well as
decreases in losses attributable to Riverside International LLC of $1.7
million, restructuring and unusual items of $1.3 million, and depreciation,
goodwill and trademark amortization of $0.5 million.
Had the program eliminations, facilities closings and expense
reductions announced in October 1997 and February 1998 been implemented prior to
the beginning of 1997, Wickes estimates that 1997 pro forma net income would
have been $6.0 million, before the $6.9 million estimated charge with respect to
these restructuring activities. See "Item 1. Business - Business Strategy"
and Note 16 of Notes to Consolidated Financial Statements included elsewhere
herein.
1996 Compared with 1995
- -----------------------
Net Sales
---------
Net sales for 1996 decreased $124.1 million, or 12.8%, to $848.5
million from $972.6 million in 1995. Same store sales decreased 6.4%. During
1996, Wickes experienced a 2.1% decrease in same store sales to its primary
customer segment, the professional home builder, and a 3.2% increase in same
store sales to commercial builders.
The reduction in the number of under-performing building centers
pursuant to the restructuring plan committed to in December of 1995 was the
major cause of the 1996 total sales decline. Pursuant to this plan, Wickes
closed or consolidated 16 building centers in December 1995 and two during 1996.
During 1995, these closed or consolidated building centers contributed an
aggregate of $86.7 million to total net sales.
Severe weather conditions in the first quarter of 1996, together with
mild weather in the first quarter of 1995, and a 17.5% decrease in same store
sales staff as part of Wickes' efforts to better align its costs to its sales
volume, were the major factors contributing to the 1996 same store sales
decline. The decrease in same store sales occurred most heavily during the
first nine months of 1996. For this period, same store sales were down 8.8%,
while fourth quarter same store sales were up slightly from the fourth
quarter of 1995.
Total housing starts in the United States increased 9.6% in 1996, and
starts in Wickes' primary markets, the Midwest and Northeast, increased
approximately 10.6% and 11.2%, respectively. Nationally, single family
housing starts, which generate the majority of Wickes' sales to building
professionals, experienced an increase of 7.8% in 1996, from 1.07 million
starts in 1995 to 1.16 million starts in 1996. In 1996 inflation in lumber
prices had a negligible effect on sales.
28
<PAGE> 29
Gross Profit
------------
Gross profit decreased $31.3 million to 22.3% of net sales for 1996
compared with 22.7% of net sales for 1995. The primary reason for the
decrease in gross profit was the reduction in total sales as a result of
Wickes' program to reduce the number of under-performing building centers.
The decline in gross profit as a percent of sales was primarily
attributable to Wickes' continued emphasis on sales to the professional
builder, resulting in an increase in the portion of Wickes' sales comprised
of lower margin commodity products, and to a lesser extent a program to
reduce the amount of excess and slow moving inventory. The percent of
Company sales attributable to professional builders increased to 84.7% for
1996 compared with 81.6% in 1995, and sales attributable to commodity lumber
products and manufactured housing components increased from 50.6% in 1995 to
52.7% in 1996. The decline in gross profit as a percent of sales was
partially offset by a decrease in the cost associated with physical inventory
count adjustments.
Selling, General, and Administrative Expense
--------------------------------------------
In 1996, SG&A decreased as a percent of net sales to 19.1% compared
with 20.0% of net sales in 1995. In 1996, Wickes focused substantial efforts on
better aligning its SG&A expenses to sales volumes and improving the
productivity of its existing sales staff in order to improve profitability.
As a result of Wickes' 1995 Plan and several cost reduction initiatives
implemented in the second half of 1995 and early 1996 Wickes was able to
reduce its total SG&A expense by 16.6%, which is proportionately greater than
the 12.8% total sales decline for the year.
Wickes experienced a decrease in salaries, wages and employee benefits
as a percent of sales by 0.5% from 1995 to 1996. On a same store basis, the
number of total employees at the average building center during 1996 was
reduced approximately 13% from 1995. In 1996 Wickes successfully recovered
$3.7 million in previous years' insurance costs. The recoveries associated
with workers compensation insurance reduced salaries, wages and employee
benefits by 0.2% of sales, and the balance of the recoveries reduced property
and casualty insurance, as a percent of sales, by 0.2%. Wickes also
experienced decreases from 1995 to 1996 as a percent of sales in postage,
communications, office supplies, and marketing expenses which were partially
offset by increased delivery costs.
In addition to the reductions in SG&A directly related to building
center closings, other cost reduction initiatives included a reduction in
vehicles and other equipment at continuing operations and various programs to
reduce costs associated with the corporate headquarters in Vernon Hills,
Illinois.
Depreciation, Goodwill and Trademark Amortization
-------------------------------------------------
Depreciation, goodwill and trademark amortization costs decreased $0.5
million in 1996 compared with 1995. The primary reasons for this decrease
were a program initiated in early 1996 to reduce excess vehicles and
equipment and the closing and sale of facilities in conjunction with the 1995
Plan.
29
<PAGE> 30
Provision for Doubtful Accounts
-------------------------------
Provision for doubtful accounts decreased to $1.1 million or 0.1% of
sales for 1996 from $6.5 million or 0.7% of sales for 1995. Much of this
decrease was attributable to improved credit policies at centers acquired since
1994 and a more selective customer base. In addition, Wickes significantly
increased its efforts to collect previously reserved accounts receivable.
The provision attributable to the Gerrity Lumber acquisition centers improved
significantly from 1995 to 1996.
Restructuring and Unusual Items
-------------------------------
After extensive review of the 1995 Plan, and changes in business
conditions in certain markets in which Wickes operates, Wickes made adjustments
to the 1995 Plan and incurred other one time costs resulting in a net $0.7
million charge to results of operations in the fourth quarter of 1996 for
restructuring and unusual items. These adjustments included (i) the
determination that three of the centers identified in the 1995 Plan for
closure will remain open, resulting in a $1.5 million credit to restructuring
expense, (ii) the extension of the 1995 plan to include the closing
(substantially completed by the end of 1996) of two building centers not
previously included, resulting in a $1.3 million charge for the write down of
assets and liabilities to their net realizable value and a $0.1 million
charge for severance and post-employment benefits, (iii) a $1.1 million
charge for impairment in the carrying value of real estate held for sale at
closed centers, and (iv) a $0.3 million credit with respect to the resolution
of a claim at below the reserved amount.
Other Operating Income
----------------------
Other operating income increased to $6.8 million in 1996 from $5.8
million in 1995. The increase was the result of an increase in gains reported
on the sale of closed facilities, excess vehicles and equipment of approximately
$1.9 million when compared with 1995. Wickes also reported a $0.6 million
gain as the result of the difference between insured replacement cost and
book value as a result of a fire and storm damage at several of Wickes'
building centers. These gains were partially offset by decreases in services
charges for overdue credit accounts of approximately $0.9 million and closed
center rental income and other miscellaneous revenues of $0.7 million.
Interest Expense
----------------
Interest expense decreased to $21.8 million in 1996 from $24.4 million
in 1995. This decrease was the result of a decrease in average outstanding debt
under Wickes revolving line of credit of $26.8 million partially offset by
an increase in the overall effective borrowing rate of 22 basis points. The
decrease in average outstanding debt was due primarily to cash provided by
operations, proceeds from the sale of additional common stock and the
proceeds from the sale of excess real estate and vehicles.
Equity in Loss of Affiliated Company
------------------------------------
During 1996, Wickes' equity in the losses of Riverside International
LLC was $3.2 million compared with equity in losses of $3.5 million during 1995.
See Note 1 of Notes to Consolidated Financial Statements included elsewhere
herein.
Provision for Income Taxes
--------------------------
In 1996, Wickes recorded current income tax expense of $1.0 million
compared with $1.4 million in 1995. The 1996 and 1995 current income tax
provisions consist of state and local tax liabilities.
30
<PAGE> 31
A deferred tax expense of $0.3 million was also recorded in 1996.
This expense results from temporary differences in the recognition of certain
items of revenue and expense for tax and financial reporting purposes. In
1995 a deferred tax benefit of $11.8 million was recorded primarily due to
the recording of a deferred tax asset as a result of the operating loss
experienced during 1995, in accordance with FAS 109. See Note 13 of Notes to
Consolidated Financial Statements included elsewhere herein.
Net Income
----------
Net income was $0.5 million in 1996, compared with a net loss of $15.6
million in 1995, an improvement of $16.1 million. The primary components of
this improvement include a decrease in SG&A expense of $32.3 million, a
decrease in restructuring and unusual items expense of $17.1 million, a
decrease in provision for doubtful accounts of $5.4 million, a decrease in
interest expense of $2.6 million, and an increase in other income of $1.0
million. These improvements were partially offset by a decrease in gross
profit of $31.3 million and an increase in the provision for income taxes of
$11.8 million.
Life Insurance Operations
- -------------------------
The Company's Consolidated Statements of Operations include the
operations of its former life insurance subsidiaries through June 6, 1996, the
date of the Circle Merger. The following table sets forth financial information
with respect to the Company's former life insurance operations through June 6,
1996:
<TABLE>
<CAPTION>
Years ended
-----------
(in thousands)
1996 1995
---- ----
<S> <C> <C>
Premiums and annuities $ 3,224 $ 8,298
Net investment income 5,027 14,492
Other income 83 453
Net investment gains 1,367 1,037
------- -------
Total income 9,701 24,280
Selling, general and administrative expenses 1,247 3,266
Interest expense 7 126
Benefits and losses 5,805 15,417
Policy acquisition expense 2,313 3,805
------ -------
Total expenses 9,372 22,614
------ -------
Net income $ 329 $ 1,666
====== =======
</TABLE>
Operating income after tax of $1,003,000 was generated for 1996;
however, this was adjusted to a net income amount of $329,000 by recording
additional amortization of deferred acquisition costs to reflect the net
economic benefit accrued pursuant to the terms of the Circle Merger
Agreement.
Parent Company and Other Subsidiaries
- -------------------------------------
The following discussion relates to the operations of the Parent Company
and its subsidiaries, other than Wickes and its former life insurance
subsidiaries (the "Parent Group").
31
<PAGE> 32
The Parent Group's non-interest operating expenses for 1997 increased
46% to $2,769,000 compared to $1,898,000 in 1996. The primary reasons for
the increase include approximately $673,000 of expenses relating to the
acquisition of certain operations that Riverside acquired from Wickes that
Wickes had determined to discontinue as a result of Wickes' plan to
streamline its operations and focus primarily on its core professional
builder business. The operations transferred include internet, telephony and
utilities marketing. Other increases to the Parent Group's non-interest
operating expenses include expenses that were no longer allocable to
Riverside's life insurance operations. Other increases include a reserve of
approximately $434,000 Riverside established in 1997 with respect to a
receivable from an affiliate of Mr. Wilson. This affiliate provides the
Company use of an airplane for its travel. During 1997, the Company's use
of this airplane was primarily by Wickes (see Note 15 of Notes to
Consolidated Financial Statements - "Related Party Transactions"). These
increases were offset by savings from the restructuring of the Wickes
Financial Service Centers, Inc. program. In addition, in 1996, Riverside
charged off certain deferred bank costs as a result of the Circle Merger.
The Parent Group's non-interest operating expenses for 1996 decreased
29% to $1,898,000 compared to $2,679,000 in 1995. The primary reason for the
decrease was savings made to the Wickes Financial Service Centers, Inc.
program in 1996. This savings was partially offset by non-recurring expenses
including bank debt costs amortized as a result of the Circle Merger, and
expenses that were no longer allowable to Riverside's life insurance
operations.
Interest expense for 1997, 1996, and 1995 was $3,108,000, $3,093,000,
and $3,280,000, respectively. In 1997, interest expense consisted of
$1,473,000 on the Parent Company's subordinated notes, $167,000 on the Parent
Company's other bank debt and $1,468,000 on the Parent Company's real estate
mortgage debt. In 1996, interest expense consisted of $1,449,000 on the
Parent Company's subordinated notes, $112,000 on the Parent Company's other
bank debt, $867,000 on the Parent Company's real estate mortgage debt,
$665,000 on a note to a bank repaid in June 1996, in connection with the
reorganization of Riverside's former life insurance subsidiaries. Interest
expense on the Parent Company's real estate debt will continue to decrease as
a result of real estate sales. In 1997, the principal balance on the
mortgage debt was reduced by $1.5 million.
Revenues of the Parent Group (excluding investment income) for 1997,
1996 and 1995 were approximately $630,000, $493,000, and $1,057,000,
respectively. The Parent Group's income primarily has consisted of non-
recurring items, such as settlement proceeds from legal proceedings;
therefore, comparisons between periods are not meaningful. Included in
other income for 1997 was $598,000 received in a settlement relating to the
Company's former property and casualty insurance operations. Revenues for
1996 included $200,000 received in a settlement relating to the Company's
former property and casualty insurance operations. Revenues for 1995
primarily consisted of $600,000 related to settlement of a disputed financing
proposal and other non-recurring items.
Revenues and expenses for 1998 are anticipated to increase significantly
as a result of the acquisition and expansion of the Parent Company's
internet, telephony and utilities marketing operations. The Company intends
to monitor carefully the progress of its internet, telephony and utilities
marketing operations and may expand or curtail any or all of them, depending
upon operating results achieved.
Real Estate Investments
- -----------------------
The Company's real estate investments consist of $9,664,000 in Georgia
properties, $4,592,000 in Florida properties and $73,000 in other states.
Included in the Company's net realized investment gains(losses) for
1997, 1996 and 1995 were net realized gains(losses) on real estate
investments of $897,000, $656,000 and $392,000, respectively.
32
<PAGE> 33
Discontinued Operations
- -----------------------
On December 1, 1997, the Company completed the sale of its mortgage
lending operations to an unrelated third party. The Company did not realize
any gain or loss from the transaction, but did agree to indemnify the
purchaser against losses on the construction loan portfolio that was
transferred. The Company currently has 250,000 shares of its Wickes common
stock pledged as collateral for this indemnification obligation. As the
construction loan portfolio decreases, the shares held as collateral will be
released. The Company believes that these indemnities will not have a
material adverse effect on the Company's financial position on results of
operations.
The following table sets forth comparative information concerning the
results of the Company's former mortgage lending operations.
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Revenues from loans $1,363 $ 368
Other income 3 -
------ ------
Total revenues 1,366 368
Selling, general & administrative expenses(1) 1,077 1,327
Interest expense 677 65
------ -------
Total expense 1,754 1,392
------ -------
Net loss $ (388) $(1,024)
====== =======
</TABLE>
(1) Net of reimbursements of $955,000 and $396,000 received during 1997 and
1996, respectively, by the Parent Company on behalf of its mortgage Lending
Operations, from Wickes.
On September 15, 1995, the Company completed the sale of its property
and casualty insurance operations, which had been discontinued in 1992. The
Company realized a gain upon disposal of these operations of $2.7 million,
including an additional payment received in 1996 of $.2 million for the
acquisition of certain tax benefits by the purchaser. Under terms of the
sale, the Company provided indemnification for certain losses on various
categories of liabilities. Terms of the indemnities provided by the Company
vary in regards to time limits and maximum amounts. The Company believes
that these indemnities will not have a material adverse effect on the
Company's financial position on results of operations.
The following table sets forth information concerning the results of the
Company's former property and casualty operations.
<TABLE>
<CAPTION>
Year ended December
-------------------
1995
----
(in thousands)
<S> <C>
Gross premiums written $ (87)
Net premiums earned (99)
Net incurred losses (170)
% of earned premium 172%
Policy acquisition & insurance fees 394
% of earned premium (398%)
Net loss from discontinued operations $(1,086)
</TABLE>
33
<PAGE> 34
Realized gains on sales of property and casualty insurance investments
included in discontinued operations were $31,000 in 1995.
Income Taxes
- ------------
The Company's effective income tax rate was 23% in 1997, 5% in 1996, and
14% in 1995. The current income tax provision consists of state and local
tax liabilities for Wickes. The low effective tax rate for 1996 is
attributable to the reduction in valuation allowance allowing previously
deferred tax benefits to be recognized currently. It is management's
determination that future profitability of Wickes and recognition of
potential gains on real estate sales will allow realization of the previously
recorded deferred tax assets. This determination is based on Wickes'
positive earnings growth from 1992 to 1994, and its expectations for the
future that operating income of Wickes will more likely than not be
sufficient to fully utilize these deferred tax assets. See Note 13 of Notes
to Consolidated Financial Statements included elsewhere herein.
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), consist
primarily of real estate sales and the Parent Company's internet, telephony
and utilities marketing operations. The Parent Company's internet, telephony
and utilities marketing operations are in the start-up phase and are expected
to be net users of cash at least through August of 1998. Also, 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.
On December 31, 1997, Riverside disposed of its investment in Circle
(see "Item 1. Business - Life Insurance Operations") for an aggregate of
approximately $5.4 million in cash. Of this amount: (i) approximately $1.2
million was utilized to repay in full the Parent Company's bank line of
credit and (ii) as of March 31, 1998, $1.4 million remains in pledge to
secure the Parent Company's $16 million real estate indebtedness to American
Founders. At March 31, 1998, after the payment of the regularly scheduled
semiannual interest on the Company's 13% subordinated notes due 1999 ("the
1999 Notes") and the remaining balance of Riverside's secured obligation to
a third party, the Parent Company had approximately $800,000 in cash on
hand.
The Parent Company believes that its cash on hand will not be sufficient
to support its operations and overhead and to service its indebtedness until
such time as the Parent Company's internet, telephony and utilities marketing
operations have begun to generate significant positive cash flow. Therefore,
the Parent Company will need to obtain significant additional funds through
asset sales or additional borrowings or other financing. The principal asset
that could be sold by the Parent Company would be its shares of Wickes common
stock.
34
<PAGE> 35
As discussed above, $1.4 million in cash, together with real estate and
1.4 million shares of Wickes common stock, are pledged to secure the Parent
Company's $16 million of real estate indebtedness. The amount of required
collateral for this indebtedness is adjusted quarterly, and cash collateral
will 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.
For a description of a $1.5 million demand bank line of credit obtained
by the Company on May 1, 1997 and repaid on December 31, 1997, see Note 10 of
Notes to Consolidated Financial Statements included elsewhere herein.
For a description of the modification by the Company of an existing
obligation to a third party in the approximate amount of $900,000 in June
1997, which the Company plans to repay in full on March 31, 1998, see Note 10
of Notes to Consolidated Financial Statements included elsewhere herein.
In late September and early October 1997, the Company sold an aggregate
of 64,875 shares of Wickes common stock to Kenneth M. Kirschner, Vice
Chairman, director of the Company, and an executive officer of Wickes, and
Frederick H. Schultz, a director of the Company. The aggregate purchase
price was $290,000, or $4.47 per share, which equaled the 30-day average
closing bid price for Wickes common stock on the NASDAQ National Stock Market
prior to the sales.
In the fourth quarter of 1997, J. Steven Wilson, the Company's Chairman,
President and Chief Executive Officer advanced $160,000 to the Company, which
at March 31, 1998 the Company had not repaid.
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.
During 1997, stockholders' equity decreased by a net of $6.0 million.
This decrease is primarily a result of Wickes' net loss and the Parent
Company's interest and operating expenses.
FORWARD-LOOKING INFORMATION CAUTIONARY STATEMENT. The discussion above
of the Company's future liquidity needs and sufficiency constitutes Forward-
Looking Information within the meaning of the Private Securities Litigation
Reform Act of 1995 and is inherently subject to uncertainty as a result of a
number of risk factors including, among other things: (i) the Company's
ability to achieve the level of real estate sales required to meet scheduled
real estate debt payments, (ii) the release of cash collateral from pledge
under the Company's real estate debt, which depends upon, among other things,
the level of real estate sales and values and the trading prices of Wickes
common stock, (iii) the level of positive or negative cash flow generated by
the Parent Company's internet, telephony and utilities marketing operations,
(iv) the Company's ability to borrow, which may depend upon, among other
things, the trading price of Wickes common stock and the Parent Company's
internet, telephony and utilities marketing operations and (v) the ability of
the Company to raise funds through sales of Wickes common stock. Future real
estate sales depend upon a number of factors, including interest rates,
general economic conditions, and conditions in the commercial real estate
markets in Atlanta, Georgia, and Jacksonville, Florida. The Company's
ability to sell Wickes common stock would depend upon, among other things,
the trading price of Wickes common stock and, in light of the relatively low
trading volume for Wickes common stock, possibly the Company's ability to
find a buyer or buyers for Wickes common stock in a private transaction or
otherwise.
35
<PAGE> 36
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.
In 1997, net cash used in operating activities amounted to $24.6
million. This compares with cash provided by operating activities of $18.7
million in 1996 and $15.9 million in 1995. The change of $43.3 million is
primarily the result of increases in accounts and notes receivable,
inventory, and other assets, as well as decreased earnings after adjustment
for non-cash expenses. A smaller decrease in accounts payable and accrued
liabilities than the decrease recorded in 1996 helped to offset a portion of
the change in net cash used in operating activities. The primary sources of
cash for operating activities were borrowings on Wickes' revolving credit
agreement and proceeds from the sales of property, plant, and equipment.
Wickes also increased its capital expenditures in 1997 to $7.8 million from
$2.9 million in 1996.
Accounts receivable at the end of 1997 were $10.6 million, or 14.9%,
higher than at year end 1996 as a result of an increase in accounts with
extended terms, a reduction in allowance for doubtful accounts, and a
receivable established for a property insurance loss. Inventory at the end
of December 1997 was $2.0 million higher than at the end of 1996, primarily
as a result of an increase in the number of sales and distribution centers.
The amount of Wickes' accounts payable on any balance sheet date may vary
from the average accounts payable throughout the period due to the timing of
payments and will tend to increase or decrease in conjunction with an
increase or decrease in inventory. Wickes' use of funds of approximately
$3.4 million in other assets was primarily the purchase of $2.2 million in
rental equipment to establish rental programs at 25 of its sales and
distribution facilities and $0.9 million in additional transaction costs to
amend and restate Wickes' revolving credit agreement on April 11, 1997.
In 1997 Wickes completed two significant sale leaseback transactions
that resulted in net proceeds of approximately $9.6 million, one of these
being Wickes' headquarters in Vernon Hills, Illinois. The $0.7 million gain
on the sale of the headquarters facility is being amortized over the term of
the lease.
Wickes' capital expenditures consist primarily of the construction of
facilities for new and existing operations, the remodeling of sales and
distribution facilities and component manufacturing facilities, and the
purchase of equipment and management information systems. Wickes may also
from time to time make expenditures to establish or acquire operations to
expand or complement its existing operations, especially in its major
markets. Wickes made $7.8 million in capital expenditures in 1997.
Approximately $4.1 million was expended on capital improvements for new
operations, showroom Resets and expansion of manufacturing operations.
Wickes expects to spend between $4 million and $5 million in 1998. These
expenditures are expected to be funded by Wickes' borrowings and its
internally generated cash flow. At December 27, 1997, there were no material
commitments for future capital expenditures.
Wickes maintained excess availability under its revolving credit
facility throughout 1997. Wickes' receivables and inventory typically
increase in the second and third quarters of the year due to higher sales in
the peak building season. In the first and second quarters of each year,
Wickes typically reaches its peak utilization of its revolving credit
facility because of the inventory build-up needed for the peak building
season. At all times during 1997 Wickes was in full compliance with all of
the requirements contained in its revolving credit agreement. Availability
under the revolving credit facility is limited, in the aggregate, to the
lesser of $130 million and a "borrowing base amount", which is the sum of (i)
between 80% and 85% of eligible accounts receivable plus (ii) between 50% and
60% of eligible inventory. At February 28, 1998, Wickes had outstanding
borrowings of $95.4 million and unused availability of $17.4 million under
its revolving credit facility.
36
<PAGE> 37
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 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. On December 24, 1997, the second amended and restated revolving
credit agreement was amended to incorporate, among other things, a reduction
in the fixed charge and net worth levels for the fourth quarter of 1997 and
first quarter of 1998. A third amendment which, among other things, further
reduced the fixed charge ratio requirement for the first three quarters of
1998 and allowed Wickes to proceed with its 1998 Restructuring plan, was
completed in March of 1998. See Note 16 of Notes to Consolidated Financial
Statements included elsewhere herein. Wickes currently has excess
availability under its revolving credit facility and anticipates that funds
provided by operations and under this facility will be adequate for Wickes'
future needs.
On June 16, 1997 Wickes entered into an interest rate swap agreement
which effectively fixed the interest rate at 8.11% (subject to adjustments in
certain circumstances), for three years, on $40 million of Wickes' borrowings
under its floating rate revolving line of credit. This interest rate swap is
operative while the 30 day LIBOR borrowing rate remains below 6.7%. At
November 3, 1997 the 30 day LIBOR borrowing rate was 5.65%.
The revolving credit facility and the trust indenture relating to
Wickes' 11-5/8% Senior Subordinated Notes contain certain covenants and
restrictions. Among other things, the revolving credit facility prohibits
non-stock dividends, certain investments and other "restricted payments" by
Wickes. The trust indenture generally restricts non-stock dividends and
other "restricted payments" by Wickes to 50% of "cumulative consolidated net
income", or if cumulative consolidated net income is a loss, minus 100% of
such loss, of Wickes earned subsequent to October 22, 1993, plus the proceeds
of the sale of certain equity securities after such date. In addition, the
trust indenture prohibits non-stock dividends and limits other restricted
payments while (as at present) Wickes' fixed charge coverage ratio is less
than or equal to 2.0.
Recently Issued Accounting Pronouncements
- -----------------------------------------
Statement of Financial Accounting Standards No. 128, "Earnings Per
Share", revises the disclosure requirements and increases the comparability
of earnings per share data on an international basis by simplifying the
existing computational guidelines in APB Opinion No. 15. The pronouncement
requires dual presentation of basic and diluted earnings per share on the
Company's Statements of Operations and is effective for the Company's fiscal
year ending December 27, 1997. The adoption of this statement did not have
a material impact on the Company's financial statements.
Statement of Financial Accounting Standards No. 129, "Disclosures of
Information About Capital Structure", establishes standards for disclosing
information about an entity's capital structure. The new accounting
principle is effective for the Company's fiscal year ending December 27,
1997. The adoption of this statement did not have a material impact on the
Company's financial statements.
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income", establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. The term comprehensive income is defined as the change
in a business' equity. Comprehensive income includes net income, as well as
other components (revenues, expenses, gains and losses) that, under generally
accepted accounting principles, are excluded from net income, but effect
equity. The statement is effective for fiscal years beginning after December
15, 1997. The Company believes adoption of the statement will not have a
material effect on its financial statements.
37
<PAGE> 38
Statement of Financial Accounting Standards No. 131, "Disclosure About
Segments of an Enterprise and Related Information", changes SFAS 14 by
requiring a new framework for segment reporting and includes the disclosure
of financial information related to each segment. The statement is effective
for fiscal years beginning after December 15, 1997.
Year 2000
- ---------
In response to the Year 2000 issue, the Company initiated a project in
early 1997 to identify, evaluate and implement changes to its existing
computerized business systems. The Company is addressing the issue through
a combination of modifications to existing programs and conversions to Year
2000 compliant software. In addition, The Company is communicating with its
customers, suppliers, and other service providers to determine whether they
are actively involved in projects to ensure that their products and business
systems will be Year 2000 compliant. If modifications and conversions by the
Company and those it conducts business with are not made in a timely manner,
the Year 2000 issue may have a material adverse effect on The Company's
business, financial condition, and results of operations. The total cost
associated with the required modifications is not expected to be material to
The Company's consolidated results of operations and financial position, and
is being expensed as incurred.
Item 7.A Quantitative and Quantitative Disclosures About Market Risk.
- ----------------------------------------------------------------------
Not applicable.
Item 8. Financial Statements and Supplementary Data.
- ------------------------------------------------------
Financial statements of the Company are set forth herein beginning on
page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and
- -------------------------------------------------------------------------
Financial Disclosure.
---------------------
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
- -------------------------------------------------------------
Information required by this Item is incorporated herein by reference
from the definitive proxy statement to be filed in connection with the Company's
Annual Meeting of Stockholders scheduled to be held on May 18, 1998.
Item 11. Executive Compensation.
- ---------------------------------
Information required by this Item is incorporated herein by reference
from the definitive proxy statement to be filed in connection with the Company's
Annual Meeting of Stockholders scheduled to be held on May 18, 1998.
38
<PAGE> 39
Item 12. Security Ownership of Certain Beneficial Owners and Management.
- ------------------------------------------------------------------------
Information required by this Item is incorporated herein by reference
from the definitive proxy statement to be filed in connection with the Company's
Annual Meeting of Stockholders scheduled to be held on May 18, 1998.
Item 13. Certain Relationships and Related Transactions.
- ---------------------------------------------------------
Information required by this Item is incorporated herein by reference
from the definitive proxy statement to be filed in connection with the Company's
Annual Meeting of Stockholders scheduled to be held on May 18, 1998.
39
<PAGE> 40
PART IV
Item 14. Exhibits, Financial Statement
Schedules, and Reports on Form
8-K.
(a) List of Financial Statements and Schedules Filed as a Part of this
Report:
(1) Financial Statements:
<TABLE>
<CAPTION>
Riverside Group, Inc. and Subsidiaries: Page No.
--------
<S> <C>
Report of Independent Accountants F - 1
Consolidated Balance Sheets - December 31,
1997 and 1996 F - 2
Consolidated Statements of Operations
for the years ended December 31, 1997,
1996 and 1995 F - 3
Consolidated Statement of Stockholders'
Equity for the years ended December 31,
1997, 1996 and 1995 F - 4
Consolidated Statements of Cash Flows for
the years ended December 31, 1997, 1996
and 1995 F - 5
Notes to Consolidated Financial Statements F - 6
(2) Financial Statement Schedules:
Riverside Group, Inc. and Subsidiaries:
Report of Independent Accountants S - 1
Schedule II - Valuation and Qualifying Accounts S - 2
Schedule III - Condensed Financial Information of Registrant S - 3
(b) Reports on Form 8-K - None
Exhibits
</TABLE>
3.1 (a)* Restated Articles of Incorporation, as amended to date
(previously filed as Exhibit 3.01 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1994).
40
<PAGE> 41
3.2* Amended and Restated Bylaws, as amended to date (previously
filed as Exhibit 3.02 to the Company's Annual Report on Form
10-K for the year ended December 31, 1994).
4.1* (a)* Second Amended and Restated Credit Agreement dated April 17,
among Wickes as Borrower, each of the financial institutions
signatory thereto, BT Commercial Corporation as Agent for Nations
Bank of Georgia N.A. as Syndication Agent, and Bankers Trust
Company, as Issuing Bank (incorporated by reference to Exhibit 4.1
to the Quarterly Report on Form 10-Q filed by Wickes for the
period ended in March 1997).
(b)* First Amendment to Second Amended and Restated Credit Agreement
(incorporated by reference to Exhibit 4.1 to the Quarterly Report on
Form 10-Q filed by Wickes for the period ended in June 1997).
(c)* Second Amendment to Second Amended and Restated Credit Agreement
(incorporated by reference too Exhibit 4.1 to the Annual Report on Form
10-K filed by Wickes for its fiscal year ended December 27, 1997(the
"Wickes 1997 Form 10-K")).
(d)* Third Amendment to Credit Agreement (incorporated by reference to
Exhibit 4.1 to the Wickes 1997 Form 10-K).
4.2* Indenture dated as of October 15, 1993 between Wickes
and Marine Midland Bank, N.A. (incorporated by reference to
Exhibit 4.2 to the Annual Report Form 10-K filed by Wickes
Inc. for its fiscal year ended December 30, 1993).
10.1 (a)** Non-Qualified Stock Option Plan.
(b)** Form of Non-Qualified Stock Option Agreement.
10.2* Agreement made as of September 20, 1993, among Riverside
Group, Inc., American Financial Acquisition Corporation,
Wickes Inc. and Bankers Trust (Delaware)(previously filed as
Exhibit 10.19 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1993).
10.3* Trademark Agreement, dated April 29, 1988, between Wickes
Companies, Inc. and Wickes Inc. (incorporated by reference to
Exhibit 10.2 to the Registration Statement on Form S-1
(Commission File No. 2-67334) filed by Wickes Inc. (the
"Wickes Form S-1")).
10.4* Agreement dated July 21, 1993, between Collins & Aikman
Group, Inc. and Wickes Inc. (incorporated by reference to
Exhibit 10.12 to the Wickes Form S-1).
10.5* Merger Agreement dated March 8, 1996, between American
Financial Acquisition Corporation and Circle Investors, Inc.
(incorporated by reference to Exhibit 10.11 of the Company's
Annual Report on Form 10-K for the year ended December 31, 1995).
10.6 (a)* Amended and Restated 1993 Long-Term Incentive Plan of
Wickes Inc. (incorporated by reference to Exhibit 10.8 to the
Annual Report on Form 10-K filed by Wickes Inc. for the year
ended December 31, 1994 (the "Wickes 1994 Form 10-K" ))
41
<PAGE> 42
(b)* Amendment No. 1 (incorporated by reference to Exhibit 10.8(b)
to the Annual Report on Form 10-K filed by Wickes Inc. for the year
ended December 29, 1996).
(c)* Form of Option Agreement (incorporated by reference to Exhibit
10.22 to the Wickes Form S-1).
(d)* Form of Option Agreement (incorporated by reference to Exhibit
10.8 to the Wickes 1994 Form 10-K).
(e)* Form of Long-Term Stock Option Agreement (incorporated by
reference to Exhibit 10.8 to the Wickes 1994 Form 10-K).
(f)* Form of Long-term Performance Bonus Agreement (incorporated by
reference to Exhibit 10.8 to the Wickes 1994 Form 10-K).
(g)* Amendment No. 2. (incorporated by reference to Exhibit 10.4(g)
to the Wickes 1997 Form 10-k).
(h)* Form of Option Agreement. (incorporated by reference to Exhibit
10.4(h) to the Wickes 1997 Form 10-K).
10.8 (a)* Amended and Restated 1993 Director Incentive Plan of Wickes
(incorporated by reference to Exhibit 10.03 to the Quarterly Report on
Form 10-Q filed by Wickes for the period ending in March 26, 1994).
(b)* Form of Option Agreement (incorporated by reference to Exhibit
10.24 to the Form S-1).
10.9* Special Severance and Stay Incentive Bonus Plan (incorporated by
reference to Exhibit 10.7 to the Wickes 1997 Form 10-K).
10.10 (a)* Agreement dated November 4, 1997 between the Registrant and
Wickes Inc. (incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the period ended
September 30, 1997).
(b)* Agreement and Closing Agreement to Agreement dated November 4,
1997 between the Registrant and Wickes (incorporated by
reference to Exhibit 10.9(b) to the Wickes Inc. 1997 Form 10-K).
21.01** Subsidiaries of the Company.
23.01** Consent of Coopers & Lybrand L.L.P.
27.01** Financial Data Schedule (S.E.C. use only).
*Incorporated by reference.
**filed herewith
42
<PAGE> 43
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.
/s/ J. Steven Wilson
---------------------------
J. Steven Wilson
Chairman of the Board,
President and
Chief Executive Officer
Dated: March 31, 1998
Pursuant to the requirements of the Securities Exchange 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:
/s/ J. Steven Wilson /s/Edward M. Carey, Sr.
- --------------------------- ---------------------------
J. Steven Wilson Edward M. Carey, Sr.
Principal Executive Officer Director, March 31, 1998
and Director, March 31, 1998
/s/ Frederick H. Schultz /s/ Kenneth M. Kirschner
- --------------------------- ---------------------------
Frederick H. Schultz Kenneth M. Kirschner
Director, March 31, 1998 Director, March 31, 1998
/s/ C. Herman Terry /s/ Varina M. Steuert
- --------------------------- ---------------------------
C. Herman Terry Varina M. Steuert
Director, March 31, 1998 Director, March 31, 1998
/s/ Catherine J. Gray
----------------------------
Catherine J. Gray
Senior Vice President
(Principal Accounting and
Financial Officer), March 31, 1998
March 31, 1998
43
<PAGE> F-1
Report of Independent Accountants
To the Board of Directors and Stockholders,
Riverside Group, Inc.
We have audited the accompanying consolidated balance sheet of Riverside
Group, Inc. and subsidiaries (the "Company") as of December 31, 1997 and 1996,
and the related consolidated statements of operations, common stockholders
equity, and cash flows for each of the three years in the period ended
December 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Riverside Group, Inc. and subsidiaries as of December 31, 1997 and 1996,
and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1997 in conformity
with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Jacksonville, Florida
March 31, 1998
F-1
<PAGE> F-2
Riverside Group, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except per share data)
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
------------ ------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,154 $ 3,100
Notes receivable 3,534 399
Accounts receivable, less allowance for doubtful
accounts of $4,206 in 1997 and $4,318 in 1996 81,968 71,315
Inventory 102,706 100,672
Deferred tax asset 8,955 10,331
Prepaid expenses 1,250 971
----------- ------------
Total current assets 201,567 186,788
Investment in real estate 14,329 16,854
Investment in Circle Investors, Inc. -- 5,345
Property, plant and equipment, net 46,792 50,245
Trademark (net of accumulated amortization of $ 10,274 in 1997
and $10,052 in 1996) 6,745 6,948
Deferred tax asset,net 20,361 18,831
Excess of cost over fair value of assets acquired 15,684 16,463
Net assets (liabilities) of discontinued operations (34) 245
Other assets (net of accumulated amortization of
$8,718 in 1997 and $6,972 in 1996) 8,427 8,095
------------ ------------
Total assets $ 313,871 $ 309,814
============ ============
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 702 $ 953
Accounts payable 41,629 41,301
Income tax payable 25 25
Accrued liabilities 23,111 27,909
----------- -----------
Total current liabilities 65,467 70,188
Long-term debt, less current maturities 202,686 186,142
Mortgage debt 16,038 17,416
Other long-term liabilities 3,084 2,985
----------- -----------
Total liabilities 287,275 276,731
Minority interest 11,976 12,308
Commitments and contigencies (Note 11)
Common stockholders' equity :
Common stock, $.10 par value; 20,000,000 shares authorized; 529 530
issued and oustanding, 5,287,123 in 1997 and 5,296,123 in 1996
Additional paid in capital 16,783 16,728
Retained earnings(deficit) (2,692) 3,517
----------- -----------
Total common stockholders' equity 14,620 20,775
----------- -----------
Total liabilities and common stockholders' equity $ 313,871 $ 309,814
=========== ===========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
F-2
<PAGE> F-3
Riverside Group, Inc. and Subsidiaries
Consolidated Statement of Operations
(in thousands except per share amounts)
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Sales and service revenues $ 884,082 $ 467,254 $ --
Insurance premiums and annuity considerations -- 3,224 8,298
Net investment income (loss) (31) 6,325 14,492
Net realized investment gains (losses) 897 1,672 (234)
Other operating income 11,297 4,837 1,513
---------- ---------- ----------
896,245 483,312 24,069
---------- ---------- ----------
Costs and expenses:
Cost of sales 681,056 363,930 --
Provision for doubtful accounts 2,148 3,523 --
Depreciation, goodwill and trademark amortization 5,613 2,830 --
Loss on reorganization of life insurance subsidiaries -- 124 10,972
Restructuring and unusual items (559) 745 --
Selling, general and administrative expenses 187,524 84,428 5,221
Interest expense 24,525 13,678 3,280
Policyholder benefits -- 5,805 15,417
Policy acquistion expenses -- 2,026 3,085
---------- ---------- ----------
900,307 477,089 37,975
---------- ---------- ----------
Earnings(loss) before income taxes, equity in related parties,
and minority interest (4,062) 6,223 (13,906)
Current income tax expense 1,099 259 --
Deferred income tax expense (benefit) (153) 61 (1,910)
Equity in losses of Wickes Inc. -- 1,714 5,849
Equity in losses of related parties 1,516 1,253 --
Minority interest, net of income taxes (703) 2,318 --
---------- ---------- ----------
Earnings (loss) before discontinued operations (5,821) 618 (17,845)
Discontinued operations:
Loss from operations of discontinued property and
casualty insurance company, net of income taxes -- -- (1,086)
Gain on disposal of discontinued property and
casualty insurance company, net of income taxes -- -- 2,731
Loss from operations of discontinued mortgage
lending operations, net of income taxes (388) (1,024) --
---------- ---------- ----------
Net earnings (loss) $ (,6209) $ (406) $ (16,200)
Basic and diluted earnings (loss) per share:
Earnings (loss) from continuing operations $ (1.12) $ 0.12 $ (3.38)
Net gain (loss) from discontinued operations (0.07) (0.20) 0.31
----------- ---------- ----------
Earnings (loss) per share $ (1.19) $ (0.08) $ (3.07)
=========== ========== ==========
Weighted average number of common stock
used in computing earnings per share 5,193,970 5,286,316 5,284,280
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-3
<PAGE> F-4
Riverside Group, Inc. and Subsidiaries
Consolidated Statement of Common Stockholders' Equity
(in thousands)
<TABLE>
<CAPTION>
Unrealized Total
Additional Investment Common
Common Paid-In Retained Appreciation Stockholders'
Stock Capital Earnings (Depreciation) Equity
------- ---------- --------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994 $ 547 $ 18,175 $ 20,123 $ (9,742) $ 29,103
Net loss -- -- (16,200) -- (16,200)
Purchase and retirement of 201,458 shares of
common stock, at cost (20) (1,148) -- -- (1,168)
Issuance of 46,800 share of common stock 4 152 -- -- 156
Cost of ESOP shares released -- 30 -- -- 30
Change in unrealized investment appreciation
of fixed maturities and equity securities -- -- -- 14,135 14,135
--------- --------- -------- ----------- -----------
Balance, December 31, 1995 531 17,209 3,923 4,393 26,056
Net loss (406) (406)
Purchase and retirement of 15,000 shares of
common stock, at cost (1) (44) -- -- (45)
Cost of ESOP shares released -- 93 -- -- 93
Change in unrealized investment appreciation
of fixed maturities and equity securities -- -- -- (4,393) (4.393)
Dividend paid ($.10 per common share) -- (530) -- -- (530)
--------- --------- --------- ----------- -----------
Balance, December 31, 1996 530 16,728 3,517 0 20,775
Net loss (6,209) (6,209)
Purchase and retirement of 9,000 shares of
common stock, at cost (1) (17) -- -- (18)
Cost of ESOP shares released -- 72 -- -- 72
--------- --------- ---------- ----------- ----------
Balance, December 31, 1997 $ 529 $ 16,783 $ (2,692) $ 0 $ 14,620
========= ========= ========== =========== ==========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
F-4
<PAGE> F-5
Riverside Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------
Cash Flows from Operating Activities 1997 1996 1995
------------------------------------------------
<S> <C> <C> <C>
Net loss $ (6,209) $ (406) $ (16,200)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Intangible assets written off for life insurance reorganization -- -- 10,790
Gain on disposal of discontinued property and casualty
insurance operations -- -- (2,731)
Depreciation expense 4,433 2,303 1,348
Amortization expense 2,754 1,695 --
Net change in deferred acquistion costs -- 49 2,614
Provision for doubtful accounts 2,148 3,523 --
Loss on Life Insurance Reorganization -- 124 --
Gain on sale of fixed assets (6,156) (705) --
Net realized investment gains (897) (1,672) (234)
Provision for deferred income taxes (153) 300 (1,910)
Equity in losses of unconsolidated subsidiaries 1,516 2,967 5,849
Minority interest (703) 2,318 --
Interest on policyholders' funds -- 3,469 9,178
Change in other assets and liabilities:
(Increase)/decrease in accounts receivable (12,497) 12,802 --
(Increase)/decrease in notes receivable (3,135) -- --
(Increase)/decrease in inventory (2,034) 10,000 --
(Increase) /decrease in other assets (4,740) 1,988 --
Increase in deferred gain (670) -- --
Accrued investment income -- 197 962
Premiums receivable and unearned premiums -- 80 13
Increase (decrease) in accounts payable and accrued liabilities (3,745) (17,759) --
Reserve for unpaid claims, policy benefits and
recoverable on paid losses from reinsurers and others -- (504) (827)
Net liabilities of discontinued operations, other liabilities
and current income taxes 318 (2,583) (6,187)
--------- ---------- ----------
Net Cash Provided (Used In) Operating Activities (29,770) 18,186 2,665
Cash Flows from Investing Activities
Purchase of investments:
Property, plant and equipment (7,772) (949) --
Fixed maturities available for sale -- (36,867) (63,425)
Equity securities -- (8,602) (39)
Investment real estate (1,004) (905) (969)
Mortgage and policy loans -- (15,570) (7,104)
Short-term investments -- -- (368,933)
Securities of Wickes Inc. -- (10,000) (2,296)
Sale, maturity, and principal reductions of investments:
Property, plant and equipment 13,802 2,113 --
Fixed maturities available for sale -- 41,675 90,411
Equity securities -- 8,643 1,922
Investment real estate 4,407 2,539 14,386
Short-term investments -- -- 370,280
Mortgage and policy loans -- 7,800 7,672
Securities of Wickes, Inc. 290 -- --
Life Insurance Reorganization proceeds 5,315 35,000 --
Net assets of Life Insurance Reorganization -- (28,202) --
--------- --------- ----------
Net Cash Provided by (Used in) Investing Activities 15,038 (3,325) 41,905
Cash Flows from Financing Activities
Net borrowings(repayment) under revolving line of credit 16,732 (22,928) --
Repayment of debt (3,529) (21,264) (16,811)
Increase in borrowings 1,539 17,798 2,700
Purchase and retirement of treasury shares (18) (46) (1,168)
Issuance of common stock 62 -- 156
Dividend paid to stockholders -- (530) --
Deposits of policyholders' funds -- 192 586
Withdrawal of policyholders' funds -- (8,665) (29,964)
--------- ---------- -----------
Net Cash Provided by (Used In) Financing Activities 14,786 (35,443) (44,501)
Net Decrease in Cash and Equivalents 54 (20,582) 69
Cash and equivalents at beginning of period 3,100 21,100 189
Wickes Inc. Cash Balance -- 2,582 --
--------- ---------- ----------
Cash and equivalents at end of period $ 3,154 $ 3,100 $ 258
========= ========== ==========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
F-5
<PAGE> F-6
RIVERSIDE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1997, 1996 and 1995
1. Organization and Significant Accounting Principles
- -------------------------------------------------------
ORGANIZATION
Riverside Group, Inc., a Florida corporation formed in 1965 ("Riverside" also
"Parent Company"), is a holding company engaged through its 51%-owned
subsidiary, Wickes Inc. ("Wickes"), in the supply and distribution of
building materials. Unless the context indicates otherwise, the term
"Company" as used herein refers to Riverside and its subsidiaries.
The consolidated financial statements present the results of operations,
financial position, and cash flows of Riverside and all of its wholly-owned
and majority-owned subsidiaries. The Company's wholly-owned and majority-
owned subsidiaries include: Wickes Financial Services Center, Inc. ("WFSC");
and the parent's two principal insurance holding company subsidiaries,
American Financial Acquisition Corporation ("AFAC"), Dependable Insurance
Group, Inc. ("DIGI") and their subsidiaries. For a description of the
Company's accounting for its Wickes' subsidiary, (see Note 3,
"Acquisitions").
AFAC's principal wholly owned subsidiary include: American Founders Insurance
Company ("American Founders") through June 1996, when the Company completed
the Life Insurance Reorganization (see Note 4, "Reorganization of Life
Insurance Operations").
Dependable Group's subsidiaries (all of which are, or were during the periods
for which they are included, wholly-owned) are: (i) a mortgage lending
company, Wickes Mortgage Lending, Inc. ("WML"), from April 1996 through
December 1997 when it was sold (See Note 6,"Sale of Mortgage
Lending Operations") and (ii) a stock property and casualty insurance
company, Dependable Insurance Company, Inc. ("Dependable"), through September
1995 when it was sold (see Note 5, "Divestiture of Property and Casualty
Insurance Operations").
SALE OF MORTGAGE LENDING OPERATIONS
The Company has included the operations of WML as discontinued operations for
all periods presented in the consolidated statements of operations.
DIVESTITURE OF PROPERTY AND CASUALTY INSURANCE OPERATIONS
The Company has included the operations of Dependable as discontinued operations
for all periods presented in the consolidated statements of operations.
F-6
<PAGE> F-7
BASIS OF FINANCIAL STATEMENT PRESENTATION
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles ("GAAP"). All
significant intercompany accounts and transactions have been eliminated.
FISCAL YEAR
The Company's fiscal year ends on the last day of the month in December.
Although Wickes' fiscal year ends on the last Saturday in December, the
Company believes timing differences are insignificant.
ACCOUNTS RECEIVABLE
The Company extends credit primarily to qualified contractors. The accounts
receivable balances exclude consumer receivables, as such receivables are
sold on a non-recourse basis. The remaining accounts and notes receivable
represent credit extended to professional contractors and professional repair
and remodelers, generally on a non-collateralized basis.
INVENTORY
Inventory consists principally of finished goods. The Company uses the
first-in, first-out ("FIFO") method for valuing its inventory. Inventory is
valued at the lower cost of cost or market, but not in excess of net
realizable values.
PROPERTY, PLANT AND EQUIPMENT
Property, plant, and equipment are stated at cost and are depreciated using
the straight-line method. Estimated useful lives range from 15 to 39 years
for buildings and leasehold improvements. Machinery and equipment useful
lives range from three to six years. Expenditures for maintenance and
repairs are charged to operations as incurred. Gains and losses from
dispositions of property, plant and equipment are included in the Company's
results of operations as other operating income. During 1997 the Company
disposed of property and equipment for a net gain of $6,156,000, of which
$5,989,000 was from the sale of excess properties.
RENTAL EQUIPMENT
Rental equipment consists of hand tools and power equipment held for rental.
This equipment is depreciated under the straight line method over a 5-to-10
year life.
OTHER ASSETS
Other assets consists primarily of deferred financing costs which are
amortized over the expected terms of the related debt. Also included in other
assets is approximately $1.5 million cash that was held as collateral for
certain real estate properties (see Note 10. "Long-Term Debt").
TRADEMARK
The Company is amortizing Wickes' "Flying W" trademark over its useful life
of 40 years.
F-7
<PAGE> F-8
INVESTMENT IN REAL ESTATE
Investments in real estate are carried at the lower of cost or appraised
value. Foreclosed property is valued at the lower of the carrying amount or
fair market value. The Company s investment in real estate primarily
consists of real estate purchased from American Founders, in connection with
the Life Insurance Reorganization (see Note 4. "Reorganization of Life
Insurance Operations"). For transactions between companies under common
control, the Company records purchases at the lower of historical carryover
cost or fair value.
PARTIALLY-OWNED COMPANIES
Investments in certain partially-owned companies are recorded using the
equity method if the Company has significant influence over the investee's
operations and the Company's ownership percentage is 50% or less. The
Company accounted for its investment in Circle through December 30, 1997 on
the equity method (see Note 4. "Reorganization of Life Insurance Operations").
In addition, the Company accounted for its investment in Wickes through June
30, 1996, on the equity method (see Note 3. "Acquisitions - Investment in
Wickes Inc.").
The Company's investment in an international operation is recorded under the
equity method. The Company's share of losses is reflected as equity in loss
of affiliated company on the Consolidated Statements of Operations. As of
December 31, 1997 the Company's investment has been reduced to zero.
INVESTMENTS
The investments of Riverside's former life insurance subsidiaries included
fixed maturities, equity securities, mortgage loans and policy loans. The
Company accounted for these investments through June 6, 1996 (see Note 4. "
Reorganization of Life Insurance Operations"), as described below:
The Company accounts for investments in debt and equity securities in
accordance with Statement of Financial Accounting Standards, ("SFAS") 115
"Accounting for Certain Investments in Debt and Equity Securities". Fixed
maturities for sale are securities held for indefinite periods of time and
may have been used as a part of the Company's asset/liability strategy or
sold in response to changes in interest rates, anticipated prepayments,
risk/reward characteristics, liquidity needs or similar economic factors.
These securities are carried at market value with the corresponding
unrealized appreciation or depreciation, net of deferred income taxes and
deferred policy acquisition costs, and are reflected in common stockholders'
equity. As of December 31, 1996, the Company did not actively manage a fixed
maturities portfolio. Equity securities available for sale include common
and nonredeemable preferred stocks and are carried at market values. Changes
in the market values of these securities, net of deferred income taxes and
deferred policy acquisition costs, are reflected as unrealized appreciation
or depreciation in common stockholders' equity.
Mortgage loans are carried at the lower of amortized cost or fair value.
Policy loans are carried at unpaid principal balances plus accrued interest.
When impairment of value of an investment in securities is considered other
than temporary,the decrease in value is reflected in the Consolidated Statement
of Operations as a realized investment loss, and a new cost basis is
established. Realized investment gains and losses are reported in
Consolidated Statement of Operations using the specific identification
method.
F-8
<PAGE> F-9
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity date of
three months or less at date of purchase to be cash equivalents. There was
$3,498,000 in cash at December 31, 1997, that was held as collateral for
certain real estate properties (see Note 10. "Long - Term Debt"), of this
amount $1,504,000 was reclassed to other assets.
ALLOWANCE FOR LOSSES
The Company provides for valuation allowances for estimated losses on real
estate when a significant and permanent decline in value occurs. In
providing valuation allowances, costs of holding real estate, including the
cost of capital, are considered. The Company's real estate is reviewed
periodically to determine potential problems at an early date.
ACCOUNTS PAYABLE
The Company includes outstanding checks in excess of in-transit cash in
accounts payable. There was $3,273,000 in outstanding checks in excess of
in-transit cash at December 31, 1997 and none at December 31, 1996.
EARNINGS PER SHARE
Basic & Diluted earnings per common share is calculated in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings Per Share".
Earnings per share are based upon the weighted average number of shares of
common stock outstanding 5,193,970 in 1997, 5,286,316 in 1996, and 5,284,280
shares in 1995. During 1997, the Company issued 50,000 stock options at an
exercise price of $3.00 per share. Since the Company had a net loss, the
options had an anti-diluted effect, and therefore, are excluded from the
calculation of diluted earnings per share.
During 1997, the Company purchased and retired 9,000 shares of its common
stock.
POST-RETIREMENT BENEFITS OTHER THAN PENSION
Wickes provides certain health and life insurance benefits for eligible
retirees and their dependents. The Company accounts for the costs of these
post-retirement benefits over the employees' working careers in accordance
with SFAS No. 106, "Employers' Accounting for Post-retirement Benefits Other
than Pensions."
POST-EMPLOYMENT BENEFITS
Wickes provides certain other post-employment benefits to qualified former or
inactive employees. The Company accounts for the costs of these post-
employment benefits in the period when it is probable that a benefit will be
provided in accordance with SFAS No. 112, "Employers' Accounting for Post-
employment Benefits".
INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes". Tax provisions and credits are recorded at
statutory rates for taxable items included in the consolidated statements of
operations regardless of the period for which such items are reported for tax
purposes. Deferred income taxes are recognized for temporary differences
between financial statement and income tax bases of assets and liabilities
for which income tax benefits will be realized in future years. Deferred tax
assets are reduced by a valuation allowance when the Company cannot make the
determination that it is more likely than not that some portion of the
related tax asset will be realized.
F-9
<PAGE> F-10
SFAS No. 109 requires that the current and non-current components of deferred
tax balances be reported separately based on the financial statement
classification of the related asset or liability which cause a temporary
difference between tax and financial reporting. Items which are not directly
related to an asset or liability that exists for financial reporting purposes
are classified as current or non-current based on the expected reversal date
of the temporary difference.
IMPAIRMENT OF LONG-LIVED ASSETS
In 1996 the Company adopted SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of". This
statement requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity, be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. As of December 31, 1997, no impairment
was recorded related to the Company's long-lived and intangible assets. The
Company periodically reviews excess property held for sale, and reports these
assets at the lower of their carrying amount or fair value less costs to
sell. (See Note 7. "Property, Plant and Equipment" ).
STOCK-BASED COMPENSATION
SFAS No. 123, "Accounting for Stock-Based Compensation," encourages, but does
not require companies to recognize compensation expense for grants of stock,
stock options, and other equity instruments to employees based on new fair
value accounting rules. Although expense recognition for employee stock
based compensation is not mandatory, the pronouncement requires companies
that choose not to adopt the new fair value accounting to disclose the pro
forma net income and earnings per share under the new method. The Company
elected not to adopt SFAS No. 123, and continued to apply the terms of
Accounting Principles Board Opinion No. 25. The Company determined the
impact on net income and earnings per share of the fair value based
accounting method would be immaterial. (see Note 12. "Employee Benefit Plans").
EXCESS OF COSTS OVER FAIR VALUE OF NET ASSETS ACQUIRED
The Company amortizes the excess of costs over fair value of net assets
("goodwill") acquired over 25 - 35 years. The Company evaluates the
recoverability of goodwill based upon expectations of non-discontinued cash
flows and income from operations for each subsidiary having a material
goodwill balance. Based upon this evaluation, the Company believes that no
impairment of goodwill exists at December 31, 1997.
As of December 31, 1997, goodwill consisted of $15.7 million, of which $8.1
million relates to Riverside's investment in Wickes and $7.6 million relates
to Wickes' investments in its subsidiaries and acquired operations. As part
of the Life Insurance Reorganization (see Note 4. "Reorganization of Life
Insurance Operations"), Riverside wrote off $10.8 million of goodwill related
to its life insurance operations. This charge is reflected under "Loss on
Reorganization of Life Subsidiaries" in the Consolidated Statement of
Operations.
FUTURE LIFE INSURANCE BENEFITS AND POLICYHOLDER CONTRACT DEPOSITS
The liability for future life insurance benefits on all traditional life
business has been computed by the net level premium method based on estimated
mortality, morbidity, withdrawal experience and future investment yields from
3% to 8.3%. For interest sensitive products, the liability for future
benefits is based on the accumulated fund balances. Interest rate
assumptions for traditional life business range from 7.8% to 9.0%. Mortality
F-10
<PAGE> F-11
is based on multiples of the 1965-70 Select and Ultimate Table modified to
reflect underwriting practices and recent industry mortality experience as it
relates to the 1965-70 Table. Withdrawals are based on the Company's
experience.
PREMIUMS
Life premiums on traditional life products are reported as earned when due.
Revenues on the Company's interest sensitive products, including annuities,
consist of expense, mortality and surrender charges assessed against the
policyholder. Benefits and expenses are associated with earned premiums so
as to result in recognition of profits over the premium paying period. This
association is accomplished by means of a provision for future policy benefit
reserves and the amortization of deferred policy acquisition costs. For
interest sensitive products, income is recognized over the term of the
contract in proportion to the risks and functions under the contract.
VALUE OF ACQUIRED INSURANCE IN FORCE
This asset represents a valuation of future profits of the acquired insurance
business in force as of the date of the acquisition of the Company's
insurance subsidiaries. The value of acquired traditional insurance in force
is being amortized over the premium paying period in proportion to the ratio
of anticipated annual premium revenue to the anticipated total premium
revenue. The value of acquired insurance in force for interest sensitive
products is amortized as a level percent of the present value of anticipated
gross profits from investment yields, including SFAS 115 adjustments,
mortality and surrender charges. A reconciliation of the balances for the
years ended December 31, 1996, and 1995, follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Beginning balance $ 18,415 $ 22,381
SFAS 115 adjustment (1) 819 (1,724)
Gross amortization (1,773) (3,362)
Interest credited at (5.4%) 414 1,120
Reorganization of Life Insurance
operations (17,875)(2) --
-------- --------
Ending balance $ 0 $ 18,415
======== ========
</TABLE>
(1) The SFAS 115 adjustment is made to reflect the effects that would have
been recognized had the unrealized gains or losses of securities available
for sale actually been realized.
(2) See Note 4. " Reorganization of Life Insurance Operations."
DEFERRED POLICY ACQUISITION COSTS
Costs which vary with and are primarily related to the acquisition of new
insurance business have been deferred to the extent such costs are
recoverable through future revenues. These costs include commissions and
sales costs, certain costs of policy issuance and underwriting, and premium
taxes.
Traditional life deferred policy acquisition costs are amortized over the
premium paying period in proportion to the ratio of anticipated annual
premium revenue to the anticipated total premium revenue. Costs deferred on
interest sensitive products are amortized as a level percent of the present
F-11
<PAGE> F-12
value of anticipated gross profits from investment yields, including SFAS 115
adjustments, mortality and surrender charges. As a result of the adoption of
SFAS 115, deferred policy acquisition costs decreased $54,000 in 1995.
Investment income is considered in the recoverability analysis of deferred
policy acquisition costs. Amounts amortized during 1996, and 1995, are
$159,000, and $372,000.
USES OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from the estimates reported.
Significant estimates made by the Company include accrued compensation
liability and medical claims, accrued post-employment and post-retirement
benefits, accrued restructuring charges, accrued environmental and valuation
allowances for accounts receivable, inventory and deferred tax assets.
Accrued compensation liability and medical claims involve the determination
of reserves for incurred but not reported claims. Accrued post-employment
and post-retirement benefits involve the use of actuarial assumptions,
including selection of discount rates (see Note 12. "Employee Benefits Plan").
Accrued restructuring charge involves an estimation of what the market will
bring and specific costs incurred relating to the liquidation of certain
Company assets using actual historical results (see Note 11. "Commitments and
Contingencies"). Accrued environmental costs involve estimated remediation
costs probable at facilities with underground storage tanks removed.
Determination of the valuation allowances for accounts receivable and
inventory involve assumptions related to current market conditions and
historical market trends. While the valuation allowance for the deferred tax
assets considers estimates of projected taxable income (see Note 13. "Income
Taxes"), it is reasonably possible that the Company's estimates for such
items could change in future.
FINANCIAL STATEMENT PRESENTATION AND RECLASSIFICATION
Certain reclassifications have been made to the 1996 presentation to conform
with the 1997 presentation.
STATEMENT OF CASH FLOWS SUPPLEMENTARY DISCLOSURE
The Company and its subsidiaries, exclusive of Wickes ("Parent Group") paid
$2,867,000, $5,129,000, $4,046,000, of interest (including interest paid by
the consolidated real estate partnerships) in 1997, 1996, and 1995,
respectively. Wickes paid $19,790,000, $20,372,000, and $22,823,000 of
interest in 1997, 1996, and 1995, respectively.
The Parent Group made no income tax payments in 1997, 1996, and 1995. Wickes
paid $1,344,000, $1,518,000, and $1,987,000 of income taxes in 1997, 1996,
and 1995, respectively.
Net cash used in discontinued operations activities total approximately
$1.2 million, $1.6 million, and $4.2 million 1997, 1996 and 1995,
respectively.
The Company paid a cash dividend on its common stock of $.10 per share, or an
aggregate of approximately $530,000 in 1996. The Company did not pay any
dividends on its common stock during 1997 and 1995.
F-12
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 128, "Earnings Per Share",
revises the disclosure requirements and increases the comparability of EPS
data on an international basis by simplifying the existing computational
guidelines in APB Opinion No. 15. The pronouncement will require dual
presentation of basic and diluted earnings per share on the Company's
Statement of Operations and is effective for the Company's fiscal year ended
December 31, 1997. The adoption of this statement did not have a material
impact on the Company's financial statements.
Statements of Financial Accounting Standards No. 129, "Disclosures of
Information About Capital Structure," establishes standards for disclosing
information about an entity s capital structure. The new accounting
principle is effective for the Company's fiscal year ending December 31,
1997. The adoption of this statement did not have a material impact on the
Company's financial statements.
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income," establishes standards for reporting and display of comprehensive
income and its components in a full set of general-purpose financial
statements. The term comprehensive income is defined as the change in a
business equity. Comprehensive income includes net income, as well as other
components (revenues, expenses, gains, and losses) that, under generally
accepted accounting principles, are excluded from net income, but affect
equity. The statement is effective for fiscal years beginning after December
15, 1997. The Company believes adoption of the statement will not have a
material effect on its financial statements.
Statement of Financial Accounting Standards No. 131, "Disclosure about
Segments of an Enterprise and Related Information," changes Statement of
Financial Accounting Standards No. 14 by requiring a new framework for
segment reporting and includes the disclosure of financial information
related to each segment. The statement is effective for fiscal years
beginning after December 15, 1997.
2. RESTRUCTURING AND UNUSUAL CHARGES
During the fourth quarter of 1995, Wickes committed to and began implementing
a restructuring plan ("1995 Plan") to improve return on assets by closing or
consolidating under-performing operating centers, decreasing the
corresponding overhead to support these building centers, and initiating
actions to strengthen its capital structure. The costs for closing these
building centers were based on management estimates of costs to exit these
markets and actual historical experience. Included in 1995 results of
operations is a $17.8 million charge, including $12.6 million in anticipated
losses on the disposition of closed center assets and liabilities and $2.2
million in severance and postemployment benefits, relating to the 1995 Plan
and other one time costs.
The major components of this charge include the write-down of assets to their
net realizable value, liabilities associated with closed building centers
held for sale, postemployment benefits to qualified former employees as a
result of the center closings, and other charges related to the strengthening
of Wickes capital structure. Also included was a charge for unusual
employment related claims expensed in the fourth quarter of 1995.
During 1996, Wickes continued executing the 1995 Plan, through the
consolidation and closing of 18 building centers and the improvement of its
overall capital structure through the issuance of new shares and the
modification of its bank revolving credit agreement (see Notes 7 and 9).
After extensive review of the 1995 Plan, and changes in business conditions
in certain markets in which Wickes operates, Wickes made adjustments to the
1995 Plan and incurred other one time costs resulting in a net $0.7 million
charge to results of operations in the fourth quarter of 1996 for
restructuring and unusual items. These adjustments included (i) the
determination that three of the centers identified in the 1995 Plan for
F-13
<PAGE> F-14
closure would remain open, resulting in a $1.5 million credit to
restructuring expense, (ii) the extension of the 1995 plan to include the
closing (substantially completed by the end of 1996) of two building centers
not previously included, resulting in a $1.3 million charge for the write
down of assets and liabilities to their net realizable value and a $0.1
million charge for severance and post-employment benefits, (iii) a $1.1
million charge for impairment in the carrying value of real estate held for
sale at closed centers, and (iv) a $0.3 million credit with respect to the
resolution of a claim below the reserved amount.
During 1997, Wickes recorded a $1.5 million restructuring charge for
discontinued programs and reductions in its corporate headquarters workforce.
This charge was offset by a $2.1 million reduction in accrued costs for
Wickes' 1995 Plan, which is now complete.
3. ACQUISITIONS
INVESTMENT IN WICKES INC.
In a series of transactions in 1993 in connection with Wickes' equity and
debt recapitalization plan (which included Wickes' initial public offering of
common stock), Riverside acquired a net 1,842,774 additional shares of Wickes
common stock and an option for 374,516 shares of Wickes common stock. The
aggregate purchase price for these shares and option was $5.9 million
including a $1.1 million promissory note. In August 1995, Riverside
exercised its option for an exercise price of $2.3 million and paid its
promissory note in full. After these transactions, Riverside owned 2,217,290
shares, or approximately 36% of Wickes' outstanding common stock. At
December 31, 1995, the Company's retained earnings included $4.0 million of
Wickes' undistributed earnings.
Riverside acquired two million newly-issued shares of Wickes' common stock on
June 20, 1996. These additional shares increased Riverside's ownership in
Wickes from 36% to 52% of Wickes' total common shares and from 39% to 55% of
Wickes' voting common shares. As a result, the accompanying consolidated
balance sheet includes Wickes at December 31, 1996 and the results of
operations and cash flows of Wickes are consolidated with the Company,
beginning July 1, 1996. Prior to July 1, 1996, the Company's balance sheet
and statements of operations and cash flows reflect Riverside's investment in
Wickes on the equity method. The acquisition of additional shares of Wickes
has been recorded as a step acquisition using the purchase method of
accounting. In September and October of 1997, Riverside sold approximately
65,000 shares of its Wickes common stock for $290,000. As a result of this
transaction, Riverside's ownership decreased to 51%. Included in the
Company's December 31, 1997 balance sheet is $8.1 million of goodwill related
to the acquisitions, which is being amortized over 25 years.
F-14
<PAGE> F-15
Summary audited financial information of Wickes for years 1997, 1996 and 1995
follows (in thousands):
<TABLE>
<CAPTION>
Years Ended December 27, 1997, December 28,
-------------------------------------------
1996 and December 30, 1995
--------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Operating Statement Data:
Net sales $884,082 $848,535 $972,612
Gross profit 203,026 189,463 220,812
Net income (loss) $ (1,560) $ 509 $(15,599)(1)
Balance Sheet Data:
Current assets $197,974 $185,061 $219,475
Total assets 283,352 272,842 302,515
Current liabilities 63,515 68,290 79,853
Long-term debt 193,061 176,376 205,221
Other long-term liabilities 2,775 2,677 2,312
Common stockholders equity $ 24,001 $ 25,499 $ 15,129
</TABLE>
(1 ) Includes restructuring charges of $10.7 million, net of income tax
benefits of $7.1 million. Income tax benefits include $2.1 million
related to the reduction in the deferred income tax valuation allowance
established in a prior year.
The following unaudited proforma summary presents information as if the 1996
acquisition of additional shares had occurred on January 1, 1995. The
proforma information is for informational purposes only and is based on
historical information and does not necessarily reflect the actual results
that would have occurred (in thousands, except per share data):
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
----------------- -----------------
<S> <C> <C>
Proforma Consolidated Operating Statement:
Net sales $848,535 $972,612
Gross profit 189,463 220,812
Net income(loss) (623) (18,724)
Net income(loss) per common share (.12) (3.54)
</TABLE>
WICKES' ACQUISITIONS
All acquisitions have been accounted for as purchases. Operations of the
companies and businesses acquired have been included in the accompanying
consolidated financial statements from their respective dates of acquisition.
The excess of the purchase price over fair value of the net assets acquired
is included in goodwill. The fair market value of the assets acquired in
1995 was approximately $12.4 million. Wickes had no acquisitions in 1997 or
1996.
During 1995 Wickes acquired five building material centers for a total cost
of $11.8 million, $8.1 million in cash and $3.7 million in liabilities
assumed. An additional $0.6 million was recorded for the 1994 Gerrity
acquisition. The cost of the acquisitions have been allocated on the basis
of the fair market value of the assets acquired and the liabilities assumed.
This allocation resulted in goodwill for one of the acquired businesses which
is being amortized over a 30-year period on a straight line basis.
4. REORGANIZATION OF LIFE INSURANCE OPERATIONS
On June 6, 1996, Riverside completed the reorganization of its life insurance
operations with Circle Investors, Inc. ("Circle"), a privately held company
F-15
<PAGE> F-16
engaged in providing financial services (the "Life Insurance
Reorganization"). As a result of this transaction, a wholly-owned subsidiary
of AFAC, that wholly-owned all of Riverside's insurance subsidiaries, merged
with Circle. Riverside received net cash of $13.5 million, after payment in
fu ll of the AFAC bank debt, taxes and expenses. Additionally, Riverside
received 2,267,000 shares of Circle common stock and 3,600 shares of Circle
Series C Preferred Stock. Riverside also retained 951,486 shares of Wickes
common stock, real estate with a net appraised value of $2.0 million, and
ce rtain miscellaneous assets that were previously owned by the insurance
su bsidiaries. These retained assets have been recorded at the lower of
historical carryover cost or fair value, consistent with transactions between
companies under common control. The real estate appraised value is net of an
$18.0 million mortgage owned by American Founders (see Note 10. "Long-Term
Debt").
In 1995, Riverside estimated and reported a loss on the reorganization of the
life insurance operations in accordance with ("SFAS") No. 121, "Accounting
for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed
of." Riverside initially recorded its investment in Circle at $2.3 million
for the common shares ($1.00 per share) plus $3.6 million liquidation value
for the preferred shares, for a total of $5.9 million. Riverside
subsequently recorded a loss on impairment of approximately $0.6 million
based upon an independent appraisal of the Circle shares and a merger
agreement that Circle and an unrelated party entered into in March 1997.
Additionally, the loss on impairment was offset by consideration paid to
Riverside by the life insurance subsidiaries of approximately $431,000 for
utilization of tax benefits related to life insurance operations through June
6, 1996. Riverside's investment in Circle is reported on the equity method
through December 30, 1997. Accordingly, the consolidated balance sheet at
December 31, 1997 and December 30, 1996 does not include the individual
consolidated assets and liabilities of Circle's life insurance operations.
Up to the closing of the Life Insurance Reorganization, the life insurance
operations generated income after taxes of $1,003,000 in 1996. However,
based on an evaluation of the life company's profits from operations and the
benefits to Wickes of these operations, additional deferred acquisition cost
amortization of $674,000 was recorded reducing life insurance income to a net
of $329,000.
On December 31, 1997, Circle was acquired by a third party. In the
acquisition, Riverside disposed of its interest in Circle for approximately
$5.4 million in cash.
5. DIVESTITURE OF PROPERTY AND CASUALTY INSURANCE OPERATIONS
During 1993, in accordance with a plan to discontinue its property and
casualty insurance operations, the Company sold or canceled virtually all of
its remaining in-force property and casualty business. On September 15,
1995, the Company completed the sale of Dependable to an unrelated third
party. The Company realized a gain from disposal of Dependable of $2.7
million and a loss from operations prior to closing of $1.1 million during
1995.
Dependable is accounted for as discontinued operations and, accordingly,
its operating results are reported in this manner for all periods presented.
The loss from discontinued operations includes total property and casualty
revenues of $932,000 for 1995. Also included are Dependable's realized gains
of $31,000 from sales of investments for 1995.
6. SALE OF MORTGAGE LENDING OPERATIONS
Beginning in 1995, Riverside marketed construction and permanent mortgage
loans to and through the professional building customers of Wickes. In early
F-16
<PAGE> F-17
1997, Riverside began to reduce the extent of mortgage operations. In
December, 1997, Riverside completed the sale of its remaining mortgage
operations to a third party, which continues to market mortgage loans through
Wickes.
During 1997 and 1996, after reimbursements of $955,000 and $396,000 received
by the Parent Company on behalf of WML, from Wickes, the Parent Company incurred
pre-tax losses of $388,000 and $1,024,000 on its mortgage operations.
7. PROPERTY, PLANT, AND EQUIPMENT
Property, plant and equipment consists of:
<TABLE>
<CAPTION>
December 31,
----------------------
1997 1996
---- ----
(in thousands)
<S> <C> <C>
Land and improvements $12,781 $12,391
Buildings 27,632 25,169
Machinery and equipment 30,960 26,505
Leasehold improvements 2,202 2,701
Construction in progress 844 90
------- --------
$74,419 $66,856
Less: Accumulated depreciation
and amortization 31,443 27,685
------- -------
42,976 39,171
Assets held for sale, net 3,816 11,074
------- -------
Property, plant, and equipment, net $46,792 $50,245
======= =======
</TABLE>
The Company reviews assets held for sale in accordance with the SFAS No. 121
" Accounting for the Assets Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of." The Company recorded a loss of $156,000 to
report land, land improvements and buildings held for sale at their net
realizable value in 1997. This charge is included under Restructuring and
Unusual items on the Consolidated Statement of Operations.
8. INVESTMENTS
Real Estate Investments
Investment in real estate consists of the following:
<TABLE>
<CAPTION>
December 31,
---------------------------
1997 1996
---- ----
(in thousands)
<S> <C> <C>
Commercial rental property $ 387 $ 400
Land held for investment 13,877 16,389
Investments in real estate joint ventures 65 65
------- --------
Gross real estate investments 14,329 16,854
Related mortgage debt (16,038) (17,584)
------- --------
Real estate investments, net of mortgage debt $(1,709) $ (730)
======= =========
</TABLE>
F-17
<PAGE> F-18
Certain of the Company's real estate was acquired from affiliates and has
been recorded at historical carryover cost. Commercial rental property
carrying values are net of accumulated depreciation of $144,000 and $130,000
at December 31, 1997 and 1996, respectively.
As of December 31, 1997, the Company had $9,664,000 of its investments in
real estate in Georgia properties, $4,592,000 in Florida properties, and
$73,000 in other states.
NET INVESTMENT INCOME(LOSS)
The major categories of investment income are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------- -------- --------
<S> <C> <C> <C>
Fixed maturities $ -- $ 4,380 $12,055
Equity securities -- 19 56
Mortgage and construction loans -- 1,194 2,941
Investment in real estate (291) (254) (316)
Policy loans -- 452 1,141
Short-term and other investments 260 1,740 681
------ ------- -------
Total investment income (31) 7,531 16,558
------ ------- -------
Investment expenses -- (1,206) (2,066)
------ ------- -------
Net investment income(loss) $ (31) $ 6,325 $14,492
====== ======= =======
</TABLE>
The Company earned no revenue during 1997 from $13,877,000 of investments in
real estate.
Investment income from the life insurance subsidiaries accounted for
approximately 99% of net investment income in 1995. Investment income for
1996 includes investment income from the Life Insurance Subsidiaries only
through June 6, 1996; therefore, comparisons between years are not
meaningful.
REALIZED INVESTMENT GAINS AND LOSSES
Net realized investment gains(losses) are summarized below (in
thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Fixed maturities
Available for sale $ -- $1,070 $ 752
Actively managed -- -- --
Equity securities
Available for sale -- (54) 271
Investment real estate 897 656 392(1)
Other -- -- (149)
Related party investments -- -- (1,500)(2)
------ ------ --------
Net realized gains(losses) $ 897 $1,672 $ (234)
====== ====== ========
</TABLE>
Investment gains(losses) for 1996, includes the realized gains and losses
earned on the Life Insurance Subsidiaries' fixed maturities and equity
securities through June 6, 1996.
F-18
<PAGE> F-19
(1) Included in realized gains for 1995 is approximately $321,000 from the
sale of the Company's real estate limited partnership holdings which are
consolidated for financial statement reporting purposes.
(2) Reflects establishment of a reserve for future losses equal to the
aggregate carrying value of these securities (See Note 15. "Related
Party Transactions").
9. ACCRUED LIABILITIES
The following table summarizes the accrued liabilities for the past two
years:
<TABLE>
<CAPTION>
December 31,
-------------
1997 1996
---- ----
(in thousands)
<S> <C> <C>
Accrued payroll $ 8,267 $ 6,614
Accrued interest 1,876 1,582
Accured liability insurance 4,178 4,572
Accrued restructuring charges 1,348 6,199
Other 7,442 8,942
------- -------
Total accrued liabilities $23,111 $27,909
======= =======
</TABLE>
Accrued liabilities consisted of $22 million and $27 million from Wickes in
1997 and 1996, respectively. The Parent Group's accrued liabilities were $1
million and $1 million for 1997 and 1996, respectively.
10. LONG-TERM DEBT
Consolidated long-term and mortgage debt obligations are summarized as
follows:
<TABLE>
<CAPTION>
December 31,
------------
1997 1996
---- ----
(in thousands)
<S> <C> <C>
The Parent Group
Long-Term Debt
Subordinated notes, net of discount of
$375,000 in 1997 and $549,000 in 1996,
interest payable at 13.00% semi-annually,
principal due September 30, 1999 $ 9,625 $ 9,451
Bank loan 656 967
-------- -------
Total long-term debt 10,281 10,418
Less current maturities (656) (652)
-------- -------
Total Company long-term debt less current maturities $ 9,625 $ 9,766
======== =======
F-19
<PAGE> F-20
Mortgage Debt
Mortgage debt, non-recourse $ 16,038 $17,584
Less current maturities - (168)
-------- -------
Total Company long-term mortgage debt less current maturities $ 16,038 $17,416
======== =======
Wickes
Revolving line of credit, interest payable at
1.50% above prime or 3.0% over LIBOR,
principal due March 31, 2001 $ 93,045 $76,313
Senior subordinated notes, interest payable
at 11-5/8% semi-annually, principal due
December 15, 2003 100,000 100,000
Other 62 196
-------- -------
Total long-term debt 193,107 176,509
Less current maturities (46) (133)
-------- -------
Total Wickes' long-term debt less current maturities 193,061 176,376
-------- -------
Total consolidated long-term debt less current maturities $218,724 $203,558
======== ========
-------- --------
Total consolidated long term and mortgage debt $219,426 $204,511
======== ========
</TABLE>
As of December 31, 1997, the Prime and London InterBank Offered Rate ("LIBOR")
three-month rates were 8.5 % and 5.8 % respectively.
THE PARENT GROUP
SUBORDINATED NOTES
These notes may be prepaid in whole or in part upon payment of a premium of
2.889% declining to zero after September 30, 1998. These notes were recorded
at an original discount of $1,256,000 which is being amortized using the
interest method over the term of the notes.
BANK LOAN
On June 24, 1997, Riverside 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 Riverside's real estate indebtedness. On November 7, 1997,
Riverside executed a reinstatement agreement following Riverside'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. Riverside is currently in compliance
under the reinstatement agreement.
LINE OF CREDIT
On May 1, 1997, Riverside obtained a $1.5 million demand bank line of credit
collateralized by 800,000 shares of Wickes common stock and 2,330 shares of
preferred stock of 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. On December
31, 1997, this line was paid in full with proceeds from the Circle closing
(See Note 4. "Reorganization of Life Insurance Operations").
F-20
<PAGE> F-21
WICKES INC.
REVOLVING LINE OF CREDIT
Under the revolving line of credit, which expires in March 31, 2001, Wickes
may borrow against certain levels of accounts receivable and inventory, up to
a maximum credit limit of $130,000,000. At December 27, 1997, the amount
available for additional borrowing was $21,064,000. A commitment fee of 1/2
of 1% is payable on the unused portion of the commitment. The weighted-
average interest rate for the years ending December 27, 1997 and December 28,
1996 was approximately 8.8% and 9.0% respectively.
Substantially all of Wickes' accounts receivable, inventory, general
intangibles and certain machinery and equipment are pledged as collateral for
the revolving line of credit. Covenants under the related debt agreements
require, among other restrictions, that Wickes maintain certain financial
ratios and certain levels of consolidated net worth. In addition, the debt
agreement restricts among other things, capital expenditures, the incurrence
of additional debt, asset sales, dividends, investments, and acquisitions
without prior approval from the lender.
The revolving credit agreement was amended and restated on April 11,1997.
Among other things, the amendment and restatement (i) extended the term of
the facility to March 2001, (ii) reduced the interest rate premiums over
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.
On June 16, 1997 Wickes entered into an interest rate swap agreement which
effectively fixed the interest rate at 8.11% (subject to adjustments in
certain circumstances), for three years, on $40 million of Wickes borrowings
under its floating rate revolving line of credit (See Note 12).
On December 24, 1997, the second amended and restated revolving credit
agreement was amended to incorporate, among other things, a reduction in the
fixed charge and net worth levels for the fourth quarter of 1997 and first
quarter of 1998.
SENIOR SUBORDINATED NOTES
On October 22, 1993, Wickes issued $100,000,000 in principal amount of 10-
year senior subordinated notes. Interest on the notes is 11-5/8%, payable
semi-annually. Covenants under the related indenture restrict among other
things, the payment of dividends, the prepayment of certain debt, the
incurrence of additional debt if certain financial ratios are not met, and
the sale of certain assets unless the proceeds are applied to the notes. In
addition, the notes require that, upon a change in control of Wickes, Wickes
must offer to purchase the notes at 101% of the principal thereof, plus
accrued interest.
F-21
<PAGE> F-22
MORTGAGE DEBT
THE PARENT COMPANY
As a part of the Life Insurance Reorganization, Riverside purchased certain
real estate owned by American Founders. In connection therewith, Riverside
issued to Circle a series of seven non-recourse promissory notes (the
"Notes") with an aggregate principal amount of $17,798,000 equal to 90% of
the purchase price of the real estate parcels. Principal and interest
payments are due in annual installments, commencing on June 6, 1997. Each
annual installment is calculated based upon equal payments amortized over a
term of 20 years. A balloon payment of the remaining principal balance is
due on the seventh anniversary of the Notes. The Notes bear interest at a
rate adjusted quarterly, equal to LIBOR, plus three hundred basis points.
The Notes are collateralized by first priority mortgages covering all of the
real estate. On each anniversary of the Notes, Riverside is required to
provide American Founders with an independent appraisal of the real estate,
subject to the mortgages ("Appraised Values"). If the outstanding principal
amount of the Notes exceeds 85% of the Appraised Value on the first
anniversary or 80% of the Appraised Value with each anniversary thereafter,
Riverside is required by December 31 of that year to make an additional
principal payment on the Notes in an amount equal to such excess. A parcel
of real estate that is subject to the mortgage may be sold by Riverside only
in cash transactions and with the prior consent of American Founders.
Subject to certain exclusions, the entire sales proceeds is required to be
paid to American Founders to fund an escrow account for the payment of
property taxes, and to pay accrued and unpaid interest and any remaining
principal balance on the Notes. As additional security for the Notes,
Riverside pledged as collateral 3,600 shares of Circle Series C preferred
stock, 2,267,000 shares of Circle Common Stock and 1,000,000 shares of
Wickes' common stock. The Circle stock pledged as collateral was converted
to cash when Circle was acquired by a third party on December 31, 1997 (see
Note 4. "Reorganization of Life Insurance Operations"). As of December 31,
1997, the cash held as collateral on the real estate was approximately $3.5
million.
AGGREGAGE MATURITIES
The aggregate amounts of consolidated future minimum principal payments on
long-term debt are as follows: (in thousands)
<TABLE>
<CAPTION>
Parent
Year Company Wickes Total
---- ------- ------ -----
<S> <C> <C> <C>
1998 656 46 702
1999 10,000 16 10,016
2000 - - -
2001 102 93,000 93,102
Thereafter 15,936 100,000 115,936
</TABLE>
11. COMMITMENTS AND CONTINGENCIES
At December 27, 1997, Wickes had accrued approximately $500,000 for
remediation of certain environmental and product liability matters,
principally underground storage tank removal.
F-22
<PAGE> F-23
Many of the sales and distribution facilities presently and formerly operated
by Wickes contained underground petroleum storage tanks. Other than tanks at
one acquired facility, recently installed and in compliance with modern
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 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 three years.
Wickes is one of many defendants in approximately 100 actions, each of which
seeks unspecified damages, brought since 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 Wickes' financial
position, results of operations or liquidity.
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 2,000,000 newly-issued shares of common stock to the
Parent Company for $10 million (see Note 3. "Acquisitions - Investment in
Wickes Inc.").
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.
The Company and its subsidiaries have various operating leases for which
approximately $10,817,000, $10,368,000 and $413,000 was expensed in 1997,
1996 and 1995, respectively. As of December 31, 1997, the Company and its
subsidiaries have the following operating leases: (i) Riverside leases its
home office property for approximately $201,000 per year, under a lease that
was extended in May of 1997 for one year. The lease has an option to renew
for one to four additional years, (ii) Wickes has operating leases for retail
space, equipment and other items. These leases provide for minimum rents.
These leases generally have options to renew for additional periods. Wickes
minimum rents under all operating leases are $10,616,000, $10,076,000 and
$10,501,000 for the years ended December 27, 1997, December 28, 1996 and
December 30, 1995, respectively.
F-23
<PAGE> F-24
The Company's total future minimum commitments for noncancelable operating
leases are as follows (in thousands):
<TABLE>
<CAPTION>
Year Amount
---- ------
<S> <C>
1998 $ 8,465
1999 6,922
2000 4,884
2001 3,277
2002 2,345
Thereafter 17,022
-------
Sub-Total 42,915
Less: Sub-lease income (6,301)
-------
Total $36,614
=======
</TABLE>
In connection with the sale of Dependable, the Company agreed to indemnify
the purchaser for certain losses on various categories of liabilities. Terms
of the indemnities provided by the Company vary with regards to time limits
and maximum amounts. AFAC subordinated debentures in the amount of $2.1
million are pledged as collateral on these indemnities. The purchaser and
the Company are engaged in a dispute over responsibility for a $250,000
assessment levied upon Dependable by the State of Florida related to
Hurricane Andrew. Although future loss development will occur over a number
of years, the Company believes, based on all information presently available,
that these indemnities will not have a material adverse effect on the
Company's financial position or results of operations.
On December 1, 1997, the Company completed the sale of its mortgage lending
operation to an unrelated third party. The Company did not realize any gain
or loss from the transaction, but agrees to indemnify the purchaser against
losses on the construction loan portfolio that was transferred. The Company
currently has 250,000 shares of its Wickes common stock pledged as collateral
for this indemnification obligation. As the construction loan portfolio
decreases, the shares held as collateral will be released. The Company
believes that these indemnities will not have a material adverse effect on
the Company s financial position or results of operations.
12. EMPLOYEE BENEFIT PLANS
THE COMPANY
ESOP
The Company has an Employee Stock Ownership Plan and Trust ("ESOP") in which
employees of the Company who work more than 1,000 hours in a plan year are
eligible to participate. The Company's Board of Directors determines the
amount, if any, of the annual contribution to the ESOP, and each participant
shares in this contribution prorata based upon the amount of the
participant's compensation as compared to all participants' compensation for
such year.
As of December 31, 1997, the ESOP owned 304,751 shares of the Company's
common stock, of which 59,852 shares were pledged under ESOP loans from the
Company. Contributions to the ESOP for payment of principal and interest on
the ESOP loans, were $97,000, $97,000 and $76,000 in 1997, 1996 and 1995,
respectively. Loans from the Company to the ESOP of $268,000 in 1994 were
used to purchase additional shares of common stock.
F-24
<PAGE> F-25
Notes receivable from the ESOP issued to purchase common shares are held by
the Company and its subsidiaries. Statement of Position ("SOP") 93-6 issued
in 1994 requires presentation of all leveraged shares held by the ESOP
("Unearned ESOP shares") as a reduction to additional paid in capital.
Accordingly, the unpaid balance of the notes receivable of $443,000 was
reclassified to stockholders' equity in 1994. As of December 31, 1997, this
amount has been reduced to $237,800 by the cost of ESOP shares released by
repayments on these notes. Unearned ESOP shares are not treated as
outstanding for the calculation of earnings per common share. The fair
value of unearned ESOP shares as of December 31, 1997 was approximately
$685,600.
STOCK OPTION PLANS
During 1985 the Company established the Riverside Group, Inc. Incentive Stock
Option Plan (for employees) and the Non-qualified Stock Option Plan (fixed
option plan for employees and directors). In 1995, the Incentive Stock
Option Plan terminated. Additional information with respect to stock options
is as follows:
<TABLE>
<CAPTION>
Number of Option Shares Option Price
----------------------- ------------
Total Exercisable Per Share Total
----- ----------- --------- -----
<S> <C> <C> <C> <C>
Outstanding at December 31, 1993 256,000 256,000 $3.33-$11.88 $1,247,130
Granted 10,000 - 7.00 -
Vested - - - -
Exercised (30,000) (30,000) 3.33 (99,900)
Expired or canceled (4,000) (4,000) 3.33-8.88 (35,520)
------- ------- ------------ ----------
Outstanding at December 31, 1994 232,000 222,000 $3.33-11.88 $1,111,710
Granted - - - -
Vested - 2,500 7.00 17,500
Exercised (46,800) (46,800) 3.33 (155,844)
Expired or canceled (82,200) (82,200) 3.33-8.88 (313,026)
------- ------- ----------- ---------
Outstanding at December 31, 1995 103,000 95,500 $5.33-11.88 $660,340
Granted - - - -
Vested - - - -
Exercised - - - -
Expired/Canceled (30,000) (30,000) (159,900)
------- ------- ------------ ---------
Outstanding at December 31, 1996 73,000 65,500 $5.33-$11.88 $ 500,440
Granted 50,000 50,000 3.00 150,000
Vested - - - -
Exercised - - - -
Expired/Canceled (3,000) (3,000) 8.88 (26,640)
------- ------- ----------- ----------
Outstanding at December 31, 1997 120,000 112,500 $3.00-$11.88 $ 623,800
======= ======= ============ =========
</TABLE>
Options outstanding as of December 31, 1997 expire in 1998 through 2003 as
follows:
<TABLE>
<CAPTION>
Shares Option Price Expiration
Exercisable Per Share Total Date
----------- --------- ----- ----
<S> <C> <C> <C>
10,000 11.88 118,800 September 1999
30,000 7.25 217,500 February 2002
2,500 7.00 17,500 October 2003
20,000 6.00 120,000 October 2003
50,000 3.00 150,000 December 2000
--------
$623,800
========
</TABLE>
Page F-25
<PAGE> F-26
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its Option Plan and, accordingly, no compensation cost has
been recognized related to the stock option. Had compensation cost been
determined in accordance with SFAS 123, the impact on the Company's net
income and earnings per share would have been immaterial for 1997 and 1996.
In January of 1997, the Company granted a non qualified stock option for
50,000 shares of its stock with an exercise price of $3.00 per share. The
Company did not grant any options in 1996 or 1995.
401(k) PLAN
The Company has a Deferred Compensation Plan for all its eligible employees
which allows participants to defer up to ten percent of their salary pursuant
to Section 401(k) of the Internal Revenue Code. The Company matches
contributions up to a maximum of 3% of compensation for employees
contributing up to 6%. Employees are 100% vested in their contributions and
vest in the Company's contribution over a period of seven years. The
Company's contribution to the 401(k) for matching was $23,000, $28,000, and
$56,000 during 1997, 1996 and 1995, respectively.
WICKES INC.
401(k) PLAN
Wickes sponsors a defined contribution 401(k) plan covering substantially all
of its full-time employees. Additionally, Wickes provides matching
contributions up to a maximum of 2.5% of participating employees salaries
and wages. Total expenses under the plan for the years ended December 27,
1997, December 28, 1996, and December 30, 1995 were $1,606,000, $1,392,000,
and $1,700,000, respectively.
POST-RETIREMENT BENEFITS OTHER THAN PENSIONS
Wickes provides life and health care benefits to retired employees.
Generally, employees who have attained an age of 60, have rendered 10 years
of service and are currently enrolled in the medical benefit plan are
eligible for post-retirement benefits. Wickes accrues the estimated cost of
retiree benefit payments, other than pensions, during the employee s active
service period.
The plan's funded status is as follows:
<TABLE>
<CAPTION>
December 27, December 28,
1997 1996
---- ----
<S> <C> <C> (in thousands)
Accumulated post-retirement benefit obligation-
Retirees and their dependents $1,033 $1,259
Active employees fully eligible to retire
and receive benefits 637 682
Active employees not fully eligible 908 1,349
------ ------
Total accumulated post-retirement benefit
obligations 2,578 3,290
Plan s assets at fair value - -
------ ------
Accumulated post-retirement benefit obligation
in excess of plan's assets 2,578 3,290
Unrecognized prior service cost 59 -0-
Unrecognized net loss 138 (613)
------ ------
Accrued post-retirement health care cost $2,775 $2,677
====== ======
</TABLE>
F-26
<PAGE> F-27
Actuarial assumptions used were as follows:
<TABLE>
<CAPTION>
December 27, December 28,
1997 1996
---- ----
(in thousands)
<S> <C> <C>
Projected health care costs trend rate 6.0% 6.0%
Ultimate trend rate 6.0% 6.0%
Year ultimate trend rate achieved n/a n/a
Effect of a 1% point increase in the health
care cost trend rate on the post-retirement
benefit obligation $49 $77
Effect of a 1% point increase in the health
care cost trend rate on the aggregate of
service and interest cost $19 $21
Discount rate 7.25% 7.75%
</TABLE>
POST-EMPLOYMENT BENEFITS
Wickes provides certain post employment benefits to qualified former or
inactive employees who are not retirees. These benefits include salary
continuance, severance, and healthcare. Salary continuance and severance pay
is based on normal straight-line compensation and is calculated based on
years of service. Additional severance pay is granted to eligible employees
who are 40 years of age or older and have been employed by Wickes five or
more years. Wickes accrues the estimated cost of benefits provided to former
or inactive employees who have not yet retired over the employees service
period or as an expense at the date of the event triggering the benefit.
Wickes incurred post employment benefit income of $28,000 and $31,000 for the
years ended December 27, 1997 and December 28, 1996, and expense of $160,000
(exclusive of amounts included in its restructuring liability, see Note 3)
for the year ended December 30, 1995.
13. INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
The Company will file a consolidated tax return for 1997 which will include
all its subsidiaries with the exception of Wickes. Riverside's ownership
in Wickes is below the requirements which allow consolidation for tax
purposes, therefore Wickes will file a separate consolidated return with its
subsidiaries.
At December 31, 1997, the Parent Group has net operating loss carry forwards
available to offset income of approximately $46 million expiring in years
2000 through 2012 and $3.8 million of capital loss carry forwards which
expire in 1999 unless utilized. To the extent carry forwards existing at the
subsidiaries' acquisition dates have been utilized, the tax benefits are
reflected as reductions to the excess of cost over fair value of net assets
acquired and the value of acquired insurance in force.
F-27
<PAGE> 28
At December 28, 1997, Wickes has net operating loss carry forwards available
to offset their consolidated taxable income of approximately $41.4 million
expiring in years 2004 through 2012. In 1993 Wickes underwent a change of
ownership as defined by section 382 of the Internal Revenue Code of 1986. As
a result of this, certain of the loss carry forwards of Wickes were limited
to an annual limitation of approximately $2.6 million a year. However, gains
inherent in the Wickes assets at the time of the ownership change which have
been recognized to date have now eliminated any limitation the future use of
net operating loss carry forwards.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. A valuation
allowance has been established to reduce deferred tax assets to the amount
which more likely than not will be realized in the future. The net amount of
deferred tax assets recognized arises from the anticipated utilization of
carry forward losses against gains to be realized in the future on real
estate assets and the turnaround of temporary differences. The components of
the deferred tax assets and liabilities at December 31, 1997 and 1996 are as
follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Deferred tax assets:
Difference in valuations of investments and capital
loss carry forwards 1,399 1,399
Trade accounts receivable 1,539 2,080
Inventories 1,895 1,954
Accrued personnel cost 2,013 1,936
Other accrued liabilities 6,796 6,912
Difference in investment carrying value 6,299 5,454
Net operating loss and AMT credit carry forwards 33,400 32,988
Other 3,348 2,533
------ ------
Total deferred tax assets 56,689 55,256
Valuation allowance for deferred tax assets (22,255) (20,398)
------- -------
Net deferred tax assets $34,434 $34,858
------- -------
Deferred tax liabilities:
Property, plant & equipment 1,365 1,951
Difference in asset bases 615 1,032
Goodwill & trademark 2,687 2,052
Other accrued income items 451 661
------- -------
Total deferred tax liabilities 5,118 5,696
------- -------
------- -------
Net deferred tax assets $29,316 $29,162
======= =======
</TABLE>
SFAS 109 requires that the current and non-current components of deferred tax
balances be reported separately based on the financial statement
classification of the related asset or liability which causes a temporary
difference between tax and financial reporting purposes. Items which are
not directly related to an asset or liability that exists for financial
reporting purposes are classified as current or non-current based on the
expected reversal date of the temporary difference. Total long term deferred
tax assets have been combined with long term deferred tax liabilities and
presented as a net amount on the balance sheet.
F-28
<PAGE> F-29
The income tax provision for 1997 consists of both current and deferred
amounts. The components of the income tax provision are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Taxes currently payable
Federal income tax $ - $ - $ -
State income tax 1,099 259 -
Deferred expense(benefit) (153) 61 (1,910)
----- ----- ------
Total income tax expense(benefit) $ 946 $ 320 $(1,910)
===== ===== =======
</TABLE>
The deferred tax expense recorded in the current year results from temporary
differences between the amount of assets and liabilities for financial
reporting purposes and such amounts for tax purposes. The sources of these
differences and the tax effect of each were as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Change in bad debt reserve $ 541 $ 203 $ -
Difference in tax and book inventory 60 245 -
Settlement of deferred compensation (76) (86) -
Change in accrued liabilities 116 4,562 (56)
Utilization/creation of NOL (220) (5,387) (3,104)
AMT credit & cap loss carryover (1,006) (471) (17)
Difference in tax and book asset basis (1,004) (4,405) -
Difference in book and tax intangibles 634 (6,245) (1,116)
Change in accrued income items (210) 182 490
Difference in reserves, net - 2,357 83
Difference in valuations of investments
and capital loss carry forwards (845) 7,896 1,578
Differences in reporting unearned premium,
accrued income, expenses and other - (8) -
Change in valuation allowance 1,857 1,218 232
------ ------ -------
Deferred tax expense(benefit) $ (153) $ 61 $(1,910)
======= ====== =======
</TABLE>
Actual income tax expense(benefit) on income(loss) differs from expected tax
expense computed by applying the Federal corporate tax rates of 34% in 1997,
1996 and 1995 as follows (in thousands):
F-29
<PAGE> 30
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Tax expense/(benefit) computed at statutory rate $(2,036) $1,768 $(6,157)
Increase (decrease) in taxes resulting from:
Effect of the difference in tax
treatment of goodwill - 69 3,939
State and local income taxes 714 259 0
Other 411 (558) 76
Change in valuation allowance 1,857 (1,218) 232
------ ------ -------
Actual tax expense(benefit) $ 946 $ 320 $(1,910)
======= ====== =======
</TABLE>
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
In accordance with SFAS No. 107, "Disclosure about Fair Value of Financial
Instruments," information has been provided about the fair value of certain
financial information. The following methods and assumptions were used to
estimate the fair value of each material class of financial instruments
covered by the Statement for which is practicable to estimate that value.
Long term debt - The carrying amount is a reasonable estimate of fair value,
- --------------
as the stated rates of interest represent current market rates.
Mortgage debt - The carrying amount is a reasonable estimate of fair value,
- -------------
as the stated rates of interest represent current market rates.
Lumber Futures Contracts - The Company enters into lumber futures contracts
- ------------------------
as a hedge against future lumber price fluctuations. All futures contracts
are purchased to protect long-term pricing commitments on specific future
customer purchases. At December 27, 1997, the Company had 79 lumber futures
contracts outstanding.
Interest Rate Swap - The Company has entered into an interest rate swap
- ------------------
agreement which effectively fixed the interest rate at 8.11% (subject to
adjustments in certain circumstances), for three years. The swap agreement
is on $40 million of the Company's 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%. The agreement also includes a
floor LIBOR rate at 4.6%. At December 28, 1997, the 30 day LIBOR borrowing
rate was 6.0%.
The estimated fair value of the Company's financial instruments at December
31, 1997 are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1997
---------------------------------
Carrying Estimated
Amount Fair Value
-------- ---------
<S> <C> <C>
Financial assets:
Cash and short-term investments $ 4,658 $ 4,658
Financial liabilities:
Long-term debt 202,686 202,686
Mortgage debt, related party 16,038 16,038
Financial contracts:
Lumber futures contracts -- 2,028
Interest rate swap -- 47,129
</TABLE>
Page F-30
<PAGE> F-31
15. RELATED PARTY TRANSACTIONS
In February, April and June of 1995, the Company advanced Wilson Financial
Corporation ("Wilson Financial") the Company's controlling stockholder, an
aggregate of $900,000 and Wilson Financial granted the Company an option to
acquire at exercise prices ranging from $5.88 to $6.31 per share the number
of shares of the Company's common stock equal to the amount of such advance
and related interest outstanding divided by the exercise price. Effective
June 30, 1995, the Company elected to exercise its option on these advances
acquiring 150,680 common shares at an aggregate exercise price of $918,310 by
canceling the advances and related interest with Wilson Financial previously
discussed. In addition, the Company purchased 23,000 common shares for an
aggregate price of $125,235 in October 1995 and 27,778 common shares for an
aggregate price of $125,000 in November of 1995 from Wilson Financial. In
addition, the ESOP purchased from Wilson Financial 111,934 shares in February
1993, for $3.06 per share and in January 1994, the Company purchased 41,185
shares for $6.50 per share. The Company also acquired from Wilson Financial
and subsequently retired as treasury shares 40,000 shares in September 1994
at $6.44 per share and 15,000 shares in November 1994 at $6.75 per share.
Following these transactions, Wilson Financial owned 59% of the Company's
outstanding common stock.
The Company reimburses its share of actual costs incurred from the Company's
use of an airplane owned by an affiliate of Mr. Wilson. Reimbursement
expenses were $925,000 in 1997, $639,000 in 1996 and $636,000 in 1995. In
1996 and 1995, the Company recorded income of $199,000 and $163,000,
respectively, with respect to salaries and other Company expenses related to
airplane use either charged to or paid by this affiliate of Mr. Wilson. In
1997, the Company established a reserve for approximately $434,000 related to
such salaries and expenses either incurred in 1997 or incurred in prior years
charged to this affiliate and not previously paid.
During 1997, 1996 and 1995, a law firm in which an officer and director of
the Company was a stockholder rendered services to the Company for which it
received $834,000, $877,000 and $977,000, respectively.
A partnership in which the Company owned a 74% interest leased office space
to The Atlantic Group, Inc. ("Atlantic") for which Atlantic paid $37,000 in
1995. Included in securities of related parties for 1994 are certain
securities of Atlantic with an aggregate carrying value of $1,500,000. In
1995, the Company wrote off the entire carrying value of these securities.
Directors of the Company beneficially own approximately 75% of Atlantic's
voting securities.
Included in operations for 1997, 1996 and 1995 is income related to office
expenses and tax services either paid to the Company or charged by the
Company to Wilson Financial of $22,000, $7,000, and $39,000, respectively.
Also included in operations for 1995 is expense paid to Wilson Financial for
providing real estate management services of $31,000. At December 31, 1997,
there was an intercompany balance of approximately $83,000 owed by Wilson
Financial to Riverside related to these net expenses.
Riverside made loans to a company owned by one of its directors in the amount
of $154,114 and $225,000 in 1996 and 1995, respectively. Riverside
restructured these notes in 1996, extending the maturity date to June 30,
1997. Riverside is currently discussing modifying the terms and collateral
of this note. At December 31, 1997, Riverside owed this company consulting
fees of $90,000 for services rendered in connection with the natural gas
program of WIXX Energy, Inc. Both parties agreed to apply the $90,000 of
fees against the outstanding principal and interest on the notes. Riverside
anticipates that this Company will continue to provide consulting services
in connection with the natural gas program of WIXX Energy, Inc. In addition,
until other arrangements are made, Riverside will continue to apply future
consulting fees against the principal and interest on the note, until the
balance of the note ia completely satisfied.
F-31
<PAGE> F-32
In late September and early October 1997, the Company sold an aggregate of
64,875 shares of Wickes common stock to Kenneth M. Kirschner, Vice Chairman,
director of the Company, and an executive officer of Wickes, and Frederick H.
Schultz, a director of the Company. The aggregate purchase price was
$290,000, or $4.47 per share, which equaled the 30-day average closing bid
price for Wickes common stock on the NASDAQ National Stock Market prior to
the sales.
In the fourth quarter of 1997, J. Steven Wilson, the Company's Chairman,
President and Chief Executive Officer advanced $160,000 to the Company, which
at March 31, 1998 the Company had not repaid.
Directors of the Company own an aggregate of $2.0 million of the Company's
13% subordinated notes.
16. SUBSEQUENT EVENTS
REAL ESTATE
On March 31, 1998, Riverside sold approximately 60 acres of its investment in
real estate for approximately $4.0 million. The entire sales proceeds was
paid to American Founders to fund an escrow account for the payment of
property taxes, accrued and unpaid interest. The excess will be applied against
the principal balance of the Notes. (See Note 10. "Long-Term Debt").
INTERNET, TELEPHONY & UTILITIES MARKETING
In November of 1997, Riverside entered into an agreement to purchase internet
and utilities marketing operations owned by Wickes Inc. The disposition of
these operations by Wickes was part of the determination made by Wickes to
discontinue or sell non-core operations. In February of 1998, this sale was
completed and Riverside paid compensation of approximately $870,000 in the
form of a three-year unsecured promissory note. In addition, Riverside
agreed to pay ten percent of the future net income of these operations,
subject to a maximum of $429,249 plus interest. The terms of the transaction
were approved by a committee of the disinterested members of Wickes' board of
directors.
RESTRUCTURING PLAN
In February of 1998, Wickes announced a plan for additional restructuring
activities to be completed in the first quarter of 1998 (the "1998 Plan").
This 1998 Plan includes the closing or consolidation of eight building
centers and two component manufacturing facilities, the sale of two
additional building centers, and further reductions in headquarters staffing.
The eight building centers and two component manufacturing facilities were
closed in the beginning of February, the sale of the two building centers was
completed in March, and the headquarters reductions have been implemented.
Wickes anticipates that it will incur, in the first quarter, a restructuring
charge of $5.4 million, including $3.6 million in anticipated losses on the
dis position of closed center assets and liabilities and $1.8 million in
severance and post employment benefits.
F-32
<PAGE> F-33
In March of 1998, as contemplated by the 1998 Plan, Wickes sold the assets of
its two Iowa centers to another building center chain for an amount greater
than current book value. The sale and transfer of the assets and operations
was completed at the end of March 1998.
THIRD AMENDMENT TO BANK AGREEMENT
On March 20, 1998 Wickes and its lenders entered into a third amendment to
Wickes' revolving credit agreement. This amendment includes a modification
to the fixed charge ratio covenant to reflect the restructuring recently
announced by Wickes and includes the lenders' consent to Wickes' sale of its
Iowa facilities and its internet and utilities marketing operations.
17. INDUSTRY SEGMENT INFORMATION AND QUARTERLY RESULTS OF OPERATIONS
The Company's operations are conducted through three segments: building
materials, life insurance, and other. Summary financial information about
the Company's operating segments for the years ended December 31 is
presented in the following table:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1997 1996 1995
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Revenues:
Building Materials $894,771 $471,515 $ 492
Life Insurance - 9,800 25,245
Other 1,474 1,997 (1,668)
-------- -------- --------
Total $896,245 $483,312 $ 24,069
======== ======== ========
Earnings(losses) before income taxes, equity
in related parties, minority interest and
discontinued operations:
Building Materials $ 462 $ 5,058 $ (1,408)
Life Insurance - 944 (10,530)
Other (4,524) (3,779) (1,968)
-------- -------- --------
Total $ (4,062) $ 6,223 $(13,906)
======== ======== ========
Identifiable Assets:
Building Materials $271,642 $281,398 $ 11,358
Life Insurance - 5,661 297,804
Other 42,316 22,755 ( 8,437)
-------- -------- --------
Total $313,958 $309,814 $300,725
======== ======== ========
</TABLE>
Building materials include the Company's equity in Wickes, the importation of
lumber through a subsidiary of the Company (sold to Wickes in 1994). Other
includes financial services related to the Wickes builders, real estate
operations, Parent Company corporate debt and all eliminating entries related
to intercompany transactions. Assets of discontinued operations, included in
"Other," are net of related liabilities for 1997, 1996 and 1995, respectively.
F-33
<PAGE> 34
Quarterly Results of Operations (Unaudited)
The following is an unaudited summary of quarterly performance of the Company
for the years ended December 31:
<TABLE>
<CAPTION>
1997
(in thousands, except per share amounts)
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
<S> <C> <C> <C> <C> <C>
Revenues $160,757 $240,296 $269,074 $226,118 $896,245
Costs and expenses $168,779 $237,341 $265,352 $228,835 $900,307
Earnings before income taxes,
equity in related parties,
minority interest, and -------- -------- -------- -------- --------
discontinued operations ($8,022) $ 2,955 $3,722 ($2,717) ($4,062)
Net earnings(loss) before dis-
continued operations ($4,139) ($393) ($417) ($872) ($5,821)
Loss from discontinued
operations ($267) ($271) ($93) ($243) ($388)
-------- -------- -------- -------- --------
Net earnings(loss) ($4,406) ($664) ($510) ($629) ($6,209)
======== ======== ======== ======== ========
Earnings(loss) per common
share:
Earnings(loss) from continuing
operations ($0.80) ($0.08) ($0.08) ($0.17) ($1.12)
Income from discontinued
operations ($0.05) ($0.05) ($0.02) $0.05 ($0.07)
-------- -------- -------- -------- --------
Net earnings(loss) ($0.85) ($0.13) ($0.10) ($0.12) ($1.19)
======== ======== ======== ======== ========
Weighted average
number of common shares used
in computing per share 5,194,389 5,193,833 5,193,833 5,193,833 5,193,970
</TABLE>
F-34
<PAGE> F-35
<TABLE>
<CAPTION>
1996
(in thousands, except per share amounts)
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
<S> <C> <C> <C> <C> <C>
Revenues $5,877 $ 4,922 $257,398 $215,115 $483,312
Costs and expenses $6,376 $ 4,738 $252,783 $213,193 $477,089
Earnings before income taxes,
equity in related parties,minority
------ ------- ------- ------- -------
interest, and discontinued operations ($499) $184 $4,616 $1,922 $6,223
Net earnings(loss) before dis-
continued operations ($2,794) $764 $557 $2,091 $618
Loss from discontinued
operations - ($163) ($342) ($519) ($1,024)
------ ------- ------- ------ -------
Net earnings(loss) ($2,794) $601 $215 $1,572 ($406)
======= ======= ======= ====== =======
EARNINGS(LOSS)PER COMMON
SHARE:
Earnings(loss) from continuing
operations ($0.53) $0.14 $0.12 $0.37 $0.11
Income from discontinued operations ($0.00) ($0.03) ($0.09) ($0.07) ($0.19)
------- ------- ------- ------- -------
Net earnings(loss) ($0.53) $0.11 $0.03 $0.30 ($0.08)
======= ======= ======= ======= =======
Weighted average number of
common shares used in
computing earnings per share 5,311,123 5,311,123 5,307,373 5,276,015 5,286,316
</TABLE>
F-35
<PAGE> S-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders,
Riverside Group, Inc.:
Our report on the consolidated financial statements of Riverside Group, Inc.
and subsidiaries is included on page F-1 of this Form 10-K. In connection
with our audits of such financial statements, we have also audited the
related financial statement schedules listed in the index on page 40 of
this Form 10-K.
In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic consolidated financial statements taken
as a whole, present fairly, in all material respects, the information
required to be included therein.
Coopers & Lybrand L.L.P.
Jacksonville, Florida
March 31, 1998
S-1
<PAGE> S-2
<TABLE>
<CAPTION>
RIVERSIDE GROUP, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 1997 and December 31, 1996
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Col. A Col. B Col. C Col. C Col. D Col. E
Additions Additions
Balance at Charged to Charged to Balance at
Beginning of Costs and Other Deduct- End of
Description Period Expenses (a) Accounts(b) ions(c) Period
- ----------- ----------- ------------ ----------- ------- ----------
1997:
Allowance for
doubtful
accounts.... $ 4,318 $ 2,148 $ (190) $ 2,070 $ 4,206
1996:
Allowance for
doubtful
accounts.... $ 0 $ 6,114 - $ 1,796 $ 4,318
</TABLE>
(a) Net of reserved and collected amounts.
(b) Allowance for doubtful accounts charged to restructuring reserve
(c) Reserved accounts written off.
S-2
<PAGE> S-3
Schedule III
Riverside Group, Inc. (Parent Only)
Condensed Financial Information of Registrant
Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
December 31,
1997 1996
-------- --------
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 3,017 $ 297
Investment real estate 13,869 16,382
Investment in subsidiaries 21,183 30,512
Other assets 5,833 3,493
-------- --------
$ 43,902 $ 50,684
======== ========
LIABILITIES & STOCKHOLDERS' EQUITY
Accrued expenses, income taxes and other
liabilities $ 2,963 $ 1,907
Debt and mortgage debt 26,319 28,002
-------- --------
29,282 29,909
Common stockholders' equity:
Common stock, $.10 par value; 20,000,000 shares
authorized, issued and outstanding in,
5,287,123 in 1997 and 5,296,123 in 1996 529 530
Additional paid-in capital 16,783 16,728
Retained earnings (2,692) 3,517
-------- --------
Total stockholders' equity 14,620 20,775
-------- --------
Total liabilities and stockholders' equity $ 43,902 $ 50,684
======== ========
</TABLE>
S-3
<PAGE> S-4
Schedule III
Riverside Group, Inc. (Parent Only)
Condensed Financial Information of Registrant
Condensed Statements of Operations
(in thousands)
<TABLE>
<CAPTION>
Years Ended December 3l,
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Net investment income $ 644 $ 1,097 $ 5
Other income 625 12 765
Equity in net income of subsidiaries, net of
income taxes (1,733) 3,699 (12,690)
Equity in investment in Wickes Inc. -- (1,714) (2,095)
-------- -------- --------
Total revenues (464) 3,094 (14,015)
Other operating costs & expenses 2,639 1,072 735
Interest expense 3,106 2,428 1,450
-------- -------- --------
Total expenses 5,745 3,500 2,185
-------- -------- --------
Income (loss) before income tax benefit (6,209) (406) (16,200)
Income tax expense (benefit) -- -- --
-------- -------- --------
Net income (loss) $ (6,209) $ (406) $(16,200)
======== ======== ========
-------- ------- --------
Earnings (loss) per share of common stock, after
deducting preferred dividends and accretion $ (1.19) $ (0.08) $ (3.07)
======== ======== =========
Weighted average number of common shares used
in computing earnings per share 5,193,970 5,266,316 5,284,280
</TABLE>
S-4
<PAGE> S-5
Schedule III
Riverside Group, Inc. (Parent Only)
Condensed Financial Information of Registrant
Condensed Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Years Ended December 3l,
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (6,209) $ (406) $(16,200)
Adjustments to reconcile net (loss)
to net cash provided by operating activities:
Net realized investment gains 897 -- --
Change in other assets and liabilities (1,284) 3,874 (487)
Equity in (income) loss of subsidiaries,
net of cash received (1,297) (771) 16,308
Depreciation and amortization 177 225 232
Net change in recoveries from indemnification
agreement -- -- 40
-------- -------- --------
Net cash provided by (used in) operating activities (7,716) 2,922 (107)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investments:
Securities of Wickes Inc. -- (10,000) (2,296)
Short-term and real estate investments (1,004) (20,654) --
Sale, maturity and principal reduction of investments:
Short-term and real estate investments 4,407 -- (139)
Securities of Wickes Inc. 290 -- --
Change in investment in and advances to subsidiaries 3,284 4,764 3,105
Life Insurance Reorganization proceeds 5,315 35,000 --
Net assets of Life Insurance Reorganization -- (28,202) --
-------- -------- --------
Net cash provided by (used in) investing activities 12,292 (19,092) 670
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt (3,395) (849) (1,243)
Increase in borrowings 1,539 17,798 1,700
Redemption of Series C Preferred stock -- -- --
Issuance of Common Stock -- -- 156
Purchase & Retirement of Common Stock -- (46) (1,168)
Dividend paid to stockholders -- (530) --
-------- -------- --------
Net cash provided by (used in) financing activities (1,856) 16,373 (555)
-------- -------- --------
Net Increase(decrease) in Cash & Cash Equivalents 4,282 203 8
Cash at beginning of year 297 94 86
-------- -------- --------
Cash at end of year 3,017 297 94
======== ======== ========
</TABLE>
S-5
<PAGE> Exhibit 10.1(a)
AMENDED AND RESTATED
RIVERSIDE GROUP, INC.
NONQUALIFIED STOCK OPTION PLAN
1. PURPOSE.
1.1 The purpose of the Riverside Group, Inc. Nonqualified Stock option
Plan (the "Plan") is to provide an incentive to directors and key employees
of Riverside Group, Inc., a Florida corporation (the "Corporation") and its
affiliated companies, who are in a position to contribute materially in the
long term success of the Corporation, to increase their interest in the
Corporation's welfare and to aid in attracting and retaining directors and
employees of outstanding ability.
2. ADMINISTRATION.
2.1 The Plan shall be administered by a committee, to be known as the
Nonqualified Option Committee, appointed by the Board of Directors of the
Corporation (the "Committee"). The Committee shall consist of not less
than one member of the Corporation's Board of Directors (the "Board") and
shall consist of the same member or members as are appointed to the Incentive
Stock Option Committee appointed pursuant to Section 2.1 of the Riverside
Group, Inc., Incentive Stock Option Plan (the "ISO"). The Board may from
time to time remove members from or add members to the Committee. Vacancies
on the Committee, howsoever caused, shall be filled by the Board. The
Committee shall select one of its members as Chairman and shall hold meetings
at such times and places as it may determine. The action of a majority of
the Committee, at which a quorum is present, or acts reduced to or so
approved in writing by a majority of the members of the Committee, shall be
the valid acts of the Committee. The Committee shall from time to
time at its discretion designate the directors and key employees who shall be
granted options and the number of shares to be optioned to each.
2.2 The interpretation and construction by the Committee of any
provisions of the Plan or of any option granted under it shall be final. No
member of the Board or the Committee shall be liable for any action or
determination made in good faith with respect to the Plan or any option
granted under it.
3. ELIGIBILITY.
3.1 The persons who shall be eligible to receive options shall be such
directors or employees of the Corporation or its affiliated companies as the
Committee shall select from time to time ("Optionee").
3.2 An Optionee may hold more than one option, but only on the terms
and subject to the restrictions set forth in the Plan.
4. STOCK.
4.1 The stock subject to the options granted under the Plan ("Option")
shall be the shares of the Corporation's authorized and unissued or
reacquired $0.10 par value Common Stock ("Shares"). The aggregate
number of Shares which may be issued under Options pursuant to the Plan shall
not exceed an amount which when added to shares subject to Options granted
pursuant to the ISO equals 300,000 shares (reflects adjustment for the
Corporation's 1987 3-for-2 stock split). The limitations established
by each of the preceding sentences shall be subject to adjustment as provided
in Plan Section 5.1(f).
4.2 In the event that any outstanding option under the Plan or the ISO
for any reason expires or is terminated, the Shares which are subject to that
Option ("Optioned Shares") may again be subjected to an Option.
5. TERMS AND CONDITIONS.
5.1 Options shall be authorized by the Committee and shall be evidenced
by agreements in such form as the Committee shall from time to time
approve, which agreements shall contain specifically or be subject to the
following terms and conditions:
(a) Number of Shares. Each Option shall state the number of Shares
----------------
to which it pertains.
(b) Option Price. Each Option shall state the option price, which
------------
shall be not less than 70% of the fair market value of the Shares subject to
the Option as of the time such Option is granted. If the Shares are traded
on a securities exchange or are otherwise quoted by a registered securities
broker, fair market value shall be determined by taking the mean between the
last bid and ask price on the date of Option grant for Shares of the
Corporation of the same class as the Optioned Shares, or, if there were not
both an ask bid price on such date on such exchange, the mean of the bid and
ask price on such exchange on the first date preceding the grant on which
there was both a bid and ask. If Shares are not traded on a securities
exchange, or otherwise quoted, on the date an Option is granted, the fair
market value of the Shares shall be established by the Board using what
method they in good faith determine is appropriate to establish such
fair market value. In fixing the Option price, the Committee, or Board when
no Shares are traded on an exchange shall have full authority and
discretion and be fully protected in doing so.
(c) Medium and Time of Payment. The Option price shall be payable
--------------------------
on the exercise of the Option and shall be paid in United States Dollars in
cash, by check or, at the sole discretion of the Board, a note on such terms
and conditions as the Board shall establish.
<PAGE>
(d) Conditions to Exercise of Options.
---------------------------------
(I) No Option shall be exercised in whole or in part more than ten
years after it is granted, and such Option shall be subject to such further
terms and conditions as to the time of its exercise as the Committee may
prescribe.
(II) In order to exercise an Option, in whole or in part, all of the
following conditions must be fulfilled at the time of exercise:
(A) At all times during the period beginning on the date of the grant
of the Option and ending on the date three months before the
date the Option is exercised (unless such three month period is
otherwise shortened by the Committee in its discretion) the
Optionee must have been a director or in the employ of the Corporation
or one of its affiliates. Whether authorized leave of absence or
absence for military or governmental service shall constitute
termination of employment, for the purposes of this
Plan, shall be determined by the Committee, whose determination shall
be final and conclusive. However, any Optionee who is totally and
permanently disabled at the time of exercise of an Option and who
has ceased to work for the Corporation or one of its affiliates as a
result of such disability shall not (unless otherwise provided by the
Committee in its discretion) be required to be so employed at the time
he exercises such Option as long as he was employed by the Corporation
or one of its affiliates at all times during the period beginning on
the date of the grant of the option and ending on the date one year
prior to the date of exercise of such Option. Permanent and total
disability for such purposes shall mean that such Optionee, at the
time he ceased his employment by, or position as a director with, the
Corporation or an affiliate, was unable to engage in any substantial
gainful activity by reason of a medically determinable physical or
mental impairment which could be expected to result in death or which
at such time could be expected to last for a continuous period of not
less than twelve months. Such Optionee shall furnish proof of his
disability in form and substance satisfactory to the Committee,
whose determination of disability shall be final and conclusive.
(B) The Optionee shall have met any additional specific conditions
imposed by the Committee at the time of the granting of the Option.
The imposition of such conditions shall be in the sole discretion of
the Committee;and such conditions may differ between individual
employees or directors; and between classes of employees or directors
and between the employees or directors of the Corporation as a
class and the employees or directors of any affiliate as a class.
(e) Death of Optionee and Transfer of Option.
----------------------------------------
(I) Notwithstanding any provision in this Plan to the contrary, if
the Optionee shall die while a director or in the employ of the
Corporation or an affiliate or within three months of terminating
his position as a director or employment for any reason with the
Corporation or any of its affiliates (unless such three month period
is otherwise shortened by the Committee in its discretion) and shall
not have fully exercised the Option, the Option may be exercised
(subject to the condition that no Option shall be exercisable
after the expiration of ten years from the date it is granted) to the
extent that the Optionee's right to exercise such Option had
accrued pursuant to this Section 5 of the Plan at the time of his
death and had not previously been exercised, at any time within
one year after the Optionee's death, by the executors or
administrators of the Optionee or by any person or persons who shall
have acquired the Option directly from the Optionee by bequest
or inheritance.
- - (II) No Option shall be transferable by the Optionee
otherwise than by will or under the laws of descent and distribution.
(f) Recapitalization.
----------------
(I) Subject to any required action by the stockholders, the
number of Shares covered by each outstanding Option, and the
price per Optioned Share, shall be proportionately adjusted for any
increase or decrease in the number of issued Shares of the Corporation
resulting from a subdivision or consolidation of Shares or the payment
of a stock dividend (but only on the Shares) or any other increase or
decrease in the number of such Shares effected without receipt of
consideration by the Corporation. For purposes of this section,
the issuance of Shares to employees for services shall be deemed
to have been issued for consideration.
(II) Subject to any required action by the stockholders, if
the Corporation shall be the surviving corporation in any merger or
consolidation, each outstanding Option shall pertain to and apply to
the securities to which a holder of the number of Shares subject to
the Option would have been entitled.
(III) In the event of a change in the Shares of the Corporation as
presently constituted, which is limited to a change of all its
authorized Shares with par value into the same number of Shares with a
different par value or without par value, the Shares resulting from
any such change shall be deemed to be the Shares within the meaning
of the Plan.
(IV) To the extent that the foregoing adjustments relate to stock
or securities of the Corporation, such adjustments shall be
made by the Committee, whose determination in that respect shall
be final, binding and conclusive.
(V) Except as hereinbefore expressly provided in this Section 5,
the Optionee shall have no rights by reason of any subdivision or
consolidation of Shares of Stock of any class or the payment of any
stock dividend or any other increase or decrease in the number of
Shares of Stock of any class or by reason of any dissolution,
liquidation, merger, or consolidation or spinoff of assets or stock
of another corporation, and any issue by the Corporation of Shares of
stock of any class, shall not affect, and no adjustment by reason
thereof shall be made with respect to, the number or price of Shares
subject to the Option.
(VI) The grant of any Option shall not affect in any way the right
or power of the Corporation to make adjustments, reclassifications,
reorganizations or changes of its capital or business structure or
to merge or to consolidate or to dissolve, liquidate or sell, or
transfer all or any part of its business or assets; provided,
however, that if any such adjustment shall result in a fractional
share for any Optionee under any Option hereunder, such fraction
shall be completely disregarded and the Optionee shall only be
entitled to the whole number of shares resulting from such adjustment.
(g) Rights as a Stockholder. An Optionee or a transferee of
--------------------------
an Option shall have no rights as a stockholder with respect to any
Optioned Shares until the date of the issuance of a stock certificate to him
for such Shares. No adjustment shall be made for dividends (ordinary or
extraordinary, whether in cash, securities or other property) or
distributions or other rights for which the record date is prior to the date
such stock certificate is issued, except as provided in this Section 5.
(h) Investment Purpose.
------------------
(I) The Corporation shall not be obligated to sell or issue any
Shares pursuant to any Option unless the Shares with respect to
which the Option is being exercised are at that time effectively
registered or exempt from registration under the Securities Act of
1933, as amended.
(II) Notwithstanding anything in the Plan to the contrary, each
Option shall be granted on the condition that the purchases of Shares
thereunder shall be for investment purposes, and not with a view to
resale or distribution except that in the event the Shares subject to
such Option are registered under the Securities Act of 1933, as
amended, or in the event of a resale of such Shares without such
registration would otherwise be permissible, such condition shall be
inoperative if in the opinion of counsel for the Corporation such
condition is not required under the Securities Act of 1933 or
any other applicable law, regulation, or rule of any governmental
agency.
(i) Other Provisions. Options authorized under the Plan shall contain
----------------
such other provisions, including, without limitation, restrictions upon the
exercise of the Option, as the Committee or the Board shall deem advisable
subject to any limitation on the discretion of the Board required by Rule
16b-3 of the Securities and Exchange Commission.
6. INDEMNIFICATION OF COMMITTEE.
In addition to such other rights of indemnification as they may have as
Directors or as members of the Committee, the members of the Committee shall
be indemnified by the Corporation against the reasonable expenses, including
attorneys' fees actually and necessarily incurred in connection with the
defense of any action, suit or proceeding, or in connection with the
defense of any action, suit or proceeding, or in connection with any appeal
therein, to which they or any of them may be a party by reason of any action
taken or failure granted thereunder, and against all amounts paid by them
in settlement thereof (provided such settlement is approved by the
independent legal counsel selected by the Corporation) or paid by them in
satisfaction of a judgment in any such action, suit or proceeding, except in
relation to matters as to which it shall be adjudged in such action, suit or
proceeding that such Committee member is liable for negligence or misconduct
in the performance of his duties; provided that with sixty days after
institution of any such action, suit or proceeding a Committee
member shall in writing offer the Corporation the opportunity, at its
own expense, to handle and defend the same.
7. AMENDMENT TO THE PLAN.
The Board of Directors of the Corporation may, from time to time, with
respect to any Shares at the time not subject to Options, suspend or
discontinue the Plan or revise or amend it in any respect whatsoever.
8. APPLICATION OF FUNDS.
The proceeds received by the Corporation from the sale of Optional
Shares will be used for general corporate purposes.
9. NO OBLIGATION TO EXERCISE OPTION.
The granting of an Option shall impose no obligation upon the Optionee
to exercise such Option.
10. EFFECT OF PLAN.
The granting of an Option shall not give the Optionee any right to
similar grants in future years or any right to be retained in the employ of
the Corporation or a Subsidiary, but an Optionee shall remain subject to
discharge to the same extent as if the Plan were not in effect.
11. EFFECTIVE DATE.
The effective date of amendments effected by this Amended and Restated
Plan (the "1989 Amendment") is March 1, 1989.
RIVERSIDE GROUP, INC
By: /s/ J. Steven Wilson
----------------------
RIVERSIDE GROUP, INC. NONQUALIFIED STOCK OPTION PLAN
PURPOSE.
1.1 The purpose of the Riverside Group, Inc. Nonqualified
Stock Option Plan (the "Plan") is to provide an incentive to directors and
key employees of Riverside Group, Inc., a Florida corporation (the
"Corporation") and its affiliated companies, who are in a position to
contribute materially to the long term success of the Corporation, to
increase their interest in the Corporation's welfare and to aid in attracting
and retaining directors and employees of outstanding ability.
2. ADMINISTRATION.
2.1 The Plan shall be administered by a committee, to be known as the
Nonqualified Option Committee, appointed by the Board of Directors of the
Corporation (the "Committee"). The Committee shall consist of not less than
one member o~f the Corporation's Board of Directors (the "Board") and
shall consist of the same member or members as are appointed to the Incentive
Stock Option Committee appointed pursuant to Section 2.1 of the
Riverside Group, Inc., Incentive Stock Option Plan (the "ISO"). The
Board may from time to time remove members from or add members to the
Committee. Vacancies on the Committee, howsoever caused, shall be filled by
the Board. The Committee shall select one of its members as Chairman and
shall hold meetings at such times and places as it may determine. The
action of a majority of the Committee, at which a quorum is present, or
acts reduced to or so approved in writing by a majority of the members of the
Committee, shall be the valid acts of the Committee. The Committee shall
from time to time at its discretion designate the directors and key employees
who shall be granted options and the number of shares to be optioned to each.
2.2 The interpretation and construction by the Committee of
any provisions of the Plan or of any option granted under it shall be final.
No member of the Board or the Committee shall be liable for any action or
determination made in good faith with respect to the Plan or any option
granted under it.
3. ELIGIBILITY.
3.1 The persons who shall be eligible to receive options shall be such
directors or employees of the Corporation or its affiliated companies as the
Committee shall select from time to time ("Optionee").
<PAGE>
3.2 An Optionee may hold more than one option, but only on the terms
and subject to the restrictions set forth in the Plan.
4. STOCK.
4.1 The stock subject to the options granted under the Plan ("Option")
shall be the shares of the Corporation's authorized and unissued or
reacquired $0.10 par value Common Stock ("Shares"). The aggregate number of
Shares which may be issued under Options pursuant to the Plan shall not
exceed an amount which when added to shares subject to Options granted
pursuant the ISO equals 200,000 shares. The limitations established by
each of the preceding sentences shall be subject to adjustment as
provided in Plan Section 5.1(f).
4.2 In the event that any outstanding Option under the Plan or the ISO
for any reason expires or is terminated, the Shares which are subject to that
Option ("Optioned Shares") may again be subjected to an Option.
4.3 No Optionee shall be granted, in any calendar year, Options to
purchase Shares having an aggregate fair market value (determined as of the
date of grant of such options as provided in Plan Section 5(b)) in excess of
(a) $100,000 plus (b) an amount which would be any unused limit carryover to
such year, as would be provided in Section 422A(c)(4) of the Internal Revenue
Code of 1954, as if the Plan was subject to such section.
5. TERMS AND CONDITIONS.
5.1 Options shall be authorized by the Committee and shall be evidenced
by agreements in such form as the Committee shall from time to time
approve, which agreements shall contain specifically or be subject to the
following terms and conditions:
(a) Number of Shares. Each Option shall state the number of Shares to
----------------
which it pertains.
(b) Option Price. Each Option shall state the option price, which
------------
shall be not less than 100% of the fair market value of the Shares subject
to the Option as of the time such Option is granted. If the Shares are
traded on a securities exchange or are otherwise quoted by a registered
securities broker, fair market value shall be determined by taking the
mean between the last bid and ask price on the date of Option grant for
Shares of the Corporation of the same class as the Optioned Shares, or, if
there were not both an ask bid price on such date on such exchange,the mean
of the bid and ask price on such exchange on the first date preceding the
grant on which there was both a bid and ask. If Shares are not traded on
a securities exchange, or otherwise quoted, on the date an Option is
granted, the fair market value of the Shares shall be established by the
Board using what method they in good faith determine is appropriate
to establish such fair market value. In fixing the Option price, the
Committee, or Board when no Shares are traded on an exchange shall
have full authority and discretion and be fully protected in doing
(c) Medium and Time of Payment. The Option price shall be payable on
--------------------------
the exercise of the Option and shall be paid in United States Dollars in
cash, by check or, at the sole discretion of the Board, a note on such
terms and conditions as the Board shall establish.
(d) Conditions to Exercise of Options.
---------------------------------
(I) No Option shall be exercised in whole or in part more than ten
years after it is granted, and such Option shall be subject to such
further terms and conditions as to the time of its exercise as the
Committee may prescribe.
(II) In order to exercise an Option, in whole or in part, all of the
following conditions must be fulfilled at the time of exercise:
(A) At all times during the period beginning on the date of the grant
of the Option and ending on the date three months before the date the
Option is exercised (unless such three month period is other wise shortened
by the Committee in its discretion) the Optionee must have been a director
or in the employ of the Corporation or one of its affiliates. Whether
authorized leave of absence or absence for military or governmental service
shall constitute termination of employment, for the purposes of this Plan,
shall be determined by the Committee, whose determination shall be final
and conclusive. However, any Optionee who is totally and permanently dis-
abled at the time of exercise of an Option and who has ceased to work for
the Corporation or one of its affiliates as a result of such disability
shall not (unless otherwise provided by the Committee in its discretion) be
required to be so employee at the time he exercises such Option as long as
he was employed by the Corporation or one of its affiliates at all times
during the period beginning on the date of the grant of the Option and
ending on the date one year prior to the date of exercise of such Option.
Permanent and total disability for such purposes shall mean that such
Optionee, at the time he ceased his employment by, or position as
a director with, the Corporation or an affiliate, was unable to engage in
any substantial gainful activity by reason of a medically determinable
physical or mental impairment which could be expected to result in death
or which at such time could be expected to last for a continuous period of
not less than twelve months. Such Optionee shall furnish proof of his
disability in form and substance satisfactory to the Committee, whose
determination of disability shall be final and conclusive.
(B) The Optionee shall have met any additional specific
conditions imposed by the Committee at the time of the granting of the
Option. The imposition of such conditions shall be in the sole
discretion of the Committee; and such conditions may differ between
individual employees or directors; and between classes of employees or
directors and between the employees or directors of the Corporation as a
class and the employees or directors of any affiliate as a class.
(e) Death of Optionee and Transfer of Option.
----------------------------------------
(I) Notwithstanding any provision in this Plan to the contrary, if
the Optionee shall die while a director or in the employ of
the Corporation or an affiliate or within three months of
terminating his position as a director or employment for any reason with
the Corporation or any of its affiliates (unless such three month period
is otherwise shortened by the Committee in its discretion) and shall not
have fully exercised the Option, the Option may be exercised (subject to
the condition that no Option shall be exercisable after the expiration of
ten years from the date it is granted) to the extent that the Optionee's
right to exercise such Option had accrued pursuant to this Section 5 of
the Plan at the time of his death and had not previously been exercised, at
any time within one year after the Optionee's death, by the executors or
administrators of the Optionee or by any person or persons who shall
have acquired the Option directly from the Optionee by bequest or
inheritance.
(II) No Option shall be transferable by the Optionee otherwise than
by will or under the laws of descent and distribution.
(f) Recapitalization.
-----------------
(I) Subject to any required action by the stockholders, the
number of Shares covered by each outstanding Option, and the price per
Optioned Share, shall be proportionately adjusted for any increase or
decrease in the number of issued Shares of the Corporation
resulting from a subdivision or consolidation of Shares or the
payment of a stock dividend (but only on the Shares) or any other increase
or decrease in the number of such Shares effected without receipt of
consideration by the Corporation. For purposes of this section, the
issuance of Shares to employees for services shall be deemed to have
been issued for consideration.
(II) Subject to any required action by the stockholders, if the
Corporation shall be the surviving corporation in any merger or
consolidation, each outstanding Option shall pertain to and apply to the
securities to which a holder of the number of Shares subject to the Option
would have been entitled.
(III) In the event of a change in the Shares of the Corporation as
presently constituted, which is limited to a change of all of its
authorized Shares with par value into the same number of Shares with a
different par value or without par value, the Shares resulting from any
such change shall be deemed to be the Shares within the meaning of the
Plan.
(IV) To the extent that the foregoing adjustments relate to stock
or securities of the Corporation, such adjustments shall be made by the
Committee, whose determination in that respect shall be final, binding and
conclusive.
(V) Except as hereinbefore expressly provided in this Section 5, the
Optionee shall have no rights by reason of any subdivision or
consolidation of Shares of stock of any class or the payment of any stock
dividend or any other increase or decrease in the number of Shares of stock
of any class or by reason of any dissolution, liquidation, merger, or
consolidation or spinoff of assets or stock of another corporation, and
any issue by the Corporation of Shares of stock of any class, shall not
affect, and no adjustment by reason thereof shall be made with respect to
the number or price of Shares subject to the Option.
(VI) The grant of any Option shall not affect in any way the right or
power of the Corporation to make adjustments, reclassifications,
reorganizations or changes of its capital or business structure or to merge
or to consolidate or to dissolve, liquidate or sell, or transfer all or any
part of its business or assets; provided, however, that if any such
adjustment shall result in a fractional share for any Optionee under any
Option hereunder, such fraction shall be completely disregarded and the
Optionee shall only be entitled to the whole number of shares resulting
from such adjustment.
(g) Rights as a Stockholder. An Optionee or a transferee of an Option
-----------------------
shall have no rights as a stock holder with respect to any Optioned Shares
until the date of the issuance of a stock certificate to him for such
Shares. No adjustment shall be made for dividends (ordinary or
extraordinary, whether in cash, securities or other property) or
distributions or other rights for which the record date is prior to the
date such stock certificate is issued, except as provided in this
Section 5.
(h) Investment Purpose.
------------------
(I) The Corporation shall not be obligated to sell or issue any
Shares pursuant to any Option unless the Shares with respect to which the
Option is being exercised are at that time effectively registered or
exempt from registration under the Securities Act of 1933, as amended.
(II) Notwithstanding anything in the Plan to the contrary, each
Option shall be granted on the condition that the purchases of Shares
thereunder shall be for investment purposes, and not with a view to resale
or distribution except that in the event the Shares subject to such Option
are registered under the Securities Act of 1933, as amended, or in the
event of a resale of such Shares without such registration would otherwise
be permissible, such condition shall be inoperative if in the
opinion of counsel for the Corporation such condition is not required
under the Securities Act of 1933 or any other applicable law, regulation,
or rule of any governmental agency.
(i) Other Provisions. Options authorized under the Plan shall
contain such other provisions, including, without limitation, restrictions
upon the exercise of the Option, as the Committee or the Board shall
deem advisable subject to any limitation on the discretion of the Board
required by Rule 16b-3 of the Securities and Exchange Commission.
6. INDEMNIFICATION OF COMMITTEE.
In addition to such other rights of indemnification as they may have as
Directors or as members of the Committee, the members of the Committee
shall be indemnified by the Corporation against the reasonable
expenses, including attorneys' fees actually and necessarily incurred
in connection with the defense of any action, suit or proceeding, or in
connection with any appeal therein, to which they or any of them may be a
party by reason of any action taken or failure to act under or in connection
with the Plan or any Option granted thereunder, and against all amounts paid
by them in settlement thereof (provided such settlement is approved by the
independent legal counsel selected by the Corporation) or paid by them in
satisfaction of a judgment in any such action, a suit or proceeding, except
in relation to matters as to which it shall be adjudged in such action, suit
or proceeding that such Committee member is liable for negligence or
misconduct in the performance of his duties; provided that with sixty days
after institution of any such action, suit or proceeding a Committee member
shall in writing offer the Corporation the opportunity, at its own expense,
to handle and defend the same.
7. AMENDMENT TO THE PLAN.
The Board of Directors of the Corporation may, from time to time, with
respect to any Shares at the time not subject to Options, suspend or discontinue
the Plan or revise or in any respect whatsoever.
8. APPLICATION OF FUNDS.
The proceeds received by the Corporation from the sale of Optional
Shares will be used for general corporate purposes.
9. NO OBLIGATION TO EXERCISE OPTION.
The granting of an Option shall impose no obligation upon the Optionee
to exercise such Option.
10. APPROVAL OF STOCKHOLDERS; EFFECTIVE DATE; DURATION OF THE
PLAN.
10.1 The Plan shall become effective upon the approval by the
Corporation's Board of Directors.
11. EFFECT OF PLAN.
The granting of an Option shall not give the Optionee any right to
similar grants in future years or any right to be retained in the employ of
the Corporation or a Subsidiary, but an Optionee shall remain subject to
discharge to the same extent as if the Plan were not in effect.
RIVERSIDE GROUP, INC.
By /s/ J. Steven Wilson
----------------------
Date of Grant: February 4th , 1992
RIVERSIDE GROUP, INC
NONOUALIFIED STOCK OPTION AGREEMENT
Kenneth M. Kirschner
10 West Adams Street
Jacksonville, Florida 32202
Dear Mr. Kirschner:
Pursuant to the Riverside Group, Inc. Nonqualified Stock Option Plan
(the "Plan") adopted by Riverside Group, Inc. (the "Corporation") on
November 19, 1985, you are hereby notified that the Nonqualified Stock Option
Committee of the Corporation (the "Committee") administering the Plan has
granted you an option to purchase stock of the Corporation.
The option granted to you is to purchase 30,000 shares of the $0.10 par
value Common Stock of the Corporation ("Common Stock") at the price of
$7.25 per share, subject to the terms and conditions herein expressed. The
date of grant of this option is the date of this notice, and it is the
determination of the Committee that on this date the fair market value of
Common Stock is no less than $7.25 per share.
A copy of the Plan is available at the Corporation's offices during
normal business hours for your review, and you can request a copy of the
Plan for no charge from the Corporation's Secretary. This option is
subject to and governed by the terms of the Plan and any amendments thereto
and the terms thereof are hereby incorporated by reference.
This option is in all respects limited and conditioned as provided in
the Plan, and the following:
a. Subject to the provisions of paragraph b hereof, this option may
be exercised by you, but only by you during your lifetime, at anytime
during the period beginning on the date of grant and ending the date
three months after the date you no longer are an employee or director of
the Corporation or an affiliate thereof.
b. If you become totally and permanently disabled while this option
is exercisable by you, this option may be exercised by you at any time
prior to the date one year after the date of your disability. If you die
while this option is exercisable by you, this option may be exercised by
the personal representative of your estate, or by the person to whom
such right devolves from you by reason of your death, at any time the date
one year after the date of your death. The number of shares for which this
option is exercisable after your death or disability shall be the same as
the number for which this option was exercisable on the date of your death
or the date your disability commenced.
c. Notwithstanding anything to the contrary contained herein,
whether this option is exercised by you or by any other party,
including your personal representative or heirs after your death, this
option must be exercised, if at all, within ten years from the date of
grant.
d. This option is nontransferable, other than in the case of your death
according to the terms of your will or the provisions of applicable laws of
descent and distribution.
e. In the event that the right to exercise this option is passed by
reason of your death to the personal representative of your estate, or to a
person to whom such right devolves by reason of your death, then this
option shall be nontransferable in the hands of the personal representative
or of such person except that this option may be distributed by the
personal representative or administrator to the distributees of your estate
as a part of your estate.
f. This option is subject to the requirement that if at any time the
Board of Directors of the Corporation shall determine, in its sole
discretion, that the listing,registration or qualification of the shares of
Common Stock subject to this option upon any securities exchange or under
any state or federal law, or the consent or approval of any governmental
regulatory body, is necessary or desirable as a condition of, or in
connection with, the granting of this option or the issue or purchase
of shares under this option, this option may not be exercised in whole or
in part unless such listing, registration, qualification, consent or
approval shall have been effected or obtained, free of any
conditions not acceptable to the Board of Directors of the Corporation.
g. You agree to make an election under Section 83(b) of the Internal
Revenue Code of 1986 (as amended from time to time) and if the Corporation
determines that the Corporation or one of its affiliates may be obligated
to withhold for taxes in connection with the exercise of this option or
the disposition of the shares of Common Stock received thereunder, you
shall pay the Corporation such amount as it determines is necessary to
satisfy such withholding obligation and the Corporation agrees the amount
paid shall be used to satisfy the withholding of tax obligation.
h. In the event of an increase or decrease in the number of shares of
Common Stock outstanding resulting from a subdivision or consolidation of
shares or any other increase or decrease in the number of shares of Common
Stock outstanding effected without receipt of consideration by the
Corporation, the number of shares of Common Stock covered by this option
and the price per share thereof shall be equitably adjusted by the
Committee to reflect such change. Additional shares which may be credited
pursuant to such adjustment shall be subject to the same restrictions as
are applicable to the shares with respect to which the adjustment relates.
In the event of the sale by the Corporation of substantially all of
its assets and the consequent discontinuance of its business, or in the
event of a merger, consolidation or liquidation of the Corporation, the
Committee may at the time of adoption of the plan for sale, merger,
consolidation or liquidation provide for an acceleration of the exercise
date of this option, for the complete termination of this option
or for the continuance of this option only to the extent that it is
exercisable as of the date of adoption by the Corporation's Board
of Directors of such plan; provided, however that if the Committee
provides for continuance of this option, the Committee shall give
you either (i) a reasonable time within which to exercise this option
prior to the effectiveness of such sale, merger, consolidation or
liquidation, or (ii) the right to exercise this option as to an
eauivalent number of shares of stock of the corporation succeeding
the Corporation by reason of such sale, merger, consolidation or
liquidation. This option shall not limit in any way the right or power
of the Corporation to make adjustments, reclassifications,
reorganizations or changes of its capital or business structure or to
merge or consolidate or to dissolve, licuidate, sell or transfer all or
any part of its business or assets.
i. This option may be exercised by delivery to the Riverside Group, Inc.
Nonqualified Stock Gption Committee, c/o J. Steven Wilson, 10 West Adams
Street, Jacksonville, Florida, 32202, or such person and address as the
Committee may from time to time direct, all of the following prior to the
time when this option expires:
(i) Notice in writing signed by you or any other person then entitled
to exercise this option stating that this option or any portion hereof
is exercised; provided this option may not be exercised for fractional
shares of Common Stock; and
(ii) Payment in full for the shares as to which exercise is made by
U. S. dollars in cash or by check.
j. You acknowledge that the interpretation and construction by the
Committee of any provisions of the Plan or of this option
shall be final and conclusive.
In the event that you have any questions regarding this option or the
Plan, please direct your inquires in writing to the Committee. Further,
please evidence your acceptance of this option and your agreement to be bound
by the terms of this letter and the Plan by signing your name in the space
provided on the copy of this letter enclosed herein and return it to
the Committee, c/o J. Steven Wilson, 10 West Adams Street,
Jacksonville, Florida, 32202.
Very truly yours,
NONQUALIFIED STOCK OPTION CONMITTEE
By /s/ J. Steven Wilson
---------------------
Accepted:
/s/ Kenneth M. Kirschner
- ------------------------
Date of Grant: October 2, 1993
RIVERSIDE GROUP, INC.
NONOUALIFIED STOCK OPTION AGREEMENT
Mr. George Bajalia
7800 Belfort Parkway #100
Jacksonville, Florida 32256
Dear Mr. Bajalia:
Pursuant to the Riverside Group, Inc. Nonqualified Stock Option Plan
adopted by Riverside Group, Inc. (the "Corporation") on November 19, 1985 and
amended and restated on February 28, 1989, (the "Plan"), you are hereby
notified that the Nonqualified Stock Option Committee of the Corporation (the
"Committee") administering the Plan has granted you an option to purchase
stock of the Corporation.
The option granted to you is to purchase 20,000 shares of the $0.10 par
value Common Stock of the Corporation ("Common Stock") at the price of $6.00
per share, subject to the terms and conditions herein expressed. The date of
grant of this option is the date of this notice, and it is the determination
of the Committee that on this date the fair market value of Common Stock is
no less than $6.00 per share.
A copy of the Plan is available at the Corporation's offices during
normal business hours for your review, and you can request a copy of the Plan
for no charge from the Corporation's Secretary. This option is subject to
and governed by the terms of the Plan and any amendments thereto and the
terms thereof are hereby incorporated by reference.
This option is in all respects limited and conditioned as provided in
the Plan, and the following:
a. Subject to the terms and conditions of this Agreement, this option
may be exercised by you, but only by you during your lifetime, at anytime
during the period beginning on October 2, 1994 (see below regarding
earlier exercise on termination of employment without cause by Wickes
Lumber Company ("Wickes")) and ending the date three months after the date
you no longer are an employee or director of the Corporation or an
affiliated company thereof. "Affiliated company" status is determined by
the Committee on the basis of direct or indirect ownership of your employer
in relation to the Corporation. If Wickes should terminate your
employment without cause prior to October 2, 1994, then this option shall
become immediately exercisable. Wickes has been determined by the
Committee to currently be an "affiliated company". Wickes's status as an
"affiliated company" will terminate when the Committee determines in its
sole discretion that Wickes should no longer be treated as an "affiliated
company"' of the Corporation and you are given notice thereof. This
termination may be a result of a direct or indirect change in ownership
of Wickes.
b. If you become totally and permanently disabled while this option
is exercisable by you this option may be exercised by you at any time
prior to the date one year after the date of your disability. If you die
while this option is exercisable by you, this option may be exercised by
the personal representative of your estate, or by the person to whom such
right devolves from you by reason of your death, at any time prior to the
date one year after the date of your death. The number of shares for which
this option is exercisable after your death or disability shall be the same
as the number for which this option was exercisable on the date of your
death or the date your disability commenced.
c. Notwithstanding anything to the contrary contained herein, whether
this option is exercised by you or by any other party, including your
personal representative or heirs after your death, this option must be
exercised, if at all, within ten years from the date of grant.
d. This option is nontransferable, other than in the case of your death
according to the terms of your will or the provisions of applicable
laws of descent and distribution.
e. In the event that the right to exercise this option is passed by
reason of your death to the personal representative of your estate, or to
a person to whom such right devolves by reason of your death, then this
option shall be nontransferable in the hands of the personal representative
or ofsuch person except that this option may be distributed by the personal
representative or administrator to the distributees of your estate as a
part of your estate.
f. This option is subject to the requirement that if at any time the
Board of Directors of the Corpora tion shall determine, in its sole
discretion, that the listing, registration or qualification of the shares
of Common Stock subject to this option upon any securities exchange or
under any state or federal law, or the consent or approval of any
governmental regulatory body, is necessary or desirable as a condition
of, or in connection with, the granting of this option or the issue or
purchase ofshares under this option, this option may not be exercised in
whole or in part unless such listing registration qualification, consent
or approval shall have been effected or obtained, free of any conditions
not acceptable to the Board of Directors of the Corporation.
g. You agree to make an election under Section 83(b) of the Internal
Revenue Code of 1986 (as amended from time to time) and if the Corporation
determines that the Corporation or one of its affiliates may be obligated
to withhold for taxes in connection with the exercise of this option or
the disposition of the shares of Common Stock received thereunder, you
shall pay the Corporation such amount as it determines is necessary to
satisfy such withholding obligation and the Corporation agrees the amount
paid shall be used to satisfy the withholding of tax obligation.
h. In the event of an increase or decrease in the number of shares of
Common Stock outstanding resulting from a subdivision or consolidation of
shares or any other increase or decrease in the number of shares of
Common Stock outstanding effected without receipt of consideration by the
Corporation the number of shares of Common Stock covered by this option
and the price per share thereof shall be equitably adjusted by the
Committee to reflect such change. Additional shares which may be credited
pursuant to such adjustment shall be subject to the same restrictions as
are applicable to the shares with respect to which the adjustment relates.
In this event of the sale by the Corporation of substantially all of its
assets and the consequent discontinuance of its business, or in the event
of a merger, consolidation or liquidation of the Corporation, the
Committee may at the time of adoption of the plan for sale merger,
consolidation or liquidation provide for an acceleration of the exercise
date of this option for the complete termination of this option or for the
continuance of this option only to the extent that it is exercisable as of
the date of adoption by the Corporationns Board of Directors of such plan;
provided, however that if the Committee provides for continuance of this
option, the Committee shall give you either (i) a reasonable time within
which to exercise this option prior to the effectiveness of such sale,
merger, consolidation or liquidation or (ii) the right to exercise this
option as to an equivalent number of shares of stock of the corporation
succeeding the Corporation by reason of such sale, merger, consolidation
or liquidation. This option shall not limit in any way the right or power
of the Corporation to make adjustments reclassification, reorganizations
or changes of its capital or business structure or to merge or consolidate
or to dissolve, liquidate, sell or transfer all or any part of its
business or assets.
i. This option may be exercised by delivery to the Riverside Group, Inc.
Nonqualified Stock Option Committee, c/o J. Steven Wilson, 7800 Belfort
Parkway #100 Jacksonville, Florida 32256, or such person and address as
the Committee may from time to time direct all of the following prior to
the time when this option expires:
(i)Notice in writing signed by you or any other person then entitled
to exercise this option stating that this option or any portion hereof is
exercised; provided this option may not be exercised for fractional shares
of Common Stock; and
(ii)Payment in full for the shares as to which exercise is made by
U.S. dollars in cash or by check.
j. You acknowledge that the interpretation and con struction by the
Committee of any provisions of the Plan or of this option shall be final
and conclusive.
In the event that you have any questions regarding this option
or the Plan please direct your inquires in writing to the Committee.
Further, please evidence your acceptance of this option and your agreement to
be bound by the terms of this letter and the Plan by signing your name in the
space provided on the copy of this letter enclosed herein and return it to
the Committee, c/o J. Steven Wilson, 7800 Belfort Parkway #100,
Jacksonville, Florida 32256.
Very truly yours,
NONQUALIFIED STOCK OPTION COMMITTEE
By: /s/ J. Steven Wilson
--------------------
Title:
Accepted:
/s/ George Bajalia
- ------------------
Exhibit 21.01
List of Subsidiaries of Registrant
State of
Name Incorporation
------------------------------------ -------------
Wickes Inc. Delaware
GLC Division, Inc. Delaware
Lumber Trademark Company Illinois
Dependable Insurance Group, Inc. Florida
American Financial Acquisitions Corporation Delaware
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Riverside Group, Inc and Subsidiaries condensed consolidated balance sheet and
condensed consolidate statement of operations and is qualified in its entirey by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 3,154
<SECURITIES> 0
<RECEIVABLES> 81,968
<ALLOWANCES> 3,772
<INVENTORY> 102,706
<CURRENT-ASSETS> 201,567
<PP&E> 78,235
<DEPRECIATION> 31,443
<TOTAL-ASSETS> 313,871
<CURRENT-LIABILITIES> 65,467
<BONDS> 109,625
0
0
<COMMON> 529
<OTHER-SE> 14,091
<TOTAL-LIABILITY-AND-EQUITY> 313,871
<SALES> 884,082
<TOTAL-REVENUES> 896,245
<CGS> 681,056
<TOTAL-COSTS> 681,056
<OTHER-EXPENSES> 192,578
<LOSS-PROVISION> 2,148
<INTEREST-EXPENSE> 24,525
<INCOME-PRETAX> (4,875)
<INCOME-TAX> (946)
<INCOME-CONTINUING> (5,821)
<DISCONTINUED> (388)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,209)
<EPS-PRIMARY> (1.19)
<EPS-DILUTED> (1.19)
</TABLE>
