<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 16, 1996
REGISTRATION NO. 333-2332
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
THE FORTRESS GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 1521 54-1774997
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NO.) IDENTIFICATION NO.)
INCORPORATION OR
ORGANIZATION)
1760 RESTON PARKWAY, SUITE 208, RESTON, VIRGINIA 22090, (703) 709-7700
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
JAMES J. MARTELL, JR.
THE FORTRESS GROUP, INC.
1760 RESTON PARKWAY, SUITE 208
RESTON, VIRGINIA 22090
(703) 709-7700
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
HOWARD S. LANZNAR, ESQ. ARNOLD H. TRACY, ESQ.
KATTEN MUCHIN & ZAVIS COUDERT BROTHERS
525 WEST MONROE STREET 1114 AVENUE OF THE AMERICAS
SUITE 1600 NEW YORK, NEW YORK 10036
CHICAGO, ILLINOIS 60661 (212) 626-4400
(312) 902-5200
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box [_].
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of earlier effective
registration statement for the same offering: [_].
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [_].
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [_].
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- -------------------------------------------------------------------------------
<PAGE>
EXPLANATORY NOTE
This Registration Statement includes two forms of prospectus: One for the
offering of Shares of Common Stock (the "Common Stock Prospectus") and one for
the offering of 13.75% Senior Notes due 2003 (the "Senior Note Prospectus").
The form of Common Stock Prospectus is included in its entirety in this
Registration Statement. Following this prospectus are included all pages from
the Senior Note Prospectus that are different from the comparable pages in the
Common Stock Prospectus. Final forms of each prospectus will be filed with the
Securities and Exchange Commission under Rule 424(b) under the Securities Act
of 1933, as amended.
<PAGE>
THE FORTRESS GROUP, INC.
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501(b) OF REGULATION S-K
<TABLE>
<CAPTION>
ITEM NUMBER AND HEADING
IN FORM S-1 REGISTRATION LOCATION IN COMMON STOCK PROSPECTUS
------------------------ -----------------------------------
<C> <S>
1. Forepart of the Registration Statement
and Outside Front Cover Page of
Prospectus.................................. Forepart; Cover Page; Inside Cover
Page
2. Inside Front and Outside Back Cover
Pages of Prospectus......................... Inside Cover Page; Additional
Information; Back Cover Page
3. Summary Information, Risk Factors
and Ratio of Earnings to Fixed
Charges..................................... Cover Page; Prospectus Summary;
Risk Factors
4. Use of Proceeds.............................. Prospectus Summary; Use of
Proceeds
5. Determination of Offering Price.............. Cover Page; Underwriting
6. Dilution..................................... Dilution
7. Selling Security Holders..................... Not Applicable
8. Plan of Distribution......................... Cover Page; Underwriting
9. Description of Securities
to be Registered............................ Description of Capital Stock
10. Interest of Named Experts
and Counsel................................. Legal Matters; Experts
11. Information with Respect to the Registrant.. Outside Front Cover Page;
Prospectus Summary; The Company;
Risk Factors; Senior Notes
Offering; Use of Proceeds;
Dividend Policy; Company Formation
and Organization; Dilution;
Capitalization; Summary
Consolidated Financial and
Operating Data; Pro Forma Combined
Financial Data; Management's
Discussion and Analysis of
Financial Condition and Results of
Operations; Business; Management;
Certain Transactions; Security
Ownership of Principal
Stockholders and Management;
Description of Capital Stock;
Description of Senior Notes;
Description of Proposed Credit
Agreement; Consolidated Financial
Statements
12. Disclosure of Securities and Exchange
Commission's Position on Indemnification for
Securities Act Liabilities.................. Not Applicable.
</TABLE>
<PAGE>
PROSPECTUS
3,000,000 SHARES
COMMON STOCK
---------------
All of the shares of common stock, $.01 per share (the "Common Stock"), of
The Fortress Group, Inc. (the "Company") offered hereby are being sold by the
Company. Prior to this offering, there has been no public market for the
Common Stock of the Company. See "Underwriting" for a discussion of the
factors to be considered in determining the initial public offering price. The
Common Stock has been approved for quotation on The Nasdaq National Market
under the trading symbol "FRTG," pending notification of issuance.
Concurrently with the Common Stock Offering, the Company is offering, by
means of a separate prospectus, $100 million aggregate principal amount of its
13.75% Senior Notes due 2003 (the "Senior Notes"). This Common Stock Offering
is conditioned upon, and is a condition to the consummation of, such Senior
Notes offering. See "Senior Notes Offering."
SEE "RISK FACTORS" FOR A DISCUSSION OF CERTAIN MATERIAL FACTORS THAT SHOULD
BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK.
---------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED
ON OR ENDORSED THE MERITS OF THIS OFFERING. ANY
REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
UNDERWRITING DISCOUNTS PROCEEDS TO
PRICE TO PUBLIC AND COMMISSIONS(1) COMPANY(2)
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share........ $9.00 $0.63 $8.37
- ------------------------------------------------------------------------------
Total(3)......... $27,000,000 $1,890,000 $25,110,000
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses payable by the Company, estimated at $2,500,000.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 450,000 additional shares of Common Stock solely to cover over-
allotments, if any. If the Underwriters exercise this option in full, the
total Price to Public, Underwriting Discounts and Commissions and Proceeds
to Company will be $31,050,000, $2,173,500, and $28,876,500, respectively.
See "Underwriting."
The shares of Common Stock are offered by the several Underwriters when, as,
and if delivered to and accepted by the Underwriters, and subject to various
prior conditions, including the right to reject orders in whole or in part. It
is expected that delivery of share certificates will be made against payment
therefor at the offices of Furman Selz LLC, 230 Park Avenue, New York, New
York 10169 on or about May 21, 1996.
FURMAN SELZ
BT SECURITIES CORPORATION
SOUTHEAST RESEARCH PARTNERS, INC.
---------------
The date of this Prospectus is May 16, 1996
<PAGE>
[LOGO]
THE FORTRESS GROUP, INC.
[FOLD-OUT]
[PHOTOGRAPHS]
----------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ STOCK MARKET, IN THE OVER-THE-
COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
2
<PAGE>
PROSPECTUS SUMMARY
Simultaneously with the closing of the offering by this Prospectus and of the
concurrent offering by the Company of the Senior Notes (together, the
"Offerings"), the Company will acquire, in a series of transactions
(collectively, the "Acquisitions") in exchange for cash and shares of Preferred
and Common Stock, four homebuilding companies which have operations in seven
separate markets (the "Founding Builders"). Unless otherwise indicated, all
references to the "Company" herein include the Founding Builders and references
to "Fortress" shall mean The Fortress Group, Inc. prior to the effectiveness of
the Acquisitions.
The following summary is qualified in its entirety by the detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. Unless otherwise indicated, all such financial
information and share and per share data in this Prospectus (i) have been
adjusted to give effect to the Acquisitions (ii) provides for an initial public
offering price of $9.00 per share for the Common Stock and (iii) assume that
the Underwriters' over-allotment option is not exercised. Prospective investors
should carefully consider the matters set forth in "Risk Factors."
THE COMPANY
The Company is a national homebuilding company designing, building and
selling single family homes in the metropolitan areas surrounding Las Vegas,
Nevada; Austin and San Antonio, Texas; Tucson, Arizona; Denver and Fort
Collins, Colorado; and Raleigh-Durham, North Carolina. The Company offers high-
quality, innovative homes, targeting a diverse range of market segments
including the first-time, entry-level buyer, move-up buyer and executive/luxury
home buyer. The Company markets a wide range of single family detached and
attached homes ranging in size from 1,000 square feet to 5,500 square feet at
prices ranging primarily from $80,000 to $600,000. As of March 31, 1996, the
average sales price of the Company's homes closed was $192,400.
The Company has entered into agreements to acquire, simultaneously with the
closing of the Offerings, four established homebuilders operating in the above
markets, each of which will become a wholly-owned subsidiary of Fortress.
Substantially all of the former owners of the Founding Builders will remain as
senior managers of these subsidiaries, subject to employment and non-compete
agreements, and will own approximately 54.4% of the outstanding capital stock
of the Company upon consummation of the Offerings. The four Founding Builders
which comprise the Company achieved revenue growth from $56.1 million in 1991
to $199.0 million in 1995, representing a compound annual growth rate of 37.2%.
The Company attributes this growth principally to the market knowledge and
experience of its local management teams and strong economic conditions in
these markets. At March 31, 1996, the Company was selling homes in a total of
54 communities, compared to 36 communities at March 31, 1995. On a combined
basis from January 1, 1996 through March 31, 1996, the Company had closed 212
homes and as of March 31, 1996, had a backlog of 736 homes under contract. This
compares to closings of 206 homes in the first quarter of 1995 and a backlog of
382 homes as of March 31, 1995.
The Company was created, and will be managed, with an emphasis on the
following key operating strategies:
. Maintaining strong market positions in attractive housing markets. The
geographic markets in which the Company operates have experienced growth
in both population and employment that have been in excess of the
national average for the past five years. Each of the geographic markets
is forecasted to continue to experience growth in population and
employment, as well as housing starts, in excess of the national average
through 1999. Within each of these markets, management believes that the
Founding Builders have established strong market positions in their
respective market segments. Since 1987 the Founding Builders have built a
total of approximately 4,750 homes in these markets.
. Reducing the risk of cyclicality through geographic and product
diversification. By operating in seven geographic markets, the Company
believes that it is less subject to the effects of local and regional
3
<PAGE>
economic cycles than homebuilders that operate in a single geographic
market. By offering homes that range from entry-level to customized luxury
models, and by targeting home buyers ranging from young families to
"empty-nesters," the Company believes that it mitigates its exposure to
economic factors that may disproportionately affect certain income or
demographic groups. The Company also believes that its broad selection of
innovative home styles, its wide variety of pre-planned and pre-costed
options and its willingness to customize homes in some markets
differentiates the Company from many other local and national homebuilders
and generates improved customer satisfaction while enhancing the Company's
overall profit margins.
. Enhancing profitability through an improved capital structure and
operating synergies. Management expects that the reduced cost of capital
and additional cash provided by the Offerings, as well as the Company's
new credit facility, will contribute to the Company's profitability by
reducing the Founding Builders' average financing cost, which was
approximately 18.3% in 1995, and by providing additional cash to fund
home construction. The Company also believes that other cost savings will
be realized from combining the operations of the Founding Builders in
areas such as purchasing, insurance and certain administrative functions.
. Combining decentralized operations with experienced management. The
Company was founded on the belief that homebuilding is localized and is
most successful when managed by experienced and cycle-tested local
managers who have developed in-depth market knowledge and strong local
relationships. The local managers will control the day-to-day operations
in their respective markets and will be principally responsible for the
operating companies' profitability and growth. The Company has
implemented policies and procedures to insure that the operating
subsidiaries are achieving profitability and growth goals. These include
strict, centralized financial controls and cash management policies as
well as comprehensive planning and reporting systems that require
approval by the corporate senior management team of, among other items,
all projects and material capital commitments.
. Limiting the Company's exposure to real estate-related risks. Management
attempts to minimize risks associated with land ownership and maximize
return on invested capital by deferring, to the extent practicable,
substantial investment in land until the later phases of the land
development and construction process. The Company attempts to control a
two- to four-year supply of lots based on its expected absorption rates.
In some markets, the Company generally acquires fully developed lots
pursuant to options or purchase contracts in quantities sufficient to
satisfy near-term demands. In other markets, the Company strives to
control undeveloped land (through options or contingent purchase
contracts) through most of the zoning and land development process,
closing on such land as close as possible to the start of home
construction. These acquisitions are generally limited to smaller tracts
of entitled land that will yield 25 to 100 lots when developed. By
limiting its land acquisitions and development activities generally to
smaller parcels of land, the Company reduces the financial and market
risks associated with owning land during the development period.
. Actively pursuing internal and external growth opportunities. The Company
intends to implement a growth strategy that focuses on accelerated growth
in the Company's current markets through the improved access to capital
that will be provided by the Offerings and expansion into new markets
through the selective acquisition of other established homebuilding
companies. Management believes that, because of the fragmented nature of
the homebuilding industry, there are significant opportunities to acquire
a number of existing homebuilding companies that satisfy the Company's
profitability, investment return and other criteria. Management believes
that the Company will be an attractive acquiror of such companies due to,
among other factors, (i) the benefits of being part of a larger,
publicly-held company, (ii) the attractiveness of the Company's
decentralized operating philosophy, and (iii) the combined experience of
the Fortress and Founding Builders' management team. In evaluating
potential acquisition candidates, the Company seeks homebuilding
companies with an established market presence, a profitable track record
and an experienced management team. The Company intends to acquire
homebuilding companies that the Company believes should have a positive
impact on the Company's earnings.
4
<PAGE>
THE COMMON STOCK OFFERING
<TABLE>
<S> <C>
Common Stock offered by the
Company..................... 3,000,000 shares
Common Stock to be
outstanding after the Common
Stock Offering.............. 11,464,375 shares(1)
Use of proceeds.............. Repay outstanding indebtedness of the Company's
subsidiaries (including repurchase of a minority
interest), make certain cash payments to the
former stockholders of the Founding Builders in
connection with the Acquisitions, and the
balance for general corporate purposes, which
may include acquisitions.
Nasdaq National Market
symbol...................... FRTG
</TABLE>
- --------
(1) Does not include up to 575,000 additional shares reserved for issuance
pursuant to the Company's Stock Option Plan and up to 575,000 shares
reserved for issuance pursuant to the Company's Bonus Award Plan. It is
anticipated that options to acquire approximately 150,000 shares of Common
Stock will be granted under the Stock Option Plan on or prior to the
consummation of this Common Stock Offering at the public offering price.
See "Management--Stock Option Plan" and "Management--Bonus Award Plan."
CONCURRENT SENIOR NOTES OFFERING
Concurrently with the Common Stock Offering, the Company is offering, by
separate prospectus, $100 million aggregate principal amount of its Senior
Notes. The consummation of the offering of Common Stock made hereby is
conditioned upon, and is a condition to, the consummation of the Senior Notes
offering. See "Senior Notes Offering."
5
<PAGE>
SUMMARY FINANCIAL AND OPERATING DATA
COMBINED PREDECESSOR COMPANIES(1)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND OPERATING DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
1995
-----------------------------
PRO
FORMA
FOR PRO FORMA
ACQUISI- AS
1991 1992 1993 1994 ACTUAL TIONS(2) ADJUSTED(3)
------- ------- -------- -------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Revenue......... $56,125 $82,543 $148,269 $174,715 $199,029 $199,029 $199,029
Gross profit.... 5,788 11,060 22,124 28,431 31,595 31,595 34,895
Operating income
(loss)......... 348 2,232 4,169 5,411 6,750 6,948 10,248
Income (loss)
before
provision/benefit
for income
taxes.......... 847 2,678 4,898 4,828 6,076 6,274 10,303
Net income
(loss) (4)..... $ 742 $ 2,349 $ 3,973 $ 4,745 $ 6,055 $ 3,935 $ 6,388
======= ======= ======== ======== ======== ======== ========
Net income (loss)
per share (5).. $ .46 $ .68
======== ========
Ratio of
earnings to
fixed
charges(6)..... 1.7x 1.2x 1.2x 1.6x
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------------------------------------
1995 1996
----------------------------- ----------------------------
PRO PRO
FORMA PRO FORMA
FOR FORMA FOR PRO FORMA
ACQUISI- AS ACQUISI- AS
ACTUAL TIONS(2) ADJUSTED(3) ACTUAL TIONS(2) ADJUSTED(3)
------- --------- ----------- ------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Revenue......... $36,869 $36,869 $36,869 $41,312 $41,312 $41,312
Gross profit.... 5,579 5,579 6,064 6,559 6,559 7,051
Operating income
(loss)......... 102 (109) 376 949 535 1,027
Income (loss)
before
provision/benefit
for income
taxes.......... 69 (142) 501 986 572 1,169
Net income
(loss) (4)..... $ 69 $ (88) $ 311 $ 986 $ 370 $ 725
======= ========= =========== ======= ======== ===========
Net income (loss)
per share (5).. $ (.01) $ .03 $ .04 $ .08
========= =========== ======== ===========
Ratio of
earnings to
fixed
charges(6)..... (6) (6) (6) (6)
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
-------------------------------------------- -----------------
1991 1992 1993 1994 1995 1995 1996
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Units:
New contracts, net of
cancellations......... 378 660 870 1,015 1,100 231 489
Closings............... 356 541 838 966 998 206 212
Backlog(7)............. 157 276 308 357 459 382 736
Aggregate sales value of
backlog (in
thousands)(7).......... $ 26,284 $ 61,378 $ 57,914 $ 78,760 $ 97,242 $ 79,080 $141,076
Average sales price per
home closed............ $157,700 $152,600 $171,300 $176,400 $190,700 $179,000 $192,400
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
---------------------------------------
PRO FORMA FOR PRO FORMA
ACTUAL ACQUISITIONS(8) AS ADJUSTED(9)
-------- --------------- --------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash................................... $ 1,697 $ 1,697 $ 13,419
Inventory.............................. 119,559 119,559 119,673
Total assets........................... 133,145 133,145 146,904
13.75% Senior Notes due 2003........... -- -- 100,000
Notes and mortgages payable............ 98,707 98,707 --
Minority interests..................... 1,348 1,348 187
Stockholders' equity................... 10,211 4,332 26,917
</TABLE>
(continued on next page)
6
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
----------------------------------------- --------------------------------------------
1995 1995 1996
--------------------- --------------------- ----------------------
PRO FORMA AS PRO FORMA AS PRO FORMA AS
1993 1994 ACTUAL ADJUSTED(3) ACTUAL ADJUSTED(3) ACTUAL ADJUSTED(3)
-------- -------- ------- ------------ ------- ------------ -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SUPPLEMENTAL FINANCIAL
DATA:
EBIT(10).............. $ 13,462 $ 15,069 $19,447 $19,599 $ 2,157 $1,908 $ 3,093 $2,621
Depreciation and
amortization......... 396 613 621 621 93 93 151 151
-------- -------- ------- ------- ------- ------ -------- ------
EBITDA(10)............ $ 13,858 $ 15,682 $20,068 $20,220 $ 2,250 $2,001 $ 3,244 $2,772
======== ======== ======= ======= ======= ====== ======== ======
Cash flows from:
Operating activities.. $(18,419) $(25,027) $(1,754) $(8,647) $(10,865)
Investing activities.. (114) (839) (936) (129) (117)
Financing activities.. 19,359 27,921 534 6,219 9,869
-------- -------- ------- ------- --------
Net increase (decrease)
in cash and cash
equivalents............ $ 826 $ 2,055 $(2,156) $(2,557) $ (1,013)
======== ======== ======= ======= ========
Interest:
Interest
incurred(11)......... $ 7,890 $ 11,684 $16,081 $13,750 $ 3,076 $3,438 $ 3,377 $3,438
Interest capitalized.. 7,820 11,548 15,961 13,750 3,048 3,438 3,329 3,438
-------- -------- ------- ------- ------- ------ -------- ------
Interest expensed
directly............. 70 136 120 0 28 0 48 0
Previously capitalized
interest amortized to
cost of sales........ 8,558 9,199 12,505 9,160 1,908 1,385 2,005 1,455
-------- -------- ------- ------- ------- ------ -------- ------
Total interest
expensed............. $ 8,628 $ 9,335 $12,625 $ 9,160 $ 1,936 $1,385 $ 2,053 $1,455
======== ======== ======= ======= ======= ====== ======== ======
EBITDA/Interest
incurred............... 1.8x 1.3x 1.2x 1.5x .7x .7x 1.0x .9x
Gross profit margin
percentage(12)......... 14.9% 16.3% 15.9% 17.5% 15.1% 16.4% 15.9% 17.1%
SG&A as a percentage of
revenue(13)............ 12.1% 13.2% 12.5% 12.4% 14.9% 15.4% 13.6% 14.6%
</TABLE>
- --------
(1) As a result of the substantial continuing interests in the Company of the
former stockholders of the Founding Builders and Fortress (the "Combined
Predecessor Companies"), the historical financial information of the
Combined Predecessor Companies has been combined on a historical cost
basis for all periods presented as if these companies had always been
members of the same operating group. However, during the periods
presented, the Founding Builders were not under common control or
management. Additionally, all of the Founding Builders were S corporations
through December 31, 1995 with the exception of Buffington which converted
to an S corporation effective January 1, 1994. As S corporations, the
Founding Builders were not subject to federal income tax. Accordingly, the
data presented should not be viewed as comparable to or indicative of the
post-combination results to be achieved by the Company.
(2) Pro Forma for Acquisitions data reflect adjustments for the Acquisitions
including: (i) compensation differentials to former owners and employees
of the Founding Builders of $1,857 for 1995 and $0 and $203 for the three
months ended March 31, 1996 and 1995, respectively; (ii) incremental
selling, general and administrative expenses associated with Fortress
corporate activities of $1,659 for 1995 and $414 for each of the three
months ended March 31, 1996 and 1995; and (iii) incremental income taxes
of $2,318 for 1995 and $202 for the three months ended March 31, 1996 and
an income tax benefit of $54 for the three months ended March 31, 1995,
which would have resulted if the entities had been combined and subject to
the effective federal and state statutory income tax rates. See "Notes to
the Pro Forma Combined Financial Statements."
(3) Pro Forma as Adjusted data reflect adjustments for the Acquisitions
described in footnote (2) and for the Offerings and the application of
proceeds therefrom as described in "Use of Proceeds." Specifically, the
adjustments assume that the proceeds of the Senior Notes Offering are used
to refinance the Company's average
7
<PAGE>
debt outstanding of approximately $88.0 million for 1995 and approximately
$93.2 million and $88.9 million for the three months ended March 31, 1996
and 1995, respectively, and approximately $7.2 million of the net proceeds
of the Common Stock Offering are used to satisfy obligations to the
Founding Builders' owners and repurchase a minority interest. These
adjustments result in a reduction in interest expense of $3,465 and a
reduction in minority interest expense of $609 for 1995 and a reduction of
interest expense of $550 and $523 and a reduction in minority interest of
$57 and $130 for the three months ended March 31, 1996 and 1995,
respectively.
Had these pro forma adjustments assumed that (i) all of the net proceeds
from the Common Stock Offering were applied to satisfy obligations to the
Founding Builders' Owners, repurchase a minority interest and reduce $15.4
million of the average debt outstanding for 1995 and for the three months
ended March 31, 1996 and 1995, and (ii) approximately $72.5 million for
1995 and approximately $77.7 million and $73.4 million for the three
months ended March 31, 1996 and 1995, respectively, of the proceeds of the
Senior Notes Offering were used to refinance the remainder of the
Company's average debt outstanding, the pro forma interest expense
adjustment would have been $5,264 for 1995 and $836 and $796 for the three
months ended March 31, 1996 and 1995, respectively, and the Company's Pro
Forma as Adjusted net income would have been $7.4 million and $.65 per
share for 1995 and the Company's Pro Forma as Adjusted net income would
have been $902 and $480 and $.08 and $.04 per share for the three months
ended March 31, 1996 and 1995, respectively. See Note (j) of "Notes to the
Pro Forma Combined Financial Statements."
(4) Each of the Founding Builders with the exception of Buffington was an S
corporation or partnership through March 31, 1996 and, accordingly, was
not subject to federal income taxes. Buffington converted from a C
corporation to an S corporation effective January 1, 1994. Except for the
"Pro Forma" columns, Net income does not give effect to the conversion
from S corporation to C corporation status and the resulting imposition
of federal income tax.
(5) The Pro Forma for Acquisitions weighted average shares outstanding of
8,464,375 consists of: (i) 2,230,500 shares issued by Fortress prior to
the Offering; and (ii) 6,233,875 shares to be issued to the stockholders
of the Founding Builders in connection with the Acquisitions. The Pro
Forma as Adjusted weighted average shares outstanding of 9,413,181
consists of: (i) the 8,464,375 shares described above, plus; (ii) 779,708
shares being sold in the Common Stock Offering to pay the cash portion of
the consideration for the Founding Builders; and (iii) 169,098 shares
being sold to acquire the Company's minority interest.
(6) The ratio of earnings to fixed charges is calculated by dividing earnings
by fixed charges. For this purpose, "earnings" means income before
provision for income taxes plus fixed charges (other than capitalized
interest). "Fixed charges" means total financing costs whether
capitalized or expensed on outstanding debt and minority interest. The
pro forma ratio of earnings to fixed charges gives effect to the net
decrease in interest expense resulting from the Common Stock Offering and
the Senior Notes Offering (at an assumed interest rate of 11.5%) and the
use of proceeds therefrom to repay existing debt. For the three months
ended March 31, 1996 and 1995 fixed charges exceeded earnings by $386 and
$1,071, respectively. For the three months ended March 31, 1996 and 1995,
the Pro Forma as Adjusted fixed charges exceeded earnings by $735 and
$1,131, respectively. The ratios for 1991 and 1992 are not shown as the
amounts of interest incurred by each of the Founding Builders during
these periods are not available.
(7) At end of period and represents homes sold but not closed.
(8) Pro Forma for Acquisitions balance sheet data gives effect to the
creation of a liability (and a corresponding reduction in stockholders'
equity) for the cash consideration of $5,879 to be paid to the
stockholders of the Founding Builders.
(9) Pro Forma as Adjusted balance sheet data also give effect to the
Offerings and the application of the proceeds therefrom as described in
"Use of Proceeds." See "Notes to the Pro Forma Combined Financial
Statements" for further detail on the pro forma data.
(10) EBIT represents earnings before financing fees, minority interests and
income tax expense. EBITDA represents EBIT plus depreciation and
amortization. The Company has included these data because they are used
by certain investors to measure a company's ability to service and/or
incur debt. EBIT and EBITDA are not measures of financial performance
under generally accepted accounting principles and should not be
considered in isolation or as an alternative to net income as a measure
of operating performance or to cash flows from operating activities as a
measure of liquidity. This information should be read in conjunction with
the Combined Statements of Cash Flows of the Combined Predecessor
Companies and of each of the Founding Builders included elsewhere in this
Prospectus.
(11) Interest incurred is calculated in accordance with the definition set
forth in the Indenture for the Senior Notes and includes stated interest
and financing fees.
(12) Gross profit as a percentage of revenue for the period.
(13) Selling, general and administrative expenses as a percentage of revenue
for the period.
8
<PAGE>
FOUNDING BUILDERS
SUMMARY FINANCIAL DATA
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------------------ ----------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
BUFFINGTON (AUSTIN AND
SAN ANTONIO, TEXAS):
Total Revenue......... $19,174 $37,483 $52,140 $64,121 $52,774 $10,804 $14,623
Cost of Sales......... 17,589 34,663 43,801 53,523 44,186 9,195 11,960
Gross Profit.......... 1,585 2,820 8,339 10,598 8,588 1,611 2,663
Selling, General and
Administrative Ex-
pense(1)............. 1,187 1,850 5,931 8,645 8,741 1,767 1,856
Operating Income
(Loss)(1)............ 398 970 2,408 1,953 (153) (156) 807
Net Income (Loss)(1).. 283 631 1,529 1,877 (183) (64) 897
CHRISTOPHER (LAS VEGAS,
NEVADA)(2):
Total Revenue......... $ 3,001 $ 2,710 $17,546 $14,821 $38,612 $ 4,278 $10,481
Cost of Sales......... 2,642 2,201 16,676 12,616 31,834 3,419 8,758
Gross Profit.......... 359 509 870 2,205 6,778 859 1,723
Selling, General and
Administrative Ex-
pense................ 558 324 2,741 3,062 3,512 792 1,051
Operating Income
(Loss)............... (199) 185 (1,872) (857) 3,266 67 672
Net Income (Loss)..... 388 583 (1,208) (498) 3,386 104 680
GENESEE (TUCSON, ARIZO-
NA, FT. COLLINS AND
DENVER, COLORADO):
Total Revenue......... $23,643 $27,320 $57,691 $62,559 $65,030 $13,523 $ 8,901
Cost of Sales......... 21,220 23,501 48,725 53,887 57,620 12,104 8,284
Gross Profit.......... 2,423 3,819 8,966 8,672 7,410 1,409 617
Selling, General and
Administrative Ex-
pense................ 2,621 3,514 6,000 6,804 6,549 1,580 871
Operating Income
(Loss)............... (198) 305 2,966 1,868 861 (161) (784)
Net Income (Loss)..... (198) 305 2,966 1,868 861 (161) (784)
SUNSTAR (RALEIGH-DURHAM,
NORTH CAROLINA):
Total Revenue......... $10,307 $15,030 $20,892 $33,214 $42,600 $ 8,264 $ 7,292
Cost of Sales......... 8,886 12,810 16,943 26,258 33,792 6,574 5,751
Gross Profit.......... 1,421 2,220 3,949 6,956 8,808 1,690 1,541
Selling, General and
Administrative Ex-
pense................ 1,074 1,448 3,282 4,509 6,038 1,335 1,302
Operating Income...... 347 772 620 2,405 2,731 345 231
Net Income (Loss)..... 269 830 686 1,498 1,985 193 178
</TABLE>
- --------
(1) For the years ended December 31, 1994 and 1995, Buffington's financial
results reflect payments made to the S Corporation's shareholders in the
amounts of $2,626 and $1,857, respectively. See note 11 to the Buffington
Combined Financial Statements.
(2) In 1991 and 1992, Christopher's homebuilding operations were conducted
through various partnerships which were primarily accounted for under the
equity method of accounting. As a result, revenues reported in these years
are primarily from management fees paid to Christopher for management and
supervision services.
9
<PAGE>
RISK FACTORS
In addition to the other information contained in this Prospectus, the
following factors should be considered carefully before purchasing any of the
shares of Common Stock offered hereby.
ABSENCE OF COMBINED OPERATING HISTORY
Fortress was founded in June 1995 and has conducted no operations prior to
the Offerings. Fortress has entered into agreements to acquire the Founding
Builders simultaneously with the closing of the Offerings. The Founding
Builders have been operating as separate independent entities and there can be
no assurance that the Company will be able to integrate these businesses on an
economic basis. There also can be no assurance that the recently assembled
management group will be able to oversee the combined entity or effectively
implement the Company's operating or growth strategies. See "Business--Company
Formation and Organization" and "Management."
HOMEBUILDING INDUSTRY MARKET CONDITIONS
The homebuilding industry is cyclical and is significantly affected by
changes in national and local economic and other conditions, such as
employment levels, availability of financing, interest rates, consumer
confidence and housing demand. The risks inherent to homebuilders in
purchasing and developing land increase as consumer demand for housing
decreases. Because of the long-term financial commitment involved in
purchasing a home, general economic uncertainties tend to result in more
caution on the part of home buyers, which caution tends to result in fewer
home purchases. Such uncertainties could adversely affect the performance of
the Company and the market price for its Common Stock. In addition,
homebuilders are subject to various risks, many of which are outside the
control of the homebuilder, including conditions of supply and demand in local
markets, weather conditions and natural disasters, such as hurricanes,
tornados and wildfires, delays in construction schedules, cost overruns,
changes in government regulation, increases in real estate taxes and other
local government fees and availability and cost of land, materials and labor.
Although the principal raw materials used in the homebuilding industry
generally are available from a variety of sources, such materials are subject
to periodic price fluctuations. There can be no assurance that the occurrence
of any of the foregoing will not have a material adverse effect on the
Company.
The homebuilding industry is also subject to the potential for significant
variability and fluctuations in real estate values. Although the Company
believes the real estate assets currently reflected on the Company balance
sheet are reasonable in amount given the size of the Company's business and
are reflected at or below their fair value, no assurances can be given that
write-downs to the net realizable value of some or all of the Company's assets
will not occur if market conditions deteriorate, or that such write-downs,
should they occur, will not be material in amount.
INTEREST RATES; MORTGAGE FINANCING
Virtually all purchasers of the Company's homes finance their acquisitions
through third-party lenders providing mortgage financing. In general, housing
demand is adversely affected by increases in interest rates, unavailability of
mortgage financing, increasing housing costs and unemployment levels. If
mortgage interest rates increase and the ability of prospective buyers to
finance home purchases is adversely affected, the Company's sales, gross
margins and net income and the market price of the Common Stock may be
adversely impacted. The Company's homebuilding activities are also dependent
upon the availability and cost of mortgage financing for buyers of homes owned
by potential customers so those customers ("move-up buyers") can sell their
homes and purchase a home from the Company. In addition, the Company believes
that the availability of Federal Housing Administration ("FHA") and Veterans
Administration ("VA") mortgage financing is an important factor in marketing a
number of its homes. Any limitation or restriction on the availability of such
financing could adversely affect the Company's sales. See "Business--Customer
Financing." Furthermore, changes in Federal income tax laws may affect demand
for new homes. Recently, proposals have been publicly
10
<PAGE>
discussed to eliminate or limit the deductibility of mortgage interest for
Federal income tax purposes and to eliminate or limit tax-free rollover
treatment provided under current law where proceeds of the sale of a principal
residence are reinvested in a new principal residence. Enactment of such
proposals may have an adverse effect on the homebuilding industry in general,
and demand for the Company's products in particular. No prediction can be made
as to whether any such proposals will be enacted and, if enacted, the
particular form such laws would take.
VARIABILITY OF RESULTS
Although the Company, on a combined basis, had net income for fiscal years
1991 through 1995 and for the three months ended March 31, 1996, there can be
no assurance that the Company's profitability will continue. In the future,
the Company expects to continue to experience variability in sales and net
income on a quarterly basis. Factors expected to contribute to this
variability include, among others (i) the timing of home closings and land
sales; (ii) the Company's ability to continue to acquire additional land or
options thereon on acceptable terms; (iii) the condition of the real estate
market and the general economy in the regions where the Company currently
operates and in other markets into which the Company may expand its
operations; (iv) the cyclical nature of the homebuilding industry and changes
in prevailing interest rates and the availability of mortgage financing; and
(v) costs of material and labor and delays in construction schedules. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
COMPETITION
The homebuilding industry is highly competitive and fragmented. Homebuilders
compete for desirable properties, financing, raw materials and skilled labor.
The Company competes for residential sales with other homebuilders, individual
resales of existing homes, available rental housing and, to a lesser extent,
resales of condominiums. The Company's competitors include a number of large
national and regional homebuilding companies and small local homebuilding
companies, some of which may have greater financial resources, easier access
to capital markets and/or lower costs than the Company. See "Business--
Competition and Market Factors."
FINANCING; FUTURE CAPITAL REQUIREMENTS
The homebuilding industry is capital intensive and requires significant up-
front expenditures to acquire and entitle land and commence development.
Accordingly, the Company has incurred substantial indebtedness to finance its
homebuilding activities. At March 31, 1996, on a pro forma basis after giving
effect to the Senior Notes Offering and the anticipated use of proceeds of the
Offerings, total consolidated indebtedness would have been approximately $100
million. Although the Company believes that internally generated funds, the
net proceeds of the Offerings and the Company's available borrowings under a
new revolving credit agreement anticipated to be entered into in connection
with the Offerings (the "Credit Agreement") will be sufficient to fund the
Company's capital and other expenditures (including land purchases in
connection with ordinary development activities and assuming no significant
cash payments in connection with any acquisitions made by the Company) for the
reasonably foreseeable future, there can be no assurance that the amounts
available from such sources will be sufficient. The Company may be required to
seek additional capital in the form of equity or debt financing from a variety
of potential sources, including additional bank financing and/or securities
offerings. The amount and type of such additional capital will be limited by
the terms of the indenture pursuant to which the Senior Notes will be issued
(the "Indenture") and by the Credit Agreement. In addition, the availability
of borrowed funds, especially for land acquisition and construction financing,
has been severely reduced nationally, and the lending community is requiring
increased amounts of equity to be invested in a project by the borrower in
connection with both new loans and the extension of existing loans. If the
Company is not successful in obtaining sufficient capital to fund its planned
capital and other expenditures, new communities planned or begun may be
abandoned or significantly delayed. Any such delay or abandonment could result
in a reduction in sales and may adversely affect the Company's future results
of operations.
11
<PAGE>
The Company's ability to make payments with respect to the Senior Notes and
to satisfy its other debt obligations will depend on its future operating
performance, which will be affected by prevailing economic conditions and
financial, business and other factors, certain of which are beyond the
Company's control. The Company believes, based on current circumstances, that
the Company's cash flow, together with the proceeds of the Offerings and
anticipated borrowings under the Credit Agreement, will be sufficient to
permit the Company to meet its operating expenses and to service its debt
requirements as they become due. Significant assumptions underlie this belief,
including, among other things, that the Company will succeed in implementing
its business strategy and that there will be no material adverse developments
in the business, liquidity or capital requirements of the Company. If the
Company is unable to service its indebtedness, it will be forced to adopt an
alternative strategy that may include actions such as reducing or delaying
capital expenditures, selling assets, restructuring or refinancing its
indebtedness or seeking additional equity capital. There can be no assurance
that any of these strategies could be effected on satisfactory terms, if at
all. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources." The Indenture will,
among other things, limit the incurrence of additional indebtedness by the
Company and its subsidiaries.
RESTRICTIONS IMPOSED BY TERMS OF INDEBTEDNESS
The Indenture will restrict the ability of the Company and its subsidiaries
to, among other things, incur additional indebtedness, pay dividends or make
certain other restricted payments or investments, consummate certain asset
sales, enter into certain transactions with affiliates, incur liens, or merge
or consolidate with any other person or sell, assign, transfer lease, convey
or otherwise dispose of all or substantially all of their assets. The
Indenture will also impose limitations on the Company's ability to restrict
the ability of its subsidiaries to pay dividends or make certain payments to
the Company or any of its subsidiaries. In addition, the Company anticipates
that the Credit Agreement will contain other and more restrictive covenants
and will require the Company to maintain specified financial ratios and
satisfy certain financial tests. The Company's ability to meet such financial
ratios and tests may be affected by events beyond its control, and there can
be no assurance that the Company will meet such tests. A breach of any of
these covenants could result in an event of default under the Credit
Agreement. In an event of default under the Credit Agreement the lenders
thereunder could elect to declare all amounts borrowed, together with accrued
interest, to be immediately due and payable and the lenders under the Credit
Agreement could terminate all commitments thereunder. If such indebtedness
were to be accelerated, there can be no assurance that the assets of the
Company would be sufficient to repay in full such indebtedness and the other
indebtedness of the Company, including the Senior Notes. See "Description of
Senior Notes" and "Description of Proposed Credit Agreement."
ACQUISITION STRATEGY
The Company expects to implement an acquisition program whereby it will seek
to acquire additional established homebuilding companies with the goal of
increasing revenues and the markets the Company serves. There can be no
assurance that the Company will be able to acquire or profitably manage
additional companies or successfully integrate such additional companies into
the Company. In addition, there can be no assurance that any companies
acquired in the future will be beneficial to the successful implementation of
the Company's overall business strategy, or that such companies will
ultimately produce returns that justify the investment therein. See
"Business--Acquisition Strategy."
The Company currently intends to finance future acquisitions by using shares
of the Company's Common Stock for all or a portion of the consideration to be
paid. In the event that the Company's Common Stock does not maintain a
sufficient market price, or the potential target companies are unwilling to
accept the Company's Common Stock as part of the purchase price, the Company
may be required to use its cash resources, if available, and proceeds from the
Senior Notes and borrowings under the Credit Agreement in order to continue
its acquisition program. If the Company is unable to fund its acquisitions
with its cash resources or funds from the Senior Notes or through the Credit
Agreement, its growth could be limited unless it can obtain the necessary
funds through additional equity or debt financing. There can be no assurance
that the Company will be able to obtain such financing if and when it is
needed or that, if available, it can be obtained on terms acceptable to the
12
<PAGE>
Company. As a result, there is a risk that the Company might be unable to
implement successfully its acquisition strategy.
GOVERNMENT REGULATIONS; ENVIRONMENTAL CONTROLS
The Company is subject to local, state and Federal statutes and rules
regulating certain developmental matters, wetland preservation, zoning,
building design and density requirements which limit the number of homes that
can be built within a particular project and can delay the progress of a
particular project. In addition, certain fees, some of which may be
substantial, may be imposed to defray the cost of providing certain
governmental services and improvements to developing areas. The Company may be
subject to additional costs and delays or may be precluded entirely from
building its projects because of "no growth" or "slow growth" initiatives,
building permit allocation ordinances, building moratoriums or similar
government regulations that could be imposed in the future due to health,
safety, welfare or environmental concerns. The Company must also obtain
certain licenses, permits and approvals from certain government agencies for
certain of its activities, the granting or receipt of which are beyond the
Company's control. See "Business--Government Regulations and Environmental
Controls."
The Company and its competitors are subject to a variety of local, state and
federal statutes, ordinances, rules and regulations concerning the protection
of health and the environment. The particular environmental laws which apply
to any given community vary greatly according to the community site, the
site's environmental conditions and the present and former use of the site.
Environmental laws may result in delays, may cause the Company to incur
substantial compliance and other costs and may also prohibit or severely
restrict development in certain environmentally sensitive regions or areas. In
addition, environmental regulations can have an adverse impact on the
availability and price of certain raw materials such as lumber.
CONTROL OF THE COMPANY
Immediately prior to the consummation of the Offerings, the Existing
Stockholders (as hereinafter defined) will own 100% of the outstanding Common
Stock and, after giving effect to the Acquisitions and the Common Stock
Offering, the Existing Stockholders and the Founding Builders' Owners
(collectively, the "Initial Stockholders") will own approximately 74% of the
outstanding Common Stock (assuming no exercise of the Underwriters' over-
allotment option). As a result, the Initial Stockholders will be able to
substantially influence the affairs and policies of the Company, to effect the
election of directors to control the Board of Directors and to approve or
disapprove any matter submitted to a vote of stockholders of the Company. Upon
consummation of the Offerings, 4 of the 10 members of the Company's initial
Board of Directors will be persons designated by the Existing Stockholders and
6 of the 10 will be persons designated by the Founding Builders' Owners.
Following the Offerings, an additional director nominated by the Existing
Stockholders will be added to the Board of Directors. Thereafter, members of
the Board of Directors will be elected in accordance with the Company's
Certificate of Incorporation and applicable law. See "Board of Directors."
Additionally, each of the Initial Stockholders have entered into a
stockholders' agreement whereby each party has agreed, for the four years
following the Offerings, to vote their shares of Common Stock in order to
cause the nomination and election of four directors nominated by and made up
of Founding Builders' Owners and four directors nominated by Existing
Stockholders. Pursuant to the stockholders' agreement each of the Initial
Stockholders have agreed, for the two years following the Offerings, to vote
their shares of Common Stock in order to cause the election of three
independent directors, two nominated by the Founding Builders' Owners and one
nominated by the Existing Stockholders. See "Description of Capital Stock--
Stockholders' Agreement." The Initial Stockholders and affiliates of the
Initial Stockholders may have conflicts of interest with other stockholders
with respect to the affairs and policies of the Company, and the ownership
position of the Initial Stockholders may have the effect of delaying,
deferring or preventing a change in control of the Company. These factors
could have an adverse effect on the market price of the Common Stock. See
"Company Formation and Organization," "Certain Transactions," "Security
Ownership of Existing Stockholders and Management" and "Description of Capital
Stock."
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<PAGE>
RELIANCE ON KEY PERSONNEL
The Company's operations are dependent on the continued efforts of its
executive officers and on senior management of the Company. In addition, the
operations of each subsidiary are dependent upon the senior management of the
Founding Builders and may be dependent on the senior management of any
additional homebuilding companies the Company may acquire in the future. If
any of these people become unable to continue in their present roles, or if
the Company is unable to attract and retain other skilled employees, the
Company's business could be adversely affected. See "Management."
ABSENCE OF PUBLIC MARKET AND POSSIBLE FLUCTUATIONS OF STOCK PRICE
Prior to the Offerings, there has been no public market for the Common
Stock. Application has been made to list the Common Stock on the Nasdaq Stock
Market. There can be no assurance, however, that, following the Offerings, a
regular trading market for the Common Stock will develop or be sustained. The
initial public offering price has been determined by negotiations among the
Company, the Existing Stockholders and the Managing Underwriters, and does not
necessarily reflect the market price of the Common Stock after the Offerings.
See "Dilution" and "Underwriting." The market price of the Common Stock could
be subject to significant fluctuation in response to variations in quarterly
operating results and other factors. Government regulation, future
announcements concerning the Company or its competitors, general economic and
business conditions, the level of interest rates, the Company's operating
results and similar matters may have a significant impact on the market price
of the Common Stock.
IMMEDIATE AND SUBSTANTIAL DILUTION
At an offering price of $9.00 per share and assuming no exercise of the
Underwriters' over-allotment option, the purchasers of the shares of Common
Stock offered hereby will experience immediate dilution in the net tangible
book value of their shares of approximately $7.09 per share. See "Dilution."
In the event the Company issues additional Common Stock in the future,
including shares which may be issued in connection with future acquisitions,
purchasers of Common Stock in this Common Stock Offering may experience
further dilution in the net tangible book value per share of the Common Stock
of the Company.
SHARES ELIGIBLE FOR FUTURE SALE
The market price of the Common Stock of the Company could be adversely
affected by the sale of substantial amounts of Common Stock of the Company in
the public market following the Offerings. The 3,000,000 shares of Common
Stock being sold in the Common Stock Offering will be freely tradeable unless
acquired by affiliates (as that term is defined under the rules and
regulations of the Securities Act) of the Company, which shares will be
subject to the resale limitations of Rule 144 ("Rule 144") promulgated under
the Securities Act of 1933, as amended (the "Securities Act").
Simultaneously with the closing of the Offerings and in connection with the
Acquisitions, the Founding Builders' Owners will receive, in the aggregate,
6,233,875 shares of Common Stock and 20,000 shares of the Company's Series A
11% Cumulative Convertible Preferred Stock. See "Company Formation and
Organization--The Acquisitions." These shares are not being offered by this
Prospectus. The Founding Builders' Owners also have certain registration
rights under the Acquisition Agreements with respect to such shares. The
founders of Fortress (James J. Martell, Jr., Jamie M. Pirrello, James
McEneaney, Charles Smith and Patricia Donnelly along with certain additional
investors who acquired shares prior to the Offerings, collectively the
"Existing Stockholders") will hold, in the aggregate, an additional 2,230,500
shares of Common Stock. See "Security Ownership of Existing Stockholders and
Management." None of these 8,464,375 shares will have been acquired in
transactions registered under the Securities Act and, accordingly, such shares
may not be sold except in transactions registered under the Securities Act or
pursuant to an exemption from registration.
The Initial Stockholders have agreed not (without the prior written consent
of the Managing Underwriter) to offer, sell, contract to sell, grant any
option to sell, or otherwise dispose of, directly or indirectly, any shares
14
<PAGE>
of Common Stock or securities convertible into or exercisable or exchangeable
for, any shares of Common Stock or warrants or other rights to purchase shares
of Common Stock or permit the registration of shares of Common Stock owned by
them for a period of 180 days after the date of this Prospectus. Upon
expiration of this period, 15% or 1,269,656 shares of Common Stock held by the
Initial Stockholders as of the closing date will be eligible for sale in the
public market. An additional 25% or 2,116,094 shares of Common Stock will
become eligible for sale in the public market commencing 12 months after the
date of this Prospectus, with an additional 30% or 2,539,312 of such shares
becoming eligible after eighteen months and the remainder becoming eligible
commencing twenty-four months after the date of this Prospectus. The 20,000
shares of Series A 11% Cumulative Convertible Preferred Stock issued in
connection with the acquisition of Genesee is convertible two years after
issuance, will be non-voting until conversion, and would convert into 222,222
shares of Common Stock (at a conversion price of $9.00 per share).
Any sales of Common Stock by the Initial Stockholders are subject to
compliance with the volume, holding period and applicable limitations of Rule
144, or pursuant to a registration statement meeting the requirements the
Securities Act. In connection with the Acquisitions, the holders of one-third
of the Common Stock held by the Founding Builders' Owners also have a one-time
right to require that the Company file a registration statement with the
Securities and Exchange Commission (the "Commission") registering the shares
of Common Stock issued in connection with the Acquisitions anytime during a
one-year period commencing eighteen months after the date of this Prospectus;
provided, however, the Founding Builders' Owners may only sell such registered
shares as are permitted by the transferability restrictions described above.
See "Company Formation and Organization--The Acquisitions." Sales of
substantial amounts of such Common Stock could impair the Company's ability to
raise capital through an offering of securities and could adversely affect the
market price of the Common Stock.
BENEFITS OF THE OFFERING TO EXISTING STOCKHOLDERS
A significant portion of the indebtedness of the Founding Builders to be
repaid with the proceeds of the Offerings is personally guaranteed by certain
of the Founding Builders' Owners. In addition, the Company has agreed to
remove certain of the Founding Builders' Owners from any personal guarantees
that may exist under any indebtedness of the Founding Builders. See "Use of
Proceeds" and "Certain Transactions--Organization of the Company."
Upon consummation of the Offerings, the shares of Common Stock held by the
Existing Stockholders, which shares were issued for nominal consideration,
will have an aggregate market value of approximately $26 million. Prior to the
Offerings, there was no public market for the Common Stock, and, therefore,
the marketability of such Common Stock was limited. If an active trading
market develops and is sustained, after expiration or waiver of the
restrictions on sale imposed by the Company and compliance with the federal
securities laws, the Existing Stockholders will have the ability to sell such
Common Stock. See "Certain Transactions--Organization of the Company" and
"Description of Capital Stock--Shares Eligible for Future Sale."
AVAILABILITY OF PREFERRED STOCK FOR ISSUANCE; POTENTIAL ANTI-TAKEOVER EFFECTS
In addition to Common Stock, the Company's Amended and Restated Certificate
of Incorporation authorizes the issuance of up to 2,000,000 shares of
preferred stock, of which 20,000 shares of the Company's Series A 11%
Cumulative Convertible Preferred Stock shall be issued in connection with the
Acquisition. The Company has not issued any other shares of preferred stock,
and has no present intention to do so. However, the Company may issue
preferred stock in the future whether in connection with acquisitions,
financing transactions or otherwise. The rights and preferences for any series
of preferred stock may be set by the Board of Directors of the Company in its
sole discretion and are likely to be superior to those of the Common Stock. In
such case, the rights of holders of Common Stock may be adversely affected.
Issuance of preferred stock by the Company could have an anti-takeover effect
depending upon the purchaser, particularly when considered in conjunction with
the
15
<PAGE>
share ownership of the Existing Stockholders and the Founding Builders'
Owners. See "Description of Capital Stock--Preferred Stock."
In addition, the Indenture contains a provision requiring the Company to
offer to purchase the Senior Notes in the event of a change of control (as
defined in the Indenture). In some circumstances, that provision may make more
difficult or discourage a takeover of the Company. The Company is incorporated
under the laws of the State of Delaware. Delaware, like many other states,
permits a corporation to adopt a number of measures, through amendment of the
corporate charter or bylaws or otherwise, which may have the effect of
delaying or deterring any unsolicited takeover attempts. In addition, Section
203 of the Delaware General Corporation Law restricts certain "business
combinations" with "interested stockholders" (generally a holder of 15% or
more of the Company's voting stock) for three years following the date that
person becomes an interested stockholder. By delaying or deterring unsolicited
takeover attempts, these provisions could adversely affect prevailing market
prices for the Common Stock. See "Description of Capital Stock--Certain
Provisions Affecting Stockholders."
SENIOR NOTES OFFERING
The offering of Common Stock is being made concurrently with the offering of
$100 million aggregate principal amount of 13.75% Senior Notes due 2003 of the
Company (the "Senior Notes Offering"). The consummation of the Common Stock
Offering is conditioned upon, and is a condition to the consummation of, the
Senior Notes Offering. For a description of certain of the terms of the Senior
Notes, see "Description of Senior Notes."
16
<PAGE>
USE OF PROCEEDS
The net proceeds to be received from the sale of the Common Stock offered
hereby, after deducting underwriting discounts and offering expenses, are
estimated to be approximately $22.6 million ($26.4 million if the
Underwriters' over-allotment option is exercised in full). The net proceeds of
the Senior Notes Offering, after deducting underwriting discounts and offering
expenses, are estimated to be approximately $95.0 million. The following table
sets forth the sources and uses of the cash proceeds from the Offerings:
<TABLE>
<S> <C>
SOURCES:
Net proceeds from Common Stock Offering...................... $ 22,610,000
Net proceeds from Senior Notes Offering...................... 95,000,000
------------
Total sources.............................................. $117,610,000
============
USES:
Repayment of subsidiary indebtedness and repurchase of minor-
ity interest................................................ $ 99,982,000(1)
Cash portion of purchase price paid to Founding Builders'
Owners...................................................... 5,879,000(2)
General corporate purposes................................... 11,749,000
------------
Total uses................................................. $117,610,000
============
</TABLE>
- --------
(1) Represents total indebtedness of the Founding Builders as of March 31,
1996. To the extent this amount is less as of the closing of the
Offerings, the additional proceeds will be used for general corporate
purposes. To the extent this amount is greater as of the closing of the
Offerings, the additional funds required to effect the repayment of such
indebtedness in excess of the proceeds available from the Offerings
(including those specified as available for general corporate purposes)
will be provided by cash from operations or from other sources. The
Company anticipates that up to approximately $15 million of such
indebtedness will remain outstanding in accordance with its terms at the
time of the Offerings.
The outstanding indebtedness incurred by the Founding Builders primarily
consists of secured revolving credit facilities ($76,281,000 as of March
31, 1996) and subordinated investor notes and equity participation loans
($20,463,000 as of March 31, 1996). These credit facilities fund the
homebuilding operations of the Founding Builders including construction and
development activities. The secured revolving facilities bear interest at
annual rates which range from prime plus .5% to 2.0% (prime at March 31,
1996 was 8.25%) and generally require loan commitment fees ranging from
0.5% to 2.5% of the loan commitment. The subordinated investor notes
consist of annualized returns ranging from 12% to 15% and require loan
commitment fees ranging up to 10% of the loan commitment. The equity
participation loans require a 50% share of the profits of the underlying
development financed. The maturity of the outstanding indebtedness varies,
but generally does not extend beyond 1998. The minority interest being
repurchased (for $1,275,000) represents a minority holding in a joint
venture between Sunstar and various third party partners.
(2) See "Company Formation and Organization--The Acquisitions."
Pending such uses, the Company will invest the net proceeds of the Offerings
in short-term, investment-grade, interest-bearing securities. Any net proceeds
to the Company from the exercise of the Underwriters' over-allotment option
will be used for general corporate purposes.
DIVIDEND POLICY
The Company presently anticipates that earnings will be retained to finance
the continuing development of its business. The payment of dividends will be
at the discretion of the Company's Board of Directors and will depend upon,
among other things, future earnings, the success of the Company's business
activities, capital requirements, the general financial condition of the
Company and general business conditions. In addition, the Credit Agreement and
the Indenture will restrict the amount of dividends payable by the Company.
See "Description of Proposed Credit Agreement" and "Description of Senior
Notes."
17
<PAGE>
COMPANY FORMATION AND ORGANIZATION
Fortress was incorporated in June 1995 to create a national homebuilding
company to engage in various aspects of the homebuilding industry in some of
the nation's strongest housing markets. The Founding Builders were selected by
Fortress due to their performance, experienced management and substantial
goodwill established in each of their respective target markets. A brief
description of each Founding Builder is set forth below:
Buffington Homes, Inc. and affiliated companies ("Buffington")--Buffington
was founded in 1987 and, immediately prior to consummation of the Offerings,
was wholly owned by Thomas Buffington, Edward Kirkpatrick, and James Giddens
who collectively have over 66 years of homebuilding experience. Buffington
currently has homebuilding operations in Austin and San Antonio, Texas. As of
December 31, 1995, Buffington was the largest privately owned builder in
Austin and the second largest homebuilder overall in Austin based on total
number of permits. Since 1987, Buffington has sold over 2,000 homes.
Buffington constructs single family detached homes which range in sales price
from approximately $84,000 to $300,000 with its primary target market being
entry level and first- and second-time move-up buyers. In May 1995, Buffington
was recognized by Builder magazine as "One of the Austin Area's Leading Home
Builders", and was recognized in 1993 and 1994 by the Texas Capitol Area
Builders Association for outstanding performance in product design and
construction, interior merchandising, management, and marketing. In 1991, the
Texas Association of Realtors named Buffington "Volume Builder of the Year."
Buffington was also recently awarded the Diamond Builder Award by Home Buyers
Warranty for excellence in residential construction and customer satisfaction.
Christopher Homes, Inc. and affiliated companies ("Christopher")--
Christopher commenced homebuilding operations in 1987 and, immediately prior
to the consummation of the Offerings, was wholly owned by J. Christopher
Stuhmer, its President, who has over 22 years of homebuilding experience in
the Las Vegas area. Christopher is currently one of the largest builders in
the luxury production market in Las Vegas based on total dollar volume of
homes sold. Since 1987, Christopher has sold approximately 600 homes with an
approximate value of $190 million. Christopher constructs single family
detached and attached luxury homes in planned communities (with many of its
communities located on golf courses) which range in sale price from
approximately $150,000 to $2,000,000, and targets luxury second- and third-
time (or higher) move-up buyers, as well as second/vacation home buyers.
Christopher has received a number of awards for excellence in the homebuilding
industry including the "Builders Spotlight Business Excellence Award" in 1993
from Builder magazine (January, 1993 issue) as one of "America's Best
Builders." Christopher also received the Gold Nugget Award of Merit in 1995
from the Pacific Coast Builders Conference as one of the "best builders in the
West." A number of Christopher's communities have received individual
Certificates of Recognition from the National Association of Home Builders and
other awards from state and local homebuilding associations.
The Genesee Company and affiliated companies ("Genesee")--Genesee was formed
in 1980 and, immediately prior to the consummation of the Offerings, was
wholly owned by Robert R. Short who has over 20 years of homebuilding
experience. Genesee currently conducts its homebuilding operations in the
Denver metropolitan area, Ft. Collins, Colorado and Tucson, Arizona. Genesee
has been ranked in the top fifteen builders in Denver and is the largest
builder in Fort Collins, based on total dollar value of sales. Since 1980,
Genesee has closed sales of approximately 1,200 homes. Genesee constructs
single family detached and attached homes ranging in sales price from
approximately $120,000 to $350,000. Genesee also constructs custom homes
ranging in sales price from $350,000 to over $1,000,000. Genesee targets all
move-up and custom home buyers. Genesee received the "Gold Medal" award from
Builder magazine (January, 1995) as the country's "Best Builder" constructing
100-500 homes.
Solaris Development Corporation and affiliated companies (including Sunstar
Mortgage LLC) d/b/a/ Sunstar Homes, Inc. ("Sunstar")--Sunstar began operations
in 1987 and, immediately prior to the consummation of the Offerings, was
wholly owned by Lanold Caldwell, David Schmidt and Lawrence Witek. Messrs.
Caldwell and Witek will continue to manage the North Carolina operation and
together have over 40 years of homebuilding experience. Sunstar's geographic
market currently encompasses the Raleigh/
18
<PAGE>
Durham/Chapel Hill, North Carolina metropolitan area. Sunstar is currently the
largest privately owned homebuilder, and the third largest homebuilder
overall, in Raleigh-Durham based on total number of sales. Since 1987, Sunstar
has closed over 950 home sales and has completed 7 communities. Sunstar builds
single family detached and attached homes that range in sales prices from
approximately $100,000 to $300,000 and targets entry-level, and first- and
second-time move-up buyers, "empty nesters," and move-down buyers. Sunstar was
selected as the Triangle Sales and Marketing Council's 1990 and 1994 "Builder
of the Year," and the Raleigh-Wake County Homebuilder's Association's "Builder
of the Year" in 1992 and 1995. In November 1995, Sunstar was also recognized
as the fastest growing privately held company in the triangle area based on
the previous three years' growth in revenues and income. The award was
presented and co-sponsored by KPMG Peat Marwick, The Triangle Business Journal
and the Triangle Council for Entrepreneurial Development.
THE ACQUISITIONS
Simultaneously with, and as a condition to, the closing of the Offerings,
Fortress will acquire each of the Founding Builders through the merger of each
Founding Builder with and into a newly formed wholly-owned subsidiary of
Fortress. The aggregate consideration to be paid by Fortress in these
transactions is as follows:
(a) An aggregate of approximately $5.9 million in cash;
(b) An aggregate of 6,233,875 shares of Common Stock of the Company,
representing approximately 54.4% of the total shares of Common Stock
outstanding after giving effect to the Common Stock Offering (but not
giving effect to the exercise of the Underwriter's over-allotment option);
and
(c) An aggregate of 20,000 shares of Series A 11% Cumulative Convertible
Preferred Stock of the Company. See "Description of Capital Stock--
Preferred Stock."
The consideration to be paid for the Founding Builders was determined
through arm's length negotiations among the Company and representatives of the
Founding Builders. See "Certain Transactions."
Each Acquisition Agreement contains standard representations and warranties
of each party as well as indemnification provisions in the event of a breach
of any representations and warranties made by any party to the agreement.
Furthermore, each Acquisition Agreement provides that the consummation of the
acquisition is subject to customary conditions. These conditions include,
among others, (i) the continuing accuracy on the closing date of the
Acquisitions of the representations and warranties of the Founding Builder,
the Founding Builders' Owners and Fortress; (ii) the performance by each of
them of all covenants included in the Acquisition Agreement; (iii) the
nonexistence of a material adverse change in the results of operations,
financial condition or business of the Founding Builder; and (iv) the
consummation of the Common Stock Offering at a specified price level.
Each Acquisition Agreement provides piggyback registration rights to the
Founding Builders' Owners which allows them to register their shares of Common
Stock, on a pro rata basis, to the extent allowable by the managing
underwriter of such offering, in the event the Company consummates a "follow-
on" offering of the Company's Common Stock for cash. Additionally, for a one-
year period beginning eighteen months after the date of this Prospectus, (i)
the holders of at least one-third of the Common Stock then held by the
Founding Builders' Owners or (ii) all of the Founding Builders' Owners of a
particular Founding Builder who hold shares of Common Stock, have a one-time
right to require the Company to effectuate a registration with the Commission
of the shares of Common Stock held by the Founding Builders' Owners which are
then available for sale. See "Risk Factors--Shares Eligible for Future Sale."
Pursuant to each Acquisition Agreement, the Founding Builders' Owners have
agreed not to compete with the Company for two years following the closing of
the Acquisitions, within 100 miles of where Fortress, the particular Founding
Builder or any of the other Founding Builders conduct business. The Founding
Builders' Owners who are also parties to employment agreements with the
Company have agreed to non-compete provisions which extend for a two-year
period after termination of each respective employment period. The Acquisition
Agreement provides that in the event a Founding Builder Owner enters into an
employment
19
<PAGE>
agreement with the Company, the terms of the non-compete provisions set forth
in the applicable Employment Agreement shall control over the noncompetition
provisions set forth in the Acquisition Agreement. See "Management--Employment
Agreements."
The Acquisition transactions include the following:
Buffington. Under an agreement with Thomas Buffington, who will become a
director of the Company upon closing of the Offerings, Edward Kirkpatrick
and James Giddens, Fortress will acquire by merger all of the issued and
outstanding stock of Buffington. The consideration to be paid by Fortress
for Buffington will be approximately $1.13 million in cash and 1,897,897
shares of Common Stock of the Company.
Christopher. Under an agreement with J. Christopher Stuhmer, who will
become a director of the Company upon closing of the Offerings, Fortress
will acquire by merger all of the issued and outstanding stock of
Christopher. The consideration to be paid by Fortress for Christopher will
be approximately $179,000 in cash and 1,691,227 shares of Common Stock of
the Company.
Genesee. Under an agreement with Robert Short, who will become a director
of the Company upon closing of the Offerings, Fortress will acquire by
merger all of the issued and outstanding stock of Genesee. The
consideration to be paid by Fortress for Genesee will be approximately
$695,000 in cash, 1,729,495 shares of Common Stock of the Company and
20,000 shares of the Company's Series A 11% Cumulative Convertible
Preferred Stock. See "Description of Capital Stock--Preferred Stock."
Sunstar. Under an agreement with Lawrence Witek, who will become a
director of the Company upon closing of the Offerings, Lanold Caldwell and
David Schmidt, Fortress will acquire by merger all of the issued and
outstanding stock of Sunstar. The consideration to be paid by Fortress for
Sunstar will be approximately $3,876,000 in cash and 915,256 shares of
Common Stock of the Company.
The information set forth above is a summary of the material terms of the
Acquisition Agreements. Copies of each Acquisition Agreement are filed as
exhibits to a registration statement of which this Prospectus is a part.
The Fortress Group, Inc. is a Delaware corporation. Its executive offices
are located at 1760 Reston Parkway, Suite 208, Reston, Virginia 22090 and its
telephone number is (703) 709-7700.
20
<PAGE>
DILUTION
The pro forma net tangible book value of the Company as of March 31, 1996
was $1,255,000, or $.15 per share of Common Stock. Pro forma net tangible book
value per share represents the Company's pro forma net tangible assets less
total liabilities divided by the number of shares of Common Stock to be
outstanding after giving effect to the Acquisitions. After giving effect to
the sale of the 3,000,000 shares of Common Stock offered hereby at the initial
public offering price of $9.00 per share, and after deducting estimated
underwriting discounts and commissions and estimated offering expenses payable
by the Company and the application of the estimated net proceeds therefrom,
the Company's pro forma as adjusted net tangible book value at March 31, 1996
would have been $21,917,000, or $1.91 per share. This represents an immediate
increase in pro forma net tangible book value of $1.76 per share to existing
stockholders and an immediate dilution of $7.09 per share to new investors
purchasing the shares in the Common Stock Offering. The following table
illustrates this pro forma dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share..................... $9.00
Pro forma net tangible book value per share before Offering....... .15
Increase in pro forma net tangible book value per share
attributable to new investors.................................... 1.76
----
Pro forma as adjusted net tangible book value per share after
Offering......................................................... 1.91
-----
Dilution per share to new investor(s)............................. $7.09
=====
</TABLE>
The following table sets forth, on a pro forma basis as of March 31, 1996,
the number of shares of Common Stock purchased from the Company, the total
consideration paid and the average price per share paid by existing
stockholders and the new investors purchasing shares of Common Stock from the
Company in the Common Stock Offering (before deducting estimated underwriting
discounts and offering expenses):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION(1) AVERAGE
------------------ -------------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- -------------- --------------------
<S> <C> <C> <C> <C> <C>
Existing stockholders... 8,464,375 73.8% $ 4,332,000 13.8% $.51
New investors........... 3,000,000 26.2 27,000,000 86.2 9.00
---------- ----- -------------- --------
Total................. 11,464,375 100.0% $ 31,332,000 100.0%
========== ===== ============== ========
</TABLE>
- --------
(1) Total consideration for existing stockholders represents the combined
stockholders' equity of the Founding Builders before the Offerings,
adjusted to reflect the cash portion of the consideration payable to the
Founding Builders' Owners in connection with the Acquisitions. See "Use of
Proceeds" and "Capitalization."
21
<PAGE>
CAPITALIZATION
The following table sets forth the short-term debt, long-term debt and
capitalization at March 31, 1996 (i) of the combined Founding Builders; (ii)
of the Company on a pro forma basis to reflect the Acquisitions; and (iii) of
the Company on a pro forma basis as adjusted to give effect to the Offerings
and the application of the estimated net proceeds therefrom. See "Selected
Combined Financial Data" and "Use of Proceeds." This table should be read in
conjunction with the Pro Forma Combined Financial Statements of the Company
and the related notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1996
---------------------------------------
PRO FORMA FOR PRO FORMA
COMBINED ACQUISITIONS(4) AS ADJUSTED(5)
-------- --------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Notes and mortgages payable(1)......... $ 98,707 $ 98,707 --
13.75% Senior Notes Due 2003........... -- -- $100,000
Pro forma distribution to Founding
Builders' Owners...................... -- 5,879 --
Minority interests(1).................. 1,348 1,348 187
Stockholders' equity:
Series A 11% Cumulative Convertible
Preferred Stock(2).................. -- 0 0
Common Stock(3)...................... 599 85 115
Additional paid-in capital........... 2,606 10,126 26,802
Retained earnings.................... 7,006 -- --
Pro forma distribution to Founding
Builders' Owners.................... -- (5,879) --
-------- -------- --------
Total stockholders' equity.......... 10,211 4,332 26,917
-------- -------- --------
Total capitalization................ $110,266 $110,266 $127,104
======== ======== ========
</TABLE>
- --------
(1) For a description of the Company's notes and mortgages payable and
minority interests see Notes 6 and 8 of Notes to the Combined Predecessor
Companies Financial Statements.
(2) $.01 par value; 2,000,000 shares authorized, of which 20,000 shares of the
Company's Series A 11% Cumulative Convertible Preferred Stock ($100 per
share liquidation value) is issued and outstanding only on a pro forma as
adjusted basis. See "Description of Capital Stock--Preferred Stock."
(3) $.01 par value, 50,000,000 shares authorized; 8,464,375 issued and
outstanding on a pro forma for Acquisitions basis; 11,464,375 issued and
outstanding on a pro forma as adjusted basis. Excludes 575,000 shares of
Common Stock reserved for issuance under the Company's Stock Option Plan
and 575,000 shares of Common Stock reserved for issuance under the
Company's Bonus Award Plan. See "Management--Stock Option Plan and Bonus
Award Plan."
(4) Gives effect to a liability for the cash consideration of $5,879,000 to be
paid to the stockholders of the Founding Builders.
(5) Pro forma as adjusted balance sheet data gives effect to the Offerings and
the application of the proceeds therefrom as described in "Use of
Proceeds." See "Notes to the Pro Forma Combined Financial Statements" for
further detail on the pro forma data.
22
<PAGE>
SELECTED COMBINED FINANCIAL AND OPERATING DATA
The Company was founded in June 1995 to create a national homebuilding
company. The Company is acquiring, simultaneously with the closing of the
Offerings, the Founding Builders. The historical financial statements of the
Founding Builders have been combined for all periods presented, as if these
companies had always been members of the same operating group. However, during
the periods presented, the Founding Builders were not under common control or
management, and all of the Founding Builders were S corporations through
December 31, 1995 with the exception of Buffington which converted to an S
corporation effective January 1, 1994. As an S corporation, the Founding
Builders were not subject to federal income tax. Accordingly, the data
presented should not be viewed as comparable to or indicative of the post-
combination results to be achieved by the Company.
The following selected combined financial data with respect to the Company's
combined balance sheet as of December 31, 1994 and 1995 and with respect to
the Company's combined statements of operations for the years ended December
31, 1993, 1994 and 1995 have been derived from the Combined Predecessor
Companies financial statements that have been audited by Price Waterhouse LLP,
which have been prepared based on the individual financial statements of the
Founding Builders' which have been audited by Price Waterhouse LLP, Ernst &
Young LLP and Hein + Associates LLP and which appear elsewhere in this
Prospectus. The selected combined financial data with respect to the Founding
Builders combined statements of operations for the years ended December 31,
1991 and 1992 and the three months ended March 31, 1995 and 1996 and with
respect to the Founding Builders' combined balance sheet as of December 31,
1991, 1992, and 1993 and as of March 31, 1996 have been derived from unaudited
financial statements which, in the opinion of management of the Founding
Builders, reflect all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of such data. Operating results
for the three month period ended March 31, 1996 are not necessarily indicative
of results for future periods, including the year ended December 31, 1996.
The Pro Forma for Acquisitions statement gives effect to compensation
differentials to employees and former owners of the Founding Builders,
incremental general and administrative costs of the corporate activities of
Fortress, and adjustments to reflect income taxes at the effective statutory
rates for the combined entity. The Pro Forma as Adjusted statement of
operations data give effect to the reduction of interest expense resulting
from the Offerings and application of the proceeds therefrom. The Pro Forma
for Acquisitions balance sheet data reflect as liabilities the amounts to be
distributed to the Founding Builders' Owners. The Pro Forma as Adjusted
balance sheet data reflect the results of the Offerings and application of the
proceeds as discussed in "Use of Proceeds." See "Pro Forma Combined Financial
Statements" and the related notes thereto.
The selected financial data for each of the Founding Builders for the years
ended December 31, 1993, 1994 and 1995 have been derived from the audited
financial statements of each of these companies that appear elsewhere in this
Prospectus. The selected financial data for each of the Founding Builders for
the years ended December 31, 1991 and 1992, and for the three months ended
March 31, 1995 and 1996 have been derived from unaudited financial statements
of these companies which, in the opinion of the management of each such
company, reflect all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of such data.
The selected combined financial data provided should be read in conjunction
with the Combined Predecessor Companies Financial Statements, the individual
Founding Builders financial statements and the Pro Forma Combined Financial
Statements, the related notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
23
<PAGE>
SELECTED FINANCIAL DATA
COMBINED PREDECESSOR COMPANIES(1)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
1995
-------------------------------------
PRO PRO
FORMA FORMA
FOR AS
1991 1992 1993 1994 ACTUAL ACQUISITIONS(2) ADJUSTED(3)
------- ------- -------- -------- -------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Revenue......... $56,125 $82,543 $148,269 $174,715 $199,029 $199,029 $199,029
Cost of sales... 50,337 71,483 126,145 146,284 167,434 167,434 164,134
------- ------- -------- -------- -------- -------- --------
Gross profit.... 5,788 11,060 22,124 28,431 31,595 31,595 34,895
Selling, general
and
administrative
expenses....... 5,440 8,828 17,955 23,020 24,845 24,647 24,647
------- ------- -------- -------- -------- -------- --------
Net operating
income (loss).. 348 2,232 4,169 5,411 6,750 6,948 10,248
Other income
(expense),
net............ 499 446 729 (583) (674) (674) 55
------- ------- -------- -------- -------- -------- --------
Income (loss)
before provi-
sion for income
taxes.......... 847 2,678 4,898 4,828 6,076 6,274 10,303
Provision/(benefit)
for income
taxes.......... 105 329 925 83 21 2,339 3,915
------- ------- -------- -------- -------- -------- --------
Net income
(loss)(4)...... $ 742 $ 2,349 $ 3,973 $ 4,745 $ 6,055 $ 3,935 $ 6,308
======= ======= ======== ======== ======== ======== ========
Net income
(loss) per
share(5)....... $ .46 $ .68
======== ========
Ratio of earn-
ings to fixed
charges(6)..... 1.7x 1.2x 1.2x 1.6x
<CAPTION>
THREE MONTHS ENDED MARCH 31,
------------------------------------------------------------------------
1995 1996
------------------------------------ -----------------------------------
PRO PRO
FORMA PRO FORMA PRO FORMA
FOR FORMA AS FOR AS
ACTUAL ACQUISITIONS(2) ADJUSTED(3) ACTUAL ACQUISITIONS(2) ADJUSTED(3)
-------- --------------- ----------- ------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Revenue......... $36,869 $36,869 $36,869 $41,312 $41,312 $41,312
Cost of sales... 31,290 31,290 30,805 34,753 34,753 34,261
-------- --------------- ----------- ------- --------------- -----------
Gross profit.... 5,579 5,579 6,064 6,559 6,559 7,051
Selling, general
and
administrative
expenses....... 5,477 5,688 5,688 5,610 6,024 6,024
-------- --------------- ----------- ------- --------------- -----------
Net operating
income (loss).. 102 (109) 376 949 535 1,027
Other income
(expense),
net............ (33) (33) 125 37 37 142
-------- --------------- ----------- ------- --------------- -----------
Income (loss)
before provi-
sion for income
taxes.......... 69 (142) 501 986 572 1,169
Provision/(benefit)
for income
taxes.......... -- (54) 190 -- 202 444
-------- --------------- ----------- ------- --------------- -----------
Net income
(loss)(4)...... $ 69 $ (88) $ 311 $ 986 $ 370 $ 725
======== =============== =========== ======= =============== ===========
Net income
(loss) per
share(5)....... $ (.01) $ .03 $ .04 $ .08
=============== =========== =============== ===========
Ratio of earn-
ings to fixed
charges(6)..... (6) (6) (6) (6)
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------------------- -------------------
1991 1992 1993 1994 1995 1995 1996
-------- -------- -------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Units:
New contracts, net of
cancellations......... 378 660 870 1,015 1,100 231 489
Closings............... 356 541 838 966 998 206 212
Backlog(7)............. 157 276 308 357 459 382 736
Aggregate sales value
of backlog (in thou-
sands)(7)............. $ 26,284 $ 61,378 $ 57,914 $ 78,760 $ 97,242 $ 79,080 $ 141,076
Average sales price per
home closed........... $157,700 $152,600 $171,300 $176,400 $190,700 $ 179,000 $ 192,400
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
----------------------------------------- ------------------------------------------
PRO FORMA
FOR PRO FORMA
ACQUISITIONS AS ADJUSTED
1991 1992 1993 1994 1995 1995 1996 1996(8) 1996(9)
------- ------- ------- -------- -------- -------- -------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash................... $ 1,404 $ 2,803 $ 2,904 $ 4,866 $ 2,710 $ 2,309 $ 1,697 $ 1,697 $ 13,419
Inventory.............. 22,870 42,212 65,507 101,214 109,016 110,636 119,559 119,559 119,673
Total assets........... 25,438 46,495 72,855 111,403 121,666 118,305 133,145 133,145 146,904
13.75% Senior Notes
due 2003.............. -- -- -- -- -- -- -- -- 100,000
Notes and mortgages
payable............... 23,711 43,120 52,912 83,161 87,604 90,163 98,707 98,707 --
Minority interests..... 348 633 806 1,346 1,295 1,356 1,348 1,348 187
Stockholders' equity... 3,811 5,640 4,374 6,018 9,836 6,145 10,211 4,332 26,917
</TABLE>
(continued on next page)
24
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
----------------------------------------- --------------------------------------------
1995 1995 1996
--------------------- --------------------- ----------------------
PRO FORMA(3) PRO FORMA AS PRO FORMA AS
1993 1994 ACTUAL AS ADJUSTED ACTUAL ADJUSTED(3) ACTUAL ADJUSTED(3)
-------- -------- ------- ------------ ------- ------------ -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SUPPLEMENTAL FINANCIAL
DATA:
EBIT(10).............. $ 13,462 $ 15,069 $19,447 $19,599 $ 2,157 $1,908 $ 3,093 $2,621
Depreciation and
amortization......... 396 613 621 621 93 93 151 151
-------- -------- ------- ------- ------- ------ -------- ------
EBITDA(10)............ $ 13,858 $ 15,682 $20,068 $20,220 $ 2,250 $2,001 $ 3,244 $2,772
======== ======== ======= ======= ======= ====== ======== ======
Cash flows from:
Operating activities.. $(18,419) $(25,027) $(1,754) $(8,647) $(10,865)
Investing activities.. (114) (839) (936) (129) (117)
Financing activities.. 19,359 27,921 534 6,219 9,869
-------- -------- ------- ------- --------
Net increase (decrease)
in cash and cash
equivalents............ $ 826 $ 2,055 $(2,156) $(2,557) $ (1,013)
======== ======== ======= ======= ========
Interest:
Interest
incurred(11)......... $ 7,890 $ 11,684 $16,081 $13,750 $ 3,076 $3,438 $ 3,377 $3,438
Interest capitalized.. 7,820 11,548 15,961 13,750 3,048 3,438 3,329 3,438
-------- -------- ------- ------- ------- ------ -------- ------
Interest expensed
directly............. 70 136 120 0 28 0 48 0
Previously capitalized
interest amortized to
cost of sales........ 8,558 9,199 12,505 9,160 1,908 1,385 2,005 1,455
-------- -------- ------- ------- ------- ------ -------- ------
Total interest
expensed............. $ 8,628 $ 9,335 $12,625 $ 9,160 $ 1,936 $1,385 $ 2,053 $1,455
======== ======== ======= ======= ======= ====== ======== ======
EBITDA/Interest
incurred............... 1.8x 1.3x 1.2x 1.5x .7x .7x 1.0x 1.9x
Gross profit margin
percentage(12)......... 14.9% 16.3% 15.9% 17.5% 15.1% 16.4% 15.9% 17.1%
SG&A as a percentage of
revenue(13)............ 12.1% 13.2% 12.5% 12.4% 14.9% 15.4% 13.6% 14.6%
</TABLE>
- --------
(1) As a result of the substantial continuing interests in the Company of the
former stockholders of the Founding Builders and Fortress (the "Combined
Predecessor Companies"), the historical financial information of the
Combined Predecessor Companies has been combined on a historical cost
basis for all periods presented as if these companies had always been
members of the same operating group. However, during the periods
presented, the Founding Builders were not under common control or
management. Additionally, all of the Founding Builders were S
corporations through December 31, 1995 with the exception of Buffington
which converted to an S corporation effective January 1, 1994. As S
corporations, the Founding Builders were not subject to federal income
tax. Accordingly, the data presented should not be viewed as comparable
to or indicative of the post-combination results to be achieved by the
Company.
(2) Pro Forma for Acquisitions data reflect adjustments for the Acquisitions
including: (i) compensation differentials to former owners and employees
of the Founding Builders of $1,857 for 1995 and $0 and $203 for the three
months ended March 31, 1996 and 1995, respectively; (ii) incremental
selling, general and administrative expenses associated with Fortress
corporate activities of $1,659 for 1995 and $414 for the three months
ended March 31, 1996 and 1995; and (iii) incremental income taxes of
$2,318 for 1995 and $202 for each of the three months ended March 31,
1996 and an income tax benefit of $54 for the three months ended March
31, 1995, which would have resulted if the entities had been combined and
subject to the effective federal and state statutory income tax rates.
See "Notes to the Pro Forma Combined Financial Statements."
(3) Pro Forma as Adjusted data reflect adjustments for the Acquisitions
described in footnote (2) and for the Offerings and the application of
proceeds therefrom as described in "Use of Proceeds." Specifically, the
adjustments assume that the proceeds of the Senior Notes Offering are
used to refinance the Company's average debt outstanding of approximately
$88.0 million for 1995 and approximately $93.2 million and $88.9 million
for the three months ended March 31, 1996 and 1995, respectively, and
that approximately $7.2 million of the net proceeds of the Common Stock
Offering are used to satisfy obligations to the Founding Builders' owners
and repurchase a minority interest. These adjustments result in a
reduction in interest expense of $3,465
25
<PAGE>
and a reduction in minority interest expense of $609 for 1995 and a
reduction of interest expense of $550 and $523 and a reduction in minority
interest of $57 and $130 for the three months ended March 31, 1996 and
1995, respectively.
Had these pro forma adjustments assumed that (i) all of the net proceeds
of the Common Stock were applied to satisfy obligations to the Founding
Builders' owners, repurchase a minority interest and reduce $15.4 million
of the average debt outstanding for 1995 and for the three months ended
March 31, 1996 and 1995, and (ii) approximately $72.5 million for 1995 and
approximately $77.7 million, $73.4 million for the three months ended
March 31, 1996 and 1995, of the proceeds of the Senior Notes Offering were
used to refinance the remainder of the Company's average debt outstanding,
the pro forma interest expense adjustment would have been $5,264 for 1995
and $836 and $796 for the three months ended March 31, 1996 and 1995,
respectively, and the Company's Pro Forma as Adjusted net income would
have been $7.4 million and $.65 per share for 1995 and the Company's Pro
Forma as Adjusted net income would have been $902 and $480 and $.08 and
$.04 per share for the three months ended March 31, 1996 and 1995,
respectively. See Note (j) of "Notes to the Pro Forma Combined Financial
Statements."
(4) Each of the Founding Builders with the exception of Buffington was an S
corporation or partnership through March 31, 1996 and, accordingly, was
not subject to federal income taxes. Buffington converted from a C
corporation to an S corporation effective January 1, 1994. Except for the
"Pro Forma" columns, Net income does not give effect to the conversion
from S corporation to C corporation status and the resulting imposition of
federal income tax.
(5) The Pro Forma for Acquisitions weighted average shares outstanding of
8,464,375 consists of: (i) 2,230,500 shares issued by Fortress prior to
the Offering; and (ii) 6,233,875 shares to be issued to the stockholders
of the Founding Builders in connection with the Acquisitions. The Pro
Forma as Adjusted weighted average shares outstanding of 9,413,181
consists of: (i) the 8,464,375 shares described above, plus; (ii) 779,708
shares being sold in the Common Stock Offering to pay the cash portion of
the consideration for the Founding Builders; and (iii) 169,098 shares
being sold to acquire the Company's minority interest.
(6) The ratio of earnings to fixed charges is calculated by dividing earnings
by fixed charges. For this purpose, "earnings" means income before
provision for income taxes plus fixed charges (other than capitalized
interest). "Fixed charges" means total financing costs whether capitalized
or expensed on outstanding debt and minority interest. The pro forma ratio
of earnings to fixed charges gives effect to the net decrease in interest
expense resulting from the Common Stock Offering and the Senior Notes
Offering (at an assumed interest rate of 11.5%) and the use of proceeds
therefrom to repay existing debt. For the three months ended March 31,
1996 and 1995, fixed charges exceeded earnings by $386 and $1,071,
respectively. For the three months ended March 31, 1996 and 1995, the Pro
Forma as Adjusted fixed charges exceeded earnings by $735 and $1,131,
respectively. The ratios for 1991 and 1992 are not shown as the amounts of
interest incurred by each of the Founding Builders during these periods
are not available.
(7) At end of period and represents homes sold but not closed.
(8) Pro Forma for Acquisitions balance sheet data gives effect to the creation
of a liability (and a corresponding reduction in stockholders' equity) for
the cash consideration of $5,879 to be paid to the stockholders of the
Founding Builders.
(9) Pro Forma as Adjusted balance sheet data also give effect to the Offerings
and the application of the proceeds therefrom as described in "Use of
Proceeds." See "Notes to the Pro Forma Combined Financial Statements" for
further detail on the pro forma data.
(10) EBIT represents earnings before financing fees, minority interests and
income tax expense. EBITDA represents EBIT plus depreciation and
amortization. The Company has included these data because they are used by
certain investors to measure a company's ability to service and/or incur
debt. EBIT and EBITDA are not measures of financial performance under
generally accepted accounting principles and should not be considered in
isolation or as an alternative to net income as a measure of operating
performance or to cash flows from operating activities as a measure of
liquidity. This information should be read in conjunction with the
Combined Statements of Cash Flows of the Combined Predecessor Companies
and of each of the Founding Builders included elsewhere in this
Prospectus.
(11) Interest incurred is calculated in accordance with the definition set
forth in the Indenture for the Senior Notes and includes stated interest
and financing fees.
(12) Gross profit as a percentage of revenue for the period.
(13) Selling, general and administrative expenses as a percentage of revenue
for the period.
26
<PAGE>
FOUNDING BUILDERS
SELECTED FINANCIAL AND OPERATING DATA
(DOLLARS IN THOUSANDS)
The following table presents selected financial data for each of the
Founding Builders for the five most recent years and the three months ended
March 31, 1995 and 1996.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------------------ ----------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
BUFFINGTON (AUSTIN AND
SAN ANTONIO, TEXAS):
Total Revenue......... $19,174 $37,483 $52,140 $64,121 $52,774 $10,804 $14,623
Cost of Sales......... 17,589 34,663 43,801 53,523 44,186 9,195 11,960
Gross Profit.......... 1,585 2,820 8,339 10,598 8,588 1,611 2,663
Selling, General and
Administrative Ex-
pense(1)............. 1,187 1,850 5,931 8,645 8,741 1,767 1,856
Operating Income
(Loss)(1)............ 398 970 2,408 1,953 (153) (156) 807
Net Income (Loss)(1).. 283 631 1,529 1,877 (183) (64) 897
New Orders............ 169 340 419 518 527 124 286
Closings.............. 155 320 411 485 439 94 118
Backlog(2)............ 35 55 63 96 184 126 352
CHRISTOPHER (LAS VEGAS,
NEVADA)(3):
Total Revenue......... $ 3,001 $ 2,710 $17,546 $14,821 $38,612 $ 4,278 $10,481
Cost of Sales......... 2,642 2,201 16,676 12,616 31,834 3,419 8,758
Gross Profit.......... 359 509 870 2,205 6,778 859 1,723
Selling, General and
Administrative Ex-
pense................ 558 324 2,741 3,062 3,512 792 1,051
Operating Income
(Loss)............... (199) 185 (1,872) (857) 3,266 67 672
Net Income (Loss)..... 388 583 (1,208) (498) 3,386 104 680
New Orders............ 0 48 18 47 109 11 18
Closings.............. 0 2 42 27 89 9 22
Backlog(2)............ 0 46 22 42 62 44 58
GENESEE (TUCSON, ARIZO-
NA, FT. COLLINS AND
DENVER, COLORADO):
Total Revenue......... $23,643 $27,320 $57,691 $62,559 $65,030 $13,523 $ 8,901
Cost of Sales......... 21,220 23,501 48,725 53,887 57,620 12,104 8,284
Gross Profit.......... 2,423 3,819 8,966 8,672 7,410 1,409 617
Selling, General and
Administrative Ex-
pense................ 2,621 3,514 6,000 6,804 6,549 1,580 871
Operating Income
(Loss)............... (198) 305 2,966 1,868 861 (161) (784)
Net Income (Loss)..... (198) 305 2,966 1,868 861 (161) (784)
New Orders............ 153 157 239 229 220 44 104
Closings.............. 148 107 231 229 219 51 31
Backlog(2)............ 51 101 109 109 110 102 183
SUNSTAR (RALEIGH-DURHAM,
NORTH CAROLINA):
Total Revenue......... $10,307 $15,030 $20,892 $33,214 $42,600 $ 8,264 $ 7,292
Cost of Sales......... 8,886 12,810 16,943 26,258 33,792 6,574 5,751
Gross Profit.......... 1,421 2,220 3,949 6,956 8,808 1,690 1,541
Selling, General and
Administrative Ex-
pense................ 1,074 1,448 3,282 4,509 6,038 1,335 1,302
Operating Income...... 347 772 620 2,405 2,731 345 231
Net Income (Loss)..... 269 830 686 1,498 1,985 193 178
New Orders............ 56 115 194 221 244 52 81
Closings.............. 53 112 154 225 251 52 41
Backlog(2)............ 71 74 114 110 103 110 143
</TABLE>
- --------
(1) For the years ended December 31, 1994 and 1995, Buffington's financial
results reflect payments made to the S Corporation's shareholders in the
amounts of $2,626 and $1,857, respectively. See Note 11 to the Buffington
Combined Financial statements.
(2) At end of period.
(3) In 1991 and 1992, Christopher's homebuilding operations were conducted
through various partnerships which were primarily accounted for under the
equity method of accounting. As a result, revenues reported in these years
are primarily from management fees paid to Christopher for management and
supervision services.
27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF
OPERATIONS
The following discussion should be read in conjunction with the Combined
Financial Statements of the Company and related notes thereto, the Pro Forma
Combined Financial Statements of the Company and related notes thereto, and
"Selected Combined Financial Data" appearing elsewhere in this Prospectus.
INTRODUCTION
The Fortress Group was formed in June 1995 to create a nationwide
homebuilding company. The Fortress Group has entered into agreements to
acquire, simultaneously with the closing of the Offerings, four established
homebuilding companies operating in seven markets of the country. The Founding
Builders have operated since 1980 (Genesee) and 1987 (Buffington, Sunstar and
Christopher). During the periods discussed below, the Combined Predecessor
Companies were not under common control or management; therefore, the data
presented may not be comparable to or indicative of the post-combination
results to be achieved by the Company.
As a result of the substantial continuing interests in the Company of the
former stockholders of the Founding Builders and Fortress, the Combined
Financial Statements of the Company include, for all periods presented, the
accounts of the Founding Builders on a historical basis, as if the Founding
Builders had always been members of the same operating group. Accordingly, no
goodwill has been recorded in combining these businesses. In the future, the
Company may be required to record goodwill to account for the amount of the
purchase price of acquired businesses which exceeds the tangible book value of
businesses which it may acquire.
Pro forma data reflect adjustments for the Acquisitions including: (i)
reduction in the Company's interest costs due to the Offerings; (ii)
compensation differentials to former owners and employees of the Combined
Predecessor Companies; (iii) incremental selling, general and administrative
costs associated with Fortress' corporate activities; (iv) income taxes as if
the entities were combined and subject to the effective federal and state
statutory rates throughout the periods discussed.
The Company's revenues are derived primarily from the sale of residential
homes. Revenue is recognized when construction of the home is complete and
title transfers from the Company to the buyer. Cost of sales includes all
direct and indirect construction costs including construction supervision,
land costs including the purchase price of land and land development costs,
interest expense on related land acquisition, land development and
construction loans, real estate taxes, and an accrual for anticipated warranty
and service costs. All of these costs incurred prior to title transfer are
capitalized into inventory and relieved from inventory at time of title
transfer and revenue is recognized. Sales and marketing costs such as
advertising and promotion expenses, as well as general and administrative
costs are recognized as expense when incurred.
The Founding Builders were previously managed as private companies and
organized as S corporations for tax purposes. Selling, general and
administrative expenses for the periods presented are affected by the amount
of compensation and related benefits that the Founding Builders' Owners and
certain key employees received from their respective businesses during these
periods. Some of the Founding Builders' Owners and key employees have agreed
to certain reductions in salaries and benefits in connection with the
consummation of the Acquisitions and the Offerings and the conversion to C
corporation status for tax purposes. The differential between the previous
compensation of these individuals and the compensation they have agreed to
receive subsequent to the Acquisitions during 1995 was $1.9 million. See
"Employment Agreements." The compensation differential is substantially offset
by expenses that will be incurred for Fortress operations.
During the periods presented certain related party transactions occurred
between the Founding Builders and their stockholders and other affiliates. See
"Certain Transactions" and Note 9 to the Combined Predecessor Companies
Financial Statements. As indicated therein, a number of these transactions
will be curtailed in connection with the Acquisitions and the Offerings.
Management does not believe that these transactions, individually or in the
aggregate, had a material impact on the historical results of operations or
gross margins of the Combined Predecessor Companies, or that their curtailment
will have such an impact on the future operations
28
<PAGE>
or financial results of the Company. Those related party transactions that are
anticipated to continue following the Offerings are, in Management's opinion,
on terms comparable to those which could be obtained from unaffiliated third
parties.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 AND
THE THREE MONTHS ENDED
MARCH 31, 1996 AND 1995
The following table sets forth various items for the applicable periods (in
thousands) and their percentages of revenue for such periods:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
PRO
FORMA
1995 AS ADJUSTED
1993 % 1994 % ACTUAL % 1995 %
-------- ----- -------- ----- -------- ----- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue.......... $148,269 100.0 $174,715 100.0 $199,029 100.0 $199,029 100.0
Cost of sales.... 126,145 85.1 146,284 83.7 167,434 84.1 164,134 82.5
-------- -------- -------- --------
Gross profit.... 22,124 14.9 28,431 16.3 31,595 15.9 34,895 17.5
Selling, general
and
administrative
expenses........ 17,955 12.1 23,020 13.2 24,845 12.5 24,647 12.4
-------- -------- -------- --------
Operating in-
come............ 4,169 2.8 5,411 2.6 6,750 3.4 10,248 5.1
Income before
provision for
income taxes.... 4,898 3.3 4,828 2.8 6,076 3.0 10,303 5.2
Provision for in-
come taxes...... 925 0.6 83 * 21 * 3,915 2.0
-------- -------- -------- --------
Net income....... $ 3,973 2.7 $ 4,745 2.7 $ 6,055 3.0 $ 6,388 3.2
======== ======== ======== ========
<CAPTION>
THREE MONTHS ENDED MARCH 31,
---------------------------------------------------------------
PRO PRO
FORMA FORMA
1995 AS ADJUSTED 1996 AS ADJUSTED
ACTUAL % 1995 % ACTUAL % 1996 %
------- ----- ----------- ----- ------- ----- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue.......... $36,869 100.0 $36,869 100.0 $41,312 100.0 $41,312 100.0
Cost of sales.... 31,290 84.9 30,805 83.6 34,753 84.1 34,261 82.9
------- ----------- ------- -----------
Gross profit.... 5,579 15.1 6,064 16.4 6,559 15.9 7,051 17.1
Selling, general
and
administrative
expenses........ 5,477 14.9 5,688 15.4 5,610 13.6 6,024 14.6
------- ----------- ------- -----------
Operating in-
come............ 102 -- 376 1.0 949 2.3 1,027 2.5
Income before
provision for
income taxes.... 69 -- 501 1.4 986 2.4 1,169 2.8
Provision for in-
come taxes...... -- -- 190 .5 -- -- 444 1.1
------- ----------- ------- -----------
Net income....... $ 69 -- $ 311 .8 $ 986 2.4 $ 725 1.8
======= =========== ======= ===========
</TABLE>
- -------
* Less than .01%.
PRO FORMA AS ADJUSTED COMBINED RESULTS OF OPERATIONS
Pro Forma for the Three Months Ended March 31, 1996 Compared to Pro Forma for
the Three Months Ended March 31, 1995
Revenue for the Combined Predecessor Companies was $41.3 million for the
three months ended March 31, 1996 as compared to $36.9 million for the three
months ended March 31, 1995. The 12.1% increase in 1996 revenues over 1995 was
primarily due to an increase in the Combined Predecessor Companies' average
sales price of homes to $192,400 in the 1996 period from $175,900 in the 1995
period. The increase in the average sales price of the Combined Predecessor
Companies was due to a significant increase in closings at Christopher Homes
(from nine closings in the first quarter of 1995 to 22 closings in the first
quarter of 1996). The average sales price at Christopher Homes was $470,200
during the first quarter of 1996. In addition, the Combined Predecessor
Companies closed six additional homes during the first quarter of 1996 as
compared to the first quarter of 1995 (212 homes in 1996 compared to 206 homes
in 1995).
Pro forma combined cost of sales during the first quarter of 1996 was $34.3
million as compared to combined cost of sales of $30.8 million during the
first quarter of 1995. As a percentage of revenue, pro forma cost of sales
during the first quarter of 1996 was 82.9% as compared to 83.6% during the
same period in 1995. The decrease in pro forma cost of sales as a percentage
of revenue is attributable to a stronger consumer demand in all of the
Company's markets which allowed the Company to minimize customer concessions,
improved profitability on new product lines introduced in 1995 and greater
economies of scale in the Company's construction supervision overhead. The pro
forma adjustment to cost of sales is attributable to an adjustment which
reflects the lower cost of capital resulting from the Offerings and the
application of the proceeds therefrom to repay the Founding Builders' existing
indebtedness and equity participation arrangements. The pro forma adjustment
was $0.5 million in both the 1996 and 1995 three month periods.
The pro forma combined selling, general and administrative ("SG&A") expenses
in the first quarter of 1996 were $6.0 million as compared to $5.7 million in
the first quarter of 1995. As a percentage of revenue, pro forma SG&A was
14.6% during the first quarter of 1996 as compared to 15.4% during the first
quarter of 1995. The decrease in pro forma SG&A expenses as a percentage of
revenue was due to greater economies of scale experienced by the Combined
Predecessor Companies during the first quarter of 1996. The pro forma
adjustments to SG&A include a decrease in executive compensation of $203,000
in 1995, from historical levels due to the agreed upon reduction in salaries
and benefits of certain
29
<PAGE>
of the Founding Builders' Owners and key employees in connection with the
Acquisition and the Offerings. See "Introduction" and "Management--Employment
Agreements". These amounts are accounted for as compensation expense in
historical SG&A. Pro forma SG&A has been increased by $414,000 over historical
levels in both 1996 and 1995, related to Fortress' corporate operating
activities.
The pro forma combined provision for income tax for the first quarter of
1996 was $444,000 as compared to $190,000 during the first quarter of 1995.
The increase is directly related to the increase in income before provision
for income taxes. Income before provision for income taxes was $1.2 million
during the first quarter of 1996 as compared to $501,000 during the same
period of 1995.
The pro forma combined net income for the first quarter of 1996, accounting
for the pro forma adjustments detailed above, was $725,000 as compared to
$311,000 for the first quarter of 1995.
Pro Forma Year Ended December 31, 1995 Compared to Historical Year Ended
December 31, 1995
Revenue for the pro forma Combined Predecessor Companies was $199.0 million
for 1995. Pro forma combined cost of sales in 1995 was $164.1 million as
compared to historical 1995 combined cost of sales of $167.4 million. As a
percentage of revenue, pro forma cost of sales in 1995 was 82.5%, compared to
84.1% on a historical basis. The 1.6% percentage point decrease in pro forma
cost of sales is due to an adjustment which reflects the lower cost of capital
resulting from the Offerings and the application of the proceeds therefrom to
repay the Founding Builders' existing indebtedness and equity participation
arrangements. The pro forma adjustments reflect a reduction in average
borrowing costs from 18.3% to 13.75%.
The pro forma combined selling, general and administrative ("SG&A") expenses
in 1995 was $24.6 million, as compared to the historical 1995 combined SG&A
expenses of $24.8 million. As a percentage of revenue, pro forma SG&A was
12.4% as compared to historical SG&A expenses of 12.5%. The pro forma SG&A
expenses includes a decrease in executive compensation of $1.9 million from
historical levels due to the agreed upon reduction in salaries and benefits of
certain of the Founding Builders' Owners and key employees in connection with
the Acquisition and the Offerings. See "Introduction" and "Management--
Employment Agreements". These amounts are accounted for as compensation
expense in historical SG&A. This decrease is substantially offset by the
estimated additional expenses of $1.7 million related to the Company's
corporate operating activities.
The pro forma combined provision for income taxes in 1995 was $3.9 million
as compared to historical 1995 combined provision for income taxes of $21,000.
The increase reflects an increase in state and federal income taxes to
statutory state and federal income tax rates to present the combined result of
operations as if the Founding Builders had been taxed as C corporations. The
historical 1995 combined provision for income taxes reflects the S corporation
status of each of the Founding Builders.
The pro forma combined net income in 1995, accounting for the pro forma
adjustments detailed above, was $6.4 million as compared to historical 1995
combined net income of $6.1 million.
HISTORICAL COMBINED RESULTS OF OPERATIONS
As discussed in "Introduction," the Founding Builders were independent
companies not under common control or management during the historical periods
discussed herein; in addition, these companies were S corporations during all
or a portion of these periods. Accordingly, the historical results discussed
herein may not be comparable to or indicative of the post-combination results
to be achieved by the Company.
Three Months Ended March 31, 1996 Compared to the Three Months Ended March
31, 1995
Revenue for the Combined Predecessor Companies was $41.3 million for the
three months ended March 31, 1996 as compared to $36.9 million for the three
months ended March 31, 1995. The 12.1% increase in the 1996 period revenues
over the 1995 period is primarily due to an increase in the Combined
Predecessor Companies' average sales price of homes to $192,400 in the first
quarter of 1996 from $175,900 in the first
30
<PAGE>
quarter of 1995. The increase in the average sales prices of the Combined
Predecessor Companies was due to a significant increase in closings at
Christopher Homes (from nine closings in the first quarter of 1995 to 22
closings in the first quarter of 1996). The average sales price at Christopher
Homes was $470,200 during the first quarter of 1996. In addition, the Combined
Predecessor Companies closed six additional homes during the first quarter of
1996 as compared to the first quarter of 1995 (212 homes in 1996 compared to
206 homes in 1995).
Combined cost of sales during the first quarter of 1996 was $34.8 million as
compared to combined cost of sales of $31.3 million during the first quarter
of 1995. As a percentage of revenue, cost of sales during the first quarter of
1996 was 84.1% as compared to 84.9% during the same time period in 1995. The
decrease in cost of sales as a percentage of revenue is attributable to
stronger consumer demand in all of the Company's markets which allowed the
Company to minimize customer concessions, improved profitability on new
product lines introduced in 1995 and greater economies of scale in the
Company's construction supervision overhead.
The combined selling, general and administrative ("SG&A") expenses in the
first quarter of 1996 were $5.4 million as compared to $5.5 million for the
first quarter of 1995. As a percentage of revenue, SG&A was 13.1% during the
first quarter of 1996 as compared to 14.4% during the first quarter of 1995.
The decrease in SG&A expenses as a percentage of revenue is due to greater
economies of scale experienced by the Combined Predecessor Companies during
the first quarter of 1996.
The combined net income for the first quarter of 1996 was $1.0 million as
compared to $69,000 for the first quarter of 1995.
Year Ended December 31, 1995 Compared to the Year Ended December 31, 1994
Revenue increased 13.9% to $199.0 million in 1995 from $174.7 million in
1994. The number of homes closed by the Company increased by 3.3% to 998 units
in 1995 from 966 units in 1994, led by a 230% increase at Christopher (from 27
to 89 units) and an 11.6% increase at Sunstar (from 225 to 251 units). Genesee
increased revenue by 4.0%, even though closings decreased (from 229 to 219).
These increases were partially offset by a 9.5% decrease at Buffington (from
485 to 439 units). The large increases at Christopher and Sunstar were the
result of earlier investments in new communities which produced closings in
1995. These two Founding Builders each added two communities in 1995. The
increase at Genesee was due in part to an increase in land sales between 1993
and 1994. The decrease at Buffington occurred due to a slowdown in the Austin
market during the first six months of 1995 which resulted in a 19.6% decrease
in new sales orders (from 301 to 243 units). Management believes this slowdown
was the result of higher interest rates during this period and the impact of
these rates on the entry level and first time move-up market which Buffington
targets. The Company's 1995 increase in revenues was also due in part to a
8.2% increase in the average selling price of homes closed to $190,700 in 1995
from $176,400 in 1994. The increase was due primarily to changes in the
product mix of homes closed within the Company.
Cost of sales increased by 14.5%, to $167.4 million in 1995 from $146.3
million in 1994. As a percentage of revenue, cost of sales increased by 0.4%,
to 84.1% in 1995 from 83.7% in 1994. The increase was due primarily to an
increase in cost of sales, as a percentage of revenue at Genesee from 86.1% in
1994 to 88.6% in 1995. This increase was the result of a decision, during the
first half of 1995, to discount home sale prices in response to the prevailing
higher mortgage interest rates during this period.
Selling, general and administrative expenses increased 7.9% to $24.8 million
in 1995 from $23.0 million in 1994. As a percentage of revenue, however, SG&A
expenses in 1995 were 12.5%, compared to 13.2% in 1994. The decrease in SG&A
as a percentage of revenue was due to increased efficiencies as revenue grew
between 1994 and 1995. The increase in SG&A expenses was due to the increase
in sales and construction activity required to sustain the higher levels of
revenues in 1995 as well as the increase in land acquisitions, market analysis
and marketing activity needed to add new communities in 1995 for which sales
and closings are expected in 1996 and beyond. The Company opened 18 new
communities in 1995.
Other non-operating expenses (income) increased 22.3% to $713,000 in 1995
from $583,000 in 1994. The increase of $130,000 was due to a decrease in other
income at Christopher due to a decrease in management fee income between 1994
and 1995 of $240,000. This decrease in other income was partially offset by a
decrease in minority interest expense at Sunstar between 1994 and 1995.
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Year Ended December 31, 1994 Compared to the Year Ended December 31, 1993
Revenue increased 17.8% to $174.7 million in 1994 from $148.3 million in
1993. The number of homes closed by the Company increased by 14.9% to 966
units in 1994 from 841 units in 1993, led by a 43.3% increase at Sunstar (from
157 to 225 units) and a 18.0% increase at Buffington (from 411 to 485 units).
These increases were partially offset by a 35.7% decrease at Christopher (from
42 to 27 units). The increases at Sunstar and Buffington can be attributed to
earlier investments in new communities which produced closings in 1994. These
two Founding Builders added 10 new communities in 1994. The Company's 1994
increase in revenue was also due in part to a 3.0% increase in the average
selling price of homes closed to $176,400 in 1994 from $171,300 in 1993. The
increase was due primarily to changes in the product mix of homes closed
throughout all of the Company's operations.
Cost of sales increased by 16.0% to $146.3 million in 1994 from $126.1
million in 1993. As a percentage of revenue, cost of sales decreased by 1.4%
to 83.7% in 1994 from 85.1% in 1993. The decrease was due primarily to lower
cost of sales, as a percentage of revenue, of Sunstar and Christopher. The
decrease in cost of sales was primarily due to improvement in operating
efficiencies at Sunstar. Certain onsite construction supervision and
purchasing efficiencies were gained due to the 59.0% revenue growth
experienced by Sunstar in 1994. Cost of sales as a percentage of total revenue
at Sunstar decreased from 81.1% in 1993 to 79.1% in 1994. At Christopher, the
reduction was due to a significant decrease in developer fees paid to partners
of a number of partnerships in which Christopher was involved. Cost of sales
at Christopher decreased from 95.0% in 1993 to 85.1% in 1994.
Selling, general and administrative expenses increased by 28.2% to $23.0
million in 1994 from $18.0 million in 1993. As a percentage of revenue, SG&A
expenses in 1994 were 13.2%, compared to 12.1% in 1993. The majority of this
increase was related to a distribution of $2.6 million to the owners of
Buffington which was classified as compensation expense. In 1993, state tax
laws did not require the owners to classify distributions as expenses and
therefore such distributions were not accounted as compensation expense. The
balance of the increase in SG&A expenses was largely due to the increases in
sales and construction activity required to sustain the higher levels of
revenues in 1994 as well as the increase in land acquisition, market analysis
and marketing activity needed to add new communities in 1994 for which sales
and closings are expected in 1995 and beyond.
Other non-operating income expenses increased by $1.3 million to expense of
$583,000 in 1994 from income of $729,000 in 1993. Sunstar incurred an increase
in minority interest expense of $972,000 in connection with a new partnership
which began closing units and generating profits. The balance of $340,000 was
related to an increase in interest expense at Buffington and a decrease in
other income at Christopher. Christopher was required to record income from a
partnership interest as other income which generated income in 1993 of
$615,000 as compared to $359,000 in 1994.
BACKLOG
The Company's homes are generally offered for sale in advance of their
construction. The majority of the Company's homes sold in fiscal year 1995
were sold pursuant to standard sales contracts entered into prior to
commencement of construction. Such sales contracts are usually subject to
certain contingencies such as the buyer's ability to qualify for financing.
Homes covered by such sales contracts are considered by the Company as its
"backlog." The Company does not recognize revenue on homes covered by such
contracts until the sales are closed and the risk of ownership has been
legally transferred to the buyer. At March 31, 1996, the Company had 736 homes
in backlog, compared to 382 homes in backlog at March 31, 1995.
The following table sets forth the Company's backlog at December 31, 1993,
1994 and 1995 and March 31, 1995 and 1996. For periods prior to December 31,
1995, the Company calculated the aggregate sales value of homes in backlog by
multiplying the average sales price (by Founding Builder) times the number of
homes in backlog of each Founding Builder. For each of December 31, 1995 and
March 31, 1996, the Company calculated
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the aggregate sales value of homes in backlog by totaling the actual price of
each sales contract for homes in backlog. No assurances can be given that
homes in backlog will result in actual closings (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1993 DECEMBER 31, 1994 DECEMBER 31, 1995
---------------------------- ---------------------------- ----------------------------
NUMBER AGGREGATE NUMBER OF NUMBER AGGREGATE NUMBER OF NUMBER AGGREGATE NUMBER OF
OF SALES ACTIVE OF SALES ACTIVE OF SALES ACTIVE
HOMES VALUE COMMUNITIES HOMES VALUE COMMUNITIES HOMES VALUE COMMUNITIES
------ --------- ----------- ------ --------- ----------- ------ --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Buffington....... 63 $ 7,974 15 96 $12,624 20 184 $24,839 24
Christopher...... 22 9,074 1 42 21,566 4 62 25,381 4
Genesee.......... 109 25,414 15 109 28,340 15 110 28,658 15
Sunstar.......... 114 15,453 4 110 16,230 4 103 18,364 6
--- ------- --- --- ------- --- --- ------- ---
Total........... 308 $57,914 35 357 $78,760 43 459 $97,242 49
<CAPTION>
MARCH 31, 1995 MARCH 31, 1996
---------------------------- ----------------------------
NUMBER AGGREGATE NUMBER OF NUMBER AGGREGATE NUMBER OF
OF SALES ACTIVE OF SALES ACTIVE
HOMES VALUE COMMUNITIES HOMES VALUE COMMUNITIES
------ --------- ----------- ------ --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Buffington....... 126 $15,065 17 352 $ 45,798 27
Christopher...... 44 17,168 1 58 25,483 4
Genesee.......... 102 28,194 13 183 45,185 16
Sunstar.......... 110 18,653 5 143 24,610 7
------ --------- ----------- ------ --------- -----------
Total........... 382 $79,080 36 736 $141,076 54
</TABLE>
As part of its sales and marketing efforts, the Company builds and maintains
model homes in each of its active communities. The Company also builds
speculative homes (defined as homes which are under construction or completed
but for which the Company does not yet have sales contracts) on a project-by-
project basis to satisfy the demands of certain home buyers or brokers. See
"Business--Sales and Marketing." Management believes that the Company's
current inventory of model homes and speculative homes is, relative to sales
levels and the number of active communities, consistent with the number of
speculative homes and model homes maintained by the Company during the periods
presented in this Prospectus. It is possible that, in the event of adverse
economic or other business conditions affecting home buying activity in the
Company's markets, the Company may be required to reduce prices or provide
sales incentives to liquidate its inventory of model or speculative homes. It
is also possible that the Company could be required to reduce prices or
provide sales incentives to sell its model homes at the conclusion of a
particular community. Either of these actions, if taken, could have the effect
of depressing the Company's gross margin for the relevant periods.
INTEREST RATES AND INFLATION
The Company's business is significantly affected by general economic
conditions in the United States and, particularly, by fluctuations in interest
rates. Higher interest rates may decrease the potential market for new homes
by making it more difficult for home buyers to qualify for mortgages or to
obtain mortgages at interest rates acceptable to them.
The Company, as well as the homebuilding industry in general, may be
adversely affected during periods of high inflation, primarily as a result of
higher land acquisition and land development costs, as well as higher costs of
labor and materials. The Company attempts to pass through to its buyers any
increases in costs through increased selling prices. There can be no assurance
that inflation will not have a material adverse impact on the Company's future
results of operations.
COST OF CAPITAL
The homebuilding industry is capital intensive and requires significant up-
front expenditures to acquire, entitle and develop land and to commence home
construction. Accordingly, the Company has incurred substantial indebtedness
to finance its homebuilding operations. As of December 31, 1995, the total of
this indebtedness was $86.4 million. The Company uses a combination of secured
revolving credit facilities ($66.6 million as of December 31, 1995),
subordinated investor notes, participating loans ($19.6 million as of December
31, 1995) and joint venture partnerships ($1.3 million as of December 31,
1995).
The secured revolving credit facilities bear interest at an annual rate
which range from prime plus .5% to 2.0% (prime at December 31, 1995 was 8.5%)
and generally require financing fees ranging from 0.5% to 2.5% of the loan
commitment. The effective annual cost of the financing fees for these
facilities is usually greater than the stated fees because, among other
things, (i) the Company is required to pay the fee based on the total amount
of the loan, yet the full amount of the loan is not drawn and outstanding for
the entire term, and (ii) the period during which the loan is outstanding is
generally significantly less than one year, usually between 75 to 180 days.
The subordinated investor notes bear interest at annual rates which range
from 12% to 15% and require loan commitment fees ranging up to 10% of the loan
commitment annually. The participating loans and joint venture partnerships
require a 50% share of the profits with the lender/partner on the underlying
development. The need for these subordinated
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<PAGE>
investor notes, participating loans and joint venture partnership is due to
the amount of equity capital which traditional secured credit lenders have
required to be invested in developments prior to providing financing.
The Company's historical average cost of capital has been influenced by the
costs of these types of financing facilities. In 1995, the Company on a
combined basis recorded interest expense, including participation and joint
venture expenses, of $12.2 million. The cost of these expenses, as a percent
of outstanding related indebtedness as of December 31, 1995, was 13.9%. In
addition, the Company estimates the total cost of financing fees incurred in
1996 was $3.9 million or 4.7% of the outstanding related indebtedness as of
December 31, 1995. The Company therefore estimates its cost of financing for
1995 approximated $16.1 million or 18.3% of the outstanding indebtedness as of
December 31, 1995.
LIQUIDITY AND CAPITAL RESOURCES
For the years ended December 31, 1995 and December 31, 1994, net cash used
in operating activities was $25.1 million and $1.7 million, respectively, and
cash and cash equivalents decreased by $2.2 million and increased by $2.1
million, respectively.
The Company plans to continue to utilize land options as a method of
controlling and subsequently acquiring land. At March 31, 1996, the Company
had 4,002 lots under option, of which 1,341 are finished lots and 2,661 are
undeveloped lots. The Company expects to exercise, subject to market
conditions, substantially all of its option contracts. Other than the capital
required to exercise land option contracts, the Company has no significant
capital commitments for the 12-month period following consummation of the
Offerings.
The Company has secured a commitment (the "Commitment") from a lending
institution (the "Bank") pursuant to which the Bank has agreed, subject to
certain terms and conditions, to enter into the Credit Agreement that will
provide a revolving credit facility under which the Company may, from time to
time, borrow up to $50 million. It is expected that upon consummation of the
Offerings, no amount will be outstanding under such Credit Agreement. For a
further description of the Commitment and the Credit Agreement, see
"Description of Proposed Credit Agreement."
The Company intends, subject to market conditions, to expand its existing
markets and to consider entering into new markets through expansion of
existing operations and/or through acquisitions of established regional
homebuilders. No plans, agreements, or understandings with respect to such
expansion either of existing markets or through acquisition currently exist.
The Company believes that funds available through proceeds from the
Offerings and borrowings under the Credit Agreement, together with cash
generated from operations will be adequate (assuming no significant cash
payments in connection with any acquisitions made by the Company) for its
anticipated cash needs for the reasonably foreseeable future. There can be no
assurance, however, that the amounts available in the future from the
Company's sources of liquidity will be sufficient, as the amount and types of
indebtedness that the Company may incur will be limited by the terms of the
Indenture and the Credit Agreement. As a result, the Company may be required
to seek additional capital in the form of equity or debt financing and from a
variety of potential sources, including additional bank financing and/or
securities offerings.
The Company is a holding company with no operations, and derives all of its
operating income and cash flows from its subsidiaries. The Company must rely
on dividends and other distributions from its subsidiaries to generate the
funds necessary to meet its obligations, including payment of principal and
interest on the Senior Notes. The Indenture prohibits the Company from
entering into agreements (except as specifically provided in the Indenture)
that would restrict the ability of its subsidiaries to distribute funds to
Fortress. Based on historical cash flow from operations of its subsidiaries,
the Company expects to generate sufficient cash flow from operations to meet
all of its interest obligations on the Senior Notes, which annually will be
approximately $13.75 million, and expects to meet its principal obligations on
the Senior Notes when due in 2003. However, the Company's ability to satisfy
such interest and principal obligations will be dependent upon the Company's
future performance and will be subject to financial, business and other
factors affecting the business and
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<PAGE>
operations of the Company, including factors beyond its control. If the
Company does not generate sufficient cash flow from operations to make
payments of interest and principal on the Senior Notes, it may be required to
attempt to refinance all or a portion of the Senior Notes, dispose of assets
or seek additional debt or equity financing.
SEASONALITY AND VARIABILITY OF RESULTS
The Company experiences significant seasonality and quarter to quarter
variability in homebuilding activity levels. The annual operating cycle
generally reflects greater homes sales in the spring and autumn months and
slower sales in the winter and summer months. Closings are slowest during the
first quarter and activity increases during the second and third quarter with
the greatest level of closing activity taking place during the fourth quarter.
The Company believes that this seasonality is a reflection of the impact of
winter weather on construction activity and the preference of home buyers to
close on their new home either prior to the start of a new school year or
prior to the end of year holiday season.
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<PAGE>
BUSINESS
INTRODUCTION
The Company is a national homebuilding company designing, building and
selling single family homes in the metropolitan areas surrounding Las Vegas,
Nevada; Austin and San Antonio, Texas; Tucson, Arizona; Denver and Fort
Collins, Colorado; and Raleigh-Durham, North Carolina. The Company offers
high-quality, innovative homes, targeting a diverse range of market segments
including the first-time, entry-level buyer, move-up buyer and
executive/luxury home buyer. The Company markets a wide range of single family
detached and attached homes ranging in size from 1,000 square feet to 5,500
square feet at prices ranging primarily from $80,000 to $600,000. As of March
31, 1996, the average sales price of the Company's homes was $192,400.
The Company has entered into agreements to acquire, simultaneously with the
closing of the Offerings, four established homebuilders operating in the above
markets, each of which will become a wholly-owned subsidiary of Fortress.
Substantially all of the former owners of the Founding Builders will remain as
senior managers of these subsidiaries, subject to employment and non-compete
agreements, and will own approximately 54.4% of the outstanding capital stock
of the Company upon consummation of the Offerings. The four Founding Builders
which comprise the Company achieved revenue growth from $56.1 million in 1991
to $199.0 million in 1995, representing a compound annual growth rate of
37.2%. The Company attributes this growth principally to the market knowledge
and experience of its local management team and strong economic conditions in
these markets. At March 31, 1996, the Company was selling homes in a total of
54 communities, compared to 36 communities at March 31, 1995. On a combined
basis from January 1, 1996 through March 31, 1996, the Company had closed 212
homes and as of March 31, 1996, had a backlog of 736 homes under contract.
This compares to closings of 206 homes in the first quarter of 1995 and a
backlog of 382 homes as of March 31, 1995.
INDUSTRY OVERVIEW
The homebuilding industry is highly competitive and extremely fragmented
with most homebuilding companies operating in a concentrated geographic area
and offering a specific type of product to a particular target market. The
National Association of Homebuilders confirms that 94% of homebuilders start
fewer than 100 homes annually and 81% of homebuilders start fewer than 25
homes each year. According to Professional Builder Magazine, a leading
publication for the homebuilding industry, in its annual survey of home-
builders for 1994, The Giant 400, no single homebuilding company closed more
than 1% of the 1,455,000 housing starts in 1994. The industry's 100 largest
homebuilding companies closed only 11.2% of the 1994 housing starts and the
400 largest home-builders closed 19.5% of the 1994 housing starts.
The homebuilding industry is greatly affected by a number of factors, on
both a national and regional level. One of the most vital factors on a
national level is interest rates and how rates are influenced by decisions of
the Federal Reserve. The homebuilding industry's sensitivity to interest rate
fluctuations is two-pronged: an increase or decrease in interest rates affects
(i) the homebuilding company directly in connection with its cost of borrowed
funds for land and project development and working capital and (ii) home
buyers' ability and desire to purchase a home if a favorable mortgage loan
cannot be obtained. Changes in interest rates also directly affect home
buyers' ability to obtain long-term mortgages at rates favorable enough to
service a long-term mortgage obligation. See "Risk Factors--Interest Rates;
Mortgage Financing." The Company believes that the availability of less
expensive non-traditional mortgage financing vehicles such as variable rate
mortgage loans will also cause potential home buyers moving to high growth
areas to be more willing to purchase a new home now and refinance at a later
date.
Local, privately held homebuilders face severe risk that their inability to
obtain sufficient financing upon reasonable terms will preclude them from
exploiting favorable land acquisition opportunities, require that on-going
projects be downsized or delayed and require that they incur indebtedness at
significantly higher interest rates which directly causes their profitability
to suffer. Additionally, smaller homebuilders with smaller capital are often
required to adhere to restrictive lending requirements established by the
lending institutions such as (i) paying costly origination fees; (ii) limiting
the number of projects that can be developed simultaneously; (iii) complying
with restrictive construction schedules; (iv) insuring projects continue to
meet certain financial
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<PAGE>
covenants throughout the development stage; and (v) providing the lender with
an option to acquire an equity stake in the project through equity
participation incentives. As a result of such restrictions and requirements,
the senior management of local homebuilders typically expends a significant
amount of its time and resources locating and negotiating with sources of
capital. This process can cause delays or cancellation of approved projects
and can cause the homebuilder to forego land acquisitions and development for
future communities.
COMPETITIVE STRENGTHS AND ADVANTAGES
The Company believes it is positioned for future success in the industry
because of (i) its established operations in attractive housing markets; (ii)
its ability to enhance profitability through an improved capital structure and
certain operating synergies; (iii) its management expertise both in
homebuilding generally and its specific target and geographic markets; (iv)
diversification of its geographic markets and products; (v) its conservative
land acquisition policies; and (vii) its ability to expand both within its
existing markets and through acquiring other local homebuilding companies
located in other strong housing markets.
Strong Market Positions in Attractive Housing Markets. The Company believes
that it operates in some of the most attractive housing markets in the nation.
Generally, the metropolitan areas where the Company conducts operations have
experienced unemployment rates below the national average and population
growth rates in excess of the national average for the past five years.
Additionally, forecasted information obtained by the Company indicates that
population and employment growth, as well as housing starts, will continue at
levels above the national average through the year 1999. See "Business--Market
and Products." Each of the Founding Builders has been building homes in their
respective markets for a significant number of years, ranging from 8 years to
25 years, has completed numerous communities and, collectively, have sold
approximately 4,750 homes since 1987. The Company believes that each local
operation has developed a reputation within its respective market as a quality
homebuilder with desirable products. Each local operation has targeted one or
more specific niches within their market and has developed products which
specifically target their niche customers. As a result, the Company believes
that each of its local operations has established strong positions within its
market.
Reducing the Risk of Cyclicality Through Geographic and Product
Diversification. In addition to focusing on growth markets, the Company's
overall strategy also relies on the geographic diversification of the
Company's existing markets. Since local housing markets are cyclical and
cycles depend, in part, on local/regional conditions, the Company believes
that by operating in seven distinct geographic markets, it is less subject to
the effects of local and regional economic cycles than homebuilders that
operate in a single geographic market. Additionally, the Company believes that
its product diversification (which range in sales price primarily from $80,000
to $600,000) and diversity of niche markets (which range from young families
to "empty-nesters") also reduce risk in the event that existing national
factors, such as interest rates, inflation, the general state of the economy
and tax legislation, detrimentally affect particular income levels or
demographic groups.
Enhancing Profitability Through Improved Capital Structure and Operating
Synergies. Management expects that the reduced cost of capital provided by the
Offerings will directly contribute to the Company's profitability by reducing
the Founding Builders' average financing cost, which was approximately 18.3%
in 1995. The Company believes that the financial strength of its local
operations, coupled with the availability of the proceeds from the Offerings
and the Company's available borrowings under the Credit Agreement, will
enhance the Company's competitive position, substantially reduce its overall
costs associated with land acquisition and project construction, and provide
the necessary capital to employ its strategies for expansion. The Company
anticipates that the proceeds from the Offerings and funds available through
the Credit Agreement should be sufficient to cover the Company's capital
requirements, including implementation of its internal growth plan, for the
reasonably foreseeable future. If the Company requires additional financing,
in particular for working capital and to finance acquisitions, management
believes that the Company should be able to secure additional financing, to
the extent necessary, on more favorable terms than would be made available to
smaller homebuilders with less capital.
Although the Company's most significant services and commodities are
obtained on a local level, management believes that the Company's overall size
and strength of operations will enable it to secure favorable terms from
certain suppliers by purchasing in volume such items as appliances, plumbing
fixtures and floor
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<PAGE>
coverings. The Company also believes that in the process of integrating the
administrative functions of each local operation, the Company will realize
both cost savings and enhanced efficiency through the centralized management
of insurance policies, employee benefits and certain other administrative
functions. Additionally, the Company believes that each of its local
operations can significantly benefit by understanding and employing those
practices, policies and strategies such as a market analysis, costing
procedures and quality control that have contributed to the success of the
Company's other local operations.
Combining Decentralized Operations with Experienced Management. The Company
was founded on the belief that the housing industry is localized and is most
successful when managed by experienced and cycle-tested local managers who
have developed in-depth market knowledge and strong local relationships. The
Company believes that the senior management team of each of its local
operations has in-depth knowledge of the local markets where operations are
conducted, thereby enabling the Company to better serve its customers and
maximize each local operation's profitability. The local senior management
teams have between approximately 10 years and 30 years experience in the
homebuilding industry in their respective markets. See "Management." The
Founding Builders' Owners who comprise the senior management of each local
operation have substantial Common Stock ownership in the Company. In addition,
each member of the local senior management team participates in incentive
compensation plans, payable both in cash and stock options, based on the
financial performance of the local operation. As a result, the local managers
receive a direct personal benefit based on the successful financial
performance of their respective local operation and the operations of the
Company taken as a whole. The local senior managers are empowered to make most
of the day-to-day operating decisions at each location and are directly
responsible for all aspects of their respective local operations, including
among other things, product design, marketing, construction and project
development. The senior management team overseeing the centralized corporate
operations has over 70 years of combined experience in the national
homebuilding industry and is responsible for formulating and implementing the
Company's policies and procedures to insure that the operating subsidiaries
achieve profitability and growth goals. The Company has implemented strict,
centralized financial controls and cash management policies as well as
comprehensive planning and reporting systems that require approval by the
corporate senior management team of, among other items, all projects and
material capital commitments.
Limiting the Company's Exposure to Real Estate-Related Risks. Management
attempts to minimize risks associated with land ownership and maximize return
on invested capital by deferring, to the extent practicable, substantial
investment in land until the later phases of the land development and
construction process. The Company attempts to control a two- to four-year
supply of lots based on its expected absorption rates. In some markets, the
Company generally acquires fully developed lots pursuant to options or
purchase contracts in quantities sufficient to satisfy near-term demands. In
other markets, the Company strives to control undeveloped land (through
options or contingent purchase contracts) through most of the zoning and land
development process, closing on such land as close as possible to the start of
home construction. See "Business--Land Acquisition and Development." These
acquisitions are generally limited to smaller tracts of entitled land that
will yield 25 to 100 lots when developed. By limiting its land acquisitions
and development activities generally to smaller parcels of land, the Company
reduces the financial and market risks associated with owning land during the
development period.
INTERNAL AND EXTERNAL GROWTH STRATEGIES
Increase Market Share in Existing Markets. One of the Company's goals,
subject to existing market conditions (such as the availability and cost of
developable land) is to accelerate growth in the Company's current markets
through the improved access to capital that will be provided by the Offerings.
The Company believes that each of its current markets has a strong economy and
will provide certain opportunities for expansion. Most of the Company's
existing markets encompass broad metropolitan areas surrounding major cities
which have an extremely fragmented homebuilding industry. Management of the
Founding Builders believe that their expansion in the past several years has
been contained by the limited availability and high cost of capital for these
organizations. The Company believes that its improved access to capital will
directly enable each local operation to pursue additional land acquisitions,
have more communities under development and increase its backlog for future
home sales. The Company believes that such internal expansion can be done
conservatively while improving the Company's financial performance.
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Growth by New Markets and Acquisitions. Depending on existing market
conditions, the Company intends to enter into one or more new markets each
year. Recognizing the highly fragmented nature of the homebuilding industry,
the Company intends to utilize an acquisition program whereby it will acquire
established, local homebuilding companies that operate in new markets. The
Company believes that it will be an attractive acquiror of other local
homebuilding companies due to (i) the benefits afforded by being a part of a
national, public homebuilding company, including an enhanced ability to
compete in the local market through the Company's financial strength and
improved access to capital; (ii) the Company's decentralized management
strategy, which will enable existing local management to continue to oversee
the operations of each company; and (iii) a team of senior executives with
over 70 years of combined experience in the homebuilding industry who are
responsible for all centralized Company operations and will be available to
provide operational support and advice on an as-needed basis. The Company
expects that each acquisition candidate will satisfy almost all of the same
criteria which was used to select each of the Founding Builders, including
among other things, a substantial asset base, growth opportunities,
experienced management team, consistent performance and establishment and
reputation in the acquiree's local market for building quality homes. In most
instances, the Company expects to retain the management, employees and name of
the acquired company while seeking to improve the acquired company's
profitability by implementing the Company's business strategies and providing
improved access to capital. The Company believes that its capital structure
and publicly traded stock will provide the Company with flexibility in
structuring the terms of each acquisition to insure that the acquired
homebuilding company has a positive impact on the Company's earnings. As
consideration for future acquisitions, the Company intends to use various
combinations of Common Stock, options to acquire Common Stock, preferred
stock, cash and notes. Since its inception in June 1995, Fortress has gathered
and assembled data with respect to numerous local homebuilding companies and
believes it is well positioned to commence its acquisition program promptly
following the Offerings. As of the date of this Prospectus, the Company has no
understandings, commitments or agreements with respect to any material
acquisition.
In the event such new markets are in close proximity to one or more of the
Company's existing markets, the expanded operations may be conducted under the
management of the Company's local operations currently operating in that area.
Management believes that such expansion will provide the Company with valuable
synergies and economies of scale which will increase the profitability of the
local operation overseeing operations within the new market. The Company
intends to reduce its risk to the maximum extent possible when entering such
new markets by thoroughly developing a marketing and overall strategy prior to
commencing operations, acquiring land in a conservative manner and upon
favorable terms and hiring local management who has developed an expertise in
the marketplace.
There can be no assurance that the Company will be able to expand into such
new markets or acquire or profitably manage additional companies or
successfully integrate such acquired companies into the Company. See "Risk
Factors--Acquisition Strategy."
MARKETS AND PRODUCTS
Overview
The Company's operations service the metropolitan areas surrounding
following cities: Raleigh-Durham, North Carolina; Austin and San Antonio,
Texas; Las Vegas, Nevada; Denver and Fort Collins, Colorado, and Tucson,
Arizona. The Company believes that each of these areas represents an
attractive homebuilding market with significant opportunity for growth. The
Company also believes that each of its local operations is well established in
its respective markets and has developed a reputation for building quality
homes at competitive prices. The Company maintains the flexibility to tailor
its product mix within a given market depending upon market conditions
including demographic trends, demand for a particular type of product,
margins, timing and the economic strength of the market.
Raleigh-Durham, North Carolina
The Raleigh-Durham metropolitan statistical area (the "Raleigh-Durham Area")
has been consistently ranked among the most attractive cities in the nation in
which to live and conduct business, and was ranked first
39
<PAGE>
in 1994 by Money and Fortune Magazines. This is due to, among other factors,
its low unemployment rate and potential for economic growth. According to the
"Market Hotness Index" published by U.S. Housing Markets (4th quarter, 1995),
the Raleigh-Durham area ranked as the 6th leading housing market in the nation
in 1995. Annual building permits issued for single-family residential units in
the Raleigh-Durham Area have more than doubled from 1990 to 1994 increasing
from approximately 4,950 permits in 1990 to approximately 10,200 permits in
1994.
The employment and population in the Raleigh-Durham Area is expected to
continue to increase due to an influx of new businesses as well as from its
already thriving high-tech and biotechnology community (Raleigh-Durham
currently has the nation's largest planned research park). The population in
the Raleigh-Durham Area grew from approximately 858,000 people in April 1990,
to approximately 965,000 people by July, 1994. Additionally, the DRI/McGraw-
Hill Inc. Markets Review (the "Markets Review") has forecasted that the
population of the Raleigh-Durham Area is expected to reach approximately
1,200,000 people by the year 2000. Despite its growing population, the
unemployment rate in the Raleigh-Durham Area has declined from 4.0% in 1992 to
2.8% as of December, 1995 (compared to the national unemployment rate of 5.2%
as of December, 1995 (seasonally adjusted to 5.6%)). A recent survey done by
DRI/McGraw-Hill Inc. (the "McGraw-Hill Survey"), an economic consulting and
forecasting firm, predicts that the Raleigh-Durham Area will create
approximately 90,000 new jobs through the year 2000. The median annual
household income in the Raleigh-Durham Area is in excess of $40,000 and more
than 35% of the population is between the ages of 25 and 44, assuring a good
supply of potential customers in various stages of the home buying cycle.
The Company believes that it is well positioned in the Raleigh-Durham Area
market as the third largest homebuilder in the Raleigh-Durham Area based on
number of units sold and among the top three homebuilders in the Raleigh-
Durham Area based on total dollar volume of sales. The Company's North
Carolina operation builds high quality, innovative, single-family detached and
attached homes that range in sales prices from approximately $100,000 to
approximately $300,000, and targets entry-level, and first- and second-time
move-up buyers and retirees. Depending on the opportunity available within
each community, the Company will either develop land which it controls under
option or contract or purchase developed lots from developers or other
homebuilders. As of March 31, 1996, the Company controlled approximately 2,646
lots (including land anticipated to be subdivided into lots) in the Raleigh-
Durham Area for new home construction. The Company's North Carolina operation
was named the fastest growing company in the Research Triangle Area in
November 1995 and the Triangle Sales and Marketing Council's 1990 and 1994
"Builder of the Year." The Company's North Carolina operation was also
selected as the Raleigh-Wake County Homebuilder's Association's "Builder of
the Year" in 1992 and 1995.
The following table presents information relating to the Company's current
and planned communities in the Raleigh-Durham Area:
<TABLE>
<CAPTION>
NUMBER NUMBER NUMBER OF NUMBER OF
TOTAL OF HOMES OF HOMES HOMES IN HOMES ESTIMATED
NUMBER OF SOLD AS OF CLOSED AT BACKLOG AT REMAINING AT AVERAGE
HOMES AT MARCH 31, MARCH 31, MARCH 31, MARCH 31, SALES
COMMUNITY HOME TYPE COMPLETION 1996 1996 1996 1996(2) PRICE(3)
--------- ---------------------- ---------- ---------- --------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
CURRENT:
Village Lakes.......... Single Family-Detached 346 248 225 23 98 $134,000
Park Village........... Single Family-Detached 609 367 308 59 242 $149,000
Preston Oaks........... Single Family-Detached 70 52 44 8 18 $254,000
The Reserve............ Single Family-Detached 195 22 17 5 173 $274,000
Millcreek.............. Single Family-Detached 85 43 27 16 42 $211,000
Lakeridge.............. Single Family-Attached 118 30 0 30 88 $177,000
Cobblestone............ Single Family-Detached 58 2 0 2 56 $125,000
----- --- --- --- -----
SUBTOTAL............... 1,481 764 621 143 717
PLANNED(1):
Sweetwater............. Single Family-Detached 1,800 0 0 0 1,800 $155,000
Millcreek.............. Single Family-Attached 117 0 0 0 117 $177,000
----- --- --- --- -----
TOTAL.................. 3,398 764 621 143 2,634
===== === === === =====
</TABLE>
40
<PAGE>
- --------
(1) "Planned" projects include only those projects in which the Company
controls land available for project development and home construction. In
most cases, planned projects require additional entitlements prior to the
commencement of construction. See "Land Acquisition and Development" and
"Risk Factors--Government Relations; Environmental Controls."
(2) "The Number of Homes Remaining" is the number of homes which could be
built on both the remaining lots available for sale and land to be
developed into lots as estimated by the Company.
(3) "Estimated Average Sales Price" is the current average sales price of
homes offered for sale in each respective community.
Austin, Texas
The Company believes that the Austin metropolitan statistical area (the
"Austin Area") offers significant opportunities for expansion and continued
profitability in the housing industry. The Austin Area economy has exhibited
solid growth in recent years due in part to an influx of technology companies
which has led to a significant increase in employment, population and housing
starts. Annual building permits issued for single-family residential units in
the Austin Area have increased from approximately 1,900 in 1990 to
approximately 6,270 in 1994. According to Builders Report statistics, as
reported by Update & More, Inc., 1995 third quarter single-family home sales
in the Austin Area were 56% higher than those of 1994. Additionally, the
Mortgage Brokers Association of America has forecasted that in 1996, the
Austin Area will be the 2nd best mortgage market in the United States based on
a number of factors, including population trends, number of households,
nonfarm payroll employment, personal income, housing permits, home sales, home
prices and housing affordability.
The Austin Area is ranked 8th in the nation by the National Association of
Homebuilders ("NAHB") for population growth over the last 10 years. According
to the U.S. Census Bureau 1994 estimates, the population of Austin is
approximately 964,000 people, up from the 1990 census figures of approximately
846,000 people. The Markets Review has projected that population in the Austin
Area will reach approximately 1,100,000 people by the year 2000. The
unemployment rate in the Austin Area has declined from 4.9% in 1990 to 3.5% as
of December, 1995 (compared to the national unemployment rate of 5.2% as of
December, 1995 (seasonally adjusted to 5.6%)). Approximately 102,300 new jobs
have been created in the Austin Area since 1990, and the Austin Chamber of
Commerce has forecasted an increase of approximately 30,000 new jobs in the
Austin Area in 1996. Additionally, the Chamber of Commerce reported a 27% job
growth rate since 1990 (with 6.1% growth in 1994 alone) with gains in almost
all employment sectors. The median annual household income of the Austin Area
is approximately $31,000 and approximately 37% of the population is between
the ages of 25 and 44, which the Company believes will assure a good supply of
potential customers in various stages of the home buying cycle.
The Company has offices located in Austin and San Antonio, Texas and
conducts operations in both of these metropolitan areas. As of December 31,
1995, the Company's Texas operation was the third largest homebuilder in
Austin based on total number of permits issued. Since its inception, the
Company's Texas operation has closed the sale of over 2,000 homes in the
Austin Area. This local operation offers primarily single family detached
homes to first- and second-time move-up home buyers that range in sales price
from approximately $84,000 to approximately $300,000. This operation generally
controls a significant number of lots which it purchases after the lots are
developed and available for the commencement of home construction. As of March
31, 1996, the Company controlled a supply of lots for the construction of over
954 homes in the Austin Area. The Company's Texas operation has recently been
recognized by the National Association of Home Builders, Professional Builder
magazine, and the Texas Capitol Area Builders Association for outstanding
performance in product design and construction, interior merchandising,
management, and marketing. In 1991, the Texas Association of Realtors named
the Texas operation "Volume Builder of the Year." The Company's Texas
operation was also recently awarded the Diamond Builder Award by Home Buyers
Warranty for excellence in residential construction and customer satisfaction.
41
<PAGE>
The following table presents information relating to the Company's current
and planned communities in the Austin Area:
<TABLE>
<CAPTION>
NUMBER OF
NUMBER OF NUMBER OF HOMES
TOTAL HOMES NUMBER OF HOMES IN REMAINING ESTIMATED
NUMBER OF SOLD AS OF HOMES CLOSED BACKLOG AT AT AVERAGE
HOMES AT MARCH AT MARCH MARCH MARCH SALES
COMMUNITY HOME TYPE COMPLETION 31, 1996 31, 1996 31, 1996 31, 1996(2) PRICE(3)
- --------- ---------------------- ---------- ---------- ------------ ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
CURRENT:
Bancroft Woods......... Single Family-Detached 38 15 8 7 23 $140,000
Blockhouse Creek....... Single Family-Detached 47 31 13 18 16 $115,000
Bohls Place............ Single Family-Detached 50 40 24 16 10 $110,000
Cat Hollow............. Single Family-Detached 147 95 59 36 52 $115,000
Chandler Creek......... Single Family-Detached 82 31 12 19 51 $100,000
Cypress Bend........... Single Family-Detached 30 21 18 3 9 $134,000
Deer Park.............. Single Family-Detached 65 51 32 19 14 $135,000
Gann Ranch............. Single Family-Detached 88 88 83 5 0 $ 92,000
Great Hills............ Single Family-Detached 64 39 18 21 25 $200,000
Meadow Lake............ Single Family-Detached 230 102 80 22 128 $100,000
Meadow Pointe.......... Single Family-Detached 109 18 6 12 91 $105,000
North Park............. Single Family-Detached 87 77 63 14 10 $115,000
Oakwood Glen........... Single Family-Detached 61 20 8 12 41 $135,000
Sierra Vista........... Single Family-Detached 66 47 32 15 19 $105,000
South Creek............ Single Family-Detached 10 5 3 2 5 $115,000
Steeds Crossing........ Single Family-Detached 130 104 89 15 26 $105,000
Villages at Western
Oaks.................. Single Family-Detached 82 54 35 19 28 $125,000
Vista Oaks............. Single Family-Detached 180 117 86 31 63 $160,000
Windemere Parke........ Single Family-Detached 37 36 35 1 1 $ 95,000
Eagle Ridge............ Single Family-Detached 40 4 0 4 36 $ 98,000
Huntington Estates..... Single Family-Detached 124 6 0 6 118 $115,000
Miscellaneous Offsite.. Single Family-Detached -- -- -- 23 --
----- ----- --- --- -----
SUBTOTAL............... 1,767 1,001 704 320 766
PLANNED(1):
The Park at Duval...... Single Family-Detached 34 0 0 0 34 $120,000
Woodgreen.............. Single Family-Detached 23 0 0 0 23 $140,000
Fairway Ridge.......... Single Family-Detached 90 0 0 0 90 $ 80,000
Spring Brook........... Single Family-Detached 120 0 0 0 120 $105,000
Oak Creek Park......... Single Family-Detached 10 0 0 0 10 $170,000
Mason Creek............ Single Family-Detached 120 0 0 0 120 $130,000
Round Rock Ranch....... Single Family-Detached 120 0 0 0 120 $130,000
----- ----- --- --- -----
TOTAL.................. 2,284 1,001 704 320 1,283
===== ===== === === =====
</TABLE>
- --------
(1) "Planned" projects include only those projects in which the Company
controls land available for project development and home construction. In
most cases, planned projects require additional entitlements prior to the
commencement of construction. See "Land Acquisition and Development" and
"Risk Factors--Government Relations; Environmental Controls."
(2) "The Number of Homes Remaining" is the number of homes which could be
built on both the remaining lots available for sale and land to be
developed into lots as estimated by the Company.
(3) "Estimated Average Sales Price" is the current average sales price of
homes offered for sale in each respective community.
42
<PAGE>
San Antonio, Texas
The San Antonio metropolitan statistical area (the "San Antonio Area") has a
population of approximately 1,438,000 people as of September 1995, up from
approximately 1,325,000 people in 1990. The Markets Review has projected that
population in the San Antonio Area will reach approximately 1.6 million people
by the year 2000. Annual building permits issued for single family residential
units in the San Antonio Area have increased from approximately 1,720 in 1990
to approximately 9,300 in 1994. Additionally, the San Antonio Area's
unemployment rate has declined from 6.7% in 1990 to 4.8% as of December, 1995
(compared to the national unemployment rate of 5.2% as of December, 1995
(seasonally adjusted to 5.6%)). More than 51% of San Antonio's households have
an annual income in excess of $35,000. Additionally, a majority of the adult
population is between the ages of 25 and 49, which the Company believes will
assure a good supply of potential customers in various stages of the home
buying cycle. Figures released in late October 1995 by the Texas Employment
Commission-Labor Market Review show that approximately 25,000 new jobs were
added to the San Antonio Area in the twelve month period ending August, 1995.
This is due in part to the relocation of several large corporations to the San
Antonio Area over the last few years, including Southwestern Bell, Citicorp,
Sony, VLSI and World Savings Bank.
The Company entered the San Antonio market in September 1993 after extensive
market and demographic research and offers primarily the same type of product
as is sold in Austin. The Company's corporate office in Austin handles the
administrative functions for its San Antonio operation. The San Antonio
division closed the sale of 10 homes in 1994 with a total volume of
approximately $1,535,000 while 32 home sales were closed in 1995 with volume
of approximately $4,000,000. The Company believes that it is well positioned
to take advantage of the dynamic growth in the San Antonio Area housing market
in the near and long term.
The following table presents information relating to the Company's current
communities in the San Antonio Area:
<TABLE>
<CAPTION>
NUMBER NUMBER NUMBER OF NUMBER OF
TOTAL OF HOMES OF HOMES HOMES IN HOMES ESTIMATED
NUMBER OF SOLD AS OF CLOSED AT BACKLOG AT REMAINING AT AVERAGE
HOMES AT MARCH 31, MARCH 31, MARCH 31, MARCH 31, SALES
COMMUNITY HOME TYPE COMPLETION 1996 1996 1996 1996(1) PRICE(2)
--------- ---------------------- ---------- ---------- --------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
CURRENT:
Las Lomas.............. Single Family-Detached 95 10 2 8 85 $175,000
Redland Heights........ Single Family-Detached 13 9 9 0 4 $170,000
Thistle Creek.......... Single Family-Detached 90 38 30 8 52 $115,500
Oak Ridge Villages..... Single Family-Detached 38 6 0 6 32 $115,000
Big Springs............ Single Family-Detached 35 3 0 3 32 $180,000
Greenshire............. Single Family-Detached 18 6 0 6 12 $160,000
Miscellaneous Offsite.. Single Family-Detached -- -- -- 1 --
--- --- --- --- ---
TOTAL.................. 289 72 41 32 217
=== === === === ===
</TABLE>
- --------
(1) "The Number of Homes Remaining" is the number of homes which could be
built on both the remaining lots available for sale and land to be
developed into lots as estimated by the Company.
(2) "Estimated Average Sales Price" is the current average sales price of
homes offered for sale in each respective community.
Las Vegas, Nevada
The Las Vegas metropolitan statistical area (the "Las Vegas Area") has
exhibited tremendous growth over the past ten years, ranked first by the NAHB
as of July 1995 in population growth and fourteenth in average volume of
single family residential building permits issued. According to the "Market
Hotness Index" published by U.S. Housing Markets (4th quarter, 1995), the Las
Vegas area was ranked as the top housing market in the nation in 1995. This
expansion has been due to, among other factors, its absence of state income
tax, inheritance tax and estate tax, its climate and its potential for
commercial growth. The growing economy in the Las Vegas
43
<PAGE>
Area has lead to an increase in annual building permits issued for single
family residential units from approximately 11,200 in 1990 to approximately
20,250 in 1994. Additionally, the Mortgage Brokers Association of America has
forecasted that in 1996, the Las Vegas Area will be the best mortgage market
in the United States based on a number of factors including, population
trends, number of households, nonfarm payroll employment, personal income,
housing permits, home sales, home prices and housing affordability.
Tourism volume in the Las Vegas Area increased 35% in 1993 and 1994,
reaching 28.2 million people in 1994, and is expected to continue to grow at
an accelerated rate in the future. By the year 2000, 45 million tourists per
year are expected to visit the Las Vegas Area. The population in the Las Vegas
Area grew from approximately 850,000 people in 1990 to approximately 1,076,000
people in 1994. The Las Vegas Chamber of Commerce has reported that the
population is projected to reach approximately 1,300,000 people by the year
2000. Despite its growing population, the unemployment rate in the Las Vegas
Area has declined from 6.8% in 1992 to 4.7% as of December 1995 (compared to
the national unemployment rate of 5.2% as of December 1995 (seasonally
adjusted to 5.6%)). In 1995, the Las Vegas job market grew by approximately
6%, which is three times the national average. The employment rate in the Las
Vegas Area is expected to continue to increase due to the already thriving and
expanding gambling/tourism industry (with eight new resorts planned for the
Las Vegas "strip" by the end of 1997 which are expected to bring as many as
70,000 new jobs to the Las Vegas Area) as well as from the relocation of new
businesses (over 200 within the last five years). According to the McGraw-Hill
Survey, the Las Vegas Area will generate approximately 96,000 new jobs through
the year 2000. The Las Vegas Chamber of Commerce has reported that the median
annual household income in Clark County (the County which houses approximately
90% of the Las Vegas workforce) is in excess of $36,000, and over 40% of the
adult population is between the ages of 25 and 45, which the Company believes
will assure a good supply of potential customers in various stages of the home
buying cycle. According to the NAHB, the Las Vegas Area ranks second
nationally in growth of household employment over the last 10 years.
The Company believes that it is well positioned to take advantage of the
dynamic growth of the Las Vegas market as one of the largest homebuilders in
the Las Vegas Area competing in the luxury homebuilding market based on total
dollar volume of homes sold. The Company's Las Vegas operation specializes in
the construction of homes in masterplanned communities which are self-
contained, pre-planned communities consisting of governmental, commercial and
residential areas, schools, parks and various other amenities such as swimming
pools and golf courses. The Company believes that such masterplanned
communities will continue to gain market share. Specifically, the Company's
Las Vegas operation constructs single family detached and attached homes (with
many of its communities located on golf courses) that range in sales price
from approximately $150,000 to approximately $850,000, and targets luxury
second- and third-time (or higher) move-up and second home buyers. The Company
generally controls raw or partially developed land which, as part of the
masterplanned community, is fully entitled, and develops the land into
finished lots ready for home construction. As of March 31, 1996, the Company
controlled approximately 287 lots in the Las Vegas Area for new home
construction and lot sales. The Company's Las Vegas operation has received a
number of awards for excellence in the homebuilding industry including the
"Builders Spotlight Business Excellence Award" in 1993 from Builder magazine
(January, 1993 issue) as one of "America's Best Builders" and a number of
national and local design awards. Management believes that the Company's Las
Vegas operation is well positioned to increase its market share in
homebuilding sales located in masterplanned communities.
44
<PAGE>
The following table presents information relating to the Company's current
and planned communities in the Las Vegas Area:
<TABLE>
<CAPTION>
NUMBER NUMBER NUMBER OF NUMBER OF
TOTAL OF HOMES OF HOMES HOMES IN HOMES ESTIMATED
NUMBER OF SOLD AS OF CLOSED AT BACKLOG AT REMAINING AT AVERAGE
HOMES AT MARCH 31, MARCH 31, MARCH MARCH SALES
COMMUNITY HOME TYPE COMPLETION 1996 1996 31, 1996 31, 1996 (2) PRICE(3)
--------- --------------------------- ---------- ---------- --------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
CURRENT:
Country Club Hills..... Single Family-Detached 81 78 78 0 3 $543,000
Country Club Estates... Single Family-Detached 90 84 47 37 6 $543,000
Country Rose Estates... Single Family-Detached 152 32 25 7 120 $253,000
Legacy Estates......... Single Family-Detached 5 3 3 0 2 $743,000
Terraces............... Single Family-Attached 66 37 23 14 29 $203,000
Legacy Estates......... Single Family-Detached Lots 46 31 28 3 15 $141,000
Custom................. 1 -- -- 0 1
--- --- --- --- ---
SUBTOTAL................ 441 265 204 61 176
PLANNED(1):
Terraces II............ Single Family-Attached 64 0 0 0 64 $203,000
Peccole Ranch.......... Single Family-Detached 81 0 0 0 81 $500,000
--- --- --- --- ---
TOTAL................... 586 265 204 61 321
=== === === === ===
</TABLE>
- --------
(1) "Planned" projects include only those projects in which the Company
controls land available for project development and home construction. In
most cases, planned projects require additional entitlements prior to the
commencement of construction. See "Land Acquisition and Development" and
"Risk Factors--Government Relations; Environmental Controls."
(2) "The Number of Homes Remaining" is the number of homes which could be
built on both the remaining lots available for sale and land to be
developed into lots as estimated by the Company.
(3) "Estimated Average Sales Price" is the current average sales price of
homes offered for sale in each respective community.
Denver, Colorado
The housing market in Colorado generally, and the Denver metropolitan
statistical area (the "Denver Area") particularly, has experienced a surge in
the residential housing market in recent years. This has been due to, among
other factors, its low unemployment rate and potential for commercial growth.
This dynamic growth has led to an increase in demand for single family
housing. Annual building permits issued for single family residential units in
the Denver Area have increased from approximately 4,400 in 1990 to
approximately 14,900 in 1995.
The employment rate in the Denver Area is expected to continue to increase
in the future due to an influx of new businesses as well as from its already
thriving retail sales, tourism and business service industries. The population
in the Denver Area has grown from approximately 1,623,000 people in the
beginning of 1990 to approximately 2,085,000 people in 1995. The Denver
Chamber of Commerce has estimated that the population is expected to reach
approximately 2,200,000 people by the year 2000. Despite its growing
population, the unemployment rate in the Denver Area has declined from 6.5% in
1992 to 3.3% as of December, 1995 (compared to the national unemployment rate
of 5.2% as of December, 1995 (seasonally adjusted to 5.6%)). The median annual
after-tax income of households in the Denver Area is in excess of $38,800 and
approximately 44% of the population is between the ages of 25 and 49, which
the Company believes will assure a good supply of potential customers in
various stages of the home buying cycle. Approximately 41,100 new jobs were
created in the Denver Area during 1994 (a 3.9% gain over 1993), due in part to
strong gains in retail trade and business service positions. According to the
Genesis Marketing Group, an independent research firm, at least 155,100 new
jobs are projected to be created in the Denver Area from the beginning of 1995
through 2000.
45
<PAGE>
The Company believes it is well positioned in this market as one of the top
fifteen homebuilders in the Denver Area based on the total dollar volume of
homes built. The Company's Colorado operation offers a wide range of
affordably priced, single family detached custom and semi-custom homes and
single family attached homes that range in sales price from approximately
$120,000 to $350,000 (with its line of custom homes in the $350,000 to over
$1,000,000 range) and targets all move-up and custom home buyers. The
Company's Colorado operation has successfully established its reputation as a
"custom builder," offering move-up buyers an opportunity to acquire homes with
features that meet their lifestyle expectations by either customizing their
home or selecting from a wide variety of upgrades and options. The Company's
Colorado operation currently conducts homebuilding operations in the Denver
Area, Ft. Collins, Colorado and Tucson, Arizona and has a land development
project in Oakland County, Michigan. Although the Company generally develops
land in the Denver Area, it has, from time to time, acquired developed lots in
Tucson if a favorable price was obtained. As of March 31, 1996, the Company
controlled approximately 645 lots in the Denver Area for new home construction
and lot sales. In January 1995, the Colorado operation was selected as the
winner of the "Gold Medal" by Builder magazine as the country's "best
builder," constructing 100 to 500 homes.
46
<PAGE>
The following table presents information relating to the Company's current
communities in the Denver Area:
<TABLE>
<CAPTION>
NUMBER OF
NUMBER NUMBER OF HOMES
TOTAL OF HOMES NUMBER HOMES IN REMAINING ESTIMATED
NUMBER OF SOLD AS OF OF HOMES BACKLOG AT AT AVERAGE
HOMES AT MARCH 31, CLOSED AT MARCH MARCH 31, MARCH 31, SALES
COMMUNITY HOME TYPE COMPLETION 1996 31, 1996 1996 1996 (2) PRICE(3)
--------- --------- ---------- ---------- --------------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
CURRENT:
Cross Ridge............ Single Family-Detached 91 21 16 5 70 $ 243,000
Highgate............... Single Family-Detached 94 40 29 11 54 $ 272,000
Ironwood............... Single Family-Detached 59 39 27 12 20 $ 233,000
North Creek............ Single Family-Detached 49 23 0 23 26 $ 182,000
Enclave................ Single Family-Detached 53 53 53 0 0 $ 180,000
Highpointe............. Single Family-Detached 85 48 36 12 37 $ 276,000
Mira Vista............. Single Family-Detached 49 29 14 15 20 $ 262,000
Fairway Vista.......... Single Family-Detached 61 38 11 27 23 $ 180,000
Panorama Ridge......... Single Family-Detached 16 15 11 4 1 $ 266,000
Mesa Meadows........... Single Family-Detached 85 37 6 31 48 $ 224,000
Orofino................ Single Family-Detached 11 1 1 0 10 $ 389,000
Fairways CPV........... Single Family-Detached 30 24 23 1 6 $ 344,000
Home Farm.............. Single Family-Detached 44 0 0 0 44 $ 176,000
Sterling Pointe........ Single Family-Detached 34 6 0 6 28 $ 164,000
Heritage Hills......... Single Family-Detached 59 1 0 1 58 $ 287,000
Custom Division........ Single Family-Detached -- -- -- 4 -- $ 350,000-
$1,000,000
----- --- --- --- ---
SUBTOTAL................ 820 375 227 152 456
PLANNED(1):
Raccoon Creek (SE)..... Single Family-Detached 31 0 0 0 31 $ 260,000
Raccoon Creek (12W).... Single Family-Detached 65 0 0 0 65 $ 225,000
----- --- --- --- ---
SUBTOTAL................ 96 0 0 0 96
LOTS:
Ridge at Hiwan......... Single Family Lots 54 1 1 0 53 $ 80,000
Mesa Meadows........... Single Family Lots 31 19 18 1 12 $ 75,000
Raccoon Creek.......... Single Family Lots 28 0 0 0 28 $ 64,000
----- --- --- --- ---
TOTAL................... 1,029 395 246 153 634
===== === === === ===
</TABLE>
- --------
(1) "Planned" projects include only those projects in which the Company
controls land available for project development and home construction. In
most cases, planned projects require additional entitlements prior to the
commencement of construction. See "Land Acquisition and Development" and
"Risk Factors--Government Relations; Environmental Controls."
(2) "The Number of Homes Remaining" is the number of homes which could be
built on both the remaining lots available for sale and land to be
developed into lots as estimated by the Company.
(3) "Estimated Average Sales Price" is the current average sales price of
homes offered for sale in each respective community.
47
<PAGE>
Fort Collins, Colorado
Fort Collins, Colorado is located approximately one hour from the heart of
Denver and approximately a two-hour drive from some of the nation's best
skiing. According to the "Market Hotness Index" published by U.S. Housing
Markets (4th quarter, 1995), the Fort Collins-Loveland, Colorado area ranked
as the 8th leading housing markets in the nation in 1995. The population of
Larimer County, Colorado has grown from approximately 186,000 in 1990 to
approximately 212,000 as of July 1994. According to estimates from Fort
Collins, Incorporated, the Economic Development Authority of Fort Collins, the
median household income for the Fort Collins Area is in excess of $29,000 and
more than 40% of the population is between the ages of 25 and 49, which the
Company believes will assure a good supply of potential customers in various
stages of the home buying cycle. According to the Building Inspection and
Zoning Office of the City of Fort Collins, annual building permits issued for
single family detached residential units in the Fort Collins Area have
increased from approximately 580 in 1990 to approximately 867 in 1995.
Additionally, the Fort Collins Area's unemployment rate has declined from 5.0%
in 1992 to 3.6% as of December, 1995 (compared to the national unemployment
rate of 5.2% as of December, 1995 (seasonally adjusted to 5.6%)). According to
the Fort Collins Chamber of Commerce, much of the recent growth in the Fort
Collins Area has been due to the development of small businesses and the
presence of large corporations such as Hewlett Packard and Teledyne in the
Fort Collins Area.
The Company's Fort Collins division is ranked as the number one builder in
the area based on the dollar volume of sales. This division offers comparable
products to those offered in the Denver area selling single family detached
homes targeting move-up and custom home buyers that range in sales price from
approximately $180,000 to approximately $300,000.
The following table presents information relating to the Company's current
and planned communities in Fort Collins:
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF NUMBER OF NUMBER OF
TOTAL HOMES SOLD HOMES HOMES IN HOMES
NUMBER OF AS OF CLOSED AT BACKLOG AT REMAINING ESTIMATED
HOMES AT MARCH MARCH MARCH AT MARCH AVERAGE
COMMUNITY HOME TYPE COMPLETION 31, 1996 31, 1996 31, 1996 31, 1996(2) SALES PRICE(3)
--------- --------- ---------- ---------- --------- ---------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
CURRENT:
Miramont............... Single Family-Detached 27 17 14 3 10 $230,000
Paragon Estates........ Single Family-Detached 4 3 3 0 1 $300,000
Terraces............... Single Family-Detached 49 32 28 4 17 $200,000
Ptarmigan.............. Single Family-Detached 16 12 10 2 4 $290,000
Cottages............... Single Family-Detached 25 23 19 4 2 $200,000
Longmont............... Single Family-Detached 6 3 3 0 3 $270,000
Willow Springs......... Single Family-Detached 22 4 0 4 18 $250,000
Miscellaneous Offsite.. Single Family-Detached -- -- -- 4 --
Windsor................ Single Family-Detached 6 0 0 0 6 $160,000
Red Fox Meadows........ Single Family-Detached/
Attached 63 0 0 0 63 $146,000
--- --- --- --- ---
SUBTOTAL................ 218 94 77 21 124
PLANNED(1):
Huntington Hills....... Single Family-Detached 160 0 0 0 160 $ 99,000
--- --- --- --- ---
TOTAL................... 378 94 77 21 284
=== === === === ===
</TABLE>
- --------
(1) "Planned" projects include only those projects in which the Company
controls land available for project development and home construction. In
most cases, planned projects require additional entitlements prior to the
commencement of construction. See "Land Acquisition and Development" and
"Risk Factors--Government Relations; Environmental Controls."
(2) "The Number of Homes Remaining" is the number of homes which could be
built on both the remaining lots available for sale and land to be
developed into lots as estimated by the Company.
(3) "Estimated Average Sales Price" is the current average sales price of
homes offered for sale in each respective community.
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<PAGE>
Tucson, Arizona
Annual building permits issued for single family residential units in the
Tucson area (the "Tucson Area") have increased from approximately 2,200 in
1990 to approximately 6,500 in 1994. According to U.S. Census Bureau 1994
estimates, the population of the Tucson Area is approximately 732,000 people,
up from approximately 667,000 people in 1990. Additionally, the Tucson Area
unemployment rate has declined from 6.0% in 1992 to 3.0% as of December, 1995
(compared to the national unemployment rate of 5.2% as of December, 1995
(seasonally adjusted to 5.6%)).
The Company's Tucson division is consistently recognized as one of the
leading builders in the area. This division has been recently recognized by
the local Homebuilders Association as "Custom Builder of the Year." This
division also offers a wide range of products architecturally designed in the
southwestern style targeted at all move-up and custom home buyers that range
in sales price from approximately $170,000 to approximately $500,000. As of
March 31, 1996, the Company controlled approximately 127 lots in the Tucson
Area for new home construction and lot sales.
The following table presents information relating to the Company's current
communities in Tucson:
<TABLE>
<CAPTION>
NUMBER OF
NUMBER OF NUMBER OF HOMES
TOTAL HOMES NUMBER OF HOMES IN REMAINING ESTIMATED
NUMBER OF SOLD AS OF HOMES CLOSED BACKLOG AT AT AVERAGE
HOMES AT MARCH AT MARCH MARCH MARCH SALES
COMMUNITY HOME TYPE COMPLETION 31, 1996 31, 1996 31, 1996 31, 1996(2) PRICE(3)
--------- --------- ---------- ---------- ------------ ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
CURRENT:
Custom................. Single Family-Detached 7 1 0 1 6 $430,000
Scattered Sites........ Single Family-Detached -- -- -- 3 -- $300,000
Bear Canyon............ Single Family-Detached 19 18 17 1 1 $245,000
Montebella............. Single Family-Detached 42 14 10 4 28 $220,000
Wildridge.............. Single Family-Detached 15 1 0 1 14 $200,000
--- --- --- --- ---
SUBTOTAL............... 83 34 27 10 49
PLANNED(1):
Highgate............... Single Family-Detached 41 0 0 0 41 $153,000
Rollie May............. Single Family-Detached 16 0 0 0 16 $200,000
--- --- --- --- ---
SUBTOTAL............... 57 0 0 0 57
LOTS:
Custom................. Single Family-Detached 2 2 2 0 0
Wildridge.............. Single Family-Detached 28 5 0 5 23 $ 75,000
--- --- --- --- ---
TOTAL.................. 170 41 29 15 129
=== === === === ===
</TABLE>
- --------
(1) "Planned" projects include only those projects in which the Company
controls land available for project development and home construction. In
most cases, planned projects require additional entitlements prior to the
commencement of construction. See "Land Acquisition and Development" and
"Risk Factors--Government Relations; Environmental Controls."
(2) "The Number of Homes Remaining" is the number of homes which could be
built on both the remaining lots available for sale and land to be
developed into lots as estimated by the Company.
(3) "Estimated Average Sales Price" is the current average sales price of
homes offered for sale in each respective community.
LAND ACQUISITION AND DEVELOPMENT
The Company's policies and strategies regarding land acquisition and
development vary and are dictated by the specific market conditions where the
Company conducts its operations. Overall, the Company's land acquisition and
development practices include (i) acquiring and exercising options to purchase
finished lots; (ii) purchasing finished lots; (iii) controlling (by option or
conditional sales contract) fully entitled land; (iv) securing options to
purchase land, which options are subject to the seller obtaining required
entitlements; and (v) in some
49
<PAGE>
instances, controlling raw land and assuming the cost of obtaining the
necessary entitlements. Generally, the Company seeks to minimize its overall
land costs and the risks associated with developing unentitled land by,
whenever possible, using option and other financing arrangements that allow
the Company to control land through the entitlement process but defer the
payment for such land until the entitlement process has been completed and the
Company is prepared to commence construction. In these situations, the Company
strives to negotiate land purchase contracts that allow the Company to
purchase portions of a parcel as close as possible to the commencement of
construction.
Typically, the Company purchases land only after necessary entitlements have
been obtained so that the Company has certain rights to begin development or
construction as market conditions dictate. In some instances, however, the
Company controls unentitled land where the Company perceives an opportunity to
build on such property in a manner consistent with the Company's overall
strategy. The term "entitlements" refers to development agreements,
preliminary maps or recorded plats, depending upon the jurisdiction within
which the land is located. Entitlements generally give the developer the right
to obtain building permits upon compliance with conditions that are usually
within the developer's control. Even after entitlements are obtained, the
Company is still required to obtain a variety of other governmental approvals
and permits during the development process.
The Company selects land for development based upon a variety of factors,
including (i) internal and external demographic and marketing studies; (ii)
financial review as to the feasibility of the proposed project, including
projected profit margins, return on capital employed and the capital payback
period; (iii) competition for the proposed project; (iv) the ability to secure
governmental approvals and entitlements; (v) results of environmental and
legal due diligence; (vi) proximity to concentrated job markets, quality
school districts and local traffic corridors; (vii) infrastructure
requirements for grading, drainage, utilities and streets; and (viii)
management's judgment as to the real estate market, economic trends and the
Company's experience in a particular market.
To control its investment in land and land acquisition costs, the Company
utilizes option arrangements or conditional purchase contracts as often as
possible. These arrangements generally provide the Company with either the
right to pursue the entitlement process directly or the right to direct the
seller in its pursuit of entitlements, and obligate the Company to take title
to the land only when specified conditions relating to entitlements (such as a
minimum density) have been obtained. Once the entitled land is purchased (or
entitlements are obtained on previously unentitled land), the Company
undertakes, where required, the development activities that include site
planning and engineering, as well as constructing road, sewer, water,
utilities, drainage and recreational facilities and other amenities.
As stated above, the Company utilizes varying strategies depending on the
market where the land is being acquired. Due to the ready supply of finished
lots in the Austin and San Antonio markets, the Company's Texas operation
purchases finished lots from land developers using rolling options which
typically require that a specified number of lots are purchased each quarter.
Failure to purchase the specified number of lots can result in the loss of the
options scheduled for subsequent quarters. Although the Company's operations
in Denver and Raleigh-Durham also utilize rolling options on finished land
where appropriate, each of these markets also provide the Company with
significant opportunities to purchase undeveloped land and invest the time and
resources into obtaining all necessary entitlements and developing the land
itself. In these situations, the Company (i) realizes greater returns on its
investment in land due to the significant value that is added once
entitlements are obtained and the land is fully developed; (ii) is provided
with a greater degree of involvement and control over the design and
development process; and (iii) continues to minimize risk and capital
investment since the purchase is not consummated until all necessary
entitlements are obtained.
Unlike the markets that exist in Austin, San Antonio, Raleigh-Durham and
Denver, the Company's strategy in Las Vegas is to build in masterplanned
communities with homesites that are along, or close in proximity to, the major
amenity which is generally a golf course. These masterplanned communities are
designed and developed by a major land developer who develops groups of lots
commonly referred to as "super pads" which
50
<PAGE>
are sold to a single homebuilder. The Company typically purchases super pads
which contain between 60 and 100 fully entitled lots which are roughly graded
and have all utilities and paving brought up to the boundaries of the super
pad. The Company completes the development of each super pad by completing
paving, final grading and installing all utilities. Similar to when the
Company purchases raw land, the Company achieves enhanced profitability while
minimizing the risk of holding excess land inventory.
The Company (through its local operations) has occasionally used
partnerships or joint ventures to purchase and develop land where such
arrangements were necessary to acquire the land or appeared to be otherwise
economically advantageous to the Company. Generally, smaller local
homebuilders are often required to utilize partnerships or joint ventures in
order to obtain necessary financing. Although management believes the
Company's financial resources and access to capital following the Offerings
will make this less of a concern, the Company may continue to consider such
partnership, joint venture and other financing arrangements with landowners
where management perceives an opportunity to acquire land upon favorable
terms, minimize risk and exploit opportunities presented through seller
financing.
The Company strives to develop a design and marketing concept for each of
its communities based on the specific geographic and target market, which
includes determination of size, style, price range of homes, layout of
streets, size and layout of individual lots and overall community design. The
development and construction of each project are managed by the Company's
local operations. At the development stage, a project manager (who may be
assigned to several ongoing projects) supervises the development of buildable
lots. In addition, project superintendents are often utilized depending on the
size of the development, and each local operation has one or more customer
service and marketing representatives assigned to its communities. See
"Business--Customer Relations and Quality Control."
At March 31, 1996, the Company owned 980 finished lots and undeveloped, or
partially developed, land which the Company expects will be developed into an
estimated 280 additional finished lots. As of March 31, 1996, the Company also
had under contract or option, subject to the satisfaction of the Company's
purchase contingencies, 1,341 finished lots and undeveloped or partially
developed land which, if purchased, the Company expects would be developed
into approximately 2,661 finished lots. The determination of the number of
lots to be available from this land are estimates based on management's
experience within the relevant jurisdiction and the status of the entitlement
process as of March 31, 1996. The actual number of lots ultimately available
may vary materially based on a variety of factors (see "Risk Factors--
Government Regulations and Environmental Controls"). The following table sets
forth, by Founding Builder, the Company's inventory of owned and controlled
land as of March 31, 1996.
<TABLE>
<CAPTION>
MARCH 31, 1996
-----------------------------------------------
LAND UNDER
LAND OWNED CONTRACT/OPTION
-------------------- --------------------
UNDEVELOPED UNDEVELOPED
FINISHED LOTS FINISHED LOTS
LOTS (ESTIMATED) LOTS (ESTIMATED) TOTAL
-------- ----------- -------- ----------- -----
<S> <C> <C> <C> <C> <C>
Buffington...................... 198 0 909 57 1,164
Christopher..................... 188 0 99 0 287
Genesee......................... 491 214 200 260 1,165
Sunstar......................... 103 66 133 2,344 2,646
--- --- ----- ----- -----
980 280 1,341 2,661 5,262
</TABLE>
CONSTRUCTION
The Company's operating units act as the general contractor for the
construction of its homes and development of finished lots. The Company's
project development operations are also controlled by its local operations,
whose employees oversee the construction of each community, including
coordinating activities of subcontractors and suppliers and insuring that all
work is subject to quality and cost controls and complies with zoning and
building codes.
51
<PAGE>
Subcontractors typically are retained on a subdivision-by-subdivision basis
to complete construction at a fixed price. Agreements with the Company's
subcontractors and materials suppliers are generally entered into after
competitive bidding on an individual basis. The Company obtains information
from prospective subcontractors and suppliers with respect to their financial
condition and ability to perform their agreements prior to commencement of the
formal bidding process. From time to time, the Company enters into longer term
contracts with subcontractors and suppliers (usually from 6 months to 1 year)
if management believes that more favorable terms can be secured.
The Company specifies that quality, durable materials be used in
constructing the Company's homes. The Company does not maintain significant
inventory of construction materials. Each of the Company's local operations
maintains close contact with its respective subcontractors and suppliers and
the Company believes that its relationship with its suppliers and
subcontractors are good. When possible, the Company negotiates price and
volume discounts with manufacturers and suppliers on behalf of subcontractors
to take advantage of its volume of production. Although the Company generally
has made no long-term purchase commitments to materials suppliers in the past,
and although certain key materials and supplies are, and will continue to be,
purchased at local/regional levels, the Company expects to enter into regional
and national supply contracts with certain of its vendors to provide
additional cost savings. Generally, access to the Company's principal
subcontracting trades, materials and supplies continue to be readily available
in each of its markets; however, prices for these goods and services may
fluctuate due to various factors, including supply and demand shortages which
may be beyond the control of the Company or its vendors.
The Company generally clusters the homes sold within a project, which
management believes creates efficiencies in land development and construction
and improves customer satisfaction by reducing the number of vacant lots
surrounding a completed home. Typically, the construction of a home by the
Company is completed within three to eight months from commencement of
construction, although construction schedules may vary depending on the
availability of labor, materials and supplies, product type and location. The
Company strives to design homes which promote efficient use of space and
materials, and to minimize construction costs and time.
Although policies may differ within each local operation and by project, the
Company generally provides a one-year limited warranty of workmanship and
materials with each of its homes. The Company's subcontractors generally
provide the Company with an indemnity and a certificate of insurance prior to
receiving payments for their work and therefore, claims relating to
workmanship and materials are usually the primary responsibility of the
Company's subcontractors. Historically, the Company has not incurred any
material costs relating to any warranty claims or defects in construction.
SALES AND MARKETING
Each of the Company's local operations are directly responsible for the
sales and marketing activities relating to each of their completed and planned
communities. The Company makes extensive use of advertising and other
promotional activities, including newspaper advertisements, brochures, direct
mail and the placement of strategically located sign boards in the immediate
areas of its developments. The Company believes that each of its local
operations has an established reputation for developing high quality homes in
the markets they serve, which helps generate interest in each new project.
The Company believes that the effective use of model homes plays an integral
part in demonstrating the competitive advantages of its home designs and
features to prospective home buyers. The Company generally builds between 1
and 6 model homes for each active community depending upon the number of homes
to be built within each community and the products to be offered. At March 31,
1996, the Company owned 52 model homes. These model homes are generally not
offered for sale until completion of the respective subdivision. Each of the
Company's local operations generally employs, or contracts with, interior
designers who are responsible for creating an attractive model home for each
product line within a project which is designed to appeal to the preferences
of potential home buyers.
52
<PAGE>
Each of the Company's local operations tailors its product offerings,
including size, style, amenities and price, to the specific markets which have
been targeted by local management over several years of operations. Some of
the Company's local operations, such as Texas, focus on the delivery of homes
with high perceived value at relatively low sales prices, achieving this goal
by employing designs and construction techniques that minimize construction
costs and by offering customers "production" homes with relatively few
options. Other of the Company's local operations, such as Las Vegas and
Colorado, that target higher income home buyers, offer a broader array of
options depending on the project and, from time to time, provide a home buyer
with the option of customizing many features of their new home.
The Company's objective is to enter into sales contracts for all of its
homes in advance of construction, thereby greatly reducing the risk of unsold
inventory upon completion of a project. From time to time, depending on market
conditions and the specific project, the Company may build speculative homes
in each of its entry level and move-up subdivisions in which it operates.
Speculative homes are homes which are under construction or completed but for
which the Company does not yet have sales contracts. These homes are used in
the Company's marketing and sales activities, and are often sold while under
construction or soon after completion. The Company carefully reviews local
market factors, such as new employment opportunity, significant job
relocations and growing housing demand in determining how many speculative
homes to build and keep an inventory. The construction of such homes is often
times necessary to supply homes to individuals who are relocating or to
satisfy the requirements of independent brokers, who often represent customers
who require a completed home within a short time period. At March 31, 1996,
the Company had 208 speculative homes at various stages of completion. The
sales contract for its homes generally provide for mortgage approval within a
specified period. The Company attempts to minimize cancellations by requiring
a nonrefundable cash deposit of on average 5% to 10% of the purchase price for
buyers using conventional financing and by training its sales force to assess
the qualification of potential home buyers.
Most of the Company's homes are sold by full-time, commissioned sales
employees who typically work from the on-site sales office for each product
line in a project. The Company's goal is to insure that each local sales force
has extensive knowledge of the Company's local operating policies and housing
products. To achieve this goal, all sales personnel attend periodic meetings
to be updated on sales techniques, competitive products in the area, the
availability of financing, construction schedules, marketing and advertising
plans and the available product lines, pricing, options and warranties offered
by the Company. Some of the Company's local operations utilize independent
brokers to sell their homes and generally pay approximately a 3% to 6% sales
commission and, in some instances, these local operations utilize cooperative
brokers and pay a sales commission of approximately 3%.
BACKLOG
The Company's homes are generally offered for sale in advance of their
construction. The majority of the Company's homes sold in fiscal year 1995
were sold pursuant to standard sales contracts entered into prior to
commencement of construction. Such sales contracts are usually subject to
certain contingencies such as the buyer's ability to qualify for financing.
Homes covered by such sales contracts are considered by the Company as its
"backlog." The Company does not recognize revenue on homes covered by such
contracts until the sales are closed and the risk of ownership has been
legally transferred to the buyer.
CUSTOMER FINANCING
The Company does not currently provide customer financing to its home
buyers. Rather, at each on-site office, sales employees provide prospective
home buyers with information as to the qualifying criteria for mortgage
financing. Either a mortgage lender is typically made available at the sales
offices to assist prospective buyers in applying for mortgage financing or the
Company acts as a mortgage broker and receives a brokerage fee once the loan
is originated. The Company utilizes mortgage lenders that can provide
qualified buyers with a variety of financing options, including a wide array
of conventional, FHA and VA financing programs.
53
<PAGE>
Due to the sales prices of homes, the Colorado, Arizona and Las Vegas
operations do not rely on home buyers who seek FHA and VA mortgage financing.
However, during 1994 and 1995, approximately 84% and 53%, respectively, of the
homes sold by the Company's Texas operation and approximately 44% and 15%,
respectively, of the homes sold by the Company's North Carolina operation, met
the dollar limits published in FHA and VA guidelines. FHA and VA financing
generally enables home buyers to purchase homes with lower down payments than
the down payments required by conventional mortgage lenders, allowing a
purchaser to borrow up to 90% to 95% of the value of the home. The Company
believes that, when conventional lending rates are higher, the availability of
FHA and VA financing broadens the group of potential purchasers for the
Company's homes. Substantially all home buyers utilize long-term mortgage
financing to purchase a home and lenders generally make loans only to
borrowers who earn three to four times the total amount of the monthly
mortgage payment plus insurance and property taxes. As a result, economic
conditions, increases in unemployment and high mortgage interest rates can
eliminate a number of potential home buyers from the market. See "Risk
Factors--Interest Rates; Mortgage Financing."
Although the Company has not historically provided financing to its home
buyers, depending on then existing market conditions, the Company may in the
future offer mortgage loan origination to home buyers. The Company expects to
conduct such operations through a separate, wholly-owned subsidiary which
would be approved by FHA and VA as a qualified mortgage lender. The Company
anticipates establishing interest rates and terms to facilitate the sale of
the Company's homes through the origination of first mortgage loans utilizing
programs established by FHA, VA, GNMA and FHLMC. As a mortgage banker, this
operation would complete the processing of loan applications, perform credit
checks, submit applications to mortgage lenders for approval and originate and
thereafter sell the mortgage loans.
CORPORATE OPERATIONS
The role of the Company's centralized corporate operations is generally to
oversee all of the Company's operations. The holding company's executive team
has over 70 years of combined national homebuilding experience. This executive
team is primarily responsible for formulating and implementing the Company's
policies and procedures to insure the cohesiveness and direction of its local
operations.
Specifically, the Company's executive team (i) reviews and approves
subsidiary capital requirements and requests, short and long range plans,
project acquisition activity, and monitors all operational and financial
performance as it relates to established objectives; (ii) evaluates and
selects geographic markets; (iii) maintains relationships with various
institutional lenders; (iv) performs accounting functions, establishes
financial policies and regularly completes financial analyses both on a
consolidated and subsidiary-by-subsidiary basis; (v) reviews and approves
subsidiary capital requirements, short and long range plans, and land
acquisition activity and monitors performance in regard to these activities;
and (vi) secures and obtains capital resources. The corporate operations also
provide for and encourage the flow of technical information and ideas among
the senior management of its local operations.
In fulfilling the duties set forth above, the executive team developed a
Comprehensive Planning System (CPS) whereby each local operation is required,
among other things, to prepare an annual plan for the upcoming fiscal year, a
three-year plan which is updated and revised each year and a project
feasibility analysis for all land acquisitions. The annual plan includes a
thorough review and analysis of the previous fiscal year, monthly detailed
projections of all revenue and expenses, financial ratio projections such as
return on assets and inventory turnover and operational changes to be
instituted in the coming year. The three-year plan insures that the local
managers continue to (i) plan for potential changes in their respective
geographic and target markets; (ii) evaluate the present and future
competition; and (iii) seek opportunities to further improve their operations.
The project feasibility analysis, which is prepared by the local managers, is
reviewed and approved before any land or lot acquisition is consummated. This
pre-designed analysis requires the local managers to provide the executive
team with a myriad of information and projections such as a subdivision plan,
product type, projected absorption rates, completion time, market analysis and
rate of return ratios. The executive team insures that the information
54
<PAGE>
presented in the project feasibility analysis satisfies the Company's
established minimum criteria before a capital investment is approved.
The Company allocates the necessary capital resources for new communities
consistent with its overall strategy and utilizes anticipated return on
capital, return of capital and profit margins as criteria for allocating
capital. In addition to establishing certain pre-determined targets, the
Company establishes its capital allocation policies based on the existing
market, results of operations and other factors. All capital commitments are
determined by the Finance Committee and the Project and Feasibility Review
Committee. See "Management."
Structurally, the Company operates through separate subsidiaries, which are
located within the areas in which they operate. Each subsidiary is managed by
executives with substantial experience in the subsidiary's markets. Although
formal approval of new communities are determined by committees of the Board,
each subsidiary is fully equipped with the skills and resources to oversee all
local operations including land acquisition, map processing, land development,
construction, marketing, sales and product service.
The Company's corporate office handles all cash management functions for
both corporate and subsidiary funds through centralized deposit and
disbursement accounts. Each operating subsidiary provides the corporate office
with weekly cash flow projections for the following three months which allows
the Company to efficiently manage its cash position. The Company utilizes a
Comprehensive Reporting System (CRS) in order to insure the timely and
accurate flow of critical information between each operating subsidiary and
the corporate office. The CRS requires preparation of periodic reports by each
operating subsidiary including weekly sales, closing, traffic and backlog
reports by subdivision. Each operating subsidiary also prepares detailed
financial statements which includes a narrative discussing trends, monthly
performance and budgets.
CUSTOMER RELATIONS AND QUALITY CONTROL
Management believes that strong customer relations and an adherence to tough
quality control standards are fundamental to the Company's continued success.
The Company believes that its commitment to customer relations and quality
control has significantly contributed to its reputation as a quality builder
in each of its local markets.
Generally, for each development, Company representatives, who may be a
project manager or project superintendent, and a customer relations
representative, oversee compliance with the Company's quality control
standards. These representatives allocate responsibility for (i) overseeing
the entire project from land development through construction; (ii) overseeing
performance by the Company's subcontractors and suppliers; (iii) reviewing the
progress of each home and conducting formal inspections as specific stages of
construction are completed; and (iv) regularly updating each buyer on the
progress of such buyer's home.
COMPETITION AND MARKET FACTORS
The development and sale of residential property is highly competitive and
fragmented. The Company competes for residential sales with national, regional
and local developers and homebuilders, resales of existing homes and, to a
lesser extent, condominiums and available rental housing. Competition among
both small and large residential homebuilders is based on a number of
interrelated factors, including location, reputation, amenities, design,
quality and price. The Company believes it compares favorably to other
homebuilders in the markets in which it operates due primarily to (i) its
experience within its specific geographic markets which allows it to develop
and offer new products to potential home buyers which reflect, and adapt to,
changing market conditions; (ii) its ability, from a capital and resource
perspective, to respond to market conditions and to exploit opportunities to
acquire land upon favorable terms; and (iii) its respective subsidiaries'
reputation for outstanding service and quality products.
The homebuilding industry is cyclical and affected by consumer confidence
levels, prevailing economic conditions in general and by job availability and
interest rate levels in particular. A variety of other factors affect
55
<PAGE>
the homebuilding industry and demand for new homes, including changes in costs
associated with home ownership such as increases in property taxes and energy
costs, changes in consumer preferences, demographic trends and the
availability of and changes in mortgage financing programs.
GOVERNMENT REGULATIONS AND ENVIRONMENTAL CONTROLS
Similar to its land acquisition policies, the Company's policies regarding
purchasing entitled versus unentitled land varies between its local
operations. See "Business--Land Acquisition and Development." Each subsidiary
operates in different geographic regions and the opportunities and
corresponding risk vary with each geographic operation. Certain of the
Company's local operations, such as its Texas operation, typically purchase
land with full entitlements, giving them the right to acquire building permits
and begin construction almost immediately, upon compliance with certain
customary conditions. Certain other of the Company's operations control
unentitled or partially entitled land and must obtain numerous government
approvals, licenses, permits and agreements before they can commence
development and construction. The Company does not close on the purchase of
land requiring rezoning until such rezoning has been completed successfully.
Through options and other financing arrangements, the Company's local
operations typically control land during the entitlement process and only
purchase the land after the planning and zoning process is complete. However,
obtaining the many necessary entitlements for residential developments is an
extended process that can take as long as one to two years, can involve a
number of different governmental jurisdictions and agencies, and can entail
considerable expense. To date, the governmental approval process to obtain
entitlements has not had a material adverse effect on the Company's local
development activities. However, there is no assurance that these and other
restrictions will not adversely affect one or more of the Company's local
operations, or the Company taken as a whole, in the future. See "Risk
Factors--Governmental Regulations; Environmental Controls."
Whether the Company controls entitled or unentitled land, certain building
and other permits, as well as approvals, are required to complete all
residential developments. The ability of the Company to obtain necessary
approvals and permits for its planned communities is often beyond the
Company's control and could restrict or prevent the development of otherwise
desirable property. The length of time necessary to obtain permits and
approvals increases the carrying costs of unimproved land acquired for the
purpose of development and construction. In addition, the continued
effectiveness of permits already granted is subject to factors such as changes
in policies, rules and regulations and their interpretation and application.
The Company is also subject to a variety of Federal, state and local
statutes, ordinances, rules and regulations concerning protection of health
and the environment. These laws may result in delays, cause the Company to
incur substantial compliance costs and prohibit or severely restrict
development in certain environmentally sensitive regions or areas. Prior to
purchasing a parcel of land, the Company's local management evaluates such
land for the presence of hazardous or toxic materials, wastes or substances.
The Company generally engages independent environmental engineers to complete
such an evaluation. The Company has not been materially adversely affected to
date by the presence or potential presence of such materials. However, no
assurance can be given that such a material adverse affect will not occur in
the future.
BONDS AND OTHER OBLIGATIONS
The Company is frequently required, in connection with the development of
communities, to obtain letters of credit and performance, maintenance and
other bonds in support of its related obligations with respect to its
development. The amount of such obligations outstanding at any time varies in
accordance with the Company's pending development activities. In the event any
such bonds or letters of credit are drawn upon, the Company would be obligated
to reimburse the issuer of such bonds or letters of credit. The Company does
not believe that any such bonds or letters of credit are likely to be drawn
upon.
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<PAGE>
EMPLOYEES AND SUBCONTRACTORS
Effective at the closing of the Offerings, it is anticipated that Fortress
will employ ten persons at the holding company level who oversee all Company
operations. See "Corporate Operations." At March 31, 1996, the Company's local
operations employed 362 persons, approximately 112 of whom were sales and
marketing personnel, approximately 98 of whom were executive, accounting and
administrative personnel, approximately 26 of whom were mortgage, customer
service and customer relations personnel and approximately 126 of whom were
involved in construction and project management. Although none of the
Company's employees are covered by collective bargaining agreements, many of
the subcontractors and suppliers which the Company engages in various markets
are represented by labor unions or are subject to collective bargaining
arrangements. The Company believes that its relations with its employees,
subcontractors and suppliers are good.
PROPERTIES
The Company leases approximately 2,000 square feet at 1760 Reston Parkway,
Suite 208, Reston, Virginia, where it conducts its central corporate
operations. The Company also leases the following properties to conduct
administrative functions for each of the local operations:
<TABLE>
<CAPTION>
APPROXIMATE
LOCATION SQUARE FEET
-------- -----------
<S> <C>
9610 Neils Thompson Drive 3,200
Suite 100
Austin, Texas
400 North Loop 1604 East 2,575
Suite 320
San Antonio, Texas
Suites 300 and 310 5,184
Hydridge Place
8617 North Mopac Expressway
Austin, Texas
235 West Giaconda Way 1,008
Suite 227
Tucson, Arizona
3307 S. College Avenue 850
Suite 200-09
Ft. Collins, Colorado
534 Commons Drive 7,262
Golden, Colorado
200-A Commonwealth Court 7,127
Cary, North Carolina
9500 Hillwood Drive 13,640
Las Vegas, Nevada
</TABLE>
In addition, each of the local operations uses sales centers and model homes
(some of which are owned and some of which are leased under sale-leaseback
arrangements) in each of the Company's markets.
LITIGATION
The Company is involved in various routine legal proceedings incidental to
the conduct of its business. Management believes that none of these legal
proceedings, certain of which are covered by insurance, will have a material
adverse impact on the financial condition or results of operations of the
Company.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
J. Marshall Coleman................ 53 Chairman of the Board and Director
James J. Martell, Jr............... 45 President, Chief Executive Officer and
Director
Brian J. McGregor.................. 55 Executive Vice President and Chief
Operating Officer
Jamie M. Pirrello.................. 38 Vice President of Finance and Chief
Financial Officer
Brian S. Buchanan.................. 45 Vice President of Operations
J. Christopher Stuhmer............. 39 Director, President and Chief Executive
Officer of the Las Vegas Operation
Lawrence J. Witek.................. 43 Director, Executive Vice President and
Chief Operating Officer of the North
Carolina Operation
Robert Short....................... 50 Director, President and Chief Executive
Officer of the Colorado Operation
Thomas B. Buffington............... 51 Director, President and Chief Executive
Officer of the Texas Operation
Mark L. Fine....................... 50 Director
James F. McEneaney, Jr............. 57 Director
Steven D. Rivers................... 47 Director
Charles F. Smith................... 52 Director
</TABLE>
In addition, as soon as practicable following the Offerings, the Board of
Directors will be expanded to add one additional independent director who will
be nominated by the Existing Stockholders. See "Description of Capital Stock--
Stockholders' Agreement."
J. Marshall Coleman has been a director of the Company since June 1995 and
Chairman of the Board since May 1996. From August 1992 through April 1996, Mr.
Coleman was an attorney with Katten Muchin & Zavis, a national law firm, and
was the Managing Partner of its Washington office from 1994 until April 1996.
From 1985 until 1992, Mr. Coleman was an attorney at the Washington, D.C. firm
of Arent, Fox, Kintner, Plotkin and Kahn. Mr. Coleman was Attorney General of
Virginia from 1978 to 1982. In 1975, Mr. Coleman was elected to the Virginia
State Senate and also served as a United States Magistrate from 1970 to 1972.
In 1972, Mr. Coleman was elected to the Virginia House of Delegates. From 1986
to 1993, Mr. Coleman was a director of NVR, a publicly traded homebuilding
company.
James J. Martell, Jr. is a founder of the Company and has been its
President, Chief Executive Officer and a director since June 1995 and has more
than 10 years in the homebuilding industry. Since 1992, Mr. Martell has been
an advisor and consultant to various companies in the homebuilding and
technology industries, including Canuso Homes, Joe Miller Homes and n-Vision.
From 1991 to 1992, Mr. Martell served as Managing Director of Investment
Banking at Credit International Bank as well as a member of its Board of
Directors. From 1987 to
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1991, Mr. Martell was a member of the board of directors of NVR and the Chief
Executive Officer of its subsidiary, NVR Development, responsible for
identifying new sources of capital and new business opportunities for NVR.
From 1985 to 1986, Mr. Martell was the Chief Financial Officer of N.V. Homes
which became a public company in 1986 and merged with Ryan Homes in 1987 to
become NVR, a publicly traded national homebuilding company.
Brian J. McGregor is a founder of the Company, has been its Executive Vice
President and Chief Operating Officer since October 1995 and has more than 26
years experience in the homebuilding industry. From 1992 to 1995, Mr. McGregor
served as President of the K. Hovnanian Companies of Metro Washington, and
from 1990 to 1992 he was a Principal and President of the Waterford Group,
Inc. Mr. McGregor also served as the President of L.J. Hooker Homes, U.S.A.,
from 1988 to 1990. From 1978 to 1988, Mr. McGregor held the positions of
Division and Regional President with Pulte Home Corporation, one of the
largest homebuilding companies in the United States. Between 1968 and 1978,
Mr. McGregor served in several capacities with the Ryland Group including
Division and Regional President.
Jamie M. Pirrello is a founder of the Company and has been the Vice
President of Finance and Chief Financial Officer of the Company since June
1995 and has over 15 years of experience in the homebuilding industry. From
November 1993 to January 1995, Mr. Pirrello was Executive Vice President of
Miles Homes, Inc., a publicly traded company, and was in charge of the
operations of two of its subsidiaries, Patwil Homes, Inc. and Miles Homes
Services, Inc. From 1988 to 1993, Mr. Pirrello was Chief Executive Officer of
H.R. Remington Properties, Inc. and Vice President of Finance of H.R.
Remington Properties, L.P., both subsidiaries of NVR, a publicly traded
company that is one of the largest homebuilding companies in the United
States. From 1985 to 1989, Mr. Pirrello was the Corporate Controller of NV
Homes (predecessor to NVR) and a Controller in the Northern Virginia Division
of Pulte Home Corporation.
Brian S. Buchanan has been the Vice President of Operations of the Company
since December, 1995 and has over 19 years in the homebuilding industry. From
1992 to 1995, Mr. Buchanan served as the Vice President of Operations for the
K. Hovnanian Companies of Metro Washington, Inc. and served as a principal and
Vice President of The Waterford Group, Inc. from 1990 to 1992. From 1989 to
1990, he was the President of Customer Living Communities of Greater
Washington, Inc. From 1977 to 1989, Mr. Buchanan held several positions with
Pulte Home Corporation, including Vice President of Finance of several Pulte
Divisions and Executive Vice President in charge of operations for one of
Pulte's largest divisions.
J. Christopher Stuhmer became a director of the Company in March 1996 and
has served as the President of Christopher Homes, Inc. since 1987. Mr. Stuhmer
has over 20 years of homebuilding experience in the Las Vegas area. In 1981,
Mr. Stuhmer started J. Christopher Stuhmer & Co., a design/build firm for
high-end custom homes and commercial interiors. He formed Christopher Homes,
Inc. in 1987 in response to the production housing demand in Las Vegas.
Lawrence Witek became a director of the Company in March 1996 and has served
as the Chief Operating Officer of Sunstar Homes, Inc. since 1987. Mr. Witek
has more than 25 years of experience in the homebuilding industry. From 1983
to 1987, Mr. Witek was the owner of Construction Systems Management, Inc., a
residential and commercial construction company in Houston, Texas. From 1982
to 1983, he was the Vice President of Construction and Operations for Oasis
Development Corporation, also in Houston. From 1974 to 1982, Mr. Witek was a
partner in Regional Construction Company, a residential/commercial
construction company in New Salem, Pennsylvania. During his career, Mr. Witek
has served on a number of homebuilding association boards including, but not
limited to, the past president (1993) of the Raleigh-Wake County Home Builders
Association and the current First Vice President of the North Carolina Home
Builders Association. He has also served as a board member and on several
committees of the National Association of Homebuilders including, but not
limited to, The Single Family Volume Production Builders Committee and as a
voting Trustee of Build-PAC.
Robert Short became a director of the Company in March 1996 and has served
as the President and Chief Executive Officer of The Genesee Company since
1980. From 1974 to 1980, Mr. Short was the Director of
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<PAGE>
Administration for the Genesee Land Company, a real estate investment
subsidiary of The Fidelity Mutual Life Insurance Company. From November 1969
until May 1971, Mr. Short was a management consultant for Touche Ross &
Company and from 1971 to 1974 he served as a Vice President of Continental
Alliance Corp., a diversified holding company with interests in real estate
development. Mr. Short is a certified public accountant and serves on the
Residential Development Counsel of the Urban Land Institute and was formerly
on the Board of the Home Builders Association of Metropolitan Denver (of which
Mr. Short served as President from November 1993 to November 1994). Mr. Short
is currently a national director for the National Association of Home
Builders.
Thomas Buffington became a director of the Company in March 1996 and has
served as the President of Buffington Homes, Inc. operation since 1987. Mr.
Buffington started Buffington Homes with partners Edward Kirkpatrick and James
Giddens in 1987. Mr. Buffington has over 18 years of experience in the
homebuilding industry. From 1983 to 1987, he served as President of the
Austin/Central Texas division of Nash Phillips/Copus (NPC), which was one of
the largest privately owned homebuilders in the nation at the time. He began
at NPC as a sales agent and was promoted to Sales Manager and Vice President
of Sales before being appointed President.
Mark L. Fine became a director of the Company in April 1996 and currently is
the President of Mark L. Fine & Associates, a development company formed in
June 1994. Mr. Fine has more than 20 years of experience in the building
industry and led the development of Las Vegas' two largest master-planned
communities. From June 1990 to June 1994, Mr. Fine served as the President of
Summerlin, a division of Howard Hughes Corporation. From 1974 to 1990 he was
the President of the American Nevada Corporation, the developer of Green
Valley, a planned community in the Las Vegas area. Mr. Fine has been a member
of Urban Land Institutes Community Development Council since July 1976 and
served as trustee of the executive committee for the Nevada Development
Authority from November 1988 to June 1994.
James F. McEneaney, Jr. is a founder of the Company and has been a director
since June 1995. Since July 1993, Mr. McEneaney has been President of MacCan
Associates, Inc., a residential housing consulting company. From 1979 to 1993,
Mr. McEneaney held a number of positions with The Ryland Group, Inc., one of
the largest homebuilding companies in the United States, including Executive
Vice President and a Director. From 1980 to 1989, Mr. McEneaney served as
President of Ryland Homes and from 1989 to 1992 he served as President and
Director of Ryland Building Company. Mr. McEneaney also served as a Director
of Ryland Mortgage Co. from 1981 to 1993. Ryland Homes, Ryland Building
Company and Ryland Mortgage Company are all subsidiaries of The Ryland Group,
Inc.
Steve D. Rivers became a director of the Company in April 1996 and from 1991
to the present has been a broker with A.G. Edwards & Sons, Inc., an investment
firm, in Austin, Texas. From 1977 to 1988, Mr. Rivers served as the Chairman
and President of Citizens State Bank in Bastrop, Texas and from 1971 to 1977,
he served as the Vice President of City Nations Bank in Austin, Texas. Since
July 1995, Mr. Rivers has served as a Director for the Lower Colorado River
Authority in Austin, Texas and he currently serves as the Chairman of such
Authority's Audit Committee. Mr. Rivers also served as the Director of the
Texas Bankers Association from the beginning of 1987 until October 1988.
Charles F. Smith is a founder of the Company and has been a director since
June 1995. For the past 25 years, Mr. Smith has been the Chief Financial
Officer, Senior Vice President and Treasurer of I & K Productions, Inc., a
privately held entertainment holding company. I & K Productions, Inc. owns
Ringling Brothers Barnum & Bailey Combined Shows, Inc., Ice Follies, Holiday
On Ice and other significant entertainment operations. Mr. Smith serves as a
Senior Executive Officer and a Board member of Sells Floto, Inc., a large
entertainment merchandising company.
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<PAGE>
OPERATING SUBSIDIARY MANAGEMENT
Other key employees of the Company's local operations are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Lanold W. Caldwell...... 48 President and Chief Executive Officer, North Carolina operation
Edward A. Kirkpatrick... 49 Executive Vice President, Texas operation
James M. Giddens........ 36 Executive Vice President, Texas operation
John W. Burke........... 47 Executive Vice President, Colorado operation
Richard N. Geiermann.... 53 Senior Vice President, Colorado operation
Terry Kyger............. 41 Chief Financial Officer, Colorado operation
Daniel Ripps............ 40 Chief Financial Officer, Las Vegas operation
</TABLE>
BOARD OF DIRECTORS
Responsibility for the overall management and oversight of the business and
affairs of the Company rests with the Company's Board of Directors (the
"Board"). The Board consists of ten Directors; six Directors nominated by the
Founding Builders' Owners (each a "Builder Director;"), four Directors
nominated by the Existing Stockholders (each an "Existing Stockholder
Director") and two independent directors nominated by the Builder Directors.
Within six months of the Offerings, an independent director nominated by the
Existing Stockholders will be appointed to the Board. That independent
director has not yet been identified. The Founding Builder Owners and Existing
Stockholders have entered into a Stockholders' Agreement (see "Description of
Capital Stock--Stockholders' Agreement") under which the Existing Stockholders
and the Founding Builders have agreed to elect one director each from the four
Founding Builders and four directors nominated by the Existing Stockholders in
each of the Annual Stockholders' Meetings for the four years following the
Offerings. In addition, under the Stockholders' Agreement, in each of the
Annual Stockholders' Meetings for the two years following the Offerings the
Existing Stockholders and the Founding Builders have agreed to elect two
independent directors nominated by the Founding Builders and one independent
director nominated by the Existing Stockholders. The Stockholders' Agreement
provides that the total number of Builder Directors (including the independent
directors nominated by the Builder Directors) shall at all times outnumber the
Existing Stockholder Directors (including the independent director nominated
by the Existing Stockholders) by one.
BOARD COMMITTEES
While the Board may establish any committees which it deems necessary in
order to manage the business affairs of the Company, it remains responsible
for all acts of such committees. The Board has established a Finance
Committee, Project and Feasibility Review Committee, Acquisition and
Development Committee, Audit Committee, Compensation Committee, Executive
Committee and Nominating Committee. A more detailed description of each of
these committees is set forth below.
Finance Committee
The Finance Committee is responsible for the financial oversight of the
Company and its subsidiaries. The Finance Committee will consist of two
Builder Directors (who will be replaced by two other Builder Directors on an
annual basis at the discretion of the Board), two Existing Stockholder
Directors and one independent director. The Finance Committee serves as the
principal interface between the Company and the capital markets. Its principal
functions include (i) monitoring relevant capital markets and the types of
financing available to the Company; (ii) managing the Company's relationships
with principal lenders and credit rating agencies; (iii) establishing
guidelines for rates, terms and conditions of financing obtained by local
operations; and (iv) in conjunction with the Project and Feasibility Review
Committee, reviewing and approving financing (whether external or internal)
for all communities.
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<PAGE>
Project and Feasibility Review Committee
The Project and Feasibility Review Committee is responsible for reviewing
and approving all new communities. The Committee will consist of two Builder
Directors (who will be replaced by two other Builder Directors on an annual
basis at the discretion of the Board), two Existing Stockholder Directors and
one independent director. The principal responsibilities of the Project and
Feasibility Review Committee include (i) the periodic review of the Company's
policies and procedures for project review and approval and recommending
appropriate changes to the Board and (ii) reviewing each local operation's
annual business plan and all project proposals.
Acquisition and Development Committee
The Acquisition and Development Committee is responsible for implementing
the Company's growth and market expansion strategies. The Committee consists
of two Builder Directors (who will be replaced by two other Builder Directors
on an annual basis at the discretion of the Board), two Existing Stockholder
Directors and one independent director. The principal responsibilities of the
Acquisition and Development Committee include (i) the periodic review and
evaluation of the Company's acquisition guidelines; (ii) maintaining an up-to-
date data base of potential expansion markets (including demographic and
competition information); (iii) evaluating and reviewing proposals to expand
into new geographic markets; (iv) evaluating alternative options for new
market entries; (v) overseeing management of the Company in structuring and
negotiating acquisitions; and (vi) recommending transactions to the Board for
approval.
Audit Committee
The Audit Committee is responsible for assuring the accuracy and consistency
of financial reporting and accounting practices by the Company and its
subsidiaries. The Committee consists of the three independent directors. The
Audit Committee fulfills the customary functions of an audit committee for a
Nasdaq National Market listed company, including, but not limited to, (i)
retaining, and evaluating the performance of, the Company's independent
auditors; (ii) approving the Company's annual audit plan; (iii) reviewing
reports of the independent auditors concerning the adequacy of financial
controls, responsiveness of management quality of systems and other related
subjects; (iv) monitoring compliance with the Company's policies and
procedures; and (v) when requested, reviewing proposed transactions between
the Company and its "affiliates" (e.g., officers, directors and significant
stockholders) to determine the fairness and reasonableness of the
transactions.
Compensation Committee
The Compensation Committee is responsible for the oversight and
administration of the Company's executive compensation structure. The
Committee consists of the three independent directors. The Compensation
Committee has all of the responsibilities typically performed by compensation
committees of public companies, including, but not limited to (i) establishing
the overall compensation policies for the Company; (ii) determining the
compensation of the Company's senior executives; (iii) administering the
Company's Incentive Compensation Plan and all other long- or short-term
incentive compensation plans; (iv) assuring that the Company's compensation
plans and policies are competitive with the market and in compliance with
applicable Securities and Exchange Commission and Internal Revenue Service
regulations; and (v) reporting on the Company's compensation practices in each
year's proxy statement.
Executive Committee
The Executive Committee is available to act on behalf of the Board when the
full Board is unavailable. The Committee will consist of two Builder
Directors, two Existing Stockholder Directors and one independent director.
Due to the size and geographic diversity of the Board, there may be
circumstances where Board action is required at times other than during
regularly scheduled meetings. In such circumstances, the Executive Committee
acts on behalf, and with the authority, of the Board. All Executive Committee
actions are reviewed and ratified by the full Board at the following regularly
scheduled meeting.
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<PAGE>
Nominating Committee
The Nominating Committee is responsible for recruiting and nominating
candidates for the Board as well as re-nominating existing Directors. Prior to
each annual meeting of stockholders, the Nominating Committee reports to the
Board regarding its nominees and the background and an evaluation of each
candidate. The Committee may also advise the Board with respect to matters of
Board philosophy, diversity, composition and related matters. The Nominating
Committee consists of the three independent directors.
DIRECTOR COMPENSATION
Directors shall be paid an annual retainer of $20,000, payable $5,000 each
quarter and shall receive $1,000 for each meeting of the full Board ($500 for
telephone meetings) and $500 for each Committee Meeting attended by the
Director. The Compensation Committee Chairman shall receive $1,000 for serving
as Chairman. Upon election as a Director, each Director shall receive options
to purchase 3,000 shares of Common Stock for fair market value at the date of
grant per share determined at the date such options are granted, and shall
receive options to purchase an additional 3,000 shares of Common Stock for
fair market value per share determined at the date such options are granted
each year such Director remains on the Board pursuant to the Company's Stock
Option Plan. See "Stock Option Plan."
LIMITATION OF LIABILITY AND INDEMNIFICATION
Pursuant to the provisions of the Delaware General Corporation Law, the
Company has adopted provisions in its Articles of Incorporation which
eliminate the personal liability of its directors to the Company or its
stockholders for monetary damages for breach of their duty of due care, and
which require the Company to indemnify its directors and permit the Company to
indemnify its officers or employees to the fullest extent permitted by
Delaware law, including those circumstances in which indemnification would
otherwise be discretionary, except that the Company shall not be obligated to
indemnify any such person (i) with respect to proceedings, claims or actions
initiated or brought voluntarily by any such person and not by way of defense
or (ii) for any amounts paid in settlement of an action indemnified against by
the Company without the prior written consent of the Company. The Company has
entered into indemnification agreements with each of its directors providing
for such indemnification. Prior to consummation of this offering, the Company
intends to obtain a Directors' and Officers' insurance policy.
EXECUTIVE COMPENSATION
Fortress was incorporated in June, 1995 and did not conduct any operations
prior to that time. The Company anticipates that during fiscal year 1996, its
most highly compensated officers and their annualized base salaries will be as
follows: Mr. Martell--$250,000, Mr. McGregor--$225,000 and Mr. Pirrello--
$150,000 (collectively, the "Fortress Executives"). Certain of the Founding
Builders' Owners, namely Messrs. Stuhmer, Caldwell, Short and Buffington will
be named President and Chief Executive Officer of the Company's respective
subsidiaries (which were formally the Founding Builders) (the "Subsidiary
Presidents"). These Subsidiary Presidents will earn a salary that will range
from $225,000 to $250,000 per year. These salaries are consistent with the
salary levels of these persons prior to the consummation of the Acquisitions
and the Offerings. Each Fortress Executive and Subsidiary President will enter
into an employment agreement with the Company. See "Employment Agreement;
Covenants Not To Compete." Pursuant to such employment agreements, each such
officer will be eligible to earn an additional year-end bonus based on the
financial performance of the Company, taken as a whole, and the performance of
the local operation for which each such officer has primary responsibility.
EMPLOYMENT AGREEMENTS; COVENANT NOT TO COMPETE
The employment agreements entered into between the Company and each of the
Fortress Executives, the Presidents of each of the Company's local operations
and all of the key employees are for a 3-year term which automatically renews
for successive one-year periods after the end of the initial 3-year term,
unless terminated
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<PAGE>
or not renewed by the Company or the employee. The employment agreements
specify an annual base salary for each such employee, which base salary may be
increased (but not decreased) from time to time during the employment term as
determined by the Board in its sole discretion.
Each of the employment agreements provides that, in the event of a
termination by the Company without cause, such employee shall be entitled to
receive from the Company such employee's then current salary for whatever
period is remaining under the existing term of the agreement. Each employment
agreement also contains a covenant not to compete with the Company for a two-
year period after termination which provides that the employee will not engage
in any business directly competitive with the Company within 100 miles of
where the Company conducted or conducts business at any time.
STOCK OPTION PLAN
The Board of Directors and Existing Stockholders have adopted The Fortress
Group, Inc. 1996 Stock Incentive Plan (the "Stock Option Plan"), effective
April 1, 1996. The purpose of the Stock Option Plan is to enable non-employee
directors, officers, key employees and consultants of the Company to
participate in the Company's future and to enable the Company to attract and
retain these persons by offering them proprietary interests in the Company.
The Stock Option Plan will be administered by the Compensation Committee. The
Stock Option Plan authorizes the issuance of up to 575,000 shares of Common
Stock pursuant to the grant or exercise of stock options, stock appreciation
rights, restricted stock or deferred stock (generally, "Awards"). Prior to the
Offerings, the Company may grant stock options under the Stock Option Plan to
certain of its officers and employees of the Company to purchase shares of
Common Stock in the aggregate for a purchase price per share equal to the
offering price. Options granted to certain senior executives, management and
other employees will vest over varied periods which will be determined at the
time such options are granted. Directors who are not employees of the Company
or any affiliate ("Non-Employee Directors") are automatically granted options
to purchase 3,000 shares on the date of each annual stockholder's meeting,
beginning in 1996. Such options shall be granted at fair market value on the
date of grant.
Stock Options may be either "incentive stock options" (within the meaning of
Section 422 of the Internal Revenue Code) or nonstatutory options. The
exercise price per share purchasable under an option shall be determined at
the time of grant by the Compensation Committee. Generally, participants will
be given ten years in which to exercise a Stock Option, or a shorter period
once a participant terminates employment. Payment may be made in cash or in
the form of unrestricted shares the participant already owns. At the Company's
option it may provide a participant with a loan or guarantee of a loan for the
exercise price of an option. The right to exercise an option may be
conditioned upon the completion of a period of service or other conditions.
Stock Appreciation Rights ("SARs") entitle a participant to receive an
amount in cash, shares or both, equal in value to (i) the excess of the Fair
Market Value of one share over the exercise price per share specified in the
related Stock Option multiplied by (ii) the number of shares to which the SAR
relates. The right to exercise a SAR may be conditioned upon the completion of
a period of service or other conditions. Generally, participants will be given
ten years in which to exercise a SAR, or a shorter period once a participant
terminates employment.
Shares of Restricted Stock may also be awarded under the Plan, which
requires the completion of a period of service or the attainment of specified
performance goals by the participant or the Company or a subsidiary, division
or department of the Company or such other criteria as the Compensation
Committee may determine. Upon a participant's Termination of Employment (as
defined in the Plan), the Restricted Stock still subject to restriction
generally will be forfeited by the participant. The Compensation Committee may
waive these restrictions in the event of hardship or other special
circumstances.
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<PAGE>
Deferred Stock is stock that can be awarded to a participant in the future,
at a specified time and under specified conditions. The Compensation Committee
will determine the participants to whom, and the time or times at which, any
Deferred Stock shall be awarded, the number of shares of Deferred Stock to be
awarded to any participant, the duration, the period during which and the
conditions under which receipt of the shares will be deferred and any other
terms and conditions of the Award. At the expiration of the deferral period,
the Compensation Committee may elect to deliver such shares to the participant
for the shares covered by the Deferred Stock Award.
Amendments and Modifications. The Plan, as adopted, is not limited as to its
duration. The Board of Directors may amend, alter, or discontinue the Plan,
subject to certain limits.
Change in Control. In the event of a Change in Control of the Company (as
defined in the Plan):
(1) any Stock Appreciation Rights and Stock Options outstanding as of the
date of such Change in Control which are not then exercisable and vested
will become fully exercisable and vested to the full extent of the original
grant; and
(2) the restrictions and deferral limitations applicable to any shares of
Restricted Stock and Deferred Stock will lapse, and such shares of
Restricted Stock and Deferred Stock will become free of all restrictions
and become fully vested and transferable to the full extent of the original
grant.
A Change in Control includes any transaction which would result in any
person owning, directly or indirectly, 20% or more of the outstanding Common
Stock of the Company or the voting power of the Company; certain changes in
the members of the board of directors; certain corporate transactions (such as
a merger); and the sale of substantially all of the Company's assets.
BONUS AWARD PLAN
The Company adopted The Fortress Group, Inc. 1996 Bonus Award Plan (the
"Bonus Plan") effective as of April 1, 1996. The Bonus Plan affords the
Compensation Committee discretion to fashion performance awards for eligible
participants with incentives the Compensation Committee deems appropriate. It
permits the issuance of awards based on the satisfaction of specific
performance criteria in cash or Common Stock.
The persons eligible to participate in the Bonus Plan are directors,
officers and employees of the Company or any affiliate of the Company who, in
the opinion of the Compensation Committee, significantly contribute to the
growth and success of the Company or its affiliates. The Bonus Plan will be
administered by the Compensation Committee. The Bonus Plan provides for the
grant of up to 575,000 shares of Common Stock. The Board of Directors or
Compensation Committee may amend, modify or discontinue the Bonus Plan at any
time unless such amendment impairs the rights of a participant.
Under the Bonus Plan, participants are awarded the opportunity to receive
payments after the close of a performance period specified by the Compensation
Committee, if specified performance objectives established by the Committee
are attained during the period. The Compensation Committee determines the
awards granted each year and the performance criteria for such awards. Unless
the Compensation Committee provides otherwise, two-thirds of all payments
pursuant to the Plan are to be made in cash, and one-third of all payments
will be made in shares of Common Stock after the Compensation Committee
certifies that the performance goals for the period have been satisfied.
However, the Compensation Committee may provide for the payments to be
deferred and/or paid in the form of restricted shares of Common Stock.
Under the Bonus Plan, the performance goals for any year may be based on a
broad array of performance measures as selected by the Compensation Committee,
including pre-tax income or return on assets, on a
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consolidated basis or operating unit basis, depending on the responsibility of
the participant. The maximum value that may be paid to any participant under
the Bonus Plan for any year in the case of an employee of the Company is five
percent (5%) of the Company's consolidated pre-tax profit; and in the case of
an employee of an affiliate, twenty percent (20%) of the affiliate's operating
income. Upon the occurrence of a Change in Control (as defined in the Bonus
Plan), all restrictions on stock issued under the Bonus Plan shall lapse. In
addition, the Compensation Committee has discretion to pay all awards, cancel
awards or provide for the substitution or assumption of awards.
PROFIT SHARING PLAN
Effective immediately prior to the Offerings, the Company will establish The
Fortress Group, Inc. Profit Sharing and Savings Plan (the "Profit Sharing
Plan"). The Profit Sharing Plan is a qualified profit sharing plan under the
Internal Revenue Code and is administered by the Company. A participant's
benefits under the Profit Sharing Plan are equal to the participant's account
balance. Contributions to the Profit Sharing Plan are entirely within the
discretion of the Company's Board of Directors and are determined annually.
All contributions paid to the Profit Sharing Plan are held in a trust fund
which is administered by trustees appointed by the Company's Board of
Directors. Employees of the Company who have completed one year of service may
participate in the Profit Sharing Plan on the next January 1. Profit Sharing
Plan contributions are allocated to accounts of participants who are employed
by the Company on the last day of the plan year on a pro rata basis calculated
based upon the proportion of a participant's total annual compensation
(subject to a maximum of $150,000) to the total compensation of all
participants who are employed by the Company on the last day of the plan year.
A participant's interest vests 20% per year in each of his or her first five
years of employment and is 100% vested thereafter. Participants (or their
beneficiaries) are entitled to receive a distribution of the full value of
their interest in their accounts upon retirement on or after their 65th
birthday, or upon death or permanent disability. Under certain limited
circumstances, a participant may, while employed by the Company, borrow
against the funds in his or her profit sharing account.
CERTAIN TRANSACTIONS
ORGANIZATION OF THE COMPANY
James J. Martell, Jr., Charles F. Smith and Patricia Donnelly were the
stockholders in the Company's predecessor which developed the concept for the
Company and financed its initial activities. These individuals, together with
certain other Existing Shareholders, organized the Company to continue and
develop the Company's business. At the time of the Company's organization,
Messrs. Martell and Smith and Ms. Donnelly received shares in the Company
based on their holdings in its predecessor. Immediately prior to the Offerings
being consummated, Fortress will have issued 2,230,500 shares of Common Stock
to the Existing Stockholders, including Messrs. Martell and Smith and Ms.
Donnelly, for consideration consisting of certain proprietary information
including analyses, business plans and financial models which were valued at
the time of contribution at $48,000. See "Security Ownership of Existing
Stockholders and Management."
In addition, Charles F. Smith, James J. Martell, Jr., Patricia Donnelly and
Brian J. McGregor have advanced funds to the Company in the amounts of
$800,000, $50,000, $100,000 and $100,000, respectively. These advances are
represented by promissory notes bearing interest at the prime rate with
respect to the notes held by Mr. Smith, Ms. Donnelly and Mr. McGregor; the
note held by Mr. Martell bears interest at 8% per annum. The funds advanced
were used to pay certain costs of the formation of the Company, the
Acquisitions and the Offerings. These notes will be paid from the proceeds of
the Offerings.
Mr. Martell, who has devoted his full time to the affairs of the Company
since its formation, received consulting fees from the Company totalling
$90,000 during 1995, along with reimbursement of out-of-pocket expenses
incurred on behalf of the Company.
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J. Marshall Coleman, the Chairman of the Board of the Company and the spouse
of Patricia Donnelly, was a partner in the law firm of Katten Muchin & Zavis
through April 1996. For its services as legal counsel to the Company in
connection with its formation, the Acquisitions, the Offerings and certain
other matters, the Company paid Katten Muchin & Zavis fees of $437,000 through
the date of this Prospectus and anticipates paying additional fees of
approximately $900,000 in 1996. Katten Muchin & Zavis may continue to
represent the Company in various matters following the consummation of the
Offerings.
In connection with the Acquisitions, and as consideration for their
interests in the Founding Builders, certain officers, directors and holders of
5% or more of the outstanding shares of Common Stock of the Company will
receive cash (approximate amounts) and shares of stock of the Company as
follows:
<TABLE>
<CAPTION>
SHARES OF SHARES OF
NAME CASH COMMON STOCK PREFERRED STOCK
---- -------- ------------ ---------------
<S> <C> <C> <C>
Lanold Caldwell....................... $260,500 457,628 --
Lawrence Witek........................ 260,500 457,628 --
Robert Short.......................... 695,000 1,556,546 20,000
J. Christopher Stuhmer................ 179,000 1,691,227 --
Thomas Buffington..................... 564,500 948,949 --
James M. Giddens...................... 282,250 474,474 --
Edward A. Kirkpatrick................. 282,250 474,474 --
</TABLE>
In connection with the Acquisitions, the Company has agreed to remove
certain of the Founding Builders' Owners from any personal guarantees that may
exist under any indebtedness of the Founding Builders within nine months of
the consummation of the Offerings. See "Use of Proceeds." Certain of such
Founding Builders' Owners who will become officers, directors or 5%
stockholders of the Company will directly or indirectly benefit as a result of
such repayment.
OTHER TRANSACTIONS
The Company had a management agreement with The Touchstone Company, which is
owned by a member of Mr. Short's family, and of which Robert Short is an
employee, to provide marketing and management activities for The Genesee
Company. The Touchstone Company receives an annual fee of $60,000 plus .5% of
the gross sales as defined in the management agreement of The Genesee Company.
For the year ended December 31, 1995, $98,000 of total fees were paid. The
contract was cancelable by either party on 30 days written notice. The Company
cancelled this contract effective January 1, 1996.
The Company had an agreement with Genesee Holdings Corporation, owned by
Robert Short, to pay it a fee of $5,000 for each lot it sells to a third-party
purchaser with respect to a subdivision of 38 lots located in Golden,
Colorado. This subdivision was closed on December 22, 1994 and no further fees
are expected to be paid pursuant to the agreement.
The Company leases 7,264 square feet of office space for $108,690 per year,
from Genesee Holdings Corporation. The lease expires December 31, 1996 and the
Company believes the lease rate reflects a market rate.
The Company leases 7,127 square feet of office space for $78,000 (increased
to $96,000 per year beginning June 1, 1996) per year for its Raleigh-Durham
operation from an entity owned in part by Lawrence Witek. The lease has a term
of five years, and the base rent increases 5% each year. The Company believes
the lease rate reflects a market rate.
The Company leases 13,640 square feet of office space for $245,520 per year
for its Las Vegas operation from an entity owned by Christopher Stuhmer's
family trust. The lease has a ten-year term and the Company believes the lease
rate reflects a market rate.
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Management believes that the terms of each of the lease agreements described
above are at least as favorable to the Company as those that could have been
obtained from unaffiliated third parties.
OTHER
Buffington refers title insurance and closing services in connection with
purchases of lots and sale of homes to Town and Country Agency, Inc. owned by
the spouses of the shareholders of Buffington. Title insurance rates are set
and regulated by the Texas Insurance Commission and all other fees are
believed to be in amounts customary and usual in the community.
COMPANY POLICY
In the future, transactions with affiliates of the Company are anticipated
to be minimal and will be approved by a majority of the Board of Directors,
including a majority of the disinterested members of the Board of Directors,
and will be made on terms no less favorable to the Company than could be
obtained from unaffiliated third parties.
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SECURITY OWNERSHIP OF EXISTING STOCKHOLDERS AND MANAGEMENT
The following table sets forth after giving effect to the Acquisitions and
as adjusted to reflect the sale of the shares offered hereby, certain
information with respect to the beneficial ownership of the Company's Common
Stock by (i) each person known by the Company to own beneficially more than 5%
of the outstanding shares of Common Stock; (ii) each executive officer,
director and person who will become a director upon consummation of the
Offerings of the Company; and (iii) all officers and directors as a group.
<TABLE>
<CAPTION>
PERCENT OF
OWNERSHIP PRIOR
SHARES BENEFICIALLY OWNED TO THE PERCENT OF OWNERSHIP
NAME BEFORE AND AFTER OFFERING OFFERINGS(2) AFTER THE OFFERINGS
- ---- ------------------------- --------------- --------------------
<S> <C> <C> <C>
James J. Martell, Jr.... 624,423 7.4% 5.4%
Brian McGregor.......... 128,787 1.5% 1.1%
Jamie M. Pirrello....... 40,650 * *
Brian S. Buchanan....... 4,683 * *
J. Christopher Stuhmer.. 1,691,227 20.0% 14.8%
Lawrence J. Witek....... 457,628 5.4% 4.0%
Robert Short............ 1,556,546 18.4% 13.6%
Thomas Buffington....... 948,949 11.2% 8.3%
Charles F. Smith........ 678,748 8.0% 5.9%
Patricia Donnelly(1).... 651,585 7.7% 5.7%
J. Marshall Coleman(1).. -- -- --
James F. McEneaney...... 50,812 * *
Mark L. Fine............ 3,000(2) * *
Steve D. Rivers......... 3,000(2) * *
All executive officers
and directors as a
group (13 persons)..... 6,921,040 81.8% 60.4%
</TABLE>
- --------
* Less than one percent.
(1) Patricia Donnelly is the spouse of J. Marshall Coleman, who is the
Chairman of the Board of the Company. The 651,585 shares are owned by
Patricia Donnelly. Mr. Coleman disclaims beneficial ownership of these
shares.
(2) Represents options to purchase shares of Common Stock granted pursuant to
the Stock Option Plan. See "Management--Director Compensation."
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 50 million shares of
Common Stock, $.01 par value per share, and 2,000,000 shares of Preferred
Stock, $.01 par value per share.
COMMON STOCK
Of the 50 million shares of Common Stock authorized, 11,464,375 shares will
be outstanding upon consummation of the Offerings. Subject to the rights of
holders of Preferred Stock, the holders of outstanding shares of Common Stock
are entitled to share ratably in dividends declared out of assets legally
available therefor at such time and in such amounts as the Board of Directors
may from time to time lawfully determine. Each holder of Common Stock is
entitled to one vote for each share held. Subject to the rights of holders of
any outstanding Preferred Stock, upon liquidation, dissolution or winding up
of the Company, any assets legally available for distribution to shareholders
as such are to be distributed ratably among the holders of the Common Stock at
that time outstanding. All shares of Common Stock currently outstanding are
and all shares of Common Stock offered hereby, when duly issued and paid for
will be, fully paid and nonassessable, not subject to redemption and
assessment and without conversion, preemptive or other rights to subscribe for
or purchase any proportionate part of any new or additional issues of any
class or of securities convertible into stock of any class.
PREFERRED STOCK
The Company has an authorized class of undesignated Preferred Stock
consisting of 2,000,000 shares. Preferred Stock may be issued in series from
time to time with such designations, relative rights, priorities, preferences,
qualifications, limitations and restrictions thereof, to the extent that such
are not fixed in the Company's Certificate of Incorporation, as the Board of
Directors determines. The rights, preferences, limitations and restrictions of
different series of Preferred Stock may differ with respect to dividend rates,
amounts payable on liquidation, voting rights, conversion rights, redemption
provisions, sinking fund provisions and other matters. The Board of Directors
may authorize the issuance of Preferred Stock which ranks senior to the Common
Stock with respect to the payment of dividends and the distribution of assets
on liquidation. In addition, the Board of Directors is authorized to fix the
limitations and restrictions, if any, upon the payment of dividends on Common
Stock to be effective while any shares of Preferred Stock are outstanding. The
Board of Directors, without shareholder approval, can issue Preferred Stock
with voting and conversion rights which could adversely affect the voting
power of the holders of Common Stock. The issuance of Preferred Stock may have
the effect of delaying, deferring or preventing a change in control of the
Company. The Company has no present intention to issue shares of Preferred
Stock.
In connection with the acquisition of Genesee, the Company issued 20,000
shares of its Series A 11% Cumulative Convertible Preferred Stock to Robert
Short (the "Acquisition Preferred Stock") out of the 2,000,000 authorized
shares of undesignated Preferred Stock referred to above. The Acquisition
Preferred Stock has a liquidation value of $100.00 per share and carries a 11%
cumulative dividend. Two years following the Offering, it is convertible at
the holder's option into the Company's Common Stock at a conversion ratio
determined by dividing (i) the liquidation value of the Preferred Stock
($100.00 per share) plus any accrued but unpaid dividends by (ii) the lesser
of (x) the Common Stock Offering price per share and (y) 75% of the lowest
closing price of the Company's Common Stock during the 30 calendar days
immediately preceding the date the Preferred Stock is converted. The closing
price is the last quoted sale price as reported by the Stock Market for a day,
or if no sale is reported, the average of the high bid and low asked prices
for the day. The Acquisition Preferred Stock is non-voting until converted and
the Company has the right to redeem all of the Acquisition Preferred Stock
anytime prior to conversion at a redemption price equal to the liquidation
value plus any accrued but unpaid dividends.
STOCKHOLDERS' AGREEMENT
In connection with the Acquisitions, each Founding Builder's Owner and each
of the Existing Stockholders entered into an agreement (the "Stockholders'
Agreement") with respect to nominating and electing Directors
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to the Board of Directors of the Company. Pursuant to the Stockholders'
Agreement (i) the Existing Stockholders have the right to nominate and the
Board will appoint an additional independent director to be added to the Board
within six months following the Offerings, bringing the full Board to eleven
members; the Existing Stockholders and the Founding Builders have agreed to
elect one director each from the four Founding Builders and four directors
nominated by the Existing Stockholders in each of the Annual Stockholders'
Meetings for fiscal years 1996, 1997, 1998, and 1999; in each of the Annual
Stockholders' Meetings for fiscal years 1996 and 1997 the Existing
Stockholders and the Founding Builders have agreed to elect two independent
directors nominated by the Founding Builders and one independent director
nominated by the Existing Stockholders. Each of the parties to the
Stockholders' Agreement has agreed to vote its Common Stock in order to cause
the nominees of the Founding Builder's Owners and the Existing Stockholders
nominated for election to be elected to the Board of Directors. The
Stockholders' Agreement will terminate immediately following the Company's
Annual Meeting of Stockholders relating to fiscal year 1999 (but occurring in
fiscal year 1999).
CERTAIN PROVISIONS AFFECTING STOCKHOLDERS
Delaware, like many other states, permits a corporation to adopt a number of
measures through amendment of the corporate charter or bylaws or otherwise,
which may have the effect of delaying or deterring any unsolicited takeover
attempts. In addition, Section 203 of the Delaware General Corporation Law
restricts certain "business combinations" with "interested stockholders"
(generally a holder of 15% or more of the Company's voting stock) for three
years following the date that person becomes an interested stockholder. By
delaying or deterring unsolicited takeover attempts, these provisions could
adversely affect prevailing market prices for the Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offerings, the Company will have 11,464,375 shares of
Common Stock outstanding (excluding shares of Common Stock reserved for
issuance under the Company's Stock Option Plan). Of these shares, the
3,000,000 shares of Common Stock sold in the Common Stock Offering (plus any
additional shares sold upon the Underwriters' exercise of their over-allotment
option) will be freely transferable without restriction or further
registration under the Act, except that any shares purchased by an existing
"affiliate" of the Company, as that term is defined by the Act ("affiliate"),
will be subject to certain of the resale limitations of Rule 144 adopted under
the Act. All of the remaining 8,464,375 shares of Common Stock will be
restricted securities as defined in Rule 144 (the "Restricted Shares"). The
Initial Stockholders have agreed not (without the prior written consent of the
Managing Underwriter) to offer, sell or otherwise dispose of any shares of
Common Stock for a period of 180 days after the date of this Prospectus. Upon
expiration of this period, 15% or 1,269,658 shares of Common Stock held by the
Initial Stockholders will be eligible for sale in the public market. An
additional 25% or 2,116,094 shares of Common Stock will become eligible for
sale in the public market commencing 12 months after the date of this
Prospectus, with an additional 30% or 2,539,312 of such shares becoming
eligible after 18 months and the remainder becoming eligible commencing 24
months after the date of this Prospectus. In addition to the Initial
Stockholders' ability to sell their shares of Common Stock during such 24
month period, in connection with the Acquisitions, (i) the holders of one-
third of the Common Stock held by the Founding Builders' Owners or (ii) all of
the stockholders of a particular Founding Builder, have a one-time right to
require that the Company file a registration statement with the Commission
registering all of their shares of Common Stock anytime during a one-year
period after expiration of the initial eighteen month period after the date of
this Prospectus; provided, however, that such registered shares shall continue
to remain subject to the sale and transferability restrictions set forth
above. See "Company Formation and Organization--The Acquisitions." Any sales
of Common Stock by the Initial Stockholders are subject to compliance with the
volume, holding period and applicable limitations of Rule 144, or pursuant to
a registration statement meeting the requirements the Securities Act. The
20,000 shares of Series A 11% Cumulative Convertible Preferred Stock issued in
connection with the acquisition of Genesee is only convertible two years after
issuance, and would convert into 222,222 shares of Common Stock (at a
conversion price of $9.00 per share).
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<PAGE>
In general, under Rule 144 as currently in effect, beginning 90 days after
the Common Stock Offering, any person (or persons whose shares are aggregated)
who has beneficially owned Restricted Shares for at least two years is
entitled to sell, within any three-month period, a number of shares that does
not exceed the greater of 1% of the then outstanding shares of the Company's
Common Stock (approximately 114,644 shares immediately after the Offerings) or
the average weekly trading volume of the Company's Common Stock in the over-
the-counter market during the four calendar weeks preceding the date on which
notice of the sale is filed with the Commission. Sales under Rule 144 are also
subject to certain manner of sale provisions, notice requirements and the
availability of current public information about the Company. Any person (or
persons whose shares are aggregated) who is not deemed to have been an
affiliate of the Company at any time during the three months preceding a sale,
and who has beneficially owned shares, within the context of Rule 144, for at
least three years, is entitled to sell such shares under Rule 144(k) without
regard to the volume limitations, manner of sale provisions, public
information or notice requirements.
The Company will grant options to purchase shares of Common Stock, which
amount will be determined and made effective on the effective date of the
Offerings, under the Company's Stock Option Plan. The Company expects, after
completion of the Common Stock Offering, to file a Registration Statement
under the Act to register the issuance of shares of Common Stock issuable
under its Stock Option Plan. See "Management--Stock Option Plan." Shares of
Common Stock issued under the Stock Option Plan after the effective date of
such Registration Statement, other than shares held by affiliates of the
Company, will be eligible for resale in the public market without restriction.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is American
Securities Transfer, Incorporated, Denver, Colorado.
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<PAGE>
DESCRIPTION OF SENIOR NOTES
GENERAL
The Company will issue the Senior Notes under an Indenture (the "Indenture")
between the Company and IBJ Schroder Bank & Trust Company, as trustee (the
"Trustee"). The following description of the Senior Notes does not purport to
be complete and is subject to, and qualified in its entirety by reference to,
the provisions of the Indenture. A copy of the form of Indenture will be filed
as an exhibit to the Registration Statement of which this Prospectus is a
part. In addition, the Indenture may be subject to change if necessary to
comply with law and is permitted to be amended pursuant to the terms of the
Indenture.
The Senior Notes will mature on May 15, 2003. The Company will pay interest
on the Senior Notes in arrears on May 15 and November 15 of each year,
commencing November 15, 1996 at the rate of 13.75% per annum. The Senior Notes
may not be redeemed, at any time prior to maturity. The Senior Notes will be
unsecured and will 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, will be effectively subordinated to secured debt of the
Company (including indebtedness under the Credit Agreement) to the extent of
any collateral, as well as to indebtedness of and guaranties (including
guaranties of indebtedness under the Credit Agreement) by the Company's
subsidiaries.
COVENANTS
The Indenture will contain certain restrictive covenants including covenants
which will restrict the ability of the Company and its subsidiaries from (i)
declaring any dividends or making other distributions on, or redeeming the
Company's equity securities, including the Common Stock; (ii) redeeming or
otherwise acquiring any subordinated indebtedness of the Company or certain
indebtedness of its subsidiaries; (iii) making certain investments; (iv)
incurring additional indebtedness; (v) selling or leasing assets or property
not in the ordinary course of business; (vi) undergoing certain fundamental
changes (such as mergers, consolidations or liquidations); (vii) creating
certain liens; (viii) entering into certain transactions with affiliates; and
(ix) imposing additional future restrictions on upstream payments from certain
subsidiaries, all as set forth in the Indenture. In addition, the Indenture
will provide that in the event of defined changes in control or if the
consolidated tangible net worth of the Company and its subsidiaries falls
below a specified level or, in certain circumstances, upon sales of assets,
the Company will be required to make an offer to repurchase certain specified
amounts of outstanding Senior Notes.
EVENTS OF DEFAULT
The following events, among others, constitute events of default under the
Senior Notes (i) the Company's nonpayment of principal when due or payable or
of interest within 30 days of such interest being due or payable; (ii) a
breach, following any applicable cure periods, of any covenant of the Company
or its subsidiaries contained in the Indenture following notice by the Trustee
or holders of 25% of the Senior Notes; (iii) certain cross-accelerations with
respect to other indebtedness of the Company or it subsidiaries; (iv) the
Company's failure to pay or have discharged certain judgments against the
Company or a subsidiary; and (v) certain events of bankruptcy or insolvency.
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DESCRIPTION OF PROPOSED CREDIT AGREEMENT
The Company has secured a commitment letter from Bankers Trust Company and
Bank One, Arizona, NA as Co-Agents, (collectively, the "Banks") pursuant to
which, and subject to the terms and conditions set forth therein, Bankers
Trust Company has expressed its willingness to arrange a full recourse senior
secured revolving credit facility (the "Facility") to the Company in the
maximum principal amount of $50,000,000 and Bankers Trust Company and Bank
One, Arizona, NA have expressed their willingness each to severally provide
for $25,000,000 principal amount of the Facility, under a revolving credit
agreement to be negotiated with the Company (the "Credit Agreement"). The
Credit Agreement will establish a revolving line of credit pursuant to which
the Company may borrow up to $50,000,000 in principal amount from time to
time, pursuant to the terms and subject to satisfaction of the conditions
specified therein. The proceeds of the revolving loans will be available for
the purpose of providing a master revolving line of credit (Borrowing Base) to
finance a portion of the cost of the construction of single family housing
units ("Units") and to a lesser extent, a portion of the cost of improved lots
and lots under development. The line of credit shall not be used to finance
(i) the acquisition of raw or speculative land nor (ii) without the prior
approval of the Banks, the acquisition of other homebuilders. The Facility may
only be used for financing properties in the Company's primary homebuilding
markets of the metropolitan areas of Tucson, Arizona, Las Vegas, Nevada,
Austin and San Antonio, Texas, Denver and Fort Collins, Colorado, and Raleigh-
Durham, North Carolina and may not be used in any other markets without the
prior approval of the Banks. Use of proceeds will be subject to other
restrictions, including, without limitation, certain geographical limitations
on the use of proceeds and the requirement that any proceeds of any revolving
loans made by the Banks to the Company which are to be advanced to any
subsidiary of the Company (in addition to the proceeds of the Senior Notes and
any other amounts which are to be advanced by the Company to any subsidiary of
the Company at any time) are advanced in the form of capital contributions or
equity investments rather than intercompany loans or other indebtedness.
Availability under the Facility will be subject, among other things, to a
borrowing base test calculated with reference to, among other things, the
percentage of different types of completed Units (presold, speculative,
model), the stages of completion of Units and of lots (vacant, under
development, completed), the geographic location of properties, the number of
lots in a project, the amount of time lots have spent in acquisition and
development and the amount of time Units have remained unsold, the number of
presold Units and model Units as a percentage of all eligible collateral, the
cost and value of lots and Units and other factors.
The term of the line of credit under the Credit Agreement will be four
years, with the first two years structured as a revolving loan with a maximum
commitment of $50,000,000, and the final two years structured as a term loan
with a reducing commitment. During this final two-year period, the maximum
commitment reduces by $6,250,000 on a quarterly basis; during the first year
of the final two year period, borrowings thereunder may still be repaid and
reborrowed.
Borrowings during the first two years will bear interest at a rate equal to
1.5% above the prime rate, as set from time to time, or 350 basis points above
the London inter-bank offering market rate ("LIBOR"), as selected by the
Company. During the two-year term loan period described above, these rates
increase to prime plus 2.0% or LIBOR plus 400 basis points, as applicable.
The Credit Agreement will provide for affirmative and negative covenants as
the Banks deem appropriate for the transactions contemplated by the Credit
Agreement, including, without limitation, requirements for regular financial
reporting and maintenance of existence, restrictions with respect to
acquisitions and mergers, joint ventures, partnerships, divestitures, or
reorganizations, and payments of dividends and making other distributions
(except that, so long as no default has occurred and is continuing under the
Credit Agreement and the related Loan Documents, dividends may be paid by the
subsidiaries that guarantee the Facility (the "Guarantors") to the Company as
required to be paid to (i) the Banks and any other lenders under the Facility
pursuant to the terms thereof and (ii) the holders of the Senior Notes
pursuant to the terms thereof in effect on the date of the closing) and
restrictions with respect to repurchasing or defeasing or redeeming or making
an
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offer to purchase, defease or redeem any equity or debt interest held by any
person, including such restrictions in respect of the Senior Notes, and
restricting the Company and the Guarantors from making investments in
subsidiaries, and prohibitions on certain amendments to the Indenture without
the prior written consent of the Banks, and changes in control of the Company
and covenants (i) regarding maintenance by the Company of its Nasdaq listing
during the term of the Facility, (ii) prohibiting the Guarantors and any other
subsidiaries from owing any debt or any contingent obligations to the Company
or to any other shareholder of the Guarantors or of any other subsidiaries,
(iii) restricting the Company and the Guarantors from incurring indebtedness,
(iv) restricting issuance of preferred stock, (v) establishing cash management
systems, and (vi) requiring observance of customary corporate formalities. The
Credit Agreement will also contain certain additional covenants, including
covenants which will subject the Company to certain operating requirements and
require the maintenance of certain financial levels and ratios, such as
minimum tangible net worth, maximum debt to net worth, minimum liquidity and
minimum interest coverage.
Additionally, the following events, among others, will constitute events of
default under the Credit Agreement: (i) the Company's non-payment of any
amounts due or payable under the Credit Agreement, (ii) a breach, following
any applicable cure periods, of covenants or agreements under the Credit
Agreement or any related loan documents by the Company or any subsidiary,
(iii) the Company's or any of its subsidiaries' non-payment of any other
indebtedness, (iv) the occurrence of certain events by which such other
indebtedness, including, without limitation, the Senior Notes, may become due
and payable prior to their expressed maturity or expiration dates, (v) certain
events of voluntary or involuntary bankruptcy, insolvency, receivership or
reorganization of the Company or any subsidiary of the Company, (vi) the
failure of certain key shareholders of the Company to continue to own
specified percentages of their holdings of capital stock of the Company which
exist on the date of the Credit Agreement, (vii) judgments or decrees entered
against the Company or any subsidiary of the Company involving an aggregate
liability of a specified aggregate principal amount and (viii) such other
events as the Banks in their judgment deem appropriate for the transactions
contemplated by the Credit Agreement, including without limitation a material
adverse change in the financial condition or prospects of the Company.
Borrowings under the Credit Agreement will be guaranteed by each subsidiary
of the Company and secured by liens on all of the real and personal property
of the Company and each of its subsidiaries. Additionally, each of the Company
and its subsidiaries will covenant not to grant or suffer to exist any
additional liens on its respective property, except certain permitted liens.
The commitment letter is subject to completion to the Banks' satisfaction of
due diligence and the Banks' continuing satisfaction with the due diligence
and is subject to other terms and conditions, including without limitation
negotiation, execution and delivery of definitive financing agreements, in
each case containing terms and conditions satisfactory to each of the Banks
and containing such other terms and conditions, representations and
warranties, covenants, indemnifications, events of default and conditions to
lending that are appropriate in the opinion of the Banks for the transactions
contemplated by the Credit Agreement. There can be no assurance as to when or
whether the Credit Agreement will be entered into or as to whether the Credit
Agreement will contain the terms and conditions described above, and such may
contain terms and conditions more favorable or less favorable to the Company
than set forth above. The Facility would be an important source of capital to
fund the Company's future residential construction projects and, if the
Company is not able to agree with the Banks on the terms of the Credit
Agreement, the Company would need to seek other sources of financing to help
fund its future residential construction projects.
75
<PAGE>
UNDERWRITING
Furman Selz LLC, BT Securities Corporation and Southeast Research Partners,
Inc. are acting as representatives (the "Representatives") of each of the
underwriters named below (the "Underwriters"). Subject to the terms and
conditions set forth in an underwriting agreement dated as of the date hereof
(the "Underwriting Agreement"), the Underwriters named below have severally
agreed to purchase, and the Company has agreed to sell to them, the aggregate
number of shares of Common Stock set forth opposite their respective names:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------ ---------
<S> <C>
Furman Selz LLC.................................................... 876,000
BT Securities Corporation.......................................... 876,000
Southeast Research Partners, Inc. ................................. 204,000
Bear, Stearns & Co. Inc. .......................................... 60,000
Alex. Brown & Sons Incorporated.................................... 60,000
Dillon, Read & Co. Inc. ........................................... 60,000
Donaldson, Lufkin & Jenrette Securities Corporation................ 60,000
Lehman Brothers Inc. .............................................. 60,000
Oppenheimer & Co., Inc. ........................................... 60,000
Schroder Wertheim & Co. Incorporated............................... 60,000
Wasserstein Perella Securities, Inc. .............................. 60,000
The Chicago Corporation............................................ 36,000
Dain Bosworth Incorporated......................................... 36,000
Janney Montgomery Scott Inc. ...................................... 36,000
Ladenburg, Thalmann & Co. Inc. .................................... 36,000
Legg Mason Wood Walker, Incorporated............................... 36,000
McDonald & Company Securities, Inc. ............................... 36,000
Piper Jaffray Inc. ................................................ 36,000
Rauscher Pierce Refsnes, Inc. ..................................... 36,000
Raymond James & Associates, Inc. .................................. 36,000
The Robinson-Humphrey Company, Inc. ............................... 36,000
Wheat First Butcher Singer......................................... 36,000
Dominick & Dominick, Incorporated.................................. 24,000
Hanifen, Imhoff Inc. .............................................. 24,000
Interstate/Johnson Lane Corporation................................ 24,000
C.L. King & Associates, Inc. ...................................... 24,000
Scott & Stringfellow, Inc. ........................................ 24,000
The Seidler Companies Incorporated................................. 24,000
Van Kaspar & Company............................................... 24,000
---------
Total............................................................ 3,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters are subject to the approval of certain legal matters by counsel
and various other conditions. The nature of the Underwriters' obligations is
such that they are committed to purchase all of the above shares if any are
purchased. The Underwriters propose to offer the shares of Common Stock
directly to the public at the offering price set forth on the cover page of
this Prospectus and to certain dealers at such price less a concession not in
excess of $0.40 per share. The Underwriters may allow, and such dealers may
reallow, a discount not in excess of $0.10 per share to certain other dealers.
After the Offering, the offering price and other selling terms may be changed
by the Representatives.
The Company has granted to the Underwriters an option, expiring 30 days from
the date of this Prospectus, to purchase up to 450,000 additional shares of
Common Stock on the same terms as set forth on the cover page
76
<PAGE>
of this Prospectus, solely to cover over-allotments, if any, incurred in the
sale of the shares of Common Stock offered hereby. If the Underwriters
exercise the option, each Underwriter will have a firm commitment, subject to
certain conditions, to purchase such number of additional shares of Common
Stock as is proportionate to such Underwriter's initial commitment to purchase
shares from the Company.
The Underwriting Agreement provides that the Company will indemnify the
Underwriters against certain liabilities, including liabilities under the Act,
or will contribute to payments that the Underwriters may be required to make
in respect thereof.
The Company has agreed that it will not, for a period of 180 days after the
closing, directly or indirectly, without the prior written consent of the
Representatives, issue, offer, sell, grant any option to purchase or otherwise
dispose of any of its Common Stock or any securities convertible into, or
exchangeable or exercisable for, its Common Stock (except for grants of
options pursuant to the Company's Stock Option Plan or Bonus Plan).
The Initial Stockholders have agreed not (without the prior consent of the
Representatives) to offer, sell or otherwise dispose of any shares of Common
Stock of the Company for a period of 180 days after the Closing Date. Upon
expiration of this period, 15% or 1,269,658 shares of Common Stock held by the
Initial Stockholders will become eligible for sale in the public market. An
additional 25% or 2,116,094 shares of Common Stock will become eligible for
sale in the public market commencing 12 months after the Closing Date, with an
additional 30% or 2,539,312 of such shares becoming eligible after eighteen
months and the remainder becoming eligible commencing twenty-four months
following the Closing Date. The 20,000 shares of Series A 11% Cumulative
Convertible Preferred Stock issued in connection with the acquisition of
Genesee is only convertible two years after issuance, is non-voting until
converted and would convert into 222,222 shares of Common Stock (at a
conversion price of $9.00 per share). Any sales of Common Stock by the Initial
Stockholders must be made in compliance with the volume, holding period and
applicable limitations of Rule 144, or pursuant to a registration statement
meeting the requirements the Securities Act.
The Representatives have advised the Company that they expect to confirm
sales of Common Stock offered by this Prospectus made to accounts over which
they exercise discretionary authority and that such sales will not exceed 5%
of the Offerings.
Prior to the Common Stock Offering, there has been no public market for the
Common Stock. The initial public offering price will be determined by
negotiations between the Company and the Underwriters. Among the factors to be
considered in determining the initial public offering price will be the
history of the Founding Builders and the prospects of the Company and the
industry in which it operates, the past and present operating results of the
Founding Builders and the trends of such results, the previous experience of
the Company's management, the market prices of publicly traded stock of
comparable companies in recent periods and the general condition of the
securities markets at the time of the Common Stock Offering.
CERTAIN LEGAL MATTERS
The legality of the shares of Common Stock offered hereby will be passed
upon for the Company by Katten Muchin & Zavis, Chicago, Illinois. J. Marshall
Coleman, who is the Chairman of the Board of the Company, was a partner of
Katten Muchin & Zavis through April 1996. Additionally, Mr. Coleman's spouse,
Patricia Donnelly, owns 651,585 shares of the Company's Common Stock. Certain
legal matters in connection with this Offering will be passed upon for the
Underwriters by Coudert Brothers, New York, New York.
77
<PAGE>
EXPERTS
The combined financial statements of the Combined Predecessor Companies, the
combined financial statements of Buffington, and the combined financial
statements of Christopher, at December 31, 1994 and 1995 and for each of the
three years in the period ended December 31, 1995, the combined financial
statements of Genesee as of December 31, 1995 and for the year ended December
31, 1995 and the financial statements of The Fortress Group at December 31,
1995 included in this Prospectus have been so included in reliance on the
reports (the report of Price Waterhouse LLP on The Fortress Group Inc.'s
separate financial statements includes an explanatory paragraph regarding
Fortress's ability to continue as a going concern) of Price Waterhouse LLP,
independent accountants, given on authority of said firm as experts in
auditing and accounting.
The combined financial statements of Genesee included in this Prospectus as
of December 31, 1994 and for each of the two years in the period ended
December 31, 1994, have been so included in reliance on the report of Hein +
Associates LLP, independent accountants, given on authority of said firm as
experts in auditing and accounting.
The consolidated financial statements of Solaris Development Corporation as
of December 31, 1995 and for each of the three years in the period ended
December 31, 1995 and the financial statements of Sunstar Mortgage Limited
Liability Company as of December 31, 1995, and for the period from March 1,
1995 (inception) to December 31, 1995, appearing in this Prospectus and
Registration Statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their reports thereon appearing elsewhere herein and
in the Registration Statement, and are included in reliance upon the authority
of such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
A Registration Statement on Form S-1, including amendments thereto, relating
to the Common Stock offered hereby has been filed with the Commission, in
Washington, D.C. This Prospectus does not contain all of the information set
forth in the Registration Statement and the exhibits and schedules thereto.
Statements contained in this Prospectus as to the contents of any contract or
any other document are not necessarily complete and in each instance reference
is made to the copy of such contract or document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference. For further information with respect to the Company and the
Common Stock offered hereby, reference is made to the Registration Statement,
exhibits and schedules. A copy of the Registration Statement may be inspected
by anyone without charge at the Commission's principal offices in Washington,
D.C. and copies of all or any part thereof may be obtained from such office
upon payment of certain fees prescribed by the Commission.
The Company intends to furnish its shareholders with an annual report
containing audited financial statements and an opinion thereon expressed by
independent auditors for each fiscal year and with quarterly reports
containing unaudited summary information for the first three quarters of each
fiscal year.
78
<PAGE>
THE FORTRESS GROUP, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PRO FORMA COMBINED FINANCIAL STATEMENTS
Introduction to Pro Forma Financial Information......................... F-3
Pro Forma Combined Balance Sheet at March 31, 1996 (unaudited).......... F-4
Pro Forma Combined Statement of Income for the year ended December 31,
1995 (unaudited)....................................................... F-5
Pro Forma Combined Statement of Income for the three months ended March
31, 1996 (unaudited)................................................... F-6
Pro Forma Combined Statement of Income for the three months ended March
31, 1995 (unaudited)................................................... F-7
Notes to Pro Forma Combined Financial Statements (unaudited)............ F-8
COMBINED PREDECESSOR COMPANIES
Report of Price Waterhouse LLP, Independent Accountants................. F-11
Balance Sheet as of December 31, 1994 and 1995 and March 31, 1996 (unau-
dited)................................................................. F-12
Combined Statement of Income for the years ended December 31, 1993, 1994
and 1995 and the three months ended March 31, 1995 and 1996 (unau-
dited)................................................................. F-13
Combined Statement of Shareholders' Equity for the years ended
December 31, 1993, 1994 and 1995 and the three months ended March 31,
1996 (unaudited)....................................................... F-14
Combined Statement of Cash Flows for the years ended December 31, 1993,
1994 and 1995 and the three months ended March 31, 1995 and 1996 (unau-
dited)................................................................. F-15
Notes to Combined Financial Statements.................................. F-16
BUFFINGTON HOMES, INC.
Report of Price Waterhouse LLP, Independent Accountants................. F-25
Combined Balance Sheets as of December 31, 1994 and 1995 and March 31,
1996 (unaudited)....................................................... F-26
Combined Statements of Operations for the years ended December 31, 1993,
1994 and 1995 and the three months ended March 31, 1995 and 1996 (unau-
dited)................................................................. F-27
Combined Statements of Changes in Shareholders' Equity for the years
ended
December 31, 1993, 1994 and 1995 and the three months ended March 31,
1996 (unaudited)....................................................... F-28
Combined Statements of Cash Flows for the years ended December 31, 1993,
1994 and 1995 and the three months ended March 31, 1995 and 1996 (unau-
dited)................................................................. F-29
Notes to Combined Financial Statements.................................. F-30
CHRISTOPHER HOMES, INC.
Report of Price Waterhouse LLP, Independent Accountants................. F-35
Combined Balance Sheets as of December 31, 1994 and 1995 and March 31,
1996 (unaudited)....................................................... F-36
Combined Statements of Operations for the years ended December 31, 1993,
1994 and 1995 and the three months ended March 31, 1995 and 1996 (unau-
dited)................................................................. F-37
Combined Statements of Stockholders' (Deficit) Equity for the years
ended
December 31, 1993, 1994 and 1995 and the three months ended March 31,
1996 (unaudited)....................................................... F-38
Combined Statements of Cash Flows for the years ended December 31, 1993,
1994 and 1995 and the three months ended March 31, 1995 and 1996 (unau-
dited)................................................................. F-39
Notes to Combined Financial Statements.................................. F-40
THE GENESEE COMPANY
Report of Price Waterhouse LLP, Independent Accountants................. F-46
Report of Hein & Associates LLP, Independent Auditor's Report........... F-47
Combined Balance Sheets as of December 31, 1994 and 1995 and March 31,
1996 (unaudited)....................................................... F-48
Combined Statements of Operations for the years ended December 31, 1993,
1994 and 1995 and the three months ended March 31, 1995 and 1996 (unau-
dited)................................................................. F-49
Combined Statements of Changes in Shareholder's Equity for the years
ended
December 31, 1993, 1994 and 1995 and the three months ended March 31,
1996 (unaudited)....................................................... F-50
Combined Statements of Cash Flows for the years ended December 31, 1993,
1994 and 1995 and the three months ended March 31, 1995 and 1996 (unau-
dited)................................................................. F-51
Notes to Combined Financial Statements.................................. F-52
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SOLARIS DEVELOPMENT CORPORATION
Report of Ernst & Young LLP, Independent Accountants.................... F-59
Consolidated Balance Sheets as of December 31, 1994 and 1995 and March
31, 1996 (unaudited)................................................... F-60
Consolidated Statements of Income for the years ended December 31, 1993,
1994 and 1995 and the three months ended March 31, 1995 and 1996 (unau-
dited)................................................................. F-61
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1993, 1994 and 1995 and the three months ended March 31,
1996 (unaudited)....................................................... F-62
Consolidated Statements of Cash Flows for the years ended December 31,
1993, 1994 and 1995 and for the three months ended March 31, 1995 and
1996 (unaudited)....................................................... F-63
Notes to Consolidated Financial Statements.............................. F-64
SUNSTAR MORTGAGE LIMITED LIABILITY COMPANY
Report of Ernst & Young LLP, Independent Accountants.................... F-69
Balance Sheets as of December 31, 1995 and March 31, 1996 (unaudited)... F-70
Statements of Operations for the period March 1, 1995 (inception) to De-
cember 31, 1995 and the periods ended March 31, 1995 and 1996 (unau-
dited)................................................................. F-71
Statements of Members' Equity for the period March 1, 1995 (inception)
to December 31, 1995 and for the period ended March 31, 1996 (unau-
dited)................................................................. F-72
Statements of Cash Flows for the period March 1, 1995 (inception) to De-
cember 31, 1995 and the periods ended March 31, 1995 and 1996 (unau-
dited)................................................................. F-73
Notes to Financial Statements........................................... F-74
THE FORTRESS GROUP, INC.
Report of Price Waterhouse LLP, Independent Accountants................. F-75
Balance Sheet as of December 31, 1995 and March 31, 1996 (unaudited).... F-76
Notes to Balance Sheet.................................................. F-77
</TABLE>
F-2
<PAGE>
THE FORTRESS GROUP, INC.
PRO FORMA COMBINED FINANCIAL STATEMENTS (UNAUDITED)
The Fortress Group, Inc. ("Fortress" or the "Company") was formed in June,
1995 to create a national homebuilding company. Fortress has entered into
definitive merger agreements with the Founding Builders, pursuant to which
Fortress will, in separate transactions, merge with each of the Founding
Builders (the "Acquisitions"). Under the merger agreements, all outstanding
shares of the Founding Builders' common stock will be converted into shares of
Fortress Common Stock and cash concurrently with the consummation of an
initial public offering (the "Common Stock Offering") of such Common Stock.
The following unaudited pro forma combined financial statements give effect to
the proposed Acquisitions.
The unaudited pro forma combined balance sheet gives effect to the
Acquisitions, as if the Acquisitions had occurred as of March 31, 1996 and
reflects as a liability the cash consideration to be paid to the shareholders
of the Founding Builders. The Acquisitions will be recorded at predecessor
cost because the owners of the Founding Builders are considered promoters and
management believes that there is not an objective and reliable basis to
estimate the fair value of the assets received in the business combination.
The unaudited pro forma balance sheet also presents, as supplemental pro forma
information, the effect of the issuance of common stock and $100.0 million of
Senior Notes due 2003 (the "Senior Notes") (at an interest rate of 13.75%)
pursuant to these concurrent Offerings. The unaudited pro forma combined
statements of operations present pro forma results from operations for the
year ended December 31, 1995 and the three month periods ended March 31, 1996
and 1995 as if the Acquisitions had occurred on January 1, 1995. The unaudited
pro forma statement of operations also presents, as supplemental pro forma
information, the effect of the Common Stock and Senior Notes and the
application of the net proceeds therefrom to refinance debt outstanding during
the period, assuming the offerings had also occurred on January 1, 1995.
Unaudited pro forma adjustments are based upon historical information,
preliminary estimates and certain assumptions management deems appropriate.
The unaudited pro forma combined financial data presented herein are not
necessarily indicative of the results Fortress would have obtained had such
events occurred at the beginning of the period, as assumed, or of the future
results of Fortress. The pro forma combined financial statements should be
read in conjunction with the historical financial statements and notes thereto
appearing elsewhere in the Prospectus.
F-3
<PAGE>
THE FORTRESS GROUP, INC.
PRO FORMA COMBINED BALANCE SHEET (UNAUDITED)
MARCH 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED
PREDECESSOR PRO FORMA PRO FORMA SUPPLEMENTAL SUPPLEMENTAL
COMPANIES ADJUSTMENTS COMBINED ADJUSTMENTS PRO FORMA
----------- ----------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equiva-
lents.................. $ 1,697 $ -- $ 1,697 $ (2)(d) $ 13,419
22,585 (d)
95,000 (f)
(98,707)(g)
(5,879)(e)
(1,275)(h)
Related party and other
receivables............ 2,935 2,935 2,935
Real estate invento-
ries................... 119,559 119,559 114 (h) 119,673
Property and equipment,
net.................... 2,098 2,098 2,098
Deferred transaction
cost................... 3,077 3,077 (3,077)(d) --
Prepaid expenses and
other assets........... 3,779 3,779 5,000 (f) 8,779
-------- ------- -------- -------- --------
Total assets......... $133,145 $ -- $133,145 $ 13,759 $146,904
======== ======= ======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and
accrued construction
liabilities............ $ 9,968 $ -- $ 9,968 (1,635)(d) $ 8,333
Notes and mortgages
payable................ 98,707 98,707 (98,707)(g)
Senior Notes............ -- -- 100,000 (f) 100,000
Due to related parties.. 2,505 2,505 (1,444)(d) 1,061
Accrued expenses........ 3,666 3,666 3,666
Customer deposits....... 6,740 6,740 6,740
Pro forma distribution
to the Predecessor
Companies'
shareholders........... -- 5,879 (b) 5,879 (5,879)(e)
-------- ------- -------- -------- --------
Total liabilities.... 121,586 5,879 127,465 (7,665) 119,800
-------- ------- -------- -------- --------
Minority interests...... 1,348 1,348 (1,161)(h) 187
-------- ------- -------- -------- --------
Shareholders' equity:
Preferred stock........ (a)
Common stock........... 599 (514)(a) 85 25 (d) 115
Additional paid-in
capital............... 2,606 514 (a) 22,585 (d)
7,006 (c) 10,126 (5,879)(e) 26,802
Retained earnings...... 7,006 (7,006)(c)
Pro forma distribution
to the Predecessor
Companies' sharehold-
ers................... -- (5,879)(b) (5,879) 5,879 (e)
-------- ------- -------- -------- --------
Total shareholders'
equity.............. 10,211 (5,879) 4,332 22,610 26,917
-------- ------- -------- -------- --------
Total liabilities and
shareholders'
equity.............. $133,145 $ -- $133,145 $ 13,759 $146,904
======== ======= ======== ======== ========
</TABLE>
F-4
<PAGE>
THE FORTRESS GROUP, INC.
PRO FORMA COMBINED STATEMENT OF INCOME (UNAUDITED)
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED
PREDECESSOR PRO FORMA PRO FORMA SUPPLEMENTAL SUPPLEMENTAL
COMPANIES ADJUSTMENTS COMBINED ADJUSTMENTS PRO FORMA
----------- ----------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenue:
Residential sales..... $190,312 $ -- $ 190,312 $ -- $ 190,312
Lot Sales............. 8,098 8,098 8,098
Other revenue......... 619 619 619
-------- ------- --------- ------ ---------
Total revenue....... 199,029 199,029 199,029
Cost of sales........... 167,434 167,434 (3,345)(j) 164,134
45 (l)
-------- ------- --------- ------ ---------
Gross profit............ 31,595 31,595 3,300 34,895
Operating expenses:
Selling expenses...... 13,152 13,152 13,152
General and adminis-
trative expenses..... 11,693 (198)(i) 11,495 11,495
-------- ------- --------- ------ ---------
Operating income...... 6,750 198 6,948 3,300 10,248
Other non-operating (in-
come) expense:
Interest.............. 120 120 (120)(j)
Minority interests.... 745 745 (609)(l) 136
Other, net............ (191) (191) (191)
-------- ------- --------- ------ ---------
Income before provision
for income taxes....... 6,076 198 6,274 4,029 10,303
Provision for income
taxes.................. 21 2,318 (k) 2,339 1,576 (k) 3,915
-------- ------- --------- ------ ---------
Net income.............. $ 6,055 $(2,120) $ 3,935 $2,453 $ 6,388
======== ======= ========= ====== =========
Net income per share.... $ .46 $ .68
========= =========
Weighted average shares
outstanding............ 8,464,375 (n) 9,413,181 (n)
========= =========
</TABLE>
F-5
<PAGE>
THE FORTRESS GROUP, INC.
PRO FORMA COMBINED STATEMENT OF INCOME (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED
PREDECESSOR PRO FORMA PRO FORMA SUPPLEMENTAL SUPPLEMENTAL
COMPANIES ADJUSTMENTS COMBINED ADJUSTMENTS PRO FORMA
----------- ----------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenue:
Residential sales..... $40,785 $ -- $ 40,785 $ -- $ 40,785
Lot sales............. 477 477 477
Other revenue......... 50 50 50
------- ------ --------- ------ ---------
Total revenue....... 41,312 41,312 41,312
Cost of sales........... 34,753 34,753 (502)(j) 34,261
10 (l)
------- ------ --------- ------ ---------
Gross profit............ 6,559 6,559 492 7,051
Operating expenses:
Selling expenses...... 2,843 2,843 2,843
General and adminis-
trative expenses..... 2,767 414 (i) 3,181 3,181
------- ------ --------- ------ ---------
Operating income...... 949 (414) 535 492 1,027
Other non-operating (in-
come) expense:
Interest.............. 48 48 (48)(j)
Minority interests.... 54 54 (57)(l) (3)
Other, net............ (139) (139) (139)
------- ------ --------- ------ ---------
Income before provision
for income taxes....... 986 (414) 572 597 1,169
Provision for income
taxes.................. -- 202 (k) 202 242 (k) 444
------- ------ --------- ------ ---------
Net income.............. $ 986 $ (616) $ 370 $ 355 $ 725
======= ====== ========= ====== =========
Net income per share.... $ .04 $ .08
========= =========
Weighted average shares
outstanding............ 8,464,375 (n) 9,413,181 (n)
========= =========
</TABLE>
F-6
<PAGE>
THE FORTRESS GROUP, INC.
PRO FORMA COMBINED STATEMENT OF INCOME (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED
PREDECESSOR PRO FORMA PRO FORMA SUPPLEMENTAL SUPPLEMENTAL
COMPANIES ADJUSTMENTS COMBINED ADJUSTMENTS PRO FORMA
----------- ----------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenue:
Residential sales..... $36,234 $ -- $ 36,234 $ -- $ 36,234
Lot Sales............. 588 588 588
Other revenue......... 47 47 47
------- ----- --------- ----- ---------
Total revenue....... 36,869 36,869 36,869
Cost of sales........... 31,290 31,290 (495)(j) 30,805
10 (l)
------- ----- --------- ----- ---------
Gross profit............ 5,579 5,579 485 6,064
Operating expenses:
Selling expenses...... 2,776 2,776 2,776
General and adminis-
trative expenses..... 2,701 (211)(i) 2,912 2,912
------- ----- --------- ----- ---------
Operating income...... 102 (211) (109) 485 376
Other non-operating (in-
come) expense:
Interest.............. 28 28 (28)(j)
Minority interests.... 152 152 (130)(l) 22
Other, net............ (147) (147) (147)
------- ----- --------- ----- ---------
Income before provision
for income taxes....... 69 (211) (142) 653 501
Provision/(Benefit) for
income taxes........... -- 54 (k) (54) 244 (k) 190
------- ----- --------- ----- ---------
Net income.............. $ 69 $(157) $ (88) $ 409 $ 311
======= ===== ========= ===== =========
Net income per share.... $ .(01) $ .03
========= =========
Weighted average shares
outstanding............ 8,464,375 (n) 9,413,181 (n)
========= =========
</TABLE>
F-7
<PAGE>
THE FORTRESS GROUP, INC.
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS (UNAUDITED)
UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS
1. Adjustments to reflect the Acquisitions of the Founding Builders including:
(a) Issuance of 6,233,875 shares of The Fortress Group common stock to the
stockholders of the Founding Builders in exchange for the stock of the
individual Founding Builders. In addition, the issuance of 20,000
shares (par value of $.01) of Series A 11% cumulative convertible
preferred stock of the Fortress Group with a liquidation value in the
aggregate of $2 million of preferred stock held by the owner of Genesee
in Genesee.
(b) Recognition of the cash portion of the consideration to be paid to the
stockholders of the Founding Builders as a liability.
(c) Elimination of retained earnings of the Founding Builders.
2. Adjustments to reflect the issuance of common stock and the $100.0 million
of proceeds from the Senior Notes through the Senior Notes Offering is as
follows:
(d) Issuance of 3,000,000 shares of common stock and the receipt of the
proceeds raised from the Offering, net of estimated expenses and
underwriting discount of $4.4 million; (i) the payment and
reclassification of deferred transaction costs, and (ii) the payment
and reclassification of deferred transaction costs.
(e) The use of a portion of the net proceeds to pay the cash portion of the
consideration to be paid to the stockholders of the Founding Builders.
(f) Issuance of $100.0 million of Senior Notes (at an interest rate of
13.75%) and recognition of the receipt of proceeds therefrom of $95
million and $5 million of estimated debt issue costs.
(g) The use of a portion of the proceeds to repay notes and mortgages
payable.
(h) The use of $1,275,000 of the proceeds to buyout the minority interest
holding in one of its consolidated joint venture partnerships,
resulting from an agreement which is contingent upon the completion of
the Offering. The payment to acquire the venture partners ownership
interest includes settlement of their minority interest liability of
$1,161,000. The difference of $114,000 has been allocated to real
estate inventory.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS ADJUSTMENTS
(i) Adjustment to reflect the reduction in compensation to former owners
and employees of Buffington totaling $1,857,000 for the year ended
December 31, 1995, and $203,000 for the three month period ended March
31, 1995 which relates to the restructuring of executive compensation
arrangements. The Pro forma adjustment is equal to the difference
between the actual compensation earned by the executives during 1995
and the amounts that these executives would have earned had the new
executive compensation arrangements been in effect during 1995. In
addition, an adjustment of $1,659,000 and $414,000, for the year ended
December 31, 1995 and the three months ended March 31, 1996 and 1995,
respectively, to reflect increased expenses for corporate operating
activities related to the newly formed public entity.
(j) These adjustments reflect the reduction in interest expense resulting
from refinancing, of the Company's average debt outstanding of
approximately $88.0 million, $93.2 million and $88.9 million for the
year ended December 31, 1995 and the three months ended March 31, 1996
and 1995, respectively. The remaining portion of the Senior Notes of
approximately $12 million, $6.8 million and $11.1 million for 1995 and
the three months ended March 31, 1996 and 1995, respectively, are not
assumed to be outstanding for the relevant period as the Company had
not incurred this level of indebtedness. Accordingly, these pro forma
adjustments do not intend to give effect to the interest expense on
that portion of the Senior Notes which exceed the amount that would
have been used to refinance existing indebtedness.
F-8
<PAGE>
THE FORTRESS GROUP, INC.
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
The interest expense adjustments were computed by comparing the actual
interest and related fees incurred by the Company with the amount of
interest costs related to the amount refinanced by the Senior Notes. In
prior years, the individual operating Companies incurred higher cost of
capital in the form of stated interest rates and fees. The effective
borrowing rate on the Senior Notes is 14.25% which reflects the assumed
stated interest rate of 13.75% plus amortization of debt issue costs.
In addition, this adjustment considers the effect that a portion of the
interest capitalized prior to January 1, 1995, which was incurred at
the Company's higher borrowing rates, would have still been in
inventory as of December 31, 1995 and March 31, 1996. This results from
the fact that certain inventory, primarily land under development and
finished lots, was acquired prior to January 1, 1995 and remained in
inventory at December 31, 1995 and March 31, 1996. Interest capitalized
on this inventory prior to and during 1995 and in the three months
ended March 31, 1996 remains in the ending balance of capitalized
interest presented below, since this inventory has not been sold during
the periods presented. An analysis of the interest expense related
adjustments are summarized as follows:
CAPITALIZED INTEREST
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED QUARTER ENDED QUARTER ENDED
DECEMBER 31, 1995 MARCH 31, 1996 MARCH 31, 1995
----------------- ---------------- ----------------
ACTUAL PRO FORMA ACTUAL PRO FORMA ACTUAL PRO FORMA
------- --------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Beginning Balance....... $ 3,816 $3,816 $7,272 $6,321 $3,816 $3,816
Interest Incurred....... 16,081 10,558 3,377 2,795 3,076 2,667
------- ------ ------ ------ ------ ------
19,897 14,374 10,649 9,116 6,892 6,483
Ending Balance.......... 7,272 6,321 8,644 7,837 4,984 5,266
------- ------ ------ ------ ------ ------
Expensed................ $12,625 $8,053 $2,005 $1,279 1,908 1,217
======= ====== ====== ====== ====== ======
Pro Forma Adjustment.. $4,572 $726 $691
====== ==== ====
These adjustments have
been applied as fol-
lows:
Cost of sales......... $4,452 $678 $663
Interest expense...... 120 48 28
------ ---- ----
$4,572 $726 $691
====== ==== ====
</TABLE>
As indicated, the pro forma interest expense adjustments outlined
above were computed assuming that the Company utilized approximately
$88.0 million for 1995 and $93.2 million and $88.9 million for the
three months ended March 31, 1996 and 1995, respectively, of proceeds
from the Senior Notes Offering to refinance its average debt
outstanding. Had the Company (i) utilized the net proceeds of the
Common Stock Offering of approximately $22.6 million to satisfy the
obligation to the Founding Builders' Owners ($5.9 million), settle the
minority interest obligation ($1.3 million) and finally to reduce
average outstanding debt of $15.4 million and (ii) utilized the
proceeds from the Senior Notes Offering to refinance the remaining
average debt outstanding of approximately $72.5 million for 1995, $77.7
million and $73.4 million for the three month period ended March 31,
1996 and 1995, respectively, the effect to the Pro Forma Income
Statement would be summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED QUARTER ENDED QUARTER ENDED
DECEMBER 31, 1995 MARCH 31, 1996 MARCH 31, 1995
----------------- -------------- --------------
<S> <C> <C> <C>
Revenue.................. $199,029 $41,312 $36,869
Gross profit............. 36,694 7,337 6,337
Operating income......... 12,047 1,313 649
Income before provision
for income taxes........ 11,992 1,455 777
Net income............... $ 7,435 $ 902 480
========== ========== ==========
Net income per share..... $ .65 $ .08 $ .04
========== ========== ==========
Weighted average shares
outstanding............. 11,464,375 11,464,375 11,464,375
========== ========== ==========
</TABLE>
F-9
<PAGE>
THE FORTRESS GROUP, INC.
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
The remaining portion of the senior notes of approximately $27.5
million for 1995 and $22.3 million and $26.6 million for the three
months ended March 31, 1996 and 1995, is not assumed to be outstanding
for such periods presented in this analysis as the Company had not
incurred that level of indebtedness. Accordingly, this pro forma
presentation does not intend to give effect to the interest expense on
that portion of the Senior Notes which exceeds the amount that would
have been used to refinance the $72.5 million for 1995 and $77.7
million and $73.4 million for the three months ended March 31, 1996 and
1995, respectively, representing the indebtedness assumed to be
outstanding.
(k) Adjustments to calculate the provision for income taxes on the combined
pro forma results at the effective statutory tax rates applicable for
each of the Founding Builders as if they had been C corporations for
the period.
(l) An adjustment to reduce minority interest expense of approximately
$609,000, $57,000 and $130,000 for 1995 and the three months ended
March 31, 1996 and 1995, respectively, as a result of the Company's
planned buyout of the minority interest holding in one of its
consolidated joint venture partnerships (See note (h)). An adjustment
of approximately $45,000 for 1995 and $10,000 for each of the three
month periods ended March 31, 1996 and 1995, to increase cost of sales
is recorded in order to recognize the amortization of the amount paid
in excess of the minority interest liability. This adjustment is based
on a per unit amortization amount applied to the units closed in each
period presented.
(m) Adjustment to reflect the calculation of a provision for income taxes
resulting from net pre-tax income of the supplemental pro forma
adjustments at an assumed statutory tax rate of 38%.
(n) The weighted average number of common shares outstanding used to
calculate pro forma earnings per share based on the estimated average
number of shares of common stock of the pro forma combined company
outstanding during the periods presented is as follows:
<TABLE>
<CAPTION>
PRO FORMA SUPPLEMENTAL
COMBINED PRO FORMA
--------- ------------
<S> <C> <C>
Shares issued by Fortress prior to the Common Stock
Offering.......................................... 2,230,500 2,230,500
Shares issued to the stockholders of the Founding
Builders.......................................... 6,233,875 6,233,875
Shares issued in the Offering to cover the cash
portion of the purchase price to be paid in con-
nection with the acquisition of the Founding
Builders.......................................... -- 779,708
Shares issued in the Offering to acquire the Minor-
ity Interest...................................... -- 169,098
--------- ---------
8,464,375 9,413,181
========= =========
</TABLE>
F-10
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of the
Combined Predecessor Companies
In our opinion, based upon our audits and the reports of other auditors, the
accompanying combined balance sheets and the related combined statements of
income, of shareholders' equity and of cash flows present fairly, in all
material respects, the financial position of the Combined Predecessor
Companies (the "Company") at December 31, 1995 and 1994, and the results of
their operations and their cash flows for each of the three years in the
period ended December 31, 1995, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
the Companies' management; our responsibility is to express an opinion on
these financial statements based on our audits. We did not audit the combined
financial statements of The Genesee Company as of December 31, 1994 and for
the two years in the period ended December 31, 1994, the consolidated
financial statements of Solaris Development Corporation, as of December 31,
1995 and for the three years in the period ended December 31, 1995 and the
financial statements of Sunstar Mortgage Limited Liability Company as of
December 31, 1995 and the period from March 1, 1995 (inception) to December
31, 1995. The financial statements which we did not audit reflect total assets
of $16.4 million and $67.4 million at December 31, 1995 and 1994,
respectively, and total revenues of $42.6 million, $95.8 million and $78.6
million for the years ended December 31, 1995, 1994 and 1993, respectively.
Those statements were audited by other auditors whose reports thereon have
been furnished to us, and our opinion expressed herein, insofar as it relates
to the amounts included for The Genesee Company, Solaris Development
Corporation and Sunstar Mortgage Limited Liability Company are based solely on
the reports of the other auditors. We conducted our audits of these statements
in accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits and the reports of the
other auditors provide a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Minneapolis, Minnesota
March 11, 1996
F-11
<PAGE>
COMBINED PREDECESSOR COMPANIES
BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, COMBINED
----------------- MARCH 31, MARCH 31,
1994 1995 1996 1996
-------- -------- ----------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents........ $ 4,866 $ 2,710 $ 1,697 $ 1,697
Related party and other receiv-
ables........................... 967 2,106 2,935 2,935
Real estate inventories.......... 101,214 109,016 119,559 119,559
Property and equipment, net...... 1,774 2,099 2,098 2,098
Deferred transaction costs....... -- 2,121 3,077 3,077
Prepaid expenses and other as-
sets............................ 2,582 3,614 3,779 3,779
-------- -------- -------- --------
Total assets................. $111,403 $121,666 $133,145 $133,145
======== ======== ======== ========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Accounts payable and accrued
construction liabilities........ $ 9,685 $ 10,726 $ 9,968 $ 9,968
Notes and mortgages payable...... 83,161 87,604 98,707 98,707
Due to related parties........... 2,320 2,495 2,505 2,505
Accrued expenses................. 4,393 4,588 3,666 3,666
Customer deposits................ 4,480 5,122 6,740 6,740
Pro forma distribution to the
Predecessor Companies'
shareholders.................... -- -- -- 5,879
-------- -------- -------- --------
Total liabilities............ 104,039 110,535 121,586 127,465
-------- -------- -------- --------
Minority interests............... 1,346 1,295 1,348 1,348
-------- -------- -------- --------
Shareholders' equity:
Preferred Stock................ -- -- -- --
Common Stock................... 575 599 599 599
Additional paid-in-capital..... 1,861 2,606 2,606 2,606
Retained earnings.............. 3,582 6,631 7,006 7,006
Pro forma distribution to the
Predecessor Companies'
shareholders.................. -- -- -- (5,879)
-------- -------- -------- --------
Total shareholders' equity... 6,018 9,836 10,211 4,332
-------- -------- -------- --------
Total liabilities and share-
holders' equity............. $111,403 $121,666 $133,145 $133,145
======== ======== ======== ========
</TABLE>
F-12
<PAGE>
COMBINED PREDECESSOR COMPANIES
STATEMENT OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
---------------------------- -----------------------
1993 1994 1995 1995 1996
-------- -------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Residential sales...... $144,077 $170,377 $190,312 $36,234 $40,785
Lot sales.............. 3,833 3,869 8,098 588 477
Other revenue.......... 359 469 619 47 50
-------- -------- -------- ------- -------
Total Revenue........ 148,269 174,715 199,029 36,869 41,312
Cost of sales............ 126,145 146,284 167,434 31,290 34,753
-------- -------- -------- ------- -------
Gross Profit............. 22,124 28,431 31,595 5,579 6,559
Operating expenses:
Selling expenses....... 9,349 11,840 13,152 2,776 2,843
General and administra-
tive expenses......... 8,606 11,180 11,693 2,701 2,767
-------- -------- -------- ------- -------
Net operating income... 4,169 5,411 6,750 102 949
Other (income) expense:
Interest............... 70 136 120 28 48
Minority interests..... (65) 907 745 152 54
Other, net............. (734) (460) (191) (147) (139)
-------- -------- -------- ------- -------
Income before provision
for income taxes........ 4,898 4,828 6,076 69 986
Provision for income tax-
es...................... 925 83 21 -- --
-------- -------- -------- ------- -------
Net income............... $ 3,973 $ 4,745 $ 6,055 $ 69 $ 986
======== ======== ======== ======= =======
Unaudited Pro Forma
Income Statement
Information (Note 13):
Income before provision
for income taxes...... $ 6,076 $ 69 $ 986
Pro Forma adjustment... 198 (211) (414)
-------- ------- -------
Pro Forma income (loss)
before provision for
income taxes.......... 6,274 (142) 572
Pro Forma
(provision)/benefit
for income taxes...... (2,339) 54 (202)
-------- ------- -------
Pro Forma net income
(loss)................ $ 3,935 $ (88) $ 370
======== ======= =======
</TABLE>
F-13
<PAGE>
COMBINED PREDECESSOR COMPANIES
STATEMENT OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-TO RETAINED
STOCK CAPITAL EARNINGS TOTAL
------ ---------- -------- -------
<S> <C> <C> <C> <C>
Balance at January 1, 1993................ $554 $1,067 $ 294 $ 1,915
Capital contributions................... 21 304 549 874
Distributions to shareholders........... -- -- (2,519) (2,519)
Net income.............................. -- -- 3,973 3,973
---- ------ ------- -------
Balance at December 31, 1993.............. 575 1,371 2,297 4,243
Capital contributions................... -- 490 -- 490
Distributions to shareholders........... -- -- (3,074) (3,074)
Redemption of common stock.............. -- -- (386) (386)
Net income.............................. -- -- 4,745 4,745
---- ------ ------- -------
Balance at December 31, 1994.............. 575 1,861 3,582 6,018
Capital contributions................... 24 767 357 1,148
Distributions to shareholders........... -- (22) (3,363) (3,385)
Net income.............................. -- -- 6,055 6,055
---- ------ ------- -------
Balance at December 31, 1995.............. 599 2,606 6,631 9,836
Capital contributions................... 83 83
Distributions to shareholders........... (694) (694)
Net income.............................. 986 986
---- ------ ------- -------
Balance at March 31, 1996 (unaudited)..... $599 $2,606 $ 7,006 $10,211
==== ====== ======= =======
</TABLE>
F-14
<PAGE>
COMBINED PREDECESSOR COMPANIES
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
----------------------------- -----------------------
1993 1994 1995 1995 1996
-------- -------- --------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income.............. $ 3,973 $ 4,745 $ 6,055 $ 69 $ 986
Adjustments to reconcile
net income to net cash
provided by (used for)
operating activities
Equity in income from
investment
partnerships......... (176) (4) 0 0 0
Depreciation and amor-
tization............. 396 613 621 93 151
Minority interest..... (65) 907 745 152 54
Changes in operating
assets and liabili-
ties:
Real estate invento-
ries................ (23,530) (35,308) (8,155) (9,422) (10,543)
Related party and
other receivables... 284 101 (1,118) (423) (565)
Prepaid expenses and
other assets........ (540) (974) (1,299) 422 (300)
Accounts payable and
accrued construction
liabilities......... 1,022 4,094 (35) 196 (1,319)
Other accrued ex-
penses.............. 510 (94) 919 (2) (812)
Customer deposits.... (293) 893 513 268 1,483
-------- -------- --------- -------- --------
Net cash used in op-
erating activi-
ties............... (18,419) (25,027) (1,754) (8,647) (10,865)
Cash flows from investing
activities:
Distributions/repayments
from investment in
partnerships........... 286 0 0 0 0
Purchase of property and
equipment.............. (495) (849) (962) (153) (27)
Proceeds from sale of
property and equip-
ment................... 95 10 26 24 10
-------- -------- --------- -------- --------
Net cash used in in-
vesting activi-
ties............... (114) (839) (936) (129) (17)
-------- -------- --------- -------- --------
Cash flows from financing
activities:
Borrowings under notes
and mortgages payable.. 90,616 101,789 115,740 23,216 34,204
Repayments of notes and
mortgages payable...... (69,702) (72,373) (111,298) (16,214) (23,143)
Related party
borrowings............. 852 2,090 2,248 107 584
Repayment of related
party borrowings....... (423) (1,013) (2,073) (806) (837)
Distributions to minor-
ity interest........... (84) (340) (791) (142) 0
Transaction costs....... (1,114) 0 (328)
Capital contributions... 324 490 1,123 140 83
Capital distributions... (2,224) (2,722) (3,301) (82) (694)
-------- -------- --------- -------- --------
Net cash provided by fi-
nancing activities....... 19,359 27,921 534 6,219 9,869
-------- -------- --------- -------- --------
Net increase (decrease) in
cash and cash
equivalents.............. 826 2,055 (2,156) (2,557) (1,013)
Cash and cash equivalents,
beginning of period...... 1,985 2,811 4,866 4,866 2,710
-------- -------- --------- -------- --------
Cash and cash equivalents,
end of period............ $ 2,811 $ 4,866 $ 2,710 $ 2,309 $ 1,697
======== ======== ========= ======== ========
</TABLE>
F-15
<PAGE>
COMBINED PREDECESSOR COMPANIES
NOTES TO THE COMBINED FINANCIAL STATEMENTS
NOTE 1--BUSINESS ORGANIZATION
The Fortress Group ("Fortress or the Company") was founded in 1995 to create
a national homebuilding company to be engaged in the acquisition and
development of land or improved lots and the construction of residential for-
sale housing.
Fortress has entered into definitive agreements to acquire, simultaneously
with the closing of an initial public offering (the "Offering"), four
homebuilding companies, Buffington Homes, Inc. ("Buffington"), Christopher
Homes and Affiliates ("Christopher"), The Genesee Company ("Genesee"), and
Solaris Development Corporation ("Solaris"), and one mortgage company, Sunstar
Mortgage Limited Liability Company ("Sunstar") for a combination of common and
preferred stock and cash. The four homebuilders and the mortgage company to be
acquired by Fortress are referred to herein as the "Predecessor Companies."
The aggregate consideration to be paid by Fortress in these transactions is
as follows:
(a) An aggregate of $5,879,000 in cash;
(b) An aggregate of 6,233,875 shares of Common Stock of the Company; and
(c) An aggregate of 20,000 shares of Series A 11% Cumulative Convertible
Preferred Stock of the Company, See Note 12.
The allocation of the above to each of the Predecessor Companies is as
follows:
<TABLE>
<CAPTION>
COMMON PREFERRED
SHARES SHARES
PREDECESSOR COMPANY CASH ALLOCATION ALLOCATION
------------------- ---------- ---------- ----------
<S> <C> <C> <C>
Buffington............................... $1,129,000 1,897,897 --
Christopher.............................. 179,000 1,691,227 --
Genesee.................................. 695,000 1,729,495 20,000
Solaris/Sunstar.......................... 3,876,000 915,256 --
---------- --------- ------
$5,879,000 6,233,875 20,000
========== ========= ======
</TABLE>
The consideration to be paid for the Predecessor Companies was determined
through arm's length negotiations among the Company and representatives of the
Predecessor Companies.
NOTE 2--BASIS OF PRESENTATION
Simultaneously with the closing of the Offering, Fortress will acquire by
merger each of the five operating businesses, Buffington, Christopher,
Genesee, Solaris and Sunstar (the "Mergers"). The accompanying combined
financial statements and related notes to the combined financial statements
are presented on a combined basis without giving effect to the Merger or the
Offering. The assets and liabilities of the predecessor Companies are
reflected at their historical amounts and include accounts of joint ventures
where the Company controls the management activities and holds a significant
economic interest. All inter-company transactions have been eliminated.
Unaudited pro forma combined balance sheet
The proforma combined balance sheet reflects as a liability the cash
consideration to be paid to the Shareholders of the Predecessor Companies, the
issuance of Fortress common stock in exchange for the stock of the Predecessor
Companies and the elimination of common stock and retained earnings of the
Predecessor Companies.
F-16
<PAGE>
COMBINED PREDECESSOR COMPANIES
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue recognition
Residential and lot sales are recognized when all conditions precedent to
closing have been fulfilled and title has passed to the buyer. The Company
generally enters into contracts of sale for its houses in advance of their
construction. The Company's standard residential sales contract generally
requires the customer to make an earnest money deposit which is recognized as
a liability until the sale closes.
Real estate inventories and cost of sales
All real estate inventories which are held for sale are carried at cost
which is less than fair value as measured in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 121 "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." Fair value
is measured based on the application of discounting expected future cash flows
of each of the Company's real estate developments. Costs incurred which are
included in inventory consist of land, land development, direct and certain
indirect construction costs, interest and real estate taxes, and direct model
construction costs and related improvements.
At the time of revenue recognition, cost of sales is charged with the actual
construction costs incurred and any estimate to complete (specific
identification), plus an allocation of the total estimated cost of land and
land development, interest, real estate taxes and any other capitalizable
common costs based on the relative sales value method of accounting.
The Company generally provides a one year limited warranty of workmanship
and materials with each of its homes. Accordingly, a warranty, reserve, based
on the Company's historical experience, is provided as residential sales are
closed; this reserve is reduced by the cost of subsequent work performed.
Estimates by Management
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Interest capitalization
Interest and related debt issuance costs are capitalized to qualifying real
estate inventories as incurred, in accordance with SFAS No. 34,
"Capitalization of Interest Cost", and charged to cost of sales as revenue
from residential sales is recognized. The interest and related debt issuance
costs capitalized are determined by applying a weighted average capitalization
rate to the accumulated qualified real estate expenditures. The capitalization
rate is based on the Company's outstanding borrowings associated with the
acquisition, development and construction of the qualified real estate
inventory. The amount of financing costs capitalized does not exceed those
costs incurred for any year presented in the accompanying combined financial
statements.
Deferred transaction costs
Transaction costs, which consist of costs incurred in conjunction with the
Mergers and Offering have been deferred and will be recorded as a reduction of
equity when the Offering is completed.
F-17
<PAGE>
COMBINED PREDECESSOR COMPANIES
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Property and equipment
Property and equipment are carried at cost less accumulated depreciation and
are depreciated using either straight line or accelerated depreciation methods
over the estimated useful lives of the assets which range in years from 5 to
10. Costs incurred for common area model improvements and certain furnishings
are amortized on a per unit basis as home sales in the related development are
closed. Significant additions and improvements are capitalized, while
expenditures for repairs and maintenance are charged to operations, as
incurred.
Income taxes
Each of the Predecessor Companies, except Buffington, was either a
subchapter S corporation or partnership for income tax purposes for all
periods presented and, accordingly, any income tax liabilities are the
responsibility of the Predecessor Companies' respective shareholders or
partners. Buffington was a C corporation through December 31, 1993 and
converted to a subchapter S corporation on January 1, 1994. The combined
financial statements of Christopher are comprised of one subchapter S
corporation, one limited partnership and two C corporations. Each of the
Predecessor Company's subchapter S corporation or partnership status will
terminate on consummation of the Merger, as disclosed in Notes 1 and 2. A pro
forma tax provision has been presented on the income statement for the
combined Predecessor Companies' as if they were a C corporation for each of
the years ended December 31, 1993, 1994 and 1995.
With respect to Buffington, the income taxes for the year ended December 31,
1993 were provided in accordance with SFAS No. 109 "Accounting for Income
Taxes". For the years ended 1993 and 1994, no income tax benefit was recorded
for the losses related to the C corporations of Christopher because there were
no remaining taxable income in the three year carry back period. For 1995, no
income tax provision was recognized because the taxable income generated by
the combined Christopher entities was primarily incurred by the S corporation.
At December 31, 1994 and 1995, no deferred taxes have been provided for the
net operating losses and other temporary differences between the financial
reporting basis and the income tax basis because the realization of the net
deferred tax asset is unlikely. Net operating loss carry forwards available in
1995 aggregate approximately $325,000. The fiscal tax year ends for
Christopher's C corporations are April 30 and June 30, respectively. See Note
13 for unaudited pro forma income tax information.
Historical net income per share
Historical net income per share has not been presented as it is not deemed
to be a meaningful presentation as a result of the Mergers.
Cash and equivalents
For purposes of reporting cash flows, the Company considers all highly
liquid investments with an original maturity of three months or less to be
cash equivalents. Supplemental disclosures of cash flow information are as
follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
1993 1994 1995
------ ------ ------
<S> <C> <C> <C>
Cash paid for:
Interest.............................................. $3,962 $6,163 $8,612
------ ------ ------
Income taxes.......................................... $ 723 $ 231 $ 83
====== ====== ======
</TABLE>
Unaudited Interim Financial Statements
In the opinion of management, Fortress and the Predecessor Companies has
made all adjustments, consisting primarily of normal recurring accruals,
necessary for a fair presentation of the financial condition of the Company as
of March 31, 1996 and the results of operations and cash flows for the three
month periods ended March 31, 1995 and 1996, as presented in the accompanying
unaudited interim financial statements.
F-18
<PAGE>
COMBINED PREDECESSOR COMPANIES
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Supplemental disclosure of non-cash activities are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------
1993 1994 1995
------ ------ ----
<S> <C> <C> <C>
Net assumption and assignment of Special Improvement
District Bonds........................................ $ 730 $ 590 $623
Distribution of property to owners of Predecessor Com-
panies................................................ 137 353 58
Redemption of common stock for notes payable........... -- 386 --
Other.................................................. 923 45 35
------ ------ ----
Total.............................................. $1,790 $1,374 $761
====== ====== ====
</TABLE>
NOTE 4--REAL ESTATE INVENTORIES
Real estate inventories are summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
----------------- -----------
1994 1995 1996
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Work-in-progress:
Sold homes................................... $ 38,177 $ 34,460 $ 46,891
Speculative homes............................ 17,275 24,208 27,556
-------- -------- --------
55,452 58,668 74,447
-------- -------- --------
Land:
Finished lots................................ 24,496 28,219 31,481
Land under development....................... 12,447 12,819 4,095
Land and other costs......................... 729 456 459
-------- -------- --------
37,672 41,494 36,035
-------- -------- --------
Models......................................... 8,090 8,854 9,077
-------- -------- --------
Total...................................... $101,214 $109,016 $119,559
======== ======== ========
</TABLE>
Models are constructed to assist in the marketing effort of a development
and speculative construction represents non-model homes either under
construction or substantially completed which are not subject to a sales
contract.
NOTE 5--PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1994 1995
------ ------
<S> <C> <C>
Model home upgrades and furnishings............................. $1,559 $1,997
Equipment and furniture......................................... 826 1,197
Vehicles........................................................ 279 266
Leasehold improvements.......................................... 44 44
Other........................................................... 67 108
------ ------
Sub-total................................................... 2,775 3,612
Less: Accumulated depreciation and amortization................. (1,001) (1,513)
------ ------
$1,774 $2,099
====== ======
</TABLE>
F-19
<PAGE>
COMBINED PREDECESSOR COMPANIES
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 6--NOTES AND MORTGAGES PAYABLE
Notes and mortgages payable are summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
--------------- -----------
1994 1995 1996
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Project specific land, land development and con-
struction loans.................................. $63,032 $66,629 $76,281
Demands for deed on sales-leasebacks.............. 2,370 230 --
Other loans....................................... 1,272 1,149 1,963
Subordinated investor notes and equity participa-
tion loans....................................... 16,487 19,596 20,463
------- ------- -------
$83,161 $87,604 $98,707
======= ======= =======
</TABLE>
The loan agreements for project specific land, land development and
construction loans are collateralized by a lien on the applicable residential
development project or a specific unit under construction. Repayment of these
loans are normally payable upon the closing of the encumbered unit. The method
to determine the repayment amount varies depending on the specific loan
agreement, but is generally based on a specified per unit amount or as a
percentage of the sale price of the sold unit. In addition, the loan
agreements typically include a limitation on the total amount that can be
borrowed or the amount that can be outstanding at any time. These loans bear
interest at annual variable rates ranging from .5% to 2.0% over prime (the
prime rate at December 31, 1995 was 8.5%) or a fixed rate of 9%. The
shareholders of Genesee, Christopher and Sunstar have personally guaranteed
the repayment of significant amount of the outstanding project specific land,
land development and construction loans.
Demands for deed on sales-lease back represent financing arrangements on
certain finished model homes which are leased by Christopher for one to two
years for marketing purposes. The demand for deed yields approximately 12%
annually with a 3% commission paid upon the resale of the model home.
Other loans consist of non-recourse notes payable secured by assets of the
Company not related to its normal business operations of homebuilding. These
loans bear interest at an annual rate of 2.0% over prime, or a fixed rate of
6.0%. Repayment of these loans varies pending on the terms of the respective
loan agreements.
Subordinated investor notes and equity participation loans generally consist
of loans from third party investors which were used to facilitate the initial
purchase of residential real estate to be held for development for certain
Genesee and Christopher projects.
The investor loans outstanding for Christopher are secured by a deed of
trust, subordinated to the land acquisition and development loan. These notes
are payable in monthly distributions equal to a 15% annualized return and a
10% fee due at the closing of each lot collateralized. The sole shareholder of
Christopher has personally guaranteed the repayment of these obligations which
at December 31, 1994 and 1995 was approximately $6.1 million and $9.2 million,
respectively.
Genesee's subordinated seller notes are either unsecured or collateralized
by a lien on its real estate inventories, and are guaranteed by Genesee's sole
stockholder. Genesee's outstanding obligation for these loans for the years
ended December 31, 1994 and 1995 were approximately $4.3 million and $5.9
million, respectively. Generally, these loans bear interest at a fixed annual
rate of 12%, paid monthly. The unsecured notes entitle the holder to receive
an additional 6% interest per annum payable at maturity of the note. These
notes generally have maturities of six months, at which time the principal and
all unpaid interest are due.
Genesee has entered into a series of equity participation agreements and
related notes payable with one private investor. Under these agreements,
Genesee has received advances form this equity participant totaling
F-20
<PAGE>
COMBINED PREDECESSOR COMPANIES
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(CONTINUED)
approximately $6.1 million and $4.6 million as of December 31, 1994 and 1995,
respectively, in the form of equity participation notes payable. The proceeds
from these notes are used to acquire and develop various predetermined real
estate properties and to construct homes in these developments.
In general, no interest is accrued on the principal balance of these notes,
but rather, the note holder is entitled to a portion of the net profits of the
development which collateralizes the note. However, at December 31, 1995,
Genesee had two equity participation notes payable which require that the
private investor receive the greater of some minimal rate of return or a
portion of the net profits of the development. At December 31, 1995, Genesee
has accrued approximately $255,000 in interest costs, all of which has been
capitalized, related to these two notes since the developments which
collateralize these notes are in the start-up stages and net profits earned as
of December 31, 1995, have been less than the minimum rate of return
guaranteed the investor. With respect to the other equity participation
agreements, only in the event of default would interest be accrued at the rate
of the greater of 3% over prime or 18%, retroactive to the origination date of
the note. As of December 31, 1995, there have been no events of a default.
Genesee periodically reviews the expected profits and cash flows of
developments with equity participation notes payable and would accrue interest
on the notes if it determines that an event of default is probable. In
general, equity participation notes payable have maturities within two years
of origination.
Based upon the equity participation agreements, net profits of the
individual developments are distributed, at Genesee's discretion, as follows:
first, distributions are to repay the principal balance and interest, if
applicable, of the equity participation note payable related to that
development; and second, once the principal balance of the equity
participation note payable for a development is repaid, net profits are
distributed between the equity participant and Genesee.
Maturities of notes and mortgages payable in future periods are as follows
(in thousands):
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31
-----------
<S> <C>
1996........................................................... $77,294
1997........................................................... 7,432
1998........................................................... 2,842
1999........................................................... 36
-------
$87,604
=======
</TABLE>
The timing of repayments on these notes and mortgages payable may differ
from the above schedule due to the actual closing pace of the units sold.
Interest and related debt issuance costs incurred and capitalized aggregated
approximately $7.9 million, $11.7 million, and $16.1 million, for the years
ended December 31, 1993, 1994 and 1995, respectively.
NOTE 7--ACCRUED EXPENSES
Included in accrued expenses are Special Improvement District assessments
which consist of special assessments issued by the city of Las Vegas to fund
the acquisition and construction of certain public improvements specially
benefiting property located in the City's Special Improvement District No.
404, the Summerlin area. The city issued bonds are secured by the unpaid
assessments on property within the district and are payable by the property
owners. The assessments are due on April 1 and October 1 of each year until
October 1, 2009. As property is sold, the balance of the assessment is
assigned to, and the liability assumed by, the buyer of the property. For the
years ended December 31, 1994 and 1995, management believes that maturities
F-21
<PAGE>
COMBINED PREDECESSOR COMPANIES
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(CONTINUED)
of these obligations prior to buyer assumptions will not be material to these
combined financial statements of the Predecessor Companies. The outstanding
obligation for these assessments is $2.3 million and $1.5 million,
respectively.
NOTE 8--MINORITY INTERESTS
The minority interests at December 31, 1994 and 1995 includes Solaris'
Village Lakes and Park Village ventures where these partners hold a 50% non-
controlling ownership interest and 34% ownership interest, respectively.
The minority interest expense included in the accompanying combined
financial statements includes the minority partners' interest in the profits
generated by the real estate venture based on its respective ownership
interest.
NOTE 9--RELATED PARTY TRANSACTIONS
Immediate family members of certain shareholders of Buffington have an
interest in a title insurance company which provides title services to
Buffington's home buyers. It has been the business practice to normally pay
closing costs and title insurance premiums to this title company on behalf of
its customers as an inducement to purchase the Buffington product. Title
insurance premiums are state regulated and the fees charged to Buffington are
consistent to those fees paid to unrelated customers. Fees in the approximate
amount of $568,000 and $674,000 were paid by Buffington for the years ended
December 31, 1994 and 1995, respectively.
The owners of Buffington hold an ownership interest in a residential
mortgage origination company. Buffington paid origination fees to this
affiliated company on behalf of its customers in the amount of $288,000,
$447,000 and $584,000 for the years ended December 31, 1993, 1994 and 1995,
respectively.
Genesee has entered into an agreement with a company (from which the sole
shareholder receives compensation for management services) to perform certain
marketing and management activities on behalf of Genesee. For the years ended
December 31, 1993, 1994 and 1995, approximately $273,000, $356,000 and $98,000
has been recorded under this agreement, respectively. This agreement has been
terminated as of January 1, 1996.
Genesee is involved in a limited partnership in which its sole shareholder
receives compensation for management services. The purpose of this partnership
is acquire and develop land for sale. Genesee receives management fees from
the partners of this partnership for services performed which was
approximately $263,000, $102,000 and $6,000 for the years ended December 31,
1993, 1994 and 1995, respectively. In addition, Genesee is entitled to a
marketing fee, but it has allowed a company, from which the sole shareholder
receives management compensation, to receive this fee directly from the
partnership with no financial impact on these combined statements.
With respect to this same partnership, Genesee has entered into several
agreements to purchase land at its estimated fair market value. For the years
ended December 31, 1993, 1994 and 1995 Genesee acquired approximately $2.7,
$2.7 million and $0, respectively.
Genesee pays a fee to an entity owned by its sole shareholder which provides
negotiation services in connection with the purchase of land. For the years
ended December 31, 1993, 1994 and 1995, Genesee recognized in cost of sales
related expense of $25,000, $145,000 and $5,000, respectively.
F-22
<PAGE>
COMBINED PREDECESSOR COMPANIES
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Genesee has made several home sales to its employees, for which sales
revenues and the related cost of sales have been included in the accompanying
combined statements of income. For the years ended December 31, 1993, 1994 and
1995, the sales revenue recognized was approximately $1.3 million, $454,000
and $0, and cost of sales of $1.3 million, $405,000 and $0, respectively.
Christopher provides certain accounting services for related parties and in
return receives a management fee, which was approximately $490,000, $343,000
and $39,000 for the years ended December 31, 1993, 1994 and 1995,
respectively. Sales commissions paid by related parties to Christopher
amounted to approximately $223,000, $108,000 and $62,000 for the years ended
December 31, 1993, 1994 and 1995, respectively. In addition, Christopher paid
rent during the years ended December 31, 1993, 1994 and 1995 of approximately
$36,000, $34,000 and $34,000, respectively, for office and warehouse space
under a month-to-month lease to a related party. In addition, Solaris entered
into an office lease with an affiliated company on November 1, 1995. Rent
expense related to this lease was approximately $13,000 for the year ended
December 31, 1995.
NOTE 10--EMPLOYEE BENEFIT PLAN
Each of the Predecessor Companies maintains a contributory profit sharing
plan established pursuant to the provisions of Section 401(k) of the Internal
Revenue Code which provides retirement benefits for their eligible employees.
The Predecessor Companies may make annual discretionary or matching
contributions to the respective plans. Contributions were approximately
$207,000 and $156,000 for each of the years ended December 31, 1994, and 1995,
respectively.
NOTE 11--COMMITMENTS AND CONTINGENCIES
The Predecessor Companies lease various office space, models and equipment
under noncancellable operating lease agreements which expire at various dates
and on month-to-month lease arrangements. Rent expense under such leases
aggregated approximately $468,000, $673,000, and $825,000 during the years
ended December 31, 1993, 1994 and 1995, respectively. Future minimum rental
payments under fixed expiration term operating leases are as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
1996.......................................................... $ 387
1997.......................................................... 456
1998.......................................................... 269
1999.......................................................... 103
2000.......................................................... 80
------
$1,295
======
</TABLE>
Genesee leases certain office equipment classified as capital leases. These
leases have a cost of $151,000, $196,000 and $206,000 and accumulated
depreciation of approximately $17,000, $52,000 and $81,000 as of December 31,
1993, 1994 and 1995, respectively. The scheduled future minimum lease payments
are $84,000.
On January 1, 1994 Solaris entered into a consulting contract with a former
shareholder which requires Solaris to pay a fee for services rendered in the
amount of $5,000 per month over a sixty month period.
The Company is involved in various routine legal proceedings incidental to
the conduct of its normal business operations. In the opinion of the
Predecessor Companies' management, these matters are not anticipated to have a
material adverse effect on the financial position or results of operations or
cash flows of the Company.
Christopher has signed a letter of intent to purchase a parcel of land for
approximately $7.7 million in a master planned development in Las Vegas,
Nevada.
F-23
<PAGE>
COMBINED PREDECESSOR COMPANIES
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 12--SHAREHOLDERS' EQUITY
Effective January 1, 1994, Solaris redeemed 1,000 shares of common stock
held by a shareholder and provided a note payable collateralized by the
redeemed shares in the amount of $386,000, this transaction resulted in a
decrease in retained earnings of $386,000 and no gain or loss. At December 31,
1994 the amount of the note payable outstanding was approximately $318,000.
In 1995, Genesee adopted an incentive stock option plan for certain
employees. The plan allows the grant of options to purchase up to 10,000
shares of Genesee's common stock. The exercise price is equal to the estimated
fair value of the common stock at the date of grant. The options generally
vest nine years after the date of grant, but the vesting period is accelerated
upon a change of control or the occurrence of certain other events as
specified in the plan agreement. The options are exercisable over periods of
up to 10 years. During 1995, options to purchase 10,000 shares of Genesee's
common stock were granted at an exercise price of $50.15 per share.
The Company has authorized 2 million shares (par value of $.01) of which
20,000 share have been authorized as Series A 11% Cumulative Convertible Non-
Voting Preferred Stock of which no shares were issued and outstanding as of
December 31, 1995. The preferred stock is restricted from converting into
common stock of Fortress for the first two years that such shares are issued
and outstanding. The preferred stock has a liquidation preference of $100 per
share ($2 million in the aggregate) and other terms, as defined in the
Certificate of Designation. The conversion ratio of such shares is the lesser
of the price of the common stock Offering or 75% of the lowest closing price
during the thirty days immediately preceding the date of conversion.
NOTE 13--UNAUDITED PRO FORMA INCOME STATEMENT INFORMATION
The following unaudited pro forma income tax information is presented in
accordance with Statement of Financial Accounting Standard No. 109 (SFAS 109)
as if the Predecessor Companies had been subchapter C corporation subject to
federal and state income taxes for the year ended December 31, 1995 and the
three months ended March 31, 1995 and 1996. In addition, a Pro Forma
adjustment is reflected related to (i) the reduction in compensation to former
owners and employees of Buffington totaling $1,857,000 for the year ended
December 31, 1995 and $203 and $0 for the three months ended March 31, 1995
and 1996, respectively, and (ii) an estimated increase in expenses for
corporate operating activities of $1,657,000 for the year ended December 31,
1995 and $414,000 for each of the three month periods ended March 31, 1995 and
1996, related to the newly formed public entity assuming it had been formed
and in operation during 1995. The net effect of these pro forma adjustments
are reflected below.
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED PERIOD ENDED
DECEMBER 31, MARCH 31, MARCH 31,
1995 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Unaudited Pro Forma Information:
Income before provision for income
taxes............................ $ 6,076 $ 69 $ 986
Pro Forma adjustment.............. 198 (211) (414)
------- ----- -----
Pro Forma income (loss) before pro-
vision for income taxes............ 6,274 (142) 572
Pro Forma (provision)/benefit for
income taxes....................... (2,339) 54 (202)
------- ----- -----
Pro Forma net income (loss)......... $ 3,935 $ (88) $ 370
======= ===== =====
</TABLE>
Buffington made distributions to the shareholders in the form of bonuses of
$2,626,000 and $1,857,000 for the years ended December 31, 1994 and 1995,
respectively. Other amounts were also paid to these shareholders in the form
of salaries for those periods. No adjustment to pro forma pretax earnings has
been made for these bonuses.
F-24
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Shareholders of
Buffington Homes, Inc.
In our opinion, the accompanying combined balance sheets and the related
combined statements of operations, of changes in shareholders' equity and of
cash flows present fairly, in all material respects, the combined financial
position of Buffington Homes, Inc. (the "Company") at December 31, 1995 and
1994, and the combined results of their operations and cash flows for each of
the three years in the period ended December 31, 1995, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
As discussed in Note 10 to the financial statements, the Company changed
from a C Corporation to an S Corporation for tax purposes in 1994.
Price Waterhouse LLP
Austin, Texas
February 16, 1996
F-25
<PAGE>
BUFFINGTON HOMES, INC.
COMBINED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------- MARCH 31,
1994 1995 1996
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents......................... $ 1,741 $ 335 $ 74
Receivables....................................... 352 382 696
Real estate inventories........................... 12,083 16,587 19,336
Property and equipment, net....................... 233 425 946
Prepaid and other assets.......................... 1,355 1,547 1,269
------- ------- -------
Total assets.................................. $15,764 $19,276 $22,321
======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued construction liabili-
ties............................................. $ 1,643 $ 1,677 $ 2,204
Notes payable..................................... 9,748 14,537 16,005
Other accrued expenses............................ 809 674 606
Customer deposits................................. 69 130 351
------- ------- -------
Total liabilities............................. 12,269 17,018 19,166
======= ======= =======
Commitments and contingencies--Note 9
Shareholders' equity:
Common stock.................................... 22 24 24
Additional paid-in capital...................... 206 855 855
Retained earnings............................... 3,267 1,379 2,276
------- ------- -------
Total shareholders' equity.................... 3,495 2,258 3,155
------- ------- -------
Total liabilities and shareholders' equity.... $15,764 $19,276 $22,321
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-26
<PAGE>
BUFFINGTON HOMES, INC.
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, PERIOD ENDED MARCH 31,
------------------------- -----------------------
1993 1994 1995 1995 1996
------- ------- ------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Sales..................... $52,021 $63,776 $52,488 $10,804 $14,623
Other revenue............. 119 345 286 -- --
------- ------- ------- ------- -------
Total revenue........... 52,140 64,121 52,774 10,804 14,623
Cost of sales............. 43,801 53,523 44,186 9,193 11,960
------- ------- ------- ------- -------
Gross profit............ 8,339 10,598 8,588 1,611 2,663
Operating expenses:
Selling expenses.......... 3,189 3,399 3,340 752 918
General and administrative
expenses................. 2,742 5,246 5,401 1,015 938
------- ------- ------- ------- -------
Operating income........ 2,408 1,953 (153) (156) 807
Other non-operating (income)
expense:
Interest expense.......... 24 94 80 18 41
Interest and other in-
come..................... (119) (101) (71) (110) (131)
------- ------- ------- ------- -------
Income (loss) before
taxes.................. 2,503 1,960 (162) (64) 897
------- ------- ------- ------- -------
Provision for taxes......... 974 83 21 -- --
------- ------- ------- ------- -------
Net income (loss)........... $ 1,529 $ 1,877 $ (183) $ (64) $ 897
======= ======= ------- ======= =======
Pro forma net income (See
Note 11)................... $ (183) $ 547
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-27
<PAGE>
BUFFINGTON HOMES, INC.
COMBINED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON ADDITIONAL RETAINED
STOCK PAID-IN EARNINGS
AMOUNT CAPITAL (DEFICIT) TOTAL
------ ---------- --------- -------
<S> <C> <C> <C> <C>
Balance at December 31, 1992.............. $ 2 $ 46 $ 665 $ 713
Capital contributions..................... 20 60 -- 80
Capital distributions..................... -- -- (410) (410)
Net income................................ -- -- 1,529 1,529
---- ---- ------- -------
Balance at December 31, 1993.............. 22 106 1,784 1,912
Capital contributions..................... -- 100 -- 100
Capital distributions..................... -- -- (394) (394)
Net income................................ -- -- 1,877 1,877
---- ---- ------- -------
Balance at December 31, 1994.............. 22 206 3,267 3,495
Capital contributions..................... 2 649 -- 651
Capital distributions..................... -- -- (1,705) (1,705)
Net income (loss)......................... -- -- (183) (183)
---- ---- ------- -------
Balance at December 31, 1995.............. 24 855 1,379 2,258
Net income................................ -- -- 897 897
---- ---- ------- -------
Balance at March 31, 1996 (Unaudited)..... $ 24 $855 $ 2,276 $ 3,155
==== ==== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-28
<PAGE>
BUFFINGTON HOMES, INC.
COMBINED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, PERIOD ENDED MARCH 31,
------------------------- ---------------------------
1993 1994 1995 1995 1996
------- ------- ------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Cash Flows From Operat-
ing Activities
Net income (loss)..... $ 1,529 $ 1,877 $ (183) $ (64) $ 897
Depreciation and amor-
tization............. 74 129 207 38 61
Decrease (increase) in
receivables.......... 70 (176) (9) (181) (314)
Increase in real es-
tate inventories..... (4,874) (1,105) (4,482) (1,294) (2,749)
(Increase) in other
assets............... (454) (861) (293) (237) (285)
Increase (decrease) in
accounts payable and
accrued expenses..... 1,688 (639) (101) (253) 459
Other................. 159 (105) 61 80 221
------- ------- ------- ------- -------
Net cash used by op-
erating
activities......... (1,808) (880) (4,800) (1,911) (1,710)
Cash Flows From
Investing Activities
Purchase of equip-
ment................. (164) (210) (399) (47) (19)
------- ------- ------- ------- -------
Cash Flows From
Financing Activities
Stock contribution.... 80 100 651 -- --
Net increase in notes
payable.............. 3,490 1,155 4,789 1,482 1,468
Capital distribution.. (273) (41) (1,647) -- --
------- ------- ------- ------- -------
Net cash provided by
financing
activities......... 3,297 1,214 3,793 1,482 1,468
------- ------- ------- ------- -------
Net increase (de-
crease) in cash.... 1,325 124 (1,406) (476) (261)
Cash and cash equiva-
lents at beginning of
year................... 292 1,617 1,741 1,741 335
------- ------- ------- ------- -------
Cash and cash equiva-
lents at end of year... $ 1,617 $ 1,741 $ 335 $ 1,265 $ 74
======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-29
<PAGE>
BUFFINGTON HOMES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 1--BUSINESS AND ORGANIZATION
Buffington Homes, Inc. is primarily engaged in the construction of detached
single-family homes in the central Texas area.
The combined financial statements include the accounts of Buffington Homes,
Inc., Buffington San Antonio, Buffington Development, Buffington Central Texas
and Elements! which are wholly owned by the stockholders of Buffington Homes,
Inc. The combined entities are hereafter referred to as the "Company". All
significant intercompany accounts and transactions have been eliminated in
combination.
Buffington Homes, Inc. is engaged in the construction of detached single
family homes in the Austin, Texas area. It had 1,000,000 shares of $1.00 par
value Common Stock authorized with 2,000 shares issued and outstanding for the
years ended December 31, 1993, 1994 and 1995. Buffington San Antonio was
formed in 1993 and is engaged in the construction of homes in the San Antonio,
Texas area. It had 1,000,000 shares of $.01 par value Common Stock authorized
with 1,000,000 shares issued and outstanding for the years ended December 31,
1993, 1994 and 1995. Elements! was formed in 1993 to provide interior design
services to Buffington Homes, Inc. and unrelated buyers. Elements! had
1,000,000 shares of $.01 par value Common Stock authorized and issued and
outstanding for the years ended December 31, 1993, 1994 and 1995. Buffington
Development was incorporated in 1994 for the purpose of holding lot inventory
in Austin, Texas. Buffington Development had 1,000,000 shares of $.01 par
value Common Stock authorized and 10,000 shares issued and outstanding at
December 31, 1994 and 1995. In 1995, Buffington Central Texas was formed to
build custom homes. Buffington Central Texas is structured as a limited
partnership and was initially capitalized with a $2,000 contribution from the
owners of Buffington Homes, Inc.
The Company and its shareholders have entered into a definitive agreement
with the Fortress Group pursuant to which the Company will merge with The
Fortress Group (the "Merger"). All outstanding shares of the Company will be
exchanged for cash and shares of the Fortress Group's Common Stock concurrent
with the consummation of the initial public offering.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition
Residential sales are recognized when all conditions precedent to closing
have been fulfilled and title has passed to the buyer. The Company's homes are
generally sold in advance of their construction. The Company's standard sales
contract generally requires the customer to make an earnest money deposit
which is recognized as a liability until the unit closes.
Real Estate Inventories and Cost of Sales
All real estate inventories, which are held for sale, are carried at cost
which is less than fair value as measured in accordance with Statement of
Financial Accounting Standards (SFAS) No. 121 "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of". Fair value
is measured based on the application of discounting expected future cash flows
of the Company's real estate developments. Costs incurred which are included
in inventory consist of land, direct and certain indirect construction costs,
interest and real estate taxes, certain selling incentives and direct model
construction costs and related improvements.
F-30
<PAGE>
BUFFINGTON HOMES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
At the time of revenue recognition, cost of sales is charged with the actual
construction costs incurred and any estimate to complete (specific
identification).
Interest Capitalization
Interest and related debt issuance costs are capitalized to qualifying real
estate inventories as incurred, in accordance with Statement of Financial
Accounting Standards (SFAS) No. 34, "Capitalization of Interest Cost", and
charged to cost of sales when revenue from residential sales is recognized.
The interest and related debt issuance costs capitalized are determined by
applying a weighted average capitalization rate to the accumulated qualified
real estate expenditures. The capitalization rate is based on the Company's
outstanding borrowings associated with the acquisition, development and
construction of the qualified real estate inventory. The amount of financing
costs capitalized does not exceed those costs incurred for any year presented
in the accompanying combined financial statements.
Property and Equipment
Property and equipment are carried at cost less accumulated depreciation and
are depreciated using the straight line method over the estimated useful lives
of the assets which is generally five years. Significant additions and
improvements are capitalized, while expenditures for repairs and maintenance
are charged to operations, as incurred.
Selling Expenses
Selling expenses includes all sales commissions paid, salaries paid to
marketing personnel, the direct and indirect costs of sales offices and
advertising expenses.
Income Taxes
Since January 1994, the Company has been a subchapter S corporation for
income tax purposes and, accordingly, any income tax liabilities are the
responsibility of the Company's shareholders. The Company's subchapter S
corporation status will terminate on consummation of the Merger as disclosed
in Note 1. The Company was a C corporation for the year ended December 31,
1993 and taxes for that year were provided in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes".
See Note 11 for information regarding the pro forma income tax disclosures.
Cash and Equivalents
For purposes of reporting cash flows, the Company considers all highly-
liquid investments with an original maturity of three months or less to be
cash equivalents. Supplemental disclosures of cash flow information are as
follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------
1993 1994 1995
---- ---- ------
<S> <C> <C> <C>
Cash paid for interest..................................... $405 $937 $1,049
---- ---- ------
Cash paid for taxes........................................ $723 $231 $ 83
---- ---- ------
Distributions of property to owners........................ $137 $353 $ 58
---- ---- ------
</TABLE>
Unaudited Interim Financial Statements
In the opinion of management, the Company has made all adjustments,
consisting primarily of normal recurring accruals, necessary for a fair
presentation of the financial condition of the Company as of March 31, 1996
and the results of operations and cash flows for the three month period ended
March 31, 1996 and 1995, as presented in the accompanying unaudited interim
financial statements.
F-31
<PAGE>
BUFFINGTON HOMES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3--REAL ESTATE INVENTORIES
Real estate inventories are summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------- MARCH 31,
1994 1995 1996
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Work in Progress:
Sold homes (under construction)................ $ 6,110 $ 8,569 $10,451
Speculative homes.............................. 2,465 3,336 3,757
------- ------- -------
8,575 11,905 14,208
------- ------- -------
Land:
Finished lots.................................. 2,231 3,041 2,964
------- ------- -------
Models........................................... 1,277 1,641 2,164
------- ------- -------
Total............................................ $12,083 $16,587 $19,336
======= ======= =======
</TABLE>
Models and speculative construction include both completed homes and homes
in progress. Speculative construction represents unsold homes which were built
to accelerate closing.
NOTE 4--PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER
31,
---------
1994 1995
---- ----
<S> <C> <C>
Equipment and furniture ........................................... $175 $425
Vehicles........................................................... 112 112
Leasehold improvements............................................. 44 44
Other.............................................................. -- --
---- ----
331 581
Less: Accumulated depreciation and amortization.................... 98 156
---- ----
$233 $425
==== ====
</TABLE>
Depreciation expense recognized approximated $29,000, $40,000 and $58,000
for the years ended December 31, 1993, 1994, and 1995.
NOTE 5--OTHER ASSETS
Other assets are summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1994 1995
------ ------
<S> <C> <C>
Model home furniture (net)....................................... $ 452 $ 431
Lot option deposits.............................................. 729 892
Architectural plans.............................................. 138 91
Other............................................................ 36 133
------ ------
$1,355 $1,547
====== ======
</TABLE>
F-32
<PAGE>
BUFFINGTON HOMES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Deposits represent amounts paid to developers under lot option contracts.
Option contracts generally require the payment of a cash deposit for the right
to acquire lots during a specified period of time at a certain price. Under
option contracts without specific performance obligations, the Company's
liability is limited to forfeiture of the non-refundable deposits.
Furniture for model homes is carried at cost less accumulated depreciation
and is depreciated using the straight line method over the estimated useful
life of the assets which is generally 5 years. Model home furniture totaled
$626,000 and $754,000 for the years ended December 31, 1994 and 1995.
Accumulated depreciation totaled $174,000 at December 31, 1994 and $323,000 at
December 31, 1995 and depreciation expense totaled $45,000, $89,000 and
$149,000 for the years ended December 31, 1993, 1994 and 1995.
Architectural plans are recorded at cost and amortized evenly over twelve
months. Other assets also includes miscellaneous and prepaid expenses.
NOTE 6--NOTES PAYABLE
Notes payable are summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------- MARCH 31,
1994 1995 1996
------ ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Conventional lot acquisition loans............... $1,947 $ 2,950 $ --
Revolving project specific construction loans.... 7,801 11,587 16,005
------ ------- -------
$9,748 $14,537 $16,005
====== ======= =======
</TABLE>
Conventional lot acquisition loans are secured by land and include
conventional loans totaling $1,223,000 and a non-recourse lot loan of
$1,727,000. The conventional loans bear interest at both fixed and variable
rates with the fixed rate being 10% per annum and variable rates ranging from
1% to 1.5% over the prime lending rate (8.5% at December 31, 1995). Fixed rate
debt included in conventional loans outstanding at December 31, 1995 totaled
$330,000. Conventional loans mature in 1996. The non-recourse lot acquisition
loan bears interest at a fixed rate of 9% and matures in 1997.
Revolving project specific construction loans are secured by the related
homes and bear interest at variable rates at 1% over the prime lending rate
(8.5% at December 31, 1995) as specified by the respective lender. Loans
generally mature as the underlying collateral project is completed. Interest
incurred for the years ended December 31, 1993, 1994 and 1995 totaled
$595,000, $896,000 and $1,002,000, respectively. Interest capitalized to the
cost of homes for the years ended December 31, 1993, 1994 and 1995 totalled
$571,000, $802,000 and $922,000, respectively.
NOTE 7--RELATED PARTY TRANSACTIONS
Immediate family members of certain shareholders of the Company have an
interest in a title insurance company which is not combined into Buffington
Homes, Inc. which processes loan closings and issues title insurance as an
intermediary to customers of Buffington Homes, Inc. Buffington Homes, Inc.
normally pays closing costs and title insurance premiums to the title company
on behalf of Buffington's customers. Title insurance premiums are regulated by
the State of Texas. All fees charged to Buffington by the title company are
the same as fees charged to unrelated customers. Fees in the approximate
amount of $568,000 and $674,000 were paid by Buffington to the title company
in 1994 and 1995, respectively.
The owners of Buffington Homes, Inc. have an interest in Mortgage Acceptance
Corporation (MAC), which provides mortgage loan origination services to
customers of the Company. The Company pays origination fees to MAC on behalf
of customers of Buffington Homes. Fees in the amount of $288,000, $447,000,
and $584,000 were paid to MAC on behalf of customers of Buffington Homes in
1993, 1994 and 1995.
F-33
<PAGE>
BUFFINGTON HOMES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The Company had notes payable outstanding to certain owners and their
immediate family members in the amount of $166,000 and $330,000 at December
31, 1994 and 1995. These notes bear interest at 10% and mature in 1996.
NOTE 8--EMPLOYEE BENEFIT PLANS
The Company has a trusted profit sharing plan covering substantially all
employees. The Company may contribute amounts as determined by the Board of
Directors, not in excess of the lesser of the maximum deduction allowable for
income tax purposes or a specified percentage of the operating profits of the
Company, as defined in the plan. The Company accrued contributions totaling
$126,000 for the years ended December 31, 1993 and 1994 and no contributions
for the year ended December 31, 1995.
NOTE 9--COMMITMENTS AND CONTINGENCIES
The Company currently leases its office space under a 5-year renewable
lease. Certain equipment is also leased under non-cancelable operating leases.
Rent expense under such leases aggregated $294,000, $370,000 and $378,000
during the years ended December 31, 1993, 1994 and 1995. Future minimum lease
payments as of December 31, 1995 were $139,000 and $35,000 for the years ended
1996 and 1997.
The Company has been assessed taxes in the amount of $177,000 by the
Internal Revenue Service for transactions related to operations in 1991, 1992
and 1993. The Company is making a vigorous defense of the assessment and
expects to be heard by an appeals officer of the IRS in the first quarter of
1996. The $177,000 in aggregate was recognized as an expense of the Company
for the years ended December 31, 1991, 1992 and 1993.
The Company is involved in various routine legal proceedings incidental to
the conduct of its normal business operations. The Company's management
believes that none of these legal proceedings will have a material adverse
impact on the financial condition or results of operations of the Company.
NOTE 10--TAXES
The Company provided taxes for the year ended December 31, 1993 in
accordance with SFAS No. 109. The Company's effective tax rate for 1993 was
approximately 39% of which approximately 4% represented Texas state franchise
taxes. Deferred taxes were not realizable in periods subsequent to 1993
because the Company changed from a C Corporation to an S Corporation in 1994.
The tax provision represents current taxes, deferred taxes were not recorded
by the Company. Taxes shown for the years ended December 31, 1994 and 1995
represent the greater of income or equity component of Texas state franchise
taxes.
NOTE 11--UNAUDITED PRO FORMA INCOME TAX INFORMATION
The following unaudited pro forma income tax information is presented in
accordance with Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes, as if the Company had been a subchapter C
corporation subject to federal income taxes for the year ended December 31,
1995 and the three month period ended March 31, 1996.
<TABLE>
<CAPTION>
PERIOD
ENDED
YEAR ENDED MARCH
DECEMBER 31, 31,
1995 1996
------------ ------
<S> <C> <C>
Earnings (loss) before pro forma adjustment, per statement
of operations............................................ $3,386 $897
Provision for income taxes................................ 1,186 350
------ ----
Pro forma net income (loss)............................... $2,200 $547
====== ====
</TABLE>
The Company made distributions to the shareholders in the form of bonuses in
the amount of $2,626,000 and $1,857,000 for the periods ended December 31,
1994 and 1995, respectively. Other amounts were also paid in the form of
salaries for those periods. No adjustment to pro forma pretax earnings has
been made for these bonuses. Pro forma taxes are computed at the Company's
historical effective tax rate of 39% of the pre-tax net income.
F-34
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholder of Christopher Homes, Inc.
In our opinion, the accompanying combined balance sheets and the related
combined statements of operations, of changes in shareholder's (deficit)
equity and of cash flows present fairly, in all material respects, the
financial position of Christopher Homes, Inc. and Affiliates (the "Company")
at December 31, 1994 and 1995, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1995,
in conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
Price Waterhouse LLP
Dallas, Texas
March 8, 1996
F-35
<PAGE>
CHRISTOPHER HOMES, INC. AND AFFILIATES
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ MARCH 31,
1994 1995 1996
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash...................................... $ 379,632 $ 495,371 $ 272,125
Receivables............................... 337,858 710,862 801,593
Real estate inventories................... 26,670,785 28,456,763 29,866,643
Property and equipment, net............... 495,159 516,771 486,138
Prepaid and other assets.................. 366,728 706,064 630,235
----------- ----------- -----------
Total assets............................ $28,250,162 $30,885,831 $32,056,734
=========== =========== ===========
LIABILITIES AND SHAREHOLDER'S (DEFICIT)
EQUITY
Accounts payable and accrued construction
liabilities.............................. $ 2,885,283 $ 3,040,649 $ 3,027,085
Notes and mortgages payable............... 21,369,258 20,665,081 22,055,141
Special improvement district bonds........ 2,313,032 1,531,267 1,266,466
Related party payable..................... 898,412 353,147 --
Other accrued expenses.................... 341,059 921,358 244,802
Customer deposits......................... 3,005,624 3,659,694 4,428,605
----------- ----------- -----------
Total liabilities....................... 30,812,668 30,171,196 31,022,099
=========== =========== ===========
Commitments and contingencies--Note 9
Shareholder's (Deficit) Equity
Common stock.......................... 549,097 549,097 549,597
Retained (deficit) earnings........... (3,111,603) 165,538 485,038
----------- ----------- -----------
Total shareholder's (deficit) equity.... (2,562,506) 714,635 1,034,635
----------- ----------- -----------
Total liabilities and shareholder's
(deficit) equity....................... $28,250,162 $30,885,831 $32,056,734
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-36
<PAGE>
CHRISTOPHER HOMES, INC. AND AFFILIATES
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, PERIOD ENDED MARCH 31,
------------------------------------- -----------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues
Residential sales..... $17,323,382 $13,863,560 $34,725,641 $3,859,399 $10,343,798
Lot sales............. 849,085 3,824,480 419,000 137,000
Other revenue......... 222,768 108,079 62,000 -- --
----------- ----------- ----------- ---------- -----------
Total revenue....... 17,546,150 14,820,724 38,612,121 4,278,399 10,480,798
Cost of sales........... 16,676,219 12,615,579 31,833,928 3,419,449 8,757,794
----------- ----------- ----------- ---------- -----------
Gross profit............ 869,931 2,205,145 6,778,193 858,950 1,723,004
Operating Expenses
Selling expenses...... 1,134,616 1,512,062 2,008,286 401,995 499,071
General and
administrative
expenses............. 1,606,603 1,550,010 1,503,707 390,123 551,872
----------- ----------- ----------- ---------- -----------
Operating (loss)
income................. (1,871,288) (856,927) 3,266,200 66,832 672,061
Non-operating income,
net.................... 614,705 359,423 119,866 36,864 7,669
----------- ----------- ----------- ---------- -----------
Income (loss) before
income taxes........... (1,256,583) (497,504) 3,386,066 103,696 679,730
Benefit for income
taxes.................. 48,858 -- --
----------- ----------- ----------- ---------- -----------
Net income (loss)....... $(1,207,725) $ (497,504) $ 3,386,066 $ 103,696 $ 679,730
=========== =========== =========== ========== ===========
Unaudited pro forma net
income (Note 10)....... $ 2,200,000 $ 448,730
=========== ===========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-37
<PAGE>
CHRISTOPHER HOMES, INC. AND AFFILIATES
COMBINED STATEMENTS OF CHANGES IN SHAREHOLDER'S (DEFICIT) EQUITY
<TABLE>
<CAPTION>
COMMON EQUITY
STOCK (DEFICIT) TOTAL
-------- ----------- -----------
<S> <C> <C> <C>
Balance at December 31, 1992................ $549,097 $(1,066,790) $ (517,693)
Contributions by shareholder................ 549,300 549,300
Distributions to shareholder................ (409,025) (409,025)
Net loss.................................... (1,207,725) (1,207,725)
-------- ----------- -----------
Balance at December 31, 1993................ 549,097 (2,134,240) (1,585,143)
Distributions to shareholder................ (479,859) (479,859)
Net loss.................................... (497,504) (497,504)
-------- ----------- -----------
Balance at December 31, 1994................ 549,097 (3,111,603) (2,562,506)
Contributions by shareholder................ 356,549 356,549
Distributions to shareholder................ (465,474) (465,474)
Net income.................................. 3,386,066 3,386,066
-------- ----------- -----------
Balance at December 31, 1995................ 549,097 165,538 714,635
Contributions by shareholder................ 500 82,107 82,607
Distributions by shareholder................ (442,338) (442,338)
Net income.................................. 679,731 679,731
-------- ----------- -----------
Balance at March 31, 1996 (Unaudited)....... $549,597 $ 485,038 $ 1,034,635
======== =========== ===========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-38
<PAGE>
CHRISTOPHER HOMES, INC. AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, PERIOD ENDED MARCH 31,
---------------------------------------- ------------------------
1993 1994 1995 1995 1996
------------ ------------ ------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash Flows From Operating
Activities
Net (loss) income............. $ (1,207,725) $ (497,504) $ 3,386,066 $ 103,696 $ 679,730
Adjustments to reconcile net
income to net cash (used in)
provided by operating
activities:
Equity in income from
investment partnerships (143,879) (3,537)
Depreciation and
amortization............... 193,252 160,636 180,953 10,000 32,722
Writedown of land held for
investment................. 45,997
(Gain) loss on disposition
of property and equipment.. (26,501) 6,030
Basis of property and
equipment included in cost
of sales................... 168,960
Changes in operating assets
and liabilities:
Real estate inventories... (2,454,953) (10,805,194) (2,408,695) (4,852,484) (1,409,880)
Receivables............... 52,351 120,334 (373,004) 202,572 170,972
Prepaid and other assets.. (71,792) (30,578) (339,336) 27,145 75,829
Accounts payable and
accrued
construction liabilities.. (140,327) 1,563,299 155,366 2,653,459 (13,564)
Other accrued expenses.... 192,796 61,222 580,299 58,118 (676,556)
Customer deposits......... (501,978) 705,387 654,070 277,559 768,911
------------ ------------ ------------ ----------- -----------
Net cash (used in)
provided by
operating activities... (4,062,759) (8,550,945) 1,835,719 (1,519,935) (371,836)
============ ============ ============ =========== ===========
Cash Flows From Investing
Activities.....................
Distributions/repayments from
investment partnerships...... 286,090
Increase in land held for
investment................... (15,763)
Proceeds from sale of land
held for investment.......... 76,000
Purchase of limited partners'
interest..................... (50,700)
Purchase of property and
equipment.................... (137,360) (384,188) (202,565) (19,788) (2,089)
Proceeds from sale of property
and equipment................ 49,821 10,000
------------ ------------ ------------ ----------- -----------
Net cash provided by
(used in)
investing activities... 132,088 (298,188) (202,565) (19,788) (2,089)
============ ============ ============ =========== ===========
Cash Flows From Financing
Activities
Borrowings under notes and
mortgages payable............ 20,689,437 20,299,821 37,263,997 5,070,762 7,608,948
Repayments of notes and
mortgage payable............. (16,585,335) (11,206,396) (37,968,174) (3,027,133) (6,261,315)
Repayments of special
improvement district bonds... (104,995) (82,763) (159,048) (135,000) (222,374)
Net advances from (repayments
to) related parties.......... 243,362 556,950 (545,265) (603,763) (614,850)
Distributions to shareholder.. (409,025) (479,859) (465,474) (442,337)
Contributions by shareholder.. 356,549 82,607
------------ ------------ ------------ ----------- -----------
Net cash provided by
(used in)
financing activities... 3,833,444 9,087,753 (1,517,415) 1,304,866 150,679
============ ============ ============ =========== ===========
Net (decrease) increase in cash
and cash equivalents........... (97,227) 238,620 115,739 (234,857) (223,246)
Cash at beginning of year....... 238,239 141,012 379,632 379,632 495,371
------------ ------------ ------------ ----------- -----------
Cash at end of year............. $ 141,012 $ 379,632 $ 495,371 $ 144,775 $ 272,125
============ ============ ============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-39
<PAGE>
CHRISTOPHER HOMES, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
Christopher Homes, Inc. and Affiliates (the "Company") is a group of
entities owned or controlled by J. Christopher Stuhmer primarily engaged in
the construction of attached and detached single-family homes in the Las Vegas
metropolitan area.
The Company and its shareholder have entered into a definitive agreement
with The Fortress Group, Inc. pursuant to which the Company will merge with
The Fortress Group (the "Merger"). All outstanding shares of the Company will
be exchanged for cash and shares of The Fortress Group's common stock
concurrent with the consummation of the initial public offering.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Combination
The combined financial statements include the accounts of Christopher Homes,
Inc. ("CH"), J. Christopher Stuhmer, Inc. ("JCS"), Christopher Homes--Custom
Home Division, Inc. ("CHD"), all of which are Nevada corporations, and Country
Club Hills Limited Partnership ("CCH"), a Nevada Limited Partnership. CH, JCS
and CHD are wholly owned by J. Christopher Stuhmer. CHD is the general partner
of CCH. All significant intercompany accounts and transactions have been
eliminated in combination.
As of December 31, 1994 and 1995, the following common stock was authorized,
issued and outstanding:
CH--No par or stated value, 2,500 shares authorized, 1,000 shares issued
and outstanding
JCS--No par or stated value, 2,500 shares authorized, 100 shares issued
and outstanding
CHD--No par or stated value, 2,500 shares authorized, 1,000 shares issued
and outstanding
Estimates by Management
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition
Residential sales are recognized when all conditions precedent to closing
have been fulfilled and title has passed to the buyer. The Company's homes are
generally sold in advance of their construction. The Company's standard sales
contract generally requires the customer to make an earnest money deposit
which is recognized as a liability until the unit closes.
Real Estate Inventories and Cost of Sales
Real estate inventories are carried at cost which is less than fair value as
measured in accordance with Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of." Fair Value is measured based on the application of
discounting expected future cash flows of each of the Company's real estate
developments. Costs incurred which are included in inventory consist of land,
land development, direct and certain indirect construction costs, interest and
real estate taxes, and direct model construction costs and related
improvements. Costs incurred for common area model improvements and certain
furnishings are amortized on a per unit basis as home sales in the related
development are closed.
F-40
<PAGE>
CHRISTOPHER HOMES, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
At the time of revenue recognition, cost of sales is charged with the actual
construction costs incurred and any estimate to complete, plus an allocation
of the development's total estimated cost of land and land development,
interest, real estate taxes and any other capitalizable common costs based on
the relative sales value method of accounting.
The Company generally provides a one or two year limited warranty of
workmanship and materials with each of its homes. Accordingly, a warranty
reserve based on the Company's historical experience is provided.
Interest Capitalization
Interest and related debt issuance costs are capitalized to qualifying real
estate inventories as incurred, in accordance with SFAS No. 34,
"Capitalization of Interest Cost", and charged to cost of sales as revenue
from residential sales is recognized. The interest and related debt issuance
costs capitalized are determined by applying a weighted average capitalization
rate to the accumulated qualified real estate expenditures. The capitalization
rate is based on the Company's outstanding borrowings associated with the
acquisition, development and construction of the qualified real estate
inventory. The amount of financing costs capitalized does not exceed those
costs incurred for any year presented in the accompanying combined financial
statements.
Property and Equipment
Property and equipment is carried at cost less accumulated depreciation and
is depreciated using the declining balance method over the estimated useful
lives of the assets which range from five to seven years. Significant
additions and improvements are capitalized, while expenditures for repairs and
maintenance are charged to operations as incurred.
Income Taxes
CHD is a subchapter S corporation and CCH is a limited partnership for
income tax purposes and, accordingly, any income tax liabilities are the
responsibility of the respective company's shareholder or partners. CHD's
subchapter S corporation status and CCH's limited partnership status will
terminate on consummation of the Merger as disclosed in Note 1.
Both CH and JCS are subchapter C corporations for income tax purposes. These
entities had losses for tax purposes in 1993 which were carried back to obtain
a refund of taxes paid in prior years.
In 1994, no income tax benefit was recognized for the combined loss reported
by the Company for financial reporting purposes because there was no remaining
available taxable income in the three-year carry back period.
In 1995, no income tax provision was recognized for the combined income
reported by the Company because the taxable income was incurred primarily by
CHD, which is a subchapter S corporation, and because of the availability of
net operating loss carry forwards for CH and JCS.
At December 31, 1994 and 1995, no deferred taxes have been provided for net
operating losses and other temporary differences between the financial
reporting basis and the income tax basis of assets and liabilities because
realization of the net deferred tax asset is not assured. Net operating loss
carry forwards available at June 30, 1995 for JCS were approximately $25,000.
At April 30, 1995, net operating loss carry forwards available for CH were
approximately $300,000. The fiscal year of JCS and CH for tax purposes are
April 30 and June 30, respectively.
See Note 10 for information regarding unaudited pro forma income tax
information.
F-41
<PAGE>
CHRISTOPHER HOMES, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Statement of Cash Flows
Supplemental disclosures of cash flow information are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Cash paid for interest......................... $1,203,312 $1,916,115 $2,759,418
Non-cash transactions:
Net assumption and assignment of Special
Improvement District bonds.................. $ 730,415 $ 589,752 $ 622,717
Assumption of debt/equity contribution by
limited partners............................ $ 549,300
</TABLE>
Unaudited Interim Financial Statements
In the opinion of management, the Company has made all adjustments,
consisting primarily of normal recurring accruals, necessary for a fair
presentation of the financial condition of the Company as of March 31, 1996
and the results of operations and cash flows for the three month period ended
March 31, 1996 and 1995, as presented in the accompanying unaudited interim
financial statements.
3. REAL ESTATE INVENTORIES
Real estate inventories are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- MARCH 31,
1994 1995 1996
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Work-in-progress:
Sold homes under construction...... $ 9,783,426 $14,026,592 $17,371,092
Speculative homes.................. 2,504,198 4,068,105 5,999,265
----------- ----------- -----------
12,287,624 18,094,697 23,370,357
----------- ----------- -----------
Land:
Finished lots...................... 6,819,300 7,742,249 5,035,731
Land under development............. 5,975,395 916,406 928,551
----------- ----------- -----------
12,794,695 8,658,655 5,964,282
----------- ----------- -----------
Models............................... 1,588,466 1,703,411 488,954
----------- ----------- -----------
Total................................ $26,670,785 $28,456,763 $29,823,593
=========== =========== ===========
</TABLE>
4. INVESTMENT IN PARTNERSHIPS
The Company was a managing partner with a 35% ownership in two partnerships
which are accounted for under the equity method. The investment balance is
included in other assets on the combined balance sheet.
The investment in partnerships was not material to the December 31, 1994 and
1995 combined balance sheets or to the combined statements of operations for
the years ended December 31, 1994 and 1995.
F-42
<PAGE>
CHRISTOPHER HOMES, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The condensed combined statement of operations for the partnerships for the
year ended December 31, 1993 follows:
<TABLE>
<S> <C>
Revenue...................................................... $11,147,061
Cost of sales................................................ (9,971,311)
-----------
Gross profit................................................. 1,175,750
Operating expenses........................................... (797,724)
-----------
Net income................................................... $378,026
===========
</TABLE>
The Company's equity in the 1993 income of the partnerships was
approximately $140,000.
5. PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
--------- ---------
<S> <C> <C>
Equipment and furniture............................ $ 222,633 $ 226,456
Vehicles........................................... 116,832 97,626
Model home and sales office furnishings............ 450,311 550,556
Other.............................................. 67,311 107,424
--------- ---------
Subtotal......................................... 857,087 982,062
Less: Accumulated depreciation and amortization.... (361,928) (465,291)
--------- ---------
$ 495,159 $ 516,771
========= =========
</TABLE>
6. NOTES AND MORTGAGES PAYABLE
Notes and mortgages payable are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- MARCH 31,
1994 1995 1996
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Conventional land acquisition and
development loans................. $12,280,245 $11,081,356 $12,734,539
Subordinated investor notes........ 6,091,197 9,180,435 8,828,174
Demands for deed on sales-
leaseback......................... 2,370,000 230,000 --
General revolving lines of credit.. 590,000 120,000 450,000
Other.............................. 37,816 53,290 42,427
----------- ----------- -----------
$21,369,258 $20,665,081 $22,055,140
=========== =========== ===========
</TABLE>
Conventional land acquisition and development loans are collateralized by
property under construction, are payable in monthly interest only installments
and are due on the earlier of the close of escrow on the related collateral or
the due date. These loans bear interest at the prime rate plus 1.5% to 2%,
which ranged from 10.25% to 10.75% at December 31, 1995.
Subordinated investor notes are generally collateralized by deeds of trust
subordinate to the conventional land acquisition and development loans. The
notes are payable in monthly distributions equal to a 15% annualized return
and a 10% fee due at the closing of the loan.
F-43
<PAGE>
CHRISTOPHER HOMES, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Demands for deed on sales-leaseback represent financing arrangements on
certain finished model homes which are leased by the Company for up to two
years for marketing purposes. The demands for deed yield approximately 12%
annually, with a 3% commission paid upon resale of the model home.
General revolving lines of credit bear interest at the prime rate plus 2%
and are due on demand.
The Company's management believes that cost approximates fair value for
notes and mortgages payable at December 31, 1994 and 1995.
Substantially all of the conventional land acquisition and development loans
and subordinated investor notes are personally guaranteed by the sole
shareholder of the Company and his spouse.
Interest incurred and capitalized totaled approximately $1,388,000,
$1,976,000 and $4,421,000 for the years ended December 31, 1993, 1994 and
1995, respectively.
At December 31, 1995, the Company has approximately $10,600,000 in unused
lines of credit available for construction loans, which is subject to
collateral requirements.
Maturities of notes and mortgages payable in future years are as follows:
<TABLE>
<S> <C>
Year ending December 31,
1996........................................................ $20,465,564
1997........................................................ 199,517
-----------
$20,665,081
===========
</TABLE>
7. SPECIAL IMPROVEMENT DISTRICT BONDS
Special Improvement District ("SID") bonds payable were $2,313,032, and
$1,531,267 at December 31, 1994 and 1995, respectively.
SID bonds consist of special assessments issued by the City of Las Vegas to
fund the acquisition and construction of certain public improvements
specifically benefiting property located in the City's Special Improvement
District No. 404, the Summerlin area. The City-issued bonds are secured by the
unpaid assessments on property within the district and are payable by the
property owners. Interest rate assessments are due on April 1 and October 1 of
each year until October 1, 2009. The bonds are due October 1, 2009, unless
assumed by buyers of homes from the Company. Management believes that
maturities of these obligations, prior to buyer assumptions thereof, are not
material to the Company's combined financial statements.
8. RELATED PARTY TRANSACTIONS
Related party receivables as of December 31, 1994 and 1995 were $105,920 and
$54,269, respectively, and are included in receivables on the combined balance
sheet.
JCS provided certain accounting services for related parties and in return
received a management fee, which was $490,103, $342,534, and $39,000 for the
years ended December 31, 1993, 1994 and 1995, respectively.
Sales commissions paid by related parties to CHD amounted to $222,768,
$108,079, and $62,000 for the years ended December 31, 1993, 1994 and 1995,
respectively.
Home sales to related parties were $596,080 for the year ended December 31,
1995.
F-44
<PAGE>
CHRISTOPHER HOMES, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The Company paid rent during the years ended December 31, 1993, 1994 and
1995 of $35,905, $33,858 and $34,431 respectively, for office and warehouse
space under a month-to-month lease to a related party.
9. COMMITMENTS AND CONTINGENCIES
The Company is involved in various routine legal proceedings incidental to
the conduct of its normal business operations. The Company's management
believes that none of those legal proceedings will have a material adverse
impact on the financial condition or results of operations of the Company.
The Company rents model homes under cancelable and non-cancelable operating
leases. All non-cancelable leases expire during 1996. Minimum lease payments
on non-cancelable leases for the year ending December 31, 1996 are
approximately $65,000.
Model home lease expense for the years ended December 31, 1994 and 1995 was
$61,198 and $204,365, respectively.
The Company has signed a letter of intent to purchase a parcel of land for
$7,695,000 in a master planned development in Las Vegas, Nevada.
10. UNAUDITED PRO FORMA INCOME TAX INFORMATION
The following unaudited pro forma income tax information is presented in
accordance with Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes, as if the Company had been a subchapter C
corporation subject to federal income taxes for the year ended December 31,
1995 and the three month period ended March 31, 1996.
<TABLE>
<CAPTION>
PERIOD
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
1995 1996
------------ ---------
<S> <C> <C>
Earnings before pro forma adjustment, per statement of
operations............................................ $3,386,066 $679,730
Provision for income taxes............................. 1,186,066 231,000
---------- --------
Pro forma net income................................... $2,200,000 $448,730
========== ========
</TABLE>
F-45
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholder
of The Genesee Company
In our opinion, the accompanying combined balance sheet and the related
combined statements of operations, changes in shareholder's equity and cash
flows present fairly, in all material respects, the financial position of The
Genesee Company and Related Entities at December 31, 1995, and the results of
their operations and their cash flows for the year ended December 31, 1995, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for the
opinion expressed above.
Price Waterhouse LLP
March 1, 1996
Denver, Colorado
F-46
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors
The Genesee Company
Golden, Colorado
We have audited the accompanying combined balance sheets of The Genesee
Company and related entities as of December 31, 1994, and the related combined
statements of operations, shareholder's equity and cash flows for each of the
two years in the period then ended. These combined financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the combined financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the combined
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall combined financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of The
Genesee Company and related entities as of December 31, 1994, and the results
of their operations and their cash flows for each of the two years in the
period then ended, in conformity with generally accepted accounting
principles.
Hein & Associates LLP
December 12, 1995
Denver, Colorado
F-47
<PAGE>
THE GENESEE COMPANY AND RELATED ENTITIES
COMBINED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------- MARCH 31,
1994 1995 1996
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents........................ $ 1,364 $ 978 $ 354
Related party and other receivables.............. 155 850 1,121
Real estate inventories.......................... 47,676 49,673 55,133
Equipment and furniture, net of accumulated
depreciation of $132, $200 and $215,
respectively.................................... 227 241 232
Prepaid and other assets......................... 1,125 1,178 1,481
------- ------- -------
Total assets................................... $50,547 $52,920 $58,321
======= ======= =======
LIABILITIES AND SHAREHOLDER'S EQUITY
Accounts payable and accrued construction........ $ 2,102 $ 3,409 $ 2,206
Notes payable.................................... 41,175 41,393 48,143
Due to related parties........................... 1,422 1,003 1,061
Other accrued expenses........................... 930 1,462 1,549
Customer deposits................................ 1,013 872 1,365
------- ------- -------
Total liabilities.............................. 46,642 48,139 54,324
======= ======= =======
Commitments and contingencies (Note 8)........... -- -- --
Shareholder's Equity:
Common stock................................... 3 3 3
Additional paid-in capital..................... 1,655 1,770 1,770
Retained earnings.............................. 2,247 3,008 2,224
------- ------- -------
Total shareholder's equity................... 3,905 4,781 3,997
------- ------- -------
Total liabilities and shareholder's equity..... $50,547 $52,920 $58,321
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-48
<PAGE>
THE GENESEE COMPANY AND RELATED ENTITIES
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, PERIOD ENDED MARCH 31,
---------------------------- -----------------------
1993 1994 1995 1995 1996
-------- -------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues
Residential sales...... $ 53,858 $ 59,539 $ 60,534 $13,316 $8,531
Lot sales.............. 3,833 3,020 4,274 169 340
Other revenue.......... -- -- 222 38 30
-------- -------- -------- ------- ------
57,691 62,559 65,030 13,523 8,901
Cost of sales............ (48,725) (53,887) (57,620) 12,104 8,284
-------- -------- -------- ------- ------
Gross profit............. 8,966 8,672 7,410 1,419 617
Operating Expenses
Selling expenses....... 3,295 4,184 4,451 887 819
General and
administrative
expenses.............. 2,705 2,620 2,098 693 582
-------- -------- -------- ------- ------
Net income (loss)........ $ 2,966 $ 1,868 $ 861 $ (161) $ (784)
======== ======== ======== ======= ======
Unaudited pro forma net
income (loss)
(Note 9)................ $ 535 $ (488)
======== ======
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-49
<PAGE>
THE GENESEE COMPANY AND RELATED ENTITIES
COMBINED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON ADDITIONAL TOTAL
STOCK PAID-IN RETAINED SHAREHOLDER'S
AMOUNT CAPITAL EARNINGS EQUITY
------ ---------- -------- -------------
<S> <C> <C> <C> <C>
Balance, January 1,
1993................... $ 2 $1,021 $ 71 $ 1,094
Capital contributions... 1 244 -- 245
Distributions........... -- -- (1,223) (1,223)
Net income.............. -- -- 2,966 2,966
---- ------ ------- -------
Balance, December 31,
1993................... 3 1,265 1,814 3,082
Capital contributions... -- 390 -- 390
Distributions........... -- -- (1,435) (1,435)
Net income.............. -- -- 1,868 1,868
---- ------ ------- -------
Balance, December 31,
1994................... 3 1,655 2,247 3,905
Capital contributions... -- 115 -- 115
Distributions........... -- -- (100) (100)
Net income.............. -- -- 861 861
---- ------ ------- -------
Balance, December 31,
1995................... 3 1,770 3,008 4,781
Net loss................ (784) (784)
---- ------ ------- -------
Balance, March 31, 1996
(Unaudited)............ $3 $1,770 $ 2,224 $ 3,997
==== ====== ======= =======
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-50
<PAGE>
THE GENESEE COMPANY AND RELATED ENTITIES
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, PERIOD ENDED MARCH 31,
---------------------------- -----------------------
1993 1994 1995 1995 1996
-------- -------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash Flows From Operating
Activities
Net income............. $ 2,966 $ 1,868 $ 861 $ (161) $ (784)
Adjustments to recon-
cile net income to net
cash used in operating
activities:
Depreciation ex-
pense............... 57 72 78 15 15
Changes in operating
assets and liabili-
ties:
Decrease (increase)
in:
Related party and
other
receivables..... (245) 252 (695) (532) (271)
Real estate in-
ventories....... (14,977) (16,037) (1,997) (2,506) (5,460)
Prepaid and other
assets.......... (342) (418) (53) 802 (303)
Increase (decrease)
in:
Accounts payable
and accrued con-
struction lia-
bilities........ (365) 301 1,307 (190) (1,203)
Other accrued ex-
penses.......... 422 (72) 497 75 87
Customer depos-
its............. 209 188 (141) (89) 493
-------- -------- -------- ------- -------
Net cash used in
operating
activities...... (12,275) (13,846) (143) (2,586) (7,426)
-------- -------- -------- ------- -------
Cash Flows From Investing
Activities
Purchases of equipment
and furniture......... (47) (53) (57) (3) (6)
Return of investment in
partnership........... 174 -- -- -- --
-------- -------- -------- ------- -------
Net cash provided
by (used in) in-
vesting activi-
ties............ 127 (53) (57) (3) (6)
-------- -------- -------- ------- -------
Cash Flows From Financing
Activities
Borrowings under notes
payable............... 47,729 50,226 39,846 9,253 10,988
Repayments of notes
payable............... (35,400) (34,802) (39,628) (7,946) (4,238)
Related party
borrowings............ 609 1,533 1,109 107 279
Repayments of related
party borrowings...... (423) (1,013) (1,528) (202) (221)
Distributions to share-
holder................ (1,082) (1,435) (100) -- --
Capital contributions
by shareholder........ 244 390 115 115 --
-------- -------- -------- ------- -------
Net cash provided
by (used in)
financing activ-
ities........... 11,677 14,899 (186) 1,327 6,808
-------- -------- -------- ------- -------
Increase (decrease) in
cash and cash equiva-
lents................... (471) 1,000 (386) (1,262) (624)
Cash and cash equiva-
lents, beginning of
year.................... 835 364 1,364 1,364 978
-------- -------- -------- ------- -------
Cash and cash equiva-
lents, end of year...... $ 364 $ 1,364 $ 978 $ 102 $ 354
======== ======== ======== ======= =======
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-51
<PAGE>
THE GENESEE COMPANY AND RELATED ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
General
The combined financial statements consist of the accounts of The Genesee
Company combined with those of The Genesee Company/Castle Pines, Ltd., The
Genesee Company of Michigan, Ltd., Genesee Venture Corporation (dba The
Genesee Company Building Group, Inc.) and, subsequent to December 31, 1994,
those of Genesee Communities I, Inc., Genesee Communities II, Inc. and Genesee
Development Company (collectively referred to as the "Company"). These
entities are related through common ownership and management.
The Company is engaged primarily in the construction and sale of single-
family residential property in Colorado and Arizona. The Company designs,
builds, and sells single-family houses on finished lots, which it purchases
ready for home construction or which it develops. The Company also purchases
undeveloped land to develop finished lots for future construction of single-
family houses and for sale to others.
The Company and its shareholder have entered into a definitive agreement
with The Fortress Group pursuant to which the Company will merge with The
Fortress Group (the "Merger"). All outstanding shares of the Company will be
exchanged for cash and shares of The Fortress Group's common stock concurrent
with the consummation of the initial public offering.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Combination
The combined financial statements include the accounts of the entities
described in Note 1, all of which are 100% owned by the same shareholder. All
significant intercompany accounts and transactions have been eliminated in
combination.
Estimates by Management
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition
Revenues from residential sales are recognized when all conditions precedent
to closing have been fulfilled and title has passed to the buyer. The
Company's homes are generally sold in advance of their construction. The
Company's standard sales contract generally requires the customer to make an
earnest money deposit which is recognized as a liability until the unit
closes.
Real Estate Inventories and Cost of Sales
All real estate inventories which are held for sale are carried at cost,
which is less than fair value as measured in accordance with Statement of
Financial Accounting Standards (SFAS) No. 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. Fair value
is measured based on the application of discounting expected future cash flows
of each of the Company's real estate developments. Costs incurred which are
included in inventory consist of land, land development, direct and certain
indirect construction costs, interest and real estate taxes, and model
construction costs and related improvements.
At the time of revenue recognition, cost of sales is charged with the actual
construction costs incurred and any estimate to complete, plus and allocation
of the total estimated cost of land and land development, interest, real
estate taxes and any other capitalizable common costs.
F-52
<PAGE>
THE GENESEE COMPANY AND RELATED ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Interest charged to cost of sales is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
1993 1994 1995
------ ------ ------
<S> <C> <C> <C>
Interest on loans from financial institutions........... $1,535 $1,848 $2,328
Profit sharing interest under equity participation
agreements............................................. 1,280 1,084 1,224
Interest on subordinated notes.......................... 499 926 981
------ ------ ------
$3,314 $3,858 $4,533
====== ====== ======
</TABLE>
Interest Capitalization
Interest and related debt issuance costs are capitalized to qualifying real
estate inventories as incurred, in accordance with SFAS No. 34,
"Capitalization of Interest Cost", and charged to cost of sales as revenue
from residential sales is recognized. The interest and related debt issuance
costs capitalized are determined by applying a weighted average capitalization
rate to the accumulated qualified real estate expenditures. The capitalization
rate is based on the Company's outstanding borrowings associated with the
acquisition, development and construction of the qualified real estate
inventory. The amount of financing costs capitalized does not exceed those
costs incurred for any year presented in the accompanying combined financial
statements.
Equipment and Furniture
Equipment and furniture are carried at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets which range in years from 5 to 10. Significant
additions and improvements are capitalized, while expenditures for repairs and
maintenance are charged to operations as incurred.
Other Assets
Other assets includes costs incurred for common area model improvements and
certain furnishings. These costs are amortized on a per unit basis as home
sales in the related development are closed.
Concentrations of Credit Risk
The Company's operations are concentrated in the construction and sale of
single-family residential property in Colorado and Arizona. Furthermore, the
Company from time to time maintains cash balances at certain financial
institutions in excess of Federally insured limits.
Income Taxes
The Company is a Subchapter S corporation for income tax purposes and,
accordingly, any income tax liabilities are the responsibility of the
Company's shareholder. The Company's Subchapter S corporation status will
terminate on consummation of the Merger as disclosed in Note 1. See Note 9 for
information regarding the pro forma income tax disclosures.
Cash and Equivalents
For purposes of reporting cash flows, the Company considers all highly
liquid investments with an original maturity of three months or less to be
cash equivalents.
F-53
<PAGE>
THE GENESEE COMPANY AND RELATED ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Supplemental disclosures of cash flow information are as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
Cash paid for interest:
Related parties.................................. $ 63 $ 114 $ 140
Other............................................ 1,748 2,548 3,605
Office equipment acquired through capital leases... 151 45 35
Distribution to shareholder through reduction of
home sales price.................................. 141 -- --
Sale of vehicles to related party.................. 64 -- --
</TABLE>
Unaudited Interim Financial Statements
In the opinion of management, the Company has made all adjustments,
consisting primarily of normal recurring accruals, necessary for a fair
presentation of the financial condition of the Company as of March 31, 1996
and the results of operations and cash flows for the three month period ended
March 31, 1996 and 1995, as presented in the accompanying unaudited interim
financial statements.
3. REAL ESTATE INVENTORIES
Real estate inventories are summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------- MARCH 31,
1994 1995 1996
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Work-in-progress:
Sold homes under construction............... $16,039 $ 7,507 $13,830
Speculative homes........................... 9,863 15,627 15,217
------- ------- -------
25,902 23,134 29,047
------- ------- -------
Land:
Finished lots............................... 15,446 17,436 20,451
Land under development...................... 2,100 5,487 1,108
Land and other costs........................ 729 -- --
------- ------- -------
18,275 22,923 21,559
Models........................................ 3,499 3,616 4,527
------- ------- -------
Total..................................... $47,676 $49,673 $55,133
======= ======= =======
</TABLE>
Speculative homes and models include completed homes and homes under
construction. Speculative construction represents homes built without an
advance sales contract in order to accelerate closing. Completed homes include
the allocation of land and development and other allocable costs.
4. NOTES PAYABLE
Notes payable are summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------- MARCH 31,
1994 1995 1996
------- ------- ----------
UNAUDITED)
<S> <C> <C> <C>
Project specific construction loans............. $20,639 $16,685 $22,958
Conventional land acquisition and development
loans.......................................... 10,140 13,746 12,457
Subordinated notes and equity participation
loans.......................................... 10,396 10,416 11,635
Unsecured lines of credit....................... -- 546 1,093
------- ------- -------
$41,175 $41,393 $48,143
======= ======= =======
</TABLE>
F-54
<PAGE>
THE GENESEE COMPANY AND RELATED ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Project specific construction loans and conventional land acquisition and
development loans consist of land, land development, and construction loans
primarily from financial institutions. These loans bear interest at annual
rates ranging from 1% to 2% over prime (the prime rate was 8.5% at December
31, 1995) and both principal and interest are normally paid at the time the
related real estate properties are sold. The loan agreements include customary
representations and covenants, including limitations on the maximum principal
amount that can be outstanding at any time. All outstanding indebtedness under
these facilities is collateralized by a lien on the related real estate
inventories, and all of these loans are personally guaranteed by the Company's
sole shareholder. At December 31, 1995, the Company was not in compliance with
the reporting requirements of certain loan agreements with one of their
financial institutions. As a result, this financial institution may, at its
option, demand immediate payment on amounts outstanding under the respective
loan agreement. However, the financial institution has continued to advance
additional funds to the Company as financing on specific projects and has
granted a written waiver of these violations to the Company.
Subordinated notes consist of notes from private investors, some of which
are unsecured and some of which are collateralized by a lien on the Company's
real estate inventories, and all of which are personally guaranteed by the
Company's sole shareholder. Generally, these loans bear interest at a fixed
annual rate of 12%, paid monthly. The unsecured notes entitle the holder to
receive an additional 6% interest per annum payable at maturity of the note.
These notes generally have maturities of six months, at which time the
principal and all unpaid interest are due.
The Company has entered into a series of equity participation agreements and
related notes payable with one private investor. Under these agreements, the
Company had outstanding advances from this equity participant totaling
approximately $6,097,000 and $4,559,000 as of December 31, 1994 and 1995,
respectively, in the form of equity participation notes payable. The proceeds
from these notes are used to acquire and develop various predetermined real
estate properties and to construct homes in these developments.
In general, no interest is accrued on the principal balance of these notes,
but rather, the note holder is entitled to a portion of the net profits of the
development which collateralizes the note payable. However, at December 31,
1995, the Company had one equity participation note payable which requires
that the private investor receive the greater of some minimal rate of return
or a portion of the net profits of the development. At December 31, 1995, the
Company has accrued approximately $255,000 in interest costs, all of which has
been capitalized, related to this note since the development is in the start-
up stage and net profits earned as of December 31, 1995 have been less than
the minimum rate of return guaranteed the investor. Other than this note, only
in the event of default in principal payment at maturity would interest be
accrued at the rate of the greater of 3% over prime or 18%, retroactive to the
origination date of the note. As of December 31, 1995, there have been no
instances in which interest has been accrued on an equity participation note
payable due to an event of default. The Company periodically reviews the
expected profits and cash flows of developments with equity participation
notes payable and would accrue interest on the notes if it determines that an
event of default is probable. In general, equity participation notes payable
have maturities within two years of origination.
Based upon the equity participation agreements, net profits of the
individual developments are distributed, at the Company's discretion, as
follows: (i) distributions are to repay the principal balance and interest, if
applicable, of the equity participation note payable related to that
development; and (ii) once the principal balance of the equity participation
note payable for a development is repaid, net profits are distributed between
the equity participant and the Company.
F-55
<PAGE>
THE GENESEE COMPANY AND RELATED ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Maturities of notes payable at December 31, 1995 in future periods are as
follows (in thousands):
<TABLE>
<S> <C>
Year Ending December 31,
1996............................................................ $31,550
1997............................................................ 7,119
1998............................................................ 2,724
-------
$41,393
=======
</TABLE>
The timing of repayments on these notes may differ from the above schedule
due to the repayment of terms of these notes, described above, some of which
may require earlier repayment.
Interest incurred and capitalized during the years ended December 31, 1993,
1994 and 1995 aggregated approximately $3,318,000, $4,746,000 and $6,597,000,
respectively.
5. SHAREHOLDERS' EQUITY
The following is a summary of the authorized, issued and outstanding shares
of the combined entities:
<TABLE>
<CAPTION>
SHARES ISSUED AND
OUTSTANDING
DECEMBER 31,
FAIR SHARES ------------------
VALUE AUTHORIZED 1993 1994 1995
------ ---------- ----- ----- ------
<S> <C> <C> <C> <C> <C>
The Genesee Company....................... No Par 100,000 2,000 2,000 90,000
The Genesee Company/Castle Pines, Ltd..... $1.00 10,000 1,000 1,000 1,000
Genesee Company of Michigan, Ltd.......... No Par 10,000 -- 1,000 1,000
Genesee Venture Corporation............... $1.00 10,000 100 100 100
Genesee Communities I, Inc................ $1.00 10,000 -- -- --
Genesee Communities II, Inc............... $1.00 10,000 -- -- --
Genesee Development Company............... $1.00 10,000 -- -- --
</TABLE>
In 1995, the Company adopted an incentive stock option plan for certain
employees. The plan allows the grant of options to purchase up to 10,000
shares of the Company's common stock. The exercise price is equal to the
estimated fair value of the common stock at the date of grant. The options
generally vest nine years after the date of grant, but the vesting period is
accelerated upon a change in control or the occurrence of certain other events
as specified in the plan agreement. The options are exercisable over periods
of up to 10 years.
During 1995, options to purchase 10,000 shares of the Company's common stock
were granted at an exercise price of $50.15 per share.
6. RELATED PARTY TRANSACTIONS
The Company has entered into an agreement with a company (from which the
sole shareholder receives compensation for management services) to perform
certain marketing and management activities on behalf of the Company. The
Company pays a management fee consisting of a fixed monthly fee, plus an
additional fee of 0.5% of gross sales, as defined in the management agreement.
For the years ended December 31, 1993, 1994 and 1995, the Company has recorded
approximately $273,000, $356,000 and $98,000 in management fees for
F-56
<PAGE>
THE GENESEE COMPANY AND RELATED ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
services performed under this agreement. The marketing and management services
provided pursuant to the agreement diminished significantly in 1995;
therefore, the agreement has been terminated as of January 1, 1996.
The Company provides management services for three entities owned by the
sole shareholder of the Company. The Company is compensated by these related
entities based upon time spent performing services on their behalf. For the
years ended December 31, 1993, 1994 and 1995, the Company recognized
management fee revenues of approximately $28,000, $13,000 and $25,000,
respectively, for services provided.
In 1991, the Company became a general partner in a limited partnership to
purchase and develop land for resale. The Company had a 10% interest in the
partnership prior to the transfer of its interest in the partnership at book
value effective January 1, 1993, to a company from which the sole shareholder
receives compensation for management services. The Company receives a monthly
management fee from the partners for work performed on behalf of the
partnership. The Company recognized approximately $180,000, $90,000 and $0 in
1993, 1994 and 1995, respectively, in management fees under this agreement.
During 1993, the Company began receiving a two-part management fee from the
partnership for oversight of the development of a land parcel on behalf of the
partnership. The Company is entitled to a management fee equal to 4% of the
cost of developing the parcel, plus an additional fee equal to 1 1/2% of gross
sales of lots on this parcel. In 1993, 1994 and 1995, the Company recognized
approximately $83,000, $12,000 and $6,000, respectively, in management fee
income under these arrangements. The Company is also entitled to a marketing
fee of 4% of gross sales of lots on this parcel, but the Company has allowed a
company, which actually markets the lots and from which the sole shareholder
receives compensation for management services, to receive this fee directly
from the partnership with no impact on the combined financial statements of
the Company.
The Company has also entered into several agreements to purchase land from
the limited partnership at estimated fair market value. During 1993, 1994 and
1995, the Company purchased approximately $2,689,000, $2,702,000 and $0,
respectively, in land from the partnership for future home construction.
The Company pays a fee to an entity owned by the sole shareholder of the
Company based on the number of homes closed in a particular development as
compensation for assistance in negotiations related to the purchase of the
land for the development. In 1993, 1994 and 1995, the Company paid
approximately $25,000, $145,000 and $5,000, respectively, in compensation to
this entity which has been recognized as a cost of sales in the combined
financial statements of the Company.
Receivables from related parties represent non-interest bearing advances and
notes to the shareholder and related entities. Such amounts are generally due
on demand or within one year.
The Company has made home sales to several employees, for which sales
revenue and the related cost of sales have been included in the accompanying
combined Statements of Income.
For the years ended December 31, 1993, 1994 and 1995, the Company has
recognized revenues of approximately $1,331,000, $454,000 and $0,
respectively, and cost of sales of approximately $1,292,000, $405,000 and $0,
respectively, in connection with these sales.
7. EMPLOYEE BENEFIT PLAN
The Company maintains a contributory profit sharing plan established
pursuant to the provisions of Section 401(k) of the Internal Revenue Code,
which provides retirement benefits for eligible employees of the Company. The
Company may make annual discretionary contributions to the plan. Discretionary
contributions during the years ended December 31, 1993, 1994 and 1995
aggregated $150,000, $50,000 and $0, respectively.
F-57
<PAGE>
THE GENESEE COMPANY AND RELATED ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
8. COMMITMENTS AND CONTINGENCIES
During a portion of 1993, the Company leased certain office equipment under
noncancelable operating leases that expired during 1993. Rent expense under
such leases aggregated $28,000 for the year ended December 31, 1993. In
addition, the Company leases office space at one of its locations on a month-
to-month basis from a company wholly-owned by the sole shareholder. Office
rent expense under this lease aggregated $87,000, $94,000 and $102,000 for the
years ended December 31, 1993, 1994 and 1995, respectively. The Company also
leases office space at two other locations from non-related parties; office
rent expense under these leases aggregated $14,000, $17,000 and $20,000 for
the years ended December 31, 1993, 1994 and 1995, respectively. Total minimum
rental commitments at December 31, 1995 are approximately $21,000 and $7,000
for 1996 and 1997, respectively.
The Company leases certain office equipment under agreements classified as
capital leases. Office equipment under these leases has a cost of $151,000,
$196,000 and $206,000 and accumulated depreciation of approximately $17,000,
$52,000 and $81,000 as of December 31, 1993, 1994 and 1995, respectively. The
following is a schedule of future minimum lease payments under capital leases
at December 31, 1995:
<TABLE>
<S> <C>
Future minimum lease payments:
1996............................................................ $51,000
1997............................................................ 24,000
1998............................................................ 9,000
-------
$84,000
=======
</TABLE>
The Company is involved in various routine legal proceedings incidental to
the conduct of its normal business operations. The Company's management
believes that none of these legal proceedings will have a material adverse
impact on the financial condition or results of operations of the Company.
9. UNAUDITED PRO FORMA INCOME TAX INFORMATION
The following unaudited pro forma income tax information is presented in
accordance with Statement of Financial Accounting Standards No. 109 as if the
Company had been a Subchapter C corporation subject to Federal and state
income taxes for the year ended December 31, 1995 and the three month period
ended March 31, 1996 (in thousands).
<TABLE>
<CAPTION>
PERIOD
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
1995 1996
------------ ---------
<S> <C> <C>
Earnings (loss) before pro forma adjustment, per state-
ment of income........................................ $ 861 $(784)
(Provision)/Benefit for income taxes................... (326) 296
----- -----
Pro forma net income (loss)............................ $ 535 $(488)
===== =====
</TABLE>
F-58
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Solaris Development Corporation
We have audited the accompanying consolidated balance sheets of Solaris
Development Corporation as of December 31, 1995 and 1994, and the related
consolidated statements of income, shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Solaris Development Corporation as of December 31, 1995 and 1994 and the
consolidated results of its operations and its cash flows for each of the
three years in the period ended December 31, 1995 in conformity with generally
accepted accounting principles.
Ernst & Young LLP
Raleigh, North Carolina
February 10, 1996
F-59
<PAGE>
SOLARIS DEVELOPMENT CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ MARCH 31,
1994 1995 1996
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Housing inventories:
Homes under construction (Note 2)..... $10,411,366 $ 7,427,620 $ 9,675,788
Land under development and improved
lots................................. 4,372,496 6,415,701 5,089,497
Land options for future development
and related costs.................... -- 456,084 458,529
----------- ----------- -----------
14,783,862 14,299,405 15,223,814
Cash.................................... 1,380,851 873,686 992,064
Restricted cash......................... 141,860 440,366 205,105
Related party accounts receivable (Note
5)..................................... 122,417 163,490 314,693
Other assets, net of accumulated
amortization of $12,633, $13,652 and
$14,022, respectively.................. 46,347 171,528 194,172
Property and equipment:
Automobiles........................... 50,204 56,590 56,590
Computer equipment.................... 4,711 12,388 12,388
Office equipment and furniture........ 63,690 93,265 104,147
Model home furniture and sales
displays............................. 483,422 691,878 671,452
----------- ----------- -----------
602,027 854,121 844,577
Less accumulated depreciation......... (234,698) (368,801) (410,258)
----------- ----------- -----------
367,329 485,320 434,319
----------- ----------- -----------
Total assets........................ $16,842,666 $16,433,795 $17,364,167
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and other liabilities.. $ 3,055,595 $ 1,591,351 $ 895,728
Line of credit (Note 4)................. 1,626,199 2,863,759 1,798,789
Notes payable (Note 3).................. 9,242,932 8,145,313 10,704,907
Customer deposits....................... 391,671 460,224 594,918
----------- ----------- -----------
Total liabilities................... 14,316,397 13,060,647 13,994,342
Minority interest....................... 1,346,273 1,294,632 1,348,443
Shareholders' equity:
Common stock, no par value, 100,000
shares authorized, 3,000 shares
issued and outstanding December 31,
1994 and 1995 and March 31, 1996..... 1,000 1,000 1,000
Retained earnings..................... 1,178,996 2,077,516 2,020,382
----------- ----------- -----------
Total shareholders' equity.......... 1,179,996 2,078,516 2,021,382
Commitments (Note 8)
----------- ----------- -----------
Total liabilities and shareholders'
equity............................. $16,842,666 $16,433,795 $17,364,167
=========== =========== ===========
</TABLE>
See accompanying notes.
F-60
<PAGE>
SOLARIS DEVELOPMENT CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, PERIOD ENDED MARCH 31,
------------------------------------ -----------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Residential home-
building revenue..... $20,875,102 $33,197,542 $42,563,554 $8,255,190 $7,287,195
Interest income....... 16,530 16,133 36,891 8,855 5,012
----------- ----------- ----------- ---------- ----------
20,891,632 33,213,675 42,600,445 8,264,045 7,292,207
Costs and expenses:
Cost of sales......... 16,942,636 26,258,391 33,792,304 6,573,977 5,751,431
General and
administrative....... 1,552,330 1,763,897 2,684,718 599,833 695,388
Selling and
marketing............ 1,729,838 2,744,734 3,353,012 735,133 607,431
Interest.............. 46,450 41,923 39,623 9,906 6,475
----------- ----------- ----------- ---------- ----------
20,271,254 30,808,945 39,869,657 7,918,849 7,060,725
----------- ----------- ----------- ---------- ----------
Income before minority
interest............... 620,378 2,404,730 2,730,788 345,196 231,482
Minority interest in
(loss) income of
subsidiaries........... (65,415) 906,672 745,457 151,961 53,811
----------- ----------- ----------- ---------- ----------
Net income.............. $ 685,793 $ 1,498,058 $ 1,985,331 $ 193,235 $ 177,671
=========== =========== =========== ========== ==========
Unaudited pro forma net
income (Note 9)........ $ 1,191,199 $ 106,603
=========== ==========
</TABLE>
See accompanying notes.
F-61
<PAGE>
SOLARIS DEVELOPMENT CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
TOTAL
COMMON RETAINED SHAREHOLDERS'
STOCK EARNINGS EQUITY
------ ----------- -------------
<S> <C> <C> <C>
Balance at January 1, 1993.................... $1,000 $ 624,390 $ 625,390
Net income.................................. -- 685,793 685,793
Distributions to shareholders............... -- (477,427) (477,427)
------ ----------- -----------
Balance at December 31, 1993.................. 1,000 832,756 833,756
Net income.................................. -- 1,498,058 1,498,058
Distributions to shareholders............... -- (765,590) (765,590)
Redemption of common stock (Note 8)......... -- (386,228) (386,228)
------ ----------- -----------
Balance at December 31, 1994.................. 1,000 1,178,996 1,179,996
Net income.................................. -- 1,985,331 1,985,331
Distributions to shareholders............... -- (1,086,811) (1,086,811)
------ ----------- -----------
Balance at December 31, 1995.................. 1,000 2,077,516 2,078,516
Net income (unaudited)...................... -- 177,671 177,671
Distributions to shareholders (unaudited)... -- (234,805) (234,805)
------ ----------- -----------
Balance at March 31, 1996 (unaudited)......... $1,000 $ 2,020,382 $ 2,021,382
====== =========== ===========
</TABLE>
See accompanying notes.
F-62
<PAGE>
SOLARIS DEVELOPMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, PERIOD ENDED MARCH 31,
---------------------------------------- -------------------------
1993 1994 1995 1995 1996
------------ ------------ ------------ ----------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income.............. $ 685,793 $ 1,498,058 $ 1,985,331 $ 193,235 $ 177,671
Adjustments to reconcile
net income to net cash
(used in) provided by
operating activities:
Depreciation and
amortization.......... 71,877 82,298 155,819 29,554 41,807
Minority interest...... (65,415) 906,672 745,457 151,961 53,811
Gain from dissolution
of joint venture...... (33,094) -- -- -- --
Gain on sale of asset.. -- -- (2,483) (2,483) --
Changes in operating
assets and liabilities:
Accounts receivable
from related parties.. 407,177 (94,879) (41,073) 87,408 (151,203)
Other assets........... (32,533) 15,811 (126,200) (61,912) (22,994)
Land under development
and improved lots..... (22,517) (2,685,168) (2,499,289) 43,290 1,323,759
Homes under
construction.......... (1,246,516) (4,495,241) 2,983,746 (813,358) (2,248,168)
Accounts payable and
other liabilities and
customer deposits..... (160,711) 2,942,414 (1,395,691) (2,013,980) (560,929)
Related party
payables.............. -- (73,105) -- -- --
------------ ------------ ------------ ----------- ------------
Net cash (used in)
provided by operating
activities............. (395,939) (1,903,140) 1,805,617 (2,386,285) (1,386,246)
INVESTING ACTIVITIES
Change in restricted
cash................... 91,503 165,140 (298,506) (108,140) 235,261
Purchases of property
and equipment.......... (120,230) (207,964) (302,297) (83,055) --
Proceeds from sale of
property and
equipment.............. 45,246 -- 25,631 25,631 9,544
------------ ------------ ------------ ----------- ------------
Net cash provided by
(used in) investing
activities ............ 16,519 (42,824) (575,172) (165,564) 244,805
FINANCING ACTIVITIES
Payments on bank line of
credit................. -- (1,777,400) (2,175,619) (381,438) (1,095,643)
Proceeds from bank line
of credit.............. -- 3,403,599 3,413,179 157,500 30,673
Payments on notes
payable................ (17,716,204) (24,587,820) (31,525,538) (4,858,795) (11,545,382)
Proceeds from notes
payable................ 18,708,406 26,704,477 30,427,919 7,252,099 14,104,976
Distributions to
shareholders........... (459,570) (765,590) (1,086,811) (142,364) (234,805)
Distributions to
minority interest...... (84,484) (339,810) (437,140) (81,500) --
Return of capital to
minority interest...... -- -- (353,600) -- --
------------ ------------ ------------ ----------- ------------
Net cash provided by
(used in) financing
activities............. 448,148 2,637,456 (1,737,610) 1,945,502 1,259,819
------------ ------------ ------------ ----------- ------------
Increase (decrease) in
cash................... 68,728 691,492 (507,165) (606,347) 118,378
Cash at beginning of the
period................. 620,631 689,359 1,380,851 1,380,851 873,686
------------ ------------ ------------ ----------- ------------
Cash at end of the
period................. $ 689,359 $ 1,380,851 $ 873,686 $ 774,504 $ 992,064
============ ============ ============ =========== ============
Supplemental disclosure
of cash flow
information
Cash paid during the
period for interest.... $ 543,300 $ 647,900 $ 1,058,581 $ 243,826 $ 236,337
============ ============ ============ =========== ============
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES
Excluded from the consolidated 1994 statement of cash flows was the effect
of a non-cash transaction in which the Company incurred $386,228 of notes
payable to a former shareholder in conjunction with the redemption of this
individual's 1,000 shares of common stock. (Note 8)
Excluded from the consolidated 1993 statement of cash flows was the effect
of a non-cash transaction in which the Company accrued $17,857 of dividends
owed to a shareholder as of December 31, 1993.
F-63
<PAGE>
SOLARIS DEVELOPMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. BUSINESS DESCRIPTION AND SIGNIFICANT ACCOUNTING POLICIES
Business of the Company
Solaris Development Corporation (the "Company") was formed in 1985 for the
purpose of developing land and building subdivisions featuring affordable
custom built homes in the Raleigh, Durham, Chapel Hill region of North
Carolina.
The Company and its shareholders have entered into a definitive agreement
with the Fortress Group pursuant to which the Company will merge with the
Fortress Group (the "Merger"). All outstanding shares of the Company will be
exchanged for cash and shares of The Fortress Group's common stock concurrent
with the consummation of the initial public offering of the common stock of
the Fortress Group and subordinated debt.
Basis of Presentation
The consolidated financial statements include the accounts of the Company
and joint ventures in which it was involved during the years ended December
31, 1993, 1994 and 1995. The Company owns a 50% interest in the Village Lakes
joint venture and a 66% interest in the Park Village joint venture. All
significant intercompany balances and transactions have been eliminated in
consolidation. The Company consolidates its 50% interest in the Village Lakes
joint venture since it is the managing partner of the venture. Solaris has
full responsibility and complete discretion in the management and control of
the business of the venture, and makes all decisions regarding the management
and affairs of the venture.
Minority interest as of December 31, 1994 and 1995 includes the 50% interest
in the Village Lakes joint venture and the 34% interest in the Park Village
joint venture owned by various other parties.
For 1993, the Village Lakes joint venture generated net income of $165,602,
while prior to 1993 the venture incurred cumulative net losses of $182,186. No
recognition of minority interest in the cumulative loss is recorded in the
financial statements as of December 31, 1993, as there is no requirement for
the minority shareholder to reimburse the Company for operating losses.
Minority interest as of December 31, 1993 includes the 34% interest in the
Park Village joint venture by various other parties.
Residential Home-building Revenue
The Company is primarily engaged in the construction and sale of residential
housing. Revenue is recognized at the time of the closing of a sale, when
title to and possession of the property transfer to the buyer.
Other Assets
Other assets consist of earnest money deposits, land options, organizational
costs, deferred offering costs and other deposits. The organizational costs
are amortized using the straight-line method over a five year period.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed
primarily using accelerated methods with useful lives ranging from five to
seven years.
Restricted Cash
When a sales contract is signed, the Company receives a deposit from the
buyer which is restricted until the transaction is closed. As of December 31,
1994 and 1995, the restricted cash held in an escrow account was $141,860 and
$440,366, respectively.
F-64
<PAGE>
SOLARIS DEVELOPMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Income Taxes
The Company has elected S Corporation status. All federal and state income
tax liabilities are accordingly the responsibility of the shareholders rather
than the Company and are therefore not recorded at the Company level. The
Company's S Corporation status will terminate on consummation of the Merger
disclosed above. See Note 9 for information regarding the pro forma income tax
disclosures.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and use
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Risks and Uncertainties
As of December 31, 1995, the Company had incurred and capitalized
approximately $456,000 in costs related to a planned urban development, the
future development of which is contingent upon the Company securing financing
to exercise its land purchase option and obtaining appropriate infrastructure
and regulatory approvals. These costs are recorded as "land options for future
development and related costs" in the accompanying balance sheet. Management
expects this development project to proceed as planned. However, should
financing and other contingencies not be successfully resolved, the Company
would need to write-off these capitalized costs.
Advertising Expense
The cost of advertising is expensed as incurred. The Company incurred
approximately $146,000, $242,000 and $261,000 in advertising costs during
1993, 1994 and 1995, respectively.
Reclassifications
Certain 1993 and 1994 amounts in the financial statements have been
reclassified to conform with 1995 classifications. These reclassifications did
not result in any changes in net income or shareholders' equity as previously
reported.
Unaudited Interim Financial Statements
In the opinion of management, the Company has made all adjustments,
consisting primarily of normal recurring accruals, necessary for a fair
presentation of the financial condition of the Company as of March 31, 1996
and the results of operations and cash flows for the three month period ended
March 31, 1996 and 1995, as presented in the accompanying unaudited interim
financial statements.
2. HOUSING INVENTORIES
Housing inventories consist principally of homes under construction, land
under development, improved lots, and land options and other costs related to
future development. Inventories are stated at the lower of cost or net
realizable value. In addition to direct land acquisition, land development and
housing construction costs, inventory costs include interest, real estate
taxes, the cost of real estate options, related legal fees, and certain
administrative costs which are capitalized in inventory during the development
and construction periods. All other costs are charged to expense as incurred.
Net realizable value estimates are based on management's present plans and
intentions of undiscounted sale prices less development and disposition costs,
assuming that disposition occurs in the normal course of business.
F-65
<PAGE>
SOLARIS DEVELOPMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Homes under construction are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- MARCH 31,
1994 1995 1996
----------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Work in progress.......................... $ 6,243,536 $4,356,776 $5,195,899
Models.................................... 1,725,115 1,893,560 1,896,830
Speculative construction.................. 2,442,715 1,177,284 2,583,059
----------- ---------- ----------
$10,411,366 $7,427,620 $9,675,788
=========== ========== ==========
</TABLE>
Models are constructed to assist in the marketing effort of a development
and speculative construction represents non-model homes either under
construction or completed which are not subject to a sales contract.
3. NOTES PAYABLE AND CONSTRUCTION LOANS
Notes payable and construction and development loans consist of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- MARCH 31,
1994 1995 1996
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Construction and development loans pay-
able:
Notes payable to financial institution
collateralized by a deed of trust on
real property with interest at prime
plus 1% (Prime was 8.65% at December
31, 1995). Interest and principal are
due on demand.......................... $5,160,054 $1,513,737 $ 1,502,349
Notes payable to bank, collateralized by
a deed of trust on real property and
personal guarantees by the shareholders
of the Company with interest at prime
plus 3/4% (Prime was 8.65% at December
31, 1995). Interest and principal are
due on demand.......................... 1,743,560 2,068,096 2,166,322
Notes payable to bank, collateralized by
a deed of trust on real property and
personal guarantees by the shareholders
of the Company with interest at prime
plus 1% (Prime was 8.65% at December
31, 1995). Interest and principal are
due on demand.......................... 1,695,350 3,910,096 6,122,295
Notes payable to bank, collateralized by
a deed of trust on real property and
personal guarantees by the shareholders
of the Company with interest at prime
plus 1/2% (Prime was 8.65% at December
31, 1995). Interest and principal are
due on demand.......................... -- 224,390 586,820
Other notes payable:
Note payable to former shareholder,
collateralized by a 25% equity interest
in the Company with interest at 6%, due
in quarterly installments of $22,496
through January 1999................... 317,898 245,376 226,561
Other notes payable..................... 326,070 183,618 150,560
---------- ---------- -----------
$9,242,932 $8,145,313 $10,704,907
========== ========== ===========
</TABLE>
F-66
<PAGE>
SOLARIS DEVELOPMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Principal maturities of the above indebtedness during the years immediately
following December 31, 1995 are as follows:
<TABLE>
<S> <C>
1996................................................................. $7,876,500
1997................................................................. 113,428
1998................................................................. 118,463
1999................................................................. 35,767
2000................................................................. 1,155
----------
$8,145,313
==========
</TABLE>
The Company incurred interest costs of approximately $543,300 in 1993,
$647,900 in 1994 and $1,058,581 in 1995. Of these amounts approximately
$73,700, $77,000 and $171,503 were capitalized to land under development and
improved lots and approximately $423,200, $529,200 and $847,455 were
capitalized to homes under construction for the years ended December 31, 1993,
1994 and 1995, respectively.
4. LINE OF CREDIT
During 1994, the Company obtained a $4 million revolving line of credit from
a bank for land development in the Park Village Subdivision. This line of
credit extends through the completion of the development of the entire tract,
and bears interest at a rate of the bank's prime rate plus 3/4%. Interest is
payable monthly. Under this line of credit, the Company had outstanding at
December 31, 1994 and 1995, borrowings of $1,626,199 and $1,537,964,
respectively. The line of credit is collateralized by first and second deeds
of trust on the land, guarantees of the Company, and limited personal
guarantees of the individual owners in the joint venture.
During 1995, the Company obtained two additional lines of credit for $2
million and $2.1 million from banks for land development in the Preston Oaks
and Lake Ridge Subdivisions. The lines of credit extend through the completion
of the development of these subdivisions. The Preston Oaks line bears interest
at prime plus 1/2% and the Lake Ridge line bears interest at prime plus 3/4%.
Under these lines of credit, the Company had outstanding at December 31, 1995,
borrowings of $693,700 and $632,095 for the Preston Oaks and Lake Ridge
Subdivisions, respectively. The lines of credit are collateralized by deeds of
trust on the land and personal guarantees by the shareholders of the Company.
5. RELATED PARTY TRANSACTIONS
The Company conducts transactions with companies affiliated through
investments in joint ventures. The Company records these related party
transactions through its due to/due from accounts, which have been eliminated
in consolidation.
As of December 31, 1994 and 1995, accounts receivable from related parties
were $122,417 and $163,490, respectively. Of this amount, $107,512 and $93,312
at December 31, 1994 and 1995, respectively, was due from a partner in one of
the Company's joint ventures. The remainder of the 1995 balance of
approximately $70,000 is due from an affiliated company for reimbursement of
expenses incurred by the Company on their behalf. These receivables represent
verbal agreements between the entities and are payable on demand.
The Company entered into an office lease agreement with an affiliated
company on November 1, 1995. Rent expense related to this agreement was
approximately $13,000 for the year ended December 31, 1995.
6. 401(k) PLAN
The Company participates in a 401(k) plan under which employees can, after
one half year of service, contribute a percentage of their gross salary up to
a maximum of $8,994 for 1993, $9,240 for 1994 and $9,500 for 1995. The Company
made matching contributions totaling $9,767, $30,827 and $29,786 to the Plan
during the years ended December 31, 1993, 1994 and 1995, respectively. The
Company did not incur any plan administrative expenses during 1993, 1994 or
1995, as these expenses were offset against forfeitures.
F-67
<PAGE>
SOLARIS DEVELOPMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. LEASES
The Company rents its facilities and certain office equipment under
operating leases. Future minimum lease payments under the leases, which have
remaining terms in excess of one year, are as follows:
<TABLE>
<S> <C>
1996................................................................ $161,776
1997................................................................ 133,532
1998................................................................ 108,515
1999................................................................ 102,507
2000................................................................ 80,008
--------
$586,338
========
</TABLE>
Total rent expense for the years ended December 31, 1993, 1994 and 1995 was
$36,593, $96,901 and $148,444, respectively.
8. REDEMPTION OF COMMON STOCK
Effective January 1, 1994, the Company redeemed all 1,000 shares of common
stock, held by a shareholder resulting in a decrease in retained earnings of
$386,228. In conjunction with this transaction, the Company incurred a note
payable to the former shareholder collateralized by the redeemed stock in the
amount of $386,228, of which $317,898, and $245,376 is outstanding as of
December 31, 1994 and 1995, respectively. This transaction did not result in
any gain or loss for the Company.
On January 1, 1994, the Company entered into a contract with this same
former shareholder whereby the Company agreed to pay the individual a
consulting fee in the amount of $300,000 payable in sixty monthly installments
of $5,000.
9. UNAUDITED PRO FORMA NET INCOME
The following unaudited pro forma income tax information is presented in
accordance with Statement of Financial Accounting Standard No. 109 (SFAS 109)
as if the Company had been a C Corporation subject to federal and state income
taxes for the year ended December 31, 1995 and the three month period ended
March 31, 1996.
<TABLE>
<CAPTION>
PERIOD
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
1995 1996
------------ ---------
<S> <C> <C>
Earnings before pro forma adjustments, per statement
of income........................................... $1,985,331 $177,671
Pro forma adjustment:
Provision for income taxes at estimated effective
rate of 40%....................................... 794,132 71,068
---------- --------
Pro forma net income................................. $1,191,199 $106,603
========== ========
</TABLE>
F-68
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Members
Sunstar Mortgage Limited Liability Company
We have audited the accompanying balance sheet of Sunstar Mortgage Limited
Liability Company (a North Carolina limited liability company) as of December
31, 1995 and the related statements of operations, members' equity, and cash
flows for the period from March 1, 1995 (inception) to December 31, 1995.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Sunstar Mortgage Limited
Liability Company at December 31, 1995, and the results of its operations and
cash flows for the period from March 1, 1995 (inception) to December 31, 1995,
in conformity with generally accepted accounting principles.
Ernst & Young LLP
Raleigh, North Carolina
February 9, 1996
F-69
<PAGE>
SUNSTAR MORTGAGE LIMITED LIABILITY COMPANY
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash................................................. $2,570 $3,450
------ ------
Total assets....................................... $2,570 $3,450
====== ======
Members' equity........................................ $2,570 $3,450
====== ======
</TABLE>
See accompanying notes.
F-70
<PAGE>
SUNSTAR MORTGAGE LIMITED LIABILITY COMPANY
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
-----------------------------------------------
MARCH 1, 1995 MARCH 1 JANUARY 1
(INCEPTION) TO (INCEPTION) TO TO
DECEMBER 31, 1995 MARCH 31, 1995 MARCH 31, 1996
----------------- -------------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Commission income............. $12,171 $ -- $14,830
General and administrative
expenses..................... 5,551 2,932 --
------- ------- -------
Net income (loss) ............ $ 6,620 $(2,932) $14,830
======= ======= =======
Unaudited pro forma net income
(Note 3)..................... $ 4,300 $11,567
======= =======
</TABLE>
See accompanying notes.
F-71
<PAGE>
SUNSTAR MORTGAGE LIMITED LIABILITY COMPANY
STATEMENTS OF MEMBERS' EQUITY
<TABLE>
<CAPTION>
MEMBERS'
EQUITY
--------
<S> <C>
Balance at March 1, 1995 (inception).................................. $25,200
Net income.......................................................... 6,620
Distributions....................................................... (29,250)
-------
Balance at December 31, 1995.......................................... 2,570
Net income (unaudited).............................................. 14,830
Distributions (unaudited)........................................... (13,950)
-------
Balance at March 31, 1996 (Unaudited)................................. $ 3,450
=======
</TABLE>
See accompanying notes.
F-72
<PAGE>
SUNSTAR MORTGAGE LIMITED LIABILITY COMPANY
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
-----------------------------------------
MARCH 1, 1995 JANUARY 1,
(INCEPTION) TO MARCH 1, 1995 TO
DECEMBER 31, (INCEPTION) TO MARCH 31,
1995 MARCH 31, 1995 1996
-------------- -------------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Operating activities
Net income......................... $ 6,620 $(2,932) $14,830
-------- ------- -------
Net cash provided by (used in)
operating activities............ 6,620 (2,932) 14,830
-------- ------- -------
Financing activities
Distributions...................... (29,250) -- (13,950)
-------- ------- -------
Net cash used in financing
activities...................... (29,250) -- (13,950)
-------- ------- -------
Net (decrease) increase in cash...... (22,630) (2,932) 880
Cash at beginning of period.......... 25,200 25,200 2,570
-------- ------- -------
Cash at end of period................ $ 2,570 $22,268 $ 3,450
======== ======= =======
</TABLE>
See accompanying notes.
F-73
<PAGE>
SUNSTAR MORTGAGE LIMITED LIABILITY COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. ACCOUNTING POLICIES
Organization
Sunstar Mortgage Limited Liability Company (the "Company") was organized on
January 3, 1995 as a limited liability company under the provisions of the
North Carolina Limited Liability Company Act. The Company shall be dissolved
and its affairs wound up in accordance with the North Carolina Act and the
Company's Operating Agreement on January 3, 2045, unless the term shall be
extended by amendment to the Operating Agreement and the Articles of
Organization.
The Company was formed for the purpose of engaging in the business of
mortgage referral services. Commissions are earned for successful referrals at
the time of the closing of the home. The Company does not negotiate or process
the mortgage loans.
As of December 31, 1995, each member of the Company is a managing member and
shall not have any personal liability for any debts or losses of the Company
beyond his respective capital contribution. The business and affairs of the
Company shall be managed by and under the direction of its managing members.
The Company and its members have entered into a definitive agreement with
the Fortress Group pursuant to which the Company will merge with the Fortress
Group (the "Merger"). All outstanding equity of the Company will be exchanged
for cash and shares of the Fortress Group's Common Stock concurrent with the
consummation of the initial public offering of the common stock of the
Fortress Group and subordinated debt.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and use
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Unaudited Interim Financial Statements
In the opinion of management, the Company has made all adjustments,
consisting primarily of normal recurring accruals, necessary for a fair
presentation of the financial condition of the Company as of March 31, 1996
and the results of operations and cash flows for the period from March 1, 1995
(inception) to March 31, 1995 and the three month period ended March 31, 1996,
as presented in the accompanying unaudited interim financial statements.
2. INCOME TAXES
For federal and state income tax purposes, the Company is treated as a
partnership. Accordingly, income, losses and credits are passed through
directly to the members, rather than being taxed at the corporate level. The
Company's limited liability company status will terminate upon consummation of
the Merger disclosed above. See Note 3 for information regarding the pro forma
income tax disclosures.
3. UNAUDITED PRO FORMA NET INCOME
The following unaudited pro forma income tax information is presented with
Statement of Financial Accounting Standard No. 109 (SFAS 109) as if the
Company had been a C Corporation subject to federal and state income taxes
throughout the period from March 1, 1995 (inception) to December 31, 1995 and
the three month period ended March 31, 1996.
<TABLE>
<CAPTION>
1995 1996
------ -------
<S> <C> <C>
Earnings before pro forma adjustments, per statement of
income....................................................... $6,620 $14,830
Pro Forma adjustment:
Provision for income taxes.................................. 2,320 (3,263)
------ -------
Pro Forma net income.......................................... $4,300 $11,567
====== =======
</TABLE>
F-74
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders of
The Fortress Group, Inc.
In our opinion, the accompanying balance sheet presents fairly, in all
material respects, the financial position of The Fortress Group, Inc. (the
"Company") at December 31, 1995, in conformity with generally accepted
accounting principles. The financial statement is the responsibility of the
Company's management; our responsibility is to express an opinion on the
financial statement based on our audit. We conducted our audit of the
statement in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statement is free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statement, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
The accompanying financial statement has been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statement, the Company has no source of revenues which raises
substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1.
The financial statement does not include any adjustments that might result
from the outcome of this uncertainty.
PRICE WATERHOUSE LLP
March 11, 1996
Minneapolis, Minnesota
F-75
<PAGE>
THE FORTRESS GROUP
BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash.................................................. $ 25 $ 2
Deferred transaction costs............................ 2,121 3,077
------ ------
Total assets.................................... $2,146 $3,079
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable...................................... $1,007 $1,635
Due to related parties................................ 1,139 1,444
------ ------
Total liabilities............................... $2,146 $3,079
Shareholders' equity:
Common stock, $.01 par value, 25 million shares
authorized, 2,230,500 shares issued and
outstanding........................................ $ 22 $ 22
Additional paid-in capital.......................... (22) (22)
------ ------
Total shareholders' equity........................ -- --
------ ------
Total liabilities and shareholders' equity...... $2,146 $3,079
====== ======
</TABLE>
The accompanying notes are an integrated part of these financial statements
F-76
<PAGE>
THE FORTRESS GROUP, INC.
NOTES TO BALANCE SHEET
NOTE 1--BUSINESS ORGANIZATION
The Fortress Group, Inc. ("Fortress" or the "Company") was formed in June,
1995 to create a national homebuilding company. Fortress has entered into
definitive merger agreements (the "Mergers") with Buffington Homes, Inc.,
Christopher Homes, Inc., The Genesee Company, Solaris Development Corporation
and Sunstar Mortgage Limited Liability Company (the "Founding Builders"),
pursuant to which Fortress has, in separate transactions, merged with each of
the Founding Builders. Under the Mergers, all outstanding shares of the
Founding Builders' common stock will be converted into shares of Fortress's
Common Stock and cash concurrently with the consummation of an initial public
offering. The Company has not had any operating business activities since
formation. All of the Company's activities have been related to the completion
of the Mergers and the Offerings. Accordingly, the Company has not presented a
statement of operations or a statement of cash flows.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. The Company has had no revenues to
date and was formed solely to create a national homebuilding company through
the combination of existing operating businesses and to consummate a public
stock offering. In this regard, the Company has incurred costs and expenses
which have resulted liabilities in excess of tangible assets which raises
considerable doubt about the Company's ability to continue as a going concern.
Management is of the opinion that sufficient additional funds could be raised
from current or new investors or the companies to be acquired, in the event
the public offering is not successful in order to continue its business
activities.
Preferred and Common Stock
The Company has authorized 2 million shares (par value of $.01) of Preferred
Stock of which 20,000 shares have been authorized as Series A 11% Cumulative
Convertible Non-Voting, for which no shares were issued and outstanding as of
December 31, 1995. The Series A preferred stock is restricted from converting
into common stock of Fortress for the first two years that such shares are
issued and outstanding. The Series A preferred stock has a liquidation
preference of $100 per share ($2 million in the aggregate) and other terms, as
defined in the Certificate of Designation. The conversion ratio of such shares
is the lesser of the price of the common stock Offering or 75% of the lowest
closing price during the thirty days immediately preceding the date of
conversion.
When the Company was founded in June, 1995, the Company issued shares (par
value of $.01 per share) of its founding common stock to its shareholders in
exchange for the value of the intangible assets and activities of the
stockholders. For financial reporting purposes, these founder shares have been
recorded at par with an offsetting reduction to additional paid in capital.
Reverse Split
In January, 1996 the Company effected a reverse stock split related to their
common stock. All share amounts have been adjusted to reflect the split.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Deferred Transaction Costs
Deferred transaction costs consist of costs related to the Merger and
Offering and will be recorded as a reduction of equity when the Offering is
completed.
F-77
<PAGE>
THE FORTRESS GROUP, INC.
NOTES TO BALANCE SHEET--(CONTINUED)
Amounts Due to Related Parties
The Company has funded a significant amount of the costs associated with
completing the Mergers and the Offerings through the issuance of interest and
non-interest bearing Promissory Notes (the "Notes"). The holders of these
notes are primarily individuals who are stockholders of the Company. As of
December 31, 1995, $740,000 of such notes bear interest at prime (8.5% as of
December 31, 1995) and $399,200 are non-interest bearing. The maturity of all
Notes coincides with the consummation of the Offerings.
UNAUDITED INTERIM FINANCIAL STATEMENTS
In the opinion of management, the Company has made all adjustments,
consisting primarily of normal recurring accruals, necessary for a fair
presentation of the financial condition of the Company as of March 31, 1996
and the results of operations and cash flows for the three month period ended
March 31, 1996 and 1995, as presented in the accompanying unaudited interim
financial statements.
F-78
<PAGE>
[LOGO]
THE FORTRESS GROUP, INC.
Existing Markets
[MAP OF EXISTING MARKETS]
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE-
SENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR ANY OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
----------------
TABLE OF CONTENTS
<TABLE>
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PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 10
Senior Notes Offering.................................................... 16
Use of Proceeds.......................................................... 17
Dividend Policy.......................................................... 17
Company Formation and Organization....................................... 18
Dilution................................................................. 21
Capitalization........................................................... 22
Selected Combined Financial and Operating Data........................... 23
Founding Builders--Selected Financial and Operating Data................. 27
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 28
Business................................................................. 36
Management............................................................... 58
Certain Transactions..................................................... 66
Security Ownership of Existing Stockholders and Management............... 69
Description of Capital Stock............................................. 70
Description of Senior Notes.............................................. 73
Description of Proposed Credit Agreement................................. 74
Underwriting............................................................. 76
Certain Legal Matters.................................................... 77
Experts.................................................................. 78
Additional Information................................................... 78
Index to Financial Statements............................................ F-1
</TABLE>
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UNTIL JUNE 10, 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICI-
PATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING
AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
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3,000,000 SHARES
[LOGO]
COMMON STOCK
(PAR VALUE $.01 PER SHARE)
----------------
P R O S P E C T U S
----------------
FURMAN SELZ
BT SECURITIES CORPORATION
SOUTHEAST RESEARCH PARTNERS, INC.
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<PAGE>
THE FORTRESS GROUP, INC.
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501(b) OF REGULATION S-K
<TABLE>
<CAPTION>
ITEM NUMBER AND HEADING
IN FORM S-1 REGISTRATION LOCATION IN COMMON STOCK
------------------------ ------------------------
<C> <S>
1. Forepart of the Registration Statement
and Outside Front Cover Page of
Prospectus.................................. Forepart; Cover Page; Inside
Cover Page
2. Inside Front and Outside Back Cover
Pages of Prospectus......................... Inside Cover Page; Additional
Information; Back Cover Page
3. Summary Information, Risk Factors
and Ratio of Earnings to Fixed
Charges..................................... Cover Page; Prospectus
Summary; Risk Factors
4. Use of Proceeds.............................. Prospectus Summary; Use of
Proceeds
5. Determination of Offering Price.............. Cover Page; Underwriting
6. Dilution..................................... Dilution
7. Selling Security Holders..................... Not Applicable
8. Plan of Distribution......................... Cover Page; Underwriting
9. Description of Securities
to be Registered............................ Description of Common Stock
10. Interest of Named Experts
and Counsel................................. Legal Matters; Experts
11. Information with Respect to the Registrant.. Outside Front Cover Page;
Prospectus Summary; The
Company; Risk Factors; Common
Stock Offering; Use of
Proceeds; Company Formation
and Organization;
Capitalization; Summary
Consolidated Financial and
Operating Data; Pro Forma
Combined Financial Data;
Management's Discussion and
Analysis of Financial
Condition and Results of
Operations; Business;
Management; Certain
Transactions; Security
Ownership of Principal
Stockholders and Management;
Description of Senior Notes;
Description of Proposed
Credit Agreement;
Consolidated Financial
Statements
12. Disclosure of Securities and Exchange
Commission's Position on Indemnification for
Securities Act Liabilities.................. Not Applicable.
</TABLE>
<PAGE>
PROSPECTUS
$100,000,000
[ART]
13.75% SENIOR NOTES DUE 2003
---------------
Interest on the Senior Notes will be payable on May 15 and November 15 of
each year, commencing November 15, 1996. The Senior Notes are not redeemable
prior to their maturity. The Company is required to offer to repurchase all
outstanding Senior Notes at 101% of principal amount, plus accrued interest,
promptly after a Change in Control.
The Senior Notes are general unsecured and unsubordinated obligations of the
Company and will rank on a parity with any future Senior Debt of the Company.
The Senior Notes will be effectively subordinated, however, to all secured
indebtedness of the Company as well as existing and future obligations of the
Company's subsidiaries. As of December 31, 1995, giving pro forma effect to
the Offerings and the anticipated use of proceeds therefrom, there would have
been no such indebtedness outstanding; however, the Company and its
subsidiaries will have the ability to incur additional indebtedness, subject
to certain limitations, in the future.
The Senior Notes will be issued only in book-entry form through the
facilities of The Depository Trust Company (the "Depository"). Interests in
the Senior Notes will be shown in, and transfer thereof will be effected only
through, records maintained by the Depository and its participants. Except as
provided herein, Senior Notes in definitive form will not be issued. See
"Description of Senior Notes--Global Securities."
Concurrently with the Senior Notes Offering, the Company is offering, by
means of a separate prospectus, 3,000,000 shares of its Common Stock. This
Senior Notes Offering is conditioned upon, and is a condition to the
consummation of, such Common Stock offering. See "Common Stock Offering."
SEE "RISK FACTORS" FOR A DISCUSSION OF CERTAIN MATERIAL FACTORS THAT SHOULD
BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE SENIOR NOTES.
---------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED
ON OR ENDORSED THE MERITS OF THIS OFFERING. ANY
REPRESENTATION
TO THE CONTRARY IS UNLAWFUL.
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<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC(1) COMMISSIONS(2) COMPANY(1)(3)
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<S> <C> <C> <C>
Per Senior Note...................... 100.0% 3.5% 96.5%
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Total................................ $100,000,000 $3,500,000 $96,500,000
</TABLE>
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(1) Plus accrued interest, if any, from May 21, 1996.
(2) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(3) Before deducting expenses payable by the Company, estimated at $1,500,000.
The Senior Notes are offered by the several Underwriters when, as, and if
delivered to and accepted by the Underwriters, and subject to various prior
conditions, including the right to reject orders in whole or in part. It is
expected that delivery of the Senior Notes will be made against payment of
immediately available funds through the facilities of the Depository Trust
Company, in book entry form only on or about May 21, 1996.
BT SECURITIES CORPORATION FURMAN SELZ
---------------
The date of this Prospectus is May 16, 1996
<PAGE>
THE SENIOR NOTES OFFERING
Securities Offered..............
$100,000,000 aggregate principal amount of
13.75% Senior Notes due 2003 (the "Senior
Notes"). The Senior Notes will be issued in
book-entry form through the facilities of The
Depository Trust Company. See "Description of
Senior Notes--Global Securities."
Interest Payment Dates..........
May 15 and November 15, commencing November
15, 1996.
Redemption......................
The Senior Notes will not be redeemable prior
to their maturity. The Senior Notes are not
entitled to the benefit of any sinking fund.
Ranking.........................
The Senior Notes will be general unsecured
and unsubordinated obligations of the Company
and will rank on parity with any future Se-
nior Debt (as defined in the Indenture). The
Senior Notes will be effectively subordinated
to all secured indebtedness of the Company
(including borrowings under the Credit Agree-
ment), as well as all existing and future ob-
ligations of the Company's subsidiaries. The
Indenture pursuant to which the Notes will be
issued (the "Indenture") will limit the abil-
ity of the Company to incur secured indebted-
ness and will limit the ability of the
Company's subsidiaries to incur indebtedness.
See "Description of the Senior Notes."
Certain Restrictions............ The Indenture will restrict, among other
things, the ability of the Company and its
Restricted Subsidiaries (as defined in the
Indenture) (i) to make distributions on and
repurchases of its Common Stock, (ii) to in-
cur additional indebtedness, (iii) to dispose
of certain assets without making an offer to
repurchase Senior Notes, (iv) to engage in
transactions with affiliates,(v) to have re-
strictions on the ability of Restricted Sub-
sidiaries to make dividend or other payments
to the Company and(vii) to merge or consoli-
date with or transfer all or substantially
all its assets to another entity. The Inden-
ture will also require the Company to main-
tain certain levels of Tangible Net Worth (as
defined in the Indenture). The restrictions
referred to above are subject to certain sig-
nificant exceptions. In addition, the Company
will be entitled to designate certain subsid-
iaries as Unrestricted Subsidiaries which
will generally not be subject to such re-
strictions. See "Description of the Senior
Notes."
5
<PAGE>
Repurchase Obligation...........
The Company will be required to offer to re-
purchase all outstanding Senior Notes at 101%
of principal amount plus accrued interest
promptly after the occurrence of a Change in
Control (as defined in the Indenture). In ad-
dition, the Company will be required to offer
to repurchase, at par, specified percentages
of outstanding Senior Notes (a) if Consoli-
dated Tangible Net Assets (as defined) at the
end of two consecutive fiscal quarters is
less than $15,000,000, or (b) from the pro-
ceeds of certain Asset Sales (as defined).
See "Description of the Senior Notes."
Use of Proceeds.................
The net proceeds from the sale of the Senior
Notes, along with the net proceeds from the
Common Stock Offering, will be used to repay
outstanding indebtedness of the Company's
subsidiaries (including repurchase of a mi-
nority interest), make certain cash payments
to the former stockholders of the Founding
Builders in connection with the Acquisitions,
and for general corporate purposes, which may
include future acquisitions. See "Use of Pro-
ceeds."
CONCURRENT COMMON STOCK OFFERING
Concurrently with the Senior Notes Offering, the Company is offering, by
separate prospectus, 3,000,000 shares of its Common Stock at an initial
offering price of $9.00 per share. The consummation of the offering of Senior
Notes made hereby is conditioned upon, and is a condition to, the consummation
of the Common Stock offering. See "Common Stock Offering."
6
<PAGE>
RISK FACTORS
In addition to the other information contained in this Prospectus, the
following factors should be considered carefully before purchasing any of the
Senior Notes offered hereby.
ABSENCE OF COMBINED OPERATING HISTORY
Fortress was founded in June 1995 and has conducted no operations prior to
the Offerings. Fortress has entered into agreements to acquire the Founding
Builders simultaneously with the closing of the Offerings. The Founding
Builders have been operating as separate independent entities and there can be
no assurance that the Company will be able to integrate these businesses on an
economic basis. There also can be no assurance that the recently assembled
management group will be able to oversee the combined entity or effectively
implement the Company's operating or growth strategies. See "Business--Company
Formation and Organization" and "Management."
HOMEBUILDING INDUSTRY MARKET CONDITIONS
The homebuilding industry is cyclical and is significantly affected by
changes in national and local economic and other conditions, such as
employment levels, availability of financing, interest rates, consumer
confidence and housing demand. The risks inherent to homebuilders in
purchasing and developing land increase as consumer demand for housing
decreases. Because of the long-term financial commitment involved in
purchasing a home, general economic uncertainties tend to result in more
caution on the part of home buyers, which caution tends to result in fewer
home purchases. Such uncertainties could adversely affect the performance of
the Company and the market price for its Common Stock. In addition,
homebuilders are subject to various risks, many of which are outside the
control of the homebuilder, including conditions of supply and demand in local
markets, weather conditions and natural disasters, such as hurricanes,
tornados and wildfires, delays in construction schedules, cost overruns,
changes in government regulation, increases in real estate taxes and other
local government fees and availability and cost of land, materials and labor.
Although the principal raw materials used in the homebuilding industry
generally are available from a variety of sources, such materials are subject
to periodic price fluctuations. There can be no assurance that the occurrence
of any of the foregoing will not have a material adverse effect on the
Company.
The homebuilding industry is also subject to the potential for significant
variability and fluctuations in real estate values, as evidenced by the
declines in real estate values in recent years. Although the Company believes
the real estate assets currently reflected on the Company balance sheet are
reasonable in amount given the size of the Company's business and are
reflected at or below their fair value, no assurances can be given that write-
downs to the net realizable value of some or all of the Company's assets will
not occur if market conditions deteriorate, or that such write-downs, should
they occur, will not be material in amount.
INTEREST RATES; MORTGAGE FINANCING
Virtually all purchasers of the Company's homes finance their acquisitions
through third-party lenders providing mortgage financing. In general, housing
demand is adversely affected by increases in interest rates, unavailability of
mortgage financing, increasing housing costs and unemployment levels. If
mortgage interest rates increase and the ability of prospective buyers to
finance home purchases is adversely affected, the Company's sales, gross
margins and net income and the market price of the Common Stock may be
adversely impacted. The Company's homebuilding activities are also dependent
upon the availability and cost of mortgage financing for buyers of homes owned
by potential customers so those customers ("move-up buyers") can sell their
homes and purchase a home from the Company. In addition, the Company believes
that the availability of Federal Housing Administration ("FHA") and Veterans
Administration ("VA") mortgage financing is an important factor in marketing a
number of its homes. Any limitation or restriction on the availability of such
financing could adversely affect the Company's sales. See "Business Customer
Financing." Furthermore,
11
<PAGE>
changes in Federal income tax laws may affect demand for new homes. Recently,
proposals have been publicly discussed to eliminate or limit the deductibility
of mortgage interest for Federal income tax purposes and to eliminate or limit
tax-free rollover treatment provided under current law where proceeds of the
sale of a principal residence are reinvested in a new principal residence.
Enactment of such proposals may have an adverse effect on the homebuilding
industry in general, and demand for the Company's products in particular. No
prediction can be made as to whether any such proposals will be enacted and,
if enacted, the particular form such laws would take.
VARIABILITY OF RESULTS
Although the Company, on a combined basis, had net income for fiscal years
1991 through 1995 and for the three months ended March 31, 1996, there can be
no assurance that the Company's profitability will continue. In the future,
the Company expects to continue to experience variability in sales and net
income on a quarterly basis. Factors expected to contribute to this
variability include, among others (i) the timing of home closings and land
sales; (ii) the Company's ability to continue to acquire additional land or
options thereon on acceptable terms; (iii) the condition of the real estate
market and the general economy in the regions where the Company currently
operates and in other markets into which the Company may expand its
operations; (iv) the cyclical nature of the homebuilding industry and changes
in prevailing interest rates and the availability of mortgage financing; and
(v) costs of material and labor and delays in construction schedules. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
COMPETITION
The homebuilding industry is highly competitive and fragmented. Homebuilders
compete for desirable properties, financing, raw materials and skilled labor.
The Company competes for residential sales with other homebuilders, individual
resales of existing homes, available rental housing and, to a lesser extent,
resales of condominiums. The Company's competitors include a number of large
national and regional homebuilding companies and small local homebuilding
companies, some of which may have greater financial resources, easier access
to capital markets and/or lower costs than the Company. See "Business--
Competition and Market Factors."
FINANCING; FUTURE CAPITAL REQUIREMENTS
The homebuilding industry is capital intensive and requires significant up-
front expenditures to acquire and entitle land and commence development.
Accordingly, the Company has incurred substantial indebtedness to finance its
homebuilding activities. At March 31, 1996, on a pro forma basis after giving
effect to the Offerings and the anticipated use of proceeds therefrom, total
consolidated indebtedness would have been approximately $100 million. Although
the Company believes that internally generated funds, the net proceeds of the
Offerings and the Company's available borrowings under a new revolving credit
agreement anticipated to be entered into executed in connection with the
Offerings (the "Credit Agreement") will be sufficient to fund the Company's
capital and other expenditures (including land purchases in connection with
ordinary development activities and assuming no significant cash payments in
connection with any acquisitions made by the Company) for the reasonably
foreseeable future, there can be no assurance that the amounts available from
such sources will be sufficient. The Company may be required to seek
additional capital in the form of equity or debt financing from a variety of
potential sources, including additional bank financing and/or securities
offerings. The amount and type of such additional capital will be limited by
the terms of the Indenture and by the Credit Agreement. In addition, the
availability of borrowed funds, especially for land acquisition and
construction financing, has been severely reduced nationally, and the lending
community is requiring increased amounts of equity to be invested in a project
by the borrower in connection with both new loans and the extension of
existing loans. If the Company is not successful in obtaining sufficient
capital to fund its planned capital and other expenditures, new communities
planned or begun may be abandoned or significantly delayed. Any such delay or
abandonment could result in a reduction in sales and may adversely affect the
Company's future results of operations.
12
<PAGE>
The Company's ability to make payments with respect to the Senior Notes and
to satisfy its other debt obligations will depend on its future operating
performance, which will be affected by prevailing economic conditions and
financial, business and other factors, certain of which are beyond the
Company's control. The Company believes, based on current circumstances, that
the Company's cash flow, together with the proceeds of the Offerings and
anticipated borrowings under the Credit Agreement, will be sufficient to
permit the Company to meet its operating expenses and to service its debt
requirements as they become due. Significant assumptions underlie this belief,
including, among other things, that the Company will succeed in implementing
its business strategy and that there will be no material adverse developments
in the business, liquidity or capital requirements of the Company. If the
Company is unable to service its indebtedness, it will be forced to adopt an
alternative strategy that may include actions such as reducing or delaying
capital expenditures, selling assets, restructuring or refinancing its
indebtedness or seeking additional equity capital. There can be no assurance
that any of these strategies could be effected on satisfactory terms, if at
all. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources." The Indenture will,
among other things, limit the incurrence of additional indebtedness by the
Company and its subsidiaries.
RESTRICTIONS IMPOSED BY TERMS OF INDEBTEDNESS
The Indenture will restrict the ability of the Company and its subsidiaries
to, among other things, incur additional indebtedness, pay dividends or make
certain other restricted payments or investments, consummate certain asset
sales, enter into certain transactions with affiliates, incur liens, or merge
or consolidate with any other person or sell, assign, transfer, lease, convey
or otherwise dispose of all or substantially all of their assets. The
Indenture will also impose limitations on the Company's ability to restrict
the ability of its subsidiaries to pay dividends or make certain payments to
the Company or any of its subsidiaries. In addition, the Company anticipates
that the Credit Agreement will contain other and more restrictive covenants
and will require the Company to maintain specified financial ratios and
satisfy certain financial tests. The Company's ability to meet such financial
ratios and tests may be affected by events beyond its control, and there can
be no assurance that the Company will meet such tests. A breach of any of
these covenants could result in an event of default under the Credit
Agreement. In an event of default under the Credit Agreement the lenders
thereunder could elect to declare all amounts borrowed, together with accrued
interest, to be immediately due and payable and the lenders under the Credit
Agreement could terminate all commitments thereunder. If such indebtedness
were to be accelerated, there can be no assurance that the assets of the
Company would be sufficient to repay in full such indebtedness and the other
indebtedness of the Company, including the Senior Notes. See "Description of
Senior Notes" and "Description of Proposed Credit Agreement."
ACQUISITION STRATEGY
The Company expects to implement an acquisition program whereby it will seek
to acquire additional established homebuilding companies with the goal of
increasing revenues and the markets the Company serves. There can be no
assurance that the Company will be able to acquire or profitably manage
additional companies or successfully integrate such additional companies into
the Company. In addition, there can be no assurance that any companies
acquired in the future will be beneficial to the successful implementation of
the Company's overall business strategy, or that such companies will
ultimately produce returns that justify the investment therein. See
"Business--Acquisition Strategy."
The Company currently intends to finance future acquisitions by using shares
of the Company's Common Stock for all or a portion of the consideration to be
paid. In the event that the Company's Common Stock does not maintain a
sufficient market price, or the potential target companies are unwilling to
accept the Company's Common Stock as part of the purchase price, the Company
may be required to use its cash resources, if available, and proceeds from the
Senior Notes and borrowings under the Credit Agreement in order to continue
its acquisition program. If the Company is unable to fund its acquisitions
with its cash resources or funds from the Senior Notes or through the Credit
Agreement, its growth could be limited unless it can obtain the necessary
funds through additional equity or debt financing. There can be no assurance
that the Company will be able to
13
<PAGE>
obtain such financing if and when it is needed or that, if available, it can
be obtained on terms acceptable to the Company. As a result, there is a risk
that the Company might be unable to implement successfully its acquisition
strategy.
HOLDING COMPANY STRUCTURE
The Company is a holding company and derives all of its operating income and
cash flow from its subsidiaries. The Company must rely entirely upon
distributions from its subsidiaries to generate the funds necessary to meet
its obligations, including the payment of principal of and interest on the
Senior Notes. The ability of the Company's subsidiaries to make such payments
will be subject to, among other things, applicable state laws and any
restrictions that may be contained in credit agreements or other financing
arrangements entered into by such subsidiaries. Claims of creditors of the
Company's subsidiaries will generally have priority as to the assets of such
subsidiaries over the claims of the Company and the holders of the Company's
indebtedness, including the Senior Notes.
The Indenture will, among other things, restrict the amount of debt that may
be incurred by the Company and its Restricted Subsidiaries, and will limit the
ability of the Company's Restricted Subsidiaries to agree to restrictions on
the ability of the Restricted Subsidiaries to make dividend or other payments
to the Company. However, these limitations are subject to a number of
important qualifications. See "Description of Senior Notes--Covenants".
GOVERNMENT REGULATIONS; ENVIRONMENTAL CONTROLS
The Company is subject to local, state and Federal statutes and rules
regulating certain developmental matters, wetland preservation, zoning,
building design and density requirements which limit the number of homes that
can be built within a particular project and can delay the progress of a
particular project. In addition, certain fees, some of which may be
substantial, may be imposed to defray the cost of providing certain
governmental services and improvements to developing areas. The Company may be
subject to additional costs and delays or may be precluded entirely from
building its projects because of "no growth" or "slow growth" initiatives,
building permit allocation ordinances, building moratoriums or similar
government regulations that could be imposed in the future due to health,
safety, welfare or environmental concerns. The Company must also obtain
certain licenses, permits and approvals from certain government agencies for
certain of its activities, the granting or receipt of which are beyond the
Company's control. See "Business--Government Regulations and Environmental
Controls."
The Company and its competitors are subject to a variety of local, state and
federal statutes, ordinances, rules and regulations concerning the protection
of health and the environment. The particular environmental laws which apply
to any given community vary greatly according to the community site, the
site's environmental conditions and the present and former use of the site.
Environmental laws may result in delays, may cause the Company to incur
substantial compliance and other costs and may also prohibit or severely
restrict development in certain environmentally sensitive regions or areas. In
addition, environmental regulations can have an adverse impact on the
availability and price of certain raw materials such as lumber.
RELIANCE ON KEY PERSONNEL
The Company's operations are dependent on the continued efforts of its
executive officers and on senior management of the Company. In addition, the
operations of each subsidiary are dependent upon the senior management of the
Founding Builders and may be dependent on the senior management of any
additional homebuilding companies the Company may acquire in the future. If
any of these people become unable to continue in their present roles, or if
the Company is unable to attract and retain other skilled employees, the
Company's business could be adversely affected. See "Management."
14
<PAGE>
COMPANY FORMATION AND ORGANIZATION
Fortress was incorporated in June 1995 to create a national homebuilding
company to engage in various aspects of the homebuilding industry in some of
the nation's strongest housing markets. The Founding Builders were selected by
Fortress due to their performance, experienced management and substantial
goodwill established in each of their respective target markets. A brief
description of each Founding Builder is set forth below:
Buffington Homes, Inc. and affiliated companies ("Buffington")--Buffington
was founded in 1987 and, immediately prior to consummation of the Offerings,
was wholly owned by Thomas Buffington, Edward Kirkpatrick, and James Giddens
who collectively have over 66 years of homebuilding experience. Buffington
currently has homebuilding operations in Austin and San Antonio, Texas. As of
December 31, 1995, Buffington was the largest privately owned builder in
Austin and the second largest homebuilder overall in Austin based on total
number of permits. Since 1987, Buffington has sold over 2,000 homes.
Buffington constructs single family detached homes which range in sales price
from approximately $84,000 to $300,000 with its primary target market being
entry level and first- and second-time move-up buyers. In May 1995, Buffington
was recognized by Builder magazine as "One of the Austin Area's Leading Home
Builders", and was recognized in 1993 and 1994 by the Texas Capitol Area
Builders Association for outstanding performance in product design and
construction, interior merchandising, management, and marketing. In 1991, the
Texas Association of Realtors named Buffington "Volume Builder of the Year."
Buffington was also recently awarded the Diamond Builder Award by Home Buyers
Warranty for excellence in residential construction and customer satisfaction.
Christopher Homes, Inc. and affiliated companies ("Christopher")--
Christopher commenced homebuilding operations in 1987 and, immediately prior
to the consummation of the Offerings, was wholly owned by J. Christopher
Stuhmer, its President, who has over 22 years of homebuilding experience in
the Las Vegas area. Christopher is currently one of the largest builders in
the luxury production market in Las Vegas based on total dollar volume of
homes sold. Since 1987, Christopher has sold approximately 600 homes with an
approximate value of $190 million. Christopher constructs single family
detached and attached luxury homes in planned communities (with many of its
communities located on golf courses) which range in sale price from
approximately $150,000 to $2,000,000, and targets luxury second- and third-
time (or higher) move-up buyers, as well as second/vacation home buyers.
Christopher has received a number of awards for excellence in the homebuilding
industry including the "Builders Spotlight Business Excellence Award" in 1993
from Builder magazine (January, 1993 issue) as one of "America's Best
Builders." Christopher also received the Gold Nugget Award of Merit in 1995
from the Pacific Coast Builders Conference as one of the "best builders in the
West." A number of Christopher's communities have received individual
Certificates of Recognition from the National Association of Home Builders and
other awards from state and local homebuilding associations.
The Genesee Company and affiliated companies ("Genesee")--Genesee was formed
in 1980 and, immediately prior to the consummation of the Offerings, was
wholly owned by Robert R. Short who has over 20 years of homebuilding
experience. Genesee currently conducts its homebuilding operations in the
Denver metropolitan area, Ft. Collins, Colorado and Tucson, Arizona. Genesee
has been ranked in the top fifteen builders in Denver and is the largest
builder in Fort Collins, based on total dollar value of sales. Since 1980,
Genesee has closed sales of approximately 1,200 homes. Genesee constructs
single family detached and attached homes ranging in sales price from
approximately $120,000 to $350,000. Genesee also constructs custom homes
ranging in sales price from $350,000 to over $1,000,000. Genesee targets all
move-up and custom home buyers. Genesee received the "Gold Medal" award from
Builder magazine (January, 1995) as the country's "Best Builder" constructing
100-500 homes.
Solaris Development Corporation and affiliated companies (including Sunstar
Mortgage LLC) d/b/a/ Sunstar Homes, Inc. ("Sunstar")--Sunstar began operations
in 1987 and, immediately prior to the consummation of the Offerings, was
wholly owned by Lanold Caldwell, David Schmidt and Lawrence Witek. Messrs.
Caldwell and Witek will continue to manage the North Carolina operation and
together have over 40 years of homebuilding experience. Sunstar's geographic
market currently encompasses the Raleigh/
16
<PAGE>
DESCRIPTION OF SENIOR NOTES
The Senior Notes will constitute direct, unsecured obligations of the
Company, ranking on a parity with all other senior unsecured debt of the
Company. The Senior Notes are being issued under an indenture (the
"Indenture") between the Company and IBJ Schroder Bank & Trust Company, as
trustee (the "Trustee"). See "Concerning the Trustee." The Indenture has been
filed as an exhibit to the Registration Statement of which this Prospectus is
a part. The following summaries of certain provisions of the Indenture do not
purport to be complete and are subject to, and are qualified in their entirety
by reference to all of the provisions of the Indenture, including the
definitions therein of certain capitalized terms used in this Prospectus.
GLOBAL SECURITIES
The Senior Notes will be issued in the form of one or more global securities
(each a "Global Security") registered in the name of Cede & Co., as nominee of
The Depository Trust Company (the "Depository"). The Global Security will be
issued in a denomination or aggregate denominations equal to the portion of
the aggregate principal amount of the outstanding Senior Notes represented by
such Global Security. Except as described herein, Senior Notes will not be
issued in definitive form. The following provisions will apply to depositary
arrangements.
Upon the issuance of a Global Security, the Depository or its nominee will
credit the accounts of persons holding through it with the respective
principal amounts of the Senior Notes represented by such Global Security to
which they are entitled. Such accounts will initially be designated by the
Underwriters. Ownership of beneficial interests in a Global Security will be
limited to persons that have accounts with the Depository ("participants") or
persons that may hold interests through participants. Ownership of beneficial
interests by participants in a Global Security will be shown on, and the
transfer of that ownership interest will be effected only through, records
maintained by the Depository for such Global Security. Ownership of beneficial
interests in such Global Security by persons that hold through participants
will be shown on, and the transfer of that ownership interest through such
participant will be effected only through, records maintained by such
participant. The foregoing may impair the ability to transfer beneficial
interests in a Global Security.
Payment of principal and interest, if any, on Senior Notes represented by
any such Global Security will be made to the Depository or its nominee, as the
case may be, as the sole registered holder of the Senior Notes represented
thereby for all purposes under the Indenture. None of the Company, the
Trustee, any agent of the Company or the Trustee or any Underwriter will have
any responsibility or liability for any aspect of the Depository's records
relating to or payments made on account of beneficial ownership interests in a
Global Security representing any Senior Notes or for maintaining, supervising
or reviewing any of the Depository's records relating to such beneficial
ownership interests.
The Company has been advised by the Depository that, upon receipt of any
payment of principal or interest on any Global Security, the Depository will
immediately credit, on its book-entry registration and transfer system, the
account of participants with payments in amounts proportionate to their
respective beneficial interests in the principal amount of such Global
Security as shown on the records of the Depository. Payments by participants
to owners of beneficial interests in a Global Security held through such
participants will be governed by standing instructions and customary practices
as is now the case with securities held for customer accounts registered in
"street name," and will be the sole responsibility of such participants.
A Global Security may not be transferred except as a whole by the Depository
for such Global Security to a nominee of such Depository or by a nominee of
such Depository to such Depository or another nominee of such Depository or by
such Depository or any such nominee to a successor of such Depository or a
nominee of such successor. If the Depository is at any time unwilling or
unable to continue as depository and a successor depository is not appointed
by the Company or the Depository within 90 days, the Company will issue Senior
Notes in definitive form in exchange for the Global Security. In addition, the
Company or the Depository may at any time and in its sole discretion determine
not to have the Senior Notes represented by the Global Security
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and, in such event, the Company will issue Senior Notes in definitive form in
exchange for the Global Security. In either instance, an owner of a beneficial
interest in the Global Security will be entitled to have Senior Notes equal in
principal amount to such beneficial interest registered in its name and will
be entitled to physical delivery of such Senior Notes in definitive form.
Senior Notes so issued in definitive form will be issued in denominations of
$1,000 and integral multiples thereof and will be issued in registered form
only, without coupons. Principal and interest, if any, on the Senior Notes
will be payable, and the Senior Notes may be presented for registration of
transfer or exchange, at the offices of the Trustee.
So long as the Depository for a Global Security, or its nominees, is the
registered owner of such Global Security, such Depository or such nominee, as
the case may be, will be considered the sole registered holder of the Senior
Notes represented by such Global Security for all purposes of receiving
payment on the Senior Notes, receiving notices and for all other purposes
under the Indenture and the Senior Notes. Beneficial interests in Senior Notes
will be evidenced only by, and transfers thereof will be effected only
through, records maintained by the Depository and its participants. Except as
provided above, owners of beneficial interests in a Global Security will not
be entitled to and will not be considered the registered holders thereof for
any purposes under the Indenture. Accordingly, any such person owning a
beneficial interest in such a Global Security must rely on the procedures of
the Depository, and, if any such person is not a participant, on the
procedures of the participant through which such person owns its interest, to
exercise any rights of a registered holder under the Indenture. The Indenture
provides that the Depository may grant proxies and otherwise authorize
participants to give or take any request, demand, authorization, direction,
notice, consent, waiver or other action which a registered holder is entitled
to give or take under the Indenture. The Company understands that under
existing industry practices, in the event that the Company requests any action
of registered holders or that an owner of a beneficial interest in such a
Global Security desires to give or take any action which a registered holder
is entitled to give or take under the Indenture, the Depository would
authorize the participants holding the relevant beneficial interest to give or
take such action and such participants would authorize beneficial owners
owning through such participants to give or take such action or would
otherwise act upon the instructions of beneficial owners owning through them.
The Underwriters named herein are participants of The Depository Trust
Company.
The Depository has advised the Company that the Depository is a limited-
purpose trust company organized under the laws of the State of New York, a
member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code, and a "clearing agency"
registered under the Securities Exchange Act of 1934, as amended. The
Depository was created to hold the securities of its participants and to
facilitate the clearance and settlement of securities transactions among its
participants in such securities through electronic book-entry changes in
accounts of the participants, thereby eliminating the need for physical
movement of securities certificates. The Depository's participants include
securities brokers and dealers, banks, trust companies, clearing corporations
and certain other organizations, some of whom (and/or their representatives)
own the Depository. Access to the Depository's book-entry system is also
available to others, such as banks, brokers, dealers and trust companies, that
clear through or maintain a custodial relationship with a participant, either
directly or indirectly.
CERTAIN COVENANTS OF THE COMPANY
Affirmative Covenants. In addition to the other covenants described herein,
the Indenture requires the Company, subject to certain limitations described
therein, to: (i) pay the principal of, and interest on, the Senior Notes when
the same shall be due and payable; (ii) maintain an office or agency where
Senior Notes may be surrendered for payment or registration of transfer or
exchange and where notices and demands to or upon the Company in respect of
the Senior Notes and the Indenture may be served; (iii) deliver to the Trustee
copies of all reports filed with the Commission; (iv) deliver to the Trustee
annual officers' certificates with respect to the Company's compliance with
its obligations under that Indenture; (v) maintain its corporate existence
subject to the provisions described below under the caption "Limitations on
Mergers and Consolidations"; (vi) pay its taxes when due except where such
taxes are being contested in good faith; and (vii) maintain insurance in at
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least such amounts and against such risks as are usually and prudently insured
against in the same general area by companies engaged in the same or a similar
business.
Reports to Holders of Senior Notes. The Indenture provides that as long as
more than 10 percent of the original amount of the Senior Notes is
outstanding, the Company will (i) remain subject to the requirements of
Section 13 or 15(d) of the Exchange Act whether or not it is required to do so
by the provisions thereof and will file with the Commission all periodic
reports as may be required thereunder and (ii) file with the Commission, and
with the Trustee within 15 days after the Company is required to file the same
with the Commission, copies of the periodic reports which the Company may be
required to file with the Commission pursuant to Section 13(a), 13(c) or 15(d)
of the Exchange Act. The Company will also make such reports available to the
Holders, prospective purchasers of the Senior Notes, securities analysts and
broker-dealers upon their written request.
The Indenture also provides that in the event that (i) 10 percent or less of
the original principal amount of the offered Senior Notes are outstanding and
(ii) the Company is not required to file with the Commission such reports and
other information referred to in the preceding paragraph, the Company will
furnish to the Trustee (A) within 120 days after the end of each fiscal year,
annual reports containing the information required to be contained in Items 1,
2, 3, 5, 6, 7, 8 and 9 of the Annual Report on Form 10-K promulgated under the
Exchange Act, or substantially the same information required to be contained
in comparable items of any successor form, (B) within 60 days after the end of
each of the first three fiscal quarters of each fiscal year, quarterly reports
containing the information required to be contained in the Quarterly Report on
Form 10-Q promulgated under the Exchange Act, or substantially the same
information required to be contained in any successor form and (C) promptly
from the time after the occurrence of an event which would be required to be
reported in the Current Report on Form 8-K if the Company was required to file
such Report, such other reports containing information required to be
contained in the Current Report on Form 8-K promulgated under the Exchange
Act, or substantially the same information required to be contained in any
successor form.
The Indenture also provides that the Company will also comply with the other
provisions of Section 314(a) of the Trust Indenture Act of 1939, as amended
(the "Trust Indenture Act").
Disposition of Proceeds of Asset Sales. The Indenture provides, subject to
the provisions of the Indenture described under the caption "Limitations on
Mergers and Consolidations", that the Company will not, and will not permit
any Restricted Subsidiary to, directly or indirectly, make any Asset Sale
unless (i) the Company or the Restricted Subsidiary, as the case may be,
receives consideration at the time of such Asset Sale at least equal to the
Fair Market Value for the shares or assets sold or otherwise disposed of
(which will be determined in good faith by the Board of Directors of the
Company); provided that the aggregate Fair Market Value of the consideration
received from any Asset Sale that is not in the form of cash or cash
equivalents will not, when aggregated with the Fair Market Value of all other
noncash consideration received by the Company and its Restricted Subsidiaries
from all previous Asset Sales since the Issue Date that has not been converted
into cash or cash equivalents, exceed five percent of the Consolidated
Tangible Net Assets of the Company at the time of the Asset Sale under
consideration, and (ii) the Company will apply the aggregate Net Proceeds
received by the Company or any Restricted Subsidiary from all Asset Sales
occurring subsequent to the Issue Date as follows: (A) to repay any
outstanding Indebtedness of the Company that is not subordinated to the Senior
Notes, or other Indebtedness of the Company, or to the payment of any
Indebtedness of any Restricted Subsidiary, in each case, within one year after
such Asset Sale or (B) to replace the properties and assets that were the
subject of the Asset Sale or properties and assets that (as determined by the
Board of Directors of the Company, whose determination will be conclusive)
will be used in the businesses existing on the Issue Date of the Company and
its Restricted Subsidiaries or in businesses reasonably related thereto within
one year after such Asset Sale. The amount of such Net Proceeds neither used
to repay the Indebtedness described above nor used or invested as set forth in
the preceding sentence constitutes "Excess Proceeds."
The Indenture also provides that, notwithstanding the foregoing, to the
extent the Company or any of its Restricted Subsidiaries receives securities
or other noncash property or assets as proceeds of an Asset Sale, the
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Company will not be required to make any application of such noncash proceeds
required by the provisions of the Indenture described in the preceding
paragraphs until it receives cash or cash equivalent proceeds from a sale,
repayment, exchange, redemption or retirement of or extraordinary dividend or
return of capital on such noncash property. Any amounts deferred pursuant to
the preceding sentence will be applied in accordance with the provisions of
the Indenture described in the preceding paragraph when cash proceeds are
thereafter received from a sale, repayment, exchange, redemption or retirement
of an extraordinary dividend or return of capital on such noncash property.
The Indenture also provides that, when the aggregate amount of Excess
Proceeds equal $5,000,000 or more, the Company will so notify the Trustee in
writing by delivery of an Officers' Certificate and will offer to purchase
from all Holders (an "Excess Proceeds Offer"), and will purchase from Holders
accepting such Excess Proceeds Offer on the date fixed for the closing of such
Excess Proceeds Offer (the "Asset Sale Offer Date"), the maximum principal
amount (expressed as a multiple of $1,000) of Senior Notes that may be
purchased out of the Excess Proceeds, at an offer price (the "Asset Sale Offer
Price") in cash in an amount equal to 100 percent of the principal amount
thereof plus accrued and unpaid interest, if any, to the Asset Sale Offer
Date, in accordance with the procedures set forth in the "Disposition of
Proceeds of Asset Sales" covenant in the Indenture. To the extent that the
aggregate amount of Senior Notes tendered pursuant to an Excess Proceeds Offer
is less than the Excess Proceeds relating thereto, then the Company may use
the Excess Proceeds which exceed the aggregate amount of the Senior Notes
tendered pursuant to such Excess Proceeds Offer for general corporate
purposes. Upon completion of an Excess Proceeds Offer, the amount of Excess
Proceeds will be reset at zero.
In addition, the Indenture provides that, within 30 days after the date on
which the amount of Excess Proceeds equals $5,000,000 or more, the Company
(with written notice to the Trustee) or the Trustee at the Company's request
(and at the expense of the Company) will send or cause to be sent by first-
class mail, postage prepaid, to all Holders on the date such Excess Proceeds
equals $5,000,000, at their respective addresses appearing in the Security
Register a notice prepared by the Company advising such Holders of such
occurrence and of such Holders' rights arising as a result thereof.
The Indenture also provides that:
(a) In the event the aggregate principal amount of Senior Notes
surrendered by Holders exceeds the amount of Excess Proceeds, the Company
will select the Senior Notes to be purchased on a pro rata basis from all
Senior Notes so surrendered, with such adjustments as may be deemed
appropriate by the Company so that only Senior Notes in denominations of
$1,000, or integral multiples thereof, will be purchased. To the extent
that the Excess Proceeds remaining are less than $1,000, the Company may
use such Excess Proceeds for general corporate purposes. Holders whose
Senior Notes are purchased only in part will be issued new Senior Notes
equal in principal amount to the unpurchased portion of the Senior Notes
surrendered.
(b) The Company will not, and will not permit any Restricted Subsidiary
to, create or permit to exist or become effective any restriction (other
than any restriction imposed by law or set forth in any agreement,
indenture, document or instrument relating to any Existing Indebtedness or
Refinancing Indebtedness with respect thereto) that would materially impair
the ability of the Company to make an Excess Proceeds Offer.
Notwithstanding the foregoing, if an Excess Proceeds Offer is made, the
Company will pay for Senior Notes tendered for purchase in accordance with
the provisions of the Indenture described under the caption "Disposition of
Proceeds of Asset Sales."
(c) Not later than one Business Day prior to the Asset Sale Offer Date in
connection with which the Excess Proceeds Offer is being made, the Company
will (i) accept for payment Senior Notes or portions thereof tendered
pursuant to the Excess Proceeds Offer (on a pro rata basis if required
pursuant to the provisions of the Indenture described in paragraph (a)
above), (ii) deposit with the Paying Agent money sufficient, in immediately
available funds, to pay the purchase price of all Senior Notes or portions
thereof so accepted and (iii) deliver to the Paying Agent an Officers'
Certificate identifying the Senior Notes or
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portions thereof accepted for payment by the Company. The Paying Agent will
promptly after acceptance mail or deliver to Holders of Senior Notes so
accepted payment in an amount equal to the Asset Sale Offer Price of the
Senior Notes purchased from each such Holder, and the Company will execute
and upon receipt of an Officers' Certificate of the Company the Trustee
will promptly authenticate and mail or deliver to such Holder a new Senior
Note equal in principal amount to any unpurchased portion of the Senior
Note surrendered. Any Senior Notes not so accepted will be promptly mailed
or delivered by the Paying Agent at the Company's expense to the Holder
thereof. The Company will publicly announce the results of the Excess
Proceeds Offer on the Asset Sale Offer Date. For purposes of the provisions
of the Indenture described above, the Company will choose a Paying Agent
which will not be the Company or a Subsidiary thereof.
(d) Any Excess Proceeds Offer will be conducted by the Company in
compliance with applicable law, including, without limitation, Section
14(e) of the Exchange Act and Rule 14e-1 thereunder, if applicable.
(e) Whenever Excess Proceeds are received by the Company, and prior to
the allocation of such Excess Proceeds pursuant to the provisions of the
Indenture described above, such Excess Proceeds will be set aside by the
Company in a separate account to be held in trust for the benefit of the
Holders; provided, however, that in the event the Company will be unable to
set aside such Excess Proceeds in a separate account because of provisions
of applicable law or any agreement, indenture, document or instrument
relating to Existing Indebtedness or Refinancing Indebtedness with respect
thereto, the Company will not be required to set aside such Excess
Proceeds.
There can be no assurance that sufficient funds will be available at the
time of an Excess Proceeds Offer to make any required repurchases. The
Company's failure to make any required repurchases in the event of an Excess
Proceeds Offer will create an Event of Default under the Indenture.
Limitations on Restricted Payments. The Indenture provides that the Company
will not, and will not permit any of its Restricted Subsidiaries to, make any
Restricted Payment, directly or indirectly, after the Issue Date if at the
time of such Restricted Payment and giving effect thereto:
(i) the amount of such Restricted Payment (the amount of such Restricted
Payment, if other than in cash, will be determined by the Board of
Directors of the Company), when added to the aggregate amount of all
Restricted Payments made after the Issue Date, exceeds the sum of: (1) 50
percent of the Company's Consolidated Net Income accrued during the period
(taken as a single period) from January 1, 1996 (or, if such aggregate
Consolidated Net Income is a deficit, minus 100 percent of such aggregate
deficit), plus (2) the net cash proceeds derived from the issuance and sale
of Capital Stock of the Company and its Restricted Subsidiaries that is not
Disqualified Stock (other than a sale to a Subsidiary of the Company) after
the Issue Date but only to the extent not applied under clause (d) of the
definition of "Restricted Payment" set forth herein, plus (3) 100 percent
of the principal amount of any Indebtedness of the Company or a Restricted
Subsidiary that is converted into or exchanged for Capital Stock of the
Company that is not Disqualified Stock, plus (4) 100 percent of the
aggregate amounts received by the Company or any Restricted Subsidiary upon
the sale, disposition or liquidation (including by way of dividends or
other return of capital) of any Investment but only to the extent (x) not
included in Consolidated Net Income in clause (i)(2) above and (y) that the
making of such Investment constituted a Restricted Investment made pursuant
to the provisions of the Indenture described in this paragraph, plus (5)
100 percent of the principal amount of, or if issued at a discount the
accreted value of, any Indebtedness or other obligation that is the subject
of a guaranty by the Company which is released after the Issue Date, but
only to the extent that the granting of such guaranty constituted a
"Restricted Payment" under the definition thereof set forth in the
Indenture and described herein; or
(ii) the Company would be unable to incur at least an additional $1.00 of
Indebtedness under the Consolidated Fixed Charge Coverage Ratio Test set
forth under the caption "Limitations on Additional Indebtedness"; or
(iii) a Default or Event of Default has occurred and is continuing or
occurs as a consequence thereof.
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Notwithstanding the foregoing, the provisions of the Indenture described
above will not prevent: (i) the payment of any dividend within 60 days after
the date of declaration thereof if the payment thereof would have complied
with the limitations of the Indenture on the date of declaration or (ii) the
retirement of shares of the Company's Capital Stock or the Company's or a
Subsidiary of the Company's Indebtedness for, in exchange for or out of the
proceeds of a substantially concurrent sale (other than a sale to a Subsidiary
of the Company) of, other shares of its Capital Stock (other than Disqualified
Stock).
Limitations on Additional Indebtedness. The Indenture provides that the
Company will not, and will not permit any of its Restricted Subsidiaries to
Incur any Indebtedness (other than Indebtedness between the Company and its
Restricted Subsidiaries which are Wholly Owned Subsidiaries or among such
Restricted Subsidiaries which are Wholly Owned Subsidiaries) including
Acquisition Debt, unless, after giving effect thereto and the application of
the proceeds therefrom, the Company's Consolidated Fixed Charge Coverage Ratio
on the date thereof would be at least 2.0 to 1.0.
Notwithstanding the foregoing, the provisions of the Indenture will not
prevent (i) in addition to the Indebtedness permitted to be Incurred under
clauses (ii) and (iii) of this sentence and Indebtedness permitted to be
Incurred under the provisions of the Indenture described in the preceding
paragraph, the Company from Incurring (A) Refinancing Indebtedness, (B) Non-
Recourse Indebtedness and (C) Indebtedness Incurred for working capital
purposes or to finance the acquisition, holding or development of property by
the Company and its Restricted Subsidiaries (including, without limitation,
the financing of any related interest reserve) in the ordinary course of
business in an aggregate amount at any one time outstanding not to exceed
$50,000,000 (excluding any Indebtedness referred to in clauses (i)(A) and
(i)(B) of this paragraph), less the amount of any Indebtedness repaid pursuant
to the provisions of the Indenture described in clause (ii)(A) of the first
paragraph under the caption "Disposition of Proceeds of Asset Sales", provided
that until June 30, 1997, the incurrence of such indebtedness for the
refinancing of Acquisition Debt other than Existing Indebtedness shall be no
more than $25,000,000 unless the Company's Consolidated Fixed Charge Coverage
Ratio exceeds 1.75 to 1, (ii) Unrestricted Subsidiaries from Incurring
Indebtedness, (iii) the Company and its Restricted Subsidiaries from Incurring
Indebtedness under any deposits made to secure performance of tenders, bids,
leases, statutory obligations, surety and appeal bonds, progress statements,
government contracts and other obligations of like nature (exclusive of the
obligation for the payment of borrowed money) in each case Incurred in the
ordinary course of business of the Company or the Restricted Subsidiary
consistent with past practice and (iv) Restricted Subsidiaries from
guaranteeing Indebtedness of the Company or another Restricted Subsidiary;
provided that the tangible net assets of all Restricted Subsidiaries
guaranteeing Indebtedness of the Company or other Restricted Subsidiaries
(other than Indebtedness Incurred from time to time under the Existing Credit
Facility) at the end of the fiscal quarter immediately preceding the date of
Incurring any such guaranty, as determined in accordance with GAAP, shall not
exceed 10% of the Company's Consolidated Tangible Net Assets.
Restrictions on Restricted Subsidiary Indebtedness. The Indenture provides
that the Company will not permit any Restricted Subsidiaries, directly or
indirectly, to Incur any additional Indebtedness after the Issue Date other
than: (i) Refinancing Indebtedness, (ii) Non-Recourse Indebtedness, (iii)
Indebtedness to the Company, (iv) any deposits made to secure performance of
tenders, bids, leases, statutory obligations, surety and appeal bonds,
progress statements, government contracts, and other obligations of like
nature (exclusive of the obligation for the payment of borrowed money), in
each case Incurred in the ordinary course of business of the Restricted
Subsidiary and (v) any guaranty of Indebtedness of the Company or another
Restricted Subsidiary; provided that the tangible net assets of all Restricted
Subsidiaries guaranteeing Indebtedness of the Company or other Restricted
Subsidiaries at the end of the fiscal quarter immediately preceding the date
of Incurring any such guaranty, as determined in accordance with GAAP, shall
not exceed 10% of the Company's Consolidated Tangible Net Assets.
Limitations and Restrictions on Issuance of Capital Stock of Restricted
Subsidiaries. The Indenture provides that the Company will not permit any
Restricted Subsidiaries to issue, or permit to be outstanding at any time,
Preferred Stock or any other Capital Stock constituting Disqualified Stock.
Change of Control. The Indenture provides that, following the occurrence of
any Change of Control, the Company will so notify the Trustee in writing by
delivery of an Officers' Certificate and will offer to purchase
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(a "Change of Control Offer") from all Holders, and will purchase from Holders
accepting such Change of Control Offer on the date fixed for the closing of
such Change of Control Offer (the "Change of Control Payment Date"), the
Outstanding Senior Notes at an offer price (the "Change of Control Price") in
cash in an amount equal to 101 percent of the aggregate principal amount
thereof plus accrued and unpaid interest, if any, to the Change of Control
Payment Date in accordance with the procedures set forth in the "Change of
Control" covenant of the Indenture.
In addition, the Indenture provides that, within 30 days after the date of
any Change of Control, the Company (with written notice to the Trustee) or the
Trustee at the Company's request (and at the expense of the Company), will
send or cause to be sent by first-class mail, postage prepaid, to all Holders
on the date of the Change of Control at their respective addresses appearing
in the Security Register, a notice prepared by the Company advising the
Holders of such occurrence and of such Holder's rights arising as a result
thereof. Such notice will contain all instructions and materials necessary to
enable such Holders to tender their Senior Notes to the Company.
The Indenture also provides that:
(a) In the event of a Change of Control Offer, the Company will only be
required to accept Senior Notes in denominations of $1,000 or integral
multiples thereof.
(b) The Company will not, and will not permit any Restricted Subsidiary
to, create or permit to exist or become effective any restriction (other
than any restriction imposed by law or set forth in any agreement,
indenture, document or instrument relating to any Existing Indebtedness or
Refinancing Indebtedness with respect thereto) that would materially impair
the ability of the Company to make a Change of Control Offer.
Notwithstanding the foregoing, if a Change of Control Offer is made, the
Company will pay for Senior Notes tendered for purchase in accordance with
the provisions of the Indenture described under the caption "Change of
Control."
(c) Not later than one Business Day prior to the Change of Control
Payment Date in connection with which the Change of Control Offer is being
made, the Company will (i) accept for payment Senior Notes or portions
thereof tendered pursuant to the Change of Control Offer, (ii) deposit with
the Paying Agent money sufficient, in immediately available funds, to pay
the purchase price of all Senior Notes or portions thereof so accepted and
(iii) deliver to the Paying Agent an Officers' Certificate identifying the
Senior Notes or portions thereof accepted for payment by the Company. The
Paying Agent will promptly after acceptance mail or deliver to Holders of
Senior Notes so accepted payment in an amount equal to the Change of
Control Price of the Senior Notes purchased from each such Holder, and the
Company will execute and, upon receipt of any Officers' Certificate of the
Company, the Trustee will promptly authenticate and mail or deliver to such
Holder a new Senior Note equal in principal amount to any unpurchased
portion of the Senior Note surrendered. Any Senior Notes not so accepted
will be promptly mailed or delivered by the Paying Agent at the Company's
expense to the Holder thereof. The Company will publicly announce the
results of the Change of Control Offer on the Change of Control Payment
Date. For purposes of the provisions of the Indenture described above, the
Company will choose a Paying Agent which will not be the Company or a
Subsidiary thereof.
(d) Any Change of Control Offer will be conducted by the Company in
compliance with applicable law, including, without limitation, Section
14(e) of the Exchange Act and Rule 14e-1 thereunder.
There can be no assurance that sufficient funds will be available at the
time of a Change of Control to make any required repurchases. The Company's
failure to make any required repurchases in the event of a Change of Control
Offer will create an Event of Default under the Senior Indenture.
No quantitative or other established meaning has been given to the phrase
"all or substantially all" (which appears in the definition of Change of
Control) by courts which have interpreted this phrase in various contexts. In
interpreting this phrase, courts make a subjective determination as to the
portion of assets conveyed, considering such factors as the value of the
assets conveyed and the proportion of an entity's income derived
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from the assets conveyed. Accordingly there may be uncertainty as to whether a
Holder of Senior Notes can determine whether a Change of Control has occurred
and exercise any remedies such Holder may have upon a Change of Control.
Limitations on Transactions with Affiliates. The Indenture provides that the
Company will not, and will not permit any of its Subsidiaries to, make any
loan, advance, guaranty or capital contribution to or for the benefit of, or
sell, lease, transfer or otherwise dispose of any of its properties or assets
to, or for the benefit of, or purchase or lease any property or assets from,
or enter into or amend any contract, agreement or understanding with, or for
the benefit of, (i) any Affiliate of the Company or any Affiliate of the
Company's Subsidiaries or (ii) any Person (or any Affiliate of such Person)
holding 10 percent or more of the Common Equity of the Company or any of its
Subsidiaries (each an "Affiliate Transaction"), except on terms that are no
less favorable to the Company or the relevant Subsidiary, as the case may be,
than those that could have been obtained in a comparable transaction on an
arm's length basis from a Person that is not an Affiliate.
The Indenture also provides that the Company will not, and will not permit
any of its Subsidiaries to, enter into an Affiliate Transaction involving or
having a value of more than $1,000,000, unless in each case such Affiliate
Transaction has been approved by a majority of the disinterested members of
the Company's Board of Directors.
The Indenture also provides that the Company will not, and will not permit
any of its Subsidiaries to, enter into any Affiliate Transaction involving or
having a value of more than $5,000,000 unless the Company has delivered to the
Trustee an opinion of an Independent Financial Advisor to the effect that the
transaction is fair to the Company or the relevant Subsidiary, as the case may
be, from a financial point of view.
The Indenture also provides that, notwithstanding the foregoing, an
Affiliate Transaction will not include (i) any contract, agreement or
understanding with, or for the benefit of, or plan for the benefit of,
employees or directors of the Company or its Subsidiaries (in their capacity
as such) that has been approved by the Company's Board of Directors, (ii)
Capital Stock issuances to members of the Board of Directors, officers and
employees of the Company or its Subsidiaries pursuant to plans approved by the
stockholders of the Company, (iii) any Restricted Payment otherwise permitted
under the provisions of the Senior Indenture described under the caption
"Limitations on Restricted Payments," (iv) any transaction between the Company
or a Restricted Subsidiary and another Restricted Subsidiary, or (v) any
contract, agreement or understanding as in effect on the Issue Date or any
transaction contemplated thereby.
Limitations on Liens. The Senior Indenture will provide that the Company
will not, and will not permit any of its Restricted Subsidiaries to, create,
Incur, assume or suffer to exist any Liens, other than Permitted Liens, on any
of its or their assets, property, income or profits therefrom unless
contemporaneously therewith or prior thereto all payments due under the
Indenture and the Senior Notes are secured on an equal and ratable basis with
the obligation or liability so secured until such time as such obligation or
liability is no longer secured by a Lien.
Limitations on Restrictions on Distributions from Restricted
Subsidiaries. The Indenture provides that the Company will not, and will not
permit any of its Restricted Subsidiaries to, create, assume or otherwise
cause or suffer to exist or become effective any consensual encumbrance or
restriction (other than encumbrances or restrictions imposed by law or by
judicial or regulatory action or by provisions in leases or other agreements
that restrict the assignability thereof) on the ability of any Restricted
Subsidiary to (i) pay dividends or make any other distributions on its Capital
Stock or any other interest or participation in, or measured by, its profits,
owned by the Company or any of its other Restricted Subsidiaries, or pay
interest on or principal of any Indebtedness owed to the Company or any of its
other Restricted Subsidiaries, (ii) make loans or advances to the Company or
any of its other Restricted Subsidiaries, or (iii) transfer any of its
properties or assets to the Company or any of its other Restricted
Subsidiaries, except for encumbrances or restrictions existing under or by
reason of (a) applicable law, (b) covenants or restrictions contained in
Existing Indebtedness as in effect on the Issue Date, (c) any restrictions or
encumbrances arising in connection with the Existing Credit Facility; provided
that any such restrictions and encumbrances relating to any extension or
renewal of the Existing Credit Facility are not more
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restrictive than those in the Existing Credit Facility being extended or
renewed, (d) any restrictions or encumbrances arising in connection with
Refinancing Indebtedness; provided that any restrictions and encumbrances of
the type described in this clause (d) that arise under such Refinancing
Indebtedness are not more restrictive than those under the agreement creating
or evidencing the Indebtedness being refunded or refinanced, (e) any agreement
restricting the sale or other disposition of property securing Indebtedness
permitted by the Indenture if such agreement does not expressly restrict the
ability of a Subsidiary of the Company to pay dividends or make loans or
advances, and (f) reasonable and customary borrowing base covenants set forth
in credit agreements evidencing Indebtedness otherwise permitted by the
Indenture which covenants restrict or limit the distribution of revenues or
sale proceeds from real estate or a real estate project based upon the amount
of Indebtedness outstanding on such real estate or real estate project and the
value of some or all of the remaining real estate or the project's remaining
assets.
Maintenance of Consolidated Tangible Net Worth. The Indenture provides that
if the Consolidated Tangible Net Worth of the Company at the end of any two
consecutive fiscal quarters is less than $15,000,000, within 30 days after the
end of each such period the Company will so notify the Trustee in writing by
delivery of an Officers' Certificate and will offer to purchase from all
Holders (a "Net Worth Offer"), and will purchase from Holders accepting such
Net Worth Offer on the date fixed for the closing of such Net Worth Offer (the
"Net Worth Offer Date"), ten percent of the original Outstanding principal
amount of the Senior Notes (the "Net Worth Amount") at an offer price (the
"Net Worth Offer Price") in cash in an amount equal to 100 percent of the
principal amount thereof plus accrued and unpaid interest, if any, to the Net
Worth Offer Date, in accordance with the procedures set forth in the
"Maintenance of Consolidated Tangible Net Worth" covenant of the Indenture. To
the extent that the aggregate amount of Senior Notes tendered pursuant to a
Net Worth Offer is less than the Net Worth Amount relating thereto, then the
Company may use the excess of the Net Worth Amount over the amount of Senior
Notes or portions thereof tendered for general corporate purposes.
The Indenture also provides that if the Consolidated Tangible Net Worth of
the Company for any two consecutive fiscal quarters is less than $15,000,000,
within 30 days after the end of such period, the Company (with written notice
to the Trustee) or the Trustee at the Company's request (and at the expense of
the Company) will send or cause to be sent by first-class mail, postage
prepaid, to all Holders on the date of the end of the second such consecutive
fiscal quarter, at their respective addresses appearing in the Security
Register, a notice prepared by the Company advising the Holders of such
occurrence and of each Holder's rights arising as a result thereof. Such
notice will contain all instructions and materials necessary to enable Holders
to tender their Senior Notes to the Company.
The Indenture also provides that:
(a) If the aggregate principal amount of Senior Notes surrendered by
Holders exceeds the Net Worth Amount, the Company will select the Senior
Notes to be purchased on a pro rata basis from all Senior Notes so
surrendered, with such adjustments as may be deemed appropriate by the
Company so that only Senior Notes in denominations of $1,000, or integral
multiples thereof, will be purchased. To the extent that the Net Worth
Amount remaining is less than $1,000, the Company may use such Net Worth
Amount for general corporate purposes. Holders whose Senior Notes are
purchased only in part will be issued new Senior Notes equal in principal
amount to the unpurchased portion of the Senior Notes surrendered.
(b) The Company will not, and will not permit any Restricted Subsidiary
to, create or permit to exist or become effective any restriction (other
than any restriction imposed by law or set forth in any agreement,
indenture, document or instrument relating to any Existing Indebtedness or
Refinancing Indebtedness with respect thereto) that would materially impair
the ability of the Company to make a Net Worth Offer. Notwithstanding the
foregoing, if a Net Worth Offer is made, the Company will pay for Senior
Notes tendered for purchase in accordance with the provisions of the
Indenture described under the caption "Maintenance of Consolidated Tangible
Net Worth."
(c) Not later than one Business Day prior to the Net Worth Offer Date in
connection with which the Net Worth Offer is being made, the Company will
(i) accept for payment Senior Notes or portions thereof
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tendered pursuant to the Net Worth Offer (on a pro rata basis if required
pursuant to the provisions of the Indenture described in paragraph (a)
above), (ii) deposit with the Paying Agent money sufficient, in immediately
available funds, to pay the purchase price of all Senior Notes or portions
thereof so accepted and (iii) deliver to the Paying Agent an Officers'
Certificate identifying the Senior Notes or portions thereof accepted for
payment by the Company. The Paying Agent will promptly after acceptance
mail or deliver to Holders of Senior Notes so accepted payment in an amount
equal to the Net Worth Offer Price of the Senior Notes purchased from each
such Holder, and the Company will execute and the Trustee will promptly
authenticate and mail or deliver to such Holder a new Senior Note equal in
principal amount to any unpurchased portion of the Senior Note surrendered.
Any Senior Notes not so accepted will be promptly mailed or delivered by
the Paying Agent at the Company's expense to the Holder thereof. The
Company will publicly announce the results of the Net Worth Offer on the
Net Worth Offer Date. For purposes of the provisions of the Indenture
described above, the Company will choose a Paying Agent which will not be
the Company or a Subsidiary thereof.
(d) Any Net Worth Offer will be conducted by the Company in compliance
with applicable law, including, without limitation, Section 14(e) of the
Exchange Act and Rule 14e-1 thereunder, if applicable.
There can be no assurance that sufficient funds will be available at the
time of a Net Worth Offer to make any required repurchases. The Company's
failure to make any required repurchases in the event of a Net Worth Offer
will create an Event of Default under the Indenture.
Limitations on Mergers and Consolidations. The Indenture provides that the
Company will not consolidate or merge with or into, or sell, lease, convey or
otherwise dispose of all or substantially all of its assets (including,
without limitation, by way of liquidation or dissolution), or assign its
obligations thereunder or under the Senior Notes as an entirety or
substantially as an entirety in one transaction or series of related
transactions, to any Person unless: (i) the Person formed by or surviving such
consolidation or merger (if other than the Company), or to which sale, lease,
conveyance or other disposition or assignment will be made (collectively, the
"Successor"), is a solvent corporation or other legal entity organized and
existing under the laws of the United States or any state thereof or the
District of Columbia, and the Successor assumes by supplemental indenture in a
form reasonably satisfactory to the Trustee all of the obligations of the
Company under the Senior Notes and Indenture, (ii) immediately after giving
effect to such transaction, no Default or Event of Default has occurred and is
continuing, (iii) immediately after giving effect to such transaction and the
use any net proceeds therefrom on a pro forma basis, the Consolidated Tangible
Net Worth of the Company or the Successor, as the case may be, would be at
least equal to the Consolidated Tangible Net Worth of the Company immediately
prior to such transaction and (iv) the Consolidated Fixed Charge Coverage
Ratio set forth in the Senior Indenture and described under the caption
"Limitations on Additional Indebtedness" of the Company or the Successor, as
the case may be, immediately after giving effect to such transaction, would be
such that the Company or the Successor, as the case may be, would be entitled
to Incur at least $1 of additional Indebtedness under such Consolidated Fixed
Charge Coverage Ratio test. However, any such consolidation, merger, sale,
lease, conveyance or disposition may result in a Change of Control, thereby
requiring the Company to make a Change of Control Offer. See "Change of
Control," above.
No quantitative or other established meaning has been given to the phrase
"all or substantially all" by courts which have interpreted this phrase in
various contexts. In interpreting this phrase, courts make a subjective
determination as to the portion of assets conveyed, considering such factors
as the value of the assets conveyed and the proportion of an entity's income
derived from the assets conveyed. Accordingly, there may be uncertainty as to
whether a Holder of Senior Notes can determine whether the Company has sold,
leased, conveyed or otherwise disposed of all or substantially all of its
assets and exercise any remedies such Holder may have upon the occurrence of
any such transaction.
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For purposes solely of this "Indenture Covenants" section of this
Prospectus, the terms set forth below shall have the following meanings:
"Acquisition Debt" means Indebtedness of any Person existing at the time
such Person became a Subsidiary of the Company (or such Person is merged into
the Company or one of the Company's Subsidiaries) or assumed in connection
with the acquisition of assets from any such Person (other than assets
acquired in the ordinary course of business of the Company and its
Subsidiaries), including, without limitation, Indebtedness Incurred in
connection with, or in contemplation of, such Person becoming a Subsidiary of
the Company (but excluding Indebtedness of such Person which is extinguished,
retired or repaid in connection with such Person becoming a Subsidiary of the
Company).
"Affiliate" of any Person means any Person directly or indirectly
controlling or controlled by, or under direct or indirect common control with,
such Person. For purposes of the Indenture, each executive officer and
director of the Company and of each Restricted Subsidiary will be an Affiliate
of the Company. In addition, for purposes of the Indenture, control of a
Person means the power to direct the management and policies of such Person,
directly or indirectly, whether through the ownership of voting securities, by
contract or otherwise. Notwithstanding the foregoing, the term "Affiliate"
will not include, with respect to the Company or any Restricted Subsidiary
which is a Wholly Owned Subsidiary of the Company, any Restricted Subsidiary
which is a Wholly Owned Subsidiary of the Company.
"Asset Sale" for any Person means the sale, lease, conveyance or other
disposition (including, without limitation, by merger, consolidation or sale
and leaseback transaction, and whether by operation of law of otherwise) of
any of that Person's assets (including, without limitation, the sale or other
disposition of Capital Stock of any Subsidiary of such Person, whether by such
Person or such Subsidiary), whether owned on the Issue Date of the Senior
Notes or subsequently acquired in one transaction or a series of related
transactions, in which such Person and/or Subsidiaries receive cash and/or
other consideration (including, without limitation, the unconditional
assumption of Indebtedness of such Person and/or its Subsidiaries) having an
aggregate Fair Market Value of $1,000,000 or more as to such transaction or
series of related transactions; provided, however, that the following will not
constitute Asset Sales (i) sales of homes and sales of mortgages on homes in
the ordinary course of business consistent with past practices, (ii) sales,
leases, conveyances or other dispositions, including, without limitation,
exchanges or swaps, of real estate or other assets in the ordinary course of
business consistent with past practices, (iii) sales, leases, sale-leasebacks
or other dispositions of amenities and other improvements at the Company's or
its Subsidiaries' communities in the ordinary course of business consistent
with past practices, and (iv) transactions between the Company and any of its
Restricted Subsidiaries which are Wholly Owned Subsidiaries, or among such
Restricted Subsidiaries which are Wholly Owned Subsidiaries of the Company.
"Board of Directors" means the board of directors of a Person or any
authorized committee of the board of directors of such Person.
"Board Resolution" means a copy of a resolution certified by the Secretary
or an Assistant Secretary of the Company to have been duly adopted by the
Board of Directors and to be in full force and effect on the date of such
certification and delivered to the Trustee.
"Business Day" means any day other than a Legal Holiday.
"Capital Stock" of any Person means any and all shares, rights to purchase,
warrants or options (whether or not currently exercisable), participations, or
other equivalents of or interests in (however designated) the equity (which
includes, but is not limited to, common stock, preferred stock and partnership
and joint venture interests) of such Person (excluding any debt securities
that are convertible into, or exchangeable for, such equity).
"Capitalized Lease Obligations" of any Person means any obligation of such
Person to pay rent or other amounts under a lease that is required to be
capitalized for financial reporting purposes in accordance with
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GAAP, and the amount of such obligation will be the capitalized amount thereof
determined in accordance with GAAP.
"Change of Control" means any of the following: (i) the sale, lease,
conveyance or other disposition of all or substantially all of the Company's
assets as an entirety or substantially as an entirety to any Person or group
of Persons (within the meaning of Section 13(d)(3) of the Exchange Act) in one
or a series of transactions; provided that a transaction where the holders of
all classes of Common Equity of the Company immediately prior to such
transaction own, directly or indirectly, 50 percent or more of the aggregate
voting power of all classes of Common Equity of such Person or group
immediately after such transaction will not be a Change of Control, (ii) the
acquisition by the Company and/or any of its Subsidiaries of 50 percent or
more of the aggregate voting power of all classes of Common Equity of the
Company in one transaction or a series of related transactions, (iii) the
liquidation or dissolution of the Company; provided that a liquidation or
dissolution of the Company which is part of a transaction or series of related
transactions that does not constitute a Change of Control under the proviso of
clause (i) above will not constitute a Change of Control under this clause
(iii) or (iv) any transaction or series of related transactions (as a result
of a tender offer, merger, consolidation or otherwise) that results in, or
that is in connection with, (a) any Person, including, a "group" (within the
meaning of Section 13(d)(3) of the Exchange Act) acquiring beneficial
ownership (as determined in accordance with said Rule 13d-3), directly or
indirectly, of 50 percent or more of the aggregate voting power of all classes
of Common Equity of the Company or of any Person that possesses beneficial
ownership (as determined in accordance with said Rule 13d-3), directly or
indirectly, of 50 percent or more of the aggregate voting power of all classes
of Common Equity of the Company or (b) less than 50 percent (measured by the
aggregate voting power of all classes) of the Common Equity of the Company
being registered under Section 12(b) or 12(g) of the Exchange Act.
"Common Equity" of any Person means all Capital Stock of such Person that is
generally entitled (i) to vote in the election of directors of such Person, or
(ii) if such Person is not a corporation, to vote or otherwise participate in
the selection of the governing body, partners, managers or others that will
control the management and policies of such Person.
"Consolidated Cash Flow Available for Fixed Charges" of the Company means,
for any period, the sum of the amounts for such period of (i) Consolidated Net
Income, plus (ii) Consolidated Income Tax Expense (other than income tax
expense (either positive or negative) attributable to extraordinary and
nonrecurring gains or losses on Asset Sales), plus (iii) Consolidated Interest
Expense, plus (iv) all depreciation, and without duplication, amortization
(including, without limitation, previously capitalized interest amortized to
cost of sales), plus (v) all other noncash items reducing Consolidated Net
Income for such period, minus (vi) all other noncash items increasing
Consolidated Net Income for such period, all as determined on a consolidated
basis for the Company and its Restricted Subsidiaries in accordance with GAAP.
"Consolidated Fixed Charge Coverage Ratio" of the Company means, with
respect to any determination date, the ratio of (i) Consolidated Cash Flow
Available for Fixed Charges of the Company for the prior four full fiscal
quarters for which financial results have been reported immediately preceding
the determination date to (ii) the aggregate Consolidated Interest Incurred of
the Company for the prior four fiscal quarters for which financial results
have been reported immediately preceding the determination date.
"Consolidated Income Tax Expense" of the Company for any period means the
income tax expense of the Company and its Restricted Subsidiaries for such
period, determined on a consolidated basis in accordance with GAAP.
"Consolidated Interest Expense" of the Company for any period means the
Interest Expense of the Company and its Restricted Subsidiaries for such
period, determined on a consolidated basis in accordance with GAAP.
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"Consolidated Interest Incurred" of the Company for any period means the
Interest Incurred of the Company and its Restricted Subsidiaries for such
period, determined on a consolidated basis in accordance with GAAP.
"Consolidated Net Income" of the Company for any period means the aggregate
net income (or loss) of the Company and its Restricted Subsidiaries for such
period, determined on a consolidated basis in accordance with GAAP; provided
that there will be excluded from such net income (to the extent otherwise
included therein), without duplication: (i) the net income (or loss) of any
Person (other than a Restricted Subsidiary) in which any Person (including,
without limitation, an Unrestricted Subsidiary) other than the Company has an
ownership interest, except to the extent that any such income has actually
been received by the Company or any Restricted Subsidiary in the form of
dividends or similar distributions during such period, (ii) except to the
extent includable in the Consolidated Net Income pursuant to the foregoing
clause (i), the net income (or loss) of any Person that accrued prior to the
date that (a) such Person becomes a Restricted Subsidiary or is merged into or
consolidated with the Company or any of its Restricted Subsidiaries or (b) the
assets of such Person are acquired by the Company or any of its Restricted
Subsidiaries, (iii) the net income of any Restricted Subsidiary to the extent
that (but only so long as) the declaration or payment of dividends or similar
distributions by such Restricted Subsidiary of that income is not permitted by
operation of the terms of its charter or any agreement, instrument, judgment,
decree, order, statute, rule or governmental regulation applicable to that
Restricted Subsidiary during such period, (iv) in the case of a successor to
the Company by consolidation, merger or transfer of its assets, any earnings
of the successor prior to such consolidation, merger or transfer of assets and
(v) the gains (but not losses) resulting from (a) the acquisition of
securities issued by the Company or extinguishment of Indebtedness of the
Company, (b) Asset Sales and (c) other extraordinary items. Notwithstanding
the foregoing, in calculating Consolidated Net Income, the Company will be
entitled to take into consideration the tax benefits associated with any
extraordinary loss, but only to the extent such tax benefits are recognized by
the Company. Consolidated Net Income will exclude any noncash losses, whether
or not extraordinary, incurred in connection with the issuance of Capital
Stock (other than Disqualified Stock) in exchange for Indebtedness of the
Company or its Wholly Owned Restricted Subsidiaries.
"Consolidated Tangible Net Assets" of the Company as of any date means the
total amount of assets of the Company and its Restricted Subsidiaries (less
applicable reserves) on a consolidated basis at the end of the fiscal quarter
immediately preceding such date, as determined in accordance with GAAP, less:
(i) Intangible Assets and (ii) appropriate adjustments on account of minority
interests of other Persons holding equity investments in Restricted
Subsidiaries, in the case of each of clauses (i) and (ii) above as reflected
on the consolidated balance sheet of the Company and its Restricted
Subsidiaries as of the end of the fiscal quarter immediately preceding such
date.
"Consolidated Tangible Net Worth" of the Company as of any date means the
stockholders' equity (including any Preferred Stock that is classified as
equity under GAAP, other than Disqualified Stock) of the Company and its
Restricted Subsidiaries on a consolidated basis at the end of the fiscal
quarter immediately preceding such date, as determined in accordance with
GAAP, less the amount of Intangible Assets reflected on the consolidated
balance sheet of the Company and its Restricted Subsidiaries as of the end of
the fiscal quarter immediately preceding such date.
"Default" means any event, act or condition that is, or after notice or the
passage of time or both would be, an Event of Default.
"Defeasance" has the meaning set forth in Section 10.02 of the Indenture.
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or is
redeemable at the option of the holder thereof, in whole or in part, on or
prior to the final Maturity date of the Senior Notes; provided that any
Capital Stock which would not constitute Disqualified Stock but for provisions
thereof giving holders thereof the right
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to require the Company to repurchase or redeem such Capital Stock upon the
occurrence of a change of control occurring prior to the final Maturity of the
Senior Notes will not constitute Disqualified Stock if the change of control
provisions applicable to such Capital Stock are not more favorable to holders
of such Capital Stock than the provisions of the Indenture described under the
caption "Change of Control" and such Capital Stock specifically provides that
the Company will not repurchase or redeem (or be required to repurchase or
redeem) any such Capital Stock pursuant to such provisions prior to the
Company's repurchase of Senior Notes pursuant to the "Change of Control"
covenant set forth in the Indenture.
"Disqualified Stock Dividend" of any Person means, for any dividend payable
with regard to Disqualified Stock issued by such Person, the amount of such
dividend multiplied by a fraction, the numerator of which is one and the
denominator of which is one minus the maximum statutory combined federal,
state and local income tax rate (expressed as a decimal number between 1 and
0) then applicable to such Person.
"Event of Default" has the meaning set forth under the caption "Events of
Default".
"Existing Credit Facility" means the Credit Agreement proposed to be entered
into pursuant to the commitment letter described under the section heading
entitled "Description of Proposed Credit Agreement" between the Company and
the lenders named therein and Bankers Trust Company, and Bank One, Arizona,
NA, as Co-Agents (together with the documents related thereto (including,
without limitation, any guaranty agreements) in each case containing such
terms and conditions as the lenders named therein, Bankers Trust Company, and
Bank One, Arizona, NA, as Co-Agents, and the Company shall approve in their
respective sole discretion), as such Facility may be amended, restated,
supplemented or otherwise modified from time to time, and includes any
facility extending the maturity of, increasing the total commitment of, or
restructuring (including, without limitation, the inclusion of additional
guarantors thereunder that are Subsidiaries of the Company) all or any portion
of, the Indebtedness under such Facility or any successor or replacement
facilities and includes any facility with one or more agents or lenders
refinancing or replacing any portion of the Indebtedness under such Facility
or any successor facilities.
"Existing Indebtedness" means (i) Indebtedness at any time Incurred pursuant
to the Existing Credit Facility and (ii) all other Indebtedness of the Company
and its Subsidiaries that is outstanding on the Issue Date.
"Fair Market Value" with respect to any asset or property means the sale
value that would be obtained in an arm's-length transaction between an
informed and willing seller under no compulsion to sell and an informed and
willing buyer under no compulsion to buy.
"GAAP" means generally accepted accounting principles set forth in the
opinion and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession of the United States, as in effect on the Issue Date.
"Hedging Obligations" of any Person means the net obligations of such Person
pursuant to any interest rate swap agreement, foreign currency exchange
agreement, interest rate collar agreement, option or futures contract or other
similar agreement or arrangement relating to interest rates or foreign
exchange rates.
"Holder" means a Person in whose name a Senior Note is registered.
"Incur" means, directly or indirectly, to create, incur, assume, guaranty,
extend the maturity of, or otherwise become liable with respect to any
Indebtedness.
"Indebtedness" of any Person at any date means, without duplication, (i) all
indebtedness of such Person for borrowed money (whether or not the recourse of
the lender is to the whole of the assets of such Person or only to a portion
thereof), (ii) all obligations of such Person evidenced by bonds, debentures,
notes or other
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similar instruments, (iii) all obligations of such Person in respect of
letters of credit or other similar instruments (or reimbursement obligations
with respect thereto), other than standby letters of credit issued for the
benefit of, or surety and performance bonds issued by, such Person in the
ordinary course of business, (iv) all obligations of such Person with respect
to Hedging Obligations (other than those that fix or cap the interest rate on
variable rate indebtedness otherwise permitted by the Indenture or that fix
the exchange rate in connection with indebtedness denominated in a foreign
currency and otherwise permitted by the Indenture and other than the purchase
of mortgage commitments in the ordinary course of business), (v) all
obligations of such Person to pay the deferred and unpaid purchase price of
property or services, including, without limitation, all conditional sale
obligations of such Person and all obligations under any title retention
agreement (except trade payables and accrued expenses incurred in the ordinary
course of business), (vi) all Capitalized Lease Obligations of such Person,
(vii) all indebtedness of others secured by a Lien on any asset of such
Person, whether or not such indebtedness is assumed by such Person, (viii) all
indebtedness of others guaranteed by, or otherwise the liability of, such
Person to the extent of such guaranty or liability, and (ix) all Disqualified
Stock issued by such Person (the amount of indebtedness represented by any
Disqualified Stock will equal the greater of the voluntary or involuntary
liquidation preference plus accrued and unpaid dividends). The amount of
indebtedness of any Person at any date will be (a) the outstanding balance at
such date of all unconditional obligations as described above, (b) the maximum
liability of such Person for any contingent obligations under clause (v) above
and (c) in the case of clause (vii) (if the indebtedness referred to therein
is not assumed by such Person), the lesser of the (A) Fair Market Value of all
assets subject to a Lien securing the indebtedness of others on the date that
the Lien attaches and (B) amount of the indebtedness secured.
"Independent Financial Advisor" means an accounting, appraisal or investment
banking firm of nationally recognized standing that is, in the reasonable
judgment of the Company's Board of Directors, (i) qualified to perform the
task for which it has been engaged, and (ii) disinterested and independent
with respect to the Company, all of its Subsidiaries, and each Affiliate of
the Company and/or its Subsidiaries that is involved in the Affiliate
Transaction with respect to which such firm has been engaged.
"Intangible Assets" of the Company means all unamortized debt discount and
expense, unamortized deferred charges, goodwill, patents, trademarks, service
marks, trade names, copyrights, write-ups of assets over their carrying value
at the end of the last fiscal quarter ended prior to the Issue Date or the
date of acquisition, if acquired subsequent thereto, and all other items which
would be treated as intangibles on the consolidated balance sheet of the
Company and its Restricted Subsidiaries prepared in accordance with GAAP.
"Interest Expense" of any Person for any period means, without duplication,
the aggregate amount of (i) interest which, in conformity with GAAP, would be
set opposite the caption "interest expense" or any like caption on an income
statement for such Person (including, without limitation, imputed interest
included on Capitalized Lease Obligations, all commissions, discounts and
other fees and charges owed with respect to letters of credit securing
financial obligations and bankers' acceptance financing, the net costs
associated with Hedging Obligations, amortization of other financing fees and
expenses, the interest portion of any deferred payment obligation,
amortization of discount or premium, if any, and all other noncash interest
expense other than interest and other charges amortized to costs of sales) and
includes, with respect to the Company and its Restricted Subsidiaries, without
duplication (including duplication of the foregoing items), all interest
included as a component of cost of sales for such period, and (ii) the amount
of Disqualified Stock Dividends recognized by the Company on any Disqualified
Stock whether or not paid during such period.
"Interest Incurred" of any Person for any period means, without duplication,
the aggregate amount of (i) interest which, in conformity with GAAP, would be
set opposite the caption "interest expense" or any like caption on an income
statement for such Person (including, without limitation, imputed interest
included on Capitalized Lease Obligations, all commissions, discounts and
other fees and charges owed with respect to letters of credit securing
financial obligations and bankers' acceptance financing, the net costs
associated with Hedging Operations, amortization of other financing fees and
expenses, the interest portion of any deferred payment obligation,
amortization of discount or premium, if any, and all other noncash interest
expense other than interest and other charges amortized to cost of sales) and
includes, with respect to the Company and its Restricted
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Subsidiaries, without duplication (including duplication of the foregoing
items), all capitalized interest for such period, all interest attributable to
discontinued operations for such period to the extent not set forth on the
income statement under the caption "interest expense" or any like caption, and
all interest actually paid by the Company or a Restricted Subsidiary under any
guaranty of Indebtedness (including, without limitation, a guaranty of
principal, interest or any combination thereof) of any other Person during
such period and (ii) the amount of Disqualified Stock Dividends recognized by
the Company on any Disqualified Stock whether or not declared during such
period.
"Investments" of any Person means all (i) investments by such Person in any
other Person in the form of loans, advances or capital contributions, (ii)
guarantees of Indebtedness or other obligations of any other Person by such
Person, (iii) purchases (or other acquisitions for consideration) by such
Person of Indebtedness, Capital Stock or other securities of any other Person
and (iv) other items that would be classified as investments (including,
without limitation, purchases of assets outside the ordinary course of
business) on a balance sheet of such Person determined in accordance with
GAAP.
"Issue Date" means the date of original issuance of the Senior Notes.
"Legal Holiday" means Saturday, Sunday or a day on which banking
institutions in New York, New York or at a Place of Payment are authorized or
obligated by law, regulation or executive order to remain closed. If a payment
date is a Legal Holiday at a Place of Payment, payment shall be made at that
place on the next succeeding day that is not a Legal Holiday and no interest
on the amount of such payment shall accrue for the intervening period.
"Lien" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or other similar encumbrance of any kind upon or in respect
of such asset, whether or not filed, recorded or otherwise perfected under
applicable law (including, without limitation, any conditional sale or other
title retention agreement, and any lease in the nature thereof, any option or
other agreement to sell, and any filing of, or agreement to give, any
financing statement under the Uniform Commercial Code (or equivalent statutes)
of any jurisdiction).
"Material Subsidiary" means any subsidiary of the Company which accounted
for three percent or more of the consolidated tangible net assets or
consolidated cash flow available for fixed charges of the Company on a
consolidated basis for the fiscal year ending immediately prior to any default
or Event of Default, all computed in accordance with generally accepted
accounting principles.
"Maturity," when used with respect to a Senior Note, means the date on which
the principal of such Senior Note or any installment thereof becomes due and
payable as therein provided or as provided in the Senior Indenture, whether at
the Stated Maturity or by declaration of acceleration, call for redemption or
otherwise.
"Net Proceeds" means (i) all cash (in U.S. dollars or freely convertible
into U.S. dollars) received by the Company or any Restricted Subsidiary from
an Asset Sale net of (a) all brokerage commissions, investment banking fees
and all other fees and expenses (including, without limitation, fees and
expenses of counsel and investment bankers) related to such Asset Sale, (b)
provisions for all income and other taxes measured by or resulting from such
Asset Sale, (c) payments made to retire Indebtedness where payment of such
Indebtedness is required in connection with such Asset Sale, (d) amounts
required to be paid to any Person (other than the Company or a Restricted
Subsidiary) owning a beneficial interest in the assets subject to the Asset
Sale and (e) appropriate amounts to be provided by the Company or any
Restricted Subsidiary thereof, as the case may be, as a reserve, in accordance
with GAAP, against any liabilities associated with such Asset Sale and
retained by the Company or any Restricted Subsidiary thereof, as the case may
be, after such Asset Sale, including, without limitation, pension and other
post-employment benefit liabilities, liabilities related to environmental
matters and liabilities under any indemnification obligations associated with
such Asset Sale, all as reflected in an Officers' Certificate delivered to the
Trustee, and (ii) all noncash consideration received by the Company or
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any of its Restricted Subsidiaries from such Asset Sale upon the liquidation
or conversion of such consideration into cash, without duplication, net of all
items enumerated in subclauses (a) through (e) of clause (i) hereof.
"Non-Recourse Indebtedness" with respect to any Person means Indebtedness of
such Person for which (i) the sole legal recourse for collection of principal
and interest on such Indebtedness is against the specific property identified
in the instruments evidencing or securing such Indebtedness and such property
was acquired with the proceeds of such Indebtedness or such Indebtedness was
Incurred within 90 days after the acquisition of such property and (ii) no
other assets of such Person may be realized upon in collection of principal or
interest on such Indebtedness.
"Officer" means the Chairman of the Board, the President, any Executive or
Senior Vice President, the Treasurer, any Assistant Treasurer, the Controller,
the Secretary, any Assistant Secretary or any Vice President of a Person.
"Officers' Certificate" means a certificate signed by two Officers, one of
whom must be the Person's Chief Executive Officer, Chief Operating Officer,
Chief Financial Officer or Chief Accounting Officer.
"Outstanding" when used with respect to Senior Notes, means, as of the date
of determination, all Senior Notes theretofore authenticated and delivered
under the Indenture, except:
(i) Senior Notes theretofore canceled by the Trustee or delivered to the
Trustee for cancellation;
(ii) Senior Notes for whose payment or redemption money in the necessary
amount has been theretofore deposited with the Trustee or any Paying Agent
(other than the Company) in trust or set aside and segregated in trust by
the Company (if the Company shall act as its own Paying Agent) for the
Holders of such Senior Notes; provided that, if such Senior Notes are to be
redeemed, notice of such redemption has been duly given pursuant to the
Indenture or provision therefor satisfactory to the Trustee has been made;
(iii) Senior Notes as to which the Defeasance has been effected pursuant
to the defeasance provisions of the Indenture; and
(iv) Senior Notes which have been paid pursuant to the "Mutilated,
Destroyed, Lost and Stolen Securities" section of the Indenture or in
exchange for or in lieu of which other Senior Notes have been authenticated
and delivered pursuant to the Indenture, other than any such Senior Notes
in respect of which there shall have been presented to the Trustee proof
satisfactory to it that such Senior Notes are held by a bona fide purchaser
in whose hands such Senior Notes are valid obligations of the Company;
provided, however, that in determining whether the Holders of the requisite
principal amount of the Senior Notes have given any request, demand,
authorization, direction, notice, consent or waiver under the Indenture,
Senior Notes owned by the Company or any other obligor of the Senior Notes or
any Subsidiary of the Company or of such other obligor shall be disregarded
and deemed not to be Outstanding, except that, in determining whether the
Trustee shall be protected in relying upon any such request, demand,
authorization, direction, notice, consent or waiver, only Senior Notes which
the Trustee knows to be so owned shall be so disregarded. Senior Notes so
owned which have been pledged in good faith may be regarded as Outstanding if
the pledgee establishes to the satisfaction of the Trustee the pledgee's right
so to act with respect to such Senior Notes and that the pledgee is not the
Company or any other obligor upon the Senior Notes or any Subsidiary of the
Company or of such other obligor.
"Paying Agent" means any Person authorized by the Company to pay the
principal of or any interest on any Senior Note.
"Permitted Investment" of any Person means any Investment of such Person in
(i) direct obligations of the United States or any agency thereof or
obligations guaranteed by the United States or any agency thereof, in each
case maturing within 180 days of the date of acquisition thereof, (ii)
certificates of deposit maturing within
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180 days of the date of acquisition thereof issued by a bank, trust company or
savings and loan association which is organized under the laws of the United
States or any state thereof having capital, surplus and undivided profits
aggregating in excess of $250 million and a Keefe Bank Watch Rating of C or
better (or a similar rating by any successor thereof), (iii) certificates of
deposit maturing within 180 days of the date of acquisition thereof issued by
a bank, trust company or savings and loan association organized under the laws
of the United States or any state thereof other than banks, trust companies or
savings and loan associations satisfying the criteria in (ii) above, provided
that the aggregate amount of all certificates of deposit issued to the Company
at any one time by such bank, trust company or savings and loan association
will not exceed $100,000, (iv) commercial paper given the highest rating by
two established national credit rating agencies and maturing not more than 180
days from the date of the acquisition thereof, (v) repurchase agreements or
money-market accounts which are fully secured by direct obligations of the
United States or any agency thereof and (vi) in the case of the Company and
its Subsidiaries, any receivables or loans taken by the Company or a
Subsidiary in connection with the sale of any asset otherwise permitted by the
Indenture.
"Permitted Liens" means (i) Liens for taxes, assessments or governmental
charges or claims that either (a) are not yet delinquent or (b) are being
contested in good faith by appropriate proceedings and as to which appropriate
reserves have been established or other provisions have been made in
accordance with GAAP, (ii) statutory Liens of landlords and carriers',
warehousemen's, mechanics', suppliers', materialmen's, repairmen's or other
Liens imposed by law and arising in the ordinary course of business with
respect to amounts that, to the extent applicable, either (a) are not yet
delinquent or (b) are being contested in good faith by appropriate proceedings
and as to which appropriate reserves have been established or other provisions
have been made in accordance with GAAP, (iii) Liens (other than any Lien
imposed by the Employee Retirement Income Security Act of 1974, as amended)
incurred or deposits made in the ordinary course of business in connection
with workers' compensation, unemployment insurance and other types of social
security, (iv) Liens incurred or deposits made to secure the performance of
tenders, bids, leases, statutory obligations, surety and appeal bonds,
progress payments, government contracts and other obligations of like nature
(exclusive of obligations for the payment of borrowed money), in each case
incurred in the ordinary course of business of the Company and its
Subsidiaries, (v) attachment or judgement Liens not giving rise to a Default
or an Event of Default and which are being contested in good faith by
appropriate proceedings, (vi) easements, rights-of-way, restrictions and other
similar charges or encumbrances not materially interfering with the ordinary
course of business of the Company and its Subsidiaries, (vii) zoning
restrictions, licenses, restrictions on the use of real property or minor
irregularities in title thereto, which do not materially impair the use of
such real property in the ordinary course of business of the Company and its
Subsidiaries or the value of such real property for the purpose of such
business, (viii) leases or subleases granted to others not materially
interfering with the ordinary course of business of the Company and its
Subsidiaries, (ix) purchase money mortgages (including, without limitation,
Capitalized Lease Obligations and purchase money security interests), (x)
Liens securing Refinancing Indebtedness; provided that such refinanced
Indebtedness was secured and that the assets covered by the Lien securing such
Refinancing Indebtedness are the same as or similar to, and not greater in
value than, the assets which secured such refinanced Indebtedness, (xi) Liens
securing Indebtedness of the Company and its Restricted Subsidiaries; provided
that, at the time any such Indebtedness is Incurred, the aggregate amount of
Indebtedness secured by Liens (other than Non-Recourse Indebtedness secured by
Liens) will not exceed 40 percent of Consolidated Tangible Net Assets, and
provided further that, notwithstanding the limitation contained in the
immediately preceding proviso, the Company may at any time borrow up to
$50,000,000 in aggregate principal amount of Indebtedness pursuant to the
Existing Credit Facility and any Liens securing such Indebtedness shall be
Permitted Liens, regardless of whether or not the aggregate amount of
Indebtedness secured by Liens exceeded 40% of Consolidated Tangible Net Assets
at the time such Indebtedness was Incurred or any such Liens were created,
(xii) any interest in or title of a lessor to property subject to any
Capitalized Lease Obligations incurred in compliance with the provisions of
the Indenture, (xiii) Liens existing on the Issue Date, including, without
limitation, Liens securing Existing Indebtedness, (xiv) any option, contract
or other agreement to sell an asset provided such sale is not otherwise
prohibited under the Indenture, (xv) Liens securing Non-Recourse Indebtedness
of the Company or a Restricted Subsidiary thereof, (xvi) Liens on property or
assets of any Restricted Subsidiary securing Indebtedness of such Restricted
Subsidiary owing to the Company or one or more
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Restricted Subsidiaries, (xvii) Liens securing Indebtedness of an Unrestricted
Subsidiary, (xviii) any right of a lender or lenders to which the Company or a
Restricted Subsidiary may be indebted to offset against, or appropriate and
apply to the payment of, such Indebtedness any and all balances, credits,
deposits, accounts or monies of the Company or a Restricted Subsidiary with or
held by such lender or lenders and (xix) any pledge or deposit of cash or
property in conjunction with obtaining surety and performance bonds and
letters of credit required to engage in constructing on-site and off-site
improvements required by municipalities or other governmental authorities in
the ordinary course of business of the Company by the Company or any
Restricted Subsidiary.
"Person" means any individual, corporation, partnership, joint venture,
limited liability company, incorporated or unincorporated association, joint
stock company, trust, unincorporated organization or government or other
agency or political subdivision thereof or other entity of any kind.
"Place of Payment", when used with respect to the Senior Notes, means the
place or places where the principal of an interest on the Senior Notes are
payable.
"Preferred Stock" of any Person means all Capital Stock of such Person which
as a preference in liquidation or with respect to the payment of dividends.
"Refinancing Indebtedness" means Indebtedness that refunds, refinances or
extends any Existing Indebtedness or other Indebtedness permitted to be
incurred by the Company or its Restricted Subsidiaries pursuant to the terms
of the Senior Indenture, but only to the extent that (i) the Refinancing
Indebtedness is subordinated to the Senior Notes to the same extent as the
Indebtedness being refunded, refinanced or extended, if at all, (ii) the
Refinancing Indebtedness is scheduled to mature either (a) no earlier than the
Indebtedness being refunded, refinanced or extended, or (b) after the maturity
date of the Senior Notes, (iii) the portion, if any, of the Refinancing
Indebtedness that is scheduled to mature on or prior to the Maturity date of
the Senior Notes has a Weighted Average Life to Maturity at the time such
Refinanced Indebtedness is Incurred that is equal to or greater than the
Weighted Average Life to Maturity of the portion of the Indebtedness being
refunded, refinanced or extended that is scheduled to mature on or prior to
the Maturity date of the Senior Notes, (iv) such Refinancing Indebtedness is
in an aggregate amount that is equal to or less than the aggregate amount then
outstanding under the Indebtedness being refunded, refinanced or extended, (v)
such Refinancing Indebtedness is Incurred by the same Person that initially
Incurred the Indebtedness being refunded, refinanced or extended, except that
the Company may Incur Refinancing Indebtedness to refund, refinance or extend
Indebtedness of any Restricted Subsidiary, and (vi) such Refinancing
Indebtedness is Incurred with 180 days after the Indebtedness being refunded,
refinanced or extended is so refunded, refinanced or extended; provided that
Refinancing Indebtedness shall include the amount of any Indebtedness under
the Existing Credit Facility which is Incurred within180 days after the
repayment of an equal amount of Indebtedness under the Existing Credit
Facility which was Incurred pursuant to the provisions of the Indenture
described in the first paragraph under the caption "Limitations on Additional
Indebtedness".
"Registrar" has the meaning set forth in the "Registration, Registration of
Transfer and Exchange" section of the Senior Indenture.
"Restricted Investment" with respect to any Person means any (i) Investment
(other than any Permitted Investment) by such person in any (a) of its
Affiliates, (b) executive officer or director of such Person or any Affiliate
of such Person, or (c) other Person other than a Restricted Subsidiary which
is a Wholly Owned Subsidiary of the referent Person, and (ii) any purchase of
unentitled land by the Company or any Subsidiary to the extent that, after
giving effect to such purchase, unentitled land would total more than 10% of
the Company's total inventory on a consolidated basis; provided, however, that
with respect to the Company and its Restricted Subsidiaries, any loan or
advance to an executive officer or director of the Company or a Subsidiary
will not constitute a Restricted Investment provided such loan or advance is
made in the ordinary course of business consistent with past practices, and,
if such loan or advance exceeds $100,000 (other than a readily marketable
mortgage loan not exceeding $500,000), such loan or advance has been approved
by the Board of Directors of the Company or a disinterested committee thereof.
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"Restricted Payment" with respect to any Person means (i) the declaration of
any dividend or the making of any other payment or distribution of cash,
securities or other property or assets in respect of such Person's Capital
Stock (except that a dividend payable solely in Capital Stock (other than
Disqualified Stock) of such Person will not constitute a Restricted Payment),
(ii) any payment on account of the purchase, redemption, retirement or other
acquisition for value of such Person's Capital Stock or any other payment or
distribution made in respect thereof (other than payments or distributions
excluded from the definitions of Restricted Payment in clause (i) above),
either directly or indirectly, (iii) any Restricted Investment, and (iv) any
principal payment, redemption, repurchase, defeasance or other acquisition or
retirement of any Indebtedness of any Unrestricted Subsidiary or of
Indebtedness of the Company or its Restricted Subsidiaries which is
subordinated in right of payment to the Senior Notes; provided, however, that
with respect to the Company and its Subsidiaries, Restricted Payments will not
include (a) any payment described in clause (i), (ii) or (iii) above made to
the Company or any of its Restricted Subsidiaries which are Wholly Owned
Subsidiaries by any of the Company's Subsidiaries, or (b) any proportionate
payment in respect of minority interests in Restricted Subsidiaries of the
Company to the extent that the payment constitutes a return of capital that
was not included in the Company's shareholders' equity or a dividend or
similar distribution not included in determining the Company's Consolidated
Net Income, or (c) any purchase, redemption, retirement or other acquisition
for value of Indebtedness of the Company or its Restricted Subsidiaries which
is subordinated to the Senior Notes if the consideration therefor consists
solely of, or is the proceeds from, Indebtedness subordinated to the Senior
Notes to the same extent as the Indebtedness being purchased, redeemed,
retired or otherwise acquired, or (d) any purchase, redemption, retirement or
other acquisition for value of Indebtedness or Capital Stock of such Person or
its Subsidiaries if the consideration therefor consists solely of Capital
Stock (other than Disqualified Stock) of such Person, or the proceeds from
such sale of such Capital Stock, or (e) any loans or advances by the Company
or any Restricted Subsidiary to any Person engaged in real estate investment
or real estate development which in an aggregate amount at any one time
outstanding do not exceed $10,000,000.
"Restricted Subsidiary" means each of the Subsidiaries of the Company which
is not an Unrestricted Subsidiary.
"Security Register" has the meaning set forth in the "Registration,
Registration of Transfer and Exchange" section of the Senior Indenture.
"Stated Maturity," when used with respect to any Senior Note or any
installments of principal thereof or interest thereon, means the date
specified in such Senior Note as the fixed date on which the principal of such
Senior Note or such installment of principal or interest is due and payable.
"Subsidiary" of any Person means any (i) corporation of which at least a
majority of the aggregate voting power of all classes of the Common Equity is
directly or indirectly beneficially owned by such Person, and(ii) entity other
than a corporation of which such Person directly or indirectly beneficially
owns at least a majority of the Common Equity.
"Trustee" means the Person named as the "Trustee" in the first paragraph of
the Indenture until a successor Trustee shall have become such pursuant to the
applicable provisions of the Indenture, and thereafter "Trustee" shall mean or
include the Person who is then the Trustee thereunder.
"Unrestricted Subsidiary" means each of the Subsidiaries of the Company so
designated by a Board Resolution. The Board of Directors of the Company may
designate an Unrestricted Subsidiary to be a Restricted Subsidiary; provided
that (i) any such redesignation will be deemed to be an Incurrence by the
Company and its Restricted Subsidiaries of the Indebtedness (if any) of such
redesignated Subsidiary for purposes of the provisions of the Indenture
described under the caption "Limitations on Additional Indebtedness" as of the
date of such redesignation and (ii) immediately after giving effect to such
redesignation and the Incurrence of any such additional Indebtedness, (a) no
Default or Event of Default shall have occurred and be continuing, and (b) the
Company and its Restricted Subsidiaries could Incur at least $1.00 of
additional Indebtedness under the Consolidated Fixed Charge Coverage Ratio set
forth in the first paragraph under the caption "Limitations on
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Additional Indebtedness." Subject to the foregoing, the Board of Directors of
the Company also may designate any Restricted Subsidiary to be an Unrestricted
Subsidiary; provided that (i) all previous Investments by the Company and its
Restricted Subsidiaries in such Restricted Subsidiary will be deemed to be
Restricted Payments at the time of such designation and will reduce the amount
available for Restricted Payment under the provisions of the Senior Indenture
described under the caption "Limitations on Restricted Payments" and (ii)
immediately after giving effect to such designation and reduction of amounts
available for Restricted Payments under such
provisions, (x) no Default or Event of Default shall have occurred and be
continuing, and (y) the Company and its Restricted Subsidiaries could Incur at
least $1.00 of additional Indebtedness under the Consolidated Fixed Charge
Coverage Ratio set forth in the first paragraph under the caption "Limitations
on Additional Indebtedness." Any such designation or redesignation by the
Board of Directors of the Company will be evidenced to the Trustee by the
filing with the Trustee of a Board Resolution giving effect to such
designation or redesignation and an Officers' Certificate certifying that such
designation or redesignation complied with the foregoing conditions and
setting forth the underlying calculations of such Officers' Certificate.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
or portions thereof, at any date, the number of years obtained by dividing (i)
the sum of the products obtained by multiplying (a) the amount of each then
remaining installment, sinking fund, serial maturity or other required payment
of principal, including, without limitation, payment at final maturity, in
respect thereof, by (b) the number of years (calculated to the nearest one-
twelfth) that will elapse between such date and the making of such payment by
(ii) the then outstanding principal amount of such Indebtedness or portion
thereof.
"Wholly Owned Subsidiary" of any Person means (i) a Subsidiary, of which 100
percent of the Common Equity (except for directors' qualifying shares or
certain minority interests owned by other Persons solely due to local law
requirements that there be more than one stockholder, but which interest is
not in excess of what is required for such purpose) is owned directly by such
Person or through one or more other Wholly Owned Subsidiaries of such Person,
or (ii) any entity other than a corporation in which such Person, directly or
indirectly, owns all of the Common Equity of such entity.
REDEMPTION
The Senior Notes may not be redeemed prior to their maturity.
EVENTS OF DEFAULT
An "Event of Default" is defined in the Indenture for the Senior Notes as
any of the following events (whatever the reason for such Event of Default and
whether it will be voluntary or involuntary or be effected by operation of law
or pursuant to any judgment, decree or any order of any court or any order,
rule or regulation of any administrative or governmental body):
(i) the failure by the Company to pay interest on any Senior Note when
the same becomes due and payable and the continuance of any such failure
for a period of 30 days;
(ii) the failure by the Company to pay the principal of any Senior Note
when the same becomes due and payable at maturity, upon acceleration or
otherwise;
(iii) the failure by the Company to comply with any of its agreements or
covenants in, or provisions of, the Senior Note or the Indenture (other
than an agreement or covenant a default in whose performance or whose
breach is elsewhere in such Indenture specifically dealt with) and such
failure continues for the period and after the notice specified below;
(iv) the acceleration of any indebtedness for borrowed money or
guarantees thereof (other than Non-Recourse Indebtedness (as defined in the
Indenture)) of the Company or any of its Subsidiaries that has an
outstanding principal amount of $2,500,000 or more in the aggregate;
provided that, if any such acceleration is withdrawn or otherwise rescinded
within five days after such acceleration by the holders of such
indebtedness, such Event of Default will be deemed to be cured and any
acceleration under the Indenture will be deemed withdrawn or rescinded;
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(v) the failure by the Company or any of its subsidiaries to make any
principal or interest payment in respect of indebtedness for borrowed money
or guarantees thereof (other than Non-Recourse Indebtedness) of the Company
or any of its Subsidiaries with an outstanding aggregate principal amount
of $2,500,000 or more within five days of such principal or interest
payment becoming due and payable (after giving effect to any applicable
grace period set forth in the documents governing such Indebtedness);
provided, however, that, if and to the extent that such failure to pay
principal or interest is with respect to Indebtedness Incurred pursuant to
the Existing Credit Facility, such failure to pay shall not constitute an
Event of Default unless and until such failure to pay has continued for a
period of 120 days following the expiration of any applicable grace period
with respect to such failure to pay;
(vi) a final judgment or judgment that exceeds $2,500,000 or more in the
aggregate, for the payment of money, having been entered by a court or
courts of competent jurisdiction against the Company or any of its
Subsidiaries and such judgment or judgments are not satisfied, stayed,
annulled or rescinded within 60 days of being entered;
(vii) the Company or any Material Subsidiary pursuant to or within the
meaning of any Bankruptcy Law:
(A) commences a voluntary case,
(B) consents to the entry of an order for relief against it in an
involuntary case,
(C) consents to the appointment of a Custodian of it or for all or
substantially all of its property; or
(D) makes a general assignment for the benefit of its creditors;
(viii) a court of competent jurisdiction enters an order or decree under
any Bankruptcy Law that:
(A) is for relief against the Company or any Material Subsidiary as
debtor in an involuntary case,
(B) appoints a Custodian of the Company or any Material Subsidiary or
a Custodian for all or substantially all of the property of the Company
or any Material Subsidiary, or
(C) orders the liquidation of the Company or any Material Subsidiary,
and the order or decree remains unstayed and in effect for 60 days.
The Indenture provides that the Trustee will not be deemed to know of a
default unless a trust officer has actual knowledge of such default or
receives written notice of such default with specific reference to such
default.
The Indenture also provides that a default as described in subclause (iv)
above is not an Event of Default until the Trustee notifies the Company, or
the holders of at least 25 percent in aggregate principal amount of the then
outstanding Senior Notes under the Indenture, notify the Company and the
Trustee, of the default and the Company does not cure the default within 60
days after receipt of the notice. The notice must specify the default, demand
that it be remedied and state that the notice is a "Notice of Default." If
such a default is cured within the applicable time period, it ceases.
The Indenture also provides that if an Event of Default (other than an Event
of Default described in sub-clause (vii) or (viii) above) shall have occurred
and be continuing under the Indenture, the Trustee (after receiving
indemnities from the holders of the Senior Notes to its satisfaction) by
notice to the Company, or the holders of at least 25 percent in principal
amount of the Senior Notes then outstanding by notice to the Company and the
Trustee, may declare all of the Senior Notes to be due and payable
immediately. Upon such declaration, the amounts due and payable on the Senior
Notes, as determined pursuant to the provisions of the "Acceleration" section
of the Indenture, will be due and payable immediately. The Indenture also
provides that if an Event of Default described in sub-clause (vii) or (viii)
above occurs, the Senior Notes will immediately become due and payable without
any declaration, notice or other act on the part of the Trustee and the
Company or any holder. The holders of a majority in principal amount of the
Senior Notes then Outstanding, by written notice to the Trustee and the
Company, may waive such Event of Default, rescind an acceleration and its
consequences (except an acceleration due to nonpayment of principal of or
interest on the Senior Notes) if the rescission would not conflict with any
judgment or decree and if all existing Events of Default have been cured or
waived.
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The Indenture contains a provision entitling the Trustee, subject to the
duty of the Trustee during a default to act with the required standard of
care, to be indemnified by the holders of Senior Notes before proceeding to
exercise any right or power under the Indenture at the request of such
holders. Subject to such provisions in the Indenture for the indemnification
of the Trustee and certain other limitations, the holders of a majority in
principal amount of Senior Notes then outstanding may direct the time, method
and place of conducting any proceeding for any remedy available to the
Trustee, or exercising any trust or power conferred on the Trustee. The
Trustee may withhold from the holders of the Senior Notes notice of any
continuing default or Event of Default (except any default or Event of Default
in payment of principal or interest on the Senior Notes) if the Trustee
determines that withholding such notice is in the holders' interest.
The Indenture also provides that no holder of Senior Notes may institute any
action against the Company under the Indenture unless (i) such holder
previously has given the Trustee written notice of the default and continuance
thereof, (ii) the holders of not less than 25 percent in principal amount of
the Senior Notes then outstanding have requested the Trustee to institute such
action and offered the Trustee reasonable indemnity, and (iii) the Trustee has
not instituted such written request from the holders of a majority in
principal amount of the Senior Notes then Outstanding. Notwithstanding any
other provision of the Indenture, the right of any holder of Senior Notes to
receive payment of principal and interest on such Senior Note on or after the
respective due dates thereof, or, subject to the provisions of the applicable
Indenture described in the preceding sentence, to bring suit for the
enforcement of any such payment on or after such respective dates, will not be
impaired or affected without the consent of such holder.
The Indenture and the Senior Notes also provide that no director, officer or
employee of the Company, as such, will have any liability for any obligations
of the Company under the Senior Notes or the Indenture. The Indenture and the
Senior Notes will also each provide that each holder of the Senior Notes, by
accepting the Senior Notes, waives and releases all such liability.
The Indenture provides that the Company will be required to deliver to the
Trustee an annual statement regarding compliance with the Indenture, and
include in such statement, if any officer of the Company is aware of any
default or Event of Default, a statement specifying such default or Event of
Default and what action the Company is taking or proposes to take with respect
thereto. In addition, the Company will be required to deliver to the Trustee
prompt notice of the occurrence of any default or Event of Default.
DISCHARGE, DEFEASANCE AND COVENANT DEFEASANCE
The Company may terminate certain of its obligations under the Indenture
with respect to the Senior Notes including its obligations to comply with the
restrictive covenants described herein, on the terms and subject to the
conditions contained in the Indenture, by depositing in trust with the Trustee
money or obligations of, or guaranteed by, the United States sufficient to pay
the principal and interest, if any, on such Senior Notes to maturity (or
earlier redemption).
TRANSFER AND EXCHANGE
A holder of a Senior Note will be able to transfer or exchange the Senior
Notes only in accordance with the provisions of the Indenture. The registrar
may require a holder, among other things, to furnish appropriate endorsements
and transfer documents, and to pay any taxes and fees required by law or
permitted by the Indenture.
MODIFICATIONS TO THE INDENTURE
The Indenture provides that the Company and the Trustee may enter into
supplemental indentures without consent of the holders of Senior Notes to,
among other things: (i) cure any ambiguity, defect or inconsistency in the
Indenture; (ii) comply with the "Limitations on Mergers and Consolidations"
section set forth in the Indenture, (iii) provide for uncertificated Senior
Notes in addition to certificated Senior Notes; (iv) make any
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change that does not adversely affect the legal rights under the Indenture of
holders of Senior Notes; (v) add to the covenants of the Company for the
benefit of the holders of Senior Notes or to surrender any right or power of
the Indenture conferred upon the Company; (vi) add any additional Events of
Default for the benefit of the holders of Senior Notes; (vii) secure the
Senior Notes pursuant to the "Limitation on Liens" section of the Indenture;
(viii) evidence and provide the acceptance of appointment under the Indenture
of a successor Trustee with respect to the Senior Notes and to add to or
change any of the provisions of the Indenture as shall be necessary to provide
for or facilitate the administration of the trusts under the Indenture by more
than one Trustee; (ix) supplement any of the provisions of the Indenture to
such extent as shall be necessary to permit or facilitate the defeasance or
discharge of Senior Notes pursuant to the Indenture; or (x) comply with the
qualification of the Indenture under the Trust Indenture Act.
The Indenture also will contain provisions permitting the Company and the
Trustee, with the consent of the holders of not less than a majority in
principal amount of Senior Notes outstanding to add any provision to, change
in any manner or eliminate any of the provisions of the Indenture for the
Senior Notes or modify in any manner the rights of the holders of the Senior
Notes so affected; provided that the Company and the Trustee may not, without
the consent of the holder of each outstanding Senior Note affected thereby,
do, among other things, any of the following: (i) change the stated maturity
of the principal of, or any installment of principal of, or interest on, any
Senior Note, or reduce the principal amount thereof or the rate of interest
thereon or any premium payable upon the redemption thereof, or change the
place of payment where any Senior Note or interest thereon, is payable, or
change the coin or currency in which any Senior Note or interest thereon is
payable, or impair the right to institute suit for the enforcement of any such
payment on or after the stated maturity thereof (or, in the case of redemption
or repayment at the option of the holder, on or after the redemption date or
repayment date); (ii) reduce the percentage in the principal amount of the
outstanding Senior Notes, the consent of whose holders is required for any
such amendment, or the consent of whose holders is required for any waiver of
compliance with certain provisions of the Indenture or certain defaults
thereunder and their consequences provided for in the Indenture; (iii) modify
the provisions of the Indenture requiring the consent of holders or rights of
holders to receive payment or to bring suits for the enforcement of past-due
payments in a manner adverse to the holders of Senior Notes; or (iv) modify
the ranking or priority of the Senior Notes in a manner adverse to the holders
of Senior Notes.
The holders of at least a majority in principal amount of the then
outstanding Senior Notes may on behalf of the holders of all Senior Notes,
waive (i) insofar as the Senior Notes are concerned, compliance by the Company
with certain covenants of the Indenture and (ii) any past default under the
Indenture with respect to the Senior Notes, except a default in the payment of
the principal of or interest on any Senior Note or in respect of a provision
which under the Indenture cannot be modified or amended without the consent of
the holder of each outstanding Senior Note affected.
CONCERNING THE TRUSTEE
IBJ Schroder Bank & Trust Company is Trustee of the Indenture and has been
appointed by the Company as paying agent and registrar. The Indenture will
contain certain limitations on the rights of the Trustee, should it or its
affiliates become a creditor of the Company, to obtain payment of claims in
certain cases or to realize on certain property received in respect of any
such claim as security or otherwise. The Trustee and its affiliates will be
permitted to engage in other transactions; however, if they acquire any
conflicting interest, the conflict must be eliminated or the Trustee must
resign.
GOVERNING LAW
The Indenture for the Senior Notes and the Senior Notes will be governed by
the laws of the State of New York.
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes the material federal income tax
considerations of the issuance of the Senior Notes. This summary does not
discuss all aspects of federal income taxation that may be relevant to
particular holders of the Senior Notes (the "Holders"), especially in light of
a Holder's personal investment circumstances, or to certain types of Holders
subject to special treatment under the federal income tax laws (for example,
life insurance companies, tax-exempt organizations, foreign corporations or
entities and individuals who are not citizens or residents of the United
States) and does not discuss any aspects of state, local or foreign taxation.
This discussion is limited to those Holders who will hold the Senior Notes as
"capital assets" (generally, property held for investment) within the meaning
of Section 1221 of the Internal Revenue Code of 1986, as amended (the "Code")
and it does not discuss special rules which may affect the treatment of
purchasers that acquire the Senior Notes other than at original issuance,
including those provisions of the Code relating to the treatment of "market
discount" and "acquisition premium." Any such purchaser should consult its tax
advisor as to the consequences to it of the acquisition, ownership and
disposition of the Senior Notes.
This summary is based upon laws, regulations, rulings and decisions now in
effect and upon proposed regulations, all of which are subject to change
(possibly with retroactive effect) by legislation, administrative action or
judicial decision.
Interest. A Holder will be required to include in gross income the stated
interest on the Senior Notes in accordance with the Holder's method of tax
accounting.
Tax Basis. Generally, a Holder's tax basis in the Senior Notes will
initially be the Holder's purchase price for the Senior Notes and will be
decreased by the amount of any principal payments received.
Sale or Redemption. The sale, exchange, redemption or other disposition of
the Senior Notes generally will be a taxable event. A Holder generally will
recognize gain or loss equal to the difference between (i) the amount of cash
plus the fair market value of any property received upon such sale, exchange,
redemption or other taxable disposition of the Senior Notes (other than in
respect of accrued interest thereon) and (ii) the Holder's adjusted tax basis
in the Senior Notes. Such gain or loss will be capital gain or loss and would
be long-term capital gain or loss if the Senior Notes were held by the Holder
for the applicable holding period (currently more than one year) at the time
of such sale or other disposition.
Backup Withholding. In general, information reporting requirements will
apply to certain payments within the United States of principal and interest
on the Senior Notes, and to payments of the proceeds of sales of Senior Notes
within the United States to Holders other than certain exempt recipients (such
as corporations). A 31% "backup withholding" tax will apply to such payments
if the Holder fails to provide an accurate taxpayer identification number or
fails to report in full all interest and dividend income required to be shown
on its federal income tax returns. The Federal income tax liability of a
person subject to withholding will be reduced by the amount of tax withheld.
If backup withholding results in an overpayment of taxes, a refund may be
obtained from the Internal Revenue Service provided it is furnished with the
required information.
THE FOREGOING SUMMARY IS INCLUDED HEREIN FOR GENERAL INFORMATION ONLY. EACH
HOLDER OF THE SENIOR NOTES SHOULD CONSULT SUCH HOLDER'S TAX ADVISOR AS TO THE
SPECIFIC TAX CONSEQUENCES TO SUCH HOLDER OF PURCHASING THE SENIOR NOTES,
INCLUDING THE APPLICATION OF AND EFFECT OF STATE, LOCAL, FOREIGN AND OTHER TAX
LAWS.
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to the Board of Directors of the Company. Pursuant to the Stockholders'
Agreement (i) the Existing Stockholders have the right to nominate and the
Board will appoint an additional independent director to be added to the Board
within six months following the Offerings, bringing the full Board to eleven
members; the Existing Stockholders and the Founding Builders have agreed to
elect one director each from the four Founding Builders and four directors
nominated by the Existing Stockholders in each of the Annual Stockholders'
Meetings for fiscal years 1996, 1997, 1998, and 1999; in each of the Annual
Stockholders' Meetings for fiscal years 1996 and 1997 the Existing
Stockholders and the Founding Builders have agreed to elect two independent
directors nominated by the Founding Builders and one independent director
nominated by the Existing Stockholders. Each of the parties to the
Stockholders' Agreement has agreed to vote its Common Stock in order to cause
the nominees of the Founding Builder's Owners and the Existing Stockholders
nominated for election to be elected to the Board of Directors. The
Stockholders' Agreement will terminate immediately following the Company's
Annual Meeting of Stockholders relating to fiscal year 1999 (but occurring in
fiscal year 1999).
CERTAIN PROVISIONS AFFECTING STOCKHOLDERS
Delaware, like many other states, permits a corporation to adopt a number of
measures through amendment of the corporate charter or bylaws or otherwise,
which may have the effect of delaying or deterring any unsolicited takeover
attempts. In addition, Section 203 of the Delaware General Corporation Law
restricts certain "business combinations" with "interested stockholders"
(generally a holder of 15% or more of the Company's voting stock) for three
years following the date that person becomes an interested stockholder. By
delaying or deterring unsolicited takeover attempts, these provisions could
adversely affect prevailing market prices for the Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offerings, the Company will have 11,464,375 shares of
Common Stock outstanding (excluding shares of Common Stock reserved for
issuance under the Company's Stock Option Plan). Of these shares, the
3,000,000 shares of Common Stock sold in the Common Stock Offering (plus any
additional shares sold upon the Underwriters' exercise of their over-allotment
option) will be freely transferable without restriction or further
registration under the Act, except that any shares purchased by an existing
"affiliate" of the Company, as that term is defined by the Act ("affiliate"),
will be subject to certain of the resale limitations of Rule 144 adopted under
the Act. All of the remaining 8,464,375 shares of Common Stock will be
restricted securities as defined in Rule 144 (the "Restricted Shares"). The
Initial Stockholders have agreed not (without the prior written consent of the
Managing Underwriter) to offer, sell or otherwise dispose of any shares of
Common Stock for a period of 180 days after the date of this Prospectus. Upon
expiration of this period, 15% or 1,269,658 shares of Common Stock held by the
Initial Stockholders will be eligible for sale in the public market. An
additional 25% or 2,116,094 shares of Common Stock will become eligible for
sale in the public market commencing 12 months after the date of this
Prospectus, with an additional 30% or 2,539,312 of such shares becoming
eligible after 18 months and the remainder becoming eligible commencing 24
months after the date of this Prospectus. In addition to the Initial
Stockholders' ability to sell their shares of Common Stock during such 24
month period, in connection with the Acquisitions, (i) the holders of one-
third of the Common Stock held by the Founding Builders' Owners or (ii) all of
the stockholders of a particular Founding Builder, have a one-time right to
require that the Company file a registration statement with the Commission
registering all of their shares of Common Stock anytime during a one-year
period after expiration of the initial eighteen month period after the date of
this Prospectus; provided, however, that such registered shares shall continue
to remain subject to the sale and transferability restrictions set forth
above. See "Company Formation and Organization--The Acquisitions." Any sales
of Common Stock by the Initial Stockholders are subject to compliance with the
volume, holding period and applicable limitations of Rule 144, or pursuant to
a registration statement meeting the requirements the Securities Act. The
20,000 shares of Series A 11% Cumulative Convertible Preferred Stock issued in
connection with the acquisition of Genesee is only convertible two years after
issuance, and would convert into 222,222 shares of Common Stock (at a
conversion price of $9.00 per share).
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In general, under Rule 144 as currently in effect, beginning 90 days after
the Common Stock Offering, any person (or persons whose shares are aggregated)
who has beneficially owned Restricted Shares for at least two years is
entitled to sell, within any three-month period, a number of shares that does
not exceed the greater of 1% of the then outstanding shares of the Company's
Common Stock (approximately 114,644 shares immediately after the Offerings) or
the average weekly trading volume of the Company's Common Stock in the over-
the-counter market during the four calendar weeks preceding the date on which
notice of the sale is filed with the Commission. Sales under Rule 144 are also
subject to certain manner of sale provisions, notice requirements and the
availability of current public information about the Company. Any person (or
persons whose shares are aggregated) who is not deemed to have been an
affiliate of the Company at any time during the three months preceding a sale,
and who has beneficially owned shares, within the context of Rule 144, for at
least three years, is entitled to sell such shares under Rule 144(k) without
regard to the volume limitations, manner of sale provisions, public
information or notice requirements.
The Company will grant options to purchase shares of Common Stock, which
amount will be determined and made effective on the effective date of the
Offerings, under the Company's Stock Option Plan. The Company expects, after
completion of the Common Stock Offering, to file a Registration Statement
under the Act to register the issuance of shares of Common Stock issuable
under its Stock Option Plan. See "Management--Stock Option Plan." Shares of
Common Stock issued under the Stock Option Plan after the effective date of
such Registration Statement, other than shares held by affiliates of the
Company, will be eligible for resale in the public market without restriction.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is American
Securities Transfer, Incorporated, Denver, Colorado.
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE-
SENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR ANY OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 11
Common Stock Offering.................................................... 15
Use of Proceeds.......................................................... 15
Company Formation and Organization....................................... 16
Capitalization........................................................... 19
Selected Combined Financial and Operating Data........................... 20
Founding Builders--Selected Financial and Operating Data................. 24
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 25
Business................................................................. 33
Management............................................................... 55
Certain Transactions..................................................... 63
Security Ownership of Existing Stockholders and Management............... 66
Description of Senior Notes.............................................. 67
Certain Federal Income Tax Considerations................................ 91
Description of Proposed Credit Agreement................................. 92
Description of Capital Stock............................................. 94
Underwriting............................................................. 97
Certain Legal Matters.................................................... 97
Experts.................................................................. 97
Additional Information................................................... 98
Index to Financial Statements............................................ F-1
</TABLE>
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UNTIL JUNE 10, 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICI-
PATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING
AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
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$100,000,000
[LOGO]
13.75% SENIOR NOTES DUE 2003
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PROSPECTUS
----------------
BT SECURITIES CORPORATION
FURMAN SELZ
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Set forth below is an estimate of the approximate amount of fees and
expenses (other than underwriting commissions and discounts) payable by the
Company in connection with the issuance and distribution of the Common Stock
and the Senior Notes pursuant to the Prospectuses contained in this
Registration Statement. The Company will pay all of these expenses.
<TABLE>
<CAPTION>
APPROXIMATE
AMOUNT
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<S> <C>
Securities and Exchange Commission registration fee.............. $ 46,380
Nasdaq Stock Market filing fee................................... 46,160
Accountants fees and expenses.................................... 1,200,000
Blue Sky fees and expenses....................................... 40,000
Legal fees and expenses.......................................... 1,700,000
Transfer Agent and Registrar fees and expenses................... 20,000
Trustees fees and expenses....................................... 10,000
Printing and engraving........................................... 500,000
Miscellaneous expenses........................................... 437,460
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Total.......................................................... $4,000,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's By-Laws provide that the Company shall, to the fullest extent
permitted by Section 145 of the General Corporation Law of the State of
Delaware, as amended from time to time, indemnify all persons whom it may
indemnify pursuant thereto.
Section 145 of the General Corporation Law of the State of Delaware permits
a corporation, under specified circumstances, to indemnify its directors,
officers, employees or agents against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlements actually and reasonably
incurred by them in connection with any action, suit or proceeding brought by
third parties by reason of the fact that they were or are directors, officers,
employees, or agents of the corporation, if such directors, officers,
employees or agents acted in good faith and in a manner they reasonably
believed to be in or not opposed to the best interests of the corporation and,
with respect to any criminal action or proceeding, had no reason to believe
their conduct was unlawful. In a derivative action, i.e., one by or in the
right of the corporation, indemnification may be made only for expenses
actually and reasonably incurred by directors, officers, employees or agents
in connection with the defense or settlement of an action or suit, and only
with respect to a matter as to which they shall have acted in good faith and
in a manner they reasonably believed to be in or not opposed to the best
interests of the corporation, except that no indemnification shall be made if
such person shall have been adjudged liable to the corporation, unless and
only to the extent that the court in which the action or suit was brought
shall determine upon application that the defendant directors, officers,
employees or agents are fairly and reasonably entitled to indemnify for such
expenses despite such adjudication of liability.
The Company's Amended and Restated Certificate of Incorporation provides
that the Company's directors will not be personally liable to the Company or
its Stockholders for monetary damages resulting from breaches of their
fiduciary duty as directors except (a) for any breach of the duty of loyalty
to the Company or its stockholders, (b) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(c) under Section 164 of the General Corporation Law of the State of Delaware,
which makes
II-1
<PAGE>
directors liable for unlawful dividends or unlawful stock repurchase or
redemptions or (d) for transactions from which directors derive improper
personal benefit.
Section 8 of the Underwriting Agreements filed as Exhibits 1.1 and 1.2
provide that the Underwriters named therein will indemnify and hold harmless
the Company and each director, officer or controlling person of the Company
from and against certain liabilities, including liabilities under the
Securities Act. Section 8 of such Underwriting Agreements also provide that
such Underwriters will contribute to certain liabilities of such persons under
the Securities Act. The Company also expects to have director and officer
insurance coverage concurrently with the consummation of the Offering.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The following information relates to securities of the Company issued or
sold within the past three years that were not registered under the Securities
Act:
(i) Between June 1995 when the Company was formed, and the consummation
of the Offerings, the Company will have issued 2,230,500 shares of Common
Stock to the Existing Stockholders for consideration equal to $22,305. Each
of these issuances of Common Stock shall be effected without a registration
under the Securities Act in reliance upon the exemptions provided by
Section 4(2) of the Securities Act.
(ii) Simultaneously with the completion of the Offerings, the Company
will issue 6,233,875 shares of its Common Stock and 20,000 shares of its
Series A 11% Cumulative Convertible Preferred Stock, in connection with the
Acquisitions. This transaction shall be effected without registration of
the such stock under the Securities Act in reliance upon the exemption
provided by Section 4(2) of the Securities Act.
In relying on the exemption provided by Section 4(2) of the Securities Act
in connection with the private placements described above, the Company relied
upon written representations of the persons acquiring the Company's shares,
that they were acquiring the shares for investment purposes and that they had
received adequate opportunity to obtain information, and had reviewed such
information regarding the Company. Certificates representing the shares issued
to these persons contained a legend restricting transfer thereof absent
registration under the Securities Act or the availability of an exemption
therefrom.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS.
<TABLE>
<C> <S>
1.1** Form of Common Stock Underwriting Agreement.
1.2** Form of Senior Notes Underwriting Agreement.
2.1** Agreement and Plan of Reorganization dated as of March 11, 1996 by
and among the Company, Buffington Acquisition, Inc., Buffington
Holdings, Inc. and the Stockholders named therein ("Buffington Merger
Agreement").
2.1(a)* First Amended to Buffington Merger Agreement, dated May 15, 1996
2.2** Amended and Restated Agreement and Plan of Reorganization dated as of
March 11, 1996 by and among the Company, Christopher Acquisition,
Inc., Christopher Homes, Custom Homes Division, Inc. and the
Stockholders named therein ("Christopher Merger Agreement").
2.2(a)* First Amendment to Christopher Merger Agreement, dated May 15, 1996
2.3** Amended and Restated Agreement and Plan of Reorganization dated as of
March 11, 1996 by and among the Company, Genesee Acquisition, Inc.,
The Genesee Company, The Genesee Company/Castle Pines, Ltd., The
Genesee Company of Michigan, Ltd., Genesee Development Company and
the Stockholders named therein ("Genesee Merger Agreement").
</TABLE>
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* Filed herewith
** Previously led
*** Revised and filed herewith
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<TABLE>
<C> <S>
2.3(a)* First Amendment to Genesee Merger Agreement, dated May 15, 1996.
2.4** Amended and Restated Agreement and Plan of Reorganization dated as
of March 11, 1996 by and among the Company, Sunstar Acquisition,
Inc., Solaris Development Corporation and the Stockholders named
therein ("Sunstar Merger Agreement").
2.4(a)* First Amendment to Sunstar Merger Agreement, dated May 15, 1996.
3.1** Amended and Restated Certificate of Incorporation of the Registrant.
3.1(a)* Amendment to Certificate of Incorporation of the Registrant.
3.2** Amended and Restated Bylaws of the Registrant.
4.1** Specimen stock certificate representing Common Stock.
4.2*** Form of Indenture for Senior Notes.
4.3** Form of Certificate for Senior Notes.
5** Form of Opinion of Katten Muchin & Zavis as to the legality of the
securities being registered (including consent).
10.1** Stock Incentive Plan.
10.3** Incentive Compensation Plan.
10.4(a)** Employment Agreement between Buffington Holdings, Inc. and Thomas
Buffington.
10.4(b)** Employment Agreement between Buffington Holdings, Inc. and Edward
Kirkpatrick.
10.4(c)** Employment Agreement between Buffington Holdings, Inc. and James
Giddens.
10.4(d)** Employment Agreement between Christopher Homes, Custom Home
Division, Inc. and J. Christopher Stuhmer.
10.4(e)** Employment Agreement between The Genesee Company and Robert Short.
10.4(f)** Employment Agreement between Solaris Development Company and Lanold
W. Caldwell.
10.4(g)** Employment Agreement between Solaris Development Company and
Lawrence J. Witek.
10.4(h)** Employment Agreement between The Fortress Group, Inc. and James J.
Martell, Jr.
10.4(i)** Employment Agreement between The Fortress Group, Inc. and Brian J.
McGregor.
10.4(j)** Employment Agreement between The Fortress Group, Inc. and James M.
Pirrello.
10.5** Directors Indemnification Agreement between The Fortress Group, Inc.
and Thomas B. Buffington, J. Marshall Coleman, Charles F. Smith,
Mark L. Fine, Steve D. Rivers, James F. McEneaney, James J. Martell,
Jr., J. Christopher Stuhmer, Lawrence J. Witek and Robert Short.
10.6(a)** Promissory Note payable to Thomas Buffington.
10.6(b)** Promissory Note payable to Edward Kirkpatrick.
10.6(c)** Promissory Note payable to James Giddens.
10.6(d)** Promissory Note payable to Lanold Caldwell.
10.6(e)** Promissory Note payable to Lawrence Witek.
10.6(f)** Promissory Note payable to J. Christopher Stuhmer.
10.6(g)** Promissory Note payable to Robert Short.
10.7*** Stockholders' Agreement between Charles F. Smith, Jr., James J.
Martell, Jr., Patricia Donnelly, Michael P. Kahn and Pepi A. Kahn,
Co-Trustees of Kahn Grantor Trust of 1993, James F. McEneaney, Jr.,
James M. Pirrello, Brian McGregor, Brian Buchanan, Thomas B.
Buffington, Edward A. Kirkpartrick, James M. Giddens, J. Christopher
Stuhmer, Robert Short, Lanold W. Caldwell, and Lawrence J. Witek.
10.8(a)** Promissory Notes payable to Charles F. Smith.
10.8(b)** Promissory Note payable to Patricia Donnelly.
10.8(c)** Promissory Note payable to James J. Martell, Jr.
10.8(d)** Promissory Note payable to Brian McGregor.
12*** Statement of Computation of Ratio of Earnings to Fixed Charges.
21** List of Subsidiaries.
</TABLE>
- --------
*Filed herewith
**Previously filed
*** Revised and filed herewith
II-3
<PAGE>
<TABLE>
<S> <C>
23.1* Consent of Price Waterhouse LLP (included on page II-7 of this Registration Statement).
23.2** Consent of Katten Muchin & Zavis (contained in its opinion to be filed as Exhibit 5 hereto).
23.3* Consent of Hein & Associates LLP.
23.4* Consent of Ernst & Young LLP (included on page II-8 of this Registration Statement).
24** Power of Attorney
24.1** Power of Attorney granted by Mark L. Fine
24.2** Power of Attorney granted by Steve D. Rivers
25** Statement of Eligibility of Trustee on Form T-1
99** Consent of Builder magazine.
</TABLE>
- --------
* Filed herewith
** Previously filed
*** Revised and filed herewith
(b) FINANCIAL STATEMENT SCHEDULES.
Schedule IX--Short-Term Borrowings.
Schedule X--Supplementary Statement of Income Information.
ITEM 17. UNDERTAKINGS.
The Registrant hereby undertakes:
(1) To provide to the Underwriters at the closing specified in the
underwriting agreement, certificates in such denominations and registered
in such names as required by the Underwriters to permit prompt delivery to
each purchaser.
(2) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions,
or otherwise, the Registrant has been advised that in the opinion of the
Commission, such indemnification is against public policy as expressed in
the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any
action, suite or proceeding) is asserted by such director, officer of
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter had been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(3) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Company pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act of 1933 shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT TO THE REGISTRATION STATEMENT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF
RESTON AND STATE OF VIRGINIA ON THE 16TH DAY OF MAY, 1996.
The Fortress Group, Inc.
/s/ James J. Martell, Jr.
By: _________________________________
JAMES J. MARTELL, JR.,
PRESIDENT
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ James J. Martell, Jr. President (Principal
- ------------------------------------- Executive Officer) May 16, 1996
JAMES J. MARTELL, JR. and Director
* Vice President of
- ------------------------------------- Finance (Principal May 16, 1996
JAMIE M. PIRRELLO Financial and
Accounting Officer)
* Director
- ------------------------------------- May 16, 1996
J. CHRISTOPHER STUHMER
* Director
- ------------------------------------- May 16, 1996
LAWRENCE J. WITEK
* Director May 16, 1996
- -------------------------------------
ROBERT SHORT
* Director
- ------------------------------------- May 16, 1996
THOMAS B. BUFFINGTON
* Director
- ------------------------------------- May 16, 1996
J. MARSHALL COLEMAN
II-5
<PAGE>
SIGNATURE TITLE DATE
--------- ----- ----
* Director
- ------------------------------------- May 10, 1996
CHARLES F. SMITH
* Director
- ------------------------------------- May 10, 1996
JAMES F. MCENEANEY, JR.
Director
* May 10, 1996
- -------------------------------------
MARK L. FINE
Director
* May 10, 1996
- -------------------------------------
STEVE D. RIVERS
/s/ James J. Martell, Jr.
*By: _______________________________
JAMES J. MARTELL, JR.,
ATTORNEY-IN-FACT
II-6
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Amendment No. 3 to the Registration Statement on Form S-1 (No. 333-2332) of
our reports as of the dates, and related to the financial statements of the
companies listed below which appear in the Prospectus of the Fortress Group,
Inc.:
<TABLE>
<CAPTION>
COMPANY DATE
------- ----
<S> <C>
Combined Predecessor Companies.......................... March 11, 1996
Buffington Homes, Inc. ................................. February 16, 1996
Christopher Homes, Inc. and Affiliates.................. March 8, 1996
Genesee Company and Related Entities.................... March 1, 1996
The Fortress Group, Inc. ............................... March 11, 1996
</TABLE>
We also consent to the reference to us under the headings "Experts" and
"Selected Financial Data" in such Prospectus. However, it should be noted that
Price Waterhouse LLP has not prepared or certified such "Selected Financial
Data."
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Minneapolis, Minnesota
May 15, 1996
II-7
<PAGE>
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated February 10, 1996, with respect to the financial
statements of Solaris Development Corporation, and our report dated February 9,
1996, with respect to the financial statements of Sunstar Mortgage Limited
Liability Company, included in Amendment No. 3 to the Registration Statements
(Form S-1, No. 333-2332) and related Prospectuses of The Fortress Group, Inc.
dated May 16, 1996.
/S/ ERNST & YOUNG LLP
Ernst & Young LLP
Raleigh, North Carolina
May 15, 1996
II-8
<PAGE>
Exhibit 2.1(a)
F I R S T A M E N D M E N T
TO
Agreement and Plan of Reorganization Amended and Restated as of March 11, 1996
by and among The Fortress Group, Inc., Buffington Acquisition, Inc., Buffington
Holdings, Inc., Buffington Homes, Inc., Buffington Homes - San Antonio, Inc.,
Buffington Development, Inc., Elements, Inc., Craft Homebuilders, Inc., Thomas
Buffington, Edward Kirkpatrick, and James Giddons (the "Agreement and Plan of
Reorganization").
The Agreement and Plan of Reorganization is hereby amended by amending
Annex II and Annex III thereto to read as follows:
"ANNEX II
TO THAT CERTAIN
AGREEMENT AND PLAN OF REORGANIZATION
AMENDED AND RESTATED AS OF MARCH 11, 1996
BY AND AMONG
THE FORTRESS GROUP, INC.
BUFFINGTON ACQUISITION, INC.
BUFFINGTON HOMES, INC.
AND
THE STOCKHOLDERS NAMED THEREIN
CONSIDERATION TO BE PAID TO STOCKHOLDERS
Part I
------
SUMMARY
Aggregate consideration to be paid to STOCKHOLDERS:
1,897,897 shares of Fortress Common Stock.
Cash: $1,129,000
Consideration to be paid to each STOCKHOLDER:
- --------------------------------------------
<TABLE>
<CAPTION>
Shares of Fortress
Stockholder Common Stock Cash
- ----------------------- ------------------ ----------
<S> <C> <C>
Thomas B. Buffington 948,949 $ 564,500
Edward A. Kirkpatrick 474,474 $ 282,250
James M. Giddens 474,474 $ 282,250
--------- ----------
Totals: 1,897,897 $1,129,000
</TABLE>
-1-
<PAGE>
ANNEX II
(continued)
PART II
Aggregate consideration to be paid to each Founding Company:
<TABLE>
<CAPTION>
Shares of Fortress Shares of Fortress Cash
Founding Company Common Stock Preferred Shares (000)
- ------------------ ------------------ ------------------ ------
<S> <C> <C> <C>
Buffington 1,897,897 $1,129
Christopher 1,691,227 179
Genesee 1,729,495 20,000 695
Solaris 915,256 3,876
--------- ---------- ------
Totals: 6,233,875 $5,879
</TABLE>
-2-
<PAGE>
ANNEX III
TO THAT CERTAIN
AGREEMENT AND PLAN OF REORGANIZATION
AMENDED AND RESTATED AS OF MARCH 11, 1996
BY AND AMONG
THE FORTRESS GROUP, INC.
BUFFINGTON ACQUISITION, INC.
BUFFINGTON HOMES, INC.
AND
THE STOCKHOLDERS NAMED THEREIN
STOCKHOLDERS AND STOCK OWNERSHIP OF THE FORTRESS GROUP, INC.
(Prior to Closing)
<TABLE>
<CAPTION>
Stockholders Number of Shares
- ------------ ----------------
<S> <C>
Charles F. Smith and Family Trusts 678,748
Patricia Donnelly 651,585
James J. Martell, Jr. 624,423
Brian J. McGregor 128,787
James McEneaney 50,812
Michael P. Kahn & Pepi A. Kahn 50,812
Co-Trustees
James M. Pirrello 40,650
Brian Buchanan 4,683
--------------
Total 2,230,500"
</TABLE>
-3-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this FIRST AMENDMENT
on this 15th day of May, 1996.
THE FORTRESS GROUP, INC.
ATTEST:
_________________________ By __________________________________
James J. Martell, Jr., President
BUFFINGTON ACQUISITION, INC.
ATTEST:
_________________________ By __________________________________
James J. Martell, Jr., President
BUFFINGTON HOLDINGS, INC.
ATTEST:
_________________________ By __________________________________
Thomas B. Buffington, President
BUFFINGTON HOMES, INC.
ATTEST:
_________________________ By __________________________________
Thomas B. Buffington, President
BUFFINGTON HOMES - SAN ANTONIO, INC.
ATTEST:
_________________________ By _________________________________
Thomas B. Buffington, President
BUFFINGTON DEVELOPMENT, INC.
ATTEST:
_________________________ By _________________________________
Thomas B. Buffington, President
ELEMENTS!, INC.
ATTEST:
_________________________ By _________________________________
Thomas B. Buffington, President
-4-
<PAGE>
CRAFT HOMEBUILDERS, INC.
ATTEST:
_________________________ By _________________________________
Thomas B. Buffington, President
STOCKHOLDERS
___________________________________
Thomas Buffington
___________________________________
Edward Kirkpatrick
____________________________________
James Giddens
-5-
<PAGE>
Exhibit 2.2(a)
F I R S T A M E N D M E N T
TO
Agreement and Plan of Reorganization Amended and Restated as of March 11, 1996
by and among The Fortress Group, Inc., Christopher Acquisition, Inc.,
Christopher Homes, Custom Home Division, Inc., Christopher Homes, J. Christopher
Stuhmer, Inc., and J. Christopher Stuhmer (the "Agreement and Plan of
Reorganization").
The Agreement and Plan of Reorganization is hereby amended by amending
Annex II and Annex III thereto to read as follows:
"ANNEX II
TO THAT CERTAIN
AGREEMENT AND PLAN OF REORGANIZATION
AMENDED AND RESTATED AS OF MARCH 11, 1996
BY AND AMONG
THE FORTRESS GROUP, INC.
CHRISTOPHER ACQUISITION, INC.
CHRISTOPHER HOMES, CUSTOM HOME DIVISION, INC.
AND
THE STOCKHOLDER NAMED THEREIN
CONSIDERATION TO BE PAID TO STOCKHOLDER
Part I
------
SUMMARY
Aggregate consideration to be paid to STOCKHOLDER:
1,691,227 shares of Fortress Common Stock.
Cash: $179,000
Consideration to be paid to each STOCKHOLDER:
--------------------------------------------
Shares of Fortress
Stockholder Common Stock Cash
- ----------- ------------------ -----
J. Christopher Stuhmer 1,691,227 $179,000
---------
Totals: 1,691,227 $179,000
-1-
<PAGE>
ANNEX II
(continued)
PART II
-------
Aggregate Consideration to be paid to each Founding Company:
<TABLE>
<CAPTION>
Shares of Fortress Shares of Fortress Cash
Founding Company Common Stock Preferred Stock (000)
- ------------------ ------------------ ------------------------ ------
<S> <C> <C> <C>
Buffington 1,897,897 $1,129
Christopher 1,691,227 179
Genesee 1,729,495 20,000 695
Solaris 915,256 3,876
--------- --------------- -------
TOTALS: 6,233,875 20,000 $5,879
</TABLE>
-2-
<PAGE>
ANNEX III
TO THAT CERTAIN
AGREEMENT AND PLAN OF REORGANIZATION
DATED AS OF MARCH 11, 1996
BY AND AMONG
THE FORTRESS GROUP, INC.
CHRISTOPHER ACQUISITION, INC.
CHRISTOPHER HOMES, CUSTOM HOME DIVISION, INC.
AND
THE STOCKHOLDER NAMED THEREIN
STOCKHOLDERS AND STOCK OWNERSHIP OF THE FORTRESS GROUP, INC.
(Prior to Closing)
<TABLE>
<CAPTION>
Stockholders Number of Shares
------------ ----------------
<S> <C>
Charles F. Smith & Family Trust 678,748
Patricia Donnelly 651,585
James J. Martell, Jr. 624,423
Brian J. McGregor 128,787
James McEneaney 50,812
Michael P. Kahn & Pepi A. Kahn 50,812
Co-Trustees
James M. Pirrello 40,650
Brian Buchanan 4,683
--------------------
Total 2,230,500"
</TABLE>
-3-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this First Amendment on this
15th day of May, 1996.
THE FORTRESS GROUP, INC.
ATTEST:
________________________ By ________________________________
James M. Pirrello James J. Martell, Jr.
Assistant Secretary President
CHRISTOPHER ACQUISITION, INC.
ATTEST:
__________________________ By ________________________________
James M. Pirrello James J. Martell, Jr.
Assistant Secretary President
CHRISTOPHER HOMES,
CUSTOM HOME DIVISION, INC.
ATTEST:
__________________________ By ________________________________
J. Christopher Stuhmer J. Christopher Stuhmer
Secretary President
CHRISTOPHER HOMES,
A NEVADA CORPORATION
ATTEST:
__________________________ By ________________________________
J. Christopher Stuhmer J. Christopher Stuhmer
Secretary President
J. CHRISTOPHER STUHMER, INC.
ATTEST:
__________________________ By ________________________________
J. Christopher Stuhmer J. Christopher Stuhmer
Secretary President
STOCKHOLDER:
_________________________
J. Christopher Stuhmer
-4-
<PAGE>
Exhibit 2.3(a)
F I R S T A M E N D M E N T
TO
Agreement and Plan of Reorganization Amended and Restated as of March 11, 1996
by and among The Fortress Group, Inc., Genesee Acquisition, Inc., The Genesee
Company, The Genesee Company/Castle Pines, Ltd., The Genesee Company of
Michigan, Ltd., Genesee Development Company, and Robert Short (the "Agreement
and Plan of Reorganization").
The Agreement and Plan of Reorganization is hereby amended by amending
Annex II and Annex III thereto to read as follows:
"ANNEX II
TO THAT CERTAIN
AGREEMENT AND PLAN OF REORGANIZATION
DATED AS OF MARCH 11, 1996
BY AND AMONG
THE FORTRESS GROUP, INC.
GENESEE ACQUISITION, INC.
THE GENESEE COMPANY
COMPANY AFFILIATES
AND
THE STOCKHOLDER NAMED THEREIN
CONSIDERATION TO BE PAID TO STOCKHOLDER
Part I
------
SUMMARY
Aggregate consideration to be paid to STOCKHOLDER:
1,729,495 shares of Fortress Common Stock.
Cash: $ 695,000
---------
Consideration to be paid to each STOCKHOLDER:
--------------------------------------------
<TABLE>
<CAPTION>
Shares of Fortress Shares of Fortress Cash
Stockholder Common Stock Preferred Shares (000)
- --------------- ------------------ ------------------ --------
<S> <C> <C> <C>
Robert Short 1,729,495 20,000 $695,000
--------- ------ --------
Totals: 1,729,495 20,000 $695,000
</TABLE>
-1-
<PAGE>
ANNEX II
(continued)
PART II
AGGREGATE CONSIDERATION TO BE PAID TO EACH FOUNDING COMPANY:
<TABLE>
<CAPTION>
Shares of Fortress Shares of Fortress Cash
Founding Company Common Stock Preferred Shares (000)
- ------------------ ------------------ ------------------ ------
<S> <C> <C> <C>
Buffington 1,897,897 $1,129
Christopher 1,691,227 179
Genesee 1,729,495 20,000 695
Solaris 915,256 3,876
------------ ----------- ------
Totals: 6,233,875 20,000 $5,879
</TABLE>
-2-
<PAGE>
ANNEX III
TO THAT CERTAIN
AGREEMENT AND PLAN OF REORGANIZATION
AMENDED AND RESTATED AS OF MARCH 11, 1996
BY AND AMONG
THE FORTRESS GROUP, INC.
GENESEE ACQUISITION, INC.
THE GENESEE COMPANY
COMPANY AFFILIATES
AND
THE STOCKHOLDER NAMED THEREIN
STOCKHOLDERS AND STOCK OWNERSHIP OF THE FORTRESS GROUP, INC.
(Prior to Closing)
<TABLE>
<CAPTION>
Stockholders Number of Shares
- ------------ ----------------
<S> <C>
Charles F. Smith & Family Trusts 678,748
Patricia Donnelly 651,585
James J. Martell, Jr. 624,423
Brian J. McGregor 128,787
James McEneaney 50,812
Michael P. Kahn & Pepi A. Kahn 50,812
Co-Trustees
James M. Pirrello 40,650
Brian Buchanan 4,683
--------------
Total 2,230,500"
</TABLE>
-3-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this First Amendment on
this 15th day of May, 1996.
THE FORTRESS GROUP, INC.
ATTEST:
______________________ By______________________________________
James J. Martell, Jr., President
GENESEE ACQUISITION, INC.
ATTEST:
______________________ By _____________________________________
James J. Martell, Jr., President
THE GENESEE COMPANY
ATTEST:
_________________________ By _____________________________________
Robert R. Short, President
The Genesee/Castle Pines, Ltd.
ATTEST:
_________________________ By _____________________________________
Robert R. Short, President
The Genesee Company of Michigan, Ltd.
ATTEST:
_________________________ By _____________________________________
Robert R. Short, President
Genesee Development Company
ATTEST:
_________________________ By _____________________________________
Robert R. Short, President
STOCKHOLDER:
___________________________________
Robert R. Short
-4-
<PAGE>
Exhibit 2.4(a)
F I R S T A M E N D M E N T
TO
Agreement and Plan of Reorganization Amended and Restated as of March 11, 1996
by and among The Fortress Group, Inc., Sunstar Acquisition, Inc., Solaris
Development Corporation, David K. Schmidt, Lanold W. Caldwell, and Lawrence J.
Witek (the "Agreement and Plan of Reorganization").
The Agreement and Plan of Reorganization is hereby amended by amending
Annex II and Annex III thereto to read as follows:
"ANNEX II
TO THAT CERTAIN
AGREEMENT AND PLAN OF REORGANIZATION
AMENDED AND RESTATED AS OF MARCH 11, 1996
BY AND AMONG
THE FORTRESS GROUP, INC.
SUNSTAR ACQUISITION, INC.
SOLARIS DEVELOPMENT CORPORATION
AND
THE STOCKHOLDERS NAMED THEREIN
STOCKHOLDERS AND STOCK OWNERSHIP OF THE FORTRESS GROUP, INC.
Part I
------
Aggregate consideration to be paid to STOCKHOLDERS:
915,256 shares of Fortress Common Stock.
Cash: $3,876,000
Consideration to be paid to each STOCKHOLDER:
--------------------------------------------
<TABLE>
<CAPTION>
Shares of Fortress
Stockholder Common Stock Cash
- -------------------- ------------------ ----------
<S> <C> <C>
David K. Schmidt - 0 - $3,355,000
Lanold W. Caldwell 457,628 260,500
Lawrence J. Witek 457,628 $ 260,500
------- ----------
Totals: 915,256 $3,876,000
</TABLE>
-1-
<PAGE>
ANNEX II
PART II
AGGREGATE CONSIDERATION TO BE PAID TO EACH FOUNDING COMPANY:
<TABLE>
<CAPTION>
Shares of Fortress Shares of Fortress Cash
Founding Company Common Stock Preferred Shares (000)
- ------------------ ------------------ ------------------------ ------
<S> <C> <C> <C>
Buffington 1,897,897 $1,129
Christopher 1,691,227 179
Genesee 1,729,495 20,000 695
Solaris 915,256 3,876
--------- -------- ------
Totals: 6,233,875 20,000 $5,879
</TABLE>
-2-
<PAGE>
ANNEX III
TO THAT CERTAIN
AGREEMENT AND PLAN OF REORGANIZATION
AMENDED AND RESTATED AS OF MARCH 11, 1996
BY AND AMONG
THE FORTRESS GROUP, INC.
SUNSTAR ACQUISITION, INC.
SOLARIS DEVELOPMENT CORPORATION
AND
THE STOCKHOLDERS NAMED THEREIN
STOCKHOLDERS AND STOCK OWNERSHIP OF THE FORTRESS GROUP, INC.
(Prior to Closing)
<TABLE>
<CAPTION>
Stockholders Number of Shares
------------ ----------------
<S> <C>
Charles F. Smith & Family Trusts 678,748
Patricia Donnelly 651,585
James J. Martell, Jr. 624,423
Brian J. McGregor 128,787
James McEneaney 50,812
Michael P. Kahn & Pepi A. Kahn 50,812
Co-Trustees
James M. Pirrello 40,650
Brian Buchanan 4,683
--------------
Total 2,230,500"
</TABLE>
-3-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this FIRST AMENDMENT on this
15th day of May, 1996.
THE FORTRESS GROUP, INC.
ATTEST:
___________________________ By: _________________________________
James J. Martell, Jr., President
SUNSTAR ACQUISITION
ATTEST:
____________________________ By ________________________________
James J. Martell, Jr., President
SOLARIS DEVELOPMENT CORPORATION
ATTEST:
____________________________ By ________________________________
Lanold W. Caldwell, President
STOCKHOLDERS:
__________________________________
David K. Schmidt
___________________________________
Lanold W. Caldwell
___________________________________
Lawrence J. Witek
-4-
<PAGE>
EXHIBIT 3.1(A)
CERTIFICATE OF AMENDMENT OF
CERTIFICATE OF INCORPORATION OF
THE FORTRESS GROUP, INC.
The Fortress Group, Inc., a corporation organized and existing under and
by virtue of the General Corporation Law of the State of Delaware,
DOES HEREBY CERTIFY:
FIRST: That at a meeting of the Board of Directors of The Fortress
Group, Inc. resolutions were adopted setting forth a proposed amendment of the
Certificate of Incorporation of said corporation, declaring said amendment to be
advisable and calling a meeting of the stockholders of said corporation for
consideration thereof. The resolution setting forth the proposed amendment is as
follows:
IT IS RESOLVED, that the Certificate of Incorporation of this
corporation be amended by changing the Article thereof numbered "Fourth" to add
the following provision to said Article Fourth:
"Reverse Stock Split. Upon the effective date of the filing of this
-------------------
certificate each share of the Corporation's Common Stock, par value $.01 per
share, is hereby changed into .944223664 of a share so as to reduce the number
of shares of the Corporation's Common Stock, par value $.01 per share,
outstanding from 2,361,259 shares to 2,230,500 shares."
SECOND: that thereafter, pursuant to the resolution of its Board of
Directors a special meeting of the stockholders of said corporation was duly
called and held upon notice in accordance with Section 222 of the General
Corporation Law of the State of Delaware at which meeting the necessary number
of shares as required by statute were voted in favor of the amendment.
THIRD: that said amendment was duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
IN WITNESS WHEREOF, said The Fortress Group, Inc. has caused this
certificate to be signed by James J. Martell, Jr., its authorized officer this
15th day of May, 1996.
The Fortress Group, Inc.
By: ____________________________
James J. Martell, Jr.
Title: President
<PAGE>
[Draft dated 5/15/96]
EXHIBIT 4.2
- --------------------------------------------------------------------------------
INDENTURE
DATED AS OF ___________ __, 1996,
BETWEEN
THE FORTRESS GROUP, INC.
AND
IBJ SCHRODER BANK & TRUST COMPANY,
TRUSTEE
- --------------------------------------------------------------------------------
<PAGE>
CROSS-REFERENCE TABLE
TIA SECTION INDENTURE SECTION
- ----------- -----------------
310(a)(1)............................................. 8.10
(a)(2).............................................. 8.10
(a)(3).............................................. N.A.
(a)(4).............................................. N.A.
(b)................................................. 8.8; 8.10
(c)................................................. N.A.
311(a)................................................ 8.11
(b)................................................. 8.11
(c)................................................. N.A.
312(a)................................................ 9.1; 9.2
(b)................................................. 9.2; 13.3
(c)................................................. 9.2; 13.3
313(a)................................................ 8.6
(b)(1).............................................. 8.6
(b)(2).............................................. 8.6
(c)................................................. 8.6
(d)................................................. 8.6
314(a)................................................ 5.3
(b)................................................. N.A.
(c)(1).............................................. 13.4; 13.5
(c)(2).............................................. 13.4; 13.5
(d)................................................. N.A.
(e)................................................. 13.8
(f)................................................. N.A.
315(a)................................................ 8.1
(b)................................................. 8.5
(c)................................................. 8.1
(d)................................................. 8.1
(e)................................................. 7.11
316(a)(last sentence)................................. 1.2; 7.5
(a)(1)(A)........................................... 7.5
(a)(1)(B)........................................... 7.4
(a)(2).............................................. N.A.
(b)................................................. 7.7
317(a)(1)............................................. 7.8
(a)(2).............................................. 7.9
(b)................................................. 3.5
318(a)................................................ 13.1
N.A. means not applicable
NOTE: This cross-reference table will not, for any purpose, be deemed to be a
part of this Indenture.
ii
<PAGE>
TABLE OF CONTENTS
PAGE
----
ARTICLE 1 DEFINITIONS AND INCORPORATION BY REFERENCE......... 1
SECTION 1.1 RULES AND CONSTRUCTION..................... 1
SECTION 1.2 DEFINITIONS................................ 2
Acquisition Debt................................... 2
Affiliate.......................................... 2
Affiliate Transaction.............................. 2
Agent.............................................. 2
Asset Sale......................................... 2
Asset Sale Offer Date.............................. 3
Asset Sale Offer Price............................. 3
Bankruptcy Law..................................... 3
Board of Directors................................. 3
Board Resolution................................... 3
Business Day....................................... 3
Capital Stock...................................... 3
Capitalized Lease Obligations...................... 3
Change of Control.................................. 3
Change of Control Offer............................ 4
Change of Control Payment Date..................... 4
Change of Control Price............................ 4
Common Equity...................................... 4
Company............................................ 4
Company Request or Company Order................... 4
Consolidated Cash Flow Available for Fixed Charges. 4
Consolidated Fixed Charge Coverage Ratio........... 4
Consolidated Income Tax Expense.................... 5
Consolidated Interest Expense...................... 5
Consolidated Interest Incurred..................... 5
Consolidated Net Income............................ 5
Consolidated Tangible Net Assets................... 6
Consolidated Tangible Net Worth.................... 6
Corporate Trust Office of the Trustee.............. 6
Covenant Defeasance................................ 6
Custodian.......................................... 6
Default............................................ 6
Defaulted Interest................................. 6
Defeasance......................................... 6
Depository......................................... 6
iii
<PAGE>
Disqualified Stock................................. 6
Disqualified Stock Dividend........................ 7
DTC................................................ 7
Event of Default................................... 7
Excess Proceeds.................................... 7
Excess Proceeds Offer.............................. 7
Exchange Act"...................................... 7
Existing Credit Facility........................... 7
Existing Indebtedness.............................. 7
Fair Market Value.................................. 8
GAAP............................................... 8
Global Security.................................... 8
Hedging Obligations................................ 8
Holder............................................. 8
Incur.............................................. 8
Indebtedness....................................... 8
Indenture.......................................... 9
Independent Financial Advisor...................... 9
Intangible Assets.................................. 9
Interest Expense................................... 9
Interest Incurred.................................. 10
interest expense................................... 10
Interest Payment Date.............................. 10
Investments........................................ 10
Issue Date......................................... 10
Legal Holiday...................................... 10
Lien............................................... 10
Material Subsidiary................................ 11
Maturity........................................... 11
Net Proceeds....................................... 11
Net Worth Amount................................... 11
Net Worth Offer.................................... 11
Net Worth Offer Date............................... 11
Net Worth Offer Price.............................. 11
Non-Recourse Indebtedness.......................... 11
Officer............................................ 12
Officers' Certificate.............................. 12
Opinion of Counsel................................. 12
Outstanding........................................ 12
Paying Agent....................................... 13
Permitted Investment............................... 13
Permitted Liens.................................... 13
Person............................................. 14
Place of Payment................................... 14
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<PAGE>
Preferred Stock.................................... 15
Refinancing Indebtedness........................... 15
Registrar.......................................... 15
Regular Record Date................................ 15
Restricted Investment.............................. 15
Restricted Payment................................. 16
Restricted Subsidiary.............................. 16
SEC................................................ 16
Securities......................................... 16
Security Register.................................. 16
Special Record Date................................ 16
Stated Maturity,................................... 16
Subsidiary......................................... 17
Successor.......................................... 17
TIA................................................ 17
Trustee............................................ 17
Trust Officer...................................... 17
U.S. Government Obligations........................ 17
Unrestricted Subsidiary............................ 17
Weighted Average Life to Maturity.................. 18
Wholly Owned Subsidiary............................ 18
ARTICLE 2 SECURITY FORMS..................................... 18
SECTION 2.1 TITLE, FORMS, ETC............................ 18
SECTION 2.2 FORM OF LEGEND FOR GLOBAL SECURITIES......... 19
SECTION 2.3 FORM OF TRUSTEE'S CERTIFICATE OF
AUTHENTICATION............................... 19
ARTICLE 3 THE SECURITIES..................................... 20
SECTION 3.1 GENERAL LIMITATION.......................... 20
SECTION 3.2 DENOMINATIONS, DATING, INTEREST ACCRUAL
AND RECORD DATE............................. 20
SECTION 3.3 EXECUTION, AUTHENTICATION AND
DELIVERY.................................... 20
SECTION 3.4 TEMPORARY SECURITIES........................ 21
SECTION 3.5 REGISTRATION, REGISTRATION OF TRANSFER
AND EXCHANGE................................ 22
SECTION 3.6 MUTILATED, DESTROYED, LOST AND STOLEN
SECURITIES.................................. 25
SECTION 3.7 PAYMENT OF INTEREST; INTEREST RIGHTS
PRESERVED................................... 26
SECTION 3.8 PERSONS DEEMED OWNERS....................... 27
SECTION 3.9 CANCELLATION................................ 27
SECTION 3.10 COMPUTATION OF INTEREST..................... 28
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<PAGE>
ARTICLE 4 REDEMPTION......................................... 28
SECTION 4.1 ELECTION TO REDEEM.......................... 28
SECTION 4.2 NOTICE TO TRUSTEE........................... 28
SECTION 4.3 SELECTION OF SECURITIES TO BE REDEEMED...... 28
SECTION 4.4 NOTICES TO HOLDERS.......................... 29
SECTION 4.5 EFFECT OF NOTICE OF REDEMPTION.............. 30
SECTION 4.6 DEPOSIT OF REDEMPTION PRICE................. 30
SECTION 4.7 SECURITIES REDEEMED IN PART................. 30
ARTICLE 5 COVENANTS.......................................... 30
SECTION 5.1 PAYMENT OF SECURITIES....................... 30
SECTION 5.2 MAINTENANCE OF OFFICE OR AGENCY............. 31
SECTION 5.3 SEC REPORTS; FINANCIAL STATEMENTS........... 31
SECTION 5.4 MONEY FOR SECURITY PAYMENTS TO BE HELD
IN TRUST.................................... 32
SECTION 5.5 COMPLIANCE CERTIFICATE...................... 33
SECTION 5.6 CORPORATE EXISTENCE, ETC.................... 34
SECTION 5.7 PAYMENT OF TAXES AND OTHER CLAIMS........... 34
SECTION 5.8 INSURANCE................................... 34
SECTION 5.9 STAY, EXTENSION AND USURY LAWS.............. 35
SECTION 5.10 MAINTENANCE OF PROPERTIES................... 35
SECTION 5.11 DISPOSITION OF PROCEEDS OF ASSET SALES...... 35
SECTION 5.12 LIMITATIONS ON RESTRICTED PAYMENTS.......... 39
SECTION 5.13 LIMITATIONS ON ADDITIONAL INDEBTEDNESS...... 40
SECTION 5.14 RESTRICTIONS ON RESTRICTED SUBSIDIARY
INDEBTEDNESS................................ 40
SECTION 5.15 LIMITATIONS AND RESTRICTIONS ON CAPITAL
STOCK OF SUBSIDIARIES....................... 41
SECTION 5.16 CHANGE OF CONTROL........................... 41
SECTION 5.17 LIMITATIONS ON TRANSACTIONS WITH
AFFILIATES.................................. 43
SECTION 5.18 LIMITATIONS ON LIENS........................ 44
SECTION 5.19 LIMITATIONS ON RESTRICTIONS ON
DISTRIBUTIONS FROM RESTRICTED
SUBSIDIARIES................................ 44
SECTION 5.20 MAINTENANCE OF CONSOLIDATED TANGIBLE
NET WORTH................................... 45
ARTICLE 6 SUCCESSORS......................................... 47
SECTION 6.1 LIMITATIONS ON MERGERS AND
CONSOLIDATIONS.............................. 47
SECTION 6.2 SUCCESSOR CORPORATION SUBSTITUTED........... 48
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<PAGE>
ARTICLE 7 DEFAULTS AND REMEDIES............................ 49
SECTION 7.1 EVENTS OF DEFAULT......................... 49
SECTION 7.2 ACCELERATION.............................. 51
SECTION 7.3 OTHER REMEDIES............................ 51
SECTION 7.4 WAIVER OF PAST DEFAULTS AND COMPLIANCE
WITH INDENTURE PROVISIONS................. 51
SECTION 7.5 CONTROL BY MAJORITY....................... 52
SECTION 7.6 LIMITATIONS ON SUITS...................... 52
SECTION 7.7 RIGHTS OF HOLDERS TO RECEIVE PAYMENT...... 52
SECTION 7.8 COLLECTION SUIT BY TRUSTEE................ 53
SECTION 7.9 TRUSTEE MAY FILE PROOFS OF CLAIM.......... 53
SECTION 7.10 PRIORITIES................................ 53
SECTION 7.11 UNDERTAKING FOR COSTS..................... 54
SECTION 7.12 RESTORATION OF RIGHTS AND REMEDIES........ 54
ARTICLE 8 TRUSTEE.......................................... 54
SECTION 8.1 DUTIES OF TRUSTEE......................... 54
SECTION 8.2 RIGHTS OF TRUSTEE......................... 56
SECTION 8.3 INDIVIDUAL RIGHTS OF TRUSTEE.............. 56
SECTION 8.4 TRUSTEE'S DISCLAIMER...................... 57
SECTION 8.5 NOTICE OF DEFAULTS........................ 57
SECTION 8.6 REPORTS BY TRUSTEE TO HOLDERS............. 57
SECTION 8.7 COMPENSATION AND INDEMNITY................ 57
SECTION 8.8 REPLACEMENT OF TRUSTEE.................... 58
SECTION 8.9 SUCCESSOR TRUSTEE BY MERGER, ETC.......... 59
SECTION 8.10 ELIGIBILITY; DISQUALIFICATION............. 60
SECTION 8.11 PREFERENTIAL COLLECTION OF CLAIMS
AGAINST COMPANY........................... 60
ARTICLE 9 HOLDERS' LISTS................................... 60
SECTION 9.1 COMPANY TO FURNISH TRUSTEE NAMES AND
ADDRESSES OF.............................. 60
SECTION 9.2 PRESERVATION OF INFORMATION............... 61
ARTICLE 10 DEFEASANCE AND COVENANT DEFEASANCE............... 61
SECTION 10.1 COMPANY'S OPTION TO EFFECT DEFEASANCE
OR COVENANT DEFEASANCE.................... 61
SECTION 10.2 DEFEASANCE AND DISCHARGE.................. 61
SECTION 10.3 COVENANT DEFEASANCE....................... 62
SECTION 10.4 CONDITIONS TO DEFEASANCE OR COVENANT
DEFEASANCE................................ 62
SECTION 10.5 DEPOSITED MONEY AND U.S. GOVERNMENT
OBLIGATIONS TO BE HELD IN TRUST; OTHER
MISCELLANEOUS PROVISIONS.................. 64
vii
<PAGE>
SECTION 10.6 REINSTATEMENT............................... 64
ARTICLE 11 SATISFACTION AND DISCHARGE......................... 65
SECTION 11.1 SATISFACTION AND DISCHARGE OF
INDENTURE.................................. 65
SECTION 11.2 APPLICATION OF TRUST MONEY................. 66
ARTICLE 12 SUPPLEMENTAL INDENTURES............................ 66
SECTION 12.1 SUPPLEMENTAL INDENTURES WITHOUT
CONSENT OF HOLDERS......................... 66
SECTION 12.2 SUPPLEMENTAL INDENTURES WITH CONSENT
OF HOLDERS................................. 67
SECTION 12.3 COMPLIANCE WITH TIA........................ 68
SECTION 12.4 REVOCATION AND EFFECT OF CONSENTS.......... 69
SECTION 12.5 NOTATION ON OR EXCHANGE OF SECURITIES...... 69
SECTION 12.6 TRUSTEE TO SIGN AMENDMENTS, ETC............ 69
ARTICLE 13 MISCELLANEOUS...................................... 70
SECTION 13.1 TIA CONTROLS............................... 70
SECTION 13.2 NOTICES.................................... 70
SECTION 13.3 COMMUNICATION BY HOLDERS WITH OTHER
HOLDERS.................................... 71
SECTION 13.4 ACTION BY SECURITYHOLDERS.................. 71
SECTION 13.5 PROOF OF EXECUTION OF INSTRUMENTS AND
HOLDING OF SECURITIES...................... 72
SECTION 13.6 OBLIGATION TO DISCLOSE BENEFICIAL
OWNERSHIP OF SECURITIES.................... 73
SECTION 13.7 CERTIFICATE AND OPINION AS TO CONDITIONS
PRECEDENT.................................. 73
SECTION 13.8 STATEMENTS REQUIRED IN CERTIFICATE OR
OPINION.................................... 73
SECTION 13.9 RULES BY TRUSTEE AND AGENTS................ 74
SECTION 13.10 NO RECOURSE AGAINST OTHERS................. 74
SECTION 13.11 GOVERNING LAW.............................. 74
SECTION 13.12 NO ADVERSE INTERPRETATION OF OTHER
AGREEMENTS................................. 74
SECTION 13.13 SUCCESSORS................................. 75
SECTION 13.14 SEVERABILITY............................... 75
SECTION 13.15 COUNTERPART ORIGINALS...................... 75
SECTION 13.16 TRUSTEE AS PAYING AGENT AND REGISTRAR...... 75
SECTION 13.17 TABLE OF CONTENTS, HEADINGS, ETC........... 75
SECTION 13.18 BENEFITS OF INDENTURE...................... 75
SECTION 13.19 ACCEPTANCE OF TRUST........................ 75
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<PAGE>
ARTICLE 14 MEETINGS OF HOLDERS OF SECURITIES.................. 76
SECTION 14.1 PURPOSES OF MEETINGS........................ 76
SECTION 14.2 CALL OF MEETINGS BY TRUSTEE................. 76
SECTION 14.3 CALL OF MEETINGS BY COMPANY OR
SECURITYHOLDERS............................. 76
SECTION 14.4 PERSON ENTITLED TO VOTE AT MEETING.......... 77
SECTION 14.5 REGULATIONS FOR MEETING..................... 77
ix
<PAGE>
INDENTURE, dated as of , 1996, between The Fortress Group, Inc.,
a Delaware corporation, and IBJ Schroder Bank & Trust Company, a banking
organization under the laws of New York, as trustee.
RECITALS OF THE COMPANY
A. The Company has duly authorized the execution and delivery of this
Indenture to provide for the issuance from time to time of its senior unsecured
notes as hereinafter described (the "Securities") to be issued as provided
herein.
B. All things necessary have been done to make the Securities, when
executed by the Company and authenticated and delivered by the Trustee hereunder
and duly issued by the Company, the valid obligations of the Company and to make
this Indenture a valid agreement of the Company in accordance with its terms.
NOW THEREFORE, in consideration of the above premises and the acquisition
of the Securities by the Holders thereof, it is mutually covenanted and agreed,
for the equal and proportionate benefit of all Holders of the Securities, as
follows:
ARTICLE 1
DEFINITIONS AND INCORPORATION BY REFERENCE
SECTION 1.1 RULES AND CONSTRUCTION
For all purposes of this Indenture, except as otherwise expressly provided
or unless the context otherwise requires:
(a) the terms defined in this Article have the meanings assigned to them in
this Article, and include the plural as well as the singular;
(b) all accounting terms not otherwise defined herein have the meanings
assigned to them in accordance with GAAP;
(c) the words "herein," "hereof" and "hereunder" and other words of similar
import refer to this Indenture as a whole and not to any particular Article,
Section or other subdivision hereof;
(d) "or" is not exclusive; and
(e) provisions apply to successive events and transactions.
<PAGE>
SECTION 1.2 DEFINITIONS
Capitalized terms used herein will have the following respective meanings
when used herein:
"Acquisition Debt" means Indebtedness of any Person existing at the time
such Person became a Subsidiary of the Company (or such Person is merged into
the Company or one of the Company's Subsidiaries) or assumed in connection with
the acquisition of assets from any such Person (other than assets acquired in
the ordinary course of business of the Company and its Subsidiaries), including,
without limitation, Indebtedness Incurred in connection with, or in
contemplation of, such Person becoming a Subsidiary of the Company (but
excluding Indebtedness of such Person which is extinguished, retired or repaid
in connection with such Person becoming a Subsidiary of the Company).
"Affiliate" of any Person means any Person directly or indirectly
controlling or controlled by, or under direct or indirect common control with,
such Person. For purposes of this Indenture, each executive officer and
director of the Company and each Restricted Subsidiary will be an Affiliate of
the Company. In addition, for purposes of this Indenture, control of a Person
means the power to direct the management and policies of such Person, directly
or indirectly, whether through the ownership of voting securities, by contract
or otherwise. Notwithstanding the foregoing, the term "Affiliate" will not
include, with respect to the Company or any Restricted Subsidiary which is a
Wholly Owned Subsidiary of the Company, any Restricted Subsidiary which is a
Wholly Owned Subsidiary of the Company.
"Affiliate Transaction" has the meaning set forth in Section 5.17(a)
hereof.
"Agent" means any Registrar or Paying Agent.
"Asset Sale" for any Person means the sale, lease, conveyance or other
disposition (including without limitation, by merger, consolidation or sale and
leaseback transaction, and whether by operation of law or otherwise) of any of
that Person's assets (including, without limitation, the sale or other
disposition of Capital Stock of any Subsidiary of such Person, whether by such
Person or such Subsidiary), whether owned on the Issue Date of the Securities or
subsequently acquired in one transaction or a series of related transactions, in
which such Person and/or its Subsidiaries receive cash and/or other
consideration (including, without limitation, the unconditional assumption of
Indebtedness of such Person and/or its Subsidiaries) having an aggregate Fair
Market Value of $1,000,000 or more as to such transaction or series of related
transactions provided, however, that the following will not constitute Asset
Sales: (i) sales of homes and sales of mortgages on homes in the ordinary
course of business consistent with past practices, (ii) sales, leases,
conveyances or other dispositions, including, without limitation, exchanges or
swaps, of real estate or other assets in the ordinary course of business
consistent with past practices, (iii) sales, leases, sale-leasebacks or other
dispositions of amenities and other improvements at the Company's or its
Subsidiaries' communities in the ordinary course of business consistent with
past practices, and (iv) transactions between the Company and
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<PAGE>
any of its Restricted Subsidiaries which are Wholly Owned Subsidiaries, or among
such Restricted Subsidiaries which are Wholly Owned Subsidiaries of the Company.
"Asset Sale Offer Date" has the meaning set forth in Section 5.11(c)
hereof.
"Asset Sale Offer Price" has the meaning set forth in Section 5.11(c)
hereof.
"Bankruptcy Law" means title 11 of the United States Code, as amended, or
any similar federal or state law for the relief of debtors.
"Board of Directors" means the board of directors of a Person or any
authorized committee of the board of directors of such Person.
"Board Resolution" means a copy of a resolution certified by the Secretary
or an Assistant Secretary of the Company to have been duly adopted by the Board
of Directors of the Company and to be in full force and effect on the date of
such certification, and delivered to the Trustee.
"Business Day" means any day other than a Legal Holiday.
"Capital Stock" of any Person means any and all shares, rights to purchase,
warrants or options (whether or not currently exercisable), participations, or
other equivalents of or interests in (however designated) the equity (which
includes, but is not limited to, common stock, preferred stock and partnership
and joint venture interests) of such Person (excluding any debt securities that
are convertible into, or exchangeable for, such equity).
"Capitalized Lease Obligations" of any Person means any obligation of such
Person to pay rent or other amounts under a lease that is required to be
capitalized for financial reporting purposes in accordance with GAAP, and the
amount of such obligation will be the capitalized amount thereof determined in
accordance with GAAP.
"Change of Control" means any of the following: (i) the sale, lease,
conveyance or other disposition of all or substantially all of the Company's
assets as an entirety or substantially as an entirety to any Person or group of
Persons (within the meaning of Section 13(d)(3) of the Exchange Act) in one or a
series of transactions; provided that a transaction where the holders of all
classes of Common Equity of the Company immediately prior to such transaction
own, directly or indirectly, 50 percent or more of the aggregate voting power of
all classes of Common Equity of such Person or group immediately after such
transaction will not be a Change of Control, (ii) the acquisition by the Company
and/or any of its Subsidiaries of 50 percent or more of the aggregate voting
power of all classes of Common Equity of the Company in one transaction or a
series of related transactions, (iii) the liquidation or dissolution of the
Company; provided that a liquidation or dissolution of the Company which is part
of a transaction or series of related transactions that does not constitute a
Change of Control under the proviso of clause (i) above will not constitute a
Change of Control under this clause (iii), or
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<PAGE>
(iv) any transaction or series of related transactions (as a result of a tender
offer, merger, consolidation or otherwise) that results in, or that is in
connection with, (a) any Person, including, a "group" (within the meaning of
Section 13(d)(3) of the Exchange Act) acquiring beneficial ownership (as
determined in accordance with said Rule 13d-3), directly or indirectly, of 50
percent or more of the aggregate voting power of all classes of Common Equity of
the Company or of any Person that possesses beneficial ownership (as determined
in accordance with said Rule 13d-3), directly or indirectly, of 50 percent or
more of the aggregate voting power of all classes of Common Equity of the
Company or (b) less than 50 percent (measured by the aggregate voting power of
all classes) of the Common Equity of the Company being registered under Section
12(b) or 12(g) of the Exchange Act.
"Change of Control Offer" has the meaning set forth in Section 5.16(a)
hereof.
"Change of Control Payment Date" has the meaning set forth in Section
5.16(a) hereof.
"Change of Control Price" has the meaning set forth in Section 5.16(a)
hereof.
"Common Equity" of any Person means all Capital Stock of such Person that
is generally entitled (i) to vote in the election of directors of such Person,
or (ii) if such Person is not a corporation, to vote or otherwise participate in
the selection of the governing body, partners, managers or others that will
control the management and policies of such Person.
"Company" means The Fortress Group, Inc., a Delaware corporation, and any
successor thereof.
"Company Request or Company Order" means a written request or order signed
in the name of the Company by its Chairman of the Board, its President, any
Senior Vice President or any Vice President, and by its Treasurer, any Assistant
Treasurer, any Secretary or any Assistant Secretary, and delivered to the
Trustee.
"Consolidated Cash Flow Available for Fixed Charges" of the Company means,
for any period, the sum of the amounts for such period of (i) Consolidated Net
Income, plus (ii) Consolidated Income Tax Expense (other than income tax expense
(either positive or negative) attributable to extraordinary and nonrecurring
gains or losses on Asset Sales), plus (iii) Consolidated Interest Expense, plus
(iv) all depreciation, and without duplication, amortization (including, without
limitation, previously capitalized interest amortized to cost of sales), plus
(v) all other noncash items reducing Consolidated Net Income for such period,
minus (vi) all other noncash items increasing Consolidated Net Income during
such period; all as determined on a consolidated basis for the Company and its
Restricted Subsidiaries in accordance with GAAP.
"Consolidated Fixed Charge Coverage Ratio" of the Company means, with
respect to any determination date, the ratio of (i) Consolidated Cash Flow
Available for Fixed Charges of the Company for the prior four full fiscal
quarters for which financial results have been reported immediately preceding
the determination date, to (ii) the aggregate Consolidated Interest Incurred
-4-
<PAGE>
of the Company for the prior four fiscal quarters for which financial results
have been reported immediately preceding the determination date.
"Consolidated Income Tax Expense" of the Company for any period means the
income tax expense of the Company and its Restricted Subsidiaries for such
period, determined on a consolidated basis in accordance with GAAP.
"Consolidated Interest Expense" of the Company for any period means the
Interest Expense of the Company and its Restricted Subsidiaries for such period,
determined on a consolidated basis in accordance with GAAP.
"Consolidated Interest Incurred" of the Company for any period means the
Interest Incurred of the Company and its Restricted Subsidiaries for such
period, determined on a consolidated basis in accordance with GAAP.
"Consolidated Net Income" of the Company for an period means the aggregate
net income (or loss) of the Company and its Restricted Subsidiaries for such
period, determined on a consolidated basis in accordance with GAAP; provided
that there will be excluded from such net income (to the extent otherwise
included therein), without duplication: (i) the net income (or loss) of any
Person (other than a Restricted Subsidiary) in which any Person (including,
without limitation, an Unrestricted Subsidiary) other than the Company has an
ownership interest, except to the extent that any such income has actually been
received the Company or any Restricted Subsidiary in the form of dividends or
similar distributions during such period, (ii) except to the extent includible
in the Consolidated Net Income pursuant to the foregoing clause (i), the net
income (or loss) of any Person that accrued prior to the date that (a) such
Person becomes a Restricted Subsidiary or is merged into or consolidated with
the Company or any of its Restricted Subsidiaries or (b) the assets of such
Person are acquired by the Company or any of its Restricted Subsidiaries, (iii)
the net income of any Restricted Subsidiary to the extent that (but only so long
as) the declaration or payment of dividends or similar distributions by such
Restricted Subsidiary of that income is not permitted by operation of the terms
of its charter or any agreement, instrument, judgment, decree, order, statute,
rule or governmental regulation applicable to that Restricted Subsidiary during
such period, (iv) in the case of a successor to the Company by consolidation,
merger or transfer of its assets, any earnings of the successor prior to such
consolidation, merger or transfer of assets and (v) the gains (but not losses)
resulting from (a) the acquisition of Securities issued by the Company or
extinguishment of Indebtedness of the Company, (b) Asset Sales and (c) other
extraordinary items. Notwithstanding the foregoing, in calculating Consolidated
Net Income, the Company will be entitled to take into consideration the tax
benefits associated with an extraordinary loss, but only to the extent such tax
benefits are recognized by the Company. Consolidated Net Income will exclude
any noncash losses, whether or not extraordinary, incurred in connection with
the issuance of Capital Stock (other than Disqualified Stock) in exchange for
Indebtedness of the Company or its Wholly Owned Subsidiaries which are
Restricted Subsidiaries.
-5-
<PAGE>
"Consolidated Tangible Net Assets" of the Company as of any date means the
total amount of assets of the Company and its Restricted Subsidiaries (less
applicable reserves) on a consolidated basis at the end of the fiscal quarter
immediately preceding such date, as determined in accordance with GAAP, less:
(i) Intangible Assets and (ii) appropriate adjustments on account of minority
interests of other Persons holding equity investments in Restricted
Subsidiaries, in the case of each of clauses (i) and (ii) above as reflected on
the consolidated balance sheet of the Company and its Restricted Subsidiaries as
of the end of the fiscal quarter immediately preceding such date.
"Consolidated Tangible Net Worth" of the Company as of any date means the
stockholders' equity (including any Preferred Stock that is classified as equity
under GAAP, other than Disqualified Stock) of the Company and its Restricted
Subsidiaries on a consolidated basis at the end of the fiscal quarter
immediately preceding such date, as determined in accordance with GAAP, less the
amount of Intangible Assets reflected on the consolidated balance sheet of the
Company and its Restricted Subsidiaries as of the end of the fiscal quarter
immediately preceding such date.
"Corporate Trust Office of the Trustee" will be at the address of the
Trustee specified in Section 13.2 hereof or such other address as the Trustee
may give notice to the Company.
"Covenant Defeasance" has the meaning set forth in Section 10.3 hereof.
"Custodian" means any receiver, trustee, assignee, liquidator or similar
official under any Bankruptcy Law.
"Default" means any event, act or condition that is, or after notice or the
passage of time or both would be, an Event of Default.
"Defaulted Interest" has the meaning set forth in Section 3.7 hereof.
"Defeasance" has the meaning set forth in Section 10.2 hereof.
"Depository" means, with respect to the Securities, a clearing agency
registered under the Exchange Act that is designated to act as Depository for
such Securities as contemplated by Section 3.1.
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or is redeemable
at the option of the holder thereof, in whole or in part, on or prior to the
final Maturity date of the Securities; provided that any Capital Stock which
would not constitute Disqualified Stock but for provisions thereof giving
holders thereof the right to require the Company to repurchase or redeem such
Capital Stock upon the occurrence of a change of control occurring prior to the
final Maturity of the Securities will not constitute Disqualified
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<PAGE>
Stock if the change of control provisions applicable to such Capital Stock are
no more favorable to the holders of such Capital Stock than the provisions
contained in Section 5.16 hereof and such Capital Stock specifically provides
that the Company will not repurchase or redeem (or be required to repurchase or
redeem) any such Capital Stock pursuant to such provisions prior to the
Company's repurchase of Securities pursuant to Section 5.16 hereof.
"Disqualified Stock Dividend" of any Person means, for any dividend payable
with regard to Disqualified Stock issued by such Person, the amount of such
dividend multiplied by a fraction, the numerator of which is one and the
denominator of which is one minus the maximum statutory combined federal, state
and local income tax rate (expressed as a decimal number between 1 and 0) then
applicable to such Person.
"DTC" has the meaning set forth in Section 2.2 hereof.
"Event of Default" has the meaning set forth in Section 7.1(a) hereof.
"Excess Proceeds" has the meaning set forth in Section 5.11(a) hereof.
"Excess Proceeds Offer" has the meaning set forth in Section 5.11(c)
hereof.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Existing Credit Facility" means the Credit Agreement proposed to be
entered into pursuant to the Commitment Letter described under "Description of
Proposed Credit Agreement" in the Prospectus dated May , 1996 pursuant to
which the Securities are being offered, between the Company and the lenders
named therein and Banker Trust Company, as Agent (together with the documents
related thereto (including, without limitation, any guaranty agreements), in
each case containing such terms and conditions as the Lender named therein and
the Company shall approve in their sole discretion), as such Facility may be
amended, restated, supplemented or otherwise modified from time to time, and
includes any facility extending the maturity of, increasing the total commitment
of, or restructuring (including, without limitation, the inclusion of additional
borrowers thereunder that are Subsidiaries of the Company and whose obligations
thereunder are guaranteed by the Company) all or any portion of, the
Indebtedness under such Facility or any successor or replacement facilities and
includes any facility with one or more agents or lenders refinancing or
replacing all or any portion of the Indebtedness under such Facility or any
successor facilities.
"Existing Indebtedness" means (i) Indebtedness at any time Incurred
pursuant to the Existing Credit Facility, and (ii) all other Indebtedness of the
Company and its Subsidiaries that is outstanding on the Issue Date of the
Securities.
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<PAGE>
"Fair Market Value" with respect to any asset or property means the sale
value that would be obtained in an arm's-length transaction between an informed
and willing seller under no compulsion to sell and an informed and willing buyer
under no compulsion to buy.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession of the United States, as in effect on the Issue Date of the
Securities.
"Global Security" means a security that evidences all or part of the
Securities and is authenticated and delivered to, and registered in the name of,
the Depository for such Securities or a nominee thereof.
"Hedging Obligations" of any Person means the net obligations of such
Person pursuant to any interest rate swap agreement, foreign currency exchange
agreement, interest rate collar agreement, opinion or futures contract or other
similar agreement or arrangement relating to interest rates or foreign exchange
rates.
"Holder" means a Person in whose name a Security is registered.
"Incur" means, directly or indirectly, to create, incur, assume, guaranty,
extend the maturity of, or otherwise become liable with respect to any
Indebtedness.
"Indebtedness" of any Person at any date means, without duplication, (i)
all indebtedness of such Person for borrowed money (whether or not the recourse
of the lender is to the whole of the assets of such Person or only to a portion
thereof), (ii) all obligations of such Person evidenced by bonds, debentures,
notes or other similar instruments, (iii) all obligations of such Person in
respect of letters of credit or other similar instruments (or reimbursement
obligations with respect thereto), other than standby letters of credit issued
for the benefit of, or surety and performance bonds issued by, such Person in
the ordinary course of business, (iv) all obligations of such Person with
respect to Hedging Obligations (other than those that fix or cap the interest
rate on variable rate indebtedness otherwise permitted by this indenture or that
fix the exchange rate in connection with indebtedness denominated in a foreign
currency and otherwise permitted by this Indenture and other than the purchase
of mortgage commitments in the ordinary course of business), (v) all obligations
of such person to pay the deferred and unpaid purchase price of property or
services, including, without limitation, all conditional sale obligations of
such Person and all obligations under any title retention agreement (except
trade payables and accrued expenses incurred in the ordinary course of
business), (vi) all Capitalized Lease Obligations of such Person, (vii) all
indebtedness of others secured by a Lien on any asset of such Person, whether or
not such indebtedness is assumed by such Person, (viii) all indebtedness of
others guaranteed by, or otherwise the liability of, such Person to the extent
of such guaranty or liability, and (ix) all Disqualified Stock issued by such
Person (the amount of indebtedness
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represented by any Disqualified Stock will equal the greater of the voluntary or
involuntary liquidation preference plus accrued and unpaid dividends). The
amount of indebtedness of any Person at any date will be (a) the outstanding
balance at such date of all unconditional obligations as described above, (b)
the maximum liability of such Person for any contingent obligations under clause
(v) above and (c) in the case of clause (vii) (if the indebtedness referred to
therein is not assumed by such Person), the lesser of the (A) Fair Market Value
of all assets subject to a Lien securing the indebtedness of others on the date
that the Lien attaches and (B) amount of the indebtedness secured.
"Indenture" means this instrument as originally executed or as it may from
time to time be supplemented or amended by one or more indentures supplemental
hereto entered into pursuant to the applicable provisions hereof, including, for
all purposes of this instrument, and any such supplemental indenture, the
provisions of the TIA that are deemed to be a part of and govern this instrument
and any such supplemental indenture, respectively.
"Independent Financial Advisor" means an accounting, appraisal or
investment banking firm of nationally recognized standing that is in the
reasonable judgment of the Company's Board of Directors, (i) qualified to
perform the task for which it has been engaged, and (ii) disinterested and
independent with respect to the Company, all of its Subsidiaries, and each
Affiliate of the Company and/or its Subsidiaries that is involved in the
Affiliate Transaction with respect to which such firm has been engaged.
"Intangible Assets" of the Company means all unamortized debt discount and
expense, unamortized deferred charges, goodwill, patents, trademarks, service
marks, trade names, copyrights, write-ups of assets over their carrying value at
the end of the last fiscal quarter ended prior to the Issue Date of the
Securities or the date of acquisition, if acquired subsequent thereto, and all
other items which would be treated as intangibles on the consolidated balance
sheet of the Company and its Restricted Subsidiaries prepared in accordance with
GAAP.
"Interest Expense" of any Person for a period means, without duplication,
the aggregate amount of (i) interest which in conformity with GAAP, would be set
opposite the caption "interest expense" or any like caption on an income
statement for such Person (including, without limitation, imputed interest
included on Capitalized Lease Obligations, all commissions, discounts and other
fees and charges owed with respect to letters of credit securing financial
obligations and bankers' acceptance financing, the net costs associated with
Hedging Obligations, amortization of other financing fees and expenses, the
interest portion of any deferred payment obligation, amortization of discount or
premium, if any, and all other noncash interest expense other than interest and
other charges amortized to cost of sales) and includes, with respect to the
Company and its Restricted Subsidiaries, without duplication including
duplication of the foregoing items), all interest included as a component of
cost of sales for such period, and (ii) the amount of Disqualified Stock
Dividends recognized by the Company on any Disqualified Stock whether or not
paid during such period.
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"Interest Incurred" of any Person for any period means, without
duplication, the aggregate amount of (i) interest which, in conformity with
GAAP, would be set opposite the caption "interest expense" or any like caption
on an income statement for such Person (including, without limitation, imputed
interest included on Capitalized Lease Obligations, all commissions, discounts
and other fees and charges owed with respect to letters of credit securing
financial obligations and bankers' acceptance financing, the net costs
associated with Hedging Obligations, amortization of other financing fees and
expenses, the interest portion of any deferred payment obligation, amortization
of discount or premium, if any, and all other noncash interest expense other
than interest and other charges amortized to cost of sales) and includes, with
respect to the Company and its Restricted Subsidiaries, without duplication
(including duplication of the foregoing items), all capitalized interest for
such period, all interest attributable to discontinued operations for such
period to the extent not set forth on the income statement under the caption
"interest expense" or any like caption, and all interest actually paid by the
Company or a Restricted Subsidiary under any guaranty of Indebtedness
(including, without limitation, a guaranty of principal, interest or any
combination thereof) of any other Person during such period and (ii) the amount
of Disqualified Stock Dividends recognized by the Company on any Disqualified
Stock whether or not declared during such period.
"Interest Payment Date," when used with respect to a Security, means the
Stated Maturity of an installment of interest on such Security.
"Investments" of any Person means (i) all investments by such Person in any
other Person in the form of loans, advances or capital contributions, (ii) all
guaranties of Indebtedness or other Obligations of any other Person by such
Person, (iii) all purchases (or other acquisitions for consideration) by such
Person of Indebtedness, Capital Stock or other securities of any other Person
and (iv) all other items that would be classified as investments (including,
without limitation purchases of assets outside the ordinary course of business)
on a balance sheet of such Person determined in accordance with GAAP.
"Issue Date" means the date of original issuance of the Securities.
"Legal Holiday" means Saturday, Sunday or a day on which banking
institutions in New York, New York or at a Place of Payment are authorized or
obligated by law, regulation or executive order to remain closed. If a payment
date is a Legal Holiday at a Place of Payment, payment shall be made at that
place on the next succeeding day that is not a Legal Holiday.
"Lien" means with respect to any asset, any mortgage, lien, pledge, charge,
security interest or other similar encumbrance of any kind upon or in respect of
such asset, whether or not filed, recorded or otherwise perfected under
applicable law (including, without limitation, any conditional sale or other
title retention agreement, and any lease in the nature thereof, any option or
other agreement to sell, and any filing of, or agreement to give, any financing
statement under the Uniform Commercial Code (or equivalent statutes) of any
jurisdiction).
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"Material Subsidiary" means any Subsidiary of the Company which accounted
for three percent or more of the Consolidated Tangible Net Assets or
Consolidated Cash Flow Available for Fixed Charges of the Company on a
consolidated basis for the fiscal year ending immediately prior to any Default
or Event of Default.
"Maturity," when used with respect to a Security, means the date on which
the principal of such Security or any installment thereof becomes due and
payable as therein or herein provided, whether at the Stated Maturity or by
declaration of acceleration, call for redemption or otherwise, including the
date upon which payment pursuant to a Change of Control Offer, an Excess
Proceeds Offer or a Net Worth Offer is due.
"Net Proceeds" means (i) all cash (in U.S. dollars or freely convertible
into U.S. dollars) received by the Company or any Restricted Subsidiary from an
Asset Sale net of (a) all brokerage commissions, investment banking fees and all
other fees and expenses (including, without limitation, fees and expenses of
counsel and investment bankers) related to such Asset Sale, (b) provisions for
all income and other taxes measured by or resulting from such Asset Sale, (c)
payments made to retire Indebtedness where payment of such Indebtedness is
required in connection with such Asset Sale, (d) amounts required to be paid to
any Person (other than the Company or a Restricted Subsidiary) owning a
beneficial interest in the assets subject to the Asset Sale and (e) appropriate
amounts to be provided by the Company or any Restricted Subsidiary thereof, as
the case may be, as a reserve, in accordance with GAAP, against any liabilities
associated with such Asset Sale and retained by the Company or any Restricted
Subsidiary thereof, as the case may be, after such Asset Sale, including,
without limitation, pension and other post-employment benefit liabilities,
liabilities related to environmental matters and liabilities under any
indemnification obligations associated with such Asset Sale, all as reflected in
an Officers' Certificate delivered to the Trustee, and (ii) all noncash
consideration received by the Company or any of its Restricted Subsidiaries from
such Asset Sale upon the liquidation or conversion of such consideration into
cash, without duplication, net of all items enumerated in subclauses (a) through
(e) of clause (i) hereof.
"Net Worth Amount" has the meaning set forth in Section 5.20(a) hereof.
"Net Worth Offer" has the meaning set forth in Section 5.20(a) hereof.
"Net Worth Offer Date" has the meaning set forth in Section 5.20(a) hereof.
"Net Worth Offer Price" has the meaning set forth in Section 5.20(a)
hereof.
"Non-Recourse Indebtedness" with respect to any Person means Indebtedness
of such Person for which (i) the sole legal recourse for collection of principal
and interest on such Indebtedness is against the specific property identified in
the instruments evidencing or securing such Indebtedness and such property was
acquired with the proceeds of such Indebtedness or such Indebtedness was
Incurred within 90 days after the acquisition of such property and (ii) no
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other assets of such Person may be realized upon in collection of principal or
interest on such Indebtedness.
"Officer" means the Chairman of the Board, the President, any Executive or
Senior Vice President, the Treasurer, any Assistant Treasurer, the Controller,
the Secretary, any Assistant Secretary or any Vice President of a Person.
"Officers' Certificate" means a certificate signed by two officers, one of
whom must be the Person's Chief Executive Officer, Chief Operating Officer,
Chief Financial Officer or Chief Accounting Officer.
"Opinion of Counsel" means an opinion from legal counsel who is reasonably
acceptable to the Trustee. The counsel may be an employee of or counsel to the
Company or the Trustee.
"Outstanding," when used with respect to the Securities, means, as of the
date of determination, all Securities theretofore authenticated and delivered
under this Indenture, except:
(i) Securities theretofore canceled by the Trustee or delivered to the
Trustee for cancellation;
(ii) Securities for whose payment or redemption money in the necessary
amount has been theretofore deposited with the Trustee or any Paying Agent
(other than the Company) in trust or set aside and segregated in trust by
the Company (if the Company shall act as its own Paying Agent) for the
Holders of such Securities; provided that, if such Securities are to be
redeemed, notice of such redemption has been duly given pursuant to this
Indenture or provision therefor satisfactory to the Trustee has been made;
(iii) Securities as to which the Defeasance has been effected
pursuant to Section 10.2 hereof; and
(iv) Securities which have been paid pursuant to Section 3.6 or in
exchange for or in lieu of which other Securities have been authenticated
and delivered pursuant to this Indenture, other than any such Securities in
respect of which there shall have been presented to the Trustee proof
satisfactory to it that such Securities are held by a bona fide purchaser
in whose hands such Securities are valid obligations of the Company;
provided, however, that in determining whether the Holders of the requisite
principal amount of the Outstanding Securities have given any request, demand,
authorization, direction, notice, consent or waiver hereunder, Securities owned
by the Company or any other obligor of the Securities or any subsidiary of the
Company or of such other obligor shall be disregarded and deemed not to be
Outstanding, except that, in determining whether the Trustee shall be protected
in relying upon any such request, demand, authorization, direction, notice,
consent or waiver, only Securities which the Trustee knows to be so owned shall
be so disregarded. Securities so
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<PAGE>
owned which have been pledged in good faith may be regarded as outstanding if
the pledgee establishes to the satisfaction of the Trustee the pledgee's right
so to act with respect to such Securities and that the pledgee is not the
Company or any other obligor upon the Securities or any Subsidiary of the
Company or of such other obligor.
"Paying Agent" means any Person authorized by the Company to pay the
principal of or any interest on any Securities.
"Permitted Investment" of any Person means any Investment of such Person in
(i) direct obligations of the United States or an agency thereof or obligations
guaranteed by the United States or any agency thereof, in each case maturing
within 180 days of the date of acquisition thereof, (ii) certificates of deposit
maturing within 180 days of the date of acquisition thereof issued by a bank,
trust company or savings and loan association which is organized under the laws
of the United States or any state thereof having capital, surplus and undivided
profits aggregating in excess of $250 million and a Keefe Bank Watch Rating of C
or better (or a similar rating by any successor thereof), (iii) certificates of
deposit maturing within 180 days of the date of acquisition thereof issued by a
bank, trust company or savings and loan association organized under the laws of
the United States or any state thereof other than banks, trust companies or
savings and loan associations satisfying the criteria in (ii) above; provided
that the aggregate amount of all certificates of deposit issued to the Company
at any one time by such bank, trust company or savings and loan association will
not exceed $100,000, (iv) commercial paper given the highest rating by two
established national credit rating agencies and maturing not more than 180 days
from the date of the acquisition thereof, (v) repurchase agreements or money-
market accounts which are fully secured by direct obligations of the United
States or any agency thereof and (vi) in the case of the Company and its
Subsidiaries, any receivables or loans taken by the Company or a Subsidiary in
connection with the sale of any asset otherwise permitted by this Indenture.
"Permitted Liens" means (i) Liens for taxes, assessments or governmental
charges or claims that either (a) are not yet delinquent or (b) are being
contested in good faith by appropriate proceedings and as to which appropriate
reserves have been established or other provisions have been made in accordance
with GAAP, (ii) statutory Liens of landlords and carriers', warehousemen's,
mechanics', suppliers', materialmen's, repairmen's or other Liens imposed by law
and arising in the ordinary course of business and with respect to amounts that,
to the extent applicable, either (a) are not yet delinquent or (b) are being
contested in good faith by appropriate proceedings and as to which appropriate
reserves have been established or other provisions have been made in accordance
with GAAP, (iii) Liens (other than any Lien imposed by the Employee Retirement
Income Security Act of 1974, as amended) incurred or deposits made in the
ordinary course of business in connection with workers, compensation,
unemployment insurance and other types of social security, (iv) Liens incurred
or deposits made to secure the performance of tenders, bids, leases, statutory
obligations, surety and appeal bonds, progress payments, government contracts
and other obligations of like nature (exclusive of obligations for the payment
of borrowed money), in each case incurred in the ordinary course of business of
the Company and its Subsidiaries, (v) attachment or judgment Liens not giving
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rise to a Default or an Event of Default and which are being contested in good
faith by appropriate proceedings, (vi) easements, rights-of-way, restrictions
and other similar charges or encumbrances not materially interfering with the
ordinary course of business of the Company and its Subsidiaries, (vii) zoning
restrictions, licenses, restrictions on the use of real property or minor
irregularities in title thereto, which do not materially impair the use of such
real property in the ordinary course of business of the Company and its
Subsidiaries or the value of such real property for the purpose of such
business, (viii) leases or subleases granted to others not materially
interfering with the ordinary course of business of the Company and its
Subsidiaries, (ix) purchase money mortgages (including, without limitation,
Capitalized Lease Obligations and Indebtedness and purchase money security
interests), (x) Liens securing Refinancing Indebtedness, provided that such
refinanced Indebtedness was secured and that the assets covered by the Liens
securing such Refinancing Indebtedness are the same as or similar to, and not
greater in value than, the assets which secured such refinanced Indebtedness,
(xi) Liens securing Indebtedness of the Company and its Restricted Subsidiaries;
provided that, at the time any such Indebtedness is Incurred, the aggregate
amount of Indebtedness secured by Liens (other than Non-Recourse Indebtedness
secured by Liens) will not exceed 40 percent of Consolidated Tangible Net
Assets, and provided further that, notwithstanding the foregoing limitation, the
Company may at any time borrow up to $50,000,000 in aggregate principal amount
pursuant to the Existing Credit Facility, and any Liens securing such
Indebtedness shall be Permitted Liensm regardless of whether or not the
aggregate amount of Indebtedness secured by such Liens exceeded 40% of
Consolidated Tangible Net Assets at the time such Indebtedness was Incurred or
any such Lien was created, (xii) any interest in or title of a lessor to
property subject to any Capitalized Lease Obligations incurred in compliance
with the provisions of this Indenture, (xiii) Liens existing on the Issue Date,
including, without limitation, Liens securing Existing Indebtedness, (xiv) any
option, contract or other agreement to sell an asset; provided such sale is not
otherwise prohibited under this Indenture, (xv) Liens securing Non-Recourse
Indebtedness of the Company or a Restricted Subsidiary thereof, (xvi) Liens on
property or assets of any Restricted Subsidiary securing Indebtedness of such
Restricted Subsidiary owing to the Company or one or more Restricted
Subsidiaries, (xvii) Liens securing Indebtedness of an Unrestricted Subsidiary,
(xviii) any right of a lender or lenders to which the Company or a Restricted
Subsidiary may be indebted to offset against, or appropriate and apply to the
payment of, such Indebtedness any and all balances, credits, deposits, accounts
or monies of the Company or a Restricted Subsidiary with or held by such lender
or lenders and (xix) any pledge or deposit of cash or property in conjunction
with obtaining surety and performance bonds and letters of credit required to
engage in constructing on-site and off-site improvements required by
municipalities or other governmental authorities in the ordinary course of
business of the Company by the Company or any Restricted Subsidiary.
"Person" means any individual, corporation, partnership, joint venture,
limited liability company, incorporated or unincorporated association, joint
stock company, trust, unincorporated organization or government or other agency
or political subdivision thereof or other entity of any kind.
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"Place of Payment", when used with respect to the Securities, means the
place or places where the principal of and interest on the Securities are
payable.
"Preferred Stock" of any Person means all Capital Stock of such Person
which has a preference in liquidation or with respect to the payment of
dividends.
"Refinancing Indebtedness" means Indebtedness that refunds, refinances or
extends any Existing Indebtedness or other Indebtedness permitted to be Incurred
by the Company or its Restricted Subsidiaries pursuant to the terms of this
Indenture but only to the extent that (i) the Refinancing Indebtedness is
subordinated to the Securities to the same extent as the Indebtedness being
refunded, refinanced or extended, if at all, (ii) the Refinancing Indebtedness
is scheduled to mature either (a) no earlier than the Indebtedness being
refunded, refinanced or extended, or (b) after the maturity date of the
Securities, (iii) the portion, if any, of the Refinancing Indebtedness that is
scheduled to mature on or prior to the Maturity date of the Securities has a
Weighted Average Life to Maturity at the time such Refinancing Indebtedness is
Incurred that is equal to or greater than the Weighted Average Life to Maturity
of the portion of the Indebtedness being refunded, refinanced or extended that
is scheduled to mature on or prior to the Maturity date of the Securities, (iv)
such Refinancing Indebtedness is in an aggregate amount that is equal to or less
than the aggregate amount then outstanding under the Indebtedness being
refunded, refinanced or extended, which Indebtedness being so refinanced or
extended shall be deemed to include any premium, penalties or other fees or
expenses incurred by the applicable Person in connection with any such
transactions, (v) such Refinancing Indebtedness is Incurred by the same Person
that initially Incurred the Indebtedness being refunded, refinanced or extended,
except that the Company may incur Refinancing Indebtedness to refund, refinance
or extend Indebtedness of any Restricted Subsidiary and (vi) such Refinancing
Indebtedness is Incurred within 180 days after the Indebtedness being refunded,
refinanced or extended is so refunded, refinanced or extended provided that
Refinancing Indebtedness shall include the amount of any Indebtedness under the
Existing Credit Facility which is Incurred within 180 days after the repayment
of an equal amount of Indebtedness under the Existing Credit Facility which was
Incurred pursuant to Section 5.13(a) hereof.
"Registrar" has the meaning set forth in Section 3.5 hereof.
"Regular Record Date" for the interest payable on any Security on any
Interest Payment Date means the date specified for that purpose as contemplated
by Section 3.2 hereof.
"Restricted Investment" with respect to any Person means (i) any
Investment (other than any Permitted Investment) by such Person in any (a) of
its Affiliates, (b) executive officer or director of such Person or any
Affiliate of such Person, or (c) other Person other than a Restricted Subsidiary
which is a Wholly Owned Subsidiary of the referent Person and (ii) any purchase
by the Company or any Subsidiary of unentitled land to the extent that, after
giving effect to such purchase, unentitled land would total more that 10% of the
Company's total inventory on a consolidated basis; provided, however, that with
respect to the Company and its Restricted Subsidiaries, any loan or advance to
an executive officer or director of the Company
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or a Subsidiary will not constitute a Restricted Investment provided such loan
or advance is made in the ordinary course of business consistent with past
practices, and, if such loan or advance exceeds $100,000 (other than a readily
marketable mortgage loan not exceeding $500,000), such loan or advance has been
approved by the Board of Directors of the Company or a disinterested committee
thereof.
"Restricted Payment" with respect to any Person means (i) the declaration
of any dividend or the making of any other payment or distribution of cash,
securities or other property or assets in respect of such Person's Capital Stock
(except that a dividend payable solely in Capital Stock (other than Disqualified
Stock) of such Person will not constitute a Restricted Payment), (ii) any
payment on account of the purchase, redemption, retirement or other acquisition
for value of such Person's Capital Stock or any other payment or distribution
made in respect thereof (other than payments or distributions excluded from the
definition of Restricted Payment in clause (i) above), either directly or
indirectly, (iii) any Restricted Investment and (iv) any principal payment,
redemption, repurchase, defeasance or other acquisition or retirement of any
Indebtedness of any Unrestricted Subsidiary or of Indebtedness of the Company or
its Restricted Subsidiaries which is subordinated in right of payment to the
Securities; provided, however, that with respect to the Company and its
Subsidiaries, Restricted Payments will not include (a) any payment described in
clause (i), (ii) or (iii) above made to the Company or any of its Restricted
Subsidiaries which are Wholly Owned Subsidiaries by any of the Company's
Subsidiaries, or (b) any proportionate payment in respect of minority interests
in Restricted Subsidiaries of the Company to the extent that the payment
constitutes a return of capital that was included in the Company's Shareholders'
equity or a dividend or similar distribution not included in determining the
Company's Consolidated Net Income, or (c) any purchase, redemption, retirement
or other acquisition for value of Indebtedness of the Company or its Restricted
Subsidiaries which is subordinated to the Securities if the consideration
therefor consists solely of, or is the proceeds from, Indebtedness subordinated
to the Securities to the same extent as the Indebtedness being purchased,
redeemed, retired or otherwise acquired, or (d) any purchase, redemption,
retirement or other acquisition for value of Indebtedness or Capital Stock of
such Person or its Subsidiaries if the consideration therefor consists solely of
Capital Stock (other than Disqualified Stock) of such Person, or the proceeds
from such sale of such Capital Stock, or (e) any loans or advances by the
Company or any Restricted Subsidiary to any Person engaged in real estate
development or real estate investment which in aggregate amount at any one time
outstanding do not exceed $10,000,000.
"Restricted Subsidiary" means each of the Subsidiaries of the Company which
is not an Unrestricted Subsidiary.
"SEC" means the Securities and Exchange Commission, and any successor
thereto.
"Securities" has the meaning set forth in the first recital of this
Indenture.
"Security Register" has the meaning set forth in Section 3.5 hereof.
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"Special Record Date" for the payment of any Defaulted Interest on any
Security means a date fixed by the Trustee pursuant to Section 3.7 hereof.
"Stated Maturity," when used with respect to any Security or any
installment of principal thereof or interest thereon, means the date specified
in such Security as the fixed date on which the principal of such Security or
such installment of principal or interest is due and payable.
"Subsidiary" of any Person means (i) any corporation of which at least a
majority of the aggregate voting power of all classes of the Common Equity is
directly or indirectly beneficially owned by such Person, and (ii) any entity
other than a corporation of which such Person directly or indirectly
beneficially owns at least a majority of the Common Equity.
"Successor" has the meaning set forth in Section 6.1(a) hereof.
"TIA" means the Trust Indenture Act of 1939, as amended, as in effect on
the date hereof, except as provided in Section 12.3 hereof; provided, however,
that if the Trust Indenture Act is amended after such date, such term means, to
the extent required by such amendment, the Trust Indenture Act as so amended.
"Trustee" means the Person named as the "Trustee" in the first paragraph of
the Indenture until a successor Trustee shall have become such pursuant to the
applicable provisions of this Indenture, and thereafter "Trustee" shall mean or
include the Person who is then the Trustee hereunder.
"Trust Officer" means any Senior Vice President, Vice President, Assistant
Vice President, Assistant Secretary or Assistant Treasurer of the Trustee
assigned by the Trustee to administer its corporate trust matters.
"U.S. Government Obligations" means (i) any security that is (a) a direct
obligation of the United States for the payment of which the full faith and
credit of the United States is pledged or (b) an obligation of a Person
controlled or supervised by and acting as an agency or instrumentality of the
United States the payment of which is unconditionally guaranteed as a full faith
and credit obligation by the United States, which, in either case (a) or (b), is
not callable or redeemable at the option of the issuer thereof, and (ii) any
depositary receipt issued by a bank (as defined in Section 3(a)(2) of the
Securities Act of 1933, as amended) as custodian with respect to any U.S.
Government obligation specified in clause (i) and held by such custodian for the
account of the holder of such depositary receipt, or with respect to any
specific payment of principal of or interest on any such U.S. Government
Obligation; provided that (except as required by law) such custodian is not
authorized to make any deduction from the amount payable to the holder of such
depositary receipt from any amount received by the custodian in respect of the
U.S. Government Obligation or the specific payment of principal or interest
evidenced by such depositary receipt.
"Unrestricted Subsidiary" means each of the Subsidiaries of the Company so
designated by a Board Resolution. The Board of Directors of the Company may
designate an Unrestricted Subsidiary to be a Restricted Subsidiary; provided
that (i) any such redesignation will be deemed to be an Incurrence by the
Company and its Restricted Subsidiaries of the Indebtedness (if any)
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of such redesignated Subsidiary for purposes of the covenant set forth in
Section 5.13 hereof as of the date of such redesignation and (ii) immediately
after giving effect to such redesignation and the Incurrence of any such
additional Indebtedness, (a) no Default or Event of Default shall have occurred
and be continuing, and (b) the Company and its Restricted Subsidiaries could
Incur $1.00 of additional Indebtedness under the Consolidated Fixed Charge
Coverage Ratio contained in the covenant set forth in Section 5.13(a) hereof.
Subject to the foregoing, the Board of Directors of the Company may designate a
Restricted Subsidiary to be an Unrestricted Subsidiary; provided that (i) all
previous Investments by the Company and its Restricted Subsidiaries in such
Restricted Subsidiary will be deemed to be Restricted Payments at the time of
such designation and will reduce the amount available for Restricted Payments
under the covenant set forth in Section 5.12 hereof and (ii) immediately after
giving effect to such designation and reduction of amounts available for
Restricted Payments under the covenant set forth in Section 5.12 hereof (x) no
Default or Event of Default shall have occurred and be continuing, and (y) the
Company and its Restricted Subsidiaries could Incur $1.00 of additional
Indebtedness under the Consolidated Fixed Charge Coverage Ratio contained in the
covenant set forth in Section 5.13(a) hereof. Any such designation or
redesignation by the Board of Directors of the Company will be evidenced to the
Trustee by the filing with the Trustee of a Board Resolution giving effect to
such designation or redesignation and an Officers' Certificate certifying that
such designation or redesignation complied with the foregoing conditions and
setting forth the underlying calculations of such Officers' Certificate.
"Weighted Average Life to Maturity" means, when applied to any
Indebtedness or portion thereof, at any date, the number of years obtained by
dividing (i) the sum of the products obtained by multiplying (a) the amount of
each then remaining installment, sinking fund, serial maturity or other required
Payment of principal, including, without limitation, payment at final maturity,
in respect thereof, by (b) the number of years (calculated to the nearest one-
twelfth) that will elapse between such date and the making of such payment by
(ii) the then outstanding principal amount of such Indebtedness or portion
thereof.
"Wholly Owned Subsidiary" of any Person means (i) a Subsidiary of which 100
percent of the Common Equity (except for directors, qualifying shares or certain
minority interests owned by other Persons solely due to local law requirements
that there be more than one stockholder, but which interest is not in excess of
what is required for such purpose) is owned directly by such Person or through
one or more other Wholly Owned Subsidiaries of such Person, or (ii) any entity
other than a corporation in which such Person, directly or indirectly, owns all
of the Common Equity of such entity.
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ARTICLE 2
SECURITY FORMS
SECTION 2.1 TITLE, FORMS, ETC.
The Securities shall be designated as the "___% Senior Notes due _________
2006" of the Company. Each Security and Global Security issued pursuant to this
Indenture shall be in substantially the form of Exhibit A annexed hereto and
made a part hereof, except that each such Global Security shall also contain the
legend described in Section 2.2 hereof. Each Security shall also contain such
appropriate insertions, omissions, substitutions and other variations as are
required or permitted by law, stock exchange rule or usage or pursuant to this
Indenture or any indenture supplemental hereto and may have such letters,
numbers or other marks of identification and such legends or endorsements placed
thereon as may, consistent herewith, be determined by the Officers executing
such Security as evidenced by their execution of such Security. If temporary
Securities are issued as Global Securities as permitted by Section 3.4 hereof,
the form thereof shall be as provided in this Section 2.1.
Securities shall be printed, lithographed or engraved or produced by any
combination of these methods or may be produced in any other manner, all as
determined by the Officers of the Company executing such Securities, as
evidenced by their execution of such Securities.
SECTION 2.2 FORM OF LEGEND FOR GLOBAL SECURITIES
Every Global Security authenticated and delivered hereunder shall bear a
legend in substantially the following form:
THIS SECURITY IS A GLOBAL SECURITY WITHIN THE MEANING OF THE INDENTURE
HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A DEPOSITORY OR A
NOMINEE OF A DEPOSITORY. THIS GLOBAL SECURITY IS EXCHANGEABLE FOR SECURITIES
REGISTERED IN THE NAME OF A PERSON OTHER THAN THE DEPOSITORY OR ITS NOMINEE ONLY
IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE INDENTURE, AND NO TRANSFER OF THIS
SECURITY (OTHER THAN A TRANSFER OF THIS SECURITY AS A WHOLE BY THE DEPOSITORY TO
A NOMINEE OF THE DEPOSITORY OR BY A NOMINEE OF THE DEPOSITORY TO THE DEPOSITORY
OR ANOTHER NOMINEE OF THE DEPOSITORY) MAY BE REGISTERED EXCEPT IN SUCH LIMITED
CIRCUMSTANCES. EVERY SECURITY DELIVERED UPON REGISTRATION OF TRANSFER OF, OR IN
EXCHANGE FOR, OR IN LIEU OF, THIS GLOBAL SECURITY SHALL BE A GLOBAL SECURITY
SUBJECT TO THE FOREGOING, EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED ABOVE.
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UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE
DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE COMPANY OR ITS
AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE
ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS
REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO
CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR
OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER
HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
SECTION 2.3 FORM OF TRUSTEE'S CERTIFICATE OF AUTHENTICATION
The Trustee's certificate of authentication shall be in substantially the
following form:
This is one of the Securities referred to in the within-mentioned
Indenture.
IBJ Schroder Bank & Trust Company,
a New York Banking Corporation,
as Trustee
By:
___________________________________
Authorized Signatory
ARTICLE 3
THE SECURITIES
SECTION 3.1 GENERAL LIMITATION
The aggregate principal amount of Securities which may be authenticated and
delivered and Outstanding under this Indenture at any one time is limited to One
Hundred Million Dollars ($100,000,000), except for Securities issued upon
transfer of, in exchange for or in lieu of, other Securities pursuant to
Sections 3.4, 3.5, 3.6 or 12.5 hereof and Securities deemed never to have been
issued pursuant to Section 3.3 hereof.
SECTION 3.2 DENOMINATIONS, DATING, INTEREST ACCRUAL AND RECORD DATE
The Securities shall be issuable in denominations of $1,000 and any
integral multiple thereof.
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Interest shall be payable on each Security on _______1 and ______ 1 in each
year commencing ______ 1, 199_. Every Security shall, except as otherwise
provided in Section 3.5, be dated as of the date of its authentication and shall
bear interest from the Interest Payment Date next preceding the date of such
Security to which interest has been paid, unless the date of such Security is a
date to which interest has been paid, in which case from the date of such
Security, or unless no interest has been paid on any of the Securities, in which
case from ______, 1996. The Regular Record Date for the Securities shall be
_____ 15 and _____ 15 in each year commencing ______ 15, 199_.
SECTION 3.3 EXECUTION, AUTHENTICATION AND DELIVERY
The Securities shall be executed on behalf of the Company by two Officers,
under its corporate seal reproduced thereon. The signature of any of the
Officers on the Securities may be manual or by facsimile.
Securities bearing the manual or facsimile signatures of individuals who
were at any time the Proper Officers of the Company shall bind the Company,
notwithstanding that such individuals or any of them have ceased to hold such
offices prior to the authentication and delivery of such Securities or did not
hold such offices at the date of such Securities.
At any time and from time to time after the execution and delivery of this
Indenture, the Company may deliver Securities, executed by the Company, to the
Trustee for authentication, together with a Company Order for the authentication
and delivery of such Securities, and the Trustee in accordance with the Company
Order shall authenticate and deliver such Securities. The Trustee may appoint
an authenticating agent acceptable to the Company to authenticate Securities.
An authenticating agent may authenticate Securities whenever the Trustee may do
so. Each reference in this Indenture to authentication by the Trustee includes
authentication by such an agent. An authenticating agent has the same rights as
an Agent to deal with the Company. The Company shall pay the reasonable fees
and expenses of any authenticating agent.
The Trustee shall have the right to decline to authenticate and deliver
such Securities if the Trustee, being advised by counsel, determines that such
action may not lawfully be taken or if the Trustee, by its board of directors or
trustees, executive committee or a trust committee of directors or trustees
and/or officers of the Trustee shall determine in good faith that such action
would expose the Trustee to personal liability to existing Holders or would
adversely affect the Trustee's own rights, duties or immunities under this
Indenture or otherwise.
No Security shall be entitled to any benefit under this Indenture or be
valid or obligatory for any purpose unless there appears on such Security a
certificate of authentication substantially in the form provided for herein duly
executed by the Trustee by manual signature of an authorized signatory, and such
certificate upon any Security shall be conclusive evidence, and the only
evidence, that such Security has been duly authenticated and delivered hereunder
and is entitled to the benefits of this Indenture. Notwithstanding the
foregoing, if any Security shall have been authenticated and delivered hereunder
but never issued and sold by the Company, and
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the Company shall deliver such Security to the Trustee for cancellation as
provided in Section 3.9 hereof together with a Company Order (which need not
comply with Section 13.8 hereof and need not be accompanied by an Opinion of
Counsel) stating that such Security has never been issued or sold by the
Company, for all purposes of this Indenture such Security shall be deemed never
to be been authenticated and delivered hereunder and shall never be entitled to
the benefits of this Indenture.
SECTION 3.4 TEMPORARY SECURITIES
Pending the preparation of definitive Securities, the Company may execute,
and upon Company Order, the Trustee shall authenticate and deliver, temporary
Securities which are printed, lithographed, typewritten, mimeographed or
otherwise produced, in any authorized denomination, substantially of the tenor
of the definitive Securities in lieu of which they are issued, and with such
appropriate insertions, omissions, substitutions and other variations as the
Officers executing such Securities may determine, as evidenced by their
execution of such Securities.
Every temporary Security shall be executed by the Company and authenticated
by the Trustee and registered by the Registrar, upon the same conditions, and
with like effect, as a definitive Security.
If temporary Securities (other than a Global Security) are issued, the
Company will cause definitive Securities to be prepared without unreasonable
delay. After the preparation of such definitive Securities, the temporary
Securities shall be exchangeable for definitive Securities, upon surrender of
the temporary Securities at the office or agency of the Company in a Place of
Payment, without charge to the Holder. Upon surrender for cancellation of any
one or more temporary Securities, the Company shall execute and the Trustee
shall authenticate and deliver in exchange a like aggregate principal amount of
definitive Securities of authorized denominations. Until so exchanged, the
temporary Securities shall in all respects be entitled to the same benefits
under this Indenture as definitive Securities.
SECTION 3.5 REGISTRATION, REGISTRATION OF TRANSFER AND EXCHANGE
(a) The Company shall maintain a register of the Securities including any
Global Security (the "Security Register") in an office or agency of the Company
in a Place of Payment (the "Registrar") where, subject to Section 3.5(c) hereof
and such reasonable regulations as the Company may prescribe, Securities may be
presented for registration of transfer or for exchange. The Company may appoint
one or more co-Registrars. The term "Registrar" includes any co-Registrar. The
Company may change any Registrar without notice to any Holder. The Company or
any of its Subsidiaries may act as Registrar.
Subject to Section 3.5(c) upon surrender for registration of transfer of
any Security at the office or agency of the Company in a Place of Payment, the
Company shall execute, and the Trustee shall authenticate and deliver, in the
name of the designated transferee or transferees,
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one or more new Securities, of any authorized denominations and of a like
aggregate principal amount.
Subject to Section 3.5(c), at the option of the Holder, Securities may be
exchanged for other Securities of any authorized denominations and of a like
aggregate principal amount, upon surrender of the Securities to be exchanged at
such office or agency. Whenever any Securities are so surrendered for exchange,
the Company shall execute, and the Trustee shall authenticate and deliver, the
Securities which the Holder making the exchange is entitled to receive.
All Securities issued upon any registration of transfer or exchange of
Securities shall be the valid obligations of the Company, evidencing the same
debt, and entitled to the same benefits under this Indenture, as the Securities
surrendered upon such registration of transfer or exchange.
Every Security presented or surrendered for registration of transfer or for
exchange shall (if so required by the Company or the Registrar) be duly
endorsed, or be accompanied by a written instrument of transfer, in form
satisfactory to the Company and the Registrar, duly executed by the Holder
thereof or its attorney duly authorized in writing.
No service charge shall be made for any registration of transfer or
exchange of Securities, but the Company may require payment of a sum sufficient
to cover any tax or other governmental charge that may be imposed in connection
with any registration of transfer or exchange of Securities, other than
exchanges pursuant to Section 3.4, 4.7 or 12.5 hereof not involving any
transfer.
The Company shall not be required (i) to issue, register the transfer of or
exchange Securities during a period beginning at the opening of business 15 days
before the day of the mailing of a notice of redemption of Securities selected
for redemption under Section 4.8 hereof and ending at the close of business on
the day of such mailing, or (ii) to register the transfer or exchange of any
Security so selected for redemption in whole or in part, except the unredeemed
portion of any Security being redeemed in part, or (iii) to issue, register the
transfer of or exchange any Security which has been surrendered for repayment at
the option of the Holder, except the portion, if any, of such Security not to be
so repaid.
(b) In case the Company, pursuant to Article 6 hereof, will be consolidated
or merged with or into any other Person or will convey, transfer or lease
substantially all of its properties and assets to any Person, and the Successor
resulting from such consolidation, or surviving such merger, or into which the
Company will have been merged, or the Person which will have received a
conveyance, transfer or lease as aforesaid, will have executed an indenture
supplemental hereto with the Trustee pursuant to Article 6 hereof, any of the
Securities authenticated or delivered prior to such consolidation, merger,
conveyance, transfer or lease may, from time to time, at the request of the
Successor, be exchanged for other Securities executed in the name of the
Successor with such changes in phraseology and form as may be appropriate, but
otherwise in substance and of like tenor as the Securities surrendered for such
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exchange and of like principal amount; and the Trustee, upon receipt of an
Officers' Certificate from the Successor, will authenticate and deliver
Securities as specified in such request for the purpose of such exchange. If
Securities will at any time be authenticated and delivered in any new name of a
Successor pursuant to this Section 3.5(b) in exchange or substitution for or
upon registration of transfer of any Securities, such Successor, at the option
of the Holders but without expense to them, will provide for the exchange of all
Securities at the time outstanding for securities authenticated and delivered in
such new name.
(c) For so long as the Securities are to be issued in whole or in part in
the form of one or more Global Securities, the Company will execute and the
Trustee will, in accordance with this Section 3.5(c), authenticate and deliver
one or more Global Securities that will (i) represent and will be denominated in
an amount equal to the aggregate outstanding principal amount of the Securities
to be represented by such Global Security or Securities, (ii) be registered in
the name of the Depositor for such Global Security or Securities or the nominee
of such Depository, (iii) be delivered by the Trustee to such Depository or
pursuant to such Depository's instructions and (iv) bear the legends set forth
in Section 2.2 hereof.
Each Depository appointed in accordance with Section 3.1 hereof for a
Global Security must, at the time of its appointment and at all times while it
serves as Depository, be a clearing agency registered under the Exchange Act,
and any other applicable statute or regulation.
Notwithstanding any other provision of this Section 3.5(c), unless and
until it is exchanged in whole for Securities in definitive form, a Global
Security representing all or a portion of the Securities may not be transferred
except as a whole by the Depository to a nominee of such Depository or by a
nominee of such Depository to such Depository or another nominee of such
Depository or by such Depository or any such nominee to a successor Depository
or a nominee of such successor Depository.
If at any time the Depository is unwilling or unable to continue as
Depository or if at any time the Depository will no longer be eligible to act as
such under this Section 3.5(c), the Company will appoint a successor Depository.
If (i) a successor Depository is not appointed by the Company within 90 days
after the Company receives notice from the Depository or otherwise becomes aware
of its unwillingness, inability or ineligibility to act, or (ii) an Event of
Default has occurred and is continuing, the Company will execute and deliver to
the Trustee as promptly as practicable Securities in definitive form, together
with an Officers' Certificate relating to the authentication and delivery of
such Securities, and the Trustee, as promptly as practicable after the receipt
of such Securities and Officers' Certificate, will authenticate and deliver
Securities in definitive form in an aggregate principal amount equal to the
principal amount of, and containing terms and provisions identical to, the
Global Security or Securities in exchange for such Global Security or
Securities.
The Company may at any time and in its sole discretion determine that the
Securities issued in the form of one or more Global Securities will no longer be
represented by such Global Security or Securities. In such event, the Company
will execute and deliver to the Trustee
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Securities in definitive form, together with an Officers' Certificate relating
to the authentication and delivery of Securities in definitive form, and the
Trustee, as promptly as practicable after the receipt of such Securities in
definitive form and Officers' Certificate, will authenticate and deliver
Securities in definitive form in an aggregate principal amount equal to the
principal amount of, and containing terms and provisions identical to, the
Global Security or Securities in exchange for such Global Security or
Securities.
Upon the exchange of a Global Security in whole or in part for Securities
in definitive form, such Global Security shall be cancelled by the Trustee.
Securities in definitive form issued in exchange for a Global Security pursuant
to this Section 3.5(c) will be registered in such names and in such authorized
denominations as the Depository, pursuant to instructions from its direct or
indirect participants or otherwise, will instruct the Trustee in writing. The
Trustee will deliver such Securities in definitive form to the Persons in whose
names such Securities are so registered or as it may otherwise be directed by
the Depository. Upon the exchange of less than the entire principal amount of a
Global Security for Securities in definitive form, the Company will also
execute, and the Trustee, upon receipt of an Officers' Certificate will also
authenticate and deliver, a new Global Security in aggregate principal amount
equal to the difference between the principal amount of the surrendered Global
Security and the aggregate principal amount of Securities in definitive form
issuable upon such exchange.
In any exchange provided for in any of the preceding three paragraphs, the
Company will execute and the Trustee will authenticate and deliver Securities in
definitive form in authorized denominations.
If a Security in definitive form is issued in exchange for any portion of a
Global Security after the close of business at the office or agency where such
exchange occurs on or after any Regular Record Date for an Interest Payment Date
and before the opening of business at such office or agency on the next Interest
Payment Date, interest will not be payable on such interest Payment Date or
proposed date for Payment, as the case may be, in respect of such Security in
definitive form, but will be payable on such Interest Payment Date only to the
Person to whom interest in respect of such portion of such Global Security is
payable in accordance with the provisions of this Indenture.
None of the Company, the Trustee, any agent of the Trustee, any Paying
Agent or the Registrar will have any responsibility or liability for any aspect
of the Depository's records relating to or payments made on account of
beneficial ownership interests in a Global Security or for maintaining,
supervising or reviewing any of the Depository's records relating to such
beneficial ownership interests.
SECTION 3.6 MUTILATED, DESTROYED, LOST AND STOLEN SECURITIES
If any mutilated Security is surrendered to the Trustee, the Company shall
execute and the Trustee shall authenticate and deliver in exchange therefor a
new Security and of like principal amount and bearing a number not
contemporaneously outstanding.
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If there shall be delivered to the Company and the Trustee (i) evidence to
their satisfaction of the destruction, loss or theft of any Security and (ii)
such security or indemnity as may be required by them and to save each of them
and any agent of either of them harmless, then, in the absence of notice to the
Company or the Trustee that such Security has been acquired by a bona fide
purchaser, the Company shall execute and upon receipt of a Company Order the
Trustee shall authenticate and deliver, in lieu of any such destroyed, lost or
stolen Security, a new Security of like principal amount and bearing a number
not contemporaneously outstanding.
In case any such mutilated, destroyed, lost or stolen Security has become
or is about to become due and payable, the Company in its discretion may,
instead of issuing a new Security, instruct the Paying Agent to pay such
Security.
Upon the issuance of any new Security under this Section 3.6, the Company
may require the payment of a sum sufficient to cover any tax or other
governmental charge that may be imposed in relation thereto and any other
expenses (including the fees and expenses of the Trustee) connected therewith.
Every new Security issued pursuant to this Section 3.6 in lieu of any
mutilated, destroyed, lost or stolen Security, shall constitute an original
additional contractual obligation of the Company, whether or not the mutilated,
destroyed, lost or stolen Security shall be at any time enforceable by anyone,
and shall be entitled to all the benefits of this Indenture equally and
proportionately with any and all other Securities duly issued hereunder.
The provisions of this Section 3.6 are exclusive and shall preclude (to the
extent lawful) all other rights and remedies with respect to the replacement or
payment of mutilated, destroyed, lost or stolen Securities.
SECTION 3.7 PAYMENT OF INTEREST; INTEREST RIGHTS PRESERVED
Interest on any Security which is payable, and is punctually paid or duly
provided for, on any Interest Payment Date shall be paid to the Person in whose
name that Security is registered at the close of business on the Regular Record
Date for such interest at the office or agency of the Company maintained for
such purpose pursuant to Section 5.2 hereof. The term Regular Record Date as
used with respect to any interest payment date shall mean the close of business
on the last day of the calendar month next preceding such interest payment date.
Any interest on any Security which is payable, but is not punctually paid
or duly provided for, on any Interest Payment Date shall forthwith cease to be
payable to the Holder on the relevant Regular Record Date by virtue of having
been such Holder, and such defaulted interest and, if applicable, interest on
such defaulted interest (to the extent lawful) at the rate specified in the
Securities (such defaulted interest and, if applicable, interest thereon herein
collectively called "Defaulted Interest") may be paid by the Company, at its
election in each case, as provided in clause (i) or (ii) below:
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(i) The Company may elect to make payment of any Defaulted Interest to the
Persons in whose names the Securities are registered at the close of
business on a Special Record Date for the payment of such Defaulted
Interest, which shall be fixed in the following manner. The Company shall
notify the Trustee in writing of the amount of Defaulted Interest proposed
to be paid on each Security and the date of the proposed payment, and at
the same time the Company shall deposit with the Trustee an amount of money
equal to the aggregate amount proposed to be paid in respect of such
Defaulted Interest or shall make arrangements satisfactory to the Trustee
for such deposit on or prior to the date of the proposed Payment, such
money when deposited to be held in trust for the benefit of the Persons
entitled to such Defaulted Interest as in this clause provided. Thereupon,
the Trustee shall fix a Special Record Date for the payment of such
Defaulted Interest which shall be not more than 15 days and not less than
10 days prior to the date of the proposed payment and not less than 10 days
after the receipt by the Trustee of notice of the proposed payment. The
Trustee shall promptly notify the Company of such Special Record Date and,
in the name and at the expense of the Company, shall cause notice of the
proposed payment of such Defaulted Interest and the Special Record Date
therefor to be mailed, first class postage prepaid, to each Holder of
Securities at its address as it appears in the Security Register, not less
than 10 days prior to such Special Record Date and notice shall be
considered given whether or not received by the Holder. If notice of the
proposed payment of such Defaulted Interest and the Special Record Date
therefor have been so mailed, such Defaulted Interest shall be paid to the
Persons in whose names the Securities are registered at the close of
business on such Special Record Date and shall no longer be payable
pursuant to the following clause (ii).
(ii) The Company may make payment of any Defaulted Interest on the
Securities in any other lawful manner not inconsistent with the
requirements of the securities exchange on which such Securities may be
listed, if any, and upon such notice as may be required by such exchange,
if, after written notice given by the Company to the Trustee of the
proposed payment pursuant to this clause, such manner of payment shall be
deemed practicable by the Trustee.
Subject to the foregoing provisions of this Section 3.7 and Section 3.5
hereof, each Security delivered under this Indenture upon registration of
transfer of or in exchange for or in lieu of any other Security shall carry the
rights to interest accrued and unpaid, and to accrue, which were carried by such
other Security.
SECTION 3.8 PERSONS DEEMED OWNERS
Subject to Section 3.5(c), prior to due presentment of a Security for
registration of transfer, the Company, the Trustee and any agent of the Company
or the Trustee may treat the Person in whose name such Security is registered as
the owner of such Security for the purpose of receiving payment of principal of
and (except as contemplated by Section 3.5 hereof and subject to Section 3.7
hereof) interest on such Security and for all other purposes whatsoever,
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whether or not such Security be overdue, and neither the Company, the Trustee
nor any agent of the Company or Trustee shall be affected by notice to the
contrary.
SECTION 3.9 CANCELLATION
All Securities surrendered for payment, redemption, repayment at the option
of the Holder, if applicable, or registration of transfer or exchange shall, if
surrendered to any Person other than the Trustee, be delivered to the Trustee
and shall be promptly cancelled by it. The Company may at any time deliver to
the Trustee for cancellation any Securities previously authenticated and
delivered hereunder which the Company may have acquired in any manner
whatsoever, and may deliver to the Trustee (or to any other Person for delivery
to the Trustee) for cancellation any Securities previously authenticated
hereunder which the Company has not issued and sold, and all Securities so
delivered shall be accompanied by an Officers' Certificate authorizing such
cancellation, and shall be promptly cancelled by the Trustee. If the Company
shall so acquire any of the Securities, however, such acquisition shall not
operate as a redemption or satisfaction of the Indebtedness represented by such
Securities unless and until the same are surrendered to the Trustee for
cancellation. No Securities shall be authenticated in lieu of or in exchange
for any Securities cancelled as provided in this Section, except as expressly
permitted by this Indenture. All cancelled Securities held by the Trustee shall
be disposed of as directed by a Company Order.
SECTION 3.10 COMPUTATION OF INTEREST
Interest on the Securities shall be computed on the basis of a 365 or 366
day year.
ARTICLE 4
REDEMPTION
SECTION 4.1 SECURITIES NOT SUBJECT TO REDEMPTION
The Securities may not be redeemed prior to their Maturity.
ARTICLE 5
COVENANTS
SECTION 5.1 PAYMENT OF SECURITIES
(a) Payment of the principal of, and interest on, the Securities on the
dates and in the manner provided herein and in the Securities will be made at
the Corporate Trust Office of the Trustee in New York, New York, and at any
other office or agency designated by the Company for such purpose; provided,
however, that, at the option of the Company, payment of interest
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due (other than at Stated Maturity) may be made by check mailed to the Person
entitled thereto at such address as shall appear in the Security Register. In
the event the Company is not the Paying Agent, principal and interest will be
considered paid on the date due if the Trustee or Paying Agent holds on that
date money deposited by the Company in immediately available funds designated
for and sufficient to pay all principal and interest then due. In the event the
Company is the Paying Agent, principal and interest will be considered paid on
the date actual payment is mailed to the Holders entitled to such payments.
(b) The Company will pay interest on overdue principal at the applicable
interest rate on the Securities.
SECTION 5.2 MAINTENANCE OF OFFICE OR AGENCY
(a) The Securities may be presented for registration of transfer or
exchange at the Corporate Trust Office of the Trustee in New York, New York, or
at the office of any Registrar designated by the Company for such purpose.
Notices and demands to or upon the Company in respect of the Securities and this
Indenture may be served upon the Company at its address:
The Fortress Group, Inc.
1760 Reston Parkway, Suite 208
Reston, Virginia 22090
Attention: James J. Martell, Jr.
The Company will give prompt written notice to the Trustee of the location, and
any change in the location, of such office or agency. If at any time the
Company fails to maintain any such required office or agency or fails to furnish
the Trustee with the address thereof, such presentations, surrenders, notices
and demands may be made or served at the Corporate Trust Office of the Trustee.
(b) The Company may also from time to time designate one or more other
offices or agencies where the Securities may be presented or surrendered for any
or all such purposes and may from time to time rescind such designations;
provided, however, that no such designation or rescission will in any manner
relieve the Company of its obligation to maintain an office or agency in New
York, New York for such purposes. The Company will give prompt written notice
to the Trustee of any such designation or rescission and of any change in the
location of any such other office or agency.
SECTION 5.3 SEC REPORTS; FINANCIAL STATEMENTS
(a) As long as more than 10 percent of the original principal amount of the
Securities is Outstanding, the Company will (i) remain subject to the
requirements of Section 13 or 15(d) of the Exchange Act whether or not it is
required to do so by the provisions thereof and will file with the SEC all
periodic reports as may be required thereunder and (ii) file with the SEC, and
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the Trustee within 15 days after the Company is required to file the same with
the SEC, copies of the periodic reports which the Company may be required to
file with the SEC pursuant to Section 13(a), 13(c) or 15(d) of the Exchange Act.
The Company will also make such reports available to the Holders, prospective
purchasers of the Securities, securities analysts and broker-dealers upon their
written request.
(b) In the event that (i) 10 percent or less of the original principal
amount of the Securities is Outstanding and (ii) the Company is not required to
file with the SEC such reports and other information referred to in Section
5.3(a) hereof, the Company will furnish to the Trustee (A) within 120 days after
the end of each fiscal year, annual reports containing the information required
to be contained in Items 1, 2, 3, 5, 6, 7, 8 and 9 of the Annual Report on Form
10-K promulgated under the Exchange Act, or substantially the same information
required to be contained in comparable items of any successor form, (B) within
60 days after the end of each of the first three fiscal quarters of each fiscal
year, quarterly reports containing the information required to be contained in
the Quarterly Report on Form 10-Q promulgated under the Exchange Act, or
substantially the same information required to be contained in any successor
form and (C) promptly from the time after the occurrence of an event which would
be required to be reported in the Current Report on Form 8-K if the Company was
required to file such Report, such other reports containing information required
to be contained in the Current Report on Form 8-K promulgated under the Exchange
Act, or substantially the same information required to be contained in any
successor form.
(c) The Company will also comply with the other provisions of TIA Section
314(a).
SECTION 5.4 MONEY FOR SECURITY PAYMENTS TO BE HELD IN TRUST
(a) In the event the Company is at any time acting as its own Paying Agent
with respect to the Securities it will, not less than one Business Day before
each due date for the payment of the principal of or interest on the Securities,
segregate and hold in trust for the benefit of the Holders entitled thereto a
sum sufficient to pay the principal or interest so becoming due until such sums
are paid to such Persons or otherwise disposed of as herein provided, and will
promptly notify the Trustee of its action or failure to so act.
(b) In the event the Company is not acting as Paying Agent with respect to
the Securities, the Company will, not less than one Business Day before each due
date for the payment of the principal of or interest on any Securities, deposit
with a Paying Agent a sum in same day funds sufficient to pay the principal or
interest so becoming due, such sum to be held in trust for the benefit of the
Persons entitled to such principal or interest, and (unless such Paying Agent is
the Trustee) the Company will promptly notify the Trustee of such action or any
failure to so act.
(c) In the event the Company is not acting as Paying Agent with respect to
the Securities, the Company will cause each Paying Agent other than the Trustee
to execute and
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deliver to the Trustee an instrument in which such Paying Agent will agree with
the Trustee, subject to the provisions of this Section that such Paying Agent
will:
(i) hold all sums held by it for the payment of the principal of or
interest on the Securities in trust for the benefit of the Holders of such
Securities and the Trustee entitled thereto until such sums are paid to
such Persons or otherwise disposed of as herein provided;
(ii) give the Trustee notice of any default by the Company in the
making of any payment of principal or interest;
(iii) at any time during the continuance of any such default, upon
the written request of the Trustee, forthwith pay to the Trustee all sums
so held in trust by such Paying Agent; and
(iv) acknowledge, accept and agree to comply in all aspects with the
provisions of this Indenture relating to the duties, rights and
disabilities of such Paying Agent.
(d) The Company may at any time, for the purpose of obtaining the
satisfaction and discharge of this Indenture or for any other purpose, pay, or
by Company Order direct any Paying Agent to pay, to the Trustee any sums held in
trust by the Company or such Paying Agent, such sums to be held by the Trustee
upon the same trusts as those upon which sums were held by the Company or such
Paying Agent; and, upon such payment by any Paying Agent to the Trustee, such
Paying Agent shall be released from all further liability with respect to such
sums.
(e) Any money deposited with the Trustee or any Paying Agent, or then held
by the Company, in trust for the payment of the principal of or interest on any
Security and remaining unclaimed for two years after such principal or interest
has become due and payable shall be paid to the Company on Company Request, or
(if then held by the Company) shall be discharged from such trust; and the
Holder of such Security shall thereafter, as an unsecured general creditor, look
only to the Company for payment thereof, and all liability of the Trustee or
such Paying Agent with respect to such trust money, and all liability of the
Company as trustee thereof, shall thereupon cease; provided, however, that the
Trustee or such Paying Agent, before being required to make any such repayment
may at the expense of the Company cause to be published once, in a newspaper
published in the English language customarily published on each Business Day and
of general circulation in New York, New York, notice that such money remains
unclaimed and that, after a date specified therein, which shall not be less than
30 days from the date of such notification or publication, any unclaimed balance
of such money then remaining will be repaid to the Company.
SECTION 5.5 COMPLIANCE CERTIFICATE
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(a) The Company will deliver to the Trustee within 120 days after the end
of each fiscal year of the Company an Officers' Certificate certifying that a
review of the Company for compliance with the Indenture has been made and
stating whether or not the signers know of any Default or Event of Default that
occurred during such period. If they do know of a Default or an Event of
Default, the Officers' Certificate will describe the Default or Event of Default
and the action the Company has taken, is taking or proposes to take with respect
thereto.
(b) The Company will deliver within 120 days after the end of each fiscal
year a statement from the Company's independent accountants that nothing has
come to their attention that would lead them to believe that the Company has
violated any provision of this Indenture.
(c) The Company will give prompt written notice to the Trustee of the
occurrence of any Default or Event of Default and what action the Company has
taken, is taking or proposes to undertake with respect thereto.
SECTION 5.6 CORPORATE EXISTENCE, ETC.
Subject to the provisions of Article 6 hereof, the Company will do or cause
to be done all things necessary to preserve and keep in full force and effect
its corporate existence and the rights (charter and statutory), licenses and
franchises of the Company, except in such cases where a failure to do so would
not in the judgment of management have a material adverse effect on the
business, prospects, assets or financial condition of the Company and its
Subsidiaries taken as a whole and would not have a materially adverse impact on
the Holders of the Securities.
SECTION 5.7 PAYMENT OF TAXES AND OTHER CLAIMS
The Company will pay or discharge or cause to be paid or discharged, before
the same become delinquent, (i) all taxes, assessments and Governmental charges
levied or imposed upon the Company or any Subsidiary or upon the income, profits
or property of the Company or any Subsidiary other than any such tax,
assessment, charge or claim whose amount, applicability or validity is being
contested in good faith by appropriate proceedings and for which appropriate
provision has been made in accordance with GAAP and (ii) all lawful claims for
labor, materials and supplies which, if unpaid, might by law become a Lien
(other than a Permitted Lien) upon the property of the Company or any Subsidiary
in each case except to the extent the failure to do so would not have, in the
judgment of management, a material adverse effect on the Company and its
Subsidiaries taken as a whole.
SECTION 5.8 INSURANCE
The Company will maintain and will cause each of its Restricted
Subsidiaries to maintain (either in the name of the Company or in such
Restricted Subsidiary's own name) with third party insurance companies or
pursuant to self insurance, (i) insurance on all their respective properties,
(ii) public liability insurance against claims for personal injury or death as a
result
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of the use of any products sold by it and (iii) insurance coverage against other
business risks, in each case, in at least such amounts and against at least such
other risks (and with such risk retention) as are usually and prudently insured
against in the same general area by companies engaged in the same or a similar
business.
SECTION 5.9 STAY, EXTENSION AND USURY LAWS
The Company covenants (to the extent that it may lawfully do so) that it
will not at any time insist upon, plead, or in any manner whatsoever claim or
take the benefit or advantage of, any stay, extension or usury law wherever
enacted, now or at any time hereafter in force, that may affect the Company's
obligation to pay the Securities, and the Company (to the extent that it may
lawfully do so) hereby expressly waives all benefit or advantage of any such law
insofar as such law applies to the Securities, and covenants that it will not,
by resort to any such law, hinder, delay or impede the execution of any power
herein granted to the Trustee, but will suffer and permit the execution of every
such power as though no such law has been enacted.
SECTION 5.10 MAINTENANCE OF PROPERTIES
The Company will take reasonable action to maintain in appropriate
condition each of its principal properties which in the judgment of management
is essential to the business operations of the Company and its Subsidiaries
taken as a whole or the loss of which would have a material adverse affect on
the financial condition of the Company and its Subsidiaries taken as a whole.
Nothing contained in this Section 5.10 will prevent or restrict the sale,
abandonment or other disposition of any property which management deems
advisable.
SECTION 5.11 DISPOSITION OF PROCEEDS OF ASSET SALES
(a) Subject to the provisions set forth in Section 6.1 hereof, the Company
will not, and will not permit a Restricted Subsidiary, directly or indirectly,
to make any Asset Sale unless (i) the Company or the Restricted Subsidiary, as
the case may be, receives consideration at the time of such Asset Sale at least
equal to the Fair Market Value for the shares or assets sold or otherwise
disposed of (which will be determined in good faith by the Board of Directors of
the Company); provided, that the aggregate Fair Market Value of the
consideration received from any Asset Sale that is not in the form of cash or
cash equivalents will not, when aggregated with the Fair Market Value of all
other non-cash consideration received by the Company and its Restricted
Subsidiaries from all previous Asset Sales since the Issue Date for Securities
that has not been converted into cash or cash equivalents, exceed five percent
of the Consolidated Tangible Net Assets of the Company at the time of the Asset
Sale under consideration, and (ii) the Company will apply the aggregate Net
Proceeds received by the Company or any Restricted Subsidiary from all Asset
Sales occurring subsequent to such Issue Date as follows: (A) to repay any
outstanding Indebtedness of the Company that is not subordinated to the
Securities, or other Indebtedness of the Company, or to the payment of any
Indebtedness of any Restricted Subsidiary, in each case within one year after
such Asset Sale or (B) to replace the properties and assets that were the
subject of the Asset Sale or properties and assets that (as determined by
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the Board of Directors of the Company, whose determination will be conclusive)
will be used in the businesses existing on the Issue Date of the Securities of
the Company, its Restricted Subsidiaries or in businesses reasonably related
thereto within one year after such Asset Sale. The amount of such Net Proceeds
neither used to repay the Indebtedness described above nor used or invested as
set forth in the preceding sentence constitutes "Excess Proceeds."
(b) Notwithstanding Section 5.11(a)(ii) hereof, to the extent the Company
or any of its Restricted Subsidiaries receives securities or other noncash
property or assets as proceeds of an Asset Sale, the Company will not be
required to make any application of such noncash proceeds required by Section
5.11(a) hereof until it receives cash or cash equivalent proceeds from a sale,
repayment, exchange, redemption or retirement of or extraordinary dividend or
return of capital on such noncash property. Any amounts deferred pursuant to
the preceding sentence will be applied in accordance with Section 5.11(a) hereof
when cash proceeds are thereafter received from a sale, repayment, exchange,
redemption or retirement of an extraordinary dividend or return of capital on
such noncash property.
(c) When the aggregate amount of Excess Proceeds equals $5,000,000 or more,
the Company will so notify the Trustee in writing by delivery of an Officers'
Certificate and will offer to purchase from all Holders (an "Excess Proceeds
Offer"), and will purchase from Holders accepting such Excess Proceeds Offer on
the date fixed for the closing of such Excess Proceeds Offer (the "Asset Sale
Offer Date"), the maximum principal amount (expressed as a multiple of $1,000)
of Securities that may be purchased out of the Excess Proceeds, at an offer
price (the "Asset Sale Offer Price") in cash in an amount equal to 100 percent
of the principal amount thereof plus accrued and unpaid interest, if any, to the
Asset Sale Offer Date, in accordance with the procedures set forth in this
Section 5.11. To the extent that the aggregate amount of Securities tendered
pursuant to an Excess Proceeds Offer is less than the Excess Proceeds relating
thereto, then the Company may use the Excess Proceeds which exceed the aggregate
amount of Securities tendered pursuant to such Excess Proceeds Offer for general
corporate purposes. Upon completion of an Excess Proceeds Offer, the amount of
Excess Proceeds will be reset at zero.
(d) Within 30 days after the date on which the amount of Excess Proceeds
equals $5,000,000 or more, the Company (with written notice to the Trustee) or
the Trustee at the Company's request (and at the expense of the Company) will
send or cause to be sent by first-class mail, postage prepaid, to all Holders on
the date such Excess Proceeds equals $5,000,000, at their respective addresses
appearing in the Security Register a notice, as prepared by the Company,
advising the Holders of such occurrence and of such Holders' rights arising as a
result thereof. Such notice will contain all instructions and materials
necessary to enable Holders to tender their Securities to the Company. Such
notice, which will govern the terms of the Excess Proceeds Offer, will state:
(i) that the Excess Proceeds Offer is being made pursuant to this
Section 5.11 and the length of time such Excess Proceeds Offer will remain
open;
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(ii) that the Holder has the right to require the Company to
repurchase such Holder's Securities at the Asset Sale Offer Price;
(iii) that any Security not tendered will continue to accrue
interest;
(iv) that any Security accepted for payment pursuant to the Excess
Proceeds Offer will cease to accrue interest on the Asset Sale Offer Date;
(v) that the Asset Sale Offer Date will be no earlier than 45 days nor
later than 60 days from the date such notice is mailed;
(vi) that Holders electing to have a Security purchased pursuant to
any Excess Proceeds Offer will be required to surrender such Security, with
the appropriate form on the Security of such series completed, to the
Company, a depositary, if appointed by the Company, or a Paying Agent at
the address specified in the notice prior to termination of the Excess
Proceeds Offer;
(vii) that Holders will be entitled to withdraw their election if the
Company, depositary or Paying Agent, as the case may be, receives, not
later than the expiration of the Excess Proceeds Offer, or such longer
period as may be required by law, a telegram, telex, facsimile transmission
or letter setting forth the name of the Holder, the principal amount of the
Security the Holder delivered for purchase and a statement that such Holder
is withdrawing its election to have such Security purchased;
(viii) that Holders whose Securities are purchased only in part will
be issued Securities of the same Maturity date and interest rate equal in
principal amount to the unpurchased portion of the Securities surrendered;
and
(ix) information concerning the details of the Excess Proceeds Offer
and the business of the Company which the Company in good faith believes
will enable such Holders to make an informed decision (which at a minimum
will include (A) the most recently filed Annual Report on Form 10-K
(including audited consolidated financial statements) of the Company, the
most recent subsequently filed Quarterly Report on Form 10-Q and any
Current Report on Form 8-K of the Company filed subsequent to such
Quarterly Report, other than Current Reports describing Asset Sales
otherwise described in the offering materials relating to the Excess
Proceeds Offer (or corresponding successor reports) (or in the event the
Company is not required to prepare an of the foregoing Forms, the
comparable information required pursuant to Section 5.3(b) hereof);
provided that the Company may at its option incorporate by reference any
such filed reports in the notice, (B) a description of material
developments in the Company's business subsequent to the date of the latest
of such reports and (C) if material, appropriate pro forma financial
information.
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(e) In the event the aggregate principal amount of Securities surrendered
by Holders exceeds the amount of Excess Proceeds, the Company will select the
Securities to be purchased on a pro rata basis from all Securities so
surrendered, with such adjustments as may be deemed appropriate by the Company
so that only Securities in denominations of $1,000, or integral multiples
thereof, will be purchased. To the extent that the Excess Proceeds remaining
are less than $1,000, the Company may use such Excess Proceeds for general
corporate purposes. Holders whose Securities are purchased only in part will be
issued new Securities of the same Maturity date and interest rate equal in
principal amount to the unpurchased portion of the Securities surrendered.
(f) The Company will not, and will not permit any Restricted Subsidiary to,
create or permit to exist or become effective any restriction (other than any
restriction imposed by law or set forth in any agreement, indenture, document or
instrument relating to any Existing Indebtedness or Refinancing Indebtedness
with respect thereto) that would materially impair the ability of the Company to
make an Excess Proceeds Offer. Notwithstanding the foregoing, if an Excess
Proceeds Offer is made, the Company will pay for Securities tendered for
purchase in accordance with the terms of this Section 5.11.
(g) Not later than one Business Day prior to the Asset Sale Offer Date in
connection with which the Excess Proceeds Offer is being made, the Company will
(i) accept for payment Securities or portions thereof tendered pursuant to the
Excess Proceeds Offer (on a pro rata basis if required pursuant to Section
5.11(e) hereof), (ii) deposit with the Paying Agent immediately available funds
sufficient to pay the purchase price of all Securities or portions thereof so
accepted and (iii) deliver to the Paying Agent an Officers' Certificate
identifying the Securities or portions thereof accepted for payment by the
Company. The Paying Agent will promptly after acceptance mail or deliver to
Holders of Securities so accepted payment in an amount equal to the Asset Sale
Offer Price of the Securities purchased from each such Holder, and the Company
will execute, and upon receipt of an Officers' Certificate of the Company the
Trustee will promptly authenticate and mail or deliver to such Holder, a new
Security of the same Maturity date and interest rate equal in principal amount
to any unpurchased portion of the Security surrendered. Any Securities not so
accepted will be promptly mailed or delivered by the Paying Agent at the
Company's expense to the Holder thereof. The Company will publicly announce the
results of the Excess Proceeds Offer on the Asset Sale Offer Date. For purposes
of this Section 5.11(g), the Company will choose a Paying Agent which will not
be the Company or a Subsidiary thereof. Any excess cash held by the Trustee
after the expiration of the Excess Proceeds Offer will be returned to the
Company.
(h) Any Excess Proceeds Offer will be conducted by the Company in
compliance with applicable law, including, without limitation, Section 14(e) of
the Exchange Act and Rule 14e-1 thereunder, if applicable.
(i) Whenever Excess Proceeds are received by the Company, and prior to the
allocation of such Excess Proceeds pursuant to this Section 5.11, such Excess
Proceeds will be set aside by the Company in a separate account to be held in
trust for the benefit of the Holders;
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provided, however, that in the event the Company will be unable to set aside
such Excess Proceeds in a separate account because of provisions of applicable
law or of any agreement, indenture, document or instrument relating to Existing
Indebtedness or Refinancing Indebtedness with respect thereto, the Company will
not be required to set aside such Excess Proceeds.
SECTION 5.12 LIMITATIONS ON RESTRICTED PAYMENTS
(a) The Company will not, and will not permit any of its Restricted
Subsidiaries to, make any Restricted Payment, directly or indirectly, after the
Issue Date of the Securities if at the time of such Restricted Payment:
(i) the amount of such Restricted Payment (the amount of such
Restricted Payment, if other than in cash, will be determined by the Board
of Directors of the Company), when added to the aggregate amount of all
Restricted Payments made after the Issue Date of the Securities, exceeds
the sum of: (1) 50 percent of the Company's Consolidated Net Income accrued
during the period (taken as a single period) since January 1, 1996 (or, if
such aggregate Consolidated Net Income is a deficit, minus 100 percent of
such aggregate deficit), plus (2) the net cash proceeds derived from the
issuance and sale of Capital Stock of the Company and its Restricted
Subsidiaries that is not Disqualified Stock (other than a sale to a
Subsidiary of the Company) after the Issue Date of Securities but only to
the extent not applied under clause (c) of the definition of "Restricted
Payment" set forth in Section 1.2 hereof, plus (3) 100 percent of the
principal amount of any Indebtedness of the Company or a Restricted
Subsidiary that is converted into or exchanged for Capital Stock of the
Company that is not Disqualified Stock, plus (4) 100 percent of the
aggregate amounts received by the Company or any Restricted Subsidiary upon
the sale, disposition or liquidation (including by way of dividends or
other return of capital) of any Investment but only to the extent (x) not
included in Consolidated Net Income pursuant to clause (2) above and (y)
that the making of such Investment constituted a Restricted Investment made
pursuant to this Section 5.12(a)(i), plus (5) 100 percent of the principal
amount of, or if issued at a discount the accreted value of, any
Indebtedness or other obligation that is the subject of a guaranty by the
Company which is released after the Issue Date of the Securities, but only
to the extent that the granting of such guaranty constituted a "Restricted
Payment" under the definition set forth in Section 1.2 hereof; or
(ii) the Company would be unable to incur an additional $1.00 of
Indebtedness under the Consolidated Fixed Charge Coverage Ratio contained
in the covenant set forth in Section 5.13(a) hereof; or
(iii) a Default or Event of Default has occurred and is continuing or
occurs as a consequence thereof.
(b) Notwithstanding the foregoing, the provisions of this Section 5.12 will
not prevent: (i) the payment of any dividend within 60 days after the date of
declaration thereof if
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the payment thereof would have complied with the limitations of this Indenture
on the date of declaration or (ii) retirement of shares of the Company's Capital
Stock or the Company's or a Subsidiary of the Company's Indebtedness for, in
exchange for, or out of the proceeds of a substantially concurrent sale (other
than a sale to a Subsidiary of the Company) of, other shares of its Capital
Stock (other than Disqualified Stock).
SECTION 5.13 LIMITATIONS ON ADDITIONAL INDEBTEDNESS
(a) The Company will not, and will not permit any of its Restricted
Subsidiaries to Incur any Indebtedness (other than Indebtedness between the
Company and its Restricted Subsidiaries which are Wholly Owned Subsidiaries or
among such Restricted Subsidiaries which are Wholly Owned Subsidiaries),
including Acquisition Debt, unless, after giving effect thereto and the
application of the proceeds therefrom, the Company's Consolidated Fixed Charge
Coverage Ratio on the date thereof would be at least 2.0 to 1.0.
(b) Notwithstanding the foregoing, the provisions of this Indenture will
not prevent: (i) in addition to the Indebtedness permitted to be Incurred under
clauses (ii) and (iii) of this sentence and Indebtedness permitted to be
Incurred under Section 5.13(a) hereof, the Company from Incurring (A)
Refinancing Indebtedness, (B) Non-Recourse Indebtedness and (C) Indebtedness
Incurred for working capital purposes or to finance the acquisition, holding or
development of property by the Company and its Restricted Subsidiaries
(including, without limitation, the financing of any related interest reserve)
in the ordinary course of business in an aggregate amount at any one time
outstanding not to exceed $50,000,000 (excluding any Indebtedness referred to in
Section 5.13(a) hereof and subclauses (i)(A), (i)(B), (ii) and (iii) of this
Section 5.13(b)), less the amount of any Indebtedness repaid pursuant to Section
5.11(a)(ii)(A) hereof, provided that until June 30, 1997, the incurrence of such
indebtedness for the refinancing of Acquisition Debt other than Existing Debt
shall be no more than $25,000,000 unless the Company's Consolidated Fixed Charge
Coverage Ratio exceeds 1.75 to 1, (ii) Unrestricted Subsidiaries from Incurring
Indebtedness, (iii) the Company and its Restricted Subsidiaries from Incurring
Indebtedness under any deposits made to secure performance of tenders, bids,
leases, statutory obligations, surety and appeal bonds, progress statements,
government contracts and other obligations of like nature (exclusive of the
obligation for the payment of borrowed money), in each case incurred in the
ordinary course of business of the Company or the Restricted Subsidiary
consistent with past practice and (iv) Restricted Subsidiaries from guaranteeing
Indebtedness of the Company or another Restricted Subsidiary; provided that the
tangible net assets of all Restricted Subsidiaries guaranteeing Indebtedness of
the Company or other Restricted Subsidiaries (other than Indebtedness Incurred
from time to time under the Existing Credit Facility) at the end of the fiscal
quarter immediately preceding the date of Incurring any such guaranty, as
determined in accordance with GAAP, shall not exceed 10% of the Company's
Consolidated Tangible Net Assets.
SECTION 5.14 RESTRICTIONS ON RESTRICTED SUBSIDIARY INDEBTEDNESS
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The Company will not permit any of its Restricted Subsidiaries, directly or
indirectly, to Incur any additional Indebtedness after the Issue Date of the
Securities other than: (i) Refinancing Indebtedness, (ii) Non-Recourse
Indebtedness, (iii) Indebtedness to the Company, (iv) any deposits made to
secure performance of tenders, bids, leases, statutory obligations, surety and
appeal bonds, progress statements, government contracts, and other obligations
of like nature (exclusive of the obligation for the payment of borrowed money),
in each case Incurred in the ordinary course of business of the Restricted
Subsidiary and (v) any guaranty of Indebtedness of the Company or another
Restricted Subsidiary; provided that the tangible net assets of all Restricted
Subsidiaries guaranteeing Indebtedness of the Company or other Restricted
Subsidiaries at the end of the fiscal quarter immediately preceding the date of
Incurring any such guaranty, as determined in accordance with GAAP, shall not
exceed 10% of the Company's Consolidated Tangible Net Assets.
SECTION 5.15 LIMITATIONS AND RESTRICTIONS ON CAPITAL STOCK OF SUBSIDIARIES
The Company will not permit any of its Restricted Subsidiaries to issue, or
permit to be outstanding at any time, Preferred Stock or any other Capital Stock
constituting Disqualified Stock.
SECTION 5.16 CHANGE OF CONTROL
(a) Following the occurrence of any Change of Control, the Company will so
notify the Trustee in writing by delivery of an Officers' Certificate and will
offer to purchase (a "Change of Control Offer") from all Holders, and will
purchase from Holders accepting such Change of Control Offer on the date fixed
for the closing of such Change of Control Offer (the "Change of Control Payment
Date"), the Outstanding Securities at an offer price (the "Change of Control
Price") in cash in an amount equal to 101 percent of the aggregate principal
amount thereof plus accrued and unpaid interest, if any, to the Change of
Control Payment Date in accordance with the procedures set forth in this Section
5.16.
(b) Within 30 days after the date of any Change of Control, the Company
(with written notice to the Trustee) or the Trustee at the Company's request
(and at the expense of the Company), will send or cause to be sent by first
class mail, postage prepaid, to all Holders on the date of the Change of Control
at their respective addresses appearing in the Security Register a notice, as
prepared by the Company, advising the Holders of the occurrence of such Change
of Control and of the Holders' rights arising as a result thereof. Such notice
will contain all instructions and materials necessary to enable Holders to
tender their Securities to the Company. Such notice, which will govern the
terms of the Change of Control Offer, will state:
(i) that the Change of Control Offer is being made pursuant to Section
5.16(a) hereof and the length of time the Change of Control Offer will
remain open;
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(ii) that the Holder has the right to require the Company to
repurchase such Holder's Securities at the Change of Control Price;
(iii) that any Security not tendered will continue to accrue
interest;
(iv) that any Security accepted for payment pursuant to the Change of
Control Offer will cease to accrue interest on the Change of Control
Payment Date;
(v) that the Change of Control Payment Date will be no earlier than 45
days nor later than 60 days from the date such notice is mailed;
(vi) that Holders electing to have a Security purchased pursuant to
any Change of Control Offer will be required to surrender such Security,
with the appropriate form on the Security completed, to the Company, a
depositary, if appointed by the Company, or a Paying Agent at the address
specified in the notice prior to termination of the Change of Control
Offer;
(vii) that Holders will be entitled to withdraw their election if the
Company, depositary or Paying Agent, as the case may be, receives, not
later than the expiration of the Change of Control Offer, or such longer
period as may be required by law, a telegram, telex, facsimile transmission
or letter setting forth the name of the Holder, the principal amount of the
Security the Holder delivered for purchase and a statement that such Holder
is withdrawing its election to have such Security purchased;
(viii) that Holders which elect to have their Securities purchased
only in part will be issued new Securities of the same Maturity date and
interest rate in a principal amount equal to the unpurchased portion of the
Securities surrendered; and
(ix) information concerning the date and details of the Change of
Control and the business of the Company which the Company in good faith
believes will enable such Holders to make an informed decision (which at a
minimum will include (A) the most recently filed Annual Report on Form 10-K
(including audited consolidated financial statements) of the Company, the
most recent subsequently filed Quarterly Report on Form 10-Q and any
Current Report on Form 8-K if the Company filed subsequent to such
Quarterly Report, other than Current Reports describing transactions
otherwise described in the offering materials relating to the Change of
Control Offer (or corresponding successor reports) (or in the event the
Company is not required to prepare any of the foregoing Forms, the
comparable information required pursuant to Section 5.3(b) hereof);
provided that the Company may at its option incorporate by reference any
such filed reports in the notice, (B) a description of material
developments in the Company's Business subsequent to the date of the latest
of such reports, and (C) if material, appropriate pro forma financial
information.
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(c) In the event of a Change of Control Offer, the Company will only be
required to accept Securities in denominations of $1,000 or integral multiples
thereof.
(d) The Company will not, and will not permit any Restricted Subsidiary to,
create or permit to exist or become effective any restriction (other than any
restriction imposed by law or set forth in an agreement, indenture, document or
instrument relating to any Existing Indebtedness or Refinancing Indebtedness
with respect thereto) that would materially impair the ability of the Company to
make a Change of Control Offer. Notwithstanding the foregoing, if a Change of
Control Offer is made, the Company will pay for Securities tendered for purchase
in accordance with the terms of this Section 5.16.
(e) Not later than one Business Day prior to the Change of Control Payment
Date in connection with which the Change of Control Offer is being made, the
Company will (i) accept for payment Securities or portions thereof tendered
pursuant to the Change of Control Offer, (ii) deposit with the Paying Agent
money sufficient, in immediately available funds, to pay the purchase price of
all Securities or portions thereof so accepted and (iii) deliver to the Paying
Agent an Officers' Certificate identifying the Securities or portions thereof
accepted for payment by the Company. The Paying Agent will promptly after
acceptance mail or deliver to Holders of Securities so accepted payment in an
amount equal to the Change of Control Price of the Securities purchased from
each such Holder, and the Company will execute and, upon receipt of an Officers'
Certificate of the Company, the Trustee will promptly authenticate and mail or
deliver to such Holder a new Security of the same Maturity date and interest
rate equal in principal amount to any unpurchased portion of the Security
surrendered. Any Securities not so accepted will be promptly mailed or
delivered by the Paying Agent at the Company's expense to the Holder thereof.
The Company will publicly announce the results of the Change of Control Offer on
the Change of Control Payment Date. For purposes of this Section 5.16(e), the
Company will choose a Paying Agent which will not be the Company or a Subsidiary
thereof. Any excess cash held by the Trustee after the expiration of the Change
of Control Offer will be returned to the Company.
(f) Any Change of Control Offer will be conducted by the Company in
compliance with applicable law, including, without limitation, Section 14(e) of
the Exchange Act and Rule 14e-1 thereunder.
SECTION 5.17 LIMITATIONS ON TRANSACTIONS WITH AFFILIATES
(a) The Company will not, and will not permit any of its Subsidiaries to,
make any loan, advance or guaranty or capital contribution to, or for the
benefit of, or sell, lease, transfer or otherwise dispose of any of its
properties or assets to, or for the benefit of, or purchase or lease any
property or assets from, or enter into or amend any contract, agreement or
understanding with, or for the benefit of, (i) any Affiliate of the Company or
any Affiliate of the Company's Subsidiaries or (ii) any Person (or any Affiliate
of such Person) holding 10 percent or more of the Common Equity of the Company
or any of its Subsidiaries (each an "Affiliate Transaction"), except on terms
that are no less favorable to the Company or the
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relevant Subsidiary, as the case may be, than those that could have been
obtained in a comparable transaction on an arms' length basis from a Person that
is not an Affiliate.
(b) The Company will not, and will not permit any of its Subsidiaries to,
enter into any Affiliate Transaction involving or having a value of more than
$1,000,000, unless in each case such Affiliate Transaction has been approved by
a majority of the disinterested members of the Company's Board of Directors.
(c) The Company will not, and will not permit any of its Subsidiaries to,
enter into an Affiliate Transaction involving or having a value of more than
$5,000,000 unless the Company has delivered to the Trustee an Opinion of an
Independent Financial Advisor to the effect that the transaction is fair to the
Company or the relevant Subsidiary, as the case may be, from a financial point
of view.
(d) Notwithstanding the foregoing, an Affiliate Transaction will not
include (i) any contract, agreement or understanding with, or for the benefit
of, or plan for the benefit of, employees or directors of the Company or its
Subsidiaries (in their capacity as such) that has been approved by the Company's
Board of Directors, (ii) Capital Stock issuances to members of the Board of
Directors, officers and employees, of the Company or its Subsidiaries pursuant
to plans approved by the stockholders of the Company, (iii) any Restricted
Payment otherwise permitted under Section 5.12 hereof, (iv) any transaction
between the Company or a Restricted Subsidiary and another Restricted
Subsidiary, or (v) any contract, agreement or understanding as in effect on the
Issue Date of the Securities or any amendment thereto or any transaction
contemplated thereby (including any amendment thereto).
SECTION 5.18 LIMITATIONS ON LIENS
The Company will not, and will not permit any of its Restricted
Subsidiaries to, create, Incur, assume or suffer to exist any Liens, other than
Permitted Liens, on any of its or their assets, property, income or profits
therefrom unless contemporaneously therewith or prior thereto all payments due
hereunder and under the Securities are secured on an equal and ratable basis
with the obligation or liability so secured until such time as such obligation
or liability is no longer secured by a Lien.
SECTION 5.19 LIMITATIONS ON RESTRICTIONS ON DISTRIBUTIONS FROM RESTRICTED
SUBSIDIARIES
The Company will not, and will not permit any of its Restricted
Subsidiaries to, create, assume or otherwise cause or suffer to exist or become
effective any consensual encumbrance or restriction (other than encumbrances or
restrictions imposed by law or by judicial or regulatory action or by provisions
in leases or other agreements that restrict the assignability thereof) on the
ability of any Restricted Subsidiary to (i) pay dividends or make any other
distributions on its Capital Stock or any other interest or participation in, or
measured by, its profits, owned by the Company or any of its other Restricted
Subsidiaries, or pay interest on or
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principal of any Indebtedness owed to the Company or any of its other Restricted
Subsidiaries, (ii) make loans or advances to the Company or any of its other
Restricted Subsidiaries, or (iii) transfer any of its properties or assets to
the Company or any of its other Restricted Subsidiaries, except for encumbrances
or restrictions existing under or by reason of (a) applicable law, (b) covenants
or restrictions contained in Existing Indebtedness as in effect on the Issue
Date of the Securities, (c) any restrictions or encumbrances arising in
connection with the Existing Credit Facility; provided that any restrictions and
encumbrances relating to any extension or renewal of the Existing Credit
Facility are not more restrictive than those in the Existing Credit Facility
being extended or renewed, (d) any restrictions or encumbrances arising in
connection with Refinancing Indebtedness; provided that any restrictions and
encumbrances of the type described in this clause (d) that arise under such
Refinancing Indebtedness are not more restrictive than those under the agreement
creating or evidencing the Indebtedness being refunded or refinanced, (e) any
agreement restricting the sale or other disposition of property securing
Indebtedness permitted by this Indenture if such agreement does not expressly
restrict the ability of a Subsidiary of the Company to pay dividends or make
loans or advances, and (f) reasonable and customary borrowing base covenants set
forth in credit agreements evidencing Indebtedness otherwise permitted by this
Indenture which covenants restrict or limit the distribution of revenues or sale
proceeds from real estate or a real estate project based upon the amount of
Indebtedness outstanding on such real estate or real estate project and the
value of some or all of the remaining real estate or the project's remaining
assets.
SECTION 5.20 MAINTENANCE OF CONSOLIDATED TANGIBLE NET WORTH
(a) In the event the Consolidated Tangible Net Worth of the Company for any
two consecutive fiscal quarters is less than $15,000,000, within 30 days after
the end of each such period the Company will so notify the Trustee in writing by
delivery of an Officers' Certificate and will offer to purchase from all Holders
(a "Net Worth Offer"), and will purchase from Holders accepting such Net Worth
Offer on the date fixed for the closing of such Net Worth Offer (the "Net Worth
Offer Date"), ten percent of the original outstanding principal amount of the
Securities (the "Net Worth Amount") at an offer price (the "Net Worth Offer
Price") in cash in an amount equal to 100 percent of the principal amount
thereof plus accrued and unpaid interest, if any, to the Net Worth Offer Date,
in accordance with the procedures set forth in this Section 5.20. To the extent
that the aggregate amount of Securities tendered pursuant to a Net Worth Offer
is less than the Net Worth Amount, then the Company may use the excess of the
Net Worth Amount over the amount of Securities or portions thereof tendered for
general corporate purposes.
(b) In the event the Consolidated Tangible Net Worth of the Company for any
two consecutive fiscal quarters is less than $15,000,000, within 45 days after
the end of such period, the Company (with written notice to the Trustee) or the
Trustee at the Company request (and at the expense of the Company) will send or
cause to be sent by first-class mail postage prepaid, to all Holders on the date
of the end of the second such consecutive fiscal quarter at their respective
addresses appearing in the Security Register, a notice, as prepared by the
Company, advising the Holders of such occurrence and of each Holders' rights
arising as a result thereof.
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Such notice will contain all instructions and materials necessary to enable
Holders to tender their Securities to the Company. Such notice, which will
govern the terms of the Net Worth Offer, will state:
(i) that the Net Worth Offer is being made pursuant to Section 5.20(a)
hereof and the length of time such Net Worth Offer will remain open;
(ii) that the Holder has the right to require the Company to
repurchase such Holder's Securities at the Net Worth Offer Price;
(iii) that any Security not tendered will continue to accrue
interest;
(iv) that any Security accepted for payment pursuant to the Net Worth
Offer will cease to accrue interest on the Net Worth Offer Date;
(v) that the Net Worth Offer Date will be no earlier than 45 days nor
later than 60 days from the date such notice is mailed;
(vi) that Holders electing to have a Security purchased pursuant to a
Net Worth Offer will be required to surrender the Security, with the
appropriate form on the Security completed, to the Company, a depositary,
if appointed by the Company, or a Paying Agent at the address specified in
the notice prior to termination of the Net Worth Offer;
(vii) that Holders will be entitled to withdraw their election if the
Company, depositary or Paying Agent, as the case may be, receives, not
later than the expiration of the Net Worth Offer, or such longer period as
may be required by law, a telegram, telex, facsimile transmission or letter
setting forth the name of the Holder, the principal amount of the Security
the Holder delivered for purchase and a statement that such Holder is
withdrawing its election to have the Security purchased;
(viii) that Holders whose Securities are purchased only in part will
be issued Securities of the same Maturity date and interest rate equal in
principal amount to the unpurchased portion of the Securities surrendered;
and
(ix) information concerning the period and details of the events
requiring the Net Worth Offer and the business of the Company which the
Company in good faith believes will enable such Holders to make an informed
decision (which at a minimum will include (A) the most recently filed
Annual Report on Form 10-K (including audited consolidated financial
statements) of the Company, the most recent subsequently filed Quarterly
Report on Form 10-Q and any Current Report on Form 8-K of the Company filed
subsequent to such Quarterly Report, other than Current Reports describing
transactions otherwise described in the offering materials relating to the
Net Worth Offer (or corresponding successor reports) (or in the event the
Company is not required to
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prepare any of the foregoing Forms, the comparable information required
pursuant to Section 5.3(b) hereof); provided that the Company may at its
option incorporate by reference any such filed reports in the notice, (B) a
description of material developments in the Company's business subsequent
to the date of the latest of such reports, and (C) if material, appropriate
pro forma financial information).
(c) In the event the aggregate principal amount of Securities surrendered
by Holders exceeds the Net Worth Amount, the Company will select the Securities
to be purchased on a pro rata basis from all Securities so surrendered, with
such adjustments as may be deemed appropriate by the Company so that only
Securities in denominations of $1,000, or integral multiples thereof, will be
purchased. To the extent that the Net Worth Amount remaining is less than
$1,000, the Company may use such Net Worth Amount for general corporate
purposes. Holders whose Securities are purchased only in part will be issued
new Securities of the same Maturity date and interest rate equal in principal
amount to the unpurchased portion of the Securities surrendered.
(d) The Company will not, and will not permit any Restricted Subsidiary to,
create or permit to exist or become effective any restriction (other than any
restriction imposed by law or set forth in and agreement, indenture, document or
instrument relating to any Existing Indebtedness or Refinancing Indebtedness
with respect thereto) that would materially impair the ability of the Company to
make a Net Worth Offer. Notwithstanding the foregoing, if a Net Worth Offer is
made, the Company will pay for Securities tendered for purchase in accordance
with the terms of this Section 5.20.
(e) Not later than one Business Day prior to the Net Worth Offer Date in
connection with which the Net Worth Offer is being made, the Company will (i)
accept for payment Securities or portions thereof tendered pursuant to the Net
Worth Offer (on a pro rata basis if required pursuant to Section 5.20(c) above),
(ii) deposit with the Paying Agent money sufficient, in immediately available
funds, to pay the purchase price of all Securities or portions thereof so
accepted and (iii) deliver to the Paying Agent with an Officers' Certificate
identifying the Securities or portions thereof accepted for payment by the
Company. The Paying Agent will promptly after acceptance mail or deliver to
Holders of Securities so accepted payment in an amount equal to the Net Worth
Offer Price of the Securities purchased from each such Holder, and the Company
will execute and the Trustee will promptly authenticate and mail or deliver to
such Holder a new Security of the same Maturity date and interest rate equal in
principal amount to any unpurchased portion of the Security surrendered. Any
Securities not so accepted will be promptly mailed or delivered by the Paying
Agent at the Company's expense to the Holder thereof. The Company will publicly
announce the results of the Net Worth Offer on the Net Worth Offer Date. For
purposes of this Section 5.20(e), the Company will choose a Paying Agent which
will not be the Company or a Subsidiary thereof. Any excess cash held by
Trustee after the expiration of the Net Worth Offer will be returned to the
Company.
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(f) Any Net Worth Offer will be conducted by the Company in compliance with
applicable law, including, without limitation, Section 14(e) of the Exchange Act
and Rule 14e-1 thereunder, if applicable.
ARTICLE 6
SUCCESSORS
SECTION 6.1 LIMITATIONS ON MERGERS AND CONSOLIDATIONS
(a) The Company will not consolidate or merge with or into, or sell, lease,
convey (or otherwise dispose of all or substantially all of its assets
(including, without limitation, by way of liquidation or dissolution), or assign
its obligations hereunder or under the Securities as an entirety or
substantially as an entirety in one transaction or series of related
transactions), to any Person unless: (i) the Person formed by or surviving such
consolidation or merger (if other than the Company), or to which such sale,
lease, conveyance or other disposition or assignment will be made (collectively,
the "Successor"), is a solvent corporation or other legal entity organized and
existing under the laws of the United States or any state thereof or the
District of Columbia, and the Successor assumes by supplemental indenture in a
form reasonably satisfactory to the Trustee all of the obligations of the
Company under the Securities and this Indenture, (ii) immediately after giving
effect to such transaction, no Default or Event of Default has occurred and is
continuing, (iii) immediately after giving effect to such transaction and the
use of any net proceeds therefrom on a pro forma basis, the Consolidated
Tangible Net Worth of the Company or the Successor, as the case may be, would be
at least equal to the Consolidated Tangible Net Worth of the Company immediately
prior to such transaction and (iv) the Consolidated Fixed Charge Coverage Ratio
contained in Section 5.13(a)(i) hereof of the Company or the Successor, as the
case may be, immediately after giving effect to such transaction, would be such
that the Company or the Successor, as the case may be, would be entitled to
Incur at least $1 of additional Indebtedness under such Consolidated Fixed
Charge Coverage Ratio test.
(b) The Company will deliver to the Trustee prior to the consummation of
the proposed transaction an Officers' Certificate to the foregoing effect and an
Opinion of Counsel stating that the proposed transaction and such supplemental
indenture comply with this Indenture.
SECTION 6.2 SUCCESSOR CORPORATION SUBSTITUTED
Upon any consolidation or merger, or any sale, lease, conveyance or other
disposition of all or substantially all of the assets of the Company or any
assignment of its obligations under this Indenture or the Securities in
accordance with Section 6.1 hereof, upon assumption by the successor
corporation, by supplemental indenture, executed and delivered to the Trustee
and satisfactory in form to the Trustee, of the due and punctual payment of the
principal of and interest on all of the Securities and the due and punctual
performance and observance of all the covenants and conditions of this Indenture
to be performed or observed by the Company, the Successor formed by such
consolidation or into or with which the Company is merged or to
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which such sale, lease, conveyance or other disposition or assignment is made
will succeed to, and be substituted for, and may exercise every right and power
of, the Company under this Indenture with the same effect as if such Successor
has been named as the Company herein and such Successor may cause to be signed
and may issue in its own name or in the name of the Company, any or all
Securities issuable hereunder and the predecessor Company, in the case of a
sale, lease, conveyance or other disposition or assignment, will be released
from all obligations under this Indenture and the Securities.
ARTICLE 7
DEFAULTS AND REMEDIES
SECTION 7.1 EVENTS OF DEFAULT
(a) "Event of Default", wherever used herein with respect to the
Securities, means any of the following events (whatever the reason for such
Event of Default and whether it will be voluntary or involuntary or be effected
by operation of law or pursuant to any judgment, decree or order of any court or
any order, rule or regulation of any administrative or governmental body):
(i) the failure by the Company to pay interest on any Security when
the same becomes due and payable and the continuance of any such failure
for a period of 30 days;
(ii) the failure by the Company to pay the principal of any Security
when the same becomes due and payable at Maturity, upon redemption or
acceleration or otherwise (including the failure to make payment pursuant
to a Change of Control Offer, an Excess Proceeds Offer or a Net Worth
Offer);
(iii) the failure by the Company to comply with any of its agreements
or covenants in, or provisions of, the Securities or this Indenture (other
than an agreement or covenant a default in whose performance or whose
breach is elsewhere in this Section specifically dealt with) and such
failure continues for the period and after the notice specified below;
(iv) the acceleration of any Indebtedness (other than Non-Recourse
Indebtedness) of the Company or any of its Subsidiaries that has an
outstanding principal amount of $2,500,000 or more in the aggregate;
provided that in the event any such acceleration is withdrawn or otherwise
rescinded within a period of five days after such acceleration by the
holders of such Indebtedness, any Event of Default under this Section
7.1(a)(iv) will be deemed to be cured and any acceleration hereunder will
be deemed withdrawn or rescinded;
(v) the failure by the Company or any of its Subsidiaries to make any
principal or interest payment in respect of Indebtedness (other than Non-
Recourse Indebtedness)
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of the Company or any of its Subsidiaries with an outstanding aggregate
amount of $2,500,000 or more within five days of such principal or interest
payment becoming due and payable (after giving effect to any applicable
grace period governing such Indebtedness); provided, however, that, if and
to the extent that such failure to pay principal or interest is with
respect to Indebtedness outstanding under the Existing Credit Facility,
such failure to pay shall not constitute an Event of Default pursuant to
this Paragraph (v) unless such failure to pay has continued for a period of
120 days following the expiration of any grace period with respect to such
failure to pay;
(vi) a final judgment or judgments that exceed $2,500,000 in the
aggregate, for the payment of money, having been entered by a court or
courts of competent jurisdiction against the Company or any of its
Subsidiaries and such Judgment or judgments is not satisfied, stayed,
annulled or rescinded within 60 days of being entered;
(vii) the Company or any Material Subsidiary pursuant to or within
the meaning of any Bankruptcy Law:
(A) commences a voluntary case,
(B) consents to the entry of an order for relief against it in an
involuntary case,
(C) consents to the appointment of a Custodian of it or for all
or substantially all of its property, or
(D) makes a general assignment for the benefit of its creditors;
(viii) a court of competent jurisdiction enters an order or decree
under any Bankruptcy Law that:
(A) is for relief against the Company or any Material Subsidiary
as debtor in an involuntary case,
(B) appoints a Custodian of the Company or any Material
Subsidiary or a Custodian for all or substantially all of the property
of the Company or any Material Subsidiary, or
(C) orders the liquidation of the Company or any Material
Subsidiary,
and the order or decree remains unstayed and in effect for 60 days.
(b) The Trustee will not be deemed to know of a Default unless a Trust
Officer has actual knowledge of such Default or receives written notice of such
Default with specific reference to such Default.
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(c) A Default under Section 7.1(a)(iii) hereof is not an Event of Default
until the Trustee notifies the Company, or the Holders of at least 25 percent in
aggregate principal amount of the outstanding Securities notify the Company and
the Trustee, of the Default and the Company does not cure the Default within 60
days after receipt of the notice. The Notice must specify the Default, demand
that it be remedied and state that the notice is a "Notice of Default." If such
a Default is cured within such time period, it ceases.
SECTION 7.2 ACCELERATION
(a) If an Event of Default, other than an Event of Default with respect to
the Company specified in clause (vii) or (viii) of Section 7.1(a) hereof, occurs
and is continuing, the Trustee (after receiving indemnities from the Holders to
its satisfaction) by notice to the Company, or the Holders of at least 25
percent in aggregate principal amount of the Outstanding Securities by notice to
the Company and the Trustee, may declare all Outstanding Securities to be due
and payable immediately. Upon such declaration, the amounts due and payable on
the Securities, as determined in Section 7.2(b) hereof, will be due and payable
immediately. If an Event of Default specified in clause (vii) or (viii) of
Section 7.1(a) hereof occurs, such an amount will ipso facto become and be
immediately due and payable without any declaration, notice or other act on the
part of the Trustee and the Company or any Holder. The Holders of a majority in
aggregate principal amount of the Outstanding Securities by written notice to
the Trustee and the Company may waive such Event of Default, rescind an
acceleration and its consequences (except an acceleration due to nonpayment of
principal or interest on the Securities) if the rescission would not conflict
with any judgment or decree and if all existing Events of Default have been
cured or waived.
(b) In the event that the maturity of the Securities is accelerated
pursuant to Section 7.2(a) hereof, 100 percent of the principal amount of the
Securities (or in the case of a default under Section 7.1(a)(ii) or (iii) hereof
resulting from a breach of the covenant set forth in Section 5.16 hereof, 101
percent of the principal amount of the Securities) will become due and payable
plus accrued interest, if any, to the date of payment.
SECTION 7.3 OTHER REMEDIES
(a) If an Event of Default occurs and is continuing, the Trustee may pursue
any available remedy by proceeding at law or in equity to collect the payment of
principal or interest on the Securities or to enforce the performance of any
provision of the Securities or this Indenture.
(b) The Trustee may maintain a proceeding even if it does not possess any
of the Securities or does not produce any of them in the Proceeding. A delay or
omission by the Trustee or any Holder in exercising any right or remedy accruing
upon an Event of Default will not impair the right or remedy or constitute a
waiver of or acquiescence in the Event of Default. All remedies are cumulative
to the extent permitted by law.
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SECTION 7.4 WAIVER OF PAST DEFAULTS AND COMPLIANCE WITH INDENTURE PROVISIONS
Subject to Sections 7.7 and 12.2 hereof, the Holders of a majority in
aggregate principal amount of the Outstanding Securities, upon notice to the
Trustee, may waive an existing Default or Event of Default and its consequences
(including waivers obtained in connection with a tender offer or exchange offer
for Securities), except a continuing Default or Event of Default in the payment
of the principal of or interest on any Security. Upon any such waiver, such
Default will cease to exist, and any Event of Default arising therefrom will be
deemed to have been cured for every purpose of this Indenture, but no such
waiver will extend to any subsequent or other Default or Event of Default or
impair any right consequent thereon.
SECTION 7.5 CONTROL BY MAJORITY
The Holders of a majority in aggregate principal amount of the Outstanding
Securities may direct the time, method and place of conducting any proceeding
for any remedy available to the Trustee (after providing indemnities to the
Trustee's satisfaction) or exercising any trust or power conferred on it.
However, the Trustee may refuse to follow any direction that conflicts with law
or this Indenture that the Trustee determines may be unduly prejudicial to the
rights of other Holders of Securities, or that may subject the Trustee to legal
liability; provided that the Trustee may take any other action deemed proper by
the Trustee which is not inconsistent with such direction.
SECTION 7.6 LIMITATIONS ON SUITS
(a) A Holder may pursue a remedy with respect to this Indenture or the
Securities only if:
(i) the Holder gives to the Trustee written notice of a continuing
Event of Default with respect to the Securities;
(ii) the Holder(s) of at least 25 percent in aggregate principal
amount of all of the Outstanding Securities make a written request to the
Trustee to pursue the remedy;
(iii) such Holder or Holders offer to the Trustee indemnity
satisfactory to the Trustee against any loss, liability or expense;
(iv) the Trustee does not comply with the request within 60 days after
receipt of the request and the offer of indemnity; and
(v) during such 60-day period the Holders of a majority in aggregate
principal amount of the Outstanding Securities do not give the Trustee a
direction inconsistent with the request.
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(b) A Holder of a Security may not use this Indenture to prejudice the
rights of another Holder or to obtain a preference or priority over another
Holder.
SECTION 7.7 RIGHTS OF HOLDERS TO RECEIVE PAYMENT
Notwithstanding any other provision of this Indenture, the right of any
Holder of a Security to receive payment of principal and interest on such
Security, on or after the respective due dates expressed in such Security, or to
bring suit for the enforcement of any such payment on or after such respective
dates, will not be impaired or affected without the consent of the Holder.
SECTION 7.8 COLLECTION SUIT BY TRUSTEE
If an Event of Default specified in Section 7.1(a)(i) or 7.1(a)(ii) hereof
occurs and is continuing, the Trustee is authorized to recover judgment in its
own name and as trustee of an express trust against the Company for the amount
of principal and interest remaining unpaid on the Securities, determined in
accordance with Section 7.2(b) hereof, and such further amount as will be
sufficient to cover the costs and expenses of collection, including, without
limitation, the reasonable compensation, expenses, disbursements and advances of
the Trustee, its agents and counsel.
SECTION 7.9 TRUSTEE MAY FILE PROOFS OF CLAIM
The Trustee is authorized to file such proofs of claim and other papers or
documents as may be necessary or advisable in order to have the claims of the
Trustee, including, without limitation, any claim for the reasonable
compensation, expenses, disbursements and advances of the Trustee, its agents
(including accountants, experts or such other professionals as the Trustee deems
necessary, advisable or appropriate), and counsel (including the allocated costs
of inside Counsel), and the Holders allowed in any judicial proceedings relative
to the Company, its creditors or property and will be entitled and empowered to
collect, receive and distribute any money or other property payable or
deliverable on any such claims, and any Custodian in any such judicial
proceeding is hereby authorized by each Holder to make such payments to the
Trustee, and in the event that the Trustee consents to the making of such
payments directly to the Holders, to pay to the Trustee any amount due to it for
the reasonable compensation, expenses, disbursements and advances of the
Trustee, its agents and counsel, and any other amounts due the Trustee under
Section 8.7 hereof. Nothing contained herein will be deemed to authorize the
Trustee to authorize or consent to or accept or adopt on behalf of an Holder any
plan of reorganization, arrangement, adjustment or composition affecting the
Securities or the rights of any Holder thereof, or to authorize the Trustee to
vote in respect of the claim of any Holder in any such proceeding.
SECTION 7.10 PRIORITIES
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(a) In the event the Trustee collects any money pursuant to this Article 7,
it will pay out the money in the following order:
FIRST: to the Trustee for amounts due under Section 8.7 hereof,
including payment of all compensation, expenses and
liabilities incurred and all advances made by the Trustee and the
costs and expenses of collection;
SECOND: to Holders for amounts due and unpaid on the Securities for
principal and interest, ratably, without preference or priority of any
kind, according to the amounts due and payable on the Securities for
principal and interest, respectively; and
THIRD: to the Company or such other Person legally entitled thereto.
(b) The Trustee may fix a record date and payment date for any payment to
Holders pursuant to this Section 7.10.
SECTION 7.11 UNDERTAKING FOR COSTS
In any suit for the enforcement of any right or remedy under this Indenture
or in any suit against the Trustee for any action taken or omitted by it as a
Trustee, a court in its discretion may require the filing by any party litigant
(other than the Trustee) in the suit of an undertaking to pay the costs of the
suit, and the court in its discretion may assess reasonable costs, including
reasonable attorneys' fees, against any party litigant in the suit, having due
regard to the merits and good faith of the claims or defenses made by the party
litigant. This Section 7.11 does not apply to a suit by the Trustee, a suit by
a Holder pursuant to Section 7.7 hereof, or a suit by Holders of more than ten
percent in aggregate principal amount of all of the outstanding Securities.
SECTION 7.12 RESTORATION OF RIGHTS AND REMEDIES
If the Trustee or any Holder has instituted a proceeding to enforce any
right or remedy under this Indenture and such proceeding has been discontinued
or abandoned for any reason, or has been determined adverse to the Trustee or to
such Holder, then and in every such case the Company, the Trustee and the
Holders will, subject to any determination in such proceeding, be restored
severally and respectively to their former positions hereunder, and thereafter
all rights and remedies of the Trustee and the Holders will continue as though
no such proceeding had been instituted.
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ARTICLE 8
TRUSTEE
SECTION 8.1 DUTIES OF TRUSTEE
(a) If an Event of Default has occurred and is continuing, the Trustee
will exercise such of the rights and powers vested in it by this Indenture, and
use the same degree of care and skill in such exercise, as a prudent man would
exercise or use under the circumstances in the conduct of his own affairs.
(b) Except during the continuance of an Event of Default:
(i) the Trustee need perform only those duties that are specifically
set forth in this Indenture and no others, and no implied covenants or
obligations will be read into this Indenture against the Trustee; and
(ii) in the absence of bad faith on its part, the Trustee may
conclusively rely, without investigation, as to the truth of the statements
and the correctness of the opinions expressed therein, upon certificates or
opinions furnished to the Trustee and conforming to the requirements of
this Indenture. However, in the case of any such certificates or opinions
which are specifically required to be furnished to the Trustee by any of
the provisions hereof, the Trustee will examine the certificates and
opinions to determine whether or not, on their face, they appear to conform
to the requirements of this Indenture.
(c) The Trustee may not be relieved from liabilities for its own gross
negligent actions, its own gross negligent failure to act, or its own willful
misconduct, except that:
(i) this Section 8.1(c) does not limit the effect of Section 8.1(b)
hereof; the Trustee will not be liable for any error of judgment made in
good faith by a Trust Officer, unless it is proved that the Trustee was
grossly negligent in ascertaining the pertinent facts; and
(ii) the Trustee will not be liable with respect to any action it
takes or omits to take in good faith in accordance with a direction
received by it pursuant to Section 8.5 hereof or when exercising any other
trust or power conferred upon the Trustee under this Indenture.
Whether or not therein expressly so provided, every provision of this Indenture
that in any way relates to the Trustee is subject to clauses (i) and (ii) of
this Section 8.1(c).
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(d) No provision of this Indenture will require the Trustee to expend or
risk its own funds or otherwise incur any financial liability in the performance
of any of its duties hereunder or in the exercise of any of its rights or
powers.
(e) The Trustee will not be liable for interest on any money received by it
except as the Trustee may agree in writing with the Company. Money held in
trust by the Trustee need not be segregated from other funds except to the
extent required by law. Subject to Sections 8.3 and 8.7 hereof, all money
received by the Trustee will, until applied as herein provided, be held in trust
for the payment of principal and interest on the Securities.
(f) The Trustee shall not be required to give any bond or surety in respect
of the exercise of its powers and performance of its duties hereunder.
SECTION 8.2 RIGHTS OF TRUSTEE
(a) Subject to Section 8.1 hereof:
(i) the Trustee may conclusively rely and will be protected in acting
or refraining from acting upon any document believed by it to be genuine
and to have been signed or presented by the proper Person. The Trustee
need not investigate any fact or matter stated in the document but the
Trustee, in its discretion, may make such further inquiry or investigation
into such facts or matters as it may see fit, and if the Trustee determines
to make such further inquiry or investigation, it will be entitled to
examine the books, records, and premises of the Company, personally or by
agent or attorney;
(ii) before the Trustee acts or refrains from acting, it may require
an Officers' Certificate and an opinion of counsel. The Trustee will not
be liable for any action it takes or omits to take in good faith in
reliance on such Officers' Certificate and an opinion of counsel. The
Trustee may consult with counsel satisfactory to it and the written advice
of such counsel or any Opinion of Counsel will be full and complete
authorization and protection in respect of any action taken, suffered or
omitted by it hereunder in good faith and in reliance thereon;
(iii) the Trustee may act through agents and will not be responsible
for the misconduct or negligence of any agent appointed with due care;
provided, however, that the Trustee will in any event be liable for the
misappropriation of funds deposited with it or in an account within its
dominion and control;
(iv) the Trustee will not be liable for any action it takes or omits
to take in good faith which it believes to be authorized or within its
rights or powers conferred upon it by this Indenture; and
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(v) unless otherwise specifically provided in this Indenture, any
demand, request, direction or notice from the Company will be sufficient if
signed by an Officer of the Company.
(b) The Trustee will be under no obligation to exercise and may refuse to
exercise any of the rights or powers vested in it by this Indenture at the
request or direction of any of the Holders pursuant to this Indenture, unless
such Holders have offered to the Trustee reasonable security or indemnity
against the costs, expenses and liabilities which might be incurred by it in
compliance with such request or direction.
SECTION 8.3 INDIVIDUAL RIGHTS OF TRUSTEE
The Trustee in its individual or any other capacity may become the owner or
pledgee of Securities and may otherwise deal with the Company or any of its
Affiliates with the same rights it would have if it were not Trustee. Any Agent
may do the same with like rights. However, the Trustee is subject to Sections
8.10 and 8.11 hereof.
SECTION 8.4 TRUSTEE'S DISCLAIMER
The Trustee makes no representation as to the validity or adequacy of this
Indenture or the Securities, it will not be accountable for any actions taken by
the Company or any action taken by the Trustee hereunder at the direction of the
Company or in reliance upon an Opinion of Counsel, and it will not be
responsible for any statement or recital herein or any statement in the
Securities, other than its certificate of authentication. The immunities and
exemptions from liability of the Trustee hereunder shall extend to its
directors, officers, employees and agents.
SECTION 8.5 NOTICE OF DEFAULTS
If a Default or Event of Default with respect to the Securities occurs and
is continuing and if it is known to the Trustee, the Trustee will mail to
Holders of such Securities a notice of the Default or Event of Default within 90
days after it occurs. However, except in the case of a Default or Event of
Default in payment of principal or interest or a breach of the Change Control
covenant, the Trustee may withhold such notice if and so long as a committee of
its Trust Officers in good faith determines that withholding the notice is in
the interests of such Holders.
SECTION 8.6 REPORTS BY TRUSTEE TO HOLDERS
(a) Within 60 days after each [Date of Indenture] beginning with [Date of
Indenture] 1997 the Trustee will mail to Holders a brief report dated as of such
reporting date that complies with TIA Section 313(a); provided, however, if no
event described in TIA Section 313(a) has occurred within such calendar year, no
report need be transmitted. The Trustee also will comply with TIA Sections
313(b) and 313(c).
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(b) A copy of each report at the time of its mailing to Holders will be
filed with the SEC and each stock exchange, if any, on which the Securities are
listed. The Company will promptly notify the Trustee when the Securities are
listed on any stock exchange.
SECTION 8.7 COMPENSATION AND INDEMNITY
(a) The Company agrees:
(i) to pay to the Trustee from time to time reasonable compensation
for all services rendered by it hereunder (which compensation will not be
limited by any provision of law in regard to the compensation of a trustee
of an express trust);
(ii) to reimburse the Trustee promptly upon its request for all
reasonable expenses, disbursements and advances incurred or made by the
Trustee in accordance with any provision of this Indenture (including,
without limitation, the reasonable compensation and the expenses, advances
and disbursements of its agents and counsel), except any such expense,
disbursement or advance as may be attributable to its gross negligence or
willful misconduct; and
(iii) to indemnify the Trustee and its agents for, and to hold them
harmless against, any loss, liability or expense incurred without gross
negligence or bad faith on their part, arising out of or in connection with
the acceptance or administration of this trust, including the costs and
expenses of defending themselves against any claim or liability in
connection with the exercise or performance of any of their powers or
duties hereunder. The Company shall defend any claim or threatened claim
asserted against the Trustee. To the extent no conflict exists or arises,
the Company and the Trustee shall have the same counsel for any such claim.
If a conflict exists, the Trustee may have separate counsel and the Company
shall pay the reasonable fees and expenses of such Counsel, or the
allocated expenses of the Trustee's inside counsel.
(b) To secure the Company's payment obligations in this Section 8.7, the
Trustee will have a Lien prior to the Securities on all money or property held
or collected by the Trustee, except that held in trust to pay principal and
interest on the Securities.
(c) When the Trustee incurs expenses or renders services after an Event of
Default specified in Section 7.1(a)(vii) or (a)(viii) occurs, the expenses and
the compensation for the services are intended to constitute expenses of
administration under any Bankruptcy Law.
SECTION 8.8 REPLACEMENT OF TRUSTEE
(a) A resignation or removal of the Trustee and appointment of a successor
Trustee will become effective only upon the successor Trustee's acceptance of
appointment as provided in this Section 8.8.
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(b) The Trustee may resign and be discharged from the trust hereby created
by so notifying the Company in writing. The Holders of a majority in principal
amount of the Outstanding Securities may remove the Trustee by so notifying the
Trustee and the Company. The Company may remove the Trustee if:
(i) the Trustee fails to comply with Section 8.10 hereof;
(ii) the Trustee is adjudged a bankrupt or an insolvent or an order
for relief is entered with respect to the Trustee under any Bankruptcy Law;
(iii) a Custodian or public officer takes charge of the Trustee or
its property; or
(iv) the Trustee becomes incapable of acting.
(c) If the Trustee resigns or is removed or if a vacancy exists in the
office of Trustee for any reason, the Company will promptly appoint a successor
Trustee.
(d) If a successor Trustee does not take office within 60 days after the
retiring Trustee resigns or is removed, the retiring Trustee, the Company or the
Holders of at least ten percent in principal amount of the outstanding
Securities may petition any court of competent jurisdiction for the appointment
of a successor Trustee.
(e) If the Trustee after written request by any Holder of a Note, who has
been a Holder of a Note for at least six months, fails to comply with Section
8.10 hereof, such Holder may petition any court of competent jurisdiction for
the removal of the Trustee and the appointment of a successor Trustee.
(f) A successor Trustee will deliver a written acceptance of its
appointment to the retiring Trustee and to the Company. Thereupon the
resignation or removal of the retiring Trustee will become effective, and the
successor Trustee will have all the rights, powers and duties of the Trustee
under this Indenture. The successor Trustee will mail a notice of its
succession to the Holders. The retiring Trustee will promptly transfer all
property held by it as Trustee to the successor Trustee, subject to the Lien
provided for in Section 8.7 hereof. Notwithstanding replacement of the Trustee
pursuant to this Section 8.8, the Company's obligations under Section 8.7 hereto
will continue for the benefit of the retiring Trustee.
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SECTION 8.9 SUCCESSOR TRUSTEE BY MERGER, ETC.
(a) Subject to Section 8.10 hereof, if the Trustee consolidates, merges or
converts into, or transfers all or substantially all of its corporate trust
business to, another corporation, the successor corporation without any further
act will be the successor Trustee; provided that in the case of a transfer of
all or substantially all of its corporate trust business to another corporation,
the transferee corporation expressly assumes all of the Trustee's liabilities
hereunder.
(b) In case any Securities have been authenticated but not delivered by the
Trustee then in office, any successor by merger, conversion or consolidation to
such authenticating Trustee may adopt such authentication and deliver the
Securities so authenticated, with the same effect as if such successor Trustee
had itself authenticated such Securities.
SECTION 8.10 ELIGIBILITY; DISQUALIFICATION
(a) There will at all times be a Trustee hereunder which will (i) be a
corporation organized and doing business under the laws of the United States,
any state thereof or the District of Columbia, authorized under such laws to
exercise corporate trustee power, (ii) be subject to supervision or examination
by federal or state (or the District of Columbia) authority and (iii) have a
combined capital and surplus of at least $100 million as set forth in its most
recent published annual report of condition.
(b) This Indenture will always have a Trustee who satisfies the
requirements of TIA Sections 310(a)(1) and 310(a)(2). The Trustee is subject to
TIA Section 310(b). If at any time the Trustee ceases to be eligible in
accordance with the provisions of this Section 8.10, it will resign immediately
in the manner and with the effect specified in Section 8.8 hereof.
SECTION 8.11 PREFERENTIAL COLLECTION OF CLAIMS AGAINST COMPANY
The Trustee is subject to TIA Section 311(a), excluding any creditor
relationship listed in TIA Section 311(b). A Trustee who has resigned or been
removed will be subject to TIA Section 311(a) to the extent indicated therein.
ARTICLE 9
HOLDERS' LISTS
SECTION 9.1 COMPANY TO FURNISH TRUSTEE NAMES AND ADDRESSES OF HOLDERS
The Company will furnish or cause to be furnished to the Trustee:
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(i) semi-annually, not more than 15 days before each Interest Payment
Date, a list, in such form as the Trustee may reasonably require, of the
names and addresses of the Holders of the Securities as of the Regular
Record Date of such Interest Payment Date; and
(ii) at such other times as the Trustee may request in writing, within
30 days after receipt by the Company of any such request, a list of similar
form and content as of a date not more than 15 days prior to the time such
list is furnished;
provided, however, that if and so long as the Trustee will be the Registrar, no
such list need be furnished.
SECTION 9.2 PRESERVATION OF INFORMATION
The Trustee will preserve, in as current a form as is reasonably
practicable, the names and addresses of Holders of the Securities contained in
the most recent list furnished to the Trustee as provided in Section 9.1 hereof
and the names and addresses of such Holders received by the Trustee in its
capacity as Registrar or Paying Agent (if so acting). The Trustee may destroy
any list furnished to it as provided in Section 9.1 hereof upon receipt of a new
list so furnished.
ARTICLE 10
DEFEASANCE AND COVENANT DEFEASANCE
SECTION 10.1 COMPANY'S OPTION TO EFFECT DEFEASANCE OR COVENANT DEFEASANCE
The Company may elect, at its option by Board Resolution at any time, to
have either Section 10.2 or 10.3 hereof applied to the outstanding Securities,
upon compliance with the conditions set forth below in this Article 10.
SECTION 10.2 DEFEASANCE AND DISCHARGE
Upon the Company's exercise of the option to have this Section 10.2 applied
to the Outstanding Securities, the Company shall be deemed to have been
discharged from its obligations with respect to the Outstanding Securities as
provided in this Section 10.2 on and after the date the conditions set forth in
Section 10.4 hereof are satisfied (hereinafter called "Defeasance"). For this
purpose, such Defeasance means that the Company shall be deemed to have paid and
discharged the entire Indebtedness represented by the Outstanding Securities,
which shall thereafter be deemed to be "Outstanding" only for the purposes of
Section 10.5 hereof and the other Sections of this Indenture referred to in (i)
and (ii) below, and to have satisfied all its other obligations under the
Securities and this Indenture insofar as such Securities are concerned (and the
Trustee, at the expense of the Company, shall execute proper instruments
acknowledging the same), except for the following which shall survive until
otherwise terminated
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or discharged hereunder: (i) the rights of Holders of Outstanding Securities to
receive solely from the trust fund described in Section 10.4 hereof and as more
fully set forth in such Section, payments in respect of the principal of and
interest on such Securities when payments are due, (ii) the Company's
obligations with respect to the Securities under Sections 3.4, 3.5, 3.6, 5.2 and
5.4 hereof, (iii) the rights, powers, trusts, duties and immunities of the
Trustee hereunder and (iv) this Article 10. Subject to compliance with this
Article 10, the Company may exercise its option to have this Section 10.2
applied to the Outstanding Securities notwithstanding the prior exercise of its
option to have Section 10.3 hereof applied to such Outstanding Securities.
SECTION 10.3 COVENANT DEFEASANCE
Upon the Company's exercise of the option to have this Section 10.3 applied
to the Outstanding Securities, (i) the Company shall be released from its
obligations under Sections 5.3 and 5.6 through 5.20, inclusive, Article 6, and
any other covenants specified in or pursuant to this Indenture and (ii) the
occurrence of any event specified in Section 7.1(a)(iii) (with respect to any of
Sections 5.3 and 5.6 through 5.20 inclusive, Article 6, and any other covenants
specified in or pursuant to this Indenture) shall be deemed not to be or result
in an Event of Default, in each case with respect to the Outstanding Securities
as provided in this Section 10.3 on and after the date the conditions set forth
in Section 10.4 hereof are satisfied (hereinafter called "Covenant Defeasance"),
and such Securities shall thereafter be deemed not to be "Outstanding" for the
purposes of any direction, waiver, consent, declaration or act of Holders (and
the consequences thereof) in connection with such covenants, but shall continue
to be "Outstanding" for all other purposes hereunder. For this purpose, such
Covenant Defeasance means that, with respect to such Outstanding Securities, the
Company may omit to comply with and shall have no liability in respect of any
term, condition or limitation set forth in any such covenant, whether directly
or indirectly by reason of any reference elsewhere herein to any such covenant
to any other provision herein or in any other document and such omission to
comply shall not constitute a Default or Event of Default under Section
7.1(a)(iii) or otherwise, as the case may be, but, except as specified above,
the remainder of this Indenture and the Securities shall be unaffected thereby.
SECTION 10.4 CONDITIONS TO DEFEASANCE OR COVENANT DEFEASANCE
The following shall be the conditions to application of either Section 10.2
or 10.3 hereof to the Outstanding Securities:
(i) The Company shall irrevocably have deposited or caused to be
deposited with the Trustee (or another trustee that satisfies the
requirements contemplated by Section 8.10 hereof and agrees to comply with
the provisions of this Article 10 applicable to it) as trust funds in trust
for the purpose of making the following payments, specifically pledged as
security for, and dedicated solely to, the benefit of the Holders of
Outstanding Securities, (A) cash in an amount, or (B) U.S. Government
Obligations that through the scheduled payment of principal and interest in
respect thereof in accordance with their terms will provide, not later than
one day before the due date of
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any payment, money in an amount, or (C) a combination thereof, in each case
sufficient, in the opinion of a nationally recognized firm of independent
public accountants expressed in a written certification thereof delivered
to the Trustee, to pay and discharge, and which shall be applied by the
Trustee (or any such other qualifying trustee) to pay and discharge, the
principal of and interest on the Securities on the respective Stated
Maturities (or redemption date, if applicable) of such principal or
installment of interest on the day on which such payments are due and
payable in accordance with the terms of this Indenture and such Securities;
provided that the Trustee shall have been irrevocably instructed to apply
such money or the proceeds of such U.S. Government Obligations to said
payments with respect to such Securities. Before such a deposit, the
Company may give to the Trustee, in accordance with Section 4.2 hereof, a
notice of its election to redeem all or any portion of such Outstanding
Securities at a future date in accordance with the terms of the Securities
and Article 4 hereof, which notice shall be irrevocable. Such irrevocable
redemption notice, if given, shall be given effect in applying the
foregoing.
(ii) In the case of an election under Section 10.2 hereof, the Company
shall have delivered to the Trustee an opinion of Counsel stating that (A)
the Company has received from, or there has been published by, the Internal
Revenue Service a ruling, or (B) since the date first set forth
hereinabove, there has been a change in the applicable Federal income tax
law, in either case, to the effect that, and based thereon such opinion
shall confirm that, the Holders of the outstanding Securities will not
recognize income, gain or loss for Federal income tax purposes as a result
of such Defeasance and will be subject to Federal income tax on the same
amounts, in the same manner and at the same times as would be the case if
such deposit, Defeasance and discharge were not to occur.
(iii) In the case of an election under Section 10.3 hereof, the
Company shall have delivered to the Trustee an Opinion of Counsel to the
effect that the Holders of the Outstanding Securities will not recognize
income, gain or loss for Federal income tax purposes as result of such
Covenant Defeasance and will be subject to Federal income tax on the same
amounts, in the same manner and at the same times as would be the case if
such deposit and Covenant Defeasance were not to occur.
(iv) The Company shall have delivered to the Trustee an Officers'
Certificate to the effect that the Securities, if then listed on any
securities exchange, will not be delisted as a result of such Defeasance or
Covenant Defeasance.
(v) No Default or Event of Default shall have occurred and be
continuing at the time of such deposit.
(vi) Such Defeasance or Covenant Defeasance shall not cause the
Trustee to have a conflicting interest within the meaning of the TIA
(assuming all Securities are in default within the meaning of the TIA).
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(vii) Such Defeasance or Covenant Defeasance shall not result in a
breach or violation of, or constitute a default under, any other agreement
or instrument to which the Company is a party or by which it is bound.
(viii) Notwithstanding any other provisions of this Section, such
Defeasance or Covenant Defeasance shall be effected in compliance with any
additional or substitute terms, conditions or limitations in connection
therewith pursuant to Section 3.1 hereof.
(ix) The Company shall have delivered to the Trustee an Officers'
Certificate, stating that all conditions precedent with resect to such
Defeasance or Covenant Defeasance have been complied with.
Such Defeasance or Covenant Defeasance shall not result in the trust
arising from such deposit constituting an investment company within the meaning
of the Investment Company Act of 1940, as amended, unless such trust shall be
qualified under such Act or exempt from regulation thereunder.
SECTION 10.5 DEPOSITED MONEY AND U.S. GOVERNMENT OBLIGATIONS TO BE HELD IN
TRUST; OTHER MISCELLANEOUS PROVISIONS
Subject to the provisions of Section 5.4(e) hereof, all money and U.S.
Government Obligations (including the proceeds thereof) deposited with the
Trustee or other qualifying trustee (solely for purposes of this Section 10.5
and Section 10.6 hereof, the Trustee and any such other trustee are referred to
collectively as the "Trustee") pursuant to Section 10.4 hereof in respect of the
Outstanding Securities shall be held in trust and applied by the Trustee in
accordance with the provisions of the Outstanding Securities and this Indenture,
to the payment, either directly or through any such Paying Agent (including the
Company acting as its own Paying Agent) as the Trustee may determine, to the
Holders of such Securities of all sums due and to become due thereon in respect
of principal and interest, but such money so held in trust need not be
segregated from other funds except to the extent required by law.
The Company shall pay and indemnify the Trustee against any tax, fee or
other charge imposed on or assessed against the U.S. Government Obligations
deposited pursuant to Section 10.4 hereof or the principal and interest received
in respect thereof other than any such tax, fee or other charge that by law is
for the account of the Holders of Outstanding Securities.
Anything in this Article 10 to the contrary notwithstanding, the Trustee
shall deliver or pay to the Company any money or U.S. Government Obligations
(and any proceeds therefrom) held by it with respect to Outstanding Securities
that are in excess of the amount thereof that was used to pay the Securities
upon Maturity.
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SECTION 10.6 REINSTATEMENT
If the Trustee or the Paying Agent is unable to apply any money in
accordance with this Article 10 with respect to the Securities by reason of any
notification, order or judgment of any court or governmental authority
enjoining, restraining or otherwise prohibiting such application, then the
Company's obligations under this Indenture and the Securities shall be revived
and reinstated as though no deposit had occurred pursuant to this Article 10
with respect to Securities until such time as the Trustee or Paying Agent is
permitted to apply all money held in trust pursuant to Section 10.5 hereof with
respect to the Securities in accordance with this Article 10; provided, however,
that if the Company makes any payment of principal of or interest on any
Security following the reinstatement of its obligations, the Company shall be
subrogated to the rights of the Holders of the Securities to receive such
payment from the money so held in trust.
ARTICLE 11
SATISFACTION AND DISCHARGE
SECTION 11.1 SATISFACTION AND DISCHARGE OF INDENTURE
This Indenture shall upon Company Request cease to be of further effect
with respect to the Securities (except as to any surviving rights of
registration of transfer or exchange of Securities herein expressly provided
for) and the Trustee, at the expense of the Company, shall execute proper
instruments acknowledging satisfaction and discharge of this Indenture when
(i) either
(A) all Securities theretofore authenticated and delivered (other
than (i) Securities which have been destroyed, lost or stolen and which
have been replaced or paid as provided in Section 3.6 hereof, and (ii)
Securities for whose payment money has theretofore been deposited in trust
with the Trustee or any Paying Agent or segregated and held in trust by the
Company and thereafter repaid to the Company, as provided in Section 6.4
hereof) have been delivered to the Trustee for cancellation; or
(B) all such Securities
(1) have become due and payable, or
(2) will become due and payable at their Stated Maturity within
one year, or
(3) if redeemable at the option of the Company, are to be called
for redemption within one year under arrangements satisfactory to the
Trustee for the giving of notice of redemption by the Trustee in the
name, and at the expense, of the Company,
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and the Company, in the case of (1), (2) or (3) above, has irrevocably deposited
or caused to be deposited with the Trustee as trust funds in trust for such
purpose an amount in cash sufficient to pay and discharge the entire
Indebtedness on such Securities not theretofore delivered to the Trustee for
cancellation, for principal and interest to the date of such deposit (in the
case of Securities which have become due and payable) or to the Stated Maturity
or redemption date, as the case may be;
(ii) the Company has paid or caused to be paid all other sums payable
hereunder by the Company; and
(iii) the Company has delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, stating that all conditions
precedent herein provided for relating to the satisfaction and discharge of
this Indenture have been complied with.
Notwithstanding the satisfaction and discharge of this Indenture, the
obligations of the Company to the Trustee under Section 8.7 hereof and, if money
shall have been deposited with the Trustee pursuant to subclause (B) of clause
(i) of this Section 11.1, the obligations of the Trustee under Sections 11.2 and
5.4(e) hereof shall survive.
SECTION 11.2 APPLICATION OF TRUST MONEY
Subject to the provisions of Section 5.4(e) hereof, all money deposited
with the Trustee pursuant to Section 11.1 hereof shall be held in trust and
applied by it, in accordance with the provisions of the Securities and this
Indenture, to the payment, either directly or through any Paying Agent
(including the Company acting as its own Paying Agent) as the Trustee may
determine, to the Persons entitled thereto, of the principal and interest for
whose payment such money has been deposited with the Trustee; but such money
need not be segregated from other funds except to the extent required by law.
ARTICLE 12
SUPPLEMENTAL INDENTURES
SECTION 12.1 SUPPLEMENTAL INDENTURES WITHOUT CONSENT OF HOLDERS
(a) The Company and the Trustee may amend this Indenture or the Securities
or waive any provision hereof without the consent of any Holder:
(i) to cure any ambiguity, defect or inconsistency;
(ii) to comply with Section 6.1 hereof;
(iii) to provide for uncertificated Securities in addition to
certificated Securities;
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(iv) to make any change that does not adversely affect the legal
rights hereunder of any Holder of a Security;
(v) to add to the covenants of the Company for the benefit of the
Holders of the Securities or to surrender any right or power herein
conferred upon the Company;
(vi) to add any additional Events of Default for the benefit of the
Holders of the Securities;
(vii) to secure the Securities pursuant to the requirements of
Section 5.18 hereof;
(viii) to evidence and provide for the acceptance of appointment
hereunder of a successor Trustee with respect to the Securities and to add
to or change any of the provisions of this Indenture as shall be necessary
to provide for or facilitate the administration of the trusts hereunder by
such successor Trustee;
(ix) to supplement any of the provisions of the Indenture to such
extent as shall be necessary to implement the provisions of Article 10
hereof or discharge of the Securities pursuant to Sections 11.1, 11.2 and
11.3 hereof; provided that any such action shall not adversely affect the
interests of the Holders of the Securities in any material respect; or
(x) to comply with the qualification of this Indenture under the TIA.
(b) Upon the request of the Company, accompanied by a Board Resolution
authorizing the execution of any such supplemental indenture, and upon receipt
by the Trustee of the documents described in Section 12.6 hereof, the Trustee
will join with the Company in the execution of any supplemental indenture
authorized or permitted by the terms of this Indenture, unless such supplemental
indenture adversely affects the Trustee's own rights, duties or immunities under
this Indenture or otherwise, and shall make any further appropriate agreements
and stipulations that may be contained therein. After an amendment or waiver
under this Section 12.1 becomes effective, the Company will mail to the Holders
of each Security affected thereby a notice describing the amendment or waiver.
Any failure of the Company to mail such notice, will not, however, affect the
validity of any such supplemental indenture.
SECTION 12.2 SUPPLEMENTAL INDENTURES WITH CONSENT OF HOLDERS
(a) Except as provided below in this Section 12.2, the Company and the
Trustee may amend this Indenture or the Securities with the written consent
(including consents obtained in connection with a tender offer or exchange offer
for Securities) of the Holders of at least a majority in principal amount of the
Outstanding Securities.
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(b) Upon the request of the Company, accompanied by a Board Resolution
authorizing the execution of any such supplemental indenture, and upon the
filing with the Trustee of evidence of the consent of the Holders as aforesaid,
and upon receipt by the Trustee of the documents described in Section 12.6
hereto, the Trustee will join with the Company in the execution of such
supplemental indenture.
(c) It will not be necessary for the consent of the Holders under this
Section 12.2 to approve the particular form of any proposed amendment or waiver,
but it will be sufficient if such consent approves the substance thereof.
(d) The Holders of a majority in principal amount of the Outstanding
Securities may waive compliance in a particular instance by the Company with any
provision of this Indenture (including waivers obtained in connection with a
tender offer or exchange offer for Securities). However, without the consent of
each Holder of an Outstanding Security affected thereby, an amendment or waiver
under this Section 12.2 may not:
(i) change the Stated Maturity of the principal of, or any installment
of principal of or interest on any Security, or reduce the principal amount
thereof or the rate of interest thereon or any premium payable upon the
redemption thereof, or change the Place of Payment where any Security or
interest thereon is payable, or change the coin or currency in which any
Security or interest thereon is payable, or impair the right to institute
suit for the enforcement of any such payment on or after the Stated
Maturity thereof (or, in the case of redemption or repayment at the option
of the Holder, on or after the redemption date or repayment date), or
(ii) reduce the percentage in principal amount of the Outstanding
Securities, the consent of whose Holders is required for any such
amendment, or the consent of whose Holders is required for any waiver of
compliance with certain provisions of this Indenture or certain defaults
hereunder and their consequences provided for in this Indenture, or
(iii) modify any of the provisions of this Section or Section 7.7,
except to increase any such percentage or to provide that certain other
provisions of this Indenture cannot be modified or waived without the
consent of the Holder of each Outstanding Security, or
(iv) modify the ranking or priority of the Securities in a manner
adverse to the Holders.
(e) The right of any Holder to participate in any consent required or
sought pursuant to any provision of this Indenture (and the obligation of the
Company to obtain any such consent otherwise required from such Holder) may be
subject to the requirement that such Holder has been the Holder of record of the
Securities with respect to which such consent is required or
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sought as of a date identified by the Trustee in a notice furnished to Holders
in accordance with the terms of this Indenture.
SECTION 12.3 COMPLIANCE WITH TIA
Every amendment to this Indenture or the Securities will comply in form and
substance with the TIA.
SECTION 12.4 REVOCATION AND EFFECT OF CONSENTS
(a) Until an amendment (which includes any supplement) or waiver becomes
effective, a consent to it by a Holder of a Security is a continuing consent by
the Holder and every subsequent Holder of a Security or portion of a Security
that evidences the same debt as the consenting Holder's Security, even if
notation of the consent is not made on any Security. However, any such Holder
or subsequent Holder may revoke the consent as to such Holder's Security or
portion of a Security if the Trustee receives written notice of revocation
before the date the amendment or waiver becomes effective. An amendment or
waiver becomes effective in accordance with its terms and thereafter binds every
Holder.
(b) The Company may, but will not be obligated to, fix a record date for
the purpose of determining the Holders entitled to consent to any amendment or
waiver. If the Company elects to fix a record date for such purpose, the record
date will be fixed at (i) the later of 30 days prior to the first solicitation
of such consent or the date of the most recent list of Holders furnished to the
Trustee prior to such solicitation pursuant to Section 9.2 hereof or (ii) such
other date as the Company may reasonably designate. If a record date is fixed,
then notwithstanding the provisions of Section 12.4(a) hereof, those Persons who
were Holders at such record date (or their duly designated proxies), and only
those Persons, will be entitled to consent to such amendment or waiver or to
revoke any consent previously given, whether or not such Persons continue to be
Holders after such record date. No consent will be valid or effective for more
than 90 days unless consents from Holders of the principal amount of Securities
required hereunder for such amendment or waiver to be effective has also been
given and not revoked within such 90-day period.
(c) After an amendment or waiver becomes effective it will bind every
Holder of a Security affected thereby, unless it is of the type described in any
of clauses (i) through (iv) of Section 12.2(d) hereof. Any amendment or waiver
will bind each Holder of a Security who has consented to it and every subsequent
Holder of a Security that evidences the same debt as the consenting Holder's
Security.
SECTION 12.5 NOTATION ON OR EXCHANGE OF SECURITIES
The Trustee may place an appropriate notation about an amendment or waiver
on any security of any series affected thereby thereafter authenticated. The
Company, in exchange for
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all Securities then Outstanding, may issue and the Trustee will authenticate new
Securities that reflect the amendment or waiver.
SECTION 12.6 TRUSTEE TO SIGN AMENDMENTS, ETC.
The Trustee will sign any amendment or supplemental indenture authorized
pursuant to this Article 12 if the amendment does not adversely affect the
rights, duties, liabilities or immunities of the Trustee. If it does, the
Trustee may, but need not, sign it. In signing or refusing to sign such
amendment or supplemental indenture, the Trustee will be entitled to receive
and, subject to Section 8.1 hereof, will be fully protected in relying upon, an
Officers' Certificate and an Opinion of Counsel as conclusive evidence that such
amendment or supplemental indenture is authorized or permitted by this
Indenture, that it is not inconsistent herewith, and that it will be valid and
binding upon the Company in accordance with its terms.
ARTICLE 13
MISCELLANEOUS
SECTION 13.1 TIA CONTROLS
If any provision hereof limits, qualifies or conflicts with a provision of
the TIA that is required under such Act to be a part of and to govern this
Indenture, the provisions of the TIA will control. If any provision hereof
modifies or excludes any provisions of the TIA that may be so modified as
excluded, such provisions of the TIA shall be deemed to apply to this Indenture
as so modified, as to be excluded, as the case may be.
SECTION 13.2 NOTICES
(a) Any notice or communication by the Company or the Trustee to the other
is duly given if in writing and delivered in person or mailed by first class
mail (registered or certified, return receipt requested), telex, telecopier or
overnight air courier guaranteeing next day delivery, to the other's address:
If to the Company:
The Fortress Group, Inc.
1760 Reston Parkway
Suite 208
Reston, Virginia 22090
Telecopier No.:
Confirmation No.:
Attention: President
If to the Trustee:
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1 State Street
New York, New York 10004
(b) The Company or the Trustee, by notice to the other, may designate
additional or different addresses for subsequent notices or communications.
(c) All notices and communications will be deemed to have been duly given:
at the time delivered by hand, if personally delivered; five Business Days after
being deposited in the mail, if mailed; when answered back, if telexed; when
receipt acknowledged by the Trustee's transmission result report, if telecopied;
and the next Business Day after timely delivery to the courier, if sent by
overnight air courier guaranteeing next day delivery.
(d) Any notice or communication to a Holder will be mailed by first-class
mail, postage-prepaid, return receipt requested, to the Holder's address shown
on the register kept by the Registrar. Failure to mail a notice or
communication to a Holder or any defect in it will not affect its sufficiency
with respect to other Holders.
(e) If a notice or communication is mailed in the manner provided above
within the time prescribed, it is duly given, whether or not the addressee
receives it.
(f) If the Company mails a notice or communication to Holders, it will mail
a copy to the Trustee and each Agent at the same time.
SECTION 13.3 COMMUNICATION BY HOLDERS WITH OTHER HOLDERS
Holders may communicate pursuant to TIA Section 312(b) with other Holders
with respect to their rights under this Indenture or the Securities. The
Company, the Trustee, the Securities Register and anyone else will have the
protection of TIA Section 312(c).
SECTION 13.4 ACTION BY SECURITYHOLDERS
Whenever in this Indenture it is provided that the Holders of a specified
percentage in aggregate principal amount of the Outstanding Securities may take
any action including the making of any demand or request, the giving of any
notice, consent or Waiver or the taking of any other action, the act that at the
time of taking any such action the Holders of such specified percentage have
joined therein may be evidenced by any instrument or any number of instruments
of similar tenor executed by (i) Holders in person or (ii) agent or proxy
appointed in writing, or by the record of the Holders in favor thereof, at any
meeting of Holders duly called and held in accordance with the provisions of
Article 14 hereof, or (iii) a combination of such instrument or instruments or
any such record of such meeting of Holders, but in each case only to the extent
that the Holders shall not have revoked such action pursuant to Section 12.4
hereof.
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Without limiting the generality of this Section 13.4, a Holder, including a
Depository that is a Holder of one or more Global Securities, may make, give or
take, by a proxy or proxies duly appointed in writing, any request, demand,
authorization, direction, notice, consent, waiver or other action provided in
this Indenture to be made, given or taken by Holders and a Depository that is a
Holder of one or more Global Securities may provide its proxy or proxies to the
beneficial owners of interests in any Global Securities through such
Depository's standing instructions and customary practices.
The Company, with advance approval by the Trustee, will fix a record date
for the purpose of determining the Persons who are beneficial owners of
interests in any Global Security held by a Depository entitled under the
procedures of such Depository to make, give or take, by a proxy or proxies duly
appointed in writing any request, demand, authorization, direction, notice,
consent, waiver or other action provided in this Indenture to be made, given or
taken by Holders. If such a record date is fixed, the Persons who are such
beneficial owners at the close of business on such record date or their duly
appointed proxy or proxies will be entitled to make, give or take such request,
demand, authorization, direction, notice, consent, waiver or other actions,
whether or not such persons remain such beneficial owners after such record
date. No such request, demand, authorization, direction, notice, consent,
waiver or other action will be valid or effective if made, given or taken more
than six months after such record date.
SECTION 13.5 PROOF OF EXECUTION OF INSTRUMENTS AND HOLDING OF SECURITIES
Proof of the execution of any instrument by a Holder or such Holder's agent
or proxy and proof of the holding by any Person of any of the Securities shall
be sufficient if made in the following manner:
(1) The fact and date of the execution by any such Person of any
instrument may be proved by the certificate of any notary public or other
officer of any jurisdiction authorized to take acknowledgments of deeds to
be recorded in such jurisdiction that the Person executing such instrument
acknowledged to him the execution thereof, or by an affidavit of a witness
to such execution sworn to before any such notary or other officer. Such
certificate or affidavit shall also constitute sufficient proof of the
authority of the Person executing any instrument in cases where Securities
are not held by Persons in their individual capacities.
(2) The fact and date of execution of any such instrument may also be
proved in any other manner which the Trustee deems sufficient.
(3) The ownership of Securities shall be proved by the Securities
Register for such Security or by a certificate of the Registrar.
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(4) The Trustee shall not be bound to recognize any Person as a
Securityholder unless such Holder's title to any Security held by such
Holder is proved in the manner provided in this Section 13.5.
The Trustee may require such additional proof of any matter referred to in
this Section 13.5 as it shall deem necessary.
SECTION 13.6 OBLIGATION TO DISCLOSE BENEFICIAL OWNERSHIP OF
SECURITIES
All Securities shall be held and owned upon the express condition that,
upon demand of any regulatory agency having jurisdiction over the Company, and
pursuant to law or regulation empowering such agency to assert such demand, any
Holder shall disclose to such agency the identity of the beneficial owner of all
Securities held by such Holder.
SECTION 13.7 CERTIFICATE AND OPINION AS TO CONDITIONS PRECEDENT
Upon any request or application by the Company to the Trustee to take any
action under this Indenture, the Company will furnish to the Trustee and the
Trustee may rely upon, as conclusive evidence:
(i) an Officers' Certificate (which will include the statements set
forth in Section 13.8 hereof) stating that, in the opinion of the signers,
all conditions precedent and covenants, if any, provided for in this
Indenture relating to the proposed action have been complied with; and
(ii) an opinion of Counsel in form and substance reasonably
satisfactory to the Trustee, (which will include the statements set forth
in Section 13.8 hereof) stating that, in the opinion of such counsel, all
such conditions precedent and covenants have been complied with.
SECTION 13.8 STATEMENTS REQUIRED IN CERTIFICATE OR OPINION
(a) Each certificate or opinion with respect to compliance with a
condition or covenant provided for in this Indenture (other than a
certificate provided pursuant to TIA Section 314(a)(4)) will include:
(i) a statement that the Person making such certificate or opinion has
read such condition or covenant;
(ii) a brief statement as to the nature and scope of the examination
or investigation upon which the statements or opinions contained in such
certificate or opinion are based;
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(iii) a statement that, in the opinion of such Person, such Person
has made such examination or investigation as is necessary to enable him or
her to express an informed opinion as to whether or not such condition or
covenant has been complied with; and
(iv) a statement as to whether or not, in the opinion of such person,
such condition or covenant has been complied with.
(b) an Opinion of Counsel, unless such Officer knows that the opinion with
respect to the matters upon which his certificate may be based as aforesaid is
erroneous, or in the exercise of reasonable care should know that the same are
erroneous. Any Opinion of Counsel may be based, insofar as it relates to
factual matters, upon the certificate, statement or opinion of or
representations by an Officer or Officers of the Company, or other Persons or
firms deemed appropriate by such counsel, unless such counsel has actual
knowledge that the certificate, statement or opinion or representations with
respect to the matters upon which his certificate, statement or opinion may be
based as aforesaid are erroneous.
(c) Any Officers' Certificate, statement or Opinion of Counsel may be
based, insofar as it relates to accounting matters, upon a certificate or
opinion of or representation by an accountant (who may be an employee of the
Company), or firm of accountants, unless such Officer or counsel, as the case
may be, has actual knowledge that the certificate or opinion or representation
with respect to the accounting matters upon which his certificate, statement or
opinion may be based as aforesaid are erroneous.
SECTION 13.9 RULES BY TRUSTEE AND AGENTS
The Trustee may make reasonable rules for action by or at a meeting of
Holders. The Registrar or Paying Agent may make reasonable rules and set
reasonable requirements for its functions.
SECTION 13.10 NO RECOURSE AGAINST OTHERS
A director, officer or employee of the Company, as such, will have no
liability for any obligations of the Company under the Securities or this
Indenture. Each Holder by accepting a Security waives and releases all such
liability.
SECTION 13.11 GOVERNING LAW
This Indenture and the Securities will be governed by and construed in
accordance with the laws of the State of New York, without regard to principles
of conflicts of law.
SECTION 13.12 NO ADVERSE INTERPRETATION OF OTHER AGREEMENTS
This Indenture may not be used to interpret another indenture, loan or debt
agreement of the Company or a Subsidiary thereof. Any such indenture, loan or
debt agreement may not
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be used to interpret this Indenture. This writing constitutes the entire
agreement of the parties with respect to the subject matter hereof. Unless
expressly or otherwise indicated herein, an action or transaction permitted by
one provision hereof must nonetheless comply with all other applicable
provisions hereof; and any action or transaction not permitted by any provision
of this Indenture will not be permitted regardless of whether any other
provision hereof might permit such action or transaction.
SECTION 13.13 SUCCESSORS
All agreements of the Company in this Indenture and the Securities will
bind its successors. All agreements of the Trustee in this Indenture will bind
its successors.
SECTION 13.14 SEVERABILITY
In case any provision in this Indenture or in the Securities is invalid,
illegal or unenforceable, the validity, legality and enforceability of the
remaining provisions will not in any way be affected or impaired thereby.
SECTION 13.15 COUNTERPART ORIGINALS
The parties may sign any number of copies of this Indenture. Each signed
copy will be an original, but all of them together represent the same agreement.
SECTION 13.16 TRUSTEE AS PAYING AGENT AND REGISTRAR
The Company initially appoints the Trustee as Paying Agent and Registrar.
SECTION 13.17 TABLE OF CONTENTS, HEADINGS, ETC.
The Table of Contents, Cross-Reference Table and Headings of the Articles
and Sections of this Indenture have been inserted for convenience of reference
only, are not to be considered a part hereof and will in no way modify or
restrict any of the terms or provisions hereof.
SECTION 13.18 BENEFITS OF INDENTURE
Nothing in this Indenture or in the Securities, express or implied, will
give to any Person, other than the parties hereto and their successors hereunder
and the Holders, any benefit or any legal or equitable right, remedy or claim
under this Indenture.
SECTION 13.19 ACCEPTANCE OF TRUST
IBJ Schroder Bank & Trust Company, the Trustee named herein, hereby accepts
the trusts in this Indenture declared and provided, upon the terms and
conditions hereinabove set forth.
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ARTICLE 14
MEETINGS OF HOLDERS OF SECURITIES
SECTION 14.1 PURPOSES OF MEETINGS
A meeting of Holders may be called at any time and from time to time
pursuant to the provisions of this Article 14 for any of the following purposes:
(a) to give any notice to the Company or to the Trustee, or to give any
direction to the Trustee, or to waive any non-performance hereunder, and its
consequences, or to take any other action authorized to be taken by Holders
pursuant to any of the provisions of this Indenture;
(b) to remove the Trustee and appoint a successor Trustee pursuant to the
provisions of Section 8.8 hereof;
(c) to consent to the amendment of the provisions contained herein and the
execution of an indenture or indentures supplemental hereto pursuant to the
provisions of Article 12 hereof; or
(d) to take any other action authorized to be taken by or on behalf of the
Holders of any specified aggregate principal amount of the Outstanding
Securities under any other provision of this Indenture or under applicable law.
SECTION 14.2 CALL OF MEETINGS BY TRUSTEE
The Trustee may at any time call a meeting of Holders to take any action
specified in Section 14.1, to be held at such time and at such place in the
State of New York, as the Trustee shall determine. Notice of each meeting of
the Holders of Securities, setting forth the time and the place of such meeting
and, in general terms, the action proposed to be taken at such meeting, shall be
mailed by the Trustee to the Holders, not less than 20 nor more than 60 days
prior to the date fixed for the meeting, at their last addresses as they shall
appear on the Security Register.
SECTION 14.3 CALL OF MEETINGS BY COMPANY OR SECURITYHOLDERS
If at any time the Company, pursuant to a Board Resolution, or the Holders
of at least 20 percent in aggregate principal amount of the Outstanding
Securities, shall have requested the Trustee to call a meeting of Holders to
take any action authorized in Section 14.1 hereof, by written request setting
forth in reasonable detail the action proposed to be taken at the meeting, and
the Trustee shall not have mailed notice of such meeting within 20 days after
receipt of such request, then the Company or the Holders in the amount above
specified may determine the time
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and the place in the State of New York for such meeting, and may call such
meeting by mailing notice thereof as provided in Section 14.2.
SECTION 14.4 PERSON ENTITLED TO VOTE AT MEETING
To be entitled to vote at any meeting of Holders, a Person shall be a
Holder or be a Person appointed by an instrument in writing as proxy by a
Holder. The only Persons who shall be entitled to be present or speak at any
meeting of the Holders shall be the Persons entitled to vote at such meeting and
their counsel and any representatives of the Company and its counsel.
SECTION 14.5 REGULATIONS FOR MEETING
Notwithstanding any provisions of this Indenture, the Trustee may make such
reasonable regulations as it may deem advisable for any meeting of Holders in
regard to the appointment of proxies, the proof of the holding of Securities,
the appointment and duties of inspectors of votes, the submission and
examination of proxies and other evidence of the right to vote, and such other
matters concerning the conduct of the meeting as it shall think fit. Except as
otherwise permitted or required by any such regulations, the holding of
Securities shall be proved in the manner specified in Section 13.5 hereof and
the appointment of any proxy shall be proved in the manner specified in such
Section 13.5 or by having the signature of the person executing the proxy
witnessed or guaranteed by any bank, banker, trust company or New York Stock
Exchange, Inc. member firm satisfactory to the Trustee.
The Trustee shall, by an instrument in writing, appoint a temporary
chairperson of the meeting, unless the meeting shall have been called by the
Company or by the Holders as provided in Section 14.3, in which case the Company
or the Holders calling the meeting, as the case may be, shall appoint a
temporary chairperson, a permanent chairperson and a permanent secretary of the
meeting shall be elected by vote of the Holders of a majority in principal
amount of the Securities represented at the meeting and entitled to vote.
At any meeting of Holders, the presence of Persons holding or representing
Securities in an aggregate principal amount sufficient to take action upon the
business for the transaction of which such meeting was called shall be necessary
to constitute a quorum, but, if less than a quorum be present, the Persons
holding or representing a majority in aggregate principal amount of the
Securities represented at the meeting may adjourn such meeting with the same
effect, for all intents and purposes, as though a quorum had been present.
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IN WITNESS WHEREOF, the undersigned have duly executed this Indenture as of
the date first above written.
THE FORTRESS GROUP, INC.
By:
--------------------------------
Name:
Title
IBJ SCHRODER BANK & TRUST COMPANY
as Trustee
By:
--------------------------------
Name:
Title:
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EXHIBIT A
(FACE OF SECURITY)
[Legend for Global Security, if Applicable]
THE FORTRESS GROUP, INC.
13 3/4% Senior Note due 2003
No. _____________ $___________
The Fortress Group, Inc., a corporation duly organized and existing under the
laws of Delaware (herein called the "Company", which term includes any successor
corporation under the Indenture hereinafter referred to), for value received,
hereby promises to pay to
, or registered assigns, the principal sum of
Dollars on _________________, and to pay interest thereon, semiannually on
_______________ and ___________________ in each year, commencing
________________, at the rate of ____% per annum, from the most recent Interest
Payment Date preceding the date of this Senior Note to which interest has been
paid or made available for payment, unless the date hereof is a date to which
Interest on the Senior Notes has been paid or made available for payment, in
which case from the date of this Senior Note, or unless no interest has been
paid or made available for payment on any of the Senior Notes, in which case
from _______, 1996, until the principal hereof is paid or made available for
payment. The interest so payable, and punctually paid or duly provided for, on
any Interest Payment Date will, as provided in such Indenture, be paid to the
Person in whose name this Senior Note is registered at the close of business on
the Regular Record Date for such interest. Any such interest not so punctually
paid or duly provided for will forthwith cease to be payable to the Holder on
such Regular Record Date and such interest and, to the extent lawful, interest
on such defaulted interest at the rate specified herein may either be paid to
the Person in whose name this Senior Note is registered at the close of business
on a Special Record Date for the payment of such Defaulted Interest to be fixed
by the Trustee, notice whereof shall be given to Holders of Senior Notes not
less than 10 days prior to such Special Record Date, or be paid at any time in
any other lawful manner not inconsistent with the requirements of any securities
exchange on which the Senior Notes may be listed, and upon such notice as may be
required by such exchange, all as more fully provided in said Indenture.
Payment of the principal of (and premium, if any) and interest on this Senior
Note will be made at the office or agency of the Company maintained for that
purpose in New York, New York, in such coin or currency of the United States of
America as at the time of payment is legal tender for payment of public and
private debts; provided, however, that at the option of the Company payment of
interest may be made by check mailed to the address of the Person entitled
thereto as such address shall appear in the Security Register.
Exhibit A-1
<PAGE>
Reference is hereby made to the further provisions of this Senior Note set
forth on the reverse hereof, which further provisions shall for all purpose have
the same effect as if set forth at this place.
Unless the certificate of authentication hereon has been executed by the
Trustee referred to on the reverse hereof by manual signature, this Senior Note
shall not be entitled to any benefit under the Indenture or be valid or
obligatory for any purpose.
In Witness Whereof, the Company has caused this instrument to be duly
executed under its corporate seal.
Dated: _________, 1996
THE FORTRESS GROUP, INC.
By:
------------------------------
Name:
Title:
By:
------------------------------
Name:
Title:
(Corporate Seal)
This Senior Note is one of the
Securities referred to in
the within-mentioned Indenture.
IBJ Schroder Bank & Trust Company,
a New York Banking Corporation
as Trustee
By:
------------------------------
Authorized Signatory
Exhibit A-2
<PAGE>
(REVERSE OF SECURITY)
THE FORTRESS GROUP, INC
13 3/4% SENIOR NOTE DUE 2003
1. INTEREST. Interest will be computed on the basis of actual days elapsed
over a 365 or 366-day year. The Company will pay interest on the Senior Notes
(except default interest, which shall be payable in the manner provided in
Section 3.7 of the Indenture) to the Persons who are Holders of Securities at
the close of business on the 15 or 15 next preceding
the Interest Payment Date (the "Regular Record Date").
2. PAYING AGENT AND REGISTRAR.
Initially, IBJ Schroder Bank & Trust Company (the "Trustee") will act as
Paying Agent and Registrar. The Company may change any Paying Agent, Registrar
or co-Registrar without notice to any Holder. The Company or any of its
Subsidiaries may act as Paying Agent, Registrar or co-Registrar.
3. INDENTURE.
The Company issued the Senior Notes under an Indenture, dated as of
1996 (the "Indenture"), between the Company and the Trustee. The terms of the
Senior Notes include those stated in the Indenture and those made part of the
Indenture pursuant to the Trust Indenture Act of 1939 (the "TIA") as in effect
on the date of the Indenture and as may be amended from time to time. The
Senior Notes are subject to and governed by all such terms, and Holders are
referred to the Indenture and the TIA for a statement of them. Capitalized
terms used in this Senior Note and not otherwise defined herein shall have the
meanings set forth in the Indenture. The Senior Notes are general unsecured
obligations of the Company, limited to the aggregate principal amount of
$100,000,000.
4. OPTIONAL REDEMPTION.
The Senior Notes may not be redeemed prior to their maturity.
5. MANDATORY REDEMPTION/SINKING FUND.
The Company shall not be obligated to make any mandatory redemption or
sinking fund payments or repurchase the Senior Notes at the option of the
Holders.
6. MANDATORY REPURCHASE OBLIGATION.
Exhibit A-3
<PAGE>
Within 30 days after the occurrence of any Change of Control, the Company
will offer to purchase all Outstanding Senior Notes at a purchase price equal to
101 percent of the amount thereof, plus accrued and unpaid interest to the
Change of Control Payment Date.
Within 30 days after the date on which the aggregate amount of Excess
Proceeds from one or more Asset Sales equals $5,000,000 or more, the Company
will offer to purchase the maximum principal amount of Senior Notes that may be
purchased out of the Excess Proceeds at a purchase price equal to 100 percent of
the principal amount thereof, plus accrued and unpaid interest to the Asset Sale
Offer Date.
Within 30 days after the end of any two consecutive fiscal quarters during
which the Consolidated Tangible Net Worth of the Company is less than
$15,000,000, the Company will offer to purchase 10 percent of the original
Outstanding principal amount of the Senior Notes at a purchase price equal to
100 percent of the original principal amount thereof, plus accrued and unpaid
interest to the Net Worth Offer Date.
A Change of Control Offer, an Excess Proceeds Offer or a Net Worth Offer
will remain open for the period specified in the Indenture. Promptly after the
termination of a Change of Control Offer, an Excess Proceeds Offer or a Net
Worth Offer, subject to the terms of the Indenture, the Company will purchase
and mail or deliver payment for all Senior Notes tendered and accepted pursuant
to such Offer.
A Holder may tender in response to a Change of Control Offer, an Excess
Proceeds Offer or a Net Worth Offer all or any portion of its Senior Notes at
its discretion by completing the form entitled "OPTION OF HOLDER TO ELECT
PURCHASE" appearing on the reverse of this Senior Note. Any portion of Senior
Notes tendered must be an integral multiple of $1,000.
7. DENOMINATIONS, TRANSFER, EXCHANGE.
The Senior Notes are issuable in registered form, without coupons, in
denominations of $1,000 and integral multiples thereof. As provided in the
Indenture and subject to certain limitations therein set forth, Senior Notes are
exchangeable for a like aggregate principal amount of Senior Notes of any
authorized denomination, as requested by the Holder surrendering the same, upon
surrender of the Senior Note or Senior Notes to be exchanged at any office or
agency where Senior Notes may be presented for registration of transfer.
As provided in the Indenture and subject to certain limitations therein set
forth, the transfer of Senior Notes is registrable in the Security Register upon
surrender of a Senior Note for registration of transfer at the Corporate Trust
Office of the Trustee in New York, or at the office of any Registrar hereafter
designated by the Company for such purpose, duly endorsed by, or accompanied by
a written instrument of transfer in form satisfactory to the Company and the
Registrar duly executed by, the Holder hereof or his attorney duly authorized in
writing, and
Exhibit A-4
<PAGE>
thereupon one or more new Senior Notes, of authorized denominations and for the
same aggregate principal amount, will be issued to the designated transferee or
transferees.
No service charge shall be made by the Company, the Trustee or the
Registrar for any such registration of transfer or exchange, but the Company may
require payment of a sum sufficient to cover any tax, assessment or other
governmental charge payable in connection therewith (other than exchanges
pursuant to Section 3.4 or 12.5 of the Indenture, not involving any transfer).
8. PERSON DEEMED OWNER.
The Holder of a Senior Note may be treated as the owner of it for all
purposes.
9. AMENDMENT, WAIVER.
The Indenture permits, in certain circumstances therein specified, the
amendment thereof and of the Senior Notes without the consent of the Holders.
The Indenture also permits, with certain exceptions as therein provided, the
amendment thereof and of the Senior Notes and the modification of the rights and
obligations under the Indenture and the Senior Notes of the Company and the
rights of Holders at any time by the Company and the Trustee with the consent of
the Holders of a majority in aggregate principal amount of the Senior Notes at
the time Outstanding. The Indenture also contains provisions permitting the
Holders of a majority in aggregate principal amount of the Senior Notes at the
time Outstanding, on behalf of the Holders of all the Senior Notes, to waive
compliance by the Company with certain provisions of the Indenture and certain
past defaults under the Indenture and their consequences. Any such consent or
waiver by the Holders shall be conclusive and binding upon the Holder of this
Senior Note and upon all future Holders of this Senior Note and of any Senior
Note issued upon the registration of transfer hereof or in exchange hereof or in
lieu hereof, whether or not notation of such consent or waiver is made upon this
Senior Note.
No reference herein to the Indenture and no provision of this Senior Note
or of the Indenture shall alter or impair the obligation of the Company, which
is absolute and unconditional, to pay the principal of (and premium, if any) and
interest on this Senior Note at the times, place and rate, and in the coin or
currency, herein prescribed.
10. SUCCESSOR CORPORATION.
When a successor corporation assumes all the obligations of its predecessor
under the Senior Notes and the Indenture, the predecessor corporation will be
released from those obligations.
11. DEFAULTS AND REMEDIES.
Exhibit A-5
<PAGE>
The following are Events of Default: (i) failure by the Company to pay
interest on any Senior Note when the same becomes due and the continuance of
such failure for 30 days; (ii) failure by the Company to pay the principal of
any Senior Note when the same becomes due and payable at Maturity, upon
redemption or acceleration or otherwise (including the failure to make payment
pursuant to a Change of Control Offer, an Excess Proceeds Offer or a Net Worth
Offer); (iii) failure by the Company to comply with any of its agreements or
covenants in, or provisions of, the Senior Notes or the Indenture and such
failure continues for 60 days after notice; (iv) acceleration of any
Indebtedness (other than Non-Recourse Indebtedness) of the Company or any of its
Subsidiaries that has an outstanding principal amount of $2,500,000 or more in
the aggregate; provided that, in the event any such acceleration is withdrawn or
otherwise rescinded within a period of five days after such acceleration by he
holders of such Indebtedness, any Event of Default pursuant to this clause (iv)
will be deemed to be cured and an acceleration under the Indenture will be
deemed withdrawn or rescinded; (v) failure by the Company or any of its
Subsidiaries to make any principal or interest payment in respect of
Indebtedness (other than Non-Recourse Indebtedness) of the Company or any of its
Subsidiaries with an outstanding aggregate principal amount of $2,500,000 or
more within five days of such principal or interest payment becoming due and
payable (after giving effect to any applicable grace period set forth in the
documents governing such Indebtedness); (vi) a final judgment or judgments that
exceed $2,500,000 or more in the aggregate, for the payment of money, having
been entered by a court or courts of competent jurisdiction against the Company
or any of its Subsidiaries and such judgment or judgments is not satisfied,
stayed, annulled or rescinded within 60 days of being entered; or (vii) certain
events of bankruptcy, insolvency or reorganization, involving the Company or a
Material Subsidiary.
If an Event of Default with respect to the Senior Notes at the time
Outstanding (other than certain Events of Default arising out of certain events
of bankruptcy, insolvency or reorganization involving the Company or a Material
Subsidiary) occurs and is continuing, the Trustee (after receiving indemnities
from the Holders to its satisfaction) by notice to the Company, or the Holders
of at least 25 percent in aggregate principal amount of the Outstanding Senior
Notes by notice to the Company and the Trustee, may declare all Outstanding
Senior Notes to be due and payable immediately. Upon such declaration, the
amounts due and payable on the Senior Notes as determined in Section 7.2(b) of
the Indenture, will be due and payable immediately. If an Event of Default
arising out of certain events of Bankruptcy, insolvency or reorganization
involving the Company or a Material Subsidiary occurs, such an amount will ipso
facto become and be immediately due and payable without any declaration, notice
or other act on the part of the Trustee and the Company or any Holder. The
Holders of a majority in aggregate principal amount of the Outstanding Senior
Notes by written notice to the Trustee and the Company may waive such Event of
Default, rescind an acceleration and its consequences (except an acceleration
due to nonpayment of principal or interest on the Senior Notes) if the
rescission would not conflict with any judgment or decree and if all existing
Events of Default have been cured or waived.
Subject to Sections 7.7 and 12.2 of the Indenture, the Holders of a
majority in aggregate principal amount of the Outstanding Senior Notes by notice
to the Trustee may waive an existing
Exhibit A-6
<PAGE>
Default or Event of Default and its consequences (including waivers obtained in
connection with a tender offer or exchange offer for Senior Notes), except a
continuing Default or Event of Default in the payment of the principal of or
interest on any Senior Note. Upon any such waiver, such Default will cease to
exist, and any Event of Default arising therefrom will be deemed to have been
cured for every purpose of the Indenture and the Senior Notes, but no such
waiver will extend to any subsequent or other Default or Event of Default or
impair any right consequent thereon.
12. TRUSTEE DEALINGS WITH COMPANY.
The Trustee under the Indenture, in its individual or any other capacity,
may become the owner or pledgee of Senior Notes and may otherwise deal with the
Company or its Affiliates with the same rights it would have if it were not
Trustee. Any Agent may do the same with like rights. However, the Trustee is
subject to Sections 8.10 and 8.11 of the Indenture.
13. NO RECOURSE AGAINST OTHERS.
A director, officer or employee of the Company, as such, shall have no
liability for any obligations of the Company under the Senior Notes or the
Indenture. Each Holder and each other owner of any beneficial interest in a
Senior Note, by accepting a Senior Note waives and releases all such liability.
14. AUTHENTICATION.
This Senior Note shall not be valid until the Trustee signs the certificate
of authentication on the other side of this Senior Note.
15. ABBREVIATIONS.
Customary abbreviations may be used in the name of a Holder or an assignee,
such as: TEN COM (= tenants in common), TEN ENT (= tenants by the entireties),
JT TEN (= joint tenants with right of survivorship and not as tenants in
common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts to Minors Act).
The Company will furnish to any Holder, upon written request and without
charge, a copy of the Indenture. Request may be made to:
The Fortress Group, Inc.
1760 Reston Parkway
Suite 208
Reston, VA 22090
Attention: President
Exhibit A-7
<PAGE>
ASSIGNMENT FORM
FOR VALUE RECEIVED, the undersigned hereby sell(s), assign(s) and
transfers unto
Please insert Social Security or Employer
Identification Number of Assignee
- ----------------------------------------
- ----------------------------------------
- ----------------------------------------
________________________________________________________________________________
Please Print or Typewrite Name and Address
including Postal Zip Code of Assignee
________________________________________________________________________________
the within Senior Note and all rights thereunder, hereby irrevocably
constituting and appointing
____________________________________________________ attorney to Transfer said
Senior Note on the books of the Company, with full-power of substitution in
the premises.
Dated:____________________ Signature _______________________________
NOTICE: The signature to this assignment must correspond with the name as it
appears upon the face of the within note in every particular, without
alteration or enlargement or any change whatever.
Exhibit A-8
<PAGE>
OPTION OF HOLDER TO ELECT PURCHASE
If you want to elect to have this Senior Note purchased by the Company
pursuant to section 5.11, 5.16 or 5.20 of the Indenture, check the box below:
[_] Section 5.11 (Excess Proceeds Offer)
[_] Section 5.16 (Change of Control Offer)
[_] Section 5.20 (Net Worth Offer)
If you want to elect to have only part of the Senior Note purchased by the
Company pursuant to Section 5.11, 5.16 or 5.20 of the Indenture, as applicable,
state the principal amount you elect to have purchased: $____. Note: The amount
you elect to have purchased must be an integral multiple of $1,000.
Date:__________________ Your signature:___________________________________
(Sign exactly as your name appears on the
Senior Note)
Signature Guarantee:___________________________________
Exhibit A-9
<PAGE>
EXHIBIT 10.7
AGREEMENT
---------
THIS AGREEMENT (the "Agreement") is made as of April 15, 1996, by and
between, Charles F. Smith, Jr., James J. Martell, Jr., Patricia Donnelly,
Michael P. Kahn and Pepi A. Kahn, Co-Trustees of the Kahn Grantor Trust of 1993,
James F. McEneaney, Jr., James M. Pirrello, Brian McGregor, and Brian Buchanan
(the "Management Group"), Thomas B. Buffington, Edward A. Kirkpatrick and James
M. Giddens (the "Buffington Group"), J. Christopher Stuhmer ("Stuhmer"), Robert
Short ("Short"), and Lanold W. Caldwell and Lawrence J. Witek (the "Sunstar
Group"); each of the Buffington Group, Stuhmer, Short and the Sunstar Group
individually, a "Builder," and collectively, the "Builders").
WHEREAS, on the date hereof, each of the undersigned parties composing the
Management Group are the sole/1/ stockholders of The Fortress Group, Inc. (the
"Corporation"), and own such shares of Common Stock of the Corporation (the
"Common Stock") as set forth on Schedule 1(a) hereto; and
WHEREAS, upon the consummation of each of the four separate Agreements and
Plans of Reorganization dated December 21, 1995 and amended and restated on
March 11, 1996, by and among the Corporation, the Builders, the Founding
Companies (as such term is defined in each Agreement and Plan of Reorganization)
and newly formed wholly-owned subsidiaries of the Corporation (the "Merger
Agreements"), the Builders will become stockholders of the Corporation and will
own such shares of Common Stock as set forth on Schedule 1(b) hereto; and
WHEREAS, the Management Group has designated James J. Martell, Jr., the
Buffington Group has designated Thomas B. Buffington and the Sunstar Group has
designated Lawrence J. Witek, to act as their respective designated
representative, and each of Stuhmer and Short will act on his own behalf (each
individually, a "Designated Representative") with respect to certain actions to
be taken by the undersigned parties pursuant to this Agreement; and
WHEREAS, the Builders have designated Thomas Buffington (the "Designated
Builders' Representative") to act on behalf of the Builders, collectively, for
the purposes of nominating Independent Directors (as such term is defined
herein) as set forth in this Agreement; and
- -----------------
/1/ Except for approximately 110,000 shares held by the children of Charles F.
Smith, Jr., whom were donees of a portion of his shares.
<PAGE>
WHEREAS, each of the undersigned parties believes that adequate
representation of the Management Group's and the Builders' interests, and the
continuity of management, is essential to the success of the business of the
Corporation, and that to preserve such representation and continuity, it is
essential for the undersigned parties to vote for the election of the board of
directors of the Corporation (the "Board of Directors") as hereinafter provided.
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
contained herein, and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the undersigned parties agree as
follows:
1. 1995 Annual Meeting.
-------------------
Each of the undersigned parties comprising the Management Group agrees to
take any and all action necessary as a stockholder and/or Director or officer of
the Company (in each case, subject to applicable fiduciary duties) to nominate
each of the individuals listed on Schedule 2 hereto for election to the Board of
Directors at the Annual Meeting of Stockholders of the Corporation relating to
fiscal year 1995 (but occurring in fiscal year 1996), and any adjournment
thereof (the "1995 Annual Meeting"). Additionally, each of the undersigned
parties composing the Management Group agrees to vote the shares of Common Stock
which it owns or hereafter acquires, or over which it has voting control or
hereafter acquires voting control, in any manner necessary to cause the
individuals listed on Schedule 2 to be elected to the Board of Directors (in the
Classes set forth on Schedule 2) at the 1995 Annual Meeting.
2. Definition.
-----------
For the purposes of this Agreement, "Unaffiliated Director" means a
Director who is not an "affiliate" of any of the parties hereto, the Corporation
or the Founding Companies, or any of their respective affiliates, and qualifies
as an "independent director" for the purposes of all Federal and state
securities laws, rules and regulations, all Internal Revenue Service rules and
regulations and all Nasdaq Stock Market listing requirements.
3. Additional Director.
--------------------
Following the consummation of the Mergers and the initial public offering
contemplated, but before the proxies are solicited for the Company's 1996 Annual
Stockholders' Meeting, each of the undersigned parties shall take any and all
action necessary as a stockholder and/or Director or officer of the Corporation
(in each case, subject to applicable fiduciary duties) to cause the adoption of
a Directors' Resolution to increase the size of the board of
2
<PAGE>
directors by one and to appoint to the board an Unaffiliated Director nominated
by Management Group's Designated Representative.
4. Nominations for the 1996 and 1997 Annual Meetings.
-------------------------------------------------
(a) With respect to the Annual Meeting of the Stockholders relating to the
1996 fiscal year (but occurring in calendar year 1997) of the Corporation and
the 1997 fiscal year (but occurring in calendar year 1998), and any adjournment
thereof (the "1996 Annual Meeting" and the "1997 Annual Meeting" respectively),
each of the undersigned parties shall take any and all action necessary as a
stockholder and/or Director or officer of the Corporation (in each case, subject
to applicable fiduciary duties) to cause --
(i) the Buffington Group's Designated Representative to nominate, on behalf
of the Buffington Group, one (1) Director nominee ("Buffington Nominee"),
who is, at the time of the nomination, a senior executive of the
Corporation's subsidiary which is the successor of Buffington Holdings,
Inc., for election to the Board of Directors,
(ii) the Sunstar Group's Designated Representative to nominate, on behalf
of the Sunstar Group, one (1) Director nominee ("Sunstar Nominee"), who is,
at the time of the nomination, a senior executive of the Corporation's
subsidiary which is the successor of Solaris Development, Inc., for
election to the Board of Directors,
(iii) Stuhmer to nominate one (1) Director nominee ("Stuhmer Nominee"), who
is, at the time of the nomination, a senior executive of the Corporation's
subsidiary which is the successor of Christopher Homes, Custom Home
Division, Inc. for election to the Board of Directors,
(iv) Short to nominate one (1) Director nominee ("Short Nominee"), who is,
at the time of the nomination, a senior executive of the Corporation's
subsidiary which is the successor of The Genesee Company for election to
the Board of Directors,
(v) the Designated Builders' Representative to nominate two (2) additional
Director nominees each of whom meet the definition of an Unaffiliated
Director,
(vi) the Management Group's Designated Representative to nominate five (5)
Director nominees ("Management Nominees"), three (3) of whom shall be James
J. Martell, Jr.( or his designee), Charles F. Smith, Jr. (or his designee),
and J. Marshall Coleman (or Patricia Donnelly's designee) and one (1) of
whom shall meet the definition of an Unaffiliated Director.
3
<PAGE>
(b) With respect to the Annual Meeting of the Stockholders relating to the
1998 fiscal year (but occurring in calendar year 1999) of the Corporation and
the 1999 fiscal year (but occurring in calendar year 2000), and any adjournment
thereof (the "1998 Annual Meeting" and the "1999 Annual Meeting" respectively),
each of the undersigned parties shall take any and all action necessary as a
stockholder and/or Director or officer of the Corporation (in each case, subject
to applicable fiduciary duties) to cause --
(i) the Buffington Group's Designated Representative to nominate, on behalf
of the Buffington Group, one (1) Director nominee ("Buffington Nominee"),
who is, at the time of the nomination, a senior executive of the
Corporation's subsidiary which is the successor of Buffington Holdings,
Inc., for election to the Board of Directors,
(ii) the Sunstar Group's Designated Representative to nominate, on behalf
of the Sunstar Group, one (1) Director nominee ("Sunstar Nominee"), who is,
at the time of the nomination, a senior executive of the Corporation's
subsidiary which is the successor of Solaris Development, Inc., for
election to the Board of Directors,
(iii) Stuhmer to nominate one (1) Director nominee ("Stuhmer Nominee"), who
is, at the time of the nomination, a senior executive of the Corporation's
subsidiary which is the successor of Christopher Homes, Custom Home
Division, Inc. for election to the Board of Directors,
(iv) Short to nominate one (1) Director nominee ("Short Nominee"), who is,
at the time of the nomination, a senior executive of the Corporation's
subsidiary which is the successor of The Genesee Company for election to
the Board of Directors,
(v) the Management Group's Designated Representative to nominate four (4)
Director nominees ("Management Nominees"), three (3) of whom shall be James
J. Martell, Jr., Charles F. Smith, Jr., and J. Marshall Coleman, or their
respective designee.
5. Election of Directors at the 1996, 1997, 1998, and 1999 Annual Meetings.
-----------------------------------------------------------------------
Each of the undersigned parties shall vote the shares of Common Stock which it
owns or hereafter acquires, or over which it has voting control or hereafter
acquires voting control, in any manner necessary to cause all Nominees nominated
pursuant to Section 4 herein, to be elected to the Board of Directors at the
1996, 1997, 1998, and 1999 Annual Meetings, respectively.
6. Notice of Nominations. Except as set forth in Section 1, the names of any
---------------------
Nominee must be submitted to the Corporation in writing by each Builder,
Management Group's Designated
4
<PAGE>
Representative, or the Designated Builders' Representative, as the case may be,
no later than one hundred and twenty (120) days prior to the Annual Meeting of
Stockholders at which such nominee shall be voted upon.
7. Successors. In the event that the Board of Directors determines (in its
----------
reasonable discretion) that a member of the Board of Directors is unable, for
any protracted period, to discharge his/her duties to the Corporation, or such
member resigns or is removed from the Board of Directors, the Builder or the
Management Group, as the case may be, that originally nominated such Director
shall designate, through its Designated Representative, a successor Director who
satisfies the qualifications set forth in this Agreement for the predecessor
Director, and each of the undersigned parties shall take any and all action
necessary as a stockholder and/or Director or officer of the Corporation (in
each case, subject to applicable fiduciary duties) to elect such successor
Director to the Board of Directors. In the event that a Designated
Representative or the Designated Builders' Representative is unable to serve as
Designated Representative or Designated Builders' Representative for his/her
designated Builder(s) or the Management Group, as the case may be, such
Builder(s) or the Management Group shall promptly designate a successor
Designated Representative or Designated Builders' Representative and shall
promptly provide the Corporation with the name of such successor Designated
Representative or Designated Builders' Representative.
8. Term. The term of this Agreement shall run from the date hereof until
----
immediately following the final adjournment of the 1997 Annual Meeting, but in
any event shall terminate at the close of business on June 30, 2000.
9. Termination/Resignation. If the Merger Agreements are not consummated by
-----------------------
May 15, 1996 (i) this Agreement will terminate and its terms will be null and
void and of no force and effect, and (ii) all Directors who were nominated by a
Builder(s) shall immediately resign.
9. Assignability/Transfers. This Agreement shall only be assignable by the
-----------------------
written consent of the parties hereto and shall be binding on all transferees of
the Common Stock owned by the parties hereto, unless such transfer is a transfer
or sale in connection with a registered public securities offering or pursuant
to Rule 144 under the Securities Exchange Act of 1934, as amended.
10. Counterparts. This Agreement may be executed in multiple counterparts,
------------
each of which shall be deemed an original.
5
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed individually, and has entered into this Agreement effective the date
and year first above written.
______________________________ ________________________________
Thomas B. Buffington Charles F. Smith, Jr.
______________________________ ________________________________
Edward A. Kirkpatrick James J. Martell, Jr.
______________________________ ________________________________
James M. Giddens Patricia Donnelly
______________________________ ________________________________
J. Christopher Stuhmer Michael Kahn, Co-Trustee
of the Kahn Grantor Trust of 1993
______________________________ ________________________________
Pepi A. Kahn, Co-Trustee of Robert Short
the Kahn Grantor Trust of 1993
______________________________ ________________________________
Lanold W. Caldwell James F. McEneaney, Jr.
______________________________ ________________________________
Lawrence J. Witek James M. Pirrello
______________________________ ________________________________
Brian Buchanan Brian McGregor
6
<PAGE>
SCHEDULE 1(A)
PRE-MERGER COMMON STOCK OWNERSHIP
<TABLE>
<CAPTION>
NAME SHARES
- ---- ----------
<S> <C>
James J. Martell, Jr. 624,423
Patricia Donnelly 651,585
Charles F. Smith, Jr. 678,748/2/
Michael Kahn & Pepi Kahn 50,812
James E. McEneaney 50,812
James M. Pirrello 40,650
Brian McGregor 128,787
Brian Buchanan 4,683
</TABLE>
- -------------------
/2/Including approximately 104,000 shares held by children of Charles F. Smith,
Jr.
7
<PAGE>
SCHEDULE 1(B)
POST-MERGER COMMON STOCK OWNERSHIP
<TABLE>
<CAPTION>
NAME SHARES
- ---- ---------
<S> <C>
Builder Group Stockholders
- --------------------------
Thomas B. Buffington 948,949
Edward A. Kirkpatrick 474,474
James Giddens 474,474
J. Christopher Stuhmer 1,691,227
Robert Short 1,729,495
Lanold W. Caldwell 457,628
Lawrence Witek 457,628
Management Group Stockholders
- -----------------------------
James J. Martell, Jr. 624,423
Patricia Donnelly 651,585
Charles F. Smith, Jr. 678,748
Michael Kahn & Pepi Kahn 50,812
James E. McEneaney 50,812
James M. Pirrello 40,650
Brian McGregor 128,787
Brian Buchanan 4,683
</TABLE>
8
<PAGE>
SCHEDULE 2
1995 ANNUAL MEETING
The following individuals shall be nominated and elected to the Board
of Directors at the 1995 Annual Meeting of the Stockholders of the Corporation:
Thomas Buffington
Robert Short
J. Christopher Stuhmer
Lawrence Witek
Charles F. Smith, Jr.
James J. Martell, Jr.
J. Marshall Coleman
James F. McEneaney, Jr.
Mark L. Fine
Steve D. Rivers
9
<PAGE>
Exhibit 12
THE FORTRESS GROUP, INC.
RATIO OF EARNINGS TO FIXED CHARGES
(ALL AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1995
1995 PRO FORMA
1993 1994 ACTUAL AS ADJUSTED
---------------------------------------
<S> <C> <C> <C> <C>
EARNINGS:
Pre-tax income $ 4,898 $ 4,828 $ 6,076 $10,549
Interest and finance cost expense 8,628 9,335 12,625 9,160
Minority interest (65) 907 745 136
One third of leases 165 224 295 295
---------------------------------------
Earnings $13,626 $15,294 $19,741 $20,140
=======================================
FIXED CHARGES:
Interest and finance costs incurred $ 7,890 $11,684 $16,081 $12,535
Minority interest (65) 907 745 136
One third of leases 165 224 295 295
---------------------------------------
Fixed Charges $ 7,990 $12,815 $17,121 $12,966
=======================================
RATIO OF EARNINGS TO FIXED CHARGES 1.7 1.2 1.2 1.6
=======================================
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------------------
1995 1996
1995 PRO FORMA 1996 PRO FORMA
ACTUAL AS ADJUSTED ACTUAL AS ADJUSTED
-----------------------------------------
<S> <C> <C> <C> <C>
EARNINGS:
Pre-tax income $ 69 $ 501 $ 986 $1,169
Interest and finance cost expense 1,939 1,455 2,005 1,415
Minority interest 152 22 54 (3)
One third of leases 74 74 74 74
-----------------------------------------
Earnings $2,231 $2,052 $3,119 $2,655
=========================================
FIXED CHARGES:
Interest and finance costs incurred $3,076 $3,087 $3,377 $3,319
Minority interest 152 22 54 (3)
One third of leases 74 74 74 74
-----------------------------------------
Fixed Charges $3,302 $3,183 $3,505 $3,390
=========================================
DIFFERENTIAL OF FIXED CHARGES
WHICH EXCEEDS EARNINGS $1,071 $1,131 $ 386 $ 735
=========================================
</TABLE>
<PAGE>
Exhibit 23.3
INDEPENDENT AUDITOR'S CONSENT
We consent to the use in the Registration Statement and Prospectus of The
Fortress Group of our report dated December 12, 1995, accompanying the combined
financial statements of The Genesee Company and related entities contained in
such Registration Statement, and to the use of our name and the statements with
respect to us, as appearing under the heading "Experts" in the Prospectus.
/S/ HEIN & ASSOCIATES LLP
HEIN & ASSOCIATES LLP
Denver, Colorado
May 13, 1996
