UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended
DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-9209
DECEMBER 31, 1998
RIVERSIDE GROUP, INC.
(Exact Name of Registrant as Specified in its Charter)
FLORIDA 59-1144172
(State of Incorporation) (IRS Employer Identification No.)
7800 BELFORT PARKWAY, JACKSONVILLE, FLORIDA 32256 (Address of
Principal Executive Offices)
(904) 281-2200
(Registrant's Telephone Number)
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE OF $.10 PER SHARE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 30, 1999, the Registrant had 5,287,123 shares of common stock,
par value $.10 per share, outstanding, and the aggregate market value of
outstanding voting stock (based on the last sale price on the NASDAQ SmallCap
Stock Market) held by nonaffiliates was approximately $ 4.70 million (includes
the market value of all such stock other than shares beneficially owned by
officers and directors and the Registrant's Employee Stock Ownership Plan and
Trust).
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement in connection with its Annual
Meeting of Shareholders scheduled May 18, 1999 are incorporated by reference
into Part III hereof, as more specifically described herein.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
PART I
<S> <C> <C>
Item 1. Business..........................................................................1
Item 2. Properties.......................................................................21
Item 3. Legal Proceedings................................................................22
Item 4. Submission of Matters To a Vote of Security-Holders..............................23
PART II
Item 5. Market For Registrant's Common Equity
and Related Stockholder Matters...............................................24
Item 6. Selected Financial Data..........................................................25
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations...........................................27
Item 7A. Quantitative and Qualitative Disclosure About Market Risk........................44
Item 8. Financial Statements and Supplementary Data......................................44
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure........................................44
PART III
Item 10. Directors and Executive Officers of the Registrant...............................45
Item 11. Executive Compensation...........................................................45
Item 12. Security Ownership of Certain Beneficial Owners and Management...................46
Item 13. Certain Relationships and Related Transactions...................................48
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.................40
(a) List of Financial Statements and Schedules Filed as a Part of this Report...40
(b) Reports on Form 8-K - None..................................................40
Exhibits.....................................................................
SIGNATURES.................................................................................43
FINANCIAL STATEMENTS....................................................................F - 1
FINANCIAL STATEMENT SCHEDULES...........................................................F - 2
</TABLE>
<PAGE>
PART I
ITEM 1. BUSINESS.
Riverside Group, Inc., a Florida corporation formed in 1965 ("Riverside",
also "Parent Company"), is a holding company focused through its 100%-owned
subsidiary, Cybermax, Inc. ("Cybermax") on marketing Internet connectivity, web
software application development and hosting service. Riverside engages through
another of its 100%-owned subsidiary, Buildscape, Inc. ("Buildscape") in the
e-commerce market, as well as advertisement on the Internet.
In addition, the Company is engaged, through its 36% owned subsidiary,
Wickes Inc. ("Wickes")(as of March 31, 1999), in the supply and distribution of
building materials.
Unless the context indicates otherwise, the term "the Company" as used
herein refers to Riverside and its subsidiaries.
HISTORICAL DEVELOPMENT
From 1986 through the first half of 1996, Riverside conducted life and
property and casualty insurance operations. The property and casualty insurance
operations were discontinued in 1993 and sold in September 1995. Riverside began
disposing of its life insurance operations at the end of 1994 and in June 1996
completed a merger of its remaining life insurance operations with a third party
that resulted in the ownership by Riverside of a non-controlling interest in the
third party. Riverside disposed of this interest on December 31, 1997.
Riverside obtained its initial investment in Wickes in 1990 through the
acquisition of American Founders Life Insurance Company, which at the time of
its acquisition owned approximately 10% of Wickes' common stock. In 1993, as
part of a Wickes recapitalization plan, including an initial public common stock
offering, Riverside increased its beneficial ownership of Wickes' common stock
to approximately 36%. On June 20, 1996, Riverside purchased from Wickes
2,000,000 newly-issued shares of Wickes' common stock for $10,000,000 in cash.
In 1998 and early 1999, Riverside sold 1,151,900 shares of its Wickes' common
stock. As of March 15, 1999, Riverside beneficially owns 3,000,515 shares of
Wickes' common stock, which constitutes 36% of Wickes' outstanding voting and
non-voting common stock. See "Building Materials Operations."
In January 1998, Riverside formed various operating subsidiaries, which
acquired certain e-commerce and advertising operations from Wickes. See
"E-Commerce and Advertising Operations".
LINES OF BUSINESS
The following table sets forth certain financial data for the past three
years for the following segments: e-commerce and advertising, web design and
internet connectivity, building materials, life insurance and other
segments. Wickes' operations are consolidated with those of the Company and its
subsidiaries for the first through the third quarter of 1998, all of 1997, and
the third and fourth quarters of 1996. The Company accounted for its investment
in Wickes' under the equity method for the fourth quarter of 1998 and the first
and second quarters of 1996. "Other" includes real estate, parent company,
financial services, and discontinued operations and all eliminating entries for
inter-company transactions.
1
<PAGE>
Years Ended December 31,
1998 1997 1996
---- ---- ----
(in thousands)
--------------
SALES:
E-Commerce & Advertising $ 30 $ -- $ --
Web Design & Internet Access 486 -- --
Building Materials(1) 667,024 884,082 467,254
Life Insurance -- -- --
Other 164 -- --
-------- -------- --------
Total $ 667,704 $884,082 $467,254
======== ======== ========
COST OF SALES:
E-Commerce & Advertising $ 14 $ -- $ --
Web Design & Internet Access 182 -- --
Building Materials(1) 508,896 681,056 363,930
Life Insurance -- -- --
Other 170 -- --
-------- -------- --------
Total $ 509,262 $681,056 $363,930
======== ======== ========
OTHER OPERATING INCOME:
E-Commerce & Advertising $ -- $ -- $ --
Web Design & Internet Access -- -- --
Building Materials(1) 5,045 10,689 4,261
Life Insurance -- -- 3,307
Other 546 608 493
--------- -------- --------
Total $ 5,591 $ 11,297 $ 8,061
========= ======== ========
INVESTMENT INCOME AND REALIZED
GAINS/(LOSSES):
E-Commerce & Advertising $ -- $ -- $ --
Web Design & Internet Access -- -- --
Building Materials(1) (1,837) -- --
Life Insurance -- -- 6,394
Other 1,306 866 1,603
--------- -------- --------
Total $ (531) $ 866 $ 7,997
========= ======== ========
EXPENSES:
E-Commerce & Advertising $ 4,605 $ 668 $ --
Web Design & Internet Access (283) -- --
Building Materials(1) 141,447 192,395 87,633
Life Insurance -- -- 9,365
Other 1,549 2,222 1,738
--------- -------- --------
Total $ 147,318 $195,285 $ 98,736
========= ======== ========
RESTRUCTURING AND UNUSUAL ITEMS:
E-Commerce & Advertising $ -- $ -- $ --
Web Design & Internet Access -- -- --
Building Materials(1) 5,932 (559) 745
2
<PAGE>
Life Insurance -- -- --
Other -- -- --
-------- -------- --------
Total $ 5,932 $ (559) $ 745
======== ======== ========
INTEREST EXPENSE:
E-Commerce & Advertising $ 85 $ -- $ --
Web Design & Internet Access 6 -- --
Building Materials(1)(2) 17,984 22,890 11,228
Life Insurance -- -- 7
Other 1,189 1,635 2,443
-------- -------- --------
Total $ 19,264 $ 24,525 $ 13,678
======== ======== ========
EARNINGS(LOSS) BEFORE INCOME TAXES,
EQUITY IN RELATED PARTIES, MINORITY
INTEREST AND DISCONTINUED OPERATIONS:
E-Commerce & Advertising $ (4,674) $ (668) $ --
Web Design & Internet Access 581 -- --
Building Materials(1) (4,027) (1,011) 7,979
Life Insurance -- -- 329
Other (892) (2,383) (2,085)
-------- -------- --------
Total $ (9,012) $ (4,062) $ 6,223
======== ========= ========
IDENTIFIABLE ASSETS:
E-Commerce & Advertising $ 248 $ -- $ --
Web Design & Internet Access 217 -- --
Building Materials(1) 14,995 290,832 281,398
Life Insurance -- -- 5,661
Other 10,942 23,073 22,755
-------- -------- --------
Total $ 26,402 $313,905 $309,814
======== ======== ========
(1) Prior to July 1, 1996 and after September 30, 1998, the Company's balance
sheet and statements of operations reflect the Company's investment in Wickes on
the equity method. See Note 3 of Notes to the Company's Consolidated Financial
Statements included elsewhere herein.
(2) Includes $1,502,000, $1,473,000 and $1,448,000 for an interest allocation
from Riverside on its 13% subordinated notes for 1998, 1997 and 1996,
respectively.
E-COMMERCE AND ADVERTISING
Effective January 15, 1998, Riverside acquired certain operations of
Wickes that Wickes had determined to discontinue as a result of Wickes' plan to
streamline its operations and focus primarily on its core professional builder
business. The operations transferred include e-commerce and advertising on the
Internet. The consideration given or to be given by Riverside to Wickes in the
transaction consists of Riverside's three-year $871,844 unsecured promissory
note and future payments of ten percent of the transferred operations' net
income (subject to a maximum of $430,000).
3
<PAGE>
In connection with this acquisition, Riverside established various operating
subsidiaries to conduct businesses acquired from Wickes, as well as related
operations. Buildscape was established to provide e-commerce and advertising
services for the building materials industry on the Internet.
Buildscape's Internet website, Buildscape.com, is currently in the
final stages of development. During the past year, the Company has allocated
most of its resources (technical and sales) towards the development of this
website.
Buildscape.com is a vortex online "community" for all industries
connected with home building products and related services. The web site is
divided into 12 channels with three more in development, each a website on its
own. Consumers will visit the Buildscape.com site to find builders, remodelers,
and other trade professionals, service providers, lenders and the products they
need for their homes. Trades-people will come to Buildscape.com to find other
trade professionals and to gather information on building products, to purchase
tools, computers, and insurance, and to showcase their products and services.
In 1998 these operations were in the start-up phase and did not
generate significant revenues. Currently the Company is seeking venture capital
to fund these operations. Management intends to monitor carefully the progress
of these operations and may expand or curtail any or all of them, depending upon
the outcome of negotiations with potential investors and the operating results
achieved. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Note 11 of Notes to Consolidated
Financial Statements included elsewhere herein.
CHANNELS OF BUILDSCAPE.COM
PRODUCTS. The Products channel is designed to become the Internet's
single largest source of building products information. The channel will have
photo descriptions, specs, technical and installation information on hundreds of
thousands of products in all categories, from the industry's leading
manufacturers, all together in one place. Visitors will be able to save their
product selections in their own personal files, making this information
convenient, organized and on hand, when they're ready to meet with their
builders or remodelers or make their purchase.
TOOLS ONLINE. Tools Online channel provides professional and
"do-it-yourselfers" with a selection of over 8,500 tools of every conceivable
category from the best tool manufacturers worldwide. This channel contains 2-3
times the variety of the traditional large home improvement centers.
HOUSE PLANS. This channel will contain an extensive interactive
selection of house plans. Customers will be able to fill in a spec sheet
describing the style of house they want, the number of bedrooms, square feet,
price range, and more and they have our search engine present a variety of plans
that fit their specs.
HOME BUILDERS. This channel will contain an extensive directory of over
214,000 of the country's homebuilders. It will provide consumers a method to
search for homebuilders down to the city level.
SUBCONTRACTORS. Buildscape will have a directory of over 737,000
subcontractors, all listed by their specialty and searchable at the city level.
The directory will provide contact information allowing builders, contractors
and homeowners to communicate with each other.
4
<PAGE>
REMODELERS. Through this channel's informative articles and tips about
remodeling, trade and consumer visitors will be able to search Buildscape's
directory of over 423,000 remodelers by specialty and city to find the remodeler
for their job.
SUPPLIERS. This channel will make it easy for the trade to find and get
bids from the right commercial size suppliers for the building material they
need. Our extensive database will be searchable by product category, brand or
supplier at the city level location.
HOMEWAREHOUSE. It is anticipated that this channel will contain over
55,000 hardware items, which would be the largest selection available on the
Internet and available for immediate purchase and delivery. In comparison to
national home improvement stores, Buildscape will contain the largest number of
SKU's available at one's fingertips.
REAL ESTATE. This channel will provide a national searchable database
of homes available for sale through the Multiple Listing Service.
FINANCING. This channel will connect the trade and consumers with
competitive resources for mortgages, construction and home equity loans.
HOME SERVICES. Home Services will be the place where homeowners can get
the help they need for lawn maintenance, termite protection, emergency
preparation, air conditioning and heating, security systems or warranty and
repair services.
BACK OFFICE. The Back Office channel will provide timesaving cost
effective administrative services and products, which give builders more control
over their business and more time for their best work. Representative services
and products include printing, shipping, software, insurance, accounting, health
care management, business productivity and new business opportunities.
INTERACT. Interact is where the Home Building Resource Community can come
together to chat, learn, have some fun and share ideas.
INFO CENTER. Info Center is Buildscape's online News Bureau, magazine stand
and research center.
SALES AND MARKETING
On June 17, 1998, Buildscape and Hanley-Wood, Inc. ("HWI"), a leading
publisher of builder, remodeling and eight other key building industry
publications, executed a Website Linking, Licensing and Commercial Agreement.
HWI brings its wide-ranging industry information and knowledge base, the
influential content of its ten leading highly respected, well-read trade
magazines and its experience in creating www.hbrnet.com, their web site, which
hosts over 350,000 visitors each month. The agreement calls for both parties to
conduct certain commerce on the World Wide Web and to provide links between the
Buildscape sites and the HWI sites. Pursuant to the terms of the agreement,
Buildscape will pay 20% of its gross revenues earned to HWI on a monthly basis
in exchange for advertising provided by HWI in their trade magazines and shows.
Buildscape is obligated to pay HWI a minimum of $250,000 with respect to the
first 12 months of the agreement, if any deficiency remains at the end of the
contract, a lump sum payment will be due in June of 1999. The term of the
contract is one year, however, it automatically continues unless terminated by
either party with a ninety day written notice.
5
<PAGE>
COMPETITION
Although Buildscape has no direct competitors operating under the same
business model today, it does recognize that it competes with both physical and
virtual storefronts selling similar products. Buildscape differs from some of
the web-based competitors as Buildscape offers a turnkey solution enabling all
five of the necessary elements behind the home building/home improvement process
(Search/Select/Interact/Promote and Fulfill). Even though there are several web
sites in operation today in this industry, they are primarily providers of
"search and select" content, usually lacking the "fulfillment" piece within the
equation. Those web sites that do offer fulfillment generally have substantially
fewer offerings than Buildscape.
Buildscape does recognize that it competes with retail stores such as Lowes
and Home Depot and that these large, well capitalized companies could easily
launch a web-based fulfillment business. However these companies focus primarily
on selling home improvement products to the general consumer whereas Buildscape
targets the trade and general consumer for both home building and home
improvement solutions. Additionally, should these companies choose to initiate
web-based sales, they would be competing with their existing retail franchise
and profit model, as they would be inviting customers to shop online and not
visit their own stores anymore.
WEB DESIGN AND INTERNET ACCESS
In February 1998, Riverside acquired from a third party, the assets of
Cybermax Communications, Inc. ("Cybermax"). Cybermax is an internet service
provider, with over 770 residential customers and over 70 commercial customers.
Cybermax services include: web design, web hosting, e-commerce solutions,
nationwide Internet access via 288 points of presence, nationwide Frame Relay
and dedicated Internet access. Cybermax also constructs extranets and intranets
and distributes computers, peripherals and routers.
In 1998 these operations were in the start-up phase and generated
revenues of approximately $486,000. Management intends to monitor carefully the
progress of these operations and may expand or curtail any or all of them,
depending upon the outcome of negotiations with potential investors and the
operating results achieved.
WEB SITE DESIGN
Cybermax offers three basic design packages: the Basic Business
Website, the Small Business Website and the Corporate Business Website. These
websites can be efficiently completed since they are based on graphics and
designs from the Cybermax's Graphic Library. In addition, Cybermax offers fully
customized web sites at multiple prices.
BASIC BUSINESS WEBSITE. Customers receive a welcome home page (30 word
welcome message, company's logo, and a single graphic), a location page (map to
one business physical location), a contact page (form that sends to one
mailbox), and one showcase page (each with two pictures of the featured item
with 40 words of descriptive text). The site construction cost is approximately
$500 with a $49 month hosting charge.
CORPORATE BUSINESS WEBSITE. Customers receive a welcome home page (100
word welcome message, company's logo, and a single graphic), a location page
(map to five business locations), a contact page (form that sends to multiple
mailboxes), an "about us" page (1,000 words or less text
<PAGE>
about the company), twenty showcase pages (each with two pictures of each
featured item with 40 words of descriptive text), thirty links, virtual domain
and web statistics. The site construction cost is approximately $5,000 with a
$140 monthly hosting charge.
SMALL BUSINESS WEBSITE. Customers receive a home page (50 word welcome
message, company's logo, and a single graphic), a location page (maps to three
business locations), a contact page (form that sends to two mailboxes), an
"about us" page (200 words or less text about their company), ten showcase pages
(each with two pictures of each featured item with 40 words of descriptive
text), twenty links, virtual domain and web statistics. The site construction
cost is approximately $2,500 with a $85 monthly hosting charge.
INTERNET ACCESS
Cybermax offers local Internet access through third-party network
providers. Currently, the Company has agreements with StarNet, Inc. and GridNet
Services. Cybermax offers a wide range of high-speed access services. Its
services include lease line access which includes dedicated high- bandwidth
connectivity to support active networks, web servers, large data and file
transfers and multimedia applications. Available in 56 Kbpts, T1 5.44 Mbps,
fractional T1, T3 45 Mbps, and fractional T3 bandwidths. Cybermax's lease lines
provide dedicated, point-to-point circuits that connect the customer's LAN
directly to Cybermax's fault-tolerant, high-speed network. Cybermax also offers
a complete line of high bandwidth access services including ISDN, Frame Relay
and ATM with speeds ranging from 256 KB to T3 45 Mbts.
CUSTOMER SERVICE
Cybermax aims for 100% customer satisfaction. Cybermax currently provides
customer support from a staff located at the Company's headquarters which is
open 7:30 a.m. until 1:30 a.m. eastern time, Monday through Friday and 7:30 a.m.
until 4:30 p.m. eastern time on the weekends.
SALES AND MARKETING
For the past year the Company has focused its resources primarily on
the sale of customer web design work and secondly on Internet access services.
The Company has a sales team dedicated to the sale of web design and receives
referrals from the Buildscape program. The Company believes that customer
referrals are the best marketing for Internet access services and has relied on
this to grow their customer base by striving to provide existing customers with
excellent services.
COMPETITION
The web design and internet service provider businesses each have become
highly competitive. However with the growth slated for the Internet business,
there seems to be plenty of customers available. Cybermax has specialized in
building Extranets/E Commerce Web sites to all players in the building industry.
There is no other web design company with this specific focus. Typically sales
of building products in retail storefronts are restricted by limited shelf space
available, the expense of carrying items that do not sell and the inability to
quickly change out inventory. All these problems are solved for manufacturers
and distributors with the cataloging an E commerce site offers. Because of the
relationship with Buildscape and Wickes, numerous contacts and opportunities
have been developed for this business.
BUILDING MATERIALS OPERATIONS
The Company retails and distributes building materials through its 36%
owned subsidiary, Wickes (as of March 31, 1999). For a description of the
reduction by the Company of its percentage ownership in Wickes during 1998 and
early 1999, see "Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations".
THE INFORMATION CONCERNING WICKES CONTAINED IN THIS REPORT WAS OBTAINED
FROM WICKES' ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 26,
1998 (THE "WICKES FORM 10-K"), FILED BY WICKES WITH THE SECURITIES AND EXCHANGE
COMMISSION (THE "COMMISSION"). FOR FURTHER INFORMATION CONCERNING WICKES,
REFERENCE IS MADE TO THE WICKES FORM 10-K AND THE PERIODIC REPORTS AND OTHER
INFORMATION FILED BY WICKES WITH THE COMMISSION.
Wickes Inc. is a major supplier and distributor of building materials.
Wickes sells its products and services primarily to residential and commercial
building professionals, repair and remodeling ("R&R") contractors and, to a
lesser extent, project do-it-yourselfers ("DIYers") involved in major home
improvement projects. At March 15, 1999, Wickes operated 101 sales and
distribution facilities in 23 states in the Midwest, Northeast, and South and 13
component manufacturing facilities that produce and distribute roof and floor
trusses, framed wall panels, and pre-hung door units.
BACKGROUND
Wickes was formed in 1987 as a Delaware corporation named "Wickes Lumber
Company." In June 1997, Wickes changed its corporate name to "Wickes Inc."
Wickes continues to conduct its primary operations under the "Wickes Lumber"
name.
6
<PAGE>
In April 1988 Wickes completed the acquisition (the "1988 Acquisition") of
operations that had commenced in 1952. These operations consisted of 223
building centers and 10 component manufacturing facilities. From 1988 through
1993, Wickes reduced the number of its building centers to 124 and the number of
its component manufacturing facilities to six.
On October 22, 1993, Wickes completed a plan of recapitalization pursuant
to which Wickes retired all outstanding indebtedness incurred in connection with
the 1988 Acquisition, restructured its previously existing classes of capital
stock, and completed the initial public offering of 2,800,000 shares of its
common stock.
During the fourth quarter of 1995 Wickes committed to and began
implementing a plan (the "1995 Plan") to reduce the number of under-performing
building centers, the corresponding overhead to support these building centers,
and to strengthen its capital structure. Pursuant to the 1995 Plan, Wickes
consolidated or closed 21 building centers and three component manufacturing
facilities. The 1995 Plan also included the private issuance of 2 million shares
of Wickes' Common Stock, which was completed in June 1996.
In the fourth quarter of 1997, Wickes announced and began to implement a
plan to streamline operations, to focus on Wickes' core professional builder
business, and to eliminate overhead costs and programs not directly supporting
this core business. In addition to these actions, in the first quarter of 1998
Wickes closed eight additional building centers and two component manufacturing
facilities and sold two other building centers, and implemented further
headquarters staffing and expense reductions. Wickes recorded a $5.9 million
restructuring charge in the first and third quarters of 1998 with respect to
these activities (the "1998 Plan"). For further information see "Business
Strategy" and Note 3 of Notes to Consolidated Financial Statements included
elsewhere herein.
INDUSTRY OVERVIEW
According to the Home Improvement Research Institute ("HIRI"), sales of
home improvement products (defined as lumber, building materials, hardware,
paint, plumbing, electrical, tools, floor coverings, glass, wallpaper, and lawn
and garden products) associated with the maintenance and repair of residential
housing and new home construction were estimated to be $228.2 billion in 1998.
Despite some consolidation over the last ten years, particularly in metropolitan
areas, the building material industry remains highly fragmented. Wickes believes
that no building material supplier accounted for more than 14% of the total
market in 1998.
In general, building material suppliers concentrate their marketing
efforts either on building professionals or consumers. Professional-oriented
building material suppliers, such as Wickes, tend to focus on single-family
residential contractors, repair and remodeling ("R&R") contractors, project
DIYers and to some extent commercial contractors. These suppliers compete
principally on the basis of service, product assortment, price, scheduled
job-site delivery and trade credit availability. In contrast, consumer-oriented
building material retailers target the mass consumer market, where competition
is based principally on price, merchandising, location and advertising.
Consumer-oriented warehouse and home center retailers typically do not offer as
wide a range of services, such as specialist advice, trade credit, manufactured
components, and scheduled job-site delivery, as do professional-oriented
building material suppliers.
Industry sales are linked to a significant degree to the level of activity
in the residential building industry, which tends to be cyclical and seasonal.
New residential construction is determined largely by household formations,
interest rates, housing affordability, availability of mortgage financing,
7
<PAGE>
regional demographics, consumer confidence, job growth, and general economic
conditions. According to the U.S. Bureau of the Census, U.S. housing starts
totaled 1.46 million in 1994, 1.35 million in 1995, 1.48 million in 1996, and
1.47 million in 1997. In 1998, total U.S. housing starts increased to 1.62
million. The Blue Chip Economic Indicators Consensus Forecast dated March 10,
1999, projects 1999 housing starts to be 1.58 million, down slightly from 1998.
Housing starts in Wickes' primary geographical market, the Midwest, increased
9.2% in 1998. Wickes' two other geographical markets, the Northeast and South,
experienced increases in 1998 housing starts of 8.6% and 10.5%, respectively.
Nationally, single family housing starts, which generate the majority of Wickes'
sales to building professionals, increased by 12.0% from 1.13 million starts in
1997 to 1.27 million starts in 1998.
Repair and remodeling expenditures tend to be less cyclical than new
residential construction. These expenditures are generally undertaken with less
regard to economic conditions, but both repair and remodeling projects
(including projects undertaken by DIYers) tend to increase with increasing sales
of both existing and newly-constructed residences. The HIRI estimates the sales
of home improvement products to repair and remodeling professionals represented
$39.9 billion, or approximately 17% of total 1998 sales of the building material
supply industry, while direct sales to DIYers amounted to $112.2 billion.
BUSINESS STRATEGY
GENERAL
Wickes' mission is to be the premier provider of building materials and
specialized services to the professional segments of the building and
construction industry.
In order to better serve its customers and markets, Wickes has organized and
streamlined its operations into three channels of distribution: Major Markets,
Conventional Markets, and Wickes Direct/Wickes International. These channels are
supported by Wickes' Manufacturing operations. In Major Markets Wickes serves
the national, regional, and large local builder in larger markets with
specialized services and a total solutions approach. In Conventional Markets
Wickes provides the smaller building professional in less-populous markets with
tailored products and services. Wickes Direct/Wickes International provides
another distribution alternative to supply the needs of its commercial
customers. Wickes' Manufacturing operations produce value-added products (such
as pre-hung interior and exterior doors, framed wall panels, and roof and floor
trusses) for Wickes' customers in both Major Markets and Conventional Markets as
well as for its Wickes Direct customers.
MAJOR MARKETS
Wickes operates in 20 Major Markets, which are served by 31 sales and
distribution facilities. These facilities are designed, stocked and staffed to
meet the needs of the particular markets in which they are located and vary from
facilities similar to Wickes' Conventional Market building centers to facilities
that stock only specific types of products, for instance lumber and wood related
products. Major Markets are also served by ten of Wickes' manufacturing
facilities.
These Major Markets are generally large metropolitan areas with favorable
growth projections and are characterized by the active presence of national,
regional and large local builders. Wickes believes that the building supply
industry in these Major Markets remains heavily fragmented.
Beginning in 1997, Wickes initiated Major Markets programs in four markets:
Pensacola, Denver, Louisville, and Raleigh/Charlotte. In 1998, Wickes initiated
8
<PAGE>
its Major Markets programs in five additional markets: Chicago, Cleveland,
Detroit, Indianapolis, and Washington/Baltimore. Other programs are being
ommenced in three other Major Markets in 1999. Wickes intends to initiate
additional Major Markets Programs as opportunities and resources permit.
Wickes' Major Markets programs seek to provide the large builder with
specialized programs and services that integrate various methods of
distribution. Wickes provides these programs and services on a "virtual store"
basis; that is, products and services may be provided from multiple facilities
serving the Major Market on a coordinated basis with centralized customer
contact and support. Wickes devotes significant efforts to redefine and improve
the customer's and its own supply chain management, material flow and logistics.
Wickes' Manufacturing operations constitute an integral part of the Major
Markets programs. These operations provide Wickes with the capability to provide
its customers with custom engineered, value-added products such as manufactured
framing component systems. For instance, in four Major Markets Wickes has begun
its "Frame a Home in a Day" concept. This program, which allows a large builder
to complete the entire process of framing and sheathing an average two-story
residence in as little as one day, rather than the substantially longer period
involved in traditional stick framing methods. In 1999 this program will be
expanded to other Major Markets.
Wickes' operations in Major Markets contributed approximately 42.0% of
Wickes' sales in 1998, compared to 35.0% in 1997, and 32.2% in 1996. Wickes
anticipates that this percentage will continue to increase in 1999. For the
Major Market programs in place during 1998, total 1998 sales increased
approximately 26.0% over 1997 total sales.
CONVENTIONAL MARKETS
In addition to Major Markets, Wickes operates 70 sales and distribution
facilities in smaller or Conventional Markets. Wickes' Conventional Markets are
generally less populous and the majority of customers are generally the smaller
single-family residential contractor, the R&R contractor and the project DIYer.
Wickes believes that competition in the building supply industry is more limited
in Conventional Markets compared to Major Markets but that there is generally
less opportunity for growth within a given Conventional Market.
Since the beginning of 1997, Wickes has completed remerchandising and
remarketing programs ("Resets") in thirteen sales and distribution facilities
located in Conventional Markets. Wickes has also completed Resets in six sales
and distribution facilities in Major Markets. These programs include upgrading
of the showroom layout and product presentation, expansion of product assortment
(typically adding a significant number of stock keeping units, or "SKUs") with a
view towards achieving category dominance in the market, and increasing service
offerings such as installed sales, tool rental, specialized delivery services
and additional in-store sales specialists. The thirteen Conventional Market
facilities that completed Resets have experienced continued significant sales
increases. Wickes intends to perform additional Resets in 1999 and future years.
Wickes' Manufacturing operations also provide significant support for Wickes'
Conventional Market sales activities, particularly through the manufacture of
pre-hung interior and exterior doors.
WICKES DIRECT/WICKES INTERNATIONAL
In an effort to increase its business to non-traditional customers and out-of
- -market trade areas, Wickes formed the Commercial Sales Division in 1993 and
added a national builder accounts sales team in 1996. In late 1996, these two
9
<PAGE>
groups were combined to form "Wickes Direct," Wickes' wholesale distribu- tion
channel, which is also operated internationally as "Wickes Interna- tional."
Through Wickes Direct, Wickes focuses on large volume orders from both
commercial and residential builders, much of which is to be shipped directly
from the manufacturer to the customer's job-site. In addition to lumber and
building materials, Wickes Direct provides estimating, logistics, and material
delivery services to large customers anywhere in the world, all accomplished
without the need for a physical facility close to the customer. Wickes Direct
also provides leads and sales support to Wickes' sales and distribution
facilities.
MANUFACTURING OPERATIONS
Wickes owns and operates thirteen component manufacturing facilities
(including ten located in Major Markets) that supply Wickes' customers with
higher-margin, value-added products such as pre-hung interior and exterior
doors, framed wall panels, and roof and floor trusses. In addition to these
facilities, eight of Wickes' sales and distribution facilities, to a lesser
extent, do some manufacturing. Wickes' manufacturing operations supplied
approximately 32% of the pre-hung interior doors, 45% of the exterior doors, 36%
of the roof and floor truss systems and 71% of the wall panel systems sold by
Wickes in 1998.
Wickes also has an agreement with a third party manufacturer to provide
manufactured housing components nationwide primarily for Wickes. This agreement
requires Wickes to make minimum quarterly purchases of approximately $3 million.
Wickes believes that these pre-assembled products improve customer service
and provide an attractive alternative to job-site construction. As resources
permit, Wickes also intends to expand its manufacturing facilities to supply a
greater number of its sales and distribution facilities with these value added
products.
OTHER INITIATIVES
Since 1997, Wickes has also initiated several other programs to supplement
its Major Market and Conventional Market strategies.
Wickes' tool rental program was developed to rent specialized, professional
quality tools and equipment to customers in need of equipment for unique or
short term projects. The program is designed to attract new customers as well as
provide Wickes with an opportunity to supply current customers with a greater
portion of their total construction needs. The program is currently in place in
25 sales and distribution facilities and will be expanded to additional
facilities in 1999.
Wickes' installed insulation program consists of specially trained
installation crews using specialized equipment and vehicles to install blown and
batt insulation in new construction or major renovations. The installed
insulation program is currently operating in 40 sales and distribution
facilities and is planned to be expanded to more locations in 1999. Installed
insulation is one of the value added services which Wickes believes it can
cost-effectively provide to meet its customers needs. Wickes is evaluating
several other product installation services which may be initiated in 1999.
RECENT RESTRUCTURING AND OPERATIONAL EFFORTS
Beginning with the formulation and adoption of the 1995 Plan in late 1995,
Wickes has continuously reviewed its assets and operations in the effort to
eliminate under-performing facilities and the corresponding overhead, to reduce
other costs, and to focus its efforts on its target customers.
10
<PAGE>
At the time the 1995 Plan was adopted, Wickes operated 126 building centers
and 12 component manufacturing facilities. From that time through the end of
1997, Wickes closed or consolidated 21 building centers and consolidated three
component manufacturing facilities. During this time, Wickes also devoted
substantial efforts to control costs. Beginning in early 1997, Wickes made a
determination to increase expenditures related to sales efforts and to initiate
the Major Market programs and Conventional Market remerchandising programs
discussed above. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations."
During the first quarter of 1998 Wickes implemented the 1998 Plan, which
resulted in the closing or consolidation of eight sales and distribution and two
manufacturing facilities in February, the sale of two sales and distribution
facilities in March, and further reductions in headquarters staffing. As a
result of the 1998 Plan, Wickes recorded a restructuring charge of $5.4 million
in the first quarter and an additional charge of $0.5 million in the third
quarter. The $5.9 million charge included $4.1 million in estimated losses on
the disposition of closed facility assets and liabilities, $2.1 million in
severance and post employment benefits related to the 1998 plan, and a benefit
of $300,000 for adjustments to prior years' restructuring accruals.
MARKETS
Wickes operates in 20 Major Markets, which are served by 31 sales and
distribution facilities and 10 manufacturing facilities. The Company also
operates 70 building centers in less populous areas, or Conventional Markets.
For a further discussion of Major Markets and Conventional Markets see "Business
Strategy".
The following table sets forth the distribution of Wickes' sales and
distribution facilities located in Conventional and Major Markets by size of the
local market:
Number of Sales and
Total Distribution Facilities
Households in Conventional Major
Thirty Mile Radius Markets Markets
------------------ ------- -------
Under 50,000 16 0
50,000-100,000 17 0
100,000-250,000 21 10
250,000-500,000 13 9
500,000 and over 3 12
----- ---
Total 70 31
GEOGRAPHICAL DISTRIBUTION
Wickes' 101 sales and distribution facilities are located in 23 states in the
Midwest, Northeast and South. Wickes believes that its geographic diversity
generally lessens the impact of economic downturns and adverse weather
conditions in any one of Wickes' geographic markets. The following table sets
forth certain information with respect to the locations of Wickes' sales and
distribution facilities as of March 15, 1999:
11
<PAGE>
Midwest Northeast South
- ------------------------ ------------------------ ---------------------
Number of Number of Number of
Sales and Sales and Sales and
Distribution Distribution Distribution
State Facilities State Facilities State Facilities
----- ---------- ----- ---------- ----- ----------
Michigan 30 Pennsylvania 6 Alabama 3
Wisconsin 14 New York 3 Kentucky 3
Indiana 11 Maine 2 Texas 2
Ohio 5 New Hampshire 2 Florida 2
Illinois 4 Connecticut 1 Mississippi 2
Colorado 3 New Jersey 1 North Carolina 2
---
Massachusetts 1 Georgia 1
Maryland 1 Louisiana 1
--- Tennessee 1
---
Total 67 Total 17 Total 17
== == ==
FACILITIES OPENED, CLOSED AND CONSOLIDATED
During the first quarter of 1998, as part of the 1998 Plan, Wickes closed or
consolidated eight building centers and two component manufacturing facilities
and sold two other building centers, all in Conventional Markets. For a further
description of the 1998 Plan see "Business Strategy." In 1998, Wickes also
opened two new component manufacturing facilities at existing sales and
distribution sites, and purchased a third component manufacturing facility in
Indianapolis, Indiana. In January 1999 Wickes purchased the assets of a
component manufacturing facility located in Cookeville, Tennessee, and in March
1999 Wickes entered into an agreement to acquire a component manufacturing
facility located in Bear, Delaware.
The following table reconciles the number of sales and distribution
facilities and component manufacturing facilities operated by Wickes at December
31, 1994, December 30, 1995, December 28, 1996, December 27, 1997, December
26,1998 and March 15, 1999.
Sales and Component
Distribution Manufacturing
Facilities Facilities
As of December 31, 1994 130 10
Acquisitions 5 2
Expansion 2 --
Closings (10) --
Consolidations (17) (1)
----- -----
As of December 30, 1995 110 11
Expansion -- 1
Consolidations (2) --
----- -----
As of December 28, 1996 108 12
12
<PAGE>
Expansion 6 1
Closings (2) --
Consolidations (1) (2)
----- -----
As of December 27, 1997 111 11
Expansion -- 2
Acquisition -- 1
Sold (2) --
Closings (7) (2)
Consolidations (1) --
----- -----
As of December 26, 1998 101 12
Acquisition -- 1
----- -----
As of March 15, 1999 101 13
===== =====
CUSTOMERS
Wickes has a broad base of customers, with no single customer accounting for
more than 1.0% of net sales in 1998. In 1998, 89% (compared with 87% in 1997) of
Wickes' sales were on trade credit, with the remaining 11% as cash and credit
card transactions.
HOME BUILDERS
Wickes' primary customers are single-family home builders. In 1998, all home
builder customers accounted for 61% of Wickes' sales, compared with 57% in 1997.
The majority of Wickes' sales to these customers are of high-volume commodity
items, such as lumber, building materials, and manufactured housing components.
Wickes will continue its intense focus on this customer segment, offering new
products and developing additional services to meet their needs.
COMMERCIAL / MULTI-FAMILY CONTRACTORS
Wickes Direct and Wickes International concentrate on sales to commercial
contractors (primarily those engaged in constructing motels, restaurants,
nursing homes, extended stay facilities, and similar projects) and multi-family
residential contractors. Sales to these customers are made on a direct ship
basis as well as through Wickes' sales and distribution facilities. In 1998,
sales to these customers accounted for more than 17% of Wickes' sales, compared
with 18% in 1997. As part of the 1998 Plan, Wickes has integrated the Wickes
Direct domestic program more closely with its other operations.
REPAIR & REMODELERS
In 1998, R&R customers accounted for approximately 10% of Wickes' sales,
compared with 12% in 1997. The R&R segment consists of a broad spectrum of
customers, from part-time handymen to large, sophisticated business enterprises.
Some R&R contractors are involved exclusively with single product application,
such as roofing, siding, or insulation, while some specialize in remodeling
jobs, such as kitchen or bathroom remodeling or the construction of decks,
garages, or full room additions. Wickes offers the product and project
expertise, special order capability, design assistance, and credit terms to
serve the widely varying needs of this diverse market.
13
<PAGE>
DIYERS
Sales to DIYers (both project and convenience) represented about 12% of
Wickes' sales in 1998, compared with 13% in 1997. The percentage of sales to
DIYers varies widely from one sales and distribution facility to another, based
primarily on the degree of local competition from warehouse and home center
retailers. Wickes' sales and distribution facilities do not have the large
showrooms or broad product assortments of the major warehouse or home center
retailers. For small purchases, the showrooms serve as a convenience rather than
a destination store. Consequently, Wickes' focus on consumer business is toward
project DIYers -- customers who are involved in major projects such as building
decks or storage buildings or remodeling kitchens or baths.
SALES AND MARKETING
Wickes employs a number of marketing initiatives designed to increase sales
and to support Wickes' goal of being the dominant force in the sale of lumber
and other building materials to building professionals in each of its markets.
BUILDING PROFESSIONAL
Wickes seeks to establish long-term relationships with its professional
customers by providing a higher level of customer assistance and services than
are generally available at independently-owned building centers or large
warehouse and home center retailers.
Wickes provides a wide range of customer services to building professionals,
including expert assistance, technical support, trade credit, scheduled job-site
delivery, manufacture of customized components, installed sales, specialized
equipment, logistical and material flow design and support, and other special
services. Building professionals generally select building material suppliers
based on price, job-site delivery, quality and breadth of product lines,
reliability of inventory levels, and the availability of credit.
For a description of the programs designed for and the emphasis being applied
to professional customers in Major Markets, see " Business Strategy - Major
Markets."
In both Conventional and Major Markets, Wickes' primary link to the building
professional market is its experienced sales staff. Wickes' approximately 390
outside sales representatives ("OSR's") are commissioned sales persons who work
with professional customers on an on-going basis at the contractors' job sites
and offices. Typically, a sale to a contractor is made through a competitive bid
prepared by the OSR from plans made available by the contractor. From these
plans, the OSR or sales support associate prepares and provides to the
contractor a bid and a complete list, or "take-off," of the materials required
to complete the project. Preparation of a take-off requires significant time and
effort by trained and experienced sales representatives and support associates.
Wickes has equipped most of its sales and distribution facilities with a
computerized system which significantly reduces the time required to prepare
take-offs. In addition, this system instantly recalculates changes and
automatically includes add-on products needed to complete the project, which
generally improves productivity, sales and margins. The ability of the sales
representative to provide prompt and accurate take-offs, to arrange timely
deliveries, and to provide additional products or services as necessary is an
important element of Wickes' marketing strategy and distinguishes Wickes from
many of its competitors.
Wickes currently employs 128 specialty salespeople in its sales and
distribution facilities who provide expert advice to customers in project
design, product selection and applications. A staff of 43 trained R&R
14
<PAGE>
sales specialists offer special services to R&R contractors equivalent to that
accorded home builders. In many of its sales and distribution facilities, Wickes
maintains separate R&R offices. Wickes currently has kitchen and bath
departments in most of its sales and distribution facilities and has a staff of
76 kitchen and bath specialists. Wickes also employs 9 specialists in other
departments.
Wickes extends credit, generally due on the 10th day of the month following
the sale, to qualified and approved contractors. Approximately 89% of Wickes'
sales during 1998 were on credit, with the remaining 11% consisting of cash or
credit card sales, including approximately 0.6% of sales on Wickes' private
label credit card. Overall credit policy is established at the corporate level,
with each sales and distribution facility manager and a district credit manager
responsible for the administration and collection of accounts. The accounts are
generally not collateralized, except to the extent Wickes is able to take
advantage of the favorable materialmen's lien laws of most states applicable in
the case of delinquent accounts. Wickes' credit practices have resulted in a bad
debt expense of .3% of total credit sales in 1998, compared with .2% in 1997,
and .1% in 1996.
Wickes owns and leases a fleet of 776 delivery vehicles as of February 28,
1999, to provide job-site deliveries of building materials scheduled to
coordinate with project progress, including 84 specialized delivery trucks
equipped for roof-top or second story delivery, 91 specialized millwork delivery
vehicles, 41 vehicles designed for installation of blown insulation, and 22
vehicles equipped with truck mounted forklifts. Wickes will continue to add
these specialized vehicles to other markets where there is sufficient demand for
such services.
Over the past several years, Wickes has installed and will continue to
increase its base of computer-aided design hardware and software. These systems
include design and take-off software for kitchens, decks, outbuildings,
additions and houses. With these tools, sales representatives and specialists
are able to provide customers with professional-quality plans more efficiently.
In 1997, Wickes began an equipment rental program at 25 of its sales and
distribution facilities. Under this program, Wickes rents specialized,
professional quality tools and equipment to customers in need of equipment for
unique or short term projects.
In 1997, Wickes also began its installed insulation program. Through the use
of specialized equipment and vehicles and its specially trained installation
crews, Wickes installs blown and batt insulation in new or existing
construction. There are currently 40 sales and distribution facilities that
offer this service.
Wickes' internet site on the world wide web provides information about
Wickes' services and products, facilitates doing business with customers, allows
customers to look up their own transactional information, and features extensive
links to suppliers and other industry references. Wickes' home page can be found
at the internet address: http://www.wickes.com.
Wickes advertises in trade journals and produces specialized direct mail
promotional materials designed to attract specific target customers. Wickes does
some select newspaper advertising, which may include circulars and run-of-press
advertisements. It also has numerous product displays in its sales and
distribution facilities to highlight special products and services.
To increase customer loyalty and strengthen customer relationships, Wickes,
in many cases with vendor support, sponsors or participates in numerous special
marketing activities, such as trade show events, informational product seminars,
various outings, and professional builder trips.
15
<PAGE>
DIYERS
Most sales and distribution facilities, primarily building centers located in
Conventional Markets, also pursue sales to project DIYers through their staff of
specially-trained inside sales representatives and specialists. These
representatives provide professional advice to consumers for home improvement
projects and assist these customers in designing specific projects with
sophisticated computer design software. The sales representatives can also
provide a comprehensive list of materials and detailed drawings to assist
customers in completing their projects. Wickes believes that project DIYers are
attracted to its sales and distribution facilities by this high level of
service.
Wickes' showrooms generally feature product presentations such as kitchen and
bath and door and window displays. The showrooms are regularly re-merchandised
to reflect product trends, service improvements and market requirements. During
1997, Wickes made significant investments to improve the appearance and
merchandising of 19 of its sales and distribution facilities' showrooms. During
1998 Wickes did not initiate any additional Resets, as it evaluated the large
number completed during 1997. For those centers that completed Resets during
1997, Wickes has experienced sales increases of approximately 20% in the
12-month period following completion of the Reset. Additional showroom
improvements are contemplated for 1999 and future years.
While Wickes' product offerings in hardlines are generally more limited than
its consumer-oriented competitors, Wickes stocks a larger selection of commodity
products and offers a special order program for custom or specialty products.
Wickes emphasizes project packages, which include all materials and detailed
instructions for the assembly of the larger projects frequently undertaken by
project DIYers.
PRODUCTS
Wickes stocks a wide variety of building products, totaling approximately
63,000 SKUs Company-wide, to provide its customers with the quality products
needed to build, remodel and repair residential and commercial properties. Each
of Wickes' sales and distribution facilities tailors its product mix to meet the
demands of its local market. Approximately 5,200 SKUs are typically stocked in a
particular sales and distribution facility.
Wickes categorizes its products into four groups: Commodity Wood Products --
lumber, plywood, treated lumber, sheathing, wood siding and specialty lumber;
Building Products -- roofing, vinyl siding, doors, windows, mouldings, drywall
and insulation; Hardlines -- hardware products, paint, tools, kitchen and
bathroom cabinets, plumbing products, electrical products, light fixtures and
floor coverings; and Manufactured Housing Components -- roof and floor trusses,
and interior and exterior wall panels. Commodity Wood Products, Building
Products, Hardlines, and Manufactured Housing Components represented 44%, 36%,
10% and 10% of Wickes' sales for 1998 and 45%, 35%, 11% and 9%, respectively, of
sales for 1997.
In addition to stock items, Wickes also fills special orders, either from its
own manufacturing facilities or through outside suppliers. Wickes believes that
these special order services are extremely important to its customers,
particularly the building professional. In 1998, approximately 32% of Wickes'
sales were of special order items, compared with 31% in 1997.
MANUFACTURING
16
<PAGE>
Wickes owns and operates 13 component manufacturing facilities that supply
Wickes' sales and distribution facilities with higher-margin, value-added
products such as pre-hung doors, framed wall panels, and roof and floor trusses.
In addition to these facilities, eight of Wickes' sales and distribution
facilities, to a lesser extent, perform some manufacturing. These manufacturing
operations enable Wickes to serve the needs of its professional customers for
such quality, custom-made products. In 1998 Wickes' door manufacturing
operations supplied approximately 32% of the pre-hung interior doors and 45% of
the exterior doors sold by Wickes. The truss manufacturing operations supplied
approximately 36% of the total roof and floor truss systems and 71% of the total
wall panel systems sold by Wickes in 1998. Wickes believes that these
preassembled products improve customer service and provide an attractive
alternative to job-site construction. Wickes has also entered into an
arrangement with a manufacturer that primarily serves Wickes. As resources
permit Wickes plans to expand its manufacturing facilities to take advantage of
these increased opportunities and to supply a greater number of its sales and
distribution facilities with these products.
SUPPLIERS AND PURCHASING
Wickes purchases its products from numerous vendors. The great majority of
commodity items are purchased directly from manufacturers, while the remaining
products are purchased from a combination of manufacturers, wholesalers and
other intermediaries. No single vendor accounted for 5% of Wickes' purchases in
1998, and Wickes is not dependent upon any single vendor for any material
product. Wickes believes that alternative sources of supply are readily
available for substantially all of the products it offers.
The great majority of Wickes' commodity purchases are made on the basis of
individual purchase orders rather than supply contracts. In certain product
lines, though, Wickes has negotiated some advantageous volume pricing agreements
for a portion of the product line's purchases. Because approximately 32% of
Wickes' average inventory consists of commodity wood products and manufactured
housing components, which are subject to price volatility, Wickes attempts to
match its inventory levels to short-term demand in order to minimize its
exposure to price fluctuations. Wickes has developed an effective coordinated
purchasing program that allows it to minimize costs through volume purchases,
and Wickes believes that it has greater purchasing power than many of its
smaller, local independent competitors. Wickes seeks to develop close
relationships with its suppliers in order to obtain favorable pricing and
service arrangements.
Wickes' computerized inventory tracking and forecasting system, as part of
its inventory replenishment system, is designed to track and maintain
appropriate levels of products at each sales and distribution facility. These
systems have increased Wickes' operating efficiencies by providing an automated
inventory replenishment system.
Wickes has active rail sidings at 59 of its sales and distribution and
manufacturing facilities enabling suppliers to ship products purchased by Wickes
directly to these facilities by rail. Wickes also utilizes two distribution
centers owned by third parties, located in Chicago, Illinois and Allentown,
Pennsylvania, through which approximately 4% of Wickes' wood products inventory
is delivered.
SEASONALITY
Historically, Wickes' first quarter and, occasionally, its fourth quarter are
adversely affected by weather patterns in the Midwest and Northeast, which
result in seasonal decreases in levels of construction activity in these areas.
The extent of such decreases in activity is a function of the severity of winter
conditions. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations."
17
<PAGE>
COMPETITION
The building material industry is highly competitive. Due to the fragmented
nature of this industry, Wickes' competitive environment varies by location and
by customer segment. Reduced levels of construction activity have, in the past,
resulted in intense price competition among building material suppliers that has
at times adversely affected Wickes' gross margins.
Within the professional market, Wickes competes primarily with local
independent lumber yards and regional and local building material chains.
Building professionals generally select building material suppliers based on
price, job-site delivery, quality and breadth of product lines, reliability of
inventory levels, and the availability of credit. Wickes believes that it
competes favorably on each of these bases. Wickes believes that it has a
significant competitive advantage in rural markets and small communities, where
it competes primarily with local independent lumber yards, regional building
material chains, and, to a lesser extent, with national building center chains
and warehouse and home center retailers, which generally locate their units in
more densely populated areas. In Major Markets Wickes believes that its total
package of services and ability to serve the large builder provides it with a
competitive advantage.
ENVIRONMENTAL AND PRODUCT LIABILITY MATTERS
Many of the sales and distribution facilities presently and formerly operated
by Wickes contained underground petroleum storage tanks. Other than tanks at one
acquired facility, recently installed and in compliance with modern standards,
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 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, the Company 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 been identified as a potential responsible party in two Superfund
landfill clean up sites. Based on the amounts claimed and Wickes' prior
experience, it is expected that Wickes' liability in these two matters will be
less than $100,000.
For information concerning certain litigation concerning products
containing asbestos or silica dust, see "Item 3. Legal Proceedings."
Wickes has reserved $152,000 towards the cost of these and other
environmental and product liability matters. Although Wickes has not expended
material amounts in the past ten years with respect to the foregoing, and
expenditures in the most recent four years have been significantly reduced,
there can be no assurances that these matters will not give rise to additional
compliance and other costs that could have a material adverse effect on Wickes.
Certain of Wickes' statements concerning environmental and product liability
matters constitute Forward-Looking Statements. See "Item 3. Legal Proceedings"
for a description of certain factors that may affect the outcome of these
matters.
18
<PAGE>
TRADEMARKS AND PATENTS
Wickes has no material patents, trademarks, licenses, franchises, or
concessions other than the name "Wickes Lumber" and the "Flying W" trademark.
OTHER OPERATIONS
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, as of
March 15, 1999, the Company owns 14,687,585 shares, or approximately forty
percent of Greenleaf's outstanding common shares. The Company also received and
owns two five year options to acquire additional newly-issued shares of
Greenleaf's common stock, as follows: (1) 5,733,333 shares at an average
exercise price of $.25 per share; and (2) 1,581,249 shares at an exercise price
of $.15 per share. In accordance with the Accounting Principles Board Opinion
Number 29: Accounting for Nonmonetary Transactions, the Company has recorded its
investment in Greenleaf at zero. The calculated 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. As of March 19, 1999, the calculated market
value of the Company's investment in Greenleaf was approximately $19,270,000
million based on Greenleaf's stock price of $1.312 per share on the
Over-the-Counter Bulletin Board. The calculated value has been determined by
multiplying 14,687,585 shares owned by the Company by the stock price listed on
the Over-the-Counter Bulletin Board on the respective date. Greenleaf stock is
thinly traded with an average weekly volume of 23,000 shares to 151,000 shares.
The Company has not determined a valuation of its investment in Greenleaf under
a block sale scenario, nor can the Company estimate how many shares and at what
market price per share could be sold over any specified period of time without
adversely affecting market price.
For information concerning discussions between the Company and Greenleaf
concerning the possible adjustment of the merger consideration to reduce the
Company's percentage of ownership of Greenleaf, see "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations".
REAL ESTATE OPERATIONS
As of December 31, 1998, Riverside's investment in real estate includes
$9,250,000 of land held for sale, $373,000 of commercial rental property, and
$44,000 of investments in real estate joint ventures.
LAND HELD FOR SALE
Included in the investment in land held for sale are approximately 138 acres
of land located within Highlands Park in Smyrna, Georgia, and 9 acres of land
located within Belfort Park in Jacksonville, Florida, referred to as "Highlands"
and "Belfort", respectively.
HIGHLANDS. Highlands originally consisted of 1,000 acres and has been an
active development since 1983 with approximately 767 acres being sold over the
19
<PAGE>
last 12 years. Highlands is a planned industrial development just outside of
Atlanta, Georgia. The land is subdivided into numerous parcels planned for
commercial, office and light industrial use. In its current state, the property
has road frontage and access to County water, sewer, electrical, gas and
telephone. In addition, many of the properties have been graded. During 1998,
Riverside completed the sale of 61 acres for approximately $3.5 million.
BELFORT. Belfort originally consisted of approximately 28 acres of vacant and
unimproved commercial land, with 21.17 acres being sold over the last two years.
All 6.83 remaining acres are designated for office use. During 1998, Riverside
completed the sale of 12 acres designed for office use for approximately $2.9
million.
EMPLOYEES
As of March 15, 1999, Riverside had 62 full-time employees. As of February
28, 1999, Wickes had approximately 3,795 employees, of whom 3,292 were employed
on a full-time basis. The Company believes that it has maintained favorable
relations with its employees. None of Riverside's or Wickes' employees are
represented by a union or covered by a collective bargaining agreement.
ITEM 2. PROPERTIES.
Riverside's executive offices are in leased space in Jacksonville, Florida.
Wickes' 101 sales and distribution facilities are located in 23 states, with
67 in the Midwest, 17 in the Northeast and 17 in the South. See "Item 1.
Business - Markets." Wickes believes that its facilities generally are in good
condition and will meet Wickes' needs in the foreseeable future.
Wickes' Conventional Market building centers generally consist of a showroom
averaging 9,600 square feet and covered storage averaging 38,500 square feet.
Wickes' sales and distribution facilities located in Major Markets tend to be
more specialized. Wickes upgraded or Reset 19 of its showrooms in 1997 and 1998.
Wickes' sales and distribution facilities are situated on properties ranging
from 1.0 to 28.2 acres and averaging 9.4 acres. Wickes also operates 13
component manufacturing facilities, which have an average of 36,400 square feet
under roof on 6.3 acres.
Wickes owns 84 of its sales and distribution facilities and 82 of the sites
on which such facilities are located. The remaining 17 sales and distribution
facilities and 19 sites are leased. As of December 26, 1998, Wickes also held
for sale the assets of ten closed facilities with an aggregate book value of
$3.7 million. In addition to its sales and distribution facilities, Wickes
operates 13 component manufacturing plants. Six of these plants are located on
sales and distribution facility sites. Of the remaining seven plants, four are
on owned sites and three are on leased properties.
Wickes also owns or leases a large fleet of trucks and other vehicles,
including vehicles specialized for the delivery of certain of Wickes' products.
As of February 28, 1999, the fleet included approximately 156 heavy duty trucks,
84 of which provide roof-top or second story delivery and 22 other vehicles
equipped with truck mounted forklifts, 478 medium duty trucks, 523 light duty
trucks and automobiles, 574 forklifts, 91 specialized millwork delivery
vehicles, and 41 vehicles equipped to install blown insulation.
Wickes leases its corporate headquarters, a portion of which is subleased,
located at 706 North Deerpath Drive in Vernon Hills, Illinois.
20
<PAGE>
ITEM 3. LEGAL PROCEEDINGS.
On November 3, 1995, a complaint styled Wolfson v. Riverside Group, Inc.,
-----------------------------------
et al., was filed against Wickes, its Directors and Riverside 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 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. See Note 11 of Notes to Consolidated Financial Statements
included elsewhere herein. There was no activity in this suit in 1998.
Wickes has been identified as a potential responsible party in two Superfund
landfill clean up sites. In Browning-Ferris Industries, et al. v. Richard Ter
--------------------------------------------------
Maat, et al. v. Wickes Lumber Company, et al., Case No. 92 C 22059 filed in the
- --------------------------------------------------------------------
United States District Court for the Northern District of Illinois, Wickes has
been named as a potentially responsible party for cleanup of the MIG-DeWanne
Landfill located in Boone County, Illinois. Wickes has also received
notification from the United States Environmental Protection Agency regarding
cleanup of the Adams/Quincy Landfills #2 & 3 located in Quincy, Illinois. Based
on the amounts claimed and Wickes' prior experience, it is expected that Wickes'
liability in these two matters will be less than $100,000.
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. Librado Amador, et al.
----------------------
v. Alamo Concrete Products Limited, Wickes Lumber Company, et al., Case No.
- --------------------------------------------------------------------------------
16696, was filed in the 229th Judicial District Court of Duval County, Texas.
- -----
Javier Benavides, et al. v. Magic Valley Concrete, Inc., Wickes Lumber Company,
- --------------------------------------------------------------------------------
et al., Case No. DC-96-89 was filed in the 229th Judicial District Court of
- ---------------------------
Starr County, Texas. 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.
Wickes and the Company are involved in various other legal proceedings which
are incidental to the conduct of their businesses. The Company does not believe
that any of these proceedings will have a material adverse effect on the
Company.
The Company's assessment of the matters described in this Item 3 and other
forward-looking statements ("Forward-Looking Statements") in this report are
made pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995 and are inherently subject to uncertainty. The outcome of the
matters described in this Item 3 may differ from the Company's assessments of
these matters as a result of a number of factors including but not limited to:
matters unknown to the Company at the present time, development of losses
materially different from the Company's experience, Wickes' ability to prevail
against
21
<PAGE>
its insurers with respect to coverage issues to date, the financial ability of
those insurers and other persons from whom Wickes may be entitled to indemnity,
and the unpredictability of matters in litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock trades over-the-counter and is quoted on the
NASDAQ SmallCap Stock Market under the trading symbol "RSGI." Prior to July 28,
1997, the Company's common stock was traded on the NASDAQ National Stock Market.
As of March 25, 1999, there were 5,287,123 shares outstanding held by
approximately 1,691 shareholders of record.
In 1998, the Company was notified by NASD that it was not in compliance
with the new Net Tangible Asset requirement and was scheduled for delisting from
the NASDAQ SmallCap Stock Market. In August of 1998, the Company was granted a
temporary exception from the requirement until September of 1998. During the
duration of the exception, the Company was listed by NASDAQ under the symbol
"RSGIC". In 1998, the Company presented to the NASDAQ Listing Qualifications
Panel, a definitive plan which showed it able to comply with the net tangible
asset requirement of NASDAQ SmallCap Stock Market over the long term. As a
result, the Panel determined to continue the listing of the Company's securities
on NASDAQ SmallCap Stock Market subject to various conditions. The Company
currently anticipates that it will not be able to continue to meet NASDAQ's
listing requirements and that delisting is therefore possible. Should the
Company not be able to meet the various requirements, the Company anticipates,
but can give no assurances, that quotations would be available on the NASD's
electronic OTC Bulletin Board.
The following table sets forth, for the periods indicated, the high and
low closing sale prices for the Company's common stock as reported on NASDAQ
SmallCap Stock Market (or, for periods prior to July 28, 1997, NASDAQ National
Market System). Prices do not include retail markups, markdowns or commissions.
High Low
---- ----
Calendar Quarter
1997:
First Quarter............................. $3.25 $1.75
Second Quarter............................ 2.87 1.87
Third Quarter............................. 3.00 1.75
Fourth Quarter............................ 2.25 1.00
1998:
First Quarter............................. $2.44 $1.25
Second Quarter............................ 5.00 1.50
Third Quarter............................. 4.00 1.06
Fourth Quarter............................ 2.50 1.25
The Company did not pay any cash dividends on its common stock during the
last two fiscal years and does not anticipate payment of such dividends for the
foreseeable future. Payment of dividends in the future is subject to the
discretion of the Board of Directors of the Company and is dependent upon the
Company's overall financial condition, capital requirements, compliance with
contractual requirements, earnings, and such other factors as the Board of
Directors may deem relevant. In addition, the terms of the Company's $1,000,000
22
<PAGE>
loan from Imagine Investments Inc. prohibit the payment of cash dividends while
this loan remains outstanding. See "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations."
23
<PAGE>
Item 6. Selected Financial Data.
The following summary of certain consolidated financial data of the
company is derived from the Company's Consolidated Financial Statements included
elsewhere herein and should be read in conjunction with these financial
statements and notes thereto and "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
Years Ended December 31.
-----------------------------------
(in thousands, except per share data)
--------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Sales and service revenues (1) $ 667,704 $ 884,082 $ 467,254 $ -- $ --
Insurance premiums and annuity
considerations (2) -- -- 3,224 8,298 18,657
Net investment income(2) (32) (31) 6,325 14,492 17,523
Net realized investment gains (losses) (499) 897 1,672 (234) (182)
Other operating income 5,591 11,297 4,837 1,513 1,512
--------- ---------- --------- ---------- ---------
Total revenues (1) 672,764 896,245 483,312 24,069 35,998
Equity in earnings (losses) of
Wickes Inc. (1) (208) -- (1,714) (5,849) 8,274
Minority interest (1) 521 703 (2,318) -- --
Reorganization of life insurance
subsidiaries (2) -- -- -- (9,062) --
Earnings (loss) from continuing operations
before cumulative effect of change in
accounting principles (3) (12,307) (5,821) 618 (17,845) 8,850
Loss from discontinued operations -- (388) (1,024) (1,086) (4,405)
Gain on disposal of discontinued operations -- -- -- 2,731 --
--------- ---------- ---------- --------- ---------
Net earnings (loss) $ (12,307) $ (6,209) $ (406) $ (16,200) $ 4,445
--------- ---------- --------- --------- ---------
Earnings (loss) per common share, after
deducting preferred stock dividends and
accretion:
Earnings (loss) from continuing operations
before cumulative effect of change in
accounting principles (2.33) (1.12) 0.12 (3.38) 1.61
Loss from discontinued operations 0.00 (0.07) (0.20) (0.21) (0.82)
Gain on disposal of discontinued operations -- -- -- 0.52 --
--------- ---------- --------- --------- ---------
Basic diluted earnings (loss) per share (2.33) (1.19) (0.08) (3.07) 0.79
--------- ---------- --------- --------- ----------
Balance Sheet data (at period end):
Total investments (2) $ 24,662 $ 14,329 $ 22,199 $ 233,441 $ 258,971
Total assets (1)(2) 26,402 313,905 309,814 300,725 353,370
Total debt and redeemable preferred
stock 22,116 219,426 204,511 31,215 45,198
Total common stockholders' equity $ 2,368 $ 14,620 $ 20,775 $ 26,056 $ 29,103
Common shares outstanding 5,287,123 5,287,123 5,296,123 5,311,123 5,465,781
Book value per common share $ 0.45 $ 2.77 $ 3.92 $ 4.91 $ 5.32
Cash dividend declared per common share $ -- $ -- $ 0.10 $ -- $ --
====================================================================================================================================
</TABLE>
24
<PAGE>
(1) WICKES' OPERATIONS ARE CONSOLIDATED WITH THOSE OF THE COMPANY AND ITS
SUBSIDIARIES FOR THE FIRST THROUGH THE THIRD QUARTER OF 1998, ALL OF 1997,
AND THE THIRD AND FOURTH QUARTERS OF 1996. THE COMPANY ACCOUNTED FOR ITS
INVESTMENT IN WICKES' UNDER THE EQUITY METHOD FOR THE FOURTH QUARTER OF
1998 AND THE FIRST AND SECOND QUARTERS OF 1996.
(2) AT THE END OF 1994, RIVERSIDE DISPOSED OF CERTAIN OF ITS LIFE INSURANCE
OPERATIONS. IN JUNE 1996, RIVERSIDE MERGED ITS REMAINING LIFE INSURANCE
OPERATIONS WITH THOSE OF A THIRD PARTY; THEREAFTER, RIVERSIDE ACCOUNTED
FOR ITS INVESTMENT IN THIS THIRD PARTY ON THE EQUITY METHOD THROUGH
DECEMBER 30, 1997.
(3) IN 1998, THE COMPANY RECORDED $3.3 MILLION IN DEFERRED INCOME TAX EXPENSE.
THIS INCREASED THE VALUATION ALLOWANCE AGAINST ITS DEFERRED TAX ASSET TO
100%.
25
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion should be read in conjunction with the
Consolidated Financial Statements and Notes contained elsewhere herein. Since
the operations of Wickes are consolidated with those of the Company and its
subsidiaries for the first through the third quarter of 1998, all of 1997, and
the third and fourth quarter of 1996, and accounted for on the equity method for
the fourth quarter of 1998, and the first and second quarter of 1997,
comparisons between periods may not be meaningful in certain respects.
FORWARD-LOOKING INFORMATION CAUTIONARY STATEMENT. The discussion below of
the Company's future operations, 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 success in obtaining of venture capital financing for Buildscape, (ii)
the outcome of the Company's discussions with the holders of the Company's 13%
Subordinated Notes due September 1999 ("the 13% Notes"),(iii) the success of and
level of negative cash flow generated by the Parent Company's 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.
RESULTS OF OPERATIONS
The Company reported results of operations for the years ended December
31, 1998, 1997 and 1996 as follows (in thousands):
1998 1997 1996
---- ---- ----
Equity in losses of Wickes(1) $ (88) $ -- $(1,714)
Earnings(loss)before income taxes, minority interest, equity in related parties,
loss on life insurance reorganization,
and discontinued operations(2)(3) (9,012) (4,062) 6,223
Earnings(loss)before discontinued operations(4) (12,307) (5,821) 618
Loss from discontinued operations -- (388) (1,024)
------- ------- -------
Net loss $(12,307) $(6,209) $ (406)
======== ======= =======
(1) WICKES' OPERATIONS ARE CONSOLIDATED WITH THOSE OF THE COMPANY AND ITS
SUBSIDIARIES FOR THE FIRST THROUGH THE THIRD QUARTER OF 1998, ALL OF 1997,
AND THE THIRD AND FOURTH QUARTERS OF 1996. THE COMPANY ACCOUNTED FOR ITS
INVESTMENT IN WICKES UNDER THE EQUITY METHOD FOR THE FOURTH QUARTER OF
1998 AND THE FIRST AND SECOND QUARTERS OF 1996.
(2) INCLUDES NET REALIZED INVESTMENT GAINS(LOSSES) OF $(499,000), $897,000,AND
$1,672,000, IN 1998, 1997 AND 1996, RESPECTIVELY. 1998 INCLUDES LOSSES OF
$1,202,000 RELATED TO THE SALES OF THE COMPANY'S COMMON STOCK IN WICKES
1998 ALSO INCLUDES A RESERVE FOR LOSSES OF $635,000 FOR SALES OF THE
COMPANY'S COMMON STOCK OF WICKES IN 1999.
(3) IN 1998 AND 1996, THE COMPANY RECORDED CHARGES OF $5.9 MILLION AND $0.7
MILLION, RESPECTIVELY, FOR RESTRUCTURING AND UNUSUAL ITEMS FOR WICKES. IN
1997 THE COMPANY RECORDED A BENEFIT OF $0.6 MILLION FOR RESTRUCTURING AND
UNUSUAL ITEMS FOR WICKES.
(4) IN 1998, THE COMPANY RECORDED $3.3 MILLION IN DEFERRED INCOME TAX EXPENSE.
THIS INCREASED THE VALUATION ALLOWANCE AGAINST ITS DEFERRED TAX ASSET TO
100%.
26
<PAGE>
E-COMMERCE AND ADVERTISING
The following table sets forth information concerning the results of
Buildscape for 1998 and 1997, respectively (in thousands):
1998 1997
---- ----
Sales $ 30 $ --
Cost of sales 14 --
-------- --------
Net profit 16 --
Selling, general and administrative 4,552 668
Depreciation and amortization 53 --
Interest expense 85 --
-------- --------
Total expenses 4,690 668
Net loss $ (4,674) $ (668)
========= ========
The 1997 expenses were incurred in the third and fourth quarters of 1997,
as a result comparisons between years are not meaningful.
Buildscape did not actively start selling its products and services until
late in the fourth quarter of 1998. As of December 31, 1998, Buildscape sold
$120,000 of advertising revenue, of which $30,000 was recognized as earned in
1998 and $90,000 was deferred and will be recognized as income in 1999. In
addition, through March 25,1999, Buildscape sold $136,000 of advertising revenue
which will be recognized as income in 1999 and the first quarter of 2000.
In 1998 these operations were in the start-up phase and did not generate
significant revenues. Currently the Company is seeking venture captial to fund
these operations. Management intends to monitor carefully the progress of these
operations and may expand or curtail any or all of them, depending upon the
outcome of negotiations with potential investors and the operating results
achieved. See Note 11 of Notes to Consolidated Financial Statements included
elsewhere herein.
WEB DESIGN/INTERNET ACCESS
The following table sets forth information concerning the results of
Cybermax for the year ending 1998 (in thousands):
1998
----
Sales $ 486
Cost of sales 182
------
Net profit 304
Selling, general and administrative (333)
Depreciation and amortization 50
Interest expense 6
Total expenses (277)
------
Net earnings $ 581
======
27
<PAGE>
Web Design services contributed approximately 44% of Cybermax's sales in
1998, and Internet access operations including network support and other
miscellaneous services provided as part of the Internet access operations
contributed 55% of Cybermax sales in 1998.
During 1998, the Company's technical and sales staff were part of the
Cybermax operations. Their services were allocated primarily to the start up
operations of Buildscape, as a result Cybermax charged Buildscape for these
services. This reimbursement is included in selling, general and administration.
Management intends to monitor carefully the progress of these operations
and may expand or curtail any or all of them, depending upon the outcome of
negotiations with potential investors and the operating results achieved (see
Note 11 of Notes to Consolidated Financial Statements).
WICKES
For the first nine months of 1998, the Company consolidated its operations
with those of Wickes. During the first nine months of 1998, losses attributable
to Wickes were $2,007,000. Included in this amount is $588,000 of operating
loss, goodwill amortization of $296,000, and $1,123,000 of interest expense
allocated from Riverside on its 13% Notes. During the fourth quarter of 1998,
losses attributable to Wickes were approximately $2,006,000. This amount
includes $209,000 of equity in Wickes earnings, $379,000 of interest expense
allocated from Riverside on its 13% Notes and losses of $1,837,000 incurred from
the sale of Wickes common stock.
The Company estimates that, after inter-company eliminations, net of
goodwill amortization of approximately $534,000 and net of interest expense
allocated from Riverside on its 13% Notes of $1,123,000, Wickes contributed
losses of $2,770,000 to the Company's results of operations in 1997. For the
first six months of 1996, losses attributable to Wickes were $2,434,000.
Included in these losses were $1,714,000 of equity in Wickes losses and $720,000
of interest expense allocated from Riverside on its 13% Notes. During the second
half of 1996, the Company consolidated Wickes' results of operations with those
of the Company's other operations. The Company estimates that, after
inter-company eliminations, net of goodwill amortization of approximately
$202,000 and net of interest expense allocated from Riverside of $728,000,
Wickes contributed earnings of $1,554,000 to the Company's results of operations
during the second half of 1996.
THE FOLLOWING DISCUSSIONS OF WICKES FULL YEAR OPERATIONS FOR 1998, 1997
AND 1996 WAS OBTAINED FROM THE WICKES FORM 10-K.
The following table sets forth, for the periods indicated, the percentage
relationship to net sales of certain expense and income items. The table and
subsequent discussion should be read in conjunction with the financial
statements and notes thereto appearing elsewhere herein.
Years Ended
-----------
Dec. 28, Dec. 27, Dec. 28,
1998 1997 1996
---- ---- ----
Net sales 100.0% 100.0% 100.0%
Gross profit 23.8 23.0 22.3
Selling, general and administrative
expense 20.5 21.0 19.1
Depreciation, goodwill and trademark
amortization .6 .6 .6
Provision for doubtful accounts .3 .2 .1
28
<PAGE>
Restructuring and unusual items .7 (.1) .1
Other operating income (.7) (1.2) (.8)
Income from operations 2.4 2.5 3.2
Wickes' operations, as well as those of the building material industry
generally, have reflected substantial fluctuations from period to period as a
consequence of various factors, including levels of construction activity,
general regional and local economic conditions, weather, prices of commodity
wood products, interest rates and the availability of credit, all of which are
cyclical in nature. Wickes anticipates that fluctuations from period to period
will continue in the future. Because a substantial percentage of Wickes' sales
are attributable to building professionals, certain of these factors may have a
more significant impact on Wickes than on companies more heavily focused on
consumers.
Wickes' first quarter and, occasionally, its fourth quarter are adversely
affected by weather patterns in the Midwest and Northeast, which result in
seasonal decreases in levels of construction activity in these areas. The extent
of such decreases in activity is a function of the severity of winter
conditions. Record setting snow falls throughout the Midwest and Northeast in
January of 1996, adversely affected construction activity in the first quarter
of 1996. Weather conditions in 1997 were relatively normal throughout the year.
During the first quarter of 1998, Wickes experienced mild winter weather
conditions in Wickes' Midwest region, which was partially offset by increased
precipitation in the Northeast and South. Unseasonably warm weather during
December of 1998 was followed by excessive snow falls in the Midwest in January
of 1999.
The following table contains selected unaudited quarterly financial data for
the years ended December 26, 1998, December 27, 1997, and December 28, 1996.
Quarterly earnings/(loss) per share may not total to year end earnings/(loss)
per share due to the issuance of additional shares of Common Stock during the
course of the year.
QUARTERLY FINANCIAL DATA
THREE MONTHS ENDED
(in millions, except per share data and percentages)
<TABLE>
<CAPTION>
Basic and Diluted
Net Sales as a Net Earnings
% of Annual Gross Net Income /(Loss) per
Net Sales Net Sales Profit /(Loss) Common Share
--------- --------- ------ ------- ------------
<S> <C> <C> <C> <C> <C>
1998
March 28 $168.8 18.5% $41.0 $(6.8) $(.83)
June 27 237.1 26.1 56.1 2.8 .34
September 26 261.1 28.7 61.0 2.8 .34
December 26 243.3 26.7 58.2 0.7 .09
1997
March 29 $159.3 18.0% $36.9 $(5.2) $(.63)
June 28 237.3 26.9 54.3 1.3 .16
September 27 266.3 30.1 60.3 1.8 .22
December 27 221.1 25.0 51.5 0.5 .06
1996
March 30 $152.5 18.0% $34.9 $(6.2) $(1.00)
29
<PAGE>
June 29 228.8 27.0 51.2 1.9 .29
September 28 255.6 30.1 55.5 2.8 .35
December 28 211.7 24.9 47.9 2.0 .24
</TABLE>
In 1998 and 1996 Wickes recorded charges of $5.9 million and $0.7 million,
respectively, for restructuring and unusual items. In 1997 Wickes recorded a
benefit of $0.6 million for restructuring and unusual items. For additional
information on the restructuring and unusual items charge see Note 3 of Notes to
Consolidated Financial Statements included elsewhere herein. In addition, in
1996 Wickes received insurance premium adjustments from a former insurance
carrier in the amount of $2.2 million and reversed an accrual of $1.5 million
for other disputed insurance premiums with this carrier. Accordingly selling,
general and administrative expenses were reduced by $1.0 million during the
first three quarters of 1996 and by $2.7 million in the fourth quarter of 1996.
In the fourth quarter of 1997, Wickes recorded a gain of $4.5 million on the
sale of six pieces of real estate. In the fourth quarters of 1998 and 1996, only
two and three pieces of real estate were sold for gains of $0.4 million and $0.6
million, respectively. Gains or losses on the sale of real estate are recorded
under other operating income.
Wickes has historically generated approximately 15% to 20% of its annual
revenues during the first quarter of each year, and Wickes has historically
recorded a significant net loss for this quarter. As a result of these seasonal
factors, Wickes' inventories and receivables reach peak levels during the second
and third quarters and are generally lower during the first and fourth quarters,
depending on sales volume and lumber prices.
This Item 7 contains statements which, to the extent that they are not
recitations of historical fact, constitute Forward Looking Statements that are
made pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995 and are inherently subject to uncertainty. A number of
important factors could cause Wickes' business and financial results and
financial condition to be materially different from those stated in the Forward
Looking Statements. Those factors include but are not limited to the seasonal
and cyclical factors discussed above in this Item 7 and elsewhere in this
report, the effects of Wickes' substantial leverage and competition, the success
of Wickes' operational efforts, and the matters discussed in Note 8 of the Notes
to Consolidated Financial Statement included elsewhere herein.
1998 COMPARED WITH 1997
NET SALES
Net sales for 1998 increased $26.2 million, or 3.0%, to $910.3 million from
$884.1 million in 1997. Sales for all facilities operated throughout both years
("same store") increased 9.0%. During 1998, Wickes experienced a 16.2% increase
in same store sales to its primary customer segment, the professional home
builder, and a 1.2% increase in same store sales to commercial builders.
Consumer sales declined 3.5% on a same store basis.
Total housing starts in the United States increased 9.6% in 1998, and starts
in Wickes' primary geographical market, the Midwest, increased approximately
9.2%. Wickes' two other geographical markets, the Northeast and South,
experienced increases of 8.6% and 10.5%, respectively. Nationally, single family
housing starts, which generate the majority of Wickes' sales to building
professionals, experienced an increase of 12.0% in 1998, from 1.13 million
starts in 1997 to 1.27 million starts in 1998.
30
<PAGE>
Wickes has experienced significant sales increases (averaging in excess of
20%) in its target major markets and at sales and distribution facilities that
completed showroom resets in 1997 and 1998.
During the first quarter, Wickes experienced a sales benefit as a result of
mild winter weather conditions in Wickes' Midwest region. This was partially
offset by increased precipitation in the Northeast and South, during the same
period. Wickes, as a whole, benefited from unseasonably warm weather during
December of 1998. Weather conditions during 1997 were closer to seasonal
averages.
Wickes estimates that deflation in lumber prices negatively affected 1998
sales by approximately $28.6 million, when compared with lumber prices during
1997.
As a result of the 1998 Plan, Wickes operated ten fewer sales and
distribution facilities at the end of 1998 than it operated at the end of 1997.
The ten sales and distribution facilities that were closed, sold, or
consolidated, as a result of the 1998 Plan, contributed an aggregate of $4.0
million to 1998 sales and $46.5 million to 1997 sales. See " Item 1. Business
Business Strategy".
GROSS PROFIT
Gross profit increased $13.3 million to 23.8% of net sales for 1998 compared
with 23.0% of net sales for 1997. The increase in gross profit is primarily due
to increased sales, improved product costs and increased margins on internally
manufactured products.
The increase in gross profit as a percent of sales is primarily attributable
to improved margins on internally manufactured products, improved product costs
and improved margins on installed sales. These improvements were partially
offset by the effects of lumber deflation and a continued increase in the
percent of sales attributable to professional builders. Wickes estimates that
lumber deflation in 1998, when compared with 1997 price levels, reduced gross
profit by approximately $5.5 million. The percent of Company sales attributable
to professional builders increased to 87.9% for 1998 compared with 86.5% in
1997. Wickes anticipates that its continued focus on the professional builder
will create additional pressure on gross profit margins.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE
In 1998, selling, general, and administrative expense ("SG&A") decreased as a
percent of net sales to 20.5% compared with 21.0% of net sales in 1997. Much of
this reduction is attributable to expense reductions as a result 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.
In the first quarter of 1998, Wickes closed eight under performing building
centers, two component manufacturing facilities and sold its two sales and
distribution facilities in Iowa. For further information, including the charge
taken by Wickes in the first quarter of 1998, see "Restructuring and Unusual
Items" and Note 3 of the Notes to Consolidated Financial Statements included
elsewhere herein.
Wickes experienced decreases from 1997 to 1998, as a percent of sales, in
maintenance, travel, professional fees, marketing, and general office expenses
which were partially offset by increased real estate rent and salaries, wages
and employee benefits. Wickes experienced a slight increase in salaries, wages
and employee benefits as a percent of sales by 0.2%. On a same store basis, the
number of total employees at the average sales and distribution facility
increased approximately 8% from 1997.
31
<PAGE>
DEPRECIATION, GOODWILL AND TRADEMARK AMORTIZATION
Depreciation, goodwill and trademark amortization costs increased $0.4
million in 1998 compared with 1997. This increase is primarily due to
depreciation on rental equipment and facilities implemented or improved 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
Wickes extends credit, generally due on the 10th day of the month following
the sale, to qualified and approved contractors. Provision for doubtful accounts
increased to $2.9 million or 0.3% of sales for 1998 from $1.7 million or 0.2% of
sales for 1997. While Wickes did experience several large write-offs during
1998, the results were in line with its historical average of approximately 0.3%
of sales.
RESTRUCTURING AND UNUSUAL ITEMS
During the first quarter of 1998 Wickes implemented the 1998 Plan which
resulted in the closing or consolidation of eight sales and distribution and two
manufacturing facilities in February, the sale of two sales and distribution
facilities in March, and further reductions in headquarters staffing. As a
result of the 1998 Plan, Wickes recorded a restructuring charge of $5.4 million
in the first quarter and an additional charge of $0.5 million in the third
quarter. The $5.9 million charge included $4.1 million in anticipated losses on
the disposition of closed facility assets and liabilities, $2.1 million in
severance and post employment benefits related to the 1998 plan, and a benefit
of $300,000 for adjustments to prior years' restructuring accruals. The $4.1
million in anticipated losses includes the write-down of assets (excluding real
estate), to their net realizable value, of $3.4 million and $700,000 in real
estate carrying costs. The $2.1 million 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 first quarter of 1998. The acceleration of these sales resulted in a
change in the estimate of facility carrying costs for the sold facilities.
OTHER OPERATING INCOME
Other operating income decreased to $6.8 million in 1998 from $10.7 million
in 1997. The decrease is primarily the result of a decrease in gains reported on
the sale of real estate of closed facilities and excess vehicles and equipment.
In 1998 Wickes sold nine pieces of real estate and recorded a gain of $1.6
million, compared with a gain of $6.0 million recorded in 1997 for the sale of
12 facilities. This decrease was partially offset by approximately $1.0 million
in gains as a result of the difference between insured replacement cost and book
value as a result of a fire and storm damage at certain of Wickes' sales and
distribution facilities during 1998.
INTEREST EXPENSE
Interest expense increased to $21.6 million in 1998 from $21.4 million in
1997. This increase was the result of a increase in average outstanding debt
under Wickes' revolving line of credit of $9.1 million partially offset by a
decrease in the overall effective borrowing rate of 38 basis points. The
increase in average
32
<PAGE>
outstanding debt was due primarily to increases in working capital and increased
investment in property, plant and equipment.
EQUITY IN LOSS OF AFFILIATED COMPANY
Wickes' net investment in Riverside International LLC was reduced to zero as
a result of the $1.5 million loss that was recorded in 1997. Accordingly, Wickes
recorded no equity in loss of affiliated company during 1998.
PROVISION FOR INCOME TAXES
In 1998, and 1997, Wickes recorded current income tax expense of $1.1 million
and $1.1 million, respectively. Current income tax provisions for both years
consist of state and local tax liabilities.
A deferred tax benefit of $0.1 million was also recorded in 1998. This
compares with a deferred tax benefit of $0.2 million in 1997. The 1998 benefit
results from the loss before federal income taxes and the establishment of a
deferred tax asset, in accordance with FAS 109. Management has determined (based
on Wickes' positive earnings growth from 1992 through 1994 and its expectations
for the future) that operating income of Wickes will more likely than not be
sufficient to recognize fully these net deferred tax assets.
NET INCOME
Wickes recorded a net loss of $0.5 million in 1998, compared with a net loss
of $1.6 million in 1997, an improvement of $1.1 million. The primary components
of this improvement include an increase in gross profit of $13.3 million and a
decrease in losses attributable to Riverside International LLC of $1.5 million.
These improvements were partially offset by a $6.5 million increase in
restructuring and unusual items expense, a reduction in other income of $3.9
million, and increases in SG&A expense of $1.5 million and provision for
doubtful accounts of $1.2 million.
1997 COMPARED WITH 1996
NET SALES
Net sales for 1997 increased $35.5 million, or 4.2%, to $884.1 million from
$848.5 million in 1996. Same store sales increased 4.7%. During 1997, Wickes
experienced a 4.1% increase in same store sales to its primary customer segment,
the professional home builder, and a 16.4% increase in same store sales to
commercial builders. Consumer same store sales were down 6.8% for the year.
Wickes believes that the following matters contributed to the 1997 sales
increase. Throughout most of 1997, Wickes operated three more sales and
distribution facilities than it operated during 1996. Also, Wickes believes that
showroom Resets at 19 of its sales and distribution facilities in 1997, sales
training, and big builder initiatives also had a positive effect on sales.
Finally, weather conditions in the Northeast during the first quarter of 1997
were more favorable compared with the record snowfalls recorded in the first
quarter of 1996. Wickes believes that inflation/deflation in lumber prices had
negligible impact on total sales.
Total housing starts in the United States were relatively unchanged in 1997
compared with 1996. Starts in Wickes' primary geographical market, the Midwest,
decreased approximately 5.5%. Wickes' two other geographical markets, the
Northeast and South, experienced increases in 1997 housing starts of 3.5% and
33
<PAGE>
1.3%, respectively. Nationally, single family housing starts, which generate the
majority of Wickes' sales to building professionals, experienced a decrease of
2.4%, from 1.16 million starts in 1996 to 1.13 million starts in 1997.
GROSS PROFIT
Gross profit increased $13.6 million to 23.0% of net sales for 1997 compared
with 22.3% of net sales for 1996. The increase in gross profit is primarily due
to increases in sales, reductions in product costs, and increases in sales of
manufactured products.
The increase in gross profit as a percent of sales is primarily attributable
to reduced cost of sales as a result of a concerted effort to obtain the best
pricing available. Wickes also expanded its sales of higher margin internally
manufactured products by approximately 27% from 1996 to 1997, and experienced a
reduction in costs associated with physical inventory count adjustments. These
increases were partially offset by increased percent of sales attributable to
professional builders and an increase in the percent of sales attributable to
lower margin commodity lumber products. The percent of Company sales
attributable to professional builders increased to 86.5% for 1997 compared with
84.7% in 1996.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE
In 1997, SG&A increased as a percent of net sales to 21.0% compared with
19.1% of net sales in 1996, primarily as a result of Wickes' increase in sales
and distribution facility employees in an effort to increase sales and market
share, expenses associated with showroom remerchandisings in 19 facilities in
1997, expenses associated with expansion of Wickes' Major Market program in
1997, and insurance recoveries recorded in 1996 with respect to prior years.
Compared to 1996, on a same store basis, the average number of employees at
Wickes' sales and distribution facilities in 1997 increased by approximately 5%.
Wickes also experienced an increase in salaries and wages in its non-core
operations. Both were major factors in the 1.0% increase, as a percentage of
sales, of Wickes' salaries, wages and employee benefits. Wickes also experienced
increases as a percentage of sales in travel, office supplies, professional and
marketing expenses.
During 1997, Wickes Reset the showrooms of thirteen Conventional Market
building centers and six Major Market sales and distribution facilities. Also
during 1997, Wickes continued its efforts to expand its Major Markets program.
See "Item 1. Business - Business Strategy". Expenses associated with these
Resets and expansion of the Major Markets program totaled approximately $1.8
million in 1997 and accounted for approximately $1.3 million of the SG&A
increase.
In 1996, Wickes recorded $3.7 million of insurance recoveries for prior
years' casualty insurance programs. During 1997, Wickes recorded $0.3 million in
prior year insurance recoveries.
In October 1997, Wickes announced plans to streamline operations and to focus
on core operations. In accordance with these plans, Wickes discontinued or sold
non-core operations that contributed approximately $1.5 million of SG&A during
1997. In addition, Wickes effected headquarters staffing reductions beginning in
October 1997, and increased the amount of these reductions pursuant to a
determination announced in February 1998.
DEPRECIATION, GOODWILL AND TRADEMARK AMORTIZATION
34
<PAGE>
Depreciation, goodwill and trademark amortization costs decreased $0.5
million in 1997 compared with 1996. The primary reason for this decrease is that
most of Wickes-owned delivery vehicles were fully depreciated in 1997. Since
1993 Wickes' new vehicles have been obtained primarily through operating leases.
PROVISION FOR DOUBTFUL ACCOUNTS
Provision for doubtful accounts increased to $1.7 million or 0.2% of sales
for 1997 from $1.1 million or 0.1% of sales for 1996. Historically Wickes'
provision for doubtful accounts averages approximately 0.3% of sales. The
results achieved in 1996 were a result of increased efforts to collect
previously reserved accounts receivable, especially those attributable to the
Gerrity Lumber acquisition centers.
RESTRUCTURING AND UNUSUAL ITEMS
During 1997 Wickes completed its 1995 Plan. As a result, it recorded a
reduction in accrued costs and a benefit to restructuring and unusual charges of
approximately $2.1 million. This benefit was partially offset by a $1.5 million
restructuring charge for severance and postemployment benefits and anticipated
losses on the disposal of discontinued non-core programs and related reductions
in headquarters staffing which was announced by Wickes in October of 1997. The
non-core programs affected by these reductions included the sale or closing of
Wickes' mortgage lending, utilities marketing, and internet service programs not
directly related to the building supply business. See "Item 1. Business Business
Strategy".
OTHER OPERATING INCOME
Other operating income increased to $10.7 million in 1997, compared with $6.8
million in 1996. The increase resulted from gains reported on the sale of
facilities and excess equipment of approximately $6.3 million, an increase of
$4.3 million from the $2.0 million recorded in 1996. The approximately $0.7
million gain on the sale of Wickes' headquarters in Vernon Hills, Illinois, is
being amortized over a 15-year period consistent with Wickes' lease of the
facility. This increase was partially offset by a $0.6 million gain recorded in
1996 as a result of the difference between insured replacement cost and book
value as a result of a fire and storm damage at certain of Wickes' building
centers.
INTEREST EXPENSE
Interest expense decreased to $21.4 million in 1997 from $21.8 million in
1996, as a result of a decrease in Company's overall effective borrowing rate of
21 basis points, partially offset by an increase in average outstanding debt
under Wickes' revolving line of credit of $4.5 million. The increase in average
outstanding debt was due primarily to reduced net cash flow from operating
activities and increased investment in property, plant and equipment.
EQUITY IN LOSS OF AFFILIATED COMPANY
During 1997, Wickes' equity in the losses of Riverside International LLC was
$1.5 million compared with $3.2 million during 1996. The $1.5 million loss in
1997 reduced Wickes' net investment to zero.
PROVISION FOR INCOME TAXES
35
<PAGE>
In 1997 Wickes recorded current income tax expense of $1.1 million compared
with $1.0 million in 1996. Current income tax provisions for both years consist
of state and local tax liabilities.
A deferred tax benefit of $0.2 million was also recorded for 1997. This
compares with a deferred tax expense of $0.3 million in 1996. The 1997 benefit
results from the loss before income taxes and the establishment of a deferred
tax asset, in accordance with FAS 109. See Note 11 of Notes to Consolidated
Financial Statements included elsewhere herein.
NET INCOME
Wickes experienced a net loss of $1.6 million in 1997 compared with net
income of $0.5 million in 1996, a change of $2.1 million. The primary components
of this change consist of an increase in SG&A expense of $23.1 million and an
increase in provision for doubtful accounts of $0.6 million. These unfavorable
changes were partially offset by increases in gross profit of $13.6 million and
other operating income of $3.9 million, as well as decreases in losses
attributable to Riverside International LLC of $1.7 million, restructuring and
unusual items of $1.3 million, and depreciation, goodwill and trademark
amortization of $0.5 million.
PARENT COMPANY AND OTHER SUBSIDIARIES
36
<PAGE>
The following discussion relates to the operations of the Parent Company
and its subsidiaries, other than Buildscape, Cybermax, Wickes and its former
life insurance subsidiaries and mortgage lending operations (the "Parent
Group").
The Parent Group's non-interest operating expenses for 1998 decreased 30%
to $1,549,000 compared to $2,222,000 in 1997. The primary reason for the
decrease includes an increase of allocable expenses from the Parent Group to its
subsidiaries principally, Buildscape and Cybermax. The Parent Group allocated
expenses to its subsidiaries of $2,085,000 and $1,139,000 in 1998 and 1997,
respectively. In addition, in 1997 a reserve was established for approximately
$434,000, with respect to a receivable from an affiliate of Mr. Wilson. This
affiliate provides the Company use of its airplane. During 1997, the Company's
use of this airplane was primarily by Wickes (see Note 15 of Notes to
Consolidated Financial Statements - "Related Party Transactions"). This reserve
was reduced by $104,000 in 1998 as a result of the Company's use of this plane.
These decreases were offset by approximately $731,000 of expenses incurred by
Wixx Energy Company ("Wixx") in 1998. Included in the expenses incurred by Wixx
was a reserve for approximately $241,000 for loans made in 1996 and 1995 to a
company controlled by one of the Company's directors. (See Note 15 of Notes to
Consolidated Statements - "Related Party Transactions"). In September of 1998,
Wixx ceased operations.
The Parent Group's non-interest operating expenses for 1997 and 1996,
respectively, were $2,222,000 and $1,738,000. The reason for the increase was
primarily due to the reserve of $434,000 established in 1997 with respect to a
receivable from an affiliate of Mr. Wilson discussed above. This increase was
offset by savings made to the Wickes Financial Service Centers, Inc. program
made in 1996.
Interest expense (excluding an interest allocation to Wickes for the
Parent Company's 13% subordinated notes of $1,502,000, $1,473,000 and $1,448,000
in 1998, 1997 and 1996, respectively) for 1998, 1997 and 1996 was $1,189,000,
$1,635,000 and $2,443,000, respectively. In 1998, interest expense consisted of
$15,000 on the Parent Company's other bank debt and $1,174,000 on the Parent
Company's real estate mortgage debt. In 1997, interest expense consisted of
$167,000 on the Parent Company's other bank debt and $1,468,000 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
principal balance on the mortgage debt was reduced by $4.7 million and $1.5
million in 1998 and 1997, respectively.
Revenues of the Parent Group (excluding investment income) for 1998, 1997
and 1996 were approximately $546,000, $605,000 and $493,000, respectively. The
Parent Group's income primarily consists of non-recurring items, such as
settlement proceeds from legal proceedings; therefore, comparisons between
periods are not meaningful. Included in other income was $407,000, $598,000 and
$200,000 for 1998, 1997 and 1996, respectively, for settlements relating to the
Company's former property and casualty insurance operations. The Company does
not anticipate significant recoveries of this nature in 1999 and subsequent
years.
REAL ESTATE INVESTMENTS
The Company's real estate investments consist of $7,361,000 in Georgia
properties, $2,254,000 in Florida properties and $52,000 in other states.
During 1998, the Company sold approximately 61 acres of its Georgia
properties for $3,471,000, which generated gains of $751,000. In addition,
during 1998, the Company sold approximately 12 acres of its Florida properties
for $2,933,000 resulting in gains of $608,000. In the first quarter of 1999, the
37
<PAGE>
Company sold a portion of real estate included in other states for a loss of
$21,000. A reserve was established in 1998 for this loss.
Included in the Company's net realized investment gains(losses) for 1998,
1997 and 1996 were net realized gains on real estate investments of $1,338,000,
$897,000, and $656,000, respectively.
DISCONTINUED OPERATIONS
On December 1, 1997, the Company completed the sale of its mortgage
lending operations to an unrelated third party. The Company did not realize any
gain or loss from the transaction, but did agree to indemnify the purchaser
against losses on the construction loan portfolio that was transferred. As of
March 15, 1999, the Company 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 on results of operations.
The following table sets forth comparative information concerning the
results of the Company's former mortgage lending operations.
1997 1996
----- ----
Revenues from loans $ 1,363 $ 368
Other income 3 --
------- -------
Total revenues 1,366 368
Selling, general & administrative
expenses(1) 1,077 1,327
Interest expense 677 65
Total expense 1,754 1,392
------- ------
Net loss $ (388) $(1,024)
======= =======
(1) Net of reimbursements of $955,000 and $396,000 received during 1997 and
1996, respectively, by the Parent Company from Wickes.
INCOME TAXES
Income Taxes
In 1998 the Company incurred a significant tax expense due to the increase
in valuation allowance against previously recognized deferred tax assets. In
management's opinion, it is unlikely the deferred tax assets will be utilized in
the near future. The current income tax provisions consists of state and local
tax liabilities for Wickes. The Company's effective income tax rate was 23% in
1997, and 5% in 1996. The low effective tax rate for 1996 is attributable to the
reduction in valuation allowance allowing previously deferred tax benefits to be
recognized currently. See Note 13 of Notes to Consolidated Financial Statements
included elsewhere herein.
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. As described below,
the principal source of funds for these purposes, and for the payment of
interest on the Parent Company's indebtedness, has been sales of shares of
Wickes common stock.
For a detailed discussion of the Parent Company's liquidity and
management's plans related thereto, see Note 11 of Notes to Consolidated
Financial Statements included elsewhere herein.
In addition to the above, the following transactions took place in
1998:
o On April 20, 1998, the Company 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 as required by the
terms of the indebtedness. Based on the fourth quarter 1998
collateral test, 97,345 shares of the Company's Wickes common
stock was released from the collateral held on the Company
real estate debt.
o In February of 1998, the Company completed the acquisition of
the 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, the Company
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, the Company agreed to pay
ten percent of future net income of these operations, subject
to a maximum of $429,249 plus interest. At March 15, 1999, the
Company had made payments of $115,752 under the promissory
note but was delinquent with respect to required payments of
approximately $252,295 of principal and interest.
38
<PAGE>
o In February of 1998, the Company acquired 100% of the assets
of Cybermax, a Jacksonville, Florida based Internet service
provider. The acquisition of Cybermax complements the opera-
tions acquired from Wickes in February 1998. The purchase
price of the acquisition of Cybermax was approximately
$100,000, in the form of a promissory note. The terms of the
promissory note include interest at a per annum rate of 8.5%
due monthly and eight quarterly principal installments,payable
on the first of each January, May, August and October,
commencing May 1, 1998 and ending January 1, 2000.
o For a description of the modification by the Company of an
existing obligation to a third party in the approximate amount
of $900,000 in June 1997, which the Company repaid in full on
March 31, 1998, see Note 10 of Notes to Consolidated Financial
Statements included elsewhere herein.
During 1998, stockholders' equity decreased by a net of $12.2 million.
Losses attributable to Wickes accounted for approximately 18% of the decrease.
Wickes recorded an operational restructuring charge of $5.9 million in 1998. In
addition, the Company recorded losses of $1.8 million on the sale of its Wickes
stock in the fourth quarter of 1998. In 1998, the Company recorded $3.0 million
in deferred income tax expense. The incurred tax expense accounted for
approximately 27% of the decrease. The Company's startup costs incurred for the
Buildscape operations accounted for approximately 38% of the decrease.
YEAR 2000
The Year 2000 issue is the result of certain computer programs that
were designed to use two digits rather than four to define the applicable year.
As a result, if the Company's computer programs with date- sensitive functions
are not Year 2000 compliant, they may recognize a date using "00" as the Year
1900 rather than the Year 2000. This could cause 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.
The Company's Accounting Department and Audit Committee met in April
1998 to discuss the Company's current financial software system which was not
year 2000 compliant. The Company's Accounting Department proposed to the
Company's Audit Committee a plan to purchase a new accounting software system.
The Company's Audit Committee approved the purchase of a new accounting system.
After reviewing the Company's financial software requirements the Company
focused on three vendors that were similar in costs and features. 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.
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. 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. However, until the Company completes the assessment process,
there can be no assurance that this is true.
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.
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.
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 was effective for fiscal years beginning after December 15, 1997. The
adoption of this statement has not had 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
39
<PAGE>
adoption of this statement will not have a significant impact on its financial
statements.
ITEM 7.A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Financial statements of the Company are set forth herein beginning on page
F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information required by this Item is incorporated herein by reference from
the definitive proxy statement to be filed in connection with the Company's
Annual Meeting of Stockholders scheduled to be held on May 18, 1999.
ITEM 11. EXECUTIVE COMPENSATION.
Information required by this Item is incorporated herein by reference from
the definitive proxy statement to be filed in connection with the Company's
Annual Meeting of Stockholders scheduled to be held on May 18, 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information required by this Item is incorporated herein by reference from
the definitive proxy statement to be filed in connection with the Company's
Annual Meeting of Stockholders scheduled to be held on May 18, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information required by this Item is incorporated herein by reference from
the definitive proxy statement to be filed in connection with the Company's
Annual Meeting of Stockholders scheduled to be held on May 18, 1999.
40
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(A) LIST OF FINANCIAL STATEMENTS AND SCHEDULES FILED AS A PART OF THIS
REPORT:
(1) FINANCIAL STATEMENTS:
RIVERSIDE GROUP, INC. AND SUBSIDIARIES: Page No.
--------
Report of Independent Accountants F - 1
Consolidated Balance Sheets - December 31,
1998 and 1997 F - 2
Consolidated Statements of Operations
for the years ended December 31, 1998,
1997 and 1996 F - 3
Consolidated Statement of Stockholders'
Equity for the years ended December 31,
1998, 1997 and 1996 F - 4
Consolidated Statements of Cash Flows for
the years ended December 31, 1998, 1997
and 1996 F - 5
Notes to Consolidated Financial Statements F - 6
WICKES INC. AND SUBSIDIARIES:
Report of Independent Accountants WF - 1
Consolidated Balance Sheets as of December 26, 1998
and December 27, 1997 WF - 2
Consolidated Statements of Operations for the years
ended December 26, 1998 and December 27, 1997 and
December 28, 1996 WF - 3
Consolidated Statements of Changes in Stockholders'
Equity for the years ended December 26, 1998,
December 27, 1997 and December 28, 1996 WF - 4
Consolidated Statements of Cash Flows for the years
ended December 26, 1998, December 27, 1997
and December 28, 1996 WF - 5
41
<PAGE>
Notes to Consolidated Financial Statements WF - 6
(2) FINANCIAL STATEMENT SCHEDULES:
RIVERSIDE GROUP, INC. AND SUBSIDIARIES:
Report of Independent Accountants S - 1
Valuation and Qualifying Accounts S - 2
Schedule II - Condensed Financial Information
of Registrant S - 3
WICKES INC. AND SUBSIDIARIES
Schedule II - Valuation and Qualifying Accounts WS - 1
(b) Reports on Form 8-K - None
EXHIBITS
3.1* Restated Articles of Incorporation, as amended to date (previously
filed as Exhibit 3.01 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1994).
3.2* Amended and Restated Bylaws, as amended to date (previously filed as
Exhibit 3.02 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1994).
4.1* Credit Agreement dated February 17, 1999, among Wickes Inc. as
borrower, each of the financial institutions signatory thereto, Bank
Boston Business Credit as Administrative Agent and Issuing Bank, Bank
Boston Robertson Stephens Inc. as Syndication Agent, and Nationsbank,
N.A. as Documentation Agent (incorporated by reference to Exhibit 4.1
to the Form 10-K filed by Wickes Inc. for its fiscal year ended
December 26, 1998).
4.2* Indenture dated as of October 15, 1993 between Wickes Inc. and Marine
Midland Bank, N.A. (incorporated by reference to Exhibit 4.2 to the
Annual Report Form 10-K filed by Wickes Inc. for the year ended
December 30, 1993).
10.1 (a)* Non-Qualified Stock Option Plan (previously filed as Exhibit
10.1(a) to the Company's Annual Report as Form 10-K for the year ended
December 31, 1997).
(b)* Form of Non-Qualified Stock Option Agreement (previously filed as
Exhibit 10.1(b) to the Company's Annual Report as Form 10-K for the
year ended December 31, 1997).
10.2 (a)* Amended and Restated 1993 Long-Term Incentive Plan of Wickes Inc.
(incorporated by reference to Exhibit 10.8 to the Annual Report on
Form 10-K filed by Wickes Inc. for the year ended December 31, 1994
(the "Wickes 1994 Form 10-K")).
(b)* Amendment No. 1 (incorporated by reference to Exhibit 10.8(b)
to the Annual Report on Form 10-K filed by Wickes Inc. for the year
ended December 29, 1996).
42
<PAGE>
(c)* Form of Option Agreement (incorporated by reference to Exhibit
10.22 to the Wickes Registration Statement on Form S-1 (Commission
File No. 2-67334) filed by Wickes Inc).
(d)* Form of Option Agreement (incorporated by reference to Exhibit
10.8 to the Annual Report of Form 10-K filed by Wickes Inc. for the
year ended December 31, 1994).
(e)* Form of Long-Term Stock Option Agreement (incorporated by
reference to Exhibit 10.8 to the Wickes 1994 Form 10-K).
(g) Amendment No. 2. (incorporated by reference to Exhibit 10.4 Form
10-K filed by Wickes Inc. for the year ended December 27, 1997).
(h) Form of Option Agreement (incorporated by reference to Exhibit
10.4 to the Annual Report of Form 10-K filed by Wickes Inc. for the
year ended December 31, 1997).
10.3 (a)* Agreement dated November 4, 1997 between the Registrant and Wickes
Inc. (incorporated by reference to Exhibit 10.1 to the From 10-Q filed
by Wickes for the September 1997 quarter).
(b)* Agreement and Closing Agreement dated November 4, 1997 between the
Registrant and Wickes Inc.(incorporated by reference to Exhibit 10.9(b)
to the Wickes Inc. 1997 Form 10-K).
10.4* Agreement date as of September 30, 1998 between Cybermax Tech, Inc. and
Greenleaf Technologies Corporation (incorporated by reference to
Exhibit 99.1 to the 8-K filed by the registrant on October 15, 1998).
10.5* Stock Purchase Agreement dated October 5, 1998 between the registrant
and Imagine Investment, Inc. (incorporated by reference to Exhibit 99.2
to the 8-K filed by the registrant on October 15, 1998).
10.6** (a) Loan Agreement dated March 11, 1999 between the registrant and
Imagine Investments, Inc.
(b) Promissory Note dated March 11, 1999 between the registrant and
Imagine Investments, Inc.
(c) Stock Option Agreement dated March 11, 199 between the registrant
and Imagine Investments, Inc.
10.7** Letter of Intent dated March 26, 1999 between the registrant and the
Registrant's 13% Subordinated Note Holders.
21.01** Subsidiaries of the Company.
23.01** Consent of PricewaterhouseCoopers LLP
27.01** Financial Data Schedule (S.E.C. use only).
*Incorporated by reference.
**filed herewith
43
<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.
/s/ J. Steven Wilson
-------------------------
J. Steven Wilson
Chairman of the Board,
President and
Chief Executive Officer
Dated: April 1, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
/s/ J. Steven Wilson /s/Edward M. Carey, Sr.
- ---------------------------- -----------------------------
J. Steven Wilson Edward M. Carey, Sr.
Principal Executive Officer Director, March 31, 1999
and Director, March 31, 1999
- ---------------------------- ------------------------------
Robert T. Shaw Harry T. Carneal
/s/ Varina M. Steuert /s/ Catherine J. Gray
- ---------------------------- ------------------------------
Varina M. Steuert Catherine J. Gray
Director, March 31, 1999 Senior Vice President, Chief
Financial Officer, (Principal Accounting
and Financial Officer), March 31, 1999
March 31, 1999
44
<PAGE>
Report of Independent Accountants
To the Board of Directors and Stockholders,
Riverside Group, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations and stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Riverside
Group, Inc. and its subsidiaries at December 31, 1998 and 1997, and the results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1998 ended in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 11 to
the consolidated financial statements, the Company has suffered recurring losses
from operations and has a net capital deficiency that raise substantial doubt
about its ability to continue as a going concern. Management plans in regard to
these matters are described in Note 11. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
Pricewaterhouse Coopers LLP
Jacksonville, Florida
March 31, 1999
F-1
<PAGE>
<TABLE>
<CAPTION>
Riverside Group, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands)
December 31, December 31,
1998 1997
----------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 509 $ 3,154
Notes receivable 197 3,504
Accounts receivable, less allowance for doubtful
accounts of $337 at 1998 and $4,206 at 1997 246 81,885
Inventory -- 102,706
Deferred tax assets, net -- 8,955
Prepaid expenses 46 1,250
----------- ------------
Total current assets 998 201,454
Investment in Wickes Inc. 14,995 --
Investment in real estate 9,667 14,329
Trademark (net of accumulated amortization of $10,274 in 1997) -- 6,745
Property, plant and equipment, net 402 46,792
Deferred tax asset, net -- 20,361
Other assets (net of accumulated amortization of
$796 at 1998 and $8,894 at 1997) 340 24,224
----------- ------------
Total assets $ 26,402 $ 313,905
=========== ============
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 10,356 $ 702
Accounts payable 335 41,629
Income tax payable -- 25
Accrued liabilities 1,377 23,111
----------- ------------
Total current liabilities 12,068 65,467
Long-term debt 415 202,686
Mortgage debt 11,345 16,038
Net liabilities of discontinued operations 22 34
Other long-term liabilities 184 3,084
----------- ------------
Total liabilities 24,034 287,309
Minority interest -- 11,976
Commitments and contingencies (Note 11)
Common stockholders' equity :
Common stock, $.10 par value; 20,000,000 shares authorized; 529 529
5,287,123 issued and outstanding in 1998 and 1997
Additional paid in capital 16,838 16,783
Retained earnings (deficit) (14,999) (2,692)
----------- ------------
Total common stockholders' equity 2,368 14,620
----------- ------------
Total liabilities and common stockholders' equity $ 26,402 $ 313,905
=========== ============
See Accompanying Notes to Consolidated Financial Statements.
</TABLE>
F-2
<TABLE>
<CAPTION>
Riverside Group, Inc. and Subsidiaries
Consolidated Statement of Operations
(in thousands except per share amounts)
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenues:
Sales and service revenues $ 667,704 $ 884,082 $ 467,254
Insurance premiums and annuity considerations -- -- 3,224
Net investment income (loss) (32) (31) 6,325
Net realized investment gains (losses) (499) 897 1,672
Other operating income 5,591 11,297 4,837
---------- ---------- ----------
672,764 896,245 483,312
---------- ---------- ----------
Costs and expenses:
Cost of sales 509,262 681,056 363,930
Provision for doubtful accounts 1,904 2,148 3,523
Depreciation, goodwill and trademark amortization 4,426 5,613 2,830
Loss on reorganization of life insurance subsidiaries -- -- 124
Restructuring and unusual items 5,932 (559) 745
Selling, general and administrative expenses 141,284 187,524 84,428
Interest expense 19,264 24,525 13,678
Policyholder benefits -- -- 5,805
Policy acquisition expense -- -- 2,026
---------- ---------- ----------
682,072 900,307 477,089
---------- ---------- ----------
Earnings(loss) before income taxes, equity in related parties,
and minority interest: (9,308) (4,062) 6,223
Current income tax expense 726 1,099 259
Deferred income tax expense (benefit) 3,002 (153) 61
Equity in losses(earnings)of Wickes, Inc. (208) -- 1,714
Equity in losses of related parties -- 1,516 1,253
Minority interest, net of income taxes (521) (703) 2,318
---------- ---------- ----------
Earnings(loss) before discontinued operations (12,307) (5,821) 618
Discontinued operations:
Loss from operations of discontinued mortgage
lending operations, net of income taxes -- (388) (1,024)
---------- ---------- ----------
Net loss $ (12,307) $ (6,209) $ (406)
========== ========== ==========
Basic and diluted earnings(loss) per common share:
Earnings (loss) from continuing operations $ (2.36) (1.12) $ 0.12
Net loss from discontinued operations -- (0.07) (0.20)
---------- ---------- ----------
Loss per share $ (2.36) $ (1.19) $ (0.08)
========== ========== ==========
Weighted average number of common shares
used in computing earnings per share 5,213,186 5,193,970 5,286,316
See Accompanying Notes to Consolidated Financial Statements.
F-3
</TABLE>
<TABLE>
<CAPTION>
Riverside Group, Inc. and Subsidiaries
Consolidated Statement of Common Stockholders' Equity
(in thousands)
Unrealized Total
Additional Retained Investment Common
Common Paid-In Earnings Appreciation Stockholders'
Stock Capital (Deficit) (Depreciation) Equity
---------- ----------- ---------- ---------------- --------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995 $ 531 17,209 3,923 4,393 26,056
Net loss -- -- (406) -- (406)
Purchase and retirement of 15,000 shares of
common stock, at cost (1) (44) -- -- (45)
Cost of ESOP shares released -- 93 -- -- 93
Change in unrealized investment appreciation
of fixed maturities and equity securities -- -- -- (4,393) (4,393)
Dividend paid ($.10 per common share) -- (530) -- -- (530)
--------- ---------- --------- --------- --------
Balance, December 31, 1996 530 16,728 3,517 -- 20,775
Net loss -- -- (6,209) -- (6,209)
Purchase and retirement of 9,000 shares of
common stock, at cost (1) (17) -- -- (18)
Cost of ESOP shares released -- 72 -- -- 72
--------- ---------- --------- --------- --------
Balance, December 31, 1997 529 16,783 (2,692) -- 14,620
Net loss -- -- (12,307) -- (12,307)
Cost of ESOP shares released -- 55 -- -- 55
--------- ---------- --------- --------- --------
Balance, December 31, 1998 $ 529 $ 16,838 $ (14,999) $ -- $ 2,368
========= ========== ========= ========= ========
See Accompanying Notes to Consolidated Financial Statements.
F-4
</TABLE>
<TABLE>
<CAPTION>
Riverside Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
Years Ended December 31,
--------------------------------------
Cash Flow from Operating Activities 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net loss $(12,307) $ (6,209) $ (406)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation expense 3,639 4,433 2,303
Amortization expense 1,914 2,754 1,695
Amortization of bond discount 201 173 149
Net change in deferred acquisition costs -- -- 49
Provision for doubtful accounts 1,904 2,148 3,523
Loss on Life Insurance Reorganization -- -- 124
Gain on sale of fixed assets (1,574) (6,156) (705)
Net realized investment (gains)losses on investments 499 (897) (1,672)
Deferred tax (benefit)provision 3,002 (153) 300
Equity in (earnings) losses of unconsolidated subsidiaries (208) 1,516 2,967
Minority interest (521) (703) 2,318
Interest on policyholders' funds -- -- 3,469
Change in other assets and liabilities:
(Increase)decrease in accounts receivable (24,749) (12,497) 12,802
(Increase)decrease in notes receivable 1,845 (3,135) --
(Increase)decrease in inventory (10,421) (2,034) 10,000
(Increase)decrease in other assets (271) (4,740) 1,988
Increase in deferred gain -- (670) --
Accrued investment income -- -- 197
Premiums receivable and unearned premiums -- -- 80
Increase (decrease) in accounts payable and accrued liabilities 7,221 (3,745) (17,759)
Reserve for unpaid claims, policy benefits and
recoverable on paid losses from reinsurers and others -- -- (504)
Net liabilities of discontinued operations, other liabilities
and current income taxes (221) 145 (2,732)
-------- -------- --------
Net Cash Provided By (Used In) Operating Activities (30,047) (29,770) 18,186
-------- -------- --------
Investing Activities
Purchase of investments:
Property, plant and equipment (3,396) (7,772) (949)
Fixed maturities available for sale -- -- (36,867)
Equity securities -- -- (8,602)
Investment real estate (423) (1,004) (905)
Mortgage and policy loans -- -- (15,570)
Securities of Wickes Inc. -- -- (10,000)
Sale of investments:
Property, plant and equipment 3,629 13,802 2,113
Fixed maturities available for sale -- -- 41,675
Equity securities -- -- 8,643
Investment real estate 6,405 4,407 2,539
Mortgage and policy loans -- -- 7,800
Securities of Wickes Inc. 2,669 290 --
Life Insurance Reorganization -- 5,315 35,000
Net assets of Life Insurance Reorganization -- -- (28,202)
-------- -------- --------
Net Cash Provided By (Used In) Investing Activities 8,884 15,038 (3,325)
-------- -------- --------
Cash Flows from Financing Activities
Net borrowings under the revolving line of credit 24,481 16,732 (22,928)
Repayment of debt (5,494) (3,529) (21,264)
Increase in borrowings 80 1,539 17,798
Purchase and retirement of treasury shares -- (18) (46)
Net proceeds from issuance of Wickes Inc. Common Stock 96 62 --
Dividends paid to stockholders -- -- (530)
Deposits of policyholders' funds -- -- 192
Withdrawal of policyholders' funds -- -- (8,665)
-------- -------- --------
Net Cash Provided By (Used In)Financing Activities 19,163 14,786 (35,443)
-------- -------- --------
Net Increase (Decrease) in Cash and Equivalents (2,000) 54 (20,582)
Cash and equivalents at beginning of period 3,154 3,100 21,100
Wickes Inc. Cash balance (645) -- 2,582
-------- -------- --------
Cash and equivalents at end of period $ 509 $ 3,154 $ 3,100
======== ======== ========
See Accompanying Notes to Consolidated Financial Statements.
F-5
</TABLE>
<PAGE>
RIVERSIDE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING PRINCIPLES
ORGANIZATION
Riverside Group, Inc., a Florida corporation formed in 1965 ("Riverside", also
"Parent Company") is a holding company focused through its 100%-owned
subsidiary, Cybermax, Inc. ("Cybermax"), on marketing Internet connectivity, web
software application development and hosting service. Riverside engages through
another of its 100%-owned subsidiary, Buildscape, Inc. ("Buildscape") in the
e-commerce market, as well as advertisement on the Internet. In addition, the
Company is engaged, through its 41% investment in Wickes Inc. ("Wickes")(at
December 31, 1998), in the supply and distribution of building material (See
Note 16. "Subsequent Events"). Unless the context indicates otherwise, the term
"Company" as used herein refers to Riverside and its subsidiaries.
The consolidated financial statements present the results of operations,
financial position, and cash flows of Riverside and all of its wholly-owned and
majority-owned subsidiaries. The Company's wholly-owned and majority-owned
subsidiaries include: Cybermax Group, Inc. ("CG"), and its subsidiaries, Wixx
Energy, Inc. ("WIXX"), Wickes Financial Services Center, Inc. ("WFSC"); and the
parent's two principal insurance holding company subsidiaries, American
Financial Acquisition Corporation ("AFAC") and Dependable Insurance Group, Inc.
("DIGI"), and their subsidiaries. For a description of the Company's accounting
for its investment in Wickes, (see Note 3, "Acquisitions").
CG's wholly owned subsidiaries include NRG Network, Inc. ("NRG"), Cybermax Tech,
Inc. ("CT"). CT's wholly owned subsidiaries include Buildscape and Gameverse,
Inc. ("Gameverse"), through September 30, 1998, when the Company sold Gameverse
to Greenleaf Technologies Corporation ("Greenleaf") (see Note 6, "Investment in
Greenleaf ").
AFAC's principal wholly owned subsidiary is: American Founders Insurance Company
("American Founders") through June 1996, when the Company completed the Life
Insurance Reorganization (see Note 4, "Reorganization of Life Insurance
Operations").
Dependable Group's wholly owned subsidiary is: Wickes Mortgage Lending, Inc.
("WML"), a mortgage lending company, from April 1996 through December 1997 when
it was sold (See Note 5, "Sale of Mortgage Lending Operations").
SALE OF MORTGAGE LENDING OPERATIONS
The Company has included the operations of WML as discontinued operations for
all periods presented in the consolidated statements of operations.
BASIS OF FINANCIAL STATEMENT PRESENTATION
F-6
<PAGE>
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles ("GAAP"). All
significant intercompany accounts and transactions have been eliminated.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity date of
three months or less at date of purchase to be cash equivalents. At December 31,
1997, there was $3,498,000 in cash that was held as collateral for certain real
estate properties (see Note 10. "Long - Term Debt"), of this amount $1,504,000
was reclassed to other assets.
ACCOUNTS RECEIVABLE
Wickes extends credit primarily to qualified contractors. The accounts
receivable balances exclude consumer receivables, as such receivables are sold
on a non-recourse basis. The remaining accounts and notes receivable represent
credit extended to professional contractors and professional repair and
remodelers, generally on a non-collateralized basis.
The Company's accounts receivable potentially subject the Company to credit
risk, as collateral is generally not required. The Company's risk of loss is
limited due to advance billings to customers for services, the use of
preapproved charges to customer credit cards, and the ability to terminate
access on delinquent accounts. The carrying amount of the Company's receivables
approximates their net realizable value.
ALLOWANCE FOR LOSSES
The Company provides for valuation allowances for estimated losses on real
estate when a significant and permanent decline in value occurs. In providing
valuation allowances, costs of holding real estate, including the cost of
capital, are considered. The Company's real estate is reviewed periodically to
determine potential problems at an early date.
INVENTORY
Inventory consists principally of finished goods. The Company uses the first-in,
first-out ("FIFO") method for valuing its inventory. Inventory is valued at the
lower of cost or market, but not in excess of net realizable values.
INVESTMENT IN REAL ESTATE
Investments in real estate are carried at the lower of cost or appraised value.
Foreclosed property is valued at the lower of the carrying amount or fair market
value. The Company's investment in real estate primarily consists of real estate
purchased from American Founders, in connection with the Life Insurance
Reorganization (see Note 4. "Reorganization of Life Insurance Operations"). For
transactions between companies under common control, the Company records
purchases at the lower of historical carryover cost or fair value.
F-7
<PAGE>
PROPERTY, PLANT AND EQUIPMENT
Property, plant, and equipment are stated at cost and are depreciated using the
straight-line method. Estimated useful lives range from 15 to 39 years for
buildings and leasehold improvements. Machinery and equipment useful lives range
from three to six years. Expenditures for maintenance and repairs are charged to
operations as incurred. Gains and losses from dispositions of property, plant
and equipment are included in the Company's results of operations as other
operating income. During 1998 the Company disposed of property and equipment for
a net gain of $1,574,000, of which $510,000 was from the sale of excess
properties.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company accounts for the "Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed Of" in accordance with SFAS No. 121. This statement
requires that long-lived assets and certain identifiable intangibles to be held
and used by an entity, be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The Company recorded a write down of $635,000 in 1998, relating to
365,000 shares of Wickes' common stock that was disposed of in the first quarter
of 1999. While additional shares may be sold on the open market or in private
transactions in the future, the Company cannot estimate whether or not such
sales will occur at a gain or loss. No assurances can be given that such losses
will not occur. At March 30, 1999 the market value of Wickes' stock was $4.03
per share compared to $4.25 per share at December 31, 1998.(See Note 3.
"Investment in Wickes"). The Company periodically reviews excess property held
for sale, and reports these assets at the lower of their carrying amount or fair
value less costs to sell. (See Note 7. "Property, Plant and Equipment ").
OTHER ASSETS
Other assets consists primarily of deferred financing costs which are amortized
over the expected terms of the related debt. In 1997, included in other assets
is approximately $1.5 million of cash that was held as collateral for certain
real estate properties (see Note 10. "Long Term Debt").
EXCESS OF COSTS OVER FAIR VALUE OF NET ASSETS ACQUIRED
The Company amortizes the excess of costs over fair value of net assets
("goodwill") acquired over 25 - 35 years. The Company evaluates the
recoverability of goodwill based upon expectations of non-discounted cash flows
and income from operations for each subsidiary having a material goodwill
balance. Based upon this evaluation, the Company believes that no impairment of
goodwill exists at December 31, 1997.
As of December 31, 1997, goodwill consisted of $15.7 million, of which $8.1
million relates to Riverside's investment in Wickes and $7.6 million relates to
Wickes' investments in its subsidiaries and acquired operations. As part of the
Life Insurance Reorganization (see Note 4. "Reorganization of Life Insurance
Operations"), Riverside wrote off $10.8 million of goodwill related to its life
insurance operations. This charge is reflected under "Loss on Reorganization of
Life Subsidiaries" in the Consolidated Statement of Operations.
PARTIALLY-OWNED COMPANIES
For 1997, the Company's investment in an international operation is recorded
under the equity method. The Company's share of losses is reflected as equity in
loss of affiliated company in the Consolidated Statements of Operations.
ACCOUNTS PAYABLE
F-8
<PAGE>
The Company includes outstanding checks in excess of bank balances in accounts
payable. There were $99,200 and $0 in outstanding checks in excess of bank
balances at December 31, 1998 and 1997, respectively.
INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." Tax provisions and credits are recorded at
statutory rates for taxable items included in the consolidated statements of
operations regardless of the period for which such items are reported for tax
purposes. Deferred income taxes are recognized for temporary differences between
financial statement and income tax bases of assets and liabilities for which
income tax benefits will be realized in future years. Deferred tax assets are
reduced by a valuation allowance when the Company cannot make the determination
that it is more likely than not that some portion of the related tax asset will
be realized.
SFAS No. 109 requires that the current and non-current components of deferred
tax balances be reported separately based on the financial statement
classification of the related asset or liability which cause a temporary
difference between tax and financial reporting. Items which are not directly
related to an asset or liability that exists for financial reporting purposes
are classified as current or non-current based on the expected reversal date of
the temporary difference.
EARNINGS PER SHARE
Basic and Diluted earnings per common share are calculated in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings Per Share."
Earnings per share are based upon the weighted average number of shares of
common stock outstanding (5,213,186 in 1998, 5,193,570 in 1997 and 5,286,316
shares in 1996). During 1997, the Company issued 50,000 stock options at an
exercise price of $3.00 per share. 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. During 1997, the Company purchased and retired 9,000
shares of its common stock.
STOCK-BASED COMPENSATION
SFAS No. 123, "Accounting for Stock-Based Compensation," encourages, but does
not require companies to recognize compensation expense for grants of stock,
stock options, and other equity instruments to employees based on new fair value
accounting rules. Although expense recognition for employee stock based
compensation is not mandatory, the pronouncement requires companies that choose
not to adopt the new fair value accounting to disclose the pro forma net income
and earnings per share under the new method. The Company elected not to adopt
SFAS No. 123, and continued to apply the terms of Accounting Principles Board
Opinion No. 25. The Company determined the impact on net income and earnings per
share of the fair value based accounting method would be immaterial (see Note
12. " Employee Benefit Plans").
REVENUE RECOGNITION
The Company recognizes revenue when services are provided. Services are
generally billed one month in advance. Advance billings and collections relating
to future access services are recorded as deferred revenue and recognized as
revenue when earned.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
F-9
<PAGE>
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.
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
adoption of this statement has not had 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.
USES OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from the estimates reported.
Significant estimates made by the Company include accrued compensation liability
and medical claims, accrued post-employment and post-retirement benefits,
accrued restructuring charges, accrued environmental and valuation allowances
for accounts receivable, inventory and deferred tax assets. Accrued compensation
liability and medical claims involve the determination of reserves for incurred
but not reported claims. Accrued post-employment and post-retirement benefits
involve the use of actuarial assumptions, including selection of discount rates
(see Note 12. "Employee Benefits Plan"). Accrued restructuring charge involves
an estimation of what the market will bring and specific costs incurred relating
to the liquidation of certain Company assets using actual historical results
(see Note 11. "Commitments and Contingencies"). Accrued environmental costs
involve estimated remediation costs probable at facilities with underground
storage tanks removed. Determination of the valuation allowances for accounts
receivable and inventory involve assumptions related to current market
conditions and historical market trends. While the valuation allowance
F-10
<PAGE>
for the deferred tax assets considers estimates of projected taxable income (see
Note 13. "Income Taxes"), it is reasonably possible that the Company's estimates
for such items could change in future.
FINANCIAL STATEMENT PRESENTATION AND RECLASSIFICATION
Certain reclassifications have been made to the 1997 financial statment
presentation to conform with the 1998 financial statement presentation.
STATEMENT OF CASH FLOWS SUPPLEMENTARY DISCLOSURE
The Company and its subsidiaries, exclusive of Wickes ("Parent Group") paid
$2,728,000, $2,867,000, and $5,129,000, of interest in 1998, 1997, and 1996,
respectively. Wickes paid $12,919,000, $19,790,000, and $20,372,000, of interest
in 1998, 1997, and 1996, respectively.
The Parent Group made no income tax payments in 1998, 1997, and 1996. Wickes
paid $769,000, $1,344,000, and $1,518,000, of income taxes in 1998, 1997, and
1996, respectively.
Net cash used in discontinued operations activities total approximately $0, $1.2
million, and $1.6 million in 1998, 1997 and 1996, respectively.
The Company paid a cash dividend on its common stock of $.10 per share, or an
aggregate of approximately $530,000 in 1996. The Company did not pay any
dividends on its common stock during 1998 and 1997.
In 1998 the Company acquired 100% of the assets of Cybermax, a Jacksonville,
Florida based Internet service provider. The purchase price of the acquisition
of Cybermax was approximately $100,000, in the form of a promissory note.
In January 1998, Riverside completed the acquisition of certain operations of
Wickes that Wickes had determined to discontinue. In connection with the
acquisition, Riverside acquired approximately $126,000 of fixed assets in
exchange for a three-year promissory note.
Amortization expense of $1,914,000 in the Company's Consolidated Statement of
Cash Flows for 1998 includes $1,127,000 of deferred financing costs of Wickes
Inc. These costs are included as interest expense in the Company's Consolidated
Statements of Operations.
The following table represents the operating assets and liabilities of Wickes
Inc. as of September 26, 1998 and December 27, 1997. Because Riverside changed
its method of accounting for its investment in Wickes these amounts were
reclassified to investment in Wickes, net of minority interest on the Company's
Consolidated Balance Sheet at December 31, 1998:
(unaudited)
October 1,
1998
----
ASSETS
Current assets:
Cash $ 645
Accounts receivable, less allowance for
doubtful accounts of $4,383 104,835
Notes receivable 1,221
Inventory 113,127
Deferred tax asset 9,260
Prepaid expenses 3,149
-----------
Total current assets $ 232,237
===========
Property, plant and equipment, net 44,691
Trademark (net of accumulated amortization of
$10,441) 6,579
Deferred tax asset 17,054
Rental equipment (net of accumulated depreciation
of $471) 1,923
Other assets (net of accumulated amortization of $9,121) 11,065
-----------
$ 313,549
===========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 22
Accounts payable 47,742
Accrued liabilities 22,490
-----------
Total current liabilities 70,254
-----------
Long-term debt, less current maturities 217,525
Other long-term liabilities 2,876
Common Stockholders' equity:
Common stock (8,202,264 shares issued and
outstanding) 82
Additional paid-in capital 86,771
Accumulated deficit (63,959)
-----------
Total common stockholders' equity 22,894
-----------
$ 313,549
===========
2. RESTRUCTURING AND UNUSUAL CHARGES
During the fourth quarter of 1995, Wickes committed to and began implementing a
restructuring plan ("1995 Plan") to improve return on assets by closing or
consolidating under-performing operating centers, decreasing the corresponding
overhead to support these building centers, and initiating actions to strengthen
its capital structure. The costs for closing these building centers were based
on management estimates of costs to exit these markets and actual historical
experience. Included in 1995 results of operations is a $17.8 million charge,
including $12.6 million in anticipated losses on the disposition of closed
center assets and liabilities and $2.2 million in severance and postemployment
benefits, relating to the 1995 Plan and other one time costs.
The major components of this charge include the write-down of assets to their
net realizable value, liabilities associated with closed building centers held
for sale, postemployment benefits to qualified former employees as a result of
the center closings, and other charges related to the strengthening of Wickes'
capital structure. Also included was a charge for unusual employment related
claims expensed in the fourth quarter of 1995.
During 1996, Wickes continued executing the 1995 Plan, through the consolidation
and closing of 18 building centers and the improvement of its overall capital
structure through the issuance of new shares and the modification of its bank
revolving credit agreement.
After extensive review of the 1995 Plan, and changes in business conditions in
certain markets in which Wickes operates, Wickes made adjustments to the 1995
Plan and incurred other one time costs resulting in a net $0.7 million charge to
results of operations in the fourth quarter of 1996 for restructuring and
unusual items. These adjustments included (i) the determination that three of
the centers identified in the 1995 Plan for closure had significantly improved
market conditions and would remain open, resulting in a $1.5 million credit to
restructuring expense, (ii) the extension of the 1995 plan to include the
closing (substantially completed by the end of 1996) of three building centers
not previously included, resulting in a $1.3 million
F-11
<PAGE>
charge for the write down of working capital assets and liabilities to their net
realizable value and a $0.1 million charge for severance and postemployment
benefits for approximately 90 employees, (iii) a $1.1 million charge for
impairment in the carrying value of real estate held for sale at four previously
closed centers, and (iv) a $0.3 million credit with respect to the resolution of
a claim below the reserved amount.
During 1997, Wickes recorded a $1.5 million restructuring charge for
discontinued programs and reductions in its corporate headquarters workforce.
The $1.5 million included approximately $0.9 million for severance and
postemployment benefits for approximately 25 headquarters employees. The
discontinued programs included Wickes' mortgage lending, utilities marketing and
certain internet programs. This charge was offset by a $2.1 million reduction in
accrued costs for Wickes' 1995 Plan, which was completed. The $2.1 million
reversal included four centers identified in the 1995 Plan for closure that had
significantly improved market conditions and would remain open, as well as a
change in the estimate of facility carrying costs for sold facilities and those
remaining to be sold.
During the first quarter of 1998 Wickes implemented a restructuring plan (the
"1998 Plan") which resulted in the closing or consolidation of eight sales and
distribution and two manufacturing facilities in February, the sale of two sales
and distribution facilities in March, and further reductions in headquarters
staffing. As a result of the 1998 Plan, Wickes recorded a restructuring charge
of $5.4 million in the first quarter and an additional charge of $0.5 million in
the third quarter. The $5.9 million charge included $4.1 million in estimated
losses on the disposition of closed facility assets and liabilities, $2.1
million in severance and postemployment benefits related to the 1998 plan, and a
benefit of $300,000 for adjustments to prior years' restructuring accruals. The
$4.1 million in estimated losses includes the write-down of assets (excluding
real estate), to their net realizable value, of $3.4 million and $700,000 in
real estate carrying costs. The $2.1 million in severance and postemployment
benefits covered approximately 250 employees, 25 of which were headquarters
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 first quarter of 1998. The
acceleration of these sales resulted in a change in the estimate of facility
carrying costs for the sold facilities. At December 26, 1998, Wickes accrued
liability for restructuring had been reduced to zero.
3. ACQUISITIONS
INVESTMENT IN WICKES INC.
In a series of transactions in 1993 in connection with Wickes' equity and debt
recapitalization plan (which included Wickes' initial public offering of common
stock), Riverside acquired a net 1,842,774 additional shares of Wickes' common
stock and an option for 374,516 shares of Wickes' common stock. The aggregate
purchase price for these shares and option was $5.9 million including a $1.1
million promissory note. In August 1995, Riverside exercised its option for an
exercise price of $2.3 million and paid its promissory note in full. After these
transactions, Riverside owned 2,217,290 shares, or approximately 36% of Wickes'
outstanding common stock. At December 31, 1995, the Company's retained earnings
included $4.0 million of Wickes' undistributed earnings.
Riverside acquired two million newly-issued shares of Wickes' common stock on
June 20, 1996 for $10,000,000 in cash. These additional shares increased
Riverside's ownership in Wickes from 36% to 52% of Wickes' total common shares
and from 39% to 55% of Wickes' voting common shares. In September and October of
1997, Riverside sold approximately 65,000 shares of its Wickes' common stock for
$290,000. (See Note 15 "Related Party Transactions").
F-12
<PAGE>
In connection with the purchase from Wickes of its newly-issued shares, 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 1993. In
August of 1998, the Company requested that 1,000,000 shares be registered
pursuant to Rule 415 under the 1933 Act. At the Company's request, Wickes has
not, however, sought to have this registration statement declared effective by
the SEC pending the Company's consideration of the various alternatives
available to it.
On October 5,1998, the Company and Imagine Investments, Inc. ("Imagine") entered
into a Stock Purchase Agreement dated the same date (the "Imagine Agreement").
Under the Imagine Agreement, the Company granted Imagine (i) an option to
acquire 750,000 shares of Wickes' common stock at a purchase price of $3.25 per
share in cash (the "Call Option") and (ii) a right of first refusal expiring
April 5, 2000 with respect to all of the shares of common stock beneficially
owned by the Company. On November 4, 1998, the Company and Imagine entered into
Amendment No. 1 to the Imagine Agreement, which extended the 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 30,
1998, the Company and Imagine entered into Amendment No. 3 to the Imagine
Agreement, which extended the amended expiration date of the Call Option until
December 9, 1998. On December 9, 1998, the Company and Imagine entered into
Amendment No. 4 to the Imagine Agreement, which extended the amended expiration
date of the Call Option until December 23, 1998. On December 23, 1998, the
Company and Imagine entered into Amendment No. 5 to the Imagine Agreement, which
extended the amended expiration date of the Call Option until January 23, 1999.
Pursuant to the Imagine Agreement, the Company sold 250,000 shares of Wickes'
common stock on October 5, 1998 to Imagine for $812,250 in cash. On November 12,
1998, Imagine partially exercised the Call Option, purchasing 200,000 shares for
$650,000 in cash. On December 22, 1998, Imagine partially exercised the Call
Option, purchasing 185,000 shares of Wickes' common stock for $601,250 in cash.
On January 26, 1999, Imagine exercised the Call Option with respect to the
remaining 365,000 shares.
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 H. 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 also elected to the Wickes Board of Directors.
On December 30, 1998, the Company sold 82,000 shares of Wickes' common stock to
Imagine for $307,500 in cash in a separate transaction. In addition, in December
1998, the Company sold 16,600 shares of Wickes' common stock for $68,300 in cash
in the open market.
At December 31, 1998, Riverside beneficially owned 3,365,515 shares of Wickes'
common stock, which constituted 41% of Wickes' outstanding voting and non-voting
common stock.
As a result of the above transactions, the accompanying consolidated balance
sheet includes Wickes at December 31, 1997. The results of operations are
consolidated with Wickes, beginning July 1, 1996 through September 30, 1998.
Prior to July 1, 1996, and after September 30, 1998, the Company's consolidated
balance sheet and consolidated statements of operations and cash flows reflect
Riverside's investment in Wickes on the equity method. The acquisition of
additional shares has been recorded as a step acquisition using the purchase
method of accounting.
F-13
<PAGE>
Summary audited financial information of Wickes for years 1998, 1997 and 1996
follows (in thousands):
<TABLE>
<CAPTION>
Years Ended December 26, 1998, and December 27,
-----------------------------------------------
1997 and December 28, 1996
--------------------------
<S> <C> <C> <C>
Operating Statement Data: 1998 1997 1996
---- ---- ----
Net sales $ 910,272 $ 884,082 $ 848,535
Gross profit 216,316 203,026 189,463
Net income (loss) $ (451) $ (1,560) $ 509
Balance Sheet Data:
Current assets $ 210,311 $ 197,974 $ 185,061
Total assets 292,750 283,352 272,842
Current liabilities 74,175 63,515 68,290
Long-term debt 191,961 193,061 176,376
Other long-term liabilities 2,952 2,775 2,677
Common stockholders' equity $ 23,662 $ 24,001 $ 25,499
</TABLE>
4. REORGANIZATION OF LIFE INSURANCE OPERATIONS
On June 6, 1996, Riverside completed the reorganization of its life insurance
operations with Circle Investors, Inc. ("Circle"), a privately held company
engaged in providing financial services (the "Life Insurance Reorganization").
As a result of this transaction, a wholly-owned subsidiary of AFAC, that
wholly-owned all of Riverside's insurance subsidiaries, merged with Circle.
Riverside received net cash of $13.5 million, after payment in full of the AFAC
bank debt, taxes and expenses. Additionally, Riverside received 2,267,000 shares
of Circle common stock and 3,600 shares of Circle Series C Preferred Stock.
Riverside also retained 951,486 shares of Wickes common stock, real estate with
a net appraised value of $2.0 million, and certain miscellaneous assets that
were previously owned by the insurance subsidiaries. These retained assets have
been recorded at the lower of historical carryover cost or fair value,
consistent with transactions between
F-14
<PAGE>
companies under common control. The real estate appraised value is net of an
$18.0 million mortgage owned by American Founders (see Note 10. "Long-Term
Debt").
In 1995, Riverside estimated and reported a loss on the reorganization of the
life insurance operations in accordance with SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of."
Riverside initially recorded its investment in Circle at $2.3 million for the
common shares ($1.00 per share) plus $3.6 million liquidation value for the
preferred shares, for a total of $5.9 million. Riverside subsequently recorded a
loss on impairment of approximately $0.6 million based upon an independent
appraisal of the Circle shares and a merger agreement that Circle and an
unrelated party entered into in March 1997. Additionally, the loss on impairment
was offset by consideration paid to Riverside by the life insurance subsidiaries
of approximately $431,000 for utilization of tax benefits related to life
insurance operations through June 6, 1996. Riverside's investment in Circle is
reported on the equity method through December 30, 1997. Accordingly, the
consolidated balance sheet at December 31, 1997 does not include the individual
consolidated assets and liabilities of Circle's life insurance operations.
Up to the closing of the Life Insurance Reorganization, the life insurance
operations generated income after taxes of $1,003,000 in 1996. However, based on
an evaluation of the life company's profits from operations and the benefits to
Wickes of these operations, additional deferred acquisition cost amortization of
$674,000 was recorded reducing life insurance income to a net of $329,000.
On December 31, 1997, Circle was acquired by a third party. In the acquisition,
Riverside disposed of its interest in Circle for approximately $5.4 million in
cash.
5. SALE OF MORTGAGE LENDING 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.
During 1997 and 1996, after reimbursements of $955,000 and $396,000 received by
the Parent Company on behalf of WML, from Wickes, the Parent Company incurred
pre-tax losses of $388,000 and $1,024,000 on its mortgage operations.
6. 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 the Accounting
Principles Board Opinion Number 29: Accounting for Nonmonetary Transactions, the
Company has recorded zero basis in its investment in Greenleaf. The calculated
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. At December 31, 1998, the
calculated market value of the Company's investment in Greenleaf was
approximately $23.8 million based on Greenleaf's stock price of $1.625 per share
on the over-the-counter Bulletin Board. The calculated value has been determined
by multiplying 14,687,585 shares owned by the Company by the stock price listed
F-15
<PAGE>
on the Over-the Counter Bulletin Board on the respective date. Greenleaf stock
is thinly traded with an average weekly volume of 23,000 shares to 151,000
shares. The Company has not determined a valuation of its investment in
Greenleaf under a block sale scenario, nor can the Company estimate how many
shares and at what market price per share could be sold over any specified
period of time without adversely affecting market price. For information
concerning discussions between the Company and Greenleaf concerning the possible
adjustment of the merger consideration that would reduce the Company's
percentage of ownership of Greenleaf. See Note 11. "Commitments and
Contingencies".
7. PROPERTY, PLANT, AND EQUIPMENT
Property, plant and equipment consists of:
December 31,
-------------
1998 1997
---- ----
(in thousands)
Land and improvements $ -- $12,781
Buildings -- 27,632
Machinery and equipment 901 30,960
Leasehold improvements -- 2,202
Construction in progress -- 844
-------- --------
901 74,419
Less: Accumulated depreciation
and amortization 499 31,443
-------- --------
402 42,976
Assets held for sale, net -- 3,816
-------- --------
Property, plant, and equipment, net $ 402 $46,792
======== ========
The Company reviews assets held for sale in accordance with the SFAS No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of." The Company recorded a loss of $156,000 to report land, land
improvements and buildings held for sale at their net realizable value in 1997.
This charge is included under Restructuring and Unusual items on the
Consolidated Statement of Operations.
8. INVESTMENTS
REAL ESTATE INVESTMENTS
Investment in real estate consists of the following:
December 31,
------------
1998 1997
---- ----
(in thousands)
Commercial rental property, net $ 373 $ 387
Land held for investment 9,250 13,877
Investments in real estate joint ventures 44 65
-------- --------
Gross real estate investments 9,667 14,329
Related mortgage debt (11,345) (16,038)
-------- --------
Real estate investments, net of mortgage debt $ (1,678) $ (1,709)
======== ========
F-16
<PAGE>
Certain of the Company's real estate was acquired from affiliates and has been
recorded at historical carryover cost. Commercial rental property carrying
values are net of accumulated depreciation of $157,000, and $144,000 at December
31, 1998 and 1997, respectively.
As of December 31, 1998, the Company had $7,361,000 of its investments in real
estate in Georgia properties, $2,254,000 in Florida properties, and $52,000 in
other states.
NET INVESTMENT INCOME
The major categories of investment income(loss) are summarized as follows
(in thousands):
1998 1997 1996
---- ---- ----
Fixed maturities $ -- $ -- $ 4,380
Equity securities -- -- 19
Mortgage and construction loans -- -- 1,194
Investment in real estate (110) (291) (254)
Policy loans -- -- 452
Short-term and other investments 78 260 1,740
------- ------- -------
Total investment income (32) (31) 7,531
------- ------- -------
Investment expenses -- -- (1,206)
------- ------- -------
Net investment income(loss) $ (32) $ (31) $ 6,325
======= ====== =======
The Company earned no revenue during 1998 from $9,249,000 of investments in real
estate.
Investment income for 1996 includes investment income from the Life Insurance
Subsidiaries only through June 6, 1996; therefore, comparisons between years are
not meaningful.
REALIZED INVESTMENT GAINS AND LOSSES
Net realized investment gains(losses) are summarized below (in thousands):
1998 1997 1996
---- ---- ----
Fixed maturities
Available for sale $ -- $ -- $ 1,070
Equity securities
Available for sale -- -- (54)
Investment real estate 1,338 897 656
Related party investments (1,837) -- --
------- ------- ------
Net realized gains(losses) $ (499) $ 897 $ 1,672
======== ======= =======
Investment gains(losses) for 1996, includes the realized gains and losses earned
on the Life Insurance Subsidiaries' fixed maturities and equity securities
through June 6, 1996.
- --------------------------------------------------------------------------------
F-17
<PAGE>
9. ACCRUED LIABILITIES
The following table summarizes the accrued liabilities for the past two years.
For 1997, accrued liabilities included $22 million from Wickes.
December 31,
------------
1998 1997
---- ----
Accrued payroll $ 240 $ 8,267
Accrued interest 361 1,876
Accrued liability insurance -- 4,178
Accrued restructuring charges -- 1,348
Other 776 7,442
-------- --------
Total accrued liabilities $ 1,377 $ 23,111
10. LONG-TERM DEBT
Consolidated long-term and mortgage debt obligations are summarized as follows:
December 31,
------------
1998 1997
---- ----
(in thousands)
THE PARENT GROUP
LONG-TERM DEBT
Subordinated notes, net of discount of
$173,000 in 1998 and $375,000 in 1997,
interest payable at 13% semi-annually,
principal due September 30, 1999 $ 9,827 $ 9,625
Bank loan -- 656
Other 944 --
------- -------
Total long-term debt 10,771 10,281
Less current maturities (10,356) (656)
------- -------
Total Company long-term debt less current maturities $ 415 $ 9,625
======== =======
MORTGAGE DEBT
Mortgage debt, non-recourse $11,345 $16,038
Less current maturities -- --
------- -------
Total Company long-term mortgage debt less current maturities $11,345 $16,038
======= =======
WICKES
Revolving line of credit, interest payable at
1.50% above prime or 3.0% over LIBOR,
F-18
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
principal due March 31, 2001 $ -- $ 93,045
Senior subordinated notes, interest payable
at 11-5/8% semi-annually, principal due
December 15, 2003 -- 100,000
Other -- 62
-------- --------
Total long-term debt -- 193,107
Less current maturities -- (46)
-------- --------
Total Wickes' long-term debt less current maturities -- 193,061
-------- --------
Total consolidated long-term debt less current maturities $11,760 $218,724
-------- --------
Total consolidated long term and mortgage debt $22,116 $219,426
======== ========
</TABLE>
As of December 31, 1998, Prime and London InterBank Offered Rate ( "LIBOR")
three-month rates were 7.75% and 5.3125% respectively.
THE PARENT GROUP
SUBORDINATED NOTES ("13% NOTES")
These notes may be prepaid in whole or in part upon payment of a premium of
2.889% declining to zero after September 30, 1998. These notes were recorded at
an original discount of $1,256,000 which is being amortized using the interest
method over the term of the notes.
Holders of a majority of the 13% Notes have informed the Company that they are
evaluating whether certain transactions and other circumstances are such that a
material adverse change in the Company's financial condition has resulted or
would result (which might authorize the holders of the 13% Notes to accelerate
the maturity of the Notes). For further information see Note 16. "Subsequent
Events" and Note 11. "Commitments and Contingencies".
OTHER
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 December 31,
1998, the Company had made payments of $115,752 under the promissory note but
was delinquent
F-19
<PAGE>
with respect to required payments of approximately $169,474 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.
BANK LOAN
On June 24, 1997, Riverside modified its existing obligation to a third party in
the approximate amount of $900,000. As modified, the terms of this obligation
call for monthly principal payments of $101,150 commencing October 1, 1997 with
the balance due July 15, 1998, with earlier payments required from proceeds of
the Circle merger in excess of $2.5 million released from pledge under
Riverside's real estate indebtedness. On November 7, 1997, Riverside executed a
reinstatement agreement following Riverside's default under the obligation. On
March 31, 1998, the Company repaid this loan in full.
LINE OF CREDIT
On May 1, 1997, Riverside obtained a $1.5 million demand bank line of credit
collateralized by 800,000 shares of Wickes' common stock and 2,330 shares of
preferred stock of Circle. Borrowings under this line of credit bear interest
payable monthly at two percent above the lender's standard rate, and principal
is payable upon demand and is designed to be paid with the cash proceeds of the
pledged Circle shares in a pending transaction. Monthly principal payments of
$125,000 per month are required beginning November 1, 1997 if the principal has
not otherwise been demanded or paid. On December 31, 1997, this line was paid in
full with proceeds from the Circle closing (See Note 4. "Reorganization of Life
Insurance Operations").
WICKES INC.
REVOLVING LINE OF CREDIT
At December 26, 1998 Wickes had a revolving line of credit, which was to expire
on March 31, 2001. Under this line of credit Wickes could borrow against certain
levels of accounts receivable and inventory, up to a maximum credit limit of
$130,000,000. At December 26, 1998, the amount available for additional
borrowing was $32,680,000. A commitment fee of 1/2 of 1% was payable on the
unused portion of the commitment. The weighted-average interest rate for the
years ending December 26, 1998 and December 27, 1997 was approximately 8.2% and
8.8% respectively.
Substantially all of Wickes' accounts receivable, inventory, general intangibles
and certain machinery and equipment were pledged as collateral for the revolving
line of credit. Covenants under the related debt agreements required, among
other restrictions, that Wickes maintain certain financial ratios and certain
levels of consolidated net worth. In addition, the debt agreement restricted
among other things, capital expenditures, the incurrence of additional debt,
asset sales, dividends, investments, and acquisitions without prior approval
from the lender.
F-20
<PAGE>
SENIOR SUBORDINATED NOTES
On October 22, 1993, Wickes issued $100,000,000 in principal amount of 10-year
senior subordinated notes. Interest on the notes is 11-5/8%, payable
semi-annually. Covenants under the related indenture restrict among other
things, the payment of dividends, the prepayment of certain debt, the incurrence
of additional debt if certain financial ratios are not met, and the sale of
certain assets unless the proceeds are applied to the notes. In addition, the
notes require that, upon a change in control of Wickes, Wickes must offer to
purchase the notes at 101% of the principal thereof, plus accrued interest.
MORTGAGE DEBT
THE PARENT COMPANY
As a part of the Life Insurance Reorganization, Riverside purchased certain real
estate owned by American Founders. In connection therewith, Riverside issued to
Circle a series of seven non-recourse promissory notes (the "Notes") with an
aggregate principal amount of $17,798,000 equal to 90% of the purchase price of
the real estate parcels. Principal and interest payments are due in annual
installments, commencing on June 6, 1997. Each annual installment is calculated
based upon equal payments amortized over a term of 20 years. A balloon payment
of the remaining principal balance is due on the seventh anniversary of the
Notes. The Notes bear interest at a rate adjusted quarterly, equal to LIBOR,
plus three hundred basis points. The Notes are collateralized by first priority
mortgages covering all of the real estate. On each anniversary of the Notes,
Riverside is required to provide American Founders with an independent appraisal
of the real estate, subject to the mortgages ("Appraised Values"). If the
outstanding principal amount of the Notes exceeds 85% of the Appraised Value on
the first anniversary or 80% of the Appraised Value with each anniversary
thereafter, Riverside is required by December 31 of that year to make an
additional principal payment on the Notes in an amount equal to such excess. A
parcel of real estate that is subject to the mortgage may be sold by Riverside
only in cash transactions and with the prior consent of American Founders.
Subject to certain exclusions, the entire sales proceeds is required to be paid
to American Founders to fund an escrow account for the payment of property
taxes, and to pay accrued and unpaid interest and any remaining principal
balance on the Notes. As additional security for the Notes, Riverside pledged as
collateral 3,600 shares of Circle Series C preferred stock, 2,267,000 shares of
Circle Common Stock and 1,000,000 shares of Wickes' common stock. The Circle
stock pledged as collateral was converted to cash when Circle was acquired by a
third party on December 31, 1997 (see Note 4. "Reorganization of Life Insurance
Operations").
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.
F-21
<PAGE>
As of December 31, 1998, there were 2,002,337 shares of Wickes' common stock
held as collateral on the real estate.
AGGREGATE MATURITIES
The aggregate amounts of consolidated future minimum principal payments on
long-term debt are as follows: (in thousands)
Year
----
1999 10,356
2000 280
2001 134
2002 102
Thereafter 11,244
11. COMMITMENTS AND CONTINGENCIES
WICKES INC.
At December 26, 1998, Wickes had accrued approximately $152,000 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. 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.
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' 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 March 15, 1999 none of these suits have made it to trial.
Losses in excess of the $152,000 reserved as of December 26, 1998 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'
<PAGE>
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. There was no activity in this suit in 1998.
The Company and Wickes are involved in various other legal proceedings which are
incidental to the conduct of their businesses. The Company does not believe that
any of these proceedings will have a material adverse effect on the Company.
The Company and its subsidiaries have various operating leases for which
approximately $10,461,000, $10,817,000, and $10,368,000 was expensed in 1998,
1997 and 1996, respectively. As of December 31, 1998, the Company and its
subsidiaries lease its home office property for approximately $201,000 per year.
This lease expires in May of 1999.
The Company's total future minimum commitments for noncancelable operating
leases are as follows (in thousands):
Year Amount
1999 320
2000 148
2001 29
2002 7
2003 1
Total 505
In connection with the sale of Dependable, the Company agreed to indemnify the
purchaser for certain losses on various categories of liabilities. Terms of the
indemnities provided by the Company vary with regards to time limits and maximum
amounts. AFAC subordinated debentures in the amount of $2.1 million are pledged
as collateral on these indemnities. 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 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
<PAGE>
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
financing for Buildscape sufficient to support Buildscape's cash needs. Although
the Company has held discussions with several venture capital firms, the Company
has received no definite financing proposals, and there can be no assurance that
any such financing will be obtained or that any 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 March 31, 1999, the Company estimates that it will have approximately
$105,000 of cash on hand and $500,000 of available borrowings under its loan
agreement with Imagine Investments, Inc. ("Imagine") described below. Also, at
March 31, 1999, the Company estimates that it will have approximately $777,000
of accounts payable and other current liabilities, approximately $430,000 of
which are past due. In addition, $252,000 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 and has
obtained a waiver of defualt through June 30, 1999. Additional borrowings under
the Imagine agreement are subject to Imagine's approval, and there can be no
assurance that the Company will be able to comply with the terms of this loan
agreement or that such additional borrowings will be available. In view of the
foregoing, the Company anticipates that it will have to begin asset sales or
obtain additional funds from other sources in the very near future.
In addition, the $10,000,000 principal of the Company's 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 these note holders have agreed in principle
to replace the 13% Notes, with new unsubordinated promissory notes due September
30, 2200 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 have agreed to
negotiate in good faith toward completion of this transaction, but 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 March 22, 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. Pursuant to
previously
<PAGE>
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.
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 meet the required interest payment due September 30, 1998 on the 13%
Notes and to fund the Company's other cash needs, on October 5, 1998, the
Company entered into an agreement (the "Imagine Agreement") with Imagine
pursuant to which the Company sold Imagine a total of 1,000,000 shares of Wickes
common stock at $3.25 per share. The Company also sold an additional 82,000
shares of Wickes common stock to Imagine in December for $3.75 per share and an
additional 16,600 shares of Wickes common stock in open market transactions at
prices ranging between $3.9175 and $4.668. Under the Imagine Agreement, the
Company granted Imagine a right of first refusal with respect to all of the
shares of Wickes common stock beneficially owned by it for eighteen months after
October 5, 1998. 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. See Note 3 of
Notes to Consolidated Financial Statements included elsewhere herein.
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 pursuant to
which the company may borrow, subject to Imagine's approval, an additional
$500,000 before May 15, 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. Management is currently having discussions with Imagine
regarding increasing the amount and extending the term of this loan. In
F-22
<PAGE>
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 discussions with the
holders of the Company's 13% Subordinated Notes due September 1999 ("the 13%
Notes"), (iii) the success of and level of negative cash flow generated by the
Parent Company's 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.
12. EMPLOYEE BENEFIT PLANS
THE COMPANY
ESOP
The Company has an Employee Stock Ownership Plan and Trust ("ESOP") in which
employees of the Company who work more than 1,000 hours in a plan year are
eligible to participate. The Company's Board of Directors determines the amount,
if any, of the annual contribution to the ESOP, and each participant shares in
this contribution prorata based upon the amount of the participant's
compensation as compared to all participants' compensation for such year.
As of December 31, 1998, the ESOP owned 181,417 shares of the Company's common
stock, of which 48,705 shares were pledged under ESOP loans from the Company.
Contributions to the ESOP for payment of principal and interest on the ESOP
loans, were $65,000, $97,000, and $97,000 in 1998, 1997 and 1996, respectively.
Loans from the Company to the ESOP of $268,000 in 1994 were used to purchase
additional shares of common stock.
F-24
<PAGE>
Notes receivable from the ESOP issued to purchase common shares are held by the
Company and its subsidiaries. Statement of Position ("SOP") 93-6 issued in 1994
requires presentation of all leveraged shares held by the ESOP ("Unearned ESOP
shares") as a reduction to additional paid in capital. Accordingly, the unpaid
balance of the notes receivable of $443,000 was reclassified to stockholders'
equity in 1994. As of December 31, 1998, this amount has been reduced to
$189,500 by the cost of ESOP shares released by repayments on these notes.
Unearned ESOP shares are not treated as outstanding for the calculation of
earnings per common share. The fair value of unearned ESOP shares as of December
31, 1998 was approximately $184,843.
STOCK OPTION PLANS
In 1985 the Company established the Riverside Group, Inc. Non-qualified Stock
Option Plan (a fixed option plan for employees and directors). In 1995, the
Incentive Stock Option Plan terminated. Additional information with respect to
stock options is as follows:
<TABLE>
<CAPTION>
Number of Option Shares Option Price
----------------------- ------------------------
Total Exercisable Per Share Total
----- ----------- --------- -----
<S> <C> <C> <C> <C>
Outstanding at December 31, 1993 256,000 256,000 $3.33-$11.88 $1,247,130
Granted 10,000 -- 7.00 --
Vested -- -- -- --
Exercised (30,000) (30,000) 3.33 (99,900)
Expired or canceled (4,000) (4,000) 3.33- 8.88 (35,520)
-------- --------- ----------- ----------
Outstanding at December 31, 1994 232,000 222,000 $3.33-11.88 $1,111,710
Granted -- -- -- --
Vested -- 2,500 7.00 17,500
Exercised (46,800) (46,800) 3.33 (155,844)
Expired or canceled (82,200) (82,200) 3.33-8.88 (313,026)
--------- --------- ------------ ----------
Outstanding at December 31, 1995 103,000 95,500 $5.33-11.88 $ 660,340
Granted -- -- -- --
Vested -- -- -- --
Exercised -- -- -- --
Expired/Canceled (30,000) (30,000) -- (159,900)
--------- --------- ------------ ----------
Outstanding at December 31, 1996 73,000 65,500 $5.33-$11.88 $ 500,440
Granted 50,000 50,000 $3.00 150,000
Vested -- -- -- --
Exercised -- -- -- --
Expired/Canceled (3,000) (3,000) 8.88 (26,640)
--------- --------- ------------ ----------
Outstanding at December 31, 1997 120,000 112,500 $3.00-$11.88 $ 623,800
Granted -- -- -- --
Vested -- -- -- --
Exercised -- -- -- --
Expired/Canceled (70,000) (62,500) $6.00-$11.88 473,800
--------- --------- ------------ -----------
Outstanding at December 31, 1998 50,000 50,000 $3.00 $ 150,000
========= ========= ============ ===========
Options outstanding as of December 31, 1998 expire in 1999 through 2006 as follows:
Shares Option Price Expiration
Exercisable Per Share Total Date
50,000 3.00 150,000 December 2006
--------
$150,000
========
</TABLE>
F-25
<PAGE>
The Company applies APB Opinion No. 25 and related interpretations in accounting
for its Option Plan and, accordingly, no compensation cost has been recognized
related to the stock option. Had compensation cost been determined in accordance
with SFAS 123, the impact on the Company's net income and earnings per share
would have been immaterial for 1998 and 1997. In January of 1997, the Company
granted a non qualified stock option for 50,000 shares of its stock with an
exercise price of $3.00 per share. The Company did not grant any options in 1998
or 1996.
401(K) PLAN
The Company has a Deferred Compensation Plan for all its eligible employees
which allows participants to defer up to ten percent of their salary pursuant to
Section 401(k) of the Internal Revenue Code. The Company matches contributions
up to a maximum of 3% of compensation for employees contributing up to 6%.
Employees are 100% vested in their contributions and vest in the Company's
contribution over a period of seven years. The Company's contribution was
$11,000, $23,000, and $28,000 during 1998, 1997 and 1996, respectively.
13. INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
The Company will file a consolidated tax return for 1998 which will include all
its subsidiaries with the exception of Wickes. Riverside's ownership in Wickes
is below the requirements which allow consolidation for tax purposes, therefore
Wickes will file a separate consolidated return with its subsidiaries.
At December 31, 1998, the Company has net operating loss carry forwards
available to offset income of approximately $50 million expiring in years 2000
through 2013. To the extent carry forwards existing at the subsidiaries'
acquisition dates have been utilized, the tax benefits are reflected as
reductions to the excess of cost over fair value of net assets acquired and the
value of acquired insurance in force.
At December 28, 1998, Wickes has net operating loss carry forwards available to
offset their consolidated taxable income of approximately $43.3 million expiring
in years 2005 through 2013. In 1993 Wickes underwent a change of ownership as
defined by section 382 of the Internal Revenue Code of 1986. As a result of
this, certain of the loss carry forwards of Wickes were limited to an annual
limitation of approximately $2.6 million a year. At December 26, 1998
approximately $7.5 million of these loss carryforwards were affected by this
limitation.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. A valuation allowance has
F-26
<PAGE>
been established to reduce deferred tax assets to the amount which more likely
than not will be realized in the future. The components of the deferred tax
assets and liabilities at December 31, 1998 and 1997 are as follows (in
thousands):
1998 1997
---- ----
Deferred tax assets:
Difference in valuations of investments and capital
loss carry forwards -- 1,399
Trade accounts receivable 259 1,539
Inventories -- 1,895
Accrued personnel cost -- 2,013
Other accrued liabilities 46 6,796
Difference in investment carrying values 7,489 6,299
Net operating loss and AMT credit carry forwards 18,821 33,400
Other -- 3,348
------- -------
Total deferred tax assets 26,615 56,689
Valuation allowance for deferred tax assets (25,512) (22,255)
------- -------
Net deferred tax assets $ 1,103 $34,434
------- -------
Deferred tax liabilities:
Property, plant & equipment -- 1,365
Difference in asset bases 651 615
Goodwill & trademark -- 2,687
Other accrued income items 452 451
------- -------
Total deferred tax liabilities 1,103 5,118
------- -------
Net deferred tax assets $ -- $29,316
======= =======
SFAS 109 requires that the current and non-current components of deferred tax
balances be reported separately based on the financial statement classification
of the related asset or liability which causes a temporary difference between
tax and financial reporting purposes. Items which are not directly related to an
asset or liability that exists for financial reporting purposes are classified
as current or non-current based on the expected reversal date of the temporary
difference. Total long term deferred tax assets have been combined with long
term deferred tax liabilities and presented as a net amount on the balance
sheet.
The income tax provision for 1998 consists of both current and deferred amounts.
The components of the income tax provision are as follows:
F-27
<PAGE>
1998 1997 1996
---- ---- ----
Taxes currently payable
Federal income tax $ -- $ -- $ --
State income tax 726 1,099 259
Deferred expense(benefit) 3,002 (153) 61
------ ------ ------
Total income tax expense(benefit) $3,728 $ 946 $ 320
====== ====== ======
The deferred tax expense recorded in the current year results from temporary
differences between the amount of assets and liabilities for financial reporting
purposes and such amounts for tax purposes. The sources of these differences and
the tax effect of each were as follows (in thousands):
1998 1997 1996
---- ---- ----
Change in bad debt reserve $ (430) $ (541) $ 203
Difference in tax and book inventory (506) 60 245
Settlement of deferred compensation 48 (76) (86)
Change in accrued liabilities 1,262 116 4,562
Utilization/creation of NOL (2,705) (220) (5,387)
AMT credit & cap loss carryover -- (1,006) (471)
Difference in tax and book asset basis 22 (1,004) (4,405)
Difference in book and tax intangibles 302 634 (6,245)
Change in accrued income items -- (210) 182
Difference in reserves, net -- -- 2,357
Difference in valuations of investments
and capital loss carry forwards 210 (845) 7,896
Differences in reporting unearned premium,
accrued income, expenses and other -- -- (8)
Change in valuation allowance 4,799 1,857 1,218
------- ------- -------
Deferred tax expense(benefit) $ 3,002 $ (153) $ 61
======= ======= =======
Actual income tax expense(benefit) on income(loss) differs from expected tax
expense computed by applying the Federal corporate tax rates of 34% in 1998,
1997 and 1996 as follows (in thousands):
F-28
<PAGE>
1998 1997 1996
---- ---- ----
Tax expense/benefit computed at statutory rate $(3,094) $(2,036) $ 1,768
Increase (decrease) in taxes resulting from:
Effect of the difference in tax
treatment of goodwill 135 -- 69
State and local income taxes 386 714 259
Other 1,502 411 (558)
Change in valuation allowance 4,799 1,857 (1,218)
------- ------- -------
Actual tax expense(benefit) $ 3,728 $ 946 $ 320
======= ======= =======
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
In accordance with SFAS No. 107, "Disclosure about Fair Value of Financial
Instruments," information has been provided about the fair value of certain
financial information. The following methods and assumptions were used to
estimate the fair value of each material class of financial instruments covered
by the Statement for which is practicable to estimate that value.
INVESTMENT IN WICKES INC. - The fair value of Wickes is determined by the
NASDAQ National Market System quoted market price.
INVESTMENT IN GREENLEAF TECHNOLOGIES, INC. - The market value of Greenleaf is
determined by the Over-the-Counter Bulletin Board price as described below.
LONG TERM DEBT - The carrying amount is a reasonable estimate of fair value, as
the stated rates of interest represent current market rates.
MORTGAGE DEBT - The carrying amount is a reasonable estimate of fair value, as
the stated rates of interest represent current market rates.
The estimated fair value of the Company's financial instruments at December 31,
1998 are summarized as follows:
December 31, 1998
Carrying Estimated
Amount Fair Value
Financial assets:
Cash and cash equivalents $ 509 $ 509
Investment in Wickes Inc. 14,995 14,303
Investment in Greenleaf Technologies -- 23,867*
Financial liabilities:
Long-term debt 415 415
Mortgage debt, related party 11,345 11,345
*Calculated based on quoted market price times shares. As the company is a
start-up operation with little revenue and on-going development expenses, its
price is volatile and volume is low to moderate. This amount is not intended to
represent the amount which the Company could realize upon liquidation. Also see
Note 6. "Investment in Greenleaf".
15. RELATED PARTY TRANSACTIONS
F-29
<PAGE>
The Company reimburses its share of actual costs incurred from the Company's use
of an airplane owned by an affiliate of Mr. Wilson. Reimbursement expenses were
$398,500, in 1998, $925,000 in 1997, and $639,000 in 1996. In 1996 the Company
recorded income of $199,000 with respect to salaries and other Company expenses
related to airplane use either charged to or paid by this affiliate of Mr.
Wilson. In 1997, the Company established a reserve for approximately $434,000
related to such salaries and expenses either incurred in 1997 or incurred in
prior years and charged to this affiliate and not previously paid. In 1998, the
Company (exclusive of Wickes) incurred $104,000 of costs from the use of the
airplane. This amount reduced the reserve recorded in 1997 to $327,000.
A former director and executive officer of the Company was during most of 1998,
and all of 1997 and 1996, a shareholder of the law firm that is general counsel
to the Company. The Company paid this firm $515,000, $834,000, and, $877,000 for
legal services provided to the Company during 1998, 1997, and 1996,
respectively.
Included in operations for 1998, 1997 and 1996 is income related to office
expenses and tax services either paid to the Company or charged by the Company
to Wilson Financial of $(632), $22,000, and $7,000, respectively. At December
31, 1998, there was an intercompany balance of approximately $103,000 owed by
Wilson Financial to Riverside related to these net expenses. This balance was
reclassified from current assets to long term assets at December 31, 1998.
Riverside made loans to a company owned by one of its directors in the amount of
$154,114 and $225,000 in 1996 and 1995, respectively. Riverside restructured
these notes in 1996, extending the maturity date to June 30, 1997. Riverside is
currently discussing modifying the terms and collateral of this note. In 1998
and 1997, Riverside owed this company consulting fees of $67,500 and $90,000,
respectively, for services rendered in connection with the natural gas program
of Wixx. Both parties agreed to apply the fees against the outstanding principal
and interest on the notes. In September of 1998, Riverside decided to
discontinue the natural gas program of Wixx. As a result, Riverside established
a reserve in the amount of $240,000 in respect to the outstanding principal less
the future board of directors fees that Riverside will apply to the remaining
balance.
In late September and early October 1997, the Company sold an aggregate of
64,875 shares of Wickes' common stock to Kenneth M. Kirschner, former Vice
Chairman and director of the Company, and an executive officer of Wickes, and
Frederick H. Schultz, a former director of the Company. The aggregate purchase
price was $290,000, or $4.47 per share, which equaled the 30-day average closing
bid price for Wickes' common stock on the NASDAQ National Stock Market prior to
the sales.
In the fourth quarter of 1997, J. Steven Wilson, the Company's Chairman,
President and Chief Executive Officer advanced $160,000 to the Company. The
Company repaid this in June 1998. In addition, the Company advanced Mr. Wilson
$150,000 in June 1998. Mr. Wilson repaid this in March of 1999.
During the fourth quarter of 1998 and the first quarter of 1999, the Company
sold a total of 1,082,000 shares of its Wickes' common stock to Imagine. The
president of Imagine is on the Company's and Wickes' Board of Directors. For
further information see Note 3. "Investment in Wickes". In March of 1999,
Imagine and the Company entered into a $1,000,000 loan agreement. For further
information see Note 11. "Commitments and Contingencies".
<PAGE>
16. Subsequent Events
On October 5, 1998, the Company and Imagine entered into a Stock Purchase
Agreement. In connection with this agreement, on January 26, 1999, Imagine
exercised the Call Option with respect to the remaining 365,000 shares. This
transactions reduced the Company's ownership in Wickes from 41% to 36%. (For
further information concerning this agreement, see Note 3. "Investment in
Wickes").
In March 1999, the Company entered into an agreement to sell approximately 27
acres of its investment in real estate for approximately $1.7 million. The
entire sales proceeds will be used to fund an escrow account for the accrued
interest due in June 1999, and the excess will be applied against the remaining
principal balance of the Notes. (See Note 10. "Long-Term Debt").
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 pursuant to
which the company may borrow, subject to Imagine's approval, an additional
$500,000 before May 15, 1999. For further information see Note 11. "Commitments
and Contingencies".
At December 31, 1998, the Company had made payments of $115,752 under the Wickes
promissory note but was delinquent with respect to required payments of
approximately $169,474 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.
The Company and the 13% Note holders have entered into a letter of intent
pursuant to which the 13% Notes, would be replaced 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. For furhter
information see Note 11., "Commitments and Contingencies".
F-30
<PAGE>
17. Industry Segment Information and Quarterly Results of Operations
The following table sets forth certain financial data for the past three
years for the following segments: e-commerce and advertising, web design and
internet connectivity, building materials, life insurance and other segments.
Wickes' operations are consolidated with those of the Company and its
subsidiaries for the first through the third quarter of 1998, all of 1997, and
the third and fourth quarters of 1996. The Company accounted for its investment
in Wickes' under the equity method for the fourth quarter of 1998 and the first
and second quarters of 1996. "Other" includes real estate, parent company,
financial services, and discontinued operations and all eliminating entries for
inter-company transactions.
Years Ended December 31,
1998 1997 1996
---- ---- ----
(in thousands)
--------------
SALES:
E-Commerce & Advertising $ 30 $ -- $ --
Web Design & Internet Access 486 -- --
Building Materials(1) 667,024 884,082 467,254
Life Insurance -- -- --
Other 164 -- --
--------- --------- ---------
Total $ 667,704 $ 884,082 $ 467,254
========= ========= =========
COST OF SALES:
E-Commerce & Advertising $ 14 $ -- $ --
Web Design & Internet Access 182 -- --
Building Materials(1) 508,896 681,056 363,930
Life Insurance -- -- --
Other 170 -- --
--------- --------- ---------
Total $ 509,262 $ 681,056 $ 363,930
========= ========= =========
OTHER INCOME:
E-Commerce & Advertising $ -- $ -- $ --
Web Design & Internet Access -- -- --
Building Materials(1) 5,045 10,689 4,261
Life Insurance -- -- 3,307
Other 546 608 493
--------- --------- ---------
Total $ 5,591 $ 11,297 $ 8,061
========= ========= =========
INVESTMENT INCOME & REALIZED
GAINS/(LOSSES):
E-Commerce & Advertising $ -- $ -- $ --
Web Design & Internet Access -- -- --
Building Materials(1) (1,837) -- --
Life Insurance -- -- 6,394
Other 1,306 866 1,603
--------- --------- ---------
Total $ (531) $ 866 $ 7,997
========= ========= =========
EXPENSES:
E-Commerce & Advertising $ 4,605 $ 668 $ --
F-31
<PAGE>
Web Design & Internet Access (283) -- --
Building Materials(1) 141,447 192,395 87,633
Life Insurance -- -- 9,365
Other 1,549 2,222 1,738
--------- --------- ---------
Total $ 147,318 $ 195,285 $ 98,736
========= ========= =========
RESTRUCTURING AND UNUSUAL ITEMS:
E-Commerce & Advertising $ -- $ -- $ --
Web Design & Internet Access -- -- --
Building Materials(1) 5,932 (559) 745
Life Insurance -- -- --
Other -- -- --
--------- --------- ---------
Total $ 5,932 $ (559) $ 745
========= ========= =========
INTEREST EXPENSE:
E-Commerce & Advertising $ 85 $ -- $ --
Web Design & Internet Access 6 -- --
Building Materials(1)(2) 17,984 22,890 11,228
Life Insurance -- -- 7
Other 1,189 1,635 2,443
--------- --------- ---------
Total $ 19,264 $ 24,525 $ 13,678
========= ========= =========
EARNINGS(LOSS) BEFORE INCOME TAXES,
EQUITY IN RELATED PARTIES, MINORITY
INTEREST AND DISCONTINUED OPERATIONS
E-Commerce & Advertising $ (4,674) $ (668) $ --
Web Design & Internet Access 581 -- --
Building Materials(1) (4,027) (1,011) 7,979
Life Insurance -- -- 280
Other (892) (2,383) (2,036)
--------- --------- ---------
Total $ (9,012) $ (4,062) $ 6,223
========== ========= =========
IDENTIFIABLE ASSETS:
E-Commerce & Advertising $ 248 $ -- $ --
Web Design & Internet Access 217 -- --
Building Materials(1) 14,995 290,832 281,398
Life Insurance -- -- 5,661
Other 10,942 23,073 22,755
--------- --------- ---------
Total $ 26,402 $ 313,905 $ 309,814
========= ========= =========
(1) Prior to July 1, 1996 and after September 30, 1998, the Company's balance
sheet and statements of operations reflect the Company's investment in Wickes on
the equity method.
(2) Includes $1,502,000, $1,473,000 and $1,448,000 for an interest allocation
from Riverside on its 13% subordinated notes for 1998, 1997 and 1996,
respectively.
F-32
<PAGE>
<TABLE>
<CAPTION>
Quarterly Results
1998
(in thousands, except per share amounts)
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------ -------
<S> <C> <C> <C> <C> <C>
Revenues $171,734 $238,999 $261,078 $ 953 $672,764
Costs and expenses 184,013 235,650 259,215 2,898 681,776
Earnings before income
taxes, equity in related
parties, minority interest
-------- -------- -------- -------- --------
and discontinued operations ($ 12,279) $ 3,349 $ 1,863 ($ 1,945) ($ 9,012)
Net loss ($ 5,098) ($ 274) ($ 1,574) ($ 5,361) ($ 12,307)
======== ======== ======== ======== ========
-------- -------- -------- ------- --------
Basic and diluted net loss, per common share $ (0.98) $ (0.05) $ (0.30) $ (1.03) $ (2.36)
======== ======== ======== ========= ========
Weighted average number
of common shares used
in computing loss per share 5,213,186 5,213,186 5,213,186 5,213,186 5,213,186
1997
(in thousands, except per share amounts)
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
Revenues $160,757 $240,296 $269,074 $226,118 $896,245
Costs and expenses 168,779 237,341 265,352 228,835 900,307
Earnings(loss) before income
taxes, equity in related
parties minority interest and
-------- -------- -------- -------- --------
discontinued operations ($ 8,022) $ 2,955 $ 3,722 ($ 2,717) ($ 4,062)
Net loss before dis-
continued operations ($ 4,139) ($ 393) ($ 417) ($ 872) ($ 5,821)
F-33
<PAGE>
Loss from discontinued
operations (267) (271) (93) (243) (388)
-------- -------- ------ ------- -------
Net loss ($ 4,406) ($ 664) ($ 510) ($ 629) ($ 6,209)
======== ======== ====== ======= =======
------- -------- ------- ------- -------
Basic and diluted net loss, per common share ($ 0.85) ($ 0.13) ($ 0.10) ($ 0.12) ($ 1.19)
======= ======== ======== ======= =======
Weighted average number of
common shares used in
computing loss per share 5,194,389 5,193,833 5,193,833 5,193,833 5,193,970
</TABLE>
F-34
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
of Wickes Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows present fairly, in all material respects, the financial position of Wickes
Inc. and its subsidiaries at December 26, 1998 and December 27, 1997, and the
results of their operations and their cash flows for each of the three years
ended December 26, 1998, December 27, 1997 and December 28, 1996, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material!
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Chicago, Illinois
February 23, 1999
WF-1
<PAGE>
WICKES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 26, 1998 and December 27, 1997
(in thousands except share data)
<TABLE>
<CAPTION>
1998 1997
---- ----
ASSETS
<S> <C> <C>
Current assets:
Cash $ 65 $ 79
Accounts receivable, less allowance for doubtful
accounts of $4,393 in 1998 and $3,765 in 1997 92,926 81,788
Notes receivable 1,095 3,200
Inventory 103,716 102,706
Deferred tax asset 8,857 8,955
Prepaid expenses 3,652 1,246
--------- ---------
Total current assets 210,311 197,974
--------- ---------
Property, plant and equipment, net 45,830 46,763
Trademark (net of accumulated amortization
of $10,496 in 1998 and $10,274 in 1997) 6,523 6,745
Deferred tax asset 17,205 17,054
Rental equipment (net of accumulated depreciation
of $572 in 1998 and $176 in 1997) 1,883 2,030
Other assets (net of accumulated amortization
of $9,502 in 1998 and $8,053 in 1997) 10,998 12,786
--------- ---------
Total assets $ 292,750 $ 283,352
========= =========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 16 $ 46
Accounts payable 54,017 41,190
Accrued liabilities 20,142 22,279
--------- ---------
Total current liabilities 74,175 63,515
--------- ---------
Long-term debt, less current maturities 191,961 193,061
Other long-term liabilities 2,952 2,775
Commitments and contingencies (Note 8)
Stockholders' equity (Note 9):
Preferred stock (no shares issued)
Common stock (8,207,268 shares issued and outstanding in 1998
and 8,176,205 shares issued and outstanding in 1997) 82 82
Additional paid-in capital 86,787 86,675
Accumulated deficit (63,207) (62,756)
--------- ---------
Total stockholders' equity 23,662 24,001
--------- ---------
Total liabilities & stockholders' equity $ 292,750 $ 283,352
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
WF-2
<PAGE>
WICKES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 26, 1998, December 27, 1997, and
December 28, 1996 (in thousands, except share data)
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
---- ---- ----
Net sales $ 910,272 $ 884,082 $ 848,535
Cost of sales 693,956 681,056 659,072
---------- --------- --------
Gross profit 216,316 203,026 189,463
---------- --------- --------
Selling, general and administrative expense 186,853 185,385 162,329
Depreciation, goodwill and trademark amortization 5,253 4,863 5,367
Provision for doubtful accounts 2,915 1,707 1,067
Restructuring and unusual items 5,932 (559) 745
Other operating income (6,837) (10,689) (6,796)
---------- --------- --------
194,116 180,707 162,712
---------- --------- --------
Income from operations 22,200 22,319 26,751
Interest expense 21,632 21,417 21,750
Equity in loss of affiliated company -- 1,516 3,183
---------- ---------- --------
Income (loss) before income taxes 568 (614) 1,818
Provision (benefit) for income taxes:
Current 1,072 1,099 1,010
Deferred (53) (153) 300
---------- --------- --------
Net (loss) income $ (451) $ (1,560) $ 508
========== ========= ========
Basic and diluted (loss)/income per common share $ (0.06) $ (0.19) $ .07
========= ========= ========
Weighted average common shares - for basic 8,197,542 8,168,257 7,207,761
========= ========= ========
Weighted average common shares - for diluted 8,197,542 8,168,257 7,221,082
========= ========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
WF-3
<PAGE>
WICKES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Years Ended December 28, 1996, December 27, 1997 and
December 26, 1998 (in thousands, except for share data)
<TABLE>
<CAPTION>
Additional Total
Common Stock Paid-in Accumulated
Stockholders'
Shares Amount Capital Deficit
Equity
- ------
<S> <C> <C> <C> <C> <C>
Balance at December 30, 1995 6,143,437 61 $ 76,772 $ (61,704) $ 15,129
Net income -- -- -- 508 508
Issuance of common stock, net 2,015,874 21 9,841 -- 9,862
--------- ---- -------- --------- --------
Balance at December 28, 1996 8,159,347 82 86,613 (61,196) 25,499
Net loss -- -- -- (1,560) (1,560)
Issuance of common stock, net 16,858 -- 62 -- 62
--------- ---- -------- --------- ---------
Balance at December 27, 1997 8,176,205 82 86,675 (62,756) 24,001
Net loss -- -- -- (451) (451)
Issuance of common stock, net 31,063 -- 112 -- 112
--------- ---- -------- --------- --------
Balance at December 26, 1998 8,207,268 82 $ 86,787 $ (63,207) $ 23,662
========= == ======== ========= ========
</TABLE>
WF-4
<PAGE>
The accompanying notes are an integral part of the consolidated financial
statements.
WF-5
<PAGE>
WICKES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Years Ended December 26, 1998, December 27,
1997, and December 28, 1996
(in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss)/income $ (451) $ (1,560) $ 508
Adjustments to reconcile net (loss)/income to
net cash provided by/(used in) operating activities:
Equity in loss of affiliated company -- 1,516 3,183
Depreciation expense 4,785 4,395 4,904
Amortization of trademark 222 222 222
Amortization of goodwill 246 246 242
Amortization of deferred financing costs 1,447 1,401 1,781
Provision for doubtful accounts 2,915 1,707 1,067
Gain on sale of assets (1,834) (6,180) (940)
Deferred tax (benefit)/provision (53) (153) 300
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (14,053) (12,285) 9,515
Decrease (increase) in notes receivable 2,105 (3,200) --
(Increase) decrease in inventory (1,010) (2,034) 9,967
Increase (decrease) in accounts payable and accrued liabilities 10,867 (4,590) (10,907)
Increase in deferred gain -- (670) --
Increase in prepaids and other assets (2,559) (3,369) (1,132)
--------- --------- --------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 2,627 (24,554) 18,710
--------- --------- --------
Cash flows from investing activities:
Purchases of property, plant and equipment (5,854) (7,758) (2,893)
Proceeds from sales of property, plant and equipment 4,231 13,798 5,303
--------- --------- --------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (1,623) 6,040 2,410
--------- --------- --------
Cash flows from financing activities:
Net (repayment) borrowing under revolving line of credit (1,084) 16,732 (28,708)
Reductions of note payable (46) (134) (428)
Net proceeds from issuance of common stock 112 62 9,862
--------- --------- --------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (1,018) 16,660 (19,274)
--------- --------- --------
NET (DECREASE) INCREASE IN CASH (14) (1,854) 1,846
Cash at beginning of period 79 1,933 87
--------- --------- --------
CASH AT END OF PERIOD $ 65 $ 79 $ 1,933
========= ========= ========
Supplemental schedule of cash flow information:
Interest paid $ 20,885 $ 19,791 $ 20,372
Income taxes paid 987 1,344 1,518
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
WF-6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
Wickes Inc. (formerly Wickes Lumber Company), through its sales and distribution
facilities, markets lumber, building materials and services primarily to
professional contractors, repair and remodelers and do-it-yourself home owners,
principally in the Midwest, Northeast and Southern United States. Wickes Inc.'s
wholly-owned subsidiaries are: Lumber Trademark Company ("LTC"), a holding
company for the "Flying W" trademark, and GLC Division, Inc. ("GLC"), which
subleases certain real estate to Wickes Inc.
In June 1997, the FASB issued SFAS Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information." This statement, effective
for financial statements for fiscal years beginning after December 15, 1997,
requires that a public business enterprise report financial and descriptive
information about its reportable operating segments. Generally, financial
information is required to be reported on the basis that it is used internally
for evaluating segment performance and deciding how to allocate resources to
segments. Based on this criteria, the Company has determined that it operates in
one business segment, that being the supply and distribution of lumber and
building materials to building professionals and do-it-yourself customers,
primarily in the Midwest, Northeast, and South. Thus, all information required
by SFAS No. 131 is included in the Company's financial statements. No single
customer represented more than 10% of the Company's total sales in 1998, 1997,
and 1996.
ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements present the results of operations,
financial position, and cash flows of Wickes Inc. and all its wholly-owned
subsidiaries (the "Company"). All significant intercompany balances have been
eliminated.
FISCAL YEAR
The Company's fiscal year ends on the last Saturday in December.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity date of
three months or less to be cash equivalents.
WF-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ACCOUNTS RECEIVABLE
The Company extends credit primarily to qualified contractors. The accounts
receivable balance excludes consumer receivables, as such receivables are sold
on a nonrecourse basis. The remaining accounts and notes receivable represent
credit extended to professional contractors and professional repair and
remodelers, generally on a non-collateralized basis.
INVENTORY
Inventory consists principally of finished goods. The Company utilizes the
first-in, first-out (FIFO) cost flow assumption for valuing its inventory.
Inventory is valued at the lower of cost or market, but not in excess of net
realizable value.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost and are depreciated under the
straight-line method. Estimated lives used range from 15 to 39 years for
buildings and improvements. Leasehold improvements are depreciated over the life
of the lease. Machinery and equipment lives range from 3 to 10 years.
Expenditures for maintenance and repairs are charged to operations as incurred.
Gains and losses from dispositions of property, plant, and equipment are
included in the Company's statement of operations as other operating income.
Once a facility is closed and the real estate is held for sale the Company
discontinues depreciation on the real estate.
RENTAL EQUIPMENT
Rental equipment consists of hand tools and power equipment held for rental.
This equipment is depreciated under the straight line method over a 5 to 10 year
life.
OTHER ASSETS
Other assets consist primarily of deferred financing costs and goodwill which
are being amortized on the straight line method, goodwill over 30 to 35 years
and deferred financing costs over the expected terms of the related debt
agreements.
The Company's investment in an international operation was recorded under the
equity method. The Company's share of losses is reflected as equity in loss of
affiliated company
WF-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
on the Consolidated Statements of Operations. As of December 27, 1997 the
Company's investment had been reduced to zero and there is no obligation to make
additional investments.
Amortization expense for deferred financing costs is reflected as interest
expense on the Company's Consolidated Statements of Operations.
TRADEMARK
The Company's "Flying W" trademark is being amortized over a 40-year period.
ACCOUNTS PAYABLE
The Company includes outstanding checks in excess of in-transit cash in accounts
payable. There was $8,232,000 in outstanding checks in excess of in-transit cash
at December 26, 1998 and $3,273.000 at December 27, 1997.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company provides certain health and life insurance benefits for eligible
retirees and their dependents. The Company accounts for the costs of these
postretirement benefits over the employees' working careers in accordance with
Statement of Financial Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions."
POSTEMPLOYMENT BENEFITS
The Company provides certain other postemployment benefits to qualified former
or inactive employees. The Company accounts for the costs of these
postemployment benefits in the period when it is probable that a benefit will be
provided in accordance with Statement of Financial Accounting Standards No. 112,
"Employers' Accounting for Postemployment Benefits."
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." Tax provisions and
credits are recorded at statutory rates for taxable items included in the
consolidated statements of operations regardless of the period for which such
items are reported for tax purposes. Deferred income taxes are recognized for
temporary differences between financial statement and income tax bases of assets
and liabilities for which income tax benefits will
WF-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
be realized in future years. Deferred tax assets are reduced by a valuation
allowance when the Company cannot make the determination that it is more likely
than not that some portion of the related tax asset will be realized.
EARNINGS PER COMMON SHARE
Earnings per common share is calculated in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings Per Share." Weighted average
shares outstanding have been adjusted for common shares underlying options and
warrants.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from the estimates reported.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates assets held for use and assets to be disposed of in
accordance with Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
This statement requires that long-lived assets and certain identifiable
intangibles held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. There was no impairment of the Company's long-lived and
intangible assets other than assets held for sale which has been provided for.
The Company has historically reviewed excess property held for sale and when
appropriate recorded these assets at the lower of their carrying amount or fair
value (see Note 5).
STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," encourages, but does not require companies to recognize
compensation expense for grants of stock, stock options, and other equity
instruments to employees based on fair value accounting rules. Although expense
recognition for employee stock-based compensation is not mandatory, the
pronouncement requires companies that choose not to adopt the fair value
accounting to disclose the pro forma net income and earnings per share under the
new method. The Company elected not to adopt Statement
WF-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
of Financial Accounting Standards No. 123, but to continue to apply APB Opinion
25. As required, the Company has disclosed the pro forma net income and pro
forma earnings per share as if the fair value based accounting methods in this
Statement had been used to account for stock-based compensation cost (see Note
9).
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.
3. RESTRUCTURING AND UNUSUAL CHARGES
During the fourth quarter of 1995, the Company committed to and began
implementing a restructuring plan ("1995 Plan") to improve return on assets by
closing or consolidating under-performing operating centers, decreasing the
corresponding overhead to support these building centers, and initiating actions
to strengthen its capital structure. The costs for closing these building
centers were based on management estimates of costs to exit these markets and
actual historical experience. Included in 1995 results of operations is a $17.8
million charge, including $12.6 million in anticipated losses on the disposition
of closed center assets and liabilities and $2.2 million in severance and
postemployment benefits, relating to the 1995 Plan and other one time costs.
The major components of this charge include the write-down of assets to their
net realizable value, liabilities associated with closed building centers held
for sale, postemployment benefits to qualified former employees as a result of
the center closings, and other charges related to the strengthening of the
Company's capital structure. Also included was a charge for unusual employment
related claims expensed in the fourth quarter of 1995.
During 1996, the Company continued executing the 1995 Plan, through the
consolidation and closing of 18 building centers and the improvement of its
overall capital structure through the issuance of new shares and the
modification of its bank revolving credit agreement.
WF-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
After extensive review of the 1995 Plan, and changes in business conditions in
certain markets in which the Company operates, the Company made adjustments to
the 1995 Plan and incurred other one time costs resulting in a net $0.7 million
charge to results of operations in the fourth quarter of 1996 for restructuring
and unusual items. These adjustments included (i) the determination that three
of the centers identified in the 1995 Plan for closure had significantly
improved market conditions and would remain open, resulting in a $1.5 million
credit to restructuring expense, (ii) the extension of the 1995 plan to include
the closing (substantially completed by the end of 1996) of three building
centers not previously included, resulting in a $1.3 million charge for the
write down of working capital assets and liabilities to their net realizable
value and a $0.1 million charge for severance and postemployment benefits for
approximately 90 employees, (iii) a $1.1 million charge for impairment in the
carrying value of real estate held for sale at four previously closed centers,
and (iv) a $0.3 million credit with respect to the resolution of a claim below
the reserved amount.
During 1997, the Company recorded a $1.5 million restructuring charge for
discontinued programs and reductions in its corporate headquarters workforce.
The $1.5 million included approximately $0.9 million for severance and
postemployment benefits for approximately 25 headquarters employees. The
discontinued programs included the Company's mortgage lending, utilities
marketing and certain internet programs. This charge was offset by a $2.1
million reduction in accrued costs for the Company's 1995 Plan, which was
completed. The $2.1 million reversal included four centers identified in the
1995 Plan for closure that had significantly improved market conditions and
would remain open, as well as a change in the estimate of facility carrying
costs for sold facilities and those remaining to be sold.
During the first quarter of 1998 the Company implemented a restructuring plan
(the "1998 Plan") which resulted in the closing or consolidation of eight sales
and distribution and two manufacturing facilities in February, the sale of two
sales and distribution facilities in March, and further reductions in
headquarters staffing. As a result of the 1998 Plan, the Company recorded a
restructuring charge of $5.4 million in the first quarter and an additional
charge of $0.5 million in the third quarter. The $5.9 million charge included
$4.1 million in estimated losses on the disposition of closed facility assets
and liabilities, $2.1 million in severance and postemployment benefits related
to the 1998 plan, and a benefit of $300,000 for adjustments to prior years'
restructuring accruals. The $4.1 million in estimated losses includes the
write-down of assets (excluding real estate), to their net realizable value, of
$3.4 million and $700,000 in real estate carrying costs. The $2.1 million in
severance and postemployment benefits covered approximately 250 employees, 25 of
which were headquarters 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
WF-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
sales of previously closedfacilities during the fourth quarter of 1997 and first
quarter of 1998. The acceleration of these sales resulted in a change in the
estimate of facility carrying costs for the sold facilities. At December 26,
1998 the accrued liability for restructuring had been reduced to zero.
For further information regarding the sale of closed center real estate see Note
5.
4. ACQUISITIONS
During 1998 the Company acquired the operating assets of Eagle Industries Inc.,
a component manufacturer, for a total cost of $1.8 million in cash. The
acquisition was accounted for as a purchase and the cost has been allocated on
the basis of the fair market value of the assets acquired and liabilities
assumed. These operations have been included in the accompanying consolidated
financial statements from their date of acquisition. The Company had no
acquisitions in 1997 or 1996.
5. PROPERTY, PLANT, AND EQUIPMENT
Property, plant and equipment is summarized as follows:
December 26, December 27,
1998 1997
---- ----
(in thousands)
Land and improvements $12,115 $12,781
Buildings 26,341 27,584
Machinery and equipment 32,257 30,619
Leasehold improvements 3,059 2,584
Construction in progress 846 844
--------- ---------
Gross property, plant, and equipment 74,618 74,412
Less: accumulated depreciation (32,661) (31,178)
--------- ---------
Property, plant, and equipment
in use, net 41,957 43,234
Assets held for sale, net 3,873 3,529
--------- ---------
Property, plant, and equipment, net $45,830 $46,763
========= =========
WF-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SALE OF REAL ESTATE
Except for the sale/leaseback of the Company's Succasunna, NJ sales and
distribution facility in 1997, which included a $3,000,000 note receivable that
was collected within 60 days, all sales of real estate have been for cash.
In 1998, the Company sold nine pieces of real estate, eight of which were sales
and distribution facilities and one an excess parcel of land, for a net gain of
$1.6 million. Eight of the properties sold had been held for sale since the
first quarter of 1998 and had not been previously written down from their
original net book value. The ninth property, which had been held for sale since
1989, had been previously written down by $709,000 from its original net book
value and sold at a net loss of $59,000.
In 1997, the Company sold 12 pieces of real estate for a net gain of $6.0
million. These transactions included the sale/leaseback of the Company's
headquarters and the Succasunna sales and distribution facility and the sale of
nine sales and distribution facilities and one excess parcel of land. Of the
properties sold, one sales and distribution facility was held for sale since
1989, had been previously written down $99,600 from its original net book value,
and sold at a loss of $100,400. The other 11 properties had not been previously
marked down from book value and had been held for sale since 1992 (2
properties), 1995 (4 properties), 1996 (2 properties) and 1997 (3 properties).
In 1996, the Company sold six sales and distribution facilities for a net gain
of $1.7 million. None of these properties had been previously written down from
their original net book value. Five had been held for sale since 1995, and one
since 1990.
The Company reviews assets held for sale in accordance with Statement of
Financial Accounting Standards No. 121. In 1997 and 1996 the Company recorded
losses of $156,000 and $1,065,000, to report land, land improvements and
buildings held for sale at their fair value. The Company did not record any
impairment to the cost of assets held for sale in 1998. Fair value is determined
by local market real estate values of properties similar to the Company's excess
real estate. These charges are included in the caption "restructuring and
unusual items" on the Consolidated Statement of Operations. Of the five
properties that were revalued in 1997 and 1996 two have sold at a net loss and
three are still held for sale.
WF-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ACCRUED LIABILITIES
Accrued liabilities consist of the following:
December 26, December 27,
1998 1997
(in thousands)
Accrued payroll $ 9,498 $ 8,148
Accrued interest 667 1,367
Accrued liability insurance 4,966 4,173
Accrued restructuring charges -- 1,348
Other 5,011 7,243
--------- ---------
Total accrued liabilities $ 20,142 $ 22,279
========= =========
WF-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. LONG-TERM DEBT
Long-term debt obligations are summarized as follows:
December 26, December 27,
1998 1997
(in thousands)
Revolving line of credit, interest payable
at .75% above prime or 2.25% over LIBOR,
principal due March 31, 2001 $ 91,961 $ 93,045
Senior subordinated notes, interest payable
at 11-5/8% semi-annually, principal due
December 15, 2003 100,000 100,000
Other 16 62
--------- ---------
Total long-term debt 191,977 193,107
Less current maturities (16) (46)
--------- ---------
Total long-term debt less current maturities $ 191,961 $ 193,061
========= =========
REVOLVING LINE OF CREDIT
At December 26, 1998 the Company had a revolving line of credit, which was to
expire on March 31, 2001. Under this line of credit the Company could borrow
against certain levels of accounts receivable and inventory, up to a maximum
credit limit of $130,000,000. At December 26, 1998, the amount available for
additional borrowing was $32,680,000. A commitment fee of 1/2 of 1% was payable
on the unused portion of the commitment. The weighted-average interest rate for
the years ending December 26, 1998 and December 27, 1997 was approximately 8.2%
and 8.8% respectively.
Substantially all of the Company's accounts receivable, inventory, general
intangibles and certain machinery and equipment were pledged as collateral for
the revolving line of credit. Covenants under the related debt agreements
required, among other restrictions, that the Company maintain certain financial
ratios and certain levels of consolidated net worth. In addition, the debt
agreement restricted among other things, capital expenditures, the incurrence of
additional debt, asset sales, dividends, investments, and acquisitions without
prior approval from the lender.
WF-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The revolving credit agreement was amended and restated on April 11,1997. Among
other things, the amendment and restatement (i) extended the term of the
facility to March 2001, (ii) reduced the interest rate premiums over LIBOR and
over prime by 75 basis points, (iii) included provisions for further interest
rate premium reductions if certain performance levels are achieved, (iv)
modified certain covenants, and (v) provided for increases in the amount of
capital expenditures allowed by the agreement equal to the proceeds received
from the sale of certain excess real estate.
On June 16, 1997 the Company entered into an interest rate swap agreement which
effectively fixed the interest rate at 8.11% (subject to adjustments in certain
circumstances), for three years, on $40 million of the Company's borrowings
under its floating rate revolving line of credit (see Note 12).
On December 24, 1997, the second amended and restated revolving credit agreement
was amended to incorporate, among other things, a reduction in the fixed charge
and net worth levels for the fourth quarter of 1997 and first quarter of 1998.
On February 17, 1999 the Company repaid all indebtedness under this line of
credit with the proceeds of a new revolving credit agreement (see Note 15).
SENIOR SUBORDINATED NOTES
On October 22, 1993, the Company issued $100,000,000 in principal amount of
10-year unsecured senior subordinated notes. Interest on the notes is 11-5/8%,
payable semi-annually. Covenants under the related indenture restrict among
other things, the payment of dividends, the prepayment of certain debt, the
incurrence of additional debt if certain financial ratios are not met, and the
sale of certain assets unless the proceeds are applied to the notes. In
addition, the notes require that, upon a change in control of the Company, the
Company must offer to purchase the notes at 101% of the principal thereof, plus
accrued interest.
AGGREGATE MATURITIES
The aggregate amounts of long-term debt maturities, before giving effect to the
new revolving credit agreement, by fiscal year are as follows:
Year Amount
(in thousands)
1999 $ 16
2000 --
2001 91,961
WF-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2002 --
2003 100,000
8. COMMITMENTS AND CONTINGENCIES
At December 26, 1998, the Company had accrued approximately $152,000 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
the Company contained underground petroleum storage tanks. All such tanks known
to the Company located on facilities owned or operated by the Company 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, the Company has found petroleum contamination of
soil and ground water on several of these sites and has taken, and expects to
take, remedial actions with respect thereto. In addition, it is possible that
similar contamination may exist on properties no longer owned or operated by the
Company the remediation of which the Company could under certain circumstances
be held responsible. Since 1988, the Company has incurred approximately $2.0
million of costs, net of insurance and regulatory reco!veries, 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. The Company has currently
reserved $60,000 for estimated clean up costs at 15 of its locations.
The Company 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 the Company's prior
experience, the Company has established a reserve of $45,000 for these matters.
The Company 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 the Company has no connection other than as a customer. The Company has
entered into a cost sharing agreement with its insurers, and any liability is
expected to be minimal.
The Company 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
WF-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
law firms. The Company is aggressively defending these actions and does not
believe that these actions will have a material adverse effect on the Company.
Since 1993, the Company has settled 16 similar actions for insignificant
amounts, and another 186 of these actions have been dismissed. As of March 15,
1999 none of these suits have made it to trial.
Losses in excess of the $152,000 reserved as of December 26, 1998 are possible
but an estimate of these amounts cannot be made.
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 the Company in 1996 of 2 million
newly-issued shares of the Company's Common Stock to Riverside Group, Inc., the
Company's largest stockholder, was unfair and constituted a waste of assets and
that the Company's directors in connection with the transaction breached their
fiduciary duties. The amended complaint, among other things, seeks on behalf of
a purported class of the Company's shareholders equitable relief or to obtain
unspecified d!amages with respect to the transaction (see Note 9). There was no
activity in this suit in 1998.
The Company is involved in various other legal proceedings which are incidental
to the conduct of its business. The Company does not believe that any of these
proceedings will have a material adverse effect on the Company's financial
position, results of operations or liquidity.
LEASES
The Company has entered into operating leases for corporate office space, retail
space, equipment and other items. These leases provide for minimum rents. These
leases generally include options to renew for additional periods. Total rent
expense under all operating leases was $12,193,000, $10,616,000, and $10,076,000
for the years ended December 26, 1998, December 27, 1997, and December 28, 1996,
respectively.
Future minimum commitments for noncancelable operating leases are as follows:
Year Amount
(in thousands)
1999 $ 8,821
2000 6,972
WF-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2001 5,688
2002 4,745
2003 2,878
Thereafter 24,478
--------
Subtotal $ 53,582
Less: Sublease income (10,995)
--------
Total $42,587
========
9. STOCKHOLDERS' EQUITY
PREFERRED STOCK
As of December 26, 1998 the Company had authorized 3,000,000 shares of preferred
stock, none of which is issued or outstanding.
COMMON STOCK
The Company currently has one class of common stock: Common Stock, par value
$.01 per share. In April 1998 all 499,768 outstanding shares on Class B
Non-Voting Common Stock were converted to 499,768 shares of Common Stock. The
Class B Non-Voting Common Stock ceased to be authorized in April 1998. At
December 26, 1998 there were 20,000,000 shares of Common Stock authorized and
8,207,268 shares issued and outstanding. In addition, at December 26, 1998,
898,986 shares of Common Stock were reserved for issuance under the Company's
1993 Long-Term Incentive Plan and 1993 Director Incentive Plan.
PRIVATE SALE OF COMMON STOCK
On June 20, 1996, pursuant to a stock purchase agreement dated January 11, 1996,
the Company sold 2,000,000 newly-issued shares of its Common Stock to Riverside
Group, Inc., the Company's largest stockholder, for $10 million in cash. Prior
to the sale the terms of the stock purchase agreement were reviewed and
recommended to the boards of directors of both companies by committees comprised
of the independent directors of each company.
WARRANTS
The Company's unexercised outstanding warrants for 3,068 shares of Common Stock
expired in May 1998 and as of December 26, 1998 there were no warrants
outstanding nor Common Stock reserved for issuance under warrants.
WF-20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STOCK COMPENSATION PLANS
As of December 26, 1998, the Company has two stock-based compensation plans
(both fixed option plans), which are described below. Under the 1993 Long-Term
Incentive plan as amended on November 30, 1994, the Company may grant options
and other awards to its employees with respect to up to 835,000 shares of common
stock. Under the 1993 Director Incentive plan, the Company may grant options and
other awards to directors with respect to up to 75,000 shares. The exercise
price of grants equals or exceeds the market price at the date of grant. The
options have a maximum term of 10 years. For non-officers, the options generally
become exercisable in equal installments over a three year period from the date
of grant. For officers, the vesting periods are based on graded calendar year
schedules, which can vary by officer.
Since the Company applies APB Opinion 25 and related interpretations in
accounting for its plans, no compensation cost has been recognized in
conjunction with these plans. Had compensation cost for the Company's
stock-based compensation plans been determined consistent with FASB Statement
123, the Company's net income and earnings per share would have been reduced to
the pro forma amounts indicated below (in thousands, except per share data):
Year 1998 1997 1996
- ---- ---- ---- ----
Net (loss) income As reported $ (451) $(1,560) $ 508
Pro forma $ (568) $(1,772) $ 321
Basic and diluted As reported $ (.06) $ (.19) $ .07
(loss) earnings Pro forma $ (.07) $ (.22) $ .04
per share
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1998, 1997, and 1996, respectively: dividend
yield of 0% for all years, expected volatility of 48%, 43%, and 42%; risk-free
interest rates of 5.6%, 6.6%, and 6.2%; and expected lives of 5.6, 6.6, and 6.5
years.
A summary of the status of the Company's fixed stock option plans as of December
26, 1998, December 27, 1997, and December 28, 1996 and changes during the years
ended on those dates is presented as follows:
WF-21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Fixed Options Shares Price Shares Price Shares Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding beginning
of year 668,283 $ 10.09 612,282 $ 10.94 446,686 $ 15.32
Granted 238,750 $ 3.45 108,350 $ 5.12 264,721 $ 4.60
Exercised (11,014) $ 4.55 -- n/a -- n/a
Forfeited-nonvested (97,070) $ 9.71 (46,981) $ 8.22 (59,793) $ 13.18
Forfeited-exercisable (64,686) $ 9.71 (5,168) $ 22.36 (36,632) $ 15.32
Expired -- n/a -- n/a -- n/a
Canceled -- n/a (200) $ 15.00 (2,700) $ 5.12
------- ------- -------
Outstanding end
of year 734,263 $ 7.67 668,283 $ 10.09 612,282 $ 10.94
Options exercisable
at year end 256,627 $ 11.39 214,402 $ 14.26 146,775 $ 15.60
Options available for
future grant at
year end 164,723 241,717 297,718
</TABLE>
Weighted-average fair value of options granted during the year where:
1998 1997 1996
---- ---- ----
Exercise price equals market price $1.62 $2.77 $2.40
Exercise price exceeds market price n/a n/a n/a
Exercise price is less than market price n/a n/a n/a
WF-22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information about fixed stock options outstanding
at December 26, 1998:
Options Outstanding Options Exercisable
------------------- -------------------
Weighted-
Average Weighted- Weighted-
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices at 12/26/98 Life Price at 12/26/98 Price
$ 3.06 - $ 5.75 503,640 8.47 years $ 4.16 93,304 $ 4.18
$10.95 - $23.25 230,623 5.71 years $ 15.36 163,323 $ 15.51
EARNINGS PER SHARE
The Company calculates earnings per share in accordance with Statement of
Financial Accounting Standards No. 128. As required by this statement the
Company has adopted the new standards for computing and presenting earnings per
share for 1997, and for all prior period earnings per share data presented. The
following is the reconciliation of the numerators and denominators of the basic
and diluted earnings per share:
1998 1997 1996
---- ---- ----
Numerators:
Net (loss) income - for basic and
diluted EPS $(451,000) $(1,560,000) $508,000
========== ============ ========
Denominators:
Weighted average common
shares - for basic EPS 8,197,542 8,168,257 7,207,761
Common shares from warrants - 6,913 10,751
Common shares from options 51,425 13,250 2,570
---------- ----------- ---------
Weighted average common
shares - for diluted EPS 8,248,967 8,188,420 7,221,082
========== =========== =========
In years where net losses are incurred, diluted weighted average common shares
are not used in the calculation of diluted EPS as it would have an anti-dilutive
effect on EPS. In addition, options to purchase 348,000, 385,000 and 302,000
weighted average shares of common stock during 1998, 1997 and 1996,
respectively, were not included in the diluted EPS as the options' exercise
prices were greater than the average market price.
WF-23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EMPLOYEE BENEFIT PLANS
401(K) PLAN
The Company sponsors a defined contribution 401(k) plan covering substantially
all of its full-time employees. Additionally, the Company provides matching
contributions up to a maximum of 2.5% of participating employees' salaries and
wages. Total expenses under the plan for the years ended December 26, 1998,
December 27, 1997, and December 28, 1996 were $1,480,000, $1,606,000, and
$1,392,000, respectively.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company provides life and health care benefits to retired employees.
Generally, employees who have attained an age of 60, have rendered 10 years of
service and are currently enrolled in the medical benefit plan are eligible for
postretirement benefits. The Company accrues the estimated cost of retiree
benefit payments, other than pensions, during the employee's active service
period.
The following tables reconcile the postretirement benefit, the plan's funded
status and actuarial assumptions, as required by Statement of Financial
Accounting Standard No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits."
<TABLE>
<CAPTION>
December 26, December 27,
1998 1997
---- ----
<S> <C> <C>
(in thousands)
Change in accumulated postretirement benefit obligation:
Benefit obligation at beginning of year $ 2,578 $ 3,290
Service cost 233 197
Interest cost 170 176
Participant contributions -- --
Claims paid (216) (265)
Actuarial gains ( 16) (751)
Plan amendments -- (69)
-------- --------
Benefit obligation at year end $ 2,749 $ 2,578
======== ========
Change in plan assets:
Fair value of plan assets -- --
Reconciliation of funded status:
Funded status $ (2,749) $ (2,578)
Unrecognized transition obilgation -- --
WF-24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unrecognized prior service cost (49) (59)
Unrecognized actuarial gain (154) (138)
-------- --------
Net amount recognized as other
long-term liabilities $(2,952) $ (2,775)
======== ========
Weighted average assumptions as of year end:
Discount rate 6.75% 7.25%
Expected return on assets n/a n/a
Medical trend 6.00% 6.00%
</TABLE>
<TABLE>
<CAPTION>
December 26, December 27, December 28,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
(in thousands)
Components of net periodic benefit cost:
Service cost $ 233 $ 197 $ 276
Interest cost 171 176 210
Expected return on plan assets n/a n/a n/a
Amortization of transition obligation -- -- --
Amortization of prior service co (10) (10) --
Amortization of actuarial loss -- -- 33
----- ----- ----
Net periodic benefit cost $ 394 $ 363 $ 519
===== ===== =====
December 26, December 27, December 28,
1998 1997 1996
---- ---- ----
(in thousands)
Weighted average assumptions used in computing net periodic benefit cost:
Discount rate 7.25% 7.75% 7.25%
Expected return on plan assets n/a n/a n/a
Medical trend 6.00% 6.00% 6.00%
Health care cost trend sensitivity: 1% Increase 1% Decrease
----------- -----------
Effect on total service cost and
interest cost components $ 17 $ (16)
Effect on postretirement benefit obligatio 57 (54)
</TABLE>
WF-25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
POSTEMPLOYMENT BENEFITS
The Company provides certain postemployment benefits to qualified former or
inactive employees who are not retirees. These benefits include salary
continuance, severance, and healthcare. Salary continuance and severance pay is
based on normal straight-line compensation and is calculated based on years of
service. Additional severance pay is granted to eligible employees who are 40
years of age or older and have been employed by the Company five or more years.
The Company accrues the estimated cost of benefits provided to former or
inactive employees who have not yet retired over the employees' service period
or as an expense at the date of the event triggering the benefit. The Company
incurred postemployment benefit income of $39,000, $28,000 and $31,000 for the
years ended December 26, 1998, December 27, 1997 and December 28, 1996,
respectively. The decrease in benefits is the result of the winding down of a
more costly long-term disability program that was !in place prior to April 1993.
11. INCOME TAXES
The Company and its subsidiaries file a consolidated federal income tax return.
As of December 26, 1998, the Company has net operating loss carryforwards
available to offset income of approximately $43.3 million expiring in the years
2005 through 2018.
On October 22, 1993, the Company completed a recapitalization plan which created
an ownership change as defined by Section 382 of the Internal Revenue Code of
1996. As a result, certain of the loss carryforwards of the company are limited
to an annual limitation of approximately $2.6 million a year. At December 26,
1998, approximately $7.5 million of these loss carryforwards were affected by
this limitation.
The income tax provision consists of both current and deferred amounts. The
components of the income tax provision are as follows:
December 26, December 27, December 28,
1998 1997 1996
---- ---- ----
(in thousands)
Taxes currently payable:
State income tax $ 1,072 $ 1,099 $ 1,010
Federal income tax -- -- --
Deferred (benefit)/expense (53) (153) 300
-------- -------- --------
Total income tax expense $ 1,019 $ 946 $ 1,310
======== ======== ========
WF-26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Tax provisions and credits are recorded at statutory rates for taxable items
included in the consolidated statements of operations regardless of the period
for which such items are reported for tax purposes. Deferred income taxes
reflect the net effects of temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used for
income tax purposes. Management has determined, based on the Company's positive
earnings growth from 1992 through 1994 and its expectations for the future, that
operating income of the Company will more likely than not be sufficient to
recognize fully its net deferred tax assets. The components of the deferred tax
assets and liabilities at December 26, 1998, December 27, 1997 and December 28,
1996, respectively, are as follows:
<TABLE>
<CAPTION>
December 26, December 27, December 28,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
(in thousands)
Deferred income tax assets:
Trade accounts receivable $ 1,727 $ 1,469 $ 1,676
Inventories 1,813 1,895 1,954
Accrued personnel cost 2,037 2,013 1,936
Other accrued liabilities 6,051 6,743 6,911
Net operating loss 16,874 16,164 16,556
Other 3,337 3,348 2,342
------- ------- -------
Gross deferred income tax assets 31,839 31,632 31,375
Less: valuation allowance (1,542) (1,542) (1,493)
-------- -------- -------
Total deferred income tax assets 30,297 30,090 29,882
-------- -------- -------
Deferred income tax liabilities:
Property, plant and equipment 1,312 1,394 1,962
Goodwill and trademark 2,923 2,687 2,052
Other accrued income items -- -- 13
-------- --------- -------
Total deferred income tax liabilities 4,235 4,081 4,027
-------- --------- -------
Net deferred tax assets $26,062 $26,009 $25,855
======= ======= =======
The deferred tax provision results from temporary differences in the recognition
of certain items of revenue and expense for tax and financial reporting
purposes. The sources of these differences and the tax effect of each are as
follows:
WF-27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 26, December 27, December 28,
1998 1997 1996
---- ---- ----
(in thousands)
Change in bad debt reserve $ 258 $ (207) $ (1,517)
Differences in tax and book
inventory (82) (60) (491)
Settlement of deferred
compensation 25 77 86
Change in accrued liabilities (692) (168) (5,130)
(Utilization)/creation of NOL 710 (392) 6,700
AMT credit and capital loss
carryover -- 1,006 942
Differences in tax and book
asset basis 82 568 (56)
Differences in book and tax
intangibles (248) (635) (704)
Change in accrued income items -- 13 13
(Increase)/decrease in valuation
allowance -- (49) (143)
-------- -------- --------
Deferred tax benefit/(expense) $ 53 $ 153 $ (300)
======== ======== =========
The following table summarizes significant differences between the provision for
income taxes and the amount computed by applying the statutory federal income
tax rates to income before taxes:
December 26, December 27, December 28,
1998 1997 1996
---- ---- ----
(in thousands)
Tax (benefit) computed at
U.S. statutory tax rate $ 199 $ (215) $ 637
State and local taxes 697 714 656
Other 123 398 (126)
Change in valuation allowance -- 49 143
-------- -------- ---------
Total tax provision $ 1,019 $ 946 $ 1,310
======== ======== =========
</TABLE>
12. FINANCIAL INSTRUMENTS
The Company uses financial instruments in its normal course of business as a
tool to manage its assets and liabilities. The Company does not hold or issue
financial instruments for trading purposes. Gains and losses relating to hedging
contracts are
WF-28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
deferred and recorded in income or as an adjustment to the carrying value of the
asset at the time the transaction is complete. Payments or receipts of interest
under the interest rate swap arrangement are accounted for as an adjustment to
interest expense. The fair value of such financial instruments is determined
through dealer quotes.
The estimated fair values of the Company's material financial instruments are as
follows:
LONG TERM DEBT
The fair value of the Company's long-term debt, in accordance with SFAS No. 107,
is estimated based on the quoted market prices for the same or similar issues or
on the current rates offered to the Company for debt of the same remaining
maturities.
WF-29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair Carrying
Value Value
(in thousands)
1998 Financial Liabilities:
Long-term Debt
Revolver $ 91,961 $ 91,961
Senior Subordinated Notes 84,000 100,000
1997 Financial Liabilities:
Long-term Debt
Revolver $ 93,045 $ 93,045
Senior Subordinated Notes 95,000 100,000
LUMBER FUTURES CONTRACTS
The Company enters into lumber futures contracts as a hedge against future
lumber price fluctuations. All futures contracts are purchased to protect
long-term pricing commitments on specific future customer purchases. At December
26, 1998 the Company had 22 lumber futures contracts outstanding with a total
market value of $1,397,000 and a net unrealized gain of $1,976. These contracts
all mature in 1999.
INTEREST RATE SWAP
At December 26, 1998 the Company had in place an interest rate swap agreement
which effectively fixed the interest rate on $40 million of the Company's
borrowings under its floating rate revolving line of credit at 8.11% (subject to
adjustments in certain circumstances), for three years. This interest rate swap
was operative while the 30-day LIBOR borrowing rate remained below 6.7%. The
agreement also included a floor LIBOR rate at 4.6%. At December 23, 1998 the
30-day LIBOR borrowing rate was 5.625%. The fair value of the interest rate swap
agreement, in accordance with SFAS No. 107, at December 26, 1998 was a negative
$400,000.
On February 17, 1999, in conjunction with the Company's new revolving credit
agreement (see Note 15), the Company terminated its interest rate swap agreement
and entered into a new interest rate swap agreement. This new agreement
effectively fixed the interest rate at 7.75% (subject to adjustments in certain
circumstances), reduced from 8.11% under the old agreement, for three years, on
$40 million of the Company's borrowings under its floating rate revolving line
of credit. Unlike the prior agreement, this interest rate swap has no provisions
for termination based on changes in the 30-day LIBOR borrowing rate.
WF-30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. RELATED PARTY TRANSACTIONS
In February 1998, as part of the determination made by the Company to
discontinue or sell non-core programs, the Company sold certain operations to
its majority stockholder 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 December 26, 1998 this stockholder had made payments of
$115,752 under the promissory note and was delinquent with respect to required
payments of approximately $169,474 of principal and interest.
In 1998, the Company paid approximately $730,000 in reimbursements primarily to
affiliates of the Company's chairman, for costs related to services provided to
the Company during 1998 by certain employees of the affiliated company and use
of a corporate aircraft. Total payments in 1997 and 1996 for similar services
were approximately $1,289,000 and $612,000, respectively.
In June of 1996, the Company entered into a mortgage lending agreement with an
affiliate of the Company's chairman. In exchange for providing home construction
loans to the Company's customers the Company reimbursed this affiliate for
certain start-up expenses. Reimbursements in 1998, 1997 and 1996 were
approximately $115,000, $1,045,000 and $365,000, respectively, and were expensed
as incurred. In late 1997, this affiliate's involvement in the program ceased.
A former director and executive officer of the Company was during most of 1998,
and all of 1997 and 1996, a shareholder of the law firm that is general counsel
to the Company. The Company paid this firm $741,000, $665,000, and, $430,000 for
legal services provided to the Company during 1998, 1997, and 1996,
respectively.
For a description of the sale of 2,000,000 newly-issued shares by the Company to
Riverside Group, Inc. in 1996, see Note 9.
OTHER OPERATING INCOME
Other operating income on the Company's Statement of Operations includes the
sale or disposal of property, plant and equipment, service charges assessed
customers on past due accounts receivables and casualty gains/losses. The sale
of property, plant and equipment includes the sale of 9, 12, and 6 pieces of
real estate in 1998, 1997 and 1996, respectively. In 1998 and 1996, gains of
$1.0 million and $0.6 million, respectively, were recorded as a result of the
differences between insured replacement cost and net book value resulting from
fire and storm damage at certain of the Company's sales and distribution
WF-31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
facilities. The following table summarizes the major components of other
operating income by year.
Other Operating Income
Gain/(Loss)
1998 1997 1996
---- ---- ----
(in thousands)
Sale of property, plant and equipment $2,111 $ 6,180 $2,005
Accounts receivable service charges 2,331 2,170 2,064
Casualties 670 (284) 350
Other 1,725 2,623 2,377
----- ----- -----
Total $6,837 $10,689 $6,796
====== ======= ======
SUBSEQUENT EVENTS
NEW REVOLVING CREDIT AGREEMENT
On February 17, 1999 the Company entered into a new revolving credit agreement
with a group of financial institutions. The new revolving line of credit
provides for, subject to restrictions discussed below, up to $160 million of
revolving credit loans and credits.
A commitment fee of 0.25% is payable on the unused amount of the new revolving
line of credit. Until delivery to the lenders of the Company's financial
statements for the period ending June 26, 1999, interest on amounts outstanding
under the new revolving line of credit will bear interest at a spread above the
base rate of BankBoston, N.A. of 0.50%, or 2.00% above the applicable LIBOR
rate. After that time, depending upon the Company's rolling four-quarter
interest coverage ratio, amounts outstanding under the new revolving line of
credit will bear interest at a spread above the base rate of from 0% to 0.75% or
from 1.50% to 2.25% above the applicable LIBOR rate.
Substantially all of the Company's accounts receivable, inventory and general
intangibles are pledged as collateral for the new revolving line of credit.
Availability is limited to 85% of eligible accounts receivable plus 60% of
eligible inventory, with these percentages subject to change in the permitted
discretion of the agent for the lenders. Covenants under the related debt
documents require, among other things, that the Company maintain unused
availability under the new revolving line of credit of at least $15 million
(subject to increase in certain circumstances) and maintain certain levels of
tangible capital funds. In addition, these documents restrict, among other
things, capital expenditures, the incurrence of additional debt, asset sales,
dividends, investments, and acquisitions.
WF-32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In conjunction with the new revolving credit agreement, the Company terminated
its existing interest rate swap agreement and entered into a new interest rate
swap agreement (see Note 12).
WF-33
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders,
Riverside Group, Inc.:
Our report on the consolidated financial statements of Riverside Group, Inc. and
subsidiaries is included on page F-1 of this Form 10-K. In connection with our
audits of such financial statements, we have also audited the related financial
statement schedules listed in the index on page ___ of this Form 10-K.
In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic consolidated financial statements taken as a
whole, present fairly, in all material respects, the information required to be
included therein.
.
Pricewaterhouse Coopers L.L.P.
Jacksonville, Florida
March 31, 1999
S-1
Riverside Group, Inc. and Subsidiaries
<PAGE>
Schedule II - Valuation and Qualifying
Accounts for the Years Ended December 31, 1998 and
December 31, 1997
(dollars in thousands)
<TABLE>
<CAPTION>
Col.A Col.B Col.C Col.C Col.D Col.E
Additions Additions
Balance at Charged to Charged to Balance at
Beginning of Costs and Other Deduct- End of
Description Period Expenses(1) Accounts(2) ions(3) Period
<S> <C> <C> <C> <C> <C>
1998:
Allowance for
doubtful
accounts.......... $4,206 $ 97 $ -- $3,966 $ 337
1997:
Allowance for
doubtful
accounts.......... $4,318 $2,148 $(190) $2,070 $4,206
(1) Net of reserved and collected amounts.
(2) Allowance for doubtful accounts charged to restructuring reserve. (3)
(a)Represents the balance of allowance for doubtful accounts
pertaining to Wickes Inc.
(b) Reserved accounts written off.
</TABLE>
S-2
<PAGE>
Schedule III
Riverside Group, Inc. (Parent Only)
Condensed Financial Information of Registrant
Balance Sheets
(unaudited,in thousands)
<TABLE>
<CAPTION>
December 31,
1998 1997
---- ----
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 367 $ 3,017
Investment in real estate 9,242 13,869
Investment in Wickes Inc. 12,983 --
Investment in subsidiaries 1,826 21,183
Other assets 461 5,833
-------- --------
Total assets $ 24,879 $ 43,902
======== ========
LIABILITIES & STOCKHOLDERS' EQUITY
Accrued expenses, income taxes and other
liabilities $ 1,051 $ 2,963
Debt and mortgage debt 21,249 26,319
-------- --------
Total liabilities 22,300 29,282
======== ========
Common stockholders' equity:
Common stock, $.10 par value; 20,000,000 shares
authorized, issued and outstanding,
5,278,123 in 1998 and 1997 529 529
Additional paid-in capital 17,049 16,783
Retained earnings (14,999) (2,692)
-------- --------
Total stockholders' equity 2,579 14,620
-------- --------
Total liabilities and stockholders' equity $ 24,879 $ 43,902
======== ========
</TABLE>
S-3
<PAGE>
Schedule III
Riverside Group, Inc. (Parent Only)
Condensed Financial Information of Registrant
Condensed Statements of Operations
(in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net investment income $ (581) $ 644 $ 1,097
Other income 546 625 12
Equity in net income of subsidiaries, net
of income taxes (6,391) (1,733) 3,699
Equity in investment in Wickes Inc. 172 -- (1,714)
--------- --------- ---------
Total revenues (6,254) (464) (3,094)
Other operating costs & expenses 1,028 2,639 1,072
Interest expense 2,691 3,106 2,428
--------- --------- ---------
Total expenses 3,719 5,745 3,500
--------- --------- ---------
Loss before income tax benefit (9,973) (6,209) (406)
Income tax expense 2,334 -- --
--------- --------- ---------
Net loss $ (12,307) $ (6,209) $ (406)
========= ========= =========
Earnings (loss) per share of common stock $ (2.36) $ (1.19) $ (0.80)
Weighted average number of common shares
used in computing earnings per share 5,213,186 5,193,970 5,286,316
========= ========= =========
</TABLE>
S-4
<PAGE>
Schedule III
Riverside Group, Inc. (Parent Only)
Condensed Financial Information of Registrant
Condensed Statements of Cash Flows
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash Flows from Operating Activities: $(12,307) $ (6,209) $ (406)
Net loss
Adjustments to reconcile net loss to net cash provided by operating
activities:
Net realized investment gains (144) 897 --
Change in other assets and liabilities 3,076 (1,284) 3,874
Equity in (income) loss of subsidiaries,
net of cash received 6,391 (1,297) (771)
Depreciation and amortization 399 177 225
-------- -------- -------
Net cash provided by (used in) operating activities 2,585 (7,716) 2,922
Cash Flows from Investing Activities:
Purchase of investments:
Securities of Wickes Inc. -- -- (10,000)
Short-term and real estate investments (423) (1,004) (20,654)
Sale, maturity and principal reduction of investments:
Short-term and real estate investments 6,405 4,407 --
Securities of Wickes Inc. 2,669 290 --
Change in investment in and advances to subsidiaries 1,830 3,284 4,764
Life Insurance Reorganization proceeds -- 5,315 35,000
Net assets of Life Insurance Reorganization -- -- (28,202)
-------- -------- --------
Net cash provided by (used in) investing activities 10,481 12,292 (19,092)
Cash Flow from Financing Activities:
Repayment of debt (5,353) (3,395) (849)
Increase in borrowings 80 1,539 17,798
Purchase & Retirement of Common Stock -- -- (46)
Dividend paid to stockholders -- -- (530)
-------- -------- --------
Net cash provided by (used in) financing activities (5,273) (1,856) 16,373
-------- -------- --------
Net Increase(decrease) in Cash & Cash Equivalents: (2,650) 2,720 203
Cash at beginning of year 3,017 297 94
-------- -------- --------
Cash at end of year $ 367 $ 3,017 $ 297
======== ======== ========
</TABLE>
S-5
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
of Wickes Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows present fairly, in all material respects, the financial position of Wickes
Inc. and its subsidiaries at December 26, 1998 and December 27, 1997, and the
results of their operations and their cash flows for each of the three years
ended December 26, 1998, December 27, 1997 and December 28, 1996, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material!
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Chicago, Illinois
February 23, 1999
<PAGE>
LOAN AGREEMENT
This Loan Agreement is entered into and effective as of the 11 day of
March, 1999, by and among: (i) Imagine Investments, Inc., a Delaware corporation
with a principal place of business in Dallas, Texas (the "Lender"), (ii)
Buildscape, Inc., a Florida corporation with a principal place f business in
Jacksonville, Florida (the "Borrower"), (iii) Riverside Group, Inc., a Florida
orporation ("Riverside"), (iv) Cybermax, Inc., a Florida corporation
("Cybermax"), and (v) ybermax Tech, Inc., a Florida corporation ("Cybermax
Tech"). Cybermax, Cybermax Tech and Riverside are hereinafter collectively
referred to as "Guarantors".
Recitals:
A. Borrower desires to obtain from Lender a term loan in the amount of
OneMillion Dollars ($1,000,000.00), which will be used by Borrower to pay
various obligations as and when the same are due and payable ("Term Loan").
B. In order to induce Lender to enter into this Loan Agreement and to
extend the Term Loan hereunder, without which inducement Lender would be
unwilling to take such actions, and in consideration of the benefits they will
receive therefrom, the Guarantors are willing and desire to guarantee the
obligations of Borrower under this Loan Agreement and to make the agreements as
set forth herein.
Agreement:
Now, Therefore, the parties hereby agree as follows:
1. Term Loan. Term Loan. Subject to the terms and conditions contained
herein, Lender hereby agrees to make the Term Loan to Borrower, in accordance
with the following provisions:
1.1 Amount, Purpose and Term.1 Amount, Purpose and Term. The amount of
the Term Loan shall be One Million Dollars ($1,000,000.00). The Term Loan is
evidenced by and shall be payable and otherwise be made on the terms set forth
in the Term Promissory Note made by Borrower to Lender of even date herewith
(the "Term Note") and on the terms established in this Loan Agreement. All
payments on the Term Note shall be made in immediately available funds at the
principal office of Lender on each date as specified in the Term Note and/or
this Loan Agreement. The outstanding principal balance of the Term Note shall
bear interest from the date hereof at the rate of ten percent (10%) per annum.
1.2 Disbursements.2 Disbursements. Contemporaneously with the execution
<PAGE>
of this Loan Agreement and the fulfillment of all conditions precedent to the
disbursement of the proceeds of the Term Loan, Lender shall disburse funds to
Borrower or on Borrower's behalf in the amounts shown on Exhibit A attached
hereto and made a part hereof by wire transfer, and as instructed by Borrower,
has paid Lender's legal fees in connection with the Term Loan.
Through and including May 15, 1999, Lender agrees to make additional
disbursements of principal of the Term Loan to Borrower as hereinafter requested
by Borrower, upon approval by Robert Shaw and one other member of the committee
consisting of Harry T. Carneal, B. Kent Hill and Robert Shaw (the "Committee").
To request a disbursement, Borrower shall submit a written request (the
"Request") to Lender (a) setting forth the amount and requested disbursement
date and (b) restating that all the representations and warranties set forth in
this Agreement (to the extent they are applicable, as of the disbursement date,
as hereinafter defined) are true and correct in all material respects as if made
on, and as of, the day the Request is made by Borrower. The Request shall be
sent in the manner and to the address set forth in Section 9 herein and signed
by the chief executive officer and chief financial officer of Borrower. The
Committee shall respond to the Request in writing, and if approved, shall fund
the disbursement within ten (10) business days of its receipt of the Request.
The maximum amount to be disbursed under the Term Note, including the amount
disbursed to Borrower and on Borrower's behalf on even date herewith, shall not
exceed One Million Dollars ($1,000,000), the face amount of the Term Note.
The Term Loan is not a revolving loan, and amounts borrowed and repaid
under the Term Note may not be reborrowed in whole or in part.
1.3 Prepayment.3 Prepayment. Any portion of the principal balance of the
Term Note, or any accrued interest thereon, may be prepaid at any time, in whole
or in part, without the written consent of Lender.
1.4 Maturity Date.4 Maturity Date. The maturity date of the Term Note,
at which time all outstanding principal and accrued interest on the Term Note
shall be due and payable in full, is September 15, 1999.
1.5 Fee.5 Fee. Borrower agrees to pay a fee to Lender in the amount of
$10,000.00 for agreeing to make the Term Loan and hereby instructs Lender to
immediately pay such fee to Lender out of the proceeds of the Term Loan.
2. Security for the Indebtedness. Security for the Indebtedness. The Term
Note, and all sums and obligations owed thereunder (collectively, the
"Indebtedness"), is and shall be secured by and entitled to the benefits of all
the following (all of the following are sometimes
<PAGE>
hereinafter collectively referred to as the "Security Instruments"; the Security
Instruments, this Loan Agreement and the Term Note are sometimes hereinafter
collectively referred to as the "Loan Documents"):
2.1 Stock Pledge Agreement Pertaining to Cybermax Tech.1 Stock Pledge
Agreement Pertaining to Cybermax Tech. That certain Stock Pledge Agreement
between Cybermax Tech and Lender of even date herewith, pursuant to which
Cybermax Tech pledges to Lender 100% of the capital stock of Borrower (the
"Buildscape Stock") and delivers to Lender the original certificates of the
Buildscape Stock, together with the appropriate blank stock powers.
2.2 Stock Pledge Agreement Pertaining to Riverside.2 Stock Pledge
Agreement Pertaining to Riverside. That certain Stock Pledge Agreement between
Riverside Group, Inc. ("Riverside") and Lender of even date herewith, pursuant
to which Riverside pledges 100% of the capital stock of Cybermax (the "Cybermax
Stock") and delivers to Lender the original certificates of the Cybermax Stock,
together with the appropriate blank stock powers.
2.3 Stock Pledge Agreement Pertaining to Cybermax.3 Stock Pledge
Agreement Pertaining to Cybermax. That certain Stock Pledge Agreement between
Cybermax and Lender of even date herewith, pursuant to which Cybermax pledges
100% of the capital stock of Cybermax Tech (the "Cybermax Tech Stock") and
delivers to Lender the original certificates of the Cybermax Tech Stock,
together with the appropriate blank stock powers.
2.4 Guaranty.4 Guaranty. The guaranty agreements of Guarantors pursuant
to Section 10 hereunder.
2.5 Security Agreement Pertaining to Borrower.5 Security Agreement
Pertaining to Borrower. That certain Security Agreement between Borrower and
Lender of even date herewith, pursuant to which Borrower pledges and grants
Lender a security interest in, and assigns to Lender, all of Borrower's assets.
2.6 Security Agreement Pertaining to Cybermax.6 Security Agreement
Pertaining to Cybermax. That certain Security Agreement between Cybermax and
Lender of even date herewith, pursuant to which Cybermax grants Lender a
security interest in, and assigns to Lender all of Cybermax's web sites and
domain names, Internet listing and numbers, trademarks, service marks, trade
names, service names, royalty payments, patents, copyrights, licenses, licensing
agreements and other rights in intellectual property, rights as lessee under any
lease of real or personal property, literary rights, goodwill, applications,
documentation, hardware, software, computer data files, books and records in
whatever media (paper, electronic or otherwise), rights in applications for any
of the foregoing, and anything used or useful in connection with all web sites
and domain names owned
<PAGE>
or operated by Cybermax or any of its affiliates, regardless whether now
existing or hereafter acquired or arising.
2.7 Security Agreement Pertaining to Cybermax Tech.7 Security Agreement
Pertaining to Cybermax Tech. That certain Security Agreement between Cybermax
Tech and Lender of even date herewith, pursuant to which Cybermax Tech grants
Lender a security interest in, and assigns to Lender, all of Cybermax Tech's web
sites and domain names, Internet listing and numbers, trademarks, service marks,
trade names, service names, royalty payments, patents, copyrights, licenses,
licensing agreements and other rights in intellectual property, rights as lessee
under any lease of real or personal property, literary rights, goodwill,
applications, documentation, hardware, software, computer data files, books and
records in whatever media (paper, electronic or otherwise), rights in
applications for any of the foregoing, and anything used or useful in connection
with all web sites and domain names owned or operated by Cybermax Tech or any of
its affiliates, regardless whether now existing or hereafter acquired or
arising.
2.8 Other Security.8 Other Security. Other security and instruments, if
any, granted by Borrower and/or Guarantors to Lender, whether of even date
herewith or hereafter or heretofore granted, to secure the Term Note and/or any
other Indebtedness.
3. Conditions Precedent. Conditions Precedent. Lender's obligations under
this Loan Agreement, including each disbursement of any proceeds of the Term
Loan, shall be subject to the fulfillment to Lender's satisfaction of each of
the following conditions precedent, unless such condition or conditions shall be
waived by Lender in writing, in the sole discretion of Lender:
3.1 Resolutions and Approvals.1 Resolutions and Approvals. Borrower and
Guarantors shall furnish certified copies of all consents, resolutions and
approvals as may be required by Lender, evidencing approval of the execution of
the Loan Documents, all in form and substance acceptable to Lender.
3.2 Legal Opinion.2 Legal Opinion. Lender shall have received a
favorable written opinion of counsel for Borrower and Guarantors (i.e. Holland &
Knight), dated and effective as of the date on which the Loan Documents are
executed and delivered, addressed to Lender and satisfactory in form and
substance to Lender, with only such modifications, exceptions, assumptions and
qualifications as shall be acceptable to Lender and its counsel.
3.3 Loan Documents.3 Loan Documents. All the Loan Documents, and such
other documents or instruments as Lender may reasonably require, all in form and
substance acceptable to Lender, shall have been duly executed and delivered to
Lender, and, where appropriate, duly recorded in the proper public offices, and
all of the Loan Documents shall be in full force and effect.
<PAGE>
3.4 Representations, Warranties and Covenants.4 Representations, Warranties
and ovenants. All representations and warranties of Borrower and Guarantors
contained herein and in the other Loan Documents shall be true and correct on,
and as of, the execution of this Agreement, as well as, on, and as of, each date
disbursements are made by Lender to Borrower pursuant to Section 1.2 of this
Agreement. Borrower and Guarantors shall be in compliance with all covenants
contained in the Loan Documents.
3.5 Consents of Third Parties.5 Consents of Third Parties. Such third
party consents, estoppels or agreements as Lender may require, all of which
shall be in form and content satisfactory to Lender in its sole discretion.
3.6 Corporate Matters.6 Corporate Matters. Lender shall have been
provided with true and correct copies of all articles of incorporation, by-laws
and corporate minutes of Borrower and shall have been provided such further
information as shall have been requested by Lender with regard to the business,
properties, finances and operations of Borrower and Guarantors.
3.7 Stock Option.7 Stock Option. Borrower shall have executed and
delivered a Stock Option Agreement in favor of Lender, of even date herewith, a
copy of which is attached hereto as Exhibit B and incorporated herein by
reference (the "Option Agreement"), pursuant to which Borrower shall have
granted Lender the exclusive right and option (the "Option") to purchase ten
percent (10%) of the common capital stock of Borrower.
3.8 No Event of Default.8 No Event of Default. No "Event of Default" and
no event which would constitute an Event of Default with the giving of notice,
passage of time, or both (a "Possible Default") shall have occurred or shall
occur after giving effect to the requested disbursement.
4. Affirmative Covenants. Affirmative Covenants. Borrower and Guarantors
jointly and severally agree that until the principal of and all interest accrued
on the Term Note and all the other Indebtedness shall have been paid in full and
this Loan Agreement terminated, Borrower and Guarantors, as applicable, shall
perform and observe all of the following terms and provisions:
4.1 Money Obligations.1 Money Obligations. Borrower and Guarantors, to
the extent provided in Guarantors' respective Guaranty Agreements, shall pay in
full:
(a) Prior in each case to the date when penalties would attach,
all taxes, assessments and governmental charges and levies hereafter due by
Borrower and/or Guarantors (except only those so long as and to the extent that
the same shall be contested in good faith by appropriate and
<PAGE>
timely legal proceedings and for which a bond staying execution or enforcement
thereof shall have been posted to the satisfaction of the Lender); and
(b) All their respective debts, obligations and liabilities
incurred after the date hereof, on or prior to their respective due dates, for
which they respectively may be or become liable or to which any or all their
properties may be or become subject.
4.2 Financial Statements.2 Financial Statements.
(a) Borrower shall furnish to Lender, within thirty (30) days
after the end of each calendar quarter, an income statement of Borrower for that
quarter and for the period from the beginning of the applicable fiscal year of
the Borrower to the end of such quarter and a balance sheet of Borrower as of
the end of each such quarter, certified by the President or Chief Financial
Officer of Borrower to be true, correct and accurate.
(b) Borrower shall furnish to the Lender, within ninety (90)
days after the end of each fiscal year of Borrower, (i) a complete financial
report, consisting of balance sheet, statement of profit and loss, application
of funds, change in financial position and the like, prepared or reviewed by a
firm of independent public accountants of recognized standing acceptable to
Lender.
(c) Borrower shall furnish to Lender, immediately upon Lender's
written request, such other information about the financial condition,
properties and operations of Borrower as Lender may from time to time reasonably
request.
(d) Each Guarantor shall furnish to Lender, (i) on or before
March 31 of each year, Guarantor's own financial statements, in a form approved
by Lender, as of the preceding December 31, certified as true and correct by
Guarantor, (ii) a copy of Guarantor's signed federal tax returns within five (5)
business days of the filing of such return with the Internal Revenue Service,
and (iii) promptly on demand of Lender, such other financial information
concerning Guarantor as Lender may request from time to time;
(e) All financial statements specified in Section 4.2(a), (b),
and (c) above shall be furnished to Lender with comparative figures for the
corresponding period in the preceding fiscal year; and all financial statements
referred to in Section 4.2(a), (b), and (c) above shall be prepared on the
accrual basis of accounting, in accordance with GAAP applied on a basis
consistent with prior years of Borrower, on a consolidated (and consolidating)
basis and shall be accompanied by a certificate of the president of Borrower:
(1) stating that there exists no Event of Default or
Possible Default hereunder;
<PAGE>
or
(2) describing with particularity any Event of Default or
Possible Default, stating the nature thereof, the period of existence
thereof and what action Borrower, its subsidiaries and/or Guarantors have
taken or propose to take with respect thereto.
(f) Borrower shall furnish to Lender, prompt written notice of
any condition or event which has resulted in or might result in:
(1) a material adverse change in the consolidated condition
(financial or other wise) or operations of Borrower or Guarantors; or
(2) a breach of or noncompliance with any term, condition or
covenant contained herein or in any document delivered pursuant hereto; or
(3) a material breach of, or noncompliance with, any term,
condition or covenant of any material contract to which Borrower and/or any
of its subsidiaries or the Guarantors are a party or by which they or their
property may be bound.
(g) Borrower and Guarantors shall furnish to Lender prompt
written notice of any claims, proceedings or disputes (whether or not
purportedly on behalf of Borrower or Guarantors) against, or to the knowledge of
Borrower or Guarantors, threatened or affecting Borrower or Guarantors which, if
adversely determined, would have a material adverse effect on the business,
properties or condition (financial or otherwise) of Borrower or any subsidiaries
or Guarantors or any labor controversy resulting in or threatening to result in
a strike against Borrower or Guarantors, or of any proposal by any public
authority to acquire any of the material assets or business of Borrower.
4.3 Financial Records.3 Financial Records. Borrower and Guarantors, as
applicable, shall:
(a) At all times keep true and complete financial records in
accordance with GAAP consistently applied;
(b) At all reasonable times, permit Lender to examine any or all
of their financial and other records and to make excerpts therefrom and
transcripts thereof;
(c) Maintain their books and records at their respective current
principal office which are the same address as listed for the Borrower and
Guarantors in Section 9 hereof; and
(d) Maintain their current fiscal years.
<PAGE>
4.4 Existence and Licenses.4 Existence and Licenses. Borrower shall
preserve its corporate existence in good standing and will be and remain
qualified to do business in good standing in all states in which it is required
to be so qualified, and will maintain all permits, licenses and other similar
matters necessary or appropriate for its business.
4.5 Notice.5 Notice. Guarantors and Borrower shall notify Lender in
writing, within no more than twenty-four (24) hours (and without the benefit of
any grace period afforded in any provision of this Loan Agreement or any
Security Instrument) after either of the Guarantors or Borrower or any of
Borrower's officers or directors learns of any of the following:
(a) the existence or occurrence of any Event of Default or
Possible Default under this Loan Agreement, or any default under the Term Note
or any of the Security Instruments;
(b) any representation or warranty made herein, or in any
related writing, not being or ceasing to be, for any reason, in any material
respect, true and complete and not misleading; or
(c) the institution of, or adverse determination in, any
litigation, arbitration or governmental proceeding (including but not limited to
an audit or examination by the Internal Revenue Service) which could have a
material and adverse effect upon Borrower or Guarantors, which notification
shall describe the nature thereof, what happened with respect thereto and what
steps are being taken by Borrower or Guarantors, as the case may be, with
respect thereto.
4.6 Agreements.6 Agreements. Borrower shall comply timely with all its
agreements and valid obligations to and with all parties, and shall not commit
or permit to be committed any default thereunder.
4.7 Stock.7 Stock. Borrower, Cybermax and Cybermax Tech shall instruct
their respective Secretaries and stock transfer agents not to issue any
additional capital stock, warrants, options or rights with respect thereto or
instruments convertible into their respective capital stock, and Borrower,
Cybermax and Cybermax Tech shall not issue any additional capital stock,
warrants, options or rights with respect thereto, or instruments convertible
into their respective capital stock, unless the same is directly pledged and
delivered to Lender as security for the Term Note pursuant to the Stock Pledge
Agreements referred to in Section 2 hereof.
4.8 Compliance with Laws and Agreements.8 Compliance with Laws and
Agreements. Borrower and Guarantors shall comply with the applicable statutes,
regulations, ordinances and other laws applicable to their operations and
activities.
<PAGE>
4.9 Subordination.9 Subordination. Borrower and Guarantors hereby agree
that all current and future debts of Borrower, with the exception of
reimbursement for travel expenses incurred on behalf of Borrower, and/or any of
its subsidiaries to any of Guarantors or any other stockholder or director of
Borrower or any of their spouses, in laws, or blood relatives shall, and are
hereby declared to be, fully subordinated to the prior repayment of all the
Indebtedness, including the Term Note, and, no payments of principal or interest
on such other debts shall be made, without the prior written consent of Lender,
until the Indebtedness, including the Term Note, has been paid in full.
4.10 Payment of Term Note and Other Indebtedness.10 Payment of Term Note
and Other Indebtedness. Borrower shall timely pay the Term Note and all the
other Indebtedness in accordance with their respective terms. All payments on
the Term Note and the other Indebtedness shall be made to Lender in immediately
available funds at Lender's principal office on the date due by no later than
2:00 p.m. Lender's local time. Funds received by Lender after that time shall be
deemed to be received by Lender on the following business day.
4.11 Domain Names.11 Domain Names. Borrower shall maintain its web
sites, domain names, Internet listings and numbers, trademarks (including any
applications therefor), applications, documentation, hardware, software,
computer data files and anything used or useful in connection with its web sites
and domain names (collectively the "Internet Property") owned or operated by
Borrower or any of its affiliates (collectively, the "Internet Property") in
good working condition, preserve its rights in all Internet Property and shall
notify Lender upon the creation of any additional domain names, web sites,
trademarks, trademark applications or other similar property. Immediately upon
Lender's request and at Borrower's sole expense, Borrower shall execute and
deliver to Lender such UCC-1 Financing Statements and assignments with the U.S.
Patent and Trademark Office, and cooperate with Lender in taking any other
actions or measures, which in Lender's sole discretion are necessary to perfect
and/or continue perfected Lender's security interest in the Internet Property,
whether now existing or hereafter acquired or arising.
5. Negative Covenants. Negative Covenants. Borrower and Guarantors jointly
and severally agree that, until the principal of and all interest on the Term
Note and all the other Indebtedness shall have been paid in full and this Loan
Agreement terminated, Borrower and Guarantors, as applicable, shall observe and
comply with each of the following provisions:
5.1 Material Adverse Changes.1 Material Adverse Changes. Borrower shall
not permit a "material adverse change" (as hereinafter defined) to occur. A
"material adverse change" shall be deemed to have occurred upon any of the
following:
(a) Any real estate of Riverside is sold for less than 90% of
the amount shown on Riverside's Collateral Analysis Schedule, a copy of which
will be provided to Lender within 30 days of the loan closing and updated
quarterly (the "Collateral Analysis Schedule"); or in the event there
<PAGE>
are no sales, future values (as reflected on any future Collateral Analysis
Schedule or, if lower, appraisals secured as provided in Section 5.2 (b) below)
of such real estate diminish more than 15% in the aggregate from their present
value reflected on the initial Collateral Analysis Schedule.
(b) The operating revenues and cash flows from Cybermax at the
end of any fiscal quarter in 1999 (on a cumulative basis) is less than 90% of
those recorded for the same period in 1998 or if the negative cash flow from
Cybermax is more than $1,000,000 at any time during 1999.
(c) During fiscal year 2000 and 2001 of Cybermax, following
approval of the executive committee (consisting of Harry Carneal, Robert Shaw
and Wilson) (the "Executive Committee") of Cybermax's business plan, if on a
cumulative basis, the gross profits of Cybermax are less than 75% of amounts
projected in such business plan, or expenses are more than 10% above amounts
projected in such business plan.
(d) Riverside's investment in Greenleaf, Inc. results in a
material negative cash effect on Riverside. Examples of a negative effect
associated with this investment would be if Riverside incurs any substantial
negative cash flow or is involved in material litigation in connection with
Greenleaf, Inc.
(e) Following approval of the Executive Committee of Borrower's
business plan, and provided significant outside capital is not invested in
Borrower, if on a cumulative basis, the gross profits of Borrower are less than
75% of amounts projected in such business plan, expenses are more than 10% above
amounts projected in such business plan, or the stages of completion of the
basic infrastructure of Borrower are more than six (6) weeks delinquent. If
significant outside capital is invested in Borrower, the foregoing business plan
shall be modified to reflect such investment and submitted to the Executive
Committee, for approval and if such modified business plan is not approved by
the Executive Committee within 20 days after such capital infusion, that shall
be deemed a material adverse change; if such modified business plan is approved
by such Executive Committee; and if gross profits are less than 25% of those
projected in such modified business plan and expenses of Borrower exceed those
projected in such modified business plan that has been approved by such
Executive Committee, no material adverse change will be deemed to have occurred
under this clause, but otherwise a material adverse change under this clause
will be deemed to have occurred.
Each of the foregoing items will be considered not individually but rather
in the aggregate, such that if an individual item has occurred but there is a
positive offset with respect to another item, Lender will consider the net
effect when making its determination as to whether a "material adverse change"
has occurred, but the Lender shall be entitled to make such determination in its
sole and unfettered discretion. As an example, in the event Riverside's
investment in Greenleaf, Inc.
<PAGE>
ultimately results in the realization of clear value (i.e. cash), then this will
be taken into consideration in evaluating the progress or results of any of the
other items.
5.2 Minimum Tangible Net Worth.2 Minimum Tangible Net Worth. Borrower
and Riverside shall not permit Riverside to fail to meet the following test:
Riverside shall maintain a minimum GAAP net worth of $1,000,000, and at
no time will the calculated net realizable value of the assets of Riverside be
less than $10,000,000 in excess of Riverside's liabilities. The calculated net
realizable value of the assets will be computed at the end of each calendar
quarter. The calculated net realizable value of the assets will be based upon
the market price of the Wickes, Inc. shares owned by Riverside (which shall be
the average closing price of the Wickes, Inc. stock over the last 20 trading
days of the calendar quarter), the net realizable value of any real estate
(determined as set forth below), the estimated value of Borrower (as determined
by Lender in its sole discretion), plus the net current assets and less all
liabilities (adjusted for any amounts included in the calculations above) of
Riverside. For purposes of this Section 5.2, the net realizable value of the
real estate shall be as reflected on the Collateral Analysis Schedule prepared
by the Riverside's real estate manager using comparable sales figures and
updated for past sales. The Lender reserves the right, at its sole discretion,
to request a third party appraisal no more than once in a twelve month period.
If the Lender exercises this right, then the minimum net realizable value of any
given piece of real estate for the twelve months following receipt of the
appraisal shall not be greater than the amount shown on the appraisal.
As used herein, the term GAAP refers to generally accepted accounting
principals in effect in the United States of America from time to time and
applied in a manner consistent with past practices.
5.3 Advances, Repayment of Debts and Dividends.3 Advances, Repayment of
Debts and Dividends. Without the prior written consent of Lender, Borrower shall
not make any advances or make any payment of principal or interest on any debt
owed to Guarantors, and shall not pay any actual or constructive dividends in
cash, stock or other property, and shall not make any other distributions
whatsoever with respect to any of its capital stock, or set aside any funds for
any of such purposes.
5.4 Repurchase of Stock.4 Repurchase of Stock. Without the prior written
consent of Lender, neither Borrower nor any of its subsidiaries nor any of the
Guarantors shall purchase, acquire, redeem or retire any of Borrower's capital
stock or rights with respect thereto, nor shall Borrower liquidate or dissolve
or take any action with a view towards same.
<PAGE>
5.5 Mergers, Sales and Transfers.5 Mergers, Sales and Transfers. Without
the prior written consent of Lender, Borrower, Borrower's subsidiaries or
Guarantors shall not:
(a) Be or become a party to any consolidation, reorganization
or merger;
(b) Sell all or substantially all of its assets;
(c) Purchase all or a substantial part of the assets of any
other corporation, partner ship, limited liability company or other business
enterprise; or
(d) Effect any change in its capital structure, or amend its
Articles of Incorporation.
5.6 Subsidiaries.6 Subsidiaries. Without the prior written consent of
Lender, neither Borrower nor any of Borrower's subsidiaries shall create any new
subsidiaries or acquire any capital stock or other securities or interests in
another corporation, limited liability company, entity, partnership, joint
venture or business. Borrower shall not transfer, assign or lend any money or
other property to any subsidiary or affiliate.
5.7 New Business.7 New Business. Borrower shall not change materially the
nature of its business in any manner.
5.8 Capital Contributions.8 Capital Contributions. Without the prior
written consent of Lender, neither Borrower nor any of its subsidiaries shall
make any capital contribution to, or investment in, any subsidiary or purchase
or commit to purchase any additional stock or securities of any kind from any
subsidiary.
5.9 Prepayment of Other Debts.9 Prepayment of Other Debts. Neither
Borrower nor any of the Guarantors shall prepay prior to their respective
presently existing maturities any debts or liabilities.
5.10 Indebtedness.10 Indebtedness. Without the prior written consent of
Lender, neither Borrower nor any of its subsidiaries nor any of the Guarantors
shall incur any indebtedness for borrowed money whatsoever or guaranty or become
directly or contingently liable on any note or other evidence of indebtedness,
letter of credit or contract of any kind, or enter any contract or agreement
requiring it to make payments regardless of the performance by the other party
or that has the effect of constituting a guaranty (and Borrower and Guarantors
shall not make any guaranty for any affiliate), except only for trade payables
incurred by Borrower or Guarantors in the ordinary course of business, and
capital leases and equipment purchases of $100,000 or less in the aggregate per
annum.
<PAGE>
5.11 Loans.11 Loans. Neither Borrower nor any of its subsidiaries nor
any of the Guarantors shall make any loans other than the creation of accounts
receivable in the ordinary course of business, or advance any funds whatsoever,
without the prior written consent of Lender.
6. Additional Agreements Regarding Stock. Additional Agreements Regarding
Stock. As additional security for the Term Loan, and also in connection with the
Option, Borrower and Guarantors hereby assign to Lender all of the respective
rights, titles and interests of Borrower and Guarantors under any and all
registration rights and similar agreements with respect to the stock of
Borrower, Cybermax and Cybermax Tech, to the extent Lender has from time to time
foreclosed upon or otherwise acquired or thereafter does foreclose or otherwise
acquire any of the stock of the Borrower, including any stock purchased pursuant
to the exercise of the Option, as defined in Section 3.7 hereof, or as to which
Lender has exercised such Option.
7. Events of Default. Events of Default. The occurrence of any or all of the
following events constitute an "Event of Default" under this Loan Agreement:
7.1 Payments.1 Payments. If any installment of principal or interest on
any of the Indebt edness, including, but not limited to the Term Note, shall not
be paid in full punctually when due and payable.
7.2 Defaults Under Loan Documents.2 Defaults Under Loan Documents. If
any default or Event of Default occurs under any Loan Document.
7.3 Covenants and Agreements.3 Covenants and Agreements. If Borrower or
either of the Guarantors shall violate or fail to perform or observe any
covenant, agreement, condition, representation, warranty, or other provision
(other than as governed by Section 7.1 or 7.2 hereof) contained or referred to
in any of the Loan Documents (or the Option Agreement) and such failure or
omission shall not have been fully corrected to the complete satisfaction of
Lender within 15 days (or such shorter grace period as may be provided in the
particular Loan Document (or the Option Agreement) for the particular default)
after Lender has given written notice thereof to Borrower and Guarantors.
7.4 Failure to Pay Other Indebtedness.4 Failure to Pay Other
Indebtedness. If Borrower or any of its subsidiaries shall fail to pay or
perform any other obligation it may have or be subject to with respect to any
party within any applicable grace period.
7.5 Accuracy of Statements.5 Accuracy of Statements. If any
representation or warranty or other statement of fact contained herein or in any
of the Security Instruments or in any writing, certificate, report or statement
at any time furnished by or for Borrower and/or Guarantors to Lender
<PAGE>
pursuant to or in connection with this Loan Agreement or otherwise in connection
with the transactions contemplated hereby shall be false or misleading in any
material respect or shall omit to state a material fact required to be stated
therein in order to make the statements contained therein, in light of the
circumstances under which made, not misleading, on the date as of which made,
whether or not made with knowledge of same.
7.6 Solvency and Other Matters.6 Solvency and Other Matters. If Borrower or
any of its subsidiaries or any of the Guarantors shall:
(a) discontinue business; or
(b) make a general assignment for the benefit of creditors; or
(c) apply for or consent to the appointment of a custodian,
receiver, trustee or liquidator of all or a substantial part of its or their
assets; or
(d) be adjudicated a bankrupt or insolvent; or
(e) file a voluntary petition in bankruptcy or file a petition
or an answer seeking a composition, reorganization or an arrangement with
creditors or seeking to take advantage of any other law (whether federal or
state) relating to relief for debtors, or admit (by answer, default or
otherwise) the material allegations of any petition filed against them in any
bankruptcy, reorganization, composition, insolvency or other proceeding (whether
federal or state) relating to relief for debtors; or
(f) suffer or permit to continue unstayed and in effect for
thirty (30) consecutive days any judgment, decree or order entered by a court or
governmental agency of competent jurisdiction, which assumes control of Borrower
(or Guarantors) or approves a petition seeking a reorganization, composition or
arrangement of Borrower (or Guarantors) or any other judicial modification of
the rights of any of its (or Guarantors) respective creditors, or appoints a
custodian, receiver, trustee or liquidator for Borrower or either of the
Guarantors or for all or a substantial part of any of their business or assets;
or
(g) not be paying their respective debts as they become due; or
(h) be enjoined or restrained from conducting all or a material
part of any of their respective businesses as now conducted and the same is not
dismissed and dissolved within thirty (30) days after the entry thereof.
7.7 Other Defaults.7 Other Defaults. If any of the following shall occur:
<PAGE>
(a) Any lien, garnishment, levy, attachment or encumbrance of
any kind is placed against any property which serves as collateral for the Term
Note;
(b) The issuance of any tax lien or levy against Borrower or
either of the Guarantors or any of its property or Borrower's or either of the
Guarantors failure to pay, withhold, collect or remit any tax when assessed or
due;
(c) There shall hereafter occur any material and adverse change
in the business operations and condition, financial or otherwise, of Borrower or
either of the Guarantors or in the value of the collateral securing payment of
the Term Note; and
(d) If a final judgment or judgments for the payment of money in
the aggregate in excess of $10,000.00 shall be rendered against Borrower or any
of the Guarantors and such judgment(s) shall remain unsatisfied or unstayed for
a period of thirty (30) days.
8. Remedies Upon Default. Remedies Upon Default. Notwithstanding any
contrary provision or inference herein or elsewhere Lender shall have the
following rights and remedies:
8.1 Optional Acceleration8.1 Optional Acceleration. If any Event of
Default referred to in Sections 7.1 through 7.6 hereof shall occur, Lender, in
its absolute discretion, without further notice to the Borrower or either of the
Guarantors, may declare all or any of the Indebtedness, including, but not
limited to, the Term Note, to be, whereupon the same shall be, accelerated and
immediately due and payable in full, all without any presentment, demand,
protest or notice of any kind, all of which are hereby expressly waived by
Borrower and Guarantors.
8.2 Automatic Acceleration8.2 Automatic Acceleration. If any Event of
Default referred to in Section 7.7 hereof shall occur, all of the Indebtedness,
including the Term Note, shall thereupon become accelerated and immediately due
and payable in full, all without presentment, demand, protest or notice of any
kind, all of which are hereby expressly waived by Borrower and Guarantors.
8.3 Offsets8.3 Offsets. If any Event of Default or Possible Default
shall occur or begin to exist, Lender shall have the right then, or at any time
thereafter, to set off against, and to appropriate and apply toward the payment
of the Indebtedness (in such order as Lender may select in its sole discretion),
including but not limited to the indebtedness evidenced by the Term Note,
whether or not such indebtedness shall then have matured or be due and payable
and whether or not Lender has declared the Term Note and/or other Indebtedness
to be in default and immediately due, any and all deposit balances and other
sums and indebtedness and other property then held or owed by the Lender to or
for the credit or account of Borrower and/or Guarantors, and in and on all of
which
<PAGE>
Borrower and Guarantors hereby grant Lender a first security interest and lien
to secure all the Indebtedness, all without notice to or demand upon Borrower or
Guarantors all such notices and demands being hereby expressly waived.
8.4 Termination of Disbursements8.4 Termination of Disbursements. Upon
the occurrence of any Possible Default, Lender may immediately cease making
disbursements under this Loan Agreement, while any Possible Default exists. Upon
the occurrence of any Event of Default, Lender shall thereafter have no
obligation under any circumstances to make any further disbursements under this
Loan Agreement, even if the Event of Default is subsequently cured, and, in such
event, Lender may pursue all other remedies available to Lender hereunder or in
connection herewith.
8.5 Rights Under Security Instruments8.5 Rights Under Security
Instruments. If any Event of Default shall occur, Lender shall also have all
rights and remedies granted it under any and all of the Security Instruments or
other Loan Documents securing or intended to secure the Indebtedness.
8.6 Rights Cumulative8.6 Rights Cumulative. All of the rights and
remedies of Lender upon occurrence of an Event of Default or Possible Default
hereunder shall be cumulative to the greatest extent permitted by law and shall
be in addition to all those rights and remedies afforded Lender at law or
equity.
9. Notices. Notices.
9.1 Giving of Notices9.1 Giving of Notices. All notices, requests,
consents, approvals, waivers, demands and other communications hereunder
(collectively, "Notices") shall be deemed to have been given if in writing and
(1) personally delivered against a written receipt, or (2) sent by confirmed
telephonic facsimile, or (3) delivered to a reputable express messenger service
(such as Federal Express, DHL Courier and United Parcel Service) for overnight
delivery, addressed as follows (or to such other address as a party shall have
given Notice to the other):
If to Lender:
Imagine Investments, Inc.
8150 North Central Expressway
Suite 1901
Dallas, Texas 75206
<PAGE>
Attn: Gary Goltz, General Counsel
Telephone: (214) 365-1905
Fax: (214) 365-6905
cc: Michael M. Fleishman, Esq.
Greenebaum Doll & McDonald PLLC
3300 National City Tower
Louisville, Kentucky 40202
Telephone: (502) 587-3530
Fax: (502) 540-2131
If to Borrower:
Buildscape, Inc.
7800 Belfort Parkway, Suite 100
Jacksonville, Florida 32256
Attn:
(904) 281-2200
Fax (904) 296-0584
cc: Malcolm Graham, Esq.
Holland & Knight
One Independent Drive, Suite 2000
Post Office Box 1559
Jacksonville, Florida 32201-1559
(32202 street address)
Telephone: (904) 354-4141
Fax: (904) 358-2199
If to Guarantors:
Riverside Group, Inc.
7800 Belfort Parkway, Suite 100
Jacksonville, Florida 32256
Attn: Cathe Gray
(904) 281-2200
Fax (904) 296-0584
cc: Malcolm Graham, Esq.
Holland & Knight
One Independent Drive, Suite 2000
Post Office Box 1559
Jacksonville, Florida 32201-1559
(32202 street address)
Telephone: (904) 354-4141
Fax: (904) 358-2199
Cybermax, Inc.
7800 Belfort Parkway, Suite 100
Jacksonville, Florida 32256
Attn: Cathe Gray
(904) 281-2200
Fax (904) 296-0584
Cybermax Tech, Inc.
7800 Belfort Parkway, Suite 100
Jacksonville, Florida 32256
Attn: Cathe Gray
(904) 281-2200
Fax (904) 296-0584
<PAGE>
9.2 Time Notices Deemed Given9.2 Time Notices Deemed Given.
All Notices shall be effective upon being properly personally delivered, or upon
confirmation of a telephonic facsimile, or upon the delivery to a reputable
express messenger service. The period in which a response to any such notice
must be given shall commence to run from the date on the receipt of a personally
delivered notice, or the date of confirmation of a telephonic facsimile or two
days following the proper delivery of the Notice to a reputable express
messenger service, as the case may be.
10. Guaranty of Guarantors. Guaranty of Guarantors. Guarantors, to the extent
permitted in their respective guaranty agreements executed on even date
herewith, unconditionally guarantee each and every covenant, agreement,
warranty, representation and obligation of Borrower under this Loan Agreement
and consent to all the terms hereof and thereof, and hereby waive all suretyship
and guarantors' defenses generally. All obligations of Borrower and Guarantors
under this Loan Agreement shall be joint and several.
11. Fees and Expenses. Fees and Expenses. Borrower and Guarantors agree that
they shall be responsible for and shall pay Lender's expenses incurred in
negotiating and effecting the Term Loan and the Loan Documents, including
Lender's attorneys' fees which, at Lender's option, may be deducted from the
proceeds of the Term Loan and paid to Lender's counsel, but shall nevertheless
be deemed disbursed directly to Borrower and evidenced by the Term Note.
Further, in the event of any default under this Loan Agreement, the
Term Note or any of the Security Instruments or any related instruments,
Borrower and Guarantors will pay to Lender, to the extent allowable by
applicable law, such further amounts as shall be sufficient to reimburse fully
the Lender for all of its costs and expenses of enforcing its rights and
remedies under this Loan Agreement, the Term Note and the Security Instruments,
and in protecting or preserving any security for the Indebtedness including
without limitation, Lender's reasonable attorneys', appraisers' and accountants'
fees, court costs, security costs and maintenance costs, and the same shall be
deemed evidenced by the Term Note and secured by all the Security Instruments.
All obligations provided for in this Section shall survive termination or
cancellation of this Loan Agreement for any reason whatsoever.
<PAGE>
12. Miscellaneous Provisions. Miscellaneous Provisions. This Loan Agreement
shall be subject to the following miscellaneous provisions:
12.1 Construction12.1 Construction. The parties have participated jointly
in the negotiation and drafting of this Loan Agreement. In the event an
ambiguity or question of intent or interpretation arises, this Loan Agreement
shall be construed as if drafted jointly by the parties and no presumption of
burden of proof shall arise favoring or disfavoring any party by virtue of the
authorship of any of the provisions of this Loan Agreement. Unless the context
clearly states otherwise, the use of the singular or plural in this Loan
Agreement shall include the other and the use of any gender shall include all
others. All references to "Section" or "Sections" refer to the corresponding
Section or Sections of this Loan Agreement. Unless otherwise expressly provided,
the word "including" does not limit the preceding words or terms.
12.2 Counterparts12.2 Counterparts. This Loan Agreement may be executed
in one or more counterparts, each of which shall be deemed to be an original
copy of this Loan Agreement and all of which, when taken together, shall be
deemed to constitute one and the same agreement.
12.3 Entire Agreement12.3 Entire Agreement. This Loan Agreement embodies
the entire agreement and understanding of the parties hereto with respect to the
subject matter herein contained, and supersedes all prior agreements,
correspondence, arrangements and understandings relating to the subject matter
hereof.
12.4 Further Assurances12.4 Further Assurances. Borrower and Guarantors
agree (a) to furnish upon Lender's request such further information, (b) to
execute and deliver such other documents, and (c) to do such other acts and
things, all as Lender may reasonably request for the purpose of carrying out the
intent of this Loan Agreement and the documents referred to in this Loan
Agreement.
12.5 Governing Law12.5 Governing Law. This Loan Agreement and all other
Loan Documents are executed and delivered in, and shall be governed by the laws
of, the Commonwealth of Kentucky, without giving effect to any conflict of law
rule or principle that might require the application of the laws of another
jurisdiction.
12.6 Headings12.6 Headings. The headings in this Loan Agreement are
included for purposes of convenience only and shall not be considered a part of
this Loan Agreement in construing or interpreting any provision hereof.
12.7 Invalidity of Provisions; Severability12.7 Invalidity of Provisions;
Severability. If any provision of this Loan Agreement or the application thereof
to any person or circumstance shall to any extent be held in any proceeding to
<PAGE>
be invalid, illegal or unenforceable, the remainder of this Loan Agreement, or
the application of such provision to persons or circumstances other than those
to which it was held to be invalid, illegal or unenforceable, shall not be
affected thereby, and shall be valid, legal and enforceable to the fullest
extent permitted by law, but only if and to the extent such enforcement would
not materially and adversely frustrate the parties' essential objectives as
expressed herein. Notwithstanding the foregoing, each party hereto agrees that
it has reviewed the provisions of this Loan Agreement, and that the same, taken
as a whole, are fair and reasonable.
12.8 Limitation on Interest12.8 Limitation on Interest. It is the
intention of the parties hereto to conform strictly to applicable usury laws.
Accordingly, all agreements between Borrower and Lender with respect to the Term
Note and the Loan Documents are hereby expressly limited so that in no event,
whether by reason of acceleration of maturity or otherwise, shall the amount
paid or agreed to be paid to Lender or charged by Lender for the use,
forbearance or detention of the money to be lent hereunder or otherwise, exceed
the maximum amount allowed by law. If the Term Loan would be usurious under
applicable law, then, notwithstanding anything to the contrary in the Term Note
or in the Loan Documents: (a) the aggregate of all consideration which
constitutes interest under applicable law that is contracted for, taken,
reserved, charged or received under the Term Note or the Loan Documents shall
under no circumstances exceed the maximum amount of interest allowed by
applicable law, and any excess shall be credited on the Term Note by the holder
thereof or, at Lender's option, refunded to Borrower; and (b) if maturity is
accelerated by reason of an election by Lender, or in the event of an
prepayment, then any consideration which constitutes interest may never include
more than the maximum amount allowed by applicable law. In such case, excess
interest, if any provided for in the Term Note, the Loan Documents or otherwise,
to the extent permitted by applicable law, shall be amortized, prorated,
allocated and spread from the date of advance until payment in full so that the
actual rate of interest is uniform through the term hereof. If such
amortization, proration, allocation and spreading is not permitted under
applicable law, then such excess interest shall be canceled automatically as of
the date of such acceleration or prepayment and, if theretofore paid, shall be
credited on the Term Note or, at Lender's option, refunded to Borrower. The
terms and provisions of this Section shall control and supersede every other
provision of the Term Note and Loan Documents. The Term Note is a contract made
under and shall be construed in accordance with and governed by the laws of
Kentucky, except that if at any time the laws of the United States America
permit Lender to contract for, take, reserve, charge or receive a higher rate of
interest than is allowed by the laws of Kentucky (whether such federal laws
directly so provide or refer to the law of any state), then such federal laws
shall to such extent govern as to the rate of interest which Lender may contract
for, take, reserve, charge or receive under the Term Note.
<PAGE>
12.9 Binding Effect12.9 Binding Effect. The provisions of this Loan
Agreement shall bind and benefit Borrower, Guarantor and Lender and their
respective successors, heirs, personal representatives and assigns, including
each subsequent holder, if any, of the Term Note or any other Indebtedness.
12.10 Modifications12.10 Modifications. This Loan Agreement may be
modified only in writing executed by Lender and Borrower, and Guarantors shall
automatically be bound by all such modifications even though one or both of the
Guarantors does not join therein or consent thereto, Guarantors hereby agreeing
that Borrower's execution thereof shall be irrevocably and conclusively deemed
Guarantors' consent thereto as Guarantors' irrevocable attorney-in-fact, even
though it does not so state.
12.11 Time of Essence12.11 Time of Essence. Time is of the essence in the
performance by Borrower and Guarantors of all the obligations set forth in this
Loan Agreement and in all of the other Loan Documents.
12.12 Waiver12.12 Waiver. The rights and remedies of Lender hereunder are
cumulative and not alternative. Neither the failure nor any delay by Lender in
exercising any right, power, or privilege under this Loan Agreement or the
documents referred to in this Loan Agreement will operate as a waiver of such
right, power, or privilege, and no single or partial exercise of any such right,
power, or privilege will preclude any other or further exercise of such right,
power, or privilege or the exercise of any other right, power, or privilege.
Each such right, power, remedy or privilege may be exercised by Lender, either
independently or concurrently with others, and as often and in such order as
Lender may deem expedient. To the maximum extent permitted by applicable law, no
waiver that may be given by a party will be applicable except in the specific
instance for which it is given. No waiver or consent granted by Lender with
respect to this Loan Agreement, the Indebtedness or any Security Instrument or
related writing shall be binding upon Lender, unless specifically granted in
writing by a duly authorized officer of Lender, which writing shall be strictly
construed.
12.13 Interpretation12.13 Interpretation. The parties hereto hereby agree
that this Loan Agreement shall be so interpreted to give effect and validity to
all the provisions hereof to the fullest extent permitted by law.
12.14 Assignment12.14 Assignment. Neither the Borrower nor either of the
Guarantors may assign any of their rights under the Loan Agreement or any of the
Loan Documents to any other party. Lender may assign its rights and obligations
under this Loan Agreement and the other Loan Documents, in whole or in part,
without the need for consent from Borrower or either of the Guarantors, and such
assignee shall be entitled to the benefits of Lender's rights hereunder.
<PAGE>
12.15 Survival of Covenants, Agreements, Warranties and
Representations12.15 Survival of Covenants, Agreements, Warranties and
Representations. All covenants, agreements, warranties and representations made
by Borrower and Guarantor herein shall survive the making of the Term Loan and
delivery of the Term Note, this Loan Agreement and any and all Security
Instruments for the Term Note and other Indebtedness, and shall be deemed to be
continuing covenants, agreements, representations and warranties at all times
while any portion of the Indebtedness, including the Term Note, remains unpaid.
13. Jury Trial Waiver. Jury Trial Waiver. BORROWER AND GUARANTORS HEREBY
KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE THE RIGHT EITHER OF THEM MAY HAVE
TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION OR ANY OTHER PROCEEDING BASED
ON, OR ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS LOAN AGREEMENT OR ANY
OTHER LOAN DOCUMENT OR OUT OF ANY COURSE OF CONDUCT, COURSE OF DEALING,
STATEMENTS (WHETHER WRITTEN OR ORAL) OR ACTIONS OF THE BORROWER, GUARANTORS OR
LENDER.
[SIGNATURES ON FOLLOWING PAGE]
<PAGE>
In Witness Whereof, the parties have entered into this Loan Agreement as of
the date first written above.
Imagine Investments, Inc.
By:
Title:
("Lender")
Buildscape, Inc.
By:
Title:
("Borrower")
Riverside Group, Inc.
By:
Title:
("Guarantor")
Cybermax, Inc.
By:
Title:
("Guarantor")
Cybermax Tech, Inc.
By:
Title:
("Guarantor")
<PAGE>
PROMISSORY NOTE
$1,000,000.00 Louisville, Kentucky
March 11, 1999
For Value Received, BuildScape, Inc., a Florida corporation with a
principal office and place of business in Jacksonville, Florida ("Maker"),
promises and agrees to pay to the rder of Imagine Investments, Inc., a Delaware
corporation, or to any holder of this Note "Payee"), the principal sum of ONE
MILLION DOLLARS ($1,000,000.00) or the aggregate principal amount advanced and
which shall be outstanding under this Note, together with interest upon such
principal balance at the rate provided below, in legal tender of the United
States of America. The unpaid principal balance of, and all accrued interest on,
this Note shall be due and payable in full on September 15, 1999, which date
shall be the final maturity date of this Note. All payments under this Note
shall be paid to Payee at 8150 North Central Expressway, Suite 1901, Dallas,
Texas 75206, or to such other person or at such other place as may be designated
in writing by Payee or any subsequent holder of this Note.
1. Interest Rate. The principal balance of this Note shall bear
interest at the rate of ten percent (10%) per annum. All parties hereto hereby
specifically agree that this Note has been delivered in the Commonwealth of
Kentucky and that the laws of the Commonwealth of Kentucky shall govern this
Note. All interest on the principal balance of this Note shall be computed on
the basis of the actual number of days elapsed over an assumed year of 360 days.
2. Disbursements of Principal. Payee may make periodic disbursements of
principal to Maker as requested by Maker and subject to the terms and conditions
set forth in that certain Loan Agreement among Maker, Payee, Riverside Group,
Inc. ("Riverside"), Cybermax, Inc. ("Cybermax"), and Cybermax Tech, Inc.
("Cybermax Tech") of even date herewith (the "Loan Agreement"). Riverside,
Cybermax and Cybermax Tech are hereinafter collectively referred to as
"Guarantors." This is not a revolving note, and amounts disbursed hereunder may
not be paid down and subsequently reborrowed by Maker. All advances under this
Note shall be recorded by appropriate entries into a ledger maintained by Payee
and shall be prima facie evidence of the amount outstanding under this Note from
time to time.
3. Repayment of Principal and Payment of Interest Prepayment. The
principal balance of this Note, together with all accrued interest thereon,
shall be paid in full on the maturity date or earlier acceleration of this Note.
This Note may be prepaid in whole or in part at any time and from time to time
without penalty.
4. Application of Payments. Payments made under this Note shall be
applied, at the holder's sole option, first to any expenses or sums advanced by
Payee or other
<PAGE>
amounts (other than principal and interest) payable to Payee in respect of and
in accordance with the terms of this Note or the Loan Agreement or under the
terms of any document or instrument securing the repayment of this Note; second,
to accrued but unpaid interest upon the principal balance of this Note and then
to the principal balance of this Note.
5. Overdue Payments; Default Rate. All overdue payments of principal or
interest on this Note shall bear additional interest until paid in full at the
rate per annum (calculated on the basis of an assumed year of 360 days as
aforesaid) of five percent (5%) per annum in excess of the rate otherwise
payable under the terms of this Note or the highest rate allowed by applicable
law, whichever is lower, and shall be due and payable on demand of the holder
hereof. The collection of default rate interest shall not be deemed a waiver of
an Event of Default.
6. Security. This Note is secured by: (i) a pledge of all the capital
stock of Cybermax, Inc., pursuant to a Stock Pledge Agreement of even date
herewith between Riverside and Payee, (ii) a pledge of all the capital stock of
Maker pursuant to a Stock Pledge Agreement of even date herewith between
Cybermax Tech and Payee, (iii) a pledge of all the capital stock of Cybermax
Tech pursuant to a Stock Pledge Agreement of even date herewith between Cybermax
and Payee, (iv) the guaranty of Riverside pursuant to the Unconditional Guaranty
Agreement of even date herewith, (v) the guaranty of Cybermax pursuant to the
Limited Guaranty Agreement of even date herewith, and (vi) the guaranty of
Cybermax Tech pursuant to the Limited Guaranty Agreement of even date herewith.
This Note has been issued pursuant to the Loan Agreement (such Loan Agreement
and the foregoing Stock Pledge Agreements and Guaranty Agreements are
hereinafter collectively referred to as the "Security Documents"), and is
subject to all terms and conditions of the Loan Agreement and is entitled to all
the benefits of the Security Documents.
7. Events of Default. Each of the following events shall constitute an
event of default under this Note, the occurrence of any of which shall entitle
the holder hereof to declare the entire principal balance of this Note, together
with all accrued interest and all other liabilities, indebtedness and
obligations of Maker and/or Guarantors to Payee, whether now existing or
hereafter created, to be immediately due and payable, and to take any and all
action allowed Payee by law or equity, under the terms of this Note, under the
terms of any of the Security Documents, and under the terms of any other
agreements between Maker and/or Guarantors and Payee:
(a) The failure of Maker to make any payment of principal
or interest provided for in this Note on the date
upon which it is due; or
(b) The occurrence of an Event of Default under any
Security Document;
8. No Waiver, Cumulative Remedies. The failure of Payee to exercise any
of its rights and remedies shall not constitute a waiver of the right to
exercise them at that or any other time. All rights and remedies of Payee in the
event of a default shall be cumulative to the greatest extent permitted by law.
<PAGE>
9. Expenses. If there is any default under this Note or any Security
Document and this Note is placed in the hands of any attorney for collection or
is collected through any court including any bankruptcy court, Maker promises
and agrees to pay to Payee its attorneys' fees, court costs, and all other
expenses incurred in collecting or attempting to collect or securing or
attempting to secure this Note as provided by the laws of the Commonwealth of
Kentucky, or any other state where the collateral or any part of it is situated.
This section shall be deemed supplemental to, and not to be in substitution for,
that section of any Security Document dealing with the reimbursement of
expenses.
10. Waivers. Maker waives (a) presentment, demand, notice of dishonor,
protest, notice of protest and non-payment, and (b) all exemptions to which
Maker may now or hereafter be entitled under the laws of the Commonwealth of
Kentucky, of any other state, or of the United States, and agrees that Payee
shall have the right (i) to grant Maker or any guarantor of this Note any
extension of time for payment of this Note or any other indulgence or
forbearance whatsoever, and (ii) to release any security for or guarantor of
payment of this Note, without in any way affecting the liability of Maker under
this Note or the Guarantors under the Security Documents, and without waiving
any rights Payee may have under this Note or by virtue of the laws of the
Commonwealth of Kentucky, or any other state of the United States.
11. Time of Essence. Time is of the essence in the payment and
performance of all of Maker's obligations under this Note, the Security
Documents and all documents securing this Note or relating hereto.
12. Venue and Jurisdiction. Maker further agrees that in the event of
any litigation for collection of or relating to this note, jurisdiction and
venue shall be proper and appropriate in any court sitting in Louisville or
Jefferson County Kentucky, and Maker hereby consents to such jurisdiction and
venue.
13. Waiver of Jury Trial. MAKER VOLUNTARILY AND INTENTIONALLY WAIVES
AND SHALL NOT ASSERT ANY RIGHT THAT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF
ANY LITIGATION ARISING FROM OR CONNECTED WITH THIS NOTE, THE SECURITY DOCUMENTS
OR ANY AGREEMENT MADE OR CONTEMPLATED TO BE MADE IN CONNECTION THEREWITH, OR ANY
COURSE OF DEALING, COURSE OF CONDUCT, STATEMENT OR ACTIONS OF ANY PARTY IN
CONNECTION WITH THIS NOTE.
14. Limitation on Interest. It is the intention of the parties hereto
to conform strictly to applicable usury laws. Accordingly, all agreements
between Maker and Payee with respect to this Note and the Loan Documents, as
defined in the Loan Agreement, are hereby expressly limited so that in no event,
whether by reason of acceleration of maturity
<PAGE>
or otherwise, shall the amount paid or agreed to be paid to Payee or charged by
Payee for the use, forbearance or detention of the money to be lent hereunder or
otherwise, exceed the maximum amount allowed by law. If this loan would be
usurious under applicable law, then, notwithstanding anything to the contrary in
this Note or in the Loan Documents: (a) the aggregate of all consideration which
constitutes interest under applicable law that is contracted for, taken,
reserved, charged or received under this Note or the Loan Documents shall under
no circumstances exceed the maximum amount of interest allowed by applicable
law, and any excess shall be credited on this Note by the holder thereof, or, at
Payee's option, refunded to Maker; and (b) if maturity is accelerated by reason
of an election by Payee, or in the event of an prepayment, then any
consideration which constitutes interest may never include more than the maximum
amount allowed by applicable law. In such case, excess interest, if any provided
for in this Note, the Loan Documents or otherwise, to the extent permitted by
applicable law, shall be amortized, prorated, allocated and spread from the date
of advance until payment in full so that the actual rate of interest is uniform
through the term hereof. If such amortization, proration, allocation and
spreading is not permitted under applicable law, then such excess interest shall
be canceled automatically as of the date of such acceleration or prepayment and,
if theretofore paid, shall be credited on this Note, or, at Payee's option,
refunded to Maker. The terms and provisions of this Section shall control and
supersede every other provision of this Note and the Loan Documents. This Note
is a contract made under and shall be construed in accordance with and governed
by the laws of Kentucky, except that if at any time the laws of the United
States America permit Payee to contract for, take, reserve, charge or receive a
higher rate of interest than is allowed by the laws of Kentucky (whether such
federal laws directly so provide or refer to the law of any state), then such
federal laws shall to such extent govern as to the rate of interest which Payee
may contract for, take, reserve, charge or receive under this Note.
15. Partial Invalidity. If any one or more of the provisions of this
Note, or the applicability of any such provision to a specific situation, shall
be held invalid or unenforceable, such provision shall be modified to the
minimum extent necessary to make it or its application valid and enforceable,
and the validity and enforceability of all other provisions of this Note and all
other applications of any such provision shall not be affected thereby. In the
event such provision(s) cannot be modified to make it or them enforceable, the
invalidity or unenforceability of any such provision(s) of this Note shall not
impair the validity or enforceability of any other provision of this Note.
16. Binding Effect. This Note shall bind the successors and assigns of
Maker and shall inure to the benefit of Payee and its successors and assigns.
Maker shall not assign or allow the assumption of its rights and obligations
hereunder without Payee's prior written consent.
<PAGE>
In Witness Whereof, the undersigned Maker has executed this Note as of
the date first above written.
BuildScape, Inc.
By:
---------------------
Title:
---------------------
("Maker")
<PAGE>
STOCK OPTION AGREEMENT
This Stock Option Agreement ("Agreement") is made and entered into as
of March __, 999, by and among: (i) Cybermax Tech, inc., a Florida corporation,
("Cybermax Tech"), (ii) magine Investments, Inc., a Delaware corporation with
its principal office and place of business n Dallas, Texas ("Imagine"), and
(iii) Buildscape, Inc., a Florida corporation ("Buildscape").
Recitals:
A. Cybermax Tech owns one hundred percent (100%), consisting of 1,000
shares, of the outstanding common stock of Buildscape (the "Common Stock").
B. In connection with a note executed by Buildscape on even date herewith
in favor of Imagine in the amount of $1,000,000, with a scheduled maturity date
of September 15, 1999 (the "Note"), Cybermax Tech is willing to grant to Imagine
an option to purchase 100 shares of the Common Stock (the "Shares"), and Imagine
desires to acquire such option from Cybermax Tech, upon the terms and provisions
set forth herein.
Agreement:
Now, Therefore, the parties hereby agree as follows:
1. Option. Option.
1.1 Grant of Option.1 Grant of Option. In consideration of the payment by
Imagine to Cybermax Tech of the sum of $10,000, the receipt and sufficiency of
which they hereby acknowledge (the "Option Consideration"), Cybermax Tech hereby
grants to Imagine the exclusive right and option to purchase the Shares (the
"Option").
1.2 Purchase Price.2 Purchase Price. The purchase price for each share
shall be determined as follows (the "Option Price"):
(a) If a third party not affiliated or related to Buildscape or
Cybermax Tech, including but not limited to a venture capital concern ("Third
Party"), invests an amount in excess of $1,000,000 (a "Third Party Investment")
in exchange for Common Stock or securities, warrants, options or other rights
convertible into Common Stock ("Convertible Securities") within the six months
following the execution of this Agreement (the "Valuation Period"), the Option
Price shall be eighty percent (80%) of the price paid per share of the Common
Stock (or in the case of Convertible Securities, the price of the Convertible
Security divided by the number of shares of Common Stock into which it may be
converted), by Third Party, or if during the Valuation Period, Third Party
acquires an option, warrant or any other right (a "Third Party Option") to
purchase Common Stock, the Option Price shall be eighty percent (80%) of the
price to be paid per share by Third Party pursuant to the Third Party Option.
Imagine shall be entitled to have its Option Price calculated using the lowest
per share purchase price paid by a Third Party, or to be paid for a Third Party
Option.
<PAGE>
(b) If there is no Third Party Investment during the Valuation
Period, the Option Price shall be a price equal to "capital stock" plus
"additional paid-in capital" on a per share basis for the Common Stock, as
reflected on Buildscape's books as of the close of business on the last day of
the month immediately prior to Imagine's exercise of the Option. Buildscape's
books shall be prepared in accordance with Generally Accepted Accounting
Principals ("GAAP").
1.3 Option Term.3 Option Term.
(a) In the event of a Third Party Investment during the Valuation
Period, the term of the Option (the "Option Term") shall commence on the date of
the closing of the Third Party Investment (the "Third Party Closing Date") and
expire on the 31st day after the Third Party Closing Date.
(b) In the absence of a Third Party Investment during the
Valuation Period, the Option Term shall commence on September 15, 1999 and shall
expire on March 15, 2000.
1.4 Manner of Exercise.4 Manner of Exercise.
(a) Imagine may exercise the Option as to any or all of the Shares
at any time during the Option Term by delivery of written notice of such
exercise ("Notice of Exercise") to Cybermax Tech, setting forth the number of
Shares to be purchased pursuant to exercise of the Option and the date for the
closing of the transfer of the Shares which date shall not be more than 30 days
following the date Notice of Exercise is delivered, unless mutually agreed
otherwise (the "Closing Date"). On the Closing Date, Imagine shall deliver to
Cybermax Tech a certified or cashier's check payable to Cybermax Tech or wire
immediately available funds in an amount equal to (i) the Option Price,
multiplied by (ii) the total number of Shares then being purchased by Imagine
pursuant to exercise of the Option; provided, however, if the Note has not then
been paid in full, Imagine may elect to pay for all or a portion of the Shares
purchased pursuant to this Agreement by applying the purchase price towards any
amounts due or outstanding under the Note, and the entire amount of the purchase
price paid for the Shares shall be deemed to have been paid to Cybermax Tech.
(b) On the Closing Date, Cybermax Tech shall deliver to Imagine
the certificate(s), accompanied by duly executed stock powers, evidencing the
Shares being purchased pursuant to the exercise of the Option, free and clear of
all liens and encumbrances, and shall take any and all such other actions, and
deliver such other documents, as Imagine may reasonably request to effectuate
the contemplated transfer.
1.5 Option Proportionate to Funding.5 Option Proportionate to Funding. If
Imagine disburses to, or on behalf of, Buildscape less than the maximum funding
amount of $1,000,000 set forth in the Note, the number of shares subject to
Imagine's Option under this Agreement shall be proportionately reduced to
reflect the actual amounts disbursed under the Note.
<PAGE>
2. Further Assurances. Further Assurances. Each party shall execute such
additional documents and take such other actions as the other party shall
reasonably request to consummate the transactions contemplated hereby and
otherwise as may be necessary to effectively carry out the terms and provisions
of this Agreement.
3. Representations and Warranties. Representations and Warranties. Cybermax Tech
and Buildscape hereby represent and warrant to Imagine that (i) both Cybermax
Tech and Buildscape have full power and authority to execute and deliver this
Agreement and to consummate their respective transactions contemplated hereby in
accordance with the terms hereof, (ii) the execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby have been
duly authorized, (iii) Cybermax Tech owns 1000 shares of the Common Stock, which
constitutes 100% of the issued and outstanding capital stock of Buildscape, (iv)
Cybermax Tech is the sole legal and beneficial owner of the Shares, and the
Shares are free and clear of all liens, claims, encumbrances, charges and
restrictions of any nature whatsoever (except for liens or interests in favor of
Imagine), (v) the execution and delivery of this Agreement and the sale of the
Shares to Imagine pursuant to the provisions hereof will not breach or
constitute a default under any contract or agreement to which either Cybermax
Tech or Buildscape is a party, (vi) this Agreement constitutes the valid and
binding obligations of each of Cybermax Tech and Buildscape, enforceable against
them in accordance with its terms. The foregoing representations and warranties
of Cybermax Tech and Buildscape shall survive the execution of this Agreement.
4. Covenants. Covenants.
4.1 Repayment of Note.1 Repayment of Note. Notwithstanding anything to
contrary contained in the Note, in the event of a Third Party Closing,
Buildscape shall repay the Note at such Third Party Closing.
4.2 Negative Covenants; Shareholders' Agreement.2 Negative Covenants;
Shareholders' Agreement.
(a) During the Option Term and thereafter, if Imagine exercises
the Option and purchases any Shares, for so long as Imagine owns any Common
Stock, Buildscape shall not and Cybermax Tech shall not allow Buildscape to (i)
issue or grant any additional capital stock or other equity securities of any
kind or options, subscription rights, warrants or other instruments with respect
thereto or any other instruments convertible into shares of its capital stock,
or sell or issue any treasury stock, unless such issuance or grant is in favor
of a Third Party and Buildscape receives full and fair market value for the
interest being sold, conveyed or exchanged, or (ii) declare any stock dividend
or stock split without Imagine's written consent, provided that if Imagine so
consents, the number of Shares subject to the Option shall be increased to
reflect the change in the total capitalization of Buildscape. The covenants
contained in this Section 4.2(a) shall survive the termination of this
Agreement, the Option Term and the purchase of the Shares by Imagine.
<PAGE>
(b) During the Option Term, Cybermax Tech shall not sell, convey,
assign, transfer, grant or dispose of any of the Common Stock, nor shall it
acquire any additional Common Stock or other capital stock of Buildscape or any
warrants, options or other similar rights relating thereto.
5. Indemnification. Indemnification. Cybermax Tech and Buildscape, jointly and
severally, shall indemnify and hold Imagine harmless against and in respect of:
(a) Any damage, deficiency, liability or costs resulting from any
misrepresentation, breach of warranty or nonfulfillment of any covenant or
agreement on the part of Cybermax Tech or Buildscape under this Agreement; and
(b) Any claim, action, suit, proceeding, demand, judgment,
assessment, cost and expense, including reasonable counsel fees, resulting from
any misrepresentation, breach of warranty or non-fulfillment of any covenant or
agreement on the part of Cybermax Tech or Buildscape under this Agreement.
6. Miscellaneous. Miscellaneous.
6.1 Notice.1 Notice. All notices, requests, consents, approvals, waivers,
demands and other communications, including the Notice of Exercise ("Notices")
hereunder shall be deemed to have been given if in writing and (1) personally
delivered against a written receipt, or (2) sent by confirmed telephonic
facsimile, or (3) delivered to a reputable express messenger service (such as
Federal Express, DHL Courier and United Parcel Service) for overnight delivery,
addressed as follows (or to such other address as a party shall have given
notice to the other):
If to Imagine:
Imagine Investments, Inc.
8150 North Central Expressway
Suite 1901
Dallas, Texas 75206
Attn: Gary Goltz, General Counsel
Telephone: (214) 365-1905
Fax: (214) 365-6905
cc: Michael M. Fleishman, Esq.
Greenebaum Doll & McDonald PLLC
3300 National City Tower
Louisville, Kentucky 40202
Telephone: (502) 587-3530
Fax: (502) 540-2131
<PAGE>
If to Cybermax Tech or Buildscape:
Cybermax Tech, Inc. and/or Buildscape, Inc.
7800 Belfort Parkway, Suite 100
Jacksonville, Florida 32256
Attn: Cathe Gray
(904) 281-2200
Fax (904) 296-0584
cc: Malcolm Graham, Esq.
Holland & Knight
One Independent Drive, Suite 2000
Post Office Box 1559
Jacksonville, Florida 32201-1559(32202 street address)
Telephone: (904) 354-4141
Fax: (904) 358-2199
All Notices shall be effective upon being properly personally
delivered, or upon confirmation of a telephonic facsimile, or upon the delivery
to a reputable express messenger service. The period in which a response to any
such notice must be given shall commence to run from the date on the receipt of
a personally delivered notice, or the date of confirmation of a telephonic
facsimile or two days following the proper delivery of the notice to a reputable
express messenger service, as the case may be.
6.2 Waiver.2 Waiver. The failure of any party to enforce any provision of
this Agreement cannot be construed to be a waiver of such provision or of the
right hereafter to enforce the same, and no waiver of any breach shall be
construed as an agreement to waive any subsequent breach of the same or any
other provision.
6.3 Entire Agreement.3 Entire Agreement. This Agreement contains the entire
agreement between the parties hereto with respect to the subject matter hereof,
and no prior or collateral promises or conditions in connection with or with
respect to the subject matter hereof not incorporated herein shall be binding
upon the parties hereto.
6.4 Amendment.4 Amendment. No modification, extension, renewal, rescission,
termination or waiver of any of the provisions contained herein or any future
representation, promise or condition in connection with the subject matter
hereof shall be binding upon either of the parties unless made in writing and
duly executed by the parties or their authorized representatives.
6.5 Successors.5 Successors. This Agreement shall be binding upon and inure
to the benefit of the parties hereto and their respective successors, assigns,
heirs and legal and personal representa tives. Imagine may assign its rights
under this Agreement, in whole or in part, and from time to time, without the
need for consent from Cybermax Tech or Buildscape.
<PAGE>
6.6 Counterparts.6 Counterparts. This Agreement may be executed in separate
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
6.7 Captions.7 Captions. The section and paragraph headings contained in
this Agreement are for reference purposes only and shall not affect the meaning
or interpretation of this document.
6.8 Governing Law.8 Governing Law. This Agreement is executed and delivered
in, and shall be construed and enforced in accordance with the laws of, the
Commonwealth of Kentucky.
[SIGNATURES ON FOLLOWING PAGE]
<PAGE>
In Witness Whereof, the parties have entered into this Agreement as of the
date first written above.
Cybermax Tech, Inc.
By:
-----------------------
Title:
--------------------
("Cybermax Tech")
Imagine Investments, Inc.
By:
-----------------------
Title:
--------------------
("Imagine")
Buildscape, Inc.
By:
-----------------------
Title:
--------------------
("Buildscape")
<PAGE>
RIVERSIDE GROUP, INC.
7800 Belfort Parkway
Jacksonville, Florida 32256
March 26, 1999
Holders of Riverside Group, Inc.
13% Subordinated Notes due September 30, 1999 (the "Notes")
Re: Agreement in Principle to Modify Notes
Gentlemen:
This letter expresses the agreement in principle between Riverside
Group, Inc., a Florida corporation ("RGI"), and the holders of the Notes
described above signing the acceptance pages attached to this letter ("the
Signing Noteholders"). The agreement in principle is to replace the Notes as
follows:
COLLATERAL The Notes held by the Signing Noteholders
would be replaced with new promissory notes
("the New Notes") which will not be
subordinated and which will be secured by
the following ("the Collateral"):
1. A perfected second lien on the collateral
package on which American Founders Life
("AFL") holds liens: (i) RGI's real estate
assets with an approximate net retail value
of $17 million ("the Real Estate") and (ii)
2,002,337 shares of Wickes Inc. common stock
("Wickes Shares"), (the Real Estate and the
Wickes Shares are together called "the AFL
Collateral"); and AFL would agree not to
increase the principal secured by the AFL
Collateral; and
2. A first lien on 10 million shares of the
Greenleaf Technologies Corporation shares
held by RGI ("Greenleaf Shares").
TERM The maturity of the New Notes held by the
Signing Noteholders March 26, 1999 would be
twelve (12) months longer than the maturity
of the existing Notes and would be September
30, 2000.
INTEREST Rate The interest rate on the New Notes
would be 11% per annum. (reduced from 13%
per annum on the existing Notes) effective
upon closing.
COLLATERAL AGENT A Collateral Agent will be appointed to hold
the Collateral on behalf of all Signing
Noteholders with the power, among other
things to (i) grant releases, (ii) direct
RGI to sell Greenleaf shares constituting
Collateral prior to selling any other Green-
leaf shares held by RGI, and (iii) receive
proceeds in trust for distribution to the
Signing Noteholders. All proceeds from the
disposition of any of the Collateral in
excess of amounts required to be paid to AFL
as to the AFL Collateral would be paid to
the Collateral Agent to obtain a release of
the Signing Noteholders lien on the Collat-
eral being sold. All proceeds will be depos-
ited in an interest bearing trust account
and distributed on a quarterly basis to all
Signing Noteholders pro-rata based on the
principal amount of the New Notes held by
each.
GREENLEAF PROCEEDS So long as the aggregate value of the Coll-
ateral in excess of all amounts due to AFL
and any other parties with a superior claim
to the Collateral or the proceeds there-
from, equals or exceeds 120% of the out-
standing principal balance of the New Notes,
then upon any sale by RGI of Greenleaf
Shares constituting Collateral, 50% of such
proceeds would be released to RGI and the
other 50% would be paid to the Collateral
Agent.
RGI holds certain Greenleaf Shares and
options in addition to the Greenleaf Shares
constituting Collateral ("Free Greenleaf
Shares"). Should RGI wish to sell any Green-
leaf Shares, RGI will so notify the
Collateral Agent who will direct whether the
Greenleaf Shares sold are from the
Collateral or from Free Greenleaf Shares.
AFL COLLATERAL In the event of any dispute between RGI
and the Signing Noteholders as to rights
to the Wickes Shares after AFL loan is
repaid, AFL will be authorized to inter-
plead the Wickes Shares into a court for
resolution. In addition, so long as Real
Estate is to be sold at not less than 95% of
appraised value, the Signing
<PAGE>
Holders of Riverside Group, Inc.
March 26, 1999
Page 3
Noteholders will agree to release their liens
on the Real Estate if all net proceeds are
used to reduce the outstanding debt to AFL
which is secured by a prior lien on the Real
Estate.
LEGAL EXPENSES RGI agrees to reimburse the Signing Notehold-
ers for all legal expenses they have incurred
in connection with seeking or securing the
replacement of the Notes whether or not the
replacement is consummated,including all work
done by Mitchell W. Legler, P.A. and Foley &
Lardner through that closing. That amount
will be paid no later than the closing of and
the delivery of the New Notes to be held by
the Signing Noteholders or June 30, 1999,
whichever occurs first.
RELEASE: The Signing Noteholders will deliver a
release to RGI releasing RGI and its officers
and directors ("the Released Parties") from
any claims which the Signing Noteholders may
have in their capacity as Noteholders relat-
ing to past actions of the Released Parties,
including, without limitation, the matters
asserted in prior correspondence on behalf of
the Signing Noteholders sent to one or more
of the Released Parties.
DOCUMENTATION: The Noteholder's attorneys to prepare the
New Notes and related agreements (the
"Definitive Agreements") all to be in form
and content satisfactory to both the Signing
Noteholders and RGI. Execution of the
Definitive Documents is a condition
precedent to the effectiveness of the
agreements in principle expressed in this
letter.
If you agree with the terms set forth above, please so indicate by
signing and returning the enclosed duplicate copy of this letter whereupon we
will instruct our attorneys to immediately begin working with your attorneys to
draft the Definitive Agreements. If Definitive Agreements have not been entered
into by RGI and Signing Noteholders holding at least 90% (unless such condition
is waived by RGI) of the outstanding Notes no later than April 30, 1999 (which
date as it may be extended by mutual consent is called the "Discontinuance
Date"), than this letter of agreement in principle will be of no further force
or effect. Both parties agree to negotiate in good faith until the
Discontinuance Date for the completion of the Definitive Agreements. Other than
<PAGE>
Holders of Riverside Group, Inc.
March 26, 1999
Page 4
the agreements contained in this last paragraph, and other than RGI's agreement
to pay the legal fees of the Signing Noteholders, this letter does not
constitute a binding agreement on any matter.
This letter of intent will have no force or effect unless executed by
RGI and Signing Noteholders holding a majority of the outstanding Notes on or
before April 15, 1999.
Very truly yours,
Riverside Group, Inc.
By:_____________________________
Its __________________________
<PAGE>
Holders of Riverside Group, Inc.
March 26, 1999
Page 5
Accepted and agreed:
-----------------------------
KENNETH M. KIRSCHNER
<PAGE>
Holders of Riverside Group, Inc.
March 26, 1999
Page 6
Accepted and agreed:
-----------------------------
CECIL ALTMANN
<PAGE>
Holders of Riverside Group, Inc.
March 26, 1999
Page 7
Accepted and agreed:
MIDLAND ADVISORS COMPANY
By:_________________________
Its______________________
<PAGE>
Holders of Riverside Group, Inc.
March 26, 1999
Page 8
Accepted and agreed:
AMERICAN CENTENNIAL INSURANCE
By: ________________________
Its_____________________
<PAGE>
Holders of Riverside Group, Inc.
March 26, 1999
Page 9
Accepted and agreed:
SOUTHCOAST CAPITAL
By:________________________
Its______________________
<PAGE>
Holders of Riverside Group, Inc.
March 26, 1999
Page 10
Accepted and agreed:
HARCH CAPITAL MANAGEMENT
By: ____________________
Its___________________
<PAGE>
Holders of Riverside Group, Inc.
March 26, 1999
Page 11
Accepted and agreed:
SOUTHERN FARM BUREAU CASUALTY
By:___________________
Its__________________
<PAGE>
<TABLE>
<CAPTION>
Exhibit 21.01
List of Subsidiaries of Registrant
State of
Name Incorporation
<S> <C>
Wickes Inc. Delaware
GLC Division, Inc. Delaware
Lumber Trademark Company Illinois
Dependable Insurance Group, Inc. Florida
American Financial Acquisitions Corporation Delaware
Cybermax Group, Inc. Florida
NRG Network, Inc. Florida
Cybermax Tech, Inc. Florida
Buildscape, Inc. Florida
Wixx Energy, Inc. Delaware
</TABLE>
<PAGE>
Exhibit 23.01
Consent of Independent Accountants
We consent to the incorporation by reference in the Registration Statement of
Riverside Group, Inc. on Form S-8 (File No. 33-16244), as amended, and the
prospectus included therein, of our report dated March 31, 1999, which includes
an explanatory paragraph as to the Company's ability to continue as a going
concern on our audits of the consolidated financial statements and financial
statement schedules of Riverside Group, Inc. and subsidiaries as of December 31,
1998 and 1997, and for each of the three years in the period ended December 31,
1998, which reports are included in this Annual Report on Form 10-K.
PricewaterhouseCoopers LLP
Jacksonville, Florida
March 31, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Riverside Group, Inc. and Subsidiaries condensed consolidated balance sheet
and condensed statement of operations and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S.Dollars
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 509
<SECURITIES> 0
<RECEIVABLES> 583
<ALLOWANCES> 337
<INVENTORY> 0
<CURRENT-ASSETS> 998
<PP&E> 901
<DEPRECIATION> 499
<TOTAL-ASSETS> 26,402
<CURRENT-LIABILITIES> 12,068
<BONDS> 9,827
0
0
<COMMON> 529
<OTHER-SE> 1,839
<TOTAL-LIABILITY-AND-EQUITY> 26,402
<SALES> 667,704
<TOTAL-REVENUES> 672,764
<CGS> 509,262
<TOTAL-COSTS> 509,262
<OTHER-EXPENSES> 151,642
<LOSS-PROVISION> 1,904
<INTEREST-EXPENSE> 19,264
<INCOME-PRETAX> (8,579)
<INCOME-TAX> (3,728)
<INCOME-CONTINUING> (12,307)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,307)
<EPS-PRIMARY> (2.36)
<EPS-DILUTED> (2.36)
</TABLE>
