<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, 1996
------------------
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)
1921 GALLOWS ROAD, SUITE 730, VIENNA, VIRGINIA 22182
(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 12, 1996, THERE WERE OUTSTANDING 11,764,375 SHARES OF
COMMON STOCK, PAR VALUE $.01, OF THE REGISTRANT.
<PAGE>
THE FORTRESS GROUP, INC.
QUARTER ENDED SEPTEMBER 30, 1996
INDEX
PAGE
----
PART I -- FINANCIAL INFORMATION
Item 1. Pro Forma Financial Statements
Pro Forma Financial Statements Introduction 1
Pro Forma Combined Statement of Operations for
the Nine Months Ended September 30, 1996 (unaudited) 2
Pro Forma Combined Statement of Operations for
the Three Months Ended September 30, 1996 (unaudited) 3
Pro Forma Combined Statement of Operations for
the Nine Months Ended September 30, 1995 (unaudited) 4
Pro Forma Combined Statement of Operations for
the Three Months Ended September 30, 1995 (unaudited) 5
Notes to Pro Forma Combined Financial Statements 6
The Fortress Group, Inc.
Consolidated Balance Sheet (unaudited) 9
Consolidated Statement of Operations (unaudited) 10
Consolidated Statement of Changes in Stockholders'
Equity (unaudited) 11
Consolidated Statement of Cash Flows (unaudited) 12
Notes to Consolidated Financial Statements (unaudited) 13
Combined Predecessor Companies
Combined Balance Sheet 16
Combined Statement of Operations (unaudited) 17
Combined Statement of Changes of Stockholders'
Equity (unaudited) 18
Combined Statement of Cash Flows (unaudited) 19
Notes to Combined Financial Statements (unaudited) 20
The Fortress Group, Inc.
Balance Sheet as of December 31, 1995 22
Notes to Balance Sheet (unaudited) 23
Buffington Homes, Inc.
Combined Balance Sheet 24
Combined Statement of Operations (unaudited) 25
Combined Statement of Changes in Stockholders'
Equity (unaudited) 26
Combined Statement of Cash Flows (unaudited) 27
Notes to Combined Financial Statements (unaudited) 28
(i)
<PAGE>
PAGE
----
Christopher Homes, Inc. and Affiliates
Combined Balance Sheet 30
Combined Statement of Operations (unaudited) 31
Combined Statement of Changes in Stockholders'
Equity (unaudited) 32
Combined Statement of Cash Flows (unaudited) 33
Notes to Combined Financial Statements (unaudited) 34
The Genesee Company and Related Entities
Combined Balance Sheet 36
Combined Statement of Operations (unaudited) 37
Combined Statement of Changes in Stockholders'
Equity (unaudited) 38
Combined Statement of Cash Flows (unaudited) 39
Notes to Combined Financial Statements (unaudited) 40
Solaris Development Corporation
Consolidated Balance Sheet 42
Consolidated Statement of Operations (unaudited) 43
Consolidated Statement of Changes in Stockholders'
Equity (unaudited) 44
Consolidated Statement of Cash Flows (unaudited) 45
Notes to Consolidated Financial Statements (unaudited) 46
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. 48
PART II -- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits. 54
(b) Reports on Form 8-K. 54
SIGNATURES 55
EXHIBIT INDEX 56
(ii)
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE FORTRESS GROUP, INC.
PRO FORMA FINANCIAL STATEMENTS
(UNAUDITED)
INTRODUCTION
The Fortress Group, Inc. ("Fortress" or the "Company") was formed in
June, 1995 and completed its initial public equity and senior note offerings
(the "Offerings") in May, 1996. Simultaneously with the closing of the
Offerings, the Company acquired, in a series of transactions, four home-
buildings companies (collectively the "Founding Builders" or "Combined
Predecessor Companies") which have operations in seven separate markets (the
"Acquisitions"). In August 1996, the Company sold the Custom Home Division of
the Predecessor Company, The Genesee Company (the "Sale"), and purchased
Landmark Homes, Inc. (the "Purchase").
The unaudited Pro Forma Statements of Operations present the Company's
results of operations as if the offerings, the Acquisitions, the Sale and the
Purchase had occurred at the beginning of the periods presented.
The unaudited Pro Forma adjustments are based upon historical
information, preliminary estimates and certain assumptions management deems
appropriate. The unaudited Pro Forma adjustments are not necessarily indicative
of the results Fortress would have attained had such events occurred at the
beginning of the periods presented.
-1-
<PAGE>
THE FORTRESS GROUP, INC.
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMBINED THE FORTRESS
PREDECESSOR GROUP, INC.
COMPANIES MAY 21, 1996 -
JANUARY 1, 1996 - SEPTEMBER 30, PRO FORMA
MAY 20, 1996 1996 ADJUSTMENTS PRO FORMA
----------------- --------------- ----------- ----------
<S> <C> <C> <C> <C>
Revenue
Residential sales.......................... $65,482 $115,225 $(4,964)(e) $ 193,805
18,062 (i)
Lot sales.................................. 1,036 2,652 3,688
Other revenue.............................. 80 589 669
------- -------- ------- -----------
Total Revenue............................. 66,598 118,466 13,098 198,162
Cost of sales............................... 56,688 99,669 (1,982)(b) 164,755
(4,928)(e)
15,308 (i)
------- -------- ------- -----------
Gross profit................................ 9,910 18,797 4,700 33,407
Operating expenses
Selling expenses........................... 4,700 6,315 (163)(e) 11,020
168 (i)
General and administrative expenses........ 3,997 5,215 (121)(e) 10,920
644 (a)
1,185 (i)
------- -------- ------- -----------
Net Operating Income...................... 1,213 7,267 2,987 11,467
Other expense (income)
Interest................................... 63 131 (71)(b) 165
42 (i)
Minority interests......................... 89 17 (98)(d) 8
Other, net................................. (339) (361) (7)(i) (707)
------- -------- ------- -----------
Income before provision for income taxes.... 1,400 7,480 3,121 12,001
Provision for income taxes.................. 2,853 1,214 (f) 4,588
521 (c)
------- -------- ------- -----------
Net Income................................ $ 1,400 $ 4,627 1,386 $ 7,413
======= ======== ======= ===========
Net income per share........................ $ .70(h)
===========
Weighted average shares outstanding......... 10,513,943(g)
===========
</TABLE>
See Notes to Pro Forma Combined Financial Statements
-2-
<PAGE>
THE FORTRESS GROUP, INC.
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THE FORTRESS
GROUP, INC. JULY
1, 1996 -
SEPTEMBER 30, PRO FORMA
1996 ADJUSTMENTS PRO FORMA
--------------- ----------- ---------
<S> <C> <C> <C>
Revenue
Residential sales........................ $74,827 $5,438 (i) $ 80,265
Lot sales................................ 1,224 1,224
Other revenue............................ 506 506
------- ------ ----------
Total Revenue........................... 76,557 5,438 81,995
Cost of sales............................. 64,214 (748)(b) 68,056
4,590 (i)
------- ------ ----------
Gross profit.............................. 12,343 1,596 13,939
Operating expenses
Selling expenses......................... 4,463 111 (i) 4,574
General and administrative expenses...... 3,489 251 (i) 3,740
------- ------ ----------
Net Operating Income.................... 4,391 1,234 5,625
Other expense (income)
Interest................................. 95 16 (i) 111
Minority interests....................... 2 2
Other, net............................... (329) 12 (i) (317)
------- ------ ----------
Income before provision for income taxes.. 4,623 1,206 5,829
Provision for income taxes................ 1,776 467 (f) 2,243
------- ------ ----------
Net Income.............................. $ 2,847 $ 739 $ 3,586
======= ====== ==========
Net income per share...................... $ .30(h)
==========
Weighted average shares outstanding....... 11,764,375(g)
==========
</TABLE>
See Notes to Pro Forma Combined Financial Statements
-3-
<PAGE>
THE FORTRESS GROUP, INC.
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMBINED
PREDECESSOR PRO FORMA
COMPANIES ADJUSTMENTS PRO FORMA
----------- ----------- ---------
<S> <C> <C> <C>
Revenue
Residential sales........................ $130,820 $(2,604)(e) $ 141,036
12,820 (i)
Lot sales................................ 3,471 3,471
Other revenue............................ 526 526
-------- ------- ---------
Total Revenue........................... 134,817 10,216 145,033
Cost of sales............................. 114,398 (2,211) (b) 120,447
(2,693) (e)
10,953 (i)
-------- ------- ---------
Gross profit.............................. 20,419 4,167 24,586
Operating expenses
Selling expenses......................... 8,772 (69) (e) 8,804
101 (i)
General and administrative expenses...... 8,040 (195) (e) 9,306
29 (a)
1,432 (i)
-------- ------- ---------
Net Operating Income.................... 3,607 2,869 6,476
Other expense (income)
Interest................................. 48 (46) (b) 2
Minority interests....................... 628 (514) (d) 114
Other, net............................... (94) (94)
-------- ------- ---------
Income before provision for income taxes.. 3,025 3,429 6,454
Provision for income taxes................ 1,319 (f) 2,446
1,127 (c)
-------- ------- ---------
Net Income.............................. $ 3,025 $ 983 $ 4,008
======== ======= =========
Net income per share...................... $ .42(h)
=========
Weighted average shares outstanding....... 9,413,181(g)
=========
</TABLE>
See Notes to Pro Forma Combined Financial Statements
-4-
<PAGE>
THE FORTRESS GROUP, INC.
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1995
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMBINED
PREDECESSOR PRO FORMA
COMPANIES ADJUSTMENTS PRO FORMA
----------- ----------- ---------
<S> <C> <C> <C>
Revenue
Residential sales........................ $50,901 $ (733)(e) $ 52,945
2,777 (i)
Lot sales................................ 1,035 1,035
Other revenue............................ 384 384
------- ------ ---------
Total Revenue........................... 52,320 2,044 54,364
Cost of sales............................. 44,426 (940)(b) 45,039
(776)(e)
2,329 (i)
------- ------ ---------
Gross profit.............................. 7,894 1,431 9,325
Operating expenses
Selling expenses......................... 3,253 (20)(e) 3,255
22 (i)
General and administrative expenses...... 2,724 28 (a) 3,267
(63)(e)
578 (i)
------- ------ ---------
Net Operating Income.................... 1,917 886 2,803
Other (income) expense
Interest................................. (9) (9)
Minority interests....................... 182 (130)(d) 52
Other, net............................... 141 141
------- ------ ---------
Income before provision for income taxes.. 1,603 1,016 2,619
Provision for income taxes................ 384 (f) 971
587 (c)
------- ------ ---------
Net Income.............................. $ 1,603 $ 45 $ 1,648
======= ====== =========
Net income per share...................... $ .17(h)
=========
Weighted average shares outstanding....... 9,413,181(g)
=========
</TABLE>
See Notes to Pro Forma Combined Financial Statements
-5-
<PAGE>
THE FORTRESS GROUP, INC.
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS ADJUSTMENTS
(a) Adjustments to reflect the reduction in compensation to former owners and
employees of Buffington totaling $1,213,000 and $386,000 for the nine and
three months ended September 30, 1995 respectively, which relates to the
restructuring of executive compensation arrangements. The Pro Forma
adjustment is equal to the difference between the actual compensation
earned by the executives during 1995 and the amounts that these executives
would have earned had the new executive compensation arrangements been in
effect during 1995. The executive compensation in 1996 for the former
owners and employees of Buffington is consistent with the now existing
executive compensation arrangements, therefore no adjustment is necessary
for the three and nine month periods ended September 30, 1996. In addition,
adjustments of $1,242,000, $414,000, $644,000 and $0 for the nine and three
months ended September 30, 1995 and 1996, respectively, reflect increased
expenses for corporate operating activities related to the newly formed
public entity.
(b) Adjustments to reflect the reduction in interest expense resulting from
refinancing of the Company's average debt outstanding of approximately
$103.5 million, $90.7 million, $135.5 million and $113.6 million for each
of the three and nine month periods ended September 30, 1995 and 1996,
respectively. The remaining portion of the Senior Notes of approximately
$9.3 million for the nine month period ended September 30, 1995 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. To the extent the average
outstanding debt exceeds the Senior Notes of $95 million (Net Senior Note
Proceeds available for refinancing), the Company has refinanced existing
mortgage loans allowing such existing indebtedness to remain in place. It
is assumed existing loans remain at their respective cost of funds.
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 Predecessor Companies incurred higher cost of
capital in the form of stated interest rates 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 September 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 through the
periods presented in the accompanying pro forma statements. Interest
capitalized on this inventory prior to and during 1995 and in the three and
nine months ended September 30, 1996 remains in the ending balance of
capitalized interest presented below, since this inventory has not been
sold during the periods presented. The resulting interest expense related
adjustments are as follows:
-6-
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1996 SEPTEMBER 30, 1996 SEPTEMBER 30, 1995 SEPTEMBER 30, 1995
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Pro Forma
Adjustment............. $748 $2,053 $940 $2,257
==== ====== ==== ======
These adjustments
have been applied as
follows................
Cost of sales.......... $748 $1,982 $940 2,211
Interest expense....... 71 46
---- ------ ---- ------
Total............. $748 $2,053 $940 $2,257
==== ====== ==== ======
</TABLE>
(c) Adjustments to calculate 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 each of the
periods presented.
(d) Adjustments to reduce minority interest expense of approximately $130,000,
$514,000, $0 and $98,000 for the three and nine months ended September 30,
1995 and 1996, respectively, as a result of the Company's buyout in May
1996 of the minority interest holding in one of its consolidated joint
venture partnerships.
(e) Adjustment to remove the results of operations of the Company's Genesee
Custom Home Building Division due to the sale of the division with an
effective date of July 1, 1996.
(f) Adjustment to reflect the calculation of a provision for income taxes
resulting from net pre-tax income of pro forma adjustments at the effective
statutory tax rates applicable for each adjustment.
(g) The weighted average number of common shares outstanding used to calculate
pro forma net income per share based on the estimated average number of
shares of common stock of the pro forma combined company outstanding during
the periods presented is as follows:
-7-
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS THREE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1996 1996 1995 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Shares issued by Fortress prior to the Common Stock Offering............ 2,230,500 2,230,500 2,230,500 2,230,500
Shares issued to the stockholders of the Founding Builders.............. 6,233,875 6,233,875 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....................................................... 779,708 779,708 779,708 779,708
Shares issued in the Offering to acquire the Minority Interest.......... 169,098 169,098 169,098 169,098
Weighted average remaining shares issued to the public in the Offering.. 2,051,194 995,653
Weighted average shares issued from the Company's exercise of the
overallotment........................................................... 300,000 105,109
---------- ---------- --------- ---------
11,764,375 10,513,943 9,413,181 9,413,181
========== ========== ========= =========
</TABLE>
(h) An adjustment to reduce net income to determine earnings per share has been
recorded in the amount of $27,500 for each of the three months ended
September 30, 1995 and 1996 and $82,500 for each of the nine months ended
September 30, 1995 and 1996 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 net liquidation value of $1 million reflects the Company's
approval effective July 1, 1996, to redeem 10,000 shares of the originally
issued and authorized 20,000 shares in connection with the sale of
Genesee's Custom Home Division (see note (e)).
(i) Adjustment to include the results of operations for each of the periods
presented for Landmark Homes, Inc., which was acquired by the Company on
August 31, 1996. The adjustments for the three and nine month periods
ending September 30, 1996 exclude the results of operations for the month
of September 1996 as these are included in the Company's actual results of
operations. Included in these adjustments is amortization of goodwill
totalling $59,000, $177,000, $39,000 and $157,000 for the three months and
nine months ended 1995 and 1996, respectively.
-8-
<PAGE>
THE FORTRESS GROUP, INC.
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1996
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Cash and cash equivalents................................................................................ $ 14,380
Related party and other receivables...................................................................... 12,580
Real estate inventories.................................................................................. 150,645
Property and equipment, net.............................................................................. 2,507
Prepaid expenses and other assets........................................................................ 9,630
Goodwill, net............................................................................................ 3,519
--------
Total Assets........................................................................................... $193,261
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued and construction liabilities................................................ $ 8,835
Notes and mortgages payable.............................................................................. 139,569
Due to related parties................................................................................... 92
Accrued expenses......................................................................................... 9,745
Customer deposits........................................................................................ 4,550
Deferred income taxes.................................................................................... 553
--------
Total Liabilities...................................................................................... 163,344
--------
Minority interests....................................................................................... 199
--------
Stockholders' equity
Preferred stock, $.01 par value, 1 million shares authorized; 10,000 issued and outstanding..........
Common stock, $.01 par value, 25 million authorized; 11,764,375 issued and outstanding............... 118
Additional paid-in capital........................................................................... 24,973
Retained earnings.................................................................................... 4,627
--------
Total Stockholders' Equity............................................................................. 29,718
--------
Total Liabilities and Stockholders' Equity............................................................. $193,261
========
</TABLE>
See Notes to Consolidated Financial Statements
-9-
<PAGE>
THE FORTRESS GROUP, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE THREE MAY 21, 1996
MONTHS ENDED THROUGH
SEPTEMBER 30, 1996 SEPTEMBER 30, 1996
------------------ ------------------
<S> <C> <C>
Revenue
Residential sales........................ $74,827 $115,225
Lot sales................................ 1,224 2,652
Other revenue............................ 506 589
------- --------
Total Revenue........................... 76,557 118,466
Cost of sales............................. 64,214 99,669
------- --------
Gross profit.............................. 12,343 18,797
Operating expenses
Selling expenses......................... 4,463 6,315
General and administrative expenses...... 3,489 5,215
------- --------
Net Operating Income.................... 4,391 7,267
Other expense (income)
Interest................................. 95 131
Minority interests....................... 2 17
Other, net............................... (329) (361)
------- --------
Income before provision for income taxes.. 4,623 7,480
Provision for income taxes................ 1,776 2,853
------- --------
Net Income.............................. $ 2,847 $ 4,627
======= ========
</TABLE>
See Notes to Consolidated Financial Statements
-10-
<PAGE>
THE FORTRESS GROUP, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
-------------- PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ ------ ---------- -------- ------------
<S> <C> <C> <C> <C> <C>
Balance at May 20, 1996................................. 2,230 $ 600 $ 3,070 $ 5,442 $ 9,112
Reclassification of
Founding Builders' Equity............................ (578) 6,020 (5,442)
Issuance of common stock net of
associated costs..................................... 9,534 96 21,747 21,843
Distributions to Founding Builders.................... (5,995) (5,995)
Net income............................................ 1,781 1,781
------ ----- ------- ------- -------
Balance at June 30, 1996................................ 11,764 118 24,842 1,781 26,741
Net income............................................ 2,846 2,846
Sale of Genesee Custom Division....................... 258 258
Distribution.......................................... (127) (127)
------ ----- ------- ------- -------
Balance at September 30, 1996........................... 11,764 $ 118 $24,973 $ 4,627 $29,718
====== ===== ======= ======= =======
</TABLE>
See Notes to Consolidated Financial Statements
-11-
<PAGE>
THE FORTRESS GROUP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE PERIOD
MAY 21, 1996
THROUGH
SEPTEMBER 30, 1996
--------------------
<S> <C>
Cash flows from operating activities
Net income...................................................................... $ 4,627
Adjustments to reconcile net income to net cash provided by operating
activities
Depreciation and amortization.................................................. 306
Minority interest.............................................................. 17
Loss on sale of property and equipment...................................... 21
Changes in operating assets and liabilities
Related party and other receivables........................................... (5,187)
Real estate inventories....................................................... (13,645)
Prepaid expenses and other assets............................................. (481)
Accounts payable and accrued construction liabilities..................... (987)
Other accrued expenses........................................................ 5,583
Customer deposits............................................................. (1,599)
Deferred income taxes......................................................... 553
---------
Net cash used by operating activities........................................ (10,792)
Cash flows from investing activities
Acquisition of Landmark Homes, Inc............................................. (4,650)
Sale of Genesee Custom Division................................................ 253
Purchase of property and equipment.............................................. (827)
Proceeds from sale of property and equipment.................................... 10
---------
Net cash used in investing activities........................................ (5,214)
Cash flows from financing activities
Borrowings under notes and mortgages payable.................................... 132,478
Repayments of notes and mortgages payable....................................... (114,747)
Repayment of related party borrowings........................................... (2,853)
Distributions to minority interest.............................................. (1,274)
Deferred financing costs........................................................ (1,737)
Capital distributions........................................................... (6,122)
Net proceeds from issuance of common stock...................................... 21,843
---------
Net cash provided by financing activities...................................... 27,588
Net increase in cash and cash equivalents........................................ 11,582
Cash and cash equivalents, beginning of period................................... 2,798
---------
Cash and cash equivalents, end of period......................................... $ 14,380
=========
</TABLE>
See Notes to Consolidated Financial Statements
-12-
<PAGE>
THE FORTRESS GROUP, INC.
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.
Four homebuilding companies were acquired by Fortress simultaneous with the
closing of its initial public offering on May 21, 1996 ("the Offering")
including Buffington Homes, Inc. ("Buffington"), Christopher Homes and
Affiliates ("Christopher"), The Genesee Company ("Genesee"), and Solaris
Development Corporation ("Sunstar"). The acquired companies as a group are
referred to as the Predecessor Companies. On August 31, 1996, the Company
acquired Landmark Homes, Inc.; The accompanying results of operations include
the results of operations for Landmark Homes, Inc. for September 1 through
September 30, 1996.
The accompanying consolidated financial statements of Fortress have been
prepared by the Company. Certain information and footnote disclosures normally
included in financial statements presented in accordance with generally accepted
accounting principles 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 read in conjunction with the financial
statements of the Predecessor Companies and notes thereto included in the
Fortress Prospectus dated May 16, 1996.
In the opinion of the Company, the accompanying unaudited financial statements
reflect all adjustments (which include only normal recurring adjustments)
necessary to present fairly the financial position of The Fortress Group, Inc.
as of September 30, 1996 and the results of operations and cash flows for the
period May 21, 1996 through September 30, 1996 and results of operations for the
three month period ended September 30, 1996. Interim results are not necessarily
indicative of fiscal year performance because of the impact of seasonable and
short-term variations.
NOTE 2 -- BASIS OF PRESENTATION
Simultaneous with the closing of the Offering, Fortress acquired by merger each
of the Predecessor Companies. The accompanying consolidated financial statements
include Fortress through the date of the Offering, after which these
consolidated financial statements reflect the results of Fortress and its
Predecessor Companies now referred to as its wholly-owned subsidiaries. Prior to
the Offering, Fortress was a nonoperating entity and principally incurred costs
associated with the consummation of the Offering. As a result of the substantial
continuing interests in the Company of the former stockholders of the
Predecessor Companies, the acquisitions have been accounted for on a historical
cost basis. The assets and liabilities of the Predecessor Companies are
reflected at their historical amounts and include accounts of joint ventures
where the Company controls the management activities and holds a significant
economic interest. In connection with the acquisition, Sunstar purchased the
minority interest position related to its joint ventures for approximately $1.3
million in cash. All inter-company transactions have been eliminated.
-13-
<PAGE>
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109). The
asset and liability approach used in SFAS 109 requires the recognition of
deferred tax assets and liabilities for the tax consequences of temporary
differences by applying enacted statutory tax rates applicable to future years
to differences between the financial statement carrying amounts and the tax
bases of existing assets and liabilities.
EARNINGS PER SHARE
Historical earnings per share has not been presented because it is not
considered to be meaningful as a result of the acquisitions and the Offering as
discussed in Note 1.
NOTE 3 -- REAL ESTATE INVENTORIES
<TABLE>
<CAPTION>
Real estate inventories are summarized as follows (in thousands):
SEPTEMBER 30, 1996
------------------
<S> <C>
Work-in-progress
Sold homes............................................... $ 53,367
Speculative homes........................................ 41,840
--------
95,207
Land
Finished lots............................................ 38,393
Land under development................................... 5,665
Land and other costs..................................... 885
--------
44,943
--------
Models.................................................... 10,495
--------
Total................................................... $150,645
========
</TABLE>
NOTE 4 -- NOTES AND MORTGAGES PAYABLE
Notes and mortgages payable are summarized as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
------------------
<S> <C>
Project specific land, land development and construction
loans................................................... $ 37,616
Other loans............................................... 1,354
Subordinated investor notes and equity participation
loans................................................... 599
13.75% Senior Notes Due 2003.............................. 100,000
--------
$139,569
========
</TABLE>
-14-
<PAGE>
SENIOR NOTES
The Company will pay interest on the Senior Notes in arrears on May 15 and
November 15 of each year, commencing November 15, 1996 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 (including indebtedness under the Credit Agreement) to the extent of any
collateral, as well as to indebtedness of and guaranties (including guaranties
of indebtedness under the Credit Agreement) by the Company's subsidiaries.
COVENANTS
The Indenture between the Bond Trustee and company contains certain restrictive
covenants including covenants which will restrict the ability of the Company and
its subsidiaries from (i) declaring any dividends or making other distributions
on, or redeeming the Company's equity securities, including the Common stock;
(ii) redeeming or otherwise acquiring any subordinated indebtedness of the
Company or certain indebtedness of its subsidiaries; (iii) making certain
investments; (iv) incurring additional indebtedness; (v) selling or leasing
assets or property not in the ordinary course of business; (vi) undergoing
certain fundamental changes (such as mergers, consolidations or liquidations);
(vii) creating certain liens; (viii) entering into certain transactions with
affiliates; and (ix) imposing additional future restrictions on upstream
payments from certain subsidiaries, all as set forth in the Indenture. In
addition, the Indenture provides that in the event of defined changes in control
or if the consolidated tangible net worth of the Company and its subsidiaries
falls below a specified level or, in certain circumstances, upon sales of
assets, the Company will be required to make an offer to repurchase certain
specified amounts of outstanding Senior Notes.
EVENTS OF DEFAULT
The following events, among others, constitute events of default under the
Senior Notes (i) the Company's nonpayment of principal when due or payable or of
interest within 30 days of such interest being due or payable; (ii) a breach,
following any applicable cure periods, of any covenant of the Company or its
subsidiaries contained in the Indenture following notice by the Trustee or
holders of 25% of the Senior Notes; (iii) certain cross-accelerations with
respect to other indebtedness of the Company or its subsidiaries; (iv) the
Company's failure to pay or have discharged certain judgments against the
Company or a subsidiary, and (v) certain events of bankruptcy or insolvency.
NOTE 5 -- STOCKHOLDERS' EQUITY
On August 9, 1996, Fortress agreed to redeem 10,000 shares of its Series A 11%
Cumulative Convertible Preferred Stock at the liquidation preference of $100 per
share (aggregating $1 million); these shares are held by a director of Fortress.
-15-
<PAGE>
COMBINED PREDECESSOR COMPANIES
COMBINED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------
<S> <C>
ASSETS
Cash and cash equivalents.................................. $ 2,710
Related party and other receivables........................ 2,106
Real estate inventories.................................... 109,016
Property and equipment, net................................ 2,099
Deferred transaction costs................................. 2,121
Prepaid expenses and other assets.......................... 3,614
--------
Total assets............................................. $121,666
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued and construction liabilities.. 10,726
Notes and mortgages payable................................ 87,604
Due to related parties..................................... 2,495
Accrued expenses........................................... 4,588
Customer deposits.......................................... 5,122
--------
Total liabilities........................................ 110,535
--------
Minority interests......................................... 1,295
--------
Stockholders' equity
Preferred Stock...........................................
Common Stock.............................................. 599
Additional paid-in-capital................................ 2,606
Retained earnings......................................... 6,631
--------
Total stockholders' equity............................... 9,836
--------
Total liabilities and stockholders' equity............... $121,666
========
</TABLE>
See Notes to Combined Predecessor Companies Financial Statements
-16-
<PAGE>
COMBINED PREDECESSOR COMPANIES
COMBINED STATEMENT OF OPERATIONS
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE PERIOD FOR THE FOR THE
JANUARY 1, 1996 THREE MONTHS NINE MONTHS
THROUGH ENDED ENDED
MAY 20, 1996 SEPTEMBER 30, 1995 SEPTEMBER 30, 1995
--------------- ------------------ ------------------
<S> <C> <C> <C>
Revenue
Residential sales.................... $65,482 $50,901 $130,820
Lot sales............................ 1,036 1,035 3,471
Other revenue........................ 80 322 464
------- ------- --------
Total Revenue....................... 66,598 52,258 134,755
Cost of sales......................... 56,688 44,426 114,398
------- ------- --------
Gross profit.......................... 9,910 7,832 20,357
Operating expenses
Selling expenses..................... 4,700 3,253 8,772
General and administrative expenses.. 3,997 2,724 8,040
------- ------- --------
Net Operating Income................ 1,213 1,855 3,545
Other expense (income)
Interest............................. 63 (9) 48
Minority interests................... 89 182 628
Other, net........................... (339) 79 (156)
------- ------- --------
Net Income.......................... $ 1,400 $ 1,603 $ 3,025
======= ======= ========
</TABLE>
See Notes to Combined Predecessor Companies Financial Statements
-17-
<PAGE>
COMBINED PREDECESSOR COMPANIES
COMBINED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON ADDITIONAL TOTAL
STOCK PAID-IN RETAINED STOCKHOLDERS'
AMOUNT CAPITAL EARNINGS EQUITY
------ ---------- -------- -------------
<S> <C> <C> <C> <C>
Balance at December 31, 1995.... $599 $2,606 $ 6,631 $ 9,836
Capital contributions.......... 1 464 82 547
Distributions to stockholders.. (2,671) (2,671)
Net income..................... 1,400 1,400
---- ------ ------- -------
Balance at May 20, 1996......... $600 $3,070 $ 5,442 $ 9,112
==== ====== ======= =======
</TABLE>
See Notes to Combined Predecessor Companies Financial Statements
-18-
<PAGE>
COMBINED PREDECESSOR COMPANIES
COMBINED STATEMENT OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE PERIOD FOR THE NINE
JANUARY 1, 1996 MONTHS
THROUGH ENDED
MAY 20, 1996 SEPTEMBER 30, 1995
--------------- ------------------
<S> <C> <C>
Cash flows from operating activities
Net income....................................................... $ 1,400 $ 3,025
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization.................................... 258 434
Minority interest................................................ 89 628
Changes in operating assets and liabilities
Related party and other receivables.............................. (6,074) (1,562)
Real estate inventories.......................................... (17,680) (15,167)
Prepaid expenses and other assets................................ (837) (777)
Accounts payable and accrued construction liabilities....... (499) 344
Accrued expenses................................................. (643) 1,336
Customer deposits................................................ 1,010 2,594
-------- --------
Net cash used in operating activities....................... (22,976) (9,145)
-------- --------
Cash flows from investing activities
Distributions/repayments from investment in partnerships 38
Purchase of property and equipment............................... (316) (141)
Proceeds from sale of property and equipment................ 10 39
-------- --------
Net cash used in investing activities............................ (306) (64)
-------- --------
Cash flows from financing activities
Borrowings under notes and mortgages payable................ 60,093 90,131
Repayments of notes and mortgages payable.......................... (31,640) (81,770)
Borrowings on line of credit....................................... 719
Repayments on line of credit....................................... (1,869)
Repayment of bonds................................................. (236)
Related party borrowings........................................... 465 1,591
Repayment of related party borrowings.............................. (1,516) (1,117)
Transaction costs........................................... (957)
Distributions to minority interest............................... (653)
Capital contributions....................................... 547 576
Capital distributions....................................... (2,671) (2,868)
-------- --------
Net cash provided by financing activities........................ 22,935 5,890
-------- --------
Net decrease in cash and cash equivalents.......................... (347) (3,319)
Cash and cash equivalents, beginning of period..................... 3,145 4,909
-------- --------
Cash and cash equivalents, end of period........................... $ 2,798 $ 1,590
======== ========
</TABLE>
See Notes to Combined Predecessor Companies Financial Statements
-19-
<PAGE>
COMBINED PREDECESSOR COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 1 -- BUSINESS AND ORGANIZATION
The Fortress Group ("Fortress" or the "Company") was founded in 1995 to create a
national home building company to be engaged in the acquisition and development
of land or improved lots and the construction of residential for-sale housing.
Four homebuilding companies which were acquired by Fortress simultaneous with
its initial public offering ("the offering") are referred to as the "Predecessor
Companies" and consist of Buffington Homes, Inc. ("Buffington"), Christopher
Homes and Affiliates ("Christopher"), The Genesee Company ("Genesee"), and
Solaris Development Corporation ("Sunstar").
The accompanying combined statements of operations, of stockholders' equity and
of cash flows of the Predecessor Companies have been prepared by the Company
without audit. Certain information and footnote disclosures normally included in
financial statements presented in accordance with generally accepted accounting
principles 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 read in conjunction with the financial statements
and notes thereto included in the Company's Prospectus dated May 16, 1996.
In the opinion of the Company, the accompanying unaudited combined statement of
operations, of stockholders equity and of cash flows reflect all adjustments
(which include only normal recurring adjustments) necessary to present fairly
with the results of operations of the combined Predecessor Companies period
April 1, 1996 through September 30, 1996, and the three months and six months
ended September 30, 1995, and the results of operations for the three month
periods ended September 30, 1996 and 1995.
NOTE 2 -- BASIS OF PRESENTATION
Simultaneously with the closing of its public offering on May 21, 1996, Fortress
acquired by merger each of the homebuilding companies: Buffington, Christopher,
Genesee, and Sunstar. The assets and liabilities of the Predecessor Companies
are reflected at their historical amounts and include accounts of joint ventures
where the Company controls the management activities and holds a significant
economic interest. In connection with the acquisition, Sunstar purchased the
minority interest position in one of its joint ventures for approximately $1.3
million. All inter-company transactions have been eliminated.
EARNINGS PER SHARE
Historical earnings per share has not been presented because it is not
considered to be meaningful as a result of the acquisitions and offering as
discussed in Note 1.
-20-
<PAGE>
NOTE 3 -- REAL ESTATE INVENTORIES
Real estate inventories are summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------
<S> <C>
Work-in-progress
Sold homes.......................................... $ 34,460
Speculative homes................................... 24,208
--------
58,668
Land
Finished lots....................................... 28,219
Land under development.............................. 12,819
Land and other costs................................ 456
--------
41,494
--------
Models................................................ 8,854
--------
Total............................................... $109,016
========
</TABLE>
NOTE 4 -- NOTES AND MORTGAGES PAYABLE
Notes and mortgages payable are summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------
<S> <C>
Project specific land, land development and construction loans... $ 66,629
Demands for deed on sales-leasebacks............................. 230
Other loans...................................................... 1,149
Subordinated investor notes and equity participation loans....... 19,596
--------
$ 87,604
========
</TABLE>
-21-
<PAGE>
THE FORTRESS GROUP, INC.
BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------
<S> <C>
ASSETS
Cash................................................................ $ 25
Deferred transaction costs.......................................... 2,121
------
Total assets...................................................... $2,146
======
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable.................................................... $1,007
Due to related parties.............................................. 1,139
------
Total liabilities................................................. $2,146
------
Stockholders' equity
Common stock, $.01 par value, 25 million shares authorized,
2,230,500 shares issued and outstanding......................... $ 22
Additional paid-in capital........................................ (22)
------
Total stockholders' equity........................................
------
Total liabilities and stockholders' equity...................... $2,146
======
</TABLE>
See Notes to The Fortress Group, Inc. Balance Sheet
-22-
<PAGE>
THE FORTRESS GROUP, INC.
NOTES TO BALANCE SHEET AS OF DECEMBER 31, 1995
NOTE 1 -- BUSINESS AND ORGANIZATION
The Fortress Group, Inc. ("Fortress" or the "Company") was formed in June, 1995
to create a national home-building company. Fortress has entered into definitive
merger agreements (the "Mergers") with Buffington Homes, Inc., Christopher
Homes, Inc., The Genesee Company, Solaris Development Corporation and Sunstar
Mortgage Limited Liability Company (the "Founding Builders"), pursuant to which
Fortress has, in separate transactions, merged with each of the Founding
Builders. Under the Mergers, all outstanding shares of the Founding Builders'
common stock were converted into shares of Fortress's Common Stock and cash
concurrently with the closing of an initial public offering on May 21, 1996. All
of the Company's activities have been related to the completion of the Mergers
and the Offerings. Accordingly, the Company has not presented a statement of
operations or a statement of cash flows.
Certain information and footnote disclosures normally included in financial
statements presented in accordance with generally accepted accounting principles
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
and notes thereto included in the Company's prospectus dated May 16, 1996.
NOTE 2 -- STOCKHOLDERS' EQUITY
In connection with the sale of the Custom Home Division of Genesee to a Company
owned by the stockholder of Genesee, effective July 1, 1996, the Company has
redeemed 10,000 shares of its Series A 11% Cumulative Preferred, Convertible
Preferred Stock at its Liquidation Preference of $100 per share (aggregate $1
million). These shares are currently held by the stockholder of Genesee who is
now a stockholder and Director of the Company as a result of the Merger and
closing of the initial public offering.
-23-
<PAGE>
BUFFINGTON HOMES, INC.
COMBINED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------
<S> <C>
ASSETS
Cash and cash equivalents.............................. $ 335
Receivables............................................ 382
Real estate inventories................................ 16,587
Property and equipment, net............................ 425
Prepaid expenses and other assets...................... 1,547
-------
Total assets......................................... $19,276
=======
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued construction liabilities.. $ 1,677
Notes payable.......................................... 14,537
Accrued expenses....................................... 674
Customer deposits...................................... 130
-------
Total liabilities.................................... 17,018
-------
Stockholders' equity
Common stock.......................................... 24
Additional paid-in capital............................ 855
Retained earnings..................................... 1,379
-------
Total stockholders' equity........................... 2,258
-------
Total liabilities and stockholders' equity........... $19,276
=======
</TABLE>
See Notes to Combined Financial Statements
-24-
<PAGE>
BUFFINGTON HOMES, INC.
COMBINED STATEMENT OF OPERATIONS
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE PERIOD FOR THE FOR THE
JANUARY 1, 1996 THREE MONTHS NINE MONTHS
THROUGH ENDED ENDED
MAY 20, 1996 SEPTEMBER 30, 1995 SEPTEMBER 30, 1995
--------------- ------------------ ------------------
<S> <C> <C> <C>
Revenue
Residential sales.................... $22,685 $13,048 $36,717
Other Revenue........................ 275 275
------- ------- -------
Total Revenue...................... 22,685 13,323 36,992
Cost of sales.......................... 18,365 10,689 30,582
------- ------- -------
Gross profit........................... 4,320 2,634 6,410
Operating expenses
Selling expenses..................... 1,491 803 2,389
General and administrative expenses.. 1,520 1,558 3,973
------- ------- -------
Net Operating Income............... 1,309 273 48
Other (income) expense
Interest............................. 61 11 48
Interest and other income............ (300) 208 1
------- ------- -------
Net Income (loss).................. $ 1,548 $ 54 $ (1)
======= ======= =======
</TABLE>
See Notes to Combined Financial Statements
-25-
<PAGE>
BUFFINGTON HOMES, INC.
COMBINED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON ADDITIONAL TOTAL
STOCK PAID-IN RETAINED STOCKHOLDERS'
AMOUNT CAPITAL EARNINGS EQUITY
------ ---------- -------- ------------
<S> <C> <C> <C> <C>
Balance at December 31, 1995.. $24 $855 $1,379 $2,258
Capital contributions........ 1 1
Capital distributions........ (606) (606)
Net income................... 1,548 1,548
--- ---- ------ ------
Balance at May 20, 1996....... $25 $855 $2,321 $3,201
=== ==== ====== ======
</TABLE>
See Notes to Combined Financial Statements
-26-
<PAGE>
BUFFINGTON HOMES, INC.
COMBINED STATEMENT OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE
FOR THE PERIOD NINE MONTHS
JANUARY 1, 1996 ENDED
THROUGH SEPTEMBER 30,
MAY 20, 1996 1995
--------------- -------------
<S> <C> <C>
Cash flows from operating activities
Net income (loss)................................................. $ 1,548 $ (1)
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization.................................... 102 172
Changes in operating assets and liabilities
Receivables................................................. 210 (453)
Real estate inventories.......................................... (10,152) (3,141)
Prepaid expenses and other assets................................ (375) 129
Accounts payable and accrued construction expenses.......... (23) 542
Other............................................................ 397 14
-------- -------
Net cash used in operating activities....................... (8,293) (2,738)
Cash flows from investing activities
Purchase or property and equipment............................... (80) (308)
-------- -------
Net cash used in investing activities....................... (80) (308)
-------- -------
Cash flows from financing activities
Stock contribution.......................................... 1 461
Net increase in notes payable............................... 8,876 2,645
Capital distributions....................................... (606) (1,554)
-------- -------
Net cash provided by financing activities........................ 8,271 1,552
-------- -------
Net increase (decrease) in cash and cash equivalents............... (102) (1,494)
Cash and cash equivalents, beginning of period..................... 335 1,784
-------- -------
Cash and cash equivalents, end of period........................... $ 233 $ 290
======== =======
</TABLE>
See Notes to Combined Financial Statements
-27-
<PAGE>
BUFFINGTON HOMES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 1 -- BUSINESS AND ORGANIZATION
Buffington Homes, Inc. (the "Company") is primarily engaged in the construction
of detached single-family homes in the central Texas area. The Company was
acquired by The Fortress Group, Inc. ("Fortress") simultaneous with the closing
of its public offering on May 21, 1996.
The accompanying statements of operations, of stockholders' equity and of cash
flows of Buffington Homes, Inc. have been prepared by the Company without audit.
Certain information and footnote disclosures normally included in financial
statements presented in accordance with generally accepted accounting principles
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
and notes thereto included in the Fortress prospectus dated May 16, 1996.
In the opinion of the Company, the accompanying unaudited statements of
operations, of stockholders' equity and of cash flows reflect all adjustments
(which include only normal recurring adjustments) necessary to present fairly
the results of operations of Buffington Homes, Inc. for the period January 1,
1996 through May 20, 1996, and the three months and nine months ended September
30, 1995.
NOTE 2 -- BASIS OF PRESENTATION
The combined financial statements include the accounts of Buffington Homes,
Inc., Buffington San Antonio, Buffington Development, Buffington Central Texas
and Elements! which are wholly owned by the stockholders of Buffington Homes,
Inc. All significant intercompany accounts and transactions have been eliminated
in combination.
Earnings Per Share
Historical earnings per share has not been presented because it is not
considered to be meaningful as a result of the acquisitions and offering as
discussed in Note 1.
NOTE 3 -- REAL ESTATE INVENTORIES
Real estate inventories are summarized as follows (in thousands):
<TABLE>
<CAPTION>
December 31, 1995
-----------------
<S> <C>
Work-in-progress
Sold homes............................................. $ 8,569
Speculative homes...................................... 3,336
-----------------
11,905
Finished lots.......................................... 3,041
Models................................................. 1,641
-----------------
Total................................................. $ 16,587
=================
</TABLE>
-28-
<PAGE>
NOTE 4 -- NOTES PAYABLE
Notes payable are summarized as follows (in thousands):
<TABLE>
<CAPTION>
December 31, 1995
-----------------
<S> <C>
Conventional lot acquisition loans....................... $ 2,950
Revolving project specific construction loans............ 11,587
-----------------
$ 14,537
=================
</TABLE>
-29-
<PAGE>
CHRISTOPHER HOMES, INC. AND AFFILIATES
COMBINED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
December 31, 1995
-----------------
<S> <C>
ASSETS
Cash and cash equivalents.............................. $ 495
Receivables............................................ 710
Real estate inventories................................ 28,457
Property and equipment, net............................ 517
Prepaid expenses and other assets...................... 706
-----------------
Total assets......................................... $ 30,885
=================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued construction liabilities.. $ 3,040
Notes and mortgages payable............................ 20,665
Special improvement district bonds..................... 1,531
Due to related parties................................. 353
Accrued expenses....................................... 921
Customer deposits...................................... 3,660
-----------------
Total liabilities.................................... 30,170
-----------------
Stockholders' equity
Common stock.......................................... 549
Retained earnings..................................... 166
-----------------
Total stockholders' equity........................... 715
-----------------
Total liabilities and stockholders' equity........... $ 30,885
=================
</TABLE>
See Notes to Combined Financial Statements
-30-
<PAGE>
CHRISTOPHER HOMES, INC. AND AFFILIATES
COMBINED STATEMENT OF OPERATIONS
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
For The Period For the For the
January 1, 1996 Three Months Nine Months
through Ended Ended
May 20, 1996 September 30, 1995 September 30, 1995
--------------- ------------------ ------------------
<S> <C> <C> <C>
Revenue
Residential sales.................... $ 15,582 $ 11,000 $ 19,224
Lot sales............................ 537 150 1,647
--------------- ------------------ ------------------
Total Revenue....................... 16,119 11,150 20,871
Cost of sales......................... 13,730 9,353 17,217
--------------- ------------------ ------------------
Gross profit.......................... 2,389 1,797 3,654
Operating expenses
Selling expenses..................... 851 683 1,311
General and administrative expenses.. 788 472 1,251
--------------- ------------------ ------------------
Net Operating Income................ 750 642 1,092
Other (income) expense
Interest............................. 2 0
Minority interests...................
Other, net........................... (13) (140) (157)
--------------- ------------------ ------------------
Net Income.......................... $ 761 $ 782 $ 1,249
=============== ================== ==================
</TABLE>
See Notes to Combined Financial Statements
-31-
<PAGE>
CHRISTOPHER HOMES, INC. AND AFFILIATES
COMBINED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
Common Total
Stock Retained Stockholders'
Amount Earnings Equity
------ -------- -------------
<S> <C> <C> <C>
Balance at December 31, 1995... $ 549 $ 166 $ 715
Capital contributions......... 82 82
Distributions to stockholder.. (1,043) (1,043)
Net income.................... 761 761
------ -------- -------------
Balance at May 20, 1996........ $ 549 $ (34) $ 515
====== ======== =============
</TABLE>
See Notes to Combined Financial Statements
-32-
<PAGE>
CHRISTOPHER HOMES, INC. AND AFFILIATES
COMBINED STATEMENT OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE
FOR THE PERIOD NINE MONTHS
JANUARY 1, 1996 ENDED
THROUGH SEPTEMBER 30,
MAY 20, 1996 1995
-------------- -------------
<S> <C> <C>
Cash flows from operating activities
Net income........................................................................... $ 761 $ 1,249
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization...................................................... 77 68
Basis of property and equipment included in cost of sales.......................... 44
Changes in operating assets and liabilities
Receivables...................................................................... 232 (323)
Real estate inventories.......................................................... (1,592) (7,979)
Prepaid expenses and other assets................................................ 189 40
Accounts payable and accrued construction liabilities............................ (708) 463
Accrued expenses................................................................. (723) 59
Customer deposits................................................................ 174 2,629
-------------- -------------
Net cash used in operating activities......................................... (1,590) (3,750)
Cash flows from investing activities
Purchase of property and equipment................................................... (182) (171)
Net cash used in investing activities......................................... (182) (171)
-------------- -------------
Cash flows from financing activities
Borrowings under notes and mortgages payable......................................... 15,254 30,166
Repayments of notes and mortgage payable............................................. (12,007) (25,717)
Repayment of special improvement district bonds...................................... (236) (159)
Net repayments to related parties.................................................... (698) (229)
Capital distributions................................................................ (1,043) (242)
Capital contributions................................................................ 82
-------------- -------------
Net cash provided by financing activities........................................ 1,352 3,819
-------------- -------------
Net increase in cash and cash equivalents............................................. (420) (102)
Cash and cash equivalents, at beginning of period..................................... 494 380
-------------- -------------
Cash and cash equivalents, at end of period........................................... $ 74 $ 278
============== =============
</TABLE>
See Notes to Combined Financial Statements
-33-
<PAGE>
CHRISTOPHER HOMES, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 1 -- BUSINESS AND ORGANIZATION
Christopher Homes, Inc. and Affiliates (the "Company") is a group of entities
owned or controlled by J. Christopher Stuhmer primarily engaged in the
construction of attached and detached single-family homes in the Las Vegas
metropolitan area. The Company was acquired by The Fortress Group, Inc.
("Fortress") simultaneous with the closing of its public offering on May 21,
1996.
The accompanying statements of operations, of stockholders' equity and of cash
flows of Christopher Homes, Inc. and Affiliates have been prepared by the
Company without audit. Certain information and footnote disclosures normally
included in financial statements presented in accordance with generally accepted
accounting principles 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 and notes thereto included in the Fortress prospectus dated
May 16, 1996.
In the opinion of the Company, the accompanying unaudited statement of
operations, of stockholders' equity and of cash flows reflect all adjustments
(which include only normal recurring adjustments) necessary to present fairly
the results of operations of Christopher Homes, Inc. and Affiliates for the
period April 1, 1996 through May 20, 1996, the period January 1, 1996 through
May 20, 1996, and the three months and nine months ended September 30, 1995.
NOTE 2 -- BASIS OF PRESENTATION
The combined financial statements include the accounts of Christopher Homes,
Inc. ("CHI"), J. Christopher Stuhmer, Inc. ("JCS"), Christopher Homes -- Custom
Home Division, Inc. ("CHD"), all of which are Nevada corporations, and Country
Club Hills Limited Partnership ("CCH"), a Nevada Limited Partnership. CH, JCS
and CHD are wholly owned by J. Christopher Stuhmer. CHD is the general partner
of CCH. All significant intercompany accounts and transactions have been
eliminated in combination.
EARNINGS PER SHARE
Historical earnings per share has not been presented because it is not
considered to be meaningful as a result of the acquisitions and the offering as
discussed in Note 1.
-34-
<PAGE>
NOTE 3 -- REAL ESTATE INVENTORIES
Real estate inventories are summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------
<S> <C>
Work-in-progress
Sold homes........................................................ $ 14,027
Speculative homes................................................. 4,068
-----------------
18,095
-----------------
Land
Finished lots..................................................... 7,743
Land under development............................................ 916
-----------------
8,659
-----------------
Models............................................................. 1,703
-----------------
Total............................................................ $ 28,457
=================
</TABLE>
NOTE 4 -- NOTES AND MORTGAGES PAYABLE
Notes and mortgages payable are summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------
<S> <C>
Conventional land acquisition and development loans................ $ 11,082
Subordinated investor notes........................................ 9,180
Demands for deed on sales-leaseback................................ 230
General revolving lines of credit.................................. 120
Other.............................................................. 53
-----------------
$ 20,665
=================
</TABLE>
-35-
<PAGE>
THE GENESEE COMPANY AND RELATED ENTITIES
COMBINED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------
<S> <C>
ASSETS
Cash and cash equivalents.............................. $ 978
Related party and other receivables.................... 850
Real estate inventories................................ 49,673
Property and equipment, net............................ 241
Prepaid expenses and other assets...................... 1,178
-------
Total assets......................................... $52,920
=======
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued construction liabilities.. $ 3,409
Notes payable.......................................... 41,393
Due to related party................................... 1,003
Accrued expenses....................................... 1,462
Customer deposits...................................... 872
-------
Total liabilities.................................... 48,139
-------
Stockholders' equity
Common stock.......................................... 3
Additional paid-in capital............................ 1,770
Retained earnings..................................... 3,008
-------
Total stockholders' equity.......................... 4,781
-------
Total liabilities and stockholders' equity.......... $52,920
=======
</TABLE>
See Notes to Combined Financial Statements
-36-
<PAGE>
THE GENESEE COMPANY AND RELATED ENTITIES
COMBINED STATEMENT OF OPERATIONS
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
For the Period For the For the
January 1, 1996 Three Months Nine Months
through Ended Ended
May 20, 1996 September 30, 1995 September 30, 1995
--------------- ------------------ ------------------
<S> <C> <C> <C>
Revenue
Residential sales.................... $ 15,323 $ 14,896 $ 41,670
Lot sales............................ 499 885 1,824
Other revenue........................ 56 41 168
--------------- ------------------ ------------------
Total Revenue....................... 15,878 15,822 43,662
Cost of sales......................... 14,867 13,987 38,815
--------------- ------------------ ------------------
Gross profit.......................... 1,011 1,835 4,847
Operating expenses
Selling expenses..................... 1,281 1,045 2,875
General and administrative expenses.. 925 430 1,552
--------------- ------------------ ------------------
Net Operating (Loss) Income......... (1,195) 360 420
Other expense (income)
Interest.............................
Minority interests...................
Other, net........................... (26) 11
--------------- ------------------ ------------------
Net Income (loss)................... $ (1,169) $ 349 $ 420
=============== ================== ==================
</TABLE>
See Notes to Combined Financial Statements
-37-
<PAGE>
THE GENESEE COMPANY AND RELATED ENTITIES
COMBINED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
Common Additional Total
Stock Paid-in Retained Stockholders'
Amount Capital Earnings Equity
------ ---------- -------- -------------
<S> <C> <C> <C> <C>
Balance at December 31, 1995.... $ 3 $ 1,770 $ 3,008 $ 4,781
Capital contributions.......... 464 464
Distributions to stockholders.. (379) (379)
Net loss....................... (1,169) (1,169)
------ ---------- -------- -------------
Balance at May 20, 1996......... $ 3 $ 2,234 $ 1,460 $ 3,697
====== ========== ======== =============
</TABLE>
See Notes to Combined Financial Statements
-38-
<PAGE>
THE GENESEE COMPANY AND RELATED ENTITIES
COMBINED STATEMENT OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
For the
For the Period Nine Months
January 1, 1996 Ended
through September 30,
May 20, 1996 1995
--------------- -------------
<S> <C> <C>
Cash flows from operating activities
Net income.............................................................................. $ (1,169) $ 420
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization......................................................... 15 46
Changes in operating assets and liabilities
Receivables......................................................................... (6,559) (676)
Real estate inventories............................................................. (789) (5,280)
Prepaid expenses and other assets................................................... (282) 441
Accounts payable and accrued construction liabilities............................... (451) 1,674
Accrued expenses.................................................................... 80 425
Customer deposits................................................................... 439 (86)
--------------- -------------
Net cash used in operating activities............................................. (8,716) (3,036)
--------------- -------------
Cash flows from investing activities
Purchase of property and equipment...................................................... (3) (19)
Proceeds from sale of property and equipment............................................
--------------- -------------
Net cash used in investing activities............................................. (3) (19)
--------------- -------------
Cash flows from financing activities
Borrowings under notes and mortgages payable............................................ 14,167 31,283
Repayments of notes and mortgage payable................................................ (4,238) (29,014)
Related party borrowings................................................................ 837
Repayments to related parties........................................................... (818) (940)
Capital distributions................................................................... (379) (100)
Capital contributions................................................................... 464 115
--------------- -------------
Net cash provided by financing activities............................................. 9,196 2,181
--------------- -------------
Net increase (decrease) in cash and cash equivalents...................................... 477 (874)
Cash and cash equivalents, at beginning of period......................................... 978 1,364
--------------- -------------
Cash and cash equivalents, at end of period............................................... $ 1,455 $ 490
=============== =============
</TABLE>
See Notes to Combined Financial Statements
-39-
<PAGE>
THE GENESEE COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 1 -- BUSINESS AND ORGANIZATION
The Genesee Company ("Genesee" or the "Company") is engaged primarily in the
construction and sale of single-family residential property in Colorado and
Arizona. The Company designs, builds, and sells single-family houses on finished
lots, which it purchases ready for home construction or which it develops. The
Company also purchases undeveloped land to develop finished lots for future
construction of single-family houses and for sale to others. The Company was
acquired by The Fortress Group, Inc. (Fortress) simultaneous with the closing of
its public offering on May 21, 1996.
The accompanying statements of operations, of stockholders' equity and of cash
flows of The Genesee Company have been prepared by the Company without audit.
Certain information and footnote disclosures normally included in financial
statements presented in accordance with generally accepted accounting principles
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 read in conjunction with the financial statements
and notes thereto included in the Fortress Prospectus dated May 16, 1996.
In the opinion of the Company, the accompanying statement of operations, of
stockholders' equity and of cash flows reflect all adjustments (which include
only normal recurring adjustments) necessary to present fairly the results of
The Genesee Company, the results of operations for the period January 1, 1996
through May 20, 1996 and the three months and nine months ended September 30,
1995.
NOTE 2 -- BASIS OF PRESENTATION
The combined financial statements consist of the accounts of The Genesee Company
combined with those of The Genesee Company/Castle Pines, Ltd., The Genesee
Company of Michigan, Ltd., Genesee Venture Corporation (dba The Genesee Company
Building Group, Inc.), those of Genesee Communities I, Inc., Genesee Communities
II Inc. Genesee Development Company (collectively referred to as related
entities). These entities are related through common ownership and management.
EARNINGS PER SHARE
Historical Earnings per share has not been presented because it has not
considered to be meaningful as a result of the acquisitions and offering as
discussed in Note 1.
-40-
<PAGE>
NOTE 3 -- REAL ESTATE INVENTORIES
Real estate investments are summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------
<S> <C>
Work-in-progress
Sold homes........................................... $ 7,507
Speculative homes.................................... 15,627
-------
23,134
-------
Land
Finished lots........................................ 17,436
Land under development............................... 5,487
-------
22,923
-------
Models................................................. 3,616
-------
Total.............................................. $49,673
=======
</TABLE>
NOTE 4 -- NOTES PAYABLE
Notes payable are summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------
<S> <C>
Project specific construction loans.................. $16,685
Conventional land acquisition and development loans.. 13,746
Subordinated notes and equity participation loans.... 10,416
Unsecured lines of credit............................ 546
-------
$41,393
=======
</TABLE>
-41-
<PAGE>
SOLARIS DEVELOPMENT CORPORATION
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------
<S> <C>
ASSETS
Cash and cash equivalents.............................. $ 1,313
Related party and other receivables.................... 164
Real estate inventories................................ 14,299
Property and equipment, net............................ 485
Other assets........................................... 172
-------
Total assets......................................... $16,433
=======
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued construction liabilities.. $ 1,591
Line of credit......................................... 2,864
Notes payable.......................................... 8,145
Customer deposits...................................... 457
-------
Total liabilities.................................... 13,057
-------
Minority interest...................................... 1,294
-------
Stockholders' equity
Common stock.......................................... 1
Retained Earnings..................................... 2,081
-------
Total stockholders' equity.......................... 2,082
-------
Total liabilities and stockholders' equity.......... $16,433
=======
</TABLE>
See Notes to Consolidated Financial Statements
-42-
<PAGE>
SOLARIS DEVELOPMENT CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
For the Period For the For the
January 1, 1996 Three Months Nine Months
through Ended Ended
May 20, 1996 September 30, 1995 September 30, 1995
--------------- ------------------ ------------------
<S> <C> <C> <C>
Revenue
Residential sales.................... $ 11,892 $ 11,957 $ 33,209
Lot sales............................
Other revenue........................ 24 6 21
--------------- ------------------ ------------------
Total Revenue....................... 11,916 11,963 33,230
Cost of sales......................... 9,726 10,397 27,784
--------------- ------------------ ------------------
Gross profit.......................... 2,190 1,566 5,446
Operating expenses
Selling expenses..................... 1,077 722 2,197
General and administrative expenses.. 764 264 1,264
--------------- ------------------ ------------------
Net Operating Income................ 349 580 1,985
Other (income) expense
Interest............................. (20)
Minority interests................... 89 182 628
Other, net...........................
--------------- ------------------ ------------------
Net Income ......................... $ 260 $ 418 $ 1,357
=============== ================== ==================
</TABLE>
See Notes to Consolidated Financial Statements
-43-
<PAGE>
SOLARIS DEVELOPMENT CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
Common Total
Stock Retained Stockholders'
Amount Earnings Equity
------ -------- -------------
<S> <C> <C> <C>
Balance at December 31, 1995.... $ 1 $ 2,081 $ 2,082
Net income..................... 260 260
Distributions to stockholders.. (643) (643)
------ -------- -------------
Balance at May 20, 1996......... $ 1 $ 1,698 $ 1,699
====== ======== =============
</TABLE>
See Notes to Consolidated Financial Statements
-44-
<PAGE>
SOLARIS DEVELOPMENT CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE PERIOD FOR THE
JANUARY 1, 1996 NINE MONTHS
THROUGH ENDED
MAY 20, 1996 SEPTEMBER 30, 1995
---------------- ------------------
<S> <C> <C>
Cash flows from operating activities
Net income........................................................ $ 260 $ 1,357
Adjustments to reconcile net income to net cash (used in)
provided by operating activities
Depreciation and amortization.................................... 64 86
Minority interest................................................ 89 628
Gain on sales of assets..........................................
Changes in operating assets and liabilities
Real estate inventories......................................... (5,147) 1,774
Related party and other receivables............................. 60) (110)
Prepaid expenses and other assets............................... (155) (7)
Accounts payable and accrued construction liabilities........... 683 (1,751)
-------- --------
Net cash (used in) provided by operating activities............ (4,146) 1,975
-------- --------
Cash flows from investing activities
Change in restricted cash........................................ (6)
Purchase of property and equipment............................... (51) (253)
Proceeds from sale of property and equipment..................... 10 39
-------- --------
Net cash used in investing activities........................ (41) (220)
-------- --------
Cash flows from financing activities
Borrowings under notes payable................................... 21,083 24,214
Repayments of notes payable...................................... (15,395) (24,963)
Borrowings on line of credit..................................... 719 1,683
Repayments on line of credit..................................... (1,869) (1,776)
Distributions to minority interest............................... (791)
Capital distributions............................................ (643) (971)
-------- --------
Net cash provided by (used in) financing activities............ 3,895 (2,604)
-------- --------
Net (decrease) in cash and cash equivalents........................ (292) (849)
Cash and cash equivalents, beginning of period..................... 1,313 1,381
-------- --------
Cash and cash equivalents, end of period........................... $ 1,021 $ 532
======== ========
</TABLE>
See Notes to Consolidated Financial Statements
-45-
<PAGE>
SOLARIS DEVELOPMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- BUSINESS AND ORGANIZATION
Solaris Development Corporation ("Sunstar" or the "Company") is engaged in
developing land and building subdivisions featuring affordable custom built
homes in the Raleigh, Durham, Chapel Hill region of North Carolina. The Company
was acquired by The Fortress Group, Inc. ("Fortress") simultaneous with the
closing of its public offering on May 21, 1996.
The accompanying statements of operations, of stockholders' equity and of cash
flows of Solaris Development Corporation have been prepared by the Company
without audit. Certain information and footnote disclosures normally included in
financial statements presented in accordance with generally accepted accounting
principles 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 read in conjunction with the financial statements
and notes thereto included in the Fortress Prospectus dated May 16, 1996.
In the opinion of the Company, the accompanying unaudited statement of
operations of stockholders' equity and of cash flows reflect all adjustments
(which include only normal recurring adjustments) necessary to present fairly
the results of operations of Solaris Development Corporation for the period
January 1, 1996 through May 20, 1996 and the three months and nine months ended
September 30, 1995.
NOTE 2 -- BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company and
joint venture in which it was involved. The Company owns a 50% interest in the
Village Lakes joint venture and a 66% interest in the Park Village joint
venture. All significant intercompany balances and transactions have been
eliminated in consolidation. The Company consolidates its 50% interest in the
Village Lakes joint venture since it is the managing partner of the venture.
Solaris has fully responsibility and complete discretion in the management and
control of the business of the venture, and makes all decisions regarding the
management and affairs of the venture. Minority interest as of December 31, 1995
includes the 50% interest in the Village Lakes joint venture and the 34%
interest in the Park Village joint venture owned by various other parties. In
connection with the acquisition by Fortress (See Note 1), the Company purchased
the minority interest position in Park Village for approximately $1.3 million in
cash.
EARNINGS PER SHARE
Historical earnings per share has not been presented because it is not
considered to be meaningful as a result of the acquisitions and offering as
discussed in Note 1.
-46-
<PAGE>
NOTE 3 -- REAL ESTATE INVENTORIES
Real estate inventories are summaries as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------
<S> <C>
Work-in-progress
Sold homes............................................... $ 4,357
Speculative homes........................................ 1,177
-------
5,534
-------
Land
Land under development................................... 6,416
Land and other costs..................................... 456
-------
6,872
-------
Models..................................................... 1,893
-------
Total.................................................. $14,299
=======
</TABLE>
NOTE 4 -- NOTES PAYABLE
Notes payable and construction and development loans consist of the following
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------
<S> <C>
Construction and development loans payable Notes payable
to financial institution collateralized by a deed of
trust on real property with interest at prime plus 1%
(8.65% at December 31, 1995). Interest and principle
are due on demand........................................... $ 1,514
Notes payable to bank, collateralized by a deed of trust on
real property and personal guarantees by the stockholders
of the Company with interest at prime plus 1/2% (8.65% at
December 31, 1995). Interest and principal are due on
demand...................................................... 2,068
Notes payable to bank, collateralized by a deed of trust on
real property and personal guarantee by the stockholders of
the Company with interest at prime plus 1% (8.65% at
December 31, 1995). Interest and principal are due on
demand...................................................... 3,910
Notes payable to bank, collateralized by a deed of trust
on real property and personal guarantees by the stockholders
of the Company with interest a prime plus 1/2% (8.65% at
December 31, 1995). Interest and principal are due on
demand...................................................... 224
Other notes payable
Note payable to former stockholder, collateralized by a 25%
equity interest at 6%, due in quarterly installments of
$22,496 through January 1999................................ 245
Other notes payable......................................... 184
-------
</TABLE> $ 8,145
=======
-47-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The Fortress Group was formed in June, 1995 and completed its initial
public equity and senior note offerings on May 16, 1996. Simultaneously with the
closing of the offerings on May 21, 1996, the Company acquired, in a series of
transactions, four home-building companies (collectively the "Founding Builders"
or "Combined Predecessor Companies") which have operations in seven separate
markets. During the period prior to May 16, 1996, the Combined Predecessor
Companies were not under common control or management. On August 31, 1996, the
Company acquired Landmark Homes which has operations in Wilmington, North
Carolina and Myrtle Beach, South Carolina. The Pro Forma results of operations
includes the operations of Landmark for all periods presented.
As a result of the substantial continuing interests in the Company of the
former stockholders of the Founding Builders and Fortress, the Combined
Financial Statements of the Company include, for all periods presented, the
accounts of the Founding Builders on a historical cost basis, as if the Founding
Builders had always been members of the same operating group. Accordingly, no
goodwill has been recorded in combining these businesses. In the future, as
other companies are acquired, the Company may be required to record goodwill to
account for the amount of the purchase price of acquired businesses which
exceeds the tangible book value of businesses which it acquires. Goodwill of
$3,539,000 has been recorded in connection with the acquisition of Landmark
Homes, Inc.
Pro Forma data reflects adjustments for the initial Acquisitions including:
(i) reduction in the Company's interest costs due to the refinancing of existing
indebtedness with proceeds from the Offerings; (ii) compensation differentials
to former owners and employees of the Combined Predecessor Companies; (iii)
incremental selling, general and administrative expenses associated with
Fortress' corporate activities; (iv) income taxes as if the entities were
combined and subject to the effective federal and state statutory rates
throughout the periods discussed; (v) elimination of operations of an operating
division which was sold; and (vi) reduction of net income due to a cumulative
preferred dividend in order to calculate net income per share. In addition, to
the extent the company acquires new homebuilding organizations (see discussion
regarding Landmark above) subsequent to the closing of the offering, the impact
of these acquisitions has been reflected as a Pro Forma adjustment for the
periods presented.
The Company's revenues are derived primarily from the sale of residential
homes. Revenue is recognized when construction of the home is complete and title
transfers from the Company to the buyer. Cost of sales includes all direct and
indirect construction costs including construction supervision, land costs,
including the purchase price of land and land development costs, interest
expense on related land acquisitions, land development and construction loans,
real estate taxes, and an accrual for anticipated warranty and service costs.
All of these costs incurred prior to title transfer are capitalized into
inventory and relieved from inventory at time of title transfer and revenue is
recognized. Sales and marketing costs such as advertising and promotion
expenses, as well as general and administrative costs are recognized as expense
when incurred.
-48-
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA AS PRO FORMA AS PRO FORMA AS PRO FORMA AS
ADJUSTED FOR ADJUSTED FOR ADJUSTED FOR ADJUSTED FOR
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1995 1996 1995 1996
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue.................... $54,364 100.0% $81,995 100.0% $145,033 100.0% $198,162 100.0%
Cost of sales............. $45,039 82.8% $68,056 83.0% $120,447 83.0% $164,755 83.1%
Gross profit............. $ 9,325 17.2% $13,939 17.0% $ 24,586 17.0% $ 33,407 16.9%
Operating Expenses
Selling expenses.......... $ 3,255 6.0% $ 4,574 5.6% $ 8,804 6.1% $ 11,020 5.6%
General &
Administrative
expenses................. $ 3,267 6.0% $ 3,740 4.6% $ 9,306 6.4% $ 10,920 5.5%
Operating income.......... $ 2,803 5.2% $ 5,625 6.9% $ 6,476 4.5% $ 11,467 5.8%
Other non-operating
(Income) expense
Interest expense.......... $ (9) 0.0% $ 111 0.1% $ 2 0.0% $ 165 0.1%
Interest and other
income................... $ 193 0.4% $ (315) -0.4% $ 20 0.0% $ (699) -0.4%
Income before taxes... $ 2,619 4.8% $ 5,829 7.1% $ 6,454 4.5% $ 12,001 6.1%
Provision for taxes........ $ 971 1.8% $ 2,243 2.7% $ 2,446 1.7% $ 4,588 2.3%
Pro forma net income....... $ 1,648 3.0% $ 3,586 4.4% $ 4,008 2.8% $ 7,413 3.7%
</TABLE>
PRO FORMA COMBINED RESULTS OF OPERATIONS
Pro Forma for the Three Months Ended September 30, 1996 Compared to Pro
Forma for the Three Months Ended September 30, 1996.
ACQUISITION OF LANDMARK HOMES, INC.
On August 31, 1996 the Company successfully consummated the acquisition of
Landmark Homes, Inc. ("Landmark"), which is consistent with the Company's
strategy to increase operations through strategic acquisitions. Landmark is the
largest production homebuilder in the Wilmington, North Carolina market and also
has operations in Myrtle Beach, South Carolina. The addition of Landmark has
resulted in increasing the Company's diversification to nine markets,
nationally. The Pro Forma results of operations reflect the adjustments
assuming that Landmark was owned by the Company for all periods presented. The
following discussion and analysis of operations includes the operating results
for Landmark for all periods presented.
In addition, in early September, 1996, Wilmington, North Carolina
experienced a severe hurricane. Although the hurricane had some effect on the
overall Wilmington market area, the damage to Landmark's work in process
inventory was minimal. However, as discussed below, the hurricane has had a
negative effect on sales in this market in the third quarter and is expected to
negatively effect such sales in the fourth quarter.
GENERAL
The Founding Builders and the Company, including Landmark, (the "Combined
Companies") achieved new orders of 271 units for the three months ended
September 30, 1996 as compared to 318 units in the three months ended
September 30, 1995. The 14.8% decrease is attributable to lower market demand
and increased competition in the Texas and Raleigh, North Carolina markets. In
addition, new orders were lower for the three months ended September 30, 1996 in
the Wilmington, North Carolina market due to hurricane conditions that effected
prospective buyer traffic. These three markets accounted for a reduction of 58
units for the three months ended September 30, 1996 as compared to the same
period in 1995. The reduction in new orders in these markets was offset by an
increase in Denver, Colorado market of 10 units, while Las Vegas was constant
with an increase of 1 unit.
REVENUE
Pro Forma revenue for the Combined Companies was $82.0 million for the
three months ended September 30, 1996 as compared to $54.4 million for the three
months ended September 30, 1995. The 50.8% increase in Pro Forma revenue was
primarily due to an increase of 59.9% increase in the number of unit closings to
438 units for the three months ended September 30, 1996 from 274 units for the
same period in 1995. All of the Company's markets experienced a significant
increase in unit closings for the three months ended September 30, 1996 ranging
from an increase of 6 units in the Las Vegas market to an additional 91 units in
the Company's Texas markets. The increase in unit closings is the result of
improved market demand in all of
-49-
<PAGE>
the Company's markets for the last two calendar quarters of 1995 and continued
into the first two calendar quarters of 1996, particularly in the Texas and
Denver, Colorado markets.
The increase in Pro Forma revenues was partially offset by a reduction in
the Company's average selling price for units closed to $183,300 for the three
months ended September 30, 1996 from $193,200 for the same period in 1995. The
decrease in the Company's average selling price is due to the lower percentage
of unit closings in relation to the Company's total unit closings in the Las
Vegas market coupled with the increase in unit closing in the Texas markets.
The Texas and Las Vegas markets represent the Company's lowest and highest
average selling price per unit, respectively.
GROSS PROFIT
Pro Forma combined gross profit for the three months ended September 30,
1996 was $13.9 million compared to $9.3 million for the same period in 1995,
representing an increase of 49.5%. This increase is consistent with the
increase in Pro Forma revenue of 50.8%. As a percentage of Pro Forma revenues,
Pro Forma gross profit for the three months ended September 30, 1996 was
relatively constant at 17.0% as compared to 17.2% for the same period in 1995.
OPERATING EXPENSES
The Pro Forma combined Company selling, general and administrative expenses
("SG&A") for the three months ended September 30, 1996 were $8.3 million as
compared to $6.5 million for the same period in 1995, representing an increase
of 27.5%. As a percentage of revenue, Pro Forma SG&A was 10.1% for the three
months ended September 30, 1996 as compared to 12.0% for the same period in
1995. Components of SG&A expenses are fixed in nature; therefore, SG&A costs as
a percentage of Pro Forma revenue have decreased due to the 50.8% increase in
revenue for the three months ended September 30, 1996.
TAXES
The Pro Forma provision for income taxes for the three months ended
September 30, 1996 was $2.2 million as compared to $1.0 million for the same
period in 1995. The Pro Forma effective tax rate was 38.4% for the three months
ended September 30, 1996 as compared to 37.0% for the same period in 1995. The
increase in the Pro Forma effective tax rate was attributable to a lower
percentage of the pre-tax net income being generated from the Company's Las
Vegas market which has the lowest effective tax rate since there are no state
income taxes assessed.
NET INCOME
The Pro Forma combined net income for the three months ended September 30,
1996 was $3.6 million as compared to $1.6 million for the three months ended
September 30, 1995, representing an increase of 117.6%. This increase is
consistent with the significant increase in the Company's combined Pro Forma
revenue.
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<PAGE>
Pro Forma for the Nine Months ended September 30, 1996 Compared to Pro
Forma for the Nine Months Ended September 30, 1995
GENERAL
The Combined Companies achieved new orders of 1,230 units for the nine
months ended September 30, 1996 as compared to 941 units for the nine months
ended September 30, 1995. The 30.7% increase in the 1996 new orders over 1995
was due to an increase in customer demand particularly in the Denver, Colorado;
Raleigh, North Carolina; and Austin and San Antonio, Texas markets. The Company
has experienced a reduction in new orders in the Las Vegas, Nevada and
Wilmington, North Carolina markets of 59 units, which represents a 25.3% decline
when comparing the nine months ended September 30, 1996 results to the nine
months ended September 30, 1995. The decline in new orders in the Wilmington,
North Carolina market is somewhat attributable to the hurricane, as traffic
declined significantly for several weeks after the hurricane had occurred. In
Las Vegas, Nevada, the decline in new orders is the result of the time lag
between the close out of existing subdivisions and the opening of new
subdivisions.
The Combined Companies' backlog as of September 30, 1996 was 671 units as
compared to 533 as of September 30, 1995. The 25.9% increase in the backlog as
of September 30, 1996 as compared to the same period in 1995 is due to the
increase in new orders experienced during the first nine months of 1996. The
value of the backlog was $125.9 million as of September 30, 1996 as compared to
$112.9 million as of September 30, 1995, an increase of 11.6%. The average
selling price of a unit in backlog was $187,600 as of September 30, 1996 as
compared to $211,800 as of September 30, 1995. This 11.4% decrease in the
average selling price of a new unit order in backlog is attributable to new
lower priced product introduced in 1996 in the Las Vegas, Nevada and Denver,
Colorado markets.
REVENUE
Pro Forma revenue for the Combined Companies was $198.2 million for the
nine months ended September 30, 1996 as compared to $145.0 million for the nine
months ended September 30, 1995. The 36.6% increase in 1996 revenues over 1995
was primarily due to an increase of 37.1% in the number of homes closed to 1,076
in 1996 from 785 homes in 1995. The average selling price of homes closed
remained constant as the amount as of September 30, 1996 was $180,100 as
compared to $179,700 as of September 30, 1995.
The significant revenue growth is primarily attributable to the Company's
Texas, Las Vegas, Nevada and Wilmington, North Carolina markets which when
combined accounted for $51.4 million of the Company's $53.1 million increase in
revenues for the nine month period ended September 31, 1996 as compared to the
nine months ended September 30, 1995. This Pro Forma revenue increase is
attributable to the increased backlog brought into 1996 due to improved demand
in these markets in the last two quarters of 1995, which continued into the
first two quarters of 1996, particularly for the Company's Texas markets and, to
a lesser extent, for the Denver, Colorado and Raleigh, North Carolina markets.
-51-
<PAGE>
GROSS PROFIT
The Pro Forma gross profit for the nine months ended September 30, 1996 was
$33.4 million as compared to $24.6 million during the same period in 1995,
representing an increase of 35.9%. The increases in Pro Forma gross profit is
consistent with the increase in revenue of 36.6%. As a percentage of Pro Forma
revenue, Pro Forma gross profit was constant as the nine months ended September
30, 1996 was 16.9% as compared to 17.0% for the same period in 1995.
OPERATING EXPENSES
The Pro Forma combined SG&A expenses for the nine months ended September
30, 1996 were $21.9 million as compared to $18.1 million during the same period
in 1995, representing an increase of 21.1%. As a percentage of revenue, Pro
Forma SG&A was 11.1% for the nine months ended September 30, 1996 as compared to
12.5% for the same period in 1995. Components of SG&A expenses are fixed in
nature; therefore, SG&A costs as a percentage of Pro Forma revenue have
decreased due to the 36.6% increase in revenue for the nine months ended
September 30, 1996.
TAXES
The Pro Forma provision for income taxes for the nine months ended
September 30, 1996 was $4.6 million as compared to $2.4 million for the same
period in 1995, representing an increase of 87.6%. The Pro Forma effective tax
rate was approximately 38% for each of the nine month periods ended September
30, 1996 and September 30, 1995, respectively.
NET INCOME
The Pro Forma combined net income for the nine months ended September 30,
1996 was $7.4 million as compared to $4.0 million for the same period in 1995,
representing an increase of 85.0%. This increase is consistent with the
significant increase in the Company's combined Pro Forma revenue.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1996 the Company had cash and cash equivalents on hand
of $14.4 million.
Prior to the offerings, the Company had secured a commitment from Bankers
Trust Company and Bank One, Arizona, N.A. (collectively, the "Banks") as Co-
Agents pursuant to which and subject to terms and conditions, Bankers Trust
Company had expressed its willingness to arrange a full recourse senior secured
revolving credit facility to the Company in the maximum amount of $50 million.
The Company has elected to allow this commitment to expire. The Company
believes it is in its best interest to refinance the credit facilities which
existed as of the offering date at the Company's operating subsidiaries.
As of the offering date, the Company had existing facilities on which the
Company had outstanding borrowings of approximately $114 million. The Company
has or is in the process
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<PAGE>
of re-negotiating the terms of these existing credit facilities to provide more
flexible terms and improved pricing.
The Company believes that funds available through the existing and newly
negotiated credit facilities, coupled with the cash on hand and cash generated
through operations will be adequate for its anticipated cash needs for the
foreseeable future.
The Company has and will continue to pursue its strategy to increase
operations through strategic acquisitions. Such acquisitions may be funded
through a combination of cash, stock and notes issued by the Company, and any
cash portion may be financed by cash on hand, credit facilities (existing or
newly negotiated) or capital markets (or any combination thereof.)
-53-
<PAGE>
PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits. Exhibit 27. Financial Data Schedule
(b) Reports on Form 8-K:
Form 8-K filed September 16, 1996 (Date of event: August 31,
1996) relating to the acquisition of Landmark Homes, Inc.
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<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, 1996 By: /s/ JAMES J. MARTELL, JR.
-------------------------------------
James J. Martell, Jr.,
President and Chief Executive Officer
Date: November 14, 1996 By: /s/ JAMIE M. PIRRELLO
--------------------------------------
Jamie M. Pirrello,
Chief Financial and Accounting Officer
-55-
<PAGE>
EXHIBIT INDEX
27 Financial Data Schedule
-56-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from The
Fortress Group, Inc. Consolidated Balance Sheet as of September 30, 1996 and The
Fortress Group, Inc. Consolidated Statement of Operations for the period May 21,
1996 - Sept. 30, 1996, and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> MAY-21-1996
<PERIOD-END> SEP-30-1996
<CASH> 14,380
<SECURITIES> 0
<RECEIVABLES> 12,580
<ALLOWANCES> 0
<INVENTORY> 150,645
<CURRENT-ASSETS> 0
<PP&E> 2,507
<DEPRECIATION> 0
<TOTAL-ASSETS> 193,261
<CURRENT-LIABILITIES> 163,344
<BONDS> 0
<COMMON> 118
0
0
<OTHER-SE> 24,973
<TOTAL-LIABILITY-AND-EQUITY> 193,261
<SALES> 117,877
<TOTAL-REVENUES> 118,466
<CGS> 99,669
<TOTAL-COSTS> 111,199
<OTHER-EXPENSES> 148
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 131
<INCOME-PRETAX> 7,480
<INCOME-TAX> 2,853
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,627
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
