-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JiORQWPfyZe3DSZqFMSK9gE5XgNjgEhwc9FgeL1bb/o2EycaJg879wb0MCs5jMd5 ta5Nex2pfyjnEPFcy989pw== /in/edgar/work/0001125282-00-000606/0001125282-00-000606.txt : 20001116 0001125282-00-000606.hdr.sgml : 20001116 ACCESSION NUMBER: 0001125282-00-000606 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FORTRESS GROUP INC CENTRAL INDEX KEY: 0001010607 STANDARD INDUSTRIAL CLASSIFICATION: [1520 ] IRS NUMBER: 541774997 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-28024 FILM NUMBER: 768734 BUSINESS ADDRESS: STREET 1: 1650 TYSONS BLVD STREET 2: SUITE 600 CITY: MCLEAN STATE: VA ZIP: 22102 BUSINESS PHONE: 7034424545 MAIL ADDRESS: STREET 1: 1650 TYSONS BLVD STREET 2: SUITE 600 CITY: MCLEAN STATE: VA ZIP: 22102 10-Q 1 0001.txt QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended: September 30, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from _________to _________. Commission file number: 0-28024 THE FORTRESS GROUP, INC. (Exact name of registrant as specified in its charter) Delaware 54-1774997 (State or other jurisdiction (IRS Employer Identification No.) of incorporation or organization) 1650 Tysons Boulevard, Suite 600, McLean, Virginia 22102 (Address of principal executive offices and zip code) Registrant's telephone number, including area code: (703) 442-4545 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _X_ No __ As of November 11, 2000 there were outstanding 3,094,739 shares of common stock, par value $.01, of the registrant. THE FORTRESS GROUP, INC. QUARTER ENDED September 30, 2000 INDEX PAGE PART I - FINANCIAL INFORMATION Item 1. The Fortress Group, Inc. Consolidated Balance Sheets (unaudited) 3 Consolidated Statements of Operations (unaudited) 4 Consolidated Statements of Cash Flows (unaudited) 6 Condensed Notes to Consolidated Financial Statements (unaudited) 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 15 PART II - OTHER INFORMATION Item 2. Changes in Securities 22 Item 6. Exhibits and Reports on Form 8-K. 22 (a) Exhibits. (b) Reports on Form 8-K. PART III - SIGNATURES 23 EXHIBIT INDEX 24 2 THE FORTRESS GROUP, INC. CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except per share amounts)
September 30, December 31, 2000 1999 ------------- ------------ (unaudited) ASSETS Cash and cash equivalents $ 7,400 $ 17,526 Accounts and notes receivable 12,049 12,748 Real estate inventories 349,249 328,513 Land held for resale 0 0 Mortgage loans 18,089 20,229 Investments in land partnerships 3,149 1,518 Property and equipment, net 11,023 12,392 Prepaid expenses and other assets 27,311 22,803 Goodwill, net 33,541 35,452 -------- --------- Total assets $461,811 $451,181 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Accounts payable and accrued construction liabilities $ 31,339 $ 38,915 Notes and mortgages payable 313,847 301,658 Accrued expenses 22,248 18,905 Customer deposits 11,219 10,530 -------- -------- Total liabilities 378,653 370,008 -------- -------- Minority interest 0 79 Obligation under Preferred Stock Redemption Agreements (See Note 6) 2,921 1,421 Shareholders' equity Preferred stock, all classes and series, $.01 par value, 1 million 1 1 authorized (See Note 6) Common stock, $.01 par value, 99 million authorized, 3,087,820 and 3,124,065 issued, respectively (See Note 7) 31 31 Additional paid-in capital 49,622 54,402 Retained earnings 30,583 26,460 Treasury stock, at cost, 0 and 265,100 shares, respectively 0 (1,221) -------- -------- Total shareholders' equity 80,237 79,673 -------- -------- Total liabilities and shareholders' equity $461,811 $451,181 ======== ========
The accompanying notes are an integral part of these financial statements. 3 THE FORTRESS GROUP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited, dollars in thousands, except per share amounts)
For the Three For the Three Months Ended Months Ended September 30, 2000 September 30, 1999 ------------------ ------------------ TOTAL REVENUES $174,913 $182,076 ------- ------- HOMEBUILDING: Residential sales $166,167 $176,245 Lot sales and other 7,317 4,410 -------- -------- Homebuilding revenues 173,484 180,655 Cost of sales 146,974 153,409 -------- -------- Gross profit 26,510 27,246 Selling 11,813 11,337 General and administrative 8,726 8,464 Asset impairment charge (see Note 9) 0 1,990 Goodwill amortization 636 603 -------- -------- Operating income 5,335 4,852 -------- -------- Other expense (income): Interest expense 596 1,156 Interest (income) (181) (147) Other, net (673) (484) ------- -------- Homebuilding income before taxes 5,593 4,327 FINANCIAL SERVICES: Revenues 1,429 1,421 General, administrative and other expenses 1,288 1,619 Interest expense 410 316 Interest (income) (349) (287) ------- -------- Financial Services income/(loss) before taxes 80 (227) Income before taxes 5,673 4,100 Provision for income taxes 2,327 1,822 ------- -------- Net income $ 3,346 $ 2,278 ======= ======== Net income available to common shareholders, basic $ 2,680 $ 1,610 ======= ======== Net income available to common shareholders, diluted $ 3,321 $ 1,610 ======= ======== NET INCOME PER SHARE DATA (See Note 7): Net income per share, basic $ 0.87 $ .53 ======= ======== Net income per share, diluted $ 0.77 $ .50 ======= ======== Weighted average shares outstanding, basic 3,083,390 3,044,075 ========= ========= Weighted average shares outstanding, diluted 4,339,745 3,194,340 ========= =========
The accompanying notes are an integral part of these financial statements. 4 THE FORTRESS GROUP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited, dollars in thousands, except per share amounts)
For the Nine For the Nine Months Ended Months Ended September 30, 2000 September 30, 1999 ------------------ ------------------ TOTAL REVENUES $489,167 $514,811 -------- ------- HOMEBUILDING: Residential sales $472,338 $502,504 Lot sales and other 12,809 7,924 -------- -------- Homebuilding revenues 485,147 510,428 Cost of sales 413,585 434,870 -------- -------- Gross profit 71,562 75,558 Selling 33,137 33,496 General and administrative 25,858 25,595 Asset impairment charge (see Note 9) 0 1,990 Special charges (see Note 8) 0 1,270 Goodwill amortization 1,910 1,989 -------- -------- Operating income 10,657 11,218 -------- -------- Other expense (income): Interest expense 2,367 3,494 Interest (income) (526) (422) Other, net (1,496) (1,764) -------- -------- Homebuilding income before taxes 10,312 9,910 FINANCIAL SERVICES: Revenues 4,020 4,383 General, administrative and other expenses 3,752 4,364 Interest expense 1,109 875 Interest (income) (911) (756) -------- -------- Financial Services income/(loss) before taxes 70 (100) Loss on sale of Landmark Homes (see Note 8) 0 2,900 Income before taxes 10,382 6,910 Provision for income taxes 4,257 3,147 -------- -------- Net income $ 6,125 $ 3,763 ======== ======== Net income available to common shareholders, basic $ 4,125 $ 1,302 ======== ========= Net income available to common shareholders, diluted $ 4,125 $ 1,302 ======== ========= NET INCOME PER SHARE DATA (See Note 7): Net income per share, basic $ 1.34 $ .43 ======== ======== Net income per share, diluted $ 1.31 $ .41 ======== ======== Weighted average shares outstanding, basic 3,071,161 3,022,886 ========= ========= Weighted average shares outstanding, diluted 3,159,889 3,195,675 ========= =========
The accompanying notes are an integral part of these financial statements. 5 THE FORTRESS GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited, in thousands)
For the Nine For the Nine Months Ended Months Ended September 30, 2000 September 30, 1999 ------------------ ------------------ Cash flows from operating activities Net income $ 6,125 $ 3,763 Adjustments to reconcile net income to net cash (used in)/ operating activities: Depreciation and amortization 6,519 7,220 Special charges 0 1,270 Asset impairment charge 0 1,990 (Gain) on sale of investment in land partnerships 0 (291) Loss on sale of Landmark Homes 0 2,900 Loss on sale of property and equipment 12 34 Changes in operating assets and liabilities Accounts and notes receivable 699 1,367 Real estate inventories (23,846) (57,950) Land held for resale 0 7,954 Mortgage loans 2,140 (1,126) Prepaid expenses and other assets (4,507) (1,648) Accounts payable and accrued construction liabilities (7,576) 4,199 Accrued expenses 4,449 1,065 Customer deposits 689 3,804 -------- --------- Net cash (used in) operating activities (15,296) (25,449) -------- --------- Cash flows from investing activities Proceeds from sale of Landmark Homes, net of cash sold 0 3,078 Proceeds from sale of land sale partnership interests 0 5,351 Payment of contingent consideration (3,504) (2,372) Minority interest - change in investment (79) 0 Proceeds from land held for resale 3,584 0 Purchase of property and equipment (2,983) (4,235) Proceeds from sale of property and equipment 97 155 Change in investment in land partnerships (1,631) 1,960 -------- --------- Net cash (used in)/provided by investing activities (4,516) 3,937 -------- --------- Cash flows from financing activities Borrowings under notes and mortgages payable 515,302 514,469 Repayment of notes and mortgages payable (503,953) (486,922) Borrowings from related parties 312 29 Repayment of related party borrowings (145) (343) Conversion of preferred stock 0 (1,693) Preferred stock redemption (521) (13,194) Other (net) 68 (142) Preferred dividends (1,377) (3,081) ---------- --------- Net cash provided by financing activities 9,686 9,123 --------- --------- Net (decrease) in cash and cash equivalents (10,126) (12,389) Cash and cash equivalents, beginning of period 17,526 23,102 --------- --------- Cash and cash equivalents, end of period $ 7,400 $ 10,713 ========= =========
The accompanying notes are an integral part of these financial statements. 6 THE FORTRESS GROUP, INC. CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 - BUSINESS AND ORGANIZATION The Fortress Group, Inc. ("Fortress" or the "Company") was formed in June 1995 to create a national homebuilding company for the acquisition and development of land or improved lots and the construction of residential for-sale housing. Fortress began operations simultaneous with the closing of its initial public offering on May 21, 1996 (the "Offering"), and the acquisition of four homebuilding companies. Currently, the Company operates under the following names in fifteen different markets:
Homebuilder Market(s) ----------- --------- Brookstone Homes ("Brookstone") Janesville, Madison, and Milwaukee, Wisconsin Christopher Homes ("Christopher") Las Vegas, Nevada Fortress Homes and Communities of Florida Jacksonville, Florida ("Fortress Florida") Don Galloway Homes ("Galloway") Charlotte, North Carolina and Charleston, South Carolina The Genesee Company ("Genesee") Denver and Fort Collins, Colorado and Tucson, Arizona Iacobucci Homes ("Iacobucci") Philadelphia, Pennsylvania and Atlantic City, New Jersey Quail Homes ("Quail") Portland, Oregon Sunstar Homes ("Sunstar") Raleigh-Durham, North Carolina Whittaker Homes ("Whittaker") St. Louis, Missouri Wilshire Homes ("Wilshire") Austin and San Antonio, Texas
Beginning in the first quarter of 1999, the Company took steps to exit or reposition itself in the following markets:
Homebuilder Action Market(s) exited ----------- ------ ----------------- Landmark Homes ("Landmark") Sold assets, March Wilmington, North Carolina and Myrtle 1999 Beach, South Carolina Buffington Homes ("Buffington") Merged with Wilshire, Exited certain communities in Austin Buffington name and San Antonio, Texas discontinued, first quarter 1999 WestBrook Homes ("WestBrook") Liquidated operation Loudoun County, Virginia throughout 1999
In January 1997, Fortress formed Fortress Mortgage, Inc. ("Fortress Mortgage"), a wholly-owned subsidiary, to provide a mortgage lending source to the Company's builder subsidiaries. Fortress Mortgage is licensed as a mortgage banker in Arizona, Alaska, California, Colorado, Florida, Missouri, Nevada, North Carolina, Oregon, Pennsylvania, South Carolina, Texas, Virginia, Washington and Wisconsin. The accompanying consolidated financial statements of Fortress have been prepared by the Company. In the opinion of management, the financial statements contain all adjustments (consisting only of normal, recurring adjustments) necessary to present fairly the Company's financial position as of September 30, 2000 and its operating results and cash flows for the nine month periods ended September 30, 2000 and 1999. Certain information and footnote disclosures normally included in financial statements presented in accordance with accounting principles generally accepted in the United States have been condensed or omitted. The Company believes the disclosures made are adequate to make the information presented not misleading. However, the financial statements should be read in conjunction with the financial statements of the Company and notes thereto included in the 1999 Annual Report on Form 10-K. Interim results are not necessarily indicative of fiscal year performance because of the impact of seasonal and short-term variations. 7 NOTE 2 - BASIS OF PRESENTATION AND NEW ACCOUNTING PRONOUNCEMENTS Basis of Presentation - --------------------- The accompanying consolidated financial statements include the accounts of Fortress, a Delaware corporation, and its majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain amounts in the prior period financial statements have been reclassified to conform to the current presentation. All periods presented have been restated to take into account the effects of a one-for-four reverse stock split implemented July 10, 2000. New Accounting Pronouncements - ----------------------------- In 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and hedging activities. The Company intends to adopt SFAS 133 in the first quarter of fiscal 2001. The adoption of SFAS 133 will not have a material effect on the financial position or results of operations of the Company In 1999, the Securities and Exchange Commission ("SEC") staff issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements." SAB 101 explains how generally accepted accounting principles should be applied in the recognition of revenue in financial statements. The Company will implement SAB 101 in the fourth quarter of 2000. The adoption of SAB 101 will not have a material effect on the financial position or results of operations of the Company. NOTE 3 - REAL ESTATE INVENTORIES Real estate inventories are summarized as follows (in thousands):
September 30, December 31, 2000 1999 ------------ ------------ (unaudited) Work-in-progress Sold homes $131,967 $100,759 Speculative 50,215 70,228 -------- -------- Total work-in-progress 182,182 170,987 Land Finished lots 85,977 105,432 Land under development 53,666 22,420 Unimproved land held for development 10,225 13,924 -------- -------- Total land 149,868 141,776 Lumber yard inventory 3,141 2,404 Model homes 14,058 13,346 -------- -------- $349,249 $328,513 ======== ========
8 NOTE 4 - INTEREST Information regarding interest is as follows (in thousands):
For the Nine Months Ended September 30, 2000 1999 ---- ---- (unaudited) (unaudited) During the periods: Interest incurred $ 27,509 $ 25,128 Interest capitalized (24,033) (20,759) Relief of previously capitalized interest 20,049 19,289 --------- --------- Total interest expensed in statement of operations $ 23,525 $ 23,658 ========= ========= At the end of the periods: Capitalized interest in ending inventory $ 27,065 $ 23,368 ========= =========
NOTE 5 - NOTES AND MORTGAGES PAYABLE Notes and mortgages payable consist of the following (in thousands):
September 30, December 31, 2000 1999 ---- ---- (unaudited) 13.75% Senior Notes due 2003 $100,000 $100,000 Project specific land, land development and construction loans 194,636 183,298 Mortgage warehouse lines of credit 17,228 19,242 Other loans 4,875 2,850 -------- -------- 316,739 305,390 Less: Unamortized debt issuance costs (2,892) (3,732) -------- -------- $313,847 $301,658 ======== ========
The Company pays interest on the Senior Notes in arrears on May 15 and November 15 of each year at the rate of 13.75% per annum. The Senior Notes may not be redeemed at any time prior to maturity. The Senior Notes are unsecured and rank pari passu with, or senior in right of payment to, all other existing and future unsecured indebtedness of the Company. The Senior Notes, however, are effectively subordinated to secured debt of the Company to the extent of any collateral, as well as to the Company's subsidiaries indebtedness. The Company is required to maintain a consolidated tangible net worth of at least $15 million and other financial covenants, as defined, in the Senior Note Indenture. The Company was in compliance with these financial covenants at September 30, 2000. In addition to financial covenants, the Senior Note Indenture imposes certain operating restrictions on the Company, based on its performance. These provisions place certain restrictions on the Company's ability to incur new debt above levels previously outstanding if the Company's Consolidated Fixed Charge Coverage Ratio, (basically EBITDA to interest incurred for the Company's Restricted Subsidiaries) is below a ratio of two to one. The Senior Note Indenture also restricts, and under certain conditions prevents, certain payments including the payment of dividends and the repurchase or redemption of the Company's stock. As of September 30, 2000, the Company had in excess of $9.4 million available for such payments, subject to the potential limitations discussed in this paragraph. Since June 30, 2000 the Company's Consolidated Fixed Charge Coverage Ratio has been below a ratio of two to one thereby potentially limiting the Company's ability to make any such restricted payments. The loan agreements for project specific land, land development and construction loans are secured by a lien on the applicable residential development project or a specific unit under construction. Repayment of the loans are generally due upon sale of the collateral property. The loans bear interest at annual variable rates ranging primarily from 200 basis points over the LIBOR rate to 1.5% over 9 Prime rate and fixed rates primarily ranging from 8.0% to 9.75%. Certain of the subsidiary credit facilities contain covenants that limit the Company's overall ratio of debt to tangible net worth, and other covenants including minimum tangible net worth, current ratio and interest coverage. In addition, many of the credit facilities include similar covenants at the subsidiary level. The Company and its subsidiaries were in compliance with these covenants in all material respects as of September 30, 2000. The Company's mortgage subsidiary has two lines of credit outstanding for the purpose of originating loans. The lines of credit are secured by the mortgage loans held for sale and are repaid upon sale of the mortgage loans. These lines bear interest at variable rates ranging from 1.5% over the LIBOR rate to 1.5% over the Fed Funds rate based on the type of loan and lending requirements. The aggregate commitment available under these lines at September 30, 2000 was $40.0 million. One of the Company's subsidiaries has a line of credit for the purpose of purchasing lumber yard inventory. The line of credit matures October 1, 2001 and bears interest at Prime minus 0.5%. At September 30, 2000, the total commitment available is $2 million with $1.76 million outstanding. This outstanding portion is included in "other loans" above. The remainder of other loans consists primarily of debt financed corporate insurance policies which bear interest at varying rates between 7.25% and 8.93%. NOTE 6 - CONVERTIBLE PREFERRED STOCK The Company has authorized 1 million shares of $.01 par value preferred stock. The following are the Company's classes and series of preferred stock, amounts designated, and amounts outstanding at September 30, 2000 and December 31, 1999: Class AAA cumulative convertible (rate of 9% per annum), 40,000 designated, 28,500 issued and outstanding ($28.5 million aggregate liquidation preference) Series C convertible, 70,000 designated, 2,433 and 18,493, respectively, issuable (see below) Series D convertible, 67,500 designated, 30,000 issued and outstanding ($3,000,000 aggregate liquidation preference) Series E convertible, 50,000 designated, 12,229 and 17,443 respectively, issued and outstanding ($1,222,900 aggregate liquidation preference) In May 2000 the Company eliminated the following classes/series of preferred stock, none of which were outstanding as of September 30, 2000 and December 31, 1999: Class AA cumulative convertible Series A 11% cumulative convertible Series B convertible Series F convertible Under a Restructuring Agreement dated December 31, 1998, between the Company and Prometheus Homebuilders LLC ("Prometheus"), the Company agreed to issue to Prometheus 40,000 shares of Class AAA Redeemable Convertible Preferred Stock having an initial liquidation value of $40.0 million in exchange for the outstanding 40,000 shares of Class AA Convertible Preferred Stock having a liquidation value of $40.0 million held by Prometheus. This exchange was effective February 4, 1999. The Company has the right to redeem the Class AAA Preferred Stock at any time until December 31, 2000 for its liquidation value plus dividends that, when combined with dividends previously paid on the Class AA Preferred Stock and subsequent dividend payments on the Class AAA Preferred Stock, will provide a 20% annual return from the inception of Prometheus' investment in the Company. The Company does not intend to redeem any Class AAA Preferred Stock unless and until it is certain such redemption would not violate a provision of its Senior Note Indenture. As of September 30, 2000, the Company has redeemed $11.5 million in Class AAA Preferred Stock. In conjunction with the issuance of the Class AAA Preferred Stock, the Company also issued Supplemental Warrants. Subject to the stock price and revenue tests described below, the Supplemental Warrants would become exercisable on September 30, 2001 with an exercise price of $0.01 per share of common stock and would expire on March 31, 2004. The number of shares of common stock subject to the Supplemental Warrants is subject to adjustment depending upon the 60 day average closing price of the common stock between the period from September 30, 2001 and September 30, 2003. If during such period the closing price remains greater than 10 $48.00 per share, no shares would be issuable pursuant to the Supplemental Warrants. If during such period the closing price is $48.00 per share or less, the number of shares of common stock issuable upon the exercise of the Supplemental Warrants could be adjusted, up to five times per year, in accordance with the following table, which has been restated to take into account the effect of the reverse stock split of the Company's common shares on July 10, 2000: Issue Price ($) Warrants --------------- -------- $40 million $28.5 million liquidation value at liquidation value as issuance of September 30, 2000 $48.01 or greater 0 0 40.01 - 48.00 151,515 107,955 32.01 - 40.00 333,333 237,500 24.01 - 32.00 833,333 593,750 16.01 - 24.00 1,666,667 1,187,500 8.01 - 16.00 3,333,333 2,375,000 0.00 - 8.00 8,333,333 5,937,500 The number of common shares issuable upon the exercise of the Supplemental Warrants would be further reduced on a pro rata basis if any Class AAA Preferred Stock were to be redeemed prior to December 31, 2000. The number of shares into which each Supplemental Warrant may be exercisable will also be subject to certain customary anti-dilution adjustments. The exercisability of the Supplemental Warrants would also be subject to a revenue test, which provides that the Supplemental Warrants may not be exercised unless the Company's consolidated revenues for the most recent 16 full fiscal quarters exceeds $2,397,225,750. The revenue test is subject to adjustment for the sale of any Company subsidiary. As of September 30, 2000, for purposes of the revenue test, the Company's cumulative consolidated revenues for the most recent sixteen quarters was $2,378,464,000. In addition, the Company is required to maintain a minimum annualized revenue amount of $625.0 million for the four quarters tested, which is adjusted to $590.0 million for the four quarter period ended March 31, 2001 and June 30, 2001. The minimum annualized revenue is subject to further adjustment for the sale of Company subsidiaries. In addition, should the Company elect to redeem all or a portion of the Class AAA Preferred Stock, the Company will then be obligated under a "make-whole" provision relating to Prometheus' common stock investment of 224,711 shares of common stock which was purchased upon the second closing of the Class AA Preferred Stock. The Company is obligated to arrange for the sale of Prometheus' common stock, at Prometheus' election, at any time during the period from November 15, 2000 to February 15, 2001 and deliver cash proceeds, provided that such proceeds result in Prometheus receiving no less than $5.50 per share. The number of shares the Company would be obligated to arrange to sell is pro-rata based on the percentage of the Class AAA redeemed. As of September 30, 2000, the Company is obligated to sell 64,604 shares of Prometheus' common stock. The number of shares and the guaranteed proceeds per share have been adjusted for the effect of the reverse stock split on July 10, 2000. Under the terms of the Class AAA Preferred Stock, the Company is obligated to pay, on a quarterly basis, a 9% annual dividend. Due to the potential applicability of certain restrictions in the Senior Note Indenture, the amount of dividend due for the quarter ended September 30, 2000 was not paid and is included in accrued expenses. (See Note 5 - Notes and Mortgages Payable and Note 10 - Subsequent Events). Under the terms of the Class D Preferred Stock, 15,000 shares were subject to a redemption request during the third quarter of 2000. Due to the potential applicability of certain restrictions in the Senior Note Indenture, these shares were not redeemed however, the value of the stock subject to redemption has been reclassified from equity to the status of mandatorily redeemable shares and is included in the balance sheet as an Obligation Under Preferred Stock Redemption Agreement. (See Note 5 - Notes and Mortgages Payable and Note 10 - Subsequent Events). 11 The Series C Preferred Stock (2,433 shares as of September 30, 2000) has been treated as outstanding for the purpose of calculating earnings per share; however, it will only be legally outstanding upon issuance. Please refer to the Company's financial statements as reported on Form 10-K for the year ended December 31, 1999 (Note 9-Shareholders' Equity) for further information on the classes and terms of preferred stocks and warrants. NOTE 7 - EARNINGS PER SHARE The following table reconciles the numerators (income) and the denominators (shares) of the basic and diluted per-share computations (dollars in thousands). The weighted number of shares outstanding and the earnings per share have been restated for all periods presented to adjust for the reverse stock split on July 10, 2000:
For the three months ended For the nine months ended September 30, September 30, 2000 1999 2000 1999 ---- ---- ---- ---- Net income $ 3,346 $ 2,278 $ 6,126 3,763 Less preferred stock dividends (666) (668) (2,001) (2,461) ---------- ---------- ---------- ---------- Income available to common shareholders $ 2,680 $ 1,610 $ 4,125 1,302 ========== ========== ========== =========== Basic EPS Income applicable to common shareholders $ 2,680 $ 1,610 $ 4,125 $ 1,302 Weighted average number of common shares outstanding 3,083,390 3,044,075 3,071,161 3,022,886 Basic income per share $ 0.87 0.53 1.34 .43 ========== ========== ========== =========== Diluted EPS Income available to common shareholders, basic $ 2,680 $ 1,610 $ 4,125 $ 1,302 Plus preferred stock dividends 641 0 0 0 ---------- ---------- ---------- ----------- Income available to common shareholders, diluted $ 3,321 $ 1,610 $ 4,125 $ 1,302 ========== ========== ========== =========== Weighted average number of common shares 3,083,390 3,044,075 3,071,161 3,022,886 outstanding Effect of dilutive securities: Preferred stock 1,256,355 150,265 88,728 172,789 Options 0 0 0 0 ---------- ---------- ---------- ----------- Weighted avg. no. of common shares outstanding, diluted 4,339,745 3,194,340 3,159,889 3,195,675 ========== ========== ========== =========== Diluted income per share $ 0.77 $ 0.50 $ 1.31 $ .41 ========== ========== ========== ===========
The Company's intention upon conversion or redemption (as the case may be and if and when such conversion or redemption occurs) of Series C and E Preferred Stock, and the portion of Series D Preferred Stock not called for redemption (See Note 9-Shareholders' Equity Form 10-K) is to issue Common Stock on the basis of the 2.5-for-1 conversion ratio contemplated in the respective agreements (as adjusted from 10 for 1 for the reverse stock split on July 10, 2000) and to pay cash for the difference between the $100 liquidation value per share and the market value of the Common Stock converted at 2.5-for-1. Accordingly, the Company would normally include in its calculation of earnings per share additional shares of common stock to be issued under the "if converted" method at the 2.5-for-1 conversion ratio. The following common stock equivalents of the Company's various classes of preferred stock were not included in the computation of diluted earnings per share because the effect of adding back the related dividends and weighted average common shares would be antidilutive: 12
Potential Common Potential Common Stock Convertible into Stock outstanding, outstanding, nine Outstanding at Common Shares as of three months ended months ended September 30, September 30, September 30, September 30, ---------------- -------------------- -------------------- ---------------------- 2000 1999 2000 1999 2000 1999 2000 1999 ---- ---- ---- ---- ---- ---- ---- ---- Class/ Series Class AA N/A 0 N/A 0 N/A 0 N/A 622,711 Class AAA 28,500 28,500 1,187,500 1,187,500 dilutive 1,187,500 1,187,500 1,198,703 Series C 2,433 18,493 6,083 46,233 dilutive dilutive dilutive dilutive Series D 30,000 30,000 37,500 75,000 dilutive dilutive dilutive dilutive Series E 12,229 17,443 30,573 43,608 30,573 43,945 37,565 46,408 Series F N/A 5,000 N/A 12,500 N/A dilutive N/A dilutive
NOTE 8 - SALE OF ASSETS AND SPECIAL CHARGES On March 26, 1999, the Company sold the assets of Landmark and realized a loss of $2.9 million. As of the disposition date, Landmark had total assets of approximately $11.3 million, which included unrecovered goodwill of approximately $3.0 million. The total selling price was approximately $8.3 million. Included in operating expenses for the nine months ended September 30, 1999 were special charges totaling $1.3 million related to the restructuring and phasing out of two of the Company's other operating subsidiaries. The Company's Wilshire division (formerly operating as Buffington) decided to exit certain communities and accrued restructuring charges of approximately $0.5 million. In addition, the Company recorded charges of approximately $0.8 million (including $0.3 million in unrecovered goodwill), as a result of its decision to wind down the operations of its WestBrook division. As of the end of 1999, substantially all of the restructuring costs accrued in the first quarter of 1999 had been paid and charged against the liability established as of March 31, 1999. NOTE 9- ASSET IMPAIRMENT CHARGE During the third quarter of 1999, the Company evaluated the carrying value of two communities in its Las Vegas market. The fair value of the communities was determined using a discounted cash flow projection of future revenues and current and projected costs. The Company determined that an adjustment to current carrying value was appropriate in accordance with Statement of Financial Accounting Standard No. 121 (Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of). The assets involved include developed lots, homes under construction, and completed homes. These two communities were closed out as of September 30, 2000. Based on the analysis of fair value, referenced above, the Company recognized during the third quarter of 1999 an asset impairment charge of $2.0 million. This charge has been included in the Company's determination of Net Operating Income. NOTE 10- SUBSEQUENT EVENTS On October 11, 2000 the Company received notice from the holder of its Class AAA Cumulative Convertible Preferred Stock acknowledging that, although the Company failed to pay the quarterly dividend due on October 2, 2000, the holder was not declaring a Payment Default and not seeking to exercise any remedies at this time. The holder also expressly reserved and stated it was not waiving any rights it may have against the Company. As a result of the Company's failure to pay the dividend, the holder of the Class AAA Preferred Stock has the right to elect additional directors to the Company's Board until such time as its elected directors constitute a majority of the Board. (See Note 5 - Notes and Mortgages Payable and Note 6 - Convertible Preferred Stock). 13 On September 27, 2000, a holder of 1,000 shares of the Class E Convertible Preferred Stock filed a lawsuit against the Company asserting wrongful failure to redeem 400 shares of this holder's preferred stock which had become redeemable. Due to the potential applicability of certain restrictions in the Senior Note Indenture, the Company deferred the redemption of this stock. (See Note 5 - Notes and Mortgages Payable and Note 6 - Convertible Preferred Stock). On November 1, 2000 the holder of the Company's Class D Convertible Preferred Stock filed a demand for arbitration seeking to compel the Company to redeem 15,000 shares of that stock that became redeemable during the third quarter of 2000. Due to the potential applicability of certain restrictions in the Senior Note Indenture the Company deferred the redemption of this stock. The Company intends to defend its actions in this matter. (See Note 5 - Notes and Mortgages Payable and Note 6 - Convertible Preferred Stock). 14 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. The following table sets forth for the periods indicated certain items of the Company's consolidated results of operations and those results as a percentage of the Company's total revenues and its segment revenues: (dollars expressed in thousands)
For the Three Months For the Three Months Ended September 30, 2000 Ended September 30, 1999 ------------------------ ------------------------ % of % of % of % of Total Segment Total Segment ------ ------- ------ ------- Total revenues $174,913 100.0% $182,076 100.0% Homebuilding revenues 173,484 99.3% 100.0 % 180,655 99.2% 100.0% Gross profit 26,510 15.2% 15.3 % 27,246 15.0% 15.1% Operating expenses (incl. amort. & restructuring) 21,175 12.1% 12.2 % 22,394 12.3% 12.4% Homebuilding income before asset impairment charge and taxes 5,593 3.2% 3.2 % 6,317 3.5% 3.5% Homebuilding pre-tax income 5,593 3.2% 3.2 % 4,327 2.4% 2.4% Mortgage revenues 1,429 0.8% 100.0 % 1,421 0.8% 100.0% Mortgage expenses 1,288 0.7% 90.2 % 1,619 0.9% 113.9% Mortgage pre-tax income (loss) 80 0.0% 5.6% (227) (0.1)% (16.0)% Pre-tax income 5,673 3.2% 4,100 2.3%
For the Nine Months For the Nine Months Ended September 30, 2000 Ended September 30, 1999 ------------------------ ------------------------ % of % of % of % of Total Segment Total Segment ------ ------- ----- ------- Total revenues $489,167 100.0% $514,811 100.0% Homebuilding revenues 485,147 99.2% 100.0% 510,428 99.1% 100.0% Gross profit 71,562 14.6% 14.8% 75,558 14.7% 14.8% Operating expenses (incl. amort., restruc. & imp.) 60,905 12.5% 12.6% 64,340 12.5% 12.6% Homebuilding income before asset impairment charge, special charges and taxes 10,312 2.1% 2.1% 13,170 2.6% 2.6% Homebuilding pre-tax income 10,312 2.1% 2.1% 9,910 1.9% 1.9% Mortgage revenues 4,020 0.8% 100.0% 4,383 0.9% 100.0% Mortgage expenses 3,752 0.8% 93.3% 4,364 0.8% 99.6% Mortgage pre-tax income (loss) 70 0% 2.0% (100) 0% (2.3)% Loss on Sale of Landmark Homes 0 0% 0% (2,900) (0.6)% Pre-tax income 10,382 2.1% 6,910 1.3%
15 Consolidated Results of Operations Comparison of the Company's Results of Operations for the Three and Nine Months Ended September 30, 2000 and 1999. Homebuilding Operations General
New Orders, Net Closings Backlog --------------- -------- ------- Three months Nine months Three months Nine months ended ended ended ended AS of September 30, September 30, September 30, September 30, September 30, 2000 1999 2000 1999 2000 1999 2000 1999 2000 1999 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- State ----- Arizona 33 12 99 31 38 7 78 51 26 14 Colorado 84 57 305 232 90 73 216 226 293 189 Florida 128 160 503 665 149 189 503 548 297 416 Missouri 87 89 327 383 134 161 322 415 101 156 Nevada 20 26 73 95 33 25 106 76 48 105 New Jersey 13 4 42 12 15 7 29 7 23 5 North Carolina 130 157 411 560 142 176 369 498 197 305 Oregon/Washington 11 37 61 105 13 27 56 75 19 43 Pennsylvania 55 26 120 114 37 35 91 120 68 47 South Carolina 12 45 67 118 30 37 91 98 51 101 Texas 124 155 426 523 121 177 434 574 227 249 Virginia 0 1 1 18 0 10 2 26 0 9 Wisconsin 41 43 145 174 53 57 131 161 55 74 -- -- --- --- -- -- --- --- -- -- Total 738 812 2,580 3,030 855 981 2,428 2,875 1,405 1,713
The Company achieved net new orders of 738 homes and 2,580 homes for the three and nine months ended September 30, 2000, compared to 812 and 3,030 homes for the same periods in 1999, a decrease of 9.1% for the three month period and 14.9% for the nine month period. While several of the Company's markets, Denver and Tuscon in particular, experienced strong increases from the third quarter of 2000 over the third quarter of 1999, most of our other markets showed declines. The softening of these markets was due in part, we believe, to rising interest rates in the early portion of this year, as well as delays in opening of new communities in several locations. New orders for the nine months ended September 30, 2000 versus the nine months ended September 30, 1999 were affected by these factors, as well as the Company's decision in the first quarter of 1999 to exit certain markets (see Note 8 - Sale of Assets and Special Charges). Approximately 26% (118 out of a total of 450) of the decline in new orders from 1999 to 2000 stemmed from this strategy. The Company has a combined backlog of 1,405 homes, with a dollar value of $310.2 million at September 30, 2000, as compared to 1,713 homes, with a dollar value of $345.1 million at September 30, 1999. This represents an 18.0% decrease in backlog units and a 10.1% decrease in backlog value. The decline of backlog units is primarily due to the decreased level of new orders in recent quarters. Partially offsetting the unit decline is a 9.6% increase of the average sales price of homes in backlog, from $201,400 at September 30, 1999 to $220,700 at September 30, 2000. Furthermore, the declines in volume in a number of markets were offset by the mix of backlog between divisions. In Colorado where our average sales price is the second highest in the Company we experienced a year over year increase in backlog of 104 units (55%) along with a 16.8% increase in average revenue per unit. 16 Revenues Homebuilding revenues for the third quarter of 2000 were $173.5 million, as compared to $180.7 million for the same period of 1999, representing a decrease of 4.0%. Dispositions discussed previously accounted for approximately $3.0 million of the quarter over quarter decrease. In addition, fewer new orders from ongoing operations in recent quarters resulted in fewer homes closed in the third quarter of 2000 (855) versus the third quarter of 1999 (981), a decrease of 12.8%. Partially offsetting this decrease was an increase in the average price of a home closed from $179,700 to $194,500 (8.2%). While the majority of the Company's markets experienced increases in average prices, the Denver division contributed most significantly, due to increases in the average price of its already higher-priced homes, as well as a very large increase in the volume of homes closed. For the nine-month period, homebuilding revenues were $485.1 million, a 5.0% decrease from the $510.4 million reported for the same period last year. Approximately $19 million of the decrease was attributable to dispositions during the first quarter of 1999. Also, the decrease reflects an 11.9% decrease in the number of homes closed from ongoing operations (2,426 in the nine month period ending September 30, 2000 versus 2,754 in the comparable period of 1999), offset by an 11.0% increase in the average price of the homes closed (approximately $194,400 versus $175,200). Approximately 31% of this increase in average price year over year was due to the Company's Las Vegas division. The Las Vegas division has experienced increases in average price of its already high-priced luxury homes, as well as an increase in the volume of homes closed. Gross Profit Gross profit for the quarter ended September 30, 2000 was $26.5 million, as compared to $27.2 million for the comparable period of 1999. However the Company's gross profit margins increased from 15.1% of homebuilding revenues to 15.3% for the same periods. As discussed in the revenue section above, since the Company's Denver division contributed significantly to the average price of homes quarter over quarter, the Company's gross profit margins continue to be positively affected by increased margin levels in Denver. For the nine month period ended September 30, 2000 gross profit decreased 5.3% to $71.6 million from $75.6 million last year. As discussed in the revenue section above, although the Company's Las Vegas division contributed significantly to the average price of homes year over year, the Company's gross profit margins continue to be adversely affected by reduced margin levels in Las Vegas. Excluding the results of the Las Vegas division during the first nine months from both periods, gross profit margins increased from 15.2% during 1999 to 16.0% during 2000. The trend in gross profit margins, is expected to increase in the fourth quarter due to a declining impact of the Las Vegas division and to the large volume increases in Colorado where gross profit margins are the highest in the Company. Operating Expenses Operating expenses (including selling, general and administrative, restructuring charges, and goodwill amortization) for the quarters ended September 30, 2000 and 1999 were $21.2 million (12.2% of homebuilding revenue) and $22.4 million (12.4% of homebuilding revenue), respectively. For the nine month period ended September 30, 2000 and 1999, total operating expenses were $60.9 million (12.6% of revenue) and $64.3 million (12.6% of revenue). The Company recognized $2.0 million in asset impairment charges during the quarter ended September 30, 1999 pertaining to the write down of land and work-in-process inventory in two communities nearing closeout in our Las Vegas market. (See Note 9 -Asset Impairment Charge). The company also recognized $1.3 million in special charges during the three months ended March 31, 1999 pertaining to restructuring costs associated with several of its subsidiaries (See Note 8 - Sale of Assets and Special Charges). Excluding the impact of these charges, total operating expenses for the nine months ended September 30, 1999, would have been $61.1 million (12.0% of revenue). Selling expenses increased to $11.8 million (6.8% of revenue) for the quarter ended September 30, 2000 as compared to $11.3 million (6.3% of revenue) for the same period of 1999. The majority of this increase is due to sales and marketing initiatives implemented in order to offset declining sales. For the nine-month period selling expenses decreased to $33.1 million (6.8% of revenue) as compared to $33.5 million (6.6% of revenue) for the same period of 1999. The decrease in absolute dollar amounts for the nine-month period was primarily due to previously discussed dispositions. 17 General and administrative expenses increased to $8.7 million (5.0% of homebuilding revenue) for the third quarter of 2000, as compared to $8.5 million (4.7% of homebuilding revenue) for the third quarter of 1999. For the nine-month period, general and administrative expenses were $25.9 million (5.3% of revenue) as compared to $25.6 million (5.0% of revenue) in 1999. We expect these increases will continue to be offset by higher revenues as volume increases continue during the fourth quarter of 2000. This could possibly reverse the trend of increasing general and administrative expenses as a percentage of revenue. Homebuilding Pretax Homebuilding pretax income for the third quarter of 2000 was $5.6 million (3.2% of homebuilding revenues), as compared to $4.3 million (2.4% of homebuilding revenues) for the third quarter of 1999 ($6.3 million excluding the impact of asset impairment charges taken as previously noted). For the nine-month period homebuilding pretax income increased to $10.3 million (2.1% of homebuilding revenues) in 2000 from $9.9 million (1.9% of homebuilding revenues) in 1999 ($13.2 million excluding the impact of asset impairment & special charges taken as previously noted). Reduced volume in 2000 due to the Company's dispositions and recent quarter declines in new orders within ongoing operations were offset by margin improvement for both the third quarter of 2000 as well as the nine-month period ended September 30, 2000 and the absence of asset impairment and special charges. Financial Services Operations Revenue for the three months ended September 30, 2000 remained constant at $1.4 million for both the quarter ended September 30, 2000 and for the same period of 1999. These revenues decreased 8.3% to $4.0 million from $4.4 million for the nine-month period. Expenses for the three months ended September 30, 2000 decreased 20.4% to $1.3 million for the comparable period of 1999 due to a decline in the number of branches. These expenses decreased 14.0% to $3.8 million from $4.4 million for the nine-month period. For the three-month period ended September 30, 1999 financial services pretax loss of $227,000 increased to a profit of $80,000 for the comparable period of 2000. Financial services pretax loss of $100,000 for the nine-month period ended September 30, 1999 increased to a profit of $70,000 for the comparable period of 2000, which resulted primarily from the volume increases in mortgage originations and declines in general and administrative expenses. Improving capture rates (the percentage of the Company's home closings financed by loans originated by the Fortress Mortgage) and reduction of operating expenses have improved Fortress Mortgage's operating results. The capture rates for the markets served by the mortgage company for the nine months ended September 30, 2000 and 1999 were 57.0% and 40.0%, respectively. The capture rate of homes in backlog at September 30, 2000 was 60.2%. Currently, Fortress Mortgage serves all of the Company's homebuilding markets with the exception of Las Vegas, Philadelphia, Atlantic City and Charleston. Loss on Sale of Landmark Homes The Company sold the assets of Landmark Homes in March 1999 as part of its strategy to redeploy capital invested in under-performing assets. Concurrent with the sale of these assets the Company exited the Wilmington, North Carolina and Myrtle Beach, South Carolina markets. The Company recognized a pretax loss of $2.9 million on this disposition, due primarily to unrecovered goodwill of approximately $3.0 million. Net Income Due to the previously described factors and the income tax effect thereof, net income for the three months ended September 30, 2000 was $5.7 million, as compared to $4.1 million in the same period of 1999. For the nine-month period ended September 30, 2000, net income was $10.4 million, a $3.5 million increase from the same period a year ago. Excluding the impact of the sale of Landmark Homes, special charges and asset impairment charges noted above, net income for the nine-months ended September 30, 1999 would have been approximately $13.1 million. The weighted number of shares outstanding and the earnings per share have been restated for all periods presented to adjust for the reverse stock split on July 10, 2000. Earnings per common share for the quarter ended September 30, 2000 was $0.87 and $0.77, on a basic and diluted basis, respectively. For the comparable period of 1999, income per share on a basic and diluted basis was $0.53 and $0.50, respectively. Earnings per share for the nine-month period ended September 30, 2000 was $1.34 and $1.31, on a basic and diluted basis, respectively. For the comparable period of 1999, earnings per share was $0.43 and $0.41 on a basic and diluted basis. 18 As indicated in Note 6 - Convertible Preferred Stock, the exercisability of the Supplemental Warrants related to the Class AAA Preferred Stock is subject to a consolidated revenue test ("Revenue Threshold Event", as defined in the Company's Supplemental Warrant Agreement dated February 4, 1999). The Company expects to exceed this revenue threshold during the fourth quarter of 2000 and accordingly, the Supplemental Warrants will be included in future calculations of the common stock equivalents for the purpose of calculating diluted earnings per share. Based upon the current price of the Company's Common Stock, this is expected to result in a material decrease in the Company's diluted income per share. These Warrants do not become exercisable prior to September 30, 2001. (See Note 6 - Convertible Preferred Stock and Note 7 - Earnings Per Share). Earnings before interest, taxes, depreciation and amortization (EBITDA) decreased to $15.3 million (8.7% of revenue) for the three months ended September 30, 2000, as compared to $16.3 million (8.9% of revenue) for the same period in 1999. For the nine-month period EBITDA decreased to $39.0 million (8.0%) of revenue) from $42.6 million (8.3% of revenue) for the same period in 1999. EBITDA is provided as a supplemental measurement of the Company's operating performance. EBITDA does not represent cash flows from operations as defined by GAAP and should not be considered as an alternative to net income as an indicator of the Company's operating performance or to cash flows as a measure of liquidity. In addition, EBITDA measures presented by the Company may not be comparable to other similarly titled measures of other companies. Liquidity and Capital Resources The Company's operating activities involve several components, principally home construction, land development, and mortgage loan origination for home purchasers. During the nine-months ended September 30, 2000, the Company's operating activities, taken in the aggregate, utilized approximately $15.3 million of cash. This cash utilization was primarily the result of increases in inventories of approximately $23.8 million. Offsetting this inventory buildup were net income of $6.1 million and increases in accrued expenses of $4.5 million. The Company's investing activities utilized approximately $4.5 million in cash, primarily due to additional consideration of approximately $3.5 million paid under the earnout provisions of prior period acquisitions. In addition, purchases of property and equipment totaled $3.0 million and proceeds from land held for resale were approximately $3.6 million. Financing activities provided $9.7 million of cash flow. Net borrowings under notes and mortgages payable of $11.3 million were used to finance the buildup of inventory discussed in the cash flows from the operating activities paragraph above. Offsetting these net borrowings was $1.4 million for the payment of preferred dividends. The Company regularly refinances existing loan agreements and executes new loan agreements. Approximately $495 million of secured lending facilities were in place at the subsidiary level at September 30, 2000. Under these credit facilities, the Company has borrowed $210 million at September 30, 2000. The total amount available under these commitments varies based on individual loan covenants and inventory levels. Under the terms of the Company's Senior Note Indenture, the Company's ability to incur new debt, beyond existing secured debt amounts, is limited to $50 million of new debt incurrence, if the Company's Consolidated Fixed Charge Coverage Ratio (as defined in the Indenture) is below a ratio of 2 to 1. Since June 30, 2000 the Company's Consolidated Fixed Charge Coverage Ratio was below 2 to 1 and as such the Company is limiting new incurrence of indebtedness in accordance with the Indenture's terms. The Company does not believe that this limitation will have a material adverse effect on its ability to continue to finance it inventories and operations, for the foreseeable future. (See Note 5 Notes and Mortgages Payable ). Management believes that funds available through the existing credit facilities coupled with the cash on hand and cash generated through operations will be adequate for the anticipated cash needs of its current operations for the foreseeable future. As of September 30, 2000 the Company had cash and cash equivalents on hand of $7.4 million. 19 At September 30, 2000, the Company had 5,119 lots in inventory beyond those already in backlog. This represents, in aggregate, an estimated eighteen-month supply of land based on sales absorption rates for the first nine months of 2000. One of the Company's operating strategies is to keep a relatively low supply of finished lots and lots under development in order to manage and minimize risk associated with land ownership. The Company utilizes land options and investments in land limited partnerships as methods of controlling and subsequently acquiring land. In markets where lot options are not readily available to meet its needs, the Company is pursuing additional off-balance sheet arrangements to reduce its economic risk. The Company plans to continue these practices and expects to exercise, subject to market conditions, substantially all of its option contracts. At September 30, 2000, the Company had an additional 11,288 lots under option representing approximately a 40-month supply of land based on the same absorption rates as above. Failure to Make Payments on Preferred Stock The Company's Senior Note Indenture (the "Indenture") places certain restrictions if the Company's Consolidated Fixed Charge Coverage Ratio (basically EBITDA to interest incurred for the Company and its Restricted Subsidiaries (as defined in the Indenture)) is below a ratio of two to one (the "Coverage Test"). As a result, this Indenture also restricts, and under certain conditions prevents, certain payments, including the payment of dividends and the repurchase or redemption of the Company's stock (the "Restricted Payments Covenant"), based in part on the Coverage Test. Since June 30, 2000, the Company did not meet the Coverage Test threshold of two to one, thereby potentially limiting the Company's ability to make payments under the Restricted Payments Covenant. In August 2000, 15,000 shares of the Company's outstanding Series D Preferred Stock, with an aggregate liquidation preference of $1,500,000, became subject to mandatory redemption as a result of the holder's request for this redemption. Under the terms of the Series D Preferred Stock, the Company is entitled to redeem the Series D Preferred Stock for cash or shares of the Company's common stock that would yield sale proceeds to the holder of at least $1,500,000. In this instance, the Company elected to redeem in cash. Under the terms of the Series D Preferred Stock, the Company is not obligated to redeem, and any redemption is deferred, if such redemption would contravene any provision of the Senior Note Indenture. The Company did not redeem the Series D Preferred Stock. The liquidation preference of the 15,000 Series D shares has been reclassified from equity to the status of mandatorily redeemable shares and is included in the balance sheet as an Obligation Under Preferred Stock Redemption Agreements. Also, 600 shares of the Company's outstanding Series E Preferred Stock, with an aggregate liquidation preference of $60,000, became subject to mandatory redemption upon request of the holder, which request was exercised. The Company has not redeemed the Series E Preferred Stock. In addition, the Company did not make the September 30, 2000, quarterly dividend payment on 28,500 shares of its outstanding Class AAA 9% Preferred Stock, with an aggregate liquidation preference of $28,500,000. The amount of the dividend has been included in accrued expenses. The Company did not redeem the Series D or Series E Preferred Stock or pay the dividend on the Class AAA Preferred Stock in order to avoid the possibility of violating the Restricted Payments Covenant. The Company does not intend to make payments on account of dividends, repurchase or redemption of any of its outstanding Preferred Stock until such time as it satisfies the Coverage Test or otherwise is certain that the payments will not violate the Restricted Payments Covenant. Under the terms of the Class AAA Preferred Stock, if the Company fails to pay dividends on the Class AAA Preferred Stock, the holder of the Class AAA Preferred Stock is entitled to elect directors of the Company constituting a majority of the Company's board. This right matures once a Payment Default (as defined in the Class AAA Preferred Stock) is declared by the holder of the Class AAA Preferred Stock and continues until such time as the Company has (i) cured any and all Payment Defaults and (ii) paid dividends currently under the Class AAA Preferred Stock for four consecutive quarterly periods. On October 11, 2000, the Company received notice from the holder of the Class AAA Preferred Stock acknowledging that although the Company failed to pay the quarterly dividend due on October 2, 2000, the holder was not invoking its right to declare a payment default. The holder of the Class AAA Preferred Stock also expressly reserved and stated that it was not waiving any rights it may have against the Company. On November 1, 2000, the holder of the Series D Preferred Stock filed a demand for arbitration seeking to compel the Company to redeem the outstanding Series D Preferred Stock that became redeemable in August 2000 for $1,500,000 or at least 666,667 shares of the Company's common stock (subject to the obligation that the sale would yield proceeds of $1,500,000). In addition, on September 27, 2000, a holder of the Series E Preferred Stock commenced litigation against the Company asserting the wrongful failure to redeem his 400 shares of Series E Preferred Stock and seeking a judgment of $100,000. 20 The Company continues to seek ways that will result in increasing the Coverage Test to a level that exceeds two to one. However, the Company cannot predict whether or in what time frame it will be able to meet the two to one threshold. In addition, certain holders of the Preferred Stock may pursue claims against the Company, which could result in, among other things, a monetary judgment against the Company or an exchange of Series D Preferred Stock for shares of the Company's common stock. Although the Company believes it has defenses to some or all of these claims, the Company is unable to predict whether the holders of the Preferred Stock will prevail in asserting any of their claims and, if so, what the ultimate impact on the Company will be from these claims. Statement on Forward-Looking Information Certain information included in this report is "forward-looking" within the meaning of the Private Securities Litigation Reform Act of 1995. You can identify this information by use of words like "may," "will," "expect," "anticipate," "estimate," or "continue" or similar expressions. Such statements represent the Company's judgment and involve known and unknown risks, uncertainties and other factors that may cause actual results to differ materially from those expressed or implied in the forward-looking statements. Such risks, uncertainties and other factors include, but are not limited to, fluctuations in interest rates, availability of raw materials and labor costs, levels of competition, housing demand in our markets, the effect of government regulation, the availability of capital, the price of the Company's common stock, weather conditions, changes in general economic conditions and other factors which may adversely effect The Fortress Group's operating results including earnings and/or those of acquired homebuilders or earnings per share. 21 PART II - OTHER INFORMATION Item 2. Changes in Securities On July 10, 2000, the Company implemented a one-for-four reverse stock split. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. Number Description ------ ----------- 27 Financial Data Schedule (b) Reports on Form 8-K. None 22 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. THE FORTRESS GROUP, INC. Date: November 14, 2000 By: /S/ George C. Yeonas ------------------ ------------------------------------ George C. Yeonas Chief Executive Officer Date: November 14, 2000 By: /S/ Jeffrey W. Shirley ------------------ ------------------------------------ Jeffrey W. Shirley Chief Financial Officer, And Principal Accounting Officer 23 EXHIBIT INDEX Number Description ------ ------------ 27 Financial Data Schedule 24
EX-27 2 0002.txt FINANCIAL DATA SCHEDULE
5 This Schedule contains summary financial information extracted from The Fortress Group, Inc. Consolidated Balance Sheet as of September 30, 2000 and The Fortress Group, Inc. Consolidated Statement of Operations for the nine months ended September 30, 2000 and is qualified in its entirety by reference to such financial statements. 1,000 U.S. 9-MOS DEC-31-2000 JAN-01-2000 SEP-30-2000 1.00 7,400 0 12,049 0 349,249 0 11,023 0 461,811 0 100,000 0 1 31 0 461,811 489,167 489,167 413,585 476,332 (1,996) 0 3,476 10,382 4,257 6,125 0 0 0 6,125 1.34 1.31
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