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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999 Commission file number 0-28024
THE FORTRESS GROUP, INC.
(Exact name of registrant as specified in its charter)
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Delaware 54-1774997
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1650 Tysons Boulevard, Suite 600, McLean, Virginia 22102
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (703)442-4545
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01
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 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
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statement incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / /
Aggregate market value of the voting stock held by non-affiliates of
the registrant as of March 24, 2000 was $8,486,900.
As of March 24, 2000, 12,231,160 shares of the Registrant's Common
Stock, $.01 par value per share, were outstanding.
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Documents Incorporated By Reference
Certain information required by Items 10, 11, 12 and 13 of Form 10-K is
incorporated by reference into Part III hereof, from the registrant's proxy
statement, which will be filed with the Securities and Exchange Commission
within 120 days after the close of the fiscal year covered by this Form 10-K,
and certain documents are incorporated by reference into Part IV hereof.
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PART I
Item 1. Business
Introduction
The Fortress Group, Inc. (the "Company" or "Fortress") is a national
homebuilding company engaged in designing, building and selling single family
homes in the metropolitan areas surrounding a diversified group of cities in the
United States. 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 luxury homebuyer. The Company markets a wide range of single
family detached and attached homes ranging in size from 1,000 to 6,200 square
feet at prices ranging generally from $90,000 to $700,000.
The Company was formed in June 1995 to create a national homebuilding company
through the simultaneous acquisition of four homebuilding companies and an
initial public offering of the Company's equity and debt securities. Subsequent
to the initial acquisitions the Company acquired nine additional homebuilding
companies from 1996 to 1998. In March of 1999, the Company sold the assets of
one subsidiary, consolidated the operations of two subsidiaries that were
operating in the same market areas, and closed down the operations of a third
subsidiary.
The Company's homebuilding operations are currently conducted in the following
markets:
<TABLE>
<CAPTION>
States Market Areas Year Entered Marketing Name
- ------ ------------ ------------ --------------
<S> <C> <C> <C>
Arizona Tucson 1996 The Genesee Company
Colorado Denver, Fort Collins 1996 The Genesee Company
Florida Jacksonville 1997 Fortress Homes and Communities
of Florida
Missouri St. Louis 1998 Whittaker Homes
Nevada Las Vegas 1996 Christopher Homes
New Jersey Atlantic City 1999 Iacobucci Homes
North Carolina Raleigh-Durham 1996 Sunstar Homes
North Carolina Charlotte 1997 Don Galloway Homes
Oregon / Washington Portland MSA 1998 Quail Homes
Pennsylvania Philadelphia 1997 Iacobucci Homes
South Carolina Charleston 1997 Don Galloway Homes
Texas Austin and San Antonio 1996 Wilshire Homes
Wisconsin Janesville-Madison-Milwaukee 1996 Brookstone Homes
</TABLE>
In January 1997, Fortress formed Fortress Mortgage, Inc. ("Fortress Mortgage"),
a wholly-owned subsidiary, to provide mortgage financing to the Company's
customers. Fortress Mortgage is licensed as a mortgage banker in Alaska,
California, Colorado, Florida, Missouri, Nevada, North Carolina, Oregon,
Pennsylvania, South Carolina, Texas, Virginia, Washington and Wisconsin.
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Operating Strategy
The Company believes it is positioned for continued success in the homebuilding
industry because of the following factors:
Established Market Positions in Attractive Housing Markets. Generally, the
metropolitan areas where the Company conducts operations have experienced low
unemployment rates and strong population growth. The Company believes that each
of its local operations has an established local market position. Each local
operation has targeted one or more specific niches within its market and has
developed products to specifically target its customers.
Reduced Risk of Cyclicality through Geographic and Product Diversification. In
addition to focusing on market positioning, the Company has created geographic
and product diversification by operating in multiple geographic markets. As a
result, the Company is less subject to the effects of local and regional
economic cycles than homebuilders that operate in a single geographic market,
developing only a select number of products.
Capital Structure and Operating Synergies. The Company believes that the
financial and operating strength of its local operations have enhanced the
Company's competitive position, reduced its overall costs associated with land
acquisition and project construction, and provided the necessary capital to
employ its strategies. Additionally, the Company's subsidiaries have generally
been able to obtain financing on more favorable terms than prior to their
acquisition.
Although the Company's most significant services and commodities are obtained on
a local level, the Company's overall size and strength of operations has enabled
it secure favorable terms from certain suppliers by purchasing in volume. The
Company has also realized 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 its
local operations benefit from the implementation of selected practices, policies
and strategies, such as market analysis, costing procedures and quality control.
Limited Exposure to Real Estate-Related Risks. The Company attempts to control a
two to four-year supply of lots based on its expected absorption rates. In some
markets, the Company 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. When necessary the Company also acquires undeveloped land and
oversees the development process.
Markets and Products
Overview
The Company's operations serve the metropolitan areas noted above. The Company
believes that each of its current markets represents an attractive homebuilding
market with opportunity for growth. The Company also believes that each of its
local operations is well established in its market 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
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of the market. Depending on the local market and our strategy to serve that
market we develop and build housing that addresses first-time homebuyers,
first-time and second-time move up homebuyers, retirees, empty nesters, and
semi-custom buyers.
The table below details our diversified product offerings and the number of lots
controlled by the Company in each of its operating subsidiaries at December 31,
1999.
<TABLE>
<CAPTION>
Operating Division Average Selling Price Product Range (Sq. Ft) Total Lots Under Control
------------------ --------------------- ---------------------- ------------------------
<S> <C> <C> <C>
Brookstone Homes $137,100 1,040-2,400 791
Christopher Homes $492,300 1,400-6,200 252
Don Galloway Homes $149,300 1,000-3,100 2,208
Fortress Homes and $124,300 1,250-3,800 2,050
Communities of Florida
The Genesee Company $250,200 1,100-3,700 2,548
Iacobucci Homes $200,900 1,400-3,000 1,457
Quail Homes $168,300 1,000-4,100 294
Sunstar Homes $236,200 1,150-3,900 1,271
Westbrook Homes $312,200 N/A 2
Whittaker Homes $177,100 1,200-3,700 1,501
Wilshire Homes $159,400 1,800-4,000 1,719
</TABLE>
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
purchase contract) fully entitled land; (iv) securing options to purchase land,
which options are subject to the seller obtaining required entitlements; and (v)
in some instances, controlling or purchasing 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 options and other purchase arrangements that allow
the Company to control land through the entitlement process but defer the
acquisition of such land until the entitlement process has been completed and
the Company is prepared to commence construction. The Company has also entered
into contracts where it acts as a general contractor providing construction and
marketing services but avoiding land development risk, as well as joint ventures
with other builders and developers to allow the Company to participate in larger
parcels of land without assuming responsibility for the entire parcel.
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 total
investment risk, projected profit margins and return on capital employed; (iii)
competition for the proposed project; (iv) the ability to secure governmental
approvals and entitlements;
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(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. The Company does not
acquire land without the approval of its Land Acquisition Committee, a group
composed of senior management and members of the Company's board of directors.
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 December 31, 1999, the Company had homes under construction on 1,754 lots and
owned 2,312 finished lots and 1,883 lots held for or under development. As of
December 31, 1999, the Company also had under contract or option, subject to the
satisfaction of the Company's purchase contingencies, 8,144 finished,
undeveloped or partially developed lots.
Construction
The Company's subsidiaries 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. 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.
Fortress management specifies that quality, durable materials be used in
constructing the Company's homes. The Company does not maintain a 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
is 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 negotiates contractual terms with certain of its vendors to
provide additional cost savings on a national basis. Generally, access to the
Company's principal subcontracting trades, materials and supplies continues 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 provides a one-year limited warranty of workmanship and
materials with each of its homes although warranty policies may differ within
each local operation and by project. The Company's subcontractors generally
provide the Company with an indemnity and a certificate of insurance prior to
receiving payments for their work; therefore, claims relating to workmanship and
materials are primarily the responsibility of the Company's subcontractors. In
many cases we supplement our one year limited warranty with a ten year limited
warranty on structural items, through policies
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purchased from third parties. Historically, the Company's divisions have not
incurred material costs relating to warranty claims or defects in construction.
Sales and Marketing
Each of the Company's subsidiaries is responsible for the sales and marketing
activities relating to its communities. The Company makes extensive use of
advertising and other promotional activities, including newspaper
advertisements, brochures, direct mail and signage in the immediate areas of its
developments. In addition the Company utilizes extensive market research,
developed internally and provided by third parties. A national sales and
marketing council promotes the sharing of best practices across the
organization, as well as the exchange of product designs and cost saving
programs. The Company believes that each of its local operations has an
established reputation for developing high quality homes in the markets it
serves, which generates additional interest in the Company's new projects.
The effective use of model homes plays an integral part in demonstrating the
competitive advantages of our home designs and features to prospective
homebuyers. The Company generally builds between one and five model homes for
each active community, depending upon the number of homes to be built within
each community and the products to be offered. Each local operation is
responsible for creating an attractive model home presentation designed to
appeal to the preferences of potential homebuyers.
The Company's objective is to enter into sales contracts for its homes in
advance of construction, thereby reducing the risk of unsold inventory.
Depending on market conditions and the specific project, the Company may also
build speculative homes. Speculative homes are homes that are under construction
or completed but for which the Company does not yet have sales contracts. These
homes are often sold while under construction or soon after completion. The
Company reviews local market factors, such as new employment opportunities,
significant job relocations and growing housing demand, in determining an
appropriate level of speculative home inventory. The construction of such homes
is often necessary to supply homes to individuals who are relocating who have
immediate housing needs. The Company's sales contracts 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 homebuyers.
Backlog
The Company's homes are generally offered for sale in advance of their
construction. The majority of the Company's homes sold in 1999 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 but not yet delivered are considered the Company's "backlog." As
of December 31, 1999, the Company had backlog of $268.3 million (1,253 homes).
The Company generally 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. In certain circumstances, generally with custom homes
involving a longer period of time from execution of the contract to settlement
(six months to one year), the Company will utilize the percentage of completion
method to more closely match revenue and expenses.
Customer Financing
In January 1997, the Company created a wholly-owned subsidiary, Fortress
Mortgage, Inc., for the purpose of providing mortgage origination and
centralized underwriting to the buyers of homes sold by the Company's
subsidiaries. Fortress Mortgage, Inc. is approved by the Federal Housing
Administration (FHA) and Veterans Administration (VA) as a qualified mortgage
lender and is licensed as a mortgage
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banker in Alaska, California, Colorado, Florida, Missouri, Nevada, North
Carolina, Oregon, Pennsylvania, South Carolina, Texas, Virginia, Washington and
Wisconsin. The mortgage company facilitates the sale of the Company's homes
through the origination of first mortgage loans utilizing programs established
by FHA, VA, Government National Mortgage Association (GNMA), Federal National
Mortgage Association (FNMA) and Federal Home Loan Mortgage Corporation (FHLMC).
As a mortgage banker, this operation will complete the processing of loan
applications, perform credit checks, process applications to underwrite loans
and originate and subsequently sell the mortgage loans.
Corporate Operations
The Company's corporate personnel oversee all of the Company's local operations.
Senior managers of the Company have extensive homebuilding experience. This
senior management group is primarily responsible for formulating and
implementing the Company's policies and procedures to promote the cohesiveness
and direction of its local operations.
Specifically, the Company's senior management (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) develops operational improvement initiatives and oversees the
integration and sharing of "best practices" between homebuilding subsidiaries
(v) provides accounting services, establishes financial policies and performs
financial analyses for the operations, (vi) provides for human resource
development; and (vii) secures and obtains capital resources.
The Company allocates the necessary capital resources for new communities
consistent with its overall strategy and utilizes anticipated return on capital
as the primary criterion 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.
Capital commitments are determined by the Project and Feasibility Review
Committee of the Board of Directors.
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 is determined by a committee of the Board,
each subsidiary is fully equipped with the skills and resources to oversee all
local operations including land acquisition, land development, construction,
marketing, sales and product service.
Customer Relations and Quality Control
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.
During 1999 the Company contracted with a third party to perform a standardized
customer satisfaction survey. The survey allows the Company to benchmark its
performance against its own subsidiaries and against national averages.
Generally, for each development, Company representatives 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) updating each buyer on the progress of their home.
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Acquisitions and Dispositions
The Company did not acquire any new operations during 1999, focusing instead on
improving the operations of existing subsidiaries.
During 1999 the Company discontinued or disposed of three operating divisions.
Effective March 31, 1999 the company; i) sold the assets of its Landmark Homes
division and exited the Wilmington, North Carolina and Myrtle Beach, South
Carolina markets, ii) sold excess land inventory of its Buffington Homes
Division and combined the remaining operations of Buffington into its Wilshire
Homes subsidiary and, iii) began the phase out of its Westbrook Homes operation
and exited the Virginia market.
Executive Officers of the Company
The Executive Officers of the Company are as follows:
Name Age Position
---- --- --------
George C. Yeonas 45 Chief Executive Officer and Director
Paul A. Giusti 42 Chief Operating Officer
Jeffrey W. Shirley 41 Chief Financial Officer
George C. Yeonas joined the Company as Chief Operating Officer and Director in
August of 1997 and in March of 1999 was appointed Chief Executive Officer. He
has over 20 years in the homebuilding industry. Prior to joining Fortress, Mr.
Yeonas served for seven years as Vice President and General Manager of the
Arvida Company's South Florida division. His responsibilities there included the
management of the city of Weston, Florida's number one selling community. Prior
to joining Arvida Mr. Yeonas served as Vice President of Development for NVR in
Washington, DC, and as a Divisional Partner for Trammell Crow in Tampa, Florida.
Paul A. Giusti joined the Company as Chief Executive Officer of Brookstone,
which was acquired by the Company in December of 1996. He retained that
position, in addition to being appointed a regional vice president of the
Company in June of 1997. In March 1999 he was named Chief Operating Officer of
the Company. Mr. Giusti co-founded a Chicago area developer, Golden Development,
Inc. in 1989, which subsequently merged with Brookstone. From 1985 to 1989, Mr.
Giusti held several management positions with General Electric, Inc., including
those of Manager, International Sales Support and Manager, International Trade
Development.
Jeffrey W. Shirley joined the Company as Vice President of Finance in November
of 1996. He was named Chief Financial Officer in November of 1999. Mr. Shirley
has over 15 years of experience in the homebuilding industry. From 1984 to 1995,
Mr. Shirley was with Kenneth Leventhal & Company providing audit and consulting
expertise to both local and regional homebuilders, developers and syndicators of
real estate operating properties. Mr. Shirley was a leader in developing a
homebuilding practice for the Chicago office of Kenneth Leventhal & Company.
From June of 1995 to November of 1996, Mr. Shirley was a director of real estate
services for the Chicago office of Price Waterhouse LLP focusing on
transactional services for a variety of real estate clients.
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Employees and Subcontractors
As of December 31, 1999, the Company employed 1,107 persons, (which includes 302
employees who are tradesmen in our Whittaker subsidiary) including corporate
staff and other personnel involved in sales, construction management and
customer service. Although most of the Company's employees are not 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 agreements. The Company believes that its
relations with its employees, subcontractors and suppliers are good.
Risk Factors
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. 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. 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 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 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. In addition, homebuilders are
subject to various risks often outside of their control, including weather
conditions and natural disasters, construction delays, cost overruns, changes in
governmental regulations, counterparty non-performance risk associated with
performance bonds, as well as availability and price fluctuations of land, labor
and raw materials.
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 fair market 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.
Government Regulations and Environmental Controls. The Company is 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.
Whether Fortress 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
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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.
Our mortgage activities also need to comply with various federal and state laws,
consumer credit rules and regulations and other requirements unique to mortgage
activities. Additionally mortgage loans originated under various national
mortgage programs such as FHA, VA, or FNMA are subject to regulations imposed by
the respective agency.
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 FHA and 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.
Furthermore, changes in Federal income tax laws pertaining to the deductibility
of mortgage interest could affect demand for new homes.
Dilution of Earnings per Share. The Company has issued $28,500,000 (net) initial
liquidation value (28,500 shares) of Class AAA preferred stock and has also
issued contingent Supplemental Warrants which potentially provide for the
issuance of between 0 and 23,750,000 shares of common stock to Prometheus
Homebuilders LLC, depending on the price of the common stock.
The Class AAA preferred stock is convertible at Prometheus' option into common
stock at any time into 4,750,000 shares of common stock at a conversion price of
$6.00 per share. The Supplemental Warrants would become exercisable at an
exercise price of $.01 per share on September 30, 2001 and would expire on March
31, 2004. The number of shares of common stock potentially issuable pursuant to
the exercise of the Supplemental Warrants is subject to adjustment depending
upon the 60 day average closing price of the common stock between September 30,
2001 and September 30, 2003. If during this entire period the closing price
remains greater than $12.00 per share, no shares would be issuable pursuant to
the Supplemental Warrants. If at any time during this period the average closing
price is $12.00 per share or less, the number of shares of common stock for
which the Supplemental Warrants may be exercisable would be adjusted, up to five
times per year. The Supplemental Warrants would be exercisable for 431,818
shares if the average closing price were no lower than $10.01 per share at any
time during this period and would increase based upon lower average closing
prices, increasing to a maximum of 23,750,000 shares if the average closing
price was $2.00 or less per share during this period. The conversion of the
Class AAA preferred stock and the exercise of the Supplemental Warrants could
have the effect of materially reducing the Company's earnings per share and
diluting the economic interest of the Company's existing stockholders.
Following the exchange of the Class AA stock for Class AAA stock in 1999, the
warrants related to the AAA stock did not have the right to convert to common
stock unless and until the Company achieved a cumulative revenue threshold, or
failed to achieve a minimum quarterly or annual revenue amount. Based on current
projections, the Company expects that it will achieve the revenue threshold
during the third quarter of 2000. If that revenue threshold is met, the
contingent rights of the warrant holders will vest and the number of warrants
exercisable into common stock will increase in accordance with the Supplemental
Warrant Agreement. Assuming (i) these supplemental warrants had vested during
the entire year of 1999, (ii) a current balance of 28,500 shares of preferred
stock was outstanding for the entire year and, (iii) a current market value of
the Company's stock of less than $2.00 per share, an additional 23,750,000
shares of common stock would have been included in the calculation of diluted
earnings per share for 1999. Diluted earnings per share on a pro forma,
unaudited basis for 1999 would have been $.20.
Dilution of Voting Power. Pursuant to the terms of the Class AAA preferred
stock, Prometheus has the right to elect three Preferred Stock directors out of
an up to 8-member board of directors. A proportionate number of the Preferred
Stock directors also are entitled to serve on each committee of the
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board of directors, except for the executive committee. The executive committee
consists of five members of which two are Preferred Stock directors. Upon the
occurrence of an event of default under the Class AAA preferred stock (which
principally consists of defaults on dividends or other payment obligations),
Prometheus would be entitled to elect additional Preferred Stock directors
sufficient to constitute a majority of the board of directors and all committees
of the board of directors.
Prometheus, as the holder of Class AAA preferred stock, is entitled to vote on
all matters voted on by holders of common stock, voting together with the common
stock as a single class at all meetings of the stockholders. Each share of Class
AAA preferred stock entitles its holder to cast the number of votes equal to the
number of shares of common stock into which such share of Class AAA preferred
stock is convertible, based on the $6.00 per share conversion price. Based upon
its ownership of $28,500,000 initial liquidation value (28,500 shares) of Class
AAA preferred stock and 898,845 shares of common stock, Prometheus holds
approximately 33% of the total voting power of the Company's stock. Prometheus
may acquire additional voting power under certain circumstances, including the
conversion of Class AAA preferred stock and the exercise of the Contingent
Warrants.
Change of Control. As described above, Prometheus has substantial voting power,
including the right under certain circumstances to elect a majority of the board
of directors, its executive committee and other committees. The holders of Class
AAA preferred stock also have certain consent rights, which require the approval
of the holders of at least 66 2/3% of the Class AAA preferred stock to effect
certain significant corporate actions or transactions, including a merger or
sale of substantial assets, unless the Class AAA preferred stock is redeemed as
part of the transaction. Further, under the Company's amended bylaws, and the
amended bylaws of the Company's subsidiaries, the Company may not, and may not
permit any of its subsidiaries to, engage in or agree to engage in a number of
significant actions or transactions, including adopting an annual operating
budget, taking actions not provided for in the budget, incurring new debt and
issuing securities, without the affirmative vote of over 81% of the board of
directors (Supermajority Director Approval) or the affirmative vote of over 81%
of the members of the executive committee (Supermajority Executive Committee
Approval). Therefore, the Company needs the approval of at least two of the
three Preferred Stock directors (together with 5 non-Preferred Stock directors)
or the unanimous approval of the executive committee, including two Preferred
Stock directors, to engage in significant actions or transactions. As a result,
Prometheus has substantial influence over, and could under certain circumstances
exercise effective control of, the direction and management of the Company and
the conduct of its business. There is no assurance that the influence and
participation of Prometheus and the Preferred Stock directors in the direction
and management of the Company will have a positive effect on the Company's
financial performance and condition.
Anti-takeover Effects. Prometheus's representation on the board of directors and
the executive committee, its voting rights, its consent rights and the
requirements of Supermajority Director Approval and Supermajority Executive
Committee Approval for certain significant actions and transactions could have
anti-takeover effects. Also, provisions of Delaware law and of the Company's
Amended and Restated Certificate of Incorporation could have the effect of
making it more difficult for a third party to acquire, or of discouraging a
third party from attempting to acquire, control of the Company. These provisions
could deter, delay or prevent tender offers or other takeover proposals or
attempts that might result in benefits to stockholders, including the payment to
stockholders of a premium over the market price of the common stock.
Shares Eligible for Future Sale. The Company has outstanding approximately
12,231,000 shares of common stock, of which approximately 11,057,000 shares are
freely tradable without restriction (including shares subject to the Resale
Registration Statement) and approximately 1,174,000 shares are
12
<PAGE>
saleable subject to certain volume and other restrictions of Rule 144 under the
Securities Act. In addition, at least 5,267,267 shares are issuable upon the
conversion of the Company's outstanding classes of preferred stock and 275,093
shares are issuable upon exercise of currently exercisable options. Additional
shares would be issuable upon the conversion of the Class AAA preferred stock
and the adjustment and exercise of the Supplemental Warrants. Sale of
substantial amounts of such shares in the public market or the prospect of such
sales could materially adversely affect the market price of the common stock.
Dependence on Management. 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 that subsidiary. 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.
13
<PAGE>
Item 2. PROPERTIES
The Company's principal executive offices are located at 1650 Tysons Boulevard,
Suite 600, McLean, Virginia 22102. The Company occupies approximately 4,800
square feet of leased office space for its corporate office in Virginia and
leases an aggregate of approximately 119,200 square feet of office space in 22
locations for its homebuilding and mortgage subsidiaries.
Item 3. LEGAL PROCEEDINGS
The Company is, from time to time, a party to litigation arising in the normal
course of its business. Management believes that none of the actions to which it
is a party will have a material adverse effect on the financial condition,
results of operations or cash flows of the Company.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to the Company's stockholders for consideration during
the quarter ended December 31, 1999.
On March 16, 2000 the Company's stockholders approved a charter amendment
authorizing the board to implement a reverse stock split of the Company's common
stock, at any time up to March 15, 2001, at a ratio not to exceed 1 for 5. This
reverse split has not been implemented as of March 29, 2000.
14
<PAGE>
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
(a) Price Range of Common Stock. The Company's common stock has traded on the
Nasdaq National Market since May 16, 1996. On March 24, 2000, the closing
price of the common stock was $1.06 per share. The following table sets
forth the range of high and low sale prices for the common stock, as
reported on the Nasdaq National Market, for the periods indicated:
High Low
Fiscal Year 1998
First fiscal quarter $5.50 $4.25
Second fiscal quarter $6.38 $4.50
Third fiscal quarter $7.00 $3.50
Fourth fiscal quarter $3.88 $1.25
Fiscal year 1999
First fiscal quarter $2.75 $1.63
Second fiscal quarter $2.44 $1.13
Third fiscal quarter $1.94 $1.13
Fourth fiscal quarter $1.66 $0.50
(b) Approximate Number of Equity Security Holders. The number of record
holders of the Company's common stock as of March 24, 2000 was 66, which
does not include beneficial owners who hold the Company's stock in street
name.
(c) Dividends. The Company, under a policy adopted in 1997, declared a
quarterly cash dividend of one-quarter cent per share on the Company's
common stock for each of the first two quarters of 1998. This policy was
discontinued during the third quarter of 1998. No dividends were declared
or paid the Company's common stock during 1999.
Under the terms of a Restructuring Agreement dated December 31, 1998 between the
Company and Prometheus Homebuilders LLC (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
and contingent warrants in exchange for the outstanding 40,000 shares of Class
AA Convertible Preferred Stock having a liquidation value of $40,000,000 and
375,000 warrants held by Prometheus. During 1999 the Company redeemed 11,500
shares of Class AAA Stock reducing the amount outstanding to 28,500 shares and
reducing a pro-rata portion of the outstanding convertible warrants. See Note 9
- - Shareholders' Equity in the Company's consolidated financial statements
included in Item 8 hereof, and Item 5 in the Company's Current Report on Form
8-K, dated May 5, 1999 and incorporated herein by reference for further
description of the terms of these securities.
15
<PAGE>
Item 6. SELECTED FINANCIAL DATA
The selected financial data provided should be read in conjunction with the
Combined Predecessor Companies Financial Statements, the individual Founding
Builders Financial Statements, The Fortress Group, Inc. Consolidated Financial
Statements, the related notes thereto and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
The Fortress Group, Inc. and Combined Predecessor Companies (1)
(dollars in thousands, except per share amounts and operating data)
<TABLE>
<CAPTION>
Combined Predecessor Companies
------------------------------
The Fortress
Group, Inc. The Fortress Group, Inc.
----------- ------------------------
Year Ended January 1 - May 21 - 1996 Year Ended Dec. 31,
Dec. 31, 1995 May 20, 1996 Dec. 31, 1996 TOTAL 1997 1998 1999
------------- ------------- ------------- ----- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues $ 199,029 $66,119 $ 210,354 $276,473 $447,374 $692,645 $740,785
Gross Profit 31,595 9,694 32,967 42,661 67,704 104,629 108,015
Operating income 6,750 1,113 12,787 13,900 16,236 24,099 19,187
Income before provision for
income taxes 6,076 1,274 13,221 14,495 13,923 21,628 14,746
Net income(2) $ 6,055 $ 1,274 $ 8,208 $ 9,482 $ 8,460 $ 12,834 $ 8,277
========= ======= ========= ======== ======== ======== ========
Basic Earnings per share(3) $ .69 $ .68 $ .46 $ .42
Diluted Earnings per share(3) $ .69 $ .63 $ .42 $ .37
========= ======== ======== ========
Cash dividends per common share $ .00 $ .01 $ .005 $ .00
Weighted average shares outstanding, basic 11,701,587 11,759,712 11,818,888 12,119,666
Weighted average shares outstanding, diluted 11,919,944 12,862,171 13,140,236 14,625,496
</TABLE>
<TABLE>
<CAPTION>
Combined Predecessor The Fortress Group, Inc.
-------------------- ---------------------------------------------------
Companies
---------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Balance Sheet Data: (as of December 31)
Cash $ 2,710 $ 16,212 $ 12,406 $ 23,102 $ 17,526
Inventory 109,016 144,106 217,342 310,706 328,513
Total assets 121,666 193,733 331,327 449,903 451,181
13.75% Senior Notes due 2003 100,000 100,000 100,000 100,000
Notes and mortgages payable 87,604 40,136 122,443 192,769 201,658
Minority interests 1,295 274 268 67 79
Stockholders' equity 9,836 31,986 62,897 91,193 79,673
</TABLE>
<TABLE>
<CAPTION>
Combined Predecessor Combined (1) The Fortress Group, Inc.
-------------------- ------------ ------------------------------------
Companies
---------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Operating Data: (for the years ended
December 31)
Units
New contracts, net of cancellations 1,100 1,410 2,706 4,366 3,729
Closings 998 1,402 2,762 4,016 4,034
Backlog(4) 459 512 1,056 1,606 1,253
Aggregate sales value of backlog
(in thousands)(4) $ 97,242 $ 95,992 $198,247 $308,832 $268,299
Average sales price per home closed $190,700 $189,500 $159,300 $168,600 $178,500
</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 and operational
information of the Combined Predecessor Companies has been combined on a
historical cost basis for all periods presented prior to the Acquisitions
as if these companies had always been members of the same operating group.
However, during the periods presented prior to the Acquisitions, the
Founding Builders were not under common control or management.
(2) All of the Founding Builders were S corporations through May 20, 1996 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 the post-combination results of the Company. Subsequent to
the Acquisitions, the information presented is on a consolidated basis of
The Fortress Group, Inc.
(3) See calculation in Note 10- Earnings Per Share in the Company's
consolidated financial statements included in Item 8 hereof.
(4) At end of period and represents homes sold but not closed.
16
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain items
of the Company's consolidated results of operations and those results as a
percentage of the Company's total revenues and, its segment revenues:
<TABLE>
<CAPTION>
(dollars expressed in millions)
For the Year For the Year For the Year
Ended Dec. 31, 1999 Ended Dec. 31, 1998 Ended Dec. 31, 1997
------------------- ------------------- -------------------
% of % of % of % of % of % of
Total Segment Total Segment Total Segment
----- ------- ----- ------- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenues $740.8 100.0% $692.6 100.0% $447.4 100.0%
Homebuilding revenues 734.6 99.2% 100.0% 687.9 99.3% 100.0% 445.3 99.5% 100.0%
Gross profit 108.0 14.6% 14.7% 104.6 15.1% 15.2% 67.7 15.1% 15.2%
Operating expenses (incl.
amortization & restructuring) 88.8 12.0% 12.1% 80.5 11.6% 11.7% 51.5 11.5% 11.6%
Homebuilding pre-tax income 17.6 2.4% 2.4% 21.5 3.1% 3.1% 13.7 3.1% 3.1%
Mortgage revenues 6.2 0.8% 100.0% 4.7 0.7% 100.0% 2.1 0.4% 100.0%
Mortgage expenses 6.2 0.8% 100.0% 4.5 0.7% 95.7% 1.9 0.4% 90.5%
Mortgage pre-tax income - - - 0.2 - 4.3% 0.2 - 9.5%
Pre-tax income 14.7 2.0% 21.6 3.1% 13.9 3.1%
</TABLE>
Acquisitions, Dispositions, and Closures
The Company did not acquire any new companies during 1999. Full year comparisons
between 1999 and 1998 are affected by the acquisition, effective March 1,
1998, of Whittaker Homes, the acquisition, effective April 1, 1998, of Quail
Homes, and the dispositions noted below.
During 1999 the Company discontinued or disposed of three operating divisions.
Effective March 31, 1999 the company; i) sold the assets of its Landmark Homes
division and exited the Wilmington, North Carolina and Myrtle Beach, South
Carolina markets, ii) sold excess land inventory of its Buffington Homes
Division and combined the remaining operations of Buffington into its Wilshire
Homes subsidiary, and iii) began the phase out of its Westbrook Homes operation
and exited the Virginia market.
Home Sales Activity
The following table sets forth information relating to new orders, home
closings, and sales backlog by state for the years ended December 31, 1999,
1998, and 1997:
17
<PAGE>
<TABLE>
<CAPTION>
New Orders (Net) Closings Backlog at December 31,
---------------- -------- -----------------------
1999 1998 1997 1999 1998 1997 1999 1998 1997
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
State
Arizona 46 92 38 75 66 37 5 34 9
Colorado 350 360 377 329 361 332 204 183 183
Florida 773 850 567 775 702 636 297 299 151
Missouri 458 462 N/A 550 438 N/A 96 188 N/A
Nevada 118 153 134 123 130 92 81 86 63
New Jersey 23 N/A N/A 13 N/A N/A 10 N/A N/A
North Carolina 676 726 522 764 692 612 155 285 250
Oregon/Washington 128 120 N/A 127 131 N/A 14 13 N/A
Pennsylvania 145 220 34 159 216 43 39 53 49
South Carolina 140 189 72 146 181 53 75 87 80
Texas 642 904 812 707 853 811 235 300 249
Virginia 18 53 N/A 34 48 N/A 1 17 N/A
Wisconsin 212 237 150 232 198 146 41 61 22
--- --- --- --- --- --- -- -- --
Total 3,729 4,366 2,706 4,034 4,016 2,762 1,253 1,606 1,056
</TABLE>
Consolidated Results of Operations
Results of Operations for the Year Ended December 31, 1999 Compared to the
Results of Operations for the Year Ended December 31, 1998
Homebuilding Operations
General
As indicated in the chart above, net new orders for the Company totaled 3,729
homes and 4,366 homes in the years ended December 31, 1999 and 1998, a 14.6%
decrease. This decrease is attributable in part to the Company's dispositions
and closures (See Note 11- Sale of Assets and Special Charges in the Company's
consolidated financial statements included in Item 8 hereof) as well as new
order declines in a number of the Company's operations. Of this decrease in
sales, 6.9% is attributable to the dispositions and closures. The balance of the
decline is due in part to a reduction in the number of communities in which the
Company operated during a portion of 1999, and to a reduction in sales pace in
several markets, primarily Pennsylvania, Florida and Missouri, during the last
six months of 1999. During the year the Company 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 moved
to improve the processes, systems and reporting of supply management indicators
to mitigate this situation in the future.
At December 31, 1999, the Company had a combined backlog of 1,253 homes with a
value of $268.3 million as compared to 1,606 homes with a value of $308.8
million as of December 31, 1998, representing a 22.0% decline in backlog homes
and a 13.1% decline in backlog value. Of the backlog decrease, 9.0% of the
decline in homes and 7.4% on the decline in value is attributable to the closure
of subsidiaries and dispositions of communities. Over the same period the
average value of a home in backlog has increased 11.4% to $214,200 from
$192,300.
18
<PAGE>
Revenue
Homebuilding revenues for the Company totaled $734.6 million for the year ended
December 31, 1999 as compared to $687.9 million for the year ended December 31,
1998, an increase of 6.8%. Although the number of homes closed and the
corresponding revenues were negatively affected by the dispositions noted above,
the year over year comparisons were favorably impacted by the acquisitions,
during 1998 of Whittaker and Quail. The number of homes closed increased to
4,034 in 1999 from 4,016 in 1998 (approximately 0.4%). The improvement in
revenue was also driven by an increase of 5.9% in the average home closing value
to $178,500 in 1999 from $168,600 in the prior year.
Revenue from lot sales increased to $14.6 million in 1999 from $10.6 million in
1998. Lot sales revenue represented 2.0% of revenue in 1999 compared to 1.5% of
revenue in 1998. The increase in this area resulted primarily from the increases
in lot sales in both our Genesee and Wilshire Homes operations. Although the
Company purchases land and engages in land development activities primarily to
support its own homebuilding activities, lots and land are occasionally sold to
other developers and homebuilders.
Gross Profit
The Company's homebuilding gross profit increased to $108.0 million in 1999 from
$104.6 million in 1998, a 3.2% improvement. Homebuilding gross profit margin
decreased to 14.7% from 15.2% over the same period. As disclosed in previous
filings, profit margins in the Company's Las Vegas subsidiary declined as
compared to prior years. This decline had a significant impact on the Company's
consolidated gross profit. Excluding the results of the Las Vegas subsidiary,
the Company's consolidated gross margin would have risen slightly to 15.3% from
15.2% in 1998. We expect the Las Vegas operations to continue to depress the
Company's Gross Margin in the coming year.
Operating Expenses
Operating expenses (including selling, general and administrative, asset
impairment charges, and goodwill amortization) for the years ending December 31,
1999 and 1998 were $88.8 million (12.1% of homebuilding revenue) and $80.5
million (11.7% of homebuilding revenue), respectively. The Company recognized
$2.0 million in asset impairment charges during 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 12 -Asset Impairment Charge). The company
also recognized $1.3 million in special charges pertaining to restructuring
costs associated with several of its subsidiaries (See Note 11 - Sale of Assets
and Special Charges in the Company's consolidated financial statements included
in Item 8 hereof.) Excluding the impact of these charges, total operating
expenses for 1999 and 1998 would have been $85.6 million (11.6% of homebuilding
revenue) and $80.5 million (11.7% of homebuilding revenue) respectively.
Selling expenses increased to $46.5 million for the year ending December 31,
1999 as compared to $43.6 million for the same period of 1998. However, selling
expense, as a percentage of homebuilding revenue remained unchanged at 6.3% for
both years.
General and administrative expenses were $36.4 million (5.0% of homebuilding
revenue) in 1999, consistent, as a percent of revenues, with $34.5 million (5.0%
of homebuilding revenue) in 1998. The increase in absolute dollars includes
increases arising from 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 certain costs, which under previous pronouncements
would have been capitalized, to be expensed as incurred. The amortization and
depreciation of
19
<PAGE>
previously capitalized information and technology costs, is also a factor
contributing to this increase.
Financial Services Operations
Fortress Mortgage's closing volume, number of mortgages originated, and capture
rates for 1999 all increased compared with 1998. These increases resulted from
additional volume generated at Fortress Mortgage branches that were open for the
full year of 1999 but were only open for a portion of 1998. The increase in
revenue is also due to a significant increase in the overall percentage of
Fortress customers served by Fortress Mortgage (capture rate). Total revenues
for the year increased 31.9% to $6.2 million from $4.7 million in 1998.
Financial services pretax income generated by Fortress Mortgage was $4,000 for
1999 compared with $168,000 for 1998. Market conditions during the third and
fourth quarters of 1999 led to increased competitive pressure and reduced
margins on loans originated. General, administrative and other expenses
increased to $6.0 million from $4.6 million 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 year ended December 31, 1999, Fortress Mortgage provided mortgages to
39.8% of the Company's closings in those markets which it serves, as compared
to 25.7% for the year ended December 31,1998.
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. (See Note 11 - Sale of Assets and Special Charges in
the Company's consolidated financial statements included in Item 8 hereof).
Net Income and Net Income Per Share
Due to the previously described factors, including the asset impairment charge,
the restructuring charge and the loss on the sale of Landmark, and the income
tax effect thereof, net income for 1999 was $8.3 million, a 35.2% decrease from
the $12.8 million achieved in 1998.
Net income per share, on a diluted basis, was $0.37 for 1999 compared with $0.42
for 1998, an 11.9% decline. Diluted net income per share was affected by the
decline in net income detailed above and by the changes in preferred dividends
and the number of convertible preferred shares included in the calculation of
net income per share noted below. (See Note 9 - Shareholders' Equity in the
Company's consolidated financial statements included in Item 8 hereof).
Excluding the effect of the asset impairment charge, the restructuring charge
and the sale of Landmark, the Company's net income per share on a diluted basis
would have been $0.60 for 1999 compared with $0.42 for 1998.
The restructuring of the Prometheus agreement (effective February 4, 1999)
resulted in an increase in the preferred dividend rate related to that class of
stock from 6% to 9% annually, resulting in increased dilution of net income per
share. Redemption of approximately 28.8% ($11.5 million) of the outstanding AAA
preferred stock, in the second quarter of
20
<PAGE>
1999 (See Note 9 - Shareholders' Equity in the Company's consolidated financial
statements included in Item 8 hereof) partially offset this increased dilution.
During 1998, the Class AA Preferred Stock was convertible at $6.00 per share.
However, Class AA preferred stock and the related warrants included future reset
tables that provided that between September 30, 2001 and September 30, 2003, the
conversion rate changed based on the then current market price of the Common
Stock (See Note 9 - Shareholders' Equity in the Company's consolidated financial
statements included in Item 8 hereof.) The dilution of earnings per share was
significantly increased during 1998 due to the lower average stock value during
the quarters ended September 30, 1998 and December 31, 1998. In accordance with
generally accepted accounting principles the Company was required to report
currently the potential future conversion based on the contractual reset tables
and the current market price even though the holder of the Class AA preferred
stock and warrants could not effect a conversion under these reset tables until
September 30, 2001.
Following conversion of the Class AA stock to Class AAA stock in 1999 (See Note
9- Shareholders Equity in the Company's consolidated financial statements
included in Item 8 hereof) the warrants related to the AAA stock did not have
the right to convert to common stock unless and until the Company achieved a
cumulative revenue threshold, or failed to achieve a minimum quarterly or annual
revenue amount. Based on current projections, the Company expects that it will
achieve the revenue threshold during the third quarter of 2000. If that revenue
threshold is met the contingent rights of the warrant holders will vest and the
number of warrants exercisable into common stock will increase in accordance
with the Supplemental Warrant Agreement. Assuming, (i) these supplemental
warrants had vested during the entire year of 1999, (ii) the current balance of
28,500 shares of preferred stock was outstanding for the entire year and, (iii)
a current market value of the Company's stock of less than $2.00 per share, an
additional 23,750,000 shares of common stock would have been included in the
calculation of diluted earnings per share for 1999. Diluted earnings per share
for 1999, on a pro forma unaudited basis, would have been $0.28 before the asset
impairment charge, restructuring charge and loss on the sale of Landmark and
would have been $0.20 using net income, as reported.
Earnings Before Interest, Taxes, Depreciation and Amortization
Earnings before interest, taxes, depreciation and amortization (EBITDA)
increased 4.3% to $62.2 million in 1999 compared to $59.6 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
generally accepted accounting principles 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.
Results of Operations for the Year Ended December 31, 1998 Compared to the
Results of Operations for the Year Ended December 31, 1997
General
As seen in the chart above, the Company achieved net new orders of 4,366 units
and 2,706 units in the years ended December 31, 1998 and 1997, a 61.3% increase.
This increase is attributable to the Company's acquisitions as well as new order
increases at the Company's operations in Arizona, Texas, and Wisconsin. At
December 31, 1998, the Company has a combined backlog of 1,606
21
<PAGE>
units with a dollar value of $308.8 million as compared to 1,056 units with a
dollar value of $198.2 million as of December 31, 1997, which is consistent with
the strong increase in new orders as stated above.
Revenue
Homebuilding revenues for the Company totaled $687.9 million for the year ended
December 31, 1998 as compared to $445.3 million for the year ended December 31,
1997, an increase of 54.5%. The increase in revenue is consistent with the
increase in the number of homes closed during the respective years. In 1998,
4,016 homes were closed as compared to 2,762 closings in 1997. This 45.4%
increase is attributable to the Company's acquisitions as well as increases in
closings in all of the markets in which the Company operates.
Additionally, the average price of units closed rose from $159,300 in 1997 to
$168,600 in 1998. This increase reflects the effects of increased closings in
the higher-end homes available in the Las Vegas market coupled with the
Whittaker and WestBrook acquisitions whose average price of units closed from
acquisition through December 31, 1998 was approximately $171,000 and $296,000,
respectively.
Lot sales and other revenue increased to $10.6 million in 1998 from $5.3 million
in 1997. Lot sales and other revenue represented 1.5% of revenue in 1998
compared to 1.2% of revenue in 1997. This resulted primarily from the sale of a
significant number of lots from a land development project in Michigan as well
as the late 1997 and early 1998 acquisitions of builders who routinely develop
their own lots and occasionally sell lots to other homebuilders.
Gross Profit
The Company's gross profit as a percentage of homebuilding revenues, or gross
margin, remained constant from 1997 to 1998 at 15.2%. The Company experienced
increased margins at certain subsidiaries. The Company uses estimates of the
total capitalized costs in order to determine the amount of costs of sales to
record each year. As a result of increases in certain cost estimates at the Las
Vegas subsidiary in late 1998, cost of sales at this subsidiary was increased
for the fourth quarter (resulting in reduced margins). The Company's margins in
1998 and 1997 were also depressed by acquisition accounting adjustments.
Generally accepted accounting principles require that, in a purchase
transaction, the acquirer write-up inventory to an estimated fair value upon
acquisition. This resulted in increased cost of sales as the written-up
inventory is closed and, therefore, decreased gross margins. Accordingly, gross
margins of acquired companies were lower than they otherwise would have been. At
December 31, 1998, the amount of unamortized inventory write-up is approximately
$1,886,000.
22
<PAGE>
Operating Expenses
Overall selling, general, and administrative expenses increased slightly as a
percentage of homebuilding revenue to 11.7% ($80.5 million) from 11.6% ($51.5
million) for the years ended December 31, 1998 and 1997, respectively. Selling
expenses remained steady at 6.3% of homebuilding revenues while general and
administrative expenses dropped slightly to 5.0% from 5.1% in 1998 and 1997,
respectively.
Amortization of goodwill increased $1.5 million to $2.4 million in 1998 from
$0.9 million in 1997. This was primarily due to the additional amortization
resulting from the Galloway and Whittaker acquisitions.
Financial Services Operations
At the end of the 1997, Fortress Mortgage had six operating branches and, by the
end of 1998 had opened an additional eight branches for a total of fourteen
branches.
Fortress Mortgage revenue grew 123.8% to $4.7 million in 1998 compared to $2.1
million in 1997. However, pre-tax income stayed constant at $.2 million. This
was largely due to the negative impact of the start-up costs incurred in
conjunction with short-term growth through the office openings. For the year
ended December 31, 1998, Fortress Mortgage provided mortgages to 25.7% of the
Company's closings in those markets which it served. In those markets which
Fortress Mortgage has served since 1997, the capture rate (the percentage of
closings for which Fortress Mortgage provided mortgages), for the year had
increased to 54.3% in 1998 from 51.9% in 1997.
Net Income and Net Income Per Share
Pre-tax income increased $7.7 million to $21.6 million in 1998 from $13.9
million in 1997, representing an increase of 55.4%. Net income for the year
ended December 31, 1998 increased correspondingly to $12.8 million from $8.5
million for the year ended December 31, 1997.
Diluted net income per share for the year ended December 31, 1998 was
significantly affected by the $5.0 million dividend paid in connection with the
restructuring of the agreement between the Company and Prometheus.
The dilution of net income per share was significantly increased during
1998 due to the lower average stock value during the quarters ended September
30, 1998 and December 31, 1998. In accordance with generally accepted accounting
principles, the Company was required to report currently the potential future
conversion based on the contractual reset tables and the current market price
even though the holder of the Class AA preferred stock and warrants could not
effect a conversion under these reset tables until September 30, 2001. Excluding
the effect of the $5 million non-recurring preferred dividend and of the
contingent dilution, on an adjusted basis, basic net income per share grew 29%
to $.88 per common share for 1998 from $.68 per common share for 1997. Based on
the same adjustments, diluted net income per share grew 8% to $.68 for 1998 from
$.63 for 1997.
Earnings Before Interest, Taxes, Depreciation and Amortization
Earnings before interest, taxes, depreciation and amortization (EBITDA)
increased 50.1% to $59.6 million in 1998 compared to $39.7 million in 1997.
EBITDA is provided as a supplemental measurement
23
<PAGE>
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 1999, the Company's operating activities, taken in the
aggregate, utilized approximately $4.2 million of cash. This cash flow utilized
in operating activities included $28.4 million invested in real estate
inventories and a $4.8 million increase in mortgage loans held for sale. These
uses were partially offset by $8.0 million in reductions in land held for sale
and a $3.5 million increase in payables. Additional borrowings under notes and
mortgages payable secured by this higher level of assets funded approximately
$13.2 million of the increase in inventories.
The $4.7 million of cash provided by the Company's investing activities include
$8.4 million in proceeds from the sale of Landmark Homes and land partnership
interests, as well as a reduction in limited partnerships of $3.4 million. These
cash flows were offset by $5.0 million in new equipment investments and $2.4
million in payments related to contingent consideration on previous
acquisitions.
The Company's financing activities utilized $6.1 million of cash flow. $13.2
million of net borrowings under notes and mortgages payable were offset by $15.1
million in preferred stock redemptions and conversions and by $3.7 million in
preferred dividends. The additional borrowings were used to fund the majority of
the buildup of inventory and mortgage loans held for sale discussed above as
part of cash flow from operations.
The Company regularly refinances existing loan agreements, executes new loan
agreements and, in the case of acquisitions, assumes loans related to the assets
being acquired. Approximately $511.1 million of secured financing commitments
were in place at the subsidiary level at year-end. Under these credit
facilities, the Company has borrowed $200.6 million at December 31, 1999. The
total amount available under these commitments varies based on individual loan
covenants and inventory levels.
The Company 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 for the foreseeable future. As of
December 31, 1999 the Company had cash and cash equivalents on hand of $17.5
million.
At December 31, 1999, the Company had 4,695 lots in inventory, in excess of
backlog, which represents a seventeen-month supply of land based on sales
absorption rates during 1999. It is one of the Company's operating strategies 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 partnerships as methods of controlling
and subsequently acquiring land. The Company plans to continue these practices
and expects to exercise, subject to market conditions, substantially all of its
option contracts. At December 31, 1999, the Company had 8,144 lots under option
representing a 30-month supply of land based on the same absorption rates as
above.
24
<PAGE>
Seasonality and Variability of Results
The Company, and the homebuilding industry in general, experience significant
seasonality and quarterly variability in homebuilding activity levels. The
annual operating cycle generally reflects greater new home orders in the spring
and autumn months and slower new orders in the winter and summer months.
Closings are slowest during the first quarter and increase throughout the
remainder of the year. The Company believes that this seasonality is a
reflection of the impact of winter weather on construction activity and the
preference of homebuyers to close on their new home either prior to the start of
a new school year in the fall or prior to the holiday season.
Outlook
The Company has experienced a decline in new order activity during 1999
compared to 1998. As noted above a portion of this decline is attributable to
the exiting of several markets, as well as some delays in opening new
communities, and to some extent increases in interest rates. While the direct
impact of increases in interest rates is difficult to measure, we believe that
it has had an impact, particularly in our first-time buyer product offerings. We
have seen a strong increase in our Denver market new order activity, but have
seen a softening in the market in other markets including Philadelphia,
Jacksonville, and St. Louis operations. Overall we expect new orders in 2000 to
be somewhat below 1999 levels.
The Company believes the successful implementation of its key
strategies should benefit future operating results in the long run. The Company
has addressed and continues to address key business strategies through, (i) the
continued focus of operational and financial management groups on the
Company-wide program to reduce direct construction costs, and identification and
implementation of processes to improve return on assets at the subsidiary level,
the sharing of "best practices" and the implementation of an integrated computer
information system, and (ii) ongoing evaluations of certain under performing
assets and alternative strategies to improve performance or redeploy funds which
might be recovered from those assets.
Please refer to Business- Risk Factors and the Statement on Forward-Looking
Information.
Year 2000 Disclosure
The Company assessed its computer systems and other business equipment during
1999 and 1998 to determine if they would be able to accurately process certain
data before, during or after January 1, 2000. The Company completed the testing
of its various systems and equipment during the fourth quarter of 1999 and made
inquiries as to whether third parties with which the Company has a material
relationship are Y2K compliant. To date the Company has experienced no adverse
effects from Y2K related issues.
Interest Rates and Inflation
The Company's business performance and the homebuilding industry in general can
be negatively affected by the impact of inflation and the adverse effect
inflation has on interest rates and the overall economic climate both nationally
and in the Company's markets.
Inflation affects the Company in a number of ways including increasing the
Company's cost of construction. Costs including land acquisition and
development, materials and subcontractor labor, overhead and interest rates on
floating rate credit facilities can all be adversely affected by inflation. In
addition, inflation may reduce consumers' ability to purchase a new home,
thereby adversely affecting
25
<PAGE>
the Company's new order flow. During 1999 and 1998, inflation has not
significantly affected the performance of the Company, although rising interest
rates may be affecting current new order activity.
While inflation has not been a significant factor in 1999 or 1998, rising
inflation in the future would likely have an adverse long-term impact on the
Company's business performance.
Adoption of New Accounting Standard
In June 1998 the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No.133, Accounting for Derivative
Instruments and Hedging Activities, effective for fiscal years beginning after
June 15, 1999. SFAS No.133 establishes comprehensive accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts and hedging activities. The standard requires that
all derivative instruments be recorded in the balance sheet at fair value,
however, the accounting for the gain or loss due to change in the fair value of
the derivative instrument depends on whether the derivative instrument qualifies
as a hedge. If the derivative instrument does not qualify as a hedge, the
accounting treatment varies based on the type of risk being hedged. During the
second quarter of 1999, the FASB issued SFAS No. 137, Accounting for Derivative
Instruments and Hedging Activities- Deferral of the effective date of SFAS 133,
which delayed implementation until fiscal years beginning on or after June 15,
2000. Currently, the Company has not yet determined the impact on its financial
condition and results of operations. The Company's only derivative is in the
form of mandatory forward looking commitments on loan sales.
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 land, 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 affect The Fortress Group's operating results
including net income and/or net income per share and other matters addressed in
Business- Risk Factors.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is exposed to market risks related to fluctuations in
interest rates on its debt and on its mortgage loans held for sale. The Company
utilizes forward sale (best efforts and mandatory) commitments to mitigate the
risk associated with the mortgage loan portfolio. Other than the commitments
noted above, the Company does not utilize interest rate swaps, forward option
contracts on foreign currencies or commodities, or other types of derivative
financial instruments.
Fortress Mortgage provides mortgage loans, which are generally sold
upon closing and subsequently delivered to a third-party purchaser within
approximately 30 days. Due to the frequency of these loan sales, the market risk
associated with these mortgage loans is minimal.
26
<PAGE>
The Company utilizes both short-term and long-term debt in its
financing strategy. For fixed rate debt, changes in interest rates generally
affect the fair value of the debt instrument, but not the Company's earnings or
cash flows. Conversely, for variable rate debt, changes in interest rates
generally do not impact the fair value of the debt instrument, but may affect
the Company's future earnings and cash flows. The Company does not have an
obligation to prepay fixed rate debt prior to maturity and, as a result,
interest rate risk and changes in fair value should not have a significant
impact on the fixed rate debt until the Company would be required to refinance
such debt.
As of December 31, 1999, short-term debt was $116,196,000, which
consisted primarily of loans secured by real estate inventories. Also included
in that amount is a mortgage warehouse line that is collateralized by
residential mortgage loans. The Company borrows on a short-term basis from banks
under committed lines of credit, which bear interest at the prevailing market
rates.
Long-term debt obligations outstanding and their maturities at December
31, 1999 are as follows (in thousands). The estimated fair value at December 31,
1999 for all debt indicated is the face value, except for $100 million of Senior
Notes due in 2003, which has an estimated fair value of $55 million at December
31, 1999.
Maturities through December 31,
--------------------------------------------
2001 2002 2003
---- ---- ----
Fixed Rate Debt................. $ 1,190 $ 568 $ 100,464
Average Interest Rate...... 7.9% 8.1% 13.7%
Variable Rate Debt............. $ 86,484 $ 488 $ 0
Average Interest Rate...... 7.9% 8.5% N/A
The Company believes that its overall balance sheet structure has
repricing and cash flow characteristics that mitigate the impact of interest
rate movements.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements are listed under Item 14(a)(1) and filed as part of
this report on the pages indicated and are incorporated herein by reference.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
27
<PAGE>
PART III
The information required by Part III is omitted from this Annual Report
on Form 10-K and is incorporated by reference from the definitive proxy
statement with respect to the 1999 Annual Meeting of Stockholders (the Proxy
Statement) which the Company will file with the Securities and Exchange
Commission (the Commission) not later than 120 days after the end of the fiscal
year covered by this Report.
Item 10. Directors and Executive Officers of the Registrant
(a) Identification of Directors. Information required by this Item will
be set forth under the caption "Proposal 1, Election of Directors -
Nominees for Election at this Annual Meeting" in the Proxy Statement,
which information is incorporated herein by
reference.
(b) Identification of Executive Officers. Information required by this
Item is set forth under the caption "Executive Officers of the
Company" under Part I, Item 1 of this Report, which information is
incorporated herein by reference.
Item 11. Executive Compensation
Information required by this Item will be set forth under the captions
"Executive Compensation" and "Proposal 1, Election of Directors - Directors'
Remuneration" in the Proxy Statement, which information is incorporated herein
by reference.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
Information required by this Item will be set forth under the caption
"Stock Ownership" in the Proxy Statement, which information is incorporated
herein by reference.
Item 13. Certain Relationships and Related Transactions
Information required by this Item will be set forth under the caption
"Certain Transactions" in the Proxy Statement, which information is incorporated
herein by reference.
28
<PAGE>
PART IV
Item 14. Exhibits, Financial Statements Schedules and Reports on Form 8-K.
(a) Financial Statements, Schedules and Exhibits.
1. Financial Statements
THE FORTRESS GROUP, INC.
INDEX TO FINANCIAL STATEMENTS
Page
----
THE FORTRESS GROUP, INC.
Report of PricewaterhouseCoopers LLP, Independent Accountants F-1
Consolidated Balance Sheets as of December 31, 1999 and 1998 F-2
Consolidated Statement of Operations for the years ended
December 31, 1999, 1998, and 1997 F-3
Consolidated Statement of Shareholders' Equity for the years
ended December 31, 1999, 1998, and 1997 F-4
Consolidated Statement of Cash Flows for the years ended
December 31, 1999, 1998, and 1997 F-5
Notes to Consolidated Financial Statements F-6
29
<PAGE>
2. Financial Statement Schedules
None.
3. Exhibits
Number Description
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"). (Exhibit 2.1 of the
Registration Statement on Form S-1 (File No. 333-2332) effective
May 16, 1996, is hereby incorporated by reference.)
2.1(a) First Amended to Buffington Merger Agreement, dated May 15,
1996. (Exhibit 2.1(a) of the Registration Statement on Form S-1
(File No. 333-2332) is hereby incorporated by reference.)
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"). (Exhibit 2.2 of the Registration Statement on Form
S-1 (File No. 333-2332) is hereby incorporated by reference.)
2.2(a) First Amendment to Christopher Merger Agreement, dated May 15,
1996. (Exhibit 2.2(a) of the Registration Statement on Form S-1
(File No. 333-2332) is hereby incorporated by reference.)
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"). (Exhibit 2.3 of the
Registration Statement on Form S-1 (File No. 333-2332) is hereby
incorporated by reference.)
2.3(a) First Amendment to Genesee Merger Agreement, dated May 15, 1996.
(Exhibit 2.3(a) of the Registration Statement on Form S-1 (File
No. 333-2332) is hereby incorporated by reference.)
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").
(Exhibit 2.4 of the Registration Statement on Form S-1 (File No.
333-2332) is hereby incorporated by reference.)
2.4(a) First Amendment to Sunstar Merger Agreement, dated May 15, 1996.
(Exhibit 2.4(a) of the Registration Statement on Form S-1 (File
No. 333-2332) is hereby incorporated by reference.)
30
<PAGE>
2.5 Asset Purchase Agreement, dated August 31, 1996 by and among The
Fortress Group, Inc., Fortress Acquisition, Inc., Landmark
Homes, Inc., B. Rex Stephens, and Bobby W. Harrelson. (Exhibit
2.1 of the Current Report on Form 8-K dated September 16, 1996
is hereby incorporated by reference.)
2.6 Asset Purchase Agreement, dated February 28, 1997 by and among
The Fortress Group, Inc., Fortress-Florida, Inc., DW Hutson
Construction, Inc., and David Hutson. (Exhibit 10.1 of the
Current Report on Form 8-K dated March 17, 1997 is hereby
incorporated by reference.)
2.7 Purchase Agreement dated August 18, 1997 among The Fortress
Group, Inc.; Fortress Galloway, Inc.; Don Galloway Homes, Inc.;
Don Galloway Land, LLC; Galloway Limited Partnership;
Thornblade, LLC, and the Persons named herein. (Exhibit 1 of the
Current Report on Form 8-K dated August 27, 1997 is hereby
incorporated by reference.)
2.8 Amended and Restated Purchase Agreement among the Company;
Whittaker Construction, Incorporated; RRKTG Lumber, Inc.; Lewis
and Clark Title Company and person named therein (Exhibit 2.1 of
the Current Report on Form 8-K dated March 16, 1998 is hereby
incorporated by reference.)
3.1 Amended and Restated Certificate of Incorporation of the
Registrant. (Exhibit 3.1 of the Registration Statement on Form
S-1 (File No. 333-2332) is hereby incorporated by reference.)
3.2 Certificate of Amendment of Certificate of Incorporation of the
Company (Exhibit 3.1(a) of Amendment No. 3 to the Registration
Statement on Form S-1 (File No. 333-2332) is hereby incorporated
by reference.)
3.3 Certificate of Amendment of Certificate of Incorporation of the
Company, effective March 6, 1998 (Exhibit 3.1 of the Form 8-K
dated March 16, 1998 is hereby incorporated by reference.)
3.3(a) Notice of Election to Terminate Charter Provisions (Exhibit
3.3(a) of the Company's 1998 Annual Report on Form 10-K dated
March 30, 1999 is hereby incorporated by reference.)
3.4 Amended and Restated Bylaws of the Registrant. (Exhibit 3.2 of
the Registration Statement on Form S-1 (File No. 333-2332)
effective May 16, 1996, is hereby incorporated by reference.)
3.5 Amendments to the Company's By-laws, effective March 6, 1998
(Exhibit 3.2 of the Form 8-K dated March 16, 1998 is hereby
incorporated by reference.)
3.6 Amendment to the Company's By-laws adopted February 4, 1999
(Exhibit 2 of the Form 8-K dated March 5, 1999 is hereby
incorporated by reference.)
4.2 Form of Indenture for Senior Notes. (Exhibit 4.2 of the
Registration Statement on Form S-1 (File No. 333-2332) is hereby
incorporated by reference.)
4.3 Form of Certificate for Senior Notes. (Exhibit 4.3 of the
Registration Statement on Form S-1 (File No. 333-2332) is hereby
incorporated by reference.)
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<PAGE>
The Company is a party to a number of other instruments defining
the rights of holders of long-term debt. No such instrument
authorizes an amount of securities in excess of 10% of the total
assets of the Company and its subsidiaries on a consolidated
basis. On request, the Company agrees to furnish a copy of each
such instrument to the Commission.
4.3(a) Second Supplemental Indenture dated May 27, 1997 (Exhibit 4 of
the Company's Quarterly Report on Form 10Q/A Amendment No. 1 for
the quarter ended June 30, 1997 is hereby incorporated by
reference.)
4.4 Stockholders' Agreement, dated as of April 15, 1996, by and
among the Company and certain shareholders (Exhibit 10.7 to
Amendment No. 1 to the Registration Statement on Form S-1 (File
No. 333-2332) is hereby incorporated by reference.)
4.5 Amended and Restated Warrant Agreement dated as of March 6, 1998
by and between the Company and Prometheus Homebuilders LLC
(Exhibit 4.6 of the Company's Current Report on Form 8-K dated
March 16, 1998 is hereby incorporated by reference.)
4.5(a) Supplemental Warrant Agreement dated as of February 4, 1999 by
and between the Company and Prometheus Homebuilders LLC (Exhibit
D of Exhibit 1 of the Schedule 13D, Amendment No. 4 filed by
Prometheus Homebuilders LLC on January 12, 1999 is hereby
incorporated by reference.)
4.6 Amended and Restated Stockholders Agreement, dated as of March
6, 1998, by and among the Company and the Stockholders named
therein (Exhibit 4.7 of the Current Report on Form 8-K dated
March 16, 1998 is hereby incorporated by reference.)
4.6(a) Second Amended and Restated Stockholders Agreement dated as of
February 4, 1999 by and between the Company and Prometheus
Homebuilders LLC (Exhibit C of Exhibit 1 of the Schedule 13D,
Amendment No. 4 filed by Prometheus Homebuilders LLC on January
12, 1999 is hereby incorporated by reference.)
4.7 Amended and Restated Registration Rights Agreement dated as of
March 6, 1998 by and between the Company and Prometheus
Homebuilders LLC (Exhibit 4.8 of the Current Report on Form 8-K
dated March 16, 1998 is hereby incorporated by reference.)
4.7(a) Second Amended and Restated Registration Rights Agreement dated
as of February 4, 1999 by and between the Company and Prometheus
Homebuilders LLC (Exhibit B of Exhibit 1 of the Schedule 13D,
Amendment No. 4 filed by Prometheus Homebuilders LLC on January
12, 1999 is hereby incorporated by reference.)
4.8(a) Amended Certificate of Designations, Preferences and Rights of
Series C Convertible Preferred Stock of The Fortress Group Inc.
(Exhibit 4.8(a) of the Company's 1998 Annual Report on Form 10-K
dated March 30, 1999 is hereby incorporated by reference.)
4.8(b) Certificate of Designations, Preferences and Rights of Series D
Convertible Preferred Stock of The Fortress Group Inc. (Exhibit
2 of the Current Report on Form 8-K dated August 27, 1997 is
hereby incorporated by reference.)
4.8(c) Amended Certificate of Designations, Preferences and Rights of
Series E 6% Convertible
32
<PAGE>
Preferred Stock of The Fortress Group, Inc. (Exhibit 4.1 of the
Quarterly Report on Form 10-Q for the Quarter ended March 31,
1997 is hereby incorporated by reference.)
4.8(d) Certificate of Designations, Preferences and Rights of Series F
6% Convertible Preferred Stock of The Fortress Group, Inc.
(Exhibit 4.2 of the Company's Quarterly Report on Form 10-Q for
the Quarter ended March 31, 1997 is hereby incorporated by
reference.)
4.8(e) Certificate of Designations, Preferences and Relative,
Participating, Optional and Other Special Rights of Preferred
Stock and Qualifications, Limitations and Restrictions thereof
of Class AAA Convertible Redeemable Preferred Stock (Exhibit A
of Exhibit 1 of the Schedule 13D, Amendment No. 4 filed by
Prometheus Homebuilders LLC on January 12, 1999 is hereby
incorporated by reference.)
10.1 Stock Incentive Plan. (Exhibit 10.1 of the Registration
Statement on Form S-1 (File No. 333-2332) is hereby incorporated
by reference.)
10.2 Stock Purchase Agreement dated as of August 14, 1997 by and
between the Company and Prometheus Homebuilders LLC (Exhibit 1
of the Schedule 13D filed by Prometheus Homebuilders LLC on
August 25, 1997 is hereby incorporated by reference.)
10.2(a) Amended and Restated Stock Purchase Agreement dated as of
September 30, 1997 by and between the Company and Prometheus
Homebuilders LLC (Exhibit 1 of the Schedule 13D, Amendment No. 1
filed by Prometheus Homebuilders LLC on October 15, 1997 is
hereby incorporated by reference.)
10.2(b) Second Amended and Restated Stock Purchase Agreement dated as of
February 19, 1998 by and between the Company and Prometheus
Homebuilders LLC (Exhibit 10 of the Current Report on Form 8-K
dated March 16, 1998 is hereby incorporated by reference.)
10.2(c) Restructuring Agreement by and among The Fortress Group, Inc.,
Prometheus Homebuilders LLC and the Homebuilder Stockholders
listed therein dated as of December 31, 1998 (Exhibit 1 of the
Schedule 13D, Amendment No. 4 filed by Prometheus Homebuilders
LLC on January 12, 1999 is hereby incorporated by reference.)
10.3 Incentive Compensation Plan. (Exhibit 10.3 of the Registration
Statement on Form S-1 (File No. 333-2332) is hereby incorporated
by reference.)
10.4(d) Employment Agreement between Christopher Homes, Custom Home
Division, Inc. and J. Christopher Stuhmer. (Exhibit 10.4(d) of
the Registration Statement on Form S-1 (File No. 333-2332) is
hereby incorporated by reference.)
10.4(e) Employment Agreement between The Genesee Company and Robert
Short. (Exhibit 10.4(e) of the Registration Statement on Form
S-1 (File No. 333-2332) is hereby incorporated by reference.)
10.4(k) Employment agreement between The Fortress Group, Inc. and
George C. Yeonas (Exhibit 10.14 of the Company's 1997 Annual
Report on Form 10K is hereby incorporated by reference.)
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. (Exhibit 10.5 of the Registration Statement on
Form S-1 (File No. 333-2332) is hereby incorporated by
reference.)
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. (Exhibit 10.7 of the
Registration
33
<PAGE>
Statement on Form S-1 (File No. 333-2332) is hereby incorporated
by reference.)
10.10 Lease Agreement between Christopher Homes Custom Home Division,
Inc., and Towne Center Limited Partnership (Exhibit 10.10 of the
Company's 1996 Annual Report on Form 10-K dated March 31, 1997
is hereby incorporated by reference.)
10.11 Lease Agreement between The Genesee Company and Genesee Holdings
Corporation (Exhibit 10.11 of the Company's 1996 Annual Report
on Form 10-K dated March 31, 1997 is hereby incorporated by
reference.)
10.12 Asset Purchase Agreement, dated July 1, 1996 by and among The
Genesee Company and Genesee Custom Homes, Inc. (Exhibit 2.1 of
the Quarterly Report on Form 10-Q for the quarter ended June 30,
1996 is hereby incorporated by reference.)
10.13 Purchase and Sale Agreement between The Genesee Company and RS
Investments/Stonebridge LLC, dated December 1, 1999 (included
herein).
10.14 Amendment to Purchase and Sale Agreement between The Genesee
Company and RS Investments/Stonebridge, LLC, dated December 1,
1999 (included herein).
10.15 Option Agreement between RS Investments/Stonebridge, LLC, and
The Genesee Company, dated December 1, 1999 (included herein).
10.16 Amendment to Option Agreement between RS Investments/
Stonebridge, LLC, and The Genesee Company, dated December 1,
1999 (included herein).
10.17 Amendment to Option Agreement Between RS Investments/
Stonebridge, LLC, and The Genesee Company, dated December 10,
1999 (included herein)
34
<PAGE>
21.1 List of Subsidiaries (included herein.)
23.1 Consent of Accountants (included herein.)
27.1 Financial Data Schedule (included herein.)
(b) Reports on Form 8-K.
None
35
<PAGE>
SIGNATURES
Pursuant to the requirements Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized March 30, 2000.
THE FORTRESS GROUP, INC.
By: /s/ George C. Yeonas
------------------------------------
Name: George C. Yeonas
Title: Chief Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity In Which Signed Date
<S> <C> <C>
/s/ George C. Yeonas Chief Executive Officer and Director 3/30/00
- ----------------------------
George C. Yeonas
/s/ Jeffrey W. Shirley Chief Financial Officer,
- ---------------------------- and Principal Accounting Officer 3/30/00
Jeffrey W. Shirley
/s/ Mark L. Fine Director 3/29/00
- ----------------------------
Mark L. Fine
/s/ Sandra A. Lamb Director 3/29/00
- ----------------------------
Sandra A. Lamb
Director
- ----------------------------
Linda H. Lewis
/s/ Robert Short Director 3/29/00
- ----------------------------
Robert Short
Director
- ----------------------------
William A. Shutzer
/s/ J. Christopher Stuhmer Director 3/30/00
- ----------------------------
J. Christopher Stuhmer
</TABLE>
36
<PAGE>
Report of Independent Accountants
To the Board of Directors and
Shareholders of The Fortress Group, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of shareholders' equity and of cash flows
present fairly, in all material respects, the financial position of The Fortress
Group, Inc. (the "Company") at December 31, 1999 and 1998, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1999 in conformity with accounting principles generally
accepted in the United States. 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 auditing standards generally accepted in the
United States, 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.
PRICEWATERHOUSECOOPERS LLP
Washington, DC
February 21, 2000
F-1
<PAGE>
THE FORTRESS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 17,526 $ 23,102
Accounts and notes receivable 12,748 14,092
Real estate inventories 328,513 310,706
Land held for resale 0 7,954
Mortgage loans 20,229 15,397
Investments in land partnerships 1,518 9,616
Property and equipment, net 12,392 13,785
Prepaid expenses and other assets 22,803 15,980
Goodwill, net 35,452 39,271
-------- --------
Total assets $451,181 $449,903
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued construction liabilities $ 38,915 $ 35,501
Notes and mortgages payable 301,658 292,769
Accrued expenses 18,905 19,665
Customer deposits 10,530 10,708
-------- ---------
Total liabilities $370,008 $ 358,643
======== =========
Commitments and Contingencies (see Note 19)
Minority interest 79 67
Obligation under preferred stock redemption agreement (see Note 9) 1,421 0
Shareholders' equity
Preferred stock, all classes and series, $.01 par value,
1 million authorized (See Note 9) 1 1
Common stock, $.01 par value, 99 million authorized,
12,496,260 and 12,173,207 issued, respectively 125 122
Additional paid-in capital 54,308 71,313
Preferred subscription receivable 0 (333)
Retained earnings 26,460 21,311
Treasury stock, at cost, 265,100 shares (1,221) (1,221)
-------- ---------
Total shareholders' equity 79,673 91,193
-------- ---------
Total liabilities and shareholders' equity $451,181 $ 449,903
======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
THE FORTRESS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
For the Year For the Year For the Year
Ended Ended Ended
December 31, 1999 December 31, 1998 December 31, 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
TOTAL REVENUES $740,785 $692,645 $447,374
-------- -------- --------
HOMEBUILDING:
Residential Sales $719,970 $677,271 $440,006
Lot sales and other 14,647 10,636 5,305
-------- -------- --------
Homebuilding revenues 734,617 687,907 445,311
Cost of sales 626,602 583,278 377,607
------- -------- --------
Gross profit $108,015 $104,629 $ 67,704
Selling 46,514 43,601 27,952
General and administrative 36,436 34,534 22,568
Asset impairment charge 1,990 0 0
Special charges 1,270 0 0
Goodwill amortization 2,618 2,395 948
-------- -------- --------
Net operating income $ 19,187 $ 24,099 $ 16,236
-------- -------- --------
Other expense (income):
Interest expense 4,592 5,547 3,396
Interest income (608) (916) (336)
Minority interest 0 (35) (6)
Other, net (2,439) (1,957) (531)
-------- -------- --------
Homebuilding income before taxes 17,642 21,460 13,713
FINANCIAL SERVICES:
Operating revenues 6,168 4,738 2,063
General, administrative and other expenses 5,987 4,592 1,889
Interest expense 1,210 755 298
Interest income (1,033) (777) (334)
-------- -------- --------
Financial Services income before taxes 4 168 210
Loss on sale of Landmark Homes 2,900 0 0
Total income before taxes 14,746 21,628 13,923
Provision for income taxes 6,469 8,794 5,463
-------- -------- --------
Net income $ 8,277 $ 12,834 $ 8,460
======== ======== ========
Income available to common shareholders, basic $ 5,149 $ 5,436 $ 7,982
======== ======== ========
Income available to common shareholders, diluted $ 5,484 $ 5,464 $ 8,093
======== ======== ========
NET INCOME PER SHARE DATA (See Note 10):
Basic net income per share $ .42 $ .46 $ .68
======== ======== ========
Diluted net income per share $ .37 $ .42 $ .63
======== ======== ========
Basic weighted average shares outstanding 12,119,666 11,818,888 11,759,712
========== ========== ==========
Diluted weighted average shares outstanding 14,625,496 13,140,236 12,862,171
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
THE FORTRESS GROUP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
Shares Amount
------------------ -----------------------------------------------------------------------------
Additional Total
Paid-In Subscription Retained Treasury Shareholders'
Preferred Common Preferred Common Capital Receivables Earnings Stock Equity
--------- ------ ---------------- ------- ----------- -------- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 10 11,763 $118 $23,808 $ 8,072 $ (12) $31,986
== ====== ==== ======= ======= ======= =======
Issuance of preferred stock 144 1 23,828 23,829
Amortization of discount on
preferred stock 263 263
Cancellation of preferred stock (3) (315) (315)
Preferred stock dividends (461) (461)
Imputed preferred stock dividend 17 (17)
Issuance of common stock 69 336 336
Adjustment of stock guarantee (57) (57)
Common stock dividends declared (118) (118)
Purchase of treasury stock (203) 2 (1,028) (1,026)
Retirement of treasury stock (1) (511) 512
Net income 8,460 8,460
--- ------ -- ---- ------- ----- ------- ------- -------
Balance at December 31, 1997 151 11,629 $1 $117 $47,371 $15,936 $ (528) $62,897
=== ====== == ==== ======= ======= ======= =======
Issuance of preferred stock 53 27,301 $(500) 26,801
Cancellation of preferred stock (1) (50) (50)
Redemption of preferred stock (35) (3,534) (3,534)
Conversion of preferred stock (19) 339 4 (327) (323)
Preferred stock dividend (7,330) (7,330)
Imputed preferred stock dividend 68 (68)
Issuance of common stock 85 1 459 460
Common stock dividends declared (61) (61)
Vesting of non-qualified options 25 25
Purchase of treasury stock (145) (693) (693)
Subscription receivable relief 167 167
Net income 12,834 12,834
--- ------ -- --- ------- ----- ------ ------- -------
Balance at December 31, 1998 149 11,908 $1 $122 $71,313 $(333) $21,311 $(1,221) $91,193
=== ====== == ==== ======= ===== ======= ======= =======
Issuance of preferred stock (342) (342)
Redemption of preferred stock (33) (13,693) 333 (13,360)
Conversion of preferred stock (21) 212 2 (1,695) (1,693)
Preferred stock dividend (3,128) (3,128)
Issuance of common stock 111 1 146 147
Preferred Stock Redemption
Obligation (1,421) (1,421)
Net income 8,277 8,277
--- ------ ------ ---- ------ ------- ------- ------- -------
Balance at December 31, 1999 95 12,231 $ 1 $125 $54,308 $ 0 $26,460 $(1,221) $79,673
=== ====== ====== ==== ======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
THE FORTRESS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
For the Year For the Year For the Year
Ended Ended Ended
December 31, 1999 December 31, 1998 December 31, 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 8,277 $ 12,834 $ 8,460
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Depreciation and amortization 9,640 9,170 5,304
Minority interest 0 (35) (6)
Special charges 1,270 0 0
Asset impairment charge 1,990 0 0
(Gain) on sale of investment in land partnerships (291) 0 0
Loss on sale of Landmark Homes 2,900 0 0
(Gain) loss on sale of property and equipment 168 (96) 45
Changes in operating assets and liabilities
Accounts receivable 1,113 11,289 (7,516)
Real estate inventories (28,440) (28,487) 1,116
Land held for resale 7,954 (1,020) (6,934)
Mortgage loans (4,832) (4,269) (11,128)
Prepaid expenses and other assets (7,413) 1,370 837
Accounts payable and accrued construction liabilities 3,547 6,934 3,471
Accrued expenses (2) 1,816 4,309
Customer deposits (91) 1,992 545
--------- --------- --------
Net cash (used in) provided by operating activities (4,210) 11,498 (1,497)
--------- --------- --------
Cash flows from investing activities
Acquisition of homebuilders, net of acquired cash 0 (27,616) (19,976)
Proceeds from sale of Landmark Homes net of cash sold 3,078 0 0
Proceeds from sale of land partnership interests 5,351 0 0
Payment of contingent consideration (2,372) (2,034) 0
Purchase of property and equipment (4,981) (6,841) (6,933)
Proceeds from sale of property and equipment 263 438 267
Change in investment in limited partnerships 3,378 (2,853) (6,763)
--------- --------- --------
Net cash provided by (used in) investing activities 4,717 (38,906) (33,405)
--------- --------- --------
Cash flows from financing activities
Borrowings under notes and mortgages payable 744,313 685,844 357,304
Repayment of notes and mortgages payable (731,153) (662,651) (332,759)
Related party borrowings 109 118 193
Repayment of related party borrowings (381) (483) (363)
Proceeds from issuance of common stock, net 148 86 14
Proceeds from issuance of Class AA Preferred Stock, net (342) 24,813 9,958
Deferred financing costs 0 0 (1,882)
Conversion of preferred stock (1,693) (324) 0
Preferred stock redemption (13,360) (1,500) 0
Preferred dividends paid (3,724) (7,017) (110)
Common dividends paid 0 (89) (89)
Purchase of treasury stock 0 (693) (1,170)
--------- --------- --------
Net cash (used in) provided by financing activities (6,083) 38,104 31,096
--------- --------- --------
Net (decrease) increase in cash and cash equivalents (5,576) 10,696 (3,806)
Cash and cash equivalents, beginning of period 23,102 12,406 16,212
--------- --------- --------
Cash and cash equivalents, end of period $ 17,526 $ 23,102 $ 12,406
========= ========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
THE FORTRESS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
(Buffington merged with Wilshire (see below); as of 1999,
operations exclusively marketed under Wilshire name
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, Myrtle
(sold March 1999) 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
(phased out during
1999)
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 a mortgage lending source to the Company's
builder subsidiaries as an ancillary benefit. Fortress Mortgage is licensed as a
mortgage banker in Alaska, California, Colorado, Florida, Missouri, Nevada,
North Carolina, Oregon, Pennsylvania, South Carolina, Texas, Virginia,
Washington and Wisconsin.
Based on its internal reporting methods, the Company has determined that its two
reportable segments are homebuilding and financial services. The Company's
various homebuilding subsidiaries comprise the homebuilding segment. These
subsidiaries engage in acquiring or developing land primarily on which to build
residential for-sale housing. Fortress Mortgage is the financial services
segment. Its function is to originate mortgage loans primarily to the buyers of
homes constructed by the homebuilding segment of the Company.
F-6
<PAGE>
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
Each subsequent acquisition has been accounted for under the purchase method of
accounting. The purchase price of each of the acquired companies was allocated
first to record the assets and liabilities acquired at estimated fair value on
the acquisition date with any remaining balances recorded as goodwill.
The consolidated statements of operations, shareholders' equity and cash flows
include the results of Fortress, inclusive of the Predecessor Companies and all
of the companies acquired since their respective dates of acquisition.
Certain prior period amounts have been reclassified to conform to the current
year presentation.
General Policies
Cash and cash 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.
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 range from two to ten years. Significant additions and
improvements are capitalized while expenditures for repairs and maintenance are
charged to operations as incurred. 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.
Deferred financing costs
Costs associated with the issuance of the Senior Notes have been capitalized and
are being amortized using the straight-line method over the seven-year term of
the related notes.
Beneficial conversion feature
In accordance with Emerging Issues Task Force Topic D-60, Accounting for the
Issuance of Convertible Preferred Stock and Debt Securities with a
Non-detachable Conversion Feature, the Company recorded a $274,000 "discount"
for the 11,700 shares of Class AA convertible preferred stock issued during
1997. (See description of preferred stock in Note 9 - Shareholders' Equity.) As
required by Topic D-60, the Company amortized this discount using the effective
interest method from the date of issuance, September 30, 1997, through the date
at which the Class AA was exchanged for Class AAA preferred stock. This
amortization was recognized as an additional return to the preferred
shareholders (see Note 10 - Earnings per Share) and is included in the Statement
of Shareholders' Equity for the years ended December 31, 1998 and 1997 as an
"imputed preferred stock dividend."
Use of estimates
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.
F-7
<PAGE>
Homebuilding Segment Policies
Revenue recognition
Residential homes and lot 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 ("SFAS")
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of. Costs incurred which are included in
inventory consist of land, land development, direct and certain indirect
construction costs, capitalized interest during the period of development
through the completion of construction, real estate taxes, 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 specifically identified estimate to
complete, 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.
Certain components of cost of sales, particularly those pertaining to land
development, are based on management estimates of the total expected costs of an
ongoing project. These estimates are subject to change.
Warranty Costs
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.
Warranty reserves are included in "accrued expenses", and amounted to
approximately $3.0 million and $2.0 million as of December 31, 1999 and 1998,
respectively.
Investments in land partnerships
The Company records its investments in land partnerships in which it holds less
than a majority interest under the equity method of accounting.
Option deposits
The Company enters into option agreements that allow the takedown of land under
the specified terms. When a deposit is required, the Company records the deposit
amount in "other assets." When the land is taken down, the deposit becomes part
of the cost basis of the land and is reclassified as land inventory. If the
decision is made not to take down the land, the deposit is expensed. Option
deposits totaling approximately $10.0 million and $8.1 million are included in
"other assets" at December 31, 1999 and 1998, respectively.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of
assets acquired and is being amortized over periods ranging from five to twenty
years. Accumulated amortization at December 31, 1999 and amortization expense
for the year then ended were $6,044,187 and $2,618,390, respectively.
Accumulated amortization at December 31, 1998 and amortization expense for the
year then ended were $3,425,807 and $2,395,166, respectively. Accumulated
amortization at December 31, 1997 and amortization expense for the year then
ended were $1,030,641 and $947,883, respectively. If facts and circumstances
dictate, the Company evaluates the recoverability of goodwill based on the
estimated future undiscounted cash flows associated with the assets. In the
event that the analysis indicates that the carrying value of goodwill is
impaired, it would be written down to its estimated fair value. During the first
quarter of 1999, the Company sold the assets of Landmark and wrote off
unrecovered goodwill of $2,977,000. During the second quarter of 1999, the
Company wrote off $294,000 in remaining goodwill of
F-8
<PAGE>
WestBrook as part of its decision to wind down the operations of that
subsidiary. (See Note 11 - Sale of Assets and Special Charges)
Minority interest
Certain of the Company's subsidiaries are participants in real estate joint
ventures in which parties unrelated to the Company own a minority interest.
Joint venture profits are allocated to the Company and the other partners
according to their respective ownership.
Financial Services Segment Policies
Mortgage income
SFAS No. 91, Accounting for Nonrefundable Fees and Costs Associated with
Originating or Acquiring Loans and Initial Direct Costs of Leases, requires the
deferral of loan origination income and direct loan origination costs over the
estimated life of the loans. The Company defers the loan fees and costs and
recognizes them at the time of sale of the loans. A total of $64,984 and
$103,229 was recorded as part of the loans held for sale balance for unamortized
loan origination fees and costs recognized under SFAS No.91 as of December 31,
1999 and 1998, respectively.
Gains and losses from sales of mortgage loans are recognized at the time of sale
and are determined by the difference between net sale proceeds and the carrying
value of the mortgage loans sold.
Recognition of gains and losses is based on SFAS No. 125, Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities,
which was effective for transfers and servicing of financial assets and
extinguishment of liabilities occurring after December 31, 1996. SFAS No. 125 is
based upon consistent application of a financial components approach that
focuses on control. Under that approach, after a transfer of financial assets,
an entity recognizes the financial and servicing assets it controls and the
liabilities it has incurred, derecognizes financial assets when control has been
surrendered, and derecognizes liabilities when extinguished.
The Company does not retain servicing on loans sold.
Mortgage loans
Mortgage loans held for sale to nonaffiliated investors are recorded in the
aggregate at the lower of cost or market. Fair value is based upon contractually
established prices at which mortgage loans will be sold or, if loans are not
committed for sale, at current market prices. Mortgage loans associated with
construction loans consist of draws that have been funded under a specific
program developed for borrowers buying upper-end homes in Nevada. No valuation
allowance was required at December 31, 1999 or 1998.
New accounting pronouncements
In June 1998 the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No.133, Accounting for Derivative
Instruments and Hedging Activities, effective for fiscal years beginning after
June 15, 1999. SFAS No.133 establishes comprehensive accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts and hedging activities. The standard requires that
all derivative instruments be recorded in the balance sheet at fair value,
however, the accounting for the gain or loss due to change in the fair value of
the derivative instrument depends on whether the derivative instrument qualifies
as a hedge. If the derivative instrument does not qualify as a hedge, the
accounting treatment varies based on the type of risk being hedged. During the
second quarter of 1999, the FASB issued SFAS No. 137, Accounting for Derivative
Instruments and Hedging Activities- Deferral of the effective date of SFAS 133,
which delayed implementation until fiscal years beginning on or after June 15,
2000. Currently, the Company has not yet determined the impact on its financial
condition and results of operations. The Company's only derivative is in the
form of mandatory forward looking commitments on loan sales.
F-9
<PAGE>
NOTE 3 - ACQUISITIONS
The Company made no acquisitions during 1999.
Effective January 1, 1998, the Company acquired certain assets and assumed
certain related indebtedness of WestBrook. Additionally, the Company acquired
the stock of Whittaker and Quail effective March 1, 1998 and April 1, 1998,
respectively. The initial purchase price for these acquisition totaled $86.7
million consisting of cash of $30.0 million, short-term notes of $0.5 million,
preferred stock with a liquidation value of $2.0 million, and assumption of
liabilities totaling $54.2 million.
The Company acquired certain assets and assumed certain related indebtedness of
Hutson and Iacobucci effective February 28, 1997 and October 1, 1997,
respectively. Additionally, the Company acquired the stock of Wilshire and
Galloway effective April 1, 1997 and August 1, 1997, respectively. The initial
purchase price for these acquisitions totaled $110.6 million including $17.7
million in cash, $5.7 million in short-term notes payable, 65,000 shares of
common stock with a stated value of $10 per share, 128,854 shares of preferred
stock (liquidation value of approximately $12.9 million), and assumed
liabilities of approximately $73.8 million. In addition, the Company loaned
approximately $3.0 million in cash to the previous owners of Galloway and
Iacobucci which is to be repaid through their respective earnouts or to be
personally repaid by the borrowers at the end of the earnout period.
In each of these acquisitions, the purchase price was allocated first to record
assets and liabilities at fair value on the acquisition date; the remaining
excess purchase price was recorded as goodwill. Cost of goods sold for the years
ended December 31, 1999, 1998, and 1997 included $815,000, $1,624,000, and
$1,928,000 related to the allocation of the purchase price to inventory.
Several of the Company's acquisition agreements include earnout provisions, by
which the seller(s) may receive future consideration based upon the operational
results of the purchased business. These provisions generally extend two to four
years past the purchase date and are calculated as a set percentage of
operational results in excess of operational goal "hurdles." In each of the
acquisitions including earnout provisions, the earnout consideration has been
and will be accounted for as additional purchase price and, accordingly,
increase the goodwill related to the acquisitions and be amortized over the
corresponding remaining goodwill amortization periods. Under these provisions,
the Company is committed to earnout payments of a minimum of $1.0 million per
year in the form of Series C preferred stock through the year 2001. (See Note 9
- - Shareholders' Equity.) In addition, pursuant to these agreements, the Company
has recorded additional purchase price for earnouts in the amount of
approximately $2.0 million, $3.8 million, and $2.8 million for the years ended
December 31, 1999, 1998, and 1997, respectively.
NOTE 4 - SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental disclosures of cash flow information are as follows (in thousands):
<TABLE>
<CAPTION>
For the Year
Ended December 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash paid for the following:
Interest $34,849 $32,415 $25,311
Income taxes $6,065 $10,838 $3,721
</TABLE>
Significant non-cash transactions
In connection with acquisitions, the Company paid the following in the form
of the Company's common and preferred stock during 1999 and 1998:
(Dollars in thousands)
F-10
<PAGE>
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Preferred Shares 0 19,88 1128,854
Common Shares 0 0 65,000
Amount 0 $1,988 $13,535
</TABLE>
Also in connection with acquisitions, the following contingent
consideration amounts ("earnouts") were recorded as non-cash transactions.
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Applied against amounts advanced
to sellers at acquisition $ 57 $ 1,393 $750
Recorded as due to related parties at year end $ 1,927 $ 2,372 0
</TABLE>
In accordance with a Restructuring Agreement dated December 31, 1998
between the Company and Prometheus Homebuilders LLC (Prometheus), the
Company issued 40,000 shares of Class AAA Redeemable Convertible Preferred
Stock in exchange for 40,000 shares of Class AA Convertible Preferred
Stock, effective February 4, 1999 (see Note 9- Shareholders' Equity).
To the extend that the Company elects to redeem all or a portion of the
Class AAA preferred stock, the Company will be obligated under a
"make-whole" provision relating to Prometheus' common stock investment of
898,845 shares of common stock which was purchased upon the second closing
of the Class AA preferred stock. The Company is obligated to arrange for
the sale of Prometheus' common stock at any time during the period from
November 15, 2000 to February 15, 2001 and deliver cash proceeds, provided
that such proceeds result in Prometheus receiving no less than $5.50 per
share. The number of shares the Company would be obligated to sell is
pro-rata based on the percentage of the Class AAA redeemed. As of December
31, 1999, the Company is obligated to sell 258,418 shares of Prometheus'
common stock, for a total of $1,421,299. This obligation has been recorded
as a reduction in additional paid-in capital (see Note 9 - Shareholders'
Equity).
The Company is amortizing debt issuance costs associated with its 13.75%
Senior Notes (see Note 8 - Notes and Mortgages Payable) over the remaining
term of those notes. The Company amortized approximately $1.1 million in
such fees in each the years ended 1999, 1998 and 1997. These financing
costs were capitalized into inventory along with other interest and
financing costs incurred in accordance with SFAS No. 34, Capitalization of
Interest Cost.
NOTE 5 - REAL ESTATE INVENTORIES
Real estate inventories are summarized as follows (in thousands):
December 31,
1999 1998
---- ----
Work-in-progress
Sold homes $100,759 $112,001
Speculative 70,228 68,288
------- -------
Total work-in-progress 170,987 180,289
Land
Finished lots 105,432 76,824
Land under development 22,420 33,454
Unimproved land held for development 13,924 6,407
-------- --------
Total land 141,776 116,685
Lumber yard inventory 2,404 2,223
Model homes 13,346 11,509
-------- --------
$328,513 $310,706
======= =======
Model homes are constructed to assist in the marketing effort of a development.
Speculative homes, included above in work-in-progress, represent both completed
and under-construction, non-model homes which are not subject to a sales
contract. Both work-in-progress and model homes include the allocation of land,
land development, and other allocable costs.
F-11
<PAGE>
NOTE 6 - INTEREST
Information regarding interest is as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
During the years ended December 31, 1999, 1998 and 1997:
Interest incurred $ 34,315 $ 32,444 $ 24,918
Interest capitalized (28,514) (26,142) (21,224)
Relief of previously capitalized interest 28,543 24,271 17,288
-------- -------- --------
Total interest expensed in statement of operations $ 34,344 $ 30,573 $ 20,982
======== ======== ========
At December 31, 1999, 1998 and 1997:
Capitalized interest in ending inventory $ 23,081 $ 23,426 $ 17,906
======== ======== ========
</TABLE>
NOTE 7 - PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
1999 1998
---- ----
<S> <C> <C>
Buildings $ 410 $ 410
Model home upgrades and furnishings 10,749 9,862
Equipment and furniture 10,053 9,052
Vehicles 1,361 1,323
Plans 1,767 416
Leasehold improvements 1,625 1,602
------- -------
25,965 22,665
Less: Accumulated depreciation and amortization (13,573) (8,880)
-------- -------
$12,392 $13,785
======= =======
</TABLE>
NOTE 8 - NOTES AND MORTGAGES PAYABLE
Notes and mortgages payable consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
1999 1998
---- ----
<S> <C> <C>
13.75% Senior Notes due 2003 $100,000 $100,000
Project specific land, land development and
construction loans 183,298 180,144
Mortgage warehouse lines of credit 19,242 14,408
Other loans 2,850 3,069
--------- --------
305,390 297,621
Less: Unamortized debt issuance costs (3,732) (4,852)
--------- --------
$301,658 $292,769
======= =======
</TABLE>
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 December 31, 1999.
In addition, the Senior Note Indenture restricts certain payments including
dividends and repurchase or redemptions of stock. As of December 31, 1999, the
Company had in excess of $9 million available for such payments. However,
F-12
<PAGE>
the Company may make payments such as those described above from cash generated
from subsidiaries or other assets 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 Offered Rate (LIBOR) to 1.0%
over prime rate and fixed rates primarily at 8.0% but ranging up to 12.0%.
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 December 31, 1999.
The Company's mortgage subsidiary has two lines of credit outstanding for the
purpose of originating loans. The lines of credit are secured by the mortgage
loans held for sale and are repaid upon sale of the mortgage loans. These lines
bear interest at variable rates ranging from 1.5% to 2.0% over the Fed Funds
rate based on the type of loan and lending requirements. The aggregate
commitment available under these lines at December 31, 1999 was $45,000,000.
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 December 31, 1999, the total commitment
available is $2 million with $1.38 million outstanding. This outstanding portion
is included in "other loans" above. The remainder of "other loans" consists
primarily of debt financed corporate insurance policies which bear interest at
rates ranging from 6.6% to 7.3%.
Principal maturities of the above indebtedness at December 31, 1999 are as
follows (in thousands):
Year Ended December 31,
2000 $116,196
2001 87,674
2002 1,056
2003 100,464
2004 0
Thereafter 0
--------
$305,390
========
NOTE 9 - SHAREHOLDERS' EQUITY
Preferred stock
The Company has authorized 1 million shares of $.01 par value preferred stock.
The following are the Company's classes and series of preferred stock, amounts
designated, and amounts outstanding at December 31, 1999 and December 31, 1998:
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
Class AAA cumulative convertible (rate of 9% per annum), 40,000
designated, 28,500 and 0, respectively issued and outstanding
($28.5 million aggregate 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, respectively,
issued and outstanding
($3,000,000 aggregate liquidation preference)
Series E 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, 0 and 5,000, respectively, issued
and outstanding
F-13
<PAGE>
Class AA
Effective September 30, 1997, the Company executed the first closing related to
its agreement with Prometheus Homebuilders LLC (Prometheus). In connection with
this agreement to sell Prometheus $75 million in preferred stock ($40 million in
Class AA and $35 million in Class AB), the Company designated 53,333 shares of
Class AA Convertible Preferred Stock. The Company, through its Restructuring
Agreement (see below) extinguished its obligation to sell the Class AB stock.
The Class AA preferred shares carried a cumulative 12% return per annum, until
the second closing at which time the rate was reduced to 6% per annum,
calculated on the liquidation value of $1,000 per share.
Under a Restructuring Agreement dated December 31, 1998 between the Company and
Prometheus, the Company agreed to issue to Prometheus, 40,000 shares of Class
AAA Redeemable Convertible Preferred Stock having an initial liquidation value
of $40,000,000 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. This exchange was effective February 4, 1999. In connection with the
restructuring agreement, the Company paid $5 million as a non-recurring dividend
on December 31, 1998.
Class AAA
The Class AAA preferred stock ranks senior to the Company's common stock as to
the payment of dividends and distributions upon the dissolution, liquidation or
winding up of the Company. Dividends are payable in cash at the annual rate of
9% cumulative and compounded quarterly, on the liquidation value of $1,000 per
share. The Company is required to declare and pay such dividends to the extent
that funds are legally available for the payment of dividends. The Class AAA
preferred stock is convertible, in whole or in part, at the option of the
holder, into the Company's common stock, at any time after issuance, at an
initial conversion price of $6.00 per share, subject to certain customary
anti-dilution adjustments. In conjunction with the issuance of the Class AAA
preferred stock, the Company also issued Supplemental Warrants. These
supplemental warrants include "reset" provisions substantially the same as those
previously included in the Class AA preferred stock. See the description of the
Supplemental Warrants, below.
The Company has the right to redeem the Class AAA preferred stock at any time
until December 31, 2000 for its liquidation value plus dividends that, when
combined with dividends previously paid on the Class AA preferred stock, and
subsequent dividend payments on the Class AAA preferred stock, will provide a
20% annual return from the inception of Prometheus' investment in the Company.
Any redemption of the Class AAA preferred stock is subject to compliance with
the Company's Senior Note Indenture, which restricts the amount of stock
redemptions or repurchases. As of December 31, 1999, the Company has redeemed
$11.5 million in Class AAA preferred stock.
The Class AAA preferred stock (unlike the Class AA preferred stock) does not
include provisions permitting Prometheus to elect a majority of the Company's
board of directors (the "Board") based upon the Company's financial results and
the Company's stock price, but would entitle Prometheus to elect a majority of
the Board following certain payment defaults, including any failure to pay the
required dividends on the Class AAA preferred stock or the amounts required to
be paid in connection with the redemption of the Class AAA preferred stock.
Subject to the stock price and revenue tests described below, the Supplemental
Warrants would become exercisable on September 30, 2001 with an exercise price
of $0.01 per share of common stock and would expire on March 31, 2004. The
number of shares of common stock subject to the Supplemental Warrants is subject
to adjustment depending upon the 60 day average closing price of the common
stock between the period from September 30, 2001 and September 30, 2003. If
during such period the closing price remains greater than $12.00 per share, no
shares would be issuable pursuant to the Supplemental Warrants. If during such
period the closing price is $12.00 per share or less, the number of shares of
common stock issuable upon the exercise of the Supplemental Warrants could be
adjusted, up to five times per year, in accordance with the following table:
F-14
<PAGE>
<TABLE>
<CAPTION>
Issue Price ($) Warrants
--------------- --------
$40 million $28.5 million
liquidation value at liquidation value as
issuance of December 31, 1999
<S> <C> <C>
$12.01 or greater 0 0
10.01 - 12.00 606,061 431,818
8.01 - 10.00 1,333,333 950,000
6.01 - 8.00 3,333,333 2,375,000
4.01 - 6.00 6,666,667 4,750,000
2.01 - 4.00 13,333,333 9,500,000
0.00 - 2.00 33,333,333 23,750,000
</TABLE>
The number of common shares issuable upon the exercise of the Supplemental
Warrants would be further reduced on a pro rata basis if any Class AAA preferred
stock were to be redeemed prior to December 31, 2000.
The number of shares into which each Supplemental Warrant may be exercisable
will also be subject to certain customary anti-dilution adjustments. The
exercisability of the Supplemental Warrants would also be subject to a revenue
test, which provides that the Supplemental Warrants may not be exercised unless
the Company's consolidated revenues for the most recent 16 full fiscal quarters
exceeds $2,429,190,500. The revenue test is subject to adjustment for the sale
of any Company subsidiary. As of December 31, 1999, for purposes of the revenue
test, the Company's cumulative consolidated revenues for the most recent sixteen
quarters was $2,144,308,000. In addition, the Company is required to maintain a
minimum annualized revenue amount of $625 million for the four quarters tested,
which is adjusted to $590 million for the four quarter period ended March 31,
2001 and June 30, 2001. The minimum annualized revenue is subject to further
adjustment for the sale of Company subsidiaries.
In addition, should the Company elect to redeem all or a portion of the Class
AAA preferred stock, the Company will then be obligated under a "make-whole"
provision relating to Prometheus' common stock investment of 898,845 shares of
common stock which was purchased upon the second closing of the Class AA
preferred stock. The Company is obligated to arrange for the sale of Prometheus'
common stock at any time during the period from November 15, 2000 to February
15, 2001 and deliver cash proceeds, provided that such proceeds result in
Prometheus receiving no less than $5.50 per share. The number of shares the
Company would be obligated to sell is pro-rata based on the percentage of the
Class AAA redeemed. As of December 31, 1999, the Company is obligated to sell
258,418 shares of Prometheus' common stock.
In connection with the issuance of the Class AAA preferred stock and the
issuance of the Supplemental Warrants, Prometheus surrendered for cancellation
outstanding warrants to purchase 375,000 shares of the Company's common stock,
and the parties terminated the Company's obligation to issue, and Prometheus'
obligation to purchase, $35 million liquidation value of Class AB preferred
stock and warrants to purchase an additional 625,000 shares of common stock,
which would have been issued in connection with the issuance of the Class AB
preferred stock.
Series A
As part of the acquisition of the Combined Predecessors, 20,000 shares were
issued in 1996 as Series A 11% cumulative convertible non-voting preferred
stock. The preferred stock is restricted from converting into common stock for
the first two years that the shares were issued and outstanding. The conversion
rate of the shares was the lesser of $9.00, the price of the common stock
Offering, or 75% of the lowest closing price during the thirty days immediately
preceding the date of conversion. The Company had the right to redeem all of the
preferred stock prior to conversion at a redemption price equal to the
liquidation value plus any accumulated but unpaid dividends; the 10,000 shares
outstanding at December 31, 1997 were converted during the second quarter of
1998.
Series B
In connection with the Hutson acquisition, Fortress issued 12,000 shares of
Series B convertible preferred stock with a liquidation value of $100 per share.
As a result of post-closing audit adjustments to the purchase price, 3,146 of
these shares were subsequently cancelled during 1997. During 1998, these
preferred shares were converted into common stock and cash with a total value of
$100 per share.
Series C
Also in connection with the Hutson acquisition, Fortress agreed to issue 60,000
shares (70,000 authorized) of Series C convertible preferred stock on an annual
basis over a period not to exceed six years ($6 million liquidation preference).
The amount of each annual issuance will be based upon future earnings of Hutson.
In 1998, the acquisition agreement
F-15
<PAGE>
was amended to allow the Company to pay the earnout in cash or Series C
preferred stock. The stock has been treated as outstanding for the purpose of
calculating earnings per share; however, it will only be legally outstanding
upon issuance. The Series C preferred stock is convertible into common stock
based on $100 liquidation value per Series C share, payable in common stock,
cash, or a combination of both, at the option of Fortress. The 1997 earnout was
paid in cash during 1998. The 1998 earnout was paid in 1999 by issuing 21,163
shares of Series C stock which were immediately converted into 211,630 shares of
common stock. At December 31, 1999, 18,493 shares remain issuable. During the
first quarter of 2000, the earnout for 1999 was paid in cash.
Series D
In connection with the Galloway acquisition, Fortress issued 60,000 shares of
Series D convertible preferred stock with a liquidation value of $100 per share
($6 million aggregate liquidation preference). Each Series D share is
convertible into ten shares of common stock. Series D shares are redeemable at
the option of the holder up to 25% each year, cumulative, over a four-year
period. However, the shares can be redeemed in cash, common stock or a
combination of both equal to the $100 per share liquidation value. The
allocation between common stock and cash is at the sole option of Fortress.
During each of 1998 and 1999, 15,000 shares were redeemed resulting in 30,000
shares outstanding at December 31, 1999.
Series E
The Company has designated 50,000 shares as Series E 6% convertible, convertible
preferred stock ("Series E"), with a liquidation value of $100 per share. In
connection with the WestBrook and Quail acquisitions, the Company issued 19,881
shares of Series E. The purchase price was subsequently adjusted and 500 Series
E shares were returned to the Company. Each Series E share is convertible into
ten shares of common stock at any time at the option of the holder. After the
common stock has traded for $10.00 per share or more for ten consecutive
business days, the Company may require the conversion of the Series E at the
same 10-for-1 conversion rate. At the option of the holder, the Company may be
required to redeem up to 20% of the total number of shares initially issued each
year beginning with the first anniversary of the date of issuance in cash or
common stock at the Company's option. The holder's redemption right is
cumulative. During 1999, the Company redeemed 1,938 shares, resulting in 17,443
shares outstanding at December 31, 1999.
Series F
In connection with the Whittaker acquisition, the Company loaned $500,000 and
then sold 5,000 shares of Series F 6% Cumulative Convertible Preferred Stock
("Series F") with a liquidation value of $100 per share to a key member of
management at Whittaker. The loan bore interest at 6% which was offset by the 6%
dividend rate on the Series F. The Series F was to be convertible, based on the
future earnings of the acquired business, for a period of 60 days commencing on
February 15, 1999, 2000, and 2001 at the closing price of the Common Stock on
the Closing Date and the first and second anniversaries of the Closing Date,
respectively. The loan was accounted for as a subscription receivable in the
equity section of the Company's balance sheet and was to be reduced based on the
future earnings of the acquired business. In the fourth quarter of 1999, the
Company redeemed the entire 5,000 shares, offsetting the outstanding
subscription receivable against the proceeds.
Common stock
In November 1996, the Company's Board of Directors approved a stock repurchase
plan authorizing the purchase of up to 350,000 shares of the Company's currently
outstanding common stock. Such repurchases were effected at various prices from
time to time in the open market. During the years ended December 31, 1998 and
1997, the Company has repurchased 145,000 and 202,500 (of which 60,000 were
acquired pursuant to an acquisition agreement), respectively, 82,400 of which
were subsequently canceled.
In March 1997, the Company established a dividend policy including the
initiation of a cash dividend of $.01 per share annually, payable quarterly, as
permitted under the Indenture. During 1997, the Board of Directors declared
quarterly dividends in accordance with this policy. During the third quarter of
1998, this policy was cancelled. There were no unpaid common stock dividends at
December 31, 1999.
F-16
<PAGE>
Warrants
Under the agreement with Prometheus, the Company issued warrants to purchase a
minimum of 375,000 shares of common stock to Prometheus. The warrants were
exercisable between September 30, 1999 and September 30, 2004, at an exercise
price of $7.00 per share of common stock, subject to adjustment between
September 30, 2001 and September 30, 2003.
In connection with the issuance of the Class AAA preferred stock and the related
issuance of the Supplemental Warrants in the first quarter of 1999, Prometheus
surrendered for cancellation the outstanding warrants to purchase 375,000 shares
of the Company's common stock. See the section describing the Class AAA
preferred stock for further discussion on the Supplemental Warrants.
NOTE 10 - EARNINGS PER SHARE
The following table reconciles the numerators (income) and the denominators
(shares) used to calculate the basic and diluted earnings per-share (in
thousands):
<TABLE>
<CAPTION>
For the Year Ended December 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net income $ 8,277 $ 12,834 $ 8,460
Less: Preferred stock dividends (3,128) (7,330) (461)
Less: Imputed preferred stock dividend 0 (68) (17)
------------ ------------ -----------
Income available to common shareholders $ 5,149 $ 5,436 $ 7,982
============ ============ ===========
Basic EPS
Income available to common
Shareholders $ 5,149 $ 5,436 $ 7,982
Weighted average number of
common shares outstanding 12,119,666 11,818,888 11,759,712
------------ ------------ -----------
Basic earnings per share $ .42 $ .46 $ .68
============ ============ ===========
Diluted EPS
Income available to common
shareholders, basic $ 5,149 $ 5,436 $ 7,982
Plus preferred stock dividends 335 28 111
------------ ------------ -----------
Income available to common
shareholders, diluted $ 5,484 $ 5,464 $ 8,093
============ ============ ===========
Weighted average number of
common shares outstanding 12,119,666 11,818,888 11,759,712
Effect of dilutive securities:
Preferred stock 2,505,830 1,120,003 1,018,564
Options 0 4,183 11,753
Warrants 0 197,162 72,142
------------ ------------ -----------
Weighted average number of
common shares outstanding, diluted 14,625,496 13,140,236 12,862,171
============ ============ ===========
Diluted earnings per share $ .37 $ .42 $ .63
============ ============ ===========
</TABLE>
Following the exchange of the Class AA stock for Class AAA stock in 1999, the
warrants related to the AAA stock did not have the right to convert to common
stock unless and until the Company achieved a cumulative revenue threshold, or
failed to achieve a minimum quarterly or annual revenue amount. Based on current
projections, the
F-17
<PAGE>
Company expects that it will achieve the revenue threshold
during the third quarter of 2000. If that revenue threshold is met, the
contingent rights of the warrant holders will vest and the number of warrants
exercisable into common stock will increase in accordance with the Supplemental
Warrant Agreement. Assuming (i) these supplemental warrants had vested during
the entire year of 1999, (ii) the current balance of 28,500 shares of preferred
stock was outstanding for the entire year and, (iii) a current market value of
the Company's stock of less than $2.00 per share, an additional 23,750,000
shares of common stock would have been included in the calculation of diluted
earnings per share for 1999. Diluted earnings per share on a pro forma,
unaudited basis for 1999 would have been $.20.
The Company's intention upon conversion or redemption (as the case may be) of
Series B, C and D preferred stock (See Note 9 - Shareholders' Equity) 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, additional 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
years ended December 31, 1999, 1998 and 1997 because the effect of adding back
the related dividends and the weighted average common shares was antidilutive:
<TABLE>
<CAPTION>
Outstanding at December 31, Convertible into Common Shares Potential Common Stock outstanding,
as of December 31, twelve months ended December 31,
1999 1998 1997 1999 1998 1997 1999 1998 1997
---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Class/ Series
Class AA 0 40,000 11,700 0 6,666,667 1,950,000 Dilutive 11,184,550 555,616
Class AAA 28,500 0 0 4,750,000 0 0 4,783,500 N/A N/A
Series A 0 0 10,000 0 0 280,702 0 Dilutive Dilutive
Series B 0 0 8,854 0 0 88,540 0 Dilutive Dilutive
Series C 18,493 39,656 60,000 184,930 396,560 600,000 Dilutive Dilutive Dilutive
Series D 30,000 45,000 60,000 300,000 450,000 600,000 Dilutive Dilutive Dilutive
Series E 17,443 19,381 0 174,430 193,810 0 182,810 153,693 N/A
Series F 0 5,000 0 0 50,000 0 Dilutive Dilutive N/A
</TABLE>
SFAS No.128 requires that options are included in the earnings per share
calculation on a quarterly basis only when the average market price of the
common stock during that period exceeds the exercise price of the options. The
options included in the annual computation of earnings per share is based on the
average of the four quarters. Certain options were not included in the
computations of diluted EPS at certain quarter-ends because the options'
exercise price was greater than the average market price of the common shares.
Note 16 - Employee Benefit and Incentive Plans contains more detailed disclosure
regarding the Company's outstanding options.
NOTE 11 - 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.
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
December 31, 1999, substantially all of the estimated restructuring costs had
been paid and charged against the liability.
F-18
<PAGE>
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 December 31, 1999, all of these
costs had been incurred and charged against the liability. Two homes remained in
WestBrook's inventory as of December 31, 1999, both of which closed during the
first quarter of 2000. WestBrook is not expected to incur additional significant
write offs beyond those charges taken during 1999.
During 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 12 - ASSET IMPAIRMENT CHARGE
During the third quarter of 1999, the Company evaluated the carrying value of
two communities in its Las Vegas market. The fair value of the communities was
determined using a discounted cash flow projection of future revenues and
current and projected costs. The Company determined that an adjustment to
current carrying value was appropriate in accordance with Statement of Financial
Accounting Standard No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of. The assets involved include
developed lots, homes under construction, and completed homes. These two
communities are scheduled to be closed out during the year 2000 with a total of
31 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.
NOTE 13 - OTHER INCOME
Whittaker owns and maintains a lumber yard that provides lumber and millwork to
the homebuilder. Intercompany sales are eliminated in consolidation and profits
deferred until the homes close. Beginning in 1999, the lumber yard began to sell
products to outside customers. Revenues and costs associated with these outside
sales are netted in other income. For the year ended 1999, the lumber yard
generated outside revenue of approximately $2.4 million and profit of $102,000.
Whittaker also owns a title company that was formed to capture profits from
title insurance issued on the sale of Whittaker homes. Revenue and costs
associated with the title insurance operation are netted in other income. For
the year ended December 31, 1999, the title company generated revenue of
$454,000 and profit of $171,000. For the period from the date of acquisition
through December 31, 1998, the title company generated revenue of $329,000 and
profits of $80,000.
NOTE 14 - RELATED PARTY TRANSACTIONS
Due from related parties
Due from related parties, which are included in accounts and notes receivable,
consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Accounts receivable from sale of Genesee Custom $ 490
Note receivable from director 698
Loans on acquisition earnouts $ 57 1,878
Employee advances and other $222 $1,321 1,350
---- ------ ------
$222 $1,378 $4,416
==== ====== ======
</TABLE>
F-19
<PAGE>
In connection with the sale of Genesee Custom to a director of the Company in
1996, the Company had a note receivable bearing interest at 12% from the
director for approximately $3.3 million at December 31, 1996. The note was paid
in full in December 1997. The related accounts receivable were paid in full in
January 1998.
The Company had a note receivable bearing interest at 13.75% from another
director for approximately $600,000 and $460,000, net of accrued interest, at
December 31, 1997 and 1996, respectively. The note was secured by a portion of
that director's shares in the Company and was paid in full, along with all
accrued interest, in June 1998.
In conjunction with certain acquisitions, the Company loaned amounts to certain
sellers. These loans bear interest at 6% per annum and are primarily repayable
either through the future earnout due to the borrower or by the borrower
personally. Based on actual performance, these loans are expected to be repaid
through earnout amounts due as a result of future earnings over the next two to
four years.
Due to related parties
Due to related parties, which are included in accrued expenses at December 31,
1999 totals $2.1 million. The balance is made up of approximately $1.9 million
representing accrued but not paid earnouts due to the former owners of certain
acquisitions, $96,000 representing accrued dividends payable and the balance
representing individually immaterial amounts due to various related parties.
Other transactions
A limited liability corporation (LLC) owned by two of the Company's former
directors and one of the Company's former officers provided consulting services
related to the Company's formation and subsequent acquisitions. Total
capitalized costs associated with this LLC during the years ended December 31,
1998 and 1997 were approximately $350,000 and $540,000, respectively.
During 1998 and 1997, the Company sold and leased back 2 and 22 models to
related parties, respectively. Total revenue recognized in connection with these
sales was approximately $406,500 and $5,880,000, respectively; and the total
gross profit recognized on these sales was $19,000 and $870,000, respectively.
(See Note 15 - Leases.)
Landmark purchased landscaping and lot improvement services from a company
affiliated with its president. Expenses related to these services were $240,000
and $569,552 for the years ended December 31, 1998 and 1997, respectively.
Additionally, Landmark purchased developed land from an affiliated company in
the amount of $2,146,000 and $2,771,100 for the years ended December 31, 1998
and 1997, respectively.
During 1999, 1998, and 1997, Fortress Florida purchased a majority of its
finished lots under written agreements with an entity whose principal is a
significant holder of the Company's Series B and C preferred stock. In 1999,
1998, and 1997, Fortress Florida purchased approximately $16.1 million, $18
million and $14 million, respectively, of such lots. Fortress Florida had
deposits of approximately $1.1 million at December 31, 1999 with this related
party for future acquisitions of finished lots with an aggregate purchase price
of approximately $9.0 million. Fortress Florida intends to fulfill its
obligation under this agreement by acquiring these remaining lots.
(See Note 19 - Commitments and Contingencies.)
Fortress Florida contracted cabinetry, interior finish services and other items
from an affiliated party amounting to approximately $5.0 million, $4.8 million,
and $4.1 million for the years ended December 31, 1999 and 1998 and from the
acquisition through December 31, 1997, respectively.
Pursuant to an option agreement executed simultaneously with the acquisition of
Iacobucci, the Company has an option to acquire land from certain parties
related to Iacobucci's vice presidents over a period of five years. In 1999,
1998 and 1997, the Company acquired 117, 169 and 14 of these lots, respectively,
at a total cost of approximately $2.0 million, $5.8 million and $.4 million,
respectively. The total purchase price of the remaining optioned lots will be
approximately $7.1 million. (See Note 19 - Commitments and Contingencies.)
Pursuant to an agreement executed simultaneously with the acquisition of
Brookstone, the Company purchases finished lots from an entity owned by the
current Chief Operating Officer of the Company. During the years ended December
31, 1999, 1998 and 1997, the Company purchased 39, 66 and 18 lots for an
aggregate purchase price of $1,147,000, $1,465,000 and $401,000, respectively.
F-20
<PAGE>
A significant shareholder and director of the Company is a member of certain
limited liability companies ("LLCs") established for the purpose of constructing
and selling real estate. Christopher has been engaged as the manager for the
projects, offering sales and marketing and construction expertise in exchange
for fees. In addition, Christopher has entered into an agreement with the
shareholder and director requiring him to share the profits from one of these
LLCs with the Company.
Another significant shareholder and director of the Company is a member of an
LLC which is engaged in developing lots. Genesee has placed a deposit of
$790,000 with this LLC, in exchange for an option agreement to purchase lots
from it.
The Company occasionally enters into lease agreements with related parties. (See
Note 15 - Leases.)
NOTE 15 - LEASES
The Company is obligated under various noncancelable operating leases for office
facilities and equipment expiring at various times through 2006. Rental expense
under these agreements amounted to approximately $5,595,000, $5,125,000 and
$3,603,000 for the years ended December 31, 1999, 1998 and 1997, respectively.
Included in this amount is rent paid to affiliated companies, under office,
model home, and warehouse leases, totaling $904,000, $1,076,000, and $1,030,000
for the respective periods.
As of December 31, 1999, future minimum lease payments under noncancelable
operating lease agreements are as follows (in thousands):
Year Ended
December 31,
------------
2000 $ 4,190
2001 2,463
2002 1,895
2003 1,110
2004 931
Thereafter 2,012
-------
$12,601
=======
NOTE 16 - EMPLOYEE BENEFIT AND INCENTIVE PLANS
Bonus award plan
The Company has a bonus award plan under which directors, officers, employees
and key consultants of the Company may be awarded cash or common stock based
upon the satisfaction of specific performance criteria. The plan provides for
the grant of up to 575,000 shares of common stock. No awards have been made
under the plan as of December 31, 1999.
Profit sharing plan
The Company's profit sharing plan is a defined contribution plan qualified under
the Internal Revenue Code. All employees who have completed one-half year of
service with the Company may participate in the plan on the first day of the
month after becoming eligible. A participant's interest in Company contributions
are 100% vested after six year of credited service. Contributions to the plan
are entirely within the discretion of the Company's Board of Directors and are
determined annually. Company contributions to the plan were approximately
$480,000, $49,000 and $0 for 1999, 1998 and 1997, respectively.
Stock purchase plan
The Board of Directors of the Company has approved a stock purchase plan under
which 500,000 shares of the Company's common stock are reserved for issuance and
sale to substantially all of the employees of the Company at 85% of market price
of the stock on specified offering dates. The number of shares issued and the
average price per share under this plan during the years ended December 31,
1999, 1998, and 1997 were 111,423 and $1.33, 23,234
F-21
<PAGE>
and $3.72, and 3,419 and $3.97, respectively. At December 31, 1999, a total of
361,924 shares were available for issuance.
Stock incentive plan
The Company has a stock incentive plan under which non-employee directors,
officers, key employees and consultants of the Company may be granted options to
purchase up to 1,550,000 shares of the Company's common stock. The stock
incentive plan also allows for the award of stock appreciation rights,
restricted stock and deferred stock. As of December 31, 1999, no stock
appreciation rights, restricted stock or deferred stock had been granted under
this plan.
The stock options granted may be either nonqualified or incentive stock options
although only employees of the Company may be granted incentive stock options.
The option price shall not be less than the fair market value of the common
stock on the date of grant; the option period shall not exceed ten years from
the grant date. Options granted as of December 31, 1999 vest over various
periods from immediately to over three years.
The Company accounts for its stock option plans under Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees. Accordingly, as
the option price equals the market price at the date of issuance, no
compensation expense is recognized for options issued to employees. The Company
provides disclosure in accordance with SFAS No. 123, Accounting for Stock-Based
Compensation.
The fair value of each stock option grant is estimated on the date of the grant
using the Black-Scholes option-pricing model with the following weighted average
assumptions used for stock options granted in 1999: expected volatility of 60%,
risk-free interest rate of 5.7%, and an expected life of 5.84 years. The
following weighted average assumptions were used for those options granted in
1998: expected volatility of 50%, risk-free interest rate of 5.0%, and an
expected life of 5.82 years. The following weighted average assumptions were
used for those options granted in 1997: expected volatility of 35%, risk-free
interest rate of 6.0%, and an expected life of 7.68 years. In 1997, expected
dividends were estimated at one cent per share in accordance with the Company's
dividend policy. This policy was subsequently cancelled; therefore, no dividends
were included in the 1998 or 1999 fair value calculation. This change does not
have a material impact on the 1997 calculations. The weighted-average fair value
of the stock options granted in 1999, 1998 and 1997 was approximately $.96,
$2.86 and $2.78 per share, respectively. Under the model, the total value of
stock options granted in 1999, 1998 and 1997 was approximately $175,000, $79,000
and $769,000 (including additional value for the repricing of 1996 grants),
respectively. Had the Company determined the compensation cost for these plans
in accordance with SFAS No. 123, the Company's resulting unaudited pro forma net
income would have been approximately $8,179,000 and the resulting unaudited pro
forma earnings per share would have been $.42 and, assuming dilution, $.37 for
the year ended December 31, 1999. The Company's resulting unaudited pro forma
net income would have been approximately $12,787,000 and the resulting unaudited
pro forma earnings per share would have been $.46 and, assuming dilution, $.41
for the year ended December 31, 1998. The Company's resulting unaudited pro
forma net income would have been approximately $7,915,000 and the resulting
unaudited pro forma earnings per share would have been $.63 and, assuming
dilution, $.59 for the year ended December 31, 1997.
Option activity is summarized as follows:
<TABLE>
<CAPTION>
Shares Weighted
available Number average
for options of shares option price
----------- --------- ------------
<S> <C>> <C> <C>
Balance available at December 31, 1996 232,200 342,800 6.00
Increase in shares available under the plan 550,000
Grants (230,895) 230,895 5.52
Cancellations 23,624 (23,624) 5.89
--------- ------- ----
December 31, 1997 574,929 550,071 5.75
Increase in shares available under the plan 425,000
Grants (27,500) 27,500 5.37
Cancellations 83,971 (83,971) 5.87
--------- ------- ----
December 31, 1998 1,056,400 493,600 5.77
Grants (181,000) 181,000 1.59
Cancellations 249,357 (249,357) 5.71
--------- ------- ----
December 31, 1999 1,124,757 425,243 $4.02
</TABLE>
* In May 1997, the Board re-priced the 1996 grants from the Offering price of
$9.00 to $6.00, the then-current market price of the Common Stock.
F-22
<PAGE>
The following tables summarize information about options outstanding at December
31, 1999:
<TABLE>
<CAPTION>
Outstanding Options Exercisable Options
Number Remaining Weighted
Range of Outstanding at Contractual Life Average
Exercise Prices December 31, 1999 (in years) Exercisable Exercise Price
--------------- ----------------- ---------- ----------- --------------
<S> <C> <C> <C> <C>
$1.01 - $2.00 181,000 9.6 49,750 $1.57
$5.01 - $5.5 74,043 3.8 72,643 $5.39
$5.51 - $6.00 136,300 6.5 123,800 $5.98
$6.01 - $6.25 33,900 7.3 28,900 $6.19
-------- --- -------- ----
425,243 6.4 275,093 $5.05
======= === ======= ====
</TABLE>
NOTE 17 - INCOME TAXES
The provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
Year ended
December 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Current:
Federal $5,350 $7,638 $4,862
State 1,773 1,577 935
------ ------ ------
7,123 9,215 5,797
Deferred:
Federal (579) (379) (325)
State (75) (42) (9)
------- ----- -------
(654) (421) (334)
Total $6,469 $8,794 $5,463
===== ===== =====
</TABLE>
The provision for income taxes differs from the amount computed by applying the
Federal income tax statutory rate of 35%, 35% and 34.25% for the years ended
December 31, 1999, 1998 and 1997, respectively, as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Income tax computed at statutory rate $5,161 $7,570 $4,768
State income taxes, net of Federal benefit 1,097 997 609
Other, net 211 227 86
------ ------ ------
Total $6,469 $8,794 $5,463
====== ====== ======
Effective Rate 43.9% 40.7% 39.2%
===== ====== ======
</TABLE>
F-23
<PAGE>
Deferred tax assets (liabilities) arise due to the recognition of income and
expense items for tax purposes in periods which differ from those used for
financial statement purposes. At December 31, 1999 and 1998, the net deferred
tax asset was comprised of the following (in thousands):
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Deferred Tax Assets:
Warranty and other reserves $1,743 $1,074
Capitalized inventory 365 163
Payroll accruals 119 103
Workers compensation accruals 272 140
Deferred profit 245 0
Other 30 78
------ -----
Total gross deferred tax assets 2,774 1,558
Deferred Tax Liabilities:
Depreciation (31) (78)
Prepaid expenses (331) (10)
Amortization (248) 0
Rebates (40) 0
------ -----
Total gross deferred tax liabilities (650) (88)
Net deferred tax asset $2,124 $1,470
====== ======
</TABLE>
Deferred tax assets are included with Prepaid expenses and other assets on the
balance sheet. Deferred tax liabilities are included with Accrued expenses on
the balance sheet.
Fortress and its wholly owned subsidiaries file a consolidated federal income
tax return. The consolidated tax return of Fortress has not been selected for
audit by the Internal Revenue Service since the Company's inception.
NOTE 18 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The financial instruments of the Company consist of accounts receivable, loans
held for sale, due to and from related parties, accounts payable and
construction liabilities and notes and mortgages payable. Mortgage loans held
for sale to nonaffiliated investors of $20.2 million and $15.4 million at
December 31, 1999 and 1998 are recorded in the aggregate at the lower of cost or
market. The estimated fair value of $20.7 million and $15.6 million at December
31, 1999 and 1998 is based upon contractually established prices at which
mortgage loans will be sold or, if loans are not committed for sale, at current
market prices. The fair value of the Company's Senior Notes at December 31, 1999
and 1998, which are recorded at their carrying value of $100 million, was
approximately $55 million and $105 million, based on quoted market prices. The
fair value of the remainder of the financial instruments is equal to the
recorded amounts due to the short-term nature of the instruments.
NOTE 19 - COMMITMENTS AND CONTINGENCIES
The Company believes that the homebuilding industry is subject to risks and
uncertainties including 1) cyclical markets sensitive to changes in general and
local economic conditions; 2) volatility of interest rates, which may affect
homebuilding demand and credit availability; 3) seasonal and weather-related
factors; 4) significant fluctuations on building material prices, finished lots
and subcontracted labor; 5) counterparty non-performance risk associated with
performance bonds; and 6) environmental regulations.
In the ordinary course of business, the Company enters into option agreements to
purchase land. As of December 31, 1999, the Company had approximately $10.0
million in deposits outstanding to acquire land with an aggregate purchase price
of approximately $301.0 million.
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.
Loan Commitments
Commitments to originate loans have an off-balance sheet market risk to the
extent that the Company does not have matching commitments to sell loans
originated under such commitments. Commitments to sell loans have off-balance
sheet market risk to the extent the Company does not have the available loans to
fill those commitments, which would require the Company to purchase the loans in
the open market.
F-24
<PAGE>
At December 31, 1999 and 1998, the Company had mandatory or best efforts
delivery commitments to cover all of the Company's loans held for sale. As of
December 31, 1999 and 1998, the Company had commitments to originate loans
(pipeline) in the amount of $107,542,593 and $93,925,540; which will sell at the
prevailing market rates at the time of closing.
Commitments related to future draws of construction loans of $4,143,761 were
outstanding as of December 31, 1998. Of the $1,661,766 in construction loan
draws funded at December 31, 1998, $671,207 of the draws related to loans that
were committed to be sold at the completion of the home. The remaining $990,559
of the draws related to loans committed for sale, had interest rates of prime
plus 1.5% and were due and payable at the completion of the home.
NOTE 20 - SUBSEQUENT EVENTS
Proposed reverse stock split
On March 16, 2000, the Company's stockholders approved a charter amendment
authorizing the board to implement a reverse stock split of the Company's common
stock, at any time up to March 15, 2001, at a ratio not to exceed 1 for 5. This
reverse split has not been implemented as of March 29, 2000.
F-25
Exhibit 10.13
PURCHASE AND SALE AGREEMENT
between
THE GENESEE COMPANY,
a Colorado corporation,
as Seller,
and
RS INVESTMENTS/STONEBRIDGE, LLC,
a Colorado limited liability company,
as Purchaser
December ____, 19999
<PAGE>
PURCHASE AND SALE AGREEMENT
THIS PURCHASE AND SALE AGREEMENT (this "Agreement") is made as of the
1st day of December, 1999 (the "Effective Date"), by and between THE GENESEE
COMPANY, a Colorado corporation ("Seller"), and RS INVESTMENTS/STONEBRIDGE, LLC,
a Colorado limited liability company ("Purchaser").
Recitals
A. Seller is, or will be, the fee owner of that certain real property
located in the County of Jefferson, State of Colorado, and more particularly
described in Exhibit A attached hereto and made a part hereof.
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").
C. Seller desires to sell the Property to Purchaser, and Purchaser
desires to purchase the Property from Seller, upon and subject to the terms and
conditions set forth herein.
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:
<PAGE>
ARTICLE I
Purchase and Sale of the Property
1.1 Purchase. Seller agrees to sell and convey to Purchaser, and
Purchaser agrees to purchase from Seller, all of the Property, subject to and
upon the terms and conditions set forth in this Agreement.
1.2 Purchase Price. The total purchase price (the "Purchase Price") for
the Property shall be $5,266,512.00, payable, subject to prorations and
adjustments in accordance with Article VIII, at the closing (the "Closing") in
cash, by certified or cashier's check, wire transfer, or other immediately
available funds.
ARTICLE II
Investigation of the Property
2.1 Permitted Exceptions; Title Commitment. Seller shall deliver to
Purchaser prior to the Closing, a current title insurance commitment (the "Title
Commitment") issued by Land Title Guarantee Company located at 1033 E. 1st Ave.,
Suite 600, Denver, Colorado 80206 (the "Title Company"), showing marketable
title to the Property to be vested in Seller and committing to insure such title
to the Lots in Purchaser by the issuance of an ALTA extended coverage policy of
owner's title insurance in the amount of the Purchase Price. The "Permitted
Exceptions" hereunder shall consist of: (i) any state of facts which would be
revealed in an ALTA/ACSM Land Title Survey or by an inspection of the Lots; (ii)
taxes and assessments for the year of closing; (iii) the exceptions to title
disclosed in the Title Commitment: excluding (A) any taxes or assessments
delinquent as of the Effective Date, (B) any monetary liens or encumbrances, and
(C) any exceptions to title disclosed in the original Title Commitment, or any
subsequent update thereof, which are deleted or removed in any update of the
Title Commitment prior to the Closing; (iv) any other instruments approved by
Purchaser.
ARTICLE III
Title
3.1 Status of Title. At Closing, Seller shall convey to Purchaser good,
marketable and insurable fee simple title to the Property, subject only to the
Permitted Exceptions. Seller shall not, after the date hereof, sell, convey,
option, mortgage, deed in trust, encumber, lease, contract to do any of the
foregoing or otherwise convey, abandon, relinquish, cloud, or encumber title to
the Property or any part thereof or contract to do any of the foregoing, except
as may be expressly provided for herein.
3.2 Issuance of Title Policy. At Closing, Seller shall cause 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.
2
<PAGE>
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 Seller and the Title Company given on or before the Closing Date.
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 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 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.
3
<PAGE>
4.5 Authority. Seller is a corporation duly organized and 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 corporate or other 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 and entities signing this Agreement on
behalf of Seller is authorized to do so. Seller shall furnish to Purchaser any
and all documents to evidence such authority as Purchaser shall reasonably
request.
4.6 Consents; Binding Obligations. No third party approval or consent
is required to enter into this Agreement or to consummate the transaction
contemplated hereby. 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 acknowledges
that the Property will be conveyed in their "as-is" condition, and Purchaser
accepts and agrees to bear all risks regarding all attributes and conditions,
latent or otherwise, of the Property purchased by Purchaser. Purchaser has made
or will make prior to each Closing its own inspection and investigation of the
Property, including, without limitation, their subsurface, soil, engineering and
other conditions and requirements, whether there are any eminent domain or other
public or quasi-public takings of the Property contemplated, and all zoning and
regulatory matters pertinent to the Property. Purchaser shall purchase the
Property upon Purchaser's own inspection and investigation and not in reliance
on any statement, representation, inducement or agreement of Seller except as
specifically provided herein. Purchaser agrees that neither Seller nor anyone
acting on behalf of Seller has made any representation, guarantee or warranty
whatsoever, either written or oral, concerning the Property except as
specifically set forth herein.
ARTICLE V
Purchaser's Representations, Warranties and Covenants
Purchaser represents, warrants and covenants to Seller as
follows:
5.1 Authority. Purchaser is a limited liability company 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 action
has been taken by Purchaser in connection
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<PAGE>
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.
6.1.3 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.
5
<PAGE>
ARTICLE VII
Closing
7.1 Time of Closing. Closing shall take place at 10:00 a.m. on December
___, 1999, 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 VIII.
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 a partial, nonexclusive assignment, of
form reasonably acceptable to Purchaser, of all of Seller's right, title and
interest in and to the Plans and Permits, 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 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.
7.2.6 Withholding Exemption Certificate. Seller shall execute
and deliver to Purchaser and the Title Company a Colorado Form DR-1083, in form
required by law.
7.2.7 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.
7.2.8 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.
7.2.9 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
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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 for the
year of Closing shall be prorated to Closing based on the most recent assessed
valuations and mill levy available. Prior to or at Closing, Seller shall pay all
taxes on the Property which are due on or before the Closing. Prior to or at
Closing, Seller shall pay the full amount (whether or not then due) of all
outstanding special assessments against the Property or any part thereof.
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 its attorneys' fees and costs.
Seller shall pay the premium for the Title Policy, the cost of recording the
deed and any instruments required to discharge any liens or encumbrances against
the Property which are not Permitted Exceptions, all conveyance, transfer, sales
and other taxes of fees, if any, the Title Company's escrow and closing fee, its
attorneys' fees and costs, and such other closing costs as are customarily paid
by a seller in the Denver metropolitan area.
8.5 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 remedy, to: terminate this Agreement,
whereupon both parties shall be discharged from all duties and performance
hereunder. 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 Purchaser fails to complete the acquisition as herein
provided by reason of any default by Purchaser, Seller, as its sole and
exclusive remedy, shall be entitled to terminate this Agreement.
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
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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.
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
8
<PAGE>
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 Seller:
The Genesee Company
603 Park Point Drive, Suite 201
Golden, Colorado 80401
Attn: Mr. Kurt Wolter
Telephone No.: (303) 526-9000
Telefacsimile No.: (303) 526-2331
If to Purchaser:
RS Investments/Stonebridge, LLC
603 Park Point Drive, Suite 201
Golden, Colorado 80401
Telephone No.: (303) 526-9000
Telefacsimile No.: (303) 526-2331
Any address fixed pursuant to the foregoing may be changed by the
addressee by notice given pursuant to this Section 10.7.
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, except in connection with a 1031 tax-deferred exchange.
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
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<PAGE>
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 10.7 hereof) of such revocation to the other party.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
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<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed effective as of the Effective Date.
SELLER:
THE GENESEE COMPANY, a Colorado
corporation
By:
--------------------------------
Terry T. Kyger, Vice President
PURCHASER:
RS INVESTMENTS/STONEBRIDGE, LLC,
a Colorado limited liability company
By:
--------------------------------
Robert R. Short, Manager
11
<PAGE>
EXHIBIT A
to
PURCHASE AND SALE AGREEMENT
Legal Description
LOTS 1-6, 10 AND 11, BLOCK 1,
LOTS 1-4, 8-13, 18-25, 31-34 AND 41-46, BLOCK 2,
LOTS 1-8, 11-19 AND 21-30, BLOCK 3,
LOTS 1-8, BLOCK 4, AND
LOTS 1-6 AND 11-14, BLOCK 5,
EAGLE RIDGE - FILING NO. 1,
COUNTY OF JEFFERSON,
STATE OF COLORADO
AND
LOTS 2 AND 3, BLOCK 13,
EAGLE RIDGE FILING NO. 1 - REPLAT C,
COUNTY OF JEFFERSON,
STATE OF COLORADO
A-1
Exhibit 10.14
AMENDMENT TO
PURCHASE AND SALE AGREEMENT
THIS AMENDMENT TO PURCHASE AND SALE AGREEMENT (this "Amendment") is
made and entered into as of the 10th day of December, 1999, by and between THE
GENESEE COMPANY, a Colorado corporation ("Seller"), and RS
INVESTMENTS/STONEBRIDGE, LLC, a Colorado limited liability company
("Purchaser").
Recitals
A. Seller and Purchaser have heretofore entered into that certain
Purchase and Sale Agreement dated as of December 1, 1999 (the "Contract"),
relating to the purchase and sale of certain real property in the County of
Jefferson, State of Colorado, more particularly described therein (the
"Property") which is comprised of 83 residential lots.
B. Initially capitalized terms used herein and defined in the Contract
shall have the definitions contained in the Contract, unless otherwise defined
herein.
A. The Property, along with certain other real property owned by
Seller, is subject to that certain Deed of Trust dated as of December 3, 1998,
executed by Seller for the benefit of Johnson Eagle Ridge, LLC ("Johnson"),
recorded in the real property records of Jefferson County, Colorado on December
7, 1998 as Reception No. F0751540 (the "Johnson Deed of Trust"), securing
payment of that certain Promissory Note in the original principal amount of
$464,000, dated December 3, 1998 executed by Seller and payable to Johnson (the
"Johnson Note").
B. The Johnson Deed of Trust provides for the partial release of lots
upon payments under the Johnson Note of $2,000 per lot.
C. Purchaser anticipates obtaining an acquisition loan from First
American Bank Texas, SSB ("Lender"), pursuant to which Purchaser will execute a
Promissory Note in the principal amount of $3,655,400, which note will secured
by a Deed of Trust, Security Agreement and Financing Statement (the "Purchaser
Deed of Trust"), granted by Purchaser to the Public Trustee for the benefit of
Lender, encumbering the Property.
D. Seller has agreed to cause the subordination of the Johnson Deed of
Trust to the Purchaser Deed of Trust, by delivering to Lender a copy of a
Subordination Agreement (the "Subordination Agreement"), executed and
acknowledged by Johnson.
E. Seller has been unable to obtain the Subordination Agreement prior
to the Closing.
F. Seller and Purchaser now desire to amend the Contract to modify
certain terms and provisions of the Contract as set forth below.
<PAGE>
Amendment
NOW, THEREFORE, for and in consideration of the mutual covenants and
agreements set forth herein, Seller and Purchaser hereby agree as follows:
1. Johnson Loan. Seller and Purchaser agree that the Johnson Deed of
Trust shall be a Permitted Exception, and that Purchaser shall take title to the
Property subject to the Johnson Deed of Trust without abatement of the Purchase
Price, subject to the terms and conditions set forth herein.
2. Subordination. Seller agrees to escrow $166,000 (the "Funds") of its
proceeds from the Closing with the Title Company pursuant to an Escrow Agreement
of even date herewith between Purchaser, Lender and the Title Company (the
"Escrow Agreement"), and an Agreement of even date herewith between Purchaser
and Lender (the "Lender Agreement"), pursuant to which Purchaser has agreed to
obtain the Subordination Agreement on or before December 17, 1999. If Purchaser
fails to obtain the Subordination Agreement prior to December 17, 1999, Lender
shall be entitled to receive the Funds and to utilize the Funds to cause the
Property to be released from the Johnson Deed of Trust. Seller acknowledges and
agrees to the terms and conditions of the Escrow Agreement and the Agreement,
and Seller further agrees that if the Funds are drawn by the Lender as described
above, Purchaser shall have no obligation to reimburse Seller therefor.
3. Release from Johnson Deed of Trust. Except as set forth in this
Amendment, Purchaser agrees that it shall be responsible for, and shall pay to
Johnson when due, the $2,000 per lot release price under the Johnson Deed of
Trust (the "Release Price") for each of the lots within the Property; provided,
however, that Purchaser shall be under no obligation to pay the Release Price
for any lots acquired by Seller from Purchaser under that certain Option
Agreement dated as of December 1, 1999, by and between Purchaser and Seller,
pursuant to which Purchaser has granted Seller the option to purchase the lots
within the Property.
4. Indemnity. Except as set forth in this Amendment, Seller and
Purchaser each agree to indemnify the other against any costs, expenses, losses,
claims, suits of damages, including reasonable attorneys' fees and costs,
arising out of or resulting from the indemnifying party's breach of any of the
terms or conditions of the Johnson Deed of Trust or the Johnson Note, including
any such breach which results in the acceleration of the obligations payable
thereunder.
5. Effect of Amendment. Except as amended by this Amendment, the terms
and provision of the Contract shall remain in full force and effect.
6. Counterparts. This Amendment may be executed in counterparts, each
of which shall be deemed a duplicate original.
7. Facsimile Signatures. Facsimile copies of any party's signature
hereon shall be deemed an original for all purposes.
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<PAGE>
IN WITNESS WHEREOF, the parties have caused this Amendment to be
executed as of the date first set forth above.
SELLER:
THE GENESEE COMPANY, a Colorado
corporation
By:
--------------------------------
Terry T. Kyger, Vice President
PURCHASER:
RS INVESTMENTS/STONEBRIDGE, LLC, a
Colorado limited liability company
By:
--------------------------------
Robert R. Short, Manager
3
Exhibit 10.15
OPTION AGREEMENT
between
RS INVESTMENTS/STONEBRIDGE, LLC
a Colorado limited liability company,
as Seller,
and
THE GENESEE COMPANY,
a Colorado corporation,
as Purchaser
December ____, 1999
<PAGE>
OPTION AGREEMENT
THIS OPTION AGREEMENT (this "Agreement") is made as of the
______ day of December, 1999 (the "Effective Date"), by and between RS
INVESTMENTS/STONEBRIDGE, LLC, a Colorado limited liability company ("Seller"),
and THE GENESEE COMPANY, a Colorado corporation ("Purchaser").
Recitals
A.Seller is the fee owner of that certain real property
located in the County of Jefferson, State of Colorado, and more particularly
described in Exhibit A attached hereto and made a part hereof, together with all
improvements thereto and all reversions, remainders, 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 (the "Land").
B. The Land consists of 83 finally platted residential lots
(the "Lots").
C. As used in this Agreement, the term "Property" includes all
of the following:
(1) The Lots;
(2) All right, title and interest of Seller 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");
(3) 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");
(4) All right, title and interest of Seller in and to 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 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"); and
(5) 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").
<PAGE>
D Seller desires to grant to Purchaser, and Purchaser
desires to acquire from Seller, a series of sequential options to purchase the
Property upon and subject to the terms and conditions set forth herein.
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 Grant of Option. Seller hereby grants to Purchaser an
exclusive option to purchase the Property on the terms and conditions set forth
herein. This Agreement grants an true option to Purchaser to purchase the Lots,
and Purchaser shall have no obligation to purchase any or all of the Lots. If
Purchaser fails to purchase sufficient Lots to satisfy the Minimum Aggregate
Takedown (as defined below), Seller's sole remedy shall be to terminate this
Agreement and retain the Option Payment. Upon such termination, the parties will
be relieved of any further obligation under this Agreement, except those which
expressly survive termination. In no event shall Purchaser have the right to
specific performance or additional damages because of Seller's failure to
purchase sufficient Lots to satisfy the Minimum Aggregate Takedown.
1.2 Option Payment. Upon the execution and delivery of this
Agreement by Seller and Purchaser, Purchaser shall deliver to Seller $790,000
(the "Option Payment"). The Option Payment (to the extent not previously applied
at a Closing) shall only be refundable to Purchaser (other than by application
towards the Purchase Price) if this Agreement is terminated pursuant to Section
10.2, if Seller defaults under this Agreement, or as otherwise expressly
provided in this Agreement.
1.3 Memorandum of Option. Contemporaneously with the
delivery by Purchaser of the Option Payment, Seller shall deliver to Purchaser a
fully executed and acknowledged Memorandum of Option of the form and content
attached hereto as Exhibit D, which may be recorded in the real property records
by Purchaser. Upon any termination of this Agreement, Purchaser agrees to
immediately execute, acknowledge and deliver to Seller a quit claim deed and
termination of the Memorandum of Option, each of form reasonably satisfactory to
Seller, quit claiming, releasing and terminating any interest of Purchaser in or
to any Lots not previously purchased by Purchaser hereunder. The provisions of
this Section 1.3 shall survive the termination of this Agreement.
1.4 Closings.
1.41 Takedown Notices. Subject to the terms of this
Agreement, Purchaser may from time to time close the purchase of Lots (sometimes
referred to herein as a "Takedown"), in groups of not less than the Lot Minimum
(as defined below), by delivering to Seller a written notice of such Takedown (a
"Takedown Notice"). A Takedown Notice shall
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<PAGE>
identify the Lots to be purchased as part of such Takedown, the Closing Date (as
defined below), and the appropriate Purchase Price as determined based on the
Lot prices set forth on Exhibit B. The minimum number of Lots that may be
subject to a Takedown (the "Lot Minimum") shall be the lesser of the following,
determined as of the date of the Takedown Notice: (i) _____ Lots; and (ii) the
number of Lots remaining in a Phase, if Purchaser elects to Takedown all such
Lots.
1.4.2 Purchase Price. The purchase price for each
Takedown (the "Purchase Price") shall equal the sum of the prices set forth on
Exhibit B for each Lot subject to such Takedown. The applicable Purchase Price,
subject to the prorations and adjustments set forth in Article IX, shall be paid
at each Closing in cash, by certified or cashier's check, wire transfer, or
other immediately available funds. The Option Payment shall be applied to the
Purchase Price of the final Lots (excluding any Excluded Lots) subject to this
Agreement, such that if Purchaser acquires all of the Lots (excluding the
Excluded Lots) under this Agreement, the entire Option Payment will be applied
to the Purchase Price of the last Lots acquired by Purchaser hereunder. If
Purchaser purchases fewer than all of the Lots (excluding the Excluded Lots) for
any reason other than Seller's default, the aggregate Purchase Price for such
unpurchased Lots, up to the entire amount of the Option Payment shall be
retained by Seller and shall not be applied to the Purchase Price of the Lots
actually purchased hereunder.
1.4.3 Minimum Takedown Schedule. Purchaser shall be
required to Takedown, in the aggregate, a sufficient number of Lots on or before
each "Takedown Deadline" set forth on Exhibit C, so that the aggregate number of
Lots purchased in all previous Takedowns equals or exceeds the "Minimum
Aggregate Takedown" as set forth on Exhibit C for such Takedown Deadline.
Purchaser may satisfy its Minimum Aggregate Takedown requirements in one or more
separate Takedowns. In the event that Purchaser fails, prior to any Takedown
Deadline, to Takedown an aggregate number of Lots equal to or in excess of the
Minimum Aggregate Takedown for such Takedown Deadline, Purchaser shall be in
default, and Seller, as its sole remedy, may exercise its rights under Section
10.3 of this Agreement.
1.4.4 Phasing. The Lots are divided into phases (the
"Phases") as set forth on Exhibit C. Purchaser shall be required to Takedown
Lots by Phases, beginning with the lowest numbered Phase and proceeding to
subsequently numbered Phases, except that following Purchaser's Takedown of not
less than 75% of the Lots (excluding Excluded Lots (as defined below)) in a
particular Phase and 100% of the Lots (excluding Excluded Lots) in all lower
number Phases, Purchaser may Takedown Lots in the next higher numbered Phase.
Purchaser may Takedown Lots within a given Phases in such order as Purchaser may
determine.
1.4.5 Closing Dates. The date of closing (a "Closing
Date") for each Takedown shall be designated by Purchaser in its Takedown Notice
on a date that is not less than five (5) nor more than 30 days after Seller's
receipt of the Takedown Notice, or such earlier business day as Seller and
Purchaser mutually agree.
1.4.6 Accelerated Takedown. Purchaser shall have the
right to Takedown Lots in excess of the Minimum Aggregate Takedown earlier than
the Takedown Deadlines. To the extent Purchaser closes the purchase of Lots in
excess of the Minimum Aggregate Takedown prior to the respective Takedown
Deadline, the Purchase Price for each such excess Lot shall be reduced to an
amount which, if increased at the rate of ____% per
3
<PAGE>
annum, compounded annually, from the Closing Date to the Takedown Deadline for
which such Lot would be allocated to satisfy the Minimum Aggregate Takedown,
would equal the Purchase Price set forth on Exhibit B. In the event that, by
reason of an accelerated Takedown or otherwise, the adjusted Purchase Price for
the Takedown of the last Lots subject to this Agreement (excluding the Excluded
Lots) is less than the sum of the unapplied Option Payment, the difference shall
be refunded to Purchaser at the final Closing.
ARTICLE II
Status of the Property
2.1 Homeowners Association. Prior to the initial Closing,
Purchaser shall prepare and deliver for Seller's approval, which shall not be
unreasonably withheld, Purchaser's proposed declaration of covenants, conditions
and restrictions for the Lots (together with any supplements, amendments or
modifications thereto, the "Declaration"), and proposed articles of
incorporation, bylaws and rules for the related homeowners association (together
with the Declaration, the "Association Documents"). Seller shall execute,
acknowledge and record the Declaration (and obtain and record a fully executed
and acknowledged consent and subordination to the Declaration from any mortgagee
holding a mortgage or deed of trust encumbering the Lots) prior to the initial
Closing, subjecting those Lots agreed upon by Seller and Purchaser to the
Declaration, and including the balance of the Lots as annexable to the
Declaration. Thereafter, prior to each subsequent Closing, Seller shall execute,
acknowledge and record a supplement to the Declaration (and obtain and record a
fully executed and acknowledged consent and subordination to the supplement to
the Declaration from any mortgagee holding a mortgage or deed of trust
encumbering the Lots), subjecting those additional Lots agreed upon by Seller
and Purchaser to the Declaration, If Seller and Purchaser are unable to agree on
the form and content of the Association Documents, or the Lots to be subjected
thereto at the initial Closing or annexed thereto at any subsequent Closing: (i)
the Declaration shall be recorded at the initial Closing subjecting only the
Lots subject to the initial Closing to the Declaration; (ii) the Declaration
shall provide for and permit the subsequent annexation of the remainder of the
Lots; and (iii) supplements to the Declaration shall be recorded at each
subsequent Closing annexing the Lots subject to such subsequent Closing to the
Declaration. At or following each Closing, if requested by Purchaser, Seller
shall assign to Purchaser any and all declarant rights under the Declaration as
may be reasonably required by Purchaser in connection with its construction,
marketing and sale of the Lots and improvements thereon, including any special
declarant rights, development rights, and the right to appoint the members of
the board of directors of the Association and the architectural review or other
similar committee (collectively, the "Declarant Rights").
2.2 Transfer Upon Failure to Acquire All Lots. In the event
that this Agreement is terminated for any reason, except by reason of Seller's
default, prior to Purchaser having acquired all of the Lots: (i) Purchaser shall
deliver to Seller copies of all architectural, site and construction plans,
elevations, drawings, specifications and designs for the product designed by of
for Purchaser, or otherwise contemplated by Purchaser, for use on the Lots (the
"Home Plans"), and shall execute and deliver to Seller one or more instruments
assigning to Seller a non-exclusive license to use the Home Plans in connection
with the development of the remaining Lots; (ii) Purchaser shall deliver to
Seller copies of any and all other Warranties, Plans, Permits, Intangible
Property and studies or tests, including, but not limited to, soil tests,
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topographical information, engineering and other similar preliminary work, but
excluding economic, financial and marketability studies and pro formas, and
similar proprietary information of Purchaser, relating to the Lots, and shall
execute and deliver to Seller one or more instruments assigning such items to
Seller; (iii) Purchaser, at Seller's request, shall transfer to Seller all of
the Declarant Rights previously transferred to Purchaser; and (iv) Purchaser
shall remove all signs, equipment, materials and other personal property from
any Lots owned by Seller or the Association. The provisions of this Section 2.2
shall survive the termination of this Agreement.
2.3 Property Condition. Except as expressly set forth in this
Agreement, Purchaser acknowledges that the Lots will be conveyed in their
"as-is" condition, and Purchaser accepts and agrees to bear all risks regarding
all attributes and conditions, latent or otherwise, of the Lots purchased by
Purchaser. Purchaser has made or will make prior to each Closing its own
inspection and investigation of the Lots, including, without limitation, their
subsurface, soil, engineering and other conditions and requirements, whether
there are any eminent domain or other public or quasi-public takings of the Lots
contemplated, and all zoning and regulatory matters pertinent to the Lots.
Purchaser shall purchase the Lots upon Purchaser's own inspection and
investigation and not in reliance on any statement, representation, inducement
or agreement of Seller except as specifically provided herein. Purchaser agrees
that neither Seller nor anyone acting on behalf of Seller has made any
representation, guarantee or warranty whatsoever, either written or oral,
concerning the Lots except as specifically set forth herein. Except for
conditions caused by Seller or its employees, contractors, agents or
representatives (Purchaser and its employees, contractors, agents or
representatives being expressly excluded from any of the foregoing), Seller
shall have no responsibility, liability or obligation subsequent to each Closing
with respect to any conditions, including, without limitation, environmental
conditions, or as to any other matters whatsoever respecting in any way the Lots
purchased by Purchaser, and Purchaser hereby fully and forever releases Seller
and its employees, contractors, agents and representatives (except in their
respective capacities, if any, as employees, contractors, agents or
representatives or Purchaser) with respect to such conditions.
2.4 Access to the Property. Purchaser shall have the right to
access the Lots for ongoing investigation, which may include, without
limitation, the right to have made, at Purchaser's expense, any surveys, studies
or inspections of the Lots 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. Following any such activities by
Purchaser, Purchaser shall restore the Lots to their preexisting condition.
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 2.4, and such indemnification
shall survive the termination of this Agreement. The foregoing notwithstanding,
Purchaser shall have no right to terminate this Agreement and receive a refund
of the Option Payment or any other amounts by reason of its investigation
activities under this Section 2.4.
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ARTICLE III
Title
3.1 Permitted Exceptions; Title Commitment. Seller shall
deliver to Purchaser within 20 days after the Effective Date a current title
insurance commitment issued by Land Title Guaranty Company, located at 3033 E.
1st Ave., Suite 600, Denver, Colorado 80206 (the "Title Company"), together with
legible copies of all recorded exceptions to title referred to therein
(collectively, the "Title Commitment"), showing marketable title to the Lots to
be vested in Seller and committing to insure such title to the Lots in Purchaser
by the issuance of an ALTA extended coverage policy of owner's title insurance
in the amount of the Purchase Price. The "Permitted Exceptions" hereunder shall
consist of: (i) any state of facts which would be revealed in an ALTA/ACSM Land
Title Survey or by an inspection of the Lots; (ii) taxes and assessments for the
year of closing; (iii) the exceptions to title disclosed in the original Title
Commitment: excluding (A) any taxes or assessments delinquent as of the
Effective Date, (B) any monetary liens or encumbrances, and (C) any exceptions
to title disclosed in the original Title Commitment, or any subsequent update
thereof, which are deleted or removed in any update of the Title Commitment
prior to the Closing; (iv) the Declaration and any other instruments approved by
Purchaser; (v) any easement, dedication, subdivision improvement agreement or
similar instrument reasonably required to develop the Lots in accordance with or
as contemplated by the final plat and other development plats, plans and
agreements relating to the Lots; and (vi) any matter created by, or at the
request or with the approval of, Purchaser or its employees, contractors, agents
and representatives.
3.2 Right to Cure. Any Lot subject to a title defect other
than the Permitted Exceptions shall be deemed an "Excluded Lot" and Seller shall
have 90 days (the "Cure Period") from receipt of written notice from Purchaser
describing such title defect within which to cure such title defect and provide
Purchaser with notice of such cure. Seller shall not be deemed to have cured a
title defect by obtaining title insurance therefor, unless Purchaser consents to
such form of cure in its sole and absolute discretion. If the title defect is
cured within the Cure Period, the Lot shall no longer be deemed an Excluded Lot.
If the title defect creating an Excluded Lot is not cured within the Cure
Period, Seller shall notify Purchaser of its inability to cure the defect, and
Purchaser, within five (5) business days following receipt of such notice from
Seller, shall elect either: (i) to waive the title defect and acknowledge that
the Lot is no longer an Excluded Lot; or (ii) to waive its right to acquire the
Excluded Lot under this Agreement. If Purchaser fails either to waive the title
defect or to waive its right to acquire the Excluded Lot within such five (5)
business day period, Purchaser shall be deemed to have elected to waive its
right to acquire the Excluded Lot. If Purchaser waives, or is deemed to have
waived, its right to acquire an Excluded Lot pursuant to the terms of this
Section 3.2, such Excluded Lot shall not be considered in determining whether
Purchaser has acquired all the Lots subject to this Agreement, and the Minimum
Aggregate Takedown for the last Takedown Deadline shall be reduced by one (1).
3.3 Condemnation. In the event that any Lot or portion of a
Lot shall be subject to a pending or threatened condemnation or similar
proceeding, or shall previously have been acquired, by authority of any
governmental agency in the exercise of its power of eminent domain or by private
purchase in lieu thereof (a "Condemnation"), Purchaser may elect, at its sole
option, either: (i) to designate such Lot as an Excluded Lot, in which event
Purchaser shall
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be deemed to have elected to waive its right to acquire such Excluded Lot; or
(ii) to waive its right to so designate the Lot and to consummate the
transaction contemplated hereby, in which case Seller shall assign to Purchaser
all of Seller's proceeds and right to receive proceeds, if any, payable as a
result of such Condemnation; provided, however, that in the event that the
Condemnation is de minimis and does not materially affect the use and
suitability of such Lot as a residential lot for the product contemplated by
Purchaser, Purchaser shall not be entitled to designate such Lot as an Excluded
Lot. If Purchaser waives, or is deemed to have waived, its right to acquire an
Excluded Lot pursuant to the terms of this Section 3.3, such Excluded Lot shall
not be considered in determining whether Purchaser has acquired all the Lots
subject to this Agreement, and the Minimum Aggregate Takedown for the last
Takedown Deadline shall be reduced by one (1).
3.4 Status of Title; Senior Loans. At Closing, Seller shall
convey to Purchaser title to the Lots, subject only to the Permitted Exceptions.
Seller shall not, after the date hereof, sell, convey, option, lease, contract
to do any of the foregoing or otherwise convey, abandon, relinquish, cloud, or
encumber title to the Lots or any part thereof or contract to do any of the
foregoing, except as may be expressly provided for herein. The foregoing
notwithstanding, Seller shall have the right to grant mortgages or deeds of
trust encumbering the Lots, and Purchaser agrees to execute and deliver
subordinations of this Agreement and the Memorandum of Option to such mortgages
and deeds of trust as may be reasonably requested by Seller. Purchaser's
obligation to so subordinate, or to enter into this Agreement subject, to any
senior mortgage or deed of trust (a "Senior Loan"), shall be subject to Seller
obtaining an agreement, of form and content reasonably satisfactory to
Purchaser, from such lender that the lender will notify Purchaser of any default
by Seller under the Senior Loan, and will permit Purchaser to cure such default.
Seller agrees that Purchaser may demand immediate cash payment from Seller, or
may elect to receive a credit against the Purchase Price (at such Closings as
Purchaser may elect), or a combination thereof, for any amounts expended by
Purchaser to cure a default under a Senior Loan, including by prepayment of the
Senior Loan in full. The foregoing notwithstanding, Purchaser shall be under no
obligation to cure any Senior Loan. Any default by Seller under any Senior Loan
or any loan junior to the Memorandum of Option, which is not cured within the
cure period, if any, contained therein or which is cured by Purchaser on
Seller's behalf, shall constitute a default by Seller under this Agreement.
3.5 Issuance of Title Policy. At Closing, Purchaser shall use
good faith efforts to cause the Title Company, at Purchaser's expense, to issue
to Purchaser, or unconditionally commit to issue to Purchaser after Closing, an
ALTA owner's policy of title insurance insuring marketable, insurable title to
the Lots 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 reasonable and customary requirements contained in the Title
Commitment or in any update thereof, including any requirements for Seller to
execute mechanics lien/final affidavits to the Title Company, except those which
by their nature can only be satisfied by Purchaser. All title insurance
premiums, closing and settlement fees, endorsement premiums and other similar
costs shall be paid by Purchaser.
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ARTICLE IV
Seller's Representations and Warranties
Seller represents and warrants 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 Lots or any portion thereof or any interest therein, except as
contemplated by this Agreement.
4.2 No Possessory Rights. Except for any rights of possession
under the Permitted Exceptions and any rights contemplated by this Agreement,
Seller has not granted or permitted any possessory rights in any of the Lots.
4.3 Litigation. Seller has no knowledge, and Seller has not
received notice, of any actions, suits, proceedings or claims pending or
threatened with respect to or in any manner affecting Seller's interest in the
Lots (to the extent not previously conveyed to Purchaser or the Association) or
the ability of Seller to consummate the transaction contemplated by this
Agreement.
4.4 Authority. Seller is a limited liability company duly
organized and 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
corporate or other 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 and
entities signing this Agreement on behalf of Seller is authorized to do so.
Seller shall furnish to Purchaser any and all documents to evidence such
authority as Purchaser shall reasonably request.
4.5 Consents; Binding Obligations. No third party approval or
consent is required to enter into this Agreement or to consummate the
transaction contemplated hereby. 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.
4.6 Omissions; Indemnity. All representations and warranties
made by Seller in this Agreement are free from any untrue statement of material
fact and do not omit to state any material facts necessary to make the
statements contained herein not misleading. 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 each Closing and
shall survive each 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.
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ARTICLE V
Purchaser's Representations and Warranties
Purchaser represents and warrants 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 Omissions; Indemnity. All representations and warranties
made by Purchaser in this Agreement are free from any untrue statement of
material fact and do not omit to state any material facts necessary to make the
statements contained herein or therein not misleading. 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
each Closing and shall survive each 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
Seller's Undertakings Pending Closing
6.1 Advise Purchaser. Until the earlier of the final Closing
or the termination of this Agreement, Seller agrees to notify Purchaser promptly
upon learning or receiving notice, whichever first occurs, of:
6.1.1 Any fact or event which would make any of the
representations or warranties of Seller contained in this Agreement untrue or
misleading in any material respect or which would cause Seller to be in
violation of any of its covenants or other undertakings or obligations
hereunder.
6.1.2 Any pending or threatened (and unresolved)
litigation which affects the Lots (to the extent not previously conveyed to
Purchaser) or any part thereof.
6.1.3 Any material damage or destruction (excluding normal
wear and tear) to the Lots (to the extent not previously conveyed to Purchaser)
or any part thereof.
6.1.4 Any pending or threatened (and unresolved)
condemnation which would affect the Lots (to the extent not previously conveyed
to Purchaser) or any part thereof.
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6.1.5 Any threatened (and unresolved) or pending
proceedings in bankruptcy or insolvency which would affect Seller or the Lots
(to the extent not previously conveyed to Purchaser).
ARTICLE VII
Purchaser's Obligations and Expenses
7.1 Expenses. It is the parties' intention that Seller shall
not be required, during the term of this Agreement, to incur any expense or
other charge applicable to the Property except as expressly set forth herein, so
that all impositions, insurance premiums, utility expenses, construction costs,
Association obligations, repair and maintenance expenses and all other costs and
expenses (but excluding income taxes and franchise taxes) of any character or
kind, general or special, ordinary or extraordinary, foreseen or unforeseen, and
of every kind and nature whatsoever, shall be paid or discharged by Purchaser;
provided, however, Seller shall have no right to incur costs relating to the
Property (other than to protect Seller's interest in the Property) for which
Purchaser shall be responsible without Purchaser's written consent. Without
limiting the foregoing, Purchaser shall, as a material part of the consideration
to Seller in exchange for Seller's grant to Purchaser of the option to purchase
the Lots: (i) pay prior to delinquency all real estate taxes, special taxes,
assessments and other charges, including homeowner association dues and charges
pertaining to common areas, roadway, water, wastewater, impact or other fees
payable to any governmental or quasi-governmental authority, district or other
utility provider (collectively, "Authorities"), or otherwise payable by seller
and attributable to the Lots, and any other portion of the Property which accrue
or become due during the term of this Agreement (but regardless of whether such
taxes (including agricultural rollback taxes), assessments, fees or charges
relate to period prior to the term of this Agreement), and (ii) maintain at its
expense the Lots in good order, condition and repair, and (iii) pay prior to
delinquency all charges for water, electricity, telephone service, trash removal
and all other services or utilities used on or about the Property prior to the
termination of this Agreement, and (iv) perform at its expense all insurance and
other obligations to be performed by Purchaser contained in this Agreement. A
copy of each check to the applicable County Tax Assessor or Treasurer (or other
applicable taxing authority) for taxes attributable to portions of the Property
owned by Seller shall be sent to Seller promptly upon the submission of same to
the Tax Assessor or Treasurer. If Purchaser either fails to exercise its rights
to acquire all of the Lots pursuant to this Agreement, or is otherwise in
default under this Agreement, then upon the termination of this Agreement,
Purchaser shall immediately pay to Seller all unpaid taxes and assessments which
accrued or became payable during the term of this Agreement with respect to the
portion of the Property not acquired by Purchaser. The amounts payable by
Purchaser upon such termination shall be determined based upon the latest
available information (apportioned on a per diem basis using a 365-day year),
and when the actual bills are received, the parties shall make such payment, one
to the other, as is necessary so that Purchaser pays the actual amount of taxes
and assessments attributable to the term of this Agreement.
7.2 Other Taxes. Purchaser acknowledges that it is acquiring
each Lot for resale. Purchaser hereby assumes the liability for and agrees to
pay: (a) all state, county, local and other assessments, transfer taxes, sales
taxes, transaction privilege taxes and other or similar taxes or charges owing
in connection with Purchaser's acquisition of the Lots and in connection with
Purchaser's development and subsequent resale of such Lots; (b) all charges in
connection
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with fire protection, streets, sidewalks, road maintenance, refuse or other
services provided to the Property by any Authorities; and (c) any tax or excise
on receipts, gross receipts tax, or other tax (but excluding income taxes and
franchise taxes), however described, which is levied or assessed by the United
States of America or any state, county or local government or agency thereof
against Seller in respect to all charges or payments made by Purchaser under
this Agreement or as a result of Seller's receipt of such charges or payments,
and Purchaser shall indemnify, defend and hold harmless Seller and its managers,
members, employees, agents, affiliates, successors and assigns for, from and
against Purchaser's failure to pay all such amounts when due and against all
liability and expense, including without limitation, penalties, interest and
reasonable attorneys' fees and costs, from any such failure.
7.3 Repair. If, during the term of this Agreement, any of the
Lots, or the improvements thereto or any streets, rights-of-way of other
improvements within the subdivision (the "Subdivision Improvements") are damaged
or destroyed, Purchaser shall immediately repair and restore the Lots and the
Subdivision Improvements to their respective condition immediately prior to such
damage and destruction. Upon the termination of this Agreement, Purchaser shall
deliver the Subdivision Improvements and the Lots not purchased by Purchaser to
Seller in good condition and repair.
7.4 Insurance. During the term of this Agreement, Purchaser
shall, at its sole expense, procure and maintain commercial general liability
insurance against claims for bodily injury, death or property damage, occurring
in, on or about the Property, or resulting from the use or maintenance thereof,
in an amount of at least $2,000,000 for each occurrence and $5,000,000 in the
general aggregate. The liability policy shall (i) name Seller and any other
parties designated by Seller as additional named insureds. The policy shall be
issued by an insurance company authorized to do business in the state in which
the Lots are located and approved by Seller, which approval will not be
unreasonably withheld. The policy shall provide that no cancellation, alteration
or non-renewal of said insurance shall be effective unless the insurance company
issuing such policy gives Seller at least 30 days prior written notice thereof.
The policy shall provide that it will be primary to any insurance policy
otherwise purchased by Seller. During the term of this Agreement, Purchaser
shall also, at its sole expense, procure and maintain employer's liability
insurance for workmen's compensation in an amount not less than the statutory
limits of coverage. Purchaser shall deliver to Seller evidence of such insurance
in a form reasonably satisfactory to Seller, on the date of this Agreement and
upon any modification, renewal or replacement of coverage.
7.5 Indemnity. To the fullest extent permitted by law,
Purchaser does and shall indemnify, defend and hold harmless, and hereby
releases and discharges, Seller and its managers, members, employees, agents,
affiliates, successors and assigns, except to the extent caused by the
negligence or willful misconduct of any such indemnified parties, for, from and
against all claims, demands, liabilities, losses, damages, costs and expenses,
including but not limited to court costs and reasonable attorneys' fees and
costs, arising out of or in connection with: (i) Purchaser's use or occupancy of
the Property, or any portion thereof: (ii) any work, occurrence, conduct, act or
omission maintained, performed, permitted or suffered by Purchaser or any
representative, subcontractor or supplier of Purchaser, or any employee, agent,
invitee or licensee of any of the foregoing, on or about or pertaining to the
Property or any portion thereof; (iii) any claim pertaining or relating to the
Property, specifically including, without limitation,
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any claims arising as a result of the condition of the surface and sub-surface
of the Property or any portion thereof existing, created or arising prior to or
during the term of this Agreement, and/or the failure of the Property or any
portion thereof to be properly graded and compacted as necessary to minimize all
risks of subsidence and any other settlement or movement of the soils; (iv) any
condition of or on the Property, or any portion thereof, or of or on any street,
curb or sidewalk thereon or adjacent thereto or any improvement constructed or
to be constructed thereon existing, created or arising prior to or during the
term of this Agreement; (v) Purchaser's failure to perform Purchaser's
obligations, or Purchaser's breach of Purchaser's obligations, representations
or warranties, under this Agreement, (vi) any act, omission, negligence or
misconduct of Purchaser or its representatives, subcontractors, suppliers,
employees, agents, invitees or licensees, (vii) any accident, injury or damage
whatsoever caused to any person, firm or corporation in or about the Property or
any sidewalk, street or land adjacent thereto arising as a result of any act or
omission during the term of this Agreement; (viii) the physical condition of the
Property or any portion thereof existing, created or arising prior to or during
the term of this Agreement, and the impact of any federal, state or local law,
common law, statute, ordinance, regulation, administrative rule, policy or
order, now in effect or at anytime hereafter enacted which pertains or is
applicable to or governs: hazardous materials or substances, or the use,
permitting and/or environmental condition of the Property (including the
subsurface thereof) and any property adjacent thereto, or which pertains to
health, industrial hygiene or the regulation or protection of the environment;
and (ix) any claim made against Seller relating to impact fees and/or real
property taxes arising for any time periods during and before the term of this
Agreement. The covenants contained in this Section 7.5 shall survive any Closing
or the termination of this Agreement and shall be continuing obligations of
Purchaser for so long as same may be enforced within any applicable statute of
limitations time periods.
ARTICLE VIII
Closings
8.1 Time of Closing. Closings shall take place at 1:00 p.m. on
the respective Closing Dates, in the offices of the Title Company, or at such
other time and place as may be mutually agreed upon by Seller and Purchaser.
8.2 Deliveries. At each Closing the following shall occur:
8.2.1 Deed. Seller shall deliver to Purchaser a duly
executed and acknowledged special warranty deed, of form reasonably acceptable
to Purchaser, conveying fee simple title to the Lots to Purchaser, subject only
to the Permitted Exceptions.
8.2.2 Payment. Purchaser shall pay to Seller the Purchase
Price as provided in Section 1.4.2, subject to the adjustments described in
Article IX.
8.2.3 Possession. Possession of the applicable Lots shall
be delivered to Purchaser.
8.2.4 Assignment of Intangibles; Delivery of Permits.
Seller shall execute and deliver to Purchaser an non-exclusive assignment, of
form reasonably acceptable to Purchaser, of all of Seller's right, title and
interest in and to the Plans, Warranties, Permits and
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Intangible Property, to the extent the same are assignable. At the Closing of
the purchase of the last Lots (excluding Excluded Lots) subject to this
Agreement, Seller shall deliver to Purchaser the originals (or accurate copies)
of all Plans, Warranties 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.
8.2.5 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.
8.2.6 Mechanics' Liens. Seller shall execute and deliver
to the Title Company such agreements or statements concerning claims for
mechanic's liens as may be customarily required by the Title Company from Seller
in order to issue the Title Policy, except that Seller shall not be required to
post any bond or security in connection therewith.
8.2.7 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 IX
Prorations and Closing Expenses
9.1 Taxes. At Closing, real and personal property taxes on the
Lots shall not be prorated. In lieu thereof, Purchaser shall receive a credit in
the amount of the credit, if any, received by Seller as a tax proration when it
originally acquired the Property, allocated in a reasonable manner among the
Lots subject to this Agreement.
9.2 Liens and Encumbrances. The amount of any lien, deed of
trust or other monetary encumbrance then affecting the Lots, 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.
9.3 Closing Costs. Purchaser shall pay the fee for recording
Seller's deed, the premium for the Title Policy, the Title Company's escrow and
closing fee, its attorneys' fees and costs, and all conveyance, transfer, sales
and other taxes of fees, if any. Seller shall pay the cost of recording any
instruments required to discharge any liens or encumbrances against the Lots
which are not Permitted Exceptions and its attorneys' fees and costs.
9.4 Settlement Statement. At each 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.
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ARTICLE X
Remedies
10.1 Defaults. If either party fails to (a) pay any sum of
money when due as provided in this Agreement and such failure continues for a
period of at least five (5) business days after the delivery of written notice
thereof by the other party, or (b) perform any other covenant, agreement or
condition as provided in this Agreement and such failure continues for a period
of at least 15 days after the delivery of written notice thereof by the other
party, the non-performing party shall be deemed to be in default hereunder. The
foregoing notwithstanding, the availability of the foregoing cure periods shall
in no event apply to Purchaser's failure to close the purchase of Lots equal to
or exceeding the requisite Minimum Aggregate Takedown on or before the
applicable Takedown Deadlines (an "Acquisition Default"), which shall
immediately constitute a default by Purchaser and for which Purchaser shall be
entitled to neither notice of default nor any cure period, and for which Seller
shall be entitled to exercise its right to terminate this Agreement under
Section 10.3 immediately.
10.2 Default by Seller. In the event of a default hereunder by
Seller, Purchaser shall be entitled to: (i) terminate this Agreement and obtain
the prompt refund of the Option Payment (to the extent not previously applied at
a Closing), whereupon both parties shall be discharged from all duties and
performance hereunder; or (ii) treat this Agreement as being in full force and
effect and to seek specific performance and/or damages.
10.3 Acquisition Default by Purchaser. In the event of an
Acquisition Default hereunder by Purchaser, Seller, as its sole and exclusive
remedy, shall be entitled to terminate this Agreement, without notice or right
to cure, and retain the Option Payment (to the extent not previously applied at
a Closing) as liquidated damages. The parties hereby agree that the amount of
the Option Payment (to the extent not previously applied at a Closing) is a fair
and reasonable estimate of the total detriment that Seller would suffer in the
event of Purchaser's Acquisition Default hereunder.
10.4 Other Default by Purchaser. In the event of a default by
Purchaser other than an Acquisition Default, Seller shall be entitled to: (i)
terminate this Agreement and retain the Option Payment (to the extent not
previously applied at a Closing) as liquidated damages, whereupon both parties
shall be discharged from all duties and performance hereunder; or (ii) treat
this Agreement as being in full force and effect and to seek specific
performance of and/or damages with respect to any of Purchaser's
representations, warranties or covenants contained in Sections 1.3, 2.2, 2.4,
11.1 and 11.2, and Articles V and VII of this Agreement.
10.5 Post-Closing Breach. The provisions of this Article X
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, other than an Acquisition Default.
10.6 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
14
<PAGE>
such litigation or legal action, including, without limitation, its reasonable
attorneys' fees and costs.
ARTICLE XI
General Provisions
11.1 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.
11.2 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.
11.3 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.
11.4 Survival. All of the parties' representations,
warranties, covenants and agreements hereunder, to the extent not fully
performed or discharged by or through a Closing, shall be deemed not merged into
any instrument delivered at such Closing and shall remain fully enforceable
thereafter.
11.5 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, a
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.
11.6 Governing Law. This Agreement shall be construed and
enforced in accordance with the laws of the State of Colorado.
11.7 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:
15
<PAGE>
If to Seller:
RS Investments/Stonebridge, LLC
603 Park Point Drive, Suite 201
Golden, Colorado 80401
Attn: Robert R. Short
Telephone No.: (303) 526-9000
Telefacsimile No.: (303) 526-2157
If to Purchaser:
The Genesee Company
603 Park Point Drive, Suite 201
Golden, Colorado 80401
Attn: Kurt Wolter
Telephone No.: (303) 526-9000
Telefacsimile No.: (303) 526-2157
with a copy to:
Michael C. Villano, Esq.
Otten, Johnson, Robinson,
Neff & Ragonetti, P.C.
950 17th Street, Suite 1600
Denver, Colorado 80202
Telephone No.: (303) 825-8400
Telefacsimile No.: (303) 825-6525
Any address fixed pursuant to the foregoing may be changed by
the addressee by notice given pursuant to this Section 11.7.
11.8 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.
11.9 Assignment. Purchaser may assign this Agreement without
the consent of Seller. Any assignee shall assume all obligations imposed on
Purchaser as if the assignee were the original purchaser in this Agreement. Upon
any such assignment and assumption, Purchaser shall be released from all
liability hereunder.
11.10 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.
16
<PAGE>
11.11 SPECIAL IMPROVEMENT DISTRICT DISCLAIMER/ DISCLOSURE.
SPECIAL TAXING DISTRICTS MAY BE SUBJECT TO GENERAL OBLIGATION INDEBTEDNESS THAT
IS PAID BY REVENUES PRODUCED FROM ANNUAL TAX LEVIES ON THE TAXABLE PROPERTY
WITHIN SUCH DISTRICTS. PROPERTY OWNERS IN SUCH DISTRICTS MAY BE PLACED AT RISK
FOR INCREASED MILL LEVIES AND EXCESSIVE TAX BURDENS TO SUPPORT THE SERVICING OF
SUCH DEBT WHERE CIRCUMSTANCES ARISE RESULTING IN THE INABILITY OF SUCH A
DISTRICT TO DISCHARGE SUCH INDEBTEDNESS WITHOUT SUCH AN INCREASE IN MILL LEVIES.
PURCHASERS SHOULD INVESTIGATE THE DEBT FINANCING REQUIREMENTS OF THE AUTHORIZED
GENERAL OBLIGATION INDEBTEDNESS OF SUCH DISTRICTS, EXISTING MILL LEVIES OF SUCH
DISTRICT SERVICING SUCH INDEBTEDNESS, AND THE POTENTIAL FOR AN INCREASE IN SUCH
MILL LEVIES.
11.12 Facsimile Signatures. The facsimile signature of any
party on this Agreement shall be deemed an original for all purposes.
11.13 Counterparts. This Agreement may be executed in
counterparts, each of which shall be deemed a duplicate original.
11.14 Acceptance. Upon execution and delivery of this
Agreement by Purchaser or 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
11.7 hereof) of such revocation to the other party.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
17
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to
be executed effective as of the Effective Date.
SELLER:
RS INVESTMENTS/STONEBRIDGE, LLC, a
Colorado limited liability company
By:
---------------------------------------
Robert R. Short, Manager
PURCHASER:
THE GENESEE COMPANY, a Colorado
corporation
By:
---------------------------------------
Terry T. Kyger
Vice President
18
<PAGE>
EXHIBIT A
to
PURCHASE AND SALE AGREEMENT
Legal Description
A Lots:
LOTS 1-6, 10 AND 11, BLOCK 1,
LOTS 1-8, BLOCK 3, AND
LOTS 1-6 AND 11-14, BLOCK 5,
EAGLE RIDGE FILING NO. 1,
COUNTY OF JEFFERSON,
STATE OF COLORADO
B Lots:
LOTS 1-4, 8-13, 18-25, 31-34 AND 41-46, BLOCK 2,
LOTS 11-19 AND 21-30, BLOCK 3,
LOTS 1-8, BLOCK 4,
EAGLE RIDGE - FILING NO. 1,
AND
LOTS 2 AND 3, BLOCK 13,
EAGLE RIDGE FILING NO. 1 - REPLAT C,
COUNTY OF JEFFERSON,
STATE OF COLORADO
<PAGE>
EXHIBIT B
to
PURCHASE AND SALE AGREEMENT
Lot Purchase Prices and Phases
Lot Type Purchase Price
A Lots $87,930
B Lots $64,435
<PAGE>
EXHIBIT C
to
PURCHASE AND SALE AGREEMENT
Minimum Aggregate Takedown and Takedown Deadlines
Takedown Deadline Minimum Aggregate Takedown
End of Month A Lots B Lots Total
February 2000 1 3 4
March 2000 3 6 9
April 2000 4 9 13
May 2000 5 13 18
June 2000 6 16 22
July 2000 8 19 27
August 2000 9 23 32
September 2000 11 26 37
October 2000 12 29 41
November 2000 14 32 46
December 2000 16 35 51
January 2001 17 39 56
February 2001 19 42 61
March 2001 20 45 65
April 2001 22 48 70
May 2001 23 51 74
June 2001 25 54 79
July 2001 26 57 83
Total 26 57 83
<PAGE>
EXHIBIT D
to
PURCHASE AND SALE AGREEMENT
Form of Memorandum of Option
Exhibit 10.16
AMENDMENT TO
OPTION AGREEMENT
THIS AMENDMENT TO OPTION AGREEMENT (this "Amendment") is made
and entered into effective as of the 1st day of December, 1999, by and between
RS INVESTMENTS/STONEBRIDGE, LLC, a Colorado limited liability company
("Seller"), and THE GENESEE COMPANY, a Colorado corporation ("Purchaser").
Recitals
A. Seller and Purchaser have heretofore entered into that certain
Option Agreement dated as of December 1, 1999 (the "Contract"), relating to the
purchase and sale of certain real property in the County of Jefferson, State of
Colorado, more particularly described therein (the "Property") which is
comprised of 83 residential lots.
B. Initially capitalized terms used herein and defined in the Contract
shall have the definitions contained in the Contract, unless otherwise defined
herein.
C. Seller and Purchaser now desire to amend the Contract to modify
certain terms and provisions of the Contract as set forth below.
Amendment
NOW, THEREFORE, for and in consideration of the mutual covenants and
agreements set forth herein, Seller and Purchaser hereby agree as follows:
1. Termination. Seller and Purchaser agree that Seller shall have the
right, in its sole and absolute discretion, to terminate the Contract at any
time by delivery of written notice to Purchaser. Upon such termination, Seller
shall promptly return to Purchaser the Option Payment, to the extent not
previously applied at a Closing.
2. Effect of Amendment. Except as amended by this Amendment, the terms
and provision of the Contract shall remain in full force and effect.
3. Counterparts. This Amendment may be executed in counterparts, each
of which shall be deemed a duplicate original.
4. Facsimile Signatures. Facsimile copies of any party's signature
hereon shall be deemed an original for all purposes.
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Amendment to be
executed as of the date first set forth above.
SELLER:
RS INVESTMENTS/STONEBRIDGE, LLC, a
Colorado limited liability company
By:
--------------------------------
Robert R. Short, Manager
PURCHASER:
THE GENESEE COMPANY, a Colorado
corporation
By:
--------------------------------
Terry T. Kyger, Vice President
2
Exhibit 10.17
AMENDMENT TO
OPTION AGREEMENT
THIS AMENDMENT TO OPTION AGREEMENT (this "Amendment") is made and
entered into as of the 10th day of December, 1999, by and between RS
INVESTMENTS/STONEBRIDGE, LLC, a Colorado limited liability company ("Seller"),
and THE GENESEE COMPANY, a Colorado corporation ("Purchaser").
Recitals
A. Seller and Purchaser have heretofore entered into that certain
Option Agreement dated as of December 1, 1999 (the "Contract"), relating to the
purchase and sale of certain real property in the County of Jefferson, State of
Colorado, more particularly described therein (the "Property") which is
comprised of 83 residential lots.
B. Initially capitalized terms used herein and defined in the Contract
shall have the definitions contained in the Contract, unless otherwise defined
herein.
A. The Property, along with certain other real property owned by
Seller, is subject to that certain Deed of Trust dated as of December 3, 1998,
executed by Seller for the benefit of Johnson Eagle Ridge, LLC ("Johnson"),
recorded in the real property records of Jefferson County, Colorado on December
7, 1998 as Reception No. F0751540 (the "Johnson Deed of Trust"), securing
payment of that certain Promissory Note in the original principal amount of
$464,000, dated December 3, 1998 executed by Seller and payable to Johnson (the
"Johnson Note").
C. Seller and Purchaser now desire to amend the Contract to modify
certain terms and provisions of the Contract as set forth below.
Amendment
NOW, THEREFORE, for and in consideration of the mutual covenants and
agreements set forth herein, Seller and Purchaser hereby agree as follows:
1. Johnson Loan. Seller and Purchaser agree that the Johnson Deed of
Trust shall be a Permitted Exception, and that Purchaser shall take title to the
Property subject to the Johnson Deed of Trust without abatement of the Purchase
Price, subject to the terms and conditions set forth herein.
2. Release from Johnson Deed of Trust. Except as set forth in this
Amendment, Purchaser agrees that it shall be responsible for, and shall pay to
Johnson when due, the $2,000 per lot release price under the Johnson Deed of
Trust (the "Release Price") for each of the lots within the Property which it
acquires under the Contract.
<PAGE>
3. Indemnity. Except as set forth in this Amendment, Seller and
Purchaser each agree to indemnify the other against any costs, expenses, losses,
claims, suits of damages, including reasonable attorneys' fees and costs,
arising out of or resulting from the indemnifying party's breach of any of the
terms or conditions of the Johnson Deed of Trust or the Johnson Note, including
any such breach which results in the acceleration of the obligations payable
thereunder.
4. Effect of Amendment. Except as amended by this Amendment, the terms
and provision of the Contract shall remain in full force and effect.
5. Counterparts. This Amendment may be executed in counterparts, each
of which shall be deemed a duplicate original.
6. Facsimile Signatures. Facsimile copies of any party's signature
hereon shall be deemed an original for all purposes.
IN WITNESS WHEREOF, the parties have caused this Amendment to be
executed as of the date first set forth above.
SELLER:
RS INVESTMENTS/STONEBRIDGE, LLC, a
Colorado limited liability company
By:
--------------------------------
Robert R. Short, Manager
PURCHASER:
THE GENESEE COMPANY, a Colorado
corporation
By:
--------------------------------
Terry T. Kyger, Vice President
2
Exhibit 21.1
List of Subsidiaries
<TABLE>
<CAPTION>
Jurisdiction of Incorporation
Subsidiary or Organization Doing Business As
- ---------- --------------- -----------------
<S> <C> <C>
Brookstone Homes, Inc. Delaware Brookstone Homes
Christopher Homes Custom Nevada Christopher Homes
Home Division, Inc.
Fortress-Florida, Inc. Delaware Fortress Homes and
Communities of Florida
Fortress Galloway, Inc. Delaware Don Galloway Homes
Don Galloway Homes, Inc. North Carolina
Thornblade,LLC North Carolina
Don Galloway Land, LLC North Carolina
Fortress Mortgage, Inc. Delaware Fortress Mortgage
Fortress Missouri-Construction, LLC Delaware
Whittaker Construction, Inc. Missouri Whittaker Homes
Fortress Missouri-Lumber, LLC Delaware
RRKTG Lumber, Inc. Missouri RRKTG Lumber
Fortress Missouri-Title, LLC Delaware
Lewis and Clark Title Company Missouri Lewis and Clark Title
Company
Fortress Oregon, LLC Delaware
Quail Construction, Inc. Oregon Quail Construction
Camden Crossing, LLC Oregon
Quail Realty, LLC Oregon Quail Realty
Fortress Pennsylvania, LLC Delaware Iacobucci Homes
Fortress Tysons, LLC Delaware WestBrook Homes
The Genesee Company Colorado The Genesee Company
Genesee Venture Corp. Colorado
Genesee Communities I, Inc Colorado
Genesee Communities II, Inc Colorado
Genesee Communities III, Inc Colorado
Genesee Communities IV, Inc Colorado
Genesee Communities V, Inc Colorado
Landmark Homes, Inc. North Carolina Sunstar Homes
Wilshire Homes, Inc. Texas Wilshire Homes
Wilshire Homes San Antonio, Ltd. Texas
Cullen Avenue Partners, Ltd. Texas
The Park at Los Indios, Ltd. Texas
</TABLE>
Exhibit 23.1
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-3 (No. 333-48147) and Form S-8 (No. 333-35041) of The
Fortress Group, Inc. of our report dated February 21, 2000 relating to the
financial statements, which appears in this Form 10-K.
PRICEWATERHOUSECOOPERS LLP
Washington, DC
March 29, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from The
Fortress Group, Inc. Consolidated Balance Sheet of December 31, 1999 and The
Fortress Group, Inc. Consolidated Statement of Operations for the Year Ended
December 31, 1999 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<CIK> 1010607
<NAME> The Fortress Group, Inc.
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-1-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 17,526
<SECURITIES> 0
<RECEIVABLES> 12,748
<ALLOWANCES> 0
<INVENTORY> 328,513
<CURRENT-ASSETS> 0
<PP&E> 12,392
<DEPRECIATION> 0
<TOTAL-ASSETS> 451,181
<CURRENT-LIABILITIES> 0
<BONDS> 100,000
0
1
<COMMON> 125
<OTHER-SE> 79,547
<TOTAL-LIABILITY-AND-EQUITY> 451,181
<SALES> 740,785
<TOTAL-REVENUES> 740,785
<CGS> 626,602
<TOTAL-COSTS> 714,280
<OTHER-EXPENSES> (2,439)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,592
<INCOME-PRETAX> 14,746
<INCOME-TAX> 6,469
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,277
<EPS-BASIC> .42
<EPS-DILUTED> .37
</TABLE>
