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: March 31, 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 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 May 12, 1997, there were outstanding 11,829,309 shares of common
stock, par value $.01, of the registrant.
1
<PAGE>
THE FORTRESS GROUP, INC.
QUARTER ENDED MARCH 31, 1997
INDEX
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1.
The Fortress Group, Inc.
Consolidated Balance Sheet 3
Consolidated Statement of Operations
(unaudited) 4
Consolidated Statement of Changes in
Shareholders' Equity (unaudited) 5
Consolidated Statement of Cash Flows
(unaudited) 6
Notes to Consolidated Financial Statements
(unaudited) 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations. 10
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K. 16
(a) Exhibits.
(b) Reports on Form 8-K.
SIGNATURES 17
EXHIBIT INDEX 18
2
<PAGE>
THE FORTRESS GROUP, INC.
CONSOLIDATED BALANCE SHEET
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
ASSETS
March 31, December 31,
1997 1996
-------- ------------
(unaudited)
<S> <C> <C>
Cash and cash equivalents $ 12,212 $ 16,212
Accounts receivable 11,523 10,700
Due from related parties 6,202 5,176
Real estate inventories 164,057 144,106
Property and equipment, net 4,593 3,543
Prepaid expenses and other assets 19,685 10,355
Goodwill, net 8,528 3,641
---------- ---------
Total assets $226,800 $193,733
========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and construction liabilities $ 10,603 $ 8,526
Notes and mortgages payable 162,023 140,136
Due to related parties 79 27
Accrued expenses 8,951 8,525
Customer deposits 5,515 4,259
---------- ---------
Total liabilities 187,171 161,473
---------- ---------
Minority interest 291 274
---------- ---------
Shareholders' equity
Preferred Series A stock, $.01 par value, 2 million shares
authorized, 10,000 issued and outstanding ($1 million
aggregate liquidation preference)
Preferred Series B stock, $.01 par value, 40,000 shares
authorized, 12,000 shares issued and outstanding ($1.2
million aggregate liquidation preference)
Preferred Series C Stock, $.01 par value, 70,000 shares 1
authorized, 60,000 shares issued and outstanding
($6 million aggregate liquidation preference)
Common stock, $.01 par value, 50 million authorized,
11,764,309 and 11,762,675 issued and outstanding 118 118
Additional paid-in capital 30,209 23,808
Retained earnings 9,010 8,072
Treasury stock, at cost, 66 and 1,700 shares (12)
---------- --------
Total shareholders' equity 39,338 31,986
---------- --------
Total liabilities and shareholders' equity $226,800 $193,733
========== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
THE FORTRESS GROUP, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited, dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
-------------------------------------------------------------
1996 Pro Forma
Combined
Predecessor
1997 1997 Pro Forma Companies
---------- --------------- ----------
<S> <C> <C> <C>
Revenue:
Residential sales $ 68,399 $ 78,391 $ 40,785
Lot sales 1,666 1,666 477
Other revenue 50
--------- ---------- ---------
Total revenue 70,065 80,057 41,312
Cost of sales 59,598 68,084 34,753
---------- ---------- ---------
Gross profit 10,467 11,973 6,559
Operating expenses:
Selling expenses 4,548 5,039 2,843
General and administrative expenses 4,256 4,559 3,181
---------- ---------- ---------
Net operating income 1,663 2,375 535
Other expense (income):
Interest 206 210 48
Minority interest 17 17 54
Other, net (173) (211) (139)
---------- ---------- ---------
Income before provision for income taxes 1,613 2,359 572
Provision for income taxes 618 906 202
---------- ---------- ---------
Net income $ 995 $ 1,453 $ 370
========== ========== =========
Net income per share $ .08 $ .12 $ .04
========== ========== =========
Weighted average shares outstanding 11,799,874 11,879,874 8,464,375
========== ========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements
4
<PAGE>
THE FORTRESS GROUP, INC.
CONSOLIDATED STATEMENT 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> <C>
Balance at December 31, 1996 10 11,763 $118 $23,808 $ 8,072 $(12) $31,986
Issuance of preferred stock 72 $ 1 6,399 6,400
Preferred stock dividends (27) (27)
Dividends declared (30) (30)
Purchase of stock (23) (130) (130)
Reissuance of treasury stock 24 2 142 144
Net income 995 995
-- ---- ---- ---- ------- -------- ---- -----
Balance at March 31, 1997 82 11,764 $ 1 $118 $30,209 $ 9,010 $ 0 $39,338
=== ======= ====== ==== ======= ======== ==== =======
</TABLE>
5
<PAGE>
THE FORTRESS GROUP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited, in thousands)
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
------------------------------------
1996
Combined
1997 Predecessor Companies
---- ---------------------
<S> <C> <C>
Cash flows from operating activities
Net income $ 995 $ 986
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization 619 151
Minority interest 17 54
Loss on sale of property and equipment 11
Changes in operating assets and liabilities
Related parties and other receivables (489) (565)
Real estate inventories (3,068) (10,543)
Prepaid expenses and other assets (1,876) (300)
Accounts payable and accrued construction liabilities (451) (1,319)
Accrued expenses 224 (812)
Customer deposits 537 1,483
--------- -------
Net cash used in operating activities (3,481) (10,865)
--------- -------
Cash flows from investing activities
Acquisition of Hutson, net of acquired cash (8,946)
Purchase of property and equipment (888) (27)
Proceeds from sale of property and equipment 41 10
---------- --------
Net cash used in investing activities (9,793) (17)
---------- --------
Cash flows from financing activities
Borrowings under notes and mortgages payable 47,849 34,204
Repayment of notes and mortgages payable (38,418) (23,143)
Related party borrowings 584
Repayments of related party borrowings (27) (837)
Capital contributions 83
Capital distributions (694)
Purchase of treasury stock (130)
Transaction costs (328)
---------- ---------
Net cash provided by financing activities 9,274 9,869
---------- ---------
Net decrease in cash and cash equivalents (4,000) (1,013)
Cash and cash equivalents, beginning of period 16,212 2,710
---------- --------
Cash and cash equivalents, end of period $ 12,212 $ 1,697
========== ========
</TABLE>
The accompanying notes are an integral part of these financial statements
<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
and D.W. Hutson Construction Company ("Hutson") on February 28, 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 unaudited financial statements
reflect all adjustments (which include only normal recurring adjustments)
necessary to present fairly the financial position of The Fortress Group, Inc.
at March 31, 1997 and the results of operations for the three months ended March
31, 1997 (actual and pro forma) and 1996 (pro forma) and cash flows for the
three months ended March 31, 1997 and 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
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 March 31,
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 from the date of acquisition.
The unaudited pro forma consolidated statement of operations for the three
months ended March 31, 1997 includes the actual results of Fortress and its
subsidiaries from the date of their acquisitions plus a pro forma adjustment for
the results of operations of 1997 acquired company Hutson from January 1, 1997
through acquisition date. The unaudited pro forma consolidated statement of
operations for the three months ended March 31, 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 statement of cash flows for the three
months ended March 31, 1996 includes the actual results of the Predecessor
Companies.
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 prices of the acquired companies Landmark, Brookstone, and Hutson in
excess of book value
7
<PAGE>
were allocated first to record the assets and liabilities at fair value on
acquisition date; the remaining purchase prices were recorded as goodwill.
NOTE 3 - REAL ESTATE INVENTORIES
Real estate inventories are summarized as follows (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
---- ----
(unaudited)
<S> <C> <C>
Work-in-progress $ 94,529 $ 83,216
Model homes 6,314 11,280
Finished lots 38,065 34,671
Land under development 23,921 13,930
Unimproved land held for development 1,228 1,009
--------- --------
$ 164,057 $144,106
========= ========
</TABLE>
NOTE 4- INTEREST
Information regarding interest is as follows (in thousands):
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
-----------------------------------
1997 1996
---- ----
(unaudited) (unaudited)
<S> <C> <C>
During the periods:
Interest incurred $ 5,002 $ 3,377
Interest capitalized ( 4,796) ( 3,329)
Interest amortized to cost of sales 3,195 2,005
-------- --------
Total interest expensed in statement of operations $ 3,401 $ 2,053
======== ========
At the end of the periods:
Capitalized interest in ending inventory $ 13,985 $ 8,644
======== ========
</TABLE>
NOTE 5 - NOTES AND MORTGAGES PAYABLE
Notes and mortgages payable consist of the following (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
---- ----
(unaudited)
<S> <C> <C>
13.75% Senior Notes due 2003 $ 100,000 $100,000
Project specific land, land development and
construction loans 59,786 38,613
Other loans 2,237 1,523
--------- --------
$ 162,023 $140,136
========= ========
</TABLE>
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
8
<PAGE>
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 6.9%.
NOTE 6 - SUBSEQUENT EVENTS
Aquisitions
Effective April 1, 1997, the Company acquired the stock of and related
partnership interests in Wilshire Homes, a homebuilding company operating
in the areas of Austin and San Antonio, Texas. The final purchase price was
approximately $16.7 million, comprised of approximately $2.9 million in
cash and common stock and debt assumption of approximately $13.8 million.
In April 1997, the Company signed a definitive agreement to acquire the
stock of and the related interests in Woodside Homes Corporation
("Woodside"). The transaction price of $126.5 million consists of $67.5
million in cash, $2.5 million in notes, $2.5 million in options for The
Fortress Group, Inc.'s common stock and $54.0 million in assumed debt. The
Company intends to finance the cash portion of the transaction through the
issuance of $25.0 million in convertible preferred stock and up to $42.5
million in newly issued senior notes. The Company is currently negotiating
these facilities. Woodside, based in Salt Lake City, Utah, has homebuilding
operations in Utah, Nevada, and Arizona.
Senior Note Indenture
In April, 1997, the Company began soliciting 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
proposed amendments are intended to give the Company greater flexibility to
continue its growth strategy.
The Genesee Company
On March 31, 1997, the company's subsidiary, The Genesee Company
("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.
Certain of the funds paid at closing have been disbursed to brokers,
counsel and others. 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. Genesee understands
that the title company maintains liability insurance, and the insurer has
been notified of Genesee's claim. Accordingly, no reserve or adjustment has
been made to the foregoing financial statements to reflect the uncertainty
with respect to its claims in connection with the transaction.
9
<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. Simultaneously
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.
The Company 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.
Consistent with the Company's stated strategy of growing through
acquisitions, on August 31, 1996, the Company acquired substantially all of the
assets of Landmark Homes, Inc.("Landmark"), which has operations in Wilmington,
North Carolina and Myrtle Beach, South Carolina. On December 31, 1996, the
Company acquired substantially all of the assets of Brookstone Homes,
Inc.("Brookstone"), which has operations in the Milwaukee-Madison, Wisconsin
corridor. On February 28, 1997 the Company acquired substantially all of the
assets of D.W.Hutson Construction Company ("Hutson"), which operates in the
Jacksonville, Florida area. The unaudited pro forma consolidated statement of
operations for the three months ended March 31, 1997 includes the actual results
of Fortress and its subsidiaries from the date of their acquisitions plus a pro
forma adjustment for the results of operations of 1997 acquired company, Hutson
from January 1, 1997 through acquisition date. The unaudited pro forma
consolidated statement of operations for the three months ended March 31, 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 statement of cash
flows for the three months ended March 31, 1996 includes the actual results of
the Predecessor Companies.
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, 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.
10
<PAGE>
THE FORTRESS GROUP, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited, dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Combined Predecessor
Companies
Actual Pro Forma Pro Forma
For the Three Months For the Three Months For the Three Months
Ended Ended Ended
March 31, 1997 March 31, 1997 March 31,1996
------------------------ ------------------------ --------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenue $ 70,065 100.0% $80,057 100.0% $ 41,312 100.0%
Cost of sales 59,598 85.1% 68,084 85.0% 34,753 84.1%
--------- ----- ------- ----- -------- -----
Gross profit 10,467 14.9% 11,973 15.0% 6,559 15.9%
--------- ----- ------- ----- -------- -----
Operating expenses
Selling 4,548 6.5% 5,039 6.3% 2,843 6.9%
General and administrative 4,256 6.1% 4,559 5.7% 3,181 7.7%
--------- ----- ------- ----- -------- -----
8,804 12.6% 9,598 12.0% 6,024 14.6%
--------- ----- ------- ----- -------- -----
Net operating income 1,663 2.4% 2,375 3.0% 535 1.3%
Other non-operating
(Income) expense
Interest expense 206 0.3% 210 0.3% 48 0.1%
Minority interest 17 0.0% 17 0.0% 54 0.1%
Other, net (173) -0.2% (211) -0.3% (139) -0.3%
--------- ----- ------- ----- -------- -----
50 0.1% 16 0.0% (37) -0.1%
--------- ----- ------- ----- -------- -----
Income before provision for
income taxes 1,613 2.3% 2,359 2.9% 572 1.4%
--------- ----- ------- ----- -------- -----
Provision for income taxes 618 0.9% 906 1.1% 202 0.5%
--------- ----- ------- ----- -------- -----
Net income $ 995 1.4% $ 1,453 1.8% $ 370 0.9%
========= === ========= === ======== ===
Earnings per share $ .08 $ .12 $ .04
========= ========= ========
Weighted average shares
outstanding 11,799,874 11,879,874 8,464,375
========== ========== =========
</TABLE>
Consolidated Results of Operations
Acquisition of D.W. Hutson Construction Company
On February 28, 1997, the Company acquired substantially all of the assets
of 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
11
<PAGE>
of operations reflect the operating activity of Hutson from the date of its
acquisition. The Pro forma results of operations for the first quarter of 1997
include the results of Hutson as if they had been acquired as of January 1,
1997.
Actual for the Three Months Ended March 31, 1997 Compared to Pro Forma
Combined Predecessors for the Three Months Ended March 31, 1996.
General
The Company achieved new orders of 565 units for the three months ended
March 31, 1997 as compared to 489 units in the three months ended March 31,
1996, an increase of 15.54% . While the addition of the acquired builders was
the predominant reason for the increase, several of the Founding Builder
operations - Las Vegas and Denver - achieved higher new orders in the first
quarter of 1997 than in the first quarter of 1996. The Company has a combined
backlog of 899 units, with a dollar volume of $150.4 million as of March 31,
1997 as compared to 736 units, with a dollar volume of $141.1 million as of
March 31, 1996.
Revenue
Actual revenue for the Company was $70.1 million for the three months
ended March 31, 1997 as compared to $41.3 million for Combined Predecessors for
the three months ended March 31, 1996. The 69.7% increase in revenue was
primarily due to a significantly greater number of units closed in the first
quarter of 1997 (398) versus the same period of 1996 (212), an increase of
87.7%. The increase was attributable to the Company's acquisitions, as well as
growth in the predessor companies. Most notable was the Company's Colorado
operation, which experienced a 145% increase in the number of units closed from
the first quarter of 1996 to the same period of 1997.
Offsetting the increase in units closed was a decline in the average
price of homes sold, from $192,400 for the three months ended March 31, 1996 to
$171,900 for the three months ended March 31, 1997. The lower-priced products
offered by the Company's acquired builders had the effect of skewing the average
price downward.
Also contributing to the increase in revenue from the first quarter of
1996 to the first quarter of 1997 was a $1.2 million increase in revenue from
lot-only sales.
Gross Profit
Actual gross profit for the three months ended March 31, 1997 was $10.5
million compared to $6.6 million for the same period in 1996, representing an
increase of 59.1%. The increase, in revenue discussed above was partially offset
by lower margins. As a percentage of revenue, gross profit was 14.9% for the
three months ended March 31, 1997 as compared to 15.9% for the three months
ended March 31, 1996. A concerted effort by the Company to liquidate its
speculative housing inventory by reducing prices, particularly in its Texas
markets, accounted for much of the decline in the margins. In addition, 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.
Operating Expenses
The Company's selling, general and administrative expenses ("SG&A") for
the three months ended March 31, 1997 were $8.8 million as compared to $6.0
million for the same period in 1996, representing an increase of 46.7%. The
increase was primarily due to overall growth of the Company by
12
<PAGE>
virtue of its acquisitions. Notwithstanding the addition of new operations, SG&A
expenses are relatively fixed in nature, which allowed the Company to take
advantage of operating efficiencies as revenues increased from 1996 to 1997. As
a percentage of revenue, SG&A expenses decreased from 14.6% in the first three
months of 1996 to 12.6% for the same period of 1997.
Taxes
The provision for income taxes for the three months ended March 31,
1997 was $.6 million as compared to a pro forma provision of $.2 million for the
same period in 1996. The effective tax rate for the three months ended March 31,
1997 was 38.3% versus 35.3% for the three months ended March 31, 1996. The
difference in the effective rate was due to the lower percentage of pre-tax
income being generated by the Company's Las Vegas operation in 1997 (Nevada has
no state income tax). Also adding to the increase in the effective rate is that
the Company is expected to move up to a higher Federal tax bracket in 1997
because of its revenue growth.
Net Income
Actual net income for the three months ended March 31, 1997 was $1.0
million as compared to $370,000 for the three months ended March 31, 1996,
representing an increase of 170%, because of the combination of factors
discussed above.
Pro Forma for the Three Months Ended March 31, 1997 Compared to Pro Forma
Combined Predecessors for the Three Months Ended March 31, 1996.
General
The Company achieved new orders of 719 on a pro forma basis for the three
months ended March 31, 1997. This represents a 47% increase over the 489 new
orders achieved by the Combined Predecessors for the same period of 1996. While
the addition of the acquired builders was the predominant reason for the
increase, several of the Founding Builder operations - Las Vegas and Denver -
achieved higher new orders in the first quarter of 1997 than in the first
quarter of 1996.
Revenue
Pro forma revenue was $80.1 million for the three months ended March 31,
1997, as compared to $41.3 million for the pro forma Combined Predecessors for
the three months ended March 31, 1996. This 93.8% increase in revenue was
primarily due to a 132.1% increase in the number of homes closed, from 212 in
the first three months of 1996 to 492 for the same period of 1997. Collectively,
the Founding Builders accounted for 34% of the increase in closings, with the
rest of the increase attributed to the growth of the Company through
acquisitions.
Offsetting the increase in units closed was a decline in the average
price of homes sold, from $192,400 for the three months ended March 31, 1996 to
$159,300 for the same period of 1997. The lower-priced products offered by the
Company's acquired builders, particularly Hutson, had the effect of skewing the
average price downward.
13
<PAGE>
Gross Profit
Pro forma gross profit for the three months ended March 31, 1997 was
$12.0 million as compared to $6.6 million for the same period of 1996,
representing an increase of 81.8%. The increase in increased revenue discussed
above was partially offset by lower margins. As a percentage of revenue, gross
profit was 15.0% for the first three months of 1997, as compared to 15.9% for
the same period of 1996. A concerted effort by the Company to liquidate its
speculative housing inventory by reducing prices, particularly in its Texas
markets, accounted for much of the decline in the margins. In addition, 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.
Operating Expenses
The Company's Pro forma SG&A expenses for the three months ended March
31, 1997 were $9.6 million as compared to $60 million for the three months ended
March 31, 1996, representing an increase of 60%. The increase was primarily due
to overall growth of the Company by virtue of its acquisitions. Notwithstanding
the addition of new operations, SG&A expenses are relatively fixed in nature,
which allowed the Company to take advantage of operating efficiencies as
revenues increased from 1996 to 1997. As a percentage of revenue, SG&A expenses
decreased from 14.6% in the first three months of 1996 to 12.0% for the first
three months of 1997.
Taxes
The Pro forma provision for income taxes for the three months ended
March 31, 1997 was $.9 million as compared to $.2 million for the three months
ended March 31, 1996. The effective rate for the three months of 1997 was 38.4%
as compared to 35.3% for the three months of 1996. The difference in the
effective rate was due to the lower percentage of pre-tax income being generated
by the Company's Las Vegas operation in 1997 (Nevada has no state income tax).
Also adding to the increase in the effective rate is that the Company is
expected to move up to a higher Federal tax bracket in 1997 because of its
revenue growth.
Net Income
Pro forma combined net income for the three months ended March 31, 1997
was $1.5 million as compared to $370,000 for the three months ended March 31,
1996, representing an increase of 305%, due to the combination of factors
discussed above.
Liquidity and Capital Resources
The Company funds its residential development activities, including
land purchases and housing construction, through cash flows generated from
operations, public debt and equity markets and secured borrowings.
As of the Offering date, the Company had existing credit facilities
through the Founding Builders which had outstanding borrowings, prior to any
repayment of approximately $112 million. The Company has or is in the process of
re-negotiating the terms of these existing credit facilities to provide more
flexible terms and improved pricing. As of March 31, 1997, the Company, through
its subsidiaries, had entered into new credit facilities with total commitments
of $85 million. The Company anticipates entering into additional credit
facilities with total commitments of $41 million. As of March 31, 1997, the
Company has drawn $28.7 millions against these facilities.
14
<PAGE>
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 the anticipated cash needs of
its current operations for the foreseeable future. As of March 31, 1997 the
Company had cash and cash equivalents on hand of $12.2 million.
The Company plans to continue its utilization of land options as a
method of controlling and subsequently acquiring land. The Company expects to
exercise, subject to market conditions, substantially all of its option
contracts. As of March 31, 1997, the Company had 7.009 lots under option.
The Company has and will continue to pursue its strategy to increase
operations through strategic acquisitions, as it did with Hutson in the first
quarter of 1997. Such acquisitions may be funded through a combination of cash,
stock (common and preferred) 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.)
In April 1997, the Company signed a definitive agreement to acquire the
stock of and the related interests in Woodside Homes Corporation ("Woodside").
The transaction price of $126.5 million consists of $67.5 million in cash, $25
million in notes, $2.5 million in notes, $2.5 million in options for The
Fortress Group, Inc's common stock and $54.0 million in assumed debt. The
Company intends to finance the cash portion of the transaction through the
issuance of $25.0 million in convertible preferred stock and up to $42.5 million
in newly issued senior notes. The Company is currently negotiating these
facilities. Woodside, based in Salt Lake City, Utah, has homebuilding operations
in Utah, Nevada, and Arizona.
In April, 1997, the Company began soliciting 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 proposed amendments
are intended to give the Company greater flexibility to continue its growth
strategy.
15
<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 March 17, 1997 (Date of event: February 28,
1997) relating to the acquisition of D.W. Hutson Construction
Company.
16
<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: May 15, 1997 By: /s/ James J. Martell, Jr.
--------------------------
James J. Martell, Jr.,
President and Chief Executive Officer
Date: May 15, 1997 By: /s/ Jamie M. Pirrello
----------------------
Jamie M. Pirrello,
Chief Financial and Accounting Officer
17
<PAGE>
EXHIBIT INDEX
27 Financial Data Schedule
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORTRESS
GROUP, INC. CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1997 AND FROM THE
FORTRESS GROUP, INC. CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS
ENDED MARCH 31, 1997.
</LEGEND>
<CIK> 0001010607
<NAME> The Fortress Group, Inc.
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<CURRENCY> U.S.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-1-1997
<PERIOD-END> MAR-31-1997
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<CASH> 12,212
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0
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