Item 1. Business
General Description - -------------------
International American Homes, Inc. (the "Company") was incorporated under the laws of the State of Delaware on April 27, 1983. The Company, through a subsidiary, designs, builds, and sells single-family homes and villas and develops finished building lots, primarily in middle income communities in suburban residential areas in Greater Tampa, Florida.
During the fiscal year ended March 31, 1998, and in prior years, the Company also conducted home building activities in Metropolitan Washington, D.C.. Such activities have been terminated. See Notes 1 and 11 in Notes to Consolidated Financial Statements of the Company appearing elsewhere in this report.
On April 16, 1990, the Company and certain of its wholly-owned subsidiaries filed voluntary petitions for relief under Chapter 11, Title 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of New Jersey (the "Bankruptcy Court"). On August 12, 1992, the Bankruptcy Court entered an order confirming the Company's Plan of Reorganization (the "Plan" or "Plan of Reorganization"). The plan expired on August 12, 1998. See Notes 1 and 7 in Notes to Consolidated Financial Statements of the Company appearing elsewhere in this report.
Financing Arrangements - ----------------------
The Company, through its subsidiary, obtains financing from commercial banks for a portion of the cost of acquiring finished building lots and undeveloped land and for most of the costs of the construction of homes. This financing is generally available for homes that are subject to a contract of sale and also for a limited number of homes in advance of sale. The Company's loan commitments as well as current banking regulations limit the portion of each home that can be financed to approximately 75% of its value. Since the Company uses its own capital resources to fund those costs that cannot be financed, the Company's future growth will be limited by the amount of such resources. As a result of the use of these financing arrangements, the Company is currently, and expects to continue to be, highly leveraged. All of the Company's financing arrangements are secured by the related real estate inventory.
Management believes that the Company currently has adequate financing and liquidity to meet its financial obligations and will be able to fund the acquisition and construction of inventory to support modest growth. However, there is no assurance that financing will be available to the Company in the future. In addition, homebuilding is a cyclical industry with economic conditions having a substantial impact on operating performance.
Markets - -------
During the three fiscal years ended March 31, 1999, the Company built and delivered 1,163 homes realizing $170,549,000 in revenues. The following tables summarize, by market area, the Company's sales revenues and number of homes delivered, respectively, for its last three fiscal years.
Home Sales Revenue (Dollars in thousands)
Year Ended March 31, ------------------------------------------- 1999 1998 1997 ---------- ---------- ---------- Market Area -----------
Greater Tampa, Florida $ 49,992 $ 42,102 $ 40,282
Metropolitan Washington, D.C. * 0 12,299 25,874 ---------- ---------- --------- Total * $ 49,992 $ 54,401 $ 66,156 ========== ========== =========
Number of Homes Delivered
Year Ended March 31, ------------------------------------------- 1999 1998 1997 ---------- ---------- ---------- Market Area ----------- Greater Tampa, Florida 354 321 309
Metropolitan Washington, D.C. * 0 56 123 ---------- ---------- --------- Total * 354 377 432 ========== ========== =========
* Includes home sales revenue and number of homes delivered prior to the restructuring of operations during the year ended March 31, 1998.
The Company is currently offering single-family homes and villas in six communities at prices ranging from $102,000 to $210,000. Purchasers of the Company's homes include both entry-level and move-up buyers. The average sales price of the homes delivered in the year ended March 31, 1999 was $ 141,000.
Land Acquisition and Development - --------------------------------
The Company generally acquires finished building lots under contracts which spread the acquisition of those lots over a period of time that roughly coincides with the estimated time required for the construction and sale of the homes on those lots. At March 31, 1999 the Company had commitments to purchase 635 finished building lots at a total purchase price of approximately $17,270,000 over a four-year period. These commitments assure a continuing supply of finished building lots in the near future. Substantial deposits will be forfeited if the Company is unable to satisfy these commitments.
During the year ended March 31, 1996, the Company purchased a parcel of land in Greater Tampa, Florida containing approximately 360 lots of which 300 were undeveloped. At March 31, 1999, the Company had developed 257 of those lots into finished building lots and delivered 148 homes on those lots in prior periods up to and including March 31, 1999. The Company is not engaged in any other land development activities.
Subcontractors and Suppliers - ----------------------------
The Company constructs homes utilizing subcontractors who operate under the supervision of the Company's staff. The subcontracts are generally fixed-price, short-term agreements. Building materials and subcontractors are readily available in the areas where the Company constructs its homes. Although the Company believes that no relationship with any particular supplier or subcontractor is material to its operations, the Company purchases substantially all of its requirements for lumber and certain other building material products for the homes that it builds in Greater Tampa, Florida from one supplier. The Company does not believe that this relationship results in any significant risk to the Company.
Warranties - ----------
The Company provides warranties to all of its customers. The Company provides a written ten-year warranty through an independent warranty program which insures performance by the Company. The warranties cover major structural defects for ten years, limited structural and mechanical defects for one to two years, and all defects for one year.
Seasonal Nature of Business - ---------------------------
Due to its product mix, the Company's operations have not been seasonal in nature.
Backlog - -------
The following comparative backlog information excludes the results from restructured operations (i.e. exiting from the Metropolitan Washington, D.C. market).
As of March 31, 1999 and 1998 the Company had a backlog of signed non-contingent contracts for 105 homes with aggregate sales prices of $15,168,000 and 107 homes with aggregate sales prices of $14,676,000, respectively.
Sales and Marketing - -------------------
The Company generally sells its homes through its own sales personnel who work in on-site model homes. Sales personnel are compensated through a combination of salary and commission. A significant portion of those sales are initiated by independent real estate brokers who are compensated on a commission basis.
The Company advertises in local and regional newspapers and publications and provides prospective purchasers with illustrated brochures and floor plans. The Company's customers may select custom options to be incorporated into their homes at additional cost.
The Company requires a cash deposit from purchasers at the time a contract of sale is executed. Such deposits are held in trust, escrow, or segregated bank accounts. Purchasers are permitted to cancel their contract and receive a refund of their deposit under certain limited circumstances including their inability to obtain permanent mortgage financing or to sell their existing home. For the years ended March 31, 1999, 1998 and 1997, the Company experienced cancellation rates of 15%, 21%, and 21%, respectively.
Although the Company attempts to limit its inventory of unsold homes, it may commence construction of homes prior to obtaining sales contracts. The Company frequently discounts the purchase price of these homes or provides various options and other sales incentives to purchasers.
Customer Financing - ------------------
The Company assists customers in arranging permanent mortgage financing by providing information regarding potential mortgage lenders. There currently is an adequate supply of competitively priced permanent mortgages available from unrelated sources to satisfy the needs of homebuyers.
The Company receives in cash, at closing, the full sales price for its homes, less any financing subsidies, deposits, closing costs, and loan repayments.
Competition - -----------
The homebuilding industry is highly competitive and fragmented. The Company competes in the geographic area in which it operates with numerous residential construction companies ranging from small local builders to large regional and national builders. The Company's competitors include: Pulte Corporation, Centex Corporation, U.S. Home Corporation and Lennar Corporation. The national builders and many of the local and regional companies have higher sales and greater financial resources than the Company. The Company considers all homes, whether offered for sale or rent (including apartment and condominium housing), to be competitive with its homes in each local area in which the Company operates. The Company competes primarily on the basis of quality, location, price, design, and reputation.
Regulation - ----------
The Company's business is affected by various local, state, and Federal statutes, ordinances, rules, and regulations concerning zoning, building design and construction, home sales, environmental protection, and other matters. Changes in governmental regulations may adversely affect the Company's business.
Many of the homes built by the Company are approved for FHA or VA financing. Where required, all construction is inspected by local government inspectors and, on FHA and VA approved homes, by FHA or VA building inspectors.
Employees - ---------
The Company employed 34 persons as of March 31, 1999 of whom 3 were executive officers, 11 were sales personnel, 9 were administrative and clerical personnel and 11 were involved in construction and supervision of construction. The Company believes its employee relations are satisfactory.
Item 2.
Item 2. Properties
As of March 31, 1999, the Company occupied leased office facilities in Tampa, Florida totaling approximately 3,170 square feet. See Notes 1 and 7 in Notes to Consolidated Financial Statements of the Company appearing elsewhere in this report.
Item 3.
Item 3. Legal Proceedings
On April 16, 1990, the Company and certain of its wholly-owned subsidiaries filed voluntary petitions for relief under Chapter 11, Title 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of New Jersey (the "Bankruptcy Court"). On August 12, 1992, the Bankruptcy Court entered an order confirming the Company's Plan of Reorganization (the "Plan" or "Plan of Reorganization"). The Plan expired on August 12, 1998.
The Company is involved from time to time in other litigation arising in the ordinary course of business which is not expected to have a material adverse effect on the Company's financial position or its results of operations. See Note 7 in Notes to Consolidated Financial Statements of the Company appearing elsewhere in this report.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of shareholders during the fourth quarter of the fiscal year covered by this report.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
At the 1994 Annual Meeting of Stockholders the stockholders approved a proposal to adopt certain amendments (the "Amendments"), to the Company's Restated Certificate of Incorporation (i) to effect a 1-for-10 reverse stock split of the Company's issued and outstanding common stock (the "Reverse Stock Split"), and (ii) to change the number of authorized shares of common stock from 30 million to 10 million. The Amendments did not change the par value of the common stock which remained at $.01 per share. The Amendments became effective on May 31, 1995 with the filing of a Certificate of Amendment with the Secretary of State of Delaware.
At the 1998 Annual Meeting of Stockholders the stockholders approved a proposal to adopt an amendment (the "Amendment"), to the Company's restated Certificate of Incorporation to effect a 1-for-3 reverse stock split of the Company's issued and outstanding common stock. This Amendment did not change the par value of the common stock which remained at $.01 per share or the number of authorized shares which remained at 10 million. The Amendment became effective on December 1, 1998 with the filing of a Certificate of Amendment with the Secretary of State of Delaware.
The effect of the reverse stock splits as set forth above has been retroactively reflected in this report.
Shares of the Company's common stock are traded in the over-the-counter market. The trading symbol is "IAHM".
The following table sets forth the range of high and low bid prices for the periods indicated as reported by the National Quotation Bureau (which reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not necessarily represent actual transactions).
High Low ---- --- Calendar Year 1997 - ------------------ First Quarter $ 4.89 $ 3.57 Second Quarter 4.68 3.57 Third Quarter 4.50 4.14 Fourth Quarter 4.50 4.14
Calendar Year 1998 - ------------------ First Quarter 4.50 4.50 Second Quarter 4.50 3.47 Third Quarter 5.25 2.63 Fourth Quarter 6.38 3.93
Calendar Year 1999 - ------------------ First Quarter 7.50 4.75
As of June 1, 1999, there were 2,323 stockholders of record.
The Company has never declared or paid any cash dividends. Although in all other respects the Plan has expired, the Company may not pay any cash dividends to stockholders until it has first paid an additional $1,250,000 to the creditors pursuant to a continuing obligation under the Plan.
Item 6.
Item 6. Selected Financial Date
Selected Consolidated Statements of Operations (1) (Dollars in thousands)
Selected Consolidated Balance Sheet Data (1) (Dollars in thousands)
--------------------------------------------
(1) In conjunction with the Reorganization, the Company adopted fresh start reporting pursuant to which all assets and assumed liabilities are restated to reflect their reorganization value whiich approximates their fair value at the date of reorganization. Accordingly, the Selected Consolidated Statements of Operations for the period March 31, 1995 through March 31, 1999 and the Selected Consolidated Balance Sheet Data as of March 31, 1995 through March 31, 1999 are not comparable to the related statements for any prior period and as of any prior date.
(2) The Selected Consolidated Statement of Operations for the year ended March 31, 1999 includes income of $1,322,000 resulting from the reversal of an estimated liability to creditors established during the year ended March 31, 1993 for which no payment was required.
(3) The Selected Consolidated Statement of Operations and Selected Consolidated Balance Sheet Data for the year ended March 31, 1998 include a charge for the restructuring of operations of $1,840,000 (i.e. exiting from the Washington, D.C. market).
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with, and is qualified in its entirety by, the Consolidated Financial Statements and the notes thereto and other financial information included elsewhere in this Annual Report on Form 10-K. Certain statements in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" are forward-looking statements. See "Special Note Regarding Forward-Looking Statements".
During 1996 and 1997 an adverse housing market in Metropolitan Washington, D.C., especially in the areas in which the Company conducted home building operations, resulted in continued operating losses in the Company's Metropolitan Washington, D.C. subsidiary. Management changes were made and administrative costs were reduced in order to minimize the loss. In addition, several communities in which operations had been poorly performing were abandoned. Notwithstanding those changes, lower operating margins and higher selling expenses continued to adversely affect the Company's ability to restore profitability in the Metropolitan Washington, D.C. market. Accordingly during the quarter ended December 31, 1997 the Board of Directors of the Company approved management's plan to discontinue the building and sale of homes and effect an orderly withdrawal from the Metropolitan Washington, D.C. housing market. Homes for which the Company had entered into non-contingent contracts have been completed and model homes and excess lot inventory have been sold. The only remaining activities are the administrative functions associated with the wind-down of the subsidiary.
Liquidity and Capital Resources - -------------------------------
The consolidated financial statements for the year ended March 31, 1998 include a restructuring charge of $1,840,000 ($1,214,000 after benefit for federal income tax) associated with the termination of home-building operations in Metropolitan Washington, D.C. (See Notes 1 and 11 in Notes to the Consolidated Financial Statements of the Company appearing elsewhere in this report). The Company believes that it has sufficient cash flow and cash on hand to absorb any remaining costs associated with the restructuring.
The Company, through its subsidiary, obtains financing from commercial banks for a portion of the cost of acquiring finished building lots and for most of the costs of the construction of homes. This financing is generally available for homes that are subject to a contract of sale and also for a limited number of homes in advance of sale. The Company's loan commitments as well as current banking regulations generally limit the portion of each home that can be financed to approximately 75% of its value. Since the Company must use its own capital resources to fund those costs that cannot be financed, the Company's future growth will be limited by the amount of such resources. As a result of the use of these financing arrangements, the Company is currently, and expects to continue to be, highly leveraged.
The Company's subsidiary currently has financing agreements in the aggregate amount of $19,900,000 with commercial banks located in the area in which it operates. The terms of these financing agreements vary, are each for one year or more from their date of origination (with expiration dates ranging from July, 1999 to October, 2000), are generally guaranteed by the Company, and are all secured by the related real estate inventory. During the fiscal year
ended March 31, 1999 a portion of these agreements up to an aggregate maximum amount of $19,500,000 along with a specific indemnification of certain environmental conditions were guaranteed by the Company's Chairman and President. In consideration thereof the Company agreed to pay a guaranty fee equal to the lessor of $80,000 or 1% of the amount guaranteed. The obligations of the Company's Chairman and President continue during the term of the loan agreement subject to certain ratios and financial performance of the Company which have been satisfied as of March 31, 1999.
The Company generally acquires finished building lots under contracts which spread the acquisition of such lots over a period of time that roughly coincides with the estimated time required for the construction and sale of homes on those lots. At March 31, 1999, the Company had commitments to purchase 635 finished building lots at a total purchase price of approximately $17,270,000 over a four-year period. These commitments assure a continuing supply of finished building lots in the near future. Substantial deposits will be forfeited if the Company is unable to satisfy these commitments.
During the year ended March 31, 1996, the Company purchased a parcel of land in Greater Tampa, Florida containing approximately 360 lots of which 300 were undeveloped. Through March 31, 1999, the Company had developed 257 of those lots into finished building lots and had delivered 148 homes on those lots. The Company obtained financing from a commercial bank to fund a portion of the cost of acquiring and developing the land.
The Company's short-term liquidity and its ability to operate over the short-term are reasonably assured by the financing agreements in place, by the Company's backlog of sales contracts, and by the commitments to acquire finished building lots. The Company's long-term liquidity is not affected by any material capital expenditures but would be impacted by the inability to renew certain of the financing agreements when they mature. The strength of the housing market in the area where the Company will continue operations and the ability of the Company to maintain a continual supply of finished building lots will also affect the Company's long-term liquidity. Management believes that the Company currently has adequate financing and liquidity to meet its financial obligations and will be able to fund the acquisition and construction of inventory to support modest growth. However, there is no assurance that such financing will be available to the Company in the future.
The Plan provided for distributions to creditors equal to 50 percent of future cash flows (as defined in the Plan), if any, for the periods ending June 30, 1993 through June 30, 1998. The plan also requires that before the Company can pay any dividends to stockholders it must first pay to certain holders of creditors' claims $1,250,000. The Plan also contained other restrictive covenants regulating various aspects of the Company's operations. With the exception of the dividend restriction which continues, all other restrictive covenants expired on August 12, 1998.
During the year ended March 31, 1993 the Company provided an estimated liability for potential distributions of cash flow to creditors of $1,322,000. The Company has calculated the cash flow (as defined in the Plan) for the cumulative six year period ended June 30, 1998 and has determined that there was no cash flow (as defined in the Plan) for that period.
Accordingly, no distribution to creditors was required. At June 30, 1998, the Company reversed the estimated liability and recognized income of $1,322,000.
Results of Operations - ---------------------
The following table and the paragraphs that follow set forth certain information with respect to homes delivered and homes sold during the periods presented (dollars in thousands). For comparative purposes, the information has been restated to eliminate the results from restructured operations (i.e. the exiting from the Washington, D.C. market).
Year Ended March 31, ----------------------------------------------------- 1999 1998 1997 ------------- -------------- --------------
Homes delivered Units 354 321 309 Home sales revenue $ 49,992 $ 42,102 $ 40,282 Average sales price $ 141.2 $ 131.2 $ 130.4
Homes sold Units 352 346 322 Sales value $ 50,351 $ 46,244 $ 41,839 Average sales price $ 143.0 $ 133.7 $ 129.9
The increase in home sales revenues for the year ended March 31, 1999 compared to the year ended March 31, 1998 and the increase in home sales revenues for the year ended March 31, 1998 compared to the year ended March 31, 1997 both result from a combination of an increase in the number of units delivered and an increase in the average sales price of the units delivered. The increase in the number of units delivered results generally from a greater number of operating communities and timing factors. The increase in the average sales price results from a wider product range and price increases.
The Company realized an increase in the number of homes sold during the year ended March 31, 1999 compared to the year ended March 31, 1998 and an increase during the year ended March 31, 1998 compared to the year ended March 31, 1997. The increases are attributable to an increase in the number of product types in the communities in which the company builds and a greater number of sales in each community.
The increase in the average sales price of homes sold during the year ended March 31, 1999 compared to the year ended March 31, 1998 and the increase during the year ended March 31, 1998 compared to the year ended March 31, 1997 results from a wider product range and price increases.
The following table sets forth certain information with respect to homes sold under contract but not delivered ("backlog") at the dates shown (dollars in thousands). For comparative purposes the information has been restated to eliminate the results from restructured operations (i.e. the exiting from the Washington D.C. market).
Year Ended March 31, ----------------------------------------------------- 1999 1998 1997 ------------- -------------- -------------- Backlog Units 105 107 82 Sales value $ 15,168 $ 14,676 $ 10,372 Average sales price $ 144.5 $ 137.2 $ 126.5
There are no contingent contracts in the backlog.
The number of units in the Company's backlog of sales contracts decreased slightly at March 31, 1999 compared to March 31, 1998. However, the value of its backlog of sales contracts increased. The decrease in the number of units is not material. The increase in the value of the backlog is attributed to an increase in the average sales price per unit resulting from a wider product range and price increases.
The Company realized an annual increase in the number and value of its backlog of sales contracts at March 31, 1998 compared to March 31, 1997. This increase is attributable to a greater number of product types in the communities in which the company builds homes as well as an increase in the number of sales per community. The increase in the average sales price results from a wider product range and price increases.
Year Ended March 31, 1999 Compared to the Year Ended March 31, 1998.
Results of Operations
The following table sets forth, for the periods indicated, certain information regarding the Company's operations (dollars in thousands). Operations for the year ended March 31, 1999 are not comparable to the year ended March 31, 1998 because of the restructuring of operations (i.e. the exiting from the Washington, D.C. market).
Interest and Other Income
Interest and other income includes $337,000 and $423,000 and interest expense includes $333,000 and $416,000 for the years ended March 31, 1999 and March 31, 1998, respectively, from wholly-owned finance subsidiaries established in prior years to sell collateralized mortgage obligations through participation in various multi-builder bond programs. The decrease in both income and expense results from decreases in mortgages receivable due to payoffs which reduces the related debt.
Income Taxes
For the year ended March 31, 1999 a provision for income tax of $583,000 was recorded. For the year ended March 31, 1998 a net income tax benefit of $380,000 was recorded. The effective tax rates for years ended March 31, 1999 and 1998 were 21% and 35%, respectively. The change in the effective tax rate results primarily from the reversal of creditor liability which is not subject to income tax .
Restructuring Provision
The year ended March 31, 1998 includes a restructuring charge of $1,840,000 associated with the termination of home-building operations in Metropolitan Washington, D.C.. The year ended March 31, 1999 did not include any restructuring charge.
Creditor Liability
The year ended March 31, 1999 includes a reversal of an estimated liability for potential distributions of cash flow to creditors of $1,322,000. The year ended March 31, 1998 did not include any reversal of creditor liability.
The following table sets forth, for the periods indicated, certain information regarding the Company's remaining Florida operations (dollars in thousands).
Gross profit increased in amount and as a percentage of home sales revenues over the prior comparable period. The increase in gross profit is attributed primarily to higher home sales revenues and a decrease in cost of home sales as a percentage of home sales revenues.
Selling, general and administrative expenses for the year ended March 31, 1999 increased in amount and as a percentage of home sales revenues over the prior comparable period. The increase in selling expenses is primarily attributed to the higher home sales revenues. The increase in general and administrative expenses is attributed to higher employment costs and expenses.
The change in pre-tax profit for the year ended March 31, 1999 compared to the year ended March 31, 1998 is a reflection of the changes in gross profit and in selling, general, and administrative expenses as discussed above.
Year Ended March 31, 1998 Compared to the Year Ended March 31, 1997.
Results of Operations
The following table sets forth, for the periods indicated, certain information regarding the Company's operations (dollars in thousands). Operations for the year ended March 31, 1998 are not comparable to the year ended March 31, 1997 because of the restructuring of operations (i.e. the exiting from the Washington, D.C. market).
Interest and Other Income
Interest and other income includes $423,000 and $483,000 and interest expense includes $416,000 and $471,000 for the years ended March 31, 1998 and March 31, 1997, respectively, from wholly-owned finance subsidiaries established in prior years to sell collateralized mortgage obligations through participation in various multi-builder bond programs. The decrease in both income and expense results from decreases in mortages receivable due to payoffs which reduces the related debt.
Income Taxes
For the year ended March 31, 1998 a net income tax benefit of $380,000 was recorded. For the year ended March 31, 1997 a provision for income taxes of $280,000 was recorded. The effective tax rates for years ended March 31, 1998 and 1997 were 35% and 30%, respectively. The change in the effective tax rate was the result of a reversal of a prior year tax reserve.
Restructuring Provision
The year ended March 31, 1998 includes a restructuring charge of $1,840,000 associated with the termination of home-building operations in Metropolitan Washington, D.C.. The year ended March 31, 1997 did not include any restructuring charge.
The following table sets forth, for the periods indicated, certain information regarding the Company's remaining Florida operations (dollars in thousands).
While gross profit increased for the year ended March 31, 1998 compared to the year ended March 31, 1997, gross profit as a percentage of home sales revenue decreased slightly. The percentage decrease is not deemed to be material.
Selling, general and administrative expenses for the year ended March 31, 1998 increased in both amount and percentage when compared to the prior comparable period. The increase in selling, general and administrative expenses is due principally to higher general and administrative expenses resulting from increased employment costs. In addition, higher total selling and marketing expenses were incurred due to the increase in home sales revenues and a small increase in per unit selling and marketing expenses. The percentage increase in selling, general and administrative expenses is due to the reasons set forth above.
The change in pre-tax profit for the year ended March 31, 1998 compared to the year ended March 31, 1997 is a reflection of the changes in gross profit and in selling, general, and administrative expenses as discussed above.
Inflation and Business Cycles
General economic conditions in the United States, and particularly the impact of inflation, availability of funds and other factors on interest rates, affect both the Company's sales and its costs. Inflation can have a long-term impact on the Company because increasing costs of land, materials, and labor result in higher sales prices of its homes. In addition, increases in interest rates on permanent mortgages generally result in reduced sales rates. The Company's business is also affected by local economic conditions, such as unemployment rates and housing demand in the market in which it builds homes. Homebuilding is a cyclical industry in which economic conditions have a substantial impact on operating performance.
Year 2000
The Company believes that Year 2000 issues are not material to its business and that the consequences of such issues would not have a material effect on the Company's business,
results of operations or financial condition without taking into account the Company's efforts to avoid those consequences. Nevertheless management is taking what it believes to be all necessary steps to become Year 2000 compliant.
Substantially all of the Company's computer equipment is relatively new and, when purchased, was and is Year 2000 compliant. To bring its mainframe computer into compliance, the Company has engaged Pro Data Business Computers ("Pro Data") to make the changes in its mainframe computer which are necessary to make it Year 2000 compliant. Pro Data commenced its work during the fiscal quarter ending March 31, 1999 and expects to complete its work prior to September 30, 1999. The Company estimates that the necessary work will cost approximately $5,000. The costs for such work will be expensed. Only limited testing of the Company's computer systems is expected to be necessary.
The costs of purchasing existing Year 2000 compliant computer equipment was approximately $10,000, all of which was financed from working capital and capitalized with a provision for amortization over a period of two years.
The Company believes that its existing software programs are capable of being modified to conform to Year 2000 requirements. The estimated costs of modification of the Company's software programs and the purchase of comparable Year 2000 compliant software will not exceed $5,000. Costs of modifying and purchasing software will be expensed as incurred.
Most of the materials used by the Company in connection with its home-building activities are purchased from local suppliers for whom Year 2000 issues as they relate to the Company are either non-existent or immaterial. The Company has made inquiries of its principal suppliers, i.e., those firms from whom it purchases appliances (General Electric Company), concrete (CSR/Rinker Materials), lumber (Hillsborough Builders Supply) and windows (Norandex) but as yet is not in a position to assess the Year 2000 readiness of such suppliers. Because the Company is a relatively modest customer of the suppliers of certain of those items, management believes that it will have only limited opportunities to engage in interactive testing with such suppliers for the purpose of determining Year 2000 readiness for transactions with them. The Company has received verbal assurances from these principal suppliers as to their readiness.
Because of the nature of the Company's relationship with its home-buyer customers, Year 2000 issues are not directly relevant to such relationships.
The Company has not formulated any contingency plan with respect to its failure or the failure of any of its suppliers to be Year 2000 compliant prior to December 31, 1999. The Company does not believe that a failure by the Company or any of its suppliers to be Year 2000 compliant by that date will have a material adverse effect on its business.
Special Note Regarding Forward-Looking Statements - -------------------------------------------------
Certain statements in this Section and "Business" and elsewhere in this Annual Report on Form 10-K constitute "forward-looking statements". Such forward-looking statements
include the discussions of the business strategies of the Company and expectations concerning future operations, margins, profitability, liquidity and capital resources. Although the Company believes that such forward-looking statements are reasonable, it can give no assurance that any forward-looking statements will prove to be correct. Such forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the demographic trends and other conditions impacting the housing market in the areas in which the Company operates, competition in such areas, the availability of financing, litigation outcomes, and general economic and business conditions which may impact levels of disposable income of potential home buyers.
Item 8.
Item 8. Financial Statements and Supplementary Data
The information required under this item is incorporated herein by reference to the information provided at Pages through of this report.
Item 9.
Item 9. Change in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
Information required to be set forth hereunder has been omitted and will be incorporated by reference, when filed, from the Company's Proxy Statement for its 1999 Annual Meeting of Stockholders.
Item 11.
Item 11. Executive Compensation
Information required to be set forth hereunder has been omitted and will be incorporated by reference, when filed, from the Company's Proxy Statement for its 1999 Annual Meeting of Stockholders.
Item 12.
Item 12. Security Ownership by Certain Beneficial Owners and Management
Information required to be set forth hereunder has been omitted and will be incorporated by reference, when filed, from the Company's Proxy Statement for its 1999 Annual Meeting of Stockholders.
Item 13.
Item 13. Certain Relationships and Related Transactions
Information required to be set forth hereunder has been omitted and will be incorporated by reference, when filed, from the Company's Proxy Statement for its 1999 Annual Meeting of
Stockholders. See Note 10 in Notes to the Consolidated Financial Statements of the Company appearing elsewhere in this report.
PART IV
Item 14.
Item 14. Exhibits, Financial Statements, Schedules, and Reports on Form 8-K
(a) Financial Statements. The following consolidated financial statements are filed as part of this Annual Report on Form 10-K. (All other schedules are omitted as the required information is inapplicable, or the information is presented in the financial statements and related notes thereto):
Page ---- INTERNATIONAL AMERICAN HOMES, INC. AND SUBSIDIARIES
Report of Independent Certified Public Accountants ..................
Consolidated Balance Sheets as of March 31, 1999 and 1998 ...........
Consolidated Statements of Operations for the three years ended March 31, 1999 ................................................
Consolidated Statements of Changes in Stockholders' Equity for the three years ended March 31, 1999 ............................
Consolidated Statements of Cash Flows for the three years ended March 31, 1999 ................................................
Notes to Consolidated Financial Statements ..........................
(b) Reports on Form 8-K. No reports on Form 8-K were filed by the Company during the last quarter of the fiscal year ended March 31, 1999.
(c) Exhibits. The following exhibits are filed as part of this Annual Report:
Exhibit Number - ------
2.1 - Second Amended Disclosure Statement dated as of June 29, 1992 and Third Amended Joint Plan of Reorganization dated June 29, 1992 (incorporated by reference to Exhibit 2.4 to Annual Report on Form 10-K for the fiscal year ended March 31, 1993).
2.2 - Fourth Amended Joint Plan of Reorganization dated November 17, 1992 (incorporated by reference to Exhibit 2.5 to Annual Report on Form 10-K for the fiscal year ended March 31, 1993).
3.1(a) - Restated Certificate of Incorporation of Registrant (incorporated by reference to Exhibit 4 to Quarterly Report on Form 10-Q for the quarter ended September 30, 1989).
3.1(b) - Certificate of Amendment to the Restated Certificate of Incorporation of Registrant dated September 8, 1994 (incorporated by reference to Exhibit 3.1(b) to Annual Report on Form 10-K for the fiscal year ended March 31, 1995).
3.1(c) - Certificate of Amendment to the Restated Certificate of Incorporation of Registrant dated May 22, 1995 (incorporated by reference to Exhibit 3.1(c) to Annual Report on Form 10-K for the fiscal year ended March 31, 1995).
3.1(d) - Certificate of Amendment to the Restated Certificate of Incorporation of Registrant dated November 19, 1998.
3.2 - By-laws of Registrant (incorporated by reference to Exhibit 3.2 to Annual Report on Form 10-K for the fiscal year ended March 31, 1989).
10.1 - Key Employee Agreement dated August 12, 1992 of Robert J. Suarez (incorporated by reference to Exhibit 10.17 to Annual Report on Form 10-K for the fiscal year ended March 31, 1993).
10.2 - Non-Qualified Stock Option Agreement dated August 12, 1992 between Robert J. Suarez and the Registrant (incorporated by reference to Exhibit 10.19 to Annual Report on Form 10-K for the fiscal year ended March 31, 1993).
10.3 - Guaranty dated as of January 20, 1993 by Robert J. Suarez to First Florida Bank, N.A. (incorporated by reference to Exhibit 10.23 to Annual Report on Form 10-K for the fiscal year ended March 31, 1993).
10.4 - Indemnity Agreement dated as of January 20, 1993 by Suarez Housing Corporation, the Registrant, and Robert J. Suarez to and for the benefit of First Florida Bank, N.A. (incorporated by reference to Exhibit 10.24 to Annual Report on Form 10-K for the fiscal year ended March 31, 1993).
10.5 - Mortgage Modification Agreement dated as of October 7, 1994 by and between Barnett Bank of Tampa and Suarez Housing Corporation (incorporated by reference to Exhibit 10.6 to Annual Report on Form 10-K for the fiscal year ended March 31, 1995).
10.6 - Consulting Agreement dated as of November 1, 1993 between Peter Davis and the Registrant (incorporated by reference to Exhibit 10.1 to Quarterly Report on Form 10-Q for the quarter ended December 31, 1993).
10.7 - Amended and Restated Master Loan Agreement dated as of November 17, 1995 between Nations Bank of Florida, N.A. and Suarez Housing Corporation (filed therewith).
10.8 - Second Amendment to Amended and Restated Loan Agreement and Partial Release of Guaranty Agreement dated as of October 30, 1995 by and between Barnett Bank of Tampa and Suarez Housing Corporation (filed therewith).
21 - List of subsidiaries of the registrant (incorporated by reference to Exhibit 21 to Annual Report on Form 10-K for the fiscal year ended March 31, 1994).
27 - Financial Data Schedule (filed herewith).
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: June 24, 1999 INTERNATIONAL AMERICAN HOMES, INC.
By: /s/ Robert J. Suarez ---------------------------------- Robert J. Suarez Chairman of the Board of Directors and President (Principal Executive Officer)
By: /s/ Robert I. Antle ---------------------------------- Robert I. Antle Executive Vice President, Secretary,Treasurer, and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
Signature Title Date --------- ----- ----
/s/ Robert J. Suarez - ------------------------- Robert J. Suarez Chairman of the Board of June 24, 1999 Directors and President
/s/ Robert I. Antle - ------------------------- Robert I. Antle Executive Vice President June 24, 1999 and Director
/s/ Peter A. Davis - ------------------------- Peter A. Davis Vice President and June 24, 1999 Director
/s/ William D. Aiken - ------------------------- William D. Aiken Director June 24, 1999
/s/ Dionel Cotanda - ------------------------- Dionel Cotanda Director June 24, 1999
/s/ James G. Farr - ------------------------- James G. Farr Director June 24, 1999
/s/ Jeffrey D. Prol - ------------------------- Jeffrey D. Prol Director June 24, 1999
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS --------------------------------------------------
To the Stockholders of International American Homes, Inc.:
We have audited the accompanying consolidated balance sheets of International American Homes, Inc. (a Delaware corporation) and subsidiaries (collectively, the "Company") as of March 31, 1999 and 1998, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for each of the three years in the period ended March 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of International American Homes, Inc. and subsidiaries as of March 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 1999, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Tampa, Florida May 14, 1999
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Item 14(a) Financial Statements
INTERNATIONAL AMERICAN HOMES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands)
ASSETS
March 31, March 31, 1999 1998 --------- --------- CASH AND CASH EQUIVALENTS-including $40 and $290 restricted, respectively $1,461 $1,461
RECEIVABLES 1,626 532
REAL ESTATE INVENTORY 18,247 20,964
COLLATERAL FOR BONDS PAYABLE 3,199 4,500
PROPERTY AND EQUIPMENT-less accumulated depreciation of $513 and $544, respectively 49 88
OTHER ASSETS 186 638 --------- --------- TOTAL ASSETS $24,768 $28,183 ========= =========
The accompanying notes are an integral part of these consolidated balance sheets.
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INTERNATIONAL AMERICAN HOMES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, March 31, 1999 1998 --------- ---------
LIABILITIES
MORTGAGE NOTES AND LOANS PAYABLE $ 8,571 $ 11,246
BONDS PAYABLE 3,068 4,341
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES 4,403 5,968
CUSTOMER DEPOSITS 180 194 --------- --------- Total Liabilities 16,222 21,749 --------- ---------
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY
PREFERRED STOCK - $.01 par value; 4,000,000 shares authorized; none issued or outstanding - -
COMMON STOCK - $.01 par value; 10,000,000 shares 10 10 authorized; 985,955 and 986,947 shares issued, respectively; 857,385 and 930,298 shares outstanding, respectively
ADDITIONAL PAID-IN CAPITAL 2,267 2,400
RETAINED EARNINGS 6,270 4,025
TREASURY STOCK, 128,570 and 56,649 shares, respectively (1) (1) --------- --------- Total Stockholders' Equity 8,546 6,434 --------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 24,768 $ 28,183 ========= =========
The accompanying notes are an integral part of these consolidated balance sheets.
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INTERNATIONAL AMERICAN HOMES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands, except per share amounts)
Year Ended March 31, ---------------------------------------- 1999 1998 1997 ------------ ------------ -----------
REVENUES Home sales $ 49,992 $ 54,401 $ 66,156 Interest and other income 355 482 617 -------- -------- -------- 50,347 54,883 66,773 -------- -------- -------- EXPENSES Cost of home sales 42,236 47,359 57,712 Selling, general and administrative 6,144 6,137 7,455 Interest 373 473 545 Depreciation 88 158 131 Restructuring charge - 1,840 - Reversal of creditor liability (1,322) - - -------- -------- -------- 47,519 55,967 65,843 -------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES 2,828 (1,084) 930
PROVISION (BENEFIT) FOR INCOME TAXES 583 (380) 280 -------- -------- -------- NET INCOME (LOSS) $ 2,245 $ (704) $ 650 ======== ======== ======== BASIC NET INCOME (LOSS) PER SHARE $ 2.47 $ (.76) $ .71 ======== ======== ======== WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 908,550 928,525 921,675 ======== ======== ======== DILUTED NET INCOME (LOSS) PER SHARE $2.45 $ (.76) $.70 ======== ======== ======== WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES 917,350 928,525 929,345 ======== ======== ========
The accompanying notes are an integral part of these consolidated statements.
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INTERNATIONAL AMERICAN HOMES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Dollars in thousands, except share amounts)
The accompanying notes are an integral part of these consolidated statements.
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INTERNATIONAL AMERICAN HOMES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands)
The accompanying notes are an integral part of these consolidated statements.
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INTERNATIONAL AMERICAN HOMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MARCH 31, 1999, 1998 AND 1997
NOTE 1 - THE COMPANY
International American Homes, Inc. and subsidiaries (the "Company") was incorporated under the laws of the State of Delaware on April 27, 1983. The Company, through a subsidiary, designs, builds, and sells single-family homes and villas and develops finished building lots, primarily in middle income communities in suburban residential areas in Greater Tampa, Florida.
During the fiscal year ended March 31, 1998, and in prior years, the Company also conducted home building activities in Metropolitan Washington, D.C.. Such activities have been terminated.
On April 16, 1990, the Company and certain of its wholly-owned subsidiaries filed voluntary petitions for relief under Chapter 11, Title 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of New Jersey (the "Bankruptcy Court"). On August 12, 1992, the Bankruptcy Court entered an order confirming the Company's Plan of Reorganization (the "Plan" or "Plan of Reorganization"). The Plan expired on August 12, 1998, with the exception of the continuing dividend restriction (see note 7).
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of International American Homes, Inc. and all subsidiaries. All significant intercompany transactions and balances have been eliminated.
Revenue Recognition
Revenues from sales are recognized at the time of closing, i.e., when a sufficient down payment has been made; financing has been arranged with a third party lender; title, possession and other attributes of ownership have been transferred to the buyer; and the Company is not obligated to perform significant additional activities after the sale.
Real Estate Inventory
Real estate inventory is carried at the lower of cost or net realizable value. Net realizable value is defined as the estimated proceeds upon disposition less all future costs to complete and expected costs to sell. Construction costs are accumulated during the period of construction and charged to cost of sales under specific identification methods. Land and land development
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costs are charged to cost of sales under specific identification methods or are amortized to cost of sales based upon the number of homes to be constructed in each community.
Interest costs related to projects in progress are capitalized during the construction period and charged to cost of sales as the related inventories are sold (see Note 5).
Land option costs are capitalized when incurred and either included as part of the purchase price when the land is acquired or charged to operations to the extent of any unrecoverable amount when the Company determines it will not exercise the option.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, receivables, mortgage notes and loans payable, accounts payable and accrued liabilities, and customer deposits approximate fair value due to the short-term maturities or variable interest rates of these instruments.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Depreciation
Depreciation is computed using the straight-line method for all depreciable assets. Estimated useful lives range from two to five years. Maintenance and repairs are charged to expense as incurred. Major renewals and improvements are capitalized and depreciated over their estimated useful lives.
Stock-Based Compensation
The Company adopted Statement of Financial Accounting Standard ("SFAS") No. 123, "Accounting for Stock-Based Compensation " during fiscal year 1997. The Company has elected to continue to measure compensation costs using Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and therefore the adoption of this statement did not have any effect on the financial results of the Company (see Note 8).
Compensation expense related to common stock options issued to directors and employees is recognized at the time the options are granted in an amount equal to the excess of the current trading price of the common shares over the option's exercise price.
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Concentration of Credit Risk
Financial instruments which potentially expose the Company to concentration of credit risk consist primarily of accounts receivable. Credit risk arising from receivables is minimal due to the large number of clients comprising the Company's customer base. Credit losses in the past have not been material.
Earnings per Share
In the fourth quarter of fiscal year 1998, the Company adopted SFAS No. 128, "Earnings per Share". This statement requires the computation and reporting of both "basic" and "diluted" earnings per share.
"Basic earnings per share" is computed as net income divided by the weighted average number of shares outstanding. "Diluted earnings per share" reflects the potential dilution that could occur if securities and other contracts to issue common stock were exercised or converted into common stock.
The following table provides a reconciliation of the numerator and denominator of basic EPS to diluted EPS.
As of March 31, 1998 there were 61,661 options outstanding which were not included in the calculation of diluted net loss per share because the effect would be antidilutive.
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Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company generally considers all highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents.
New Accounting Pronouncements
During fiscal year 1998, the Company adopted the provisions of SFAS No. 129, "Disclosure of Information about Capital Structure". The adoption of SFAS No. 129 did not have a material effect on the Company's financial statements.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131, "Disclosures about segments of an Enterprise and Related Information", which is effective for fiscal years beginning after December 15, 1997. The Company adopted SFAS No. 131 in fiscal year 1999 and the impact was not significant.
NOTE 3 - REAL ESTATE INVENTORY
Real estate inventory consists of the following (in thousands):
From time to time as part of the normal operations of the business, a subsidiary of the Company has bought lots or land which another subsidiary of the Company was obligated to buy from a third party seller or which the other subsidiary of the Company owned. Such transactions were at prices approximating fair market value and were not material to the financial statements taken as a whole. The year ended March 31, 1998 included real estate inventory for home-building operations in Metropolitan Washington, D.C..
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NOTE 4 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following (in thousands):
Accounts payable and accrued liabilities as of March 31, 1999 and March 31, 1998, include liabilities of approximately $40 and $41 respectively, which represent cash to be distributed to the creditors pursuant to the Plan of Reorganization (See Note 7) and accrued expenses related to the bankruptcy. The accrued estimated future cash distribution to creditors at March 31, 1998 was an estimate of future cash distributions to creditors as defined by the Plan of Reorganization established during the year ended March 31, 1993. This liability was reversed during the year ended March 31, 1999 as no payment was required.
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NOTE 5 - MORTGAGE NOTES AND LOANS PAYABLE
Mortgage notes and loans payable consist of the following (in thousands):
The weighted average principal amount outstanding during the year ended March 31, 1999 was approximately $8,762,000. The maximum principal amount outstanding during the year ended March 31, 1999 was approximately $11,246,000. The weighted average interest rate during the year ended March 31, 1999 was 8.25%. The weighted average interest rate at March 31, 1999 was 8.66%. The prime rate of interest at March 31, 1999 was 7.75%.
Acquisition and construction loans payable at March 31, 1999 are due as follows (in thousands):
Year Ending March 31, Amount ----------- ------ 2000 $8,171 2001 400 ------ Total $8,571 ======
The acquisition and construction loans payable are principally payable from the sales proceeds of real estate inventory, generally provide for extensions, and are all secured by real estate inventory. As of March 31, 1999, the Company had approximately $11,329,000 of undrawn commitments for additional construction and land acquisition financing. Interest on the acquisition and construction loans payable is payable monthly.
The Company's loan commitments limit the portion of each home that can be financed to approximately 75% of its value.
The Company capitalized interest of approximately $708,000, $1,153,000 and $1,373,000 for the years ended March 31, 1999, 1998 and 1997, respectively.
NOTE 6 - INCOME TAXES
The Company has adopted SFAS No. 109, "Accounting for Income Taxes". SFAS No. 109 is an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. In estimating future tax consequences, SFAS No. 109 generally considers all expected future events other than enactments of changes in the tax law or rates.
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The income tax provision (benefit) consists of the following (in thousands):
Year Ended March 31, --------------------------------------- 1999 1998 1997 -------------- ------------ ------------ Current Federal $ - $ (105) $ 280 State 83 73 69 --------- ---------- -------- 83 (32) 349 --------- ---------- -------- Deferred Federal 500 (348) (69) State - - - --------- ---------- -------- 500 (348) (69) --------- ---------- -------- Provision (benefit) for income taxes $ 583 $ (380) $ 280 ========= ========== ========
The provision (benefit) for income taxes at the effective rate of 21% differs from the Federal statutory corporate tax rate as follows (in thousands):
Year Ended March 31, --------------------------------------- 1999 1998 1997 -------------- ------------ ------------
Federal income tax at 34% statutory rate $ 962 $ (393) $ 316
State income tax, net of Federal benefit 55 48 37
Reversal of creditor liability (449) - -
Other 15 (35) (73) --------- ---------- -------- $ 583 $ (380) $ 280 ========= ========== ========
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Temporary differences and carryforwards which give rise to a significant portion of deferred tax assets and liabilities for March 31, 1999 and 1998 are as follows (in thousands):
At March 31, 1999, the Company had Federal income tax loss carryforwards of approximately $1,250,000 that expire at approximately $150,000 per year through 2008.
The Company has provided a valuation allowance on the net deferred tax assets which primarily results from the restricted use of net operating loss carryforwards.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
At March 31, 1999, the Company had commitments to purchase 635 finished building lots, providing for an aggregate purchase price of approximately $17,270,000 over a four-year period. Substantial deposits will be forfeited if the Company is unable to satisfy these commitments.
Suarez Housing Corporation, a subsidiary of the Company, has an employment agreement with the Company's Chairman and President expiring August 12, 2001, currently providing for base compensation of $325,000 per annum.
At March 31, 1999, the Company had open letters of credit and guarantees totaling approximately $1,361,000 to secure performance obligations.
The Company currently occupies office space under an operating lease agreement expiring September 30, 2004. The Company also leases storage space on a month-to-month basis. Prior to the year ending March 31, 1999, the Company had leased model home furniture under other operating lease agreements. The total rental expense incurred under these leases was approximately $60,000, $349,000, and $299,000 for the years ended March 31, 1999, 1998, and 1997, respectively.
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The future minimum rental payments under these operating leases as of March 31, 1999 are as follows:
Year Ending March 31, Amount ----------- -------- 2000 $ 57,040 2001 60,066 2002 61,757 2003 63,448 2004 65,139 Thereafter 32,992 -------- Total $340,442 ========
The Plan of Reorganization provided for distributions equal to 50 percent of future cash flows (as defined in the Plan), if any, for the periods ending June 30, 1993 through June 30, 1998. The Company calculated the cash flow (as defined in the Plan) for the six year period ended June 30, 1998 and determined that there was no excess cash flow (as defined in the Plan) for that six year period and accordingly no distribution to creditors was required. During the year ended March 31, 1993, the Company estimated the initial liability for these potential distributions in the amount of $1,322,000 and such amount was included in Accounts Payable and Accrued Liabilities on the accompanying consolidated balance sheets (See Note 4). During the year ended March 31, 1999, the Company reversed the estimated liability and recognized income of $1,322,000.
The Plan also required that before the Company can pay any dividends to stockholders it must first pay to certain holders of creditor's claims $1,250,000. The Plan also contained other restrictive covenants regulating various aspects of the Company's operations. With the exception of the dividend restriction which continues, all other restrictive covenants expired on August 12, 1998.
The Company is involved from time to time in litigation arising in the ordinary course of business, none of which is expected to have a material adverse effect on the Company's financial position or results of operations.
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NOTE 8 - COMMON STOCK AND STOCK OPTIONS
On February 13, 1997, an option for 33,333 shares of common stock at a purchase price of $3.94 per share was granted to the Chairman and President of the Company. The exercise price equaled the market price on the date of grant. The option is exercisable over a four-year period commencing one year after the date granted on a cumulative basis of 10%, 30%, 60% and 100%, respectively, for each year subsequent to the grant date. All shares must be purchased by February 12, 2007.
On August 11, 1997, an option for 16,666 shares of common stock at a purchase price of $4.50 per share was granted to the Executive Vice President of the Company. The exercise price equaled the market price on the date of grant. The option is exercisable over a four-year period commencing one year after the date granted on a cumulative basis of 10%, 30%, 60% and 100%, respectively, for each year subsequent to the grant date. All shares must be purchased by August 10, 2007.
At the 1998 Annual Meeting of Stockholders the stockholders approved a proposal to adopt an amendment (the "Amendment"), to the Company's restated Certificate of Incorporation to effect a 1-for-3 reverse stock split of the Company's issued and outstanding common stock. The Amendment did not change the par value of the common stock which remained at $.01 per share or the number of authorized shares which remained at 10 million. The Amendment became effective on December 1, 1998 with the filing of a Certificate of Amendment with the Secretary of State of Delaware. The effect of the reverse stock split has been retroactively reflected in the consolidated statements for all periods presented.
On February 11, 1999, an option for 10,000 shares of common stock at a purchase price of $5.00 per share was granted to a Vice President of the Company. The exercise price equals the market price on the date of grant. The option is exercisable over a four-year period commencing one year after the date granted on a cumulative basis of 10%, 30%, 60% and 100%, respectively, for each year subsequent to the grant date. All shares must be purchased by February 11, 2009.
The Company has a Non-Qualified Stock Option Plan for which 50,000 shares of common stock have been reserved for issuance under this plan. All grants of options pursuant to this plan must be approved by the Board of Directors and the exercise price equals the market price at the date of grant. There are 43,001 shares available to be issued pursuant to the Non-Qualified Stock Option Plan.
At the 1995 Annual Meeting of Stockholders the stockholders approved a proposal to adopt a Non-Employee Directors Stock Option Plan. Pursuant to the Non-Employee Directors Stock Option Plan, options to purchase 1,666 shares of common stock were granted to each of the Company's non-employee Directors. Four Directors received options to purchase 1,666 shares each in June 1995, two Directors received options to purchase 1,666 shares each in September 1995 and one Director received an option to purchase 1,666 shares in September 1996 upon election as a Director. Five Directors received options to purchase 1,666 shares each in September 1998. These options are exercisable 33% one year from the date of grant, 33% two years from the date of grant, and 34% three years from the date of grant. All options expire 5
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years from the date of grant. All options granted must be approved by the Board of Directors and exercise price equals market at the date of grant.
A summary of the status of the Company's stock option plans and options granted at March 31, 1999, 1998 and 1997 and changes during the years then ended is presented in the table and narrative below:
The 79,991 options outstanding at March 31, 1999 have exercise prices between $3.00 and $5.44, with a weighted average exercise price of $4.33 and a weighted average remaining contractual life of 6.8 years. There are 22,772 of these options exercisable with a weighted average exercise price of $4.28.
The Company accounts for its stock-based compensation plans under Accounting Principles Board Opinion No. 25 ("APB 25"), under which no compensation expense has been recognized. In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), which was effective for fiscal years beginning after December 15, 1995. SFAS 123 allows companies to continue following the accounting guidance of APB 25, but requires pro forma disclosure of net income and earnings per share for the effects on compensation expense had the accounting guidance of SFAS 123 been adopted. The Company has adopted SFAS 123 for disclosure purposes.
For SFAS 123 purposes, the fair value of each option grant is estimated on the date of grant using the Black- Scholes option pricing model with the following weighted average assumptions used for grants in fiscal years 1999, 1998 and 1997, respectively: risk-free rates of return of 5.26%, 6.36% and 6.42%; expected dividend yields of 0.00%, 0.00%, and 0.00%;
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expected lives of 7.27 years, 10 years and 9.76 years and expected volatility of 65.86%, 101.03% and 153.45%.
Had the compensation cost for these plans been determined consistent with SFAS No. 123, the Company's net income and earnings per share would have been reduced to the following pro forma amounts:
Year Ended March 31, 1999 1998 1997 ---- ---- ----
Net income (loss): As Reported $2,245,000 $(704,000) $650,000
Pro Forma $2,223,000 $(777,000) $582,000
Basic net income As Reported $2.47 $(0.76) $0.71 (loss) per share: Pro Forma $2.45 $(0.84) $0.63
Diluted net income As Reported $2.45 $(0.76) $0.70 (loss) per share: Pro Forma $2.42 $(0.84) $0.63
NOTE 9 - CONDENSED FINANCIAL STATEMENTS OF CONSOLIDATED FINANCE SUBSIDIARIES
The Company's wholly-owned finance subsidiaries were established to sell collateralized mortgage obligations through participation in various multi-builder bond programs. In these sales, which last occurred in 1987, the Company originated and pooled mortgage loans which were then pledged as collateral for bonds payable. The interest rates on the mortgage loans which comprise the collateral for bonds payable, roughly equate with the interest rates on the related bonds payable.
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Condensed financial information is as follows (in thousands):
Condensed Balance Sheets (Unaudited)
March 31, 1999 March 31, 1998 -------------- --------------
Assets: Collateral for bonds payable $ 3,199 $ 4,500 Other assets 3 6 ----------- ------------ Total Assets $ 3,202 $ 4,506 =========== ============ Liabilities and Equity: Bonds payable $ 3,068 $ 4,341 Equity and intercompany advances 134 165 ----------- ------------ Total Liabilities and Equity $ 3,202 $ 4,506 =========== ============
Condensed Statements of Income (Unaudited)
Year Ended March 31, ------------------------------------------- 1999 1998 1997 ------------ ------------ ------------ Revenues $ 337 $ 423 $ 483 ============ ============ ============ Income before income taxes $ 4 $ 7 $ 12 ============ ============ ============
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NOTE 10 - RELATED PARTY TRANSACTIONS
During the fiscal year ending March 31, 1999, a portion of a financing agreement with a maximum aggregate amount of $19,500,000 including a specific indemnification of certain environmental conditions was guaranteed by the Company's Chairman and President. In consideration thereof the Company agreed to pay a guaranty fee equal to the lessor of $80,000 or 1% of the amount guaranteed. The obligations of the Company's Chairman and President continue during the term of the loan agreement subject to certain ratios and financial performance of the Company which have been satisfied as of March 31, 1999. The Company has agreed to indemnify the President and Chairman in the event that this personal guarantee is called.
A member of the Board of Directors is Vice President and Director of a company which during the year ended March 31, 1999 sold lumber and certain other building material products in the amount of approximately $4,625,000 to Suarez Housing Corporation, a subsidiary of the Company. Suarez Housing Corporation purchases all of its requirements for those products from this company.
A member of the Board of Directors is the sole stockholder and President and Chief Executive Officer of Paramount Title Corporation. During the years ended March 31, 1999, 1998 and 1997, Paramount Title Corporation provided settlement and title insurance services for substantially all the homes sold by Suarez Housing Corporation.
NOTE 11- RESTRUCTURING CHARGE
During the past several years a competitive housing market in Metropolitan Washington, D.C., especially in the areas in which the Company conducted home building operations, resulted in continued operating losses in the Company's Metropolitan Washington, D.C. subsidiary. Management changes were made and administrative costs were reduced in order to minimize the loss. In addition, several communities in which operations had been performing poorly were abandoned. Notwithstanding those changes, lower operating margins and higher selling expenses continued to adversely affect the Company's ability to restore profitability in the Metropolitan Washington, D.C. market. Accordingly during the quarter ended December 31, 1997 the Board of Directors of the Company approved management's plan to discontinue the building and sale of homes and affect an orderly withdrawal from the Metropolitan Washington, D.C. housing market.
The consolidated financial statements for the year ended March 31, 1998 include a restructuring charge of $1,840,000 ($1,214,000 after benefit for federal income tax) associated with the termination of home-building operations in Metropolitan Washington, D.C.. The restructuring charge of $1,840,000 includes the following: $701,000 for selling expenses; $277,000 for write-off of deferred charges; $327,000 for loss on remaining homes; and $535,000 for administrative and other. At March 31, 1999 $6,000 of the restructuring charge is included in Accounts Payable and Accrued Liabilities.
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