UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended: September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _________to _________.
Commission file number: 0-28024
THE FORTRESS GROUP, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 54-1774997
- --------------------------------- ---------------------------------
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
1650 Tysons Boulevard, Suite 600, McLean, Virginia 22102
--------------------------------------------------------
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (703) 442-4545
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __
As of November 12, 1999, there were outstanding 12,198,906 shares of
common stock, par value $.01, of the registrant.
<PAGE>
THE FORTRESS GROUP, INC.
QUARTER ENDED September 30, 1999
INDEX
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1.
The Fortress Group, Inc.
Consolidated Balance Sheets (unaudited) 3
Consolidated Statements of Operations
(unaudited) 4
Consolidated Statements of Cash Flows
(unaudited) 6
Condensed Notes to Consolidated Financial
Statements (unaudited) 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 14
PART II - OTHER INFORMATION
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K. 20
(a) Exhibits.
(b) Reports on Form 8-K.
PART III -
SIGNATURES 21
EXHIBIT INDEX 22
2
<PAGE>
THE FORTRESS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
---- ----
(unaudited)
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 10,713 $ 23,102
Accounts and notes receivable 11,173 12,714
Real estate inventories 357,922 310,706
Land held for resale - 7,954
Mortgage loans 16,523 15,397
Investments in land partnerships 2,936 9,616
Property and equipment, net 13,500 13,785
Prepaid expenses and other assets 17,987 17,358
Goodwill, net 35,757 39,271
--------- ---------
Total assets $ 466,511 $ 449,903
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued construction liabilities $ 39,567 $ 35,501
Notes and mortgages payable 315,765 292,769
Accrued expenses 19,209 19,665
Customer deposits 14,425 10,708
--------- ---------
Total liabilities 388,966 358,643
--------- ---------
Minority interest 79 67
Obligation under Preferred Stock Redemption Agreement (See Note 6) 1,421 -
Shareholders' equity
Preferred stock, all classes and series, $.01 par value, 1 million
authorized (See Note 6 ) 1 1
Common stock, $.01 par value, 99 million authorized,
12,464,006 and 12,173,207 issued, respectively 125 122
Additional paid-in capital 54,860 71,313
Preferred subscription receivable (333) (333)
Retained earnings 22,613 21,311
Treasury stock, at cost, 265,100 shares (1,221) (1,221)
--------- ---------
Total shareholders' equity 76,045 91,193
--------- ---------
Total liabilities and shareholders' equity $ 466,511 $ 449,903
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
THE FORTRESS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
For the Three For the Three
Months Ended Months Ended
September 30, 1999 September 30, 1998
------------------ ------------------
<S> <C> <C>
TOTAL REVENUES $ 182,076 $ 175,668
------------ ------------
HOMEBUILDING:
Residential sales $ 176,245 $ 170,001
Lot sales and other 4,410 4,544
------------ ------------
Homebuilding revenues 180,655 174,545
Cost of sales 153,409 145,775
------------ ------------
Gross profit 27,246 28,770
Selling 11,337 10,887
General and administrative 8,464 9,663
Asset impairment charge 1,990 -
Goodwill amortization 603 596
------------ ------------
Net operating income 4,852 7,624
Other expense (income):
Interest expense 1,156 1,073
Interest (income) (147) (104)
Other, net (484) (581)
------------ ------------
Homebuilding income before taxes 4,327 7,236
FINANCIAL SERVICES:
Operating revenues 1,421 1,123
General, administrative and other expenses 1,619 1,162
Interest expense 316 179
Interest (income) (287) (160)
------------ ------------
Financial Services (loss) before taxes (227) (58)
Total income before taxes 4,100 7,178
Provision for income taxes 1,822 2,872
------------ ------------
Net income $ 2,278 $ 4,306
============ ============
Income available to common shareholders, basic $ 1,610 $ 3,660
============ ============
Income available to common shareholders, diluted $ 1,610 $ 4,306
============ ============
NET INCOME PER SHARE DATA (See Note 7):
Basic net income per share $ .13 $ .31
============ ============
Diluted net income per share $ .13 $ .16
============ ============
Basic weighted average shares outstanding 12,176,298 11,979,840
============ ============
Diluted weighted average shares outstanding 12,777,358 26,724,353
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
THE FORTRESS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
For the Nine For the Nine
Months Ended Months Ended
September 30, 1999 September 30, 1998
------------------ ------------------
<S> <C> <C>
TOTAL REVENUES $ 514,811 $ 462,679
------------ ------------
HOMEBUILDING:
Residential sales $ 502,504 $ 452,139
Lot sales and other 7,924 7,706
------------ ------------
Homebuilding revenues 510,428 459,845
Cost of sales 434,870 388,693
------------ ------------
Gross profit 75,558 71,152
Selling 33,496 29,855
General and administrative 25,595 24,472
Asset impairment charge 1,990 -
Special charges 1,270 -
Goodwill amortization 1,989 1,739
------------ ------------
Net operating income 11,218 15,086
------------ ------------
Other expense (income):
Interest expense 3,494 3,174
Interest (income) (422) (471)
Other, net (1,764) (1,134)
------------ ------------
Homebuilding income before taxes 9,910 13,517
FINANCIAL SERVICES:
Revenues 4,383 2,834
General, administrative and other expenses 4,364 2,896
Interest expense 875 525
Interest (income) (756) (540)
------------ ------------
Financial Services (loss) before taxes (100) (47)
Subtotal- Homebuilding & Financial Services 9,810 13,470
Loss on sale of Landmark Homes 2,900 -
------------ ------------
Total income before taxes 6,910 13,470
Provision for income taxes 3,147 5,391
------------ ------------
Net income $ 3,763 $ 8,079
============ ============
Income available to common shareholders, basic $ 1,302 $ 6,327
============ ============
Income available to common shareholders, diluted $ 1,302 $ 8,018
============ ============
NET INCOME PER SHARE DATA (See Note 7):
Basic net income per share $ 0.11 $ .54
============ ============
Diluted net income per share $ 0.10 $ .37
============ ============
Basic weighted average shares outstanding 12,091,545 11,798,929
============ ============
Diluted weighted average shares outstanding 12,782,702 21,524,512
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
THE FORTRESS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
<TABLE>
<CAPTION>
For the Nine For the Nine
Months Ended Months Ended
September 30, 1999 September 30, 1998
------------------ ------------------
<S> <C> <C>
Cash flows from operating activities
Net income $ 3,763 $ 8,079
Adjustments to reconcile net income to net cash (used in)/
provided by operating activities:
Depreciation and amortization 7,220 6,377
Minority interest (53)
Special charges 1,270
Asset impairment charge 1,990
(Gain) on sale of investment in land partnerships (291)
Loss on sale of Landmark Homes 2,900
Loss/(gain) on sale of property and equipment 34 (158)
Changes in operating assets and liabilities
Accounts and notes receivable 1,367 9,724
Real estate inventories (57,950) (34,793)
Land held for resale 7,954 (730)
Mortgage loans (1,126) (4,692)
Prepaid expenses and other assets (1,648) 544
Accounts payable and accrued construction liabilities 4,199 5,590
Accrued expenses 1,065 3,902
Customer deposits 3,804 6,417
--------- ---------
Net cash (used in)/provided by operating activities (25,449) 207
--------- ---------
Cash flows from investing activities
Acquisition of homebuilders, net of acquired cash (26,972)
Proceeds from sale of Landmark Homes, net of cash sold 3,078
Proceeds from sale of land partnership interests 5,351
Payment of contingent consideration (2,372) (2,034)
Purchase of property and equipment (4,235) (4,624)
Proceeds from sale of property and equipment 155 402
Distributions from/(investment in) land partnerships 1,960 (3,417)
--------- ---------
Net cash provided by/(used in) investing activities 3,937 (36,645)
--------- ---------
Cash flows from financing activities
Borrowings under notes and mortgages payable 514,469 450,038
Repayment of notes and mortgages payable (486,922) (431,761)
Borrowings from related parties 29 88
Repayment of related party borrowings (343) (368)
Proceeds from issuance of Class AA Preferred Stock, net 26,765
Conversion of preferred stock (1,693) (305)
Redemption of preferred stock (13,194) (684)
Other (net) (142) 59
Preferred dividends (3,081) (1,450)
Common dividends (89)
Purchase of treasury stock (693)
--------- ---------
Net cash provided by financing activities 9,123 41,600
--------- ---------
Net (decrease)/increase in cash and cash equivalents (12,389) 5,162
Cash and cash equivalents, beginning of period 23,102 12,406
--------- ---------
Cash and cash equivalents, end of period $ 10,713 $ 17,568
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
THE FORTRESS GROUP, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BUSINESS AND ORGANIZATION
The Fortress Group, Inc. ("Fortress" or the "Company") was formed in June 1995
to create a national homebuilding company for the acquisition and development of
land or improved lots and the construction of residential for-sale housing.
Fortress began operations simultaneous with the closing of its initial public
offering on May 21, 1996 (the "Offering"), and the acquisition of four
homebuilding companies:
<TABLE>
<CAPTION>
Homebuilder Market(s)
----------- ---------
<S> <C>
The Genesee Company ("Genesee") Denver and Fort Collins, Colorado and Tucson, Arizona
Buffington Homes, Inc. ("Buffington) Austin and San Antonio, Texas
Christopher Homes ("Christopher") Las Vegas, Nevada
Solaris Development Corp. ("Sunstar") Raleigh-Durham, North Carolina
</TABLE>
Subsequent to the Offering, Fortress acquired the following homebuilding
companies:
<TABLE>
<CAPTION>
Homebuilder Date Acquired Market(s)
----------- ------------- ---------
<S> <C> <C>
Landmark Homes, Inc. ("Landmark") August 31, 1996 Wilmington North Carolina,
(sold March 1999) Myrtle Beach, South Carolina
Brookstone Homes, Inc. ("Brookstone") December 31, 1996 Janesville, Madison, and Milwaukee
Wisconsin
D.W. Hutson Construction Company, now February 28, 1997 Jacksonville, Florida
known as Fortress Homes and Communities
of Florida ("Fortress Florida")
Wilshire Homes, Inc. ("Wilshire") April 1, 1997 Austin and San Antonio, Texas
Don Galloway Homes, Inc. ("Galloway") August 1, 1997 Charlotte, North Carolina and
Charleston, South Carolina
The Iacobucci Organization ("Iacobucci") October 1, 1997 Philadelphia, Pennsylvania
WestBrook Homes ("WestBrook") January 1, 1998 Loudoun County, Virginia
Whittaker Construction ("Whittaker") March 1, 1998 St. Louis, Missouri
Quail Construction ("Quail) April 1, 1998 Portland, Oregon
</TABLE>
In January 1997, Fortress formed Fortress Mortgage, Inc. ("Fortress Mortgage"),
a wholly-owned subsidiary, to provide mortgage-lending services to the Company's
builder subsidiaries. Fortress Mortgage currently provides mortgage services in
the Company's markets in Texas, Colorado, North Carolina, Nevada, Wisconsin,
Florida, Oregon, Pennsylvania, and Missouri.
The accompanying consolidated financial statements of Fortress have been
prepared by the Company. Certain information and footnote disclosures normally
included in financial statements presented in accordance with generally accepted
accounting principles have been condensed or omitted. The Company believes the
disclosures made are adequate to make the information presented not misleading.
However, the financial statements should be read in conjunction with the
financial statements of the Company and notes thereto included in the 1998
Annual Report on Form 10-K.
Interim results are not necessarily indicative of fiscal year performance
because of the impact of seasonal and short-term variations.
7
<PAGE>
NOTE 2 - BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Fortress, a Delaware corporation, and its majority-owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation. The results of companies acquired during the periods presented
are included from their respective dates of acquisition.
Certain amounts in the prior period financial statements have been reclassified
to conform to the current presentation.
NOTE 3 - REAL ESTATE INVENTORIES
Real estate inventories are summarized as follows (in thousands):
September 30, December 31,
1999 1998
---- ----
(unaudited)
Work-in-progress
Sold homes $137,388 $112,001
Speculative 64,554 68,288
-------- --------
Total work-in-progress 201,942 180,289
Land
Finished lots 106,856 76,824
Land under development 19,933 33,454
Unimproved land held for development 14,206 6,407
-------- --------
Total land 140,995 116,685
Lumber yard inventory 2,722 2,223
Model homes 12,263 11,509
-------- --------
$357,922 $310,706
======== ========
NOTE 4 - INTEREST
Information regarding interest is as follows (in thousands):
<TABLE>
<CAPTION>
For the Nine Months Ended September 30,
---------------------------------------
1999 1998
---- ----
(unaudited) (unaudited)
<S> <C> <C>
During the periods:
Interest incurred $ 25,128 $ 24,667
Interest capitalized (20,759) (20,968)
Interest amortized to cost of sales 19,289 15,662
-------- --------
Total interest expensed in statement of operations $ 23,658 $ 19,361
======== ========
At the end of the periods:
Capitalized interest in ending inventory $ 23,268 $ 26,426
======== ========
</TABLE>
8
<PAGE>
NOTE 5 - NOTES AND MORTGAGES PAYABLE
Notes and mortgages payable consist of the following (in thousands):
September 30, December 31,
1999 1998
---- ----
(unaudited)
13.75% Senior Notes due 2003 $ 100,000 $ 100,000
Project specific land, land development and
construction loans 200,506 180,144
Mortgage warehouse lines of credit 15,698 14,408
Other 3,573 3,069
--------- ---------
319,777 297,621
Less: Unamortized senior note issuance costs (4,012) (4,852)
--------- ---------
$ 315,765 $ 292,769
========= =========
The Company pays interest on the Senior Notes in arrears on May 15 and November
15 of each year at the rate of 13.75% per annum. The Senior Notes may not be
redeemed at any time prior to maturity. The Senior Notes are unsecured and rank
pari passu with, or senior in right of payment to, all other existing and future
unsecured indebtedness of the Company. The Senior Notes, however, are
effectively subordinated to secured debt of the Company to the extent of any
collateral, as well as to the Company's subsidiaries' indebtedness. The Company
is required to maintain a consolidated tangible net worth of at least $15
million and other financial covenants, as defined in the Senior Note Indenture.
The Company was in compliance with all financial covenants at September 30,
1999.
In addition, the Senior Note Indenture restricts certain payments including
dividends and repurchase or redemptions of stock. As of September 30, 1999, the
Company had in excess of $6 million available for such payments. However, the
Company also may make payments such as those described above from the
distribution of capital generated by subsidiaries designated as "unrestricted"
as defined in the Senior Note Indenture.
The loan agreements for project specific land, land development and construction
loans are secured by a lien on the applicable residential development project or
a specific unit under construction. Repayment of the loans are generally due
upon sale of the collateral property. The loans bear interest at annual variable
rates ranging from 2.0% over the London Interbank Offer Rate (LIBOR) to 1% over
prime rate and fixed rates generally from 8% to 12%. Certain of the subsidiary
credit facilities contain covenants that limit the Company's overall ratio of
debt to tangible net worth, and other covenants including minimum tangible net
worth, current ratio and interest coverage. In addition, many of the credit
facilities include similar covenants at the subsidiary level. The Company and
its subsidiaries were in compliance with all such covenants as of September 30,
1999.
The Company's mortgage subsidiary has two warehouse lines of credit outstanding
for the purpose of originating loans. The warehouse lines are secured by the
mortgage loans held for sale and are repaid upon sale of the mortgage loans. The
lines bear interest at variable rates ranging from 1.5% to 1.875% over the
Federal Funds Rate, based on the type of loan and lending requirements.
One of the Company's subsidiaries has a line of credit for the purpose of
purchasing lumber yard inventory. The line of credit matures October 1, 2001 and
bears interest at prime minus 1/2%. At September 30,1999 the total commitment
available is $2.0 million with $1.65 million currently outstanding. The
outstanding portion of this line is included in "other" above. The remainder of
other notes and mortgages payable consists primarily of debt financed corporate
insurance policies which bear interest at varying rates between 6.62% and 7.25%.
9
<PAGE>
NOTE 6 - CONVERTIBLE PREFERRED STOCK
The following are the Company's classes and series of preferred stock, amounts
designated, and amounts outstanding at September 30, 1999 and December 31, 1998:
Class AAA cumulative convertible (rate of 9% per annum), 40,000 designated,
28,500 and 0, respectively, issued and outstanding ($28.5 million
initial liquidation preference)
Class AA cumulative convertible (rate of 12% per annum decreased to 6% on March
6, 1998), 53,333 designated, 0 and 40,000, respectively, issued and
outstanding ($40 million initial liquidation preference)
Series A 11% cumulative convertible, 20,000 designated, 0 issued and outstanding
Series B convertible, 40,000 designated, 0 issued and outstanding
Series C convertible, 70,000 designated, 18,493 and 39,656, respectively,
issuable (See below)
Series D convertible, 67,500 designated, 30,000 and 45,000 issued and
outstanding ($3,000,000 aggregate liquidation preference)
Series E 6% convertible, 50,000 designated, 17,443 and 19,381, respectively,
issued and outstanding ($1,744,300 aggregate liquidation preference)
Series F convertible, 5,000 designated, 5,000 issued and outstanding ($500,000
aggregate liquidation preference)
Under a Restructuring Agreement dated December 31, 1998 between the Company and
Prometheus, the Company issued to Prometheus, effective February 4, 1999, 40,000
shares of Class AAA Redeemable Convertible Preferred Stock having an initial
liquidation value of $40,000,000 in exchange for the outstanding 40,000 shares
of Class AA Convertible Preferred Stock having a liquidation value of
$40,000,000 held by Prometheus. In addition the Company issued Prometheus
Supplemental Warrants convertible into common stock. Please refer to the
Company's financial statements as reported on Form 10-K for the year ended
December 31, 1998 (Note 9 - Shareholders' Equity and Note 17 - Subsequent
Events) for further information on the classes and terms of preferred stock and
warrants.
During the second quarter of 1999, the Company redeemed 11,500 shares of Class
AAA stock, ($11,500,000 liquidation value). Consequently, in addition to
reducing the number of preferred shares outstanding, the Company has reduced,
pro-rata, the number of Supplemental Warrants potentially issuable under its
Supplemental Warrant Agreement. As of September 30, 1999 the Company had issued
and outstanding 28,500 shares of Class AAA cumulative convertible preferred
stock and outstanding Supplemental Warrants (not exercisable before September
30, 2001) providing for the issuance of between 0 and 23,750,000 shares of
additional common stock.
In accordance with the restructuring agreement when redeeming Class AAA stock,
the Company is obligated to provide Prometheus with a 20% return on its
investment for the amount of stock redeemed. A portion of the $5 million dollar
dividend paid to Prometheus in December 1998 has been applied to meet the 20%
return requirement for the stock redeemed to date. No additional cash, in excess
of the principal amount of $11.5 million, was required to redeem the 11,500
preferred shares.
As a result of the redemption of the 11,500 shares of Class AAA stock,
Prometheus may require the Company to arrange for the sale by February 15, 2001
of a pro rata portion, 258,418 shares, of the 898,845 shares of common stock
held by Prometheus and deliver a minimum of $5.50 per share to Prometheus. The
Company's actual cost will be the difference, if any, between $5.50 per share
and the amount realized from the sale of the stock. The Company has recorded
this obligation, at $5.50 per share, as a reduction to its Additional
Paid-In-Capital and an increase in Obligation Under Preferred Stock Redemption
Agreement.
The number of shares into which each Supplemental Warrant may be exercisable
will be subject to certain customary anti-dilution adjustments. The
exercisability of the Supplemental Warrants would also be subject to a revenue
test, which provides that the Supplemental Warrants may not be exercised unless
the Company's consolidated revenues for the most recent 16 full fiscal quarters
exceeds $2,429,190,500. The revenue test is subject to adjustment for the sale
of any Company subsidiary. As of September 30, 1999, for purposes of the revenue
test, the Company's cumulative consolidated revenues for the most recent sixteen
quarters were $1,984,330,000.
In addition, the Company is required to maintain a minimum annualized revenue
amount of $610 million for the last four quarters tested, which is adjusted to
$590 million for the four-quarter period ended March
10
<PAGE>
31, 2001 and June 30, 2001. The minimum annualized revenue is subject to further
adjustment for the sale of Company subsidiaries. At September 30, 1999 the
Company met or exceeded the revenue test.
The Series C stock (18,493 shares as of September 30, 1999) has been treated as
outstanding for the purpose of calculating earnings per share; however, it will
only be legally outstanding upon issuance.
NOTE 7 - EARNINGS PER SHARE
The following table reconciles the numerators (income) and the denominators
(shares) of the basic and diluted per-share computations (dollars in thousands):
<TABLE>
<CAPTION>
For the three months For the nine months
ended September 30, ended September 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $ 2,278 $ 4,306 3,763 $ 8,079
Less preferred stock dividends (668) (629) (2,461) (1,701)
Less imputed preferred stock dividend 0 (17) 0 (51)
------------ ------------ ------------ ------------
Income available to common shareholders $ 1,610 $ 3,660 $ 1,302 $ 6,327
============ ============ ============ ============
Basic EPS
Income available to common shareholders $ 1,610 $ 3,660 $ 1,302 $ 6,327
Weighted average number of common shares outstanding 12,176,298 11,979,840 12,091,545 11,798,929
Basic earnings per share $ .13 $ .31 $ .11 $ .54
============ ============ ============ ============
Diluted EPS
Income available to common shareholders, basic $ 1,610 $ 3,660 1,302 $ 6,327
Plus preferred stock dividends 0 646 0 1,691
------------ ------------ ------------ ------------
Income available to common shareholders, diluted $ 1,610 $ 4,306 $ 1,302 $ 8,018
============ ============ ============ ============
Weighted average number of common shares outstanding 12,176,298 11,979,840 12,091,545 11,798,929
Effect of dilutive securities:
Preferred stock 601,060 14,482,185 691,157 9,435,622
Options 0 3,967 0 5,577
Restricted stock 0 20,000 0 21,502
Warrants 0 238,361 0 262,882
------------ ------------ ------------ ------------
Weighted avg. number of common shares outstanding, diluted 12,777,358 26,724,353 12,782,702 21,524,512
============ ============ ============ ============
Diluted earnings per share $ .13 $ .16 $ .10 $ .37
============ ============ ============ ============
</TABLE>
The Company's intention upon conversion or redemption (as the case may be) of
Series B, C, D, E and F (See Note 9-Shareholders' Equity Form 10-K) is to issue
Common Stock on the basis of the 10-for-1 conversion ratio contemplated in the
respective agreements and to pay cash for the difference between the $100
liquidation value per share and the market value of the Common Stock converted
at 10-for-1. Accordingly, the Company has included, in its calculation of
earnings per share for the three months ended September 30, 1999, an additional
601,060 shares of common stock to be issued under the "if converted" method at
the 10-for-1 conversion ratio.
The following shares were not included in the computation of diluted EPS for the
three and nine months ended September 30, 1999 and 1998 because the effect of
adding back the related dividends and the weighted average common shares was
antidilutive:
11
<PAGE>
<TABLE>
<CAPTION>
------------------------1999---------------------- -----------------------1998-----------------------
Outstanding Convertible Convertible
at into Potential Outstanding into Potential
September Common Common stock at September Common Common stock
Class/ Series 30, shares outstanding 30, shares outstanding
Three Nine Three Nine
Months Months Months Months
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Class AAA 28,500 4,750,000 4,750,000 4,794,811 0 0 N/A N/A
Class AA 0 0 0 2,490,842 40,000 6,666,667 Dilutive Dilutive
Series A 0 0 0 0 0 0 0 Dilutive
Series B 0 0 0 0 276 2,760 Dilutive Dilutive
Series C 18,493 184,930 Dilutive Dilutive 39,656 396,560 Dilutive Dilutive
Series D 30,000 300,000 Dilutive Dilutive 45,000 450,000 Dilutive Dilutive
Series E 17,443 174,430 175,780 185,632 19,381 193,810 Dilutive 140,173
Series F 5,000 50,000 Dilutive Dilutive 5,000 50,000 Dilutive Dilutive
</TABLE>
NOTE 8 - SALE OF ASSETS AND SPECIAL CHARGES
On March 26, 1999, the Company sold the assets of Landmark and realized a loss
of $2.9 million. As of the disposition date, Landmark had total assets of
approximately $11.3 million, which included unrecovered goodwill of
approximately $3.0 million. The total selling price was approximately $8.3
million.
On March 31, 1999 the Company, as part of a restructuring of its Texas
operations, sold its interest in several land partnerships in its Austin and San
Antonio markets. The total proceeds to the Company from this sale were
approximately $5.4 million and were received in April 1999. The gain on the sale
of these partnership interests of approximately $291,000 is included in other
income in the accompanying Consolidated Statement of Operations.
Included in operating expenses for the nine months ended September 30, 1999 are
costs related to the restructuring of two of the Company's operating
subsidiaries, Wilshire (formerly operating as Buffington) and WestBrook.
Concurrent with the decision to sell its interest in several land partnerships
in Texas, the Company decided to exit certain communities. Restructuring costs
totaling $480,000 related to employee severance, carrying costs for model homes,
and the write off of other product-line related assets that were determined to
provide no future benefit under the restructured Wilshire operation. As of
September 30, 1999, approximately $324,000 of the estimated restructuring costs
had been paid and charged against the liability. The remaining restructuring
costs are expected to be incurred within approximately three months.
In addition, during the second quarter of 1999 the Company decided to wind down
the operations of its WestBrook Homes subsidiary. Charges taken during the first
quarter of 1999 totaled $790,000 and included the write off of land purchase
deposits, previously capitalized architectural costs, other land development
costs and $294,000 in remaining goodwill. As of September 30, 1999, all of these
costs had been incurred and there is no outstanding liability. WestBrook is
expected to build out its current inventory within approximately three months
and is not expected to incur additional significant write offs beyond those
charges taken earlier in the year.
During the nine months ended September 30, 1999 the Company sold a 960-acre
parcel of land located in Raleigh, North Carolina. The land had been carried on
the Company's books as land held for resale. The $8.2 million sales price for
the property resulted in a gain of approximately $108,000. The gain on the sale
of this property is reflected in the income statement as other income.
NOTE 9 - ASSET IMPAIRMENT CHARGE
During the quarter, the Company evaluated the carrying value of two communities
in its Las Vegas market. The fair value of the communities was determined using
a discounted cash flow projection of future revenues and current and projected
costs. The Company determined that an adjustment to current carrying value was
appropriate in accordance with Statement of Financial Accounting Standard No.
121
12
<PAGE>
(Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of). The assets involved include developed lots, homes under
construction, and completed homes. These two communities are scheduled to be
closed out during the year 2000 with a total of 45 homes remaining to close.
Based on the analysis of fair value, referenced above, the Company recognized
during the third quarter an asset impairment charge of approximately $2.0
million. This charge has been included in the Company's determination of Net
Operating Income.
13
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The following table sets forth for the periods indicated certain items of the
Company's unaudited consolidated financial statements in dollars (expressed in
thousands) and as a percentage of the Company's total revenues and segment
revenues:
<TABLE>
<CAPTION>
For the Three For the Three
Months Ended Months Ended
September 30, 1999 September 30, 1998
------------------ ------------------
<S> <C> <C> <C> <C> <C> <C>
Total revenues $182,076 100.0% $175,668 100.0%
Homebuilding revenues 180,655 99.2% 100.0% 174,545 99.4% 100.0%
Homebuilding gross profit 27,246 15.0% 15.1% 28,770 16.4% 16.5%
Homebuilding income before special
charges and taxes 6,317 3.5% 3.5% 7,236 4.1% 4.1%
Homebuilding income before taxes 4,327 2.4% 2.4% 7,236 4.1% 4.1%
Financial Services revenues 1,421 0.8% 100.0% 1,123 0.6% 100.0%
Financial Services general, administrative
and other expenses 1,619 0.9% 113.9% 1,162 0.7% 103.5%
Financial Services (loss) before taxes (227) (0.1)% (16.0)% (58) - (5.2)%
Net income 2,278 1.3% 4,306 2.5%
<CAPTION>
For the Nine For the Nine
Months Ended Months Ended
September 30, 1999 September 30, 1998
------------------ ------------------
<S> <C> <C> <C> <C> <C> <C>
Total revenues $514,811 100.0% $462,679 100.0%
Homebuilding revenues 510,428 99.1% 100.0% 459,845 99.4% 100.0%
Homebuilding gross profit 75,558 14.7% 14.8% 71,152 15.4% 15.5%
Homebuilding income before special
charges and taxes 13,170 2.6% 2.6% 13,517 2.9% 2.9%
Homebuilding income before taxes 9,910 1.9% 1.9% 13,517 2.9% 2.9%
Financial Services revenues 4,383 0.9% 100.0% 2,834 0.6% 100.0%
Financial Services general, administrative
and other expenses 4,364 0.8% 99.6% 2,896 0.6% 102.2%
Financial Services (loss) before taxes (100) - (2.3)% (47) - (1.7)%
Loss on Sale of Landmark Homes (2,900) (0.6)% -
Net income 3,763 0.7% 8,079 1.7%
</TABLE>
Consolidated Results of Operations
Comparison of the Company's Results of Operations for the Three and Nine Months
Ended September 30, 1999 and 1998.
Homebuilding Operations
General
<TABLE>
<CAPTION>
New Orders, Net Closings Backlog1 at September 30,
--------------- -------- -------------------------
Three Months Nine Months Three Months Nine Months
1999 1998 1999 1998 1999 1998 1999 1998 1999 1998
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
State
Arizona 12 28 31 62 7 19 51 34 14 37
Colorado 57 72 232 304 73 79 226 250 189 237
Florida 160 175 665 675 189 168 548 497 416 329
Missouri 89 133 383 338 161 137 415 295 156 207
Nevada 26 51 95 134 25 21 76 70 105 127
New Jersey 4 N/A 12 N/A 7 N/A 7 N/A 5 N/A
North Carolina 157 175 560 585 176 180 498 495 305 342
Oregon 26 27 67 36 16 26 45 30 33 16
Pennsylvania 26 48 114 171 35 58 120 159 47 61
South Carolina 45 41 118 144 37 52 98 143 101 79
Texas 155 211 523 755 177 209 574 603 249 401
Virginia 1 11 18 40 10 12 26 26 9 26
Washington 11 25 38 47 11 33 30 50 10 11
Wisconsin 43 48 174 187 57 48 161 112 74 97
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total 812 1,045 3,030 3,478 981 1,042 2,875 2,764 1,713 1,970
</TABLE>
- --------
1 Backlog represents homes sold but not yet closed.
14
<PAGE>
The Company achieved net new orders of 812 homes and 3,030 homes for the three
and nine months ended September 30, 1999 compared to 1,045 homes and 3,478 homes
for the same periods in 1998, a decrease of 22.3% for the three-month period and
12.9% for the nine-month period. When adjusted for the disposition changes, (See
Note 8 - Sale of Assets and Special Charges) the decline was 15.7% for the
three-month period and 10.9% for the nine-months. The balance of the decline for
both the quarter and nine months is in large part due to a reduction in the
number of communities in which the Company operates. During the year the Company
has experienced delays in the acquisition, permitting and/or completion of lots
affecting the continuity and growth in the number of communities from which to
sell homes. The Company has moved to improve the processes, systems and
reporting of supply management indicators to mitigate this situation in the
future.
The Company has a combined backlog of 1,713 homes, with a dollar value of $345.1
million at September 30, 1999, as compared to 1,970 homes, with a dollar value
of $376.4 million at September 30, 1998. This 13.0% decline in the number of
homes in backlog is consistent overall with the effect brought about by the
disposition decisions mentioned above combined with the reduction in new orders
during the quarter noted above. Average backlog value per home has increased
5.4% from $191,100 in 1998 to $201,400 at September 30, 1999, reflecting
increases in selling prices rather than any significant change in the mix of
products in backlog.
Revenues
Homebuilding revenues for the third quarter of 1999 were $180.7 million, as
compared to $174.5 million for the same period of 1998, representing an increase
of 3.6%. The decline in the number of homes closed was more than offset by an
increase in the average price of homes closed (approximately $184,200 for the
third quarter of 1999 as compared to approximately $167,500 in the third quarter
of 1998). For the nine-month period, revenues were $510.4 million, an 11.0%
increase over the $459.8 million reported for the same period last year. A 4.0%
increase in the number of homes closed (2,875 in the nine-month period ending
September 30, 1999 versus 2,764 in the comparable period of 1998) as well as a
6.7% increase in the average price of homes closed (approximately $177,500
versus $166,400) contributed to the year over year growth.
Gross Profit
Gross profit for the quarter ended September 30, 1999 was $27.2 million, as
compared to $28.8 million for the comparable period of 1998. Gross profit
margins for the quarter declined from 16.5% in 1998 to 15.1% in 1999. Although
on a per home closed basis, gross profit for the quarter increased a marginal
$200, gross profit and gross profit margins were impacted, in large part, by
reduced margin levels in our Las Vegas division, which impact we expect to
continue through the next physical year. For the nine-month period gross profit
increased 6.3% to $75.6 million from $71.1 million last year. The increase in
gross profit resulting primarily from increased closings was offset in part by a
reduction in gross profit margin including the reduced margin levels noted
above. For the nine-month period gross profit per home closed increased
approximately $600.
Operating Expenses
Operating expenses (including selling, general and administrative, asset
impairment charges, and goodwill amortization) for the quarters ended September
30, 1999 and 1998 were $22.4 million (12.4% of revenue) and $21.1 million (12.1%
of revenue), respectively. For the nine month period ended September 30, 1999
and 1998, total operating expenses including selling, general and
administrative, asset impairment charges, restructuring charges, and goodwill
amortization were $64.3 million (12.6% of revenue) and $56.1 million (12.2% of
revenue). The Company recognized $2.0 million in asset impairment charges during
the quarter ended September 30, 1999 pertaining to the write down of land and
work-in-process inventory in two communities nearing close-out in our Las Vegas
market. (See Note 9 -Asset Impairment Charge). The
15
<PAGE>
company also recognized $1.3 million in special charges during the quarter ended
March 31, 1999 pertaining to restructuring costs associated with several of its
subsidiaries (See Note 8 - Sale of Assets and Special Charges). Excluding the
impact of these charges, total operating expenses for the three months ended
September 30, 1999 and 1998 would have been $20.4 million (11.3% of revenue) and
$21.1 million (12.1% of revenue) respectively, and for the nine months would
have been $61.0 million (12.0% of revenue) and $56.1 million (12.2% of revenue)
respectively.
Selling expenses increased to $11.3 million (6.3% of revenue) for the quarter
ended September 30, 1999 as compared to $10.9 million (6.2% of revenue) for the
same period of 1998. For the nine-month period selling expenses increased to
$33.5 million (6.6% of revenue) as compared to $29.9 million (6.5% of revenue)
for the same period of 1998. The increases for the quarter and nine months
generally reflect the increase in revenues, although a portion of the increase
reflects higher model home related expenses.
General and administrative expenses were $8.5 million (4.7% of revenue) for the
third quarter of 1999, as compared to $9.7 million (5.5% of revenue) for the
third quarter of 1998. For the nine-month period general and administrative
expenses were $25.6 million (5.0% of revenues) as compared to $24.5 million
(5.3% of revenues) in 1998. The increase for the nine-month period over last
year reflects an increase due to the additional general and administrative costs
related to acquisitions in the first quarter of 1998. Additionally the
implementation of Statement of Position 98-1 (SOP 98-1) (Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use), which
requires these costs to be expensed as incurred, accounted for a portion of the
increase. The amortization and depreciation of these information and technology
costs, which were capitalized in prior years, is also a factor contributing to
this increase.
During the quarter, the Company evaluated the carrying value of two communities
in its Las Vegas market and determined that an adjustment was appropriate in
accordance with Statement of Financial Accounting Standard No. 121 (Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of). (See Note 9 -Asset Impairment Charge) These two communities are scheduled
to be closed out during the year 2000 with a total of 45 homes remaining to
close. Consequently, the Company recognized an impairment charge of
approximately $2.0 million, in the third quarter. This charge has been included
in the Company's determination of Net Operating Income.
Homebuilding Pretax
Homebuilding pretax income declined for the third quarter to $4.3 million (2.4%
of revenues) from $7.2 million (4.1% of revenues) in the prior year. As noted
above, the decline in gross profit and the asset impairment charge were the
primary factors in this decline. For the nine-month period, homebuilding pretax
income declined from $13.5 million in 1998 to $9.9 million in 1999. Excluding
the impact of the restructuring and asset impairment charges discussed above,
homebuilding pretax income for this period declined $347,000 or 3.0%. Gross
profit dollar increases, driven by higher revenue volume, were offset by
operating expense increases, both of which are discussed above.
Excluding the effect of the dispositions noted earlier, and excluding the
operations and impact of our Las Vegas division, homebuilding pretax income
would have been $7.3 million (4.4% of revenues) for the third quarter of 1999
compared to $7.0 million (4.5% of revenues) for the prior year quarter. For the
nine-month period, adjusted as above and further adjusted to eliminate the
impact of acquisitions during the first and second quarter of 1998 for
comparability, Homebuilding pretax income would have been $16.0 million (3.5% of
revenues) in 1999 compared with $14.0 million (3.3% of revenues) in the same
period in 1998.
Financial Services Operations
Fortress Mortgage's closing volume, number of mortgages originated, and capture
rates for the third quarter and nine month period all increased from the
comparable periods of 1998. These increases resulted from additional volume
generated at five Fortress Mortgage branches that began operating during 1998 as
well as increased capture rates at other branches.
Revenue for the three months ended September 30, 1999 increased 27.3% to $1.4
million from $1.1 million for the comparable period of 1998 due to the increased
closing volume. These revenues increased 57.1% to $4.4 million from $2.8 million
for the nine-month period.
16
<PAGE>
Financial services pretax (loss) generated by Fortress Mortgage was ($227,000)
for the third quarter of 1999, as compared to ($58,000) for the third quarter of
1998. Market conditions during the third quarter led to increased competitive
pressure and reduced margins on loans originated. General, administrative and
other expenses increased to $1.6 million from $1.2 million in the third quarter
of 1998. These increases resulted from increases in some loan related expenses
as well increases due to the expansion into new markets during late 1998. For
the nine months ended September 30, 1999 financial services pretax (loss) was
($100,000) as compared to ($47,000) for the prior period. This decline is the
result of the same conditions that impacted the third quarter.
Loss on Sale of Landmark Homes
The Company sold the assets of Landmark Homes in March 1999 as part of its
strategy to redeploy capital invested in under-performing assets. Concurrent
with the sale of these assets the Company exited the Wilmington, North Carolina
and Myrtle Beach, South Carolina markets. The Company recognized a pretax loss
of $2.9 million on this disposition, due primarily to unrecovered goodwill of
approximately $3.0 million.
Net Income
Due to the previously described factors and the income tax effect thereof, net
income for the three months ended September 30, 1999 was $2.3 million, a 46.5%
decrease from the $4.3 million achieved in the comparable period of 1998. For
the nine-month period ended September 30, 1999, net income was $3.8 million a,
$4.3 million decline from the same period a year ago.
The restructuring of the Prometheus agreement resulted in an increase in the
preferred dividend rate related to that class of stock from 6% to 9% annually.
This change in preferred rate along with changes in the amount of preferred
investment outstanding resulted in an increase in the amount of preferred
dividends impacting net income per share.
Excluding the impact of the asset impairment charge, the restructuring charge
and the sale of Landmark, the Company's income per share on a diluted basis
would have been $0.20 for the three months and $0.36 for the nine months ended
September 30, 1999.
Earnings before interest, taxes, depreciation and amortization (EBITDA)
increased 1.9% to $16.3 million for the three months ended September 30, 1999,
as compared to $16.0 million for the same period in 1998. For the nine-month
period EBITDA increased 11.8% to $42.6 million for the current year, from $38.1
million in 1998. EBITDA is provided as a supplemental measurement of the
Company's operating performance. EBITDA does not represent cash flows from
operations as defined by GAAP and should not be considered as an alternative to
net income as an indicator of the Company's operating performance or to cash
flows as a measure of liquidity. In addition, EBITDA measures presented by the
Company may not be comparable to other similarly titled measures of other
companies.
Liquidity and Capital Resources
The Company's operating activities involve several components, principally home
construction, land development, and mortgage loan origination for home
purchasers. During the nine months ended September 30, 1999, the Company's
operating activities, taken in the aggregate, utilized approximately $25.4
million of cash. This cash utilization was primarily the result of increases in
inventories of approximately $58.0 million, which is consistent with the
Company's growth in its backlog and the seasonal nature of the homebuilding
industry. Offsetting this inventory buildup were reductions in land held for
resale, through the sale of a parcel of land in North Carolina, for $8.0
million, increases in trade payables of $4.2 million, and increases in customer
deposits of $3.8 million.
The majority of the Company's investing activities during the nine months--net
cash provided of $3.9 million--related to proceeds from the sale of Landmark
($3.1 million net) and proceeds from the sale of land partnership interests
($5.4 million). These investment cash flows were offset by (a) additional
consideration under the earnout provisions of prior period acquisitions ($2.4
million), and (b) property and equipment expenditures ($4.2) million.
17
<PAGE>
Financing activities provided $9.1 million of cash flow, primarily through net
borrowings under notes and mortgages payable of $27.6 million, offset by $13.2
million in redemptions of preferred stock and $3.1 million in the payment of
preferred dividends.
Management believes that funds available through the existing credit facilities
coupled with the cash on hand and cash generated through operations will be
adequate for the anticipated cash needs of its current operations for the
foreseeable future. As of September 30, 1999, the Company had cash and cash
equivalents on hand of $10.7 million.
At September 30, 1999, the Company had 4,276 lots in inventory beyond those
already in backlog. This represents, in aggregate, an estimated sixteen-month
supply of land based on sales absorption rates for the nine months of 1999. One
of the Company's operating strategies is to keep a relatively low supply of
finished lots and lots under development in order to manage and minimize risk
associated with land ownership. The Company utilizes land options and
investments in land limited partnerships as methods of controlling and
subsequently acquiring land. In markets where lot options are not readily
available to meet its needs, the Company is pursuing additional off-balance
sheet arrangements to reduce its economic risk and improve its liquidity. The
Company plans to continue these practices and expects to exercise, subject to
market conditions, substantially all of its option contracts. At September 30,
1999, the Company had an additional 7,075 lots under option representing
approximately a two-year supply of land based on the same absorption rates as
above.
Year 2000
As computer systems and other business equipment are embedded with chips or
processors that use only two digits to represent the year or are programmed with
software that uses such a two digit system, they may be unable to accurately
process certain data before, during or after January 1, 2000. If not addressed
and corrected, such programs and chips may cause computer systems to fail or to
miscalculate data. This issue is commonly referred to as the "Y2K" issue.
In conjunction with the ongoing process of converting all of its builder
subsidiaries to an integrated computer information system ("ICIS"), Fortress
began the project of addressing the Y2K issue during 1998. The Company's project
is directed at modifying or replacing portions of its existing computer systems
to ensure that they will function properly with respect to dates in the year
2000 and thereafter. The Company's plan encompasses both information technology
systems and non-information technology systems, such as chips embedded in its
security systems, office equipment, and facilities.
The general phases of the Company's plan include the following: (1) plan and
ensure company-wide awareness of the Y2K issue, (2) inventory all possible Y2K
risks, (3) assess inventory (including identification of non-Y2K compliant
items, prioritize inventory into mission-critical and non-mission-critical
categories, and plan for repair and replacement of non-compliant items), (4)
repair or replace non-Y2K compliant items, (5) plan and execute Y2K testing, and
(6) design and implement contingency plans for non-compliant items. Due to the
Company's structure and its ongoing computer information system rollout, the
Company is in different phases of implementation of its plan at its different
subsidiaries.
As of September 30, 1999, the Company believes that its key homebuilding
business systems are Year 2000 compliant. However, certain data, voice
communication and financial service's systems are in the process of being
replaced or upgraded. The IT group has not yet identified any office system that
will not be Y2K compliant before year end.
The Company is currently assessing whether third parties with which the Company
and its operating subsidiaries have a material relationship are Y2K compliant.
The Company's assessments with respect to these third party verification
projects was substantially completed as of September 30, 1999. As part of this
assessment, the Company has examined its relationships with suppliers,
subcontractors, financial institutions and other third parties to determine the
status of their Y2K efforts as related to the Company. As a general matter, the
Company is vulnerable to significant suppliers' inability to remedy their own
Y2K issues. Furthermore, the Company relies on financial institutions,
government agencies (particularly for zoning, building permits and related
matter), utility companies, telecommunication service companies and other
service providers outside of its control. While certain third parties
significant to the Company's business have provided certain assurances regarding
their intentions to be Y2K compliant, there is no assurance that such third
parties will not suffer a Y2K business disruption. It is conceivable that such
18
<PAGE>
failures could, in turn, have a material adverse effect on the Company's results
of operations, financial condition, and liquidity.
Costs
- -----
As the Company's Y2K project has been combined with the ICIS project, many areas
of the project would have been undertaken regardless of the Y2K issue.
Management currently estimates that the total cost of the ICIS project will be
approximately $5.0 to $5.5 million; however, it is not possible to determine the
portion of that amount which is specifically attributable only to the Y2K
compliance work. The increase in estimates reflects an expansion of the scope of
the ICIS project. The total amount expended on the ICIS project work from
inception to September 30, 1999 was approximately $4.3 million. The Company
believes that the costs to specifically address the Y2K issue will not have a
significant impact on the Company's results of operations, financial condition,
or liquidity for any year in the reasonably foreseeable future. The plan for the
successful completion of the Company's Y2K project and the estimated total costs
are based upon certain assumptions by management regarding future events,
including the continued availability of qualified resources to implement the
program and the cost of such resources.
Risks
- -----
The Company acknowledges that its failure to resolve a material Y2K issue could
result in the interruption in, or a failure of, certain normal business
activities or operations. Possible risks of Y2K failure include among other
risks, delays or errors with respect to payments, third-party delivery of
materials, and government approvals. Such failures could materially adversely
affect the Company's results of operations. Although the Company generally
considers its exposure to the Y2K issue risks from third party suppliers as
generally low, due to the uncertainty of the Y2K readiness of third-party
suppliers, the Company is unable to determine at this time whether the
consequences of Y2K failures will have a material impact on the Company's
results of operations, financial condition, or liquidity. In addition, the
Company could be materially adversely affected by Y2K system failures at
government agencies on which the Company is dependent for zoning, building
permits, and related matters. Further, the Company could be materially adversely
affected if Y2K system failures result in widespread economic or financial
market disruption. The Company's Y2K project is expected to significantly reduce
the Company's level of uncertainty and exposure to the Y2K issue. To date, the
Company has not identified any operating systems, either of its own or of a
material third-party supplier, that present a material risk of not being Y2K
compliant or for which a suitable alternative cannot be implemented.
Contingency Plan
- ----------------
The Company's Y2K preliminary contingency plan focused on whether it would be
feasible to get non-compliant builder subsidiaries converted to the Company-wide
ICIS. As of September 30, 1999, all builders are believed to be Y2K compliant
for core business applications. During the fourth quarter of 1999, the Company
will continue to assess the need for further contingency planning as it relates
to the operation of our systems and the operation of material third-party
suppliers. While management expects that the company will not experience
material adverse consequences in connection with the Y2K issue as it relates to
its internal operating system, no assurance can be given that the system will
operate as expected in the Year 2000. See "Risks" section above and "Statement
on Forward-Looking Information".
Statement on Forward-Looking Information
Certain information included in this report is "forward-looking" within the
meaning of the Private Securities Litigation Reform Act of 1995. You can
identify this information by use of words like "may," "will," "expect,"
"anticipate," "estimate," or "continue" or similar expressions. Such statements
represent the Company's judgment and involve known and unknown risks,
uncertainties and other factors that may cause actual results to differ
materially from those expressed or implied in the forward-looking statements.
Such risks, uncertainties and other factors include, but are not limited to,
fluctuations in interest rates, availability of raw materials and labor costs,
levels of competition, housing demand in our markets, the effect of government
regulation, the availability of capital, the price of the Company's common
stock, weather conditions, changes in general economic conditions and other
factors which may adversely effect The Fortress Group's operating results
including earnings and/or those of acquired homebuilders or earnings per share.
19
<PAGE>
PART II - OTHER INFORMATION
Item 5. Other Information.
Effective July 1, 1999 Sandra Lamb was elected to the board as a Preferred
director to fill a vacancy that had been created earlier.
Effective July 3, 1999 J. Marshall Coleman resigned as a director of the
Company.
Effective September 30, 1999 Klaus P. Kretschmann, a Preferred director,
resigned as a director of the Company.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Number Description
------ -----------
10 Option Agreement
27 Financial Data Schedule
(b) Reports on Form 8-K.
None
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE FORTRESS GROUP, INC.
Date: 11/15/99 By: /S/ George C. Yeonas
-------- -------------------------------------
George C. Yeonas
President and Chief Executive Officer
Date: 11/15/99 By: /S/ Jeffrey W. Shirley
-------- -------------------------------------
Jeffrey W. Shirley
Vice President of Finance
(Principal Financial Officer)
21
<PAGE>
EXHIBIT INDEX
Number Description Page
------ ----------- ----
10 Option Agreement
27 Financial Data Schedule
22
Exhibit 10
OPTION AGREEMENT
between
THE GENESEE COMPANY,
a Colorado corporation,
as Purchaser,
and
RS INVESTMENTS VI, LLC,
a Colorado limited liability company
as Seller
September 16, 1999
<PAGE>
OPTION AGREEMENT
THIS OPTION AGREEMENT (this "Agreement") is made as of the 16th day of
September, 1999 (the "Effective Date"), by and between THE GENESEE COMPANY, a
Colorado corporation ("Purchaser"), and RS INVESTMENTS VI, LLC, a Colorado
limited liability company ("Seller").
Recitals
A. Seller has agreed to grant an option to Purchaser for the purchase
of certain real property located in the County of Douglas, State of Colorado,
and more particularly described in Exhibit A attached hereto and made a part
hereof, on the terms and provisions set forth herein.
B. As used in this Agreement, the term "Property" includes all of the
following:
(1) The real property described in Exhibit A together with all
easements, rights-of-way, appurtenances, leases, subleases, agreements,
licenses, tenements and hereditaments appertaining to or otherwise benefiting or
used in connection with such real property, together with all of Seller's right,
title and interest in and to any strips of land, streets, and alleys abutting or
adjoining such real property (the "Real Property");
(2) All right, title and interest of Seller in and to all
governmental permits, licenses, certificates and authorizations relating to the
construction, development, use or operation of the Property, to the extent that
they relate to the Property and are assignable (the "Permits"); and
(3) A nonexclusive interests in Seller's interest in all site
plans, surveys, plats, plans, soil and substratus studies, architectural,
construction, road, drainage and utility drawings, plans and specifications,
engineering plans and studies, landscape plans, appraisals, marketing,
feasibility and environmental studies, and other plans and studies of any kind
if existing and in Seller's possession or control that relate to the Property,
to the extent that they relate to the Property and are assignable (the "Plans").
(4) All water and water rights, wells and well permits and
rights, ditches and ditch rights, reservoir and reservoir rights, and ditch and
water company stock, if any, appurtenant to the Real Property, whether in the
nature of tributary, non-tributary or not non-tributary interests (collectively,
the "Water Rights");
(5) All right, title and interest of Seller, if any, in and to
all unexpired warranties, guaranties and bonds, including, without limitation,
contractors' and manufacturers' warranties or guaranties, relating to the
Property, to the extent that they relate to the Property and are assignable (the
"Warranties");
<PAGE>
(6) Any and all other rights, privileges, and appurtenances
owned by Seller and in any way related to or used in connection with the
Property, to the extent that they relate to the Property and are assignable,
including, without limitation, rights to use any and all trademarks and trade
names relating to the Property (the "Intangible Property").
Agreement
NOW, THEREFORE, for the mutual covenants and agreements set forth
herein, and other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties agree as follows:
ARTICLE I
Option to Purchase the Property
1.1 Option. Seller hereby grants to Purchaser an exclusive option (the
"Option") to purchase the Property on the terms and provisions set forth herein.
1.2 Purchase Price. Purchaser shall deliver to Seller an option deposit
in the amount of $765,000.00 (the "Deposit") to be held in pursuant to the terms
hereof. In the event Purchaser defaults hereunder or fails to exercise the
Option within the Option Term (unless this Agreement has previously been
terminated as permitted herein), the Deposit shall be retained by Seller as
liquidated damages hereunder. In all other events the Deposit shall be applied
to the Purchase Price at Closing (as defined below) or returned to Purchaser
upon the termination of this Agreement by any reason other than Purchaser's
default or failure to exercise the Option, as applicable. The total purchase
price (the "Purchase Price") for the Property shall be the sum of: (i)
$765,000.00, and (ii) 4,335,000.00 increased at a rate of 17% per annum,
compounded annually, commencing on the date hereof, and continuing until the
Closing Date (as defined below). The Purchase Price shall be payable, subject to
prorations and adjustments in accordance with Article IX, at the closing (the
"Closing") in cash, by certified or cashier's check, wire transfer, or other
immediately available funds.
1.3 Term and Exercise of Option. Purchaser shall have the right to
exercise the Option by delivery of written notice thereof (the "Exercise
Notice") to Seller at any time during the period commencing on the date hereof
and ending on December 1, 2000 (the "Option Term"). If Purchaser fails to
deliver the Exercise Notice during the Option Term, the Deposit shall be
retained by Seller and this Option shall terminate and be of no further force or
effect. If Purchaser delivers the Exercise Notice during the Option Term, the
Closing shall occur on the 15th day after the delivery thereof, or on such
earlier date as the parties may mutually agree.
ARTICLE II
Investigation of the Property
2.1 Title and Survey Matters. The "Permitted Exceptions" hereunder
shall consist of: (i) all matters to which Seller takes title to the Property;
and (ii) all plats, easements, dedications, restrictions and other matters
agreed to or imposed by Seller or any governmental entity after the date hereof
in connection with the rezoning, platting and/or development of the
2
<PAGE>
Property, to the extent previously approved by Purchaser, which approval shall
not be unreasonably withheld.
2.2 Inspection of Property. Purchaser acknowledges that it has had the
opportunity to investigate the Property, the zoning and other governmental
limitations applicable to the Property, all documents and/or information
provided to Purchaser relating thereto, and any other aspects or characteristics
of the Property which may affect its development, usage, operation or
marketability. Purchaser's past investigations of the Property have been
sufficient to induce Purchaser to enter into this Agreement, and Purchaser shall
have no right to terminate this Agreement and to receive a return of the Deposit
for any reason, except as expressly set forth in this Agreement. Purchaser shall
continue to have the right of investigation, which shall include, without
limitation, the right to have made, at Purchaser's expense, any surveys, studies
or inspections of the Property as Purchaser may deem necessary or appropriate.
Seller agrees to cooperate reasonably with any such investigations, inspections,
surveys or studies made by or at Purchaser's direction so long as such
cooperation is at no expense to Seller. Purchaser shall indemnify, defend, and
hold harmless Seller from any expenses, damages and liabilities, including
reasonable attorneys' fees, that Seller may suffer or incur arising out of any
claims for property damage or personal injury, or claims from materialmen or
laborers, which in turn arise from Purchaser's investigations under this Section
2.2, and such indemnification shall survive the termination of this Agreement.
Further, in the event Purchaser is unwilling or unable to close the transaction
contemplated by this Agreement, for any reason whatsoever, except by reason of
Seller's default, any and all plats, plans, submittals to governmental agencies
and utilities, studies or tests, including, but not limited to, soil tests,
topographical information, engineering and other similar preliminary work, but
expressly excluding architectural and construction plans, drawings,
specifications and designs, economic, financial and marketability studies and
pro formas, and similar proprietary information of Purchaser, shall immediately
be delivered to Seller and thereafter become the sole property of Seller.
ARTICLE III
Title
3.1 Status of Title. At Closing, Seller shall convey to Purchaser fee
simple title to the Property, subject only to the Permitted Exceptions.
3.2 Issuance of Title Policy. At Closing, Seller shall cause Land Title
Guarantee Company (the "Title Company") to issue to Purchaser, or
unconditionally commit to issue to Purchaser after Closing, an ALTA extended
coverage owner's policy of title insurance insuring marketable, insurable title
to the Property in Purchaser in the amount of the Purchase Price, subject only
to the Permitted Exceptions (the "Title Policy"). At or before the Closing,
Seller shall satisfy all requirements contained in the Title Commitment or in
any update thereof, except for those requirements which by their nature can only
be satisfied by Purchaser.
3.3 Failure of Title. In the event Seller, through no fault of its own,
is unable to convey title to the Property on the Closing Date in accordance with
the provisions of this Agreement, Seller shall, on or before the Closing Date,
give notice of such inability (and the nature thereof) to Purchaser, and
Purchaser may either (i) accept such title as Seller can convey, without any
reduction of the Purchase Price, or (ii) terminate this Agreement by written
notice to
3
<PAGE>
Seller and the Title Company given on or before the Closing Date, in which event
the Deposit shall be returned to Purchaser, and both parties shall be relieved
of any further obligations hereunder, except those which expressly survive
termination.
ARTICLE IV
Seller's Representations, Warranties and Covenants
Seller represents, warrants and covenants to Purchaser as follows:
4.1 No Third-Party Interests. Seller has not granted to any party any
option, contract or other agreement with respect to a purchase or sale of the
Property or any portion thereof or any interest therein.
4.2 No Possessory Rights. Except for any rights of possession under the
Permitted Exceptions, there are no parties in possession of any of the Real
Property, and there are no other rights of possession or use which have been
granted to any third party.
4.3 Notices. Seller has no knowledge, and Seller has not received
notice, of: (i) the Property being in violation of any applicable statutes,
ordinances, codes (including, but not limited to, zoning, building, subdivision,
pollution, environmental protection, water disposal, health, fire and safety
engineering codes), or the rules and regulations of, any governmental authority
having jurisdiction over the Property; (ii) any actions, suits, proceedings or
claims pending or threatened with respect to or in any manner affecting the
Property or the ability of Seller to consummate the transaction contemplated by
this Agreement; or (iii) any pending or threatened condemnation or similar
proceedings or special assessments affecting the Property, or any part thereof.
4.4 Authority. Seller is a limited liability company organized, validly
existing and in good standing under the laws of the State of Colorado. Seller
has the full right and authority to enter into this Agreement and consummate the
transaction contemplated by this Agreement. All requisite entity action has been
taken by Seller in connection with the entering into of this Agreement, the
instruments referenced herein, and the consummation of the transaction
contemplated hereby. Each of the persons signing this Agreement on behalf of
Seller is authorized to do so. Purchaser shall furnish to Seller any and all
documents to evidence such authority as Seller shall reasonably request.
4.5 Environmental Conditions. Seller has no knowledge, and Seller has
not received notice, of: (i) any violation of Applicable Environmental Laws
relating to the Real Property; or (ii) the presence, use, storage or discharge
of any Hazardous Substances on, in or under the Real Property.
As used herein, the term "Applicable Environmental Laws" shall mean any
local, state or federal law, rule or regulation, pertaining to environmental
regulation, contamination, cleanup or disclosure, including, without limitation,
the Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended, (42 U.S.C. ss. 9601, et seq.), the Resource, Conservation and
Recovery Act, as amended, (42 U.S.C. ss. 6901, et seq.), Superfund Amendments
and Reauthorization Act of 1986 (Pub. L. 99-499 100 Stat. 1613), the Toxic
Substances Control Act (15 U.S.C. ss. 2601, et seq.), the Emergency Planning and
Community
4
<PAGE>
Right to Know Act of 1986 (42 U.S.C. ss. 1101, et seq.) and all amendments of
the foregoing, or any state superlien or environmental clean-up or disclosure
statutes. As used herein, the term "Hazardous Substances" shall mean all
substances and materials which are included under or regulated by any Applicable
Environmental Law together with asbestos, polychlorinated biphenyls, petroleum
and raw materials which include hazardous constituents.
4.6 Consents; Binding Obligations. This Agreement and all documents
required hereby to be executed by Seller are and shall be valid, legally binding
obligations of and enforceable against Seller in accordance with their terms.
4.7 Omissions; Indemnity. The copies of any documents furnished to
Purchaser in connection with this transaction are, to the best of Seller's
knowledge, true and complete copies of the documents they purport to be. Each of
the representations and warranties contained in this Article IV are acknowledged
by Seller to be material and to be relied upon by Purchaser in proceeding with
this transaction, shall be deemed to have been remade by Seller as of the date
of Closing and shall survive Closing. Seller shall indemnify and hold Purchaser
harmless and defend Purchaser from any loss, liability or expense, including
reasonable attorneys' fees, incurred by Purchaser, and any claim made against
Purchaser by reason of the breach of any of the foregoing representations or
warranties.
Except as expressly set forth in this Agreement, Purchaser is
purchasing the Property "as is" with all faults and defects, and Purchaser
acknowledges and agrees that, except as expressly set forth in this Agreement,
Seller has not made, does not make and specifically disclaims any
representations, warranties, promises, covenants, agreements, or guaranties of
any kind or character whatsoever, whether express or implied, oral or written,
past, present or future, of, as to, concerning or with respect to (a) the
nature, quality or condition of the Property, including, without limitation, the
water, soil and geology, or the presence or absence of any pollutant, hazardous
waste, gas or substance or solid waste on or about the Property, (b) the income
to be derived from the Property, (c) the suitability of the Property for any and
all activities and uses which Purchaser may intend to conduct thereon, (d) the
compliance of or by the Property or its operations with any laws, rules,
ordinances or regulations of any governmental authority or body having
jurisdiction including, without limitation, all applicable zoning laws, (e) the
habitability, merchantability or fitness for a particular use or purpose of the
Property, or (f) any other matter related to or concerning the Property; and
Purchaser shall not seek recourse against Seller on account of any loss, cost or
expense suffered or incurred by Purchaser with regard to any of the matters
described in clauses (a) through (f) above subject to the express provisions of
this Agreement. Purchaser acknowledges that Purchaser, having been given the
opportunity to inspect the Property, is relying solely on its own investigation
of the Property and not on any information provided or to be provided by Seller,
except as expressly set forth in this Agreement. Purchaser further acknowledges
that no independent investigation or verification has been or will be made by
Seller with respect to any information supplied by Seller concerning the
Property, and, except as expressly set forth in this Agreement, Seller makes no
representation as to the accuracy or completeness of such information, it being
intended by the parties that Purchaser shall verify the accuracy and
completeness of such information, itself. Purchaser acknowledges that the
disclaimers, agreements and other statements set forth in this paragraph are an
integral portion of this Agreement and that Seller would not agree to sell the
Property to Purchaser for the purchase price without the disclaimers, agreements
and other statements set
5
<PAGE>
forth in this paragraph. Purchaser further agrees that the provisions of this
paragraph shall survive the Closing and the delivery of the Deed.
ARTICLE V
Purchaser's Representations, Warranties and Covenants
Purchaser represents, warrants and covenants to Seller as follows:
5.1 Authority. Purchaser is a corporation duly organized, validly
existing and in good standing under the laws of the State of Colorado. Purchaser
has the full right and authority to enter into this Agreement and consummate the
transaction contemplated by this Agreement. All requisite corporate action has
been taken by Purchaser in connection with the entering into of this Agreement,
the instruments referenced herein, and the consummation of the transaction
contemplated hereby. Each of the persons signing this Agreement on behalf of
Purchaser is authorized to do so. Purchaser shall furnish to Seller any and all
documents to evidence such authority as Seller shall reasonably request.
5.2 Additional Acts. In addition to the acts and documents recited
herein and contemplated to be performed, executed and delivered by Purchaser,
Purchaser shall perform, execute and deliver or cause to be performed, executed
or delivered at the Closing or thereafter any and all further acts, documents
and assurances as Seller or the Title Company may reasonably require to
consummate or evidence the consummation of the transactions contemplated herein.
5.3 Omissions; Indemnity. Each of the representations and warranties
contained in this Article V are acknowledged by Purchaser to be material and to
be relied upon by Seller in proceeding with this transaction, shall be deemed to
have been remade by Purchaser as of the date of Closing and shall survive
Closing. Purchaser shall indemnify and hold Seller harmless and defend Seller
from any loss, liability or expense, including reasonable attorneys' fees,
incurred by Seller or any claim made against Seller by reason of the breach of
any of the foregoing representations or warranties.
ARTICLE VI
Purchaser's Obligation to Close
6.1 Conditions. Purchaser shall not be obligated to close hereunder
unless each of the following conditions shall exist on the date of Closing (as
may be extended pursuant to this Agreement, the "Closing Date"):
6.1.1 Title Policy. The Title Company shall be prepared to
issue (or prepared to unconditionally commit to issue) the Title Policy as
described in Section 3.2.
6.1.2 Accuracy of Representations. The representations and
warranties made by Seller in Article IV shall be true and correct in all
material respects on and as of the Closing Date with the same force and effect
as though such representations and warranties had been made on and as of the
Closing Date.
6
<PAGE>
6.1.3 Seller's Performance. Seller shall have performed all
covenants and obligations and complied with all conditions required by this
Agreement to be performed or complied with by Seller on or before the Closing
Date.
6.1.4 Failure of Conditions. If any condition specified in
Section 6.1 is not satisfied on or before Closing, Purchaser may, at its option,
(i) waive such condition either at the time originally established for Closing
or at any time thereafter, or (ii) terminate this Agreement by written notice
thereof to Seller, and receive the return of the Deposit, in which event both
parties shall be relieved of any further obligations hereunder, except those
which expressly survive termination.
ARTICLE VII
Closing
7.1 Time of Closing. Closing shall take place at 10:00 a.m. on the
Closing Date, in the offices of the Title Company located at 3033 East First
Avenue, Suite 600, Denver, Colorado 80206, or at such other time and place or on
such earlier date as may be mutually agreed upon by Seller and Purchaser.
7.2 Deliveries. At Closing the following shall occur:
7.2.1 Deed. Seller shall deliver to Purchaser a duly executed
and acknowledged special warranty deed, of form reasonably acceptable to
Purchaser, conveying good, marketable and insurable fee simple title to the Real
Property to Purchaser, subject only to the Permitted Exceptions.
7.2.2 Payment. Purchaser shall pay to Seller the Purchase
Price as provided in Section 1.2, subject to the adjustments described in
Article IX.
7.2.3 Possession. Possession of the Property shall be
delivered to Purchaser.
7.2.4 Assignment of Intangibles; Delivery of Permits. Seller
shall execute and deliver to Purchaser an assignment, of form reasonably
acceptable to Purchaser, of all of Seller's right, title and interest in and to
the Warranties, Plans, Permits and General Intangibles, to the extent the same
are assignable. Seller shall deliver to Purchaser the originals (or accurate
copies) of all Plans and Permits in Seller's possession and all other materials
of whatever kind owned by Seller relating to the development, improvement and
ownership of the Property.
7.2.5 Water Rights. Seller shall deliver to Purchaser a duly
executed and acknowledged quit claim deed, of form reasonably acceptable to
Purchaser, conveying the Water Rights, if any, to Purchaser.
7.2.6 Non-Foreign Certificate. Seller shall execute and
deliver to Purchaser and the Title Company an affidavit that Seller is exempt
from the withholding requirements of Section 1445 of the Internal Revenue Code.
7
<PAGE>
7.2.7 Withholding Exemption Certificate. Seller shall execute
and deliver to Purchaser and the Title Company a Colorado Form DR-1083, in form
required by law.
7.2.8 Real Property Transfer Declaration. Purchaser shall
execute and deliver to Seller and the Title Company a Real Property Transfer
Declaration, in form required by law, concerning information with respect to a
conveyance of a Colorado real property interest.
7.2.9 Mechanics' Liens. Seller shall execute and deliver to
the Title Company such agreements or statements concerning claims for mechanic's
liens as may be required by the Title Company in order to issue the Title
Policy.
7.2.10 Miscellaneous Documents. Seller shall, whenever and as
often as it shall be reasonably requested so to do by Purchaser, and Purchaser
shall, whenever and as often as it shall be reasonably requested so to do by
Seller, execute, acknowledge and deliver, or cause to be executed, acknowledged
and delivered, any and all conveyances, assignments and all other instruments
and documents as may be reasonably necessary in order to complete the
transaction herein provided and to carry out the intent and purposes of this
Agreement.
ARTICLE VIII
Prorations and Closing Expenses
8.1 Closing Adjustments. The cash due at Closing pursuant to Section
1.2.2 shall be subject to adjustment as of Closing in accordance with the
following provisions:
8.2 Taxes. Real and personal property taxes on the Property shall not
be prorated.
8.3 Liens and Encumbrances. The amount of any lien, deed of trust or
other monetary encumbrance then affecting the Property, including all prepayment
penalties, shall be paid from the funds to which Seller shall otherwise be
entitled. If such funds are insufficient to pay all such encumbrances, Seller
shall pay the deficiency.
8.4 Closing Costs. Purchaser shall pay the Title Company's escrow and
closing fee, the premium for the Title Policy, the cost of recording the deed,
all conveyance, transfer, sales and other taxes of fees, if any, and such other
closing costs as are customarily incurred in connection with the purchase and
sale of real property in the Denver metropolitan area.
8.5 Reimbursement of Expenses. During the Option Term, Purchaser shall
promptly reimburse Seller for all expenditures reasonably made by Seller in
connection with the ownership, rezoning, platting and development of the
Property, including, without limitation, taxes, fees, assessments, association
dues and insurance (but reduced by the amount of the tax proration received by
Seller in connection with its purchase of the Property), but excluding any fees,
interest or other costs incurred by Seller in connection with any loan or other
financing arrangement. Any discretionary expenditures (which shall not include
such expenditures as taxes and insurance) shall be subject to Purchaser's prior
approval.
8
<PAGE>
8.6 Settlement Statement. At Closing, Seller and Purchaser shall
execute a Closing settlement statement to reflect the credits, prorations, and
adjustments contemplated by or specifically provided for in this Agreement.
ARTICLE IX
Remedies
9.1 Breach by Seller. Time is of the essence of Seller's obligations
hereunder. If Seller fails to comply with any of its obligations hereunder which
are required to be performed at or prior to Closing, Purchaser, at Purchaser's
option, shall be entitled, as its sole remedies, to either: (i) terminate this
Agreement, whereupon the Deposit shall be returned to Purchaser and both parties
shall be discharged from all duties and performance hereunder; or (ii) to seek
specific performance. In no event shall Seller be liable to Purchaser for any
actual, punitive, speculative, consequential or other damages.
9.2 Breach by Purchaser. Time is of the essence of Purchaser's
obligations hereunder. If this Agreement has not been previously terminated as
permitted herein, and Purchaser fails to exercise the Option and complete the
acquisition as herein provided, Seller, as its sole and exclusive remedy, shall
be entitled to terminate this Agreement, whereupon the Deposit shall be retained
by Seller as liquidated damages. Seller waives specific performance and/or
damages other than liquidated damages in the amount of the Deposit.
9.3 Post-Closing Breach. The provisions of Sections 9.1 and 9.2
notwithstanding, either party shall be entitled, in addition to any other
remedies available under this Agreement or otherwise, to seek damages for any
post-Closing breach by the other party of its representations, warranties or
covenants hereunder.
9.4 Attorneys' Fees. Notwithstanding any contrary provision contained
in this Agreement, in the event of any litigation or legal action arising out of
this Agreement, the court shall award the prevailing party its reasonable costs
and expenses incurred in connection with such litigation or legal action,
including, without limitation, its reasonable attorneys' fees and costs.
ARTICLE X
General Provisions
10.1 Brokers. Seller and Purchaser each hereby represent and warrant to
the other that their only contact with the other or with the Property has been
made without the assistance of any broker or other third party. Seller and
Purchaser agree to save and hold each other free, clear and harmless from any
claim, cost or expense, including reasonable attorneys' fees, for or in
connection with any claims for commissions or compensation claimed or asserted
by or through each respective party in connection with the transaction
contemplated herein.
10.2 Further Assurances. Each of the parties hereto undertakes and
agrees to execute and deliver such documents, writings and further assurances as
may be requisite to carry out the intent and purpose of this Agreement.
9
<PAGE>
10.3 Entire Agreement. No change or modification of this Agreement
shall be valid unless the same is in writing and signed by the parties hereto.
No waiver of any of the provisions of this Agreement shall be valid unless in
writing and signed by the party against whom it is sought to be enforced. This
Agreement contains the entire agreement between the parties relating to the
purchase and sale of the Property. All prior negotiations between the parties
are merged in this Agreement; and there are no promises, agreements, conditions,
undertakings, warranties or representations, oral or written, express or
implied, between the parties other than as herein set forth.
10.4 Survival. All of the parties' representations, warranties,
covenants and agreements hereunder, to the extent not fully performed or
discharged by or through Closing, shall be deemed not merged into any instrument
delivered at Closing and shall remain fully enforceable thereafter.
10.5 Dates. If any date set forth in this Agreement for the delivery of
any document or the happening of any event (such as, for example, the expiration
of the Inspection Period or the Closing Date) should, under the terms hereof,
fall on a weekend or holiday, then such date shall be automatically extended to
the next succeeding weekday that is not a holiday.
10.6 Governing Law. This Agreement shall be construed and enforced in
accordance with the laws of the State of Colorado.
10.7 Notices. Any notice required or permitted to be sent pursuant to
this Agreement shall be in writing and shall be deemed given, sent, delivered
and received upon the earlier of: (i) when personally or actually delivered; or
(ii) three (3) business days after having been deposited in a U.S. Postal
Service depository and sent by registered or certified mail, return receipt
requested, with all required postage prepaid; (iii) upon confirmed telefacsimile
transmission and the deposit of the original in a U.S. Postal Service
depository, with all required postage; or (iv) one (1) business day after being
deposited with a commercial overnight courier and sent by overnight delivery
with all required charges prepaid; and addressed:
If to Purchaser:
The Genesee Company
603 Park Point Drive, Suite 201
Golden, Colorado 80401
Attn: Terry T. Kyger
Telephone No.: (303) 526-9000
Telefacsimile No.: (303) 526-2157
10
<PAGE>
If to Seller:
RS Investments VI, LLC
603 Park Point Drive, Suite 201
Golden, Colorado 80401
Attn: Robert R. Short
Telephone No.: (303) 526-9000
Telefacsimile No.: (303) 526-2157
Any address fixed pursuant to the foregoing may be changed by the
addressee by notice given pursuant to this Section 10.9.
10.8 Headings. The paragraph headings which appear in some of the
Sections of this Agreement are for purposes of convenience and reference and are
not in any sense to be construed as modifying the Sections in which they appear.
10.9 Assignment. Purchaser may not assign this Agreement without the
consent of Seller, which consent shall not be unreasonably withheld.
10.10 Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the parties and their respective heirs, personal
representatives, successors and assigns.
10.11 Facsimile Signatures. The facsimile signature of any party on
this Agreement shall be deemed an original for all purposes.
10.12 Counterparts. This Agreement may be executed in counterparts,
each of which shall be deemed a duplicate original.
10.13 Acceptance. Upon execution and delivery of this Agreement by
Purchaser and Seller, this Agreement shall constitute an offer to purchase the
Property on the terms and conditions set forth herein. The foregoing
notwithstanding, either party may revoke its execution and delivery at any time
prior to the execution and delivery by the other party, by delivering oral or
written notice (which need not conform with the requirements of Section 10.9
hereof) of such revocation to the other party.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
11
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed effective as of the Effective Date.
PURCHASER:
THE GENESEE COMPANY, a Colorado
corporation
By:
-------------------------------
Terry T. Kyger
Vice President
SELLER:
RS INVESTMENTS VI, LLC, a Colorado
limited liability company
By:
-------------------------------
Robert R. Short, Manager
12
<PAGE>
EXHIBIT A
to
PURCHASE AND SALE AGREEMENT
Legal Description
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FORTRESS GROUP, INC. CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1999 AND
FROM THE FORTRESS GROUP, INC. CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE
MONTHS ENDED SEPTEMBER 30, 1999.
</LEGEND>
<CIK> 0001010607
<NAME> The Fortress Group, Inc.
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1.000
<CASH> 10,713
<SECURITIES> 0
<RECEIVABLES> 11,173
<ALLOWANCES> 0
<INVENTORY> 357,922
<CURRENT-ASSETS> 0
<PP&E> 13,500
<DEPRECIATION> 0
<TOTAL-ASSETS> 466,511
<CURRENT-LIABILITIES> 0
<BONDS> 100,000
0
1
<COMMON> 125
<OTHER-SE> 75,919
<TOTAL-LIABILITY-AND-EQUITY> 466,511
<SALES> 510,428
<TOTAL-REVENUES> 514,811
<CGS> 434,870
<TOTAL-COSTS> 468,336
<OTHER-EXPENSES> 29,080
<LOSS-PROVISION> (2,900)
<INTEREST-EXPENSE> 4,369
<INCOME-PRETAX> 6,910
<INCOME-TAX> 3,147
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,763
<EPS-BASIC> 0.11
<EPS-DILUTED> 0.10
</TABLE>
