UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
November 24, 1998
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File
For Quarter Ended September 30, 1998 Number 0-9209
------------------ ---------------
RIVERSIDE GROUP, INC.
(Exact name of registrant as specified in its charter)
Florida 59-1144172
_______________________________ _______________
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
7800 Belfort Parkway, Jacksonville, Florida 32256
____________________________________________ _________
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code number
904-281-2200
Indicate by a check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months, and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
On November 10, 1998, there were 5,287,123 shares of the Registrant's
common stock outstanding.
<page 2>
<TABLE>
<CAPTION>
RIVERSIDE GROUP, INC.
INDEX
Page
PART I. FINANCIAL INFORMATION Number
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
September 30, 1998 (Unaudited)
and December 31, 1997 3
Condensed Consolidated Statements
of Operations
Three and Nine months ended
September 30, 1998 and 1997 (Unaudited) 4
Condensed Consolidated Statement
of Common Stockholders' Equity
Nine months ended
September 30, 1998 (Unaudited) 5
Condensed Consolidated Statements of
Cash Flows Nine months ended
September 30, 1998 and 1997 (Unaudited) 6
Notes to Condensed Consolidated
Financial Statements (Unaudited) 7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 13
PART II.
Item 5. Other Information 25
Item 6. Exhibits and Reports on Form 8-K 25
</TABLE>
<page 3>
Riverside Group, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
_____________ ____________
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 140 $ 3,154
Notes receivable 439 3,534
Accounts receivable, less allowance for doubtful
accounts of $422 in 1998 and $4,206 in 1997 570 81,968
Inventory --- 102,706
Deferred tax assets, net --- 8,955
Prepaid expenses 46 1,250
_______ ________
Total current assets 1,195 201,567
Investment in Wickes Inc. 17,520 ---
Investment in real estate 10,943 14,329
Trademark (net of accumulated amortization of
$10,274 in 1997) --- 6,745
Property, plant and equipment, net 311 46,792
Deferred tax asset, net 3,307 20,361
Other assets (net of accumulated amortization of
$739 in 1998 and $8,894 in 1997) 497 24,111
________ _________
Total assets 33,773 313,905
======== =========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 10,146 $ 702
Accounts payable 1,181 41,629
Income tax payable 25 25
Accrued liabilities 1,325 23,111
________ ________
Total current liabilities 12,677 65,467
Long-term debt 507 202,686
Mortgage debt 12,750 16,038
Liabilities of discontinued operations 6 34
Other long-term liabilities 159 3,084
________ _________
Total liabilities 26,099 287,309
Minority interest --- 11,976
Commitments and contigencies (Note 4)
Common stockholders' equity:
Common stock, $.10 par value; 20,000,000 shares
authorized; issued and outstanding, 5,287,123
in 1998 and 1997 529 529
Additional paid in capital 16,783 16,783
Retained earnings (deficit) (9,638) (2,692)
________ _________
Total common stockholders' equity 7,674 14,620
________ _________
Total liabilities and common
stockholders' equity $ 33,773 $ 313,905
======== =========
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements
</TABLE>
<page 4>
Riverside Group, Inc. and Subsidiaries
Condensed Consolidated Statement of Operations
(unuadited)
(in thousands except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
_________________________ _________________________
Sept. Sept. Sept. Sept.
1998 1997 1998 1997
_________ _________ __________ _________
<S> <C> <C> <C> <C>
Revenues:
Sales and service revenues $ 261,389 $ 266,324 $ 667,558 $ 662,978
Net investment income(loss) (36) (79) (87) (132)
Net realized investment gains(losses) (1,560) 133 (1,123) 820
Other operating income 1,285 2,063 5,463 4,543
_________ _________ _________ _________
261,078 268,441 671,811 668,209
_________ _________ _________ _________
Costs and expenses:
Cost of sales 200,128 206,048 509,191 511,448
Provision for doubtful accounts 538 309 1,740 892
Depreciation, goodwill and trademark
amortization 1,453 1,320 4,324 4,030
Restructuring and unusual items 501 --- 5,932 ---
Selling, general and administrative
expenses 50,257 51,423 139,093 136,928
Interest expense 6,338 6,277 18,598 18,222
________ ________ _________ _________
259,215 265,377 678,878 671,520
________ ________ _________ _________
Earnings(loss) before income taxes,
equity in related parties,
and minority interest 1,863 3,064 (7,067) (3,311)
Income tax expense 2,051 1,817 421 531
Equity in losses of related parties --- 704 --- 1,470
Minority interest, net of
income taxes 1,386 885 (542) (976)
_________ _________ _________ _________
Earnings(loss) before discontinued
operations (1,574) (342) (6,946) (4,336)
Discontinued operations:
Loss from operations of discontinued
mortgage lending operations,
net of income taxes --- (75) --- (613)
_________ ________ _________ _________
Net earnings(loss) (1,574) (417) (6,946) (4,949)
========= ======== ========= =========
Basic and diluted earnings(loss) per
common share:
Earnings(loss) from continuing
operations $ (0.30) $ (0.06) $ (1.33) $ (0.82)
Net earnings(loss) from
discontinued operations 0.00 (0.01) 0.00 (0.12)
_________ _________ --------- ---------
Earnings(loss) per share $ (0.30) $ (0.07) $ (1.33) $ (0.94)
========= ========= ========= =========
Weighted average numer of common
stock used in computing earnings
per share 5,227,571 5,307,833 5,227,571 5,193,972
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
</TABLE>
4
Riverside Group, Inc. and Subsidiaries
Condensed Consolidated Statement of Common Stockholders' Equity
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Total
Additional Common
Common Paid-In Retained Stockholders'
Stock Capital Earnings Equity
______ ________ ________ ____________
<S> <C> <C> <C> <C>
Balance, December 31, 1997 $ 529 $ 16,783 $ (2,692) $ 14,620
Net loss, nine months ended
September 30, 1998 (6,946) (6,946)
_______ ________ ________ ________
Balance, September 30, 1998 $ 529 $ 16,783 $ (9,638) $ 7,674
======= ======== ======== ========
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
</TABLE>
5
Riverside Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended Sept. 30,
-----------------------------
1998 1997
---------- ---------
<S> <C> <C>
Cash Flow from Operating Activities
Net loss $ (6,946) $ (4,949)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation expense 3,597 3,214
Amortization expense 1,854 1,898
Provision for doubtful accounts 1,780 891
Gain on sale of fixed assets (1,574) (1,379)
Net realized investment (gains)losses
on investments 1,123 (798)
Benefit for deferred income taxes (305) (579)
Equity in losses of unconsolidated subsidiaries --- 1,470
Minority interest (542) (976)
Change in other assets and liabilities:
Increase in accounts receivable (25,258) (33,463)
Decrease in notes receivable 1,874 ---
Increase in inventory (10,421) (17,298)
(Increase)decrease in other assets 8,069 (1,954)
Increase(decrease) in accounts payable
and accrued liabilities (1,218) 11,147
Net liabilities of discontinued
operations, other liabilities and
current income taxes 118 362
_________ ________
Net Cash Used in Operating Activities (27,849) (42,414)
========= =======
Investing Activities
Purchase of investments:
Property, plant and equipment (3,562) (4,980)
Investment real estate --- (493)
Sale of investments:
Property, plant and equipment 3,629 7,946
Investment real estate 3,808 3,351
_________ ________
Net Cash Provided by Investing Activities 3,875 5,824
Cash Flows from Financing Activities
Net borrowings under the revolving line
of credit 24,481 33,974
Repayment of debt (4,077) (1,628)
Increase in borrowings 972 1,414
Purchase and retirement of treasury shares --- (18)
Net proceeds from sale of Wickes Inc. 229 160
Net proceeds from issuance of common stock --- 47
_________ _________
Net Cash Provided by Financing Activities 21,605 33,949
Net Decrease in Cash and Equivalents (2,369) (2,641)
Cash at beginning of year 3,154 3,100
Less: Wickes Inc. cash balance (645) ---
_________ ________
Cash and equivalents at end of period $ 140 $ 459
========= ========
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
</TABLE>
<page 7>
RIVERSIDE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
__________________________________________
Basis of Financial Statement Presentation
_________________________________________
The condensed consolidated financial statements present the financial
position, results of operations, and cash flows of Riverside Group, Inc. and
its wholly-owned and majority-owned subsidiaries (the "Company"). The Company
no longer owns a majority interest in Wickes Inc. ("Wickes") (see Note 9 -
Subsequent Event) and at September 30, 1998, the Company began to report its
investment in Wickes on the equity method. Accordingly, the Company's
consolidated balance sheet at September 30, 1998 does not include the
accounts of Wickes. The Company's consolidated statements of operations and
cash flows for periods ending September 30, 1998 include Wickes on a
consolidated basis.
The condensed consolidated balance sheets as of September 30, 1998, the
condensed consolidated statements of operations for the nine months ended
September 30, 1998 and 1997, the condensed consolidated statement of common
stockholders' equity for the nine months ended September 30, 1998 and the
condensed consolidated statements of cash flows for the nine months ended
September 30, 1998 and 1997, have been prepared by the Company without audit.
In the opinion of management, all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial position,
results of operations and cash flows at September 30, 1998, and for all
periods presented have been made. The results for the nine month period
ended September 30, 1998 is not necessarily indicative of the results to be
expected for the full year or for any interim period.
Certain information and footnote disclosures normally included in
consolidated financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted. It is
suggested that these condensed consolidated financial statements be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1997 filed with the Securities and Exchange Commission.
Earnings Per Share
__________________
Basic and diluted earnings per common share is calculated in accordance
with Statement of Financial Accounting Standards No. 128, "Earnings Per
Share". Earnings per share are based on the weighted average number of shares
of common stock outstanding during each period (5,227,571 shares in 1998 and
5,193,972 shares in 1997). Since the Company had a net loss, the options had
an anti-dilutive effect, and therefore, are excluded from the calculation of
diluted earnings per share.
<page 8>
2. INVESTMENT IN GREENLEAF
_______________________
As of September 30, 1998, the Company entered into and completed an
agreement with Greenleaf Technologies Corporation ("Greenleaf"), based in
Iselin, New Jersey, whereby the Company has acquired common shares of
Greenleaf in exchange for 100% of the common stock of the Company's wholly
owned subsidiary, GameVerse, Inc. ("GameVerse"). As a result of the
transaction, the Company now owns 14,687,585 shares, or approximately forty
percent of Greenleaf's outstanding common shares. The Company also received
two five year options to acquire additional newly-issued shares of
Greenleaf's common stock (1) 5,733,333 shares at an average exercise price of
$.25 per share; (2) 1,581,249 shares at an exercise price of $.15 per share.
In accordance with Accounting Principles Board Opinion Number 29: Accounting
for Nonmonetary Transactions, the Company has recorded zero basis in its
investment in Greenleaf. The market value of the Company's investment
in Greenleaf at the time of the transaction was approximately $6.7 million
based on Greenleaf's stock price of $.46 per share on the over-the-counter
Bulletin Board.
3. INVESTMENT IN WICKES
____________________
For information concerning the Company's accounting for its investment in
Wickes, see Note 1 - Summary of Significant Accounting Policies - Basis of
Financial Statement Presentation.
For a description of certain transactions that have reduced the Company's
ownership interest in Wickes to less than 50%, see Note 9 - Subsequent
Event. In connection with the sale of Wickes stock in November, the Company
established a reserve for losses for approximately $1.5 million.
Summary financial information of Wickes for the third quarter 1998 follows
(in thousands):
<TABLE>
<CAPTION>
(unaudited)
Sept. 26, 1998 Dec. 27, 1997
______________ _____________
<S> <C> <C>
Balance Sheet Data:
Current assets $ 232,237 $ 197,974
Total assets 313,549 283,352
Current liabilities 70,254 63,515
Long term debt and other long-term liabilities 290,655 259,351
Common stockholders' equity $ 22,894 $ 24,001
</TABLE>
4. COMMITMENTS AND CONTINGENCIES
_____________________________
At September 26, 1998, Wickes had accrued $500,000 for remediation of
certain environmental and product liability matters, principally underground
storage tank removal. Many of the sales and distribution facilities
presently and formerly operated by Wickes contained underground petroleum
storage tanks. All such tanks known to Wickes located on facilities owned or
operated by Wickes have been filled or 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. It is possible
that Wickes could incur additional losses in excess of current reserves but
an estimate of these losses cannot be made. Since 1988, Wickes has incurred
approximately $1.9 million of net costs with respect to the filling or
removing of underground storage tanks and related investigatory and remedial
actions.
<page 9>
Wickes is one of many defendants in approximately 60 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 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 Wickes. The number of
outstanding claims has continued to decline over the last two years. Since
1993, Wickes has settled 11 claims for insignificant amounts, another 185 of
these actions have been dismissed.
On November 3, 1995, a complaint styled Wolfson v. Riverside Group, Inc.,
et al., was filed against Wickes, its Directors and Riverside Group, Inc. 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 in 1995 by Wickes of 2 million newly issued shares of its
common stock to Riverside Group, Inc. was unfair and constituted a waste of
Wickes' assets and that Wickes and Riverside breached their fiduciary duties
in their approval of this transaction. The amended complaint, among other
things, seeks on behalf of a purported class of Wickes' shareholders to
enjoin, or to obtain unspecified damages with respect to the transaction.
Wickes is involved in various other legal proceedings which are incidental
to the conduct of its business. Wickes does not believe that any of these
proceedings will have a material adverse effect on Wickes.
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.
In connection with the sale of the Company's former property and casualty
insurance operations, 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. Subordinated debentures of a subsidiary of the Company in
the amount of $2.1 million are pledged as collateral on these indemnities.
Although future loss development will occur over a number of years, the
Company believes, based on all information presently available, that these
indemnities will not have a material adverse effect on the Company's
financial position or results of operations.
On December 1, 1997, the Company completed the sale of its mortgage lending
operation to an unrelated third party. The Company did not realize any gain
or loss from the transaction, but agrees to indemnify the purchaser against
losses on the construction loan portfolio that was transferred. The Company
currently has 125,000 shares of its Wickes common stock pledged as collateral
for this indemnification obligation. As the construction loan portfolio
decreases, the shares held as collateral will be released. The Company
believes that these indemnities will not have a material adverse effect on
the Company's financial position or results of operation.
<page 10>
5. LONG TERM AND MORTGAGE DEBT
___________________________
Consolidated long-term and mortgage debt is comprised of the following at
September 30, 1998 (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Long-Term Debt
Subordinated Notes $ 9,773
Other 880
Less: current maturities (10,146)
________
Total long-term debt less current maturities $ 507
________
Mortgage Debt
Mortgage debt, non-recourse $ 12,750
Less: current maturities -
________
The Parent Group long-term mortgage debt, less
current maturities $ 12,750
________
Total long-term and mortgage debt _________
less current maturities $ 13,257
=========
</TABLE>
On April 20, 1998, Riverside amended certain terms of its mortgage debt.
In connection with the amendment, (i) the Parent Company pledged an
additional 325,000 shares of Wickes common stock in substitution for the $1.4
million cash then held by the lender as collateral and (ii) agreed to a
reduced collateral value for the shares of pledged Wickes common stock.
In February 1998, as part of the determination made by Wickes to discontinue
or sell non-core programs, Wickes sold certain operations to the Company for
a three-year $870,000 unsecured promissory note and 10% of future net income
of these operations (subject to a maximum of $429,249 plus interest). At
November 1, 1998, the Company had made payments of $115,752 under the
promissory note but was delinquent with respect to required payments of
approximately $88,854 of principal and interest.
6. OPERATIONAL RESTRUCTURING
_________________________
In February of 1998, Wickes announced a restructuring plan, the "1998
Plan", which included the closing or consolidation of eight sales and
distribution facilities and two component manufacturing facilities in
February, the sale of two additional sales and distribution facilities in
March, and further reductions in headquarters staffing. Wickes recorded a
restructuring charge of $5.4 million, which included $3.7 million in
anticipated losses on the disposition of closed center assets and
liabilities, $2.0 million in severance and post employment benefits related
<Page 11>
to the 1998 Plan, and a benefit of $300,000 for adjustments to prior years'
restructuring accruals. The $3.7 million in anticipated losses includes the
write-down of assets, to net realizable value, of $3.4 million and $300,000
in real estate carrying costs. The $2,000,000 in severance and post
employment benefits covered approximately 250 employees that were released as
a result of reductions in headquarters staffing and the closing or
consolidation of the ten operating facilities. The $300,000 benefit from
prior years was a result of accelerated sales of previously closed facilities
during the fourth quarter of 1997 and the first quarter of 1998. The
acceleration of these sales resulted in a change in the estimate of facility
carrying costs for the sold facilities. No restructuring or unusual items
were recorded in the first nine months of 1997.
In the third quarter of 1998, Wickes recorded additional restructuring
expense of $500,000 as a result of certain costs, including facility carrying
costs and severance costs, that were in excess of estimates or unknown at the
time the plan was announced, but incurred as a result of the 1998 Plan.
7. INCOME TAXES
____________
Wickes files its tax returns separately of the Company and its wholly owned
subsidiaries and the tax provisions are prepared on the same basis. An
effective tax rate of 39% was used to calculate the federal income taxes for
Wickes for the first nine months of 1998, compared to an effective rate of
39.1% for the first nine months of 1997. In addition, state income and
franchise taxes are included in the provision for both years. The Company's
effective tax rate was 0% for the nine months ended September 30, 1998 and
1997. The overall effective rate for the consolidated financial statements is
higher due to state income and franchise taxes recorded on Wickes and the tax
losses at the Company level for which deferred tax benefits were not recognized.
The Company continues to review future earnings projections to determine
that there is sufficient support for its deferred tax assets and valuation
allowance. In spite of the losses incurred during 1995 and 1997, management
believes that it is more likely than not that the Company will receive full
benefit of its deferred tax asset and that the valuation allowance is
properly stated. This assessment constitutes Forward-Looking Information
made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995 and is inherently subject to uncertainty and
dependent upon the Company's future profitability, which in turn depends upon
a number of important risk factors, including but not limited to, the
effectiveness of the Company's operational efforts, cyclicality and
seasonality of the Company's business, the effects of the Company's
substantial leverage and competition.
8. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
_________________________________________
Reporting Comprehensive Income. Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income," establishes standards for
reporting and display of comprehensive income and its components in a full
set of general-purpose financial statements. The term comprehensive income
is defined as the change in the equity of a business. Comprehensive income
includes net income as well as other components (revenues, expenses, gains,
and losses) that under generally accepted accounting principles are excluded
from net income but affect equity. The statement was effective for fiscal
years beginning after December 15, 1997. Adoption of the statement has not
had a material effect on the Company's financial statements.
<Page 12>
Disclosure About Segments. Statement of Financial Accounting Standards
No. 131, "Disclosure about Segments of an Enterprise and Related Information",
changes Statement of Financial Accounting Standards No. 14 by requiring a new
framework for segment reporting and includes the disclosure of financial
information related to each segment. The statement was effective for fiscal
years beginning after December 15, 1997. Adoption of the statement has not
had a material effect on the Company's financial statements.
Employers' Disclosures About Pensions and Other Postretirement Benefits.
Statement of Financial Accounting Standards No. 132, "Employers' Disclosures
About Pensions and Other Postretirement Benefits," standardizes the disclosure
requirements for pensions and other post retirement benefits, requires
additional information on changes in the benefit obligation and fair values
of plan assets and eliminates certain disclosures that are no longer useful.
This statement is effective for fiscal years beginning after December 15,
1997. The Company believes that the adoption of this statement will not have
a significant impact on its financial statements.
Accounting for Derivative Instruments and Hedging Activities. Statement
of Financial Accounting Standards No. 133 "Accounting for Derivative
Instruments and Hedging Activities," establishes accounting and reporting
standards requiring that every derivative instrument, including certain
derivative instruments imbedded in other contracts, be recorded in the
balance sheet as either an asset or liability measured at its fair value.
The statement also requires that changes in the derivative's fair value be
recognized in earnings unless specific hedge accounting criteria are met.
This statement is effective for fiscal years beginning after June 30, 1999.
The Company believes that the adoption of this statement will not have a
significant impact on its financial statements.
9. SUBSEQUENT EVENT
________________
In connection with the June 1996 issuance by Wickes of 2,000,000 shares
of its common stock to the Company for $10 million, Wickes agreed to provide
the Company with certain rights to have some or all of the shares registered
for the Company's benefit under the Securities Act of 1933. In August of
1998, the Company requested that 1,000,000 shares be registered pursuant to
Rule 415 under the 1933 Act.
As previously reported in the Company's Current Report on Form 8-K dated
October 15, 1998, on October 5, 1998, the Company and Imagine Investments,
Inc. ("Imagine") entered into a Stock Purchase Agreement dated the same date
(the "Imagine Agreement").
On November 4, 1998, the Company and Imagine entered into Amendment No.
1 to the Imagine Agreement, which extended the initial expiration date of the
Call Option until November 19, 1998 and the expiration of the Put Option
until November 30, 1998.
On November 18, 1998, the Company and Imagine entered into Amendment No. 2
to the Imagine Agreement, which extended the amended expiration date of the Call
Option until November 30, 1998.
On November 12, 1998, Imagine purchased under the Call Option 200,000
shares of Wickes Common Stock for $650,000 in cash.
<page 13>
A condition to the obligations of Imagine under the Imagine Agreement was
that the Company create two vacancies on its Board of Directors and that
Robert T. Shaw and Harry T. Carneal be elected to fill such vacancies. On
October 5, 1998, two directors of the Company, Kenneth M. Kirschner and
Frederick H. Schultz, resigned from the Company's Board of Directors, and
Messrs. Shaw and Carneal were elected to fill these vacancies. On November
12, 1998, Messrs. Shaw and Carneal were elected to the Wickes' Board of
Directors.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
_______________________________________________________________
RESULTS OF OPERATIONS
_____________________
The following discussion should be read in conjunction with the Condensed
Consolidated Financial Statements and Notes thereto contained elsewhere
herein and in conjunction with the Consolidated Financial Statements and
Notes thereto and Management's Discussion and analysis of Financial Condition
and Results of Operations contained in the Company's Annual report on Form
10-K for the year ended December 31, 1997. The Company's results of
operations for periods ending September 30, 1998 include Wickes Inc. on a
consolidated basis. For subsequent periods, the Company will report its
investment in Wickes Inc. on the equity method.
RESULTS OF OPERATIONS
General
The Company reported results of operations for the three and nine months
ended September 30, 1998 and 1997, as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
__________________ _________________
(unaudited) (unaudited)
Sept. 30, Sept. 30 Sept. 30, Sept. 30,
1998 1997 1998 1997
____ ____ ____ ____
<S> <C> <C> <C> <C>
Earnings(loss) before income taxes,
equity in related parties, and
minority interest(1)(2) $1,863 $3,064 $(7,067) $(3,311)
Net loss before discontinued
operations (1,574) (342) (6,946) (4,336)
Discontinued operations:
Loss from operations of
discontinued mortgage lending
operations, net of income tax -- (75) -- (613)
Net earnings(loss) $(1,574) $(417) $(6,946) $(4,949)
</TABLE>
<page 14>
(1) Includes realized investment gains(losses) of $(1,560,000) and
$133,000 for the three months ended September 30, 1998 and 1997,
respectively, and $(1,123,000) and $820,000 for the first nine months
ended September 30, 1998 and 1997, respectively. Included in realized
gains (losses) for the three months ended September 30, 1998, is a
reserve for losses on the sale of Wickes stock in November of
approximately $1,535,000.
(2) Includes restructuring charges from Wickes of $.5 million in the third
quarter of 1998 and $5.9 million for the nine months ended September 30,
1998. For a description of the restructuring charges, see Note 6 of
"Notes to Condensed Consolidated Financial Statements".
Wickes Inc.
The Company estimates that the Company's results of operations for the third
quarter of 1998 include profits of $1,325,000 attributable to Wickes,
compared to profits of $1,313,000 for the same period in 1997. The Company
estimates that its results of operations include losses of $863,000 and
$2,189,000 attributable to Wickes for the first nine months of September 30,
1998 and 1997, respectively.
The following table sets forth, for the periods indicated, the percentage
relationship to net sales of certain expense and income items. This
information includes the results from all sales and distribution and
component manufacturing facilities operated by Wickes, including those closed
or sold during the period.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Sept. 26, Sept. 27, Sept. 26, Sept. 27,
1998 1997 1998 1997
_________ _________ _________ _________
<S> <C> <C> <C> <C>
Net Sales 100.0% 100.0% 100.0% 100.0%
Gross profit 23.4% 22.6% 23.7% 22.8%
Selling, general and
administrative expense 19.0% 19.2% 20.4% 20.5%
Depreciation, goodwill and
trademark amortization 0.5% 0.4% 0.6% 0.5%
Provision for doubtful accounts 0.2% 0.1% 0.3% 0.1%
Restructuring and unusual items 0.2% -- 0.9% --
Other operating income (0.5)% (0.8)% (0.8)% (0.7)%
Income from operations 4.0% 3.7% 2.3% 2.4%
</TABLE>
<Page 15>
Net Earnings
____________
The first nine months of 1998 presented favorable economic conditions for
the building materials supply industry, despite significant deflation in
lumber prices. Single family housing starts were up 10.1% over the first
nine months of 1997. During the first quarter of 1998, the positive effects
of the mild winter in Wickes' Midwest region, Wickes' primary region, were
partially offset by increased precipitation in the Northeast and South.
Weather conditions during the first quarter of 1997 were closer to historical
seasonal averages.
Net income for the three months ended September 26, 1998 was $2,810,000
compared with income of $1,833,000 for the three months ended September 27,
1997. The increase in the net income for the three month period is primarily
the result of increased gross profit (resulting from an increase in gross
profit margin partially offset by a slight decrease in total sales),
reductions in selling, general and administrative ("SG&A") expense, and the
elimination of equity in losses of an affiliated company. The impact of
these changes was partially offset by a reduction in other operating income,
and increases in interest expense, depreciation, restructuring and unusual
items and provision for doubtful accounts.
Net loss for the first nine months of 1998 was $1,203,000 compared with
a loss of $2,015,000 for the first nine months of 1997. The improvement in
net loss is primarily the result of increases in sales and gross profit
margin, the elimination of equity in losses of an affiliated company, and
increases in other operating income. The impact of these improvements was
partially offset by a $5.9 million charge for restructuring and unusual items
and increases in the provision for doubtful accounts, depreciation, interest
expense, and SG&A expense.
Operational Restructuring
_________________________
In the first quarter of 1998, Wickes announced a plan for additional
restructuring activities (the "1998 Plan"). Wickes recorded charges of $5.4
million in the first quarter of 1998 and $0.5 million in the third quarter of
1998 as a result of the 1998 Plan. For a description of the 1998 Plan see
Note 7 of "Notes to Condensed Consolidated Financial Statements."
Three Months Ended September 26, 1998 Compared
with the Three Months Ended September 27, 1997
______________________________________________
Net Sales
_________
Sales for the third quarter of 1998 of $261.1 million decreased 1.9% from
the $266.3 million recorded in the third quarter of 1997. Wickes estimates
that approximately $7.8 million of this decrease (or approximately 3.0% of
third quarter 1997 sales) can be attributed to lumber price deflation.
Despite the lumber price deflation, same store sales increased 4.9% compared
with the same period last year. Same store sales to Wickes' primary
customers, building professionals, also increased 7.1%, while consumer same
store sales decreased 8.1%. As of September 26, 1998 Wickes operated 101
sales and distribution facilities, 10 less than it operated at the end of the
third quarter of 1997.
<page 16>
Wickes believes that its investments in its target major markets and
re-merchandised conventional market sales and distribution facilities, as well
as favorable economic conditions have offset the reduction in operating
facilities and commodity lumber deflation. Same store sales increased 20% in
Wickes' nine target major markets, while same store sales increased 12% in
the 11 sales and distribution facilities which Wickes had finished
remerchandising by the end of the second quarter of 1998. Single family
housing starts were approximately 9.8% higher, nationally, in the third
quarter of 1998 than in the comparable period of 1997. In Wickes' primary
geographical market, the Midwest, single family housing starts were up 5.1%.
Gross Profit
____________
1998 third quarter gross profit increased to $61.1 million from $60.3
million for the third quarter of 1997, a 1.3% increase. Gross profit as a
percentage of sales increased to 23.4% for the third quarter of 1998 from
22.6% in 1997. The increase in gross profit as a percentage of sales is
primarily attributable to improved margins on Wickes' internally manufactured
products and lower product costs. These improvements were partially offset by
the effects of lumber deflation, estimated to have reduced gross profit by
$1.7 million for the quarter when compared with third quarter of 1997. Sales
to building professionals, as a percentage of total sales, increased to 86.5%
from 84.7% for the third quarter of 1997. Lumber and building materials
accounted for 90.3% of sales in the third quarter of 1998, compared with
89.0% in the third quarter of 1997.
Selling, General and Administrative Expense
___________________________________________
SG&A expense decreased to 19.0% of net sales in the third quarter of 1998
compared with 19.2% of net sales in the third quarter of 1997. Much of the
reduction can be attributed to expense reductions as part of Wickes' 1998
Plan and the completion of most of Wickes' remerchandising programs during or
prior to the end of the second quarter of 1998.
Decreases as a percentage of sales in general office, travel, employee
relocation, professional fees, and remerchandising expenses were partially
offset by increases in salaries and wages, and real estate rent expense.
Salaries, wages and employee benefits increased as a percentage of sales by
0.3%. As of September 26, 1998, Wickes had 3,948 full time and part time
employees, a decrease of 5.3% from September 27, 1997. Salaries and wages
for the fourth quarter will be adversely affected by approximately $600,000
as a result of a payment made to a former executive officer in connection
with his separation from Wickes.
Depreciation, Goodwill and Trademark Amortization
_________________________________________________
Depreciation, goodwill and trademark amortization increased to $1.3
million for the third quarter of 1998 compared with $1.1 million for the same
period in 1997. This increase is primarily due to depreciation on rental
equipment and the additional equipment and facilities implemented as a result
of Wickes' major market and remerchandising programs.
<page 17>
Provision for Doubtful Accounts
_______________________________
Wickes recorded an expense from the provision for doubtful accounts of
$0.6 million in the third quarter of 1998, compared with an expense of $0.3
million in the third quarter of 1997.
Restructuring and Unusual Items
_______________________________
In the third quarter of 1998, Wickes recorded additional restructuring
expense of $500,000 as a result of certain costs, including facility carrying
costs and severance costs, that were in excess of estimates or unknown at the
time the plan was announced, but incurred as a result of the 1998 Plan.
Other Operating Income
______________________
Other operating income for the third quarter of 1998 was $1.2 million
compared with $2.1 million for the third quarter of 1997. During the third
quarter of 1997, Wickes recorded gains of approximately $700,000 on the sale
of previously closed sales and distribution facilities. There were no
significant sales of real estate in the third quarter of 1998.
Interest Expense
________________
In the third quarter of 1998 interest expense increased to $5.6 million
from $5.5 million for the third quarter of 1997, resulting primarily from an
increase in average total long term debt of approximately $3.8 million,
partially offset by a decrease in the effective borrowing rate on total long
term debt of approximately 10 basis points. The decrease in the effective
borrowing rate is primarily due to a small reduction in the LIBOR rate.
Approximately 94% of Wickes' third quarter average borrowings on its
revolving credit facility were LIBOR-based.
Equity in Loss of Affiliated Company
____________________________________
In the third quarter of 1997 Wickes recorded equity in loss of affiliated
company of $704,000. Wickes' net equity in this affiliate was reduced to
zero at December 31, 1997 thus no additional equity losses for this affiliate
were recorded in 1998.
Provision for Income Taxes
__________________________
Wickes recorded income tax expense of $2.1 million for the third quarter
of 1998 compared with an expense of $1.8 million in the third quarter of
1997. An effective federal income tax rate of 39.0% was used to calculate
federal income taxes for the third quarter of 1998, compared with an
effective rate of 39.1% for the third quarter of 1997. In addition to the
effective federal tax rate, state income and franchise taxes were calculated
separately and are included in the provision reported for both years.
<Page 18>
Wickes continues to review future earnings projections to determine that
there is sufficient support for its deferred tax assets and valuation
allowance. In spite of the losses incurred during 1995 and 1997, management
believes that it is more likely than not that Wickes will receive full
benefit of its deferred tax asset and that the valuation allowance is
properly stated. This assessment constitutes Forward-Looking Information
made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995 and is inherently subject to uncertainty and
dependent upon Wickes' future profitability, which in turn depends upon a
number of important risk factors including but not limited to: the
effectiveness of Wickes' operational efforts, cyclicality and seasonality of
Wickes' business, the effects of Wickes' substantial leverage and
competition.
Nine Months Ended September 26, 1998 Compared
with the Nine Months Ended September 27, 1997
_____________________________________________
Net Sales
_________
Although net sales for the first nine months of 1998 increased 0.6% to
$667.0 million from $663.0 million for the first nine months of 1997, same
store sales increased 6.7% compared with the same period last year, despite
deflation in lumber prices which Wickes estimates reduced sales by
approximately $23.2 million, or approximately 3.5%, compared with 1997
comparable period pricing. Same store sales to Wickes' primary customers,
building professionals, also increased 8.3% when compared with the first nine
months of 1997. Consumer same store sales decreased 6.6% for the first nine
months. As of September 26, 1998 Wickes operated 101 sales and distribution
facilities, 10 less than it operated at the end of the third quarter of 1997.
Wickes believes that its investments in its target major markets and
re-merchandised conventional market sales and distribution facilities, as well
as favorable economic and weather conditions have offset the reduction in
number of operating facilities and commodity lumber deflation. Same store
sales increased 25% in Wickes' nine target major markets, while same store
sales increased 18% in the 11 sales and distribution facilities Wickes
finished remerchandising by the end of the second quarter of 1998. Single
family housing starts were 10.1% higher, nationally, in the first nine months
of 1998 than in the comparable period of 1997. In Wickes' primary
geographical market, the Midwest, single family housing starts were up 6.8%.
During the first quarter of 1998, the positive effects of the mild winter in
Wickes' Midwest region, Wickes' primary region, were partially offset by
increased precipitation in the Northeast and South. Weather conditions
during the first quarter of 1997 were closer to historical seasonal averages.
Gross Profit
____________
Gross profit during the first nine months of 1998 increased to $158.1
million from $151.5 million for the first nine months of 1997, a 4.4%
increase. Gross profit as a percentage of sales increased to 23.7% for the
first nine months of 1998 from 22.8% in 1997. The increase in gross profit
as a percentage of sales is primarily attributable to improved product costs,
increased margins on internally manufactured products and a reduction in
costs associated with physical inventory count adjustments. These
improvements were partially offset by the effects of lumber deflation,
estimated to have reduced gross profit by $7.8 million for the first nine
months when compared with the first nine months of 1997. Sales to building
professionals, as a percentage of total sales, increased to 87.8% for the
first nine months of 1998 from 86.2% for the same period in 1997. Lumber and
building materials accounted for 89.3% of sales in the first half of 1998,
compared with 88.8% in the first nine months of 1997.
<Page 19>
Selling, General and Administrative Expense
___________________________________________
SG&A expense as a percent of sales decreased slightly, to 20.4% of net
sales in the first nine months of 1998 compared with 20.5% of net sales in
the first nine months of 1997. Increased expenses attributable to major
market expansion programs and remerchandising of sales and distribution
facilities were more than offset through reductions in other areas, primarily
the reduction of costs anticipated under Wickes' operational restructuring
plan, implemented in the first quarter of 1998.
Decreases as a percentage of sales in professional fees, marketing,
travel and general office expense were partially offset by increases in
salaries and wages, and real estate rental expenses. Salaries, wages and
employee benefits for the first nine months of 1998, increased as a
percentage of sales by 0.4% when compared with the first nine months of 1997.
Depreciation, Goodwill and Trademark Amortization
_________________________________________________
Depreciation, goodwill and trademark amortization increased to $3.8
million for the first nine months of 1998 compared with $3.5 million for the
same period in 1997. This increase is primarily due to depreciation on
rental equipment and the additional equipment and facilities implemented as
a result of Wickes' major market and remerchandising programs, partially
offset by reduced depreciation on vehicles. Wickes' tool rental program was
initiated during 1997 and no depreciation on rental equipment was recorded in
the first half of 1997.
Provision for Doubtful Accounts
_______________________________
The provision for doubtful accounts increased to $1.8 million for the
first nine months of 1998 from $0.9 million in the first nine months of 1997.
The primary reason for the increase is the better than historical collection
performance achieved during the first nine months of 1997, expense of only
0.1% of total sales.
Restructuring and Unusual Items
_______________________________
Through the first nine months of 1998 Wickes has recorded $5.9 million in
restructuring charges as a result of the 1998 Plan.
<Page 20>
Other Operating Income
______________________
Other operating income for the first nine months of 1998 was $5.0 million
compared with $4.5 million for the first nine months of 1997. During the
first nine months of 1998, Wickes recorded a gain of approximately $1.8
million on the sale of two sales and distribution facilities located in Iowa,
two other closed facilities, and excess equipment. A gain of $180,000 on the
difference between insured replacement cost and book value of inventory, as
a result of a fire at one of its sales and distribution facilities was also
recorded in the first half of 1998. In the first nine months of 1997,
Wickes recorded gains of approximately $1.3 million on the sale of five
previously closed sales and distribution facilities.
Interest Expense
________________
In the first nine months of 1998, interest expense increased to $16.5
million from $15.9 million during the first nine months of 1997, resulting
primarily from an increase in average total long term debt of approximately
$10.7 million, partially offset by a decrease in the effective borrowing rate
on total long term debt of approximately 25 basis points. The decrease in
the effective borrowing rate is primarily due to a reduction in the interest
rate on Wickes' revolving line of credit, effective April 11, 1997.
Approximately 94% of Wickes' average borrowings on its revolving credit
facility during the first nine months of 1998 were LIBOR-based.
Equity in Loss of Affiliated Company
____________________________________
In the first nine months of 1997 Wickes recorded equity in loss of
affiliated company of $1.5 million. Wickes' net equity in this affiliate was
reduced to zero at December 31, 1997 thus no additional equity losses for
this affiliate were recorded in 1998.
Provision for Income Taxes
__________________________
Wickes recorded an income tax expense of $421,000 for the first nine
months of 1998 compared with an expense of $531,000 in the first nine months
of 1997. An effective federal income tax rate of 39.0% was used to calculate
federal income taxes for the first nine months of 1998, compared with an
effective rate of 39.1% for the first nine months of 1997. In addition to
the effective federal tax rate, state income and franchise taxes were
calculated separately and are included in the provision reported for both
years.
Parent Company and Other Subsidiaries
The following discussion relates to the operations of the Parent Company
and its subsidiaries, other than Wickes (the "Parent Group"). In December of
1997, Riverside purchased "Wickes Plus" from Wickes Inc., and in January of
1998, Riverside purchased Cybermax, an Internet Service Provider located in
Jacksonville, Florida. These operations have established Riverside as a
marketer of Internet services including dial-up and dedicated connectivity,
web software development, web hosting, long distance, prepaid and post paid
calling cards. Riverside markets these operations under the name "Cybermax".
In 1998, Riverside also began marketing gas and electricity under the name of
WIXX Energy ("WIXX"). These operations are in the start-up phase and did not
generate substantial revenues through September 30, 1998.
<Page 21>
The Parent Group's non-interest operating expenses for the third quarter
of 1998 and 1997 were $749,000 and $459,000, respectively. Cybermax operations
accounted for approximately $706,000 of the expenses. In addition, WIXX
incurred approximately $123,000 of expense for the third quarter of 1998.
The Parent Group's non-interest operating expenses for the first nine
months of 1998 and 1997 were $3,252,000 and $1,275,000, respectively. Cybermax
operations accounted for approximately $2,420,000 of the expenses. In
addition, WIXX incurred approximately $504,000 of expenses for the nine
months ending September 30, 1998.
Revenues of the Parent Group (excluding investment income) for the third
quarter of 1998 and 1997 were $255,000 and $1,000, respectively. Included in
the third quarter of 1998 is $251,000 in sales attributable to the Cybermax
operations.
The Parent Group's revenues for the first nine months of 1998 were
$952,000 compared with $2,000 in 1997. Included in the first nine months of
1998 is $533,000 in sales attributable to the Cybermax operations and
$415,000 received in various lawsuit settlements.
Interest expense decreased to $749,000 from $785,000 for the three
months ending September 30, 1998 and 1997, respectively. Principal payments
made on the Parent Company's real estate debt during the last twelve months,
are the primary reason for the decrease. The interest expense will continue
to decrease as a result of real estate sales.
The Parent Group's interest expenses for the first nine months of 1998
were $2,116,000 compared with $2,320,000 in 1997. The primary reason for the
decrease was a result of principal payments made on the Parent Company's real
estate debt. During the first nine months of 1998, the principal balance on
the mortgage debt was reduced by $3.2 million.
Real Estate Investments
The Company's real estate investments consist of $7,396,000 in Georgia
properties, $3,474,000 in Florida properties and $73,000 in other states.
Included in the Company's net realized investment gains for the first
nine months of 1998 and 1997 were net realized gains on real estate
investments of $437,000 and $820,000 respectively.
<page 22>
Discontinued Operations
Beginning in 1995, Riverside marketed construction and permanent mortgage
loans to and through the professional building customers of Wickes. In early
1997, Riverside began to reduce the extent of mortgage operations. In
December 1997, Riverside completed the sale of its remaining mortgage
operations to a third party, which continues to market mortgage loans through
Wickes.
The following table sets forth (in thousands) information concerning the
results of the Company's former mortgage lending operations.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30,1997(1) September 30,1997(2)
____________________ ____________________
<S> <C> <C>
Revenues
Other income(loss) $313 $944
____ _____
Total revenues 313 944
Selling, general and
administrative expenses (3) 886
Interest expense 385 671
____ _____
Total expense 388 1,557
____ _____
Net loss $(75) $(613)
==== =====
</TABLE>
(1) Net of reimbursements of $152,000 received during the three
months ended September 30, 1997, by the Parent Company on behalf of
its mortgage lending operations from Wickes.
(2) Net of reimbursements of $700,000 received during the first nine
months of 1997, by the Parent Company on behalf of its mortgage
lending operations from Wickes.
Income Taxes
The Company's effective tax rate was 0% for the nine months ended
September 30, 1998 and 1997. The Company's equity in losses of Wickes
has reduced Wickes' GAAP basis in its investment in Wickes creating
deferred tax benefits which will be realized upon sale or subsequent
increase in GAAP basis of this investment.
LIQUIDITY AND CAPITAL RESOURCES
The Parent Group
The Parent Company's general liquidity requirements consist
primarily of funds for payment of debt and related interest and for
operating expenses and overhead.
Operations consist primarily of real estate sales and the Parent
Company's internet, telephony and utilities marketing operations. The
Parent Company's internet, telephony and utilities marketing operations
are in the start-up phase and are expected to be net users of cash for
several months. Also, real estate sales proceeds are required to be
applied to real estate debt reduction and are not available to the
Parent Company for other purposes.
<page 23>
On April 20, 1998, Riverside amended certain terms of its real
estate debt. In connection with the amendment, (i) the Parent Company
pledged an additional 325,000 shares of Wickes common stock in
substitution for the $1.4 million cash then held by the lender as
collateral and (ii) agreed to a reduced collateral value for the shares
of pledged Wickes common stock. In October, 1998, the Company pledged
an additional 275,000 shares of its Wickes common stock.
In February of 1998, Riverside completed the acquisition of the
Internet and utilities marketing operations formerly owned by Wickes.
The disposition of these operations by Wickes was part of the
determination made by Wickes to discontinue or sell non-core
operations. For these operations, Riverside paid consideration of
approximately $872,000 in the form of a 3-year unsecured promissory
note. The terms of the promissory note include interest based on the
prime lending rate plus two percentage points due monthly and principal
due in thirteen equal quarterly installments, beginning May 15, 1998
and ending May 15, 2001. In addition, Riverside agreed to pay ten
percent of future net income of these operations, subject to a maximum
of $429,249 plus interest. At November 1, 1998, the Company had made
payments of $115,752 under the promissory note but was delinquent with
respect to required payments of approximately $88,854 of principal and
interest.
On October 5, 1998, the Company entered into an agreement with
Imagine Investments, Inc. ("Imagine"), which was amended on November 4,
1998 (the "Imagine Agreement"). Pursuant to the Imagine Agreement, the
Company sold 250,000 shares of Wickes Common Stock to Imagine for
$812,500 on October 5, 1998. Also pursuant to the Imagine Agreement,
the Company granted Imagine a call option that expires November 30, 1998 to
purchase an additional 550,000 shares of Wickes common stock for $3.25
and a right of first refusal with respect to all of the shares of
Wickes common stock beneficially owned by the Company. On November 12, 1998,
Imagine purchased an additional 200,000 shares under this call option for
$650,000 in cash. For additional information, see Note 9 of Notes to
Consolidated Condensed Financial Statements included elsewhere herein.
The Parent Company believes that its cash on hand will not be sufficient
to support its operations and overhead and to service its indebtedness until
such time as its Cybermax and WIXX operations have begun to generate
significant positive cash flow. Therefore, the Parent Company will need to
obtain these and any other additional required funds through asset sales or
additional borrowings or other financing. The Company presently anticipates
that it willobtain these funds either through additional borrowings, exercise
by Imagine of its call option described above, or through market and private
sales of Wickes common stock. At November 16, 1998, approximately 2,224,682
of the Parent Company's 3,849,115 shares of Wickes common stock are pledged to
secure various obligations of the Company.
On April 2, 1998, the Parent Company repaid the remaining $453,000
balance of a secured obligation to a third party. On February 12,
1998, the Parent Company issued an unsecured note for $100,000 to a
third party in connection with its acquisition of Cybermax.
<Page 24>
In the fourth quarter of 1997, J. Steven Wilson, Wickes' Chairman,
President and Chief Executive Officer advanced $160,000 to the Company.
The Company repaid this advance in June 1998. In addition, the Company
advanced Mr. Wilson $150,000 in June 1998.
The $10,000,000 principal of The Company's 13% Subordinated 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, asset sales, or
funds provided by operations.
During the first nine months of 1998, stockholders' equity
decreased by a net of $6.9 million. Losses attributable to Wickes
accounted for approximately 35% of the decrease. In addition,
interest expense incurred at the Parent Group accounted for 30% of
the decrease.
FORWARD-LOOKING INFORMATION CAUTIONARY STATEMENT. The discussion
above of the Company's future liquidity needs and sufficiency
constitutes Forward-Looking Information within the meaning of the
Private 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 Company's ability to achieve
the level of real estate sales required to meet scheduled real estate
debt payments, (ii) the level of positive or negative cash flow
generated by the Parent Company's internet, telephony and utilities
marketing operations, (iii) the Company's ability to borrow, which may
depend upon, among other things, the trading price of Wickes common
stock and the Parent Company's internet, telephony and utilities
marketing operations and (iv) the ability of the Company to raise funds
through sales of Wickes common stock. 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. The Company's ability to
sell Wickes common stock would depend upon, among other things, the
trading price of Wickes common stock and, in light of the relatively
low trading volume for Wickes common stock, possibly Wickes' ability to
find a buyer or buyers for Wickes common stock in a private transaction
or otherwise.
Year 2000
_________
The Year 2000 problems relates to the inability of certain computer
programs and computer hardware to properly handle dates after December 31,
1999. As a result, businesses may be at risk for miscalculations and
system failures.
The Year 2000 problem could affect computers, software, and other
equipment used, operated, or maintained by the Company. Accordingly, the
Company is reviewing its internal computer programs and systems to ensure
that the programs and systems will be Year 2000 compliant. The Company
presently believes that its computer systems will be Year 2000 compliant
in a timely manner. The estimated costs of these efforts are not expected
to be material to the Company's financial position.
<Page 25>
PART II
OTHER INFORMATION
Item 5. Other Information
For a description of this sale by the Company of 450,000 shares
of Wickes common stock and a stock purchase agreement pursuant
to which the Company granted a call option with respect to an
additional 550,000 shares of Wickes common stock and a right of
first refusal with respect to all shares of Wickes common stock
beneficially owned by the Company, see Note 9 of Notes to
Condensed Consolidated Financial Statements included elsewhere
herein.
For a description of the sale of the Company's GameVerse subsidiary
to Greenleaf in exchange for approximately 40% of the Greenleaf
common stock, see Note 2 of Notes to Condensed Consolidated Financial
Statements included elsewhere herein.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
See Exhibit Index included elsewhere herein.
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K dated as of
October 30, 1998 reporting under Item 5.
The Company filed a Current Report on Form 8-K dated as of
October 5, 1998 reporting under Item 5.
<Page 26>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
RIVERSIDE GROUP, INC.
By /s/ J. Steven Wilson
________________________________
J. Steven Wilson
Chairman of the Board,
President and
Chief Executive Officer
By /s/ Catherine J. Gray
________________________________
Catherine J. Gray
Senior Vice President and
Chief Financial Officer
Date: November 24, 1998
<Page 27>
EXHIBIT INDEX
Exhibit No. Description
10.1 Amendment No. 1 dated November 4, 1998 to Stock Purchase
Agreement dated October 3, 1998 between the Company and
Imagine Investments, Inc.
10.2 Amendment No. 2 dated November 18, 1998 to Stock Purchase
Agreement dated October 3, 1998 between The Company and
Imagine Investments, Inc.
27.1 Financial Data Schedule (SEC Use Only)
<page 1>
Amendment No. 1 to
Stock Purchase Agreement
THIS AMENDMENT NO. 1 is entered into as of November 4,
1998, between Riverside Group, Inc., a Florida corporation (the
"Seller"), and Imagine Investments, Inc., a Delaware corporation
("Purchaser").
Preamble
The Seller and the Purchaser are parties to that certain
Stock Purchase Agreement dated as of October 5, 1998 (the
"Agreement") and desire to modify certain of the provisions
thereof as set forth herein.
NOW THEREFORE, in consideration of the mutual covenants
herein contained and for other good and valuable consideration
hereinafter set forth, the parties hereto agree as follows:
1. Definitions. Capitalized terms used herein without
definition that are defined in the Agreement shall have the same
meanings herein as therein.
2. Amendment of Section 1.02 of the Agreement. Section
1.02(b) of the Agreement is hereby amended as follows:
(a) The reference to "November 4" contained in the first
sentence (but not anywhere else) is hereby changed to "November
19."
(b) The reference to "November 14" is hereby changed to
"November 30."
3. Miscellaneous. This Amendment No. 1 may be executed in
any number of counterparts, each of which shall be deemed an
original, but all of which together shall constitute one and the
same instrument. To the extent not inconsistent with this
Amendment No. 1, the Agreement remains in full force and effect.
The Agreement, as amended by this Amendment No. 1, supersedes all
prior negotiations and agreements (written or oral) among the
parties with respect to the subject matter covered thereby and
constitutes the entire understanding among the parties thereto.
<Page 2>
IN WITNESS WHEREOF, each of the parties hereto has caused
this Agreement to be executed on its behalf, by an officer
thereunto duly authorized, all as of the date first above
written.
IMAGINE INVESTMENTS, INC.
By___________________________
Name:
Title:
"Purchaser"
RIVERSIDE GROUP, INC.
By________________________________
Name:
Title:
"Seller"
<Page 3>
Amendment No. 2 to
Stock Purchase Agreement
THIS AMENDMENT NO. 2 is entered into as of November 18,
1998, between Riverside Group, Inc., a Florida corporation (the
"Seller"), and Imagine Investments, Inc., a Delaware corporation
("Purchaser").
Preamble
The Seller and the Purchaser are parties to that certain
Stock Purchase Agreement dated as of October 5, 1998 (the
"Agreement") and Amendment No. 1 to the Agreement dated November
4, 1998, and desire to modify certain of the provisions thereof
as set forth herein.
NOW THEREFORE, in consideration of the mutual covenants
herein contained and for other good and valuable consideration
hereinafter set forth, the parties hereto agree as follows:
1. Definitions. Capitalized terms used herein without
definition that are defined in the Agreement shall have the same
meanings herein as therein.
2. Amendment of Section 1.02 of the Agreement. Section
1.02(b) of the Agreement is hereby amended as follows:
(a) The reference to "November 4" contained in the first
sentence of the Agreement(but not anywhere else) and as amended
to November 19 in Amendment No. 1 is hereby changed to "November
30."
3. Miscellaneous. This Amendment No. 2 may be executed in
any number of counterparts, each of which shall be deemed an
original, but all of which together shall constitute one and the
same instrument. To the extent not inconsistent with this
Amendment No. 2 and Amendment No. 1, the Agreement remains in
full force and effect. The Agreement, as amended by Amendment
No. 1 and this Amendment No. 2, supersedes all prior negotiations
and agreements (written or oral) among the parties with respect
to the subject matter covered thereby and constitutes the entire
understanding among the parties thereto.
<Page 4>
IN WITNESS WHEREOF, each of the parties hereto has caused
this Agreement to be executed on its behalf, by an officer
thereunto duly authorized, all as of the date first above
written.
IMAGINE INVESTMENTS, INC.
By_________________________________
Name:
Title:
"Purchaser"
RIVERSIDE GROUP, INC.
By________________________________
Name:
Title:
"Seller"
