<PAGE> 1
UNITED STATES
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 [NO FEE REQUIRED, EFFECTIVE OCTOBER 7, 1996].
For the Fiscal Year Ended
DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-9209
DECEMBER 31, 1996
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 21, 1997, the Registrant had 5,287,123 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 $2,800,000 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).
<PAGE> 2
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement in connection with its
Annual Meeting of Shareholders scheduled May 20, 1997, are incorporated by
reference into Part III hereof, as more specifically described herein.
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<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE NO.
PART I
<S> <C> <C>
Item 1. Business...........................................................................................1
Item 2. Properties........................................................................................18
Item 3. Legal Proceedings.................................................................................19
Item 4. Submission of Matters To a Vote of Security-Holders...............................................19
PART II
Item 5. Market For Registrant's Common Equity
and Related Stockholder Matters..............................................................19
Item 6. Selected Financial Data...........................................................................21
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations..........................................................23
Item 8. Financial Statements and Supplementary Data.......................................................38
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.......................................................38
PART III
Item 10. Directors and Executive Officers of the Registrant................................................38
Item 11. Executive Compensation............................................................................38
Item 12. Security Ownership of Certain Beneficial Owners and Management....................................38
Item 13. Certain Relationships and Related Transactions....................................................38
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K..................................39
(a) List of Financial Statements and Schedules Filed as a Part of this Report....................39
(b) Reports on Form 8-K - None...................................................................39
(c) Exhibits.....................................................................................39
SIGNATURES.......................................................................................................42
FINANCIAL STATEMENTS..........................................................................................F - 1
FINANCIAL STATEMENT SCHEDULES.................................................................................S - 1
</TABLE>
<PAGE> 4
PART I
ITEM 1. BUSINESS.
Riverside Group, Inc., a Florida corporation formed in 1965
("Riverside" also "Parent Company"), is a holding company engaged through its
52%-owned subsidiary Wickes Lumber Company ("Wickes") in the retailing and
distribution of building materials.
The Company also provides financial services related to the operations
of Wickes, engages in the sale of its real estate investments, and owns a
non-controlling interest in a financial services holding company that is the
successor of the Company's former life insurance operations.
Unless the context indicates otherwise, the term "the Company" as used
herein refers to Riverside and its subsidiaries.
HISTORICAL DEVELOPMENT
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 public common stock offering, the Company increased its
beneficial ownership of Wickes' Common Stock to approximately 36%. On June 20,
1996, Riverside purchased from Wickes 2,000,000 newly-issued shares of Wickes'
Common Stock for $10,000,000 in cash. As a result of this transaction, Riverside
beneficially owns 4,217,288 shares of Wickes' Common Stock, which constitutes
52% of Wickes' outstanding voting and non-voting common stock. See "Building
Materials."
During the first half of 1996, 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. On June 6, 1996,
Riverside completed a merger of its remaining life insurance operations with
Circle Investors, Inc. ("Circle") that resulted in the ownership by Riverside of
a non-controlling interest in Circle. See "Life Insurance Operations - Circle
Merger; Investment in Circle."
From 1986 until 1993, the Company also conducted property and casualty
insurance operations through its Dependable Insurance Company, Inc.
("Dependable") subsidiary. 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.
LINES OF BUSINESS
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. Wickes' operations are consolidated with those
<PAGE> 5
of the Company and its subsidiaries for the third and fourth quarters of 1996
and accounted for under the equity method for prior periods. Accordingly, the
following table presents only revenues, income and identifiable assets of
Wickes' at the net amount recorded on the Company's books for the years ending
1995 and 1994. "Other" includes real estate, parent company, financial services,
and discontinued operations and all eliminating entries for inter-company
transactions.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------
1996 1995 1994
---- ---- ----
(in thousands)
<S> <C> <C> <C>
REVENUES:
Building Materials $471,515 $ 492 $ 725
Life Insurance 9,800 25,245 37,079
Other 2,342 (1,688) (294)
-------- --------- --------
Total $483,657 $ 24,069 $ 37,510
======== ========= ========
INCOME FROM CONTINUING
OPERATIONS (BEFORE TAXES):
Building Materials $ 5,058 $ (1,408) $ (416)
Life Insurance 4,944 (10,530) 2,372
Other (4,803) (1,968) 103
------- ---------- --------
Total $ 5,199 $ (13,906) $ 2,059
======== ========== ========
IDENTIFIABLE ASSETS:
Building Materials $281,398 $ 11,358 $ 14,996
Life Insurance 5,661 297,804 330,083
Other 26,771 (8,437) 11,631
-------- ---------- --------
Total $313,830 $ 300,725 $356,710
======== ========== ========
</TABLE>
BUILDING MATERIALS
The Company retails and distributes building materials through its
52%-owned subsidiary, Wickes.
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,
1996 (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 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 twelve component manufacturing facilities that produce
and distribute pre-hung door units, roof and floor trusses, framed wall panels,
and pre-assembled windows.
2
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BACKGROUND
Wickes was formed as a Delaware corporation in 1987 and in April 1988
completed the acquisition (the "1988 Acquisition") of an operating division that
had commenced in 1952 with a single building center. Upon completion of the 1988
Acquisition, Wickes operations consisted of 223 building centers and 10
component manufacturing facilities. From 1988 through 1993, Wickes reduced the
number of its building centers to 124 and the number of its component
manufacturing facilities 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, restructured its
previously existing classes of capital stock, and completed the initial public
offering of 2,800,000 shares of its common stock.
In 1994, Wickes commenced an acquisition program which resulted in the
acquisition of fifteen building centers and five component manufacturing
facilities during 1994 and 1995, principally through the acquisition of the
Gerrity Lumber business. For further information, see Note 3 of Notes to
Consolidated Financial Statements included elsewhere herein.
During the fourth quarter of 1995 Wickes committed to a plan (the "1995
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 operational changes contemplated by this plan were begun
on December 29, 1995. Since that date, Wickes has consolidated or closed 18
building centers and has identified additional building centers for
consolidation or closing. The plan also included the modification and extension
of the Wickes' bank revolving credit agreement, which was completed on March
12, 1996, and the private sale of 2 million newly-issued shares of Wickes's
Common Stock for $10 million, which occurred on June 20, 1996. In connection
with the 1995 Plan, and other unusual items, Wickes recorded a $17.8 million
charge in the fourth quarter of 1995. (See Note 2 of Notes to Consolidated
Financial Statements included elsewhere herein).
INDUSTRY OVERVIEW
According to the Home Improvement Research Institute ("HIRI"), sales of
home improvement products (defined as lumber, building materials, hardware,
paint, plumbing, electrical, tools, floor coverings, glass, wallpaper, and lawn
and garden products) associated with the maintenance and repair of residential
housing and new home construction were estimated to be $203.2 billion in 1996.
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 1996.
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.
3
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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 totaled 1.20
million in 1992, 1.29 million in 1993, and 1.46 million in 1994, and $1.35
million in 1995. In 1996, housing starts increased by 8.8% to 1.47 million. The
increase in 1996 housing starts in Wickes' primary markets, the Midwest and
Northeast, were approximately 11.2% and 10.6%, respectively. Nationally, single
family housing starts, which generate the majority of Wickes's sales to building
professionals, experienced an increase of 7.8% in 1996, from 1.07 million starts
in 1995 to 1.16 million starts in 1996. The Blue Chip Economic Indicators
Consensus Forecast dated March 10, 1997, projects 1997 housing starts to be 1.39
million, or a decrease of approximately 5.4%.
Repair and remodeling expenditures tend to be less cyclical than new
residential construction. 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 HIRI
estimates the sales of home improvement products to repair and remodeling
professionals represented $40.3 billion, or approximately 20% of total 1996
sales of the building material supply industry, while direct sales to DIYers
amounted to $95.1 billion.
BUSINESS STRATEGY
GENERAL
Wickes' strategic goal is to become the preferred supplier of building
materials and services to its target customers: home builders, commercial
builders, and trade contractors and remodelers.
Wickes has focused on improving its product lines, staffing,
facilities, purchasing, sales and marketing, as well as other aspects of its
operations to fit a new operational model based on a lower cost structure,
improved asset turnover, and more efficient service to target customers. The
shift to improve upon Wickes's traditional "dual yard" format was necessary to
remain profitable in the high volume, lower margin professional construction
market.
INCREASED MARKET SHARE IN EXISTING MARKETS
In order to increase sales force productivity and increase market share
in existing markets, Wickes has commenced several management and sales
initiatives. To improve penetration in its current markets, Wickes is broadening
and deepening the non-wood inventory selection carried at its building centers
and establishing more competitive pricing on these items. In addition, Wickes is
significantly increasing the number of its outside sales representatives
("OSR's") through the addition of quality experienced OSR's in most of its
building centers. Other initiatives, such as a tool rental program and expanded
inventory for R&R contractors in many locations, are aimed at increasing sales
through improved product and service offerings. Also, Wickes is significantly
expanding its management and sales training programs.
4
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INCREASED FOCUS AND STRATEGIC ALLIANCES WITH TOP BUILDERS
In 1996 Wickes established a special management team to focus on the
top 400 builders in the U.S. The goal was to increase Wickes' success with
medium-sized, regional and top national builders and to explore strategic
alliances with these builders where mutually beneficial. The efforts of this
team have led to increased sales to twelve major builders. In addition, Wickes
is involved in serious discussions with several top builders to create strategic
alliances that leverage Wickes' size, number of locations, and significant
resources on both a regional and national basis.
LIMITED SKU FACILITIES
In order to meet the specific needs of large key accounts in markets
Wickes does not currently service, Wickes has developed a model for a low cost
"Limited SKU Facility". Limited SKU Facilities are designed to be established in
conjunction with a builder engaged in a major development to provide the
specific inventory, equipment, logistics, and services to meet the customer's
special needs and specifications. Limited SKU facilities are designed to be
profitable at lower gross margins and may include some form of component
manufacturing. Two facilities have already opened in 1997, two others are
currently being assembled, and several others are in early stages of planning.
Because of the need to supply only the specific service needs of a
single customer, it is expected that a Limited SKU Facility can be operational
usually within 90 days of reaching agreement with the customer. Once operating,
the facility will look to expand its services to other customers within its
market. Each facility will be designed to allow for ease of exit at the end of
the agreement, if necessary, or the ability to grow into a full - fledged
building center or component manufacturing operation. Initial reaction to this
concept from large national and regional builders has been very favorable.
EXPANDED COMPONENT MANUFACTURING
Wickes owns and operates twelve 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. These operations
supply approximately 56% of the pre-hung interior doors, 69% of the metal
exterior doors, 42% of the roof and floor truss systems and all the wall panel
systems sold by Wickes in 1996. 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.
In addition to expanding the production capacity at existing
facilities, Wickes is currently working on several projects to meet the needs of
specific customers in markets not currently serviced by Wickes' manufacturing
operations. These projects vary from low cost start-up operations to joint
ventures with existing experienced manufacturers.
5
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WICKES DIRECT
In an effort to increase its business to non-traditional customers and
out-of-market trade areas, Wickes formed the Commercial Sales Division in 1993
and added a national builder accounts sales team in 1996. In late 1996, these
two groups were combined to form "Wickes Direct", Wickes' wholesale division.
This division focuses on large volume orders, from both commercial and
residential builders, much of which is to be shipped directly from the
manufacturer to the customer's job-site. A team of ten key account managers and
twelve independent sales representatives has been assembled to work directly
with customers to provide products and services. In addition to lumber and
building materials, this division provides design, estimating, logistics, and
material delivery services to large customers anywhere in the world, all
accomplished without the need for a physical facility close to the customer.
INCREASED USE OF SALES TECHNOLOGY
Wickes is progressive in its use of the Internet to expand its
business. Wickes maintains a Web site, at http://www.wickes.com/, which provides
product and service information, together with links to numerous suppliers and
customers, a listing of all building centers and management and sales staff,
information about Wickes, and the ability to leave questions or requests for
quotes. At the National Association of Home Builders show held in Houston in
January 1997, Wickes introduced a new site designed to help maximize the
customer's efficiency by offering Wickes' services 24 hours a day. This site
allows a customer, through a secure link on the Internet, the ability to check
pricing, place orders, request quotes, or check billing information. It is
currently being implemented with select customers.
Wickes is also expanding its use of the Internet and telemarketing to
identify sales opportunities as they become available, rather than waiting until
they appear in traditional industry sources.
IMPROVEMENT OF WICKES' BALANCE SHEET
Wickes has taken numerous steps to strengthen its balance sheet,
including the improvement of working capital management, the reduction of under
performing and non-operating assets, the modification of its revolving credit
agreement and the sale of newly-issued stock. These steps, along with other
on-going efforts have improved, and are expected to further improve, Wickes'
debt position and increase its return on assets.
During the fourth quarter of 1995, Wickes committed to and began
implementing the 1995 Plan, which was designed 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. During 1996 and 1997, Wickes continued
executing the 1995 Plan. Through February 28, 1997 Wickes has consolidated or
closed 18 building centers. See Note 2 of Notes to Consolidated Financial
Statements included elsewhere herein.
During the first and second quarters of 1996, Wickes implemented a plan to
reduce the number of under utilized vehicles and equipment. As a result of this
program, the number of delivery vehicles and forklifts was reduced by
approximately 350 units, while still providing customers with the high level of
delivery service to which they are accustomed.
6
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The 1995 Plan also included the amendment and restatement of Wickes'
revolving credit agreement, which was completed March 12, 1996. See Note 9 of
"Notes to Consolidated Financial Statements" included elsewhere herein. A second
amendment and restatement of this credit agreement, which would include among
other things (i) extension of the life of the facility until March, 2001, (ii)
75 basis point reductions in the interest rate premiums over London InterBank
Offered Rate ("LIBOR") and over prime, (iii) modifications to certain financial
covenants, and (iv) a provision for further interest rate premium reductions if
certain performance levels are achieved, is expected to be completed in March or
early April 1997. Also, on June 20, 1996, Wickes sold 2,000,000 newly-issued
shares of its Common Stock to Riverside, Wickes' largest stockholder, for $10
million in cash. See Note 3 of Notes to Consolidated Financial Statements
included elsewhere herein.
MARKETS
Wickes has generally located its building centers in less populous areas,
with 81% 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 36
10,000-25,000 24
25,000-50,000 30
50,000-100,000 16
100,000 and over 4
---
Total 110
===
</TABLE>
In its more densely populated markets, Wickes sells primarily to building
professionals, while in smaller markets, Wickes' building centers generally sell
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
its 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 28, 1997:
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<TABLE>
<CAPTION>
Midwest Northeast South
- ----------------------------- ---------------------------- -------------------------
Number of Number of Number of
Building Building Building
State Centers State Centers State Centers
- ------------- ----------- ------------- ----------- -------- --------
<S> <C> <C> <C>
Michigan 30 New York 8 Alabama 3
Wisconsin 15 Pennsylvania 7 Kentucky 3
Indiana 11 Maine 2 Texas 2
Ohio 5 Connecticut 3 Louisiana 1
Illinois 5 New Hampshire 2 Mississippi 2
Iowa 2 New Jersey 1 Tennessee 1
Colorado 2 Massachusetts 1 Georgia 1
-- Maryland 1 North Carolina 1
-- Florida 1
--
Total 70 Total 25 Total 15
== == ==
</TABLE>
During the first two months of 1997, Wickes opened two new building
centers, in Aurora, Illinois and Colorado Springs, Colorado. Both of these
facilities were initially established as Limited SKU Facilities to meet the
specific needs of an existing customer, but with the intention and flexibility
to expand the volume at these operations well beyond these initial needs.
During 1996, Wickes opened a new component manufacturing facility in
Indiana and consolidated two building centers into other existing centers.
The following table reconciles the number of building centers and
component manufacturing facilities operated by Wickes at December 31, 1994,
December 30, 1995, December 28, 1996 and February 28, 1997.
<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
=== ===
Expansion - 1
Consolidations (2) -
--- ---
As of December 28, 1996 108 12
=== ===
Expansion 2 -
As of February 28, 1997 110 12
=== ===
</TABLE>
8
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CUSTOMERS
Wickes has a broad base of customers, with no single customer accounting
for more than 0.5% of net sales in 1996. In 1996, 87% (compared with 82% in
1995) of Wickes' sales were on trade credit, with the remaining 13% as cash and
credit card transactions.
HOME BUILDERS
Wickes' primary customers are single-family home builders. In 1996, all
home builder customers accounted for 57% of Wickes' sales, compared with 54% in
1995. The majority of Wickes' sales to these customers are of high-volume
commodity items, such as lumber and building material. 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 a program developed specifically to serve the
unique needs of commercial and multi-family contractors. In 1996 and early 1997
the responsibility for serving this customer segment was transferred to Wickes'
building center operations and the newly formed Wickes Direct sales division. In
1996, sales to these customers accounted for more than 16% of Wickes' sales,
compared with 14% of Wickes' sales in 1995.
REPAIR & REMODELERS
In 1996, R&R customers accounted for approximately 12% of Wickes' sales,
compared with 14% in 1995. 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 15% of
Wickes' sales in 1996, compared with 18% in 1995. 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.
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.
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BUILDING PROFESSIONAL
Wickes 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' approximately 370 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.
In January 1997 a new sales and marketing division, Wickes Direct, was
launched targeting sales to some of the nation's largest single and multi-family
residential builders, as well as commercial construction contractors. Wickes
Direct employs numerous non-traditional, as well as traditional, selling
techniques to reach customers generally not serviced by Wickes' existing
building centers. Positioned as the "wholesale division of Wickes Lumber",
Wickes Direct pursues sales through ten key account managers and approximately
twelve independent sales representatives throughout the country. Shipments to
Wickes Direct accounts are primarily made direct from the supplier or
manufacturer and in many cases will not require the support of a physical Wickes
Lumber facility.
Wickes currently employs 147 specialty salespeople in its building centers
who provide expert advice to customers in project design, product selection and
applications. A staff of 64 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. In many of its building centers,
Wickes maintains separate R&R offices. Wickes currently has kitchen and bath
departments in all of its building centers and has a staff of 72 kitchen and
bath specialists. Wickes also employs 11 specialists in other departments.
Wickes extends credit, generally due on the 10th day of the month
following the sale, to qualified and approved contractors. Approximately 87% of
Wickes' sales during 1996 were on credit, with the remaining 13% consisting of
cash or credit card sales, including approximately 1% of sales on Wickes'
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<PAGE> 14
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 .1% of total credit sales in 1996, compared with .8% in 1995 and
.3% in both 1994 and 1993. Much of the increase in 1995 was attributable to the
conversion of accounts at the Gerrity Lumber building centers acquired in 1994
to Wickes' credit practices.
Wickes owns and leases a fleet of 687 delivery vehicles as of February 28,
1997, to provide job-site deliveries of building materials scheduled to
coordinate with project progress, including 55 specialized delivery trucks
equipped for roof-top or second story delivery and 85 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 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 has built and continues to expand its Internet site on the world
wide web. This resource provides information about Wickes' services and
products, facilitates doing business with customers, allows customers to pull up
their own transactional information, and features extensive links to suppliers
and other industry references. The home page can be found at the Internet
address: http://www.wickes.com/. Wickes has also begun implementation of a
client/server data warehouse system to upgrade its central information
processing needs.
Wickes advertises in trade journals and produces specialized direct mail
promotional materials designed to attract specific target customers. 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, sponsors or participates in numerous
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.
11
<PAGE> 15
While Wickes' product offerings in hardlines are generally more limited
than its consumer-oriented competitors, Wickes stocks a larger selection of
commodity products and offers a special order program for custom or specialty
products. Wickes emphasizes project packages, which include all materials and
detailed instructions for the assembly of the larger projects frequently
undertaken by project DIYers.
PRODUCTS
Wickes stocks a wide variety of building products, totaling approximately
49,000 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 5,200
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,
moldings, 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 52%, 36% and 12%, respectively, of Wickes' sales for 1996
and 51%, 36% and 13% of sales for 1995.
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 1996, approximately 30% of Wickes'
sales were of special order items, compared with 32% in 1995.
Wickes owns and operates twelve 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 95 of Wickes' building centers by supplying
approximately 56% of the pre-hung interior doors and 69% of the metal exterior
doors sold by Wickes. The truss manufacturing operations supplied 42 building
centers with approximately 42% of the total roof and floor truss systems sold by
Wickes in 1996 and 17 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.
SUPPLIERS AND PURCHASING
Wickes purchases its products from numerous vendors. The great majority of
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 42% of the roof and
floor trusses, 56% of the pre-hung interior doors, and 69% of the metal exterior
doors sold in its building centers. No single vendor accounted for as much as 5%
of Wickes' purchases in 1996, 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.
12
<PAGE> 16
The great majority of Wickes' commodity purchases are made on the basis of
individual purchase orders rather than supply contracts. In certain product
lines, though, Wickes has negotiated some advantageous volume pricing agreements
for a portion of the product line's purchases. Because approximately 33% 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 63 of its building centers enabling
suppliers 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
Wickes owns 46% of a company, Riverside International LLC, engaged in
logging, sawmill and other lumber-related activities in Russia, principally in
the Archangel region. During 1996, two investment funds invested $5 million each
in this company and each received a 25% equity interest, with Wickes retaining
46% interest and Riverside International LLC's management receiving the balance
of the equity. All of the funds received in this transaction were retained by
Riverside International LLC for its own operations.
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. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations."
13
<PAGE> 17
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 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 most recent available, the average product mix of
consumer-oriented retailers consist of 14% wood products, 11% building products
and 75% hardlines, compared with 52% , 36%, and 12%, respectively, for Wickes in
1996.
ENVIRONMENTAL AND PRODUCT LIABILITY MATTERS
Many of the building center facilities presently and formerly operated by
Wickes contained underground petroleum storage tanks. Other than tanks at one
acquired facility, recently installed in compliance with modern standards,
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 $1.0 million 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."
14
<PAGE> 18
TRADEMARKS AND PATENTS
Wickes has no material patents, trademarks, licenses, franchises, or
concessions other than the name "Wickes Lumber" and the "Flying W" trademark.
LIFE INSURANCE OPERATIONS
GENERAL
Prior to the completion of the Circle Merger (as defined below) on June 6,
1996, the Company conducted life insurance operations through its American
Founders and Aztec subsidiaries. Effective with completion of the Circle Merger,
the Company ceased to be engaged directly or indirectly in life insurance
operations. The Company accounts for its investment in Circle on the equity
method. As discussed below, the Company continues to hold an investment in
Circle.
HISTORICAL OPERATIONS
The Company historically distributed its products through general agents,
direct response marketing and a financial institution marketing force. In 1993,
the Company eliminated its financial institution marketing force in order to
reduce operating costs. The great majority of the Company's life insurance sales
in recent years had been generated through this distribution method.
American Founders offered a variety of products, including its universal,
term mortgage protection and annuity products. 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 marketing operations
ceased with the sale of its business to another insurer in December 1994.
CIRCLE MERGER; INVESTMENT IN CIRCLE
On June 6, 1996, the Company merged (the "Circle Merger") its life
insurance operations with those of Circle Investors, Inc. ("Circle"). Circle is
a privately-held financial services company located in Indianapolis, Indiana. In
the Circle Merger, the Company's former life insurance subsidiaries became
wholly-owned by Circle, and the Company received $35,000,000 in cash, 2,267,000
newly-issued shares of Circle's common stock (the "Circle Common Shares"),
without par value, and 3,600 newly-issued shares of Circle's Series C Preferred
Stock (the "Circle Preferred Shares") with an aggregate liquidation preference
of $3,600,000.
Also, in connection with the Circle Merger, 951,486 shares of Wickes
Common Stock and certain other assets formerly held by American Founders were
distributed to the Company. Also, the Company purchased from American Founders
certain real estate with a net appraised value of approximately $19,775,000 for
$1,977,500 in cash and seven-year non recourse promissory notes in the aggregate
principal amount of $17,797,500. See Note 9 of Notes to the Consolidated
Financial Statements included elsewhere herein.
For a description of a definitive agreement entered into by Circle
pursuant to which the Circle Common Shares and the Circle Preferred Shares are
to be converted into, at the Company's election, either 5,686,000 shares of
common stock of an unrelated third party or $5,345,000, see "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
15
<PAGE> 19
OTHER OPERATIONS
FINANCIAL SERVICES TO BUILDERS
MORTGAGE LENDING
The Company's wholly-owned subsidiary, Wickes Mortgage Lending, Inc.
("WML"), markets construction and permanent mortgages to the professional
builder customers of Wickes, as well as the customers of theses builders. WML
also markets permanent and construction-permanent mortgage loans to consumers
directly through referrals and from realtors and builders. Prior to the Circle
Merger, WML operated as a division of the Company's life insurance investment
operations. During 1995, WML opened two offices and began operations on a test
basis.
During 1996, WML opened four branch offices (Jacksonville, Florida;
South Bend, Indiana; Detroit, Michigan; and Pensacola, Florida) to add to its
existing two branch offices (Indianapolis, Indiana and Birmingham, Alabama)
opened during 1995. At the end of 1996, WML employed 20 persons (13 at its home
office and seven loan officers located at its branch offices).
WML has a $23 million warehouse line of credit from Liberty Savings
Bank for funding its construction and permanent loans. This facility replaced
the $6 million facility previously in effect. $20 million of this facility is
available for construction loans and $3 million is available for permanent
loans. See Note 9 of Notes to Consolidated Financial Statements included
elsewhere herein. WML retains construction loans for interest and fee income,
and is repaid by the borrower's proceeds from the sale of the completed home.
Permanent and construction-permanent loans are sold, shortly after the date of
such loans for premiums and service release fees to outside investors under
existing agreements. No customer accounted for 10% or more of revenues during
1996.
WML markets loan products insured by FHA and guaranteed by VA under
sponsored corporate marketing agreements with several approved lenders. As a HUD
and VA approved lender, WML's operations are subject to the rules and
regulations promulgated by HUD and VA.
WML markets a "one-time-closing" construction-permanent loan to
consumers which WML simultaneously sells at closing to Liberty Lending Services,
Inc. under a Correspondent Agreement with Liberty. In a separate Mortgage
Servicing Agreement with Liberty, WML agrees to administer the loans for Liberty
during the construction phase of the loans. WML receives a fee from the investor
for the sale of the loan, a portion of which is deferred until the completion of
the construction of the home.
During 1996, WML entered into a Mortgage Marketing Agreement with
Wickes in which Wickes granted to WML a sublicense to use its trademarks for
purposes contained in the agreement to jointly market a mortgage lending program
to and through Wickes' builder customers. Wickes also agreed to reimburse WML
for a portion of its start up costs.
WML competes primarily with banks and savings institutions in the
origination of construction loans to builders. The mix of competition between
national banks, state and community banks and savings institutions varies from
market to market. Predominantly, WML's builder customer is a small builder who
builds less than 15 homes per year. Because of this size, typically WML
competes more directly with the smaller state and community banks and savings
institutions, though the pricing and credit requirements of these institutions
are affected by those of the larger national banks.
16
<PAGE> 20
WML typically competes with the mortgage bank subsidiaries of national
banks, large mortgage bankers, moderate size mortgage lenders and mortgage
brokers, in the origination of permanent loans to consumers.
As of December 31, 1996, included in construction and permanent loans
were $1,135,000 of permanent loans and $3,044,000 of construction loans. The
unused amount of construction loan commitments at December 31, 1996, totaled
$3,329,000. The Company's commitment to fund the unused balance is contingent
upon the borrower's successful completion of certain specified conditions.
Approximately 65% of the construction loans outstanding at December 31, 1996,
were made with respect to homes for which no purchase agreement existed.
INSURANCE SERVICES
Wickes Financial Services Center, Inc. ("WFSC") is a Delaware
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 in the company. The Company subsequently restructured these
operations with WFSC operating as a managing general agent ("MGA"). During the
fourth quarter of 1996, the Company discontinued its MGA operations and entered
into a marketing arrangement with its former sales manager that provides the
same insurance products to Wickes' builder customers.
During 1996 and 1995, WFSC's operations incurred pre-tax losses of
approximately $.5 million and $.7 million, respectively.
REAL ESTATE OPERATIONS
As of December 31, 1996, the Company's investment in real estate
includes $16,389,000 of land held for sale, $400,000 of commercial rental
property, and $65,000 of investments in real estate joint ventures.
LAND HELD FOR SALE
Included in the investment in land held for sale is approximately 233
acres of land located within Highlands Park in Smyrna, Georgia, and 28 acres of
land located within Belfort Park in Jacksonville, Florida, referred to as
"Highlands" and "Belfort", respectively. In June 1996, in connection with the
Circle Merger, the Company purchased these properties from American Founders.
HIGHLANDS. Highlands originally consisted of 1,000 acres and has been
an active development since 1983 with approximately 767 acres being sold over
the last 12 years. Highlands is a planned industrial development just outside of
Atlanta, Georgia. The land is subdivided into numerous parcels planned for
commercial, office and light industrial use.
In its current state, the property has road frontage and access to
County water, sewer, electrical, gas and telephone. In addition, many of the
properties have been graded. All remaining property can be sold in its existing
condition without any additional capital outlay.
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<PAGE> 21
During 1996, the Company completed the sale of 25 acres for
approximately $2,600,000. Currently, 89 acres are under contract for sale for an
aggregate purchase price of approximately $5.3 million.
BELFORT. Belfort consists of approximately 28 acres of vacant and
unimproved commercial land. 21 of the 28 acre parcel are designated for office
use. The Company has entered into a letter of intent to sell these 21 acres for
approximately $4.0 million.
EMPLOYEES
As of February 28, 1997, the Company had 46 full-time employees
(excluding those of Wickes). As of the same date, Wickes had 3,042 employees, of
whom 2,886 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.
Riverside's executive offices are in leased space in Jacksonville,
Florida. In addition, WML leases five offices in various states. See "Item 1.
Business - Other Operations - Financial Services to Builders."
Wickes' 110 building centers are located in 24 states, with 70 in the
Midwest, 25 in the Northeast and 15 in the South. See "Item 1. Business -
Building Materials - Markets." Wickes believes that its facilities generally are
in good condition and will meet Wickes' needs in the foreseeable future.
Wickes' building centers generally consist of a showroom averaging
9,700 square feet and covered storage averaging 42,800 square feet. Wickes'
building centers are situated on properties ranging from 1.3 to 40.0 acres and
averaging 10.2 acres. Wickes also operates twelve component manufacturing
facilities which have an average of 37,700 square feet under roof on 7.8 acres.
Wickes owns 96 of its building centers and 92 of the sites on which
such building centers are located. The remaining 14 building centers and
eighteen sites are leased. As of December 28, 1996, Wickes also held for sale
the assets of eight closed building centers and three other properties with an
aggregate book value of $11.1 million. In addition to its building centers,
Wickes operates twelve component manufacturing plants. Six of these plants are
located on building center sites. Of the remaining six plants, four are on
owned sites and two are on leased properties.
Wickes also owns and leases a large fleet of trucks and other vehicles,
including vehicles specialized for the delivery of certain of Wickes' products.
As of February 28, 1997, the fleet included approximately 96 heavy duty trucks,
55 of which provide roof-top or second story delivery, 506 medium duty trucks,
433 light duty trucks and automobiles, 531 forklifts, and 85 specialized
millwork delivery vehicles.
Wickes owns its corporate headquarters, located at 706 North Deerpath
Drive in Vernon Hills, Illinois.
18
<PAGE> 22
ITEM 3. LEGAL PROCEEDINGS.
On November 3, 1995, a complaint styled Morris Wolfson v. J. Steven
Wilson, Kenneth M. Kirschner, Albert Ernest, Jr., Claudia B. Slacik, Jon F.
Hanson, Robert E. Mulcahy, Frederick H. Schultz, Wickes Lumber Company and
Riverside Group, Inc. was filed in the Court of Chancery of the State of
Delaware in and for New Castle County (C.A. No. 14678). As amended, this
complaint alleges, among other things, that the sale by Wickes of 2 million
newly-issued shares of Wickes Common Stock to Riverside was unfair and
constituted a waste of assets and that Wickes' directors in connection with the
transaction breached their fiduciary duties. The amended complaint, among other
things, seeks on behalf of a purported class of Wickes' shareholders equitable
relief or to obtain damages with respect to the transaction. See "Item 1.
Business - Building Materials - Background" and Note 10 of Notes to Consolidated
Financial Statements included elsewhere herein.
As a result of the settlement of certain claims between the plaintiffs
and other parties peripheral to the dispute included in FynSyn Capital
Corporation and Wickes Lumber Investment Partnership vs. Bankers Trust Company,
et al., the primary remaining issue in the dispute is Wickes' affirmative claim
for attorney's fees from the plaintiffs.
Wickes is one of many defendants in approximately 110 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. Each of the
plaintiffs in these actions are represented by one of two law firms. Wickes is
aggressively defending these actions and does not believe that these actions
will have a material adverse effect on Wickes.
Wickes and the Company are 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.
The Company's assessment of the matters described in this Item 3 and
other forward-looking statements ("Forward-Looking Statements") in this report
are made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995 and are inherently subject to uncertainty. The
outcome of the matters described in this Item 3 may differ from the Company's
assessments 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, Wickes'
ability to prevail against its insurers with respect to coverage issues to date,
the financial ability of those insurers and other persons from whom Wickes may
be entitled to indemnity, and the unpredictability of matters in litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
None.
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<PAGE> 23
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
20, 1997, there were 5,287,123 shares outstanding held by approximately 1,790
shareholders of record.
The following table sets forth, for the periods indicated, the high and
low last 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>
Calendar Quarter
1995:
First Quarter..........................................$6.750 $5.250
Second Quarter......................................... 6.500 5.250
Third Quarter.......................................... 6.250 5.000
Fourth Quarter......................................... 5.250 3.375
1996:
First Quarter..........................................$4.000 $3.000
Second Quarter......................................... 3.875 2.875
Third Quarter.......................................... 3.500 2.875
Fourth Quarter......................................... 3.000 1.563
</TABLE>
On October 1, 1996, the Company declared a cash dividend of $.10 per
share, payable on October 31, 1996, to shareholders of its common stock of
record on October 15, 1996. The Company did not pay any other cash dividends on
its common stock during the last two fiscal years. The Company will continue to
evaluate the option of future payments of dividends but does not anticipate
declaring any dividends at least until its short-term liquidity improves. See
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations." 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 contractual
requirements, earnings, and such other factors as the Board of Directors may
deem relevant.
The Company is dependent on dividends from its subsidiaries to pay cash
dividends to its shareholders. Wickes has not declared or paid any dividends on
common stock in the past three years and has no present intention to pay cash
dividends on its common stock in the foreseeable future. Wickes' revolving
credit facility prohibits cash dividends on Wickes Common Stock, and the trust
indenture related to Wickes' 11-5/8% senior subordinated notes restricts cash
dividends on Wickes' Common Stock. See "Item 7, Management's Discussion and
Analysis of Financial Condition and Results of Operations."
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<PAGE> 24
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 thise 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)
--------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Sales and service revenues (1) $ 467,254 $ -- $ -- $ -- $ --
Insurance premiums and annuity
considerations (3) 3,224 8,298 18,657 21,704 23,608
Net investment income 6,325 14,492 17,523 20,735 25,076
Net realized investment gains (losses) 1,662 (234) (182) 4,147 7,334
Other operating income 5,192 1,513 1,512 5,989 2,075
Total revenues (1) 478,465 22,556 35,998 46,586 56,018
Equity in earnings (losses) of
Wickes Lumber Company (1)(2) (1,714) (5,849) 8,274 1,525 --
Minority interest (1) (2,318) -- -- -- --
Reorganization of life insurance
subsidiaries (2) -- (9,062) -- -- --
Earnings (loss) from continuing operations
before extraordinary items and cumulative
effect of change in accounting principles (406) (17,845) 8,850 4,043 5,011
Loss from discontinued operations (4) -- (1,086) (4,405) (1,988) (12,583)
Gain on disposal of discontinued operations 2,731 -- -- --
Extraordinary item (5) -- -- -- -- 5,319
Cumulative effect of change in accounting
principles (6) -- -- -- 596 2,178
----------- ----------- ----------- ----------- -----------
Net earnings (loss) $ (406) $ (16,200) $ 4,445 $ 2,651 $ (75)
----------- ----------- ----------- ----------- -----------
Earnings (loss) per common share, after
deducting preferred stock dividends and
accretion:
Earnings (loss) from continuing operations
before extraordinary items and cumulative
effect of change in accounting principles (0.08) (3.38) 1.61 0.50 0.70
Loss from discontinued operations -- (0.21) (0.82) (0.37) (2.25)
Gain on disposal of discontinued operations -- 0.52 -- -- --
Extraordinary item -- -- -- -- 0.95
Cumulative effect of change in accounting
principles -- -- -- 0.11 0.39
----------- ----------- ----------- ----------- -----------
Net earnings (loss) per share (0.08) (3.07) 0.79 0.24 (0.21)
----------- ----------- ----------- ----------- -----------
Balance Sheet data (at period end):
Total investments $ 22,199 $ 233,441 $ 258,971 $ 306,942 $ 352,621
Total assets 313,830 300,725 353,370 390,731 512,457
Total debt and redeemable preferred
stock 208,419 31,215 45,198 49,949 58,131
Total common stockholders' equity $ 20,775 $ 26,056 $ 29,103 $ 38,397 $ 35,871
Common shares outstanding 5,296,123 5,311,123 5,465,781 5,294,930 5,594,930
Book value per common share $ 3.92 $ 4.91 $ 5.32 $ 7.25 $ 6.41
Cash dividend declared per common share $ 0.10 $ -- -- -- $ --
==============================================================================================================================
</TABLE>
21
<PAGE> 25
(1) The Company accounted for its investment in Wickes on the equity method
through June 30, 1996 and on a consolidated basis thereafter.
(2) In 1995, Wickes recorded a $17.8 million charge relating to a plan to
reduce the number of operating building centers and other unusual
items. In 1994, Wickes recorded $4.2 million of tax benefits related to
the renewal of a deferred tax valuation allowance established in a
prior year.
(3) The Company discontinued active life insurance marketing operations in
1992. At the end of 1994, Aztec disposed of its insurance in force and
ceased active operations. In June 1996, the Company merged its
remaining life insurance operations with those of Circle; thereafter,
the Company accounted for its investment in Circle on the equity
method.
(4) During 1992, Dependable incurred losses and assessments of $14.7
million (pre-tax), net of reinsurance, as a result of Hurricane Andrew.
(5) Extraordinary gain on early retirement of debt.
(6) Cumulative effect of adopting SFAS No. 109 "Accounting for Income
Taxes."
22
<PAGE> 26
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 contained elsewhere herein. Since
the operations of Wickes are consolidated with those of the Company and its
subsidiaries for the third and fourth quarters 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 PARENT COMPANY
The Parent 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 debt instruments), consist primarily of
real estate sales and the operations of WML. Although revenues are increasing
for WML the Company currently forecasts that these operations will continue to
produce negative cash flows through at least through the second quarter of 1997
and that these operations alone will not provide sufficient funds for the Parent
Company's total long-term liquidity needs.
As a consequence, the Parent Company 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) or
additional financing to support its operations and service its indebtedness. The
principal assets that could be sold by the Parent Company are its shares of
Circle common and preferred stock (the "Circle Shares") and Wickes Common Stock.
Circle has entered into a definitive merger agreement with an unrelated
third party pursuant to which the Circle Shares are to be converted into an
aggregate of approximately $5.3 million in cash. Currently, all of the Circle
Shares are pledged to secure the Company's real estate indebtedness to American
Founders, and only the merger proceeds of Circle Shares that are released from
pledge at the time of the merger and merger proceeds that are subsequently
released from pledge would, without American Founders' consent, be available to
the Parent Company. The amount of required collateral for this indebtedness is
adjusted quarterly and the amount of any excess collateral released. The
Company anticipates that Circle Shares that are to be converted into
approximately $2.5 million in this merger will be released at March 31, 1997,
and depending upon certain factors, including the market value of the Wickes
Common Stock and the timing and amount of sales of the real estate securing
this indebtedness, a significant additional number of Circle Shares or the
merger proceeds thereof could be released in the future. In addition, the
Company is currently holding discussions with American Founders concerning the
release of additional Circle Shares or merger proceeds in exchange for the
pledge of additional shares of Wickes Common Stock. If this merger is completed
on its current terms, and if all of the merger proceeds of the Circle Shares
are available to the Company, the Company anticipates that it would have
sufficient liquidity for its projected needs without additional asset sales or
financing through 1998. There can be no assurance, however, that this merger
will be completed or concerning the amount of the merger proceeds that will be
available to the Company.
At March 20, 1997, the Parent Company had $795,000 in cash and
short-term investments. After payment of the $650,000 interest payment due on
March 31, 1997 with respect to its 13% subordinated notes due 1999, and pending
disposition of the Circle Shares in the merger described
23
<PAGE> 27
above, the Company intends to sell Wickes Common Stock from time to time in
sufficient amounts to fund its operating cash needs not supplied by additional
financing or from other sources.
At December 31,1996, the principal amount of the Company's real estate
debt to American Founders was $17,583,000, and the Company estimates that
principal and interest payment on this debt will be approximately $1,899,000
during 1997 and $1,896,000 during 1998. The Company anticipates that it will
complete sufficient sales of the real estate securing this debt to make the
required payments. Sales in excess of the required amount are required to be
applied to reduction of future amounts payable under this debt.
The $10,000,000 principal of the 13% Notes is due in September 1999.
The Company anticipates that to repay this indebtedness it will need to obtain
additional funds through borrowings, issuance of debt or equity securities or
asset sales.
The ability of WML to attain profitability and provide a positive
contribution to the Parent Company's liquidity depends upon a variety of
factors, including the ability to attract qualified loan representatives, market
acceptance for its services, the maintenance of an adequate interest spread
between its cost of borrowing and rates charged on its construction loans, and
the ability to keep its operating costs at an acceptable level.
During 1996, the following transactions also affected liquidity:
- In June 1996, the completion of the Circle Merger 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 3 of Notes to Consolidated
Financial Statements included elsewhere herein).
- In August 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. In addition, the Company purchased and retired 9,000
shares during the first quarter of 1997. The Company will
continue to review the plan in 1997.
- In October 1996, the Company paid a cash dividend of
approximately $.10 per share, or an aggregate of approximately
$530,000, to shareholders of record on October 15, 1996. See
"Item 5. Market for Registrant's Common Equity and Related
Matters."
See Note 10 of Notes to Consolidated Financial Statements included
elsewhere for a description of certain contingencies.
During 1996, stockholders' equity decreased by a net of $5.28 million
primarily as a result of decreases in market value of invested assets of the
life insurance subsidiaries of $4.4 million and the dividend of $.5 million paid
to shareholders on October 31, 1996.
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
24
<PAGE> 28
Securities Litigation Reform Act of 1995 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 Shares or Wickes Common Stock. The future operating results of WML
will depend upon, among other things, the factors discussed above. Future real
estate sales depend upon a number of factors, including interest rates, general
economic conditions, and conditions in the commercial real estate markets in
Atlanta, Georgia, and Jacksonville, Florida. As discussed above, although there
is currently pending an agreement that would convert the Circle Shares into
approximately $5.3 million in cash there is no assurance that this transaction
will be completed or how many Circle Shares will be released from pledge. The
Company's ability to sell Wickes Common Stock will 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.
WICKES
Wickes' principal sources of working capital and liquidity are earnings
and borrowings under its revolving credit facility. Wickes' primary need for
capital resources is to finance inventory and accounts receivabl
In 1996, net cash provided by Wickes' operating activities amounted to
$18.7 million. This compares favorably with cash provided by operating
activities of $15.9 million in 1995 and $1.3 million in 1994. This increase is
primarily the result of decreases in accounts receivable and inventory as well
as earnings after adjustment for non-cash expenses. A decrease in accounts
payable and accrued liabilities partially offset these increases. These funds
were used primarily to reduce Wickes' net borrowings under its revolving credit
facility.
Wickes' management's focus on improving the balance sheet included
making significant improvements in the use of working capital. Accounts
receivable at the end of 1996 were $10.6 million, or 12.9%, lower than at
year-end 1995. Building centers that were closed at the end of December 1995 and
during 1996 account for approximately $6.3 million of this reduction. The
remainder is attributed to improved collection practices, especially at building
centers that were acquired during 1994, a reduction in the number of accounts
with extended terms and improved delinquency. Inventory at the end of 1996 was
$10.0 million, or 9.0%, lower than at year-end 1995. The primary reason for the
decrease in inventory is the closing of 18 building centers since December of
1995. The amount of Wickes' accounts payable on any balance sheet date may vary
from the average accounts payable throughout the period due to the timing of
payments and will tend to increase or decease in conjunction with an increase or
decrease in inventory.
On June 20, 1996, Wickes sold to the Parent Company 2 million newly-is
sued 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 $12 million in real estate was released as collateral required
under this agreement. These funds were used to reduce Wickes' borrowings under
its revolving credit facility.
Wickes maintained excess availability under its revolving credit
facility throughout 1996. Wickes' receivables and inventory typically increase
in the second and third quarters of the year due to higher
25
<PAGE> 29
sales in the peak building season. In the first and second quarters of each
year, Wickes typically reaches its peak utilization of its revolving credit
facility because of the inventory build-up needed for the peak building season.
At all times during 1996 Wickes was in full compliance with all of the
requirements contained in its revolving credit agreement. Availability under the
revolving credit facility is limited, in the aggregate, to the lesser of $130
million and a "borrowing base amount," which is the sum of (i) between 80% and
85% of eligible accounts receivable plus (ii) between 50% and 60% of eligible
inventory. At March 1, 1997, Wickes had outstanding borrowings of $79.1 million
and unused availability of $27.7 million under its revolving credit facility. A
second amendment and restatement of the revolving credit agreement, which would
include among other things (i) extension of the life facility until March 2001,
(ii) 75 basis points reductions in the interest rate premiums over LIBOR and
over prime, (iii) modifications to certain financial covenants, and (iv) a
provision for further interest rate premium reductions if certain performance
levels are achieved, is expected to be completed in March or early April 1997.
Wickes currently has excess availability under its revolving credit facility
and anticipates that funds provided by operations and under this facility will
be adequate for Wickes' future needs.
The revolving credit facility and the trust indenture related to
Wickes' 11-5/8% Senior Subordinated Notes contain certain covenants and
restrictions. Among other things, the revolving credit facility prohibits
non-stock dividends, certain investments and other "restricted payments" by
Wickes. The trust indenture generally 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 earned subsequent to October 22, 1993, plus the proceeds of the sale
of certain equity securities after such date. In addition, the trust indenture
prohibits non-stock dividends and limits other restricted payments while (as at
present) Wickes' fixed charge coverage ratio is less than or equal to 2.0.
Wickes' capital expenditures consist primarily of the construction of
storage facilities, the remodeling of building centers and component
manufacturing facilities, and the purchase of equipment and management
information systems. Wickes may also from time to time make expenditures to
establish Limited SKU Facilities or to establish or acquire operations to expand
or complement its existing operations. Wickes made $2.9 million in capital
expenditures in 1996. Wickes expects to spend between $4 million and $6 million
in 1997. These expenditures are expected to be funded by Wickes' borrowings and
its internally generated cash flow. At December 28, 1996, there were no material
commitments for future capital expenditures.
26
<PAGE> 30
RESULTS OF OPERATIONS
The Company reported results of operations for the years ended December
31, 1996, 1995 and 1994 as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Equity in earnings(losses) of Wickes(1)(2) $(1,714) $(5,849) $8,274
Earnings(loss) before income taxes, equity in
related parties, minority interest and
discontinued operations(3)(4) 5,199 (13,906) 2,059
Earnings before discontinued operations (406) (17,845) 8,850
Gain (loss) from discontinued operations(5) - 1,645 (4,405)
------ -------- ------
Net earnings(loss) $ (406) $(16,200) $4,445
====== ======== ======
- ------------------------------------------------------------------------------------------
</TABLE>
(1) Includes ($3.8) million in 1995 related to restructuring charges and
$4.2 million of tax benefits in 1994 related to reversal of a deferred
tax valuation allowance established in a prior year.
(2) Subsequent to June 30,1996, the Company consolidated its results of
operations with those of Wickes.
(3) Includes net realized investment gains(losses) of $1,674,000,
($234,000), and ($182,000) in 1996, 1995 and 1994, 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 certain 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.)
(4) Includes a $10,970,000 charge on reorganization of life insurance
subsidiaries primarily resulting from the write off of intangible
assets.
(5) Includes realized investment gains of $31,000 and $91,000 in 1995 and
1994, 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.
27
<PAGE> 31
WICKES LUMBER COMPANY
For the first six months of 1996, the Company recorded equity in
Wickes' losses of $1,714,000. During the second half of 1996, the Company
consolidated Wickes' results of operations with those of the Company's other
operations. The Company estimates that, after inter-company eliminations, and
net of goodwill amortization of approximately $202,000, Wickes contributed
earnings of $2,282,000 to the Company's results of operations during the second
half of 1996.
The following discussions of Wickes' full year operations for 1994,
1995 and 1996 was obtained from the Wickes 10-K.
The following table sets forth, for the periods indicated, the
percentage relationship to net sales of certain expense and income items. The
table and subsequent discussion should be read in conjunction with the Financial
Statements and notes thereto appearing elsewhere herein.
<TABLE>
<CAPTION>
Year Ended
----------
Dec. 28, Dec. 30, Dec. 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Gross profit 22.3 22.7 23.7
Selling, general and
administrative expense 19.1 20.0 19.7
Depreciation, goodwill and
trademark amortization .6 .6 .4
Provision for doubtful accounts .1 .7 .3
Restructuring and
unusual Items .1 1.8 .2
Other operating income (.8) (.6) (.7)
Income from operations 3.2 .2 3.8
</TABLE>
Wickes' operations, as well as those of the building material industry
generally, have reflected substantial fluctuations from period to period as a
consequence of various factors, including levels of construction activity,
general regional and local economic conditions, prices of commodity wood
products, interest rates and the availability of credit, all of which are
cyclical in nature. Wickes anticipates that fluctuations from period to period
will continue in the future. Because a substantial percentage of Wickes' sales
are attributable to building professionals, certain of these factors may have a
more significant impact on Wickes than on companies more heavily focused on
consumers.
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. The following table
contains selected unaudited quarterly financial data for the years ended
December 28, 1996, December 30, 1995 and December 31, 1994.
28
<PAGE> 32
WICKES LUMBER COMPANY
QUARTERLY FINANCIAL DATA
THREE MONTHS ENDED
(in millions, except per share data and percentages)
<TABLE>
<CAPTION>
Net Sales as a Net Earnings/
% of Annual Gross Net Income (Loss) per
Net Sales Net Sales Profit /(Loss) Common Share
--------- --------- ------ ------- -----
<S> <C> <C> <C> <C> <C>
1996
March 30 $152.5 18.0% $34.9 $(6.2) $(1.00)
June 29 228.8 27.0 51.2 1.9 .29
September 28 255.6 30.1 55.5 2.8 .35
December 28 211.7 24.9 47.9 2.0 .24
1995
April 1 $191.7 19.7% $45.6 $(4.6) $ (.75)
July 1 272.8 28.0 63.9 2.5 .40
September 30 284.5 29.3 62.9 1.9 .31
December 30 223.6 23.0 48.4 (15.4) (2.50)
1994
March 26 $149.6 15.1% $37.2 $(8.7) $(1.43)
June 25 259.3 26.3 62.0 7.4 1.21
September 24 284.2 28.8 67.1 10.7 1.75
December 31 293.8 29.8 67.5 18.7 3.06
</TABLE>
Net income/(loss) in the fourth quarter of 1995 was negatively affected by
a $17.8 million charge for restructuring and unusual items. In 1996 and 1994
Wickes recorded charges of $0.7 million and $2.0 million, respectively, as
restructuring and unusual items. For additional information on the restructuring
and unusual items charge see "1995 Compared with 1994" and Note 2 of Notes to
Consolidated Financial Statements included elsewhere herein. In addition, in
1996 Wickes received insurance premium adjustments from a former insurance
carrier in the amount of $2.2 million and reversed an accrual of $1.5 million
for other disputed insurance premiums with this carrier. Accordingly, Selling,
General and Administrative ("SG&A) expenses were reduced by $1.0 million
during the first three quarters of 1996 and by $2.7 million in the fourth
quarter of 1996.
Wickes has historically generated approximately 15% to 20% of its annual
revenues during the first quarter of each year, and Wickes has historically
recorded a significant net loss for this quarter. As a result of these seasonal
factors, Wickes' inventories and receivables reach peak levels during the second
and third quarters and are generally lower during the first and fourth quarters,
depending on sales volume and lumber prices.
This Item 7 contains statements which, to the extent that they are not
recitations of historical fact, constitute Forward Looking Statements that are
made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995 and are inherently subject to uncertainty. A
number of important factors could cause Wickes' business and financial results
and financial condition to be materially different from those stated in the
Forward Looking Statements. Those factors include but are not limited to the
seasonal and cyclical factors discussed above in this Item 7 and elsewhere in
this report, the effects of Wickes' substantial leverage and competition, the
success of Wickes' operational efforts, and the matters discussed in Note 10 of
the Notes to Consolidated Financial Statements included elsewhere herein.
29
<PAGE> 33
1996 COMPARED WITH 1995
NET SALES. Wickes' net sales for 1996 decreased $124.1 million, or 12.8%,
to $848.5 million from $972.6 million in 1995. Sales for all facilities operated
throughout both years ("same store") decreased 6.4%. During 1996, Wickes
experienced a 2.1% decrease in same store sales to its primary customer segment,
the professional home builder, and a 3.2% increase in same store sales to
commercial builders.
The reduction in the number of under-performing building centers pursuant
to the restructuring plan committed to in December of 1995 was the major cause
of Wickes' 1996 total sales decline. Pursuant to this plan, Wickes closed or
consolidated 16 building centers in December 1995 and two during 1996. During
1995, these closed or consolidated building centers contributed an aggregate of
$86.7 million to total net sales.
Severe weather conditions in the first quarter of 1996, together with mild
weather in the first quarter of 1995, and a 17.5% decrease in same store sales
staff as part of Wickes' efforts to better align its costs to its sales volume,
were the major factors contributing to the 1996 same store sales decline. The
decrease in same store sales occurred most heavily during the first nine months
of 1996. For this period, same store sales were down 8.8%, while fourth quarter
same store sales were up slightly from the fourth quarter of 1995.
Total housing starts in the United States increased 8.8% in 1996, and
starts in Wickes' primary markets, the Midwest and Northeast, increased
approximately 10.6% and 11.2%, respectively. Nationally, single family housing
starts, which generate the majority of Wickes' sales to building professionals,
experienced an increase of 7.8% in 1996, from 1.07 million starts in 1995 to
1.16 million starts in 1996. In 1996 inflation in lumber prices had a negligible
effect on sales.
GROSS PROFIT. Wickes' gross profit decreased $31.3 million to 22.3% of net
sales for 1996 compared with 22.7% of net sales for 1995. The primary reason for
the decrease in gross profit was the reduction in total sales as a result of
Wickes' program to reduce the number of under-performing building centers.
The decline in gross profit as a percent of sales is primarily attributed
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. The percent of Wickes' sales attributable to professional
builders increased to 84.7% for 1996 compared with 81.6% in 1995, and sales
attributable to commodity lumber products increased from 50.6% in 1995 to 52.7%
in 1996. Wickes anticipates that its continued focus on the professional builder
will create additional pressure on gross profit margins. The decline in gross
profit as a percent of sales was partially offset by a decrease in the cost
associated with physical inventory count adjustments.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE. In 1996, Wickes' SG&A
decreased as a percent of net sales to 19.1% compared with 20.0% of net sales
in 1995. In 1996, Wickes focused substantial efforts on better aligning its
SG&A expenses to sales volumes and improving the productivity of its existing
sales staff in order to improve profitability. As a result of Wickes' 1995 Plan
and several cost reduction initiatives implemented in the second half of 1995
and early 1996 Wickes was able to reduce its total SG&A expense by 16.6%, which
is proportionately greater than the 12.8% total sales decline for the year.
30
<PAGE> 34
Wickes experienced a decrease in salaries, wages and employee benefits
as a percent of sales by 0.5% from 1995 to 1996. On a same store basis, the
number of total employees at the average building center during 1996 was reduced
approximately 13% from 1995. In 1996 Wickes successfully recovered $3.7 million
in previous year's insurance costs. The recoveries associated with workers
compensation insurance reduced salaries, wages and employee benefits by 0.2% of
sales, and the balance of the recoveries reduced property and casualty
insurance, as a percent of sales, by 0.2% Wickes also experienced decreases from
1995 to 1996 as a percent of sales in postage, communications, office supplies,
and marketing expenses which were partially offset by increased delivery costs.
In addition to the reductions in SG&A directly related to building center
closings, other cost reduction initiatives included a reduction in vehicles and
other equipment at continuing operations and various programs to reduce costs
associated with Wickes' corporate headquarters in Vernon Hills, Illinois.
DEPRECIATION, GOODWILL AND TRADEMARK AMORTIZATION. Wickes' depreciation,
goodwill and trademark amortization costs decreased $0.5 million in 1996
compared with 1995. The primary reasons for this decrease were a program
initiated in early 1996 to reduce excess vehicles and equipment and the closing
and sale of facilities in conjunction with the 1995 Plan.
PROVISION FOR DOUBTFUL ACCOUNTS. Wickes extends credit, generally due on
the 10th day of the month following the sale, to qualified and approved
contractors. Wickes' provision for doubtful accounts decreased to $1.1 million
or 0.1% of sales for 1996 from $6.5 million or 0.7% of sales for 1995. Much of
this decrease is attributable to improved credit policies at centers acquired
since 1994 and a more selective customer base. In addition, Wickes significantly
increased its efforts to collect previously reserved accounts receivable. The
provision attributable to the Gerrity Lumber acquisition centers improved
significantly from 1995 to 1996. Historically Wickes' provision for doubtful
accounts averages approximately 0.3% of sales.
RESTRUCTURING AND UNUSUAL ITEMS. After extensive review of the 1995 Plan,
and changes in business conditions in certain markets in which Wickes operates,
Wickes made adjustments to the 1995 Plan and incurred other one time costs
resulting in a net $0.7 million charge to results of operations in the fourth
quarter of 1996 for restructuring and unusual items. These adjustments included
(i) the determination that three of the centers identified in the 1995 Plan for
closure will remain open, resulting in a $1.5 million credit to restructuring
expense, (ii) the extension of the 1995 plan to include the closing
(substantially completed by the end of 1996) of two building centers not
previously included, resulting in a $1.3 million charge for the write down of
assets and liabilities to their net realizable value and a $0.1 million charge
for severance and post-employment benefits, (iii) a $1.1 million charge for
impairment in the carrying value of real estate held for sale at closed centers,
and (iv) a $0.3 million credit with respect to the resolution of a claim at
below the reserved amount.
OTHER OPERATING INCOME. Wickes' other operating income increased to $6.8
million in 1996 from $5.8 million in 1995. The increase was the result of an
increase in gains reported on the sale of closed facilities, excess vehicles and
equipment of approximately $1.9 million when compared with 1995. Wickes also
reported a $0.6 million gain as the result of the difference between insured
replacement cost and book value as a result of a fire and storm damage at
several of Wickes' building centers. These gains were partially offset by
decreases in services charges for overdue credit accounts of approximately $0.9
million and closed center rental income and other miscellaneous revenues of $0.7
million.
31
<PAGE> 35
INTEREST EXPENSE. Wickes' interest expense decreased to $21.8 million in
1996 from $24.4 million in 1995. This decrease was the result of a decrease in
average outstanding debt under Wickes' revolving line of credit of $26.8 million
partially offset by an increase in the overall effective borrowing rate of 22
basis points. The decrease in average outstanding debt was due primarily to cash
provided by operations, proceeds from the sale of additional common stock and
the proceeds from the sale of excess real estate and vehicles.
EQUITY IN LOSS OF AFFILIATED COMPANY. During 1996, Wickes' equity in the
losses of Riverside International LLC was $3.2 million compared with equity in
losses of $3.5 million during 1995. See "Item 1. Business - Building Materials -
International Operations" and 2 of Notes to Consolidated Financial Statements
included elsewhere herein.
PROVISION FOR INCOME TAXES. In 1996, Wickes recorded current income tax
expense of $1.0 million compared with $1.4 million in 1995. The 1996 and 1995
current income tax provisions consist of state and local tax liabilities.
A deferred tax expense of $0.3 million was also recorded in 1996. This
expense results from temporary differences in the recognition of certain items
of revenue and expense for tax and financial reporting purposes. In 1995 a
deferred tax benefit of $11.8 million was recorded primarily due to the
recording of a deferred tax asset as a result of the operating loss experienced
during 1995, in accordance with FAS 109. Management has determined, based on the
Wickes' positive earnings growth from 1992 through 1994 and its expectations for
the future, that operating income of Wickes will more likely than not be
sufficient to recognize fully these net deferred tax assets. See Note 13 of
Notes to Consolidated Financial Statements included elsewhere herein.
NET INCOME. Wickes' net income was $0.5 million in 1996, compared with a
net loss of $15.6 million in 1995, an improvement of $16.1 million. The primary
components of this improvement include a decrease in SG&A expense of $32.3
million, a decrease in restructuring and unusual items expense of $17.1 million,
a decrease in provision for doubtful accounts of $5.4 million, a decrease in
interest expense of $2.6 million, and an increase in other income of $1.0
million. These improvements were partially offset by a decrease in gross profit
of $31.3 million and an increase in the provision for income taxes of $11.8
million.
1995 COMPARED WITH 1994
NET SALES. Wickes' net sales for 1995 decreased $14.3 million, or 1.4%, to
$972.6 million from $986.9 million in 1994. The 1994 fiscal year consisted of 53
weeks compared with 52 weeks in 1995. After adjusting for this additional week
of sales in 1994, Wickes experienced only a $.3 million sales decline from 1994.
Sales for all facilities operated throughout both years decreased 3.8%. After
adjusting for the additional week in 1994 the decrease was 2.1%.
In 1995 deflation in lumber prices amounted to approximately 18% as a
result of increased production in Canadian mills, generated by demand for wood
pulp, and a decrease in demand for construction lumber in both the United States
and foreign markets. Wickes estimates the decline in wood prices accounted for
$45 million in lost sales for 1995, or approximately a 4.6% decline. A decline
in housing starts in the United States also adversely affected sales. U.S.
Bureau of the Census data indicated a nation-wide decline of approximately 7.5%
and declines in Wickes' primary markets, the Midwest and Northeast, of
approximately 12.1% and 15.1%, respectively. Nationally, single family housing
starts experienced a larger decline of 10.8% in 1995, from 1.20 million starts
in 1994 to 1.07 million starts in 1995. While Wickes added seven new building
32
<PAGE> 36
centers through acquisition and expansion during 1995, it also closed or
consolidated 26 other building centers (sixteen of these occurred on December
29, 1995).
Wickes experienced a 6.2% increase in sales to its primary customer
segment, the professional home builder, and a 45.8% increase in sales to
commercial builders.
GROSS PROFIT. Wickes' gross profit decreased $13.0 million to 22.7% of net
sales for 1995 compared with 23.7% of net sales for 1994. Wickes estimates that
deflation in lumber prices caused approximately $7.6 million of this decrease,
and the additional week of sales in 1994 contributed approximately $3.3 million
of additional gross profit in 1994.
Wickes' continued emphasis on sales to professional builders and the
resulting increased sales of lower margin wood products also contributed to the
change. Wickes believes that approximately 50% of the decrease in gross profit
percentage was the result of the shift in customer mix from 22% consumer and 78%
professional in 1994 to 18% consumer and 82% professional in 1995. An increase
in the percent of sales attributable to commodity lumber and building materials
along with customer pricing issues, accounted for the remainder of the variance.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE. In 1995, Wickes' SG&A
increased as a percent of net sales to 20.0% compared with 19.7% of net sales in
1994. While new residential construction activity slowed during 1995, expenses
were not adjusted quickly enough to match the rate of the decline in residential
construction. The deflation in lumber prices also affected SG&A as a percent of
sales as certain costs tend to increase from year to year, such as delivery,
rent and utilities, and are relatively unaffected by lumber deflation.
Wickes' largest single expense, labor costs, remained constant as a
percent of sales from 1994 to 1995. Wickes did experience increases from 1994 to
1995, as a percent of sales, in communications, rental, and delivery expense.
Wickes also experienced a decrease, as a percent of sales, in marketing and
advertising costs. In the second half of 1995, there were significant reductions
made in the work force to keep salary and wage costs in line with actual sales
volume.
DEPRECIATION, GOODWILL AND TRADEMARK AMORTIZATION. Wickes' depreciation,
goodwill and trademark amortization costs increased $1.3 million in 1995
compared with 1994. Depreciation of vehicles and equipment, and amortization of
goodwill for acquisitions purchased during the second half of 1994 and first
half of 1995 account for all of the increase.
PROVISION FOR DOUBTFUL ACCOUNTS. In 1995, Wickes' provision for doubtful
accounts increased as a percentage of net sales to 0.7% compared with 0.3% in
1994. Approximately $3.1 million of the $4.0 million increase is attributable to
the Gerrity Lumber centers. During the integration of the Gerrity Lumber centers
these centers experienced significant credit losses as they converted to Wickes'
more controlled credit policies.
RESTRUCTURING AND UNUSUAL ITEMS. During the fourth quarter of 1995 Wickes
committed to the 1995 Plan, which included a reduction in the number of
under-performing building centers and the corresponding overhead to support
these building centers, and the strengthening of Wickes capital structure.
Wickes recorded a $17.8 million charge relating to the 1995 Plan and other
unusual items. See "Item 1. Business Background" and Note 2 of Notes to
Consolidated Financial Statements included elsewhere herein.
33
<PAGE> 37
OTHER OPERATING INCOME. Wickes' other operating income decreased to $5.8
million in 1995 from $6.8 million in 1994. The primary reasons for this decline
were two unusual gains recorded in 1994, a $1.2 million gain on the sale of
Wickes' private label credit card portfolio and a $0.7 million gain as the
result of the difference between insured replacement cost and book value as the
result of storm related damage to one of Wickes' building centers. Service
charges for overdue credit accounts increased to $3.0 million in 1995 compared
with $2.5 million in 1994. Wickes also experienced an increase in rental income,
interest earned, and miscellaneous revenues of $0.5 in 1995 compared with 1994.
INTEREST EXPENSE. Wickes' interest expense increased to $24.4 million in
1995 from $21.7 million in 1994. This increase was the result of an increase in
average outstanding debt, due primarily to acquisitions made in 1995 and late
1994, and to a lesser degree, an increase in the average effective interest rate
on Wickes' total debt of 7 basis points compared with 1994.
EQUITY IN LOSS OF AFFILIATED COMPANY. During 1995, Wickes' equity in the
losses of Riverside International LLC operations was $3.5 million. During
1994, the results of the Riverside International LLC operations were
consolidated with those of Wickes and contributed a loss of approximately $0.4
million (pre-tax). See "Items 1. Business - Building Materials - International
Operations" and 2 of Notes to Consolidated Financial Statements included
elsewhere herein.
PROVISION FOR INCOME TAXES. In 1995, Wickes recorded current income tax
expense of $1.4 million compared with $1.7 million in 1994. The 1995 income tax
provision consists of state and local tax liabilities. The 1994 income tax
provision consisted of $1.4 million for state and local liabilities and $0.3
million for the alternative minimum federal income tax liability. A deferred tax
benefit of $11.8 million was also recorded in 1995. This benefit is primarily
due to the recording of a deferred tax asset as a result of the operating loss
experienced during 1995, in accordance with FAS 109. See Note 13 of Notes to
Consolidated Financial Statements included elsewhere herein.
NET INCOME. Wickes experienced a net loss of $15.6 million in 1995
compared with $28.1 million of net income for 1994, a change of $43.7 million.
The primary components of the change 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 SG&A of $4.1 million, increased losses of the operations
of Riverside International LLC 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 expense, and in the
fourth quarter of 1994, the Wickes recorded a $1.2 million one time gain on the
sale of its private label credit card portfolio.
LIFE INSURANCE OPERATIONS
The Company's Consolidated Statements of Operations includes the
operations of its former life insurance subsidiaries through June 6, 1996, the
date of the Circle Merger. The following table sets forth financial information
with respect to the Company's former life insurance operations through June 6,
1996. (in thousands):
34
<PAGE> 38
<TABLE>
<CAPTION>
Years ended
----------------------------------------
1996(1) 1995 1994
------- ------ ----
<S> <C> <C> <C>
Premiums and annuities $ 3,224 $ 8,298 $ 18,657
Net investment income 5,027 14,492 17,523
Other income 83 453 (82)
Net investment gains(losses) 1,367 1,037 518
-------- -------- --------
Total income 9,701 24,280 36,616
Selling, general and administrative expenses 1,247 3,266 5,821
Interest expense 7 126 0
Benefits and losses 5,805 15,417 19,399
Policy acquisition expense 2,313 3,085 5,093
-------- -------- --------
Total expenses 9,372 21,894 30,313
-------- -------- --------
Net income(loss) $ 329 $ 2,386 $ 6,303
======== ======== ========
</TABLE>
(1) Includes the operations through June 6, 1996, the date of the Circle Merger.
Operating income after tax of $1,003,000 was generated for 1996;
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 pursuant to the terms of the Circle Merger 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. 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.
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").
The Parent Group's non-interest operating expenses were $3,205,000,
$1,955,000 and $2,453,000 in 1996, 1995, and 1994, respectively. Increased
operating expenses for 1996 were primarily due to the expansion of WML's
operations, which accounted for approximately $1,307,000 of the increase. Other
increases included expenses resulting from non-recurring expenses including bank
debt costs amortized as a result of the Circle Merger, and expenses that were no
longer allocable to the Life Insurance Group. The increase in expenses was
partially offset by savings of approximately $436,000 from improvements made to
the WFSC program in 1996.
Interest expense for 1996, 1995, and 1994 was $3,158,000, 3,280,000 and
$3,040,000, respectively. Interest expense for 1996 was relatively unchanged
when compared to 1995.
Revenues of the Parent Group (excluding investment income) for 1996,
1995 and 1994 were approximately $848,000, $1,057,000 and $1,596,000,
respectively. The Parent Group's income primarily
35
<PAGE> 39
consists of non-recurring items, such as settlement proceeds from legal
proceedings; therefore, comparisons between periods are not meaningful. Included
in other income for 1996 was $355,000 related to WML's operations, and $200,000
received in a settlement relating to the Company's former property and casualty
insurance operations. Revenues for 1995 primarily consisted of $600,000 related
to a settlement of disputed financing proposal, and approximately $125,000
collected for the administration of a risk management plan for the Parent
Company. Revenues for 1994 includes $558,000 from the sale of certain of the
Company's 13% subordinated notes and a gain of approximately $613,000 on a sale
of a former subsidiary of the Company to Wickes.
REAL ESTATE INVESTMENTS
The Company's real estate investments consist of $10,954,000 in Georgia
properties, $5,828,000 in Florida properties and $72,500 in other states.
Included in the Company's net realized investment gains(losses) for
1996, 1995 and 1994 of $1,672,000 ($234,000) and ($182,000) were net realized
gains(losses) on real estate investments of $656,000, $392,000 and ($82,000),
respectively.
DISCONTINUED OPERATIONS
On September 15, 1995, the Company completed the sale of its property
and casualty insurance operations, which had been discontinued in 1992. The
Company realized a gain upon disposal of these operations of $2.7 million,
including an additional payment received in 1996 of $.2 million for the
acquisition of certain tax benefits by the purchaser. 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 on
results of operations.
The following table sets forth comparative information concerning the
results of the Company's former property and casualty operations.
<TABLE>
<CAPTION>
Year ended December
-------------------
1995 1994
---- ----
(in thousands)
<S> <C> <C>
Gross premiums written $ (87) $(2,536)
Net premiums earned (99) 645
Net incurred losses (170) 4,220
% of earned premium 172% 654%
Policy acquisition & insurance fees 394 145
% of earned premium (398%) 22%
Net loss from discontinued operations $(1,086) $ (4,405)
</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.
36
<PAGE> 40
Realized gains on sales of Dependable's investments included in
discontinued operations were $31,000 and $91,000 in 1995 and 1994, respectively.
INCOME TAXES
The Company's effective income tax rate was 6% in 1996, 10% in 1995 and
25% in 1994. The current income tax provision consists of state and local tax
liabilities for Wickes. The low effective tax rate for 1996 is attributable to
the reduction in valuation allowance allowing previously deferred tax benefits
to be recognized currently. It is management's determination that future
profitability of Wickes and recognition of potential gains on real estate sales
will allow realization of the previously recorded deferred tax assets. This
determination is based on Wickes' positive earnings growth from 1992 to 1994,
and its expectations for the future that operating income of Wickes will more
likely than not be sufficient to fully utilize these deferred tax assets. See
Note 13 of Notes to Consolidated Financial Statements included elsewhere herein.
STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
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 accounting principle was effective for the Company fiscal year
ending December 31, 1996. Adoption did not have a material impact on the
Company's financial position.
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 earnings per
share under the new method. This new accounting principle was effective for the
Company fiscal year ending December 31, 1996, and did not have a material impact
on its financial position as the Company did not adopt the new fair value
accounting, but instead implemented the disclosure requirements.
Statement of Financial Accounting Standard No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities",
addresses accounting for transactions including securitizations, transfers of
securities with recourse, repurchase agreements, securities-lending
arrangements, pledges of collateral, financial assets subject to prepayment
risk, servicing of financial assets, and extinguishment of liabilities. The
Company did not have any transaction during 1996 addressed by this statement.
Statement of Financial Accounting Standards No. 128, "Earnings Per
Share," revises the disclosure requirements and increases the comparability of
EPS data on an international basis by simplifying the existing computational
guidelines in APB Opinion No. 15. The pronouncement will require dual
presentation of basic and diluted EPS on the Company Statement of Operations and
is effective the Company fiscal year ending
37
<PAGE> 41
December 31, 1997. The Company believe that adoption will not have a material
impact on its financial statements.
Statement of Financial Accounting Standards No. 129, "Disclosures of
Information About Capital Structure," establishes standards for disclosing
information about an entity's capital structure. The new accounting principle is
effective for the Company fiscal year ending December 31, 1997. The Company
believes that adoption will not have a material impact on its current
disclosures.
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 scheduled to be held on May 20, 1997.
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 scheduled to be held on May 20, 1997.
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 scheduled to be held on May 20, 1997.
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 scheduled to be held on May 20, 1997.
38
<PAGE> 42
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:
<TABLE>
<CAPTION>
RIVERSIDE GROUP, INC. AND SUBSIDIARIES: Page No.
-------
Report of Independent Accountants
<S> <C>
F - 1
Consolidated Balance Sheets - December 31,
1996 and 1995 F - 2
Consolidated Statements of Operations
for the years ended December 31, 1996,
1995 and 1994 F - 3
Consolidated Statement of Stockholders'
Equity for the years ended December 31,
1996, 1995 and 1994 F - 4
Consolidated Statements of Cash Flows for
the years ended December 31, 1996, 1995
and 1994 F - 5
Notes to Consolidated Financial Statements
F - 6
(2) FINANCIAL STATEMENT SCHEDULES:
RIVERSIDE GROUP, INC. AND SUBSIDIARIES:
Report of Independent Accountants S - 1
Valuation and Qualifying Accounts S - 2
Schedule II - Condensed Financial Information of Registrant S - 3
(b) Reports on Form 8-K - None
(c) Exhibits
3.01(a)* 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).
</TABLE>
39
<PAGE> 43
<TABLE>
<S> <C>
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).
4.1* Credit Agreement dated March 12, 1996, among Wickes Lumber Company as
borrower, each of the financial institutions signatory thereto (the
"Lenders"), BT Commercial Corporation, as Agent for the Lenders, and
Bankers Trust Company, as issuing Bank (incorporated by reference to
Exhibit 4.1 to the Annual Report on Form 10-K filed by Wickes Lumber
Company for its fiscal year ended December 30, 1995).
4.2* Indenture dated as of October 15, 1993 between Wickes Lumber Company
and Marine Midland Bank, N.A. (incorporated by reference to Exhibit 4.2
to the Annual Report Form 10-K filed by Wickes Lumber Company for its
fiscal year ended December 30, 1995).
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).
10.2(a)* Non-Qualified Stock Option Plan (incorporated by reference to Exhibit
10.01 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1993).
(b)* Form of Non-qualified Stock Option Agreement (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).
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).
10.6* Trademark Agreement, dated April 29, 1988, between Wickes Companies,
Inc. and Wickes Lumber Company (incorporated by reference to Exhibit
10.2 to the Registration Statement on Form S-1 (Commission File No.
2-67334) filed by Wickes Lumber Company (the "Wickes Form S-1")).
</TABLE>
40
<PAGE> 44
<TABLE>
<S> <C>
10.7* Agreement dated July 21, 1993, between Collins & Aikman Group, Inc. and
Wickes Lumber Company (incorporated by reference to Exhibit 10.12 to
the Wickes Form S-1).
10.8* 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).
10.19* Merger Agreement dated March 8, 1996 between American Financial
Acquisition Corporation and Circle Investors, Inc. (incorporated by
reference to Exhibit 10.11 of the Company's Annual Report on Form 10-K
for the year ended December 31, 1995).
10.10(a)* Amended and Restated 1993 Long-Term Incentive Plan of Wickes Lumber
Company (incorporated by reference to Exhibit 10.8 to the Annual Report
on Form 10-K filed by Wickes Lumber Company for the year ended December
31, 1994 (the "Wickes 1994 Form 10K")).
(b)* Amendment No. 1 (incorporated by reference to Exhibit 10.8(b) to the
Annual Report on Form 10-K filed by Wickes Lumber Company for the year
ended December 29, 1996).
(c)* Form of Option Agreement (incorporated by reference to Exhibit 10.22 to
the Wickes Form S-1).
(d)* Form of Option Agreement (incorporated by reference to Exhibit 10.8 to
the Wickes 1994 Form 10-K).
(e)* Form of Long-Term Stock Option Agreement (incorporated by reference to
Exhibit 10.8 to the Wickes 1994 Form 10-K).
(f)* Form of Long-Term Performance Bonus Agreement (incorporated by
reference to Exhibit 10.8 to the Wickes 1994 Form 10-K).
21.01** Subsidiaries of the Company.
23.01** Consent of Coopers & Lybrand L.L.P.
27.01** Financial Data Schedule (S.E.C. use only).
</TABLE>
*Incorporated by reference.
**Filed herewith
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.
41
<PAGE> 45
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 31, 1997
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 31, 1997
and Director, March 31, 1997
/s/ Frederick H. Schultz /s/ Kenneth M. Kirschner
_---------------------------- -------------------------------
Frederick H. Schultz Kenneth M. Kirschner
Director, March 31, 1997 Director, March 31, 1997
/s/ C. Herman Terry /s/ Varina M. Steuert
- ----------------------------- -------------------------------
C. Herman Terry Varina M. Steuert
Director, March 31, 1997 Director, March 31, 1997
/s/ Catherine J. Gray
-------------------------------
Catherine J. Gray
Vice President (Principal
Accounting and
Financial Officer), March 31, 1997
March 31, 1997
42
<PAGE> 46
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, 1996 and 1995,
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, 1996. 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 audit 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.
In our opinion, the consolidated 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, 1996 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles.
Coopers & Lybrand L.L.P.
Jacksonville, Florida
March 28, 1997
F-1
<PAGE> 47
Riverside Group, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31, 1996 and 1995
(in thousands except per share data)
<TABLE>
<CAPTION>
1996 1995
------ ------
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 3,100 $ 1,100
Accounts receivable, less allowance for
doubtful accounts of $4,318 in 1996 and $0 in 1995 71,743 438
Inventory 100,672
Construction and permanent loans 4,169 4,190
Deferred tax asset 10,331
Prepaid expenses 1,023
----------- ----------
Total current assets 191,038 25,728
Investment in real estate 16,854 17,879
Investment in Circle Investors, Inc. 5,345
Investment in Wickes Lumber Company, at equity 11,210
Property, plant and equipment, net 50,245 1,086
Trademark (net of accumulated amortization of $10,052 in 1996) 6,948
Deferred tax asset 18,831 825
Excess of cost over fair value of assets acquired 16,463
Other assets (net of accumulated amortization of
$6,983 in 1996 and $634 in 1995)
8,106 2,037
Investments:
Fixed maturities available for sale - at market (amortized 147,152
cost $141,755 in 1995)
Equity securities available for sale - at market 838
Mortgage loans 22,713
Policy loans 19,827
Accrued investment income 2,488
Reinsurance receivables 28,500
Value of acquired insurance in force 18,415
Deferred policy acquisition costs 2,027
----------- ----------
Total assets $ 313,830 $ 300,725
=========== ==========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 4,861 $ 4,845
Accounts payable 41,318 3,705
Income tax payable 25
Accrued liabilities 28,000 1,317
----------- ----------
Total current liabilities 74,204 9,867
Long-term debt, less current maturities 186,142 26,370
Mortgage debt, related party 17,416
Other long-term liabilities 2,985
Future life insurance benefits 140,295
Policyholder contract deposits and other funds 97,171
Unpaid claims 966
----------- ----------
Total liabilities 280,747 274,669
Minority interest 12,308
Commitments and contingencies (Note 10)
Common stockholders' equity
Common stock, $.10 par value; 20,000,000 shares authorized; 530 531
issued and outstanding, 5,296,123 in 1996 and 5,311,123 in 1995
Additional paid in capital 16,728 17,209
Retained Earnings 3,517 3,923
Unrealized investment appreciation net of taxes and deferred
policy acquisition costs of $884 in 1995 4,393
----------- ----------
Total common stockholders' equity 20,775 26,056
----------- ----------
Total liabilities and common stockholders $ 313,830 $ 300,725
----------- ----------
</TABLE>
See accompanying Notes to Consolidated Financial Statements
F-2
<PAGE> 48
RIVERSIDE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share amounts)
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES:
Sales and service revenues $ 467,254 $ -- $ --
Insurance premiums and annuity considerations 3,224 8,298 18,657
Net investment income 6,325 14,492 17,523
Net realized investment gains(losses) 1,662 (234) (182)
Other operating income 5,192 1,513 1,512
------------ ------------ ------------
COSTS AN EXPENSES: 483,657 24,069 37,510
============ ============ ============
Cost of sales 363,930 -- --
Provision for doubtful accounts 3,523 -- --
Depreciation, goodwill and trademark amortization 2,832 -- --
Loss on reorganization of life insurance subsidiaries 124 10,972 --
Resturcturing and unusual items 745 -- --
Selling, general and administrative expenses 85,730 5,221 8,076
Interest expense 13,743 3,280 2,883
Policyholder benefits 5,805 15,417 19,399
Policy acquisition expenses 2,026 3,085 5,093
------------ ------------ ------------
478,458 37,975 35,451
------------ ------------ ------------
EARNINGS BEFORE INCOME TAXES, EQUITY IN RELATED
PARTIES, MINORITY INTEREST AND DISCONTINUED
OPERATIONS 5,199 (13,906) 2,059
Current income tax expense 259 -- --
Deferred income tax expense (benefit) 61 (1,910) 1,483
Equity in losses (earnings) of Wickes Lumber Company 1,714 5,849 (8,274)
Equity in losses of related parties 1,253 -- --
Minority interest 2,318 -- --
------------ ------------ ------------
EARNINGS BEFORE DISCONTINUED OPERATIONS (406) (17,845) 8,850
============ ============ ============
DISCONTINUED OPERATIONS
Loss from operations of discontinued property and
casualty insurance company, net of income taxes -- (1,086) (4,405)
Gain on disposal of discontinued property and
casualty insurance company, net of income taxes -- 2,731 --
------------ ------------ ------------
NET EARNINGS(LOSS) (406) (16,200) 4,445
============ ============ ============
EARNINGS (LOSS) PER SHARE:
Earnings (loss) from continuing operations (0.08) (3.38) 1.61
Net gain from discontinued operations -- 0.31 (0.82)
------------ ------------ ------------
Earnings(loss) per share (0.08) (3.07) 0.83
============ ============ ============
Weighted average number of common shares
use in computing earnings per share $ 5,286,316 $ 5,284,280 $ 5,350,672
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
F-3
<PAGE> 49
Riverside Group, Inc. and Subsidiaries
Consolidated Statement of Common Stockholder's 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, 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 avalable 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
Net loss (406) (406)
Purchase and retirement of 15,000 shares
of common stock, at cost (1) (44) (45)
Cost of ESOP shares released 93 93
Change in unrealized investment appreciation
of fixed maturities and equity securities (4,393) (4,393)
Dividend paid ($.10 per common share) (530) (530)
-------- ----------- ------------ --------- -----------
Balance, December 31, 1996 $ 530 $ 16,728 $ 3,517 $ 0 $ 20,775
======== =========== =========== ========= ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-4
<PAGE> 50
RIVERSIDE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------------
OPERATING ACTIVITES: 1996 1995 1994
------------- ----------- -----------
<S> <C> <C> <C>
Net income (loss) $ (406) $ (16,200) $ 4,445
Adjustments to reconcile net 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)
Depreciation expense 2,315 1,348 1,474
Amortization expense 1,695
Net change in deferred acquistion costs 49 2,614 1,564
Provision for doubtful accounts 3,523
Loss on Life Insurance Reorganization 124
Gain on sale of fixed assets (705)
Net realized investment (gains) losses on investments (1,672) (234) 91
Provision for deferred income taxes 300 (1,910) 1,478
Equity in (earnings) losses of unconsolidated subsidiaries 2,967 5,849 (8,274)
Minority interest 2,318 237
Interest on policyholder's funds 3,469 9,178 10,262
Change in other assets and liabilities:
Increase in accounts receivable 12,787
Decrease in inventory 10,000
(Increase)/decrease in other assets 1,873
Accrued investment income 197 962 270
Premiums receivable and unearned premiums 80 13 102
Increase/(decrease) in accounts payable and accrued liabilities (17,585)
Reserve for unpaid claims, policy benefits and
recoverable on paid losses from reinsurers and others (504) (827) (11,182)
Net liabilities of discontinued operations, other liabilities
and current income taxes (2,365) (6,187) 2,939
------------- ----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 18,460 2,665 3,406
INVESTING ACTIVITIES
Purchase of investments:
Property, plant and equipment (949)
Fixed maturities available for sale (36,867) (63,425) (88,132)
Equity securities (8,602) (39) (33)
Investment real estate (905) (969) (347)
Mortgage, construction and policy loans (23,524) (7,104) (4,169)
Short-term investments (368,933) (396,265)
Securites of Wickes Lumber Company (10,000) (2,296)
Sale, maturity, and principal reductions of investments:
Property, plant and equipment 2,113
Fixed maturities available for sale 41,675 90,411 80,889
Fixed maturities actively managed 22,369
Equity securities 8,643 1,922 2,820
Investment real estate 2,539 14,386 4,809
Mortgage, construction and policy loans 11,572 7,672 3,661
Short-term investments 370,280 386,558
Proceeds from dispoistion of life policies 8,203
Life Insurance Reorganization proceeds 35,000
Net assets of Life Insurance Reorganization (28,202)
------------- ----------- -----------
NET CASH (USED) PROVIDED BY INVESTING ACTIVITIES (7,507) 41,905 20,363
FINANCING ACTIVITIES
Net (repayment) under revolving line of credit (22,928)
Repayment of debt (21,264) (16,811) (21,652)
Increase in borrowings 21,706 2,700 20,000
Preferred stock redemption and dividends (1,283)
Purchase and retirement of treasury shares (46) (1,168) (357)
Issuance of common stock 156 100
Dividend paid to stockholders (530)
Deposits of policyholders' funds 192 586 8,123
Withdrawal of policyholders' funds (8,665) (29,964) (28,976)
------------- ----------- -----------
NET CASH USED IN FINANCING ACTIVITIES (31,535) (44,501) (24,045)
INCREASE (DECREASE) IN CASH (20,582) 69 (276)
Cash at beginning of year 21,100 189 465
Wickes Lumber Cash Balance 2,582
------------- ----------- -----------
CASH AT END OF YEAR $ 3,100 $ 258 $ 189
============= =========== ===========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
F - 5
<PAGE> 51
RIVERSIDE GROUP, INC. REVISED MARCH 26, 1997
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING PRINCIPLES
ORGANIZATION
Riverside Group, Inc., a Florida corporation formed in 1965 ("Riverside" also
"Parent Company"), is a holding company engaged through its 52%-owned
subsidiary, Wickes Lumber Company ("Wickes"), in the retailing and distribution
of building materials. The Company also provides financial services related to
the operations of Wickes, engages in the sale of real estate, and owns a
non-controlling interest in a financial services holding company that is the
successor to the Company's former life insurance operations. Unless the context
indicates otherwise, the term "Company" as used herein refers to Riverside and
its subsidiaries.
The consolidated financial statements present the results of operations,
financial position, and cash flows of Riverside and all of its wholly-owned and
majority-owned subsidiaries. The Company's wholly-owned and majority-owned
subsidiaries include: Wickes Financial Services Center, Inc. ("WFSC"); and the
parent's two principal insurance holding company subsidiaries, American
Financial Acquisition Corporation ("AFAC") (99% ownership), Dependable Insurance
Group, Inc. ("DIGI") and their subsidiaries. For a description of the Company's
accounting for its Wickes' subsidiary, see Note 3, "Acquisitions".
AFAC's principal subsidiaries (all of which are, or were for the periods during
which they are included, wholly-owned) are: four stock life insurance companies:
American Founders Insurance Company ("American Founders"); Aztec Life Assurance
Company ("Aztec"); Laurel Life Insurance Company ("Laurel Life") through June
1996, when the Company completed the Life Insurance Reorganization (see Note 4,
"Reorganization of Life Insurance Operations"); and National American Life
Insurance Company of Texas ("NALICO of Texas") through December 1995, when it
was sold.
Dependable Group's subsidiaries (all of which are, or were during the periods
for which they are included, wholly-owned) are: (I) a mortgage lending company,
Wickes Mortgage Lending, Inc. ("WML"), formed in April 1996, (ii) a stock
property and casualty insurance company, Dependable Insurance Company, Inc.
("Dependable"), through September 1995 when it was sold (see Note 5,
"Divestiture of Property and Casualty Insurance Operations"), and (iii) an
insurance agency, Richmond I. Barge & Associates, Inc. ("Barge") which is
currently inactive.
Additionally, the Company's consolidated financial statements include the
accounts of three 74%-owned real estate entities, which owned and operated
office buildings which were partially occupied by the Company, through May 1995,
when these investments were sold.
REORGANIZATION OF LIFE INSURANCE OPERATIONS
The Company has included the operations of the life insurance operations through
June 6,1996, when the Company completed the Life Insurance Reorganization. For
more information concerning the reorganization, see Note 4, "Reorganization of
Life Insurance Operations."
F-6
<PAGE> 52
DIVESTITURE OF PROPERTY AND CASUALTY INSURANCE OPERATIONS
The Company has included the operations of Dependable and Barge as discontinued
operations for all periods presented in the consolidated statements of
operations.
BASIS OF FINANCIAL STATEMENT PRESENTATION
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles ("GAAP"). All
significant intercompany accounts and transactions have been eliminated.
FISCAL YEAR
The Company's fiscal year ends on the last day of the month in December.
Although Wickes' fiscal year ends on the last Saturday in December, the Company
believes timing differences are insignificant.
ACCOUNTS RECEIVABLE
The Company extends credit primarily to qualified contractors. The accounts
receivable balances exclude consumer receivables, as such receivables are sold
on a non-recourse 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 uses the first-in,
first-out ("FIFO") method for valuing its inventory. Inventory is valued at the
lower cost or market, but not in excess of net realizable values.
PROPERTY, PLANT AND EQUIPMENT
Property, plant, and equipment are stated at cost and are depreciated using the
straight-line method. Estimated useful lives range from 15 to 39 years for
buildings and leasehold improvements. Machinery and equipment useful lives range
from three to six 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.
OTHER ASSETS
Other assets consists primarily of deferred financing costs which are amortized
over the expected terms of the related debt.
TRADEMARK
The Company is amortizing Wickes' "Flying W" trademark over its useful life of
40 years.
F-7
<PAGE> 53
INVESTMENT IN REAL ESTATE
Investments in real estate are carried at the lower of cost or appraised value.
Foreclosed property is valued at the lower of the carrying amount or fair market
value. The Company's investment in real estate primarily consists of real
estate purchased from American Founders, in connection with the Life
Insurance Reorganization (see Note 4. "Reorganization of Life Insurance
Operations"). For transactions between companies under common control, the
Company records purchases at the lower of historical carryover cost or fair
value.
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. The Company's investment
in Circle is accounted for on the equity method. In addition, the Company
accounted for its investment in Wickes through June 30, 1996, on the equity
method (see Note 3. " Acquisitions - Investment in Wickes Lumber Company").
CONSTRUCTION AND PERMANENT LOANS
Construction and permanent loans are carried at the lower of amortized cost or
fair value.
INVESTMENTS
The investments of the Company's former life insurance subsidiaries included
fixed maturities, equity securities, mortgage loans and policy loans. The
Company accounted for these investments for through June 6, 1996 (see Note 4,
"Life Insurance Operations"), as described below:
The Company accounts for investments in debt and equity securities in accordance
with Statement of Financial Accounting Standards, ("SFAS") 115 "Accounting for
Certain Investments in Debt and Equity Securities". Fixed maturities for sale
are securities held for indefinite periods of time and may have been 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, and are reflected in common
stockholders' equity. As of December 31, 1996, the Company did not actively
manage a fixed maturities portfolio. Equity securities available for sale
include common and nonredeemable preferred stocks and are carried at market
values. Changes in the market values of these securities, net of deferred income
taxes and deferred policy acquisition costs, are reflected as unrealized
appreciation or depreciation in common stockholders' equity.
Mortgage loans are carried at the lower of amortized cost or fair value. Policy
loans are carried at unpaid principal balances plus accrued interest.
When impairment of value of an investment is considered other than temporary,
the decrease in value is reflected in the Consolidated Statement of Operations
as a realized investment loss, and a new cost basis is established. Realized
investment gains and losses are reported in Consolidated Statement of Operations
using the specific identification method.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity date of
three months or less at date of purchase to be cash equivalents. At December
31, 1996, the cash included restricted mortgage escrow and premium accounts of
approximately $58,000.
F-8
<PAGE> 54
ALLOWANCE FOR LOSSES
The Company provides for valuation allowances for estimated losses on loans and
real estate when a significant and permanent decline in value occurs. In
providing valuation allowances, costs of holding real estate, including the cost
of capital, are considered. The Company's major loans and real estate owned are
reviewed periodically to determine potential problems at an early date. The
Company's experience has shown that foreclosures on loans result in some degree
of loss. Therefore, in addition to allowances for specific loans, the Company
records a provision for losses on properties based on experience and prevailing
market conditions.
EARNINGS PER SHARE
Earnings per share are based upon the weighted average number of shares of
common stock outstanding (5,286,316 in 1996, 5,284,280 shares in 1995 and
5,350,672 in 1994), and are computed after deducting preferred dividends and
preferred stock accretion of $234,000 in 1994. Dilution relating to stock
options and warrants was not material.
POST-RETIREMENT BENEFITS OTHER THAN PENSION
Wickes provides certain health and life insurance benefits for eligible retirees
and their dependents. The Company accounts for the costs of these
post-retirement benefits over the employees' working careers in accordance with
SFAS No. 106, "Employers' Accounting for Post-retirement Benefits Other than
Pensions."
POST-EMPLOYMENT BENEFITS
Wickes provides certain other post-employment benefits to qualified former or
inactive employees. The Company accounts for the costs of these post-employment
benefits in the period when it is probable that a benefit will be provided in
accordance with SFAS No. 112, "Employers' Accounting for Post-employment
Benefits".
INCOME TAXES
The Company accounts for income taxes in accordance with SFAS 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.
IMPAIRMENT OF LONG-LIVED ASSETS
In 1996 the Company adopted SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of". This statement
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. As of December 31, 1996, no impairment was recorded related to the
Company's long-lived and intangible assets. The Company periodically reviews
excess property held for sale, and reports these assets at the lower of their
carrying amount or fair value less costs to sell.
F-9
<PAGE> 55
STOCK-BASED COMPENSATION
SFAS 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 earnings per share under the new method. The Company elected not to adopt
SFAS No. 123, and continued to apply the terms of Accounting Principles Board
Opinion No. 25.
The Company determined the impact on net income and earnings per share of the
fair value based accounting method would be immaterial based on the small
number of outstanding options and their prices (see Note 12, "Employee Benefit
Plans").
EXCESS OF COSTS OVER FAIR VALUE OF NET ASSETS ACQUIRED
The Company amortizes the excess of costs over fair value of net assets
("goodwill") acquired over 25 - 35 years. The Company evaluates the
recoverability of goodwill based upon expectations of non-discontinued cash
flows and income from operations for each subsidiary having a material goodwill
balance. Based upon this evaluation, the Company believes that no impairment of
goodwill exists at December 31, 1996.
As of December 31, 1996, goodwill consisted of $16.4 million, of which $8.6
million relates to the Company's investment in Wickes and $7.8 million relates
to Wickes' investments in its subsidiaries and acquired operations. As part of
the Life Insurance Reorganization (see Note 4. "Reorganization of Life Insurance
Operations"), the Company wrote off $10.79 million of goodwill related to its
life insurance operations. This charge is reflected under "Loss on
Reorganization of Life Subsidiaries" in the Consolidated Statement of
Operations.
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.
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.
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
F-10
<PAGE> 56
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, 1996,
1995, and 1994 follows (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Beginning balance $ 18,415 $ 22,381 $29,596
SFAS 115 adjustment (1) 819 (1,724) 1,687
Gross amortization (1,773) (3,362) (10,300)(2)
Interest credited at (5.4%) 414 1,120 1,398
Reorganization of Life Insurance
operations (17,875)(3) - -
------- -------- -------
Ending balance $ 0 $ 18,415 $22,381
======= ======== =======
</TABLE>
(1) The SFAS 115 adjustment is made 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.
(3) See Note 4. Reorganization of Life Insurance Operations.
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 1996, 1995 and 1994, are $159,000, $372,000, and $6,566,000,
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.
USES OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with GAAP 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 post-employment and post-retirement benefits,
accrued restructuring charges, accrued environmental and valuation allowances
for accounts receivable, inventory and deferred tax assets. Accrued compensation
liability
F-11
<PAGE> 57
and medical claims involve the determination of reserves for incurred but not
reported claims. Accrued postemployment and post-retirement benefits involve the
use of actuarial assumptions, including selection of discount rates (see Note
12. "Employee Benefits Plan"). Accrued restructuring charge involves 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 10. "Commitments and Contingencies"). Accrued environmental costs involve
estimated remediation costs probable at facilities with underground storage
tanks removed. 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 13. "Income
Taxes"), it is reasonably possible that the Company's estimates for such items
could change in future.
FINANCIAL STATEMENT PRESENTATION AND RECLASSIFICATION
Certain reclassifications have been made to the 1995 presentation to conform
with the 1996 presentation.
SFAS No. 109 requires that the current and non-current components of deferred
tax balances be reported separately based on the financial statement
classification of the related asset or liability which cause a temporary
difference between tax and financial reporting. Items which are not directly
related to an asset or liability that exists for financial reporting purposes
are classified as current or non-current based on the expected reversal date of
the temporary difference.
STATEMENT OF CASH FLOWS SUPPLEMENTARY DISCLOSURE
The Parent Group paid $5,174,000, $4,046,000, $4,020,000 of interest
(including interest paid by the consolidated real estate partnerhips) in 1996,
1995, and 1994, respectively. Wickes paid $20,372,000, $22,823,000 and
$18,777,000 of interest in 1996, 1995, and 1994, respectively.
The Parent Group made no income tax payments in 1996, 1995, and 1994. Wickes
paid $1,518,000, $1,987,000 and $18,777,000 of interest in 1996, 1995, 1994,
respectively .
See Note 11, "Redeemable Preferred Stock and Stockholder's Equity", for a
discussion of the Series C preferred stock and plan of recapitalization. Net
cash used in discontinued operations activities total approximately $4.2
million and $6.6 million 1995 and 1994.
The Company paid a cash dividend on its common stock of $.10 per share, or an
aggregate of approximately $530,000 in 1996. The Company did not pay any
dividends on its common stock during 1995 and 1994.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities", addresses accounting for transactions including
securitization, transfers of securities with recourse, repurchase agreements,
securities-lending arrangements, pledges of collateral, financial assets subject
to prepayment risk, servicing of financial assets, and extinguishment of
liabilities. The Company did not have any transactions during 1996 addressed by
this statement.
SFAS No. 128, "Earnings Per Share," revises the disclosure requirements and
increases the comparability of EPS data on an international basis by simplifying
the existing computational guidelines in APB Opinion No. 15. The pronouncement
will require dual presentation of basic and diluted EPS on the Company's
Statement of Operations and is effective the Company's fiscal year ending
December 31, 1997. The Company believes that adoption will not have a material
impact on its financial statements.
SFAS No. 129, "Disclosures of Information About Capital Structure," establishes
standards for disclosing information about an entity's capital structure. The
new accounting principle is effective for the Company's fiscal year ending
December 31, 1997. The Company believes that adoption will not have a material
impact on its current disclosures.
2. RESTRUCTURING AND UNUSUAL CHARGES
During the fourth quarter of 1995, Wickes committed to and began implementing a
restructuring plan ("1995 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. The costs for closing these building centers were based
on management's estimates of costs to exit these markets and actual historical
experience. Included in Wickes' 1995 Results of Operations is a $17.8 million
charge,
F-12
<PAGE> 58
including $12.6 million in anticipated losses on the disposition of closed
centers and liabilities and $2.2 million in severance and post-employment
benefits relating to the 1995 Plan and other one time costs.
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, post-employment benefits to qualified former employees as a result of
the center closings, and other charges related to the strengthening o Wickes'
capital structure. Also included was a charge for unusual employment related
claims expensed in the fourth quarter of 1995.
During 1996, Wickes continued executing the 1995 Plan, through the consolidation
and closing of 18 building centers and the improvement of its overall capital
structure through the issuance of new shares and the modification of its bank
revolving credit agreement (see Note 9. "Long Term Debt".) Management
anticipates completion of the 1995 Plan by the end of 1997.
After extensive review of the 1995 Plan, and changes in business conditions in
certain markets in which Wickes operates, Wickes made adjustments to the 1995
Plan and incurred other one time costs resulting in a net $0.7 million charge to
results of operations in the fourth quarter of 1996 for restructuring and
unusual items. These adjustments included (i) the determination that three of
the centers identified in the 1995 Plan for closure will remain open, resulting
in a $1.5 million credit to restructuring expense, (ii) the extension of the
1995 plan to include the closing (substantially completed by the end of 1996) of
two building centers not previously included, resulting in a $1.3 million
charge for the write down of assets and liabilities to their net realizable
value and a $0.1 million charge for severance and post-employment benefits,
(iii) a $1.1 million charge for impairment in the carrying value of real estate
held for sale at closed centers, and (iv) a $0.3 million credit with respect to
the resolution of a claim at below the reserved amount.
3. ACQUISITIONS
INVESTMENT IN WICKES LUMBER COMPANY
In a series of transactions in 1993 in connection with Wickes' equity and debt
recapitalization plan (which included Wickes' initial public offering of common
stock), the Company acquired a net 1,842,774 additional shares of Wickes common
stock and an option for 374,516 shares of Wickes common stock. The aggregate
purchase price for these shares and option was $5.9 million including a $1.1
million promissory note. In August 1995, the Company exercised its option for an
exercise price of $2.3 million and paid its promissory note in full. After these
transactions, the Company owned 2,217,290 shares, or approximately 36% of
Wickes' outstanding common stock. At December 31, 1995, the Company's retained
earnings included $4.0 million of Wickes' undistributed earnings.
The Company acquired two million newly-issued shares of Wickes' common stock on
June 20, 1996. These 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. As a result, the accompanying consolidated balance
sheet includes Wickes at December 31, 1996. Additionally, the results of
operations and cash flows of Wickes are consolidated with the Company, beginning
July 1, 1996. Prior to July 1, 1996, the Company's balance sheet and statements
of operations and cash flows reflect the Parent Company's investment in Wickes
on the equity method. The acquisition of additional shares of Wickes has been
recorded as a step acquisition using the purchase method of accounting. Included
in the Company's December 31, 1996 balance sheet is $8.6 million of goodwill
related to the acquisitions, which is being amortized over 25 years.
F-13
<PAGE> 59
Summary audited financial information of Wickes for years 1996, 1995 and 1994
follows (in thousands):
Years Ended December 30, 1996, December 31,
-------------------------------------------
1995 and December 25, 1994
--------------------------
<TABLE>
<CAPTION>
Operating Statement Data: 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net sales $848,535 $972,612 $986,872
Gross Profit 189,463 220,812 233,831
Net income (loss) $ 509 $(15,599)(1) $ 28,054(2)
Balance Sheet Data:
Current assets $185,061 $219,475 $239,694
Total assets 272,842 302,515 319,573
Current liabilities 68,290 79,853 76,183
Long-term debt 176,376 205,221 211,139
Other long-term liabilities 2,677 2,312 2,105
Common stockholders' equity $ 25,499 $ 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
reduction in the deferred income tax valuation allowance established in a
prior year.
(2) Includes income of $14.4 million related to the reduction in the deferred
income tax valuation allowance established in a prior year.
The following unaudited proforma summary presents information as if the 1996
acquisition of additional shares had occurred on January 1, 1995. The pro forma
information is for informational purposes only and is based on historical
information and does not necessarily reflect the actual results that would have
occurred (in thousands, except per share data):
<TABLE>
<CAPTION>
December 31, 1996 December 30, 1995
----------------- -----------------
<S> <C> <C>
Proforma Consolidated Operating Statement:
Net sales $848,535 $972,615
Gross profit 189,463 220,812
Net income(loss) (623) (18,724)
Net income(loss) per common share (.12) (3.54)
</TABLE>
WICKES' 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 in 1995 was
approximately $12.4 million. Wickes had no significant acquisitions in 1996.
F-14
<PAGE> 60
During 1995, Wickes acquired five retail building material centers for a total
cost of $11.8 million, $8.1 million in cash and $3.7 million in liabilities
assumed. An additional $0.6 million was recorded for the 1994 Gerrity
acquisition. The cost of the acquisitions has 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, Wickes acquired all of the net assets of two building material
centers for approximately the fair market value of the assets and liablilities
assumed. The cost of the acquisition approximated the fair market value of the
assets acquired and liabilities assumed. In addition, Wickes acquired all of the
outstanding Class B common stock of Riverside International Corporation from
Riverside. 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, Wickes 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.
4. REORGANIZATION OF LIFE INSURANCE OPERATIONS
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 this transaction, a wholly-owned subsidiary of AFAC, that
wholly-owned all of the Company's insurance subsidiaries, merged with Circle.
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 951,486 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 (see Note 9, "Long-Term Debt").
In 1995 the Company estimated and reported a loss on the reorganization of the
life insurance operations in accordance with SFAS ("SFAS") No. 121 "Accounting
for the Impairment of Long-Lived Assets and LongLived Assets to be Disposed of".
The Company initially 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 subsequently recorded
a loss on impairment of approximately $.6 million based upon an independent
appraisal of the Circle shares and a merger agreement that Circle and an
unrelated party entered into in March 1997. Additionally, the loss on impairment
was offset by consideration paid to the Company by the life insurance
subsidiaries of approximately $431,000 for utilization of tax benefits related
to life insurance operations through June 6, 1996. The Company's investment in
Circle is reported on the equity method. Accordingly, the consolidated balance
sheet at December 31,1996 does not include the individual consolidated assets
and liabilities of Circle's life insurance operations.
Up to the closing of the Life Insurance Reorganization, the life insurance
operations generated income after taxes of $1,003,000 in 1996. However, based
on an evaluation of the life company's profits from operations 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.
F-15
<PAGE> 61
5. DIVESTITURE OF PROPERTY AND CASUALTY INSURANCE 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 an unrelated third party. 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, and $3,684,000 respectively for 1995 and 1994.
Also, included are Dependable's realized gains of $31,000 and $91,000 from sales
of investments for 1995 and 1994, respectively. During 1994, Dependable incurred
net claims of $4.2 million (pre-tax), net of reinsurance, primarily due to
adverse loss experience on its commercial insurance lines of business.
6. PROPERTY, PLANT, AND EQUIPMENT
Property, plant and equipment consists of:
<TABLE>
<CAPTION> December 31,
---------------------
1996 1995
---- ----
(in thousands)
<S> <C> <C>
Land and improvements $12,391
Buildings 25,169
Machinery and equipment 26,505 2,743
Leasehold improvements 2,701
Construction in progress 90
------- ------
$66,856 2,743
Less: Accumulated depreciation
and amortization 27,685 1,658
------- ------
39,171 1,085
Assets held for sale, net 11,074
-------
Property, plant, and equipment, net $50,245 $1,085
======= ======
</TABLE>
The Company reviews assets held for sale in accordance with the SFAS No. 121
"Accounting for the Assets Impairment of Long-Lived Assets and for Long-Lived
Assets to be Diposed Of". In 1996, Wickes recorded a loss of $1.1 million to
report land, land improvements and buildings held for sale at their net
realizable value. This charge is included under Restructuring and Unusual items
on the Consolidated Statement of Operations. At December 30, 1995, Wickes had
gross property, plant and equipment of $51,634,000, including $4,911,000 of
assets held for sale.
F-16
<PAGE> 62
7. INVESTMENTS
REAL ESTATE INVESTMENTS
Investment in real estate consists of the following:
<TABLE>
<CAPTION>
December 31,
--------------------
(in thousands)
1996 1995
---- ----
<S> <C> <C>
Commercial rental property $ 400 $ 563
Land held for investment 16,389 17,251
Investments in real estate joint ventures 65 65
-------- -------
Gross real estate investments 16,854 17,879
Related mortgage debt (17,583) (2,312)
-------- -------
Real estate investments, net of mortgage debt $ (729) $15,567
======== =======
</TABLE>
Certain of the Company's real estate was acquired from affiliates and has been
recorded at historical carryover cost. Commercial rental property carrying
values are net of accumulated depreciation of $130,000 and $117,000 at December
31, 1996 and 1995, respectively.
As of December 31, 1996, the Company had $5,828,000 of its investments in real
estate in Florida properties, $10,954,000 in Georgia properties, and $72,000 in
other states.
CONSTRUCTION AND PERMANENT LOANS
As of December 31, 1996, properties related to the Company's construction loans
are located in Indiana (59%), Alabama (39%) and Florida (2%).
In addition, the undrawn amount of construction loans committed at December 31,
1996, totaled $3,329,000. The Company's commitment to fund the undrawn balance
is contingent upon the borrowers' successful completion of certain specified
conditions. Approximately 65% of the total construction loans outstanding at
December 31, 1996, were made with respect to homes for which no purchase
agreements existed.
NET INVESTMENT INCOME
The major categories of investment income are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Fixed maturities $ 4,380 $12,055 $14,697
Equity securities 19 56 43
Mortgage and construction loans 1,194 2,941 2,580
Investment in real estate (254) (316) (353)
Policy loans 452 1,141 1,227
Short-term and other investments 1,740 681 704
------- ------- -------
Total investment income 7,531 16,588 18,898
------- ------- -------
Investment expenses (1,206) (2,066) (1,375)
------- ------- -------
Net investment income $ 6,325 $14,492 $17,523
======= ======= =======
</TABLE>
F-17
<PAGE> 63
The Company earned no revenue during 1996 from $16,389,000 of investments in
real estate.
Investment income from the life insurance subsidiaries accounted for
approximately 99% of net investment income in 1995. Investment income for 1996
includes investment income from the Life Insurance Subsidiaries only through
June 6, 1996; therefore, comparisons between years are not meaningful.
REALIZED INVESTMENT GAINS AND LOSSES
Net realized investment gains(losses) are summarized below (in
thousands):
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Fixed maturities
Available for sale $ 1,070 $ 752 $ (345)
Actively managed -- -- (883)
Equity securities
Available for sale (54) 271 1,173
Investment real estate 656 392 (1) (82)
Other (10) (149) (45)
Related party investments -- (1,500)(2) --
------- ------- -------
Net realized gains(losses) $ 1,662 $ (234) $ (182)
======= ======= =======
</TABLE>
Investment gains(losses) for 1996, includes the realized gains and losses earned
on the Life Insurance Subsidiaries' fixed maturities and equity securities
through June 6, 1996.
- -------------------------------------------------------------------------------
(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 reporting purposes.
(2) Reflects establishment of a reserve for future losses equal to the
aggregate carrying value of these securities (See Note 14, "Related
Party Transactions").
F-18
<PAGE> 64
FIXED MATURITIES
The amortized cost and market values of investments in fixed maturities and
equity securities at December 31, 1995 are as follows:
<TABLE>
<CAPTION>
December 31, 1995
----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Gains Value
---- ----- ----- -----
(in thousands)
<S> <C> <C> <C> <C>
Available for sale:
United State 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 maturies 141,755 5,763 (366) 147,152
Equity securities 968 -- (130) 838
-------- -------- -------- --------
Total $142,724 $ 5,763 $ (496) $147,990
======== ======== ======== ========
</TABLE>
8. ACCRUED LIABILITIES
The following table summarizes the accrued liabilities for the past two years:
<TABLE>
<CAPTION>
December 31,
------------
1996 1995
---- ----
<S> <C> <C>
Accrued payroll $ 6,623 $ 442
Accrued interest 1,610 337
Accrued liability insurance 4,572 -
Accrued restructuring charges 6,199 -
Other 8,996 538
------- ------
Total accrued liabilities $28,000 $1,317
======= ======
</TABLE>
As of December 31, 1996, accrued liabilities consisted of $27 million from
Wickes and $1 million from the Parent Group. In addition, Wickes had accrued
liabilities of $38 million at December 30, 1995.
F-19
<PAGE> 65
9. LONG-TERM DEBT
Consolidated long-term and mortgage debt obligations are summarized as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------
1996 1995
---- ----
(in thousands)
THE PARENT GROUP
<S> <C> <C>
LONG-TERM DEBT
Subordinated notes, net of discount of
$549,000 in 1996 and $697,000 in 1995,
interest payable at 13.00% semi-annually,
principal due September 30, 1999 $ 9,451 $ 9,303
Bank Note, interest payable at 30 to 130 basis points above prime
or 180 to 280 basis points above the Eurodollar rate. Repaid in
connection with the Life Insurance Reorganization (see Note 4.
"Reorganization of Life
Insurance Operations".) -- 18,000
Warehouse line of credit for construction
and permanent loans 3,908 --
Other 967 1,600
-------- --------
Total long-term debt 14,326 28,903
Less current maturities (4,560) (2,533)
-------- --------
Total Company long-term debt less current maturities $ 9,766 $ 26,370
======== ========
MORTGAGE DEBT
Mortgage debt, non-recourse, related party $ 17,583 $ --
Mortgage debt, recourse 2,312
-------- --------
Total Company mortgage debt 17,583 2,312
Less current maturities (168) (2,312)
-------- --------
Total Company long-term mortgage debt less current maturities $ 17,415 --
======== ========
</TABLE>
WICKES
Revolving line of credit, interest payable at
1.50% above prime or 3.0% over LIBOR,
F-20
<PAGE> 66
<TABLE>
<S> <C> <C>
principal due January 22, 1998 $ 76,313 $ --
Senior subordinated notes, interest payable
at 11-5/8% semi-annually, principal due
December 15, 2003 100,000 --
Other 196 --
Total long-term debt 176,509 --
Less current maturities (133)
Total Wickes' long-term debt less current maturities 176,376
-------- --------
Total consolidated long-term debt less current maturities $186,142 $ 26,370
======== ========
Total consolidated long term and mortgage debt $203,557 $ 26,370
======== ========
</TABLE>
As of December 31, 1996, the Prime and london InterBank Offered Rate ("LIBOR")
three month rates were 8.25 %, and 5.63 % respectively.
THE PARENT GROUP
SUBORDINATED NOTES (THE PARENT COMPANY)
These notes may be prepaid in whole or in part upon payment of a premium of
2.889% 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.
BANK NOTES - (AFAC)
All indebtedness under this facility was repaid in connection with the Life
Insurance Reorganization.
WAREHOUSE LINE OF CREDIT - (WML)
On June 26, 1996, WML obtained an $6,000,000 warehouse line of credit (the
"Line") from Liberty Savings Bank ("Liberty") for funding first mortgage loans
to its customers, subject to the following limitations: (I) Speculative and
Pre-Sold Home Loans ("Construction Loans") - loans to qualified builders for the
purpose of constructing one-family residential houses limited to an aggregate
maximum amount of $5,000,000, and (ii) Permanent End Loans ("Permanent Loans") -
loans to qualified home buyers for the purpose of purchasing or refinancing
existing home mortgages - 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")
limited 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 Construction Loans, and rate equal to the Prime Rate for Permanent Loans.
Interest is paid monthly for all
F-21
<PAGE> 67
types of loans. Other fees associated with the Line include an annual warehouse
fee equal to 25 basis points multiplied by the total available amount of the
Line, and administrative fees of $175 and $25 for construction and permanent
loans, respectively. 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, after
notification from Liberty, 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 a minimum of $2,200,000. The unused portion of the line at
December 31, 1996, was approximately $3,500,000.
In 1997, WML replaced its $5 million construction loan line of credit with a
$20 million line and increased its permanent loan line of credit to $3 million
(see Note 16. " Subsequent Events").
WICKES LUMBER COMPANY
REVOLVING LINE OF CREDIT
Under the revolving line of credit, which expires in January 1998, Wickes may
borrow against certain levels of accounts receivable and inventory, up to a
maximum credit limit of $130,000,000. At December 28, 1996, the amount available
for borrowing was $27,676,000. A commitment fee of 1/2 of 1% is payable on the
unused portion of the commitment. The weighted-average interest rate for the
years ending December 28, 1996 and December 30, 1995 was approximately 9.0% and
8.8%, respectively.
Substantially all of the 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 among other things, capital expenditures, the incurrence of additional
debt, asset sales, dividends, investments, and acquisitions.
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 Wickes' 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 the Parent Company of $10 million from the sale of equity
securities of Wickes. The sale of securities to the Parent Company was
completed on June 20, 1996 and required real estate collateral was released.
SENIOR SUBORDINATED NOTES
On October 22, 1993, Wickes 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 Wickes, Wickes must offer to
purchase the notes at 101% of the principal thereof, plus accrued interest.
F-22
<PAGE> 68
MORTGAGE DEBT
RELATED PARTY - THE PARENT COMPANY
As a part of the Life Insurance Reorganization, the Parent Company purchased
certain real estate owned by American Founders. 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 purchase price of the real estate parcels. 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 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 American Founders
with an independent appraisal of the real estate, subject to the mortgages
("Appraised Values"). If the outstanding principal amount of the Notes exceeds
85% of the Appraised Value on the first anniversary or 80% of the Appraised
Value with each anniversary thereafter, the Company is required by December 31
of that year, 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 and with the prior consent
of American Founders. Subject to certain exclusions, the entire sales proceeds
is required to be paid to American Founders 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
reviewed and required to have a coverage ratio of 116%. At December 31, 1996,
the Company had a coverage ratio of 171%.
MORTGAGE DEBT, RECOURSE - AMERICAN FOUNDERS
All mortgage notes outstanding as of December 31, 1995 were repaid in March
1996.
AGGREGATE MATURITIES
The aggregate amounts of consolidated future minimum principal payments on
long-term debt are as follows: (in thousands) The Year Company Wickes Total
<TABLE>
<CAPTION>
THE
YEAR COMPANY WICKES TOTAL
---- ------- ------ -----
<S> <C> <C> <C>
1997 4,728 133 4,862
1998 706 76,360 77,066
1999 10,425 16 10,441
2000 458 - 458
2001 501 - -
Thereafter 15,639 100,000 116,140
</TABLE>
10. COMMITMENTS AND CONTINGENCIES
At December 28, 1996, Wickes had accrued approximately $1,003,000 for
remediation of certain environmental and product liability matters, principally
underground storage tank removal.
F-23
<PAGE> 69
Many of the building center facilities presently and formerly operated by Wickes
contained underground petroleum storage tanks. Other than tanks at one acquired
facility recently installed in compliance with modern standards, 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 net costs with respect to the filling or removing
of underground storage tanks and related investigatory and remedial actions.
Wickes is one of many defendants in approximately 110 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. Each of the plaintiffs in these actions is represented by one of two
law firms. Wickes 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 Wickes', its directors and
the Company seeking to enjoin or to obtain damages with respect to Wickes'
agreement to issue 2,000,000 newly-issued shares of common stock to the Parent
Company for $10 million (see Note 3. "Acquisitions - Investment in Wickes
Lumber").
The Company and Wickes are involved in various other legal proceedings which are
incidental to the conduct of their businesses. The Company does not believe that
any of these proceedings will have a material adverse effect on the Company.
The Company's assessment of the matters described in this note and other
forward-looking statements ("Forward-Looking Statements") in these notes are
made pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995 and are inherently subject to uncertainty. The outcome of the
matters 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, Wickes' ability to prevail against its insurers
with respect to coverage issues to date, the financial ability of those insurers
and other persons from whom Wickes may be entitled to indemnity, and the
unpredictability of matters in litigation.
The Company and its subsidiaries have various operating leases for which
approximately $10,368,000, $413,000 and $330,000 was expenses in 1996, 1995 and
1994 respectively. As of December 31, 1996, the Company and its subsidiaries
have the following operating leases: (I)RGI leases its home office property for
approximately $251,000 per year, under a lease expiring in 1997, with an option
for one to five additional years. (ii) WML leases five office spaces for
approximately $87,000 per year, for its branch operations, with leases expiring
between 1998 through 2000. (iii) Wickes has operating leases for retail space,
equipment and other items. These leases provide for minimum rents. Theses leases
generally have options to renew for additional periods. Wickes' minimum rents
under all operating leases are $10,076,000, $10,051,000 and $8,086,000 for the
years ended December 27, 1996, December 31, 1995 and December 31,1994,
respectively.
F-24
<PAGE> 70
The Company's total future minimum commitments for noncancelable operating
leases are as follows (in thousands):
<TABLE>
<CAPTION>
Year Amount
---- ------
<S> <C>
1997 $6,831
1998 4,060
1999 2,936
2000 1,034
2001 404
Thereafter 1,889
--------
Sub-Total 17,154
Less: Sub-lease income (929)
--------
Total $ 16,225
========
</TABLE>
In connection with the sale of Dependable, 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. The purchaser and the Company are engaged in
a dispute over responsibility for a $250,000 assessment levied upon Dependable
by the State of Florida related to Hurricane Andrew. Although future loss
development will occur over a number of years, the Company believes, based on
all information presently available, it is not anticipated that these
indemnities will have a material adverse effect on the Company's financial
position or results of operations.
11. REDEEMABLE PREFERRED STOCK AND STOCKHOLDER'S EQUITY
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 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.
12. EMPLOYEE BENEFIT PLANS
THE COMPANY
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.
Pursuant to an agreement with Wilson Financial Corporation ("Wilson Financial"),
the Company's controlling stockholder, the ESOP purchased 41,185 shares of its
common stock in 1994 for $267,500, which was based on average market prices.
As of December 31, 1996, 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
F-25
<PAGE> 71
on the ESOP loans, were $97,000, $76,000 and $38,000 in 1996, 1995 and 1994,
respectively. Loans from the Company to the ESOP of $268,000 in 1994 were used
to purchase additional shares of common stock.
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, 1996, this amount has been reduced to
$335,000 by the cost of ESOP shares released by repayments on these notes.
Unearned ESOP shares are not treated as outstanding for the calculation of
earnings per common share. The fair value of unearned ESOP shares as of December
31, 1996, was approximately $609,500.
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 (fixed
option plan for employees and directors). In 1995, the Incentive Stock Option
Plan 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, 1993 256,000 256,000 3.33-11.88 1,247,130
Granted 10,000 - 7.00 -
Vested - - - -
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
Granted - - - -
Vested - - - -
Exercised - - - -
Expired/Canceled (30,000) (30,000) (159,900)
------- ------- ----------
Outstanding at December 31, 1996 73,000 65,500 $5.33-$11.88 $ 500,440
======= ======= ==========
</TABLE>
Options outstanding as of December 31, 1996 expire in 1997 through 2003 as
follows:
<TABLE>
<CAPTION>
Shares Option Price
Exercisable Per Share Total Expiration Date
----------- --------- ----- ---------------
<S> <C> <C> <C>
3,000 8.88 26,640 December 1997
10,000 11.88 118,800 September 1999
30,000 7.25 217,500 February 2002
2,500 7.00 17,500 October 2003
20,000 6.00 120,000 October 2003
--------
$500,440
========
</TABLE>
F-26
<PAGE> 72
Since the Company applies APB Opinion No. 25 and related interputations in
accounting for its plan, no compensation cost has been recognized in conjunction
with this plan. Had compensation cost been determined in accordance with SFAS
123, the Company's net income and earnings per share would not have changed.
This is primarily due to the weighted average exercise price being greater than
the average market value of the common stock. As of December 31, 1996 and 1995,
there have been no options granted since 1994, and there is little or no
volatility in the market of the common stock.
401(K) PLAN
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 $28,000, $56,000 and $61,000 during 1996, 1995 and 1994,
respectively.
WICKES LUMBER COMPANY
401(K) PLAN
Wickes sponsors a defined contribution 401(k) plan covering substantially all of
its full-time employees. Additionally, Wickes 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 28, 1996, December 30,
1995, and December 31, 1994 were $1,392,000, $1,700,000, and $2,625,000,
respectively.
POST-RETIREMENT BENEFITS OTHER THAN PENSIONS
Wickes 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
post-retirement benefits. Wickes accrues the estimated cost of retiree benefit
payments, other than pensions, during the employees' active service period.
F-27
<PAGE> 73
The plan's funded status is as follows:
<TABLE>
<CAPTION>
December 28, December 30,
1996 1995
---- ----
(in thousands)
<S> <C> <C>
Accumulated post-retirement benefit obligation -
Retirees and their dependents $ 1,259 $ 934
Active employees fully eligible to retire
and receive benefits 682 531
Active employees not fully eligible 1,349 1,292
------- -------
Total accumulated post-retirement benefit obligations 3,290 2,757
Plan's assets as fair value -- --
------- -------
Accumulated post-retirement benefit obligations in
excess of plan's assets 3,290 2,757
Unrecognized net loss (613) (445)
------- -------
Accrued post-retirement health care cost $ 2,677 $ 2,312
======= =======
</TABLE>
Actuarial assumptions used were as follows:
<TABLE>
<CAPTION>
December 28, December 30,
1996 1995
---- ----
(in thousands)
<S> <C> <C>
Projected health care costs trend rate 6.0% 6.0%
Ultimate trend rate 6.0% 6.0%
Year ultimate trend rate achieved n/a n/a
Effect of a 1% point increase in the health care cost
trend rate on the post-retirement benefit obligation $ 77 $ 63
Effect of a 1% point increase in the health care cost
trend rate on the aggregate of service and interest cost $ 21 $ 18
Discount rate 7.75% 7.25%
</TABLE>
POST-EMPLOYMENT BENEFITS
Wickes provides certain post-employment benefits to qualified former or inactive
employees who are not retirees. These benefits include salary continuance,
severance, and health care. 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 Wickes five or more years. Wickes accrues
the estimated cost of benefits provided to former of 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. Wickes incurred post-employment benefit
income of $31,390 for the year ended December 28, 1996, and expense of $160,000
(exclusive of amounts included in its restructuring liability, see Note 3) and
$2,000,000 for the years ended December 30, 1995 and December 31, 1994,
respectively.
13. 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
F-28
<PAGE> 74
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 will file a consolidated tax return for 1996 which will include all
its subsidiaries with the exception of Wickes. The Company's ownership in
Wickes is below the requirements which allow consolidation for tax purposes,
therefore Wickes will file a separate consolidated return with its
subsidiaries.
At December 31, 1996, the Company and its subsidiaries, exclusive of Wickes,
have net operating loss carry forwards available to offset income of
approximately $44 million expiring in years 2000 through 2011 and $3.8 million
of capital loss carry forwards which expire in 1999 unless utilized. To the
extent carry forwards existing at the subsidiaries' acquisition dates have been
utilized, the tax benefits are 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.
At December 28, 1996, Wickes has net operating loss carry forwards available to
offset their consolidated taxable income of approximately $42 million expiring
in years 2004 through 2011 and $.90 million of capital loss carry forwards which
expire in 1997 unless utilized. In 1993 Wickes underwent a change of ownership
as defined by section 382 of the Internal Revenue Code of 1986. As a result of
this, certain of the loss carry forwards of Wickes are limited to an annual
limitation of approximately $2.6 million a year. However gains inherent in the
Wickes assets at the time of the ownership change which have been recognized
have reduced the amount of net operating loss subject to limitation to less than
$3 million.
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 carry forward losses
against gains to be realized in the future on real estate assets and the
turnaround of temporary differences. The components of the deferred tax assets
and liabilities at December 31, 1996 and 1995 are as follows: (in thousands)
F-29
<PAGE> 75
<TABLE>
<CAPTION>
Deferred tax assets: 1996 1995
---- ----
<S> <C> <C>
Difference in reserves, net - 2,357
Difference in valuations of investments and capital - -
loss carry forwards 1,399 9,295
Difference in reporting unearned premium, accrued - -
income, expenses and other - 47
Trade accounts receivable 2,080 -
Inventories 1,954 -
Accrued personnel cost 1,936 -
Other accrued liabilities 6,912 -
Difference in investment carrying values 5,454 -
Net operating loss and AMT credit carry forwards 32,988 14,017
Other 2,533 -
-------- --------
Total deferred tax assets 55,257 25,716
Valuation allowance for deferred tax assets (20,398) (17,759)
-------- --------
Net deferred tax assets 34,859 7,957
-------- -------
Deferred tax liabilities:
Deferred policy acquisition costs - 8
Value of insurance in force - 6,597
Property, plant & equipment 1,951 -
Difference in asset bases 1,032 -
Goodwill & trademark 2,052 -
Other accrued income items 661 527
-------- --------
total deferred tax liabilities 5,697 7,132
-------- --------
Net deferred tax asset/(liability) 29,162 825
======== ========
</TABLE>
SFAS 109 requires that the current and non-current components of deferred tax
balances be reported separately based on the financial statement classification
of the related asset or liability which causes a temporary difference between
tax and financial reporting purposes. Items which are not directly related to
an asset or liability that exists for financial reporting purposes are
classified as current or non-current based on the expected reversal date of the
temporary difference. Total long term deferred tax assets have been combined
with long term deferred tax liabilities and presented as a single amount on the
balance sheet.
The income tax provision for 1996 consists of both current and deferred
amounts. The provision includes the Company's income tax amounts for only July
1 to December 31. For the first six months the Company reported their
ownership of Wickes on the equity method of accounting. See Note 3,
"Acquisitions". The components of the income tax provision are as follows:
F-30
<PAGE> 76
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Taxes currently payable
Federal income tax -- -- --
State income tax 259 -- --
Deferred expense(benefit) from income (loss) on
reorganization of life insurance companies
Deferred expense(benefit) 61 (1,910) 1,483
------ ------ ------
Total income tax expense(benefit) 320 (1,910) 1,483
====== ====== ======
</TABLE>
The deferred tax expense recorded in the current year 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 (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Change in bad debt reserve 203 -- --
Difference in tax and book inventory 245 -- --
Settlement of deferred compensation (86) -- --
Change in accrued liabilities 4,562 (56) 31
Utilization/creation of NOL (5,387) (3,104) (946)
AMT credit & cap loss carryover (471) (17) (19)
Difference in tax and book asset basis (4,405) -- 2,517
Difference in book and tax intangibles (6,245) (1,116) (2,388)
Change in accrued income items 182 490 782
Difference in reserves, net 2,357 83 3,982
Difference in valuations of investments
and capital loss carry forwards 7,896 1,578 (849)
Differences in reporting unearned premium,
accrued income, expenses and other (8) -- 59
Change in valuation allowance 1,218 232 (1,686)
------ ------ ------
Deferred tax benefit 61 (1,910) 1,483
====== ====== ======
</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 1996,
1995 and 1994 as follows:
F-31
<PAGE> 77
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Tax(benefit) computed at statutory rate 1,768 (6,157) 2,016
Increase (decrease) in taxes resulting from:
Effect of the difference in book and tax
treatment of goodwill 69 3,939 320
State and local taxes 259 0 0
Other (558) 76 3
Change in valuation allowance (1,218) 232 (852)
Tax exempt interest on bonds (4)
------ ------ ------
Actual tax expense(benefit) 320 (1,910) 1,483
====== ====== ======
</TABLE>
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
In accordance with SFAS No. 107,"Disclosure about Fair Value of Financial
Instruments", information has been provided about the fair value of certain
financial information. 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 is practicable to estimate that value.
PERMANENT AND CONSTRUCTION LOANS - The fair value of construction loans
are based upon current appraised values. The carrying value of permanent loans
is a reasonable estimate of fair value based upon their interest rate which
reflect current market conditions.
INVESTMENT IN CIRCLE INVESTORS - The fair value is based upon the purchase price
per contract with an unrelated party(see Note 4, "Reorganization of Life
Insurance Operations").
LONG TERM DEBT - The carrying amount is a reasonable estimate of fair value, as
the stated rates of interest represent current market rates.
MORTGAGE DEBT - The carrying amount is a reasonable estimate of fair value, as
the stated rates of interest represent current market rates.
The estimated fair value of the Company's financial instruments at December 31,
1996, are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1996
--------------------------
Carrying Estimated
Amount Fair Value
------ ----------
<S> <C> <C>
Financial assets:
Cash and short-term investments $ 3,100 $ 3,100
Permanent and construction loans 4,179 5,136
Investment in Circle 5,345 5,345
Financial liabilities:
Long-term debt 186,359 186,359
Mortgage debt, related party 17,583 17,583
</TABLE>
F-32
<PAGE> 78
15. 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 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 February 24, 1994, AFAC acquired $2 million principal amount of the Company's
13% subordinated notes due 1999 from an affiliate of Mr. Wilson in exchange for
cancellation of indebtedness of this affiliate to AFAC in the amount of
approximately $1.4 million. Subsequently, AFAC sold the subordinated notes to an
unrelated third party for $1,958,000 plus accrued interest.
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
$639,000 in 1996, $636,000 in 1995, and $854,000 in 1994. Included in operations
for 1996 and 1995, is income from reimbursements of salary expenses paid to the
Company by a subsidiary of Wilson Financial, JB Aviation, of $199,000 and
$163,000, respectively.
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 1996, 1995 and 1994, the firm rendered services to the Company for which
it received $877,000, $977,000 and $1,353,000, respectively.
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 and
$94,000 in 1995 and 1994, 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 1996, 1995 and 1994, is income from reimbursements of
office expenses and tax services paid to the Company by Wilson Financial of
$7,000, $39,000 and $50,000, respectively. Also included in operations is
expense paid to Wilson Financial for providing real estate management services
of $31,000, and $120,000 in 1995 and 1994, respectively.
The Company made loans to a company owned by a director of the Company in the
amounts of $154,114 and $225,000 in 1996 and 1995, respectively. The Company
restructured these notes in 1996, extending the maturity date to June 30, 1997.
The loan bears interest at a rate of 7.5%. The Company received interest
payments of $21,708 and $13,555 in 1996 and 1995, respectively.
Directors of the Company own an aggregate of $2.0 million of the Company's 13%
subordinated notes.
F-33
<PAGE> 79
16. SUBSEQUENT EVENTS
In March 1997, Circle entered into a definitive merger agreement with an
unrelated third party pursuant to which the Company's shares of Circle common
and preferred stock are to be converted into, at the Company's election, the
5,686,000 shares of common stock of an unrelated third party or $ 5.3 million.
(See Note 4. "Reorganization of Life Insurance Operations.") The net effect
of this transaction is immaterial.
In March 1997, WML replaced its $5 million construction loan line of credit to a
new $20 million line. To collateralize the increase, the Company pledged an
additional 550,000 shares of Wickes' Common Stock. The committed balance on the
existing line of $5 million, was approximately $10 million on March 14, 1997.
The loans on this line will continue to run-off. In February 1997, the permanent
line of credit increased from $1 million to $3 million. The collateral and terms
remained the same on the permanent line.
In March 1997, the Company entered into a letter of intent to sell 21 acres of
their investment in real estate for approximately $4.0 million which would
result in an immaterial gain. The property was purchased from American
Founders, and is subject to certain exclusions. The entire sales proceeds is
required to be paid to American Founders to fund an escrow account for the
payment of property taxes, accrued and unpaid interest and any remaining
principal balance on the Notes. (See Note 9. "Long-Term Debt")
17. INDUSTRY SEGMENT INFORMATION AND QUARTERLY RESULTS OF OPERATIONS
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,
---------------------------------------------
1996 1995 1994
---- ---- ----
(in thousands)
<S> <C> <C> <C>
REVENUES:
Building Materials $ 471,515 $ 492 $ 725
Life Insurance 9,800 25,245 37,079
Other 2,342 (1,668) (294)
--------- --------- ---------
Total $ 483,657 $ 24,069 $ 37,510
========= --------- ---------
EARNINGS BEFORE INCOME
TAXES, EQUITY IN RELATED
PARTIES, MINORITY INTEREST
AND DISCONTINUED OPERATIONS:
Building Materials $ 5,058 $ (1,408) $ (416)
Life Insurance 4,944 (10,530) 2,372
Other (4,803) (1,968) 103
--------- --------- ---------
Total $ 5,199 $ (13,906) $ 2,059
========= --------- ---------
IDENTIFIABLE ASSETS:
Building Materials $ 281,398 $ 11,358 $ 14,996
Life Insurance 5,661 297,804 330,083
Other 26,771 (8,437) 8,291
--------- --------- ---------
Total $ 313,830 $ 300,725 $ 353,370
========= ========= =========
</TABLE>
F-34
<PAGE> 80
<TABLE>
<CAPTION>
1996
(in thousands, except per share amounts)
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -----
<S> <C> <C> <C> <C> <C>
Revenues $ 5,877 $ 4,953 $ 257,524 $ 215,303 $ 483,657
---------- ---------- ---------- ---------- ----------
Costs and expenses $ 6,376 $ 5,363 $ 253,250 $ 213,469 $ 478,458
---------- ---------- ---------- ---------- ----------
Earnings before income taxes,
equity in related parties, minority
interest, and discontinued
operations
$ (5,089) $ 601 $ 4,274 $ 5,413 $ 5,199
---------- ---------- ---------- ---------- ----------
Earnings before discontinued
operations
$ (2,794) $ 601 $ 215 $ 1,572 $ (406)
Loss from operations of ---------- ---------- ---------- ---------- ----------
discontinued operations
Gain on disposal of discontinued
operations
Net earnings (loss)
$ (2,794) $ 601 $ 215 $ 1,572 $ (406)
---------- ---------- ---------- ---------- ----------
Earnings(loss)
per common share:
Earnings from continuing
operations
Income from disontinued $ (0.53) $ 0.11 $ 0.03 $ 0.30 $ (0.08)
operations ---------- ---------- ---------- ---------- ----------
$ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00
---------- ---------- ---------- ---------- ----------
Net earnings (loss)
$ (0.53) $ 0.11 $ 0.03 $ 0.30 $ (0.08)
---------- ---------- ---------- ---------- ----------
Weighted average
number of common
shares used in
computing earnings
per share
5,311,123 5,311,123 5,307,373 5,276,015 5,286,316
---------- ---------- --------- ---------- ----------
</TABLE>
F-35
<PAGE> 81
<TABLE>
<CAPTION>
1995
(in thousands, except per share amounts)
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -----
<S> <C> <C> <C> <C> <C>
Revenues $ 6,707 $ 5,990 $ 5,960 $ 5,412 $ 24,069
---------- ---------- ---------- ---------- ----------
Costs and expenses $ 6,866 $ 5,582 $ 6,782 $ 7,773 $ 27,003
---------- ---------- ---------- ---------- ----------
Earnings before income taxes,
equity in related parties, minority
interest, and discontinued
operations
$ (159) $ 408 $ (822) $ 13,333 $ (2,734)
---------- ---------- ---------- ---------- ----------
Earnings before discontinued
operations
$ (1,598) $ 1,102 $ (278) $ (17,071) $ (17,845)
---------- ---------- ---------- ---------- ----------
Loss from operations of
discontinued operations
$ 98 $ (116) $ (725) $ (343) $ (1,086)
---------- ---------- ---------- ---------- ----------
Gain on disposal of discontinued
operations
$ 2,481 $ 250 $ 2,731
---------- ---------- ----------
Net earnings (loss)
$ (1,500) $ 986 $ 1,478 $ (17,164) $ (16,200)
---------- ---------- ---------- ---------- ----------
Earnings(loss)
per common share:
Earnings from continuing
operations
Income from disontinued $ (0.28) $ 0.20 $ (0.06) $ (3.24) $ (3.38)
operations ---------- ---------- ---------- ---------- ----------
Net earnings (loss)
$ 0.02 $ (0.02) $ 0.34 $ (0.03) $ 0.31
---------- ---------- ---------- ---------- ----------
$ (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> 82
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 this 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 39 of this Form 10-K.
In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic consolidated financial statements taken as a
whole, present fairly, in all material respects, the information required to be
included therein.
Coopers & Lybrand L.L.P.
Jacksonville, Florida
March 28, 1997
S-1
<PAGE> 83
Riverside Group, Inc. And Subsidiaries
Schedule II - Valuation and Qualifying Accounts
For the Years Ended December 31, 1996
(dollars in thousands)
<TABLE>
<CAPTION>
Col. A Col. B Col. C Col. D Col. E
Additions
Balance at Charged to Balance at
Beginning of Costs and End of
Description Period Expenses Deductions Period
1996:
<S> <C> <C> <C> <C>
Allowance For Doubtful accounts.................... $0 $6,114 $ 1,796 $ 4,318
</TABLE>
S-2
<PAGE> 84
SCHEDULE III
RIVERSIDE GROUP, INC. (PARENT ONLY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
ASSETS 1996 1995
---- ----
<S> <C> <C>
Cash and cash equivalents $ 297 $ 655
Investment Real Estate 16,382 90
Investment in subsidiaries 30,162 36,611
Other assets 3,493 565
--------- ----------
$ 50,684 $ 37,921
========= ==========
LIABILITIES & STOCKHOLDERS' EQUITY
Accrued expenses, income taxes and other
liabilities $ 1,907 $ 962
Debt and mortgage debt 28,002 10,903
--------- ----------
$ 29,909 $ 11,865
Common stockholders equity:
Common stock $.10 par value; 20,000,000 shares
authorized, issued and outstanding in,
5,296,123 in 1996 and 5,311,123 in 1995 530 531
Additional paid-in capital 16,728 17,209
Retained earnings 3,517 3,923
Unrealized investment appreciation (depreciation) 4,393
--------- ----------
20,775 26,056
--------- ----------
Total stockholders' equity $ 50,684 $ 37,921
========= ==========
</TABLE>
S-3
<PAGE> 85
SCHEDULE III
RIVERSIDE GROUP, INC. (PARENT ONLY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENT OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net investment income $ 1,097 $ 5 $ 851
Other income 12 765 1,484
Equity in net income of subsidiaries,
net of income taxes 3,699 (12,690) 3,321
Equity in investment in Wickes
Lumber Company (1,714) (2,095) 1,523
---------- --------- ----------
Total revenue 3,094 $ (14,015) $ 7,179
Other operating costs & expenses 1,072 735 1,118
Interest expense 2,428 1,450 1,616
--------- --------- ----------
Total expenses 3,500 2,185 2,734
Income (loss) before income tax
benefit (406) (16,200) 4,445
Income tax expense (benefit) - -
---------- ---------- ----------
Net income (loss) $ (406) $ (16,200) $ 4,445
========== ========== ==========
Earnings (loss) per share of common
stock, after deducting preferred
dividends and accretion $ (0.08) $ (3.07) $ 0.24
========== ========== ==========
Weighted average number of
common shares used in
computing earnings
per share 5,286,316 5,284,280 5,350,672
========== ========== ==========
</TABLE>
S-4
<PAGE> 86
SCHEDULE III
RIVERSIDE GROUP, INC. (PARENT ONLY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-----------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Operating Activities
Net Income (loss) $ (406) (16,200) $ 4,445
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Net realized gains - (558)
Change in other assets and liabilities 3,874 (487) (550)
Equity in (income) loss of subsidiaries,
net of cash received (771) 16,308 (4,844)
Depreciation and amortization 225 232 190
Net change in recoveries from indemnification
agreement - 40 14
-------- -------- -------
Net cash provided by (used in) operating activities 2,922 (107) (1,303)
Investing Activities:
Purchase of Investments:
Securities of Wickes Lumber Company (10,000) (2,296) -
Short-term and real estate investments (20,654) - -
Sale, maturity and principal reduction of investments:
Short-term investments and other investments (139) (377)
Change in investment in and advance to subsidiaries 4,764 3,105 3,936
Life Insurance Reorganization proceeds 35,000 - -
Net assets of Life Insurance Reorganization (28,202)
-------- -------- -------
Net cash provided by (used in) investing activities (19,092) 670 3,559
Financing Activities:
Repayment of debt (849) (1,243) (750)
Increase in borrowings 17,798 1,700
Redemption of Series C Preferred Stock - - (1,283)
Issuance of Common Stock - 156 100
Purchase & Retirement of Common Stock (46) (1,168) (357)
Dividend paid to stockholders (530) - -
-------- -------- -------
Net cash provided by (used in) financing activities 16,373 (555) (2,290)
-------- -------- -------
Increase (decrease) in cash 203 8 (34)
Cash at beginning of year 94 86 120
-------- -------- -------
Cash at end of year $ 297 94 $ 86
======== ======== =======
</TABLE>
S-5
<PAGE> 1
Exhibit 21.01
LIST OF SUBSIDIARIES OF REGISTRANT
State of
Name Incorporation
- ---- -------------
American Financial Acquisitions Corporation Delaware
Dependable Insurance Group, Inc. Florida
GLC Division, Inc. Delaware
Lumber Trademark Company Illinois
Wickes Financial Services Corporation Delaware
Wickes Lumber Company Delaware
Wickes Mortgage Lending, Inc. Florida
<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-8 (File Nos. 33-16087 and 33-16244), as
amended, and prospectuses included therein, of our reports dated March 28,
1997, on our audits of the consolidated financial statements and financial
statements schedules of Riverside Group, Inc. and subsidiaries as of December
31, 1996 and 1995, for each of the three years in the period ended December 31,
1996, which reports are included in this Annual Report on Form 10-K.
COOPERS & LYBRAND L.L.P.
Jacksonville, Florida
March 28, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF RIVERSIDE GROUP, INC. AND SUBSIDIARIES CONDENSED
CONSOLIDATED BALANCE SHEET AND CONDENSED CONSOLIDATED STATEMENTS 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-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 3,100
<SECURITIES> 0
<RECEIVABLES> 71,743
<ALLOWANCES> 100,672
<INVENTORY> 4,318
<CURRENT-ASSETS> 191,038
<PP&E> 50,245
<DEPRECIATION> 27,685
<TOTAL-ASSETS> 313,830
<CURRENT-LIABILITIES> 74,204
<BONDS> 208,419
0
0
<COMMON> 530
<OTHER-SE> 20,245
<TOTAL-LIABILITY-AND-EQUITY> 313,830
<SALES> 467,254
<TOTAL-REVENUES> 483,657
<CGS> 363,930
<TOTAL-COSTS> 363,930
<OTHER-EXPENSES> 97,262
<LOSS-PROVISION> 3,523
<INTEREST-EXPENSE> 13,743
<INCOME-PRETAX> (86)
<INCOME-TAX> (320)
<INCOME-CONTINUING> (86)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (406)
<EPS-PRIMARY> (.08)
<EPS-DILUTED> (.08)
</TABLE>
