<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File
For Quarter Ended September 30, 1996 Number 0-9209
------------------------ ------
RIVERSIDE GROUP, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Florida 59-1144172
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7800 Belfort Parkway, Jacksonville, Florida 32256
- ------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code number
904-281-2200
------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
On October 15, 1996, there were 5,296,123 shares of the Registrant's common
stock outstanding.
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RIVERSIDE GROUP, INC.
INDEX
<TABLE>
<CAPTION>
Page
Number
------
<S> <C> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
September 30, 1996 (Unaudited)
and December 31, 1995 3
Condensed Consolidated Statements
of Operations
Nine and three months ended
September 30, 1996 and 1995 (Unaudited) 4
Condensed Consolidated Statement
of Common Stockholders' Equity
Nine months ended
September 30, 1996 (Unaudited) 5
Condensed Consolidated Statements of
Cash Flows
Nine months ended
September 30, 1996 and 1995 (Unaudited) 6
Notes to Condensed Consolidated
Financial Statements (Unaudited) 7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 15
PART II.
Item 5. Other Information 26
</TABLE>
2
<PAGE> 3
RIVERSIDE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1996 AND DECEMBER 31, 1995
(in thousands except share data)
<TABLE>
<CAPTION>
(UNAUDITED)
SEPT. 30, DECEMBER 31,
1996 1995
----------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash, short-term and other investments $ 5,126 $ 21,100
Accounts receivable, less allowance for
doubtful accounts of $5,118 in 1996 91,808
Inventory 108,475
Construction and permanent loans 969
Deferred tax asset 25,906
Prepaid expenses 2,374
--------- ---------
Total current assets 234,658 21,100
Investment in real estate 17,579 17,879
Investment in life insurance subsidiaries, at equity 5,900
Investment in Wickes Lumber Company, at equity 11,210
Property, plant and equipment, net 51,655
Trademark (net of accumulated amortization of $9,996 in 1996) 7,004
Deferred tax asset 1,674 825
Excess of cost over fair value of assets acquired 8,746
Other assets (net of accumulated amortization of
$5,994 in 1996 and $4,959 in 1995) 17,086 3,561
Investments:
Fixed maturities 147,152
Equity securities 838
Mortgage and construction loans 26,903
Policy loans 19,827
Accrued investment income 2,488
Reinsurance receivables 28,500
Value of acquired insurance in force 18,415
Deferred policy acquistion costs 2,027
--------- ---------
Total assets $ 344,302 $ 300,725
========= =========
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of debt $ 2,129 $ 7,645
Accounts payable 54,436
Income tax payable 1,680
Accrued liabilities 35,407 5,022
--------- ---------
Total current liabilities 93,652 12,667
Long-term debt, less current maturities 199,358 23,570
Mortgage debt, related party 17,447
Other long-term liabilities 2,848
Future life insurance benefits 140,295
Policyholder contract deposits and other funds 97,171
Unpaid claims 966
--------- ---------
Total liabilities 313,305 274,669
Minority interest 11,357
Commitments and contigencies (Note 4)
COMMON STOCKHOLDERS' EQUITY:
Common stock, $.10 par value; 20,000,000 shares authorized; 530 531
issued and oustanding, 5,296,123 in 1996 and 5,311,123 1995
Additional paid in capital 17,165 17,209
Retained Earnings 1,945 3,923
Unrealized investment appreciation net of taxes and deferred
policy acquistion costs of $884 in 1995 4,393
--------- ---------
Total common stockholders' equity 19,640 26,056
--------- ---------
Total liabilities and common stockholders' equity $ 344,302 $ 300,725
========= =========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
3
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RIVERSIDE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS END
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $ 255,575 $ --- $ 255,575 $ ---
Cost of sales 200,118 --- 200,118 ---
---------- ---------- ---------- ----------
Gross Profit 55,457 0 55,457 0
Net realized gains 10 264 1,227 560
Equity in income(losses) of Wickes Lumber Company --- 544 (1,715) (201)
Equity in losses of related parties (322) --- (322) ---
Other operating income 1,775 500 1,971 1,189
Premiums and annuity considerations --- 1,812 3,224 6,123
Net investment income 164 3,384 6,357 10,953
---------- ---------- ---------- ----------
Total revenues 57,084 6,504 66,199 18,624
Selling, general and adminstrative expenses 44,895 1,187 47,247 3,944
Provision for doubtful accounts 339 --- 339 ---
Depreciation, goodwill and trademark amortization 1,642 --- 1,642 ---
Interest expense 6,256 784 7,812 2,351
Policyholder benefits --- 4,368 5,805 11,102
Policy acquistion expenses --- 443 2,026 2,001
---------- ---------- ---------- ----------
Total expenses 53,132 6,782 64,871 19,398
Minority interest 1,372 --- 1,372 ---
Income realized on reorganization of life insurance
subsidiaries --- --- 431 ---
---------- ---------- ---------- ----------
Income/(loss) from continuing operations before income taxes 2,580 (278) 387 (774)
Income tax expense: --- --- --- ---
Current 2,365 --- 2,365 ---
Deferred --- --- --- ---
---------- ---------- ---------- ----------
Income/(loss) from continuing operations 215 (278) (1,978) (774)
Loss from operations of discontinued property
and casualty insurance company --- (725) --- (743)
Gain on disposal of discontinued property
and casualty insurance company --- 2,481 --- 2,481
---------- ---------- ---------- ----------
Net gain from discontinued operations 0 1,756 0 1,738
---------- ---------- ---------- ----------
Net income/(loss) $ 215 $ 1,478 $ (1,978) $ 964
========== ========== ========== ==========
Earnings (loss) per share:
Income/(loss) from continuing operations $ 0.03 $ (0.06) $ (0.37) $ (0.15)
Net gain from discontinued operations 0.00 0.34 0.00 0.33
---------- ---------- ---------- ----------
Net income(loss) per share $ 0.03 $ 0.28 $ (0.37) $ 0.18
========== ========== ========== ==========
Weighted average number of common shares
used in computing earnings per share 5,307,373 5,216,522 5,309,864 5,316,423
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
4
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RIVERSIDE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF COMMON STOCKHOLDERS' EQUITY
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
UNREALIZED TOTAL
ADDITIONAL INVESTMENT COMMON
COMMON PAID-IN RETAINED APPRECIATION STOCKHOLDER
STOCK CAPITAL EARNINGS (DEPRECIATION) EQUITY
------ ---------- -------- -------------- -----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995 $ 531 $ 17,209 $ 3,923 $ 4,393 $ 26,056
Net loss (1,978) (1,978)
Change in unrealized investment appreciation
of fixed maturities and equity securities (4,393) (4,393)
Purchase and retirement of 15,000 shares of
common stock, at cost (1) (44) (45)
----- -------- ------- ------- --------
Balance, September 30, 1996 $ 530 $ 17,165 $ 1,945 $ 0 $ 19,640
===== ======== ======= ======= ========
</TABLE>
5
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RIVERSIDE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPT. 30,
OPERATING ACTIVITES: 1996 1995
--------- ---------
<S> <C> <C>
Net loss $ (1,978) $ 964
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation expense 1,263 526
Amortization expense 882
Net change in deferred acquistion costs 49 1,644
Provision for doubtful accounts 3,533
Gain on sale of discountinued property &
casualty insurance operations (2,481)
Gain on Life Insurance Reorganization (431)
Gain on sale of fixed assets (183)
Net realized investment gains (1,227) (560)
Provision for deferred income taxes 13
Equity in losses of Wickes Lumber 1,715 201
Minority interest 1,372
Interest on policyholder's funds 3,469 7,020
Change in other assets and liabilities:
Increase in accounts receivable (7,770)
Decrease in inventory 2,197
(Increase)/decrease in other assets 214 (414)
Accrued investment income 197 497
Premiums receivable and unearned premiums 80 (12)
Increase/(decrease) in accounts payable and accrued liabilities 4,121
Reserve for unpaid claims, policy benefits and
recoverable on paid losses from reinsurers and others (504) (1,639)
Net liabilities of discontinued operations, other liabilities
and current income taxes 910 (2,700)
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 7,909 3,059
INVESTING ACTIVITIES
Purchase of investments:
Property, plant and equipment (600)
Fixed maturities available for sale (36,867) (39,285)
Equity securities (8,602) (32,544)
Investment real estate (139) (339)
Mortgage, construction and policy loans (10,756) (3,148)
Securites of Wickes Lumber Company (10,000)
Net assets of Life Insurance Reorganization (28,202)
Sale, maturity, and principal reductions of investments:
Property, plant and equipment 935
Fixed maturities available for sale 41,675 58,263
Equity securities 8,643 29,477
Investment real estate 604 14,027
Mortgage, construction and policy loans 2,294 4,869
Life Insurance Reorganization proceeds 35,000
--------- ---------
NET CASH PROVIDED BY INVESTING ACTIVITIES (6,015) 31,320
FINANCING ACTIVITIES
Net borrowings(repayment) under revolving line of credit (9,972)
Repayment of debt (20,726) (17,804)
Increase in borrowings 18,767 2,093
Purchase and retirement of treasury shares (46) (918)
Deposits of policyholders' funds 192 539
Withdrawal of policyholders' funds (8,665) (25,029)
--------- ---------
NET CASH USED IN FINANCING ACTIVITIES (20,450) (41,119)
INCREASE (DECREASE) IN CASH (18,556) (6,740)
Cash at beginning of year 21,100 22,451
Wickes Lumber Cash Balance 2,582
--------- ---------
CASH AT END OF PERIOD $ 5,126 $ 15,711
========= =========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
6
<PAGE> 7
RIVERSIDE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Financial Statement Presentation
The condensed consolidated financial statements present the financial
position, results of operations, and cash flows of Riverside Group, Inc. (the
"Company") and its wholly-owned and majority-owned subsidiaries. See Note 2
for a description of the Company's accounting for its Wickes Lumber Company
("Wickes") subsidiary.
The condensed consolidated balance sheets as of September 30, 1996,
the condensed consolidated statements of operations for the nine months and
three months ended September 30, 1996 and 1995, the condensed consolidated
statement of common stockholders' equity for the nine months ended September
30, 1996 and the condensed consolidated statements of cash flows for the nine
months ended September 30, 1996 and 1995, have been prepared by the Company
without audit. In the opinion of management, all adjustments (which include
only normal recurring adjustments) necessary to present fairly the financial
position, results of operations and cash flows at September 30, 1996, and for
all periods presented have been made.
Certain information and footnote disclosures normally included in
consolidated financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted. It is suggested
that these condensed consolidated financial statements be read in conjunction
with the consolidated financial statements and notes thereto included in the
Company's 1995 Annual Report on Form 10-K.
Earnings Per Share
Earnings per share are based on the weighted average number of shares
of common stock outstanding during each period (5,309,864 shares in 1996 and
5,316,423 shares in 1995). During the third quarter of 1996, the Company
purchased and retired 15,000 shares of its common stock.
2. INVESTMENT IN WICKES LUMBER COMPANY
The Company acquired two million newly-issued shares of Wickes' common
stock on June 20, 1996. The purchase of additional shares increased the
Company's ownership in Wickes from 36% to 52% of Wickes' total common shares
and from 39% to 55% of Wickes' voting common shares. The accompanying
consolidated balance sheet includes Wickes at September 30, 1996 and the
accompanying December 31, 1995 consolidated balance sheet has been presented in
a classified format consistent with the September 30, 1996 presentation.
Additionally, the results of operations and cash flows of Wickes are
consolidated with the Company, beginning July 1, 1996. Prior to July 1, 1996,
Wickes' operations and cash flows have been reflected on the equity method.
7
<PAGE> 8
The acquisition of Wickes has been recorded as a step acquisition
using the purchase method of accounting. Included in the Company's September
30, 1996 balance sheet is $8.7 million of goodwill, which is being amortized
over 25 years. Summary financial information of Wickes for the third quarter
and first nine months of 1996 and 1995 follow (in thousands, except per share
data):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
(unaudited) (unaudited)
Sept. 28, 1996 Sept. 28, 1995 Sept. 28, 1996 Sept. 30, 1995
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Operating Statement Data:
Net Sales $255,575 $284,488 $636,856 $748,983
Gross profit 55,457 62,863 141,596 172,356
Net income(loss) 2,843 1,927 (1,450) (201)
Net income(loss) per
Wickes common share $ .35 $ .31 $ (.21) $ (.03)
</TABLE>
<TABLE>
<CAPTION>
(unaudited) (unaudited)
Sept. 28, 1996 Dec. 30, 1995
-------------- -------------
<S> <C> <C>
Balance Sheet Data:
Current assets $230,115 $219,475
Total assets 305,252 302,515
Current liabilities 89,716 79,853
Long term debt and other
long-term liabilities 192,008 207,533
Common stockholders' equity $ 23,528 $ 15,129
</TABLE>
At September 30, 1996, the Company, owned 4,217,290 shares, or
approximately 52%, of Wickes' outstanding common stock. Included in the
Company's results of operations for the first six and nine months of 1996 and
1995, respectively, are net losses of $1,715,000 and $201,000.
Had the acquisition of additional shares of Wickes occurred at January
1, 1995, the Company's proforma consolidated operating statement data for the
nine months ended September 30, 1996 and 1995 would appear as follows (in
thousands, except per share data):
<TABLE>
<CAPTION>
Nine Months Ended
-----------------
(unaudited) (unaudited)
Sept. 30, 1996 Sept. 30, 1995
-------------- --------------
<S> <C> <C>
Proforma Consolidated Operating Statement Data:
Net sales $636,856 $748,983
Gross profit 141,956 172,356
Net income(loss) (2,884) 764
Net income(loss) per common share $ (.54) $ .14
</TABLE>
8
<PAGE> 9
3. LIFE INSURANCE REORGANIZATION
On June 6, 1996, the Company completed the reorganization of its life
insurance operations with Circle Investors, Inc. ("Circle"), a privately held
company engaged in providing financial services (the "Life Insurance
Reorganization"). As a result of the transaction, a wholly-owned subsidiary of
American Financial Acquisition Corporation ("AFAC"), which wholly-owned all of
the Company's insurance subsidiaries, was merged with and into Circle, with
Circle surviving. The Company received net cash of $13.5 million, after
payment in full of the AFAC bank debt, taxes and expenses. Additionally, the
Company received 2,267,000 shares of Circle common stock and 3,600 shares of
Circle Series C Preferred Stock. The Company also retained 950,000 shares of
Wickes common stock, real estate with a net appraised value of $2 million and
certain miscellaneous assets that were previously owned by the insurance
subsidiaries. These retained assets have been recorded at the lower of
historical carryover cost or fair value, consistent with transactions between
companies under common control. The real estate appraised value is net of an
$18 million mortgage owned by American Founders Life Insurance Company ("AFL")
(see note 5).
The Company previously estimated and reported a loss on the
reorganization of the life insurance operations in the year ended December 31,
1995 in accordance with Statement of Financial Accounting Standards ("SFAS")
No. 121 "Accounting for the Impairment of Long-Lived Assets and Long-Lived
Assets to be Disposed Of". A net gain on the reorganization of $431,000 was
reflected in the second quarter of 1996 as an adjustment to the previous
estimate. The gain is primarily related to consideration paid to the Company
by the life insurance subsidiaries for utilization of tax benefits related to
life insurance operations through the date the transaction closed.
The Company has recorded its investment in Circle at $2.3 million for
the common shares ($1.00 per share) plus $3.6 million liquidation value, for
the preferred shares, for a total of $5.9 million. The Company's investment in
Circle is accounted for under the equity method. The loss recorded on the
reorganization of the life insurance operation may be adjusted for future
reporting periods based on results of additional analysis of the value of the
Circle securities.
Up to the closing of the Life Insurance Reorganization, the life
insurance operations generated income after taxes of $1,003,000. However,
based on an evaluation of the life operations profits and the benefits to the
Company of these operations, additional deferred acquisition cost amortization
of $674,000 was recorded reducing life insurance income to a net of $329,000.
4. COMMITMENTS AND CONTINGENCIES
On or about August 11, 1993, FynSyn Capital Corp. ("FynSyn") and a
related entity, Wickes Lumber Investment Partnership ("WLIP"), sold an
aggregate of 260,760 shares of Wickes' common stock, an option to acquire
374,516 additional shares of Wickes' common stock and 10.33 shares of Wickes'
9% redeemable preferred stock to the Company. In connection with this sale,
FynSyn stated that it was unable to locate the stock certificate representing
the preferred stock and executed and delivered to Wickes an affidavit of loss
and indemnity agreement, in reliance on which Wickes issued a replacement stock
certificate to FynSyn, which was delivered to the Company upon completion of
the sale. The 10.33 preferred shares were converted into approximately 103,922
shares of Wickes common stock as part of Wickes' plan of recapitalization
completed on October 22, 1993. In February 1994, a third party informed Wickes
that FynSyn had previously transferred the 10.33 preferred shares to the
9
<PAGE> 10
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 the Company. In
1995, this action was removed to the United States District Court for the
District of New Jersey. The Company and Wickes have answered the complaint in
this action and counterclaimed seeking, among other things, indemnity and
enforcement of their contractual rights. Wickes has also sought declaratory
relief as to the respective rights and liabilities of Wickes and the Company,
as well as FynSyn and the third party related to and as a consequence of these
matters and seeking indemnity from FynSyn. The Company and Wickes intend to
pursue vigorously their respective rights against FynSyn, WLIP and related
parties, and the Company intends to defend vigorously the claims of FynSyn and
WLIP.
On November 3, 1995, a complaint styled Morris Wolfson v. J. Steven
Wilson, Kenneth M. Kirschner, Albert Ernest, Jr., Claudia B. Slacik, Jon F.
Hanson, Robert E. Mulcahy, Frederick H. Schultz, Wickes Lumber Company and
Riverside Group, Inc. was filed in the Court of Chancery of the State of
Delaware in and for New Castle County (C.A. No. 14678). As amended, this
complaint alleges, among other things, that the acquisition by the Company of
two million shares of Wickes (the "Wickes Acquisition") is unfair and
constitutes a waste of Wickes' assets and that Wickes and the Company breached
their fiduciary duties in their approval of this transaction. The amended
complaint, among other things, seeks on behalf of a purported class of Wickes'
shareholders to obtain injunctive relief or damages with respect to the
transaction.
In connection with the sale of Dependable Insurance Company, the
Company agreed to indemnify the purchaser for certain losses on various
categories of liabilities. Terms of the indemnities provided by the Company
vary with regards to time limits and maximum amounts. AFAC subordinated
debentures in the amount of $2.1 million are pledged as collateral on these
indemnities. Although future loss development will occur over a number of
years; the Company believes, based on all information presently available, that
reserves transferred to the purchaser at the closing and those held by the
Company are adequate for these indemnities. It is not anticipated that these
indemnities will have a material adverse effect on the Company's financial
position, results of operations or cash flows.
Accrued liabilities at September 30, 1996, includes approximately $1.0
million for remediation of certain environmental and product liability matters,
principally underground storage tank removal on real property owned by Wickes.
Many of the building center facilities presently and formerly operated
by Wickes and its predecessor contained underground petroleum storage tanks.
All such tanks known to Wickes located on facilities owned or operated by
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
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has incurred approximately $2.1 million of costs, net of recoveries, with
respect to the filling or removing of underground storage tanks and related
investigatory and remedial actions.
At September 30, 1996, Wickes had an investment in Riverside
International Corporation, which conducts operations in Russia, of $2.3
million. This investment entails significant inherent risks, including
expropriation, legal, currency, crime, management, labor, weather and other
operational risks.
Wickes is one of many defendants in approximately 140 actions, each of
which seeks unspecified damages, brought since 1993 in various Michigan state
courts against manufacturers and building material retailers by individuals who
claim to have suffered injuries from products containing asbestos. All of the
plaintiffs in these actions are represented by the same counsel. Wickes is
aggressively defending these actions and does not believe that these actions
will have a material adverse effect on Wickes.
In the opinion of management, the potential liability in excess of
amounts accrued for the above matters would not materially affect its financial
condition or results of operations. The Company's assessment of the
contingencies described in this note constitutes forward-looking information
within the meaning of the Private Securities Litigation Reform Act of 1995
("Forward-Looking Information") and is inherently subject to uncertainty. The
outcome of the contingencies described in this note may differ from the
Company's assessment of these matters as a result of a number of factors
including, but not limited to, matters unknown to the Company at the present
time, development of losses materially different from the Company's experience
to date and the unpredictability of matters in litigation.
5. LONG TERM AND MORTGAGE DEBT
Consolidated long-term and mortgage debt is comprised of the following
at September 30, 1996 (in thousands):
<TABLE>
<S> <C>
LONG TERM DEBT
The Company
- -----------
Subordinated debt $ 9,412
Other 2,099
Less: current maturities (1,622)
--------
The Company long-term debt $ 9,889
Wickes
- ------
Revolving line of credit $ 89,380
Senior subordinated notes 100,000
Other 245
Less: current maturities (156)
--------
Wickes' long-term debt $189,469
--------
Total Consolidated long-term debt $199,358
========
</TABLE>
11
<PAGE> 12
<TABLE>
<S> <C>
MORTGAGE DEBT
The Company
Mortgage debt, related party $ 17,798
Less: current maturities (351)
--------
The Company long term mortgage debt $ 17,447
========
</TABLE>
THE COMPANY
As a part of the Life Insurance Reorganization, the Company purchased
certain real estate owned by AFL (see note 3). In connection therewith, the
Company issued to Circle, a series of seven secured non-recourse promissory
notes (the "Notes") with an aggregate principal amount of $17,798,000 equal to
90% of the price of the real estate parcels purchased from AFL. Principal and
interest payments are due in annual installments, commencing on June 6, 1997.
Each annual installment is calculated based upon equal payments amortized over
a term of 20 years. A balloon payment of the remaining principal balance is
due on the seventh anniversary of the Notes. The Notes bear interest at a rate
adjusted quarterly, equal to the London InterBank Offered Rate ("LIBOR"), plus
three hundred basis points. The Notes are secured by first priority mortgages
covering all of the real estate. On each anniversary of the Notes, the Company
is required to provide AFL with an independent appraisal of the real estate,
subject to the mortgages ("Appraised Values"). If the outstanding principal
amount of the Notes exceed 85% of the Appraised Value on the first anniversary
or 80% of the Appraised Value with each anniversary thereafter, the Company is
required, prior to the next succeeding December 31, to make an additional
principal payment on the Notes in an amount equal to such excess. A parcel of
real estate that is subject to the mortgage may be sold by the Company only in
cash transactions with the prior consent of AFL. Subject to certain
exclusions, the entire sales proceeds is required to be paid to AFL to fund an
escrow account for the payment of property taxes, and to pay accrued and unpaid
interest and any remaining principal balance on the Notes. As additional
security for the Notes, the Company pledged as collateral 3,600 shares of
Circle Series C preferred stock, 2,267,000 shares of Circle common stock and
1,000,000 shares of Wickes' common stock. At the end of each calendar quarter,
the collateral pledged is adjusted according to changes in market value.
WICKES MORTGAGE LENDING
On June 26, 1996, Wickes Mortgage Lending, Inc. ("WML"), a
wholly-owned subsidiary of the Company, obtained an $6,000,000 warehouse line
of credit (the "Line") from Liberty Savings Bank ("Liberty") for first mortgage
loans for funding mortgage loans to its customers, subject to the following
limitations: (1) Speculative and Pre-Sold Home Loans ("Spec Loans") - loans to
qualified builders for the purpose of constructing one-family residential
houses up to an aggregate maximum amount of $5,000,000, and (2) Permanent End
Loans ("Permanent Loans") - loans to qualified home buyers for the purpose of
purchasing or refinancing existing home mortgages - are limited to an aggregate
maximum amount of $1,000,000. In addition, WML and Liberty entered into a
correspondent relationship, which provides for the placement of
construction/permanent mortgage loans ("CP loans") up to an aggregate maximum
amount of $5,000,000. CP Loans are loans made to qualified home buying
customers for construction loans that can be converted to permanent loans.
Interest accrues daily at the Prime Rate plus 25 basis points for Spec Loans,
and at a variable rate equal to the Prime Rate for Permanent Loans. Interest
is paid monthly for all types of loans. Other fees associated with the Line
include an annual warehouse fee equal to 25 basis points
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on the total available amount of the Line, a $175 set up fee for each Spec Loan
submitted and a $25 set up fee for each Permanent Loan submitted. The initial
term of the Line is one year. Liberty may cancel the line at its anniversary
date with 90 days notice. The Line is guaranteed by the Company. To
collateralize this guarantee, the Company pledged 425,000 shares of Wickes'
common stock as collateral. In the event that, at any time, the value of the
collateral based upon the closing price of Wickes' common stock, as reported in
the Wall Street Journal, is less than $1,650,000, the Company is required,
within five business days, to pledge to Liberty additional shares of Wickes to
bring the total value of the collateral to at least $2,200,000. The unused
amount available for borrowing at September 30, 1996, was $10,031,000.
WICKES LUMBER COMPANY
Wickes' debt includes a revolving line of credit which was amended and
restated on March 12, 1996. Among other things, the amendment and restatement
(i) extended the term of the facility 15 months to January 1998, (ii) reduced
the maximum borrowing limit $15 million to $130 million and (iii) modified
certain covenants. Under the revolving line of credit, Wickes may borrow
against certain levels of accounts receivable and inventory. The unused amount
available for borrowing, at September 30, 1996, was $35.6 million.
Substantially all of Wickes' accounts receivable, inventory, general
intangibles and certain machinery and equipment are pledged as collateral for
the revolving line of credit. Covenants under the related debt agreements
require, among other restrictions, that Wickes maintain certain financial
ratios and certain levels of consolidated net worth. In addition, the debt
agreement restricts capital expenditures, the incurrence of additional debt,
asset sales, dividends, investments and acquisitions.
In addition, Wickes' debt includes 10-year unsecured senior
subordinated notes issued October 22, 1993. Interest on the notes is at the
annual rate of 11 5-8%, payable semi-annually. Covenants under the related
indenture restrict among other things, the payment of dividends, the prepayment
of certain debt, the incurrence of additional debt if certain financial ratios
are not met, and the sale of certain assets unless the proceeds are applied to
the notes. In addition, the notes require that, upon a change in control of
Wickes, Wickes must offer to purchase the notes at 101% of the principal
thereof, plus accrued interest.
6. INCOME TAXES
The increased ownership in Wickes by the Company does not result in
consolidation for income tax filing purposes. Thus, each company will continue
to separately determine its income tax liability. The Company's effective tax
rate, excluding Wickes', was 0% for the nine months ended September 30, 1996
and 1995. The current tax expense on the life insurance reorganization has
been offset by a reduction in previously recorded deferred tax expense. The
equity losses of Wickes have reduced the Company's GAAP basis in Wickes
creating deferred tax benefits which will be realized upon sale or subsequent
increase in GAAP basis of Wickes' common stock.
Wickes' provision for income taxes for the third quarter of 1996 was
$2.4 million, compared to $1.3 million for the third quarter of 1995. Wickes
recorded a tax benefit of $1.5 million for the first six months of 1996 which
was included in the equity pickup recorded by the Company. An effective tax
rate of 38.5% was used to calculate income taxes for the third quarter of 1996,
compared with an effective rate of 39.7% for the third quarter of 1995. In
addition to the effective rate used, state franchise taxes were calculated
separately and are included in the provision reported.
13
<PAGE> 14
7. RELATED PARTY TRANSACTIONS
In March 1996, the Company entered into an employment agreement with
its Chairman, J. Steven Wilson, with respect to his employment by the Company
during 1996. Pursuant to this agreement, Mr. Wilson received his entire 1996
salary at his 1995 rate of $208,040 in advance and received an advance against
his 1996 bonus equal to the amount of his 1995 bonus of $200,000.
On March 29, 1996, the Company made a loan of $154,114 to a company
owned by a director of the Company. In addition, the Company agreed to extend
the maturity date of a previous loan of $225,000 to this company. Both loans
bear interest at a rate of 7.5%. The maturity date of both loans was extended
to October 15, 1996, but the Company and the borrower are currently discussing
a long-term extension on a secured basis.
In July 1996, WML entered into a definitive agreement with Wickes (the
"Mortgage Marketing Agreement") in which Wickes and WML jointly develop, market
and implement a mortgage lending program to Wickes' builders and their
customers. As part of the agreement, Wickes agreed to reimburse WML for
"start-up costs" incurred by the hiring of additional loan representatives.
These reimbursements are approximately $284,000 for the nine months ended
September 30, 1996. The agreement terminates on December 31, 1997, and may be
extended thereafter on a month by month basis.
8. SUBSEQUENT EVENT
The Board of Directors declared a cash distribution of $.10 per share,
payable on October 30, 1996, to shareholders of its common stock of record on
October 15, 1996.
14
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Condensed Consolidated Financial Statements and Notes thereto contained
elsewhere herein and in conjunction with the Consolidated Financial Statements
and Notes thereto and Management's Discussion and Analysis of Financial
Condition and Results of Operations contained in the Company's Annual report on
Form 10-K for the year ended December 31, 1995. Because the operations of
Wickes are consolidated with those of the Company and its other subsidiaries
for the third quarter of 1996 and accounted for on the equity method for prior
periods, comparisons between periods may not be meaningful in certain respects.
LIQUIDITY AND CAPITAL RESOURCES
The Company
At November 1, 1996, the Company had $2 million in cash and short-term
investments. The Company's general liquidity requirements consist primarily of
funds for payment of debt and related interest, and for operating expenses.
Operations exclusive of Wickes (which is currently prohibited from paying
dividends by reason of restrictions in its debt instruments), consist primarily
of real estate sales, the operations of Wickes Financial Services Center, Inc.
("WFSC") and the operations of WML. Although revenues are increasing for WML
and WFSC has implemented a managing general agent structure which is less
capital intensive, the Company anticipates these operations will continue to
produce negative cash flows through first quarter 1997 and that these
operations alone may not provide sufficient funds for the Company's total long
term liquidity needs.
As a consequence, the Company currently anticipates that beginning in
early to mid 1997 it will need to obtain significant additional funds through
asset sales (other than sales of real estate, the proceeds of which are
required to be utilized to reduce real estate debt) to support its operations
and service its indebtedness. The principal assets that could be sold by the
Company are its shares of Circle common and preferred stock and Wickes common
stock. The Company will make its determination of the timing, amount and
identity of the assets to be sold in the light of the circumstances that exist
at the time sales are made, but believes that it will be able to generate
sufficient funds from asset sales for its liquidity needs.
The completion of the Life Insurance Reorganization (see note 3), on
June 6, 1996, provided net cash of $13.5 million after payment of $18.0 million
of bank debt, $2.0 million down payment for real estate, closing expenses and
taxes. The Company used $10 million of the proceeds to acquire two million
shares of Wickes common stock on June 20, 1996 (see note 2). The completion of
these two transactions resulted in significant changes in accounting for the
investment in Wickes and financial reporting changes for the Company (see notes
2 and 3).
The Company currently has approximately 35 acres of its Georgia real
estate under contract for sale. The Company anticipates closing the sales
during the fourth quarter of 1996. Estimated net proceeds of $2.3 million will
be paid to AFL to fund the escrow account on the Company's real estate debt
(see Note 5).
15
<PAGE> 16
On August 9, 1996, the Company announced that its Board of Directors
approved a plan to acquire in open market transactions from time to time up to
100,000 shares of the Company's common stock. The Company purchased and
retired 15,000 shares of its common stock during the third quarter of 1996.
The Company does not plan to purchase additional shares during the fourth
quarter of 1996, but will continue to review the plan in 1997.
On October 30, 1996, the Company paid a cash dividend of approximately
$530,000 to shareholders of record on October 15, 1996 (see note 8).
See note 4 of Notes to Condensed Consolidated Financial Statements for
a description of (i) litigation seeking, among other things, recision of the
transaction in which Riverside acquired for approximately $6.5 million an
aggregate of 739,198 shares of Wickes common stock and (ii) litigation seeking,
among other things, to obtain damages with respect to the Wickes Acquisition.
During the first nine months of 1996, stockholders' equity decreased
by a net of $6.4 million primarily as a result of decreases in the market value
of invested assets of the life insurance subsidiaries of $4.4 million and
interest expense at the parent company of $1.7 million.
FORWARD-LOOKING INFORMATION CAUTIONARY STATEMENT. The discussion
above of the Company's future liquidity needs constitutes forward-looking
information within the meaning of the Private Securities Litigation Reform Act
of 1995 ("Forward-Looking Information") and is inherently subject to
uncertainty as a result of a number of risk factors including, among other
things: (i) the future operating results of WML, (ii) the Company's ability to
achieve the level of real estate sales required to meet scheduled real estate
debt payments, and (iii) the ability of the Company to raise funds through
sales of Circle stock or Wickes common stock. The future operating results of
WML will depend upon, among other things, the degree of market acceptance for
WML's services, general economic conditions, and WML's ability to maintain an
adequate mortgage warehouse line of credit. The Company's ability to sell
Circle stock would depend upon, among other things, the value of Circle stock,
the Company's ability to find a buyer or buyers for this minority position, and
the Company's ability to obtain Circle's consent to such sales and to release
the sales proceeds from pledge under the Company's real estate debt. The
Company's ability to sell Wickes common stock would depend upon, among other
things, the public trading price of Wickes common stock and, in light of the
relatively low public trading volume for Wickes common stock, possibly the
Company's ability to find a buyer or buyers for Wickes common stock in a
private transaction or otherwise.
The information given above with respect to the anticipated real
estate sales also constitutes Forward-Looking Information and is inherently
subject to uncertainty. Sales, if any, actually completed may differ from this
Forward- Looking Information as a result of a number of important risk factors
including, but not limited to, the purchasers' satisfaction with their
pre-closing due diligence investigations, the prospective purchasers' financial
capacities and general economic conditions.
WICKES LUMBER COMPANY
Wickes' principal sources of working capital and liquidity are
earnings and borrowings under its revolving credit facility. Wickes' primary
need for capital resources is to finance inventory and accounts receivable.
16
<PAGE> 17
In the nine-month period of each of 1996 and 1995 Wickes has been able
to generate positive net cash provided by operating activities, $6.8 million
and $11.8 million respectively. With the peak building season historically
occurring in the second and third quarters, Wickes normally experiences
increases in its accounts receivable and inventory levels during the first
quarter to meet the anticipated increase in sales and in the second quarter as
a result of increased sales activity. In the first three months of 1996,
however, operating activities generated a positive cash flow as Wickes made
significant reductions in its working capital, primarily as a result of
building center closings begun in late December, 1995 as part of Wickes'
restructuring plan. The third quarter traditionally provides cash through
operating income and reductions in inventory as Wickes begins its seasonal
adjustments, this held true for 1996.
Wickes' accounts receivable balance at the end of the third quarter of
1996 decreased $16.7 million when compared to the third quarter of 1995, a
decrease of 15.5%. Approximately $7.0 million of this decrease is attributable
to accounts receivable from building material centers closed in 1995. The
remainder of the decrease is primarily a result of reduced sales for 1996 when
compared with 1995 and improved collections at recently acquired building
centers.
Inventory at the end of the third quarter of 1996 was $15.5 million,
or 12.5%, lower than at the end of the third quarter of 1995. Approximately
$10.8 million of this reduction is attributable to inventory disposed from
building centers closed in 1995. Wickes' inventory control processes are
primarily responsible for the remainder of the inventory reduction.
On June 20, 1996, Wickes sold to the Company, 2 million newly-issued
shares of Wickes' common stock for $10 million in cash. In accordance with the
terms of Wickes' revolving credit agreement, upon completion of this
transaction, certain real estate was released as collateral required under this
agreement.
Wickes' capital expenditures consist primarily of the construction of
storage facilities, the remodeling of building centers and component
manufacturing facilities, and the purchase of vehicles, equipment and
management information systems. In the first nine months of 1996, Wickes spent
$2.6 million on capital expenditures. Wickes expects to spend approximately $4
million for all of 1996. Under Wickes' bank revolving credit agreement, as
amended, capital expenditures during 1996 are limited to $6 million plus any
portion of 1995's capital expenditures that were not spent. Wickes expects to
fund capital expenditures through borrowings and its internally generated cash
flow.
During 1996 Wickes has not completed any acquisitions of building
centers or component manufacturing facilities. In April of 1996 Wickes began
operating a new component manufacturing facility in Elwood, IN. The operation
manufactures trusses and wall panels for several of Wickes Indiana and Ohio
centers. The facility is located on the site of a former Wickes Lumber
building center. In November of 1996 Wickes announced its plans to consolidate
the operations of two additional building centers with other nearby Wickes
centers.
Through the first nine months of 1996, Wickes has also generated $4.1
million primarily from the sale of real estate for three closed building
centers and the sale of approximately 350 excess delivery vehicles and
forklifts.
17
<PAGE> 18
Wickes maintained excess availability under its revolving line of
credit, throughout the first nine months of 1996. In the first nine months of
1996, Wickes utilized funds from the sale of 2 million shares of newly-issued
common stock, cash generated by operating activities, and proceeds from the
sale of excess property, plant and equipment to reduce Wickes' net borrowings
under its revolving line of credit. At the end of the third quarter of 1996,
total borrowings under the revolving line of credit were $29.5 million lower
than at the end of the third quarter of 1995. Under the current terms of
Wickes' bank revolving credit agreement, Wickes believes that it will continue
to have sufficient funds available for its anticipated operations and capital
expenditures. On October 26, 1996, $83.4 million was outstanding under Wickes'
revolving line of credit, and the unused availability was approximately $37.6
million. Wickes assessment of its future funds availability constitutes
Forward-Looking Information and is inherently subject to uncertainty resulting
from, among other things, the factors discussed under "Results of Operations -
Income Taxes", as well as Wickes' ability to renew or replace its revolving
credit facility upon its scheduled expiration.
18
<PAGE> 19
RESULTS OF OPERATIONS
GENERAL
The Company reported results of operations for the quarter and nine
months ended September 30, 1996 and 1995, as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
---------------------------- ---------------------------
(unaudited) (unaudited)
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Income(loss) from continuing
operations $215 $ (278)(1) $(1,978)(1) $(774)(1)
Net gain(loss) from discontinued
operations - 1,756 (2) - 1,738 (2)
---- ------ ------- -----
Net income(loss) $215 $1,478 $(1,978) $ 964
==== ====== ======= =====
</TABLE>
(1) Includes the Company's equity in net income(loss) from Wickes of
$(1,715,000) during the first six months of 1996. Includes the
Company's equity in income(losses) of Wickes for the third quarter and
first nine months of 1995 of $544,000 and $(201,000), respectively.
(2) During the third quarter of 1995, the Company sold all of its
remaining property and casualty insurance operations, resulting in a
gain on disposal of $2,481,000. Operating losses from discontinued
lines were $725,000 and $743,000 for the quarter and nine months ended
September 30, 1995, respectively.
WICKES LUMBER COMPANY
The following table provides certain Wickes' comparative total
operating statement data and certain Company data with respect to Wickes (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
(unaudited) (unaudited)
Sept. 28, 1996 Sept. 28, 1995 Sept. 28, 1996 Sept. 30, 1995
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Total Operating Statement
Data:
Net sales $255,575 $284,488 $636,856 $748,983
Gross profit 55,457 62,863 141,596 172,356
Net income(loss) 2,843 1,927 (1,450) (201)
Company Data:
Equity in income(losses)
of Wickes - 544 (1,715) (201)
Minority Interest 1,372 - 1,372 -
</TABLE>
19
<PAGE> 20
The following table sets forth, for the periods indicated, the
percentage relationship to net sales of certain expense and income items. This
information includes the results from all building centers and component
manufacturing facilities operated by Wickes, including those subsequently
closed or sold.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
Sept. 28, 1996 Sept. 30, 1995 Sept. 28, 1996 Sept. 30, 1995
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Gross profit 21.7 % 22.1 % 22.2 % 23.0 %
Selling, general and
administrative expense 17.3 % 18.2 % 19.1 % 19.9 %
Depreciation, goodwill and
trademark amortization 0.5 % 0.6 % 0.6 % 0.6 %
Provision for doubtful accounts 0.1 % 0.5 % 0.2 % 0.7 %
Other operating income (0.5)% (0.5)% (0.6)% (0.6)%
Income from operations 4.3 % 3.3 % 2.9 % 2.4 %
</TABLE>
Net Earnings
Net income (loss) was $2,843,000 and $(1,450,000) for the three months
and nine months ended September 28, 1996, respectively, compared with
$1,927,000 and $(201,000) for the three months and nine months ended September
30, 1995. The increase for the three-month period primarily results from lower
selling, general and administrative expenses ("SG&A") and a reduction in the
provision for doubtful accounts, which more than offsets the decrease in sales
and gross profit.
Net Sales
Net sales for the third quarter of 1996 decreased 10.2% to $255.6
million from $284.5 million for the third quarter of 1995. Same store sales
declined 4.3% compared with the same period last year. Wickes believes that
the decrease in same store sales is primarily attributable to a slowdown in
residential construction and an 18.8% reduction in sales staff. Wickes
estimates that inflation in lumber prices accounted for an increase in total
sales of approximately $8.2 million for the quarter, compared with the 1995
comparable period. Same store sales to Wickes' primary customers, residential
and commercial builders, declined only 0.3% when compared with the third
quarter of 1995. Wickes' program to reduce the number of under-performing
building centers was also a major cause of the 1996 sales decline compared with
1995. As of October 28, 1996, Wickes operated 110 building centers, 14 fewer
than at the end of the third quarter of 1995.
Gross Profit
In 1996 third quarter gross profit decreased to $55.5 million from
$62.9 million for the third quarter of 1995, an 11.8% decrease. Gross profit
as a percent of sales decreased to 21.7% for the third quarter of 1996 from
22.1% in 1995. The decline in gross profit as a percent of sales is primarily
attributable to Wickes' continued emphasis on sales to the professional
builder, resulting in an increase in the portion of
20
<PAGE> 21
Wickes' sales comprised of lower margin commodity products. Sales to the
professional builder, as a percent of total sales, increased to 83.1% for the
third quarter of 1996 from 81.0% for the same period in 1995.
Selling, General and Administrative Expense
SG&A expense decreased to 17.3% of net sales in the third quarter of
1996 compared with 18.2% of net sales in the third quarter of 1995. Wickes was
able to reduce its total SG&A expense by 14.9%, which is proportionately
greater than the 10.2% sales decline for the third quarter, as a result of
center closings and several cost reduction initiatives implemented since
mid-1994.
Total salaries, wages and employee benefits decreased, as a percent of
sales, by 0.6%. As of September 28, 1996, Wickes had 3,876 full-time and
part-time employees, down 13.0% from September 1995. In addition, during the
third quarter, Wickes recognized approximately $700,000 in recoveries from its
casualty insurance carrier for positive claims experience prior to 1994.
Depreciation, Goodwill and Trademark Amortization
Depreciation, goodwill and trademark amortization decreased to $1.3
million for the third quarter of 1996 compared with $1.6 million for the same
period in 1995. This decrease is primarily due to the sale or disposal of
excess facilities and equipment since June of 1995.
Provision for Doubtful Accounts
Provision for doubtful accounts decreased to $0.3 million or 0.1% of
sales for the third quarter of 1996 compared with $1.6 million or 0.5% of sales
for the same period in 1995. This decrease is the result of a more selective
customer base and improved credit policies at centers acquired since 1994 and
increased efforts in collecting previously reserved accounts receivable.
Other Operating Income
Other operating income for the third quarter 1996 was $1.4 million.
This was relatively unchanged, as a percent of sales, when compared with the
$1.5 million recorded for the same period in 1995.
Interest Expense
In the third quarter of 1996 interest expense decreased 11.8% to $5.5
million from $6.2 million in the third quarter of 1995. This reduction
reflects a $30.9 million decrease in average borrowings on Wickes' revolving
credit facility resulting primarily from the closing of building centers in
December 1995 and $9.8 million in net proceeds from Wickes' issuance of 2
million shares of its common stock in June 1996. The effective borrowing rate
on total long term debt for the third quarter increased 46 basis points from
the third quarter of 1995. Approximately 96% of Wickes' third quarter average
borrowings on its revolving credit facility were LIBOR-based.
21
<PAGE> 22
Equity in Loss of Affiliated Company
In the third quarter of 1996, Wickes recorded a loss of $0.3 million,
under the equity method, with respect to its investment in its subsidiary
engaged in operations in Russia. In the third quarter of 1995, Wickes recorded
a loss of $0.7 million, on a consolidated basis, with respect to this
subsidiary.
NINE MONTHS ENDED SEPTEMBER 28, 1996 COMPARED
WITH THE NINE MONTHS ENDED SEPTEMBER 30, 1995
Net Sales
Net sales for the first nine months of 1996 decreased 15.0% to $636.9
million from $749.0 million for the first nine months of 1995. Same store
sales declined 8.8% compared with the same period last year. Wickes believes
that the decrease in same store sales is primarily attributable to a slowdown
in residential construction, severe weather conditions in the first quarter,
and an 18.9% decrease in same store sales staff. Wickes estimates that
deflation in lumber prices, which adversely affected Wickes during the first
half of 1996, had a negligible effect on sales for the nine-month period. Same
store sales to Wickes' primary customer, residential and commercial builders,
declined only 2.2% when compared with the first nine months of 1995. Wickes'
program to reduce the number of under-performing building centers was also a
major cause of the 1996 sales decline compared with 1995. As of October 28,
1996, Wickes operated 110 building centers, 14 fewer than at the end of the
third quarter of 1995.
Gross Profit
In 1996 nine months gross profit decreased to $141.6 million from
$172.4 million for the nine months of 1995, a 17.8% decrease. Gross profit as
a percent of sales decreased to 22.2% of sales for the first nine months of
1996 from 23.0% in 1995. The decline in gross profit as a percent of sales is
primarily attributable to Wickes' continued emphasis on sales to the
professional builder, resulting in an increase in the portion of Wickes' sales
comprised of lower margin commodity products, and to a lesser extent, a program
to reduce the amount of excess and slow-moving inventory. During the first
nine months of 1996, the percent of Wickes' sales attributable to professional
builders increased to 84.4% from 80.9% in the first nine months of 1995.
Selling, General and Administrative Expense
SG&A expense decreased to 19.1% of net sales in the first nine months
of 1996 compared with 19.9% of net sales in the first nine months of 1995.
Wickes was able to reduce its total SG&A expense by 18.0%, which is
proportionately greater than the 15.0% total sales decline for the first nine
months, as a result of center closings and several cost reduction initiatives
implemented since mid-1994.
Total salaries, wages and employee benefits decreased, as a percent of
sales, by 0.6%. In addition, during the first nine months of 1996 Wickes
recognized approximately $1.0 million in recoveries from its casualty insurance
carrier for positive claims experience prior to 1994.
22
<PAGE> 23
Depreciation, Goodwill and Trademark Amortization
Depreciation, goodwill and trademark amortization decreased to $4.1
million in the first nine months of 1996 from $4.5 million in the first nine
months of 1995. This decrease is primarily due to the sale or disposal of
excess facilities and equipment since January of 1995.
Provision for Doubtful Accounts
Provision for doubtful accounts decreased to $1.1 million or 0.2% of
sales for the first nine months of 1996 from $5.6 million or 0.7% of sales in
the first nine months of 1995. This decrease is the result of a more selective
customer base and improved credit policies at centers acquired since 1994 and
increased efforts in collecting previously reserved accounts receivable. The
improved collection efforts in 1996 are more consistent with Wickes historical
credit collection performance.
Other Operating Income
Other operating income for the first nine months of 1996 was $3.9
million. This was relatively unchanged, as a percent of sales, when compared
with the $4.4 million recorded for the same period in 1995.
Interest Expense
In the first nine months of 1996 interest expense decreased 9.4% to
$16.6 million from $18.4 million in the first nine months of 1995. This
reduction reflects a $25.1 million decrease in average borrowings on Wickes'
revolving credit facility resulting primarily from the closing of building
centers in December 1995 and $9.8 million in net proceeds from the Wickes'
issuance of 2 million shares of its common stock in June 1996. The effective
borrowing rate on total long term debt for the first nine months increased 30
basis points from the first nine months of 1995. Approximately 94% of the
Wickes' 1996 year-to-date average borrowings on its revolving credit facility
were LIBOR-based.
Equity in Loss of Affiliated Company
In the first nine months of 1996, Wickes recorded a loss of $2.3
million, under the equity method, with respect to its investment in its
affiliate engaged in operations in Russia. In the first nine months of 1995
Wickes recorded a loss of $1.5 million, on a consolidated basis, with respect
to this affiliate.
LIFE INSURANCE OPERATIONS
The Statement of Operations includes the operations of the life
insurance subsidiaries through June 6, 1996 the date of the Life Insurance
Reorganization. Operating income after tax of $1,003,000 was generated for
this period, however, this was adjusted to a net income amount of $329,000 by
recording additional amortization of deferred acquisition costs to reflect the
net economic benefit accrued to the Company pursuant to the terms of the merger
agreement with Circle. The following table sets forth financial information
with respect to the Company's life insurance operations (in thousands):
23
<PAGE> 24
<TABLE>
<CAPTION>
Nine Months Ended
-------------------------------------
(unaudited) (unaudited)
Sept. 30, 1996(1) Sept. 30, 1995(2)
----------------- -----------------
<S> <C> <C>
Premiums and annuities $ 3,224 $ 6,123
Net investment income 5,027 11,027
Other income 83 276
Net investment gains 1,367 239
------- -------
Total income 9,701 17,665
Selling, general and administrative expenses 1,247 2,555
Interest expense 7 109
Benefits and losses 5,805 11,102
Policy acquisition expense 2,313 2,001
------- -------
Total expenses 9,372 15,767
------- -------
Net income $ 329 $ 1,898
======= =======
</TABLE>
(1) Includes the operations through June 6, 1996, the date of the Life
Insurance Reorganization.
(2) Includes the operations for nine months.
PARENT COMPANY AND OTHER SUBSIDIARIES
The following discussion relates to the operations of the parent
company, and its subsidiaries, other than Wickes and its former life insurance
subsidiaries (the "Parent Group").
Prior to the Life Insurance Reorganization (see note 3) on June 6,
1996, WML operated as a division of the Company's life insurance investment
operations. During 1995, the mortgage division 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 a result of the Life Insurance Reorganization
and the success of the test program, the Company expanded its mortgage lending
program under a newly formed, wholly-owned subsidiary of the company, WML.
Through September 30, 1996, the Parent Group did not generate significant
revenues.
The Parent Group's operating expenses for the three months ended
September 1996, increased to $1,012,000 compared to $684,000 for the same
period in 1995. Increased operating expenses for the third quarter of 1996
were primarily due to the expansion of WML's operations. Other increased
expenses for the quarter include expenses no longer allocable to the Life
Insurance Group.
The Parent Group's operating expenses for the first nine months were
$2,116,000 and $2,013,000 for 1996 and 1995, respectively. The increased
expense year to date primarily resulted from several non-recurring expenses,
including bank debt costs amortized as a result of the Life Insurance
Reorganization and expenses related to the proposed Wickes merger. Other
increases include the expansion of WML's
24
<PAGE> 25
operations which were partially offset by the savings of approximately $323,000
incurred by the implementation of a managing general agent structure at WFSC.
Interest expense was $774,000 for the third quarter of 1996. This was
relatively unchanged when compared with the $747,000 recorded for the same
period in 1995. Interest expense for the first nine months of 1996 was
$2,330,000 compared to $2,241,000 for the first nine months of 1995.
INCOME TAXES
The increased ownership in Wickes by the Company does not result in
consolidation for income tax filing purposes. Thus, each company will continue
to separately determine its income tax liability. The Company's effective tax
rate, excluding Wickes, was 0% for the nine months ended September 30, 1996 and
1995. The current tax expense on the life insurance reorganization has been
offset by a reduction in previously recorded deferred tax expense. The equity
losses of Wickes have reduced the Company's GAAP basis in Wickes creating
deferred tax benefits which will be realized upon sale or subsequent increase
in GAAP basis of Wickes common stock.
Wickes recorded an income tax expense of $2.4 million for the third
quarter of 1996 compared to $1.3 million in the third quarter of 1995. Wickes
recorded a tax benefit of $1.5 million for the first six months of 1996 which
was included in the equity pickup recorded by the Company. An effective tax
rate of 38.5% was used to calculate income taxes for the third quarter of 1996
compared with an effective rate of 39.7% for the third quarter of 1995. In
addition to the effective rate used, state franchise taxes were calculated
separately and are included in the expense reported for 1996.
Wickes continues to review future earnings projections to determine
that there is sufficient support for its deferred tax assets and valuation
allowance. In spite of the losses incurred during 1995, management believes
that it is more likely than not that Wickes will receive full benefit of its
deferred tax asset and that the valuation allowance is properly stated. This
assessment constitutes Forward-Looking Information and is inherently subject to
uncertainty and dependent upon Wickes' future profitability, which in turn
depends upon a number of important risk factors including, but not limited to,
the effectiveness of Wickes' operational efforts, cyclicality and seasonality
of Wickes' business, the effects of Wickes' substantial leverage and
competition.
25
<PAGE> 26
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS
(a) Exhibits
27.1 Financial Data Schedule (SEC Use Only)
(b) Reports on Form 8-K
None
26
<PAGE> 27
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
RIVERSIDE GROUP, INC.
By /s/ J. Steven Wilson
---------------------------------
J. Steven Wilson
Chairman of the Board,
President and
Chief Executive Officer
By /s/ Catherine J. Gray
---------------------------------
Catherine J. Gray
Vice President and Treasurer
27
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF RIVERSIDE GROUP, INC. AND SUBSIDIARIES CONDENSED BALANCE
SHEET AND CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 5,126
<SECURITIES> 0
<RECEIVABLES> 91,808
<ALLOWANCES> 5,118
<INVENTORY> 108,475
<CURRENT-ASSETS> 234,658
<PP&E> 51,655
<DEPRECIATION> 29,636
<TOTAL-ASSETS> 344,302
<CURRENT-LIABILITIES> 93,652
<BONDS> 109,412
0
0
<COMMON> 530
<OTHER-SE> 19,110
<TOTAL-LIABILITY-AND-EQUITY> 344,302
<SALES> 255,575
<TOTAL-REVENUES> 66,199
<CGS> 200,118
<TOTAL-COSTS> 200,118
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 339
<INTEREST-EXPENSE> 7,812
<INCOME-PRETAX> 387
<INCOME-TAX> (2,365)
<INCOME-CONTINUING> (1,978)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,978)
<EPS-PRIMARY> (.37)
<EPS-DILUTED> (.37)
</TABLE>
