================================================================================
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: June 30, 1999
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)
Registrant's telephone number, including area code: (703) 442-4545
--------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __
As of August 12 1999, there were outstanding 12,162,416 shares of
common stock, par value $.01, of the registrant.
================================================================================
<PAGE>
THE FORTRESS GROUP, INC.
QUARTER ENDED JUNE 30, 1999
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1.
The Fortress Group, Inc.
Consolidated Balance Sheets (unaudited) 3
Consolidated Statements of Operations
(unaudited) 4
Consolidated Statements of Cash Flows
(unaudited) 6
Notes to Consolidated Financial Statements
(unaudited) 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
PART II - OTHER INFORMATION
Item 2. Changes in Securities 20
Item 4. Submission of Matters to a Vote of
Security Holders 20
Item 6. Exhibits and Reports on Form 8-K. 20
(a) Exhibits.
(b) Reports on Form 8-K.
PART III -
SIGNATURES 21
EXHIBIT INDEX 22
2
<PAGE>
THE FORTRESS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---- ----
(unaudited)
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 17,952 $ 23,102
Accounts and notes receivable 13,692 12,714
Due from related parties 865 1,378
Real estate inventories 340,513 310,706
Land held for resale - 7,954
Mortgage loans 16,759 15,397
Investments in land partnerships 4,153 9,616
Property and equipment, net 14,329 13,785
Prepaid expenses and other assets 13,276 15,980
Goodwill, net 34,700 39,271
-------- --------
Total assets $456,239 $449,903
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued construction liabilities $ 35,896 $ 35,501
Notes and mortgages payable 315,140 292,769
Due to related parties 340 3,405
Accrued expenses 13,134 16,260
Customer deposits 14,314 10,708
-------- --------
Total liabilities 378,824 358,643
-------- --------
Minority interest 79 67
Obligation under Preferred Stock Redemption Agreement (See Note 6) 1,421 -
Shareholders' equity
Preferred stock, all classes and series, $.01 par value, 1 million 1 1
authorized (See Note 6 )
Common stock, $.01 par value, 99 million authorized,
12,427,516 and 12,173,207 issued, respectively 124 122
Additional paid-in capital 56,341 71,313
Preferred subscription receivable (333) (333)
Retained earnings 21,003 21,311
Treasury stock, at cost, 265,100 shares (1,221) (1,221)
-------- --------
Total shareholders' equity 75,915 91,193
-------- --------
Total liabilities and shareholders' equity $456,239 $449,903
======== ========
</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
June 30, 1999 June 30, 1998
------------- -------------
<S> <C> <C>
TOTAL REVENUES $ 182,011 $ 166,666
---------- ----------
HOMEBUILDING:
Residential sales $ 177,992 $ 164,113
Lot sales and other 2,441 1,705
---------- ----------
Homebuilding revenues 180,433 165,818
Cost of sales: 153,749 140,715
---------- ----------
Gross profit 26,684 25,103
Selling 11,590 10,696
General and administrative 8,330 8,063
Goodwill amortization 606 610
---------- ----------
Net operating income 6,158 5,734
---------- ----------
Other expense (income):
Interest expense 1,193 980
Interest (income) (166) (210)
Other, net (579) (328)
---------- ----------
Homebuilding income before taxes 5,710 5,292
FINANCIAL SERVICES:
Operating revenues 1,578 848
General, administrative and other expenses 1,435 852
Interest expense 317 189
Interest (income) (264) (198)
---------- ----------
Financial Services income before taxes 90 5
Total income before taxes 5,800 5,297
Provision for income taxes 2,371 2,121
---------- ----------
Net income $ 3,429 $ 3,176
========== ==========
Income available to common shareholders, basic $ 2,665 $ 2,529
========== ==========
Income available to common shareholders, diluted $ 3,429 $ 3,176
========== ==========
NET INCOME PER SHARE DATA (See Note 7):
Basic net income per share $ .22 $ .21
========== ==========
Diluted net income per share $ .19 $ .15
========== ==========
Basic weighted average shares outstanding 12,144,941 11,803,650
========== ==========
Diluted weighted average shares outstanding 18,463,718 21,160,703
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
THE FORTRESS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
For the Six For the Six
Months Ended Months Ended
June 30, 1999 June 30, 1998
------------- -------------
<S> <C> <C>
TOTAL REVENUES $ 332,735 $ 287,011
---------- ----------
HOMEBUILDING:
Residential sales $ 326,259 $ 282,138
Lot sales and other 3,514 3,162
---------- ----------
Homebuilding revenues 329,773 285,300
Cost of sales 281,461 242,918
---------- ----------
Gross profit 48,312 42,382
Selling 22,159 18,968
General and administrative 17,131 14,809
Special Charges 1,270 -
Goodwill amortization 1,386 1,143
---------- ----------
Net operating income 6,366 7,462
---------- ----------
Other expense (income):
Interest expense 2,338 2,101
Interest (income) (275) (367)
Other, net (1,280) (553)
---------- ----------
Homebuilding income before taxes 5,583 6,281
FINANCIAL SERVICES:
Revenues 2,962 1,711
General, administrative and other expenses 2,745 1,734
Interest Expense 559 346
Interest (income) (469) (380)
---------- ----------
Financial Services income before taxes 127 11
Subtotal- Homebuilding & Financial Services 5,710 6,292
Loss on sale of Landmark Homes 2,900 -
---------- ----------
Total income before taxes 2,810 6,292
Provision for income taxes 1,325 2,519
---------- ----------
Net income $ 1,485 $ 3,773
========== ==========
(Loss)/income available to common shareholders, basic $ (308) $ 2,667
========== ==========
(Loss)/income available to common shareholders, diluted $ (308) $ 3,741
========== ==========
NET INCOME PER SHARE DATA (See Note 9):
Basic net (loss)/income per share $ (0.03) $ .23
========== ==========
Diluted net (loss)/income per share $ (0.03) $ .20
========== ==========
Basic weighted average shares outstanding 12,048,466 11,706,974
========== ==========
Diluted weighted average shares outstanding 12,048,466 19,033,066
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
THE FORTRESS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
<TABLE>
<CAPTION>
For the Six For the Six
Months Ended Months Ended
June 30, 1999 June 30, 1998
------------- -------------
<S> <C> <C>
Cash flows from operating activities
Net income $ 1,485 $ 3,773
Adjustments to reconcile net income to net cash (used in)/
provided by operating activities:
Depreciation and amortization 4,864 4,227
Minority interest (43)
Special charges 1,270
Gain on sale of investment in land partnerships (291)
Loss on sale of Landmark Homes 2,900
Loss/(gain) on sale of property and equipment 70 (118)
Changes in operating assets and liabilities
Accounts and notes receivable (1,152) 8,161
Due from related parties 513 1,431
Real estate inventories (38,606) (11,917)
Land held for resale 7,954 (70)
Mortgage loans (1,362) (3,243)
Prepaid expenses and other assets 2,114 20
Accounts payable and accrued construction liabilities 528 515
Accrued expenses (3,680) (1,546)
Customer deposits 3,693 5,386
--------- ---------
Net cash (used in)/provided by operating activities (19,700) 6,576
--------- ---------
Cash flows from investing activities
Acquisition of homebuilders, net of acquired cash (27,244)
Proceeds from sale of Landmark Homes, net of cash sold 3,078
Proceeds from sale of land partnership interests 5,351
Payment of contingent consideration (2,372) (2,034)
Redemption of Class AAA preferred stock (11,500)
Purchase of property and equipment (3,504) (3,183)
Proceeds from sale of property and equipment 87 344
Investments in land partnerships 743 (2,834)
--------- ---------
Net cash used in investing activities (8,117) (34,951)
--------- ---------
Cash flows from financing activities
Borrowings under notes and mortgages payable 342,735 282,899
Repayment of notes and mortgages payable (315,533) (274,814)
Borrowings from related parties 3 87
Repayment of related party borrowings (327) (477)
Proceeds from issuance of Class AA Preferred Stock, net 27,294
Redemption of Class C preferred stock (1,693)
Other (net) (182) 37
Preferred dividends (2,336) (820)
Common dividends (59)
Purchase of treasury stock (157)
--------- ---------
Net cash provided by financing activities 22,667 33,990
--------- ---------
Net (decrease)/increase in cash and cash equivalents (5,150) 5,615
Cash and cash equivalents, beginning of period 23,102 12,406
--------- ---------
Cash and cash equivalents, end of period $ 17,952 $ 18,021
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<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.
Fortress began operations simultaneous with the closing of its initial public
offering on May 21, 1996 (the "Offering"), and the acquisition of four
homebuilding companies:
<TABLE>
<CAPTION>
Homebuilder Market(s)
----------- ---------
<S> <C>
The Genesee Company ("Genesee") Denver and Fort Collins, Colorado and Tucson, Arizona
Buffington Homes, Inc. ("Buffington) Austin and San Antonio, Texas
Christopher Homes ("Christopher") Las Vegas, Nevada
Solaris Development Corp. ("Sunstar") Raleigh-Durham, North Carolina
</TABLE>
Subsequent to the Offering, Fortress acquired the following homebuilding
companies:
<TABLE>
<CAPTION>
Homebuilder Date Acquired Market(s)
----------- ------------- ---------
<S> <C> <C>
Landmark Homes, Inc. ("Landmark") August 31, 1996 Wilmington, North Carolina,
(sold March 1999) Myrtle Beach, South Carolina
Brookstone Homes, Inc. December 31, 1996 Janesville, Madison, and
("Brookstone") Milwaukee, Wisconsin
D.W. Hutson Construction Company, February 28, 1997 Jacksonville, Florida
now known as Fortress Homes and
Communities of Florida ("Fortress
Florida")
Wilshire Homes, Inc. ("Wilshire") April 1, 1997 Austin and San Antonio, Texas
Don Galloway Homes, Inc. August 1, 1997 Charlotte, North Carolina and
("Galloway") Charleston, South Carolina
The Iacobucci Organization October 1, 1997 Philadelphia, Pennsylvania
("Iacobucci")
WestBrook Homes ("WestBrook") January 1, 1998 Loudoun County, Virginia
Whittaker Construction ("Whittaker") March 1, 1998 St. Louis, Missouri
Quail Construction ("Quail) April 1, 1998 Portland, Oregon
</TABLE>
In January 1997, Fortress formed Fortress Mortgage, Inc. ("Fortress Mortgage"),
a wholly-owned subsidiary, to provide mortgage-lending services to the Company's
builder subsidiaries. Fortress Mortgage currently provides mortgage services in
the Company's markets in Texas, Colorado, North Carolina, Nevada, Wisconsin,
Florida, Oregon, Pennsylvania and Missouri.
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 1998
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.
7
<PAGE>
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. The results of companies acquired during the periods presented
are included from their respective dates of acquisition.
Certain amounts in the prior period financial statements have been reclassified
to conform to the current presentation.
NOTE 3 - REAL ESTATE INVENTORIES
Real estate inventories are summarized as follows (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---- ----
(unaudited)
<S> <C> <C>
Work-in-progress
Sold homes $133,485 $112,001
Speculative 54,901 68,288
-------- --------
Total work-in-progress 188,386 180,289
Land
Finished lots 78,965 76,824
Land under development 46,240 33,454
Unimproved land held for development 12,429 6,407
-------- --------
Total land 137,634 116,685
Lumber yard inventory 2,247 2,223
Model homes 12,246 11,509
-------- --------
$340,513 $310,706
======== ========
</TABLE>
NOTE 4 - INTEREST
Information regarding interest is as follows (in thousands):
<TABLE>
<CAPTION>
For the Six Months Ended June 30,
---------------------------------
1999 1998
---- ----
(unaudited) (unaudited)
<S> <C> <C>
During the periods:
Interest incurred $ 16,667 $ 15,603
Interest capitalized (13,770) (13,156)
Interest amortized to cost of sales 13,521 9,953
-------- --------
Total interest expensed in statement of operations $ 16,418 $ 12,400
======== ========
At the end of the periods:
Capitalized interest in ending inventory $ 23,359 $ 25,138
======== ========
</TABLE>
8
<PAGE>
NOTE 5 - NOTES AND MORTGAGES PAYABLE
Notes and mortgages payable consist of the following (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---- ----
(unaudited)
<S> <C> <C>
13.75% Senior Notes due 2003 $100,000 $100,000
Project specific land, land development and
construction loans 200,715 180,144
Mortgage warehouse lines of credit 16,058 14,408
Other 2,659 3,069
-------- --------
319,432 297,621
Less: Unamortized senior note issuance costs (4,292) (4,852)
-------- --------
$315,140 $292,769
======== ========
</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 Company was in compliance with all financial covenants at June 30, 1999.
In addition, the Senior Note Indenture restricts certain payments including
dividends and repurchase or redemptions of stock. As of June 30, 1999, the
Company had in excess of $5 million available for such payments. However, the
Company also may make payments such as those described above from the
distribution of capital generated by subsidiaries designated as "unrestricted"
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 2.0% over the London Interbank Offer Rate (LIBOR) to 1% over
prime rate and fixed rates generally from 8% to 12%. Certain of the subsidiary
credit facilities contain covenants that limit the Company's overall ratio of
debt to tangible net worth, and other covenants including minimum tangible net
worth, current ratio and interest coverage. In addition, many of the credit
facilities include similar covenants at the subsidiary level. The Company and
its subsidiaries were in compliance with all such covenants as of June 30, 1999.
The Company's mortgage subsidiary has two warehouse lines of credit outstanding
for the purpose of originating loans. The warehouse lines are secured by the
mortgage loans held for sale and are repaid upon sale of the mortgage loans. The
lines bear interest at variable rates ranging from 1.5% over the Euro rate to
1.75% over the 30-day Federal Funds Rate, based on the type of loan and lending
requirements.
One of the Company's subsidiaries has a line of credit for the purpose of
purchasing lumber yard inventory. The line of credit matures October 1, 1999 and
bears interest at prime minus 1/2%. At June 30,1999 the total commitment
available is $2.0 million with $1.65 million currently outstanding. The
outstanding portion of this line is included in "other" above. The remainder of
other notes and mortgages payable consists primarily of debt financed corporate
insurance policies which bear interest at varying rates between 6.85% and 7.25%.
9
<PAGE>
NOTE 6 - CONVERTIBLE PREFERRED STOCK
The following are the Company's classes and series of preferred stock, amounts
designated, and amounts outstanding at June 30, 1999 and December 31, 1998:
Class AAA cumulative convertible (rate of 9% per annum), 40,000 designated,
28,500 and 0, respectively, issued and outstanding ($28.5 million initial
liquidation preference)
Class AA cumulative convertible (rate of 12% per annum decreased to 6% on March
6, 1998), 53,333 designated, 0 and 40,000, respectively, issued and
outstanding ($40 million initial liquidation preference)
Series A 11% cumulative convertible, 20,000 designated, 0 issued and outstanding
Series B convertible, 40,000 designated, 0 issued and outstanding
Series C convertible, 70,000 designated, 18,493 and 39,656, respectively,
issuable (See below)
Series D convertible, 67,500 designated, 45,000 issued and outstanding
($4,500,000 aggregate liquidation preference)
Series E 6% convertible, 50,000 designated, 17,643 and 19,381, respectively,
issued and outstanding ($1,764,300 aggregate liquidation preference)
Series F convertible, 5,000 designated, 5,000 issued and outstanding ($500,000
aggregate liquidation preference)
Under a Restructuring Agreement dated December 31, 1998 between the Company and
Prometheus, the Company issued to Prometheus, effective February 4, 1999, 40,000
shares of Class AAA Redeemable Convertible Preferred Stock having an initial
liquidation value of $40,000,000 in exchange for the outstanding 40,000 shares
of Class AA Convertible Preferred Stock having a liquidation value of
$40,000,000 held by Prometheus. In addition the Company issued Prometheus
Supplemental Warrants convertible into common stock. Please refer to the
Company's financial statements as reported on Form 10-K for the year ended
December 31, 1998 (Note 9 - Shareholders' Equity and Note 17 - Subsequent
Events) for further information on the classes and terms of preferred stock and
warrants.
During the second quarter of 1999, the Company redeemed 11,500 shares of Class
AAA stock, ($11,500,000 liquidation value). Consequently, in addition to
reducing the number of preferred shares outstanding, the Company has reduced,
pro-rata, the number of Supplemental Warrants potentially issuable under its
Supplemental Warrant Agreement. As of June 30, 1999 the Company had issued and
outstanding 28,500 shares of Class AAA cumulative convertible preferred stock
and outstanding Supplemental Warrants (not exercisable before September 30,
2001) providing for the issuance of between 0 and 23,750,000 shares of
additional common stock.
In accordance with the restructuring agreement when redeeming Class AAA stock,
the Company is obligated to provide Prometheus with a 20% return on its
investment for the amount of stock redeemed. A portion of the $5 million dollar
dividend paid to Prometheus in December 1998, has been applied to meet the 20%
return requirement for the stock redeemed to date. No cash in excess of the
principal amount of $11.5 million was required to redeem the 11,500 preferred
shares.
As a result of the redemption of the 11,500 shares of Class AAA stock,
Prometheus may require the Company to arrange for the sale by February 15, 2001
of a pro rata portion, 258,418 shares, of the 898,845 shares of common stock
held by Prometheus and deliver a minimum of $5.50 per share to Prometheus.
The Company's actual cost will be the difference, if any, between $5.50 per
share and the amount realized from the sale of the stock. The Company has
recorded this obligation at $5.50 per share as a reduction to its Additional
Paid-In-Capital and an increase in Obligation under Preferred Stock Redemption
Agreement.
The number of shares into which each Supplemental Warrant may be exercisable
will be subject to certain customary anti-dilution adjustments. The
exercisability of the Supplemental Warrants would also be subject to a revenue
test, which provides that the Supplemental Warrants may not be exercised unless
the Company's consolidated revenues for the most recent 16 full fiscal quarters
exceeds $2,429,190,500. The revenue test is subject to adjustment for the sale
of any Company subsidiary. As of June 30, 1999, for purposes of the revenue
test, the Company's cumulative consolidated revenues for the most recent sixteen
quarters were $1,855,966,000.
In addition, the Company is required to maintain a minimum annualized revenue
amount of $610 million for the last four quarters tested, which is adjusted to
$590 million for the four-quarter period ended March 31, 2001 and June 30, 2001.
The minimum annualized revenue is subject to further adjustment for the sale of
Company subsidiaries. At June 30, 1999 the Company met or exceeded the revenue
test.
The Series C stock (18,493 shares as of June 30, 1999) has been treated as
outstanding for the purpose of calculating earnings per share; however, it will
only be legally outstanding upon issuance.
10
<PAGE>
NOTE 7 - EARNINGS (LOSS) 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 six months
ended June 30, ended June 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $ 3,429 $ 3,176 $ 1,485 $ 3,773
Less preferred stock dividends (764) (630) (1,793) (1,072)
Less imputed preferred stock dividend 0 (17) 0 (34)
---------- ---------- ---------- ----------
Income/(loss) available to common shareholders $ 2,665 $ 2,529 $ (308) $ 2,667
========== ========== ========== ==========
Basic EPS
Income/(loss) available to common shareholders $ 2,665 $ 2,529 $ (308) $ 2,667
Weighted average number of common shares outstanding 12,144,941 11,803,650 12,048,466 11,706,974
---------- ---------- ---------- ----------
Basic earnings/(loss) per share $ .22 $ .21 $ (.03) $ .23
========== ========== ========== ==========
Diluted EPS
Income/(loss) available to common shareholders, basic $ 2,665 $ 2,529 (308) $ 2,667
Plus preferred stock dividends 764 647 0 1,074
---------- ---------- ---------- ----------
Income/(loss) available to common shareholders, diluted $ 3,429 $ 3,176 $ (308) $ 3,741
========== ========== ========== ==========
Weighted average number of common shares outstanding 12,144,941 11,803,650 12,048,466 11,706,974
Effect of dilutive securities:
Preferred stock 6,318,777 9,013,259 0 7,022,302
Options 0 8,928 0 6,382
Restricted stock 0 20,000 0 22,265
Warrants 0 314,866 0 275,143
---------- ---------- ---------- ----------
Weighted avg. number of common shares outstanding, diluted 18,463,718 21,160,703 12,048,466 19,033,066
========== ========== ========== ==========
Diluted earnings/(loss) per share $ .19 $ .15 $ (.03) $ .20
========== ========== ========== ==========
</TABLE>
The Company's intention upon conversion or redemption (as the case may be) of
Series B, C, D, E and F (See Note 8- Convertible Preferred Stock Form 10-K) is
to issue Common Stock on the basis of the 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 for the three months ended June 30, 1999, an additional
839,110 shares of common stock to be issued under the "if converted" method at
the 10-for-1 conversion ratio.
Given the loss available to common shareholders for the six months ended June
30, 1999, no common stock equivalents of the Company's various classes and
series of preferred stock were included in the computation of diluted loss per
share for that period. The effect of adding back the related dividends and the
weighted average common shares would be antidilutive.
The following shares were not included in the computation of diluted EPS for the
three and six months ended June 30, 1999 and 1998 because the effect of adding
back the related dividends and the weighted average common shares was
antidilutive:
11
<PAGE>
<TABLE>
<CAPTION>
-------------------------1999----------------- -----------------------1998---------------------
Convertible Convertible
into Potential into Potential
Class/ Outstanding common common stock Outstanding common common stock
Series at June 30, shares outstanding at June 30, shares outstanding
Three Six Three Six
Months Months Months Months
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Class AAA 28,500 4,750,000 Dilutive 4,817,587 0 0 N/A N/A
Class AA 0 0 0 3,756,906 40,000 6,666,667 Dilutive Dilutive
Series A 0 0 0 0 0 0 Dilutive Dilutive
Series B 0 0 0 0 880 8,800 Dilutive Dilutive
Series C 18,493 184,930 Dilutive 270,284 39,656 396,560 Dilutive Dilutive
Series D 45,000 450,000 Dilutive 450,000 60,000 600,000 Dilutive Dilutive
Series E 17,643 176,430 Dilutive 190,641 19,881 198,810 Dilutive 112,385
Series F 5,000 50,000 Dilutive 16,670 5,000 50,000 Dilutive Dilutive
</TABLE>
NOTE 8 - SALE OF ASSETS AND SPECIAL CHARGES
On March 26, 1999, the Company sold the assets of Landmark and realized a loss
of $2.9 million. As of the disposition date, Landmark had total assets of
approximately $11.3 million, which included unrecovered goodwill of
approximately $3.0 million. The total selling price was approximately $8.3
million.
On March 31, 1999 the Company, as part of a restructuring of its Texas
operations, sold its interest in several land partnerships in its Austin and San
Antonio markets. The total proceeds to the Company from this sale were
approximately $5.4 million, and were received in April 1999. The gain on the
sale of these partnership interests of approximately $291,000 is included in
other income in the accompanying Consolidated Statement of Operations.
Included in operating expenses for the six months ended June 30, 1999 are costs
related to the restructuring of two of the Company's operating subsidiaries,
Wilshire (formerly operating as Buffington) and WestBrook.
Concurrent with the decision to sell its interest in several land partnerships
in Texas, the Company decided to exit certain communities. Restructuring costs
totaling $480,000 related to employee severance, carrying costs for model homes,
and the write off of other product-line related assets that were determined to
provide no future benefit under the restructured Wilshire operation. As of June
30, 1999, approximately $163,000 of the estimated restructuring costs had been
paid and charged against the liability. The remaining restructuring costs are
expected to be incurred within approximately six months.
In addition, during the second quarter of 1999 the Company decided to wind down
the operations of its WestBrook Homes subsidiary. Charges taken during the first
quarter of 1999 totaled $790,000 and included the write off of land purchase
deposits, previously capitalized architectural costs, other land development
costs and $294,000 in remaining goodwill. As of June 30, 1999, all of these
costs had been incurred and there is no outstanding liability. WestBrook is
expected to build out its current inventory within approximately six months and
is not expected to incur additional significant write offs beyond those charges
taken earlier in the year.
During the quarter ended June 30, 1999 the Company sold a 960-acre parcel of
land located in Raleigh, North Carolina. The land had been carried on the
Company's books as land held for resale. The $8.2 million sales price for the
property resulted in a gain of approximately $108,000. The gain on the sale of
this property is reflected in the income statement as other income.
12
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
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 revenues and segment
revenues:
<TABLE>
<CAPTION>
For the Three For the Three
Months Ended Months Ended
June 30, 1999 June 30, 1998
------------- -------------
<S> <C> <C> <C> <C>
Total revenues $182,011 100.0% $166,666 100.0%
Homebuilding revenues 180,433 99.1% 100.0% 165,818 99.5% 100.0%
Homebuilding gross profit 26,684 14.7% 14.8% 25,103 15.1% 15.1%
Homebuilding income before taxes 5,710 3.1% 3.2% 5,292 3.2% 3.2%
Financial Services revenues 1,578 0.9% 100.0% 848 0.5% 100.0%
Financial Services expenses 1,435 0.8% 90.9% 852 0.5% 100.5%
Financial Services income before taxes 90 0.1% 5.7% 5 - 0.6%
Net income 3,429 1.9% 3,176 1.9%
</TABLE>
<TABLE>
<CAPTION>
For the Six For the Six
Months Ended Months Ended
June 30, 1999 June 30, 1998
------------- -------------
<S> <C> <C> <C> <C>
Total revenues $332,735 100.0% $287,011 100.0%
Homebuilding revenues 329,773 99.1% 100.0% 285,300 99.4% 100.0%
Homebuilding gross profit 48,312 14.5% 14.7% 42,382 14.8% 14.9%
Homebuilding income before special
charges and taxes 6,853 2.1% 2.1% 6,281 2.2% 2.2%
Homebuilding income before taxes 5,583 1.7% 1.7% 6,281 2.2% 2.2%
Financial Services revenues 2,962 0.9% 100.0% 1,711 0.6% 100.0%
Financial Services expenses 2,745 0.8% 92.7% 1,734 0.6% 101.3%
Financial Services income before taxes 127 - 4.3% 11 - 0.6%
Loss on Sale of Landmark Homes (2,900) (0.9)% -
Net income 1,485 0.4% 3,773 1.3%
</TABLE>
Consolidated Results of Operations
Comparison of the Company's Results of Operations for the Three and Six Months
Ended June 30, 1999 and 1998.
Homebuilding Operations
General
<TABLE>
<CAPTION>
New Orders, Net Closings Backlog(1) at June 30,
--------------- -------- ----------------------
Three Months Six Months Three Months Six Months
1999 1998 1999 1998 1999 1998 1999 1998 1999 1998
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
State
Arizona 5 21 19 34 14 7 44 15 9 28
Colorado 72 112 175 232 90 97 153 171 205 244
Florida 203 183 505 500 197 174 359 329 445 322
Missouri 166 149 294 205 130 121 254 158 228 214
Nevada 25 47 69 83 35 34 51 49 104 98
New Jersey 8 N/A 8 N/A N/A N/A N/A N/A 8 N/A
North Carolina 197 207 403 410 168 161 322 315 324 346
Oregon 22 9 41 9 11 4 29 4 24 19
Pennsylvania 54 49 88 123 46 54 85 101 56 71
South Carolina 38 32 73 103 30 32 61 91 93 91
Texas 178 315 368 544 195 212 397 394 271 399
Virginia 7 9 17 29 8 9 16 14 18 27
Washington 15 22 27 22 11 17 19 17 9 14
Wisconsin 65 84 131 139 60 42 104 64 88 97
--- --- --- --- --- --- --- --- --- ---
Total 1,055 1,239 2,218 2,433 995 964 1,894 1,722 1,882 1,970
</TABLE>
- --------
1 Backlog represents homes sold but not yet closed.
13
<PAGE>
The Company achieved net new orders of 1,055 homes and 2,218 homes for
the three and six months ended June 30, 1999 compared to 1,239 homes and 2,433
homes for the same periods in 1998, a decrease of 14.9% for the three month
period and 8.8% for the six month period. Approximately one half of the decline
in new orders for the quarter is related to the Company's decision to sell a
subsidiary, reposition another subsidiary and begin phasing out a third
subsidiary. For the six-month period approximately one third of the overall
decline is related to these changes. (See Note 8 - Sale of Assets and Special
Charges) The balance of the decline for both the quarter and six months is in
large part due to a reduction in the number of communities in which the Company
operates as the result of delays in land development, either on the part of the
Company or its land suppliers.
The Company has a combined backlog of 1,882 homes, with a dollar value of $372.6
million at June 30, 1999 as compared to 1,970 homes, with a dollar value of
$366.2 million at June 30, 1998. This 4.5% decline in the number of homes in
backlog is consistent overall with the reductions in backlog brought about by
the sale of our Landmark Homes subsidiary, our repositioning in the Texas
markets, and our decision to phase out the Virginia homebuilding operations. The
increase in backlog value is consistent with a general increase in average
selling prices in many of our operations and is reflected in a 6.5% increase in
average backlog per home from $185,900 in 1998 to $198,000 at June 30, 1999.
Revenues
Homebuilder revenues for the second quarter of 1999 were $180.4 million, as
compared to $165.8 million for the same period of 1998, representing an increase
of 8.8%. A portion of this increase is attributable to the increase in the
number of homes closed (995 versus 964, a 3.2% increase). The rest is due to an
increase in the average price of homes closed (approximately $181,300 for the
second quarter of 1999 as compared to approximately $172,000 in the second
quarter of 1998). For the six-month period, revenues were $329.8 million a 15.6%
increase over the $285.3 million reported for the same period last year. This
increase reflects a 10.0% increase in the number of homes closed (1,894 in the
six-month period ending June 30, 1999 versus 1,722 in the comparable period of
1998) as well as a 5.1% increase in the average price of homes closed
(approximately $170,100 versus $165,700).
Gross Profit
Gross profit for the quarter ended June 30, 1999 was $26.7 million, as compared
to $25.1 million for the comparable period of 1998. Gross profit margins for the
quarter declined from 15.1% in 1998 to 14.8% in 1999. While the overall gross
profit increased 6.4% for the quarter due in part to the increased number of
closings, as previously indicated, reduced margin levels at our Nevada
subsidiary, which we expect to continue, contributed to the decline in gross
margin. For the six-month period gross profit increased 13.9% to $48.3 million
from $42.4 million last year. As with the quarter results the increase in gross
profit resulting primarily from increased closings was offset by a reduction in
gross profit margin in part due to the factors noted above.
Operating Expenses
Operating expenses including selling, general and administrative, and goodwill,
for the quarters ended June 30, 1999 and 1998 were $20.5 million (11.4% of
revenue) and $19.4 million (11.7% of revenue), respectively. For the six month
period ended June 30, 1999 and 1998, total operating expenses including selling,
general and administrative, special charges, and goodwill were $41.9 million
(12.7% of revenue) and $34.9 million (12.2% of revenue). The company recognized
$1.3 million in special charges during the
14
<PAGE>
quarter ended March 31, 1999 pertaining to restructuring costs associated with
several of its subsidiaries (See Note 8 - Sale of Assets and Special Charges).
Excluding the impact of these charges, total operating expenses for the six
months ended June 30, 1999 would have been $40.6 million (12.3% of revenue).
Selling expenses increased to $11.6 million (6.4% of revenue) for the quarter
ended June 30, 1999 as compared to $10.7 million (6.5% of revenue) for the same
period of 1998. For the six-month period selling expenses increased to $22.2
million (6.7% of revenue) as compared to $19.0 million (6.6% of revenue) for the
same period of 1998. The increases for the quarter and six months generally
reflect the increase in revenues, although a portion of the increase reflects
higher model home related expenses.
General and administrative expenses were $8.3 million (4.6% of revenue) for the
second quarter of 1999, as compared to $8.1 million (4.9% of revenue) for the
second quarter of 1998. For the six-month period general and administrative
expenses were $17.1 million (5.2% of revenues) as compared to $14.8 million
(5.2% of revenues) in 1998. The increase for the six-month period over last year
reflects an increase due to the additional general and administrative costs
related to acquisitions in the first quarter of 1998. Additionally the
implementation of Statement of Position 98-1 (SOP 98-1) changes in accounting
for costs related to implementation of information technology systems, which
require these costs to be expensed as incurred, accounted for a portion of the
increase. The amortization and depreciation of these information and technology
costs, which were capitalized in prior years, is also a factor contributing to
this increase.
Homebuilding Pretax
Homebuilding pretax income rose for the second quarter to $5.7 million (3.2% of
revenues) from $5.3 million (3.2% of revenues). Although for the six month
period homebuilding pre tax income declined, from $6.3 million in 1998 to $5.6
million in 1999, excluding the impact of the special charges discussed above,
homebuilding pretax income for this period rose to $6.9 million (2.1% of
revenues) a 9.5% increase. Gross profit dollar increases, offset partially by
operating expense increases, both of which are discussed above, combined to
achieve this increase in pretax profit before special charges.
Financial Services Segment
Fortress Mortgage's closing volume, number of mortgages originated, and capture
rates for the second quarter and six month period all increased from the
comparable periods of 1998. These increases resulted mainly from additional
volume generated at the following Fortress Mortgage branches that began
operating during 1998:
- Jacksonville
- St. Louis
- Milwaukee
- Portland
- Charlotte
Revenue for the three months ended June 30, 1999 increased 88.7% to $1.6 million
from $848,000 for the comparable period of 1998 due to the increased closing
volume. These revenues increased 76.5% to $3.0 million from $1.7 million for the
six-month period.
Financial services pretax profit generated by Fortress Mortgage reached $90,000
for the second quarter of 1999, as compared to $5,000 for the second quarter of
1998, and reached $127,000 for the first six months of 1999 compared with
$11,000 for 1998. The profit increases resulted primarily from the volume
increases noted above.
Loss on Sale of Landmark Homes
The Company sold the assets of Landmark Homes in March 1999, as part of its
strategy to redeploy capital invested in under-performing assets. Concurrent
with the sale of these assets the Company exited the Wilmington, North Carolina
and Myrtle Beach, South Carolina markets. The Company recognized a pretax loss
of $2.9 million, on this disposition, due primarily to unrecovered goodwill of
approximately $3.0 million.
15
<PAGE>
Net Income
Due to the previously described factors and the income tax effect thereof, net
income for the three months ended June 30, 1999 was $3.4 million, a 6.3%
increase over the $3.2 million achieved in the comparable period of 1998. For
the six-month period ended June 30, 1999, net income was $1.5 million a $2.3
million decline from the same period a year ago. Excluding the impact of the
special charges and the sale of Landmark, on the six month results, net income
for the first half of 1999 would have been approximately $4.1 million, an
increase of 7.9% over the prior year.
The restructuring of the Prometheus agreement resulted in an increase in the
preferred dividend rate related to that class of stock from 6% to 9% annually.
This change in preferred rate along with changes in the amount of preferred
investment outstanding resulted in an increase in the amount of preferred
dividends impacting net income/(loss) per share. Total preferred dividends for
the second quarter 1999 increased 18.1% to $764,000 from $647,000 in 1998. For
the six-month period, total preferred dividends impacting net income/(loss) per
share rose 63.6% to $1.8 million from $1.1 million in the prior year. Excluding
the impact of the special charges and the sale of Landmark, the Company's income
per share for the six months ended June 30, 1999, would have been $0.19 (basic)
and $0.16 (diluted).
Earnings before interest, taxes, depreciation and amortization (EBITDA)
increased 20.1% to $16.7 million for the three months ended June 30, 1999 as
compared to $13.9 million for the same period in 1998. For the six-month period
EBITDA increased 19.0% to $26.3 million for the current year, from $22.1 million
in 1998. 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 six months ended June 1999, the Company's operating
activities, taken in the aggregate, utilized approximately $19.7 million of
cash. This cash utilization was primarily the result of increases in inventories
of approximately $38.6 million, which is consistent with the Company's growth in
its backlog and the seasonal nature of the homebuilding industry. Offsetting
this inventory buildup were reductions in land held for resale, through the sale
of a parcel of land in North Carolina, of $8.0 million and increases in customer
deposits of $3.7 million.
The majority of the Company's investing activities during the six months--net
cash use of $8.1 million--related to (a) redemption of Class AAA preferred stock
($11.5 million), (b) additional consideration under the earnout provision of
prior period acquisitions ($2.4 million), and (c) property and equipment
expenditures ($3.5 million). These investments were offset by proceeds from the
sale of Landmark ($3.1 million net) and proceeds from the sale of land
partnership interests ($5.4 million).
Financing activities generated net cash of $22.7 million. These activities
included net borrowings under notes and mortgages payable of $27.2 million. The
redemption of Class C preferred stock of $1.7 million and preferred dividend
payments of $1.6 million offset these cash inflows for the six month period.
Management 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 June 30, 1999, the Company had cash and cash
equivalents on hand of $18.0 million.
At June 30, 1999, the Company had 4,265 lots in inventory beyond those already
in backlog. This represents, in aggregate, an estimated fifteen-month supply of
land based on sales absorption rates for the first six months of 1999. One of
the Company's operating strategies is 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 practices and
expects to exercise, subject to market conditions, substantially all of its
option contracts. At June 30, 1999, the Company had an additional 7,086 lots
under option representing a slightly less than two year supply of land based on
the same absorption rates as above.
16
<PAGE>
Year 2000
As computer systems and other business equipment are embedded with chips or
processors that use only two digits to represent the year or are programmed with
software that uses such a two digit system, they may be unable to accurately
process certain data before, during or after January 1, 2000. If not addressed
and corrected, such programs and chips may cause computer systems to fail or to
miscalculate data. This issue is commonly referred to as the "Y2K" issue.
In conjunction with the ongoing process of converting all of its builder
subsidiaries to an integrated computer information system ("ICIS"), Fortress
began the project of addressing the Y2K issue during 1998. The Company's project
is directed at modifying or replacing portions of its existing computer systems
to ensure that they will function properly with respect to dates in the year
2000 and thereafter. The Company's plan encompasses both information technology
systems and non-information technology systems, such as chips embedded in its
security systems, office equipment, and facilities.
The general phases of the Company's plan include the following: (1) plan and
ensure company-wide awareness of the Y2K issue, (2) inventory all possible Y2K
risks, (3) assess inventory (including identification of non-Y2K compliant
items, prioritize inventory into mission-critical and non-mission-critical
categories, and plan for repair and replacement of non-compliant items), (4)
repair or replace non-Y2K compliant items, (5) plan and execute Y2K testing, and
(6) design and implement contingency plans for non-compliant items. Due to the
Company's structure and its ongoing computer information system rollout, the
Company is in different phases of implementation of its plan at its different
subsidiaries.
The Company has assessed the information systems of the subsidiaries as its
greatest area of business risk and, accordingly, has given this area highest
priority. As of June 30, 1999, the Company has completed the fifth phase and is
well underway with phase six at all subsidiaries for the core financial
applications. The Company is still in phase 3 for hardware, peripheral computer
equipment, and office equipment at all subsidiaries. The Company plans to have
completed all phases by the end of the third quarter of 1999.
The Company's information technology ("IT") group completed its testing of the
Y2K version of the ICIS and converted the three subsidiaries and the corporate
office, which are currently operating on the system. As of June 30, 1999, one
builder subsidiary was not Y2K compliant. The Company has begun the conversion
process at this subsidiary and plans for the conversion to be completed in the
third quarter of 1999. Due to the IT group's current focus on bringing the
Company into Y2K compliance, those subsidiaries who either received or purchased
Y2K compliant versions of their software will not implement the ICIS until 2000.
Management does not consider this delay in implementation to have a material
adverse impact on the Company.
Over the last eighteen months, the Company's IT group has normalized the network
server and desktop operating systems, hardware platforms and network peripheral
devices to equipment and software that are certified as Y2K ready. Each desktop
computer in use at all builder subsidiaries has been certified to be Y2K
compliant or has been identified for replacement currently expected by the end
of September 1999. Each server hardware component and operating system is
certified to be Y2K ready. Each component of the subsidiary builder local area
networks is compliant and the wide area network equipment and software is
likewise certified.
While the Company is giving greatest priority to its operating systems and those
of its subsidiaries, the Company is also addressing the Y2K issues associated
with the Company's telephone and voice mail systems, fax machines, copiers and
other office systems integrated into the office facilities, and other equipment
including embedded chips or processors. Eight of the Company's builder
subsidiaries have completed a comprehensive survey of all computer and embedded
systems and are fully Y2K compliant. The remaining builder subsidiaries are
scheduled to be assessed, repaired or replaced and tested by the end of
September 1999. The IT group has not yet identified any office system that will
not be Y2K compliant.
The Company is currently assessing whether third parties with which the Company
and its operating subsidiaries have a material relationship are Y2K compliant.
The Company currently expects that its assessments with respect to these third
party verification projects will be substantially completed as of September 30,
1999. As part of this assessment, the Company has examined its relationships
with suppliers, subcontractors, financial
17
<PAGE>
institutions and other third parties to determine the status of their Y2K
efforts as related to the Company. As a general matter, the Company is
vulnerable to significant suppliers' inability to remedy their own Y2K issues.
Furthermore, the Company relies on financial institutions, government agencies
(particularly for zoning, building permits and related matter), utility
companies, telecommunication service companies and other service providers
outside of its control. While certain third parties significant to the Company's
business have provided certain assurances regarding their intentions to be Y2K
compliant, there is no assurance that such third parties will not suffer a Y2K
business disruption. It is conceivable that such failures could, in turn, have a
material adverse effect on the Company's results of operations, financial
condition, and liquidity.
Costs
- -----
As the Company's Y2K project has been combined with the ICIS project, many areas
of the project would have been undertaken regardless of the Y2K issue.
Management currently estimates that the total cost of the ICIS project will be
approximately $5.0 to $5.5 million; however, it is not possible to determine the
portion of that amount which is specifically attributable only to the Y2K
compliance work. The increase in estimates from prior periods reflects an
expansion of the scope of the ICIS project. The total amount expended on the
ICIS project work from inception to June 30, 1999 was approximately $3.7
million. The Company believes that the costs to specifically address the Y2K
issue will not have a significant impact on the Company's results of operations,
financial condition, or liquidity for any year in the reasonably foreseeable
future. The plan for the successful completion of the Company's Y2K project and
the estimated total costs are based upon certain assumptions by management
regarding future events, including the continued availability of qualified
resources to implement the program and the cost of such resources.
Risks
- -----
The Company acknowledges that the failure to resolve a material Y2K issue could
result in the interruption in, or a failure of, certain normal business
activities or operations. Possible risks of Y2K failure include among other
risks, delays or errors with respect to payments, third-party delivery of
materials, and government approvals. Such failures could materially adversely
affect the Company's results of operations. Although the Company generally
considers its exposure to the Y2K issue risks from third party suppliers as
generally low, due to the uncertainty of the Y2K readiness of third-party
suppliers, the Company is unable to determine at this time whether the
consequences of Y2K failures will have a material impact on the Company's
results of operations, financial condition, or liquidity. In addition, the
Company could be materially adversely affected by Y2K system failures at
government agencies on which the Company is dependent for zoning, building
permits, and related matters. Further, the Company could be materially adversely
affected if Y2K system failures result in widespread economic or financial
market disruption. The Company's Y2K project is expected to significantly reduce
the Company's level of uncertainty and exposure to the Y2K issue. To date, the
Company has not identified any operating systems, either of its own or of a
material third-party supplier, that present a material risk of not being Y2K
compliant or for which a suitable alternative cannot be implemented.
Contingency Plan
- ----------------
The Company's Y2K preliminary contingency plan focused on whether it would be
feasible to get non-compliant builder subsidiaries converted to the Company-wide
ICIS (scheduled for conversion to the Y2K compliant version in July 1999). As of
the date of this report, all builders are believed to be Y2K compliant for core
business applications. During the third quarter of 1999, the Company will
continue to assess the need for further contingency planning as it relates to
the operation of our systems and the operation of material third-party
suppliers. While management expects that the company will not experience
material adverse consequences in connection with the Y2K issue as it relates to
its internal operating system, no assurance can be given that the system will
operate as expected in the Year 2000. See "Risks" section above and "Statement
on Forward-Looking Information".
Statement on Forward-Looking Information
Certain information included within this report is "forward-looking "
within the meaning of the Private Securities Litigation Reform Act of 1995
including but not limited to, statements concerning
18
<PAGE>
growth, anticipated operating results, financial position, and liquidity and
financial resources. Such information involves known and unknown risks,
uncertainties and other factors that may cause actual results to differ
materially. Such risks, uncertainties and other factors include, but are not
limited to, fluctuations in interest rates, availability of raw materials and
labor costs, levels of competition, the effect of government regulation, the
availability of capital, the price of the Company's common stock, weather
conditions, changes in general economic conditions and other factors which may
adversely effect the Company's earnings and/or the earnings of the acquired
homebuilders or earnings per share.
19
<PAGE>
PART II - OTHER INFORMATION
Item 2. Changes in Securities.
Under a Restructuring Agreement dated December 31, 1998 between the Company and
Prometheus Homebuilders LLC ("Prometheus), the Company redeemed during the
second quarter of 1999, 11,500 shares of the 40,000 shares of Class AAA
Redeemable Convertible Preferred Stock previously outstanding. This redemption
reduced to 28,500 the number of shares outstanding at June 30, 1999.
(Liquidation value of $28,500,000.) Concurrent with this redemption, a pro-rata
portion of contingent warrants related to these shares was also retired. A more
detailed description of the features of this class of stock as well as other
terms related to this agreement has been reported on Form 8-K, filed March 5,
1999.
Effective in May 1999 the Company redeemed $173,800 (1,738 shares) of Series E
Convertible Preferred Stock, in accordance with the terms of that class of
stock.
Item 4. Submission of Matters to a Vote of Security Holders.
The annual meeting of the Company was held on May 26, 1999. The following items
were submitted for approval and approved by the shareholders with the voting
results as noted:
With respect to the election of the directors of the Company, all management
nominees for the Common Directors of the Board of Directors were approved as
solicited in the proxy.
The voting tabulation for each common nominee was as follows:
For Withheld
--- --------
J. Marshall Coleman 14,555,359 388,197
Mark L. Fine 14,857,110 86,446
Robert Short 14,862,487 81,069
William A. Shutzer 14,857,687 85,869
J. Christopher Stuhmer 14,863,910 79,646
George C. Yeonas 14,862,487 81,069
Additionally, the holders of the Series AAA Preferred Stock reelected Mr.
Kretschmann and Ms. Lewis to the Board of Directors.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Number Description
------ -----------
27 Financial Data Schedule
(b) Reports on Form 8-K.
None
20
<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: 08/16/99 By: /s/ George C. Yeonas
------------------ -------------------------------------
George C. Yeonas
President and Chief Executive Officer
Date: 08/16/99 By: /s/ Jeffrey W. Shirley
------------------ -------------------------------------
Jeffrey W. Shirley
Vice President of Finance
(Principal Financial Officer)
21
<PAGE>
EXHIBIT INDEX
Number Description Page
------ -----------
27 Financial Data Schedule xx
22
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INOFORMATION EXTRACTED FROM THE
FORTRESS GROUP, INC. CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1999 AND FROM THE
FORTRESS GROUP, INC. CONSOLIDATED STATEMENT OF OPERATIONS FOR THE SIX MONTHS
ENDED JUNE 30, 1999.
</LEGEND>
<CIK> 0001010607
<NAME> The Fortress Group, Inc.
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1.000
<CASH> 17,952
<SECURITIES> 0
<RECEIVABLES> 13,692
<ALLOWANCES> 0
<INVENTORY> 340,513
<CURRENT-ASSETS> 0
<PP&E> 14,329
<DEPRECIATION> 0
<TOTAL-ASSETS> 456,239
<CURRENT-LIABILITIES> 0
<BONDS> 100,000
0
1
<COMMON> 124
<OTHER-SE> 76,790
<TOTAL-LIABILITY-AND-EQUITY> 456,239
<SALES> 329,773
<TOTAL-REVENUES> 332,735
<CGS> 281,461
<TOTAL-COSTS> 323,407
<OTHER-EXPENSES> 721
<LOSS-PROVISION> (2,900)
<INTEREST-EXPENSE> 2,897
<INCOME-PRETAX> 2,810
<INCOME-TAX> 1,325
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,485
<EPS-BASIC> (0.03)
<EPS-DILUTED> (0.03)
</TABLE>
