<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934
For the Quarterly Period Ended September 30, 1998
-------------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
For the Transition Period From To
---------- ----------
Commission file number 0-20614
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THE ROTTLUND COMPANY, INC.
-------------------------------------------------------
(Exact name of registrants as specified in its charter)
MINNESOTA 41-1228259
- ------------------------------- -----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
2681 Long Lake Road, Roseville, MN 55113
- ------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(651) 638-0500
- ------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
- ------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
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
----- -----
The number of shares outstanding of the Registrant's common stock, par value
$.10 per share, at November 5, 1998 was 5,772,913 shares.
1
<PAGE>
THE ROTTLUND COMPANY, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated balance sheets - September 30, 1998
and March 31, 1998 3
Consolidated statements of operations - Three and
six months ended September 30, 1998 and 1997 4
Consolidated statements of cash flows - Six
months ended September 30, 1998 and 1997 5
Notes to consolidated financial statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II. OTHER INFORMATION 11
SIGNATURES 12
</TABLE>
2
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
THE ROTTLUND COMPANY, INC. AND SUBSIDIARIES
Consolidated Balance Sheets - Unaudited
As of
<TABLE>
<CAPTION>
September 30, 1998 March 31, 1998
------------------ --------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 438,363 $ 4,246,674
Escrow and other receivables 1,387,370 2,519,913
Land, development costs and finished lots 51,739,204 47,247,120
Residential housing completed and under construction 28,942,215 27,132,455
Property and equipment, net 1,005,717 1,250,710
Deferred financing costs and other assets 7,284,551 5,884,127
----------- -----------
$90,797,420 $88,280,999
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Revolving credit facility $15,735,000 $15,010,000
Senior notes payable 29,024,227 30,924,636
Notes payable 1,545,927 1,972,402
Accounts payable 11,391,581 11,552,749
Accrued liabilities 4,491,743 2,506,176
Income taxes payable 629,087 0
----------- -----------
Total liabilities 62,817,565 61,965,963
----------- -----------
Shareholders' equity:
Preferred stock, $.10 par value,
10,000,000 shares authorized;
none issued - -
Common stock, $.10 par value,
40,000,000 shares authorized;
issued and outstanding 5,772,913
and 5,745,110 respectively 143,291 140,511
Paid-in capital 11,744,428 11,747,208
Retained earnings 16,092,136 14,427,317
----------- -----------
Total shareholders' equity 27,979,855 26,315,036
----------- -----------
$90,797,420 $88,280,999
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE>
THE ROTTLUND COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended September 30, Ended September 30,
------------------------------- --------------------------------
1998 1997 1998 1997
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Net sales $63,782,429 $41,673,698 $115,136,882 $84,377,761
Cost of sales 54,082,306 36,035,840 98,566,526 72,665,106
----------- ----------- ------------ -----------
9,700,123 5,637,858 16,570,356 11,712,655
Selling, general and
administrative expense 6,821,627 5,102,398 12,442,713 10,141,243
----------- ----------- ------------ -----------
Operating income 2,878,496 535,460 4,127,643 1,571,412
Other (income) expense:
Interest expense 699,202 440,453 1,416,403 719,957
Other income (54,371) (54,079) (110,579) (67,276)
----------- ----------- ------------ -----------
Income before provision
for income taxes 2,233,665 149,086 2,821,819 918,731
----------- ----------- ------------ -----------
Provision for taxes 916,000 55,000 1,157,000 371,000
----------- ----------- ------------ -----------
Net income $1,317,665 $94,086 $1,664,819 $547,731
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
Net income per share $0.23 $0.02 $0.29 $0.10
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
Weighted average
shares outstanding 5,772,913 5,745,110 5,772,913 5,745,110
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE>
THE ROTTLUND COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
<TABLE>
<CAPTION>
For the Six Months Ended September 30,
1998 1997
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $1,664,819 $547,731
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 364,469 193,008
Changes in operating items:
Escrow and other receivables 1,132,543 581,391
Land, development costs and finished
Lots (4,492,084) 1,574,659
Residential housing completed and
Under construction (1,809,760) 8,117,804
Deferred financing costs and other
Assets (1,400,424) (521,177)
Accounts payable (161,169) (1,679,809)
Accrued liabilities 1,985,567 (346,338)
Income taxes payable 629,087 (1,613,834)
----------- -----------
Net cash provided by(used for)
Operating activities (2,086,952) 6,853,433
----------- -----------
INVESTING ACTIVITIES:
Purchase of property and equipment, net (119,476) (269,108)
----------- -----------
FINANCING ACTIVITIES:
Proceeds from mortgage notes payable 54,000 572,529
Repayments of mortgage notes payable (480,475) (3,151,116)
Proceeds from revolving credit facility, net 725,000 (6,825,000)
Stock options exercised 0 0
Repayment of senior notes payable (1,900,408) (1,430,313)
----------- -----------
Net cash used for financing activities (1,601,883) (10,833,900)
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (3,808,311) (4,249,575)
CASH AND CASH EQUIVALENTS:
Beginning of period 4,246,674 7,015,543
----------- -----------
End of period $ 438,363 $ 2,765,968
----------- -----------
----------- -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS
INFORMATION:
Cash paid for interest, net of amounts capitalized $ 1,416,403 $719,957
Cash paid for income taxes 1,164 1,984,912
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE>
THE ROTTLUND COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1. General
The financial statements included herein have been prepared by the Company
without audit, in accordance with generally accepted accounting principles,
and pursuant to the rules and regulations of the Securities and Exchange
Commission. These interim financial statements should be read in conjunction
with the consolidated financial statements and notes in the Company's annual
report for the year ended March 31, 1998 as filed with the Securities and
Exchange Commission. In the opinion of management of the Company, these
financial statements contain all adjustments of a normal recurring nature
necessary to present fairly the financial position, results of operations and
cash flows of the Company for the interim periods presented.
The Company has experienced, and expects to continue to experience, significant
variability in quarterly net sales and net income. Operating results for the
three and six months ending September 30, 1998 are not necessarily indicative of
the results that may be expected for the year ending March 31, 1999.
Note 2. Note Payable to Bank
As of September 30, 1998, the Company had a line-of-credit arrangement with a
bank totaling $23,000,000, with interest at the bank's prime rate plus .5%.
Borrowings outstanding at September 30, 1998 were $15,735,000 under this
arrangement. In addition, letters of credit totaling approximately $1,025,000
were outstanding under this arrangement at September 30, 1998.
6
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The following table sets forth certain information regarding the Company's
operations for the periods indicated.
<TABLE>
<CAPTION>
Percentage of Net Sales
------------------------
For The Three Months For The Six Months
Ended September 30 Ended September 30
--------------------- ---------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 84.8 86.4 85.6 86.1
------- ------- ------- -------
Gross profit 15.2 13.6 14.4 13.9
Selling, general and
Administrative expense 10.7 12.3 10.8 12.0
------- ------- ------- -------
Operating income 4.5 1.3 3.6 1.9
Other (income) expense:
Interest 1.1 1.1 1.2 .9
Other (.1) (.1) (.1) (.1)
------- ------- ------- -------
Income before provision
for income taxes 3.5 .3 2.5 1.1
Provision for income
taxes 1.4 .1 1.0 .4
------- ------- ------- -------
Net income 2.1% .2% 1.5% .7%
------- ------- ------- -------
------- ------- ------- -------
Number of homes closed 415 283 762 594
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
BACKLOG
The following table sets forth the Company's backlog as of the dates indicated:
<TABLE>
<CAPTION>
Number of
September 30, Homes Sales Value
- ------------- ---------- ------------
<S> <C> <C>
1998 698 $113,828,000
1997 394 $62,192,000
</TABLE>
As a cautionary note to investors, certain matters discussed in this
management's discussion and analysis are forward looking statements within the
meaning of the Private Securities Litigation Act of 1995. Such matters involve
risks and uncertainties, including changes in economic conditions and interest
rates, increases in raw material and labor costs, weather conditions, and
general competitive factors that may cause actual results to differ materially.
7
<PAGE>
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1997
Net sales for the three months ended September 30, 1998, increased by 53.0%, to
$63.8 million, from $41.7 million for the comparable period of 1997. The number
of homes closed by the Company increased by 46.6% to 415 homes for the three
months ended September 30, 1998, from 283 homes during the same period in 1997.
The average selling price of a home increased 4.3% to $153,700, during the three
months ended September 30, 1998 from $147,300 for the comparable period in 1997.
This increase was due to an overall increase in prices for homes sold by the
Company.
Gross profit increased by 73.2%, to $9.7 million for the three months ended
September 30, 1998, from $5.6 million for the comparable period of 1997. Gross
profit as a percentage of net sales increased to 15.2% from 13.6% primarily as a
result of steady material and labor costs in the current quarter versus sharply
rising costs in the prior period.
Selling, general and administrative expenses increased by 33.3% to $6.8 million
in the three months ended September 30, 1998, from $5.1 million for the
comparable period of 1997. This increase is due to an increase in variable
costs related to the increase in revenue during the quarter. As a percentage of
net sales, selling, general and administrative expense decreased to 10.7% for
the three month period ended September 30, 1998, from 12.3% for the same period
in 1997.
Interest expense increased to $699,000 for the three months ended September 30,
1998, from $440,000 for the comparable period in 1997. The increase in interest
expense is primarily due to the Company terminating capitalizing interest on a
piece of commercial land that it has held for approximately ten years. The land
is currently for sale and has a book value of about $9.0 million. The Company
capitalizes certain interest costs for land development and includes such
capitalized interest in cost of home sales when the related homes are delivered
to purchasers.
The Company's effective tax rate for both periods was approximately 41%, which
reflects the federal statutory rate plus state taxes, net of federal income tax
benefit.
8
<PAGE>
SIX MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO SIX MONTHS ENDED
SEPTEMBER 30, 1997
Net sales for the six month period ended September 30, 1997, increased by 36.4%,
to $115.1 million, from $84.4 million for the comparable period of 1996. The
number of homes closed by the Company increased by 28.3%, to 762 homes for the
six months ended September 30, 1998, from 594 homes during the same period in
1997. The average selling price of a home increased 6.3% to $151,100, in 1998
from $142,100 for the same period in 1997. This increase was due to an overall
increase in prices for homes sold by the Company.
Gross profit increased by 41.9%, to $16.6 million for the six month period ended
September 30, 1998, from $11.7 million for the comparable period of 1997. Gross
profit as a percentage of revenue increased to 14.4% from 13.9%, primarily as a
result of steady material and labor costs in the current six months versus
sharply rising costs in the prior period.
Selling, general and administrative expenses increased by 22.8%, to $12.4
million in the six month period ended September 30, 1998, from $10.1 million for
the comparable period of 1997. This increase is due to an increase in variable
costs related to the increase in revenue during the six months. As a
percentage of net sales, selling, general and administrative expenses decreased
to 10.8% for the six months ended September 30, 1998, from 12.0% for the same
period in 1997.
Interest expense increased to $1,416,000 for the six months ended September 30,
1998, from $720,000 for the same period in 1997. The increase in interest
expense is primarily due to the Company terminating capitalizing interest on a
piece of commercial land that it has held for approximately ten years. The land
is currently for sale and has a book value of about $9.0 million. The Company
capitalizes certain interest costs for land development and includes such
capitalized interest in cost of home sales when the related homes are delivered
to purchasers.
The Company's effective tax rate for both periods was approximately 41%, which
reflects the federal statutory rate plus state taxes, net of federal income tax
benefit.
9
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, the Company had available cash and cash equivalents of
approximately $438,000.
The Company's financing needs depend primarily upon sales volume, asset
turnover, and land acquisition and inventory balances. In December 1994, the
Company issued $25 million of 12.11% Senior Notes payable and in February 1996,
the Company issued an additional $10 million of 9.42% Senior Notes payable
(collectively referred to as the "Senior Notes"). Proceeds were used to retire
certain mortgage notes payable and for working capital purposes. Principal and
interest payments of approximately $552,000 are due monthly from December 1996
through December 2004.
At September 30, 1998, the Company also had a $23.0 million revolving credit
facility from a commercial lender. Borrowings under this facility's line of
credit totaled $15.7 million at September 30, 1998. The Company has the
capacity as of September 30, 1998 to borrow an additional $10.0 million of
short-term debt, if otherwise available, without violating the terms of the
Senior Notes. The Company believes those amounts available under its existing
borrowing arrangements (assuming extensions and renewals of debt in the ordinary
course of business) and amounts generated from operations will provide funds
adequate for its home building activities and debt service.
Due to lower than expected financial results in the fiscal year ended March 31,
1998, the Company was not in compliance with certain covenants under both its
Senior Note agreements and its revolving credit facility. All of the Company's
lenders have agreed to waive the violations and in addition the agreements have
been amended. Certain financial covenants have been reset over the next fiscal
year in order to give the Company time to reach original covenant levels. The
Company will pay an additional $100,000 principal per month amortization on the
Senior Notes for the remaining life of the notes.
The Company has generally been able to secure financing for its acquisition,
development and construction activities, and management believes such
arrangements will continue to be available on terms satisfactory to the
Company. There can be no assurance, however, that continued financing for
land acquisitions will be available or, if available, will be on terms
satisfactory to the Company.
YEAR 2000 ISSUES
Key financial information and operations systems have been assessed and plans
developed in order to solve the Year 2000 issue. These plans revolve around
upgrades of purchased software. These projects are substantially underway and
are on schedule for completion between December 1998 and April 1999. The
Company believes that the costs to address the Year 2000 issue will not have a
material impact on the Company's financial condition or results of operations,
liquidity or cash flows for any year in the reasonably foreseeable future. The
Company intends to initiate during fiscal year 1999 a communication plan with
significant suppliers to determine the status of their Year 2000 issues and does
not currently anticipate a material impact on the Company's operations and
financial results. However, if such upgrades and conversions are not made, or
are not timely completed, the Year 2000 issues could have a material impact on
the operations and financial results of the Company.
INFLATION
The Company, as well as the homebuilding industry in general, may be adversely
affected during periods of high inflation, primarily because of higher land,
material and labor costs. In addition, higher mortgage interest rates may
significantly affect the affordability of permanent mortgage financing to
prospective purchasers. The Company attempts to pass through to its customers
any increase in its costs through increased selling prices, and to date,
inflation has not had a material adverse effect on the Company's results of
operations. However, there is no assurance that inflation will not have a
material adverse impact on the Company's future results of operations.
10
<PAGE>
PART II - OTHER INFORMATION
Items 1 through 3. Not applicable.
Item 4. Submission of matters to a vote of security holders.
The Company held its annual meeting of shareholders on September 10,
1998. Messrs. Bernard J. Rotter, David H. Rotter, Todd M. Stutz, John
J. Dierbeck, Lawrence B. Shapiro, Dennis J. Doyle and Scott D. Rued
were elected by a majority of the votes cast as directors for a
one-year term. In addition, the shareholders ratified Arthur Anderson
LLP. As the Company's independent public accountants for the fiscal
year ending March 31, 1999.
Item 5. Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits. Not applicable.
(b) Reports on Form 8-K.
The registrant filed no reports on Form 8-K during the three
months ended September 30, 1998.
11
<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 ROTTLUND COMPANY, INC.
Date: November 5, 1998 By: /s/ DAVID H. ROTTER
------------------------------
DAVID H. ROTTER
President and
Chief Executive Officer
Date: November 5, 1998 By: /s/ LAWRENCE B. SHAPIRO
------------------------------
LAWRENCE B. SHAPIRO
Vice President of Finance
Chief Financial Officer
(Principal Financial and
Accounting Officer)
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 438,363
<SECURITIES> 0
<RECEIVABLES> 1,387,370
<ALLOWANCES> 0
<INVENTORY> 80,681,419
<CURRENT-ASSETS> 82,507,152
<PP&E> 2,150,186
<DEPRECIATION> 1,144,469
<TOTAL-ASSETS> 90,797,420
<CURRENT-LIABILITIES> 33,793,338
<BONDS> 29,024,227
0
0
<COMMON> 143,291
<OTHER-SE> 27,836,564
<TOTAL-LIABILITY-AND-EQUITY> 90,797,420
<SALES> 63,782,429
<TOTAL-REVENUES> 63,782,429
<CGS> 54,082,306
<TOTAL-COSTS> 54,082,306
<OTHER-EXPENSES> 6,821,627
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 699,202
<INCOME-PRETAX> 2,233,665
<INCOME-TAX> 916,000
<INCOME-CONTINUING> 1,317,665
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,317,665
<EPS-PRIMARY> .23
<EPS-DILUTED> .23
</TABLE>
