<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 December 31, 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
THE ROTTLUND COMPANY, INC.
- -------------------------------------------------------------------------------
(Exact name of registrants as specified in its charter)
<TABLE>
<S> <C>
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)
</TABLE>
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 February 5, 1999 was 5,772,913 shares.
1
<PAGE>
THE ROTTLUND COMPANY, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<S> <C> <C>
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated balance sheets - December 31, 1998 3
and March 31, 1998
Consolidated statements of operations - Three and 4
nine months ended December 31, 1998 and 1997
Consolidated statements of cash flows - Nine 5
months ended December 31, 1998 and 1997
Notes to consolidated financial statements 6
Item 2. Management's Discussion and Analysis of Financial 7
Condition and Results of Operations
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>
December 31, 1998 March 31, 1998
-------------------- ------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ -- $ 4,246,674
Escrow and other receivables 1,773,014 2,519,913
Land, development costs and finished lots 50,135,471 47,247,120
Residential housing completed and under construction 31,444,279 27,132,455
Property and equipment, net 881,083 1,250,710
Deferred financing costs and other assets 7,348,349 5,884,127
-------------------- -------------------
$ 91,582,196 $ 88,280,999
-------------------- -------------------
-------------------- -------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Revolving credit facility $ 19,235,000 $ 15,010,000
Senior notes payable 27,889,635 30,924,636
Notes payable 1,166,842 1,972,402
Accounts payable 8,293,870 11,552,749
Accrued liabilities 5,255,338 2,506,176
Income taxes payable 739,087 --
-------------------- ------------------
Total liabilities 62,579,772 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 17,114,705 14,427,317
------------------- ------------------
Total shareholders' equity 29,002,424 26,315,036
------------------- ------------------
------------------- ------------------
$91,582,196 $88,280,999
------------------- -------------------
------------------- -------------------
</TABLE>
See accompanying notes to consolidated financial statements
3
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THE ROTTLUND COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended December 31, Ended December 31,
----------------------------------------------- -----------------------------------------------
1998 1997 1998 1997
--------------------- ---------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C>
Net sales $58,786,225 $32,007,826 $173,923,107 $116,385,587
Cost of sales 50,057,759 27,926,088 148,624,285 100,585,478
--------------------- ---------------------- ---------------------- ----------------------
8,728,466 4,081,738 25,298,822 15,800,109
Selling, general and
Administrative expense 6,415,036 4,793,292 18,857,750 14,940,250
--------------------- ---------------------- ---------------------- ----------------------
Operating income 2,313,430 (711,554) 6,441,072 859,859
Other (income) expense:
Interest expense 669,195 556,857 2,085,599 1,276,815
Other income (88,335) (38,781) (198,915) (106,056)
--------------------- ---------------------- ---------------------- ----------------------
Income before provision
for income taxes 1,732,570 (1,229,630) 4,554,388 (310,900)
Provision for taxes 710,000 (498,000) 1,867,000 (127,000)
--------------------- ---------------------- ---------------------- ----------------------
Net income $1,022,570 ($731,630) $2,687,388 ($183,900)
--------------------- ---------------------- ---------------------- ----------------------
--------------------- ---------------------- ---------------------- ----------------------
Net income per share $0.18 ($0.13) $0.47 ($0.03)
--------------------- ---------------------- ---------------------- ----------------------
--------------------- ---------------------- ---------------------- ----------------------
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 Nine Months Ended December 31,
-------------------------------------------------
1998 1997
------------------------ ----------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $2,687,388 ($183,900)
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 548,247 334,293
Changes in operating items:
Escrow and other receivables 746,899 483,695
Land, development costs and finished (2,888,351) (1,703,075)
Lots
Residential housing completed and (4,311,824) 6,696,933
Under construction
Deferred financing costs and other (1,463,223) (424,638)
Assets
Accounts payable (3,258,879) (2,111,648)
Accrued liabilities 2,750,162 (1,425,671)
Income taxes payable 739,087 (2,147,018)
------------------------ -----------------------
Net cash provided by(used for)
Operating activities (4,452,494) (481,029)
------------------------ -----------------------
INVESTING ACTIVITIES:
Purchase of property and equipment, net (178,620) (858,242)
------------------------ -----------------------
FINANCING ACTIVITIES:
Proceeds from mortgage notes payable 120,000 605,529
Repayments of mortgage notes payable (925,560) (3,430,641)
Proceeds from revolving credit facility, net 4,225,000 (675,000)
Repayment of senior notes payable (3,035,000) (2,176,160)
------------------------ -----------------------
Net cash used for financing activities 384,440 (5,676,272)
------------------------ -----------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (4,246,674) (7,015,543)
CASH AND CASH EQUIVALENTS:
Beginning of period 4,246,674 7,015,543
------------------------ -----------------------
End of period $ -- $ --
------------------------ -----------------------
------------------------ -----------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS
INFORMATION:
Cash paid for interest, net of amounts capitalized $ 2,085,599 $1,276,815
Cash paid for income taxes 1,164 2,020,096
------------------------ -----------------------
------------------------ -----------------------
</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 nine months ending December 31, 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 December 31, 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 December 31, 1998 were $19,235,000 under this
arrangement. In addition, letters of credit totaling approximately $20,000 were
outstanding under this arrangement at December 31, 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 Nine Months
Ended December 31 Ended December 31
---------------------- --------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 85.2 87.2 85.5 86.4
------------- ------------- -------------- -------------
Gross profit 14.8 12.8 14.5 13.6
Selling, general and
Administrative expense 10.9 15.0 10.8 12.9
------------- ------------- -------------- -------------
Operating income 3.9 (2.2) 3.7 .7
Other (income) expense:
Interest 1.1 1.7 1.2 1.1
Other (.1) (.1) (.1) (.1)
------------- ------------- -------------- -------------
Income before provision
for income taxes 2.9 (3.8) 2.6 (.3)
Provision for income
taxes 1.2 (1.6) 1.1 (.1)
------------- ------------- -------------- -------------
Net income 1.7 % (2.2) % 1.5 % (.2) %
------------- ------------- -------------- -------------
------------- ------------- -------------- -------------
Number of homes closed 364 202 1126 796
------------- ------------- -------------- -------------
------------- ------------- -------------- -------------
</TABLE>
BACKLOG
The following table sets forth the Company's backlog as of the dates indicated:
<TABLE>
<CAPTION>
Number of
December 31, Homes Sales Value
------------ ---------- -------------
<S> <C> <C> <C>
1998 624 $104,651,000
1997 457 $ 71,464,000
</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 DECEMBER 31, 1998 COMPARED TO THREE MONTHS ENDED
DECEMBER, 1997
Net sales for the three months ended December 31, 1998, increased by 83.8%, to
$58.8 million, from $32.0 million for the comparable period of 1997. The number
of homes closed by the Company increased by 80.2% to 364 homes for the three
months ended December, 1998, from 202 homes during the same period in 1997. The
average selling price of a home increased 1.9% to $161,500, during the three
months ended December 31, 1998 from $158,500 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 112.2%, to $8.7 million for the three months ended
December 31, 1998, from $4.1 million for the comparable period of 1997. Gross
profit as a percentage of net sales increased to 14.8% from 12.8% primarily as a
result of steady material and labor costs in the current quarter versus sharply
rising costs in the prior period, combined with the higher revenues which
decreased fixed costs as a percentage of revenue.
Selling, general and administrative expenses increased by 33.3% to $6.4 million
in the three months ended December 31, 1998, from $4.8 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 10.9% for the
three month period ended December 31, 1998, from 15.0% for the same period in
1997.
Interest expense increased to $669,000 for the three months ended December 31,
1998, from $557,000 for the comparable period in 1997. The increase in interest
expense is primarily due to an increase in borrowings under the Company's
revolving credit facility used to fund the increased level of business activity.
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>
NINE MONTHS ENDED DECEMBER 31, 1998 COMPARED TO NINE MONTHS ENDED
DECEMBER 31, 1997
Net sales for the nine month period ended December 31, 1998, increased by 49.4%,
to $173.9 million, from $116.4 million for the comparable period of 1997. The
number of homes closed by the Company increased by 41.5%, to 1126 homes for the
nine months ended December 31, 1998, from 796 homes during the same period in
1997. The average selling price of a home increased 5.7% to $154,500, in 1998
from $146,200 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 60.1%, to $25.3 million for the nine month period
ended December 31, 1998, from $15.8 million for the comparable period of 1997.
Gross profit as a percentage of revenue increased to 14.5% from 13.6%, primarily
as a result of steady material and labor costs in the current nine months versus
sharply rising costs in the prior period, combined with the higher revenues
which decreased fixed costs as a percentage of revenue.
Selling, general and administrative expenses increased by 26.8%, to $18.9
million in the nine month period ended December 31, 1998, from $14.9 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 nine months. As a percentage
of net sales, selling, general and administrative expenses decreased to 10.8%
for the nine months ended December 31, 1998, from 12.9% for the same period in
1997.
Interest expense increased to $2,086,000 for the nine months ended December 31,
1998, from $1,277,000 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, and an
increase in borrowings under the Company's revolving credit facility used to
fund the increased level of business activity. 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 December 31, 1998, the Company had no available cash and cash equivalents.
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 December 31, 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 $19.2 million at December 31, 1998. The Company has the capacity
as of December 31, 1998 to borrow an additional $3.8 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 completed as of
the date of this report. The Company has incurred costs of less than $50,000 to
address the Year 2000 issue and believes these costs 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 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 December 31, 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: February 5, 1999 By:
----------------------------
DAVID H. ROTTER
President and
Chief Executive Officer
Date: February 5, 1999 By:
-----------------------------
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> OCT-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 1,773,014
<ALLOWANCES> 0
<INVENTORY> 81,579,750
<CURRENT-ASSETS> 83,352,764
<PP&E> 2,209,331
<DEPRECIATION> 1,328,247
<TOTAL-ASSETS> 91,582,196
<CURRENT-LIABILITIES> 34,690,137
<BONDS> 27,889,635
0
0
<COMMON> 143,291
<OTHER-SE> 28,859,133
<TOTAL-LIABILITY-AND-EQUITY> 91,582,196
<SALES> 58,786,225
<TOTAL-REVENUES> 58,786,225
<CGS> 50,057,759
<TOTAL-COSTS> 50,057,759
<OTHER-EXPENSES> 6,415,036
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 669,195
<INCOME-PRETAX> 1,732,570
<INCOME-TAX> 710,000
<INCOME-CONTINUING> 1,022,570
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,022,570
<EPS-PRIMARY> .18
<EPS-DILUTED> .18
</TABLE>