<PAGE>
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, 2000
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 11, 2000 there were outstanding 3,087,820 shares of common
stock, par value $.01, of the registrant.
<PAGE>
THE FORTRESS GROUP, INC.
QUARTER ENDED June 30, 2000
INDEX
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
Condensed Notes to Consolidated Financial Statements
(unaudited) 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 14
PART II - OTHER INFORMATION
Item 2. Changes in Securities 19
Item 4. Submission of matters to a vote of Security Holders 19
Item 6. Exhibits and Reports on Form 8-K. 19
(a) Exhibits.
(b) Reports on Form 8-K.
PART III -
SIGNATURES 20
EXHIBIT INDEX 21
2
<PAGE>
THE FORTRESS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
---- ----
(unaudited)
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 7,803 $ 17,526
Accounts and notes receivable 10,005 12,748
Real estate inventories 347,608 328,513
Land held for resale 3,584 0
Mortgage loans 20,255 20,229
Investments in land partnerships 2,714 1,518
Property and equipment, net 11,256 12,392
Prepaid expenses and other assets 24,088 22,803
Goodwill, net 34,177 35,452
--------- ---------
Total assets $ 461,490 $ 451,181
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued construction liabilities $ 33,503 $ 38,915
Notes and mortgages payable 319,424 301,658
Accrued expenses 16,323 18,905
Customer deposits 11,700 10,530
--------- ---------
Total liabilities 380,950 370,008
========= =========
Minority interest 79 79
Obligation under Preferred Stock Redemption Agreement (See Note 6) 1,421 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,
3,076,806 and 3,124,065 issued, respectively 31 31
Additional paid-in capital 51,104 54,402
Retained earnings 27,904 26,460
Treasury stock, at cost, 0 and 265,100 shares, respectively 0 (1,221)
--------- ---------
Total shareholders' equity 79,040 79,673
--------- ---------
Total liabilities and shareholders' equity $ 461,490 $451,181
========= =========
</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, 2000 June 30, 1999
------------- -------------
<S> <C> <C>
TOTAL REVENUES $ 171,108 $ 182,011
--------- ---------
HOMEBUILDING:
Residential sales $ 166,450 $ 177,992
Lot sales and other 3,453 2,441
--------- ---------
Homebuilding revenues 169,903 180,433
Cost of sales 145,113 153,749
--------- ---------
Gross profit 24,790 26,684
Selling 11,582 11,590
General and administrative 8,761 8,330
Goodwill amortization 638 606
--------- ---------
Net operating income 3,809 6,158
--------- ---------
Other expense (income):
Interest expense 797 1,193
Interest (income) (167) (166)
Other, net (493) (579)
--------- ---------
Homebuilding income before taxes 3,672 5,710
FINANCIAL SERVICES:
Operating revenues 1,204 1,578
General, administrative and other expenses 1,178 1,435
Interest expense 387 317
Interest (income) (325) (264)
--------- ---------
Financial Services income/(loss) before taxes (36) 90
Total income before taxes 3,636 5,800
Provision for income taxes 1,490 2,371
--------- ---------
Net income $ 2,146 $ 3,429
========= =========
Net income available to common shareholders, basic $ 1,479 $ 2,665
========= =========
Net income available to common shareholders, diluted $ 1,479 $ 3,429
========= =========
NET INCOME PER SHARE DATA (See Note 7):
Net income per share, basic $ 0.48 $ .88
========= =========
Net income per share, diluted $ 0.47 $ .74
========= =========
Weighted average shares outstanding, basic 3,071,525 3,036,235
========= =========
Weighted average shares outstanding, diluted 3,156,422 4,615,929
========= =========
</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, 2000 June 30, 1999
------------- -------------
<S> <C> <C>
TOTAL REVENUES $ 314,254 $ 332,735
--------- ---------
HOMEBUILDING:
Residential sales $306,171 $326,259
Lot sales and other 5,492 3,514
--------- ---------
Homebuilding revenues 311,663 329,773
Cost of sales 266,611 281,461
--------- ---------
Gross profit 45,052 48,312
Selling 21,324 22,159
General and administrative 17,132 17,131
Special charges (see Note 8) 0 1,270
Goodwill amortization 1,274 1,386
--------- ---------
Net operating income 5,322 6,366
--------- ---------
Other expense (income):
Interest expense 1,771 2,338
Interest (income) (345) (275)
Other, net (823) (1,280)
--------- ---------
Homebuilding income before taxes 4,719 5,583
FINANCIAL SERVICES:
Operating revenues 2,591 2,962
General, administrative and other expenses 2,464 2,745
Interest expense 699 559
Interest (income) (562) (469)
--------- ---------
Financial Services income/(loss) before taxes (10) 127
Loss on sale of Landmark Homes (see Note 8) 0 2,900
Total income before taxes 4,709 2,810
Provision for income taxes 1,930 1,325
--------- ---------
Net income $ 2,779 $ 1,485
========= =========
Net income/(loss) available to common shareholders, basic $ 1,445 $ (308)
========= =========
Net income/(loss) available to common shareholders, diluted $ 1,445 $ (308)
========= =========
NET INCOME PER SHARE DATA (See Note 7):
Net income/(loss) per share, basic $ 0.47 $ (.10)
========= =========
Net income/(loss) per share, diluted $ 0.46 $ (.10)
========= =========
Weighted average shares outstanding, basic 3,064,980 3,012,117
========= =========
Weighted average shares outstanding, diluted 3,163,750 3,012,117
========= =========
</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, 2000 June 30, 1999
------------- -------------
<S> <C> <C>
Cash flows from operating activities
Net income $ 2,779 $ 1,485
Adjustments to reconcile net income to net cash (used in)/
operating activities:
Depreciation and amortization 4,405 4,864
Special charges 0 1,270
(Gain) on sale of investment in land partnerships 0 (291)
Loss on sale of Landmark Homes 0 2,900
Loss on sale of property and equipment 0 70
Changes in operating assets and liabilities
Accounts and notes receivable 2,743 (639)
Real estate inventories (22,417) (38,606)
Land held for resale 0 7,954
Mortgage loans (26) (1,362)
Prepaid expenses and other assets (1,284) 2,114
Accounts payable and accrued construction liabilities (5,412) 528
Accrued expenses (706) (3,680)
Customer deposits 1,170 3,693
---------- ----------
Net cash (used in) operating activities (18,748) (19,700)
---------- ----------
Cash flows from investing activities
Proceeds from sale of Landmark Homes, net of cash sold 0 3,078
Proceeds from sale of land sale partnership interests 0 5,351
Payment of contingent consideration (3,504) (2,372)
Purchase of property and equipment (1,794) (3,504)
Proceeds from sale of property and equipment 97 87
Change in investment in land partnerships (1,196) 743
---------- ----------
Net cash (used in)/provided by investing activities (6,397) 3,383
---------- ----------
Cash flows from financing activities
Borrowings under notes and mortgages payable 352,677 342,735
Repayment of notes and mortgages payable (335,471) (315,533)
Borrowings from related parties 209 3
Repayment of related party borrowings (145) (327)
Conversion of preferred stock 0 (1,693)
Preferred stock redemption (521) (11,500)
Other (net) 50 (182)
Preferred dividends (1,377) (2,336)
---------- ----------
Net cash provided by financing activities 15,422 11,167
---------- ----------
Net (decrease) in cash and cash equivalents (9,723) (5,150)
Cash and cash equivalents, beginning of period 17,526 23,102
---------- ----------
Cash and cash equivalents, end of period $ 7,803 $ 17,952
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
THE FORTRESS GROUP, INC.
CONDENSED 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. Currently, the Company operates under the following
names in fifteen different markets:
<TABLE>
<CAPTION>
Homebuilder Market(s)
----------- ---------
<S> <C>
Brookstone Homes ("Brookstone") Janesville, Madison, and Milwaukee, Wisconsin
Christopher Homes ("Christopher") Las Vegas, Nevada
Fortress Homes and Communities of Florida Jacksonville, Florida
("Fortress Florida")
Don Galloway Homes ("Galloway") Charlotte, North Carolina and Charleston, South Carolina
The Genesee Company ("Genesee") Denver and Fort Collins, Colorado and Tucson, Arizona
Iacobucci Homes ("Iacobucci") Philadelphia, Pennsylvania and Atlantic City, New Jersey
Quail Homes ("Quail") Portland, Oregon
Sunstar Homes ("Sunstar") Raleigh-Durham, North Carolina
Whittaker Homes ("Whittaker") St. Louis, Missouri
Wilshire Homes ("Wilshire") Austin and San Antonio, Texas
</TABLE>
Beginning in the first quarter of 1999, the Company took steps to exit or
reposition itself in the following markets:
<TABLE>
<CAPTION>
Homebuilder Action Market(s) exited
----------- ------ ----------------
<S> <C> <C>
Landmark Homes ("Landmark") Sold assets, March Wilmington, North Carolina and Myrtle
1999 Beach, South Carolina
Buffington Homes ("Buffington") Merged with Wilshire, Exited certain communities in Austin
Buffington name and San Antonio, Texas
discontinued, first
quarter 1999
WestBrook Homes ("WestBrook") Liquidated operation Loudoun County, Virginia
throughout 1999
</TABLE>
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. Fortress Mortgage is licensed as a mortgage banker in
Arizona, Alaska, California, Colorado, Florida, Missouri, Nevada, North
Carolina, Oregon, Pennsylvania, South Carolina, Texas, Virginia, Washington and
Wisconsin.
The accompanying consolidated financial statements of Fortress have been
prepared by the Company. In the opinion of management, the financial statements
contain all adjustments (consisting only of normal, recurring adjustments)
necessary to present fairly the Company's financial position as of June 30, 2000
and its operating results and cash flows for the six month periods ended June
30, 2000 and 1999. Certain information and footnote disclosures normally
included in financial statements presented in accordance with accounting
principles generally accepted in the United States 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 1999 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.
Certain amounts in the prior period financial statements have been reclassified
to conform to the current presentation. All periods presented have been restated
to take into account the effects of a one-for-four reverse stock split
implemented July 10, 2000.
NOTE 3 - REAL ESTATE INVENTORIES
Real estate inventories are summarized as follows (in thousands):
June 30, December 31,
2000 1999
(unaudited)
Work-in-progress
Sold homes $136,046 $100,759
Speculative 58,536 70,228
-------- --------
Total work-in-progress 194,582 170,987
Land
Finished lots 79,226 105,432
Land under development 38,744 22,420
Unimproved land held for development 17,800 13,924
-------- --------
Total land 135,770 141,776
Lumber yard inventory 3,156 2,404
Model homes 14,100 13,346
-------- --------
$347,608 $328,513
======= =======
NOTE 4 - INTEREST
Information regarding interest is as follows (in thousands):
<TABLE>
<CAPTION>
For the Six Months Ended June 30,
---------------------------------
2000 1999
---- ----
(unaudited) (unaudited)
<S> <C> <C>
During the periods:
Interest incurred $ 18,032 $ 16,667
Interest capitalized (15,562) (13,770)
Relief of previously capitalized interest 13,012 13,521
------- --------
Total interest expensed in statement of operations $ 15,482 $ 16,418
======= =======
At the end of the periods:
Capitalized interest in ending inventory $25,631 $23,359
====== ======
</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,
2000 1999
---- ----
(unaudited)
<S> <C> <C>
13.75% Senior Notes due 2003 $100,000 $100,000
Project specific land, land development and
construction loans 201,336 183,298
Mortgage warehouse lines of credit 19,333 19,242
Other loans 1,927 2,850
--------- ---------
322,596 305,390
Less: Unamortized debt issuance costs (3,172) (3,732)
--------- ---------
$319,424 $301,658
========= =========
</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, 2000.
In addition, the Senior Note Indenture restricts certain payments including
dividends and repurchase or redemptions of stock. As of June 30, 2000, the
Company had in excess of $8 million available for such payments. However, the
Company may make payments such as those described above from cash generated from
subsidiaries or other assets 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 primarily from .0625% below to 1.5% over prime rate and fixed
rates primarily ranging from 8.0% to 9.0%. 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 required covenants as of June 30, 2000.
The Company's mortgage subsidiary has two lines of credit outstanding for the
purpose of originating loans. The lines of credit are secured by the mortgage
loans held for sale and are repaid upon sale of the mortgage loans. These lines
bear interest at variable rates ranging from 1.5% over the Libor rate to 1.5%
over the Fed Funds rate based on the type of loan and lending requirements. The
aggregate commitment available under these lines at June 30, 2000 was
$40,000,000.
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, 2001 and
bears interest at prime minus 1/2%. At June 30, 2000, the total commitment
available is $2 million with $1.65 million outstanding. This outstanding portion
is included in "other loans" above.
9
<PAGE>
NOTE 6 - CONVERTIBLE PREFERRED STOCK
The Company has authorized 1 million shares of $.01 par value preferred stock.
The following are the Company's classes and series of preferred stock, amounts
designated, and amounts outstanding at June 30, 2000 and December 31, 1999:
Class AAA cumulative convertible (rate of 9% per annum), 40,000 designated,
28,500 issued and outstanding ($28.5 million aggregate liquidation
preference)
Series C convertible, 70,000 designated, 2,433 and 18,493, respectively,
issuable (see below)
Series D convertible, 67,500 designated, 30,000 issued and outstanding
($3,000,000 aggregate liquidation preference)
Series E convertible, 50,000 designated, 12,229 issued and outstanding
($1,222,900 aggregate liquidation preference)
In May 2000 the Company eliminated the following classes/series of preferred
stock, none of which were outstanding as of June 30, 2000 and December 31, 1999:
Class AA cumulative convertible
Series A 11% cumulative convertible
Series B convertible
Series F convertible
Under a Restructuring Agreement dated December 31, 1998 between the Company and
Prometheus Homebuilders LLC ("Prometheus"), the Company agreed to issue to
Prometheus 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. This exchange was effective
February 4, 1999.
The Company has the right to redeem the Class AAA preferred stock at any time
until December 31, 2000 for its liquidation value plus dividends that, when
combined with dividends previously paid on the Class AA preferred stock and
subsequent dividend payments on the Class AAA preferred stock, will provide a
20% annual return from the inception of Prometheus' investment in the Company.
Any redemption of the Class AAA preferred stock is subject to compliance with
the Company's Senior Note Indenture, which restricts the amount of stock
redemptions or repurchases. As of June 30, 2000, the Company has redeemed $11.5
million in Class AAA preferred stock.
In conjunction with the issuance of the Class AAA preferred stock, the Company
also issued Supplemental Warrants. Subject to the stock price and revenue tests
described below, the Supplemental Warrants would become exercisable on September
30, 2001 with an exercise price of $0.01 per share of common stock and would
expire on March 31, 2004. The number of shares of common stock subject to the
Supplemental Warrants is subject to adjustment depending upon the 60 day average
closing price of the common stock between the period from September 30, 2001 and
September 30, 2003. If during such period the closing price remains greater than
$48.00 per share, no shares would be issuable pursuant to the Supplemental
Warrants. If during such period the closing price is $48.00 per share or less,
the number of shares of common stock issuable upon the exercise of the
Supplemental Warrants could be adjusted, up to five times per year, in
accordance with the following table, which has been restated to take into
account the effect of the reverse stock split of the Company's common shares on
July 10, 2000:
<TABLE>
<CAPTION>
Issue Price ($) Warrants
--------------- --------
$40 million $28.5 million
liquidation value at liquidation value as
issuance of June 30, 2000
<S> <C> <C>
$48.01 or greater 0 0
40.01 - 48.00 151,515 107,955
32.01 - 40.00 333,333 237,500
24.01 - 32.00 833,333 593,750
16.01 - 24.00 1,666,667 1,187,500
8.01 - 16.00 3,333,333 2,375,000
0.00 - 8.00 8,333,333 5,937,500
</TABLE>
10
<PAGE>
The number of common shares issuable upon the exercise of the Supplemental
Warrants would be further reduced on a pro rata basis if any Class AAA preferred
stock were to be redeemed prior to December 31, 2000.
The number of shares into which each Supplemental Warrant may be exercisable
will also 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 $2,397,225,750. The revenue test is subject to adjustment for the sale
of any Company subsidiary. As of June 30, 2000, for purposes of the revenue
test, the Company's cumulative consolidated revenues for the most recent sixteen
quarters was $2,347,464,000. In addition, the Company is required to maintain a
minimum annualized revenue amount of $625 million for the 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.
In addition, should the Company elect to redeem all or a portion of the Class
AAA preferred stock, the Company will then be obligated under a "make-whole"
provision relating to Prometheus' common stock investment of 898,845 (224,711 as
restated for the effect of the July 10, 2000 reverse stock split) shares of
common stock which was purchased upon the second closing of the Class AA
preferred stock. The Company is obligated to arrange for the sale of Prometheus'
common stock at any time during the period from November 15, 2000 to February
15, 2001 and deliver cash proceeds, provided that such proceeds result in
Prometheus receiving no less than $22.00 (as restated from $5.50) per share. The
number of shares the Company would be obligated to arrange to sell is pro-rata
based on the percentage of the Class AAA redeemed. As of June 30, 2000, the
Company is obligated to sell 64,604 shares of Prometheus' common stock. The
number of shares and the guaranteed proceeds per share have been adjusted for
the effect of the reverse stock split on July 10, 2000.
The Series C preferred stock (2,433 shares as of June 30, 2000) has been treated
as outstanding for the purpose of calculating earnings per share; however, it
will only be legally outstanding upon issuance.
Please refer to the Company's financial statements as reported on Form 10-K for
the year ended December 31, 1999 (Note 9- Shareholders' Equity) for further
information on the classes and terms of preferred stocks and warrants.
11
<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 (dollars in thousands).
The weighted number of shares outstanding and the earnings/(loss) per share have
been restated for all periods presented to adjust for the reverse stock split on
July 10, 2000:
<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30, June 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $ 2,146 $ 3,429 $ 2,779 $ 1,485
Less preferred stock dividends (667) (764) (1,334) (1,793)
----------- ----------- ----------- -----------
Income/(loss) available to common shareholders $ 1,479 $ 2,665 $ 1,445 $ (308)
=========== =========== =========== ===========
Basic EPS
---------
Income/(loss) applicable to common shareholders $ 1,479 $ 2,665 $ 1,445 $ (308)
Weighted average number of common shares outstanding 3,071,525 3,036,235 3,064,980 3,012,117
Basic income/(loss) per share $ 0.48 $ 0.88 $ 0.47 $ (0.10)
=========== =========== =========== ===========
Diluted EPS
-----------
Income/(loss) available to common shareholders, basic $ 1,479 $ 2,665 $ 1,445 $ (308)
Plus preferred stock dividends 0 764 0 0
----------- ----------- ----------- -----------
Income/(loss) available to common shareholders, diluted $ 1,479 $ 3,429 $ 1,445 $ (308)
=========== =========== =========== ===========
Weighted average number of common shares 3,071,525 3,036,235 3,064,980 3,012,117
outstanding
Effect of dilutive securities:
Preferred stock 84,897 1,579,694 98,770 0
Options 0 0 0 0
----------- ----------- ----------- -----------
Weighted avg. no. of common shares outstanding, diluted 3,156,422 4,615,929 3,163,750 3,012,117
=========== =========== =========== ===========
Diluted income/(loss) per share $ 0.47 $ 0.74 $ 0.46 $ (0.10)
=========== =========== =========== ===========
</TABLE>
The Company's intention upon conversion or redemption (as the case may be) of
Series C, D, and E preferred stock (See Note 9-Shareholders' Equity Form 10-K)
is to issue Common Stock on the basis of the 2.5-for-1 conversion ratio
contemplated in the respective agreements (as adjusted from 10 for 1 for the
reverse stock split on July 10, 2000) and to pay cash for the difference between
the $100 liquidation value per share and the market value of the Common Stock
converted at 2.5-for-1. Accordingly, the Company would normally include in its
calculation of earnings per share additional shares of common stock to be issued
under the "if converted" method at the 2.5-for-1 conversion ratio.
The following common stock equivalents of the Company's various classes of
preferred stock were not included in the computation of diluted earnings per
share because the effect of adding back the related dividends and weighted
average common shares would be antidilutive:
<TABLE>
<CAPTION>
Outstanding at Convertible into Potential Common Stock Potential Common Stock
--------------- ----------------- ---------------------- ----------------------
June 30, Common Shares as of outstanding, three months outstanding, six
-------- -------------------- ------------------------- ----------------
June 30, ended June 30, months ended June 30,
-------- -------------- ---------------------
2000 1999 2000 1999 2000 1999 2000 1999
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Class/ Series
Class AA N/A 0 N/A 0 N/A 0 N/A 939,227
Class AAA 28,500 28,500 1,187,500 1,187,500 1,187,500 dilutive 1,187,500 1,204,397
Series C 2,433 18,493 6,083 46,233 dilutive dilutive dilutive 67,571
Series D 30,000 45,000 75,000 112,500 dilutive dilutive dilutive 112,500
Series E 12,229 17,643 30,573 44,108 35,595 dilutive 41,100 47,660
Series F N/A 5,000 N/A 4,168 N/A dilutive N/A 4,167
</TABLE>
12
<PAGE>
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.
Included in operating expenses for the six months ended June 30, 1999 were
special charges totaling $1,270,000 related to the restructuring and phasing out
of two of the Company's other operating subsidiaries. The Company's Wilshire
division (formerly operating as Buffington) decided to exit certain communities
and accrued restructuring charges of approximately $480,000. In addition, the
Company recorded charges of approximately $790,000 (including $294,000 in
unrecovered goodwill), as a result of its decision to wind down the operations
of its WestBrook division. As of the end of 1999, substantially all of the
restructuring costs accrued in the first quarter of 1999 had been paid and
charged against the liability established as of March 31, 1999.
NOTE 9- SUBSEQUENT EVENTS
On July 10, 2000 the Company implemented a one-for-four reverse stock split. All
periods presented have been restated to adjust for the effect of the reverse
stock split.
13
<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 consolidated results of operations and those results as a percentage
of the Company's total revenues and its segment revenues:
(dollars expressed in thousands)
<TABLE>
<CAPTION>
For the Three Months For the Three Months
Ended June 30, 2000 Ended June 30, 1999
------------------- -------------------
% of % of % of % of
Total Segment Total Segment
<S> <C> <C> <C> <C> <C> <C>
Total revenues $171,108 100.0% $182,011 100.0%
Homebuilding revenues 169,903 99.3% 100.0 % 180,433 99.1% 100.0%
Gross profit 24,790 14.5% 14.6 % 26,684 14.7% 14.8%
Operating expenses (incl.amort. &
restructuring) 20,981 12.3% 12.3 % 20,526 11.3% 11.4%
Homebuilding pre-tax income 3,672 2.1% 2.2 % 5,710 3.1% 3.2%
Mortgage revenues 1,204 0.7% 100.0 % 1,578 0.9% 100.0%
Mortgage expenses 1,240 0.7% 103.0 % 1,488 0.8% 94.3%
Mortgage pre-tax income (36) 0.0% (3.0)% 90 0.1% 5.7%
Pre-tax income 3,636 2.1% 5,800 3.2%
<CAPTION>
For the Six Months For the Six Months
Ended June 30, 2000 Ended June 30, 1999
------------------- -------------------
% of % of % of % of
Total Segment Total Segment
<S> <C> <C> <C> <C> <C> <C>
Total revenues $314,254 100.0% $332,735 100.0%
Homebuilding revenues 311,663 99.2% 100.0 % 329,773 99.1% 100.0%
Gross profit 45,052 14.3% 14.5 % 48,312 14.5% 14.7%
Operating expenses (incl. amort.&
restructuring) 39,730 12.6% 12.7 % 41,946 12.6% 12.7%
Homebuilding pre-special charges 4,719 1.5% 1.5 % 6,853 2.1% 2.1%
Homebuilding pre-tax income 4,719 1.5% 1.5 % 5,583 1.7% 1.7%
Mortgage revenues 2,591 0.8% 100.0 % 2,962 0.9% 100.0%
Mortgage expenses 2,601 0.8% 100.4 % 2,835 0.9% 95.7%
Mortgage pre-tax income (10) 0% (0.3)% 127 0% 4.3%
Loss on Sale of Landmark Homes 0 0% 0 % (2,900) -0.9%
Pre-tax income 4,709 1.5% 2,810 0.8%
</TABLE>
14
<PAGE>
Consolidated Results of Operations
Comparison of the Company's Results of Operations for the Three and Six Months
Ended June 30, 2000 and 1999.
Homebuilding Operations
General
<TABLE>
<CAPTION>
New Orders, Net Closings Backlog
--------------- -------- -------
Three months Six months Three months Six months ended As of June
ended June 30, ended June 30, ended June 30, June 30, 30,
2000 1999 2000 1999 2000 1999 2000 1999 2000 1999
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
State
-----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Arizona 31 5 66 19 28 14 40 44 31 9
Colorado 110 72 221 175 74 90 126 153 299 205
Florida 196 203 375 505 166 197 354 359 318 445
Missouri 116 166 240 294 111 130 188 254 148 228
Nevada 25 25 53 69 41 35 73 51 61 104
New Jersey 14 8 29 8 9 0 14 0 25 8
North Carolina 128 197 281 403 127 168 227 322 209 324
Oregon/Washington 17 37 50 68 23 22 43 48 21 33
Pennsylvania 24 54 65 88 31 46 54 85 50 56
South Carolina 28 38 55 73 36 30 61 61 69 93
Texas 135 178 302 368 148 195 313 397 224 271
Virginia 0 7 1 17 0 8 2 16 0 18
Wisconsin 48 65 104 131 55 60 78 104 67 88
-- -- --- --- -- -- -- --- -- --
Total 872 1,055 1,842 2,218 849 995 1573 1,894 1,522 1,882
</TABLE>
The Company achieved net new orders of 872 homes and 1,842 homes for the three
and six months ended June 30, 2000, compared to 1,055 and 2,218 homes for the
same periods in 1999, a decrease of 17.3% for the three month period and 17.0%
for the six month period. While several of the Company's markets, Denver and
Tuscon in particular, experienced strong increases from the second quarter of
2000 over the second quarter of 1999, most of our other markets showed declines.
The softening of these markets was due in part, we believe, to rising interest
rates, as well as delays in opening of new communities in several locations. New
orders for the six months ended June 30, 2000 versus the six months ended June
30, 1999 were affected by these factors, as well as the Company's decision in
the first quarter of 1999 to exit certain markets (see Note 8 - Sale of Assets
and Special Charges). Approximately 20% (78 out of a total of 376) of the
decline in new orders from 1999 to 2000 stemmed from this strategy.
The Company has a combined backlog of 1,522 homes, with a dollar value of $325.6
million at June 30, 2000, as compared to 1,882 homes, with a dollar value of
$372.7 million at June 30, 1999. This represents a 19.2% decrease in backlog
units and a 12.6% decrease in backlog value. The decline of backlog units is
primarily due to the decreased level of new orders in recent quarters. Partially
offsetting the unit decline is an 8.1% increase of the average sales price of
homes in backlog, from $198,000 at June 30, 1999 to $214,000 at June 30, 2000.
Revenues
Homebuilding revenues for the second quarter of 2000 were $169.9 million, as
compared to $180.4 million for the same period of 1999, representing a decrease
of 5.8%. Dispositions discussed previously accounted for approximately $2.3
million of the quarter over quarter decrease. In addition, fewer new orders from
ongoing operations in recent quarters resulted in fewer homes closed in the
second quarter of 2000 (849)
15
<PAGE>
versus the second quarter of 1999 (995), a decrease of 14.7%. Partially
offsetting this decrease was an increase in the average price of a home closed
from $178,900 to $196,100 (9.6%). While virtually all of the Company's Markets
experienced increases in average prices, the Las Vegas division contributed most
significantly, due to large increases in the average price of its already
high-priced luxury homes, as well as an increases in the volume of homes closed.
However, in the second half of 2000, as closing volume increases elsewhere
throughout the Company, the Las Vegas division is expected to have a less
significant impact on the overall results of the Company. For the six-month
period, homebuilding revenues were $311.7 million, a 5.5% decrease from the
$329.8 million reported for the same period last year. Approximately $16 million
of the decrease was attributable to dispositions during the first quarter of
1999. Also, the decrease reflects an 11.9% decrease in the number of homes
closed from ongoing operations (1,571 in the six month period ending June 30,
2000 versus 1,783 in the comparable period of 1999), offset by a 12.1% increase
in the average price of the homes closed (approximately $194,300 versus
$173,400). Approximately 31% of this increase in average price was due to the
Company's Las Vegas division.
Gross Profit
Gross profit for the quarter ended June 30, 2000 was $24.8 million, as compared
to $26.7 million for the comparable period of 1999. The Company's gross profit
margins also decreased from 14.8% of homebuilding revenues to 14.6% for the same
periods. As discussed in the revenue section above, although the Company's Las
Vegas division contributed significantly to the average price of homes quarter
over quarter, the Company's gross profit margins continue to be adversely
affected by reduced margin levels in Las Vegas. As noted previously, the Las
Vegas division is expected to have a less significant impact on the Company's
overall gross profit margins in the latter part of 2000. Excluding the results
of the Las Vegas division from both periods, gross profit margins increased from
15.2% during the second quarter of 1999 to 15.9% during the second quarter of
2000. For the six month period ended June 30, 2000 gross profit decreased 6.6%
to $45.1 million from $48.3 million last year. Excluding the results of the Las
Vegas division from both periods, gross profit margins increased from 15.0%
during the first six months of 1999 to 15.8% during the first six months of
2000.
Operating Expenses
Operating expenses (including selling, general and administrative, special
charges, and goodwill amortization) for the quarters ended June 30, 2000 and
1999 were $21.0 million (12.3% of homebuilding revenue) and $20.5 million (11.4%
of homebuilding revenue), respectively. For the six month period ended June 30,
2000 and 1999, total operating expenses were $39.7 million (12.7% of
revenue) and $41.9 million (12.7% of revenue). The Company recognized $1.3
million in special charges during the six months ended June 30, 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, 2000 and 1999 would
have been $39.7 million (12.7% of revenue) and $40.6 million (12.3% of revenue),
respectively
Selling expenses remained constant at $11.6 million for both the quarter ended
June 30, 2000 and for the same period of 1999. However, given the decreased
revenue for the quarter, this resulted in selling expenses as a percent of
homebuilding revenue increasing from 6.4% to 6.8%. For the six-month period
selling expenses decreased to $21.3 million (6.8% of revenue) as compared to
$22.2 million (6.7% of revenue) for the same period of 1999. The decrease in
absolute dollar amounts for the six-month period was primarily due to previously
discussed dispositions.
General and administrative expenses increased to $8.8 million (5.2% of
homebuilding revenue) for the second quarter of 2000, as compared to $8.3
million (4.6% of homebuilding revenue) for the second quarter of 1999. For the
six-month period, general and administrative expenses were $17.1 million (5.5%
of revenue) as compared to $17.1 million (5.2% of revenue) in 1999. The decrease
in absolute dollar amounts due to first quarter 1999 dispositions was offset by
increased expenditures within ongoing operations. These increases are expected
to be absorbed by higher gross profits as volume increases during the latter
half of 2000. We expect this will reverse the trend of increasing general and
administrative expenses as a percentage of revenue.
Homebuilding Pretax
Homebuilding pretax income for the second quarter of 2000 was $3.7 million (2.2%
of homebuilding revenues), as compared to $5.7 million (3.2% of homebuilding
revenues) for the second quarter of 1999.
16
<PAGE>
For the six-month period homebuilding pretax income declined to $4.7 million in
2000 from $5.6 million in 1999 ($6.9 million excluding the impact of special
charges taken as previously noted). Reduced volume in 2000 due to the Company's
dispositions and recent quarter declines in new orders within ongoing operations
were the key factors affecting the decline in earnings before special charges
for both the second quarter and six month periods.
Financial Services Operations
Revenue for the three months ended June 30, 2000 decreased 25.0% to $1.2 million
from $1.6 million for the comparable period of 1999 due to decreased closing
volume attributable to decreased closing volume in homebuilding segments. These
revenues decreased 13.3% to $2.6 million from $3.0 million for the six-month
period.
For the three month period ended June 30, 1999 financial services pretax profit
of $90,000 decreased to a loss of $36,000 for the comparable period of 2000.
Financial services pretax profit of $127,000 for the six-month period ended June
30, 1999 decreased to a loss of $10,000 for the comparable period of 2000. The
profit decrease resulted primarily from the volume decreases.
Improving capture rates (the percentage of the Company's home closings financed
by loans originated by the Fortress Mortgage) mitigated Fortress Mortgage's
declining operating results. The capture rates for the markets served by the
mortgage company for the six months ended June 30, 2000 and 1999 were 55.9% and
34.9%, respectively. The capture rate of homes in backlog at June 30, 2000 was
58.8%. Currently, Fortress Mortgage serves all of the Company's homebuilding
markets with the exception of Las Vegas, Philadelphia, Atlantic City and
Charleston.
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.
Net Income
Due to the previously described factors and the income tax effect thereof, net
income for the three months ended June 30, 2000 was $2.1 million, as compared to
net income of $3.4 million in the same period of 1999. For the six-month period
ended June 30, 2000, net income was $2.8 million, a $1.3 million increase from
the same period a year ago. Excluding the impact of the sale of Landmark Homes
and special charges noted above, net income for the six months ended June 30,
1999 would have been approximately $4.1 million.
Earnings per common share for the quarter ended June 30, 2000 was $0.48 and
$0.47, on a basic and diluted basis, respectively. For the comparable period of
1999, income per share on a basic and diluted basis was $0.88 and $0.74,
respectively. Earnings per share for the six-month period ended June 30, 2000
was $0.47 and $0.46, on a basic and diluted basis respectively. For the
comparable period of 1999, loss per share was $(0.10) on a
basic and diluted basis.
Earnings before interest, taxes, depreciation and amortization (EBITDA)
decreased to $13.9 million (8.1% of revenue) for the three months ended June 30,
2000, as compared to $16.7 million (9.2% of revenue) for the same period in
1999. For the six-month period EBITDA decreased to $23.7 million (7.5%) of
revenue) from $26.3 million (7.9% of revenue) for the same period in 1999.
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.
17
<PAGE>
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 30, 2000, the Company's operating
activities, taken in the aggregate, utilized approximately $18.7 million of
cash. This cash utilization was primarily the result of increases in inventories
of approximately $22.4 million, which is consistent with the Company's growth in
its backlog since year end and the seasonal nature of the homebuilding industry.
The Company's investing activities utilized approximately $6.4 million in cash,
primarily due to additional consideration of approximately $3.5 million paid
under the earnout provisions of prior period acquisitions. In addition,
purchases of property and equipment totaled $1.8 million and investments in land
joint ventures were approximately $1.2 million.
Financing activities provided $15.4 million of cash flow. Net borrowings under
notes and mortgages payable of $17.2 million were used to finance the buildup of
inventory discussed in the cash flows from the operating activities paragraph
above. Offsetting these net borrowings was $1.4 million for the payment of
preferred dividends.
The Company regularly refinances existing loan agreements and executes new loan
agreements. Approximately $500 million of secured lending facilities were in
place at the subsidiary level at June 30, 2000. Under these credit facilities,
the Company has borrowed $201 million at June 30, 2000. The total amount
available under these commitments varies based on individual loan covenants and
inventory levels.
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, 2000 the Company had cash and cash
equivalents on hand of $7.8 million.
At June 30, 2000, the Company had 6,623 lots in inventory beyond those already
in backlog. This represents, in aggregate, an estimated eighteen-month supply of
land based on sales absorption rates for the first six months of 2000. 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 land limited partnerships as methods of controlling and
subsequently acquiring land. In markets where lot options are not readily
available to meet its needs, the Company is pursuing additional off-balance
sheet arrangements to reduce its economic risk. The Company plans to continue
these practices and expects to exercise, subject to market conditions,
substantially all of its option contracts. At June 30, 2000, the Company had an
additional 11,439 lots under option representing approximately a 38-month supply
of land based on the same absorption rates as above.
Statement on Forward-Looking Information
Certain information included in this report is "forward-looking" within the
meaning of the Private Securities Litigation Reform Act of 1995. You can
identify this information by use of words like "may," "will," "expect,"
"anticipate," "estimate," or "continue" or similar expressions. Such statements
represent the Company's judgment and involve known and unknown risks,
uncertainties and other factors that may cause actual results to differ
materially from those expressed or implied in the forward-looking statements.
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, housing demand in our markets, 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 Fortress Group's operating results
including earnings and/or those of acquired homebuilders or earnings per share.
18
<PAGE>
PART II - OTHER INFORMATION
Item 2. Changes in Securities
On March 10 and June 15, 2000, the Company, pursuant to the previously reported
terms of the asset purchase agreement between the Company, D.W. Hutson
Construction, Inc. ("Hutson") and the principal shareholder of Hutson, paid
earnouts for 1999 in the amounts of $1,420,932 and $185,135 respectively. These
cash payments reduced the number of issuable shares of Class C preferred stock
from 18,493 at December 31, 1999 to 2,433 at June 30, 2000.
In May of 2000 the Company's board of directors voted to eliminate the following
class/series of preferred stock:
Class AA cumulative convertible
Series A 11% cumulative convertible
Series B convertible
Series F convertible
Also in May of 2000, the Company's board of directors voted to retire 265,100
shares of Treasury Stock.
On July 10, 2000, the Company implemented a one-for-four reverse stock split.
Item 4. Submission of matters to a vote of Security Holders.
The annual meeting of the common shareholders of the Company was held on May 24,
2000. The following item was 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 of common nominee was as follows:
For Withheld
--- --------
Mark L. Fine 13,795,447 85,042
Robert Short 13,796,600 83,889
William A. Shutzer 13,793,524 86,965
J.Christopher Stuhmer 13,797,123 83,366
George C. Yeonas 13,791,000 89,489
Additionally, the holders of the Series AAA preferred stock reelected Sandra A.
Lamb and Linda H. Lewis to the board of directors. Subsequently, on June 12,
2000 Ms. Lewis resigned from the board and the Series AAA preferred stock
holders elected Andrew E. Zobler and Richard I. Gilchrist.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Number Description
------ -----------
3.5 Certificate of Amendment of the Certificate of
Incorporation of the Company, effective July 10, 2000
27 Financial Data Schedule
(b) Reports on Form 8-K.
Form 8-K filed April 19, 2000, pursuant to Item 4, the dismissal
of PricewaterhouseCoopers LLP and the appointment of Ernst and
Young LLP as the Company's independent accountants.
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: August 14, 2000 By: /S/ George C. Yeonas
------------------ -----------------------------------
George C. Yeonas
Chief Executive Officer
Date: August 14, 2000 By: /S/ Jeffrey W. Shirley
------------------ -----------------------------------
Jeffrey W. Shirley
Chief Financial Officer,
And Principal Accounting Officer
20
<PAGE>
EXHIBIT INDEX
Number Description
------ -----------
3.5 Certificate of Amendment of the Certificate of
Incorporation of the Company, effective July 10, 2000.
27 Financial Data Schedule
21
