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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File
For Quarter Ended September 30, 1995 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
602-224-6820
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, and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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On November 10, 1995 there were 5,267,101 shares of the Registrant's common
stock outstanding.
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RIVERSIDE GROUP, INC.
INDEX
<TABLE>
<CAPTION>
Page
Number
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
September 30, 1995 (Unaudited)
and December 31, 1994 3
Condensed Consolidated Statements
of Operations
Three months and nine months ended
September 30, 1995 and 1994 (Unaudited) 4
Condensed Consolidated Statement
of Common Stockholders' Equity
Nine months ended
September 30, 1995 (Unaudited) 5
Condensed Consolidated Statements of
Cash Flows
Nine months ended
September 30, 1995 and 1994
(Unaudited) 6
Notes to Condensed Consolidated
Financial Statements (Unaudited) 7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 12
PART II.
Item 1. Legal Proceedings 18
Item 3. Defaults Upon Senior Securities 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
</TABLE>
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RIVERSIDE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1995 AND DECEMBER 31, 1994
(in thousands)
<TABLE>
<CAPTION>
(unaudited)
September 30, December 31,
1995 1994
ASSETS ------------- ------------
<S> <C> <C>
Investments:
Fixed maturities available for sale - at market $151,474 $157,579
Equity securities available for sale - at market 1,886 951
Mortgage loans 25,739 27,153
Investment real estate 17,989 31,284
Policy loans 19,698 19,742
Short-term and other investments, (at cost which approximates market) 15,331 22,262
-------- --------
Total investments 232,117 258,971
Cash 380 189
Investment in Wickes Lumber Company, at equity 16,858 14,763
Securities of related parties 1,500 1,500
Accrued investment income 2,953 3,450
Reinsurance receivables 28,073 29,434
Premiums receivable 374 362
Value of acquired insurance in force 19,549 22,381
Deferred policy acquisition costs 2,309 2,453
Excess of cost over fair value of net assets acquired 11,242 11,586
Other assets 3,127 2,773
Separate account assets 8,937 8,848
-------- --------
Total assets $327,419 $356,710
======== ========
LIABILITIES & STOCKHOLDERS' EQUITY
Future life insurance benefits $140,008 $147,701
Policyholder contract deposits and other funds 99,004 111,465
Unpaid claims 911 1,227
Accrued expenses and other liabilities 6,958 8,799
Deferred income taxes 865 1,029
Notes payable 18,000 20,093
Mortgage debt 2,312 15,930
Subordinated debt 9,269 9,175
Net liabilities of discontinued operations -- 3,340
Separate account liabilities 8,937 8,848
-------- --------
Total liabilities 286,264 327,607
======== ========
Commitments and contingencies (Note 5)
Common stockholders' equity:
Common stock, $.10 par value; 20,000,000 shares authorized;
issued and outstanding, 5,315,101 in 1995 and 5,465,781 in 1994 532 547
Additional paid-in capital 17,272 18,175
Retained earnings 21,087 20,123
Unrealized investment appreciation (depreciation), net of taxes and deferred
policy acquisition costs of $438 in 1995 and ($894) in 1994 2,264 (9,742)
-------- --------
Total common stockholders' equity 41,155 29,103
-------- --------
Total liabilities and common stockholders' equity $327,419 $356,710
======== ========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
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<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ --------------------
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Premiums and annuity considerations $1,812 $ 4,282 $ 6,123 $14,433
Net investment income 3,384 4,032 10,953 13,325
Net realized investment gains 264 1,046 560 198
Equity in income (losses) of Wickes Lumber Company 544 3,191 (201) 2,679
Other income 500 991 1,189 1,697
------ ------- ------- -------
Total revenues 6,504 13,542 18,624 32,332
Policy benefits 4,368 4,578 11,102 15,201
Commissions and insurance service fees 443 2,080 2,001 4,031
Other operating costs and expenses 1,187 2,284 3,944 6,317
Interest expense 784 724 2,351 2,125
Minority interest -- 86 -- 79
------ ------- ------- -------
Total expenses 6,782 9,752 19,398 27,753
Income (loss) from continuing operations before income taxes (278) 3,790 (774) 4,579
Income tax expense -- 80 -- 899
------ ------- ------- -------
Income (loss) from continuing operations (278) 3,710 (774) 3,680
Loss from operations of discontinued property
and casualty insurance company (725) (869) (743) (3,035)
Gain on disposal of discontinued property
and casualty insurance company 2,481 -- 2,481 --
------ ------- ------- -------
Net gain (loss) from discontinued operations 1,756 (869) 1,738 (3,035)
------ ------- ------- -------
Net income $1,478 $2,841 $ 964 $ 645
====== ======= ======= =======
Earnings (loss) per share, after deducting preferred
stock dividends and accretion:
Income (loss) from continuing operations $(0.06) $ 0.67 $(0.15) $ 0.63
Net gain (loss) from discontinued operations 0.34 (0.16) 0.33 (0.56)
------ ------- ------- -------
Net income per share $ 0.28 $ 0.51 $ 0.18 $ 0.07
====== ======= ======= =======
Weighted average number of common shares
used in computing earnings per share 5,216,522 5,520,781 5,316,423 5,439,434
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
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<TABLE>
<CAPTION>
Unrealized Total
Additional Investment Common
Common Paid-In Retained Appreciation Stockholders'
Stock Capital Earnings (Depreciation) Equity
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<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994 $547 $18,175 $20,123 $(9,742) $29,103
Net income, nine months ended September 30, 1995 964 964
Purchase and Retirement of 150,680 shares
of common stock, at cost (15) (903) (918)
Change in unrealized investment appreciation
of fixed maturities and equity securities 12,006 12,006
---- ------- ------- ------- -------
Balance, September 30, 1995 $532 $17,272 $21,087 $ 2,264 $41,155
==== ======= ======= ======= =======
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
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<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------
OPERATING ACTIVITIES 1995 1994
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<S> <C> <C>
Net income $ 964 $ 645
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Gain on sale of discontinued property and casualty
insurance operations (2,481) --
Amortization of value of acquired insurance in force 1,526 197
Net change in deferred policy acquisition costs 118 2,218
Provision for deferred income taxes 13 899
Net realized investment gains (560) (198)
Depreciation and amortization 526 1,142
Interest on policyholders' funds 7,020 7,314
Equity in (gains) losses of unconsolidated subsidiaries 201 (2,679)
Minority interest and other non-cash adjustments -- (79)
Change in other assets and liabilities:
Premiums receivable and unearned premiums (12) 334
Accrued investment income 497 501
Reserve for unpaid claims, policy benefits and
recoverable on paid losses from reinsurers and others (1,639) (7,533)
Other assets (414) 3,641
Net liabilities of discontinued operations, other liabilities
and current income taxes (2,700) (4,588)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 3,059 1,814
INVESTING ACTIVITIES
Purchase of investments:
Fixed maturities available for sale (39,285) (83,428)
Equity securities (32,544) (30)
Investment real estate (339) (321)
Mortgage and policy loans (3,148) (12)
Short-term investments (236,640) (131,433)
Sale, maturity, and principal reduction of investments:
Fixed maturities available for sale 58,263 70,157
Fixed maturities actively managed -- 22,369
Equity securities 29,477 2,563
Mortgage and policy loans 4,869 2,851
Investment real estate 14,027 3,371
Short-term investments 243,571 127,385
-------- --------
NET CASH PROVIDED BY INVESTING ACTIVITIES 38,251 13,472
FINANCING ACTIVITIES
Repayment of debt (17,804) (20,087)
Increase in borrowings 2,093 20,000
Preferred stock redemption -- (1,283)
Issuance of common stock -- 100
Purchase and retirement of treasury shares (918) (257)
Deposits of policyholders' funds 539 6,284
Withdrawal of policyholders' funds (25,029) (20,508)
-------- --------
NET CASH USED IN FINANCING ACTIVITIES (41,119) (15,751)
INCREASE (DECREASE) IN CASH -------- --------
191 (465)
Cash at beginning of year 189 465
-------- --------
CASH AT END OF PERIOD $ 380 $ --
======== ========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
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RIVERSIDE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Financial Statement Presentation
The condensed consolidated balance sheets of Riverside Group, Inc. and
subsidiaries ("Riverside" or "the Company") as of September 30, 1995, the
condensed consolidated statements of operations for the three month and nine
month periods ended September 30, 1995 and 1994, the condensed consolidated
statement of common stockholders' equity for the nine months ended September 30,
1995 and the condensed consolidated statements of cash flows for the nine months
ended September 30, 1995 and 1994, have been prepared by the Company without
audit. In the opinion of management, all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial position,
results of operations and cash flows at September 30, 1995, and for all periods
presented have been made.
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
1994 Annual Report on Form 10-K.
Earnings Per Share
Earnings per share are based upon the weighted average number of shares
of common stock outstanding during each period (5,316,423 shares in 1995 and
5,439,434 shares in 1994), after deducting accretion of redeemable Series C
preferred stock totaling $234,000 in 1994. Effective June 30, 1995, the Company
exercised an option to purchase 150,680 shares of its common stock which were
retired as treasury shares.
2. EQUITY INVESTMENT IN WICKES LUMBER COMPANY
Summary financial information of Wickes Lumber Company ("Wickes") for
the first nine months of 1995 and 1994 follows (in thousands, except per share
data):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
(unaudited) (unaudited)
Sept. 30, 1995 Sept. 24, 1994 Sept. 30, 1995 Sept. 24, 1994
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Operating Statement Data:
Net sales $284,488 $284,172 $ 748,983 $693,085
Gross profit 62,863 67,091 172,356 166,351
Income (loss) before income taxes 3,069 11,266 (492) 10,806
Income tax expense (benefit) 1,271 586 (132) 1,486
Net income (loss) 1,927 10,680 (201) 9,320
Net income (loss) per common share $ 0.31 $ 1.75 $ (0.03) $ 1.53
</TABLE>
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<TABLE>
<CAPTION>
(unaudited)
Sept. 30, 1995 Dec. 31, 1994
-------------- -------------
<S> <C> <C>
Balance Sheet Data:
Total assets $345,032 $319,573
Long term debt 221,008 211,139
Common stockholders' equity $ 30,516 $ 30,146
</TABLE>
At September 30, 1995, the Company, owned 2,217,102 shares, or
approximately 36%, of Wickes outstanding common stock. On August 14, 1995, the
Company exercised its option from Wickes Lumber Investment Partnership ("WLIP")
to purchase 374,516 shares at an aggregate exercise price of $2,300,000. For a
description of the pending dispute with WLIP, see Note 5 of Notes to Condensed
Consolidated Financial Statements included elsewhere herein. The market value of
the Company's investment is $16,100,000 at November 7, 1995, based on its quoted
closing market price of $7.25 per share. Included in the Company's results of
operations for the third quarter and first nine months of 1995 are net income
(losses) of $544,000 and $(201,000) respectively, which represents the Company's
share of Wickes net income (losses), less amortization of capitalized costs
related to the Wickes investment. In 1994 the Company reported its share of
Wickes net income for the third quarter and first nine months of $3,191,000 and
$2,679,000 respectively. For a discussion of the proposed plan to combine Wickes
Lumber Company operations with the Company see Note 9 of Notes to Condensed
Consolidated Financial Statements included elsewhere herein.
3. DIVESTITURE OF PROPERTY AND CASUALTY OPERATIONS
On September 15, 1995, the Company completed the sale of Dependable
Insurance Company ("Dependable") to MedMarc Insurance Company ("MedMarc"). The
Company realized a gain upon disposal of these operations of $2,481,000. Under
terms of the sale contract the Company provided indemnification for certain
losses on various categories of liabilities. Terms of the indemnities provided
by the Company vary in regards to time limits and maximum amounts. The Company
believes that these indemnities will not have a material adverse effect on the
Company's results of operations or financial condition.
Prior to the sale the Company had incurred a year-to-date loss from
discontinued operations of $743,000 for 1995. The operating losses were
primarily the result of excess incurred claims and adjustable reinsurance
premiums. Losses from discontinued operations includes total property and
casualty revenues of $258,000 and $1,297,000 for the three months and nine
months ended September 30, 1995 and $268,000 and $2,268,000 for the three months
and nine months ended September 30, 1994, respectively. Realized investment
gains (losses) were $117,000 and $31,000 for the three months and nine months
ended September 30, 1995 and $(248,000) and $(31,000) for the three months and
nine months ended September 30, 1994, respectively. Also included in results of
discontinued operations for 1995 is income of $285,000 related to an arbitration
award on a disputed reinsurance settlement received in the first quarter.
4. INVESTMENTS
In 1994 the Company's life insurance subsidiaries had a separate
trading portfolio (fixed maturities actively managed) which was included in the
Company's investment portfolio at market value. These investments were
liquidated in the second quarter of 1994. Unrealized losses on the securities
actively managed included in the results of operations for 1994 totaled
$1,017,000. All other investments in fixed
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maturities are classified as available for sale and as such are carried at
market value with unrealized gains or losses reflected directly in stockholders'
equity, net of applicable deferred income taxes and net of the adjustment to
deferred acquisition costs that would have been recognized had the unrealized
holding losses been realized.
In May of 1995 the Company's real estate limited partnership holdings,
which are consolidated for financial statement purposes, sold real estate
properties which were recorded on the Company's financial statements at a value
of approximately $14.0 million. Related mortgage debt on these properties of
$10.5 million was paid off and capital gains of $0.3 million were realized.
5. COMMITMENTS AND CONTINGENCIES
On or about August 11, 1993, FynSyn Capital Corp. ("FynSyn") and a
related entity, WLIP, sold an aggregate of 260,760 shares of Wickes' common
stock, an option to acquire 374,516 additional shares of Wickes' common stock
and 10.33 shares of Wickes' 9% redeemable preferred stock to Riverside. In
connection with this sale, FynSyn stated that it was unable to locate the stock
certificate representing the preferred stock and executed and delivered to
Wickes an affidavit of loss and indemnity agreement, in reliance on which Wickes
issued a replacement stock certificate to FynSyn, which was delivered to the
Company upon completion of the sale. The 10.33 preferred shares were converted
into approximately 103,922 shares of Wickes common stock as part of Wickes' plan
of recapitalization completed on October 22, 1993. In February 1994, a third
party informed Wickes that FynSyn had previously transferred the 10.33 preferred
shares to the third party in 1989. On July 8, 1994, Wickes filed an action (the
"Florida FynSyn Action") styled Wickes Lumber Company vs. FynSyn Capital Corp.,
et al. in the United States District Court for the Middle District of Florida,
Jacksonville Division. In this action, Wickes sought, among other things,
declaratory relief as to the respective rights and liabilities of Wickes and
Riverside, as well as FynSyn and the third party related to and as a consequence
of these matters and seeking indemnity from FynSyn. Riverside cross-claimed
against FynSyn, WLIP and related parties seeking indemnity, among other things.
The court in the Florida FynSyn Action dismissed Wickes' complaint on
jurisdictional grounds. In a related action (the "New Jersey FynSyn Action")
filed in July 1994, by FynSyn and WLIP in Superior Court of New Jersey, Essex
County, Chancery Division, styled FynSyn Capital Corporation and Wickes Lumber
Investment Partnership vs. Bankers Trust Company, et al., FynSyn and WLIP are
seeking, among other things, rescission of the affidavit of loss and indemnity
agreement and the rescission or reformation of the terms of the sale of all of
their Wickes securities to Riverside. In 1995, this action was removed to the
United States District Court for the District of New Jersey. Riverside and
Wickes have answered the complaint in the New Jersey FynSyn Action and
counterclaimed seeking, among other things, indemnity and enforcement of their
contractual rights. Wickes has also sought declaratory relief similar to that
sought in the Florida FynSyn Action. Riverside and Wickes intend to pursue
vigorously their respective rights against FynSyn, WLIP and related parties, and
Riverside intends to defend vigorously the claims of FynSyn and WLIP.
For a description of certain indemnities granted by the Company to
MedMarc, see Note 3 of Notes to Condensed Consolidated Financial Statements
included elsewhere herein.
As is common in the insurance industry, the Company is regularly
engaged in the defense of claims arising out of the conduct of the insurance
business. Currently, the Company is not aware of any litigation which would, in
management's opinion, have a material adverse effect on the Company's financial
condition, results of operations or cash flows.
9
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6. NOTE PAYABLE
Terms of American Financial Acquisition Corp.'s ("AFAC") credit
agreement with Bank of Montreal and First Interstate Bank of California were
revised by a second amendment dated July 28, 1995. Under terms of this amendment
the loan repayment schedule is as follows: 1995-$1,000,000; 1996-$2,000,000;
1997-$5,200,000; 1998-$4,000,000; 1999-$4,520,000 and 2000-$2,280,000. The most
recent loan repayment schedule for this agreement prior to the second amendment
was as follows: 1995-$2,000,000; 1996-$5,000,000; 1997-$2,000,000;
1998-$2,400,000 and 1999-$7,600,000. The second amendment provided for an
additional $1,000,000 bridge loan not included in the above repayment schedule,
which was utilized as a portion of the exercise price on the Company's option to
acquire additional common shares of Wickes stock. The bridge loan was repaid in
full upon the closing of the sale of Dependable. The second amendment also
revised the terms for determining the effective interest rate on the loan,
permits the sale of AFAC subsidiaries, requires minimum Risk Based Capital
levels for life insurance subsidiaries, lowered the minimum Wickes stock market
value to $10 per common share, increases the Company's minimum net worth by
$4,000,000 to $32,000,000 and establishes a limit of $2,000,000 which the
Company may pay in dividends or to redeem, retire, repurchase or otherwise
acquire any shares of any class of its capital stock presently or hereafter
outstanding for the duration of the loan. All other provisions of the original
credit agreement and first amendment remain in effect.
Since September 29, 1995, the Company has not been in compliance with a
covenant under AFAC's credit agreement requiring a minimum per share market
value of $10 for Wickes common stock. The Company is presently considering a
proposed plan to combine operations with Wickes and to sell its remaining life
insurance and certain other operations, see Note 9 of Notes to Condensed
Consolidated Financial Statements included elsewhere herein.) Upon sale of the
life insurance operations it is anticipated the AFAC credit agreement would be
repaid in full. First Interstate Bank of California and Bank of Montreal have
been informed of these plans, and management is of the opinion the banks will
continue to cooperate with plans calling for early retirement of this debt.
7. INCOME TAXES
The Company's effective tax rate for the three months and nine months
ended September 30, 1995 was 0% compared to 2% and 20% for the three months and
nine months ended September 30, 1994, respectively. For 1995, the Company
presently believes current life deferred taxes payable can be sheltered against
non-life deferred tax assets for net operating losses. The Company is presently
evaluating this position in relation to the proposed business combination plan
with Wickes and will make future adjustments as appropriate. The low effective
tax rates for 1994 were primarily due to the recognition of deferred tax assets
arising from the recapture of deferred tax loss carryforwards.
8. RELATED PARTY TRANSACTIONS
In February, April and June of 1995, the Company advanced to Wilson
Financial Corporation ("Wilson Financial") an aggregate of $900,000 and Wilson
Financial granted the Company an option to acquire at exercise prices ranging
from $5.88 to $6.31 per share the number of shares of the Company's Common Stock
equal to the amount of such advance and related interest outstanding divided by
the exercise price. Effective June 30, 1995, the Company elected to exercise its
option on these advances acquiring 150,680 common shares at an aggregate
exercise price of $918,310 by canceling the advances and related interest with
Wilson Financial previously discussed. Also on October 2 and November 1, 1995,
the Company purchased from
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Wilson Financial approximately 48,000 shares of the Company's common stock at an
aggregate price of approximately $250,000. All shares acquired were subsequently
retired as treasury shares.
9. SUBSEQUENT EVENT
On November 2, 1995, the Company announced that the independent members
of its Board of Directors and the independent members of the Board of Directors
of Wickes Lumber, a 36% owned subsidiary, are considering a plan under which the
two companies would be combined. The plan, as proposed by the Chairman and Chief
Executive Officer of both companies, would value Wickes' shares in the
combination at the recent market value of $8 per share. The value of the
Company's shares would be based on the expected net proceeds from the sale of
its remaining life insurance operations and the value of its other assets. As
part of the plan, essentially all of the Company's remaining operations, other
than its interest in Wickes, would be sold. For a further discussion of the
Company's present investment in Wickes see Note 2 of Notes to Condensed
Consolidated Financial Statements included elsewhere herein.
The proposed combination would be subject to, among other things, the
negotiation and execution of a definitive merger agreement, receipt of fairness
opinions and approval by the Boards of Directors of both Riverside and Wickes
and the approval of the shareholders of both companies at special meetings to be
held for the purpose after distribution of a proxy statement/prospectus included
in a registration statement to be filed with the Securities and Exchange
Commission.
When the Company formulates its plan for disposition of the life
insurance operations it will report same as discontinued operations in
accordance with Accounting Principles Bulletin No. 30.
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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, 1994.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
The Company's general liquidity requirements consist primarily of
providing funds for payment of debt and related interest and for operating
expenses.
Presently funds available for general uses from operating sources are
limited to: management fees and expense reimbursements for services provided to
the Company's operating subsidiaries; funds that may be generated from the sale
of unrestricted assets; and surplus note payments from Laurel Life Insurance
Company ("Laurel") via dividends Laurel receives from its American Founders Life
Insurance Company ("American Founders") subsidiary. In general, Texas statutes
limit the amount of dividends American Founders may pay in any year, without
state approval, to the greater of prior year's statutory net gain from
operations after income taxes or 10% of statutory capital and surplus. American
Founders has paid dividends totaling $5.2 million in 1995 and anticipates an
additional $1.0 million dividend will be paid in November. For the remainder of
1995 American Founders would be eligible to pay additional dividends of $0.9
million without state approval. The recent decline in Wickes stock market value
however, has caused a reduction in the statutory capital and surplus of American
Founders. The decision to pay further dividends in 1995 will be considered by
management and depend upon, among other things, fourth quarter operating results
and the market price of Wickes stock. For a description of the non-compliance by
the Company with the terms of a provision of AFAC's bank credit agreement see
Note 6 of Notes to Condensed Consolidated Financial Statements included
elsewhere herein. Upon sale of the Company's life insurance operations discussed
below, the indebtedness under AFAC's credit agreement would be repaid in full.
The banks have been informed of the Company's plans, and management is of the
opinion that the banks will continue to cooperate with plans calling for early
retirement of this debt.
On September 15, 1995, the Company completed the sale of Dependable
Insurance Company to MedMarc Insurance Company, see Note 3 of Notes to Condensed
Consolidated Financial Statements included elsewhere herein. Cash generated by
the sale was less than anticipated as a result of Dependable operating losses
prior to the sale and holdback of funds by the buyer pending further resolution
of uncertainties.
The Company had previously completed a second amendment of its AFAC
bank credit agreement which reduced the term note repayment requirements in 1995
by $1.0 million and also provided a $1.0 million bridge loan facility to the
Company which was utilized as part of the proceeds for the exercise of the
option to acquire additional Wickes stock and repaid in full upon the closing of
the Dependable sale. Under the AFAC credit agreement the next scheduled
principal repayment of $0.5 million is due September 1996. For a further
description of the terms of this amendment and the exercise of the
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Wickes option, see Notes 2, 5 and 6 of Notes to Condensed Consolidated Financial
Statements included elsewhere herein.
The Company is presently considering a plan to combine operations with
Wickes Lumber Company. Under the proposed plan the Company's life insurance
operations would be sold and it is anticipated the proceeds would be utilized in
part to retire the indebtedness under the AFAC credit agreement. The Company
presently believes it has sufficient liquidity to meet its needs throughout a
reasonable time frame for sale of the life insurance operations. If the sale of
the life insurance operations does not occur as anticipated, the Company's
liquidity will become insufficient during the first half of 1996.
See Note 5 of Notes to Condensed Consolidated Financial Statements
included elsewhere herein for a description of litigation seeking, among other
things, recission of the transaction in which Riverside acquired for
approximately $6.5 million an aggregate of 739,198 shares of Wickes Common
Stock.
INSURANCE SUBSIDIARIES
General During the first nine months of 1995, approximately $21.4
million of cash was used by consolidated operating activities, including
deposits and withdrawals of policyholders funds principally as the result of
annuity surrenders and payment of death benefits.
Dependable On September 15, 1995, Dependable Insurance Company was sold
to MedMarc Insurance Company. Cash generated from the sale of Dependable was
less than anticipated as a result of operating losses sustained prior to the
sale and holdback of funds by the buyer pending resolution of uncertainties.
Claim reserves had not decreased as expected in relation to claim payments and
increases in adjustable reinsurance premiums were factors reducing cash realized
from the sale.
Life Insurance Subsidiaries The life insurance subsidiaries' investment
portfolio is highly liquid, consisting predominately of readily marketable
securities. The life insurance subsidiaries do not expect any material changes
in their cash requirements and are not aware of any other trends, events or
uncertainties that are reasonably likely to have a material effect on life
operations' liquidity. American Founders anticipates a year end closing on the
sale of its National American Life Insurance Company of Texas subsidiary to
General American Life Insurance Company will provide an additional $1.0 million
of liquidity.
13
<PAGE> 14
RESULTS OF OPERATIONS
GENERAL
The Company reported results of operations for the quarter and nine
months ended September 30, 1995 and 1994, as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
(unaudited) (unaudited)
Sept. 30, 1995 Sept. 30, 1994 Sept. 30, 1995 Sept. 30, 1994
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Income (loss) from continuing
operations (1) $ (278) $ 3,710 $(774) $ 3,680
Net gain (loss) from discontinued
operations (2) 1,756 (869) 1,738 (3,035)
----- ----- ----- -------
Net income (loss) $1,478 $2,841 $ 964 $ 645
====== ====== ====== ======
</TABLE>
(1) Includes net realized investment gains of $264,000 and $1,046,000 for
the quarters ended September 30, 1995 and 1994, respectively and
$560,000 and $198,000 for the nine months ended September 30, 1995 and
1994, respectively. The Company's equity in net income of Wickes Lumber
Company for the third quarter of 1995 and 1994 were $544,000 and
$3,191,000, respectively and $(201,000) and $2,679,00 for year to date
1995 and 1994, respectively. Also included in results of continuing
operations for the first quarter of 1995 is income of $600,000 related
to the settlement of a disputed financing proposal. 1994 year to date
results of continuing operations include a first quarter gain of
$558,000 from the sale of the Company's subordinated notes and third
quarter income of $1,000,000 from the sale of Riverside International
Corporation to Wickes Lumber.
(2) During the third quarter of 1995 the Company sold all remaining
operations of Dependable Insurance Company resulting in a gain on
disposal of $2,481,000. Operating losses from discontinued lines were
$(725,000) and $(743,000) for the quarter and nine months ended
September 30, 1995, respectively. Discontinued operations losses for
the third quarter resulted from additional incurred claims and
adjustable reinsurance premiums. During the second quarter of 1994 the
Company experienced unusually adverse loss development in its
commercial lines.
WICKES LUMBER COMPANY
The following table provides comparative Wickes total operating
statement data and the Company's equity in net income (loss) of Wickes:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
(unaudited) (unaudited)
Sept. 30, 1995 Sept. 24, 1994 Sept. 30, 1995 Sept. 24, 1994
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Total Operating Statement Data:
Net sales $284,488 $284,172 $748,983 $693,085
Gross profit 62,863 67,091 172,356 166,351
Income (loss) before income taxes 3,069 11,266 (492) 10,806
Income tax expense (benefit) 1,271 586 (132) 1,486
Net income (loss) 1,927 10,680 (201) 9,320
Equity in net income (loss) of Wickes $ 544 $ 3,191 $ (201) $ 2,679
</TABLE>
14
<PAGE> 15
The slight increase in net sales for the third quarter is supported by
acquisitions since the second quarter of 1994. On a same store basis third
quarter sales decreased 6.4% due to a slow down in residential construction and
lumber price deflation. Net sales for the first nine months of 1995 increased on
both a total and same store basis. The increase in same store sales of 0.5% is
attributable to a milder winter in 1995 compared to the severe winter weather
conditions of 1994 which is offset by a significant decline in housing starts in
Wickes primary markets and framing lumber price deflation.
Gross profit as a percent of sales decreased to 22.1% of sales for the
third quarter of 1995 from 23.6% of sales in the third quarter of 1994. For the
first nine months of 1995 gross profit as a percent of sales decreased to 23.0%
from 24.0% for the first nine months of 1994. Contributing to reduced gross
margins was increased sales to the building professionals customer segment which
purchases a greater portion of lower margin commodity building materials. Also,
declines of commodity wood prices caused a decrease in gross profit dollars.
Wickes net income before income taxes for the third quarter of 1995
decreased by $8.2 million primarily due to lower gross profit margins, higher
selling, general and administrative expenses as a percent of sales and higher
interest expense. For the first nine months of 1995 Wickes net income before
income taxes decreased by 11.3 million compared to the first nine months of
1994. Lower gross profit margins, higher interest expense and higher selling,
general and administrative expenses are primarily responsible for the 1995 year
to date net loss before taxes as compared to the 1994 net income before taxes .
Wickes third quarter 1995 income tax expense was $1.3 million compared
to $0.6 million for the third quarter of 1994. For the first nine months of 1995
Wickes recorded a current tax benefit of $0.1 million compared to an expense of
$1.5 million in 1994.
INSURANCE OPERATIONS
The following table sets forth comparative information with respect to
the Company's life insurance operations.
<TABLE>
<CAPTION>
Quarter Ended Sept. 30, Nine Months Ended Sept. 30,
----------------------- ---------------------------
Inc. Inc.
1995 1994 (Dec.) 1995 1994 (Dec.)
---- ---- ------ ---- ---- ------
<S> <C> <C> <C> <C> <C> <C>
Premiums and annuities $1,812 $4,282 (61%) $6,123 $14,433 (58%)
Benefits and losses 4,368 4,578 (5%) 11,102 15,201 (27%)
Policy acquisition expenses 443 2,080 (79%) 2,001 4,031 (50%)
Investment income $3,123 $4,026 (15%) $11,027 $13,110 (16%)
</TABLE>
The decrease in premiums and annuity considerations for 1995 compared
to 1994 was caused primarily by the sale of the life and accident and health
business in Aztec Life Assurance Company ("Aztec") in December 1994.
Benefits and losses decreased during 1995 compared to 1994 primarily
due to larger decreases in reserves than in prior year and the sale of the Aztec
business. For the third quarter of 1995 this decrease was offset by higher than
normal death benefits and reserve increases.
15
<PAGE> 16
Policy acquisition amortization expenses are lower in 1995 compared to
1994 due to the reduction in the underlying assets as a result of amounts
written off at year-end 1994 and lower commission expenses in 1995 related to
the sale of the inforce business of Aztec.
The decrease in investment income in 1995 compared to 1994 resulted
primarily from lower average invested assets.
The Company estimates that the December 1994 sale of the Aztec business
generated a decrease in profits from life insurance operations of $0.7 million
for the third quarter and $2.1 million for the first nine months of 1995
compared to the same periods for 1994.
American Founders has signed a definitive agreement with General
American Life Insurance Company for sale of the corporate charter and state
licenses of its National American Life Insurance Company of Texas subsidiary.
INVESTMENT OPERATIONS
Investment operations include all invested assets of the life insurance
subsidiaries, the parent company, and assets of Dependable that were retained by
the Company after the sale of Dependable. Investment income, net of investment
expenses, decreased 28% from 1994 to 1995 primarily as a result of reduced
invested assets.
Annualized investment yields on average invested assets were 6.1% in
1995 compared to 6.2% in 1994. Included in net investment income for the first
nine months of 1995 and 1994 were $(477,000), and $(353,000), respectively, of
net real estate expense.
Net realized investment gains for the first nine months of 1995 and
1994 were $560,000 and $198,000, respectively.
OPERATING COSTS AND INTEREST EXPENSE
Other operating costs and expenses were $1,186,000 for the third
quarter of 1995 compared to $2,284,000 in 1994. For the nine months ended
September 30, 1995, other operating costs and expenses were $3,943,000 compared
to $6,317,000 for the same period in 1994. Decreased expenses are due to reduced
lease expenses, data processing expense savings, expense reimbursements from
third parties for administrative services and staff reductions. The decrease in
operating costs is attributable, in part, to decreased premium and investment
income revenues as a result of life insurance policies sold or lapsed.
Interest expense for the third quarter of 1995 compared to 1994 was
$784,000 and $724,000, respectively and comparable amounts for the first nine
months were $2,351,000 and $2,125,000, respectively. The increase in interest
expense for the first nine months ended September 30, 1995, results principally
from the increased indebtedness of AFAC incurred in April 1994 and from higher
interest rates.
DISCONTINUED PROPERTY AND CASUALTY INSURANCE OPERATIONS
On September 15, 1995 the Company completed the sale of Dependable
Insurance which resulted in a gain on disposal of $2.5 million. Operating losses
for 1995 prior to the sale were $0.7 million due to excess incurred claims. The
large losses experienced in 1995 are primarily the result of unusually adverse
loss development on commercial lines.
16
<PAGE> 17
INCOME TAXES
The Company's effective tax rate for the three months and nine months ended
September 30, 1995 was 0% compared to 2% and 20% for the three months and nine
months ended September 30, 1994, respectively. For 1995, the Company presently
believes current life deferred taxes payable can be sheltered against non-life
deferred tax assets for net operating losses. The Company is presently
evaluating this position in relation to the proposed business combination plan
with Wickes and will make future adjustments as appropriate. The low effective
tax rates for 1994 were primarily due to the recognition of deferred tax assets
arising from the recapture of deferred tax loss carryforwards.
17
<PAGE> 18
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On November 3, 1995, a complaint styled Morris Wolfson v. J. Steven
Wilson, Kenneth M. Kirschner, Albert Ernest, Jr., Claudia B. Slacik, Jon F.
Hanson, Robert E. Mulcahy, Frederick H. Schultz, Wickes Lumber Company and
Riverside Group, Inc. was filed in the Court of Chancery of the State of
Delaware in and for New Castle County (C.A. No. 14678). This complaint alleges
breach of fiduciary duty and seeks on behalf of a purported class of the Wickes'
shareholders to enjoin, or to obtain damages with respect to, the business
combination between the Company and Wickes currently under consideration.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
For a description of the non-compliance by the Company with the terms
of a provision of AFAC's bank credit agreement see Management's Discussion and
Analysis of Financial Condition and Note 6 of Notes to Condensed Consolidated
Financial Statements included elsewhere herein.
ITEM 5. OTHER INFORMATION
For a description of a plan currently being considered by the Company
that involves the sale of the Company's remaining life insurance operations and
a business combination with Wickes, see Note 9 of Notes to Condensed
Consolidated Financial Statements included elsewhere herein.
ITEM 6. EXHIBITS AND REPORTS OF FORM 8-K.
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
There were no Reports on Form 8-K filed by the
Company during the first nine months of 1995.
18
<PAGE> 19
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
RIVERSIDE GROUP, INC.
/s/ Duane T. Miller
- ------------------------------
Duane T. Miller
Vice President and
Controller
/s/ Wayne A. Schreck
- ------------------------------
Wayne A. Schreck
Executive Vice President
(Chief Accounting Officer)
Dated: November 13, 1995
19
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
Riverside Group, Inc. and Subsidiaries condensed consolidated balance sheet and
condensed consolidated statement of operations and is qualified it its entirety
by reference to such financial statements
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<DEBT-HELD-FOR-SALE> 151,474
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 1,886
<MORTGAGE> 25,739
<REAL-ESTATE> 17,989
<TOTAL-INVEST> 232,117
<CASH> 380
<RECOVER-REINSURE> 28,073
<DEFERRED-ACQUISITION> 21,858
<TOTAL-ASSETS> 327,419
<POLICY-LOSSES> 140,008
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 911
<POLICY-HOLDER-FUNDS> 99,004
<NOTES-PAYABLE> 29,581
<COMMON> 532
0
0
<OTHER-SE> 40,623
<TOTAL-LIABILITY-AND-EQUITY> 327,419
6,123
<INVESTMENT-INCOME> 10,953
<INVESTMENT-GAINS> 560
<OTHER-INCOME> 988
<BENEFITS> 11,102
<UNDERWRITING-AMORTIZATION> 1,644
<UNDERWRITING-OTHER> 357
<INCOME-PRETAX> (774)
<INCOME-TAX> 0
<INCOME-CONTINUING> (774)
<DISCONTINUED> 1,738
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 964
<EPS-PRIMARY> .18
<EPS-DILUTED> .18
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
