UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
AMENDMENT NO. 1
Amendment to application on Report filed
pursuant to Section 13 or 15(d) of The Securities
Exchange Act of 1934
Date of Report: March 15, 1997
The Fortress Group, Inc.
(Exact Name of Registrant as Specified in Charter)
Delaware 0-28024 54-1774997
-------- ------- ----------
(State or Other Jurisdiction (Commission (IRS Employer
of Incorporation) File Number) Identification No.)
1921 Gallows Road, Suite 730, Vienna, Virginia 22182
----------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (703) 442-4545
<PAGE>
The undersigned registrant, in order to provide the financial statements
required to be included in the Current Report on Form 8-K dated March 17, 1997
in connection with the acquisition of certain assets and assumption of certain
liabilities of D.W. Hutson Construction Company, hereby amends the following
item, or other portions of such Current Report on Form 8-K set forth in the
pages attached hereto.
Item 7. Financial Statements and Exhibits.
The financial statements and information in the following table of contents and
attached hereto are hereby filed with the Commission in accordance with the
above-referenced item.
<PAGE>
Item 7. Financial Statements and Exhibits.
(a) Financial Statements of Business Acquired.
The following financial statements of the acquired business,
D.W. Hutson Construction Company, are submitted herewith on the
indicated pages.
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Certified Public Accountants 5
Balance Sheets as of December 31, 1996 and 1995 6
Statements of Income for the Years Ended December 31, 1996 and 1995 7
Statement of Changes in Shareholder's Equity as of December 31, 1996 8
Statements of Cash Flows for the Years Ended December 31, 1996 and 1995 9
Notes to Financial Statements 10
(b) Pro Forma Financial Data
The following unaudited pro forma condensed combined
financial information of The Fortress Group, Inc. and D.W.
Hutson Construction Company are submitted herewith on the
indicated pages.
Pro Forma Financial Data 18
Pro Forma Consolidating Balance Sheet at December 31, 1996 (Unaudited) 19
Pro Forma Consolidating Statement of Operations for the Year
Ended December 31, 1996 (Unaudited) 20
Notes to Pro Forma Consolidating Financial Data (Unaudited) 21
Signatures 23
</TABLE>
<PAGE>
Item 7. Financial Statements and Exhibits
(a) Financial Statements of Business Acquired
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
of D.W. Hutson Construction, Inc.
In our opinion, the accompanying balance sheets and the related statements of
income, of changes in shareholders' equity and of cash flows present fairly, in
all material respects, the financial position of D.W. Hutson Construction, Inc.
at December 31, 1996 and 1995, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
Price Waterhouse LLP
April 24, 1997
Fort Lauderdale, Florida
<PAGE>
D.W. HUTSON CONSTRUCTION, INC.
BALANCE SHEETS
(in thousands except per share data)
<TABLE>
<CAPTION>
December 31,
---------------
1996 1995
---- ----
<S> <C> <C>
ASSETS
Cash and cash equivalents....................................... $ 1,251 $ 688
Restricted cash................................................. 546 761
Related party receivables....................................... 6,055 3,797
Other receivables............................................... 10 83
Real estate inventories......................................... 14,652 13,997
Equipment and furniture, net of accumulated depreciation of
$562 and $467, respectively.................................. 571 573
Deposits on land with related parties........................... 1,612 2,456
Prepaid expenses and other assets............................... 186 209
----- -----
Total assets............................................... $24,883 $22,564
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued construction liabilities........... $ 2,422 $ 2,509
Notes payable................................................... 8,486 10,389
Accrued expenses................................................ 287 169
Customer deposits............................................... 628 620
------ -----
Total liabilities.......................................... 11,823 13,687
Commitments and contingencies (Note 6).......................... -- --
Shareholders' equity:
Common stock, $1 par value, 25,000 shares authorized,
issued and outstanding.................................. 25 25
Retained earnings............................................. 13,035 8,852
------ -----
Total shareholders' equity................................ 13,060 8,877
------ -----
Total liabilities and shareholders' equity................. $24,883 $22,564
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
-6-
<PAGE>
D.W. HUTSON CONSTRUCTION, INC.
STATEMENTS OF INCOME
(in thousands)
Year Ended December 31,
-----------------------
1996 1995
---- ----
Revenue:
Residential sales....................... $ 79,471 $ 60,531
Lot sales............................... 100 --
-------- --------
Total revenue........................... 79,571 60,531
Cost of sales................................ 65,721 51,407
-------- --------
Gross profit ................................ 13,850 9,124
Operating expenses
Selling expenses........................ 4,644 3,160
General and administrative expenses..... 1,431 2,213
-------- --------
Total operating expenses.............. 6,075 5,373
-------- --------
Net operating income.................... 7,775 3,751
Other expense (income)
Interest................................ 225 274
Other................................... (104) (127)
-------- --------
Total other expense................... 121 147
-------- ---------
Net income ............................... $ 7,654 $ 3,604
========= ==========
The accompanying notes are an integral part of these financial statements.
-7-
<PAGE>
D.W. HUTSON CONSTRUCTION, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands)
Common Total
------ -----
Stock Retained Shareholders'
----- -------- -------------
Amount Earnings Equity
------ -------- ------
Balance, December 31, 1994................ $ 25 $ 9,444 $ 9,469
Distributions............................. -- (4,196) (4,196)
Net income................................ -- 3,604 3,604
----- ----- -----
Balance, December 31, 1995................ 25 8,852 8,877
Distributions............................. -- (3,471) (3,471)
Net income................................ -- 7,654 7,654
----- ----- -----
Balance, December 31, 1996 ............... $ 25 $13,035 $13,060
===== ======= =======
The accompanying notes are an integral part of these financial statements.
-8-
<PAGE>
D.W. HUTSON CONSTRUCTION, INC.
STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities
Net income......................................... $ 7,654 $ 3,604
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation expense.......................... 113 107
Changes in operating assets and liabilities:
Loss on sale of equipment and furniture....... 47 --
Decrease (increase) in:
Restricted cash..................... 215 (402)
Related party receivables........... (2,258) 4,627
Other receivables................... 73 (62)
Real estate inventories:
Additions to real estate
inventories.................... (65,445) (54,294)
Capitalized interest............. (931) (954)
Cost of sales.................... 65,721 51,407
Deposit on land with related
parties.......................... 844 (2,456)
Prepaid expenses and other assets... 23 37
Increase (decrease) in:
Accounts payable and accrued
construction liabilities....... (87) 232
Accrued expenses................. 118 (282)
Customer deposits................ 8 220
------ ------
Net cash provided by operating
activities........................ 6,095 1,784
------ ------
Cash flows from investing activities
Purchases of equipment and furniture............... (277) (128)
Proceeds from sale of equipment and furniture...... 119 18
------ ------
Net cash used in
investing activities.............. (158) (110)
------ ------
Cash flows from financing activities
(Repayments) borrowings under notes payable, net... (1,903) 2,141
Distributions to shareholders...................... (3,471) (4,196)
------ ------
Net cash used in
financing activities.............. (5,374) (2,055)
------ ------
Increase (decrease) in cash and cash equivalents........ 563 (381)
Cash and cash equivalents, beginning of year............ 688 1,069
------ ------
Cash and cash equivalents, end of year.................. $ 1,251 $ 688
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
-9-
<PAGE>
D.W. HUTSON CONSTRUCTION, INC.
NOTES TO FINANCIAL STATEMENTS
1. Business and Organization
General
D.W. Hutson Construction, Inc. (the "Company") is engaged primarily in the
construction and sale of single-family residential housing units in northeastern
Florida. The Company designs, builds and sells single-family houses on finished
lots, which it purchases ready for home construction or which it develops.
During 1996, the Company and its shareholders entered into negotiations
with Fortress - Florida, Inc.(qualified to do business in Florida as Fortress -
Jax Florida, Inc.) a wholly owned subsidiary of The Fortress Group, Inc.
("Fortress") pursuant to which certain assets of the Company were purchased and
related liabilities were assumed by Fortress subsequent to December 31, 1996.
(See Note 7)
2. Summary of Significant Accounting Policies:
Estimates by Management
Preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The Company
is a member of a group of commonly owned Companies and, as disclosed in Note 5,
has significant transactions and relationships with members of the group.
Management believes values of these transactions approximates fair value.
Cash and Cash Equivalents
For purposes of reporting cash flows, the Company considers all highly
liquid investments with an original purchased maturity of three months or less
to be cash equivalents.
Supplemental disclosures of cash flow information are as follows (in
thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1996 1995
---- ----
<S> <C> <C>
Cash paid for interest, excluding amounts capitalized:
Lines of credit with third parties........................ $205 $217
Related parties........................................... 20 57
</TABLE>
Restricted Cash
Restricted cash consists principally of escrow accounts representing
customer deposits restricted as to use.
Revenue Recognition
Revenues from residential sales are recognized when all conditions
precedent to closing have been fulfilled and title has passed to the buyer. The
Company's homes are generally contracted for in advance of their construction.
The Company's standard sales contract generally requires the customer to make an
earnest money deposit which is recognized as a customer deposit liability until
the unit closes.
Real Estate Inventories and Cost of Sales
All real estate inventories which are held for sale are carried at cost,
which is less than fair value as measured in accordance with Statement of
Financial Accounting Standards (SFAS) No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of. Fair value is
measured based on the expected future cash flows of each of the Company's real
estate developments. Costs incurred which are included in inventory consist of
land, land development, direct and certain indirect construction costs, interest
and real estate taxes, and model construction costs and related improvements.
-10-
<PAGE>
D.W. HUTSON CONSTRUCTION, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Cost of sales includes construction, land and land development costs
incurred, interest, real estate taxes and other capitalizable common costs.
Interest charged to cost of sales totaled $999,642 and $806,991 in 1996 and
1995, respectively, resulting primarily from loans from financial institutions.
General and administrative expenses of $150,241 and $157,000 were capitalized to
real estate inventories respectively, as of December 31, 1995 and 1996.
Interest Capitalization
Interest and related amortization of debt issuance costs are capitalized to
qualifying real estate inventories, and are relieved from inventory to cost of
sales as revenue from residential sales is recognized. Interest and related
amortization of debt issuance costs are capitalized under the specific
identification method to individual qualifying real estate inventory. The
capitalization rate is based on the Company's outstanding borrowings for
acquisition, development and construction of the qualified real estate
inventory.
Equipment and Furniture
Equipment and furniture are carried at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets which range from 5 to 39 years. Significant additions
and improvements are capitalized, while expenditures for repairs and maintenance
are charged to operations as incurred.
Prepaid Expenses and Other Assets
Prepaid expenses and other assets include debt issue costs, other deposits
and prepaid expenses.
Deposits on Land
Deposits on land include deposits held by a related party for future
acquisitions of finished lots ready for home construction.
Concentrations of Credit Risk
The Company's operations are concentrated in the construction and sale of
single-family residential property in northeastern Florida. Furthermore, the
Company from time to time maintains cash balances at certain financial
institutions in excess of Federally insured limits.
Income Taxes
The Company is a Subchapter S corporation for income tax purposes and,
accordingly, any income tax liabilities are the responsibility of the Company's
shareholders. The Company's Subchapter S corporation status will terminate on
the acquisition by Fortress as disclosed in Note 1. See Note 8 for information
regarding the pro forma income tax disclosures.
-11-
<PAGE>
D.W. HUTSON CONSTRUCTION, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
3. Real Estate Inventories
Real estate inventories are summarized as follows (in thousands):
December 31,
------------
1996 1995
---- ----
Work-in-progress:
Sold homes under construction..... $ 8,063 $ 9,628
Speculative homes................. 2,325 2,109
------ ------
10,388 11,737
------ ------
Land:
Finished lots..................... 2,359 1,805
Land under development............ 1,076 --
------ ------
3,435 1,805
Models: 829 455
------ ------
$14,652 $13,997
======= =======
Speculative homes and models include completed homes and homes under
construction. Speculative construction represents homes built without an advance
sales contract in order to accelerate closing. Completed homes include land,
development, and other allocable costs.
-12-
<PAGE>
D.W. HUTSON CONSTRUCTION, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
4. Notes Payable
Notes payable at December 31 are summarized as follows (in thousands):
1996 1995
---- ----
Construction notes payable
$11,000 Line of Credit $ 3,785 $ 4,000
$ 6,000 Line of Credit 2,013 2,869
$ 4,000 Line of Credit 2,406 3,172
$ 3,000 Line of Credit 101 215
Other notes payable to related parties 181 133
------- -------
$ 8,486 $10,389
======= =======
Construction loans consist of four lines of credit with commercial banks
for the purpose of financing acquisition of lot inventory and related single
family home construction. The loans bear interest at annual rates ranging from
.5% to 1% over the individual lender's prime rate, payable monthly. Fundings
under the loans, together with unpaid accrued related interest, are due
primarily upon sale of each completed home or upon demand.
The lines of credit are secured by individual lots and related construction
and certain lines of credit are secured by mortgages on property held by the
Company's related parties. The lines of credit are individually guaranteed by a
majority shareholder of the Company. The loan agreements include restrictive
covenants, including financial ratio compliance, limitations on construction
advances and the maximum outstanding principal balance.
Other loans payable consist of three loans from current and former
stockholders, all of which are unsecured, bear interest at annual rates ranging
from 6.25% to 9.25%, and mature before December 31, 2006.
Maturities of loans payable at December 31, 1996 are as follows (in
thousands):
Year Ending December 31,
1997..................... $8,414
1998..................... 9
1999..................... 9
2000..................... 9
2001..................... 9
thereafter............... 36
------
$8,486
======
Interest incurred and capitalized, excluding amortization of deferred loan
costs during the years ended December 31, 1996 and 1995 aggregated approximately
$931,000 and $954,000, respectively.
-13-
<PAGE>
D.W. HUTSON CONSTRUCTION, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
5. Related Party Transactions
The Company purchases substantially all of its finished lots under
verbal agreements at fair value from related parties, Hutson Land Company, Inc.,
Hutson Land Group, Inc., Land Planners Development, Inc., and Heritage Land
Group, Inc., which share common majority shareholders and are under common
management. The Company also purchases land from its majority shareholders.
During 1995 and 1996, the Company purchased approximately $14,763,000 and
$15,238,000, respectively. The Company had deposits of $2,456,500 and
$1,612,500, respectively at December 31, 1995 and 1996 with Hutson Land Group,
Inc. for future acquisitions of finished lots ready for home construction.
The Company pays a fee to shareholders based on the number of homes
closed in a particular development as compensation. In 1995 and 1996, the
Company paid approximately $459,000 and $570,000, respectively, in compensation
to the shareholders.
Hutson Land Company, Inc. develops certain land for future construction
by the Company and is reimbursed for development costs incurred. During 1996,
the Company reimbursed Hutson Land Company, Inc. approximately $134,000 for land
development costs and capitalized these amounts to real estate inventories. The
Company did not incur charges from Hutson Land Company, Inc. in conjunction with
land development during 1995. Charges by Hutson Land Company, Inc. for land
development services may not be necessarily indicative of that which would be
negotiated with an independent third party.
The Company contracted cabinetry and interior finish services from a
related party, Southeastern Supply Company, Inc., an entity wholly owned by the
Company's majority shareholder. During 1995 and 1996, the Company incurred fees
of approximately $3,500,000 and $4,500,000, respectively, for these related
party services. Charges by Southeastern Supply Company, Inc. for these services
may not be necessarily indicative of that which would be negotiated with an
independent third party.
During 1995 and 1996, the Company sold models to shareholders at cost
and recognized revenues and cost of sales of approximately $157,500 and
$500,000, respectively. These sales are not the same as those which would result
from transactions with an independent third party.
The Company leased models from a related party, Hutson Rental
Partnership which shares common ownership and is under common management, under
varying cancelable verbal agreements and incurred rental expense of $121,060 and
$176,231, respectively, for years ended December 31, 1995 and 1996,
respectively. The Company also leases office space from the majority shareholder
under a verbal agreement and incurred rental expense of $139,539, for years
ended December 31, 1995 and 1996, respectively. Rental charges by Hutson Rental
Partnership may not be necessarily indicative of that which would be negotiated
with an independent third party.
The Company provides financial and administrative services and is the
employer of certain workers for five entities which share common majority
shareholders. The Company is reimbursed by these related entities for costs
incurred based upon time spent performing services on their behalf. For the
years ended December 31, 1995 and 1996, the Company recognized management fee
revenues of approximately $42,840 and $39,522, respectively, for services
provided.
The Company made home sales to several affiliates of the shareholders
and to an employee during 1996, at cost and accordingly recognized revenues and
cost of sales of approximately $655,888. Construction in progress includes
$535,000 for a custom home being built for the majority shareholder at December
31, 1996. No home sales were made to affiliates of shareholders and/or employees
during 1995.
-14-
<PAGE>
D.W. HUTSON CONSTRUCTION, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Receivables from related parties represent non-interest bearing advances
and notes to the shareholders and related entities. Such amounts are generally
due on demand or within one year.
6. Commitments and Contingencies
The Company is involved in various routine legal proceedings incidental to
the conduct of its normal business operations. The Company's management believes
that none of these legal proceedings will have a material adverse impact on the
financial condition or results of operations of the Company.
The Company may be responsible for funding certain homeowners associations
activities in the ordinary course of business. The Company does not currently
believe these obligations will have any material adverse effect on its financial
position or results of operations.
7. Subsequent Events
On February 28, 1997, Fortress acquired certain assets of the Company and
assumed certain related liabilities for $7,653,753 in cash, $1,200,000 of
Fortress Class B convertible preferred stock, and future payments in the form of
Class C convertible preferred stock totaling $6,000,000 at a minimum of
$1,000,000 annually until 2002. The Fortress Class B and Class C convertible
preferred stock issues have a par value of $.01 per share with a liquidation
value of $100 and each share of preferred stock is convertible into 10 shares of
Fortress Common Stock.
In conjunction with the acquisition, Fortress entered into a purchase and
sale agreement with Hutson Land Company, Inc. for $7,000,000 to acquire certain
finished lots at estimated fair market value over a period expiring March 31,
2000. Fortress also entered into an agreement under which Hutson Land Company,
Inc. will manage the development of a certain subdivision. The related fee
will be based on the number of lots serviced. Fortress entered into an exclusive
purchasing agreement for a period of five years to contract cabinetry and
interior finish services with Southeastern Supply Company, Inc. at an initial
price equal to the amount that the contractor charged the Company on the last
date prior to the acquisition by Fortress. Fortress entered into an agreement
with the majority shareholder of the Company, for a period of five years
commencing March 1, 1997 under which Fortress is the exclusive builder and
purchaser of lots developed by the shareholder and its affiliates.
-15-
<PAGE>
D.W. HUTSON CONSTRUCTION, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
8. Unaudited Pro Forma Income Tax information
The following unaudited pro forma income tax information is as if the
Company had been a Subchapter C corporation subject to Federal and state income
taxes for the year ended December 31, 1996 (in thousands).
<TABLE>
<CAPTION>
Year Ended
----------
December 31,
------------
1996
----
<S> <C>
Earnings (loss) before pro forma adjustment, per statement of income...... $ 7,654
Provision for income taxes................................................ (3,062)
-------
Pro forma net income...................................................... $ 4,592
=======
</TABLE>
-16-
<PAGE>
*****
Item 7. Financial Statements and Exhibits
(b) Pro Forma Financial Data
-17-
<PAGE>
THE FORTRESS GROUP, INC.
------------------------------
PRO FORMA CONSOLIDATED FINANCIAL DATA
-----------------------------------
(unaudited)
-----------
The Fortress Group, Inc. ("Fortress" or the "Company") was formed in
June 1995 to create a national homebuilding company through the May 1996 initial
public offering (Offering) and the simultaneous (Merger) of four separate
homebuilding companies (Combined Predecessor Companies). The unaudited pro forma
consolidated financial data reflect the merger of the Combined Predecessor
Companies, the sale effective July 1, 1996 of the Genesee Custom Homes Division
(Genesee Custom), the purchase on August 31, 1996 of Landmark Homes, Inc.
(Landmark), and the purchase on February 28, 1997 of D.W. Hutson Construction
Company (Hutson).
The unaudited pro forma consolidated balance sheet gives effect to the
purchase of Hutson as if the purchase had occurred on December 31, 1996. The pro
forma adjustments reflect the cash payment for the purchase, the increase of
inventory to fair value at purchase date, and the recording of goodwill.
The unaudited pro forma consolidated statement of operations presents
pro forma results from operations for the year ended December 31, 1996 as if the
Merger, the sale of Genesee Custom and the purchase of both Landmark and Hutson
had occurred on January 1, 1996. The pro forma adjustments reflect certain
administrative costs of the Fortress corporate organization, the sale of Genesee
Custom, amortization of goodwill and the increased provision for income taxes as
if the Combined Predecessor Companies, Landmark and Hutson were combined and
subject to the effective federal statutory income tax rate throughout the
period.
The pro forma consolidated financial data of The Fortress Group, Inc.
are unaudited and are based upon historical information, preliminary estimates
and certain assumptions management deems appropriate. The unaudited pro forma
consolidated financial data presented herein are not necessarily indicative of
the results Fortress would have attained had such events occurred at the
beginning of the period, nor are they indicative of the future results of
Fortress. The unaudited pro forma consolidated financial data and notes thereto
should be read in conjunction with the Company's 1996 Annual Report on Form
10-K.
-18-
<PAGE>
PRO FORMA CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
D.W. Hutson Pro Forma The Fortress
Construction Adjustments for Group, Inc.
The Fortress Group, Inc. Company Acquisition Pro Forma
(Unaudited) (Unaudited)
------------------------ ------- ----------- ----------
ASSETS
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 16,212 $ 1,797 $(7,654) (a) $ 6,374
(12) (f)
(3,969) (g)
Accounts receivable 10,700 10 10,710
Due from related parties 5,176 6,055 (173) (f) 5,176
(5,882) (h)
Real estate inventories 144,106 14,652 316 (d) 159,074
Property and equipment, net 3,543 571 (2) (f) 4,112
Prepaid expenses and other assets 10,355 1,798 250 (d) 17,791
(494) (f)
5,882 (h)
Goodwill, net 3,641 -- 5,066 (e) 8,707
-------- ------- ------- --------
Total assets $193,733 $24,883 $(6,672) $211,944
======== ======= ======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and construction liabilities $ 8,526 $ 2,422 $ 3,969 (g) $ 10,948
(3,969) (g)
Notes and mortgages payable 140,136 8,486 148,622
Due to related parties 27 27
Accrued expenses 8,525 287 8,812
Customer deposits 4,259 628 (12) (f) 4,875
-------- ------- ------- --------
Total liabilities 161,473 11,823 (12) 173,284
-------- ------- ------- --------
Minority interest 274 274
-------- ------- ------- --------
Shareholders' equity
Preferred stock $.01 par value
2 million actual, 2.11 million Pro Forma
shares authorized, 10,000 actual, 82,000
Pro Forma shares issued and outstanding
($1.0 million actual $8.2 million Pro Forma
aggregate liquidation preference.) 1 (b) 1
Common stock, $.01 par value, 50
million authorized, 11,762,675 issued
and outstanding 118 118
Common stock, $1 par value, 25,000
shares authorized, issued and
outstanding 25 (25) (c)
Additional paid-in capital 23,808 6,399 (b) 30,207
Retained earnings 8,072 13,035 (9,066) (c) 8,072
(3,969) (g)
Treasury stock, at cost, 1,700 shares (12) (12)
-------- ------- ------- --------
Total shareholders' equity 31,986 13,060 (6,660) 38,386
-------- ------- ------- --------
Total liabilities and shareholders' equity $193,733 $24,883 $(6,672) $211,944
======== ======= ======= ========
</TABLE>
See Notes to Pro Forma Consolidated Financial Data.
-19-
<PAGE>
THE FORTRESS GROUP, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Predecessor Landmark Homes, Inc.
Companies The Fortress Group, Inc. January 1, 1996 - D.W. Hutson
January 1, 1996 - May 21, 1996 - August 31, 1996 Construction
May 20, 1996 December 31, 1996 (unaudited) Company
------------ ---------------- ----------- -------
<S> <C> <C> <C> <C>
Revenue:
Residential sales $ 64,984 $200,721 $18,062 $ 79,471
Lot sales 1,036 9,239 100
Other revenue 99 394
------- --------- ------- --------
Total revenue 66,119 210,354 18,062 79,571
Cost of sales 56,425 177,387 15,151 65,721
------- --------- ------- --------
Gross profit 9,694 32,967 2,911 13,850
Operating expenses:
Selling expenses 4,689 11,527 168 4,644
General and administrative
expenses 3,892 8,653 1,185 1,431
------- --------- ------- --------
Net operating income 1,113 12,787 1,558 7,775
Other expense (income)
Interest 63 429 42 225
Minority interests 89 92
Other, net (313) (955) (7) (104)
------- --------- ------- --------
Income before provision for income
taxes 1,274 13,221 1,523 7,654
Provision for income taxes 5,013
------- --------- ------- --------
Net income $ 1,274 $ 8,208 $ 1,523 $ 7,654
======= ========= ======= ========
</TABLE>
Net income per share
Weighted average shares outstanding
See Notes to Pro Forma Consolidated Financial Data.
<PAGE>
<TABLE>
<CAPTION>
Unaudited
Pro Forma Adjustments
------------------------------------------
D.W. Hutson The Fortress
Genesee Custom/ Construction Group, Inc
Landmark Company Pro Forma
Merger Acquisition Acquisition (unaudited)
------ ----------- ----------- ---------
<S> <C> <C> <C> <C>
Revenue:
Residential sales $(4,964) (d) $ 358,274
Lot sales 10,375
Other revenue 493
------- -------- ------- ------
Total revenue (4,964) 369,142
Cost of sales (4,928) (d) 309,756
------- -------- ------- ------
Gross profit (36) 59,386
Operating expenses:
Selling expenses (163) (d) 20,865
General and administrative
expenses $ 644 (a) (121) (d) 338 (f) 16,179
157 (e)
------- -------- ------- ------
Net operating income (644) 91 (338) 22,342
Other expense (income)
Interest 759
Minority interests (98)(b) 83
Other, net (1,379)
------- -------- ------- ------
Income before provision for income
taxes (546) 91 (338) 22,879
Provision for income taxes 472 (c) 579 (c) 2,780 (c) 8,672
(207)(g) 35 (g)
------- -------- ------- ------
Net income $ (811) $ (523)* $(3,118) $14,207 (h)
======= ======== ======= ======
Net income per share $ 1.29
======
Weighted average shares outstanding 10,939,988 (i)
===========
</TABLE>
<PAGE>
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL DATA
NOTE 1 - Pro Forma Consolidated Balance Sheet Adjustments
The pro forma consolidated balance sheet adjustments have been prepared to
reflect the acquisition by The Fortress Group, Inc. ("Fortress" or the
"Company") of D.W. Hutson Construction, Inc. ("Hutson") for an aggregate
purchase price of approximately $27.3 million consisting of approximately $7.7
million in cash, $1.2 million in Class B preferred stock, $5.2 million in Class
C preferred stock with a liquidation value of $6 million. The purchase price
also includes the assumption of $12.4 million in Hutson debt at purchase date.
There is no pro forma adjustment for the debt assumption.
(a) Cash payment of the purchase price;
(b) Purchase price consideration paid in the form of Class B and Class C
preferred stock,
(c) Elimination of Hutson's shareholders' equity,
(d) Increase in real estate inventories and land purchase options of Hutson to
estimated fair value at the purchase date,
(e) Excess of purchase price over the fair value at the purchase date,
(f) Elimination of certain Hutson assets not purchased and related liabilities
not assumed,
(g) Recordation of dividends declared by Hutson on December 31, 1996 and
subsequently paid,
(h) Reclassification of Hutson's related party receivables to lot deposits for
improved lots.
NOTE 2 - Pro Forma Consolidated Statement of Operations Adjustments
The pro forma consolidated statement of operations adjustments have been
prepared to reflect the merger of the Combined Predecessor companies, operating
expenses of the Fortress corporate organization, the sale of Genesee custom, the
acquisition of Landmark and the acquisition of Hutson.
(a) Adjustment of $644,000 for the year ended December 31, 1996, to reflect
increased expenses for corporate operating activities related to the
newly formed public entity.
(b) Adjustments to reduce minority interest expense by approximately
$98,000 for the year ended December 31, 1996, as a result of the
Company's buyout in May 1996 of the minority interest holding in one of
its consolidated joint venture partnerships.
(c) Adjustments to calculate the provision for income taxes on the pro
forma results at the effective statutory tax rates applicable for each
of the Founding Builders, Landmark and Hutson as if they had been
subject to the effective federal statutory income tax rate throughout
the period.
(d) Adjustment to remove the results of operations of Genesee Custom due to
the sale of the division with an effective date of July 1, 1996.
(e) Adjustment to record amortization of goodwill for the period January 1,
1996 through August 31, 1996 associated with the purchase of Landmark.
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<PAGE>
(f) Amortization of goodwill on a straight-line basis over fifteen years
associated with the purchase of Hutson.
(g) 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.
(h) Adjustment to reduce net income to determine earnings per share in the
amount of $110,000 for the year ended December 31, 1996 to reflect the
11% cumulative preferred dividend based on the net liquidation value of
the 11% cumulative, 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 Custom. [see note 2(d)].
(i) 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:
Year ended
December 31, 1996
-----------------
Shares issued by Fortress prior to the
Common Stock Offering 2,230,500
Shares issued to the stockholders of the
Founding Builders 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
Shares issued in the Offering to acquire
the Minority Interest 169,098
Weighted average remaining shares
issued to the public in the
Offering 1,256,807
Weighted average shares issued from
the Company's exercise of the
overallotment 150,000
Issuance of Class B Preferred Stock
in connection with the acquisition
of Hutson 120,000
----------
10,939,988
==========
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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 hereunto duly authorized.
THE FORTRESS GROUP, INC.
Dated: March 15, 1997 By: /s/ JAMES J. MARTELL, JR.
-----------------------------
James J. Martell, Jr.
President and Chief Executive
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