<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
---------------------------------------------------------------------
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-21378
INCO HOMES CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 33-0534734
(State or jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1282 WEST ARROW HIGHWAY
UPLAND, CALIFORNIA 91786
(Address of principal executive offices) (zip code)
(909) 981-8989
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year
if changed since last report)
Indicate by a 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 the number of shares outstanding of each of the issuers classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Outstanding at
Class of Common Stock March 31, 1996
--------------------- --------------
<S> <C>
$.01 par value 8,409,573
</TABLE>
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<PAGE> 2
INCO HOMES CORPORATION
INDEX
<TABLE>
<CAPTION>
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<S> <C>
Consolidated Balance Sheets as of March 31, 1996 and
December 31, 1995......................................................................3
Consolidated Statements of Operations for the Three
Months Ended March 31, 1996 and 1995...................................................4
Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 1996 and 1995...................................................5
Notes to Consolidated Financial Statements.............................................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations..........................................8
PART II. OTHER INFORMATION.....................................................................17
SIGNATURES .............................................................................................18
</TABLE>
2
<PAGE> 3
INCO HOMES CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Dollars in thousands, except share data) March 31, December 31,
1996 1995
---- ----
(Unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 362 $ 420
Receivable from sale of divisions 55 1,722
Real estate inventories - net of allowances of $18,517
and $19,425 for 1996 and 1995, respectively 39,526 40,535
Deferred tax asset - net of valuation allowances of $8,137
and $7,759 for 1996 and 1995, respectively 2,200 2,200
Other assets 999 897
------- -------
Total assets $43,142 $45,774
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities $ 6,526 $ 8,742
Notes payable secured by real estate 15,630 16,660
Lines of credit 4,441 4,840
Convertible note payable 213 --
Minority partners' investment in consolidated partnerships 1,420 --
------- -------
Total liabilities 28,230 30,242
------- -------
Commitments and contingencies
Stockholders' Equity
Common stock - $.01 par value; 20,000,000 shares
authorized, 8,409,573 and
8,077,308 shares issued
and outstanding for 1996 and 1995, respectively 84 81
Additional paid in capital 40,999 40,676
Deficit (26,171) (25,225)
------- -------
Total stockholders' equity 14,912 15,532
------- -------
Total liabilities and stockholders' equity $43,142 $45,774
======= =======
</TABLE>
See accompanying notes to financial statements
3
<PAGE> 4
INCO HOMES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data)
For the Three Months Ended March 31,
------------------------------------
1996 1995
---- ----
<S> <C> <C>
Revenue from home sales $ 3,646 $ 20,633
Cost of homes sold 3,343 17,257
---------- -----------
Gross profit 303 3,376
---------- -----------
Selling and marketing expenses 677 2,198
General and administrative expenses 602 1,098
---------- -----------
1,279 3,296
---------- -----------
Operating income (loss) (976) 80
Other income 30 67
Mortgage brokerage loss - net -- (107)
---------- -----------
Income (loss) before minority partners'
share and provision (benefit) for income taxes (946) 40
Minority partners' share -- --
---------- -----------
Income (loss) before provision
(benefit) for income taxes (946) 40
Provision (benefit) for income taxes -- 16
---------- -----------
Net income (loss) $ (946) $ 24
=========== ===========
Net income (loss) per common share $ (0.11) $ 0.003
=========== ===========
Weighted average number of
common shares outstanding 8,227,010 7,985,000
=========== ===========
</TABLE>
See accompanying notes to financial statements
4
<PAGE> 5
INCO HOMES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
------------------------------------
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (946) $ 24
Adjustment to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Minority partners' share -- --
(Increase) decrease in income taxes receivable -- 2,214
(Increase) decrease in deferred tax asset -- 16
(Increase) decrease in receivable from sale of divisions 1,667 --
(Increase) decrease in real estate inventories 19 1,746
(Increase) decrease in other assets (102) 109
Increase (decrease) in accounts payable and accrued liabilities (1,677) (1,410)
------ -------
Net cash provided by (used in) operating activities (1,039) 2,699
------ -------
Cash flow from financing activities:
Proceeds from notes payable secured by real estate 3,811 16,218
Repayments on notes payable secured by real estate (3,851) (16,742)
Proceeds from lines of credit -- 3,500
Repayments on lines of credit (399) (3,300)
Contributions from minority partners 1,420 --
------ -------
Net cash provided by (used in) financing activities 981 (324)
------ -------
Net increase (decrease) in cash and cash equivalents (58) 2,375
Cash and cash equivalents at beginning of year 420 747
------ -------
Cash and cash equivalents at end of period $ 362 $ 3,122
====== =======
</TABLE>
Supplemental schedule of non-cash activities
/1/ In the first quarter of 1996, the Company issued 332,265 shares of
common stock to creditors in exchange for relieving the Company of
$326,000 of accounts payable.
/2/ Subsequent to March 31, 1996, the Company issued 213,000 shares of
common stock to a creditor upon conversion of a convertible note issued
in the first quarter of 1996 under a convertible note purchase
agreement. The note was issued in exchange for relieving the Company of
$213,000 of accounts payable.
/3/ In the first quarter of 1996, the Company deeded back property with a
book cost basis of $990,000 to a land seller in satisfaction of
$990,000 in indebtedness.
See accompanying notes to financial statements
5
<PAGE> 6
INCO HOMES CORPORATION
Notes to Consolidated Financial Statements (Unaudited)
NOTE 1 - GENERAL
The accompanying unaudited consolidated financial statements of Inco
Homes Corporation, subsidiaries and affiliates ("Inco" or "Company")
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions
to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all the information and footnotes required by generally
accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (including normal recurring
accruals) considered necessary for a fair presentation have been
included.
The accompanying unaudited consolidated financial statements should be
read in conjunction with the financial statements and related notes
thereto contained in the Company's Annual Report on Form 10-K for the
year ended December 31, 1995. The accompanying consolidated financial
statements include the accounts of the Company and all wholly- owned
subsidiaries, and the Company's general partnership interests in
Palmdale Vistas Housing Developments, Ltd. ("Palmdale Vistas") and
Spirit Corona 77, L.P. ("SC 77"). All significant intercompany
transactions have been eliminated.
In April 1993, the Company effected a reorganization ("Reorganization")
of its operations, which involved an exchange offer ("Exchange Offer")
with the shareholders and partners of the predecessor entities and an
initial public offering ("IPO").
In 1994 the Company expanded into Phoenix, Arizona and Las Vegas,
Nevada. In December 1995 the Company sold its Phoenix and Las Vegas
divisions, including its Phoenix mortgage operations, to an unrelated
third party. The sales price was $14.5 million, of which the purchaser
assumed $12.0 million of bank indebtedness, and accounts payable and
accrued liabilities. As a result, the Company's sole market is in
Southern California and it is substantially dependent on local economic
factors.
The Company has experienced, and expects to continue to experience,
significant variability in quarterly revenues and net income. The
results of any interim period are not necessarily indicative of results
that can be expected for the entire year.
NOTE 2 - RELATED PARTY TRANSACTIONS
For the three months ended March 31, 1996 and 1995, the Company
incurred approximately $15,000 and $43,600, respectively, in model home
design fees and reimbursements for the cost of the model home
furnishings with Nancy Orman Interiors. Nancy Orman Interiors is
affiliated with Ira C. Norris.
For the three months ended March 31, 1996 and 1995, the Company
incurred rental expense for the use of office space of approximately
$26,500 and $40,100, respectively, with Inco Plaza Ltd., an affiliated
partnership.
Included in other assets as of March 31, 1996 and December 31, 1995 is
an unsecured non-interest bearing advance in the amount of $293,000
from Victor Valley Commercial Properties, an affiliated partnership.
Subsequent to March 31, 1996, this advance was assigned by the Company
to Ira C. Norris in exchange for a cash payment of $293,000.
6
<PAGE> 7
NOTE 3 - UNAUDITED NET INCOME PER COMMON SHARE
The primary and fully diluted weighted average number of common shares
was 8,227,010 and 7,985,000 for the three months ended March 31, 1996
and 1995, respectively. Common share equivalents include dilutive
stock options and warrants using the treasury stock method. There were
no dilutive stock equivalents, options or warrants for any of the
periods covered.
NOTE 4 - STOCKHOLDERS' EQUITY
The decrease in stockholders' equity from December 31, 1995 to March
31, 1996, is reconciled as follows:
Dollars in thousands
<TABLE>
<CAPTION>
Common Stock
Number and Additional
of Shares Paid in Capital Deficit Total
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance - December 31, 1995 8,077,308 $40,757 $(25,225) $ 15,532
Common Stock Issued 332,265 326 -- 326
Net Loss -- -- (946) (946)
-----------------------------------------------------------------
Balance - March 31, 1996 8,409,573 $41,083 $(26,171) $ 14,912
=================================================================
</TABLE>
Common stock was issued in the quarter ended March 31, 1996 to certain
subcontractors, suppliers and other creditors in satisfaction of debt
owed by the Company. See --- Liquidity and Capital Resources.
NOTE 5 - COMMITMENTS AND CONTINGENCIES
The Company, in its normal course of business, makes commitments to
purchase land for residential development and has various outstanding
performance bonds.
As of March 31, 1996, the Company had no commitments to purchase
parcels of land for future residential developments.
As a result of the limited amount of available working capital, the
Company has not paid all of its subcontractors and suppliers on a
current basis. Certain of these subcontractors and suppliers have filed
liens, a few of which are pursuing further legal action, including the
filing of complaints. Additionally, the Company is presently involved
in litigation regarding alleged construction defects at one of its
projects. See Part II --- Other Information, Item 1. Legal
Proceedings.
7
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Except for historical information contained herein, the matters
discussed in this report contain forward- looking statements that involve risks
and uncertainties that could cause results to differ materially, including the
land valuation write-downs, changing market conditions, and other risks detailed
in this report, the Company's Annual Report on Form 10-K, and other documents
filed by the Company with the Securities and Exchange Commission from time to
time.
OVERVIEW
The Company's results of operations for the periods presented reflect the
cyclical nature of the homebuilding industry and the Company's historical focus
on the Southern California housing market. The most recent peak in the industry
cycle occurred in 1988 and 1989, which was followed by a downturn in 1990,
coinciding with the general national recession and the depressed economic and
real estate conditions in California. These conditions have continued into 1996
and have had an adverse impact on the Company's results of operations.
The Company's financial results have been adversely affected by the continuing
weakness in the Southern California new home market. In response to declining
overall home sales in this market, during 1994 the Company substantially
increased its overall marketing programs and provided homebuyers with price
discounts and other sales incentives in order to remain competitive. In 1995 and
1996 the Company reduced its marketing expenditures. However, price discounts
and other sales incentives have continued. This action has resulted in reduced
profitability on the homes that the Company has sold.
In response to these difficult market conditions, the Company decided in late
1993 to pursue a diversification strategy. As a result, in 1994 it entered the
Phoenix and Las Vegas markets, and expanded its operations in Riverside County
of Southern California. Additionally, in 1994 the Company implemented cost
reduction measures including (i) consolidation of its High Desert Division with
its Inland Division and (ii) closing or reducing the scope of several
communities in the high desert region. These cost reduction efforts have
continued in 1995 and 1996, with the Company closing an additional
underperforming project in the high desert region and reducing the current scope
of development of a project in Riverside County. Accordingly, the Company
accelerated the write-off of previously capitalized costs associated with both
of these projects.
During the third quarter of 1995, the Company further consolidated all of its
Southern California operations and personnel in one location, closing its Inland
Division operating office and relocating the division into office space at the
Company's headquarters in Upland. The Company also sold its insurance services
operations to an unrelated third party and transferred the California and Las
Vegas operations of its mortgage brokerage subsidiary to an unrelated third
party.
In December 1995 the Company sold its Phoenix and Las Vegas operations,
including its Phoenix mortgage operations, to an unrelated third party. The
sales price was $14.5 million, of which the purchaser assumed $12.0 million of
bank indebtedness, and accounts payable and accrued liabilities. This sale was
consummated as a result of the Company's continuing efforts to raise needed
capital, and will enable the Company to focus its efforts and capital on its
historical core business in Southern California. However, the sale initially
will result in a reduced level of closings and revenues, and is expected to have
an adverse effect on earnings.
In 1995 the Company commenced negotiations with six land sellers from whom the
Company purchased land in the high desert. The Company owns these properties
subject to seller loans that have current or approaching maturity dates.
Negotiations may result either in extensions of maturity dates and/or other
adjustments to the seller notes, or deedbacks of some or all of the properties
to the sellers in full satisfaction of the indebtedness. If all such deedbacks
occur, it would result in a reduction of real estate inventories of $3.1 million
(net of a reserve in the amount of $5.3 million that had been established as of
December 31, 1995) and a reduction of debt obligations of $3.1 million.
8
<PAGE> 9
Additionally, based on the Company's evaluation of the net realizable value of
its remaining other properties, write-downs of real estate totaling $5.8 million
were recorded as of December 31, 1995, of which $4.4 million related to
properties in the high desert and $1.4 million related to properties in
Riverside County.
Continuing uncertainties remain regarding the timing of the realization of the
total deferred tax asset. These uncertainties are attributable to the impact of
the sale of the Phoenix and Las Vegas operations on future earnings, the land
deed backs and write-downs, and current business operations. Therefore, pursuant
to Statement of Financial Accounting Standards No. 109 ("SFAS No. 109")
"Accounting for Income Taxes", as of March 31, 1996 the Company did not record
an additional net deferred tax asset. No assurances can be given that the
Company will not have to record a further valuation allowance against future tax
benefits.
RESULTS OF OPERATIONS
Revenue from Home Sales
Revenue from home sales decreased significantly to $3.6 million during the three
months ended March 31, 1996, from $20.6 million during the three months ended
March 31, 1995, representing a decrease of $17.0 million or 82.3%. The Company
closed 28 homes at an average sales price of $130,200 during the three months
ended March 31, 1996 compared to 158 homes closed at an average sales price of
$130,600 during the three months ended March 31, 1995, an 82.3% decrease in
closings and a 0.3% decrease in average sales price. The decrease in California
closings was 70.2%. The decrease in revenue and number of homes closed during
the three months ended March 31, 1996 is attributable to the close-out of two
successful subdivisions in Riverside County in 1995, the sale of the Phoenix and
Las Vegas divisions and a decrease in demand combined with declining inventory
available for sale.
The following table sets forth, for the periods indicated, the number of homes
closed by the Company's three operating divisions:
<TABLE>
<CAPTION>
Homes Closed for the
Quarter Ended March 31,
-----------------------
1996 1995
-------- -------
<S> <C> <C>
Southern California Division
High Desert 18 33
Riverside County 10 61
Phoenix Division (1) -- 38
Las Vegas Division (1) -- 26
-- ---
Total 28 158
== ===
</TABLE>
- - ----------
(1) In December 1995 the Company sold its Phoenix and Las Vegas home building
divisions to an unrelated third party.
Cost of Homes Sold
Cost of homes sold includes land acquisition, development, construction, direct
and indirect costs, job-site supervision, customer service, warranty costs,
capitalized interest, property taxes and other capitalized indirect costs.
Cost of homes sold for the three months ended March 31, 1996 was $3.3 million, a
decrease of $13.9 million, or 80.6%, from $17.3 million during the three months
ended March 31, 1995. Cost of homes sold as a percentage of revenue increased to
91.7% for the three months ended March 31, 1996 from 83.6% for the same period
in 1995. The increase in cost of homes sold as a percentage of revenue for the
first quarter of 1996 is the result of a number of factors including price
discounts and other sales incentives in the high desert region due to continuing
competitive pressures and from the close out of certain high desert communities.
The Company believes that, since the prices of lumber, other building materials
and related services are subject to fluctuation, its gross margins in future
periods may be significantly affected by changes in prevailing prices.
9
<PAGE> 10
Selling and Marketing Expenses
Selling expenses include loan discount points, internal and third party sales
commissions, escrow fees, title insurance fees and other closing costs.
Selling expenses were $298,000 and $878,000 for the three months ended March 31,
1996 and 1995, respectively, a decrease of 66.1%. Selling expenses as a
percentage of revenue were 8.2% and 4.3% for the three months ended March 31,
1996 and 1995, respectively. The increase in selling expenses as a percentage of
revenue is primarily due to the greater proportion of homes closed using outside
brokers, a change in the commission structure, financing incentives granted to
homebuyers as a result of the recent increase in interest rates, and the low
level of closing revenues.
Marketing expenses include advertising and promotion costs associated with
maintaining model homes and sales offices. Marketing expenses in any given
period may be significantly influenced by the number of grand openings and the
number of projects that are being actively marketed during the period. Marketing
costs associated with items such as establishing sales offices and upgrading
standard homes to model homes are capitalized when incurred and are expensed as
revenue is earned, while other marketing costs are expensed as incurred.
Marketing expenses were $379,000 and $1.3 million for the quarters ended March
31, 1996 and 1995, respectively, representing a decrease of 71.3%. As a
percentage of revenue, marketing expenses were 10.4% and 6.4% for the three
months ended March 31, 1996 and 1995, respectively. The decrease in marketing
costs was a result of the sale of the Phoenix and Las Vegas divisions, a fewer
number of active projects in Southern California and the implementation of cost
reduction measures to further reduce marketing expenses. The increase as a
percentage of revenues is due to the low level of closing revenues.
During the first quarter of 1996 and 1995, the Company was delivering homes from
six and twelve projects, respectively. In the first quarter of 1996 the Company
had no grand openings. In 1995, marketing costs were incurred related to two
grand openings in the first quarter and two grand openings early in the second
quarter.
General and Administrative Expenses
General and administrative expenses include payroll and related benefits,
insurance, financial reporting, general office expense and other corporate and
division level expenses.
General and administrative expenses were $602,000 and $1.1 million for the three
months ended March 31, 1995, respectively, a decrease of 45.2%. As a percentage
of revenue, general and administrative expenses were 16.5% and 5.3% for the
three months ended March 31, 1996 and 1995, respectively. The decrease in the
dollar amount of general and administrative expenses primarily reflects the sale
of the Phoenix and Las Vegas divisions and the Company's continuing cost
reduction measures. The increase as a percentage of revenues is due to the low
level of closing revenues.
Other Income
Other income includes interest earned on cash balances related to certain
projects, miscellaneous income and income from the Company's insurance services
operations. Other income was $30,000 and $67,000 for the three months ended
March 31, 1996 and 1995, respectively. The decrease was primarily related to the
sale of the insurance services operations in the third quarter of 1995 to an
unrelated third party.
Mortgage Brokerage Loss - Net
Mortgage brokerage loss - net of Freedom Mortgage, Inc. ("Freedom"), the
Company's former wholly-owned mortgage brokerage business, reflects revenue
earned from loan origination, discount and servicing release fees, net of costs.
10
<PAGE> 11
In the third quarter of 1995, the Company transferred the California and Las
Vegas operations of Freedom to an unrelated third party, and in December 1995
the Company transferred its Phoenix operations in conjunction with the sale of
its Phoenix division.
Freedom generated a net loss of $107,000 for the three months ended March 31,
1995. The net loss was attributable to Freedom's low capture rate and the high
general and administrative costs associated with these operations.
Minority Partners' Share
Minority partners' share represents the interest of affiliated limited partners
in partnerships included in the Company's financial statements. Pursuant to the
Reorganization in April 1993, all interests of prior minority partners were
eliminated except for the interest of partners in Palmdale Vistas. In January
1996 the Company formed SC 77.
The minority partners' share of profits (losses) was $0 for the three months
ended March 31, 1996.
Provision (Benefit) for Income Taxes
Provision (benefit) for income taxes represents federal income taxes based on
net income (loss) computed at the effective federal tax rate plus state income
taxes computed at the effective tax rate, net of federal tax benefit, as
adjusted for regulations affecting net operating losses.
For the three months ended March 31, 1996, the Company increased its valuation
allowance by $378,000, an amount equal to the deferred tax benefit that would
have otherwise been recorded. Provision for income taxes was $16,000 for the
three months ended March 31, 1995. As of December 31, 1995, the Company had net
operating loss carryforwards for federal income tax purposes of $10.4 million
that are available to offset future federal taxable income. Of these federal net
operating losses, $3.7 million and $6.7 million expire in the years 2009 and
2010, respectively.
Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes
("SFAS 109") requires, among other things, the recognition of deferred tax
assets for the estimated future tax effects attributable to net deductible
temporary differences and net operating loss carryforwards. SFAS 109 further
requires the reduction of deferred tax assets by a valuation allowance if, based
on the weight of available evidence, it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The future
realization of the deferred tax assets must be evaluated along with the
accumulated differences caused by other tax and book basis differences.
Uncertainties exist due to the reduced level of closings, revenues and earnings
resulting from the sale of the Company's Phoenix and Las Vegas divisions, the
need to raise capital for new land acquisitions and current business operations.
Accordingly, the Company has provided a $8.1 million valuation allowance to
reserve against the deferred tax asset as a result of these uncertainties. At
such time as it becomes more likely than not that portions of the additional tax
asset will be realized in the future, the valuation allowance can be adjusted.
The Company believes that during the time period in which the deferred tax asset
can be utilized it will generate sufficient income to realize the net deferred
tax asset. It is difficult to assess the ultimate timing of the realization of
the deferred tax asset. Additionally, no assurances can be given regarding the
realization of the deferred tax asset or that the Company will not have to
record a further valuation allowance against future tax benefits.
BACKLOG
The Company's homes are offered for sale in advance of their construction.
Historically, the Company has entered into standard sales contracts for a
majority of the homes to be built in a phase of a project before construction
commences. Such sales contracts are usually subject to certain contingencies
such as the buyer's ability to qualify for financing and/or the sale of an
existing home. The Company does not recognize revenue on homes covered by such
contracts until the escrows are closed and title is transferred to the buyer.
Homes covered by such sales contracts are considered by the Company as its
backlog. The following table sets forth the Company's backlog by region at the
dates indicated:
11
<PAGE> 12
<TABLE>
<CAPTION>
March 31,
-----------------------------
1996 1995
------------- -------------
<S> <C> <C>
Southern California Division
High Desert 52 69
Riverside County 38 48
Phoenix Division (1) -- 100
Las Vegas Division (1) -- 58
----------- -----------
Number of Homes 90 275
=========== ===========
Aggregate Sales Value $11,924,000 $32,003,000
=========== ===========
Average Sales Price $ 132,500 $ 116,400
=========== ===========
</TABLE>
- - ----------
(1) In December 1995 the Company sold its Phoenix and Las Vegas home building
divisions to an unrelated third party.
The Company's backlog at any particular date is subject to substantial variation
and is dependent upon several factors including the number of homes then
available for sale, prevailing market conditions and the length of time
necessary to complete the closing of home sales subject to pending contracts.
The Company has generally experienced a rapid increase in backlog during periods
in which it holds a grand opening for one of its projects. In the first quarter
of 1996 the Company had no grand openings, compared to two grand openings in the
first quarter of 1995.
The Company's backlog decreased 67.3% to 90 homes at March 31, 1996 from 275
homes at March 31, 1995. The aggregate sales value of the units in backlog
decreased by $20.1 million or 62.7%, due to the decrease in number of homes
under sales contracts. This decrease is due to the sale of the Phoenix and Las
Vegas divisions, a fewer number of grand openings and active projects, and
declining inventory available for sale. The average sales price of homes in
backlog increased by $16,100 or 13.8% due to the higher average sales prices in
California. The decrease in the number of California homes in backlog was 23.1%.
No assurances can be given that homes in backlog will result in actual closings
because cancellations vary from period to period. The Company believes that
cancellations have been relatively high in recent periods, reflecting the weak
economic conditions that exist in the Southern California markets, increased
competition, rising interest rates and the inability of certain potential
homebuyers to qualify for mortgage financing.
NET ORDERS
Net orders represents the number of homes for which the Company has received
signed sales contracts and purchase deposits during the period, net of
cancellations. The following table sets forth the Company's net orders by region
for the dates indicated:
<TABLE>
<CAPTION>
For the Quarters
Ended March 31,
----------------------
1996 1995
---- ----
<S> <C> <C>
Southern California Division
High Desert 25 33
Riverside County 16 26
Phoenix Division (1) -- 50
Las Vegas Division (1) -- 51
-- ---
Total 41 160
== ===
</TABLE>
- - ----------
(1) In December 1995 the Company sold its Phoenix and Las Vegas home building
divisions to an unrelated third party.
12
<PAGE> 13
Net new orders declined to 41 homes from 160 homes for the quarters ended March
31, 1996 and 1995, respectively, a decrease of 74.4%. The decrease in California
net orders was 18 homes or 30.5%. The decrease in California net orders is
attributable to continued market weakness, as well as fewer subdivisions and
declining inventory available for sale.
VARIABILITY IN QUARTERLY RESULTS
The Company has experienced, and expects to continue to experience, significant
variability in its operating results. This variability may cause the Company's
overall results of operations to fluctuate significantly on a period-to-period
basis, and revenues anticipated to occur in a fiscal period may not be earned
until subsequent fiscal periods. Many factors contribute to this variability,
including: (i) the timing and mix of home deliveries; (ii) the Company's ability
to continue to acquire additional land on favorable terms for future
developments; (iii) the condition of the real estate markets and the economy in
general; (iv) the cyclical nature of the home building industry and changes in
prevailing interest rates; (v) cost and availability of materials and labor; and
(vi) delays in construction schedules caused by timing of inspections and
approvals by regulatory agencies, strikes at subcontractors and adverse weather
conditions. The Company's historical financial results are not necessarily a
meaningful indicator of future results and, in general, the Company expects its
financial results to vary from project to project. The Company's revenue and net
income may also vary substantially as a result of variations in the number of
projects at which the Company is closing the sale of homes at any one time. In
addition, the recent sale of operations in Phoenix and Las Vegas will result in
a reduction in the level of closings and revenues, and is expected to have an
adverse effect on earnings.
INFLATION
The Company, as well as the homebuilding industry in general, may be adversely
affected during periods of high inflation, primarily because of higher land
acquisition, land development, construction and interest costs. In addition,
higher interest rates may significantly affect the affordability of permanent
mortgage financing to prospective purchasers and the cost of financing the
Company's land acquisition, development of real estate and construction of
homes. The Company believes that higher mortgage interest rates during much of
1995 had a negative impact on home sales, particularly on entry-level buyers.
Inflation also increases the Company's interest cost and the cost of labor and
materials. The Company attempts to pass any such increases in costs to its
buyers through increased selling prices of its homes. However, there is no
assurance that inflation will not have a material adverse impact on the
Company's future results of operations.
ADOPTION OF ACCOUNTING STANDARDS
In March 1995 the Financial Accounting Standards Board adopted Statement of
Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of". SFAS
121 shall be effective for financial statements for fiscal years beginning after
December 15, 1995, with earlier application encouraged. SFAS 121 requires that
long-lived assets be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of the asset may not be
recoverable. If the sum of the expected future undiscounted cash flows from an
asset to be held and used is less than the carrying amount of the asset, an
impairment loss must be recognized in the amount of the difference between the
carrying amount and fair value less the costs to sell. Assets to be disposed of
must be valued at the lower of the carrying amount or fair value less costs to
sell. The Company did not adopt SFAS No. 121 as of December 31, 1995, continuing
to state its real estate inventories at lower of cost or net realizable value.
The Company's adoption of SFAS No. 121 did not have a material impact on the
Company's consolidated financial statements.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." The statement encourages entities to adopt a fair value method of
accounting for employee stock compensation plans. Entities that choose not to
adopt the new fair value accounting rules must disclose pro forma net income and
earnings per share under the new method. The statement is effective for fiscal
years beginning after December 15, 1995. The Company has adopted the disclosure
requirements of SFAS No. 123.
13
<PAGE> 14
There were no other new accounting pronouncements that could have a significant
effect on the Company's financial statements for any period presented.
LIQUIDITY AND CAPITAL RESOURCES
The homebuilding industry is capital intensive and often involves high leverage
and significant up-front expenditures to acquire land and begin development.
Accordingly, the Company incurs substantial indebtedness to finance its
homebuilding activities and its business and earnings are substantially
dependent on its ability to obtain bank or other debt financing on acceptable
terms. The financial statements set forth herein have been prepared assuming the
Company will continue as a going concern. In addition, the Company's business
plan calls for substantial future expenditures relating to the acquisition and
construction of new projects. No assurances can be given that the cash flow from
operations and the Company's ability to borrow from various lenders will be
sufficient to fund most of its planned expenditures. The Company currently is
attempting to raise needed capital for both ongoing working capital and the
acquisition of land for future projects in Southern California. If the Company
is not successful in obtaining sufficient capital in 1996 to fund its planned
expenditures, some or all of its projects may be significantly delayed or
abandoned. Any such delay or abandonment could result in cost increases and have
a material adverse effect on the Company's business, financial condition and
results of operations The Company is unable to predict whether it will be
successful in raising such capital, nor can any assurances be given that, if
successful, the capital will be raised on terms favorable to the Company.
Accordingly, absent raising capital, the Company's ability to continue its
current level of business operations and finance the acquisition of additional
land for the delivery of future homes will be greatly impaired. Additionally, as
a result of the limited amount of available working capital, the Company has not
paid all of its subcontractors and suppliers on a current basis. A number of
these subcontractors and suppliers have filed liens, a few of which are pursuing
further legal action, including the filing of complaints.
In the first quarter of 1996 the Company entered into common stock purchase
agreements for 545,265 shares of common stock with certain subcontractors,
suppliers and other creditors, including a director and former directors of the
Company. The Company issued 332,265 shares of common stock in the three months
ended March 31, 1996 and issued an additional 213,000 shares of common stock
subsequent to March 31, 1996 upon conversion of a convertible note issued under
a convertible note purchase agreement. These shares were issued in exchange for
relieving the Company of debt owed to the respective creditors in the aggregate
amount of $539,000. In March 1996, the Company filed a Registration Statement on
Form S-3 in accordance with the terms of the common stock purchase agreement
that granted registration rights to these stockholders. The Registration
Statement was declared effective by the Securities and Exchange Commission
subsequent to March 31, 1996. None of the proceeds from the sale of the shares
by the selling stockholders under that Registration Statement will be received
by the Company. The Company agreed to bear all expenses (other than underwriting
discounts and commissions) in connection with the registration.
In March 1996, the Company entered into a letter of intent with an unaffiliated
third party to sell 2,000,000 shares of the Company's Common Stock to the third
party in a private transaction. The letter of intent provides for the parties to
proceed towards entering into a formal agreement. The letter of intent also
provides that the price per share would be based on an average closing price of
the Common Stock for a ten-day period, such price not to exceed $1.10 per share
nor to be less than $0.95 per share. It is anticipated that the definitive
agreement, if any, would provide for the granting of certain registration rights
to the investor or investors and also result in the issuance of warrants to
purchase the Company's Common Stock. No assurances can be given whether the
Company and the third party will enter into a definitive purchase agreement, or
if entered into, what the precise terms of the transaction will be and whether
any conditions to the consummation of such a transaction will be satisfied.
In April 1996, the Company entered into a letter of intent with an unaffiliated
privately held home builder primarily doing business in Southern California
relating to a potential combination of the Company and the home builder and
certain of the home builder's affiliates. The letter of intent provides for a
period of 60 to 90 days to conduct such due diligence as each party deems
necessary to negotiate the terms of the proposed combination. During the 60 to
90 day due diligence period both the Company and the home builder are bound to
deal exclusively with the other, and may not discuss with any other party any
potential merger, reorganization or purchase and sale of assets or stock, other
than homes sold in the ordinary course of business. As part of the proposed
combination, the parties intend to raise
14
<PAGE> 15
additional capital either in the form of equity or debt. No assurances can be
given whether the Company and the home builder will enter into a definitive
agreement, or if entered into, what the precise terms of the transaction will
be, whether any conditions to the consummation of such a transaction will be
satisfied, and whether the combined entity will be successful in raising
additional capital on reasonable terms or at all.
Subsequent to March 31, 1996, the Company assigned its $293,000 receivable from
Victor Valley Commercial Properties, an affiliated partnership, to Ira C. Norris
in exchange for a cash payment of $293,000. Additionally, subsequent to March
31, 1996, Mr. Norris committed, subject to certain conditions, to advance up to
$750,000 to the Company in exchange for a secured promissory note. It is
anticipated that this advance would be used to facilitate the extension of $6.9
million of loans with a commercial bank that have matured. Any such advance
would be on terms no less favorable to the Company than could be obtained from
an unaffiliated third party. No assurances can be given that this latter
transaction will be consummated. Both of these transactions were unanimously
approved by the disinterested members of the Company's board of directors.
The Company has historically financed its operations from a combination of
limited partner capital contributions, cash generated from operations, land
seller financing, borrowings from various banking institutions and the net
proceeds from the Company's initial public offering. The Company received an
income tax refund of $2.2 million in the first quarter of 1995 from the
carryback of its 1994 net operating loss to prior years.
The Company is in the process of forming two joint ventures for projects to be
built on Company-owned land and two joint ventures for new land acquisitions. If
consummated, the Company believes that all four of these new projects would
generate sales in the second half of 1996. No assurances can be given whether
the company will enter into definitive agreements with respect to any of these
potential transactions, or if entered into, whether any of these transactions
will be consummated.
The Company often acquires land with an initial down payment, with the balance
financed by seller non-recourse notes. The notes typically include partial
reconveyance provisions, that allow the Company to obtain the necessary
development financing on a phased basis. The Company also occasionally uses
options to acquire property. At March 31, 1996 and December 31, 1995, the
Company had outstanding land seller indebtedness of $4.4 million and $5.5
million, respectively.
In 1995 the Company commenced negotiations with six land sellers from whom the
Company purchased land in the high desert. The Company owns these properties
subject to seller loans that have current or approaching maturity dates.
Negotiations may result either in extensions of maturity dates and/or other
adjustments to the seller notes, or deedbacks of some or all of the properties
to the sellers in full satisfaction of the indebtedness. One of these properties
was deeded back to the land seller in the first quarter of 1996 in satisfaction
of $1.0 million of indebtedness. If all five remaining deedbacks occur, it would
result in a reduction of real estate inventories of $2.1 million (net of a
reserve in the amount of $4.3 million as of March 31, 1996), in satisfaction of
$2.1 million of indebtedness outstanding at March 31, 1996. Additionally, based
on the Company's evaluation of the net realizable value of its remaining other
properties, write-downs of real estate totaling $5.8 million were recorded as of
December 31, 1995, of which $4.4 million related to properties in the high
desert and $1.4 million related to properties in Riverside County.
In 1994, the Company commenced the process of deeding property back to nine
other land sellers. The Company recorded a charge to operations in 1994 of
approximately $4.1 million, and as the deed backs occur will ultimately reduce
its real estate inventories and debt obligations by $3.2 million, $1.4 million
of which was recorded in 1995. As of March 31, 1996, the Company is still in the
process of deeding back land to five of these land sellers that will result in a
further reduction of real estate inventories of $1.8 million in satisfaction of
$1.8 million of indebtedness outstanding at March 31, 1996. During 1994 the
Company also closed four communities and reduced the scope of three other
communities in the high desert which resulted in the acceleration of the
write-off of previously capitalized costs associated with its regional
development and marketing activities of approximately $4.0 million. Based upon
the Company's evaluation of the net realizable value of its other real estate
inventories at December 31, 1994, the Company recorded write-downs of real
estate totaling $2.6 million during 1994.
15
<PAGE> 16
The Company typically obtains its infrastructure, development and construction
funding from commercial banks. Lenders generally provided interim construction
loans for each phase of homes within the project for a term of up to 12 months,
with extension provisions. The development loans typically are repaid with
proceeds from these interim construction loans. Interest rates on construction
loans ranged from the prime rate plus 1.0% to the prime rate plus 2.25% and
interest rates on development loans ranged from the prime rate plus 1.0% to the
prime rate plus 3.0%. The loan agreements include customary representations and
covenants. All outstanding indebtedness under these facilities is secured by a
lien on the project real property. At March 31, 1996, aggregate borrowings of
approximately $11.2 million were outstanding under these facilities ($5.4
million of which has matured) and approximately $8.5 million was available for
further qualified project finance borrowing.
The Company also has secured and unsecured revolving lines of credit with banks
as follows: (i) a $3.0 million line that bears annual interest at the prime rate
plus 1.0% that matures June 1996, and provides for quarterly principal payments
of $500 for each home closed, commencing with the fourth quarter of 1995 and
(ii) a $1.5 million line that bears interest at the prime rate plus 2.5% that
matured March 1996, is now payable on demand, and the Company is negotiating the
terms of an extension. The outstanding balance under these lines of credit at
March 31, 1996 was $4.4 million.
At March 31, 1996, the Company did not satisfy certain financial covenants under
two of its bank loans and a development lender related to minimum liquidity and
minimum net worth levels at quarter end. The Company has received appropriate
waivers from all three of the affected lenders. Based on the anticipated results
for the balance of 1996 and the need for additional working capital, the Company
will also be in violation of certain financial covenants under its existing loan
agreements for future quarters. Although the Company believes these covenants
will be appropriately modified or waived, the Company can give no assurance that
such modifications or waivers will be obtained.
The availability of borrowed funds for homebuilders, especially for land
acquisition and construction financing is variable, and at times has been
severely restricted and in some cases eliminated entirely. Currently such
financings are generally available, but lenders have been requiring borrowers to
invest increased amounts of equity in a project in connection with both new
loans and the extension of existing loans.
In late 1992 and throughout 1993, the Company encountered a significant increase
in the price of lumber purchased for use in its homes. In response, the Company
in the fourth quarter of 1993 entered into a lumber purchase contract for 600
homes in 1994 at specified pre-established prices. The Company purchased lumber
for approximately 100 homes under the contract. In February 1995, the Company
reached an agreement with the lumber company to settle its outstanding lumber
purchase commitment for $800,000, $645,000 of which was paid during 1995 and the
remaining balance of $155,000 was paid in 1996.
16
<PAGE> 17
INCO HOMES CORPORATION
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in routine litigation arising in the ordinary
course of business. Such matters, if decided adversely to the Company,
would not, in the opinion of management, have a material adverse effect
on the financial condition of the Company. In addition, from time to
time, the Company could be involved in litigation in connection with
claims of development or construction defects, which matters, if
decided adversely to the Company, could have a material adverse effect
on the financial condition of the Company.
As a result of the limited amount of available working capital, the
Company has not paid all of its subcontractors and suppliers on a
current basis. Certain of these subcontractors and suppliers have filed
liens, a few of which are pursuing further legal action, including the
filing of complaints.
In May 1994, the owners of 11 homes sold by the Company at its 201-home
Northfork project located in Murrieta, California filed a complaint
against Inco Development Corporation, a wholly-owned subsidiary of the
Company ("Inco Development"), in the Superior Court of California in
Riverside County. In June 1994, the owners of six additional homes
filed a separate complaint. These two complaints were consolidated into
one action. Subsequent to the consolidation, one of the homeowners
dismissed the lawsuit due to the Company's repair of the alleged
defects. In August 1994, one additional homeowner filed a complaint.
The complaints each allege, among other things, negligence, nuisance,
strict liability, breach of warranty, negligent infliction of emotional
distress and fraud based on alleged design and construction defects and
inadequate soils conditions. The plaintiffs are seeking general,
special, and punitive damages in an unspecified amount, and attorney
fees. The causes of action for fraud were dismissed by the court in
1994 with respect to the complaints filed in 1994, and accordingly,
there are no claims for punitive damages. The Company believes that the
claims made against it are without merit and intends to continue to
vigorously defend itself in this action. The Company believes that this
litigation will not have a material adverse effect on the Company's
business.
ITEMS 2 THROUGH 5. Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit 27 - Financial Data Schedule.
(b) Reports on Form 8-K. There were no reports on Form 8-K for
the three months ended March 31, 1996.
17
<PAGE> 18
INCO HOMES CORPORATION
SIGNATURES
Pursuant to the requirements 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.
INCO HOMES CORPORATION
Date: May 14, 1996 By: /s/ Ira C. Norris
-------------------------
IRA C. NORRIS
Chairman of the Board, President
and Chief Executive Officer
Date: May 14, 1996 By: /s/ Robert H. Daskal
------------------------
ROBERT H. DASKAL
Executive Vice President and
Chief Financial Officer
18
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