UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File
For Quarter Ended March 31, 1998 Number 0-9209
______________ _______________
RIVERSIDE GROUP, INC.
(Exact name of registrant as specified in its charter)
Florida 59-1144172
_______________________________ _________________
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7800 Belfort Parkway, Jacksonville, Florida 32256
___________________________________________ _____
(Address of principal executive Offices) (Zip Code)
Registrant's telephone number, including area code number
904-281-2200
____________
Indicate by a check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
___
On May 5, 1998, there were 5,287,123 shares of the Registrant's common stock
outstanding.
<page 2>
RIVERSIDE GROUP, INC.
INDEX
<TABLE>
<CAPTION>
Page
PART I. FINANCIAL INFORMATION Number
______
<S>
Item 1. Financial Statements <C>
Condensed Consolidated Balance Sheets
March 31, 1998 (Unaudited)
And December 31, 1997 3
Condensed Consolidated Statements
of Operations
Three months ended
March 31, 1998 and 1997 (Unaudited) 4
Condensed Consolidated Statement
of Common Stockholders' Equity
Three months ended
March 31, 1998 (Unaudited) 5
Condensed Consolidated Statements of
Cash Flows
Three months ended
March 31, 1998 and 1997 (Unaudited) 6
Notes to Condensed Consolidated
Financial Statements (Unaudited) 7
Item 2. Management's Discussion and Analysis 11
of Financial Condition and Results of
Operations
PART II.
Item 2. Changes in Securities 22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
</TABLE>
2
<page 3>
Riverside Group, Inc. and Subsidiaries
Consolidated Balance Sheet
(unaudited)
(in thousands, except per share data)
<TABLE>
March 31, December 31,
1998 1997
_________ ___________
<CAPTION>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,783 $ 3,154
Notes receivable 1,364 3,534
Accounts receivable, less allowance for doubtful
accounts of $5,205 in 1998 and $4,206 in 1997 74,184 81,968
Inventory 114,670 102,706
Deferred tax asset, net 13,121 8,955
Prepaid expenses 1,466 1,250
_______ _______
Total current assets 207,588 201,567
Investment in real estate 10,953 14,329
Property, plant and equipment, net 45,511 46,792
Trademark (net of accumulated amortization of
$10,329 in 1998 and $10,274 in 1997) 6,690 6,745
Deferred tax asset, net 20,361 20,361
Rental equipment (net of accumulated depreciation
of $269 in 1998 and $176 in 1997) 1,925 2,030
Excess of cost over fair value of assets acquired 15,523 15,684
Net assets (liabilities) of discontinued operations (29) (34)
Other assets (net of accumulated amortization of
$9,103 in 1998 and $8,718 in 1997) 5,567 6,397
________ ________
Total assets $314,089 $313,871
======== ========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 540 $ 702
Accounts payable 49,583 41,629
Income tax payable 25 25
Accrued liabilities 23,204 23,111
______ ______
Total current liabilities 73,352 65,467
Long-term debt, less current maturities 206,654 202,686
Mortgage debt 12,750 16,038
Other long-term liabilities 3,120 3,084
_______ _______
Total liabilities 295,876 287,275
Minority interest 8,691 11,976
Commitments and contingencies (Note 11)
Common stockholders' equity:
Common stock, $.10 par value; 20,000,000 shares
authorized; issued and outstanding, 5,287,123 in
1998 and 5,296,123 in 1997 529 529
Additional paid in capital 16,783 16,783
Retained earnings (deficit) (7,790) (2,692)
______ _______
Total common stockholders' equity 9,522 14,620
Total liabilities and common stockholders' _________ _________
equity $ 314,089 $313,871
========= ========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
3
<Page 4>
RIVERSIDE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Riverside Group, Inc. and Subsidiaries
Consolidated Statement of Operations
(unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended March 31,
____________________________
1998 1997
____ ____
<S> <C>
Revenues:
Sales and service revenues $168,861 $159,319
Net investment income (loss) (15) (7)
Net realized investment gains (losses) 437 54
Other operating income 2,451 845
________ ________
171,734 160,211
________ _______
Costs and expenses:
Cost of sales 127,881 122,372
Provision for doubtful accounts 1,333 1,046
Depreciation, goodwill and trademark amortization 1,420 1,307
Restructuring and unusual items 5,431 --
Selling, general and administrative expenses 41,781 38,148
Interest expense 6,167 5,906
_______ _______
184,013 168,779
_______ _______
Loss before Income taxes, equity in related
parties, and minority interest (12,279) (8,568)
Income tax benefit (3,879) (2,740)
Equity in losses of related parties -- 553
Minority interest, net of income taxes (3,302) 2,509
_______ _______
Loss before discontinued operations (5,098) (3,872)
Discontinued operations:
Loss from operations of discontinued mortgage
lending operating, net of income taxes -- (267)
_______ _______
Net loss $ (5,098) $ (4,139)
======== =======
Basic and diluted earnings (loss) per common share:
Earnings (loss) from continuing operations $ (0.98) $ (0.73)
Net gain (loss) from discontinued operations -- (0.05)
Earnings (loss) per share $ (0.98) $ (0.78)
========= =========
Weighted average number of common stock
used in computing earnings per share 5,227,751 5,308,389
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
4
<Page 5>
Riverside Group, Inc. and Subsidiaries
Condensed Consolidated Statement of Common Stockholders' Equity
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Total
Additional Common
Common Paid-In Retained Stockholders'
Stock Capital Earnings Equity
______ __________ ________ ___________
<S> <C>
Balance, December 31, 1997 $ 529 $16,783 $(2,692) $14,620
Net loss, three months ended
March 31, 1998 (5,098) (5,098)
_______ _______ _______ _______
March 31, 1998 $ 529 $16,783 $(7,790) $ 9,522
======= ======= ======= =======
</TABLE>
See Accompanying Notes to Condensed Consolidated Financial Statements.
5
<Page 6>
Riverside Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1998 1997
____ ____
<S> <C>
Cash Flow from Operating Activities
Net loss $(5,098) $(4,139)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation expense 1,175 1,082
Amortization expense 831 730
Net change in deferred acquisition costs -- --
Provision for doubtful accounts 1,333 1,046
Gain on sale of fixed assets (1,399) (25)
Net realized investment gains on investments (437) (54)
Benefit for deferred income taxes (4,166) (3,100)
Equity in losses of unconsolidated subsidiaries -- 553
Minority interest (3,302) (2,509)
Change in other assets and liabilities:
Decrease in accounts receivable 5,558 2,734
Decrease in notes receivable 2,310 --
Increase in inventory (11,964) (8,834)
(Increase) decrease in other assets 859 (442)
Increase in accounts payable and accrued
liabilities 8,009 443
Net liabilities of discontinued operations,
other liabilities and current income taxes 81 197
_______ _______
Net Cash Used in Operating Activities (6,258) (12,318)
Investing Activities
Purchase of Investments:
Property, plant and equipment (1,123) (515)
Investment real estate -- (240)
Sale of Investments:
Property, plant and equipment 2,729 143
Investment real estate 3,808 569
_______ _______
Net Cash Provided by (Used in) Investing
Activities 5,414 (43)
Cash Flows from Financing Activities
Net borrowings under the revolving line of
credit 3,877 10,063
Repayment of debt (3,504) (227)
Increase in borrowings 100 --
_______ ______
Net Cash Provided by Financing Activities 473 9,836
Net Decrease in Cash and Equivalents (371) (2,525)
Cash at beginning of year 3,154 3,100
_______ ______
Cash and equivalents at end of period $ 2,783 $ 575
======= ======
</TABLE>
See Accompanying Notes to Condensed Consolidated Financial Statements
6
<Page 7>
RIVERSIDE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Financial Statement Presentation
_________________________________________
The condensed consolidated financial statements present the financial
position, results of operations, and cash flows of Riverside Group, Inc. and its
wholly-owned and majority-owned subsidiaries (the "Company").
The condensed consolidated balance sheets as of March 31, 1998, the condensed
consolidated statements of operations for the three months ended March 31, 1998
and 1997, the condensed consolidated statement of common stockholders' equity
for the three months ended March 31, 1998 and the condensed consolidated
statements of cash flows for the three months ended March 31, 1998 and 1997,
have been prepared by the Company without audit. In the opinion of management,
all adjustments (which include only normal recurring adjustments) necessary to
present fairly the financial position, results of operations and cash flows at
March 31, 1998, and for all periods presented have been made. The results for
the three month period ended March 31, 1998 is not necessarily indicative of the
results to be expected for the full year or for any interim period.
Certain information and footnote disclosures normally included in
consolidated financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. It is suggested that
these condensed consolidated financial statements be read in conjunction with
the consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997 filed
with the Securities and Exchange Commission.
Reclassifications
_________________
Reclassifications have been made to the first quarter condensed consolidated
balance sheet and condensed consolidated statement of cash flows to more
appropriately reflect purchase rebates receivable as a reduction of accounts
payable rather than as accounts receivable. The amount previously recorded as
accounts receivable in the first quarter of 1997 was $1.5 million.
Earnings Per Share
__________________
Basic and 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 on the weighted average number of shares of common
stock outstanding during each period (5,227,751 shares in 1998 and 5,308,389
shares in 1997). Since the Company had a net loss, the options had an anti-
dilutive effect, and therefore, are excluded from the calculation of diluted
earnings per share.
7
<Page 8>
2. COMMITMENTS AND CONTINGENCIES
_____________________________
At March 31, 1998, Wickes had accrued approximately $500,000 (included in
accrued liabilities at March 31, 1998) for remediation of certain environmental
and product liability matters, principally underground storage tank removal.
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, 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 $1.9 million
of net costs with respect to the filling or removing of underground storage
tanks and related investigatory and remedial actions.
Wickes is one of many defendants in approximately 95 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. All of the
plaintiffs in these actions are represented by one of two law firms. Wickes is
aggressively defending these actions and does not believe that these actions
will have a material adverse effect on the Company.
On November 3, 1995, a complaint was filed against Wickes', its directors
and the Company seeking to enjoin or to obtain damages with respect to Wickes
agreement to issue 2,000,000 newly-issued shares of common stock to the Parent
Company for $10 million.
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.
8
<Page 9>
3. LONG TERM AND MORTGAGE DEBT
___________________________
Consolidated long-term and mortgage debt is comprised of the following
at March 31, 1998 (in thousands):
<TABLE>
<CAPTION>
<S> <C>
THE PARENT GROUP
Long-Term Debt
Subordinated Notes $ 9,672
Other 553
Less: current maturities (503)
_________
Total Company long-term debt less current maturities $ 9,722
_________
Mortgage Debt
Mortgage debt, non-recourse $ 12,750
Less: current maturities -
________
The Parent Group long-term mortgage debt, less
current maturities $ 12,750
________
WICKES
Revolving line of credit $ 96,922
Senior subordinated notes 100,000
Other 47
Less: current maturities (37)
________
Total Wickes' long-term debt less current maturities $196,932
________
Total long-term and mortgage debt ________
less current maturities $219,404
========
</TABLE>
THE PARENT GROUP
________________
On April 20, 1998, Riverside amended certain terms of its mortgage debt. In
connection with the amendment, (i) the Parent Company pledged an additional
325,000 shares of Wickes common stock in substitution for the $1.4 million cash
then held by the lender as collateral (less a $200,000 holdback for the
scheduled second quarter interest payment) and (ii) agreed to a reduced
collateral value for the shares of pledged Wickes common stock.
WICKES
______
Under its revolving line of credit, Wickes may borrow against certain levels
of accounts receivable and inventory. The unused amount available for borrowing
at March 28, 1998 was $25.3 million.
9
<Page 10>
On March 20, 1998, Wickes and its lenders entered into a third amendment to
its revolving credit agreement. This amendment includes a modification to the
fixed charge ratio covenant to reflect the restructuring announced by Wickes in
February, 1998 and includes the lenders' consent to Wickes' sale of its Iowa
facilities and its internet and utilities marketing operations.
4. INCOME TAXES
____________
The percentage ownership of Wickes by the Company does not allow consolidation
for federal income tax filing purposes. Thus, each company will continue to
separately determine its income tax liabilities. The Company's effective tax
rate, excluding Wickes', was 0% for the three months ended March 31, 1998 and
1997.
Wickes' provision for income taxes for the first quarter of 1998 was a benefit
of $3.9 million, compared to a benefit of $2.7 million for the first quarter of
1997. An effective tax rate of 39.0% was used to calculate federal income taxes
for the first quarter of 1998, compared with an effective rate of 39.1% for the
first quarter of 1997. In addition to the effective federal rate used, state
income and franchise taxes were calculated separately and are included in the
provision reported.
The Company continues to review future earnings projections to determine that
there is sufficient support for its deferred tax assets and valuation allowance.
In spite of the losses incurred during 1995 and 1997, management believes that
it is more likely than not that the Company will receive full benefit of its
deferred tax asset and that the valuation allowance is properly stated. This
assessment constitutes Forward-Looking Information made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995 and
is inherently subject to uncertainty and dependent upon the Company's future
profitability, which in turn depends upon a number of important risk factors,
including but not limited to, the effectiveness of the Company's operational
efforts, cyclicality and seasonality of the Company's business, the effects of
the Company's substantial leverage and competition.
5. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
_________________________________________
Reporting Comprehensive Income. 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 the equity of a business. 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 was effective for fiscal years beginning after December
15, 1997. Adoption of the statement has not had a material effect on the
Company's financial statements.
10
<Page 11>
Disclosure About Segments. 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 was effective for fiscal
years beginning after December 15, 1997. Adoption of the statement has not had
a material effect on the Company's financial statements.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
_____________________
The following discussion should be read in conjunction with the Condensed
Consolidated Financial Statements and Notes thereto contained elsewhere herein
and in conjunction with the Consolidated Financial Statements and Notes thereto
and Management's Discussion and analysis of Financial Condition and Results of
Operations contained in the Company's Annual report on Form 10-K for the year
ended December 31, 1997.
11
<Page 12>
RESULTS OF OPERATIONS
General
The Company reported results of operations for the three months ended March
31, 1998 and 1997, as follows (in thousands):
<TABLE>
CCaption>
Three Months Ended March 31,
_______________________________
(unaudited) (unaudited)
1998 1997
____ ____
<S> <C>
Earnings(loss) before income taxes, equity
in related parties, and
minority interest (1)(2) $(12,279) $(8,568)
Net loss before discontinued operations (5,098) (3,872)
Discontinued operations:
Loss from operations of discontinued mortgage
lending operations, net of income tax - (267)
Net loss $(5,098) $(4,139)
</TABLE>
(1) Includes realized investment gains of $437,000 and $54,000 for the first
quarters of 1998 and 1997, respectively.
(2) Includes a restructuring charge from Wickes of $5.4 million. This
charge consisted of $3.7 million in anticipated losses on the
disposition of closed center assets and liabilities and $2.0 million in
severance and post employment benefits related to the 1998 Plan, and a
benefit of $0.3 million for adjustments to prior years restructuring
accruals.
Wickes Inc.
___________
The Company estimates that the Company's results of operations include losses
attributable to Wickes of $3,596,000 and $2,681,000 for the first three months
of March 31, 1998 and 1997, respectively.
The following discussion was obtained from the Wickes' first quarter 1998
10-Q.
The following table sets forth, for the periods indicated, the percentage
relationship to net sales of certain expense and income items. This information
includes the results from all building centers and component manufacturing
facilities operated by Wickes, including those subsequently closed or sold.
12
<Page 13>
<TABLE>
<CAPTION>
Three Months Ended
__________________
(unaudited) (unaudited)
March March
28, 1998 29, 1997
________ _______
<S> <C>
Net sales 100.0% 100.0%
Gross profit 24.3% 23.2%
Selling, general and
administrative expense 24.1% 23.7%
Depreciation, goodwill and
trademark amortization 0.7% 0.7%
Provision for doubtful accounts 0.8% 0.7%
Restructuring and unusual items 3.2%
Other operating income (1.4)% (0.5)%
Income from operations (3.1)% (1.4)%
</TABLE>
Net Earnings
____________
Wickes' first quarter has historically been adversely affected by seasonal
decreases in building construction activity in the Northeast and Midwest
resulting from winter weather conditions. In the first quarter of 1998, the
Midwest experienced a very mild winter. The positive effects of the mild
winter in this region, Wickes' primary region, were partially offset by
increased precipitation in the Northeast and South. Weather conditions during
the first quarter of 1997 were closer to historical seasonal averages. The
first quarter of 1998 also had favorable economic conditions for the building
materials supply industry. Single family housing starts were up 8.5% over the
first quarter of 1997.
Net loss for the three months ended March 28, 1998 was $6,799,000 compared
with a loss of $5,190,000 for the three months ended March 29, 1997. The
increase in the net loss is primarily the result of a $5.4 million charge for
restructuring and unusual items and an increase in selling, general and
administrative ("SG&A") expense, interest expense, and provision for doubtful
accounts. The impact of these charges were partially offset by increases in
sales and gross profit margins, a $1.6 million increase in other operating
income, and the elimination of equity in losses of an affiliated company.
Operational Restructuring
_________________________
In the first quarter of 1998, Wickes announced and completed a plan for
additional restructuring activities (the "1998 Plan"). The 1998 Plan included
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. Wickes recorded a restructuring
charge of $5.4 million with respect to the 1998 Plan, consisting of $3.7 million
in anticipated losses on the disposition of closed center assets and
liabilities, $2.0 million in severance and post employment benefits, and a
benefit of $300,000 for adjustments to prior years' restructuring accruals.
13
<Page 14>
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 approximately $3.9
million, resulting in a gain of approximately $700,000.
Three Months Ended March 28, 1998 Compared
With the Three Months Ended March 29, 1997
__________________________________________
Net Sales
_________
Net sales for the first quarter of 1998 increased 5.9% to $168.7 million from
$159.3 million for the first quarter of 1997. Same store sales increased 10.3%
compared with the same period last year. Same store sales to Wickes' primary
customers, building professionals, also increased 10.3% when compared with the
first quarter of 1997, and consumer same store sales increased by 4.3% for the
quarter. As of March 28, 1998, Wickes operated 101 sales and distribution
facilities, nine less than it operated at the end of the first quarter of 1997.
Wickes estimates that deflation in lumber prices reduced total sales for the
quarter by approximately $4.4 million, compared with the 1997 comparable period.
Wickes believes that the sales increase results primarily from its recent
investments in its target major market and re-merchandised conventional market
sales and distribution facilities, as well as favorable economic and weather
conditions. Same store sales increased 29% in the Wickes' nine target major
markets, while same store sales increased 34% in the five building centers
Wickes finished remerchandising before the fourth quarter of 1997. Single
family housing starts were 8.5% higher, nationally, in the first quarter of 1998
than in the comparable period of 1997. In Wickes' primary geographical market,
the Midwest, single family housing starts were 14.0% higher.
Gross Profit
____________
1998 first quarter gross profit increased to $41.0 million from $36.9 million
for the first quarter of 1997, a 10.9% increase. Gross profit as a percent of
sales increased to 24.3% for the first quarter of 1998 from 23.2% in 1997. The
increase in gross profit as a percent of sales is primarily attributable to
improved product costs, increased margins on internally manufactured products
and a reduction in costs associated with physical inventory count adjustments.
Sales to building professionals, as a percentage of sales remained constant in
the two quarters, at 89.7%. Lumber and building materials accounted for 87.4%
of sales in the first quarter of 1998, unchanged from the first quarter of 1997.
Selling, General and Administrative Expense
___________________________________________
SG&A expense increased to 24.1% of net sales in the first quarter of 1998
compared with 23.7% of net sales in the first quarter of 1997. Much of the
increase is attributable to major market expansion programs and Wickes'
decision, in the second half of 1997, to remerchandise 19 sales and distribution
facilities and invest in programs to support sales improvement.
14
<Page 15>
Increases, as a percent of sales, in salaries and wages, employee relocation
and real estate and equipment rental expense were partially offset by reductions
in professional fees. Salaries, wages and employee benefits increased, as a
percent of sales, by 0.8%. As of March 28, 1998, Wickes had 3,550 full time and
part time employees, relatively unchanged from March 29, 1997.
Depreciation, Goodwill and Trademark Amortization
_________________________________________________
Depreciation, goodwill and trademark amortization increased to $1.3 million
for the first quarter of 1998 compared with $1.2 million for the same period in
1997. This increase is primarily due to depreciation on rental equipment.
Wickes' tool rental program was initiated during 1997 and no depreciation on
rental equipment was recorded in the first quarter of 1997.
Provision for Doubtful Accounts
_______________________________
The provision for doubtful accounts increased to $1.3 million for the first
quarter of 1998 from $1.0 million in the first quarter of 1997. The primary
reasons for the increase is better than historical collection performance in
the first quarter of 1997 and additional expense as a result of delinquency of
one major account in 1998.
Restructuring and Unusual Items
_______________________________
In February of 1998, Wickes announced the 1998 Plan which included the closing
or consolidation of eight building centers and two component manufacturing
facilities in February, the sale of two additional building centers in March,
and further reductions in headquarters staffing. Wickes recorded a
restructuring charge of $5.4, million which included $3.7 million in anticipated
losses on the disposition of closed center assets and liabilities, $2.0 million
in severance and post employment benefits related to the 1998 Plan, and a
benefit of $300,000 million for adjustments to prior years restructuring
accruals. No restructuring or unusual items were recorded in the first quarter
of 1997.
Other Operating Income
______________________
Other operating income for the first quarter of 1998 was $2.4 million compared
with $800,000 for the first quarter of 1997. During the first quarter of 1998,
Wickes recorded a gain of approximately $1.4 million on the sale of its two Iowa
centers, two other closed building centers, and excess equipment. In the first
quarter of 1997, Wickes sold no real estate and recorded gains of $25,000 on the
sale of excess equipment.
Interest Expense
________________
In the first quarter of 1998 interest expense increased to $5.4 million from
$5.2 million during the first quarter of 1997, resulting primarily from an
increase in average total long term debt of approximately $15.3 million,
partially offset by a decrease in the effective borrowing rate on total long
term debt of approximately 47 basis points. The decrease in the effective
borrowing rate is primarily due to a reduction in interest rate on Wickes'
revolving line of credit, effective April 11, 1997. Approximately 92% of
Wickes' first quarter average borrowings on its revolving credit facility were
LIBOR-based.
15
<Page 16>
Equity in Loss of Affiliated Company
____________________________________
In the first quarter of 1997, Wickes recorded equity in loss of affiliated
company of $600,000. Wickes' net equity in this affiliate has been reduced to
zero, and Wickes recorded no equity in this affiliate's losses in 1998.
Parent Company and Other Subsidiaries
_____________________________________
The following discussion relates to the operations of the Parent Company and
its subsidiaries, other than Wickes (the "Parent Group"). In December of 1997,
Riverside purchased "Wickes Plus" from Wickes Inc., and in January of 1998,
Riverside purchased Cybermax, an Internet Service Provider located in
Jacksonville, Florida. These operations have established Riverside as a
marketer of Internet services including dial-up and dedicated connectivity, web
software development, web hosting, long distance, prepaid and post paid calling
cards, and 800 and voice Messaging telephony services. Riverside markets these
operations under the name "Cybermax". In 1998, Riverside also began marketing
gas and electricity under the name of WIXX Energy ("WIXX").
Non-interest operating expenses for the first three months of 1998 and 1997
were $1,186,000 and $376,000, respectively. The primary reason for the increase
is due to the startup costs incurred by the Cybermax operations, which accounted
for approximately $865,000 of the expenses. In addition, WIXX incurred
approximately $162,000 of expenses during the first quarter of 1998.
Revenues of the Parent Group (excluding investment income) for the first
quarter of 1998 and 1997 were $199,000 and $0, respectively. Included is
$115,000 in sales attributable to the Cybermax operations and $82,500 received
in settlement of a lawsuit.
Interest expense remained relatively unchanged at $744,000 to $754,000 for the
quarters ending March 31, 1998 and 1997, respectively. Interest expense on the
Parent Company's real estate debt will continue to decrease as a result of real
estate sales. During the first quarter of 1998, the principal balance on the
mortgage debt was reduced by $3.2 million.
Real Estate Investments
_______________________
The Company's real estate investments consist of $7,399,000 in Georgia
properties, $3,481,000 in Florida properties and $73,000 in other states.
Included in the Company's net realized investment gains for the first three
months of 1998 and 1997 were net realized gains on real estate investments of
$437,000 and $54,000, respectively.
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<Page 17>
Discontinued Operations
_______________________
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. In December
1997, Riverside completed the sale of its remaining mortgage operations to a
third party, which continues to market mortgage loans through Wickes.
The following table sets forth information concerning the results of the
Company's former mortgage lending operations.
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1997
______________
<S> <C>
Revenues $ 288
Other income(loss) (15)
_____
Total revenues 273
Selling, general and administrative expenses (1) 429
Interest expense 111
_____
Total expense 540
_____
Net loss $(267)
=====
</TABLE>
(1) Net of reimbursements of $300,000 received during the first three months
of 1997, by the Parent Company on behalf of its mortgage lending
operations from Wickes.
17
<Page 18>
Income Taxes
____________
The Company does not consolidate with Wickes for income tax filing purposes.
Thus, each company will continue to separately determine its income tax
liability. The Company's effective tax rate, excluding Wickes', was 0% for the
three months ended March 31, 1998 and 1997. The Company's equity in losses of
Wickes has reduced the Company's GAAP basis in its investment in Wickes creating
deferred tax benefits which will be realized upon sale or subsequent increase
in GAAP basis of this investment.
Wickes' provision for income taxes for the first quarter of 1998 was a benefit
of $3.9 million, compared to a benefit of $2.7 million for the first quarter of
1997. An effective tax rate of 39.0% was used to calculate federal income taxes
for the first quarter of 1998, compared with an effective rate of 39.1% for the
first quarter of 1997. In addition to the effective rate used, state franchise
taxes were calculated separately and are included in the provision reported.
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 for several months. 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 April 20, 1998, Riverside amended certain terms of its real estate debt.
In connection with the amendment, (i) the Parent Company pledged an additional
325,000 shares of Wickes common stock in substitution for the $1.4 million cash
then held by the lender as collateral (less a $200,000 holdback for the
scheduled second quarter interest payment) and (ii) agreed to a reduced
collateral value for the shares of pledged Wickes common stock.
In February of 1998, Riverside completed the acquisition of the Internet and
utilities marketing operations formerly owned by Wickes. The disposition of
these operations by Wickes was part of the determination made by Wickes to
discontinue or sell non-core operations. For these operations, Riverside paid
consideration of approximately $872,000 in the form of a three-year unsecured
promissory note. The terms of the promissory note include interest based on the
prime lending rate plus two percentage points due monthly and principal due in
thirteen equal quarterly installments, beginning May 15, 1998 and ending May 15,
2001. In addition, Riverside agreed to pay ten percent of future net income of
these operations, subject to a maximum of $429,249 plus interest. The Company's
Consolidated financial statements do not reflect the promissory note since it
is an inter-company note and, therefore, eliminated in consolidation.
18
<Page 19>
At May 8, 1998, the Parent Company had approximately $1.7 million 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 its Cybermax and WIXX operations have begun to
generate significant positive cash flow. Therefore, the Parent Company will
need to obtain additional funds through asset sales or additional borrowings or
other financing. The principal asset that the parent Company could sell would
be its shares of Wickes common stock. At May 1, 1998, approximately 2,012,180
of the Parent Company's 4,152,415 shares of Wickes common stock are pledged to
secure various obligations of the Company.
On April 2, 1998, the Parent Company repaid the remaining $453,000 balance of
a secured obligation to a third party. On February 12, 1998, the Parent Company
issued an unsecured note for $100,000 to a third party in connection with its
acquisition of Cybermax.
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 May 1, 1998, the Company had not repaid. The Company plans to repay this
advance during the second quarter of 1998.
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 the first quarter of 1998, stockholders' equity decreased by a net of
$5.1 million, primarily as a result of Wickes' operating losses. Wickes'
results of operations have historically been adversely affected by seasonal
weather factors during the first quarter of the year. In addition, Wickes
recorded an operational restructuring charge of $5.4 million in the first
quarter of 1998.
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 level of positive or negative cash flow generated by the Parent
Company's internet, telephony and utilities marketing operations, (iii) 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 (iv) 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.
19
<Page 20>
Wickes
______
Wickes' principal sources of working capital and liquidity are earnings and
borrowings under its revolving credit facility. Wickes' primary need for
capital resources is to finance inventory and accounts receivable.
During the first three months of 1998 net cash used in operating activities
was $5.8 million, $5.7 million less than the $11.5 million used in the first
quarter of 1997. The first three months of the year historically have generated
negative cash flows from operating activities. With the peak building season
historically occurring in the second and third quarters, Wickes normally
experiences increases in its inventory levels during the first quarter to meet
the anticipated increase in sales.
Wickes' accounts receivable balance at the end of the first quarter of 1998
increased $7.4 million when compared to the end of the first quarter of 1997,
an increase of 10.9%. Approximately $4.3 million of this increase is
attributable to increased credit sales during March of 1998, compared with March
of 1997. Balances on accounts with special terms have also increased
approximately $4.0 million from 1997 to 1998.
Inventory at the end of the first quarter of 1998 was $5.2 million, or 4.7%
higher than at the end of the first quarter of 1997. This increase is largely
attributable to the major market and showroom remerchandising programs, as well
as the increase in first quarter sales. Roofing, insulation and vinyl siding
account for a $6.2 million increase in inventory which is partially offset by
decreases in commodity lumber inventory, primarily as a result of lower market
prices. Accounts payable at the end of the first quarter of 1998 increased
approximately $6.9 million, or 16.4% from the first quarter of 1997, primarily
attributable to an increase in total inventory and special buys on commodity
building materials (roofing, drywall, insulation) which included extended
accounts payable terms.
Wickes' capital expenditures consist primarily of the construction of storage
facilities, the remodeling and reformatting of building centers and component
manufacturing facilities, and the purchase of vehicles, equipment and management
information systems for both existing and new operations. In the first three
months of 1998, Wickes' spent $0.8 million on capital expenditures as compared
to $0.5 million for the same period in 1997. Wickes expects to spend
approximately $5.0 million for all of 1998. Under Wickes' bank revolving credit
agreement, as amended, capital expenditures during 1998 are limited to $6.0
million plus the proceeds from the sale of certain excess real estate plus the
portion of 1997's capital expenditures that were not spent. Wickes expects to
fund capital expenditures through borrowings and its internally generated cash
flow.
Through the first three months of 1998, Wickes has closed, consolidated, or
sold ten sales and distribution facilities and two component manufacturing
facilities. At May 1, 1998, Wickes operated 101 sales and distribution centers
and 10 component manufacturing facilities compared with 112 sales and
distribution facilities and 11 component manufacturing facilities at May 1,
1997. The following table reconciles the number of building centers and
component manufacturing facilities operated by Wickes through May 1, 1998:
20
<Page 21>
<TABLE>
<CAPTION>
Sales & Component
Distribution Manufacturing
Facilities Facilities
__________ _____________
<S> <C>
As of December 27, 1997 111 11
Expansion - 1
Sold (2) -
Closings (7) (2)
Consolidation (1) -
___ __
As of May 1, 1998 101 10
___ __
</TABLE>
Wickes maintained excess availability under its revolving line of credit
throughout the first three months of 1998. At the end of the first quarter,
total borrowings under the revolving line of credit were $10.5 million higher
than at the end of the first quarter of 1997. Under the current terms of
Wickes' bank revolving credit agreement, Wickes believes that it will continue
to have sufficient funds available for its anticipated operations and capital
expenditures. At March 28, 1998, $96.9 million was outstanding under Wickes'
revolving line of credit, and the unused availability was approximately $25.3
million. Wickes' assessment of its future funds availability constitutes
Forward-Looking Information made pursuant to the Private Securities Litigation
Reform Act of 1995 and is inherently subject to uncertainty resulting from,
among other things, the factors discussed under "Results of Operations -
Provision for Income Taxes".
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 announced by Wickes
in February, 1998 and includes the lenders' consent to Wickes' sale of its Iowa
facilities and its internet and utilities marketing operations.
21
<Page 22>
PART II
OTHER INFORMATION
Item 2. Changes in Securities
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule (SEC Use Only)
(b) Reports on Form 8-K
None
22
<Page 23>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
RIVERSIDE GROUP, INC.
By /s/ J. Steven Wilson
____________________________
J. Steven Wilson
Chairman of the Board,
President and
Chief Executive Officer
By /s/ Catherine J. Gray
____________________________
Catherine J. Gray
Senior Vice President and
Chief Financial Officer
Date: May 14, 1998
23
