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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
AMENDMENT NO. 1
Current Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
August 27, 1997
-----------------------------------------------
Date of Report (Date of earliest event reported)
THE FORTRESS GROUP, INC.
----------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 0-28024 54-1774997
- --------------------------------- ------------ -------------------
(State or other jurisdiction (Commission (IRS Employer
of incorporation or organization) File No.) Identification No.)
1650 Tysons Blvd, Suite 600, McLean, VA 22102
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(Address of principal executive offices and zip code)
(703) 442-4545
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(Registrant's telephone number, including area code)
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<PAGE>
The undersigned registrant, in order to provide the financial statements
required to be included in the Current Report on Form 8-K dated August 27, 1997
in connection with the acquisition of the stock of Don Galloway Homes, Inc. and
related interests, hereby amends the following item, or other portions of such
Current Report of 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.
(a) Financial Statements of Business Acquired. The following financial
statements of the acquired business, Don Galloway Homes, Inc. and related
interests, are submitted herewith on the indicated pages.
<TABLE>
<S> <C>
Report of Independent Accountants 4
Combined Balance Sheets as of December 31, 1996, June 30, 1997 (unaudited)
and June 30, 1996 (unaudited) 5
Combined Statements of Operations for the Year Ended December 31, 1996 and
the Six Months Ended June 30, 1997 (unaudited) and 1996 (unaudited) 6
Combined Statements of Changes in Stockholder's and Members' Equity as of
December 31, 1996 and June 30, 1997 (unaudited) 7
Combined Statements of Cash Flows for the Year Ended December 31, 1996 and
the Six Months Ended June 30, 1997 (unaudited) and 1996 (unaudited) 8
Notes to Combined Financial Statements 9
(b) Pro Forma Financial Data. The following unaudited pro forma combined
financial information of The Fortress Group, Inc. and Don Galloway Homes,
Inc. and related interests are submitted herewith on the indicated pages.
Introduction to Pro Forma Financial Data 16
Pro Forma Consolidating Statement of Operations for the Year Ended December
31, 1996 (unaudited) 17
Pro Forma Consolidating Statement of Operations for the Nine Months Ended
September 30, 1997 (unaudited) 18
Notes to Pro Forma Consolidating Financial Data 19
</TABLE>
2
<PAGE>
Item 7. Financial Statements and Exhibits.
(a) Financial Statements of Business Acquired.
3
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholder and Members of
Don Galloway Homes, Inc. and Affiliates
In our opinion, the accompanying combined balance sheet and the related combined
statements of operations, of changes in stockholder's and members' equity and of
cash flows present fairly, in all material respects, the financial position of
Don Galloway Homes, Inc. and Affiliates at December 31, 1996, and the results of
their operations and their cash flows for the year, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
- ------------------------
Charlotte, North Carolina
October 10, 1997
4
<PAGE>
DON GALLOWAY HOMES, INC. AND AFFILIATES
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
Assets December June 30, June 30,
31, 1996 1997 1996
------------ ------------ -------------
(unaudited) (unaudited)
<S> <C> <C> <C>
Cash and cash equivalents................................ $ 1,897,431 $ 1,503,946 $ 1,011,122
Accounts receivable...................................... 457,669 1,497,698 34,452
Due from related party................................... 112,812 - 206,818
Real estate inventories.................................. 20,345,162 22,504,722 20,101,301
Prepaid assets........................................... 27,149 21,012 38,659
Equipment and furniture, net of accumulated depreciation
of $225,801, $198,011 and $223,252, respectively....... 108,940 222,533 75,770
Other assets............................................. 457,996 745,578 436,475
----------- ------------ ------------
$23,407,159 $ 26,495,489 $ 21,904,597
----------- ------------ ------------
Liabilities and Stockholder's and Members' Equity
Accounts payable and accrued construction liabilities.... $ 3,449,074 $ 3,326,940 $ 2,557,434
Notes payable............................................ 13,406,064 16,908,904 15,117,705
Customer deposits........................................ 607,735 631,813 548,309
Other accrued expenses................................... 474,773 351,037 377,036
----------- ------------ ------------
Total liabilities............................... 17,937,646 21,218,694 18,600,484
----------- ------------ ------------
Stockholder's and members' equity:
Common stock.......................................... 21,807 23,807 21,807
Paid-in capital....................................... 4,500 2,500 4,500
Retained earnings..................................... 5,443,206 5,250,488 3,277,806
----------- ------------ ------------
Total stockholder's and members' equity......... 5,469,513 5,276,795 3,304,113
----------- ------------ ------------
$23,407,159 $ 26,495,489 $ 21,904,597
=========== ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
DON GALLOWAY HOMES, INC. AND AFFILIATES
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended For the six For the six
December 31, months ended months ended
1996 June 30, 1997 June 30, 1996
------------ ------------- --------------
(unaudited) (unaudited)
<S> <C> <C> <C>
Sales............................................... $ 57,123,396 $ 33,917,201 $ 25,804,154
Cost of sales....................................... 46,205,095 26,322,598 21,029,441
------------ ------------ ------------
Gross profit........................................ 10,918,301 7,594,603 4,774,713
Operating expense:
General and administrative expenses.............. 2,059,347 1,269,767 1,034,344
Marketing and selling expenses................... 3,460,950 1,876,673 1,587,924
------------ ------------ ------------
Total operating expense.................... 5,520,297 3,146,440 2,622,268
Other income/(expense):
Interest income/(expense)........................ (553,213) (221,555) (293,497)
Other income/(expense)........................... 153,752 105,674 24,318
------------ ------------ ------------
Total other income/(expense)......... (399,461) (115,881) (269,179)
============ ============ ============
Net income.......................................... $ 4,998,543 $ 4,332,282 $ 1,883,266
============ ============ ============
Unaudited pro forma net income (Note 10)............ $ 3,099,097
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
DON GALLOWAY HOMES, INC. AND AFFILIATES
COMBINED STATEMENTS OF CHANGES IN STOCKHOLDER'S AND MEMBERS' EQUITY
<TABLE>
<CAPTION>
Common Paid-in Retained
Stock Capital Earnings Total
-------- ------- ----------- ---------
<S> <C> <C> <C> <C>
Balance, December 31, 1995........................ $ 21,807 $ 3,500 $ 2,945,411 2,970,718
Contributions of capital.......................... 1,000 -- 1,000
Distributions to stockholder/members.............. -- -- (2,500,748) (2,500,748)
Net income........................................ -- -- 4,998,543 4,998,543
-------- ------- ----------- ---------
Balance, December 31, 1996........................ 21,807 4,500 5,443,206 5,469,513
(Unaudited)
Distributions to stockholder/members.............. -- -- (4,525,000) (4,525,000)
Transfer of paid-in capital of Don
Galloway Homes of North Carolina,
LLC and Don Galloway Homes of
South Carolina, LLC to members................... -- (2,000) -- (2,000)
Issuance of 1,000 shares of Common
Stock, $1.00 par and value, of Don
Galloway Homes of North Carolina,
Inc. and Don Galloway Homes of
South Carolina, Inc., respectively.............. 2,000 -- -- 2,000
Net income........................................ -- -- 4,332,282 4,332,282
-------- ------- ---------- ----------
Balance, June 30, 1997............................ $ 23,807 $ 2,500 $5,250,488 $5,276,795
-------- ------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
DON GALLOWAY HOMES, INC. AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended For the six For the six
December 31, months ended months ended
1996 June 30, 1997 June 30, 1996
------------ ------------- -------------
(unaudited) (unaudited)
<S> <C> <C> <C>
Cash flows from operating activities
Net income................................................ $ 4,998,543 $ 4,332,282 $1,883,265
Adjustments to reconcile net income to net cash
provided by
operating activities:
Depreciation and amortization expense................... 33,215 24,938 16,180
Gain on sale of equipment and furniture................. (9,133) (5,877) (9,240)
Changes in operating assets and liabilities:
Decrease (increase) in:
Due from related party.............................. 38,376 112,812 (55,630)
Accounts receivable................................. (452,746) (1,040,029) (29,529)
Real estate inventories............................. (825,543) (2,159,559) (581,682)
Prepaid and other assets............................ (126,769) (281,445) (116,757)
Increase (decrease) in:
Accounts payable and accrued
construction liabilities.......................... 1,585,024 (122,134) 693,384
Other accrued expenses.............................. 98,254 (123,736) 517
Customer deposits................................... 237,719 24,078 178,293
------------ ----------- ----------
Net cash provided by operating activities........... 5,576,940 761,330 1,978,801
------------ ----------- ----------
Cash flows from investing activities
Proceeds from sale of equipment and furniture............. 11,585 10,500 11,585
Purchases of equipment and furniture...................... (63,779) (143,155) (6,156)
------------ ----------- ----------
Net cash used in investing activities............... $ (52,194) $ (132,655) $ 5,429
------------ ----------- ----------
Cash flows from financing activities
Borrowings under notes payable............................ 37,902,393 25,957,030 17,184,385
Repayments of notes payable............................... (39,540,292) (22,454,190) (17,268,077)
Distributions to shareholder/members...................... (2,400,000) (4,525,000) (1,300,000)
------------ ----------- ------------
Net cash used in financing activities............... (4,037,899) (1,022,160) (1,383,692)
------------ ----------- -----------
Increase (decrease) in cash and cash equivalents.......... 1,486,847 (393,485) 600,538
Cash and cash equivalents, beginning of year.............. 410,584 1,897,431 410,584
------------ ----------- ------------
Cash and cash equivalents, end of year.................... $ 1,897,431 $ 1,503,946 $ 1,011,122
------------ ----------- ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
DON GALLOWAY HOMES, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
1. Business and Organization
General
The accompanying combined financial statements consist of the accounts of
Don Galloway Homes, Inc. combined with those of Don Galloway Homes of North
Carolina, Inc. (formerly Don Galloway Homes of North Carolina, LLC), Don
Galloway Homes of South Carolina, Inc. (formerly Don Galloway Homes of South
Carolina, LLC), Don Galloway Land, LLC and Thornblade, LLC (collectively
referred to as the "Company"). These entities are related through common
ownership and management. See Note 2 for additional discussion.
The Company is engaged primarily in the construction and sale of
single-family residential property in North Carolina and South Carolina. The
Company designs, builds, and sells single-family houses on finished lots, which
it purchases ready for home construction or which it develops. The Company also
purchases undeveloped land to develop finished lots for future construction of
single-family houses.
Effective August 1, 1997, the Company and its stockholder entered into a
definitive agreement with The Fortress Group, Inc. ("Fortress") pursuant to
which the Company was acquired by Fortress (the "Acquisition"). All outstanding
shares of the Company were exchanged for cash and shares of Fortress' Preferred
stock.
2. Summary of Significant Accounting Policies:
Principles of Combination
The combined financial statements include the accounts of the entities
described in Note 1. Don Galloway Homes, Inc. is owned by a sole stockholder
(the "Stockholder"). Don Galloway Homes of North Carolina, Inc., Don Galloway
Homes of South Carolina, Inc. are 100% owned by Don Galloway Homes, Inc.
Thornblade, LLC is 99% owned by the Stockholder. Don Galloway Land, LLC is 99%
owned by Galloway Limited Partnership, which is owned by outside parties,
including the Stockholder. All significant intercompany accounts and
transactions have been eliminated in combination.
Estimates by Management
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
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 sold 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 liability until closing.
9
<PAGE>
DON GALLOWAY HOMES, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
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 application of discounting 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. At the time of revenue recognition,
cost of sales is charged with the actual construction costs incurred and any
estimate to complete, plus an allocation of the total estimated cost of land and
land development, interest, real estate taxes and any other capitalizable common
costs.
Interest Capitalization
Interest and related debt issuance costs are capitalized to qualifying
real estate inventories as incurred, in accordance with SFAS No. 34,
"Capitalization of Interest Cost," and charged to cost of sales as revenue from
residential sales is recognized. The interest and related debt issuance costs
capitalized are based on the Company's outstanding borrowings associated with
the acquisition, development and construction of the qualified real estate
inventory. The amount of financing costs capitalized does not exceed those costs
incurred for any year presented in the accompanying combined financial
statements. Interest incurred and capitalized during the year was $1,526 and
$879, respectively (in thousands).
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 five to eight years. Significant
additions and improvements are capitalized, while expenditures for repairs and
maintenance are charged to operations as incurred.
Other Assets
Other assets include deposits paid on options to purchase developed lots
of approximately $453,000 as discussed in Note 9.
Income Taxes
As of December 31, 1996, Don Galloway Homes, Inc. was a Subchapter S
corporation and the remaining affiliates, as discussed in Note 1, were limited
liability corporations ("LLC") for income tax purposes. Accordingly, any income
tax liabilities are the responsibility of the Company's Stockholder and members.
In connection with a change in tax laws, Don Galloway Homes of North Carolina,
LLC and Don Galloway Homes of South Carolina, LLC were liquidated effective
January 1, 1997. All of the assets and liabilities of the entities were
transferred to their members, who concurrently contributed the assets into two
new Subchapter S Corporations, wholly-owned by Don Galloway Homes, Inc. The
entities' Subchapter S corporation and LLC status terminated on consummation of
the Merger as disclosed in Note 1. See Note 10 for information regarding the pro
forma income tax disclosures.
10
<PAGE>
DON GALLOWAY HOMES, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
Cash and Equivalents
For purposes of reporting cash flows, the Company considers all highly
liquid investments with an original maturity of three months or less to be cash
equivalents.
Supplemental disclosures of cash flow information are as follows (in
thousands):
Year Ended
December 31, 1996
-----------------
Cash paid for interest............................... $ 1,542
3. Real Estate Inventories
Real estate inventories are summarized as follows (in thousands):
December 31, 1996
-----------------
Work-in-progress:
Speculative homes............................. $ 5,493
Sold homes under construction................. 8,632
-----
14,125
Land:
Finished lots................................. 2,499
Land under development........................ 2,006
-----
4,505
Models ......................................... 1,715
-----
$ 20,345
=========
Speculative homes and models include completed homes and homes under
construction. Speculative construction represents homes which are not subject to
a sales contract. Completed homes and work-in-progress include the allocation of
land and development and other allocable costs.
4. Equipment and Furniture
During March 1996, the Company transferred its office building, in the
form of non-cash distribution with a net book value of $400,748, to an
affiliated entity controlled by the Stockholder.
At December 31, 1996, furniture and equipment consisted of the
following (in thousands):
December 31, 1996
-----------------
Motor vehicles $ 110
Equipment and furniture............................... 225
---------
335
Less: Accumulated depreciation....................... (226)
---------
$ 109
=========
11
<PAGE>
5. Notes Payable
Notes payable are summarized as follows (in thousands):
December 31, 1996
-----------------
Project specific construction loans........................ $ 12,083
Conventional land acquisition and development loans........ 1,323
---------
$ 13,406
=========
Project specific construction loans consist of land and construction loans
primarily from financial institutions. These loans bear interest at annual rates
ranging from 1/2% to 1% over prime (the prime rate was 8.5% at December 31,
1996). Principal payments are normally made at the time the sales of the related
real estate properties are closed, whereas interest is paid monthly. The loan
agreements include customary representations and covenants, including
limitations on the maximum principal amount that can be outstanding at any time.
Substantially all inventories are pledged as collateral for these loans, and
substantially all of these loans are personally guaranteed by the Stockholder.
At December 31, 1996, the Company has combined lines of credit available
for borrowings up to approximately $30,750,000 with five financial institutions,
of which approximately $7,879,000 was outstanding. The Company also has a
facility with another lender for pre-approved borrowings of approximately
$19,000,000, of which approximately $4,204,000 was outstanding at December 31,
1996. These lines expire at various dates through December 1997 and, in most
cases, must be renewed annually.
At December 31, 1996, the Company also has combined land acquisition and
development loans for borrowings of up to approximately $2,968,000 with two
financial institutions and two individuals, of which approximately $1,323,000
was outstanding. These loans expire at various dates through June 1999.
Maturities of notes payable at December 31, 1996 in future periods are as
follows (in thousands):
Year Ending December 31,
1997...................... $ 13,147
1998...................... 161
1999...................... 98
--------
$ 13,406
========
12
<PAGE>
6. Stockholder's Equity
At December 31, 1996, Don Galloway Homes, Inc. had 100,000 shares of common
stock authorized at $1.00 par value, of which 21,807 were issued and
outstanding. Also at December 31, 1996, Don Galloway Homes of North Carolina,
LLC and Don Galloway Homes of South Carolina, LLC, each had contributed capital
of $1,000, while Don Galloway Homes, Inc. had paid-in capital of $500. Effective
January 1, 1997, all of the assets of Don Galloway Homes of North Carolina, LLC
and Don Galloway Homes of South Carolina, LLC were transferred to their members,
who concurrently contributed the assets into two new Subchapter S Corporations
wholly-owned by Don Galloway, Homes, Inc. At June 30, 1997, Don Galloway Homes
of North Carolina, Inc. and Don Galloway Homes of South Carolina, Inc. each had
1,000 shares of $1.00 par value common stock authorized, issued and outstanding.
At December 31, 1996 and at June 30, 1997, Don Galloway Land, LLC and
Thornblade, LLC each had contributed capital of $1,000.
7. Related Party Transactions
As discussed in Note 4, the Company transferred its office building to
the Stockholder in March 1996 and began making monthly lease payments in April
1996 of $9,900 in accordance with a lease agreement entered between the parties,
which expires March 31, 2001. Estimated future minimum lease payments under this
lease are as follows for fiscal years ending December 31:
1997 $ 118,800
1998 118,800
1999 118,800
2000 118,800
2001 29,700
----------
$ 504,900
==========
The accompanying financial statements include certain amounts due from
Galloway Land, Inc., an entity affiliated through common ownership. Amounts
outstanding at December 31, 1996 were approximately $112,800, which primarily
represents amounts paid on behalf of Galloway Land, Inc. by the Company. These
amounts were repaid in early 1997.
8. Employee Benefit Plans
The Company maintains a profit sharing plan (the "Plan") for all eligible
employees. Employees become eligible to participate after one year of service.
Participants become 20% vested in the Plan after two years of service and are
fully vested after six years. Annual contributions are made at the discretion of
the Board of Directors. The Company made no contributions to the Plan in 1996.
The Company also has a 401(k) plan which became effective in July 1993.
The Company matches a percentage of participant contributions based on years of
service of each participant. The Company contributed approximately $15,000 to
the 401(k) plan in 1996.
13
<PAGE>
9. Commitments and Contingencies
As of December 31, 1996, the Company had various options and commitments
to purchase approximately 1,000 developed lots for approximately $23,275,000
during 1997 and beyond. Failure to meet these commitments and option dates could
result in forfeitures of deposits and option fees of up to approximately
$453,000 and possible voiding of the contracts with the sellers for future
purchases at the specified contract prices. Under certain agreements, sellers
may force the purchase of all lots under contract.
The Company operates within an area that represents a geographic
concentration of risk within the states of North Carolina and South Carolina.
The Company's ability to make future sales and recover its costs included in
development inventories is dependent upon the economic conditions within these
areas. In management's opinion, this concentration represents a normal business
risk.
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.
10. Unaudited Pro Forma Income Tax Information
The following unaudited pro forma income tax information is presented in
accordance with Statement of Financial Accounting Standards No. 109 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).
Year Ended
December 31,
1996
------------
Earnings before pro forma adjustment, per statement of income.... $ 4,998
Provision for income taxes....................................... (1,899)
--------
Pro forma net income ............................................ $ 3,099
========
14
<PAGE>
Item 7. Financial Statements and Exhibits.--(continued)
(b) Pro Forma Financial Data.
15
<PAGE>
THE FORTRESS GROUP, INC.
PRO FORMA CONSOLIDATED FINANCIAL DATA
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" or "Founding Builders"). The
unaudited pro forma financial statements included herein 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), the purchase on February 28, 1997 of D.W.
Hutson Construction Company (Hutson), and the purchase effective August 1, 1997
of Don Galloway Homes, Inc. and related interests (collectively, "Galloway"). No
balance sheet has been included as the items being adjusted for the pro forma
information are reflected in the Company's actual Consolidated Balance Sheet at
September 30, 1997.
The unaudited pro forma statements of operations present pro forma results from
operations for the year ended December 31, 1996 and for the nine months ended
September 30, 1997 as if the merger, the sale of Genesee Custom and the
purchases of Landmark, Hutson, and Galloway 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, Hutson, and Galloway were combined and subject to the
effective Federal statutory income tax rate throughout the period.
The pro forma financial statements of The Fortress Group, Inc. are unaudited and
are based upon historical information, preliminary estimates and certain
assumptions management deems appropriate. The unaudited pro forma financial data
presented herein are not necessarily indicative of the results of Fortress would
have attained had such events occurred at the beginning of the period, nor are
they indicative of the future results of Fortress. The unaudited pro forma
financial data and notes thereto should be read in conjunction with the
Company's 1996 Annual Report on Form 10-K.
16
<PAGE>
<TABLE>
<CAPTION>
THE FORTRESS GROUP, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(Unaudited, in thousands, except per share amounts)
Combined Landmark
Predecessors/ Homes, Inc. D.W. Hutson Don
The Fortress Jan. 1, 1996- Construction Galloway Pro Forma
Group, Inc. Aug. 31, 1996 Company Homes, Inc. Adjustments Pro Forma
----------- ------------- ------------ ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Residential sales $ 265,705 $ 18,062 $79,471 $57,123 $(4,964)(a) $415,397
Lot sales and other revenue 10,768 244 11,012
--------- --------- ------- ------- -------- ------
Total revenue 276,473 18,062 79,715 57,123 (4,964) 426,409
Cost of sales 233,812 15,308 65,721 46,205 (4,928)(a) 356,118
--------- --------- ------- ------ ------ -------
Gross profit 42,661 2,754 13,994 10,918 (36) 70,291
Operating expenses:
Selling 16,216 168 4,421 2,059 (163)(a) 22,701
General and administrative 12,545 1,028 1,695 3,461 (121)(a) 20,373
157 (b)
644 (c)
396 (d)
568 (e)
--------- --------- ------- ------ ------ -------
Net operating income 13,900 1,558 7,878 5,398 (1,517) 27,217
--------- --------- ------- ------ ------ -------
Other expense (income):
Interest 492 42 224 553 1,311
Minority interest 181 (98)(f) 83
Other, net (1,268) (7) (154) (1,429)
-------- -------- ------- ------ ------ -------
Income before provision for income taxes 14,495 1,523 7,654 4,999 (1,419) 27,252
Provision for income taxes 5,013 879 (g) 10,349
2,773 (h)
1,684 (i)
--------- -------- ------- ------- ------- --------
Net income $ 9,482 $ 1,523 $ 7,654 $ 4,999 $(6,755) $ 16,903
========= ======== ======= ======= ======= ========
Less cumulative preferred dividends 1,514 (j)
--------
Net income available to common shareholders $ 15,389
========
Net income per share $ 1.31
========
Weighted average shares outstanding 11,743,040 (k)
==========
</TABLE>
See Notes to Pro Forma Financial Statements.
17
<PAGE>
THE FORTRESS GROUP, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(Unaudited, in thousands, except per share amounts)
<TABLE>
<CAPTION>
D.W. Hutson Don
Construction Galloway
Company Homes, Inc.
The Fortress January 1 - January 1 - Pro Forma
Group, Inc. February 28, 1997 July 31, 1997 Adjustments Pro Forma
----------- ----------------- ------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Revenue:
Residential sales $ 289,394 $ 9,992 $ 39,507 $338,893
Lot sales and other revenue 4,015 4,015
--------- ------- --------- ------- --------
Total revenue 293,409 9,992 39,507 342,908
Cost of sales 249,173 8,486 30,891 288,550
--------- ------- --------- ------- -------
Gross profit 44,236 1,506 8,616 54,358
Operating expenses:
Selling 18,581 491 2,180 21,252
General and administrative 15,740 237 1,776 $ 66 (d) 18,150
331 (e)
Non-recurring acquisition abandonment 335 335
Model home reserve 284 284
--------- ------- --------- ------- ------
Net operating income 9,296 778 4,660 (397) 14,337
--------- ------- --------- ------- ------
Other expense (income):
Interest 2,422 4 261 2,687
Minority interest 6 6
Other, net (988) (38) (102) (1,128)
--------- ------- --------- ------- ------
Income before provision for income taxes 7,856 812 4,501 (397) 12,772
Provision for income taxes 3,016 288 (h) 4,888
1,584 (i)
--------- ------- --------- ------- ------
Net income $ 4,840 $ 812 $ 4,501 $(2,269) $ 7,884
========== ======== ========= ======= =======
Less cumulative preferred dividends 86 1,136 (j)
--------- -------
Net income available to common
shareholders $ 4,754 $ 6,748
========== =======
Net income per share $ .38 $ .52
========== =======
Weighted average shares outstanding 12,466,591 13,067,515(l)
========== ==========
</TABLE>
See Notes to Pro Forma Financial Statements.
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THE FORTRESS GROUP, INC.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - Pro Forma Statements of Operations Adjustments
The pro forma statements 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, the acquisition of Hutson and the acquisition of Galloway.
(a) 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.
(b) Adjustment to record amortization of goodwill for the period January 1,
1996 through August 31, 1996 associated with the purchase of Landmark
on a straight-line basis over fifteen years.
(c) 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.
(d) Amortization of goodwill associated with the purchase of Hutson on a
straight-line basis over fifteen years.
(e) Amortization of goodwill associated with the purchase of Galloway on a
straight-line basis over twenty years.
(f) 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.
(g) Adjustments to calculate the provision for income taxes on the combined
pro forma results at the effective statutory tax rates applicable for
each of the Founding Builders and Landmark as if they had been subject
to the effective Federal statutory income tax rate throughout the
period.
(h) Adjustment to reflect the calculation of a provision for income taxes
for Hutson resulting from pre-tax income net of pro forma adjustments
at the effective statutory tax rates applicable for each adjustment.
(i) Adjustment to reflect the calculation of a provision for income taxes
for Galloway resulting from pre-tax income net of pro forma adjustments
at the effective statutory tax rates applicable for each adjustment.
(j) Adjustments to reduce net income to determine earnings per share as
follows: (1) Reductions of $110,000 for the year ended December 31,
1996 and $82,500 for the nine months ended September 30, 1997 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 1(a).]
19
<PAGE>
(2) Reductions of $1,404,000 for the year ended December 31, 1996 and
$1,053,000 for the nine months ended September 30, 1997 to reflect the
12% cumulative preferred dividend based on the net liquidation value of
the Class AA preferred stock issued at $100 per share ($.01 par value).
The net liquidation value of $11,700,000 million reflects the Company's
sale of 11,700 shares of Class AA preferred stock to Prometheus
Builders to finance the Galloway transaction.
(k) 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 and common stock equivalents of the
pro forma consolidated 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
Weighted average outstanding shares issued
to the public in the offerings 1,990,089
Common stock equivalent of preferred shares
issued in the Hutson and Galloway acquisitions 1,288,540
----------
11,743,004
==========
(l) 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 and common stock equivalents
of the pro forma consolidated Company outstanding during the periods
presented is as follows:
Nine Months Ended
September 30, 1997
------------------
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
Weighted average outstanding shares issued
to the public in the offerings 3,287,517
Weighted average restricted shares issued by
the Company subsequent to the offerings 27,083
Common stock equivalent of preferred shares
issued in the Hutson and Galloway acquisitions 1,288,540
----------
13,067,515
==========
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange
Act of 1934, the Reigistrant has duly caused this report to be signed on
its behalf by the undersigned hereunto duly authorized.
THE FORTRESS GROUP, INC.
Dated: November 10, 1997 By: /s/ Jamie M. Pirrello
---------------------
Jamie M. Pirrello
Chief Financial Officer
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