10-Q 1 form10q.txt RIVERSIDE GROUP, INC. 10Q 10/30/01 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File For Quarter Ended September 30, 2001 Number 0-9209 -------------------- ------ RIVERSIDE GROUP, INC. (Exact name of registrant as specified in its charter) Florida 59-1144172 -------------------------------------------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 7800 Belfort Parkway, Jacksonville, Florida 32256 ------------------------------------------- ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code number 904-281-2200 ------------ Indicate by a check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- --- On November 10, 2001, there were 4,767,123 shares of the Registrant's common stock outstanding. RIVERSIDE GROUP, INC. INDEX

Riverside Group, Inc. and Subsidiaries Condensed Consolidated Balance Sheets (unaudited) (in thousands)

See Accompanying Notes to Condensed Consolidated Financial Statements. Riverside Group, Inc. and Subsidiaries Condensed Consolidated Statement of Operations (unaudited) (in thousands except per share amounts)

See Accompanying Notes to Condensed Consolidated Financial Statements. Riverside Group, Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows (unaudited) (in thousands)

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 subsidiaries (the "Company" or Riverside"). The condensed consolidated balance sheets as of September 30, 2001, the condensed consolidated statements of operations for the three and nine months ended September 30, 2001 and 2000 and the condensed consolidated statements of cash flows for the nine months ended September 30, 2001 and 2000, 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, 2001, and for all periods presented, have been made. The results for the nine month period ended September 30, 2001 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") common stock as available for sale. These available for sale securities are reported at fair value, with unrealized gains and losses excluded from earnings, but reported within stockholders' 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, are 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. Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America 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, 2000 filed with the Securities and Exchange Commission. Recently Issued Accounting Pronouncements ----------------------------------------- On July 20, 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets." These Statements make significant changes to the accounting for business combinations, goodwill, and intangible assets. SFAS No. 141 eliminates the pooling-of-interests method of accounting for business combinations with limited exceptions for combinations initiated prior to July 1, 2001. In addition, it further clarifies the criteria for recognition of intangible assets separately from goodwill. This statement is effective for business combinations completed after June 30, 2001. SFAS No. 142 discontinues the practice of amortizing goodwill and indefinite lived intangible assets and initiates an annual review for impairment. Impairment would be examined more frequently if certain indicators are encountered. Intangible assets with a determinable useful life will continue to be amortized over that period. The amortization provisions apply to goodwill and intangible assets acquired after June 30, 2001. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001. Goodwill and intangible assets on the books at June 30, 2001, will be affected when the Company adopts the Statement effective January 1, 2002. In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations". SFAS No. 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred and requires that the amount recorded as a liability be capitalized by increasing the carrying amount of the related long-lived asset. Subsequent to initial measurement, the liability is accreted to the ultimate amount anticipated to be paid, and is also adjusted for revisions to the timing or amount of estimated cash flows. The capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. SFAS No. 143 is required to be adopted for fiscal years beginning after June 15, 2002, with earlier application encouraged. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". This statement supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of". SFAS No. 144 retains the Fundamental provisions of SFAS No. 121 for (a) recognition and measurement of the impairment of long-lived assets to be held and used and (b) measurement of long-lived assets to be disposed of by sale. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. The Company is evaluating the impact of the adoption of these standards and has not yet determined the effect of adoption on its financial position and results of operations. Comprehensive Income -------------------- Total comprehensive loss for the nine months ended September 30, 2001 was $2,379,000. Changes in the components of other comprehensive income for the first nine months of 2001 are as follows: Unrealized Gains on Securities -------------- Balance at December 31, 2000 $ 2,325,000 Change during the first nine months of 2001 (1,960,000) -------------- Balance at September 30, 2001 $ 365,000 ============== Earnings Per Share ------------------ Basic and diluted earnings per common share are calculated in accordance with Statement of Financial Accounting Standards No. 128, "Earnings Per Share". Earnings per share are based on the weighted average number of shares of common stock outstanding during each period (4,767,123 and 4,759,123 shares during the three and nine months ending September 2001 and 2000, respectively). 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 third 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. ("Wickes") -------------------------------------- As of September 30, 2001, Riverside beneficially owned 2,860,243 shares of Wickes' common stock, which constituted 35% of Wickes' outstanding voting and non-voting common stock. Summary financial information of Wickes follows (in thousands):

3. INVESTMENT IN BUILDSCAPE, INC. ("Buildscape") --------------------------------------------- As of September 30, 2001, the Company owned (before Buildscape's employee stock options) 40.11% of Buildscape on a fully converted basis. As of September 30, 2001, Buildscape owned 87.5% membership interest in Buildscape, LLC. Summary financial information of Buildscape follows (in thousands):

4. INVESTMENT IN GREENLEAF ----------------------- In accordance with SFAS 115, "Accounting for Certain Investments in Debt and Equity Securities" 10,200,000 and 5,665,508 shares of the Company's common stock in Greenleaf are classified as available for sale at September 30, 2001 and December 31, 2000, respectively. At September 30, 2001, the cost basis is $0 and the estimated fair market value is $408,000, resulting in gross unrealized gains of $408,000. At December 31, 2000, the cost basis is $0 and the estimated fair market value is $2,323,000, resulting in gross unrealized gains of $2,323,000. At December 31, 2000, sales of Greenleaf shares were restricted under the provisions of Securities and Exchange Commission ("SEC") Rule 144. The Company has received a legal opinion that the shares of Greenleaf may now be sold under SEC Rule 144(k). Accordingly, at September 30, 2001, the total number of Greenleaf shares owned by the Company have been classified as available for sale and marked to market. 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. The remaining 4,834,492 Greenleaf shares at December 31, 2000, were restricted under the provisions of Rule 144 and were not considered to be marketable equity securities subject to valuation under the provisions of SFAS 115. Accordingly, these restricted shares were not reported at fair value at December 31, 2000, but rather were recorded at their cost basis of zero. At December 31, 2000, the calculated market value of the Company's shares (including the shares held in escrow) in Greenleaf was approximately $4.3 million based on Greenleaf's stock price of $.41 per share on the Over-the-Counter Pink Sheets. At September 30, 2001, the Company's investment in Greenleaf consisted of 8,810,000 common shares, 1,390,000 escrow shares and 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. The Company has transferred the right to exercise 84,151 of these options to employees. 5. COMMITMENTS AND CONTINGENCIES ----------------------------- The Company is not aware of any legal proceedings that will have a material adverse effect on the Company. In connection with the sale of Dependable Insurance Company, Inc. ("Dependable") in 1995, (a former property and casualty insurance company of the Company), the Company agreed to indemnify the purchaser for certain losses on various categories of liabilities. The terms of the indemnities provided by the Company vary with regards to time limits and maximum amounts. In 1995, in connection with the sale of Dependable, the Company established a reserve for $300,000 for future losses. Since the Company has not experienced losses on this business, the Company released $75,000 and $150,000 of the reserve in 1999 and 1998, respectively. The Company's reserve at September 30, 2001 is $75,000, which the Company believes is sufficient for any potential future losses. Although future loss development may occur over a number of years, the Company believes, based on all information presently available, that indemnities for any losses that may occur will not have a material adverse effect on the Company's financial position or results of operations. In connection with the sale of its mortgage lending operation in 1997, the Company 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. The Company has been notified of a potential liability under its indemnity and is in negotiation to settle this. The Company believes that these indemnities will not have a material adverse effect on the Company's financial position or results of operation. The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the financial statements, the Company has historically had net losses and as of September 30, 2001 and December 31, 2000, the Company's current liabilities exceeded its current assets. In addition, at September 30, 2001, the Company's total liabilities exceeded its total assets by $2,854,000. These factors among others, may indicate that the Company may be unable to continue as a going concern for a sufficient period of time to realize the value of its assets. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. As described in Note 6, the Company is in default with respect to the majority of its outstanding long-term debt agreements and the balance has been classified as a current liability. The Company's continuation as a going concern is dependent upon its ability to generate sufficient cash flow to meet its obligations on a timely basis, to obtain additional financing or refinancing as may be required, and ultimately to attain successful operations. The Company is primarily a holding company, which derives its financial resources through asset sales. At September 30, 2001, such assets consist of 87 acres of land located within Smyrna, Georgia, 2,860,243 shares of Wickes common stock and 8,810,000 shares of Greenleaf common stock, all of which are pledged as collateral on the Company's debt agreements. The Company's debt agreements require the proceeds from the sale of these assets be used to pay principal and interest on the related indebtedness. Accordingly, unless the note holders release these assets, the sale of such assets will not generate resources to be used to pay other current obligations or to pay operating expenses until the debt has been repaid in full. The Company's additional 1,390,000 shares of Greenleaf common stock are held in escrow and the release of any sales proceeds from these shares is subject to consent of the Greenleaf escrow manager. The Company is vigorously pursuing the sale of its Georgia property which management believes may be sufficient to payoff the mortgage debt and reduce the balance of the 11% Secured Notes. The Company is also negotiating with its note holders to restructure its various debt agreements to establish satisfactory repayment terms and to release a portion of the Greenleaf shares held as collateral under the notes, allowing sales proceeds to be used to pay operating costs. The Company believes that corporate assets have adequate value to cover liabilities and management is evaluating all options on liquidating assets and investments to meet the debt requirements. If the Company is unsuccessful in these efforts, it may file a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code and operate its businesses as debtors in possession under the supervision of the Bankruptcy Court. 6. LONG-TERM DEBT ------------------ Consolidated long-term debt is comprised of the following as of September 30, 2001 (in thousands): Collateralized notes $ 9,500 Wickes promissory note 402 Imagine loan 2,022 Mortgage debt 5,612 Other debt 34 ------------ Long-term debt 17,570 Less current maturities (17,503) ------------ Total long-term debt less current maturities $ 67 ============ Collateralized Notes ("the 11% Secured Notes") The Company failed to make the required payment on its 11% Secured Notes which was due December 31, 2000. The Company received notice from the agent for the note holders declaring all amounts outstanding under the notes immediately due and payable. The Company was also advised that the agent would immediately commence foreclosure proceedings on the collateral securing the notes. The collateral includes certain real estate assets of Riverside and shares of Wickes and Greenleaf. In March 2001, Imagine purchased a majority of the Company's 11% Secured Notes from the holders of these 11% Secured Notes. As a result of this action, the agent for the note holders cancelled the foreclosure sales mentioned above. In August, 2001, Imagine, acquired the remaining 25% of the 11% Secured Notes, and now owns 100% of the Notes. Imagine and the Company are negotiating to restructure the debt. There can be no assurance that the Company will be able to successfully negotiate a restructuring of its debt, and the failure to do so would have a material adverse effect on the Company's financial position. In addition, if a successful restructuring of its debt obligations does not occur, the Company may need to seek reorganization under applicable federal bankruptcy laws. Wickes Promissory Note During 1998, 1999 and 2000, the Company was delinquent on the payment of principal and interest on its promissory note to Wickes. In September 1999, the Company paid this note current. In March 2000, the Company and Wickes renegotiated the terms of the note, deferring all principal payments due until April 1, 2001, including the delinquent principal payments for November 1999 and February 2000. The interest rate was increased to prime lending rate plus four percentage points. In July 2001, the Company paid Wickes the April 1, 2001 principal and interest payment. The Company is currently in default on the July and November 2001, principal and interest payments. Imagine Loan On August 31, 2000, the Company and Imagine extended the principal and interest payments that were due on August 31, 2000 until December 15, 2000. The $1.8 million loan balance was increased by $222,000 for unpaid interest and refinancing costs with this extension. The Company did not make any payment of principal and interest on December 15, 2000 and the loan is currently in default. The Company and Imagine are in discussions regarding the extension of the principal and interest payments that were due under the Imagine loan agreement on December 15, 2000. Mortgage Debt The failure to pay the 11% Secured Notes when due also constitutes a default under Riverside's $5.6 million mortgage loan obligations to American Founders. The mortgage lender has notified the Company that it has the right, but not the obligation, to defer exercising all or any of its rights under default, pending the outcome of negotiations between the Company and Imagine. Other Debt On April 4, 2001, the Company executed a non-interest bearing promissory note with Holland & Knight LLP ("H&K"), the Company's former attorneys, for approximately $59,000. The terms of the note call for monthly principal payments of $5,000, commencing May 1, 2001, and continuing on a monthly basis until the note is paid in full. This note was for payment of previous legal fees incurred by the Company and owed to H&K. On September 12, 2001, Buildscape, LLC executed a Second Amendment and Restated Note ("Amended Note"), under which Dow may make advances in the aggregate principal amount of $13,000,000 to Buildscape, LLC. Riverside executed a Guaranty for 35.1% of this Amended Note. If payments of principal and interest under the Amended Note are not paid, Dow may call the guaranty and Riverside may satisfy its obligation by transferring to Dow shares of its Buildscape common stock up to 1,014,000 shares. 7. INCOME TAXES ------------ The Company's effective tax rate was 2% for the three and nine months ended September 30, 2001 and 0% for the three and nine months ended September 30, 2000. 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. 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, 2000. FORWARD-LOOKING INFORMATION CAUTIONARY STATEMENT. The following discussion of the Company's future operations, liquidity needs and sufficiency constitutes Forward-Looking Information and is inherently subject to uncertainty as a result of a number of risk factors including, among other things: (i) the Company's ability to successfully restructure its 11% Secured Notes and other debt in a timely and reasonable matter, (ii) the success of and level of cash flow generated by Cybermax, (iii) 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, (iv) 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, (v) the ability of the Company to raise funds through sales of Wickes common stock and Greenleaf securities and (vi) 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. 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, the possible difficulty the Company may have finding a buyer or buyers for these securities in a private transaction or otherwise. Lines of Business The following table sets forth certain financial data for the three and nine months ended September 30, 2001 and 2000, respectively, for the following segments: Buildscape, Cybermax, Wickes and the Parent Group. The "Parent Group" includes real estate, parent company operations and all eliminating entries for inter-company transactions. The Company accounted for its investment in Wickes and Buildscape under the equity method for the three and nine months ended September 30, of 2001 and 2000, respectively.

(1) Includes (losses) gains of $(4,000) and $(7,000) on the sale of Wickes stock during the three months ended September 30, 2001 and 2000, respectively, and $(72,000) and $77,000 for the nine months ended September 30, 2001 and 2000, respectively. (2) Includes an interest allocation from Riverside on its 11% Secured Notes of $408,000 and $411,000 for the three months ended September 30, 2001 and 2000, respectively, and $1,208,000 and $1,059,000 for the nine months ended September 30, 2001 and 2000, respectively. (3) The Company's balance sheet and statements of operations reflect the Company's investment in Wickes and Buildscape under the equity method. The following table sets forth information concerning the results of Cybermax for the three and nine months ended September 30, 2001 and 2000, respectively: (in thousands)

Revenues for the third quarter of 2001 were $199,000 compared to $500,000 for the comparable period in 2000. Revenues for the third quarter of 2001 include $97,000 of e-Commerce solutions sales, $74,000 of e-Learning sales and $28,000 of network services. Revenues for the third quarter of 2000 include $400,000 of e-Commerce solution sales, $10,000 of equipment sales, $14,000 of multi-media solutions sales and $76,000 of network services. The direct costs for the third quarter of 2001 include $75,000 of e-Commerce solutions sales, $17,000 of e-Learning sales and $27,000 of network services. The direct costs for the third quarter of 2000 include $183,000 of e-Commerce solutions sales, $32,000 of multi-media sales, $10,000 of equipment sales, $55,000 of network services and $1,000 of miscellaneous costs. Selling, general and administrative expenses ("SG&A") decreased for the third quarter of 2001 to $176,000 compared to $289,000 for the third quarter of 2000. The primary reason for this decrease was the reduction of the personnel in 2001. Revenues for the first nine months of 2001 were $1,012,000 compared to $1,248,000 for the comparable period in 2000. Revenues for the first nine months of 2001 include $555,000 of e-Commerce solutions sales, $298,000 of e-Learning sales, $73,000 of multi-media solution sales and $86,000 of network services. Revenues for the first nine months of 2000 include $952,000 of e-Commerce solutions sales, $96,000 of equipment sales, and $21,000 of multi-media solutions sales and $179,000 of network services. The direct costs for the first nine months of 2001 include $274,000 of e-Commerce solutions sales, $137,000 of e-Learning sales, $15,000 of multi-media sales and $60,000 for network services. The direct costs for the first nine months of 2000 include $320,000 of e-Commerce solutions sales, $31,000 of multi-media sales, $133,000 of network services, $68,000 of equipment sales and $17,000 of miscellaneous costs. Selling, general and administrative expenses decreased for the first nine months of 2001 to $757,000 compared to $1,081,000 for the first nine months of 2000. The primary reason for this decrease was the reduction of personnel in and legal expense in 2001 which was offset slightly by increases in contractual services, software services and marketing and advertising expense. In July of 2001, the Company entered into an agreement with Ennovative Commerce Solutions, Inc. ("Ennovative"), based in California, whereby effective July 1, 2001, Ennovative manages and operates the business of Cybermax, Inc. ("Cybermax"), a wholly owned subsidiary of the Company. Ennovative receives a management fee of 60% of the profits and is responsible for funding 60% of the losses of Cybermax as defined by the agreement. During the third quarter of 2001, Cybermax recorded miscellaneous income of $26,000 for Ennovative's share of Cybermax losses. Buildscape The Company's investment in Buildscape at September 30, 2001 and December 31, 2000 was a deficit of $947,000. Accordingly, the Company has not recorded its equity in Buildscape's losses since October 21, 1999. In addition, the Company recorded no gains during the three and nine months ended September 30, 2001 and 2000, relating to Buildscape's sale of unissued common stock and membership interest in Buildscape LLC. On September 12, 2001, Buildscape, LLC executed a Second Amendment and Restated Note ("Amended Note"), under which Dow may make advances in the aggregate principal amount of $13,000,000 to Buildscape, LLC. Riverside executed a Guaranty for 35.1% of this Amended Note. If payments of principal and interest under the Amended Note are not paid, Dow may call the guaranty and Riverside may satisfy its obligation by transferring to Dow shares of its Buildscape common stock up to 1,014,000 shares. See Note 3 to the Consolidated Financial Statements for summary unaudited financial information for Buildscape for the three and nine months ended September 30, 2001 and 2000. Wickes The Company's results of operations for the third quarter of 2001 include losses of $215,000 attributable to Wickes, compared to profits of $218,000 for the same period in 2000. The Company's results of operations include losses of $3,344,000 and $1,226,000 attributable to Wickes, for the nine months ended September 30, 2001 and 2000, respectively. For additional information regarding Wickes' financial statements, see the Wickes Form 10Q for the third quarter of 2001 filed by Wickes on November 13, 2001 with the Securities and Exchange Commission. Parent Company and Other Subsidiaries The following discussion relates to the operations of the Parent Group, excluding the real estate operations. The Parent Group's non-interest operating expenses for the third quarter of 2001 decreased to $64,000 compared to $132,000 during the same period in 2000. For certain costs, including human resources, senior management, accounting and office related expenses, the Parent Company charges its subsidiaries for its share of its costs based on actual usage during a period. As a result, comparison between periods may not be meaningful. Revenues of the Parent Group (excluding sales and investment income) for the third quarter of 2001 and 2000 were $0 and $42,000, respectively. Interest expense (excluding interest allocation to Wickes for the Parent Company's 11% Secured Notes of $408,000 in 2001 and $411,000 in 2000) for the third quarter of 2001 and 2000, was $187,000 and $356,000, respectively. Interest expense consisted of $113,000 on the Company's mortgage debt, $65,000 on the Imagine loan and $9,000 on the Wickes promissory note, for the third quarter of 2001. Interest consisted of $284,000 on the Company's mortgage debt, $62,000 on the Imagine loan and $10,000 on the Wickes promissory note, for the third quarter of 2000. The Company expects the interest expense to continue decreasing in 2001, due to a lower principal balance on the Company's mortgage debt. The Parent Group's non-interest operating expenses for the first nine months of 2001 decreased to $333,000 compared to $529,000 during the same period in 2000. The primary reason for the decrease is the compensation expense recorded on the transfer of Greenleaf common stock options to certain employees during the second quarter of 2000. In the same 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 and an offsetting compensation expense of approximately $105,000. For certain costs, including human resources, senior management, accounting and office related expenses, the Parent Company charges its subsidiaries for its share of its costs based on actual usage during a period. As a result, comparison between periods may not be meaningful. Revenues of the Parent Group (excluding sales and investment income) for the first nine months of 2001 and 2000 were $211,000 and $77,000, respectively. Interest expense (excluding interest allocation to Wickes for the Parent Company's 11% Secured Notes of $1,208,000 in 2001 and $1,059,000 in 2000) for the first nine months of 2001 and 2000, was $614,000 and $1,042,000 respectively. Interest expense consisted of $386,000 on the Company's mortgage debt, $195,000 on the Imagine loan and $33,000 on the Wickes promissory note, for the first nine months of 2001. Interest consisted of $828,000 on the Company's mortgage debt, $178,000 on the Imagine loan and $36,000 on the Wickes promissory note, for the first nine months of 2000. The Company expects the interest expense to continue decreasing in 2001, due to a lower principal balance on the Company's mortgage debt. Real Estate Held for Sale The Company's real estate held for sale at September 30, 2001 consists of $4,722,000 in Georgia properties, and $8,000 in other states. Investments in real estate held for sale are carried at the lower of cost or fair value. As a result, the Company's investment in real estate is carried at cost. Included in the real estate held for sale are approximately 87 acres of land located within Highlands Park in Smyrna, Georgia. The Company had no sales of its real estate investments during the third quarter of 2001. 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. During the first nine months of 2001, the Company sold 41 acres of its Highlands property for approximately $6,389,000. The Company recorded gains of approximately $3,916,000 on these sales. The entire sales proceeds were used to pay the Company's mortgage debt and a prepayment of interest. During the first nine months 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 and 6.83 acres of its Florida property for $1,636,000, and recorded a loss of $3,000 on the sale. During the fourth quarter of 1999, the Company had established a reserve for $278,000 on this property. Greenleaf The Company had no sales of its Greenleaf common stock for the third quarter of 2001. Compared to the third quarter of 2000, when the Company sold 227,000 shares of its Greenleaf common stock for approximately $309,000, resulting in gains of approximately $309,000. All of the proceeds from the sales in 2000 were used to pay principal and interest on the Company's 11% Secured Notes. The Company had no sales of its Greenleaf escrow shares during the third quarter of 2001. During the third quarter of 2000, the Company sold 40,000 shares of its Greenleaf escrow shares for approximately $45,000, of which $22,500 was paid to Greenleaf. During the first nine months of 2001, the Company sold 300,000 shares of its Greenleaf common stock for approximately $77,000 resulting in gains of approximately $77,000. Compared to the first nine months of 2000, when the Company sold 770,000 shares of its Greenleaf common stock for approximately $1,286,000, resulting in gains of approximately $1,286,000. The agent for the 11% Note holders allowed the proceeds of the sales to date in 2001 released to the Company to cover operating costs. The Company had no sales of its Greenleaf escrow shares during the first nine months of 2001. During the first nine months of 2000, the Company sold 40,000 shares of its Greenleaf escrow shares for approximately $45,000, of which $22,500 was paid to Greenleaf. For additional information regarding Greenleaf financial statements, see the Greenleaf Form 10-SB filed by Greenleaf on January 19, 2001 with the Securities and Exchange Commission. Income Taxes The Company's effective tax rate was 2% and 0% for the three and nine months ended September 30, 2001 and 2000, respectively. 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 Riverside's general liquidity requirements consist primarily of funds for payment of debt and related interest and for operating expenses and overhead. The Company's operations consist primarily of asset sales (real estate, Greenleaf shares and Wickes shares) and Cybermax's operations. Proceeds from real estate sales are required to be applied to real estate debt reduction and are not available to Riverside for other purposes. Riverside's cash on hand will not be sufficient to support its operations and overhead through 2001. Therefore, the Company will need to obtain significant additional funds through asset sales or additional borrowings or other financing for such purposes and may need to reduce the level of its operations. As described in Note 6, the Company is in default with respect to the majority of its outstanding long-term debt. The Company's immediate plans are to reorganize its debts that are currently due and evaluate options on liquidating assets and investments to meet the debt requirements. There can be no assurance that the Company will be able to successfully negotiate a restructuring of its debt and the failure to do so would have a material adverse effect on the Company's financial position. In addition, if a successful restructuring of its debt obligations does not occur, the Company may need to seek reorganization under applicable federal bankruptcy laws. Cash Used in Operations ----------------------- During the third quarter of 2001, the Company used approximately $5,000 of cash for its operations, including $83,000 of cash used for the operations of Cybermax and $78,000 of cash provided by the operations of the Parent Company. During the first nine months of 2001, the Company used approximately $538,000 of cash for its operations, including $235,000 of cash used for the operations of Cybermax and $303,000 of cash used for the operations of the Parent Company. Cash Provided by Investing Activities ------------------------------------- During the third quarter of 2001, the Company sold 2,000 shares of its Wickes stock for approximately $8,000. During the first nine months of 2001, sales of the Company's real estate investments generated approximately $5,863,000 of cash. These proceeds were used to reduce the real estate debt. During the first nine months of 2001, the Company sold 50,800 shares of its Wickes stock for approximately $223,000. The proceeds from these sales were used to cover the operations of Cybermax and the Parent Company. The Company also sold 300,000 shares of its Greenleaf stock for approximately $77,000 during the first nine months of 2001. The proceeds from these sales were used to cover the operations of Cybermax and the Parent Company. Cash Used in Financing Activities --------------------------------- As of September 30, 2001, the Company mortgage debt is approximately $5,612,000. During the first nine months of 2001, the Company reduced the principal balance of its mortgage debt by approximately $5,733,000. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The following discussion about the Company's risk-management activities includes "forward-looking" statements that involve risk and uncertainties. Actual results could differ materially from those projected in the forward-looking statements. The Company is subject to market risk from changes in market price of equities and real estate. In accordance with SFAS 115, "Accounting for Certain Investments in Debt and Equity Securities" 10,200,000 and 5,665,508 shares of the Company's common stock of Greenleaf are, and were, respectively, classified as available for sale at September 30, 2001, and the remaining 4,834,492 Greenleaf shares at December 31, 2000, were restricted under the provisions of Rule 144 promulgated under the Securities and Exchange Act of 1934 and were not considered to be marketable equity securities subject to valuation under the provisions of SFAS 115. Accordingly, these restricted shares were not reported at fair value at December 31, 2000, but rather are recorded at their cost basis of zero. The unrealized gain at September 30, 2001, of $408,000 has decreased to $163,200 at November 10, 2001 due to a decrease in the market price of the underlying equities. The market demand directly impacts the Company's ability to sell these securities which effects realized gains and cash flow. Historically, all proceeds from the sale of these securities have been applied to reduce debt. However, in August Imagine allowed the Company to use the proceeds for operating costs. The increase in cash flow improves the Company's ability to repay its debt and support operations. While the Company cannot influence or control the fluctuations in market price of the equities, management observes the price and demand on these equities on a daily basis in an effort to take advantage of any upswings in the market which presents favorable conditions to sell shares. The Company is currently liquidating its real estate portfolio and is exposed to any adverse changes in the real estate market. The Company believes that based on current economic conditions and the values of real estate, proceeds from the sale of its real estate will allow it to pay off its mortgage debt and pay down its 11% Secured Notes. However deterioration in economic conditions and /or a decline in the value of real estate could have a significant negative impact. The table below reflects the impact that a decrease of 10% and 25% in market prices may have on the Company's realized gains on real estate sales and the cash available to pay down the 11% Secured Notes. Current @ 90% @ 75% (in thousands) Value Value Value -------------- ----- ----- ----- Market price less sales expenses $ 12,314 $ 11,083 $ 9,236 Realized gains $ 7,648 $ 6,417 $ 4,570 Cash flow net of mortgage debt $ 5,840 $ 4,695 $ 2,977 The Company believes that its interest rate risk is minimal as a hypothetical ten percent increase or decrease in interest rates is immaterial to the Company's cash flow and earnings. The Company has mortgage debt at a floating rate of interest calculated as the London InterBank Offered Rate ("LIBOR") plus 300 basis points, with a current outstanding balance of $5.6 million. 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% collateralized notes, see Note 6 of Notes to Condensed Consolidated Financial Statements included elsewhere herein. Item 6. Exhibits and Reports on Form 8-K 4.1 (a) Guaranty Agreement dated September 12, 2001 among the registrant and Dow Chemical Company Reports on Form 8-K None 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, 2001 [RIVERSIDE GUARANTY AGREEMENT] GUARANTY THIS FIRST AMENDED AND RESTATED GUARANTY, dated as of September 12, 2001 (this "Guaranty"), by RIVERSIDE GROUP, INC., a Delaware corporation (the "Guarantor"), for the benefit of THE DOW CHEMICAL COMPANY, a Delaware corporation (together with its successors and assigns, "Lender") in connection with a SECOND AMENDED AND RESTATED SECURED PROMISSORY NOTE from BUILDSCAPE, LLC., a Delaware limited liability company ("Borrower"), in favor of Lender and dated on even date herewith. R E C I T A L A. Borrower has executed a Second Amended and Restated Secured Promissory Note, dated on even date herewith, amending and restating the First Amended and Restated Secured Promissory Note dated June 28,2001, which in turn amended and restated the Secured Promissory Note dated April 12, 2001, in favor of Lender pursuant to which Lender may make Advances (as defined in the Note) to Borrower in the aggregate principal amount of up to $13,000,000 (said Note, together with all extensions, amendments, renewals, substitutions, consolidations or modifications thereof hereafter collectively called the "Note"). B. Guarantor is, through its ownership of Buildscape Inc. securities or other rights to such securities, the beneficial owner of approximately 35.1% of the membership interests of Borrower and will be benefited, directly and/or indirectly, by the making of Advances to Borrower. C. Condition precedents to the agreement of Lender to make any Advances include the execution and delivery of this Guaranty by Guarantor. D. To satisfy said condition precedent and to induce Lender to make the Advances, Guarantor has entered into this Guaranty. NOW, THEREFORE, FOR GOOD AND VALUABLE CONSIDERATION, the receipt and sufficiency of which are hereby acknowledged, and to induce Lender to make the Advances evidenced by the Note, and to accept the Note and to consummate the transactions contemplated hereunder and thereunder, Guarantor hereby covenant and agree as follows: 1. Guarantor hereby unconditionally and irrevocably guarantees to Lender and agrees for the benefit of Lender to be liable, as primary obligor and not merely as surety, jointly and severally with Borrower, for the due and punctual payment to Lender (whether upon acceleration or otherwise in accordance with the terms thereof) all of the aggregate unpaid principal amounts of each of the Advances, together with accrued interest thereon (collectively the "Loan"), as evidenced by the Note, but not to exceed Thirty-Five and One Tenth Percent ( 35.1%) of the aggregate amount outstanding (principal and interest) under the Loan. In addition, Guarantor hereby agrees to pay to Lender, on demand, all reasonable attorneys' fees and disbursements and court costs incurred in connection with enforcing Lender's rights against Guarantor under or in connection with this Guaranty, whether in litigation, in administrative, bankruptcy or reorganization proceedings affecting Borrower or Guarantor, in appeals therefrom, or otherwise (collectively, "Enforcement Costs"). This is a guaranty of payment and performance and not merely of collection. Guarantor's obligations hereunder shall be unconditional (and shall not be subject to any defense, setoff, deduction, counterclaim or recoupment whatsoever) irrespective of the genuineness, validity, regularity or enforceability of the Loan or any conduct of Borrower and/or Lender which might constitute a legal or equitable discharge of a surety, co-obligor, guarantor or guaranty. Guarantor shall, promptly upon the request of Secured Party and from time to time, execute acknowledgements, in form and substance reasonably satisfactory to Secured Party, stating that each Advance is covered by this Guaranty; failure to request any such acknowledgement shall not in any way prejudice the rights of Secured Party hereunder. 2. Lender shall have the right from time to time to demand payment from Guarantor of such sums for which Guarantor may be liable hereunder, which demand shall be in writing and which payment shall be in lawful money of the United States. 3. The obligations hereunder are independent of the obligations of Borrower or the obligations of any other person or guarantor who may be liable to Lender, in whole or in part, for the Loan, or any part thereof, and a separate action or actions may be brought and prosecuted against Guarantor whether an action is brought against Borrower alone or whether Borrower be joined in any such action or actions. Guarantor waive the benefit of any statute of limitations affecting its liability hereunder or the enforcement hereof. 4. Notwithstanding anything contrary contained herein, Guarantor may, at its sole option, satisfy any or all of its obligations under this Guaranty by assigning and conveying over to Lender its right, title and interest to common stock of Buildscape, Inc. For each share of Buildscape, Inc. common stock so assigned and conveyed, Borrower's obligations under the Note (and thus Guarantor's obligations under this Guaranty) shall be reduced $4.50. 5. Guarantor authorizes Lender, without notice or consent and without affecting, impairing or discharging, in whole or in part, Guarantor' liability hereunder, to, from time to time, (a) renew, modify, amend, compromise, extend, accelerate, discharge, or otherwise change the time for payment or performance of, or otherwise change the terms or provisions of, the Loan, or any part thereof, including, without limitation, increasing or decreasing the rate of interest payable with respect to or in connection with the Loan; (b) take and hold security for the payment of this Guaranty or the Loan, and exchange, subordinate, foreclose on, enforce, waive, release or otherwise deal with any such security; (c) apply such security and direct the order or manner of sale thereof as Lender in its discretion may determine; (d) exercise or refrain from exercising any of its rights or obligations under the Note, at law or in equity; (e) apply any payments or other security, collateral or recoveries or proceeds therefrom against the portion of the Loan not guaranteed hereunder before application thereof to the portion of the Loan guaranteed hereunder; and (f) release or substitute, in whole or in part, Guarantor, any general partner, shareholder, or member of, or other owner of a beneficial ownership interest in, Borrower, any one or more of the endorsers or anyone else who may be partially or wholly liable for any part of the Loan. Guarantor hereby waive all suretyship defenses. Lender may, without notice, assign this Guaranty in whole or in part. 6. Guarantor, to the extent permitted under law, waive any right to require Lender to (a) proceed with or exhaust remedies against Borrower; (b) proceed against or exhaust any security received from Borrower or Guarantor and held by Lender; (c) pursue any other remedy whatsoever to which Lender may be entitled; (d) apply any such security first against any other person or guarantor who may be liable to Lender, in whole or in part, for the Loan. Guarantor agree that no failure by Lender to file, record or otherwise perfect any lien against or security interest in property collateralizing the Loan, or Guarantor' obligations hereunder, nor any improper filing or recording, nor failure by Lender to insure or protect any such security nor any other dealing (or failure to deal) with any such security by Lender shall impair or release Guarantor from Guarantor's obligations hereunder. Without limiting the foregoing, Lender shall be entitled to exercise all of its rights and remedies hereunder against Guarantor without regard to whether or not the Loan has matured or been accelerated, or an action has been commenced against Borrower. 7. Guarantor waives any defense arising by reason of any disability or other defense of Borrower or by reason of the cessation or modification from any cause whatsoever of the liability of Borrower. Without limiting the preceding sentence, the obligations of Guarantor shall remain in full force and effect without regard to, and shall not be affected or impaired by, the following, nor shall the following create a defense by Guarantor with respect to such obligations, or give Guarantor any recourse or right of action against Lender: any bankruptcy, insolvency, reorganization, dissolution, liquidation, moratorium or other like proceeding relating to Borrower, any shareholder, affiliate or partner of Borrower, Guarantor or other person or entity, or any action taken with respect to this Guaranty or the Note by any trustee, debtor-in-possession, receiver or court, in or pursuant to any such proceeding. Guarantor is fully aware of the financial condition, business and prospects of Borrower and assumes full responsibility for obtaining any additional information now or hereafter related thereto, without reliance on Lender to any extent. Guarantor waives any right to enforce any remedy which Lender now has or may hereafter have against Borrower, and waives any benefit of, and any right to participate in, any security now or hereafter held by Lender. Guarantor waives diligence, all presentments, demands for performance, notices or non-performance or default, protests, notices of protest, notices of dishonor, notices of acceptance of this Guaranty and of the existence, creation or incurring of new, changed, modified, increased or additional indebtedness to Lender, and all other notices of every and any kind. 8. Any indebtedness of Borrower now or hereafter held by or owing to Guarantor is hereby subordinated to the Loan, and such indebtedness of Borrower to Guarantor, if Lender so requests, shall be collected, enforced and received by Guarantor as trustee for Lender and be paid over to Lender on account of the Loan, but without reducing or affecting in any manner the liability of Guarantor under the other provisions of this Guaranty, except to the extent Lender realizes payment on the Loan by receipt of such payment. In the event of any distribution, division or application, partial or complete, voluntary or involuntary, by operation of law or otherwise, of all or any part of the assets of Borrower or the proceeds thereof to the creditors of Borrower by reason of dissolution, liquidation or other winding up of Borrower or its business, or compromise or settlement with its creditors, or any sale, receivership, insolvency, reorganization or bankruptcy proceeding or assignment for the benefit of creditors, or any proceeding by or against Borrower for any relief under provisions of any bankruptcy, reorganization or insolvency laws, then, and in any such event, any payment or distribution of any kind or character which shall be payable or deliverable with respect to any and all indebtedness due to Guarantor by Borrower shall be paid or delivered directly to Lender for application on the Loan until the Loan shall have first and fully been paid and satisfied. Guarantor hereby assigns, transfers and sets over to Lender all of its rights to any and all such distributions. 9. Guarantor hereby represents, warrants, covenants and agrees as follows (the "Representations"): (a) This Guaranty constitutes the legal, valid and binding obligation of Guarantor, enforceable against Guarantor in accordance with its terms; and (b) Neither the execution or delivery of this Guaranty, nor the performance by Guarantor of the agreements, waivers and other terms and provisions hereof, will violate or conflict with the provisions of any agreement, instrument or other restriction of any kind to which Guarantor is a party, or by which Guarantor or any of Guarantor' properties are bound, or with any statute, law, decree, regulation or order of any governmental authority, nor will it result in a default under any agreement, or cause the acceleration of any obligation or loan to which Guarantor is a party. 10. Guarantor agrees to pay, upon demand therefor, reasonable attorneys' fees and all other costs and expenses that may be incurred by Lender in the enforcement of this Guaranty and agree that all attorneys' fees and other costs and expenses incurred by Lender in pursuing or enforcing rights under this Guaranty, or with respect to the Loan or this Guaranty shall constitute indebtedness which is guaranteed hereunder. 11. This Guaranty cannot be changed, modified or terminated orally, but only by an instrument signed by Guarantor and Lender. No delay on the part of Lender in exercising any of its options, powers or rights hereunder, or partial or single exercises thereof, shall constitute a waiver thereof. The obligations of Guarantor hereunder shall be binding upon Guarantor's successors, representatives, estates and assigns and shall inure to the benefit of Lender's successors and assigns. If any term or provision of this Guaranty, or the application thereof to any person or circumstance shall to any extent be invalid or unenforceable, the remainder of this Guaranty, or the application of such term or provision to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby, and each term and provision of this Guaranty shall be valid and be enforced to the fullest extent permitted by law. THIS GUARANTY AND THE OBLIGATIONS ARISING HEREUNDER SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK (WITHOUT GIVING EFFECT TO CONFLICTS OF LAW PRINCIPLES) APPLICABLE TO CONTRACTS MADE AND PERFORMED IN SUCH STATE AND ANY APPLICABLE LAW OF THE UNITED STATES OF AMERICA. TO THE FULLEST EXTENT PERMITTED BY LAW, GUARANTOR HEREBY UNCONDITIONALLY AND IRREVOCABLY WAIVES ANY CLAIM TO ASSERT THAT THE LAW OF ANY OTHER JURISDICTION GOVERNS THIS GUARANTY, AND THIS GUARANTY SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK PURSUANT TO ss. 5-1401 OF THE NEW YORK GENERAL OBLIGATIONS LAW. 12. Guarantor consents and agrees that Lender shall be under no obligation to marshall any asset in favor of Guarantor, or against or in payment of any or all of the Loan. Guarantor further agree that to the extent Borrower or Guarantor make a payment or payments to Lender which payment or payments or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside and/or required to be repaid to a trustee, debtor-in-possession, receiver or any other party under any bankruptcy act or code, state or federal law, common law or equitable cause, or any settlement of a claim to that effect (any such payment is hereafter referred to as a "Preferential Payment"), then to the extent of such Preferential Payment, the obligation or part thereof intended to be satisfied shall be revived and continued in full force and effect as if said Preferential Payment had not been made. Until such time as the Loan has been paid in full and the period of time has expired during which any payment made by Borrower or Guarantor to Lender may be determined to be a Preferential Payment, any claim or other rights which Guarantor may now have or hereafter acquire against Borrower that arise from the existence or performance of Guarantor's obligations under this Guaranty or any other agreement (all such claims and rights are referred to as "Guarantor's Conditional Rights"), including without limitation, any right of subrogation, reimbursement, exoneration, contribution, or indemnification, any right to participate in any claim or remedy of Lender against Borrower or any collateral which Lender now has or hereafter acquires, whether or not such claim, remedy or right arises in equity or under contract, statute or common law, by any payment made hereunder or otherwise, including without limitation, the right to take or receive from Borrower, directly or indirectly, in cash or other property or by setoff or in any other manner, payment or security on account of such claim or other rights, shall be subordinate to Lender's right to full payment of the Loan, and Guarantor shall not enforce Guarantor's Conditional Rights until such time as the Loan has been paid in full and the period of time has expired during which any payment made by Borrower or Guarantor to Lender may be determined to be a Preferential Payment. 13. Any and all present and future debts and obligations of Borrower to Guarantor are hereby postponed in favor of, and subordinated to the full payment of the Loan, and as security for this Guaranty, Guarantor hereby assigns to Lender all claims of any nature which Guarantor may now or hereafter have against Borrower. 14. This Guaranty shall remain in full force and effect without respect to future changes in conditions, including, without limitation, change of law or any invalidity or irregularity with respect to the issuance of any obligations of Borrower to Lender or with respect to the execution and delivery of any agreement between Borrower and Lender. 15. Lender shall have the right to seek recourse against Guarantor to the full extent provided for herein and in any other document or instrument evidencing obligations of Guarantor to Lender, and against Borrower, to the full extent provided for in the Note. No election to proceed in one form of action or proceeding, or against any party, or on any obligation, shall constitute a waiver of Lender's right to proceed in any other form of action or proceeding or against other parties unless Lender has expressly waived such right in writing. Specifically, but without limiting the generality of the foregoing, no action or proceeding by Lender against Borrower under any document or instrument evidencing or securing the Loan shall serve to diminish the liability of Guarantor except to the extent Lender realized payment on the Loan by such action or proceeding. 16. Guarantor shall promptly execute and deliver to Lender or its designee written reaffirmation of Guarantor's obligations hereunder if so requested by Lender from time to time. Guarantor's absolute obligation to make such reaffirmation is not to be construed to infer an absence of liability on Guarantor's behalf in any instance in which Guarantor are not asked to reaffirm (or fail to reaffirm) Guarantor' obligations, notwithstanding any modification of Borrower's obligations to Lender. 17. This Guaranty shall remain in full force and effect, and shall be automatically reinstated, without any further action on the part of Lender in the event that Lender is required, in any bankruptcy, reorganization, insolvency, or other proceeding involving Borrower, to return or rescind any payment made to, or value received by, Lender from or of the account of Borrower. This Section and the last sentence of Section 15 hereof shall remain in full force and effect notwithstanding any termination of this Guaranty or release by Lender of Guarantor unless terminated by a duly authorized officer of Lender by a written instrument which includes specific reference to this Section. 18. Any notice, approval, demand, statement, request or consent (a "Notice") made hereunder shall be in writing and shall be sent and be deemed given three (3) business days after being sent by registered or certified mail, postage prepaid, return receipt requested, or one (1) business day after the date sent by Federal Express or other nationally recognized overnight courier providing evidence of delivery, (i) if to Riverside, to: 7800 Belfort Parkway, Suite 100, Jacksonville, Florida 32256, or (iii) if to Lender, to: 2030 Dow Center, Midland, Michigan 48674, or to such other address or addresses as Guarantor or Lender, as the case may be, shall in like manner designate in writing. 19. (a) ANY LEGAL SUIT, ACTION OR PROCEEDING AGAINST LENDER OR GUARANTOR ARISING OUT OF OR RELATING TO THIS GUARANTY SHALL BE INSTITUTED ONLY IN ANY FEDERAL OR STATE COURT IN NEW YORK, NEW YORK, PURSUANT TO ss. 5-1402 OF THE NEW YORK GENERAL OBLIGATIONS LAW, AND GUARANTOR WAIVE ANY OBJECTION WHICH THEY MAY NOW OR HEREAFTER HAVE TO THE FIXING OF VENUE (INCLUDING GROUNDS OF FORUM NON CONVENIENS) OF ANY SUCH SUIT, ACTION OR PROCEEDING, AND GUARANTOR HEREBY IRREVOCABLY SUBMITS TO THE JURISDICTION OF ANY SUCH COURT IN ANY SUIT, ACTION OR PROCEEDING. (b) GUARANTOR AND LENDER EACH HEREBY ABSOLUTELY, IRREVOCABLY AND UNCONDITIONALLY WAIVES TRIAL BY JURY IN ANY LITIGATION, ACTION, CLAIM, SUIT OR PROCEEDING, AT LAW OR IN EQUITY, ARISING OUT OF, PERTAINING TO OR IN ANY WAY ASSOCIATED WITH (I) THE LOAN, (II) THIS GUARANTY, (III) THE RELATIONSHIP OF THE PARTIES HERETO AS LENDER AND GUARANTOR, (IV) THE NOTE, OR (V) THE ACTIONS OF GUARANTOR AND LENDER IN CONNECTION WITH ANY OF THE FOREGOING. GUARANTOR WAIVES ANY CLAIM FOR INDIRECT, PUNITIVE OR CONSEQUENTIAL DAMAGES AGAINST LENDER ARISING OUT OF, PERTAINING TO OR IN ANY WAY ASSOCIATED WITH THE LOAN. THIS WAIVER OF RIGHT TO TRIAL BY JURY IS GIVEN KNOWINGLY AND VOLUNTARILY BY GUARANTOR, AND IS INTENDED TO ENCOMPASS INDIVIDUALLY EACH INSTANCE AND EACH ISSUE AS TO WHICH THE RIGHT TO A TRIAL BY JURY WOULD OTHERWISE ACCRUE. LENDER IS HEREBY AUTHORIZED TO FILE A COPY OF THIS PARAGRAPH IN ANY PROCEEDING AS CONCLUSIVE EVIDENCE OF THIS WAIVER BY GUARANTOR. IN WITNESS WHEREOF, the undersigned Guarantor has executed and delivered this Guaranty, independent of any other guarantor and not relying upon or in consideration of the execution hereof by any other party, as of the date first written above. GUARANTOR: RIVERSIDE GROUP, INC. By: ____________________________ Name: Catherine J. Gray Title: Senior Vice President

RIVERSIDE GROUP INC/FL 10-Q