UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC
Form 8-K
CURRENT REPORT
Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
Date of Report (Date of earliest event reported): August 23, 2000
_______________
RIVERSIDE GROUP, INC.
(Exact name of registrant as specified in its charter)
Florida 0-9209 59-1144172
(State of other (Commission File No.) (IRS Employer
jurisdiction of Identification
incorporation) number)
7800 Belfort Parkway, Jacksonville, Florida 32256
(Address of principal executive offices) (Zip Code)
904-281-2200
(Registrant's telephone number, including area code)
<PAGE>
ITEM 5. OTHER EVENTS
On August 23, 2000, Riverside, Group, Inc. ("the Company") issued a press
release announcing its preliminary financial results for the quarter ended June
30, 2000. The Company also announced that it expects to file its Form 10-Q for
the second quarter ended June 30, 2000 immediately upon completion of the
quarterly review by the Company's independent accountants. The Company's press
release is attached as an exhibit to this Form 8-K.
The Company is releasing its second quarter financial statements and related
schedules and Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") to the investment community prior to the
completion of the review by its independent accountants. Copies of the financial
statements, related schedules and MD&A are attached as exhibits to this Form
8-K.
ITEM 7. EXHIBITS
Ex 99.1 Press Release dated August 23, 2000
Ex 99.2 Financial Statements and Supplementary Data
Ex 99.3 Management's Discussion and Analysis of Financial Condition and
Results of Operations
2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
RIVERSIDE GROUP, INC.
Date: August 23, 2000 By: /s/ Catherine J. Gray
--------------------------
Catherine J. Gray
Senior Vice President &
Chief Financial Officer
3
<PAGE>
RIVERSIDE GROUP, INC.
7800 Belfort Parkway, Suite 100
Jacksonville, FL 32256
904/281-2200, Fax: 904/296-0584
AT THE COMPANY
Cathe Gray
Shareholder Relations
(904) 281-2200
[email protected]
________________________________________________________________________________
RIVERSIDE GROUP, INC.
ANNOUNCES FILING OF 8-K WITH
SECOND QUARTER 2000 RESULTS
JACKSONVILLE, FLORIDA, AUGUST 23, 2000...RIVERSIDE GROUP, INC. (OTCBB:RSGI),
reported today its second quarter results in a Form 8-K filing. Management
expects to file the Company's Form 10Q for the second quarter ended June 30,
2000 immediately upon the completion of the quarterly review by the Company's
independent accountants. The delay in the review of the second quarter financial
statements and the filing of Form 10Q is primarily attributable to issues
associated with the manner in which the Company has accounted for its investment
in Greenleaf Technologies common stock. The Company changed auditors for this
reporting period and the new auditors are reviewing the proper accounting
treatment for the merger transaction with Greenleaf that was recorded in 1998.
This issue impacts the second quarter and may impact historical financial
statements. Additional time and cooperation with the previous accounting firm
is required to resolve the accounting issues on Greenleaf.
The Company also announced that it has executed an Amendment to the Forbearance
Agreement with the agent for the 11% Noteholders. the Amendment provides for an
extension of the maturity date of the Company's $10 million debt from September
30, 2000 to December 31, 2000. Additionally, Imagine Investments has agreed to
extend the maturity date of its $1.8 million note from August 31, 2000 to
December 31, 2000 and to increase the principal due for the unpaid interest of
$214,000.
The Company recorded a net loss of $241,000 or ($.05 per share) for the quarter
ending June 30, 2000, compared to a net loss for the same period in 1999 of
$1,214,000 or ($.23 per share). For the six months ended June 30, 2000, the
Company reported a net loss of $1,852,000 or ($.39 per share) compared to a net
loss of $4,378,000 or ($.84 per share), for the same period in 1999. The
reduction in net loss for the three and six months ending June 30, 2000 is
primarily attributable to gains on the sale of investment assets and the change
to the equity method for reporting the operations of Buildscape, Inc.
("Buildscape"). Buildscape is a minority-owned subsidiary of Riverside.
In October 1999, the Company sold 38% of its common stock of Buildscape and
began to account for its investment in Buildscape on the equity method. Because
the Company's carrying value of Buildscape on the balance sheet is a negative
$947,000, the Company's income statement for this quarter does not include the
4
<PAGE>
Company's prorata share of Buildscape losses. The Company's results of
operations for the three and six months of 1999, respectively, include losses
attributable to Buildscape of $1,324,000 and $2,444,000.
During the second quarter of 2000, the Company recorded an increase in equity of
approximately $3,672,000 as a result of its investment in Greenleaf. Included
was approximately $449,000 of gains resulting from the sale of 320,000 shares
and $3,223,000 of change in unrealized gains on the Greenleaf common stock. The
six months ended June 30, 2000, include an increase in equity of approximately
$6,471,000 as a result of $977,000 in gains resulting from the sale of 543,000
shares and $5,494,000 of change in unrealized gains on the Greenleaf common
stock. In accordance with SFAS 115, the shares of Greenleaf Technologies
Corporation ("Greenleaf") owned by the Company that are allowable for sale over
the next twelve months under Securities and Exchange Commission Rule 144 have
been classified as available for sale. Pursuant to this rule, 4,558,680 shares
of the Company's common stock in Greenleaf are recorded at their market value of
$6,746,847 on June 30,2000. Each quarter the carrying value and unrealized gain
on the Company's investment in Greenleaf is adjusted for changes in the market
price. The calculated market value of the Company's total investment in
Greenleaf at June 30, 2000 was approximately $18.5 million.
The results of operations for the second quarter of 2000 include profits of
$417,000 attributable to Wickes, Inc., another minority owned subsidiary of the
Company, compared to profits of $1,178,000 for the same period in 1999. Included
in operations for the first six months ended June 30, 2000 and 1999,
respectively, are losses of $880,000 and $147,000 attributable to Wickes. The
decrease in net equity income from Wickes for the three month and six-month
period primarily is the result of increases in sales, general and
administrative, depreciation and interest expenses, as well as a reduction in
other operating income, all of which offset higher gross margins. Included in
the equity in Wickes is goodwill amortization of $130,200 for the three months
ended June 30, 2000 and 1999, and $260,400 for the six months ended June 30,
2000 and 1999, respectively.
During the second quarter of 2000, the Company recorded losses attributable to
its Cybermax subsidiary of $241,000 compared to losses of $351,000 for the same
period in 1999. The Company's results of operations include losses attributable
to Cybermax of $412,000 compared to $547,000 for the six months ending June 30,
2000 and 1999, respectively.
Riverside Group is a holding company engaged in traditional and e-commerce based
supply and distribution of building materials. The Riverside family of companies
includes its 36% owned subsidiary, Wickes Inc. (NASDAQ:WIKS), its 40% owned
subsidiary, Buildscape, Inc. and approximately 10% ownership in Greenleaf
Technologies Corporation (OTCBB:GLFC). Riverside also provides e-commerce
solutions to the building industry through its 100% owned subsidiary, Cybermax,
Inc. and engages in Internet services and web design. For more information on
Riverside's subsidiaries, visit them online at www.wickes.com,
www.buildscape.com and www.cybermax.com.
5
<PAGE>
Safe Harbor Statement
---------------------
Statements contained herein may be deemed forward-looking statements within the
meaning of the Securities Act of 1933 and the Securities and Exchange Act of
1934 which are intended to be covered by the safe harbors created thereby.
Forward-looking statements are subject to risks and uncertainties that could
cause actual risks to differ materially from those expressed in the statements.
A summary of risks and uncertainties which could cause the Company's actual
results to differ materially from those included in, or inferred by, the
forward-looking statements are detailed in the Company's Form 10-K and Form 10-Q
which are on file with the Securities and Exchange Commission.
###
6
<PAGE>
RIVERSIDE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-------------- --------------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 289 $ 277
Accounts receivable, less allowance for doubtful
accounts of $14 at 2000 and $3 at 1999 375 259
Investment in Greenleaf Technologies Corp. 6,747 1,253
Notes receivable 26 30
Prepaid expenses 117 19
-------------- --------------
Total current assets 7,554 1,838
Investment in Wickes Inc. 14,564 15,799
Investment in Buildscape Inc. (947) (947)
Real Estate held for sale 7,387 8,996
Property, plant and equipment, net 259 340
Other assets (net of accumulated amortization of
$59 in 2000 and $46 at 1999) 147 157
-------------- --------------
Total assets $ 28,964 $ 26,183
============== ==============
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current debt and current maturities of long-term debt $ 11,806 $ 11,813
Accounts payable 477 430
Accrued liabilities 1,058 1,758
-------------- --------------
Total current liabilities 13,341 14,001
Long-term debt 268 469
Mortgage debt 11,345 11,345
Net liabilities of discontinued operations 20 21
Other long-term liabilities 84 83
-------------- --------------
Total liabilities 25,058 25,919
Commitments and contingencies (see Note 5)
COMMON STOCKHOLDERS' EQUITY :
Common stock, $.10 par value; 20,000,000 shares authorized; 477 477
4,767,123 issued and outstanding in 2000 and 1999
Additional paid in capital 16,468 16,468
Accumulated other comprehensive income 6,747 1,253
Retained earnings (deficit) (19,786) (17,934)
-------------- --------------
Total common stockholders' equity 3,906 264
-------------- --------------
Total liabilities and common stockholders' equity $ 28,964 $ 26,183
============== ==============
</TABLE>
See Accompanying Notes to Condensed Consolidated Financial Statements.
3
<PAGE>
RIVERSIDE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2000 1999 2000 1999
---- ---- ---- ----
REVENUES:
<S> <C> <C> <C> <C>
Sales and service revenues $ 344 $ 270 $ 748 $ 751
Net investment loss (9) (7) (27) (36)
Net realized investment gains 587 -- 1,163 --
Other operating income 44 24 47 49
--------- ---------- -------- ---------
966 287 1,931 764
--------- ---------- -------- ---------
COSTS AND EXPENSES:
Cost of sales 164 140 288 218
Provision for doubtful accounts 9 63 11 4
Depreciation, goodwill and trademark amortization 63 94 125 154
Selling, general and administrative expenses 665 1,732 1,145 3,316
Interest expense 723 650 1,334 1,303
--------- ---------- -------- ---------
1,624 2,679 2,903 4,995
--------- ---------- -------- ---------
LOSS BEFORE EQUITY IN EARNINGS (LOSSES) OF
RELATED PARTIES (658) (2,392) (972) (4,231)
Equity in earnings (losses) of Wickes, Inc. 417 1,178 (880) (147)
--------- ---------- --------- ----------
NET LOSS $ (241) $ (1,214) $ (1,852) $ (4,378)
========= ========== ========= ==========
BASIC AND DILUTED LOSS PER COMMON SHARE:
Loss per share $ (0.05) $ (0.23) $ (0.39) $ (0.84)
Weighted average number of common shares
used in computing earnings per share 4,759,123 5,213,186 4,759,123 5,213,186
See Accompanying Notes to Condensed Consolidated Financial Statements.
4
</TABLE>
<PAGE>
RIVERSIDE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
For the Six Months Ending June 30,
----------------------------------
2000 1999
----- ----
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net loss $ (1,852) $ (4,378)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation expense 102 93
Amortization expense 23 321
Amortization of bond discount -- 113
Provision for doubtful accounts 11 (4)
Net realized investment gains (1,058) --
Equity in earnings (losses) of unconsolidated subsidiaries 880 (113)
Change in other assets and liabilities:
Increase in accounts receivable (127) (8)
Decrease in notes receivable 4 167
Increase in other assets (107) (230)
Increase(decrease) in accounts payable and accrued liabilities (654) 1,082
Increase in discontinued operations, other liabilities
and current income taxes -- (111)
--------- ---------
NET CASH USED IN OPERATING ACTIVITIES (2,778) (3,068)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of investments:
Property, plant and equipment (17) (131)
Investment in real estate -- --
Proceeds from sales of investments
Investment in real estate 1,599 44
Securities of Greenleaf Technologies Corp. 977 --
Securities of Wickes Inc. 439 1,186
---------- ----------
NET CASH PROVIDED BY INVESTING ACTIVITIES 2,998 1,099
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of debt (208) (153)
Increase in borrowings -- 2,032
---------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (208) 1,879
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 12 (90)
Cash and cash equivalents at beginning of period 277 509
---------- ----------
Cash and cash equivalents at end of period $ 289 $ 419
========== ==========
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Non-cash compensation expense (Greenleaf Option) $ 105 $ --
</TABLE>
See Accompanying Notes to Condensed Consolidated Financial Statements.
5
<PAGE>
RIVERSIDE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
Basis of Financial Statement Presentation
-----------------------------------------
The condensed consolidated financial statements present the financial
position, results of operations, and cash flows of Riverside Group, Inc. and its
wholly-owned and majority-owned subsidiaries (the "Company"). The Company no
longer owns a majority interest in Buildscape, Inc. ("Buildscape") and at
October 21, 1999, the Company began to report its investment in Buildscape on
the equity method (see Note 3. "Investment in Buildscape"). Accordingly, the
Company's consolidated balance sheet as of December 31, 1999 does not include
the accounts of Buildscape. The Company's condensed consolidated statements of
operations and cash flows for the period ending June 30, 1999, include
Buildscape on a consolidated basis.
The condensed consolidated balance sheets as of June 30, 2000, the
condensed consolidated statements of operations for the six months ended June
30, 2000 and 1999 and the condensed consolidated statements of cash flows for
the six months ended June 30, 2000 and 1999, have been prepared by the Company
without audit. In the opinion of management, all adjustments (which include only
normal recurring adjustments) necessary to present fairly the financial
position, results of operations and cash flows as of June 30, 2000, and for all
periods presented have been made. The results for the six month period ended
June 30, 2000 are not necessarily indicative of the results to be expected for
the full year or for any interim period.
The Company accounts for its investment in Greenleaf Technologies
Corporation ("Greenleaf") securities according to the provisions of FAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." This
statement requires that all applicable investments be classified as trading
securities, available-for-sale, or held-to-maturity securities. Greenleaf
securities have been classified as available-for-sale securities, and as such,
will be reported at fair value based upon the closing price on the exchange on
which they are traded on the last day of the quarter. The unrealized gains and
losses are excluded from earnings, but reported within shareholders' equity in
accumulated other comprehensive income (net of the effect of income taxes) until
they are sold. At the time of sale, any gains or losses, calculated by the
specific identification method, will be recognized as a component of operating
results.
Certain information and footnote disclosures normally included in
consolidated financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. It is suggested that these
condensed consolidated financial statements be read in conjunction with the
consolidated financial statements, the related Auditor's report, and notes
thereto included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1999 filed with the Securities and Exchange Commission.
6
<PAGE>
Comprehensive Income
--------------------
Changes in the components of other comprehensive income and in
accumulated other comprehensive income for the first six months of 2000 are as
follows:
<TABLE>
<CAPTION>
Unrealized Total
Gains on Comprehensive
Securities Income
---------- ------------
<S> <C> <C>
Balance at December 31, 1999 $ 1,253 $ (1,425)
Change during the first six months of 2000 5,494 3,642
---------- ----------
Balance at June 30, 2000 $ 6,747 $ 2,217
========== ==========
</TABLE>
The change in comprehensive income includes the change in unrealized gains and
the net loss for the first six months of 2000.
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 is based on the weighted average number of shares
of common stock outstanding during each period (4,759,123 shares in 2000 and
5,213,186 shares in 1999). 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.
2. INVESTMENT IN WICKES INC.
-------------------------
As of June 30, 2000, Riverside beneficially owned 2,925,113 shares of
Wickes Inc.'s ("Wickes") common stock, which constituted 36% of Wickes'
outstanding voting and non-voting common stock.
Summary financial information of Wickes for the first quarter of 2000
follows (in thousands):
<TABLE>
<CAPTION>
(unaudited) (audited)
June 24, 2000 Dec. 25, 1999
------------- -------------
<S> <C> <C>
Balance Sheet Data:
Current assets $ 261,658 $ 241,835
Total assets 355,893 334,636
Current liabilities 73,176 79,312
Long-term debt and other long-term liabilities 253,451 224,505
Common stockholders' equity 29,266 30,819
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
(unaudited) (unaudited) (unaudited) (unaudited)
June 24 June 26 June 24 June 26
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Income Statement Data:
Net sales $ 279,703 $ 288,764 $ 495,479 $ 479,934
Cost of sales 210,386 222,425 372,467 367,628
Gross profit 69,317 66,339 123,012 112,306
Selling, general & administrative 59,290 54,810 110,746 99,480
Other expenses 8,171 7,532 16,104 14,714
Other income (917) (2,187) (1,703) (3,043)
Income(loss) before income tax 2,773 6,184 (2,135) 1,155
Net income (loss) 1,532 3,587 (1,667) 311
</TABLE>
3. INVESTMENT IN BUILDSCAPE
------------------------
On October 21, 1999, Imagine Investments, Inc. ("Imagine") made a $10
million investment in Buildscape which prior to the investment was a
wholly-owned subsidiary of the Company. Imagine converted $3 million of
convertible debt into common stock, exchanged 520,000 shares of Riverside common
stock for Buildscape common stock and purchased an additional $5 million of
Buildscape Series A Preferred Stock.
In connection with the transaction, Imagine was granted the right to
vote the Company's common shares on all matters with the exception of a change
in control. As of October 22, 1999, the Company owned 62% of the Buildscape
common stock; however, because the Company's voting rights were controlled by
Imagine as of October 22, 1999, the Company accounted for its investment in
Buildscape on the equity method. The Company retained 3,119,067 outstanding
shares of Buildscape's common stock. As a result of this transaction, the
Company owned (before Buildscape employee's stock options) 47% of Buildscape on
a fully converted basis. Imagine owned 38% of the common and 100% of the
preferred stock of Buildscape, or 53% on a fully converted basis.
On May 12, 2000, Buildscape entered into a stock purchase agreement
with Imagine and the Dow Chemical Company ("Dow") pursuant to which Dow
purchased Series A Preferred Stock and common stock of Buildscape from Imagine
and also purchased newly issued Series B Preferred Stock directly from
Buildscape. As a result of these transactions, Imagine's right to vote the
Company's common shares of Buildscape was terminated. Dow purchased one tranche
of Series B Preferred Stock and will purchase a second tranche upon the
completion of certain milestones by Buildscape. Dow also has an option to
acquire additional shares in Buildscape that will increase its ownership to
50.1%. Upon the completion of all of these transactions, Riverside's ownership
in Buildscape will be reduced from 47% to 35%, on a fully converted basis.
Summary financial information of Buildscape for the second quarter of
2000 follows (in thousands):
8
<PAGE>
<TABLE>
<CAPTION>
(unaudited) (audited)
June 30, 2000 December 30, 1999
------------- -----------------
<S> <C> <C>
Balance Sheet Data:
Current assets $ 6,860 $ 2,677
Total assets 8,691 3,587
Current liabilities 1,818 1,592
Common stockholders' equity 6,873 1,995
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
(unaudited) (unaudited)
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Income Statement Data:
Net sales $ 122 $ 114 $ 249 $ 179
Cost of goods 91 91 196 123
Gross profit 31 23 53 56
Selling, general & administrative 3,054 1,262 4,948 2,365
Other expenses 175 85 299 135
Other income (54) -- (72) --
Loss before income tax (3,144) (1,324) (5,122) (2,444)
Net loss (3,144) (1,324) (5,122) (2,444)
</TABLE>
4. INVESTMENT IN GREENLEAF
As of September 30, 1998, the Company completed a transaction with
Greenleaf, based in Iselin, New Jersey, whereby the Company acquired common
shares of Greenleaf in exchange for 100% of the common stock of the Company's
former wholly-owned subsidiary, Gameverse, Inc.
As a result of Greenleaf's dissatisfaction with the transaction, on January 28,
2000, the Company and Greenleaf executed a Settlement Agreement (the "Greenleaf
Settlement"). In the Greenleaf Settlement, the Company retained 10,000,000
shares of the 14,687,585 shares that it had originally received. The Company
also retained a five year option to acquire 2,000,000 additional newly issued
shares of Greenleaf common stock at an exercise price of $.25 per share. In
addition to the 10,000,000 retained shares, 3,000,000 of the Greenleaf shares
are held in an escrow account (the "Escrow Shares"), pursuant to an Escrow
Agreement acceptable to Greenleaf and the Company. The proceeds from the sale of
the Escrow Shares are to be used to fund a mutually agreeable joint venture for
the marketing of technology and internet-related products, to be owned in equal
amounts by Greenleaf and the Company. In connection with the settlement,
Riverside granted Greenleaf a stock option to purchase 5% of the issued and
outstanding shares of Cybermax, Inc. ("Cybermax"), a wholly-owned subsidiary of
the Company. The exercise price is $1,000,000 and the expiration date of the
option is September 30, 2003. In addition, the Company entered into an agreement
9
<PAGE>
with a subsidiary of Greenleaf, Future Com., South Florida, Inc. for use of
satellite air time, related technology, hardware and software, on an as-needed
basis, at fair market value.
INVESTMENT SECURITIES - AVAILABLE FOR SALE
------------------------------------------
In accordance with SFAS 115 and Rule 144, under the Securities Act of
1933, as amended (the "'33 Act") 4,558,680 shares of the Company's common stock
in Greenleaf are classified as available for sale as of June 30, 2000. The cost
basis is $0 and the estimated fair market value is $6,747,000, resulting in
gross unrealized gains of $6,747,000. Sales of Greenleaf shares are limited by
Rule 144 under the '33 Act to (i) the greater of the average weekly reported
volume of trading in such securities during the four calendar weeks preceding
such a sale or (ii) 1% of Greenleaf's outstanding shares during a 90 day period.
Based on the Company's intention to sell the maximum number of shares allowed in
order to fund current operations and debt, such shares have been classified as
available for sale and accordingly the value of such shares has been reflected
as a component of comprehensive income, net of applicable tax of $0. No taxes
have been provided as the Company has available net operating loss carryforwards
and strategies which would result in no tax liability upon the sale of these
securities.
5. COMMITMENTS AND CONTINGENCIES
-----------------------------
WICKES INC.
As of June 24, 2000, Wickes had accrued approximately $131,000
(included in accrued liabilities as of June 24, 2000) 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 currently has reserved
approximately $43,000 for estimated clean up costs at 11 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 $28,000 for these matters.
10
<PAGE>
Wickes is one of many defendants in two multi-plaintiff 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 196 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 24 similar
actions for insignificant amounts, and another 224 of these actions have been
dismissed. As of June 24, 2000, none of these suits have made it to trial.
Losses in excess of the amounts accrued as of June 24, 2000 are possible
but an estimate of these amounts cannot be made.
Wickes is involved in various other legal proceedings which are
incidental to the conduct of its business. Certain of these proceedings involve
potential damages for which Wickes' insurance coverage may be unavailable. While
Wickes does not believe that any of these proceedings will have a material
adverse effect on Wickes' financial position, annual results of operations or
liquidity, there can be no assurance of this.
Wickes' assessment of the matters described in this note and other
forward-looking statements in this Form 10-Q are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995
("Forward-Looking Information") and are inherently subject to uncertainty. The
outcome of the matters described in this note may differ from Wickes' assessment
of these matters as a result of a number of factors including, but not limited
to, matters unknown to Wickes at the present time, development of losses
materially different from Wickes' experience, Wickes' ability to prevail against
its insurers with respect to coverage issues to date, the financial ability of
those insurers and other persons from whom Wickes may be entitled to indemnity,
and the unpredictability of matters in litigation.
THE COMPANY AND WICKES
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.
In connection with the sale of Dependable Insurance Company, a former
property and casualty subsidiary of the Company, the Company agreed to indemnify
11
<PAGE>
the purchaser for certain losses on various categories of liabilities. Terms of
the indemnities provided by the Company vary with regard to time limits and
maximum amounts. American Financial Acquisition Corporation subordinated
debentures in the amount of $2.1 million are pledged as collateral on these
indemnities.
Although future loss development will occur over a number of years, the
Company believes, based on all information presently available, that these
indemnities will not have a material adverse effect on the Company's financial
position or results of operations.
On December 1, 1997, the Company completed the sale of its mortgage
lending operation to an unrelated third party. The Company did not realize any
gain or loss from the transaction, but agreed 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.
LIQUIDITY AND MANAGEMENT'S PLANS
The Company's $1.8 million debt to Imagine due to mature on August 31,
2000 has been extended to December 31, 2000 and increased for the amount of
unpaid interest of $214,000. The Company has entered into a Amendment to
Forbearance Agreement with the agent for its 11% Noteholders that will allow the
principal and interest due on the 11% Notes on September 30, 2000 to be paid on
December 31, 2000. The terms of this agreement provide (i) the Company will
continue to sell Greenleaf common stock in a reasonable manner, (ii) the Company
will apply the proceeds from such sales first to the unpaid interest and second
to the principal, (iii) the interest rate will remain at 17% and the Noteholders
will receive a second lien behind Imagine on the 3,119,067 shares of Buildscape
common stock. The Amended Forbearance Agreement is subject to obtaining the
requisite consent of 50% of the 11% Noteholders, the approval of the Riverside
Board and the receipt by the agent of the executed pledge agreement for the
Buildscape common stock. The Company continues to have discussions with other
present and prospective lenders regarding refinancing all, or a portion of these
debts. However, there can be no assurance that the Company will be able to
refinance any of these debts prior to the extended due dates for these loans.
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. The Company is primarily
a holding company, which derives its financial resources through asset sales,
additional borrowings or other financings. As described below, the principal
source of funds in the past has been borrowings and sales of shares of Wickes
common stock. However, because the Company has executed the Greenleaf Settlement
(see Note 4, "Investment in Greenleaf"), the Company is now able to sell shares
of its Greenleaf stock to cover some of its debt obligations, subject to the
limitations and restrictions described below. The Company is currently working
on additional options as discussed below. The primary use of funds is interest
and principal payments on the Company's debt and to fund the operations of its
wholly-owned subsidiary, Cybermax. Cybermax is generating sales and the Company
projects that by the end of this year, Cybermax will generate cash from
operations sufficient to fund its operations. However, there can be no assurance
that this will occur.
12
<PAGE>
The Company estimates that as of August 10, 2000, it will have
approximately $560,000 of accounts payable and other current liabilities
(excluding interest payable), approximately $290,000 of which are past due. In
March of 2000, the Company and Wickes renegotiated the terms of the Company's
note to Wickes, deferring all principal payments due for one year, including the
delinquent principal payments for November of 1999 and February of 2000.
As stated above, the two assets that the Company may sell to cover
immediate cash needs are Wickes and Greenleaf common stock. However, as of
August 14, 2000, all of the Company's 2,918,543 shares of Wickes common stock
were pledged to secure various obligations of the Company. On the closing of the
Imagine short-term loan, Imagine released 81,970 shares of Wickes common stock,
thereby permitting the Company to sell such shares. The Company currently owns
9,360,000 shares of Greenleaf common stock and has a five year option to
purchase two million shares at $0.25 per share. All 9,360,000 shares owned are
pledged to secure the Company's 11% Notes, and any proceeds of sale are required
to be applied as discussed above. The Company owns an additional three million
shares of Greenleaf common stock that are held in an escrow account, pursuant to
an escrow agreement between the Company and Greenleaf (see Note 4. "Investment
in Greenleaf").
The Company has been selling shares of Wickes and Greenleaf common
stock to meet the immediate cash requirements of interest due and operations.
Through August 18, 2000, the Company has sold 81,970 shares of Wickes common
stock and 640,000 shares of Greenleaf common stock for proceeds of approximately
$476,000 and $1,098,000, respectively. Proceeds from the sale of Wickes common
stock were used to pay the interest due to Wickes and to fund current operating
costs. Proceeds from the sale of Greenleaf common stock of $1,075,000 were used
to pay the 11% Noteholders as discussed in Note 6."Long Term and Mortgage Debt".
The Company's $11.3 million of real estate indebtedness is secured by
the Company's real estate and 2,016,168 shares of Wickes common stock.
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.
In June 2000, the Company sold 6.83 acres of its Florida real estate,
which generated proceeds of approximately $1.6 million. The entire proceeds were
used to pay the interest due on the Company's mortgage debt and a prepayment of
interest of approximately $88,000.
The Company currently has 21 acres of its investment in real estate
under contract to sell. The sales proceeds, estimated at $1.8 million (after
closing costs) will be used to pay interest, real estate taxes and pay down
principal on the current mortgage debt of $11.3 million. The Company previously
had a contract to sell all remaining acres scheduled for a May closing, however,
the buyer was unable to meet the terms of the sale and it was cancelled.
13
<PAGE>
The Company's assessment of the matters described in this note and
other Forward-Looking Information is 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 success of, and level of cash flow
generated by Cybermax, (ii) 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, (iii) 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
Cybermax and Buildscape, (iv) the ability of the Company to raise funds through
sales of Wickes and Greenleaf common stock and (v) 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 re-zoning permits, interest rates, general economic
conditions, and conditions in the commercial real estate markets in Atlanta,
Georgia. In addition to the factors described above, the Company's ability to
sell Wickes and Greenleaf common stock would depend upon, among other things,
the trading prices for these securities, and, in light of the relatively low
trading volume for Wickes, the Company's ability to find a buyer or buyers for
these securities in a private transaction or otherwise.
6. LONG TERM AND MORTGAGE DEBT
---------------------------
Consolidated long-term and mortgage debt is comprised of the following
as of June 30, 2000 (in thousands):
<PAGE>
<TABLE>
<CAPTION>
LONG-TERM DEBT
<S> <C>
Collateralized Notes $ 9,805
Other 2,269
Less: current maturities (11,806)
-----------
Total Company long-term debt less current maturities $ 268
MORTGAGE DEBT
Mortgage debt, non-recourse $ 11,345
-----------
Total long-term and mortgage debt
less current maturities $ 11,613
===========
</TABLE>
14
COLLATERALIZED NOTES ("THE 11% NOTES")
On August 25, 1999, the Company and the 13% Note holders executed an
agreement (the "11% Agreement"), whereby the Company's 13% Notes that were
scheduled to mature in September 1999, were replaced with new unsubordinated
promissory notes due September 30, 2000 bearing 11% interest. The 11% Notes are
secured by a junior lien on the collateral securing the Company's real estate
indebtedness and 10 million shares of Greenleaf common stock.
On March 24, 2000, the Company and the 11% Note holders executed a
modification to the 11% Agreement. This modification allows the Company to use
100% of the net sales proceeds from the sale of its Greenleaf shares to be
applied against the semi-annual interest payment due March 31, 2000 in lieu of
payment against the principal. In addition, the Company agreed to make a
principal reduction of $550,000 on the 11% Notes on or before April 30, 2000.
The Company was unable to sell a sufficient amount of the Greenleaf shares to
meet the April 30 deadline, and received a notice of default from the note
holders on May 8, 2000.
On May 8, 2000, the Company and the 11% Note holders executed a
Forbearance Agreement that precluded the 11% Note holders from taking any action
to accelerate the payment of the 11% Notes, as long as the Company performed
pursuant to the terms of the agreement. The terms included funding the balance
of the $550,000 principal payment that was due April 30, 2000 and selling
additional shares of Greenleaf common stock in subsequent months with the entire
proceeds applied to reduce the outstanding principal on the 11% Notes. The
Company reduced the principal balance of the notes by $195,000 in June, $145,000
in July and $160,000 in August, however, these payments fell below the
requirements of the forbearance agreement.
The Company has entered into an Amendment to the Forbearance Agreement
with the agent for the 11% Noteholders that will allow the interest and
principal due on September 30, 2000, to be paid on December 31, 2000. The terms
of this agreement provide (i) the Company continue to sell the Greenleaf common
stock in a reasonable manner, (ii) the Company will apply the proceeds from such
sales first to the unpaid interest and second to the unpaid principal, (iii) the
interest rate will remain at 17% and the Noteholders will receive a second lien
behind Imagine on the 3,119,067 shares of Buildscape common stock. The
Amendment to the Forbearance Agreement is subject to obtaining the requisite
consent of 50% of the 11% Noteholders, the approval of the Riverside Board and
the receipt by the agent of the executed pledge agreement for the Buildscape
stock.
15
<PAGE>
OTHER
WICKES PROMISSORY NOTE
In March of 2000, the Company and Wickes renegotiated the terms of the
Wickes promissory note, deferring all principal payments, including the
delinquent principal payments due in November of 1999 and February of 2000, for
one year, after which the principal payments are due on a quarterly basis. The
interest on this note will be payable on a quarterly basis.
IMAGINE SHORT-TERM LOAN
As of May 9, 2000, the Company had made payments of $9,553 under the
Imagine short-term loan but was delinquent with respect to required payments of
approximately $174,675 of interest. In connection with the Greenleaf Settlement,
the Company granted Greenleaf a stock option to purchase 5% of the issued and
outstanding shares of Cybermax, all of which are pledged to Imagine. The Company
believes that if Greenleaf exercises this stock option, then the Imagine
short-term loan will be paid in full. The Company and Imagine have agreed to
extend the principal and interest payments due on August 31, 2000 until
December 31, 2000. The $1.8 million loan balance will be increased for unpaid
interest of $214,000 with this extension.
7. INCOME TAXES
------------
The Company's effective tax rate was 0% for the six months ended June
30, 2000 and 1999. The Company has established a reserve for the full amount of
deferred tax assets. In management's opinion, it is unlikely the deferred tax
assets will be realized in the near future.
8. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
-----------------------------------------
SFAS 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. In June 1999, SFAS No. 137, "Accounting for Derivative Instruments
and Hedging Activities--Deferral of the Effective Date of SFAS No. 133," was
issued amending SFAS No. 133 by deferring the effective date for one year, to
fiscal years beginning after June 15, 2000. The Company currently is evaluating
the effects of this pronouncement.
9. SUBSEQUENT EVENTS
-----------------
In the second quarter management proposed the transfer of additional
shares of Greenleaf's common stock and options to certain officers and
employees. These issuances are subject to the Company's Board of Directors
review and approval. On April 7, 2000, the Board engaged an outside consulting
firm to conduct a compensation analysis of incentive programs. The Board has not
taken any further action pending receipt of the report.
On August 14, 2000, the Company executed an Amendment to the Forbearance
Agreement with the agent for the 11% Noteholders, that provides for an extension
of the maturity date of the Notes from September 30, 2000 to December 31, 2000.
For further information regarding this extension see Note 5. "Commitments and
Contingencies".
On August 10, 2000, Imagine agreed to extend the maturity date of its
Note from August 31, 2000 to December 31, 2000 and to increase the principal due
for the unpaid interest of $214,000. For further information regarding this
extension see Note 5. "Commitments and Contingencies".
16
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
---------------------------------------------------------------- -------
The following discussion should be read in conjunction with the
Condensed Consolidated Financial Statements and Notes thereto contained
elsewhere herein and in conjunction with the Consolidated Financial Statements
and Notes thereto and Management's Discussion and Analysis of Financial
Condition and Results of Operations contained in the Company's Annual Report on
Form 10-K for the year ended December 31, 1999.
RESULTS OF OPERATIONS
GENERAL
The Company reported results of operations for the three and six months
ended June 30, 2000 and 1999, as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
(unaudited) (unaudited)
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Earnings(loss) before income taxes,
and equity in related parties(1)(2) $ (658) $ (2,392) $ (972) $ (4,231)
Income tax (benefit) expense -- --
Equity in earnings (losses)
of Wickes Inc.(3) 417 1,178 (880) (147)
---------- ----------- ---------- ----------
Net loss $ (241) $ (1,214) $ (1,852) $ (4,378)
========== =========== ========== ==========
</TABLE>
(1) Includes realized investment gains of $587,000 and $0 for the three
months ended June 30, 2000 and 1999, and $1,163,000 and $0 for the six
months ended June 30, 2000 and 1999, respectively.
(2) The Company accounted for its investment in Buildscape under the equity
method for the six months of 2000. During the same period in 1999, the
Company consolidated Buildscape's operations with those of the Company
and its subsidiaries.
(3) Includes goodwill amortization of $130,200 and $130,200 for the three
months ended June 30, 2000 and 1999, and $260,400 and $260,400 for the
six months ended June 30, 2000 and 1999, respectively.
17
<PAGE>
LINES OF BUSINESS
The following tables sets forth certain financial data for the three and
six months ended June 30, 2000 and 1999, respectively, for the following
segments: Buildscape, Cybermax, Wickes and the Parent Group. Buildscape's
operations are consolidated with those of the Company and its subsidiaries
through October 21, 1999. The Company accounted for its investment in Buildscape
under the equity method for the first six months of 2000. The "Parent Group"
includes real estate, parent company, discontinued operations and all
eliminating entries for inter-company transactions.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
---- ---- ---- ----
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
SALES:
Buildscape(1) $ -- $ 114 $ -- $ 179
Cybermax 344 143 748 543
Wickes(2) -- -- -- --
Parent Group -- 13 -- 29
------------ ---------- ------------ -----------
Total $ 344 $ 270 $ 748 $ 751
============ =========== ============ ==========
COST OF SALES:
Buildscape(1) $ -- $ 91 $ -- $ 123
Cybermax 164 48 288 91
Wickes(2) -- -- -- --
Parent Group -- 1 -- 4
------------ ----------- ---------- ------------
Total $ 164 $ 140 $ 288 $ 218
============ =========== =========== ============
OTHER OPERATING INCOME:
Buildscape(1) $ -- $ -- $ -- $ --
Cybermax 9 -- 12 1
Wickes(2) -- -- -- --
Parent Group 35 24 35 48
------------ ----------- ---------- ----------
Total $ 44 $ 24 $ 47 $ 49
============ =========== ========== =========
INVESTMENT INCOME AND REALIZED
GAINS/(LOSSES):
Buildscape(1) $ -- $ -- $ -- $ --
Cybermax -- -- -- --
Wickes(2) 36 -- 84 --
Parent Group 542 (7) 1,052 (36)
----------- ----------- ---------- -----------
Total $ 578 $ (7) $ 1,136 $ (36)
=========== =========== ========== ===========
18
<PAGE>
Three Months Ended Six Months Ended
------------------ ----------------
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
---- ---- ---- ----
(in thousands) (in thousands)
EXPENSES:
Buildscape(1) $ -- $ 1,301 $ -- $ 2,417
Cybermax 430 445 884 998
Wickes(2) -- -- -- --
Parent Group 307 143 397 59
----------- ------------ ---------- -----------
Total $ 737 $ 1,889 $ 1,281 $ 3,474
=========== ============ ========== ===========
INTEREST EXPENSE:
Buildscape(1) $ -- $ 46 $ -- $ 83
Cybermax -- 1 -- 2
Wickes (2) 374 382 648 763
Parent Group 349 221 686 455
----------- ------------ ---------- -----------
Total $ 723 $ 650 $ 1,334 $ 1,303
=========== ============ ========== ===========
EARNINGS(LOSS) BEFORE INCOME
TAXES, EQUITY IN RELATED PARTIES
AND MINORITY INTEREST:
Buildscape(1) $ -- $ (1,324) $ -- $ (2,444)
Cybermax (241) (351) (412) (547)
Wickes(2) (338) (382) (564) (763)
Parent Group (79) (335) 4 (477)
----------- ------------ ---------- ----------
Total $ (658) $ (2,392) $ (972) $ (4,231)
=========== ============ ========== ==========
IDENTIFIABLE ASSETS:
Buildscape(1) $ (947) 713 $ (947) $ 713
Cybermax 558 569 558 569
Wickes(2) 14,564 13,405 14,564 13,405
Parent Group 14,789 10,043 14,789 10,043
----------- ------------ ---------- -----------
Total $ 28,964 $ 24,730 $ 28,964 $ 24,730
=========== =========== ========== ===========
</TABLE>
(1) After October 21, 1999, the Company's balance sheet and statements of
operations reflect the Company's investment in Buildscape on the equity method.
(2) Includes an interest allocation from Riverside on its 11% secured notes and
13% subordinated notes of $374,000 and $382,000 for the three months ended June
30, 2000 and 1999, respectively, and $648,000 and $763,000 for the six months
ended June 30, 2000 and 1999, respectively.
19
<PAGE>
BUILDSCAPE, INC.
The following table sets forth unaudited information concerning the results
of Buildscape for the three and six months ended June 30, 2000 and 1999,
respectively: (in thousands)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
(unaudited) (unaudited)
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales $ 122 $ 114 $ 249 $ 179
Cost of sales 91 91 196 123
---------- ---------- ---------- ----------
Net profit 31 23 53 56
Selling, general and administrative 3,054 1,262 4,948 2,365
Depreciation and amortization 165 39 289 52
Interest expense 10 46 10 83
---------- ---------- ----------- ----------
Total expenses 3,229 1,347 5,247 2,500
Other income 54 -- 72 --
---------- ---------- ---------- ----------
Net loss $ (3,144) $ (1,324) $ (5,122) $ (2,444)
========== ========== ========== ==========
</TABLE>
On October 21, 1999, the Company sold to Imagine 38% of the common and
100% of the preferred stock of Buildscape. As a result, the Company accounted
for its investment in Buildscape under the equity method after October 21, 1999.
On May 12, 2000, Buildscape entered into a stock purchase agreement
with Imagine and the Dow Chemical Company ("Dow") pursuant to which Dow
purchased Series A Preferred Stock and common stock of Buildscape from Imagine
and also purchased newly issued Series B Preferred Stock directly from
Buildscape. Dow purchased one tranche of Series B Preferred Stock upon the
completion of certain milestones by Buildscape. Dow also acquired an option to
acquire additional shares in Buildscape that will increase its ownership to
50.1%. Upon the completion of the transactions, Riverside's ownership in
Buildscape will be reduced from 47% to 35%, on a fully converted basis.
In March 1999, Buildscapeauction.com was introduced. Although this
website is conducting sales, development costs continue as the site content is
expanded and the functionality of the site is enhanced and improved. Selling,
general and administrative expense includes personnel and technology costs
relevant to developing the technology for the website and the marketing sales
plan for the Buildscape.
Buildscape delivers products and services to construction professionals
through the Internet and other emerging technologies. BuildscapePro
(www.buildscapepro.com) provides access to real-time product and procurement
information, including pricing, availability and delivery. This allows
professional builders and contractors to better manage the flow of materials,
20
<PAGE>
locate subcontractors and enhance their customer service. Buildscape also
operates www.buildscape.com, giving consumers access to building products and
information for their home improvement needs.
Buildscape has experienced cumulative operating losses, and its
operations are subject to certain risks and uncertainties, including, among
others, risks associated with technology and regulatory trends, evolving
industry standards, growth and acquisitions, actual and prospective competition
by entities with greater financial and other resources, the development of the
Internet market and the need for additional capital. There can be no assurances
that Buildscape will be successful in becoming profitable or generating positive
cash flow in the future. Buildscape is considered to be a development stage
company.
CYBERMAX, INC.
The following table sets forth unaudited information concerning the
results of Cybermax for the three and six months ended June 30, 2000 and 1999,
respectively (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
(unaudited) (unaudited)
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales $ 344 $ 143 $ 748 $ 543
Cost of sales 164 48 288 91
------- -------- --------- --------
Net profit 180 95 460 452
Selling, general and administrative 384 414 792 943
Depreciation and amortization 46 31 92 53
Interest expense -- 1 -- 2
-------- -------- --------- --------
Total expenses 430 446 884 999
Other operating income 9 -- 12 1
-------- -------- -------- --------
Net loss $ (241) $ (351) $ (412) $ (547)
======== ======== ======= ========
</TABLE>
21
<PAGE>
Revenues for the second quarter of 2000 were $344,000 compared to
$143,000 for the comparable period in 1999. Revenues for the second quarter of
2000 include $250,000 of e-Commerce solution sales, $34,000 of software and
equipment sales, $7,000 of multi-media solution sales and $53,000 of network
services. Revenues for the second quarter of 1999 include $87,000 of e-Commerce
solution sales, $8,000 of software and equipment sales and $48,000 of network
services. The direct costs for the second quarter of 2000 include $83,000 for
e-Commerce solution sales, $28,000 of software and equipment sales, $40,000
network services and $13,000 of miscellaneous costs. The direct costs for the
second quarter of 1999 include $6,000 of costs for software and equipment sales,
$35,000 of costs for network services and $7,000 of miscellaneous costs. During
the second quarter of 1999, the direct costs for the e-Commerce solution sales
were employees salaries which were included in the selling, general and
administrative line item. In 2000, these costs were provided by an outside
consulting firm and were included as a direct cost of sales.
Revenues for the first six months of 2000 were $748,000 compared to
$543,000 for the first six months of 1999. Revenues for the first six months of
2000 include $553,000 of e-Commerce solution sales, $86,000 of software and
equipment sales, $7,000 of multimedia solutions sales and $102,000 of network
services. Revenues for the first six months of 1999 include $426,000 of
e-Commerce solution sales, $8,000 of software and equipment sales and $109,000
of network services. The direct costs for the first six months of 2000 include
$137,000 for e-Commerce solution sales, $57,000 of software and equipment sales,
$78,000 of network services and $16,000 of miscellaneous costs. During the first
six months of 1999, the direct costs for the e-Commerce solution sales were
employees salaries which were included in the selling, general and
administrative line item. In 2000, these costs were provided by an outside
consulting firm and were included as a direct cost of sales.
Selling, general and administrative expenses decreased for the second
quarter of 2000 to $384,000, compared to $414,000 during the first six months of
1999. The primary reason for this decrease was the reduction of personnel and
legal expense which was offset slightly by increases in contractual services,
software services and marketing and advertising expense.
Selling, general and administrative expenses decreased for the first
six months of 2000 to $792,000, compared to $943,000 during the first six months
of 1999. The primary reason for this decrease was the reduction of the personnel
in 2000 and legal expenses which was offset slightly by increases in contractual
services, software services and marketing and advertising expense.
WICKES INC.
The Company estimates that its results of operations for the second
quarter of 2000 include profits of $79,000 attributable to Wickes, compared to
profits of $796,000 for the same period in 1999. The Company estimates that its
results of operations include losses of $1,444,000 and $909,000 attributable to
Wickes, for the first six months ended June 30, 2000 and 1999, respectively.
The following discussion was obtained from the Wickes Quarterly Report
on Form 10-Q for the second quarter of 2000.
22
<PAGE>
The following discussion should be read in conjunction with the Condensed
Consolidated Financial Statements and Notes thereto contained elsewhere herein
and in conjunction with the Consolidated Financial Statements and Notes thereto
and Management's Discussion and Analysis of Financial Condition and Results of
Operations contained in Wickes' Annual Report on Form 10-K for the year ended
December 25, 1999.
The following table sets forth, for the periods indicated, the percentage
relationship to net sales of certain expense and income items. This information
includes the results from all sales and distribution and component manufacturing
facilities operated by Wickes, including those closed or sold during the period.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
(unaudited) (unaudited)
June 24, June 26 June 24, June 26,
2000 1999 2000 1999
-------- -------- -------- -------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Gross profit 24.8% 23.0% 24.8% 23.4%
Selling, general and
administrative expense 21.2% 19.0% 22.4% 20.7%
Depreciation, goodwill and
trademark amortization 0.7% 0.6% 0.7% 0.6%
Provision for doubtful accounts 0.0% 0.0% 0.1% 0.1%
Other operating income (0.3)% (0.8)% (0.3)% (0.6)%
Income from operations 3.2% 4.2% 2.0% 2.6%
</TABLE>
Wickes' results of operations are historically affected by, among other
factors, weather conditions, interest rates, lumber prices, housing starts and
other external economic factors. Weather conditions during the first six months
of 2000 were relatively comparable to the prior year. However, in Wickes'
largest region, the Midwest, experienced extremely wet conditions in May and
June which tends to adversely impact sales. The second quarter and first half of
2000 showed continuing trends of higher interest rates, which many builders took
as a sign to slow down production and test demand. As a result of these factors,
housing starts for the second quarter of 2000 were down from the second quarter
of 1999 a combined 5.4% in the Midwest and Northeast regions of the United
States (5.3% and 5.4%, respectively). The Midwest and Northeast represented
approximately 79.0% of Wickes' sales in the second quarter of 2000 versus 76.4%
of Wickes' sales in the comparable period of 1999. When combined with the South,
housing starts for the second quarter of this year were flat in all regions
served by Wickes over the same period last year. On a year-to-date basis, actual
housing starts are relatively comparable to last year. In addition to the
effects of the foregoing, escalating fuel prices and higher interest rates have
also adversely impacted Wickes' earnings.
Net income for the three months ended June 24, 2000 was $1.5 million
compared with a net income of $3.6 million for the three months ended June 26,
1999. The decrease in net income for the three-month period primarily is the
result of increased sales, general and administrative expenses, interest and
depreciation expenses, as well as a reduction in other operating income, all of
which offset higher gross margins.
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Net loss for the first six months of 2000 was $1.7 million compared
with net loss of $311,000 for the first six months of 1999. The decrease in net
income for the six-month period primarily is the result of increases in sales,
general and administrative, depreciation and interest expenses, as well as a
reduction in other operating income, all of which offset higher gross margins.
PARENT COMPANY AND OTHER SUBSIDIARIES
The following discussion relates to the operations of the Parent
Company and its subsidiaries, other than Buildscape, Cybermax and Wickes (the
"Parent Group").
The Parent Group's non-interest operating expenses for the second
quarter of 2000 increased to $307,000 compared to $143,000 for the same period
in 1999. On April 14, 2000, the Company's Board of Directors authorized the
Company to (i) transfer certain options held by the Company to acquire common
stock of Greenleaf to certain employees of the Company. The terms of the
commitments to the employees which were approved by the Board of Directors,
began the vesting period for the options on October 1, 1998. Accordingly, in the
second quarter of 2000, the Company recorded income of approximately $105,000
included in net realized investment gains, which represents the value of the
shares transferred. Such approval effectively results in the awarding of vested
options and the recognition of compensation expense of approximately $105,000,
accordingly. In addition, travel, audit and legal expenses increased during the
second quarter of 2000 compared to the second quarter of 1999.
Revenues of the Parent Company (excluding investment income) for the
second quarter of 2000 and 1999 were $35,000 and $24,000, respectively.
Interest expense (excluding interest allocation to Wickes for the
Parent Company's 11% and 13% Notes of $374,000 in 2000 and $382,000 in 1999) for
the second quarter of 2000 and 1999, were $349,000 and $221,000 respectively. In
2000, interest consisted of $71,000 on the Parent Company's other debt and
$278,000 on the Parent Company's real estate mortgage debt. In 1999, interest
consisted of $2,000 on the Parent Company's other bank debt and $219,000 on the
Parent Company's real estate mortgage debt. The primary reason for the increase
in interest expense is due to additional debt of the Company and higher interest
rates on the Company's mortgage debt.
The Parent Group's non-interest operating expenses for the first six
months of 2000 increased to $307,000 compared to $59,000 during the same period
in 1999. The 1999 expenses include income of approximately $100,000, which
resulted from the release of a reserve established in prior years in connection
with the sale of the Company's former property and casualty operations.
In 2000, compensation expense of approximately $105,000 was included for options
transferred to employees, as discussed above. In addition travel, audit and
legal expenses were higher for the six months of 2000 compared to the six months
of 1999.
Revenues of the Parent Group (excluding investment income) for the
first six months of 2000 and 1999 were $35,000 and $48,000, respectively.
Interest expense (excluding interest allocation to Wickes for the
Parent Company's 11% and 13% notes of $648,000 in 2000 and $763,000 in 1999) for
the six months of 2000 and 1999, were $686,000 and $455,000 respectively. In
2000, interest consisted of $142,000 on the Parent Company's other debt and
$544,000 on the Parent Company's real estate mortgage debt. In 1999, interest
consisted of $3,000 on the Parent Company's other bank debt and $452,000 on the
Parent Company's real estate mortgage debt. The primary reason for the increase
in interest expense is due to additional debt of the Company and higher interest
rates on the Company's mortgage debt.
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REAL ESTATE INVESTMENTS
The Company's real estate investments consist of $7,306,000 in Georgia
properties, and $81,000 in other states.
During the second quarter of 2000, the Company sold 6.83 acres of its
Florida property for $1,636,000, and recorded a loss of $3,400 on the sale.
During the fourth quarter of 1999, the Company had established a reserve for
$278,000 on this property. The Company had no sales of its real estate
investments during the second quarter of 1999.
INCOME TAXES
The Company's effective tax rate was 0% for the three and six
months ended June 30, 2000 and 1999. The Company's equity in losses of Wickes
has reduced the Company's GAAP basis in its investment in Wickes creating
deferred tax benefits which will be realized upon sale or subsequent increase in
GAAP basis of this investment.
LIQUIDITY AND CAPITAL RESOURCES
The Parent 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 asset sales and
Cybermax's operations. Proceeds from real estate sales are required to be
applied to real estate debt reduction and are not available to the Parent
Company for other purposes.
The $9,500,000 principal amount of the Company's 11% Notes due
September 30, 2000, and the $1,800,000 principal amount of the Company's
short-term loan from Imagine due August 31, 2000, has been extended. For further
information regarding these loans see Note 5. "Commitments and Contingencies"
and Note 6. "Long Term and Mortgage Debt".
For a detailed discussion of the Parent Company's liquidity and
management's plans related thereto, see Note 5. "Commitments and Contingencies".
During the first six months of 2000, stockholders' equity increased by
a net of $3,642,000. The primary reason for the increase was the change in
unrealized gains on the Company's Greenleaf common stock which was approximately
$5,494,000. In addition, the Company recorded gains on the sale of its Greenleaf
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common stock of $977,000. This increase was offset by losses attributable to
Wickes of approximately $1,444,000. In addition, the Parent Company's and
Cybermax's operations incurred losses of approximately $1,385,000.
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's total cost for the Year 2000 project was approximately
$350,000, of which approximately $306,000 was used to replace the Company's
accounting software system. The remaining $44,000 is for the replacement of
systems, equipment and software which was accelerated due to the Year 2000
problem, and has been capitalized over the systems and software estimated useful
life.
To date, the Company has not experienced any significant Year 2000
problems and will continue to monitor its systems over the next few months.
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