<PAGE>
UNITED STATES
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
For the fiscal year ended December 31, 1998
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From _____ to _____
--------------------
Commission file number 0-08305.
THE WRITER CORPORATION
Colorado 84-0510478
-------- ----------
(State of incorporation) (IRS Employer Identification No.)
6061 S. Willow Drive #232, Englewood, Colorado 80111
- ---------------------------------------------- -----
(303) 779-4100
- --------------
Securities registered pursuant to Section 12(b) of the Act: 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
8, 1999 (based upon the average between the reported bid and asked prices of
these shares traded over-the-counter) held by non-affiliates was
approximately $7,627,000.
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 26, 1999,
7,432,590 shares of The Writer Corporation's $.10 par value common stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
(NONE)
<PAGE>
PART I
ITEM 1. BUSINESS.
The Writer Corporation is a developer and builder of planned residential
communities in the Denver, Colorado area. The Company has recently expanded
into the Northern Colorado area with projects in Ft. Collins and Windsor,
Colorado. The Company believes its expansion into Northern Colorado provides
an opportunity for the Company to identify more affordable development
opportunities in an expanding marketing area. Because of these
opportunities, the Company has assumed an aggressive position relative to its
overall land philosophy and current land position. The Company has purchased
a contract which allows the Company to acquire 107 acres in Southeast Ft.
Collins which is entitled under the Ft. Collins "City Plan". Under the City
Plan, the zoning requires the development of no less than 481 lots. This
parcel will allow the Company to plan and develop a significant community
consistent with its historical developments. The Company also acquired 140
single family lots in Arvada, Colorado for a new project called Sunrise
Ridge. The Company is continuously investigating community development
opportunities and has recently entered into three letters of intent to
purchase parcels in the Denver Metropolitan area and is processing contracts
on two additional parcels. To fund this growth, the Company has re-employed
its available cash flow and will continue to expand its borrowing
relationships. See additional discussion at Item 7, "Management's Discussion
and Analysis of Financial Condition and Results of Operations".
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, 1998,
the Company has closed the sale of 9,925 homes in 35 communities.
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 $129,000 to $337,000.
The following table presents historical data relating to sales of the
Company's homes and homes under contract.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total Revenues From
Closed Sales (in thousands)(1) $ 64,091 $ 44,098 $ 46,284 $ 31,960 $ 36,126
Average Sales Price (per home) $219,048 $220,913 $215,274 $194,878 $174,522
Number of Homes Closed 286 196 215 164 207
Backlog as of December 31,
(number of homes) 166 73 54 66 36
Backlog as of December 31,
(in thousands) $ 31,653 $ 16,183 $ 11,885 $ 14,766 $ 6,365
</TABLE>
2
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(1) 1998 and 1997 Revenue includes $1,433,000 and $799,0000 from 27 and 14
finished lot sales, respectively.
Backlog is defined as the number of homes in planning or construction 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,
1998 backlog to close within 1999. The backlog at March 7, 1999 was 203
homes, representing $39,650,000 in potential revenue.
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 35 communities,
26 of which have been completed. The Company was active in eleven
communities during 1998, some of which have more than one product line,
including; Southpark's Peninsula, Greenbrook, Northpark, Lowry, Castle Pines
North, Highlands Ranch Writer Ridge II, SummerHill and Settler's Village, all
located in metropolitan Denver, and Water Valley and River West 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>
<CAPTION>
Under Construction Current or
Date Units In --------------------- Projected
Opened Master Units Under Not Under Units Not Base Price
PROJECT for Sale Plan Closed Contract Contract Started Models Range
- ------- -------- -------- ------ -------- --------- --------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SOUTHPARK 1982 1051 1051 0 0 0 0
GREENBROOK (1)
Townhomes 1983 212 153 22 7 27 3 $128,400 -
$132,400
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 453 380 25 16 32 0 $166,400 -
$179,400
</TABLE>
3
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<TABLE>
<CAPTION>
Under Construction Current or
Date Units In --------------------- Projected
Opened Master Units Under Not Under Units Not Base Price
PROJECT for Sale Plan Closed Contract Contract Started Models Range
- ------- -------- -------- ------ -------- --------- --------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
LOWRY (3)
Townhomes 1998 120 19 38 0 60 3 $185,500 -
$199,500
CASTLE PINES NORTH
Single Family
Royal Hill/Kings 1985 338 338 0 0 0 0
Crossing
Noble Ridge 1997 186 52 1 2 128 3 $284,900 -
$336,900
KnightsBridge 1985 235 149 16 4 64 2 $205,900 -
$227,900
Townhomes 1999 97 0 0 0 97 0 to be
determined
HIGHLANDS RANCH
Single Family
Writer Ridge 1990 100 100 0 0 0 0
Writer Ridge II 1993 88 88 0 0 0 0
SummerHill 1993 139 106 13 5 13 2 $202,000 -
$227,990
Townhomes
Settler's Village (2) 1995 199 122 13 5 59 0 $155,400 -
$180,900
SUNRISE RIDGE (6)
Single Family 1999 50 0 0 0 50 0 to be
determined
Townhomes 1999 90 0 0 0 90 0 to be
determined
RIVER WEST (5)
Single Family 1998 49 5 0 6 36 2 $228,000 -
$304,500
STETSON CREEK
Single Family 1997 47 7 7 6 25 2 $209,500 -
$234,500
Townhomes (4) 1999 102 0 0 0 102 0 to be
determined
WATER VALLEY (7)
Single Family 1997 6 4 0 2 0 0 $230,000 -
$262,500
----- ----- --- -- --- --
Total as of
December 31, 1998 4,041 3,053 135 53 783 17
----- ----- --- -- --- --
----- ----- --- -- --- --
</TABLE>
4
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See footnotes below.
(1) The Company re-opened this community in 1997.
(2) In 1997 three of the models at each community were sold and leased back to
the Company.
(3) The Company holds an option agreement to acquire an additional 52 lots to
be purchased in 1999.
(4) Purchased in January 1999.
(5) During 1998 37 lots were purchased, the remaining 12 lots were purchased in
February 1999.
(6) Acquired in 1998.
(7) Completed in 1999.
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 will be
platted into 90 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 intends
to enter 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.
5
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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 Company must provide through its
working capital. They are repaid by refinancing from related construction
loan facilities and/or ultimately by proceeds from sale.
HOME CONSTRUCTION
The Company typically completes construction of its homes in 120 to 150
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 financing for a portion of the Company's lot purchases and
substantially all material and outside labor costs incurred in the
construction of residences. In addition, loan agreements provide model home
financing and allow a specific number of speculative homes to be built.
These loans currently bear interest at rates ranging from the prime rate of
interest to prime plus 1.5% and are typically renewed annually, at which time
loan fees ranging from 0.5% to 1.0% are funded from the loans.
The Company has remaining approximately $17,922,000 available from financing
sources for construction financing as of December 31, 1998.
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.
6
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CUSTOMER FINANCING
The Company has identified mortgage lenders which are available for buyers to
use which it believes 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.
WORKING CAPITAL FACILITIES
The Company obtains a portion of its working capital through credit
facilities from institutional lenders. Currently the Company has three such
facilities having the following terms.
<TABLE>
<CAPTION>
Maximum Principal Amount Interest Rate Security
------------------------ ------------- ---------
<S> <C> <C>
$1,424,000 (Revolving) Prime + 1% Portions of Castle Pines North
$1,000,000 (Revolving) Prime + .5% Unsecured
$1,500,000 Prime + 1.5% Currently unsecured, to be secured by Sunrise Ridge
</TABLE>
See Discussion at Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations".
OTHER FACTORS INFLUENCING THE COMPANY'S BUSINESS
Most raw materials and other construction materials or products that the
Company uses are readily available and are carried by major suppliers.
However, 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. The Company competes
with other companies in its business which may have substantially greater
financial resources than the Company.
Metro-Denver, Colorado has pockets of soils which can cause damage to home
foundations resulting from expansion due to moisture in those soils. The
Company engages soils engineers who advise the Company with respect to
foundation structures designed to control expansion of soils which are
discovered as a result of preconstruction testing conducted by such engineers.
The Company and other home builders in Colorado have been the subjects of
lawsuits claiming, in addition to costs of repair, damages for mental
distress, punitive damages, and treble damages under the Colorado Consumer
Protection Act arising out of failure to properly design and construct
foundations, to properly disclose hazards due to the existence of expansive
soils and to promptly repair damages caused by expansive soils.
7
<PAGE>
The Company maintains liability insurance which covers design and
manufacturing defects in its products. Management of the Company believes
that such insurance is adequate to cover its loss exposure for such defects,
including damages which may be caused to its homes by expansive soils.
However, the Company's insurance may not cover punitive damages or civil
penalties.
The Company has received claims with respect to expansive soils damage at
three of its communities. To date, except as discussed below, these claims
have been satisfied in the ordinary course of warranty repairs to the
Company's homes.
Claims asserted by two homeowners against the Company have been submitted to
arbitration in which the Company was defended by its insurance carrier under
a reservation of rights. An award was rendered against the Company which
included interest and treble damages under the Colorado Consumer Protection
Act. The Company's insurer paid $1,700,000.00 in settlement of these awards,
reserving the right to later assert policy defenses against the Company.
However, based upon advice received from the Company's insurance coverage
counsel, Management does not believe that it is likely that the Company's
insurer would prevail if claims based on policy defenses were asserted by the
Company's carrier.
Management also believes that it is unlikely that any pending claims of
damage due to expansive soils will result in recovery of awards which would
not be covered by insurance and/or would in the aggregate have a material
adverse impact upon the Company. However, there is no assurance that pending
expansive soils claims or such claims which may be asserted in the future
will not have elements of damage which are not covered by the Company's
liability insurance and will not have an adverse impact upon the cost of the
Company's liability insurance.
EMPLOYEES
As of December 31, 1998 the Company had 101 full time employees, including 7
in executive positions, 9 in sales and marketing activities, 73 in planning,
construction or development activities, 12 in administrative activities, and
13 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.
ITEM 2. PROPERTIES.
The Company's principal offices are in the Atrium Building located at 6061 S.
Willow St., Englewood, Colorado. The Company has leased approximately 10,000
square feet for a five year term ending June 2002 with renewal options. The
Company's Northern Division has its office at 5200 Hahns Peak Drive,
Loveland, Colorado. The Company has leased approximately 1200 square feet
for a three year term ending May 2001.
On March 14, 1997, the Company sold its headquarters building to an unrelated
party at a gain of $542,200. 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.
8
<PAGE>
The Company owns various parcels of real estate in metropolitan Denver and
Northern Colorado which it holds for development as residential property.
ITEM 3. LEGAL PROCEEDINGS.
The Company has no material pending legal proceedings other than ordinary
routine litigation incidental to its business. See Discussion at Item 1,
"Business, Other Factors Influencing the Company's Business".
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 8, 1999 was 400.
<TABLE>
<CAPTION>
Stock Price and Dividends Low High
- ------------------------- --- ----
"Bid Price" "Ask Price" Dividends Paid
----------- ----------- Per Share
--------------
<S> <C> <C> <C>
1998
----
First Quarter $1.31 $2.25 None
Second Quarter 1.88 2.63 None
Third Quarter 1.75 2.69 None
Fourth Quarter 1.63 2.38 None
1997
----
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
</TABLE>
9
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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>
<CAPTION>
Dollar amounts in thousands
other than per share data 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues $64,091 $44,098 $46,284 $31,960 $36,126
Income (loss) from continuing
operations (1) $2,182 $3,460 $1,301 $(316) $1,233
Income (loss) from continuing
operations per share
Basic $.29 $.47 $.18 $(.05) $.21
Diluted $.29 $.46 $.18 $(.05) $.21
Net income (1) (2) $2,182 $3,460 $1,301 $1,121 $1,233
Net income per share (1) (2)
Basic $.29 $.47 $.18 $.18 $.21
Diluted $.29 $.46 $.18 $.18 $.21
Weighted average shares
outstanding (Basic) 7,412,000 7,355,000 7,341,000 6,280,000 5,974,000
Dividends paid per share -0- -0- -0- -0- -0-
Total assets $44,478 $41,580 $36,650 $41,070 $41,851
Notes payable $17,936 $19,221 $17,241 $22,419 $25,937
</TABLE>
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(1) Included in 1997 Income is $1,185,000 of non-recurring income.
(2) These amounts include the Company's extraordinary gain from early
extinguishment of debt, of $1,437,000, recorded during 1995.
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, 1998 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
10
<PAGE>
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, 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 affect 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
In 1998 the Company recorded the highest levels of sales, revenue, gross
profit, and income from residential operations in the last decade of its
history. Total 1998 revenue of $64,100,000 represents a 45.3% increase over
the previous year total. This $20,000,000 increase in revenue was
accompanied by a $15,800,000 or 44.1% increase in cost of sales but resulted
in a $12,500,000 total gross profit. The Company's backlog of homes sold but
not yet completed at December 31, 1998 grew from 73 to 166, an increase of
127% over December 31, 1997.
This improved performance reflects the Company's continued efforts to
maximize the efficiencies in its purchasing, construction and development
processes. In addition the Company has focused on increasing sales prices as
high as product acceptance and resulting market demand will prudently
support. The Company's marketing area continues to provide strong demand.
During 1998 the Company closed 286 units, including 16 from its Northern
Colorado Division, which operated for its first full year in 1998. The 1998
closings represent a 45.9% increase in unit closings for the year, a percent
change consistent with revenue growth. The average sales price in 1998 was
consistent with the prior year. However, there was a slight drop in the
price from $220,900 in 1997 to $219,000 in 1998. In 1996 the average sales
price was $215,300.
11
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The Company continued its trend of product mix weighting toward attached
single family, as illustrated in the table below.
<TABLE>
<CAPTION>
Closings Townhomes Single Family Cluster Homes Total
-------- --------- ------------- ------------- -----
<S> <C> <C> <C> <C>
Year ended December 31, 1998 149 115 22 286
Year ended December 31, 1997 84 98 14 196
Year ended December 31, 1996 83 116 16 215
</TABLE>
The Company's only cluster home project, the Peninsula, was completed in 1998.
The Company's gross profit of $12,500,000 is a $4,203,000 or 50.4% increase
over 1997 results, and a 62.4% increase over 1996. As a percentage of sales
the Company's gross profit improved to 19.6% from 18.9% in 1997, and 16.7% in
1996.
As a percentage of revenues all of the Company's expenses improved over the
previous year. The Company has focused on maximizing its economies of scale
and controlling expenses as revenue increased. This successful effort
reflects the stability of the Company's fixed costs notwithstanding its
revenue growth which increased variable costs, particularly those associated
with sales and marketing.
Sales and marketing costs increased in 1998 by $1,400,000 or 38.3%; however,
as a percentage of revenue, the costs improved to 8.0% versus 8.4% in 1997.
These costs for the current year are consistent with levels in 1996 when 7.7%
of revenue was expended on these activities. Sales commissions are a
significant portion of these costs.
General and administrative costs increased by $1,044,000 in 1998 and were
5.8% of revenue versus 6.1% in 1997 and 4.1% in 1996. The dollar increase in
1998 reflects more aggressive compensation programs necessitated by market
pressure on salaries and incentive programs for qualified industry personnel.
In addition the Company increased expenditures on architectural and
engineering consultants commensurate with new product development. The
Company also incurred rental charges for office space in 1998 and the last
half of 1997. Previous year occupancy cost was recorded as interest on debt
service and minor depreciation expense included in general and administrative
costs.
Interest expense as a percentage of revenue remained consistent in 1998 with
the previous year at 1.4%. Both periods reflect an improvement over costs in
1996 which were 2.6% of revenue. This reflects more competitive interest
rates which the Company has obtained from its lenders, as well as lower
interest rates in the Colorado market generally. In 1998 the Company
completed its last significant lender related profit sharing interest
arrangement which will lower the Company's effective borrowing rate in the
future. The Company incurred $3,050,000 of interest in 1998 including
$621,000 from profit sharing arrangements compared to $2,303,000 and
$2,955,000 in 1997 and 1996, respectively. The Company's improved
performance has enabled it to repay higher coupon debt and structure more
favorable credit facilities over the last three years, but increased sales
and closing levels in 1998 increased the overall interest incurred amount.
12
<PAGE>
As a result of these items and the increased revenues discussed above, the
Company's income from residential operations grew to $2,801,000, a 112.4%
increase from 1997 income from residential operations of $1,319,000. This
follows a 22.9% increase in 1997 from 1996.
In 1997 the Company reported $1,240,000 of interest and other income which
included three non-recurring transactions. A sale of the Company's office
property and retirement of related debt resulted in a gain of $648,000 and
two refunds from protests and litigation of impact fees and property taxes
resulted in income of $537,000. With the exclusion of the non-recurring
items in 1997 the Company recorded an increase of approximately $156,000 in
interest and other income in 1998 compared to the previous year.
Due to the improved results discussed above, the Company recorded an increase
in income before tax to $3,012,000 versus $2,559,000 in 1997 and $1,277,000
in 1996.
In previous years, the Company recorded expenses via valuation reserves to
properly reflect the fair market value of its holdings. During 1998 a
portion of these previously recorded deductions will be used to offset
taxable income because some of the underlying property has been sold to third
parties through normal operations. This reduced the Company's recorded tax
liability in 1998 and increased the deferred tax asset to $1,166,000 at
December 31, 1998. The income tax expense was calculated at statutory rates,
reflecting the impact of the deferred asset.
All of the factors discussed above resulted in net income of $2,182,000, net
of $830,000 of tax expense for 1998 versus net income of $3,460,000 net of a
tax benefit of $901,000 in 1997. Net income in 1996 was $1,301,000, net of a
tax benefit of $24,000.
FINANCIAL CONDITION
At December 31, 1998 the Company had 188 homes under construction ranging
from foundation stage to final completion as compared to 146 at December 31,
1997. The higher inventory levels are predicated on market conditions, low
mortgage rates, the Company's sales growth which led to the Company's
increased backlog. The Company received 379 new orders in 1998 which was a
164 unit increase and 76.3% increase over 1997's total of 215, an 86.7%
increase over 1996 results of 203. These increases resulted in a 127.4%
increase in unit sales backlog which was 166 units at December 31, 1998
versus 73 units at the prior year end. Since year end the backlog has grown
an additional 22.3% to 203 at March 7, 1999. The Company's backlog expressed
in projected sales revenue at December 31, 1998 grew by 95.6% to over
$31,653,000 from $16,183,000 at December 31, 1997. This backlog provides a
foundation for strong results in 1999, but is tempered by extended
construction time caused by the tight labor market in the Company's marketing
areas. This lack of available labor continues to pressure construction
schedules and increase construction costs. 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 and continues to press this growth. Because of this, the
Company continues to quickly re-employ its resources back into production.
13
<PAGE>
WORK IN PROCESS INVENTORY
At December 31, 1998 and 1997, the Company's work in process included a mix as
follows.
<TABLE>
<CAPTION>
Year Ended Dec. 31 Presold Speculative Total
------------------ ------- ---------- -----
<S> <C> <C> <C>
1998 166 53 219
1997 73 73 146
</TABLE>
The Company's inventory of homes under construction increased by $828,000 or
4.9% notwithstanding the relatively large increases in units in process
(50.0%), because 31 inventory presold units were in the permitting or
engineering process at year end and, therefore, carried small cost bases.
Model homes and furnishings increased by $674,000 during 1998 which reflects
a 19% increase in the carrying value of these assets. During the year the
Company opened four new model homes at two locations for its Northern
Colorado Division, at Stetson Creek and at the River West projects. In
addition, the Company completed three models at Castle Pines North and three
models at Park Square at Lowry. This marketing investment will grow in 1999
as new models are also in process for a single family attached product line
for Castle Pines and Stetson Creek. The Company is processing plans for
models for both attached and detached single family product lines to be
marketed at Sunrise Ridge, the new project in Arvada, Colorado, (north
metro-Denver). At December 31, 1998, the Company had six active model sale
and lease back transactions.
The Company's investment in land and land development decreased by $825,000,
or approximately 5% from the prior year end balance. During the year the
Company developed an additional filing at its Castle Pines North project,
which has been under contract to sell developed lots, while continuing
development at the Settler's Village and Northpark projects. The Company also
began development at its Greenbrook project and the Castle Pines North
townhome site. The Company closed on 27 lots from Castle Pines North during
1998, while the balance of 33 lots will be sold in 1999 under the terms of
the sales agreement consummated in 1996.
The Company has continued to acquire partially developed townhome sites at
its Lowry project and developed lots at River West pursuant to pre-existing
purchase agreements and will do so into 1999. These costs have been netted
with those transferred to homes under construction in the net change
identified above.
In January 1999 the Company acquired raw ground which will be developed and
marketed as 102 townhomes at Stetson Creek. In January 1999, the Company
acquired through purchase a contract which entitles the Company to purchase
approximately 107 acres of ground in southeast Ft. Collins, Colorado. The
Company is currently planning and platting the site which is zoned for no
less than 481 units. The Company is also in the planning and engineering
process for the product lines to be marketed at this traditional neighborhood
development. See additional discussion of land acquisitions and investigation
at Liquidity and Capital Resources discussion below.
14
<PAGE>
The Company's office property and equipment increased by $127,000, or
approximately 27% from the previous year which reflects purchases of
equipment related to the set up of new sales offices and computer equipment.
The Company's cash, cash equivalents, and restricted cash increased during
the year from 1997. The increases primarily related to the relatively high
level of closings which the Company had in December 1998. These cash
balances were used to retire trade payables or re-employed into inventory
shortly after year-end. The increase in accounts payable and accrued expenses
was caused primarily by the estimated accrual of expenses related to the
completion of inventory closed in December, for which bills had not been
received at year end, and to overall increased activity.
The Company's carrying value of its deferred tax asset was adjusted to
$1,166,000 during 1998. 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, 1998 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 believes is more likely than not
to be realized. The Company's total deferred tax asset is $1,630,000 which
is netted with a $464,000 valuation allowance as of December 31, 1998. 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 remained
consistent with the prior year even though inventory levels have increased.
Overall committed construction loan amounts are higher than last year and
will generate larger balances as early construction stages on several
inventory homes mature into active construction during the first quarter of
1999. 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 1.0% and accrue interest at prime to prime
plus 1.5%. Certain facilities also allow the Company to select a rate
indexed on the LIBOR rate.
The Company's notes payable related to land debt decreased by $153,000, or
approximately 5.2% during 1998. This decrease is reflective of the Company's
efforts to accelerate debt repayments when possible and repayments associated
with increased production and closings, versus new land and land development
financing.
The Company's other notes payable account decreased during the year as a
revolving line of credit was paid off. The Company has remaining $900,000
from its unsecured convertible debt offering which was entered into in 1993
and a small loan for taps at the Company's Greenbrook project. See
Additional Discussion at Item 13, Certain Relationships and Related
Transactions.
The Company issued 78,000 shares of stock during the year pursuant to
exercises of stock option grants previously made to employees.
LIQUIDITY AND CAPITAL RESOURCES
During 1998 the Company generated $3,879,000 of cash from operating
activities, primarily from net income. Cash provided from operating
activities includes $1,915,000 related to increases in trade
15
<PAGE>
payables. In addition, $1,285,000 of debt was retired in 1998. The Company
also upgraded computer facilities and other office equipment with $372,000 of
expenditures during the year. These results are consistent with management's
objective of re-employing all available working capital into operations.
With the sustained, improved operating performance that the Company has
shown, its relationships with its lenders has continued to solidify. This
has provided the Company with more financing opportunities to leverage its
cash and has provided greater opportunities to negotiate more favorable rates
and terms. The Company has also attracted lenders who will provide working
capital facilities to supplement the Company's liquidity and capital
resources generated by operations.
The Company intends to use these working capital facilities for some or all
of its equity contribution in new project acquisition and development. The
facilities have available commitments of $1,924,000 at December 31, 1998,
with no outstanding balances at year end. These funds may not provide all of
the necessary equity which traditional lending relationships will require for
leveraged, financing of acquisition and development costs of projects.
Therefore the Company expects to continue to re-employ its working capital
generated from operations to support growth and or debt retirement.
The Company has offered profit or revenue participation to land sellers as
part of the acquisition price negotiation. Because of strong buyer demand
for improved and undeveloped land, many sellers in the Company's market area
are demanding profit participation and requesting more stringent purchase
terms; which include cash at closing, closings prior to full entitlement,
specific performance contracts, and shorter due diligence periods. The
Company weighs all of these risk factors against perceived opportunity as new
projects are analyzed. Notwithstanding these factors, land acquisition costs
and risk continue to increase because of demand generated by competing
builders.
RECENT ACQUISITIONS
The Company has recently completed three acquisitions.
In December 1998, The Company purchased a 140 single family parcel in Arvada,
Colorado. The sites were zoned and platted. The Company is currently
re-platting a portion for its townhome product. Financing was provided by a
$1,500,000 unsecured line of credit, however the Company is currently
structuring financing for its development and planned construction with this
same lender and will repay the unsecured facility with a new secured
facility. The new facility is planned for closing in April 1999.
In January 1999, The Company purchased a 102 single family attached parcel in
Ft. Collins, Colorado. This is a continuation of the Company's Stetson Creek
project. Financing was provided via an existing $10,000,000 acquisition,
development and construction facility. The Company negotiated a $5,000,000
increase in this facility which was closed in March 1999. As part of this
facility, the Company was granted a $1,000,000 unsecured working capital line
which has an annual maturity. Management anticipates using this new facility
to finalize the third acquisition discussed below.
In January 1999, the Company closed on an opportunity to purchase for
$750,000 cash, a contract which allows the Company to purchase approximately
107 acres in Ft. Collins, Colorado. The parcel is entitled under the Ft.
Collins "City Plan" which requires not less than 481 units to be platted.
The Company is platting and engineering the site and expects to begin
development in 1999. Three or four product lines will be marketed at this
master planned traditional neighborhood development community.
16
<PAGE>
The Company initiated development at new filings at Castle Pines North and
Greenbrook, while completing construction at its Peninsula and Writer Ridge
II projects. The Company's Summerhill project in Highlands Ranch will be
completed in 1999.
The Company is active in seeking replacement projects for the aforementioned
completed projects. To this end, the Company has entered into three letters
of intent for additional, potential projects and is finalizing a contract for
two additional projects. These potential acquisitions will require equity
investment from the Company which Management expects to obtain via working
capital generation and through additional borrowing from the Company's
working capital facilities.
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 digit year 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 in its software and
equipment that require modification to ensure year 2000 compliance. The
Company has completed testing of its internal hardware and has determined
that it is compliant with regard to the year 2000 issue. None of the
Company's equipment that may contain embedded computer chips are critical to
the Company's operations. The Company has contacted all significant vendors
and others upon whom it relies to assure that their systems will be converted
in a timely fashion. The Company utilizes software to process its management
information, which has been developed by an outside vendor. Currently, this
vendor software is year 2000 compliant. The Company intends to install this
upgrade during the second quarter of 1999. Other application software, (such
as spreadsheets, word processing and other personal and work group
applications), will be upgraded when the year 2000 compliant software is
available. The Company plans to be 100% year 2000 compliant by June 30,
1999.
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. All costs to
date have been expensed.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary risk facing the Company is interest rate risk on debt
obligations. The Company primarily enters into debt obligations to finance
the development and acquisition of land, and to support its homebuilding and
general corporate operations. All of the Company's debt has variable
interest rates, which exposes the Company to interest rate risk. The
Company's business strategy has been to accept the interest rate risk
associated with variable rate debt which allows it to participate in the
increased earnings and cash flows associated with decreases in interest rates.
Under its current policies, the Company does not use interest rate derivative
instruments to manage its exposure to interest rate changes. The following
sets forth as of December 31, 1998, the Company's debt obligations, principal
cash flows by scheduled maturity, weighted average interest rates and
estimated fair market value.
17
<PAGE>
At December 31, 1998, the Company had variable rate debt outstanding of
approximately $17,000,000. The annual increase (decrease) in cash
requirements for interest at this level of borrowing should the market rates
increase (decrease) by 10% compared to the interest rates in effect at
December 31, 1998 would be approximately $132,000 ($132,000).
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.
DIRECTORS
Name, Age, and Other Period Served as Director and Business
Positions, if any, with Registrant Experience During Past 5 Years
- ---------------------------------- ---------------------------------------
George S. Writer, Jr., 63 Chief Executive Officer, Chairman of the
Chief Executive Officer, Board since 1964. Elected a director in
Chairman of the Board of Directors 1961.
Roland Seidler, Jr., 70 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 Mellon Financial Group
West.
Ronald S. Loser, 65 Elected a director in 1973. Secretary
of The Writer Corporation since its
inception. Mr. Loser is a Principal of
Brega & Winters, P.C., a Denver law
firm.
Deane J. Writer, Jr., 65 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, 58 Elected a director in 1989. Mr.
Bansbach is President of Columbine
Realty, Inc., and a Director of United
Bancorp of Wyoming.
Robert G. Tointon, 65 Elected a director in 1992. Mr. Tointon
is the President and Chief Executive
Officer of
18
<PAGE>
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 New Century
Energies.
William J Gillilan III, 52 Appointed a director in 1999. Mr.
Gillilan is the former President of
Centex Corporation. During his 24 years
with Centex he also served as Chairman
of Centex Corporation's real estate and
mortgage banking operations. Currently
he has been involved in real estate
opportunities both as an investor and as
an advisor.
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 1998. The Executive Committee includes Directors
George S. Writer, Jr., who receives no fees for service, Louis Bansbach, III,
Ronald S. Loser, and Robert G. Tointon. This committee meets with the
Company's Senior Management during months when a full Board meeting is not
convened.
In 1998, 1997 and 1996, 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.
Positions Held and Business
Name and Age Experience During Past 5 Years
- ------------ ------------------------------
George S. Writer, Jr., 63 Chief Executive Officer, Chairman of the
Board of Directors of The Writer Corporation
since 1964.
Daniel J. Nickless, 43 Executive Vice President, Chief Operating
Officer, Chief Financial Officer and
Treasurer since April, 1998. 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.
19
<PAGE>
Robert R. Reid, 50 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.
Dave Steinke, 43 Senior Vice President since October 1998.
From October 1996 to October 1998 he served
as Executive Vice President for Miles
Advertising. From November 1989 to June 1996
he was Vice President of Sales and Marketing
for Falcon Homes.
Richard M. Wells, 41 Vice President and Controller since June
1998. From April 1996 to May 1998 he served
as Assistant Controller - Finance for Natkin
Contracting, a national mechanical
contractor. From July 1995 to March 1996 he
served, in a temporary capacity, as
Controller for Encore Media International, a
division of TCI providing cable television
programming internationally. From December
1993 to June 1995 he served as Controller for
Fiber Optic Technologies, a division of ICG
Communications providing design and
installation of communication networks.
Darwin Horan, 34 Vice President; Northern Division Manager
since January, 1998. Mr. Horan also serves
as Vice President of Land Acquisition and
Development and 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, 55 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, 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation
- ------------------------------------------------------------------------------------------------------
Name and Principal Other Annual
Position Year Salary Bonus Compensation(1)
<S> <C> <C> <C> <C>
George S. Writer, Jr. 1998 $159,412 $60,000 $ 141,297
Chief Executive Officer 1997 139,800 -0- 223,465
1996 100,800 -0- 62,472
Daniel J. Nickless 1998 $118,583 $18,556 $ 4,881
Exec. Vice President, 1997 $ 89,800 $15,113 $ 3,792
Chief Operating Officer,
Chief Financial Officer
and Treasurer
Robert R. Reid 1998 $107,718 $18,758 $ 22,574
Sr. Vice President of 1997 $ 94,800 $15,125 $ 28,702
Operations
Nancy Ashley 1998 $ 74,800 $91,696 $ 960
Vice President of Sales
</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.
21
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
As of March 8, 1999, 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>
<CAPTION>
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) 1,450,971 19.52%
Littleton, Colorado
Common Stock Phelps-Tointon, Inc.(2) 1,320,166 17.76%
Greeley, Colorado
Common Stock Polaris Capital Corporation 389,500 5.24%
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 8, 1999.
<TABLE>
<CAPTION>
Amount and Nature of Percent
Title of Class Beneficiary Ownership of Class
-------------- --------------------- --------
<S> <C> <C> <C>
George S. Writer, Jr. Common Stock 1,450,971 19.52%
Robert G. Tointon (1) Common Stock 1,320,166 17.76%
Roland Seidler, Jr. Common Stock 221,474(2) 2.97%
Deane J. Writer, Jr. Common Stock 209,000 2.81%
Louis P. Bansbach, III Common Stock 126,124 1.69%
Daniel J. Nickless Common Stock 25,710 (3)
Robert R. Reid Common Stock 17,930 (3)
Ronald S. Loser Common Stock 11,900 (3)
Richard M. Wells Common Stock 1,000 (3)
Dave Steinke Common Stock 500 (3)
All Directors &
Officers as a group (13) Common Stock 3,384,775 45.54%
</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.
TRANSACTIONS WITH AFFILIATES OF DIRECTORS
Brega and Winters, the law firm in which Ronald S. Loser (a director) is a
principal, was paid attorney's fees that do not exceed five percent of Brega
and Winters gross revenue for their last fiscal year.
H.R.H. Insurance Company, the insurance agency that employs Deane J. Writer,
Jr., (a director) was paid insurance premiums of $210,185 during 1998.
Certain of the Company's officers and directors, directly and indirectly,
provided financial assistance to the Company in several transactions through
December 31, 1998.
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 was repaid as of December 31, 1997. The
$1,600 per lot additional interest payment continues through the balance of
the project. During 1998 the Company paid $26,000 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. Principal and interest on
principal related to this facility 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 continued
to pay throughout 1998. During 1998, $621,000 was earned from profit sharing
and subsequently paid to the lender group. The project was completed in 1998
and $35,000 remains owed to the lending group. Certain wind down expenses
have been incurred in 1999 which will offset most if not all of the remaining
profit sharing accrued at year end. During 1998 the Company paid $502,000
under this agreement to the directors.
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 bore interest at 10% per annum and was repaid
during 1998.
23
<PAGE>
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, 1999. 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>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report .................................... F-1
Consolidated Balance Sheets as of December 31, 1998 and 1997..... F-2
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996........................... F-4
Consolidated Statements of Stockholders' Equity for
the years ended December 31, 1998, 1997 and 1996............ F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996............................ F-6
Notes to Consolidated Financial Statements....................... F-7
</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.
25
<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, 1998 and 1997, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1998.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material 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, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1998 in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Denver, Colorado
March 19, 1999
F-1
<PAGE>
THE WRITER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 1998 1997
<S> <C> <C>
RESIDENTIAL REAL ESTATE HELD FOR SALE, NET
(Note 2):
Homes under construction $17,632,000 $16,804,000
Model homes and furnishings, less accumulated depreciation
of $511,000 and $528,000 4,190,000 3,516,000
Land and land development 15,216,000 16,041,000
Unplatted land 817,000 739,000
----------- -----------
Total 37,855,000 37,100,000
----------- -----------
OFFICE PROPERTY AND EQUIPMENT, less accumulated
depreciation of $586,000 and $401,000 (Note 2) 597,000 470,000
----------- -----------
OTHER ASSETS:
Cash and cash equivalents 3,363,000 1,015,000
Restricted cash 541,000 722,000
Accounts receivable 374,000 315,000
Other 582,000 707,000
Deferred tax asset (Note 3) 1,166,000 1,251,000
----------- -----------
Total 6,026,000 4,010,000
----------- -----------
TOTAL $44,478,000 $41,580,000
----------- -----------
----------- -----------
</TABLE>
See notes to consolidated financial statements. (Continued)
F-2
<PAGE>
THE WRITER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
<S> <C> <C>
LIABILITIES:
Notes payable (Note 2):
Construction, including $128,000 and $314,000 to related parties $14,215,000 $14,116,000
Land 2,793,000 2,946,000
Other, including $900,000 and $950,000 to related parties 928,000 2,159,000
----------- -----------
Total 17,936,000 19,221,000
----------- -----------
OTHER LIABILITIES:
Accounts payable and accrued expenses 6,716,000 4,796,000
Accrued interest 177,000 182,000
----------- -----------
Total 6,893,000 4,978,000
----------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 2 and 6)
STOCKHOLDERS' EQUITY (Notes 2 and 4):
Common stock, $.10 par value; 10,000,000 shares authorized;
7,432,600 and 7,354,600 shares issued and outstanding 743,000 735,000
Additional paid-in capital 12,430,000 12,352,000
Retained earnings 6,476,000 4,294,000
----------- -----------
Stockholders' equity 19,649,000 17,381,000
----------- -----------
TOTAL $44,478,000 $41,580,000
----------- -----------
----------- -----------
</TABLE>
See notes to consolidated financial statements. (Concluded)
F-3
<PAGE>
THE WRITER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
RESIDENTIAL OPERATIONS:
Revenues $64,091,000 $44,098,000 $46,284,000
----------- ----------- -----------
Costs and expenses:
Cost of sales 51,551,000 35,761,000 38,563,000
Sales and marketing 5,121,000 3,703,000 3,548,000
General and administrative 3,719,000 2,675,000 1,883,000
Interest (Note 2) 899,000 640,000 1,217,000
----------- ----------- -----------
Total 61,290,000 42,779,000 45,211,000
----------- ----------- -----------
Income from residential operations 2,801,000 1,319,000 1,073,000
INTEREST AND OTHER INCOME, NET
(Note 6) 211,000 1,240,000 204,000
----------- ----------- -----------
INCOME BEFORE INCOME TAXES 3,012,000 2,559,000 1,277,000
INCOME TAX (EXPENSE) BENEFIT (Note 3) (830,000) 901,000 24,000
----------- ----------- -----------
NET INCOME $ 2,182,000 $ 3,460,000 $ 1,301,000
----------- ----------- -----------
----------- ----------- -----------
EARNINGS PER SHARE (Notes 1 and 5):
Basic $ 0.29 $ 0.47 $ 0.18
----------- ----------- -----------
----------- ----------- -----------
Diluted $ 0.29 $ 0.46 $ 0.18
----------- ----------- -----------
----------- ----------- -----------
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING:
Basic 7,412,000 7,355,000 7,341,000
----------- ----------- -----------
----------- ----------- -----------
Diluted 7,836,000 7,723,000 7,403,000
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
THE WRITER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ADDITIONAL RETAINED
COMMON STOCK PAID-IN EARNINGS
SHARES AMOUNT CAPITAL (DEFICIT)
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996 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
Issuance of common stock
78,000 8,000 78,000 -
Net income - - - 2,182,000
--------- -------- ----------- ----------
BALANCE, DECEMBER 31, 1998 7,432,600 $743,000 $12,430,000 $6,476,000
--------- -------- ----------- ----------
--------- -------- ----------- ----------
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
THE WRITER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
------------ ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,182,000 $ 3,460,000 $ 1,301,000
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 546,000 387,000 513,000
Deferred income taxes 85,000 (901,000) (33,000)
Provision for impairment - - 475,000
(Gain) loss on disposal of property and model home furnishings (25,000) (546,000) 59,000
Changes in operating assets and liabilities:
Homes under construction (828,000) (3,920,000) 2,395,000
Model homes and furnishings (990,000) (284,000) 1,003,000
Land and land development 825,000 (5,349,000) 811,000
Unplatted land (78,000) 5,664,000 (520,000)
Restricted cash 181,000 (55,000) (312,000)
Other assets 66,000 (406,000) 34,000
Accounts payable and accrued expenses 1,915,000 (510,000) (626,000)
------------ ----------- -----------
Net cash provided by (used in) operating activities 3,879,000 (2,460,000) 5,100,000
------------ ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of office property and equipment (372,000) (347,000) (104,000)
Proceeds from sales of property and equipment 40,000 847,000 -
------------ ----------- -----------
Net cash provided by (used in) investing activities (332,000) 500,000 (104,000)
------------ ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 41,520,000 32,964,000 24,237,000
Proceeds from notes payable from related parties 236,000 1,135,000 1,619,000
Principal payments and other reductions on notes payable (42,569,000) (28,857,000) (27,177,000)
Principal payments and other reductions on notes payable to
related parties (472,000) (3,262,000) (3,857,000)
Proceeds from sale of common stock 86,000 - 83,000
------------ ----------- -----------
Net cash provided by (used in) financing activities (1,199,000) 1,980,000 (5,095,000)
------------ ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,348,000 20,000 (99,000)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,015,000 995,000 1,094,000
------------ ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 3,363,000 $ 1,015,000 $ 995,000
------------ ----------- -----------
------------ ----------- -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
The Company paid $905,000, $897,000 and $1,320,000 in interest
(net of amounts capitalized) and $365,000, $61,000 and $0 in
income taxes during the years ended December 31, 1998, 1997
and 1996, respectively.
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
THE WRITER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- -------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Writer Corporation (the Company) is a developer and builder of planned
residential communities primarily in the Denver, Colorado metropolitan
area. The Company's operations constitute a single business segment. 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. The Company provides a two year structural
warranty to home buyers.
Land costs are allocated to filings based on the relative pre-construction
market value of each filing to the total pre-construction market value of
an entire parcel. Individual home sites within each filing are generally
homogeneous and are considered to be similar in value. Land development
costs that are specific to individual home sites are allocated to those
home sites. Land development costs that cannot be specifically identified
to individual home sites are allocated to home sites (including estimates
to complete, if applicable) based on the identified costs of each home
site.
Inventory that is substantially complete and ready for its intended use is
carried 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 value of the asset may not be recoverable. An
asset will be identified as impaired if the undiscounted estimated cash
flows from development and ultimate sale of such asset is less than its
carrying value. If a long-lived asset is identified as impaired, the
carrying amount 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.
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 two 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.
The Company uses the intrinsic value method to account for stock options
granted to employees.
F-7
<PAGE>
In 1998, the Company adopted Statement of Financial Accounting Standards
No. 130, "REPORTING COMPREHENSIVE INCOME" ("SFAS 130") and Statement of
Financial Accounting Standards No. 131, "DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION" ("SFAS 131"). SFAS 130 establishes
standards for reporting and display of comprehensive income and its
components and SFAS 131 establishes standards for reporting selected
information about operating segments and related disclosures about
products and services, geographic areas, and major customers. The Company
has no items of other comprehensive income and operates in a single
segment business. Therefore, adoption of SFAS 130 and SFAS 131 had no
effect on the Company's financial statements.
In 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES" ("SFAS 133"). SFAS 133 establishes
standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities. SFAS 133 requires that an entity
recognize all derivatives as either assets or liabilities in the statement
of financial position and measure those instruments at fair value. The
accounting for changes in the fair value of a derivative (gains and
losses) depends on the intended use of the derivative and the resulting
designation. The Company is required to adopt SFAS 133 on January 1, 2000.
The Company has not completed the process of evaluating the impact that
will result from adopting SFAS 133.
Certain items in 1997 and 1996 have been reclassified to conform with the
1998 presentation.
F-8
<PAGE>
2. NOTES PAYABLE
Notes payable for construction related debt obligations at December 31
consist of the following:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
$15,000,000 loan facility with a financial institution, interest at prime rate
plus 1.0%, interest payable monthly, due June 1, 1999. The loan facility has
$10,096,000 unused and available at December 31, 1998. $ 4,904,000 $ 8,665,000
$6,000,000 loan commitment with a financial institution,
interest at prime rate plus 0.5%, interest payable monthly,
collateralized by a first deed of trust, due May 1, 2000.
The loan facility has $2,056,000 unused and available at
December 31, 1998. 3,944,000 909,000
$7,000,000 loan commitment with a financial institution, interest at prime rate
plus 1.5%, interest payable monthly, collateralized by deed of trust, due
February 28, 2000. The loan facility has $4,319,000 unused and available
at December 31, 1998. 2,681,000 3,417,000
$4,000,000 loan facility with a financial institution, interest at prime rate
plus 0.5%, interest payable monthly, collateralized by residential real
estate, due May 1, 2000. The loan facility has $1,442,000 unused and available
at December 31, 1998. 2,558,000 -
Note payable to a related party for the construction of a home, interest at
prime rate plus 1.5%, interest payable upon the closing of the home. The loan
facility has $9,000 unused and available at December 31, 1998. 128,000 314,000
Individual notes payable with financial institutions for the
construction of homes, which were paid during 1998. - 811,000
----------- -----------
Total $14,215,000 $14,116,000
----------- -----------
----------- -----------
</TABLE>
F-9
<PAGE>
Notes payable for land and land development related debt obligations at
December 31 consist of the following:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
$5,500,000 loan facility with a financial institution, interest at prime rate
plus 0.5%, interest payable monthly, collateralized by residential real
estate, due May 1, 2000. The loan facility has $4,321,000 unused and available
at December 31, 1998. $ 1,179,000 $ 1,184,000
$1,500,000 unsecured loan facility with a financial
institution, interest at prime rate plus 1.5%, due April 11, 1999.
The loan facility has $144,000 unused and available
at December 31, 1998. 1,356,000 -
$3,157,000 loan facility with a financial institution, interest
at prime rate plus 1%, collateralized by deed of trust,
due February 28, 2000. The loan facility has $3,002,000
unused and available at December 31, 1998. 155,000 1,209,000
$500,000 loan with a financial institution reserved for lot
takedowns, interest at prime rate plus 0.5%, due May 1, 2000.
The loan has $414,000 unused and available at December 31, 1998. 86,000 -
$1,507,000 loan commitment bearing an interest rate of
prime plus 1.5%, which was paid in 1998. - 89,000
Loan with a financial institution to refinance an existing encumbrance, at an
interest rate of prime plus 0.5% due May 1, 2000. 17,000 464,000
----------- -----------
Total $ 2,793,000 $ 2,946,000
----------- -----------
----------- -----------
</TABLE>
Notes payable for other debt obligations at December 31 consist of the
following:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
$900,000 unsecured convertible debt to certain members of
the board of directors. Interest at prime rate plus 3%,
payable monthly, convertible into common stock at a rate
of $3 per share, due September 30, 1999. $ 900,000 $ 900,000
$28,000 loan with a financial institution to finance the
purchase of taps. The loan bears an interest rate of prime
plus 0.5%, due May 1, 2000. 28,000 -
$1,424,000 revolving line of credit for working capital, bearing an interest
rate of prime plus 1% balance, collateralized by residential real estate, due
December 30, 1999. The revolving line of credit has $1,424,000 unused and
available at December 31, 1998. - 1,209,000
Payable to related parties, interest at 10% - 50,000
----------- -----------
Total $ 928,000 $ 2,159,000
----------- -----------
----------- -----------
</TABLE>
F-10
<PAGE>
The Company has an unsecured working of line of credit in the amount of
$500,000. The line of credit bears interest at prime plus .5% and matures
May 1, 2000. No amounts were outstanding under this line of credit at
December 31, 1998.
At December 31, 1998, the Company's debt maturity schedule, excluding
construction related debt is as follows:
<TABLE>
<S> <C>
1999 $2,284,000
2000 1,437,000
----------
Total $3,721,000
----------
----------
</TABLE>
The Company's construction related debt has due dates in 1999 and 2000,
however, principal and interest are generally due upon sale of the
respective collateral which is expected to occur in 1999. Construction
related financing arrangements are generally renewed in the ordinary
course of business.
During the years ended December 31, 1998, 1997 and 1996, interest of
$3,050,000, $2,303,000 and $2,955,000 was incurred, of which $648,000,
$578,000 and $753,000 was from related parties. Interest totaling
$2,152,000, $1,663,000 and $1,738,000 was capitalized in each of the
respective years. Interest paid, net of amounts capitalized , totaled
$905,000, $897,000 and $1,320,000 in 1998, 1997 and 1996, respectively.
The weighted average interest rate for the years ended December 31, 1998,
1997 and 1996 was 12.06%, 12.25% and 13.60% respectively.
The Company's notes payable and revolving credit facilities bear interest
at variable rates based on prime, as a result, the carrying amount of
these instruments approximates their fair value.
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.
The components of income tax (expense) benefit are as follows for the year
ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Current $(745,000) $ - $ (9,000)
Deferred (85,000) 901,000 33,000
--------- -------- --------
Tax (expense) benefit $(830,000) $901,000 $ 24,000
--------- -------- --------
--------- -------- --------
</TABLE>
F-11
<PAGE>
The tax effects of significant items comprising the Company's net deferred
tax asset as of December 31 are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
DEFERRED TAX ASSETS:
Residential real estate $1,710,000 $2,220,000
Warranty reserve 233,000 311,000
Accruals - 9,000
Other 106,000 42,000
---------- ----------
2,049,000 2,582,000
---------- ----------
DEFERRED TAX LIABILITIES:
Capitalized interest (286,000) (329,000)
Depreciation (133,000) (262,000)
---------- ----------
(419,000) (591,000)
---------- ----------
Total 1,630,000 1,991,000
---------- ----------
Less valuation allowance (464,000) (740,000)
---------- ----------
Net deferred tax asset $1,166,000 $1,251,000
---------- ----------
---------- ----------
</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, 1998, the
Company remains uncertain as to the realization of all 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, 1998, 1997
and 1996 was a reduction of $276,000, $1,330,000 and $246,000,
respectively, as a result of the utilization of tax credits and net
operating loss carryforwards and the reevaluation of the expected 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.
Reconciliations of the expected tax at the statutory tax rate to the
effective tax (expense) benefit are as follows for the year ended
December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Expected tax (expense) benefit at the
statutory rate $(1,024,000) $ (870,000) $(434,000)
State taxes, net of federal benefit (105,000) (90,000) (45,000)
Change in the valuation allowance 276,000 1,330,000 246,000
Utilization of NOL carryforwards
and tax credits 45,000 467,000 289,000
Adjustments and other (22,000) 64,000 (32,000)
---------- ---------- ---------
Effective tax (expense) benefit $ (830,000) $ 901,000 $ 24,000
---------- ---------- ---------
---------- ---------- ---------
</TABLE>
F-12
<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, 1998, 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, 1998, are as follows:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE NUMBER OF
EXERCISE PRICE SHARES
<S> <C> <C>
Options outstanding, January 1, 1996 $ 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 1.30 603,640
Granted 2.22 228,250
Forfeited 1.18 (215,750)
Exercised 1.10 (78,000)
------ --------
Options outstanding, December 31, 1998 $ 1.77 538,140
------ --------
------ --------
Total exercisable at December 31, 1998 $ 1.57 253,390
------ --------
------ --------
</TABLE>
As of December 31, 1998, the 538,140 options outstanding under the plans
have exercise prices which range from $.65 to $2.50 and a weighted-average
remaining contractual life of 6.72 years.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "ACCOUNTING FOR STOCK-BASED
COMPENSATION" (SFAS 123). Accordingly, no compensation cost has been
recognized for options granted by the Company. Had compensation expense
for the options granted been determined based on the fair value at the
grant dates, consistent with the provisions of SFAS 123, Writer's net
income and net income per share would have been changed to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net income:
As reported $2,182,000 $3,460,000 $1,301,000
Pro forma 1,985,000 3,460,000 1,286,000
Net income per share - basic:
As reported $ 0.29 $ 0.47 $ 0.18
Pro forma 0.27 0.47 0.18
Net income per share - diluted:
As reported $ 0.29 $ 0.46 $ 0.18
Pro forma 0.26 0.46 0.18
</TABLE>
F-13
<PAGE>
The fair value of the options for disclosure purposes was estimated on the
dates of grant in 1998 and 1996 using the Black-Scholes Model with the
following assumptions:
<TABLE>
<CAPTION>
1998 1996
---- ----
<S> <C> <C>
Expected dividend yield 0% 0%
Expected price volatility 42% 37%
Risk-free interest rate 4.5% 5.9%
Expected life of options 4 4
</TABLE>
5. EARNINGS PER SHARE
Basic net income per share is computed by dividing net income by the
weighted average number of common shares. Diluted income per share
includes the effects of convertible debt described in Note 2 in 1998 and
1997 (the impact of convertible debt was antidilutive in 1996) 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).
The following table reconciles the income and share amount used in the
calculation of net income per share.
<TABLE>
<CAPTION>
NET
NET INCOME
INCOME SHARES PER SHARE
<S> <C> <C> <C>
For the year ended December 31, 1998:
Basic $2,182,000 7,412,000 $ 0.29
Effect of options 124,000
Effect of convertible debt 75,000 300,000
---------- ---------
Diluted $2,257,000 7,836,000 $ 0.29
---------- ---------
---------- ---------
For the year ended December 31, 1997:
Basic $3,460,000 7,355,000 $ 0.47
Effect of options 68,000
Effect of convertible debt 94,000 300,000
---------- ---------
Diluted $3,554,000 7,723,000 $ 0.46
---------- ---------
---------- ---------
For the year ended December 31, 1996:
Basic $1,301,000 7,341,000 $ 0.18
Effect of options 62,000
---------- ---------
Diluted $1,301,000 7,403,000 $ 0.18
---------- ---------
---------- ---------
</TABLE>
F-14
<PAGE>
6. COMMITMENTS AND CONTINGENCIES AND OTHER MATTERS
The Company leases property, equipment and model homes under operating
leases. Total rental expense under all operating leases was approximately
$359,000, $250,000 and $26,000 for 1998, 1997 and 1996, respectively.
As of December 31, 1998, the Company's future minimum payments under
operating leases are as follows:
<TABLE>
<S> <C>
1999 $336,000
2000 252,000
2001 198,000
2002 97,000
--------
Total minimum lease payments $883,000
--------
--------
</TABLE>
In March 1997, the Company sold its office building to an unrelated party
and recognized a gain on the sale (included in 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. Total Company contributions to the
Plan for the years ended December 31, 1998, 1997 and 1996 were $57,000,
$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 $289,000 and $90,000
has been incurred as of December 31, 1998 and December 31, 1997 with
respect to this plan. At December 31, 1996 no liability was accrued.
The Company had outstanding letters of credit of $628,000 at December 31,
1998 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 expensed $115,000, $61,000 and $65,000 in the years ended
December 31, 1998, 1997 and 1996, respectively, for legal fees to a firm
having a principal who is also a director of the Company.
7. LEGAL PROCEEDINGS
In March 1999, an arbitration award was entered against the Company in
favor of certain homeowners related to various foundation and structural
damages allegedly caused by expansive soils. The award against the Company
will be settled and paid pursuant to coverage under an existing insurance
policy. As a result the Company has not incurred any loss associated with
this matter.
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-15
<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, (Exec. Vice President, Chief Operating
Principal Executive Officer) Officer, Chief Financial Officer and
Treasurer)
Date: April 12, 1999
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., April 12, 1999 Ronald S. Loser, April 12, 1999
(Chairman of the Board of Directors (Secretary and Director)
and Principal Executive Officer)
/s/ Deane J. Writer, Jr. /s/ Roland Seidler, Jr.
- ------------------------------------ ---------------------------------------
Deane J. Writer, Jr., April 12, 1999 Roland Seidler, Jr., April 12, 1999
(Director) (Director)
/s/ Louis P. Bansbach, III /s/ Robert G. Tointon
- ------------------------------------ ---------------------------------------
Louis P. Bansbach, III, April 12, 1999 Robert G. Tointon, April 12, 1999
(Director) (Director)
/s/ William J Gillilan, III
- ------------------------------------
William J Gillilan, III, April 12, 1999
(Director)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 3,904,000<F1>
<SECURITIES> 0
<RECEIVABLES> 374,000
<ALLOWANCES> 0
<INVENTORY> 37,855,000<F2>
<CURRENT-ASSETS> 0
<PP&E> 1,183,000
<DEPRECIATION> 586,000
<TOTAL-ASSETS> 44,478,000<F3>
<CURRENT-LIABILITIES> 6,893,000
<BONDS> 17,936,000
0
0
<COMMON> 743,000
<OTHER-SE> 18,906,000
<TOTAL-LIABILITY-AND-EQUITY> 44,478,000
<SALES> 64,091,000
<TOTAL-REVENUES> 64,091,000
<CGS> 51,551,000
<TOTAL-COSTS> 51,551,000
<OTHER-EXPENSES> 9,528,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,012,000
<INCOME-TAX> 830,000
<INCOME-CONTINUING> 2,182,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,182,000
<EPS-PRIMARY> .29
<EPS-DILUTED> .29
<FN>
<F1>CASH INCLUDES $541,000 OF RESTRICTED CASH
<F2>INVENTORY INCLUDES HOMES UNDER CONSTRUCTION $17,632,000, MODEL HOMES &
FURNISHINGS $4,190,000, LAND & LAND DEVELOPMENT $15,216,000, UNPLAITTED LAND
$817,000
<F3>TOTAL ASSETS INCLUDES OTHERS OF $1,748,000
</FN>
</TABLE>
