<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended DECEMBER 31, 1995
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-9209
RIVERSIDE GROUP, INC.
(Exact Name of Registrant as Specified in its Charter)
FLORIDA 59-1144172
(State of Incorporation) (IRS Employer Identification No.)
7800 BELFORT PARKWAY, JACKSONVILLE, FLORIDA 32256
(Address of Principal Executive Offices)
(904) 281-2200
(Registrant's Telephone Number)
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE OF $.10 PER SHARE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / /
As of March 24, 1996, the Registrant had 5,311,123 shares of common
stock, par value $.10 per share, outstanding, and the aggregate market value of
outstanding voting stock (based on the last sale price on the NASDAQ National
Market System) held by nonaffiliates was approximately $4 million (includes the
market value of all such stock other than shares beneficially owned by officers
and directors and the Registrant's Employee Stock Ownership Plan and Trust).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement in connection with its
Annual Meeting of Stockholders tentatively scheduled to be held in May 1996, are
incorporated by reference into Part III hereof, as more specifically described
herein.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
<S> <C>
PART I
Item 1. Business................................................................... 1
Item 2. Properties................................................................. 24
Item 3. Legal Proceedings.......................................................... 25
Item 4. Submission of Matters To a Vote of Security-Holders........................ 26
PART II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters.......................................... 26
Item 6. Selected Financial Data.................................................... 27
Item 7. Management's Discussion and Analysis....................................... 28
Item 8. Financial Statements and Supplementary Data................................ 37
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure................................... 37
PART III
Item 10. Directors and Executive Officers of the Registrant......................... 37
Item 11. Executive Compensation..................................................... 37
Item 12. Security Ownership of Certain Beneficial Owners and Management............. 37
Item 13. Certain Relationships and Related Transactions............................. 37
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........... 37
(a) List of Financial Statements and Schedules Filed as a Part of this Report.. 37
(b) Reports on Form 8-K........................................................ 39
(c) Exhibits................................................................... 39
SIGNATURES ........................................................................... 41
FINANCIAL STATEMENTS.................................................................... F-1
FINANCIAL STATEMENT SCHEDULES........................................................... S-1
</TABLE>
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PART I
ITEM 1. BUSINESS.
Riverside Group, Inc., a Florida corporation formed in 1965
("Riverside" also "Parent Company"), engages through its 36% owned subsidiary
Wickes Lumber Company ("Wickes") in the retailing and distribution of building
materials.
The Company also has interests in life insurance and other operations.
The Company is in the process of reorganizing its life insurance operations
through a proposed combination of these operations with those of a
privately-held company engaged in providing financial services. Upon completion
of this reorganization, the Company will own a minority interest in the combined
operations and will utilize the proceeds of this reorganization to increase its
ownership in Wickes to approximately 52%.
Unless the context indicates otherwise, the term "the Company" as used
herein refers to Riverside and its subsidiaries.
HISTORICAL DEVELOPMENT
BACKGROUND
The Company obtained its initial investment in Wickes in 1990 through
the acquisition of American Founders Life Insurance Company ("American
Founders"), which at the time of its acquisition owned approximately 10% of
Wickes' common stock. In 1993, as part of a Wickes recapitalization plan,
including an initial common stock public offering, the Company increased its
ownership of Wickes common stock to 2,217,290 shares, including an option to
purchase 374,516 shares which was exercised on August 14, 1995. The Company's
ownership of Wickes shares represents approximately 36% and 39% of Wickes
outstanding common stock and voting common stock, respectively. For a discussion
of the Company's equity investment in Wickes and possible consequences of the
litigation seeking, among other things, rescission of the transaction in which
the Parent Company acquired 364,682 shares of Wickes common stock and the call
option for an additional 374,516 shares, see "Item 3. Legal Proceedings" and
Notes 2 and 13 of Notes to Consolidated Financial Statements included elsewhere
herein.
During 1995, the Company's life insurance operations comprised the
Company's other main business segment. The Company commenced life insurance
operations in 1986 and expanded these operations through the 1989 acquisition of
Aztec Life Assurance Company ("Aztec") and the 1990 acquisition of American
Founders. At the end of 1994, Aztec disposed of all of its insurance in force
and ceased active operations. On December 31, 1995, the Company sold the
corporate charter and state insurance licenses of another life insurance
subsidiary, National American Life Insurance Company of Texas ("NALICO of
Texas"). The Company has entered into a definitive agreement to combine its
remaining life insurance operations with those of a privately-held company as
discussed below under the heading "Proposed Transactions-Life Insurance
Reorganization."
From 1986 until 1993, the Company also conducted property and
casualty insurance operations through its subsidiary, Dependable Insurance
Company, Inc. ("Dependable"). Dependable's operations were discontinued in
1993 when Dependable ceased all insurance programs and disposed of
substantially all of its in force business. The Company completed the sale
of Dependable in September 1995. See "Discontinued Operations."
<PAGE> 4
PROPOSED TRANSACTIONS
In November 1995, the Company announced its intention to sell its
remaining life insurance operations and to pursue a possible business
combination or other transaction with Wickes.
Wickes Investment. On January 11, 1996, the Company and Wickes entered
into a Stock Purchase Agreement (the "Wickes Agreement") pursuant to which the
Company agreed to acquire an additional two million newly-issued shares of
Wickes common stock for $10 million in cash. The terms of the agreement were
approved and recommended to the Boards of Directors of the Company and Wickes by
committees comprised of the independent directors of each company. Wickes' board
committee also received the opinion of its financial advisor that the
transaction is fair, from a financial point of view, to Wickes. Upon completion
of this transaction, the Company would own approximately 52% and 55% of Wickes
outstanding common stock and voting common stock, respectively.
Closing of the Wickes Agreement is subject to, among other things, the
completion of the Life Insurance Reorganization (as defined herein).
Life Insurance Reorganization. On March 8, 1996, the Company entered
into a definitive agreement (the "Circle Agreement") to combine its life
insurance operations with those of Circle Investors, Inc. ("Circle"), a
privately-held company engaged in providing financial services (the "Life
Insurance Reorganization").
Pursuant to the Circle Agreement, a wholly-owned subsidiary of American
Financial Acquisition Corporation ("AFAC") that wholly-owns all of AFAC's
insurance subsidiaries, will merge with and into Circle, with Circle surviving.
As a result of the merger, Circle will wholly-own the Company's life insurance
subsidiaries as well as Liberty Bankers Life Insurance Company ("Liberty
Bankers"), an Ohio-domiciled life insurance company currently wholly-owned by
Circle. At and for the period ended December 31, 1995, Liberty Bankers had (on a
statutory accounting basis) approximately $9.2 million of assets, $3.3 million
of policyholders' surplus and total revenues of $1.0 million.
Upon completion of this reorganization, the Company will own
approximately 40% of Circle's outstanding common stock and will possess the
right to vote approximately 10% of Circle's common stock and will share the
right to vote approximately an additional 30%. The Company also will own 100% of
a new series of Circle's preferred stock with a liquidation preference of $3.6
million. Circle has also agreed to appoint the Company's Chairman, J. Steven
Wilson, or another reasonably acceptable candidate to Circle's Board of
Directors. The Company will be the largest single stockholder of Circle
following completion of this transaction. Other investors in Circle will include
Conseco, Inc., a publicly-held financial services company, which will own a 10%
non-voting interest in Circle's common stock as well as a separate class of
Circle's preferred stock.
In connection with this reorganization, the Company will receive
approximately $15 million in cash before taxes and expenses, and will retain
certain assets held by American Founders, including real estate with a $2
million net appraised value (net of an $18 million mortgage) and approximately
950,000 shares of Wickes common stock. Also in connection with this transaction,
Circle will replace all of AFAC's indebtedness under its bank credit agreement,
which totaled $18 million at December 31, 1995.
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After anticipated income taxes and other expenses of approximately $1.0
million, net cash to be received by the Company in this transaction would
approximate $14 million, $10 million of which it has agreed to utilize to
acquire two million newly-issued shares of Wickes common stock pursuant to the
Wickes Agreement.
Completion of the transactions contemplated by the Circle Agreement is
subject to, among other things, receipt of insurance regulatory approvals and
the completion by Circle of necessary financing arrangements. It is anticipated
that the transactions will close in June, 1996.
The Company has taken a net pre-tax charge of $11 million against 1995
income from continuing operations for the life insurance reorganization and the
sale of NALICO of Texas. This charge primarily reflects a write-off of $10.8
million of intangible assets acquired in the various life acquisitions.
Additionally, the Company realized a $1.9 million tax benefit on the proposed
merger with Circle, which partially offsets the reorganization charges.
Operations After Proposed Transactions. Upon completion of the Wickes
Agreement and the Circle Agreement, the Company will continue to be primarily
engaged through Wickes (which will be a majority-owned subsidiary of the
Company) in the retailing and distribution of building materials. The Company
will also engage through wholly-owned subsidiaries in financial services related
to the home building industry and will own a minority interest in Circle and
retain certain real estate currently owned by American Founders. For a further
discussion of the effects of the proposed transactions on the financial
statements of the Company see Note 14 of Notes to the Consolidated Financial
Statements included elsewhere herein.
LINES OF BUSINESS
The following table sets forth certain financial data for the past
three years of the Company's building materials, life insurance, and other
segments. The Company's ownership of Wickes is accounted for on the equity
method. Accordingly, the following table presents only the revenues, income and
identifiable assets for Wickes at the net amounts recorded on the Company's
books. "Other" includes all eliminating entries for intercompany transactions.
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<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
(in thousands)
<S> <C> <C> <C>
REVENUES:
Building Materials $ (5,357) $ 8,999 $ 1,525
Life Insurance 25,245 37,079 47,748
Other (1,668) (294) 4,827
-------- -------- -------
Total $ 18,220 $ 45,784 $54,100
======== ======== =======
INCOME FROM CONTINUING
OPERATIONS (BEFORE TAXES):
Building Materials $ (7,257) $ 7,858 $ 899
Life Insurance (10,530) 2,372 416
Other (1,968) 103 2,749
-------- -------- -------
Total $(19,755) $ 10,333 $ 4,064
======== ======== =======
IDENTIFIABLE ASSETS:
Building Materials $ 11,358 $ 14,996
Life Insurance 297,804 330,083
Other (8,437) 11,631
-------- --------
Total $300,725 $356,710
======== ========
</TABLE>
BUILDING MATERIALS AND RELATED OPERATIONS
The Company retails and distributes building materials through its 36%
beneficially owned subsidiary, Wickes. In addition, two wholly-owned
subsidiaries of the Company market financial products, including insurance and
mortgage and construction loans, to Wickes' professional builders and their
customers.
For information concerning an agreement dated January 11, 1996,
pursuant to which Riverside is to acquire an additional two million newly issued
shares of Wickes common stock, bringing its ownership of Wickes to approximately
52 % and 55% of Wickes outstanding common stock and voting securities,
respectively, see "HISTORICAL DEVELOPMENT - Proposed Transactions - Wickes
Investment."
WICKES LUMBER COMPANY
The information concerning Wickes contained in this report was obtained
from Wickes' Annual Report on Form 10-K for the fiscal year ended December 30,
1995 (the "Wickes Form 10-K"), filed by Wickes with the Securities and Exchange
Commission (the "Commission"). For further information concerning Wickes,
reference is made to the Wickes Form 10-K and the periodic reports and other
information filed by Wickes with the Commission.
Wickes Lumber Company ("Wickes") is a major retailer and distributor of
building materials. Wickes sells its products and services primarily to
residential and commercial building professionals, repair and remodeling
contractors, and to a lesser extent, project do-it-yourselfers ("DIYers")
involved in major home improvement projects. Wickes operates 110 building
centers in 24 states in the Midwest, Northeast, and South and eleven
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component manufacturing facilities that produce and distribute pre-hung door
units, roof and floor trusses, framed wall panels, and pre-assembled windows.
BACKGROUND
The predecessor of Wickes commenced its operations in 1952 with the
opening of a single building center in Bay City, Michigan. By 1981, the number
of building centers operated had reached 280. Wickes was formed as a Delaware
corporation in 1987, and in April 1988 completed the acquisition of 223 building
centers and 10 component manufacturing facilities in a leveraged buy-out
transaction (the "1988 Acquisition"). From 1988 through 1993, Wickes reduced the
number of its building centers to 124 and the number of its component
manufacturing plants to six.
On October 22, 1993, Wickes completed a plan of recapitalization (the
"Recapitalization Plan") pursuant to which Wickes retired all outstanding
indebtedness incurred in connection with the 1988 Acquisition and restructured
its previously existing classes of capital stock. The Recapitalization Plan
included, among other things: (i) the initial public offering by Wickes of
2,800,000 shares of its common stock, $.01 par value per share; (ii) the
offering of $100,000,000 principal amount of Wickes' 11-5/8% Senior Subordinated
Notes due 2003; (iii) the retirement of Wickes' previously outstanding long-term
debt; and (iv) restructuring of Wickes' equity capitalization. For further
information, see Note 4 of Wickes' Consolidated Financial Statements included
elsewhere herein.
In 1994, Wickes commenced an acquisition program which, over the next two
years, resulted in the acquisition of fifteen building centers and five
component manufacturing facilities, principally through the acquisition of
Gerrity Lumber. See "Business Strategy," "Acquisitions" and "Markets."
For information concerning a restructuring plan which Wickes developed and
began implementing in December of 1995, see "Business Strategy - 1995
Restructuring Plan" and Note 12 of Wickes' Notes to Consolidated Financial
Statements included elsewhere herein.
INDUSTRY OVERVIEW
Based on U.S. Bureau of the Census figures, Wickes believes that sales of
building materials associated with new home construction approximated $44.0
billion in 1995. According to the Home Improvement Research Institute (HIRI),
sales of building materials associated with the maintenance and repair of
residential housing, excluding new home construction, were approximately $133.9
billion. Despite some consolidation over the last ten years, particularly in
metropolitan areas, the building material industry remains highly fragmented.
Wickes believes that no building material supplier accounted for more than 10%
of the total market in 1995.
In general, building material retailers concentrate their marketing
efforts either on building professionals or consumers. Professional-oriented
building material retailers, such as Wickes, tend to focus on single-family
residential contractors, repair and remodeling ("R&R") contractors and project
DIYers. These retailers compete principally on the basis of service, product
assortment, price, scheduled job-site delivery and trade credit availability. In
contrast, consumer-oriented building material retailers target the mass consumer
market, where competition is based principally on price, merchandising, location
and advertising. Consumer-oriented warehouse and home center retailers typically
do not offer as wide a range of services, such as specialist advice, trade
credit and scheduled job-site delivery, as do professional-oriented building
material retailers.
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Industry sales are closely linked to the level of activity in the
residential building industry, which tends to be cyclical and seasonal. New
residential construction is determined largely by household formations, interest
rates, housing affordability, availability of mortgage financing, regional
demographics, consumer confidence, job growth, and general economic conditions.
According to the U.S. Bureau of the Census, U.S. housing starts, which totaled
1.01 million in 1991, the lowest level since World War II, increased to 1.20
million in 1992, 1.29 million in 1993, and 1.46 in 1994. In 1995, housing starts
declined by 7.5% to 1.35 million units. Declines in Wickes' primary markets, the
Midwest and Northeast, were approximately 12.1% and 15.1%, respectively.
Nationally, single family housing starts, which generate the majority of Wickes'
sales to building professionals, experienced a larger decline of 10.8% in 1995,
from 1.20 million starts in 1994 to 1.07 million starts in 1995. The Blue Chip
Economic Indicators Consensus Forecast dated February 10, 1996, projects 1996
housing starts to be 1.36 million.
Repair and remodeling expenditures tend to be less cyclical than new
residential construction and provide a more stable base for the building
material supply industry. These expenditures are generally undertaken with less
regard to economic conditions, but both repair and remodeling projects
(including projects undertaken by DIYers) tend to increase with increasing sales
of both existing and newly-constructed residences. The Home Improvement Research
Institute statistics show sales of lumber and building materials to repair and
remodeling professionals represented $39.6 billion, or approximately 20% of
total 1995 sales of the building material supply industry, while direct sales to
DIYers amounted to $94.3 billion.
BUSINESS STRATEGY
General
Wickes' goal is for each of its building centers to be the dominant force
in the sale of lumber and other building materials to the professional building
contractors in the market in which it operates. To support this strategy and
achieve future growth and improved profitability, Wickes will focus on
continuing to provide quality products and services to its professional
customers, increasing sales to the commercial builder, increasing sales of
certain higher-margin, value-added products, including those manufactured or
assembled by Wickes, and continuing its emphasis on cost reduction and return on
assets.
1995 Restructuring Plan
During the fourth quarter of 1995 Wickes committed to a plan to reduce the
number of under-performing building centers, the corresponding overhead to
support these building centers, and to strengthen its capital structure. The
purpose of the plan is to achieve a more focused customer and marketing
strategy, to reduce costs, and to dispose of certain under-performing assets.
Management anticipates the completion of this plan in 1996.
The operational changes contemplated by this plan were begun on December
29, 1995. Since that date, Wickes has consolidated or closed 16 building centers
and has identified additional building centers for consolidation or closing. The
average 1995 annual sales for the 16 centers closed on December 29 was $4.4
million. This compares with a company average of $8.4 million. Centers to be
consolidated into nearby locations often performed tasks that could be performed
at the remaining center more efficiently with little or no reduction in customer
service.
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The two principal financial elements of the restructuring plan are
modification and extension of Wickes' bank revolving credit agreement, which was
completed on March 12, 1996 and the private sale to Riverside of two million
newly-issued shares of Wickes' Common Stock for $10 million. Also included in
the plan was the obtaining of "stand-alone" financing for Wickes' operations in
Russia. On February 21, 1996, Wickes and its subsidiaries involved in Russian
operations entered into definitive agreements for such financing. See
"International Operations."
In connection with this restructuring plan, and other unusual items,
Wickes recorded a $17.8 million charge in the fourth quarter of 1995.
Acquisitions
Since the 1993 Recapitalization, Wickes has actively pursued acquisitions
of local or regional building centers to complement and expand its operations.
For a description of acquisitions completed in 1994 and 1995, see
"Acquisitions." Wickes continues to believe that the fragmented nature of the
building material industry presents opportunities for acquisitions of
strategically located operations and may, subject to availability of adequate
borrowing capacity and liquidity, pursue attractive acquisitions from time to
time. Wickes is not, however, currently actively pursuing acquisitions, and
there can be no assurance that Wickes will be able to identify and complete
additional acquisitions in the future.
ACQUISITIONS
1995
During 1995, Wickes completed the acquisition of (i) a combination
building center and component manufacturing facility in Pensacola, Florida, into
which Wickes consolidated its existing Pensacola building center, (ii) a
building center in South Haven, Michigan and a combination building center and
component manufacturing facility in Fruitport, Michigan, (iii) a building center
in Caro, Michigan, and (iv) a building center in Newtown, Connecticut into which
Wickes consolidated its older and smaller Danbury, Connecticut building center.
In each case, Wickes acquired the inventory and equipment of the acquired
operations and entered into leases of, or in one location purchased, the sites
on which the operations are located. Accounts receivable were retained by the
sellers, and cash used to make the acquisitions was obtained under Wickes' bank
revolving credit facility.
1994
During 1994, Wickes acquired (i) two related building centers located in
Marquette and Ishpeming, Michigan, (ii) all of the Class B Common Stock of
Riverside International Corporation from Riverside (see "International
Operations") and (iii) the Gerrity Lumber business from Gerrity Company, Inc.,
which consisted of eight building centers and three component manufacturing
facilities located in the northeastern United States. Included in the assets
acquired were inventory and accounts receivable. All of the cash to effect these
acquisitions was derived from Wickes' bank revolving credit agreement.
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PRODUCTS
Wickes stocks a wide variety of building products, totaling approximately
57,000 stock keeping units ("SKUs") company-wide, to provide its customers with
the quality products needed to build, remodel and repair residential and
commercial properties. Each of Wickes' building centers tailors its product mix
to meet the demands of its local market. A core group of approximately 5,900
SKUs is typically stocked in each building center.
Wickes separates its products into three groups: Wood Products -- lumber,
plywood, roof and floor trusses, treated lumber, sheathing, wood siding and
specialty lumber; Building Products -- roofing, vinyl siding, doors, windows,
mouldings, drywall and insulation; and Hardlines -- hardware products, paint,
tools, kitchen and bathroom cabinets, plumbing products, electrical products,
light fixtures and floor coverings. Wood Products, Building Products and
Hardlines represented 51%, 36% and 13%, respectively, of Wickes' sales for 1995
and 52%, 34% and 14% of sales for 1994.
In addition to stock items, Wickes also fills special orders, either from
its own manufacturing facilities or through outside suppliers. Wickes believes
that these special order services are extremely important to its customers,
particularly the building professional. In 1995, approximately 32% of Wickes'
sales were of special order items, compared with 27% in 1994.
Wickes owns and operates eleven component manufacturing facilities that
supply Wickes' building centers with certain higher-margin, value-added products
such as pre-hung doors, framed wall panels, roof and floor trusses, and windows.
These manufacturing facilities enable Wickes to serve the needs of its
professional customers for such quality, custom-made products. The door
manufacturing operations support 103 of Wickes' building centers by supplying
approximately 54% of the pre-hung interior doors and 65% of the metal exterior
doors sold by Wickes. The truss manufacturing operations supplied 41 building
centers with approximately 33% of the total roof and floor truss systems sold by
Wickes in 1995 and nine building centers with wall panel systems. Wickes
believes that these pre-assembled products improve customer service and provide
an attractive alternative to job-site construction as labor costs rise. Wickes
plans to expand its manufacturing facilities to take advantage of these
increased opportunities and to supply a greater number of its building centers
with these products.
MARKETS
Wickes has generally located its building centers in less populous areas,
with 78% located in trade areas (10 mile radius) with fewer than 50,000
owner-occupied households. The following table sets forth the distribution of
Wickes' building centers by size of community:
<TABLE>
<CAPTION>
Owner-Occupied Number of
Households in Building
Ten Mile Radius Centers
---------------- -------
<S> <C>
Under 10,000 35
10,000-25,000 25
25,000-50,000 26
50,000-100,000 18
100,000 and over 6
---
Total 110
</TABLE>
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In its more densely populated markets, Wickes sells primarily to building
professionals, while in smaller markets, Wickes' building centers generally
emphasize sales to both building professionals and consumers. Each of Wickes'
building centers operates as a separate profit center and tailors its product
and service mix to the local market.
Wickes' 110 building centers are located in 24 states in the Midwest,
Northeast and South. Wickes believes that its geographic diversity generally
lessens the impact of economic downturns and adverse weather conditions in any
one of Wickes' geographic markets. The following table sets forth certain
information with respect to the locations of Wickes' building centers as of
February 29, 1996:
<TABLE>
<CAPTION>
Midwest Northeast South
------- --------- -----
Number of Number of Number of
Building Building Building
State Centers State Centers State Centers
- ----- ------- ----- ------- ----- -------
<S> <C> <C> <C> <C> <C>
Michigan 30 New York 8 Alabama 3
Wisconsin 15 Pennsylvania 7 Kentucky 3
Indiana 11 Maine 2 Texas 2
Ohio 6 Connecticut 3 Louisiana 1
Illinois 4 New Hampshire 2 Mississippi 2
Iowa 2 New Jersey 2 Tennessee 1
Colorado 1 Massachusetts 1 Georgia 1
Maryland 1 North Carolina 1
Florida 1
--
Total 69 Total 26 Total 15
== == ==
</TABLE>
During 1995, Wickes acquired five building centers and opened two new
building centers. Wickes also closed ten building centers and one component
manufacturing facility and consolidated another 17 building centers into other
existing or acquired centers. The following table reconciles the number of
building centers and component manufacturing facilities owned by Wickes at
December 31, 1994 and December 30, 1995.
<TABLE>
<CAPTION>
Component
Building Manufacturing
Centers Facilities
<S> <C> <C>
As of December 31, 1994 130 10
Acquisitions 5 2
Expansion 2 -
Closings (10) -
Consolidations (17) (1)
--- --
As of December 30, 1995 110 11
=== ==
</TABLE>
Wickes is currently renovating a former building center located in Indiana
into a component manufacturing facility. This facility is expected to begin
producing roof and floor trusses and framed wall panels in early 1996 and will
increase the number of operating component manufacturing facilities to twelve.
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During 1994, Wickes acquired ten building centers and three component
manufacturing facilities. During 1994, Wickes closed three building centers (two
in order to consolidate operations with newly-acquired facilities) and converted
a fourth to a component manufacturing facility. During 1993, Wickes acquired no
facilities and closed one building center.
CUSTOMERS
In 1995, 82% of Wickes' sales were on trade credit, with the remaining 18%
as cash and credit card transactions. Wickes has a broad base of customers, with
no single customer accounting for more than 0.4% of net sales in 1995.
Home Builders
Wickes' primary customers are single-family home builders. In 1995, all
home builder customers accounted for 54% of Wickes' sales. During 1994 and 1993,
these customers accounted for approximately 51% and 48%, respectively, of
Wickes' sales. The majority of Wickes' sales to these customers are of high
volume commodity items, such as Wood Products and Building Products. Wickes will
continue its intense focus on this customer segment, offering new products and
developing additional services to meet their needs.
Commercial Contractors
In 1993, Wickes launched its Commercial Sales Division ("CSD"), which was
developed specifically to serve the unique needs of commercial and multi-family
contractors. In 1995, sales to this segment accounted for more than 14% of
Wickes' sales, compared with 10% of Wickes' sales in 1994 and 7% in 1993.
Repair & Remodelers
In 1995, R&R customers accounted for approximately 14% of Wickes' sales,
compared with 17% in 1994 and 19% in 1993. The R&R segment consists of a broad
spectrum of customers, from part-time handymen to large, sophisticated business
enterprises. Some contractors are involved exclusively with single product
application, such as roofing, siding, or insulation, while some specialize in
remodeling jobs, such as kitchen or bathroom remodeling or the construction of
decks, garages, or full room additions. Wickes offers the product and project
expertise, special order capability, design assistance, and credit terms to
serve the widely varying needs of this diverse market.
DIYers
Sales to DIYers (both project and convenience) represented about 18% of
Wickes' sales in 1995, compared with 22% in 1994 and 26% in 1993. The percentage
of sales to DIYers varies widely from one building center to another, based
primarily on the degree of local competition from warehouse and home center
retailers. Wickes' building centers do not have the large showrooms or broad
product assortments of the major warehouse or home center retailers. For small
purchases, the showrooms serve as a convenience rather than a destination store.
Consequently, Wickes' focus on consumer business is toward project DIYers --
customers who are involved in major projects such as building decks or storage
buildings or remodeling kitchens or baths.
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SALES AND MARKETING
Wickes employs a number of marketing initiatives designed to increase
sales and to support Wickes' goal of being the dominant force in the sale of
lumber and other building materials to building professionals in each of its
markets.
Building Professional
In addition to its broad range of quality products, Wickes also seeks to
establish long-term relationships with its professional customers by providing a
higher level of customer assistance and services than are generally available at
independently-owned building centers or large warehouse and home center
retailers.
Wickes provides a wide range of customer services to building
professionals, including expert assistance, technical support, trade credit,
scheduled job-site delivery and other special services. Wickes believes that,
while pricing is an important purchasing criterion for these customers,
availability of quality products and services are equally or more important.
Wickes' primary link to the building professional market is its
experienced sales staff. Wickes' 384 outside sales representatives ("OSRs") are
commissioned sales persons who work with professional customers on an on-going
basis at the contractors' job sites and offices. Typically, a sale to a
contractor is made through a competitive bid prepared by the OSR from plans made
available by the contractor. From these plans, the OSR or sales support
associate prepares and provides to the contractor a bid and a complete list, or
"take-off," of the materials required to complete the project. Preparation of a
take-off requires significant time and effort by trained and experienced sales
representatives and support associates. Wickes has equipped all of its building
centers with a computerized system which significantly reduces the time required
to prepare take-offs. In addition, this system instantly recalculates changes
and automatically includes add-on products needed to complete the project, which
generally improves productivity, sales and margins. The ability of the sales
representative to provide prompt and accurate take-offs, to arrange timely
deliveries, and to provide additional products or services as necessary is an
important element of Wickes' marketing strategy and distinguishes Wickes from
many of its competitors.
Wickes expanded its emphasis on the light commercial market with the
creation of the CSD in 1993. CSD provides project leads and estimating help
utilizing a nationwide database and directly supports sales through a network of
nine Regional Account Managers. Targeted customers include multi-family, motel,
restaurant, retail, and other light commercial contractors. Wickes' direct sales
program has been integrated with the CSD. In the direct sales program, sales are
initiated by local OSRs, but are managed by a home office sales manager, and
products are shipped directly to the job site from the manufacturer.
Wickes currently employs 172 specialty salespeople who provide expert
advice to customers in project design, product selection and applications. In
many of its building centers, Wickes maintains separate R&R offices. A staff of
74 trained R&R sales specialists offer special services to R&R contractors
equivalent to that accorded home builders. Wickes, for many years, has made its
local offices and office equipment (such as facsimile and photocopy machines)
available to R&R customers, many of whom work out of their homes and have a need
for these services. Wickes currently has kitchen and bath departments in all of
its building centers and has a staff of 80 kitchen and bath specialists. Wickes
also employs 18 specialists in other departments.
11
<PAGE> 14
Wickes extends credit, generally due on the 10th day of the month
following the sale, to qualified and approved contractors. Approximately 82% of
Wickes' sales during 1995 were on credit, with the remaining 18% consisting of
cash or credit card sales, including approximately 2% of sales on Wickes'
private label credit card. Overall credit policy is established at the corporate
level, with each building center manager and a district credit manager
responsible for the administration and collection of accounts. The accounts are
generally not collateralized, except to the extent Wickes is able to take
advantage of the favorable materialmen's lien laws of most states applicable in
the case of delinquent accounts. Wickes' credit practices have resulted in a bad
debt expense of .8% of total credit sales in 1995, compared with .3% in both
1994 and 1993. Much of the increase in 1995 is attributable to the conversion of
accounts at the Gerrity acquisition centers to Wickes' credit practices.
Wickes owns and leases a fleet of 837 delivery vehicles, as of February
29, 1996, to provide job-site deliveries of building materials scheduled to
coordinate with project progress, including 54 specialized delivery trucks
equipped for roof-top or second story delivery and 89 specialized millwork
delivery vehicles. Wickes will continue to add these specialized vehicles to
other markets where there is sufficient demand for such services.
Over the past several years, Wickes has installed and will continue to
increase its base of computer-aided design ("CAD") hardware and software. These
systems include design and take-off software for kitchens, decks, outbuildings,
additions and houses. With these tools, sales representatives and specialists
are able to provide customers with professional-quality plans more efficiently.
Wickes advertises in trade journals and produces specialized direct mail
promotional materials designed to attract specific targeted customer segments.
Wickes does some select newspaper advertising, which may include circulars and
run-of-press advertisements. It also has numerous product displays in its
building centers to highlight special products and services.
To increase customer loyalty and strengthen customer relationships,
Wickes, in many cases with vendor support, has increased the number of its
special marketing activities, such as trade show events, informational product
seminars, various outings, and professional builder trips.
DIYers
Most building centers also pursue sales to project DIYers through their
staff of specially-trained inside sales representatives and specialists. These
representatives provide professional advice to consumers for home improvement
projects and assist these customers in designing specific projects with
sophisticated computer design software. The sales representatives can also
provide a comprehensive list of materials and detailed drawings to assist
customers in completing their projects. Wickes believes that project DIYers are
attracted to its building centers by this high level of service.
Wickes' showrooms generally feature product presentations such as kitchen
and bath and door and window displays. The showrooms are regularly
re-merchandised to reflect product trends, service improvements and market
requirements.
While Wickes' product offerings in hardlines are generally more limited
than its consumer-oriented competitors, Wickes stocks a much larger selection of
commodity products and offers a special order program for custom or specialty
products. Wickes emphasizes project packages, which
12
<PAGE> 15
include all materials and detailed instructions for the assembly of the larger
projects frequently undertaken by project DIYers.
SUPPLIERS AND PURCHASING
Wickes purchases its products from numerous vendors. Substantially all
commodity items are purchased directly from manufacturers, while the remaining
products are purchased from a combination of manufacturers, wholesalers and
other intermediaries. Wickes also manufactures approximately 33% of the roof and
floor trusses, 54% of the pre-hung interior doors, and 65% of the metal exterior
doors sold in its building centers. No single vendor accounted for as much as 5%
of Wickes' purchases in 1995, and Wickes is not dependent upon any single vendor
for any material product. Wickes believes that alternative sources of supply are
readily available for substantially all of the products it offers.
Substantially all of Wickes' commodity purchases are made on the basis of
individual purchase orders rather than supply contracts. Because approximately
31% of Wickes' average inventory consists of commodity wood products, which are
subject to price volatility, Wickes attempts to match its inventory levels to
short-term demand in order to minimize its exposure to price fluctuations.
Wickes has developed an effective coordinated purchasing program that allows it
to minimize costs through volume purchases, and Wickes believes that it has
greater purchasing power than many of its smaller, local independent
competitors. Wickes seeks to develop close relationships with its suppliers in
order to obtain favorable pricing and service arrangements. With certain of its
suppliers, Wickes has entered into purchasing arrangements which allow Wickes to
purchase wood products shipped to distribution centers as such goods are needed
to restock inventory or fill customer orders, thereby allowing Wickes to reduce
its on-hand inventory needs.
Wickes' computerized inventory tracking and forecasting system as well as
its inventory replenishment system are designed to track and maintain
appropriate levels of products at each building center. These systems have
increased Wickes' operating efficiencies by providing an automated inventory
replenishment system, allowing more time to be devoted to sales opportunities.
In 1995, Wickes established a replenishment program for many of its
non-commodity products through an independent hardlines distributor. This
arrangement provides weekly replenishment of many hardline products in more
economic quantities at competitive prices. Wickes also has experienced
significant purchasing and administrative efficiencies as a result of the
implementation of this program.
Wickes has active rail sidings at 65 of its building centers enabling
vendors to ship products purchased by Wickes directly to these building centers
by rail. Wickes also utilizes two distribution centers owned by third parties,
located in Chicago, Illinois and Pottstown, Pennsylvania. Approximately 4% of
Wickes' wood products inventory is distributed through these facilities.
INTERNATIONAL OPERATIONS
One of Wickes' subsidiaries engages in logging, sawmill and other
lumber-related activities in Russia, principally in the Archangel region.
On February 21, 1996, this subsidiary entered into an agreement with two
investment funds. Pursuant to this agreement, the two funds are each to invest
$5 million in this subsidiary and are each to receive a 25% equity interest,
with Wickes retaining an interest slightly less than 50% and the subsidiary's
management
13
<PAGE> 16
receiving the balance of the equity. A total of $4 million of the funds'
investment has been advanced to the subsidiary as a loan, which is to be
converted to equity upon funding of the remaining $6 million, which is to occur
on satisfaction of certain conditions, including among other things the
resolution of certain legal matters and the achieving of specified operational
levels.
MANAGEMENT INFORMATION SYSTEMS
Wickes maintains an integrated distributed processing system in its
building centers. This system was specifically designed for the management of
building centers and provides Wickes with information regarding average cost,
replacement cost, perpetual inventory, margin and bid analysis, accounts
receivable and salesperson analysis. This system enables Wickes to manage and
optimize margins and inventory levels and to respond to the changing demands of
its markets and customers, as well as to increase productivity. Most senior
management and many building center managers have remote access to this system,
as well as the headquarters network, through personal computers.
A satellite-based communications network links all building centers,
component manufacturing facilities and Wickes' headquarters. This network
carries data, electronic mail, and broadcast television. In 1995, all field
locations were given on-line access to Wickes' replenishment system via the
satellite communications network, giving control of replenishing non-commodity
products to local management. The broadcast television facility is used for
various company communications including the rapid deployment of training
topics.
Wickes has begun implementation of a client/server data warehouse system
to upgrade its central information processing needs. Wickes also has established
a home page on the world wide web which can be found at the Internet address:
http://www.wickes.com/ .
SEASONALITY
Historically, Wickes' first quarter and, frequently, its fourth quarter
are adversely affected by weather patterns in the Midwest and Northeast, which
result in seasonal decreases in levels of construction activity in these areas.
The extent of such decreases in activity is a function of the severity of winter
conditions. While Wickes experienced a relatively mild first quarter in 1995,
severe ice storms in the Northeast in 1994, and record setting snow falls
throughout the Midwest and Northeast in January of 1996, have adversely affected
construction activity in the first quarter of these years.
COMPETITION
The building material industry is highly competitive. Due to the regional
and local nature of this industry, Wickes' competitive environment varies by
location and by customer segment. Reduced levels of construction activity have,
in the past, resulted in intense price competition among building material
suppliers that has at times adversely affected Wickes' gross margins.
Within the professional market, Wickes competes primarily with local
independent lumber yards and regional and local building material chains.
Building professionals generally select building material suppliers based on
quality and expertise of its sales staff, quality and breadth of product lines
and services, reliability of inventory levels, competitive pricing, job-site
delivery, and the availability of credit. Wickes believes that it competes
favorably on each of these bases. Wickes believes that it has a significant
competitive advantage in
14
<PAGE> 17
rural markets and small communities, where it competes primarily with local
independent lumber yards, regional building material chains, and, to a lesser
extent, with national building center chains and warehouse and home center
retailers, which generally locate their units in more densely populated areas.
Within the consumer segment, Wickes competes primarily with local lumber
yards and hardware stores and, in certain of its markets, with local units of
larger warehouse and home center retailers. Competition within this segment is
based principally on price, merchandising, location and advertising. Wickes
focuses primarily on project DIYers, who tend to place much more value on
product selection and the availability of special services in selecting a
building materials supplier. According to Building Supply Home Centers "1995
Giants" report, the average product mix of consumer oriented retailers consist
of 14% wood products, 11% building products and 75% hardlines, compared with
51%, 36%, and 13%, respectively, for Wickes in 1995.
ENVIRONMENTAL AND PRODUCT LIABILITY MATTERS
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 Wickes
have been filled, removed, or are scheduled to be removed in accordance with
applicable environmental laws in effect at the time. As a result of reviews made
in connection with the sale or possible sale of certain facilities, Wickes has
found petroleum contamination of soil and ground water on several of these sites
and has taken, and expects to take, remedial actions with respect thereto. In
addition, it is possible that similar contamination may exist on properties no
longer owned or operated by Wickes the remediation of which Wickes could under
certain circumstances be held responsible. Since 1988, Wickes has incurred
approximately $2.1 million of costs with respect to the filling or removing of
underground storage tanks and related investigatory and remedial actions, and
Wickes has reserved $1,000,000 towards the cost of these and other environmental
and product liability matters.
Although Wickes has not expended material amounts in the past eight years
with respect to the foregoing, there can be no assurances that these matters
will not give rise to additional compliance and other costs that could have a
material adverse effect on Wickes.
For information concerning certain litigation concerning products
containing asbestos, see "Item 3. Legal Proceedings."
TRADEMARKS AND PATENTS
Wickes has no material patents, trademarks, licenses, franchises, or
concessions other than the name "Wickes Lumber" and the "Flying W" trademark.
FINANCIAL SERVICES TO BUILDERS
INSURANCE
Wickes Financial Services Center, Inc. ("WFSC") is a Florida
corporation wholly-owned by Riverside that markets insurance products to Wickes'
professional builder customers. WFSC commenced operations in 1993 and initially
marketed the insurance products of third-party carriers through "captive agents"
who were employees of the Company. The Company subsequently determined these
operations could be structured more efficiently with WFSC operating as a
managing general agent
15
<PAGE> 18
(MGA), and in March 1996, WFSC's "captive agents" became employees of various
independent insurance agencies who have contracted with WFSC to market these
products. The Company believes the MGA structure will allow WFSC to capitalize
on its relationship with Wickes on a more cost effective and less capital
intensive basis.
WFSC currently offers a range of competitively priced products and
programs developed exclusively for residential contractors. The products include
worker compensation, general liability, property, commercial auto, builder risk,
health, life and annuity insurance. Presently operations are active in Michigan,
Wisconsin, Indiana and Alabama through fifteen independent agencies. WFSC
supports the agencies through direct marketing to Wickes customers and providing
leads or customer lists to the agents for follow up sales.
During 1995 and 1994 WFSC's operations generated revenues of $.3
million and $.1 million and incurred pre-tax losses of approximately $.7
million and $1.0 million, respectively.
MORTGAGE LENDING
During 1995, the Company, as part of American Founders investment
operations, opened two mortgage lending offices and began, on a test basis,
marketing construction and permanent mortgage loans to the professional builder
customers of Wickes as well as the customers of these builders. Currently the
program retains construction loans for interest and fee income while permanent
mortgages are sold to outside investors for service release fees under existing
agreements. Since inception of the test, the Company has issued commitments or
funded approximately 48 construction loans to builders aggregating approximately
$8 million and approximately 36 permanent loans to homeowners aggregating
approximately $5 million. The Company also believes that opportunities exist for
cross-selling insurance products to builders and their customers. Currently,
there are approximately 50 builders participating in the program.
At the end of 1995, the Company had two mortgage loan representatives
located in two loan production offices. Based upon the success of the test
program, the Company intends to attempt to expand its mortgage lending program
under a newly-formed, wholly-owned subsidiary of the Company, Wickes Mortgage
Lending, Inc., which plans to add six locations and 18 loan representatives in
1996. Expansion of this program after completion of the Life Insurance
Reorganization will depend upon entering into a lending arrangement with an
alternative lender or lenders to provide a source of funds for construction
loans and to act as a "warehouse lender" for permanent loans.
During 1995 and 1994, mortgage lending operations (exclusive of
American Founders' investment results) generated revenues of $.2 million and $.0
million, respectively, and pre-tax losses of $.7 million and $.2 million,
respectively.
LIFE INSURANCE OPERATIONS
GENERAL
For information concerning the proposed combination of the Company's
life insurance operations with those of Circle in a transaction that would
result in Circle's wholly-owning the Company's life insurance subsidiaries and
the Company's owning a minority interest in Circle, see "HISTORICAL DEVELOPMENT
- - Proposed Transactions - Life Insurance Reorganization."
16
<PAGE> 19
All of the Company's life insurance subsidiaries are currently
wholly-owned by the Company's 99%-owned life insurance holding company
subsidiary, AFAC. AFAC wholly-owns American Founders, which in turn wholly-owns
Aztec.
In December 1995, American Founders sold the corporate charter and
state insurance licenses of NALICO of Texas to General American Life Insurance
Company. This sale resulted in a realized gain of approximately $.8 million.
Prior to the sale, American Founders assumed all of the life and accident and
health business of NALICO of Texas under an assumption reinsurance agreement.
In December 1994, the Company sold all in force policies of Aztec to
Guardian Insurance and Annuity Company for $8.2 million in cash at a net loss of
$.2 million. See Note 9 of Notes to Consolidated Financial Statements included
elsewhere herein. Under terms of a related agreement, Aztec was to administer
the policies for a period not less than one year from the date of closing. This
agreement has been extended into 1996. The Company estimates that the sale of
the Aztec business generated a decrease in profits from life insurance
operations of approximately $2.5 million during 1995.
In January 1995, the life insurance operations successfully converted
to a new policy administration software system. The new system greatly increases
flexibility and efficiency for processing sophisticated life insurance products.
The Company presently has no active life insurance marketing
operations. The Company's life subsidiaries historically distributed their
products through general agents, direct response marketing and a financial
institution marketing force. In 1993, in order to reduce operating costs, the
Company eliminated its financial institution marketing force, which had
generated the great majority of the Company's life insurance sales. Upon
completion of the Life Insurance Reorganization, it is anticipated that active
marketing operations will recommence under American Founders and Aztec, although
American Founders and Aztec will no longer be subsidiaries of the Company.
American Founders is domiciled in Texas and licensed in 38 states and
the District of Columbia. American Founders has in force a variety of products,
including its universal life, term, mortgage protection and annuity products. It
continues to allow sale of these products through its general agents, however,
it is not actively soliciting new business.
Aztec is domiciled in California and licensed in nine states. Aztec
specialized in selling, primarily through a financial institution marketing
force, mortgage protection life insurance products through leads generated by
the mortgage lending activities of various financial institutions. Aztec's
insurance operations ceased with the sale of its business to another insurer in
December 1994.
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<PAGE> 20
The following table sets forth for the past three years certain
information with respect to the Company's life insurance in force:
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------
1995 1994 1993
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Insurance in force, January 1 $1,504,137 $ 3,625,830 $3,945,235
Increased by:
New direct business issued 67,789 28,947 495,179
Reinsurance assumed 738 - -
---------- ----------- ----------
Total 68,527 28,947 495,179
========== =========== ==========
Decreased by:
Death 6,934 14,424 10,869
Maturity 113 146 390
Expiry 3,958 15,030 18,188
Surrender 54,303 130,416 123,074
Lapse 180,500 349,743 616,205
Other 16,404 1,640,881(1) 45,858
---------- ----------- ----------
Total 262,212 2,150,640 814,584
Decrease (193,685) (2,121,693) (319,405)
---------- ----------- ----------
Insurance in force
December 31 $1,310,452 $ 1,504,137 $3,625,830
========== =========== ==========
</TABLE>
(1) Includes a decrease related to the sale of Aztec's business of
$1,453,000.
The following table sets forth for the past three years certain
information with respect to the account values of the Company's deferred
annuities.
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------
1995 1994 1993
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Account value, January 1 $106,057 $119,453 $135,063
Premiums 598 478 539
Deaths (1,580) (1,031) (734)
Gross surrenders (21,024) (18,638) (23,130)
Administrative charges (5) (5) (5)
Interest credited 5,423 5,800 7,720
-------- -------- --------
Account value, December 31 $ 89,469 $106,057 $119,453
======== ======== ========
</TABLE>
18
<PAGE> 21
PRODUCTS
American Founders' portfolio consists of two broad categories of
products: universal life (flexible premium, interest-bearing products) and term
life (including annually renewable term products with annually increasing
premiums, a level term product with level premiums for 10 or 12 years, and
mortgage term life). American Founders also has in force a substantial amount of
annuity policies including a block of deferred annuities acquired from another
insurer in 1991.
On policies issued prior to October 1990, American Founders retained no
more than $50,000 of risk on any one life. American Founders retains up to
$250,000 per risk on policies issued after that date.
CLAIMS
The Company's life insurance claims are processed by Company personnel.
Most investigations are completed internally, although occasionally outside
investigation firms are used in the claimant's locale.
RESERVES
The Company's life insurance subsidiaries maintain policy reserves,
which are balance sheet liabilities representing estimates of amounts needed to
meet future obligations on its outstanding policies. These liabilities are
computed using assumptions as to future investment yield, mortality and
withdrawals, which assumptions include margins for adverse deviations. See Note
1 of Notes to Consolidated Financial Statements included elsewhere herein.
REINSURANCE CEDED
A reinsurance transaction takes place when an insurance company
transfers, or cedes, a portion or all of its exposure on insurance directly
written or assumed by it to another insurer, which assumes the exposure in
return for a portion or all of the premium. Life insurance companies principally
cede insurance to reduce net liability on individual risks or to maintain
desired financial ratios. Reinsurance is effected under agreements, or treaties,
where losses above a fixed point, or retention level, are reinsured. Reinsurance
treaties are also utilized to acquire or dispose of blocks of business between
insurers.
For a description of certain reinsurance transactions entered into by
the Company's life insurance subsidiaries see Note 9 of Notes to Consolidated
Financial Statements included elsewhere herein.
GEOGRAPHICAL DISTRIBUTION
In 1995, 1994, and 1993 approximately the following percentages of the
Company's direct premiums were written in the following states:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
California 33% 56% 54%
Texas 46% 25% 24%
</TABLE>
No other state accounted for in excess of 5%.
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<PAGE> 22
The reduction in 1995 direct premiums in California relates primarily
to the sale of Aztec business as the majority of Aztec's premiums were in
California.
COMPETITION
The life insurance business is highly competitive. Many of the insurers
competing with the Company are substantially larger, have a greater number of
agents and have considerably greater financial resources than the Company. The
proposed life insurance reorganization (see Note 14 of Notes to Consolidated
Financial Statements included elsewhere herein) will not immediately enhance the
competitive position of the Company's life insurance operations, since neither
the Company nor Circle has active distribution systems for life insurance
products.
REGULATION
The Company's life insurance subsidiaries are subject to regulation and
supervision by the states in which they transact business. The state of domicile
exercises principal regulatory supervision of insurance companies. The purpose
of such regulation and supervision is primarily to provide safeguards for
policyholders rather than to protect the interests of stockholders. The states
have established regulatory agencies with broad administrative powers to
regulate, among other things: licenses to transact business; policy forms; trade
practices; premium and commission rates; agency agreements; deposit of
securities for the benefit of policyholders; form and content of financial
statements; accounting practices; maintenance of reserves and capital for the
protection of policyholders; dividends; examinations of insurers' affairs; and
investments. The relationships among the Parent Company and its insurance
subsidiaries is also subject to regulations under state insurance holding
company laws. Under these laws, inter-company asset transfers, investments and
other transactions, as well as dividends from insurance companies, may be
subject to prior notice to, or approval by, the state insurance regulatory
authority, depending upon the size of such transaction or dividend.
For a description of certain restrictions placed upon the
dividend-paying capability of the Company's insurance subsidiaries by applicable
laws, see "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations - Liquidity and Capital Resources."
Under insolvency or guaranty laws in most states in which the Company
operates, insurers doing business in those states can be assessed up to
prescribed limits for policyholder losses by other companies that become
insolvent. Under these laws, the extent of any future assessments against the
Company is not determinable. However, most laws do provide that an assessment
may be excused or deferred if it would threaten a solvent insurer's financial
strength.
The National Association of Insurance Commissioners (the "NAIC")
reviews the financial statements filed by insurance companies against certain
ratios and provides the results to the insurance departments of the various
states. Insurance companies with a sufficient number of ratios outside the
NAIC's "normal ranges" are given priority ratings indicating the amount of
regulatory review required. American Founders was designated as "third priority"
in 1994. The Company has completed a preliminary calculation of the 1995 ratios
which indicate "third priority" status would be retained. Given the decrease in
the trading price of Wickes common stock during 1995 and its impact on statutory
capital and surplus it is possible the NAIC may assign a higher priority status
to American Founders.
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<PAGE> 23
Regulatory concerns over solvency, asset diversification and asset
quality have increased significantly in recent years. A number of legislative
proposals have been made, at both state and federal levels, in response to these
concerns. The NAIC and the Texas Department of Insurance adopted recommended
levels of "risk-based" capital for life insurers, determined by the application
of a formula that evaluates a company's capital and surplus based on various
perceived risk factors related to asset type and quality, interest rate
exposure, kinds and amount of insurance written and other business risks. All of
the Company's life insurance companies exceed the NAIC recommended and Texas
mandated levels.
INVESTMENTS
The investments of the Company's life insurance subsidiaries are
managed under the supervision of their respective boards of directors.
Investments are subject to the statutory requirements of the states of domicile
of the Company's subsidiaries and the terms of the Company's bank loan
agreement.
The investments of the Company's insurance subsidiaries consist
primarily of publicly-traded bonds, mortgage and construction loans, policy
loans, real estate and short-term securities. The investment emphasis is on
maximizing total portfolio return to the extent consistent with applicable
regulations and maintenance of prudent portfolio quality, diversity, maturity,
liquidity and income tax consequences. The investment make-up of the portfolio
has been altered from time to time to respond to anticipated changes in
insurance underwriting results, as well as in response to market conditions and
fluctuations in interest rates. Effective December 31, 1993, the Company adopted
Statement of Financial Accounting Standards No. 115 ("SFAS 115") "Accounting for
Certain Investments in Debt and Equity Securities." For a discussion of the
impact of SFAS 115 see "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations--Investment Operations."
The following table summarizes the investment results of the Company's
insurance subsidiaries for the past three years.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1995 1994 1993
---- ---- ----
(in thousands, except yields)
<S> <C> <C> <C>
Average invested assets $ 246,206 $ 282,957 $ 308,860
Net investment income 14,492 17,523 20,735
Before-tax yield on average
invested assets 5.9% 6.2% 6.7%
Net realized investment
gains (losses) (234) (182) 4,147
Change in unrealized investment
depreciation in equity securities (1) (139) (1,917)
Change in unrealized investment
appreciation (depreciation) on
fixed maturities available for sale 15,627 (18,320) 8,089
Change in unrealized investment
appreciation (depreciation)
on fixed maturities of
discontinued operations $ 288 $ (533) $ 245
</TABLE>
21
<PAGE> 24
The following table sets forth the classification and carrying value of
the investments of the Company's insurance subsidiaries at the end of each of
the past two years.
<TABLE>
<CAPTION>
December 31,
---------------------
1995 1994
---- ----
(in thousands)
<S> <C> <C>
Fixed maturities (bonds):
United States Government and agencies $ 19,666 $ 27,089
States, and political subdivisions -- 8,384
Corporate 83,661 85,016
Mortgage-backed and other
asset-back securities 43,825 37,090
-------- --------
Total fixed maturities (1) 147,152 157,579
Equity securities 838 951
Mortgage and construction loans 26,903 27,153
Investment in real estate 17,879 31,284
Policy loans 19,827 19,742
Short-term investments and other investments 20,842 22,262
-------- --------
Total investments $233,441 $258,971
======== ========
</TABLE>
(1) Fixed maturities as of December 31, 1995 and 1994 were all classified
as available for sale.
Based upon the ratings of Standard & Poor's Corporation, as of December
31, 1995, the quality distribution of the Company's fixed maturities was: U.S.
Treasury and AAA - 38.2%; AA - 9.1%; A - 36.0%; BBB - 10.6%; BB-5.8%; and
non-rated - .3%.
As of December 31, 1995, the Company held $43.8 million of securities
backed by mortgages and other assets ("Structured Securities") which represented
30% of the Company's fixed maturities. These securities were composed of the
following types:
<TABLE>
<CAPTION>
Market Average
Value Duration
------ --------
(in thousands) (Years)
<S> <C> <C>
Mortgage pass-throughs $18,435 4.1
Collateralized mortgage obligations ("CMOs") 19,110 3.6
Other asset-backed 6,280 4.8
------- ---
$43,825 4.0
======= ===
</TABLE>
The structured securities portfolio did not include any interest-only,
principal-only, or inverse floating CMOs, nor any residual interests in CMOs.
Management is of the opinion that the Structured Securities owned by the Company
have good liquidity in readily available markets and were all rated investment
grade, with 81% rated AAA by Moody's Investors Service or Standard & Poor's
Corporation. The effective yield to maturity on the Structured Securities
portfolio as of December 31, 1995 was 7.6%. The impact of interest rate trends
on income derived from mortgage-backed securities did not materially affect
investment operations during 1995 or 1994. Given present interest rate
environments the Company does not anticipate any material changes in income
during 1996. The
22
<PAGE> 25
Company's philosophy has been and continues to be to invest in conservative,
high quality assets which are not subject to the excessive volatility associated
with other forms of mortgage-backed assets.
The following table sets forth maturities of the fixed-maturity
investments as of the end of each of the past two years.
<TABLE>
<CAPTION>
December 31,
---------------------
1994 1995
---- ----
(in thousands)
<S> <C> <C>
One year and under $ 9,906 $ 9,627
Over one year through five years 29,495 37,302
Over five years through ten years 55,106 56,235
Over ten years 8,820 17,325
Mortgage-backed and other asset backed securities 43,825 37,090
-------- --------
Total $147,152 $157,579
======== ========
</TABLE>
In 1995, the Company opened two mortgage lending offices and began, on
a test basis, marketing construction and permanent mortgage loans to the
professional builder customers of Wickes as well as the customers of these
builders. As of December 31, 1995, included in mortgage and construction loans
were $818,000 of permanent loans, which are held for sale to investors under
existing agreements, and $3,372,000 in construction loans generated by these
offices .
In addition, the undrawn amount of construction loans committed at
December 31, 1995, totaled $2,469,000. The Company's commitment to fund the
undrawn balance is contingent upon the borrowers successful completion of
certain specified conditions. Approximately 95% of the total construction loans
outstanding were made with respect to homes for which no purchase agreements
existed.
For further information concerning the Company's investments, see Note
5 of Notes to Consolidated Financial Statements included elsewhere herein.
DISCONTINUED OPERATIONS
The Company conducted property and casualty insurance operations
beginning in 1986 through its wholly-owned subsidiary, Dependable, which was
domiciled in Florida and licensed to conduct business in 47 states and in the
District of Columbia. In 1993 and prior years, Dependable wrote a significant
amount of credit-related (principally, collateral protection) insurance for
financial institutions. Dependable also wrote certain other specialty lines of
insurance including homeowners and commercial lines.
As a result of Hurricane Andrew in August 1992, the Company determined
to discontinue property and casualty operations. After Hurricane Andrew,
Dependable ceased writing new business and, in a series of transactions effected
throughout 1993, Dependable disposed of substantially all of its in force
business. On September 15, 1995, Riverside completed the sale of Dependable to
MedMarc Insurance Company ("MedMarc") in a transaction that resulted in a gain
of approximately $2.7 million. In connection with the sale, the Company agreed
to indemnify MedMarc 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
23
<PAGE> 26
effect on the Company's financial position, results of operations or cash flows.
See Note 3 of Notes to Consolidated Financial Statements included elsewhere
herein.
The following table sets forth for the past three years certain
information concerning the results of the Company's property and casualty
operations.
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------
1995 1994 1993
---- ---- ----
(in thousands, except percentages)
<S> <C> <C> <C>
Gross premiums written $ (87) $(2,536) $ 8,841
Net premiums written (233) (884) (11,643)
Net premiums earned (99) 645 25,204
Net incurred losses (170) 4,220(1) 12,840
Loss ratio N/A 654% 51%
Underwriting and operating expenses $ 2,154 $ 3,769 $ 20,082
Expense ratio (2) N/A 584% 80%
</TABLE>
(1) 1994 net incurred losses included net claims of $3.5 million from
unusually adverse loss experience on discontinued commercial lines.
(2) GAAP Underwriting and operating expenses as a percentage of earned
premiums.
EMPLOYEES
At December 31, 1995, the Company had 57 full-time employees (excluding
those of Wickes). As of February 29, 1996, Wickes had approximately 3,615
employees, of whom 3,011 were employed on a full-time basis. The Company
believes that it has maintained favorable relations with its employees. None of
Riverside's or Wickes' employees is represented by a union or covered by a
collective bargaining agreement.
ITEM 2. PROPERTIES
The Company leases 15,662 square feet of office space in Jacksonville,
Florida, for its executive offices, under a lease expiring in 1997, with an
option for one to five additional years. In addition, the Company leases 16,000
square feet of office space in Phoenix, Arizona, for its life insurance
operations under a lease expiring in 1997 with an option for two additional
years. Circle would assume full responsibility for the leased office space in
Phoenix, Arizona upon completion of the Life Insurance Reorganization.
Wickes owns eleven component manufacturing facilities, 98 of its
building centers and 94 of the sites on which such building centers are located.
The remaining twelve building centers and 16 sites are leased. As of December
30, 1995, Wickes also held for sale the assets of 16 closed building centers
with an aggregate book value of $4.9 million.
Wickes also owns and leases a large fleet of trucks and other vehicles,
including vehicles specialized for the delivery of certain of Wickes' products.
24
<PAGE> 27
Wickes owns its corporate headquarters, located at 706 North Deerpath
Drive in Vernon Hills, Illinois.
ITEM 3. LEGAL PROCEEDINGS
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. 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 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 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 Riverside, as
well as FynSyn and the third party related to and as a consequence of these
matters and seeking indemnity from FynSyn. 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.
On November 3, 1995, a complaint styled Wolfson v. Riverside Group,
Inc., et al., 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 transaction contemplated by the Wickes Agreement is
unfair and constitutes a waste of Wickes' assets and that Wickes and Riverside
breached their fiduciary duties in their approval of this transaction. The
amended complaint, among other things, seeks on behalf of a purported class of
the Company's shareholders to enjoin, or to obtain damages with respect to, the
transaction. See "Item 1. Business - HISTORICAL DEVELOPMENT - Proposed
Transactions - Wickes Investment."
Wickes is one of many defendants in 164 actions, each of which seek
unspecified damages, brought in 1993, 1994 and 1995 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 material adverse effect on Wickes.
As is common in the insurance industry, the Company's insurance
subsidiaries are regularly engaged in the defense of claims arising out of the
conduct of the insurance business. In management's opinion, none of these claims
will have a material adverse effect on the Company's financial position, results
of operations or cash flows.
25
<PAGE> 28
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
None.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock trades over-the-counter and is quoted on the
NASDAQ National Market System under the trading symbol "RSGI." As of March 24,
1996, there were 5,311,123 shares outstanding held by approximately 1,872
stockholders of record.
The following table sets forth, for the periods indicated, the high and
low sale prices for the Company's common stock as reported on the NASDAQ
National Market System. Prices do not include retail markups, markdowns or
commissions.
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
1994:
First Quarter $ 11.00 $ 7.125
Second Quarter 9.375 6.75
Third Quarter 8.00 6.00
Fourth Quarter 7.50 5.25
1995:
First Quarter $ 6.75 $ 5.25
Second Quarter 6.50 5.25
Third Quarter 6.25 5.00
Fourth Quarter $ 5.25 $ 3.375
</TABLE>
The Company did not pay cash dividends on its common stock during the
last three fiscal years and anticipates that for the foreseeable future it will
not pay any cash dividends on its common stock. Payment of dividends in the
future is subject to the discretion of the Board of Directors of the Company and
is dependent upon the Company's overall financial condition, capital
requirements, compliance with regulatory and contractual requirements, earnings,
and such other factors as the Board of Directors may deem relevant.
As a holding company, the Company is dependent on dividends from its
subsidiaries to pay cash dividends to its stockholders. The Company's insurance
subsidiaries are subject to state insurance laws that restrict their ability to
pay dividends. In addition, AFAC's bank loan agreement restricts transfers of
funds to the Parent Company. For a description of these and other restrictions
on cash dividends see "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources."
26
<PAGE> 29
ITEM 6. SELECTED FINANCIAL DATA
The following summary of certain consolidated financial data of the Company is
derived from the Company's Consolidated Financial Statements included elsewhere
herein and should be read in conjunction with those financial statements and
notes thereto and "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations."
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
(in thousands, except per share amounts)
--------------------------------------------------------------------------
1995(1) 1994(1) 1993 (1) 1992 1991
------- ------- -------- ---- ----
<S> <C> <C> <C> <C> <C>
Premiums and annuity considerations $ 8,298 $ 18,657 $ 21,704 $ 23,608 $ 21,358
Net investment income 14,492 17,523 20,735 25,076 28,275
Realized investment gains (losses) (234) (182) 4,147 7,334 3,822
Equity in earnings (losses) of
Wickes Lumber Company (5,849) 8,274 1,525 -- --
Total revenues 18,220 45,784 54,100 58,093 56,238
Earnings (loss) from continuing operations
before extraordinary item and cumulative
effect of change in accounting principles (17,845) 8,850 4,043 5,011 (639)
Loss from discontinued operations (1,086) (4,405) (1,988) (12,583)(2) (7,704)
Gain on disposal of discontinued operations 2,731 -- -- -- --
Extraordinary item -- -- -- 5,319(3) --
Cumulative effect of change in accounting
principles -- -- 596 2,178(4) --
----------- ----------- ----------- ----------- -----------
Net income (loss) (16,200) 4,445 2,651 (75) (8,343)
=========== =========== =========== =========== ===========
Earnings (loss) per common share,
after deducting preferred stock dividends and
accretion:
Earnings (loss) from continuing operations
before extraordinary item and cumulative
effect of change in accounting principles $ (3.38) $ 1.61 $ 0.50 $ 0.70 $ (0.11)
Loss from discontinued operations (0.21) (0.82) (0.37) (2.25) (1.38)
Gain on disposal of discontinued operations 0.52 -- -- -- --
Extraordinary item -- -- -- 0.95 --
Cumulative effect of change in accounting
principles -- -- 0.11 0.39 --
----------- ----------- ----------- ----------- -----------
Net income (loss) $ (3.07) $ 0.79 $ 0.24 $ (0.21) $ (1.49)
=========== =========== =========== =========== ===========
Total investments $ 233,441 $ 258,971 $ 306,942 $ 352,621 $ 419,945
Total assets 300,725 353,370 390,731 512,457 551,538
Long-term debt and redeemable preferred
stock 31,215 45,198 49,349 58,131 75,518
Total common stockholders' equity $ 26,056 $ 29,103 $ 38,397 $ 35,871 $ 33,524
Common shares outstanding 5,311,123 5,465,781 5,294,930 5,594,930 5,594,930
Book value per common share $ 4.91 $ 5.32 $ 7.25 $ 6.41 $ 5.99
</TABLE>
- --------------------------------------------------------------------------------
(1) For various matters affecting 1995, 1994 and 1993 results of operations,
see "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations- Results of Operations."
(2) During 1992, Dependable incurred losses and assessments of $14.7 million
(pre-tax), net of reinsurance, as a result of Hurricane Andrew.
27
<PAGE> 30
(3) Extraordinary gain on early retirement of debt.
(4) Cumulative effect of adopting SFAS 109 "Accounting for Income Taxes."
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion should be read in conjunction with the
Consolidated Financial Statements and Notes thereto contained elsewhere herein.
LIQUIDITY AND CAPITAL RESOURCES
THE PARENT COMPANY
The liquidity requirements of the Parent Company consist primarily of
providing funds for payment of debt and related interest, and for operating
expenses.
The funds available to the Parent Company from operating sources
continue to be limited. Pending the completion of the proposed Life Insurance
Reorganization (see "Item 1. Business - HISTORICAL DEVELOPMENT - Proposed
Transactions Life Insurance Reorganization"), sources of funds available to the
Parent Company include: management fees and expense reimbursements for services
provided to the Company's subsidiaries; funds that may be generated from the
sale of unrestricted assets; and intercompany advances from AFAC. The Company
anticipates that these sources, together with cash on hand, will be adequate to
meet the Company's liquidity needs through late June 1996, by which time the
Company expects to have completed the Life Insurance Reorganization.
The Company anticipates that the net after-tax cash proceeds of the
Life Insurance Reorganization will be approximately $14 million, of which the
Company has agreed to utilize $10 million under the Wickes Agreement to acquire
an additional two million shares of Wickes Common Stock. See "Item 1. Business -
HISTORICAL DEVELOPMENT - Proposed Transactions - Wickes Investment." The Company
anticipates that its funds on hand after completion of this investment in
Wickes, together with its other sources of funds, will be adequate for the
Company's liquidity requirements at least through the second quarter of 1997. In
recent years the Company has realized a significant portion of its liquidity
requirements through expense reimbursements and other distributions from its
insurance subsidiaries. Following completion of the Life Insurance
Reorganization these sources of funds will no longer be available. The Company's
remaining operations, exclusive of Wickes (which is currently prohibited from
paying dividends by reason of restrictions in its debt instruments), will
consist primarily of the disposition of certain real estate and the operations
of WFSC and the Company's mortgage lending operations, both of which are in the
start-up phase and are anticipated to produce significant negative cash flows
at least through 1996. The Company will continue to evaluate the prospects
and anticipated future cash requirements and contributions of these operations.
Should the Company not complete the Life Insurance Reorganization or
comparable transaction by September 30, in order for the Company to maintain
adequate liquidity and to meet the scheduled payments of principal and interest
on its indebtedness, the Company would be required to obtain an extension of
currently scheduled principal and interest payments, obtain additional financing
or sell a
28
<PAGE> 31
significant amount of assets held by the Parent Company and to use the
proceeds for Parent Company purposes, which would require the consent of the
Company's current bank lenders. The Company believes that should the Circle
Agreement for any reason, be terminated the Company would be able to enter
into a definitive agreement for a comparable transaction in a reasonable
time-frame. Although the Company believes it will complete the Life Insurance
Reorganization by late June 1996, there can be no assurance that the Company
will continue to have funds sufficient for its needs if the closing of the Life
Insurance Reorganization or comparable transaction does not occur or occurs
significantly later than expected.
As a result of the decrease during 1995 in the trading value of Wickes
and the charges taken in the fourth quarter of 1995 related to the Life
Insurance Reorganization, a waiver of certain requirements of the Company's bank
credit agreement has been provided and is in the process of being extended. The
Company anticipates that this waiver will remain in effect until late June 1996,
to allow for completion of the Life Insurance Reorganization. Under the terms of
the Life Insurance Reorganization all indebtedness under the Company's bank
credit agreement is to be repaid in full by Circle. Circle has informed the
Company that it believes, based upon discussions with lenders interested in
providing loans to Circle, that it will be able to obtain financing sufficient
to retire the Company's bank indebtedness. For a description of the terms of,
and certain covenants and restrictions placed upon the Company and AFAC by the
Company's bank credit agreement, see Note 6 of Notes to Consolidated Financial
Statements included elsewhere herein.
In addition, the $10 million principal amount of the Company's 13%
subordinated notes (the "13% Notes") is payable in September 1999. The Company
anticipates that in order to repay this principal amount, the Company may need
to obtain additional funds through borrowings, issuance of debt or equity
securities or sale of assets held by the Parent Company (such as shares of
Wickes common stock).
During 1995 and early 1996, material transactions also affecting
liquidity are:
- In February 1995, the Parent Company received $600,000 in connection
with the settlement of a dispute with respect to a financing proposal
to the Company in late 1992.
- In August 1995, AFAC advanced to the Parent Company the proceeds of a
$1.0 million bridge loan facility it received under an amendment to the
Company's bank credit agreement. This advance supplied part of the
funds used to exercise the Wickes option.
- In February, April and June of 1995 the Company advanced Wilson
Financial Corporation ("Wilson Financial"), the Company's controlling
stockholder, an aggregate of $900,000, and Wilson Financial granted the
Company an option to acquire (at exercise prices ranging from $5.88 to
$6.31 per share) the number of shares of the Company's common stock
equal to the amount of such advance and related interest divided by the
exercise price. Effective June 30, 1995, the Company elected to
exercise this option, acquiring 150,680 shares of its common stock by
canceling $918,310 of advances and related interest. In addition the
Company purchased from Wilson Financial 23,000 shares of its common
stock for an aggregate price of $125,235 in October 1995 and 27,778
common shares for an aggregate price of $125,000 in November of 1995.
29
<PAGE> 32
- On August 14, 1995, the Company exercised its option from Wickes Lumber
Investment Partnership to purchase 374,516 shares of Wickes common
stock at an aggregate price of $2.3 million. In connection with the
option exercise the Company repaid in full a promissory note issued to
Fynsyn Capital Corp. of $1.1 million.
- In September 1995, the Company completed the sale of Dependable
Insurance Company to MedMarc Insurance Company. Cash generated by the
sale net of debt repayments and holdback of funds by the buyer pending
further resolution of uncertainties was minimal.
See Note 13 of Notes to Consolidated Financial Statements included
elsewhere herein for a description of litigation seeking, among other things,
rescission of the transaction in which Riverside acquired for approximately $6.5
million an aggregate of 739,198 shares of Wickes common stock.
During 1995, stockholders' equity decreased by a net of $2.7 million
due to the losses sustained by Wickes and charges related to the Life Insurance
Reorganization which were partially offset by changes in the market value of the
Company's invested assets. The ratio of the Company's consolidated total
recourse debt to stockholders' equity increased from 113% at December 31, 1994,
to 120% at December 31, 1995, as a result of the decline in stockholder's
equity.
AFAC
AFAC's liquidity requirements consist primarily of funds required to
repay debt and related interest under the Company's bank credit agreement. See
"The Parent Company."
Sources of funds available to AFAC consist of surplus note payments
from Laurel Life Insurance Company ("Laurel"). Laurel receives dividends from
its American Founders subsidiary. In general, Texas statutes limit the amount of
dividends American Founders may pay in any year to the greater of prior year's
statutory net gain from operations after income taxes or 10% of statutory
capital and surplus without state approval. For 1996, American Founders is
eligible to pay dividends in excess of the Company's debt service requirements
without state approval.
INSURANCE SUBSIDIARIES
General. During 1995, approximately $26.7 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.
Life Insurance Subsidiaries. The Company's investment portfolio is
highly liquid, consisting predominately of readily marketable securities. The
Company does not expect any material changes in its cash requirements and is not
aware of any trends, events or uncertainties that are reasonably likely to have
a material effect on life operations' liquidity.
30
<PAGE> 33
RESULTS OF OPERATIONS
GENERAL
The Company reported results of operations for the years ended December
31, 1995, 1994 and 1993 as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Income (loss) from continuing operations before
reorganization charges for life insurance
operations and cumulative effect of change
in accounting principle (1) $ (8,783) $ 8,850 $ 4,043
Loss on reorganization of life insurance
operations (2) (9,062) -- --
Income (loss) from continuing operations before
cumulative effect of change in accounting
principle (17,845) 8,850 4,043
Gain (loss) from discontinued operations (3) 1,645 (4,405) (1,988)
Cumulative effect of change in accounting
principle(4) -- -- 596
-------- -------- --------
Net income (loss) $(16,200) $ 4,445 $ 2,651
======== ======== ========
</TABLE>
- --------------------------
(1) Includes net realized investment gains (losses) of ($234,000), ($182,000)
and $4,147,000 in 1995, 1994 and 1993, respectively. 1995 includes other
income of $600,000 related to the settlement of a disputed financing
proposal. 1994 includes other income of $558,000 from the sale of the
Company's 13% subordinated notes and a gain on sale of a former
subsidiary to Wickes of $613,000. (See Note 12 of Notes to the
Consolidated Financial Statements included elsewhere herein.) Includes
equity in earnings (loss), net of tax, of Wickes of ($5,849,000),
$8,274,000 and $1,525,000 for 1995, 1994 and 1993 respectively. The
Company's equity in Wickes earnings (losses) include losses of ($3.8)
million related to restructuring charges incurred in 1995 and $4.2
million of tax benefits related to reversal of a deferred tax valuation
allowance established in a prior year in 1994.
(2) Charge primarily reflects the write off of intangible assets of
($10,790,000) and income tax benefits of $1,910,000.
(3) Includes realized investment gains of $31,000, $91,000 and $7,651,000 in
1995, 1994 and 1993, respectively. 1995 includes a gain on disposal of
discontinued property and casualty lines of $2,731,000. 1994 includes
$3,500,000 of incurred losses, net of reinsurance, due to unusually
adverse loss experience on commercial lines runoff. 1993 includes pre-tax
catastrophe losses of $3,200,000 from the severe winter storm of March
1993 and gains resulting from sale of blocks of business of $2,400,000.
(4) See Note 5 of Notes to Consolidated Financial Statements included
elsewhere herein.
31
<PAGE> 34
QUARTERLY RESULTS AND SEASONALITY
Although the Company's results historically have not been affected
significantly by seasonal factors, the Company's equity investment in Wickes'
results can be expected to fluctuate from period to period. Wickes' operations
are adversely affected by the weather patterns in the markets in which it
operates, which result in decreased levels of construction activity and lower
sales historically in the first quarter and frequently, in the fourth quarter.
The extent of such decreases in activity is a function of the severity of winter
conditions.
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>
1995 1994 1993
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Total Operating Statement Data:
Net sales $ 972,612 $ 986,872 $ 846,842
Gross profit 220,812 233,831 206,558
Net income (loss) (15,599) 28,054 8,183
Equity in net income (loss) of Wickes $ (5,849) $ 8,274 $ 1,525
</TABLE>
NET SALES
Wickes net sales for 1995 decreased $14.3 million, or 1.4%, compared to
1994. The 1994 fiscal year consisted of 53 weeks compared to 52 weeks in 1995.
After adjusting for the additional week in 1994, Wickes net sales decreased only
$.3 million in 1995. Sales for all facilities operating throughout both years
decreased 3.8%, 2.1% after adjusting for the additional week in 1994.
In 1995 deflation in lumber prices, of approximately 18%, accounted for
an estimated $45 million in lost sales. Housing starts declined in Wickes'
primary markets, the Midwest and Northeast, by approximately 12% and 15%,
respectively, which also adversely affected sales in 1995. While Wickes added
seven new building centers through acquisition and expansion in 1995, it closed
or consolidated 26 other building centers (sixteen of these occurred at year-end
1995).
Net sales increased $140.1 million, or 16.5%, in 1994 compared to 1993.
The additional week in fiscal 1994 accounted for $14 million of additional
sales. The acquisition of ten building centers and three component manufacturing
facilities in 1994 contributed $24 million of additional sales. Same store sales
in 1994 increased 14% over 1993 due to increased prices on wood products,
increased housing starts and favorable weather during the fourth quarter which
kept sales strong through year-end and offset the impact of severe weather
during the first quarter of 1994.
GROSS PROFITS
Gross profit decreased $13 million to 22.7% of net sales in 1995
compared with 23.7% of net sales in 1994. Wickes estimates that deflation in
lumber prices caused $7.6 million of the decrease and that the additional week
of sales in 1994 contributed approximately $3.3 million of additional gross
profit in 1994.
32
<PAGE> 35
Wickes' continued emphasis on sales to professional builders and the
resulting increased sales of lower margin wood products also contributed to the
change in 1995. Wickes believes that approximately 50% of the decrease in gross
profit percentage is the result of the shift in customer mix from 22% consumer
and 78% professional in 1994 to 18% consumer and 82% professional in 1995.
In 1994 gross profit decreased to 23.7% of net sales compared to 24.4%
of net sales for 1993. Approximately 66% of the decrease in gross profit
percentage for 1994 resulted from the shift in customer mix to emphasize the
professional builder.
NET INCOME
Net income for Wickes decreased to a loss of $15.6 million in 1995
compared with $28.1 million in income for 1994, a change of $43.7 million. The
primary components of the decrease include an increase in restructuring and
unusual items of $15.8 million, a decrease in gross profit dollars of $13.0
million, an increase in selling, general and administrative ("S, G & A")
expenses of $4.1 million, increased losses of Wickes' Russian operations of $3.1
million and an increase in interest expense of $2.7 million. Wickes also
recorded a lower tax benefit in 1995 compared with 1994, increased depreciation
and amortization expenses. In the fourth quarter of 1994 Wickes recorded a $1.2
million one-time gain on the sale of its private label credit card portfolio.
The increased restructuring and unusual items charges in 1995 results
from Wickes plan to reduce the number of under-performing building centers, the
corresponding overhead to support these building centers and to strengthen its
capital structure. Wickes anticipates completion of this plan in 1996 and has
recorded a $17.8 million charge related to this strategic restructuring plan. In
1994 Wickes incurred restructuring charges of $2 million primarily as a result
of its headquarters cost reduction plan.
Net income increased to $28.1 million in 1994 compared to $8.2 million
in 1993. A deferred tax benefit of $14.4 million was recorded due to the
reversal of a deferred tax valuation allowance established in a prior year.
Other major contributors to the 1994 increase included the increased level of
sales, reduced S, G & A expenses as a percentage of sales, reduced trademark
amortization and increased other operating income, partially offset by decreased
gross profit as a percentage of sales, restructuring and unusual charges and
increased interest expense. In 1993 Wickes recorded a one-time extraordinary
gain of $1.2 million as a result of its 1993 recapitalization plan.
33
<PAGE> 36
LIFE INSURANCE OPERATIONS
OPERATING RESULTS
The following table sets forth comparative information with respect to
the Company's life insurance operations.
<TABLE>
<CAPTION>
Years ended December31,
-----------------------------------------------------------
Increase Increase
1995 (Decrease) 1994 (Decrease) 1993
---- ---------- ---- ---------- ----
(in thousands, except percentages)
<S> <C> <C> <C> <C> <C>
Premiums and annuities $ 8,298 (56%) $18,657 (14%) $21,704
Benefits and losses 15,417 (21%) 19,399 (15%) 22,892
Policy acquisition expenses 3,085 (39%) 5,093 (42%) 8,725
Net investment income $14,492 (17%) $17,523 (12%) $20,735
</TABLE>
The decrease in premiums and annuity considerations in 1995 resulted
primarily from the sale of Aztec in December 1994. Decreases in 1994 relate to
reductions in traditional premium writings.
Benefits and losses decreased in 1995 due to the sale of the Aztec
business. This decrease was partially offset during 1995 by higher death
benefits and reserve increases. Benefits and losses decreased during 1994 as a
result of reduced interest crediting rates on the Company's annuities and lower
death benefits.
Policy acquisition expenses were 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. Policy acquisition costs were lower in 1994 compared
to 1993 due to decreased amortization of deferred acquisition costs as a result
of a change in the emergence of gross profits on interest sensitive products.
The Company estimates the December 1994, sale of the Aztec business
generated a decrease in pre-tax profits of the life insurance operations of $2.5
million in 1995 compared to 1994.
INVESTMENT RESULTS
Decreases in investment income for all years presented result from
lower average invested assets and lower investment yields (See "Investment
Operations").
OPERATING COSTS AND INTEREST EXPENSE
Other operating costs and expenses were $5,221,000, $8,076,000, and
$15,174,000 in 1995, 1994 and 1993, respectively. Decreased operating expenses
in 1995 are due to reduced lease expenses, data processing expense savings,
expense reimbursements from third parties for administrative services and staff
reductions. Operating expenses decreased significantly in 1994 through savings
realized by staff related and other expense reductions in the life insurance
subsidiaries. In 1993, cost reductions resulting from life insurance staff
reductions were more than offset by a $3.6 million write-off of the excess of
cost over fair value of net assets acquired for certain life operations
determined to be unrecoverable.
34
<PAGE> 37
Interest expense for 1995, 1994 and 1993 was $3,280,000 $2,883,000, and
$3,245,000, respectively. The increase in interest expense between 1995 and 1994
results principally from the increased indebtedness of AFAC incurred in April
1994 and from higher interest rates. The decreases in interest expense between
1994 and 1993 result from paydowns of debt and lower interest rates.
INVESTMENT OPERATIONS
Investment operations include all invested assets of the life insurance
subsidiaries and the Parent Company. Investment income, net of investment
expenses, declined 17% from 1994 to 1995 and 15% from 1993 to 1994 as a result
of reduced invested assets and lower investment yields as discussed below.
Annualized investment yields on average invested assets were 5.9% in
1995 compared to 6.2% and 6.7% in 1994 and 1993, respectively. The decrease in
yields in 1995 and 1994 is primarily due to: (i) the lower yields on funds
reinvested in fixed maturities and mortgages, and (ii) loss on real estate
assets. Included in net investment income for 1995, 1994 and 1993 were
($316,000), ($353,000), and $668,000, of net real estate income (expenses)
respectively.
Net realized investment gains (losses) for 1995, 1994 and 1993 were
($234,000), ($182,000), and $4,147,000 respectively. Net realized investment
losses for 1995 include losses of $1.5 million incurred to write down the entire
carrying value of securities of The Atlantic Group, Inc. ("Atlantic"). Directors
of the Company beneficially own approximately 75% of Atlantic. On December 31,
1993 as a result of adopting SFAS 115, management segregated certain of the life
insurance companies investments in fixed maturities into a separate trading
portfolio (Fixed maturities actively managed). These investments were held with
the objective of generating incremental returns over those of other alternative
fixed income investments within the succeeding year. These investments were
liquidated in 1994. Principally as a result of rising interest rates during the
first half of 1994, losses realized on the trading portfolio were ($883,000),
(($583,000) net of taxes) and partially offset the $903,000 ($596,000 net of
taxes) of gains recorded on the trading portfolio in 1993. The gains on the
trading portfolio for 1993, net of taxes, are recorded in the consolidated
statements of operations as a cumulative effect of change in accounting
principles. See Note 5 of Notes to Consolidated Financial Statements included
elsewhere herein for further discussion of the investment portfolio.
Mortgage and construction loans on real estate include 162 residential
loans aggregating approximately 27% of the dollar value of the Company's
mortgage loan portfolio. Of the total residential loans, the Company's mortgage
lending operations accounted for five permanent mortgage loans (3% of mortgage
portfolio total), which are held for resale to investors under existing
agreements, and 34 construction financing loans (13% of mortgage portfolio
total). In addition, 48 commercial mortgage loans comprised 73% of the dollar
value of the mortgage loan portfolio. As of December 31, 1995 delinquencies were
approximately 1% of the mortgage loan portfolio amount.
The Company has $6,008,000 of its investment in real estate in Florida
properties, $11,799,000 in Georgia properties, and $72,000 in other states.
DISCONTINUED OPERATIONS
Discontinued operations include the Company's property and casualty
insurance and mortgage servicing operations.
35
<PAGE> 38
During 1993, the Company sold or canceled virtually all of its
remaining in force property and casualty business. On September 15, 1995, the
Company completed the sale of Dependable to Medmarc. The Company realized a gain
upon disposal of these operations of $2.7 million, including an additional
payment to be received in 1996 of $.2 million for the acquisition of certain tax
benefits by MedMarc. Under terms of the sale the Company provided
indemnification for certain losses on various categories of liabilities. Terms
of the indemnities provided by the Company vary in regards to time limits and
maximum amounts. The Company believes that these indemnities will not have a
material adverse effect on the Company's financial position, results of
operations or cash flows.
The following table sets forth comparative information concerning the
results of the Company's property and casualty operations.
<TABLE>
<CAPTION>
Years ended December31,
-----------------------------------
1995 1994 1993
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Gross premiums written $ (87) $ (2,536) $ 8,841
Net premiums earned (99) 645 25,204
Net incurred losses (170) 4,220 12,840
% of earned premium 172% 654% 51%
Policy acquisition &
insurance fees 394 145 10,203
% of earned premium (398%) 22% 40%
Net loss from discontinued
operations $ (1,086) $ (4,405) $ (1,988)
</TABLE>
During 1994, Dependable incurred $3.5 million of net losses from
unusually adverse loss experience on its discontinued commercial lines of
business. Included in net income (loss) for 1994 is $700,000 in gains related to
reinsurance transactions.
Included in net loss from discontinued operations for 1993 is
approximately $2.4 million of gains resulting from Dependable's sale of several
blocks of business. Also in 1993, Dependable incurred claims, net of
reinsurance, of $3.2 million pre-tax as a result of damage from the severe
winter storm of March 1993.
Realized gains on sales of Dependable's investments included in
discontinued operations were $31,000, $91,000, and $7,651,000 in 1995, 1994 and
1993, respectively.
Included in net loss from discontinued operations is a net loss for
1993 of $4,113,000 for mortgage servicing operations. This loss resulted
primarily from accelerated amortization of purchase mortgage servicing rights.
On January 3, 1994, the Company sold these operations for their approximate book
value.
INCOME TAXES
The Company's effective income tax rate was 10% in 1995, 25% in 1994
and 13% in 1993. The low effective tax rate for 1995 is due to the inability to
fully utilize losses realized on the life insurance reorganization for tax
purposes. The low effective tax rate for 1994 and 1993 is due to the recognition
of deferred tax assets arising from recapture of tax loss carryforwards.
36
<PAGE> 39
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements of the Company are set forth herein beginning on
page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information required by this Item is incorporated herein by reference
from the definitive proxy statement to be filed in connection with the Company's
Annual Meeting of Stockholders tentatively scheduled to be held in May 20, 1996.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this Item is incorporated herein by reference
from the definitive proxy statement to be filed in connection with the Company's
Annual Meeting of Stockholders tentatively scheduled to be held in May 20, 1996.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information required by this Item is incorporated herein by reference
from the definitive proxy statement to be filed in connection with the Company's
Annual Meeting of Stockholders tentatively scheduled to be held in May 20, 1996.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information required by this Item is incorporated herein by reference
from the definitive proxy statement to be filed in connection with the Company's
Annual Meeting of Stockholders tentatively scheduled to be held in May 20, 1996.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM-8-K.
(a) LIST OF FINANCIAL STATEMENTS AND SCHEDULES FILED AS A PART OF THIS
REPORT:
(1) FINANCIAL STATEMENTS:
RIVERSIDE GROUP, INC. AND SUBSIDIARIES:
Report of Independent Accountants F - 1
Consolidated Balance Sheets as of December 31, 1995 and 1994 F - 2
37
<PAGE> 40
Consolidated Statements of Operations for the years ended December
31, 1995, 1994 and 1993 F - 3
Consolidated Statement of Common Stockholders' Equity for the years
ended December 31, 1995, 1994 and 1993 F - 4
Consolidated Statements of Cash Flows for the years ended December
31, 1995, 1994 and 1993 F - 5
Notes to Consolidated Financial Statements F - 6
WICKES LUMBER COMPANY AND SUBSIDIARIES:
Report of Independent Accountants WF - 1
Consolidated Balance Sheets as of December 30, 1995 and December
31, 1994 WF - 2
Consolidated Statement of Operations for the years ended December
30, 1995, December 31, 1994 and December 25, 1993 WF - 3
Consolidated Statements of Changes in Stockholders' Equity (deficit)
for the years ended December 30, 1995, December 31, 1994 and
December 25, 1993 WF - 4
Consolidated Statements of Cash Flows for the years ended December
31, 1995, December 25, 1994 and December 26, 1993 WF - 5
Notes to Consolidated Financial Statements WF - 6
(2) FINANCIAL STATEMENT SCHEDULES:
RIVERSIDE GROUP, INC. AND SUBSIDIARIES:
Report of Independent Accountants S - 1
Schedule I - Summary of Investments Other Than Investments in Related
Parties S - 2
Schedule II - Condensed Financial Information of Registrant S - 3
Schedule III - Supplementary Insurance Information S - 6
Schedule IV - Reinsurance S - 7
38
<PAGE> 41
WICKES LUMBER COMPANY AND SUBSIDIARIES:
Schedule II - Valuation and Qualifying Accounts WS - 1
(B) REPORTS ON FORM 8-K
On January 23, 1996, the Company filed a current report Form 8-K in
regards to the signing of the Wickes Agreement, reporting under Item 5. Other
Events.
(C) EXHIBITS
3.01 Restated Articles of Incorporation, as amended to date (previously
filed as Exhibit 3.01 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1994).
3.02 Amended and Restated Bylaws, as amended to date (previously filed as
Exhibit 3.02 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1994):
10.01 Form of Incentive Stock Option Agreement (previously filed as Exhibit
10.17(b) to the Company's Annual Report on Form 10-K for the year
ended December 31, 1992).
10.02 Form of Non-qualified Stock Option Agreement Sequential (previously
filed as Exhibit 10.18 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1992).
10.03 Agreement, dated as of July 23, 1993, among FynSyn Capital Corp., W.
Lumber Investment Partnership, Riverside Group, Inc. and
American Financial Acquisition Corporation (previously filed as
Exhibit 10.9 to the Company's Quarterly Report on Form 10-Q for the
period ended June 30, 1993). Report on Form 10-Q for the period ended
June 30, 1994).
10.04 Settlement Agreement, dated as of August 11, 1993, among FynSyn
Capital Corp., W. Lumber Investment Partnership, Riverside Group,
Inc. and Arthur M. Goldberg (previously filed as Exhibit 10.10 to the
Company's Quarterly Report on Form 10-Q for the period ended June 30,
1993).
10.05 Agreement made as of September 20, 1993, among Riverside Group, Inc.,
American Financial Acquisition Corporation, Wickes Lumber Company and
Bankers Trust (Delaware) (previously filed as Exhibit 10.19 to the
Company's Annual Report on Form 10-K for the year ended December 31,
1993).
10.06 Plan of Recapitalization dated April 20, 1994 among the Company,
Wilson
39
<PAGE> 42
Financial Corporation and J. Steven Wilson (previously filed as
Exhibit 10.01 to the Company's Quarterly Report on Form 10-Q for the
period ended March 31, 1994).
10.07 Agreement entered into as of February 28, 1995, between Wilson
Financial Corporation and the Company (previously filed as Exhibit
10.08 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1994).
10.08* Agreement entered into as of April 30, 1995, between Wilson Financial
Corporation and the Company.
10.09* Agreement entered into as of June 1, 1995, between Wilson Financial
Corporation and the Company.
10.10 Stock Purchase Agreement dated January 11, 1996, between Riverside
Group, Inc. and Wickes Lumber Company (previously filed as Exhibit
99.1 to the Company's Current Report on Form 8-K dated January 23,
1996.)
10.11* Merger Agreement dated March 8, 1996 between American Financial
Acquisition Corporation and Circle Investors, Inc.
10.12* Employment Agreement between the Company and J. Steven Wilson dated
March 26, 1996.
21.01* Subsidiaries of the Company.
23.01* Consent of Coopers & Lybrand L.L.P.
27* Financial Data Schedule
There have been omitted certain instruments with respect to long-term
debt not in excess of 10% of the consolidated total assets of the Company. The
Company agrees to furnish copies of any such instruments to the Commission upon
request.
- -----------------
* Filed herewith
40
<PAGE> 43
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
RIVERSIDE GROUP, INC.
/s/ J. Steven Wilson
-----------------------
J. Steven Wilson
Chairman of the Board,
President and
Chief Executive Officer
Dated: March 30, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
/s/ J. Steven Wilson /s/ Edward M. Carey, Sr.
J. Steven Wilson Edward M. Carey, Sr.
Principal Executive Officer Director, March 30, 1996
and Director, March 30, 1996
/s/ Frederick H. Schultz /s/ Kenneth M. Kirschner
Frederick H. Schultz Kenneth M. Kirschner
Director, March 30, 1996 Director, March 30, 1996
/s/ C. Herman Terry /s/ Varina M. Steuert
C. Herman Terry Varina M. Steuert
Director, March 30, 1996 Director, March 30, 1996
/s/ Wayne A. Schreck
Wayne A. Schreck
Executive Vice President
(Principal Accounting and Financial Officer),
March 30, 1996
March 30, 1996
41
<PAGE> 44
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders,
Riverside Group, Inc.:
We have audited the accompanying consolidated balance sheets of Riverside Group,
Inc. and subsidiaries (the "Company") as of December 31, 1995 and 1994, and the
related consolidated statements of operations, common stockholders' equity and
cash flows for each of the three years in the period ended December 31, 1995.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As discussed in Notes 1 and 14 of the Notes to Consolidated Financial
Statements, the Company has entered into a definitive agreement to combine its
life insurance operations with those of Circle Investors, Inc. and has estimated
and recorded a loss on the reorganization of its life insurance operations of
$10,972,000 at December 31, 1995 based on the estimated consideration to be
received from Circle Investors, Inc.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Riverside Group,
Inc. and subsidiaries as of December 31, 1995 and 1994, and the consolidated
results of their operations and cash flows for each of the three years in the
period ended December 31, 1995 in conformity with generally accepted accounting
principles.
As discussed in Note 1 of the Notes to Consolidated Financial Statements, in
1995 the Company adopted the provisions of Statement of Financial Accounting
Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" and in 1993 the Company adopted the
provisions of Statement of Financial Accounting Standards No. 115 "Accounting
for Certain Investments in Debt and Equity Securities."
Coopers & Lybrand L.L.P.
Phoenix, Arizona
March 27, 1996
F-1
<PAGE> 45
RIVERSIDE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
(in thousands)
<TABLE>
<CAPTION>
ASSETS
1995 1994
--------- ---------
<S> <C> <C>
Investments:
Fixed maturities available for sale - at market $ 147,152 $ 157,579
(amortized cost $141,755 in 1995 and $167,809 in 1994)
Equity securities available for sale - at market 838 951
(cost $968 in 1995 and $1,080 in 1994)
Mortgage and construction loans 26,903 27,153
Investment real estate 17,879 31,284
Policy loans 19,827 19,742
Short-term and other investments, (at cost which approximates market) 20,842 22,262
--------- ---------
Total investments 233,441 258,971
Cash 258 189
Investment in Wickes Lumber Company, at equity 11,210 14,763
Securities of related parties -- 1,500
Accrued investment income 2,488 3,450
Reinsurance receivables 28,500 29,434
Deferred income taxes 825 --
Value of acquired insurance in force 18,415 22,381
Deferred policy acquisition costs 2,027 2,453
Excess of cost over fair value of net assets acquired -- 11,586
Other assets 3,561 3,135
Separate account assets -- 8,848
--------- ---------
$ 300,725 $ 356,710
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Future life insurance benefits $ 140,295 $ 147,701
Policyholder contract deposits and other funds 97,171 111,465
Unpaid claims 966 1,227
Accrued expenses and other liabilities 5,022 8,799
Deferred income taxes -- 1,029
Notes payable 19,600 20,093
Mortgage debt 2,312 15,930
Subordinated debt 9,303 9,175
Separate account liabilities -- 8,848
Net liabilities of discontinued operations -- 3,340
Commitments and contingencies (Notes 5, 9, 13 and 14)
Common stockholders' equity:
Common stock, $.10 par value; 20,000,000 shares authorized;
issued and outstanding, 5,311,123 in 1995 and 5,465,781 in 1994 531 547
Additional paid-in capital 17,209 18,175
Retained earnings 3,923 20,123
Unrealized investment appreciation (depreciation), net of taxes and deferred
policy acquisition costs of $884 in 1995 and ($894) in 1994 4,393 (9,742)
--------- ---------
Total common stockholders' equity 26,056 29,103
--------- ---------
$ 300,725 $ 356,710
========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-2
<PAGE> 46
RIVERSIDE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amount)
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------
1995 1994 1993
------------- ----------- -----------
<S> <C> <C> <C>
Premiums and annuity considerations $ 8,298 $ 18,657 $ 21,704
Net investment income 14,492 17,523 20,735
Net realized investment gains (losses) (234) (182) 4,147
Equity in earnings (losses) of Wickes Lumber Company (5,849) 8,274 1,525
Other income 1,513 1,512 5,989
----------- ----------- -----------
Total revenues 18,220 45,784 54,100
Policyholder benefits 15,417 19,399 22,892
Commissions and insurance service fees 3,085 5,093 8,725
Other operating costs and expenses 5,221 8,076 15,174
Interest expense 3,280 2,883 3,245
----------- ----------- -----------
Total expenses 27,003 35,451 50,036
Loss realized on reorganization of life insurance
subsidiaries (10,972) -- --
Income (loss) from continuing operations before income taxes and
cumulative effect of change in accounting principle (19,755) 10,333 4,064
Income tax expense (benefit) (1,910) 1,483 21
----------- ----------- -----------
Income (loss) from continuing operations before cumulative
effect of change in accounting principle (17,845) 8,850 4,043
Loss from operations of discontinued property and casualty
insurance and mortgage servicing companies, net of
income taxes of $0, $0 and $70, respectively (1,086) (4,405) (1,988)
Gain on disposal of discontinued property and
casualty insurance company, net of income taxes of $0 2,731 -- --
----------- ----------- -----------
Income (loss) before cumulative effect of change
in accounting principle (16,200) 4,445 2,055
Cumulative effective of change in accounting principle
net of income taxes of $307 in 1993 -- -- 596
----------- ----------- -----------
Net income (loss) $ (16,200) $ 4,445 $ 2,651
=========== =========== ===========
Earnings (loss) per share, after deducting preferred
stock dividends and accretion:
Income from continuing operations $ (3.38) $ 1.61 $ 0.50
Loss from discontinued operations (0.21) (0.82) (0.37)
Gain on disposal of discontinued operations 0.52 0.00 0.00
Cumulative effect of change in accounting principles 0.00 0.00 0.11
----------- ----------- -----------
Net earnings (loss) per share $ (3.07) $ 0.79 $ 0.24
=========== =========== ===========
Weighted average number of common shares
used in computing earnings per share 5,284,280 5,350,672 5,332,430
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-3
<PAGE> 47
RIVERSIDE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMMON STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Unrealized Total
Additional Investment Common
Common Paid-In Retained Appreciation Stockholders'
Stock Capital Earnings (Depreciation) Equity
--------- --------- -------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1992 $ 559 $ 18,850 $ 14,639 $ 1,823 $ 35,871
Net income 2,651 2,651
Change in unrealized investment appreciation
(depreciation) of equity securities and fixed
maturities available for sale 2,753 2,753
Preferred dividends and accretion of value
of redeemable Series C preferred stock (1,378) (1,378)
Purchase and retirement of 300,000
shares of common stock, at cost (30) (1,470) (1,500)
-------- -------- -------- -------- --------
Balance, December 31, 1993 529 17,380 15,912 4,576 38,397
Net income 4,445 4,445
Change in unrealized investment appreciation
(depreciation) of equity securities and fixed
maturities available for sale (14,318) (14,318)
Issuance of 225,851 shares of common stock 23 1,875 1,898
Preferred dividends and accretion of value
of redeemable Series C preferred stock (234) (234)
Redemption of Series C preferred stock (330) (330)
Purchase and retirement of 55,000
shares of common stock, at cost (5) (352) (357)
Excess of market value over cost on
7,028 ESOP shares released 45 45
Cost of 98,579 unearned shares held by ESOP
pledged under loans from the Company (443) (443)
-------- -------- -------- -------- --------
Balance, December 31, 1994 547 18,175 20,123 (9,742) 29,103
Net loss (16,200) (16,200)
Purchase and Retirement of 201,458 shares
of common stock, at cost (20) (1,148) (1,168)
Issuance of 46,800 shares of common stock 4 152 156
Cost of ESOP shares released 30 30
Change in unrealized investment appreciation
of fixed maturities and equity securities 14,135 14,135
-------- -------- -------- -------- --------
Balance, December 31, 1995 $ 531 $ 17,209 $ 3,923 $ 4,393 $ 26,056
======== ======== ======== ======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-4
<PAGE> 48
RIVERSIDE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------------
OPERATING ACTIVITIES 1995 1994 1993
---------- --------- ---------
<S> <C> <C> <C>
Net income (loss) $ (16,200) $ 4,445 $ 2,651
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Intangible assets written off for life insurance reorganization 10,790 -- --
Gain on disposal of discontinued property and casualty
insurance company (2,731) -- --
Amortization of value of acquired insurance in force 2,242 862 8,295
Net change in deferred policy acquisition costs 372 702 8,190
Provision for deferred income taxes (1,910) 1,478 140
Net realized (gains) losses on investments (234) 91 (12,703)
Depreciation and amortization 1,348 1,474 13,143
Interest on policyholders' funds 9,178 10,262 12,070
Cumulative effect of changes in accounting principle -- -- (903)
Equity in (earnings) losses of unconsolidated subsidiaries 5,849 (8,274) (1,703)
Minority interest and other non-cash adjustments -- 237 (2,467)
Change in other assets and liabilities:
Premiums receivable 13 102 (29,476)
Accrued investment income 962 270 1,365
Reserve for policyholder benefits (827) (11,182) (9,301)
Net assets of discontinued operations and other assets (2,109) 3,614 2,236
Other liabilities and current income taxes (4,078) (675) (4,040)
--------- --------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 2,665 3,406 (12,503)
INVESTING ACTIVITIES
Purchase of investments:
Fixed maturities available for sale (63,425) (88,132) (150,733)
Equity securities (39) (33) (4,924)
Investment real estate (969) (347) (641)
Mortgage, construction and policy loans (7,104) (4,169) (2,433)
Short-term investments (368,933) (396,265) (208,292)
Securities of Wickes Lumber Company (2,296) -- (4,978)
Sale, maturity, and principal reduction of investments:
Fixed maturities available for sale 90,411 80,889 177,602
Fixed maturities actively managed -- 22,369 --
Equity securities 1,922 2,820 14,104
Mortgage, construction and policy loans 7,672 3,661 9,702
Investment real estate 14,386 4,809 9,771
Short-term investments 370,280 386,558 203,982
Proceeds from disposition of life policies -- 8,203 --
--------- --------- ---------
NET CASH PROVIDED BY INVESTING ACTIVITIES 41,905 20,363 43,160
FINANCING ACTIVITIES
Repayment of debt (16,811) (21,652) (10,639)
Increase in borrowings 2,700 20,000 5,843
Preferred stock redemption and dividends -- (1,283) --
Issuance of common stock 156 100 --
Purchase and retirement of treasury shares (1,168) (357) (1,500)
Deposits of policyholders' funds 586 8,123 7,942
Withdrawal of policyholders' funds (29,964) (28,976) (32,605)
--------- --------- ---------
NET CASH USED IN FINANCING ACTIVITIES (44,501) (24,045) (30,959)
--------- --------- ---------
INCREASE (DECREASE) IN CASH 69 (276) (302)
Cash at beginning of year 189 465 767
--------- --------- ---------
CASH AT END OF YEAR $ 258 $ 189 $ 465
========= ========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-5
<PAGE> 49
RIVERSIDE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1995, 1994 and 1993
(1) SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements have been prepared in accordance
with generally accepted accounting principles ("GAAP"), which requires the use
of assumptions and estimates in reporting certain assets and liabilities and
related disclosures, and actual results may differ from those estimates. These
financial statements include the accounts of Riverside Group, Inc. (the "Parent"
or "Riverside"), Wickes Financial Services Center, Inc. and the parent's two
principal insurance holding company subsidiaries, American Financial Acquisition
Corporation ("AFAC") (99% ownership) and Dependable Insurance Group, Inc.
("Dependable Group") (wholly-owned) and their subsidiaries (collectively "the
Company").
AFAC's principal subsidiaries (all of which are, or were for the
periods during which they are included, wholly-owned) are: (i) four stock life
insurance companies: American Founders Life Insurance Company ("American
Founders"); Aztec Life Assurance Company ("Aztec"); Laurel Life Insurance
Company ("Laurel Life"); and National American Life Insurance Company of Texas
("NALICO of Texas"), through December 1995, when it was sold, and (ii) BMCO
Holding Corp. ("BMCO"), a holding company which, until January 3, 1994, owned
Riverside Mortgage Company, Ltd. ("Riverside Mortgage"), a limited partnership
engaged in mortgage servicing operations.
Dependable Group's subsidiaries (all of which are, or were during the
periods for which they are included, wholly-owned) are: (i) a stock property and
casualty insurance company, Dependable Insurance Company, Inc. ("Dependable"),
through September 1995 when it was sold, and (ii) an insurance agency, Richmond
I. Barge & Associates, Inc. ("Barge").
The consolidated financial statements also include the Company's
investment in Wickes Lumber Company ("Wickes") accounted for on the equity
method, beginning in October 1993. Effective in August 1995, the Company's
ownership interest in Wickes increased from 30% to 36%. See Note 2, Equity
Investment in Wickes Lumber Company.
Additionally, the Company's consolidated financial statements include
the accounts of three 74%-owned real estate entities, which own and operate
office buildings which are partially occupied by the Company, through May 1995,
when these investments were sold.
All significant intercompany accounts and transactions have been
eliminated.
DIVESTITURE OF PROPERTY AND CASUALTY AND MORTGAGE SERVICING OPERATIONS
The Company has included the operations of Dependable, Barge and
Riverside Mortgage as discontinued operations for all periods presented in the
consolidated statements of operations. For 1994 all assets and liabilities of
discontinued operations are presented as net liabilities of discontinued
operations in the consolidated balance sheets.
F-6
<PAGE> 50
Reorganization of Life Insurance Operations
In November 1995, the Company announced its intention to reorganize its
life insurance operations (the "Life Insurance Reorganization")and subsequent
to December 31, 1995, the Company entered into a definitive agreement to
combine its life insurance operations with those of Circle Investors, Inc.
("Circle"). See Note 14, "Subsequent Events." Because of the Company's
continued interest in the life operations as a result of the proposed retention
of its equity investment in Circle, the life operations are not reflected as
discontinued operations in the accompanying consolidated financial statements.
The Company has estimated and recorded a loss on the reorganization of its life
insurance operations at 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." The pre-tax loss
of $10,972,000 was calculated by comparing the adjusted carrying value of the
life operations to the estimated fair value of consideration to be received by
the Company. The loss may be adjusted for future reporting periods based on
results of additional analysis of the value of the Circle securities. The
resulting loss at December 31, 1995 is reflected in the accompanying
consolidated balance sheets as a reduction of excess of cost over fair value of
net assets acquired.
Basis of Financial Statement Presentation
The accompanying consolidated financial statements have been prepared
in conformity with generally accepted accounting principles. Such accounting
principles differ from statutory accounting practices prescribed or permitted
for insurance companies by regulatory authorities.
Investments
A. Fixed Maturities
As of December 31, 1993, the Company adopted SFAS 115 Accounting for
Certain Investments in Debt and Equity Securities. The impact of the adoption of
SFAS 115 was reported in the consolidated statements of operations for 1993 as a
cumulative effect of change in accounting principle. See Note 4, "Fair Value of
Financial Instruments", for further information on the fair market value of
these investments.
Fixed maturities available for sale are securities held for indefinite
periods of time and may be used as a part of the Company's asset/liability
strategy or sold in response to changes in interest rates, anticipated
prepayments, risk/reward characteristics, liquidity needs or similar economic
factors. These securities are carried at market value with the corresponding
unrealized appreciation or depreciation, net of deferred income taxes and
deferred policy acquisition costs, reflected in common stockholders' equity.
Fixed maturities actively managed assets acquired in 1993 and sold in
1994 were purchased with the objective of generating incremental returns over
those of alternative fixed income investments on a short term basis. These
securities are carried at market value with changes in their market value
reflected, net of deferred income taxes, in the consolidated statements of
operations. During 1994, the Company liquidated its position in these
securities. As of December 31, 1995, the Company did not maintain a fixed
maturities actively managed portfolio.
F-7
<PAGE> 51
B. Equity Securities
Equity securities available for sale include common stocks and
nonredeemable preferred stocks and are carried at market values. Changes in the
market value of these securities, net of deferred income taxes and deferred
policy acquisition costs, are reflected as unrealized appreciation or
depreciation in common stockholders' equity.
C. Mortgage, Construction and Policy Loans
Mortgage and construction loans are carried at the lower of amortized
cost or fair value. Policy loans are carried at unpaid principal plus accrued
interest.
D. Short-Term Investments
Short-term and other investments are carried at cost which approximates
market.
E. Investment Real Estate
Investments in real estate are carried at the lower of cost or
appraised value. Foreclosed property is valued at the lower of carrying amount
or fair market value.
F. Partially-Owned Companies
Investments in certain partially-owned companies are recorded using the
equity method if the Company has significant influence over the investee's
operations and the Company's ownership percentage is 50% or less. Upon
completion of the proposed merger agreement with Circle, see Note 14,
"Subsequent Events", the Company will use the equity method for reporting its
investment in Circle stock.
G. Investment Gains (Losses)
When impairment of value of an investment is considered other than
temporary, the decrease in value is reflected in the consolidated statements of
operations as a realized investment loss and a new cost basis is established.
Realized investment gains and losses are reported in the consolidated statements
of operations using the specific identification method.
Premiums
Life premiums on traditional life products are reported as earned when
due. Revenues on the Company's interest sensitive products, including annuities,
consist of expense, mortality and surrender charges assessed against the
policyholder. Benefits and expenses are associated with earned premiums so as to
result in recognition of profits over the premium paying period. This
association is accomplished by means of a provision for future policy benefit
reserves and the amortization of deferred policy acquisition costs. For interest
sensitive products, income is recognized over the term of the contract in
proportion to the risks and functions under the contract.
F-8
<PAGE> 52
Value of Acquired Insurance In Force
This asset represents a valuation of future profits of the acquired
insurance business in force as of the date of the acquisition of the Company's
insurance subsidiaries. The value of acquired traditional insurance in force is
being amortized over the premium paying period in proportion to the ratio of
anticipated annual premium revenue to the anticipated total premium revenue. The
value of acquired insurance in force for interest sensitive products is
amortized as a level percent of the present value of anticipated gross profits
from investment yields, including SFAS 115 adjustments, mortality and surrender
charges. A reconciliation of the balances for the years ended December 31, 1995,
1994, and 1993 follows (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Beginning balance ................. $ 22,381 $ 29,596 $ 37,891
SFAS 115 adjustment (1) ........... (1,724) 1,687 (727)
Gross amortization ................ (3,362) (10,300)(2) (9,383)
Interest credited at (5.4%) ....... 1,120 1,398 1,815
-------- -------- --------
Ending balance .................... $ 18,415 $ 22,381 $ 29,596
======== ======== ========
</TABLE>
(1) The SFAS 115 adjustment is to reflect the effects that would have been
recognized had the unrealized gains or losses of securities available for
sale actually been realized.
(2) Includes $6.5 million related to the sale of all Aztec's in force business
to another insurer.
The estimated percentages of the December 31, 1995 balance to be
amortized during each of the next five years are: 1996, 10.3%; 1997, 9.5%; 1998,
8.5%; 1999, 7.4%; and 2000, 6.9%.
Deferred Policy Acquisition Costs
Costs which vary with and are primarily related to the acquisition of
new insurance business have been deferred to the extent such costs are
recoverable through future revenues. These costs include commissions and sales
costs, certain costs of policy issuance and underwriting, and premium taxes.
Traditional life deferred policy acquisition costs are amortized over
the premium paying period in proportion to the ratio of anticipated annual
premium revenue to the anticipated total premium revenue. Costs deferred on
interest sensitive products are amortized as a level percent of the present
value of anticipated gross profits from investment yields, including SFAS 115
adjustments, mortality and surrender charges. As a result of the adoption of
SFAS 115, deferred policy acquisition costs decreased $54,000 in 1995 and
increased $772,000 in 1994. Investment income is considered in the
recoverability analysis of deferred policy acquisition costs. Amounts amortized
during 1995, 1994 and 1993, are $372,000, $6,566,000 and $6,706,000,
respectively. The change in deferred acquisition costs for 1994 includes a
reduction of $5,830,000 related to the sale of all Aztec's in force business to
another insurer.
F-9
<PAGE> 53
Excess Of Cost Over Fair Value of Net Assets Acquired
The excess of cost over fair value of net assets acquired, including
the value of agency contracts, licenses and other intangible items of insurance
business acquired, as well as certain other items, is amortized generally over
twenty-five years using the straight-line method. Excess of cost over fair value
of net assets acquired of $338,000 were written-off as part of the sale of
NALICO of Texas during 1995. As a part of the proposed reorganization of the
Company's life insurance operations see Note 14, "Subsequent Events" the
December 31, 1995 balance of excess of cost over fair value of net assets
acquired was reduced to zero through a charge of $10,790,000 to loss on
reorganization of life subsidiaries in the consolidated statements of
operations. Amortization of these assets in 1995 was $458,000 exclusive of this
charge. Total accumulated amortization was $8,704,000 at December 31, 1994.
Future Life Insurance Benefits and Policyholder Contract Deposits
The liability for future life insurance benefits on all traditional
life business has been computed by the net level premium method based on
estimated mortality, morbidity, withdrawal experience and future investment
yields from 3% to 8.3%. For interest sensitive products, the liability for
future benefits is based on the accumulated fund balances. Interest rate
assumptions for traditional life business range from 7.8% to 9.0%. Mortality is
based on multiples of the 1965-70 Select and Ultimate Table modified to reflect
underwriting practices and recent industry mortality experience as it relates to
the 1965-70 Table. Withdrawals are based on the Company's experience.
Depreciation
Property and equipment, included in other assets, is depreciated over
three to ten years using the straight-line method. Investment real estate is
depreciated over nineteen to fifty years using the straight-line method.
Depreciation expense was $455,000, $920,000, and $1,130,000, for 1995, 1994 and
1993, respectively, and accumulated depreciation as of December 31, 1995 and
1994 was $1,912,000 and $4,120,000, respectively. Assets with accumulated
depreciation of $2.3 million at year end 1994 were fully disposed of during
1995.
Earnings Per Share
Earnings per share are based upon the weighted average number of shares
of common stock outstanding (5,284,280 shares in 1995, 5,350,672 shares in 1994
and 5,332,430 shares in 1993), and are computed after deducting preferred
dividends and preferred stock accretion of $0, $234,000, and $1,378,000 in 1995,
1994 and 1993, respectively. Dilution relating to stock options and warrants
outstanding was not material.
Separate Account
The separate account assets and liabilities are associated with special
contracts, wherein the investment risk lies solely with the holder of the
contract rather than the Company. Investment income for these contracts is
excluded from the Company's operations. The separate account has been terminated
at the request of the policyholder. Payments under the policy were paid out of
the separate account assets.
F-10
<PAGE> 54
Financial Statement Presentation and Reclassification
Certain amounts for 1994 and 1993 have been reclassified to conform
with the 1995 presentation.
Statement of Cash Flows Supplementary Disclosure
Cash includes only bank demand deposits.
The Company paid $4,046,000, $4,020,000 and $4,528,000 of interest
(including interest paid by the consolidated real estate partnerships) in 1995,
1994 and 1993, respectively. No income tax payments were made in 1995, 1994 and
1993. See Note 11, "Redeemable Preferred Stock and Stockholders' Equity", for a
discussion of the Series C preferred stock and plan of recapitalization. Net
cash used in discontinued operating activities totaled approximately $4.2
million, $6.6 million and $32 million in 1995, 1994 and 1993, respectively.
The Company did not pay any dividends on its common stock during 1995,
1994 or 1993.
Recently Issued Accounting Pronouncements
During the year ended December 31, 1995, the Company adopted Statement
of Financial Accounting Standards No. 121 ("SFAS No. 121") "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of". In
accordance with SFAS No. 121, the Company reviews its long-lived assets for
impairment when events or changes in circumstances indicate that the carrying
value of an asset may not be recoverable. The Company's evaluation for such
assets to be held is based on the estimated future cash flows expected to result
from the use of the asset and its eventual disposition. If the sum of future
cash flows is less than the carrying value of the asset, the Company would
recognize an impairment loss. For assets to be disposed of, the Company reports
the asset at the lower of the asset's carrying value or fair value less costs to
sell. As a result of the Company's decision to reorganize its life insurance
operations, a loss of $10,972,000 related to the assets of the life insurance
operations was recorded at December 31, 1995. Prior to the change in
circumstances and in prior years, the Company periodically evaluated its
historical and future financial results in evaluating the recoverability of its
intangible assets.
As of December 31, 1995, the Company has not adopted SFAS No. 123
"Accounting for Stock-Based Compensation" and has not determined the effects, if
any, on the consolidated financial statements. However, the Company intends to
adopt the disclosure provisions of SFAS No. 123. The disclosure requirements,
which are effective for fiscal years beginning after December 15, 1995, require
companies to provide proforma disclosures of net income and earnings per share
as if they had adopted the fair value accounting method for options granted in
1995 and 1996.
Concentrations and Uncertainties
In 1995, 1994, and 1993 approximately the following percentages of the
Company's direct premiums were written in the following states:
F-11
<PAGE> 55
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
California 33% 56% 54%
Texas 46% 25% 24%
</TABLE>
No other state accounted for in excess of 5%.
The life insurance business is highly competitive. Many of the insurers
competing with the Company are substantially larger, have a greater number of
agents and have considerably greater financial resources than the Company. The
proposed life insurance reorganization (see Note 14, "Subsequent Events") will
not immediately enhance the competitive position of the Company's life insurance
operations, since neither the Company nor Circle has active distribution systems
for life insurance products.
The Company's life insurance subsidiaries are subject to regulation and
supervision by the states in which they transact business. The state of domicile
exercises principal regulatory supervision of insurance companies. The purpose
of such regulation and supervision is primarily to provide safeguards for
policyholders rather than to protect the interests of stockholders. The states
have established regulatory agencies with broad administrative powers to
regulate, among other things: licenses to transact business; policy forms; trade
practices; premium and commission rates; agency agreements; deposit of
securities for the benefit of policyholders; form and content of statutory
financial statements; accounting practices; maintenance of reserves and capital
for the protection of policyholders; dividends; examinations of insurers'
affairs; and investments. The relationships among the Parent Company and its
insurance subsidiaries is also subject to regulations under state insurance
holding company laws. Under these laws, inter-company asset transfers,
investments and other transactions, as well as dividends from insurance
companies, may be subject to prior notice to, or approval by, the state
insurance regulatory authority, depending upon the size of such transaction or
dividend.
(2) EQUITY INVESTMENT IN WICKES LUMBER COMPANY
All Wickes common share data reflect a 21.73-for-1 stock split effected
on October 22, 1993.
In January 1996, the Company entered into a definitive agreement with
Wickes to purchase two million newly issued shares of common stock at an
aggregate purchase price of $10 million. Closing of the definitive agreement is
subject to, among other things, completion of the proposed Life Insurance
Reorganization, see Note 14, "Subsequent Events." Acquisition of these shares
would increase the Company's ownership in Wickes common stock to 52% of total
common shares and 55% of voting common shares. The Company is presently
evaluating if its controlling interest in Wickes will be temporary. If the
controlling interest is temporary, the Company will continue to use the equity
method for its investment in Wickes in lieu of consolidating the financial
statements of Wickes with those of the Company.
When the Company acquired AFAC in 1990, AFAC's subsidiary American
Founders owned 10% of the common stock (217,300 shares) and 61% of the
cumulative redeemable preferred stock of Wickes. On August 11, 1993, the Company
purchased 10.33 additional shares of cumulative redeemable preferred stock with
an aggregate liquidation preference of approximately $1.4 million, 260,760
shares of common stock of Wickes, and a two-year option to acquire an additional
374,516 Wickes common shares. The purchase price was $3.2 million in cash and a
$1.1 million promissory note. The option was exercised in
F-12
<PAGE> 56
August of 1995 for an aggregate exercise price of $2.3 million, and at the same
time the promissory note was paid in full. For a discussion of the litigation
seeking, among other things, rescission of this transaction, see Note 13,
"Commitments and Contingencies." As a result of a previously existing right of
first refusal held by another Wickes stockholder, in early October 1993 the
Company sold 16,645 of these shares for an aggregate of $147,310 in cash.
In separate transactions on August 11 and 12, 1993, the Company
purchased from certain of Wickes' former executive officers 456,330 shares of
Wickes' outstanding common stock, as well as certain retirement obligations
payable to them by Wickes, for an aggregate $1.4 million in cash. This purchase
resolved a dispute concerning the Company's right to purchase approximately 18%
of Wickes' common stock from these persons for nominal consideration. In
September 1993, the Company sold a 25% interest in these retirement obligations
to another stockholder for $365,000 in cash. On October 22, 1993, Wickes
acquired the Company's remaining 75% interest in these retirement obligations
for $1,275,000 in cash.
Wickes' public stock and senior subordinated debt offerings were
completed on October 22, 1993. Pursuant to Wickes' recapitalization plan also
completed on that date, (i) the Company received 838,109 shares of Wickes'
common stock in exchange for its shares of Wickes' preferred stock, (ii) 76,055
shares of Wickes' common stock held by the Company were canceled, and (iii) the
Company received 162,975 shares of Wickes' common stock in respect of certain
warrants that the Company had the right to acquire for nominal consideration
from certain of Wickes' management. In August 1995, the Company exercised its
option to acquire an additional 374,516 common shares. After these transactions,
the Company owns 2,217,102 shares, or approximately 36%, of Wickes' outstanding
common stock. As of December 31, 1995 the Company's retained earnings includes
$4.0 million of undistributed earnings of Wickes.
Summary audited financial information of Wickes for years 1995, 1994
and 1993 follows (in thousands):
<TABLE>
<CAPTION>
Years Ended December 30, 1995, December 31,
-------------------------------------------
1994 and December 25, 1993
--------------------------
Operating Statement Data: 1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Net sales $ 972,612 $ 986,872 $ 846,842
Gross profit 220,812 233,831 206,558
Income (loss) before extraordinary gains (15,599)(1) 28,054(2) 6,942
Net income (loss) $ (15,599)(1) $ 28,054(2) $ 8,183
Balance Sheet Data:
Current assets $ 219,475 $ 239,694
Total assets 302,515 319,573
Current liabilities 79,853 76,183
Long-term debt 205,221 211,139
Other long-term liabilities 2,312 2,105
Common stockholders' equity $ 15,129 $ 30,146
</TABLE>
(1) Includes restructuring charges of $10.7 million, net of income tax
benefits of $7.1 million. Income tax benefits include $2.1 million
related to the reverse of a deferred income tax valuation allowance
established in a prior year.
F-13
<PAGE> 57
(2) Includes income of $14.4 million related to reversal of deferred income
tax valuation allowance established in a prior year.
Wickes' revolving credit facility and trust indenture related to their
subordinated notes contain certain covenants and restrictions. Among other
things, the revolving credit facility prohibits non-stock dividends, debt
prepayments and other "restricted payments" by Wickes, and the trust indenture
restricts non-stock dividends and other restricted payments by Wickes to 50% of
"cumulative consolidated net income," or if cumulative consolidated net income,
shall be a loss, minus 100% of such loss, of Wickes' earnings subsequent to
October 22, 1993, plus the proceeds of the sale of certain equity securities
after such date.
(3) DIVESTITURE OF PROPERTY AND CASUALTY AND MORTGAGE SERVICING OPERATIONS
During 1993, in accordance with a plan to discontinue its property and
casualty insurance operations the Company sold or canceled virtually all of its
remaining in force property and casualty business. On September 15, 1995, the
Company completed the sale of Dependable to MedMarc Insurance Company
("MedMarc"). The Company realized a gain from disposal of Dependable of $2.7
million and a loss from operations prior to closing of $1.1 million during 1995.
Dependable and Barge are accounted for as discontinued operations and,
accordingly, their operating results are reported in this manner for all periods
presented. The loss from discontinued operations includes total property and
casualty revenues of $932,000, $3,684,000 and $36,230,000 respectively, for
1995, 1994 and 1993. Included in loss from discontinued operations for 1993 are
approximately $2,400,000 of gains resulting from Dependable's sale of several
blocks of business. Also included are Dependable's realized gains of $31,000,
$91,000 and $7,651,000 from sales of investments for 1995, 1994 and 1993,
respectively.
During 1994, Dependable incurred net claims of $4.2 million (pre-tax),
net of reinsurance, primarily due to adverse loss experience on commercial lines
runoff. In 1993 Dependable incurred claims, net of reinsurance, of $3.2 million
(pre-tax) as a result of damage from the severe winter storm of March.
During the fourth quarter of 1993, the Company decided to discontinue
its mortgage servicing operations. As a result, Riverside Mortgage is accounted
for as a discontinued operation and, accordingly, its operating results are
reported in this manner for all periods presented. Included in loss from
discontinued operations are Riverside Mortgage's total revenues of $2,401,000,
and net loss of $4,113,000 for 1993. The 1993 net loss resulted primarily from
accelerated amortization of purchased mortgage servicing rights. On January 3,
1994, the Company sold Riverside Mortgage for its approximate book value.
(4) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions are used to estimate the fair
value of each class of financial instruments for which it is practicable to
estimate that value:
F-14
<PAGE> 58
Cash, short-term and other investments - The carrying amount is a
reasonable estimate of fair value.
Fixed maturities - The fair value of fixed maturities is determined by
utilizing recognized fixed income pricing services and supplemented with bid
side market evaluations obtained from various NASD member firms which make
markets in the specified securities.
Equity securities - The fair value of equity securities is generally
determined by quoted market price.
Investment in Wickes Lumber Company - The fair value of Wickes is
determined by the NASDAQ National Market System quoted market price.
Mortgage and construction loans - The fair value of mortgage and
construction loans is calculated by discounting scheduled cash flows through the
estimated maturity using the current rates at which similar loans would be made
to borrowers with similar credit and interest rate risk.
Policy loans - As the maturities of policy loans are indeterminable, it
is not practicable to estimate the fair value of the Company's policy loans.
Policyholder contract deposits - The fair value is approximated as the
amount due to the annuity holder if the annuity contract was surrendered at the
end of the year.
Notes payable and mortgage debt - The carrying amount is a reasonable
estimate of fair value, as the stated rates of interest represent current market
rates.
Subordinated debt - The estimate fair value is determined by
discounting scheduled cash flows at a rate equal to those of similar instruments
which have quoted market prices.
The estimated fair values of the Company's financial instruments are
summarized as follows (in thousands):
<TABLE>
<CAPTION>
December 31, 1995
----------------------
Carrying Estimated
Amount Fair Value
-------- ----------
<S> <C> <C>
Financial assets:
Fixed maturities $147,152 $147,152
Equity securities 838 838
Mortgage and construction loans 26,903 26,565
Policy loans 19,827 19,827
Cash, short-term and other investments 20,842 20,842
Investments in Wickes 11,210 11,086
Financial liabilities:
Policyholder contract deposits 97,171 92,479
Notes payable and mortgage debt 21,912 21,912
Subordinated debt $ 9,303 $ 8,205
</TABLE>
F-15
<PAGE> 59
(5) INVESTMENTS
At December 31, 1993, 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. As a result of
adopting SFAS 115, $903,000 ($596,000 net of tax) of unrealized gains on the
Company's fixed maturities actively managed were reported in results of
operations as a cumulative effect of a change in accounting principle, net of
tax for 1993. These investments were liquidated in 1994. Realized losses on the
securities actively managed included in the consolidated statements of
operations for 1994 totaled $883,000 ($583,000 net of tax benefit) which
partially offset the previously discussed gains recorded in 1993. All other
investments in fixed maturities are classified as available for sale and as such
are carried at market value with unrealized appreciation (depreciation)
reflected directly in common stockholders' equity, net of applicable deferred
income taxes and net of the adjustment to deferred acquisition cost that would
have been recognized had the unrealized holding gains (losses) been realized.
The Company's investment portfolio includes positions in securities
which have a market value in excess of $2.6 million, which is 10% of common
stockholder's equity, as follows:
<TABLE>
<CAPTION>
Market
Value
--------------
(in thousands)
<S> <C>
Standard Credit Card Trust 1994-2A, 7.25%, due 4/06 $ 3,228
American Express Credit , due 1/96 2,999
West Pennsylvania Power , due 1/96 2,998
Prudential Funding, due 1/96 2,998
Ford Motor Credit, due 1/96 2,997
Prudential Home Mortgage Securities CMO, due 4/24 2,863
Walt Disney Company, due 3/00 2,675
</TABLE>
A. Net Investment Income
The major categories of investment income are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Fixed maturities $ 12,055 $ 14,697 $ 16,236
Equity securities 56 43 5
Mortgage and construction loans 2,941 2,580 3,198
Investment real estate (316) (353) 668
Policy loans 1,141 1,227 1,274
Short-term and other investments 639 574 886
Related party investments 42 130 130
--------- --------- ---------
Total investment income 16,558 18,898 22,397
--------- --------- ---------
Investment expenses (2,066) (1,375) (1,662)
---------- --------- ---------
Net investment income $ 14,492 $ 17,523 $ 20,735
========= ========= =========
</TABLE>
The Company derived no revenue during 1995 from $17,711,000 of
investments in real estate.
F-16
<PAGE> 60
B. Realized Investment Gains and Losses
Net realized investment gains (losses) are summarized below (in
thousands):
<TABLE>
<CAPTION>
Realized gains (losses): 1995 1994 1993
----- ---- ----
<S> <C> <C> <C>
Fixed maturities
Available for sale $ 752 $ (345) $ 1,664
Actively managed - (883) 903
Equity securities
Available for sale 271 1,173 887
Investment real estate 392(1) (82) 745
Other (149) (45) (52)
Related party investments (1,500)(2) - -
-------- ---------- ----------
Net realized gains (losses) $ (234) $ (182) $ 4,147
======== ========== ==========
</TABLE>
- ------------------------
(1) Included in realized gains for 1995 is approximately $321,000 from the
sale of the Company's real estate limited partnership holdings which are
consolidated for financial statement purposes.
(2) Reflects establishment of a reserve for future losses equal to the
aggregate carrying value of these securities. (see Note 12, "Related Party
Transactions").
F-17
<PAGE> 61
C. Fixed Maturities
The amortized cost and market values of investments in fixed maturities
and equity securities at December 31, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
December 31, 1995
----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
(in thousands)
<S> <C> <C> <C> <C>
Available for sale:
United States Government and agencies $ 18,088 $ 1,578 $ -- $ 19,666
Corporate 80,995 2,964 (298) 83,661
Mortgage-backed and other asset-backed
securities 42,672 1,221 (68) 43,825
-------- -------- -------- --------
Total Fixed Maturities 141,755 5,763 (366) 147,152
Equity securities 968 0 (130) 838
-------- -------- -------- --------
Total $142,723 $ 5,763 $ (496) $147,990
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1994
------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
(in thousands)
<S> <C> <C> <C> <C>
Available for sale:
United States Government and agencies $ 29,361 $ 30 $ (2,302) $ 27,089
States and political subdivisions 9,612 -- (1,228) 8,384
Corporate 90,226 336 (5,546) 85,016
Mortgage-backed and other asset-backed
securities 38,610 216 (1,736) 37,090
-------- -------- -------- --------
Total Fixed Maturities 167,809 582 (10,812) 157,579
Equity securities 1,080 13 (142) 951
-------- -------- -------- --------
Total $168,889 $ 595 $(10,954) $158,530
======== ======== ======== ========
</TABLE>
The amortized cost and market value of fixed maturities at December 31,
1995, by contractual maturity, are shown below. Expected maturities may differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties and the Company
may have the right to put the obligations back to the issuer prior to the stated
maturity date.
F-18
<PAGE> 62
<TABLE>
<CAPTION>
Amortized Market
Cost Value
---- -----
(in thousands)
<S> <C> <C>
Due in one year or less $ 9,822 $ 9,906
Due after one year through five years 28,416 29,495
Due after five years through ten years 52,283 55,106
Due after ten years 8,562 8,820
----------- ------------
Sub-total 99,083 103,327
Mortgage-backed and other asset-backed 42,672 43,825
----------- ------------
Total $ 141,755 $ 147,152
=========== ============
</TABLE>
Proceeds from sales of the Company's available for sale portfolio, excluding
maturities, follow:
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994
---- ----
(in thousands)
<S> <C> <C>
Total Proceeds from sales $ 78,846 $ 64,321
============ ============
Total Gross realized gains from sales $ 2,393 $ 2,225
============ ============
Total Gross realized losses from sales $ (1,323) $ (1,397)
============ ============
</TABLE>
Proceeds from sales of fixed maturities in 1993 were $81,863,000. Gross gains
and (losses) on the sales of fixed maturities were $2,264,000 and ($267,000),
respectively.
Based upon the ratings of Standard & Poor's Corporation, as of December
31, 1995, the quality distribution of the Company's fixed maturities was: U.S.
Treasury and AAA-38.2%; AA-9.1%; A-36.0%; BBB-10.6%; BB-5.8% and non-rated .3%.
As of December 31, 1995, the Company held $43.8 million of securities
backed by mortgages and other assets ("Structured Securities"), which
represented 30% of the Company's fixed maturities. These securities were
composed of the following types:
<TABLE>
<CAPTION>
Market Average
Value Duration
----- --------
(in thousands) (years)
<S> <C> <C>
Mortgage-Pass-Throughs $ 18,435 4.1
Collateralized Mortgage Obligations ("CMOs") 19,110 3.6
Other Asset-Backed 6,280 4.8
---------- ---
$ 43,825 4.0
========== ---
</TABLE>
The Structured Securities portfolio did not include any interest-only,
principal-only, or inverse floating CMOs, nor any residual interests in CMOs.
Management is of the opinion that the Structured Securities owned by the Company
have good liquidity in readily available markets and were all rated
F-19
<PAGE> 63
investment grade, with 81% rated AAA by Moody's Investors Service or Standard &
Poor's Corporation. The effective yield to maturity of the Company's Structured
Securities portfolio as of December 31, 1995 is 7.6%.
D. Mortgage and Construction Loans and Investment Real Estate
Mortgage and construction loans on real estate include 162 residential
loans aggregating approximately 27% of the dollar value of the Company's
mortgage loan portfolio. Of the total residential loans, the Company's mortgage
lending operations accounted for five permanent mortgage loans (3% of mortgage
portfolio total), which are held for resale to investors under existing
agreements, and 34 construction financing loans (13% of mortgage portfolio
total). In addition, 48 commercial mortgage loans comprised 73% of the dollar
value of the mortgage loan portfolio. As of December 31, 1995, delinquencies
were approximately 1% of the mortgage loan portfolio amount.
As of December 31, 1995, properties related to the Company's mortgage
loans are located primarily in Louisiana (16%) Arizona (48%), Texas (15%), and
Georgia (12%). No other state contains properties with loans aggregating more
than 5% of total mortgage loans.
As of December 31, 1995, properties related to the Company's
construction loans are located in Indiana (71%), Alabama (27%) and Florida (2%).
In addition, the undrawn amount of construction loans committed at
December 31, 1995, totaled $2,469,000. The Company's commitment to fund the
undrawn balance is contingent upon the borrowers successful completion of
certain specified conditions. Approximately 95% of the total construction loans
outstanding were made with respect to homes for which no purchase agreements
existed.
Investments in real estate consist of the following:
<TABLE>
<CAPTION>
December 31,
---------------------------
(in thousands)
1995 1994
---- ----
<S> <C> <C>
Commercial rental property $ 563 $ 13,793
Land held for investment 17,251 17,426
Investments in real estate joint ventures 65 65
---------- ----------
Gross Real Estate Investments 17,879 31,284
Related mortgage debt (2,312) (15,930)
---------- ----------
Real estate investments, net or mortgage debt $ 15,567 $ 15,354
========== ==========
</TABLE>
Certain of the Company's real estate was acquired from affiliates and
has been recorded at the lower of historical carryover cost or fair value,
consistent with transactions between companies under common control. Commercial
rental property carrying values are net of accumulated depreciation of $117,000
and $1,160,000 at December 31, 1995 and 1994, respectively.
As of December 31, 1995, the Company had $6,008,000 of its investments
in real estate in Florida properties, $11,799,000 in Georgia properties, and
$72,000 in other states.
F-20
<PAGE> 64
E. Statutory Deposits
As of December 31, 1995, investment securities with a market value of
approximately $23,137,000 were held on deposit for various state insurance
departments.
F. Policy Loans:
As of December 31, 1995, the Company had $19,827,000 in policy loans.
The Company's life insurance policies that accumulate cash surrender values
provide for loans to policyholders. Loan interest rates vary by policy form and
presently range from 8.5% to 3.5%. Loan repayment is not required as long as
sufficient cash value is maintained on each policy. Payment of death or
surrender benefits on policies with loans is net of the outstanding loan balance
and accrued interest.
F-21
<PAGE> 65
(6) DEBT
The Company's debt is summarized as follows:
<TABLE>
<CAPTION>
December 31,
----------------
1995 1994
---- ----
(in thousands)
<S> <C> <C>
NOTES PAYABLE:
Parent - Prime rate note payable to bank. Beginning
January 1996, 36 monthly principal payments of
$44,000 until maturity of January 1999. $ 1,600 $ --
Parent - 4 1/2% note payable, collateralized by
364,683 shares of Wickes common stock and option to
purchase an additional 374,516 shares. Debt was
retired in August, 1995. -- 1,093
AFAC - Prime rate or Eurodollar rate plus an
applicable margin ranging from 30 to 130
basis points for the prime or 180 to 280 basis points
for the Eurodollar rate, depending on the market
value of the Wickes common stock and statutory net
income levels of American Founders. Guaranteed by
the Parent Company and collateralized by all common
stock of Laurel Life and common shares of Wickes
stock owned by the Company. Principal due in
installments totaling; 1996-$2 million, 1997-$5.2
million, 1998-$4 million, 1999 $4.5 million and
2000-$2.3 million. All outstanding amounts due
under this note are to be repaid by Circle under
terms of the proposed Life Insurance Reorganization
(See Note 14, "Subsequent Events"). $18,000 $19,000
------- -------
Total notes payable $19,600 $20,093
======= =======
As of December 31, 1995, the Prime, Eurodollar three month and Eurodollar six
month rates were 8.75%, 5.625% and 5.50% respectively.
SUBORDINATED DEBT:
Parent - 13% subordinated notes payable, net of
discount of $697,000 in 1995 and $825,000 in 1994
not collateralized and subordinated to all senior
indebtedness, interest only paid semiannually,
principal due September, 1999. $ 9,303 $ 9,175
------- -------
Total subordinated debt $ 9,303 $ 9,175
======= =======
MORTGAGE DEBT:
Mortgage notes payable, bearing interest rates from
1% to 1.5% above the prime rate, collateralized by
certain real state investments acquired from an
affiliate:
</TABLE>
F-22
<PAGE> 66
<TABLE>
<S> <C> <C>
Nonrecourse $ -- $12,211
Recourse 2,312 3,719
------- -------
Total mortgage debt $ 2,312 $15,930
======= =======
</TABLE>
Maturities of debt in each of the five years subsequent to December 31,
1995 are: 1996 - $4,845,000; 1997 - $5,733,000; 1998 - $4,533,000, 1999 -
$13,803,000 and 2000 - $2,300,000. Upon completion of the proposed Life
Insurance Reorganization, the revised maturity schedule will be: 1996 - $2.8
million, 1997 - $.5 million, 1998 - $.5, and 1999 - $9.3 million, .
Bank Notes Payable: On April 19, 1994, AFAC entered into a $20 million
credit agreement with Bank of Montreal and First Interstate Bank of California.
This bank loan facility is guaranteed by the Parent Company, and is
collateralized principally by AFAC's stock ownership in Laurel Life and shares
of Wickes common stock owned by the Company.
The credit agreement, among other things, requires American Founders to
maintain a minimum level of statutory capital and surplus, generally prohibits
liens on assets of AFAC and its subsidiaries, and on the stock of AFAC held by
the Company, generally prohibits dividends or other payments by AFAC to its
stockholders, generally prohibits the incurrence of additional debt by AFAC and
its subsidiaries, prohibits business acquisitions by AFAC and its subsidiaries,
requires the Company and AFAC to maintain a minimum adjusted net worth (each as
defined), restricts the business in which AFAC and its subsidiaries may engage,
requires AFAC to maintain a minimum ratio of life insurance operation value and
Wickes market value to loan balance outstanding and limits the permitted
investments by AFAC and its subsidiaries.
As a result of the decrease during 1995 in the trading value of Wickes
and the charges taken in the fourth quarter of 1995 related to the Life
Insurance Reorganization the Company has not been in compliance with certain
requirements of its bank credit agreement. A waiver has been provided and is in
the process of being extended. The Company anticipates that this waiver will
remain in effect until late June 1996, to allow for completion of the Life
Insurance Reorganization. Under the terms of the Life Insurance Reorganization
all indebtedness under the Company's bank credit agreement is to be repaid in
full by Circle. Circle has informed the Company that it believes, based upon
discussions with lenders interested in providing loans to Circle, that it will
be able to obtain financing sufficient to retire the Company's bank
indebtedness. Should the Company not complete the Life Insurance Reorganization
or comparable transaction, the Company would be required to obtain an extension
of currently scheduled principal and interest payments, obtain additional
financing or sell assets held by the Parent Company and to use the proceeds for
Parent Company purposes, which would require the consent of the Company's
current bank lenders.
Subordinated Notes: Parent - These notes may be prepaid in whole or in
part upon payment of a premium of 4.333% declining to zero after September 30,
1998. These notes were recorded at an original discount of $1,256,000 which is
being amortized using the interest method over the term of the notes. In
February 1993, $250,000 principal amount of subordinated notes were repurchased
at par by
F-23
<PAGE> 67
the Company and retired. Certain holders have questioned whether the proposed
Life Insurance Reorganization and investment in Wickes entitles them to declare
an event of default, see Note 13, "Commitments and Contingencies".
Mortgage Notes Collateralized by Real Estate: All mortgage notes
outstanding as of December 31, 1995 were retired in March, 1996.
(7) INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
The Company files multiple tax returns. The Company and its non-life
insurance subsidiaries have approximately $35.2 million, and its life insurance
subsidiaries have approximately $4.7 million, in net operating loss
carryforwards which expire in the years 2000 through 2010. To the extent
carryforwards existing at the subsidiaries' acquisition dates are utilized, the
tax benefits will be reflected as reductions to the excess of cost over fair
value of net assets acquired and the value of acquired insurance in force. The
recognition of such utilization in 1994 resulted in a reduction to the excess of
cost over fair value of assets of $1,425,000.
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. A valuation
allowance has been established to reduce deferred tax assets to the amount which
more likely than not will be realized in the future. The net amount of deferred
tax assets recognized arises from the anticipated utilization of carryforward
losses against gains to be realized in the future on the real estate assets.
Significant components of the Company's deferred tax assets and liabilities as
of December 31, 1995 and 1994 are as follows :
<TABLE>
<CAPTION>
1995 1994
---- ----
(in thousands)
<S> <C> <C>
Deferred tax assets:
Differences in reserves, net $ 2,357 $ 2,440
Differences in valuations of investments and
capital loss carryforwards 9,295 10,873
Differences in reporting unearned premium,
accrued income and expenses, and other 47 11
Net operating loss and AMT credit carryforwards 14,017 10,896
-------- --------
Total deferred tax assets 25,716 24,220
Valuation allowance for deferred tax assets (17,759) (17,527)
-------- --------
Net deferred tax assets 7,957 6,693
Deferred tax liabilities:
Phase III tax 452 --
Deferred policy acquisition costs 8 111
</TABLE>
F-24
<PAGE> 68
<TABLE>
<CAPTION>
1995 1994
---- ----
(in thousands)
<S> <C> <C>
Value of insurance in force 6,597 7,610
Other 75 1
-------- --------
Total deferred tax liabilities 7,132 7,722
-------- --------
Net deferred tax (liability) asset $ 825 $ (1,029)
======== ========
</TABLE>
The life companies have a Phase III tax liability of $452,000 resulting
from previously deferred taxable income. A deferred tax liability was not
recognized for this liability until it became apparent that the factors
contributing to the liability would reverse in the foreseeable future. The
reorganization of the life insurance subsidiaries will result in the payment of
this tax liability, therefore it has been recognized as a deferred liability in
1995.
Income tax expense for the Company consists of the following
components:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Current $ $ -- $ 258
Deferred (1,910) 1,483 140
------- ------- -------
Income tax expense (benefit) $(1,910) $ 1,483 $ 398
======= ======= =======
</TABLE>
Actual income tax expense (benefit) on income (loss) differs from
expected tax expense computed by applying the Federal corporate tax rates of 34%
in 1995, 1994 and 1993, as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Taxes computed at statutory rate $(6,157) $ 2,016 $ 1,037
Increase (decrease) in taxes resulting from:
Effect of the difference in book and tax
treatment of goodwill 3,939 320 1,510
Changes in valuation allowance 232 (852) (1,664)
Tax exempt interest on bonds (4) (288)
Other, net, including state taxes 76 3 (197)
------- ------- -------
Actual tax expense (benefit) $(1,910) $ 1,483 $ 398
======= ======= =======
</TABLE>
F-25
<PAGE> 69
(8) STATUTORY FINANCIAL DATA
The Company's life insurance subsidiaries are required to file Annual
Statements with regulatory authorities prepared under a statutory basis of
accounting. The net income (loss) and capital and surplus of the life insurance
companies on the statutory basis of reporting to regulatory authorities are
presented below :
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Operating income , statutory basis $ 4,501 $ 12,871 $ 5,411
Net income (loss), statutory basis 6,340 (15,450) (2,026)
Capital and surplus, statutory basis 18,358 23,146 22,674
</TABLE>
Each insurance subsidiary prepares its statutory financial statements
in accordance with accounting practices prescribed or permitted by its
respective domiciliary state insurance department. Prescribed statutory
accounting practices include a variety of publications of the National
Association of Insurance Commissioners ("NAIC"), as well as state laws,
regulations and general administrative rules. Permitted statutory practices
encompass all accounting practices not so prescribed. Insurance subsidiaries
states of domicile are: American Founders and Laurel Life-Texas, and
Aztec-California.
During 1994, American Founders recorded realized adjustments to those
invested assets whose admitted values were less than their statutory ledger
value and for which no recovery was anticipated. The write down of the assets
generated realized investment losses for statutory purposes of $23,592,000
charged against net income. The impact upon statutory capital and surplus was
offset by the release of the previously established loss reserve for these
assets.
American Founders' Board of Directors approved a plan to eliminate the
accumulated deficit in unassigned surplus as provided by Texas statute. This
statutory basis quasi reorganization was completed on November 30, 1994, with
the transfer of $26.1 million from additional paid in capital to unassigned
surplus.
Aztec's 1994 statutory basis net income resulted primarily from the
sale of all its in force business see Note 9 "Reinsurance." The statutory gain
on this transaction of $8.0 million was partially offset by realized investment
losses on bonds of BMCO of $3.3 million.
California and Texas law restrict payment of dividends from the
Company's insurance subsidiaries. In 1996, American Founders may pay dividends
of $4.5 million without Texas Department of Insurance approval. Aztec is not
allowed to pay dividends without special approval. Aztec received written
approval from the California Insurance Department to pay a special dividend of
approximately $23.7 million to American Founders following the sale of all its
in force business. This transaction decreased the statutory capital and surplus
of Aztec by the same amount. The receipt of the dividend did not impact
statutory capital and surplus of American Founders as assets received were
offset by a reduction in investments in subsidiaries.
F-26
<PAGE> 70
The National Association of Insurance Commissioners ("NAIC") and Texas
adopted recommended levels of "risk-based" capital for life insurers, determined
by the application of a formula that evaluates a company's capital and surplus
based on various perceived risk factors related to asset type and quality,
interest rate exposure, kinds and amount of insurance written and other business
risks. All of the Company's insurance subsidiaries exceed both the NAIC
recommended and Texas-mandated levels of "risk-based" capital.
In accordance with instruction from the Texas Department of Insurance,
American Founders carries its investment in Wickes at market value in its
statutory basis financial statements. American Founders is also required to
establish related statutory asset valuation reserves to moderate the impact of
Wickes' market value fluctuations on statutory capital and surplus.
Additionally, American Founders has agreed with the Texas Department of
Insurance to either dispose of or non-admit certain real estate investments over
a period of time.
(9) REINSURANCE
The Company evaluates the financial condition of its reinsurers and
monitors cancellations of credit risk arising from similar geographic regions,
activities, or economic characteristics of the reinsurance to minimize exposure
to significant losses from reinsurer insolvencies. At December 31, 1995, the
Company does not believe there to be a significant concentration of credit risk
related to its reinsurance program.
Life
On policies issued prior to October 24, 1990, American Founders
retained no more than $50,000 of risk on any one life and retains up to
$250,000, per risk on policies issued subsequently. Aztec transferred all
reinsurance risks to Guardian Insurance and Annuity Company ("GIAC") in the
transaction discussed below.
On December 31, 1995, American Founders acquired all of the life and
accident and health business of NALICO of Texas. Under the agreement, American
Founders received assets equal to the liabilities transferred which were
$160,000 in aggregate. No gain or loss on this transaction was recorded.
In December 1994, Aztec completed an asset transfer and acquisition
agreement with GIAC in which Aztec ceded to GIAC all its in force insurance
policies. As required by SFAS 113, the balance sheet effects of this reinsurance
transaction result in the establishment of reinsurance receivable related to the
ceded reserves of $21,909,000 and $22,316,000 as of December 31, 1995 and 1994,
respectively. The purchase price for this block of business was $8.2 million,
which resulted in a net loss of $.2 million. Under terms of the agreement Aztec
is entitled to additional funds of $.2 million if the original writing agency
for this business agrees to amend its commission agreement as outlined by GIAC.
Aztec anticipates receipt of these funds in 1996. Under terms of a related
agreement Aztec will continue to administer these policies for a period not less
than one year from the closing date. This agreement has been extended into 1996.
F-27
<PAGE> 71
Following is a summary of net premiums and amounts earned for life
operations for each of the three years ended December 31, 1995, 1994 and 1993,
and certain insurance balances at December 31, 1995, and 1994:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Direct premiums and amounts
assessed against policyholders $ 10,297 $ 21,654 $ 25,015
Assumed premiums 348 190 227
Ceded premiums (2,347) (3,187) (3,538)
-------- -------- --------
Net premiums and amounts earned $ 8,298 $ 18,657 $ 21,704
======== ======== ========
Ceded losses, loss adjustment
expenses and policy benefits $ 1,827 $ 736 $ 2,518
======== ======== ========
Reinsurance commissions $ 16 $ 25 $ 38
======== ======== ========
Reinsurance receivable $ 28,500 $ 29,434
======== ========
Reinsurance payable $ 182 $ 605
======== ========
Ceded future life insurance benefits $ 27,711 $ 29,200
======== ========
</TABLE>
The reduction in premiums from 1994 to 1995 primarily reflects the sale of
Aztec's business to GIAC.
(10) EMPLOYEE BENEFIT PLANS
A. ESOP
The Company has an Employee Stock Ownership Plan and Trust ("ESOP") in
which employees of the Company who work more than 1,000 hours in a plan year are
eligible to participate. The Company's Board of Directors determines the amount,
if any, of the annual contribution to the ESOP, and each participant shares in
this contribution pro rata based upon the amount of the participant's
compensation as compared to all participants' compensation for such year.
During 1992, the Company entered into an agreement that permitted it to
acquire from Wilson Financial Corporation ("Wilson Financial"), ,the Company's
controlling stockholder, shares of its common stock at a price based on average
market prices prevailing at year end prior to the times of purchase in 1993 and
1994, and aggregating $680,000 for use in the Company's employee benefit plans.
Pursuant to this agreement, the ESOP purchased 111,934 shares in 1993, and
41,185 shares in 1994.
As of December 31, 1995, the ESOP owned 304,751 shares of the Company's
common stock, of which 93,290 shares were pledged under ESOP loans from the
Company. Contributions to the ESOP for payment of principal and interest on the
ESOP loans, were $76,000, $38,000 and $114,000 in 1995, 1994 and 1993,
respectively. Loans from the Company to the ESOP of $268,000 in 1994 were used
to purchase additional shares of common stock, respectively.
Notes receivable from the ESOP issued to purchase common shares are
held by the Company and its subsidiaries. Statement of Position ("SOP") 93-6
issued in 1994 requires presentation of all leveraged shares held by the ESOP
("Unearned ESOP shares") as a reduction to additional paid in capital.
Accordingly the unpaid balance of the notes receivable of $443,000 was
reclassified to stockholders' equity in 1994. As of December 31, 1995 this
amount has been reduced to $412,943 for the cost of ESOP shares released by
repayments on these notes. Unearned ESOP shares are not treated as
F-28
<PAGE> 72
outstanding for the calculation of earnings per common share. The fair value of
unearned ESOP shares as of December 31, 1995 was approximately $315,000.
B. Stock Option Plans
During 1985 the Company established the Riverside Group, Inc. Incentive
Stock Option Plan (for employees) and the Non-qualified Stock Option Plan (for
employees and directors). In 1995, both of these plans terminated. Additional
information with respect to stock options is as follows:
<TABLE>
<CAPTION>
Number of Option Shares Option Price
------------------------ -------------------------
Total Exercisable Per Share Total
----- ----------- --------- -----
<S> <C> <C> <C> <C>
Outstanding at December 31, 1992 246,000 241,000 $3.33-$11.88 $1,156,530
Granted 20,000 20,000 6.00 120,000
Vested - 5,000 11.88 59,400
Exercised - - - -
Expired or canceled (10,000) (10,000) 8.88 (88,800)
-------- ------- ----------
Outstanding at December 31, 1993 256,000 256,000 3.33-11.88 1,247,130
Granted 10,000 0 7.00 -
Vested - 0 - -
Exercised (30,000) (30,000) 3.33 (99,900)
Expired or canceled (4,000) (4,000) 8.88 (35,520)
-------- ------- ----------
Outstanding at December 31, 1994 232,000 222,000 3.33-11.88 1,111,710
Granted - - - -
Vested - 2,500 7.00 17,500
Exercised (46,800) (46,800) 3.33 (155,844)
Expired or canceled (82,200) (82,200) 3.33-8.88 (313,026)
-------- ------- ----------
Outstanding at December 31, 1995 103,000 95,500 $5.33-$11.88 $ 660,340
======== ======= ==========
</TABLE>
Options outstanding as of December 31, 1995 expire in 1996 through 2003 and
unused options not vested are earned equally over the next three years.
C. 401(K)
The Company has a Deferred Compensation Plan for all its eligible
employees which allows participants to defer up to ten percent of their salary
pursuant to Section 401(k) of the Internal Revenue Code. The Company matches
contributions up to a maximum of 3% of compensation for employees contributing
up to 6%. Employees are 100% vested in their contributions and vest in the
Company's contribution over a period of seven years. The Company's contribution
to the 401(k) for matching was $56,000, $61,000 and $83,000 during 1995, 1994
and 1993, respectively.
(11) REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
A. Recapitalization
The Company retired through a plan of recapitalization effective April
20, 1994, its outstanding shares of its Series C Preferred Stock, which had an
aggregate liquidation preference of $7 million, from its
F-29
<PAGE> 73
controlling stockholders in exchange for approximately $1,283,000 in cash and
195,851 newly-issued shares of the Company's common stock at $9.09 per share.
B. Warrants
All outstanding common stock warrants issued pursuant to a warrant
agreement dated August 31, 1989 expired in 1994 unexercised.
(12) RELATED PARTY TRANSACTIONS
In February, April and June of 1995 the Company advanced 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. In addition the Company purchased 23,000 common shares for
an aggregate price of $125,235 in October 1995 and 27,778 common shares for an
aggregate price of $125,000 in November of 1995 from Wilson Financial. In
February 1993, the Company repurchased 300,000 shares of its common stock from
Wilson Financial for $5.00 per share. In addition the ESOP purchased from Wilson
Financial 111,934 shares in February 1993, for $3.06 per share and in January
1994, the Company purchased 41,185 shares for $6.50 per share. The Company also
acquired from Wilson Financial and subsequently retired as treasury shares
40,000 shares in September 1994, at $6.44 per share and 15,000 shares in
November 1994, at $6.75 per share. Following these transactions Wilson Financial
owned 59% of the Company's outstanding common stock.
On October 1, 1992, a complaint was settled by the Company and a
director, who controlled the firm that was the Company's investment advisor.
Under the terms of the settlement, the Company paid $400,000 and Aegis
Investments, Inc., ("Aegis") a corporation wholly-owned by Mr. Wilson, acquired
from the plaintiff $2 million of the Company's 13% subordinated notes due 1999
plus accrued interest for $1.1 million. Aegis also received the right to acquire
from the plaintiff for nominal consideration the related warrants to purchase
70,000 shares of the Company's common stock at $13 per share. AFAC advanced to
Aegis $1 million of the consideration used. Aegis executed a note payable to the
Company for $1.4 million which was secured by the 13% subordinated notes
acquired and guaranteed by Mr. Wilson personally to the extent of $1 million. On
February 24, 1994, the Company reacquired the subordinated notes by canceling
its loan to Aegis and subsequently sold the subordinated notes to an unrelated
third party for $1,958,000 plus accrued interest.
A partnership in which the Company owned a 74% interest, leased office
space to the Atlantic Group, Inc. ("Atlantic") for which Atlantic paid $37,000,
$94,000 and $108,000 in 1995, 1994 and 1993, respectively. Included in
securities of related parties for 1994 are certain securities of Atlantic with
an aggregate carrying value of $1,500,000. In 1995, the Company wrote off the
entire carrying value of these securities. Directors of the Company beneficially
own approximately 75% of Atlantic's voting securities.
Included in operations for 1995, 1994, and 1993, is income from
reimbursements of office expenses and tax services paid to the Company by Wilson
Financial of $39,000, $50,000, and $81,000
F-30
<PAGE> 74
respectively. Also included in operations is expense paid to Wilson Financial
for providing real estate management services of $31,000, $120,000, and $199,000
in 1995, 1994 and 1993, respectively.
The Company reimburses its share of actual costs incurred from the
Company's use of an airplane owned by an affiliate of Mr. Wilson. Reimbursement
expenses were $23,000 in 1995, $44,000 in 1994, and $428,000 in 1993. Included
in operations for 1995, is income from reimbursements of salary expenses paid to
the Company by a subsidiary of Wilson Financial, JB Aviation, of $163,000.
In 1993 the Company's investments were being managed by a firm whose
majority stockholder is a director of the Company. Fees paid to this firm for
1993 were $112,000.
Kirschner, Main, Graham, Tanner & Demont, a law firm in which an
officer and director of the Company is a stockholder, is general counsel to the
Company. During 1995, 1994, and 1993, the firm rendered services to the Company
for which it received $583,000, $730,000, and $948,000, respectively.
Directors of the Company own an aggregate of $2.0 million of the
Company's 13% subordinated notes.
In February 1995, the Company made a loan of $225,000 to a company
owned by a director of the Company. The loan bears interest at a rate of 7.5%
and is scheduled to mature on March 31, 1996. the Company received interest
payments of $13,555 in 1995 on this note.
(13) 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 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. 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
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 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 Riverside, as well as FynSyn and
the third party related to and as a consequence of these matters and seeking
indemnity from FynSyn. 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.
F-31
<PAGE> 75
The Company and its subsidiaries have various operating leases for
office space for which approximately $413,000, $330,000, and $1,098,000 was
expensed in 1995, 1994 and 1993 respectively. The lease terms range from
month-to-month to 1997. Minimum annual rentals under these leases are 1996,
$396,000 per year; and 1997, $112,000.
In connection with the sale of Dependable, the Company agreed to
indemnify MedMarc 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 MedMarc 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 cashflows.
As is common in the insurance industry, the Company's insurance
subsidiaries are regularly engaged in the defense of claims arising out of the
conduct of the insurance business. In management's opinion, none of these claims
will have a material adverse effect on the Company's financial position, results
of operations or cash flows.
The Company is not aware of any environmental liabilities or similar
issues.
(14) SUBSEQUENT EVENTS
In January 1996, the Company entered into a definitive agreement with
Wickes to purchase two million newly issued shares of common stock at an
aggregate purchase price of $10 million. Closing of the definitive agreement is
subject to, among other things, completion of the Life Insurance Reorganization.
Acquisition of these shares would increase the Company's ownership in Wickes
common stock to 52% of total common shares and 55% of voting common shares.
Presently the Company is uncertain as to whether this transaction will require
consolidation of Wickes' financial results as the resulting majority interest
position may be temporary.
On March 8, 1996, the Company entered into a definitive agreement to
combine its life insurance operations with those of a privately-held company
engaged in providing financial services. Pursuant to this agreement, a
wholly-owned subsidiary of AFAC that wholly-owns all of AFAC's insurance
subsidiaries, will merge with and into Circle, with Circle surviving. As a
result of the merger, Circle will wholly-own the Company's life insurance
subsidiaries as well as Liberty Bankers Life Insurance Company ("Liberty
Bankers"), an Ohio-domiciled life insurance company currently wholly-owned by
Circle. At and for the period ended December 31, 1995, Liberty Bankers had (on
a statutory accounting basis) approximately $9.2 million of assets, $3.3
million of policyholders' surplus and total revenues of $1.0 million.
F-32
<PAGE> 76
Upon completion of this reorganization, the Company will own
approximately 40% of Circle's outstanding common stock and will possess the
right to vote approximately 10% of Circle's common stock and will share the
right to vote approximately an additional 30%. The Company also will own 100% of
a new series of Circle's preferred stock with a liquidation preference of $3.6
million. Circle has also agreed to appoint the Company's Chairman, J. Steven
Wilson, or another reasonably acceptable candidate to Circle's Board of
Directors. The Company will be the largest single stockholder of Circle
following completion of this transaction.
In connection with this reorganization, the Company will receive
approximately $15 million in cash before taxes and expenses, and will retain
certain assets held by American Founders, including real estate with a $2
million net appraised value (net of an $18 million mortgage) and approximately
950,000 shares of Wickes common stock. Also in connection with this transaction,
Circle will replace all of AFAC's indebtedness under its bank credit agreement,
which totaled $18 million at December 31, 1995.
After anticipated income taxes and other expenses of approximately $1.0
million, net cash to be received by the Company in this transaction would
approximate $14 million, $10 million of which it has agreed to utilize to
acquire two million newly-issued shares of Wickes common stock pursuant to the
Wickes Agreement.
Completion of the transactions contemplated by this agreement is
subject to, among other things, receipt of insurance regulatory approvals and
the completion by Circle of necessary financing arrangements. It is anticipated
that the transactions will close in June, 1996.
The Company has taken a net pre-tax charge of $11 million against 1995
income from continuing operations for the life insurance reorganization and the
sale of NALICO of Texas. This charge primarily reflects a write-off of $10.8
million of intangible assets acquired in the various life acquisitions.
Additionally, the Company realized a $1.9 million tax benefit on the proposed
merger with Circle, which partially offsets the reorganization charges.
The following provides an unaudited proforma balance sheet for the
Company as of December 31, 1995 assuming completion of the above transactions
and the equity method for reporting investments in Wickes and Circle.
<TABLE>
<CAPTION>
(in thousands, unaudited)
ASSETS LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C> <C>
Real Estate $17,871 Mortgage Debt $18,315
Investment In Wickes 21,255 Subordinated Debt 9,302
Investment In Circle 5,900 Bank Debt 1,600
Cash and Short Term Investments 6,439 Income Taxes Payable 600
Deferred Tax Assets 1,425 Accrued Expenses 2,076
-------
Other Assets 547 Total Liabilities 31,893
-------
Stockholders' Equity 21,544
-------
Total Liabilities and
Total Assets $53,437 Stockholders' Equity $53,437
====== =======
</TABLE>
F-33
<PAGE> 77
Life insurance operations to be combined with those of Circle generated
revenues of $25.2 million, operating losses of $.5 million and net income of $.6
million (exclusive of the estimated loss arising from the reorganization)
consolidated statement of operations for the year ended December 31, 1995.
(15) INDUSTRY SEGMENT INFORMATION
The Company's operations are conducted through three segments: building
materials, life insurance, and other. Summary financial information about the
Company's operating segments for the years ended December 31, is presented in
the following table (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1995 1994 1993
---- ---- ----
(in thousands)
<S> <C> <C> <C>
REVENUES:
Building Materials $ (5,357) $ 8,999 $ 1,525
Life Insurance 25,245 37,079 47,748
Other (1,668) (294) 4,827
-------- -------- --------
Total $ 18,220 $ 45,784 $ 54,100
======== ======== ========
INCOME FROM CONTINUING
OPERATIONS BEFORE TAXES:
Building Materials $ (7,257) $ 7,858 $ 899
Life Insurance (10,530) 2,372 416
Other (1,968) 103 2,749
-------- -------- --------
Total (19,755) 10,333 4,064
======== ======== ========
IDENTIFIABLE ASSETS:
Building Materials $ 11,358 $ 14,996
Life Insurance 297,804 330,083
Other (8,437) 8,291
--------- --------
Total $300,725 $353,370
======== ========
</TABLE>
Building materials include the Company's equity in Wickes, the
importation of lumber through a subsidiary of the Company (sold to Wickes in
1994) and operations of providing financial services to Wickes' customers
through a subsidiary of the Company. Other includes Parent Company corporate
debt and assets of Dependable anticipated to be retained after the sale of
Dependable and all eliminating entries related to intercompany transactions.
Assets of discontinued operations, included in "Other", are net of related
liabilities for 1995 and 1994.
F-34
<PAGE> 78
Wickes' 110 building centers are located in 24 states in the Midwest,
Northeast and South. Wickes believes that its geographic diversity generally
lessens the impact of economic downturns and adverse weather conditions in any
one of Wickes' geographic markets. The following table sets forth certain
information with respect to the locations of Wickes' building centers as of
February 29, 1996:
<TABLE>
<CAPTION>
Midwest Northeast South
------- --------- -----
Number of Number of Number of
Building Building Building
State Centers State Centers State Centers
- ----- --------- ----- --------- ----- ---------
<S> <C> <C> <C> <C> <C>
Michigan 30 New York 8 Alabama 3
Wisconsin 15 Pennsylvania 7 Kentucky 3
Indiana 11 Maine 2 Texas 2
Ohio 6 Connecticut 3 Louisiana 1
Illinois 4 New Hampshire 2 Mississippi 2
Iowa 2 New Jersey 2 Tennessee 1
Colorado 1 Massachusetts 1 Georgia 1
Maryland 1 North Carolina 1
Florida 1
-- -- --
Total 69 Total 26 Total 15
== == ==
</TABLE>
F-35
<PAGE> 79
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is an unaudited summary of quarterly performance of the
Company, for the years ended December 31:
<TABLE>
<CAPTION>
1995
(In thousands, except per share amounts)
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -----
<S> <C> <C> <C> <C> <C>
Total revenues $ 5,436 $ 6,684 $ 6,504 $ (404) $ 18,220
=========== ============ =========== =========== ===========
Income (loss) from
continuing
operations $ (1,598) $ 1,102 $ (278) $ (17,071) $ (17,845)
=========== ============ =========== =========== ===========
Loss from
discontinued
operations $ 98 $ (116) $ (725) $ (343) $ (1,086)
=========== ============ =========== =========== ===========
Gain on disposal of
discontinued property
and casualty company $ 2,481 $ 250 $ 2,731
Net income
(loss) $ (1,500) $ 986 $ 1,478 $ (17,164) $ (16,200)
=========== ============ =========== =========== ===========
Earnings (loss)
per common share:
Income from
continuing
operations $ (0.28) $ 0.20 $ (.06) $ (3.24) $ (3.38)
=========== ============ =========== =========== ===========
Net income(loss) $ (0.26) $ 0.18 $ 0.28 $ (3.27) $ (3.07)
=========== ============ =========== =========== ===========
Weighted average
number of common
shares used in
computing earnings
per share 5,465,781 5,365,546 5,216,522 5,189,146 5,284,280
=========== ============ =========== =========== ===========
</TABLE>
F-36
<PAGE> 80
<TABLE>
<CAPTION>
1994
(in thousands, except per share amounts)
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -----
<S> <C> <C> <C> <C> <C>
Total revenues $ 7,742 $ 11,048 $ 13,542 $ 13,452 $ 45,784
=========== ============ ============= ============= ===========
Income (loss) from
continuing
operations $ (1,543) $ 1,513 $ 3,710 $ 5,170 $ 8,850
=========== ============ ============= ============= ===========
Loss from
discontinued
operations $ (155) $ (2,011) $ (869) $ (1,370) $ (4,405)
=========== ============ ============= ============= ===========
Net income
(loss) $ (1,698) $ (498) $ 2,841 $ 3,800 $ 4,445
=========== ============ ============= ============= ===========
Earnings (loss)
per common share:
Income from
continuing
operations $ (0.33) $ 0.28 $ 0.67 $ 0.99 $ 1.61
=========== ============ ============= ============= ===========
Net income(loss) $ (0.36) $ (0.09) $ 0.51 $ 0.73 $ .79
=========== ============ ============= ============= ===========
Weighted average
number of common
shares used in
computing earnings
per share 5,320,263 5,477,259 5,520,781 5,377,148 5,350,672
=========== ============ ============= ============= ===========
</TABLE>
F-37
<PAGE> 81
REPORT OF INDEPENDENT ACCOUNTANTS
To The Stockholders and Board of Directors
We have audited the accompanying consolidated balance sheets of Wickes Lumber
Company and Subsidiaries (the "Company") as of December 30, 1995 and December
31, 1994, and the related consolidated statements of earnings, changes in common
stockholders' equity (deficit) and cash flows for the years ended December 30,
1995 and December 31, 1994, and December 25, 1993. We have also audited the
financial statement schedule of valuation and qualifying accounts. These
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and this financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Wickes
Lumber Company and Subsidiaries as of December 30, 1995 and December 31, 1994,
and the consolidated results of their operations and cash flows for the years
ended December 30, 1995, December 31, 1994, and December 25, 1993, in conformity
with generally accepted accounting principles. In addition, in our opinion, the
financial statement schedule referred to above, when considered in relation to
the basic financial statements taken as a whole, presents fairly, in all
material respects, the information required to be included therein.
Coopers & Lybrand L.L.P.
Chicago, Illinois
March 12, 1996
WF-1
<PAGE> 82
WICKES LUMBER COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 30, 1995 and December 31, 1994
(in thousands except share data)
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash .................................................. $ 87 $ 2,037
Accounts receivable, less allowance for doubtful
accounts of $8,208 in 1995 and $4,657 in 1994 ....... 81,792 97,629
Inventory ............................................. 110,639 124,084
Deferred tax asset .................................... 25,906 14,360
Prepaid expenses ...................................... 1,051 1,584
--------- ---------
Total current assets .............................. 219,475 239,694
--------- ---------
Property, plant and equipment, net ........................ 56,545 56,847
Trademark (net of accumulated amortization
of $9,830 in 1995 and $9,608 in 1994) .................... 7,170 7,392
Deferred tax asset ........................................ 250 --
Other assets (net of accumulated amortization
of $4,464 in 1995 and $2,071 in 1994) .................... 19,075 15,640
--------- ---------
$ 302,515 $ 319,573
========= =========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt .................. $ 424 $ 709
Accounts payable ...................................... 41,457 46,620
Accrued liabilities ................................... 37,972 28,854
--------- ---------
Total current liabilities ........................... 79,853 76,183
--------- ---------
Long-term debt, less current maturities ................... 205,221 211,139
Other long-term liabilities ............................... 2,312 2,105
Commitments and contingencies (Note 5)
Common stockholders' equity:
Common stock (6,143,473 issued and outstanding in 1995
and 6,100,549 shares issued and outstanding in 1994) . 61 61
Additional paid-in capital ............................ 76,772 76,190
Accumulated deficit ................................... (61,704) (46,105)
--------- ---------
Total common stockholders' equity .................... 15,129 30,146
--------- ---------
$ 302,515 $ 319,573
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
WF-2
<PAGE> 83
WICKES LUMBER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
For the Years Ended December 30, 1995, December 31, 1994, and December 25, 1993
(in thousands, except per share data)
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Net sales ................................................... $ 972,612 $ 986,872 $ 846,842
Cost of sales ............................................... 751,800 753,041 640,284
----------- ----------- -----------
Gross profit ........................................... 220,812 233,831 206,558
----------- ----------- -----------
Selling, general and administrative expense ................. 201,111 197,043 176,831
Depreciation, goodwill and trademark amortization ........... 5,882 4,543 5,782
Restructuring and unusual items ............................. 17,798 2,000 53
Other operating income ...................................... (5,831) (6,772) (4,575)
----------- ----------- -----------
218,960 196,814 178,091
----------- ----------- -----------
Income from operations ................................. 1,852 37,017 28,467
Interest expense ............................................ 24,351 21,663 20,298
Equity in loss of affiliated company ........................ 3,543 -- --
----------- ----------- -----------
Income (loss) before income taxes and extraordinary gain (26,042) 15,354 8,169
Provision (benefit) for income taxes:
Current ................................................... 1,353 1,660 1,227
Deferred .................................................. (11,796) (14,360) --
----------- ----------- -----------
Income (loss) before extraordinary gain ................ (15,599) 28,054 6,942
Extraordinary gain on extinguishment of debt,
net of income taxes of $193 ................................ -- -- 1,241
----------- ----------- -----------
Net (loss) income ...................................... $ (15,599) $ 28,054 $ 8,183
=========== =========== ===========
Earnings (loss) per common share (pro forma in 1993):
Earnings (loss) before extraordinary gain ................ $ (2.54) $ 4.59 $ 1.14
Extraordinary gain ....................................... -- -- $ 0.20
----------- ----------- -----------
Earnings (loss) per common share (pro forma in 1993) ... $ (2.54) $ 4.59 $ 1.34
=========== =========== ===========
Weighted average common and common
equivalent shares outstanding (pro forma in 1993) ......... 6,151,771 6,106,279 6,099,985
=========== =========== ===========
Earnings per common share- historical basis (Note 15).
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
WF-3
<PAGE> 84
WICKES LUMBER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCKHOLDERS' EQUITY (DEFICIT)
For the Years Ended December 25, 1993, December 31, 1994 and December 30, 1995
(in thousands)
<TABLE>
<CAPTION>
Total
Additional Common
Common Paid-in Accumulated Stockholders'
Stock Capital Deficit Equity (Deficit)
<S> <C> <C> <C> <C>
Balance at December 28, 1991 ........................... $ 20 $ 32,486 $(86,394) $(53,888)
Net income ............................................. -- -- -- --
Dividends on redeemable preferred stock ................ -- -- (1,080) (1,080)
Issuance of warrants to management ..................... -- 7 -- 7
-------- -------- -------- --------
Balance at December 27, 1992 ........................... $ 20 $ 32,493 $(81,470) $(48,957)
Net income ............................................. -- -- 8,183 8,183
Dividends on redeemable preferred stock ................ -- -- (872) (872)
Issuance of common stock, net of offering costs ........ 28 38,266 -- 38,294
Issuance of common stock in exchange for preferred stock 13 16,823 -- 16,836
Extinguishment of warrants ............................. -- (11,666) -- (11,666)
-------- -------- -------- --------
Balance at December 25, 1993 ........................... 61 75,916 (74,159) 1,818
-------- -------- -------- --------
Net income ............................................. -- -- 28,054 28,054
Issuance of common stock, net .......................... -- 274 -- 274
-------- -------- -------- --------
Balance at December 31, 1994 ........................... 61 76,190 (46,105) 30,146
-------- -------- -------- --------
Net income ............................................ -- -- (15,599) (15,599)
Issuance of common stock, net ......................... -- 582 -- 582
-------- -------- --------- --------
Balance at December 30, 1995 .......................... $ 61 $ 76,772 $ (61,704) $ 15,129
======== ========= ========= ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
WF-4
<PAGE> 85
WICKES LUMBER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 30, 1995, December 31, 1994 and December 25, 1993
(in thousands)
<TABLE>
<CAPTION>
1995 1994 1993
---------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income / (loss) .......................................................... $ (15,599) $ 28,054 $ 8,183
Adjustments to reconcile net income/(loss) to
net cash provided by (used in) operating activities:
Cumulative effect of accounting change .................................
Depreciation expense ....................................................... 5,391 4,277 4,329
Amortization of trademark .................................................. 222 222 1,453
Amortization of goodwill ................................................... 270 44 0
Amortization of deferred financing costs ................................... 2,085 1,781 1,839
Provision for doubtful accounts ............................................ 3,551 1,618 600
Accretion of note discount ................................................. -- -- 2,023
Writedown of preferred stock investment ................................ -- --
Minority interest -- --
Gain on sale of assets ..................................................... (71) (238) (1,118)
Extraordinary gain on extinguishment of debt ............................... -- -- (1,434)
Deferred tax benefit ....................................................... (11,795) (14,360) 0
Changes in assets and liabilities net of effects
from acquisitions:
(Increase) decrease in accounts receivable .............................. 12,286 (14,834) (19,889)
(Increase) decrease in inventory ........................................ 20,697 (98) (12,794)
Increase (decrease) in accounts payable and accrued liabilities ......... 2,377 (4,896) (3,232)
(Increase) in other assets .............................................. (3,552) (239) (1,229)
--------- --------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 15,862 1,331 (21,269)
--------- --------- ---------
Cash flows from investing activities:
Purchases of property, plant and equipment. .................................. (4,111) (5,947) (4,289)
Payments for acquisitions .................................................... (8,686) (36,515) 0
Proceeds from sales of property, plant and equipment ......................... 2,520 685 9,612
--------- --------- ---------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (10,277) (41,777) 5,323
--------- --------- ---------
Cash flows from financing activities:
Net (repayment) borrowing under revolving line of credit ................... (5,760) 43,462 (21,552)
Reductions of note payable ................................................. (2,357) (556) (461)
Repayment of term loan ..................................................... -- -- (62,839)
Retirement of subordinated note ............................................ -- -- (30,000)
Proceeds from issuance of senior subordinated notes ........................ -- -- 100,000
Proceeds from issuance of common stock ..................................... 582 274 42,000
Payment of transaction costs of the
Recapitalization Plan ............................................... -- (700) (11,204)
--------- --------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (7,535) 42,480 15,944
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH (1,950) 2,034 (2)
Cash at beginning of period .................................................... 2,037 3 5
--------- --------- ---------
CASH AT END OF PERIOD $ 87 $ 2,037 $ 3
========= ========= =========
Supplemental schedule of cash flow information:
Interest paid ............................................................. $ 22,823 $ 18,777 $ 25,298
Income taxes paid ........................................................ 1,987 1,536 1,146
Supplemental schedule of non-cash investing and financing activities:
The Company purchased capital stock and assets in conjunction with
acquisitions made during the period. In connection with these acquisitions,
liabilities were assumed as follows:
Fair value of assets acquired ............................................ $ 12,387 $ 41,736
Cash paid ................................................................ (8,686) (36,515)
---------- ----------
Liabilities assumed ................................................... $ 3,701 $ 5,221
========== ==========
Issuance of common stock in exchange for preferred
stock, including accumulated dividends ................................. $ 16,836
=========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
WF-5
<PAGE> 86
WICKES LUMBER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
Wickes Lumber Company, through its building centers, markets lumber, building
materials and services to professional contractors, repair and remodelers and
do-it-yourself home owners principally in the Midwest, Northeast and Southern
United States. Wickes Lumber Company's wholly-owned and majority-owned
subsidiaries are: Lumber Trademark Company ("LTC"), a holding company for the
"Flying W" trademark; GLC Division, Inc. ("GLC"), which operates the Gerrity
Lumber business; and Riverside International Corporation ("RIC"), engaged in the
procurement and processing of lumber in the former Soviet Republics.
2. ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements present the results of operations,
financial position, and cash flows of Wickes Lumber Company and all its
wholly-owned and majority-owned subsidiaries (the "Company"), except for RIC,
the investment in which is recorded under the equity method because control is
likely to be temporary and to be lost in the near term (see Note 16). All
significant intercompany balances have been eliminated.
Fiscal Year
The Company's fiscal year ends on the last Saturday in December.
Accounts Receivable
The Company extends credit primarily to qualified contractors. The accounts
receivable balance excludes consumer receivables as such receivables are sold on
a nonrecourse basis. The remaining accounts and notes receivable represent
credit extended to professional contractors and professional repair and
remodelers, generally on a non-collateralized basis.
Inventory
Inventory consists principally of finished goods. The Company utilizes the
first-in, first-out (FIFO) cost flow assumption for valuing its inventory.
Inventory is valued at the lower of cost or market, but not in excess of net
realizable value.
Property, Plant, and Equipment
Property, plant, and equipment are stated at cost and are depreciated under the
straight-line method. Estimated lives used range from 15 to 39 years for
buildings and improvements and leasehold improvements. Machinery and equipment
lives range from 3 to 6 years. Expenditures for maintenance and repairs are
charged to operations as incurred. Gains and losses from dispositions of
property, plant, and equipment are included in the Company's results of
operations as other operating income.
WF-6
<PAGE> 87
WICKES LUMBER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Other Assets
Other assets consist primarily of deferred financing costs and goodwill which
are being amortized on the straight line method, goodwill primarily over 35
years and deferred financing costs over the expected terms of the related debt
agreements. At each balance sheet date, the Company evaluates the realizability
of goodwill based upon expectations of nondiscounted cash flows and operating
income for each subsidiary having a material goodwill balance. Based upon its
most recent analysis, the Company believes that no impairment of goodwill exists
at December 30, 1995.
Trademark
Prior to completion of the Recapitalization Plan (as hereinafter defined), the
Company's "Flying W" trademark was being amortized over 10 years. Effective with
the Recapitalization, certain restrictions on the trademark were eliminated,
resulting in a change in the amortization of the trademark to reflect a 40-year
amortization period.
Accounts Payable
The Company includes outstanding checks in excess of in-transit cash in accounts
payable. There were $1,672,000 outstanding checks in excess of in-transit cash
at December 30, 1995 and none at December 31, 1994.
Postretirement Benefits Other Than Pensions
The Company provides certain health and life insurance benefits for eligible
retirees and their dependents. The Company accounts for the costs of these
postretirement benefits over the employees' working careers in accordance with
Statement of Financial Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions."
Postemployment Benefits
The Company provides certain other postemployment benefits to qualified former
or inactive employees. The Company accounts for the costs of these
postemployment benefits in the period when it is probable that a benefit will be
provided in accordance with Statement of Financial Accounting Standards No. 112,
"Employers' Accounting for Postemployment Benefits".
Income Taxes
The Company accounts for income taxes in accordance with statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." Tax provisions and
credits are recorded at statutory rates for taxable items included in the
consolidated statements of operations regardless of the period for which such
items are reported for tax purposes. Deferred income taxes are recognized for
temporary differences between financial statement and income tax bases of assets
and liabilities for which income tax benefits will be realized in future years.
Deferred tax assets are reduced by a valuation allowance when the Company cannot
make the determination that it is more likely than not that some portion of the
related tax asset will be realized.
Computation of Earnings Per Common Share and Pro Forma Common Share
WF-7
<PAGE> 88
WICKES LUMBER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Earnings per common share is based upon the weighted average number of shares of
common stock outstanding and, where dilutive, common equivalent shares (using
the treasury stock method). Common equivalent shares consist of common stock
warrants and common stock options. Dilution relating to common stock options was
not material. Pro forma common shares is presented for fiscal year 1993, giving
effect to the Recapitalization Plan as if it had occurred on December 27, 1992
(see Note 4). Computation of earnings per share on a historical basis for fiscal
year 1993 is presented in Note 15.
Stock Split
In connection with the Recapitalization Plan, on October 14, 1993 the Company's
Board of Directors declared a 21.73-for-1 stock split of its outstanding shares
of common stock. The accompanying financial statements have been restated to
reflect this stock split.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity date of
three months or less to be cash equivalents.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from the estimates reported.
Significant estimates made by the Company include accrued compensation liability
and medical claims, accrued postemployment and postretirement benefits, accrued
restructuring charges, and valuation allowances for accounts receivable,
inventory and deferred tax assets. Accrued compensation liability and medical
claims involve the determination of reserves for incurred but not reported
claims. Accrued postemployment and postretirement benefits involve the use of
actuarial assumptions, including selection of discount rates (see Note 10).
Accrued restructuring charges involve an estimation of what the market will
bring and specific costs incurred relating to the liquidation of certain Company
assets using actual historical results (see Note 12). Determination of the
valuation allowances for accounts receivable and inventory involve assumptions
related to current market conditions and historical market trends. While the
valuation allowance for the deferred tax assets considers estimates of projected
taxable income (see Note 11). It is reasonably possible that the company's
estimates for such items could change in the near term.
Recently Issued Accounting Pronouncements
Impairment of Long-Lived Assets. Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Impairment is evaluated by
comparing future cash flows (undiscounted and without interest charges) expected
to result from the use or sale of the asset and its eventual disposition, to the
carrying amount of the asset. This new accounting principle is effective for the
Company's fiscal year ending December 28, 1996. The Company believes that
adoption will not have a material impact on its financial position.
WF-8
<PAGE> 89
WICKES LUMBER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock-Based Compensation. Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," encourages, but does not require,
companies to recognize compensation expense for grants of stock, stock options,
and other equity instruments to employees based on new fair value accounting
rules. Although expense recognition for employee stock based compensation is not
mandatory, the pronouncement requires companies that choose not to adopt the new
fair value accounting, to disclose the pro-forma net income and earning per
share under the new method. This new accounting principle is effective for the
Company's fiscal year ending December 28, 1996. The Company believes that
adoption will not have a material impact on its financial position as the
Company will not adopt the fair new value accounting, but instead comply with
the disclosure requirements.
3. ACQUISITIONS
All acquisitions have been accounted for as purchases; operations of the
companies and businesses acquired have been included in the accompanying
consolidated financial statements from their respective dates of acquisition.
The excess of the purchase price over fair value of the net assets acquired is
included in goodwill. The fair market value of the assets acquired were
approximately $12.4 million in 1995.
During 1995 the Company acquired five retail building material centers for a
total cost of $8.1 million. The cost of the acquisitions have been allocated on
the basis of the fair market value of the assets acquired and the liabilities
assumed. This allocation resulted in goodwill for one of the acquired businesses
which is being amortized over a 30 year period on a straight line basis.
In August 1994, the Company acquired all of the net assets of Great Lakes
Building Supply, Inc. and Ishpeming Building Supply, Inc. The cost of the
acquisition approximated the fair market value of the assets acquired and
liabilities assumed. In addition, the Company acquired all of the outstanding
Class B common stock of Riverside International Corporation, from an affiliated
entity. The cost of this acquisition has been allocated on the basis of the
estimated fair value of the assets acquired and liabilities assumed. In October
1994, the Company acquired the Gerrity Lumber business from the Gerrity Company,
Inc. The acquired business consisted of the operating assets of eight lumber and
building material centers of which three include component manufacturing plants.
The purchase price has been adjusted in accordance with a post-acquisition
audit of the acquired assets, resulting in an increase in goodwill. Goodwill is
being amortized over 35 years under a straight line basis.
The following unaudited pro forma summary presents information as if the 1994
acquisitions had occurred at the beginning of the fiscal year. The pro forma
information is not required for the 1995 acquisitions and is provided for 1994
for informational purposes only. It is based on historical information and does
not necessarily reflect the actual results that would have occurred nor is it
necessarily indicative of future results of operations of the combined
enterprise:
<TABLE>
<CAPTION>
(Unaudited)
Years Ended
December 31, December 25,
1994 1993
---- ----
(in thousands except per share amounts)
<S> <C> <C>
Net sales................................................... $1,059,218 $933,364
</TABLE>
WF-9
<PAGE> 90
WICKES LUMBER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C> <C>
Income before extraordinary item ........................... 29,356 7,433
Net income.................................................. 29,356 8,674
====== =====
Per share:
Earnings before extraordinary item.......................... 4.80 1.22
====== =====
Earnings per common share and pro forma in 1993 4.80 1.42
====== =====
</TABLE>
See Note 2 - Accounting Policies - Computation of Earnings Per Common Share and
Pro Forma Common Share
4. RECAPITALIZATION PLAN
On October 22, 1993, the Company completed a recapitalization plan (the
"Recapitalization Plan"), which included (i) the initial public offering by the
Company of 2,800,000 shares of common stock, par value $.01 per share (the
"Common Stock"), which resulted in $42 million in gross proceeds; (ii) the
offering of 11-5/8% Senior Subordinated Notes due 2003, which generated $100
million in gross proceeds; (iii) the establishment of a new $135 million
revolving credit facility; (iv) the payment by the Company of an aggregate of
$35 million in full payment and cancellation of the subordinated note and
warrant to purchase common stock of the Company issued by the Company to the
holder of the subordinated note; (v) the payment by the Company of an aggregate
of $65.5 million in full payment and cancellation of the term loan and warrant
to purchase common stock of the Company issued to the lender of the term loan,
and the repayment of all outstanding indebtedness, $32.7 million, under and
termination of the Company's then-existing revolving credit working capital
facility, and the payment of $1.5 million of accrued interest on the term loan
and the revolving credit facility; (vi) the restructuring of the Company's
outstanding capital stock pursuant to which the Company in September 1993
reclassified each share of the existing classes of common stock into one share
of Common Stock or Class B non-voting common stock, par value $.01 per share,
and effected a 21.73-for-1 stock split immediately prior to the consummation of
the initial common stock offering, on October 22, 1993; (vii) the issuance by
the Company of 1,206,881 shares of Common Stock (valued at the public offering
price in the initial common stock offering, less underwriting discount) in
exchange for the outstanding shares of preferred stock (including accrued and
unpaid dividends to the date of the consummation of the recapitalization plan);
(viii) the payment by the Company of $1.7 million in full settlement of certain
supplemental retirement benefits ("SRBs") payable by the Company and acquired by
Riverside Group, Inc. from certain former executive officers of the Company; and
(ix) the payment of fees and expenses relating to the foregoing.
Upon the completion of the Recapitalization Plan, there were 5,571,461 shares of
Common Stock and 499,768 shares of Class B Non-Voting Common Stock outstanding.
As a result of the Recapitalization Plan the Company recorded an extraordinary
gain of $1.2 million. This gain is comprised of (i) a gain of $0.7 million on
retirement of the SRBs, (ii) a gain of $4.6 million on the retirement of the
previously outstanding subordinated note and accrued interest, (iii) a $3.9
million write-off of the unamortized transaction costs from the 1988
Acquisition, in which former members of senior management and other investors
participated in a leveraged buy-out of the Company, and (iv) applicable income
tax expense of $0.2 million.
5. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment is summarized as follows:
WF-10
<PAGE> 91
WICKES LUMBER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
December 30, December 31,
1995 1994
(in thousands)
<S> <C> <C>
Land and improvements .............. $15,888 $15,142
Buildings .......................... 32,242 30,212
Machinery and equipment ............ 26,495 25,785
Leasehold improvements ............. 2,715 2,238
Construction in progress ........... 226 549
------- -------
Gross property, plant, and equipment 77,566 73,926
Less: accumulated depreciation ..... 25,932 23,637
------- -------
Property, plant, and equipment
in use, net ....................... 51,634 50,289
Assets held for sale, net .......... 4,911 6,558
------- -------
Property, plant, and equipment, net $56,545 $56,847
======= =======
</TABLE>
6. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
December 30, December 31,
1995 1994
(in thousands)
<S> <C> <C>
Accrued payroll .................................. $ 6,934 $11,469
Accrued interest ................................. 1,546 2,103
Accrued liability insurance ...................... 4,970 3,063
Accrued restructuring charges .................... 14,871 723
Other ............................................ 9,651 11,496
------- -------
Total accrued liabilities ........................ $37,972 $28,854
======= =======
</TABLE>
7. LONG-TERM DEBT
Long-term debt obligations are summarized as follows:
<TABLE>
<CAPTION>
December 30, December 31,
1995 1994
(in thousands)
<S> <C> <C>
Revolving line of credit, interest payable
at 1.5% above prime or 3.0%
over LIBOR ,
principal due January 22, 1998 ............. $ 105,021 $ 110,498
Senior subordinated notes, interest payable
at 11-5/8% semi-annually, principal due
December 15, 2003 .......................... 100,000 100,000
Other ...................................... 624 1,350
--------- ---------
Total long-term debt ....................... 205,645 211,848
Less current maturities .................... (424) (709)
--------- ---------
</TABLE>
WF-11
<PAGE> 92
WICKES LUMBER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C> <C>
Total long-term debt less current maturities $ 205,221 $ 211,139
========= =========
</TABLE>
Revolving Line of Credit
The revolving credit agreement was amended and restated in its entirety 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, (iii) modified certain covenants,
including changes to accommodate the Company's fourth quarter 1995 restructuring
charge, (iv) required the temporary addition of approximately $12 million of
real estate collateral and (v) required the completion by July 31, 1996 of the
receipt from Riverside Group, Inc. of $10 million from the sale of equity
securities of the Company.
Under the revolving line of credit, the Company may borrow against certain
levels of accounts receivable and inventory. Taking into account the March 12,
1996 amendment and restatement, the amount available for borrowing on December
30, 1995 would have been $9.3 million. A commitment fee of 1/2 of 1% is payable
on the unused portion of the commitment. The weighted-average interest rate on
the revolving line of credit for the years ending December 30, 1995 and December
31, 1994 was approximately 8.8% and 8.2%, respectively.
Substantially all of the Company's accounts receivable, inventory, general
intangibles and certain real estate, machinery and equipment are pledged as
collateral for the revolving line of credit. Covenants under the related debt
agreements require, among other restrictions, that the Company maintain certain
financial ratios and certain levels of consolidated net worth. In addition, the
debt agreement restricts among other things, capital expenditures, the
incurrence of additional debt, asset sales, dividends, investments, and
acquisitions.
Senior Subordinated Notes
On October 22, 1993, the Company issued $100,000,000 in principal amount of
10-year unsecured senior subordinated notes. Interest on the notes is 11-5/8%,
payable semi-annually. Covenants under the related indenture restrict among
other things, the payment of dividends, the prepayment of certain debt, the
incurrence of additional debt if certain financial ratios are not met, and the
sale of certain assets unless the proceeds are applied to the notes. In
addition, the notes require that, upon a change in control of the Company, the
Company must offer to purchase the notes at 101% of the principal thereof, plus
accrued interest.
Aggregate Maturities
The aggregate amounts of long-term debt maturities by fiscal year are as
follows:
<TABLE>
<CAPTION>
Year Amount
(in thousands)
<S> <C>
1996............................. $ 424
1997............................. 130
1998............................. 105,075
1999............................. 16
2000............................. 0
Thereafter....................... 100,000
</TABLE>
WF-12
<PAGE> 93
WICKES LUMBER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. COMMITMENTS AND CONTINGENCIES
At December 30, 1995, the Company had accrued approximately $1,000,000 for
remediation of certain environmental and product liability matters, principally
underground storage tank removal.
Many of the building center facilities presently and formerly operated by the
Company and its predecessor contained underground petroleum storage tanks. All
such tanks known to the Company 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, the
Company 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 the Company the remediation of which
the Company could under certain circumstances be held responsible. Since 1988,
the Company has incurred approximately $ 2.1 million of costs with respect to
the filling or removing of underground storage tanks and related investigatory
and remedial actions.
In February 1994, the Company was notified that a stock certificate representing
103,922 shares of Common Stock that had been previously reported as lost and
that had been reissued and transferred to an affiliate of the Company may in
fact not have been lost but instead previously transferred by the original owner
to a third party. In connection with the reissuance of the allegedly lost stock
certificate, the Company examined its records, found no information concerning a
possible prior transfer of the stock certificate, and received an indemnity from
the original owner. If both transferees are determined to be bona fide
purchasers, both may be entitled to ownership of the 103,922 shares, which would
result in a corresponding increase in the number of outstanding shares of Common
Stock. In such a case, the Company believes it would be entitled to indemnity
from the original owner, which could be utilized to purchase and retire an
equivalent number of shares. If either of the purported transferees is
determined not to be a bona fide purchaser, its certificate would be canceled.
Litigation has been commenced in which, among other things, the Company is
seeking indemnity and a declaratory judgment concerning the rights and
obligations of the various parties and the original owner is disputing its
obligation to indemnify the Company.
At December 30, 1995, the Company's investment in RIC was $4.5 million. This
investment entails significant inherent risks, including expropriation, legal,
currency, crime, management, labor, weather and other operational risks.
The Company is one of many defendants in 164 actions, each of which seeks
unspecified damages, brought in 1993, 1994 and 1995 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. The Company is
aggressively defending these actions and does not believe that these actions
will have a material adverse effect on the Company.
On November 3, 1995, a complaint was filed against the Company, its directors
and Riverside Group, Inc. seeking to enjoin or to obtain damages with respect to
the Company's agreement to issue two million newly-issued shares of common stock
to Riverside Group, Inc. for $10 million (see Note 9).
The Company is involved in various other legal proceedings which are incidental
to the conduct of its business. The Company does not believe that any of these
proceedings will have a material adverse effect on the Company.
WF-13
<PAGE> 94
WICKES LUMBER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Leases
The Company has entered into operating leases for retail space, equipment and
other items. These leases provide for minimum rents. These leases generally
include options to renew for additional periods. Total minimum rents under all
operating leases were $10,501,000, $8,086,000, and $5,482,000 for the years
ended December 30, 1995, December 31, 1994, and December 25, 1993, respectively.
Future minimum commitments for noncancelable operating leases are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- ------
(IN THOUSANDS)
<S> <C>
1996............................... $ 9,121
1997............................... 6,895
1998............................... 4,047
1999............................... 2,872
2000............................... 938
Thereafter ........................ 2,252
---------
Subtotal......................... 26,125
Less: Sublease income (1,026)
---------
$25,099
---------
</TABLE>
9. STOCKHOLDERS' EQUITY
The Company's Recapitalization Plan is discussed in Note 4.
Preferred Stock
As of December 30, 1995 the Company had authorized 3,000,000 shares of preferred
stock, none of which is issued or outstanding.
Common Stock
The Company has two classes of common stock: Common Stock, par value $.01 per
share, and Class B Non-Voting Common Stock, par value $.01 per share. At
December 30, 1995 there were 20,000,000 shares of Common Stock authorized and
5,643,705 shares issued and outstanding, and there were 1,200,000 shares of
Class B Non-Voting Common authorized and 499,768 shares issued and outstanding.
Class B Non-Voting Common Stock is generally equivalent to Common Stock, except
that shares of Class B Non-Voting Common Stock may not be voted except on
certain matters regarding merger, consolidation, recapitalization and
reorganization, and as otherwise provided by law. Class B Non-Voting Common
Stock is convertible into Common Stock on a share-for-share basis in certain
circumstances. In addition, at December 30, 1995, 14,589 shares of Class A
Voting Common Stock were reserved for issuance under outstanding warrants.
Warrants
WF-14
<PAGE> 95
WICKES LUMBER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In 1989 and 1992, the Company issued warrants to certain members of its
management. These warrants would have become exercisable for up to 195,970
shares of Common Stock upon the date of determination of the Company's
attainment of certain levels of financial results. These warrants were replaced
during the Recapitalization Plan by the issuance of 162,975 shares of Common
Stock and warrants for 28,756 shares of Common Stock, exercisable through April
29, 1998, at a nominal exercise price.
Stock Options
At December 30, 1995 and December 31, 1994, the Company had outstanding, under
its Director Incentive Plan, options held by members of the Company's Board of
Directors to purchase 16,335 and 16,002 shares of Common Stock, respectively.
These options have an exercise price of between $10.95 and $23.25 per share;
approximately 3,334 of the options were exercisable at December 31, 1994, of
which none were exercised during fiscal 1995. Approximately 5,779 shares were
exercisable at December 30, 1995.
In addition, at December 30, 1995 and December 31, 1994, the Company had
outstanding under its Long-Term Incentive Plan, options held by key employees to
purchase 430,351 and 270,213 shares of Common Stock, respectively. These options
have an exercise price of between $15.00 and $18.50 per share; approximately
29,683 of the options were exercisable at December 31, 1994, of which none were
exercised during fiscal 1995. Approximately 108,295 shares were exercisable at
December 30, 1995.
Proposed Sale of Common Stock
On January 11, 1996, the Company entered into a definitive agreement with
Riverside Group, Inc. ("Riverside"), the Company's largest stockholder, that
provides for the acquisition by Riverside of 2 million newly-issued shares of
the Company's common stock for $10 million in cash. The definitive agreement was
approved and recommended by committees of each company's independent directors.
The sale is subject to the reorganization or sale by Riverside of one of certain
of its operations. The transaction is expected to be completed prior to July 31,
1996.
10. EMPLOYEE BENEFIT PLANS
401(k) Plan
The Company sponsors a defined contribution 401(k) plan covering substantially
all of its full-time employees. Additionally, the Company provides matching
contributions up to a maximum of 2.5% of participating employees' salaries and
wages. Total expenses under the plan for the years ended December 30, 1995,
December 31, 1994, and December 25, 1993 were $1,700,000, $2,625,000, and
$2,167,000, respectively.
Postretirement Benefits Other than Pensions
The Company provides life and health care benefits to retired employees.
Generally, employees who have attained an age of 60, have rendered 10 years of
service and are currently enrolled in the medical benefit plan are eligible for
postretirement benefits. The Company accrues the estimated cost of retiree
benefit payments, other than pensions, during the employees' active service
period.
WF-15
<PAGE> 96
WICKES LUMBER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The plans' funded status is as follows:
<TABLE>
<CAPTION>
December 30, December 31,
1995 1994
---- ----
(in thousands)
<S> <C> <C>
Accumulated postretirement benefit obligation-
Retirees and their dependents ................. $ 934 $ 866
Active employees fully eligible to retire
and receive benefits ..................... 531 298
Active employees not fully eligible ........... 1,292 1,552
------- -------
Total accumulated postretirement benefit obligations 2,757 2,716
Plan's assets at fair value ........................ -0- -0-
------- -------
Accumulated postretirement benefit obligation in
excess of plans' assets ........................ 2,757 2,716
Unrecognized net loss .............................. (445) (611)
------- -------
Accrued postretirement health care cost ............ $ 2,312 $ 2,105
======= =======
</TABLE>
Actuarial assumptions used were as follows:
<TABLE>
<CAPTION>
December 30, December 31,
1995 1994
---- ----
(in thousands)
<S> <C> <C>
Projected health care costs trend rate ........... 6.0% 9.4%
Ultimate trend rate .............................. 6.0% 5.5%
Year ultimate trend rate achieved ................ n/a 2021
Effect of a 1% point increase in the health care
cost trend rate on the postretirement benefit
obligation ................................... $ 63 $ 119
Effect of a 1% point increase in the health care
cost trend rate on the aggregate of service and
interest cost ................................. $ 18 $ 25
Discount rate .................................... 7.25% 8.25%
</TABLE>
The Company's postretirement health care plan at December 25, 1993 was not
funded. The present value of accumulated postretirement benefits at December 25,
1993 was $1,790,000. The assumed discount rate used in determining the
accumulated postretirement benefit obligation at December 25, 1993 was 6.63%.
Postemployment Benefits
The Company provides certain postemployment benefits to qualified former or
inactive employees who are not retirees. These benefits include salary
continuance, severance, and healthcare. Salary continuance and severance pay is
based on normal straight-line compensation and is calculated based on years of
service. Additional severance pay is granted to eligible employees who are 40
years of age or older and have been employed by the Company five or more years.
The Company accrues the estimated cost of benefits provided to former or
inactive employees who have not yet retired over the employees service period or
as an expense at the date of the event triggering the benefit. The Company
incurred postemployment benefit expense of $160,000 (exclusive of amounts
included in its restructuring liability) for the year ended December 30, 1995
(see Note 12). The total postemployment
WF-16
<PAGE> 97
WICKES LUMBER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
benefits expense for the years ended December 31, 1994 and December 25, 1993 was
$2,000,000 and $53,000, respectively.
11. INCOME TAXES
The Company files a consolidated federal tax return with its wholly-owned
subsidiaries. As of December 30, 1995, the Company has net operating loss
carryforwards available to offset future U.S. income of approximately $25.3
million expiring in the years 2004 through 2010; and $1.5 million of capital
loss carryforwards which expire in the years 1997 through 2000.
The completion of the Recapitalization Plan, as discussed in Note 4, created an
"ownership change" as defined by Section 382 of the Internal Revenue Code of
1986, as amended. As a result of this, certain of the loss carryforwards of the
Company are subject to an annual limitation of approximately $2.6 million a
year. Due to the inherent tax gain in the assets owned by the Company at the
time of the ownership change, the annual limitation on use of the loss
carryforwards will be increased by the amount of the gains as they are
recognized. To the extent that the 1995 loss carryforward limitation as
increased for gains recognized was not utilized in 1995, the annual limitation
for 1996 will be increased. The Company has reviewed its valuation allowance for
deferred tax assets, the inherent tax gain in the assets owned by the Company at
the time of the ownership change, and their net operating loss availability. As
a result, the Company anticipates an additional increase to the annual
limitation on utilization of loss carryforwards in 1996 of approximately $1.3
million as a result of gains recognized during the year. This amount is subject
to further review by the Internal Revenue Service. An additional loss
carryforward of $11.2 million was generated during 1995. This amount will be
available without limitations, to offset taxable income in future periods and
will expire in 2010.
Tax provisions and credits are recorded at statutory rates for taxable items
included in the consolidated statements of operations regardless of the period
for which such items are reported for tax purposes. Deferred income taxes were
recorded to reflect changes in temporary differences between the financial
reporting basis and the tax basis of the company's assets and liabilities. These
amounts are expected to be recognized in future periods . A deferred tax benefit
of $11.8 million was recorded in 1995. The benefit in the current year was
mainly due to differences in the restructuring liability, allowance for doubtful
accounts, net operating loss carryover, intangible asset amortization and
utilization of prior year capital loss carryovers. As a result of recognizing
the deferred tax benefit in 1995, the Company anticipates their provision for
taxes in subsequent years will reflect a normal statutory rate adjusted for
state taxes. The Company continues to record a valuation allowance with respect
to the future tax benefits of capital losses reflected in deferred income taxes
as a result of the uncertainty of their ultimate realization due to restrictions
placed on their usage. Significant components of the Company's deferred tax
assets and liabilities, and their related tax effects, as of December 30, 1995
and December 31, 1994 are as follows:
<TABLE>
<CAPTION>
1995 1994
(in thousands)
<S> <C> <C>
Trade accounts receivable .... $ 3,193 $ 1,816
Inventories .................. 2,446 3,252
Accrued personnel cost ....... 1,850 2,153
Other accrued liabilities .... 12,042 8,718
Net operating loss ........... 9,856 5,640
Other ........................ 1,399 2,003
-------- --------
Total deferred tax assets .... 30,786 23,582
</TABLE>
WF-17
<PAGE> 98
WICKES LUMBER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C> <C>
Less: valuation allowance .... (1,350) (3,421)
-------- --------
Net deferred tax assets ...... 29,436 20,161
-------- --------
Property, plant and equipment 1,906 5,094
Goodwill and trademark ....... 1,348 690
Other accrued income items ... 26 17
-------- --------
Total deferred tax liabilities 3,280 5,801
-------- --------
Net deferred tax asset ....... $ 26,156 $ 14,360
======== ========
</TABLE>
Income tax expense including applicable tax on extraordinary gain, consists of
the following components:
<TABLE>
<CAPTION>
1995 1994 1993
(in thousands)
<S> <C> <C> <C>
Current: Charge to operations .... $ 1,353 $ 1,660 $ 1,227
Charge to extraordinary item ..... -- -- 193
Deferred benefit ................. (11,796) (14,360) --
-------- -------- --------
Total income tax expense (benefit) $(10,443) $(12,700) $ 1,420
======== ======== ========
</TABLE>
Provision for income taxes on income differs from expected tax expense computed
by applying the Federal corporate tax rate of 35% in 1995, 34% in 1994 and 1993
as follows:
<TABLE>
<CAPTION>
1995 1994 1993
(in thousands)
<S> <C> <C> <C>
Taxes (benefit) computed at
statutory rate ....................................... $ (9,115) $ 5,220 $ 3,687
State tax expense ..................................... 894 891 1,036
Alternative minimum tax rate differential ............. -- 310 384
Current and deferred benefit of capital loss (utilized) -- (2) (373)
Current benefit of deferred tax asset ................. -- (14,360) --
Other ................................................. (151) 148 --
Change in valuation allowance for deferred tax asset .. (2071) -- --
Current and deferred benefit of NOL
carried forward (utilized) ........................... -- (4,907) (3,314)
-------- -------- --------
Total tax provision ................................... $(10,443) $(12,700) $ 1,420
======== ======== ========
</TABLE>
Deferred tax expense results from temporary differences in the recognition of
certain items of revenue and expense for tax and financial reporting purposes.
The sources of these differences and the tax effect of each were as follows:
<TABLE>
<CAPTION>
1995 1994
(in thousands)
<S> <C> <C>
Change in bad debt reserve ..................... $ 1,377 $ 631
Differences in tax and book inventory .......... (806) (47)
Settlement of deferred compensation ............ (303) 309
Change in accrued liabilities .................. 3,324 2,548
Utilization of NOL ............................. 4,216 (7,474)
AMT credit and capital loss carryforward ....... (604) 993
Differences in tax and book asset basis ........ 3,188 (2,909)
Differences in tax and book basis in intangibles (658) (690)
</TABLE>
WF-18
<PAGE> 99
WICKES LUMBER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C> <C>
Extinguishment of debt ......................... -- --
Change in accrued income items ................. (9) 34
Change in valuation allowance for
deferred tax assets ............................ 2,071 20,965
-------- --------
Deferred tax benefit ........................... $ 11,796 $ 14,360
======== ========
</TABLE>
12. RESTRUCTURING AND UNUSUAL CHARGES
During the fourth quarter of 1995, the Company committed to and began
implementing a restructuring plan to improve return on assets by closing or
consolidating under-performing operating centers, decreasing the corresponding
overhead to support these building centers, and initiating actions to strengthen
its capital structure. Management anticipates completion of the plan in 1996.
The costs for closing these building material centers were based on management
estimates of costs to exit these markets and actual historical experience. The
Company recorded a $17.8 million charge relating to its strategic restructuring
program and other one time costs which are reflected in the Company's
Consolidated Statements of Operations as restructuring and unusual items.
The major components of this charge include the write-down of assets to their
net realizable value, liabilities associated with closed building centers held
for sale, postemployment benefits to qualified former employees as a result of
the center closings, and other charges related to the strengthening of the
Company's capital structure.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
In accordance with SFAS No. 107, "Disclosures About Fair Value of Financial
Instruments," information has been provided about the fair value of certain
financial instruments. The following methods and assumptions were used to
estimate the fair value of each material class of financial instruments covered
by the Statement for which it is practicable to estimate that value:
Long-Term Debt
The fair value of the Company's long-term debt is estimated based on the quoted
market prices for the same or similar issues or on the current rates offered to
the Company for debt of the same remaining maturities. The estimated fair values
of the Company's material financial instruments at December 30, 1995 and
December 31, 1994 are as follows:
<TABLE>
<CAPTION>
Fair Carrying
Value Value
----- -----
(in thousands)
<S> <C> <C>
1995 Financial Liabilities:
Long-term Debt
Revolver ................ $105,021 $105,021
Senior Subordinated Notes 68,000 100,000
1994 Financial Liabilities:
Long-term Debt
Revolver ................. $110,498 $110,498
</TABLE>
WF-19
<PAGE> 100
WICKES LUMBER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C> <C>
Senior Subordinated Notes 97,380 100,000
</TABLE>
14. RELATED PARTY TRANSACTIONS
In September 1992, the Company began efforts to determine the feasibility of
obtaining lumber from the former Soviet Republics. In March 1993, the Company
determined to enter into a test arrangement that required the approval of one of
its former lenders. This former lender declined to grant its approval but
permitted the Company's participation, on a test basis, in an arrangement
pursuant to which an affiliate of the Company, formed for the purpose, imported
in December 1993 a load of rough sawn goods, which the Company acquired upon
arrival in the United States and milled into common finishing boards and
moulding. On July 31, 1994, the Company acquired the affiliate that imported the
test load, Riverside International Corporation, from the Riverside Group, Inc.,
the Company's largest stockholder, for $895,000. The acquisition was accounted
for as a purchase and ended the related party relationship. In December 1995,
voting rights to 66 2/3% of RIC's voting stock were assigned to Riverside
Group, Inc. In addition, Riverside Group, Inc. obtained the right, during 1996,
to acquire up to $5 million of RIC's non-voting common stock, at the then fair
market value.
In 1995, the Company paid approximately $613,000 in reimbursements to an
affiliate of the Company's chairman and to third parties for costs related to
services provided to the Company during 1995 by certain employees of the
affiliated company and use of a corporate aircraft. Total payments in 1994 and
1993 for similar services were approximately $810,000 and $860,000,
respectively.
The Chairman and certain directors of the Company, as well as an affiliated
company, own in the aggregate a majority of the voting securities of a private
manufacturer of glass products, wooden stair parts and other building materials
that supplies products, primarily through independent distributors, to the
Company. The Chairman of the Company also is chairman of the board, president
and chief executive officer, and one of the Company's directors is a director
and officer, of this manufacturer. During 1995, the Company estimates that it
purchased approximately $1,423,000 of this manufacturer's products at prices
generally available from the third party distributors from which the products
were obtained. This compares with $2,086,000 and $1,500,000 of similar products
purchased in 1994 and 1993, respectively.
A certain director and executive officer of the Company, is a shareholder of the
law firm that is general counsel to the Company. The Company paid this firm
$394,000, $623,000, and $518,000 for legal services provided to the Company
during 1995, 1994, and 1993, respectively.
For a description of the proposed sale of 2 million newly-issued shares by the
Company to Riverside Group, Inc., see Note 9.
15. COMPUTATION OF EARNINGS PER COMMON SHARE-HISTORICAL BASIS
The earnings per common and common equivalent share, computed on a historical
basis for fiscal year 1993, less redeemable preferred stock dividends is
presented below to comply with the provisions of Accounting Principles Board
Opinion No. 15:
<TABLE>
<CAPTION>
Year Ended
December 25,
1993
----
<S> <C>
Income (loss) before extraordinary gain
</TABLE>
WF-20
<PAGE> 101
WICKES LUMBER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
and cumulative effect of accounting change $ 2.12
Extraordinary gain ........................ .43
Cumulative effect of accounting change .... --
Net income (loss) ......................... $ 2.55
=============
Weighted average common
and common equivalent shares ............. 2,871,091
=============
</TABLE>
16. SUBSEQUENT EVENT
On February 21, 1996, the Company and its RIC subsidiary entered into an
agreement with two investment funds. Pursuant to this agreement, the two funds
are each to invest $5 million in this subsidiary and are each to receive a 25%
equity interest, with the Company retaining an interest slightly less than 50%
and the subsidiary's management receiving the balance of the equity. A total of
$4 million of the funds' investment has been advanced to the subsidiary as a
loan, which is to be converted to equity upon funding of the remaining $6
million, which is to occur upon satisfaction of certain conditions, including
among other things the resolution of certain legal matters and the achieving of
specified operational levels.
WF-21
<PAGE> 102
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders,
Riverside Group, Inc.:
Our report on the consolidated financial statements of Riverside Group, Inc. and
subsidiaries is included on page F-1 of the Annual Report on Form 10-K. In
connection with our audits of such financial statements, we have also audited
the related financial statement schedules listed in the index on page 38 of this
Form 10-K.
In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.
Coopers & Lybrand L.L.P.
Phoenix, Arizona
March 27, 1996
S-1
<PAGE> 103
Schedule I
Riverside Group, Inc. & Subsidiaries
Summary of Investments - Other Than Investments in Related Parties
December 31, 1995
<TABLE>
<CAPTION>
Amount at Which
Market Shown in the
Type of Investment Cost Value Balance Sheet
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed maturities:
Bonds:
United States Government
and government agencies
and authorities $ 18,088,000 $ 19,666,000 $ 19,666,000
States, municipalities and
political subdivisions -- -- --
Public utilities 14,449,000 14,832,000 14,832,000
All other corporate bonds 66,546,000 69,361,000 69,361,000
Mortgage-back and other
asset backed securities 42,672,000 43,825,000 43,825,000
------------ ------------ ------------
Total fixed maturities 141,755,000 147,152,000 147,152,000
Equity securities:
Common stocks:
Banks, trusts, and
insurance companies 799,000 799,000 799,000
Industrial miscellaneous
and other 169,000 39,000 39,000
------------ ------------ ------------
Total common stocks 968,000 838,000 838,000
Preferred stocks:
Bank, trusts, and
insurance companies -- -- --
Industrial, miscellaneous
an other -- -- --
------------ ------------ ------------
Total preferred stocks -- -- --
------------ ------------ ------------
Total equity securities 968,000 838,000 838,000
Mortgage & construction loans 26,903,000 xxxxxxxxxxx 26,903,000
Policy loans 19,827,000 xxxxxxxxxxx 19,827,000
Investment real estate 17,879,000 xxxxxxxxxxx 17,879,000
Short-term and other investments 20,842,000 xxxxxxxxxxx 20,842,000
------------ ------------
Total investments $228,174,000 $233,441,000
============ ============
</TABLE>
S-2
<PAGE> 104
Schedule II
Riverside Group, Inc. (Parent Only)
Condensed Financial Information of Registrant
Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
December 31,
-------------------
1995 1994
------- --------
<S> <C> <C>
ASSETS
Investments:
Investment real estate $ 90 $ 90
Short-term investments 561 422
------- -------
Total investments 651 512
Cash 94 86
Investment in and advances to
Dependable Group and AFAC 29,652 32,960
Investment in Wickes Lumber Company 6,959 6,756
Indemnification recoverable -- 40
Other assets 565 28
------- -------
$37,921 $40,382
======= =======
LIABILITIES & STOCKHOLDERS' EQUITY
Accrued expenses, income taxes and other
liabilities $ 962 $ 1,011
Notes payable and subordinated debentures 10,903 10,268
------- -------
11,865 11,279
Common stockholders' equity:
Common stock, $.10 par value; 20,000,000 shares
authorized, 5,311,123 and 5,465,781 shares issued
and outstanding in 1995 and 1994 531 547
Additional paid-in capital 17,209 18,175
Retained earnings 3,923 20,123
Unrealized investment appreciation (depreciation) 4,393 (9,742)
------- -------
Total stockholders' equity 26,056 29,103
------- -------
37,921 40,382
======= =======
</TABLE>
S-3
<PAGE> 105
Schedule II
Riverside Group, Inc. (Parent Only)
Condensed Financial Information of Registrant
Condensed Statements of Operations
(in thousands)
<TABLE>
<CAPTION>
Years Ended December 3l,
-------------------------------------
1995 1994 1993
---------- ---------- -----------
<S> <C> <C> <C>
Net investment income $ 5 $ 851 $ 95
Other income 765 1,484 4,831
Equity in net income of subsidiaries, net of
income taxes (12,690) 3,321 844
Equity in investment in Wickes Lumber Company (2,095) 1,523 270
---------- ---------- -----------
Total revenues (14,015) 7,179 6,040
Other operating costs & expenses 735 1,118 1,810
Interest expense 1,450 1,616 1,564
---------- ---------- -----------
Total expenses 2,185 2,734 3,374
---------- ---------- -----------
Income (loss) before income tax (16,200) 4,445 2,666
Income tax expense (benefit) -- -- 15
---------- ---------- -----------
Net income (loss) $ (16,200) $ 4,445 $ 2,651
========== ========== ===========
Earnings (loss) per share of common stock, after
deducting preferred dividends and accretion $ (3.07) $ 0.79 $ 0.24
========== ========== ===========
Weighted average number of
common shares used in
computing earnings
per share 5,284,280 5,350,672 5,332,430
========== ========== ==========
</TABLE>
S-4
<PAGE> 106
Schedule II
Riverside Group, Inc. (Parent Only)
Condensed Financial Information of Registrant
Condensed Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------
1995 1994 1993
-------- ------- -------
<S> <C> <C> <C>
Operating Activities:
Net income (loss) $(16,200) $ 4,445 $ 2,651
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Net realized gains -- (558) (2,400)
Change in other assets and liabilities (487) (550) (2,986)
Equity in (income) loss of subsidiaries,
net of cash received 16,308 (4,844) (1,114)
Depreciation and amortization 232 190 300
Net change in recoveries from indemnification
agreement 40 14 267
-------- ------- -------
Net cash provided by (used in) operating activities (107) (1,303) (3,282)
Investing Activities:
Purchase of investments:
Securities of Wickes Lumber Company (2,296) -- (4,978)
Sale, maturity and principal reduction of investments:
Short-term investments (139) (377) 60
Change in investment in and advances to subsidiaries 3,105 3,936 9,646
-------- ------- -------
Net cash provided by investing activities 670 3,559 4,728
Financing Activities:
Repayment of debt (1,243) (750) (2,500)
Increase in borrowings 1,700 -- --
Redemption of Series C Preferred Stock -- (1,283)
Issuance of Common Stock 156 100
Purchase & Retirement of Common Stock (1,168) (357)
Preferred stock dividends -- -- 1,093
-------- ------- -------
Net cash (used in) financing
activities (555) (2,290) (1,407)
-------- ------- -------
Increase (decrease) in cash 8 (34) 39
Cash at beginning of year 86 120 81
-------- ------- -------
Cash at end of year $ 94 $ 86 $ 120
======== ======= =======
</TABLE>
S-5
<PAGE> 107
Schedule III
Riverside Group, Inc. & Subsidiaries
Supplemental Insurance Information
For the Years Ended December 31, 1995, 1994, and 1993
(in Thousands)
<TABLE>
<CAPTION>
Future Policy
Benefits,
Deferred Losses, Other Policy
Policy Claims and Claims and Net
Acquisition Loss Unearned Benefits Premium Investment
Segment Costs Expenses Premiums Payable Revenue Income
(1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1995
- ---------------
Life $2,027 $238,432 - - $ 8,298 $14,600
Other $ (108)
---------------------------------------------------------------------------------------------
$2,027 $238,432 - - $ 8,298 $14,492
=============================================================================================
1994
- ---------------
Life $2,453 $260,393 - - $18,657 $17,986
Other $ (463)
---------------------------------------------------------------------------------------------
$2,453 $260,393 - - $18,657 $17,523
=============================================================================================
1993
- ---------------
Life $8,248 $283,758 $121 - $21,704 $20,533
Other $ 202
---------------------------------------------------------------------------------------------
$8,248 $283,758 $121 - $21,704 $20,735
=============================================================================================
<CAPTION>
Benefits, Amortization
Claims, Losses of Deferred
and Settle- Policy Other
ment Acquisition Operating Premiums
Segment Expenses Costs Expenses Written
(2)
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1995
- ---------------
Life $15,417 $2,613 $ 3,464 N/A
Other $ 1,757
====================================================================
$15,417 $2,613 $ 5,221
====================================================================
1994
- ---------------
Life $19,399 $3,132 $ 5,821 N/A
Other $ 2,255
====================================================================
$19,399 $3,132 $ 8,076
====================================================================
1993
- ---------------
Life $22,892 $1,962 $11,469 N/A
Other $ 1,924
====================================================================
$22,892 $1,962 $13,393
====================================================================
</TABLE>
(1) Allocation of net investment income is based on specific identification of
assets for each segment
(2) Other operating expenses are determined by specific identification
S-6
<PAGE> 108
Schedule IV
Riverside Group, Inc. & Subsidiaries
Reinsurance
For the Year Ended December 31, 1995
(in Thousands, except percentages)
<TABLE>
<CAPTION>
Ceded to Assumed Percentage of
Gross Other from Other Net Amount Assumed
Amount Companies Companies Amount to Net
<S> <C> <C> <C> <C> <C>
Life Insurance
in force $ 1,310,452 $ (484,445) $ - $ 826,007 0.00%
===================================================================================
Premium Income:
Life $ 10,297 $ (2,347) $ 348 $ 8,298 4.19%
===================================================================================
</TABLE>
S-7
<PAGE> 109
WICKES LUMBER COMPANY AND SUBSIDIARIES
Schedule II-Valuation and Qualifying Accounts
For the Years Ended December 30, 1995, December 31, 1994, and December 25, 1993
(dollars in thousands)
<TABLE>
<CAPTION>
Col. A Col. B Col. C Col. D Col. E
Additions
Balance at Charged to Balance at
Beginning Costs and End of
Description of Period Expenses Deductions Period
<S> <C> <C> <C> <C>
1995:
Allowance for doubtful accounts ...... $4,657 $18,168 $14,617 $8,208
1994:
Allowance for doubtful accounts ...... $3,039 $9,214 $7,596 $4,657
1993:
Allowance for doubtful accounts ...... $2,439 $5,928 $5,328 $3,039
</TABLE>
WS-1
<PAGE> 1
EXHIBIT 10.08
Agreement
THIS AGREEMENT is entered into as of April 30, 1995 between Wilson
Financial Corporation, a Florida corporation ("WFC"), and Riverside Group, Inc.,
a Florida corporation ("RGI").
In consideration of the mutual covenants herein contained and for other
good and valuable consideration hereinafter set forth, the parties hereto agree
as follows:
The Advance
On the date hereof, RGI shall advance to WFC, or at its direction, the
sum of $85,000, which WFC agrees to repay upon demand by RGI, with interest from
the date hereof at a floating rate equal to the Base Rate plus two and one-half
percentage points (2.5%). As used herein, the term "Base Rate" means the rate
per annum announced from time to time by The First National Bank of Boston at
its head office as its Base Rate.
The Option
WFC hereby grants to RGI the option (the "Option") to acquire up to the
number of shares determined as below described (the "Option Shares") of RGI's
common stock, $.10 par value per share ("RGI Stock"), at an exercise price of
$5.875 per share, payable in cash or by forgiveness of an equivalent amount of
the Advance and related interest. The number of the Option Shares at any given
time shall be equal to (i) the aggregate unrepaid amount of the Advance and
related interest at the time, divided by (ii) the exercise price. The Option may
be exercised in whole or in part and from time to time by notice given by RGI to
WFC at any time after the date hereof and before all of the Advance and related
interest shall have been repaid by WFC.
Discretion to Sell RGI Stock on WFC's Behalf
WFC agrees to deliver to RGI possession of stock certificates
representing at least the number of shares of RGI Stock that, when multiplied
times the lower of the publicly-traded price per share of RGI Stock or the
exercise price of the Option, shall equal or exceed the aggregate unpaid amount
of the Advance and related interest. WFC hereby grants RGI irrevocable authority
to effect the sale thereof on WFC's behalf at such time, at such prices and on
such terms as RGI shall determine in its sole discretion and to apply the
proceeds against the Advance. In furtherance of the foregoing, WFC shall
constitute RGI and its designees as WFC's attorneys-in-fact to sign all such
documents and to take all such actions as they may deem appropriate, and WFC
shall itself take all such actions and sign such documents as RGI may request.
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed on its behalf by an officer thereunto duly authorized,
all as of the date first above written.
<PAGE> 2
RIVERSIDE GROUP, INC.
By_________________________________
WILSON FINANCIAL CORPORATION
By_________________________________
<PAGE> 1
EXHIBIT 10.09
Agreement
THIS AGREEMENT is entered into as of June 1, 1995 between Wilson
Financial Corporation, a Florida corporation ("WFC"), and Riverside Group, Inc.,
a Florida corporation ("RGI").
In consideration of the mutual covenants herein contained and for other
good and valuable consideration hereinafter set forth, the parties hereto agree
as follows:
The Advance
On the date hereof, RGI shall advance to WFC, or at its direction, up
to the sum of $500,000, which WFC agrees to repay upon demand by RGI, with
interest from the date hereof at a floating rate equal to the Base Rate plus two
and one-half percentage points (2.5%). As used herein, the term "Base Rate"
means the rate per annum announced from time to time by The First National Bank
of Boston at its head office as its Base Rate.
The Option
WFC hereby grants to RGI the option (the "Option") to acquire up to the
number of shares determined as below described (the "Option Shares") of RGI's
common stock, $.10 par value per share ("RGI Stock"), at an exercise price of
$6.00 per share, payable in cash or by forgiveness of an equivalent amount of
the Advance and related interest. The number of the Option Shares at any given
time shall be equal to (i) the aggregate unrepaid amount of the Advance and
related interest at the time, divided by (ii) the exercise price. The Option may
be exercised in whole or in part and from time to time by notice given by RGI to
WFC at any time after the date hereof and before all of the Advance and related
interest shall have been repaid by WFC.
Discretion to Sell RGI Stock on WFC's Behalf
WFC agrees to deliver to RGI possession of stock certificates
representing at least the number of shares of RGI Stock that, when multiplied
times the lower of the publicly-traded price per share of RGI Stock or the
exercise price of the Option, shall equal or exceed the aggregate unpaid amount
of the Advance and related interest. WFC hereby grants RGI irrevocable authority
to effect the sale thereof on WFC's behalf at such time, at such prices and on
such terms as RGI shall determine in its sole discretion and to apply the
proceeds against the Advance. In furtherance of the foregoing, WFC shall
constitute RGI and its designees as WFC's attorneys-in-fact to sign all such
documents and to take all such actions as they may deem appropriate, and WFC
shall itself take all such actions and sign such documents as RGI may request.
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed on its behalf by an officer thereunto duly authorized,
all as of the date first above written.
<PAGE> 2
RIVERSIDE GROUP, INC.
By_________________________________
WILSON FINANCIAL CORPORATION
By_________________________________
<PAGE> 1
EXHIBIT 10.11
MERGER AGREEMENT
BETWEEN
AMERICAN FINANCIAL ACQUISITION CORPORATION
AND
CIRCLE INVESTORS, INC.
March 8, 1996
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
SECTION PAGE
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<S> <C>
List of Annexes, Exhibits and Schedules v
1. DEFINITIONS 1
2. MERGER; CLOSING; TRANSFERS 1
(a) Merger 1
(b) Merger Consideration 2
(c) The Closing 2
(d) Actions at the Closing 2
(e) Effects of the Merger 2
(i) General 3
(ii) Articles of Incorporation. 3
(iii) Bylaws 3
(iv) Directors and Officers 3
(v) Conversion of Newco Shares 3
(vi) Conversion of Capital Stock of CAC 3
(f) Contributions to Newco 3
(g) Excluded Asset Transfers 4
(h) Investment Real Estate of AFL 4
3. REPRESENTATIONS AND WARRANTIES CONCERNING THE TRANSACTION 4
(a) Representations and Warranties of AFAC and Newco 4
(i) Authorization, Execution and Delivery 4
(ii) Noncontravention - AFAC 5
(iii) Required Consents 5
(iv) Organization, Standing and Authority of AFAC 5
(v) Brokerage 5
(b) Representations and Warranties of Circle and CAC 5
(i) Authorization, Execution and Delivery 5
(ii) Noncontravention - Circle/CAC 6
(iii) Required Consents 6
(iv) Organization, Standing and Authority of Circle and CAC 6
(v) Company Shares Not Registered 7
(vi) Brokerage 7
4. REPRESENTATIONS AND WARRANTIES CONCERNING NEWCO, THE COMPANY AND ITS
SUBSIDIARIES 7
(a) Organization, Standing and Authority; Subsidiaries 7
(b) Licenses 7
(c) Noncontravention 8
(d) Actions and Proceedings 8
(e) Outstanding Capital Stock of Newco, the Company and its
Subsidiaries 9
(f) Title to the Company Shares and Subsidiary Stock 9
(g) Options or Other Rights 9
(h) Corporate Records 9
(i) Insurance Annual Statements; Financial Statements 10
(j) Absence of Liabilities and Obligations 11
(k) [OMITTED] 11
(l) No Material Adverse Change 11
(m) Compliance with Laws 11
(n) Property 12
(o) Intellectual Property 13
(p) Contracts and Other Agreements 14
(q) Employment Benefits 14
(r) Employees 17
(s) Agents 18
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
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<S> <C>
(t) Operations 18
(u) State Security Deposits 19
(v) Powers of Attorney 19
(w) Insurance 19
(x) Intercompany Arrangements 19
(y) Tax Matters. 19
(z) Tax Status of Insurance/Annuity Products 21
(aa) Guaranty Fund Payments 21
(bb) NALICO-TX; Guardian 22
(cc) Environmental Matters 22
(dd) Bank Accounts 22
(ee) Brokerage 22
(ff) Underwriting Standards and Ratings 22
(gg) No Misrepresentations 23
5. REPRESENTATIONS AND WARRANTIES OF CIRCLE WITH RESPECT TO CIRCLE AND
ITS SUBSIDIARIES 23
(a) Organization, Standing and Authority; Subsidiaries 23
(b) Licenses 23
(c) Noncontravention 24
(d) Actions and Proceedings 24
(e) Outstanding Capital Stock of Circle and its Subsidiaries 24
(f) Title to the Subsidiary Stock 25
(g) Options or Other Rights 25
(h) Capitalization of Circle at Effective Time 25
(i) Corporate Records 25
(j) Insurance Annual Statements; Financial Statements 26
(k) Absence of Liabilities and Obligations 26
(l) No Material Adverse Change 27
(m) Compliance with Laws 27
(n) Operations 27
6. PRE-CLOSING COVENANTS 28
(a) General 28
(b) Notices and Consents 28
(c) Operation of Business 29
(d) Full Access 31
(e) Disclosure Schedule 31
(f) Licenses 32
(g) Filings 32
(h) State Insurance and Other Regulatory Approvals 32
(i) Wickes Mortgage Lending 33
(j) Exclusivity 33
(k) Other Documents 33
(l) Intercompany Arrangements 33
(m) Transfer of Certain Employees 34
(n) Operation of Business 34
7. POST-CLOSING COVENANTS 35
(a) General 35
(b) Litigation Support 35
(c) Employee Benefit Plan Cooperation 35
(d) Excluded Assets 35
(e) WINS/Services to Dependable Insurance Company, Inc 35
(f) SEC Filings and Computer Access 36
(g) NALICO-TX 36
(h) Duane T. Miller 36
8. CONDITIONS TO OBLIGATION TO CLOSE. 36
(a) Conditions to Obligation of Circle 36
(b) Conditions to Obligation of AFAC 39
</TABLE>
<PAGE> 4
<TABLE>
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<S> <C>
9. REMEDIES FOR BREACHES OF THIS AGREEMENT 40
(a) Survival Period; Indemnification as Remedy 40
(b) Indemnification Provisions for Benefit of Circle 40
(c) Indemnification Provisions for Benefit of AFAC 41
(d) Matters Involving Third Parties 41
(e) Determination of Adverse Consequences 42
(f) Exclusive Remedy After the Closing 42
(g) Claim Notice 42
9A. TAXES, ADJUSTMENTS AND TAX INDEMNITIES. 42
(a) Phase III Tax 42
(b) Section 338(h)(10) Election 42
(c) Short-Tax Year 43
(d) Hypothetical Tax 43
(e) Closing of Tax Year and Allocation 44
(f) Audits 44
(g) Amended Returns 44
(h) Tax Status of Insurance/Annuity Products 44
10. TERMINATION 44
(a) Termination of Agreement 44
(b) Effect of Termination 46
11. MISCELLANEOUS 47
(a) Press Releases and Public Announcements 47
(b) No Third-Party Beneficiaries 47
(c) Entire Agreement 47
(d) Succession and Assignment 47
(e) Counterparts 47
(f) Headings 47
(g) Expenses 47
(h) Notices 47
(i) Governing Law 48
(j) Attorneys' Fees 49
(k) Amendments and Waivers 49
(l) Severability 49
(m) Construction 49
(n) Incorporation of Exhibits, Annexes, and Schedules 49
</TABLE>
<PAGE> 5
LIST OF ANNEXES, EXHIBITS AND SCHEDULES
Exhibit A - Definitions
Exhibit B - Terms of Series C Preferred Stock
Exhibit C - Articles of Merger
Exhibit D - Excluded Assets
Exhibit E - Certain Information and Documents Relating to Transfer of
Excluded Assets
Exhibit F - Purchase and Sale of the Investment Real Estate of AFL
Exhibit G - Investment Policy
Exhibit H - Transfer of Certain Employees
Exhibit I - Copy of Language Pertaining to use of WINS by Dependable
Insurance Company, Inc.
Exhibit J - Shareholders' Agreement
Exhibit K - Section 338 Tax Allocation
Annex I - Exceptions to AFAC's Representations and Warranties
Concerning the Transaction
Annex II - Exceptions to Circle's Representations and Warranties
Concerning the Transaction
AFAC's - Exceptions to Representations and Warranties Disclosure
Concerning Newco, the Company and its Schedule Subsidiaries
Circle's - Exceptions to Representations and Warranties
Disclosure Concerning Circle and its Subsidiaries
Schedule
<PAGE> 6
MERGER AGREEMENT
This Agreement is entered into as of March _____, 1996, by and between
Circle Investors, Inc, an Indiana corporation ("Circle"), and Circle Acquisition
Corp., an Arizona corporation and a wholly-owned subsidiary of Circle ("CAC"),
and American Financial Acquisition Corporation, a Delaware corporation ("AFAC"),
and Securus Financial Corporation, an Arizona corporation and a wholly-owned
subsidiary of AFAC ("Newco"). Circle, CAC, AFAC and Newco are referred to
collectively herein as the "Parties" and singularly as "Party."
Riverside Group, Inc. ("Riverside") owns a majority of the outstanding
capital stock of AFAC. AFAC owns all the outstanding stock of Laurel Life
Insurance Company, a Texas life insurance company (the "Company"), and the
Surplus Note, dated February 26, 1991, in the original principal amount of
twenty seven million eight hundred thousand dollars ($27,800,000) (the "Note"),
issued by the Company. The Company owns all the outstanding stock of American
Founders Life Insurance Company, a Texas life insurance company ("AFL"). AFL
owns all of the outstanding capital stock of Aztec Life Assurance Company, a
California life insurance company ("Aztec Life"). Prior to the transaction
described in the next paragraph, AFAC is transferring all the outstanding stock
of Laurel Life and the Note to Newco.
This Agreement contemplates a merger transaction in which Circle and
AFAC will combine their insurance operations, AFAC will acquire shares of common
and preferred stock of Circle (as well as cash), and Circle will acquire all of
the outstanding capital stock of Newco, all upon the terms and conditions of
this Agreement.
Now, therefore, in consideration of the premises and the mutual
promises herein made, and in consideration of the representations, warranties,
and covenants herein contained, the Parties agree as follows:
1. DEFINITIONS.
As used in this Agreement, certain terms shall have the meanings set
forth in EXHIBIT A.
2. MERGER; CLOSING; TRANSFERS.
(a) Merger. On and subject to the terms and conditions of this
Agreement, CAC will merge with and into Newco (the "Merger") at the Effective
Time. Newco shall be the corporation surviving the Merger (the "Surviving
Corporation") and shall continue to be governed by the laws of the State of
Arizona, and the separate corporate existence of Newco with all its rights,
privileges, immunities, powers and franchises shall continue unaffected by the
Merger.
(b) Merger Consideration. The Merger Consideration to be received by
AFAC at the Effective Time as a result of the Merger is:
(i) an amount equal to seventeen million dollars
($17,000,000) in cash (the "Merger Cash"); plus
(ii) unless Circle or CAC shall have assumed the AFAC Debt as
provided for in Section 8(b)(ix) at or prior to the Effective Time, an
additional amount equal to eighteen million dollars ($18,000,000) in cash (which
would be paid in the same manner and at the same time as the Merger Cash) (the
"Additional Merger Cash"); plus
(iii) 3,600 shares of Series C Preferred Stock, $1,000
liquidation value per share, of Circle for a total of $3,600,000 of liquidation
value and having the terms and provisions set forth in EXHIBIT B attached hereto
(the "Series C Preferred Stock"); plus
(iv) 2,267,000 shares (the "Merger Shares") of Common Shares,
without par value, of Circle (the "Circle Common Stock") (collectively, the
Merger Cash, the Additional Merger Cash, if any, the Series C Preferred Stock
and the Merger Shares are herein called the "Merger Consideration").
(c) The Closing. The closing of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of Baker & Daniels in
Indianapolis, Indiana commencing at 9:00 a.m. local time, on the third (3rd)
business day following the satisfaction or waiver of all conditions to the
obligations of the Parties to consummate the transactions contemplated hereby
(other than conditions with respect to actions the respective Parties will take
at the Closing itself) or such other date as Circle and AFAC may mutually
determine. (The date and time at which the Closing actually occurs are herein
called the "Closing Date".)
<PAGE> 7
(d) Actions at the Closing. At the Closing, (i) Newco and AFAC will
deliver to Circle and CAC the various certificates, instruments, and documents
referred to in Section 8(a) below, (ii) Circle and CAC will deliver to AFAC the
various certificates, instruments, and documents referred to in Section 8(b)
below, (iii) Newco and CAC will file with the Secretary of State of the State of
Arizona Articles of Merger in the form attached hereto as EXHIBIT C (the
"Articles of Merger"), and (iv) Circle will cause the Surviving Corporation to
deliver the Merger Consideration to AFAC at the Effective Time as provided for
in subsection (e)(v) below.
(e) Effects of the Merger.
(i) General. The Merger shall become effective at the time
Newco and CAC file the Articles of Merger with the Secretary of State of the
State of Arizona (the "Effective Time"). The Merger shall have the effects set
forth in the Arizona Business Corporation Act. The Surviving Corporation may, at
any time after the Effective Time, take any action (including executing and
delivering any document) in the name and on behalf of either Newco or CAC in
order to carry out and effectuate the transactions contemplated by this
Agreement.
(ii) Articles of Incorporation. The Articles of Incorporation
of the Surviving Corporation shall be amended and restated at and as of the
Effective Time to read as did the Articles of Incorporation of CAC immediately
prior to the Effective Time (except that the name of the Surviving Corporation
will remain unchanged).
(iii) Bylaws. The Bylaws of the Surviving Corporation shall be
amended and restated at and as of the Effective Time to read as did the Bylaws
of CAC immediately prior to the Effective Time (except that the name of the
Surviving Corporation will remain unchanged).
(iv) Directors and Officers. The directors and officers of CAC
shall become the directors and officers of the Surviving Corporation at and as
of the Effective Time (retaining their respective positions and terms of
office), until their successors have been duly elected or appointed and
qualified or until their earlier death, resignation or removal.
(v) Conversion of Newco Shares. At and as of the Effective
Time, the Newco Shares outstanding immediately prior to the Effective Time shall
be converted into the right to receive the Merger Consideration, which shall be
delivered to AFAC at the Effective Time against delivery to Circle of the
certificates formerly representing all of the Newco Shares. At the Effective
Time, all of the Newco Shares, by virtue of the Merger and without any action on
the part of AFAC, shall no longer be outstanding and shall be cancelled and
retired and shall cease to exist, and AFAC shall thereafter cease to have any
rights with respect to such Shares, except the right to receive the Merger
Consideration. The Merger Cash and the Additional Cash, if any, shall be paid at
the Effective Time in cash, payable by wire transfer or delivery of
immediately-available funds.
(vi) Conversion of Capital Stock of CAC. At and as of the
Effective Time, each share of Common Stock, no par value per share, of CAC shall
be converted into one share of Common Stock no par value per share, of the
Surviving Corporation.
(f) Contributions to Newco. Immediately prior to the Closing, AFAC
shall make a capital contribution to Newco of all of the issued and outstanding
Company Shares and the Note. Prior to the Closing, Newco shall conduct no
activities other than those required in connection with its corporate
organization and the execution, delivery and performance of this Agreement.
(g) Excluded Asset Transfers. EXHIBIT D attached hereto sets forth a
complete list of all Excluded Assets as of March 1, 1996, and their statutory
values as of December 31, 1995, as set forth on the 1995 Insurance Annual
Statements of AFL or Aztec (the "Statutory Values"). Prior to and/or at the time
of Closing, the shares of Wickes Lumber Company stock that are Excluded Assets
shall be transferred to and received by AFAC without any additional
consideration pursuant to an assignment agreement in substantially the same form
as the assignment agreement that is part of Exhibit E. It is contemplated that
this result may be effected in the manner set forth in the "Contemplated
Assignment" description that is also part of Exhibit E. The other Excluded
Assets will be transferred at their respective Statutory Values pursuant to an
asset purchase agreement in substantially the same form as the asset purchase
agreement that is part of Exhibit E.
(h) Investment Real Estate of AFL. Simultaneously with the Closing,
Riverside and AFL shall consummate the purchase and sale of the Investment Real
Estate of AFL upon the terms and conditions set forth on Exhibit F.
3. Representations and Warranties Concerning the Transaction.
(a) Representations and Warranties of AFAC and Newco.
<PAGE> 8
Each of AFAC and Newco represents and warrants to Circle and CAC that
the statements contained in this Section 3(a) are correct and complete as of the
date of this Agreement and will be correct and complete as of the Closing Date
(as though made then and as though the Closing Date were substituted for the
date of this Agreement throughout this Section 3(a)).
(i) Authorization, Execution and Delivery. Each of AFAC and
Newco has full corporate power and authority to execute and deliver this
Agreement and to perform its obligations hereunder. The execution and delivery
of this Agreement by each of AFAC and Newco and the consummation by each of AFAC
and Newco of the transactions contemplated hereby have been duly authorized by
the Board of Directors and stockholders of each of AFAC and Newco, and no other
corporate proceedings on the part of AFAC or Newco are necessary to authorize
the execution and delivery of this Agreement and the consummation by AFAC and
Newco of the transactions contemplated hereby. This Agreement has been duly
executed and delivered by each of AFAC and Newco and constitutes a valid and
binding obligation of each of AFAC and Newco enforceable against each of them in
accordance with its terms, except as such enforcement may be limited by
applicable bankruptcy, rehabilitation, liquidation, insolvency, reorganization,
rearrangement, receivership and other similar laws relating to or affecting
insurance companies or the enforcement of creditors' rights generally, by
general principles of equity (regardless of whether enforceability is considered
in a proceeding in equity or at law), and by matters involving the discretionary
authority of any court before which any proceeding therefor may be brought or
any state Insurance Commissioner or Insurance Department that has jurisdiction.
(ii) Noncontravention - AFAC. Except as set forth in Annex I,
neither the execution and the delivery of this Agreement, nor the consummation
of the transactions contemplated hereby, will (A) violate any constitution,
statute, regulation, rule, injunction, judgment, order, decree, ruling, charge,
or other restriction of any government, governmental agency, or court to which
AFAC is subject or, any provision of its charter or bylaws or (B) conflict with,
result in a breach of, constitute a default under, result in the acceleration
of, create in any party the right to accelerate, terminate, modify, or cancel,
or require any notice under any agreement, contract, lease, license, instrument,
or other arrangement to which AFAC is a party or by which it is bound or to
which any of its assets is subject.
(iii) Required Consents. Except as set forth in Annex I, AFAC
is not required to give any notice to, make any filing with, or obtain any
authorization, consent or approval of any government or governmental agency or
other Person in order for the Parties to consummate the transactions
contemplated by this Agreement.
(iv) Organization, Standing and Authority of AFAC. AFAC is a
corporation duly organized, validly existing and in Good Standing under the laws
of the State of Delaware.
(v) Brokerage. No broker or finder has acted directly or
indirectly for AFAC or any of its Subsidiaries or will have any valid claim
against AFAC or any of its Subsidiaries for any brokerage, finder's fee or other
commission or compensation.
(b) Representations and Warranties of Circle and CAC.
Each of Circle and CAC represents and warrants to AFAC and Newco that
the statements contained in this Section 3(b) are correct and complete as of the
date of this Agreement and will be correct and complete as of the Closing Date
(as though made then and as though the Closing Date were substituted for the
date of this Agreement throughout this Section 3(b)).
(i) Authorization, Execution and Delivery. Each of Circle and
CAC has full corporate power and authority to execute and deliver this Agreement
and to perform its obligations hereunder. The execution and delivery of this
Agreement by Circle and CAC and the consummation by Circle and CAC of the
transactions contemplated hereby have been duly authorized by Circle's Board of
Directors and by CAC's Board of Directors and sole shareholder and no other
corporate proceedings on the part of Circle or CAC are necessary to authorize
the execution and delivery of this Agreement and the consummation by Circle and
CAC of the transactions contemplated hereby (except for (A) the approval of the
holders of Circle's Series A Preferred Stock to issue the Non-Voting Redeemable
Series B Preferred Stock to be issued pursuant to the Conseco Commitment and the
Series C Preferred Stock and (B) the filing of Articles of Amendment to Circle's
Articles of Incorporation to effect the foregoing). This Agreement has been duly
executed and delivered by each of Circle and CAC and constitutes a valid and
binding obligation of each of Circle and CAC, enforceable against each of them
in accordance with its terms, except as such enforcement may be limited by
applicable bankruptcy, rehabilitation, liquidation, insolvency, reorganization,
rearrangement, receivership and other similar laws relating to or affecting
insurance companies or the enforcement of creditors' rights generally, by
general principles of equity (regardless of whether enforceability is considered
in a proceeding in equity or at law), and by matters involving the discretionary
authority of any court before which any proceeding therefor may be brought or
any state Insurance Commissioner or Insurance Department that has jurisdiction.
<PAGE> 9
(ii) Noncontravention - Circle/CAC. Except as set forth in
Annex II, neither the execution and the delivery of this Agreement, nor the
consummation of the transactions contemplated hereby, will (A) violate any
constitution, statute, regulation, rule, injunction, judgment, order, decree,
ruling, charge, or other restriction of any government, governmental agency, or
court to which Circle or CAC is subject or, any provision of its charter or
bylaws or (B) conflict with, result in a breach of, constitute a default under,
result in the acceleration of, create in any party the right to accelerate,
terminate, modify, or cancel, or require any notice under any agreement,
contract, lease, license, instrument, or other arrangement to which Circle or
CAC is a party or by which it is bound or to which any of its assets is subject.
(iii) Required Consents. Except as set forth in Annex II,
neither Circle nor CAC is required to give any notice to, make any filing with,
or obtain any authorization, consent or approval of any government or
governmental agency or other Person in order for the Parties to consummate the
transactions contemplated by this Agreement.
(iv) Organization, Standing and Authority of Circle and CAC.
Circle is a corporation duly organized and validly existing and in Good Standing
under the laws of the State of Indiana and CAC is a corporation duly organized
and validly existing and in Good Standing under the laws of the State of
Arizona.
(v) Company Shares Not Registered. Circle is fully informed
as to the applicable limitations upon any distribution or resale of the Company
Shares (which have not been registered pursuant to the Securities Act) under the
Securities Act and will comply with applicable securities laws in the future
with respect to any distribution or resale of the Company Shares.
(vi) Brokerage. No broker or finder has acted directly or
indirectly for Circle or will have any valid claim against Circle for any
brokerage, finder's fee or other commission or compensation.
4. REPRESENTATIONS AND WARRANTIES CONCERNING NEWCO, THE COMPANY AND ITS
SUBSIDIARIES.
AFAC represents and warrants to Circle that the statements contained in
this Section 4 are correct and complete as of the date of this Agreement and
will be correct and complete as of the Closing Date (as though made then and as
though the Closing Date were substituted for the date of this Agreement
throughout this Section 4).
(a) Organization, Standing and Authority; Subsidiaries. Each of the
Company and its Subsidiaries is a life insurance company duly organized, validly
existing and in Good Standing under the laws of the state of its organization,
which is identified in Section 4(a) of the disclosure schedule delivered by AFAC
to Circle on the date hereof and initialed by the Parties ("AFAC's Disclosure
Schedule"). Newco is a corporation duly organized and validly existing and in
Good Standing under the laws of the State of Arizona. Except as disclosed in
Section 4(b) of AFAC's Disclosure Schedule, each of Newco, the Company and its
Subsidiaries is duly qualified as a foreign corporation or otherwise to conduct
business and is in Good Standing under the laws of each jurisdiction where such
qualification is required, except where the lack of such qualification would not
have a Material Adverse Effect. Newco does not currently own any Subsidiaries;
however, immediately prior to the Closing, AFAC shall have transferred all the
outstanding shares of capital stock of the Company to Newco, resulting in the
Company becoming a wholly-owned Subsidiary of Newco.
(b) Licenses. Except as set forth in Section 4(b) of AFAC's
Disclosure Schedule, each of the Company and its Subsidiaries is a life
insurance company, and is duly licensed and qualified to transact all business
it is currently conducting, including an insurance business in the lines of
business noted on Section 4(b) of AFAC's Disclosure Schedule; and is in Good
Standing in the state of its incorporation and in each of the other
jurisdictions where it is currently conducting such business, including those
with respect to which it is listed as having Licenses in Section 4(b) of the
Disclosure Schedule, and those Licenses are (i) in full force and effect and
(ii) are not subject to any action, proceeding, or investigation which restricts
or would restrict any of the Licenses.
(c) Noncontravention. Except as set forth in Section 4(c) of AFAC's
Disclosure Schedule, neither the execution and the delivery of this Agreement,
nor the consummation of the transactions contemplated hereby, will (i) violate
any constitution, statute, regulation, rule, injunction, judgment, order,
decree, ruling, charge, or other restriction of any government, governmental
agency, or court to which Newco, the Company or any of its Subsidiaries is
subject or any provision of the charter or bylaws of Newco, the Company or its
Subsidiaries or (ii) conflict with, result in a breach of, constitute a default
under, result in the acceleration of, create in any party the right to
accelerate, terminate, modify, or cancel, or require any notice under any
agreement, contract, lease, license, instrument, or other arrangement to which
Newco, the Company or any of its Subsidiaries is a party or by which it is bound
or to which any of its assets is subject (or result in the imposition of any
Security Interest upon any of its assets), except where the violation, conflict,
breach, default, acceleration, termination, modification, cancellation, failure
to give notice, or Security Interest would not have a Material Adverse Effect or
materially adversely affect the ability of the Parties to consummate the
transactions contemplated by this Agreement (AFAC will use reasonable efforts to
set forth on AFAC's Disclosure Schedule the matters described in this
<PAGE> 10
clause (ii) without regard to the exception for Material Adverse Effect). Except
as contemplated by this Agreement or set forth in Section 4(c) of AFAC's
Disclosure Schedule, none of Newco, the Company nor its Subsidiaries is required
to give any notice to, make any filing with, or obtain any authorization,
consent, or approval of any government or governmental agency or any other
Person in order for the Parties to consummate the transactions contemplated by
this Agreement, except where the failure to give notice, to file, or to obtain
any authorization, consent, or approval would not have a Material Adverse Effect
or materially adverse affect the ability of the Parties to consummate the
transactions contemplated by this Agreement (AFAC will use reasonable efforts to
set forth on AFAC's Disclosure Schedule the matters described in this sentence
without regard to the exception for Material Adverse Effect).
(d) Actions and Proceedings. Except for claims under or with respect
to insurance policies and except as set forth in Section 4(d) of AFAC's
Disclosure Schedule, (i) there are no outstanding orders, judgments,
injunctions, awards or decrees of any court, governmental or regulatory body or
arbitration tribunal against or naming Newco, the Company or its Subsidiaries,
or any of the directors, officers or employees of Newco, the Company or its
Subsidiaries in their capacity as such; and (ii) there are no complaints,
actions, suits or claims or legal, administrative or arbitration proceedings
against or investigations of, or to the Knowledge of AFAC, threatened against or
involving, any of Newco, the Company or its Subsidiaries, or any of their
directors, officers, employees in their capacity as such or their properties or
assets.
(e) Outstanding Capital Stock of Newco, the Company and its
Subsidiaries. Section 4(e) of AFAC's Disclosure Schedule sets forth all of the
authorized capitalization of Newco, the Company and its Subsidiaries (including
the Note and any treasury shares). AFAC is the record and beneficial owner of
one hundred (100) issued and outstanding Newco Shares, which represent all of
Newco's capital stock that is issued and outstanding. AFAC is the current record
and beneficial owner of seven hundred thousand (700,000) issued and outstanding
Company Shares, which represent all of the Company's capital stock that is
issued and outstanding, and the Note, all of which will be transferred to Newco
immediately prior to the Closing. All of the Newco Shares, the Company Shares,
the Note and the outstanding shares of capital stock of each Subsidiary are duly
authorized and are validly issued, fully paid and non-assessable. The Company or
one of its Subsidiaries is the record and beneficial owner of all the issued and
outstanding shares of capital stock of each of its Subsidiaries. Section 4(e) of
AFAC's Disclosure Schedule with respect to the Company's Subsidiaries, sets
forth the number of issued and outstanding shares of each class of its capital
stock, the names of the holders thereof, and the number of shares held by each
such holder.
(f) Title to the Company Shares and Subsidiary Stock. Except as set
forth in Section 4(f) of AFAC's Disclosure Schedule, (i) AFAC currently owns the
Newco Shares, the Company Shares and the Note and (ii) the Company or one of its
Subsidiaries owns all of the outstanding shares of capital stock of Aztec Life
and AFL, in each case free and clear of any Security Interests, restrictions,
liens or encumbrances. At the Effective Time, Newco will own such Company Shares
and the Note, free and clear of any Security Interest, restriction, lien or
encumbrance.
(g) Options or Other Rights. There is no (i) outstanding right,
subscription, warrant, call, unsatisfied preemptive right, option or other
contract or other agreement of any kind to purchase or otherwise to receive from
Riverside or any of its Subsidiaries any of the outstanding, authorized but
unissued, unauthorized or treasury shares of the common stock or any other
security of Newco, the Company or its Subsidiaries, (ii) outstanding security of
any kind convertible into any security of Newco, the Company or its
Subsidiaries, or (iii) outstanding contract or other agreement to purchase,
redeem or otherwise acquire any outstanding shares of Newco Shares, the Company
Stock or any other security of Newco, the Company or its Subsidiaries.
(h) Corporate Records. AFAC has heretofore delivered to Circle true,
complete and correct copies of the Certificates or Articles of Incorporation and
the By-Laws of Newco, the Company and its Subsidiaries, as in effect on the date
hereof, and made available to Circle copies of (i) the stock transfer records,
which are true and complete and reflect all issuances and transfers of capital
stock, and (ii) the corporate records of meetings of the directors and
shareholders, of the Company and its Subsidiaries, which for periods since
October 24, 1990, are true and complete and reflect all corporate actions and
proceedings of the directors and shareholders that actually took place since
that date which should be reflected therein.
(i) Insurance Annual Statements; Financial Statements. AFAC has
furnished to Circle copies of the Annual Statements ("Insurance Annual
Statements") of the Company and each of its Subsidiaries for the years ended
December 31, 1995, 1994, 1993, and 1992, in each case as filed by the Company or
the respective Subsidiary with the Insurance Department of the state of its
incorporation and with the appropriate regulatory authorities in all
jurisdictions in which such filing is required. The Insurance Annual Statements
of AFL and Aztec Life for the years ended December 31, 1994, 1993 and 1992 have
been audited. For the periods of the Most Recent Company Financial Statements,
there are no separate company audited financial statements with respect to the
Company itself. Additionally, AFAC has furnished to Circle audited financial
statements of the Company and each of its Subsidiaries for the years ended
December 31, 1994, 1993 and 1992, together with the auditor's reports thereon
and the notes thereto, and unaudited financial statements of the Company
<PAGE> 11
and each of its Subsidiaries for the twelve (12) months ended December 31, 1995,
prepared in accordance with GAAP (all of the foregoing financial statements
referred to in this Section 4(i) are hereinafter collectively referred to as the
"Most Recent Company Financial Statements"). Each of the Most Recent Company
Financial Statements fairly presents the financial position of the Company or
the applicable Subsidiary as of its date and results of its operations for the
periods set forth therein in accordance with SAP or GAAP, as the case may be,
applied on a consistent basis throughout the related periods, except as may be
noted therein or in Section 4(i) of AFAC's Disclosure Schedule and except that
the unaudited statements are subject to audit adjustments and may lack footnotes
and other presentation items.
The reserves established and reflected in the Most Recent Company
Financial Statements in respect of the insurance and annuity policies and
contracts of the Company and its Subsidiaries were determined in accordance with
generally accepted actuarial standards consistently applied, are fairly stated
in all material respects in accordance with sound actuarial principles and are
in compliance in all material respects with the requirements of the applicable
insurance laws, rules and regulations in the states of Texas or California, as
the case may be, as well as those of any other applicable jurisdictions.
During the period prior to Closing, AFAC shall deliver to Circle: (i)
unaudited monthly financial statements for the month of February and each month
thereafter of the Company and each of its Subsidiaries, within twenty (20)
calendar days after the end of that month (i.e., February financial statements
delivered on March 20, 1996); and (ii) audited SAP financial statements of AFL
and Aztec Life for the year ended December 31, 1995, and in any event within
five (5) days after the issuance of the final audit report thereon, which shall
be provided at least twenty (20) days prior to Closing. All of such financial
statements shall be prepared on a basis consistent with the Most Recent Company
Financial Statements.
(j) Absence of Liabilities and Obligations. Except as set forth on
Section 4(j) of AFAC's Disclosure Schedule, as of December 31, 1995, neither the
Company nor any of its Subsidiaries had any liabilities, that were required to
be reflected in accordance with GAAP or SAP, which were not reflected on the
Most Recent Company Financial Statements or any footnotes thereto. Newco, as a
newly-formed Subsidiary of AFAC has not incurred, and prior to the Closing will
not incur, any liabilities except as contemplated by this Agreement.
(k) [OMITTED]
(l) No Material Adverse Change. Except as set forth in Section 4(1)
of AFAC's Disclosure Schedule, since December 31, 1995, there has been (i) no
change, or development involving a prospective change, in the general affairs,
management, shareholders' equity, assets, liabilities, properties, business,
operations, condition (financial or otherwise) or results of operations of
Newco, the Company and its Subsidiaries, that has had or may reasonably be
expected to have a Material Adverse Effect, other than those resulting from (A)
a change in general economic or financial conditions in the United States or (B)
actions contemplated under this Agreement, and (ii) no material change in the
manner in which the business of the Company or its Subsidiaries is conducted;
nor will there be prior to Closing other than those resulting from actions
contemplated under this Agreement.
(m) Compliance with Laws. Except as set forth in Section 4(m) of
AFAC's Disclosure Schedule, Newco, the Company and each of its Subsidiaries have
complied in all respects (or will comply within the applicable statutory or
grace period provided) with all laws, regulations, including, but not limited
to, requirements concerning sales practices, licensing requirements and orders
applicable to it or to the operation of its business where the failure to do so
would have a Material Adverse Effect. Except as set forth in Section 4(m) of
AFAC's Disclosure Schedule, neither the Company nor any of its Subsidiaries is
in violation of (i) any applicable order, judgment, injunction, award or decree,
or (ii) any federal, state, local or foreign law, ordinance or regulation or any
other requirement of any governmental authority, court or arbitrator applicable
to any of its business that would have a Material Adverse Effect, and none of
AFAC, the Company or its Subsidiaries has received written notice that any such
violation is being alleged. The Company and each of its Subsidiaries has filed
all reports and other documents that it was required to file with any Insurance
Department or other governmental or regulatory authority having jurisdiction
over the Company or any of its Subsidiaries where the failure to file would have
a Material Adverse Effect. As of their respective dates, each of such reports
and documents complied in all respects with the relevant statutes, rules and
regulations enforced or promulgated by the authority with which they were filed
and did not contain any untrue statement of a fact or omit to state any fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading, where such non-compliance, untrue statement or omission would have a
Material Adverse Effect. AFAC has provided Circle with true and complete copies
of (A) all exam reports issued by any Insurance Department with respect to any
examination of the Company or any of its Subsidiaries conducted since December
31, 1992, and (B) all insurance policy and annuity or insurance contract forms
issued since October 24, 1990, by the Company or its Subsidiaries. Except as set
forth on Section 4(m) of AFAC's Disclosure Schedule, all deficiencies reported
on the exam reports referred to in clause (A) above have been resolved. Since
October 24, 1990, all insurance policy and annuity or insurance contract forms
issued by the Company or its Subsidiaries have been filed with and approved by
all applicable Insurance Departments to the extent required by law.
<PAGE> 12
(n) Property.
(i) Section 4(n)(i) of AFAC's Disclosure Schedule lists all
real property that the Company or any of its Subsidiaries own. Except as set
forth on Section 4(n)(i) of AFAC's Disclosure Schedule, with respect to each
such parcel of owned real property, and except for matters which would not have
a Material Adverse Effect:
(A) the Company or the applicable Subsidiary has good and
marketable title to the parcel of real property, free and clear of any
Security Interest, easement, covenant, or other restriction, except for
installments of special assessments not yet delinquent, recorded
easements, covenants, and other restrictions, and utility easements,
building restrictions, zoning restrictions, and other easements and
restrictions existing generally with respect to properties of a similar
character;
(B) there are no leases, subleases, licenses, concessions, or
other agreements granting to any party or parties the right of use or
occupancy of any portion of the parcel of real property; and
(C) there are no outstanding options or rights of first refusal
to purchase the parcel of real property, or any portion thereof or
interest therein, except as contemplated by EXHIBIT F attached hereto.
(ii) Section 4(n)(ii) of AFAC's Disclosure Schedule lists all
real property leased or subleased to Newco, the Company or any of its
Subsidiaries. AFAC has delivered to Circle correct and complete copies of the
leases and subleases listed in Section 4(ii) of AFAC's Disclosure Schedule (as
amended to date). Except as set forth in Section 4(n)(ii) of AFAC's Disclosure
Schedule, to the Knowledge of AFAC, each lease and sublease listed in
Section 4(n)(ii) of AFAC's Disclosure Schedule is legal, valid, binding,
enforceable, and in full force and effect, except where the illegality,
invalidity, nonbinding nature, unenforceability, or ineffectiveness would not
have a Material Adverse Effect. To the Knowledge of AFAC, none of Newco, the
Company, the applicable Subsidiary of the Company or any other party to such
lease or sublease, is in material violation or breach of or default under any
such lease or sublease.
(iii) Section 4(n)(iii) of AFAC's Disclosure Schedule lists
(x) all material hardware, software and network equipment, and all material
agreements and licenses relating thereto, that are used primarily in, or that
are essential to, processing and administering the business and accounting
systems of Newco, the Company and its Subsidiaries and (y) all other tangible
personal property owned, leased or used by Newco, the Company or any of its
Subsidiaries that is material to the business, identifying whether such property
is owned, leased or used. Except as set forth in Section 4(n)(iii) of AFAC's
Disclosure Schedule, the Company or its Subsidiaries have good and marketable
title to, or a valid leasehold or contractual interest in, all of such equipment
and other property, free and clear of any Security Interest, and all of such
equipment and other property is in good working order and condition, ordinary
wear and tear excepted.
(iv) Except as otherwise set forth in Section 4(n)(iv) of
AFAC's Disclosure Schedule, the Company and its Subsidiaries own or have the
right to use all material items of tangible and intangible property necessary
for the conduct of the business of the Company and its Subsidiaries as it is
currently conducted.
(o) Intellectual Property. Section 4(o) of AFAC's Disclosure Schedule
identifies all the intellectual property of Newco, the Company and its
Subsidiaries that constitutes a common law trade or service mark or name and
each registration which has been issued to each of the Company or its
Subsidiaries with respect to any intellectual property that is a trademark or
service mark, and identifies each license, agreement, or other permission which
each of the Company and its Subsidiaries has received from any third party with
respect to any of that intellectual property or has granted to any third party
with respect to any of that intellectual property. Except as set forth in
Section 4(o) of AFAC's Disclosure Schedule, (i) such intellectual property
constitutes all of the intellectual property of that type used in the conduct of
the business of Newco, the Company or any of its Subsidiaries and the Company
and its Subsidiaries have all rights necessary to use all of their intellectual
property of that type, free and clear of any claims by third parties, and (ii)
there are no infringement suits pending, or, to the Knowledge of AFAC or any of
its Subsidiaries, threatened, against any of them with respect to that
intellectual property, and none of Newco, AFAC or any of its Subsidiaries knows
of any fact or condition which could give rise to any such infringement suit.
(p) Contracts and Other Agreements. Section 4(p) of AFAC's Disclosure
Schedule lists every outstanding material contract and commitment, written or
oral, to which each of Newco, the Company or its Subsidiaries is a party or by
which it is bound, that is currently in effect, including without limitation,
reinsurance or loss portfolio transfer agreements, transactions between
Affiliates, relationships with its agents and brokers, general agency contracts,
distribution of insurance products, or leases (capital or otherwise); but
excluding direct insurance policies written or assumed by Newco, the Company or
any of its Subsidiaries. For purposes of this Section 4(p), a contract or
commitment is "material" if it (i) involves the payment to or by Newco, the
Company and its Subsidiaries in any calendar year of more than ten thousand
dollars
<PAGE> 13
($10,000) or (ii) cannot be terminated by Newco, the Company or its Subsidiaries
within thirty (30) days after giving notice of termination without resulting in
cost, penalty or liability to Newco, the Company or any of its Subsidiaries of
in excess of ten thousand dollars ($10,000). To Knowledge of AFAC, except as set
forth in Section 4(p) of AFAC's Disclosure Schedule, each contract or commitment
disclosed that is required to be disclosed in Section 4(p) of AFAC's Disclosure
Schedule is in full force and effect and constitutes a legal, valid and binding
obligation of Newco, the Company or the applicable Subsidiary and neither Newco,
the Company or the applicable Subsidiary nor, to the Knowledge of AFAC and its
Subsidiaries, any other party to such contract or commitment, is in material
violation or breach of or default under any such contract or commitment.
(q) Employment Benefits.
(i) Section 4(q) of AFAC's Disclosure Schedule lists each
Benefit Plan that any of Riverside and its Subsidiaries maintains or to which
any of Riverside and its Subsidiaries contributes and that covers or applies to
any employee or former employee of Newco, the Company and its Subsidiaries, and
except as set forth in Section 4(q) of AFAC's Disclosure Schedule:
(A) Each Benefit Plan that is an Employee Benefit Plan (and
each related trust, insurance contract, or fund) complies in form and
in operation in all material respects with the applicable requirements
of ERISA, the Code, and other applicable laws.
(B) All required reports and descriptions (including Form 5500
Annual Reports, Summary Annual Reports, PBGC-1's, and Summary Plan
Descriptions) have been filed or distributed appropriately and in
accordance with the Code and ERISA with respect to each such Benefit
Plan. The requirements of Part 6 of Subtitle B of Title I of ERISA and
of Code Sec. 4980B have been met in all material respects with respect
to each such Benefit Plan that is an Employee Welfare Benefit Plan.
(C) All contributions (including all employer contributions
and employee salary reduction contributions) that are due have been
paid to each such Benefit Plan which is an Employee Pension Benefit
Plan and all contributions for any period ending on or before the
Closing Date that are not yet due have been paid to each such Employee
Pension Benefit Plan or accrued in accordance with the past custom and
practice of each of the Company and its Subsidiaries. All premiums or
other payments for all periods ending on or before the Closing Date
will have been paid with respect to each such Benefit Plan that is an
Employee Welfare Benefit Plan or accrued on the Closing Balance Sheet.
All contributions required to have been made by the Company or its
Subsidiaries under the terms of any Benefit Plan have been timely made.
(D) Each such Benefit Plan that is an Employee Pension Benefit
Plan meets all of the requirements of a "qualified plan" under Code
Sec. 401(a) and has received, within the last two (2) years, a
favorable determination letter from the Internal Revenue Service, and
neither Riverside nor AFAC has Knowledge of any circumstances that
could affect adversely the qualified status of such Benefit Plan.
(E) The market value of assets under each such Benefit Plan
which is an Employee Pension Benefit Plan (other than any Multiemployer
Plan) equals or exceeds the present value of all vested and nonvested
liabilities thereunder determined in accordance with PBGC methods,
factors, and assumptions applicable to an Employee Pension Benefit Plan
terminating on the Closing Date.
(F) No such Benefit Plan that is in an Employee Pension
Benefit Plan has an "accumulated funding deficiency" (whether or not
waived) within the meaning of Code Sec. 412 or Section 302 of ERISA,
and no member of the Controlled Group of Corporations that includes the
Company and its Subsidiaries has an outstanding funding waiver.
(G) With respect to each Benefit Plan that is an Employee
Pension Benefit Plan, AFAC has delivered to Circle correct and complete
copies of the plan documents and summary plan descriptions, the most
recent determination letter received from the Internal Revenue Service,
the most recent Form 5500 Annual Report, and all related trust
agreements, insurance contracts, and other funding agreements that
implement each such Employee Benefit Plan, if any, and with respect to
any Benefit Plan that is not an Employee Pension Benefit Plan AFAC has
given Circle access to the documents described in this
Section 4(q)(i)(G), if any.
(ii) With respect to each Benefit Plan that any of Newco,
the Company, its Subsidiaries or the Controlled Group of Corporations that
includes Newco, the Company and its Subsidiaries or any member of that
Controlled Group of Corporations maintains or ever has maintained or to which
any of them contributes, ever has contributed, or ever has been required to
contribute:
<PAGE> 14
(A) No such Benefit Plan that is an Employee Pension Benefit
Plan (other than any Multiemployer Plan) has been completely or
partially terminated or been the subject of a Reportable Event as to
which notices would be required to be filed with the PBGC. No
proceeding by the PBGC to terminate any such Employee Pension Benefit
Plan (other than any Multiemployer Plan) has been instituted or, to the
Knowledge of AFAC, the Company and its Subsidiaries, threatened.
(B) There have been no Prohibited Transactions with respect to
any such Benefit Plan that is an Employee Benefit Plan. No Fiduciary
has any liability for any material breach of fiduciary duty or any
other material act or failure to act or comply in connection with the
administration of or investment of the assets of any such Employee
Benefit Plan. No action, suit, proceeding, hearing, or investigation
with respect to the administration of or the investment of the assets
of any such Employee Benefit Plan (other than routine claims for
benefits) is pending or, to the Knowledge of AFAC, the Company and its
Subsidiaries, threatened.
(C) None of Newco, the Company, any of its Subsidiaries and
the other members of the Controlled Group of Corporations that includes
Newco, the Company and its Subsidiaries has incurred any material
liability (whether known or unknown, whether asserted or unasserted,
whether absolute or contingent, whether accrued or unaccrued, whether
liquidated or unliquidated, and whether due or to become due) to the
PBGC (other than PBGC premium payments) or otherwise under Title IV of
ERISA (including any withdrawal liability) or under the Code with
respect to any such Benefit Plan that is an Employee Pension Benefit
Plan.
(iii) None of Newco, the Company, its Subsidiaries and the
other members of the Controlled Group of Corporations that includes Newco, the
Company and its Subsidiaries contributes to, ever has contributed to, or ever
has been required to contribute to any Multiemployer Plan or has any material
liability (whether known or unknown, whether asserted or unasserted, whether
absolute or contingent, whether accrued or unaccrued, whether liquidated or
unliquidated, and whether due or to become due), including any withdrawal
liability, under any Multiemployer Plan.
(iv) Each of Newco, the Company and its Subsidiaries has not
maintained nor maintains or contributes, nor ever has contributed, or ever has
been required to contribute to any Employee Welfare Benefit Plan providing
medical, health, or life insurance or other welfare-type benefits for current or
future retired or terminated employees, their spouses, or their dependents
(other than in accordance with Code Sec. 4980B).
(v) AFAC has delivered to Circle true and complete copies
of all Benefit Plans currently in effect, all of which are listed on Section
4(q) of AFAC's Disclosure Schedule.
(vi) Prior to Closing, Riverside shall amend each Employee
Benefit Plan that is set forth in clauses (a), (b) and (c) of the definition of
"Employee Benefit Plan" in which any employee of Newco, the Company or any of
its Subsidiaries is a participant to provide that the accrued benefits under
such Plan of any participant who is an employee of Newco, the Company or any of
its Subsidiaries at the Closing Date shall become one hundred percent (100%)
vested and nonforfeitable at the Closing Date. AFAC and Riverside shall take all
actions necessary to terminate, as of the Closing Date, the status of Newco, the
Company and its Subsidiaries as participating employers under all Employee
Pension Benefit Plans maintained by any member of the Controlled Group of
Corporations that includes Newco, the Company and its Subsidiaries. In addition,
AFAC and Riverside shall take all further action required to ensure that, under
the terms of each such Employee Pension Benefit Plan, each participant who is an
employee of Newco, the Company or any of its Subsidiaries at the Closing Date
will be treated, as of the Closing Date, as a terminated or retired employee
entitled to receive a distribution of his or her vested accrued benefits under
such Plan.
The Parties acknowledge that this Section 4(q)(vi) does not
require AFAC to amend or terminate Duane T. Miller's employment agreement with
AFAC or his stock option agreement for Riverside stock, which in each case will
remain governed by the terms and conditions of those agreements.
(r) Employees. A list of the employees of Newco, the Company and
its Subsidiaries (or of Riverside or AFAC but assigned to Newco, the Company or
any of its Subsidiaries on substantially a full-time basis), specifying the
legal employer of each such employee, as of January 1, 1996 is set forth in
Section 4(r) of AFAC's Disclosure Schedule.
(s) Agents. Access to lists of all the appointed agents of the
Company and its Subsidiaries that are authorized to write insurance as of
January 1, 1996, has been provided to Circle. Except as set forth in Section
4(s) of AFAC's Disclosure Schedule thereon, during the period since October 24,
1990, all of the agents of the Company and its Subsidiaries have complied with
all applicable state laws and regulations regarding market conduct in the sale
of insurance products on behalf of the Company and its Subsidiaries, where
non-compliance would have a Material Adverse Effect.
<PAGE> 15
(t) Operations. Except as set forth on Section 4(t) of AFAC's
Disclosure Schedule or otherwise contemplated under this Agreement, since
December 31, 1995, the business of Newco, the Company and its Subsidiaries has
been conducted only in the Ordinary Course of Business and none of Newco, the
Company and its Subsidiaries has:
(i) amended its Certificate of Incorporation or Articles of
Incorporation or By-laws or merged with or into or consolidated with any other
Person, subdivided or in any way reclassified any shares of its capital stock or
changed or agreed to change in any manner the rights of its outstanding capital
stock or the character of its business;
(ii) except pursuant to this Agreement, issued or sold or
purchased, or issued options or rights to subscribe to, or entered into any
contracts or commitments to issue or sell or purchase, any shares of its capital
stock or any evidence of indebtedness owed by the Company or its Subsidiaries,
including bonds, notes, debentures or other evidences of indebtedness;
(iii) incurred any indebtedness for borrowed money in excess
of ten thousand dollars ($10,000), or incurred or assumed any liability in
excess of five thousand dollars ($5,000), in each case, outside of the Ordinary
Course of Business;
(iv) declared or paid any dividends or declared or made any
other distributions of any kind to its shareholders or made any direct or
indirect redemption, retirement, purchase or other acquisition of any shares of
its capital stock;
(v) effected any increase in the salary or other
compensation of any employee other than increases made in the Ordinary Course of
Business that did not result in an increase of more than ten percent (10%) in
the salary or other compensation of any such person;
(vi) except for the sale of NALICO-TX or real estate,
effected any sale, transfer or conveyance (other than in the Ordinary Course of
Business) of the assets or properties of the Company or its Subsidiaries with
book values in excess of ten thousand dollars ($10,000); or
(vii) purchased or sold any stock or bonds with values
exceeding ten thousand dollars ($10,000).
(u) State Security Deposits. All securities deposited by the
Company or its Subsidiaries with state Insurance Departments and other
regulatory authorities at a given time are accurately reflected on the
Insurance Annual Statements as of such time.
(v) Powers of Attorney. Except as set forth in Section 4(v) of
AFAC's Disclosure Schedule, there are no outstanding powers of attorneys granted
by Newco, the Company or its Subsidiaries.
(w) Insurance. Section 4(w) of AFAC's Disclosure Schedule contains
a list and description of all liability, property, workers' compensation,
conduct of business, directors and officers liability, malpractice and other
similar insurance policies of Riverside, Newco, the Company or any of its
Subsidiaries relating to the ownership, use or operation of any of the tangible
assets or properties of the Company or such Subsidiary. Except as set forth on
Section 4(w) of AFAC's Disclosure Schedule, all premiums have been paid on all
such policies, such policies are in full force and effect and neither Riverside
nor any of its Subsidiaries has received any notice of cancellation or
non-renewal, or has Knowledge of any basis for termination, of any of such
policies. Section 4(w) of AFAC's Disclosure Schedule lists all claims and
collections that are in each case in excess of ten thousand dollars ($10,000)
with respect to the Company and its Subsidiaries under such policies.
(x) Intercompany Arrangements. Section 4(x) of AFAC's Disclosure
Schedule lists the current intercompany arrangements between or among Newco, the
Company or any of its Subsidiaries and their respective Affiliates. Circle has
been provided with the Forms B filed by the Company and each of its Subsidiaries
with any Insurance Department since December 31, 1995. Except as set forth on
Section 4(x) of AFAC's Disclosure Schedule, since December 31, 1995, all
settlements of intercompany liabilities between or among Newco, the Company or
any of its Subsidiaries on one hand and their respective Affiliates on the other
hand have been made, and all allocations of intercompany expenses have been
applied, in the Ordinary Course of Business.
(y) Tax Matters. For tax periods ending on or prior to December
31, 1995:
(i) The unpaid federal income Taxes of the Company and its
Subsidiaries do not exceed the reserves for federal income Tax liability (rather
than any reserve for deferred taxes established to reflect timing differences
<PAGE> 16
between book and tax income) set forth in the 1995 Insurance Annual Statements
for the Company and its Subsidiaries by an amount in excess of twenty thousand
dollars ($20,000).
(ii) The unpaid Taxes (other than federal income Taxes) of
the Company and its Subsidiaries do not exceed the reserves for those Taxes set
forth on the 1995 Insurance Annual Statements for the Company and its
Subsidiaries by an amount in excess of twenty thousand dollars ($20,000).
(iii) Each of the Company and its Subsidiaries has filed all
Tax Returns that it was required to file. All such Tax Returns were correct and
complete in all material respects. Except as noted on Section 4(y) of AFAC's
Disclosure Schedule, none of the Company and its Subsidiaries currently is the
beneficiary of any extension of time within which to file any income Tax Return.
(iv) There is no material dispute or claim concerning any
Tax liability of any of the Company and its Subsidiaries either (A) claimed or
raised by any authority in writing or (B) as to which AFAC has Knowledge based
upon personal contact with any agent of such authority.
(v) Section 4(y) of AFAC's Disclosure Schedule lists all
federal, state, local, and foreign Tax Returns filed with respect to any of the
Company and its Subsidiaries for taxable periods ended on or after December 31,
1990, that have been audited, and indicates those Tax Returns that currently are
the subject of audit. AFAC has delivered to Circle correct and complete copies
of all federal income Tax Returns, examination reports, and statements of
deficiencies assessed against or agreed to by any of the Company and its
Subsidiaries since December 31, 1990. None of the Company and its Subsidiaries
has waived any statute of limitations in respect of Taxes or agreed to any
extension of time with respect to an Tax assessment or deficiency.
(vi) None of the Company and its Subsidiaries is a party to
any tax allocation or sharing agreement with taxpayers outside the tax
consolidated group of which the Company or Riverside is common parent. Since the
tax period beginning October 25, 1990, none of the Company and its Subsidiaries
(A) has been a member of an Affiliated Group filing a consolidated federal
income Tax Return (other than a group the common parent of which was the
Company) or (B) has any liability for the Taxes of any Person (other than any of
the Company and its Subsidiaries) under Treas. Reg. Section 1.1502-6 (or any
similar provision of state, local, or foreign law), as a transferee or
successor, by contract, or otherwise.
(vii) The Company is subject to federal income Tax as a
"life insurance company" within the meaning of Section 801 of the Code,
however, AFAC is not representing and warranting that after Closing it will
retain that status.
(viii) Proper and accurate amounts have been withheld by the
Company and its Subsidiaries in full and complete compliance with the Tax and
social security withholdings provisions of applicable Federal, state, local and
foreign law, and such withholdings have been timely paid to the respective
Governmental Authorities.
(ix) The Company and its Subsidiaries have made all required
estimated tax payments sufficient to avoid any underpayment penalties.
(x) All tax reserves of the Company and its Subsidiaries
have been properly calculated in accordance with Section 807 of the Code or
applicable Code sections. There are no tax reserves for which the transitional
election of 1984 is used to calculate the tax reserve.
(xi) All tax reserves of the Company and its Subsidiaries
are calculated properly in accordance with Section 846 of the Code or
applicable Code sections.
(z) Tax Status of Insurance/Annuity Products
(i) All of the life insurance contracts of the Company and
its Subsidiaries qualify as "life insurance contracts" within the meaning of
Section 7702 of the Code, however, there is no representation and warranty that
after the Closing they will retain that status.
(ii) No life insurance contracts issued by the Company and
its Subsidiaries meet the test of "modified endowment contracts" contained in
Section 7702A of the Code, but there is no representation or warranty that
after the Closing they will retain that status.
<PAGE> 17
(iii) All annuity contracts issued by the Company and its
Subsidiaries that are subject to Section 72(s) of the Code, contain all of the
necessary provisions of Section 72(s), but no representation or warranty is
made that after the Closing they will retain that status.
(aa) Guaranty Fund Payments. Section 4(aa) of AFAC's Disclosure
Schedule sets forth for each jurisdiction the amount of the guaranty fund
payment to such jurisdiction that is capitalized on the Most Recent Company
Financial Statements. Except as disclosed on Section 4(aa) of AFAC's Disclosure
Schedule, each amount set forth on Section 4(aa) of AFAC's Disclosure Schedule
can be applied against future premium taxes in the respective jurisdiction to
the extent permitted by the laws of such jurisdiction, and a portion of such
amount may be applied in that manner prior to Closing.
(bb) NALICO-TX; Guardian. AFAC is not in breach of its obligations
to (i) General American Life Insurance Company under the Stock Purchase
Agreement dated as of September 20, 1995, among AFL, Riverside and General
American Life Insurance Company pursuant to which NALICO-TX was sold to General
American Life Insurance Company and the Asset Transfer and Assumption Agreement
entered into in connection therewith, or (ii) the Asset Transfer and Acquisition
Agreement dated as of December 8, 1994, between Aztec Life and The Guardian
Insurance & Annuity Company, Inc.
(cc) Environmental Matters. Except as set forth in Section 4(cc)
of AFAC's Disclosure Schedule, since October 24, 1990, neither the conduct nor
operation of Riverside, Newco, the Company or its Subsidiaries nor any condition
of any property presently or, since then, previously owned, leased or operated
by any of them violates or violated any Environmental Laws in any respect
material to the business of Newco, the Company and its Subsidiaries and since
then no condition has existed or event has occurred with respect to any of them
or any such property that, which, with notice or the passage of time, or both,
would constitute a violation material to the business of Newco, the Company and
its Subsidiaries of Environmental Laws or obligate (or potentially obligate)
Newco, the Company or its Subsidiaries to remedy, stabilize, neutralize or
otherwise alter the environmental condition of any such property where the
aggregate cost of such actions would be material to Newco, the Company and its
Subsidiaries. From October 25, 1990, to the present none of Riverside, AFAC,
Newco, the Company and any of its Subsidiaries has received any notice that any
operation or condition of any property presently or, previously owned, leased or
operated by any of them are or were in violation of any Environmental Laws or
that any of them are responsible (or potentially responsible) for the cleanup or
other remediation of any pollutants, contaminants, or hazardous or toxic wastes,
substances or materials at, on or beneath any such property.
(dd) Bank Accounts. Section 4(dd) of AFAC's Disclosure Schedule
identifies the bank accounts of Newco, the Company and its Subsidiaries, as well
as the signatories with respect thereto.
(ee) Brokerage. No broker or finder has acted directly or
indirectly for Riverside, AFAC, Newco, the Company or its Subsidiaries or has or
will have any valid claim against Circle or Newco, the Company and its
Subsidiaries for any brokerage, finder's fee or other commission or
compensation.
(ff) Underwriting Standards and Ratings. Since October 24, 1990,
the underwriting standards utilized and ratings applied by the Company and its
Subsidiaries and, to the Knowledge of AFAC, by any other Person that is a party
to or bound by any reinsurance, coinsurance, or other similar contract with each
of the Company and its Subsidiaries, conform in all material respects to
industry accepted practices and the standards and ratings required pursuant to
the terms of the respective reinsurance, coinsurance, or other similar
contracts.
(gg) No Misrepresentations. None of the representations and
warranties of AFAC set forth in this Agreement or any statement set forth in any
of the schedules to this Agreement or in the certificates of officers to be
delivered to Circle at Closing contains or shall contain any untrue statement of
a material fact or omits or shall omit any material fact required to be stated
therein. AFAC has disclosed all material facts necessary to make such
representations and warranties contained herein or any such statement not
misleading, in light of the circumstances under which they were made.
5. REPRESENTATIONS AND WARRANTIES OF CIRCLE WITH RESPECT TO CIRCLE AND ITS
SUBSIDIARIES.
Circle represents and warrants to AFAC that the statements contained in
this Section 5 are correct and complete as of the date of this Agreement and
will be correct and complete as of the Closing Date (as though made then and as
though the Closing Date were substituted for the date of this Agreement
throughout this Section 5).
(a) Organization, Standing and Authority; Subsidiaries. Liberty is
Circle's only Subsidiary other than CAC. Liberty is a life insurance company
duly organized, validly existing and in Good Standing under the laws of the
State of Ohio. Each of Circle and its Subsidiaries is duly qualified as a
foreign corporation or otherwise to conduct business and is in Good Standing
under the laws of each jurisdiction where such qualification is required, except
where the lack of such
<PAGE> 18
qualification would not have a Material Adverse Effect except as disclosed in
Section 5(b) of the disclosure schedule delivered by Circle to AFAC on the date
hereof and initialed by the parties ("Circle's Disclosure Schedule").
(b) Licenses. Except as set forth in Section 5(b) of Circle's
Disclosure Schedule, Liberty is duly licensed and qualified to transact all
business it is currently conducting, including an insurance business in the
lines of business noted on Section 5(b) of Circle's Disclosure Schedule; and is
in Good Standing in the State of Ohio and in each of the other jurisdictions
where it is currently conducting such business, including those with respect to
which it is listed as having Licenses in Section 5(b) of Circle's Disclosure
Schedule, and those Licenses are (i) in full force and effect and (ii) are not
subject to any action, proceeding, or investigation which restricts or would
restrict any of the Licenses.
(c) Noncontravention. Except as set forth in Section 5(c) of Circle's
Disclosure Schedule, neither the execution and the delivery of this Agreement,
nor the consummation of the transactions contemplated hereby, will (i) violate
any constitution, statute, regulation, rule, injunction, judgment, order,
decree, ruling, charge, or other restriction of any government, governmental
agency, or court to which Liberty is subject or any provisions of the charter or
bylaws of Liberty or (ii) conflict with, result in a breach of, constitute a
default under, result in the acceleration of, create in any party the right to
accelerate, terminate, modify, or cancel, or require any notice under any
agreement, contract, lease, license, instrument, or other arrangement to which
Liberty is a party or by which it is bound or to which any of its assets is
subject (or result in the imposition of any Security Interest upon any of its
assets), except where the violation, conflict, breach, default, acceleration,
termination, modification, cancellation, failure to give notice, or Security
Interest would not have a Material Adverse Effect or materially adversely affect
the ability of the Parties to consummate the transactions contemplated by this
Agreement. (Circle will use reasonable efforts to set forth on Circle's
Disclosure Schedule the matters described in this clause (ii) without regard to
the exception for Material Adverse Effect.) Except as contemplated by this
Agreement or set forth in Section 5(c) of Circle's Disclosure Schedule, Liberty
is not required to give any notice to, make any filing with, or obtain any
authorization, consent, or approval of any government or governmental agency or
any other Person in order for the Parties to consummate the transactions
contemplated by this Agreement where the failure to give notice, to file, or to
obtain any authorization, consent, or approval would not have a Material Adverse
Effect or materially adverse affect the ability of the Parties to consummate the
transactions contemplated by this Agreement. (Circle will use reasonable efforts
to set forth on Circle's Disclosure Schedule the matters described in this
sentence without regard to the exception for Material Adverse Effect.)
(d) Actions and Proceedings. Except for claims under or with respect to
insurance policies and except as set forth in Section 5(d) of Circle's
Disclosure Schedule, (i) there are no outstanding orders, judgments,
injunctions, awards or decrees of any court, governmental or regulatory body or
arbitration tribunal against or naming Circle or its Subsidiaries, or any of the
directors, officers or employees of Circle or its Subsidiaries in their capacity
as such; and (ii) as of the date of this Agreement there are no complaints,
actions, suits or claims or legal, administrative or arbitration proceedings
against or investigations of, or to the Knowledge of Circle, threatened against
or involving Circle or its Subsidiaries, or any of their directors, officers,
employees in their capacity as such or their properties or assets.
(e) Outstanding Capital Stock of Circle and its Subsidiaries.
Section 5(e) of Circle's Disclosure Schedule sets forth all of the authorized
capitalization of Circle and its Subsidiaries (including any treasury shares).
Circle is the record and beneficial owner of (i) 100 issued and outstanding
shares of common stock, with no par value, of CAC, which represent all of CAC's
capital stock that is issued and outstanding and (ii) 1,500,000 issued and
outstanding shares of $1.00 par value common stock of Liberty, which represent
all of Liberty's capital stock that is issued and outstanding. All of the
outstanding shares of capital stock of Circle and its Subsidiaries are duly
authorized and are validly issued, fully paid and non-assessable.
(f) Title to the Subsidiary Stock. Except as set forth in Section 5(f)
of Circle's Disclosure Schedule, Circle owns all of the outstanding shares of
capital stock of each of CAC and Liberty, free and clear of any Security
Interests, restrictions, liens or encumbrances.
(g) Options or Other Rights. Except as set forth in Section 5(g) of
Circle's Disclosure Schedule, there is no (i) outstanding right, subscription,
warrant, call, unsatisfied preemptive right, option or other contract or other
agreement of any kind to purchase or otherwise to receive from Circle or any of
its Subsidiaries any of the outstanding, authorized but unissued, unauthorized
or treasury shares of the common stock or any other security of Circle or its
Subsidiaries, (ii) outstanding security of any kind convertible into any
security of Circle or its Subsidiaries, or (iii) outstanding contract or other
agreement to purchase, redeem or otherwise acquire any outstanding shares of or
security of Circle or its Subsidiaries.
(h) Capitalization of Circle at Effective Time. Immediately after the
Effective Time, the authorized capital stock of Circle shall consist of (i)
shares of Circle Common Stock, not more than 7,267,000 of which shall be issued
and
<PAGE> 19
outstanding (including the Merger Shares), and (ii) 1,000,000 shares of
Special Shares, without par value, of which Circle shall have authorized the
issuance of (A) 5,000 shares of Series A Preferred Stock, 4,398 of which shall
be issued and outstanding, (B) 30,000 shares of Series B Non-Voting Redeemable
Preferred Stock, 20,000 of which shall be issued and outstanding pursuant to the
Conseco Commitment, and (C) 3,600 shares of Series C Preferred Stock, all of
which shall be issued and outstanding. The Merger Shares and the Series C
Preferred Stock shall, upon the issuance thereof at the Effective Time in
accordance with this Agreement, be duly authorized, validly issued, fully paid
and non-assessable. From December 31, 1995, to immediately after the Effective
Time, none of the shares of issued and outstanding Circle Common Stock shall
have been issued for less than $1.00 in cash per share, except for the warrants
to be issued to Conseco pursuant to the Conseco Commitment.
(i) Corporate Records. Circle has heretofore delivered to AFAC true,
complete and correct copies of the Certificates or Articles of Incorporation and
the By-Laws of Circle and its Subsidiaries, as in effect on the date hereof.
(j) Insurance Annual Statements; Financial Statements. Circle has
furnished to AFAC a copy of the Annual Statement of Liberty for the year ended
December 31, 1995 (which has not been audited), as filed by Liberty with the
Insurance Department of the State of Ohio and with the appropriate regulatory
authorities in all jurisdictions in which such filing is required. Additionally,
Circle has furnished to AFAC audited financial statements of each of Circle for
the year ended December 31, 1994 together with the auditor's report thereon and
the notes thereto, and unaudited financial statements of Circle and Liberty for
the twelve (12) months ended December 31, 1995, prepared in accordance with GAAP
(all of the foregoing financial statements referred to in this Section 5(j) are
hereinafter collectively referred to as the "Most Recent Circle Financial
Statements"). Each of the Most Recent Circle Financial Statements fairly present
the financial position of Circle or Liberty as of its date and results of its
operations for the periods set forth therein in accordance with SAP or GAAP, as
the case may be, on a consistent basis through the related periods, except as
may be noted therein or in Section 5(j) of Circle's Disclosure Schedule and
except that the unaudited statements are subject to audit adjustments and may
lack footnotes and other presentation items.
The reserves established and reflected in the Most Recent Circle
Financial Statements in respect of the insurance and annuity policies and
contracts of Liberty were determined in accordance with generally accepted
actuarial standards consistently applied or based on actuarial assumptions that
were in accordance with those called for in relevant insurance policy and
contract provisions, are fairly stated in all material respects in accordance
with sound actuarial principles and are in compliance in all material respects
with the requirements of the applicable insurance laws, rules and regulations in
the State of Ohio, as well as those of any other applicable jurisdictions.
During the period prior to Closing, Circle shall deliver to AFAC: (i)
unaudited monthly financial statements for the month of February and each month
thereafter of Circle and Liberty (the "Monthly Financial Statements"), within
twenty (20) days after the end of that month (i.e., February financial
statements delivered on March 20, 1996); and (ii) audited GAAP financial
statements of each of Circle and Liberty, consolidated for the year ended
December 31, 1995, within five (5) days after the issuance of the final audit
report thereon. Each of such statements shall be prepared on a basis consistent
with the Most Recent Circle Financial Statements.
(k) Absence of Liabilities and Obligations. Except as set forth on
Section 5(k) of Circle's Disclosure Schedule, as of December 31, 1995, neither
Circle nor Liberty had any liabilities that were required to be reflected in
accordance with GAAP or SAP which were not reflected on the Most Recent Circle
Financial Statements.
(l) No Material Adverse Change. Except as set forth in Section 5(l) of
Circle's Disclosure Schedule, since December 31, 1995, there has been (i) no
change, or development involving a prospective change, in the general affairs,
management, shareholders' equity, assets, liabilities, properties, business,
operations, condition (financial or otherwise) or results of operations of
Circle and its Subsidiaries, that has had or may reasonably be expected to have
a Material Adverse Effect, other than those resulting from (A) a change in
general economic or financial conditions in the United States or (B) actions
contemplated under this Agreement, and (ii) no material change in the manner in
which the business of Circle or its Subsidiaries is conducted; nor will there be
prior to Closing other than those resulting from actions contemplated under this
Agreement.
(m) Compliance with Laws. Except as set forth in Section 5(m) of
Circle's Disclosure Schedule, since August 25, 1995, Circle and each of its
Subsidiaries have complied in all respects (or will comply within the applicable
statutory or grace period provided) with all laws, regulations, including, but
not limited to, requirements concerning sales practices, licensing requirements
and orders applicable to it or to the operation of its business where the
failure to do so would have a Material Adverse Effect. Except as set forth in
Section 5(m) of Circle's Disclosure Schedule, neither Circle nor any of its
Subsidiaries is in violation of (i) any applicable order, judgment, injunction,
award or decree, or (ii) any federal, state, local or foreign law, ordinance or
regulation or any other requirement of any governmental authority, court or
arbitrator applicable to any of its business that would have a Material Adverse
Effect, and none of Circle or its Subsidiaries has
<PAGE> 20
received written notice that any such violation is being alleged. Circle and
each of its Subsidiaries has filed all reports and other documents that it was
required to file since August 25, 1995, with any Insurance Department or other
governmental or regulatory authority having jurisdiction over Circle or any of
its Subsidiaries where the failure to file would have a Material Adverse Effect.
As of their respective dates, each of such reports and documents complied in all
respects with the relevant statutes, rules and regulations enforced or
promulgated by the authority with which they were filed and did not contain any
untrue statement of a fact or omit to state any fact required to be stated
therein or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading, where such
non-compliance, untrue statement or omission would have a Material Adverse
Effect.
(n) Operations. Except as set forth on Section 5(n) of Circle's
Disclosure Schedule or otherwise contemplated under this Agreement, since
December 31, 1995, the business of Circle and its Subsidiaries has been
conducted only in the Ordinary Course of Business and none of Circle and its
Subsidiaries has:
(i) amended its Certificate of Incorporation or Articles of
Incorporation or By-laws or merged with or into or consolidated with any other
Person, subdivided or in any way reclassified any shares of its capital stock or
changed or agreed to change in any manner the rights of its outstanding capital
stock or the character of its business;
(ii) except pursuant to this Agreement, issued or sold or
purchased, or issued options or rights to subscribe to, or entered into any
contracts or commitments to issue or sell or purchase, any shares of its capital
stock or any evidence of indebtedness owed by Circle or its Subsidiaries,
including bonds, notes, debentures or other evidences of indebtedness;
(iii) incurred any indebtedness for borrowed money in excess
of ten thousand dollars ($10,000), or incurred or assumed any liability in
excess of five thousand dollars ($5,000), in each case, outside of the Ordinary
Course of Business;
(iv) declared or paid any dividends or declared or made any
other distributions of any kind to its shareholders or made any direct or
indirect redemption, retirement, purchase or other acquisition of any shares of
its capital stock; or
(v) effected any sale, transfer or conveyance (other than in
the Ordinary Course of Business) of the assets or properties of Circle or its
Subsidiaries with book values in excess of ten thousand dollars ($10,000).
6. PRE-CLOSING COVENANTS. The Parties agree as follows with respect to
the period between the execution of this Agreement and the Closing.
(a) General. Each of the Parties will use its reasonable best efforts
to take all action and to do all things necessary, proper, or advisable in order
to consummate and make effective the transactions contemplated by this Agreement
(including satisfaction, but not waiver, of the closing conditions set forth in
Section 8 below).
(b) Notices and Consents. Each of the Parties will (and AFAC will
cause the Company and its Subsidiaries to) (i) give notices to those third
parties and will use their reasonable best efforts to obtain those third party
consents that are necessary, proper or advisable in connection with the
transactions contemplated hereby and (ii) give any notices to, make any filing
with, and use its reasonable best efforts to obtain any authorizations,
consents, and approvals of, governments and governmental agencies in connection
with the transactions contemplated hereby. Without limiting the generality of
the foregoing, each of the Parties will file (and AFAC will cause the Company to
file) any Notification and Report Forms and related material that it may be
required to file with the Federal Trade Commission and the Antitrust Division of
the United States Department of Justice under the Hart-Scott-Rodino Act, will
use its reasonable best efforts to obtain (and AFAC will cause the Company to
use its reasonable best efforts to obtain) a waiver from the applicable waiting
period, and will make (and AFAC will cause the Company to make) any further
filings pursuant thereto that may be necessary in connection therewith.
AFAC and Circle agree that each of them will pay one-half (1/2) of all filing
fees payable in connection with any filings under the Hart-Scott-Rodino-Act.
(c) Operation of Business. Except as otherwise contemplated by this
Agreement or as Circle may otherwise consent to in writing, which will not be
unreasonably withheld or delayed, AFAC will cause Newco, the Company and each of
its Subsidiaries to:
<PAGE> 21
(i) in all material respects, operate only in the Ordinary
Course of Business and in substantially the same manner as its business is
currently conducted;
(ii) use reasonable best efforts to keep available such
employee and other services and facilities as are necessary or appropriate to
continue to operate their business as required by the foregoing clause (i);
(iii) use reasonable best efforts to preserve its relationships
with agents, lenders, suppliers, policyholders, licensors and licensees,
insurance departments and others having material business dealings with the
Company and its Subsidiaries;
(iv) not issue, sell or deliver any shares of its capital
stock or issue or sell any securities convertible into or exchangeable for, or
options with respect to, or warrants to purchase or rights to subscribe to any
of its capital stock;
(v) not effect any recapitalization, reclassification, stock
dividend, stock split or similar change in capitalization;
(vi) not merge with or into, consolidate or otherwise combine
with, or acquire all or substantially all of the assets of, any other entity;
(vii) not make any commitments outside of the Ordinary Course
of Business that extend beyond the Closing Date in an amount individually
exceeding ten thousand dollars ($10,000) or in the aggregate exceeding twenty
five thousand dollars ($25,000);
(viii) not change any provision of its Certificate or Articles
of Incorporation or By-laws or similar governing documents;
(ix) to use reasonable best efforts to not permit any material
insurance policy naming it as a beneficiary or a loss payee to be cancelled or
terminated or any of the coverage thereunder to lapse unless simultaneously with
such termination or cancellation replacement policies reasonably satisfactory to
Circle are in full force and effect;
(x) not enter into any material contract, lease or other
agreement, outside of the Ordinary Course of Business, that extends by its terms
beyond the Closing Date;
(xi) not amend or cancel or agree to the amendment or
cancellation of any reinsurance agreement, treaty or arrangement outside of the
Ordinary Course of Business;
(xii) not make any material change in any accounting methods or
practices;
(xiii) not deviate in a material respect from the material terms
of any life insurance or annuity policy or contract outside of the Ordinary
Course of Business;
(xiv) not effect any increases in salary, bonuses or otherwise
increase or enhance any employee or officer compensation or benefits outside of
the Ordinary Course of Business or make any promise of employment to existing
employees that extend by their terms beyond the Closing Date or hire any new
employees;
(xv) not declare or pay dividends or declare or make any other
distributions of any kind to its shareholders or make any direct or indirect
redemption, retirement, purchase or other acquisition of its capital stock;
(xvi) not effect any sale, transfer or conveyance (other than
in the Ordinary Course of Business) of assets or properties of the Company or
its Subsidiaries with book values in excess of ten thousand dollars ($10,000)
other than real estate;
(xvii) not borrow or agree to borrow any amount of funds, or
directly or indirectly guarantee or agree to guarantee any obligations of others
in each case outside of the Ordinary Course of Business; or
(xviii) invest its future cash flow, any cash from matured and
maturing investments, any cash proceeds from the sale of its assets and
properties, and any cash funds currently held by it, exclusively in cash
equivalent assets or in short-term investments (consisting of United States
government issued or guaranteed securities, commercial paper rated A-1 or P-1,
or certificates of deposit issued by one or more of the banks or financial
institutions listed in Section 4(dd) of AFAC's Disclosure Schedule), except (A)
as otherwise required by law, (B) as required to provide cash (in the Ordinary
Course of
<PAGE> 22
Business) to meet its reasonably anticipated current obligations or (C) as
permitted in accordance with the Statement of Investment Policy and Guidelines
set forth on EXHIBIT G attached hereto.
(xix) not enter into any agreement or understanding to do any
of the things described in clauses (i) through (xviii) above.
Written notice to Circle via facsimile to the facsimile number of Circle in
Section 11(h) of this Agreement shall be treated as a deemed consent by Circle
if Circle does not respond orally or in writing that Circle is not consenting
within three (3) business days after the written notice is duly given.
(d) Full Access. AFAC will permit, and AFAC will cause the Company
and its Subsidiaries to permit, representatives of Circle to have full access at
all reasonable times, and in a manner so as not to interfere with the normal
business operations of the Company and its Subsidiaries, to all premises,
properties, personnel, books, records (including tax records), contracts, and
documents of or pertaining to each of Newco, the Company and its Subsidiaries.
Circle will treat and hold as such any Confidential Information it receives from
AFAC and the Company in the course of the reviews contemplated by this
Section 6(d), will not use any of the Confidential Information except in
connection with this Agreement, and, if this Agreement is terminated for any
reason whatsoever, will return to AFAC and the Company all tangible embodiments
(and all copies) of the Confidential Information which are in its possession.
(e) Disclosure Schedule.
(i) AFAC may update and revise AFAC's Disclosure Schedule to
reflect any omission, inaccuracy or development causing a breach of any of the
representations and warranties in Section 4 above. Unless Circle has the right
to terminate this Agreement pursuant to Section 10(a)(ii) below by reason
thereof and exercises that right within the period of ten (10) business days
referred to in Section 10(a)(ii) below, the update and revision pursuant to this
Section 6(e)(i) will be deemed to have amended AFAC's Disclosure Schedule, to
have qualified the representations and warranties contained in Section 4 above,
and to have cured any misrepresentation or breach of warranty that otherwise
might have existed hereunder by reason thereof.
(ii) Circle may update and revise Circle's Disclosure Schedule
to reflect any omission, inaccuracy or development causing a breach of any of
the representations and warranties in Section 5 above. Unless AFAC has the right
to terminate this Agreement pursuant to Section 10(a)(iii) below by reason
thereof and exercises that right within the period of ten (10) business days
referred to in Section 10(a)(iii) below, the update and revision pursuant to
this Section 6(e)(ii) will be deemed to have amended Circle's Disclosure
Schedule, to have qualified the representations and warranties contained in
Section 5 above, and to have cured any misrepresentation or breach of warranty
that otherwise might have existed hereunder by reason thereof.
(iii) Each Party will give prompt written notice to the other
upon discovering a material breach of any of its own representations and
warranties in Section 3, Section 4 or Section 5 above. Except as provided in
Section 6(e)(i) or (ii), no disclosure by any Party pursuant to this
Section 6(e)(iii), however, shall be deemed to amend or supplement Annex I,
Annex II, AFAC's Disclosure Schedule or Circle's Disclosure Schedule or to
prevent or cure any misrepresentation or breach of warranty.
(f) Licenses. From the date hereof through the Closing Date, AFAC
shall cause Newco, the Company and its Subsidiaries (i) to not take any
unreasonable action that would impair the ability of any of the Company and its
Subsidiaries to renew or retain its Licenses, and (ii) to take all reasonable
actions necessary to maintain the current Licenses to conduct business in each
of the applicable jurisdictions in its current status or better, provided that
neither AFAC nor the Company shall be obligated to incur out-of-pocket expenses
greater than seventeen thousand six hundred dollars ($17,600) with respect to
the maintenance of any individual License for a jurisdiction.
(g) Filings. AFAC shall cause the Company and it Subsidiaries to
continue to make all necessary filings with each of the applicable insurance
departments and other governmental or regulatory agencies having jurisdiction
over the Company and its Subsidiaries.
(h) State Insurance and Other Regulatory Approvals. Circle shall, in
cooperation with AFAC, use its reasonable best efforts: (i) to obtain as
promptly as practicable the approval of the Texas, California and Ohio
Departments of Insurance to consummate the transactions contemplated hereby;
(ii) to provide notice to the appropriate governmental or regulatory body of
each of the other applicable departments of insurance for the jurisdictions set
forth at Section 4(b) of AFAC's Disclosure Schedule with respect to the
transactions contemplated hereby; and (iii) to obtain all necessary approvals,
authorizations and consents of each governmental and regulatory body required to
be obtained prior to the Closing Date to consummate the transactions
contemplated hereby. Prior to the Closing Date, AFAC shall, and shall cause the
Company and each of its Subsidiaries to cooperate with Circle to the fullest
extent practicable in seeking to obtain the approval of the Texas, California
and Ohio Departments of Insurance and any other necessary governmental
approvals, and in providing notice to other insurance departments, and shall
provide, and shall cause the Company to provide such information and
<PAGE> 23
communications to the Texas, California and Ohio Departments of Insurance and
such other governmental and regulatory bodies as Circle may reasonably request
in connection therewith.
(i) Wickes Mortgage Lending. Circle and AFAC agree to negotiate in
good faith for an agreement reasonably satisfactory to both Circle and AFAC for
the continuance of the mortgage operations of AFL's mortgage division by a
subsidiary of Riverside pursuant to which AFL will continue to be the lender
with respect thereto after Closing.
(j) Exclusivity. AFAC and Riverside will not, and will cause the
Company and its Subsidiaries not to (and AFAC will not cause or permit the
Company to) solicit, initiate, encourage or accept the submission of any
proposal or offer from any Person relating to, or agree to or otherwise
facilitate, the acquisition of all or any part of the capital stock or the
assets of AFAC, Newco, the Company or any of its Subsidiaries (including any
acquisition structured as a merger, consolidation, or share exchange), except
for sales or dispositions of assets in the Ordinary Course of Business and sales
of real estate. AFAC or Riverside shall promptly inform Circle of any such
proposals or offers received.
(k) Other Documents. Prior to the Closing Date, AFAC shall provide
Circle with copies of all material filings made by the Company or any of its
Subsidiaries with any insurance department or other governmental or regulatory
agency (including, without limitation, any tax returns), within ten (10)
business days after the filing thereof.
(l) Intercompany Arrangements. During the period prior to the
Closing, all settlements of intercompany liabilities between or among Newco, the
Company or any of its Subsidiaries and their respective Affiliates shall be
made, and all allocations of intercompany expenses shall be applied
substantially consistent with past practice in accordance with the intercompany
arrangements set forth in Section 4(x) of AFAC's Disclosure Schedule.
Immediately prior to the Closing, all such intercompany arrangements between or
among Newco, the Company or any of its Subsidiaries, on the one hand, and
Riverside, AFAC and their other Affiliates, on the other hand, shall be
terminated and all amounts payable by or to Newco, the Company and its
Subsidiaries, to or by Riverside, AFAC and their other Affiliates shall be
settled and paid in full. However, this Section 6(l) shall not apply to the sale
of real estate in accordance with Section 2(h) above and transfer of Excluded
Assets in accordance with Section 2(g) above. Not later than five (5) business
days prior to the Closing Date, AFAC shall deliver to Circle a schedule setting
forth in reasonable detail the foregoing settlement and payment and the bases
therefore.
(m) Transfer of Certain Employees. Prior to the Closing, AFAC and
Riverside shall cause the employees listed on EXHIBIT H to cease to be employees
of Newco, the Company or any of its Subsidiaries, either by transfer of
employment to Riverside or any of its other Affiliates, or by termination of
employment, at the option of AFAC and Riverside. AFAC and Riverside, jointly and
severally, shall be responsible for all severance payments and other benefits,
if any, due to any such employees as a result of any such transfer or
termination of employment. Further, AFAC and Riverside shall be responsible for
any disability payments due to Greg Tatum or Leslie Gunter that are not covered
by the disability insurance that was in place prior to Closing.
(n) Operation of Business. Except as otherwise contemplated by this
Agreement or as AFAC may otherwise consent to in writing, which will not be
unreasonably withheld or delayed, Circle will not and will cause each of its
Subsidiaries to not:
(i) amend its Certificate of Incorporation or Articles of
Incorporation or By-laws or merge with or into or consolidate with any other
Person, subdivide or in any way reclassify any shares of its capital stock or
change or agree to change in any manner the rights of its outstanding capital
stock or the character of its business;
(ii) issue or sell or purchase, or issue options or rights to
subscribe to, or enter into any contracts or commitments to issue or sell or
purchase, (A) any shares of its capital stock, except for sales or commitments
to sell Circle Common Stock at a price of at least $1.00 per share payable in
cash, as contemplated by the Conseco Commitment, and the warrants to be issued
pursuant to the Conseco Commitment, or (B) any evidence of indebtedness owed by
Circle or its Subsidiaries, including bonds, notes, debentures or other
evidences of indebtedness;
(iii) incur any indebtedness for borrowed money in excess of
ten thousand dollars ($10,000) or incur or assume any liability in excess of
five thousand dollars ($5,000), in each case, outside of the Ordinary Course of
Business;
(iv) declare or pay any dividends or declare or make any other
distributions of any kind to its shareholders or make any direct or indirect
redemption, retirement, purchase or other acquisition of any shares of its
capital stock; or
(v) enter into any agreement or understanding to do any of
the things described in clauses (i) through (iv) above.
<PAGE> 24
7. POST-CLOSING COVENANTS. The Parties agree as follows with respect to
the period following the Closing.
(a) General. In case at any time after the Closing any further action
is necessary to carry out the purposes of this Agreement, each of the Parties
will take such further action (including the execution and delivery of such
further instruments and documents) as any other Party reasonably may request,
all at the sole cost and expense of the requesting Party (unless the requesting
Party is entitled to indemnification therefor under Section 9 or Section 9A
below).
(b) Litigation Support. In the event and for so long as any Party
actively is contesting or defending against any action, suit, proceeding,
hearing, investigation, charge, complaint, claim, or demand in connection with
(i) any transaction contemplated under this Agreement or (ii) any fact,
situation, circumstance, status, condition, activity, practice, plan,
occurrence, event, incident, action, failure to act, or transaction on or prior
to the Closing Date involving Newco, the Company or a Subsidiary, each of the
other Parties shall cooperate with it or its counsel in the defense or contest,
make available their personnel, and provide such testimony and access to their
books and records as shall be necessary in connection with the defense or
contest, all at the sole cost and expense of the contesting or defending Party
(unless the contesting or defending Party is entitled to indemnification
therefor under Section 9 or Section 9A below).
(c) Employee Benefit Plan Cooperation. For a reasonable period after
the Closing, AFAC agrees to reasonably cooperate with Circle in connection with
the transition of the current employees of the Company and its Subsidiaries to
becoming covered by Benefit Plans of Circle and shall make available AFAC's
personnel and provide reasonable access to Riverside's books and records as
shall be necessary to assist in the transition.
(d) Excluded Assets. To the extent for any reason that the transfers of
Excluded Assets are not completely effective prior to or at the Closing, Circle
shall cause the Company and its Subsidiaries to promptly complete the transfers
after the Closing and to take any such actions necessary to evidence same.
(e) WINS/Services to Dependable Insurance Company, Inc. Circle agrees
to cause the Company to provide the access and use of the WINS computer software
and hardware to Dependable Insurance Company, Inc. ("Dependable Insurance") as
set forth in Section 13.4 of the Stock Purchase Agreement dated September 22,
1995, pertaining to the sale of Dependable Insurance, a copy of which section is
duplicated in EXHIBIT I. AFAC agree(s) to indemnify Circle against any
liabilities to Dependable Insurance Company, Inc., arising from Circle's, the
Company's and AFL's compliance with this Section 7(e), excluding those
liabilities arising as a result of or from Circle's, the Company's or AFL's
willful noncompliance or gross negligence.
(f) SEC Filings and Computer Access. Without charge, Circle shall cause
the Company and Subsidiaries to (i) consistent with past practice, cooperate in
the preparation and filing of the reports (including the quarterly reports)
required to be filed by Riverside with the Securities and Exchange Commission
with respect to the quarter that includes the Closing Date; and (ii) provide to
Riverside the same level of computer and software access and support as is
currently provided until December 31, 1996. Neither Circle, the Company nor any
of its Subsidiaries will be liable for any Adverse Consequences incurred by
Riverside in connection with the performance of this Section 7(f), other than
those caused by the gross negligence or willful misfeasance of Circle, the
Company or its Subsidiaries. Prior to December 31, 1996, AFAC will arrange at
its cost for the conversion of any computer data that it intends to use after
that date and will reimburse Circle for out-of-pocket costs incurred to effect
the conversion.
(g) NALICO-TX. AFL entered into a Stock Purchase Agreement dated as of
September 20, 1995, with General American Life Insurance Company for the sale of
NALICO-TX, and an Asset Transfer and Assumption Agreement with NALICO-TX for
purposes of the transfer of certain assets to and the assumption of liabilities
by AFL. The closings contemplated thereunder have occurred. Copies of those
agreements have been delivered to Circle. Circle agrees to cause AFL to honor
its obligations under those agreements.
(h) Duane T. Miller. The parties acknowledge that Duane T. Miller will
be an employee of AFL after closing and that AFL is not assuming AFAC's
obligations under any Employment Agreement or Stock Option Agreement between
AFAC and Duane T. Miller. During any period of employment of Mr. Miller by the
Company or by its Affiliates during the one-year period after the Closing, he
shall be paid compensation by the Company or its Affiliates at least at the
level of salary currently paid by AFL.
8. CONDITIONS TO OBLIGATION TO CLOSE.
(a) Conditions to Obligation of Circle. The obligation of Circle and
CAC to consummate the transactions to be performed by it in connection with the
Closing is subject to satisfaction of the following conditions:
<PAGE> 25
(i) the representations and warranties set forth in
Section 3(a) and Section 4 above shall be true and correct in all material
respects at and as of the Closing Date;
(ii) AFAC shall have performed and complied with all of its
covenants hereunder in all material respects through the Closing;
(iii) there shall not be any injunction, judgment, order,
decree, ruling, or charge in effect preventing consummation of any of the
transactions contemplated by this Agreement;
(iv) AFAC shall have delivered to Circle a certificate to the
effect that each of the conditions specified above in Section 8(a)(i)-(iii) is
satisfied in all respects;
(v) all applicable waiting periods (and any extensions
thereof) under the Hart-Scott-Rodino Act shall have expired or otherwise been
terminated;
(vi) all approvals, authorizations, and consents from federal
and state governmental and regulatory bodies required for the transactions
contemplated by this Agreement (including, without limitation, the approval of
the transactions contemplated by this Agreement by the Texas, California and
Ohio Departments of Insurance) shall have been obtained and shall be in full
force and effect and without conditions or limitations reasonably unacceptable
to Circle, and Circle shall have been provided with appropriate evidence,
reasonably satisfactory to it and its counsel, of the granting of such
approvals, authorizations and consents;
(vii) Circle shall have received either (i) certificates of
compliance (or the equivalent thereof) dated as of a date not more than sixty
(60) days prior to the Closing Date, with respect to each of the Company and its
Subsidiaries, as to the applicable jurisdictions with respect to which it has a
License, or (ii) with respect to those jurisdictions with respect to which no
certificate of compliance is received, an officer's certificate from AFAC
stating that all reports and taxes known to be due have been filed and paid and
that there have been no adverse regulatory actions that are pending, except as
disclosed in Section 4(d) of AFAC's Disclosure Schedule;
(viii) each officer and director of Newco, the Company and its
Subsidiaries shall have submitted resignations from positions and offices
thereof effective the Closing Date;
(ix) Riverside and AFL shall have consummated the purchase and
sale of the Investment Real Estate of AFL upon the terms and conditions set
forth on Exhibit F prior to or simultaneously with the Closing;
(x) except as set forth in Section 4(l) of AFAC's Disclosure
Schedule, since December 31, 1995, there has been (a) no change, or development
involving a prospective change, in the general affairs, management,
shareholders' equity, assets, liabilities, properties, business, operations,
condition (financial or otherwise) or results of operations of the Company and
its Subsidiaries, that has had or may reasonably be expected to have a Material
Adverse Effect, other than those resulting from (x) a change in general economic
or financial conditions in the United States or (y) matters contemplated under
this Agreement, and (b) no material change in the manner in which the business
of the Company or its Subsidiaries is conducted other than those resulting from
matters contemplated under this Agreement;
(xi) Circle or CAC shall have, simultaneously with the
Closing, either (A) assumed the AFAC Debt in accordance with the Assumption Debt
Commitment resulting in the release of AFAC's obligations under the AFAC Debt,
or (B) received the proceeds of the Alternative Bank Commitment, in the amount
of at least $18,000,000; and, in either case, the lenders of the AFAC Debt shall
have terminated all Security Interests in the Company Shares and the Note;
(xii) Circle or CAC shall have, simultaneously with the
Closing, received $20,000,000 in gross proceeds from the sale of its Series B
Preferred Stock upon the terms and conditions set forth in the commitment letter
(including the accompanying terms sheet), dated February 5, 1996, from Conseco,
Inc. to Circle (the "Conseco Commitment");
(xiii) Simultaneously with the execution and delivery of this
Agreement, Riverside, AFAC and Circle shall have entered into the Shareholders'
Agreement in the form set forth on Exhibit J attached hereto (the "Shareholders'
Agreement");
(xiv) AFAC and its Subsidiaries shall have given all notices,
made all filings and received all authorizations, consents or approvals of all
Persons required in order for the Parties to consummate the transactions
contemplated by this Agreement, except where the failure to give notice, to file
or to obtain such authorization, consent or
<PAGE> 26
approval would not have a Material Adverse Effect or materially adversely affect
the ability of the Parties to consummate the transactions contemplated by this
Agreement;
(xv) Circle shall have received from counsel to AFAC and
Riverside an opinion in form and substance reasonably satisfactory to Circle and
its counsel, addressed to Circle, and dated as of the Closing Date; and
(xvi) all actions to be taken by AFAC and its Subsidiaries in
connection with consummation of the transactions contemplated hereby and all
certificates, opinions, instruments, and other documents required to effect the
transactions contemplated hereby will be reasonably satisfactory in form and
substance to Circle.
Circle may waive any condition specified in this Section 8(a) if it executes a
writing so stating at or prior to the Closing.
(b) Conditions to Obligation of AFAC. The obligation of AFAC and
Newco to consummate the transactions to be performed by it in connection with
the Closing is subject to satisfaction of the following conditions:
(i) the representations and warranties set forth in
Section 3(b) and Section 5 above shall be true and correct in all material
respects at and as of the Closing Date;
(ii) Circle shall have performed and complied with all of its
covenants hereunder in all material respects through the Closing;
(iii) there shall not be any injunction, judgment, order,
decree, ruling, or charge in effect preventing consummation of any of the
transactions contemplated by this Agreement;
(iv) Circle shall have delivered to AFAC a certificate to the
effect that each of the conditions specified above in Section 8(b)(i)-(iii) is
satisfied in all respects;
(v) all applicable waiting periods (and any extensions
thereof) under the Hart-Scott-Rodino Act shall have expired or otherwise been
terminated;
(vi) all approvals, authorizations, and consents from federal
and state governmental and regulatory bodies required for the transactions
contemplated by this Agreement (including, without limitation, the approval of
the transactions by the Texas, California and Ohio Departments of Insurance)
shall have been obtained and shall be final and in full force and effect and
without conditions or limitations reasonably unacceptable to AFAC, and AFAC
shall have been provided with appropriate evidence, reasonably satisfactory to
it and its counsel, of the granting of such approvals, authorizations and
consents;
(vii) Riverside and AFL shall have consummated the purchase and
sale of the Investment Real Estate of AFL upon the terms and conditions set
forth on EXHIBIT F prior to or simultaneously with the Closing;
(viii) AFAC shall have received all right, interest and title to
the Excluded Assets in accordance with Section 2(g) above.
(ix) Circle or CAC shall have, simultaneously with the
Closing, either (A) assumed the AFAC Debt in accordance with the Assumption Debt
Commitment resulting in the release of AFAC's obligations under the AFAC Debt,
or (B) received the proceeds of the Alternative Bank Commitment, in the amount
of at least $18,000,000; and, in either case, the lenders of the AFAC Debt shall
have terminated all Security Interests in the Company Shares and the Note;
(x) Circle shall have, simultaneously with the Closing,
received $20,000,000 in gross proceeds from the sale of its Series B Non-Voting
Redeemable Preferred Stock upon the terms and conditions set forth in the
Conseco Commitment;
(xi) Simultaneously with the execution and delivery of this
Agreement, Riverside, AFAC and Circle shall have entered into the Shareholders'
Agreement;
(xii) Circle and its Subsidiaries shall have given all notices,
made all filings and received all authorizations, consents or approvals of all
Persons required in order for the Parties to consummate the transactions
contemplated by this Agreement, except where the failure to give notice, to file
or to obtain such authorization, consent or approval would not have a Material
Adverse Effect or materially adversely affect the ability of the Parties to
consummate the transactions contemplated by this Agreement;
<PAGE> 27
(xiii) AFAC shall have received from counsel to Circle an
opinion reasonably satisfactory to AFAC and its counsel in form and substance
and dated as of the Closing Date; and
(xiv) all actions to be taken by Circle in connection with
consummation of the transactions contemplated hereby and all certificates,
opinions, instruments, and other documents required to effect the transactions
contemplated hereby will be reasonably satisfactory in form and substance to
AFAC; and
(xv) The Board of Directors of Riverside shall have approved
the transactions contemplated by this Agreement and approved Riverside entering
into the Shareholders' Agreement.
AFAC may waive any condition specified in this Section 8(b) if AFAC executes a
writing so stating at or prior to the Closing.
9. REMEDIES FOR BREACHES OF THIS AGREEMENT.
(a) Survival Period; Indemnification as Remedy. Except as otherwise
provided in this Subsection (a) all of the covenants, representations and
warranties of the Parties contained in this Agreement shall survive the Closing
and continue in full force and effect until January 1, 1998 (or such shorter
period as a particular covenant may specifically provide), and then expire. The
representations, warranties and covenants set forth in Section 4(y) above and
Section 4(z) above, this Section 9 and Section 9A below shall survive the
Closing and continue in full force and effect for a survival period of forever
thereafter.
(b) Indemnification Provisions for Benefit of Circle. In the event
AFAC breaches any of its representations, warranties, and covenants contained
herein, provided that Circle makes a written claim for indemnification against
AFAC pursuant to Section 9(g) below within the applicable survival period, then
AFAC agrees to indemnify Circle from and against the entirety of any Adverse
Consequences Circle shall suffer through and after the date of the claim for
indemnification caused proximately by the breach. Additionally, AFAC will
indemnify Circle from and against the entirety of any Adverse Consequences
arising out of the State of California's claim that the agents of the Company or
its Subsidiaries are employees instead of independent contractors.
(c) Indemnification Provisions for Benefit of AFAC. In the event
Circle or CAC breaches any of its representations, warranties, and covenants
contained herein, and, provided that AFAC makes a written claim for
indemnification against Circle pursuant to Section 9(g) below within the
applicable survival period, then Circle agrees to indemnify AFAC from and
against the entirety of any Adverse Consequences AFAC shall suffer through and
after the date of the claim for indemnification that are caused proximately by
the breach.
(d) Matters Involving Third Parties.
(i) If any third party shall notify any Party (the
"Indemnified Party") with respect to any matter (a "Third Party Claim") which
may give rise to a claim for indemnification against any other Party (the
"Indemnifying Party") under this Section 9 or Section 9A below, then the
Indemnified Party shall promptly (and in any event within ten (10) business days
after receiving notice of the Third Party Claim) notify each Indemnifying Party
thereof in writing.
(ii) Any Indemnifying Party will have the right to assume and
thereafter conduct the defense of the Third Party Claim with counsel of its
choice reasonably satisfactory to the Indemnified Party; provided, however, that
the Indemnifying Party will not consent to the entry of any judgment or enter
into any settlement with respect to the Third Party Claim without the prior
written consent of the Indemnified Party (not to be withheld unreasonably)
unless the judgment or proposed settlement involves only the payment of money
damages and does not impose an injunction or other equitable relief upon the
Indemnified Party.
(iii) Unless and until an Indemnifying Party assumes the
defense of the Third Party Claim as provided in Section 9(d)(ii) above, however,
subject to Section 9(d)(iv) below, the Indemnified Party may defend against the
Third Party Claim in any manner it reasonably may deem appropriate.
(iv) In no event will the Indemnified Party consent to the
entry of any judgment or enter into any settlement with respect to the Third
Party Claim without the prior written consent of each of the Indemnifying
Parties (not to be withheld unreasonably).
(e) Determination of Adverse Consequences. The Parties shall make
appropriate adjustments for tax benefits and insurance proceeds received by the
indemnified party and take into account the time cost of money (using the
Applicable Rate as the discount rate) in determining Adverse Consequences for
purposes of this Section 9. All indemnification payments under this Section 9
shall be deemed adjustments to the Merger Consideration. Any Taxes payable under
this Section 9 or Section 9A below may be verified by independent public
accounting firms selected by each of Circle and AFAC and in the event that
<PAGE> 28
the two accounting firms cannot agree, then a third accounting firm shall be
selected jointly by such two accounting firms and the decision of the third
accounting firm will be final.
(f) Exclusive Remedy After the Closing. After the Closing, the
indemnification provisions in this Section 9 and Section 9A below shall be the
exclusive remedy of the Parties for any breach of any certifications,
representations, warranties or covenants set forth in this Agreement or in the
certificates delivered pursuant to Section 8(a)(iv) and Section 8(b)(iv) above.
(g) Claim Notice. To be effective, the claim notice for
indemnification under this Section 9 or Section 9A below must (i) be sent in
accordance with Section 11(h) below; and (ii) set forth in reasonable detail the
specific facts and circumstances with respect to the claim.
9A. TAXES, ADJUSTMENTS AND TAX INDEMNITIES.
(a) Phase III Tax. AFAC shall indemnify and hold Circle harmless from
and against any Phase III tax triggered by the sale by AFL of NALICO-TX to the
extent that tax is not otherwise paid by AFAC or Riverside.
(b) Section 338(h)(10) Election. It is the Parties' intent that the
merger pursuant to this Agreement be treated as a purchase and sale of the
assets of the Company and its Subsidiaries for federal income Tax purposes, and
the Parties shall, in cooperation with each other, prepare a form of election
under Section 338(h)(10) of the Code to treat it for federal income Tax
purposes as if all the assets of Newco, the Company and its Subsidiaries have
been sold to Circle in a fully taxable transaction. AFAC or Riverside and Circle
will comply with the Section 338(h)(10)(c) reporting requirements and will take
all such other actions as are reasonably necessary to effect such Section
338(h)(10) election. Circle shall cause any refunds of Taxes with respect to
Newco, the Company and its Subsidiaries for the periods ending prior to or on
the Closing Date to be paid to AFAC, including any relating to the Section
338(h)(10) election. For purposes of the Section 338(h)(10) election the
parties agree that the value of the Merger Consideration is $38,600,000 and that
it shall be allocated among the assets of Newco, the Company and its
Subsidiaries in substantially the manner as set forth in EXHIBIT K to this
Agreement.
(c) Short-Tax Year. The Company and its Subsidiaries will join in the
filing of a federal consolidated return with AFAC and Riverside for the period
commencing on January 1, 1996, and ending on the Closing Date (the "Short-Tax
Year"). AFAC shall indemnify and hold Circle harmless from and against any and
all federal income Taxes of AFAC, the Company and its Subsidiaries and of any
other member of the Affiliated Group (as defined in Section 1504 (a) of the
Code) of which AFAC is a member, that is attributable to the Short-Tax Year,
including without limitation those arising from the election under Section
338(h)(10) of the Code set forth in subsection (b) above. AFAC shall be entitled
to all refunds of Taxes attributable to Newco, the Company and its Subsidiaries
for the Short-Tax Year and Circle shall cause Newco, the Company and its
Subsidiaries to pay those to AFAC.
(d) Hypothetical Tax. For the Short-Tax Year a hypothetical federal
income tax (the "Hypothetical Tax") shall be calculated for Newco, the Company
and its Subsidiaries as set forth below and as if they were filing a separate
return for that period and that tax shall be paid to Riverside. For this
purpose:
(i) the Section 338(h)(10) election shall be treated as not
occurring and any tax consequences resulting from that election shall be
ignored;
(ii) any net operating loss and capital loss carryovers and
"operations loss deductions" shall be ignored so they are treated as not
reducing the taxable income;
(iii) the effective tax rate shall be 27.5%; and
(iv) the small life insurance company deduction shall be
ignored so that it is treated as not reducing taxable income.
Provided, however, that the maximum Hypothetical Tax shall be $430,000.
The Company shall compute the Hypothetical Tax and present an
estimate of that and any reasonably requested support information to Circle and
AFAC at least ten (10) business days prior to the projected Closing Date. If
Circle agrees with the computation, then the Company and its Subsidiaries shall
pay that to Riverside at the Closing. If Circle disagrees with that computation,
Circle shall advise AFAC of that disagreement in writing within five (5)
business days of the receipt of the computation and of its objections. Then the
computation, support information and Circle's objections shall be provided to a
neutral accounting firm within three (3) business days that does not provide
accounting services to any of the Parties or their affiliates, which accounting
firm shall determine the Hypothetical Tax, which determination shall be final.
The Parties shall equally share the cost of the accounting firm's determination.
<PAGE> 29
(e) Closing of Tax Year and Allocation. For federal income Tax
purposes, the books of Newco, the Company and it Subsidiaries shall be closed as
of the Effective Time in accordance with Treasury Reg. Section 1.1502-76(b)(4).
If there are any items of income and expense for which it is not possible to
close the books, they shall be prorated for 1996 in proportion to the number of
days in 1996 prior to the Closing (allocated to AFAC) and the number of days
that are subsequent to the Closing (allocated to Circle).
(f) Audits. The Parties agree to promptly notify each other upon
receipt of notice of any audit of Newco, the Company or any of its Subsidiaries
for any taxable year ending prior to or including the Closing Date, and agree to
furnish or cause to be furnished to each other, upon request, as promptly as
practicable, such information (including access to books and records) and
assistance relating to the Company and its Subsidiaries as is reasonably
necessary for the preparation and filing of any return, for the preparation for
any audit, and for the prosecution or defense of any claim, suit or proceeding
relating to any proposed adjustment. The Parties shall cooperate with each other
in the conduct of any audit or other proceedings involving the Company or any
entity with which it is consolidated or combined for any tax purpose and each
shall execute and deliver such powers of attorney and other documents as are
necessary to carry out the intent of this subsection (c) provided that, AFAC,
upon good faith consultation with Circle, shall have the right to control the
resolution of such audit or settlement of proceedings.
(g) Amended Returns. Circle agrees that it will cause the Company and
its Subsidiaries to not amend their Tax Returns for periods prior to 1996
without the consent of AFAC.
(h) Tax Status of Insurance/Annuity Products. Circle agrees that,
after Closing, it will cause the Company and its Subsidiaries to use reasonable
best efforts to monitor the life insurance and annuity contracts for which AFAC
is making representations and warranties under Section 4(z) for the applicable
tax status and will cause the Company and its Subsidiaries to use reasonable
best efforts to mitigate any Adverse Consequences that may arise from breach of
those representations and warranties.
10. TERMINATION.
(a) Termination of Agreement. Certain of the Parties may terminate
this Agreement as provided below:
(i) Circle and AFAC may terminate this Agreement by mutual
written consent at any time prior to the Closing;
(ii) Circle may terminate this Agreement by giving written
notice to AFAC at any time prior to the Closing in the event (A) AFAC has within
the then previous ten (10) business days given Circle any notice pursuant to
Section 6(e)(i) above and (B) Circle determines the matter disclosed in the
update or revision to AFAC's Disclosure Schedule that is the subject of the
notice has had or is reasonably likely to have a Material Adverse Effect;
(iii) AFAC may terminate this Agreement by giving written
notice to Circle at any time prior to the Closing in the event (A) Circle has
within the then previous ten (10) business days given AFAC any notice pursuant
to Section 6(e)(ii) above and (B) AFAC determines the matter disclosed in the
update or revision to Circle's Disclosure Schedule that is the subject of the
notice has had or is reasonably likely to have a Material Adverse Effect;
(iv) Circle may terminate this Agreement by giving written
notice to AFAC at any time prior to the Closing (A) in the event AFAC has
breached any material representation, warranty, or covenant contained in this
Agreement in any material respect, Circle has notified AFAC of the breach, and
the breach has continued without cure for a period of ten (10) business days
after the notice of breach or (B) if the Closing shall not have occurred on or
before June 30, 1996, by reason of the failure of any condition precedent under
Section 8(a) hereof (unless the failure results primarily from Circle itself
breaching any representation, warranty, or covenant contained in this
Agreement);
(v) AFAC may terminate this Agreement by giving written
notice at any time prior to the Closing in the event that after forty-five (45)
days from the date hereof:
(A) Circle or CAC has not received either (i) a commitment
from the lenders of the AFAC Debt permitting the assumption of
the AFAC Debt by Circle or CAC upon terms and conditions that are
reasonably acceptable to AFAC (including, without limitation,
release of AFAC's obligations thereunder) and reasonably
acceptable to Circle (including without limitation, a termination
of all Security Interests in the Company Shares and the Note)
(the "Assumption Debt Commitment"), or (ii) a commitment
reasonably acceptable to AFAC and to Circle for at least
$18,000,000 in alternative bank financing (the "Alternative Bank
Commitment");
<PAGE> 30
(B) Circle has not since December 31, 1995, received at least
$800,000 from the issuance of 800,000 shares of its common stock;
or
(C) Circle has not received the approval of the holders of
Circle's Series A Preferred Stock to issue the Series B
Non-Voting Redeemable Preferred Stock to be issued pursuant to
the Conseco Commitment and the Series C Preferred Stock.
(vi) AFAC may terminate this Agreement by giving written
notice to Circle at any time prior to the Closing (A) in the event Circle has
breached any material representation, warranty, or covenant contained in this
Agreement in any material respect, AFAC has notified Circle of the breach, and
the breach has continued without cure for a period of ten (10) business days
after the notice of breach or (B) if the Closing shall not have occurred on or
before June 30, 1996, by reason of the failure of any condition precedent under
Section 8(b) hereof (unless the failure results primarily from AFAC itself
breaching any representation, warranty, or covenant contained in this
Agreement); and
(vii) AFAC or Circle may terminate this Agreement by giving
written notice to the other Parties at any time prior to the Closing in the
event that any order of any court or administrative agency shall be in effect
which restrains or prohibits the transactions contemplated hereby or if any
suit, action, or legal or administrative proceeding shall be pending which has
been brought by a governmental or regulatory body and which challenges
consummation of the transactions contemplated hereby, if not dismissed or agreed
to be dismissed prior to the giving of notice of termination, which notice may
not be given prior to the tenth (10th) business day after suit, action or
proceeding is brought.
(viii) Circle or AFAC may terminate this Agreement by giving
written notice prior to the Closing in the event that, after ten (10) business
days from the date hereof, Riverside's Board of Directors shall not have
approved the transactions contemplated by this Agreement and approved Riverside
entering into the Shareholders' Agreement.
(b) Effect of Termination. If any Party terminates this Agreement
pursuant to Section 10(a) above, all rights and obligations of the Parties
hereunder shall terminate without any liability of any Party to any other Party
(except for any liability of any Party for a pre-existing breach of this
Agreement or a wrongful termination not in accord with Section 10(a) above);
provided, however, that this Section 10 and the confidentiality provisions
contained in Section 6(d) above shall survive termination. In the event that, at
any time after the termination of this Agreement by any Party for any reason
whatsoever, Riverside and its Subsidiaries, directly or indirectly, shall cease
to own at least a majority of the outstanding voting securities of AFL or shall
sell or otherwise transfer (by merger, consolidation, sale of assets or
otherwise) to any third Person (other than Circle or its Affiliates or Riverside
and its Affiliates) all or any substantial part of AFL's assets other than in
the Ordinary Course of Business, then upon the occurrence of any such event,
AFAC shall promptly pay to Circle the amount of $100,000 by wire transfer or
other immediately available funds.
11. MISCELLANEOUS.
(a) Press Releases and Public Announcements. No Party shall issue any
press release or make any public announcement relating to the subject matter of
this Agreement prior to the Closing without the prior written approval of Circle
and AFAC; provided, however, that any Party may make any public disclosure it
believes in good faith is required by applicable law or any listing or trading
agreement concerning its publicly-traded securities (in which case the
disclosing Party will use its best efforts to advise the other Parties prior to
making the disclosure).
(b) No Third-Party Beneficiaries. This Agreement shall not confer any
rights or remedies upon any Person other than the Parties and their respective
successors and permitted assigns.
(c) Entire Agreement. This Agreement (including the documents
referred to herein) constitutes the entire agreement among the Parties and
supersedes any prior understandings, agreements, or representations by or among
the Parties, written or oral, to the extent they have related in any way to the
subject matter hereof.
(d) Succession and Assignment. This Agreement shall be binding upon
and inure to the benefit of the Parties named herein and their respective
successors and permitted assigns. No Party may assign either this Agreement or
any of its rights, interests, or obligations hereunder without the prior written
approval of Circle and AFAC.
(e) Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
(f) Headings. The section headings contained in this Agreement are
inserted for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
<PAGE> 31
(g) Expenses. Each of the Parties will bear its own costs and
expenses (including legal fees and expenses) incurred in connection with this
Agreement and the transactions contemplated hereby except that each shall
equally bear the filing fees payable in connection with the
Hart-Scott-Rodino-Act as set forth in Section 6(b) above.
(h) Notices. All notices, requests, demands, claims, and other
communications hereunder will be in writing. Any notice, request, demand, claim,
or other communication hereunder shall be deemed duly given if (and then two (2)
business days after) it is sent by registered or certified mail, return receipt
requested, postage prepaid, and addressed to the intended recipient as set forth
below:
If to AFAC: American Financial Acquisition Company
c/o Kenneth M. Kirschner, Esquire
One Independent Drive, Suite 2000
Jacksonville, FL 32202
Facsimile: (904) 358-2199
Copy to: Kirschner, Main, Petrie,
Graham, Tanner & Demont
Professional Association
One Independent Drive, Suite 2000
Jacksonville, FL 32202
Facsimile: (904) 358-2199
Attention: Barry C. Averitt, Esquire
If to Circle: Circle Investors, Inc.
251 N. Illinois Street, Suite 1680
Indianapolis, IN 46204
Facsimile: (317) 237-3371
Attention: R. Matthew Neff, President
Copy to: Baker & Daniels
300 North Meridian Street, Suite 2700
Indianapolis, IN 46204-1782
Facsimile: (317) 237-1000
Attention: J. Jeffrey Brown, Esquire
Any Party may send any notice, request, demand, claim, or other communication
hereunder to the intended recipient at the address set forth above using any
other means (including personal delivery, expedited courier, messenger service,
telecopy, telex, ordinary mail, or electronic mail), but no such notice,
request, demand, claim, or other communication shall be deemed to have been duly
given unless and until it actually is received by the intended recipient. Any
Party may change the address to which notices, requests, demands, claims, and
other communications hereunder are to be delivered by giving the other Parties
notice in the manner herein set forth.
(i) Governing Law. This Agreement shall be governed by and construed
in accordance with the domestic laws of the State of Indiana without giving
effect to any choice or conflict of law provision or rule (whether of the State
of Indiana or any other jurisdiction) that would cause the application of the
laws of any jurisdiction other than the State of Indiana.
(j) Attorneys' Fees. If any legal action, arbitration proceeding or
similar proceeding is brought for the enforcement or interpretation of this
Agreement or any of its provisions, the successful or prevailing party or
parties shall be entitled to recover reasonable attorneys' fees in addition to
any other relief which may be granted.
(k) Amendments and Waivers. No amendment of any provision of this
Agreement shall be valid unless the same shall be in writing and signed by the
Parties hereto. No waiver by any Party of any default, misrepresentation, or
breach of warranty or covenant hereunder, whether intentional or not, shall be
deemed to extend to any prior or subsequent default, misrepresentation, or
breach of warranty or covenant hereunder or affect in any way any rights arising
by virtue of any prior or subsequent such occurrence.
<PAGE> 32
(l) Severability. Any term or provision of this Agreement that is
invalid or unenforceable in any situation in any jurisdiction shall not affect
the validity or enforceability of the remaining terms and provisions hereof or
the validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction.
(m) Construction. The Parties have participated jointly in the
negotiation and drafting of this Agreement. In the event an ambiguity or
question of intent or interpretation arises, this Agreement shall be construed
as if drafted jointly by the Parties and no presumption or burden of proof shall
arise favoring or disfavoring any Party by virtue of the authorship of any of
the provisions of this Agreement. Any reference to any federal, state, local, or
foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context requires otherwise. The
word "including" shall mean including without limitation.
(n) Incorporation of Exhibits, Annexes, and Schedules. The Exhibits,
Annexes, and Schedules identified in this Agreement are incorporated herein by
reference and made a part hereof.
<PAGE> 33
IN WITNESS WHEREOF, each of the Parties hereto has caused this
Agreement to be duly executed as of the date first above written.
"CIRCLE"
CIRCLE INVESTORS, INC.
By:
Title:__________________________
"CAC"
CIRCLE ACQUISITION CORP.
By:
Title:__________________________
"AFAC"
AMERICAN FINANCIAL ACQUISITION
COMPANY
By: /s/ Kenneth M. Kirschner
Title: Vice President
__________________________
"NEWCO"
SECURUS FINANCIAL CORPORATION
By: /s/ Kenneth M. Kirschner
Title: Vice President
__________________________
<PAGE> 34
EXHIBIT A
Definitions
"Additional Merger Cash" has the meaning set forth in Section 2(b)(ii)
of this Agreement.
"Adverse Consequences" means all actions, suits, proceedings, hearings,
investigations, charges, complaints, claims, demands, injunctions, judgments,
orders, decrees, rulings, damages, dues, penalties, fines, costs, liabilities,
obligations, taxes, liens, losses, expenses, and fees, including court costs and
reasonable attorneys' fees and expenses. However, with respect to the Licenses,
the maximum Adverse Consequences for inability to use or loss of a License is
seventeen thousand six hundred dollars ($17,600).
"AFAC Debt" means $18,000,000 of the indebtedness outstanding pursuant
to the Credit Agreement, dated as of April 19, 1994, as amended, among AFAC,
Bank of Montreal and First Interstate Bank of California.
"AFAC's Disclosure Schedule" has the meaning set forth in Section 4(a)
of this Agreement.
"Affiliate" has the meaning set forth in Rule 12b-2 of the regulations
promulgated under the Securities Exchange Act.
"Affiliated Group" means any affiliated group within the meaning of
Code Sec. 1504.
"AFL" has the meaning set forth in the preface of this Agreement.
"Alternative Bank Commitment" has the meaning set forth in
Section 10(a)(v)(A) of this Agreement.
"Applicable Rate" means the base rate on corporate loans as published
in the Midwest Edition of The Wall Street Journal (or any successor publication)
under the caption "Prime Rate."
"Articles of Merger" has the meaning set forth in Section 2(d) of this
Agreement.
"Assumption Debt Commitment" has the meaning set forth in
Section 10(a)(v)(A) of this Agreement.
"Aztec Life" has the meaning set forth in the preface of this
Agreement.
"Benefit Plan" means any benefit plan, contract or arrangement
(regardless of whether it in funded or unfunded) covering any employee or former
employee of the Company or any of its Subsidiaries, including, without
limitation, any Employee Benefit Plan, any employment or severance contract with
any director, officer or employee, any profit sharing, stock bonus or stock
option plan, or any plan of deferred compensation.
"CAC" has the meaning set forth in the preface of this Agreement.
"Circle" has the meaning set forth in the preface of this Agreement.
"Circle Common Stock" has the meaning set forth in Section 2 of this
Agreement.
"Circle's Disclosure Schedule" has the meaning set forth in Section 5
of this Agreement.
"Closing" has the meaning set forth in Section 2(c) of this Agreement.
"Closing Date" has the meaning set forth in Section 2(c) of this
Agreement.
"Code" means the Internal Revenue Code of 1986, as amended.
"Company" has the meaning set forth in the preface of this Agreement.
"Company Share" means any share of the Common Stock, par value one
dollar ($1.00) per share, of the Company.
"Confidential Information" means any information concerning the
businesses and affairs of the Company and its Subsidiaries that is not already
generally available to the public.
<PAGE> 35
"Conseco Commitment" has the meaning set forth in Section 8(a)(xii) of
this Agreement.
"Controlled Group of Corporations" has the meaning set forth in
Section 1563 of the Code.
"Dependable Insurance" has the meaning set forth in Section 7(e) of
this Agreement.
"Effective Time" has the meaning set forth in Section 2(e)(i) of this
Agreement.
"Employee Benefit Plan" means any (a) nonqualified deferred
compensation or retirement plan or arrangement which is an Employee Pension
Benefit Plan, (b) qualified defined contribution retirement plan or arrangement
which is an Employee Pension Benefit Plan, (c) qualified defined benefit
retirement plan or arrangement which is an Employee Pension Benefit Plan
(including any Multiemployer Plan), or (d) Employee Welfare Benefit Plan or
material fringe benefit plan or program, including, without limitation, any plan
intended to be a "cafeteria plan" under Code Sec. 125.
"Employee Pension Benefit Plan" has the meaning set forth in ERISA Sec.
3(2).
"Employee Welfare Benefit Plan" has the meaning set forth in ERISA Sec.
3(1).
"Environmental Laws" means all local, state and federal environmental,
health and safety laws and regulations in all jurisdictions in which Riverside,
AFAC, Newco, the Company and its Subsidiaries have done business or owned,
leased or operated property, including, without limitation, the Federal Resource
Conservation and Recovery Act, the Federal Comprehensive Environmental Response,
Compensation and Liability Act, the Federal Clean Water Act, the Federal Clean
Air Act, and the Federal Occupational Safety and Health Act.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Excluded Assets" are the assets listed on Exhibit D attached hereto.
"Fiduciary" has the meaning set forth in ERISA Sec. 3(21).
"GAAP" means United States generally accepted accounting principles as
in effect from time to time.
"Good Standing" means that the applicable entity has not been dissolved
and has paid the franchise taxes, if any, and filed all necessary reports due
and owing to date to avoid being disqualified to do business in a foreign
jurisdiction or dissolved in its jurisdiction of incorporation.
"Hart-Scott-Rodino Act" means the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended.
"Hypothetical Tax" has the meaning set forth in Section 9A of this
Agreement.
"Indemnified Party" has the meaning set forth in Section 9(d) of this
Agreement.
"Indemnifying Party" has the meaning set forth in Section 9(d) of this
Agreement.
"Insurance Annual Statements" has the meaning set forth in Section 4(i)
of this Agreement.
"Knowledge" means actual knowledge after reasonable inquiry of an
employee of the applicable entity responsible for having knowledge of the matter
in question.
"Liberty" means Liberty Bankers Life Insurance Company, an insurance
company chartered under the laws of the State of Ohio.
"License(s)" means all applicable governmental licenses, certificates
of authority, permits, consents and/or authorizations to transact insurance
business in a jurisdiction.
"Material Adverse Effect" means a material adverse effect on the
assets, liabilities, properties, business, operations, financial condition or
results of operations of (a) in the case of AFAC and its Subsidiaries (i) Newco,
the Company and its Subsidiaries taken as a whole or (ii) AFL standing alone and
(b) in the case of Circle and its Subsidiaries, Circle and its Subsidiaries take
as a whole.
<PAGE> 36
"Merger" has the meaning set forth in Section 2(a) of this Agreement.
"Merger Cash" has the meaning set forth in Section 2(b) of this
Agreement.
"Merger Consideration" has the meaning set forth in Section 2(b) of
this Agreement.
"Merger Shares" has the meaning set forth in Section 2(b)(iv) of this
Agreement.
"Monthly Financial Statements" has the meaning set forth in
Section 5(j) of this Agreement.
"Most Recent Company Financial Statements" has the meaning set forth in
Section 4(i) of this Agreement.
"Most Recent Circle Financial Statements" has the meaning set forth in
Section 5(i) of this Agreement.
"Multiemployer Plan" has the meaning set forth in ERISA Sec. 3(37).
"NALICO-TX" has the meaning set forth in the preface of this Agreement.
"Newco" has the meaning set forth in the preface of this Agreement.
"Newco Shares" means any shares of Common Stock of Newco.
"Note" has the meaning set forth in the preface of this Agreement.
"Ordinary Course of Business" means the ordinary course of business
consistent with past custom and practice (including with respect to quantity and
frequency).
"Party and Parties" has the meaning set forth in the preface of this
Agreement.
"PBGC" means the Pension Benefit Guaranty Corporation.
"Person" means an individual, a partnership, a corporation, an
association, a joint stock company, a trust, a joint venture, an unincorporated
organization, or a governmental or regulatory entity (or any department, agency,
or political subdivision thereof).
"Prohibited Transaction" has the meaning set forth in ERISA Sec. 406
and Code Sec. 4975.
"Reportable Event" has the meaning set forth in ERISA Sec. 4043.
"Riverside" has the meaning set forth in the preface of this Agreement.
"SAP" means statutory accounting practices prescribed or permitted by
the insurance commission of the States of Texas or California, including all
rules and regulations applicable thereto.
"Securities Act" means the Securities Act of 1933, as amended.
"Securities Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Security Interest" means any mortgage, pledge, lien, encumbrance,
charge, or other security interest, other than (a) mechanic's, materialmen's,
and similar liens, (b) liens for taxes not yet due and payable, and (c) liens
securing rental payments under capital lease arrangements.
"Series C Preferred Stock" has the meaning set forth Section 2(b) of
this Agreement.
"Shareholders' Agreement" has the meaning set forth in
Section 8(a)(xiii) of this Agreement.
"Short-Tax Year" has the meaning set forth in Section 9A of this
Agreement.
"Statutory Values" has the meaning set forth in Section 2(g) of this
Agreement.
<PAGE> 37
"Subsidiary" means any corporation with respect to which a specified
Person (or a Subsidiary thereof) owns a majority of the common stock or has the
power to vote or direct the voting of sufficient securities to elect a majority
of the directors.
"Surviving Corporation" has the meaning set forth in Section 2(a) of
this Agreement.
"Taxes" means all federal, state and local income, profits, franchise,
premium, sales, use, occupancy, severance, excise, value added, property,
withholding and other taxes (including interest, penalties and any additions to
tax) of any nature whatsoever.
"Tax Returns" means all federal, state and local tax returns, tax
reports, and declarations of estimated tax required under applicable law to be
filed by or with respect to the income, operations or assets of Newco, the
Company or any of its Subsidiaries or any consolidated, combined, or unitary
group of which the Company or any of its Subsidiaries is a member.
"Third Party Claim" has the meaning set forth in Section 9(d) of this
Agreement.
<PAGE> 38
EXHIBIT B
Terms of Series C Preferred Stock
Section 5.8. Terms of Series C Preferred Stock. The designation,
preferences, limitations and relative voting and other rights of the shares of
the third series of the authorized Special Shares of the Corporation (such
series being hereinafter called the "Series C Preferred Stock"), in addition to
those set forth in these Articles of Incorporation which are applicable to
Special Shares of all series, are hereby fixed as follows:
(a) Designation and Amount; Stated Value. The shares of such series shall be
designated "Series C Preferred Stock" and the number of authorized shares
constituting such series shall be Three Thousand, Six Hundred (3,600) shares.
(b) Rank. The Series C Preferred Stock shall, with respect to rights upon
liquidation, winding up or dissolution, rank (I) junior to the Corporation's
Series B Non-Voting Redeemable Preferred Stock and to any other series of
Special Shares hereafter duly established by the Board of Directors of the
Corporation, the terms of which shall specifically provide that such series
shall rank prior to the Series C Preferred Stock as to the distribution of
assets upon liquidation (the "Senior Preferred Stock"), (ii) pari passu with the
Corporation's Series A Preferred Stock (the "Series A Preferred Stock") or any
other series of Special Shares hereafter duly established by the Board of
Directors of the Corporation, the terms of which shall specifically provide that
such series shall rank pari passu with the Series C Preferred Stock as to the
distribution of assets upon liquidation (the "Parity Preferred Stock") and (iii)
prior to any other series of Special Shares or other class or series of capital
stock of or other equity interests in the Corporation, including, without
limitation, all classes of the common stock of the Corporation, whether now
existing or hereafter created (all of such classes or series of capital stock
and other equity interests of the Corporation, including, without limitation,
the Common Shares of the Corporation, are collectively referred to herein as the
"Junior Securities").
(c) Liquidation Rights. In the event of any liquidation, dissolution or
winding up of the Corporation, whether voluntary or involuntary, the holders of
Series C Preferred Stock shall be entitled to receive, out of the assets of the
Corporation available for distribution to shareholders after liquidation of any
Senior Preferred Stock and before distributions in respect of Junior Securities,
an amount in cash or property (valued at its fair market value), or a
combination thereof, equal to $1,000 per share (prorated for fractional
shares)(such $1,000 per share being the "Liquidation Value"), plus the aggregate
amount of dividends imputed with respect thereto pursuant to Section 5.8(d)
below. If upon any liquidation, dissolution or winding up of the Corporation,
the amounts payable with respect to the Series C Preferred Stock and any Parity
Preferred Stock are not paid in full, the holders of the Series C Preferred
Stock and of such Parity Preferred Stock will share ratably in any such
distribution of assets in proportion to the full respective preferential amounts
to which they are entitled. After
<PAGE> 39
payment of the full amount of the liquidating distribution to which they are
entitled, the holders of shares of Series C Preferred Stock will not be entitled
to any further participation in any distribution of assets by the Corporation.
Neither the merger or consolidation of the Corporation into or with any other
corporation or the merger or consolidation of any other corporation into or with
the Corporation, nor the sale of all or substantially all the assets of the
Corporation, shall be deemed to be a liquidation, dissolution or winding up,
voluntary or involuntary, for the purposes of this Section 5.8(c).
(d) Imputed Dividends. Dividends shall not be payable on the Series C
Preferred Stock, except upon the liquidation, dissolution or winding up of the
Corporation as provided for in Section 5.8(c) above. Solely for purposes of
Section 5.8(c), dividends shall be imputed on the Liquidation Value ($1,000 per
share) of the Series C Preferred Stock from the date of original issuance (the
"Issue Date") at a variable per annum rate of, for the period from the Issue
Date through August 25, 1997, the Bank Prime Rate plus one and one-half percent
(1.5%) and, thereafter, the Bank Prime Rate plus one percent (1%), such rate to
adjust quarterly on the last day of each calendar quarter to reflect any change
in the Bank Prime Rate. For purposes hereof, the term "Bank Prime Rate" shall
mean the base rate on corporate loans as published in the Midwest Edition of the
Wall Street Journal (or any successor publication) under the caption "Prime
Rate". Imputed dividends shall be cumulative from the Issue Date and shall be
computed on the basis of a 360-day year of twelve 30-day months.
(e) Voting Rights. Except as may be required by law, the holders of shares
of Series C Preferred Stock in their capacity as such have no voting rights.
(f) Conversion. The shares of Series C Preferred Stock shall be convertible
into Common Shares of the Corporation subject to the following terms and
conditions:
(i) Conversion Related to Series A Preferred Stock. At any time and
from time to time upon
(A) any redemption by the Corporation of any shares of Series A Preferred Stock,
or
(B) any conversion of any shares of Series A Preferred Stock into Common Shares
of the Corporation, then, upon the happening of such event, that number of
shares of Series C Preferred Stock equal to the number of shares of Series A
Preferred Stock so redeemed or converted, as the case may be, shall
automatically and immediately be converted into Common Shares of the
Corporation.
(ii) Other Conversion Events. All of the outstanding shares of Series
C Preferred Stock shall automatically and immediately be converted into Common
Shares of the Corporation upon the first to occur of the following events: (A)
the closing of the initial public offering and sale, pursuant to a registration
statement filed by the Corporation under the Securities Act of 1933 with the
Securities and Exchange Commission (other than a registration statement filed on
Form S-8 or any successor thereto), of Common Shares (such offering and sale is
herein called the "IPO"); (B) the date on which the Secured Promissory
<PAGE> 40
Note, dated as of ________, 1996, issued by Riverside Group, Inc., a Florida
corporation, to American Founders Life Insurance Company, a Texas life insurance
company, together with all interest and other charges accruing with respect
thereto, is indefeasibly paid in full or (C) the acquisition, whether in a
single or series of transaction, by any "person" (including a group), as defined
in Section 13(d)(3) of the Securities Exchange Act of 1934 (other than the
holder or any group including the holder), of voting securities of the
Corporation having fifty-one percent (51%) or more of the aggregate voting power
of all then outstanding voting securities of the Corporation.
(iii) Conversion Price. The shares of Series C Preferred Stock shall be
converted into fully paid and nonassessable Common Shares. The number of Common
Shares issued upon conversion of each share of Series C Preferred Stock shall be
equal to the quotient of the Liquidation Value divided by the Conversion Price
then in effect. The price at which Common Shares shall be delivered upon
conversion (herein called the "Conversion Price") shall be one hundred fifty
percent (150%) of the Common Share Book Value. For purposes hereof, the term
"Common Share Book Value" shall mean the sum of (A) $________ [this amount will
be inserted and will be the book value per share of the Corporation's
outstanding Common Shares determined in accordance with generally accepted
accounting principles as applied by the Corporation as of [the last day of the
calendar quarter next preceding] the Issue Date], plus
(B) the aggregate amount (on a basis per share of the Corporation's
outstanding Common Shares) of all amounts paid or contributed to the Corporation
after the Issue Date and on or prior to the Conversion Date (as hereinafter
defined) in consideration for, or as a capital contribution in respect of,
shares of the Corporation's Common Shares otherwise than pursuant to an IPO. No
payment or adjustment shall be made in respect of accrued dividends on Common
Shares. No fractional Common Shares will be issued; and a cash payment will be
paid in lieu of any fractional share in an amount equal to the same fraction of
the Common Share Book Value.
(iv) Conversion Notices. Within ten (10) business days after the date
(the "Conversion Date") of any of the events causing a conversion of shares of
Series C Preferred Stock pursuant to Section 5.8(f)(i) or (ii) above, the
Corporation shall give written notice thereof (a "Conversion Notice") by mail,
postage prepaid, to the holders of record of the Series C Preferred Stock so
converted, addressed to each such holder at his post office address as shown by
the records of the Corporation. In case of the conversion of less than all of
the outstanding shares of Series C Preferred Stock, the shares to be converted
shall be selected by lot or in a substantially equivalent manner as the Board of
Directors shall determine from among the outstanding shares of Series C
Preferred Stock. The shares of Series C Preferred Stock so converted shall be
deemed to have been converted as of the close of business on the Conversion
Date, and the person or persons entitled to receive the Common Shares issuable
upon such conversion shall be treated for all purposes as the record holder or
holders of such Common Shares as of the close of business on such Conversion
Date.
<PAGE> 41
(v) Certificates. Each holder of shares of Series C Preferred Stock
converted hereunder shall surrender the certificate or certificates therefor,
duly endorsed to the Corporation or in blank, at the office of the Corporation
or at such other place or places, if any, as the Board of Directors of the
Corporation shall have designated, together with the name or names (with
addresses) in which he wishes the certificate or certificates for Common Shares
to be issued. The Corporation will, as soon as practicable thereafter, issue and
deliver at said office or place to such holder of shares of Series C Preferred
Stock, or to his nominee or nominees, certificates for the number of full Common
Shares to which he shall be entitled as aforesaid, together with cash in lieu of
any fraction of a share. Notwithstanding that any certificate for shares so
converted shall not have been so surrendered on or after the Conversion Date,
upon the Conversion Date the shares of Series C Preferred Stock so converted
shall no longer be deemed to be outstanding, and all rights of the holders
thereof as holders of shares of Series C Preferred Stock (except the right to
receive a certificate or certificate representing such Common Shares, together
with cash in lieu of any fraction of a share, as hereinabove provided) shall
cease and terminate.
(vi) Adjustment of Conversion Price. In case, at any time after the
Issue Date, the Corporation shall (A) pay a dividend in shares of its Common
Shares, (B) subdivide its outstanding Common Shares, (C) combine its outstanding
Common Shares into a smaller number of shares, or (D) issue by reclassification
of its Common Shares any shares of the Corporation, the Conversion Price in
effect immediately prior thereto shall be adjusted so that the holder of any
share of Series C Preferred Stock thereafter surrendered for conversion shall be
entitled to receive the number of shares of the Corporation which he would have
owned or have been entitled to receive after the happening of any of the events
described above, had such share of Series C Preferred Stock been converted
immediately prior to the happening of such event.
(vii) Reorganizations. In case of any capital reorganization of the
Corporation or any reclassification of the Common Shares of the Corporation
(other than a reclassification covered by Section 5.8(f)(vi)(D)) or in case of
the consolidation or merger of the Corporation with or into any other
corporation or of the sale, lease or other disposition of the properties and
assets of the Corporation as, or substantially as, an entirety to any other
corporation, there shall be no adjustment of the Conversion Price pursuant to
Section 5.8(f)(vi) hereof, but each share of Series C Preferred Stock shall,
after such capital reorganization, reclassification of Common Shares,
consolidation, merger or sale, lease or other disposition, be convertible into
the kind and amount of shares of stock or other securities or property
(including cash) to which the holder of the number of Common Shares deliverable
(immediately prior to the time of such capital reorganization, reclassification
of Common Shares, consolidation, merger, sale, lease or other disposition) upon
conversion of such share of Series C Preferred Stock would have been entitled
upon such capital reorganization, reclassification of Common Shares,
consolidation, merger, sale, lease or other disposition; and, in any such case,
if necessary, appropriate adjustment shall be made in the application of the
provisions set forth in this Section 5.8(f) with respect to the rights and
interests thereafter of the holders of the shares of Series C Preferred Stock,
to the end that the provisions set forth in this Section 5.8(f) shall
thereafter correspondingly be made applicable, as nearly as may reasonably be,
in
<PAGE> 42
relation to any shares of stock or other securities or property thereafter
deliverable on the conversion of the shares of Series C Preferred Stock. Any
such adjustment shall be made by the Board of Directors (whose determination
shall be conclusive). The provisions of this Section 5.8(f)(vii) shall
similarly apply to successive reorganizations, reclassifications,
consolidations, mergers, sales, leases or other dispositions.
(viii) Reservation of Common Shares. The Corporation shall at all times
reserve and keep available, free from preemptive rights, out of the aggregate of
its authorized but unissued Common Shares and its issued Common Shares held in
its treasury, solely for the purpose of effecting the conversion of the shares
of Series C Preferred Stock, the full number of Common Shares then issuable upon
the conversion of all outstanding shares of Series C Preferred Stock.
(ix) Status of Converted Stock. Following the conversion of any share
of Series C Preferred Stock into Common Shares, the shares of Series C Preferred
Stock so converted shall revert to the status of authorized but unissued Special
Shares of the Corporation, undesignated as to series, and thus be available for
further issuance in accordance with applicable law.
(g) No Sinking Fund. The Series C Preferred Stock shall not be entitled to
the benefits of any retirement or sinking fund.
(h) Restriction on Issuance of Senior Preferred Stock or Parity Preferred
Stock. The Corporation shall not authorize or issue any shares of Senior
Preferred Stock or Parity Preferred Stock without the prior written consent of
the holders of a majority of the outstanding shares of Series C Preferred Stock.
Whenever the consent of the holders of shares of Series C Preferred Stock is
required under this Section 5.8(h), the Board of Directorsof the Corporation
shall fix a record date for the purposes of determining the holders entitled to
grant or withhold such consent, which date may not be earlier than the date
seventy (70) days immediately preceding the date such consent is requested.
<PAGE> 43
EXHIBIT C
Articles of Merger
STATE OF ARIZONA
ARTICLES OF MERGER OF
CIRCLE ACQUISITION CORP., an Arizona corporation
INTO
SECURUS FINANCIAL CORPORATION, an Arizona corporation
Pursuant to the provisions of Section s 10-1105, Arizona Revised
Statutes, the undersigned corporations adopt the following Articles of Merger:
FIRST: The Plan of Merger attached hereto as Exhibit A was adopted by
each of the undersigned corporations in the manner prescribed by
the laws of the jurisdiction under which each such corporation
was organized.
SECOND: The number of outstanding shares of each class and series of the
undersigned corporations are as follows:
<TABLE>
<CAPTION>
Number of
Name of Shares Designation of
Corporation Outstanding Class & Series
----------- ----------- --------------
<S> <C> <C>
Circle Acquisition Corp., 100 Common
an Arizona corporation
Securus Financial Corporation, 100 Common
an Arizona corporation
</TABLE>
THIRD: None of such outstanding shares were entitled to vote as a class
or series with respect to the merger.
FOURTH: All of the outstanding shares of Circle Acquisition Corp., an
Arizona corporation, were voted for the Plan of Merger; no shares
were voted against the Plan of
<PAGE> 44
Merger. The number of shares voted for the Plan of Merger was
sufficient for approval of the Plan of Merger.
FIFTH: All of the outstanding shares of Securus Financial Corporation,
an Arizona corporation, were voted for the Plan of Merger; no
shares were voted against the Plan of Merger. The number of
shares voted for the Plan of Merger was sufficient for approval
of the Plan of Merger.
SIXTH: The name and address of the know place of business of the
surviving corporation are:
Securus Financial Corporation
2720 East Camelback Road
Phoenix, Arizona 85016
SEVENTH: The name and address of the statutory agent of the surviving
corporation are:
Gallagher & Kennedy Service Corporation
2600 North Central Avenue
Phoenix, Arizona 85004
EIGHTH: There are no amendments to the articles of incorporation of the
surviving corporation.
DATED: March ___, 1996
SECURUS FINANCIAL CORPORATION,
an Arizona corporation
By:___________________________
Wayne A. Schreck, President
By:_________________________
2
<PAGE> 45
Denise L. Thoren, Secretary
CIRCLE ACQUISITION CORP., an
Arizona Corporation
By:___________________________
R. Matthew Neff, President
By:___________________________
Daniel S. Jones, Secretary
3
<PAGE> 46
EXHIBIT D
Excluded Assets
<TABLE>
<CAPTION>
12/31/95
Description Statutory Value
- --------------------------------------------------------------------------------
<S> <C>
Wickes Lumber Company Common Stock 4,757,430
UGI C/S Warrants 52
Stokes Note 0
Lehigh Group C/S 0
ESOP Note Receivable AFL 61,173
ESOP Note Receivable Aztec 48,828
</TABLE>
<PAGE> 47
EXHIBIT E (PART 1 OF 3)
Certain Information and Documents
Relating to Transfer of Excluded Assets
Exhibit E has three (3) parts. This page, is Part 1. The others are the
Asset Purchase Agreement (Part 2 of 3) and the Assignment (Part 3 of 3).
Proposed Contemplated Assignment language: It is intended that all
shares of the Wickes Lumber Company stock be transferred to AFAC at or prior to
the Effective Time without any payment or consideration to anyone.
The transfer of the Wickes Lumber Company stock contemplated under the
Merger Agreement may occur through a purchase of the Wickes Lumber Company stock
by Newco from AFL in return for a promissory note of Newco, followed by an
assignment to AFAC by Newco, with the obligations under the note remaining
solely those of Newco without encumbering the Wickes Lumber Company stock after
the Effective Time.
<PAGE> 48
EXHIBIT E (PART 2 OF 3)
Asset Purchase Agreement
ASSET PURCHASE AGREEMENT
[FOR EXCLUDED ASSETS OTHER THAN WICKES LUMBER COMPANY STOCK]
THIS AGREEMENT (the "Agreement") is made as of this _____ day of
___________, 1996, by and between American Founders Life Insurance Company
("Seller"), and ______________________________, a _______________ ("Buyer").
RECITALS
A Merger Agreement dated March _____, 1996, the parties to which included
American Financial Acquisition Corporation and Circle Investors, Inc. (as such
agreement may be amended or modified, the "Merger Agreement") will affect the
beneficial ownership of Seller.
The Merger Agreement provides for the transfer of "Excluded Assets" upon
or immediately prior to the merger contemplated therein. This Agreement is
intended to effectuate the transfer of those Excluded Assets listed on EXHIBIT
A.
NOW THEREFORE, for good and valuable consideration, receipt of which is
hereby acknowledged, Seller and Buyer hereby agree and take such other actions
as follows:
1. Seller agrees to assign, transfer and convey unto Buyer any and all
right, title and interest of Seller in the assets listed in EXHIBIT A, attached
hereto and incorporated herein by reference and any and all rights associated
therewith (the "Purchased Assets") at the Closing (as defined below). This sale
is on an "as is" basis.
2. The Purchase Price is $__________, which is payable in
immediately-available funds.
3. The closing for the purchase and sale contemplated herein is taking
place simultaneously with the execution and delivery of this Agreement (the
"Closing").
4. Seller agrees to take the actions necessary for Buyer to receive the
Purchased Assets, whether the actions are before or after the Closing. Without
limiting the above, Seller agrees to execute and deliver such other stock
powers, instruments and documents as reasonably requested by Buyer, whether
before or after Closing, in order to effect the intent of this Agreement.
5. Each of the parties represents and warrants that it has full power and
authority to enter into and perform this Agreement, and that it has been duly
authorized by its board of directors.
<PAGE> 49
IN WITNESS WHEREOF, Seller and Buyer have caused this Agreement to be duly
executed on the day and year first above written.
"Seller"
Witnesses: AMERICAN FOUNDERS LIFE INSURANCE
COMPANY
______________________________ By:__________________________
Its ______ President
______________________________
"Buyer"
Witnesses: [_____________________________]
______________________________ By:__________________________
Its _____ President
______________________________
<PAGE> 50
EXHIBIT A
List of Assets
<PAGE> 51
EXHIBIT E (PART 3 OF 3)
ASSIGNMENT
[FOR SHARES OF WICKES LUMBER COMPANY STOCK]
THIS ASSIGNMENT (the "Assignment") is made as of this _____ day of
___________, 1996, in favor of American Financial Acquisition Corporation
("Assignee") by __________________ ("Assignor").
RECITALS
A Merger Agreement dated March _____, 1996, the parties to which
included American Financial Acquisition Corporation and Circle Investors, Inc.
(as such agreement may be amended or modified, the "Merger Agreement") will
affect the beneficial ownership of Assignor.
The Merger Agreement provides for the transfer of "Excluded Assets"
upon or immediately prior to the merger contemplated therein. The shares of
Wickes Lumber Company common stock (the "Wickes Stock") are Excluded Assets.
This Assignment is intended to effectuate the transfer of the Wickes Stock.
NOW THEREFORE, for good and valuable consideration, receipt of which is
hereby acknowledged, Assignor hereby assigns, transfers and conveys, as set
forth herein and agrees as set forth herein.
1. Assignor hereby assigns, transfers and conveys unto Assignee any and
all right, title and interest of Assignor in any and all shares of Wickes Stock
and any and all rights associated therewith.
2. Assignor agrees to take the actions necessary for Assignee to
receive the Assigned Assets, whether the actions are before or after the Closing
of the merger contemplated in the Merger Agreement, in order to effect the
intent of this Assignment. Without limiting the above, Assignor agrees to
execute and deliver such stock powers, instruments and documents as reasonably
requested by Assignee.
<PAGE> 52
3. Each of the parties represents and warrants that it has full power
and authority to enter into and perform this Assignment, and that it has been
duly authorized by its board of directors.
<PAGE> 53
IN WITNESS WHEREOF, Assignor and Assignee have caused this Assignment
to be duly executed on the day and year first above written.
"Assignor"
Witnesses:
______________________________ By:__________________________
Its ______ President
______________________________
"Assignee"
Witnesses: AMERICAN FINANCIAL ACQUISITION
CORPORATION
______________________________ By:__________________________
Its _____ President
<PAGE> 54
EXHIBIT F
PURCHASE BY RIVERSIDE OF INVESTMENT REAL ESTATE OF AFL
1. Sale and Purchase of Investment Real Estate.
(a) Simultaneously with the Closing, Riverside shall purchase from AFL,
and AFL shall sell to Riverside, all of the investment real estate then owned by
AFL and more particularly described S4(n)(i) of AFAC's Disclosure Schedule (the
"Real Estate"), upon the terms and conditions set forth in this Exhibit F, free
and clear of the lien of Barnett Bank listed in _4(n)(ii) of AFAC's Disclosure
Schedule and all other Security Interests (including, without limitation, any
purchase money security interest) other than the Mortgages described below and
customary matters of record.
(b) After the date of this Agreement and prior to the Closing, without
the prior written consent of Circle, AFAC shall not (i) permit AFL to sell any
of the Real Estate for less than the price therefor set forth in _4(n)(i) of
AFAC's Disclosure Schedule or, if no price is set forth therein, its 1995
AppraisedValue (as hereinafter defined), or (ii) suffer to exist any Security
Interest (including, without limitation, any purchase money security interest)
on the Real Estate that is not set forth in _4(n)(i) of AFAC's Disclosure
Schedule.
2. Purchase Price; Payment.
(a) The aggregate purchase price for the Real Estate shall equal
$20,350,000, as adjusted downward for any sales of any parcels of the Real
Estate permitted by Section 1(b) above prior to the Closing (as so adjusted, if
adjusted, the "Purchase Price"). Any such adjustment shall be equal to the
aggregate net proceeds received by AFL upon the sale of the parcel(s) sold.
(b) At the closing of the sale and purchase of the Real Estate,
Riverside shall deliver the Purchase Price to AFL as follows:
(i) an amount equal to 10% of the Purchase Price shall be paid
in cash to AFL by wire transfer or delivery of other immediately available
funds; and
(ii) an amount equal to 90% of the Purchase Price shall be
paid by delivery to AFL of a Secured Promissory Note of Riverside having the
terms described in Section 3 below and otherwise in form and substance
reasonably satisfactory to Circle and Riverside (the "Note").
3. Significant Terms of the Note; Mortgages.
(a) The principal amount of the Note shall be amortized over a period
of 20 years, and amortized payments of principal shall be made on each
anniversary of the date of the Note; provided, that the aggregate remaining
principal of and accrued interest on the Note shall be due and payable on the
seventh anniversary of the date of the Note.
(b) The outstanding principal of the Note shall bear interest at the
floating rate equal to the three-month London Interbank Offered Rate (LIBOR)
plus 3.0%, payable annually in arrears. The interest rate shall be adjusted on a
quarterly basis.
(c) The Note shall be secured by first priority mortgages covering all
of the Real Estate, having the terms described herein and such other terms and
conditions as are customary for first mortgages covering comparable real estate,
and otherwise in form and substance reasonably satisfactory to Circle and
Riverside (the "Mortgages"). Each Mortgage shall cover one or more parcels of
the Real Estate such that no single Mortgage will cover more than $3,000,000 of
the Real Estate, based upon its appraised value as shown on the appraisal report
of Coldwell Banker as of December 1, 1995 or Walter M. Lampe as of December 6,
1995, as applicable (the "1995 Appraised Value"). For purposes of subsection (d)
below, the aggregate principal amount of the Note outstanding from time to time
shall
<PAGE> 55
be allocated among the Mortgages based on the relative appraised values of
the Real Estate subject thereto, based on the foregoing appraisal report, and
such allocation shall not thereafter be adjusted.
(d) Commencing with the first anniversary of the date of each Mortgage,
and on each anniversary date thereafter until such Mortgage has been released,
Riverside shall, at Riverside's expense, provide AFL with an appraisal of the
Real Estate subject to such Mortgage, as performed by an independent certified
appraiser that is mutually acceptable to Riverside and AFL. To the extent that
the outstanding principal amount of the Note allocated to such Real Estate as
provided in subsection (c) above (after taking into account all payments of
principal on such anniversary date) exceeds (i) with respect to the first
anniversary date, 85.0%, or (ii) with respect to each anniversary date there
after, 80.0%, of the appraised value thereof, based on such appraisal (as
applicable, the "Required Loan-to-Value Ratio"), then Riverside shall, prior to
the next succeeding December 31, make an additional principal payment on the
Note in an amount sufficient to achieve the Required Loan-to-Value Ratio.
(e) A parcel of Real Estate subject to a Mortgage may be sold by
Riverside only in any transaction by which Riverside receives net sale proceeds
in cash in an amount at least equal to an amount agreed to by Riverside and AFL
prior to such sale. Upon any such sale, the entire net proceeds thereof shall be
paid to AFL and the related Mortgage shall be released to the extent thereof.
AFL shall apply such payment to the payment of the Note as follows:
(i) First, to fund an escrow account for the payment of
property taxes related to the Real Estate, to the extent required for such
purpose;
(ii) Second, to the payment of accrued and unpaid interest, to
the extent thereof;
(iii) Third, to the payment of any and all past due principal
of the Note, to the extent thereof; and
(iv) Fourth, to the payment of principal of the Note in the
order of maturity.
(f) The Note shall be non-recourse beyond the collateral provided by
the Mortgage and in Section 4 below.
4. Riverside Pledge Agreement.
(a) Simultaneously with its delivery of the Note, Riverside and AFAC
shall deliver to Circle a Pledge Agreement having the terms described in this
Section 4 and otherwise in form and substance reasonably satisfactory to Circle
and Riverside (the "Pledge Agreement"), together with the collateral described
in subsection (c) below.
(b) The Pledge Agreement shall provide additional security to Circle
for the payment of indebtedness evidenced by the Note, to the extent of the
collateral pledged thereunder. The Pledge Agreement shall continue and be in
full force and effect until all of the indebtedness evidenced by the Note shall
have been indefeasibly paid in full.
(c) Riverside and AFAC shall pledge to Circle (i) the 3,600 shares of
Series C Preferred Stock issued to AFAC in the Merger, (ii) the 2,267,000 shares
of Circle Common Stock issued to AFAC in the Merger and (iii) 1,000,000 shares
of common stock of Wickes Lumber Company ("Wickes Stock") (collectively, the
"Collateral"); in each case subject to adjustment as provided for in subsection
(d) below; provided, however, that after an IPO (as defined in the Shareholders
Agreement), unpledged shares of Circle Common Stock of equal fair market value
may be substituted for the Wickes Stock, which may then be transferred free of
restriction.
(d) Within five business days after the end of each calendar quarter,
Circle shall calculate the Collateral Ratio and the Collateral Value, each as of
the end of such quarter, and shall deliver a copy of such calculations to
Riverside. As used herein:
(i) "Collateral Ratio" means the dollar amount equal to 116%
of the outstanding principal amount of the Note as of the end of such quarter.
(ii) "Collateral Value" means the sum of the Series C
Preferred Value, the Circle Common Stock Value, the Wickes Stock Value and the
Real Estate Collateral Value.
(iii) "Series C Preferred Value" means $1,000 per share,
multiplied by the number of shares of Series C Preferred Stock pledged to Circle
as of the end of such quarter.
<PAGE> 56
(iv) "Circle Common Stock Value" means $1 per share (or, if the
Circle Common Stock is publicly traded, the average closing sale price of the
Circle Common Stock on the principal exchange (including the Nasdaq National
Market System) on which such stock is listed or, if the Circle Common Stock is
not listed on any exchange, the average closing bid price of the Circle Common
Stock as reported by Nasdaq, in either case for the 30-trading day period ending
on the last day of such quarter), multiplied by the num ber of shares of Circle
Common Stock pledged to Circle as of the end of such quarter.
(v) "Wickes Stock Value" means the average closing sale price
of the Wickes Stock on the principal exchange (including the Nasdaq National
Market System) on which such stock is listed or, if the Wickes Stock is not
listed on any exchange, the average closing bid price of the Wickes Stock as
reported by Nasdaq, in either case for the 30-trading day period ending on the
last day of such quarter, multiplied by the number of shares of Wickes Stock
pledged to Circle as of the end of such quarter.
(vi) "Real Estate Collateral Value" means the sum of:
(x) (A) with respect to the first calculation thereof,
$12,000,000 minus 66% of the aggregate amount of any adjustment made to the
Purchase Price pursuant to Section 2(a) above, or (B) with respect to each
quarterly calculation thereafter, the Real Estate Collateral Value calculated as
of the end of the prior quarter preceding such calculation, minus (y) 66% of
the aggregate amount of all payments of principal of the Note applied during the
most recent quarter pursuant the provision described in Section 3(e)(iv) above
only.
To the extent that the Collateral Ratio exceeds the Collateral
Value, Riverside shall either prepay a sufficient amount of principal (applied
to installments in the order due) to eliminate or reduce such excess or, to the
extent such excess is not so eliminated, pledge to Circle additional shares, as
follows:
(1) First, shares of Wickes Stock (valued as provided for in
clause (v) above), and if any excess still remains;
(2) Second, shares of Series C Preferred Stock (valued for
this purpose at $1,000 per share), to the extent of such excess (which excess
shall be rounded up to the nearest $1,000) and to the extent then held by
Riverside, and if any excess still remains (without taking into account the
rounding provided for in the preceding parenthetical);
(3) Third, shares of Circle Common Stock (valued as provided
for in clause (iv) above), to the extent of such remaining excess and to the
extent then held by Riverside; provided, however, that in no event shall
Riverside be obligated to have pledged under the Pledge Agreement more than the
respective numbers of shares of Series C Preferred Stock, Circle Common Stock or
Wickes Stock set forth in Section 4(c) above, except that to the extent
Riverside has Transferred any Series C Preferred Stock or Circle Common Stock
(other than pledged shares disposed of as permitted by the last paragraph of
this Section 4) the amount of Wickes Common Stock that may be required to be
pledged will be increased by an amount of such stock with a Wickes Stock Value
equal to the aggregate of the Circle Common Stock Value and the Series C
Preferred Value of the stock so Transferred. To the extent that the Collateral
Value exceeds the Collateral Ratio, Circle shall release from the pledge:
(1) First, shares of Series C Preferred Stock (valued for this
purpose at $1,000 per share), to the extent of such excess (which excess shall
be rounded down to the nearest $1,000), and if any excess still remains (without
taking into account the rounding provided for in the preceding parenthetical);
(2) Second, shares of Circle Common Stock (valued as provided
for in clause (iv) above), to the extent of such remaining excess, and if any
excess still remains;
(3) Third, shares of Wickes Stock (valued as provided for in
clause (v) above), to the extent of such remaining excess.
Any required pledge or release provided for above shall be
effected within five business days after Riverside's receipt of the foregoing
calculations.
<PAGE> 57
When and to the extent Shares (as defined in the Shareholders'
Agreement) pledged under the Pledge Agreement are disposed of by Riverside under
the registration rights provisions of the Shareholders' Agreement or in Rule 144
sales permitted by the Shareholders' Agreement, Circle shall release such Shares
from the pledge provided AFL is simultaneously paid the net proceeds of such
disposition as a principal prepayment (to be applied to installments in the
order due) on the Note.
<PAGE> 58
EXHIBIT G
Investment Policy
AMERICAN FOUNDERS LIFE INSURANCE COMPANY
STATEMENT OF INVESTMENT POLICY AND GUIDELINES
I. GENERAL INVESTMENT POLICY STATEMENT
1. All investments shall conform to the statutory regulations and
bank loan restrictions to which American Founders Life Insurance
Company (the "Company") is subject.
2. The goal of this investment policy is to optimize the total
after-tax return earned in the Company's investment portfolio on
a basis consistent with the limitations imposed by statutory
regulations, lending agreements and management prudence. An
overriding consideration is the maintenance of a significant
margin of safety in the Company's ability to meet its
obligations to its policyholders.
3. The Company's Board of Directors will be responsible on a
continuing basis for the establishment and review of appropriate
investment portfolio guidelines. The Board may delegate to
committees, employees, or agents the authority to act, subject
to the final approval of the Board, regarding the investment of
the Company's assets.
II. PORTFOLIO GUIDELINES -- The following guidelines are applicable for the
marketable securities owned by the Company. Any references contained in
these guidelines to the "total portfolio" shall mean the total of cash
and invested assets as would be listed on line 10A of page 2 of the
Company's Annual Statement.
A. AUTHORIZED INVESTMENT TYPES -- The Company is authorized to
invest in those types of investment which are authorized by its
applicable statutory regulations.
B. DIVERSIFICATION -- The following limitations apply to the
Company's investment portfolio:
1. ASSET CLASSES:
-- DEBT OBLIGATIONS -- Up to 100% of the total
portfolio may be invested in debt obligations.
-- EQUITY SECURITIES -- No more than 20% of the total
portfolio may be invested in preferred and common
stocks. Equity securities may be purchased by
investment advisors retained to manage
1
<PAGE> 59
equity securities subject to written investment
restrictions. Such restriction shall be incorporated
into this document (See Attachment I). No other new
investments in preferred or common stocks may be made
without the prior approval of the Company's President.
-- CONVERTIBLE BONDS -- Convertible bonds may be purchased
and treated as debt obligations if the security is
priced such that little or no value is given to the
conversion feature of the security. If the security is
priced such that the conversion feature has material
value, the security shall be treated for purposes of
these guidelines as an equity security.
-- REAL ESTATE -- Up to 15% of the total portfolio may be
invested in real estate assets.
2. INDUSTRY AND SECURITY TYPES:
-- CORPORATE OBLIGATIONS -- No more than 15% of the total
portfolio at the time of its purchase may be invested in
any one industry based upon the industry classifications
issued by Standard & Poor's Corporation.
-- MORTGAGE RELATED OBLIGATIONS -- No more than 50% of the
total portfolio at the time of its purchase may be
invested in mortgage pass-through securities,
collateralized mortgage obligations and non-securitized
mortgage loans with no more than 30% of the total
portfolio invested in non-securitized mortgage loans.
-- ASSET-BACKED SECURITIES AND COLLATERALIZED BOND
OBLIGATIONS -- No more than 15% of the total portfolio
at the time of its purchase may be invested in
securities collateralized by any one type of asset,
e.g., credit cards, auto receivables, corporate bonds,
and no more than 25% of the portfolio at cost can be
invested in all such securities.
3. ISSUER:
-- U.S. GOVERNMENT -- There is no limit on the amount of
securities which may be owned if such obligations have
been issued by the U.S. Treasury or guaranteed by a U.S.
agency which is backed by the full faith and credit of
the U.S. government. (For GNMAs, see the more
constraining limitation for mortgage related obligations
stated above.)
-- U.S. GOVERNMENT AGENCY MORTGAGE OBLIGATIONS -- No more
than 50% of the total portfolio at the time of its
purchase may be invested in mortgage pass-through
securities issued or
2
<PAGE> 60
guaranteed by any U.S. government agency or government-
sponsored enterprise.
-- OTHER U.S. GOVERNMENT AGENCY OBLIGATIONS -- No more than
15% of the total portfolio at the time of its purchase
may be invested in securities issued or guaranteed by
any one U.S. government agency which is not backed by
the full faith and credit of the U.S. government or
supported by some other assets, such as mortgages.
-- GENERAL OBLIGATIONS OF U.S. STATE GOVERNMENTS, THE CANADIAN
GOVERNMENT AND CANADIAN PROVINCIAL GOVERNMENTS -- Up to $4.0
million par amount may be invested in general
obligations issued or guaranteed by each U.S. state
government, the Canadian government or each Canadian
provincial government. No more than 15% of the total
portfolio at the time of its purchase may be invested in
all general obligations of U.S. state governments and no
more than 15% of the total portfolio at the time of its
purchase may be invested in all Canadian obligations.
-- COLLATERALIZED MORTGAGE OBLIGATIONS -- Up to $4.0 million
face value may be invested in any one tranche of a
collateralized mortgage obligation provided that it is
rated "Aaa" by Moody's Investors Service. "AAA" by
Standard & Poor's Corporation or a comparable rating by
another nationally recognized rating service.
-- NON-SECURITIZED MORTGAGE LOANS -- Up to $4.0 million face
amount may be invested in any one non-securitized loan.
Each loan must be secured by a valid first lien on real
property and each loan must not exceed 90% of the value
of the real property.
-- CORPORATE AND OTHER MUNICIPAL OBLIGATIONS, ASSET BACKED
SECURITIES, COLLATERALIZED BOND OBLIGATIONS, AND COLLATERALIZED
MORTGAGE OBLIGATIONS RATED BELOW "AAA" -- Such investments
shall be limited to the following maximum par amounts
per issuer based upon their rating at the time of their
purchase as designated by the Securities Valuation
Office of the NAIC:
Rating ($000s)
------ -------
NAIC 1 ("A" or better) 3,500
NAIC 2 ("BBB") 3,500
NAIC 3 ("BB") 2,000
NAIC 4 ("B") 1,000
NAIC 5 ("CCC") 1,000
Investments in securities rated NAIC 3, 4 or 5 shall
also be
3
<PAGE> 61
reasonably diversified with respect to industry
and geographic location.
-- INVESTMENTS IN AFFILIATES -- Any investment in an
affiliated company shall be made in compliance
with all applicable statutory regulations and
may not be made without the prior approval of
the Company's President.
C. CREDIT QUALITY:
-- "A" RATED OR BETTER -- At least 65% of the total bond
portfolio at the time of its purchase shall be
invested in securities which (1) are rated "A3" or
better by Moody's Investors Service, "A-" or better by
Standard & Poor's Corporation or a comparable rating
by another nationally recognized rating service, or
(2) are Qualifying Short-Term Investments (as defined
below).
-- BELOW "A" RATED -- No more than 35% of the total bond
portfolio at the time of its purchase may be invested
in securities which are rated below "A3" by Moody's
Investors Service, "A-" by Standard & Poor's
Corporation or a comparable rating by another
recognized rating agency, or which are non-rated
securities.
-- BELOW "BBB" RATED -- No more than 10% of the total bond
portfolio at the time of its purchase may be invested
in securities which are rated below "Baa3" by Moody's
Investors Service, "BBB-" by Standard & Poor's
Corporation or a comparable rating by another
recognized rating agency, or which are non-rated
securities.
D. LIQUIDITY:
-- PUBLICLY-TRADED SECURITIES -- At least 50% of the total
portfolio at the time of its purchase shall be
invested in publicly-traded securities.
-- PRIVATELY-PLACED SECURITIES -- No more than 50% of the
total portfolio at the time of its purchase may be
invested in privately-placed stocks and bonds,
non-securitized mortgage loans, and real estate.
E. MATURITY/DURATION -- A portion of the Company's investment
portfolio shall be invested to approximate the estimated
duration of the Company's liabilities. Generally, the
maturity structure of the Company's portfolio shall be
laddered to accommodate anticipated and unanticipated cash
outflows while minimizing the potential of realizing capital
losses.
4
<PAGE> 62
F. QUALIFYING SHORT-TERM INVESTMENTS:
-- MONEY MARKET FUNDS -- Investments may be made in funds
which invest in a diversified portfolio of securities
and which provide for investments to be withdrawn daily
without capital gain or loss. Investments may be made
without limit in the Pacific American Fund -- U.S.
Treasury Portfolio or comparable Funds provided in
conjunction with the custodial services offered by the
Company's investment custodian or the Merrill Lynch
Government or Treasury Funds.
-- COMMERCIAL PAPER AND CORPORATE MASTER NOTES --
Investments may be made provided that the obligations
are rated "A-1" by Moody's Investors Service or "P-1" by
Standard & Poor's Corporation or are pari passu with
other obligations of the issuer that have such a
short-term debt rating.
-- CERTIFICATES OF DEPOSIT, TIME DEPOSITS MONEY MARKET
ACCOUNTS, BANK MASTER NOTES AND BANKERS' ACCEPTANCES --
Investments may be made with (1) the 100 largest banks
by asset size, provided that they have been issued a
senior long-term debt rating of "Baa2" or higher by
Moody's Investors Service or "BBB" or higher by Standard
& Poor's Corporation, or (2) those banks specifically
approved by the Company's Board of Directors. Deposits
may also be made with other banks and savings and loan
institutions, provided that the amount of such deposits
do not exceed $100,000 per institution and they are
fully insured by the FDIC or FSLIC.
-- REPURCHASE AGREEMENTS -- Investments may be made in
repurchase agreements with qualified banks and
broker-dealers, provided that each investment is fully
collateralized with securities which otherwise qualify
for investment under these guidelines. An issuing bank
must meet the qualifying criteria specified for
certificates of deposit stated above. An issuing
broker-dealer must have minimum equity capitalization in
excess of $100 million.
5
<PAGE> 63
ATTACHMENT I
JACK WOLF & COMPANY EQUITY ACCOUNT
INVESTMENT LIMITATIONS
Investments may be made in common and preferred stocks and convertible bonds
subject to the following additional restrictions:
(1) The issuer must be a corporation organized under the laws of the
United States of America or any of its states;
(2) The issuer must be solvent with at least $1,000,000 of net worth as
of the date of its latest annual or more recent certified audited
financial statement, or will have at least $1,000,000 of net worth
after completion of a securities offering to which is being
subscribed;
(3) The securities must be listed or traded on a recognized U.S.
securities exchange or as part of the NASDAQ National Market System,
and not subject to restrictions on transfer of registration;
(4) The securities of any one corporation may not be purchased, if at
the time of purchase, their value would exceed $1,000,000;
(5) The securities of any corporation may not be purchased, if it would
result in the ownership of more than 4.9% of the total outstanding
shares of the issue;
(6) No securities which have been issued by Riverside Group, Inc. or any
affiliate of Riverside Group, Inc., including Wickes Lumber Company,
may be purchased;
(7) Securities may not be sold short, nor purchased on margin;
(8) Investments may be made without limitation in the Pacific American
Fund -- U.S. Treasury Portfolio; and
(9) All securities transactions are to be made "Delivery versus Payment"
in the custodial account which has been designated by American
Founders Life Insurance Company.
6
<PAGE> 64
EXHIBIT H
Transfer of Certain Employees
Blair, Stacy
Boles, Kimberly
Cline, Carl
Conley, Justin
Gailes, Leighann
Graham, Lewis
Hatcher, Gina
Medley, Beverly
Olson, Craig
Toomey, Sharon
Rupp, Christopher
Schumacher, Robert
Abdullah, Carol
Salem, Edward
<PAGE> 65
EXHIBIT I
WINS Services to Dependable Insurance Company, Inc.
Section 13.4 WINS Software. Seller and Riverside agree to permit the
Purchaser unrestricted access to, and use of, the WINS computer software and
hardware (including the hardware located in Arizona) associated with the
Company's operations until March 1, 1997, subject to Purchaser's option to
extend such access and use until December 31, 1997 on the same terms. The
Purchaser will bear the maintenance costs of the WINS operating system until
March 1, 1997 (or December 31, 1997, if applicable) or such earlier date as
shall be determined in the sole discretion of the Purchaser.
<PAGE> 66
EXHIBIT J
CIRCLE INVESTORS, INC.
SHAREHOLDERS' AGREEMENT
SHAREHOLDERS' AGREEMENT (this "Agreement"), dated as of March ___,
1996, among Circle Investors, Inc., an Indiana corporation ("Circle"), Riverside
Group, Inc., a Florida corporation ("Riverside"), and American Financial
Acquisition Corporation, a Delaware corporation and a Subsidiary of Riverside
("AFAC").
W I T N E S S E T H :
WHEREAS, simultaneously with the execution and delivery of this
Agreement, Circle and AFAC are entering into a Merger Agreement, dated as of the
date hereof (the "Merger Agreement"), which provides for the combination of
Circle's and Riverside's life insurance businesses pursuant to a merger of a
wholly owned subsidiary of Circle with and into a wholly owned subsidiary of
AFAC (the "Merger");
WHEREAS, the Merger Agreement provides that AFAC is to receive
pursuant to the Merger 3,600 shares of Circle's Series C Preferred Stock and
2,267,000 shares of Circle's Common Shares, and the parties desire to make their
agreements set forth herein regarding the voting, disposition and registration
of such shares; and
WHEREAS, in order to induce Circle and AFAC to enter into and
consummate the transactions contemplated by the Merger Agreement, the parties
hereto desire to make their other agreements set forth herein.
NOW, THEREFORE, in consideration of the premises and the mutual
agreements set forth herein, the parties hereto hereby agree as follows:
ARTICLE I
Certain Definitions
For purposes of this Agreement, the following terms shall have the
following meanings:
1.1. Affiliate. With respect to any Person, any (a) director, officer
or partner of such Person; (b) any other Person that beneficially owns, directly
or indirectly, equity securities having 50% or more of the voting power to elect
the directors of such Person; (c) any other Person of which such Person
beneficially owns, directly or indirectly, equity securities having 50% or more
of the voting power to elect the directors of such other Person; and (d) any
other Person Controlling, Controlled by or under common Control with where the
term "Control" means the possession, directly or indirectly, of the power to
direct or cause the direction of the management and policies of such Person,
whether through the ownership of equity securities or otherwise.
1.2. Commission. The United States Securities and Exchange Commission
or any successor agency.
1.3. Common Shares. The Common Shares, without par value, of Circle
and any other class or series of common stock of Circle that may be authorized
after the date hereof.
1.4. Conseco Group. Conseco, Inc. and its permitted transferees having
any registration rights granted to them in connection with the transactions
contemplated by the Conseco Commitment (as defined in the
Merger Agreement).
1.5. Conseco Group's Registrable Securities. The Securities subject to
any registration rights granted to the Conseco Group in connection with the
transactions contemplated by the Conseco Commitment.
1.6. Exchange Act. The Securities Exchange Act of 1934, as amended,
and the rules and regulations of the Commission thereunder, all as the same
shall be in effect from time to time.
<PAGE> 67
1.7. IPO. The closing of the initial public offering by Circle of
Common Shares pursuant to an effective registration statement (other than a
registration statement on Form S-4 or Form S-8 or any replacement of any such
form) under the Securities Act, and the listing of the Common Shares on a
national securities exchange or admission thereof for trading on the Nasdaq
Stock Market.
1.8. Permitted Transferee. The meaning ascribed to that term in
Section 6.3(a)(iii) below.
1.9. Person. An individual, corporation, partnership, limited
liability company, firm, joint venture, trust or other entity or association of
any nature whatsoever.
1.10. Pledged Shares. The Shares that are pledged or could be required
to be pledged to Circle or any Subsidiary of Circle as contemplated by Exhibit F
to the Merger Agreement.
1.11. Registrable Securities. All Common Shares, including Common
Shares issued or issuable upon conversion of the Series C Preferred Stock, that
are owned by AFAC, any Affiliate of AFAC or any Permitted Transferee.
1.12. Securities. The Common Shares, the Series C Preferred Stock and
any other equity securities, and any securities convertible into or exchangeable
for equity securities, of any class or series issued by Circle, and any options,
warrants or other rights to acquire any of the foregoing.
1.13. Securities Act. The Securities Act of 1933, as amended, and the
rules and regulations of the Commission thereunder, all as the same shall be in
effect from time to time.
1.14. Selling Shareholder. A Shareholder who has advised Circle in
writing of its intention to include Registrable Securities in a registration
statement filed pursuant to Article VII hereof.
1.15. Series C Preferred Stock. The Series C Preferred Stock, $1,000
liquidation value per share, of Circle.
1.16. Shares. The 2,267,000 Common Shares to be issued to AFAC
pursuant to the Merger Agreement, the 3,600 shares of Series C Preferred Stock
to be issued to AFAC pursuant to the Merger Agreement, the Common Shares issued
or issuable upon conversion of such shares of Series C Preferred Stock, and any
other securities which may be issued in respect of any of the foregoing as
contemplated by Section 8.3 hereof.
1.17. Subsidiary. Any corporation with respect to which a specified
Person (or a Subsidiary thereof) owns a majority of the common stock or has the
power to vote or direct the voting of sufficient securities to elect a majority
of thedirectors.
1.18. Shareholder. AFAC and any future owner of any of the Shares.
1.19. Transfer. Any sale, transfer, assignment, pledge, hypothecation,
gift, conveyance, security interest or other encumbrance, or any contract
therefor, any voting trust or other agreement with respect to the transfer of
voting rights or any other beneficial interest in, or any other transfer or
disposition (including, without limitation, any disposition that would
constitute a "sale" within the meaning of the Securities Act) whatsoever
affecting the right, title, interest or possession in or to any Securities.
1.20. Voting Securities. Securities having the right (or convertible
into, or exercisable or exchangeable for, Securities having the right) to vote
on an election of directors of Circle.
ARTICLE II
Representations and Warranties of Riverside and AFAC
Riverside and AFAC, jointly and severally, hereby represent and
warrant to Circle as follows:
<PAGE> 68
2.1. Corporate Organization. Riverside is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Florida; and AFAC is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware.
2.2. Authorization, Execution and Delivery. Each of Riverside and AFAC
has full corporate power and authority to execute and deliver this Agreement and
to perform its obligations hereunder. The execution and delivery of this
Agreement by each of Riverside and AFAC and the consummation by each of them of
the transactions contemplated hereby have been duly authorized by the Board of
Directors of each of Riverside and AFAC, and no other corporate proceedings on
the part of Riverside or AFAC are necessary to authorize the execution and
delivery of this Agreement and the consummation by each of them of the
transactions contemplated hereby. This Agreement has been duly executed and
delivered by each of Riverside and AFAC and constitutes a valid and binding
obligation of each of Riverside and AFAC, enforceable against each of them in
accordance with its terms, subject to bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium and similar laws of general applicability
relating to or affecting creditors' rights and to general equity principles.
2.3. Noncontravention. Neither the execution and the delivery of this
Agreement by Riverside and AFAC, nor the consummation by each of them of the
transactions contemplated hereby, will (a) violate any constitution, statute,
regulation, rule, injunction, judgment, order, decree, ruling, charge, or other
restriction of any government, governmental agency, or court to which Riverside
or AFAC is subject or, any provision of its articles of incorporation or bylaws
or (b) conflict with, result in a breach of, constitute a default under, result
in theacceleration of, create in any party the right to accelerate, terminate,
modify, or cancel, or require any notice under any agreement, contract, lease,
license, instrument, or other arrangement to which Riverside or AFAC is a party
or by which either of them is bound or to which any of their respective assets
is subject.
2.4. No Required Consents. Neither Riverside nor AFAC is required to
give any notice to, make any filing with, or obtain any authorization, consent
or approval of any government or governmental agency or other Person in order
for Riverside and AFAC to execute and deliver this Agreement and consummate the
transactions contemplated hereby.
2.5. Investment Representations. Each of Riverside and AFAC
understands and agrees that:
(a) The Shares have not been registered under the Securities Act or
any state securities laws and that, therefore, the Shares may not be Transferred
unless they are registered under the Securities Act and any applicable state
securities laws or unless an exemption from registration thereunder is
available; and that this Agreement contains further restrictions on Transfer of
the Shares.
(b) AFAC is acquiring the Shares solely for its own account for the
purpose of investment and not with a view to or for sale in connection with any
distribution thereof, except in compliance with the Securities Act, any
applicable state securities laws and the rules and regulations thereunder.
(c) The certificate or certificates representing the Shares will bear
the following legend, unless such certificate(s) bear a substantially similar
legend at the date hereof:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED BY THE
HOLDER SOLELY FOR ITS OWN ACCOUNT FOR THE PURPOSE OF INVESTMENT AND NOT WITH A
VIEW TO OR FOR SALE IN CONNECTION WITH ANY DISTRIBUTION THEREOF IN VIOLATION OF
THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND APPLICABLE
STATE SECURITIES LAWS. THE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE ACT OR
STATE SECURITIES LAWS AND MAY NOT BE SOLD, PLEDGED, OR OTHERWISE TRANSFERRED
WITHOUT REGISTRATION UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS OR AN
EXEMPTION THEREFROM. OWNERSHIP, ENCUMBRANCE, PLEDGE, ASSIGNMENT, TRANSFER OR
OTHER DISPOSITION OF ANY SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
THE RESTRICTIONS (INCLUDING AN IRREVOCABLE PROXY) CONTAINED IN THE SHAREHOLDERS'
AGREEMENT BETWEEN THE CORPORATION AND THE HOLDER, A COPY OF WHICH IS ON FILE AT
THE OFFICE OF THE CORPORATION."
<PAGE> 69
ARTICLE III
Representations and Warranties of Circle
Circle hereby represents and warrants to Riverside and AFAC as follows:
3.1. Corporate Organization. Circle is a corporation duly organized,
validly existing and in good standing under the laws of the State of Indiana.
3.2. Authorization, Execution and Delivery. Circle has full corporate
power and authority to execute and deliver this Agreement and to perform its
obligations hereunder. The execution and delivery of this Agreement by Circle
and the consummation by it of the transactions contemplated hereby have been
duly authorized by the Board of Directors of Circle, and no other corporate
proceedings on the part of Circle are necessary to authorize the execution and
delivery of this Agreement and the consummation by Circle of the transactions
contemplated hereby. This Agreement has been duly executed and delivered by
Circle and constitutes a valid and binding obligation of Circle, enforceable
against Circle in accordance with its terms, subject to bankruptcy, insolvency,
fraudulent transfer, reorganization, moratorium and similar laws of general
applicability relating to or affecting creditors' rights and to general equity
principles.
3.3. Noncontravention. Neither the execution and the delivery of this
Agreement by Circle, nor the consummation by Circle of the transactions
contemplated hereby, will (a) violate any constitution, statute, regulation,
rule, injunction, judgment, order, decree, ruling, charge, or other restriction
of any government, governmental agency, or court to which Circle is subject or,
any provision of its articles of incorporation or bylaws or (b) conflict with,
result in a breach of, constitute a default under, result in the acceleration
of, create in any party the right to accelerate, terminate, modify, or cancel,
or require any notice under any agreement, contract, lease, license, instrument,
or other arrangement to which Circle is a party or by which it is bound or to
which any of its assets is subject.
3.4. No Required Consents. Circle is not required to give any notice
to, make any filing with, or obtain any authorization, consent or approval of
any government or governmental agency or other Person in order for Circle to
execute and deliver this Agreement and consummate the transactions contemplated
hereby.
ARTICLE IV
Agreements Relating to the Merger Agreement
4.1. Certain Defined Terms. Capitalized terms used in this Article IV
and not otherwise defined in this Agreement shall have the meanings ascribed to
them in the Merger Agreement.
4.2. Employment Benefits. (a) Prior to Closing, Riverside shall amend
each Employee Benefit Plan that is set forth in clauses (a), (b) and (c) of the
definition of "Employee Benefit Plan" in the Merger Agreement in which any
employee of Newco, the Company or any of its Subsidiaries is a participant to
provide that the accrued benefits under such Plan of any participant who is an
employee of Newco, the Company or any of its Subsidiaries at the Closing Date
shall become one hundred percent (100%) vested and nonforfeitable at the Closing
Date. AFAC and Riverside shall take all actions necessary to terminate, as of
the Closing Date, the status of Newco, the Company and its Subsidiaries as
participating employers under all Employee Pension Benefit Plans maintained by
any member of the Controlled Group of Corporations that includes Newco, the
Company and its Subsidiaries. In addition, AFAC and Riverside shall take all
further action required to ensure that, under the terms of each such Employee
Pension Benefit Plan, each participant who is an employee of Newco, the Company
or any of its Subsidiaries at the Closing Date will be treated, as of the
Closing Date, as a terminated or retired employee entitled to receive a
distribution of his or her vested accrued benefits under such Plan.
(b) For a reasonable period after the Closing, each of Riverside and
AFAC agrees to reasonably cooperate with Circle in connection with the
transition of the current employees of the Company and its Subsidiaries to
becoming covered by Benefit Plans of Circle and shall make available Riverside's
and AFAC's personnel and provide reasonable access to Riverside's books and
records as shall be necessary to assist in the transition.
<PAGE> 70
(c) The Parties acknowledge that this Section 4.2 does not require
AFAC to amend or terminate Duane T. Miller's employment agreement with AFAC or
his stock option agreement for Riverside stock, which in each case will remain
governed by the terms and conditions of those agreements.
4.3. Exclusivity. Riverside will not, and will cause AFAC, the Company
and its Subsidiaries not to (and AFAC will not cause or permit the Company to)
solicit, initiate, encourage or accept the submission of any proposal or offer
from any Person relating to, or agree to or otherwise facilitate, the
acquisition of all or any part of the capital stock or the assets of Newco, the
Company or any of its Subsidiaries (including any acquisition structured as a
merger, consolidation, or share exchange), except for sales or dispositions of
assets in the Ordinary Course of Business and sales of real estate. AFAC or
Riverside shall promptly inform Circle of any such proposals or offers received.
4.4. Intercompany Arrangements. During the period prior to the
Closing, all settlements of intercompany liabilities between or among Newco, the
Company or any of its Subsidiaries and their respective Affiliates shall be
made, and all allocations of intercompany expenses shall be applied, on a basis
substantially consistent with past practice in accordance with the intercompany
arrangements set forth in 4(x) of AFAC's Disclosure Schedule. Immediately prior
to the Closing, all such intercompany arrangements between or among Newco, the
Company or any of its Subsidiaries, on the one hand, and Riverside, AFAC and
their other Affiliates, on the other hand, shall be terminated and all amounts
payable by or to the Company and its Subsidiaries, to or by Riverside, Newco,
AFAC and their other Affiliates shall be settled and paid in full. However, this
Section 4.4. shall not apply to the sale of real estate and transfer of
Excluded Assets.
4.5. Transfer of Certain Employees. Prior to the Closing, AFAC and
Riverside shall cause the employees listed on Exhibit H to the Merger Agreement
to cease to be employees of the Company or any of its Subsidiaries, either by
transfer of employment to Riverside or any of its other Affiliates, or by
termination of employment, at the option of AFAC and Riverside. AFAC and
Riverside, jointly and severally, shall be responsible for all severance
payments and other benefits, if any, due to any such employees as a result of
any such transfer or termination of employment. Further, AFAC and Riverside
shall be responsible for any disability payments due to Greg Tatum or Leslie
Gunter that are not covered by the disability insurance that was in place prior
to Closing.
4.6. Section 338 Election. It is the parties' intent that the
acquisition of the Company Shares pursuant to the Merger Agreement be treated as
a purchase and sale of the assets of the Company and its Subsidiaries for
federal income tax purposes, and the parties hereto shall, in cooperation with
each other, prepare a form of election under Section 338(h)(10) of the Code to
treat the acquisition of the Company Shares for federal income tax purposes as
if all the assets of Newco, the Company and its Subsidiaries have been sold to
Circle in a fully taxable transaction. AFAC or Riverside shall pay all Taxes of
Riverside and its Affiliates (including the Company and its Subsidiaries)
arising as a result of such treatment, including any tax liability related to
the deemed or actual distribution of the policyholders' surplus accounts of the
Company and its Subsidiaries (i.e., the Phase III tax). AFAC or Riverside and
Circle will comply with the Section 338(h)(10)(c) reporting requirements and
will take all such other actions as are reasonably necessary to effect such
Section 338(h)(10) election. Circle shall cause any refunds of Taxes with
respect to Newco, the Company and its Subsidiaries for the periods ending prior
to or on the Closing Date to be paid to AFAC.
4.7. Press Releases and Public Announcements. No party to this
Agreement shall issue any press release or make any public announcement relating
to the subject matter of this Agreement or the Merger Agreement prior to the
Closing without the prior written approval of Circle and Riverside; provided,
however, that any party may make any public disclosure it believes in good faith
is required by applicable law or any listing or trading agreement concerning its
publicly-traded securities (in which case the disclosing party will use its best
efforts to advise the other parties prior to making the disclosure).
4.8. Further Assurances. Riverside shall cause AFAC to use its
reasonable best efforts to take all action and to do all things necessary,
proper, or advisable in order to consummate and make effective the transactions
contemplated by the Merger Agreement (including satisfaction, but not waiver, of
the closing conditions set forth in Section 8 of the Merger Agreement).
4.9. Guarantee. (a) In order to induce Circle to enter into the Merger
Agreement and to consummate the transactions contemplated thereby, Riverside
hereby unconditionally guarantees to Circle the full and prompt
<PAGE> 71
payment of AFAC's indemnification obligations set forth in Sections 9 and 9A of
the Merger Agreement, subject and pursuant to the terms and conditions of
Sections 9 and 9A of the Merger Agreement.
(b) As to Riverside's obligations under this guarantee, Riverside
hereby waives and agrees not to assert:
(i) any right to require Circle to marshall any assets or to pursue
any other remedy in Circle's power before proceeding against Riverside;
(ii) any defense arising by virtue of the lack of authority of Circle;
and
(iii) any defense based upon an election of remedies by Circle,
including without limitation, an election which terminates or otherwise impairs
the subrogation rights of Riverside or the right of Riverside to proceed against
Circle for reimbursement, or both.
4.10. Survival. The agreements of the parties set forth in Sections
4.2, 4.3, 4.4, 4.5, 4.7 and 4.8 above shall survive the Closing and continue in
full force and effect until January 1, 1998 (or such shorter period as a
particular Section may specifically provide), and then expire. The agreements of
the parties set forth in Sections 4.1, 4.6 and 4.9 above, and this Section 4.10,
shall survive the Closing (and any later termination of this Agreement) and
continue in full force and effect for a survival period of forever thereafter.
ARTICLE V
Certain Agreements Regarding the Shares
5.1. Voting of Shares by AFAC and Affiliates. (a) All of the Shares
owned by AFAC and its Affiliates constituting more than 9.0% of the aggregate
number of votes entitled to be cast by all outstanding Voting Securities shall,
on any matter on which such Shares are entitled to vote, be voted in accordance
with the recommendation of the Board of Directors of Circle.
(b) Riverside and AFAC each hereby irrevocably appoints the Board of
Directors of Circle, or any member of the Board of Directors of Circle
designated by a resolution of such Board, as its proxy, with full power of
substitution, to vote all of the Shares held by them and collectively
constituting more than 9.0% of the aggregate number of votes entitled to be cast
by all outstanding Voting Securities, in their discretion on any matter on which
the Merger Shares are entitled to vote.
(c) The parties agree that the proxy appointments made in subsection
(b) above is irrevocable and is coupled with an interest within the meaning of
Indiana Code Section 23-1-30-3(d) because (i) as provided in Exhibit F to the
Merger Agreement, the Shares will be pledged to Circle, (ii) AFAC will be a
purchaser of the Shares under the Merger Agreement, (iii) Circle is requiring
the appointment as a condition to accepting the note and the mortgage referred
to in Exhibit F of the Merger Agreement and (iv) this Section 5.1 constitutes a
voting agreement under Indiana Code Section 23-1-31-2.
(d) This Section 5.1 shall terminate upon the first date on which the
Shares owned by Riverside and its Affiliates collectively constitute, on a
fully-converted basis, less than 9.0% of the aggregate number of votes entitled
to be cast by all outstanding Voting Securities on an election of directors of
Circle. This Section 5.1 shall not apply to any Shares held by a Permitted
Transferee (as hereinafter defined) or by any Person who acquired such Shares in
a transaction registered under the Securities Act or exempt from such
registration pursuant to Rule 144 promulgated thereunder or any similar rule or
regulation hereafter adopted by the Commission.
5.2. Board Representation. (a) Effective upon the Effective Time of
the Merger (as defined in the Merger Agreement), the Board of Directors of
Circle shall appoint J. Steven Wilson or another individual designated by
Riverside and reasonably acceptable to the Board of Directors of Circle (as the
case may be, the "Riverside Representative"), as a member of the Board of
Directors of Circle. Thereafter, the Board of Directors shall nominate the
Riverside Representative for election as a member of the Board of Directors of
Circle by Circle's shareholder at each annual election of the Board of
Directors, and all Shares referred to in Section 5.1 above shall be voted in
favor of the election of the Riverside Representative.
<PAGE> 72
(b) This Section 5.2 shall terminate upon later of (i) the first date
on which the Shares owned by Riverside and its Affiliates collectively
constitute, on a fully-converted basis, less than 9.0% of the aggregate number
of votes entitled to be cast by all outstanding Voting Securities on an election
of directors of Circle and (ii) the first date on which Riverside and its
Affiliates collectively own fewer than 1,000 shares of Series C Preferred Stock.
ARTICLE VI
Restrictions on Transfer of Shares
6.1. Restrictions on Transfer. AFAC shall not Transfer any Shares or
any interest therein to any Person, unless such Transfer is made in strict
compliance with the terms of this Agreement and in compliance with the
Securities Act and all applicable state securities laws. No Transfer in
violation of this Agreement shall be made or recorded on the books of Circle and
any such Transfer shall be void and of no effect.
6.2. Limitation on Transfers of Pledged Shares. AFAC shall not
Transfer any of the Pledged Shares or any interest therein to any Person (other
than (i) to Circle as provided in any pledge agreement and (ii) Shares disposed
of in Transfers in strict compliance with the terms of Article VII of this
Agreement or pursuant to Rule 144 under the Securities Act or any similar rule
or regulation hereafter adopted provided that in any such case the net proceeds
of such disposition is simultaneously paid to the holder of the Note (as defined
in the Merger Agreement)).
6.3. Permitted Transfers of Shares Other than the Pledged Shares.
Subject to Section 6.3(b) below, the following Transfers of Shares other than
Pledged Shares shall be deemed to be in compliance with this Agreement:
(i) a Transfer made to an Affiliate of AFAC;
(ii) a Transfer made by an Affiliate of AFAC to any other Affiliate of
AFAC (including a Transfer back to AFAC);
(iii) subject to the final sentence of this clause (iii), a Transfer
made prior to an IPO in a negotiated private placement or in connection with a
financing transaction to any Person who is not an Affiliate of AFAC; provided,
however, that (A) immediately after such Transfer, the transferee (together with
all Affiliates of such Person), shall own Voting Securities constituting less
than 5.0% of the aggregate number of votes entitled to be cast by all
outstanding Voting Securities and (B) the transferee shall enter into a written
agreement, in form and substance satisfactory to Circle, to become bound, and
does become bound, by all of the terms and conditions of this Agreement. A
transferee of a Transfer made pursuant to this clause (iii) is herein called a
"Permitted Transferee". There shall be no more than four Permitted Transferees
who own Shares at any one time during the term of this Agreement;
(iv) a Transfer by a Permitted Transferee back to AFAC or any
Affiliate of AFAC;
(v) a Transfer made in strict compliance with the terms of
Article VII of this Agreement; or
(vi) subject to Section 7.8 below, any Transfer made after an IPO in
compliance with the condition set forth in Section 6.3(b) below.
(b) No Transfer pursuant to this Section 6.3 attempted to be made to
any Person other than AFAC or an Affiliate of AFAC shall be made or recorded on
the books of Circle unless such Transfer is made pursuant to either (i) an
effective registration statement under the Securities Act and all applicable
state securities laws, or (ii) an available exemption from the registration
requirements of the Securities Act and such laws and, prior to such Transfer,
the Shareholder delivers to Circle a written opinion of counsel, in form and
substance satisfactory to Circle, to the effect that the proposed Transfer is
exempt from such registration requirements.
ARTICLE VII
Registration Rights
7.1. Consideration of IPO. (a) At any time and from time to time prior
to an IPO, but no more frequently than once in an 12-month period, the holders
of a majority of the Registrable Securities may demand in writing that
<PAGE> 73
Circle use its best efforts to effect an IPO. Within 30 days after the date of
its receipt of such demand, Circle shall select a managing underwriter (which
shall be reasonably acceptable to the holders of a majority of the holders of
Registrable Securities making such demand) for that purpose, and shall
thereafter cooperate with such underwriter in its investigation of Circle and
the potential public market for the Common Shares. Within 30 days after Circle's
selection of the managing underwriter: (a) the managing underwriter shall advise
the Board of Directors of Circle of its opinion regarding (i) the total number
of Common Shares that could reasonably be sold in the proposed IPO without
adversely affecting the price or distribution of the Common Shares, (ii) the
range of the public offering price of the Common Shares in the proposed IPO and
(iii) whether an IPO is advisable at that time; and (b) the Board of Directors
shall determine, based upon the managing underwriter's opinion and all other
information presented to it, and in light of its business judgment, whether the
proposed IPO is in the best interest of Circle. The Board's determination shall
be conclusive and binding on all parties. If the Board determines that an IPO is
advisable, it shall use its best efforts to effect an IPO as expeditiously as
possible on the terms recommended to it by its managing underwriter or upon such
other terms as it determines appropriate.
(b) In connection with any IPO effected pursuant to this Section 7.1,
the holders of Registrable Securities shall be offered "piggy-back" registration
rights pursuant to Section 7.2 below. Any holder of Registrable Securities that
does request registration of all of such holder's Registrable Securities as
provided for in Section 7.2 shall not have any "demand" registration rights
under Section 7.3 below.
7.2. "Piggy-Back" Registration Rights. If, at any time, Circle
proposes to register any of its equity securities under the Securities Act,
whether or not for sale for its own account, in a manner that would permit
registration of Registrable Securities for sale to the public under the
Securities Act, Circle will each such time give prompt written notice to each
Shareholder of its intention to do so, which notice shall set forth the intended
method of disposition of the securities proposed to be registered by Circle. The
notice shall offer to include in such registration such aggregate number of
Registrable Securities as each Shareholder may request, upon the terms and
conditions of this Article VII. Each Shareholder shall advise Circle in writing
within 15 days after the date of receipt of such offer from Circle, setting
forth the aggregate number of Registrable Securities, if any, for which
registration is requested. Circle shall thereupon include in such registration
the number of Registrable Securities for which registration is so requested and
shall use its best efforts to effect registration under the Securities Act of
such Registrable Securities, to the extent requisite to permit their public
sale; provided, that:
(a) if the registration involves an underwritten offering, each
Selling Shareholder must sell the Registrable Securities to be registered to the
underwriters selected by Circle on the same terms and conditions as apply to
Circle; provided, however, that if any Selling Shareholder disapproves of such
terms and conditions, such Shareholder may withdraw from such registration by
delivering a written notice thereof to Circle at least five business days prior
to the effective date of the registration statement;
(b) if the managing underwriter (which shall be selected by Circle)
advises Circle in writing that, in its opinion, the total number of shares that
Circle and the Selling Shareholders intend to include in such registration
exceeds the number that can reasonably be sold without adversely affecting the
price or distribution of securities offered, Circle shall include in such
registration, to the extent of the number of shares that Circle is advised can
be so sold in the offering (the "Maximum Includable Shares"), (i) first, 100% of
the Securities Circle proposes to sell, (ii) second, 100% of the Conseco Group's
Registrable Securities requested to be registered by the Conseco Group pursuant
to the Conseco Group's own "piggy back" registration rights granted in
connection with the transactions contemplated by the Conseco Commitment, and
(iii) third, the number of Registrable Securities requested to be registered by
the Selling Shareholders, pro rata in proportion to the number of shares
requested to be registered by them; provided, however, that if the offering is
an IPO and Circle notified Riverside of its intention to effect the offering as
provided for in Section 7.2(a) within 180 days after the date of any demand
delivered by Riverside to Circle pursuant to Section 7.1 above, Circle shall
include in such offering, (x) first, (A) that number of the Conseco Group's
Registrable Securities requested to be registered by the Conseco Group pursuant
to the Conseco Group's own "piggy back" registration rights granted in
connection with the transactions contemplated by the Conseco Commitment, equal
to not more than 25% of the Maximum Includable Shares, and (B) that number of
Registrable Securities requested to be registered by the Selling Shareholders
equal to not more than 25% of the Maximum Includable Shares, pro rata in
proportion to the number of shares requested to be registered by them, and (y)
second, the Securities Circle proposes to sell to the extent that the inclusion
thereof would not cause the aggregate number of shares to be registered to
exceed the Maximum Includable Shares;
<PAGE> 74
(c) if, at any time after giving written notice of its intention to
register any of its equity securities and prior to the effective date of the
registration statement filed in connection therewith, the Board of Directors of
Circle shall determine for any reason not to register any such equity
securities, Circle may, at its option, give written notice of such determination
to the Selling Shareholders and, thereupon, shall be relieved of its obligation
to register any Registrable Securities in connection with such registration (but
not of its obligation to pay the registration expenses set forth in Section 7.6
hereof that then have been incurred in connection therewith).
7.3. Demand Registration Rights. (a) Subject to Section 7.1(b) above,
after an IPO, upon the written demand of the holders of a majority of the sum of
(i) the Registrable Securities having rights under this Section 7.3 and (ii) the
Conseco Group's Registrable Securities having "demand" registration rights under
the registration rights granted in connection with the transactions contemplated
by the Conseco Commitment, Circle shall, as expeditiously as reasonably
practicable, use its best efforts to effect the registration under the
Securities Act of such number of Registrable Securities included in such demand,
to the extent requisite to permit their public sale; provided, that Circle may
postpone the filing or the effectiveness of such registration (i) if a
registration statement under the Securities Act has been filed, for a period of
180 days after such filing, (ii) until such time as a registration statement may
be filed and become effective after the expiration of any holdback period agreed
to by Circle pursuant to Section 7.8 below, (iii) until such time as such
registration statement may be filed and become effective without the necessity
of Circle having conducted any special audit of its financial statements solely
for the purpose such registration, or (iv) by delivering to the shareholders
demanding such registration a duly adopted resolution of Circle' Board of
Directors stating the Board's determination that the filing or effectiveness of
such registration statement would be likely to have a material adverse effect on
any plan or proposal by Circle with respect to any financing or acquisition;
provided, that the aggregate number of days for which the filing and
effectiveness of such registration statement may be postponed under clause (iv)
above shall not exceed 180 days after receipt by Circle of the demand for
registration referred to above.
(b) If the registration demanded involves an underwritten offering:
(i) the shareholders owning a majority of the sum of the Registrable
Securities and the Conseco Group's Registrable Securities to be included in such
registration shall have the right to select the managing underwriter (which
shall be of national standing and which shall be reasonably acceptable to
Circle); and
(ii) if the managing underwriter advises Circle in writing that, in
its opinion, the total number of shares that the Selling Shareholders and the
Conseco Group intend to include in such registration exceeds the number that can
reasonably be sold without affecting the price or distribution of securities
offered in a manner unacceptable to the shareholders owning a majority of the
sum of the Registrable Securities and the Conseco Group's Registrable Securities
to be included in such registration, Circle shall include in such registration
only that aggregate number of the Registrable Securities and the Conseco Group's
Registrable Securities that Circle is advised can be so sold in the offering,
pro rata in proportion to the number of shares proposed to be registered by the
Selling Shareholders and the Conseco Group. Neither Circle nor any other Person
shall have the right to include any securities in such registration unless all
Registrable Securities proposed to be sold by the Selling Shareholders and the
Conseco Group shall have been included in such registration.
(c) Registrations under this Section 7.3 shall be on such appropriate
registration form of the Commission eligible for use by Circle (i) as shall be
reasonably acceptable to the holders of a majority of the sum of the Registrable
Securities and the Conseco Group Registrable Securities so to be registered and
(ii) as shall permit the disposition of such Registrable Securities and Conseco
Group Registrable Securities in accordance with the intended method or methods
of disposition specified in their request for such registration.
(d) Circle shall be obligated to effect only one registration under
this Section 7.3. A registration requested pursuant to this Section 7.3 shall
not be deemed to have been effected:
(i) unless a registration statement with respect thereto has become
effective, provided that a registration which does not become effective after
Circle has filed a registration statement with respect thereto solely by reason
of the refusal to proceed of the Selling Shareholders (other than a refusal to
proceed based upon the advice of counsel relating to a matter with respect to
Circle) shall be deemed to have been effected by Circle at the request of such
Selling Shareholders unless the Selling Shareholders shall have paid all
registration
<PAGE> 75
expenses in connection with such registration (pro rated in accordance with the
respective numbers of shares proposed to be registered by the Selling
Shareholders and the Conseco Group);
(ii) if, after it has become effective, such registration is
interfered with by any stop order, injunction or other order or requirement of
the Commission or other governmental agency or court for any reason other than
some act or omission by the Selling Shareholders, or such registration statement
does not remain effective for a period of 180 days or such shorter period as
shall permit the intended disposition of the securities subject thereto for any
reason other than some act or omission by the Selling Shareholders; or
(iii) the conditions to closing specified in the purchase agreement or
underwriting agreement entered into in connection with such registration are not
satisfied, other than by reason of some act or omission by the Selling
Shareholders.
7.4. Registration Procedures. Whenever Circle is required by this
Agreement to effect the registration of any of the Registrable Securities,
Circle shall, as expeditiously as reasonably practicable:
(a) prepare and file with the Commission the requisite registration
statement with respect to such Registrable Securities and use its best efforts
to cause such registration statement to become and remain effective for a period
of time required for the disposition of such Registrable Securities by the
Selling Shareholders; provided, however, that before filing such registration
statement or any amendments thereto, Circle will furnish to the counsel selected
by the holders of a majority of the Registrable Securities to be included in
such registration copies of all such documents proposed to be filed, which
documents will be subject to the review of such counsel; and provided further,
that Circle shall not be required to keep such registration statement effective
for more than 180 days;
(b) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in connection
therewith as may be necessary to keep such registration statement effective and
to comply with the provisions of the Securities Act and the Exchange Act with
respect to the sale or other disposition of the Registrable Securities covered
by such registration statement until the earlier of such time as all of such
Registrable Securities have been disposed of or the expiration of 180 days;
(c) as soon as available, furnish to the Selling Shareholders such
number of copies of such registration statement and of each amendment or
supplement thereto, and of each prospectus (including each preliminary
prospectus or summary prospectus) included therein, in conformity with the
requirements of the Securities Act, and such other documents, as the Selling
Shareholders may reasonably request;
(d) use its best efforts to register or qualify the Registrable
Securities covered by such registration statement under such other securities or
blue sky laws of such jurisdictions within the United States as the Selling
Shareholders shall request (provided, however, Circle shall not be obligated to
qualify as a foreign corporation to do business under the laws of any
jurisdiction in which it is not then qualified or to file any general consent to
service of process), and do such other reasonable acts and things as may be
required of it to enable the Selling Shareholders to consummate the disposition
in such jurisdictions of the Registrable Securities included in such
registration statement;
(e) use its best efforts to list such Registrable Securities on any
securities exchange on which the securities of the class being so registered are
then listed;
(f) furnish, on the date that the Registrable Securities are delivered
to the underwriters for sale pursuant to such registration or, if the
Registrable Securities are not being sold through underwriters, on the effective
date of such registration statement, (i) an opinion of counsel to Circle for the
purposes of such registration (or, if no such opinion is being provided to
underwriters, a certificate signed by two executive officers of Circle), dated
such date, addressed to the underwriters, if any, and the Selling Shareholders,
stating that such registration statement has become effective under the
Securities Act and that (w) to the best knowledge of such counsel (or officers),
no stop order suspending the effectiveness thereof has been issued and no
proceedings for that purpose have been instituted or are pending or contemplated
under the Securities Act, (x) the registration statement, the related
prospectus, and each amendment or supplement thereto, comply as to form in all
material respects with the requirements of the Securities Act and the applicable
rules and regulations of the Commission thereunder (except that, in the case of
an opinion of counsel, such counsel need to express no opinion as to financial
statements contained therein), (y) the descriptions in the registration
statement or the prospectus, or any amendment or supplement thereto, of all
legal
<PAGE> 76
matters and contracts and other legal documents or instruments are accurate and
fairly present the information required to be shown, and (z) such counsel (or
officers) do not know of any legal or governmental proceedings, pending or
contemplated, required to be described in the registration statement or
prospectus, or any amendment or supplement thereto, which are not described as
required, nor of any contracts or documents or instruments of a character
required to be described in the registration statement or prospectus, or any
amendment or supplement thereto, or to be filed as exhibits to the registration
statement which are not described and filed or incorporated by reference as
required; such counsel (or officers) shall also render such other customary
opinions as may reasonably be requested by the underwriters or the Selling
Shareholders and confirm that nothing has come to their attention that would
lead them to believe that either the registration statement or the prospectus,
or any amendment or supplement thereto (other than, in the case of an opinion of
counsel, financial material as to which such counsel need make no statement)
contains any untrue statement of a material fact or omits to state a material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances in which made, not misleading, and (ii) a letter
dated such date, from the independent certified public accountants of Circle,
addressed to such underwriters and to the Selling Shareholders (or, if such
accountants refuse to deliver such letter to the Selling Shareholders because
they are not then deemed underwriters under the Securities Act, then to Circle)
stating that they are independent certified public accounts within the meaning
of the Securities Act and containing such other statements as Circle and such
underwriters may agree;
(g) enter into customary agreements (including an underwriting
agreement in customary form) and take such other actions as are reasonably
required in order to expedite or facilitate the disposition of the Registrable
Securities; and
(h) otherwise use its best efforts to comply with all applicable rules
and regulations of the Commission, and make available to its security holders,
as soon as reasonably practicable, but no later than 18 months after the
effective date of such registration statement, an earnings statement which shall
satisfy the provisions of Section 11(a) of the Securities Act and Rule 158
thereunder.
It shall be a condition precedent to the obligation of Circle to take
any action pursuant to this Agreement in respect of the Registrable Securities
which are to be registered that the Selling Shareholders shall furnish to Circle
such information regarding the securities held by them and the intended method
of disposition thereof as Circle shall reasonably request and as shall be
required in connection with such registration by Circle.
7.5. Notification to Selling Shareholders. Whenever Selling
Shareholders are participating in a registration effected hereunder:
(a) Circle will notify the Selling Shareholders of (i) the issuance of
any stop order suspending the effectiveness of the registration statement or the
institution or threatening of any proceeding for such purpose or (ii) the
receipt by Circle of any notification with respect to the suspension of the
qualification of the Registrable Securities for sale in any jurisdiction or the
initiation or threatening of any proceeding for such purpose. Immediately upon
receipt of any such notice, the Selling Shareholders shall cease to offer or
sell any Registrable Securities pursuant to the registration statement in the
jurisdiction to which such stop order or suspension relates. Circle will use
every reasonable effort to prevent the issuance of any such stop order or the
suspension of any such qualification and, if any such stop order is issued or
any such qualification is suspended, to obtain as soon as possible the
withdrawal or revocation thereof, and will notify the Selling Shareholders at
the earliest practicable date of the date on which the Selling Shareholders may
offer and sell Registrable Securities pursuant to the registration statement.
(b) Circle will notify the Selling Shareholders promptly if any event
shall occur or if any state of facts shall exist that, in the judgment of
Circle, should be set forth in any preliminary or final prospectus then being
used by the Selling Shareholders in connection with the sale of any Registrable
Securities. Immediately upon receipt of such notice, the Selling Shareholders
shall cease to offer or sell any Registrable Securities pursuant to such
preliminary or final prospectus, cease to deliver or use such preliminary or
final prospectus and, if so requested by Circle, use their respective best
efforts to return to Circle, at Circle' expense, all copies (other than
permanent file copies) of such preliminary or final prospectus. Circle will, as
promptly as practicable, take such action as may be necessary to amend or
supplement such preliminary or final prospectus in order to set forth or reflect
such event or state of facts. (c) If, pursuant to the provisions of this Section
7.5, the Selling Shareholders are required to cease to offer or sell any
Registrable Securities pursuant to the registration statement, the termination
of the period during which such
<PAGE> 77
registration statement is required to be kept effective pursuant to Section
7.4(a) of this Agreement shall be postponed by a number of days equal to the
number of days during which the Selling Shareholders are so required to cease to
offer or sell Registrable Securities.
7.6. Expenses. All expenses incident to performance of or compliance
with this Article VII, including, without limitation, all registration and
filing fees (including all filing fees incident to filing with the National
Association of Securities Dealers, Inc.), listing fees and expenses, printing
expenses, fees and disbursements of counsel and accountants for Circle, expenses
of any audits incident to or required by any such registration of Registrable
Securities and expenses of complying with the securities or blue sky laws of any
jurisdictions, shall be paid by Circle; provided, that Circle shall not be
liable for the fees and disbursements of counsel for any Selling Shareholder or
any transfer taxes, fees, discounts or commissions in respect of the Registrable
Securities sold by any Selling Shareholder.
7.7. Indemnification. (a) In the event of any registration of any
Registrable Securities under the Securities Act pursuant to this Agreement,
Circle shall indemnify and hold harmless each Selling Shareholder and each other
Person (including each underwriter) who participated in the offering of such
Registrable Securities and each other Person, if any, who controls such
participating Person within the meaning of the Securities Act, against any
losses, claims, damages or liabilities, joint or several, to which the Selling
Shareholders or any such participating Person or controlling Person may become
subject under the Securities Act or any other statute or at common law, insofar
as such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon (i) any alleged untrue statement of any material
fact contained in any registration statement under which such securities were
registered under the Securities Act, any preliminary prospectus or final
prospectus contained therein, or any amendment or supplement thereto, or (ii)
any alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, and shall
reimburse the Selling Shareholders or any such participating Person or
controlling Person for any legal or any other expenses reasonably incurred by
the Selling Shareholders or any such participating Person or controlling Person
in connection with investigating or defending any such loss, claim, damage,
liability or action; provided, however, that Circle shall not be liable in any
such case to the extent that any such loss, claim, damage or liability arises
out of or is based upon any alleged untrue statement or alleged omission made in
such registration statement, preliminary prospectus, prospectus or amendment or
supplement in reliance upon and in conformity with written information furnished
to Circle by any Selling Shareholder specifically for use therein or (in the
case of any registration pursuant to Section 7.3 if Circle is not a party to
the underwriting agreement) so furnished for such purposes by any underwriter.
Such indemnity shall remain in full force and effect regardless of any
investigation made by or on behalf of any Selling Shareholder or any such
participating Person or controlling Person, and shall survive the transfer of
such Registrable Securities by any Selling Shareholder.
Such indemnification with respect to any preliminary prospectus shall
not inure to the benefit of any Selling Shareholder or, if Circle is not a party
to the underwriting agreement, of any underwriter (or any officer, director of
employee of, or Person controlling, such underwriter) from whom the Person
asserting any such loss, claim, damage or liability purchased the Registrable
Securities which are the subject thereof if such Person did not receive a copy
of the final prospectus with respect to such Registrable Securities (or such
final prospectus as amended or supplemented) at or prior to the confirmation of
the sale of such Registrable Securities to such Person (provided that such final
prospectus was made available by Circle as required by this Agreement prior to
the confirmation) in any case where such delivery is required by the Securities
Act and the untrue statement or omission of a material fact contained in such
preliminary prospectus was corrected in such final prospectus (or such final
prospectus as amended or supplemented).
(b) In the event of any registration of any Registrable Securities
under the Securities Act pursuant to this Agreement, each Selling Shareholder,
severally and not jointly (except that the obligations of Riverside and its
Affiliates hereunder shall be joint and several) agrees to indemnify and hold
harmless Circle, its directors and officers and each other Person, if any, who
controls Circle within the meaning of the Securities Act against any losses,
claims, damages or liabilities, joint or several, to which Circle or any such
director or officer or any such Person may become subject under the Securities
Act or any other statute or at common law, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon information provided in writing to Circle by such Selling Shareholder for
use in connection with such registration and which is contained in any
registration statement under which Registrable Securities were registered under
the Securities Act at the request of Riverside, any preliminary prospectus or
final prospectus contained therein, or any amendment or supplement
<PAGE> 78
thereto; provided, that no Selling Shareholder shall be required pursuant to
this Section 7.7(b) to contribute any amount in excess of the aggregate proceeds
to such Selling Shareholder of the Registrable Securities being offered by the
Selling Shareholder pursuant to such registration statement.
(c) Indemnification similar to that specified in the preceding
subsections of this Section 7.7 (with appropriate modifications) shall be given
by Circle and each Selling Shareholder with respect to any required registration
or other qualification of securities under any state securities or "blue sky"
law or regulation of any jurisdiction.
(d) The indemnification required by this Section 7.7 shall be made by
periodic payments of the amount thereof during the course of the investigation
or defense, as and when bills are received or expense, loss, damage or liability
is incurred.
(e) If the indemnification provided for in the preceding subsections of
this Section 7.7 is unavailable to an indemnified party in respect of any
expense, loss, damage or liability referred to therein, then each indemnifying
party, in lieu of indemnifying such indemnified party, shall contribute to the
amount paid or payable by such indemnified party as a result of such expense,
loss, damage or liability (i) in such proportion as it appropriate to reflect
the relative benefits received by Circle on the one hand and the Selling
Shareholder or underwriter, as the case may be, on the other from the
distribution of the Registrable Securities or (ii) if the allocation provided by
clause (i) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of Circle on the one hand and of the Selling
Shareholder or underwriter, as the case may be, on the other in connection with
the statements or omissions which resulted in such expense, loss, damage or
liability, as well as any other relevant equitable considerations; provided,
that the foregoing contribution agreement shall not inure to the benefit of any
indemnified Person if indemnification would be unavailable to such indemnified
Person by reason of the proviso contained in the second paragraph of subsection
7.7(a) hereof, and in no event shall the obligation of any indemnifying party to
contribute under this subsection (e) exceed the amount that such indemnifying
party would have been obligated to pay by way of indemnification if the
indemnification provided for under subsection (a) or (b) of this Section 7.7
had been available under the circumstances.
Circle and the Selling Shareholders agree that it would not be just
and equitable if contribution pursuant to this subsection 7.7(e) were determined
by pro rata allocation (even if the Selling Shareholders and any underwriters
were treated as one entity for such purpose) or by any other method of
allocation that does not take account of the equitable considerations referred
to in the immediately preceding paragraph. The amount paid or payable by an
indemnified party as a result of the losses, claims, damages and liabilities
referred to in the immediately preceding paragraph shall be deemed to include,
subject to the limitations set forth in the preceding sentence, any legal or
other expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim.
Notwithstanding the provisions of this subsection 7.7(e), no Selling
Shareholder or underwriter shall be required to contribute any amount in excess
of the amount by which (i) in the case of any Selling Shareholder, the net
proceeds received by such Shareholder from the sale of Registrable Securities or
(ii) in the case of an underwriter, the total price at which the Registrable
Securities purchased by it and distributed to the public were offered to the
public exceeds, in any such case, the amount of any damages that such
Shareholder or underwriter has otherwise been required to pay by reason of such
untrue or alleged untrue statement or omission or alleged omission. No Person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Securities Act) shall be entitled to contribution from any person who was
not guilty of such fraudulent misrepresentation.
7.8. Holdback Agreement. Riverside agrees that, if requested by the
managing underwriter of any underwritten offering of Securities, neither
Riverside nor any of its Subsidiaries shall sell or otherwise Transfer any
Securities (except pursuant to a pledge, hypothecation, security interest or
other encumbrance) during the 180-day period after the effective date of the
first registration statement to become effective after the date of this
Agreement, unless such Securities are included in such registration statement
pursuant to this Article VII. Circle may issue stop-transfer instructions with
respect to any Securities subject to the foregoing restriction until the
expiration of such 180-day period.
7.9 Rule 144. (a) After the IPO, Circle shall timely file the reports
required to be filed by it under the Securities Act and the Exchange Act
(including but not limited to the reports under Section s 13 and 15(d) of the
<PAGE> 79
Exchange Act referred to in subparagraph (c)(1) of Rule 144 adopted by the
Commission under the Securities Act) and the rules and regulations adopted by
the Commission thereunder (or, if Circle is not required to file such reports,
will, upon the request of any holder of Registrable Securities, make publicly
available other information) and will take such further action as any holder of
Registrable Securities may reasonably request, all to the extent required from
time to time to enable such holder to sell Registrable Securities without
registration under the Securities Act within the limitation of the exemptions
provided by (i) Rule 144 under the Securities Act, as such Rule may be amended
from time to time, or (ii) any similar rule or regulation hereafter adopted by
the Commission. Upon the request of any holder of Registrable Securities, Circle
will deliver to such holder a written statement as to whether it has complied
with such requirements.
(b) If any Shares are disposed of in accordance with Rule 144 under
the Securities Act or otherwise by a holder of Registrable Securities, such
holder shall deliver to Circle at or prior to the time of such disposition such
documentation as Circle may reasonably request in connection therewith and, in
the case of a disposition in accordance with Rule 144, an executed copy of Form
144 required to be filed with the Commission (if required to be filed by Rule
144).
ARTICLE VIII
Miscellaneous
8.1. Binding Effect; Assignment. Except as provided in the next
sentence of this Section 8.1, this Agreement may not be assigned by any party
hereto without the prior written consent of all other parties, but shall inure
to the benefit of and be binding upon each party hereto and its successors and
permitted assigns (including each Permitted Transferee but excluding Persons who
acquire Shares in transactions registered under the Securities Act or exempt
from such registration pursuant to Rule 144 promulgated thereunder or any
similar rule or registration hereafter adopted by the Commission). The rights of
the holders of Registrable Securities under Article VII hereof are personal to
AFAC and its Affiliates, except that such rights may be assigned by AFAC and its
Affiliates to up to four (4) Permitted Transferees in connection with Transfers
of Shares pursuant to Section 6.3(a)(iii), and no Transfer of Securities by any
of them to any other Person shall effect any assignment to the transferee of any
rights under any such Article.
8.2. Enforcement Rights. Each party to this Agreement acknowledges and
agrees that the agreements set forth herein are fundamental to their willingness
to enter into and be bound by this Agreement and the Merger Agreement.
Accordingly, each party hereby agrees that any party hereto may institute and
maintain any action, suit or proceeding, at equity or in law, against any other
party (including any Permitted Transferee or other Shareholder) to enforce, or
otherwise act in respect of, the agreements of such other party set forth in
this Agreement.
8.3. Recapitalizations, Exchanges, Etc. The provisions of this
Agreement shall apply, to the full extent set forth herein, to any and all
Securities of Circle or the securities of any successor or assign of Circle
(whether by merger, consolidation, sale of all or substantially all of Circle'
assets or otherwise) which may be issued in respect of, in exchange for, upon
conversion of, or in substitution of, any of the Shares by reason of any stock
dividend, stock split, stock issuance, reverse stock split, combination,
recapitalization, reclassification, conversion, merger, consolidation or
otherwise (any such securities being included within the Shares subject to this
Agreement).
8.4. Entire Agreement. This Agreement constitutes the entire agreement
and supersedes all other agreements and understandings, both written and oral,
among the parties with respect to the subject matter hereof.
8.5. Modification or Amendment. This Agreement may be modified or
amended only by a written instrument duly executed and delivered by each of the
parties hereto.
8.6. Termination. This Agreement shall continue in full force and
effect until the first to occur of (a) the termination of the Merger Agreement
for any reason whatsoever, (b) the termination of this Agreement pursuant to a
writing duly executed and delivered by each of the parties hereto, and (c) the
date that is [10] years after the date of this Agreement. Upon any termination
of this Agreement, no party hereto shall have any liability or further
obligation hereunder to any other party, except that nothing herein shall
relieve any party from liability for any breach of this Agreement prior to the
date of such termination, and except that Sections 4.1, 4.6, 4.9 and 4.10 of
this Agreement shall survive any such termination as provided for in Section
4.10 above.
<PAGE> 80
8.7. Notices. All notices, requests, demands, claims, and other
communications hereunder will be in writing. Any notice, request, demand, claim,
or other communication hereunder shall be deemed duly given if (and then two
business days after) it is sent by registered or certified mail, return receipt
requested, postage prepaid, and addressed to the intended recipient as set forth
below:
(a) If to Riverside or AFAC, to Riverside or AFAC as the case may be,
at:
c/o Kenneth M. Kirschner, Esquire
One Independent Drive, Suite 2000
Jacksonville, FL 32202
With a copy to:
Kirschner, Main, Petrie, Graham, Tanner & Demont
Professional Association
One Independent Drive, Suite 2000
Jacksonville, FL 32202
Facsimile: (904) 358-2199
Attention: Barry C. Averitt, Esquire
(b) If to Circle, to:
Circle Investors, Inc.
251 N. Illinois Street, Suite 1680
Indianapolis, IN 46204
Facsimile: (317) 237-3371
Attention: R. Matthew Neff, President
With a copy to:
Baker & Daniels
300 North Meridian Street, Suite 2700
Indianapolis, IN 46204-1782
Facsimile: (317) 237-1000
Attention: J. Jeffrey Brown, Esquire
Any party may send any notice, request, demand, claim, or other communication
hereunder to the intended recipient at the address set forth above using any
other means (including personal delivery, expedited courier, messenger service,
telecopy, telex, ordinary mail, or electronic mail), but no such notice,
request, demand, claim, or other communication shall be deemed to have been duly
given unless and until it actually is received by the intended recipient. Any
party may change the address to which notices, requests, demands, claims, and
other communications hereunder are to be delivered by giving the other parties
notice in the manner herein set forth.
8.8. Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of Indiana, without regard to the
conflicts of laws principles thereof.
8.9. Counterparts. This Agreement may be executed in counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
IN WITNESS WHEREOF, this Agreement has been duly executed and
delivered by the duly authorized officers of each of Circle, Riverside and AFAC
as of the date first written above.
CIRCLE INVESTORS, INC.
By
-----------------------------
Name:
Title:
RIVERSIDE GROUP, INC.
By /s/ KENNETH M. KIRSCHNER
-----------------------------
Name: Kenneth M. Kirschner
Title: Vice Chairman
AMERICAN FINANCIAL ACQUISITION CORPORATION
By /s/ KENNETH M. KIRSCHNER
-----------------------------
Name: Kenneth M. Kirschner
Title:
<PAGE> 81
EXHIBIT K
Section 338 Tax Allocation
The tax allocation shall be prepared in accordance with the Internal
Revenue Code and regulations promulgated thereunder, and subject to that, as
otherwise mutually agreed by the Parties.
<PAGE> 1
EXHIBIT 10.12
March 26, 1996
Mr. J. Steven Wilson
Chairman
Riverside Group, Inc.
7800 Belfort Parkway
Jacksonville, Florida 32256
Re: 1996 Employment
Dear Steve:
This letter agreement will evidence your agreement to continue to serve
in your current capacities with Riverside Group, Inc. and its subsidiaries
through calendar 1996, unless otherwise consented to by Riverside after approval
of its Board of Directors, and the agreement of Riverside to continue your
employment in such capacities for such period, on the terms and conditions set
forth herein.
Compensation. You will be entitled to receive your current annual
salary, payable in such periodic or lump sum payments as you may request,
including without limitation a single lump sum in advance. In addition, you will
be eligible to receive such bonus, if any, for your services during 1996 as
Riverside shall in its sole discretion determine. You may at any time request an
advance against your 1996 bonus of up to the amount of your 1995 bonus, provided
that the amount of any excess of any such advance over any 1996 bonus ultimately
authorized will promptly be remitted by you to Riverside. Riverside may withhold
appropriate amounts for federal, state and local taxes, social security,
Medicare and other items legally required to be withheld.
Termination. This agreement shall not be terminable by you or Riverside
without the agreement of the other.
Other Benefits. You shall be entitled to the benefits afforded by
Riverside to its other employees and such other benefits as Riverside shall
approve.
If you agree to the foregoing, please so indicate by signing a copy of
this letter in the space provided below.
RIVERSIDE GROUP, INC.
By
-----------------------------
Wayne A. Schreck
Executive Vice President
Agreed to:
- ------------------------------
J. Steven Wilson, Individually
<PAGE> 1
EXHIBIT 21.01
Subsidiaries of the Company
State of
Name Incorporation
- ---- -------------
Wickes Lumber Company Delaware
Dependable Insurance Group, Inc. Florida
American Financial Acquisition Corporation Florida
Laurel Life Insurance Company Texas
American Founders Life Insurance Company Texas
Aztec Life Assurance Company California
<PAGE> 1
EXHIBIT 23.01
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements of
Riverside Group, Inc. on Form S-3 (File Nos. 33-7703 and 33-23643) and Form S-8
(File Nos. 33-16087 and 33-16244), as amended, and prospectuses included
therein, of our reports dated March 27, 1996, on our audits of the consolidated
financial statements and financial statement schedules of Riverside Group, Inc.
and subsidiaries as of December 31, 1995 and 1994, and for each of the three
years in the period ended December 31, 1995, which reports are included in this
Annual Report on Form 10-K.
Coopers & Lybrand L.L.P.
Phoenix, Arizona
March 27, 1996
<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
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 147,152
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 838
<MORTGAGE> 26,903
<REAL-ESTATE> 17,879
<TOTAL-INVEST> 233,441
<CASH> 258
<RECOVER-REINSURE> 28,500
<DEFERRED-ACQUISITION> 20,442
<TOTAL-ASSETS> 300,725
<POLICY-LOSSES> 140,295
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 966
<POLICY-HOLDER-FUNDS> 97,171
<NOTES-PAYABLE> 31,215
0
0
<COMMON> 531
<OTHER-SE> 25,525
<TOTAL-LIABILITY-AND-EQUITY> 300,725
8,298
<INVESTMENT-INCOME> 14,492
<INVESTMENT-GAINS> (234)
<OTHER-INCOME> (4,336)
<BENEFITS> 15,417
<UNDERWRITING-AMORTIZATION> 2,613
<UNDERWRITING-OTHER> 472
<INCOME-PRETAX> (19,755)
<INCOME-TAX> (1,910)
<INCOME-CONTINUING> (17,845)
<DISCONTINUED> 1,645
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (16,200)
<EPS-PRIMARY> (3.07)
<EPS-DILUTED> (3.07)
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
