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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
Amendment No. 1
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended: June 30, 1997
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 221~2
(Address ofprincipal executive offices and zip code)
Registrant's telephone number, including area code: (703) 442-4545
Indicate by check mark whether the registrant (l) 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 9O days. Yes /X/ No
As of August 13, 1997, there were outstanding 11,745,275 shares of common
stock, par value $.01, of the registrant.
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<PAGE>
THE FORTRESS GROUP, INC.
QUARTER ENDED JUNE 30, 1997
INDEX
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1.
The Fortress Group, Inc.
Consolidated Balance Sheets 3
Consolidated Statements of Operations
(unaudited) 4
Consolidated Statements of Changes in
Shareholders' Equity (unaudited) 6
Consolidated Statements of Cash Flows
(unaudited) 7
Notes to Consolidated Financial Statements
(unaudited) 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations. 12
PART II - OTHER INFORMATION
Item 2. Changes in Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 6. Exhibits and Reports on Form 8-K. 17
(a) Exhibits.
(b) Reports on Form 8-K
SIGNATURES 18
EXHIBIT INDEX 19
2
<PAGE>
THE FORTRESS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
June 30, December 31,
1997 1996
---- ----
(unaudited)
ASSETS
Cash and cash equivalent $ 8,820 $ 16,212
Accounts receivable 10,511 10,700
Due from related parties 4,606 5,176
Real estate inventories 192,938 144,106
Property and equipment, net 6,584 3,543
Prepaid expenses and other assets 25,254 10,355
Goodwill, net 8,388 3,641
-------- --------
Total assets $257,101 $193,733
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued construction
liabilities $ 13,186 $ 8,526
Notes and mortgages payable 188,182 140,136
Due to related parties 620 27
Accrued expenses 10,626 8,525
Customer deposits 5,614 4,259
-------- --------
Total liabilities 218,228 161,473
-------- --------
Minority interest 276 274
-------- --------
Shareholders' equity
Preferred stock, $.01 par value, 1 million
shares authorized: 1
Series A 11% cumulative convertible
preferred stock, 20,000 authorized,
10,000 issued and outstanding
($1 million aggregate liquidation
preference)
Series B convertible preferred stock, 40,000
authorized, 8,854 issued and outstanding
($885,400 aggregate liquidation preference)
Series C convertible preferred stock, 70,000
authorized, 60,000 issuable (See Note 6)
Common stock, $.01 par value, 49 million
authorized, 11,805,275 and 11,762,675
issued and outstanding 118 118
Additional paid-in capital 28,415 23,808
Retained earnings 10,208 8,072
Treasury stock, at cost, 24,100 and 1,700
shares (145) (12)
-------- --------
Total shareholders' equity 38,597 31,986
-------- --------
Total liabilities and shareholders' equity $257,101 $193,733
======== ========
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
THE FORTRESS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
For the Three For the Period For the Three Months
Months ended May 21- ended June 30
June 30, 1997 June 30, 1996 1996 Pro Forma (Note 2)
------------ ------------- -----------------------
<S> <C> <C> <C>
Residential sales $104,214 $40,896 $65,095
Lot sales and other revenue 1,367 1,492 2,100
-------- ------- -------
Total revenue 105,581 42,388 67,195
Cost of sales 90,324 35,718 57,390
-------- ------- -------
Gross profit 15,257 6,670 9,805
Operating expenses:
Selling 6,959 1,863 3,709
General and administrative 5,276 1,831 3,186
Non-recurring acquisition abandonment 335 -- --
Model home reserve 410 -- --
-------- ------- -------
Net operating income 2,277 2,976 2,910
-------- ------- -------
Other expense (income):
Interest 665 36 51
Minority interest (15) 15 50
Other, net (392) (58) (232)
-------- ------- -------
Income before provision for income taxes 2,019 2,983 3,041
Provision for income taxes 764 1,125 1,150
-------- ------- -------
Net income $ 1,255 $ 1,858 $ 1,891
======== ======= =======
Net income per share $ .10 $ .19
======== =======
Weighted average shares outstanding 12,533,874 9,829,210
========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
THE FORTRESS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Pro Forma (Note 2)
Actual -------------------------
----------------------------- For the Six
For the Six For the Period Months Ended
Months Ended May 21- June 30,
June 30, 1997 June 30, 1996 1997 1996
------------- ------------- ---- ----
<S> <C> <C> <C> <C>
Residential sales $172,613 $ 40,896 $182,605 $105,880
Lot sales and other revenue 3,033 1,492 3,033 2,627
-------- -------- -------- --------
Total revenue 175,646 42,388 185,638 108,507
Cost of sales 149,922 35,718 158,408 92,143
-------- -------- -------- --------
Gross profit 25,724 6,670 27,230 16,364
Operating expenses:
Selling 11,507 1,863 11,998 6,552
General and administrative 9,532 1,831 9,835 6,367
Non-recurring acquisition abandonment 335 335
Model home reserve 410 410
-------- -------- -------- --------
Net operating income 3,940 2,976 4,652 3,445
-------- -------- -------- --------
Other expense (income):
Interest 871 36 875 99
Minority interest 2 15 2 104
Other, net (565) (58) (603) (371)
-------- -------- -------- --------
Income before provision for income taxes 3,632 2,983 4,378 3,613
Provision for income taxes 1,382 1,125 1,670 1,352
-------- -------- -------- --------
Net income $ 2,250 $ 1,858 $ 2,708 $ 2,261
======== ======== ======== ========
Net income per share $ .18 $ .21 $ .24
======== ======== ========
Weighted average shares outstanding 12,276,476 12,520,930 9,146,793
========== ========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
THE FORTRESS GROUP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited - except for December 31, 1996 balances, in thousands)
<TABLE>
<CAPTION>
Shares Amount Additional Total
----------------- ----------------- Paid-In Retained Treasury Shareholders'
Preferred Common Preferred Common Capital Earnings Stock Equity
--------- ------ --------- ------ ------- -------- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 10 11,763 $118 $23,808 $ 8,072 $ (12) $31,986
Issuance ofpreferred stock 72 $1 4,409 4,410
Redemption ofpreferred stock (3) (192) (192)
Preferred stock dividends (55) (55)
Issuance of common stock 65 349 349
Adjustment of put option 39 39
Dividends declared (59) (59)
Purchase of treasury stock (47) (275) (275)
Reissuance of treasury stock 24 2 142 144
Net income 2,250 2,250
-- ------ -- ---- ------- ------- ----- -------
Balance at June 30, 1997 79 11,805 $1 $118 $28,415 $10,208 $(145) $38,597
== ====== == ==== ======= ======= ===== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
THE FORTRESS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
<TABLE>
<CAPTION>
For the Six For the Period
Months Ended May 21-
June 30, 1997 June 30, 1996
------------- -------------
<S> <C> <C>
Cash flows from operating activities
Net income $ 2,250 $ 1,858
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Depreciation and amortization 1,388 67
Minority interest 2 15
Loss on sale of property and equipment 8
Changes in operating assets and liabilities
Accounts receivable 849 (6,716)
Due from related parties 527
Real estate inventories (14,151) 6,251
Prepaid expenses and other assets (688) (355)
Accounts payable and accrued construction liabilities (725) (1,614)
accrued expenses (245) 1,967
Customer deposits (93) (446)
--------- ---------
Net cash (used in) provided by operating activities (10,878) 1,027
--------- ---------
Cash flows from investing activities
Acquisition of homebuilders, net of acquired cash (10,002)
Purchase of property and equipment (1,780) (192)
Proceeds from sale of property and equipment 57 12
Investment in limited partnerships (3,609) --
Investment in Mortgage Company (729) --
--------- ---------
Net cash used in investing activities (16,063) (180)
--------- ---------
Cash flows from financing activities
Borrowings under notes and mortgages payable 115,607 110,898
Repayment of notes and mortgages payable (93,835) (92,976)
Related party borrowings 45
Repayments of related party borrowings (4,007)
Deferred financing costs (1,882) (1,737)
Capital distributions (29) (5,936)
Distributions to minority interest (1,274)
Preferred dividends (82) --
Purchase of treasury stock (275) --
Net proceeds from issuance of common stock 21,843
--------- ---------
Net cash provided by financing activities 19,549 26,811
--------- ---------
Net (decrease) increase in cash and cash equivalents (7,392) 27,658
Cash and cash equivalents, beginning of period 16,212 3,028
--------- ---------
Cash and cash equivalents, end of period $ 8,820 $ 30,686
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<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 companies as a group are referred to as the
Predecessor Companies.
Fortress has made additional acquisitions of Landmark Homes, Inc. (Landmark) on
August 31, 1996; Brookstone Homes. Inc. (Brookstone) on December 31, 1996; D.W.
Hutson Construction Company (Hutson) on February 28, 1997 and Wilshire Homes
(Wilshire) effective April 1, 1997.
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 be read in conjunction with the
financial statements of the Company and notes thereto included in the 1996
Annual Report on Form 10-K.
In the opinion of the Company, the accompanying consolidated financial
statements reflect all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial position of The Fortress
Group, Inc. at June 30, 1997 and the results of operations for the three and six
months ended June 30, 1997 and the period from May 21 through June 30,
1996 (actual) and cash flows for the six months ended June 30, 1997 and the
period from May 21 through June 30, 1996. Interim results are not necessarily
indicative of fiscal year performance because of the impact of seasonal and
short-term variations.
NOTE 2 - BASIS OF PRESENTATION
The consolidated balance sheet of the Company at December 31, 1996 consists of
Fortress and its subsidiaries (the Predecessor Companies and the 1996 acquired
companies, Landmark and Brookstone). The consolidated balance sheet at June 30,
1997 and the consolidated statements of operations, of shareholders' equity and
of cash flows are unaudited and include the results of Fortress, its
subsidiaries and Hutson and Wilshire.
The unaudited consolidated statements of operations for the three and six months
ended June 30, 1997 includes the actual results of Fortress and its subsidiaries
from the respective dates of their acquisitions. The unaudited pro forma
consolidated statements of operations for the three and six months ended June
30, 1996 includes the actual results of the Predecessor Companies plus pro forma
adjustments for the following items: a) adjustments for the increased expenses
for corporate operating activities related to the newly formed public entity and
b) adjustment to reflect the calculation of a provision for income taxes as if
the Predecessor companies were combined and subject to the effective federal
statutory income tax rate throughout the period. The unaudited pro forma
consolidated statement of operations for the six months ended June 30, 1997
includes actual results of Fortress and its subsidiaries from the dates of their
acquisitions plus a pro forma adjustment for the results of operations of
Hutson, a 1997 acquisition, from January 1, 1997 through the acquisition date.
The unaudited statement of cash flows for the
8
<PAGE>
period from May 21 through June 30, 1996 includes the actual results of The
Fortress Group, Inc. subsequent to formation.
Due to the substantial continuing interests in the Company of the former
stockholders of the Predecessor Companies, the acquisition in May 1996 of the
Predecessor Companies has been accounted for on a historical cost basis. The
purchase price in excess of book value of each of the acquired companies were
allocated first to record the assets and liabilities at fair value on the
acquisition date with any remaining balances recorded as goodwill.
During the second quarter, the Company terminated discussions with a potential
acquisition and, accordingly, wrote off the related accumulated acquisition
costs.
NOTE 3 - REAL ESTATE INVENTORIES
Real estate inventories are summarized as follows (in thousands):
June 30, December 31,
1997 1996
---- ----
(unaudited)
Work-in-progress:
Sold homes $ 64,916 $ 38,547
Speculative 38,080 44,669
-------- --------
Total Work-in-progress 102,996 83,216
Land:
Finished lots 44,020 34,671
Land under development 31,342 13,930
Land held for development 6,682 1,009
-------- --------
Total Land 82,044 49,610
Model homes: 7,898 11,280
-------- --------
Total $192,938 $144,106
======== ========
NOTE 4 - INTEREST
Information regarding interest is as follows (in thousands):
For the Six Months Ended June 30,
---------------------------------
1997 1996 Pro Forma
---- --------------
(unaudited) (unaudited)
During the periods:
Interest incurred $ 11,769 $ 7,788
Interest capitalized (10,895) (7,636)
Interest amortized to cost of sales 7,731 5,263
-------- -------
Total interest expensed in statement of
operations $ 8,605 $ 5,415
======== =======
At the end of the periods:
Capitalized interest in ending inventory $ 16,394 $ 9,645
======== =======
9
<PAGE>
NOTE 5 - NOTES AND MORTGAGES PAYABLE
Notes and mortgages payable consist of the following (in thousands):
June 30, December 31,
1997 1996
---- ----
(unaudited)
13.75% Senior Notes due 2003 $100,000 $100,000
Project specific land, land development and
construction loans 86,270 38,613
Other loans 1,912 1,523
-------- --------
$188,182 $140,136
======== ========
The Company pays interest on the Senior Notes in arrears on May 15 and November
15 of each year 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 to the extent of any
collateral, as well as to indebtedness of any guaranties by the Company's
subsidiaries. The Company is required to maintain a consolidated tangible net
worth of at least $15 million.
The loan agreements for project specific land, land development and construction
loans are secured by a lien on the applicable residential development project or
a specific unit under construction. Repayment of the loans are generally due
upon sale of the collateral property. The loans bear interest at annual variable
rates ranging from .5%, to 2% over prime rate.
Other loans consist primarily of debt financed corporate insurance policies
which bear interest at varying rates between 7.0% and 7.8%.
NOTE 6 - SERIES C PREFERRED STOCK
In connection with Hutson acquisition, Fortress has guaranteed the future
issuance of 60,000 shares (70,000 authorized) of Series C convertible preferred
stock on an annual basis over a period not to exceed six years ($6 million
liquidation preference). The amount of the annual issuance is based upon future
earnings of Hutson. Accordingly, the stock has been treated as outstanding for
the purpose of calculating primary earnings per share. However, the stock will
only be legally outstanding upon issuance.
NOTE 7 - MODEL HOME RESERVE
On March 31, 1997, the Company's subsidiary, Genesee, closed on a transaction
pursuant to which it sold a certain purchaser 11 model homes and concurrently
leased back the model homes. Pursuant to the terms of the sale, Genesee was to
receive cash and a note secured by a second mortgage on the model homes and by a
lien on certain other collateral. Genesee recorded in the quarter ended March
31, 1997 revenue of approximately $3 million and a gain of approximately
$410,000 with respect to the sale of the model homes.
During April, Genesee discovered that the title company handling the closing had
recorded deeds conveying the model homes to the purchasers and recorded first
mortgages securing indebtedness incurred by the purchasers in connection with
their purchase of the model homes notwithstanding the fact that the purchasers
had failed to deliver to the title company certain collateral required by the
terms of the transaction to secure the purchaser's note issued to Genesee.
10
<PAGE>
A suit has been filed in the District Court for the City and County of
Denver seeking a judicial determination of who is entitled to the proceeds of
the transaction, and Genesee has also asserted claims in the suit against the
purchasers, the title company, the brokers and a number of other participants in
the transaction seeking damages. Pending a decision in such litigation, the
remainder of the sale proceeds is being held by the court and in escrow by the
title company. Also pending the outcome of the litigation, the purchasers, based
upon Genesee's agreement to make the required payments on the first mortgage
loan, have conveyed the title to the model homes to an affiliate of Genesee,
subject to the first mortgage liens and the lease was canceled.
Given the events subsequent to the initial recording of the transaction, Genesee
has recorded a reserve in the second quarter equal to the full amount of profit
recognized.
NOTE 8 - SUBSEQUENT EVENTS
Fortress executed a definitive agreement (the Agreement), subject to
shareholder approval, with Lazard Freres Real Estate Investors, LLC (LFREI),
which commits LFREI to acquire $75 million (Aggregate Subscription Amount) of
Fortress preferred stock. The preferred stock initially consists of $35 million
of Class AA convertible preferred stock (Class AA) and $40 million of Class AB
convertible redeemable preferred stock (Class AB). The Agreement also provides
that over the two-year period following approval, as defined, Fortress may sell
to LFREI an additional combination of Class AA and Class AB totaling $25
million for which the terms are consistent with those below.
The Class AA bears a cumulative annual six percent preferred dividend which is
payable quarterly and convertible into Fortress common stock at a price of
$6.00 per common share, subject to adjustment between the fourth and sixth
anniversaries of the closing based on the market price of the common stock
during that period, or at the Company's option at any time the common stock is
trading at $12.00 per share or higher. The Class AB bears a cumulative annual
twelve percent preferred dividend which is payable quarterly and convertible
after four years into common stock at 95 percent of the then market price of
the common stock. The Class AB is redeemable after five years at Fortress's
option. Additionally, up to 1.0 million of stock warrants (based on the
Aggregate Subscription Amount), which can be exercised after two years at a
price of $7.00 per common share, are attached to the Class AB. The exercise
price and number of shares issuable upon exercise of the warrants are subject
to adjustment between the fourth and sixth anniversaries of the closing based
on the market price of the common stock during that period.
11
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The Fortress Group, Inc. was formed in June, 1995 and completed its
initial public equity and senior note offerings on May 16, 1996 (the Offerings).
Simultaneous with the closing of the Offerings on May 21, 1996, the Company
acquired, in a series of transactions, four homebuilding 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.
The Offerings provided the capital required to acquire the Founding Builders.
Fortress was founded on the belief that homebuilding is localized and
is most successful when managed by experienced local managers who have developed
in depth market knowledge and strong local relationships and that that success
can be even greater when combined with operating economies of scale and
significant sharing of operational best practices within the industry.
Consistent with the Company's stated strategy of growing through
acquisitions, the Company acquired substantially all of the assets of Landmark
Homes, Inc. (Landmark), with operations in Wilmington, North Carolina and Myrtle
Beach, South Carolina, on August 31, 1996; Brookstone Homes, Inc. (Brookstone),
with operations in the Milwaukee-Madison, Wisconsin corridor on December 31,
1996; D.W. Hutson Construction Company (Hutson), with operations in the
Jacksonville, Florida area on February 28, 1997; and Wilshire Homes, Inc.
(Wilshire), with operations in San Antonio and Austin, Texas, effective April 1,
1997 (collectively the "Acquired Builders"). The unaudited consolidated
statements of operations for the three and six months ended June 30, 1997
include the actual results of Fortress and its subsidiaries from the date of
their acquisitions. The unaudited pro forma consolidated statements of
operations for the three and six months ended June 30, 1996 include the actual
results of the Predecessor Companies plus pro forma adjustments for the
following items: a) adjustments for the increased expenses for corporate
operating activities related to the newly formed public entity and b) adjustment
to reflect the calculation of a provision for income taxes as if the Predecessor
Companies were combined and subject to the effective Federal statutory income
tax rate throughout the period.
The Company's revenues are derived primarily from the sale of the
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 and 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 concurrent with revenue recognition. Sales and marketing
costs, such as advertising and promotion expenses, as well as general and
administrative costs are recognized as expense when incurred.
The following table sets forth for the periods indicated certain items of the
Company's unaudited consolidated financial statements in dollars (expressed in
millions) and as a percentage of the Company's total revenue:
<TABLE>
<CAPTION>
Actual Pro Forma Actual Pro Forma
For the Six Months For the Six Months For the Three Months For the Three Months
Ended Ended Ended Ended
----- ----- ----- -----
June 30, 1997 June 30, 1996 June 30, 1997 June 30, 1996
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue $175.6 100.0% $108.5 100.0% $105.6 100.0% $67.2 100.0%
Gross profit 25.7 14.6% 16.4 15.1% 15.3 14.5% 9.8 14.6%
Net income 2.3 1.3% 2.3 2.1% 1.3 1.2% 1.9 2.8%
</TABLE>
12
<PAGE>
Acquisitions
Acquisition of D.W. Hutson Construction Company
On February 28, 1997, the Company acquired substantially all of the
assets of D.W. Hutson Construction Company (Hutson). Hutson is one of the
largest homebuilders in the Jacksonville, Florida market and is engaged in the
construction and sale of homes targeted for the entry level and first-time
move-up markets. The Company's actual results of operations for the three and
six month periods ended June 30, 1997 reflect the operating activity of Hutson
from the date of its acquisition.
Acquisition of Wilshire Homes, Inc.
Effective April 1, 1997, the Company acquired the stock of Wilshire
Homes, Inc. (Wilshire) and related interests. Wilshire has operations in the San
Antonio and Austin, Texas markets and is engaged in the construction and sale of
homes targeted for entry level and the first and second-time move-up markets.
The Company's actual results of operations reflect the operating activity of
Wilshire from the effective date of its acquisition.
Consolidated Results of Operations
No comparison is made to 1996 actual results due to the incomparability
of periods resulting from the Company's Offerings.
Actual for the Six Months Ended June 30, 1997 Compared to Pro Forma
Combined Predecessors for the Six Months Ended June 30, 1996.
General
The Company achieved new orders of 1,325 units for the six months ended
June 30, 1997 as compared to 875 units in the six months ended June 30, 1996, an
increase of 51.4%. This increase is attributable to the recent acquisitions and
an increase in new orders in the Company's Denver, Fort Collins and Las Vegas
operations. The Company has a combined backlog of 1,076 units with a dollar
value of $187.9 million as of June 30, 1997 as compared to 784 units with a
dollar value of $146.6 million as of June 30, 1996 which is consistent with the
increase in new orders as stated above.
Revenue
Actual revenue for the Company was $175.6 million for the six months
ended June 30, 1997 as compared to $108.5 million for the six months ended June
30, 1996. The 61.8% increase in revenue is consistent with the increase in the
number of units closed which produced 1,060 as compared to 546 for the six
months ended June 30, 1997 and 1996, respectively. This increase which
represents 95.2% is attributable to the Company's recent acquisitions, as well
as growth in revenue of the Company's Denver and Fort Collins operations.
Offsetting the effect on the revenue of the increase in units closed
was a decline in the average price of units closed, from $193,900 to $161,900
for the six months ended June 30, 1996 and 1997, respectively. This reflects the
effect of the Hutson and Brookstone acquisitions whose average price of units
closed is approximately $105,000 and $125,000 per unit, respectively.
Gross Profit
Actual gross profit for the six months ended June 30, 1997 was $25.7
million compared to $16.4 million for the same period in 1996, representing an
increase of 56.7%. As a percentage of revenue, gross profit was 14.6% for the
six months ended June 30, 1997 as compared to 15.1% for the six months ended
June 30, 1996.
13
<PAGE>
Gross margins of acquired companies Landmark and Hutson were lower than
they ordinarily would be due to amortization of inventory written up to fair
value at their respective acquisitions. Without this amortization, Fortress's
gross profit as a percentage of revenue would increase to 14.8% for the six
months ended June 30, 1997. It is anticipated that this amortization of
inventory which was written up to fair value will be fully amortized by the end
of 1997.
A concerted effort by the Company to liquidate lower profit speculative
housing inventory, particularly in its Texas markets, accounted for the
remaining decline in the margins. The Company's speculative inventory as a
percentage of total inventory was reduced from 31% at December 31, 1996 to 19.8%
as of June 30, 1997.
Operating Expenses
In June 1997, Fortress chose not to go forward with its interest in a
potential acquisition. This resulted in the expensing of approximately $335,000
of acquisition costs that had previously been capitalized. These acquisition
abandonment costs as a percentage of revenue are .2%.
Additionally, the Company has established a reserve of $410,000
relating to a first quarter 1997 sales-leaseback transaction in its Denver
operations. Subsequent to the closing of the sale, the Company discovered that
the buyer's collateral to secure our seller financing was not in place though
the title had been delivered to the buyer and all other matters to effect a
closing occurred. The Company has filed a claim against the title company and
buyer to recover all monies owed in connection with this transaction.
Without these non-recurring items, overall SG&A increased as a
percentage of revenue from 11.9% ($12.9 million) to 12.0% ($21.0 million) for
the six months ended June 30, 1996 and 1997, respectively. Selling expenses
increased from 6.1% ($6.6 million) to 6.6% ($11.5 million) while general and
administrative expenses decreased from 5.9% ($6.4 million) to 5.4% ($9.5
million) for the six months ended June 30, 1996 and 1997, respectively. The
increase in selling expenses as a percentage of revenue is attributable to
increased expenditures in the Company's Denver region to increase new orders and
Raleigh division to counteract competitive factors.
General and administrative expenses decreased as a percentage of
revenue which reflects the economies of scale and efficiencies gained as a
result of expansion through acquisitions.
Net Income
Net income for the six months ended June 30, 1997 was constant with pro
forma net income for the six months ended June 30, 1996 at $2.3 million. In
addition to the previously discussed operating income factors and non-recurring
expenses, Fortress incurred significantly higher interest expense in the first
six months of 1997. Consistent with the Company's philosophy of limiting its
land risk, the Company has continued its use of lot option deposits and has
significantly increased its investments in partnerships with land developing
entities in a limited partner capacity. While these strategies provide a highly
effective means of controlling land, the Company has incurred additional,
non-capitalizable carrying costs associated with these investments.
Actual for the Quarter Ended June 30, 1997 Compared to Pro Forma
Combined Predecessors for the Quarter Ended June 30, 1996.
General
The Company achieved new orders of 760 units for the quarter ended June
30, 1997 as compared to 389 units in the quarter ended June 30, 1996, an
increase of 95.4% reflecting the effect of the recently acquired builders.
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Revenue
Actual revenue for the Company was $105.6 million for the quarter ended
June 30, 1997 as compared to $67.2 million for the quarter ended June 30, 1996.
The 57.1% increase in revenue was primarily due to a significantly greater
number of units closed during this period in 1997 (668) versus the same period
of 1996 (337), an increase of 98.2%. The increase was attributable to the recent
acquisitions, and the Denver and Fort Collins operations.
The average price of homes sold declined from $193,200 for the second
quarter of 1996 to $156,000 for the second quarter of 1997. The recently
acquired builders have lower priced homes which reduced the average price per
unit closed accordingly.
Gross Profit
Actual gross profit for the quarter ended June 30, 1997 was $15.3
million compared to $9.8 million for the same period in 1996, representing an
increase of 56.1%. As a percentage of revenue, gross profit was 14.5% and 14.6%
for the three months ended June 30, 1997 and 1996, respectively. This decrease
is primarily the result of the gross margins of acquired companies Landmark and
Hutson being lower than they ordinarily would be due to amortization of
inventory written up to fair value at their respective acquisitions. Without
this amortization, Fortress's gross profit as a percentage of revenue would
increase to 14.7% for the quarter ended June 30, 1997.
Operating Expenses
Excluding the non-recurring items discussed in the review of the six
month operations, overall SG&A increased as a percentage of revenue from 10.3%
($6.9 million) to 11.6% ($12.2 million) for the quarter ended June 30, 1996 and
1997, respectively. Selling expenses increased from 5.5% ($3.7 million) to 6.6%
($7.0 million) and general and administrative expenses increased from 4.8% ($3.2
million) to 5.0% ($5.3 million) for the quarter ended June 30, 1996 and 1997,
respectively. As discussed in the six-month analysis, the increase in selling
expenses is attributable to increased expenditures in the Company's Denver
region to increase new orders and Raleigh division to counteract competitive
factors.
The increase in general and administrative expenses as a percentage of
revenue is attributable to increased costs incurred at the corporate level to
affect enhanced controls as the Company expands through acquisitions.
Net Income
Net income for the quarter ended June 30, 1997 was below pro forma net
income for the quarter ended June 30, 1996 decreasing to $1.3 million in 1997
from $1.9 million in 1996.
Liquidity and Capital Resources
The Company funds its residential development activities, including
land purchases and housing construction, through cash flows generated from
operations, secured borrowings and the capital raised in connection with the
initial public offerings.
Since the culmination of the initial public offering through June 30,
1997, the Company has refinanced existing loan agreements, executed newly formed
loan agreements or assumed loans resulting from the acquisitions totaling
approximately $200 million of available secured financing at the subsidiary
level. Under these credit facilities, the Company has borrowed approximately $86
million and has remaining available commitments of approximately $114 million at
June 30, 1997.
In May 1997, the Company received the written consent of registered
holders of its 13.75% Senior Notes due 2003 to proposed amendments to the
Indenture under which the Senior Notes were issued. The amendment allows the
Company the opportunity to continue to increase its secured borrowing capacity
at the
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subsidiary level. It has been the Company's experience that this financing
strategy provides lower cost borrowings and flexible terms as compared to
unsecured borrowings at the parent company level.
In August 1997, Fortress executed a definitive agreement (the
Agreement) with Lazard Freres Real Estate Investors, LLC (LFREI) which commits
LFREI to purchase $75 million (Aggregate Subscription Amount) of Fortress
preferred stock. The Agreement requires that LFREI purchase approximately $12
million (the actual amount is dependent on the market price of the common stock
on the purchase date) of Class AB preferred stock promptly after signing the
agreement but no later than September 30, 1997 (the Initial Closing).
Upon shareholder approval, LFREI will purchase an additional $25
million of Class AA and Class AB preferred stock no later than December 30,
1997. The remaining funds to purchase a combination of Class AA and Class AB
preferred stock will be drawn down in increments of not less than $10 million
through December 31, 1998. The Agreement also provides that Fortress and LFREI
may mutually agree to the purchase by LFREI of an additional combination of
Class AA and Class AB totaling approximately $25 million over the two-year
period following the Closing.
Each funding under the Agreement is subject to customary closing
conditions including government approval and, with the exception of the Initial
Closing, is subject to shareholder approval as noted above.
The Company believes that funds available through the existing credit
facilities and the LFREI agreement, coupled with the cash on hand and cash
generated through operations, will be adequate for the anticipated cash needs of
its current operations for the foreseeable future. As of June 30, 1997, the
Company had cash and cash equivalents on hand of $8.8 million.
The Company plans to continue its utilization of land options and
investments in limited land partnerships as methods of controlling and
subsequently acquiring land. The Company expects to exercise, subject to market
conditions, substantially all of its option contracts. As of June 30, 1997, the
Company had 7,037 lots under option.
The Company has and will continue to pursue its strategy to increase
operations through strategic acquisitions, as it did with Hutson and Wilshire
during the first six months of 1997. Such acquisitions may be funded through a
combination of cash, stock (common and preferred) and notes issued by the
Company. Any cash portion will be funded by cash from operations, availability
under credit facilities (existing or newly negotiated), the investment from
LFREI or a combination thereof.
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PART II - OTHER INFORMATION
Item 2. Changes in Securities.
Included in the consideration for the acquisition of Wilshire Homes
(effective April 1, 1997) was 65,000 shares of the Registrant's common stock
with an agreed value of $10 per share. The shares were issued to the seller in
the acqusition in a transaction not involving a public offering.
Item 4. Submission of Matters to a Vote of Security Holders.
The annual meeting of the Company was held on May 21, 1997. The following items
were submitted for approval and approved by the shareholders with the voting
results as noted:
With respect to the election of the directors of the Company, all management
nominees for the Board of Directors were approved as solicited in the proxy.
Each nominee received at least 10,501,571 votes. Two shareholders, representing
1,025 shares, withheld their votes from all nominees. The highest number of
shares withheld from any individual nominee was 1,025.
With respect to the proposal to increase the number of shares available under
the 1996 Stock Incentive Plan from 575,000 shares to 1,125,000 shares, 8,779,205
shares were voted for the proposal and 1,592,107 against. The proposal was
adopted.
With respect to the proposal to approve the Employee Stock Purchase Plan,
10,263,787 shares were voted for the proposal and 7,725 against. The proposal
was adopted.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Number Description
------ -----------
*4 Second Supplemental Indenture dated as of May 27, 1997.
*27 Financial Data Schedule.
(b) Reports on Form 8-K.
Form 8-K filed April 24, 1997 relating to the Senior Note
consent solicitation.
Form 8-K/A filed May 15, 1997 to amend the Form 8-K filed
March 17, 1997 relating to the acquisition of D.W. Hutson
Construction Company.
- -------------
* Previously filed.
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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: August 15, 1997 By: /s/James J. Martell, Jr.
----------------- --------------------------------
James J. Martell, Jr.
President and Chief Executive
Officer
Date: August 15, 1997 By: /s/Jamie M. Pirrello
----------------- -------------------------------
Jamie M. Pirrello
Chief Financial Officer
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EXHIBIT INDEX
Number Description Page
------ ----------- ----
*4 Second Supplemental Indenture dated as of May 27, 1997.
*27 Financial Data Schedule
- -----------
* Previously filed.
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