<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1997, Commission file number 0-08305.
THE WRITER CORPORATION
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Colorado 84-0510478
-------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
6061 S. Willow Drive #232, Englewood, Colorado 80111
- ---------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 779-4100
--------------
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Title of Each Class Which Registered
------------------- ----------------
None None
Securities registered pursuant to Section 12(g) of the Act:
$.10 PAR VALUE COMMON STOCK
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. __X__
The aggregate market value of The Writer Corporation common shares on March
9, 1998 (based upon the average between the reported bid and asked prices of
these shares traded over-the-counter) held by non-affiliates was
approximately $7,419,000.
Indicate the number of shares outstanding of each of the registrant's classes
of common stock, as of the latest practicable date. As of March 15, 1998,
7,354,590 shares of The Writer Corporation's $.10 par value common stock were
outstanding.
<PAGE>
PART I
ITEM 1. BUSINESS.
The Writer Corporation is a developer and builder of planned residential
communities in the Denver, Colorado area. During 1997 the Company started a
Northern Colorado Division which is expected to generate closings in 1998.
This new Division is headquartered in Windsor, Colorado.
The Company has received local and national recognition for the design of its
planned residential communities which integrate single family homes and
townhomes with extensive greenbelts, bicycle and walking paths, winding
streets and family recreation facilities to create a beneficial lifestyle for
their residents. From the date of its inception through December 31, 1997,
the Company has closed the sale of 9,437 homes in 28 communities.
The Company's expansion with Northern Colorado includes two new projects. In
addition the Company has acquired through an option agreement 120 townhome
sites in the inner-city redevelopment of the former Lowry Air Force Base, in
Denver, Colorado. (See Additional Discussion at Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations).
RESIDENTIAL DEVELOPMENTS
The Company markets its planned residential communities to a broad spectrum
of middle and upper middle income buyers. Sales prices for the Company's
homes currently range from approximately $120,000 to $328,000.
The following table presents historical data relating to sales of the
Company's homes and homes under contract. 1997 Revenue includes $799,000
from 14 finished lot sales.
<TABLE>
Year Ended December 31,
-----------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total Revenues From
Closed Sales (in thousands) $ 44,098 $ 46,284 $ 31,960 $ 36,126 $ 26,800
Average Sales Price (per home) $220,913 $215,274 $194,878 $174,522 $152,270
Number of Homes Closed 196 215 164 207 176
Backlog as of December
31, (number of homes) 73 54 66 36 72
Backlog as of December
31, (in thousands) $ 16,183 $ 11,885 $ 14,766 $ 6,365 $ 11,294
</TABLE>
Backlog is defined as the number of homes completed or under construction or
in planning which are under contract but not closed. Backlog contracts are
cancelable upon forfeiture of $2,000 to $5,000 deposits or without forfeiture
if permanent financing cannot be obtained or other contingencies included in
the contract have not been resolved. The Company expects the majority of the
December 31, 1997 backlog to close within the first six months of 1998. The
backlog at March 10, 1998 was 133 homes, representing $26,927,000 in
potential revenue.
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PLANNED RESIDENTIAL COMMUNITIES
The Company designs its planned residential communities to complement
existing land characteristics, blending cul-de-sacs with extensive greenbelt
parks, natural open space and winding streets to create a pleasant
environment compatible with its surroundings. Typically the Company's
planned communities incorporate one or more recreation facilities such as a
clubhouse, swimming pool or tennis courts. The Company constructs model
homes to assist in marketing each community, striving for distinctive
architecture and interior design. The Company has built in 30 communities,
21 of which have been completed. The Company is active in nine communities,
some of which have more than one product line, including; Castle Pines North,
Writer Ridge II, SummerHill, NorthPark, Peninsula, Settler's Village and
Greenbrook, all located in metropolitan Denver, and Water Valley in Windsor,
Colorado, and Stetson Creek in Ft. Collins, Colorado.
The following table summarizes information with respect to all of the
Company's current residential communities.
<TABLE>
Under Construction Current or
Date Units In ------------------ Projected
Opened Master Units Under Not Under Units Not Base Price
for Sale Plan Closed Contract Contract Started Models Range
-------- ---- ------ -------- -------- ------- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PROJECT
SOUTHPARK
Single Family 1982 269 269 0 0 0 0
Townhomes:
Colony 1982 411 411 0 0 0 0
Wildwood 1982 273 273 0 0 0 0
Peninsula 1992 98 76 9 5 6 2 $293,250 -
$327,750
GREENBROOK (1)
Townhomes 1983 212 121 0 13 75 3 $119,400 -
$122,400
NORTHPARK
Single Family:
Executive 1983 258 258 0 0 0 0
Village 1986 163 163 0 0 0 0
New Single Family 1992 58 58 0 0 0 0
Townhomes (2) 1984 454 330 11 18 95 0
$160,900 -
$173,900
</TABLE>
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<TABLE>
Under Construction Current or
Date Units In ------------------ Projected
Opened Master Units Under Not Under Units Not Base Price
for Sale Plan Closed Contract Contract Started Models Range
-------- ---- ------ -------- -------- ------- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PROJECT
WATER VALLEY
Single Family: (6) 1997 6 0 0 6 0 0 to be
determined
STETSON CREEK (6)
Single Family: 1997 47 0 0 0 47 0 $206,000 -
$229,000
CASTLE PINES
NORTH
Single Family: (3)
Royal Hill/Kings 1985 338 338 0 0 0 0
Crossing
Noble Ridge 1997 184 0 3 15 163 3 $284,900 -
$336,900
KnightsBridge 1985 235 116 6 7 104 2 $205,900 -
$227,900
Townhomes (4) 1998 96 0 0 0 96 0 to be
determined
HIGHLANDS RANCH
Single Family:
Writer Ridge 1990 100 100 0 0 0 0
Writer Ridge II 1993 88 74 8 5 1 0 $212,990 -
$223,990
SummerHill 1993 114 79 7 16 10 2 $176,700 -
$220,590
Townhomes
Settler's Village (2) 1995 199 74 9 24 92 0 $148,900 -
$174,900
LOWRY (5)
Townhomes (6) 1998 0 0 0 0 0 0 $172,850 -
$187,850
Total as of
December 31, 1997 3,603 2,740 53 109 689 12
----- ----- --- --- --- ---
</TABLE>
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See footnotes on next page.
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(1) The Company re-opened this project in 1997; the first new sales activity
will be in 1998.
(2) Three of the models at each project have been sold and leased back to the
Company.
(3) Noble Ridge is a successor product line to the Company's former Royal
Hill and King's Crossing lines.
(4) This parcel is currently in the final platting process; development is
expected to begin in 1998.
(5) The Company has executed an option agreement to acquire 120 townhome
sites. Subsequent to year end 7 sites have been acquired. The Company
expects to acquire an additional 2 sites during the first quarter of 1998.
(6) Subsequent to year end construction of models at these projects was
initiated.
OPERATIONS
The Company utilizes its staff, outside consultants and subcontractors as
necessary to accomplish all stages of development and sale including
acquisition of land, land use planning and development, building design,
construction, marketing and sales.
LAND ACQUISITION AND DEVELOPMENT
The Company acquires options on land which it intends to develop in order to
further explore the suitability of the property. The Company typically
engages outside consultants to verify market expectations. They provide
marketing studies which address factors such as product design and pricing,
target market location, population growth patterns, and zoning suitability.
The Company's staff prepares preliminary cost estimates, land and site
layouts, and obtains environmental and regulatory approvals. The staff also
designs preliminary roads, sewers, water, and drainage layouts and other
community amenities, in concert with independent engineers.
The Company currently has a small inventory of unplatted land which is
currently being platted for 96 townhome sites. In addition, the Company has
land under development sufficient for planned construction activities for the
near future. As an additional source of lots for construction, the Company
enters into purchase agreements for developed or partially developed sites.
The Company designs its residential communities to complement the
characteristics of the land and the surrounding area to create an appealing
environment. Internal staff determines the type and mix of houses suitable
for the property, evaluates traffic patterns, designs roadways, recreational
areas and greenbelts. Physical development, including paving of streets,
grading of home sites and underground installation of utilities, is generally
performed by subcontractors under fixed price contracts, which are
competitively bid, and supervised by in-house staff.
The Company is subject to regulation by various state and local authorities,
including those administering zoning and land subdivision ordinances.
Certain matters require agency approval and the Company's homes are subject
to inspection by local building departments during construction. The Company
believes that its relationships with the municipalities and agencies having
jurisdiction over its properties are excellent. The Company historically has
experienced little difficulty in obtaining the necessary permits for
developing its properties. Some local municipalities have attempted to limit
growth through allocations of building permits or water and sewer taps. The
Company has not been directly impacted by these measures to date but may be
in the future.
LAND ACQUISITION AND DEVELOPMENT FINANCING
The Company acquires development financing through lending relationships with
financial institutions or other institutional lenders. Usually these loans
require equity contributions which the
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Company must provide through its working capital. They are repaid by
refinancing within related construction loan facilities and/or ultimately by
proceeds from sale.
HOME CONSTRUCTION
The Company typically completes construction of its homes in 80 to 120
working days, depending on the complexity of the model. On-site construction
is performed by subcontractors and overseen by the Company's project
supervisors. Most subcontract work is performed under fixed price contracts,
which usually cover both labor and materials. Cost savings are sought
through the use of quality standard materials and components, building on
contiguous sites, standardization of available options, limiting certain
types of options and efficient use of land. The Company has many long
standing relationships with its subcontractors and believes that these
relationships contribute to cost and production efficiencies. The Company
continually considers design innovations in its house plans, most of which
were developed internally and refined over the years.
CONSTRUCTION FINANCING
The Company currently obtains the majority of its construction financing
under revolving lines of credit with local and national banks. These
agreements provide for some lot purchases and substantially all material and
outside labor costs incurred in the construction of residences. In addition,
certain agreements provide model home financing and allow a specific number
of speculative homes to be built. The term of the facilities require annual
renewals, commitment fees of 0.5% to 1.0%, and bear interest generally at
prime plus 0.5% to prime plus 1.5%.
The Company has approximately $12,700,000 available from institutional
financing sources for construction financing as of December 31, 1997.
MARKETING AND SALES
The Company markets its planned residential communities to middle and upper
middle income purchasers through Company employed, on-site, commissioned
salespersons. Many of the Company's sales involve co-operative commission
arrangements with an independent real estate broker. The Company encourages
this cooperative activity through various programs aimed at outside real
estate professionals who many times have significant influence over buyer
decisions. The Company advertises in the print media, uses various types of
signage, and maintains model home complexes at its communities to assist
sales efforts. Prospective purchasers execute contracts for the Company's
homes, making a down payment of $2,000 to $5,000 which is forfeited if the
home is not purchased for any reasons other than failure to obtain financing
or resolution of other contingencies in the contract.
CUSTOMER FINANCING
The Company has identified mortgage lenders which are available for buyers to
use which it feels are capable of providing timely and professional services
at competitive rates. The Company does not require any specific permanent
financing relationship to be used by buyers. This practice allows the
Company to focus on its primary marketing objective of home sales. Most
buyers obtain long term loans with down payments ranging from 5 to 30% of the
purchase price. In order to facilitate
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certain transactions, the Company provides credits against the purchase price
of up to 2% which can be used by purchasers to obtain financing for their
homes, and other incentives on a case by case basis.
OTHER FACTORS
Periods of high inflation can have a negative impact on the operations of the
Company. Land prices and housing demand are affected by inflation which also
impacts interest rates. Interest rates are a significant factor that impact
the real estate development and home building industry. Rate increases
affect construction and financing costs negatively and mortgage rates
directly impact the number of purchasers who are willing, to buy houses and
who qualify for mortgage financing.
Most raw materials and other construction materials or products that the
Company uses are readily available and are carried by major suppliers.
WORKING CAPITAL FACILITY
On December 30, 1996 the Company consummated a loan agreement which provided
the Company with a $1,700,000 revolving line of credit. The working capital
facility is secured by the Company's Castle Pines North project. As a result
of sales of the underlying collateral the facility has been reduced to
$1,562,500 as of December 31, 1997. As a supplement to this facility the
Company has executed loan documents with another lender by which $500,000 of
unsecured working capital is available. See Discussion at Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
PRIVATE PLACEMENT OF COMMON STOCK
During the second quarter of 1995, the Company offered to private investors
2,000,000 shares of its common stock at $1.50 per share. In total 1,637,516
shares of stock were issued through this private placement with 1,530,003
shares subscribed as of December 31, 1995 and the balance subscribed in 1996.
Through this offering the Company raised $2,380,000 of new working capital.
An underwriting fee was paid in 1996 by issuing 51,180 shares of the
Company's common stock. See additional discussion at Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations.
EXTINGUISHMENT OF DEBT
On March 14, 1997, the Company's headquarters office was sold to an unrelated
party at a gain of $542,200. The Company now leases its office space. In
addition, the Company received a discount of $106,000 on the early
extinguishment of the debt securing the office property. The gains on the
sale of the building and on the early extinguishment of debt were recorded in
the first quarter of 1997.
EMPLOYEES
As of December 31, 1997 the Company had 75 full time employees, including 7
in executive positions, 9 in sales and marketing activities, 49 in planning,
construction or development activities,
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10 in administrative activities, and 8 part-time employees, primarily
assisting in sales. The Company considers its employee relations to be good
and none of the Company's employees are unionized.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Company currently operates in one industry segment, the residential real
estate development and homebuilding industry.
ITEM 2. PROPERTIES.
The Company's principal offices are in the Atrium Building located at 6061 S.
Willow St., in Englewood, Colorado. The Company has leased approximately
9,200 square feet for a five year term with renewal options. The Company's
Northern Division has its office at 1600-A Water Valley Parkway, Windsor,
Colorado.
The Company owns various parcels of real estate in metropolitan Denver which
it holds for development as residential property.
ITEM 3. LEGAL PROCEEDINGS.
The Company is involved in various legal matters of a nature incidental to
its business which in the opinion of management should not have a material
adverse effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company's common stock is traded over-the-counter under the symbol WRTC.
The following table presents the "highest bid" and "lowest ask" quotations (as
supplied by the National Quotation Bureau, Inc.) and dividend information for
the Company. The approximate number of holders of record of the Company's
common stock as of March 15, 1998 was 400.
<TABLE>
Stock Price and Dividends Low High
------------------------- --- ----
Dividends Paid
1997 "Bid Price" "Ask Price" Per Share
---- ----------- ----------- ---------
<S> <C> <C> <C>
First Quarter $1.01 $1.30 None
Second Quarter 1.06 1.36 None
Third Quarter 1.08 1.25 None
Fourth Quarter 1.06 1.47 None
1996
----
First Quarter $1.00 $1.44 None
Second Quarter 1.00 1.50 None
Third Quarter .85 1.25 None
Fourth Quarter 1.01 1.31 None
</TABLE>
8
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ITEM 6. SELECTED FINANCIAL DATA.
The selected financial and other data of the Company set forth below should
be read in conjunction with the Company's Consolidated Financial Statements
and the notes thereto included elsewhere in this Form 10-K.
<TABLE>
Dollar amounts in thousands other than per
share data 1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues $44,098 $46,284 $31,960 $36,126 $26,800
Income (loss) from continuing
operations $3,460 $1,301 $(316) $1,233 $(664)
Income (loss) from continuing
operations per share (3)
Basic $.47 $.18 $(.05) $.21 $(.13)
Diluted $.46 $.18 $(.05) $.21 $(.13)
Net income (loss) (1)(2)(3) $3,460 $1,301 $1,121 $1,233 $(388)
Net income (loss) per share (1)(2)(3)
Basic $.47 $.18 $.18 $.21 $(.08)
Diluted $.46 $.18 $.18 $.21 $(.08)
Weighted average shares
outstanding (Basic) 7,355,000 7,401,000 6,280,000 5,974,000 5,258,000
Dividends paid per share -0- -0- -0- -0- -0-
Total assets $41,580 $36,650 $41,070 $41,851 $36,637
Notes payable $19,221 $17,241 $22,419 $25,937 $21,713
</TABLE>
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(1) These amounts include the Company's extraordinary gain from early
extinguishment of debt, of $1,437,000, recorded during 1995.
(2) These amounts include the gain on the disposal of net assets of
discontinued operations of $299,000, during 1993.
(3) In 1997 the Company adopted the Statement of Financial Accounting Standard
128, and has restated earnings per share.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Management's Discussion and Analysis of Financial Condition and Results of
Operations for the year ended December 31, 1997 follows.
FORWARD LOOKING STATEMENTS
In connection with, and because it desires to take advantage of, the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995,
the Company cautions readers regarding certain forward looking statements
contained in the following discussion and elsewhere in this report and in any
other statements made by or on behalf of the Company whether or not in future
filings with the Securities and Exchange Commission. Forward looking
statements are statements not based on historical information and which
relate to the future operations, strategies, financial results, or other
developments. In particular, statements using verbs such as, "expected",
"anticipate", "believe", or words of similar import generally involve forward
looking statements. Without limiting the foregoing,
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forward looking statements include statements which represent the Company's
beliefs concerning future, or projected levels of sales of the Company's
homes, investments in land or other assets, projected absorption rates, or
the Company's ability to attract needed financing, or the continued earnings
or profitability of the Company's activities. Forward looking statements are
necessarily based upon estimates and assumptions that are inherently subject
to significant business, economic, and competitive uncertainties and
contingencies, many of which are beyond the Company's control and many of
which, with respect to future business decisions, are subject to change.
These uncertainties and contingencies can effect actual results and could
cause actual results to differ materially from those expressed in any forward
looking statements made by or on behalf of the Company. Whether or not
actual results differ materially from forward looking statements may depend
on numerous foreseeable and unforeseeable events or developments, some of
which may be national in scope, such as general economic conditions and
interest rates; some of which may be related to the homebuilding industry
generally, such as price, competition, regulatory developments, and industry
consolidation; and others of which may relate to the Company specifically,
such as credit availability and the liquidity necessary to provide equity
into land acquisition and development transactions and other factors.
RESULTS OF OPERATIONS
During 1997 the Company recorded gross revenues of $44,098,000 which produced
the highest gross profit level which the Company has achieved during any of
the last ten years. Income from continuing operations includes interest and
other income of $1,240,000 which reflects the gain on the sale of the
Company's office building as well as certain refunds which the Company
received from municipalities related to previously paid fees and taxes.
The Company closed 196 homes in 1997 compared to 215 homes and 164 homes in
1996, and 1995, respectively. Although the current year unit volume
decreased by 9% over the previous year, the overall Company revenues
decreased only 5% due to an increase in the average sales price of the homes
closed during the year. During 1996 the Company recorded a significant
revenue increase as compared to 1995 by approximately $14,324,000, or 45%.
The average sales price per house was $220,913, $215,274, and $194,878 for
1997, 1996, and 1995, respectively. The change in the average sales price
reflects price increases partially driven by cost increases for some of the
Company's product components and labor, but also represent sales of larger
homes at certain of the Company's projects. In addition, some prices have
been increased due to market demand and the Company's attempts to strengthen
profit margins when possible. Although the Company continues its desire to
move the mix of its closings to a heavier weighting of single family detached
homes, the Company's land positions and the market acceptance of the
Company's townhome product has continued to weight sales and closings toward
the attached product. The table below illustrates the product mix which the
Company has experienced over the last three years.
<TABLE>
Closings Townhomes Single Family Cluster Homes Total
-------- --------- ------------- ------------- -----
<S> <C> <C> <C> <C>
Year ended December 31, 1997 84 98 14 196
Year ended December 31, 1996 83 116 16 215
Year ended December 31, 1995 97 51 16 164
</TABLE>
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In 1997, cost of sales was $2,802,000 lower than in 1996. This represents a
7% decrease in cost of sales compared to a 5% decrease in overall revenue for
the year. The improvement in the gross profit margin of 2% is partly
attributable to the impact of the $475,000 impairment loss which the Company
recorded in the 1996 comparable results. During 1996 the Company decided to
sell a parcel of partially development land which the Company had previously
planned to develop and build. The Company received contingent offers which
were less than its carrying amount, accordingly the Company recorded the
impairment loss. The other improvement relates to sales price increases and
cost efficiencies which the Company gained throughout the current year and
the change in categorization of certain costs included as construction costs
in 1996 as discussed below. In 1996 the Company's cost of sales was
$12,248,000 higher than in 1995. This increase reflects the higher closing
levels during the year and was more than offset by the $14,324,000 revenue
increase that year.
The Company's 1997 gross profit was $8,337,000, or 19% of revenue compared
with $7,721,000, or 17% in 1996. The Company's 1995 gross profit was
$5,645,000 or approximately 18% of revenue.
With the improvement in direct costs of construction, the Company's overall
operating expenses decreased by 5.4% which lead to higher profitability. The
Company's sales and marketing costs increased, however. This increase
reflects increased spending on marketing efforts through ad agency fees,
promotional events and mailings, media advertising and upgrading of
promotional literature. Also contributing is the expansion of the Company's
operations leading to higher levels of fixed marketing and administrative
costs commensurate with more remote locations, and increased volumes.
In 1997 the Company's sales and marketing expenses increased by approximately
$155,000, over the prior year. The Company expects to continue to increase
these costs in order to enhance the Company's market presence. During 1996
the Company also increased these expenses by $338,000 over 1995. Management
believes based on its statistical tracking, that its enhanced marketing
program has positively impacted overall absorption rates and traffic
generation at the Company's projects.
During 1997 the Company's general and administrative expenses increased by
$792,000. In 1997 as a percentage of revenue these costs were 6.1% compared
to 4.1% in 1996. This increase in attributable to the Company's growth,
including the start up costs of the new Northern Colorado Division, and costs
incurred in the opening of new project locations. Also contributing were
compensation increases tied to employee incentive programs. The Company has
also categorized certain costs including salaries, benefits, consulting and
other associated support costs, which had been previously classified as
construction costs, into its general and administrative category due to
shifts in responsibilities within operations, and administrative changes
predicated on the Company's new purchase order and scheduling system.
In 1996 the Company's general and administrative expenses increased by
$274,000 over 1995. Although there was an increase during 1996 as a
percentage of revenue these costs decreased from 5% to 4% of sales. The
increase in 1996 primarily reflects compensation paid to the Company's new
President. In the previous year the President's duties were performed by the
Company's Chief Executive Officer, who also served as President.
In 1997, the Company's improved performance was positively impacted by the
Company's continued reduction of interest costs. During the year the
Company's interest expense decreased by $577,000 or approximately 47% from
the previous year end. This follows an $808,000, or 40% decrease from 1995
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to 1996. During 1997 the Company closed a similar number of homes compared
to the prior year and at year end had approximately 39% more units in its
inventory. Notwithstanding this growth, the Company reduced its total
interest incurred in 1997 from $2,955,000 to $2,303,000, a $652,000 decrease
or 22% savings. Interest capitalized to inventory was also reduced by
approximately $75,000 compared to the previous year. This savings is
reflective of the Company's efforts to streamline its lending relationships,
negotiate more favorable terms and pay off higher coupon loans. The
Company's progress during 1997 was even more evident when compared to 1995
levels, when interest of $3,693,000 was incurred.
The reduction of interest expense in 1996 from 1995 reflects the benefit of
restructuring or termination of some of the Company's less favorable
financing arrangements and the expansion of those with more attractive costs.
In addition, principal payments were accelerated as cash from operations
became available and because certain development loans required an aggressive
repayment schedule compared to those which were typical in prior years or
possible under prior sales levels.
Interest and other income during 1997 increased by $1,036,000 over the
previous year due primarily to three nonrecurring transactions. The first
involved the gain of $542,000 related to the sale of the Company's office
property. The second transaction was a $342,000 refund of previously
assessed impact fees which the Company received from a municipality. The
third item was a refund of $195,000 related to real estate taxes previously
paid at several of the Company's projects.
The Company recorded an income tax benefit of $901,000 which represents the
release of a portion of the valuation reserve which was previously recorded
against the Company's deferred tax asset.
Due to the factors discussed above the Company recorded income from
continuing operations of $3,460,000 compared to income of $1,301,000 in 1996
and a loss of $316,000 in 1995. Net income for the Company increased to
$3,460,000 compared to $1,301,000 in 1996 and $1,121,000 in 1995. Net income
in 1995 included a $1,437,000 gain on early extinguishment debt from a
refinancing of project debt.
FINANCIAL CONDITION
At December 31, 1997 the Company had 146 homes under production ranging from
foundation stage to final completion as compared to 105 at December 31, 1996.
The increase in the total number of units is the reason the Company's
inventory of homes under construction increased by $3,920,000. This buildup
is predicated on market conditions, low mortgage rates, the Company's growth
and in particular the Company's increased backlog. In addition, because of
market demand, management currently believes that more in process inventory
will translate to greater market share by providing more available and more
timely deliveries to home buyers who desire shorter closing dates from
initial contract execution. The Company's backlog of sales contracts at
December 31, 1997 was 73 units representing $16,183,000 in revenue. This
reflects a 35% unit increase from the prior year and a $4,298,000, or 36%
revenue increase. The Company's backlog was 54 units at December 31, 1996
compared with 66 units at December 31, 1995. At December 31, 1996 the total
dollar backlog represented by the 54 contracts was $11,885,000 compared to a
December 31, 1995 dollar backlog of $14,766,000. The Company's backlog at
March 10, 1998 had increased to 133 units. This growth, which represents a
82% increase since year end alone, provides the Company with a $26,927,000
backlog, substantially all of which the Company believes will close in 1998.
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<PAGE>
During 1997 the Company recorded 215 new orders net of cancellations, a portion
of which will close in 1998, representing a 6% increase over the 1996 new orders
of 203. In 1995 the Company had 194 new orders.
At December 31, 1997 and 1996, the Company's work in process included a mix as
follows.
WORK IN PROCESS INVENTORY
<TABLE>
Year Ended Dec. 31 Presold Speculative Total
- ------------------ ------- ----------- -----
<S> <C> <C>
1997 73 73 146
1996 54 51 105
</TABLE>
Model homes and furnishings increased by $77,000 during 1997 which reflects a 2%
increase in the carrying value of these assets. During the year the Company
opened four model homes at Knightsbridge, and Summerhill, and sold nine models
including four which the Company leased back. At December 31, 1997 the Company
had six active model sale and lease back transactions. During 1996 seven models
at four projects were sold while two new models were opened at the Company's
Castle Pines North project. This activity was driven by the Company's desire to
reduce asset levels in order to reduce associated carrying costs and produce a
higher return on assets.
The Company's land and land development increased by $5,349,000, or
approximately 50% from the prior year end balance. This increase tracks
consistently with the decrease in the Company's unplatted land account which
dropped by approximately $5,664,000 as land was platted and development
initiated. The Company has been aggressively developing all of its assets in
order to employ these assets into production as soon as possible. During the
year the Company developed an additional filing at its Castle Pines North
project, while continuing development at the Settler's Village and Northpark
projects. Subsequent to year end the Company also began the development
necessary at its Greenbrook project. Part of the development expenditures at
Castle Pines North relate to the portion of a filing which the Company intends
to sell to third party purchasers. Under the terms of the purchase agreements,
the Company would anticipate closing on approximately 35 lots during 1998, while
the balance of approximately 27 lots would take place after 1998. The purchases
are structured on a quarterly or semi-annual takedown schedule.
The Company's office property and equipment decreased by $134,000, or
approximately 22% from the previous year which reflects purchases of
approximately $347,000 of office property and equipment related to the set up of
the new office location and the computer equipment necessary for the new
management information system which the Company implemented effective January 1,
1998. Netted in this activity is the sale of the Company's office building
which generated approximately $847,000 of proceeds which was used to repay the
debt underlying the office building.
The Company's cash, cash equivalents, and restricted cash increased slightly
during the year from 1996. The increases primarily related to the additional
restricted cash; funds which primarily support development letters of credit
issued to various municipalities from the Company's lenders. As the development
work is completed by the Company and accepted by the municipalities, the need
for these collateral accounts will be eliminated and these funds will be
available to the Company for working
13
<PAGE>
capital. The Company has financing in place to fund the development work
necessary to complete these activities. They are expected to be completed as
development within the projects continues.
The Company's accounts receivable increased by approximately $80,000 which
relates primarily to the sales of taps related to lots sales at Castle Pines
North and landscape escrows which will be received as weather permits
installation of the landscaping.
The Company's other assets increased by $326,000 from the previous year end
balance of $381,000. This increase is primarily attributable to increases
related to deposits held by sellers of ground which the Company has or may
purchase. Typically the deposits are applied to the last takedown within the
specific option agreements. In addition, the Company had approximately $96,000
which represents prepaid homeowners association dues at one of the Company's
projects. These dues will be charged to expense over the life of the project.
In addition, the Company has placed rental security deposits with the owner of
its present office facility which will be applied to the Company's office rents
prior to the termination of its lease.
The Company's carrying value of its deferred tax asset increased to $1,251,000
during 1997. A significant portion of the Company's deferred tax asset
represents temporary differences between deductions for financial reporting and
tax reporting, primarily from land basis differences. As of December 31, 1997
the Company remains uncertain as to the realization of the total net deferred
tax asset due to the cyclical nature of the real estate industry and other
factors outside the control of the Company, such as interest rates. The
valuation allowance was adjusted to reflect that portion of the deferred tax
asset which the Company feels is more likely than not to be utilized against
future operations. The Company's total deferred tax asset is $2,303,000 which
is netted with a $1,050,000 valuation allowance as of December 31, 1997. The
amount of the deferred tax assets considered realizable, however, could be
increased or decreased in the near term if estimates of future taxable income
are changed.
The Company's notes payable related to construction activities increased by
$3,184,000, or 29% during the year, which reflects the inventory growth
discussed above. The Company finances virtually all of its construction
activities through its loan facilities. The Company's loan facilities generally
require annual commitment fees of up to .5% and accrue interest at prime plus
.5% to 1.25%.
The Company's notes payable related to land debt decreased by $1,265,000, or
approximately 30% during 1997. This decrease is reflective of the Company's
desire to accelerate debt repayments when possible and repayments associated
with increased production and closings. As lots are transferred into
construction, the Company typically pays off the underlying acquisition and
development loan with the construction facility, thereby reducing this higher
priced debt which is ultimately repaid as the homes are closed with third party
purchasers.
The Company's other notes payable account increased slightly during the year. At
December 31, 1997 the Company has remaining $900,000 from its unsecured
convertible debt offering which was entered into in 1993. See Additional
Discussion at Item 13, Certain Relationships and Related Transactions. The
balance primarily reflects the amount drawn on the Company's secured working
capital facility, which had an outstanding balance of $1,209,000 at year end.
Subsequent to year end, the Company repaid approximately $475,000 of this
revolving facility. Overall repayment of the facility will be
14
<PAGE>
accomplished upon sale of the underlying collateral, if not retired sooner
from working capital generated through operations.
The Company's accounts payable and accrued expenses decreased by approximately
$264,000, or 5% from the previous year end. Typically payables balances
increase as inventory levels and activities increase. This converse result
reflects the Company's desire to reduce liabilities as cash flow allows.
In addition, the Company's accrued interest decreased by $246,000, or
approximately 57% from the year end balance, which is also reflective of the
Company's efforts to minimize its outstanding liabilities as cash is generated
from operations.
During the first quarter of 1996, the Company finalized the private placement of
its common stock commenced in 1995. In total, 1,637,516 shares of common stock
were issued under the placement. In 1996, 107,513 shares were issued including
51,180 shares issued as compensation to the underwriter.
LIQUIDITY AND CAPITAL RESOURCES
The Company continued to show improvement in its liquidity and capital resources
during 1997. Net income from operations of $3,460,000 was adjusted for changes
in inventory balances and other assets and liabilities, indicating a total of
$2,462,000 of cash being used in operating activities. As is illustrated in the
Company's statement of cash flows, the Company reduced its overall accounts
payable and accrued expenses by approximately $510,000, and provided a net
increase in inventory of $3,682,000. Although this increase in inventory
reflects of use of cash, it is important to note that the expenditures for homes
under construction and model homes and furnishings were primarily provided
through borrowings included in the financing activities of the cash flow
statement. In light of this classification, the Company actually generated
positive cash from its operations of approximately $1,220,000. In addition,
certain debt was satisfied with the sale of the Company's office building which
generated cash proceeds of $847,000 used to retire debt.
With the improved operating results, the Company's relationship with its lenders
has also solidified which has allowed the Company to obtain more favorable
interest rates and financing terms. This progress is reflected in the analysis
of its interest costs, as more fully discussed at Results of Operations. In
addition, the Company has significant unused construction and development
commitments which it feels are sufficient to fund planned growth which the
Company desires over the next few years. As of December 31, 1997, the Company
has $25,567,000, available to it in committed financing for development and
construction activities. Management believes that its operating and working
loan facilities including its working capital line of approximately $1,500,000
together with anticipated results of operations will be sufficient to meet its
current operating requirements. The section below discusses some of the
Company's more recent expansion activities which the Company expects will
continue throughout 1998.
RECENT EXPANSION
During the fourth quarter of 1997 the Company established a Northern Colorado
Division, currently headquartered in Windsor, Colorado. Commensurate with the
opening, the Company acquired two project locations which this Division will
operate.
15
<PAGE>
The first, known as Water Valley, located in Windsor, Colorado, will provide the
Company with building sites for three single family detached product lines. The
Company has executed a contract to purchase 64 lots on a quarterly acquisition
schedule, and has provided a deposit of $114,000 to support the contract. The
agreement also provides for the Company to have an opportunity to acquire a
significant number of additional sites under certain conditions. The Company
has acquired 12 of the sites through March 1, 1998. The Company and the seller
have each alleged defaults under this contract and are in the preliminary stages
of discussing whether the issues between them can be resolved.
The second, known as Stetson Creek, located in Ft. Collins, Colorado, was
purchased on December 30, 1997. Under the terms of the purchase and option
agreement the Company acquired 47 developed lots for its single family product.
In addition, the Company has an option to purchase approximately 12 acres for
development of a townhome community, if the seller successfully subdivides the
property using the Company's land plan. No assurance can be provided that this
entitlement process will be acceptable to the municipality.
The financing for the Company's expansion was provided from the Company's equity
funds and a new $10,000,000 secured acquisition, development and construction
loan facility which will service the planned growth of this new Division. At
December 31, 1997 $1,184,000 had been drawn on the land acquisition and
development facility which is limited to $3,500,000. The balance of the
facility is earmarked for construction of models, presold homes, and a specific
number of speculative inventory units. In addition the credit agreement
provides $500,000 in unsecured working capital funds, available under the terms
of the agreement, which in concert with the Company's own working capital and
the secured facility will provide the Company with the opportunity for
aggressive penetration into this new market. The Company is exploring further
opportunities for this Division.
The Company has also executed an option agreement to purchase 120 partially
developed townhome lots in a new urban redevelopment project. The project
located in east Denver, is part of an overall redevelopment of the former Lowry
Air Force Base. The Company's marketing effort was initiated in March of 1998
and has been well received. The Company has acquired the first takedown of
seven lots and anticipates closing an additional 20 lots in the first quarter of
1998, via an accelerated takedown.
The Company also began marketing the remaining 91 sites at it's Greenbrook
townhome project. The Company was unsuccessful in its earlier attempts to sell
this ground and has designed a new townhome product line which will allow the
Company to target first time buyers. This lower price point should expand the
number of potential buyers.
INFORMATION SYSTEMS AND YEAR 2000 ISSUE
The inability of computer software and other equipment utilizing microprocessors
to recognize and properly process data fields containing a two year digit is
commonly referred to as the year 2000 compliance issue. As the year 2000
approaches such systems may be unable to accurately process certain date-based
information.
The Company has identified all significant applications that require
modification to insure year 2000 compliance. The Company has completed testing
of its internal hardware and has determined that it is compliant with regards to
the year 2000 issue. The Company utilizes software to process its management
information, which has been developed by an outside vendor. Currently, the
vendor
16
<PAGE>
software is not year 2000 compliant, but the vendor has represented that it
will provide an updated software release sometime during fiscal year 1998
which will meet the compliance issues.
The total costs to the Company of these year 2000 compliance issues is not
anticipated to be material, and has not been material to date. Should the
outside software vendor not provide a year 2000 compliant release, it could have
material adverse effect on the Company's management information system.
17
<PAGE>
PART III
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
<TABLE>
DIRECTORS
Name, Age, and Other Period Served as Director and Business
Positions, if any, with Registrant Experience During Past 5 Years
- ---------------------------------- ----------------------------------------------
<S> <C>
George S. Writer, Jr., 62 Chief Executive Officer, Chairman of the Board
Chief Executive Officer, since 1964. Elected a director in 1961.
Chairman of the Board of Directors
Roland Seidler, Jr., 69 Elected a director in 1971. Mr. Seidler is the
Chairman and Chief Executive Officer of The
Seidler Companies Incorporated, a Los Angeles
based investment banking firm. Mr. Seidler also
is a member of the Board of Directors for First
Business Bank and First Business Corporation.
Ronald S. Loser, 64 Elected a director in 1973. Secretary of The
Secretary Writer Corporation since its inception.
Mr. Loser is a Principal of Brega & Winters,
P.C., a Denver law firm.
Deane J. Writer, Jr., 64 Elected a director in 1975. Since January 1992
Mr. Writer has been an account executive with
HRH Insurance, a national insurance agency. Prior
to that he was the owner of The Writer Agency,
since 1956.
Louis P. Bansbach, III, 57 Elected a director in 1989. Mr. Bansbach is
President of Columbine Realty, Inc., and a
Director of United Bancorp of Wyoming.
18
<PAGE>
Robert G. Tointon, 64 Elected a director in 1992. Mr. Tointon is
President the Chief Executive Officer of
Phelps-Tointon, Inc. a manufacturer of
structural and architectural pre-stress
components, detention equipment, safes,and
architectural woodwork. Mr. Tointon is also
a director of Public Service Company of
Colorado.
</TABLE>
DIRECTORS FEES AND TRANSACTIONS - In 1996 the Company adopted a plan by which
the outside directors receive an annual retainer fee of $5,000 and a per meeting
fee of $750, for either full Board or Executive Committee meetings. These fees
were paid in 1997. The Executive Committee includes Directors George S. Writer,
Jr., who receives no fees for service, Louis Bansbach, III, and Robert G.
Tointon. This committee meets with the Company's Senior Management during
months when a full Board meeting is not convened.
In 1997, 1996 and 1995, Brega and Winters, the law firm in which Ronald S. Loser
is a principal, was paid attorneys' fees. Additionally, insurance is placed
with a company with which Mr. Deane J. Writer, Jr. is employed and receives a
commission. The Company places substantially all of its insurance coverage
through this agency. In the opinion of management, the amounts charged in these
transactions are less than or comparable to charges which would have been made
by unaffiliated parties. Deane J. Writer, Jr. is a first cousin of George S.
Writer, Jr.
Executive Officers - Set forth below are the names, ages and offices held by
each of the executive officers of the Company.
NAME AND AGE POSITIONS HELD AND BUSINESS EXPERIENCE DURING
PAST 5 YEARS
George S. Writer, Jr., 62 Chief Executive Officer, Chairman of the
Board of Directors of The Writer Corporation
since 1964.
Ronald J. Benkert, 44 Former President and Chief Operating Officer.
Mr. Benkert was hired in February 1996. From
January 1995 to January 1996, Mr. Benkert
served as President of Williamsburg
Properties, Inc., residential homebuilder
based in Cincinnati, Ohio. From November,
1979 to October 1994, Mr. Benkert worked for
Zaring Homes Inc., a publicly traded regional
developer and homebuilder based in
Cincinnati, Ohio.
Robert R. Reid, 49 Senior Vice President Operations since August
1992. Mr. Reid has been employed by the
Company since 1977 and served as Vice
President-Construction, Vice President-
Southwest Region, Construction Manager and
Project Manager prior to his present
position.
19
<PAGE>
Daniel J. Nickless, 42 Senior Vice President, Chief Financial
Officer and Treasurer since June 1994. Mr.
Nickless served as Vice President of
Finance and Treasurer from July 1993 to June
1994, and Vice President Controller since
November 1989. Mr. Nickless joined the
Company as Controller in February 1989.
Derrell Schreiner, 45 Vice President of Construction since July
1993 and also serves as the Company's Safety
Officer. Mr. Schreiner has been employed by
the Company since 1985 and served as
Construction Manager and as a project
superintendent prior to his present position.
Darwin Horan, 33 Vice President; Division Manager since
January, 1998. Mr. Horan has been employed
by the Company since 1986 in several
capacities in our construction, warranty and
service, and development departments. Mr.
Horan served as the Company's Development
Manager, since 1994, prior to his present
position.
Nancy Ashley, 54 Vice President of Sales since January, 1998.
Ms. Ashley joined the Writer Corporation in
June, 1997 as Sales Manager. From November
1994 to April, 1997 she served as Director of
Sales and Marketing for Carmel Homes, a local
Denver builder. From 1992 to 1994, Ms.
Ashley was employed by Centex Homes as a
community sales manager.
The Company is not aware of any officer, director or holder of 10% or more of
its securities which has failed to comply with the reporting requirements under
Section 16, of the Securities Exchange Act of 1934.
20
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION.
The information in the following table is given for the Company's Chief
Executive Officer and the other Executive Officers whose total compensation and
remuneration from the corporation was more than $100,000 during the three years
ended December 31, 1997.
<TABLE>
SUMMARY COMPENSATION TABLE
Annual Compensation
- -------------------------------------------------------------------------------------
Name and Principal Other Annual
Position Year Salary Bonus Compensation(1)
<S> <C> <C> <C> <C>
George S. Writer, Jr. 1997 $139,800 $ -0- $ 223,465
Chief Executive Officer 1996 100,800 -0- 62,472
1995 100,800 -0- 257,661
Ronald J. Benkert 1997 $210,520 $ -0- $ 1,023
President and Chief 1996(2) $165,113(3) -0- -0-
Operating Officer
Robert R. Reid 1997 94,800 $15,125 $ 28,702
Sr. Vice President of
Operations
Daniel J. Nickless 1997 $ 89,800 $15,113 $ 3,792
Sr. Vice President,
Treasurer and Chief
Financial Officer
</TABLE>
- --------------------
(1) Amounts disclosed represent earnings and contributions on the individual
vested portion of the Company qualified profit sharing retirement plan
account balances during the years presented.
(2) First year of employment.
(3) Includes $13,431 of relocation costs reimbursed to Mr. Benkert.
21
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
As of March 1, 1998, to the knowledge of the Company, the following persons
owned beneficially and of record more than 5 percent of the Company's common
stock:
<TABLE>
Name and Address of Amount and Nature of Percent
Title of Class Beneficial Owner Beneficial Ownership of Class
- -------------- -------------------- -------------------- --------
<S> <C> <C> <C>
Common Stock George S. Writer, Jr.(1) 1,398,847 19.02%
Littleton, Colorado
Common Stock Phelps-Tointon, Inc.(2) 1,260,666 17.14%
Greeley, Colorado
Common Stock Polaris Capital Corporation 549,384 7.5%
Denver, Colorado
</TABLE>
- -------------------------
(1) Control person of the Company.
(2) Phelps-Tointon, Inc. is a company which is partly owned by Robert G.
Tointon, one of the Company's directors. The shares listed include
shares owned directly by Mr. Tointon.
Security Ownership of Management - The following information indicates the
common stock of the Company beneficially owned, directly or indirectly, by all
directors and executive officers of the Company as of March 1, 1998.
<TABLE>
Amount and Nature of Percent
Title of Class Beneficiary Ownership of Class
-------------- --------------------- --------
<S> <C> <C> <C>
George S. Writer, Jr. Common Stock 1,398,847 19.02%
Robert G. Tointon (1) Common Stock 1,260,666 17.14%
Deane J. Writer, Jr. Common Stock 209,000 2.84%
Roland Seidler, Jr. Common Stock 201,474(2) 2.74%
Louis P. Bansbach, III Common Stock 140,238 1.91%
Daniel J. Nickless Common Stock 25,710 (3)
Robert R. Reid Common Stock 25,430 (3)
Ronald S. Loser Common Stock 11,900 (3)
Derrell Schreiner Common Stock 5,000 (3)
All Directors &
Officers as a group (11) Common Stock 3,278,265 44.57%
</TABLE>
(1) Reflects shares held by Phelps-Tointon, Inc., of which Mr. Tointon is
the President and part owner.
(2) Does not include shares in varying amounts owned as a market maker by
a broker-dealer with which Mr. Seidler is affiliated.
(3) Less than 1% of shares outstanding.
22
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The following information is furnished with respect to certain transactions in
which the amount involved exceeded $60,000 and which involved an officer,
director, beneficial holder of more than five percent of the voting stock of the
Company or a person or entity affiliated with such persons.
Certain of the Company's officers and directors, directly and indirectly,
provided financial assistance to the Company in several transactions through
December 31, 1997.
SUBDIVISION LOAN PARTICIPATIONS
On January 14, 1992 the Company executed a loan agreement with a real estate
investment trust under which $1,500,000 was committed to the Company for
development of its Northpark project. George S. Writer, Jr. and Roland Seidler,
Jr. participated in this transaction by advancing 20% of the committed funds and
have received 20% of the loan payments, including 20% of a $1,600 per Northpark
lot additional interest payment. Principal and interest on principal of this
loan have been repaid as of December 31, 1997 but the Company is in the process
of negotiating a renewal of the facility for future development of this project.
Regardless of whether the Company renews and modifies this facility, the $1,600
per lot additional interest payment will continue through the balance of the
project. The Company has other development financing sources should the renewal
and modification not be consummated, although the Company expects to renew the
facility under more favorable terms than under the original agreement. During
1997 the Company paid $16,000 under this agreement to the directors.
PENINSULA ACQUISITION AND DEVELOPMENT FINANCING
On August 12, 1992 the Company acquired 22 acres of vacant ground from its
Chairman and Chief Executive Officer George S. Writer, Jr. The land was
transferred at Mr. Writer's out-of-pocket cost. The acquisition was financed by
a loan from several affiliates of the Company including George S. Writer, Jr.
($300,000), Roland Seidler, Jr. ($150,000), Phelps-Tointon, Inc. ($525,000),
Louis P. Bansbach III ($225,000) and two non-affiliates who contributed
$300,000. The same affiliates have funded an additional $2,000,000 for
development of that land. Principal and interest on principal related to these
facilities was fully repaid at December 31, 1997. The loan agreement entitles
the lenders to an additional interest payment equal to 50% of the net profit
from the project, which the Company continues to pay. During 1997, $213,000 was
earned from profit sharing and subsequently paid to the lender group.
FOUNDATION LOANS
On March 19, 1993 the Company entered into a loan agreement with four affiliates
of the Company under which it borrowed $300,000 which was used to construct
foundations for the Company's inventory of homes. The affiliates included
George S. Writer, Jr. ($100,000), Roland Seidler, Jr. ($50,000) and
Phelps-Tointon, Inc. ($50,000). In January, 1994, the Company entered into a
modification agreement by which the foundation loan fund was increased to
$600,000. The increase was provided by George S. Writer, Jr. ($100,000) and
Phelps-Tointon, Inc. ($200,000). The loan was repaid in full in1997.
23
<PAGE>
UNSECURED ADVANCES
During 1989 and 1990 George S. Writer, Jr. advanced an additional $155,500 for
working capital purposes to the Company either personally or through a
corporation which he owns. These unsecured advances were repaid in full in
1997.
WORKING CAPITAL LOAN AND STOCK SUBSCRIPTION AGREEMENT
On February 14, 1992 the Company entered into a loan with a corporation
affiliated with Mr. Robert Tointon, one of the Company's directors. Under the
terms of the loan agreement $175,000 of working capital was advanced to the
Company. The advance bears interest at 10% per annum and will be repaid during
1998. At December 31, 1997 $50,000 was outstanding on the loan.
SERIES 1993 A CONVERTIBLE UNSECURED PROMISSORY NOTES
The Company currently has outstanding unsecured convertible debt of $900,000
held by Phelps-Tointon, Inc. in the amount of $500,000; George S. Writer, Jr. in
the amount of $312,500; Roland Seidler, Jr., in the amount of $87,500. The
convertible debt can be converted into stock at $3.00 of unpaid principal at any
time prior to the maturity date of the note which has been extended for one year
to September 30, 1998. Interest on the debt accrues at prime plus 3.0% and is
paid monthly.
24
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
a) 1. Financial Statements:
The following consolidated financial statements of The Writer
Corporation and its subsidiaries are included in Part II, Item 8:
The Writer Corporation and subsidiaries Consolidated Financial Statements:
<TABLE>
Page
----
<S> <C>
Independent Auditors' Report ......................................... F-1
Consolidated Balance Sheets as of December 31, 1997 and 1996.......... F-2
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995.................................... F-4
Consolidated Statements of Stockholders' Equity forthe years
ended December 31, 1997, 1996 and 1995.............................. F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995.................................... F-7
Notes to Consolidated Financial Statements............................ F-8
</TABLE>
All schedules and separate financial statements of the registrant are omitted
because they are not applicable, or not required, or because the required
information is included in the consolidated financial statements or notes
thereto.
a) 3. Exhibits: None
b) Reports on Form 8-K: None
c) Exhibits Required by Item 601 of Regulation S-K:
(3) Articles of Incorporation and Bylaws - Exhibits 4(a) and
4(b) to the Company's Registration Statement on Form S-2,
Commission File No. 2-81816 are incorporated by reference.
1
<PAGE>
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
THE WRITER CORPORATION
(Registrant)
/s/ George S. Writer, Jr. /s/ Daniel J. Nickless
- --------------------------------------- ----------------------------------
By: George S. Writer, Jr. By: Daniel J. Nickless (Chairman
of the Board of Directors, (Sr. Vice President, Chief
Financial Principal Executive Officer) Officer and Treasurer)
Date: March 25, 1998
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:
/s/ George S. Writer, Jr. /s/ Ronald S. Loser
- --------------------------------------- ----------------------------------
George S. Writer, Jr., March 25, 1998 Ronald S. Loser, March 25, 1998
(Chairman of the Board of Directors and (Secretary and Director)
Principal Executive Officer)
/s/ Deane J. Writer, Jr. /s/ Roland Seidler, Jr.
- --------------------------------------- ----------------------------------
Deane J. Writer, Jr., March 25, 1998 Roland Seidler, Jr., March 25, 1998
(Director) (Director)
/s/ Louis P. Bansbach, III /s/ Robert G. Tointon
- --------------------------------------- ----------------------------------
Louis P. Bansbach, III, March 25, 1998 Robert G. Tointon, March 25, 1998
(Director) (Director)
2
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
of The Writer Corporation:
We have audited the accompanying consolidated balance sheets of The Writer
Corporation and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of The Writer Corporation and
subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Denver, Colorado
March 12, 1998
F-1
<PAGE>
THE WRITER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
- -------------------------------------------------------------------------------
<TABLE>
ASSETS 1997 1996
<S> <C> <C>
RESIDENTIAL REAL ESTATE HELD FOR SALE, NET
(Note 2):
Homes under construction $16,804,000 $12,884,000
Model homes and furnishings, less accumulated
depreciation of $528,000 and $660,000 3,516,000 3,439,000
Land and land development 16,041,000 10,692,000
Unplatted land 739,000 6,403,000
----------- -----------
Total 37,100,000 33,418,000
----------- -----------
OFFICE PROPERTY AND EQUIPMENT, less accumulated
depreciation of $401,000 and $804,000 (Note 2) 470,000 604,000
----------- -----------
OTHER ASSETS:
Cash and cash equivalents 1,015,000 995,000
Restricted cash 722,000 667,000
Accounts receivable 315,000 235,000
Other 707,000 381,000
Deferred tax asset (Note 3) 1,251,000 350,000
----------- -----------
Total 4,010,000 2,628,000
----------- -----------
TOTAL $41,580,000 $36,650,000
----------- -----------
----------- -----------
</TABLE>
See notes to consolidated financial statements. (Continued)
F-2
<PAGE>
THE WRITER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
- -------------------------------------------------------------------------------
<TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
<S> <C> <C>
LIABILITIES:
Notes payable (Note 2):
Construction, including $314,000 and $520,000 to
related parties $14,116,000 $10,932,000
Land, including $1,608,000 to related
parties in 1996 2,946,000 4,211,000
Other, including $950,000 and $1,175,000 to
related parties 2,159,000 2,098,000
----------- -----------
Total 19,221,000 17,241,000
----------- -----------
OTHER LIABILITIES:
Accounts payable and accrued expenses 4,796,000 5,060,000
Accrued interest 182,000 428,000
----------- -----------
Total 4,978,000 5,488,000
----------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 2 and 6)
STOCKHOLDERS' EQUITY (Notes 2 and 4):
Common stock, $.10 par value; 10,000,000 shares
authorized; 7,354,600 shares issued and
outstanding 735,000 735,000
Additional paid-in capital 12,352,000 12,352,000
Retained earnings 4,294,000 834,000
----------- -----------
Stockholders' equity 17,917,000 13,921,000
----------- -----------
TOTAL $41,580,000 $36,650,000
----------- -----------
----------- -----------
</TABLE>
(Concluded)
F-3
<PAGE>
THE WRITER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- -------------------------------------------------------------------------------
<TABLE>
1997 1996 1995
<S> <C> <C> <C>
RESIDENTIAL OPERATIONS:
Revenues $44,098,000 $46,284,000 $31,960,000
Costs and expenses:
Cost of sales 35,761,000 38,563,000 26,315,000
Sales and marketing 3,703,000 3,548,000 3,210,000
General and administrative 2,675,000 1,883,000 1,609,000
Interest (Note 2) 640,000 1,217,000 2,025,000
----------- ---------- ----------
Total 42,779,000 45,211,000 33,159,000
----------- ---------- ----------
Income (loss) from residential operations 1,319,000 1,073,000 (1,199,000)
INTEREST AND OTHER INCOME, NET
(Note 6) 1,240,000 204,000 169,000
----------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES 2,559,000 1,277,000 (1,030,000)
INCOME TAX BENEFIT (Note 3) 901,000 24,000 714,000
----------- ---------- ----------
INCOME (LOSS) BEFORE EXTRAORDINARY
ITEM 3,460,000 1,301,000 (316,000)
EXTRAORDINARY ITEM - Gain on
extinguishment of debt, net of income taxes
of $722,000 (Note 2) - - 1,437,000
----------- ---------- ----------
NET INCOME $ 3,460,000 $1,301,000 $1,121,000
----------- ---------- ----------
----------- ---------- ----------
</TABLE>
See notes to consolidated financial statements. (Continued)
F-4
<PAGE>
THE WRITER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 and 1995
- -------------------------------------------------------------------------------
<TABLE>
1997 1996 1995
<S> <C> <C> <C>
EARNINGS (LOSS) PER SHARE (Notes 1 and 5):
BASIC:
Continuing operations $ 0.47 $ 0.18 $ (0.05)
Extraordinary item 0.23
---------- ---------- ----------
Net income $ 0.47 $ 0.18 $ 0.18
---------- ---------- ----------
---------- ---------- ----------
DILUTED:
Continuing operations $ 0.46 $ 0.18 $ (0.05)
Extraordinary item 0.23
---------- ---------- ----------
Net income $ 0.46 $ 0.18 $ 0.18
---------- ---------- ----------
---------- ---------- ----------
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING:
Basic 7,355,000 7,341,000 6,280,000
---------- ---------- ----------
---------- ---------- ----------
Diluted 7,723,000 7,745,000 6,280,000
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
(Concluded)
F-5
<PAGE>
THE WRITER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- -------------------------------------------------------------------------------
<TABLE>
ADDITIONAL RETAINED
COMMON STOCK PAID-IN EARNINGS
SHARES AMOUNT CAPITAL (DEFICIT)
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1995 5,713,800 $571,000 $10,133,000 $(1,588,000)
Private placement of common stock
(Note 4) 1,530,000 153,000 2,142,000 -
Issuance of common stock 3,300 1,000 4,000 -
Net income - - - 1,121,000
--------- -------- ----------- -----------
BALANCE, DECEMBER 31, 1995 7,247,100 725,000 12,279,000 (467,000)
Issuance of common stock 107,500 10,000 73,000 -
Net income - - - 1,301,000
--------- -------- ----------- -----------
BALANCE, DECEMBER 31, 1996 7,354,600 735,000 12,352,000 834,000
Net income - - - 3,460,000
--------- -------- ----------- -----------
BALANCE, DECEMBER 31, 1997 7,354,600 $735,000 $12,352,000 $ 4,294,000
--------- -------- ----------- -----------
--------- -------- ----------- -----------
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
THE WRITER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- -------------------------------------------------------------------------------
<TABLE>
1997 1996 1995
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,460,000 $ 1,301,000 $ 1,121,000
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Gain on debt extinguishment - - (1,437,000)
Depreciation and amortization 387,000 513,000 516,000
Deferred income tax benefit (901,000) (33,000) (754,000)
Provision for impairment - 475,000 -
(Gain) loss on disposal of property and model
home furnishings (546,000) 59,000 -
Changes in operating assets and liabilities:
Homes under construction (3,920,000) 2,395,000 2,286,000
Model homes and furnishings (284,000) 1,003,000 (208,000)
Land and land development (5,349,000) 811,000 (3,512,000)
Unplatted land 5,664,000 (520,000) 1,497,000
Restricted cash (55,000) (312,000) (69,000)
Other assets (406,000) 34,000 337,000
Accounts payable and accrued expenses (510,000) (626,000) (684,000)
------------ ----------- ------------
Net cash provided by (used in)
operating activities (2,462,000) 5,100,000 (907,000)
------------ ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of office property and equipment (347,000) (104,000) (245,000)
Proceeds from sales of property and equipment 847,000 - -
------------ ----------- ------------
Net cash provided by (used in) investing
activities 500,000 (104,000) (245,000)
------------ ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 32,964,000 24,237,000 21,745,000
Proceeds from notes payable from related parties 1,135,000 1,619,000 1,203,000
Principal payments and other reductions on
notes payable (28,857,000) (27,177,000) (21,727,000)
Principal payments and other reductions on
notes payable to related parties (3,262,000) (3,857,000) (2,580,000)
Proceeds from sale of common stock - 83,000 2,300,000
------------ ----------- ------------
Net cash provided by (used in) financing
activities 1,980,000 (5,095,000) 941,000
------------ ----------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 20,000 (99,000) (211,000)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 995,000 1,094,000 1,305,000
------------ ----------- ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 1,015,000 $ 995,000 $ 1,094,000
------------ ----------- ------------
------------ ----------- ------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
The Company paid $897,000, $1,320,000 and
$1,941,000 in interest (net of amounts capitalized)
and $61,000, $0 and $0 in income taxes during the
years ended December 31, 1997, 1996 and 1995,
respectively.
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
THE WRITER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- -------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Writer Corporation (the Company) is a developer and builder of planned
residential communities in the Denver, Colorado metropolitan area. The
accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amount of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
Residential real estate sales and costs of sales are recorded at the time of
closing. Cost of sales includes land and land development costs, direct and
indirect construction costs, capitalized interest and taxes and estimated
warranty costs. As of January 1, 1996, the Company provides a two year
structural warranty to home buyers. Previously all structural warranties
were covered by a third party insurer.
Costs of unplatted land are transferred to land and land development as each
development plat is filed, according to the estimated value of the acreage
in that filing in relation to the estimated value of the total project.
Land and land development costs are prorated to homes under construction
based on total estimated costs to complete each filing and the number of
home sites in the filing.
The Company adopted Statement of Financial Accounting Standards (SFAS)
No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED
ASSETS TO BE DISPOSED OF (SFAS No. 121) effective January 1, 1996, which
requires inventory that is substantially complete and ready for its intended
use to be stated at the lower of carrying value or fair value less costs to
sell. Land under development and land held for future development and sale
is evaluated for impairment whenever events or changes in circumstances
indicate that the carrying amount of the asset may not be recoverable. If a
long-lived asset is identified as impaired, the value of the asset is
reduced to its fair value. In 1996, the Company recorded an impairment loss
of $475,000, which is included in cost of sales, to reduce a parcel of land
to its fair value as a result of the Company's decision to sell the land
instead of continuing with previous plans to develop and build out the
project.
Office property and equipment and model home furnishings are recorded at
cost. Depreciation is provided by the straight-line method over estimated
useful lives ranging from three to thirty years. The Company does not
depreciate model homes because estimated future sales prices are expected to
exceed cost.
The Company's cash and cash equivalents consist of demand deposits and money
market funds.
F-8
<PAGE>
In October 1995, the Financial Accounting Standards Board issued SFAS
No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, (SFAS No. 123) which was
effective for the Company beginning January 1, 1996. SFAS No. 123 requires
expanded disclosures of stock-based compensation arrangements with employees
and encourages (but does not require) compensation cost to be measured based
on the fair value of the equity instrument awarded. Companies are
permitted, however, to continue to apply APB Opinion No. 25, which
recognizes compensation cost based on the intrinsic value of the equity
instrument awarded. The Company has continued to apply APB Opinion No. 25
to its stock based compensation awards to employees and has disclosed the
required pro forma effect on net income and earnings per share at Note 4.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 EARNINGS PER SHARE ("SFAS 128").
SFAS 128 establishes standards for computing and presenting earnings per
share (EPS), and supersedes APB Opinion No. 15 and its related
interpretations. It replaces the presentation of primary EPS with a
presentation of basic EPS, which excludes dilution, and requires dual
presentation of basic and diluted EPS for all entities with complex capital
structures. Diluted EPS is computed similarly to fully diluted EPS pursuant
to Opinion No. 15. The Company adopted SFAS 128 in December 1997 and has
restated EPS in the accompanying financial statements to give retroactive
effect to the adoption of the accounting standard. The adoption of SFAS 128
did not have a material effect on EPS.
2. NOTES PAYABLE
CONSTRUCTION - The Company has construction financing arrangements with
various banks and related parties. The borrowings generally bear interest
at rates ranging from prime (8.5% at December 31, 1997) plus .5% to prime
plus 1.5% and are collateralized by residential real estate. Principal and
interest are generally due upon sale of the respective collateral and the
financing arrangements are generally renewed in the ordinary course of
business.
During 1997 and 1996, the Company obtained several new revolving lines of
credit and increased the borrowing availability on existing lines of credit
to be used for construction purposes. These lines allow the Company to
finance a defined number of speculative homes and an unlimited number of
presold homes as long as the total amount of the commitment is not exceeded.
At December 31, 1997, the Company has total construction commitments
available of $12,695,000.
F-9
<PAGE>
LAND - Notes payable related to unplatted land and land development at
December 31 consist of the following:
<TABLE>
DESCRIPTION 1997 1996
<S> <C> <C>
Interest at prime + 1%, payable monthly $1,209,000 $1,694,000
Interest at prime + .5%, payable monthly 1,184,000 -
Interest at prime + 1%, payable monthly 464,000 -
Interest at prime + 1.25%, payable monthly 89,000 625,000
Payable to related parties and other, interest at 10% - 981,000
Payable to related parties, interest at 12% - 725,000
Interest at 14% - 186,000
---------- ----------
Total $2,946,000 $4,211,000
---------- ----------
---------- ----------
</TABLE>
At December 31, 1997, the Company has a loan facility of $2,656,000 with a
financial institution. The borrowings bear interest at prime plus 1%,
matures February 20, 1999 and are secured by residential real estate. At
December 31, 1997 and 1996, the Company has $1,209,000 and $1,694,000,
respectively, outstanding under this loan.
In December 1997, the Company consummated a $10,000,000 loan facility with a
financial institution to fund the acquisition and development of certain
lots and the construction of homes within preapproved subdivisions. The
land acquisition and development portion is limited to $3,500,000, of which
$1,184,000 is outstanding as of December 31, 1997. The borrowings bear
interest at prime plus .5%, matures May 1, 2000 and are secured by
residential real estate. The credit agreement also provides for an
unsecured working capital line of $500,000. No amounts were outstanding
under this unsecured line at December 31, 1997.
In November 1997, the Company consummated a $3,800,000 loan facility
comprised of a $3,000,000 revolving line of credit for construction and an
$800,000 non-revolving line of credit to refinance $725,000 of debt as of
December 31, 1996 which had been advanced by certain members of the
Company's Board of Directors. The non-revolving credit portion bears
interest at prime plus 1%, matures May 1, 1999 and is secured by residential
real estate. At December 31, 1997, the Company had $464,000 outstanding
under the non-revolving portion.
At December 31, 1997 and 1996, the Company had $89,000 and $625,000,
respectively, due on a $1,507,000 loan commitment to develop a residential
townhouse project. The loan, which matures December 31, 1998, bears
interest at prime plus 1.25% and is collateralized by the land.
During 1997, the Company paid off certain secured notes which represented
borrowings from members of the board of directors or from companies
controlled by members of the board. The note bore interest at 10% and
provided the lenders with additional interest in the form of a participation
payment equal to 50% of the adjusted profit of the project, as defined.
Additional interest earned by the lenders was
F-10
<PAGE>
$213,000, $283,000 and $286,000 for the years ended December 31, 1997, 1996
and 1995, respectively. At December 31, 1996, the Company had $981,000
outstanding under this note.
At December 31, 1996, the Company had $186,000 outstanding under a loan
agreement with a real estate investment trust. The loan bore interest at
14% and was payable as the underlying collateral was sold. Two of the
Company's directors were participating lenders with a 20% subordinate
interest in the loan. The loan principal was repaid during 1997. The terms
of the loan provide for a $1,600 per lot participation payment payable as
the underlying collateral is sold. The per lot participation payment will
continue through the balance of the project. The participating directors
were paid $16,000 in 1997 as a result of the per lot participation terms.
In December 1997, the Company consummated a $3,500,000 loan facility to
finance the acquisition of certain lots and the construction of townhouses
on those lots. No advances had been made as of December 31, 1997. The loan
bears interest at prime + .5% and matures December 31, 2000.
At December 31, 1997, the Company had $12,518,000 available to borrow under
existing lender arrangements for land development.
OTHER - Other notes payable consist of the following at December 31:
<TABLE>
DESCRIPTION 1997 1996
<S> <C> <C>
Revolving line of credit $1,209,000 $ -
Payable to related parties and others, convertible into
common stock 900,000 1,025,000
Payable to related parties, interest at 10%, due
February 1999 50,000 175,000
Interest at prime + 1%, payable monthly,
collateralized by the Company's office building - 891,000
Interest at prime + 1%, unsecured, due March 1997 - 7,000
---------- ----------
Total $2,159,000 $2,098,000
---------- ----------
---------- ----------
</TABLE>
In December 1996, the Company obtained a commitment for a revolving line of
credit for working capital in the amount of $1,700,000. In December 1997,
the line was reduced to $1,562,250 because certain collateral was sold. The
line is secured by real estate and bears interest at prime + 1% and matures
December 31, 1998. At December 31, 1997, the Company has $1,209,000
outstanding under this revolving line of credit.
On July 22, 1993, the Company issued $1,025,000 in unsecured convertible
debt to certain members of the board of directors, a company controlled by a
director, and an unrelated entity. The debt is convertible into common
stock at the option of the holders at the rate of $3 of unpaid principal for
each share of common stock. During the year, the Company repaid certain
holders of this debt. The obligation was to mature September 30, 1997, but
was extended to September 30, 1998 in exchange for an increase in the
interest rate from prime + 1.5% to prime + 3%, which is payable monthly.
F-11
<PAGE>
In March 1997, the Company's note payable, collateralized by the Company's
office building, was repaid from the sales proceeds of the Company's office
property.
On June 22, 1995, the Company entered into an agreement to satisfy a
$2,756,000 obligation for a $750,000 cash payment, which resulted in an
extraordinary gain of $2,006,000. The cash payment was primarily made from
the proceeds of the common stock offering discussed in Note 4. In addition,
the Company was obligated to this lender for stock appreciation rights on
500,000 shares of the Company's common stock, which was also satisfied in
full with the cash payment to the lender.
The debt obligations of the Company, excluding construction financing and
assuming principal is paid at loan maturity, are scheduled below:
<TABLE>
DECEMBER 31,
1997
<S> <C>
1998 $2,198,000
1999 1,723,000
2000 1,184,000
Thereafter -
----------
Total $5,105,000
----------
----------
</TABLE>
During the years ended December 31, 1997, 1996 and 1995, interest of
$2,303,000, $2,955,000 and $3,693,000 was incurred, of which $578,000,
$753,000 and $901,000 was from related parties. Interest totaling
$1,663,000, $1,738,000 and $1,668,000 was capitalized in each of the
respective years. Interest paid, net of amounts capitalized, totaled
$897,000, $1,320,000 and $1,941,000 in 1997, 1996 and 1995, respectively.
The weighted average interest rate for the years ended December 31, 1997,
1996 and 1995 was 12.25%, 13.60% and 14.59%, respectively.
FAIR VALUE - The Company used the following methods and assumptions to
estimate its fair value disclosures for notes payable:
CONSTRUCTION - Due to the short term nature and characteristics of the
Company's construction borrowings, the carrying amounts
reported in the balance sheet as of December 31, 1997
and 1996 approximate the fair value of the liabilities.
LAND AND OTHER - Management has evaluated the Company's land and other
obligations based on rates currently available to the
Company for debt with similar collateral, terms and
maturities. Management has concluded that the carrying
amounts reported in the balance sheet as of December 31,
1997 and 1996 approximate the fair value of the obligations.
3. INCOME TAXES
The Company computes deferred income taxes based on the difference between
the financial statement and income tax bases of assets and liabilities and
operating loss and tax credit carryforwards, using enacted tax rates.
F-12
<PAGE>
The components of income tax expense (benefit) are as follows:
<TABLE>
1997 1996 1995
<S> <C> <C> <C>
Current $ - $ 9,000 $ 40,000
Deferred (901,000) (33,000) (754,000)
--------- -------- ---------
Tax benefit from continuing operations $(901,000) $(24,000) $(714,000)
--------- -------- ---------
--------- -------- ---------
</TABLE>
The income tax benefit includes $467,000, $291,000 and $0 for 1997, 1996 and
1995, respectively, as a result of the utilization of tax credits and net
operating loss carryforwards. The income tax benefit for 1997 includes
$1,531,000 resulting from the change in the valuation allowance.
The tax effects of significant items comprising the Company's net deferred
tax asset as of December 31 are as follows:
<TABLE>
1997 1996
<S> <C> <C>
DEFERRED TAX ASSETS:
Residential real estate $ 2,220,000 $ 2,422,000
Warranty reserve 311,000 181,000
Depreciation 172,000 105,000
Tax credits and net operating loss carryforwards - 491,000
Accruals 9,000 92,000
Other 42,000 17,000
----------- -----------
2,754,000 3,308,000
----------- -----------
DEFERRED TAX LIABILITIES:
Capitalized interest (329,000) (324,000)
Loss on sales of assets (124,000) (53,000)
----------- -----------
(453,000) (377,000)
----------- -----------
Total 2,303,000 2,931,000
Less valuation allowance (1,050,000) (2,581,000)
----------- -----------
Net deferred tax asset $ 1,251,000 $ 350,000
----------- -----------
----------- -----------
</TABLE>
A significant portion of the Company's deferred tax asset represents
temporary differences between deductions for financial reporting and tax
reporting, primarily land basis differences. As of December 31, 1997, the
Company remains uncertain as to the realization of its deferred tax assets
due to the cyclical nature of the real estate industry, factors that are
outside the control of the Company, such as interest rates, as well as the
Company's history of operating losses. The net change in the total
valuation allowance during the years ended December 31, 1997 and 1996 was a
reduction of $1,531,000 and $447,000, respectively, as a result of the
utilization of tax credits and net operating loss carryforwards and the
revaluation of the results of future operations. The amount of the deferred
tax assets considered realizable, however, could be increased or decreased
in the near term if estimates of future taxable income are changed.
The Company's effective tax rate does not bear a normal relationship to the
expected United States statutory rate for any year presented due to the
change in the previously provided valuation allowance.
F-13
<PAGE>
4. COMMON STOCK
The Company has stock option plans giving certain officers and employees the
right to purchase shares of its common stock at quoted market value at date
of grant. At December 31, 1997, 760,000 shares have been reserved under the
plans. The plans allow the options to be exercised in four equal annual
installments, beginning one year after the date of grant, and have a maximum
term of ten years. Changes in options outstanding under the plans for the
three years ended December 31, 1997, are as follows:
<TABLE>
WEIGHTED-AVERAGE NUMBER OF
EXERCISE PRICE SHARES
<S> <C> <C>
Options outstanding, January 1, 1995 $1.66 319,400
Granted 2.00 50,000
Forfeited 2.23 (80,500)
----- -------
Options outstanding, December 31, 1995 1.56 288,900
Granted 1.04 325,000
Forfeited 1.25 (9,760)
----- -------
Options outstanding, December 31, 1996 1.31 604,140
Forfeited 2.50 (500)
----- -------
Options outstanding, December 31, 1997 $1.30 603,460
----- -------
----- -------
Total exercisable at December 31, 1997 $1.36 318,000
----- -------
----- -------
</TABLE>
As of December 31, 1997, the 603,640 options outstanding under the plans
have exercise prices which range from $.65 to $2.50 and a weighted-average
remaining contractual life of 7.07 years.
The Company applies APB Opinion 25 and related interpretations in accounting
for its plans. Accordingly, no compensation cost has been recognized in the
accompanying consolidated financial statements. The estimated fair value of
the employees' stock options was calculated using the Black-Scholes model
with the following assumptions for 1996 and 1995: no dividend yield; an
expected life of 4 years; expected volatility of 37 percent; and risk-free
interest rates of 5.9 percent. No options were granted in 1997. Had
compensation expense for the option plans been determined based on the fair
value at the grant date for the options awarded in 1996 and 1995 consistent
with the provisions of SFAS 123, the Company's net income would have been
reduced to $3,418,000, $1,286,000 and $1,112,000 for the years ended
December 31, 1997, 1996 and 1995, respectively, with no effect on basic or
diluted earnings per share.
During 1995, the Company completed a private placement of its common stock.
The "best efforts" offering resulted in the sale of 1,530,000 shares at
$1.50 per share. In addition, two of the Company's directors converted
short term loans to the Company, totaling $276,000, to common stock in lieu
of repayment. Including this conversion, four of the Company's directors
invested $750,000 in this private placement. The balance was purchased by
"accredited investors" which were unaffiliated with the Company.
F-14
<PAGE>
5. EARNINGS (LOSS) PER SHARE
Basic net income (loss) per share is computed by dividing net income (loss)
by the weighted average number of common shares. Diluted income (loss) per
share includes the effects of convertible debt described in Note 2 and
includes the potential dilution that could occur upon the exercise of the
stock options described in Note 4, computed using the treasury stock method
which assumes that the increase in the number of shares is reduced by the
number of shares which could have been repurchased by the Company with the
proceeds from the exercise of the options (which were assumed to have been
made at the average market price of the common shares during the reporting
period). For the year ended December 31, 1995, diluted net income (loss)
per share is the same as basic net income per share because the Company had
a loss from continuing operations.
The following table reconciles the number of shares outstanding used in the
calculation of net income (loss) per share.
<TABLE>
INCOME
INCOME (LOSS)
(LOSS) SHARES PER SHARE
<S> <C> <C> <C>
For the Year Ended December 31, 1997:
Net income $3,460,000 7,355,000 $ 0.47
Effect of options 68,000
Effect of convertible debt 94,000 300,000
---------- ---------
Net income per share - assuming dilution $3,554,000 7,723,000 $ 0.46
---------- ---------
---------- ---------
For the Year Ended December 31, 1996:
Net income $1,301,000 7,341,000 $ 0.18
Effect of options 62,000
Effect of convertible debt 100,000 342,000
---------- ---------
Net income per share - assuming dilution $1,401,000 7,745,000 $ 0.18
---------- ---------
---------- ---------
For the Year Ended December 31, 1995:
Income from continuing operations $ (316,000) 6,280,000 $(0.05)
Effect of options
Effect of convertible debt
---------- --------- ------
Income from continuing operations - assuming dilution (316,000) 6,280,000 (0.05)
Extraordinary item 1,437,000 6,280,000 0.23
---------- --------- ------
Net income per share - assuming dilution $1,121,000 6,280,000 $ 0.18
---------- --------- ------
---------- --------- ------
</TABLE>
F-15
<PAGE>
6. COMMITMENTS AND CONTINGENCIES AND OTHER MATTERS
The Company leases property, equipment and model homes under operating
leases. Total rental expenditures under all operating leases were
approximately $250,000, $26,000 and $0 for 1997, 1996 and 1995,
respectively.
As of December 31, 1997, the Company's future minimum payments under
operating leases are as follows:
<TABLE>
<S> <C>
1998 $ 339,000
1999 289,000
2000 205,000
2001 167,000
2002 116,000
Thereafter -
----------
Total minimum lease payments $1,116,000
----------
----------
</TABLE>
In March 1997, the Company sold its office building to an unrelated party
and recognized a gain on the sale (other income) of $542,000.
The Company has a profit sharing retirement plan (the Plan). During 1996,
the Plan was modified to include a 401(k) feature under which eligible
employees may contribute up to 12% of their salaries. Company contributions
are at the discretion of the Company's board of directors unless required by
ERISA regulations, as was the case in 1997 and 1996. Total Company
contributions to the Plan for the year ended December 31, 1997 and 1996 were
$64,000 and $58,000, respectively.
In December 1996 the Company's Board of Directors approved a profit sharing
plan whereby pretax profit is shared with key employees based on formulas as
defined in the agreement. Approximately $90,000 has been accrued as of
December 31, 1997 with respect to this plan.
The Company had outstanding letters of credit of $578,000 at December 31,
1997 related to its obligations to local governments to construct roads and
other improvements in various developments. The Company does not believe
that any letters of credit are likely to be drawn upon.
The Company is involved in various legal matters of a nature incidental to
its business which, in the opinion of management, should not have a material
adverse effect on the Company.
* * * * *
F-16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,737,000<F1>
<SECURITIES> 0
<RECEIVABLES> 315,000
<ALLOWANCES> 0
<INVENTORY> 37,100,000<F2>
<CURRENT-ASSETS> 0
<PP&E> 871,000
<DEPRECIATION> (401,000)
<TOTAL-ASSETS> 41,580,000<F3>
<CURRENT-LIABILITIES> 4,978,000
<BONDS> 19,221,000
0
0
<COMMON> 735,000
<OTHER-SE> 16,646,000
<TOTAL-LIABILITY-AND-EQUITY> 41,580,000
<SALES> 44,098,000
<TOTAL-REVENUES> 44,098,000
<CGS> (35,761,000)
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 5,778,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,559,000
<INCOME-TAX> 901,000<F4>
<INCOME-CONTINUING> 3,460,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,460,000
<EPS-PRIMARY> .47
<EPS-DILUTED> .46
<FN>
<F1>CASH INCLUDES $722,000 OF RESTRICTED CASH
<F2>INVENTORY INCLUDES HOMES UNDER CONSTRUCTION $16,804,000, MODEL HOMES &
FURNISHINGS OF $3,516,000, LAND & LAND DEVELOPMENT $16,041,000 UNPLATTED LAND
$739,000
<F3>TOTAL ASSETS INCLUDES $707,000 OTHER ASSETS, & $1,251,000 DEFERRED TAX
<F4>TAX BENEFIT
</FN>
</TABLE>
