AMENDMENT IS MADE TO INCLUDE FINANCIAL DATA SCHEDULE
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q/A 1
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Period ended SEPTEMBER 30, 1995
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ________________________
to___________________________
Commission File Number: 0-2568
WISCONSIN REAL ESTATE INVESTMENT TRUST
(Exact name of registrant as specified in its charter)
WISCONSIN 39-0993859
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
55 EAST MONROE STREET, SUITE 1600, CHICAGO, ILLINOIS 60603
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (312) 849-2990
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT NOVEMBER 1, 1995
Common Stock, $1.00 Par Value 1,468,209 shares
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WISCONSIN REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30,
1995 December 31,
(UNAUDITED) 1994
ASSETS
REAL ESTATE:
Property, plant and equipment 33,456,000 31,106,000
Real estate held for development and sale 25,911,000 26,517,000
Mortgage loans 3,973,000 5,050,000
Land contracts receivable 4,387,000 5,117,000
---------- ----------
67,727,000 67,790,000
---------- ----------
INVESTMENTS IN SECURITIES:
Short-term investments 5,039,000 14,042,000
Fixed maturities 5,799,000 39,314,000
Equity securities 16,318,000 20,792,000
Investments in affiliates 2,472,000 4,759,000
---------- ----------
29,628,000 78,907,000
---------- ----------
OPERATING ASSETS:
Cash 354,000 235,000
Restricted cash 3,931,000 5,544,000
Accounts receivable 24,038,000 21,554,000
Premiums receivable 29,617,000 9,145,000
Inventories 44,581,000 42,909,000
Policy acquisition costs 2,748,000 1,098,000
Prepaid expenses 1,609,000 1,296,000
----------- ----------
106,878,000 81,781,000
----------- ----------
OTHER ASSETS:
Receivable from affiliates 4,577,000 3,249,000
Cost in excess of assets acquired 11,412,000 6,195,000
Other assets 9,130,000 5,948,000
----------- -----------
25,119,000 15,392,000
----------- -----------
$ 229,352,000 243,870,000
=========== ===========
See Accompanying Notes
<PAGE>
WISCONSIN REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30,
1995 December 31,
(UNAUDITED) 1994
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
DEBT:
Notes payable $ 32,588,000 52,677,000
Mortgage notes 14,314,000 16,111,000
---------- ----------
46,902,000 68,788,000
---------- ----------
OTHER LIABILITIES:
Insurance reserves 60,462,000 62,681,000
Unearned premiums 45,797,000 18,494,000
Accounts payable 9,579,000 10,173,000
Accrued expenses 14,106,000 18,885,000
Other liabilities 16,440,000 14,038,000
Payable to affiliates 31,425,000 29,254,000
----------- -----------
177,809,000 153,525,000
----------- -----------
TOTAL LIABILITIES 224,711,000 222,313,000
----------- -----------
MINORITY INTERESTS IN SUBSIDIARIES 36,112,000 42,290,000
----------- -----------
SHAREHOLDERS' EQUITY (DEFICIT):
Preferred shares of beneficial interest,
Par value $100 per share;
Authorized 1,000,000 shares;
None outstanding
Common shares of beneficial interest,
Par value $1.00 per share; issued,
including shares held in treasury,
1,553,051 shares 1,553,000 1,553,000
Additional paid-in capital 616,000 615,000
Deficit (27,655,000) (15,976,000)
Treasury stock - at cost; 84,842 shares (669,000) (669,000)
Unrealized gains on marketable
equity securities 3,352,000 2,412,000
----------- -----------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) (22,803,000) (12,065,000)
Less receivable from affiliate (8,668,000) (8,668,000)
----------- -----------
$ 229,352,000 243,870,000
=========== ===========
See Accompanying Notes
<PAGE>
WISCONSIN REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months Ended
SEPTEMBER 30,
1995 1994
REVENUES:
Insurance premiums earned $ 22,951,000 $ 11,600,000
Manufacturing sales 33,973,000 32,677,000
Real estate sales 957,000 1,486,000
Investment income 8,250,000 1,130,000
Equity in earnings of affiliates 229,000 305,000
Other income 3,542,000 2,691,000
---------- ----------
Total revenues 69,902,000 49,889,000
---------- ----------
COSTS AND EXPENSES:
Insurance loss and loss adjustment expenses 20,684,000 8,270,000
Cost of manufacturing sales 29,465,000 25,420,000
Cost of real estate sales 787,000 640,000
Selling and operating costs 17,889,000 12,836,000
Corporate expenses 520,000 826,000
Furniture writedowns 5,450,000 --
Interest expense 2,567,000 1,671,000
---------- ----------
Total costs and expenses 77,362,000 49,663,000
---------- ----------
INCOME(LOSS) BEFORE ITEMS SHOWN BELOW (7,460,000) 226,000
(Provision) benefit for income taxes 467,000 (633,000)
Minority interest in (income) loss
of subsidiaries 2,420,000 (487,000)
---------- --------
NET LOSS $ (4,573,000) $ (894,000)
========== ========
PER SHARE INFORMATION
Weighted average shares outstanding 1,468,209 1,468,209
========= =========
Net loss per common share $(3.11) $(.61)
====== =====
See Accompanying Notes
<PAGE>
WISCONSIN REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Nine Months Ended
SEPTEMBER 30,
1995 1994
REVENUES:
Insurance premiums earned $ 54,556,000 $ 34,139,000
Manufacturing sales 98,740,000 96,724,000
Real estate sales 1,724,000 14,056,000
Investment income 11,577,000 4,517,000
Equity in earnings of affiliates 718,000 538,000
Other income 8,201,000 7,278,000
Total revenues 175,516,000 157,252,000
COSTS AND EXPENSES:
Insurance loss and loss adjustment expenses 46,787,000 27,886,000
Cost of manufacturing sales 80,541,000 75,341,000
Cost of real estate sales 1,180,000 9,549,000
Selling and operating costs 49,754,000 38,542,000
Corporate expenses 1,669,000 2,318,000
Furniture writedowns 5,450,000 --
Interest expense 7,356,000 4,718,000
----------- -----------
Total costs and expenses 192,737,000 158,354,000
----------- -----------
LOSS BEFORE ITEMS SHOWN BELOW (17,221,000) (1,102,000)
(Provision) benefit for income taxes 207,000 (1,679,000)
Minority interest in (income) loss
of subsidiaries 5,335,000 (682,000)
----------- ----------
NET LOSS $ (11,679,000) $ (3,463,000)
=========== ==========
PER SHARE INFORMATION
Weighted average shares outstanding 1,468,209 1,468,209
========= =========
Net loss per common share $(7.95) $(2.36)
===== =====
See Accompanying Notes
<PAGE>
WISCONSIN REAL ESTATE INVESTMENT TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Nine Months Ended
SEPTEMBER 30,
1995 1994
OPERATING ACTIVITIES:
Net loss $ (11,679,000) $ (3,463,000)
Adjustments to reconcile net loss
to net cash utilized in operating
activities:
Depreciation and amortization 4,500,000 3,789,000
Adjustments to interest yields (249,000) (103,000)
Gains from sale of property, plant
and equipment 126,000 (14,000)
Realized gains on investments (9,701,000) (3,229,000)
Reserves and writedowns 7,974,000 1,662,000
Loss on investment in real estate
partnerships 38,000 162,000
Equity in undistributed income (771,000) (607,000)
Minority interest in income (losses) (5,335,000) 437,000
Changes in assets and liabilities:
Real estate held for development
and sale 704,000 8,022,000
Inventories (2,096,000) (3,868,000)
Mortgage loans on real estate
and land contracts receivable 1,769,000 (745,000)
Mortgage notes payable on real
estate held (1,450,000) (7,130,000)
Insurance reserves and unearned
premiums 25,084,000 (17,879,000)
Operating assets and other liabilities (21,241,000) (2,410,000)
----------- -----------
Total adjustments (648,000) (21,913,000)
----------- -----------
NET CASH UTILIZED IN OPERATING ACTIVITIES (12,327,000) (25,376,000)
----------- -----------
INVESTING ACTIVITIES:
Investments in securities sold or matured 70,872,000 64,021,000
Investments in affiliates sold 9,287,000 648,000
Investment in securities purchased (52,890,000) (23,165,000)
Investment in affiliates purchased (462,000) (622,000)
Additional investments in subsidiaries (996,000) (4,644,000)
Other investments (1,291,000) (1,740,000)
Loans/repayments to affiliates (320,000) (300,000)
Purchases of property plant and equipment (3,133,000) (3,686,000)
Acquisition of Balfour (15,312,000) 14,000
Repayments of mortgage loans 258,000 1,136,000
----------- ----------
NET CASH PROVIDED BY (UTILIZED IN)
INVESTING ACTIVITIES 6,013,000 31,662,000
----------- ----------
FINANCING ACTIVITIES:
Issuance of note payable 15,106,000 9,512,000
Repayments of notes and mortgage
notes payable (10,241,000) (16,793,000)
Dividends of majority owned subsidiaries (45,000) (46,000)
---------- -----------
NET CASH PROVIDED BY (UTILIZED IN)
FINANCING ACTIVITIES 4,820,000 (7,327,000)
---------- ----------
INCREASE (DECREASE) IN CASH (1,494,000) (1,041,000)
Cash, beginning of period 5,779,000 9,579,000
---------- ----------
Cash, end of period 4,285,000 8,538,000
Less: restricted cash (3,931,000) (8,297,000)
---------- ----------
Unrestricted cash $ 354,000 $ 241,000
======= =======
See Accompanying Notes
<PAGE>
WISCONSIN REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION AND GOING CONCERN
Wisconsin Real Estate Investment Trust ("WREIT or "Company", including its
majority-owned subsidiary, Sunstates Corporation ("Sunstates"); "Investment
Trust", excluding Sunstates) is a majority-owned subsidiary of Hickory
Furniture Company ("Hickory") and Hickory in turn is a direct and indirect
majority-owned subsidiary of Telco Capital Corporation ("Telco") and RDIS
Corporation ("RDIS").
The consolidated financial statements have been prepared on the basis of a
going concern.
Through September 30, 1995, Investment Trust had advanced an aggregate of
$8,668,000 to Telco on a demand basis. These advances were made in the 1980's,
have no stated maturity date and are not secured. No schedule for payment of
the amounts advanced has been established and no significant collections on
the amount due, including interest, are anticipated within the next year.
Telco has substantial obligations to a bank and to subordinated debenture
holders and has no recurring sources of cash. Because of the uncertainty as
to the period for recovery, the Investment Trust classified the advances with
stockholders' deficit and effective January 1, 1992, suspended recognition of
interest in its financial statements with respect to the amounts advanced.
Prior to the suspension, interest was accrued at a rate of prime plus 2%.
Investment Trust's only assets are its investment in Sunstates Corporation
and its receivable from Telco, both of which are pledged to Hickory to secure
a $30,251,000 obligation to Hickory. The obligation to Hickory is a demand
promissory note bearing interest at a rate of prime plus 2% with principal and
interest due on demand. If Hickory were to take possession of the pledged
assets, which it has the right to do at any time, Investment Trust would be
forced to cease operations. Investment Trust has no recurring sources of cash
from which to meet its ongoing administrative cash requirements. During the
past year, Hickory has provided cash to meet these requirements. It is
uncertain at this time whether Hickory will be willing or able to continue
to provide cash to Investment Trust.
These conditions raise substantial doubts about the Investment Trust's
ability to continue as a going
concern. The consolidated financial statements do not include any adjustment
that might result from the outcome of this uncertainty.
<PAGE>
2. INTERIM FINANCIAL STATEMENTS
The accompanying consolidated financial statements are unaudited and do
not include certain information and note disclosures required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments considered necessary for a fair
presentation have been included, which consist solely of adjustments of a
normal recurring nature. These statements should be read in conjunction with
the financial statements, and notes thereto, included in the Form 10-K of
WREIT for the year ended December 31, 1994. The results of operations for the
nine months ended September 30, 1995, are not necessarily indicative of the
results that may be expected for the full fiscal year.
The consolidated financial statements include the accounts of the Company
and of its subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
3. ACQUISITION OF BALFOUR HEALTH CARE
On March 6, 1995, the Company's textile apparel manufacturing subsidiary
(Alba) purchased the Balfour Health Care Division (Balfour) and manufacturing
facility in Rockwood, Tennessee from Kayser-Roth Corporation. Alba financed
100% of the acquisition cost under a variable rate term loan agreement (see
Note 5). The following table presents the Company's investment as allocated
utilizing the purchase method of accounting (subject to possible further
adjustments) to the individual assets and liabilities of Balfour as of March
6, 1995:
Accounts receivable $ 1,956,279
Property, plant and equipment 2,730,830
Inventory 1,523,111
Liabilities assumed (316,928)
---------
Fair value of net assets acquired 5,893,291
Cash price paid 15,312,436
----------
Cost in excess of assets acquired (goodwill) $ 9,419,145
==========
The cost in excess of assets acquired ($9,419,145) will be amortized on a
straight-line basis over 15 years. The results of Balfour are included in the
accompanying financial statements since the date of acquisition.
The following unaudited pro forma financial information presents the
information as if the acquisition has occurred at the beginning of 1995 and
1994, after giving effect to certain adjustments, including amortization of
goodwill and interest expense from debt issued to fund the acquisition and
related income tax effects and minority interests. The total interest expense
included in this pro forma is $934,600 and $647,800 in the nine months of 1995
and 1994, respectively. Goodwill is amortized at $156,986 per quarter. This
pro forma is provided for information purposes only. It is based on
historical information and does not necessarily reflect the actual results
that would have occurred nor is it necessarily indicative of future results of
operations.
Quarter Ended Nine Months Ended
September 30, September 30,
1995 1994 1995 1994
Total Revenues $ 69,876,619 53,530,527 178,095,778 168,246,871
Net Income (4,572,000) (851,000) (11,661,000) (3,463,000)
Net Income Per Share $(3.11) (0.58) (7.94) (2.36)
4. INVENTORIES
The principal classifications of inventories were:
September 30, December 31,
1995 1994
Furniture manufacturing -
Materials and supplies $ 3,066,000 2,808,000
Work in progress 6,986,000 6,535,000
Finished goods 12,401,000 12,041,000
---------- ----------
22,453,000 21,384,000
---------- ----------
Textile apparel manufacturing -
Materials and supplies 3,867,000 3,297,000
Work in progress 5,570,000 5,803,000
Finished goods 7,397,000 8,164,000
---------- ----------
16,834,000 17,264,000
---------- ----------
Bootwear manufacturing -
Materials and supplies 1,253,000 882,000
Work in progress 1,588,000 1,501,000
Finished goods 1,074,000 543,000
--------- ---------
3,915,000 2,926,000
--------- ---------
Textile equipment manufacturing 857,000 883,000
Resort development 212,000 164,000
Other 310,000 288,000
---------- ----------
$44,581,000 42,909,000
---------- ----------
During 1994, the Company changed its method of inventory valuation for
its furniture manufacturing inventories from the last-in, first-out (LIFO)
method to the first-in, first-out (FIFO) method because the FIFO method of
reporting inventories and cost of sales represents a preferable method. The
change is reported in the accompanying financial statements by restating all
prior years to reflect the new method of accounting. The change is
preferable, in part, because under the current economic environment of low
inflation, the Company believes that the FIFO method will result in a better
measurement of operating results. Also, as a result of the recent operating
losses and demands upon its liquidity, the Company believes its financial
position is the primary concern of the readers of its financial statements and
that the accounting change will reflect inventories in the balance sheet at a
value that more closely represents current costs.
Restatement of operating results due to the change decreased cost of
manufacturing sales and the net loss by $348,000, net of minority interest,
($.24 per share) in the nine months ended September 30, 1994. The cumulative
effect of the change of $3,278,000 represents the reversal of the LIFO reserve
as of January 1, 1994 of $7,350,000, net of minority interest. Of this
amount, $6,246,000 represented the LIFO reserve originally recorded in
connection with the acquisition of the furniture assets from the Company's
controlling shareholder in June of 1990. The original accounting for this
acquisition resulted in a charge to additional paid in capital to reflect the
excess of the purchase price paid over the seller's historical cost basis of
the assets acquired. Accordingly, $2,776,000, which is net of minority
interest, has been reflected in the accompanying financial statements as a
retroactive adjustment to additional paid in capital. The remaining balance
of $502,000, net of minority interest, has been reported as an adjustment to
the accumulated deficit as of January 1, 1994. The aggregate effect of the
change was to increase stockholders' equity by $3,626,000 as of September 30,
1994.
5. DEBT
On March 6, 1995, the Company's textile apparel manufacturing subsidiary
entered into a $15,000,000 variable rate term loan, the proceeds from which
were used to acquire Balfour (see Note 3). Interest on this loan accrues at
the rate of LIBOR plus 2% with principal payments to be made quarterly
beginning June 30, 1995, and maturing on March 31, 2000. The note is
collateralized by all of the assets of the textile apparel manufacturing
subsidiary and contains various covenants covering minimum tangible net worth,
cash flow, leverage ratios, capital spending and the payment of dividends.
Notes payable include $11,966,686 due to Citibank and secured by
substantially all of the assets of the Company's furniture manufacturing
operations. The loan has been extended through January 3, 1996, to allow the
Company additional time to obtain refinancing. However, the Company cannot
state with certainty that it will be able to find alternative financing at
terms acceptable to the Company prior to the extended maturity date of the
loan.
At September 30, 1995, mortgage notes include $4,813,037 of loans on real
estate which have or will mature in 1995. One of these loans in the amount of
$1,382,749 is in the process of being foreclosed and will result in no loss to
the Company. The Company is continuing to search for satisfactory alternative
financing for the remaining properties. However, the availability of real
estate financing has been severely curtailed as the result of problems in both
the banking and real estate industries. Accordingly, the Company cannot state
with certainty that it will be successful in obtaining such refinancing.
6. INCOME TAXES
The provisions for federal income taxes differ from the amounts computed
by multiplying income before income taxes and minority interest in income of
subsidiaries by the statutory federal rates as follows (amounts in thousands):
NINE MONTHS ENDED SEPTEMBER 30,
1995 1994
Tax computed at statutory rate $ (5,855) (375)
State taxes, net of federal benefit 110 246
Tax exempt income and dividend exclusion (148) (1,033)
Puerto Rican income not subject to Puerto
Rican or federal tax (124) (247)
Effect of purchase accounting adjustments 737 (304)
Effect of losses not utilized
in the provision 5,073 3,279
Alternative minimum tax -- 113
----- -----
Total $ (207) 1,679
===== =====
7. LITIGATION AND CONTINGENCIES
On June 14, 1991, a jury in a District Court of Dallas County, Texas
awarded $3.5 million in actual damages and $5 million in punitive damages to
the plaintiffs of a lawsuit filed against the Company. This dispute related
to the amount of additional purchase consideration due plaintiffs under an
agreement made in 1983 whereby the Company purchased National Development
Company, a real estate company based in Dallas. The Company appealed the
verdict based, in part, on the exclusion by the court of evidence crucial to
the Company's defense. On August 9, 1995, the Court of Appeals Fifth District
of Texas at Dallas reversed the trial court's judgement and remanded the case
back to the trial court for a new trial. Subsequently, the Court of Appeals
denied the plaintiffs' motion for rehearing and the plaintiffs have filed an
application for Writ of Error with the Supreme Court of Texas. The Company
will file its response during November 1995. No date for a new trial has yet
been set.
On April 27, 1995, a purported class action complaint denominated David
Prosnitz v. Wisconsin Real Estate Investment Trust and Clyde Wm. Engle, was
filed in the Circuit Court of Cook County, Illinois. The complaint alleges
various breaches of fiduciary duty involving the operations and investment
activities of the Company and its subsidiaries during an unspecified period.
The plaintiff seeks monetary damages related to the decrease in the market
value of his investment during the period 1984 to 1994, and similar damages
for the members of the purported class, together with punitive damages,
attorneys fees and costs. The Company has not filed an answer to the complaint
in as much as the time within which to answer or otherwise plead has not
expired, and certain of the defendants have not been served with the
complaint. The Company intends to defend this action aggressively. Since the
litigation is at an early stage, it is not possible to predict the effect, if
any, the litigation may have on the financial position, results of operation
and cash flow of the Company.
INSURANCE MATTERS
During the previous three years, the Company's insurance subsidiary
experienced significant declines in premium volume as the result of the
discontinuation of certain general liability reinsurance programs and several
unprofitable direct automotive insurance programs combined with the effect of
price increases having been implemented in other markets which were producing
unsatisfactory results. The combination of the above resulted in the written
premium volume declining to approximately $47,944,000 in 1994 as compared to
$57,063,000 in 1993 and $118,830,000 in 1992. The decline in premium volume
stabilized during the early part of 1994 and began to increase during the last
half of the year as new programs already established and other planned actions
to increase volume started to become effective. Premiums written for the
first three quarters of 1995 totaled $20,480,000, $28,776,000 and 32,603,000,
respectively, as compared to $11,506,000, $11,506,000 and $12,023,000 in
respective quarters of 1994.
The short-term impact of the drop in written volume was that the Company
experienced a period of negative cash flow from underwriting activities
resulting from relatively immediate declines in collected premiums while claim
payouts, relating primarily to previously written policies, continue at
disproportionately higher levels. The Company's negative cash flow from
underwriting has begun to decline as premium volume has stabilized and started
to increase. Negative cash flow from investment income and underwriting
activities of the insurance segment for the first nine months of 1995 was a
negative $6,670,000, $1,721,000 and $2,044,000 in the first three quarters of
1995 for a combined negative cash flow of $10,435,000; as compared to
$23,611,000 for the first nine months of 1994. The negative cash flow which
the Company has experienced over the past three years has resulted in
significant liquidations of the insurance subsidiary's investment portfolio.
At September 30, 1995, the insurance subsidiary's investments in equity and
fixed maturity securities (excluding investments in other segments of the
Company's businesses) totaled $17,865,153. The Company believes that required
liquidations of the investment portfolio in order to meet operating cash flow
requirements during 1995 will be greatly reduced. However, such reductions
are dependent upon future premium volumes and claim payments, which, to a
great extent, are beyond the control of the Company.
The level of liquid assets, as defined by the National Association of
Insurance Commissioners ("NAIC"), of the Company's insurance subsidiaries was
$59,431,739 at September 30, 1995, as compared to $90,109,196 at December 31,
1994. The decline is due to the liquidation of investments to cover negative
cash flow requirements. Included in NAIC-defined liquid assets are certain
securities with a reported value of $6,932,590 at September 30, 1995, which
are not publicly traded as well as approximately $8,333,000 of securities and
certificates of deposit which were on deposit pursuant to state laws and
various reinsurance agreements. In addition, $31,246,647 ($33,954,320 at
December 31, 1994) of investments in publicly traded equity securities of
other companies, valued at their quoted market prices on September 30, 1995,
do not meet the NAIC definition of liquid assets solely because of the level
of ownership of such securities.
In August 1992, the Company agreed with the Illinois Department of
Insurance to decrease Coronet's ratio of liabilities to liquid assets, as
defined by the NAIC, to 105% over a five year period. At June 30, 1995,
Coronet's liquidity ratio was 173.3%, as compared to the agreed upon ratio of
178.25% at June 30, 1995 (130% at December 31, 1995). The Illinois Department
of Insurance has issued a Corrective Order amending the terms of the original
agreement whereby Coronet may make no new investments in affiliates (including
other business segments of the Company) and the liquidity ratio calculation
may no longer include the effect of any type of borrowing, reverse repurchase
or lending of securities or any other similar type of leverage transaction.
At September 30, 1995, under the terms of the Corrective Order, Coronet's
ratio was 233.7%, as compared to the agreed upon ratio of 130% at December 31,
1995. Inasmuch as the consolidated ratio of Coronet and its wholly-owned
insurance subsidiaries is 186.3% at September 30, 1995, the Company thereby
has the ability to impact Coronet's separate ratio through various
restructurings or asset transfers. However, compliance will be dependent upon
numerous factors, including but not limited to; the combination of future
premium volumes, underwriting and investment results, various restructurings
and asset transfers, potential regulatory examination adjustments, if any, and
other factors beyond the Company's control. Accordingly, the Company cannot
state with certainty that it will be able to achieve the agreed upon ratio at
December 31, 1995.
On October 10, 1995, the Arizona Department of Insurance issued a
Suspension Order prohibiting Coronet from writing any further business in the
State. The Company immediately appealed the order and the Arizona courts
issued a stay of the Order and the Company is allowed to continue its
activities in Arizona unimpeded pending the outcome of an administrative
hearing before the Arizona Department of Insurance. The Company is currently
engaged in settlement discussions with the Arizona Department of Insurance and
believes that it will be allowed to continue to write business in the State.
Through September 30, 1995, Coronet's written premium in the State of Arizona
totaled $15,679,000.
The Illinois Department is currently conducting a financial examination
of Coronet as of December 31, 1993, although the examination has not been
completed, at this time no matters have been brought to the Company's
attention which would have a material adverse impact on the Company.
LIQUIDITY
As the result of negative cash flow from insurance underwriting,
operating losses in certain other segments of the Company's operations, and
maturing debt obligations, all discussed in more detail below, the Company
will be facing various demands upon its liquidity in 1995 and 1996. The
Illinois Department of Insurance has issued a Corrective Order specifying that
Coronet may make no new investments in or advances to affiliates (including
other business segments of the Company). Accordingly, Coronet's non-insurance
operations may be required to obtain necessary funds entirely from external
financing or disposition of assets. Although the Company believes that it can
meet such demands upon its liquidity through selective liquidations of
securities in its investment portfolio, sales or refinancings of various real
estate and other assets, coupled with the anticipated reversal of the
insurance subsidiary's negative cash flow from underwriting, it cannot predict
with certainty the outcomes of such matters.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
SIGNIFICANT MATTERS
BASIS OF PRESENTATION AND GOING CONCERN
Wisconsin Real Estate Investment Trust ("WREIT or "Company", including its
majority-owned subsidiary, Sunstates Corporation ("Sunstates"); "Investment
Trust", excluding Sunstates) is a majority-owned subsidiary of Hickory
Furniture Company ("Hickory") and Hickory in turn is a direct and indirect
majority-owned subsidiary of Telco Capital Corporation ("Telco") and RDIS
Corporation ("RDIS").
The consolidated financial statements have been prepared on the basis of a
going concern.
Through September 30, 1995, Investment Trust had advanced an aggregate of
$8,668,000 to Telco on a demand basis. These advances were made in the 1980's,
have no stated maturity date and are not secured. No schedule for payment of
the amounts advanced has been established and no significant collections on
the amount due, including interest, are anticipated within the next year.
Telco has substantial obligations to a bank and to subordinated debenture
holders and has no recurring sources of cash. Because of the uncertainty as
to the period for recovery, the Investment Trust classified the advances
with stockholders' deficit and effective January 1, 1992, suspended
recognition of interest in its financial statements with respect to the
amounts advanced. Prior to the suspension, interest was accrued at a rate of
prime plus 2%.
Investment Trust's only assets are its investment in Sunstates Corporation
and its receivable from Telco, both of which are pledged to Hickory to secure
a $30,251,000 obligation to Hickory. The obligation to Hickory is a demand
promissory note bearing interest at a rate of prime plus 2% with principal
and interest due on demand. If Hickory were to take possession of the pledged
assets, which it has the right to do at any time, Investment Trust would be
forced to cease operations. Investment Trust has no recurring sources of cash
from which to meet its ongoing administrative cash requirements. During the
past year, Hickory has provided cash to meet these requirements. It is
uncertain at this time whether Hickory will be willing or able to continue
to provide cash to Investment Trust.
These conditions raise substantial doubts about the Investment Trust's
ability to continue as a going
concern. The consolidated financial statements do not include any adjustment
that might result from the outcome of this uncertainty.
<PAGE>
LITIGATION
See Note 7 of Notes to Consolidated Financial Statements for information
with respect to outstanding litigation.
On April 27, 1995, a purported class action complaint denominated David
Prosnitz v. Wisconsin Real Estate Investment Trust and Clyde Wm. Engle, was
filed in the Circuit Court of Cook County, Illinois. The complaint alleges
various breaches of fiduciary duty involving the operations and investment
activities of the Company and its subsidiaries during an unspecified period.
The plaintiff seeks monetary damages related to the decrease in the market
value of his investment during the period 1984 to 1994, and similar damages
for the members of the purported class, together with punitive damages,
attorneys fees and costs. The Company has not filed an answer to the complaint
in as much as the time within which to answer or otherwise plead has not
expired, and certain of the defendants have not been served with the
complaint. The Company intends to defend this action aggressively. Since the
litigation is at an early stage, it is not possible to predict the effect, if
any, the litigation may have on the financial position, results of
operation and cash flow of the Company.
CHANGE IN INVENTORY VALUATION
See Note 4 of Notes to Consolidated Financial Statements for information
with respect to the Company's change in the method of valuing its furniture
manufacturing inventories from last-in, first-out (LIFO) to first-in, first-
out (FIFO).
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
As the result of negative cash flow from insurance underwriting,
operating losses in certain other segments of the Company's operations, and
maturing debt obligations, all discussed in more detail below, the Company
will be facing various demands upon its liquidity in 1995 and 1996. The
Illinois Department of Insurance has issued a Corrective Order specifying that
Coronet may make no new investments in or advances to affiliates (including
other business segments of the Company). Accordingly, Coronet's non-insurance
operations may be required to obtain necessary funds entirely from external
financing or disposition of assets. Although, the Company believes that it
can meet such demands through selective liquidations of securities in its
investment portfolio, sales or refinancing of various real estate and other
assets, coupled with the anticipated reversal of the insurance subsidiary's
negative cash flow from underwriting, it cannot predict with certainty the
outcomes of such matters.
Total assets decreased $14,518,000 during the nine months of 1995 as the
result of several factors. Assets increased significantly due to the Balfour
acquisition on March 6, 1995, (see Note 3 of Notes to Consolidated Financial
Statements), which is reflected in increases in property, plant and equipment,
accounts receivable, inventories and costs in excess of assets acquired.
Investments in securities decreased due to the disposition of a significant
investment in U. S. Government securities acquired under agreements to resell,
and by the sale of securities to cover negative cash flow from underwriting
(see Insurance below). The increase in premiums receivable and policy
acquisition costs is related to the increase in the written premium volume at
the Company's insurance subsidiary.
Total debt declined $21,886,000 during the first nine months of 1995,
primarily due to the settlement of approximately $25,343,000 of transactions
through which securities were acquired under agreements to resell, the
repayment of approximately $7,654,000 against the Company's $10,000,000
working capital loan from the proceeds received in connection with the sale of
a portion of the Company's investment in Rocky Mountain Chocolate Factory,
Inc. and the repayment of $2,050,000 by the military boot manufacturing
subsidiary. These declines were partially offset by $15,000,000 of borrowings
in connection with the Balfour acquisition. The increase in unearned premiums
is related to the increase in written premium volume experienced in the first
nine months of 1995. The decrease in accrued expenses is partially the result
of approximately $8,170,000 due to brokers in connection with securities
purchased at the end of December 1994. Approximately 79.6% of the Company's
debt of $46,902,000 at September 30, 1995, carries a floating rate of interest
which varies with the prime lending rate. Accordingly, any increase or
decrease in interest rates will have a significant impact on its debt service
requirements.
Shareholders' deficit increased $10,738,000 during the nine months of
1995 primarily due to the net loss of $11,679,000 offset by increases in
unrealized gains in the Company's investment portfolio, net of minority
interest, totaling $940,000.
INSURANCE
During the previous three years, the Company's insurance subsidiary
experienced significant declines in premium volume as the result of the
discontinuation of certain general liability reinsurance programs and several
unprofitable direct automotive insurance programs combined with the effect of
price increases having been implemented in other markets which were producing
unsatisfactory results. The combination of the above resulted in the written
premium volume declining to approximately $47,944,000 in 1994 as compared to
$57,063,000 in 1993 and $118,830,000 in 1992. The decline in premium volume
stabilized during the early part of 1994 and began to increase during the last
half of the year as new programs already established and other planned actions
to increase volume started to become effective. Premiums written for the
first three quarters of 1995 totaled $20,480,000, $28,776,000 and 32,603,000,
respectively, as compared to $11,506,000, $11,506,000 and $12,023,000 in
respective quarters of 1994.
The short-term impact of the drop in written volume was that the Company
experienced a period of negative cash flow from underwriting activities
resulting from relatively immediate declines in collected premiums while claim
payouts, relating primarily to previously written policies, continue at
disproportionately higher levels. The Company's negative cash flow from
underwriting has begun to decline as premium volume has stabilized and started
to increase. Negative cash flow from investment income and underwriting
activities of the insurance segment for the first nine months of 1995 was a
negative $6,670,000, $1,721,000 and $2,044,000 in the first three quarters of
1995 for a combined negative cash flow of $10,435,000; as compared to
$23,611,000 for the first nine months of 1994. The negative cash flow which
the Company has experienced over the past three years has resulted in
significant liquidations of the insurance subsidiary's investment portfolio.
At September 30, 1995, the insurance subsidiary's investments in equity and
fixed maturity securities (excluding investments in other segments of the
Company's businesses) totaled $17,865,153. The Company believes that required
liquidations of the investment portfolio in order to meet operating cash flow
requirements during 1995 will be greatly reduced. However, such reductions
are dependent upon future premium volumes and claim payments, which, to a
great extent, are beyond the control of the Company.
The level of liquid assets, as defined by the National Association of
Insurance Commissioners ("NAIC"), of the Company's insurance subsidiaries was
$59,431,739 at September 30, 1995, as compared to $90,109,196 at December 31,
1994. The decline is due to the liquidation of investments to cover negative
cash flow requirements. Included in NAIC-defined liquid assets are certain
securities with a reported value of $6,932,590 at September 30, 1995, which
are not publicly traded as well as approximately $8,333,000 of securities and
certificates of deposit which were on deposit pursuant to state laws and
various reinsurance agreements. In addition, $31,246,647 ($33,954,320 at
December 31, 1994) of investments in publicly traded equity securities of
other companies, valued at their quoted market prices on September 30, 1995,
do not meet the NAIC definition of liquid assets solely because of the level
of ownership of such securities.
In August 1992, the Company agreed with the Illinois Department of
Insurance to decrease Coronet's ratio of liabilities to liquid assets, as
defined by the NAIC, to 105% over a five year period. At June 30, 1995,
Coronet's liquidity ratio was 173.3%, as compared to the agreed upon ratio of
178.25% at June 30, 1995 (130% at December 31, 1995). The Illinois Department
of Insurance has issued a Corrective Order amending the terms of the original
agreement whereby Coronet may make no new investments in affiliates (including
other business segments of the Company) and the liquidity ratio calculation
may no longer include the effect of any type of borrowing, reverse repurchase
or lending of securities or any other similar type of leverage transaction.
At September 30, 1995, under the terms of the Corrective Order, Coronet's
ratio was 233.7%, as compared to the agreed upon ratio of 130% at December 31,
1995. Inasmuch as the consolidated ratio of Coronet and its wholly-owned
insurance subsidiaries is 186.3% at September 30, 1995, the Company thereby
has the ability to impact Coronet's separate ratio through various
restructurings or asset transfers. However, compliance will be dependent upon
numerous factors, including but not limited to; the combination of future
premium volumes, underwriting and investment results, various restructurings
and asset transfers, potential regulatory examination adjustments, if any, and
other factors beyond the Company's control. Accordingly, the Company cannot
state with certainty that it will be able to achieve the agreed upon ratio at
December 31, 1995.
On October 10, 1995, the Arizona Department of Insurance issued a
Suspension Order prohibiting Coronet from writing any further business in the
State. The Company immediately appealed the order and the Arizona courts
issued a stay of the Order and the Company is allowed to continue its
activities in Arizona unimpeded pending the outcome of an administrative
hearing before the Arizona Department of Insurance. The Company is currently
engaged in settlement discussions with the Arizona Department of Insurance and
believes that it will be allowed to continue to write business in the State.
Through September 30, 1995, Coronet's written premium in the State of Arizona
totaled $15,679,000.
The Illinois Department is currently conducting a financial examination
of Coronet as of December 31, 1993, although the examination has not been
completed, at this time no matters have been brought to the Company's
attention which would have a material adverse impact on the Company.
Statutory net worth decreased to $54,000,583 at September 30, 1995, as
compared to $59,483,697 at December 31, 1994, primarily due to continuing
underwriting losses and unrealized losses in the investment portfolio,
partially offset by a contribution to capital. The annualized ratio of
premiums written during the nine months ended September 30, 1995, to statutory
surplus as of September 30, 1995, was 2.02 to 1. A ratio of less than 3.0 to
1 is generally considered conservative.
MANUFACTURING
Hickory White has loans totaling $11,966,686 at September 30, 1995, with
a major bank which are secured by substantially all of the assets of the
furniture manufacturing division and which have been extended until January 3,
1996, to provide time necessary to find refinancing. Management has begun
discussions with potential lenders but cannot state with certainty that such
refinancing will be available or in an amount sufficient to totally retire the
outstanding balance.
The working capital of the furniture manufacturing operation was
$9,756,880 at September 30, 1995. The current asset ratio at September 30,
1995, was 1.5 to 1. This ratio reflects the characterization of all of the
bank financing of the furniture manufacturing operations as a current
liability. Accordingly, at September 30, 1995, the division has no long-term
debt (excluding intercompany debt). Also, at September 30, 1995, Hickory
White had no additional borrowing capacity under its Credit Agreement. The
furniture manufacturing division is restricted in its ability to transfer
funds to Sunstates under the terms of its Credit Agreement with Citicorp.
Working capital of the Company's textile manufacturing operation (Alba)
is adequate to support its operations and totaled $19,423,104 at September 30,
1995, yielding a current ratio of 3.05 to 1. In addition, Alba has a short-
term line of credit of $5,000,000, of which $2,494,744 was available at
September 30, 1995. The division had long-term debt of $12,850,000 and had
total net assets of $27,396,610 at September 30, 1995, including minority
interests.
The military footwear manufacturing division's working capital, including
marketable securities held for investment, is more than adequate to support
current operating levels and totaled $12,455,324 at September 30, 1995,
yielding a current ratio of 5 to 1. The division had no long-term debt at
September 30, 1995, and had total net assets of $12,547,077, including
minority interests.
Liquidity for the textile machinery manufacturing operations has
historically been provided through its sales terms. Normally, 50% of the sales
price is paid at the time of the order, 40% at the time the production of the
machine is completed, with the final 10% paid upon installation in the
customer's facility. Working capital of the division totaled $1,065,500 at
September 30, 1995, yielding a current ratio of 1.97 to 1. There was no debt
at September 30, 1995, and total net assets were $12,799,771.
REAL ESTATE
The real estate segment's debt totaled $14,464,371 at September 30, 1995
with real estate assets of $41,013,000 yielding an asset leverage ratio of
35.3%. At September 30, 1995, mortgage notes include $4,813,037 of loans on
real estate which have or will mature in 1995. One of these loans in the
amount of $1,382,749 is in the process of being foreclosed and will result in
no loss to the Company. The Company is continuing to search for satisfactory
alternative financing for the remaining properties. However, the availability
of real estate financing has been severely curtailed as the result of problems
in both the banking and real estate industries. Accordingly, the Company
cannot state with certainty that it will be successful in obtaining such
refinancing.
EQUITY INVESTEES
Equity investees do not normally represent a significant source of cash
flow to the Company. The stock of Rocky Mountain is publicly traded and could
provide potential liquidity to the Company in the future. This equity
investment is held by WREIT's insurance subsidiary (is pledged against a
working capital loan with an outstanding balance of $2,346,260 at September
30, 1995) and is therefore subject to restrictions regarding the transfer of
funds to its parents. (See Results of Operations - Equity Investees for
information concerning the sale of 500,000 shares of Rocky Mountain common
stock in the third quarter of 1995.)
CORPORATE
Sunstates has annual dividend obligations currently totaling $1,025,111
on its $3.75 Cumulative Preferred Stocks. Sunstates is currently in arrears
ten semi-annual dividend payments on its $3.75 Cumulative Preferred Stock
aggregating $5,209,931.
Investment Trust has pledged the Sunstates stock which it owns and its
direct receivable from Telco of $8,668,000 as collateral for $30,251,000 of
Investment Trust's payable to Hickory. In 1993, Hickory purchased a $3,833,000
obligation of Investment Trust to Nelreco Troy, Inc. for $800,000. In
connection with that purchase, Hickory has pledged certain of the shares of
Sunstates Corporation owned of record by Investment Trust to secure Hickory's
obligation to Nelreco Troy. The $300,000 remaining balance of this obligation,
of which $150,000 was due January 2, 1995 and July 2, 1995, respectively, has
not been paid.
See Basis of Presentation and Going Concern for a discussion of
Investment Trust's liquidity.
CASH FLOWS
OPERATING ACTIVITIES
The following table presents the net cash flows from operating activities
by industry segment for the nine month periods indicated:
Cash Flows Provided By (Utilized In)
OPERATING ACTIVITIES
1995 1994
Insurance $ (10,435,000) (23,611,000)
Manufacturing 2,217,000 109,000
Real Estate (1,459,000) 1,319,000
Equity Investees (55,000) 14,000
Corporate (2,595,000) (3,207,000)
----------- -----------
$ (12,327,000) (25,376,000)
=========== ===========
The net cash utilized by insurance operations is primarily the result of
declining premium volume in 1993 and 1994 resulting in increased negative cash
flow from underwriting activities (see Insurance above). The short-term
impact of the drop in written volume is that the company will experience a
period of negative cash flow from underwriting activities resulting from
relatively immediate declines in collected premiums while claim payouts,
relating primarily to previously written policies, continue at
disproportionately higher levels. The negative cash flow can be expected to
continue throughout the payout period related to the lost business or until
new programs and other planned actions to increase premium volume can become
effective. The Company's negative cash flow from underwriting has begun to
decline as premium volume has stabilized and started to increase. Negative
cash flow from investment income and underwriting activities of the insurance
segment for the first nine months of 1995 was a negative $6,670,000,
$1,721,000 and $2,044,000 in the first three quarters of 1995 for a combined
negative cash flow of $10,435,000; as compared to $23,611,000 for the first
nine months of 1994. The Company believes that required operating cash flow
requirements during 1995 will be greatly reduced. However, such reductions
are dependent upon future premium volumes and claim payments, which, to a
great extent, are beyond the control of the Company.
During the first nine months of 1995, the furniture manufacturing
business utilized $2,589,000 of cash in its operating activities, including
$1,802,000 of interest expense and including $512,000 of cash utilized to
increase net operating assets and liabilities (mostly inventories and accounts
receivable). This compares to $4,016,000 and $2,194,000 of cash utilized
during the full twelve month periods ended December 31, 1994 and 1993,
respectively. During the first nine months of 1994, the furniture
manufacturing business utilized $2,726,000 of cash in its operating
activities, including $1,867,000 of interest expense and including $996,742 of
cash utilized to increase net operating assets and liabilities (mostly due to
an increase in inventories). At September 30, 1995, Hickory White had no
additional borrowing capacity under its Credit Agreement.
Cash flow from the remaining operations within the manufacturing segment
totaled $4,806,000 in the first nine months of 1995 as compared to $2,835,000
for the first nine months of 1994. The higher cash flow in 1995 is primarily
attributable to collections of accounts receivable at the Company's military
boot manufacturing subsidiary.
The cash utilized in real estate increased in 1995 due primarily to an
$800,000 principal reduction made in connection with the restructuring of a
loan on one of the Company's shopping centers. The cash provided by real
estate in 1994 was due primarily to the sale of an apartment complex.
The higher cash utilized in the corporate segment in 1994 reflects cash
used in the payment of estimated income taxes.
<PAGE>
INVESTING ACTIVITIES
The following table presents the net cash flows from investing activities
by industry segment for the nine month periods indicated:
Cash Flows Provided By (Utilized In)
INVESTING ACTIVITIES
1995 1994
Insurance $ 12,052,000 34,811,000
Manufacturing (14,666,000) (896,000)
Real Estate (607,000) (347,000)
Equity Investees 9,287,000 260,000
Corporate (53,000) (2,166,000)
--------- ----------
$ 6,013,000 31,662,000
========= ==========
Generally, cash flow from operations not otherwise needed for operating
or financing purposes is utilized in investing activities, primarily at the
Company's insurance subsidiaries. However, declines in premium volumes
required that securities be sold from the insurance subsidiary's investment
portfolio to cover the negative cash flow from underwriting activities
discussed above as well as provide funds needed by other segments of the
Company's business. As discussed above in Insurance, due to cash requirements
needed to cover anticipated negative cash flow from underwriting, liquidations
of the investment portfolio in 1995 are expected to continue, although at a
reduced level from that of 1994.
The higher utilization of cash in the manufacturing segment in 1995
represents the approximately $15 million acquisition cost of the Balfour
operations by the Company's textile manufacturing subsidiary. The utilization
of cash in the manufacturing segment in 1994 primarily represents additions to
property, plant and equipment.
During 1994, the collection of a mortgage loan was included in the real
estate segment's cash flow.
Cash from equity investees represents proceeds from the sale of a portion
of the Company's investment in the common stock of Rocky Mountain Chocolate
Factory. (See "Results of Operations - Equity Investees" below.)
During the nine months ended September 30, 1995, Sunstates purchased
Sunstates Class B stock formerly owned by Investment Trust for proceeds of
$251,000. Investment Trust's payable to Hickory was reduced by the same
amount.
During the nine months ended September 30, 1995 and 1994, WREIT, through
Sunstates, purchased equity securities of Sunstates for an aggregate cost of
$996,000 and $4,644,000, respectively.
FINANCING ACTIVITIES
The following table presents the net cash flows from financing activities
by industry segment for the nine month periods indicated:
Cash Flows Provided By (Utilized In)
FINANCING ACTIVITIES
1995 1994
Insurance $ (7,684,000) (6,025,000)
Manufacturing 12,619,000 (1,231,000)
Real Estate (115,000) (70,000)
Corporate -- (1,000)
--------- ----------
$ 4,820,000 (7,327,000)
========= ==========
In the third quarter of 1995, proceeds totaling $7,735,000 from the sale
of 500,000 shares of common stock of Rocky Mountain were used to reduce the
principal outstanding under a $10,000,000 working capital loan. (See "Results
of Operations - Equity Investees" below.) The insurance segment's utilization
of cash in 1994 reflects the repayment of a $6,000,000 short-term line of
credit.
The significant source of cash in the manufacturing segment in 1995
relates to the $15,000,000 in financing obtained by the Company's textile
apparel manufacturing subsidiary in connection with its acquisition of the
Balfour Health Care operations.
<PAGE>
RESULTS OF OPERATIONS
The Company's net loss totaled $11,679,000 in the first nine months of
1995 or $7.95 per share, compared to a loss of $3,463,000 or $2.36 per share
in 1994. Losses at the Company's insurance, resort development and furniture
manufacturing operations contributed to the higher loss in 1995. Additionally,
the Company recorded writedowns totaling $5,450,000 or $3.71 per share (before
minority interest) related to the Company's furniture operations (see
"Manufacturing" below). Partially offsetting these losses was a gain of
$6,697,000 or $4.56 per share (before minority interest) resulting from the
sale of a portion of the Company's investment in Rocky Mountain Chocolate
Factory (see "Equity Investees" below).
INDUSTRY SEGMENTS
WREIT operates in three industry segments; insurance, manufacturing and
real estate development. Information about the operations of the different
industry segments for the nine months ended September 30, 1995 and 1994 is as
follows (amounts in thousands):
1995 1994
Revenues:
Insurance $ 58,502 37,901
Manufacturing 99,222 97,645
Real Estate 6,713 18,265
Equity Investees 7,789 846
Corporate & Eliminations 3,290 2,595
-------- -------
$175,516 157,252
======== =======
Pre-tax Income (Loss):
Insurance $ (10,598) (1,745)
Manufacturing (7,334) 3,817
Real Estate (2,339) 518
Equity Investees 7,734 846
Corporate (4,684) (4,538)
------- ------
$(17,221) (1,102)
======= ======
INSURANCE
Following is a summary of the results of operations of the insurance segment
for the nine months ended September 30, 1995 and 1994 (amounts in thousands):
1995 1994
Premiums written $ 81,860 35,035
Premium growth (decline) 134% (24.8%)
Premiums earned 54,556 34,139
Losses and loss adjustment expenses 46,787 27,886
Loss ratio 85.8% 81.7%
Underwriting loss (12,635) (4,520)
Statutory combined ratio 113.1% 113.3%
Investment income recognized 3.756 3,807
Change in unrealized gains (393) (1,127)
Combined annual investment yield 9.51% 4.4%
Pre-tax loss (10,598) (1,745)
(See "Liquidity and Capital Resources - Insurance" above for a discussion
of premium volume.)
During the first nine months of 1995, the Company recorded an
underwriting loss of $12,635,000, which included $3,522,000 of losses
recognized on inactive programs and losses on continuing active programs of
$9,113,000. The combined ratio for the 1995 accident year on the Company's
continuing active programs was 116.6% as compared to 1994 when the Company
recorded a current accident year combined ratio of 120.0% for the full year on
continuing active programs. The combined ratio of 113.1% for the first nine
months of 1995 continues to be at an unacceptable level.
Investment income recognized was lower in 1995 as there were fewer sales
of securities to meet cash flow requirements in the current year. Realized
gains from the sale of equity securities totaled approximately $2,054,000 in
the nine months of 1995 as compared to $2,577,000 in the 1994 period.
Interest expense totaled $1,746,892 in the nine months of 1995 ($605,084
in 1994) reflecting the insurance subsidiary's $10,000,000 working capital
loan obtained in December of 1994, as well as borrowings incurred in
connection with certain investment transactions by which the Company acquired
U. S. Treasury securities under agreements to resell - see "Liquidity and
Capital Resources - Insurance" above.
MANUFACTURING
Net furniture sales decreased by $276,023 or 0.3% in the first nine
months of 1995 compared against the increase of $1,549,443 or 4.7% experienced
in the first nine months of 1994. The furniture cost of sales, as a percent
of net sales, decreased approximately 0.5% in 1995 as compared to an increase
of approximately 5% in the comparable 1994 period. The 1995 results reflect
the impact of increased discounting and promotions necessary to move out slow
moving or discontinued product lines. In aggregate, the 1995 gross profit
increased by $156,834 or 3.3% as compared to a increase of $820,860 or 26.4%
in the prior year. Selling and administrative expenses increased 2% between
the two periods.
During the third quarter the Company recognized a one-time charge of
$5,450,000 ($3.71 per share, before minority interest), primarily to writeoff
unamortized goodwill which had been recorded in connection with a pre-1970
acquisition of certain furniture operations. Additionally, the charge
provided for writing down various assets at its non-residential furniture
operations (which are currently being offered for sale) to more closely
reflect their current values as well as the cost of certain administrative and
operational restructurings. The Company is taking these steps in response to
softness in high-end furniture retail markets, which have not recovered to
their pre-recession levels of 1990.
Net textile apparel manufacturing sales for the first nine months of 1995
increased $4,560,375 or 10.7% compared to the same period in 1994. This
increase was primarily due to the acquisition of the Balfour Health Care
operation which added $9,738,578 of net sales to the 1995 period. Without
this acquisition, sales for the nine months of 1995 would have declined
$5,178,203 or 12.1% as the result of weakness in the consumer products line as
major customers experienced overstock positions in retail inventories, the
termination of two Japanese distributors in its direct marketing operation and
softness in its Byford division as the result of softness in the sweater
market. Gross margins decreased to 19.7% of sales as compared to 25.9% in
1994. This decrease in margins is due to decreased sales in the Consumer and
Alba Direct Divisions and an increase in manufacturing cost resulting from
overhead cost not being reduced proportionate to the reduction in sales
volume. In addition, during the third quarter a writedown of $1,200,000 was
recorded to reflect close-outs and irregular inventory. Although the Company
writes down close-outs and irregular inventory on a regular basis, the fact
that consumer products sales volume has been soft for the last year and
product prices are being depressed by other manufacturers closing out excess
inventories necessitated these additional writedowns. Selling, general and
administrative expenses increased from 19.2% for the first nine months of 1994
to 19.7% for the same period in 1995, due primarily to the addition of
$305,000 (0.6%) of goodwill related to the acquisition of Balfour. Operating
income decreased by $2,812,920 or 99% as compared to the first nine months of
1994. Increased interest expense in 1995 related to the $15,000,000 of long-
term debt obtained to finance the Balfour acquisition also contributed to the
lower earnings in 1995.
Operating revenues from the military footwear division decreased by
$2,889,571 or 18.4% from their nine month 1994 levels. This reflects almost a
22% decrease in the number of pairs of combat boots sold in the first nine
months of 1995 as compared to the first nine months of last year. The current
period reflects delivery of combat boots to the U. S. government under the
sixteen month schedule whereas the prior period was on a twelve month schedule
for the same total pairs. Also, the prior period included a significant sale
of machinery and combat boot manufacturing materials to a foreign customer,
and significant sales to two domestic customers. Cost of military boot sales
and services as a percent of revenues increased from 80.1% to 87.4% between
the two years due to increases in manufacturing costs such as health insurance
and workers compensation insurance.
Textile machinery's net sales increased $543,925 in the first nine months
of 1995 as compared to an increase of $644,864 experienced in the same nine
months of 1994. Gross margin percentages increased 9.8% in 1995 as compared
to 1994.
REAL ESTATE
RESORT DEVELOPMENT
The Company's resort development in Spring Green, Wisconsin reported a
loss of $1,772,594 during the first nine months of 1995 as compared to
$1,584,159 in 1994, both years representing primarily property taxes,
operating expenses and overhead costs. However, the 1995 period reflected
additional overhead for the real estate development operation not present in
the first quarter of 1994 and higher interest cost relating to amounts
borrowed from its parent in connection with ongoing operating losses. There
have been no significant real estate sales to date.
COMMERCIAL AND RESORT LOTS
During the second quarter or 1994, the Company sold an apartment project
generating net sales of $10,643,988 and profit of $2,728,693. There was no
other significant or unusual activity in these divisions of the Company's real
estate segment during the first nine months of either 1995 or 1994.
EQUITY INVESTEES
The following table sets forth for the nine months ended September 30,
1995 and 1994, the Company's share of the earnings Rocky Mountain Chocolate
Factory, Inc., in which it has an ownership level whereby it has the
opportunity to exert significant influence, but not control and thereby
accounts for its investment utilizing the equity method of accounting (amounts
in thousands):
1995 1994
- Operations $ 718 538
- General expenses (55)
- Sale of stock and interest 7,071 308
------ ---
$ 7,734 846
====== ===
On September 20, 1995, the Company sold 500,000 shares of Rocky Mountain
Chocolate Factory, Inc. common stock in a public offering for net proceeds of
$7,735,000, resulting in a pre-tax gain of $6,697,000 or $4.56 per share
(before minority interest). The proceeds from the sale were used to retire
corporate debt. The Company also received payment in full under a note
receivable from the president of Rocky Mountain Chocolate Factory totaling
$1,177,507, including accrued interest. In connection with the public
offering, the Company had granted the underwriter a 30-day option to purchase
up to an additional 84,375 shares of common stock for the purpose of covering
over-allotments, if any. On October 18, 1995, the underwriter exercised its
option and purchased an additional 62,500 shares resulting in additional
proceeds of $966,875, which were also used to retire corporate debt. The
insurance subsidiary still owns 858,757 shares of the common stock of Rocky
Mountain Chocolate Factory representing approximately 29% of the outstanding
shares.
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On June 14, 1991, a jury in a District Court of Dallas County, Texas
awarded $3.5 million in actual damages and $5 million in punitive damages to
the plaintiffs of a lawsuit filed against the Company. This dispute related
to the amount of additional purchase consideration due plaintiffs under an
agreement made in 1983 whereby the Company purchased National Development
Company, a real estate company based in Dallas. The Company appealed the
verdict based, in part, on the exclusion by the court of evidence crucial to
the Company's defense. On August 9, 1995, the Court of Appeals Fifth
District of Texas at Dallas reversed the trial court's judgement and remanded
the case back to the trial court for a new trial. Subsequently, the Court of
Appeals denied the plaintiffs' motion for rehearing and the plaintiffs have
filed an application for Writ of Error with the Supreme Court of Texas. The
Company will file its response during November 1995. No date for a new trial
has yet been set.
On April 27, 1995, a purported class action complaint denominated David
Prosnitz v. Wisconsin Real Estate Investment Trust and Clyde Wm. Engle, was
filed in the Circuit Court of Cook County, Illinois. The complaint alleges
various breaches of fiduciary duty involving the operations and investment
activities of the Company and its subsidiaries during an unspecified period.
The plaintiff seeks monetary damages related to the decrease in the market
value of his investment during the period 1984 to 1994, and similar damages
for the members of the purported class, together with punitive damages,
attorneys fees and costs. The Company has not filed an answer to the complaint
in as much as the time within which to answer or otherwise plead has not
expired, and certain of the defendants have not been served with the
complaint. The Company intends to defend this action aggressively. Since the
litigation is at an early stage, it is not possible to predict the effect, if
any, the litigation may have on the financial position, results of
operation and cash flow of the Company.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Dividends on the Company's $3.75 Cumulative Preferred Stock are payable
semi-annually at the annual rate of $3.75 per share, when and as declared, and
such dividends are cumulative. The $3.75 Cumulative Preferred Stock has no
voting rights, except if two semi-annual dividend payments are unpaid and in
arrears at the date of the Company's annual meeting, the holders of the $3.75
Cumulative Preferred Stock have the right to elect fifty percent of the
members of the Company's board of directors. Sunstates is currently in
arrears ten semi-annual dividend payments on its $3.75 Cumulative Preferred
Stock aggregating $5,209,931.
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits:
Exhibit-27
(B) Reports on Form 8-K
The Company filed a current report on Form 8-K disclosing the
acquisition by its textile manufacturing subsidiary of the Balfour Health
Products Division from Kayser-Roth Corporation on March 21, 1995. No financial
statements or pro forma financial information was filed with such Form 8-K but
was filed by amendment on Form 8-K/A on May 22, 1995.
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
WISCONSIN REAL ESTATE INVESTMENT TRUST
/S/ CLYDE WM. ENGLE
-------------------------
Clyde Wm. Engle
Chairman of the Board and
Chief Executive Officer
/S/ PHILLIP J. ROBINSON
--------------------------
Phillip J. Robinson
Chief Accounting Officer
Date: February 6, 1996
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