UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File
For Quarter Ended MARCH 31, 1999 Number 0-9209
-------------- ------
RIVERSIDE GROUP, INC.
(Exact name of registrant as specified in its charter)
Florida 59-114417
------- ---------
(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 May 13, 1999, there were 5,287,123 shares of the Registrant's common stock
outstanding.
<PAGE>
RIVERSIDE GROUP, INC.
INDEX
Page
PART I. FINANCIAL INFORMATION Number
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
March 31, 1999 (Unaudited)
And December 31, 1998 3
Condensed Consolidated Statements
of Operations
Three months ended
March 31, 1999 and 1998 (Unaudited) 4
Condensed Consolidated Statement
of Common Stockholders' Equity
Three months ended
March 31, 1999 (Unaudited) 5
Condensed Consolidated Statements of
Cash Flows
Three months ended
March 31, 1999 and 1998 (Unaudited) 6
Notes to Condensed Consolidated
Financial Statements (Unaudited) 7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 15
PART II.
Item 2. Changes in Securities 25
Item 5. Other Information 25
Item 6. Exhibits and Reports on Form 8-K 25
2
<PAGE>
Riverside Group, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(unaudited)
(in thousands)
<TABLE>
<CAPTION> <C> <C>
March 31, December 31,
1999 1998
-------- -------------
<S>
ASSETS
Current assets
Cash and cash equivalents $ 183 $ 509
Accounts receivable, less allowance for doubtful
accounts of $278 at 1999 and $337 at 1998 436 246
Notes receivable 40 197
Inventory 20 1
Prepaid expenses 96 46
--------- ----------
Total current assets 775 999
Investment in Wickes Inc. 12,490 14,995
Investment in real estate 9,621 9,667
Property, plant and equipment, net 483 402
Other assets (net of accumulated amortization of
$823 at 1999 and $796 at 1998) 337 339
--------- ----------
Total assets $ 23,706 $ 26,402
========= ==========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 10,963 $ 10,356
Accounts payable 586 223
Accrued liabilities 932 1,377
Deferred revenue 190 112
--------- ---------
Total current liabilities 12,671 12,068
Long-term debt 335 415
Mortgage debt 11,345 11,345
Net liabilities of discontinued operations 22 22
Other long-term liabilities 129 184
--------- ---------
Total liabilities 24,502 24,034
Commitments and contingencies (Note 3)
Common stockholders' equity :
Common stock, $.10 par value; 20,000,000 shares authorized; 529 529
5,287,123 issued and outstanding in 1999 and 1998
Additional paid in capital 16,838 16,838
Retained earnings (deficit) (18,163) (14,999)
--------- ---------
Total common stockholders' equity (796) 2,368
--------- ---------
Total liabilities and common stockholders' equity $ 23,706 $ 26,402
========= =========
See Accompanying Notes to Condensed Consolidated Financial Statements.
3
</TABLE>
<PAGE>
Riverside Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(unaudited)
(in thousands except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended March 31,
-----------------------------
1999 1998
---- ----
<S> <C> <C>
Revenues:
Sales and service revenues $ 481 $ 168,861
Net investment loss (29) (15)
Net realized investment gains - 437
Other operating income 25 2,451
--------- ----------
477 171,734
--------- ----------
Costs and expenses:
Cost of sales 78 127,881
Provision for doubtful accounts (59) 1,333
Depreciation, goodwill and trademark amortization 60 1,420
Restructuring and unusual items - 5,431
Selling, general and administrative expenses 1,584 41,781
Interest expense 653 6,167
--------- ----------
2,316 184,013
--------- ----------
Loss before income taxes, equity in related parties,
and minority interest: (1,839) (12,279)
Income tax benefit - (3,879)
Equity in losses of Wickes, Inc. 1,325 -
Minority interest, net of income taxes - (3,302)
---------- ----------
Net loss $ (3,164) $ (5,098)
=========== =========
Basic and diluted loss per common share:
Loss from continuing operations $ (0.61) $ (0.98)
Weighted average number of common shares
used in computing earnings per share 5,213,186 5,213,186
See Accompanying Notes to Condensed Consolidated Financial Statements.
4
</TABLE>
<PAGE>
Riverside Group, Inc. and Subsidiaries
Condensed Consolidated Statement of Common Stockholder's Equity
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Total
Additional Retained Common
Common Paid-In Earnings Stockholders'
Stock Capital (Deficit) Equity
------- ---------- --------- -----------
<S> <C> <C> <C> <C>
Balance, December 31, 1998 $ 529 $ 16,838 $ (14,999) $ 2,368
Net loss, three months ended March 31, 1999 -- -- (3,164) (3,164)
-------- -------- --------- ---------
Balance, March 31, 1999 $ 529 $ 16,838 $ (18,163) $ 796
======== ======== ========= =========
</TABLE>
See Accompanying Notes to Condensed Consolidated Financial Statements.
5
<PAGE>
Riverside Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
For the Three Months Ending
<S> <C> <C>
-----------------------------
Cash Flow from Operating Activities 1999 1998
---- ----
Net loss $ (3,164) $ (5,098)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation expense 44 1,175
Amortization expense 16 783
Amortization of bond discount 56 48
Provision for doubtful accounts (59) 1,333
Gain on sale of fixed assets - (1,399)
Net realized investment (gains)losses on investments - (437)
Benefit for deferred income taxes - (4,166)
Equity in losses of unconsolidated subsidiaries 1,325 -
Minority interest - (3,302)
Change in other assets and liabilities:
(Increase)decrease in accounts receivable (131) 5,558
Decrease in notes receivable 157 2,310
Increase in inventory (19) (11,964)
(Increase)decrease in other assets (64) 859
Increase (decrease) in accounts payable and accrued liabilities (82) 8,009
Net liabilities of discontinued operations, other liabilities
and current income taxes 23 33
--------- ---------
Net Cash Used In Operating Activities (1,898) (6,258)
--------- ----------
Investing Activities
Purchase of investments:
Property, plant and equipment (120) (1,123)
Investment real estate (3) -
Sale of investments:
Property, plant and equipment - 2,729
Investment real estate 44 3,808
Securities of Wickes Inc. 1,180 -
-------- ---------
Net Cash Provided By Investing Activities 1,101 5,414
-------- ---------
Cash Flows from Financing Activities
Net borrowings under the revolving line of credit - 3,877
Repayment of debt (61) (3,504)
Increase in borrowings 532 100
-------- ---------
Net Cash Provided By Financing Activities 471 473
Net Decrease in Cash and Equivalents (326) (371)
Cash and equivalents at beginning of period 509 3,154
-------- --------
Cash and equivalents at end of period $ 183 $ 2,783
======== ========
</TABLE>
See Accompanying Notes to Condensed Consolidated Financial Statements.
6
<PAGE>
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") 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 December 31, 1998 does
not include the accounts of Wickes. The Company's condensed consolidated
statements of operations and cash flows for period ending March 31, 1998,
include Wickes on a consolidated basis.
The condensed consolidated balance sheets as of March 31, 1999, the
condensed consolidated statements of operations for the three months ended March
31, 1999 and 1998, the condensed consolidated statement of common stockholders'
equity for the three months ended March 31, 1999 and the condensed consolidated
statements of cash flows for the three months ended March 31, 1999 and 1998,
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
March 31, 1999, and for all periods presented have been made. The results for
the three month period ended March 31, 1999 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, the related Auditor's report and notes
thereto included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1998 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 (5,213,186 shares in 1999 and 1998). 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.
7
<PAGE>
2. 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.
Summary financial information of Wickes for the first quarter of 1999
follows (in thousands):
<TABLE>
<CAPTION>
(unaudited) (audited)
March 27, 1999 Dec. 26, 1998
-------------- -------------
<S> <C> <C>
Balance Sheet Data
Current assets $ 229,174 $ 210,310
Total assets 314,200 292,750
Current liabilities 82,059 74,175
Long term debt and other long-term liabilities 211,739 194,913
Common stockholders' equity 20,402 23,662
</TABLE>
3. COMMITMENTS AND CONTINGENCIES
WICKES INC.
At March 27, 1999, Wickes had accrued approximately $152,000 (included in
accrued liabilities at March 27, 1999) 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. Since 1988, Wickes has incurred approximately $2.0 million of
costs, net of insurance and regulatory recoveries, with respect to the filling
or removing of underground storage tanks and related investigatory and remedial
actions. Insignificant amounts of contamination have been found on excess
properties sold over the past four years. Wickes has currently reserved $60,000
for estimated clean up costs at 15 of its locations.
8
<PAGE>
Wickes has been identified as having used two landfills which are now
Superfund clean up sites, for which it has been requested to reimburse a portion
of the clean-up costs. Based on the amounts claimed and Wickes's prior
experience, Wickes has established a reserve of $45,000 for these matters.
Wickes is one of many defendants in two class action suits filed in
August of 1996 by approximately 200 claimants for unspecified damages as a
result of health problems claimed to have been caused by inhalation of silica
dust, a byproduct of concrete and mortar mix, allegedly generated by a cement
plant with which Wickes has no connection other than as a customer. Wickes has
entered into a cost sharing agreement with its insurers, and any liability is
expected to be minimal.
Wickes is one of many defendants in approximately 100 actions, each of
which seeks unspecified damages, 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. Since 1993, Wickes has settled 16 similar
actions for insignificant amounts, and another 186 of these actions have been
dismissed. As of April 30, 1999 none of these suits have made it to trial.
Losses in excess of the $152,000 reserved as of March 27, 1999 are
possible but an estimate of these amounts cannot be made.
THE PARENT GROUP AND WICKES
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 in 1996 of 2 million newly-issued
shares of Wickes' Common Stock to Riverside Group, Inc., Wickes' largest
stockholder, 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 unspecified damages with
respect to the transaction. In March 1999, by stipulation among the parties,
this complaint was dismissed without prejudice.
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.
9
<PAGE>
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. American Financial Acquisition Corporation subordinated
debentures in the amount of $2.1 million are pledged as collateral on these
indemnities. Although future loss development will occur over a number of years,
the Company believes, based on all information presently available, that 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 62,500 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 operations.
PARENT COMPANY LIQUIDITY AND MANAGEMENT'S PLANS
The accompanying condensed consolidated financial statements have been
prepared assuming the Company will continue as a going concern. In light of the
Company's current projected earnings and cash flow, management believes the
Company does not have the financial resources to maintain its current level of
operations through the second quarter of 1999. Therefore, the Company will need
to obtain significant additional funds through asset sales or additional
borrowings or other financing for such purposes and may need to reduce the level
of its operations. As described below, the principal source of funds for these
purposes in the past, and for the payment of interest on the Company's
indebtedness, has been sales of shares of Wickes common stock. The Company is
currently working on additional options as discussed below.
The principal user of the Company's cash has been and continues to be
Buildscape. The Company has been actively seeking to obtain venture capital or
other financing for Buildscape sufficient to support Buildscape's cash needs.
The Company has held discussions with several venture capital firms and other
potential financing sources, and has received financing proposals which are
currently either under consideration or being negotiated. There can be no
assurance, however, that such financing will be obtained or that financing
obtained will be sufficient to support Buildscape's operations for a long period
of time. The Company will continue to evaluate Buildscape's prospects in light
of available funds and may reduce or curtail these operations as appropriate.
At May 13, 1999, the Company estimates that it will have approximately
$1,063,000 of accounts payable and other current liabilities, approximately
$401,000 of which are past due. In addition, $280,000 of these current
liabilities are principal and interest payments due to Wickes that were overdue
but which have been deferred until June, 1999 by Wickes. Also, the Company is
not in compliance with certain of the terms of the original loan agreement with
Imagine Investments, Inc. ("Imagine") and has obtained a waiver of default
through June 30, 1999, and there can be no assurance that the Company will be
able to comply with the terms of this loan agreement. Management is currently
formalizing an agreement with Imagine to increase the amount of its loan.
10
<PAGE>
The $10,000,000 principal of the Company's 13% Subordinated Notes ("the
13% Notes") is due in September 1999, the $1,000,000 principal of the Company's
short-term loan from Imagine described below is due September 15, 1999, and
approximately $468,000 of interest on the Company's real estate indebtedness
described below, which might not be funded from real estate sales, is due on
June 30, 1999. The holders of the 13% Notes have expressed concerns about, among
other things, the transactions effected pursuant to the October 5, 1998
agreement between the Company and Imagine (the "Imagine Agreement") described
below. Holders of a majority of the 13% Notes also informed the Company that
they were evaluating whether these transactions and other circumstances were
such that a material adverse change in the Company's financial condition had
resulted or would result (which might have authorized holders of the 13% Notes
to accelerate the maturity of the 13% Notes). The Company and at least 80% of
the 13% Note holders have agreed in principle to replace the 13% Notes, with new
unsubordinated promissory notes due September 30, 2000 that would bear 11%
interest and be secured by a junior lien on the collateral securing the
Company's real estate indebtedness and 10 million shares of Greenleaf common
stock. The Company and these note holders are currently in the process of
formalizing this agreement in principle and hope to have definitive agreements
signed this month. This transaction will be subject to the approval of certain
of the Company's creditors and there can be no assurance that this transaction
will be completed. The Company anticipates that to repay the principal of the
13% Notes, whether or not replaced, it will need to obtain significant
additional funds through borrowings, issuance of debt or equity securities, or
asset sales.
The principal asset that could be sold by the Parent Company would be
its shares of Wickes common stock. At May 13, 1999, approximately 2,064,837 of
the Parent Company's 3,000,515 shares of Wickes common stock are pledged to
secure various obligations of the Company. In addition, the Company's shares of
Wickes common stock are subject to securities law restrictions on resale. The
Company has granted to Imagine, a right of first refusal with respect to all the
shares of Wickes beneficially owned by it. Pursuant to previously existing
registration rights, at the Company's request, Wickes has filed a shelf
registration statement with respect to 1,000,000 shares of Wickes common stock
held by the Company. At the Company's request, Wickes has not, however, sought
to have this registration statement declared effective by the Securities and
Exchange Commission pending the Company's consideration of the various financing
alternatives available to it.
The Company may also seek to sell shares of Greenleaf common stock.
Effective September 30, 1998, the Company exchanged all of the outstanding
shares of its wholly-owned subsidiary, GameVerse, Inc. for approximately 40% of
the outstanding securities of Greenleaf. These securities presently may not be
sold in the open market, and the Company anticipates that its ability to sell
significant amounts of these securities will be limited. Greenleaf and the
Company have, as a result of Greenleaf's dissatisfaction with the transaction,
had discussions regarding possible adjustments to the merger consideration that
would reduce the Company's percentage of ownership in Greenleaf. These
discussions led to a proposal whereby a portion of the Company's shares of
Greenleaf was to have been sold to a third party investor identified by
Greenleaf with proceeds of the sale to be split between Greenleaf and the
Company. This proposal was not implemented, and at this date, all discussions of
this nature have been dropped.
11
<PAGE>
The Company's $11.3 million of real estate indebtedness is secured by
the Company's real estate and 2,002,337 shares of Wickes common stock. The
amount of required collateral for this indebtedness is adjusted quarterly.
Additional collateral would be required in the event there is any collateral
deficit, at any quarterly valuation date, which would depend upon factors
including the market value of Wickes' common stock and the timing and amount of
real estate sales. Approximately $468,000 of interest is due on this
indebtedness on June 30, 1999. Although the Company has under contract
sufficient real estate sales to pay this interest, these sales may not close
until after that date, and the Company may need to seek an extension for such
payment from the lender or to pay this interest from another source.
In order to obtain funds for the continuation of Buildscape's
operations, on March 11, 1999, Buildscape entered into a short-term loan
agreement with Imagine pursuant to which Buildscape borrowed $500,000 in March
1999 and $500,000 in April 1999. This loan is due September 15, 1999, bears
interest at the annual rate of 10%, is guaranteed by Riverside and certain of
its subsidiaries, and is secured by a pledge of the stock of Buildscape and
certain of the Company's subsidiaries and by a security interest in the assets
of Buildscape and these subsidiaries. The Company anticipates that this loan
would be repaid with a portion of the proceeds of any venture capital financing
obtained for Buildscape. In connection with this loan, the Company granted
Imagine an option to purchase 10% of Buildscape's currently outstanding shares
at 80% of the price for such shares set in any venture capital financing or if
venture capital financing is not obtained for an amount equal to the Company's
investment in Buildscape as calculated on a per share basis. The documents
related to this loan place various restrictions on the Company and Buildscape,
including, among other things, a requirement that the Company maintain at least
$1 million of stockholders' equity and a prohibition against incurrence by the
Company, Buildscape, or any of the Company's subsidiaries that guaranteed the
loan, from incurring additional debt. As discussed above, the Company has had to
obtain a waiver of compliance with certain of these restrictions.
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 certain matters described in this note may differ from the Company's
assessment of these matters as a result of a number of factors including but not
limited to: matters unknown to the Company at the present time, development of
losses materially different from the Company's experience, 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 addition, the discussion above of the Company's future operations,
liquidity needs and sufficiency constitutes Forward-Looking Information and is
inherently subject to uncertainty as a result of a number of risk factors
including, among other things: (i) the Company's success in obtaining of venture
capital financing for Buildscape, (ii) the outcome of the Company's negotiations
with the holders of the Company's 13% Notes due September 1999, (iii) the
success of and level of negative cash flow generated by the Parent Company's
12
<PAGE>
Internet, e-commerce and advertising operations, (iv) the Company's ability to
achieve the level of real estate sales required to meet scheduled real estate
debt principal and interest payments and to avoid the requirement that the
Company provide additional collateral for this debt, (v) the Company's ability
to borrow, which may depend upon, among other things, the trading price of
Wickes common stock, the value and liquidity of the Company's Greenleaf
securities, and the success of the Parent Company's internet, e- commerce and
advertising operations, (vi) the ability of the Company to raise funds through
sales of Wickes common stock and Greenleaf securities, (vii) the outcome of the
Company's discussions with Greenleaf, and (viii) uncertainty concerning the
possible existence of indemnification claims resulting from the Company's
discontinued operations. 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. In addition to the factors described above, the Company's ability to
sell Wickes common stock or Greenleaf securities would depend upon, among other
things, the trading prices for these securities, and, in light of the relatively
low trading volume for these securities, possibly the Company's ability to find
a buyer or buyers for these securities in a private transaction or otherwise.
4. LONG TERM AND MORTGAGE DEBT
Consolidated long-term and mortgage debt is comprised of the following
at March 31, 1999 (in thousands):
Long-Term Debt
Subordinated Notes $ 9,882
Other 1,416
Less: current maturities (10,963)
-----------
Total Company long-term debt less
current maturities $ 335
----------
Mortgage Debt
Mortgage debt, non-recourse $ 11,345
----------
Total long-term and mortgage
less current maturities $ 11,680
==========
SUBORDINATED NOTES ("THE 13% NOTES")
These notes may be prepaid in whole or in part prior to their September 30,
1999 due date without payment of a premium. 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. The Company is currently formalizing an
agreement in principle to refinance these notes. See Note 3 under the heading
"Parent Company Liquidity and Management's Plans".
13
<PAGE>
WICKES PROMISSORY NOTE
In February of 1998, Riverside completed the acquisition of e-commerce and
advertising 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 March 31, 1999,
the Company had made payments of $115,752 under the Wickes promissory note but
was delinquent with respect to required payments of approximately $275,100 of
principal and interest. Wickes has deferred these payments and interest thereon
until June 30, 1999. During this extension, the interest rate will be based on
the prime lending rate plus four percentage points.
5. INCOME TAXES
The Company's effective tax rate was 0% for the three months ended March
31, 1999 and 1998. For the three months ended March 31, 1998, Wickes results of
operations were consolidated with the Company's for financial reporting purposes
(see Note 1. "Summary of Significant Accounting Policies) and included a tax
benefit of $3.9 million. An effective tax rate of 39% was used to calculate the
federal income taxes for the first quarter of 1998. In addition to the effective
federal rate used for that period, state income and franchise taxes were
calculated on a separate basis and included in the provision reported.
The Company has established a reserve for the full amount of deferred tax
assets. In management's opinion, it is unlikely the deferred tax assets will be
utilized in the near future.
6. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities," standardizes the accounting for
derivative instruments by requiring that all derivatives be recognized as assets
and liabilities and measured at fair value. The statement is effective for
fiscal years beginning after June 15, 1999. The Company believes adoption of the
statement will not have a material effect on its financial statements.
14
<PAGE>
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, 1998.
RESULTS OF OPERATIONS
GENERAL
The Company reported results of operations for the three months ended March
31, 1999 and 1998, as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
(unaudited) (unaudited)
1999 1998
---- ----
<S> <C> <C>
Earnings(loss) before income taxes, equity
in related parties, and
minority interest (1)(2) $ (1,839) $ (12,279)
Income tax benefit -- 3,879
Equity in losses of Wickes Inc.(3) (1,325) --
Minority interest, net of income taxes(3) -- 3,302
---------- ---------
Net loss $ (3,164) $ (5,098)
=========== ==========
</TABLE>
(1) Includes realized investment gains of $0 and $437,000 for the first
quarters of 1999 and 1998, respectively.
(2) Includes a restructuring charge from Wickes of $5.4 million in 1998. This
charge consisted of $3.7 million in anticipated losses on the disposition
of closed center assets and liabilities and $2.0 million in severance and
post employment benefits related to the 1998 Plan, and a benefit of $0.3
million for adjustments to prior years restructuring accruals.
(3) The Company accounted for its investment in Wickes' under the equity method
for the first quarter of 1999. During the first quarter of 1998 the Company
consolidated Wickes' operations with those of the Company and its
subsidiaries.
15
<PAGE>
LINES OF BUSINESS
The following table sets forth certain financial data for the three months
ending March 31, 1999 and 1998, respectively, for the following segments:
e-commerce and advertising, web design and internet connectivity, building
materials, and other segments. The Company accounted for its investment in
Wickes' under the equity method for the first quarter of 1999. Wickes'
operations are consolidated with those of the Company and its subsidiaries for
the first quarter of 1998. "Other" includes real estate, parent company,
financial services, and discontinued operations and all eliminating entries for
inter-company transactions.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
(IN THOUSANDS)
1999 1998
---- ----
<S> <C> <C>
SALES:
E-Commerce & Advertising $ 65 $ --
Web Design & Internet Access 400 115
Building Materials(1) -- 168,746
Other 16 --
------------- -----------
Total $ 481 $ 168,861
=========== ===========
COST OF SALES
E-Commerce & Advertising $ 32 $ --
Web Design & Internet Access 43 117
Building Materials(1) -- 127,764
Other 3 --
----------- ------------
Total $ 78 $ 127,881
=========== ============
OTHER OPERATING INCOME:
E-Commerce & Advertising $ -- $ --
Web Design & Internet Access 1 --
Building Materials(1) -- 2,367
Other 24 84
------------ ------------
Total $ 25 $ 2,451
=========== ============
INVESTMENT INCOME AND REALIZED
GAINS/(LOSSES):
E-Commerce & Advertising $ -- $ --
Web Design & Internet Access -- --
Building Materials(1) -- --
Other (29) 422
------------ ------------
Total $ (29) $ 422
============ ============
16
<PAGE>
THREE MONTHS ENDED MARCH 31,
1999 1998
---- ----
(IN THOUSANDS)
EXPENSES:
E-Commerce & Advertising $ 1,116 $ 30
Web Design & Internet Access 553 632
Building Materials(1) -- 43,293
Other (85) 580
------------ -------------
Total $ 1,585 $ 44,535
============ =============
RESTRUCTURING AND UNUSUAL ITEMS:
E-Commerce & Advertising $ -- $ --
Web Design & Internet Access -- --
Building Materials(1) -- 5,431
Other -- --
------------ -------------
Total $ -- $ 5,431
============ =============
INTEREST EXPENSE:
E-Commerce & Advertising $ 37 $ 19
Web Design & Internet Access 1 1
Building Materials(1)(2) 381 5,776
Other 234 371
------------ -------------
Total $ 653 $ 6,167
============ =============
EARNINGS(LOSS) BEFORE INCOME TAXES,
EQUITY IN RELATED PARTIES AND MINORITY
INTEREST:
E-Commerce & Advertising $ (1,120) $ (49)
Web Design & Internet Access (196) (634)
Building Materials(1) (381) (11,151)
Other (142) (445)
------------ --------------
Total $ (1,839) $ (12,279)
============ =============
IDENTIFIABLE ASSETS:
E-Commerce & Advertising $ 341 $ 248
Web Design & Internet Access 867 217
Building Materials(1) 12,490 14,995
Other 10,008 10,942
------------ -------------
Total $ 23,706 $ 26,402
============ =============
</TABLE>
(1) During the first three months of 1999, the Company accounted for its
investment in Wickes on the equity method. During the same period in 1998, the
Company consolidated Wickes operations with those of the Company.
17
<PAGE>
(2) Includes $381,000, and $373,000 for an interest allocation from Riverside on
its 13% notes for the first three months of 1999 and 1998, respectively.
E-COMMERCE AND ADVERTISING
The following table sets forth information concerning the results of
Buildscape, Inc. ("Buildscape") for 1999 and 1998, respectively: (in thousands)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1999 1998
---- ----
<S> <C> <C>
Sales $ 65 $ --
Cost of sales 32 --
-------- -----------
Net profit 33 --
Selling, general and administrative 1,103 30
Depreciation and amortization 13 --
Interest expense 37 19
-------- ----------
Total expenses 1,153 49
-------- ----------
Net loss ($ 1,120) $ (49)
========= ==========
</TABLE>
Comparisons between periods are not meaningful, since Buildscape operations
did not start until after the first quarter of 1998. Buildscape launched its
website, Buildscape.com, and began sales in the fourth quarter of 1998. In March
1999, Buildscapeauction.com was introduced. Although these websites are
conducting sales, development costs continue as the site content is expanded and
the functionality of the sites is enhanced and improved. Selling, General and
Administrative Expense ("SG&A") includes personnel and technology costs relevant
to developing the technology for the websites and the marketing and sales plan
for the Company. These costs are fully expensed in accordance with the Statement
of Financial Accounting Standards No 86, "Accounting for the Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed".
18
<PAGE>
WEB DESIGN AND INTERNET ACCESS
The following table sets forth information concerning the results of Cybermax,
Inc. ("Cybermax") for 1999 and 1998, respectively: (in thousands)
Three Months Ended March 31,
1999 1998
---- ----
Sales $ 400 $ 115
Cost of sales 43 117
-------- --------
Net profit 357 (2)
Other operating income 1 --
Selling, general and administrative 531 624
Depreciation and amortization 22 7
Interest expense 1 1
-------- --------
Total expenses 553 632
-------- --------
Net loss $ (196) $ (634)
========= =========
The Company purchased the assets of Cybermax, Inc. ("Cybermax")
on January 31, 1998. During 1998, the Company incurred various start-up costs,
which makes comparisons between periods not meaningful.
WICKES INC.
The Company estimates that the Company's results of operations include
losses attributable to Wickes of $1,706,000 and $3,969,000 for the first three
months of March 31, 1999 and 1998, respectively.
The following discussion was obtained from the Wickes' Quarterly Report on
Form 10-Q for the first quarter of 1999.
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 Wickes' Annual Report on Form 10-K for the year ended
December 26, 1998.
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.
19
<PAGE>
THREE MONTHS ENDED
March 27, March 28,
1999 1998
---- ----
Net Sales 100.0% 100.0%
Gross profit 24.0% 24.3%
Selling, general and
Administrative expense 23.4% 24.1%
Depreciation, goodwill and
Trademark amortization 0.8% 0.7%
Provision for doubtful accounts 0.2% 0.8%
Restructuring and unusual items -- 3.2%
Other operating income (0.5)% (1.4)%
Income from operations 0.1% (3.1)%
NET EARNINGS
Wickes' first quarter has historically been adversely affected by
seasonal decreases in building construction activity in the Northeast and
Midwest resulting from winter weather conditions. Weather conditions during the
first quarter of 1999 were relatively close to seasonal averages, whereas in the
first quarter of 1998 Wickes' largest region, the Midwest, experienced a very
mild winter. The first quarter of 1999 had favorable economic conditions for the
building materials supply industry, single family housing starts were up 14.2%
over the first quarter of 1998.
Net loss for the three months ended March 27, 1999 was $3,276,000
compared with a loss of $6,799,000 for the three months ended March 28, 1998.
The reduction in the net loss is primarily the result of there being no charge
for restructuring and unusual items during the first quarter of 1999, increased
sales and gross profit, and reductions in provision for doubtful accounts and
interest expense. The positive impact of these changes were partially offset by
increases in SG&A expense and depreciation and a reduction in other operating
income.
NET SALES
Net sales for the first quarter of 1999 increased 13.3% to $191.1 million
from $168.7 million for the first quarter of 1998. Same store sales increased
15.1% compared with the same period last year. Same store sales to Wickes'
primary customers, building professionals, also increased 16.5% when compared
with the first quarter of 1998. Consumer same store sales decreased by 3.1% for
the quarter. As of March 27, 1999 Wickes operated 101 sales and distribution
facilities, the same number it operated at the end of the first quarter of 1998.
Sales of approximately $4.0 million were recorded, in January of 1998, for the
10 sales and distribution facilities that were sold or closed during the first
quarter of 1998. Wickes estimates that deflation in lumber prices reduced total
sales for the quarter by approximately $1.3 million, compared with the 1998
comparable period.
20
<PAGE>
Wickes believes that the sales increase results primarily from its recent
investments in its target major market and re-merchandised conventional market
sales and distribution facilities, as well as favorable economic conditions.
Same store sales increased 16% in Wickes' nine target major markets, while same
store sales increased 14.4% in the eleven conventional market building centers
Wickes remerchandised during 1997 and 1998. Single family housing starts were
14.2% higher, nationally, in the first quarter of 1998 than in the comparable
period of 1997. In Wickes' primary geographical market, the Midwest, single
family housing starts were 10.7% higher.
GROSS PROFIT
1999 first quarter gross profit increased to $45.9 million from $41.0
million for the first quarter of 1998, a 12.0% increase. Gross profit as a
percentage of sales decreased to 24.0% for the first quarter of 1999 from 24.3%
in 1998. The decrease in gross profit as a percentage of sales is primarily
attributable to increased percent of sales to building professionals and the
expansion of Wickes' installed sales programs, partially offset by increased
margins on internally manufactured products. Sales to building professionals as
a percentage of sales increased to 91.6% in the first quarter of 1999 compared
with 89.6% in 1998. Lumber and building materials accounted for 88.1% of sales
in the first quarter of 1999, compared with 87.4% for the first quarter of 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
SG&A expense decreased to 24.0% of net sales in the first quarter of 1999
compared with 24.3% of net sales in the first quarter of 1998. Much of the
decrease is attributable to operating leverage achieved through increased sales
volume, expense reductions achieved as a result of the 1998 first quarter
restructuring and reduced spending on major market expansion programs in 1999.
Decreases as a percentage of sales in salaries, wages and benefits,
employee relocation and equipment rental expense were partially offset by
increases in professional fees, marketing and maintenance expense. Salaries,
wages and employee benefits decreased as a percentage of sales by 0.6%. As of
March 27, 1999, Wickes had 3,907 full time and part time employees, an increase
of 10.1% from March 28, 1998.
OTHER OPERATING INCOME
Other operating income for the first quarter of 1999 was $0.9 million
compared with $2.4 million for the first quarter of 1998. During the first
quarter of 1999 Wickes did not sell any excess real estate and recorded gains of
only $29,000 on the sale of excess equipment. In the first quarter of 1998,
Wickes recorded a gains of approximately $1.4 million on the sale of its two
Iowa centers, two other closed building centers, and excess equipment. Wickes
also recorded less income as a result of service charges collected on delinquent
accounts receivable as a result of improved delinquency in the first quarter of
1999.
21
<PAGE>
PARENT COMPANY AND OTHER SUBSIDIARIES
The following discussion relates to the operations of the Parent Company
and its subsidiaries, other than Buildscape, Cybermax and Wickes (the "Parent
Group").
The Parent Group's non-interest operating expenses for the first three
months of 1999 decreased to $(85,000) compared to $580,000 during the same
period in 1998. The 1999 expenses include income of approximately $100,000,
which resulted from the release of a reserve established in prior years in
connection with the sale of the Company's former property and casualty
operations. As of March 31, 1999, the Company still has a reserve for future
losses of approximately $75,000. This reserve will most likely be released into
income during 1999, since no losses have occurred on these operations. The 1998
expenses include approximately $165,000 from operations the Company discontinued
in the fourth quarter of 1998. Also included is approximately $400,000 of
expenses that the Parent Company incurred on behalf of its subsidiaries, which
was not allocated to these subsidiaries during the first quarter of 1998.
Revenues of the Parent Group (excluding investment income) for the first
quarter of 1999 and 1998 were $40,000 and $84,000, respectively. Included in
1998 was $82,500 received in settlement of a lawsuit.
Interest expense (excluding interest allocation to Wickes for the Parent
Company's 13% notes of $381,000 in 1999 and $373,000 in 1998) for the quarters
ending March 31, 1999 and 1998, were $234,000 and $371,000, respectively. In
1999, interest consisted of $1,000 on the Parent Company's other bank debt and
$233,000 on the Parent Company's real estate mortgage debt. In 1998, interest
consisted of $19,000 on the Parent Company's other bank debt and $352,000 on the
Parent Company's real estate mortgage debt. Interest expense on the Parent
Company's real estate debt will continue to decrease as a result of real estate
sales. The Company did not have any real estate sales during the first quarter
of 1999, as a result, the principal balance was not reduced. During the first
quarter of 1998, the principal balance was reduced by approximately $3.2
million.
REAL ESTATE INVESTMENTS
The Company's real estate investments consist of $7,362,000 in Georgia
properties, $2,251,000 in Florida properties and $8,000 in other states.
Included in the Company's net realized investment gains for the first
three months of 1998 and 1997 were net realized gains on real estate investments
of $0 and $437,000, respectively.
INCOME TAXES
The Company's effective tax rate was 0% for the three months ended
March 31, 1999 and 1998. 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.
22
<PAGE>
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 (exclusive of Wickes, which is prohibited from paying
dividends under its debt instruments) consist primarily of real estate sales and
the Parent Company's Internet, e-commerce and advertising operations. The Parent
Company's e-commerce and advertising operations are in the start-up phase and
are expected to be net users of cash at least through 1999. 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.
The Parent Company's cash on hand and available borrowings will not be
sufficient to support its operations and overhead through the second quarter of
1999. Therefore, the Parent Company will need to obtain significant additional
funds through asset sales or additional borrowings or other financing for such
purposes and may need to reduce the level of its operations.
For a detailed discussion of the Parent Company's liquidity and
management's plans related thereto, see Note 3. "Commitments and Contingencies".
During the first three months of 1999, stockholders' equity decreased by
a net of $3.2 million. Losses attributable to Wickes accounted for approximately
42% of the decrease. The Company's startup costs incurred for the Buildscape
operations accounted for approximately 35% of the decrease.
YEAR 2000
The Year 2000 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 system failures, miscalculations, the inability to
process transactions, send invoices, or process similar business activities.
The Company is currently assessing the Year 2000 issue. The Company has
focused its assessment into three major categories: (1) internal financial
software system (2) internal non-financial software and (3) technology software.
In August of 1998, the Company purchased an accounting system from Clarus Inc.
This system is Year 2000 compliant and runs on NT 4.0 and SQL Server version
6.5. The total cost for the system and implementation was approximately
$306,000. The Company completed the implementation process during the fourth
quarter of 1998 and is currently processing the 1999 financial information on
the new system.
23
<PAGE>
The Company is currently assessing the potential effect of, and costs of
remediating the Year 2000 problem on its office and facilities equipment, such
as fax machines, photocopiers, telephone equipment, and other common devices
that may be affected by the Year 2000 problem.
In addition, the Company is in the process of identifying problems the
Year 2000 may have on its Technology Department. In February of 1999, the
Company hired a Chief Technical Officer. The Technology Department is currently
evaluating all of the equipment and software that are used in the Company's
operations. The Company anticipates that since most of the equipment and
software relating to the Company's Technology Department was acquired in 1998,
that all of the equipment and software will be in compliance.
The Company estimates the total cost of completing any required
modifications, upgrades, or replacements of its software or equipment will not
have a material adverse effect on the Company's business or results of
operations.
24
<PAGE>
PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
For information concerning a short-term loan agreement dated
March 11, 1999, see Note 3 of Notes to Condensed Consolidated
Financial Statements included elsewhere herein.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule (SEC Use Only)
(b) Reports on Form 8-K
None
25
<PAGE>
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: May 14, 1999
26
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Riverside Group, Inc. and Subsidiaries condensed consolidated balance sheet
and condensed consolidated statement of operations and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000277356
<NAME> Riverside Group, Inc.
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-01-1999
<PERIOD-END> Mar-31-1999
<EXCHANGE-RATE> 1
<CASH> 183
<SECURITIES> 0
<RECEIVABLES> 714
<ALLOWANCES> 278
<INVENTORY> 20
<CURRENT-ASSETS> 775
<PP&E> 998
<DEPRECIATION> 515
<TOTAL-ASSETS> 23,706
<CURRENT-LIABILITIES> 12,671
<BONDS> 9,882
0
0
<COMMON> 529
<OTHER-SE> (1,352)
<TOTAL-LIABILITY-AND-EQUITY> 23,706
<SALES> 481
<TOTAL-REVENUES> 477
<CGS> 78
<TOTAL-COSTS> 78
<OTHER-EXPENSES> 1,584
<LOSS-PROVISION> (59)
<INTEREST-EXPENSE> 653
<INCOME-PRETAX> (3,164)
<INCOME-TAX> (3,164)
<INCOME-CONTINUING> (3,164)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,164)
<EPS-PRIMARY> (.61)
<EPS-DILUTED> (.61)
</TABLE>
