<PAGE> 1
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 June 30, 1996 Number 0-9209
------------- -------
RIVERSIDE GROUP, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Florida 59-1144172
- ----------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7800 Belfort Parkway, Jacksonville, Florida 32256
- ------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code number
904-281-2200
------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
On August 8, 1996, there were 5,311,123 shares of the Registrant's common stock
outstanding.
<PAGE> 2
RIVERSIDE GROUP, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
-------
PART I. FINANCIAL INFORMATION
<S> <C> <C> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
June 30, 1996 (Unaudited)
and December 31, 1995 3
Condensed Consolidated Statements
of Operations
Six and three months ended
June 30, 1996 and 1995 (Unaudited) 4
Condensed Consolidated Statement
of Common Stockholders' Equity
Six months ended
June 30, 1996 (Unaudited) 5
Condensed Consolidated Statements of
Cash Flows
Six months ended
June 30, 1996 and 1995 (Unaudited) 6
Notes to Condensed Consolidated
Financial Statements (Unaudited) 7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 11
PART II.
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
</TABLE>
2
<PAGE> 3
RIVERSIDE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 1996 and DECEMBER 31, 1995
(in thousands except share data)
<TABLE>
<CAPTION>
(UNAUDITED)
JUNE 30, DECEMBER 31
1996 1995
------------ ------------
ASSETS
CURRENT ASSETS:
<S> <C>
Cash, short-term and other investments $ 7,528 $ 21,100
Accounts receivable, less allowance for
doubtful accounts of $5,778 in 1996 88,017
Inventory 110,672
Deferred tax asset 25,906
Prepaid expenses 3,469
------------ ------------
Total current assets 235,592 21,100
Investment in real estate 17,595 17,879
Investment in life insurance subsidiaries, at equity 5,900
Investment in Wickes Lumber Company, at equity 11,210
Property, plant and equipment, net 53,020
Trademark (net of accumulated amortization of $9,941 in 1996) 7,059
Deferred tax asset 1,674 825
Excess of cost over fair value of assets acquired 8,796
Other assets (net of accumulated amortization of
$5,972 in 1996 and $4,959 in 1995) 17,616 3,561
Investments:
Fixed maturities 147,152
Equity securities 838
Mortgage and construction loans 26,903
Policy loans 19,827
Accrued investment income 2,488
Reinsurance receivables 28,500
Value of acquired insurance in force 18,415
Deferred policy acquistion costs 2,027
------------ ------------
Total assets $ 347,252 $ 300,725
============ ============
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 1,082 $ 7,645
Accounts payable 53,990
Income tax payable 601
Accrued liabilities 32,077 5,022
------------ ------------
Total current liabilities 87,750 12,667
Long-term debt, less current maturities 209,344 23,570
Mortgage debt 17,798
Other long-term liabilities 2,920
Future life insurance benefits 140,295
Policyholder contract deposits and other funds 97,171
Unpaid claims 966
------------ ------------
Total liabilities 317,812 274,669
Minority interest 9,970
Commitments and contigencies (Note 4)
COMMON STOCKHOLDERS' EQUITY:
Common stock, $.10 par value; 20,000,000 shares authorized; 531 531
issued and oustanding, 5,311,123 in 1996 and 1995
Additional paid in capital 17,209 17,209
Retained Earnings 1,730 3,923
Unrealized investment appreciation net of taxes and deferred
policy acquistion costs of $884 in 1995 4,393
------------ ------------
Total common stockholders' equity 19,470 26,056
------------ ------------
Total liabilities and common stockholders' equity $ 347,252 $ 300,725
============ ============
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
3
<PAGE> 4
RIVERSIDE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATION
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
----------------------------- ---------------------------
1996 1995 1996 1995
---------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Premiums and annuity considerations $ 1,258 $ 2,110 $ 3,224 $ 4,311
Net investment income 3,036 3,707 6,193 7,569
Net realized gains 743 344 1,217 296
Equity in income(losses) of Wickes Lumber Company 580 694 (1,715) (745)
Other income(expense) (84) (171) 196 689
---------- ----------- ----------- -----------
Total revenues 5,533 6,684 9,115 12,120
Policyholder benefits 2,227 2,808 5,805 6,734
Policy acquistion expenses 969 892 2,026 1,558
Other operating costs and expenses 1,400 1,110 2,352 2,757
Interest expense 767 772 1,556 1,567
---------- ----------- ----------- -----------
Total expenses 5,363 5,582 11,739 12,616
Gain realized on reorganization of life insurance
subsidiaries 431 -- 431 --
---------- ----------- ----------- -----------
Income/(loss) from continuing operations before income taxes 601 1,102 (2,193) (496)
Income tax expense -- -- -- --
---------- ----------- ----------- -----------
Income/(loss) from continuing operations 601 1,102 (2,193) (496)
Loss from operations of discontinued property
and casualty insurance company -- (116) -- (18)
---------- ----------- ----------- -----------
Net income/(loss) $ 601 $ 986 $ (2,193) $ (514)
========== =========== =========== ===========
Earnings (loss) per share:
Income/(loss) from continuing operations $ 0.11 $ 0.20 $ (0.41) $ (0.09)
Loss from discontinued operations 0.00 (0.02) 0.00 0.00
---------- ----------- ----------- -----------
Net income(loss) per share $ 0.11 $ 0.18 $ (0.41) $ (0.09)
========== =========== =========== ===========
Weighted average number of common shares
used in computing earnings per share 5,311,123 5,365,546 5,311,123 5,366,370
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
4
<PAGE> 5
RIVERSIDE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF COMMON STOCKHOLDERS' EQUITY
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
UNREALIZED TOTAL
ADDITIONAL INVESTMENT COMMON
COMMON PAID-IN RETAINED APPRECIATION STOCKHOLDERS'
STOCK CAPITAL EARNINGS (DEPRECIATION) EQUITY
---------- ----------- --------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995 $ 531 $ 17,209 $ 3,923 $ 4,393 $ 26,056
Net loss (2,193) (2,193)
Change in unrealized investment appreciation
of fixed maturities and equity securities (4,393) (4,393)
------ --------- -------- --------- ------------
Balance, June 30, 1996 $ 531 $ 17,209 $ 1,730 $ 0 $ 19,470
====== ========= ======== ========= ============
</TABLE>
5
<PAGE> 6
RIVERSIDE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-----------------------------
OPERATING ACTIVITES: 1996 1995
---------- ----------
<S> <C>
Net loss $ (2,193) $ (514)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Net change in deferred acquistion costs 49 1,302
Gain on Life Insurance Reorganization (430)
Provision for deferred income taxes 13
Net realized investment gains(losses) (1,217) 48
Depreciation and amortization 505 354
Interest on policyholder's funds 3,469 4,367
Equity in losses of Wickes Lumber 1,715 745
Minority interest and non-cash adjustments
Change in other assets and liabilities:
Premiums receivable and unearned premiums 80 10
Accrued investment income 197 241
Reserve for unpaid claims, policy benefits and
recoverable on paid losses from reinsurers and others (504) (602)
Other assets (998) 231
Net liabilities of discontinued operations, other liabilities
and current income taxes (358) (4,335)
---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 315 1,860
INVESTING ACTIVITIES
Purchase of investments:
Fixed maturities available for sale (36,867) (33,169)
Equity securities (8,602) (13,375)
Investment real estate (137) (69)
Mortgage, construction and policy loans (9,787) (1,351)
Securites of Wickes Lumber Company (10,000)
Net assets of Life Insurance Reorganization (28,202)
Sale, maturity, and principal reductions of investments:
Fixed maturities available for sale 41,675 32,897
Equity securities 8,643 12,931
Investment real estate 591 13,789
Mortgage, construction and policy loans 2,294 2,825
Life Insurance Reorganization proceeds 35,000
---------- ----------
NET CASH PROVIDED BY INVESTING ACTIVITIES (5,392) 14,478
FINANCING ACTIVITIES
Repayment of debt (20,402) (12,529)
Increase in borrowings 17,798
Purchase and retirement of treasury shares (918)
Deposits of policyholders' funds 192 494
Withdrawal of policyholders' funds (8,665) (19,131)
---------- ----------
NET CASH USED IN FINANCING ACTIVITIES (11,077) (32,084)
INCREASE (DECREASE) IN CASH (16,154) (15,746)
Cash at beginning of year 21,100 22,451
Wickes Lumber Cash Balance 2,582
---------- ----------
CASH AT END OF PERIOD $ 7,528 $ 6,705
========== ==========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
6
<PAGE> 7
RIVERSIDE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Financial Statement Presentation
The condensed consolidated financial statements present the financial
position, results of operations, and cash flows of Riverside Group, Inc. (the
"Company") and its wholly-owned and majority owned subsidiaries, except for
Wickes Lumber Company ("Wickes"). The Company's investment in Wickes is
recorded under the equity method on the statement of operations and cash flows
for the six months and three months ended June 30, 1996, and is consolidated in
the balance sheet as of June 30, 1996. See note 2 regarding the Company's
acquisition of additional shares of Wickes and the resulting financial
reporting changes.
The condensed consolidated balance sheets as of June 30, 1996, the
condensed consolidated statements of operations for the six months and three
months ended June 30, 1996 and 1995, the condensed consolidated statement of
common stockholders' equity for the six months ended June 30, 1996 and the
condensed consolidated statements of cash flows for the six months ended June
30, 1996 and 1995, 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 June 30, 1996, 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 1995 Annual Report on Form 10-K.
2. INVESTMENT IN WICKES LUMBER COMPANY
The Company acquired two million newly issued shares of Wickes' common
stock on June 20, 1996. The purchase of additional shares increased the
Company's ownership in Wickes from 36% to 52% of Wickes' total common shares
and from 30% to 55% of Wickes' voting common shares. The accompanying
consolidated balance sheet includes Wickes at June 30, 1996 and the
accompanying December 31, 1995 consolidated balance sheet has been presented in
a classified format consistent with the June 30, 1996 presentation.
Additionally, the results of operations and cash flows of Wickes will be
consolidated with the Company beginning July 1, 1996. Prior to July 1, 1996,
Wickes' operations and cash flows have been reflected on the equity method.
The acquisition of Wickes has been recorded as a step acquisition using
the purchase method of accounting. Such acquisition resulted in approximately
$8.8 million in goodwill reflected in the accompanying balance sheet. Summary
financial information of Wickes for the second quarter and first six months of
1996 and 1995 follow (in thousands, except per share data):
7
<PAGE> 8
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
---------------------------- ----------------------------
(unaudited) (unaudited)
June 29, 1996 July 1, 1995 June 29, 1996 July 1, 1995
------------- ------------ ------------- ------------
Operating Statement Data:
<S> <C> <C> <C> <C>
Net sales $ 228,773 $272,791 $381,281 $ 464,495
Gross profit 51,209 63,936 86,139 109,493
Net income(loss) 1,881 2,470 (4,293) (2,128)
Net income(loss) per Wickes
common share $ .29 $ 0.40 $ (.68) $ (0.35)
</TABLE>
<TABLE>
<CAPTION>
(unaudited)
June 29, 1996 December 30, 1995
------------- -----------------
<S> <C> <C>
Balance Sheet Data:
Current assets $ 229,951 $219,475
Total assets 307,237 302,515
Current liabilities 84,794 79,853
Long term debt and other long-term
liabilities 201,774 207,533
Common stockholders' equity $ 20,669 $ 15,129
</TABLE>
At June 30, 1996, the Company, owned 4,217,290 shares, or approximately
52%, of Wickes' outstanding common stock. Included in the Company's results of
operations for the first six months of 1996 and 1995 are net losses of
$1,715,000 and $745,000 respectively, which represent the Company's share of
Wickes' net losses, less amortization of capitalized costs related to the
Wickes investment.
Had the acquisition of additional shares of Wickes occurred at January 1,
1995, the Company's proforma operating statement data for the six months ended
June 30, 1996 and 1995 would appear as follows:
<TABLE>
<CAPTION>
Six Months Ended
----------------
(unaudited)
June 30, 1996 June 30, 1995
------------- -------------
<S> <C> <C>
Proforma Operating Statement Data:
Net sales $381,281 $464,495
Gross profit 86,139 109,493
Net loss (2,783) (954)
Net income(loss) per common share (0.52) (0.18)
</TABLE>
3. LIFE INSURANCE REORGANIZATION
On June 6, 1996, the Company completed the reorganization of its life
insurance operations with Circle Investors, Inc. ("Circle"), a privately held
company engaged in providing financial services (the "Life
8
<PAGE> 9
Insurance Reorganization"). As a result of the transaction, a wholly-owned
subsidiary of American Financial Acquisition Corporation ("AFAC"), which
wholly-owned all of the Company's insurance subsidiaries, was merged with and
into Circle, with Circle surviving. The Company received net cash of $13.5
million, after payment in full of the AFAC bank debt, taxes and expenses.
Additionally, the Company received 2,267,000 shares of Circle common stock and
3,600 shares of Circle Series C Preferred Stock. The Company also retained
950,000 shares of Wickes common stock, real estate with a net appraised value of
$2 million and certain miscellaneous assets that were previously owned by the
insurance subsidiaries.. These retained assets have been recorded at the lower
of historical carryover cost or fair value, consistent with transactions between
companies under common control. The real estate appraised value is net of an
$18 million mortgage owned by American Founders Life Insurance Company ("AFL")
(see note 5).
The Company previously estimated and reported a loss on the reorganization
of the life insurance operations in the year ended December 31, 1995 in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 121
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed Of". A net gain on the reorganization of $431,000 is reflected in the
second quarter of 1996 as an adjustment to the previous estimate. The gain is
primarily related to consideration paid to the Company by the life insurance
subsidiaries for utilization of tax benefits related to life insurance
operations through the date the transaction closed.
The Company has recorded its investment in Circle at $2.3 million for the
common shares ($1.00 per share) plus $3.6 million liquidation value, for the
preferred shares, for a total of $5.9 million. The Company's investment in
Circle will be reported in subsequent financial statements on an equity basis.
The consolidated balance sheet as of June 30, 1996 does not, and future
consolidated balance sheets will not, include the consolidated assets and
liabilities of Circle's life insurance operations.
Up to the closing of the Life Insurance Reorganization, the life insurance
operations generated income after taxes of $1,003,000. However, based on an
evaluation of the life operations profits and the benefits to the Company of
these operations, additional deferred acquisition cost amortization of $674,000
was recorded reducing life insurance income to a net of $329,000.
4. COMMITMENTS AND CONTINGENCIES
On or about August 11, 1993, FynSyn Capital Corp. ("FynSyn") and a related
entity, Wickes Lumber Investment Partnership ("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 the Company. 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. In July 1994, FynSyn and WLIP commenced an action 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
9
<PAGE> 10
the terms of the sale of all of their Wickes securities to the Company. In
1995, this action was removed to the United States District Court for the
District of New Jersey. The Company and Wickes have answered the complaint in
this action and counterclaimed seeking, among other things, indemnity and
enforcement of their contractual rights. Wickes has also sought declaratory
relief as to the respective rights and liabilities of Wickes and the Company, as
well as FynSyn and the third party related to and as a consequence of these
matters and seeking indemnity from FynSyn. The Company and Wickes intend to
pursue vigorously their respective rights against FynSyn, WLIP and related
parties, and the Company intends to defend vigorously the claims of FynSyn and
WLIP.
On November 3, 1995, a complaint styled Morris Wolfson v. J. Steven
Wilson, Kenneth M. Kirschner, Albert Ernest, Jr., Claudia B. Slacik, Jon F.
Hanson, Robert E. Mulcahy, Frederick H. Schultz, Wickes Lumber Company and
Riverside Group, Inc. was filed in the Court of Chancery of the State of
Delaware in and for New Castle County (C.A. No. 14678). As amended, this
complaint alleges, among other things, that the acquisition by the Company of
two million shares of Wickes (the "Wickes Acquisition") is unfair and
constitutes a waste of Wickes' assets and that Wickes and the Company breached
their fiduciary duties in their approval of this transaction. The amended
complaint, among other things, seeks on behalf of a purported class of Wickes'
shareholders to obtain injunctive relief or damages with respect to the
transaction.
In connection with the sale of Dependable Insurance Company, the Company
agreed to indemnify the purchaser for certain losses on various categories of
liabilities. Terms of the indemnities provided by the Company vary with
regards to time limits and maximum amounts. AFAC subordinated debentures in
the amount of $2.1 million are pledged as collateral on these indemnities.
Although future loss development will occur over a number of years; the Company
believes, based on all information presently available, that reserves
transferred to the purchaser at the closing and those held by the Company are
adequate for these indemnities. It is not anticipated that these indemnities
will have a material adverse effect on the Company's financial position,
results of operations or cash flows.
Accrued liabilities at June 30, 1996, includes approximately $1,007,000
for remediation of certain environmental and product liability matters,
principally underground storage tank removal on real property owned by Wickes.
Many of the building center facilities presently and formerly operated by
Wickes and its predecessor contained underground petroleum storage tanks. All
such tanks known to Wickes located on facilities owned or operated by the
Company have been filled, removed, or are scheduled to be removed in accordance
with applicable environmental laws in effect at the time. As a result of
reviews made in connection with the sale or possible sale of certain facilities,
Wickes has found petroleum contamination of soil and ground water on several of
these sites and has taken, and expects to take, remedial actions with respect
thereto. In addition, it is possible that similar contamination may exist on
properties no longer owned or operated by Wickes, the remediation of which
Wickes could, under certain circumstances, be held responsible. Since 1988,
Wickes has incurred approximately $2.1 million of costs, net of recoveries, with
respect to the filling or removing of underground storage tanks and related
investigatory and remedial actions.
10
<PAGE> 11
At June 29, 1966, Wickes had an investment in Riverside International
Corporation, which conducts operations in Russia, of $2.6 million. This
investment entails significant inherent risks, including expropriation, legal,
currency, crime, management, labor, weather and other operational risks.
Wickes is one of many defendants in approximately 150 actions, each of
which seeks unspecified damages, brought in 1993, 1994, 1995, and 1996 in
various Michigan state courts against manufacturers and building material
retailers by individuals who claim to have suffered injuries from products
containing asbestos. All of the plaintiffs in these actions are represented by
the same counsel. Wickes is aggressively defending these actions and does not
believe that these actions will have a material adverse effect on Wickes.
5. LONG TERM AND MORTGAGE DEBT
Consolidated long-term debt is comprised of the following at June 30, 1996
(in thousands):
<TABLE>
<CAPTION>
The Company
<S> <C>
Subordinated debt $ 9,374
Other 1,511
Less: current maturities (871)
--------
The Company long-term debt $ 10,014
Wickes
Revolving line of credit $ 9,241
Senior subordinated notes 100,000
Other 300
Less: current maturities (211)
--------
Wickes' long-term debt $199,330
Total Consolidated long-term debt $209,344
========
Mortgage debt $ 17,789
========
</TABLE>
THE COMPANY
As a result of the decrease during 1995 in the trading value of Wickes'
common stock and the charges taken in the fourth quarter of 1995 related to the
Life Insurance Reorganization, the Company had not been in compliance with
certain requirements of its bank credit agreement. This issue was resolved
with the completion of the Life Insurance Reorganization and the repayment in
full of the bank credit agreement.
As a part of the Life Insurance Reorganization, the Company purchased
certain real estate owned by AFL (see note 3). The Company issued a series of
seven secured non-recourse promissory notes (the "Notes") with an aggregate
principal amount of $17,789, equal to 90% of the price of the real estate
parcels purchased from AFL. Principal and interest payments are due in annual
installments, commencing on the first anniversary of the Notes. Each annual
installment is calculated based upon equal payments amortized over a term of 20
years. A balloon payment of the remaining principal balance is due on the
seventh anniversary of the Notes. The Notes bear interest at a rate adjusted
quarterly, equal to the London InterBank
11
<PAGE> 12
Offered Rate ("LIBOR"), plus three hundred basis points. The Notes are secured
by first priority mortgages covering all of the real estate. On each
anniversary of the Notes, the Company is required to provide AFL with an
independent appraisal of the real estate, subject to the mortgages ("Appraised
Values"). If the outstanding principal amount of the Notes exceed 85% of the
Appraised Value on the first anniversary or 80% of the Appraised Value with each
anniversary thereafter, the Company is required, prior to the next succeeding
December 31, to make an additional principal payment on the Notes in an amount
equal to such excess. A parcel of real estate that is subject to the mortgage
may be sold by the Company only in cash transactions with the prior consent of
AFL. Subject to certain exclusions, the entire sales proceeds is required to be
paid to AFL to fund an escrow account for the payment of property taxes, and to
pay accrued and unpaid interest and any remaining principal balance on the
Notes. As additional security for the Notes, the Company pledged as collateral
3,600 shares of Circle Series C preferred stock, 2,267,000 shares of Circle
common stock and 1,000,000 shares of Wickes' common stock. At the end of each
calendar quarter, the collateral pledged is adjusted according to changes in
market value.
WICKES MORTGAGE LENDING
On June 26, 1996, Wickes Mortgage Lending, Inc. ("WML"), obtained an
$11,000,000 warehousing lending line of credit (the "Line") from Liberty
Savings Bank ("Liberty") for first mortgage loans for funding mortgage loans to
its customers, subject to the following limitations: (1) Speculative and
Pre-Sold Home Loans ("Spec Loans") - loans to qualified builders for the
purpose of constructing one-family residential houses - are limited to an
aggregate maximum amount of $5,000,000, (2) Permanent End Loans ("Permanent
Loans") - loans to qualified home buyers for the purpose of purchasing or
refinancing existing home mortgages - are limited to an aggregate maximum
amount of $1,000,000 and (3) Construction/Permanent Loans ("CP Loans") - loans
made to qualified home buying customers for construction loans that can be
converted to permanent loans - are limited to an aggregate maximum amount of
5,000,000. Interest accrues daily at the prime rate plus 25 basis points for
Spec Loans at a variable rate equal to the prime rate for Permanent Loans, and
at rates periodically published by Liberty for CP Loans. Interest is paid
monthly for all types of loans. Other fees associated with the Line include an
annual warehouse fee equal to 25 basis points on the total available amount of
the Line, a $175 set up fee for each Spec Loan submitted and a $25 set up fee
for each Permanent Loan submitted. The initial term of the Line is one year.
Liberty may cancel the line at its anniversary date with 90 days notice. The
Line is guaranteed by the Company. To secure this guarantee, the Company
pledged 425,000 shares of Wickes' common stock as collateral. In the event
that, at any time, the value of the collateral based upon the closing price of
Wickes' common stock, as reported in the Wall Street Journal, is less than
$1,650,000, the Company is required, within five business days, to pledge to
Liberty additional shares of Wickes to bring the total value of the collateral
to at least $2,200,000. The unused amount available for borrowing at June 30,
1996, was $11,000,000.
WICKES LUMBER COMPANY
Wickes' debt includes a revolving line of credit which was amended and
restated on March 12, 1996. Among other things, the amendment and restatement
(i) extended the term of the facility 15 months to January 1998, (ii) reduced
the maximum borrowing limit $15 million to $130 million and (iii) modified
certain covenants. Under the revolving line of credit, Wickes may borrow
against certain levels of accounts receivable and inventory. The unused amount
available for borrowing, at June 30, 1996, was $24,046,000. Collateral for the
revolving line of credit, including all of Wickes' accounts receivable,
inventory, general
12
<PAGE> 13
intangibles and certain real estate, machinery and equipment. Covenants under
the related debt agreements require, among restrictions, that Wickes maintain
certain financial ratios and certain levels of consolidated net worth. In
addition, the debt agreement restricts capital expenditures, the incurrence of
additional debt, asset sales, dividends, investments and acquisitions.
In addition, Wickes' debt includes 10-year unsecured senior subordinated
notes issued October 22, 1993. Interest on the notes is at the annual rate of
11 5-8%, payable semi-annually. Covenants under the related indenture restrict
among other things, the payment of dividends, the prepayment of certain debt,
the incurrence of additional debt if certain financial ratios are not met, and
the sale of certain assets unless the proceeds are applied to the notes. In
addition, the notes require that, upon a change in control of Wickes, Wickes
must offer to purchase the notes at 101% of the principal thereof, plus accrued
interest.
6. INCOME TAXES
The Company's effective tax rate was 0% for the six months ended June 30,
1996 and 1995. The current tax expense on the life insurance reorganization
has been offset by a reduction in previously recorded deferred tax expense.
The increased ownership in Wickes by the Company does not result in
consolidation for income tax filing purposes. Thus, each company will continue
to separately determine its income tax liability. The losses of Wickes reduce
the Company's GAAP basis in Wickes creating deferred tax benefits which are
realized upon sale or subsequent increase in GAAP basis of Wickes common stock.
7. RELATED PARTY TRANSACTIONS
In March 1996, the Company entered into an employment agreement with its
Chairman, J. Steven Wilson, with respect to his employment by the Company
during 1996. Pursuant to this agreement, Mr. Wilson received his entire 1996
salary at his 1995 rate of $208,040 in advance and received an advance against
his 1996 bonus equal to the amount of his 1995 bonus of $200,000.
On March 29, 1996, the Company made a loan of $154,114 to a company owned
by a director of the Company. In addition, the Company agreed to extend the
maturity date of a previous loan of $225,000 to this company. Both loans bear
interest at a rate of 7.5%. The maturity date of both loans has been extended
to October 15, 1996.
8. SUBSEQUENT EVENT
In July 1996, WML, a wholly owned subsidiary of the Company, entered into a
definitive agreement with Wickes (the "Mortgage Marketing Agreement") in which
Wickes and WML will jointly develop, market and implement a mortgage lending
program to and through Wickes' builder customers. As part of the agreement,
Wickes agreed to reimburse WML for "start-up costs" incurred by the hiring of
additional loan representatives. The Company estimates these reimbursements in
1996 to be approximately $1,024,000. The agreement terminates on December 31,
1997, and may be extended thereafter on a month by month basis.
13
<PAGE> 14
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, 1995.
LIQUIDITY AND CAPITAL RESOURCES
THE COMPANY
The Completion of the Life Insurance Reorganization (see note 3), on June
6, 1996, provided cash of $14.4 million after payment of $18.0 million of bank
debt and the $2.0 million down payment for the real estate and before expenses
and income taxes. It is estimated that after expenses and income taxes are
paid in the next quarter, the net cash proceeds will be $13.5 million, as
reported previously. The Company used $10 million of the proceeds to acquire
two million shares of Wickes common stock on June 20, 1996 (see note 2). The
completion of these two transactions resulted in significant changes in
accounting for the investment in Wickes and financial reporting changes for the
Company (see notes 2 and 3).
At August 6, 1996, the Company had $4.4 million in cash and short-term
investments. The Company's general liquidity requirements consist primarily of
funds for payment of debt and related interest, and for operating expenses.
The Company anticipates that its funds will be adequate for its liquidity
requirements at least until mid 1997. Remaining operations after the Life
Insurance Reorganization, exclusive of Wickes (which is currently prohibited
from paying dividends by reason of restrictions in its debt instruments),
consist primarily of real estate sales, the operations of Wickes Financial
Services Center, Inc. ("WFSC") and the operations of Wickes Mortgage Lending,
Inc. ("WML"). Although revenues are increasing for WML and WFSC has
implemented a managing general agent structure which is less capital intensive,
the Company anticipates these operations will continue to produce negative cash
flows through the remainder of this year. The Company believes that
modifications could, if necessary, be made to the business plan for these
operations that would reduce negative cash flow and help to control liquidity.
In addition, should additional liquidity be necessary or desirable, the Company
could obtain additional financing or sell assets.
As a result of the decrease during 1995 in the trading value of Wickes'
common stock and the charges taken in the fourth quarter of 1995 related to the
Life Insurance Reorganization, the Company had not been in compliance with
certain requirements of its bank credit agreement. This issue has been
resolved with the completion of the Life Insurance Reorganization and resulting
repayment in full of the bank credit agreement.
On August 9, 1996, the Company announced that its Board of Directors
approved a plan to acquire in open market transactions from time to time up to
100,000 shares of the Company's common stock.
14
<PAGE> 15
See note 4 of Notes to Condensed Consolidated Financial Statements for a
description of (i) litigation seeking, among other things, recision of the
transaction in which Riverside acquired for approximately $6.5 million an
aggregate of 739,198 shares of Wickes common stock and (ii) litigation seeking,
among other things, to enjoin or to obtain damages with respect to the Wickes
Acquisition.
During the first six months of 1996, stockholders' equity decreased by a
net of $6.6 million primarily as a result of losses sustained by Wickes of $1.7
million and decreases in the market value of invested assets of the life
insurance subsidiaries of $4.4 million.
WICKES
Wickes' principal sources of working capital and liquidity are earnings
and borrowings under its revolving credit facility. Wickes' primary need for
capital resources is to finance inventory and accounts receivable.
The first half of the year, historically, generates negative cash flows
from operating activities. With the peak building season historically
occurring in the second and third quarters, Wickes normally experiences
increases in its accounts receivable and inventory levels during the first
quarter to meet the anticipated increase in sales and in the second quarter as
a result of increased sales activity. In the first half of 1996, Wickes
utilized its revolving line of credit, as well as proceeds from the sales of
excess property, plant and equipment to provide funds used by operations.
On June 20, 1996, Wickes sold to the Company, two million newly-issued
shares of Wickes' common stock for $10 million in cash. As a result of this
issue, approximately $12 million in real estate was released from the total
collateral required under Wickes' revolving line of credit.
Wickes' capital expenditures consist primarily of the construction of
storage facilities, the remodeling of building centers and component
manufacturing facilities, and the purchase of equipment and management
information systems. In the first six months of 1996, Wickes spent $2.0
million on capital expenditures. Wickes expects to spend approximately $4
million for all of 1996. Under Wickes' bank revolving credit agreement, as
amended, capital expenditures during 1996 are limited to $6 million plus any
portion of the permitted capital expenditures for 1995 that were not spent in
1995. Wickes expects to fund capital expenditures through borrowings and its
internally generated cash flow.
In April of 1996, Wickes began operating a new component manufacturing
facility in Elwood, Indiana. The operation manufactures trusses and wall
panels for several of Wickes' Indiana and Ohio centers. The facility is
located on the site of a former Wickes center.
Through the first six months of 1996, Wickes has also generated $3.2
million from the sale of real estate for two closed lumber centers and 280
excess delivery vehicles and forklifts. This compares with only $0.6 million
generated in the first six months of 1995.
Wickes maintained excess availability under its revolving line of credit
throughout the first six months of 1996. At the end of the second quarter of
1996, total borrowings under the revolving line of credit were $33.7 million
lower than at the end of the second quarter of 1995. Under the current terms
of Wickes' bank
15
<PAGE> 16
revolving credit agreement, Wickes believes that it will continue to have
sufficient funds available for its anticipated operations and capital
expenditures. At July 27, 1996, $99.5 million was outstanding under Wickes'
revolving line of credit, and the unused availability was approximately $25.0
million.
16
<PAGE> 17
RESULTS OF OPERATIONS
GENERAL
The Company reported results of operations for the quarter and six months
ended June 30, 1996 and 1995, as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
(unaudited) (unaudited)
1996 1995 1996 1995
----- ----- ----- -----
<S> <C> <C> <C> <C>
Income(loss) from continuing
operations (1) $ 601 $1,102 $(2,193) $(496)
Income(loss) from discontinued
operations (2) --- (116) --- (18)
----- ------ ------- -----
Net income (loss) $ 601 $ 986 $(2,193) $(514)
===== ====== ======= =====
</TABLE>
(1) Includes the Company's equity in income(losses) of Wickes for the second
quarter of 1996 and 1995 of $580,000 and $694,000 respectively, and
($1,715,000) and ($745,000) for year-to-date 1996 and 1995, respectively.
1996 includes additional deferred acquisition cost amortization of
$674,000. For a discussion of the additional amortization see Note 3 of
Notes to Condensed Consolidated Financials Statements included elsewhere
herein. Includes net realized gains on life insurance investments of
$893,000 and $344,000 for the second quarters of 1996 and 1995,
respectively, and $1,367,000 and $296,000 for the six months ended June
30, 1996 and 1995, respectively. The second quarter of 1995 includes
income of $600,000 related to the settlement of a disputed financing
proposal.
(2) 1995 includes first quarter income of $285,000 related to an arbitration
award on disputed reinsurance receivable.
WICKES LUMBER COMPANY
The following table provides Wickes' comparative total operating statement
data and the Company's equity in income(losses) of Wickes:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
(unaudited) (unaudited)
June 29, 1996 July 1, 1995 June 29, 1996 July 1, 1995
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Total Operating Statement
Data:
Net sales $228,773 $272,791 $381,281 $464,495
Gross profit 51,209 63,936 86,139 109,493
Net income(loss) 1,881 2,470 (4,293) (2,128)
Equity in income(losses)
of Wickes $ 580 $ 694 $ (1,715) $ (745)
</TABLE>
17
<PAGE> 18
Net Sales
Net sales for the second quarter of 1996 decreased 16.1% to $228.8 million
from $272.8 million for the second quarter of 1995. Same store sales declined
9.6% compared with the same period last year. Wickes believes that the
decrease in same store sales is primarily attributable to a slowdown in
residential construction, severe spring rains in the midwest and a 23%
reduction in sales staff. Wickes estimates that deflation in lumber prices
accounted for a decrease in total sales of approximately 0.8%, or $1.9 million.
Same store sales to Wickes' primary customer, residential and commercial
builders, declined only 1.8% when compared with the second quarter of 1995.
Wickes' program to reduce the number of under-performing building centers was
also a major cause of the 1996 sales decline compared with 1995. Wickes
currently operates 110 building centers, 17 fewer than at the end of the first
quarter of 1995.
Net sales for the first six months of 1996 decreased 17.9% to $381.3
million from $464.5 million for the first six months of 1995. Same store sales
declined 11.6% compared with the same period last year. Wickes believes that
the decrease in same store sales is primarily attributable to a slowdown in
residential construction, deflation in lumber prices, severe weather
conditions, and a 22.4% decrease in sales staff. Wickes estimates that
deflation in lumber prices accounted for a decrease in total sales of
approximately 2.7% or $10.4 million. Same store sales to Wickes primary
customer, residential and commercial builders, declined only 3.4% when compared
with the second quarter of 1995. Wickes' program to reduce the under of
under-performing building centers was also a major cause of the 1996 sales
decline compared with 1995. Wickes currently operates 110 building centers, 17
fewer than at the end of the second quarter of 1995.
Gross Profit
1996 second quarter gross profit decreased to $51.2 million from $63.9
million for the second quarter of 1995, a 19.9% decrease. Gross profit as a
percent of sales decreased to 22.4% of sales for the second quarter of 1996
from 23.4% in 1995. The decline in gross profit as a percent of sales is
primarily attributable to Wickes' continued emphasis on sales to the
professional builder, resulting in an increase in the portion of Wickes' sales
comprised of lower margin commodity products, and to a lesser extent, a program
to reduce the amount of excess and slow-moving inventory. Sales to the
professional builder, as a percent of total sales, increased to 84.1% for the
second quarter of 1996 from 79.9% for the same period in 1995.
1996 first half gross profit decreased to $86.1 million from $109.5
million for the first half of 1995, a 21.3% decrease. Gross profit as a
percent of sales decreased to 22.6% of sales for the first half of 1996 from
23.6% in 1995. The decline in gross profit as a percent of sales is primarily
attributable to Wickes' continued emphasis on sales to the professional
builder, resulting in an increase in the portion of Wickes' sales comprised of
lower margin commodity products, and to a lesser extent, a program to reduce
the amount of excess and slow-moving inventory. During the first half of 1996,
the percent of Wickes sales attributable to professional builders increased to
85.3% from 81.5% in the first half of 1995. Wickes also estimates the decline
in lumber prices during the first half of 1996, compared with the first half of
1995, resulted in a decrease of approximately $1.7 million in total gross
profit.
18
<PAGE> 19
Selling, General and Administrative Expense
SG&A expense decreased to 18.1% of net sales in the second quarter of 1996
compared with 19.8% of net sales in the second quarter of 1995. Despite a
16.1% total sales decline for the second quarter, Wickes was able to reduce its
total SG&A expense by 23.1%, as a result of cost reductions affected pursuant
to Wickes' restructuring plan begun in December 1995, a program to reduce
excess vehicles and equipment, and previous cost reduction actions.
Improved credit controls at various lumber centers and good success in
collecting previously reserved accounts receivable, reduced bad debt expense as
a percent of sales by 1.0%. Total salaries, wages and employee benefits
decreased, as a percent of sales, by 0.8%. As of June 30, 1996, the company
had 3,854 full time and part time employees, down 18% from June 1995. As a
percent of sales, Wickes experienced an increase in delivery and accounts
receivable collection expenses, partially offset by decreases in professional
and legal fees and marketing expenses.
Net Income(loss)
Net income(loss) was $1,881,000 and $(4,293,000) for the three months and
six months ended June 29, 1996, respectively, compared with $2,470,000 and
$(2,128,000) for the three months and six months ended July 1, 1995. The
decrease for the three-month period primarily results from lower sales, reduced
gross profit margins, and equity in the loss of an affiliated company,
partially offset by decreased selling, general and administrative expenses
("SG&A").
Other operating income for the second quarter 1996 was $1.6 million. This
was relatively unchanged, as a percent of sales, when compared with the $1.8
million recorded for the same period in 1995. Other operating income for the
first half 1996 was $2.5 million. This was relatively unchanged, as a percent
of sales, when compared with the $2.9 million recorded for the same period in
1995.
In the second quarter of 1996, interest expense decreased 11.7% to $5.5
million from $6.2 million in the second quarter of 1995. This change reflects
a $29.5 million decrease in average borrowings on Wickes' revolving credit
facility. The effective borrowing rate on total long term debt for the second
quarter increased 24 basis points from the second quarter of 1995.
Approximately 92% of Wickes' second quarter average borrowings on its revolving
credit facility were LIBOR-based. In the first half of 1996 interest expense
decreased 8.1% to $11.2 million from $12.2 million in the first half of 1995.
This change reflects a $22.1 million decrease in average borrowings on Wickes'
revolving credit facility. The effective borrowing rate on total long term
debt for the first half increased 22 basis points from the first half of 1995.
Approximately 94% of Wickes' first quarter average borrowings on its revolving
credit facility were LIBOR-based.
In the second quarter of 1996, Wickes recorded a loss of $0.9 million with
respect to its investment in its investment in its subsidiary engaged in
operations in Russia. In the second quarter of 1995, Wickes recorded a loss of
$0.5 million, recorded on a consolidated basis, with respect to this
subsidiary. In the first half of 1996, Wickes recorded a loss of $1.9 million
with respect to its investment in its subsidiary engaged in operations in
Russia. In the first half of 1995, Wickes recorded a loss of $0.8 million,
recorded on a consolidated basis, with respect to this subsidiary.
19
<PAGE> 20
Equity in Losses of Wickes
The Company's share of Wickes' income for the three months ended June,
1996, decreased to $580,000 compared to $694,000 for the same period in 1995.
The decrease for the three-month period primarily results from the decreased
income at Wickes, offset by the additional ownership in Wickes acquired in
August 1995 and June 1996. The Company's share of Wickes' losses for the six
months of 1996 increased to $1,715,000 from $745,000 for the first six months
of 1995. This increase is the result of the additional losses at Wickes of
$2,165,000; of this amount, the Company's share of Wickes loss increased
$650,000. The additional loss of $320,000 is due to the additional ownership
acquired in August 1995 and June 1996.
LIFE INSURANCE OPERATIONS
The Statement of Operations includes the operations of the life insurance
subsidiaries through June 6, 1996 the date of the Life Insurance
Reorganization. Operating income after tax of $1,003,000 was generated for
this period, however, this was adjusted to a net income amount of $329,000 by
recording additional amortization of deferred acquisition costs to reflect the
net economic benefit accrued to the Company pursuant to the terms of the merger
agreement with Circle. The following table sets forth comparative information
with respect to the Company's life insurance operations.
Life Insurance Operations
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
-------------------------------- -------------------------
(in 000's) Inc./ (in 000's) Inc./
1996 1995 (Dec) 1996 1995 (Dec)
---- ---- ----- ---- ----- ----
<S> <C> <C> <C> <C> <C> <C>
Premiums and annuities $1,258 $2,110 -40% $3,224 $4,311 -25%
Benefits and losses 2,227 2,808 -21% 5,805 6,734 -14%
Policy acquisition expenses 969 892 9% 2,026 1,558 30%
Investment income $2,903 $3,745 -22% $5,027 $7,604 -34%
</TABLE>
Note that amounts for 1995 will include a full quarter and six months of
operations, while 1996 amounts include operations through the June 6 Life
Insurance Reorganization.
The decrease in premiums and annuity considerations for 1996 compared to
1995 is primarily the result of normal lapse activity as the Company does not
presently have active life insurance marketing operations.
Benefits and losses decreased during 1996 compared to 1995 primarily due
to reduced surrender activity on annuity policies as a result of a large number
of policies with surrender charges expiring in the first quarter of 1995. The
decrease is partially offset by a $.4 million increase in death claims for
1996.
Policy acquisition expenses increased in 1996 compared to 1995 due to
additional deferred acquisition cost amortization of $674,000 related to the
Life Insurance Reorganization. See Note 3 of Notes to Condensed Consolidated
Financial Statements included elsewhere herein. All other acquisition costs
20
<PAGE> 21
decreased between years primarily as a result of reduced spreads on interest
sensitive products which slows the rate at which these assets are amortized.
The decrease in investment income in 1996 compared to 1995 resulted
primarily from lower average invested assets, lower reinvestment rates and
increased investment expenses related to expansion of mortgage lending
activities.
OPERATING COSTS AND INTEREST EXPENSE
Other operating costs and expenses were $1,400,000 for the second quarter
of 1996 compared to $1,110,000 in 1995, and comparable amounts for the first
six months were $2,352,000 and $2,757,000 for 1996 and 1995, respectively. The
increased expenses in the second quarter of 1996 resulted from deferred bank
debt costs amortized as a result of the Life Insurance Reorganization,
partially offset by decreased amortization expense of intangible assets written
off at year end 1995, data processing savings and other cost reduction efforts
at the Company's life insurance subsidiaries and the implementation of a
managing general agent structure at WFSC.
Interest expense for the second quarter of 1996 was $767,000. This was
relatively unchanged when compared with the $772,000 recorded for the same
period in 1995. Interest expense for the first six months of 1996 was
$1,556,000 compared to $1,567,000 for the first six months of 1995.
INCOME TAXES
The Company's effective tax rate was 0% for the six months ended June 30,
1996 and 1995. The current tax expense on the life insurance reorganization
has been offset by a reduction in previously recorded deferred tax expense.
The increased ownership in Wickes by the Company does not result in
consolidation for income tax filing purposes. Thus, each company will continue
to separately determine its income tax liability. The losses of Wickes reduce
the Company's GAAP basis in Wickes creating deferred tax benefits which are
realized upon sale or subsequent increase in GAAP basis of Wickes common stock.
21
<PAGE> 22
PART II
OTHER INFORMATION
ITEM 5. OTHER INFORMATION
For information concerning the completion of the Life Insurance
Reorganization on June 6, 1996, see Note 3 of Notes to Condensed
Consolidated Financial Statements contained elsewhere herein.
For information regarding the acquisition of additional shares of Wickes
Lumber Company's common stock, see Note 2 of Notes to Condensed
Consolidated Financial Statements contained elsewhere herein.
ITEM 6. EXHIBITS AND REPORTS OF FORM 8-K.
(a) Exhibits
10.1 Mortgage Marketing Agreement effective as of June 30,
1996 between Wickes Lumber Company and Wickes Mortgage Lending,
Inc.
27.1 Financial Data Schedules (SEC Use Only)
Ex. 27.1, Ex. 27.2 & Ex. 27.3
(b) Reports on Form 8-K
On June 21, 1996, the Company filed a current report Form 8-K in regard
to the completion of the Life Insurance Reorganization and the Wickes
Investment, reporting under Item 2. Acquisition or Disposition of
Assets.
22
<PAGE> 23
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
RIVERSIDE GROUP, INC.
By /s/ J. Steven Wilson
---------------------------
J. Steven Wilson
Chairman of the Board,
President and
Chief Executive Officer
By /s/ Catherine J. Gray
---------------------------
Catherine J. Gray
Vice President
(Principal Accounting Officer)
Dated: August 14, 1996
23
<PAGE> 1
EXHIBIT 10.1
MORTGAGE MARKETING AGREEMENT
This Agreement made as of June 30, 1996 by and between Wickes Lumber
Company, a Delaware corporation ("Wickes"), and Wickes Mortgage Lending, Inc.,
a Delaware corporation ("WML")
WITNESSETH:
WHEREAS, Wickes is engaged in the retail and wholesale sale and
distribution of lumber and building products; and
WHEREAS, WML is an indirect wholly-owned subsidiary of Riverside Group,
Inc. engaged in mortgage lending operations;
WHEREAS, Wickes and WML desire to jointly develop, market and implement a
mortgage lending program to and through Wickes' builder customers; and
WHEREAS, Wickes is willing to grant a sublicense to WML to use the
Trademarks (as defined below) for such purpose in accordance with the terms and
conditions hereof.
NOW, THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Wickes and WML agree as follows:
ARTICLE I
MARKETING
1.1 Conduct of the Business by WML. During the term of this Agreement,
WML shall use good faith efforts to market to Wickes' builder customers
mortgage loans and related products and services and such other services and
products as agreed to by the parties from time to time (collectively, the
"Business"). WML shall maintain adequate resources to conduct the Business and
perform its obligations hereunder in a manner meeting the highest industry
standards, including but not limited to promptness of administrative action and
courtesy to customers of Wickes. WML shall conduct the Business in accordance
with all applicable laws, rules and regulations and shall use reasonable
efforts to conduct the Business in such a manner that Wickes is not considered
as engaging in the Business.
1.2 Agreements of Wickes. Wickes agrees that during the term of this
Agreement it shall without charge (except as provided below):
<PAGE> 2
(a) provide such cooperation as may be necessary to enable WML to
carry out the purposes of this Agreement, including but not limited to
allowing WML to participate in direct mail solicitations and other
marketing programs of Wickes relating to such purposes;
(b) provide to WML customer lists and such other information on
Wickes' customers as WML may reasonably request relating to such purposes;
(c) reasonably endorse the Business, including but not limited to the
delivery of such letters of endorsement of the Business as WML may
reasonably request (subject to WML reimbursing Wickes for paper and
postage); and
(d) use reasonable best efforts to assist WML to locate a substitute
builder to complete construction of any structure subject to a mortgage
included in the Business after default by the original builder and to
continue on a commercially reasonable basis under the circumstances the
supply of building materials for such construction.
1.3 Cost Sharing. (a) Wickes agrees to reimburse WML for those costs
incurred by WML and its affiliates from January 1 through June 30, 1996, for
the hiring, training, office setup and other operating costs of loan
representatives with respect to the Business ("Start-up Costs"), provided that
such reimbursement shall not exceed the cumulative sum shown of Wickes' Total
Participation Funding on Exhibit A hereto through June 1996.
(b) Wickes agrees to reimburse WML on a monthly basis for Start-up Costs
incurred after June 30, 1996, provided that:
(i) Wickes shall not be required to reimburse WML more than $60,000
with respect to the Start-up Costs related to any single loan representative;
(ii) at no time during 1996 shall Wickes be required to reimburse WML
for an aggregate amount in excess of the Wickes' Total Participation
Funding shown on Exhibit A (on a cumulative basis through the end of the
month for which payment is made); and
(iii) at no time during any year after 1996 shall Wickes be required
to reimburse WML for an aggregate amount in excess of $100,000 multiplied
by the number of months elapsed in such year through the end of the month
for which payment is made.
2
<PAGE> 3
Such reimbursement shall be paid promptly upon receipt of an invoice from WML
setting forth in reasonable detail the amount due under this Section 1.3.
(c) Other than the reimbursement set forth in this Section 1.3, Wickes is
not obligated to pay any compensation to WML hereunder, and WML shall be
responsible for the payment of any and all expenses of any type or nature
whatsoever, whether billed to WML or Wickes, incurred in connection with
performance of WML's obligations hereunder. WML will remit promptly to Wickes
any such item billed to Wickes upon notice by Wickes to WML thereof.
1.4 Reports and Records. WML shall furnish to Wickes monthly reports
regarding the Business in such form and containing such information as Wickes
may reasonably request. WML shall keep true and complete records of all
transactions and correspondence with customers of Wickes. Such records and all
accounting records of WML pertaining to the Business may be examined by
representatives of Wickes at any time during normal business hours, whether
during or after the term of this Agreement. WML also shall provide any
financial information reasonably requested by Wickes at any time.
1.5 Exclusivity. During the term of this Agreement, Wickes shall not
provide a list of its customers to any other person or entity for purposes of
using it to market mortgage loans to or through such customers, except as set
forth in the next sentence. If Wickes desires to provide all or part of such a
list to a person or entity in a market area in which WML is not then operating
it may do so provided it first gives WML written notice of its intention to do
so and WML does not represent in writing to Wickes within 30 days of receipt
of the notice that it will use reasonable efforts to begin operations in the
subject market within six months.
1.6 Customer Complaints. Wickes retains the right to investigate any and
all complaints of its customers, agents, employees and others relating to the
Business. In the event that WML becomes aware of a customer complaint relating
to the Business, it shall promptly give Wickes notice of such complaint. WML
agrees to resolve all Wickes customers' complaints to the reasonable
satisfaction of Wickes.
3
<PAGE> 4
ARTICLE II
TRADEMARKS
2.1 Grant of License. Wickes hereby grants to WML a royalty-free,
non-exclusive license to use the name "Wickes" and the Flying W trademark
depicted on Exhibit B hereto (collectively, the "Trademarks") solely in
connection with carrying on the Business in accordance with the terms of this
Agreement during the term of this Agreement. Any use of the name "Wickes"
pursuant to the license granted hereby shall be made only in conjunction with
the words "Wickes Mortgage Lending, Inc." The Trademarks are and shall remain
the property of Wickes and no right, title or interest has been transferred or
is transferred to WML hereunder, except the right to use the same as herein
provided. Any use of the name "Wickes" by WML shall be expressly subordinate
to the use of said name by Wickes.
2.2 Use of Trademarks. WML shall use the Trademarks only to conduct the
Business in accordance with the terms hereof and for no other purpose
whatsoever, in a manner consistent with the maintenance of the existent
goodwill associated with the Trademarks.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
3.1 WML represents to Wickes that:
(a) WML is a corporation duly incorporated under the laws of the State of
Delaware and has full power and authority to enter into and perform the
transactions contemplated by this Agreement; and
(b) this Agreement and the transactions contemplated hereby have been duly
authorized by the Board of Directors of WML.
3.2 Wickes represents to WML that:
(a) Wickes is a corporation duly incorporated under the laws of the State
of Delaware and has full power and authority to enter into and perform the
transactions contemplated by this Agreement;
(b) this Agreement and the transactions contemplated hereby have been duly
authorized by the Board of Directors of Wickes; and
(c) Wickes has a valid license to use the Trademarks.
4
<PAGE> 5
ARTICLE IV
INSURANCE, INDEMNIFICATION AND CONFIDENTIALITY
4.1 E & O Coverage. WML shall maintain in full force and effect during
the term of this Agreement, at its sole cost and expense, a policy or policies
of Errors and Omissions insurance, issued by an insurer acceptable to Wickes,
to afford coverage in the amount of at least $1,000,000.
4.2 Indemnification. WML agrees to defend, indemnify and hold harmless
Wickes, its agents and employees from and against all costs, expenses, claims,
liabilities and losses which result or arise from or relate to the negligent or
willful acts, or errors or omissions of WML, its agents, sub-agents or
employees under this Agreement. Such costs, expenses, claims, liabilities and
losses shall include, but not be limited to, attorney fees (whether or not
litigation ensues) and other legal fees, penalties, fines, direct or
consequential damages, assessments and verdicts (including punitive damages).
4.3 Confidentiality. (a) WML hereby acknowledges that the confidential
and proprietary information to be furnished by Wickes to WML hereunder,
including but not limited to all information regarding customers (the
"Information") is confidential information belonging to Wickes. WML further
acknowledges that unauthorized use or disclosure of the Information would
irreparably injure Wickes.
(b) WML shall not, and shall use reasonable efforts to cause its agents,
subagents, employees, affiliates and contractors not to, during or after the
term of this Agreement, use or disclose the Information for any reason
whatsoever to any person or entity except for such use or disclosure reasonably
necessary in conducting the Business. WML will implement such practices and
measures as are reasonably necessary to preserve and protect the
confidentiality of the Information.
(c) In the event of a breach or threatened breach of Section 4.3(b)
hereof, Wickes shall be entitled to an injunction restraining WML, or its
agents, subagents or employees, from disclosing the Information in whole or
part or conducting the Business with any person or entity to whom the
Information has been disclosed or is threatened to be disclosed. Nothing
herein shall be construed as prohibiting Wickes from pursuing any other
remedies available to Wickes for such breach or threatened breach, including
the recovery of damages.
5
<PAGE> 6
ARTICLE V
TERM, RESTRICTIONS AFTER TERM, ETC.
5.1 Term. The term of this Agreement shall take effect upon the obtaining
by Wickes of all necessary consents of its lenders and shall terminated on
December 31, 1997; provided, that the term shall automatically be extended for
an additional month on the last day of December 1997 and each month thereafter
unless either party notifies the other to the contrary 30 days prior to the
commencement of such extension; and provided further, that the term of this
Agreement may be terminated by Wickes prior to December 31, 1997 on 30 days'
written notice to WML.
5.2 Restrictions and Rights After Term; Effect of Termination or
Expiration. (a) After the term of this Agreement, WML may continue to operate
the Business as to customers to whom it has made mortgage loans or issued
mortgage loan commitments, but only with respect to and to the extent of such
loans or commitments. Notwithstanding the foregoing, on the termination date
of the term of this Agreement, the sublicense granted to WML to use the
Trademarks shall be automatically revoked and of no further force and effect,
and WML agrees (i) not to conduct any business under the name Wickes Mortgage
Lending, Inc. or any name containing the word "Wickes", (ii) not to otherwise
use the name "Wickes", (iii) to change its name such that the word "Wickes" is
not part of its name, and (iv) upon request from Wickes to assign Wickes all of
WML's right, title and interest in and to the name "Wickes Mortgage Lending,
Inc." and all variations thereof.
(b) For two (2) years after the termination of the term of this Agreement
for any reason, WML agrees not, directly or indirectly, to market construction
loans to any professional builder that is a customer of Wickes at the time of
termination or whose name has been on any customer list provided to Wickes
written one year prior to the time of termination.
(c) Sections 4.3, 5.2, 5.3, 6.1 and 6.10 shall survive the termination or
expiration of this agreement for the respective periods set forth therein or,
if no such period is specified, indefinitely. The termination or expiration of
this Agreement in accordance with its terms: (i) shall not affect the
obligations of the parties to make all payments accrued on the date of such
termination or expiration and (ii) shall not result in any other liability on
the part of any party hereof.
5.3 Return of Information. Upon the termination of the term of this
Agreement for any reason, each party shall return to the other within ten (10)
days of the expiration or termination date hereof all documents, contracts,
records or properties of any kind furnished by the other party, including but
not limited to any information provided on magnetic medium, and destroy all
copies thereof. Notwithstanding the foregoing, WML and Wickes may retain
6
<PAGE> 7
such information as is reasonably necessary to enable it to conduct business or
as required by law.
ARTICLE VI
MISCELLANEOUS
6.1 Expenses. Each party to this Agreement shall pay its own attorneys'
fees and expenses in connection with the transactions contemplated hereby.
6.2 Waiver. The terms and provisions of this Agreement may be waived at
any time by the party which is entitled to the benefit thereof, but only by a
written instrument executed by the party waiving compliance.
6.3 Amendment, etc. Anything herein or elsewhere to the contrary
notwithstanding, to the extent permitted by law this Agreement may be amended,
or supplemented at any time, but only by a written instrument executed by
Wickes and WML.
6.4 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed to have been duly given upon personal delivery,
being sent via confirmed facsimile or three (3) days after being mailed first
class postage prepaid, to the parties at the following address or fax number
(or at such other address or fax number for a party as shall be specified by
like notice):
If to Wickes:
Wickes Lumber Company
706 Deerpath Drive
Vernon Hills, IL 60606
Attention: George A. Bajalia
Facsimile No.: (847) 367-3750
If to WML:
Wickes Mortgage Lending, Inc.
7800 Belfort Parkway, Suite 100
Jacksonville, FL 32256
Attention: Edward B. Salem
Facsimile No.: (904) 296-0584
6.5 Headings/Exhibits. The section headings contained in this Agreement
are for convenience only and shall not control or affect the meaning or
construction of any of the provisions of this Agreement. The exhibits attached
hereto are incorporated herein by reference and made a part hereof.
7
<PAGE> 8
6.6 Counterparts; Entire Agreement. This Agreement may be executed in any
number of counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument. This Agreement
supersedes all prior negotiations and agreements (written or oral) among the
parties with respect to the subject matter covered hereby and, with respect to
such subject matter, constitutes the entire understanding among the parties
hereto.
6.7 Saving Provision. In the event any provision of this Agreement is
adjudged to be unenforceable, all remaining provisions shall continue in full
force and effect.
6.8 Miscellaneous. This Agreement shall inure to the benefit of and be
binding upon the parties named herein and their respective successors. This
Agreement may not be assigned by WML, and nothing in this Agreement, express or
implied, is intended to confer upon any other person, any rights or remedies
under or by reason of this Agreement.
6.9 Governing Law. This Agreement shall be construed and enforced in
accordance with the laws of the State of Illinois.
6.10 Arbitration. Any claim or controversy arising out of this Agreement,
or breach hereof, shall be settled by arbitration in accordance with the rules
of the American Arbitration Association in Chicago, Illinois. Judgment on an
arbitration award may be entered in the court of jurisdiction thereof.
Notwithstanding the foregoing provisions of this Section 6.10: (i) Wickes shall
be entitled to seek injunctive relief pursuant to Section 4.3(c) hereof for the
breach or threatened breach of Section 4.3(b) or 5.2 hereof by WML, (ii) WML
shall be entitled to injunctive relief for the present or threatened breach of
Section 1.5 hereof by Wickes and (iii) Wickes and WML shall be entitled to seek
injunctive relief for the present or threatened breach by the other of Section
1.8 or 5.3 hereof. IN THE EVENT THAT FOR ANY REASON ARBITRATION DOES NOT
RESULT IN A FINAL SETTLEMENT OF SUCH DISPUTED MATTER OR BREACH, WICKES AND WML
HEREBY WAIVE TRIAL BY JURY OF ANY MATTER WHICH ARISES OUT OF OR RELATES TO THIS
AGREEMENT.
8
<PAGE> 9
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of
the date first above written.
WICKES LUMBER COMPANY
By: _________________________
Name: _______________________
Title: ______________________
WICKES MORTGAGE LENDING, INC.
By: _________________________
Name: _______________________
Title: ______________________
Lumber Trademark Company, a Delaware corporation, licensor of the
Trademarks, hereby joins in this Agreement for the sole purpose of consenting
to the sublicense granted to WML pursuant to Article II hereof.
LUMBER TRADEMARK COMPANY
By: ________________________
Name: ______________________
Title: _____________________
9
<PAGE> 10
EXHIBIT A
WICKES MORTGAGE LENDING, INC.
PROPOSAL OF WICKS LUMBER COMPANY PARTICIPATION IN 1996 PLANNED LPO START-UP
<TABLE>
<CAPTION>
Assumptions:
<S> <C> <C> <C>
1. Total Wickes Participation $1,080,000
2. Participation Per LR $ 60,000
3. Breakdown of Start-Up Costs Per LR
Search Firm Recruiting Fee $12,500
Salary & Tax (first 90 days) 16,200
Initial Marketing & Adv. Materials 19,500
Training and Education 4,800
Office Setup costs 7,000
-------
Total Startup-Costs $ 60,000
</TABLE>
PARTICIPATION FUNDING SCHEDULE
<TABLE>
<CAPTION>
MONTH Jan-96 Feb-96 Mar-96 Apr-96 May-96 Jun-96 Jul-96
===========================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
# of LR's Hired This Mo. 0 0 0 1 1 1 5
Total # of LR's Hired 0 0 0 1 2 3 8
Wickes Participation Funding
Search Firm Recruiting Fee 0 0 0 12,500 12,500 12,500 62,500
Salary & Tax (first 90 days) 0 0 0 5,400 10,800 16,200 37,800
Initial Marketing & Adv.
Materials 0 0 0 17,160 17,940 16,720 88,140
Training and Education 0 0 0 1,685 3,195 3,290 11,540
Office Setup Costs 0 0 0 3,700 5,500 6,500 21,800
Total Participation ------ ------ ------ ------- ------- ------- --------
Funding Schedule $ 0 $ 0 $ 0 $40,445 $49,935 $57,210 $221,780
====== ====== ====== ======= ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
MONTH Aug-96 Sep-96 Oct-96 Nov-96 Dec-96 Total
=======================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
# of LR's Hired This Mo. 3 2 5 0 0 18
Total # of LR's Hired 11 13 18 18 18
Wickes Participation Funding
Search Firm Recruiting Fee 37,500 25,000 62,500 0 0 225,000
Salary & Tax (first 90 days) 48,600 54,000 54,000 37,800 0 264,600
Initial Marketing & Adv.
Materials 56,940 41,340 93,600 7,800 0 341,640
Training and Education 14,210 9,885 19,280 12,270 0 75,355
Office Setup Costs 21,600 18,300 27,600 12,500 0 117,500
Total Participation -------- -------- -------- ------- ------- ----------
Funding Schedule $178,850 $148,525 $256,980 $70,370 $ 0 $1,024,095
======== ======== ======== ======= ======= ==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM RIVERSIDE
GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS AND CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 7,528
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 110,672
<CURRENT-ASSETS> 235,592
<PP&E> 53,020
<DEPRECIATION> 0
<TOTAL-ASSETS> 347,252
<CURRENT-LIABILITIES> 87,750
<BONDS> 0
0
0
<COMMON> 531
<OTHER-SE> 18,939
<TOTAL-LIABILITY-AND-EQUITY> 347,252
<SALES> 0
<TOTAL-REVENUES> 9,115
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 10,183
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,556
<INCOME-PRETAX> (2,193)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,193)
<EPS-PRIMARY> (.41)
<EPS-DILUTED> (.41)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM RIVERSIDE
GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET AND CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<DEBT-HELD-FOR-SALE> 0
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 17,595
<TOTAL-INVEST> 17,595
<CASH> 7,528
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 347,252
<POLICY-LOSSES> 0
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 228,224
0
0
<COMMON> 531
<OTHER-SE> 18,939
<TOTAL-LIABILITY-AND-EQUITY> 347,252
3,224
<INVESTMENT-INCOME> 6,193
<INVESTMENT-GAINS> 1,217
<OTHER-INCOME> 196
<BENEFITS> 5,805
<UNDERWRITING-AMORTIZATION> 458
<UNDERWRITING-OTHER> 458
<INCOME-PRETAX> (2,193)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,193)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,193)
<EPS-PRIMARY> (.41)
<EPS-DILUTED> (.41)
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> CT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM RIVERSIDE
GROUP INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET AND CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<TOTAL-ASSETS> 347,252
0
0
<COMMON> 531
<OTHER-SE> 18,939
<TOTAL-LIABILITY-AND-EQUITY> 347,252
<TOTAL-REVENUES> 9,115
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,193)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,193)
<EPS-PRIMARY> (.41)
<EPS-DILUTED> (.41)
</TABLE>
