Fortress International Group: virtue is sometimes rewarded
by PlanMaestro
Our decision to convert a sizeable portion of our note will not only reduce debt, improve cash flow and enhance the balance sheet of the company, but it should also serve as a demonstration of the complete confidence we have in our business model and ability to move from a period of slow backlog turnover to profitable quarters. Along with significant pay cuts taken by Gallagher and myself, the pay reduction of board members and additional overhead reduction measures, these actions will assist the company in recovering its EBITDA losses experienced in the past six quarters – CEO Tom Rosato
We commented in a previous FIGI write-up the possibility of substantial pent-up demand. Well, the company announced last week the closing of several large and small projects for $27 million during the first quarter. This event reinforces the announcement in October of $39.4 million in new contracts showing a nice demand recovery the last two quarters.
Another positive element has been management’s response to the ordeal: proactive and sharing the burden. Management has not been tempted to dilute the upside with unnecessary capital injections and has been very much aligned with the interest of shareholders.
- Implemented a 10% salary reduction for substantially all of the Company’s employees.
- CEO Thomas Rosato, President and COO Gerard Gallagher and CFO Timothy Dec agreed to further reduce their annual base salary to $150,000 last year. In compensation, they were awarded equity grants of an aggregate of 102,564, 102,564 and 48,410 restricted stock awards respectively.
- Members of the board of directors took reductions in their annual compensation totaling $750,000, none of which was replaced in stock compensation.
- In 2008, CEO Tom Rosato and President Jerry Gallagher converted $3,500,000 of seller’s notes to equity at the original $7.50 share price. This action eliminated the balance of the Rosato note in full on the balance sheet. Gallagher agreed to defer interest and principal payments on the balance of his note until the first quarter of 2010. These actions reduced $225k in 2008 and $2.3mm in 2009 in cash payments.
- The balance of the Gallagher note was further renegotiated recently and 30% partially converted to equity at a price of $2 that was substantially higher than the stock price at the time of conversion
- Simplified its contingencies by selling Rubicon to its management for $1,000,000 in cash, $235,714 in an outstanding promissory note, a release of the $104,711 Rubicon’s obligation for payment of certain bonus payments, a $534,574 promissory note, additional contingent earn-outs upon performance, and releasing FIGI from any obligations relating to earn-out payments from the original Rubicon acquisition
- Reduced the size of the board from nine to six members responding to concerns on more cost reductions
- Voluntarily delisted from Nasdaq to further reduce expenses
- Recovered $1 million on previously written off bad debt
These measures had the healthy effect of stopping cash burn and give FIGI time to capture future demand. They are also a sign of management confidence on its company’s viability and prospects.
Why it was so cheap, what was the Variant Perception? I think the main reason is obvious: this is an ultra tinny micro cap so it is not like everyone was watching. Barry Kitt, a large shareholder, also dumped all of his shares into a weak stock market and FIGI is a thinly traded stock. Lucky for us he has finished selling and the story is much different now with orders coming in and the downside very well protected with the new lean and mean cost structure.
For more information in the industry, there are several write ups on major datacenter players at the Value Investors Club.
SDXC http://www.valueinvestorsclub.com/value2/Idea/ViewIdea/3479
EQIX http://www.valueinvestorsclub.com/value2/Idea/ViewIdea/17405
DFT http://www.valueinvestorsclub.com/value2/Idea/ViewIdea/3476
Long FIGI
Variant Perceptions 
I was extremely confused when I saw FIGI – Fortress Investment Group. The names seem to be confusing between FIG which is the hedge fund/PE fund Fortress Investment Group and this one, FIGI which is Fortress International Group.
Either way, nice find and write up. As for FIG, it is a name I know well, and it is valued very differently, instead as a percentage of assets under management, so becomes more about capital raising and AUM growth. It was undervalued when it traded down to about $1, but not so clear now with uncertainty over hedge fund/PE fund regulatory environment.
Ups, my mistake. Fixed
this is an interesting idea. what do you think of the acquisition of rubicon only to have it be sold to current management at about 30% the price the company bought it for only 3 years later?
do you trust management? that seems shady and if not shady definitely value-destroying… and i’m sure the details are in one of these edgar docs, just wondering what you think. there are an awful lot of related-party transactions listed here, maybe not for a ton of money but it seems unnecessary and raises my eyebrows just upon my first skimming of their filings.
Not the best use of capital but it is not the last time we will see this in consulting related industries. Usually when times are good (and remember the CEO and President were aggressively buying shares in 2008) young consulting companies think they can gain expertise by buying the competition. The problem is that these assets are walking assets. So if something goes wrong with the deal and you want to sell or renegotiate, previous management has a strong bargaining position even when you have strong non-competes.
I do not distrust management maybe because I was buying before the deal. One of my concerns at the time was how they were going to handle the related Rubicon notes and earn-outs. In my opinion, the deal increased the margin of safety and the upside is still great.
The thing I’m concerned about is that they sold the business to themselves. How do we know they didn’t give themselves a sweetheart deal? I havent made it back to their filings yet but I dont have any data on rubicons earnings or lack of them. Can you fill me in on what you know?
They sold it to Rubicon’s management not to themselves
ah ok that makes more sense then. i just saw it was an entity called rubicon acquisition group, then i misread your post on top of that… i figured it was self dealing just by seeing all the related party transactions, it wouldnt be too surprising
it is still pretty nasty value destruction though.
If they learned their lesson, it could be for the better. I have seen other consulting companies making that same mistake but on a larger scale.
[…] Seems like the industry capital expenditure is back after the severe cash crunch after Lehman and the pent-up is showing. We also discussed this sales uptrend while reviewing the first quarter announcement and the deep cost reductions. […]