10K798
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended July 31, 1998
Commission file number 1-7643
WASHINGTON HOMES, INC
(Exact name of registrant as specified in its charter)
Maryland 52-0818872
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1802 Brightseat Road, Landover, MD 20785-4235
(Address of principal executive offices) (Zip Code)
(301) 772-8900
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock (voting), $.01 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
On October 16, 1998, the aggregate market value of the voting and non-
voting common stock held by non-affiliates of the registrant was approximately
$17,316,828.
Number of shares of each of the registrant's classes of common stock
outstanding at September 30, 1998:
Class Number of Shares
Common Stock (voting), $.01 par value 7,914,433
Common Stock (non-voting), $.01 par value 28,330
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for fiscal year ended July 31,
1998 (Part II).
Proxy statement to be filed pursuant to Regulation 14A for 1998 Annual Meeting
of Shareholders to be held November 20, 1998 (Part III).
WASHINGTON HOMES, INC.
FORM 10-K REPORT
TABLE OF CONTENTS
PART I. PAGE
Item 1. Business ............................................. 3
Item 2. Properties ........................................... 9
Item 3. Legal Proceedings .................................... 9
Item 4. Submission of Matters to a Vote of Security Holders .. 9
Executive Officers
PART II.
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters .................................. 12
Item 6. Selected Financial Data .............................. 12
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations .................. 13
Item 7A.Quantitative and Qualitative Disclosures about Market
Risk 13
Item 8. Financial Statements and Supplementary Data .......... 13
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure .................. 13
PART III.
Item 10. Directors and Executive Officers of the Registrant .. 13
Item 11. Executive Compensation .............................. 13
Item 12. Security Ownership of Certain Beneficial Owners
and Management ...................................... 13
Item 13. Certain Relationships and Related Transactions ...... 13
PART IV.
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K ................................ 14
SIGNATURES ......................................................... 16
EXHIBITS ...........................................................
Note: This report on form 10-K contains statements which may be construed as
"forward-looking statements" as defined in the Private Securities Litigation
Reform Act of 1995. Such statements may involve unstated risks, uncertainties,
and other factors that may cause actual results to differ materially. Such
risks, uncertainties and other factors include, but are not limited to, changes
in general economic conditions, fluctuations in interest rates, increases in
costs of materials, supplies and labor and general competitive conditions.
Part I
Item 1. Business
General
Washington Homes, Inc. designs, builds and markets single-family detached
homes, townhomes and condominium homes primarily to first-time and first move-up
homebuyers in the metropolitan areas of Washington, D.C.-Baltimore, Maryland;
Greensboro, Raleigh and Charlotte, North Carolina; Nashville, Tennessee; and
Pittsburgh, Pennsylvania. The Company's largest market is the combined
Washington-Baltimore metropolitan areas. The Company commenced operations in
1965 and entered the Raleigh and Greensboro, North Carolina markets through an
acquisition effective as of May 1, 1994. During fiscal 1996 the Company began
operating in Charlotte, North Carolina and Nashville, Tennessee and expanded
operations in Pittsburgh, Pennsylvania. The Company operates under the name
"Washington Homes" in Maryland, Virginia and Pennsylvania and as "Westminster
Homes" in North Carolina and Tennessee.
The Company focuses its marketing efforts on consumers whose top priorities
are price and value. During the five years ended July 31, 1998 the Company
delivered 6,039 homes and currently offers homes for sale in 72 communities at
base sales prices ranging from $79,900 to $270,000. The Company delivered 1,479
homes during the fiscal year ended July 31, 1998 generating homebuilding
revenues of $233.1 million. The average sales price of homes delivered by the
Company during fiscal 1998 was approximately $157,600. At July 31, 1998 there
was a backlog of 821 homes under contract with a sales value of $141.6 million.
Washington Homes, Inc. was incorporated in the State of Maryland in 1965.
Unless the context otherwise requires, the terms "Company" and "WHI" as used in
this report refer to Washington Homes, Inc. and its subsidiaries. The Company's
principal executive offices are located at 1802 Brightseat Road, Landover,
Maryland 20785-4235, and its telephone number is (301) 772-8900.
Products
The Company builds homes designed by its own personnel with assistance from
outside architectural firms. It strives to create a diversity of architectural
styles in each residential community by providing exterior and interior design
options for homes with the same basic floor plans that are intended to appeal to
a broad range of potential buyers and respond to changes in the market place.
Each residential community offers several home plans, with the opportunity
to select various exterior styles. The Company develops new designs to replace
or augment existing ones as part of its continuing efforts to assure that its
homes are responsive to current consumer preferences.
The range of base sales prices and home sizes for the Company's homes as of
July 31, 1998 was as follows:
Base Sales Prices Range of Sizes
Single-family detached $97,000 - $270,000 1,100 to 3,000 sq. ft.
homes
Townhomes $96,000 - $157,000 1,050 to 1,600 sq. ft.
Condominiums $79,900 - $131,000 600 to 1,400 sq. ft.
In all of WHI's communities, certain options including fireplaces, finished
basements, brick fronts, upgraded appliances, upgraded carpet and premium lot
location are available to the purchaser for an additional charge.
The following table sets forth a breakdown of the Company's deliveries by
housing type in each of the last three years:
<TABLE>
<CAPTION> Years Ended July 31,
1998 1997 1996
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Homes % Amount Homes % Amount Homes % Amount
Single- 990 66.9% $170,139 890 67.7% $152,155 668 61.5% $112,655
family
Detached
homes
Townhomes... 420 28.4% 56,054 355 27.0% 46,515 366 33.7% 49,117
Condominiums 69 4.7% 6,918 70 5.3% 7,906 53 4.8% 6,049
1,479 100.0% $233,111 1,315 100.0% $206,576 1,087 100.0% $167,821
Total.......
...
</TABLE>
During fiscal 1997, the Company decided to phase out its condominium
operations.
Organization
The Company's homebuilding operations are organized into seven
geographically based homebuilding divisions. Division offices are maintained in
Landover, Maryland; Manassas, Virginia; Charlotte, Cary and Greensboro, North
Carolina; Nashville, Tennessee; and Pittsburgh, Pennsylvania. Corporate
headquarters are located in Landover, Maryland.
Each division is headed by a division president who reports to the
President-Homebuilding Operations. Division presidents have responsibility for
day-to-day operations, including implementation of community marketing
strategies, pricing of homes, managing subcontractors, delivering of finished
homes and providing attendant service work. Division presidents are supported by
sales and production managers. Sales managers coordinate marketing and
advertising programs and oversees the sales representatives based at each
community. Production managers oversee field operations with managerial
responsibility for on-site production superintendents and are responsible for
purchasing materials, procuring subcontractor services, technical design and
construction issues.
Sales and building activities are managed at each community by a sales
representative and a superintendent. The sales representative is responsible for
implementing the Company's marketing programs and for follow-through with
customers, from contract signing and loan application through delivery. The
superintendent coordinates the work of subcontractors and is responsible for
quality control and delivery of the finished product in a timely manner.
Residential Developments
As of July 31, 1998, the Company controlled over 6,300 homesites, as
follows:
<TABLE>
<S> <C> <C> <C> <C> <C>
Communities in Lots Owned
Which
Homes Are Total Finished Lots Under Lots Under
Currently
Market Offered For Sale Lots Lots Development Option
Washington, DC- 32 3,607 687 1,428 1,492
Baltimore, MD
Greensboro, NC 10 826 227 284 315
Raleigh, NC 10 701 171 98 432
Charlotte, NC 9 558 82 -- 476
Nashville, TN 6 493 71 -- 422
Pittsburgh, PA 5 201 56 15 130
Combined Total 72 6,386 1,294 1,825 3,267
</TABLE>
Operations
Land Acquisition and Development
The Company builds homes on building lots which it either acquires as
finished lots from developers or which it develops itself. At July 31, 1998, the
Company owned or held options for 6,386 building lots.
The Company's general strategy is to purchase, to the extent feasible,
finished building lots through land acquisition option contracts which provide
the maximum degree of flexibility for the timing of land purchases and minimizes
the Company's investment outlay. Through the utilization of land acquisition
option contracts, the Company purchases the right, but not the obligation, to
buy a large number of building lots from a land developer. The options allow the
Company to purchase building lots on a takedown schedule commensurate with
anticipated home sales. As a result, the Company generally does not purchase the
building lot until the building lot can be utilized in its construction
schedule. The purchase agreements generally limit the Company's financial
exposure to amounts placed with property sellers as deposits. Although option
contracts generally contain predetermined lot takedown schedules and price
escalation provisions, the Company believes use of such contracts significantly
reduces risk since the Company is able to minimize its investment in land and
limit its exposure to debt financing. At July 31, 1998, the Company owned 1,294
finished lots and had under option 3,267 homebuilding lots for which it had
posted deposits of approximately $3.6 million in the form of cash, letters of
credit and promissory notes.
The Company also develops land for its own residential operations, and 611
or 41.3% of the homes delivered in fiscal 1998 were built on land developed by
the Company. As of July 31, 1998, the Company owned 1,825 residential lots in 22
communities which were in the process of land development. All communities have
obtained the required zoning and public approvals and, with two exceptions, have
physical construction underway. The Company does not buy land for the purpose of
speculation.
The Company from time to time experiences difficulties in obtaining
building lots. The Company has experienced delays in acquiring lots from land
developers, primarily due to the difficulty experienced by developers in
obtaining financing. In certain instances, the Company acquired the land from
the developer and completed the development process itself. The imposition of
sewer moratoria, zoning changes and other governmental actions also can affect
the availability and use of land.
In its land development operations, the Company employs experienced
supervisory personnel who deal directly with independent engineers and
consultants for land and site planning, obtaining governmental and environmental
approvals, and constructing on and off-site improvements where necessary (such
as roads, water, sewers, storm drainage and other public facilities and
amenities). Actual development work is performed by independent contractors,
utility companies and/or local governmental water and sewer agencies.
Marketing
Generally, a sales office is located in each community which is staffed by
a Company sales representative. In addition, a significant portion of sales are
derived from the introduction of customers to the Company's communities by local
independent real estate brokers. The Company maintains an extensive broker co-op
program. The Company's sales personnel are compensated with salary and incentive
compensation and are trained by the Company. They attend weekly meetings to be
updated on financing availability, construction schedules, new land
acquisitions, marketing and advertising plans. The concentration of the
Company's communities allows the Company to employ sales personnel on a
long-term, rather than a single community basis, which management believes
results in reduced training costs and a more motivated sales force with
extensive knowledge of the Company's operating policies and housing products.
The Company utilizes model home presentations (generally one per community)
as an integral part of the Company's marketing program. In addition, the Company
advertises in newspapers, local and regional publications, on radio, as well as
utilizing billboards and roadside signage.
The Company utilizes standard sales contracts which require the customer to
make an earnest money deposit which is generally in the range of $500 to $5,000.
Upon execution of the contract and receipt of the deposit, the home sale is
included in backlog. The sales contract is generally cancelable without
forfeiture of deposit if the customer is unable to sell an existing home or
obtain permanent financing. The sales contract sets forth details of the home
being purchased, location, options ordered, details of financing sought and
closing requirements.
In addition to relying on management's extensive experience, the Company
determines the prices for its homes through a Company-designed competitive
analysis program that compares a WHI home with homes offered by other builders
in the relevant marketing area. The Company accomplishes this by evaluating
differences in product features, amenities and location and updates such
analyses frequently.
The Company has established a new home Design Center in a Bowie, Maryland
as a showcase for the marketing of options available on the Company's homes.
This facility has been used by the Company's Maryland Division and the Company
intends to expand the concept to other divisions in fiscal 1999.
Building
In its construction of homes, the Company acts as a general contractor with
independent contractors performing all home construction and site improvement
work generally under fixed-price contracts. Construction is performed under the
direction of superintendents employed by the Company. The Company enforces its
commitment to quality by providing its construction superintendents with
incentive compensation arrangements based on the homebuyer's satisfactory
responses to pre-closing and post-closing checklists.
Operating Controls
The Company attempts to limit exposure resulting from speculative building.
Generally, construction of single-family homes is commenced only after a sales
contract has been executed and the customer has received preliminary loan
approval. Construction of multi-family buildings is generally commenced after
sales contracts have been executed for a majority of the homes in a particular
building. The Company may begin construction of detached homes prior to
obtaining sales contracts in order to maintain a limited inventory, in
anticipation of winter weather conditions or to conform to local market
requirements.
When possible, the Company contracts on a fixed-price basis for materials,
such as appliances, lumber and carpeting, in an effort to minimize the effects
of changes in costs and to take advantage of bulk purchase discounts. The
Company focuses on the gross profit margins of each home sold in each community
and the monitoring of selling, general and administrative expenses. Every home
and every community is considered a profit center for budgeting and cost control
purposes.
Financing for Customers
The Company builds, markets and prices its homes under the guidelines and
specifications of the Federal Housing Administration ("FHA") and the Veterans
Administration ("VA"), in order to afford its prospective purchasers the added
benefits of FHA insured and VA guaranteed mortgages. The majority of the
Company's home deliveries are financed through these agencies. In some areas,
the Company has obtained lower than market interest rate financing for
purchasers of its homes through state or county bond programs. The Company also
assists its homebuyers in obtaining conventional mortgage financing.
In fiscal 1993, the Company established Homebuyer's Mortgage, Inc.
("Homebuyer's") as a subsidiary to provide residential mortgage services to the
Company's customers and others. Homebuyer's initially has been processing
mortgage applications with underwriting and funding provided by independent
wholesale lenders. In fiscal 1998 Homebuyer's closed 898 loans totaling $121.9
million in permanent residential financing compared to 580 loans totaling $82.2
million the previous fiscal year. The Company's capture rate (the percentage of
Washington Homes' homebuyers using the Company's mortgage services) increased to
55% from 42% last fiscal year.
During fiscal 1998 the homebuilding industry experienced a continuation
of relatively low home mortgage interest rates. There can be no assurance that
a favorable interest rate environment or government programs providing
assistance for homebuyers will continue in the future.
Other Services
Through various joint ventures, the Company provides title insurance agency
services and other insurance agency services in Maryland and Virginia.
Regulation
The Company is subject to a variety of federal, state and local statutes,
ordinances, rules and regulations concerning protection of health, safety and
the environment. The particular environmental laws which apply to any given
community vary greatly according to the community site, the site's environmental
condition and the present and former uses of the site. These environmental laws
may result in delays, cause the Company to incur compliance and other costs and
prohibit or restrict development in certain environmentally sensitive regions or
areas. Prior to consummating the purchase of land, the Company requires
independent environmental engineers to evaluate such land for the presence of
wetlands and hazardous or toxic materials, wastes or substances. The Company has
not been materially affected to date by the presence or potential presence of
such conditions.
To varying degrees, site development and building permits and approvals are
required to complete the residential developments currently being planned by the
Company. The timing and ability of the Company to obtain necessary approvals and
permits for these communities is often beyond the Company's control. The length
of time necessary to obtain permits and approvals increases the carrying costs
of unimproved property acquired for the purpose of development and construction.
In addition, the continued effectiveness of permits already granted may be
subject to factors such as changes in policies, rules and regulations and their
interpretation and application.
When developing land, the Company must obtain the approval of numerous
government authorities regulating such matters as permitted land uses and levels
of density, the installation of utility services such as water and waste
disposal and the dedication of acreage for open space, parks, schools and other
community purposes. To date, the governmental approval process and restrictive
zoning and moratoria have not had a material adverse effect on the Company's
development activities nor does the Company currently have any lots that cannot
be developed due to local or federal regulatory restrictions. There is no
assurance, however, that these or other restrictions will not adversely affect
the Company in the future.
Competition and Market Factors
The metropolitan housing markets served by the Company are highly
competitive. In its marketing efforts, the Company encounters competition from
other homebuilders and apartment and condominium developers, as well as from
sellers of existing homes. In the locations where the Company builds, there is
intense competition among numerous large and small homebuilders. Competition in
the homebuilding industry is intense in part because of the historic ease with
which large national homebuilders, many of which may have greater financial
resources than the Company, can expand their operations.
The Company competes on the basis of price, location, mortgage financing
terms, design and the Company's reputation for quality. Based upon the
experience of its management, the Company believes that it compares favorably
with its principal competitors in terms of its knowledge, expertise and its
ability to obtain building lots at prices and locations which allow it to offer
a well-priced, quality product and to obtain financing for its customers.
The Company also competes with other builders for the acquisition of
building lots. This competition is based primarily on a builder's reputation,
and perceived abilities to market its homes.
The housing industry is cyclical and affected by consumer confidence
levels, prevailing economic conditions generally and particularly by interest
rate levels. A variety of other factors affect the housing industry and demand
for new homes, including the availability of labor and materials and increases
in the costs thereof, changes in costs associated with home ownership, such as
increases in property taxes and energy costs, changes in consumer preferences,
demographic trends and the availability of and changes in mortgage financing
programs.
Bonds, Warranties and Other Obligations
The Company is frequently required, in connection with the development of
its communities, to obtain performance or maintenance bonds to ensure completion
of the Company's development obligations. The amount of such obligations
outstanding at any time varies in accordance with the Company's pending
development activities. To date, the Company has fulfilled its development
obligations. Should the Company fail to build required improvements and the
bonds backing such obligations were called, the Company would be obligated to
reimburse the issuing surety company or bank. The Company's financial exposure
in this regard is reduced as improvements are completed and bonds released. At
July 31, 1998, the Company had approximately $21.4 million in letters of credit
and surety bonds outstanding for the previously enumerated purposes.
All homes delivered by the Company are sold with the benefit of the
Company's two-year limited warranty as to workmanship supplemented by a limited
ten-year warranty as to structural integrity under the Residential Warranty
Corporation program, a privately insured program and other similar warranty
programs. To assist the Company in meeting its warranty obligations to
customers, the Company requires subcontractors to provide warranties of their
workmanship to the Company.
Employees
At July 31, 1998, the Company employed 377 full time personnel of whom 69
were sales and marketing personnel, 124 were executive, administrative and
clerical personnel and 184 were involved in construction. Although none of the
Company's employees are covered by collective bargaining agreements, certain of
the independent contractors which the Company engages employ personnel who may
be represented by labor unions or may be subject to collective bargaining
agreements. The Company believes that its relations with its employees and
independent contractors are good.
Joint Ventures
The Company participates in two joint ventures formed to develop
residential land into finished building lots for sale to the Company and other
homebuilders utilizing non-recourse acquisition and development loans. In
forming one of the joint ventures in April 1995, the Company contributed land
with a book value of $9.6 million and the Company has received cash proceeds to
date of $7.4 million which was used to reduce outstanding amounts under
revolving credit facilities.
During fiscal 1998, the Company formed a joint venture with US Home
Corporation to construct and market active adult housing in the Raleigh, North
Carolina market.
The Company's interest in the joint ventures' operating results has not
been significant to date.
Item 2. Properties
The Company leases over 24,000 square feet of office space from Citadel
Land, Inc. for its corporate headquarters and offices for certain of its
divisions and subsidiaries in a six story office building located in Landover,
Maryland pursuant to a lease expiring in May 2008.
During the fiscal year ended July 31, 1998 the Company paid Citadel Land,
Inc. approximately $434,600 in rentals. Citadel Land is a company beneficially
owned by the family of Geaton A. DeCesaris, Sr., Chairman of the Board of the
Company.
The Company also leases office space for division offices in Manassas,
Virginia; Charlotte, Cary and Greensboro, North Carolina; Nashville, Tennessee;
and Pittsburgh, Pennsylvania.
Item 3. Legal Proceedings
The Company is involved in various claims and proceedings arising out of
the normal course of business involving customers, contractors and others. The
Company believes that it is not a party to any pending or threatened litigation
or administrative proceeding which is expected to have a material adverse impact
on the Company's financial position or operating results.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during the
Company's fiscal quarter ended July 31, 1998.
Executive Officers
The executive officers of the Company are as follows:
<TABLE>
Name Age Position with Company
<S> <C> <C>
Geaton A. DeCesaris,Sr. 67 Chairman of the Board of Directors
Geaton A. DeCesaris,Jr. 43 President, Chief Executive Officer and
Director
Thomas J. Pellerito 51 President-Homebuilding Operations and Chief
Operating Officer
Christopher Spendley 39 Senior Vice President, Chief Financial Officer
and Secretary
Clayton W. Miller 47 Senior Vice President, Chief Accounting
Officer and Treasurer
Paul C. Sukalo 46 Senior Vice President - Construction and
Director
</TABLE>
Geaton A. DeCesaris, Sr. has served as Chairman of the Board of the Company
since August 1988. Prior thereto from June 1985 to August 1988, Mr. DeCesaris
served as Senior General Partner of Sonny DeCesaris and Sons Development Group,
a real estate development and construction firm; from 1973 to June 1985, he was
founder and President of Sonny DeCesaris and Sons Builders, Inc. and from 1960
to 1973 President of Procopio and DeCesaris Construction Company. Mr. DeCesaris
is the father of Geaton A. DeCesaris, Jr. and is the father-in-law of Paul C.
Sukalo who are directors and Executive Officers of the Company.
Geaton A. DeCesaris, Jr. has served as President, Chief Executive Officer
and a Director of the Company from August 1988 to the present. Prior thereto,
Mr. DeCesaris was Managing General Partner of Sonny DeCesaris and Sons
Development Group from June 1985 to August 1988 and Vice President of Sonny
DeCesaris and Sons Builders, Inc. from 1973 to June 1985. Mr. DeCesaris is the
son of Geaton A. DeCesaris, Sr.
Thomas J. Pellerito has served as President-Homebuilding Operations and
Chief Operating Officer since July 1997. Prior thereto from 1985 to July 1997
he was President of Richmond American Homes, the northern Virginia based
subsidiary of a national homebuilder. Mr. Pellerito has over 18 years
experience in residential construction and related services.
Christopher Spendley has served as Senior Vice President and Chief
Financial Officer since September 1996 and Secretary since September 1997.
Prior thereto Mr. Spendley was with Ryland Homes, Inc., a subsidiary of Ryland
Group, Inc. for 14 years where he served most recently as President of the
Baltimore Division from February 1994 to August 1996 and Controller from 1989 to
1994. He has over 15 years of experience in real estate and finance.
Clayton W. Miller has served as Senior Vice President since November 1989
and Chief Accounting Officer since September 1994 and Treasurer since November
1997. From November 1989 to September 1994, he served as Chief Financial Officer
of the Company. Mr. Miller has over 19 years experience in finance and real
estate development.
Paul C. Sukalo has served as Senior Vice President and a Director of the
Company from August 1988 to the present. Prior thereto, he was a general partner
of Sonny DeCesaris and Sons Development Group from June 1985 to August 1988. He
has over 18 years of related construction experience, principally in residential
construction and related services. Mr. Sukalo is the son-in-law of Geaton A.
DeCesaris, Sr.
Officers are appointed by the Board of Directors to serve at the pleasure
of the Board. There are no arrangements or understandings with respect to the
selection of executive officers.
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
(a) Market Information.
The Company's Common Stock (voting) trades on the New York Stock Exchange
under the symbol WHI.
The high and low sale prices for the Company's Common Stock for each
quarterly period within the last two fiscal years have been as follows:
Fiscal 1998 High Low
August 1 to October 31, 1997 $ 4.88 $ 3.69
November 1, 1997 to January 31, 4.50 3.50
1998
February 1 to April 30, 1998 5.38 3.75
May 1 to July 31, 1998 6.25 4.65
Fiscal 1997 High Low
August 1 to October 31, 1996 $ 4.13 $3.38
November 1, 1996 to January 31, 4.75 3.63
1997
February 1 to April 30, 1997 5.00 3.88
May 1 to July 31, 1997 4.13 3.63
(b) Holders
On September 30, 1998, there were approximately 216 holders of record of
the Company's Common Stock (voting) and one holder of record of the Common Stock
(non-voting).
(c) Dividends
During fiscal 1998 and 1997, the Company did not pay any dividends on its
Common Stock.
The payment of cash dividends is at the discretion of the Board of
Directors of the Company and will depend upon, among other things, future
earnings, results of operations, capital requirements and the Company's
financial condition. The Company's lending agreements limit the amount of annual
cash dividends that the Company may pay to its shareholders. The most
restrictive of these limits dividends to no more than 25 percent of cumulative
net income for the four prior fiscal quarters. The Company does not anticipate
paying dividends in the foreseeable future.
(d) Sales of Unregistered Securities
During the fiscal year ended July 31, 1998, the registrant did not sell
any securities which were not registered under the Securities Act of 1933.
Item 6. Selected Financial Data
The information required by this item is incorporated herein by reference
from "Washington Homes, Inc. Selected Financial Data" on page 1 of the Company's
Annual Report to Shareholders for the fiscal year ended July 31, 1998.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The information required by this item is incorporated herein by reference
from pages 9 to 11 of the Company's Annual Report to Shareholders for the fiscal
year ended July 31, 1998.
Item 7A. Quantitative and Qualitative Disclosure about Market Risk
The information required by this item is incorporated herein by reference
from page 11 of the Company's Annual Report to Shareholders for the fiscal year
ended July 31, 1998.
Item 8. Financial Statements and Supplementary Data
The information required by this item is incorporated herein by reference
from pages 12 to 20 of the Company's Annual Report to Shareholders for the
fiscal year ended July 31, 1998.
Item 9. Changes in or Disagreements with Accountants on Accounting and
Financial Disclosure
There have been no changes in or disagreements with accountants during the
two fiscal years ended July 31, 1998.
Part III
Item 10. Directors and Executive Officers of the Registrant
The information required by this item with respect to Directors of the
Company is incorporated herein by reference to the registrant's Proxy Statement
relating to the 1998 Annual Meeting of Shareholders.
The information required by this item on Executive Officers is included in
Part I.
Item 11. Executive Compensation
The information required by this item is incorporated herein by reference
to the registrant's Proxy Statement relating to the 1998 Annual Meeting of
Shareholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated herein by reference
to the registrant's Proxy Statement relating to the 1998 Annual Meeting of
Shareholders.
Item 13. Certain Relationships and Related Transactions
The information required by this item is incorporated herein by reference
to the registrant's Proxy Statement relating to the 1998 Annual Meeting of
Shareholders.
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Financial Statements
The following consolidated financial statements of Washington Homes,
Inc. and subsidiaries have been incorporated herein by reference as
set forth in Item 8:
Independent Auditors' Report
Consolidated Balance Sheets at July 31, 1998 and 1997
Consolidated Statements of Operations for each of the years in the
three year period ended July 31, 1998
Consolidated Statements of Shareholders' Equity for each of the years
in the three year period ended July 31, 1998
Consolidated Statements of Cash Flows for each of the years in the
three year period ended July 31, 1998
Notes to Consolidated Financial Statements for each of the years in
the three year period ended July 31, 1998
(b) Reports on Form 8-K
During the period from May 1, 1998 to July 31, 1998, there were no
reports on Form 8-K filed by the registrant.
(c) Exhibits
There are included in this report or incorporated herein by reference
the following exhibits:
Exhibit No. Description of Exhibit
3 Articles of Incorporation of registrant, as amended
( (Filed as Exhibit 3(a) to Registration No. 33-52648)*
a
)
3 Articles of Merger merging WH Holdings, Inc. into
( registrant (Filed as Exhibit 3(a)(1) to Registration
a No. 33-52648)*
)
(
1
)
3 Articles of Restatement of Charter of registrant (Filed
( as Exhibit 3(a)(2) to Registration No. 33-52648)*
a
)
(
2
)
3 Articles Supplementary to the Charter of registrant
( (Filed as Exhibit 3(a)(3) to Registration No.
a 33-52648)*
)
(
3
)
3 By-Laws of registrant, as amended (Filed as Exhibit
( 3(b) to 10-K Report for year ended July 31, 1997)*
b
)
4 Specimen Common Stock Certificate (Filed as Exhibit
( 4(a) to Registration No. 33-52648)*
a
)
1 Office Lease Agreement between Citadel Land, Inc. and
0 the Company dated as of January 1, 1997
(
a
)
1 First Amendment to Office Lease Agreement between
0 Citadel Land, Inc. and the Company dated as of May 14,
( 1998
b
)
1 Second Amendment to Office Lease Agreement between
0 Citadel Land, Inc. and the Company dated as of June 1,
( 1998
c
)
1 Note Agreement dated as of April 15, 1994 with respect
0 to $43,000,000 Senior Notes due October 2000 (Filed as
( Exhibit 19 to 10-Q Report for quarter ended April 30,
d 1994 - File No. 1-7643)*
)
1 $70,000,000 Revolving Acquisition and Development Loan
0 and Term Loan, Consolidated Amended and Restated Loan
( Agreement dated as of July 31, 1997 with First Union
e National Bank of Maryland. (Filed as Exhibit 10(d) to
) 10-K Report for year ended July 31, 1997)*
1 Letter Agreement dated as of April 30, 1998 to
0 consolidated amended and Restated Loan Agreement dated
( as of July 31, 1997 (filed as Exhibit 10 to 10-Q Report
f for quarter ended April 30, 1998)*
)
1 Second Amendment Agreement dated as of January 30, 1998
0 to Note Agreement dated as of April 15, 1994 (filed as
( Exhibit 10 to 10-Q Report for quarter ended January 31,
g 1998)*
)
1 Washington Homes, Inc. 401(k) Plan (filed as Exhibit
0 10(i) t o 10-K Report for year ended July 31, 1996)*
(
h
)
1 Washington Homes, Inc. Employee Stock Option Plan
0 (Filed as Exhibit 10(f) to Registration No. 33-52648)*
(
I
)
1 Amendment to Employee Stock Option Plan (Filed as
0 Exhibit 10(f)(1) to Registration No. 33-52648)*
(
j
)
1 Amendment Number 2 to Employee Stock Option Plan
0
(
k
)
1 Form of non-compete agreements with officers (Filed as
0 Exhibit 10(g) to Registration No. 33-52648)*
(
l
)
1 Non-compete agreements with Geaton A. DeCesaris, Sr.
0 and Geaton A. DeCesaris, Jr. (Filed as Exhibit 10(g)(1)
( to Registration No. 33-52648)*
n
)
1 Washington Homes Inc. Non-Employee Directors' Stock
0 Option Plan (Filed as Exhibit A to Definitive Proxy
( Statement for meeting held December 9, 1994)*
n
)
1 Amendment to Non-Employee Directors' Stock Option Plan
0
(
o
)
1 1998 Annual Report to Shareholders (except for the
3 portions incorporated herein by reference, this Exhibit
is filed for informational purposes only)
2 Subsidiaries of registrant
1
2 Consent of Independent Auditors
3
2 Powers of Attorney
4
2 Financial Data Schedule
7
* Incorporated herein by reference.
d) Financial Statement Schedules
All schedules are omitted because the information is not applicable or is
presented in the financial statements or related notes.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 on the 16th of October, 1998, by the undersigned, thereunto duly
authorized.
WASHINGTON HOMES, INC.
(Registrant)
By: /s/ GEATON A. DECESARIS, JR.
Geaton A. DeCesaris, Jr., President and Chief Executive 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 dates indicated.
Name Position Date
/s/ GEATON A. DECESARIS, JR. President, Principal October 16, 1998
Geaton A. DeCesaris, Jr. Executive Officer
and Director
GEATON A. DECESARIS, SR.* Director October 16, 1998
Geaton A. DeCesaris, Sr.
THOMAS CONNELLY* Director October 16, 1998
Thomas Connelly
PAUL C. SUKALO* Director October 16, 1998
Paul C. Sukalo
RONALD M. SHAPIRO* Director October 16, 1998
Ronald M. Shapiro
RICHARD S. FRARY* Director October 16, 1998
Richard S. Frary
RICHARD B. TALKIN* Director October 16, 1998
Richard B. Talkin
/s/ CHRISTOPHER SPENDLEY Principal Financial October 16, 1998
Christopher Spendley Officer
/s/ CLAYTON W. MILLER Principal Accounting October 16, 1998
Clayton W. Miller Officer
*By: /s/ GEATON A. DECESARIS, JR.
Geaton A. DeCesaris, Jr.
Attorney-in-fact
-23-
EXHIBIT 10(a)
OFFICE LEASE AGREEMENT
THIS LEASE AGREEMENT (the "Lease") is made and entered into as of the 1st
day of January 1997 , by and between CITADEL LAND, INC. (the "Landlord") and
Washington Homes, Inc. (the Tenant"), collectively called the "Parties".
WITNESSETH:
FOR AND IN CONSIDERATION of the sum of One Dollar ($1.00) and the mutual
independent covenants in this Lease, the Parties agree as follows:
1. DEFINITIONS
Unless the context in which they appear requires otherwise, the
following capitalized words, when initially capitalized in this Lease, shall
have the meanings assigned to each as below:
A. "Office Building": That building known as "Ingle West Building I" at
1802 Brightseat Road, Landover, Maryland.
B. "Office Building Area": That parcel of land found on Tax Map 60, Grid
C-4, Parcel 86, in Prince George's County, Maryland and the Office Building as
shown on Exhibit A of this Lease.
C. "Premises": That Rentable Area of Twenty Four Thousand Three Hundred
Eighty (24,380) square feet on the third, fifth, and sixth floors of the Office
Building as shown on Exhibit A of this Lease.
D. "Term": That period beginning on the Rental Commencement Date
(hereinafter defined), extending for One Hundred Twenty (120) months thereafter
and including any and all properly exercised renewals.
E. "Rental Commencement Date,": January 1, 1998
F. "Termination Date" The earlier of (i) Midnight on the last day of the
Term, or (ii) at Landlord's option in the event of a breach of this Lease by
Tenant.
G. "Base Rent" The sum of Three Hundred Ninety Thousand Eighty DOLLARS
and NO/100 ($390,080) during the first twelve (12) months of this Lease per
annum, payable by Tenant as directed by Landlord pursuant to Section 4 herein in
equal monthly installments in advance, of Thirty Two Thousand Five Hundred Six
DOLLARS AND 66/100 ($32,506.66). The Base Rent shall be adjusted pursuant to
Section 4.
H. "Security Deposit" The amount of Thirty Two Thousand Six Hundred
Seventy Five DOLLARS AND 42/100 ($32,675.42) deposited with Landlord by Tenant
on the date hereof, to be held and disposed of by Landlord in accordance with
Section 14 hereof.
I. (Intentionally Deleted)
J. "Operating Year" That period beginning October 1 to and including the
next following September 30. The Initial Operating Year shall be October 1,
1997 through September 30, 1998.
K. "Operating Costs" Those expenses paid or incurred by Landlord in
providing services to and in connection with operating, maintaining
and repairing the Office Building and the Office building Area, or any
part thereof, including common parking, open space, in the manner
deemed by Landlord to be reasonable and appropriate for the best
interest of Landlord and its property, Tenant and its property, and
other tenants in the Office Building and Office Building Area
consistent with the principles of sound real estate management of
similar office buildings in the area, and shall include, by way of
illustration only, but not be limited to, all of the following costs
and expenses:
(i) Operating, repairing, lighting, cleaning and insuring (included, but
not limited to, the costs of liability insurance for personal injury, death, and
property damage and workmen's compensation insurance covering personnel; glass,
fire and casualty insurance) the Office Building and Office Building Area, or
any part thereof, as well as all costs incurred in removing snow, ice and debris
therefrom and of policing and regulating traffic with respect thereto, and
depreciation of all machinery and equipment used therein or thereon;
(ii) All costs of utilities, including electricity, gas, water and steam
used in lighting, heating, air conditioning, ventilating and providing similar
services to the Office Building and Office Building Area, including the Common
Areas and Service Areas, but exclusive of costs with respect to utilities and
other charges directly attributable to any single tenant or group of tenants in
the Office Building which are charged directly to and paid by such tenant or
group of tenants by Landlord;
(iii) Repair and maintenance costs incurred for the purpose of
maintaining the asset in questions in good condition and working order, or
repairing the asset in question for the purpose of returning the asset to good
condition and working order. In such regard repairs and maintenance may be
preventative or curative and shall include, but not be limited to, plumbing,
elevator, electrical, heating, air conditioning and ventilating equipment;
restrooms, stairways, hallways, the lobby, parking areas and other common areas.
It is understood that repairs and maintenance relate to services normally
performed on a recurring basis for the purpose of keeping the asset in an
ordinarily efficient operating condition. However, a repair and maintenance
item may be sudden and nonrecurring;
(iv) Service agreement costs for the Office Building Area, Office Building
and equipment therein, including, but not limited to, security, alarm service,
elevators, HVAC equipment, landscaping (including replanting and replacing
flowers an other plantings), window or brick cleaning, pest control, trash
removal and disposal and janitorial service, including equipment, uniforms,
supplies and sundries;
(v) Maintenance, replacement and repair costs of pavement, curbs,
walkways, roof, walls, windows, floors, drainage, ducts, conduits and lighting;
(vi) Repainting and redecorating costs of all commonly used areas;
(vii) Maintenance, management and other costs of matters required under
recorded covenants, agreements and declarations;
(viii) Amortization of the costs of capital investment items which are
primarily for the purpose of reducing operating costs or which may be required
for the purpose of reducing operating costs or which may be required by
governmental authorities. All such costs shall be amortized over the reasonable
life of the capital investment item, such being determined in accordance with
generally accepted accounting principles.
(ix) All taxes and assessments and governmental charges applicable to the
Office Building and/or Office Building Area, or to Landlord's personal property
used in connection therewith, whether federal, state, county or municipal, and
whether assessed by taxing districts or authorities presently taxing the Office
Building Area or the operation thereof, or by other taxing authorities, whether
subsequently created or otherwise, and any other taxes and assessments
attributable to the Office Building and Office Building Area or its operation
(excluding, however, any federal and state taxes on income) and the costs and
expenses of contesting any such assessments and charges, including, but not
limited to, attorney's fees and bonds;
(x) Management fees and commissions, wages, salaries and compensations,
including payroll taxes, insurance and benefits, for all persons engaged in the
maintenance, operation or repair of the Office Building or Office Building Area;
(xi) Legal, accounting, appraisal and engineering fees for services;
(xii) All other items which would be considered as procured or incurred
in maintaining, operating or repairing the Office Building and Office Building
Area under sound accounting principles.
Operating Costs shall exclude:
1. The cost of any work or service performed for any tenant for which
such tenant pays directly or, except as set forth in (vii) above, the cost of
capital improvements as determined under sound accounting principles;
2. Leasing and renting commissions;
3. Interest or other payments on loans to Landlord;
4. Expenses for repairs paid by proceeds of insurance or other parties
unrelated to Landlord;
5. Income Taxes.
L. "Rentable Area" That floor area within the inside surface of the
outer glass or finished column or exterior walls enclosing the Premises and
measured to the midpoint of the walls separating areas leased by or held for
lease to other tenants or from areas devoted to corridors, elevator foyers,
restrooms, mechanical rooms, janitor closets, vending areas, and other similar
facilities for the use of all tenants on the particular floor ("Common Areas"),
but including a proportionate part of the Common Areas located on such floor
based upon the ratio which the Tenant's Rentable Area (determined by excluding
Common Areas) bears to the total Rentable Area on such floor, plus an allocation
of the square footage of the Office Building's elevator, mechanical rooms,
central mechanical and electrical rooms and any public lobbies used by all
tenants which bears the same relationship as Tenant's Rentable Area (determined
without regard to such areas) bears to the total Rentable Area of the Office
Building (determined without regard to such areas). No deductions for Rentable
Areas shall be made for columns or projections necessary to the Office Building.
Landlord and Tenant agree that the Rentable Areas of the Premises as of the date
of the execution hereof is 24,380 square feet.
M. "Percentage" Forty Percent (40%) provided, however, that in the event
that the amount of space leased by Tenant shall increase or decrease subsequent
to the Rental Commencement Date, whether pursuant to an option to expand or
otherwise, the Percentage shall be appropriately adjusted by the Landlord.
N. "Consumer Price Index" The Consumer Price Index of "All Items - U.S.
Cities Average" published by the United States Department of Labor. Should such
Index be discontinued, the base changed, or there otherwise be material changes,
any adjustment in Base Rent or Additional Rent required under this Lease shall
fairly reflect the increase in the cost of living from the Rental Commencement
Date to the applicable date.
2. GRANTING CLAUSE
Subject to the terms, conditions and provisions hereinafter set forth, and
each in consideration of the duties, covenants and obligations of the other
hereunder, Landlord does hereby lease, demise and let to Tenant, and Tenant
hereby leases from Landlord the Premises, to have and to hold the same for the
Term specified herein. This Lease, however, is subject to the existing rights
and interests of third parties under existing liens, easements, ground leases or
encumbrances covering the Office Building Area and all applicable zoning
regulations, restrictions, rules and ordinances, building restrictions,
restrictive covenants, agreements and other laws and regulations now in effect
or hereinafter adopted by any governmental authority having jurisdiction over
the Office Building and Office Building Area.
3. TERM AND TERMINATION
A. The Term shall begin on the Rental Commencement Date and unless
extended or renewed by mutual agreement shall end without notice at midnight on
the Termination Date. Tenant agrees to vacate the Premises at the end of the
Term and that Landlord shall be entitled to the benefit of all summary
proceedings to recover possession of the Premises at the end of the Term as if
statutory notice had been given.
B. Tenant shall have the option to extend this Lease for a period of
three (3) years subsequent to the Initial Term at terms to be mutually agreed
upon, provided that Tenant is not in default of this Lease and that Tenant
declares such intention to Landlord in writing no later than thirty (30) months
following the Rental Commencement Date.
C. During the period of four (4) months prior to the end of the Term,
Landlord may display on the Premises a "for rent" sign and show the Premises to
prospective tenants during normal business hours.
D. In case of holding over by Tenant after expiration or termination of
this Lease or of any properly exercised renewal or extension thereof, Tenant
will pay, as liquidated damages, two hundred percent (200%) of the Base Rent and
all attorneys' fees and expenses incurred by Landlord in enforcing its rights
hereunder. No holding over by Tenant after the Term as such Term may be renewed
or extended, either with or without the consent and acquiescence of Landlord,
shall operate to extend the Lease unless Landlord and Tenant enter into a
holdover agreement in writing. Any holding over shall constitute a tenancy-at-
will.
4. RENTAL
A. Base Rent.
(i) Tenant hereby agrees to pay to Landlord or its agent, without
notice, demand, abatement, deduction or set-off during the Term, Base Rent for
the Premises as due under this Lease, for the nonpayment of which Landlord shall
be entitled to exercise all such rights and remedies as are herein provided
(Base Rent, Additional Rent [hereinafter defined] and all such other sums of
money due from and payable by Tenant pursuant to this lease are collectively
called "Rent"). The monthly Base Rent, together with any installment of
Additional Rent due on a monthly basis, shall be due and payable in advance on
the first day of each calendar month during the Term hereof and any extensions
or renewal thereof, and Tenant hereby agrees to pay such Rent to Landlord c/o
The Michael Companies, Inc., 4390 Parliament Place, Lanham, Maryland 20706,
Attn: Debra Marshall, or at such other address as may be designated by Landlord
in writing from time to time. If the Rental Commencement Date is a day other
than the first day of the month in which it falls, or if the Termination Date
falls on a day other than the last day of a month, the Base Rent and Additional
Rent due and payable for such month or months shall be prorated based on thirty
(30) days per month, and the Rent so prorated shall be paid in advance.
(ii) Beginning with the second Rental Year of the Term and for each
subsequent year, the Base Rent shall be increased by an amount equal to the
percentage increase in the Consumer Price Index multiplied by the Base Rental as
of the last day of prior Operating Year provided however that such percentage
increase shall never be less than 2 1/2% or more than 5%.
B. "Additional Rent" Additional Rent shall include all items and/or
amounts so qualified in this Lease.
(i) During the Term Tenant shall pay to Landlord as Additional Rent an
amount equal to the product of Tenant's Percentage multiplied by the amount, if
any, by which the Operating Costs during a given Operating Year are estimated to
exceed the Operating Costs for the Initial Operating Year. Such Additional Rent
shall be paid monthly in advance and in equal installments based on the total
amount calculated to be due of the Operating Year. In the event the Rental
Commencement Date is a date other than the first day of the Operating Year or
terminates on a date other than the last day of the Operating Year, the amount
of Additional Rent payable by Tenant hereunder shall be prorated in the same
ratio that the number of days during such Operating Year that Tenant has an
obligation to pay Base Rent hereunder bears to 360.
(ii) Following the end of each Operating Year Landlord, as soon as its
practical, will submit to Tenant a statement (the "Operating Costs Statement")
which shall include: (a) the Operating Costs, including real estate taxes,
incurred during the previous Operating Year (except for the Initial Operating
Year during which the Office Building Area is in operation, in which case
Landlord's estimate of what actual Operating Costs would have been had the
Office Building Area been in operation, the entire year shall be used); (b)
the sum of any payments of estimated Additional Rent the Tenant paid under (i)
above during such Operating Year; (c) the total amount of Additional Rent
payable by Tenant for such Operating Year; (d) the amount of any overpayment or
underpayment of Additional Rent by Tenant for such Operating Year; and (e) an
estimate of the total Additional Rent payable by Tenant during the Operating
Year in which Tenant receives the Operating Costs Statement. For the Operating
Year in which the Rental Commencement Date occurs, Tenant shall pay monthly
installments of Additional Rent based upon Landlord's estimate of Operating
Costs to be insured during such year. Commencing with the first Operating Year
following the Operating Year in which the Rental Commencement Date occurs and
continuing for each Operating Year thereafter during this Lease, the monthly
installment of estimated Additional Rent or Operating Costs payable following
Tenant's receipt of the Operating Costs Statement shall be derived by
subtracting all payments of Additional Rent pertaining to the then current
Operating Year already paid during such Operating Year, divided by the number of
complete months remaining in such Operating Year.
(iii) Commencing with the first monthly payment of Additional Rent after
Tenant's receipt of the Operating Costs Statement and continuing until Tenant
receives the next Operating Costs Statement, Tenant shall pay, on a monthly
basis in advance, the installment of estimated Additional Rent calculated under
the provisions of Subsection (ii) above, which payments shall be applied to the
actual Additional Rent due for the entire Operating Year in which such payments
are made. Tenant shall pay any Additional Rent due, as shown in the Operating
Costs Statement, within thirty (30) days after Tenant's receipt thereof, and
Landlord shall apply as a credit against, and in reduction of, the next monthly
payment (s) due, any overpayment of Additional Rent during the prior year
disclosed in such Operating Costs Statement provided, however, that Tenant
shall never pay less than the Basic Rent due for such Operating Year.
(iv) If, for any reason, during the Term, Tenant increases or decreases
the amount of space in the Office Building which it has under lease, then Tenant
shall pay a prorata share of the Additional Rent attributable to such increased
or decreased space, which prorata shall be based on the same ratio that the
number of days during the Operating Year that such increased or decreased space
was under lease bears to 360.
(v) In computing the Additional Rent due by Tenant hereunder, if the
Office Building is not fully leased throughout the Operating Year in question,
or is not fully leased to tenants receiving services from Landlord and
contributing to the costs thereof in same manner as services are provided to,
and reimbursed by, Tenant hereunder, an adjustment shall be made by Landlord so
that the amount of Operating Costs used in such computation pursuant to
Subsection (i) above is the amount which, in Landlord's reasonable judgement,
the Operating Costs would have been if the Office Building had been fully leased
to tenants receiving services from Landlord and contributing to the costs
thereof in the manner provided for herein.
C. Late Charge. In the event any installment of Base Rent or Additional
Rent shall be past due for more than seven (7) days, Tenant shall pay to
landlord as Additional Rent a sum equal to eight (8%) percent of such unpaid
amounts to cover Landlord's cost for the collection and the loss of income. All
Base Rent, Additional Rent and all other sums due under this Lease shall be paid
to Landlord when due, and if not paid when due, shall bear interest at the rate
of fifteen (15%) percent per annum until paid, compounded monthly.
D. All taxes, charges and costs which Tenant is required to pay hereunder,
together with all interest and penalties that may accrue thereon in the event of
Tenant's failure to pay such amount, and all damages and costs which Landlord
may incur by reason of any default of Tenant or failure on Tenant's part to
comply with the terms of this Lease, shall be deemed to be Additional Rent, and,
in the event of nonpayment by Tenant of any Additional Rent herein, Landlord
shall have all the rights and remedies with respect thereto as Landlord has for
nonpayment of the Base Rent. Tenant's obligation to pay any Additional Rent
occurring during the Term of this Lease pursuant to the terms of the Lease shall
survive the expiration or sooner termination of this Lease.
5. SERVICES BY LANDLORD
A. Utilities and Services
Landlord shall supply, insofar as facilities permit and as long as Tenant
is not in default herein:
(i) Cold water (at the normal temperature of the supply of water to the
Office Building ) for lavatory and toilet purposes, refrigerated water for
drinking purposes, and hot water (from the regular Office Building supply at
prevailing temperatures) for lavatory purposes, all of such water service to be
supplied from the regular supply of water to the Office Building at points of
supply provided for the general use of tenants of the Office Building and
through fixtures installed by Landlord or by Tenant with Landlord's consent.
(ii) Electrical facilities for, and sufficient power to operate,
typewriters, voice writers, calculating machines and other office machines of
similar low electrical consumption but not including electricity required for
electronic data processing equipment, special lighting in excess of Office
Building standard, and any other items of electrical equipment which (singly)
consumes more than 0.5 kilowatts at rated capacity or requires a voltage other
than 120 volts single phase.
(iii) Heating and air conditioning in season, at such times as Landlord
normally furnishes these services to all tenants of the Office Building (which
are 8:00 a.m. to 6:00 p.m.) Monday through Friday, Saturdays from 8:00 a.m. to
1:00 p.m., exclusive of legal holidays), and at such temperatures and in such
amounts as are considered by Landlord from time to time, including, but not
limited to, any adjustment required by any governmental regulations now or
hereafter in effect with respect to energy consumption), such service otherwise
on Saturdays, Sundays, and legal holidays to be optional on the part of Landlord
and to be furnished only in the event Tenant bears the entire cost thereof.
(iv) Elevator service in common with other tenants for ingress to and
egress from the Premises provided that Landlord may reasonably limit the number
of elevators to be in operation on Saturdays, Sundays and legal holidays.
(v) Janitorial cleaning services Monday through Friday, exclusive of
holidays, in the manner and to the extent deemed by Landlord to be standard.
(vi) Routine maintenance and electric lighting service for public areas
and special service areas of the Office Building in the manner and to the extent
deemed by Landlord to be standard.
(vii) All Office Building standard fluorescent bulb replacement in the
Premises and all incandescent bulb replacement in public areas, restroom areas
and stairways.
(viii) At Landlord's option, security and/or alarm service to the Office
Building during the weekends and after normal business hours during the week.
Landlord shall not be liable for losses due to theft or burglary or for damages
done by unauthorized persons on the Premises.
The failure by Landlord to any extent to furnish these defined services, or
any cessation, fluctuation, variation or interruption thereof shall not render
Landlord liable in any respect for damages, direct or consequential, to either
person or property, nor be construed as an eviction of Tenant, nor work an
abatement of rent, nor relieve Tenant from the obligation to fulfill any
covenant or agreement hereof. Should any of the equipment or machinery break
down, or for any cause cease to function properly, Tenant shall have no claim
for rebate of rent or damages on account of an interruption in service
occasioned thereby or resulting therefrom.
If Tenant's requirements for electricity, water, security of other services
exceed the standard normally provided by Landlord, Landlord, at Tenant's
expense, will make reasonable efforts to supply such excess service through the
then existing feeders servicing the Office Building and may bill Tenant
periodically for such additional excess service. Such additional consumption
shall be determined, at Landlord's election, either (1) by a survey performed by
a reputable consultant selected by Landlord and paid for by Tenant, or (2) by a
separate meter or other system of measurement in the Premises to be installed,
maintained and ready by Landlord at Tenant's sole expense. All installations of
fixtures, appliances and equipment for electricity or other utilities within the
Premises will be subject to Landlord's prior written approval. Landlord's
obligation to furnish electrical and other utility services will be subject to
the rules and regulations of the supplier of such electricity or other utility
services and the rules and regulations of any municipal or other governmental
authority regulating the business of providing electricity and other utility
services. At all times Tenant agrees that its use of electric current, water
and other utilities will never exceed the level which Landlord determines to be
its allocable share of the capacity of existing facilities to the Office
Building or the riser or wiring installations and plumbing intake and discharge
systems. Any riser or risers or wiring to meet Tenant's excess electrical
requirements or excess plumbing fixtures or equipment, upon Tenant's request,
will be installed by Landlord at Tenant's sole cost (if, in Landlord's sole
judgement, the same are necessary and will not cause permanent damage or injury
to the Office Building or to the Premises or cause or create a dangerous or
hazardous condition or entail excessive or unreasonable alterations, repairs or
expenses or interfere with or disturb other tenants of occupants).
B. Keys and locks. Landlord shall furnish Tenant two (2) keys for the
corridor door entering the Premises. Additional keys will be furnished at a
charge by Landlord on receipt of an order signed by Tenant or Tenant's
authorized representative. All such keys shall remain the property of Landlord.
No additional locks shall be allowed on any door of the Premises without
Landlord's written permission, and Tenant shall not make or permit to be made
any duplicate keys, except those furnished by Landlord. Upon termination of
this Lease, Tenant shall surrender to Landlord all keys to the Premises and give
to Landlord the combination of all locks for safes, safe cabinets and vault
doors, if any, remaining in the Premises.
C. Graphics. Landlord shall provide and install, at Tenant's cost, all
letters or numerals on exterior doors to the Premises. All such letters and
numerals shall be in the standard graphics for the Office Building and no others
shall be used or permitted on the exterior of the Premises.
D. Maintenance and repairs. Unless otherwise stipulated herein, Landlord
shall not be required to make any repairs of any kind or character on the
Premises during the Term or any extension thereof. The obligation of Landlord
to maintain and repair the Premises shall be limited to repair of Office
Building standard items. Any other leasehold improvements will be maintained by
Landlord at Tenant's written request and expense, at a cost or charge equal to
all costs incurred in such maintenance plus an additional charge to cover
overhead, which costs and charges shall be payable by Tenant to Landlord within
ten (10) days of the date Tenant receives an invoice therefor.
6. TENANT'S ACCEPTANCE OF PREMISES
A. Occupancy as acceptance. By occupying the Premises Tenant accepts
them in their present condition and acknowledges they are suited for their
intended use and agrees that Landlord shall not be required to make any repairs
or improvements except those structural repairs required for the safety of the
occupants of the Office Building.
B. Requirements of law. Tenant, at its sole cost and expense, shall
comply promptly with all statutes, laws, ordinances, orders, regulations and
requirements of the federal, state and local governments and any and all of
their departments and bureaus, and of the Board of Fire Underwriters applicable
to Tenant's use of the Premises, for the correction, prevention and abatement of
nuisances or violations in, upon or connected with the Premises during the Term
and for the prevention of fires.
C. Certificate of occupancy. Tenant will not use or occupy the Premises
in violation of any certificate of occupancy, permit or other governmental
consent issued for the Office Building. If any governmental authority, after
the commencement of the Term, shall contend or declare that the Premises are
being used for a purpose which is in violation of such certificate of occupancy,
permit or consent, then Tenant shall, upon five (5) days notice from Landlord,
immediately discontinue such use of the Premises. Landlord represents that the
Office Building is zoned to permit office uses.
7. ALTERATIONS AND IMPROVEMENTS
A. Extension of Rental Commencement Date. In the event Landlord agrees
to improve the Premises and if for any reason they are not ready for occupancy
by the Rental Commencement Date, Landlord shall not be liable or responsible to
Tenant for any claims, damages or liabilities, and unless the delay is
attributable to the Tenant, the Rental Commencement Date shall be extended to
the date that Landlord's work has been completed.
B. Mechanics' and materialmen's liens. Tenant shall not do or suffer to
be done any act, matter or thing whereby Tenant's interest in the leased
Premises, or any part thereof, may be encumbered by any mechanics' or
materialmen's lien. Tenant shall discharge, within ten (10) days after the date
of filing, any mechanics' or materialmen's liens filed against Tenant's interest
in the leased premises, or any part thereof, purporting to be for labor or
material furnished or to be furnished to Tenant. Landlord shall not be liable
for any labor or materials furnished or to be furnished to Tenant upon credit,
and no mechanics' or materialmen's or other lien for labor or materials shall
attach to or effect the reversionary, leasehold or other estate or interest of
Landlord in and to the leased Premises, or the real property.
C. Landlord's improvements. Landlord agrees to provide at its sole cost
the improvements to the leased Premises set forth in Schedule B attached hereto
(the "Leasehold Improvements") and made a part of this Lease.
D. Tenant's improvements. Except to the extent that Landlord is
responsible for making improvements to the Premises pursuant to Section 7.C
above, Tenant agrees that it will make its improvements to the Premises as it
may deem necessary at its sole cost. However, Tenant shall not cut or drill
into or secure any fixtures, apparatus or equipment of any kind to any part of
the Office Building, nor shall Tenant make any alterations, decorations,
installations, additions or improvements to the Premises, including but not
limited to, the installation of any electrical or other wiring, fixtures,
amenities, equipment, appliances or other apparatus, without Landlord's prior
written approval and then only by using contractors or mechanics employed or
approved by Landlord. All such work, alterations, decorations, installations,
additions or improvements shall be done at Tenant's sole expense and at such
times and in such manner as Landlord may from time to time designate. However,
Tenant may install shelving on the walls in the area designated on Exhibit A as
the "copy room". All alterations, decorations, installations, additions or
improvements made by either of the Parties hereto upon the Premises, except
movable office furniture installed at Tenant's expense, shall be the property of
Landlord and shall remain upon and be surrendered with the Premises at the
termination of this Lease without molestation or injury.
8. REPAIRS AND OPERATION.
A. Landlord will maintain the exterior of the Premises in good condition,
unless the need for repairs is caused by the carelessness or negligence of
Tenant, its agents, employees or servants, in which event Tenant shall be
responsible for the costs of such repairs. Tenant shall give Landlord written
notice of the necessity for such repairs regardless of cause.
B. Tenant will keep the interior of the Premises clean and in good
repair, will surrender them in as good condition as when received, excepting
depreciation caused by ordinary wear and tear and damage by fire, unavoidable
accident or Act of God; will not overload the electrical wiring serving the
Premises; will maintain all mechanical equipment and keep producing or
reproducing equipments it owns or operates in the Office Building Area in good
working order free from vibrations or noise which may interfere with the quiet
enjoyment of others of the Office Building Area; will receive and ship articles
in and out of the Office Building and Office Building Area through facilities
prescribed by Landlord; will replace promptly with glass of like kind and
quality any glass in the Premises which may become broken or cracked due to
Tenant's occupancy unless damaged by fire, Act of God, or act of Landlord, its
agents or employees; and will not without the prior permission of Landlord place
any sign, advertisement or decoration on the exterior walls, windows or doors of
the Premises which is visible from the exterior of the Premises.
C. Tenant will pay for all damage to the Office Building and/or Office
Building Area, its fixtures and appurtenances, as well as all damages sustained
by the tenants or occupants of the Office Building due to any waste, misuse or
neglect of the Premises, its fixtures and appurtenances by Tenant, its employees
or any other person or persons upon the Premises by Tenant's permission. Tenant
shall not place a load upon any floor of the Premises exceeding the floor load
per square foot which such floor was designed to carry and which may be allowed
by law. Landlord reserves the right to prescribe the weight and position of all
safes, telephone switchboards or other heavy equipment and to prescribe the
reinforcing necessary, if any, which in the opinion of Landlord may be required
under the circumstances, such reinforcing to be at Tenant's expense. Business
machines and mechanical equipment, if approved by Landlord in a separate written
agreement between Landlord and Tenant, shall be placed and maintained by Tenant,
or at Tenant's expense, in settings sufficient in Landlord's judgement to absorb
and prevent vibration, noise of annoyance, and Tenant shall, at its expense,
take such steps as Landlord may direct to remedy any such condition. There
shall be no allowance to Tenant for a diminution of rental value, no abatement
of Rent, and no liability on the part of Landlord by reason of inconvenience,
annoyance or injury to business arising from Landlord, Tenant or others making
repairs, alterations, additions or improvements in or to any portion of the
Office Building or Office Building Area, or the Premises or in or to fixtures,
appurtenances or equipment thereof, and no liability upon Landlord for failure
of Landlord or others to may any repairs, alterations, additions or improvements
in or to any portion of the Office Building Area, the Office Building or of the
Premises, or in or to the fixtures, appurtenances or equipment thereof and the
foregoing shall not be construed to mean that Landlord has any such obligations.
D. Landlord, its agents, employees and contractors shall have the right
to enter the Premises at all reasonable times and with reasonable notice for the
purpose of making inspections or to install, maintain, repair, use or replace
electrical, plumbing and mechanical equipment or installations serving the
Office Building or Office Building Area. Except in case of emergency Landlord
agrees that to the degree possible such repairs shall be made at time which will
not disrupt Tenant's normal business operations. If Tenant fails to maintain or
repair the Premises as required, Landlord may repair the Premises and charge the
cost to Tenant as Additional Rent.
9. OFFICE BUILDING AREA AND PARKING FACILITIES
A. Subject to the Rules and Regulations and any other conditions imposed
by Landlord or any other party having authority to control the Office Building
Area, Tenant shall be entitled to the non-exclusive use in common with others of
automobile parking areas, driveways, access roads, footways, loading facilities,
freight elevators and other facilities as may be constructed by Landlord for the
common use by tenants in the Office Building Area. Tenant shall be limited to,
without charge, 3.5 automobile parking spaces per 1000 square feet of Rentable
Area in the Premises.
B. Landlord reserves the right to make changes or revisions in the layout
of the Office Building and the Office Building Area to increase the leasable
area and to construct additional buildings.
10. ASSIGNMENT; SUBLETTING
A. Tenant will not assign this Lease, sublet the Premises or permit
the use of the Premises by any other party, directly or by operation of law,
without first obtaining Landlord's written consent, which consent shall not be
unreasonably withheld. Consent by Landlord to any assignment, subletting or use
shall not constitute a waiver of the necessity for such consent to any
subsequent assignment, subletting or use. If Tenant is a corporation whose
voting stock is not publicly traded and if a change in the legal or beneficial
ownership of the voting corporate stock of Tenant results in a change in control
of Tenant, Landlord shall have the option to terminate this Lease without
liability. If Landlord is a corporation whose voting stock is not publicly
traded and if a change of control of Landlord or of the Office Building occurs,
Tenant may terminate this Lease upon thirty (30) days prior notice to Landlord.
Tenant shall give Landlord notice within ten (10) days of any change in the
ownership of beneficial interest of the voting corporate stock of Tenant which
would permit Landlord to terminate this Lease. In no event shall such
assignment or subletting release Tenant of any of its obligations hereunder.
B. Tenant shall not assign this Lease or sublet any part of the Premises
let hereunder except with written approval by Landlord.
C. Landlord reserves the right to assign this Lease as may be required
under the terms of any financing or other agreement(s) for the Office Building
or the Office Building Area or any part thereof.
11. INSURANCE; INDEMNITY
A. Property Insurance. Landlord shall maintain fire and property
insurance on the Office Building with an insurance company authorized to conduct
business in Maryland, in amounts desired by Landlord. Payments for losses
thereunder shall be made solely to Landlord. Tenant shall maintain at its
expense fire and extended coverage insurance on all of its personal property,
including removable trade fixtures located in the Premises and on all additions
and improvements made by Tenant. Tenant will not do or suffer to be done, or
keep or suffer to be kept, anything in, upon or about the Office Building or
Office Building Area which will contravene Landlord's policies insuring against
loss or damage by fire or other hazards (including, without limitation, public
liability) or which will prevent Landlord from procuring such policies in
companies and at premium rates acceptable to Landlord. If anything done,
omitted to be done or suffered by Tenant to be kept in, upon or about the Office
Building Area or other property of Landlord causes the premiums to be paid by
Landlord to exceed the standard rates because of Tenant's operations, Tenant
will pay promptly upon Landlord's demand, as Additional Rent, the amount of any
such increased premium.
B. Liability insurance. Tenant will keep in force at its own expense, as
long as this Lease or any extension thereto remains in effect, public liability
insurance with respect to the Premises in companies and in a form acceptable to
Landlord with minimum limits of Five Hundred Thousand Dollars ($500,000.00) for
injuries or death to any one person, and One Million Dollars ($1,000,000.00) for
injuries and/or death arising out of any one occurrence or disaster, and
property damage insurance with minimum limits of Fifty Thousand Dollars
($50,000.00). Tenant will deposit the insurance policy or policies or their
certificates with Landlord together with satisfactory evidence that their
premiums have been paid. The policies shall name Landlord and, at the request
of Landlord, its mortgagee and land lessor as additional insured and shall
provide that Landlord will be given notice at least (10) days in advance of any
termination of such insurance for any cause. If Tenant fails to comply with its
covenants made in this Section, if such insurance would terminate or if Landlord
has reason to believe such insurance is about to be terminated, Landlord may, at
its option, cause such insurance as it, in its sole judgement, deems necessary
to be issued, and in such event Tenant agrees to pay promptly upon Landlord's
demand, as Additional Rent, the premiums for such insurance.
C. The Parties waive all right of recovery by way of subrogation, each
against the other from any and all claims for loss by fire or any of the
casualties covered by standard extended insurance coverage. If any additional
charge or increase in premium is made by the insurer because of the waiver or
subrogation, the party in whose favor the waiver is obtained shall pay such
additional charge or increase in premium. If such waiver of the right of
subrogation is not available from the insurers of either party, then this
Subsection 11.C shall have no effect.
D. Tenant shall attempt to obtain, in each of its insurance policies,
provisions permitting waiver of any claim against the Tenant, for itself and its
insurers, of all claims against the Landlord for which Tenant is insured. This
Subsection shall not affect Subsection 11.C.
E. Tenant will indemnify Landlord and hold it harmless and defend it from
and against any and all loss claims, actions, damages, liability and expense,
including attorneys' fees, in connection with loss of life, bodily injury,
personal injury and/or damage to property arising from or out of the condition
of the Premises or out of the occupancy or use by Tenant of the Premises, the
Office Building or the Office Building Area or any other part of Landlord's
property, occasioned wholly or in part by any act or omission of Tenant, its
agents, contractors, employees or invitees.
12. DESTRUCTION - FIRE OR OTHER CASUALTY
In case of partial damage to the Premises by fire or other casualty insured
against by Landlord, Tenant shall give immediate notice thereof to Landlord, who
shall thereupon cause damage to all property owned by Landlord to be repaired
with reasonable speed at expense of landlord, due allowance being made for
reasonable delay which may arise by reason of adjustment of loss under insurance
policies on the part of Landlord and/or Tenant, and for reasonable delay on
account of "labor troubles" or any other cause beyond Landlord's control, and to
the extent that the Premises are rendered untenantable the Rent shall
proportionately abate, provided the damage above-mentioned occurred without the
fault or neglect of Tenant, Tenant's servants, employees, agents, or visitors.
But if such partial damage is due to the fault or neglect of Tenant, Tenant's
servants, employees, agents or invitees, the damage shall be repaired by
Landlord at Tenant's expense and there shall be no apportionment or abatement of
Rent. In the event the damage shall be so extensive to the whole Office
Building as to render it uneconomical, in Landlord's opinion, to restore for
Office Building use or Landlord shall decide not to repair or rebuild the Office
Building, this Lease, at the option of Landlord, shall be terminated upon
written notice to Tenant and the Rent shall, in such event, be paid to or
adjusted as of the date of such damage, and the terms of this Lease shall expire
by lapse of time and conditional limitation upon the third day after such notice
is mailed, and Tenant shall thereupon vacate the Premises and surrender the same
to landlord, but no such termination shall release Tenant from any liability to
Landlord arising from such damage or from any breach of the obligations imposed
on Tenant hereunder.
13. PREPAID RENT
Tenant shall pay upon the execution of this Lease the amount set forth in
Section 1 (I) to be held as Prepaid Rent and security to be forfeited, without
limitation of other remedies, for any defaults of this Lease by Tenant occurring
prior to the Rental Commencement Date. If no such defaults occur the Prepaid
Rent shall be applied by Landlord against the first installment of Rent payable
by Tenant.
14. SECURITY DEPOSIT
Tenant shall pay upon the execution of this Lease the amount set forth in
Section 1 (I) as a Security Deposit, to be held or used by Landlord without
interest for the benefit of Landlord as security for the faithful performance by
Tenant of all the terms and covenants of this Lease. If Tenant fails to occupy
the Premises this sum and the Prepaid Rent will be forfeited without
extinguishing or limiting Landlord's right to further damages. if any amount
owned by Tenant to Landlord as Base Rent, Additional Rent or otherwise shall be
ten (10) days past due, Landlord may apply the Security Deposit toward such
obligation and Tenant agrees to re-establish the full amount of Security Deposit
paying such additional amount as Additional Rent together with the next
installment of Base Rent. The Security Deposit shall be returned to Tenant,
less all costs incurred by Landlord in correcting or satisfying any default of
this Lease and/or in returning the Premises to the same condition as when
delivered to Tenant, excluding reasonable wear and tear, within a reasonable
time after the Termination Date. No right or remedy available to Landlord as
provided in this Section shall preclude or extinguish any other right or remedy
to which Landlord might otherwise be entitled by this Lease or by Law.
15. SUBORDINATION, ATTORNMENT AND ESTOPPEL
A. Tenant acknowledges that its rights under this Lease are and shall
always be subordinated to the operation and effect of any mortgage, deed of
trust, ground lease or other similar security instrument and of all the
covenants and restrictions running with the land, now or to be placed upon all
or any portion of the Office Building and the Office Building Area, and shall be
subject to the legal operation and effect of the loan documents related to
landlord's existing loan. The subordination provisions of this Subsection 15.A
shall be self-operative and no further instruments of subordination shall be
required. In confirmation of such subordination, Tenant shall execute and
deliver promptly any certificate or other instrument which Landlord or any
holder of any mortgage or any trustee under any Deed of Trust to which their
Lease is subordinate, may reasonably request. In the event of any sale of the
Office Building and/or Office Building Area, or any part thereof, pursuant to
any foreclosure or other provisions of any Deed of Trust or mortgage, this Lease
shall continue in full force and effect, and the Tenant will, upon request,
attorn to and acknowledge the purchaser or purchasers at such sale or sales as
Landlord hereunder. Unless the Beneficiary of such Deed of Trust or other
Mortgagee or such purchaser or purchasers or the Trustees under the Deed of
Trust shall, at or prior to the time of such sale or sales or within sixty (60)
days thereafter, notify the Tenant, in writing, to vacate and surrender the
leased Premises within ninety (90) days from the date of such sale or sales, in
the event of which notice this Lease Shall fully terminate and expire at the end
of such period of ninety (90) days from and after the date of such sale or
sales. Tenant, upon request, will execute an attornment instrument and attorn
to such Mortgagees or Trustees or to any successor in interest of Landlord, and
become its tenant on the same terms and covenants of this Lease for the
unexpired portion of the Term. Tenant also agrees, within twenty one (21) days
of a written request by Landlord, to execute, acknowledge and deliver to
Landlord or to any mortgagee, trustee or other similar secured party designated
by Landlord a certificate in writing stating: (i) that this Lease is unmodified
and in full force and effect (or if there have been modifications, that the
Lease is in full force and effect as modified and identifying the modification
agreements), or if this Lease is not in full force and effect the certificate
shall so state; (ii) the date to which Rent has been paid; (iii) whether or not
there is any existing default by Tenant in the payment of Rent or any other sums
due under this Lease, and whether or not there is any other existing default by
either party and whether a notice of default has been served, and, if there is
such a default, specifying its nature and extent; (iv) whether or not there are
then any set-offs, defenses or counterclaims against enforcement or the
obligations to be perform by Tenant under this Lease; and (v) such other matters
relating to this Lease as may be reasonably request by Landlord or any
mortgagees, trustees or other secured party, it being intended that any such
certificate delivered pursuant to this Section may be relied upon by any such
mortgagee, trustee or other secured party; and (vi) an acknowledgement of any
Deed of Trust or mortgage on the Office Building and/or Office Building Area in
form acceptable to the mortgagee, trustees or beneficiary of trust.
B. Failure of Tenant to respond timely to a request made pursuant to this
Section shall operate as a conclusive presumption that Landlord is not in
default of any covenant of this Lease and that it is unmodified except as
Landlord otherwise indicates.
C. No lender who holds a mortgage or is a beneficiary under a deed of
trust shall be liable to Tenant for any act of any prior Landlord.
16. USE AND QUIET ENJOYMENT
A. Landlord leases to Tenant and Tenant rents from Landlord the Premises
for the Term set forth to be used only as an office for business purposes.
Tenant agrees to use the Premises in a manner which does not interfere with the
right of quite enjoyment of any other tenant and which is not a nuisance.
Landlord agrees that as long as Tenant is not in default of any covenant or term
of this Lease, Tenant shall have the right to peaceful and quiet enjoyment of
the Premises during the Term against any claims made through or against
Landlord.
B. Landlord may, by notice to Tenant, amend the description of the
Premises. Tenant agrees to execute an amendment to this Lease which redescribes
the Premises with appropriate rental and tenant improvement adjustments, and the
Lease shall otherwise continue in full force and effect.
C. Landlord hereby grants to Tenant a First Right to Lease contiguous
space in the building. Upon receipt of notice from Landlord that a Tenant has
been obtained for such contiguous space, Tenant shall exercise its first right
to lease within five (5) business days following receipt of Landlord's
notification.
17. RULES AND REGULATIONS
Tenant acknowledges receipt of and agrees to comply with the Rules and
Regulations of the Premises, Office Building and Office Building Area, attached
hereto as Exhibit C as Landlord may amend from time to time by written notice to
Tenant. Failure to comply with the then existing Rules and Regulations shall
constitute a breach of this Lease.
18. TENANT'S FAILURE TO PERFORM
In the event that Tenant fails, after fifteen(15) days written notice from
Landlord, to keep the Premises in a good state of condition and repair, or to
commence and continuously make required repairs, or to do any act or make any
payment or perform any term or covenant on Tenant's part required under this
Lease, or otherwise fails to comply herewith, Landlord may, at its option, but
without being required to do so, immediately, or at any time thereafter and
without notice, perform the same for the account of Tenant (including entering
upon the leased Premises at all reasonable hours to make repair an do any act or
make any payment which Tenant has failed to do), and if Landlord makes any
expenditures or incurs any obligations for the payment of money in connection
therewith, including, but not limited to, attorney's fees in instituting,
prosecuting or defending any action or proceeding, such sums paid or obligations
incurred, with interest and costs, shall be deemed to be Additional Rent
hereunder and shall be paid by Tenant to Landlord within five (5) days of
rendition of any bill or statement to Tenant therefor. All rights given to
Landlord in this Section shall be in addition to any other right or remedy of
Landlord herein contained.
19. DEFAULT AND REMEDIES
A. Landlord. If the Rent and all other sums of money which may be
considered Additional Rent in whole or in part are not paid when due, Landlord
may distrain upon Tenant's goods located on the Premises. In the event, (1)
Tenant shall breach the covenant to pay Rent by Failing to pay Rent or all other
sums of money which may be considered Addition Rent when due; or (ii) the
Premises shall be serted or vacated or Tenant suspends its business; or (iii)
Tenant shall fail to comply with any term provision, condition or covenant of
this Lease other than as set forth in (i) above, or any of the Rules and
Regulations now or hereafter established for the government of the Premises,
Office Building and Office Building Area; or (iv) any petition or other
proceeding is filed by or against Tenant under the National Bankruptcy Act, as
amended, or any proceeding provided by the applicable laws of Maryland in the
nature of a bankruptcy or for the benefit of creditors; or (v) Tenant shall
become insolvent or make a transfer for the benefit of creditors; or (vi) Tenant
shall make as assignment for the benefit of creditors; or (vii) a receiver is
appointed for a substantial part of the assets of Tenant; or (viii) the
leasehold interest is levied on under execution or lien - then, in any of such
events, Landlord shall have the option to do any of the following in addition to
and not in limitation of any other remedy permitted by law or by this Lease:
(a) Terminate this Lease in which event Tenant shall immediately surrender
the Premises to Landlord; but if Tenant shall fail to do so, Landlord may,
without further notice and without prejudice to any other remedy Landlord may
have for possession or arrearages in Rent or damages for breach of contract,
enter upon the Premises and remove Tenant and his effects by force, if
necessary, without being liable to prosecution or any claim for damages, and
Tenant agrees to indemnify Landlord for all loss and damages which Landlord may
suffer by reason of such termination, whether through inability to relet the
Premises, or through decrease in Rent, or otherwise, including but not limited
to, all expenses, including reasonable attorney's fees of any proceedings,
expenses of re-renting , etc. In the event of such termination, Landlord may at
its option, declare the entire amount of the Rent, which would become due and
payable during the remainder of the Term, to be immediately due and payable, in
which event Tenant agrees to pay the same at once together with all Base Rents
and additional Rents to Landlord. Such payments shall not constitute a penalty
or forfeiture or liquidated damages, but shall merely constitute a payment in
advance of the Rent for the remainder of the Term. Upon making such payment,
Tenant shall be entitled to receive from Landlord all Rents received by Landlord
from other tenants on account of the Premises during the Term of this Lease;
provided, however, tact the monies to which the Tenant shall so become entitled
shall in no event exceed the entire amount payable by Tenant to Landlord as
Base Rent and Additional Rent.
(b) Enter the Premises as the agent of Tenant, by force if necessary,
without being liable to prosecution or any claim for damages and relet the
Premises as the agent of the Tenant and receive the Rent therefor, and the
Tenant shall pay to the Landlord on demand any deficiency that may arise by
reason of such reletting.
(c) Perfect and otherwise enforce a lien, which Tenant agrees that
Landlord shall have, on all personal property, fixtures and trade fixtures of
Tenant, presently existing or subsequently acquired, placed in the Office
Building by or for the benefit of Tenant, and may, without notice and without
liability to Tenant or other party, be sold by Landlord at public or private
sale with the proceeds being applied to the amount owed to Landlord and toward
damages from Tenant's breach of this Lease.
Pursuit of any of the foregoing remedies shall not preclude pursuit of any
of the other remedies provided by this Lease or by law. If Landlord shall incur
any expense, including covenants or term of this lease, the amounts so incurred
shall be payable to Landlord as Additional Rent by Tenant with the next due
installment of Base Rent.
B. Tenant. If the Landlord or any successor in interest shall be an
individual, joint venture, tenancy in common, firm, or partnership, general or
limited, there shall be no personal liability on such individual or on the
members of such joint venture, tenancy in common, firm, or partnership or on
such joint venture, tenant in common, firm, or partnership, in respect to any of
the covenants or conditions of this Lease or arising out of the occupancy by
Tenant of the Premises. The Tenant shall look solely to landlord's interest in
the Office Building and there shall be no other liability of Landlord to Tenant
for the satisfaction of the remedies of the Tenant in the event of a breach by
the Landlord of any of the covenants or conditions of this Lease.
20. PERSONAL PROPERTY OF TENANT
A. If Tenant shall not remove all its personal property from the Premises
at the termination of this Lease, Landlord may remove all or part of that
property in any manner Landlord chooses and may store the same without liability
to Tenant for its loss or damage. Tenant shall be liable to Landlord for all
expenses incurred in the removal and storage of Tenant's personal property.
B. The Tenant covenants and agrees that all furniture, fixtures and
property of every kind, nature and description which may be in or upon the
Premises or Office Building or Office Building Area during the term of this
Lease or any extension thereof shall be at the sole risk and hazard of the
Tenant and if the whole or any cause whatsoever no part of said damage or loss
shall be charged or borne by the Landlord except said loss occasioned by the
negligence of the Landlord.
21. FORCE MAJEURE
Landlord shall be excused for the period of any delay in the performance of
any obligation when the delay is, in Landlord's opinion, any cause or causes
beyond its control which include, but are not limited to, all labor disputes,
governmental regulations or controls, fire or other casualty, inability to
obtain any material, services or financing.
22. CONDEMNATION
If the Premises or any part shall be taken by eminent domain or by a
negotiated sale or settlement in lieu of a taking by eminent domain, this Lease
shall terminate on the date when title vests pursuant to such taking or sale and
the Base Rent and Additional Rent shall be apportioned as of that date. The
award or any payment made as a result of such taking or sale shall be the
property of Landlord, but Tenant shall be entitled to seek on its own behalf a
separate award for trade fixtures installed by Tenant at its own expense and
which are not part of the Premises and relocation.
23. APPLICABLE LAW
This Lease shall be construed according to the laws of the State of
Maryland.
24. CAPTIONS AND HEADINGS
The captions and headings throughout this Lease are for convenience and
reference only, and shall in no way affect the interpretation, construction or
meaning or any provision of this Lease.
25. RECORDING
Both Landlord and Tenant agree that upon the request of the other, they
will execute, acknowledge and deliver a short form of Lease (or Memorandum of
Lease) suitable for being recorded among the Land Records of Prince George's
County, Maryland, and that all costs of such recording, including all taxes,
fees and charges shall be paid by Tenant as Additional Rent.
26. JOINT AND SEVERAL LIABILITY
In the event that two (2) or more Parties shall sign this Lease as Tenant,
the liability of each such party to pay Rent and perform all other covenants of
this Lease shall be joint and several. In the event that the Tenant shall be a
partnership or other business association, the members of which are, by virtue
of statute or general law, subject to personal liability, the liability of each
such member shall be personal and joint and several.
27. NO DISCRIMINATION
Landlord requires the Office Building be operated in such a manner so that
all tenants, and their customers, employees, licensees and invitees shall have
an equal opportunity to obtain all the goods, services, accommodations,
advantages, facilities and privileges of the Office Building without
discrimination because of race, creed, color, sex, age, national origin or
ancestry. Tenant agrees not to discriminate in the conduct and operation of its
business in the Premises against any person or group of persons because of the
race, creed, color, sex, age, national origin or ancestry of such persons or
group of persons.
28. NO OPTION
The submission of this Lease to Tenant for execution does not constitute a
reservation of or option for the Premises, and this Lease becomes effective only
upon execution and delivery to Tenant by Landlord.
29. SEVERABILITY
If the application of any term or provision of this Lease, whether in whole
or in part, be held invalid or unenforceable, in general or in any instance, the
remainder of this Lease shall not be affected by such holding and it shall be
fully enforced.
30. INTEGRATION OF AGREEMENTS
This writing is intended by the Parties as a final expression of their
agreement and is a complete and exclusive statement of its terms, and all
negotiations, considerations and representations between the parties are
incorporated herein. No course of prior dealings between the Parties or their
affiliates shall be relevant or admissible to supplement, explain, or vary any
of the terms of this Lease. Acceptance of, or acquiescence to, a course of
performance rendered under this Lease or any prior agreement between the Parties
or their affiliates shall not be relevant or admissible to determine the meaning
of any of the terms or covenants of this Lease. Other than as specifically set
forth in the Lease, no representations, understanding, or agreements have been
made or relied upon in the making of this Lease. This Lease can only be
modified in writing and signed by each of the Parties or their agents.
31. THIRD PARTY BENEFICIARY
Nothing contained in this Lease shall be construed so as to confer upon any
other party the rights of a third party beneficiary, except as may be otherwise
specifically provided for herein.
32. NO WAIVER
The failure of Landlord to insist, in any one or more instances, upon a
strict performance of any of the covenants or to exercise any option contained
in this Lease shall not be construed as a waiver or a relinquishment for the
future of such covenant or option, and the same shall continue and remain in
full force and effect. The receipt by Landlord of Rent coupled with knowledge
of the breach of any covenant of this Lease shall not be a waiver of such
breach.
33. NOTICES
All notices, demands and requests required under this Lease shall be in
writing. All such notices, demands and requests shall be deemed to have been
properly given if sent by United States registered or certified mail, postage,
prepaid, addressed to the notice addresses set forth below:
TO TENANT: TO LANDLORD:
Washington Homes, Inc. Citadel Land, Inc.
1802 Brightseat Road 1802 Brightseat Road
Landover, MD 20785 Landover, MD 20785
Attn: President Attn: President
Either party may designate a change of address by written notice to the
other party. Notices, demands and requests which shall be served by registered
or certified mail in the manner aforesaid shall be deemed sufficiently served or
given for all purposes hereunder at the time such notice, demand or request
shall be mailed by United States registered mail or certified mail as aforesaid
in any Post Office or Branch Post Office regularly maintained by the United
States Government.
34. REAL ESTATE BROKER
Tenant warrants what no real estate broker or any other party has
participated in bringing about this Lease and agrees to hold harmless and
indemnify Landlord from all claims of others arising out of the negotiation or
entering into of this Lease.
35. EFFECTIVE DATE OF THIS LEASE
All terms, conditions, and covenants by Tenant contained in this Lease
shall be effective as of delivery of this Lease by Landlord to Tenant except the
covenant to pay Rent which shall be effective on the Rental Commencement Date.
36. VARIATION IN PRONOUNS
All pronouns and any variation thereof shall be deemed to refer to
masculine, feminine, neuter, singular or plural, as the identity of the person
or persons may require.
37. SUCCESSORS AND ASSIGNS
The covenants, conditions and agreements contained in the Lease shall bind
and inure to the benefit of Landlord and Tenant, and their respective heirs,
distributees, executors, administrators, successors and, except as otherwise
provided in this Lease, their assigns. Tenant's obligation to pay all sums
under this Lease shall survive the expiration or sooner termination of the Term.
38. PROPERTY SUBJECT TO DECLARATIONS
Notwithstanding any of the terms of this Lease, the Office Building and the
Office Building Area are subject to easements, restriction, plats, covenants,
declarations and agreements of record and nothing contained in this Lease shall
in any way contravene any of the conditions imposed on the Office Building and
Office Building Area by any of the foregoing documents.
39. LANDLORD'S LIABILITY
The term "Landlord" as used in the Lease means only the owner or the
mortgagee or trustee, as the case may be, in possession, for the time being of
the Office Building or Office Building Area (or the owner of a lease of the
Office Building or of the Office Building Area), so that in the event of any
transfer of title to or lease of said Office Building or Office Building Area,
the Landlord in possession immediately prior to such transfer or lease shall be
and hereby is entirely freed and relieved of all covenants and obligations of
Landlord hereunder thereafter accruing.
IN WITNESS WHEREOF, the Parties hereto have executed this Lease under their
respective seals as of the day and year first above written.
WITNESS: LANDLORD:
CITADEL LAND INC.
By:
TENANT:
WASHINGTON HOMES, INC.
By:
President
A:\whilease1stamend.wpd
EXHIBIT 10(b)
FIRST AMENDMENT TO OFFICE LEASE AGREEMENT
THIS FIRST AMENDMENT TO OFFICE LEASE AGREEMENT (the "First Amendment") is
made and entered into as of this 14th day of May, 1998, by and between CITADEL
LAND, INC., a Maryland corporation, hereinafter called the "Landlord", and
WASHINGTON HOMES, INC., hereinafter called the "Tenant".
WHEREAS, by OFFICE LEASE AGREEMENT dated January 1, 1997 (the "Agreement"),
Landlord and Tenant agreed upon the lease of office space in "Ingle West
Building I" located at 1802 Brightseat Road, Landover, Maryland, and set forth
the terms and conditions of said lease;
WHEREAS, Section 10(A) of the Agreement provides that the Tenant may
terminate the Agreement upon 30 days notice to Landlord if Landlord is a
corporation whose voting stock is not publicly traded or if a change of control
of the Landlord or of the office building occurs and that Landlord may terminate
the Agreement if Tenant is a corporation whose voting stock is not publicly
traded and if a change in the legal or beneficial ownership of the voting
corporate stock of Tenant results in a change of control of Tenant; and
WHEREAS, the parties have agreed to amend the Agreement as set forth below
to provide that the portion of Section 10(A) of the Agreement with respect to
the above be deleted.
NOW THEREFORE, for Ten Dollars ($10.00) and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
Landlord and Tenant hereby agree as follows:
1. The Agreement is hereby amended to replace the existing Section
10(A) with a revised Section 10(A) as follows:
1. Tenant will not assign this Lease, sublet the Premises or permit
the use of the Premises by any other party, directly or by operation
of law, without first obtaining Landlord's written consent, which
consent shall not be unreasonably withheld. Consent by Landlord to
any assignment, subletting or use shall not constitute a waiver of the
necessity for such consent to any subsequent assignment, subletting or
use. In no event shall such assignment or subletting release Tenant of
any of its obligations hereunder.
1. Other than the aforementioned amendment, all other provisions, terms,
and conditions of the Agreement remain unchanged.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of
the day and year first above written.
WITNESS: LANDLORD:
CITADEL LAND, INC.
By:
Geaton A. DeCesaris, Jr., President
WITNESS: TENANT:
WASHINGTON HOMES, INC.
By:
Geaton A. DeCesaris, Jr., President
C:\LEGAL\DOCS\whileasamend2.wpd
EXHIBIT 10(c)
SECOND AMENDMENT TO OFFICE LEASE AGREEMENT
THIS SECOND AMENDMENT TO OFFICE LEASE AGREEMENT (the "Second Amendment") is
made and entered into as of this 1st day of June, 1998, by and between CITADEL
LAND, INC., a Maryland corporation, hereinafter called the "Landlord", and
WASHINGTON HOMES, INC., hereinafter called the "Tenant".
WHEREAS, by OFFICE LEASE AGREEMENT dated January 1, 1997 (the "Agreement"),
Landlord and Tenant agreed upon the lease of office space in "Ingle West
Building I" located at 1802 Brightseat Road, Landover, Maryland, and set forth
the terms and conditions of said lease;
WHEREAS, Section 1(E) of the Agreement provides that the Rental
Commencement Date of the lease is January 1, 1998; and
WHEREAS, the parties have agreed to amend the Agreement as set forth below.
NOW THEREFORE, for Ten Dollars ($10.00) and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
Landlord and Tenant hereby agree as follows:
1. The Agreement is hereby amended to change the Rental Commencement
Date from January 1, 1998, as provided for in Section 1(E) of the
Agreement, to June 1, 1998.
2. Other than the aforementioned amendment, all other provisions,
terms, and conditions of the Agreement remain unchanged.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of
the day and year first above written.
WITNESS: LANDLORD:
CITADEL LAND, INC.
By:
Geaton A. DeCesaris, Jr., President
WITNESS: TENANT:
WASHINGTON HOMES, INC.
By:
Geaton A. DeCesaris, Jr., President
C:\MYFILES\98K\EX10K.DOC
EXHIBIT 10(k)
SECOND AMENDMENT TO WASHINGTON HOMES
EMPLOYEE STOCK OPTION PLAN
WASHINGTON HOMES, INC. (the "Company") hereby adopts this SECOND AMENDMENT
(the "Amendment") to the WASHINGTON HOMES EMPLOYEE STOCK OPTION PLAN (the
"Plan"), as of November 20, 1997, as set forth herein.
WHEREAS, the Company adopted the Plan effective as of September 17, 1992;
WHEREAS, the Company amended the Plan effective as of November 15, 1992, to
increase the maximum number of shares of the Company's Common Stock which may be
issued pursuant to option granted under the Plan, to 500,000 shares, subject to
adjustment upon changes in capitalization of the Company; and
WHEREAS, the Company wishes to again amend the Plan to increase the number
of shares of the Company's Common Stock, which may be issued pursuant to options
granted under the Plan from 500,000 to 1,000,000 shares, subject to adjustment
upon changes in capitalization of the Company; and
WHEREAS, the Board of Directors of the Company approved the Amendment to
the Plan at a meeting of the Board on July 18, 1997, subject to the approval of
the Shareholders; and
WHEREAS, the Company presented the Amendment to the Shareholders of the
Company at the 1997 Annual Meeting of the Shareholders at which Shareholders
have voted on and duly approved such Amendment.
NOW THEREFORE, the Company hereby amends the Plan as follows:
1. Section 3. of the Plan shall be replaced with the following Section 3.:
"Section 3. Number of Shares Available for Options. An aggregate
maximum of 1,000,000 Shares may be issued under Options
pursuant to the Plan, subject to adjustment upon changes in
capitalization pursuant to Section 9. Shares subject to
Options that have lapsed unexercised may again be offered
under Options, but Shares that have been issued under
Options and reacquired by the Company shall not again be
offered under Options."
2. All other terms, conditions, and provisions of the Plan shall remain
unchanged.
The signature block appears on the next page.
IN WITNESS WHEREOF, the President of the Company has executed this
Amendment as of the day and year first above written.
WASHINGTON HOMES, INC.
By:
Geaton A. DeCesaris, Jr., President
C:\MYFILES\98K\EXHIBIT 10O.DOC
FIRST AMENDMENT TO WASHINGTON HOMES
NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
WASHINGTON HOMES, INC. (the "Company") hereby adopts this FIRST AMENDMENT
(the "Amendment") to the WASHINGTON HOMES NON-EMPLOYEE DIRECTORS' STOCK OPTION
PLAN (the "Plan"), as of November 20, 1997, as set forth herein.
WHEREAS, the Company adopted the Plan effective as of September 15, 1994;
WHEREAS, the Company wishes to amend the Plan to increase the number of
shares of the Company's Common Stock, which may be issued pursuant to options
granted under the Plan from 30,000 to 100,000 shares; and
WHEREAS, the Board of Directors of the Company approved the Amendment to
the Plan at a meeting of the Board on October 10, 1997, subject to the approval
of the Shareholders; and
WHEREAS, the Company presented the Amendment to the Shareholders of the
Company at the 1997 Annual Meeting of the Shareholders at which Shareholders
have voted on and duly approved such Amendment.
NOW THEREFORE, the Company hereby amends the Plan as follows:
1. Section 5.1 of the Plan shall be replaced with the following Section
5.1:
"Section 5.1 Number of Shares Available. The Plan provides for the
issuance of an aggregate of 100,000 shares of Common Stock
(voting) of the Corporation, par value $0.01 per share,
which may be authorized but unissued shares, treasury
shares, or shares purchased on the open market."
2. All other terms, conditions, and provisions of the Plan shall remain
unchanged.
IN WITNESS WHEREOF, the President of the Company has executed this
Amendment as of the day and year first above written.
WASHINGTON HOMES, INC.
By:
Geaton A. DeCesaris, Jr., President
EXHIBIT 13
Washington Homes, Inc. Selected Financial Data
Years Ended July 31, In Thousands, Except Per Share Amounts and Number of Homes
<TABLE>
Statement of Operations 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Total revenues $240,703 $217,459 $175,025 $183,485 $143,240
Gross profit 42,539 37,551 33,829 36,428 29,761
Earnings (loss) before 11,801 (8,396) 11,240 13,520 10,006
interest, financing fees
and taxes
Total interest and 5,793 5,836 4,771 4,921 2,874
financing fees expense
Net earnings (loss) * 3,788 (13,289) 3,747 5,045 4,426
Earnings (loss) per common 0.48 (1.67) 0.47 0.64 0.56
share *
Dividends per common share - - - 0.05 0.20
Selected Operating Data
Number of homes delivered 1,479 1,315 1,087 1,167 991
Number of net new orders 1,709 1,305 1,127 1,124 1,024
Number of homes in backlog 821 591 601 561 604
at end of period
Balance Sheet Data
Cash $10,321 $10,313 $15,384 $15,111 $20,076
Residential inventories 113,198 111,520 125,033 119,652 118,379
Total assets 145,972 142,842 170,227 164,063 166,025
Notes and loans payable 58,255 65,569 74,282 72,608 76,832
Shareholders' equity 58,270 54,480 67,769 64,022 59,374
</TABLE>
1997 included an after-tax, non-cash charge of $15.8 million for the
impairment of long-lived assets. For further discussion of the non-cash charge,
see "Management's Discussion and Analysis of Financial Condition and Results of
Operations and the accompanying consolidated financial statements.
Bar Charts
Total Revenues Total Debt Shareholders Equity
In Millions of Dollars In Millions of Dollars In Millions of Dollars
1998 241 1998 58.2 1998 58.3
1997 217 1997 65.6 1997 54.5
1996 175 1996 74.3 1996 67.8
1995 183 1995 72.6 1995 64.0
1994 143 1994 76.8 1994 59.4
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Results of Operations
The following table presents certain information regarding
the Company's operations for the last three fiscal years
(dollars in thousands):
1998 1997 1996
Revenues:
Homebuilding $233,111 $206,576 $167,821
Land 4,483 7,958 5,145
Other 3,109 2,925 2,059
Total $240,703 $217,459 $175,025
Homes delivered 1,479 1,315 1,087
Net new orders 1,709 1,305 1,127
Homes in backlog
at end of period 821 591 601
Sales value of backlog $141,619 $96,343 $97,625
Annual Operating Cycle
The homebuilding industry in general, and the operations of the Company, are
seasonal in nature. The number of new sales contracts signed escalates from
January through April, compared to the balance of the year. Deliveries peak in
the fiscal quarter ended July 31, as a substantial portion of homes contracted
during the fiscal quarter ended April 30 are delivered. Delivery volume is
relatively constant during the remainder of the year. As a result of increased
deliveries and reduced selling, general and administrative costs as a percent of
revenues, net earnings are substantially greater in the fourth quarter, compared
to the prior three quarters.
The following tables contain quarterly operating information for the Company's
last two fiscal years and illustrates the annual operating cycle (dollars in
thousands except per share amounts):
Three Months Ended
October 31, January 31, April 30, July 31,
1997 1998 1998 1998
Number of homes delivered 265 290 340 584
Net new orders 289 382 640 398
Total revenues $42,806 $48,035 $54,444 $95,418
Gross profit
from homebuilding $ 7,761 $ 8,010 $ 9,244 $16,715
Net earnings $ 736 $ 64 $ 564 $ 2,426
Basic earnings per
share, based on
7,942,763 shares $ 0.09 $ 0.01 $ 0.07 $ 0.31
Three Months Ended
October 31, January 31, April 30, July 31,
1996 1997 1997* 1997
Number of homes delivered 281 298 258 478
Net new orders 327 312 438 228
Total revenues $46,662 $48,681 $ 42,801 $79,315
Gross profit
from homebuilding $ 8,067 $ 8,308 $ 6,966 $13,537
Net earnings (loss) $ 931 $ 655 $(16,834) $ 1,959
Basic earnings (loss)
per share, based on
7,942,763 shares $ 0.12 $ 0.08 $ (2.12) $ 0.25
*The quarter ended April 30, 1997 includes an after-tax, non-cash charge of
$15.8 million for the write-down of goodwill and certain land inventory and
an extraordinary loss of $390,000.
Product Mix
Since the spring of 1994, the Company has expanded into markets in North
Carolina and Tennessee. This expansion is in part responsible for a shift in the
Company's product mix to more detached homes. The following table sets forth a
breakdown of the Company's deliveries by housing type in each of the last three
fiscal years:
1998 1997 1996
Detached 990 890 668
Attached 489 425 419
Total 1,479 1,315 1,087
Geographic Concentration
During the last three fiscal years the Company has built moderately priced,
quality homes in the metropolitan areas of Washington, DC-Baltimore, Maryland,
Raleigh and Greensboro, North Carolina and Pittsburgh, Pennsylvania. In fiscal
1996, the Company commenced operations in the Charlotte, North Carolina and
Nashville, Tennessee markets and began expansion in Pittsburgh. The following
tables describe the Company's operations in each of its markets during the last
three fiscal years:
Net New Orders
1998 1997 1996
Maryland 481 483 376
Virginia 357 247 288
North Carolina 703 454 409
Pittsburgh 55 55 33
Nashville 113 66 21
Total Net New Orders 1,709 1,305 1,127
Homes Delivered
1998 1997 1996
Maryland 469 482 458
Virginia 319 293 219
North Carolina 560 420 382
Pittsburgh 44 53 24
Nashville 87 67 4
Total Deliveries 1,479 1,315 1,087
Backlog of Homes Under Contract
1998 1997 1996
Maryland 240 228 227
Virginia 176 138 184
North Carolina 328 185 151
Pittsburgh 35 24 22
Nashville 42 16 17
Total Backlog 821 591 601
Active Communities
1998 1997 1996
Maryland 19 15 21
Virginia 13 15 12
North Carolina 29 23 18
Pittsburgh 5 5 3
Nashville 6 4 5
Total Active Communities 72 62 59
Year Ended July 31, 1998 Compared
To Year Ended July 31, 1997
Total revenues increased by 10.7% to $240.7 million in fiscal 1998 from $217.5
million in fiscal 1997, as the number of homes delivered increased by 12.5% to
1,479 units from 1,315 units. The average sales price of homes delivered in
fiscal 1998 increased slightly to $157,600 from $157,100. Deliveries increased
in North Carolina by 33.3% and in Nashville by 29.9% as the Company allocated
more capital to these markets as evidenced by the increase in active
communities. Deliveries in Pittsburgh decreased due to developer delays in two
new communities.
The gross profit margin as a percentage of homebuilding revenues remained flat
at 17.9%. Margins have increased in North Carolina as a result of cost reduction
initiatives. However, this was offset by the lower margins in Maryland due to
the Company's strategy to increase inventory turnover.
Total selling, general, and administrative expenses increased to $33.2 million
in fiscal 1998 from $29.1 million in the prior year due to increased volume, an
increase in the number of active communities, and the growth of the Company's
mortgage subsidiary. Selling, general, and administrative expenses as a
percentage of homebuilding revenues increased slightly to 14.2% in fiscal 1998
from 14.1% in fiscal 1997.
Interest and financing expenses remained constant at $5.8 million, however
interest and financing expenses as a percentage of homebuilding revenues
decreased to 2.5% from 2.8% in fiscal 1997 due to improved inventory turnover
and better terms on the revolving credit facility which was put in place at the
beginning of fiscal year 1998.
Land sales decreased from $8.0 million in fiscal 1997 to $4.5 million in fiscal
1998. Fiscal 1997 was impacted by one significant land transaction.
Net earnings increased to $3.8 million in fiscal 1998 from a net loss of $13.3
million in fiscal 1997. The increase in deliveries which resulted in the
increased revenues was a major factor in the Company's improved earnings
performance. In fiscal 1997 the Company incurred an after-tax, non-cash charge
of $15.8 million for the write-down of goodwill and certain land inventory in
suburban Maryland, and an extraordinary loss of $390,000 from an IRS settlement
relating to the extraordinary gain on debt forgiveness associated with the
exchange of subordinated debt during the 1992 tax year.
Year Ended July 31, 1997 Compared
To Year Ended July 31, 1996
Total revenues increased by 24.3% to $217.5 million in fiscal 1997 from $175.0
million in fiscal 1996, as the number of homes delivered increased by 21.0% to
1,315 units from 1,087 units. The average sales price of homes delivered in
fiscal 1997 increased to $157,100 from $154,400. Deliveries in the existing
North Carolina markets declined by 5.3%, but were offset by growth in the
expansion markets and a 14.5% increase in the Washington market.
The gross profit margin as a percentage of homebuilding revenues decreased to
17.9% in fiscal 1997 from 20.0% largely due to the competitive Washington
market, the Company's strategy to increase inventory turnover, lower margins on
initial closings in our expansion markets, and reduced margins in the Company's
existing North Carolina markets.
Total selling, general and administrative expenses increased to $29.1 million in
fiscal 1997 from $23.9 million in the prior year due to increased volume,
expanded number of division operations, and the growth of the Company's mortgage
subsidiary. However, selling, general and administrative expenses as a
percentage of homebuilding revenues decreased to 14.1% in fiscal 1997 from 14.2%
in fiscal 1996.
Interest and financing expenses increased to $5.8 million in fiscal 1997 from
$4.8 million but remained constant at 2.8% as a percentage of homebuilding
revenues.
Gross profit from land sales increased in 1997 to $673,000 from $282,000 in
fiscal 1996.
During fiscal 1997, the Company recorded an after-tax, non-cash charge of $15.8
million for the write-down of goodwill and certain land inventory in suburban
Maryland, and an extraordinary loss of $390,000. As a result, the Company
reported a net loss of $13.3 million or $1.67 per share for the year.
Capital Resources and Liquidity
Funding for the Company's residential building and land development activities
is provided principally by cash flows from homebuilding operations and borrowing
from banks and other financial institutions. The Company's capital needs depend
upon its sales volume, asset turnover, land purchases and inventory levels.
At July 31, 1998, the Company had cash and cash equivalents of $10.3 million, of
which $238,000 was restricted to collateralize deposits and escrows. The
remaining $10.1 million was available to the Company.
In April 1994, the Company issued $43,000,000 principal amount of Senior Notes
due October 2000. Two series of Senior Notes were issued: $30.0 million with a
fixed rate of 8.61% per annum and $13.0 million with a floating rate of LIBOR
plus 2.4%. The notes are to be repaid in three equal annual principal
installments commencing in October 1998.
In July 1997, the Company obtained a $70 million revolving credit facility
replacing two credit facilities totaling $49 million. The facility provides
funding for land acquisition and home construction, letters of credit, and the
initial principal payment on the Senior Notes. At July 31, 1998, $12.2 million
was outstanding under this facility. Borrowings under the facility bear interest
at LIBOR plus 1.55% or 1.75%, depending on the type of collateral and are
secured by the related inventory.
In addition to the Senior Notes and revolving credit facility, the Company has
loans with various lenders providing $3.0 million for land acquisition,
development and home construction. These loans bear interest at fixed rates
ranging from 8% to 10% or variable rates ranging from prime to prime plus 1%
with maturities ranging from the date of lot recordation through December 1999.
At July 31, 1998, the Company in the aggregate had $101.1 million in borrowing
availability of which $39.2 million was available. During fiscal 1998, the
Company's average interest rate was 8.0%, an improvement of 0.2% when compared
to its average interest rate during fiscal 1997 of 8.2%.
The Company participates in two joint ventures formed to develop residential
land into finished building lots for sale to the Company and other homebuilders
utilizing non-recourse acquisition and development loans.
The Company believes that it will be able to fund its activities for the
foreseeable future through a combination of operating cash flow, existing cash
balances and existing facilities. Except for ordinary expenditures for the
construction of homes and acquisition and development of land, the Company does
not have any material commitments for capital expenditures at the present time.
Year 2000 Issue
The Year 2000 (Y2K) problem is the result of computer programs being written
using two digits rather than four to define the applicable year. Thus the year
1998 is represented by the number "98"in many legacy software applications.
Consequently, on January 1, 2000, the year will jump back to "00" in accordance
with many non-Y2K compliant applications. To systems that are non-Y2K compliant,
the time will seem to have reverted back 100 years. So, when computing basic
lengths of time, computer programs, certain building infrastructure components
(including elevators, alarm systems, telephone networks, sprinkler systems,
security access systems and certain HVAC systems) and any additional time-
sensitive software that are non-Y2K compliant may recognize a date using the
"00" as the Year 1900. This could result in system failures or miscalculations
which could cause personal injury, property damage, disruption of operations,
and/or delays in payment from the Company's customers all of which could
materially adversely effect the Company's business, financial condition, or
results of operations.
The Company has completed an assessment of its computer systems, to identify
computer hardware, software, and process control systems, that are not Y2K
compliant. The Company presently believes that its business-critical computer
systems which are not presently Y2K-compliant will be replaced, upgraded or
modified prior to 2000.
The costs of the Company's Y2K compliance efforts are being funded with cash
flows from operations. In total, these costs are not expected to have a material
adverse effect on the Company's overall results of operations or cash flows.
The foregoing assessment of the impact of the Y2K problem on the Company is
based on management's best estimate at the present time, and could change
substantially. The assessment is based upon numerous assumptions as to future
events. There can be no guarantee that these estimates will prove accurate, and
actual results could differ from those estimated if these assumptions prove
inaccurate.
Quantitative and Qualitative Disclosures About Market Risk
The table below provides information about the Company's financial instruments
that are sensitive to changes in interest rates, in particular, debt obligations
and an interest rate swap. The Company does not trade in these instruments or
derivatives. The table represents principal cash flows and related weighted
average interest rates by expected maturity dates. (See chart below)
Forward Looking Statements
Certain statements in the Company's Form 10-K, this Annual Report to
Shareholders, as well as statements made by the Company in periodic press
releases, oral statements made by the Company's officials to analysts and
shareholders in the course of presentations about the Company and conference
calls following the quarterly earnings releases, may be construed as Forward-
Looking Statements as defined in the Private Securities Litigation Reform Act of
1995 (the Reform Act). Such statements may involve unstated risks, uncertainties
and other factors that may cause actual results to differ materially. Such
risks, uncertainties and other factors include, but are not limited to, changes
in general economic conditions; fluctuations in interest rates; increases in
costs and materials, supplies and labor; and general competitive conditions.
Financial Instruments by Expected Maturity Date
(In thousands) 1999 2000 2001 2002 Total Fair Value
Notes payable
Fixed rate $) 10,000 10,000 10,000 0 30,000 31,500
Average interest rate 8.61% 8.61% 8.61% 0
Variable rate ($) 18,300 4,333 4,333 0 26,966 26,966
Average interest rate 7.55% 7.96% 7.96% 0
Interest rate swap
Variable to fixed ($) 15,000 15,000 15,000 15,000
Average pay rate 5.66% 5.66% 5.66% 0%
Average receive rate 5.67% 5.67% 5.67% 5.67%
Notes payable are shown by expected maturity dates and the interest rate swap by
its notational amount outstanding.
Consolidated Balance Sheets
July 31,
(dollars in thousands) 1998 1997
Assets
Cash and cash equivalents $ 10,321 $ 10,313
Residential inventories 113,198 111,520
Excess of cost over net assets acquired, net 6,015 6,216
Investment in joint ventures 2,848 3,058
Other 13,590 11,735
Total Assets $145,972 $142,842
Liabilities and Shareholders' Equity
Liabilities
Notes and loans payable 58,255 $ 65,569
Trade accounts payable 21,647 16,231
Income taxes payable 1,179 137
Deferred income taxes 2,038 1,919
Other 4,583 4,506
Total liabilities 87,702 88,362
Commitments and Contingent Liabilities
Shareholders' equity:
Common stock $.01 par value; 15,000,000
shares authorized; 7,914,433 and 7,015,025
shares issued and outstanding, 79 70
Non-voting common stock $.01 par value;
1,100,000 shares authorized; 28,330 and
927,738 shares issued and outstanding, 0 9
Additional paid-in capital 35,147 35,147
Retained earnings 23,044 19,254
Total shareholders' equity 58,270 54,480
Total Liabilities and Shareholders' Equity $145,972 $142,842
See Accompanying Notes to Consolidated Financial Statements.
Consolidated Statements of Operations
Year Ended July 31,
(In thousands except per share amounts) 1998 1997 1996
Revenues:
Homebuilding $233,111 $206,576 $167,821
Land sales 4,483 7,958 5,145
Other income 3,109 2,925 2,059
Total revenues 240,703 217,459 175,025
Expenses:
Cost of sales-homebuilding 191,381 169,698 134,274
Cost of sales-land sales 3,674 7,285 4,863
Cost of sales-impairment loss 0 9,200 0
Selling, general, and administrative 33,206 29,078 23,885
Interest expense 5,172 5,059 3,975
Financing fees 621 777 796
Write-down in carrying value of goodwill 0 9,981 0
Amortization and depreciation 641 616 763
Total expenses 234,695 231,694 168,556
Earnings (loss) Before Income Taxes
and Extraordinary Item 6,008 (14,235) 6,469
Income tax expense (benefit) 2,218 (1,336) 2,722
Earnings (loss) Before Extraordinary Item 3,790 (12,899) 3,747
Extraordinary item 0 (390) 0
Net Earnings (loss) $ 3,790 $ (13,289) $ 3,747
Basic and Diluted Earnings (loss) Per Share:
Earnings (loss) Before Extraordinary Item $ 0.48 $ (1.62) $
0.47
Extraordinary Item 0 (0.05) 0
Basic and Diluted Earnings (loss) Per Share $ 0.48 $ (1.67) $ 0.47
See Accompanying Notes to Consolidated Financial Statements.
Consolidated Statements of Shareholders' Equity
Years Ended July 31, 1998, 1997 and 1996 (in thousands)
Common Stock Additional Total
Paid-in Retained Shareholders'
Shares Voting Non-voting Capital Earnings Equity
Balance,
August 1, 1995 7,943 $70 $9 $35,147 $28,796 $64,022
Net earnings 0 0 0 0 3,747 3,747
Balance,
July 31, 1996 7,943 70 9 35,147 32,543 67,769
Net earnings
(loss) 0 0 0 0 (13,289) (13,289)
Balance,
July 31, 1997 7,943 70 9 35,147 19,254 54,480
Conversion of
non-voting to
voting 0 9 (9) 0 0 0
Net earnings 0 0 0 0 3,790 3,790
Balance,
July 31, 1998 7,943 $79 $0 $35,147 $23,044 $58,270
See Accompanying Notes to Consolidated Financial Statements.
Consolidated Statements of Cash Flows
Year Ended July 31,
(in thousands) 1998 1997 1996
Cash Flows From Operating Activities:
Net earnings (loss) $ 3,790 $(13,289) $ 3,747
Adjustments to reconcile net earnings
(loss) to net cash provided by (used in)
operating activities:
Amortization and depreciation 641 616 763
Deferred income taxes 119 (3,314) 22
Write-down of goodwill 0 9,981 0
Impairment loss 0 9,200 0
Changes in assets and liabilities:
Residential inventories (1,678) 4,313 (5,382)
Other assets (1,995) (1,421) (535)
Trade accounts payable 5,416 (1,341) 638
Income taxes payable 1,042 (271) (298)
Other liabilities 77 (457) 381
Net cash provided by (used in)
operating activities 7,412 4,017 (664)
Cash Flows From Investing Activities:
Purchases of property and equipment,
net of disposals (90) (68) (262)
Investment in joint ventures 0 (307) (475)
Net cash used in investing activities (90) (375) (737)
Cash Flows From Financing Activities:
Proceeds from notes and loans payable 112,527 120,442 103,917
Repayments of notes and loans payable (119,841) (129,155) (102,243)
Net cash provided by (used in)
financing activities (7,314) (8,713) 1,674
Net Increase (Decrease) In Cash And
Cash Equivalents 8 (5,071) 273
Cash And Cash Equivalents, Beginning Of Year 10,313 15,384 15,111
Cash And Cash Equivalents, End Of Year $10,321 10,313 $15,384
See Accompanying Notes to Consolidated Financial Statements.
Notes to Consolidated Financial Statements
Years Ended July 31, 1998, 1997 and 1996
1. Summary of Significant Accounting Policies
Organization
The Company is principally engaged in the business of the construction and sale
of moderately priced, quality residential housing in the states of Maryland,
North Carolina, Virginia, Pennsylvania, and Tennessee. Generally, construction
is not commenced until the Company has entered into a sales contract with a
customer. Homes are built on land that has been developed by the Company and
others.
Basis of Presentation
The consolidated financial statements include the accounts of Washington Homes,
Inc. and its wholly-owned subsidiaries (collectively, the "Company"). All
significant intercompany balances and transactions have been eliminated in
consolidation. The Company's investment in joint ventures is accounted for using
the equity method.
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 amounts reported in the consolidated financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash and Cash Equivalents
For purposes of the Statements of Cash Flows, the Company considers its cash,
including temporary investments with original maturities of three months or
less, to be cash equivalents. Included in these amounts at July 31, 1998 and
1997 were $238,000 and $118,000, respectively, that are restricted to
collateralize certain obligations of the Company.
Excess of Cost Over Net Assets Acquired, Net
Excess of cost over net assets acquired (goodwill) represents the excess of
purchase price over the fair value of assets acquired less any write down to
fair value and is being amortized over a 40-year period. The Company annually
reviews its goodwill recoverability by assessing historical profitability and
expectations as to future nondiscounted cash flows and net income. Based upon an
analysis of the market potential associated with the goodwill in fiscal 1997,
the Company wrote down to fair value the carrying value of goodwill by
approximately $10.0 million. Based upon its most recent analysis, the Company
believes that no material impairment of goodwill exists at July 31, 1998.
Warranties
The Company records an accrual at the date of closing for future warranty costs
based upon the relationship of historical homebuilding revenues to actual
warranty costs.
Income Taxes
The Company accounts for income taxes in accordance with the provisions of
Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes. Deferred income taxes are provided for temporary differences in the
recognition of certain income and expenses for financial and tax reporting
purposes.
Revenue Recognition
Homebuilding revenues and land sales are recorded at the date of closing with
the purchaser.
Earnings (loss) Per Common Share
Basic and diluted earnings (loss) per common share are computed based on the
weighted average number of common shares outstanding during each period. The
weighted average number of common shares outstanding was 7,943,000 for the years
ended July 31, 1998, 1997 and 1996. Common stock equivalents for stock options
have not been included in calculating diluted earnings per share because the
dilutive effect is not significant.
Financial Instruments
The Company utilizes an interest rate swap agreement to reduce its exposure
resulting from fluctuations in interest rates. The interest rate swap is matched
as a hedge against the Company's variable rate debt. Gains and losses related to
this hedge are deferred and included in the measurement of the related
transaction, when the hedge transaction occurs.
Stock-Based Compensation
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation", requires expanded disclosures of stock-based
compensation arrangements with employees. The Company has chosen to continue to
account for employee stock-based compensation using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees", and related Interpretations. Accordingly, compensation
costs for stock options is measured as the excess, if any, of the quoted market
price of the Company's stock at the date of the grant over the amount the
employee must pay to acquire the stock (see Note 5).
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS No.'s 130 and
131, "Reporting Comprehensive Income" and "Disclosures about Segments of an
Enterprise and Related Information", in February 1998 issued SFAS No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits - an
amendment of SFAS No.'s 87, 88, and 106", and in June 1998, they issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities". SFAS No.
130 establishes standards for reporting and display of comprehensive income and
its components in a full set of general purpose financial statements. SFAS No.
131 establishes standards for the way public business enterprises report
information about operating segments and the related disclosures about products
and services, geographic areas and major customers. SFAS No. 132 revises
employers' disclosure about pension and other postretirement benefit plans. SFAS
133 establishes accounting and reporting standards for derivative instruments,
and for hedging activities. The Company does not believe that the adoption of
SFAS No.'s 130, 131, 132 and 133 will have a significant effect on the Company's
financial statement presentation or disclosures, or on its earnings and
financial position. SFAS No.'s 130, 131 and 132 are effective for financial
statements for fiscal years beginning after December 15, 1997, and SFAS No. 133
is effective for fiscal years beginning after June 15, 1999.
2. Residential Inventories
Homes in process are stated at cost (determined by accumulating actual costs,
including construction, interest and related direct overhead costs), which is
not in excess of market. Finished building lots represents the cost, which is
not in excess of market, of finished lots developed by the Company or acquired
from other developers. Upon delivery, the costs of the homes and related lots
are expensed on a specific identification basis. Land under development consists
of land being developed into finished building lots. Certain costs, including
interest, are capitalized as incurred during the development process. The
Company's inventory consists of the following:
(in thousands) July 31, 1998 July 31, 1997
Homes in process $ 44,942 $ 41,389
Finished lots 45,444 40,560
Land under development 22,812 29,571
$113,198 $111,520
In fiscal 1997, the Company adopted FASB Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," which, among other things, requires impairment losses to be recorded on
long-lived assets that are expected to be disposed of when indicators of
impairment are present and the undiscounted cash flows estimated to be generated
by those assets are less than the assets' carrying amount. Based on a review of
long-lived assets during the third quarter of fiscal 1997, the Company wrote
down to fair value, determined based on the present value of expected future
cash flows, the carrying value of certain land inventory by $9.2 million.
A significant portion of the land inventory write-down was attributable to two
long term development projects in suburban Maryland. The remainder of the
writedown related to six close-out and three condominium communities. Based upon
the Company's most recent analysis, no impairment exists at July 31, 1998.
3. Investment in Joint Ventures
The Company participates in two joint ventures formed to develop residential
land into finished building lots for sale to the Company and other homebuilders
utilizing non-recourse acquisition and development loans. The Company's interest
in the joint ventures' operating results has not been significant to date.
4. Notes and Loans Payable
Notes and loans payable consist of the following:
(in thousands) July 31, 1998 July 31, 1997
Senior notes $43,000 $43,000
Revolving credit facility 12,197 19,455
Land acquisition and development 2,979 3,034
Mortgages and other notes payable 79 80
$58,255 $65,569
Senior Notes
In April 1994, the Company issued $43,000,000 principal amount of unsecured
Senior Notes due October 2000. Two series of Senior Notes were issued:
$30,000,000 with a fixed rate of 8.61% per annum, with interest payable semi-
annually beginning in October 1994 and $13,000,000 with a floating rate of LIBOR
plus 2.4%, (7.96% at July 31, 1998), with interest payable July 1994 and either
quarterly or semi-annually thereafter at the option of the Company. Beginning
April 1998 interest became payable on a quarterly basis for both series of
Senior Notes. Principal repayments are due in three equal annual installments
commencing October 1998 and continuing to October 2000.
Revolving Credit Facility
At July 31, 1998, the Company had a $70 million facility to fund land
acquisition and home construction, letters of credit, and the initial payment of
the senior notes.
The facility has a maturity date (which may be extended) of October 31, 1999.
Borrowings under the facility bear interest at thirty-day LIBOR (5.66% at July
31, 1998) plus either 1.55% or 1.75% depending upon the type of collateral and
are secured by the related inventory.
The senior notes and revolving credit facility require the Company to meet net
worth, leverage and cash flow coverage tests and place limitations on dividends,
the securing of additional loans, investments, and finished lot purchases. These
provisions do not significantly restrict the Company's operations.
Land Acquisition and Development Loans
The Company has loans with various lenders for the acquisition and development
of land amounting to $2,979,000 and $3,034,000 at July 31, 1998 and 1997,
respectively. These loans bear interest at fixed rates ranging from 8% to 10% or
variable rates of prime to prime plus 1% and are collateralized by the related
inventory.
Mortgages and Other Notes Payable
Mortgages and other notes payable, amounting to approximately $79,000 and
$80,000 at July 31, 1998 and 1997 respectively, bear interest at rates ranging
from 4.9% to 10% and mature in varying periods of up to 3 years.
Aggregate maturities of notes and loans payable are as follows:
For the year ending July 31 (in thousands)
1999 $15,604
2000 28,309
2001 14,342
$58,255
In January 1998, the Company entered into an interest rate swap agreement to
manage interest rate exposure on the Company's variable rate debt. Amounts to be
paid or received under the swap agreement are accrued as interest rates change
and are recognized over the life of the swap agreement as an adjustment to
interest expense. The fair value of the swap agreement was not recognized in the
consolidated financial statements, since it is accounted for as a hedge. This
swap agreement expires in January 2002 and effectively converts $15 million of
variable LIBOR based borrowings to a fixed LIBOR of 5.67% at July 31, 1998.
The carrying amounts reported above for $13,000,000 of the senior notes, the
revolving credit facilities and the land acquisition and development loans
approximate their fair value based upon the indebtedness having, for the most
part, short-term maturities and variable interest rates. The fair value of the
remaining $30,000,000 of senior notes is estimated to be $31,500,000 based upon
debt with interest rates currently available and similar terms and remaining
maturities. At July 31, 1998 the pay and receive rates are approximately equal.
Accordingly no value is assigned to the swap agreement.
Capitalized Interest
A summary of capitalized interest follows:
Year Ended July 31
(In thousands) 1998 1997 1996
Interest capitalized $ 992 $1,454 $2,728
Interest expense 5,172 5,059 3,975
Interest incurred 6,164 6,513 6,703
Interest paid 6,705 6,886 6,643
Interest in cost of sales 1,960 2,108 1,561
5. Shareholders' Equity
Common Stock
The Company has 7,942,763 shares of Common Stock outstanding at July 31, 1998,
of which 7,914,433 shares are voting and 28,330 shares are non-voting. Non-
voting shares are convertible to voting on a share by share basis.
Stock Options
The Company has adopted two plans for the issuance of stock options to its
employees and non-employee members of its Board of Directors.
On September 17, 1992, the Company adopted the Washington Homes Stock Option
Plan (the Employee Option Plan) pursuant to which options for up to 500,000
shares of Common Stock can be granted to officers and other key employees of the
Company. In July 1997, the Board of Directors voted to increase the number of
shares for which options could be granted to 1,000,000. The amendment to the
plan was subsequently approved by the shareholders in November 1997. Options
granted under the Employee Option Plan can be either incentive stock options
(Incentive Stock Options) or non-qualified options (Non-Qualified Options) as
determined by a committee of the independent directors of the Board of
Directors. Options granted under the Employee Option Plan will have an exercise
price not less than fair market value at date of grant.
Options will become exercisable, in part, after 12 months from the date of grant
and will generally remain exercisable for ten years from the date of grant.
Certain options are not excercisable until fiscal 2000.
On September 15, 1994 the Company adopted the Washington Homes Non-Employee
Directors' Stock Option Plan (the Directors Option Plan) pursuant to which
options for up to 30,000 shares of Common Stock can be granted to directors who
are not employees of the Company or its subsidiaries. In November 1997, the
shareholders approved an amendment to increase the number of shares available
for options to 100,000. Options that are Non-Qualified Options, generally become
exercisable in part after 12 months from date of grant and generally remain
exercisable for ten years from the date of grant.
In September, 1996, options for 47,000 shares at $9.00 were exchanged for 47,000
shares at $3.69.
Option activity under the Company's plans is summarized below:
Employees Directors
Weighted Weighted
Number Average Number Average
of Shares Price of Shares Price
Outstanding - July 31, 1995 177,000 6.43 6,000 3.63
Granted 173,000 4.96 6,000 6.00
Canceled 18,000 6.48 2,000 3.63
Exercised 0 0 0 0
Outstanding - July 31, 1996 332,000 5.66 10,000 5.05
Granted 189,000 4.09 9,000 3.69
Canceled 89,000 4.43 0 0
Exercised 0 0 0 0
Outstanding - July 31, 1997 432,000 5.23 19,000 4.41
Granted 592,000 4.46 40,000 4.00
Canceled 43,000 4.76 0 0
Exercised 0 0 0 0
Outstanding - July 31, 1998 981,000 4.79 59,000 4.13
Exercisable at July 31, 1998 201,250 4.93 9,250 4.41
At July 31, 1998, there were 60,000 shares reserved for future grants.
The following summarizes information about the Company's stock options
outstanding at July 31, 1998.
Options Outstanding Options Exercisable
Weighted Average
Weighted
Number Remaining Exercise Number Average
Exercise Price Range Outstanding Term in Years Price Exercisable Exercise
Price
$ 3.63 - $ 4.00 300,000 9.15 3.90 29,250 3.70
4.06 - 4.69 295,000 8.97 4.45 19,000 4.30
4.75 - 4.75 203,000 9.68 4.75 2,500 4.75
4.88 - 6.00 242,000 6.60 5.14 159,750 5.20
$ 3.63 - $ 6.00 1,040,000 8.61 4.51 210,500 4.91
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation," issued in October 1995. In accordance
with the provisions of SFAS No. 123, the Company applies APB Opinion 25 and
related interpretations in accounting for its stock option plan and,
accordingly, does not recognize compensation cost based on the fair value of the
options granted at grant date as prescribed by SFAS No. 123. Had compensation
been recorded consistent with SFAS No. 123, net earnings and earnings per share
would have been reduced to the pro forma amounts indicated in the table below
(in thousands except per share amounts):
Year Ended July 31,
1998 1997 1996
Net earnings (loss) - as reported $3,790 $(13,289) $3,747
Net earnings (loss) - pro forma 3,621 (13,314) 3,717
Earnings (loss) per share - as reported 0.48 (1.67) 0.47
Earnings (loss) per share - pro forma 0.46 (1.68) 0.47
The fair value of each option is estimated on the date of grant using the Black-
Scholes option pricing model with the following assumptions:
Year Ended July 31,
1998 1997 1996
Expected dividend yield 0 0 0
Expected stock price volatility 46% 27% 37%
Risk-free interest rate 5.2% 6.2% 6.8%
Expected life of options 8 9 9
The weighted average fair value of options granted during 1998, 1997 and 1996
were $2.62, $1.96 and $2.92 per option, respectively.
6. Income Taxes
As discussed in Note 1, the Company follows the provisions of SFAS 109. The
provision (benefit) for income taxes includes the following:
Year Ended July 31,
(In thousands) 1998 1997 1996
Current:
Federal $1,982 $ 1,619 $2,210
State 117 359 490
2,099 1,978 2,700
Deferred:
Federal 112 (2,713) 18
State 7 (601) 4
119 (3,314) 22
Total Provision (Benefit) $2,218 $(1,336) $2,722
The difference between the effective tax rate and the expected statutory tax
rate computed on earnings before taxes is attributable to the following:
Year Ended July 31,
1998 1997 1996
Taxes computed at statutory rate 34.0% (34.0)% 34.0%
Increases (decreases):
State income taxes 1.4 (1.7) 5.3
Excess cost over net assets acquired 1.1 24.7 2.7
Other .4 1.6 .1
Effective tax rate 36.9% (9.4)% 42.1%
The deferred income tax at July 31, 1998 and 1997 represents the tax effect of
temporary differences as follows:
July 31, 1998 July 31, 1997
Land step up in basis $151 $ (189)
Capitalized interest 1,665 1,782
Uniform capitalized costs 250 281
Investment in joint venture 124 239
Other (152) (194)
$2,038 $1,919
During the years ended July 31, 1998, 1997 and 1996, income taxes in the amount
of $922,328, $3,807,000 and $2,998,000, respectively, were paid.
The Internal Revenue Service has examined the Company's tax returns for the
years ended July 31, 1992, 1993, and 1994. The IRS raised issues primarily
related to matters having to do with the Company's recapitalization in 1992 and
1993 including a $20.0 million gain on debt forgiveness which the Company
treated as non-taxable under the provisions of Section 108 of the Internal
Revenue Code.
In March 1997, the Company reached a settlement with the IRS for all items in
question. As a result, the Company recognized an extraordinary loss of $390,000
relating to the extraordinary gain on debt forgiveness associated with the
exchange of subordinated debt during the 1992 tax year.
7. Employee Retirement Plan
The Company has a 401 (k) Plan which allows eligible employees to defer a
portion of their total compensation subject to limitations of the Internal
Revenue Code. The Company matches 50% of participant contributions, up to a
maximum of the greater of $1,000 or 1.5% of compensation for each participant.
The Company's total matching contributions under the Plan for the years ended
July 31, 1998, 1997 and 1996 were approximately $124,600, $112,900 and $67,500,
respectively.
8. Related Party Transactions
In prior years, the Company engaged in transactions with related parties for the
acquisition of building lots. During the year ended July 31, 1996, the Company
paid $2,596,000 to companies owned by relatives of the Chairman of the Board to
acquire building lots.
The Company leases certain office space from an affiliated entity
(see Note 9).
9. Commitments and Contingent Liabilities
The Company leases its headquarters offices and offices for certain divisions
from an affiliate and certain other facilities from unrelated parties, all under
non-cancelable operating leases with terms ending through May 2008. Future
minimum rental payments required under these operating lease commitments that
have initial or remaining non-cancelable lease terms in excess
of one year subsequent to July 31, 1998, are as follows:
For the year ending July 31 (In thousands)
1999 $1,477
2000 1,255
2001 961
2002 660
2003 and thereafter 2,860
Total future rental payments $7,213
Rental expense was $1,693,000, $1,227,000 and $1,072,000 for the years ended
July 31, 1998, 1997 and 1996, respectively.
At July 31, 1998 the Company was contingently liable to banks and other
financial institutions for approximately $21.4 million for outstanding letters
of credit and surety bonds relating to building lot acquisition contracts and
municipal bonding for land development activities.
The Company is involved in various claims and legal actions arising in the
normal course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial position or results of operations.
Independent Auditor's Report
To the Shareholders' and Board of Directors of Washington Homes, Inc.:
We have audited the accompanying consolidated balance sheets of Washington
Homes, Inc. and subsidiaries as of July 31, 1998 and 1997, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended July 31, 1998. 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
misstatements. 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, such consolidated financial statements present fairly, in all
material respects, the financial position of Washington Homes, Inc. and
subsidiaries as of July 31, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended July 31,
1998 in conformity with generally accepted accounting principles.
Washington, D.C.
September 4, 1998
A:\10K797wpd.wpd
EXHIBIT 21
Jurisdiction
of
Subsidiary Organization
Housing-Home Sales ,Inc. Maryland
The Southampton Corporation Maryland
All Seasons, Inc. Maryland
Washington Homes, Inc. of Virginia Virginia
Designed Contracts, Inc. Maryland
Consultants Corporation Maryland
WH Land I, Inc. Maryland
WH Land II, Inc. Maryland
WH Properties, Inc. Maryland
WH Land III, Inc. Maryland
WH Properties Limited Partnership Maryland
WH Properties II Limited Partnership Maryland
Potomac Knolls A1 Limited Partnership Maryland
Potomac Knolls A3 Limited Partnership Maryland
Potomac Knolls B1 Limited Partnership Maryland
Potomac Knolls B2 Limited Partnership Maryland
Potomac Knolls E1 Limited Partnership Maryland
Homebuyer's Mortgage, Inc. Maryland
Westminster Homes, Inc. North Carolina
WH/PR Land Company LLC Delaware
New Homebuyer's Title Company, Inc. Maryland
Homebuyer's Insurance Agency LLC Maryland
New Homebuyer's Title Company (Virginia) LLC Virginia
Westminster Homes (Charlotte), Inc. North Carolina
Westminster Homes of Tennessee, Inc. Tennessee
Arbor West LLC Maryland
Condominium Community (Park Place), Inc. Maryland
Condominium Community (Truman Drive), Inc. Maryland
Condominium Community (Bowie New Town), Inc. Maryland
Condominium Community (Quail Run), Inc. Maryland
Condominium Community (Largo Town), Inc. Maryland
Quarry Services, Inc. Maryland
Carrington Homes LLC North Carolina
Washington Homes of West Virginia, Inc. West Virginia
Washwest, L.P. Delaware
Preston Grande Homes, Inc. North Carolina
Omitted subsidiaries would not in the aggregate constitute a Significant
Subsidiary.
EXHIBIT 27
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement (No. 33-
64144) of Washington Homes, Inc. on Form S-8 of our report dated September 4,
1998, incorporated by reference in this Annual Report on Form 10-K of Washington
Homes, Inc. for the year ended July 31, 1998.
DELOITTE & TOUCHE LLP
Washington, D.C.
October 16, 1998
EXHIBIT 27
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned directors or
officers of Washington Homes, Inc., a Maryland corporation, does hereby
constitute and appoint Geaton A. DeCesaris, Jr. his or her true and lawful
attorney-in-fact and agent, with full power to act, for him or her, in his or
her name, place and stead, in any and all capacities, to do any and all acts and
things and execute any and all instruments which said attorney and agent may
deem necessary or desirable to enable Washington Homes, Inc. to comply with the
Securities Exchange Act of 1934, as amended, and any rules, regulations and
requirements of the Securities and Exchange Commission in respect thereof, in
connection with the filing with said Commission of an Annual Report on Form 10-K
for the fiscal year ended July 31, 1998; but without limiting the generality of
the foregoing, power and authority to sign the name of the undersigned to such
Report, and any and all amendments thereto, and to any instruments and documents
filed as part of or in connection with such Report or amendments thereto; and
the undersigned hereby ratifies and confirms all that said attorney and agent
shall do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, each of the undersigned has subscribed to these
presents as of the 16th day of October, 1998.
/s/ GEATON A. DECESARIS, SR. /s/ PAUL C. SUKALO
Geaton A. DeCesaris, Sr. Paul C. Sukalo
/s/ THOMAS CONNELLY /s/ RICHARD S. FRARY
Thomas Connelly Richard S. Frary
/s/CLAYTON MILLER /s/CHRISTOPER SPENDLEY
Clayton Miller Christopher Spendley
/s/ RICHARD B. TALKIN
Richard B. Talkin
/s/ RONALD M. SHAPIRO
Ronald M. Shapiro
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<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S CONDENSED CONSOLIDATED BALANCE SHEET AND CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS AT AND FOR THE PERIOD ENDED JULY 31, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-END> JUL-31-1998
<CASH> 10321
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 113198
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 145972
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 79
<OTHER-SE> 58191
<TOTAL-LIABILITY-AND-EQUITY> 145972
<SALES> 237594
<TOTAL-REVENUES> 240703
<CGS> 195055
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 33847
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5793
<INCOME-PRETAX> 6008
<INCOME-TAX> 2218
<INCOME-CONTINUING> 3790
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3790
<EPS-PRIMARY> .48
<EPS-DILUTED> .48
</TABLE>
