UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File
For Quarter Ended September 30, 2000 Number 0-9209
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RIVERSIDE GROUP, INC.
(Exact name of registrant as specified in its charter)
Florida 59-1144172
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7800 Belfort Parkway, Jacksonville, Florida 32256
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code number
904-281-2200
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Indicate by a check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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On November 10, 2000, there were 4,767,123 shares of the Registrant's common
stock outstanding.
<PAGE>
RIVERSIDE GROUP, INC.
INDEX
<TABLE>
<CAPTION>
Page
PART I. FINANCIAL INFORMATION Number
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<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
September 30, 2000 (Unaudited)
and December 31, 1999 3
Condensed Consolidated Statements
of Operations
Three and Nine Months ended
September 30, 2000 and 1999 (Unaudited) 4
Condensed Consolidated Statements of
Cash Flows
Nine months ended
September 30, 2000 and 1999 (Unaudited) 5
Notes to Condensed Consolidated
Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 18
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 28
PART II.
Item 2. Changes in Securities 29
Item 5. Other Information 29
Item 6. Exhibits and Reports on Form 8-K 29
2
</TABLE>
RIVERSIDE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
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ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 131 $ 277
Accounts receivable, less allowance for doubtful 335 259
accounts of $21 at 2000 and $3 at 1999
Investment in Greenleaf Technologies Corp. 5,073 1,253
Notes receivable 26 30
Prepaid expenses 565 19
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Total current assets 6,130 1,838
Investment in Wickes Inc. 15,157 15,799
Investment in Buildscape Inc. (947) (947)
Real Estate held for sale 6,755 8,996
Property, plant and equipment, net 213 340
Other assets (net of accumulated amortization of
$32 in 2000 and $35 at 1999) 109 157
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Total assets $ 27,417 $ 26,183
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LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current debt and current maturities of long-term debt $ 11,656 $ 11,813
Accounts payable 602 430
Accrued liabilities 1,032 1,758
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Total current liabilities 13,290 14,001
Long-term debt 335 469
Mortgage debt 11,345 11,345
Net liabilities of discontinued operations 18 21
Other long-term liabilities 84 83
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Total liabilities 25,072 25,919
Commitments and contingencies
COMMON STOCKHOLDERS' EQUITY :
Common stock, $.10 par value; 20,000,000 shares authorized; 477 477
4,767,123 issued and outstanding in 2000 and 1999
Additional paid in capital 16,468 16,468
Accumulated other comprehensive income 5,073 1,253
Retained earnings (deficit) (19,673) (17,934)
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Total common stockholders' equity 2,345 264
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Total liabilities and common stockholders' equity $ 27,417 $ 26,183
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</TABLE>
See Accompanying Notes to Condensed Consolidated Financial Statements.
3
RIVERSIDE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPT 30, NINE MONTHS ENDED SEPT 30,
--------------------------- --------------------------
2000 1999 2000 1999
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<S> <C> <C> <C> <C>
REVENUES:
Sales and service revenues $ 500 $ 518 $ 1,248 $ 1,269
Net investment income (loss) (22) 17 (49) (19)
Net realized investment gains 477 18 1,640 18
Other operating income 43 (5) 90 44
----------- ----------- ----------- -----------
998 548 2,929 1,312
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COSTS AND EXPENSES:
Cost of sales 281 236 569 454
Provision for doubtful accounts 6 120 17 124
Depreciation, goodwill and trademark amortization 59 145 184 299
Selling, general and administrative expenses 401 2,245 1,546 5,561
Interest expense 767 691 2,101 1,994
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1,514 3,437 4,417 8,432
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EARNINGS (LOSSES) BEFORE EQUITY IN EARNINGS (LOSSES) OF
RELATED PARTIES (516) (2,889) (1,488) (7,120)
Equity in earnings (losses) of Wickes, Inc. 629 1,840 (251) 1,693
----------- ----------- ----------- -----------
NET EARNINGS (LOSSES) $ 113 $ (1,049) $ (1,739) $ (5,427)
=========== =========== =========== ===========
BASIC AND DILUTED EARNINGS (LOSSES) PER COMMON SHARE:
Net earnings (losses) $ 0.02 $ (0.20) $ (0.37) $ (1.04)
Weighted average number of common shares
used in computing earnings (losses) per share 4,759,123 5,213,186 4,759,123 5,213,186
</TABLE>
See Accompanying Notes to Condensed Consolidated Financial Statements.
4
RIVERSIDE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDING
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2000 1999
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CASH FLOW FROM OPERATING ACTIVITIES
<S> <C> <C>
Net loss $ (1,739) $ (5,427)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation expense 151 196
Amortization expense 33 103
Amortization of bond discount -- 173
Provision for doubtful accounts 17 124
Gain on sale of fixed assets 4 ---
Net realized investment gains (1,535) (17)
Equity in earnings (losses) of unconsolidated subsidiaries 251 (1,693)
Change in other assets and liabilities:
Increase in accounts receivable (93) (131)
Decrease in notes receivable --- 167
Increase in other assets (526) (300)
Increase (decrease) in accounts payable and accrued liabilities (554) 1,775
Increase in discontinued operations, other liabilities
and current income taxes (6) (177)
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NET CASH USED IN OPERATING ACTIVITIES (3,997) (5,207)
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CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of investments:
Property, plant and equipment (20) (291)
Investment in real estate --- ---
Proceeds from sales of investments:
Property, plant and equipment 4 2
Investment in real estate 2,381 79
Securities of Greenleaf Technologies Corp. 1,309 ---
Securities of Wickes Inc. 468 1,186
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NET CASH PROVIDED BY INVESTING ACTIVITIES 4,142 976
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CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of debt (513) (420)
Increase in borrowings 222 5,182
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NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (291) 4,762
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (146) 531
Cash and cash equivalents at beginning of period 277 509
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Cash and cash equivalents at end of period $ 131 $ 1,040
=========== ===========
Supplemental schedule of cash flow information:
Non-cash compensation expense (Greenleaf) options $ 105 $ ---
</TABLE>
See Accompanying Notes to Condensed Consolidated Financial Statements.
5
<PAGE>
RIVERSIDE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Financial Statement Presentation
The condensed consolidated financial statements present the financial
position, results of operations, and cash flows of Riverside Group, Inc. and its
wholly-owned and majority-owned subsidiaries (the "Company"). The Company no
longer owns a majority interest in Buildscape, Inc. ("Buildscape") and at
October 21, 1999, the Company began to report its investment in Buildscape on
the equity method (see Note 3. "Investment in Buildscape"). Accordingly, the
Company's consolidated balance sheet as of December 31, 1999 does not include
the accounts of Buildscape. The Company's condensed consolidated statements of
operations and cash flows for the period ending September 30, 1999 include
Buildscape on a consolidated basis.
The condensed consolidated balance sheets as of September 30, 2000, the
condensed consolidated statements of operations for the three and nine months
ended September 30, 2000 and 1999 and the condensed consolidated statements of
cash flows for the nine months ended September 30, 2000 and 1999, have been
prepared by the Company without audit. In the opinion of management, all
adjustments (which include only normal recurring adjustments) necessary to
present fairly the financial position, results of operations and cash flows as
of September 30, 2000, and for all periods presented have been made. The results
for the three month period ended September 30, 2000 are not necessarily
indicative of the results to be expected for the full year or for any interim
period.
The Company accounts for its investment in Greenleaf Technologies
Corporation ("Greenleaf") securities according to the provisions of FAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." This
statement requires that all applicable investments be classified as trading
securities, available-for-sale, or held-to-maturity securities. Greenleaf
securities have been classified as available-for-sale securities, and as such,
will be reported at fair value based upon the closing price on the exchange on
which they are traded on the last day of the quarter. The unrealized gains and
losses are excluded from earnings, but reported within shareholders' equity in
accumulated other comprehensive income (net of the effect of income taxes) until
they are sold. At the time of sale, any gains or losses, calculated by the
specific identification method, will be recognized as a component of operating
results.
Certain information and footnote disclosures normally included in
consolidated financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. It is suggested that these
condensed consolidated financial statements be read in conjunction with the
consolidated financial statements, the related Auditor's report, and notes
thereto included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1999 filed with the Securities and Exchange Commission.
6
<PAGE>
Comprehensive Income
____________________
Changes in the components of other comprehensive income and in
accumulated other comprehensive income for the first nine months of 2000 are as
follows:
<TABLE>
<CAPTION>
Unrealized Total
Gains on Comprehensive
Securities Income
<S> <C> <C>
Balance at December 31, 1999 $ 1,253 $ (1,425)
Change during the first nine months of 2000 3,820 2,081
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Balance at September 30, 2000 $ 5,073 $ 656
========= ===========
</TABLE>
The change in comprehensive income includes the change in unrealized gains and
the net loss for the first nine months of 2000.
Earnings Per Share
__________________
Basic and diluted earnings per common share are calculated in
accordance with Statement of Financial Accounting Standards No. 128, "Earnings
Per Share". Earnings per share is based on the weighted average number of shares
of common stock outstanding during each period (4,759,123 shares in 2000 and
5,213,186 shares in 1999). In periods where net losses are incurred, diluted
weighted average common shares are not used in the calculation of diluted
earnings per share as it would have an anti-dilutive effect on earnings per
share. In addition, during the 3rd quarter of 2000, options to purchase 50,000
shares were not included in the diluted earnings per share since the options'
exercise price were greater than the average market price.
2. INVESTMENT IN WICKES INC.
As of September 30, 2000, Riverside beneficially owned 2,918,543 shares
of Wickes Inc.'s ("Wickes") common stock, which constituted 35% of Wickes'
outstanding voting and non-voting common stock.
Summary financial information of Wickes for the third quarter of 2000
follows (in thousands):
<TABLE>
<CAPTION>
(unaudited) (audited)
Sept. 23, 2000 Dec. 25, 1999
-------------- -------------
<S> <C> <C>
Balance Sheet Data:
Current assets $ 241,212 $ 241,835
Total assets 335,065 334,636
Current liabilities 86,301 79,312
Long-term debt and other long-term liabilities 217,349 224,505
Common stockholders' equity 31,415 30,819
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
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(unaudited) (unaudited) (unaudited) (unaudited)
Sept. 23, Sept. 25, Sept. 23, Sept. 25,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Income Statement Data:
Net sales $ 281,942 $ 325,371 $ 777,421 $ 805,305
Cost of sales 219,707 259,916 609,818 641,108
Gross profit 62,235 65,455 167,603 164,197
Selling, general &
administrative 50,829 50,524 144,645 136,997
Other expenses 2,315 1,803 5,692 4,700
Other income (937) (1,337) (2,640) (4,380)
Income before income tax 3,865 8,588 1,730 9,743
Net income 2,136 5,044 469 5,355
</TABLE>
3. INVESTMENT IN BUILDSCAPE
On October 21, 1999, Imagine Investments, Inc. ("Imagine") made a $10
million investment in Buildscape, which prior to the investment was a
wholly-owned subsidiary of the Company. Imagine converted $3 million of
convertible debt into common stock, exchanged 520,000 shares of Riverside common
stock for Buildscape common stock and purchased an additional $5 million of
Buildscape Series A Preferred Stock.
In connection with the transaction, Imagine was granted the right to
vote the Company's common shares on all matters with the exception of a change
in control. As of October 22, 1999, the Company owned 62% of the Buildscape
common stock; however, because the Company's voting rights were controlled by
Imagine as of October 22, 1999, the Company accounted for its investment in
Buildscape on the equity method. The Company retained 3,119,067 outstanding
shares of Buildscape's common stock. As a result of this transaction, the
Company owned (before Buildscape employee's stock options) 47% of Buildscape on
a fully converted basis. Imagine owned 38% of the common and 100% of the
preferred stock of Buildscape, or 53% on a fully converted basis.
On May 12, 2000, Buildscape entered into a stock purchase agreement
with Imagine and the Dow Chemical Company ("Dow") pursuant to which Dow
purchased Series A Preferred Stock and common stock of Buildscape from Imagine
and also purchased newly issued Series B Preferred Stock directly from
Buildscape. As a result of these transactions, Imagine's right to vote the
Company's common shares of Buildscape was terminated. Dow purchased one tranche
of Series B Preferred Stock and will purchase a second tranche upon the
completion of certain milestones by Buildscape. Dow also has an option to
acquire additional shares in Buildscape that will increase its ownership to
50.1%. Upon the completion of all of these transactions, Riverside's ownership
in Buildscape will be reduced from 47% to 35%, on a fully converted basis.
8
<PAGE>
Summary financial information of Buildscape for the third quarter of
2000 follows (in thousands):
<TABLE>
<CAPTION>
(unaudited) (audited)
September 30, 2000 December 30, 1999
------------------ -----------------
<S> <C> <C>
Balance Sheet Data:
Current assets $ 2,573 $ 2,677
Total assets 5,072 3,587
Current liabilities 2,052 1,592
Common stockholders' equity 3,020 1,995
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
(unaudited) (unaudited)
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Income Statement Data:
Net sales $ 326 $ 207 $ 575 $ 386
Cost of goods 294 191 490 314
Gross profit 32 16 85 72
Selling, general & administrative 3,952 1,725 9,189 4,142
Other expenses -- 79 10 162
Other income (66) -- (138) --
Loss before income tax (3,854) (1,788) (8,976) (4,232)
Net loss (3,854) (1,788) (8,976) (4,232)
</TABLE>
4. INVESTMENT IN GREENLEAF
As of September 30, 1998, the Company completed a transaction with
Greenleaf, based in Austin, Texas, whereby the Company acquired common shares of
Greenleaf in exchange for 100% of the common stock of the Company's former
wholly-owned subsidiary, Gameverse, Inc. As a result of Greenleaf's
dissatisfaction with the transaction, on January 28, 2000, the Company and
Greenleaf executed a Settlement Agreement (the "Greenleaf Settlement"). In the
Greenleaf Settlement, the Company retained 10,000,000 shares of the 14,687,585
shares that it had originally received. The Company also retained a five year
option to acquire 2,000,000 additional newly issued shares of Greenleaf common
stock at an exercise price of $.25 per share. In addition to the 10,000,000
retained shares, 3,000,000 of the Greenleaf shares are held in an escrow account
(the "Escrow Shares"), pursuant to an Escrow Agreement acceptable to Greenleaf
and the Company. The proceeds from the sale of the Escrow Shares are to be used
to fund a mutually agreeable joint venture for the marketing of technology and
internet-related products, to be owned in equal amounts by Greenleaf and the
Company. In connection with the settlement, Riverside granted Greenleaf a stock
option to purchase 5% of the issued and outstanding shares of Cybermax, Inc.
9
<PAGE>
("Cybermax"), a wholly-owned subsidiary of the Company. The exercise price is
$1,000,000 and the expiration date of the option is September 30, 2003. In
addition, the Company entered into an agreement with a subsidiary of Greenleaf,
Future Com., South Florida, Inc. for use of satellite air time, related
technology, hardware and software, on an as-needed basis, at fair market value.
INVESTMENT SECURITIES - AVAILABLE FOR SALE
In accordance with SFAS 115 and Rule 144, under the Securities Act of
1933, as amended (the "'33 Act") 4,611,786 shares of the Company's common stock
in Greenleaf are classified as available for sale as of September 30, 2000. The
cost basis is $0 and the estimated fair market value is $5,073,000, resulting in
gross unrealized gains of $5,073,000. Sales of Greenleaf shares are limited by
Rule 144 under the '33 Act to (i) the greater of the average weekly reported
volume of trading in such securities during the four calendar weeks preceding
the filing of Form 144 or(ii) 1% of Greenleaf's outstanding shares as of the
most recent statement published by issuer. Based on the Company's intention to
sell the maximum number of shares allowed in order to fund current operations
and debt, such shares have been classified as available for sale and accordingly
the value of such shares has been reflected as a component of comprehensive
income, net of applicable tax of $0. No taxes have been reserved for since the
Company has available net operating loss carryforwards and strategies which
would result in no tax liability upon the sale of these securities.
5. COMMITMENTS AND CONTINGENCIES
WICKES INC.
As of September 23, 2000, Wickes had accrued approximately $98,000 for
remediation of certain environmental and product liability matters, principally
underground storage tank removal.
Many of the sales and distribution facilities presently and formerly
operated by Wickes contained underground petroleum storage tanks. All such tanks
known to Wickes located on facilities owned or operated by Wickes have been
filled or removed in accordance with applicable environmental laws in effect at
the time. As a result of reviews made in connection with the sale or possible
sale of certain facilities, Wickes has found petroleum contamination of soil and
ground water on several of these sites and has taken, or 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.
In prior periods, Wickes had been identified as having used two landfills
which are now Superfund clean up sites for which requests for reimbursement of a
portion of the clean-up costs were submitted. These issues have been settled and
Wickes has been relieved of responsibility.
10
<PAGE>
Wickes is one of many defendants in two multi-plaintiff suits filed in
August of 1996 by approximately 200 claimants for unspecified damages as a
result of health problems claimed to have been caused by inhalation of silica
dust, a byproduct of concrete and mortar mix, allegedly generated by a cement
plant with which Wickes has no connection other than as a customer. Wickes has
entered into a cost sharing agreement with its insurers, and any liability is
expected to be minimal.
Wickes is one of many defendants in approximately 200 actions, each
seeking unspecified damages, in various Michigan state courts. These actions are
aimed at 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 30
similar actions for insignificant amounts, and another 245 of these actions have
been dismissed. As of September 23, 2000 none of these suits have made it to
trial.
Losses in excess of the amounts accrued as of September 23, 2000 are
possible but an estimate of these amounts cannot be made.
Wickes is a defendant in a lawsuit resulting from a 1998 accident
involving an employee truck driver that resulted in personal injuries to a third
party. Plaintiffs seek compensatory damages in an unspecified amount. Recently,
plaintiffs have amended their complaint to include a claim for punitive damages
in an unspecified amount, for which insurance coverage may or may not be
available.
Wickes' assessment of the matters described in this note and other
forward-looking statements in this Form 10-Q are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995
("Forward-Looking Information") and are inherently subject to uncertainty. The
outcome of the matters described in this note may differ from Wickes' assessment
of these matters as a result of a number of factors including, but not limited
to, matters unknown to Wickes at the present time, development of losses
materially different from Wickes' experience, Wickes' ability to prevail against
its insurers with respect to coverage issues to date, the financial ability of
those insurers and other persons from whom Wickes may be entitled to indemnity,
and the unpredictability of matters in litigation.
THE COMPANY AND WICKES
The Company and Wickes are involved in various other legal proceedings
which are incidental to the conduct of their businesses. The Company does not
believe that any of these proceedings will have a material adverse effect on the
Company.
In onnection with the sale of Dependable Insurance Company, a former
property and casualty subsidiary of the Company, 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 regard to time limits and
11
<PAGE>
maximum amounts. American Financial Acquisition Corporation subordinated
debentures in the amount of $2.1 million are pledged as collateral on these
indemnities. Although future loss development will occur over a number of years,
the Company believes, based on all information presently available, that these
indemnities will not have a material adverse effect on the Company's financial
position or results of operations.
On December 1, 1997, the Company completed the sale of its mortgage
lending operation to an unrelated third party. The Company did not realize any
gain or loss from the transaction, but agreed to indemnify the purchaser against
losses on the construction loan portfolio that was transferred. The Company
currently has 62,500 shares of its Wickes' common stock pledged as collateral
for this indemnification obligation. As the construction loan portfolio
decreases, the shares held as collateral will be released. The Company believes
that these indemnities will not have a material adverse effect on the Company's
financial position or results of operations.
LIQUIDITY AND MANAGEMENT'S PLANS
The Company's $1.8 million debt to Imagine that was due to mature on
August 31, 2000 has been extended to December 15, 2000 and increased for the
amount of unpaid interest and refinancing costs of $221,000. The Company has
entered into a Amendment to Forbearance Agreement with the agent for its 11%
Noteholders that will allow the principal and interest that was due on the 11%
Notes on September 30, 2000 to be paid on December 31, 2000. The terms of this
agreement provide that (i) the Company will continue to sell Greenleaf common
stock in a reasonable manner, (ii) the Company will apply the proceeds from such
sales first to the unpaid interest and second to the principal, (iii) the
interest rate will remain at 17% and the Noteholders will receive a second lien
behind Imagine on the 3,119,067 shares of Buildscape common stock. The Company
continues to have discussions with other present and prospective lenders
regarding refinancing all or a portion of these debts. However, there can be no
assurance that the Company will be able to refinance any of these debts prior to
the extended due dates for these loans.
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. The Company is primarily
a holding company, which derives its financial resources through asset sales,
additional borrowings or other financings. As described below, the principal
source of funds in the past has been borrowings and sales of shares of Wickes
common stock. However, because the Company has executed the Greenleaf Settlement
(see Note 4, "Investment in Greenleaf"), the Company is now able to sell shares
of its Greenleaf stock to cover some of its debt obligations, subject to the
limitations and restrictions described below. The Company is currently working
on additional options as discussed below. The primary use of funds is interest
and principal payments on the Company's debt and to fund the operations of its
wholly-owned subsidiary, Cybermax. Cybermax is generating sales and the Company
projects that by the end of this year, Cybermax will generate cash from
operations sufficient to fund its operations. However, there can be no assurance
that this will occur.
The Company estimates that as of November 9, 2000, it had approximately
$436,000 of accounts payable and other current liabilities (excluding interest
payable), approximately $301,000 of which are past due. In March of 2000, the
12
<PAGE>
Company and Wickes renegotiated the terms of the Company's note to Wickes,
deferring all principal payments due for one year, including the delinquent
principal payments for November of 1999 and February of 2000.
As stated above, the two assets that the Company may sell to cover
immediate cash needs are Wickes and Greenleaf common stock. However, as of
September 30, 2000, all of the Company's 2,918,543 shares of Wickes common stock
were pledged to secure various obligations of the Company. On the closing of the
Imagine short-term loan, Imagine released 81,970 shares of Wickes common stock,
thereby permitting the Company to sell such shares. Imagine has now released
another 81,720 shares of Wickes common stock that the Company will sell in the
market and use the proceeds to cover payables and current operating costs. The
Company currently owns 9,140,000 shares of Greenleaf common stock and has a five
year option to purchase two million shares at $0.25 per share. All 9,140,000
shares owned are pledged to secure the Company's 11% Notes, and any proceeds of
sale are required to be applied as discussed above. The Company owns an
additional three million shares of Greenleaf common stock that are held in an
escrow account, pursuant to an escrow agreement between the Company and
Greenleaf (see Note 4. "Investment in Greenleaf"). Through November 9, 2000, the
Company sold 140,000 shares of the Greenleaf escrow shares for approximately
$151,000, of which $75,500 was paid to Greenleaf. Pursuant to the escrow
agreement in October 0f 2000, the Company and Greenleaf began investing the
proceeds of the escrow stock sales in joint ventures.
The Company has been selling shares of Wickes and Greenleaf common
stock to meet the immediate cash requirements of interest due and operations.
Through November 9, 2000, the Company has sold 81,970 shares of Wickes common
stock and 860,000 shares of Greenleaf common stock for proceeds of approximately
$476,000 and $1,385,000, respectively. Proceeds from the sale of Wickes common
stock were used to pay the interest due to Wickes and to fund current operating
costs. All proceeds from the sale of Greenleaf common stock, other than the
escrow shares, are used to pay the 11% Noteholders as discussed in Note 6. "Long
Term and Mortgage Debt ."
The Company's $11.3 million of real estate indebtedness is secured by
the Company's real estate and 2,016,168 shares of Wickes common stock.
Additional collateral would be required in the event there is any collateral
deficit, at any quarterly valuation date, which would depend upon factors
including the market value of Wickes' common stock and the timing and amount of
real estate sales.
In June 2000, the Company sold 6.83 acres of its Florida real estate,
which generated proceeds of approximately $1.6 million. The entire proceeds were
used to pay the interest due on the Company's mortgage debt and a prepayment of
interest. In September 2000, the Company sold 8.8 acres of its Atlanta real
estate, which generated proceeds of approximately $861,000. As of November 9,
2000, the Company has made a prepayment of interest of approximately $400,000 on
its mortgage debt.
The Company currently has 45 acres of its Atlanta real estate under
contract to sell. All sales proceeds, estimated at $7 million (after closing
13
<PAGE>
costs), will be used to pay interest, real estate taxes and pay down principal
on the current mortgage debt of $11.3 million. The Company previously had a
contract to sell all remaining acres scheduled for a May closing, however, the
buyer was unable to meet the terms of the sale and it was cancelled.
In October 2000, the Company sold its remaining Florida property for
approximately $309,000. These proceeds were used to fund the Company's current
operations.
The Company's assessment of the matters described in this Section and
other Forward-Looking Information is inherently subject to uncertainty. The
outcome of certain matters described in this Section may differ from the
Company's assessment of these matters as a result of a number of factors
including but not limited to: matters unknown to the Company at the present
time, development of losses materially different from the Company's experience,
Wickes' ability to prevail against its insurers with respect to coverage issues
to date, the financial ability of those insurers and other persons from whom
Wickes may be entitled to indemnity, and the unpredictability of matters in
litigation.
In addition, the discussion above of the Company's future operations,
liquidity needs and sufficiency constitutes Forward-Looking Information and is
inherently subject to uncertainty as a result of a number of risk factors
including, among other things: (i) the success of, and level of cash flow
generated by Cybermax, (ii) the Company's ability to achieve the level of real
estate sales required to meet scheduled real estate debt principal and interest
payments and to avoid the requirement that the Company provide additional
collateral for this debt, (iii) the Company's ability to borrow, which may
depend upon, among other things, the trading price of Wickes common stock, the
value and liquidity of the Company's Greenleaf securities, and the success of
Cybermax and Buildscape, (iv) the ability of the Company to raise funds through
sales of Wickes and Greenleaf common stock and (v) uncertainty concerning the
possible existence of indemnification claims resulting from the Company's
discontinued operations. Future real estate sales depend upon a number of
factors, including re-zoning permits, interest rates, general economic
conditions, and conditions in the commercial real estate markets in Atlanta,
Georgia. In addition to the factors described above, the Company's ability to
sell Wickes and Greenleaf common stock would depend upon, among other things,
the trading prices for these securities, and, in light of the relatively low
trading volume for Wickes, the Company's ability to find a buyer or buyers for
these securities in a private transaction or otherwise.
14
<PAGE>
6. LONG TERM AND MORTGAGE DEBT
Consolidated long-term and mortgage debt is comprised of the following
as of September 30, 2000 (in thousands):
<TABLE>
<CAPTION>
<S> <C>
LONG-TERM DEBT
Collateralized Notes $ 9,500
Other 2,491
Less: current maturities (11,656)
------------
Total Company long-term debt less current maturities $ 335
MORTGAGE DEBT
Mortgage debt, non-recourse $ 11,345
Total long-term and mortgage debt
------------
less current maturities $ 11,680
============
</TABLE>
COLLATERALIZED NOTES ("THE 11% NOTES")
On August 25, 1999, the Company and the 13% Note holders executed an
agreement (the "11% Agreement"), whereby the Company's 13% Notes that were
scheduled to mature in September 1999, were replaced with new unsubordinated
promissory notes due September 30, 2000 bearing 11% interest. The 11% Notes are
secured by a junior lien on the collateral securing the Company's real estate
indebtedness and 10 million shares of Greenleaf common stock.
On March 24, 2000, the Company and the 11% Note holders executed a
modification to the 11% Agreement. This modification allows the Company to use
100% of the net sales proceeds from the sale of its Greenleaf shares to be
applied against the semi-annual interest payment due March 31, 2000 in lieu of
payment against the principal. In addition, the Company agreed to make a
principal reduction of $550,000 on the 11% Notes on or before April 30, 2000.
The Company was unable to sell a sufficient amount of the Greenleaf shares to
meet the April 30 deadline, and received a notice of default from the note
holders on May 8, 2000.
On May 8, 2000, the Company and the 11% Note holders executed a
Forbearance Agreement that precluded the 11% Note holders from taking any action
to accelerate the payment of the 11% Notes, as long as the Company performed
pursuant to the terms of the agreement. The terms included funding the balance
of the $550,000 principal payment that was due April 30, 2000 and selling
additional shares of Greenleaf common stock in subsequent months with the entire
proceeds applied to reduce the outstanding principal on the 11% Notes. The
Company reduced the principal balance of the notes by $195,000 in June, $145,000
in July and $160,000 in August, however, these payments fell below the
requirements of the forbearance agreement.
15
<PAGE>
The Company has entered into an Amendment to the Forbearance Agreement
with the agent for the 11% Noteholders that will allow the interest and
principal that was due on September 30, 2000, to be paid on December 31, 2000.
The terms of this agreement provide that (i) the Company continue to sell the
Greenleaf common stock in a reasonable manner, (ii) the Company will apply the
proceeds from such sales first to the unpaid interest and second to the unpaid
principal, (iii) the interest rate will remain at 17% and the Noteholders will
receive a second lien behind Imagine on the 3,119,067 shares of Buildscape
common stock.
OTHER
WICKES PROMISSORY NOTE
In March of 2000, the Company and Wickes renegotiated the terms of the
Wickes promissory note, deferring all principal payments, including the
delinquent principal payments due in November of 1999 and February of 2000, for
one year, after which the principal payments are due on a quarterly basis. The
interest on this note will be payable on a quarterly basis.
IMAGINE SHORT-TERM LOAN
As of May 9, 2000, the Company had made payments of $9,553 under the
Imagine short- term loan but was delinquent with respect to required payments of
approximately $174,675 of interest. In connection with the Greenleaf Settlement,
the Company granted Greenleaf a stock option to purchase 5% of the issued and
outstanding shares of Cybermax, all of which are pledged to Imagine. The Company
believes that if Greenleaf exercises this stock option, then the Imagine
short-term loan will be paid in full. On August 31, 2000 the Company and Imagine
extended the principal and interest payments that was due on August 31, 2000
until December 15, 2000. The $1.8 million loan balance was increased by $221,000
for unpaid interest and refinancing costs with this extension.
7. INCOME TAXES
The Company's effective tax rate was 0% for the nine months ended
September 30, 2000 and 1999. The Company has established a reserve for the full
amount of deferred tax assets. In management's opinion, it is unlikely the
deferred tax assets will be realized in the near future.
8. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities". In June 2000, the FASB issued
SFAS No. 138, which amends certain provisions of SFAS 133 to clarify four areas
causing difficulties in implementation. The amendment included expanding the
normal purchase and sale exemption for supply contracts, permitting the
offsetting of certain intercompany foreign currency derivatives and thus
reducing the number of third party derivatives, permitting hedge accounting for
foreign-currency denominated assets and liabilities, and redefining interest
rate risk to reduce sources of ineffectiveness. The Company has appointed a team
to implement SFAS 133 on a global basis for the Company. This team has been
implementing an SFAS 133 complaint risk management information system, globally
educating both financial and non- financial personnel, inventorying embedded
derivatives and addressing various other SFAS 133 related issues. The Company
will adopt SFAS 133 and the corresponding amendments under SFAS 138 on January
1, 2001. Our SFAS 133 team is currently determining the impact of SFAS 133 on
our consolidated results of operations and financial position. This statement
should have no impact on the Company's consolidated cash flows.
16
<PAGE>
9. STOCK OPTIONS
In the second quarter management proposed the transfer of additional
shares of Greenleaf's common stock and options to certain officers and
employees. These issuances are subject to the Company's Board of Directors
review and approval. On April 7, 2000, the Board engaged an outside consulting
firm to conduct a compensation analysis of incentive programs. The Board has not
taken any further action pending review of the report.
17
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Condensed Consolidated Financial Statements and Notes thereto contained
elsewhere herein and in conjunction with the Consolidated Financial Statements
and Notes thereto and Management's Discussion and Analysis of Financial
Condition and Results of Operations contained in the Company's Annual Report on
Form 10-K for the year ended December 31, 1999.
RESULTS OF OPERATIONS
GENERAL
The Company reported results of operations for the three and nine months
ended September 30, 2000 and 1999, as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Earnings(loss) before income taxes,
and equity in related parties(1)(2) $ (516) $ (2,889) $ (1,488) $ (7,120)
Income tax (benefit) expense -- --
Equity in earnings (losses)
of Wickes Inc.(3) 629 1,840 (251) 1,693
__________ _________ __________ _________
Net earnings(losses) $ 113 $ (1,049) $ (1,739) $ (5,427)
=========== ========= ========= =========
</TABLE>
(1) Includes realized investment gains of $477,000 and $18,000 for the three
months ended September 30, 2000 and 1999, and $1,640,000 and $18,000 for
the nine months ended September 30, 2000 and 1999, respectively.
(2) The Company accounted for its investment in Buildscape under the equity
method for the nine months of 2000. During the same period in 1999, the
Company consolidated Buildscape's operations with those of the Company
and its subsidiaries.
(3) Includes goodwill amortization of $130,200 and $130,200 for the three
months ended September 30, 2000 and 1999, and $390,600 and $390,600 for
the nine months ended September 30, 2000 and 1999, respectively.
18
<PAGE>
LINES OF BUSINESS
The following tables sets forth certain financial data for the three and
nine months ended September 30, 2000 and 1999, respectively, for the following
segments: Buildscape, Cybermax, Wickes and the Parent Group. Buildscape's
operations are consolidated with those of the Company and its subsidiaries
through October 21, 1999. The Company accounted for its investment in Buildscape
under the equity method for the first nine months of 2000. The "Parent Group"
includes real estate, parent company, discontinued operations and all
eliminating entries for inter-company transactions.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------- ------------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2000 1999 2000 1999
---- ---- ---- ----
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
SALES:
Buildscape(1) $ -- $ 207 $ -- $ 386
Cybermax 500 306 1,248 849
Wickes(2) -- -- -- --
Parent Group -- 5 -- 34
----------- ----------- ----------- -----------
Total $ 500 $ 518 $ 1,248 $ 1,269
=========== =========== =========== ===========
COST OF SALES:
Buildscape(1) $ -- $ 191 $ -- $ 314
Cybermax 281 45 569 136
Wickes(2) -- -- -- --
Parent Group -- -- -- 4
----------- ----------- ----------- -----------
Total $ 281 $ 236 $ 569 $ 454
=========== =========== =========== ===========
OTHER OPERATING INCOME:
Buildscape(1) $ -- $ -- $ -- $ --
Cybermax 1 -- 13 1
Wickes(2) -- -- -- --
Parent Group 42 (5) 77 43
----------- ----------- ------------ -----------
Total $ 43 $ (5) $ 90 $ 44
=========== ============ ============ ===========
INVESTMENT INCOME AND REALIZED
GAINS/(LOSSES):
Buildscape(1) $ -- $ -- $ -- $ --
Cybermax -- -- -- --
Wickes(2) -- -- 84 --
Parent Group 455 35 1,507 (1)
----------- ----------- ----------- -----------
Total $ 455 $ 35 $ 1,591 $ (1)
=========== =========== =========== ===========
19
<PAGE>
Three Months Ended Nine Months Ended
------------------------- ---------------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2000 1999 2000 1999
---- ---- ---- ----
(in thousands) (in thousands)
EXPENSES:
Buildscape(1) $ -- $ 1,725 $ -- $ 4,142
Cybermax 334 583 1,218 1,581
Wickes(2) -- -- -- --
Parent Group 132 202 529 261
----------- ------------ ----------- -----------
Total $ 466 $ 2,510 $ 1,747 $ 5,984
=========== =========== =========== ===========
INTEREST EXPENSE:
Buildscape(1) $ -- $ 79 $ -- $ 162
Cybermax -- 1 -- 3
Wickes (2) 411 368 1,059 1,131
Parent Group 356 243 1,042 698
----------- ----------- ----------- -----------
Total $ 767 $ 691 $ 2,101 $ 1,994
=========== =========== =========== ===========
EARNINGS(LOSS) BEFORE INCOME
TAXES, EQUITY IN RELATED PARTIES
AND MINORITY INTEREST:
Buildscape(1) $ -- $ (1,788) $ -- $ (4,232)
Cybermax (114) (323) (526) (870)
Wickes(2) (411) (368) (975) (1,131)
Parent Group 9 (410) 13 (887)
------------ ----------- ----------- -----------
Total $ (516) $ (2,889) $ (1,488) $ (7,120)
============ =========== =========== ===========
IDENTIFIABLE ASSETS:
Buildscape(1) $ (947) $ 526 $ (947) $ 526
Cybermax 585 585 585 585
Wickes(2) 15,157 15,245 15,157 15,245
Parent Group 12,622 10,895 12,622 10,895
----------- ----------- ----------- ---------
Total $ 27,417 $ 27,251 $ 27,417 $ 27,251
=========== =========== =========== =========
</TABLE>
(1) After October 21, 1999, the Company's balance sheet and statements of
operations reflect the Company's investment in Buildscape on the equity method.
(2) Includes an interest allocation from Riverside on its 11% secured notes and
13% subordinated notes of $411,000 and $368,000 for the three months ended
September 30, 2000 and 1999, respectively, and $1,059,000 and $1,131,000 for the
nine months ended September 30, 2000 and 1999, respectively.
20
<PAGE>
BUILDSCAPE, INC.
The following table sets forth unaudited information concerning the results
of Buildscape for the three and nine months ended September 30, 2000 and 1999,
respectively: (in thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------------- ---------------------------
(unaudited) (unaudited)
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales $ 326 $ 207 $ 575 $ 386
Cost of sales 294 191 490 314
----------- ----------- ------------ -----------
Net profit 32 16 85 72
Selling, general and administrative 3,733 1,648 8,681 4,013
Depreciation and amortization 219 77 508 129
Interest expense -- 79 10 162
----------- ----------- ------------ -----------
Total expenses 3,952 1,804 9,199 4,304
Other income 66 -- 138 --
----------- ----------- ------------ -----------
Net loss $ (3,854) $ (1,788) $ (8,976) $ (4,232)
=========== ============ ============ ==========
</TABLE>
Revenues for the third quarter of 2000 were $326,000 compared to
$207,000 for the comparable period in 1999. Revenues for the third quarter of
2000 include $281,000 of product revenue and $45,000 of fee revenue. Revenues
for the third quarter of 1999 include $158,000 of product revenue and $49,000 of
fee revenues. The direct costs for the third quarter of 2000 were $347,000
compared to $191,000 for comparable period in 1999. The direct costs for the
third quarter of 2000 include $347,000 for product revenue and $0 for fee
revenue.
Revenues for the first nine months of 2000 were $575,000 compared to
$386,000 for the comparable period in 1999. Revenues for the first nine months
of 2000 include $511,000 of product revenue and $64,000 of fee revenue. Revenues
for the first nine months of 1999 include $228,000 of product revenue and
$158,000 of fee revenue. The direct costs for the first nine months of 2000 were
$490,000 compared to $314,000 for the comparable period in 1999. The direct
costs for the first nine months of 2000 include $488,000 for product revenue and
$2,000 for fee revenue.
SG&A expenses increased for the third quarter of 2000 to $3,733,000
compared to $1,648,000 during the third quarter of 1999. This increase is
primarily the result of increased personnel, and higher legal, advertising,
computer services, and travel expenses.
SG&A expenses increased for the first nine months of 2000 to $
8,681,000
compared to $4,013,000 during the first nine months of 1999. This increase is
primarily due to increased personnel which accounted for $2.7 million of the
increase. In addition, advertising, legal, computer services and travel expenses
increases were significantly higher.
On October 21, 1999, the Company sold to Imagine 38% of the common and
100% of the preferred stock of Buildscape. As a result, the Company accounted
for its investment in Buildscape under the equity method after October 21, 1999.
On May 12, 2000, Buildscape entered into a stock purchase agreement
with Imagine and the Dow Chemical Company ("Dow") pursuant to which Dow
purchased Series A Preferred Stock and common stock of Buildscape from Imagine
and also purchased newly issued Series B Preferred Stock directly from
Buildscape. Dow will purchase a second tranche of Series B Preferred Stock upon
the completion of certain milestones by Buildscape. Dow also acquired an option
to acquire additional shares in Buildscape that will increase its ownership to
50.1%. Upon the completion of the transactions, Riverside's ownership in
Buildscape will be reduced from 47% to 35%, on a fully converted basis.
Buildscape delivers products and services to construction professionals
through the Internet and other emerging technologies. BuildscapePro
(www.buildscapepro.com) provides access to real- time product and procurement
information, including pricing, availability and delivery. This allows
professional builders and contractors to better manage the flow of materials,
locate subcontractors and enhance their customer service. Buildscape also
operates www.buildscape.com, giving consumers access to building products and
information for their home improvement needs.
21
<PAGE>
Buildscape has experienced cumulative operating losses, and its
operations are subject to certain risks and uncertainties, including, among
others, risks associated with technology and regulatory trends, evolving
industry standards, growth and acquisitions, actual and prospective competition
by entities with greater financial and other resources, the development of the
Internet market and the need for additional capital. There can be no assurances
that Buildscape will be successful in becoming profitable or generating positive
cash flow in the future. Buildscape is considered to be a development stage
company.
CYBERMAX, INC.
The following table sets forth unaudited information concerning the
results of Cybermax for the three and nine months ended September 30, 2000 and
1999, respectively (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------------- ------------------------------
(unaudited) (unaudited)
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales $ 500 $ 306 $ 1,248 $ 849
Cost of sales 281 45 569 136
----------- ----------- ----------- -----------
Net profit 219 261 679 713
Selling, general and administrative 289 530 1,081 1,474
Depreciation and amortization 45 53 137 106
Interest expense -- 1 -- 3
----------- ----------- ----------- -----------
Total expenses 334 584 1,218 1,583
Other operating income 1 -- 13 --
----------- ----------- ----------- -----------
Net loss $ (114) $ (323) $ (526) $ (870)
=========== =========== =========== ===========
</TABLE>
Revenues for the third quarter of 2000 were $500,000 compared to
$306,000 for the comparable period in 1999. Revenues for the third quarter of
2000 include $400,000 of e- Commerce solution sales, $10,000 of software and
equipment sales, $14,000 of multi-media solution sales and $76,000 of network
services. Revenues for the third quarter of 1999 include $240,000 of e-Commerce
solution sales, $15,000 of software and equipment sales and $51,000 of network
services. The direct costs for the third quarter of 2000 include $183,000 for
e-Commerce solution sales, $32,000 of multimedia sales, $10,000 of software and
equipment sales, $55,000 network services and $1,000 of miscellaneous costs. The
direct costs for the third quarter of 1999 include $9,000 of costs for software
and equipment sales, $32,000 of costs for network services and $4,000 of
miscellaneous costs. During the third quarter of 1999, the direct costs for the
e-commerce solution sales were employees salaries which were included in the
SG&A line item. In 2000, these costs were provided by an outside consulting firm
and were included as a direct cost of sales.
22
<PAGE>
Revenues for the first nine months of 2000 were $1,248,000 compared to
$849,000 for the first nine months of 1999. Revenues for the first nine months
of 2000 include $952,000 of e- Commerce solution sales, $96,000 of software and
equipment sales, $21,000 of multimedia solutions sales and $179,000 of network
services. Revenues for the first nine months of 1999 include $666,000 of
e-Commerce solution sales, $160,000 of software and equipment sales and $23,000
of network services. The direct costs for the first nine months of 2000 include
$320,000 for e- Commerce solution sales, $68,000 of software and equipment
sales, $31,000 of multimedia sales, $133,000 of network services and $17,000 of
miscellaneous costs. The direct costs for the first nine months of 1999 include
$10,000 for e-Commerce solution sales, $16,000 of software and equipment sales,
$110,000 of network services and $10,000 of miscellaneous costs. During the
first nine months of 1999, the direct costs for the e-Commerce solution sales
were employees salaries which were included in the SG&A line item. In 2000,
these costs were provided by an outside consulting firm and were included as a
direct cost of sales.
SG&A expenses decreased for the third quarter of 2000 to $289,000,
compared to $530,000 during the third quarter of 1999. The primary reason for
this decrease was the reduction of personnel and legal expense which was offset
slightly by increases in contractual services, software services and marketing
and advertising expense.
SG&A expenses decreased for the first nine months of 2000 to
$1,081,000, compared to $1,474,000 during the first nine months of 1999. The
primary reason for this decrease was the reduction of the personnel in 2000 and
legal expenses which were offset slightly by increases in contractual services,
software services and marketing and advertising expense.
WICKES INC.
The Company estimates that its results of operations for the third
quarter of 2000 include profits of $218,000 attributable to Wickes, compared to
profits of $1,472,000 for the same period in 1999. The Company estimates that
its results of operations include losses of $1,226,000 attributable to Wickes,
for the first nine months ended September 30, 2000 compared to profits of
$821,000 for the same period in 1999.
The following discussion was obtained from the Wickes Quarterly Report
on Form 10-Q for the second quarter of 2000.
The following discussion should be read in conjunction with the Condensed
Consolidated Financial Statements and Notes thereto contained elsewhere herein
and in conjunction with the Consolidated Financial Statements and Notes thereto
and Management's Discussion and Analysis of Financial Condition and Results of
Operations contained in Wickes' Annual Report on Form 10- K for the year ended
December 25, 1999.
The following table sets forth, for the periods indicated, the percentage
relationship to net sales of certain expense and income items. This information
includes the results from all sales and distribution and component manufacturing
facilities operated by Wickes, including those closed or sold during the period.
23
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------------- --------------------------
Sept. 23, Sept. 25, Sept. 23, Sept. 25,
2000 1999 2000 1999
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Gross profit 22.1% 20.1% 21.6% 20.4%
Selling, general and
administrative expense 18.0% 15.5% 18.6% 17.0%
Depreciation, goodwill and
trademark amortization 0.5% 0.4% 0.6% 0.5%
Provision for doubtful accounts 0.3% 0.2% 0.2% 0.1%
Other operating income (0.3)% (0.4)% (0.4)% (0.5)%
Income from operations 3.6% 4.4% 2.6% 3.3%
</TABLE>
Wickes' results of operations historically are affected by, among other
factors, weather conditions, interest rates, lumber prices, housing starts and
other external economic factors. Weather conditions during the first nine months
of 2000 were relatively comparable to the prior year. However, Wickes' largest
region, the Midwest, experienced wetter than normal conditions in May, June and
July which tends to adversely impact sales. The second quarter and first half of
2000 showed continuing trends of higher interest rates, which many builders took
as a sign to slow down production and test demand. In addition to these factors,
housing starts for the third quarter of 1999 were a combined 9.4% in the Midwest
and Northeast regions of the United States (11.0% and 5.9%, respectively). The
Midwest and Northeast regions of the United States represented approximately
82.0% of Wickes' sales in the third quarter of 2000 versus 79% in the comparable
period in 1999. When combined with the South, housing starts for the third
quarter of this year were down 10.2% from the third quarter of 1999. On a
year-to-date basis, actual housing starts are down 3.5% nationally from the
third quarter of 1999. In addition to the affects of the foregoing, escalating
fuel prices and higher interest rates also have adversely impacted Wickes'
earnings.
Dimensional lumber and panel products are commodities which cause
Wickes' costs to fluctuate with changing market conditions, generally tracked
using the Random Lengths Framing Composite Average and the Random Lengths Panel
Index. Increases in commodity lumber prices ("lumber inflation") generally are
passed on to the customer with certain lag effects, resulting in higher selling
prices, or are fixed in the futures market for a small percentage of longer term
sales contracts. In periods of decreasing commodity lumber prices ("lumber
deflation"), selling prices for lumber decrease, with certain lag effects.
Net income for the three months ended September 23, 2000 was $2.1
million compared with a net income of $5.0 million for the three months ended
September 25, 1999. The decrease in net income for the three-month period
primarily is the result of decreased sales and is the result of decreased sales
24
<PAGE>
and gross margin generally resulting from lumber deflation; increased SG&A
expenses driven by higher fuel costs; an increase in the provision for doubtful
accounts; and higher interest costs.
Net income for the first nine months of 2000 was $0.5 million compared
with net income of $5.4 million for the first nine months of 1999. The decrease
in net income for the nine-month period primarily is the result of increases in
SG&A, depreciation and interest expenses, as well as a reduction in other
operating income, all of which offset higher gross margin.
PARENT COMPANY AND OTHER SUBSIDIARIES
The following discussion relates to the operations of the Parent Company
and its subsidiaries, other than Buildscape, Cybermax and Wickes (the "Parent
Group").
The Parent Group's non-interest operating expenses for the third quarter
of 2000 decreased to $132,000 compared to $202,000 during the same period in
1999. The 1999 expenses include approximately $104,000 of expenses incurred in
connection with the replacement of the Company's 13% Notes that matured in 1999.
Revenues of the Parent Company (excluding investment income) for the
third quarter of 2000 and 1999 were $42,000 and $(5,000), respectively.
Interest expense (excluding interest allocation to Wickes for the Parent
Company's 11% and 13% Notes of $411,000 in 2000 and $368,000 in 1999) for the
third quarter of 2000 and 1999, were $356,000 and $243,000 respectively. In
2000, interest consisted of $72,000 on the Parent Company's other debt and
$284,000 on the Parent Company's real estate mortgage debt. In 1999, interest
consisted of $14,000 on the Parent Company's other bank debt and $229,000 on the
Parent Company's real estate mortgage debt. The primary reason for the increase
in interest expense is due to additional debt of the Company and higher interest
rates on the Company's mortgage debt.
The Parent Group's non-interest operating expenses for the first nine
months of 2000 increased to $529,000 compared to $261,000 during the same period
in 1999. The 1999 expenses include income of approximately $100,000, which
resulted from the release of a reserve established in prior years in connection
with the sale of the Company's former property and casualty operations. In
addition, the 1999 expenses include approximately $104,000 of expenses incurred
in connection with the replacement of the Company's 13% Notes that matured in
1999. On April 14, 2000, the Company's Board of Directors authorized the Company
to transfer certain options held by the Company to acquire common stock of
Greenleaf to certain employees of the Company. Accordingly, in the second
quarter of 2000, the Company recorded income of approximately $105,000 included
in net realized investment gains, which represents the value of the shares
transferred. Such approval effectively results in the awarding of options and
the recognition of compensation expense of approximately $105,000, accordingly.
In addition travel, audit and legal expenses were higher for the nine months of
2000 compared to the nine months of 1999.
25
<PAGE>
Revenues of the Parent Group (excluding investment income) for the first
nine months of 2000 and 1999 were $77,000 and $43,000, respectively.
Interest expense (excluding interest allocation to Wickes for the Parent
Company's 11% and 13% notes of $1,059,000 in 2000 and $1,131,000 in 1999) for
the nine months of 2000 and 1999, were $1,042,000 and $698,000 respectively. In
2000, interest consisted of $214,000 on the Parent Company's other debt and
$828,000 on the Parent Company's real estate mortgage debt. In 1999, interest
consisted of $17,000 on the Parent Company's other bank debt and $681,000 on the
Parent Company's real estate mortgage debt. The primary reason for the increase
in interest expense is due to additional debt of the Company and higher interest
rates on the Company's mortgage debt.
REAL ESTATE INVESTMENTS
The Company's real estate investments consist of $6,676,000 in Georgia
properties, and $79,000 in other states.
During the third quarter of 2000, the Company sold 8.8 acres of its
Georgia property for $861,000, and recorded a gain of $153,000 on the sale. The
Company had no sales of its real estate investments during the third quarter of
1999.
INCOME TAXES
The Company's effective tax rate was 0% for the three and nine months
ended September 30, 2000 and 1999. The Company's equity in losses of Wickes has
reduced the Company's GAAP basis in its investment in Wickes creating deferred
tax benefits which will be realized upon sale or subsequent increase in GAAP
basis of this investment.
LIQUIDITY AND CAPITAL RESOURCES
The Parent Company's general liquidity requirements consist primarily of
funds for payment of debt and related interest and for operating expenses and
overhead.
Operations (exclusive of Wickes, which is prohibited from paying
dividends under its debt instruments) consist primarily of asset sales and
Cybermax's operations. Proceeds from real estate sales are required to be
applied to real estate debt reduction and are not available to the Parent
Company for other purposes.
The $9,500,000 principal amount of the Company's 11% Notes due September
30, 2000, and the $1,800,000 principal amount of the Company's short-term loan
from Imagine due August 31, 2000 have been extended. For further information
regarding these loans see Note 5. "Commitments and Contingencies", and Note 6.
"Long Term and Mortgage Debt".
For a detailed discussion of the Parent Company's liquidity and
management's plans related thereto, see Note 5. "Commitments and Contingencies".
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During the first nine months of 2000, stockholders' equity increased by a
net of $2,081,000. The primary reason for the increase was the change in
unrealized gains on the Company's Greenleaf common stock which was approximately
$3,820,000. In addition, the Company recorded gains on the sale of its Greenleaf
common stock of $1,413,000. This increase was offset by losses attributable to
Wickes of approximately $1,226,000. In addition, the Parent Company's and
Cybermax's operations incurred losses of approximately $1,926,000.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For information regarding the Company's legal proceedings,
see Note 5 of Notes to Condensed Consolidated Financial
Statements included elsewhere herein.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
For information regarding the Company's default on its 11%
Notes, see Note 6 of Notes to Condensed Consolidated
Financial Statements included elsewhere herein.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
27.1 Financial Data Schedule (SEC Use Only).
(b) Reports on Form 8-K
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SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
RIVERSIDE GROUP, INC.
By /s/ J. Steven Wilson
------------------------------------
J. Steven Wilson
Chairman of the Board,
President and
Chief Executive Officer
By /s/ Catherine J. Gray
----------------------------------
Catherine J. Gray
Senior Vice President and
Chief Financial Officer
Date: November 14, 2000
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