<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
AMENDMENT NO. 1
Amendment to application on Report filed pursuant
to Section 13 or 15(d) of The Securities Exchange Act of 1934
Date of Report: November 15, 1996
The Fortress Group, Inc.
(Exact Name of Registrant as Specified in Charter)
Delaware 0-28024 54-1774997
- ---------------------------- ------------ -------------------
(State or Other Jurisdiction (Commission (IRS Employer
of Incorporation) File Number) Identification No.)
1921 Gallows Road, Suite 730, Vienna, Virginia 22182
- ---------------------------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (703) 442-4545
--------------
<PAGE>
The undersigned registrant, in order to provide the financial statements
required to be included in the Current Report on Form 8-K dated September 16,
1996 in connection with the acquisition of certain assets and assumption of
certain liabilities of Landmark Homes, Inc., hereby amends the following item,
or other portions of such Current Report on Form 8-K set forth in the pages
attached hereto.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
The financial statements and information in the following table of contents and
attached hereto are hereby filed with the Commission in accordance with the
above-referenced item.
-2-
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements of Business Acquired.
The following financial statements of the acquired business, Landmark
Homes, Inc., are submitted herewith on the indicated pages.
Page
----
Report of Independent Accountants 5
Balance Sheets as of December 31, 1995 and
and June 30, 1995 and 1996 (Unaudited) 6
Statements of Operations for the Year Ended
December 31, 1995 and the Six Months Ended
June 30, 1995 and 1996 (Unaudited) 7
Statement of Shareholders' Equity as of June 30, 1996 (Unaudited) 8
Statements of Cash Flows for the Years Ended
December 31, 1995 and the Six Months Ended June 30,
1996 (Unaudited) 9
Notes to Financial Statements 10
(b) Pro Forma Financial Data
The following unaudited pro forma condensed combined financial information
of The Fortress Group, Inc. and Landmark Homes, Inc. are submitted herewith
on the indicated pages.
Pro Forma Financial Data 18
Pro Forma Balance Sheet at June 30, 1996 (Unaudited) 19
Pro Forma Statement of Operations for the Six Months Ended
June 30, 1996 (Unaudited) 20
Pro Forma Statement of Operations for the Year Ended
December 31, 1995 (Unaudited) 21
Notes to Pro Forma Financial Data (Unaudited) 22
Signatures 25
-3-
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED
-4-
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Landmark Homes, Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations, of shareholders' equity and of cash flows present fairly, in all
material respects, the financial position of Landmark Homes, Inc. (the
"Company") at December 31, 1995, and the results of its operations and its cash
flows for the year then ended, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audit of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for the opinion expressed
above.
Price Waterhouse LLP
Minneapolis, Minnesota
October 11, 1996
5
<PAGE>
LANDMARK HOMES, INC.
--------------------
BALANCE SHEET
-------------
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
December 31, June 30,
1995 1995 1996
------------ ---------- -------
(unaudited)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 25 $ 113 $ 106
Accounts receivable 293 247 446
Accounts receivable - related parties 787 747 701
Real estate inventories 7,173 4,205 9,704
Property and equipment, net 204 182 182
Prepaid expenses and other assets 16 10 -
------ ------ -------
Total assets $8,498 $5,504 $11,139
====== ====== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued construction liabilities $1,361 $ 488 $ 1,367
Customer deposits 144 90 136
Notes payable 5,182 3,269 7,217
------ ------ -------
Total liabilities 6,687 3,847 8,720
------ ------ -------
Shareholders' equity:
Common stock, $1 par value; 100,000 shares
authorized, 1,000 shares issued and outstanding 1 1 1
Additional paid-in capital 275 275 275
Retained earnings 1,535 1,381 2,143
------ ------ -------
Total shareholders' equity 1,811 1,657 2,419
------ ------ -------
Total liabilities and shareholders' equity $8,498 $5,504 $11,139
====== ====== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
LANDMARK HOMES, INC.
--------------------
STATEMENT OF OPERATIONS
-----------------------
(in thousands)
<TABLE>
<CAPTION>
For the Year Ended For the Six Months
December 31, Ended June 30,
1995 1995 1996
------------------- ---- ----
(unaudited)
<S> <C> <C> <C>
Revenue:
Residential sales $19,640 $10,043 $12,624
Cost of sales 16,950 8,624 10,718
------- ------- -------
Gross profit 2,690 1,419 1,906
Operating expenses:
General and administrative expenses 1,821 736 816
Selling expenses 122 79 57
------- ------- -------
Net operating income 747 604 1,033
Other (income) expense:
Interest, net (10) - 26
Other (43) - (19)
------- ------- -------
Net income $ 800 $ 604 $ 1,026
======= ======= =======
Unaudited pro forma net income $ 496 $ 637
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
LANDMARK HOMES, INC.
--------------------
STATEMENT OF SHAREHOLDERS' EQUITY
---------------------------------
(in thousands)
<TABLE>
<CAPTION>
Additional Total
Common Paid-in Retained Shareholders'
Stock Capital Earnings Equity
------ ---------- -------- -------------
<S> <C> <C> <C> <C>
Balance at January 1, 1995 $1 $275 $ 1,820 $ 2,096
Net Income 800 800
Distributions to shareholders (1,085) (1,085)
-- ---- ------- -------
Balance at 1 275 1,535 1,811
December 31, 1995
Net income (unaudited) 1,535 1,026
Distributions to shareholders (418) (418)
(unaudited) -- ---- ------- -------
Balance at June 30, 1996 $1 $275 $ 2,143 $ 2,419
(unaudited) == ==== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
LANDMARK HOMES, INC.
--------------------
STATEMENT OF CASH FLOWS
-----------------------
(in thousands)
<TABLE>
<CAPTION>
For the Year Ended For the Six Months
December 31, ended June 30,
1995 1995 1996
------------------ ------- ----------
(unaudited)
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 800 $ 604 $ 1,026
Adjustments to reconcile net income to
net cash used for operating activities:
Depreciation 68 27 21
Changes in operating assets and liabilities:
Accounts receivable (651) (564) (65)
Real estate inventories (2,886) (1,203) (2,531)
Prepaid expenses and other assets 2 (4) 17
Accounts payable and accrued construction
liabilities 491 (372) 6
Customer deposits (1,027) 43 (8)
------- ------- -------
Net cash used by operating activities (3,203) (1,469) (1,534)
------- ------- -------
Cash flows from investing activities
Purchase of property and equipment (108) (45) (2)
------- ------- -------
Net cash used by investing activities (108) (45) (2)
------- ------- -------
Cash flows from financing activities
Proceeds from notes payable 13,133 5,277 8,734
Principal payments on notes payable (8,868) (2,925) (6,699)
Distributions to shareholders (1,085) (881) (418)
------- ------- -------
Net cash provided by financing activities 3,180 1,471 1,617
------- ------- -------
Net increase (decrease) in cash and cash equivalents (131) (43) 81
Cash and cash equivalents, beginning of period 156 156 25
------- ------- -------
Cash and cash equivalents, end of period $ 25 $ 113 $ 106
======= ======= =======
Supplemental disclosures of cash flows information
Cash payments for interest $ 268 $ 140 $ 277
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
9
<PAGE>
LANDMARK HOMES, INC.
--------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
NOTE 1 - BUSINESS ORGANIZATION
Landmark Homes, Inc. (Landmark, the Company) was organized on January 1,
1989 as an S-Corporation and is engaged primarily in the construction and sale
of single and multi-family residential property in North Carolina and South
Carolina. The Company designs, builds and sells single and multi-family houses
on finished lots, which it purchases ready for home construction. The Company
has also purchased undeveloped land in South Carolina to develop finished lots
for sale and future construction of single family.
The Company's business, and the housing industry in general, are cyclical.
The Company's operations are concentrated in North Carolina and South Carolina
and are affected by local and regional factors such as local economies,
demographic demand for housing, population growth, property taxes and energy
costs. National factors such as short and long-term interest rates, federal
mortgage financing programs, federal income tax policies and general economic
trends also can impact the Company's operations. In addition, the Company is
subject to various risks including availability and cost of land, conditions of
supply and demand in local markets, weather conditions, delays in construction
schedules and the entitlement process.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The accompanying balance sheet at June 30, 1996 and the statements of
operations and cash flows for the six months ended June 30, 1996 and 1995 and
the statement of shareholders' equity for the six months ended June 30, 1996,
are unaudited. In the opinion of management, these statements have been
prepared on the same basis as the audited financial statements and include all
adjustments, consisting primarily of normal recurring accruals, necessary for a
fair presentation of the financial condition of the Company as of June 30, 1996
and the results of operations and cash flows for the six month period ended June
30, 1996 and 1995.
Revenue recognition
Revenue from the sale of homes is recognized when all conditions precedent
to closing have been filled and title has passed to the buyer. The Company
considers accounts receivable to be fully collectible; accordingly, no allowance
for doubtful accounts has been established. If accounts become uncollectible,
the balances are charged to operations when that determination is made. The
Company's standard sales contract generally requires the customer to make a
deposit which is recognized as a liability until the home sale closes.
10
<PAGE>
Cash and cash equivalents
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
Real estate inventories and cost of sales
Real estate inventories are carried at cost which is less than fair value
as measured in accordance with Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of." Fair value is measured based on the application of
discounting expected future cash flows of each of the Company's real estate
projects. Costs incurred which are included in inventory consist of land, land
development, direct and certain indirect construction costs, interest, real
estate taxes, and direct model construction costs and related improvements.
Costs incurred for common area model improvements are amortized on a per unit
basis as home sales in the related development are closed.
At the time of revenue recognition, cost of sales is charged with the
actual construction costs incurred and any estimate to complete using the
specific identification method.
Property and equipment
Property and equipment is carried at cost less accumulated depreciation and
is depreciated using either accelerated or straight-line methods over the
estimated useful lives of the respective assets which range from five to seven
years. Significant additions and improvements are capitalized while expenditure
for repairs and maintenance are charged to operations as incurred.
Income taxes
The Company, with the consent of its shareholders, has elected, under the
Internal Revenue Code and the laws of the State of North Carolina, to be an S
corporation. In lieu of corporation income taxes, the shareholders of an S-
Corporation are taxed on their proportionate share of the Company's taxable
income. Therefore, no provision for federal or state income taxes has been
included in these financial statements.
Estimates by management
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
11
<PAGE>
NOTE 3 - REAL ESTATE INVENTORIES
Real estate inventories are summarized as follows (in thousands):
<TABLE>
<CAPTION>
December 31, June 30,
1995 1995 1996
------------ ---- ----
(unaudited)
<S> <C> <C> <C>
Work-in-progress:
Sold homes $3,028 1,984 $4,337
Speculative homes 3,174 1,323 4,054
Land:
Finished lots 97 423 97
Land under development 469 353 604
Model homes 405 122 612
------ ------ ------
$7,173 $4,205 $9,704
====== ====== ======
</TABLE>
Speculative homes and model homes include completed homes and homes under
construction. Speculative construction represents homes built without an
advance sales contract in order to accelerate closing.
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows (in thousands):
<TABLE>
<CAPTION>
December 31, June 30,
1995 1995 1996
------------ ------ -------
(unaudited)
<S> <C> <C> <C>
Model home upgrades and furnishings $ 10 $ 44 $ 86
Equipment and furniture 389 293 315
----- ----- -----
399 337 401
Less: accumulated depreciation (195) (155) (219)
----- ----- -----
$ 204 $ 182 $ 182
===== ===== =====
</TABLE>
12
<PAGE>
NOTE 5 - NOTES PAYABLE
Notes payable are summarized as follows (in thousands):
<TABLE>
<CAPTION>
December 31, June 30,
1995 1995 1996
------------ -------- ------
(unaudited)
<S> <C> <C> <C>
Project specific construction loans $4,790 $2,904 $6,839
Shareholders' notes payable 285 280 293
Equipment loans 107 85 85
------ ------ ------
$5,182 $3,269 $7,217
====== ====== ======
</TABLE>
Project specific construction loans are collateralized by homes under
construction, are payable in monthly interest only installments and are due upon
demand. These loans bear interest at the prime rate plus 0.25% to 0.50%, which
ranged from 9.00% to 9.25% at December 31, 1995.
Shareholders' notes payable are loans from the principals of the Company
and are payable upon demand. These loans bear interest at 18%.
Equipment loans are collateralized by the equipment, are payable in monthly
interest only installments and are due upon demand. These loans bear interest
at the prime rate plus .25% which was 9.00% at December 31, 1995.
At December 31, 1995, the Company has approximately $5,100,000 in unused
lines of credit available.
The Company's management believes that recorded cost approximates fair
value for notes payable at December 31, 1995.
Maturities of notes payable are as follows (in thousands):
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
<S> <C> <C>
1996 $5,108
1997 ---
1998 74
------
$5,182
======
</TABLE>
13
<PAGE>
NOTE 6 - RELATED PARTY TRANSACTIONS
Accounts receivable - related parties are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
December 31, June 30,
1995 1995 1996
----- ---- ----
<S> <C> <C> <C>
(unaudited)
Note receivable - Landmark Real Estate $ 416 $ 380 $ 478
Account receivable - Landmark Organization, Inc. 285 338 192
Shareholder receivable 86 29 31
----- ----- -----
$ 787 $ 747 $ 701
===== ===== =====
</TABLE>
Note receivable - Landmark Real Estate is receivable from a corporation
owned by the principal shareholders of the Company. The unsecured note
receivable bears interest at 8% annually and payment is due upon demand.
Management of the Company has represented that this note is collectible and that
the Company will receive payment as provided for in the note.
Account receivable - Landmark Organization, Inc. is due from a corporation
owned principally by the shareholders of the Company. Management has represented
that this receivable is collectible.
Shareholder receivable is an amount due from corporations owned principally
by the shareholders of the Company and from shareholders of the Company, arising
from transactions occurring in the normal course of business.
Other miscellaneous related party transactions (in thousands) during the
year ended December 31, 1995 include the following:
Rental expense of $53 in 1995 was paid to a corporation owned
principally by the shareholders of the Company for office space and rental
of pagers.
Management fee income and expense of $38 and $13, respectively, in
1995 was derived from transactions with various corporations owned
principally by the shareholders of the Company.
Salaries expense was reduced by $198 in 1995 for reimbursements for
services rendered by employees of the Company to various corporations owned
principally by the shareholders of the Company.
Accounts payable and accrued construction liabilities at December 31,
1995 include $48 due to a partnership comprised of shareholders of the
Company and a corporation owned principally by the shareholders of the
Company.
Real estate purchases of $3,733 were made in 1995 from corporations
owned principally by the shareholders of the Company.
14
<PAGE>
Commissions of $596 were paid on sales of real estate in 1995 to a
corporation owned principally by the shareholders of the Company.
Development costs of $580 were paid in 1995 to a corporation owned
principally by the shareholders of the Company.
Interest income in the amount of $56 was collected on intercompany
receivables in 1995 from corporations owned principally by the
shareholders of the Company.
Inventory at December 31, 1995 includes $60 for homes being built for an
officer of the Company and an employee of a corporation owned principally
by the shareholders of the Company.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
The Company is involved in certain legal disputes arising in the normal
course of business, generally relating to claims by customers for repairs on
purchased homes. In the opinion of management, resolution of these claims will
not have a material impact on the Company's financial position or results of
operations.
NOTE 8 - SUBSEQUENT EVENTS
On August 31, 1996, the Company and its Shareholders (the Sellers) entered
into an Asset Purchase Agreement (the Agreement) with The Fortress Group, Inc.
(the Purchaser), whereby the Seller agreed to sell to the Purchaser
substantially all of the assets of the Company in exchange for approximately
$5,000,000 in cash and the assumption of approximately $8,200,000 in
liabilities, as set forth in the Agreement.
In connection with this Agreement, the Company entered into a Shared
Services Agreement through December 31, 1997 with an affiliated corporation
owned principally by the shareholders of the Company, Landmark Organization,
Inc. (LOI). Beginning in September 1996, the Company will pay a monthly fee in
consideration of certain services, use of equipment and office space provided by
LOI to the Company.
15
<PAGE>
NOTE 9 - UNAUDITED PRO FORMA NET INCOME
The following unaudited pro forma income tax information (in thousands) is
presented in accordance with Statement of Financial Accounting Standards No.
109, Accounting for Income Taxes, as if the Company had been a subchapter C
corporation subject to federal income taxes for the year ended December 31, 1995
and the six months ended June 30, 1996.
<TABLE>
<CAPTION>
For the For the Six
Year Ended Months Ended
December 31, June 30,
1995 1995
------------ ------------
<S> <C> <C>
Earnings before pro forma adjustment, per
statement of operations $800 $1,026
Provision for income taxes 304 389
---- ------
Pro forma net income $496 $ 637
==== ======
</TABLE>
16
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(b) PRO FORMA FINANCIAL DATA
17
<PAGE>
THE FORTRESS GROUP, INC.
------------------------
PRO FORMA FINANCIAL DATA
------------------------
(unaudited)
-----------
The Fortress Group, Inc. ("Fortress" or the "Company") was formed in June 1995
to create a national homebuilding company through the May 1996 initial public
offering ("offering") and the simultaneous merger of four separate homebuilding
companies ("Combined Predecessor Companies"). The unaudited pro forma financial
data reflect the sale effective July 1, 1996 of the Genesee Custom Homes
Division ("Genesee Custom"), the offering of The Fortress Group, Inc., the
merger of the Combined Predecessor Companies and the purchase on August 31, 1996
of Landmark Homes, Inc. ("Landmark").
The unaudited pro forma balance sheet gives effect to the purchase of Landmark
Homes, Inc. as if the purchase had occurred on June 30, 1996. The pro forma
adjustments reflect the cash payment for the purchase, the increase of inventory
to fair value at purchase date, and the recording of goodwill.
The unaudited pro forma statements of operations present pro forma results from
operations for the year ended December 31, 1995 and the six months ended June
30, 1996 as if the merger, the offering, the sale of Genesee Custom and the
purchase of Landmark had occurred on January 1, 1995. The pro forma adjustments
reflect the application of the net proceeds from the offering to refinance debt
outstanding during the period, certain administrative costs of the Fortress
corporate organization, the sale of Genesee Custom, amortization of goodwill and
the increased provision for income taxes as if the Combined Predecessor
Companies and Landmark Homes, Inc. were C corporations.
The pro forma financial data of The Fortress Group, Inc. are unaudited and are
based upon historical information, preliminary estimates and certain assumptions
management deems appropriate. The unaudited pro forma financial data presented
herein are not necessarily indicative of the results Fortress would have
attained had such events occurred at the beginning of the period, nor are they
indicative of the future results of Fortress. The unaudited pro forma financial
data and notes thereto should be read in conjunction with the Company's
Prospectus dated May 16, 1996 and the Company's Quarterly Report on Form 10-Q
for the six months ended June 30, 1996.
18
<PAGE>
THE FORTRESS GROUP, INC.
------------------------
PRO FORMA BALANCE SHEET
-----------------------
JUNE 30, 1996
-------------
(unaudited, in thousands, except per share amounts)
<TABLE>
<CAPTION>
The Fortress Landmark The Fortress
Group, Inc. Homes, Inc. Pro Forma Group, Inc.
Historical Historical Adjustments Pro Forma
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 30,686 $ 106 $ 253 (a) $ 24,265
(5,000)(b)
(26)(f)
(1,754)(g)
Related party and other receivables 4,347 1,147 4,074 (a) 9,022
(546)(f)
Real estate inventories 133,489 9,704 (4,667)(a) 138,839
461 (d)
(148)(f)
Property and equipment, net 1,829 182 (12)(f) 1,999
Prepaid expenses and other assets 9,296 (22)(a) 9,273
(1)(f)
Goodwill 4,127 (e) 4,127
-------- ------- ----------- --------
Total assets $179,647 $11,139 $(3,261) $187,525
======== ======= =========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued construction liabilities $ 9,830 $ 1,367 $ (184)(a) $ 10,533
(480)(f)
1,754 (g)
(1,754)(g)
Notes and mortgage payable 131,446 7,217 (252)(a) 138,411
Due to related parties 184 184
Accrued expenses 4,366 4,366
Customer deposits 5,808 136 (184)(a) 5,760
Deferred income taxes 1,076 1,076
-------- ------- ----------- --------
Total liabilities 152,710 8,720 (1,100) 160,330
-------- ------- ----------- --------
Minority interests 196 196
-------- ------- ----------- --------
Shareholders equity:
Preferred stock, $.01 par value, 2 million shares
authorized, 20,000 shares issued and outstanding
Common stock, $.01 par value, 25 million shares
authorized, 11,764,375 shares issued and outstanding 118 118
Common stock, $1 par value, 100,000 shares authorized,
1,000 shares issued and outstanding 1 (1)(c)
Additional paid in capital 24,842 275 258 (a) 25,100
(275)(c)
Retained earnings 1,781 2,143 (389)(c) 1,781
(1,754)(g)
-------- ------- ----------- --------
Total shareholders' equity 26,741 2,419 (2,161) 26,999
-------- ------- ----------- --------
Total liabilities and shareholders' equity $179,647 $11,139 $(3,261) $187,525
======== ======= =========== ========
</TABLE>
See notes to pro forma financial data.
19
<PAGE>
THE FORTRESS GROUP, INC.
---------------------------------
PRO FORMA STATEMENT OF OPERATIONS
---------------------------------
FOR THE SIX MONTHS ENDED JUNE 30, 1996
----------------------------------------
(unaudited, in thousands, except per share amounts)
<TABLE>
<CAPTION>
Combined The Pro Forma Adjustments
Predecessor Fortress
Companies Group, Inc.
January 1, May 21,
1996 - 1996 -
May 20, June 30, Landmark Genesee The Fortress
1996 1996 Homes, Inc. Merger/ Custom Landmark Group, Inc.
Historical Historical Historical Offering Disposition Acquisition Pro Forma
----------- ----------- ----------- ---------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Residential sales $65,482 $40,398 $12,624 $(4,964)(n) $ 113,540
Lot sales 1,036 1,428 2,464
Other revenue 80 83 163
------- ------- ------- ------- ------- ----- ----------
Total revenue 66,598 41,909 12,624 (4,964) 116,167
Cost of sales 56,688 35,455 10,718 $(1,234)(j) (4,928)(n) 96,699
------- ------- ------- ------- ------- ----- ----------
Gross profit 9,910 6,454 1,906 1,234 (36) 19,468
Operating expenses:
Selling expenses 4,700 1,852 816 (163)(n) 7,205
General and
administrative
expenses 3,997 1,726 57 644 (h) (121)(n) $ 79 (l) 6,382
------- ------- ------- ------- ------- ----- ----------
Net operating income 1,213 2,876 1,033 590 248 (79) 5,881
Other (income) expense:
Interest, net 63 36 26 (71)(j) 54
Minority interest 89 15 (98)(k) 6
Other, net (339) (32) (19) (390)
------- ------- ------- ------- ------- ----- ----------
Income before provision for
income taxes 1,400 2,857 1,026 759 248 (79) 6,211
Provision for income taxes 1,076 830 (i) 94 (i) 360 (i) 2,360
------- ------- ------- ------- ------- ----- ----------
Net income $ 1,400 $ 1,781 $ 1,026 $ (71) $ 154 $(439) $ 3,851
======= ======= ======= ======= ======= ===== ==========
Net income per share $ .38(m)
==========
Weighted average shares 9,881,857
==========
</TABLE>
See notes to pro forma financial data.
20
<PAGE>
THE FORTRESS GROUP, INC.
------------------------
PRO FORMA STATEMENT OF OPERATIONS
---------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1995
------------------------------------
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Pro Forma Adjustments
(Unaudited)
Combined
Predecessor Landmark Genesee The Fortress Group,
Companies Homes, Inc. Merger/ Custom Landmark Inc.
Historical Historical Offering Disposition Acquisition Pro Forma
------------ ---------- -------- ----------- ----------- -------------------
<S> <C> <C> <C> <C> <C> <C>
(unaudited)
Revenue
Residential sales $190,312 $19,640 $ (4,671)(n) $ 205,281
Lot sales 8,098 8,098
Other revenue 619 619
-------- ------- --------- -------- ----- ---------
Total revenue 199,029 19,640 (4,671) 213,996
Cost of sales 167,434 16,950 $ (3,345)(j) (4,887)(n) 176,197
45 (k)
-------- ------- --------- -------- ----- ---------
Gross profit 31,595 2,690 3,300 216 37,801
Operating expenses:
Selling expenses 13,152 122 (145)(n) 13,129
General and
administrative
expenses 11,693 1,821 (198)(h) (214)(n) $ 158(l) 13,260
-------- ------- --------- -------- ----- ---------
Net operating
income 6,750 747 3,498 575 158 11,412
Other (income) expense:
Interest 120 (10) (120)(j) (10)
Minority interest 745 (609)(k) 136
Other, net (191) (43) (5)(n) (229)
-------- ------- --------- -------- ----- ---------
Income before provision
for income taxes 6,076 800 4,227 570 (158) 11,515
Provision for income taxes 21 3,894 (i) 217(i) 244 (i) 4,376
-------- ------- --------- -------- ----- ---------
Net income $ 6,055 $ 800 $ 333 $ 353 $(402) $ 7,139
======== ======= ========= ======== ===== =========
Net income per share $ .75(m)
=========
Weighted average shares
outstanding 9,413,181
=========
</TABLE>
See notes to pro forma financial data.
21
<PAGE>
THE FORTRESS GROUP, INC.
------------------------
NOTES TO THE PRO FORMA FINANCIAL DATA
-------------------------------------
(unaudited, in thousands)
-------------------------
NOTE 1 - Pro Forma Balance Sheet Adjustments
The pro forma balance sheet adjustments have been prepared to reflect the
disposition of the Genesee Custom Homes Division and acquisition by The Fortress
Group, Inc. ("Fortress" or the "Company") of Landmark Homes, Inc. ("Landmark")
for an aggregate purchase price of approximately $5,000,000 and the assumption
of certain liabilities totaling approximately $8,200,000 as follows:
(a) Elimination of the assets and liabilities of the Genesee Custom Homes
Division,
(b) Cash payment of the Landmark purchase price,
(c) Elimination of the common shareholders' equity accounts of Landmark,
(d) Increase in inventory of Landmark to estimated fair value at the purchase
date,
(e) Excess of purchase price over the fair value of net assets acquired
(goodwill),
(f) Elimination of certain assets and liabilities of Landmark not purchased by
Fortress, and
(g) (i) Dividend payable declared by Landmark at August 31, 1996 and (ii)
subsequent payment by Fortress.
NOTE 2 - Pro Forma Statement of Operations Adjustments
The pro forma statement of operations adjustments have been prepared to reflect
the offering, the merger of the Combined Predecessor Companies, the sale of the
Genesee Custom Homes Division and the acquisition by Fortress of Landmark as
follows:
(h) Net effect of two pro forma adjustments for: (i) the reduction in 1995
compensation expense for two employees of one Combined Predecessor Company
to reflect the assumption that their 1996 compensation agreements had been
in effect since January 1, 1995. Under the new agreements, compensation
expense would have been reduced by $1,857 and $0 for the year ending
December 31, 1995 and the six months ended June 30, 1996, respectively, and
(ii) the increase in general and administrative expenses associated with
Fortress corporate operations of $1,659 for the year ending December 31,
1995 and $644 for the six months ended June 30, 1996.
22
<PAGE>
(i) These adjustments reflect the increase in the provision for income taxes on
the combined pro forma results at the effective statutory tax rates
applicable for each of the Founding Builders as if they had been C
corporations for the period.
(j) These adjustments reflect the reduction in interest expense resulting from
refinancing, of the Company's average debt outstanding of approximately $88
million for the year ended December 31, 1995. The remaining portion of the
Senior Notes of approximately $12 million is not assumed to be outstanding
for the relevant period as the Company had not incurred this level of
indebtedness. Accordingly, these pro forma adjustments do not intend to
give effect to the interest expense on that portion of the Senior Notes
which exceed the amount that would have been used to refinance existing
indebtedness.
The interest expense adjustments were computed by comparing the actual
interest and related fees incurred by the Company with the amount of
interest costs related to the amount refinanced by the Senior Notes. In
prior years, the individual Combined Predecessor Companies incurred higher
costs of capital in the form of stated interest relates and fees. The
effective borrowing rate on the Senior Notes is 14.25% which reflects the
assumed stated interest rate of 13.75% plus amortization of debt issue
costs. In addition, this adjustment considers the effect that a portion of
the interest capitalized prior to January 1, 1995, which was incurred at
the Company's higher borrowing rates, would have still been in inventory as
of December 31, 1995 and June 30, 1996. This results from the fact that
certain inventory, primarily land under development and finished lots, was
acquired prior to January 1, 1995 and remained in inventory at December 31,
1995 and June 30, 1996. Interest capitalized on this inventory prior to and
during 1995 and in the six months ended June 30, 1996 remains in the ending
balance of capitalized interest presented below, since this inventory has
not been sold during the periods presented. An analysis of the interest
expense related adjustments are summarized as follows:
<TABLE>
<CAPTION>
CAPITALIZED INTEREST
(IN THOUSANDS)
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1995 JUNE 30, 1996
----------------------- ------------------
ACTUAL PRO FORMA ACTUAL PRO FORMA
--------- --------- ------- ---------
<S> <C> <C> <C> <C>
Beginning balance............ $ 3,816 $ 3,816 $ 7,272 $ 7,190
Interest incurred............ 16,081 12,534 7,788 7,400
------- ------- ------- -------
19,897 16,350 15,060 14,590
Ending balance............... 7,272 7,190 9,645 10,479
------- ------- ------- -------
Expensed..................... $12,625 $ 9,160 $ 5,415 $ 4,111
======= ======= ======= =======
Pro Forma Adjustment...... $ 3,465 $ 1,305
======= =======
The adjustment has
been applied as follows:
Cost of sales.......... $ 3,345 $ 1,234
Interest expense....... 120 71
------- -------
$ 3,465 $ 1,305
======= =======
</TABLE>
23
<PAGE>
(k) An adjustment to reduce minority interest expense of approximately $609 for
the year ended December 31, 1995 and $98 for the six months ended June 30,
1996 as a result of the buyout by Fortress in May 1996 of the minority
interest holding in one of its consolidated joint venture partnerships. An
adjustment of approximately $45,000 for 1995 to increase cost of sales is
recorded in order to recognize the amortization of the amount paid in
excess of the minority interest liability. This adjustment is based on a
per unit amortization amount applied to the units closed in each period
presented.
(l) Amortization of goodwill on a straight-line basis over fifteen years.
(m) An adjustment to reduce net income to determine earnings per share has been
recorded in the amount of $110 and $55 for the year ended December 31, 1995
and the six months ended June 30, 1996, respectively to reflect the 11%
cumulative preferred dividend based on the net liquidation value of the 11%
cumulative preferred, convertible preferred stock issued at $100 per share
($.01 par value).
The weighted average number of common shares outstanding used to calculate pro
forma net income per share is as follows:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
JUNE 30, 1996 DECEMBER 31, 1995
------------- -----------------
<S> <C> <C>
Shares issued by Fortress prior to the
Common Stock Offering 2,230,500 2,230,500
Shares issued to the stockholders of the
Founding Builders 6,233,875 6,233,875
Shares issued in the Offering to cover the
cash portion of the purchase price to be
paid in connection with the acquisition
of the Founding Builders 779,708 779,708
Shares issued in the Offering to acquire
the Minority Interest 169,098 169,098
Weighted average remaining shares issued
to the public in the Offering 422,951 -
Weighted average shares issued from the
Company's exercise of the overallotment 45,724 -
------------- -----------------
9,881,856 9,413,181
============= =================
</TABLE>
(n) Adjustment to remove the results of operations of the Company's Genesee
Custom Homebuilding Division due to the sale of the division which closed
with an effective date of July 1, 1996.
24
<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 hereunto duly authorized.
THE FORTRESS GROUP, INC.
Dated: November 15, 1996 By: /s/ JAMES J. MARTELL, JR.
-------------------------------------
James J. Martell, Jr.
President and Chief Executive Officer
25
