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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-9209
DECEMBER 31, 1999
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 15, 2000, the Registrant had 4,767,123 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 nonaffiliated was approximately $6.24 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).
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TABLE OF CONTENTS
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PAGE NO.
PART I
Item 1. Business...........................................................................................1
Item 2. Properties........................................................................................18
Item 3. Legal Proceedings.................................................................................19
Item 4. Submission of Matters To a Vote of Security-Holders...............................................20
PART II
Item 5. Market For Registrant's Common Equity
and Related Stockholder Matters..............................................................21
Item 6. Selected Financial Data...........................................................................22
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations..........................................................24
Item 7A. Quantitative and Qualitative Disclosure About Market Risk.........................................34
Item 8. Financial Statements and Supplementary Data.......................................................34
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.......................................................34
PART III
Item 10. Directors and Executive Officers of the Registrant................................................35
Item 11. Executive Compensation............................................................................35
Item 12. Security Ownership of Certain Beneficial Owners and Management....................................35
Item 13. Certain Relationships and Related Transactions....................................................35
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K..................................36
(a) List of Financial Statements and Schedules Filed as a Part of this Report....................36
(b) Reports on Form 8-K - None...................................................................37
Exhibits.....................................................................................38
SIGNATURES.......................................................................................................41
FINANCIAL STATEMENTS..........................................................................................F - 1
FINANCIAL STATEMENT SCHEDULES.................................................................................F - 2
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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
wholly-owned subsidiary, Cybermax, Inc. ("Cybermax") on providing e-commerce
solutions to the building industry, as well as web software application
development and hosting services.
The Company also is engaged in the supply and distribution of building
materials through its 36%- owned subsidiary, Wickes Inc. ("Wickes") and its
47%-owned subsidiary, Buildscape, Inc. ("Buildscape"). Wickes is a leading
supplier and manufacturer of building materials in the United States, with 101
sales and distribution facilities and 25 manufacturing facilities located in 23
states. Buildscape provides e-commerce services and building-related content to
the home building professional as well as consumers.
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, 2000, Riverside beneficially owns 3,000,513 shares of
Wickes' common stock, which constitutes 36% of Wickes' outstanding voting and
non-voting common stock. See "Wickes."
In January 1998, Riverside formed various operating subsidiaries, which
acquired certain e-commerce and advertising operations from Wickes. In October
of 1999, the Company decreased its ownership in Buildscape to 47%. See
"Buildscape".
In February 1998, Riverside acquired the assets of Cybermax from a third
party. See "Cybermax".
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LINES OF BUSINESS
The following table sets forth certain financial data for the past
three years for the following segments: Buildscape, Cybermax, Wickes and the
Parent Group. 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
all of 1999. Buildscape's operations are consolidated with those of the Company
and its subsidiaries for all of 1998 and through October 21, 1999. The Company
accounted for its investment in Buildscape under the equity method for the
remainder of 1999. The "Parent Group" includes real estate, parent company, and
discontinued operations and all eliminating entries for inter-company
transactions.
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Years Ended December 31,
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1999 1998 1997
---- ---- ----
(in thousands)
SALES:
Buildscape(1) $ 415 $ 30 $ --
Cybermax 1,171 486 --
Wickes(2) -- 667,024 884,082
Parent Group 34 164 --
--------- --------- ---------
Total $ 1,620 $ 667,704 $ 884,082
========= ========= =========
COST OF SALES:
Buildscape(1) $ 342 $ 14 $ --
Cybermax 213 182 --
Wickes(2) -- 509,740 681,056
Parent Group 4 170 --
-------- --------- ---------
Total $ 559 $ 510,106 $ 681,056
======== ========= =========
OTHER OPERATING INCOME:
Buildscape(1) $ -- $ -- $ --
Cybermax 15 -- --
Wickes(2) -- 5,045 10,689
Parent Group 80 546 608
------- --------- ---------
Total $ 95 $ 5,591 $ 11,297
======= ========= =========
INVESTMENT INCOME AND REALIZED
GAINS/(LOSSES):
Buildscape(1) $ 3 $ -- $ --
Cybermax -- -- --
Wickes(2) -- (1,837) --
Parent Group (321) 1,306 866
-------- ---------- ---------
Total $ (318) $ (531) $ 866
======== ========== =========
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Years Ended December 31,
1999 1998 1997
---- ---- ----
(in thousands)
EXPENSES:
Buildscape(1) $ 4,485 $ 4,605 $ 668
Cybermax 2,209 (283) --
Wickes(2) -- 141,447 192,395
Parent Group 421 1,549 2,222
-------- --------- ----------
Total $ 7,115 $ 147,318 $ 195,285
======== ========= ==========
RESTRUCTURING AND UNUSUAL ITEMS:
Buildscape(1) $ -- $ -- $ --
Cybermax -- -- --
Wickes(2) -- 5,932 (559)
Parent Group -- -- --
--------- --------- -----------
Total $ -- $ 5,932 $ (559)
========= ========= ===========
INTEREST EXPENSE:
Buildscape(1) $ 174 $ 85 $ --
Cybermax 3 6 --
Wickes(2)(3) 1,407 17,984 22,890
Parent Group 1,058 1,189 1,635
------- --------- ---------
Total $ 2,642 $ 19,264 $ 24,525
======= ========= =========
EARNINGS(LOSS) BEFORE INCOME TAXES,
EQUITY IN RELATED PARTIES, MINORITY
INTEREST AND DISCONTINUED OPERATIONS:
Buildscape(1) $(4,583) $ (4,674) $ (668)
Cybermax (1,239) 581 --
Wickes(3) (1,407) (4,871) (1,011)
Parent Group (1,690) (1,188) (2,383)
-------- ---------- ----------
Total $(8,919) $ (10,152) $ (4,062)
======== ========== ==========
IDENTIFIABLE ASSETS:
Buildscape(1) $ (947) $ 248 $ --
Cybermax 556 217 --
Wickes(3) 15,799 14,738 290,832
Parent Group 9,522 10,942 23,073
------- --------- ---------
Total $24,930 $ 26,145 $ 313,905
======= ========== =========
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(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.
See Note 6 of Notes to the Company's Consolidated Financial Statements included
elsewhere herein.
(2) 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.
(3) Includes $1,407,000, $1,502,000, and $1,473,000 for an interest allocation
from Riverside on its 13% subordinated notes and 11% secured notes for 1999,
1998 and 1997, respectively.
INTERNET AND E-COMMERCE OPERATIONS
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).
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.
Cybermax was established to provide e-commerce solutions to the building
industry, as well as software application development and hosting services.
BUILDSCAPE
The Company provides services to the e-commerce market through its
47%-owned subsidiary, Buildscape. For a description of the reduction by the
Company of its percentage ownership in the fourth quarter of 1999, in connection
with a Buildscape financing, see "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations."
Buildscape markets home building related content, service and commerce
online to the home building industry consumer and professional. To better serve
differing needs within the home building marketplace, Buildscape is creating two
separate online communities. Www.buildscape .com is a consumer site and
www.buildscapepro.com is targeted toward the home building professional. There
are no member fees to use either of Buildscape's web sites.
CHANNELS OF BUILDSCAPE.COM
Buildscape.com, the consumer site, consists of four basic channels and
provides content, service and commerce, as follows:
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SUPERSTORE. Through relationships with affiliate distributors,
manufacturers, and suppliers, Buildscape's online store offers over 65,000
products available for direct shipment within the 48 contiguous United States. A
percentage of product sales revenue is shared between Buildscape and its
affiliates.
AUCTION. For a pre-negotiated fee, sellers are able to post products
online. Interested buyers are able to bid for and purchase these products using
Buildscape's online auction site.
RESOURCES. Home building related content is available online at no
charge and includes in- depth stories, industry news, product reviews, design
ideas and tips from qualified industry professionals as well as a database of
building professionals searchable by geographic area and specialty. Consumers
can also apply for online home mortgages and purchase house plans.
Buildscape has completed agreements with web affiliates Prism Mortgage,
Hanley Wood and Improvenet. Prism Mortgage hosts an online residential mortgage
loan service whereby Buildscape receives a fee for each closed loan that
originates from Buildscape's web site. Hanley Wood provides relative content
directly to Buildscape and hosts a separate site for house plans purchasable
online, whereby Buildscape is paid a percentage of house plan sales it generates
through the web site. Improvenet hosts an online customer/contractor project
matching service whereby Buildscape receives a fee for each project that
originates from Buildscape's web site. Both companies pay monthly fees to share
banner add and direct advertisements between their respective web sites.
INTERACT. Building professionals and do-it-yourselfers can post
industry related questions and answers at no charge on Buildscape's message
board. Questions and answers are sorted by topic and date and remain on the
message boards for future reference by users.
BUILDSCAPEPRO.COM
Buildscape's newly launched web site, buildscapepro.com, is designed to
provide a range of supply chain, construction material procurement and project
execution solutions for affiliate lumberyards and their customers. A separate
buildscapepro.com site will be tailored specifically to each affiliate
lumberyard's available product line and local pricing. Buildscapepro.com will
provide all the features of Buildscape.com, as well as features designed for the
building professional. In addition to the lumberyard's onsite inventory,
customers will be able to order over 100,000 direct ship items that can be
shipped to their local lumberyard for delivery or pick-up. For all products
purchased online through buildscapepro.com, Buildscape will receive a variable
percentage of gross- margin depending on whether the product is available
through the local lumberyard or Buildscape's direct ship national catalog.
Buildscape.com has begun pilot operations through an agreement reached
in early 2000 with Wickes. Development pilot projects are underway under this
agreement with Wickes in Pensacola, Florida, and Pascagoula, Mississippi. During
2000, Buildscape intends to complete its pilot program with Wickes and, subject
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to finalization of terms with Wickes, to begin implementation of the program in
each of Wickes' approximately 100 sales and distribution facilities. Buildscape
is also attempting to reach pilot program agreements with other major buildings
materials chains with the goal of establishing a nationwide system of affiliate
lumberyards.
OTHER SERVICES
In addition to offering items found on the complete bill of materials
for a construction project, additional online services and content will be
accessible through a variety of interfaces, including Internet presence and
wireless personal digital assistance (" PDA") technology, as well as phone and
facsimile; all of which improve the way lumberyards and their customers do
business.
COMPETITION
Buildscape competes primarily with numerous other Internet companies
who provide content and commerce services to the home building products market,
many of which possess greater financial resources than Buildscape. E-commerce in
the building industry is in the development stage, but the Company believes that
Buildscape, through its relationship with the Company and Wickes possess a
significant competitive advantage.
CYBERMAX
In February 1998, Riverside acquired from a third party the assets of
Cybermax.
Cybermax is a professional services company specializing in e-business
solutions encompassing commerce/web development, networking, multimedia,
marketing and promotional services to enable Cybermax's clients to meet their
e-business objectives.
Cybermax generated sales of approximately $1,171,000 in 1999 compared
to sales of approximately $486,000 in 1998. In 1998, these operations were in
the start-up phase. One customer accounted for approximately 53% of these sales
in 1999 and 40% in 1998.
MARKET DIFFERENTIATION
Cybermax has several unique market differentiators to distinguish
itself from traditional Information Technology ("IT") professional services and
web development competitors. They are:
INDUSTRY SPECIFIC FOCUS
Cybermax has established itself as a competitor in e-commerce solutions
to the building industry. This focus includes manufacturers, distributors/
jobbers, mass-merchandisers, retailers, builders, professional tradespeople and
trade associations. Cybermax seeks to continue to leverage its position in the
building industry to expand into other vertical markets.
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CROSS INDUSTRY APPLICATIONS
Cybermax has developed multiple business applications that can be
deployed across multiple industries to expand market reach and growth.
DEVELOPMENT OF A PACKAGED ENTERPRISE SUPPLY CHAIN ENGINE
Leveraging features and functions designed by Cybermax and built into
various websites. Cybermax has developed a very powerful proprietary transaction
engine, coupled with a core set of business-to-business open-architected
applications capable of addressing customer driven requirements anytime, any
place, using any multiple of business rules and policies. This "engine" can be
used to power numerous e-business applications for a broad cross industry
segment.
CUSTOMERS
Cybermax has built numerous "high profile" electronic commerce
solutions for industry. To date, Cybermax has developed over 200 web sites that
are commerce enabled.
With the background and momentum Cybermax has created during the past
year, Cybermax is poised to re-launch itself through an aggressive marketing
communications program utilizing trade and industry analyst outlets, Internet,
print and collateral advertising promotion.
PRODUCTS AND SERVICES
As an e-commerce solutions provider, Cybermax offers a full array of
consulting and technical support services divided over five service areas -
e-business solutions, network services, multimedia solutions, promotional
services, and marketing programs. These product and service groups can be
offered individually or combined to create a full-service offering to address
the most demanding needs of an e-Commerce customer, from the initiation of an
e-Commerce strategy all the way through development and service deployment.
E-BUSINESS SOLUTIONS
Cybermax's e-Business Solutions division is the "front-end" group for
business development and maintenance of client relationships at the account
level. All other business units within the entity will function in a
service-support role to the consulting unit.
E-BUSINESS OFFERING
Within e-business solutions, Cybermax offers a broad range of custom
and packaged services including:
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CUSTOM WEB SITE DEVELOPMENT
Cybermax will continue to seek out custom web site development
incorporating full- commerce capabilities. This area is Cybermax's core
competency and primary revenue resource. Custom developed sites encompass
Internet (customers), Intranet (employees) and extranet (partners and suppliers)
features and functions, tied to comprehensive back office application modules.
COMMERCE VALUE WEB SITES
Commerce Value Web sites is the name applied to a group of prepackaged
templated web site designs offered for a fixed-cost price. This is a low-cost,
high value offering providing each customer a professionally designed web site
for a fraction of the cost of a custom site. Cybermax also packages an online
Web Wizard Template, which allows the customer to maintain his/her own site
content and graphics without any knowledge of programming or web development.
PACKAGED COMMERCE STORE
The Cybermax Private Store module enables customers to create and
populate their own online virtual stores, from which they can sell and promote a
diverse assortment of goods and services. This store can also be customized to
provide Intranet and extranet functionality for administration and restricted
password-protected access for select customers.
The Private Store module contains a shopping basket and online payment
options via credit card or open account billing capture. Shipping modules for
package delivery are also available as part of the store functionality.
NETWORK SERVICES OFFERINGS
Cybermax offers a full range of network services providing customers
one-stop shopping for Internet/web access, e-mail messaging and web hosting
services. These network services sold separately and in combination with
Cybermax's e-business solutions extend the resources and revenues that can be
derived from Cybermax's customers, providing cross-selling and up-selling
opportunities for Cybermax.
DIAL AND DEDICATED ACCESS SERVICES
Cybermax offers national Internet service access via a number of local
access points-of- presence ("POP"). These low speed (56kbps) circuits offer
unlimited Internet access for a monthly fee. Internet access fees include one
e-mail account address per customer inclusive in the monthly service fee and
additional e-mail accounts can be ordered at extra cost.
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WEB HOSTING SERVICES
Web hosting is an integral part of web development through Cybermax's
Network Services business unit. Hosting allows Cybermax to develop customer
sites online, where the client - regardless of business locale - can view and
critique site development as it unfolds. With Cybermax's ability to host sites
it creates, Cybermax can also manage, maintain and modify sites quickly and
supply support whenever the need arises seven days a week, 24 hours a day.
MESSAGING SERVICES
E-mail messaging allows commerce site customers to communicate with
customers immediately at little or no incremental cost (included in web site
hosting and ISP access accounts).
CUSTOMER SUPPORT SERVICES
Cybermax performs customer service support for its ISP and web hosting
customers. In 2000, Cybermax seeks to expand its customer services support for
partner customers such.
COMPETITION
The web design and internet service provider businesses each have
become highly competitive. Cybermax, however, has specialized in building
Extranets/E-Commerce Web sites for participants in the building industry. The
Company believes that this provides Cybermax with a significant competition
advantage.
WICKES
The Company retails and distributes building materials through its
36%-owned subsidiary Wickes. 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 25,
1999 (the "Wickes Form 10- K"), filed by Wickes with the Securities and Exchange
Commission (the "Commission"). For further information concerning Wickes,
reference is made to the Wickes Form 10-K and the periodic reports and other
information filed by Wickes with the Commission.
Wickes is a leading supplier and manufacturer of building materials in
the United States. 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- yourselfer consumers
("DIYers") involved in major home improvement projects. At February 29, 2000,
the Company operated 101 sales and distribution facilities in 23 states in the
Midwest,
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Northeast, and South and 25 component manufacturing facilities that produce and
distribute roof and floor trusses, framed wall panels, and pre-hung door units.
INDUSTRY OVERVIEW
According to the Home Improvement Research Institute ("HIRI") (an
independent research organization for manufacturers, retailers and wholesalers
allied to the home improvement industry), 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 $248.6 billion in 1999. 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 15.4% of the total market in
1999.
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, 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 due to weather. New residential construction is determined largely by
household formations, interest rates, housing affordability, availability of
mortgage financing, regional demographics, consumer confidence, job growth, and
general economic conditions. According to the U.S. Bureau of the Census, U.S.
housing starts totaled 1.35 million in 1995, 1.48 million in 1996, 1.47 million
in 1997, 1.62 million in 1998, and increased to 1.66 million in 1999. The Blue
Chip Economic Indicators Consensus Forecast, dated March 10, 2000, projects 2000
housing starts to be 1.58 million, down slightly from 1999. Housing starts in
Wickes' primary geographical market, the Midwest, increased 7.9% in 1999.
Wickes' two other geographical markets, the Northeast and South, experienced
increases in 1999 housing starts of 3.4% and 2.5%, respectively. Nationally,
single family housing starts, which generate the majority of Wickes' sales to
building professionals, increased by 4.7% from 1.27 million starts in 1998 to
1.33 million starts in 1999.
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. HIRI estimates that sales
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of home improvement products to repair and remodeling professionals represented
$40.5 billion, or approximately 16.3% of total 1999 sales of the building
material supply industry, while direct sales to DIYers amounted to $122.4
billion.
BUSINESS STRATEGY
Wickes' mission is to be the premier provider of building materials and
services and manufacturer of value-added building components to the professional
segments of the building and construction industry.
Wickes is streamlined and goal-oriented, focusing on the professional
builder and contractor market. Wickes targets five customer groups: the
production or volume builder; the custom builder; the tradesman; the repair and
remodeler; and the commercial developer. Its marketing approach encompasses
three channels of distribution: Major Markets, Conventional Markets, and Wickes
Direct. These channels are supported by Wickes network of building components
manufacturing operations. In Major Markets, Wickes serves the national,
regional, and large local builder in larger markets with a total solutions
approach and specialized services. In Conventional Markets, Wickes provides the
smaller building professional in less-populous markets with tailored products
and services. Wickes Direct provides materials flow and logistics management
services to commercial customers. Wickes also serves building professionals
through its network of 25 component manufacturing facilities that produce
value-added, wood framed wall panels, roof and floor truss systems, and pre-hung
interior and exterior doors.
Wickes announced its "Build 2003" program in 1999 as part of Wickes
initiative to build public awareness of its corporate goals. Using 1998 results
as a performance baseline, management outlined seven objectives it aims to
achieve by the end of 2003: (1) Minimum sales growth of 6% annually: Wickes
achieved a 19.2% sales gain in 1999 and same store sales growth of 18.1%. (2)
Internally manufacture 75% of wall panel, roof truss, floor deck and prehung
door needs: Wickes made steady progress in 1999, internally producing 46% of
these building components in 1999, up from the 40% level achieved in 1998. (3)
Increase EBITDA (see Part II, Item 6 for definition) as a percentage of net
sales by a minimum 25%: Wickes generated EBITDA as a percentage of net sales
(before gains on sale of fixed assets) of 3.80% in 1999, a strong improvement
from the 3.34% achieved in 1988. (4) Improve debt-to-equity ratio and achieve
1:1 debt-to-equity by year-end 2003: Wickes improved this leverage ratio in 1999
to a 7.2:1 ratio from 8.3:1 at the end of 1998. (5) Generate a return on capital
in excess of its peer group: Wickes' 14.4% return on capital employed in 1999
was well above the estimated 8.5% average of its publicly traded, building
materials distribution peer group. (6) Extend its earnings season: Wickes
achieved positive EBITDA of $1.6 million in the first quarter 1999 after
reporting slightly negative EBITDA in the same period of 1998. (7) Provide
consistency in earnings growth: Wickes has demonstrated seven consecutive
quarters of earnings growth.
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CUSTOMERS
Wickes has a broad base of customers, with no single customer
accounting for more than 2.0% of net sales in 1999. In 1999, 93% (compared with
89% in 1998) of Wickes' sales were on trade credit, with the remaining 7% as
cash and credit card transactions.
HOME BUILDERS
Wickes' primary customers are single-family home builders. In 1999, all
home builder customers accounted for 62% of Wickes' sales, compared with 61% in
1998. 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 the Wickes' sales and distribution
facilities. In 1999, sales to these customers accounted for approximately 19% of
Wickes sales, compared with 17% in 1998. During 1999, Wickes integrated the
Wickes Direct domestic program more closely with its manufacturing operations.
REPAIR & REMODELERS
In 1999, R&R customers accounted for approximately 9% of Wickes' sales,
compared with 10% in 1998. 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.
DIYERS
Sales to DIYers (both project and convenience) represented about 10% of
Wickes' sales in 1999, compared with 12% in 1998. 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.
12
<PAGE>
PRODUCTS
To provide its customers with the quality products needed to build,
remodel and repair residential and commercial properties, Wickes offers a wide
variety of building products, totaling approximately 63,000 SKUs Company wide
and the ability to special order additional products. Wickes believes that these
special order services are extremely important to its customers, particularly
the building professional. In 1999, approximately 31% of Wickes' sales were of
special order items, compared with 32% in 1998. Each of Wickes' sales and
distribution facilities tailors its product mix to meet the demands of its local
market. Approximately 5,500 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
37%, 34%, 10% and 19%, respectively, of Wickes' sales for 1999 and 44%, 36%, 10%
and 10%, respectively, of sales for 1998.
MANUFACTURING
Wickes owns and operates 25 component manufacturing facilities that
supply Wickes' customers with higher-margin, value-added products such as framed
wall panels, roof and floor trusses, and pre-hung interior and exterior doors.
These facilities include 17 stand alone operations as well as eight additional
operations that exist at Wickes' sales and distribution facilities. These
manufacturing operations enable Wickes to serve the needs of its professional
customers for such quality, custom-made products. In 1999, Wickes' manufacturing
operations supplied approximately 46% of the pre-hung doors, roof trusses, wall
panels, and floor decks sold by the Wickes. Wickes believes that these
value-added, engineered manufactured products improve customer service and
provide an attractive alternative to job-site construction. 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 more than
4.4% of Wickes' purchases in 1999, 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.
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<PAGE>
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 34% 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. In addition, Wickes enters into futures
contracts to hedge longer term pricing commitments. 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 60 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 one
distribution center owned by a third party, located in Chicago, Illinois,
through which approximately 2% 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, that
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
weather conditions. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations."
COMPETITION
The building material industry is highly competitive. Due to the fragmented
nature of the 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 building professionals 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,
conventional markets, where it competes primarily with local independent lumber
14
<PAGE>
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.
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 acquired common shares of Greenleaf in
exchange for 100% of the common stock of a former wholly owned subsidiary of the
Company. In January 2000, the Company and Greenleaf settled a dispute covering
the terms of this transaction. Giving effect to the settlement, the Company
received 10,000,000 shares of Greenleaf common stock and a five year option to
acquire an additional 2,000,000 shares for an exercise price of $.25 per share.
In addition, another 3,000,000 shares have been placed in escrow to be used to
fund a mutually acceptable joint venture related to technology and interest,
related products to be owned in equal amounts by Greenleaf and the Company. See
Note 5 to the Consolidated Financial Statements included elsewhere herein.
At April 12, 2000, the calculated market value of the Company's
investment in Greenleaf was approximately $24.1 million based on Greenleaf's
stock price of $2.81 per share on the Over- the-Counter Bulletin Board. The
calculated value has been determined by multiplying 13,500,000 shares owned and
under option by the Company less 73,413 options given to employees of the
Company by the stock price listed on the Over-the-Counter Bulletin Board on that
date. During the first quarter of 2000, Greenleaf's stock has traded with an
average weekly volume of 176,100 shares to 2,084,900 shares.
Greenleaf develops and markets encryption services designed for the
software and entertainment industries including games, applications and music.
Greenleaf's innovative software security protection offers new ways to bundle
and distribute PC-based content on advanced media including DVD-ROM and the
Internet.
The information concerning Greenleaf contained in this report was
obtained from Greenleaf's Form 10-SB filed on November 15, 1999 ("the Greenleaf
Form 10-SB"), filed by Greenleaf with the Securities and Exchange Commission
(the "Commission").
On February 23, 1999, Greenleaf announced that it had reached an Agree-
ment with Accolade Inc., now known as Infogrames North America ("Infogrames")
and Warner Advanced Media Operations ("Warner"), a business unit of Time Warner
Inc.) (NYSE: TWX), to form a joint venture referred to as "WAG".
Under the WAG banner, the three companies will join to market multiple
computer game titles on a single DVD disc for distribution to the personal
computer Original Equipment Manufacturers ("OEM") market. The DVD software will
15
<PAGE>
be encrypted by the Company utilizing its proprietary "DigiGuard(TM)" security
technology. On May 6, 1999, Greenleaf announced that it would debut the Accolade
Family Spectacular, the initial game bundle to be released by WAG, at the E3
Expo industry trade show. On August 30, 1999, the Company and Broadcast DVD,
Inc. ("BroadcastDVD") announced a three-year, exclusive partnership to include
BroadcastDVD's FILM- FEST, a video magazine that exposes viewers to prestigious
film festivals of the world, in the DVD disc packages to be marketed by the WAG
joint venture. Contents of the video magazine are currently anticipated to
include interviews with The Blair Witch Project directors Daniel Myrick and
Eduardo Sanchez, and filmakers and celebrities including Tim Roth, Eric Stoltz,
Sheryl Crow, Guy Pearce and Robert Carlyle. Also expected to be included is an
hour of award-winning short films from the latest film festivals.
In September 1999, Greenleaf entered into an agreement to acquire all
the outstanding shares of Future Com South Florida, Inc. ("Future Com") in
exchange for 4,000,000 shares of Greenleaf's restricted common stock. Of these
shares, 2,000,000 shares were to be issued to William Gale, the president and
Chief Executive Officer of Future Com, and 2,000,000 shares were to be issued to
Warren Blanck, the Secretary and Treasurer of Future Com. Future Com was formed
by Mr. Gale and Mr. Blanck for the purpose of acquiring and managing mobile
communications radio licenses and/or systems. As a wholly-owned subsidiary of
Greenleaf, Future Com intends to continue to pursue this line of business.
Greenleaf completed the acquisition in November 1999.
COMPUTER SOFTWARE AND HARDWARE PRODUCTS
Beginning in late 1998 the efforts of Greenleaf and Greenleaf Research
and Development Inc. ("GRD") have been concentrated on developing and marketing
a line of proprietary computer software and hardware to customers in the
entertainment industry. As described below, Greenleaf's customers then utilize
Greenleaf's products to facilitate sales via electronic media, including the
Internet. Greenleaf's line of computer data security and communications
solutions assists customers in protecting their intellectual property and
information assets from access by unauthorized parties. In addition, Greenleaf's
products provide an alternative to traditional methods of bundling and
distributing software-based entertainment content through electronic media.
To date, Greenleaf has developed the following two proprietary software
products:
DIGIGUARD(TM)
Greenleaf's DigiGuard(TM) product consists of a suite of software
packages to support the locking, unlocking, and playing of entertainment media.
DigiGuard(TM) protects data contained on CD-ROMs and DVDs, allowing customers to
securely bundle various entertainment content, such as games, music and movies,
on a single disc or for transmission via the Internet. DigiGuard(TM) creates
access "keys" to unlock protected content. Each "key" is unique for each user to
protect the integrity of the content. After meeting certain criteria, such as a
credit card number exchange for payment, customers may unlock a product via the
Internet or by phone.
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<PAGE>
MUSICLOCK(TM)
Greenleaf's MusicLock(TM) product allows distributors to deliver
digitally-recorded songs to radio stations over the Internet. MusicLock(TM)
prevents premature access to the recording by allowing playback of the songs
only after a pre-determined time, which allows music distributors to control the
distribution of new releases while reducing distribution costs for the record
labels. MusicLock(TM) allows record promoters to distribute new releases in
advance of the release date with the security of knowing that material cannot be
played until the designated time and date.
REAL ESTATE OPERATIONS
As of December 31, 1999, Riverside's investment in real estate includes
$8,919,000 of land held for sale and $77,000 of commercial rental property.
LAND HELD FOR SALE
Included in the investment in land held for sale are approximately 137
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 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. Riverside
completed the sale of .841 acres for approximately $67,000 and 61 acres for
approximately $3.5 million, in 1999 and 1998, respectively.
The Company currently has approximately the remaining 137 acres of its
investment in Highlands under contract to sell, subject to the buyer's
satisfaction with its due diligence investigation. The net sales proceeds is
estimated to be $14.1 million, approximately $11.3 million of which would be
used to pay off the existing mortgage debt plus accrued interest. Under the
contract, the closing is to to occur, if at all by August of 2000.
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. The Company
did not have any sales in 1999. During 1998, Riverside completed the sale of 12
acres designed for office use for approximately $2.9 million.
The Company currently has all 6.83 acres of this property under
arrangement to sell for approximately $1.6 million subject to the buyer's
satisfaction with its due diligence investigation and other conditions.
17
<PAGE>
EMPLOYEES
As of February 14, 2000, Riverside and its wholly-owned subsidiaries
had 26 full-time employees, and Buildscape had 53 employees. As of December 25,
1999, Wickes had approximately 4,219 employees, of whom 3,668 were employed on a
full-time basis. The Company believes that it has maintained favorable relations
with its employees. None of these 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 38,400 square
feet. Wickes' sales and distribution facilities located in Major Markets tend to
be more specialized. Since the beginning of 1997, Wickes has completed Resets in
fourteen sales and distribution facilities located in Conventional Markets.
Wickes' sales and distribution facilities are situated on properties ranging
from 1.0 to 28.2 acres and averaging 9.3 acres. Wickes also operates 17 stand
alone component manufacturing facilities, which have an average of 40,300 square
feet under roof on 6.9 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 25, 1999, Wickes
also held for sale the assets of 7 closed facilities with an aggregate book
value of $2.5 million. In addition to its sales and distribution facilities,
Wickes operates 17 stand alone component manufacturing plants. Six of these
plants are located on sales and distribution facility sites. Of the remaining 11
plants, seven are on owned sites and four 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 29, 2000, the fleet included approximately 194 heavy duty trucks,
87 of which provide roof-top or second story delivery and 49 other vehicles
equipped with truck mounted forklifts, 516 medium duty trucks, 568 light duty
trucks and automobiles, 574 forklifts, 102 specialized millwork delivery
vehicles, and 47 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.
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<PAGE>
ITEM 3. LEGAL PROCEEDINGS.
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 State 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 not be material.
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 145 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.
The Company and 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 the Company's insurance coverage
may be unavailable. While 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, there can be no assurance of this.
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 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.
19
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
20
<PAGE>
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
OTC Bulletin Board under the trading symbol "RSGI." Prior to July 28, 1997, the
Company's common stock was traded on the Nasdaq National Stock Market. From that
date to July 8, 1999, the Company's Common Stock was traded on the Nasdaq
SmallCap Stock Market. As of March 17, 2000, there were 4,767,123 shares
outstanding held by approximately 1,644 shareholders of record.
The following table sets forth, for the periods indicated through July
7, 1999, the high and low closing sale prices for the Company's common stock as
reported on SmallCap Stock Market and from July 8, 1999, through December 31,
1999, the high and low bid quotation for the Company's Common Stock on the OTC
Bulletin Board. Prices do not include retail markups, markdowns or commissions.
<TABLE>
<CAPTION>
<S> <C> <C>
Calendar Quarter High Low
---- ---
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
1999:
First Quarter................................................... $ 4.25 $ 2.13
Second Quarter............................................... 2.06 1.06
Third Quarter................................................. 2.00 1.00
Fourth Quarter................................................ 1.44 .50
</TABLE>
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 $1,800,000
short-term loan from Imagine Investments Inc. ("Imagine") prohibit the payment
of cash dividends without the prior approval of Imagine. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
21
<PAGE>
<TABLE>
<CAPTION>
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."
Years Ended December 31.
---------------------------
( in thousands, except per share data)
---------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Sales and service revenues (1) $ 1,620 $ 667,704 $ 884,082 $ 467,254 $ --
Insurance premiums and annuity
considerations (2) -- -- -- 3,224 8,298
Net investment income(2) (61) (32) (31) 6,325 14,492
Net realized investment gains (losses) (257) (499) 897 1,672 (234)
Other operating income 95 5,591 11,297 4,837 1,513
---------- ---------- ---------- ---------- -----------
Total revenues (1) 1,397 672,764 896,245 483,312 24,069
Equity in earnings (losses) of
Wickes Inc. (1) 2,247 (208) -- (1,714) (5,849)
Minority interest (1) -- 521 703 (2,318) --
Reorganization of life insurance
subsidiaries (2) -- -- -- -- (9,062)
Gain on sale of Buildscape Inc. (3) 3,994 -- -- -- --
Earnings (loss) from continuing operations
before cumulative effect of change in
accounting principles (4) (2,678) (12,307) (5,821) 618 (17,845)
Loss from discontinued operations -- -- (388) (1,024 (1,086)
Gain on disposal of discontinued operations -- -- -- -- 2,731
---------- ---------- ---------- ---------- ----------
Net earnings (loss) $ (2,678) $ (12,307) $ (6,209) $ (406) $ (16,200)
---------- ---------- ---------- ---------- ----------
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 (0.56) (2.33) (1.12) 0.12 (3.38)
Loss from discontinued operations -- -- (0.07) (0.20) (0.21)
Gain on disposal of discontinued operations -- -- -- -- 0.52
---------- ---------- ---------- ---------- ----------
Basic and diluted earnings(loss) per share (0.56) (2.33) (1.19) (0.08) (3.07)
---------- ---------- ---------- ---------- ----------
Balance Sheet data (at period end):
Total investments (2) $ 23,848 $ 24,662 $ 14,329 $ 22,199 $ 233,441
Total assets (1)(2) 26,183 26,402 313,905 309,814 300,725
Total debt and redeemable preferred
stock 23,627 22,116 219,426 204,511 31,215
Total common stockholders' equity $ 264 $ 2,368 $ 14,620 $ 20,775 $ 26,056
Common shares outstanding 4,767,123 5,287,123 5,287,123 5,296,123 5,311,123
Book value per common share $ 0.06 $ 0.45 $ 2.77 $ 3.92 $ 4.91
Cash dividend declared per common share $ -- $ -- $ -- $ 0.10 $ --
</TABLE>
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<PAGE>
(1) Wickes' operations are consolidated with those of the Company and its
subsidiaries for the first through the third quarter of 1998, and all
of 1997. The Company accounted for its investment in Wickes under the
equity method for the fourth quarter of 1998 and all of 1999.
(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%.
(4) Buildscape's operations are consolidated with those of the Company and
its subsidiaries for all of 1998 and through October 21, 1999. The
Company accounted for its investment in Buildscape under the equity
method for the remainder of 1999.
(5) In 1999, the Company recorded a gain of $3.4 million on the sale of
1,880,933 shares of Buildscape's common stock and 1,666,667 shares of
Buildscape's voting Series A Cumulative Convertible Preferred Stock,
this reduced the Company's ownership in Buildscape to 47% on a fully
converted basis.
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<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
accounted for on the equity method for the fourth quarter of 1998 and all of
1999, comparisons between periods may not be meaningful in certain respects. In
addition, the operations of Buildscape are consolidated with those of the
Company and its subsidiaries for all of 1998 and through October 21, 1999, and
accounted for on the equity method for the remainder of 1999.
FORWARD-LOOKING INFORMATION CAUTIONARY STATEMENT. 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 common stock and
Greenleaf securities 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 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.
24
<PAGE>
RESULTS OF OPERATIONS
The Company reported results of operations for the years ended December
31, 1999, 1998 and 1997 as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1999 1998 1997
---- ---- ----
Equity in earnings of Wickes(1) $ 2,247 $ 208 $ --
Earnings(loss) before income taxes, minority interest,
equity in related
parties, loss on life insurance
reorganization, and discontinued operations(2)(3)(6) (8,919) (10,152) (4,062)
Earnings(loss) before discontinued operations(4)(5) (2,678) (12,564) (5,821)
Loss from discontinued operations -- -- (388)
--------- --------- ---------
Net loss $ (2,678) $ (12,564) $ (6,209)
========= ========= =========
</TABLE>
(1) Wickes' operations are consolidated with those of the Company and its
subsidiaries for the first through the third quarter of 1998, and all
of 1997. The Company accounted for its investment in Wickes under the
equity method for the fourth quarter of 1998 and all of 1999.
(2) Includes net realized investment gains(losses) of $(257,000),
$(499,000), and $897,000, in 1999, 1998 and 1997, respectively. 1999
includes a reserve for losses of $278,000 for sales of the Company's
real estate in 2000. 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 the Company recorded charges of $5.9 million 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%.
(5) In 1999, the Company recorded a $3.9 million gain for the sale of 38%
of its common shares and 100% of its preferred shares of Buildscape.
(6) Buildscape's operations are consolidated with those of the Company and
its subsidiaries for 1998 and from January 1, 1999 through October 21,
1999. The Company accounted for its investment in Buildscape on the
equity method for the remainder of 1999.
25
<PAGE>
BUILDSCAPE
On October 21, 1999, Imagine made a $10 million investment into
Buildscape by converting $3 million of debt into common stock, exchanging
520,000 shares of Riverside stock for Buildscape common stock and investing an
additional $5 million for Buildscape preferred shares.
In this transaction, Imagine acquired from Riverside 1,880,933 of
Buildscape's 5,000,000 outstanding shares of common stock in exchange for (i)
the cancellation of $3 million of indebtedness and (ii) 520,000 shares of
Riverside's common stock held by Imagine. In connection with the transaction,
Imagine was granted the right to vote the Company's common shares on all matters
with the exception of change in control. As of October 22, 1999, the Company
owns 62% of the Buildscape common stock, however, since the Company's voting
rights are controlled by Imagine, the Company is accounting for its investment
in Buildscape on the equity method. The Company retained the remaining 3,119,067
outstanding shares of Buildscape's common stock. In addition, Buildscape issued
to Imagine in exchange for $5,000,000, 1,666,667 shares of Buildscape's voting
Series A Cumulative Convertible Preferred Stock with a $5 million aggregate
liquidation preference. As a result of this transaction, the Company owns
(before Buildscape employee's stock options) 47% of Buildscape on a fully
converted basis. Imagine owns 38% of the common and 100% of the preferred shares
of Buildscape, or 53% on the same basis. The Company recorded a gain of $3.9
million on the transaction.
As a result of a reduction in the Company's ownership of Buildscape to
a level below 50%, the Company accounted for investment in Buildscape on the
equity method after October 21,1999. From January 1998 through October 21, 1999,
the financial statements of the Company included those of Buildscape on a
consolidated basis.
The following table sets forth information concerning the results of
Buildscape for January 1, 1999 through October 21, 1999 and 1998, respectively
(in thousands):
<TABLE>
<CAPTION>
<S> <C> <C>
1999 1998
---- ----
Sales $ 415 $ 30
Cost of sales 342 14
--------- ---------
Net profit 73 16
Selling, general and administrative expense 4,343 4,552
Depreciation and amortization 139 53
Interest expense 174 85
--------- ---------
Total expenses 4,656 4,690
--------- ---------
Net loss $ (4,583) $ (4,674)
========= =========
</TABLE>
Buildscape had advertising revenue of $159,000 in 1999 compared to
$30,000 in 1998. Revenue generated from Buildscape's auctions and superstores
were $257,000 in 1999. Buildscape did not actively start selling its products
and services until late in the fourth quarter of 1998.
26
<PAGE>
CYBERMAX
The following table sets forth information concerning the results of
Cybermax 1999 and 1998, respectively (in thousands):
<TABLE>
<CAPTION>
<S> <C> <C>
1999 1998
---- ----
Sales $ 1,171 $ 486
Cost of sales 213 182
--------- ---------
Net profit 958 304
Selling, general and administrative expense 2,053 (333)
Depreciation and amortization 156 50
Interest expense 3 6
--------- ---------
Total expenses 2,219 (277)
Other income (expense) 15 --
Gain on sale of Buildscape 3,994 --
--------- ---------
4,009 0
--------- ---------
Net earnings $ 2,755 $ 581
========= =========
</TABLE>
Web design services contributed approximately 76% of Cybermax sales in
1999 compared to 44% in 1998. The increase in sales is due primarily to the
increase in sales and marketing efforts in 1999. Internet access operations,
including network support and other services contributed approximately 24% of
Cybermax sales in 1999, compared to 55% in 1998.
Selling, general and administrative expense increased in 1999 primarily
as a result of the increased overhead required to increase the sales levels
achieved in 1999 and to further increase sales efforts in future years. During
1998, the Company's technical staff and sales staff were part of Cybermax's
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 expense.
WICKES
The Company estimates that, after inter-company eliminations, net of
goodwill amortization of approximately $521,000 and net of interest expense
allocated from Riverside on its 13% and 11% Notes of $1,407,000, Wickes
contributed earnings of $840,000 to the Company's results of operations in 1999.
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 $2,263,000.
27
<PAGE>
Included in this amount is $844,000 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 $2,008,000. This amount includes $208,000 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.
WICKES
The following discussions of Wickes' full year operations for 1999,
1998 and 1997 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.
<TABLE>
<CAPTION>
Years Ended
Dec 25, Dec. 26, Dec 27,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Gross profit 23.4 23.7 23.0
Selling, general and administrative
expense 19.8 20.5 21.0
Depreciation, goodwill and trademark
amortization 0.6 0.6 0.6
Provision for doubtful accounts 0.2 0.3 0.2
Restructuring and unusual items 0.0 0.7 (0.1)
Other operating income (0.5) (0.7) (1.2)
Income from operations 3.4 2.3 2.5
</TABLE>
Wickes' operations, as well as those of the building material industry
generally, have reflected substantial fluctuations from period to period as a
consequence of various factors, including levels of construction activity,
general regional and local economic conditions, 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.
28
<PAGE>
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
weather conditions. Weather conditions in 1997 and 1999 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.
Wickes recorded net income of $7.6 million in 1999, compared with a net
loss of $1.0 million in 1998, an improvement of $8.6 million. The primary
components of this improvement include an increase in gross profit dollars of
$38.2 million, a $5.9 million decrease in restructuring and unusual items, a
0.7% decrease in SG&A as a percentage of net sales and a $1.2 million decrease
in provision for doubtful accounts. These improvements were partially offset by
a $1.1 million increase in depreciation, goodwill and trademark amortization, a
$1.7 million increase in interest expense, a $5.1 million increase in provision
for income taxes and a reduction in other income of $1.2 million.
Wickes recorded a net loss of $1.0 million in 1998, compared with a net
loss of $1.6 million in 1997, an improvement of $0.6 million. The primary
components of this improvement include an increase in gross profit of $12.4
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.
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 1999 decreased
73% to $421,000 compared to $1,549,000 in 1998. The primary reason for the
decrease is that in 1999 all expenses relating to any of the Company's operating
subsidiaries were paid directly by the subsidiary, thereby eliminating
allocations. As a result, the Parent Company's expenses for 1999 include only
expenses relating to public reporting (such as legal fees, audit fees, transfer
agent fees and director fees) and depreciation of the Parent Company's property,
plant and equipment and reserve for doubtful accounts. The Parent Groups
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 owned by Mr. Wilson. This affiliate provides the
Company use of its airplane. During 1997, the Company's use of this airplane was
29
<PAGE>
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 deceases 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.
Interest expense (excluding an interest allocation to Wickes for the
Parent Company's 13% subordinated notes and 11% secured notes of $1,407,000,
$1,502,000 and $1,473,000 in 1999, 1998 and 1997, respectively) for 1999, 1998
and 1997 was $1,058,000, $1,189,000 and $1,635,000, respectively. In 1999,
interest expense consisted of $90,000 on the Company's other loans and $968,000
on the Company's real estate mortgage debt. 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 1999,
1998 and 1997 were approximately $80,000, $546,000, and $605,000, 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 and $598,000
for 1998 and 1997, respectively, for settlements relating to the Company's
former property and casualty insurance operations.
REAL ESTATE INVESTMENTS
The Company's real estate investments consist of $7,308,000 in Georgia
properties, $1,681,000 in Florida properties and $7,000 in other states.
During 1999, the Company sold approximately .841 acres of its Georgia
properties for $67,000, which generated gains of $20,000, compared to 1998 when
the Company sold approximately 61 acres of its Georgia properties for
$3,471,000, which generated gains of $751,000. In addition, during 1999, the
Company sold a lot in Florida for $283,000 which generated gains of $1,000.
During 1998, the Company sold approximately 12 acres of its Florida properties
for $2,933,000 resulting in gains of $608,000.
Included in the Company's net realized investment gains(losses) for
1999, 1998 and 1997 were net realized gains on real estate investments of
$(257,000), $1,338,000 and $897,000, respectively. In 1999, the Company
established a reserve for approximately $278,000 for its Florida properties.
30
<PAGE>
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, 2000, 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
----
Revenues from loans $ 1,363
Other income 3
---------
Total revenues 1,366
Selling, general & administrative expenses(1) 1,077
Interest expense 677
---------
Total expense 1,754
---------
Net loss $ (388)
=========
(1) Net of reimbursements of $955,000 during 1997 by the Parent Company from
Wickes.
INCOME TAXES
In 1999 the Company incurred a $0 tax expense. A 100% valuation allowance
has been recorded to reduce the deferred tax assets to the amount where more
likely than not, will be realized in the future. The current income tax
provisions consists of state and local tax liabilities for Wickes. 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
Cybermax's operations. 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.
31
<PAGE>
The Parent Company's cash on hand and available borrowings will not be
sufficient to support its operations and overhead through 2000. 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 and Greenleaf common
stock.
In addition, the $10,000,000 principal amount of the Company's 11%
Notes is due in September 2000, and the $1,800,000 principal amount of the
Company's short-term loan from Imagine is due August 2000.
For a detailed discussion of the Parent Company's liquidity, debt
repayment obligations, 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
1999:
o During 1999 Buildscape borrowed $3,350,000 from Imagine. These loans were
assumed by Riverside and cancelled in connection with the acquisition by
Imagine of a majority interest in Buildscape on October 21, 1999. For
additional information concerning this transaction, see Note 6 to the
Consolidated Financial Statements included elsewhere herein. As a result
of this transaction, Buildscape operates independently of the Company
and its operations.
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 10% of future net income of these operations,
subject to a maximum of $429,249 plus interest. At March 15, 2000, the
Company had made payments of $545,046 under the promissory note but was
delinquent with respect to required payments of approximately $82,486 of
principal and interest. In March of 2000, the Company and Wickes
renegotiated the terms of the note, deferring all principal payments past
due and due in the year ending December 31, 2000, for one year, at which
time the principal payments would be due on a quarterly basis. The interest
on this note will be paid on a quarterly basis.
o On August 25, 1999, the Company and the holders of the 13% Subordinated
Notes ("the 13% Notes") completed an agreement whereby the Company's 13%
Notes that were scheduled to mature in September 1999, were replaced with
new subordinated promissory notes due September 30, 2000 bearing 11%
interest ("the 11% Notes"). In March of 2000, the Company and the 11% Note
holders modified their original agreement, which allows the Company to use
100% of the net sales proceeds from the sale of its Greenleaf shares to
beapplied again the semi-annual interest due on March 31, 2000, in lieu of
payment against the principal balance of the notes. In addition, the
Company agreed to make a principal payment of approximately $550,000 on or
before April 30, 2000. For information regarding the collateral for and
terms of the 11% Notes, see Note 10 to the Consolidated Financial
Statements included elsewhere herein.
32
<PAGE>
o On August 27, 1999, the Company entered into a short-term loan agreement
with Imagine pursuant to which the Company borrowed $711,055 in August 1999
and $1,088,945 in September 1999. The Company used these borrowings to fund
its operations including (1) interest of approximately $631,507 on the 11%
Notes, (2) delinquent principal and interest of approximately $349,924 on
the Wickes debt (3) expenses of approximately $104,000 in connection with
the replacement of the Company's 13% Notes and (4) delinquent payables of
approximately $417,196. This loan is due August 31, 2000. In addition, as
of March 31, 2000, the Company has made payments of approximately $9,500 to
Imagine but $58,650 of interest is past due. For information regarding the
collateral for and terms of this short-term loan agreement, see Note 10 to
the Consolidated Financial Statements included elsewhere herein.
o For a description of recent sales by the Company of Wickes and Greenleaf
common stock, see Note 11 to the Consolidated Financial Statements included
elsewhere herein.
During 1999, stockholders' equity decreased by $1,874,000. Included
were losses attributable to Buildscape for approximately $4,583,000, which was
offset by a $3,994,000 gain on the sale of Buildscape. Cybermax's operation and
the Parent Company's debt accounted for approximately $2,929,000 of the
decrease. These decreases were offset by $1,253,000 of unrealized gains recorded
on the Company's Greenleaf common stock. Earnings of approximately $840,000
attributable to Wickes partially offset these losses. In addition, the Company
retired 520,000 shares of its common stock, which accounted for approximately
$422,000 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'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.
33
<PAGE>
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.
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.
34
<PAGE>
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 23, 2000.
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 23, 2000.
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 23, 2000.
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 23, 2000.
35
<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:
<TABLE>
<CAPTION>
RIVERSIDE GROUP, INC. AND SUBSIDIARIES: Page No.
<S> <C>
--------
Consolidated Balance Sheets - December 31,
1999 and 1998 F-1
Consolidated Statements of Operations
for the years ended December 31, 1999,
1998 and 1997 F-2
Consolidated Statement of Stockholders'
Equity for the years ended December 31,
1999, 1998 and 1997 F-3
Consolidated Statements of Cash Flows for
the years ended December 31, 1999, 1998
and 1997 F-4
Notes to Consolidated Financial Statements F-5
WICKES INC. AND SUBSIDIARIES:
Independent Auditors Report WF-1
Report of Independent Certified Public Accountants WF-2
Consolidated Balance Sheets as of December 25, 1999
and December 27, 1998 WF-3
Consolidated Statements of Operations for the years ended
December 25, 1999 and December 27, 1998 and December 28, 1997 WF-4
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 25, 1999, December
27, 1998 and December 28, 1997 WF-5
36
<PAGE>
Consolidated Statements of Cash Flows for the years ended
December 25, 1999, December 27, 1998 and December 28, 1997 WF-6
Notes to Consolidated Financial Statements WF-7
BUILDSCAPE, INC.:
Report of Independent Certified Public Accounts BS-1
Balance Sheets - December 31, 1999 and 1998 BS-2
Statements of Operations for the years
ended December 31, 1999, and 1998 BS-3
Statement of Stockholders' Equity for the years
ended December 31, 1999 and 1998 BS-4
Statements of Cash Flows for the years ended
December 31, 1999 and 1998 BS-5
Notes to Consolidated Financial Statements BS-6
(2) FINANCIAL STATEMENT SCHEDULES:
RIVERSIDE GROUP, INC. AND SUBSIDIARIES:
Report of Independent Certified Public Accountants S-1
Schedule II - Valuation and Qualifying Accounts S-2
Schedule III - Condensed Financial Information of Registrant S-3
(b) Reports on Form 8-K - None
</TABLE>
37
<PAGE>
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 (a)* Credit Agreement dated April 1, 1999 between the registrant and
the signatories thereto (incorporated by reference to Exhibit
4.1(a) to the Quarterly Report Form 10-Q filed by the Company for
the quarter ending June 30, 1999).
(b)* Form of 11% Secured Promissory Note dated April 1, 1999
(incorporated by reference to Exhibit 4.1(b) to the Quarterly
Report Form 10-Q filed by the Company for the quarter ending
June 30, 1999).
(c)** Modification to Credit Agreement dated March 24, 2000 between
the registrant and Mitchell W. Legler, as agent for the Holders.
4.2 (a)* Amendment to Loan Agreement dated May 20, 1999 among the registr-
ant, Cybermax, Inc., Cybermax Tech, Inc. Buildscape, Inc. and
Imagine Investments, Inc. (incorporated by reference to Exhibit
4.2(a) to the Quarterly Report Form 10-Q filed by the Company for
the quarter ending June 30, 1999).
(b)* Amended and Restated Term Promissory Note dated May 20, 1999
(incorporated by reference to Exhibit 4.2(b) to the Quarterly
Report Form 10-Q filed by the Company for the quarter ending
June 30, 1999).
(c)* Amendment to Stock Option Agreement dated May 20, 1999 between
Cybermax Tech, Inc. and Imagine Investments, Inc.(incorporated by
reference to Exhibit 4.2(c) to the Quarterly Report Form 10-Q
filed by the Company for the quarter ending June 30, 1999).
4.3 (a)* Loan Agreement dated August 12, 1999 among the registrant,
Cybermax, Inc., Cybermax Tech, Inc., Buildscape, Inc. and Imagine
Investments, Inc. (incorporated by reference to Exhibit 4.3(a) to
the Quarterly Report Form 10-Q filed by the Company for the
quarter ending June 30, 1999)
(b)* Promissory Note dated August 12, 1999 (incorporated by
reference to Exhibit 4.3(b) to the Quarterly Report Form 10-Q
filed by the Company for the quarter ending June 30, 1999).
38
<PAGE>
(c)* Stock Option Agreement dated August 12, 1999 between Cybermax
Tech, Inc. and Imagine Investments, Inc.(incorporated by refer-
ence to Exhibit 4.3(c) to the Quarterly Report Form 10-Q filed
by the Company for the quarter ending June 30, 1999).
4.4 (a)* Loan Agreement dated August 27, 1999 between the
registrant, and Imagine Investments, Inc.*(incorporated by
reference to Exhibit 4.1(a) to the Quarterly Report Form 10-Q
filed by the Company for the quarter ending September 30, 1999)
(b)* Demand Promissory Note dated August 27, 1999 (incorporated by
reference to Exhibit 4.1(b) to the Quarterly Report Form 10-Q
filed by the Company for the quarter ending September 30,
1999).
(c)* Stock Pledge Agreement dated August 27, 1999 between the
registrant and Imagine Investments, Inc (incorporated by
reference to Exhibit 4.1(c)to the Quarterly Report Form 10-Q
filed by the Company for the quarter ending September 30,
1999).
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)* Agreement dated November 4, 1997 between the Registrant and
Wickes Inc. (incorporated by reference to Exhibit 10.1 to the
Form 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).
10.3* Agreement dated September 30, 1998 between Cybermax Tech, Inc.
and Greenleaf Technologies Corporation (incorporated by refer-
ence to Exhibit 99.1 to the 8-K filed by the registrant on
October 15, 1998).
10.4* 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).
10.5* Agreement dated October 15, 1999 among Imagine Investments,
Inc., Riverside Group, Inc., Cybermax, Inc., Cybermax Tech,
Inc. and Buildscape, Inc. (incorporated by reference to Exhibit
2.1 to the 8-K filed by the registrant on October 15, 1998).
39
<PAGE>
10.6* Series A Cumulative Convertible Preferred Stock Purchase
Agreement dated October 15, 1999 among Riverside Group, Inc.,
Buildscape, Inc. and Imagine Investments, Inc. (incorporated by
reference to Exhibit 2.2 to the 8-K filed by the registrant on
October 15, 1998).
10.7** Agreement between Buildscape, Inc. and Wickes, Inc.
10.8** Settlement Agreement dated January 28, 2000 between the registr-
ant, Greenleaf Technologies Corporation, Cybermax Tech, Inc. and
Cybermax, Inc.
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
40
<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: March 30, 2000
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 30, 2000
and Director, March 30, 2000
/s/ Varina M. Steuert /s/ Catherine J. Gray
- ------------------------------- ---------------------
Varina M. Steuert Catherine J. Gray
Director, March 30, 2000 Senior Vice President, Chief
Financial Officer, (Principal
Accounting and financial
Officer), March 30, 2000
March 30, 2000
41
<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 common stockholders' equity and cash
flows present fairly, in all material respects, the consolidated financial
position of Riverside Group, Inc. and its subsidiaries at December 31, 1999 and
1998, and the results of their consolidated operations and cash flows for each
of the three years in the period ended December 31, 1999 in conformity with
accounting principles generally accepted in the United States. These
consolidated 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 generally accepted in the
United States, 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 Riverside 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 also described in Note 11. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
Jacksonville, Florida PricewaterhouseCoopers LLP
April 14, 2000
F-1
<TABLE>
<CAPTION>
Riverside Group, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands)
December 31, December 31,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 277 $ 509
Accounts receivable, less allowance for doubtful
accounts of $3 at 1999 and $337 at 1998 259 246
Notes receivable 30 197
Prepaid expenses 19 46
---------- ----------
Total current assets 585 998
Investment in Wickes Inc. 15,799 14,738
Investment in Buildscape Inc. (947) --
Investment in Greenleaf Technologies Corp 1,253 --
Investment in real estate 8,996 9,667
Property, plant and equipment, net 340 402
Other assets (net of accumulated amortization of
$60 in 1999 and $796 at 1998) 157 340
---------- ----------
Total assets $ 26,183 $ 26,145
========== ==========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Current debt and current maturities of long-term debt $ 11,813 $ 10,356
Accounts payable 430 223
Accrued liabilities 1,758 1,377
Deferred taxes -- --
Deferred revenue -- 112
---------- ----------
Total current liabilities 14,001 12,068
Long-term debt 469 415
Mortgage debt 11,345 11,345
Net liabilities of discontinued operations 21 22
Other long-term liabilities 83 184
---------- ----------
Total liabilities 25,919 24,034
Commitments and contingencies (Note 11)
Common stockholders' equity :
Common stock, $.10 par value; 20,000,000 shares authorized; 477 529
4,767,123 and 5,287,123 issued and outstanding in 1999 and 1998
Additional paid in capital 16,468 16,838
Cumulative comprehensive income 1,253 --
Retained earnings (deficit) (17,934) (15,256)
---------- ----------
Total common stockholders' equity (264) 2,111
---------- ----------
Total liabilities and common stockholders' equity $ 26,183 $ 26,145
========== ==========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
F-2
<TABLE>
<CAPTION>
Riverside Group, Inc. and Subsidiaries
Consolidated Statements of Operations
(in thousands except per share amounts)
1999 1998 1997
--------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Sales and service revenues $ 1,620 $ 667,704 $ 884,082
Net investment loss (61) (32) (31)
Net realized investment gains (losses) (257) (499) 897
Other operating income 95 5,591 11,297
---------- ----------- ---------
1,397 672,764 896,245
---------- ----------- ---------
Costs and expenses:
Cost of sales 559 510,106 681,056
Provision for doubtful accounts 91 1,904 2,148
Depreciation, goodwill and trademark amortization 375 4,426 5,613
Restructuring and unusual items -- 5,932 (559)
Selling, general and administrative expenses 6,649 141,284 187,524
Interest expense 2,642 19,264 24,525
----------- ----------- ----------
10,316 682,916 900,307
----------- ----------- ----------
Loss before income taxes, equity in earnings of
related parties and minority interest: (8,919) (10,152) (4,062)
Current income tax expense -- (396) (1,099)
Deferred income tax benefit (expense) -- (3,002) 153
Equity in earnings of Wickes, Inc. 2,247 208 --
Gain on sale of Buildscape Inc. 3,994 -- --
Equity in related parties -- -- (1,516)
Minority interest, net of income taxes -- 778 703
---------- ---------- ----------
Earnings (loss) before discontinued operations (2,678) (12,564) (5,821)
Discontinued operations:
Loss from operations of discontinued mortgage
lending operations, net of income taxes -- -- (388)
---------- ---------- ----------
Net loss $ (2,678) $ (12,564) $ (6,209)
========== ========== ==========
Basic and diluted loss per common share:
Net loss from continuing operations $ (0.52) $ (2.41) $ (1.12)
Net loss from discontinued operations -- -- (0.07)
---------- ---------- ----------
Loss per share $ (0.52) $ (2.41) $ (1.19)
========== ========== ==========
Weighted average number of common shares
used in computing earnings per share 5,128,131 5,213,186 5,193,970
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
F-3
<TABLE>
<CAPTION>
Riverside Group, Inc. and Subsidiaries
Consolidated Statement of Common Stockholder's Equity
(in thousands)
Accumulated Total
Additional Other Retained Common Total
Common Paid-In Comprehensive Earnings Stockholders' Comprehensive
Stock Capital Income (Deficit) Equity Income
---------- ---------- ------------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 $ 530 $ 16,728 $ -- $ 3,517 $ 20,775
Net loss -- -- -- (6,209) (6,209) $ (6,209)
----------
Total comprehensive income $ (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 0 (2,692) 14,620
Net loss -- -- -- (12,564) (12,564) $ (12,564)
----------
Total comprehensive income $ (12,564)
==========
Cost of ESOP shares released -- 55 -- -- 55
--------- --------- ---------- ---------- ---------
Balance, December 31, 1998 529 16,838 0 (15,256) 2,111
Net loss -- -- -- (2,678) (2,678) $ (2,678)
Increase in unrealized investment gains,
net of deferred taxes -- -- 1,253 -- 1,253 1,253
---------
Total comprehensive income $ (1,425)
=========
Retirement of 520,000 shares of
common stock, at cost (52) (370) -- -- (422)
---------- ---------- ---------- --------- ---------
Balance, December 31, 1999 $ 477 $ 16,468 $ 1,253 $ (17,934) $ 264
========== ========== ========== ========= =========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
F-4
Riverside Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash Flow from Operating Activities
Net loss $ (2,678) $ (12,564) $ (6,209)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation expense 254 3,639 4,433
Amortization expense 636 1,914 2,754
Amortization of bond discount 173 201 173
Provision for doubtful accounts 91 1,904 2,148
Gain on sale of fixed assets (2) (1,574) (6,156)
Gain on sale of subsidiary (3,994) -- --
Net realized investment (gains) losses 257 499 (897)
Benefit for deferred income taxes -- 3,002 (153)
Equity in earnings of unconsolidated subsidiaries (2,768) (208) 1,516
Minority interest -- (778) (703)
Change in other assets and liabilities:
Increase in accounts receivable (104) (24,749) (12,497)
(Increase)Decrease in notes receivable 157 1,845 (3,135)
Increase in inventory -- (10,421) (2,034)
(Increase)decrease in other assets 39 573 (4,740)
Increase in deferred gain -- -- (670)
Increase(decrease) in accounts payable and accrued liabilities 588 6,891 (3,745)
Net liabilities of discontinued operations, other liabilities
and current income taxes (220) (221) 145
---------- ---------- ----------
Net Cash Used In Operating Activities (7,557) (30,047) (29,770)
---------- ---------- ----------
Cash Flows from Investing Activities
Purchase of investments:
Property, plant and equipment (338) (3,396) (7,772)
Investment in real estate (9) (423) (1,004)
Sale of investments:
Property, plant and equipment 2 3,629 13,802
Investment in real estate 405 6,405 4,407
Securities of Wickes Inc. 1,186 2,669 290
Sale of Buildscape, Inc. 4,391 -- --
Life Insurance Reorganization -- -- 5,315
---------- ---------- ----------
Net Cash Provided By Investing Activities (5,637) 8,884 15,038
---------- ---------- ----------
Cash Flows from Financing Activities
Net borrowings under the revolving line of credit -- 24,481 16,732
Repayment of debt (3,494) (5,494) (3,529)
Increase in borrowings 5,182 80 1,539
Purchase and retirement of treasury shares -- -- (18)
Net proceeds from sale of Wickes Inc. -- 96 62
---------- ---------- ----------
Net Cash Provided By Financing Activities 1,688 19,163 14,786
Net Increase (Decrease) in Cash and Equivalents (232) (2,000) 54
Cash and equivalents at beginning of period 509 3,154 3,100
Less: Wickes Inc. cash balance -- (645) --
---------- ---------- ----------
Cash and equivalents at end of period $ 277 $ 509 $ 3,154
========== ========== ==========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
F- 5
RIVERSIDE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING PRINCIPLES
ORGANIZATION
Riverside Group, Inc., a Florida corporation formed in 1965 ("Riverside", also
"Parent Company") is a holding company ocused through its wholly-owned
subsidiary, Cybermax, Inc. ("Cybermax"), on providing e-commerce solutions to
the building industry, as well as web software application development and
hosting services. Unless the context indicates otherwise, the term "Company" as
used herein refers to Riverside and its subsidiaries.
The Company also engages in the supply and distribution of building materials
through its 36%- owned subsidiary, Wickes Inc. ("Wickes") and its 47%-owned
subsidiary, Buildscape, Inc. ("Buildscape"). Buildscape provides e-commerce
services and building related contact to the home building professional as well
as consumer.
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, and its subsidiaries, Wixx Energy, Inc.
("Wixx"), Wickes Financial Services Center, Inc. ("WFSC"), NRG Network, Inc.
("NRG"); 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. "Investment in Wickes").
The Company dissolved WFSC and NRG on December 31, 1999.
Cybermax's wholly-owned subsidiaries include Cybermax Tech, Inc. ("CT"). CT was
dissolved on October 31, 1999, when the Company sold 38% of its common stock of
Buildscape. CT's wholly-owned subsidiaries include Buildscape through October
21, 1999, after the Company sold 38% of its common stock to Imagine Investments,
Inc. ("Imagine") (see Note 6. "Investment in Buildscape") and Gameverse, Inc.
("Gameverse"), through September 30, 1998, when the Company sold Gameverse to
Greenleaf Technologies Corporation ("Greenleaf") (see Note 5. "Investment in
Greenleaf"). During the fourth quarter of 1999, CT contributed its investment in
Buildscape to Cybermax who contributed it to Riverside.
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 4. "Sale of Mortgage Lending Operations").
F-6
<PAGE>
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
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.
ACCOUNTS RECEIVABLE
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.
F-7
<PAGE>
INVESTMENT SECURITIES, AVAILABLE FOR SALE
The Company accounts for its investment in 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. The Company did not have any investments classified as trading
securities during the periods presented. The statement further requires that
held-to-maturity securitie be reported at fair value, with unrealized gains and
losses 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 teh
specifice identification method, will be recognized as a component of operating
results. The fair value of these securities are based upon the last reported
price on the exchange on which they are traded.
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.
PROPERTY, PLANT AND EQUIPMENT
Property, plant, and equipment are stated at cost, less accumulated
depreciation, and are depreciated using the straight-line method. Estimated
useful lives range from 3 to 5 years. 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 Statement of Financial Accounting
Standards ("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.
OTHER ASSETS
Other assets consists primarily of deferred financing costs which are amortized
over the expected terms of the related 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 10 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, 1999.
Net goodwill of $4.7 million and $5.2 million is included in the Company's
investment in Wickes at December 31, 1999 and December 31, 1998, respectively.
F-8
<PAGE>
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
The Company includes outstanding checks in excess of bank balances in accounts
payable. There were $99,200 in outstanding checks in excess of bank balances at
December 31, 1998.
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
SFAS No. 128, "Earnings Per Share". Earnings per share are based upon the
weighted average number of shares of common stock outstanding (5,128,131 in
1999, 5,213,186 in 1998, and 5,193,570 in 1997 ). On October 21, 1999, the
Company retired 520,000 shares of its common stock previously held by Imagine
received by the Company in connection with the Buildscape sale (see Note 6.
"Investment in Buildscape"). During 1997, the Company issued 50,000 stock
options at an exercise price of $3.00 per share. In addition during 1997, the
Company purchased and retired 9,000 shares of its common stock. Since the
Company had a net loss in 1999 and 1998, the options had an anti-dilutive
effect, and therefore, are excluded from the calculation of diluted earnings per
share.
F-9
<PAGE>
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
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.
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.
FINANCIAL STATEMENT PRESENTATION AND RECLASSIFICATION
Certain reclassifications have been made to the 1998 financial statement
presentation to conform with the 1999 financial statement presentation.
STATEMENT OF CASH FLOWS SUPPLEMENTARY DISCLOSURE
The Company and its subsidiaries, exclusive of Wickes ("Parent Group") paid
$1,544,000, $2,728,000, and $2,867,000, of interest in 1999, 1998, and 1997,
respectively. Wickes paid $12,919,000, and $19,790,000, of interest in 1998, and
1997, respectively.
F-10
<PAGE>
The Parent Group made no income tax payments in 1999, 1998, and 1997. Wickes
paid $769,000, and $1,344,000, of income taxes in 1998, and 1997, respectively.
Net cash used in discontinued operations totaled approximately $1.2 million in
1997.
The Company did not pay any dividends on its common stock during 1999 and 1998.
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.
These costs are included as interest expense in the Company's Consolidated
Statements of Operations.
In October 1999, the Company sold 1,880,000 shares of Buildscape common stock in
exchange for (i) the cancellation of $3 million of indebtedness and (ii) 520,000
shares of Riverside's common stock held by Imagine. The calculated market value
on Riverside's stock was approximately $422,500 on the date of the sale.
The following table represents the assets and liabilities of Wickes as of
October 1, 1998. Because Riverside changed its method of accounting for its
investment in Wickes to the equity method, these amounts were reclassified to
investment in Wickes, net of minority interest on the Company's Consolidated
Balance Sheet at December 31, 1998:
F-11
<PAGE>
<TABLE>
<CAPTION>
(unaudited)
October 1,
1998
__________
<S> <C>
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 2,305
----------
Total current assets 231,393
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
----------
Total assets $ 312,705
==========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 22
Accounts payable 47,742
Accrued liabilities 22,160
----------
Total current liabilities 69,924
----------
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 (64,473)
----------
Total common stockholders' equity 22,380
----------
Total liabilities & stockholders' equity $312,705
==========
F-12
<PAGE>
The following table represents the assets and liabilities of Buildscape as of
October 21, 1999. Because Riverside changed its method of accounting for its
investment in Buildscape to the equity method, these amounts were reclassified
to investment in Buildscape on the Company's Consolidated Balance Sheet at
December 31, 1999.
(unaudited)
October 21,
1999
___________
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 48
Accounts receivable and accrued interest 54
Inventory 123
Prepaid expenses 70
----------
Total current assets 295
Furniture and equipment, net 161
Other assets (net of accumulated amortization of $73) 60
----------
Total assets $ 516
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 350
Accrued expenses 1,009
Accounts payable 605
Deferred revenue 31
----------
1,995
Due to affiliates/related parties 39
----------
Total liabilities 2,034
----------
STOCKHOLDERS' EQUITY
Common stock --
Additional paid-in capital 8,450
Retained earnings (9,967)
-----------
Total stockholders' equity (1,518)
----------
Total liabilities and stockholders' equity $ 516
=========
</TABLE>
F-13
<PAGE>
2. RESTRUCTURING AND UNUSUAL CHARGES
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 a restructuring plan formulated by Wickes in late 1995, which
was completed in 1997. The $2.1 million reversal included four centers
identified 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 cumulative 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,
offset by 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 the accrued liability for restructuring had been reduced to zero.
3. INVESTMENT IN WICKES
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 $10.0 million in cash. These additional shares increased
Riverside's ownership in Wickes from 36% to 52% of Wickes' total common shares
F-14
<PAGE>
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").
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 1933. 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 Securities and Exchange Commission pending the Company's consideration of
the various alternatives available to it.
On October 5,1998, the Company and 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 Wickes 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. During 1999, Messrs.
Shaw and Carneal resigned from the Company's Board of Directors.
F-15
<PAGE>
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, 1999, Riverside beneficially owned 3,000,513 shares of Wickes'
common stock, which constituted 36% of Wickes' outstanding voting and non-voting
common stock.
As a result of the above transactions, 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 sheets
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.
Summary audited financial information of Wickes for years 1999, 1998 and 1997
follows (in thousands):
<TABLE>
<CAPTION>
Years Ended December 25, 1999, and December 27,
----------------------------------------------
1998 and December 28, 1997
--------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Operating Statement Data:
Net sales $1,084,633 $ 910,272 $ 884,082
Gross profit 253,643 215,472 203,026
Net income (loss) $ 7,588 $ (965) $ (1,560)
Balance Sheet Data:
Current assets $ 241,208 $ 209,467 $ 197,974
Total assets 334,009 292,183 283,352
Current liabilities 78,685 74,122 63,515
Long-term debt 220,742 191,961 193,061
Other long-term liabilities 3,763 2,952 2,775
Common stockholders' equity $ 30,819 $23,148 $ 24,001
BARTER TRANSACTION
</TABLE>
At any given time approximately 1% to 2% of Wickes' total inventory will be
classified as delete or obsolete merchandise. Delete or obsolete merchandise
consists of inventory that, while in good sellable condition, will be
discontinued for one of several business reasons. This inventory, which may
consist of items from any of Wickes' product lines, historically has been marked
down in value by approximately 20% to 30% of its original cost.
F-16
<PAGE>
In September of 1998, Wickes entered into a transaction in which it exchanged
delete/obsolete merchandise, with an impaired book value of $1.2 million, for
barter credits at a stated value of $1.6 million. As part of the barter
transaction Wickes had agreed to sell the merchandise for the new owner, on a
clearance basis, and remit the proceeds, up to $350,000, to the owner. Wickes
entered into the transaction to free valuable showroom and storage space for new
merchandise. The value of this merchandise had been previously reduced from its
original cost of approximately $1.6 million to $1.2 million, based on Wickes'
most recent sales information. Initially the exchange was considered to be a
non-monetary exchange, as outlined under APB 29 and EITF 93-11, and no further
impairment was recorded at that time. The barter credits were recorded as a
prepaid expense with a value of $1.2 million.
Subsequent to the second quarter of 1999, Wickes restated its September 1998
financial statements to account for the barter transaction as a monetary
transaction, upon receiving written confirmation from a second "Big Five"
accounting firm and after careful review and concurrence of its Board of
Directors Audit Committee. A non-cash charge of $844,000 has now been recorded
to reduce the value of the inventory exchanged, and the resulting book value of
the barter credits, from approximately $1.2 million to $350,000. As a result of
this change, Wickes will also record increased future earnings for each dollar
of barter credits used in excess of $350,000.
The following table reconciles the amounts Wickes previously reported to the
amounts Wickes reported in the condensed consolidated statements of operations
for the year ended December 26, 1998 (amounts in thousands, except per share
data).
<TABLE>
<CAPTION>
Restatement
Previously for Barter
Reported Transaction As Restated
__________ ___________ ___________
<S> <C> <C> <C>
Income (loss) before income taxes $ 568 $ (844) $ (276)
Provision for income taxes 1,019 (330) 689
-------- -------- ---------
Net loss $ (451) $ (514) $ (965)
========= ======== =========
Basic and diluted loss
per common share $ (0.60) $ (0.06) $ (0.12)
</TABLE>
Wickes restated 1998 earnings in 1999. Such restatement changed the Company's
net investment and related equity in earnings of subsidiary to reflect a
reduction of approximately $257,000. Such adjustment has been made to the 1998
financial statements filed in this Form 10-K.
4. 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, after reimbursement of $955,000 received by the Parent Company on
behalf of WML, from Wickes, the Parent Company incurred pre-tax loss of $388,000
on its mortgage operations.
F-17
<PAGE>
5. INVESTMENT IN GREENLEAF
As of September 30, 1998, the Company entered into and completed an agreement
with 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. As a result of the transaction,
the Company owned 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.
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's 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's 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. 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 with a subsidiary of Greenleaf, Future Com.
("Future"), for use of satellite air time, related technology, hardware and
software, on an as-needed basis, at fair market value.
At December 31, 1999, the calculated market value of the Company's investment in
Greenleaf was approximately $5.5 million based on Greenleaf's stock price of
$.41 per share on the Over-the-Counter Bulletin Board. The calculated value was
determined by multiplying 13,500,000 shares owned by the Company by the stock
price listed on the Over-the-Counter Bulletin Board on the respective date.
At April 12, 2000, the calculated market value of the Company's investment in
Greenleaf was approximately $24.1 million based on Greenleaf's stock price of
$1.80 per share on the Over-the-Counter Bulletin Board. The calculated value has
been determined by multiplying 13,500,000 shares owned and under option by the
Company less 73,413 options shares given to employees of the Company by the
stock price listed on the Over-the-Counter Bulletin Board on that date. During
the first quarter of 2000, Greenleaf's stock has traded with an average weekly
volume of 176,100 shares to 2,084,900 shares.
F-18
<PAGE>
6. INVESTMENT IN BUILDSCAPE
On October 21, 1999, Imagine made a $10 million investment into Buildscape by
converting $3 million of debt into common stock, exchanging 520,000 shares of
Riverside stock for Buildscape common stock, and investing an additional $5
million for Buildscape preferred shares.
In this transaction, Imagine acquired from Riverside 1,880,933 of Buildscape's
5,000,000 outstanding shares of common stock in exchange for (i) the
cancellation of $3 million of indebtedness and (ii) 520,000 shares of
Riverside's common stock held by Imagine. In connection with the transaction,
Imagine was granted the right to vote the Company's common shares on all matters
with the exception of change in control. As of October 22, 1999, the Company
owns 62% of the Buildscape common stock, however, since the Company's voting
rights are controlled by Imagine, the Company is accounting for its investment
in Buildscape on the equity method. The Company retained the remaining 3,119,067
outstanding shares of Buildscape's common stock. In addition, Buildscape issued
to Imagine in exchange for $5,000,000, 1,666,667 shares of Buildscape's voting
Series A Cumulative Convertible Preferred Stock with a $5 million aggregate
liquidation preference. As a result of this transaction, the Company owns
(before Buildscape employee's stock options) 47% of Buildscape on a fully
converted basis. Imagine owns 38% of the common and 100% of the preferred shares
of Buildscape, or 53% on the same basis. The Company recorded a gain of $3.9
million on the transaction.
From January 1998 through October 21, 1999, the financial statements of the
Company included those of Buildscape on a consolidated basis.
Summary audited financial information for Buildscape for years 1999 and 1998
follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1999 1998
---- ----
<S> <C> <C>
Operating Statement Data:
Net Sales $ 547 $ 30
Gross profit 85 17
Net loss $ (5,935) $ (4,674)
Balance Sheet Data:
Current assets $ 2,677 $ 90
Current liabilities 1,592 1,003
Stockholder's equity $ 1,995 $ (754)
</TABLE>
F-19
<PAGE>
7. INVESTMENTS
REAL ESTATE INVESTMENTS
Investment in real estate consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1999 1998
---- ----
<S> <C> <C>
Commercial rental property, net $ 77 $ 373
Land held for investment 8,919 9,250
Investments in real estate joint ventures -- 44
--------- ----------
Gross real estate investments 8,996 9,667
Related mortgage debt (11,345) (11,345)
--------- -----------
Real estate investments, net of mortgage debt $ (2,439) $ (1,678)
========= ===========
</TABLE>
Certain of the Company's real estate was acquired from affiliates and has been
recorded at historical carryover cost. Commercial rental property carrying
values are net of accumulated depreciation of $94,000, and $157,000, at December
31, 1999 and 1998, respectively.
As of December 31, 1999, the Company had $7,308,000 of its investments in real
estate in Georgia properties, and $1,681,000 in Florida properties, and $7,000
in other states.
NET INVESTMENT INCOME
The major categories of investment income(loss) are summarized as
follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Investment in real estate $ (67) $ (110) $ (291)
Short-term and other investments 6 78 260
----------- --------- ----------
Net investment income(loss) $ (61) $ (32) $ (31)
========== ========== ==========
The Company earned no revenue during 1999 from $8,919,000 of investments in real
estate.
REALIZED INVESTMENT GAINS AND LOSSES
Net realized investment gains(losses) are summarized below (in
thousands):
1999 1998 1997
---- ---- ----
Investment real estate $ (257) $ 1,338 $ 897
Related party investments -- (1,837) --
---------- --------- ---------
Net realized gains(losses) $ (257) $ (499) $ 897
========== ========= =========
</TABLE>
F-20
<PAGE>
INVESTMENT SECURITIES - AVAILABLE FOR SALE
In accordance with SFAS 115 and Securities and Exchange Commission ("SEC") Rule
144, 3,056,724 shares of the Company's common stock in Greenleaf is classifiedas
available for sale at December 31, 1999. The amortized basis is $0, the
estimated fair market value is $1,253,257, resulting in gross unrealized gains
of $1,253,257.
In March 2000 the Company received the legal opinion considered necessary in
order for the Company to have the ability to sell shares of its investment in
Greenleaf. Sales of such shares are limited by Rule 144 of the SEC to 1% of
Greenleaf's outstanding shares in 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 any applicable tax. 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.
8. PROPERTY, PLANT, AND EQUIPMENT
Property, plant and equipment consists of (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1999 1998
---- ----
<S> <C> <C>
Furniture and office equipment $ 386 $ 377
Computer equipment 249 511
Software 251 13
--------- ---------
886 901
Less: Accumulated depreciation
and amortization 546 499
--------- ---------
Property, plant and equipment, net $ 340 $ 402
========= =========
</TABLE>
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.
9. ACCRUED LIABILITIES
The following table summarizes the accrued liabilities (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1999 1998
---- ----
<S> <C> <C>
Accrued payroll $ 108 $ 240
Accrued interest 1,286 361
Other 364 776
--------- ---------
Total accrued liabilities $ 1,758 $ 1,377
========= =========
</TABLE>
F-21
<PAGE>
10. LONG-TERM DEBT
Long-term and mortgage debt obligations are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1999 1998
---- ----
<S> <C> <C>
LONG-TERM DEBT
Subordinated notes, net of discount of
$173,000 in 1998, interest payable at
13% semi-annually, principal due September
30, 1999, replaced with collateralized notes $ -- $ 9,827
Collateralized 10,000 --
Other 2,282 944
Total long-term debt 12,282 10,771
Less current maturities (11,813) (10,356)
---------- ----------
Total Company long-term debt less
current maturities $ 469 $ 415
========== ==========
MORTGAGE DEBT
Mortgage debt, non-recourse $ 11,345 $ 11,345
Less current maturities -- --
---------- ----------
Total Company long-term mortgage debt less
current maturities $ 11,345 $ 11,345
========== ==========
Total long term and mortgage debt $ 23,158 $ 22,116
========== ==========
</TABLE>
As of December 31, 1999, Prime and London InterBank Offered Rate ( "LIBOR")
three-month rates were 8.50% and 6.09% respectively.
SUBORDINATED NOTES ("THE 13% NOTES")/COLLATERALIZED NOTES ("THE 11% NOTES")
These notes may be prepaid in whole or in part without premium. The 13% 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.
F-22
<PAGE>
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 agrees to make a principal reduction of $550,000 on the
11% Notes on or before April 30, 2000. For further information regarding this
modification see Note 16. "Subsequent Events".
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 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.
At August 10, 1999, the Company had made payments of $195,752 under the Wickes
promissory note but was delinquent with respect to required payments of
approximately $239,518 of principal and interest. Wickes had deferred these
payments and interest thereon until September 30, 1999. On September 3, 1999 the
Company made a payment of approximately $349,924 of principal and interest,
which brought this debt current at that time.
In November 1999, the Company received an extension from Wickes deferring
approximately $77,332 of principal and interest originally due November 15, 1999
until February 15, 2000 and the Companies agreed to restructure the terms of the
debt. During this extension, the interest rate, on the amount deferred will be
based on the prime lending rate plus four percentage points.
In March of 2000, the Company and Wickes renegotiated the terms of the note,
deferring all principal payments, including the delinquent principal payments
due in November of 1999 and February of 2000, for one year at which time the
principal payments would be due on a quarterly basis. The interest on this note
will be payable on a quarterly basis. For further information regarding this
extension see Note 16. "Subsequent Events".
F-23
<PAGE>
IMAGINE SHORT-TERM LOAN
On August 27, 1999, the Company entered into a short-term loan agreement with
Imagine pursuant to which the Company borrowed $711,055 in August 1999 and
$1,088,945 in September 1999. The loan is due August 31, 2000. The loan bears
interest at an annual rate of 12.75%, and is guaranteed by Riverside and is
secured by a pledge of 840,845 shares of Wickes common stock and 100% of the
outstanding shares of Cybermax stock. The pledged Wickes stock is to be released
to the borrower in one or more stages in increments of 81,000 shares. The shares
released are required to be sold for the sole purpose of covering interest
payments on this debt, interest on the 11% Notes and/or principal and interest
on its debt payments due to Wickes. In addition, the Company's shares of Wickes
common stock are subject to securities law restrictions on resale. The Company
has granted to Imagine, a right of first refusal with respect to all the shares
of Wickes beneficially owned by it. For further information regarding the
Company's use of the funds, see Note 11. "Commitments and Contingencies".
At April 14, 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 $116,662 of interest. The Company has not received a waiver from
Imagine on this delinquency. In connection with the Greenleaf Settlement, the
Company granted Greenleaf a stock option to purchase 5% of the issued and
outstanding shares of Cybermax. Since 100% of the outstanding shares of Cybermax
stock are pledged to Imagine under the short-term loan agreement, the Company is
currently in violation. The Company believes that if Greenleaf exercises this
stock option, then the Imagine short-term loan will be paid in full.
MORTGAGE DEBT
Riverside purchased certain real estate owned by its former life company
subsidiary. In connection therewith, Riverside issued 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
the lender 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 the lender. Subject to certain exclusions, the entire sales proceeds
is required to be paid to the lender 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.
F-24
<PAGE>
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 having each share held
as collateral valued at 75% of its per share market value.
On December 30, 1999, the Company had made payments of $34,945 under the
mortgage debt, but was delinquent with respect to required payments of $461,239.
On December 31, 1999, American Founders agreed to amend certain terms of its
mortgage with the Company. In connection with the amendment, (i) all interest
due through December 31, 1999, was deferred until the next land sale (ii)
additional interest will accrue on the interest due on June 6, 1999 at a rate of
LIBOR plus 3 points (iii) as future sales occur, all past due interest and taxes
will be paid first; then future interest through June 6th of each year will be
paid; thereafter, proceeds will be applied to principal. In addition, the
Company paid the lender a $10,000 fee in consideration for this deferral.
As of December 31, 1999, there were 2,016,168 shares of Wickes' common stock
held as collateral on the real estate.
AGGREGATE MATURITIES
Aggregate amounts of future minimum principal payments on long-term and mortgage
debt are as follows (in thousands):
YEAR
2000 $ 11,813
2001 268
2002 201
2003 102
Thereafter 11,243
--------
$ 23,627
========
11. COMMITMENTS AND CONTINGENCIES
WICKES INC.
At December 25, 1999, Wickes had accrued approximately $132,000 for remediation
of certain environmental and product liability matters, principally underground
storage tank removal.
F-25
<PAGE>
Many of the sales and distribution facilities presently and formerly operated by
the 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 five years. Wickes has accrued $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 accrued $28,000 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 145 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 the Company. Since 1993, Wickes has settled 30
similar actions for insignificant amounts, and another 224 of these actions have
been dismissed. None of these suits have made it to trial.
Losses in excess of the $132,000 reserved as of December 25, 1999 are possible
but an estimate of these amounts cannot be made.
The Company 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 the Company's insurance coverage may be unavailable. While the
Company does not believe than any of these proceedings will have a adverse
effect on the Company's financial position, results of operations or liquidity,
there can be no assurance of this.
The Company and its subsidiaries have various operating leases for which
approximately $296,000, $10,461,000, and $10,817,000, was expensed in 1999, 1998
and 1997, respectively. As of December 31, 1999, the Company and its
subsidiaries lease its home office property for approximately $226,000 per year.
This lease expires in May 31, 2001.
F-26
<PAGE>
The Company's total future minimum commitments for noncancelable operating
leases are as follows (in thousands):
YEAR AMOUNT
2000 $ 234
2001 103
2002 18
2003 1
2004 --
-------
Total $ 356
=======
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 from operations, management believes the
Company does not have the financial resources to maintain its current level of
operations without obtaining significant additional funds through asset sales,
additional borrowings or other financing or reducing the level of its
operations. As described below, the principal source of funds for these purposes
in the past, and for the payment of interest on the Company's indebtedness, has
been borrowings and sales of shares of Wickes common stock. However, since the
Company has executed the Greenleaf Settlement, the Company will now be able to
sell shares of its Greenleaf stock to cover some of its operating deficit and
debt obligations. The Company is currently working on additional options as
discussed below.
At April 14, 2000, the Company estimates that it will have approximately
$482,000 of accounts payable and other current liabilities (excluding interest
payable), approximately $176,000 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 of April 14,
2000, $116,662 of interest is currently past due on the Company's note to
Imagine. Additionally, the $10,000,000 principal of the Company's 11% Notes is
due in September 2000, and the $1,800,000 principal of the Company's short-term
loan from Imagine is due August 2000.
The principal user of the Company's cash during 1999 was Buildscape. On October
21, 1999, Imagine, acquired a majority voting interest in Buildscape and
provided Buildscape with independent funding. For additional information
concerning this transaction, see Note 6. "Investment in Buildscape". As a result
of this transaction, Buildscape will operate independently of the Company and
its operations. In order to continue its operations, Buildscape will need to
obtain additional financing in the near future.
On August 25, 1999, the Company and the holders of the 13% Notes completed an
agreement whereby the Company's 13% Notes that were scheduled to mature in
September 1999, were replaced with the 11% Notes. For information regarding the
collateral on the 11% Notes, see Note 10. "Long-Term Debt". In March of 2000,
the Company and the 11% Note holders modified their original agreement, which
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 due on March 31,
2000, in lieu of payment against the principal balance of the notes. In
addition, the Company agreed to make a principal payment of approximately
$550,000 on or before April 30, 2000.
The two assets that the Company may sell to cover immediate cash needs are
Wickes and Greenleaf shares. On April 14, 2000, virtually all of the Parent
Company's 3,000,513 shares of Wickes common stock are pledged to secure various
obligations of the Company, as discussed below, Imagine has released from pledge
81,970 shares to be sold. The Company currently owns ten million shares of
Greenleaf common stock and has a five year option to purchase two million shares
at .$25 per share. All ten million shares owned are pledged to secure the
Company's 11% Notes, and any proceeds of sale are required to be applied as
discussed above. In addition, three million shares of the Greenleaf's shares are
held in an escrow account, pursuant to an escrow agreement between the Company
and Greenleaf. For further information regarding the reduction of the Company's
shares of Greenleaf stock, see Note 5. "Investment in Greenleaf" and Note 16.
"Subsequent Events".
F-27
<PAGE>
The Company has begun selling shares of Wickes and Greenleaf stock to meet the
immediate cash requirements of interest due March 31 on the 11% Notes, interest
due on the Wickes note and operations. Through April 13, 2000, the Company has
sold 61,100 shares of Wickes and 250,000 shares of Greenleaf stock for proceeds
of approximately $581,344 and $355,825, on each. The Company sold sufficient
shares of Greenleaf prior to March 31 to make the interest payment on the 11%
notes within the allowable grace period prescribed in the note agreement.
Proceeds from the sale of Wickes shares will be used for the interest due to
Wickes and current operating costs.
Based upon available information, the Company believes that it may sell
approximately 750,000 shares of Greenleaf, or 1% of their total outstanding
shares, in a 90 day period under Rule 144. Pursuant to the settlement reached
with Greenleaf (see Note 5. "Investment in Greenleaf") during the first 90 day
period, up to 20% of these shares are reserved to be sold by the escrow agent.
From the three million shares held in escrow, the Company anticipates being able
to sell the total number of shares permitted to be sold by it in the market over
the next 45 days. The proceeds received from the sales after paying interest and
principal payment on the 11% Notes and the escrow fund, would be split 50% with
the 11% Note holders and the balance, if any, will be available to cover
operating costs of the Company. The Company also plans to sell an additional
41,000 shares of Wickes stock, the balance of the amount allowable under Rule
144, over the next 30 days to fund operating costs.
The Company's subsidiary, Cybermax, is generating sales and the Company projects
by the end of this year, Cybermax will generate cash from operations sufficient
to fund its operations. There can be no assurance of this, however.
On August 27, 1999, the Company entered into a short-term loan agreement with
Imagine pursuant to which the Company borrowed $711,055 in August 1999 and
$1,088,945 in September 1999. The Company used these borrowings to fund its
operations including (1) interest of approximately $631,507 on the 11% Notes,
(2) delinquent principal and interest of approximately $349,924 on the Wickes
debt (3) expenses of approximately $104,000 in connection with the replacement
of the Company's 13% Notes and (4) delinquent payables of approximately
$417,196. The loan is due August 31, 2000. As described above, $58,650 of
interest is past due. The loan bears interest at an annual rate of 12.75% is
guaranteed by Riverside and is secured by a pledge of 840,845 shares of Wickes
common stock and 100% of the Cybermax stock. This stock is to be released to the
Borrower in one or more stages in increments of 81,000 shares. The shares
released are required to be sold for the sole purpose of covering interest
payments on this debt, interest on the 11% Notes and/or principal and interest
on its debt payments due to Wickes. The Company has granted to Imagine a right
of first refusal that expires in April 2000 with respect to all the shares of
Wickes beneficially owned by it.
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. Approximately
$1,005,366 of payments due at December 31, 1999 has been deferred. See Note 10.
"Long-Term Debt". 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.
F-28
<PAGE>
The Company currently has all of its remaining 144 acres of its investment in
real estate under contract to sell. The sales proceeds, estimated at $15.7
million (after closing costs) will be used to pay off the current mortgage debt
of $11.3 million plus accrued interest and property taxes and the balance of the
proceeds will be used to pay down the principal due on the 11% notes. The
closing on the sale is subject to the buyer obtaining re-zoning permits. The
buyer is entitled not to close on the sale without forfeiture of the earnest
money if the permits are not received . If the permits are received, the buyer
will forfeit earnest money of $10,000 if he fails to close the sale. The
extensions available, under the sales agreement, to obtain the re-zoning permits
allow the buyer until August 22, 2000 to close this sale.
The Company is having discussions with present and prospective lenders regarding
refinancing all, or the portion due after application of the real estate
proceeds, of the 11% notes due September 30, 2000 and the note payable to
Imagine due August 31, 2000. The Company anticipates that sales of Greenleaf and
/or Wickes shares or other asset sales or borrowings will make up the shortfall
on these loans. There can be no assurance of this, however.
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 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 and Jacksonville, Florida. 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, possibly the Company's ability to find a buyer or buyers for these
securities in a private transaction or otherwise.
F-29
12. EMPLOYEE BENEFIT PLANS
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, and $97,000 in 1998 and 1997, respectively. Loans from the
Company to the ESOP of $268,000 in 1994 were used to purchase additional shares
of common stock.
Notes receivable from the ESOP issued to purchase common shares are held by the
Company and its subsidiaries. Statement of Position ("SOP") 93-6 issued in 1994
requires presentation of all leveraged shares held by the ESOP ("Unearned ESOP
shares") as a reduction to additional paid in capital. Accordingly, the unpaid
balance of the notes receivable of $443,000 was reclassified to stockholders'
equity in 1994. As of December 31, 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.
F-30
<PAGE>
The Company terminated the ESOP plan effective December 29, 1999. The Board
approved the termination of the plan and directed the ESOP to sell the
unallocated shares and apply the proceeds to the unpaid balance of the note. The
ESOP had approximately 58,000 unallocated shares on the date of termination. The
ESOP sold 15,000, 15,000 and 20,000 shares respectively, of the Company's stock
to the Company's Chairman, President and Chief Executive Officer, Chief
Financial Officer and Senior Vice President of Cybermax. The Company received
promissory notes of $12,188, $12,188 and $16,250, respectively, from the
Company's Chairman of the Board, Chief Financial Officer and Senior Vice
President of Cybermax for payment of these shares. All of the notes bear an
interest rate 8.50% and are collateralized by the shares sold to these officers.
The remaining 8,000 shares are being held pending the outcome of the Internal
Revenue Service review of the termination of the plan and will be sold upon
completion of this process. In accordance with Rule 5.02.30 of Regulation S-X of
the SEC Act of 1934, these promissory notes are reflected as a reduction to Paid
in Capital on the Company's Consolidated Balance Sheet. All 58,000 shares are
considered issued and outstanding at December 31, 1999.
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). 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 -- -- -- --
F-31
<PAGE>
NUMBER OF OPTION SHARES OPTION PRICE
-------------------------- -------------------------
TOTAL EXERCISABLE PER SHARE TOTAL
-------- ----------- ------------ ----------
Expired/Canceled (70,000) (62,500) $6.00-$11.88 (473,800)
-------- --------- ------------ ----------
Outstanding at December 31, 1998 50,000 50,000 $3.00 $ 623,800
Granted -- -- -- --
Vested -- -- -- --
Exercised -- -- -- --
Expired/Canceled -- -- -- --
-------- --------- ------------ ----------
Outstanding at December 31, 1999 50,000 50,000 $3.00 $ 150,000
======== ========= ============ ==========
Options outstanding as of December 31, 1999 expire in 2000 through 2006 as
follow:
Shares Option Price Expiration
Exercisable Per Share Total Date
- ----------- --------- ----- --------------
50,000 3.00 150,000 December 2000
---------
$ 150,000
</TABLE>
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 1999
or 1998, respectively.
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, $11,000, and $23,000, during 1999, 1998 and 1997, 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.
F-32
<PAGE>
The Company will file a consolidated tax return for 1999 which will include all
its subsidiaries with the exception of Wickes. The activities of Buildscape
after October 21, 1999 will be reported on a separate tax return. Riverside's
ownership in Wickes and Buildscape post October 21, 1999, is below the
requirements which allow consolidation for tax purposes, therefore a separate
return will be filed for these companies.
At December 31, 1999, the Company has net operating loss carry forwards
available to offset income of approximately $49 million expiring in years 2000
through 2019. 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.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. A valuation allowance has
been established to reduce deferred tax assets to the amount which more likely
than not will be realized in the future. The components of the deferred tax
assets and liabilities at December 31, 1999 and 1998 are as follows (in
thousands):
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Deferred tax assets:
Trade accounts receivable 170 259
Other accrued liabilities 20 46
Difference in investment carrying values 7,848 7,584
Net operating loss and AMT credit carry forwards 18,502 18,821
Property, plant and equipment 58 18
--------- ---------
Total deferred tax assets 26,598 26,728
Valuation allowance for deferred tax assets 25,536 25,607
--------- ---------
Net deferred tax assets $ 1,062 $ 1,121
--------- ---------
Deferred tax liabilities:
Difference in asset bases 610 669
Other accrued income items 452 452
--------- ---------
Total deferred tax liabilities 1,062 1,121
--------- ---------
Net deferred tax assets $ -- $ --
========= =========
</TABLE>
F-33
<PAGE>
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 1999 consists of both current and deferred amounts.
The components of income tax provision are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C>
Taxes currently payable
Federal income tax $ -- $ -- $ --
State income tax -- 396 1,099
Deferred expense(benefit) -- 3,002 (153)
--------- --------- --------
Total income tax expense(benefit) -- $ 3,398 $ 946
========= ========= ========
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):
1999 1998 1997
---- ---- ----
<S> <C> <C>
Change in bad debt reserve 89 $ (430) $ 541
Difference in tax and book inventory -- (506) 60
Settlement of deferred compensation -- 48 (76)
Change in accrued liabilities 26 1,262 116
Utilization/creation of NOL 319 (2,705) (220)
Difference in tax and book asset basis (98) 22 (1,004)
Difference in book and tax intangibles -- 302 634
Change in accrued income items (1) -- --
Difference in valuations of investments
and capital loss carry forwards (728) 210 (845)
Differences in reporting unearned premium,
accrued income, expenses and other -- -- --
Change in valuation allowance 393 4,799 1,957
--------- --------- --------
Deferred tax expense(benefit) $ 0 $ 3,002 $ (153)
========= ========= =========
</TABLE>
F-34
<PAGE>
Actual income tax expense(benefit) on income(loss) differs from expected tax
expense computed by applying the Federal corporate tax rates of 34% in 1999,
1998 and 1997 as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C>
Tax expense/benefit computed at statutory rate (911) $ (3,348) $ (2,036)
Increase (decrease) in taxes resulting from:
Effect of the difference in tax
treatment of goodwill 193 135 --
State and local income taxes (80) 310 714
Other 405 1,407 411
Change in valuation allowance 393 4,884 1,857
--------- --------- --------
Actual tax expense(benefit) $ 0 $ 3,348 $ 946
========= ========= ========
</TABLE>
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
In accordance with SFAS No. 107, "Disclosure about Fair Value of Financial
Instruments," information has been provided about the fair value of certain
financial information. The following methods and assumptions were used to
estimate the fair value of each material class of financial instruments covered
by the Statement for which is practicable to estimate that value.
INVESTMENT IN WICKES INC. - The fair value of Wickes is determined by the NASDAQ
National Market System quoted market price.
INVESTMENT IN GREENLEAF TECHNOLOGIES CORP. - The market value of Greenleaf is
determined by the Over-the-Counter Bulletin Board price as described below.
INVESTMENT IN BUILDSCAPE, INC. - The market value of Buildscape is determined by
the share price used in the Imagine transaction. (see Note 6. "Investment in
Buildscape")
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.
F-35
<PAGE>
The estimated fair value of the Company's financial instruments at December 31,
1999 are summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1999
----------------------------------
Carrying Estimated
Amount Fair Value
---------- ----------
<S> <C> <C>
Financial assets:
Cash and cash equivalents $ 277 $ 277
Investment in Wickes Inc. 15,799 16,128
Investment in Greenleaf Technologies Corp.
Common stock -- 4,100
Options -- 820
Investment in Buildscape, Inc. (947) 9,357
Financial liabilities:
Long-term debt 469 469
Mortgage debt, related party 11,345 11,345
</TABLE>
15. RELATED PARTY TRANSACTIONS
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
$195,000 in 1999, $398,500 in 1998, and $925,000 in 1997. In 1997, the Company
established a reserve for approximately $434,000 related to 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 $330,000. In 1999, the Parent Company incurred
(exclusive of Wickes) $195,000 of costs from use of the airplane, of which
$11,000 reduced the reserve. This amount reduced the reserve to $319,000.
A former director and executive officer of the Company was during most of 1998,
and all of 1997, a shareholder of the law firm that is general counsel to the
Company. The Company paid this firm $515,000 and $834,000, for legal services
provided to the Company during 1998 and 1997, respectively. No reimbursements
were made in 1999.
Included in operations for 1999, 1998 and 1997 is income related to office
expenses and tax services either paid to the Company or charged by the Company
to Wilson Financial of $34,000, ($632), and $22,000, respectively. At December
31, 1999 and 1998, there was an intercompany balance of approximately $82,000
and $103,000, respectively, 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, 1999 and 1998, respectively.
F-36
<PAGE>
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. 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.
Included in operations for 1999, 1998 and 1997 is income related to tax and
accounting services paid to the Company by a former affiliate of the Company of
$65,000, $12,500 and $7,080, respectively.
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 December of 1999, three executive officers of the Company and its
subsidiaries, purchased 50,000 shares of the Company's common stock in
connection with the termination of the Company's ESOP Plan. The Company received
promissory notes for $40,626 for payment of these shares. For further
information regarding this transaction, see Note 12. "Employee Benefits". These
notes have been recorded as a component of stockholders' equity.
During 1999, the Company entered into a short-term loan agreement with Imagine.
The loan is for $1,800,000, bears interest at an annual rate of 12.75%, and is
due August 31,2000. For further information on this short-term loan agreement,
see Note 10. "Long-Term Debt."
On October 21, 1999, the Company sold 38% of its Buildscape common stock and
100% of its Buildscape preferred stock to Imagine for the cancellation of $3.0
million of indebtedness and 520,000 shares of its Riverside common stock. For
further information on this transaction, see Note 6. "Investment in Buildscape".
F-37
<PAGE>
16. SUBSEQUENT EVENTS
On January 28, 2000, the Company and Greenleaf executed a Settlement Agreement.
In this agreement, 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's common
stock at an exercise price of $.25 per share. In addition to the ten million
retained shares, three million of the Greenleaf's shares are held in an escrow
account, pursuant to an escrow agreement acceptable to all parties. 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. For further information
concerning the Company's obligation on this transaction see Note 5. "Investment
in Greenleaf."
At December 31, 1999, the Company made payments of $545,046 under its promissory
note but was delinquent with respect to required payments of approximately
$82,486 of principal and interest to Wickes. In March of 2000, the Company and
Wickes renegotiated the terms of the note, deferring all principal payments due
through February of 2000, for one year, at which time the principal payments
would be due on a quarterly basis. The interest on this note will be paid on a
quarterly basis.
On March 24, 2000, the Company and the holders of the 11% Notes executed a
modification to the agreement dated August 25, 1999. This modification allowed
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 agrees
to make a principal reduction of $550,000 on or before April 30, 2000.
On April 14, 2000, the Company's Board of Directors approved the issuance of
grants and the right to acquire options held by the Company related to one of
the Company's investments in Greenleaf. The grants and options approved by the
Board of Directors were pursuant to that described and committed to certain
officers and employees on October 1, 1998. 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 will record a charge to income which represents the value of the
shares granted and the vested portion of options granted as represented by the
passage of time from the commitment date until the date approved by the Board of
Directors. Such approval effectively results in the awarding of vested grants
and options and the recognition of compensation expense accordingly.
Management has proposed the grant of additional shares and options to certain
officers and employees. The issuance of these is subject to the Company's Board
of Directors review and approval. The Board has engaged an outside consulting
firm to conduct a compensation review and advise them with respect to these
issues.
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: Buildscape, Cybermax, Wickes and the Parent
Group. 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 all of
1999. Buildscape's operations are consolidated with those of the Company and its
subsidiaries for all of 1998 and through October 21, 1999. The Company accounted
for its investment in Buildscape under the equity method for the remainder of
1999. The "Parent Group" includes real estate, parent company, and discontinued
operations and all eliminating entries for inter-company transactions.
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------
1999 1998 1997
---- ---- ----
(in thousands)
------------
<S> <C> <C> <C>
SALES:
Buildscape(1) $ 415 $ 30 $ --
Cybermax 1,171 486 --
Wickes(2) -- 667,024 884,082
Parent Group 34 164 --
--------- --------- ---------
Total $ 1,620 $ 667,704 $ 884,082
========= ========= =========
</TABLE>
F-38
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------
1999 1998 1997
---- ---- ----
(in thousands)
------------
<S> <C> <C> <C>
COST OF SALES:
Buildscape(1) $ 342 $ 14 $ --
Cybermax 213 182 --
Wickes(2) -- 509,740 681,056
Parent Group 4 170 --
--------- --------- ---------
Total $ 559 $ 510,106 $ 681,056
========= ========= =========
OTHER OPERATING INCOME:
Buildscape(1) $ -- $ -- $ --
Cybermax 15 -- --
Wickes(2) -- 5,045 10,689
Parent Group 80 546 608
--------- --------- ---------
Total $ 95 $ 5,591 $ 11,297
========= ========= =========
INVESTMENT INCOME AND REALIZED
GAINS/(LOSSES):
Buildscape(1) $ 3 $ -- $ --
Cybermax -- -- --
Wickes(2) -- (1,837) --
Parent Group (321) 1,306 866
--------- --------- ---------
Total (318) $ (531) $ 866
========= ========== =========
EXPENSES:
Buildscape(1) $ 4,485 $ 4,605 $ 668
Cybermax 2,209 (283) --
Wickes(2) -- 141,447 192,395
Parent Group 421 1,549 2,222
--------- --------- ---------
Total $ 7,115 $ 147,318 $ 195,285
========= ========= =========
RESTRUCTURING AND UNUSUAL ITEMS:
Buildscape(1) $ -- $ -- $ --
Cybermax -- -- --
Wickes(2) -- 5,932 (559)
Parent Group -- -- --
--------- --------- ---------
Total $ -- $ 5,932 $ (559)
========= ========= =========
F-39
<PAGE>
Years Ended December 31,
---------------------------------------------
1999 1998 1997
---- ---- ----
(in thousands)
------------
INTEREST EXPENSE:
Buildscape(1) $ 174 $ 85 $ --
Cybermax 3 6 --
Wickes(2)(3) 1,407 17,984 22,890
Parent Group 1,058 1,189 1,635
--------- ---------- ---------
$ 2,642 $ 19,264 $ 24,525
========= ========== =========
EARNINGS(LOSS) BEFORE INCOME TAXES,
EQUITY IN RELATED PARTIES, MINORITY
INTEREST AND DISCONTINUED OPERATIONS:
Buildscape(1) $ (4,583) $ (4,674) $ (668)
Cybermax (1,239) 581 --
Wickes(3) (1,407) (4,871) (1,011)
Parent Group (1,690) (1,188) (2,383)
--------- ---------- ---------
Total $ (8,919) $ (10,152) $ (4,062)
========= ========== ==========
IDENTIFIABLE ASSETS:
Buildscape(1) $ (947) $ 248 $ --
Cybermax 556 217 --
Wickes(3) 15,799 14,738 290,832
Parent Group 9,522 10,942 23,073
--------- ---------- ---------
Total $ 24,930 $ 26,145 $ 313,905
========= ========== =========
</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) 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.
(3) Includes $1,407,000, $1,502,000, and $1,473,000 for an interest allocation
from Riverside on its 11% secured notes, 13% subordinated notes for 1999, 1998
and 1997, respectively.
F-40
<PAGE>
<TABLE>
<CAPTION>
QUARTERLY RESULTS (unaudited)
1999
(in thousands, except per share amounts)
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -----
<S> <C> <C> <C> <C> <C>
Revenues $ 477 $ 287 $ 548 $ 85 $ 1,397
Costs and expenses 2,316 2,679 3,437 1,884 10,310
Earnings before income
taxes, equity in related
parties, minority interest -------- -------- -------- -------- --------
and discontinued operations $ (1,839) $ (2,392) $ (2,889) $ (1,793) $ (8,913)
Net earnings(loss) $ (3,164) $ (1,214) $ (1,049) 2,755 $ (2,672)
======== ======== ======== ======== =========
Basic and diluted earnings
(loss) per common share $ (0.61) $ (0.23) $ (0.20) $ 0.57 $ (0.52)
======== ======== ======== ======== ==========
Weighted average number
of common shares used
in computing loss per share 5,213,186 5,213,186 5,213,186 4,829,123 5,128,131
F-41
<PAGE>
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 $ 4,038 $682,916
Earnings before income
taxes, equity in related
parties, minority interest ------- -------- -------- -------- --------
and discontinued operations ($12,279) $ 3,349 $ 1,863 ($ 3,085) ($ 10,152)
Net loss ($ 5,098) ($ 274) ($ 1,574) ($ 5,618) ($ 12,564)
======= ========= ======== ======== ========
Basic and diluted loss
per common share $ (0.98) $ (0.05) $ (0.30) $ (1.08) $ (2.46)
======= ======== ======== ======== ========
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
</TABLE>
F-42
<PAGE>
<PAGE>
INDEPENDENT AUDITORS REPORT
---------------------------
To the Board of Directors and Stockholders of
Wickes Inc.
Vernon Hills, IL
We have audited the accompanying consolidated balance sheet of Wickes Inc.
and subsidiaries as of December 25,1999 and the related consolidated
statements of operations, changes in stockholders' equity, and cash flows
for the year then ended. Our audit also included the financial statement
schedule for the year ended December 25, 1999 listed in the Index at Item
14. These financial statements and the financial statement schedule are
the responsibility of the Company's management. Our responsibility is to
express an opinion on the financial statements and financial statement
schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Wickes Inc. and
subsidiaries as of December 25, 1999, and the results of their operations
and their cash flows for the year then ended in conformity with generally
accepted accounting principles. Also, in our opinion, such financial
statement schedule for the year ended December 25, 1999, when considered in
relation to the basic 1999 consolidated financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
/s/ Deloitte & Touche LLP
Chicago, IL
February 22, 2000
WF-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and
Board of Directors of Wickes Inc.
In our opinion, the accompanying consolidated balance sheet 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 the results
of their operations and their cash flows for each of the two years ended
December 26, 1998 and December 27, 1997, 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.
As discussed in Note 15 to the 1999 consolidated financial statements (Note
16 in the 1998 consolidated financial statements), Wickes Inc. has restated
previously issued consolidated financial statements to change its
accounting for a barter transaction.
/s/ PricewaterhouseCoopers LLP
Chicago, Illinois
February 23, 1999 except for Note 15 in the 1999 financial statements (Note
16 in the 1998 financial statements), as to which the date is August 31,
1999.
WF-2
<PAGE>
<TABLE>
<CAPTION>
WICKES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 25, 1999 and December 26, 1998
(in thousands, except share data)
1999 1998
ASSETS ---- ----
<S> <C> <C>
Current assets:
Cash $ 72 $ 65
Accounts receivable, less allowance for doubtful
accounts of $4,105 in 1999 and $4,393 in 1998 110,103 92,926
Notes receivable 481 1,095
Inventory 120,705 103,716
Deferred tax asset 7,184 8,857
Prepaid expenses 2,663 2,808
------- -------
Total current assets 241,208 209,467
------- -------
Property, plant and equipment, net 50,599 45,830
Trademark (net of accumulated amortization
of $10,718 in 1999 and $10,496 in 1998) 6,301 6,523
Deferred tax asset 14,695 17,482
Rental equipment (net of accumulated depreciation
of $1,010 in 1999 and $572 in 1998) 1,981 1,883
Other assets (net of accumulated amortization
of $11,463 in 1999 and $9,502 in 1998) 19,225 10,998
------- -------
Total assets $ 334,009 $ 292,183
======= =======
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ - $ 16
Accounts payable 53,190 54,017
Accrued liabilities 25,495 20,089
------- -------
Total current liabilities 78,685 74,122
------- -------
Long-term debt, less current maturities 220,742 191,961
Other long-term liabilities 3,763 2,952
Commitments and contingencies (Note 8)
Stockholders' equity (Note 9):
Preferred stock (no shares issued)
Common stock, $0.01 par value
20,000,000 shares authorized
1999 - 8,224,888 shares issued
1998 - 8,207,268 shares issued 82 82
Additional paid-in capital 86,870 86,787
Accumulated deficit (56,133) (63,721)
------- -------
Total stockholders' equity 30,819 23,148
------- -------
Total liabilities and stockholders' equity $ 334,009 $ 292,183
======= =======
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
WF-3
<PAGE>
<TABLE>
<CAPTION>
WICKES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 25, 1999, December 26, 1998, and December 27, 1997
(in thousands, except per share data)
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net sales $1,084,633 $ 910,272 $ 884,082
Cost of sales 830,990 694,800 681,056
--------- --------- ---------
Gross profit 253,643 215,472 203,026
--------- --------- ---------
Selling, general and administrative
expenses 214,581 186,853 185,385
Depreciation, goodwill and trademark
amortization 6,473 5,253 4,863
Provision for doubtful accounts 1,724 2,915 1,707
Restructuring and unusual items - 5,932 (559)
Other operating income (5,768) (6,837) (10,689)
--------- --------- ---------
217,010 194,116 180,707
--------- --------- ---------
Income from operations 36,633 21,356 22,319
Interest expense 23,302 21,632 21,417
Equity in loss of affiliated company - - 1,516
--------- --------- ---------
Income (loss) before income taxes 13,331 (276) (614)
Provision (benefit) for income taxes:
Current 1,283 1,019 1,099
Deferred 4,460 (330) (153)
--------- --------- ---------
Net income (loss) $ 7,588 $ (965) $ (1,560)
========= ========= =========
Basic income (loss) per common share $ 0.92 $ (0.12) $ (0.19)
========= ========= =========
Diluted income (loss) per common share $ 0.91 $ (0.12) $ (0.19)
========= ========= =========
Weighted average common shares -
for basic 8,216,265 8,197,542 8,168,257
========= ========= =========
Weighted average common shares -
for diluted 8,330,571 8,197,542 8,168,257
========= ========= =========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
WF-4
<PAGE>
<TABLE>
<CAPTION>
WICKES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Years Ended December 27, 1997, December 26, 1998 and December 25, 1999
(in thousands, except for share data)
Additional Total
Common Stock Paid-in Accumulated Stockholders'
Shares Amount Capital Deficit Equity
------ ------ ------- ------- ------
<S> <C> <C> <C> <C> <C>
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 16,858 - 62 - 62
--------- --- ------- --------
Balance at December 27, 1997 8,176,205 82 86,675 (62,756) 24,001
Net loss - - (965) (965)
Issuance of common stock 31,063 - 112 - 112
--------- --- ------- ------- ------
Balance at December 26, 1998 8,207,268 82 86,787 (63,721) 23,148
Net income - - 7,588 7,588
Issuance of common stock 17,620 - 83 - 83
--------- --- ------- -------- -------
Balance at December 25, 1999 8,224,888 $ 82 $ 86,870 $ (56,133) $ 30,819
========= === ======= ======== =======
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
WF-5
<PAGE>
<TABLE>
<CAPTION>
WICKES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 25, 1999, December 26, 1998, and December 27, 1997
(in thousands)
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 7,588 $ (965) $ (1,560)
Adjustments to reconcile net income (loss) to
net cash (used in) provided by operating activities:
Equity in loss of affiliated company - - 1,516
Depreciation expense 5,852 4,785 4,395
Amortization of trademark 222 222 222
Amortization of goodwill 399 246 246
Amortization of deferred financing costs 1,510 1,447 1,401
Provision for doubtful accounts 1,724 2,915 1,707
Gain on sale of assets (1,458) (1,834) (6,180)
Deferred tax (benefit) provision 4,460 (330) (153)
Changes in assets and liabilities, excluding effects
of acquisitions:
Increase in accounts receivable (16,904) (14,053) (12,285)
Decrease (increase) in notes receivable 614 2,105 (3,200)
Increase in inventory (15,831) (1,010) (2,034)
Increase (decrease) in accounts payable and accrued
liabilities 3,539 10,814 (4,590)
Increase in deferred gain - - (670)
Increase in prepaids and other assets (2,960) (1,715) (3,369)
------- -------- -------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (11,245) 2,627 (24,554)
------- -------- -------
Cash flows from investing activities:
Purchases of property, plant and equipment (8,624) (5,854) (7,758)
Payments for acquisitions (12,999) - -
Proceeds from sales of property, plant and equipment 4,026 4,231 13,798
------- ------ ------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (17,597) (1,623) 6,040
------- ------ ------
Cash flows from financing activities:
Net borrowing (repayments) under revolving line of credit 28,782 (1,084) 16,732
Reductions of note payable (16) (46) (134)
Net proceeds from issuance of common stock 83 112 62
------ ------ ------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 28,849 (1,018) 16,660
------ ------ ------
NET INCREASE (DECREASE) IN CASH 7 (14) (1,854)
Cash at beginning of period 65 79 1,933
------ ------ ------
CASH AT END OF PERIOD $ 72 $ 65 $ 79
======== ======== ========
Supplemental schedule of cash flow information:
Interest paid $ 21,503 $ 20,885 $ 19,791
Income taxes paid 1,524 987 1,344
Supplemental schedule of non-cash investing
and financing activities
The Company purchased capital stock and assets
in conjunction with acquisitions made during the
period. In connection with these acquisitions,
liabilities were assumed as follows:
Assets acquired $ 14,850 $ - $ -
Liabilities assumed $ 529 $ - $ -
Purchase price payable $ 1,322 $ - $ -
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
WF-6
<PAGE>
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.
2. 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. All periods
presented represent 52-week years.
Cash and Cash Equivalents
- -------------------------
The Company considers all highly liquid investments with a maturity date of
three months or less to be cash equivalents.
Accounts Receivable
- -------------------
The Company extends credit primarily to qualified 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 useful lives range from 15 to 39 years for
WF-7
<PAGE>
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.
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 20 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 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.
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 ("SFAS") 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 SFAS No. 112, "Employers' Accounting for
Postemployment Benefits."
WF-8
<PAGE>
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. 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 are calculated in accordance with SFAS No. 128,
"Earnings Per Share." Weighted average shares outstanding have been adjusted for
dilution using the treasury stock method.
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 disclosure of
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 SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of." This statement requires
that long-lived assets and certain identifiable intangibles 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 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
- ------------------------
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 the fair value
of such instruments. The pronouncement requires companies that choose not to
adopt the fair value method of accounting to disclose the pro forma net income
and earnings per share under the fair value method. As permitted by SFAS 123,
the Company elected to continue the intrinsic value method of accounting
WF-9
<PAGE>
prescribed by 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 had been used to account for stock-based compensation cost
(see Note 9).
Segment Reporting
- -----------------
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 1999, 1998,
and 1997.
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 is currently evaluating the effects
of this pronouncement.
3. Restructuring and Unusual Charge
- -- --------------------------------
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 a restructuring plan formulated by the
Company in late 1995, which was completed in 1997. The $2.1 million reversal
included four centers identified 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.
WF-10
<PAGE>
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 cumulative 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, offset by a benefit of $300,000 for adjustments to
prior years' restructuring accruals. The $4.1 million in estimated losses
included 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, 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
- -- ------------
The Company made four acquisitions during 1999, all component facilities. The
total purchase price of these acquisitions was $14.3 million, of which $13.0
million was paid in cash in 1999 with the remainder to be paid in 2000 and 2001,
payable in cash or stock at the option of the Company. In January, the Company
acquired the assets of a wall panel manufacturer located in Cookeville,
Tennessee. In March, the Company acquired the assets of Porter Building
Products, a manufacturer of trusses and wall panels, located in Bear, Delaware.
In October, the Company acquired the assets of Advanced Truss Systems, Inc. of
Kings Mountain, North Carolina. Advanced Truss Systems is a manufacturer of
engineered wood trusses, servicing the greater Charlotte, North Carolina,
market. In November, the Company acquired the assets of United Building Systems,
Inc. of Lexington, Kentucky. United Building Systems is a manufacturer of wall
panels and roof and floor trusses, in the Lexington, Kentucky, market.
The costs of these acquisitions have been allocated on the basis of the fair
value of the assets acquired and the liabilities assumed. The excess of the
purchase price over the fair value of the net assets acquired for three of the
acquisitions resulted in goodwill, which is being amortized over a 20-year
period on a straight-line basis. All acquisitions have been accounted for as
purchases. Operations of the companies acquired have been included in the
accompanying consolidated financial statements from their respective acquisition
dates.
WF-11
<PAGE>
During 1998, the Company acquired the operating assets of Eagle Industries Inc.,
a component manufacturer, for a total cost of $1.8 million. The acquisition was
accounted for as a purchase and the cost has been allocated on the basis of the
fair value of the assets acquired and liabilities assumed. This operation has
been included in the accompanying consolidated financial statements from its
date of acquisition. The Company had no acquisitions in 1997.
The results of all acquisitions were not material to the Company's consolidated
operations.
5. Property, Plant, and Equipment
- -- ------------------------------
Property, plant and equipment is summarized as follows:
<TABLE>
<CAPTION>
December 25, December 26,
1999 1998
----------- -----------
(in thousands)
<S> <C> <C>
Land and improvements $13,607 $12,115
Buildings 29,634 26,341
Machinery and equipment 36,905 32,257
Leasehold improvements 3,118 3,059
Construction in progress 1,301 846
------- -------
Gross property, plant, and equipment 84,565 74,618
Less: accumulated depreciation (36,443) (32,661)
------- -------
Property, plant, and equipment
in use, net 48,122 41,957
Assets held for sale, net 2,477 3,873
------- -------
Property, plant, and equipment, net $50,599 $45,830
======= =======
</TABLE>
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 1999, the Company sold five pieces of real estate, all of which were sales
and distribution facilities, for a net gain of $1.4 million. One property, which
WF-12
<PAGE>
had been held for sale since the first quarter of 1990, had been previously
written down by $200,000 from its original net book value and sold at a net loss
of $23,000. The other four properties, one held for sale since 1992 and the
others since 1998, had not been previously written down and each were sold for
net gains.
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
written down from book value and had been held for sale since 1992 (2
properties), 1995 (4 properties), 1996 (2 properties) and 1997 (3 properties).
The Company reviews assets held for sale in accordance with SFAS No. 121. At
December 25, 1999, the Company held seven properties for resale which had been
written down to their estimated fair market values in 1997 and prior. In 1997,
the Company recorded a loss of $156,000 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 1999 or 1998. Certain of these
properties are leased to others until such time that appropriate disposition can
be affected. These charges are included in the caption "restructuring and
unusual items" on the Consolidated Statement of Operations.
6. Accrued Liabilities
- -- -------------------
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
December 25, December 26,
1999 1998
----------- ------------
(in thousands)
<S> <C> <C>
Accrued payroll $ 11,401 $ 9,498
Accrued liability insurance 5,844 4,966
Other 8,250 5,625
------- ------
Total accrued liabilities $25,495 $20,089
======= =======
</TABLE>
F-13
<PAGE> F-14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Long-Term Debt
- -- --------------
Long-term debt obligations are summarized as follows:
<TABLE>
<CAPTION>
December 25, December 26,
1999 1998
----------- -----------
(in thousands)
<S> <C> <C>
Revolving line of credit $ 120,742 $ 91,961
Senior subordinated notes 100,000 100,000
Other - 16
-------- --------
Total long-term debt 220,742 191,977
Less current maturities - (16)
-------- --------
Total long-term debt less
current maturities $220,742 $191,961
======== ========
</TABLE>
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.
On February 17, 1999, the Company entered into a new revolving credit agreement
with a group of financial institutions with an expiration date of June 30, 2003.
The new revolving line of credit provided for, subject to restrictions and
modifications 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.
On July 8, 1999, the revolving credit agreement was amended to clarify the
definition of unused availibilty to allow the full amount of the Company's
borrowing base to be included in the unused availibilty calculation.
WF-14
<PAGE>
On September 9, 1999, the revolving credit agreement was amended to increase the
total commitment from $160 million to $200 million from May 15 through November
15 of each year. At December 25, 1999, the amount available for additional
borrowing was $38.8 million. The weighted-average interest rate for the years
ending December 25, 1999 and December 26, 1998 was approximately 7.72% and
8.22%, respectively.
With delivery to the lenders of the Company's financial statements for the
period ending September 25, 1999, the Company's borrowing spreads were reduced
to 1.75% above the applicable LIBOR and to 0.25% above the base rate.
Substantially all of the Company's accounts receivable, inventory and general
intangibles are pledged as collateral for the 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 revolving line of credit of at least $15 million (subject
to increase in certain circumstances) and maintain certain levels of tangible
capital funds, as defined in the loan and credit agreement. In addition, these
documents restrict, among other things, capital expenditures, the incurrence of
additional debt, asset sales, dividends, investments, and acquisitions.
In conjunction with the revolving credit agreement, the Company terminated its
existing interest rate swap agreement and entered into a new interest rate swap
agreement (see Note 12).
Senior Subordinated Notes
- -------------------------
On October 22, 1993, the Company issued $100,000,000 principal amount of 10-
year unsecured senior subordinated notes, due December 15, 2003. Interest on the
notes is 11-5/8%, payable semi-annually. Covenants under the related indenture
restricts, 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 amount of long-term debt of $220.7 million matures in fiscal year
2003.
WF-15
<PAGE>
8. Commitments and Contingencies
- -- -----------------------------
At December 25, 1999, the Company had accrued approximately $132,000 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 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 five years. The Company has accrued $43,000
for estimated clean-up costs at 11 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 accrued $28,000 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 145 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. 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 30 similar actions for insignificant amounts, and another 224 of these
actions have been dismissed. None of these suits have made it to trial.
Losses in excess of the $132,000 reserved as of December 25, 1999 are possible
but an estimate of these amounts cannot be made.
WF-16
<PAGE>
The Company 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 the Company's insurance coverage may be unavailable. While the
Company does not believe that any of these proceedings will have a material
adverse effect on the Company's financial position, annual results of operations
or liquidity, there can be no assurance of this.
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 $13,640,000, $12,193,000, and $10,616,000
for the years ended December 25, 1999, December 26, 1998, and December 27, 1997,
respectively.
Future minimum commitments for noncancelable operating leases are as follows:
<TABLE>
<CAPTION>
Year Amount
---- ------
<S> <C>
(in thousands)
2000 $10,316
2001 8,684
2002 7,555
2003 5,612
2004 3,404
Thereafter 23,884
------
Subtotal 59,455
Less sublease income ( 7,489)
------
Total $51,966
======
</TABLE>
9. Stockholders' Equity
- -- --------------------
Preferred Stock
- ---------------
As of December 25, 1999, the Company had authorized 3,000,000 shares of
preferred stock, none of which were issued or outstanding.
Common Stock
- ------------
The Company currently has one class of common stock: Common Stock, par value
$.01 per share. At December 25, 1999, there were 20,000,000 shares of Common
Stock authorized and 8,224,888 shares issued and outstanding. In addition, at
WF-17
<PAGE>
December 25, 1999, 895,369 shares of Common Stock were reserved for issuance
under the Company's 1993 Long-Term Incentive Plan and 1993 Director Incentive
Plan.
Warrants
- --------
The Company's unexercised outstanding warrants for 3,068 shares of Common Stock
expired in May 1998, and, as of December 25, 1999, there were no warrants
outstanding or Common Stock reserved for issuance under warrants.
Stock Compensation Plans
- ------------------------
As of December 25, 1999, 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 for 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 for 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 can vary by grant.
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 SFAS 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):
<TABLE>
<CAPTION>
Year 1999 1998 1997
- ---- ---- ---- ----
<S> <S> <C> <C> <C>
Net income (loss) As reported $7,588 $(965) $(1,560)
Pro forma $7,357 $(1,082) $(1,772)
Basic income As reported $.92 $(.12) $(.19)
(loss) per share Pro forma $.90 $(.12) $(.19)
Diluted income As reported $.91 $(.12) $(.19)
(loss) per share Pro forma $.88 $(.12) $(.19)
</TABLE>
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 1999, 1998, and 1997, respectively: dividend
yield of 0% for all years, expected volatility of 49%, 48%, and 43%; risk-free
interest rates of 5.1%, 5.6%, and 6.6%; and expected lives
of 5.6, 5.6, and 6.6 years.
WF-18
<PAGE>
A summary of the status of the Company's fixed stock option plans as of December
25, 1999, December 26, 1998, and December 27, 1996 and changes during the years
ended on those dates is presented as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
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 734,263 $ 7.67 668,283 $10.09 612,282 $10.94
Granted 121,475 $ 4.85 238,750 $ 3.45 108,350 $ 5.12
Exercised (3,617) $ 3.91 (11,014) $ 4.55 - n/a
Forfeited-nonvested (33,290) $ 4.33 (97,070) $ 9.71 (46,981) $ 8.22
Forfeited-exercisable (30,759) $12.33 (64,686) $ 9.71 (5,168) $ 22.36
Expired - n/a - n/a - n/a
Canceled - n/a - n/a (200) $15.00
------ ----- ------ ---- ----- -----
Outstanding end
of year 788,072 $ 7.22 734,263 $ 7.67 668,283 $10.09
Options exercisable
at year end 384,720 $10.23 256,627 $ 11.39 214,402 $14.26
Options available for
future grant at
year end 107,297 164,723 241,717
</TABLE>
Weighted-average fair value of options granted during the year where:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Exercise price equals market price $2.51 $1.62 $2.77
Exercise price exceeds market price n/a n/a n/a
Exercise price is less than market price n/a n/a n/a
</TABLE>
The following table summarizes information about fixed stock options
outstanding at December 25, 1999:
WF-19
<PAGE>
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------ -----------------------
Weighted-
Average Weighted- Weighted-
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices at 12/25/99 Life Price at 12/25/99 Price
------ ----------- ---- ------ ----------- -----
<S> <C> <C> <C> <C> <C>
$ 3.06 - $ 5.75 584,749 7.80 years $ 4.34 181,397 $ 4.34
$10.95 - $23.25 203,323 4.70 years $15.48 203,323 $15.48
</TABLE>
Earnings Per Share
- ------------------
The Company calculates earnings per share in accordance with SFAS No. 128. The
following is the reconciliation of the numerators and denominators used for
basic and diluted earnings per share:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Numerators:
Net income (loss) - for basic
and diluted EPS $7,588,000 $(965,000) $(1,560,000)
========= ======== ==========
Denominators:
Weighted average common
shares - for basic EPS 8,216,265 8,197,542 8,168,257
Common shares from options 32,115 - -
Other common stock equivalents 82,191 - -
--------- --------- ---------
Weighted average common
shares - for diluted EPS 8,330,571 8,197,542 8,168,257
========= ========= =========
</TABLE>
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 227,000 weighted-average shares
of common stock during 1999 were not included in the diluted EPS as the options'
exercise prices were greater than the average market price.
10. 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 25, 1999,
December 26, 1998, and December 27, 1997 were $1,754,000, $1,480,000, and
$1,606,000, respectively.
WF-20
<PAGE>
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 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 25, December 26,
1999 1998
----------- -----------
(in thousands)
<S> <C> <C>
Change in accumulated postretirement
benefit obligation:
Benefit obligation at beginning
of year $2,749 $2,578
Service cost 244 233
Interest cost 151 170
Participant contributions - -
Claims paid (241) (216)
Actuarial gains (761) (16)
Plan amendments - -
------ ------
Benefit obligation at year end $2,142 $2,749
====== ======
Change in plan assets:
Fair value of plan assets - -
Reconciliation of funded status:
Funded status $(2,142) $(2,749)
Unrecognized transition obilgation - -
Unrecognized prior service cost (39) (49)
Unrecognized actuarial gain (876) (154)
------- -------
Net amount recognized as other
long-term liabilities $(3,057) $(2,952)
======= =======
Weighted-average assumptions as of year-end:
Discount rate 8.00% 6.75%
Expected return on assets n/a n/a
Medical cost trend 6.00% 6.00%
</TABLE>
WF-21
<PAGE>
<TABLE>
<CAPTION>
December 25, December 26, December 27,
1999 1998 1997
----------- ----------- -----------
(in thousands)
<S> <C> <C> <C>
Components of net periodic
benefit cost:
Service cost $ 244 $ 233 $ 197
Interest cost 151 171 176
Expected return on
plan assets n/a n/a n/a
Amortization of transition
obligation - - -
Amortization of prior
service cost (10) (10) (10)
Amortization of actuarial
loss (39) - -
----- ----- -----
Net periodic benefit cost $ 346 $ 394 $ 363
===== ===== =====
December 25, December 26, December 27,
1999 1998 1997
----------- ----------- -----------
(in thousands)
Weighted average assumptions
used in computing net
periodic benefit cost:
Discount rate 6.75% 7.25% 7.75%
Expected return on
plan assets n/a n/a n/a
Medical cost trend 6.00% 6.00% 6.00%
</TABLE>
<TABLE>
<CAPTION>
Health care cost trend sensitivity: 1% Increase 1% Decrease
----------- -----------
<S> <C> <C>
Effect on total service cost and
interest cost components $ 18 $ (17)
Effect on postretirement benefit obligation 47 (44)
</TABLE>
Postemployment Benefits
- -----------------------
The Company provides certain postemployment benefits to qualified former or
inactive employees who are not retirees. The Company had accrued $161,000 and
$165,000 at December 25, 1999 and December 26, 1998, respectively. These
benefits include salary continuance, severance, and healthcare. Salary
continuance and severance pay are based on normal straight-line compensation and
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.
WF-22
<PAGE>
11. Income Taxes
- --- ------------
The Company and its subsidiaries file a consolidated federal income tax return.
As of December 25, 1999, the Company has net operating loss carryforwards
available to offset income of approximately $35.9 million expiring in the years
2006 through 2018.
The income tax provision consists of both current and deferred amounts. The
components of the income tax provision are as follows:
<TABLE>
<CAPTION>
December 25, December 26, December 27,
1999 1998 1997
----------- ----------- -----------
(in thousands)
<S> <C> <C> <C>
Taxes currently payable:
State income tax $ 1,122 $ 1,019 $ 1,099
Federal income tax 161 - -
Deferred expense (benefit) 4,460 (330) (153)
------- ------ ------
Total income tax expense $ 5,743 $ 689 $ 946
======= ======= =======
</TABLE>
Tax provision and credits are recorded at statutory rates for the 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. The valuation allowance primarily relates to losses
incurred on certain investments which the Company believes may not be fully
deductible for tax purposes. Management has determined, based on the Company's
positive earnings in 1999 and its expectations for the future, that operating
income of the Company will more likely than not be sufficient to fully recognize
its remaining net deferred tax assets. The components of the deferred tax assets
and liabilities at December 25, 1999, December 26, 1998 and December 27, 1997,
respectively, are as follows:
WF-23
<PAGE>
<TABLE>
<CAPTION>
December 25, December 26, December 27,
1999 1998 1997
----------- ------------ -----------
(in thousands)
<S> <C> <C> <C>
Deferred income tax assets:
Trade accounts receivable $ 1,591 $ 1,727 $ 1,469
Inventories 2,016 1,813 1,895
Accrued personnel cost 1,671 2,037 2,013
Other accrued liabilities 4,515 6,051 6,743
Net operating loss 13,917 17,151 16,164
Other 3,483 3,337 3,348
-------- -------- --------
Gross deferred income tax assets 27,193 32,116 31,632
Less: valuation allowance (1,132) (1,542) (1,542)
-------- -------- --------
Total deferred income tax assets 26,061 30,574 30,090
Deferred income tax liabilities:
Property, plant and equipment 1,244 1,312 1,394
Goodwill and trademark 2,938 2,923 2,687
------- -------- --------
Total deferred income tax 4,182 4,235 4,081
-------- -------- --------
Net deferred tax assets $ 21,879 $ 26,339 $ 26,009
======== ======== ========
</TABLE>
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:
<TABLE>
<CAPTION>
December 25, December 26, December 27,
1999 1998 1997
----------- ----------- -----------
(in thousands)
<S> <C> <C> <C>
Tax/ (benefit) computed at
U.S. statutory tax rate $ 4,666 $ (96) $ (215)
State and local taxes 1,159 662 714
Alternative minimum tax
Differential 161 - -
Other (243) 123 447
-------- -------- --------
Total tax provision $ 5,743 $ 689 $ 946
======== ======== ========
</TABLE>
WF-24
<PAGE>
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 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 interest rate swap arrangements are accounted for as
an adjustment to interest expense. The fair value of such financial instruments
is determined through dealer quotes. For cash and cash equivalents, accounts
receivable, accounts payable and notes payable, the carrying amount approximates
fair value due to the short maturity of these instruments.
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, 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.
<TABLE>
<CAPTION>
Fair Carrying
Value Value
----- -----
(in thousands)
<S> <C> <C>
1999 Financial Liabilities:
Long-term Debt
Revolver $ 120,742 $ 120,742
Senior Subordinated Notes 85,000 100,000
1998 Financial Liabilities:
Long-term Debt
Revolver $ 91,961 $ 91,961
Senior Subordinated Notes 84,000 100,000
</TABLE>
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
25, 1999, the Company had 15 lumber futures contracts outstanding with a total
market value of $552,000 and an immaterial net unrealized loss. These contracts
all mature in 2000.
WF-25
<PAGE>
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 7), the Company terminated its interest rate swap agreement
and entered into a new interest rate swap agreement. This new agreement
effectively fixed the Company's borrowing cost at 7.75% (based on the LIBOR plus
2.00% pricing in effect on February 17, 1999), 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. At September 25, 1999, the Company's
performance reduced the rate charged to LIBOR plus 1.75%, fixing the Company's
borrowing cost on $40 million at 7.50% through December 25, 1999. Unlike the
prior agreement, this interest rate swap has no provisions for termination based
on changes in the 30-day LIBOR borrowing rate.
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 $429,000
plus interest). At December 25, 1999 this stockholder had made payments of
$545,046 under the promissory note and was delinquent with respect to required
payments of approximately $82,486 of principal and interest. The Company and the
stockholder have reached an agreement that requires all accrued interest to be
paid by March 31, 2000 and that extends the terms for repayment of principal.
In 1999, the Company paid approximately $660,000 in reimbursements primarily to
affiliates of the Company's chairman, for costs related to services provided to
the Company during 1999 by certain employees of the affiliated company and use
of a corporate aircraft. Total payments in 1998 and 1997 for similar services
were approximately $730,000 and $1,289,000, 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 and 1997 were approximately
WF-26
<PAGE>
$115,000 and $1,045,000, respectively, and were expensed as incurred. In late
1997, this affiliate's involvement in the program ceased. No reimbursements were
made in 1999.
A former director and executive officer of the Company was, during most of 1998
and all of 1997, a shareholder of the law firm that is general counsel to the
Company. The Company paid this firm $741,000 and $665,000 for legal services
provided to the Company during 1998 and 1997, respectively.
14. Other Operating Income
- --------------------------
Other operating income on the Company's Statement of Operations includes
primarily 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 5, 9, and 12
pieces of real estate in 1999, 1998 and 1997, respectively. In 1998, casualty
gains of $1.0 million 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 facilities. The following
table summarizes the major components of other operating income by year.
<TABLE>
<CAPTION>
Other Operating Income
Gain/(Loss)
1999 1998 1997
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Sale of property, plant
and equipment $ 1,821 $ 2,111 $ 6,180
Accounts receivable service charges 2,460 2,331 2,170
Casualties (556) 670 (284)
Other 1,927 1,725 2,623
------ ------ ------
Total $ 5,652 $ 6,837 $10,689
====== ====== ======
</TABLE>
15. Barter Transaction
- -----------------------
At any given time approximately 1% to 2% of the Company's total inventory will
be classified as delete or obsolete merchandise. Delete or obsolete merchandise
consists of inventory that, while in good sellable condition, will be
discontinued for one of several business reasons. This inventory, which may
consist of items from any of the Company's product lines, historically has been
marked down in value by approximately 20% to 30% of its original cost.
WF-27
<PAGE>
In September of 1998, the Company entered into a transaction in which it
exchanged delete/obsolete merchandise, with an impaired book value of $1.2
million, for barter credits at a stated value of $1.6 million. As part of the
barter transaction the Company had agreed to sell the merchandise for the new
owner, on a clearance basis, and remit the proceeds, up to $350,000, to the
owner. The Company entered into the transaction to free valuable showroom and
storage space for new merchandise. The value of this merchandise had been
previously reduced from its original cost of approximately $1.6 million to $1.2
million, based on the Company's most recent sales information. Initially the
exchange was considered to be a non-monetary exchange, as outlined under APB 29
and EITF 93-11, and no further impairment was recorded at that time. The barter
credits were recorded as a prepaid expense with a value of $1.2 million.
Subsequent to the second quarter of 1999, the Company restated its September
1998 financial statements to account for the barter transaction as a monetary
transaction, upon receiving written confirmation from a second "Big Five"
accounting firm and after careful review and concurrence of its Board of
Directors Audit Committee. A non-cash charge of $844,000 has now been recorded
to reduce the value of the inventory exchanged, and the resulting book value of
the barter credits, from approximately $1.2 million to $350,000. As a result of
this change, the Company will also record increased future earnings for each
dollar of barter credits used in excess of $350,000.
The following table reconciles the amounts previously reported to the amounts
currently being reported in the condensed consolidated statements of operations
for the year ended December 26, 1998 (amounts in thousands, except per share
data).
<TABLE>
<CAPTION>
Restatement
Previously for Barter
Reported Transaction As Restated
-------- ----------- -----------
<S> <C> <C> <C>
Income (loss) before income taxes $ 568 $ (844) $ (276)
Provision for income taxes 1,019 (330) 689
------- ------- -------
Net loss $ (451) $ (514) $ (965)
Basic and diluted loss
per common share $ (0.06) $ (0.06) $ (0.12)
</TABLE>
16. Selected Quarterly Financial Data (unaudited)
- --------------------------------------------------
The following table contains selected unaudited quarterly financial data for the
years ended December 25, 1999, December 26, 1998 and December 27, 1997.
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.
WF-28
<PAGE>
<TABLE>
<CAPTION>
QUARTERLY FINANCIAL DATA
Three Months Ended
(in millions, except per share data and percentages)
Basic / 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>
1999
March 27 $191.1 17.6% $45.9 $(3.3) $(.40)/(.40)
June 26 288.7 26.6 66.3 3.6 .44 / .43
September 25 325.4 30.0 73.8 5.0 .61 / .61
December 25 279.4 25.8 67.6 2.2 .27 / .26
1998
March 28 $168.8 18.5% $41.0 $(6.8) $(.83)/(.83)
June 27 237.1 26.1 56.1 2.8 .34/.34
September 26 261.1 28.7 60.2 2.3 .28/.28
December 26 243.3 26.7 58.2 0.7 .09/.09
1997
March 29 $159.3 18.0% $36.9 $(5.2) $(.63)/(.63)
June 28 237.3 26.9 54.3 1.3 .16/.16
September 27 266.3 30.1 60.3 1.8 .22/.22
December 27 221.1 25.0 51.5 0.5 .06/.06
</TABLE>
WF-29
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Directors and Stockholders of
Buildscape, Inc. (A Development Stage Company):
We have audited the accompanying balance sheets of Buildscape, Inc. (a
development stage company) (the "Company") as of December 31, 1999 and 1998, and
the related statements of operations, stockholders' equity (deficit) and cash
flows for the years then ended and for the period from date of inception through
December 31, 1999. 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 in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Buildscape, Inc. at December 31, 1999 and
1998, and the results of its operations and its cash flows for the years then
ended and for the period from date of inception through December 31, 1999, in
conformity with accounting principles generally accepted in the United States of
America.
The Company is in the development stage at December 31, 1999. As discussed in
Note 1 to the financial statements, successful completion of the Company's
development program and, ultimately, the attainment of profitable operations, is
dependent upon future events, including obtaining adequate financing to fulfill
its development activities and achieving a level of sales adequate to support
the Company's cost structure.
Dallas, Texas
March 10, 2000
BS-1
<PAGE>
BUILDSCAPE, INC.
(A Development Stage Company)
BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
ASSETS 1999 1998
---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,395,699 $ 20,507
Accounts receivable and accrued interest 102,779 41,441
Inventory 79,616 --
Prepaid expenses 99,374 28,123
----------- -----------
Total current assets 2,677,468 90,131
FURNITURE AND EQUIPMENT - Net 904,983 88,826
OTHER ASSETS 4,568 70,711
----------- -----------
TOTAL $ 3,587,019 $ 249,668
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable $ 1,498,107 $ 108,506
Accrued expenses 87,181 --
Note payable -- 804,779
Deferred income 6,250 90,000
----------- -----------
Total current liabilities 1,591,538 1,003,285
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' EQUITY (DEFICIT):
Convertible, voting preferred stock, $.01 par
value; 3,000,000 shares authorized, 1,667,667
issued and outstanding 4,865,506 --
Common stock, $.000002 par value; 10,500,000
shares authorized; 5,000,000 shares issued
and outstanding 10 10
Additional paid-in-capital 8,449,512 3,920,607
Deficit accumulated in development stage (11,319,547) (4,674,234)
----------- -----------
Total stockholders' equity (deficit) 1,995,481 (753,617)
----------- -----------
TOTAL $ 3,587,019 $ 249,668
=========== ===========
BS-2
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
BUILDSCAPE, INC.
(A Development Stage Company)
STATEMENT OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999 AND 1998, AND THE PERIOD FROM
DATE OF INCEPTION THROUGH DECEMBER 31, 1999
- -----------------------------------------------------------
Accumulated
From Date of
Inception Through
December 31,
1999 1999 1998
---- ---- ----
<S> <C> <C> <C>
REVENUES:
Sales Revenue $ 373,536 $ 373,536 $ --
Advertising Revenue 203,800 173,800 30,000
------------ ------------ ------------
Total revenues 577,336 547,336 30,000
COST OF GOODS SOLD 475,536 462,036 13,500
Gross Profit 101,800 85,300 16,500
OPERATING EXPENSE:
Sales and Marketing 3,241,754 1,645,065 1,596,689
Advertising expense 1,047,377 543,923 503,454
Technology development 3,172,597 1,621,168 841,271
General and administrative expense 3,570,390 1,959,752 1,610,638
Depreciation and amortization 181,295 127,860 53,435
------------ ------------ ------------
Total operating expense 11,213,413 5,897,768 4,605,487
------------ ------------ -----------
Net operating loss (11,111,613) (5,812,468) (4,588,987)
OTHER INCOME (EXPENSE):
Interest income 31,643 31,643 --
Other income 24,810 24,810 --
Interest expense (264,387) (179,140) (85,247)
------------ ------------ ------------
Total other income (expense) (207,934) (122,687) (85,247)
------------ ------------ ------------
NET LOSS (11,319,547) (5,935,155) (4,674,234)
============ ============ ============
See notes to financial statements.
</TABLE>
BS-3
<PAGE>
BUILDSCAPE, INC.
(A Development Stage Company)
STAATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1999 AND 1998, AND THE PERIOD FROM
DATE OF INCEPTION THROUGH DECEMBER 31, 1999
- ----------------------------------------------------------
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
ADDITIONAL IN THE
PREFERRED COMMON PAID-IN DEVELOPMENT
STOCK STOCK CAPITAL STAGE TOTAL
---- ------ -------- ------------ ------
<S> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1998 $ -- $ -- $ 710,158 $ (710,158) $ --
Issuance of 5,000, 000 shares of common
stock at $.000002 per share -- 10 -- -- 10
Contribution from stockholder -- -- 4,630,765 -- 4,630,765
Distribution from stockholder -- -- (710,158) (710,158)
Net loss (4,674,234) (4,674,234)
----------- ----------- ----------- ------------- ----------
BALANCE AT DECEMBER 31, 1998 -- 10 4,630,765 (5,384,392) (753,617)
Issuance of 1,666,667 shares of preferred stock
at $3.00 per share, net of issuance costs -- -- -- -- 4,865,506
Conversion of debt by stockholder -- -- 3,818,747 -- 3,818,747
Net loss -- -- -- (5,935,155) (5,935,155)
----------- ----------- ---------- ------------- -----------
BALANCE AT DECEMBER 31, 1999 $ 4,865,506 $ 10 $8,449,512 $ (11,319,547 $ 1,995,481
=========== =========== ========== ============= ===========
</TABLE>
See notes to financial statements.
BS-4
<PAGE>
BUILDSCAPE INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999 AND 1998, AND THE PERIOD FROM
DATE OF INCEPTION THROUGH DECEMBER 31, 1999
- ---------------------------------------------
<TABLE>
<CAPTION>
Accumulated
From Date of
Inception Through
December 31,
1999 1999 1998
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net Loss $ (11,319,547) $ (5,935,155) $ (4,674,234)
Adjustments to reconcile net loss to net cash used in
OPERATING ACTIVITIES:
Depreciation and amortization 181,295 127,860 53,435
Expenses paid by Riverside 5,340,923 -- 4,630,765
Net changes in operating assets and liabilities:
Accounts receivable (102,779) (61,338) (41,441)
Inventory (79,616) (79,616) --
Prepaid expenses (99,374) (71,191) (28,183)
Other assets (15,216) 66,143 (81,359)
Accrued expenses 1,498,107 1,389,601 108,506
Accounts payable 87,181 87,181 --
Other liabilities 6,250 (83,750) 90,000
-------------- ------------- -------------
Net cash (used in) provided by operating activities (4,502,776) (4,560,265) 57,489
-------------- ------------- -------------
INVESTING ACTIVITIES- Purchase of furniture
and equipment (1,075,630) (944,017) (131,613)
------------- ------------ ------------
FINANCING ACTIVITIES:
Proceeds from notes payable 3,818,747 3,013,968 804,779
Issuance of preferred stock and common stock 4,865,516 4,865,506 10
Distribution to stockholder (710,158) -- (710,158)
------------- ------------ ------------
Net cash provided by financing activities 7,974,105 7,879,474 94,631
------------- ------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 2,395,699 2,375,192 20,507
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD 20,507 20,507 --
------------- ------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,416,206 $ 2,395,699 $ 20,507
============= ============ ============
SUPPLEMENTAL INFORMATION - Interest Paid $ 264,837 $ 179,140 $ 85,247
============= ============ ============
NONCASH TRANSACTIONS: $ 3,818,747 $ 3,818,747 $ --
============= ============ ============
Conversion of note payable to equity
Expenses paid by Riverside on behalf of the Company $ 5,340,923 $ -- $ 4,630,765
============= =========== =============
See notes to financial statements.
</TABLE>
BS-5
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS - Buildscape, Inc. (a development stage company)
(the "Company") was incorporated on January 13, 1998, to provide home-
building materials, service and commerce online to consumers and profess-
ionals in the home-building industry. Prior to incorporation, the Company
was funded by the Riverside Group, Inc. ("Riverside").
On October 21, 1999, Imagine Investments, Inc. ("Imagine") acquired from
Riverside 1,880,933 shares of the Company's 5,000,000 outstanding shares
of common stock in exchange for (i) the cancellation of $3 million of
indebtedness and (ii) 520,000 shares of Riverside's common stock held by
Imagine. Riverside retained the remaining 3,119,067 outstanding shares of
the Company's common stock. In addition, the Company issued to Imagine
1,666,667 shares of the Company's voting Series A Cumulative Convertible
Preferred Stock with a $5 million aggregate liquidation preference in
exchange for $5,000,000. As a result of this transaction, Riverside owns
47% of the Company on a fully converted basis. Imagine owns 38% of the
common shares and 100% of the preferred shares of the Company, or 53%, on
a fully converted basis.
The Company 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 the Company will be
successful in becoming profitable or generating positive cash flow in the
future. The Company is considered to be a development stage company.
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid
investment instruments with a maturity date of three months or less at
date of purchase to be cash equivalents.
INVENTORIES - Inventories consist principally of finished goods such as
tools and other building supplies and materials. 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.
FURNITURE AND EQUIPMENT - Furniture and equipment are stated at cost and
are depreciated using the straight-line method over the estimated useful
lives of the assets, generally three years or less.
REVENUE RECOGNITION - Revenue consists of sales of products sold through
the Company's online superstore and auction sites and of advertising fees.
The Company recognizes revenue when earned. In the case of product sales,
revenue is recognized when the product is shipped. Advertising revenue,
which is all cash, is recognized over the term of the contract.
USE OF ESTIMATES - 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, the disclosure of 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
those estimates.
BS-6
<PAGE>
INCOME TAXES - On October 21, 1999, the Company went through an ownership
change, which was considered a Section 382 exchange in the Internal
Revenue Code. As a result of this change, the net operating loss
carryforward available for use each year will be subject to an annual
limitation.
Prior to October 21, 1999, the Company was included in the consolidated
federal and state income tax returns of Riverside. Income taxes were
calculated on a separate return filing basis. Subsequent to October 21,
1999, the Company will file a separate tax return. Therefore, a portion of
the Company's losses may be utilized in the consolidated Riverside tax
return.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS - Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," was issued in June 1998 and
establishes standards for accounting and reporting for derivative
instruments. It requires entities to record all derivative instruments on
the balance sheet at fair value. Changes in the fair value of derivatives
are recorded each period in current earnings or other comprehensive
income, depending on whether a derivative is designated as part of a hedge
transaction and on the type of hedge transaction. The portion of all
hedges not effective in achieving offsetting changes in fair value is
recognized in earnings. SFAS No. 133, as amended, is effective for all
fiscal quarters of all fiscal years beginning after June 15, 2000.
Management has completed its evaluation of the impact of the provisions of
this statement on the Company's financial statements and believes its
adoption will not have a material effect on its financial statements.
COMPREHENSIVE INCOME - The Company has no elements of comprehensive
income.
SEGMENTS - The Company is in a single-market segment.
LONG-LIVED ASSETS - The carrying value of long-lived assets is
periodically reviewed to determine whether impairment exists. The review
is based on comparing the carrying amount of the assets to the
undiscounted estimated cash flows over the remaining useful lives. No
impairment is indicated as of December 31, 1999.
2. FURNITURE AND EQUIPMENT
Furniture and equipment at December 31 consisted of the following:
1999 1998
---- ----
Computer equipment $ 319,159 $ 127,072
Computer software 741,505 4,541
Furniture and office equipment 14,966 --
----------- -----------
Total 1,075,630 131,613
Accumulated depreciation and amortization (170,647) (42,787)
----------- -----------
Furniture and equipment - net $ 904,983 $ 88,826
=========== ===========
Depreciation expense was $127,860 and $42,787 for 1999 and 1998,
respectively.
BS-7
<PAGE>
3. OTHER ASSETS
Other assets at December 31 consisted of the following:
1999 1998
---- ----
Organization costs $ -- $ 81,359
Security deposit 4,568 --
----------- -----------
Total 4,568 81,359
Accumulated amortization -- (10,648)
----------- -----------
Other assets - net $ 4,568 $ 70,711
=========== ===========
Amortization expense was $10,648 for 1998. During 1999, in accordance with
Statement of Position 98-5, "Reporting on the Costs of Start-Up
Activities," the Company expensed the remaining $70,711 of organization
costs.
4. NOTE PAYABLE
At December 31, 1998, the Company had a note payable to Riverside of
$804,779. The note was unsecured, with principal payable in quarterly
installments and including interest, calculated at Bankers Trust Company's
prime lending rate plus 2% (9.75% at December 31, 1998), with a maturity
on May 15, 2001. In 1999, the note was contributed as equity by Riverside.
At December 31, 1999, the Company did not have any notes payable
outstanding.
5. STOCKHOLDERS' EQUITY
COMMON STOCK - Upon incorporation on January 13, 1998, the Company issued
1,000 shares of common stock, $0.01 par value per share, at a purchase
price of $10. On October 15, 1999, the Board approved a 5,000-to-1 common
stock split. All periods presented have been restated to reflect the
split.
SERIES A CUMULATIVE CONVERTIBLE, VOTING PREFERRED STOCK - The Company has
authorized the issuance of up to 3,000,000 shares of its Series A
Cumulative Convertible Preferred Stock ("Series A Preferred"). On October
21, 1999, the Company sold 1,666,667 shares, par value $0.01 per share, at
a purchase price of $3.00 per share. Each share of preferred stock is
convertible into one share of common stock and has voting rights equal to
its applicable common stock conversion amount. Upon the consummation of a
qualified public offering of common stock, each share of Series A
Preferred outstanding will be automatically converted into common stock.
In the event of liquidation or dissolution, the preferred shares have
liquidation privileges of $5,000,000 before any distributions are made to
holders of common stock, and receive a pro rata share of any dividends
declared for common stock based on the number of shares of common stock
into which such preferred shares are then convertible.
DISTRIBUTION TO STOCKHOLDER - In 1997, $710,158 of expenses related to the
start-up of the Company were paid by Riverside. These costs were
recognized by the Company and recorded as an equity contribution. In 1998,
the costs incurred by Riverside prior to the incorporation of the Company
were repaid to Riverside and recorded by the Company as a distribution to
stockholder.
CAPITAL CONTRIBUTION FROM STOCKHOLDER - During 1998, Riverside provided
services to the Company, including technical, marketing, human resources,
accounting, tax and executive management. Riverside also provided office
space and a telephone system for home office operations, insurance, and
various office supplies and equipment. These services were included, at
cost, in the results of operations in the amount of $4,630,765 and as a
capital contribution.
BS-8
<PAGE>
CURRENT STOCK OPTION PLAN - Effective January 1, 1999, the Board of
Directors approved the adoption of a stock option plan to be administered
by a committee. Each option is exercisable in accordance with certain
price and vesting restrictions. The committee shall, in any agreement,
prescribe a vesting schedule that governs when the option becomes fully
vested and exercisable. Unless the agreement prescribes a different
schedule, the options shall be vested and exercisable as follows:
one-third on or after the date that is one calendar year from the date the
option was granted, two-thirds after two calendar years and 100% after
three calendar years. During 1999, 926,100 options were granted at an
exercise price of $1.00 per share, of which 5,250 of these options were
forfeited during the year. Also during 1999, 8,000 options were granted at
a price of $3.00 per share. As of December 1999, no options were vested or
exercisable.
The Company applies the provisions of APB No. 25 and related
interpretations in accounting for its stock option plan. Accordingly, no
compensation cost has been recognized for its stock option plan, since the
exercise price of the Company's stock option grants was the estimated fair
market value of the underlying stock on the date of the grant. Had
compensation costs for the stock option plan been determined based on the
fair value at the grant date consistent with SFAS No. 123, "Accounting for
Stock Based Compensation," the Company's net loss for 1999 would not have
been significantly affected.
6. COMMITMENTS AND CONTINGENCIES
The Company shares executive offices with Riverside in leased office
spaces. Riverside allocates rent based on square footage to the Company.
In addition, the Company leases offices in various states, which expire in
2001. Future minimum commitments on operating leases at December 31, 1999,
are as follows:
Year ending:
2000 $ 118,007
2001 49,369
Thereafter --
---------
Total $ 167,376
7. EMPLOYEE BENEFIT PLANS
The Company has a deferred compensation plan for all of its eligible
employees, which allows participants to defer up to 10% of their
compensation pursuant to Section 401(k) of the Internal Revenue Code. The
Company matches up to a maximum of 3% of the compensation for employees
contributing up to 6%. Employees are 100% vested in their contributions
and vest in the Company's contribution over a period of seven years. The
Company's contribution to the 401(k) plan was $19,958 for 1999.
8. RELATED PARTIES
For certain costs, including office space and overhead; business services,
such as Internet connectivity telephone service; human resources; and
accounting, the Company and Riverside have entered into a shared services
agreement. This agreement allocates expenses to each company based on its
proportioned usage. During 1999, the Company paid $313,886 for these
services.
BS-9
<PAGE>
The Company reimburses its share of actual costs incurred from its use of
an airplane owned by an affiliate of the President and CEO of the Company.
The amount of expenses reimbursed were $202,591 and $13,068 for 1999 and
1998, respectively.
During 1999, the Company had interest expense on debt payable to Imagine
in the amount of $121,732. The Company also paid interest in the amount of
$57,408 to Riverside. Also during 1999, the Company paid commissions to
Wickes, Inc., a company in which Riverside and Imagine own common stock
totaling approximately 49%, in the amount of $43,062 from advertising
revenue received on advertisements over the Company's website.
9. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No. 107,
"Disclosures about Fair Value of Financial Instruments." The estimated
fair value amounts have been determined by the Company using available
market information and appropriate valuation methodologies. However,
considerable judgment is required in interpreting market data to develop
the estimates of fair value. Accordingly, the estimates presented herein
are not necessarily indicative of the amounts that the Company could
realize in a current market exchange. The use of different market
assumptions and/or estimation methodologies may have a material effect on
the estimated fair value amounts.
CASH AND CASH EQUIVALENTS, ACCOUNTS RECEIVABLE, ACCOUNTS PAYABLE AND
ACCRUED EXPENSES - The carrying amounts of these items are a reasonable
estimate of their fair value.
NOTE PAYABLE - Interest rates that are currently available to the Company
for issuance of debt with similar terms and remaining maturities are used
to estimate fair value for bank debt. The carrying amounts comprising this
item are reasonable estimates of fair value.
The fair value estimates are based on pertinent information available to
management as of December 31, 1999. Although management is not aware of
any factors that would significantly affect the estimated fair value
amounts, such amounts have not been comprehensively revalued for purposes
of these financial statements since that date, and current estimates of
fair value may differ significantly from the amounts presented.
BS-10
<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 36 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.
PricewaterhouseCoopers LLP
Jacksonville, Florida
April 14,2000
S-1
<PAGE>
Riverside Group, Inc. and Subsidiaries
Schedule II - Valuation and Qualifying
Accounts for the Years Ended December 31, 1999 and
December 31, 1998
(dollars in thousands)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Col.A Col.B Col.C Col.D Col.E
Additions
Balance at Charged to Balance at
Beginning of Costs and Deduct- End of
Description Period Expenses ions(2) Period
- ----------- ------ ----------- ----------- -------
1999:
Allowance for
doubtful
accounts.......... $ 337 $ 295 $ 39 $ 3
1998:
Allowance for
doubtful
accounts.......... $ 4,206 $ 97 $ 3,966 $ 337
</TABLE>
(1) Net of reserved and collected amounts.
(2) Allowance for doubtful accounts charged to restructuring reserve.
S-2
<PAGE>
SCHEDULE III
Riverside Group, Inc. (Parent Only)
Condensed Financial Information of Registrant
Balance Sheets
(unaudited, in thousands)
<TABLE>
<CAPTION>
December 31,
1999 1998
---- ----
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 228 $ 367
Investment in real estate 8,911 9,242
Investment in Greenleaf Technologies Corp 1,253 --
Investment in Wickes Inc. 15,981 12,726
Investment in Buildscape, Inc. (947) --
Investment in subsidiaries (13) 1,615
Other assets 280 461
---------- ----------
Total assets $ 25,693 $ 24,411
========== ==========
LIABILITIES & STOCKHOLDERS' EQUITY
Accrued expenses, income taxes and other
liabilities $ 1,815 $ 1,051
Debt and mortgage debt 23,614 21,249
---------- ----------
Total liabilities 25,429 22,300
Common stockholders' equity:
Common stock, $.10 par value; 20,000,000
shares authorized, 4,767,123 and 5,278,123
issued and outstanding in 1999 and 1998 477 529
Additional paid-in capital 16,468 16,838
Cumulative comprehensive income 1,253 --
Retained earnings (17,934) (15,256)
---------- ----------
Total stockholders' equity $ 264 2,111
Total liabilities and stockholders' ---------- ----------
equity $ 25,693 $ 24,411
========== ==========
</TABLE>
S-3
<PAGE>
Schedule III
Riverside Group, Inc. (Parent Only)
Condensed Financial Information of Registrant
Condensed Statements of Operations
(unaudited, in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net investment income $ (375) $ (581) $ 644
Other income 41 546 625
Equity in net income of subsidiaries, net
of income taxes (1,579) (6,648) (1,733)
Equity in investment in Wickes Inc. 2,095 172 --
---------- ---------- ----------
Total revenues 192 (6,511) (464)
Other operating costs & expenses 405 1,028 2,639
Interest expense 2,465 2,691 3,106
---------- ---------- ----------
Total expenses 2,870 3,719 5,745
---------- ---------- ----------
Loss before income tax benefit (2,678) (10,230) (6,209)
Income tax expense -- 2,334 --
---------- ---------- ----------
Net loss $ (2,678) $ (12,564) $ (6,209)
========== ========== ==========
---------- ---------- ----------
Loss per share of common stock $ (0.52) $ (2.41) $ (1.19)
========== ========== ==========
Weighted average number of common shares
used in computing earnings per share 5,128,131 5,213,186 5,193,970
========== ========== ==========
</TABLE>
S-4
<PAGE>
MODIFICATION TO CREDIT AGREEMENT
This Agreement is made as of the ____ day of March, 2000, by and
between RIVERSIDE GROUP, INC., a Florida corporation (the "Company") and
MITCHELL W. LEGLER, as agent for the Holders, as defined below (the "Agent").
Recitation of Facts
A. The Company, the Agent and the Holders are parties to a Credit Agreement
dated as of April 1, 1999 (the "Credit Agreement").
B. The capitalized terms used herein shall have the meanings ascribed to
them in the Credit Agreement unless other meanings are set forth herein.
C. Section 4.3 of the Credit Agreement provides that, subject to certain
conditions, the Agent will release the Greenleaf Shares from the Agent's
security interest upon the sale of such shares provided that 50% of the net
proceed of sale is applied to prepayment of the Notes.
D. The Company has requested that it be permitted to apply up to 100% of
the net sales proceeds of the Greenleaf Shares to the payment of accrued but
unpaid interest due to the Holders on March 31, 2000 (the "March Interest
Payment"). The Agent has agreed to such release upon the terms and conditions
set forth below.
Agreement
In consideration of the release by the Agent of Greenleaf Shares as set
forth herein and for other good and valuable consideration, the Company and the
Agent agree as follows:
1. Use of Proceeds. Notwithstanding the provisions of Section 4.3 of the
Credit Agreement, the net proceeds from the sale of released Greenleaf Shares
shall be applied as follows:
(a) First, 100% of the net sales proceeds shall be applied to the March
Interest Payment;
(b) Second, 100% of the additional net sales proceeds shall be applied to
reduce the principal balance of the Notes by the amount applied to the March
Interest Payment under subparagraph (a);
(c) Thereafter, net sales proceeds shall be applied as set forth, and
subject to the conditions, in Section 4.3 of the Credit Agreement.
1
<PAGE>
(d) The Company agrees that, unless the Agent shall otherwise consent,
it will sell Greenleaf Shares which are Collateral before selling or otherwise
disposing of any such shares which are not Collateral until such time as
prepayment of principal of the Notes has been made in an aggregate amount equal
to the net sales proceeds previously applied to the March Interest Payment.
Thereafter, the provisions of the last sentence of Section 4.3 of the Credit
Agreement shall apply.
2. Principal Reduction. The Company agrees to make a principal reduction of
$550,000.00 on the Notes on or before April 30, 2000.
3. Ratification. The Company hereby ratifies and confirms its obligations
under the Credit Agreement and this Agreement and represents and warrants to the
Agent that the Company has no defenses, offsets, counterclaim or claims in any
way relating to the Credit Agreement or the Collateral Documents or in
connection with any of the transactions described in the Credit Agreement.
4. Default. Any default under this Agreement shall be an Event of Default
under the Credit Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date above written.
RIVERSIDE GROUP, INC.
By _________________________________
Its_______________________________
___________________________________
MITCHELL W. LEGLER, as agent for the
Holders
2
Exhibit 10.6
- ----------------------------------------------------------------------------
AGREEMENT
---------
THIS AGREEMENT is made and entered into as of __________, 2000, by and
between Buildscape, Inc., a Florida corporation ("Buildscape"), and Wickes
Inc., a Delaware corporation (the "Lumber Company")
WITNESSETH:
-----------
WHEREAS, Buildscape is developing and operating an Internet based
business intended to become a virtual community of building trades
professionals, their customers, their suppliers and their service providers
in the home construction and home improvement industry through its
websites, buildscape.com and buildscapePRO.com (the "Site") and through
other communications channels;
WHEREAS, Buildscape desires to explore with the Lumber Company various
business opportunities, including without limitation, the distribution of
building materials directly from local lumberyards;
WHEREAS, the Lumber Company is a leading full-line building materials
and finishing products retailer;
WHEREAS, the Lumber Company desires to develop a relationship whereby
customers of the Lumber Company may use a uniquely branded version of the
Site and the internet for, among other things, placing orders for building
materials and products in designated geographic areas; and
WHEREAS, Buildscape and the Lumber Company intend this Agreement,
among other things, (i) to reflect their initial relationship and their
respective roles in the Lumber Company Site through a pilot period and (ii)
to be modified as described herein upon completion of the pilot period to
reflect more fully the final terms of such relationship and roles.
NOW, THEREFORE, as consideration for the promises and mutual covenants
and agreements contained herein, the parties hereto hereby agree as
follows.
Section 1. Definitions.
------------
As used herein, the following terms shall have the following meanings:
"Affiliate" shall mean, with respect to a party, any Person that,
-----------
directly or indirectly, Controls, or is Controlled by, or is under common
Control with, such party.
<PAGE>
"Agreement" shall mean this Agreement, together with the schedules
-----------
attached hereto.
"BOSS" shall have the meaning given to it in Subsection 2.1 hereof.
------
"Buildscape" and "BuildscapePRO" shall have the meanings set forth in
------------ ---------------
the preamble hereto.
"Buildscape Trademarks" shall mean those Trademarks owned or licensed
-----------------------
and utilized or utilizable by Buildscape in the course of its business and
identified in writing from time to time by Buildscape to the Lumber
Company.
"Confidential Information" means information regarding the terms of
--------------------------
this Agreement and all trade secrets, know-how and nonpublic information
that relates to research, development, trade secrets, know-how, inventions,
source codes, technical data, software programming, concepts, designs,
procedures, manufacturing, purchasing, accounting, engineering, marketing,
merchandising, selling, business plans or strategies and other proprietary
or confidential information.
"Control" shall mean the possession, directly or indirectly, of the
---------
power to direct or cause the direction of the management and policies of a
Person, whether by contract or through the ownership of voting securities,
including the ownership of more than fifty percent (50%) of the equity,
partnership or similar interest in such Person.
"Customer Area" shall mean, with respect to the Lumber Company or an
---------------
Other Lumberyard, the total geographical area served by the retail
distribution facilities operated at the time of determination by the Lumber
Company or such Other Lumberyard. For this purpose, a distribution facility
shall be conclusively presumed to serve the area comprised within a 50-mile
radius of such facility.
"Derivative" means (i) any enhancement, improvement or modification or
------------
(ii) any "derivative work" (as such term is defined in the U.S. Copyright
Act, as amended from time to time).
"Initial Term" shall have the meaning set forth in Section 10 hereof.
--------------
"Internet" means the Internet or the World Wide Web (or any successor
----------
or other online network including those using delivery over television,
cable, set top boxes, intranets, extranets and personal digital
assistants).
"Internet Lumber Operations" shall mean the sale over the Internet of
----------------------------
building materials and products which are the same as or competitive with
Lumberyard Products or National Catalog.
2
<PAGE>
"IPR" means any copyright, Trademark, patent, trade secret, or other
-----
intellectual property or proprietary right of any kind (including
applications therefor and, in the case of patents, any continuation or
divisional patent applications claiming priority thereto), whether arising
under the laws of the United States or any other nation, state or
jurisdiction (including any foreign equivalents thereto).
"Lumber Company" shall have the meaning set forth in the preamble
-----------------
hereto.
"Lumber Company Customer Area" shall mean the Customer Area of the
-------------------------------
Lumber Company.
"Lumber Company Customer Data" shall have the meaning given to it in
------------------------------
Subsection 7.1 hereof.
"Lumber Company Customers" shall mean current customers of the Lumber
--------------------------
Company and customers registering on the Site and assigned to the Lumber
Company.
"Lumber Company Site" shall have the meaning given to it in Subsection
---------------------
2.1 hereof; provided, however, that this term shall not be deemed to refer
------------------
to any non-commerce Internet site operated or utilized by the Lumber
Company otherwise than in conjunction with Buildscape under this Agreement.
"Lumber Company Trademarks" shall mean those Trademarks owned or
-----------------------------
licensed and utilized or utilizable by the Lumber Company in the course of
its business and identified in writing from time to time by the Lumber
Company to Buildscape.
"Lumberyard Products" are products inventoried, sold and shipped by
---------------------
the Lumber Company.
"National Catalog Products" are products sold and shipped by
-----------------------------
Buildscape.
"Offline Lumberyard" shall mean any Person primarily engaged in the
--------------------
non-Internet sale of Lumberyard Products to building professionals or end
users.
"Other Lumberyards" shall have the meaning given to it in Subsection
--------------------
4.2 hereof.
"Other Lumberyard Internet Agreement" shall have the meaning given to
-------------------------------------
it in Subsection 4.2 hereof.
"Person" shall mean any individual, corporation, partnership, limited
--------
liability company, trust, association or other entity or organization,
including any governmental or political subdivision or any agency or
instrumentality thereof.
3
<PAGE>
"Pilot Period" shall mean the period beginning on the date hereof and
--------------
ending on the earlier to occur of (i) the first anniversary of the date
hereof, (ii) the date the Relationship Managers agree pursuant to
Subsection 3.2 hereof that the Lumber Company Site is ready to be provided
to additional markets or (iii) the date the parties agree to terminate this
Agreement.
"Relationship Managers" shall have the meaning given to it in
------------------------
Subsection 5.3 hereof.
"Site" shall have the meaning set forth in the preamble hereto.
------
"Third Party" shall mean any Person that is not a party hereto or a
-------------
wholly owned Affiliate of a party hereto.
"Trademark(s)" means all common law or registered trademarks, logos,
--------------
service marks, trade names, Internet domain names and trade dress rights
and similar or related rights arising under any of the laws of the United
States or any other country or jurisdiction, whether now existing or
hereafter adopted or acquired.
Section 2. General.
--------
2.1 General Agreements of the Parties. Buildscape and the Lumber
----------------------------------
Company desire to explore the feasibility of developing and operating a
uniquely branded version of the Site (the "Lumber Company Site") that will
be the Lumber Company's primary direct Internet presence for Lumber Company
Customers for the purposes of (i) attracting home building, remodeling,
home improvement, decorating, home management, property management,
restoration and light construction trade professionals and do-it-
yourselfers to participate in the Site's on-line community and (ii) selling
over the Internet National Catalog Products and Lumberyard Products. The
parties contemplate that the features and functions of the Site would
generally provide for:
[CERTAIN CONFIDENTIAL MATERIAL HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE S.E.C. PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT ]
2.2 Collaboration. Buildscape and the Lumber Company will
--------------
collaborate to develop the look, feel and functionality of the Lumber
Company Site, subject to constraints imposed by Buildscape's design
intentions, support requirements and technology architecture, making it
accessible by current and potential Lumber Company Customers.
4
<PAGE> 5
2.3 Maintenance of the Lumber Company Site. Once developed, it is
---------------------------------------
contemplated that Buildscape would use reasonable best efforts to maintain
the Lumber Company Site in order that availability, reliability, security
and response time meet the then current generally accepted standards for
business to business e-commerce sites on the World Wide Web.
2.4 General Guidelines. Buildscape and the Lumber Company currently
-------------------
contemplate that the Site and the Lumber Company Site would be generally
operated in accordance with the guidelines set forth on Schedule 1 hereto.
The parties agree to use their reasonable best efforts to reach specific
agreement on all aspects of the matters described on such schedule and to
enter into an amendment to this Agreement reflecting such agreements on or
prior to completion of the Pilot Period, subject to the terms of the
termination provisions stated in Subsection 11.2 hereof.
2.5 Technology Integration. The integration of the Lumber Company's
-----------------------
and Buildscape's information systems and the development of a highly
integrated computer interface, including business rules and data formats
for the purposes of conducting product transactions through the Lumber
Company Site will generally take place in accordance with the mutually
agreed terms that will be incorporated in the amendment to this Agreement
contemplated by Subsection 2.4 hereof. Each party will pay its own costs
associated with such technology integration. Each party will provide all
necessary technical support on an on-going basis in order to maintain and
enhance the technical interface contemplated hereby.
Section 3. Pilot Program and Deployment.
-----------------------------
3.1 Pilot Program. The Lumber Company and Buildscape agree to
---------------
identify, within 30 days of the date hereof, a market from among those
markets currently served by the Lumber Company to be used as the Pilot
Market. Buildscape will use good faith efforts (i) to commence a limited
pilot program in this market within 120 days of the date hereof, consisting
of selected Lumber Company Customers and features of the Lumber Company
Site and with the intent to deploy the Lumber Company Site in such a way as
to gain a detailed understanding, among other things, of the needs of such
customers, the relative attractiveness of various features of the Lumber
Company Site to such customers, the economics of the relationships
contemplated hereby, and the nature and extent of the interface and
integration required for full functionality of the Lumber Company Site; and
(ii) to test, revise as necessary and make ready for deployment to all
Lumber Company Customers in the test market all features of the Lumber
Company Site within 210 days of the date hereof. It is currently
contemplated that the limited pilot program will be commenced in February
2000 and completed in July 2000.
5
<PAGE>
3.2 Deployment. After the Lumber Company Site has become fully
-----------
operational and made available to all Lumber Company Customers in the test
market area, and when the Relationship Managers agree the parties are ready
to provide the Lumber Company Site to additional markets, a schedule will
be established to identify the order in which the Lumber Company markets
will be given access to the Lumber Company Site, and the responsibilities
of each party to achieve that goal. This schedule will be incorporated in
a written document signed by the parties and attached to, and made a part
of, this Agreement as a schedule hereto. Prior to commencement of the
activities contemplated on such schedule, the parties will enter into the
amendment to this Agreement contemplated by Subsection 2.4 hereof
3.3 Reasonable Best Efforts. The parties agree that to a great
-------------------------
extent, the complete development and implementation of currently planned
features and functions of the Lumber Company Site, and full enhancement of
the Site and the Lumber Company Site in the future, will require a close,
working relationship and significant input and contribution from the Lumber
Company of management efforts, capital expenditures, sales initiatives and
the Lumber Company Customer Data. In this regard, the parties intend to
use their reasonable best efforts to maximize the attractiveness, appeal
and reputation of the Lumber Company Site.
Section 4. Relationships and Restrictions.
-------------------------------
4.1 Lumber Company. During the term of this Agreement, the Lumber
---------------
Company shall not directly engage on its own behalf in Internet Lumber
Operations, shall utilize the Lumber Company Site as its sole Internet
presence for Internet Lumber Operations, and shall not promote any other
Internet site for Internet Lumber Operations. The Lumber Company
acknowledges and agrees that the development, construction, programming and
hosting of the Lumber Company Site involves significant investment by
Buildscape and is being undertaken in reliance upon the representation by
the Lumber Company that it will maintain a continued economic relationship
with Buildscape pending successful completion of the Pilot Market effort
and substantially as set forth in this agreement. Nothing herein shall
restrain the Lumber Company from selling products through, or providing
related product support for, other third party Internet sites.
4.2 Buildscape. During the term of this Agreement, Buildscape agrees
-----------
that Buildscape will use the Lumber Company exclusively for fulfilling
local deliveries of Lumberyard Products in the Lumber Company Customer Area
subject to the conditions set forth below. Nothing contained in this
Agreement shall prohibit Buildscape from entering into and performing any
agreement with other lumberyards for Internet Lumber Operations (an "Other
Lumberyard Internet Agreement", and such lumberyards "Other Lumberyards")
within the Lumber Company Customer Area; provided that (i) Buildscape will
--------
use good faith efforts to select such Other Lumberyards so as to minimize
the extent to which the Lumber Company and any Other Lumberyard would serve
the same customer territories, while seeking to provide service to as much
of the United States as possible, and (ii) Buildscape may not enter into an
Other Lumberyard Internet Agreement with an Other Lumberyard whose Customer
Area includes more than 20% of the Lumber Company Customer Area without
obtaining the consent of the Lumber Company, which may be withheld in the
6
<PAGE>
Lumber Company's sole discretion. Subject to the foregoing sentence, both
parties acknowledge that some overlap of customer territories will occur
between the Lumber Company and Other Lumberyards.
4.3 Promotional Activities. (a) During the term of this Agreement,
-----------------------
the Lumber Company will not promote the Internet Lumber Operations of any
Person other than Buildscape.
(b) Buildscape shall not display the Trademark of any Person
primarily engaged in operations competitive to those conducted by the
Lumber Company within the Lumber Company Site.
4.4 Nature of Relationship. The parties are independent contractors
-----------------------
under this Agreement. Each party acknowledges and agrees that it is not and
will not be during the term of this Agreement an employee or an agent of
the other party. Nothing in this Agreement will be deemed to constitute,
create, give effect to or otherwise recognize a joint venture, partnership,
franchise or business entity of any kind. Nothing in this Agreement will be
construed as providing for the sharing of profits or losses arising out of
the efforts of the parties hereto.
Section 5. Relationship Modification Process.
----------------------------------
5.1 Intentionally Omitted.
----------------------
5.2 Area Liaisons. (a) The parties shall each appoint liaisons in
--------------
each of the following areas: (i) information technology, (ii) finance,
(iii) merchandising, (iv) distribution, (v) marketing, (vi) operations, and
(vii) customer recruiting (the "Area Liaisons"). The respective Area
Liaisons shall be available to meet on an ad hoc basis to oversee and
address issues, interpretations of this Agreement and business rules,
complaints and expansion of the relationship contemplated by this
Agreement. All of the Area Liaisons shall meet, either in person or by
teleconference, at least once each calendar quarter to discuss
opportunities, general strategies and goals of the parties with respect to
the Site.
(b) All recommended changes to the relationship contemplated hereby,
after appropriate study and discussion, shall be forwarded in writing by
the Area Liaisons to the Relationship Managers. In addition, any dispute
not resolved by the Area Liaisons after appropriate discussion shall be
referred to the Relationship Managers for resolution.
5.3 Relationship Manager. (a) Each party shall appoint a senior
---------------------
executive officer to oversee and have overall responsibility for the
administration of this Agreement and the business relationship contemplated
by this Agreement (the "Relationship Manager"). The Relationship Managers
shall meet, either in person or by telephone conference, as needed and in
no event less than once each month.
7
<PAGE>
(b) The Relationship Managers shall consider proposed changes or
modifications to the relationship contemplated hereby. All decisions of
the Relationship Managers shall be reflected in a written amendment to
either the process manual (to be mutually developed by the parties) or this
Agreement, signed by the Relationship Managers. Any dispute not resolved
by the Relationship Managers will be subject to the dispute resolution
procedures set forth in Section 16 hereof.
Section 6. Compensation.
-------------
The respective compensation of Buildscape and the Lumber Company
hereunder is described on Schedule 2 hereto.
----------
Section 7. Data; Reports and Records; Audit Procedures.
--------------------------------------------
7.1 Historical Data Sharing. The Lumber Company will, to the extent
------------------------
reasonably possible, develop and share with Buildscape the Lumber Company
Customer account data and profiles, including but not limited to previous
buying patterns, knowledge of their building activity, average number of
projects, average project costs and other information ("Lumber Company
Customer Data"), to aid in the initial development of customer profiles for
the Lumber Company Site. The Lumber Company will share such the Lumber
Company Customer account data and profiles on a market by market basis in
preparation for, and reasonably in advance of, introducing new geographic
markets to the Lumber Company Site.
7.2 Data Ownership. The Lumber Company and Buildscape will, as
----------------
between one and the other, own the Lumber Company Customer Data as follows:
(1) the Lumber Company will own all the Lumber Company Customer Data
relating to the Lumber Company Customers who place their orders with the
Lumber Company other than through the Lumber Company Site; (2) the Lumber
Company and Buildscape will own jointly all the Lumber Company Customer
Data relating to the Lumber Company Customers whose orders are placed
through the Lumber Company Site; and (3) Buildscape will own all the Lumber
Company Customer Data as it specifically relates to orders placed by the
Lumber Company Customers through versions of the Site other than the Lumber
Company Site.
7.3 Reports. Buildscape shall furnish to the Lumber Company
--------
quarterly reports regarding Lumber Company Customers in such form and
containing such information as to which the parties may reasonably agree.
Buildscape shall keep true and complete records of all transactions and
correspondence with Lumber Company Customers. Such records and all
accounting records of Buildscape pertaining to the Lumber Company Customers
hereunder may be examined by representatives of the Lumber Company, whether
during or after the term of this Agreement, during normal business hours
upon reasonable advance written notice and subject to the Buildscape's
reasonable security and confidentiality provisions.,
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7.4 Audit Procedures. (a) The Lumber Company will be entitled, once
-----------------
during any six-month period (except as provided below), to audit, at the
Lumber Company's expense, Buildscape's records with respect to sales to the
Lumber Company Customers through the Lumber Company Site to ensure that
the fees paid to the Lumber Company pursuant to this Agreement are
accurate. Buildscape will be entitled, once during any six-month period
(except as provided below), to audit, at Buildscape's expense, the Lumber
Company's records with respect to sales to the Lumber Company Customers
through the Lumber Company Site to ensure that the fees paid to Buildscape
pursuant to this Agreement are accurate. If a party discovers a Material
Discrepancy, (i) then the party causing the audit will be reimbursed by the
other party for all reasonable costs of the audit, including costs of any
reimbursement to the other party, and (ii) such party will be entitled to
conduct the audits contemplated by this Section 7.4 once during any three-
month period until two consecutive audits have been conducted without the
discovery of any Material Discrepancy. All amounts discovered in the audit
and agreed to that are less or more than the contracted amount, will be
paid to the appropriate party within five days of agreement as to the
difference and will bear interest at a rate of one and one-half percent
(1.5%) for each whole month after the payment was due, or such lesser
amount necessary to comply with all applicable laws.
(b) The audits contemplated by this Subsection 7.4 shall only be
conducted upon reasonable advance written notice and subject to the other
party's reasonable security and confidentiality provisions. The parties
agree to cooperate with each other in these reviews, furnish the other with
reasonably requested information in a timely manner, and provide the other
with reasonably timely access to personnel during normal business hours for
audit purposes at no charge; provided, however, that a party may charge the
other for its reasonable costs for any technical resources or extraordinary
personnel time required by the other and necessary for such audit or
verification report.
(c) A "Material Discrepancy" in fees paid to the Lumber Company or
Buildscape will be deemed to occur if the total amount of fees due a party
based on the audit report exceeds the amount of fees actually paid by the
other party by five percent (5%) or more. If a party discovers a Material
Discrepancy, after reviewing applicable supporting documentation, the
parties will promptly attempt to agree on such analysis. If it is agreed a
Material Discrepancy occurred, then the party causing the audit shall be
reimbursed by the other party for all reasonable costs of the audit,
including costs of any reimbursement to the other party for technical
resources or extraordinary personnel time, as described in (a) and (b)
above. In all other circumstances, the auditing party will bear the costs
of audits performed by or at its direction. If the parties are unable to
agree, the parties will follow the dispute resolutions found in Section 16
hereof.
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(d) Any amounts discovered in the audit that are less or more than
the contracted amount, and that are not disputed, will be paid to the
appropriate party within 5 days of agreement as to the difference.
7.5 Confidentiality of Customer Data. Except as provided in this
---------------------------------
Section 7, Buildscape will neither transmit nor disclose the Lumber Company
Customer Data owned by the Lumber Company or jointly owned by Buildscape
and the Lumber Company to any third party, including Other Lumberyards, or
permit such data to be utilized in any manner by any Other Lumberyard.
Buildscape may utilize the Lumber Company Customer Data owned by the Lumber
Company or jointly owned by Buildscape and the Lumber Company for the
purposes of marketing various products and services to the Lumber Company
Customers, provided that such the Lumber Company Customer Data, to the
extent that it particularly identifies a customer, is not disclosed to any
third parties and such products and services are not being offered directly
by Other Lumberyards to the Lumber Company customers. Additionally,
Buildscape may use aggregate and statistical information and otherwise use
the Lumber Company Customer Data for any purpose so long as such data does
not identify the Lumber Company or a Lumber Company Customer. This Section
7 shall survive the termination of this Agreement.
Section 8. Trademark and Technology License.
---------------------------------
8.1 Buildscape Grant. Buildscape hereby grants to the Lumber Company
-----------------
and any of its wholly owned entities a non-exclusive, royalty-free,
worldwide license in all jurisdictions in which Buildscape has any rights,
to use, reproduce, distribute and display the Buildscape Trademarks as
authorized in this Agreement, subject to mutual agreement of the parties
hereto.
8.2 Lumber Company Grant. The Lumber Company hereby grants to
-----------------------
Buildscape a non-exclusive, royalty-free, worldwide license in all
jurisdictions in which the Lumber Company has any rights, to use,
reproduce, distribute and display the Lumber Company Trademarks as
authorized in this Agreement, subject to mutual agreement of the parties
hereto.
8.3 Quality Control. Each party will have the right to exercise
-----------------
quality control over the use of its Trademarks by the other party to the
degree necessary, in the sole opinion of the owner of such Trademarks, to
maintain the validity and enforceability of such Trademarks and to protect
the goodwill associated therewith. Each party will, in its use of the
other's Trademarks, adhere to a level of quality at least as high as that
used by such party in connection with its use of its own Trademarks. If the
owner of a Trademark, in its reasonable opinion, finds that use of such
Trademark by the other party materially threatens the goodwill of such
Trademark, the user of such Trademark will, upon notice from the owner,
immediately, and no later than ten (10) days after receipt of such owner's
notice, take all measures reasonably necessary to correct the deviation(s)
or misrepresentation(s) in, or misuse of, the applicable Trademark.
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8.4 Use. Each party shall use the other's Trademarks in
----
accordance with sound trademark and trade name usage principles and in
compliance with all applicable laws and regulations of the United States
(including all laws and regulations relating to the maintenance of the
validity and enforceability of such Trademarks) and will not use the
Trademarks in any manner that might tarnish, disparage, or reflect
adversely on the Trademarks or the owner of such Trademarks. Each party
shall use, in connection with the other's Trademarks, all legends, notices
and markings required by law. No party may materially alter the appearance
of another's Trademarks in any advertising, marketing, distribution, or
sales materials, or any other publicly distributed materials without the
prior written consent of the other party.
8.5 Lumber Company IPR License. Lumber Company hereby grants to
----------------------------
Buildscape, to the extent it is permitted to do so under applicable law and
agreements, if any, pursuant to which the Lumber Company has acquired such
content, a non-exclusive, non-sublicenseable, royalty-free, worldwide
license to reproduce, distribute, publicly perform, publicly display and
digitally perform and prepare Derivative works of all Content in
conjunction with the Site or the Lumber Company Site where such Content:
(i) has been included at any time in the Site or Lumber Company Site or
(ii) has been included in any IPR subject to Joint IPR Rights. As used
herein "Content" means all text, pictures, sound, graphics, video and other
data supplied by Lumber Company to Buildscape pursuant to this Agreement),
as such Content may be modified from time to time.
Section 9. Intellectual Property.
----------------------
9.1 Preexisting Property. All IPR owned by a party prior to the date
---------------------
of this Agreement will remain the sole property of such party.
9.2 Developed Property. (a) All IPR created solely by one party
-------------------
(the "Sole IP Rights") in connection with its activities under this
Agreement will be owned by such party.
(b) All IPR created jointly by both parties (the "Joint IP Rights")
in connection with their activities under this Agreement will be jointly
owned by both parties and each party will be free to exploit such Joint IP
Rights without accounting to the other, provided, however, that all
-------------------
modifications, enhancements, revisions, Derivative works or other changes
(collectively "Changes") made solely by either party to any IPR that
originally was subject to Joint IP Rights shall be subject only to
Sole IP Rights and the other party shall have no rights to such Changes
under this Agreement or otherwise.
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<PAGE>
(c) Notwithstanding Subsections 9.1 and 9.2 hereof, in the event that
Buildscape develops, solely or jointly, any modifications, improvements or
enhancements to the Site and/or the Lumber Company Site, including all
computer hardware and software interface technology and related
specifications which enable the Site and/or the Lumber Company Site to
interface or communicate with the Lumber Company's information systems, and
any training materials related to the Site and/or the Lumber Company Site
("Site Improvements"), all IPR in and to such Site Improvements shall be
owned solely by Buildscape and considered Buildscape's Sole IP Rights, and
the Lumber Company hereby assigns all right, title and interest it may have
in such IPR to Buildscape. The Lumber Company will provide Buildscape with
all reasonable assistance to perfect and otherwise enforce Buildscape's
rights in the Site Improvements.
9.3 Protection of Joint IP Rights. The parties will cooperate in
-------------------------------
developing a strategy for identifying and protecting, prosecuting and
maintaining the Joint IP Rights, including registering or applying for
patent, utility model or copyright rights ("Filings") to protect or perfect
rights in and to such Joint IP Rights. All costs incurred by the parties
directly in connection with the making and prosecution of such Filings and
maintenance of Joint IP Rights will be borne equally by the parties. Each
party will cooperate and supply any information that is reasonably
necessary to assist the other in the preparation, filing and prosecution of
documentation necessary to protect the Joint IP Rights. Such cooperation
will include the execution of any and all documentation necessary to
properly complete any Filing. In the event that either party declines to
protect any specific Joint IP Right, then the other party may, in its sole
discretion, take whatever action it deems appropriate at its sole cost and
expense, including making such Filings as it deems appropriate, to protect
any aspect of the Joint IP Rights in the name of such party as sole owner
of such Joint IP Rights.
All other Joint IP Rights, and especially those in the nature of trade
secrets, will be identified specifically by the parties and appropriate
measures adopted to safeguard the value thereof. The parties may issue
instructions to guide the handling of all Joint IP Rights constituting
trade secrets which will be reasonable under the circumstances. In any
event, each party will be obliged to treat these Joint IP Rights in
accordance with the same degree of care such party uses to protect its own
trade secrets, but in any event not less than a reasonable degree of care.
9.4 Enforcement of Rights in Joint Intellectual Property. (a) If
-----------------------------------------------------
either party believes that any Joint IP Right is being infringed or is
being misused by a third party, such party will promptly notify the other
party of such infringement or misuse. If, within sixty (60) days from the
date such notice is received, the parties agree that action is warranted,
the parties will cooperate in the filing and maintenance of a claim,
demand, investigation, suit or other proceeding (an "Action"), as
appropriate, regarding such infringement or misuse. Each of the parties
will bear its own internal costs and expenses in connection with the filing
and prosecution of such Action, and out-of-pocket fees and expenses will be
borne equally by the parties. All damages, profits, awards and royalties
obtained by the parties in connection with such Action will be shared
equally.
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(b) If either party declines to participate in, or the parties are
unable to agree on, the filing or prosecution or an Action relating to any
Joint IP Right within such sixty (60) day period, then the other party (the
"Participating Party") may proceed in its sole discretion and at its sole
expense to file and prosecute such Action for infringement or misuse in its
own name or, if required by law, jointly with the other party and in such
event the Participating Party is hereby authorized to take action in the
name of the other party as well; provided however, that if the
Participating Party takes action in the name of the other party, the
Participating Party will indemnify and hold the other party harmless from
and against any and all monetary damages, fines, fees, penalties,
obligations, deficiencies, losses and out-of-pocket expenses that the other
party incurs or is subject to directly as a result of such Action. The
Participating Party will receive for its sole benefit any damages, profits,
awards and royalties recoverable for such infringement or misuse as the
result of such Action.
(c) If both parties initially agree to mutually prosecute any Action
relating to any Joint IP Right, either party may elect at any time to
settle or withdraw for any reason from the prosecution of such Action;
provided, however, the settling party will not as part of any settlement
grant a license in the Joint IP Right which renders the Action moot. In
such circumstance, the withdrawing or settling party, as the case may be,
will bear one-half (1/2) of the total out-of-pocket fees and expenses
incurred in pursuing such Action up to the time of withdrawal or
settlement. Going forward, the continuing party will bear all of the fees
and expenses incurred for such Action and may proceed in its sole
discretion to prosecute, settle (including licenses granted in connection
therewith) or discontinue prosecution of such Action. Any damages,
profits, awards and royalties recovered or to be recovered for such Action
will be apportioned between the parties in direct proportion to the ratio
of each party's out-of-pocket fees and expenses compared to the total out-
of-pocket fees and expenses of both parties and taking into account any
benefits recovered by the non-continuing party as the result of any
settlement.
Section 10. Term of Agreement.
------------------
This Agreement will be effective from the date of this Agreement and
shall continue for a period ending on the fourth anniversary of the date
hereof (the "Initial Term") and shall automatically be extended and renewed
for subsequent consecutive renewal terms of one calendar year each unless
this Agreement is terminated pursuant to Section 11 hereof.
13
<PAGE>
Section 11. Termination.
------------
11.1 On Expiration. Upon not less than ninety (90) days' prior
---------------
notice to the other party, either the Lumber Company or Buildscape may
terminate this Agreement effective on expiration of the Initial Term or any
renewal term.
11.2 Pilot Period. By notice given to the other party within 30 days
-------------
after completion of the Pilot Period, either the Lumber Company or
Buildscape may terminate this Agreement effective on the date set forth in
such notice, which shall be at least 30 days and no more than 60 days after
the date such notice is given.
11.3 Bankruptcy, etc. Effective immediately upon notice to the other
----------------
party, either the Lumber Company or Buildscape may terminate this
Agreement, without penalty, upon the receivership or bankruptcy of the
other party.
11.4 Breach. Upon any material breach of the provisions hereof by
-------
Buildscape or the Lumber Company, the Lumber Company or Buildscape,
respectively, may upon notice to the other party giving the reasons
therefor and indicating that the other party has 30 days within which to
remedy the breach terminate this Agreement upon expiration of such 30-day
period; provided, that if such breach is remedied within such period, this
---------
Agreement will remain in full force and effect as though no breach had
occurred.
11.5 Violation of Law. Either party, in its sole discretion, may
------------------
terminate at any time this Agreement immediately upon notice to the other
in the event it is conclusively and non-appealably determined by a court or
administrative agency with jurisdiction in the matter, that either this
Agreement or the conduct of the other party pursuant hereto violates, in
any respect that would have a materially adverse effect on such party or
the relationship contemplated hereby, any applicable federal, state, or
local law.
11.6 Continuation of Obligations. Notwithstanding the termination of
----------------------------
this Agreement, the obligations and provisions contained in Sections 7, 9,
and 11 through 18 hereof shall survive and shall continue in full force and
effect after any such termination.
11.7 Effect on Licenses. Upon termination of this Agreement all
--------------------
licenses granted pursuant to this Agreement shall terminate.
11.8 Site Software. In the event this Agreement is terminated
---------------
pursuant to Subsection 11.1 hereof or by the Lumber Company pursuant to
Subsection 11.4, then Buildscape will grant the Lumber Company a license to
use the computer software ("Site Software") owned by Buildscape, or if not
owned by Buildscape to the extent Buildscape is permitted to grant such
license without cost, and required for the operation of the Lumber Company
Site, to enable the Lumber Company to operate and maintain the Lumber
14
<PAGE>
Company Site for a transition period of up to 120 days. The Lumber Company
---
shall prior to commencement of such license agree to pay Buildscape a
reasonable fee (which shall not be less than any prevailing fee charged by
Buildscape at the time to Third Parties for similar licenses). The Lumber
Company may not use the Site Software for any other purpose (including,
creating versions of the Site for any Third Party) other than operation of
the Lumber Company Site. The Lumber Company acknowledges that the Site
Software may not constitute all software required to operate and maintain
the Lumber Company Site, and the Lumber Company will be required to obtain
the rights to use any other required software from the owner thereof.
Section 12. Representations and Warranties.
-------------------------------
12.1 Representations and Warranties of Buildscape. Buildscape hereby
---------------------------------------------
represents and warrants to the Lumber Company as follows:
(i) Authorization. All corporate action on the part
--------------
of Buildscape, its officers, directors and stockholders necessary for
the authorization, execution and delivery of this Agreement, and the
performance of all obligations of Buildscape hereunder has been taken,
and this Agreement, when executed and delivered by Buildscape, will
constitutes valid and legally binding obligation of Buildscape,
enforceable against Buildscape in accordance with its terms.
(ii) Intellectual Property. Buildscape owns or
-----------------------
possesses sufficient legal rights to all IPR necessary for its
business as now conducted without any conflict with, or infringement
of, the rights of others. Buildscape has not received any written
communications alleging that any Buildscape IPR have violated or would
violate any of the IPR of any Third Party. Buildscape is not aware
that any of its employees is obligated under any contract or other
agreement, or subject to any judgment, decree or order of any court or
administrative agency, that would interfere with such employee's
ability to promote the interests of Buildscape or that would conflict
with Buildscape's business. Neither the execution, delivery or
performance of this Agreement, nor the carrying on of Buildscape's
business as now conducted by the employees of Buildscape, will
conflict with or result in a breach of the terms, conditions, or
provisions of, or constitute a default under, any contract, covenant
or instrument under which any such employee is now obligated.
(iii) Compliance with Other Instruments. The
---------------------------------------
execution, delivery and performance of this Agreement will not result
in any violation of or conflict with or constitute, with or without
the passage of time and giving of notice, a default under any
provision of Buildscape's charter or bylaws or any instrument,
judgment, order, writ, decree or contract to which Buildscape is a
party or by which Buildscape is bound, or any provision of any federal
or state statute, rule or regulation applicable to Buildscape, the
15
<PAGE>
effect of which would have a material adverse effect on the ability of
Buildscape to perform its obligations under this Agreement or result
in the creation of any lien, charge or encumbrance upon any asset of
Buildscape.
(iv) EXCEPT AS EXPRESSLY SET FORTH HEREIN, BUILDSCAPE
MAKES NO REPRESENTATIONS OR WARRANTIES OF ANY KIND WHATSOEVER,
DIRECTLY OR INDIRECTLY, EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED
TO, IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR
PURPOSE, WITH RESPECT TO ANY GOODS OR SERVICES TO BE PROVIDED UNDER
THIS AGREEMENT.
12.2 Representations and Warranties of the Lumber Company. The
--------------------------------------------------------
Lumber Company hereby represents and warrants to Buildscape as follows:
(i) Authorization. All corporate action on the part
--------------
of the Lumber Company, its officers, directors and stockholders
necessary for the authorization, execution and delivery of this
Agreement, and the performance of all obligations of the Lumber
Company thereunder has been taken, and this Agreement, when executed
and delivered by the Lumber Company, will constitute valid and legally
binding obligation of the Lumber Company, enforceable against the
Lumber Company in accordance with its terms.
(ii) Intellectual Property. The Lumber Company owns
----------------------
or possesses sufficient legal rights to all IPR necessary for its
business as now conducted without any conflict with, or infringement
of, the rights of others. The Lumber Company has not received any
written communications alleging that any the Lumber Company IPR have
violated or would violate any of the IPR of any Third Party. The
Lumber Company is not aware that any of its employees is obligated
under any contract or other agreement, or subject to any judgment,
decree or order of any court or administrative agency, that would
interfere with such employee's ability to promote the interests of the
Lumber Company or that would conflict with the Lumber Company's
business. Neither the execution, delivery or performance of this
Agreement, nor the carrying on of the Lumber Company's business as now
conducted by the employees of the Lumber Company, will conflict with
or result in a breach of the terms, conditions, or provisions of, or
constitute a default under, any contract, covenant or instrument under
which any such employee is now obligated.
(iii) Compliance With Other Instruments. The
---------------------------------------
execution, delivery and performance of this Agreement will not result
in any violation of or be in conflict with or constitute, with or
without the passage of time and giving of notice, a default under any
provision of the Lumber Company's, charter or bylaws or any
16
<PAGE>
instrument, judgment, order, writ, decree or contract to which the
Lumber Company is a party or by which the Lumber Company is bound, or
any provision of any federal or state statute, rule or regulation
applicable to the Lumber Company, the effect of which would have a
material adverse effect on the ability of the Lumber Company to
perform its obligations under this Agreement or result in the creation
of any lien, charge or encumbrance upon any asset of the Lumber
Company.
(iv) EXCEPT AS EXPRESSLY SET FORTH HEREIN, THE LUMBER
COMPANY MAKES NO REPRESENTATIONS OR WARRANTIES OF ANY KIND WHATSOEVER,
DIRECTLY OR INDIRECTLY, EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED
TO, IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR
PURPOSE, WITH RESPECT TO ANY GOODS OR SERVICES TO BE PROVIDED UNDER
THIS AGREEMENT.
Section 13. Indemnification.
----------------
13.1 Indemnification. The Lumber Company and Buildscape each shall
----------------
indemnify the other, its Affiliates and its officers, directors, employees,
representatives, shareholders, successors, assigns, and agents (the
"Indemnified Parties") against, and hold all of them harmless from any and
all debts, claims, deficiencies, actions, proceedings, demands,
assessments, orders, writs, decrees, liabilities, suits, costs, judgments,
penalties, obligations, losses, damages and other expenses (including
reasonable attorneys' and accounting fees) (collectively, "Damages") of any
nature and of any kind whatsoever which may be made against or incurred by
any of them resulting from a Third Party claim ("Third Party Claim")
resulting from or arising out of or in any way connected with (i) any
breach by the other party of any representation, warranty, agreement or
covenant made by such other party in this Agreement or (ii) any sales
effected by such party on or through the Site or the Lumber Company Site to
the extent that such Damages do not result from the action or inaction of
an Indemnified Party.
13.2 Operation of Indemnity. Upon the occurrence of any event for
-----------------------
which any party is entitled to indemnification under this Agreement, such
party ("Indemnified Party") shall promptly notify the other party
("Indemnitor") of the type of Damages and the amount of such Damages. No
failure of an Indemnified Party to promptly notify an Indemnitor shall
relieve the Indemnitor from any obligation to indemnify the Indemnified
Party unless and to the extent the Indemnitor is actually prejudiced by
such delay in notification. Within 10 days of delivery of such notice,
Indemnitor shall either pay to the Indemnified Party, by certified or
official bank check, the full amount of such Damages or provide a
certificate from a responsible officer setting forth in reasonable detail
the reasons why Indemnitor does not believe that the claim constitutes
Damages under this Agreement. The Indemnified Party shall have the right
17
<PAGE>
to offset the amount of any Damages for which it reasonably believes it is
entitled to indemnification against all amounts which Indemnified Party may
at any time owe to Indemnitor.
13.3 Claims by Third Party. Subject to the provisions of Section 14
----------------------
hereof, if a Third Party Claim is made or proceeding is commenced against
an Indemnified Party, such Indemnified Party will promptly notify the
Indemnitor in writing. No failure of an Indemnified Party to so notify
the Indemnitor shall relieve the Indemnitor from the obligation to
indemnify the Indemnified Party unless and to the extent the Indemnitor is
actually prejudiced by such failure. Such Indemnified Party will accord the
Indemnitor the opportunity to assume entire control for the defense,
compromise or settlement of any such Third Party Claim through its own
counsel and at its own expense; provided that no such compromise or
settlement shall include any non-monetary terms and conditions applicable
to such Indemnified Party without the consent of the Indemnified Party; and
provided further, that the Indemnified Party may retain its own counsel at
its own expense (the Indemnitor shall only be liable for the cost of one
such counsel for all Indemnified Parties) if the Indemnitor, within thirty
(30) days (or such shorter period required to file a responsive pleading)
after notice of any Third Party Claim, fails to assume the defense of such
Third Party Claim. If the Indemnitor Party does not assume entire control
of the defense, compromise or settlement of such Third Party Claim, the
Indemnified Party may compromise or settle any such Third Party Claim.
Buildscape and the Lumber Company each agrees to cooperate fully with
respect to the defense of any Third Party Claim.
Section 14. Infringement Claims.
--------------------
14.1 Lumber Company. The Lumber Company reserves, and shall continue
---------------
to have, any and all rights to commence, prosecute, compromise and settle
any claim, action or proceeding for infringement, unfair competition,
unauthorized use, misappropriation or violation of any of the Lumber
Company IPR by any Third Party or any claim, action or proceeding to defend
any of the Lumber Company IPR (collectively, the "Lumber Company IPR
Claims"). The Lumber Company may commence, prosecute, compromise, defend
or settle any such the Lumber Company IPR Claims, in its sole discretion,
but shall not have any obligation to do so. The Lumber Company shall notify
Buildscape of any Lumber Company IPR Claims related to the Site or the
Lumber Company Site and shall keep Buildscape reasonably informed regarding
the status of any such Lumber Company IPR Claim and notify Buildscape if
the Lumber Company elects to discontinue further prosecution or defense of
the same.
14.2 Buildscape. Buildscape reserves, and shall continue to have,
-----------
any and all rights to commence, prosecute, compromise and settle any claim,
action or proceeding for infringement, unfair competition, unauthorized
use, misappropriation or violation of any of the Buildscape IPR by any
Third Party or any action or proceeding to defend any of the Buildscape IPR
(collectively, the "Buildscape IPR Claims"). Buildscape may commence,
prosecute, compromise, defend or settle any such Buildscape IPR Claims in
18
<PAGE>
its sole discretion, but shall not have any obligation to do so. Buildscape
shall notify the Lumber Company of any Buildscape IPR Claims related to the
Site or the Lumber Company Site and shall keep the Lumber Company
reasonably informed regarding the status of any such Buildscape IPR Claim
and notify the Lumber Company if Buildscape elects to discontinue further
prosecution or defense of the same.
Section 15. Additional Obligations of the Parties.
--------------------------------------
15.1 Nondisclosure. (a) A party receiving any Confidential
--------------
Information (the "Receiving Party") of the other party (the "Disclosing
Party") shall exercise a reasonable degree of care, but in no event less
than the same degree of care that it uses to protect its own confidential
information of a like nature, to keep confidential and not disclose such
Confidential Information. Without limiting the generality of the foregoing,
the Receiving Party shall disclose the Confidential Information of the
other party only to those of its employees and contractors (i) who have a
reasonable need to know the Confidential Information in order for the
Receiving Party to perform under this Agreement, and (ii) who are
contractually obligated to comply with the disclosure and usage
restrictions set forth in this Agreement provided that Confidential
--------------
Information may only be disclosed to such contractors after the Receiving
Party provides not less than ten days (10) notice to the Disclosing Party
of its intent to do so and the Disclosing Party does not object thereto,
any such objection not to be made unreasonably. Such notice must
specifically identify the contractor and the purpose of the disclosure by
the Receiving Party. In addition, each party may, without the prior written
consent of the other party disclose the existence and terms of this
Agreement to potential sources of financing who are contractually obligated
to maintain the confidentiality of such information.
(b) The obligations set forth for release by the Receiving Party in
(a) above shall not apply to any Confidential Information to the extent it:
(i) is approved by prior written authorization of the Disclosing Party;
(ii) is disclosed in order to comply with a judicial order issued by a
court of competent jurisdiction, in which event the Receiving Party shall
give prior written notice to the Disclosing Party of such disclosure as
soon as practicable and shall cooperate with the Disclosing Party in using
all reasonable efforts to obtain an appropriate protective order or
equivalent, provided that the information shall continue to be Confidential
Information to the extent it is covered by such protective order or
equivalent; (iii) becomes generally available to the public through any
means other than a breach by the Receiving Party of its obligations under
this Agreement; (iv) was in the possession of the Receiving Party without
obligation of confidentiality prior to receipt or disclosure under this
Agreement as evidenced by written records made prior to such receipt or
disclosure; (v) is developed independently by the Receiving Party without
the use of or benefit from any of the Confidential Information of the other
party or without breach of this Agreement, as evidenced by written records
of the Receiving Party in existence as of disclosure by the Disclosing
Party; or (vi) is required to be disclosed by any national securities
19
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exchange, by government rule or regulation (e.g., in connection with a
securities filing) or by any other provisions of applicable law, provided
that the Receiving Party gives the Disclosing Party advance written notice
(to the extent practicable) of the disclosure and cooperates with the
Disclosing party in any reasonable attempt to limit the scope of the
required disclosure. In any dispute over whether information is
Confidential Information under this Agreement, it will be the burden of the
Receiving Party to show that such contested information falls within the
exceptions set forth in this paragraph.
15.2 No Contest of the Lumber Company IPR. Buildscape shall not
-------------------------------------
contest or otherwise challenge (in any legal action or otherwise), or
assist or encourage any other Person to contest or challenge, the validity
of any the Lumber Company IPR; provided that the foregoing shall not
preclude Buildscape from claiming that the IPR in question is Buildscape
IPR.
15.3 No Contest of Buildscape IPR. The Lumber Company shall not
-------------------------------
contest or otherwise challenge (e.g., in any legal action or otherwise), or
assist or encourage any other Person to contest or challenge, the validity
of any Buildscape IPR; provided that the foregoing shall not preclude the
Lumber Company from claiming that the IPR in question is the Lumber Company
IPR.
15.4 Use of IPR. Except as expressly set forth herein, this
-------------
Agreement shall not be construed as granting any rights whatsoever to any
party with respect to the IPR of the other Party, and neither Party shall
claim any such rights to IPR of the other Party.
Section 16. Resolution of Disputes.
-----------------------
16.1 General. If any dispute relating to this Agreement arises
--------
between the parties, other than a dispute as to rights to IPR, that is not
otherwise resolved, then each party shall follow the dispute resolution
procedures set forth in this Section 16 unless otherwise agreed in writing
by the parties at the time the dispute arises.
16.2 Initiation of Procedures. If a party seeks to initiate the
-------------------------
procedures under this Section 16, such party will give written notice
thereof to the other party. Such notice will (a) state that it is a notice
initiating the procedures under this section, (b) describe briefly the
nature of the dispute and the initiating party's claim or position in
connection with the dispute, and (c) identify an individual with authority
to settle the dispute on such party's behalf. Within ten (10) days after
receipt of any notice under this Subsection 16.2, the receiving party will
give the initiating party written notice that describes briefly the
receiving party's claims and positions in connection with the dispute and
identifies an individual with the authority to settle the dispute on behalf
of the receiving party.
16.3 Pre-Arbitration Discussion. The parties will cause the
----------------------------
individuals identified in their respective notices under Subsection 16.2
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hereof to promptly make such investigation of the dispute as such
individuals deem appropriate. Promptly and in no event later than ten (10)
days after the date of the initiating party's notice under Subsection 16.2
hereof, such individuals will commence discussions concerning resolution of
the dispute. If the dispute has not been resolved within 30 days after
commencement of such discussions, then any party may request that the other
party make its chief executive officer available to discuss resolution of
such dispute. Each party will cause its chief executive officer to meet
together with the other party's chief executive officer to discuss such
dispute at a mutually agreed upon time within 15 days after a party makes
such request. If the dispute has not been resolved within 15 days after
the chief executive officers of the parties have first met, then the
parties shall enter into mediation with a mutually agreed upon mediator or
mediation firm. If the mediator is unable to resolve the dispute within 15
days following the commencement of mediation or the parties are unable to
agree on a mediator, any party may submit the dispute to arbitration in
accordance with Subsection 16.4 hereof.
16.4. Dispute Resolution; Arbitration. (a) If any dispute under
---------------------------------
this Agreement arises and the parties are unable to resolve such dispute in
accordance with Subsections 16.1, 16.2 and 16.3 hereof, the unresolved
matter shall be resolved by binding arbitration if a party requests
arbitration in accordance with this Subsection 16.4 hereof. The place of
arbitration shall be in Jacksonville, Florida. Arbitration shall be
conducted under the auspices of the American Arbitration Association
("AAA"). Except as otherwise provided in this Subsection 16.4, the Rules of
the AAA shall govern all proceedings; and in the case of conflict between
the AAA Rules and this Agreement, the provisions of this Agreement shall
govern.
(b) Any party may initiate arbitration by making a demand on the
other parties in accordance with the AAA Rules. The dispute or controversy
shall be submitted to a panel of three neutral arbitrators, all of whom
shall be selected from the list of neutrals maintained by the AAA, as
existing at the time arbitration is invoked, one of whom shall be selection
by Buildscape, one of whom shall be selected by the Lumber Company, and the
third of whom shall be selected by joint agreement of the arbitrators
selected by Buildscape and the Lumber Company.
(c) The parties shall have the right of discovery in accordance with
the Federal Rules of Civil Procedure and shall make the disclosures
required by Rule 26(a) thereof, except that discovery may commence
immediately upon the service of the demand for arbitration. A party's
unreasonable refusal to cooperate in discovery shall be deemed to be
refusal to proceed with arbitration and, until AAA has designated all three
arbitrators, the parties may enforce their rights (including the right of
discovery) in the courts. Such enforcement in the courts shall not
constitute a waiver of a party's right to arbitration. Upon appointment of
all three arbitrators, the arbitrators shall have the power to enforce the
parties' discovery rights.
(d) The parties shall be bound by the decision of the arbitrators and
accept their decision as the final determination of the matter in dispute,
21
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except as provided under Florida law permitting the appeal of arbitration
results on grounds of bias or misbehavior on the part of an arbitrator.
Under no circumstances, other than an appeal under Florida law based on
allegations of bias or misbehavior on the part of an arbitrator, shall
either party appeal or contest the decision of the arbitrators. The
prevailing party shall be entitled to enter a judgment in any court upon
any arbitration award made pursuant to this Subsection 16.4. The
arbitrators shall award the costs and expenses of the arbitration,
including reasonable attorneys' fees, disbursements, arbitration expenses,
arbitrators' fees and the administrative fee of the AAA, to the prevailing
party as shall be determined by the arbitrators.
16.5 Exclusive Remedy. The procedures set forth in this Section 16
-----------------
shall be the parties' sole remedy for resolving disputes, other than
disputes as to rights to IPR and disputes for which arbitration in
accordance with Section 16.4 hereof is not requested, under the Agreement.
The provisions of this Section 16 shall not apply to disputes as to rights
to IPR or as to which arbitration is not requested.
Section 17. Damages
-------
17.1 Direct Damages. OTHER THAN EACH PARTY'S PAYMENT OBLIGATIONS
----------------
UNDER SECTION 6 HEREOF, AND EACH PARTY'S INDEMNIFICATION OBLIGATIONS UNDER
SECTION 16 HEREOF, IN NO EVENT SHALL A PARTY'S CUMULATIVE LIABILITY TO THE
OTHER ARISING OUT OF OR RELATED TO THIS AGREEMENT, WHETHER BASED IN
CONTRACT, NEGLIGENCE, STRICT LIABILITY, TORT OR OTHER LEGAL OR EQUITABLE
THEORY, EXCEED THE GREATER OF (I) $100,000 OR (II) THE AMOUNTS RECEIVED BY
SUCH PARTY FROM THE OTHER UNDER THIS AGREEMENT.
17.2 Consequential Damages. In no event will either party have any
----------------------
liability, whether based in contract, tort (including negligence), warranty
or other legal or equitable grounds, for any loss of interest, profit or
revenue by the other party or for any consequential, indirect, incidental,
special, punitive or exemplary damages suffered by the other party, arising
from or related to this Agreement, even if such party has been advised of
the possibility of such losses or damages.
Section 18. Miscellaneous.
--------------
18.1 Insurance. Each party shall maintain at all times and at its
----------
own expense insurance in such amounts, and with such coverage and terms, as
are commercially reasonable in light of the business conducted by such
party.
18.2 Assignment; Sale of Assets or Capital Stock. This Agreement
---------------------------------------------
shall be binding upon and inure to the benefit of the parties hereto, and
the legal representatives, successors in interest and permitted assigns,
respectively, of each such party. This Agreement shall not be assigned in
whole or in part by any party without the prior written consent of the
other party.
22
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18.3 Notices. All notices, requests, demands, applications, services
--------
of process, and other communications that are required to be or may be
given under this Agreement shall be in writing and shall be deemed to have
been duly given if sent by telecopy or facsimile transmission, or delivered
by courier or overnight delivery service, first class mail, postage
prepaid, return receipt requested, to the parties to this Agreement at the
following addresses:
If to Buildscape: Buildscape, Inc.
7800 Belfort Parkway
Jacksonville, Florida 32256
FAX: 904-296-0584
Attention: President
If to the Lumber Company: Wickes Inc.
706 North Deerpath Drive
Vernon Hills, Illinois 60061
FAX: 367-847-3750
Attention: President
or to such other address as the party shall have furnished to the other
party by notice given in accordance with this Subsection 18.3. Such notice
shall be effective (a) if delivered in person or by courier or overnight
delivery service, upon actual receipt by the intended recipient, or (b) if
sent by telecopy or facsimile transmission, on the date of transmission
unless transmitted after normal business hours, in which case on the
following date, or (c) if mailed, upon the date of first attempted
delivery.
18.4 Waiver. No provision of this Agreement shall be deemed to be
-------
waived and no breach excused unless such waiver or consent shall be in
writing and signed by the party that is claimed to have waived or
consented. The failure of a party at any time, or from time to time, to
require performance by the other party of any provision hereof shall in no
way affect the rights of such party thereafter to enforce the same nor
shall the waiver by a party of any breach of any provision hereof by the
other party constitute a waiver of any succeeding breach of such provision,
or a waiver of any provision itself, or a waiver of any other provisions
hereof.
18.5 Severability. This Agreement will be enforced to the fullest
-------------
extent permitted by applicable law. If for any reason any provision of this
Agreement is held to be invalid or unenforceable to any extent, then: (a)
such provision will be interpreted, construed or reformed to the extent
reasonably required to render the same valid, enforceable and consistent
with the original intent underlying such provision; (b) such provision will
be void to the extent it is held to be invalid or unenforceable; (c) such
provision will remain in effect to the extent that it is not invalid or
23
<PAGE>
unenforceable; and (d) such invalidity or unenforceability will not affect
any other provision of this Agreement or any other agreement between the
parties.
18.6 Governing Law. This Agreement shall be governed by and
---------------
construed according to the laws of the State of Florida without regard to
its choice of law provisions. The parties consent to the jurisdiction of
any Florida court located within Duval County and the United States
District Court for the Middle District of Florida (Jacksonville Division)
and waive any right to assert that any such court constitutes an
inconvenient or improper forum.
18.7 Publicity. Neither party shall, without the approval of the
----------
other, make any press release or other public announcement concerning the
transactions contemplated by this Agreement, except as and to the extent
that any such party shall be so obligated by law or by the rules,
regulations or policies of any national securities exchange or association
or governmental entity, in which case the other party shall be advised and
the parties shall use their best efforts to cause a mutually agreeable
release or announcement to be issued; provided, however, that the parties
hereby acknowledge and agree that communications among employees of the
parties and their attorneys, representatives and agents necessary to
consummate the transactions contemplated hereby shall not be deemed a
public announcement for purposes of this Subsection 18.7. Upon the
execution and delivery of this Agreement, the parties hereto will cooperate
in respect of the immediate issuance of a mutually acceptable press release
relating to the transactions contemplated by this Agreement.
18.8 Entire Agreement. All schedules to this Agreement are
------------------
incorporated in and constitute a part of this Agreement. This Agreement
including the schedules hereto and thereto, each as amended from time to
time, constitute the entire understanding between the parties in relation
to the subject matter hereof and supersede all prior discussions,
agreements and representations related to this subject matter, whether oral
or written and whether or not executed by a party. Unless otherwise
provided in this Agreement, no modification, amendment or other change may
be made to this Agreement or any part thereof unless reduced to writing and
executed by authorized representatives of all parties.
18.9 Counterparts. This Agreement may be executed in two or more
-------------
counterparts, each of which will be deemed an original, but all of which
together will constitute one and the same instrument.
18.10 Titles and Subtitles. The titles and subtitles used in this
---------------------
Agreement and in the schedules hereto are used for convenience only and are
not to be considered in construing or interpreting this Agreement.
18.11 Force Majeure. Neither party shall be responsible for a
---------------
failure to meet its obligations under this Agreement to the extent caused
by the following: (a) materially inaccurate data submitted by the other
party; (b) any failure by the other party to meet its obligations stated in
24
<PAGE>
this Agreement; (c) any failure of equipment, facilities or services not
controlled or supplied by such party; or (d) failure(s) caused by acts of
God, acts of nature, riots and other major civil disturbances, strike by
such party's personnel, sabotage, injunctions or applicable laws or
regulations, in each case without breach by such party of any obligations
under this Agreement with regard to either such event or such failure. The
Lumber Company or Buildscape, as applicable, agrees to use its commercially
reasonable efforts to restore performance of its obligations under this
Agreement as soon as reasonably practicable following any such event.
18.12 Injunctive Relief. The parties acknowledge that a material
------------------
breach of this Agreement would cause irreparable harm, the extent of which
would be difficult to ascertain. Accordingly, they agree that, such party
will be entitled to obtain immediate injunctive relief in the event of a
material breach of this Agreement to enjoin such breach pending resolution
pursuant to this Agreement.
18.13 Attorneys' Fees. Subject to the provisions of Section 16
-----------------
hereof, in the event any action is commenced to enforce the provisions of
this Agreement, then the prevailing party in such action shall be entitled
to recover from the other party such prevailing party's costs and expenses,
including attorneys fees incurred in connection with such action.
(SIGNATURE PAGE FOLLOWS)
25
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed on its behalf by its officers thereunto duly
authorized, all as of the date first above written.
BUILDSCAPE, INC.
By_/s/______________________________
----------------------------------
WICKES INC.
By_/s/______________________________
----------------------------------
[CERTAIN CONFIDENTIAL MATERIAL HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE S.EC. PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT ]
26
SETTLEMENT AGREEMENT
This SETTLEMENT AGREEMENT is made as of the 28th day of January, 2000
by and among GREENLEAF TECHNOLOGIES CORPORATION ("Greenleaf"), a Delaware
corporation, with an office at 8834 Capital of Texas Highway North, Suite 150,
Austin, Texas 78759, and RIVERSIDE GROUP, INC. ("Riverside"), a Florida
corporation, CYBERMAX TECH, INC., a Florida corporation ("Cybermax"), CYBERMAX,
INC., a Florida corporation, ("Cybermax, Inc."), wholly owned subsidiaries of
Riverside, Catherine Gray ("Gray") and J. Steven Wilson ("Wilson"), all having
an office at 7800 Belfort Parkway, Suite 100, Jacksonville, Florida.
W I T N E S S E T H:
WHEREAS, Greenleaf entered into an agreement (the "Purchase Agreement")
with Cybermax dated as of September 30, 1998 for the purchase by Greenleaf from
Cybermax of all of the outstanding shares of capital stock (the "Gameverse
Shares") of Gameverse, Inc. ("Gameverse"); and
WHEREAS, as consideration for the Gameverse Shares, Greenleaf issued to
Cybermax 14,687,585 shares of the voting common stock of Greenleaf and options
(the "Greenleaf Shares") and options to purchase an aggregate of 7,314,582
shares of the voting common stock of Greenleaf (the "Greenleaf Options"); and
WHEREAS, Greenleaf has filed a complaint in the United States District
Court for the District of New Jersey (Docket No. 99-5720), wherein Greenleaf has
alleged certain misrepresentations against Riverside, Cybermax, Gameverse, Jared
Nielsen, Catherine Gray and J. Steven Wilson (the "Pending Litigation"), which
all defendants in the Pending Litigation deny and dispute; and
1
<PAGE>
WHEREAS, the parties in the Pending Litigation, without admission of
fault or liability on the part of any of them, have resolved their differences
and desire to enter into a complete and final settlement of all of their claims,
differences and causes of action with respect to the Purchase Agreement and the
claims and disputes which are, or could be, asserted in the Pending Litigation.
NOW, THEREFORE, in exchange for good and valuable consideration,
including the mutual promises set forth herein, the receipt and sufficiency of
which is hereby acknowledged, and intending to be legally bound hereby, the
parties agree as follows:
1. Greenleaf Shares and Options. In full settlement of all claims which
Greenleaf may have against Riverside, Cybermax, Gray and/or Wilson with respect
to the Purchase Agreement and the claims and disputes which are, or could be,
asserted in the Pending Litigation, the parties agree as follows:
a. Riverside and/or Cybermax shall retain Ten Million
(10,000,000) of the Greenleaf Shares and Two Million (2,000,000) of the
Greenleaf Options exercisable at $.25 each pursuant to the terms of a certain
"Option Agreement A" originally dated September 30, 1998 to be amended and
restated in the form attached hereto as Exhibit A; and
b. One Million Six Hundred Eighty-Seven Thousand Five Hundred
Eighty-Five (1,687,585) of the Greenleaf Shares and Five Million Three Hundred
Fourteen Thousand Five Hundred Eighty-Two (5,314,582) of the Greenleaf Options
shall be canceled by Greenleaf without payment to Riverside or Cybermax; and
c. Three Million (3,000,000) of the Greenleaf Shares shall be
placed in escrow (the "Escrow Shares") with Randall S.D. Jacobs, Esq. pursuant
to an escrow agreement acceptable to all parties, and shall be sold upon
mutually agreeable terms pursuant to Rule 144 as in effect under the Securities
2
<PAGE>
Act of 1933, as amended ("Rule 144"). Riverside and Cybermax shall each be
responsible for any state and federal income taxes imposed upon the proceeds of
such sales other than any applicable federal alternative minimum tax ("AMT").
Any such AMT found to be due and owing upon such sales shall be paid from the
proceeds of sale of the Escrow Shares prior to funding the Joint Venture or
distribution to the parties in accordance with the terms of subparagraph 1.d of
this Settlement Agreement; and
d. The proceeds from the sale of the Escrow Shares shall be
used to fund a mutually agreeable joint venture ("Joint Venture") for the
marketing of technology and internet- related products, to be owned in equal
amounts by Greenleaf and Riverside. The parties shall negotiate in good faith
and use their reasonable best efforts to form and operate the Joint Venture in a
mutually beneficial manner. Peter Jegou on behalf of Greenleaf and Ed Salem on
behalf of Riverside shall undertake to resolve any disagreements as to the
formation and operation of the Joint Venture, subject to ratification by the
Board of Directors of the respective companies. In the event the parties fail to
reach agreement with respect to the form and operation of the Joint Venture,
notwithstanding their good faith negotiations and reasonable best efforts, the
proceeds of sale of the Escrow Shares, less any taxes due and owing upon sale,
shall be distributed in equal shares to Greenleaf and Riverside.
2. Grant of Riverside Option. Riverside and Greenleaf shall enter into a
Stock Option Agreement in the form attached hereto as Exhibit B pursuant to
which Riverside shall grant to Greenleaf a non-qualified stock option (the
"Riverside Option Agreement"), that being an option not intended to qualify as
an incentive stock option within the meaning of Section 422A of the Internal
Revenue Code of 1986, as amended (the "Code"), to purchase that number of shares
of Cybermax, Inc. equal to five percent (5%) of the issued and outstanding
shares of Cybermax, Inc. (the "Cybermax, Inc. Shares"). The exercise price for
the Riverside Option shall be One Million Dollars ($1,000,000). The Riverside
3
<PAGE>
Option Agreement shall contain a cashless exercise provision. The Riverside
Option shall be exercisable immediately and at any time prior to 5:30 p.m.,
eastern standard time, on September 30, 2003, in accordance with the terms of
the Riverside Option Agreement.
3. Grant of Exclusivity. Riverside shall, through its subsidiaries
Cybermax, Inc. and Buildscape, Inc. appoint Greenleaf as its exclusive
encription vendor and shall enter into an Exclusivity Agreement for such
services, on an as-needed basis, at fair market value. The parties shall
negotiate in good faith and use their reasonable best efforts to agree to the
terms of an Exclusivity Agreement that will be mutually beneficial.
4. Future Com Agreement. Riverside shall enter into an agreement with
Future Com, a Greenleaf subsidiary, for the use of satellite air time, related
technology, hardware and software, on an as-needed basis, at fair market value.
The parties shall negotiate in good faith and use their reasonable best efforts
to agree to the terms of a Future Com Agreement that will be mutually
beneficial.
5. Riverside, Cybermax and Cybermax, Inc. Representations. Riverside,
Cybermax and Cybermax, Inc. represent and warrants to Greenleaf as follows: a.
Title to the Shares and Options. Riverside is the lawful record and beneficial
owner of the Greenleaf Shares and the Greenleaf Options, and with the exception
of the claims asserted by Greenleaf in the Pending Litigation owns the shares
and options that will be canceled pursuant to subparagraph 1.b of this
Settlement Agreement and the shares that will be deposited into escrow pursuant
to subparagraph 1.c (together the "Unencumbered Shares"), free and clear of all
security interests, liens, encumbrances, claims and equities of every kind, and
which Unencumbered Shares are duly authorized, validly issued and outstanding,
fully paid and nonassessable.
4
<PAGE>
b. No Other Equity Securities. As of the date of this Settlement Agreement,
neither Riverside nor Cybermax or Cybermax, Inc. owns, directly or indirectly
any issued and outstanding equity securities of Greenleaf or securities
convertible or exchangeable for such equity securities.
c. Capacity of and Execution by Riverside, Cybermax and Cybermax, Inc. The
President, any Vice President or Edward B. Salem (authorized signer) of
Riverside have full legal power and capacity to execute, deliver and perform
this Settlement Agreement, and to deliver certificates representing the
Greenleaf Shares and the Greenleaf Options owned by Riverside and have full
legal power to transfer such securities in accordance with the Settlement
Agreement. Without limiting the generality of the foregoing, no authorization,
consent or approval or other order or action of or filing with any court,
administrative agency, or other governmental or regulatory body or authority is
required for the execution and delivery by Riverside, Cybermax or Cybermax, Inc.
of this Settlement Agreement or the consummation by any of them of the
transactions contemplated hereby; this Settlement Agreement has been duly and
validly executed and delivered by Riverside, Cybermax and Cybermax, Inc. and
constitutes the valid and binding obligation of each of them enforceable in
accordance with its terms, except as its enforceability is limited by
bankruptcy, reorganization, insolvency, fraudulent conveyance, moratorium and
similar laws presently or hereafter in effect affecting the enforcement of
creditors' rights generally and subject to general principles of equity; and the
transfer and delivery of the Unencumbered Shares in accordance with this
Settlement Agreement will vest good title to the Shares in Greenleaf or other
transferee, free and clear of all security interests, liens, encumbrances,
claims and equities of every kind other than restrictions on disposition
contained in applicable federal and state securities laws.
5
<PAGE>
d. Conflict with Other Instruments. Neither the execution and delivery of
this Agreement by Riverside, Cybermax or Cybermax, Inc. nor the consummation by
any of them of the transactions contemplated in this Settlement Agreement will
(a) conflict with, or result in a breach of, the terms, conditions or provisions
of, or constitute a default (or an event which would by notice or lapse of time
or both would become a default) or permit acceleration or termination of
obligations under, or result in the creation of a lien or encumbrance on any of
the properties of Riverside, Cybermax or Cybermax, Inc. pursuant to, (i) the
certificate of incorporation or by-laws of either of them or (ii) any indenture,
mortgage, lease, agreement, or other instrument which is material in nature to
which any of them is a party or by which it or they, or any of its or their
properties, may be bound or affected, or (b) violate any law, rule, order or
regulation, material in nature, to which either of them is subject or by which
it or they or its or their properties are bound.
e. Corporate Existence, Power and Authority. Riverside, Cybermax and
Cybermax, Inc. are corporations duly organized, validly existing and in good
standing under the laws of the State of Florida and have all requisite corporate
power and authority to enter into this Settlement Agreement and to carry out the
transactions contemplated in this Settlement Agreement and to carry on their
businesses as now being conducted by them and to own, lease or otherwise hold
their properties.
f. Corporate Action. The execution and delivery of this Settlement
Agreement by Riverside, Cybermax and Cybermax, Inc. and the consummation by
Riverside, Cybermax and Cybermax, Inc. of the transactions contemplated in this
Settlement Agreement have been authorized by all requisite corporation action on
the part of Riverside, Cybermax and Cybermax, Inc.
g. Cooperation In Sale of Shares and Further Assurances. In the event
Greenleaf seeks to sell any Cybermax, Inc. Shares obtained upon exercise of its
its rights under the Riverside Option Agreement, Riverside, Cybermax and
Cybermax, Inc. shall take all necessary and appropriate steps to cooperate
in and assist the sale of such shares pursuant to the provisions of Rule 144 and
any other applicable law, rule or regulation, including without limitation
making Rule 144 available (including fulfilling all periodic reporting require-
ments under Federal securities laws) and causing counsel to issue an appropriate
6
<PAGE>
legal opinion. At any time, and from time to time, within a reasonable time
after written requires by Greenleaf, Cybermax, Inc. will make, execute and
deliver, or cause to be made, executed and delivered, to Greenleaf and, where
appropriate, cause to be recorded and/or filed, any and all such other and
further instruments or documents, or other items as Greenleaf may reasonably
deem necessary or desirable to effectuate or complete the sale of any of the
Cybermax, Inc. Shares issued pursuant to Greenleaf's exercise of rights under
the Riverside Option Agreement.
6. Representations, Warranties and Covenants of Greenleaf. Greenleaf
represents, warrants and covenants to Riverside, Cybermax and Cybermax, Inc. as
follows:
a. Corporate Existence, Power and Authority. Greenleaf is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware and has all requisite corporate power and authority to
enter into this Settlement Agreement and to carry out the transactions
contemplated in this Settlement Agreement and to carry on its business as now
being conducted by it and to own, lease or otherwise hold its properties.
b. Corporate Action. The execution and delivery of this Settlement
Agreement by Greenleaf and the consummation by Greenleaf of the transactions
contemplated in this Settlement Agreement have been authorized by all requisite
corporation action on the part of Greenleaf.
c. Capacity of and Execution by Greenleaf. The President and Secretary of
Greenleaf have full legal power and capacity to execute, deliver and perform
this Settlement Agreement. Without limiting the generality of the foregoing, no
authorization, consent or approval or other order or action of or filing with
any court, administrative agency, or other governmental or regulatory body or
authority is required for the execution and delivery by the Greenleaf of this
Settlement Agreement or Greenleaf's consummation of the transactions
contemplated hereby; this Settlement Agreemen has been duly and validly
7
<PAGE>
executed and delivered by Greenleaf and constitutes the valid and binding
obligation of Greenleaf enforceable in accordance with its terms, except as its
enforceability is limited by bankruptcy, reorganization, insolvency, fraudulent
conveyance, moratorium and similar laws presently or hereafter in effect
affecting the enforcement of creditors' rights generally and subject to general
principles of equity.
d. Conflict with Other Instruments. Neither the execution and delivery of
this Settlement Agreement by Greenleaf nor the consummation by Greenleaf of the
transactions contemplated in this Settlement Agreement will (a) conflict with,
or result in a breach of, the terms, conditions or provisions of, or constitute
a default (or an event which would by notice or lapse of time or both would
become a default) or permit acceleration or termination of obligations under, or
result in the creation of a lien or encumbrance on any of the properties of
Greenleaf pursuant to, (i) the certificate of incorporation or by-laws of
Greenleaf or (ii) any indenture, mortgage, lease, agreement, or other instrument
which is material in nature to which Greenleaf or Greenleaf is a party or by
which it, or any of its properties, may be bound or affected, or (b) violate any
law, rule, order or regulation, material in nature, to which Greenleaf or either
Greenleaf is subject or by which it or its properties are bound.
e. Cooperation In Sale of Shares and Further Assurances. In the event
Riverside seeks to sell any Greenleaf Shares retained under this Settlement
Agreement, or obtained upon exercise of its rights under "Option Agreement A" as
modified by this Settlement Agreement, Greenleaf shall take all necessary and
appropriate steps to cooperate in and assist the sale of such shares pursuant to
the provisions of Rule 144 and any other applicable law, rule or regulation,
including without limitation making Rule 144 available (including fulfilling all
periodic reporting requirements under Federal securities laws) and causing
counsel to issue an appropriate legal opinion. At any time, and from time to
time, within a reasonable time after written request by Riverside, Greenleaf
will make, execute and deliver, or cause to be made, executed and delivered,
8
<PAGE>
to Riverside and, where appropriate, cause to be recorded and/or filed, any and
all such other and further instruments or documents, or other items as Riverside
may reasonably deem necessary or desirable to effectuate or complete the sale of
any of the Greenleaf Shares or shares of Greenleaf common stock issued pursuant
to Riverside's exercise of rights under "Option Agreement A" or any shares of
Greenleaf common stock obtained by Riverside pursuant to stock splits, stock
dividends or other corporate action.
7. Cooperation in the Event of Nielsen Claim. In the event Jared
Nielsen commences any suit or proceeding against Riverside, Cybermax, Cybermax,
Inc. or Greenleaf relating to or regarding this Settlement Agreement, the
Purchase Agreement, the Greenleaf Shares, the Greenleaf Options or Gameverse, or
Jared Nielsen claims any right, title or interest in any of the transactions
between Greenleaf on the one hand and Riverside, Cybermax or Cybermax, Inc. on
the other hand, Greenleaf, Riverside, Cybermax and Cybermax, Inc., their
officers, employees, agents and representatives shall cooperate with each other
in the defense of any such suit, proceeding or claim. Such cooperation shall
include without limitation making such persons available for interviews,
providing documents for inspection, making out affidavits or certifications and
giving testimony at any trial or hearing.
8. Indemnification Against Nielsen Claim. Riverside, Cybermax and,
Cybermax, Inc. agree to indemnify and hold harmless Greenleaf and its affiliates
and their officers, employees, agents and representatives, at any time without
limitation, against, and in respect of, liabilities, contingent or otherwise,
losses, claims, costs, or damages, or any amounts which may become payable,
resulting from or arising out of, or in connection with any claims by Jared
Nielsen relating to Gameverse, including, but not limited to, any ownership
interest in Gameverse or in any of the patents, trademarks, licenses and
copyrights listed on Exhibit C hereto (the "Nielsen Claim"). Greenleaf shall
give Riverside, Cybermax and Cybermax, Inc. a reasonable opportunity, at their
9
<PAGE>
expense, of defending or settling the Nielsen Claim, subject to the right of
Greenleaf to participate fully in such defense at its own costs. To the extent
that they do not agree to defend or settle such claim, Greenleaf shall have the
right to defend or settle the same and hold Riverside, Cybermax and Cybermax,
Inc. responsible pursuant to this indemnification.
9. Forgiveness of Debt. Riverside agrees to forgive and discharge
Greenleaf's current indebtedness to Riverside in the amount of $111,820
representing reimbursement for employee expenses paid by Riverside subsequent to
the closing of the Purchase Agreement in or about September 1998.
10. Release and Stipulation of Dismissal. Greenleaf, Riverside,
Cybermax , Cybermax, Inc., Gray and Wilson shall execute a Release in the form
attached hereto as Exhibits D-1 through D-4 and counsel for the parties hereto
shall enter into a Stipulation of Dismissal with prejudice of the Pending
Litigation in the form attached hereto as Exhibit E. It is the intention of the
parties that the Releases and Stipulation of Dismissal shall bar and preclude
forever the claims subject to the Releases and Stipulation of Dismissal and that
the Pending Litigation shall not be reopened or reinstated for any reason,
including without limitation any claim of breach of this Settlement Agreement,
claim that this Settlement Agreement, the Releases or Stipulation was procured
by misrepresentation or fraud or claim that the consideration obtained by
Greenleaf herein (including the Riverside Option) is lacking or inadequate. In
the event of a claim of breach of this Settlement Agreement, the parties'
exclusive right and remedy shall be the commencement of a separate action or
arbitration in accordance with the terms of paragraph 14 of this Settlement
Agreement.
11. No Admission of Liability. This Settlement Agreement is not
an admission on the part of any party of any fault or liability whatsoever or
that any party in any way acted improperly or unlawfully.
10
<PAGE>
12. Notices. All notices and other communications required or relating
to this Settleme Agreement shall be in writing and shall be deemed to have been
given when it is personally delivered, telecopied, deposited in the United
States mails, by registered or certified mail, or sent by reputable overnight
courier service, to the respective party at the address set forth at the
beginning of this Settlement Agreement or such other address as a party shall
provide pursuant to this paragraph.
13. Severability. Should any provisions of this Settlement Agreement
be held to be illegal, void or unenforceable, such provision shall be of no
force and effect. However, the illegality or unenforceability of any such
provision shall have no effect upon, and shall not impair the enforceability of,
any other provision of this Settlement Agreement.
14. Governing Law/Jurisdiction. This Settlement Agreement shall be
governed by and construed in accordance with the laws of the State of New
Jersey, excluding the choice of law rules thereof. The parties agree that the
courts of the State of New Jersey and the U.S. District Court sitting in the
State of New Jersey are to have exclusive jurisdiction over this Settlement
Agreement with the exception of any claim or dispute arising under paragraphs 3
and 4 of this Settlement Agreement. In the event of a claim or dispute under
either of those paragraphs, the parties agree tosubmit such claim or dispute to
binding arbitration in New Jersey in accordance with the Commercial Rules of the
American Arbitration Association then in effect.
11
<PAGE>
15. Amendments. This Settlement Agreement may only be changed or
amended by an written agreement signed by the parties hereto.
16. Binding Effect. This Settlement Agreement shall be binding and
inure to each of the parties, and their respective successors and assignees.
17. Assignability. This Settlement Agreement is not assignable by
a party without theprior written consent of the other party.
18. Counterparts. This Settlement Agreement may be executed in one
or more counterparts, each of which shall be deemed an original, but all of
which taken together shall constitute one and the same Settlement Agreement.
19. Waiver of Enforcement. The failure of any party to enforce at
and time any of the provisions of this Settlement Agreement shall not be
construed to be a waiver of any such provision or of any other provision in this
Settlement Agreement, nor in any way effect the validity of this Settlement
Agreement or the right of any party to enforce each and every provision in the
future. No waiver of any breach of this Settlement Agreement shall be held to be
a waiver of any other or subsequent breach or affect the right of a party at a
later time to enforce same. Any party may, at its sole option, waive provision
of this Settlement Agreement, provided such waiver is in writing.
20. Descriptive Headings. All section and subsection headings and
titles contained herein are inserted for convenience of reference only and are
to be ignored in any construction, interpretation or enforcement of the
provisions hereof.
21. Independent Counsel. The parties acknowledge and agree that
they have been represented by counsel or had the opportunity to consult with
independent counsel in connectionwith this Settlement Agreement and the terms
12
<PAGE>
and conditions ofthis Settlement Agreement, and that they have had the
opportunity to review this Settlement Agreement with counsel of their choosing.
The parties further acknowledge that Greenleaf has been represented by the law
firm of Greenbaum, Rowe, Smith, Ravin, Davis, & Himmel LLP, and Riverside,
Cybermax and Cybermax, Inc. have been represented by the firm of Saiber
Schlesinger Satz & Goldstein LLC.
22. Entire Agreement. This Settlement Agreement constitutes the
complete understanding and agreement of the parties hereto with respect to the
matters contained herein. All prior agreements between the parties, including
without limitation the Purchase Agreement, are superseded by this Settlement
Agreement and are of no force or effect except as stated herein. By signing
below, the parties indicate that they have carefully read and understood the
terms of this Settlement Agreement, enter into the Settlement Agreement
13
<PAGE>
knowingly, voluntarily and of their own free will, understand its terms and
significance and intend to abide by its provisions without exception.
IN WITNESS WHEREOF, this Settlement Agreement has been executed as of
the date and year first above written.
GREENLEAF TECHNOLOGIES CORPORATION
By: _______________________________
RIVERSIDE GROUP, INC.
By: _______________________________
CYBERMAX TECH, INC.
By: _______________________________
CYBERMAX, INC.
By: _______________________________
-------------------------------
Catherine Gray
-------------------------------
J. Steven Wilson
14
<PAGE>
<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, Inc. Florida
Buildscape, Inc. Florida
</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), of our report dated April
14, 2000 relating to the finanacial statements, which appears in the Annual
Report to Shareholders, which is incorporated in this Annual Report on this Form
10-K. We also consent to the incorporation by reference of our reort dated April
14, 2000 relating to the financial statements which appear in this Form 10-K.
PricewaterhouseCoopers LLP
Jacksonville, Florida
April 14, 2000
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Riverside Group, Inc. and Subsidiaries condensed consolidated balance sheet and
condensed consolidated statement of operations and is qualified in its entirety
by reference to such financial statements
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<PERIOD-TYPE> YEAR
<EXCHANGE-RATE> 1.0
<CASH> 277
<SECURITIES> 0
<RECEIVABLES> 259
<INVENTORY> 0
<ALLOWANCES> 0
<CURRENT-ASSETS> 585
<PP&E> 911
<DEPRECIATION> 571
<TOTAL-ASSETS> 26,183
<CURRENT-LIABILITIES> 14,001
<BONDS> 0
0
0
<COMMON> 477
<OTHER-SE> 213
<TOTAL-LIABILITY-AND-EQUITY> 26,183
<SALES> 1,620
<TOTAL-REVENUES> 1,397
<CGS> 559
<TOTAL-COSTS> 559
<OTHER-EXPENSES> 7,024
<LOSS-PROVISION> 91
<INTEREST-EXPENSE> 2,642
<INCOME-PRETAX> (2,678)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,678)
<DISCONTINUED> 0
<CHANGES> 0
<EXTRAORDINARY> 0
<NET-INCOME> (2,678)
<EPS-BASIC> (.52)
<EPS-DILUTED> (.52)
</TABLE>
