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