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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, 1998
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)
1650 Tysons Boulevard, Suite 600, McLean, Virginia 22102
----------------------------------------------------------
(Address of principal executive offices and zip code)
(703) 442-4545
----------------------------------------------------
(Registrant's telephone number, including area code)
----------
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, 1998, there were outstanding 11,687,643 shares of common
stock, par value $.01, of the registrant.
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<PAGE>
THE FORTRESS GROUP, INC.
QUARTER ENDED MARCH 31, 1998
INDEX
PAGE
----
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheets 3
Consolidated Statements of Operations (unaudited) 4
Consolidated Statements of Cash Flows (unaudited) 5
Notes to Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 12
PART II -- OTHER INFORMATION
Item 2. Changes in Securities. 18
Item 4. Submission of Matters to a Vote of Security Holders. 18
Item 6. Exhibits and Reports on Form 8-K. 19
(a) Exhibits.
(b) Reports on Form 8-K.
SIGNATURES 20
EXHIBIT INDEX 21
<PAGE>
Part I
Financial Informations
Item 1. Financial Statements
THE FORTRESS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
---- ----
(unaudited)
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 15,651 $ 12,406
Accounts and notes receivable 16,125 21,944
Due from related parties 3,954 4,416
Real estate inventories 274,923 217,342
Land held for resale 7,160 6,934
Mortgage loans held for sale 12,170 11,128
Investments in land partnerships 8,386 6,763
Property and equipment, net 13,105 10,246
Prepaid expenses and other assets 22,636 22,655
Goodwill, net 35,035 23,470
-------- --------
Total assets $409,145 $337,304
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued construction liabilities $ 22,413 $ 23,172
Notes and mortgages payable 263,911 228,420
Due to related parties 978 783
Accrued expenses 21,141 14,464
Customer deposits 12,088 7,300
-------- --------
Total liabilities 320,531 274,139
-------- --------
Minority interest 78 268
-------- --------
Shareholders' equity
Preferred stock, all classes and series, $.01 par value, 1 million authorized 2 1
Class AA cumulative convertible (rate of 12% per annum
decreasing to 6%), 53,333 designated, 40,000 and 11,700,
respectively, issued and outstanding ($40 million initial liquidation
preference)
Series A 11% cumulative convertible, 20,000 designated, 10,000 issued
and outstanding ($1 million aggregate liquidation preference)
Series B convertible, 40,000 designated, 8,854 issued and outstanding
($885,400 aggregate liquidation preference)
Series C convertible, 70,000 designated, 39,656 and 60,000,
respectively, issuable (Note 8)
Series D convertible, 67,500 designated, 60,000 issued and outstanding
($6,000,000 aggregate liquidation preference)
Series E convertible, 50,000 designated, 2,500 and 0, respectively,
issued and outstanding ($250,000 aggregate liquidation preference)
Series F convertible, 5,000 designated, 5,000 and 0, respectively,
issued and outstanding ($500,000 aggregate liquidation preference)
Common stock, $.01 par value, 99 million authorized,
11,601,498 and 11,748,694 issued and outstanding 118 117
Additional paid-in capital 73,557 47,371
Preferred subscription receivable (500)
Retained earnings 16,044 15,936
Treasury stock, at cost, 151,100 and 120,100 shares, respectively (685) (528)
-------- --------
Total shareholders' equity 88,536 62,897
-------- --------
Total liabilities and shareholders' equity $409,145 $337,304
======== ========
</TABLE>
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 Three
Months Ended Months Ended
March 31, 1998 March 31, 1997
-------------- --------------
<S> <C> <C>
TOTAL REVENUES $120,527 $70,339
-------- -------
HOMEBUILDING:
Residential sales $118,026 $68,399
Lot sales and other 1,456 1,666
-------- -------
Homebuilding revenues 119,482 70,065
Cost of sales
Construction and land costs 101,661 59,422
Amortization of purchase accounting adjustments 542 176
-------- -------
Gross profit 17,279 10,467
Selling 8,272 4,548
General and administrative 6,747 4,161
Goodwill amortization 532 95
-------- -------
Net operating income 1,728 1,663
-------- -------
Other expense (income):
Interest 1,121 206
Minority interest (24) 17
Other, net (358) (204)
-------- -------
Homebuilding income before taxes 989 1,644
MORTGAGE:
Operating revenues 1,045 274
General, administrative and other expenses 1,039 305
-------- -------
Mortgage income (loss) before taxes 6 (31)
Total income before taxes 995 1,613
Provision for income taxes 398 618
-------- -------
Net income $ 597 $ 995
======== =======
NET INCOME PER SHARE DATA (See Note 9):
Basic net income per share $ .01 $ .08
======== =======
Diluted net income per share $ .01 $ .08
======== =======
Basic weighted average shares outstanding 11,605,334 11,759,874
========== ==========
Diluted weighted average shares outstanding 13,112,729 12,238,096
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
THE FORTRESS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
<TABLE>
<CAPTION>
For the Three For the Three
Months Ended Months Ended
March 31, 1998 March 31, 1997
-------------- --------------
<S> <C> <C>
Cash flows from operating activities
Net income $ 597 $ 995
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization 1,697 619
Minority interest (24) 17
(Gain) loss on sale of property and equipment (85) 11
Changes in operating assets and liabilities
Accounts receivable 6,423 (1,072)
Due from related parties 464 277
Real estate inventories (5,600) (3,068)
Land held for resale (226)
Mortgage loans held for sale (1,042) (701)
Prepaid expenses and other assets 71 (290)
Accounts payable and accrued construction liabilities (4,250) (426)
Accrued expenses 5,895 224
Customer deposits 3,508 537
--------- --------
Net cash provided by (used in) operating activities 7,428 (2,877)
--------- --------
Cash flows from investing activities
Acquisition of homebuilders, net of acquired cash (24,334) (8,946)
Payment of contingent consideration (2,034)
Purchase of property and equipment (1,603) (949)
Proceeds from sale of property and equipment 292 41
Investment in limited partnerships (1,623)
--------- --------
Net cash used in investing activities (29,302) (9,854)
--------- --------
Cash flows from financing activities
Borrowings under notes and mortgages payable 112,445 47,849
Repayment of notes and mortgages payable (113,968) (38,418)
Repayments of related party borrowings (474) (27)
Proceeds from issuance of Class AA Preferred Stock, net 27,663
Proceeds from Employee Stock Purchase Plan 17
Preferred dividends (378)
Common dividends (29)
Purchase of treasury stock (157) (130)
--------- --------
Net cash provided by financing activities 25,119 9,274
--------- --------
Net increase (decrease) in cash and cash equivalents 3,245 (3,457)
Cash and cash equivalents, beginning of period 12,406 16,212
--------- --------
Cash and cash equivalents, end of period $ 15,651 $ 12,755
========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<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"), doing business in Austin and
San Antonio, Texas; Christopher Homes and Affiliates ("Christopher"), doing
business in Las Vegas, Nevada; The Genesee Company ("Genesee"), doing business
in Denver and Fort Collins, Colorado and Tucson, Arizona; and Solaris
Development Corporation ("Sunstar"), doing business in Raleigh-Durham, North
Carolina. These companies as a group are referred to as the Predecessor
Companies. Prior to the Offering, Fortress was a nonoperating entity and
principally incurred costs associated with the consummation of the Offering.
Fortress has made additional acquisitions of Landmark Homes, Inc. ("Landmark"),
a Wilmington, North Carolina and Myrtle Beach, South Carolina homebuilder, on
August 31, 1996; Brookstone Homes, Inc. ("Brookstone"), a Janesville, Madison
and Milwaukee, Wisconsin homebuilder, on December 31, 1996; D.W. Hutson
Construction Company ("Hutson"), a Jacksonville, Florida homebuilder, on
February 28, 1997; Wilshire Homes ("Wilshire"), an Austin, Texas homebuilder,
effective April 1, 1997; Don Galloway Homes, Inc. ("Galloway"), a Charlotte,
North Carolina and Charleston, South Carolina homebuilder, effective August 1,
1997; The Iacobucci Organization ("Iacobucci"), a Philadelphia, Pennsylvania
homebuilder, effective October 1, 1997; WestBrook Homes ("WestBrook"), a Loudon
County, Virginia homebuilder effective January 1, 1998; and Whittaker Homes
("Whittaker"), a St. Louis, Missouri homebuilder, effective March 1, 1998.
In January 1997, Fortress formed Fortress Mortgage, Inc. ("Fortress Mortgage"),
a wholly-owned subsidiary, to provide a mortgage lending source to the Company's
builder subsidiaries as an ancillary benefit. Fortress Mortgage is licensed in
Texas, Colorado, Nevada, North Carolina, Pennsylvania, and Wisconsin. Licenses
are pending in Florida, Missouri, and South Carolina.
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 1997
Annual Report on Form 10-K.
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 accompanying consolidated financial statements include the accounts of
Fortress, a Delaware corporation, and its majority-owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
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. Each
6
<PAGE>
subsequent acquisition has been accounted for under the purchase method of
accounting. The purchase price of each of the acquired companies was allocated
first to record the assets and liabilities acquired at estimated fair value on
the acquisition date with any remaining balances recorded as goodwill.
The consolidated statements of operations, shareholders' equity and cash flows
include the results of Fortress, inclusive of the Predecessor Companies and all
of the companies acquired since their respective dates of acquisition.
Certain amounts in the prior period financial statements have been reclassified
to conform to the current presentation.
NOTE 3 - PRO FORMA SUMMARY CONSOLIDATED RESULTS OF OPERATIONS
The Company's unaudited pro forma summary consolidated results of operations for
the three months ended March 31, 1998 and 1997, as if the significant 1997 and
1998 acquisitions had occurred at January 1, 1997 and excluding the amortization
of the purchase accounting adjustments for the step-up of inventory, are
presented below. The unaudited pro forma results also include the increased
provision for income taxes as if the Combined Predecessor Companies and the
subsequent acquisitions were C corporations throughout the periods presented.
Additionally, the issuance of 40,000 shares of Class AA convertible preferred
stock, which provided financing for the Galloway and Whittaker acquisitions, has
been factored into the earnings per share calculations for both periods. In
preparing the unaudited pro forma information, various assumptions were made,
and the Company does not purport this information to be indicative of what would
have occurred had these transactions been made as of January 1, 1997.
Three Months Ended
March 31,
------------------
1998 1997
---- ----
(unaudited, in thousands,
except per share amounts)
Revenue $129,922 $112,475
Net income 1,377 2,327
Net income per share .06 .14
Net income per share, assuming dilution .06 .11
NOTE 4 - SIGNIFICANT ACQUISITIONS
On March 6, 1998, the Company acquired the stock of Whittaker for initial
consideration of approximately $62.1 million ($26.4 million in cash and
approximately $35.7 in assumed debt).
Effective August 1, 1997, the Company acquired the stock of Galloway for initial
consideration of approximately $34.6 million ($5.0 million in cash, $5.0 million
in a short-term note, 60,000 shares of Series D Convertible preferred stock with
a $6.0 million liquidation value, and approximately $18.6 million in assumed
debt). Additional consideration not to exceed $5.0 million is expected to be
paid over a period not to exceed four years based upon the future performance of
Galloway.
In February 1997, the Company acquired the assets of Hutson for initial
consideration of approximately $24.7 million ($9.0 million in cash, $1.2 million
in Class B preferred stock, and approximately $8.5 million in assumed debt).
Approximately $1 million in cash and $315,000 of the preferred stock was
returned to the Company based on the final accounting of the acquisition.
Additional consideration of $6.0 million is expected to be paid over a period
not to exceed six years based upon the future performance of Hutson (See Note
8).
In each of these acquisitions, the earnout consideration will be accounted for
as additional purchase price and, accordingly, increase the goodwill related to
the acquisitions when earned and be amortized over the corresponding remaining
amortization periods.
7
<PAGE>
NOTE 5 - REAL ESTATE INVENTORIES
Real estate inventories are summarized as follows (in thousands):
March 31, December 31,
1998 1997
---- ----
(unaudited)
Work-in-progress
Sold homes $100,449 $ 81,225
Speculative 44,966 45,058
-------- --------
Total work-in-progress 145,415 126,283
Land
Finished lots 61,770 43,585
Land under development 48,323 39,666
Unimproved land held for development 5,449 1,084
-------- --------
Total land 115,542 84,335
Lumber yard inventory 2,525
Model homes 11,441 6,724
-------- --------
$274,923 $217,342
======== ========
NOTE 6 - INTEREST
Information regarding interest is as follows (in thousands):
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
------------------------------------
1998 1997
------------ -----------
(unaudited) (unaudited)
<S> <C> <C>
During the periods:
Interest incurred $ 7,122 $ 5,002
Interest capitalized (5,845) (4,796)
Interest amortized to cost of sales 4,371 3,195
------- -------
Total interest expensed in statement of operations $ 5,648 $ 3,401
======= =======
At the end of the periods:
Capitalized interest in ending inventory $20,944 $13,985
======= =======
</TABLE>
Included in general, administrative and other expenses for Fortress Mortgage is
approximately $156,000 of interest expense.
8
<PAGE>
NOTE 7 - NOTES AND MORTGAGES PAYABLE
Notes and mortgages payable consist of the following (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
---- ----
(unaudited)
<S> <C> <C>
13.75% Senior Notes due 2003 $100,000 $100,000
Project specific land, land development and
construction loans 152,593 111,318
Mortgage warehouse lines of credit 10,281 15,546
Other loans 1,037 1,556
-------- ---------
$263,911 $ 228,420
======== =========
</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 Company to the extent of any
collateral, as well as to the Company's subsidiaries indebtedness. The Company
is required to maintain a consolidated tangible net worth of at least $15
million and other financial covenants, as defined, in the Senior Note Indenture.
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 2.5% over the London InterBank Offered Rate (LIBOR) to 2%
over prime rate and fixed rates generally from 8.5% to 12.75%.
The Company's mortgage subsidiary has two warehouse lines of credit outstanding
for the purpose of originating loans. The warehouse lines, totaling $10 million,
are secured by the mortgage loans held for sale and are repaid upon sale of the
mortgage loans. The line bears interest at variable rates ranging from 1.5% to
2.75% over the 30-day LIBOR. The lines of credit mature April 30, 1998 and
August 31, 1998 but can be renewed at the Company's option. The aggregate
commitment available at March 31, 1998 was $17,000,000.
Other loans consist primarily of debt financed corporate insurance policies
which bear interest at varying rates between 7.0% and 7.8%.
NOTE 8 - CONVERTIBLE PREFERRED STOCK
In connection with the Whittaker acquisition, the Company loaned $500,000 and
then sold 5,000 shares of Series F 6% Cumulative Convertible Preferred Stock
("Series F") with a liquidation value of $100 per share to a key member of
management at Whittaker. The loan bears interest at 6% which is offset by the 6%
dividend rate on the Series F. The Series F is convertible, based on the future
earnings of the acquired business, for a period of 60 days commencing on
February 15, 1999, 2000, and 2001 at the closing price of the Common Stock on
the Closing Date and the first and second anniversaries of the Closing Date,
respectively. The loan has been accounted for as a subscription receivable in
the equity section of the Company's balance sheet and will be reduced based on
the future earnings of the acquired business.
In connection with the WestBrook acquisition, the Company issued 2,500 shares of
Series E 6% Cumulative Convertible Preferred Stock ("Series E"). Each Series E
share is convertible into ten shares of Common Stock at any time at the option
of the holder. After the Common Stock has traded
9
<PAGE>
for $10.00 per share or more for ten consecutive business days, the Company may
require the conversion of the Series E at the same 10-for-1 conversion rate. At
the option of the holder, the Company may be required to redeem up to 20% of the
total number of shares initially issued each year beginning with the first
anniversary of the date of issuance in cash or Common Stock at the Company's
option. The holder's redemption right is cumulative.
The Company executed the second closing related to its agreement with Prometheus
Homebuilders LLC (Prometheus) on March 6, 1998. The Company sold an additional
28,300 shares of Class AA Preferred Stock for $28,300,000.
In March 1998, the Company amended the Hutson purchase agreement to pay the 1997
earnout in cash rather than Series C Convertible Preferred Stock ("Series C").
The total cash payment was approximately $2.0 million. The remaining Series C
stock (39,656 shares) has been treated as outstanding for the purpose of
calculating earnings per share; however, it will only be legally outstanding
upon issuance.
NOTE 9 - EARNINGS PER SHARE
The following table reconciles the numerators (income) and the denominators
(shares) of the basic and diluted per-share computations (in thousands):
<TABLE>
<CAPTION>
For the Three Months For the Three Months
Ended March 31, 1998 Ended March 31, 1997
---------------------------------- -------------------------------
Per-Share Per-Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Net income $ 597 $995
Less: Preferred stock dividends (442) (28)
Less: Imputed preferred stock dividend (17)
----- ----
Basic EPS
Income available to common
shareholders $ 138 11,605,334 $.01 $968 11,759,874 $.08
Effect of Dilutive Securities
Series A convertible preferred stock $ 28 222,222
Series B convertible preferred stock - 88,540 42,667
Series C convertible preferred stock 554,791 213,333
Series D convertible preferred stock 600,000
Options 3,836
Restricted stock 24,556
Warrants 235,672
----- ---------- ---- ----------
Diluted EPS
Income available to common
shareholders plus assumed
conversions $ 138 13,112,729 $.01 $996 12,238,096 $.08
</TABLE>
The Company's intention upon conversion or redemption (as the case may be) of
Series B, C and D preferred stock is to issue Common Stock on the basis of
10-for-1 conversion ratio contemplated in the respective agreements and to pay
cash for the difference between the $100 liquidation value per share and the
market value of the common stock converted at 10-for-1. Accordingly, the Company
has included, in its calculation of earnings per share, additional Common Stock
to be issued under the "if converted" method at the 10-for-1 conversion ratio.
At March 31, 1998, 40,000 shares of Class AA convertible preferred stock were
outstanding and convertible into 6,666,667 shares of Common Stock; for EPS
purposes, the conversion features of these shares resulted in Common Stock
equivalents totaling 3,785,820 shares. Additionally, 10,000 shares of Series A
convertible preferred stock were outstanding and convertible into 277,056 shares
of Common Stock (and an equal number of Common Stock equivalents). Also at March
31, 1998, 2,500 shares of Series E convertible preferred stock were outstanding
and convertible into 25,000 shares of Common Stock; for EPS purposes, the
conversion features of these shares resulted in Common Stock equivalents
totaling 13,056 shares. None of these shares were included in the computation of
diluted EPS as the effect of adding back the related dividends and the weighted
average common shares is antidilutive.
Additional options to purchase an approximately 528,000 shares of Common Stock
at various prices between $5.00 and $6.25 per share were outstanding at March
31, 1998, and options to purchase 342,800 shares of Common Stock at $9.00 per
10
<PAGE>
share (subsequently repriced at $6.00 per share) were outstanding at March 31,
1997. These options were not included in the computations of diluted EPS because
the options' exercise prices were greater than the average market price of the
common shares.
NOTE 10 - SUBSEQUENT EVENTS
Effective April 1, 1997, the Company acquired certain assets of Quail
Construction, a homebuilding company with operations in the Portland, Oregon
area, for an initial purchase price of approximately $16.0 million including
cash, notes, Series E preferred stock and the assumption of debt. The
acquisition terms include earnout provisions based on the future operations of
the acquired business. This contingent consideration will be accounted for as
additional purchase price in the form of goodwill.
11
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The Fortress Group, Inc. (the "Company" or "Fortress") 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 Landmark Homes, Inc. ("Landmark"), with
operations in Wilmington, North Carolina and Myrtle Beach, South Carolina and
Brookstone Homes, Inc. ("Brookstone"), with operations in the Milwaukee-Madison,
Wisconsin corridor in 1996 and the following builders in 1997: D.W. Hutson
Construction Company ("Hutson"), with operations in the Jacksonville, Florida
area; Wilshire Homes, Inc. ("Wilshire"), with operations in San Antonio and
Austin, Texas; Don Galloway Homes, Inc. ("Galloway"), with operations primarily
in Charlotte, North Carolina and Charleston, South Carolina; and The Iacobucci
Organization ("Iacobucci"), with operations in the Philadelphia, Pennsylvania
area. In 1998 the Company has acquired WestBrook Homes ("WestBrook"), with
operations in the Loudoun County, Virginia; Whittaker Homes ("Whittaker"), with
operations in St. Louis, Missouri; and Quail Construction ("Quail"),with
operations in Portland, Oregon and Vancouver, Washington. All acquired companies
are referred to as the Acquired Builders. In addition, the Company formed
Fortress Mortgage, Inc. ("Fortress Mortgage") in January of 1997 as a
wholly-owned subsidiary of the Company.
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 thousands) and as a percentage of the Company's total and segment
revenues:
<TABLE>
<CAPTION>
For the Three Months For the Three Months
Ended Ended
March 31, 1998 March 31, 1997
-------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Revenues $120,527 100.0% $70,339 100.0%
Homebuilding revenues 119,482 99.1% 100.0% 70,065 99.6% 100.0%
Homebuilding gross profit including step-up 17,279 14.3% 14.5% 10,467 14.9% 14.9%
Homebuilding gross profit excluding step-up 17,821 14.8% 14.9% 10,643 15.1% 15.2%
Homebuilding pretax income 989 .8% .8% 1,644 2.3% 2.3%
Mortgage revenues 1,045 .9% 100.0% 274 .4% 100.0%
Mortgage expenses 1,039 .9% 99.4% 305 .4% 111.5%
Mortgage pretax income 6 - .6% (31) - (11.5)%
Net income 597 .5% 995 1.4%
</TABLE>
12
<PAGE>
Acquisitions
Acquisition of WestBrook Homes
Effective January 1, 1998, the Company acquired WestBrook, a
homebuilder in the Loudoun County, Virginia. Located west of the District of
Columbia, Loudoun County, Virginia is part of the Washington PMSA. WestBrook
builds first and second time move-up single-family homes and townhomes.
Acquisition of Whittaker Homes
Effective March 1, 1998, the Company acquired Whittaker, a homebuilder
in St. Charles County, Missouri. The largest single-family homebuilder in the
St. Louis MSA, Whittaker builds single-family detached and attached homes
targeting entry level and first and second move-up buyers.
Acquisition of Quail Construction
Effective April 1, 1998, the Company acquired Quail, a homebuilder
based in Vancouver, Washington with operations in the greater Portland, Oregon
market area marking the Company's expansion into the Pacific Northwest. Quail is
a single-family homebuilder whose product targets the entry level, first move-up
and empty-nester market segments.
The Company's actual results of operations reflect the operating
activity of the acquisitions from their respective effective dates of
acquisition. Accordingly, no results are included for Quail in the accompanying
financial statement or the following discussion.
Consolidated Results of Operations
Comparison of the Company's Results of Operations for the Three Months Ended
March 31, 1998 and 1997.
Homebuilding Operations
General
New Orders, Net Closings Backlog at March 31,
--------------- -------- --------------------
1998 1997 1998 1997 1998 1997
State
-----
Arizona 13 10 8 7 14 11
Colorado 120 116 74 69 229 185
Florida 317 61 155 59 313 222
Missouri 56 N/A 37 N/A 186 N/A
Nevada 36 29 15 22 84 28
North Carolina 203 100 154 93 299 171
Pennsylvania 74 N/A 47 N/A 76 N/A
South Carolina 71 N/A 59 N/A 83 N/A
Texas 229 200 182 130 296 233
Virginia 20 N/A 5 N/A 27 N/A
Wisconsin 55 49 22 18 55 49
------ ----- ---- ------ ------- -----
Total 1,194 565 758 398 1,662 899
As seen in the chart above, the Company achieved net new orders of
1,194 units and 565 units in the three months ended March 31, 1998 and 1997, an
increase of 111.3%. This increase is attributable to the Company's 1997 and 1998
acquisitions and an increase in net new orders in the Company's Texas (increase
of 29 units or 14.5%), Nevada (increase of 7 units or 24.1%) and Wisconsin
(increase of 6 units or 12.2%) operations. As a group, the Founding Builders
showed a 7.1% increase in net new orders in first quarter of 1998 from the same
period in
13
<PAGE>
1997. At March 31, 1998, the Company has a combined backlog of 1,662 units with
a dollar value of $305.4 million as compared to 899 units with a dollar value of
$150.4 million as of March 31, 1997. This increase in backlog units is
consistent with the strong increase in new orders as stated above. The number of
units in the backlog of the Founding Builders at March 31st increased 25.8% in
1998 from 1997. In addition to the effect of more units in backlog, the per-unit
dollar value of backlog has increased from approximately $167,000 to $184,000.
This increase is primarily attributable to the backlog at the Company's luxury
homebuilder in Nevada, which represents a higher percentage of the Company's
overall backlog in terms of dollar value.
Revenues
Homebuilding revenues for the Company totaled $119.5 million for the
three months ended March 31, 1998 as compared to $70.1 million for the three
months ended March 31, 1997, an increase of 70.5%. The increase in revenue is
consistent with the increase in the number of units closed during the quarter.
Closings for the quarter increased with 758 closings in 1998 from 398 closings
in 1997. This increase which represents 90.5% is primarily attributable to the
Company's recent acquisitions. As a group, the Founding Builders revenue for the
first quarter of 1998 was relatively consistent with their revenue in the first
quarter of 1997.
Offsetting the effect on the revenue due to the increase in units
closed was a decline in the average price of units closed, to $155,700 from
$171,900 for the quarters ended March 31, 1998 and 1997, respectively. This
reflects the effect of further diversification caused by the acquisition of new
builders as the revenue generated for the Company's high-end Nevada operations
is less as a percentage of overall revenue. The acquisitions which have the most
dramatic effect on lowering our average price of units closed are the Hutson and
Galloway acquisitions, whose average price of units closed is approximately
$110,200 and $140,300 per unit, respectively.
Gross Profit
The Company's gross profit margin decreased to 14.9% for the quarter
ended March 31, 1998 from 15.2% in 1997 excluding the effect of the purchase
accounting adjustments to the inventory of the acquired companies. The Company's
generally-improved margins in 1998 were depressed by the liquidation of aged
inventory, continuing competitive pressures in the Raleigh, North Carolina
market, and the deferral of profits from certain model sales. During the first
quarter of 1998, the Company sold approximately 50 homes at significantly lower
than average gross profit margins in order to move aged inventory. These homes
included primarily completed spec homes combined with fewer homes priced
competitively to close out those communities.
The Company's Raleigh, North Carolina subsidiary has implemented
aggressive marketing strategies and modest price decreases to maintain volume to
respond to competitive pressure, which have slightly impacted the Company's
margins. However, the Company has seen some positive signs in other slowed
markets. In Austin, a market where a decline in permits in 1997 was a cause of
concern for the Company, the Company's subsidiary has been able to close homes
during the first quarter of 1998 at margins consistent with those of the same
quarter in 1997.
Additionally, management has implemented a plan to sell and leaseback
its model homes. While this program has the benefit of decreasing asset levels,
the accounting for sale-leaseback transactions has required that a certain
portion of the profit received be deferred. Therefore, gross profit margins are
decreased as only a portion of the revenue is recognized while all of the costs
of the homes are relieved. For the quarter ended March 31, 1998, the Company has
deferred profit recorded against revenue of approximately $263 thousand on the
sale of these homes.
Generally accepted accounting principles require that, in a purchase
transaction, the acquirer must write-up inventory to an estimated fair value
upon acquisition. This results in increased cost of sales as the written up
inventory is closed and, therefore, decreased gross margins. Accordingly, gross
margins of Acquired Companies were lower than they otherwise would have been. At
March 31, 1998, the amount of unamortized inventory write-up is approximately
$2.2 million. Approximately, $1.5 million of the unamortized inventory write-up
is allocated to unimproved and improved land held by Whittaker. This will be
amortized as unit closings occur over the build out period of the next few
years.
14
<PAGE>
The amortization of the inventory write-up during the first quarter of
1998 totaled $541 thousand and totaled $176 thousand for the same period in
1997. This amortization had the effect of decreasing the 1998 and 1997 gross
profit margins to 14.5% and 14.9%, respectively.
Operating Expenses
Total operating expenses increased as a percentage of revenue to 12.9%
($15.6 million) from 12.5% ($8.8 million) for the three months ended March 31,
1998 and 1997, respectively. Selling expenses increased to 6.9% ($8.3 million)
from 6.5% ($4.5 million). The increase in selling expenses as a percentage of
revenue, as previously discussed, is the result of the Company's attack on
tightening markets in some areas of Texas and North Carolina with aggressive new
marketing strategies in order to counteract increasing competition as well as an
increase number of new community openings and increased lease expenses of
approximately $500 thousand as a result of the sale-leaseback program.
Additionally, the Company's Nevada subsidiary opened five new luxury model homes
in late December of 1997 that required extensive upgrades that are being
amortized as additional selling expenses. Management has been pleased to see a
high level of sales activity in this new community since the completion and
opening of these model homes.
General and administrative expenses as a percentage of revenue
decreased to 5.6% in the first quarter of 1998 from 5.9% in 1997. This decrease
is due both to an improvement in general and administrative expenses as a
percentage of revenue in certain builders as well as the acquisition of some
builders with percentages of general and administrative expenses as compared to
revenue that are lower than the company-wide average.
Amortization of goodwill for the first quarter increased $437 thousand
to $532 thousand in 1998 from $95 thousand in 1997. The increase in goodwill
amortization is a function of increased acquisitions during 1997 and the
beginning of 1998. The Company had acquired two builders prior to the first
quarter of 1997 and has acquired seven builders during 1997 and 1998.
Homebuilding Income before Taxes
Homebuilding pre-tax net income decreased $.6 million to $1.0 million
for the first three months of 1998 from $1.6 million for the same period in
1997, representing a decrease of 37.5%. The primary cause for this decrease is
the higher interest expense in 1998 than 1997, an increase of $915 thousand or
444.2%. This is consistent with the Company's need to invest in "non-qualified"
assets, those assets for which interest must be immediately expensed. In 1998
and 1997, Fortress acquired several prime homebuilders with strong reputations
and solid operational histories. In most cases, these acquisitions required
payments in excess of the companies' book value for the goodwill that the
owners' have established, an intangible asset that has long-term value.
Management considers this a key investment in the growth of the Company;
however, this growth does come with the added cost of the goodwill. The Company
has also significantly increased its investments in partnerships with land
development entities in a limited partner capacity and has invested in a
company-wide standardized and integrated information system. These investments
in the future of The Fortress Group have increased the overall leverage of the
Company which has resulted in increased interest expense.
Fortress Mortgage Operations
Fortress Mortgage, which was formed in January of 1997, is in a
start-up phase as it continues to open new branch operations in our builder
markets. At the end of the first quarter of 1997, Fortress Mortgage had two
operating branches and, by the end of the first quarter of 1998, has opened an
additional eight branches for a current total of ten.
Fortress Mortgage had net income of $6 thousand in the first quarter of
1998, representing an increase of 119.4% from the net loss of $31 thousand for
the same period of 1997. Revenues and expenses increased proportionately from
1997 to 1998 as new branch operations have been established. During this growth
period, the Company has also incurred related non-recurring setup costs of
opening the new branches. The capture rate (the percentage of Fortress
homebuyers who choose Fortress Mortgage to finance their homes) of these
branches has continued to improve the longer they have been in operation. The
branches operating in the first quarter of 1997
15
<PAGE>
had higher capture rates in the first quarter of 1998 (approximately 65% in 1998
versus approximately 45% in 1997).
Net Income
Due to the previously described factors and the income tax effect
thereof, net income for the first quarter of 1998 decreased to $597 thousand
from $995 thousand in the first quarter of 1997. Earnings per share was further
impacted by the dividend due to Prometheus on the $40 million of Class AA
preferred stock outstanding in the first quarter of 1998 that was issued at the
end of the third quarter of 1997 ($11.7 million) and on March 6, 1998 ($28.3
million). The proceeds from this issuance were used for the acquisitions of
Galloway, Iacobucci, Whittaker, and Quail. Management anticipates that the
earnings from these companies will more than make-up for these acquisition
financing costs in the coming year.
Earnings before interest, taxes, depreciation and amortization (EBITDA)
increased 46.4% to $8.2 million for the quarter ended March 31, 1998 compared to
$5.6 million for the same quarter of 1997. EBITDA is provided as a supplemental
measurement of the Company's operating performance. EBITDA does not represent
cash flows from operations as defined by GAAP and should not be considered as an
alternative to net income as an indicator of the Company's operating performance
or to cash flows as a measure of liquidity. In addition, EBITDA measures
presented by the Company may not be comparable to other similarly titled
measures of other companies.
Liquidity and Capital Resources
The Company's operating activities involve several components,
principally home construction, land development and mortgage loan origination
for home purchasers. During the first three months of 1998, the Company's
operating activities, taken in the aggregate, provided approximately $7.4
million of cash. This cash flow was primarily generated by home sales which was
offset in part by the Company's increasing inventories due to additional build
up consistent with the Company's growth and risk management strategies and the
Company's paydown of construction payables.
The majority of the Company's investing activities during the
quarter--net cash use of $29.3 million--related to the purchases of Whittaker
and WestBrook. The Company also paid approximately $2.0 million as additional
consideration under the earnout provisions of prior period acquisitions.
Additionally, the Company had cash outflows of approximately $1.6 million for
property and equipment primarily as a result of the continuing implementation of
the management information system. The Company also continued its investments in
limited land partnerships. The Company's financing activities generated cash of
$25.1 million, consisting of the net proceeds from the issuance of 28,300 shares
of Class AA preferred stock to Prometheus offset by net repayments notes and
mortgages payable of $1.5 million (which includes the borrowings/repayments to
fund the mortgage loans held for sale) and miscellaneous other financing
activities.
The Company has entered into a stock purchase agreement (the
"Agreement") with Prometheus Homebuilders LLC ("Prometheus"), a subsidiary of
Lazard Freres Strategic Realty Investors II L.P., which commits Prometheus to
purchase $75 million of Fortress preferred stock and/or debt. The second closing
under the Agreement took place on March 6, 1998 with Prometheus's purchase of
28,300 shares ($28.3 million initial liquidation value) of Class AA preferred
stock. The proceeds were used to purchase Whittaker on March 6th and Quail in
April.
The Company believes that funds available through the existing 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, 1998, the Company had cash and cash
equivalents on hand of $15.7 million.
At March 31, 1998, the Company had 4,135 lots in inventory, which
represent an approximately eleven month supply of land based on sales absorption
rates for the first three months of 1998. It is one of the Company's operating
strategies to keep a relatively low supply of finished lots and lots under
development in order to manage and minimize risk associated with land ownership.
The Company utilizes land options and investments in limited land partnerships
as methods of controlling and subsequently acquiring land. The Company plans to
continue these
16
<PAGE>
practices and expects to exercise, subject to market conditions, substantially
all of its option contracts. At March 31, 1998, the Company had an additional
7,122 lots under option representing slightly more than a one-and-a-half-year
supply of land based on the same absorption rates as above.
The Company will continue to pursue its strategy to increase operations
through strategic acquisitions, as it did with Whittaker, WestBrook and Quail
during the first four months of 1998. 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
Prometheus or a combination thereof.
17
<PAGE>
PART II -- OTHER INFORMATION
Item 2. Changes in Securities.
Effective January 1, 1998, the Company acquired the stock of WestBrook
Homes, Inc. ("WestBrook") from the shareholders of WestBrook. The consideration
paid by the Company consisted of cash, 2,500 shares of the Company's Series E
Cumulative Convertible Preferred Stock ("Series E Preferred Stock") having an
aggregate liquidation value of $250 thousand, and the assumption of WestBrook's
debt. The Series E Preferred Stock will rank senior to the Common Stock as to
the payment of distributions upon the dissolution, liquidation or winding up of
the Company. Each share of the Series E Preferred Stock is convertible into ten
shares of Common Stock. The conversion rate is subject to certain antidilution
adjustments. Additionally, from and after the date the Common Stock has traded
on the market for $10.00 per share or more for ten consecutive business days,
the Company may, at its sole option, require the holders of the Series E
Preferred Stock to convert each share of Series E Preferred Stock into ten
shares of Common Stock. To the extent permitted under applicable law, the
Indenture governing the Company's Senior Notes and the Class AA Preferred Stock,
each holder of Series E Preferred Stock has the right to require the Company to
redeem up to 20% of the total number of shares issued to such holder, for a
period of 30 days after each redemption date. The redemption dates are the first
trading day after the first, second, third, fourth and fifth anniversaries of
the date the Series E Preferred Stock was issued. The redemption amount will be
payable in cash, Common Stock, or a combination thereof, at the Company's
option. The Series E Preferred Stock was issued without registration under the
Securities Act of 1933, as amended (the "Securities Act"), pursuant to Section
4(2) as a transaction not involving a public offering.
Under the Agreement with Prometheus, the Company issued to Prometheus,
effective March 6, 1998, 28,300 shares of Class AA Convertible Preferred Stock
having an initial liquidation value of $28,300,000 for a purchase price of
$28,300,000. The Class AA Preferred Stock will rank senior to the Company's
common stock as to the payment of dividends and distributions upon the
dissolution, liquidation or winding up of the Company. Dividends will be payable
in cash at the annual rate of 6%, cumulative and compounded quarterly, on the
liquidation value of $1,000 per share. The Company will be required to declare
and pay such dividends to the extent that funds are legally available therefor.
The Class AA Preferred Stock will be convertible, in whole or in part, at the
option of the holder, into Common Stock, at any time after issuance, at an
initial conversion price of $6.00 per shares, subject to certain adjustments.
The conversion price is subject to decrease, at the option of the holder, up to
five times per year, between September 30, 2001 and September 30, 2003, if the
average closing price of the Common Stock for the 60 days prior to such
adjustment is $12.00 or less. The amount of adjustment will vary based on the
average closing price of the Common Stock. The Company has the option to require
conversion of all, but not less than all, of the Class AA Preferred Stock into
Common Stock if the average closing price of the Common Stock for the 90 days
preceding such conversion is $12.00 per share or more. In either case, the
conversion price is subject to certain antidilution adjustments. The Company
will not have the right to redeem the Class AA Preferred Stock. The Class AA
Preferred Stock was issued without registration under the Securities Act,
pursuant to Section 4(2) as a transaction not involving a public offering.
The issuance of Series F 6% Cumulative Convertible Preferred Stock was
previously reported in the Company's Proxy Statement dated February 19, 1998.
Item 4. Submission of Matters to a Vote of Security Holders.
A Special Meeting of Stockholders was held on March 6, 1998 to consider
and act upon the following:
1. A proposal to approve certain investment transactions involving the
purchase by Prometheus of up to $100,000,000 of the Company's newly
issued convertible preferred stock and amendments to the Company's
certificate of incorporation which, among other things, would increase
the Company's authorized common stock and would require the affirmative
vote of more than 81% of the Company's board of directors or executive
committee for the Company to engage in certain significant actions or
transactions; and
2. A proposal to authorize an increase in the common stock subject to the
Company's 1996 Stock Incentive Plan.
18
<PAGE>
The vote for the approval of the Prometheus transaction was 8,288,299 for and
2,000 against with no abstentions or broker non-votes.
The vote for the approval of the increase in the common stock subject to the
1996 Stock Incentive Plan was 8,073,723 for; 197,458 against; and 19,118 broker
non-votes.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Number Description
------ -----------
4.1 Amended Certificate of Designations, Preferences and
Rights of Series E 6% Cumulative Convertible
Preferred Stock of The Fortress Group, Inc.
4.2 Certificate of Designations, Preferences and Rights
of Series F 6% Cumulative Convertible Preferred
Stock of Fortress Group, Inc.
27 Financial Data Schedule.
(b) Reports on Form 8-K.
Form 8-K filed March 16, 1998 reporting, pursuant to Item 2,
the acquisition of Whittaker Homes and reporting, pursuant to
Item 5, the shareholder approval of the Prometheus agreement.
19
<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: 05/14/98 By: /s/ James J. Martell, Jr.
-------- -------------------------
James J. Martell, Jr.
President and
Chief Executive Officer
Date: 05/14/98 By: /s/ Jamie M. Pirrello
-------- ---------------------
Jamie M. Pirrello
Chief Financial Officer
20
<PAGE>
EXHIBIT INDEX
Number Description
------ -----------
4.1 Amended Certificate of Designations, Preferences and
Rights of Series E 6% Cumulative Convertible
Preferred Stock of The Fortress Group, Inc.
4.2 Certificate of Designations, Preferences and Rights
of Series F 6% Cumulative Convertible Preferred
Stock of The Fortress Group, Inc.
27 Financial Data Schedule
21
Exhibit 4.1
AMENDED
CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RIGHTS
OF
SERIES E 6% CUMULATIVE CONVERTIBLE PREFERRED STOCK
OF
THE FORTRESS GROUP, INC.
Pursuant to Section 151 of the General Corporation Law of the
State of Delaware.
The Fortress Group, Inc., a Delaware corporation (the "Corporation"),
certifies -
(1) No Shares of Series E 6% Cumulative Convertible Preferred Stock have
been issued, and
(2) That pursuant to the authority contained in its Certificate of
Incorporation and in accordance with the provisions of Section 151 of the
General Corporation Law of the State of Delaware, its Board of Directors has
adopted the following resolution, amending the voting powers, designations,
preferences, and relative, participating, optional or other rights of its Series
E 6% Cumulative Convertible Preferred Stock:
RESOLVED, that a Series of the class of authorized Preferred Stock, $.01
par value per share, of the Corporation (the "Preferred Stock") be hereby
created, and that the designation and amount thereof and the voting powers,
preferences and relative, participating, optional and other special rights of
the shares of such series, and the qualifications, limitations and restrictions
thereof are as follows:
Section 1. Designation and Amount. The shares of such Preferred Stock
shall be designated as the "Series E 6% Cumulative Convertible Preferred Stock"
(the "Series E Preferred Stock") and the number of shares constituting such
series shall be 50,000 which number may be decreased (but not increased) by the
Board of Directors without a vote of stockholders; provided, however, that such
number may not be decreased below the number of then currently outstanding
shares of Series E Preferred Stock. Certain capitalized terms used herein are
defined in Section 14 hereof.
Section 2. Dividends.
(a) 6% Preferred Dividend. When and as declared by the Corporation's
Board of Directors and to the extent permitted by the General Corporation Law of
the State of Delaware, the Corporation will pay preferential dividends to the
holders of the Preferred
<PAGE>
Stock as provided in this Section 2(a). Except as otherwise provided herein,
dividends on each share of Preferred Stock will accrue cumulatively at the rate
of 6% per annum of the initial $100 Liquidation Preference thereof, from and
including the date of issuance of such share of Preferred Stock, to and
including the earlier of (i) the date on which the Liquidation Preference of
such share of Preferred Stock is paid, (ii) such share is redeemed or converted
in accordance with the provisions hereof, and (iii) the date the Common Stock of
the Corporation has traded on the market for $10.00 per share or more for ten
(10) consecutive business days (the "6% Preferred Dividends"). Such dividends
will accrue whether or not it has been declared and whether or not there are
profits, surplus or other funds of the Corporation legally available for the
payment of the 6% Preferred Dividends. The date on which the Corporation
initially issues any share of Preferred Stock (the "Issue Date") will be deemed
to be the date of issuance of such shares.
(b) The 6% Preferred Dividend shall be cumulative and begin to accrue
on a daily basis beginning on the Issue Date. The amount of the 6% Preferred
Dividend so payable shall be determined on the basis of twelve 30-day months and
a 360-day year for the actual number of days elapsed. The Board of Directors may
fix a record date for the determination of holders of shares of Preferred Stock
to receive payment of the 6% Preferred Dividend declared thereon, which record
date shall be no more than 60 days prior to the date fixed for the payment
thereof.
Section 3. Liquidation. Upon any liquidation, dissolution or winding up
of the Corporation, the holders of the Series E Preferred Stock will be entitled
to be paid, before any distribution or payment is made upon any Junior
Securities, (as hereinafter defined in Section 14), an amount in cash equal to
the aggregate Liquidation Value of all shares outstanding and the holders of the
Series E Preferred Stock will not be entitled to any further payment. If upon
any such liquidation, dissolution or winding up of the Corporation, the
Corporation's assets to be distributed among the holders of the Series E
Preferred Stock are insufficient to permit payment to such holders of the
aggregate amount which they are entitled to be paid, then the entire assets to
be distributed will be distributed ratably among such holders and the holders of
Parity Securities based upon the aggregate Liquidation Value of the Series E
Preferred Stock and the Parity Securities held by each such holder. The
Corporation will mail written notice of such liquidation, dissolution or winding
up, not less than 60 days prior to the payment date stated therein, to each
record holder of Series E Preferred Stock. Neither the consolidation or merger
of the Corporation into or with any other corporation or corporations, nor the
sale or transfer by the Corporation of all or any part of its assets, nor the
reduction of the capital stock of the Corporation, will be deemed to be a
liquidation, dissolution or winding up of the Corporation within the meaning of
this Section 3.
Section 4. Voting Rights. Except as otherwise provided by the
Corporation's Certificate of Incorporation or by applicable law, the holders of
the Preferred Stock shall not be entitled to vote.
2
<PAGE>
Section 5. Conversion.
(a) Conversion at the Option of Holder. Each share of Series E
Preferred Stock may, at the option of the holder thereof, be converted into ten
(10) fully paid and nonassessable shares of the Common Stock of the Corporation
on the terms and conditions set forth in this Section 5. The holder of any
shares of Series E Preferred Stock may exercise his right to convert such shares
into shares of Common Stock by surrendering for such purpose to the Corporation,
at its principal office or at such other office or agency maintained by the
Corporation for that purpose, a certificate or certificates representing the
shares of Series E Preferred Stock to be converted accompanied by a written
notice stating that such holder elects to convert all or a specified whole
number of such shares in accordance with the provisions of this Section 5 and
specifying the name or names in which such holder wishes the certificate or
certificates for shares of Common Stock to be issued. In case such notice shall
specify a name or names other than that of such holder, such notice shall be
accompanied by payment of all transfer taxes payable upon the issuance of shares
of Common Stock (or other securities) in such name or names. Other than such
taxes, the Corporation will pay any and all transfer and other taxes (other than
taxes based on income) that may be payable in respect of any issue or delivery
of shares of Common Stock on conversion of Series E Preferred Stock pursuant
hereto. As promptly as practicable, and in any event within five business days
after the surrender of such certificate or certificates and the receipt of such
notice relating thereto and, if applicable, payment of all transfer taxes (or
the demonstration to the satisfaction of the Corporation that such taxes have
been paid), the Corporation shall deliver or cause to be delivered (i)
certificates representing the number of validly issued, fully paid and
nonassessable full shares of Common Stock to which the holder of shares of
Series E Preferred Stock so converted shall be entitled and (ii) if less than
the full number of shares of Series E Preferred Stock evidenced by the
surrendered certificate or certificates, of like tenor, for the number of shares
evidenced by such surrendered certificate or certificates less the number of
shares converted. Such conversion shall be deemed to have been made at the close
of business on the date of giving of such notice and of such surrender of the
certificate or certificates representing the shares of Series E Preferred Stock
to be converted so that the rights of the holder thereof as to the shares being
converted shall cease except for the right to receive shares of Common Stock in
accordance herewith, and the person entitled to receive the shares of Common
Stock shall be treated for all purposes as having become the record holder of
such shares of Common Stock at such time.
(b) Conversion at the Option of the Corporation. From and after the
date the Common Stock of the Corporation has traded on the market for $10.00 per
share or more for ten (10) consecutive business days, and from time to time
thereafter, the Corporation shall have the right, at its sole option, to require
the holders of Series E Preferred Stock to convert each share of Series E
Preferred Stock into ten (10) fully paid and nonassessable shares of the Common
Stock of the Corporation under the procedure for conversion set forth in Section
5(a), above.
(c) Status of Converted Shares. Any shares of Series E Preferred Stock
which are converted or otherwise acquired by the Corporation shall be canceled,
and, upon
3
<PAGE>
cancellation, shall become authorized but unissued shares of preferred stock of
the Corporation and may be reissued as part of another series of Preferred
Stock.
(d) No Fractional Shares. In connection with the conversion of any
shares of Series E Preferred Stock, no fractions of shares of Common Stock shall
be issued, but in lieu thereof the Corporation shall pay a cash adjustment in
respect of such fractional interest in an amount equal to such fractional
interest multiplied by the Current Market Price per share of Common Stock on the
day on which such shares of Series E Preferred Stock are deemed to have been
converted.
(e) Reservation of Shares of Common Stock. The Corporation shall at all
times reserve and keep available out of its authorized and unissued Common
Stock, solely for the purpose of effecting the conversion of the Series E
Preferred Stock, such number of shares of Common Stock as shall from time to
time be sufficient to effect the conversion of all then outstanding shares of
Series E Preferred Stock. The Corporation shall from time to time, subject to
and in accordance with the laws of Delaware, increase the authorized amount of
Common Stock if at any time the number of authorized shares of Common Stock
remaining unissued shall not be sufficient to permit the conversion at such time
of all then outstanding shares of Series E Preferred Stock.
(f) Adjustments. The Conversion Rate shall be subject to adjustment
from time to time as follows: In case the Corporation shall at any time or from
time to time declare a dividend, or make a distribution, on all of the
outstanding shares of Common Stock in shares of Common Stock or subdivide or
reclassify all of the outstanding shares of Common Stock into a greater number
of shares or combine or reclassify all of the outstanding shares of Common Stock
into a smaller number of shares of Common Stock, then, and in each such case,
(i) the number of shares of Common Stock into which each share
of Series E Preferred Stock is convertible shall be adjusted so that
the holder of each share thereof shall be entitled to receive, upon the
conversion thereof, the number of shares of Common Stock which the
holder of a share of Series E Preferred Stock would have been entitled
to receive after the happening of any of the events described above had
such share been converted immediately prior to the happening of such
event or the record date therefor, whichever is earlier; and
(ii) an adjustment made pursuant to this Section 5(b) shall
become effective (x) in the case of any such dividend or distribution,
immediately after the close of business on the record date for the
determination of holders of shares of Common Stock entitled to receive
such dividend or distribution or (y) in the case of any such
subdivision, reclassification or combination, at the close of business
on the day upon which such corporate action becomes effective.
(g) Organic Change. Any capital reorganization, reclassification,
consolidation, merger or sale of all or substantially all of the Corporation's
assets to another Person which is effected in such a way that holders of Common
Stock are entitled to receive (either directly
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<PAGE>
or upon subsequent liquidation) stock, securities or assets with respect to or
in exchange for Common Stock is referred to herein as an "Organic Change". Prior
to the consummation of any Organic Change the Corporation will make appropriate
provisions (in form and substance satisfactory to the holders of a majority of
the Series E Preferred Stock then outstanding) to insure that each of the
holders of Series E Preferred Stock will thereafter have the right to acquire
and receive, in lieu of or in addition to the shares of Common Stock immediately
theretofore acquirable and receivable upon the conversion of such holder's
Series E Preferred Stock, such shares of stock, securities or assets as such
holder would have received in connection with such Organic Change if such holder
had converted his Series E Preferred Stock immediately prior to such Organic
change. In any such case, the Corporation will make appropriate provisions (in
form and substance satisfactory to the holders of a majority of the Series E
Preferred Stock then outstanding) to insure that the provisions of this Section
5 will thereafter be applicable to the Series E Preferred Stock. The Corporation
will not effect any such consolidation, merger or sale, unless prior to the
consummation thereof, the successor corporation (if other than the Corporation)
resulting from consolidation or merger or the corporation purchasing such assets
assumes by written instrument (in form reasonably satisfactory to the holders of
a majority of the Series E Preferred Stock then outstanding), the obligation to
deliver to each such holder such shares of stock, securities or assets as, in
accordance with the foregoing provisions, such holder may be entitled to
acquire.
(h) DeMinimis Adjustments. If any adjustment in the number of shares of
Common Stock into which each share of Series E Preferred Stock may be converted
required pursuant to this Section 5 would result in an increase or decrease of
less than 1% in the number of shares of Common Stock into which each share of
Series E Preferred Stock is then convertible, the amount of any such adjustment
shall be carried forward and adjustment with respect thereto shall be made at
the time of and together with any subsequent adjustment, which, together with
such amount and any other amount or amounts so carried forward, shall aggregate
at least 1% of the number of shares of Common Stock into which each share of
Series E Preferred Stock is then convertible.
(i) Shares of the Series E Preferred Stock may not be converted after
the close of the fifth business day preceding the date fixed for redemption of
such shares pursuant to Section 7.
Section 6. Redemption at Option of Holder of Series E Preferred Stock.
(a) To the extent permitted under applicable law from and for a period
of 30 days after each respective Series E Redemption Date as set forth in the
column below (the "Series E Redemption Dates"), each holder of the Series E
Preferred Stock shall have a right, at the sole option and election of such
holder, to require the Corporation at once to redeem up to 20% of the total
number of shares of Series E Preferred Stock initially issued to such holder for
cash equal to $100 per share (the "Redemption Amount"), plus an amount equal to
all unpaid dividends thereon, including accrued dividends, whether or not
declared, to the redemption date.
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Any shares of the Corporation's Common Stock issued to a holder pursuant
to this Section 6(a) shall be freely tradable securities, registered with the
Securities Exchange Commission at the expense of the Corporation.
Series E Redemption Dates
----------------------------
First Anniversary of the Issue Date
Second Anniversary of the Issue Date
Third Anniversary of the Issue Date
Fourth Anniversary of the Issue Date
Fifth Anniversary of the Issue Date
Each holder's right under this Section 6 shall be cumulative in nature.
Shares a holder had a right to but did not redeem on a Series E Redemption Date
may be added to the total that may be redeemed on the next Series E Redemption
Date.
(b) Subject to paragraph (a) the holder of any shares of the Series E
Preferred Stock entitling the holder thereof to redemption rights pursuant to
paragraph (a) may exercise this right to require the Corporation to redeem such
shares by surrendering for such purpose to the Corporation, at its principal
office, a certificate or certificates representing the shares of Series E
Preferred Stock to be redeemed accompanied by a written notice stating that such
holder elects to require the Corporation to redeem the specified integral number
of such shares in accordance with the provisions of this Section 6. As promptly
as practicable, and in any event within 10 business days after such surrender or
such certificate and the receipt of such notice, the Corporation shall deliver
or cause to be delivered to the holder of such shares being redeemed the
Redemption Amount therefor as provided in paragraph (a) and, if applicable, a
new certificate of like tenor for the number of shares evidenced by such
surrendered certificate less the number of shares redeemed. Such redemption
shall be deemed to have been made at the close of business on the date of the
receipt of such notice and of the surrender of the certificate representing the
shares of Series E Preferred to be redeemed.
Section 7. Redemption at the Option of the Corporation of Series E
Preferred Stock.
(a) To the extent permitted under applicable law the Corporation shall
have the right, at its sole option and election to redeem the shares of the
Series E Preferred Stock, in whole or part, at any time and from time to time
for cash equal to the Redemption Amount, plus an amount equal to all unpaid
dividends thereon, including accrued dividends, whether or not declared, to the
redemption date.
(b) Notice of any redemption of the Series E Preferred Stock shall be
mailed at least thirty but not more than sixty days prior to the date fixed for
redemption to each holder of the Series E Preferred Stock to be redeemed, at
such address as it appears on the books of the Corporation.
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(c) On the redemption date specified in the notice given pursuant to
paragraph (b), the Corporation shall deposit for the pro-rata benefit of the
holders of the shares of the Series E Preferred Stock so called for redemption
the funds necessary for such redemption with a bank or trust company in the
County of Fairfax, Virginia having a capital and surplus of at least
$50,000,000.
(d) Upon the deposit of funds pursuant to paragraph (c) in respect to
the shares of Series E Preferred Stock called for redemption, notwithstanding
any certification for such shares shall not have been surrendered for
cancellation, the shares represented thereby shall no longer be deemed
outstanding, the rights to receive dividends thereon shall cease to accrue from
and after the date of redemption designated in the notice of redemption and all
rights of the holders of the shares of the Series E Preferred Stock called for
redemption shall cease and terminate, excepting only the right to receive the
redemption price therefor and the right to convert such shares into shares of
Common Stock until the close of business on the fifth business day preceding the
redemption date, as provided in Section 5(i).
Section 8. Reports as to Adjustments. Whenever the number of shares of
Common Stock into which each share of Series E Preferred Stock is convertible as
provided in Section 5 hereof, the Corporation shall promptly mail to the holders
of record of the outstanding shares of Series E Preferred Stock at their
respective addresses as the same shall appear in the Corporation's stock records
a notice stating that the number of shares of Common Stock into which the shares
of Series E Preferred Stock are convertible has been adjusted and setting forth
the new number of shares of Common Stock (or describing the new stock,
securities, cash or other property) into which each share of Series E Preferred
Stock is convertible as a result of such adjustment, a brief statement of the
facts requiring such adjustment and the computation thereof, and when such
adjustment became effective.
Section 9. Ranking. With regard to rights to receive dividends and
distributions upon the dissolution, liquidation and winding up of the
Corporation, the Series E Preferred Stock shall --
(a) Be subject to the Corporation's shares of Class AA
Convertible Preferred Stock and Class AB Preferred Stock;
(b) Rank pari passu with any Parity Stock; and
(c) Rank senior to all Junior Securities.
Section 10. Registration of Transfer. The Corporation will keep at its
principal office a register for the registration of Series E Preferred Stock.
Upon the surrender of any certificate representing Series E Preferred Stock at
such place, the Corporation will, at the request of the record holder of such
certificate, execute and deliver (at the Corporation's expense) a new
certificate or certificates in exchange therefor representing in the aggregate
the number of shares represented by the surrendered certificate. Each such new
certificate will be registered in such name and will represent such number of
shares as is requested by the holder of the surrendered certificate and will be
substantially identical in form to the
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<PAGE>
surrendered certificate, and dividends will accrue on the Series E Preferred
Stock represented by such new certificate from the date to which dividends have
been fully paid on such Series E Preferred Stock represented by the surrendered
certificate.
Section 11. Replacement. Upon receipt of the evidence reasonably
satisfactory to the Corporation (an affidavit of the registered holder will be
satisfactory) of the ownership and the loss, theft, destruction or mutilation of
any certificate evidencing shares of Series E Preferred Stock, and in the case
of any such loss, theft or destruction, upon receipt of indemnity reasonably
satisfactory to the Corporation, or, in the case of any such mutilation upon
surrender of such certificate, the Corporation will (at its expense) execute and
deliver in lieu of such certificate a new certificate of like kind representing
the number of shares represented by such lost, stolen, or destroyed or mutilated
certificate and dated the date of such lost, stolen, destroyed or mutilated
certificate, and dividends will accrue on the Series E Preferred Stock
represented by such new certificate from the date to which dividends have been
fully paid on such lost, stolen, destroyed or mutilated certificate.
Section 12. Amendment. No amendment, modification or waiver will be
binding or effective with respect to any provision of this Certificate of
Designations, Preferences and Rights of Series E Preferred Stock without the
prior written consent of the holders of at least majority of the then
outstanding shares of Series E Preferred Stock.
Section 13. Notice. Except as otherwise expressly provided, all notices
referred to herein will be in writing and will be delivered by registered or
certified mail, return receipt requested, postage prepaid and will be deemed to
have been given when so mailed (i) to the Corporation at its principal executive
offices and (ii) to any stockholder, at such holder's address as it appears in
the stock records of the Corporation (unless otherwise indicated by any such
holder).
Section 14. Definitions. For the . purposes of the Certificate of
Designation of Series E Non-Voting Convertible Preferred Stock which embodies
this resolution:
"Class AB Preferred Stock" means the Corporation's Class ABI
Convertible Redeemable Preferred Stock and Class ABII Convertible Redeemable
Preferred Stock.
"Closing Price" means the last sales price, regular way, per share of
the Common Stock on the day in question, or if no such sale takes place, the
average of the closing bid and asked prices, regular way, as reported in the
principal consolidated transaction reporting system with respect to the
Corporation's Common Stock.
"Common Stock" means the authorized common stock, $.01 par value, of the
Corporation.
"Fair Market Value" means the average of the daily Closing Price for
the 30 consecutive Trading Days immediately prior to the respective Series E
Redemption Date.
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"Junior Securities" means any of the Corporation's equity securities
other than (i) its Class AA Convertible Preferred Stock and Class AB Preferred
Stock and (ii) the Parity Securities.
"Liquidation Value" means the amount of $100 per share of Series E
Preferred Stock.
"Parity Securities" means the Corporation's Series A 11% Cumulative
Convertible Stock, Series B Convertible Preferred Stock, Series C Convertible
Preferred Stock, Series D 6% Cumulative Convertible Preferred Stock, and any
other securities which are expressly made Parity Securities with the
Corporation's Series E Preferred Stock.
"Person" shall mean any individual partnership, joint venture, firm,
corporation, trust or unincorporated organization, or a government or agency or
political subdivision thereof or other entity, and shall include any successor
(by merger or otherwise) of such entity.
"Subsidiary" of any Person means any corporation or other entity of
which a majority of the voting power of the voting equity securities or equity
interest is owned, directly or indirectly, by such Person.
"Trading Day" means a day on which the principal national securities
exchange on which shares of the Common Stock of the Corporation are listed is
open for the transaction of business.
IN WITNESS WHEREOF, the Corporation has caused this Amended Certificate
of Designations of Series E 6% Cumulative Convertible Preferred Stock to be duly
executed by its President and attested to by its Secretary this 17th day of
February, 1998.
THE FORTRESS GROUP, INC.
By:
-----------------------
James J. Martell, Jr.
President
ATTEST:
- -------------------
Hildy Zampella,
Assistant Secretary
9
Exhibit 4.2
CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RIGHTS
OF
SERIES F 6% CUMULATIVE CONVERTIBLE PREFERRED STOCK
OF
THE FORTRESS GROUP, INC.
Pursuant to Section 151 of the General Corporation Law of the
State of Delaware
The Fortress Group, Inc., a Delaware corporation (the "Corporation"),
certifies that pursuant to the authority contained in its Certificate of
Incorporation and in accordance with the provisions of Section 151 of the
General Corporation Law of the State of Delaware, its Board of Directors has
adopted the following resolution, creating a series of its Preferred Stock, $.01
par value per share, designated as Series F 6% Cumulative Convertible Preferred
Stock:
RESOLVED, that a Series of the class of authorized Preferred Stock, $.01
par value per share, of the Corporation (the "Preferred Stock") be hereby
created, and that the designation and amount thereof and the voting powers,
preferences and relative, participating, optional and other special rights of
the shares of such series, and the qualifications, limitations and restrictions
thereof are as follows:
Section 1. Designation and Amount. The shares of such Preferred Stock
shall be designated as the "Series F 6% Cumulative Convertible Preferred Stock"
(the "Series F Preferred Stock") and the number of shares constituting such
series shall be 5,000 which number may be decreased (but not increased) by the
Board of Directors without a vote of stockholders; provided, however, that such
number may not be decreased below the number of then currently outstanding
shares of Series F Preferred Stock. Certain capitalized terms used herein are
defined in Section 14 hereof.
Section 2. Dividends.
(a) 6% Preferred Dividend. When and as declared by the Corporation's
Board of Directors and to the extent permitted by the General Corporation Law of
the State of Delaware, the Corporation will pay preferential dividends to the
holders of the Series F Preferred Stock as provided in this Section 2(a). Except
as otherwise provided herein, dividends on each share of Series F Preferred
Stock will accrue cumulatively at the rate of 6% per annum of the initial $100
Liquidation Preference thereof (the "6% Preferred Dividend"), from and including
the date of issuance of such share of Preferred Stock, to and including the
earlier of (i) the date on which the Liquidation Preference of such share of
Preferred Stock is paid, (ii) such share is redeemed or converted in accordance
with the provisions hereof, and (iii) March 1, 2001. Such dividends will accrue
whether or not they have been declared and whether or not there are profits,
surplus or
<PAGE>
other funds of the Corporation legally available for the payment of the 6%
Preferred Dividends. The date on which the Corporation initially issues any
share of Series F Preferred Stock (the "Issue Date") will be deemed to be the
date of issuance of such shares.
(b) The 6% Preferred Dividend shall be cumulative and begin to accrue
on a daily basis beginning on the Issue Date. The amount of the 6% Preferred
Dividend so payable shall be determined on the basis of twelve 30-day months and
a 360-day year for the actual number of days elapsed. The Board of Directors may
fix a record date for the determination of holders of shares of Preferred Stock
to receive payment of the 6% Preferred Dividend declared thereon, which record
date shall be no more than 60 days prior to the date fixed for the payment
thereof.
Section 3. Voting Rights. Except as otherwise provided by the
Corporation's certificate of incorporation or by applicable law, the holders of
the Series F Preferred Stock shall not be entitled to vote.
Section 4. Liquidation. Upon any liquidation, dissolution, or winding up
of the Corporation, the holders of the Series F Preferred Stock will be entitled
to be paid, before any distribution or payment is made upon any Junior
Securities, (as hereinafter defined in Section 14), an amount in cash equal to
the aggregate Liquidation Value of all shares outstanding plus accrued dividends
(the "Liquidation Preference"), and the holders of the Series F Preferred Stock
will not be entitled to any further payment. If upon any such liquidation,
dissolution, or winding up of the Corporation, the Corporation's assets to be
distributed among the holders of the Series F Preferred Stock are insufficient
to permit payment to such holders of the aggregate amount which they are
entitled to be paid, then the entire assets to be distributed will be
distributed ratably among such holders and the holders of Parity Securities
based upon the aggregate Liquidation Value of the Series F Preferred Stock and
the Parity Securities held by each such holder. The Corporation will mail
written notice of such liquidation, dissolution, or winding up to each record
holder of Series F Preferred Stock not less than 60 days prior to the payment
date stated therein. Neither the consolidation or merger of the Corporation into
or with any other corporation or corporations, nor the sale or transfer by the
Corporation of all or any part of its assets, nor the reduction of the capital
stock of the Corporation, will be deemed to be a liquidation, dissolution or
winding up of the Corporation within the meaning of this Section 4.
Section 5. Conversion.
(a) Conversion at the Option of Holder. Shares of Series F Preferred
Stock may, at the option of the holder thereof, be converted into fully paid and
nonassessable shares of the Common Stock of the Corporation on the terms and
conditions set forth in this Section 5. Any shares of the Corporation's Common
Stock issued to a holder pursuant to this Section 5(a) shall be freely tradable
securities, registered with the Securities Exchange Commission at the expense of
the Corporation
(i) For a period of sixty (60) days commencing on February 15,
1999, that number of shares of Series F Preferred Stock having a value
equal to the amount of principal forgiven (rounded up the nearest $100)
pursuant to Section 2.2(a)(1) of the Whittaker
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<PAGE>
Promissory Note (the "1998 Forgiveness Amount") shall be convertible
into that number of shares of Common Stock equal to the number
determined by dividing a by b where "a" is equal the 1998 Forgiveness
Amount and "b" is the Fair Market Value of the Common Stock on the
Closing Date.
(ii) For a period of sixty (60) days commencing on February
15, 2000, that number of shares of Series F Preferred Stock having a
value equal to the amount of principal forgiven (rounded up the nearest
$100) pursuant to Section 2.2(a)(2) or 2.2(b) of the Whittaker
Promissory Note, as the case may be, (the "1999 Forgiveness Amount")
shall be convertible into that number of shares of Common Stock equal
to the number determined by dividing c by d where "c" is equal the 1999
Forgiveness Amount and "d" is the Fair Market Value of the Common Stock
on the first anniversary of the Closing Date.
(iii) For a period of sixty (60) days commencing on February
15, 2001, that number of shares of Series F Preferred Stock having a
value equal to the amount of principal forgiven (rounded up the nearest
$100) pursuant to Section 2.2(a)(3) or 2.2(c) of the Whittaker
Promissory Note, as the case may be, (the "2000 Forgiveness Amount")
shall be convertible into that number of shares of Common Stock equal
to the number determined by dividing e by f where "e" is equal the 2000
Forgiveness Amount and "f" is the Fair Market Value of the Common Stock
on the second anniversary of the Closing Date.
For the purpose of this subsection (a), each share of Series F Preferred Stock
shall be deemed equal to $100 per share. The holder of any shares of Series F
Preferred Stock may exercise his right to convert such shares into shares of
Common Stock by surrendering for such purpose to the Corporation, at its
principal office or at such other office or agency maintained by the Corporation
for that purpose, a certificate or certificates representing the shares of
Series F Preferred Stock to be converted accompanied by a written notice stating
that such holder elects to convert all or a specified whole number of such
shares in accordance with the provisions of this Section 5 and specifying the
name or names in which such holder wishes the certificate or certificates for
shares of Common Stock to be issued. In case such notice shall specify a name or
names other than that of such holder, such notice shall be accompanied by
payment of all transfer taxes payable upon the issuance of shares of Common
Stock (or other securities) in such name or names. Other than such taxes, the
Corporation will pay any and all transfer and other taxes (other than taxes
based on income) that may be payable in respect of any issue or delivery of
shares of Common Stock on conversion of Series F Preferred Stock pursuant
hereto. As promptly as practicable, and in any event within five business days
after the surrender of such certificate or certificates and the receipt of such
notice relating thereto and, if applicable, payment of all transfer taxes (or
the demonstration to the satisfaction of the Corporation that such taxes have
been paid), the Corporation shall deliver or cause to be delivered (i)
certificates representing the number of validly issued, fully paid and
nonassessable full shares of Common Stock to which the holder of shares of
Series F Preferred Stock so converted shall be entitled and (ii) if less than
the full number of shares of Series F Preferred Stock evidenced by the
surrendered certificate or certificates, of like tenor, for the number of shares
evidenced by such surrendered certificate or certificates less the number of
shares converted. Such conversion shall
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<PAGE>
be deemed to have been made at the close of business on the date of giving of
such notice and of such surrender of the certificate or certificates
representing the shares of Series F Preferred Stock to be converted so that the
rights of the holder thereof as to the shares being converted shall cease except
for the right to receive shares of Common Stock in accordance herewith, and the
person entitled to receive the shares of Common Stock shall be treated for all
purposes as having become the record holder of such shares of Common Stock at
such time.
(b) Status of Converted Shares. Any shares of Series F Preferred Stock
which are converted or otherwise acquired by the Corporation shall be canceled,
and, upon cancellation, shall become authorized but unissued shares of preferred
stock of the Corporation and may be reissued as part of another series of
Preferred Stock.
(c) No Fractional Shares. In connection with the conversion of any
shares of Series F Preferred Stock, no fractions of shares of Common Stock shall
be issued, but in lieu thereof the Corporation shall pay a cash adjustment in
respect of such fractional interest in an amount equal to such fractional
interest multiplied by the Fair Market Price per share of Common Stock on the
day on which such shares of Series F Preferred Stock are deemed to have been
converted.
(d) Reservation of Shares of Common Stock. The Corporation shall at all
times reserve and keep available out of its authorized and unissued Common
Stock, solely for the purpose of effecting the conversion of the Series F
Preferred Stock, such number of shares of Common Stock as shall from time to
time be sufficient to effect the conversion of all then outstanding shares of
Series F Preferred Stock. The Corporation shall from time to time, subject to
and in accordance with the laws of Delaware, increase the authorized amount of
Common Stock if at any time the number of authorized shares of Common Stock
remaining unissued shall not be sufficient to permit the conversion at such time
of all then outstanding shares of Series F Preferred Stock.
(e) Adjustments. The Conversion Rate shall be subject to adjustment
from time to time as follows: In case the Corporation shall at any time or from
time to time declare a dividend, or make a distribution, on all of the
outstanding shares of Common Stock in shares of Common Stock or subdivide or
reclassify all of the outstanding shares of Common Stock into a greater number
of shares or combine or reclassify all of the outstanding shares of Common Stock
into a smaller number of shares of Common Stock, then, and in each such case,
(i) the number of shares of Common Stock into which each share
of Series F Preferred Stock is convertible shall be adjusted so that
the holder of each share thereof shall be entitled to receive, upon the
conversion thereof, the number of shares of Common Stock which the
holder of a share of Series F Preferred Stock would have been entitled
to receive after the happening of any of the events described above had
such share been converted into Common Stock immediately prior to the
happening of such event or the record date therefor, whichever is
earlier; and
(ii) an adjustment made pursuant to this Section 5(e) shall
become effective (x) in the case of any such dividend or distribution,
immediately after the close of business on the record date for the
determination of holders of shares of Common Stock entitled to
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<PAGE>
receive such dividend or distribution or (y) in the case of any such
subdivision, reclassification or combination, at the close of business
on the day upon which such corporate action becomes effective.
(f) Organic Change. Any capital reorganization, reclassification,
consolidation, merger or sale of all or substantially all of the Corporation's
assets to another Person which is effected in such a way that holders of Common
Stock are entitled to receive (either directly or upon subsequent liquidation)
stock, securities or assets with respect to or in exchange for Common Stock is
referred to herein as an "Organic Change". Prior to the consummation of any
Organic Change the Corporation will make appropriate provisions (in form and
substance satisfactory to the holders of a majority of the Series F Preferred
Stock then outstanding) to insure that each of the holders of Series F Preferred
Stock will thereafter have the right to acquire and receive, in lieu of or in
addition to the shares of Common Stock immediately theretofore acquirable and
receivable upon the conversion of such holder's Series F Preferred Stock, such
shares of stock, securities or assets as such holder would have received in
connection with such Organic Change if such holder had converted his Series F
Preferred Stock immediately prior to such Organic change. In any such case, the
Corporation will make appropriate provisions (in form and substance satisfactory
to the holders of a majority of the Series F Preferred Stock then outstanding)
to insure that the provisions of this Section 5 will thereafter be applicable to
the Series F Preferred Stock. The Corporation will not effect any such
consolidation, merger or sale, unless prior to the consummation thereof, the
successor corporation (if other than the Corporation) resulting from
consolidation or merger or the corporation purchasing such assets assumes by
written instrument (in form reasonably satisfactory to the holders of a majority
of the Series F Preferred Stock then outstanding), the obligation to deliver to
each such holder such shares of stock, securities or assets as, in accordance
with the foregoing provisions, such holder may be entitled to acquire.
(g) DeMinimis Adjustments. If any adjustment in the number of shares of
Common Stock into which each share of Series F Preferred Stock may be converted
as required pursuant to this Section 5 would result in an increase or decrease
of less than 1% in the number of shares of Common Stock into which each share of
Series F Preferred Stock is then convertible, the amount of any such adjustment
shall be carried forward and adjustment with respect thereto shall be made at
the time of and together with any subsequent adjustment, which, together with
such amount and any other amount or amounts so carried forward, shall aggregate
at least 1% of the number of shares of Common Stock into which each share of
Series F Preferred Stock is then convertible.
(h) Right Terminates with Redemption. Shares of the Series F Preferred
Stock may not be converted after the close of the fifth business day preceding
the date fixed for redemption of such shares pursuant to Section 6.
Section 6. Redemption at the Option of the Corporation of Series F
Preferred Stock.
(a) To the extent permitted under applicable law, the Corporation shall
have the right, at its sole option and election, to redeem the shares of the
Series F Preferred Stock, in whole or part, at any time from and after March 1,
2002, for cash equal to their Liquidation Value, plus an amount
5
<PAGE>
equal to all unpaid dividends thereon, including accrued dividends, whether or
not declared, to the redemption date.
(b) Notice of any redemption of the Series F Preferred Stock shall be
mailed at least thirty but not more than sixty days prior to the date fixed for
redemption to each holder of the Series F Preferred Stock to be redeemed, at
such address as it appears on the books of the Corporation.
(c) On the redemption date specified in the notice given pursuant to
paragraph (b), the Corporation shall deposit for the pro-rata benefit of the
holders of the shares of the Series F Preferred Stock so called for redemption
the funds necessary for such redemption with a bank or trust company in the
County of Fairfax, Virginia having a capital and surplus of at least
$50,000,000. Written notice of the deposit shall be sent to the holders and the
account shall be clearly marked for the benefit of holders of the shares of the
Series F Preferred Stock. Upon identification the bank or trust company shall
deliver the funds to the holders.
(d) Upon the deposit of funds pursuant to paragraph (c) in respect to
the shares of Series F Preferred Stock called for redemption, notwithstanding
any certificate for such shares shall not have been surrendered for
cancellation, the shares represented thereby shall no longer be deemed
outstanding, the rights to receive dividends thereon shall cease to accrue from
and after the date of redemption designated in the notice of redemption and all
rights of the holders of the shares of the Series F Preferred Stock called for
redemption shall cease and terminate, excepting only the right to receive the
redemption price therefor and the right to convert such shares into shares of
Common Stock until the close of business on the fifth business day preceding the
redemption date, as provided in Section 5(h).
Section 7. Redemption at Option of Holder of Series F Preferred Stock.
(a) To the extent permitted under applicable law, from and after the
date the audited financial results of the Corporation for the period ended
December 31, 2000 are released to the public each holder of the Series F
Preferred Stock shall have a right, at the sole option and election of such
holder, to require the Corporation at once to redeem the total number of shares
of Series F Preferred Stock having a value equal to the Net Forgiveness Amount
(rounded up to the nearest $100) for cash equal to $100 per share (the
"Redemption Amount"), plus an amount equal to all unpaid dividends thereon,
including accrued dividends, whether or not declared, to the redemption date.
For the purpose of this subsection (a), each share of Preferred Stock shall be
deemed equal to $100 per share. The Corporation shall apply the amount due to
the holder under this Section 9(a) directly against the Whittaker Promissory
Note.
(b) Subject to paragraph (a) the holder of any shares of the Series F
Preferred Stock entitling the holder thereof to redemption rights pursuant to
paragraph (a) may exercise this right to require the Corporation to redeem such
shares by surrendering for such purpose to the Corporation, at its principal
office, a certificate or certificates representing the shares of Series F
Preferred Stock to be redeemed accompanied by a written notice stating that such
holder elects to require the Corporation to redeem the specified number of such
shares in accordance with the provisions of this Section 7. As promptly as
practicable, and in any event within 10 business days after such surrender or
such certificate and the receipt of such notice, the Corporation shall
6
<PAGE>
deliver or cause to be delivered to the holder of such shares being redeemed the
Redemption Amount therefor as provided in paragraph (a) and, if applicable, a
new certificate of like tenor for the number of shares evidenced by such
surrendered certificate less the number of shares redeemed. Such redemption
shall be deemed to have been made at the close of business on the date of the
receipt of such notice and of the surrender of the certificate representing the
shares of Series F Preferred to be redeemed.
Section 8. Reports as to Adjustments. Whenever the number of shares of
Common Stock into which each share of Series F Preferred Stock is convertible as
provided in Section 5 hereof, the Corporation shall promptly mail to the holders
of record of the outstanding shares of Series F Preferred Stock at their
respective addresses as the same shall appear in the Corporation's stock records
a notice stating that the number of shares of Common Stock into which the shares
of Series F Preferred Stock are convertible has been adjusted and setting forth
the new number of shares of Common Stock (or describing the new stock,
securities, cash or other property) into which each share of Series F Preferred
Stock is convertible as a result of such adjustment, a brief statement of the
facts requiring such adjustment and the computation thereof, and when such
adjustment became effective.
Section 9. Ranking. With regard to rights to receive dividends and
distributions upon the dissolution, liquidation and winding up of the
Corporation, the Series F Preferred Stock shall --
(a) Be subject to the Corporation's shares of Class AA
Convertible Preferred Stock and Class AB Preferred Stock;
(b) Rank pari passu with any Parity Stock; and
(c) Rank senior to all Junior Securities.
Section 10. Registration of Transfer. The Corporation will keep at its
principal office a register for the registration of Series F Preferred Stock.
Upon the surrender of any certificate representing Series F Preferred Stock at
such place, the Corporation will, at the request of the record holder of such
certificate, execute and deliver (at the Corporation's expense) a new
certificate or certificates in exchange therefor representing in the aggregate
the number of shares represented by the surrendered certificate. Each such new
certificate will be registered in such name and will represent such number of
shares as is requested by the holder of the surrendered certificate and will be
substantially identical in form to the surrendered certificate, and dividends
will accrue on the Series F Preferred Stock represented by such new certificate
from the date to which dividends have been fully paid on such Series F Preferred
Stock represented by the surrendered certificate.
Section 11. Replacement. Upon receipt of the evidence reasonably
satisfactory to the Corporation (an affidavit of the registered holder will be
satisfactory) of the ownership and the loss, theft, destruction or mutilation of
any certificate evidencing shares of Series F Preferred Stock, and in the case
of any such loss, theft or destruction, upon receipt of indemnity reasonably
satisfactory to the Corporation, or, in the case of any such mutilation upon
surrender of such certificate, the Corporation will (at its expense) execute and
deliver in lieu of such certificate a
7
<PAGE>
new certificate of like kind representing the number of shares represented by
such lost, stolen, or destroyed or mutilated certificate and dated the date of
such lost, stolen, destroyed or mutilated certificate, and dividends will accrue
on the Series F Preferred Stock represented by such new certificate from the
date to which dividends have been fully paid on such lost, stolen, destroyed or
mutilated certificate.
Section 12. Amendment. No amendment, modification or waiver will be
binding or effective with respect to any provision of this Certificate of
Designations, Preferences and Rights of Series F Preferred Stock without the
prior written consent of the holders of at least majority of the then
outstanding shares of Series F Preferred Stock.
Section 13. Notice. Except as otherwise expressly provided, all notices
referred to herein will be in writing and will be delivered by registered or
certified mail, return receipt requested, postage prepaid and will be deemed to
have been given when so mailed (i) to the Corporation at its principal executive
offices and (ii) to any stockholder, at such holder's address as it appears in
the stock records of the Corporation (unless otherwise indicated by any such
holder).
Section 14. Definitions. For the purposes of the Certificate of
Designation of Series F Preferred Stock which embodies this resolution:
"1998 Forgiveness Amount" - as defined in Section 5(a)(i).
"1999 Forgiveness Amount" - as defined in Section 5(a)(ii).
"2000 Forgiveness Amount" - as defined in Section 5(a)(iii).
"6% Preferred Dividend" - as defined in Section 2(a).
"Board of Directors" means the Corporation's board of directors as
constituted from time to time.
"Closing Date" shall have the meaning ascribed to in the Purchase
Agreement.
"Closing Price" means the last sales price, regular way, per share of
the Common Stock on the day in question, or if no such sale takes place, the
average of the closing bid and asked prices, regular way, as reported in the
principal consolidated transaction reporting system with respect to the
Corporation's Common Stock.
"Common Stock" means the authorized common stock, $.01 par value, of
the Corporation.
"Current Market Price" means the Closing Price of the Common Stock on
the date in question.
"Fair Market Value" means the average of the daily Closing Price for
the 30 consecutive Trading Days immediately preceding the date in question.
8
<PAGE>
"Issue Date" - as defined in Section 2(a).
"Junior Securities" means any of the Corporation's equity securities
other than the Parity Securities.
"Liquidation Preference" - as defined in Section 4.
"Liquidation Value" means the amount of $100 per share of Series F
Preferred Stock.
"Net Forgiveness Amount" means that amount of principal payable
pursuant to the Whittaker Promissory Note that is not forgiven pursuant to
Section 2.2 thereof.
"Organic Change" - as defined in Section 5(f).
"Parity Securities" means the Corporation's Series A 11% Cumulative
Convertible Stock, Series B Convertible Preferred Stock, Series C Convertible
Preferred Stock, Series D 6% Cumulative Convertible Preferred Stock, Series E 6%
Cumulative Convertible Preferred Stock and any other securities which are
expressly made Parity Securities with the Corporation's Series F Preferred
Stock.
"Person" shall mean any individual partnership, joint venture, firm,
corporation, trust or unincorporated organization, or a government or agency or
political subdivision thereof or other entity, and shall include any successor
(by merger or otherwise) of such entity.
"Purchase Agreement" means the agreement among The Fortress Group,
Inc., a Delaware corporation ("Fortress" and the "Purchaser"), Whittaker
Construction, Incorporated, a Missouri corporation ("Whittaker Construction"),
RRKTG Lumber, Inc., a Missouri corporation ("RKG"), Lewis and Clark Title
Company, a Missouri corporation ("L&C" and together with Whittaker Construction
and RKG, the "Acquired Companies"), Robert N. Whittaker, Sr., Shirley J.
Whittaker, Gregory G. Whittaker, Robert N. Whittaker, Jr., Timothy H. Whittaker,
and Kelly K. Whittaker, each Missouri residents (collectively, the "Principals"
and the "Sellers") and Robert N. Whittaker, Sr., Trustee under Voting Trust
Agreements among Whittaker Construction, Incorporated and Shirley J. Whittaker,
Gregory G. Whittaker, Robert N. Whittaker, Jr., Timothy H. Whittaker, and Kelly
K. Whittaker (the "Beneficial Owners") and among RKG and the Beneficial Owners,
dated December 31, 1997, as amended and restated, herein incorporated by
reference.
"Series F Preferred Stock" - as defined in Section 1.
"Trading Day" means a day on which the principal national securities
exchange on which shares of the Common Stock of the Corporation are listed is
open for the transaction of business.
9
<PAGE>
"Whittaker Promissory Note" means the promissory note attached as
Exhibit J to the Purchase Agreement, herein incorporated by reference.
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Designations of Series F 6% Cumulative Convertible Preferred Stock to be duly
executed by its President and attested to by its Secretary this 27th day of
February, 1998.
THE FORTRESS GROUP, INC.
By:
-----------------------
James J. Martell, Jr.
President
ATTEST:
- -------------------
Hildy Zampella,
Assistant Secretary
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FORTRESS GROUP, INC. CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1998 AND
FROM THE FORTRESS GROUP, INC. CONSOLIDATED STATEMENT OF OPERATIONS FOR THE
QUARTER ENDED MARCH 31, 1998.
</LEGEND>
<CIK> 0001010607
<NAME> The Fortress Group, Inc.
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<CURRENCY> U.S. Dollar
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
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<CASH> 15,651
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0
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