<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
----------------------------------------------------------------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
[_] 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.
Outstanding at
Class of Common Stock June 30, 1998
--------------------- --------------
$.01 par value 2,095,764
- -------------------------------------------------------------------------------
<PAGE>
INCO HOMES CORPORATION
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 1998 (Unaudited)
and December 31, 1997.. ...................................... 3
Consolidated Statements of Operations (Unaudited) for the
Three Months and Six Months Ended June 30, 1998 and 1997...... 4
Consolidated Statements of Cash Flows (Unaudited) for the Six
Months Ended June 30, 1998 and 1997........................... 5
Notes to Consolidated Financial Statements (Unaudited)........ 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................. 10
PART II. OTHER INFORMATION............................................. 18
Item 1. Legal Proceedings............................................. 18
Item 2. Recent Sales of Unregistered Securities....................... 18
Item 4. Submission of Matters to a Vote of Security Holders........... 19
Item 5. Other Information............................................. 20
Item 6. Exhibits and Reports on Form 8-K.............................. 20
SIGNATURES.............................................................. 21
2
<PAGE>
INCO HOMES CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Dollars in thousands, except share data) June 30, December 31,
------------ ------------
1998 1997
---- ----
(unaudited)
<S> <C> <C>
ASSETS
Cash $ 215 $ 736
Real estate inventories 27,723 27,329
Deferred tax asset 2,204 2,200
Other assets 677 669
----------- -----------
Total assets $ 30,819 $ 30,934
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities $ 6,473 $ 5,580
Notes payable 19,540 19,202
Line of credit 491 330
Notes to stockholders 1,255 1,187
------------ ------------
Total liabilities 27,759 26,299
------------ ------------
Minority partners' investment in consolidated partnerships 481 545
Commitments and contingencies
Stockholders' Equity
Preferred stock - $.01 par value; 1,000,000 shares
authorized; 2,340 shares issued and outstanding
for 1998 and 1997 2,340 2,340
Common stock - $.01 par value; 20,000,000 shares
authorized; 2,095,764 and 1,637,096 shares issued
and outstanding for 1998 and 1997 21 16
Additional paid in capital 43,029 42,876
Deficit (42,811) (41,142)
------------ ------------
Total stockholders' equity 2,579 4,090
------------ ------------
Total liabilities and stockholders' equity $ 30,819 $ 30,934
============ ============
</TABLE>
See accompanying notes to financial statements
3
<PAGE>
INCO HOMES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data) For the Three Months Ended June, For the Six Months Ended June,
------------------------------- -----------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue from home sales $ 9,120 $ 5,452 $ 13,404 $ 8,872
Revenue from land and lot sales - 600 - 600
--------- --------- ---------- ----------
9,120 6,052 13,404 9,472
--------- --------- ---------- ----------
Cost of homes sold 8,492 5,363 12,702 8,447
Cost of land and lots - 667 - 667
--------- --------- ---------- ----------
8,492 6,030 12,702 9,114
--------- --------- ---------- ----------
Gross profit 628 22 702 358
--------- --------- ---------- ----------
Provision for write-down of real estate - 9,213 - 9,213
Selling and marketing expenses 934 1,064 1,682 1,720
General and administrative expenses 372 357 847 775
--------- --------- ---------- ----------
1,306 10,634 2,529 11,708
--------- --------- ---------- ----------
Operating loss (678) (10,612) (1,827) (11,350)
Other income 142 56 145 62
--------- --------- ---------- ----------
Loss before minority partners' share
and provision (benefit) for income taxes (536) (10,556) (1,682) (11,288)
- - - -
Minority partners' share (9) (67) (13) (113)
--------- --------- ---------- ----------
Loss before provision (benefit) for income
taxes (527) (10,489) (1,669) (11,175)
Provision (benefit) for income taxes - - - -
--------- --------- ---------- ----------
Loss before extraordinary item (527) (10,489) (1,669) (11,175)
Extraordinary item - 846 - 1,332
--------- --------- ---------- ----------
Net loss $ (527) $ (9,643) $ (1,669) $ (9,843)
========= ========= ========== ==========
Basic and diluted net loss per common share $ (0.27) $ (5.89) $ (0.89) $ (6.08)
========= ========= ========== ==========
Weighted average number of common shares
outstanding 1,957,742 1,637,096 1,867,866 1,620,153
========= ========= ========== ==========
</TABLE>
See accompanying notes to financial statements
4
<PAGE>
INCO HOMES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months Ended
June 30,
------------------------
1998 1997
---- ----
(Dollars in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,669) $(9,843)
Adjustment to reconcile net loss to net
cash provided by (used in) operating
activities:
Extraordinary item - (1,332)
Provision for write-down of real estate - 9,213
Minority partners' share (14) (113)
Increase in real estate inventories (310) (1,114)
Increase in deferred income tax asset (4) -
Increase in other assets (25) 91
Increase (decrease) in accounts payable
and accrued liabilities 1,068 (1,760)
-------- -------
Net cash used in operating activities (954) (4,858)
-------- -------
Cash flow from financing activities:
Proceeds from notes payable secured by real estate 14,137 13,205
Repayments on notes payable secured by real estate (13,799) (9,905)
Proceeds from line of credit 244 1,113
Repayments on line of credit (83) (2,136)
Proceeds from notes to stockholder - 2,122
Repayments on notes to stockholder - (283)
Repayments to minority partners (50) -
Proceeds from sale of common stock 2 500
Proceeds from additional paid in capital 50 -
Costs of stock issuance and reverse stock split (35)
-------- -------
Net cash provided by financing activities 501 4,581
-------- -------
Net decrease in cash and cash equivalents (453) (277)
Cash and cash equivalents at beginning of year 736 586
-------- -------
Cash and cash equivalents at end of period $ 215 $ 309
======== =======
</TABLE>
5
<PAGE>
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-QSB 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-KSB, as amended, for
the year ended December 31, 1997. The accompanying consolidated financial
statements include the accounts of the Company and all wholly-owned
subsidiaries, and the Company's general partnership interests in Freedom-
Eagle Ranch Housing Partners ("FERHP") and Triumph-Lancaster Housing
Partners ("Triumph"). All significant intercompany transactions have been
eliminated.
On January 16, 1997, the Company effected a one-for-six reverse stock split
("the reverse stock split").
The Company has experienced, and expects to continue to experience,
significant variability in quarterly results of operations. 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 June 30, 1998 and 1997, the Company incurred
$33,000 and $3,000, respectively, in model home design fees and
reimbursements for the cost of the model home furnishings with Nancy Orman
Interiors. For the six months ended June 30, 1998 and 1997, the Company
incurred $112,000 and $105,000, respectively, in fees and costs with Nancy
Orman Interiors. Nancy Orman Interiors is owned by Nancy Norris, the wife
of Ira C. Norris.
Thomas E. Gibbs, Jr., a former director of the Company, holds a 56.3%
general partner's interest in Hunter's Ridge Investment Partners ("HRIP").
Included in notes payable at June 30, 1998 is a loan with a balance of
$474,000 from HRIP, secured by one of the Company's projects in Fontana,
California. Additionally, the Gibbs Family Trust, of which Mr. Gibbs is a
beneficiary and trustee, is a 50% limited partner in Triumph.
Thomas A. Hantges, a director and stockholder of the Company, owns
approximately 67% of both USA Commercial Mortgage Company, Inc. ("USA") and
USA Commercial Real Estate Group ("USA Real Estate"). USA has provided
loans and arranged for individual lenders to provide loans to the Company
secured by Company projects in amounts totaling $11,020,000 through June
30, 1998. USA has earned fees for these loans totaling $1,118,000, of
which $909,000 has been paid. The balance is secured by notes and is to be
paid from proceeds from sales of completed homes in certain of the
Company's projects. The interest rates on loans provided by USA range from
12.25% to 20.0%, with the average being 15.08%. The outstanding balance of
these loans at June 30, 1998 was $7,117,000. Additionally, in June 1997,
USA Real Estate arranged for an additional group of investors to purchase
the Company's Eagle Ranch project in the high desert for $2,400,000. Funds
from this sale helped the Company repay portions of matured loans secured
by this project with a commercial bank. The investors granted the Company
a six-year
6
<PAGE>
option to periodically repurchase portions of the property, subject to
annual minimum repurchase thresholds, for the development of single-family
homes. If the Company fails to repurchase the minimum number of lots in any
year, the option terminates. The investors are to receive one half of the
cash generated upon the sale of these single-family homes constructed by
the Company on the repurchased lots, and USA Real Estate is to receive a
fee of $1,000 for each home sold. If the Company approves a bulk sale of
these lots by the investors, the Company is to receive one half of any
profits earned. In March, 1998 the Company was notified that the option was
terminated for failure to pay real estate taxes and Mello Roos assessments
of approximately $170,000. The Company will be able to purchase lots in the
future at fair market value.
NOTE 3 - NOTES TO STOCKHOLDERS
From September 1996 through November 30, 1997, the Company received
advances of $2,747,000 from Ira C. Norris, of which the Company had repaid
$460,000. The advances were unsecured, bore interest at 10% and were due on
March 31, 1998. The balance of these advances at December 23, 1997 was
$2,462,000, which included accrued interest of $171,000. On that date, Mr.
Norris agreed to convert $2,340,000 of this debt to 2,340 shares of Series
A Cumulative Preferred Stock of the Company. The Company issued these
shares on December 30, 1997 to the Norris Living Trust, of which Mr. Norris
is a beneficiary and trustee. An unsecured note to the Norris Living Trust,
bearing interest at 10% and maturing on December 23, 1998, evidences the
balance of indebtedness not converted in the amount of approximately
$122,000. The balance owing under this note at June 30, 1998 was $127,904,
which includes accrued interest of approximately $6,030.
The Series A Preferred Stock has a par value of $0.01, has no voting
rights, is non-participating, and has no conversion features. The stock is
redeemable at the option of the Company for cash at the redemption price of
$1,000 per share plus accumulated but unpaid dividends. The established
dividend rate on the Preferred Stock is $100 per share per annum payable
quarterly from available working capital.
In addition to the loans described above, in June 1997, the Norris Living
Trust loaned the Company $500,000 secured by undeveloped land owned by the
Company in Victorville and Palmdale, California. This note bears interest
at 10%, was due in June 1998 and has been extended until June 1999. The
balance owing under this note at June 30, 1998 was $550,712, which includes
accrued interest of approximately $50,712.
In June 1997, the Company signed a note and deed of trust in connection
with a loan of $500,000 from the Neeley Revocable Family Trust. Ronald L.
Neeley, a director of the Company until May 1, 1998, is a beneficiary and
trustee of this trust. The note bears interest at 15%, was due in June
1998 and has been extended until June 1999, and is secured by the same
undeveloped land owned by the Company in Victorville and Palmdale,
California which secures the Norris Living Trust loan of $500,000 mentioned
above. The balance owing under this note at June 30, 1998 was $576,027,
which includes accrued interest of approximately $76,027.
NOTE 4 - EXTRAORDINARY ITEMS
In February 1997, the Company obtained new financing from both USA and
another third party lender, providing a total of $2,336,000. Pursuant to
an Agreement with a commercial bank, this amount was accepted as payment in
full on matured loans with balances totaling $2,822,000, secured by one of
the Company's projects in Riverside County. This resulted in an
extraordinary gain of approximately $486,000.
7
<PAGE>
NOTE 5 - NET LOSS PER COMMON SHARE
Loss per share for the three-month and six-month periods ended June 30,
1998 and 1997 is calculated as follows:
<TABLE>
<CAPTION>
For the Three Months For the Six Months Ended
(Dollars in thousands, except per Ended June 30, June 30,
share data)
------------------------ ------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net loss $ 527 $ 9,643 $ 1,669 $ 9,843
Cumulative preferred dividends 59 -- 123 --
---------- ---------- ---------- ----------
Net loss to common shareholders $ 586 $ 9,643 $ 1,792 $ 9,843
========== ========== ========== ==========
Weighted average number of common
shares outstanding 1,957,742 1,637,096 1,867,866 1,620,153
Basic and diluted loss per share $ 0.29 $ 5.89 $ 0.95 $ 6.08
Dilutive potential common shares 61,114 0 80,509 0
</TABLE>
Since losses have occurred in all periods presented, the inclusion of
dilutive potential common shares (principally stock options and warrants)
to calculate diluted loss per share would be anti-dilutive.
NOTE 6 - STOCKHOLDERS' EQUITY
The decrease in stockholders' equity from December 31, 1997 to June 30,
1998, is reconciled as follows:
<TABLE>
<CAPTION>
Common Stock
Preferred Stock and Additional Paid
(Dollars in thousands) in Capital
-------------------------------------------------------------------------
Shares Amount Shares Amount Deficit Total
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance - December 31, 1997 2,340 $2,340 1,637,096 $42,892 $(41,142) $ 4,090
Common stock issued -- -- 458,668 158 -- 158
Net loss -- -- -- -- (1,669) (1,669)
-------------------------------------------------------------------------
Balance - June 30, 1998 2,340 $2,340 2,095,764 $43,050 $(42,811) $ 2,579
=========================================================================
</TABLE>
Common Stock was issued in the six months ended June 30, 1998 in various
private transactions with sales prices totaling $806,581. Pursuant to
these transactions, (i) in December 1997, the Company received $100,000 in
cash and was relieved of debt in the amount of $200,000, (ii) in January
1998, the Company received $6,000 in consulting services, (iii) in March
1998, the Company was relieved of accounts payable in the amount of
$72,500, (iv) in May 1998, the Company was relieved of accounts payable in
the amount of $28,081 and (v) the Company received $350,000 in November
1997 and $50,000 through February 1998 pursuant to the exercise of
warrants. See Part I, Item 2.--Liquidity and Capital Resources.
NOTE 7 - 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 June 30, 1998, the Company had open escrows to purchase one parcel of
land for future residential developments with the purchase price totaling
$750,000.
8
<PAGE>
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.
Numerous subcontractors and suppliers have filed liens, and some are
pursuing 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, Item 1.--Legal
Proceedings.
9
<PAGE>
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-KSB, as amended, 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 continued into 1998 in
certain geographic areas of Southern California in which the Company conducted
operations and have had an adverse impact on the Company's results of
operations. Although the Company is experiencing improved sales at many of its
projects, the Company continues to provide homebuyers with price incentives at
some of its projects in order to remain competitive or sell out the final
remaining units of a project or phase of a project. This has resulted in
reduced profitability or losses on some of the homes that the Company has sold.
RESULTS OF OPERATIONS
Revenue from Home Sales
Revenue from home sales increased to $9,100,000 during the three months ended
June 30, 1998, from $5,500,000 during the three months ended June 30, 1997,
representing an increase of $3,600,000 or 65.5%. The Company closed sales of 56
homes at an average sales price of $162,500 during the three months ended June
30, 1998 compared to 42 home closings at an average sales price of $129,800
during the three months ended June 30, 1997, a 33.3% increase in closings and a
25.2% increase in average sales price.
Revenue from home sales also increased to $13,400,000 during the six months
ended June 30, 1998, from $8,900,000 during the six months ended June 30, 1997,
representing an increase of $4,500,000 or 50.6%. The Company closed sales of 88
homes at an average sales price of $152,270 during the six months ended June 30,
1998 compared to 73 home closings at an average sales price of $121,500 during
the six months ended June 30, 1997, a 20.5% increase in closings and a 25.3%
increase in average sales price.
The Company attributes the increase in revenue during both the three months and
six months ended June 30, 1998 to improvement in the overall Southern California
housing climate combined with a significantly higher average selling price per
unit.
The following table sets forth, for the periods indicated, the number of home
sales by the Company:
<TABLE>
<CAPTION>
Home sales for the Home sales for the
Three Months Six Months
Ended June 30, Ended June 30,
------------------- ------------------
1998 1997 1998 1997
-------- -------- -------- -------
<S> <C> <C> <C> <C>
High Desert of San Bernardino and 22 28 37 54
Los Angeles Counties
Inland Riverside and San Bernardino 34 14 51 19
Counties
-------- -------- -------- -------
Total Number of Homes 56 42 88 73
======== ======== ======== =======
</TABLE>
10
<PAGE>
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 June 30, 1998 was $8,500,000, an
increase of $3,100,000, or 57.4%, from $5,400,000 during the three months ended
June 30, 1997. Cost of homes sold as a percentage of revenue decreased to 93.0%
for the three months ended June 30, 1998 from 98.4% for the same period in 1997.
Cost of homes sold for the six months ended June 30, 1998 was $12,700,000, an
increase of $4,300,000, or 51.2% from $8,400,000 during the six months ended
June 30, 1997. Cost of homes sold as a percentage of revenue decreased to 94.8%
for the six months ended June 30, 1998 from 95.2% for the same period in 1997.
The decrease in cost of homes sold as a percentage of revenue for both the three
months and six months ended June 30, 1998 is the result of the increased sales
prices of homes which was offset by higher carrying costs.
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 $429,000 and $438,000 for the three months ended June 30,
1998 and 1997, respectively, a decrease of 2.0%. Selling expenses as a
percentage of revenue were 4.7% and 8.0% for the three months ended June 30,
1998 and 1997, respectively. Selling expenses were $734,000 and $777,000 for
the six months ended June 30, 1998 and 1997, respectively, a decrease of 6.0%.
Selling expenses as a percentage of revenue were 5.0% and 8.8% for the six
months ended June 30, 1998 and 1997, respectively.
The decrease in selling expenses as a percentage of revenue for the three months
ended June 30, 1998 is primarily due to the increased sales volume of homes
coupled with reduced payroll expense for the Company's internal sales force and
lower total commissions paid to independent real estate brokers. This decrease
was partially offset by higher incentives given to homebuyers in order to sell
the final remaining units of several of the Company's projects.
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 $506,000 and $626,000 for the three months ended June
30, 1998 and 1997, respectively, representing a decrease of 19.0%. As a
percentage of revenue, marketing expenses were 5.5% and 10.3% for the three
months ended June 30, 1998 and 1997, respectively. Marketing expenses were
$948,000 and $943,000 for the six months ended June 30, 1998 and 1997,
respectively, representing an increase of 1.0%. As a percentage of revenue,
marketing expenses were 7.1% and 10.0% for the six months ended June 30, 1998
and 1997, respectively.
The Company attributes the decrease in marketing costs as a percentage of sales
to the increased sales volume of homes and more efficient use of newspaper and
magazine advertising. The decrease was offset partially by increased expenses
from the use of billboards and other signs, and greater aggregate payments made
pursuant to the Company's customer referral program.
During the second quarter of 1998 and 1997, the Company was selling homes from
seven and eight projects, respectively. In the first six months of 1998, the
Company had one grand opening, which occurred in the second quarter. In the
first six months of 1997, the Company had one grand opening, which also occurred
in the second quarter.
11
<PAGE>
General and Administrative Expenses
General and administrative expenses include payroll and related benefits,
insurance, financial reporting costs, and general office expenses.
General and administrative expenses were $372,000 and $357,000 for the three
months ended June 30, 1998 and 1997, respectively, an increase of 4.1%. As a
percentage of revenue, general and administrative expenses were 4.0% and 5.9%
for the three months ended June 30, 1998 and 1997, respectively. General and
administrative expenses were $847,000 and $775,000 for the six months ended June
30, 1998 and 1997, respectively, an increase of 9.3%. As a percentage of
revenue, general and administrative expenses were 6.3% and 8.2% for the six
months ended June 30, 1998 and 1997, respectively.
The decrease in general and administrative expenses primarily reflects the
Company's continuing cost reduction measures.
Other Income
Other income includes development fees, interest earned on cash balances related
to certain projects and miscellaneous income. Other income was $142,000 and
$56,000 for the three months ended June 30, 1998 and 1997, respectively and
$145,000 and $62,000 for the six months ended June 30, 1998 and 1997,
respectively.
Minority Partners' Share
Minority partners' share represents the interest of affiliated limited partners
in partnerships consolidated in the Company's financial statements. These
partnerships are FERHP and Triumph.
The minority partners' share of losses was $9,800 and $67,000 for the three
months ended June 30, 1998 and 1997, respectively, and $13,600 and $113,000 for
the six months ended June 30, 1998 and 1997, respectively.
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 June 30, 1998 and 1997, the Company increased its
valuation allowance by $210,000 and $80,000 respectively, and for the six months
ended June 30, 1998 and 1997, the Company increased its valuation allowance by
$668,000 and $457,000 respectively. Both of these increases in the valuation
allowance were in an amount equal to the deferred tax benefit that would have
otherwise been recorded. As of December 31, 1997, the Company had net operating
loss carryforwards for federal income tax purposes of $33,931,000 that are
available to offset future federal taxable income. Of these federal net
operating losses, $3,695,000, $5,046,000, $7,830,000 and $17,360,000 expire in
the years 2009, 2010, 2011 and 2012, respectively.
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 and thus may not be completed. Homes covered by such sales
contracts, as well as completed homes covered by such sales contracts, are
considered by the Company as its backlog. The Company does not recognize
revenue on homes covered by such contracts until the escrows are closed and
title is transferred to the buyer. The following table sets forth the Company's
backlog at the dates indicated:
12
<PAGE>
<TABLE>
<CAPTION>
June 30,
-----------------------------
1998 1997
------------- -------------
<S> <C> <C>
High Desert of San Bernardino
and Los Angeles Counties 35 33
Inland San Bernardino and
Riverside Counties 26 32
Projects Built for a Fee (See
Liquidity and Capital Resources) 20 --
------------- ------------
Total Number of Homes 81 65
============= ============
Aggregate Sales Value $11,712,000 $9,215,000
============= ============
Average Sales Price $144,600 $141,800
============= ============
</TABLE>
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 six
months of 1998 the Company had one grand opening, and the Company also had one
grand opening in the first six months of 1997.
The Company's backlog increased 25.0% to 81 homes at June 30, 1997 from 65 homes
at June 30, 1997. The aggregate sales value of homes in backlog increased by
$2,497,000 or 27.1% primarily due to the increase in number of homes under sales
contracts. The average sales price of homes in backlog increased by $2,800 or
2.0% due to a change in the mix of homes offered for sale.
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 have existed in the Southern California markets,
increased competition, 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 for the
dates indicated:
<TABLE>
<CAPTION>
For the For the
Three Months Six months
Ended June 30, Ended June 30,
--------------------- ---------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
High Desert of San Bernardino and Los 23 20 48 35
Angeles Counties
Inland San Bernardino and Riverside 19 16 58 21
Counties
Projects Built for a Fee (See Liquidity and 15 -- 20 --
Capital Resources)
-------- -------- -------- --------
Total 57 36 126 56
======== ======== ======== ========
</TABLE>
Net new orders increased to 57 homes from 36 homes for the three months ended
June 30, 1998 and 1997, respectively, an increase of 58.0%. Net new orders
increased to 126 homes from 56 homes for the six months ended June 30, 1998 and
1997, respectively, an increase of 125.0%. The Company believes that the
increase in net
13
<PAGE>
orders is attributable to improving market conditions in certain of the
geographic areas of Southern California in which the Company conducts
operations.
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 received
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.
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 attempts to pass any increases in its costs due to inflation
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
Management believes there are no new accounting pronouncements that could have a
significant effect on the Company's financial statements for any period
presented.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
SFAS No. 130 establishes requirements for disclosure of comprehensive income and
becomes effective for the Company's fiscal year ending December 31, 1998.
Reclassification of prior year financial statements for comparative purposes is
required. At June 30, 1998, the Company has no elements which give rise to
reporting comprehensive income.
FASB has also issued Statement No. 131, "Disclosures about Segments of an
Enterprise and Related Information." Statement No. 131 modifies the disclosure
requirements for reportable segments and is effective for the Company's year
ending December 31, 1998. This pronouncement currently has no significant
impact on the reporting practices of the Company since its adoption.
Year 2000 Compliance
The Company is currently working to resolve the potential impact of the "Year
2000" on the processing of date sensitive information by the Company's
computerized information systems. The Company is in the process of converting
its current computer information system to a new system which is 2000-compliant.
This conversion is expected to be completed prior to year end.
14
<PAGE>
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 Company plans for substantial future expenditures relating to the
acquisition and construction of new projects, as well as the continued
construction of existing, ongoing projects. Additionally, the Company continues
to experience shortfalls in working capital and has payables from prior periods
and closed-out projects in excess of $2,000,000, most of which have been
outstanding for more than 90 days. This amount has been reduced by the Company
from an outstanding balance of more than $11,000,000 in December 1994. As a
result of the limited amount of available working capital, the Company has not
paid all of its subcontractors or suppliers on a current basis. Numerous
subcontractors and suppliers have filed liens, and some are pursuing further
legal action, including the initiation of lawsuits. The Company has negotiated
payment arrangements, as appropriate, in an effort to settle these claims and
release the liens, but various claims and lawsuits are pending and unresolved.
In its efforts to seek funding for working capital shortfalls and to reduce old
payables, as well as to finance the acquisition of additional land for the
delivery of future homes, the Company is discussing with various sources of
capital the investment of additional funds in the Company. No material
agreements between the Company and these potential sources of capital have been
signed, and no assurances can be given whether or when the Company may enter
into an agreement with any source or, if entered into, what the precise terms of
the agreement will be.
If the Company is not successful in obtaining sufficient capital to fund its
planned expenditures, the Company's ability to continue its current level of
business operations could be impaired, and the Company may not be able to
conduct operations as presently anticipated. This could have a material adverse
affect on the Company's business, financial condition and results of operations.
Historically, the Company has financed its operations from a combination of
limited partner capital contributions, cash generated from operations, purchase
money financing of land purchases, borrowings from various banking institutions,
borrowings from related parties, deferring accounts payable and sales of its
capital stock. The Company is also exploring alternative methods of financing.
Management believes that existing cash and capital resources, cash flow from
operations as well as the financial sources upon which it has historically
relied, similar to those discussed in more detail below, will be sufficient to
fund the Company's cash requirements for at least the next 12 months at the
Company's presently anticipated level of operations.
The Company is in the process of making a private offering (the "Offering") of
up to $5,000,000 of Subordinated Investment Notes ("Investment Notes") bearing
interest at the rate of 15% per annum. The Investment Notes will have an 18
month maturity date and no prepayment penalty. The face value of each
Investment Note will be $10,000. The Offering will terminate on February 9,
1999, but may be extended by the Company to a date not later than July 31, 1999.
The Company is conducting the Offering through its employees and is employing
the services of a placement agent to assist it in the Offering. Net proceeds,
if any, from the Offering will be used for working capital. As of June 30,
1998, the Company had received subscriptions for the Investment Notes totaling
$120,000.
The Investment Notes have not been, and will not be, registered under the
Securities Act of 1933 and may not be offered or sold in the United States
absent registration or an applicable exemption from registration requirements of
the Securities Act of 1933.
In 1997, the Company established a relationship with USA, which has provided
loans and arranged for individual lenders to provide loans to the Company
secured by Company projects in amounts totaling $11,020,000 through June 30,
1998. Funds have been utilized to refinance projects, to purchase additional
land for future homes, and to develop some of this land. Additionally, in June
1997, USA Real Estate arranged for an additional group of investors to purchase
the Company's Eagle Ranch project in the high desert for $2,400,000. Funds from
this sale helped the Company repay portions of matured loans with a commercial
bank secured by this project. The investors granted the Company a six-year
option to periodically repurchase portions of the property, subject to annual
15
<PAGE>
minimum repurchase thresholds, for the development of single-family homes. If
the Company fails to repurchase the minimum number of lots in any year, the
option terminates. The investors are to receive one half of the cash generated
upon the sale of these single-family homes constructed by the Company on the
repurchased lots, and USA Real Estate is to receive a fee of $1,000 for each
home sold. If the Company approves a bulk sale of these lots by the investors,
the Company is to receive one half of any profits earned. In March, 1998 the
Company was notified that the option was terminated for failure to pay real
estate taxes and Mello Roos assessments of approximately $170,000. Thomas A.
Hantges owns 67% of both USA and USA Real Estate. Mr. Hantges became a director
of the Company in January 1998. The Company will be able to purchase lots at
fair market value.
USA has earned fees totaling $1,118,000 for providing these loans to the
Company, of which $909,000 has been paid. The balance is secured by notes and
is to be paid from proceeds from sales of completed homes in certain of the
Company's projects. The interest rates on loans provided by USA range from
12.25% for certain loans secured by a first deed of trust to 20.0% for certain
subordinated land loans, with the average being 15.08%. The outstanding balance
of these loans at June 30, 1998 was $7,117,000.
From September 1996 through November 30, 1997, the Company received advances of
$2,747,000 from Ira C. Norris, of which the Company had repaid $460,000. The
advances were unsecured, bore interest at 10% and were due on March 31, 1998.
The balance of these advances at December 23, 1997 was $2,462,000, which
included accrued interest of $171,000. On that date, Mr. Norris agreed to
convert $2,340,000 of this debt into 2,340 shares of Series A Cumulative
Preferred Stock of the Company. The Company issued these shares on December 30,
1997 to the Norris Living Trust, of which Mr. Norris is a beneficiary and
trustee. An unsecured note to the Norris Living Trust, bearing interest at 10%
and maturing on December 23, 1998, evidences the balance of indebtedness not
converted in the amount of approximately $122,000. The balance owing under this
note at June 30, 1998 was $127,904, which includes accrued interest of
approximately $6,030.
The Series A Preferred Stock has a par value of $0.01, has no voting rights, is
non-participating, and has no conversion features. The stock is redeemable at
the option of the Company for cash at the redemption price of $1,000 per share
plus accumulated but unpaid dividends. The established dividend rate on the
Preferred Stock is $100 per share per annum payable quarterly from available
working capital.
In addition to the loans described above, in June 1997, the Norris Living Trust
loaned the Company $500,000 secured by undeveloped land owned by the Company in
Victorville and Palmdale, California. This note bears interest at 10% and was
due in June 1998 and has been extended until June 1999. The balance owing under
this note at June 30, 1998 was $550,712, which includes accrued interest of
approximately $50,712.
Subsequent to June 30, 1998, the Norris Living Trust obtained a $1,000,000 non-
revolving Line of Credit (Credit Line) from a commercial bank, personally
guaranteed by Mr. Norris. Mr. Norris has agreed to make these funds available
to the Company on the same terms and conditions that are required by the bank.
In consideration of Mr. Norris personally obtaining the Credit Line, the board
of directors has authorized the issuance to Mr. Norris and his designee (to the
extent that the designee also guarantees the Credit Line) a three-year warrant
to purchase up to an aggregate of 200,000 shares of Common Stock of the Company.
The issuance of this warrant is conditioned on the approval of the stockholders
of the Company. The exercise price per share of the warrant will be the fair
market value of a share of Common Stock on the date stockholders approve the
issuance of the warrant and the term of such warrant will commence on that date.
In June 1997, the Company signed a note and deed of trust in connection with a
loan of $500,000 from the Neeley Revocable Family Trust. Ronald L. Neeley, a
former director of the Company, is a beneficiary and trustee of this trust. The
note bears interest at 15%, was due in June 1998 and has been extended until
June 1999, and is secured by the same undeveloped land owned by the Company in
Victorville and Palmdale, California which secures the Norris Living Trust loan
of $500,000 mentioned above. The balance owing under this note at June 30, 1998
was $576,027, which includes accrued interest of approximately $76,027.
All of the above transactions with Mr. Norris and the Company's other directors
were unanimously approved by the disinterested members of the Company's board of
directors.
16
<PAGE>
In December 1996, the Company issued a warrant to purchase 200,000 shares of
Common Stock in a private transaction to Overland Company, Inc. ("OCI"), a
corporation affiliated with Overland Opportunity Fund, LLC ("Overland").
Overland owned 9.5% of the Company's Common Stock at June 30, 1998. The warrant
was issued as compensation for services to be performed pursuant to a consulting
agreement entered into with OCI in December 1996. The consulting agreement is
for a term of two years during which OCI, on a non-exclusive basis, is to seek
out, investigate and pursue residential development projects and present them to
the Company for its consideration and approval. The warrant was exercisable
within eighteen months of the date of the agreement at a price of $5.25 per
share. Beginning in November 1997, the Company offered OCI the opportunity to
exercise the warrant for an exercise price of $2.00 per share. From November
1997 through February 1998, OCI assigned portions of its total interest in the
warrant to third parties. The Company received $350,000 in 1997 and $50,000 in
1998 from these third parties as deposits pursuant to the exercise of the
warrants for all 200,000 shares. The stock certificates were issued in June
1998.
In October 1997, the Company entered into a Development and Marketing Agreement
with a third party to develop, construct, and market 139 lots owned by the third
party in Moreno Valley, California. All financing and bonding is the
responsibility of the third party. The Company receives compensation in the
form of overhead draws, development fees and sales and marketing fees totaling
approximately 8.0% of the gross sales price of the homes. The Company assumes
the home warranty costs for which it is paid $750 per house. During the three
months ended June 30, 1998, the Company received an aggregate of $43,500 for
overhead draws.
The Company typically obtains its infrastructure, development and construction
funding and various other land loans from commercial banks and other financing
sources. Lenders generally provide 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 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 June 30, 1998, aggregate borrowings
of $15,749,000 were outstanding under these facilities and $4,271,000 was
available for further qualified project finance borrowing. Interest rates on
these loans range from 7.625% to 20.0%, with the average being 10.5%.
The Company has two unsecured revolving lines of credit totaling $1,250,000 with
commercial banks that bear interest at the prime rate plus 1.0%. The net
outstanding balance under these lines of credit at June 30, 1998 was $491,000.
At the time a homebuyer enters into a sales contract with the Company, meets
certain loan pre-qualification requirements with a third party mortgage lender,
and opens an escrow, the bank advances funds to the Company under this line at
an amount equal to 70% of the net cash proceeds estimated by the Company that it
would receive at the close of the homebuyer's escrow. The escrow company repays
the lender directly from net proceeds when the escrow closes. The Company had
available approximately $200,000 on one of these credit facilities at June 30,
1998.
The availability of borrowed funds for homebuilders, especially for land
acquisition and construction financing is variable. Currently such financings
are generally available, but some 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.
17
<PAGE>
INCO HOMES CORPORATION
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Except as disclosed below, the Company is involved only 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.
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. Through October 1996, various owners of additional
homes in this project filed separate complaints. All complaints were
subsequently consolidated into one complaint involving 40 homeowners.
The alleged damages related primarily to the performance of the concrete
slabs of the homes. The matter was resolved in mediation, which
concluded on March 2, 1998, in the agreed upon amount of $2,100,000.
Payments of the settlement amount will be shared by three of the
Company's primary insurance carriers, and by various subcontractors
against whom the Company had filed cross-complaints. Settlement
documents were signed in April and May 1998, which included all
necessary releases and dismissals of all complaints. Management believes
that any obligations the Company may have relating to the self-insured
retentions included in its insurance policies will not be material.
As a result of the limited amount of available working capital,
relationships with certain subcontractors have weakened due to the
Company's inability to pay all of its subcontractors and their suppliers
on a current basis. Numerous subcontractors and suppliers have filed
liens, and some are pursuing further legal action, including the
initiation of lawsuits. The Company has negotiated payment arrangements,
as appropriate, in an effort to settle these claims and release the
liens, but various claims and lawsuits are pending and unresolved.
Management does not believe that any of these claims, in the aggregate,
will have a material adverse financial effect on the Company's business.
However, if the Company continues to have disputes with its
subcontractors and suppliers, in the future it may be difficult for the
Company to attract and retain qualified subcontractors and suppliers who
are willing to work with the Company and the Company's business could be
adversely affected.
Item 2. Recent Sales of Unregistered Securities
During the three months ended June 30, 1998:
1. The Company sold an aggregate of 12,000 shares of its Common Stock
to one of its vendors in satisfaction of indebtedness to them in
the total amount of $28,081.
2. The Company sold an aggregate of 200,000 shares of its Common Stock
to nine individuals upon their exercise of outstanding Warrants for
cash in the amount of $400,000.
3. The Company sold an aggregate of $120,000 principal amount of
subordinated investment notes to three investors for cash in the
amount of $120,000.
The above-described sales of securities were not effected through any
broker-dealer, and no underwriting discounts or commissions were paid in
connection with such sales. Exemption from registration
18
<PAGE>
requirements is claimed under the Securities Act of 1933 (the
"Securities Act") in reliance on Section 4(2) of the Securities Act or
Regulation D promulgated thereunder of the Securities Act. No brokers'
commissions or fees were paid in connection with any of the foregoing
transactions. The recipients of securities in each such transaction
represented that they were accredited investors under Regulation D of
the Act and their intention to acquire the securities for investment
only and not with a view to, or for sale in connection with, any
distribution thereof and appropriate legends were affixed to the
certificates evidencing the securities in such transactions. All
recipients had adequate access to information about the Company.
Item 3. Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
(a) The Company held its Annual Meeting of Stockholders on June 3, 1998.
(b) The following directors were elected at the Annual Meeting of
Stockholders:
John F. Seymour, Jr.
Thomas A. Hantges
The following are additional directors whose term of office continued
after the meeting:
Ira C. Norris
Robert H. Daskal
David A. Fogg
(c) At the Annual Meeting of Stockholders, the following matters were
voted upon:
(1) A proposal to elect directors as follows:
John F. Seymour, Jr. Thomas A. Hantges
-------------------- -----------------
Affirmative Votes: 1,197,505 1,197,505
Negative Votes: 0 0
Abstentions: 16,609 14,609
Not Voted: 669,650 671,650
(2) A proposal to approve the adoption of the Company's 1998 Incentive and
Nonstatutory Stock Option Plan which will reserve 200,000 shares that
can be optioned and sold thereunder:
Affirmative Votes: 893,104
Negative Votes: 34,298
Abstentions: 16,079
Not Voted: 940,283
(3) A proposal to ratify the selection of Price Waterhouse LLP as the
independent auditors of the Company for the fiscal year ending
December 31, 1998.
Affirmative Votes: 1,209,815
Negative Votes: 516
Abstentions: 3,783
Not Voted: 669,650
19
<PAGE>
Item 5. Other Information
Stockholders are hereby notified that if they wish to submit a proposal
for consideration at the Company's 1999 annual meeting of stockholders,
but do not wish to submit the proposal for inclusion in the Company's
proxy statement pursuant to Rule 14a-8 under the Securities Exchange Act
of 1934, they must deliver a written copy of their proposal no later
than March 16, 1999. Proposals should be delivered to the Company's
principal executive offices, 1282 West Arrow Highway, Upland, CA 91786,
and Attention: Ira C. Norris. To avoid controversy and establish timely
receipt by the Company, it is suggested that stockholders send their
proposals by certified mail return receipt requested.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
10.1 Promissory Note between the Norris Living Trust and Business
Bank of California dated July 15, 1998.
10.2 Modification of Secured Promissory Note between Ira C.
Norris, Trustee, Norris Living Trust and Inco Homes
Corporation dated June 26, 1998.
10.3 Modification of Secured Promissory Note between Ronald L.
Neeley and Lucille A. Neeley, Co-Trustees under the Neeley
Revocable Family Trust and Inco Homes Corporation dated June
26, 1998.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K. There were no reports on Form 8-K for the
three months ended June 30, 1998.
20
<PAGE>
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: August 13, 1998 By: /s/ Ira C. Norris
--------------------------------
IRA C. NORRIS
Chairman of the Board, President
and Chief Executive Officer
Date: August 13, 1998 By: /s/ David A. Fogg
--------------------------------
DAVID A. FOGG
Chief Operating Officer and
Chief Financial Officer
21
<PAGE>
EXHIBIT 10.1
PROMISSORY NOTE
<TABLE>
<CAPTION>
Principal Loan Date Maturity Loan No Call Collateral Account Officer Initials
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$1,000,000 07-15-1998 07-02-1999 06096 1053201 SJ
- -----------------------------------------------------------------------------------------------------
</TABLE>
References in the shaded area are for Lender's use only and do not limit the
applicability of this document to any particular loan or item.
Borrower: The Norris Living Trust Lender: BUSINESS BANK OF CALIFORNIA
Amended March 26, 1995 REAL ESTATE FINANCE DEPT.
IRA NORRIS, Trustee 321 E. SIXTH STREET
NANCY NORRIS, Trustee CORONA, CA 91719-1599
1282 W. Arrow Highway, Suite 200
Upland, CA 91786
- -------------------------------------------------------------------------------
Principal Amount: $1,000,000.00 Initial Rate: 10.000%
Date of Note: July 15, 1998
PROMISE TO PAY. IRA NORRIS and NANCY NORRIS, not personally but as Trustees on
behalf of The Norris Living Trust Amended March 26, 1995 under the provisions of
a Trust Agreement dated February 17, 1989 ("Borrower") promise to pay to
BUSINESS BANK OF CALIFORNIA ("Lender"), or order, in lawful money of the United
States of America, the principal amount of One Million & 00/100 Dollars
($1,000,000.00) or so much as may be outstanding, together with interest on the
unpaid outstanding principal balance of each advance. Interest shall be
calculated from the date of each advance until repayment of each advance.
PAYMENT. Borrower will pay this loan in one payment of all outstanding principal
plus all accrued unpaid interest on July 2, 1999. In addition, Borrower will
pay regular monthly payments of accrued unpaid interest beginning August 2,
1998, and all subsequent interest payments are due on the same day of each month
after that. Interest on this Note is computed on a 365/365 simple interest
basis; that is, by applying the ratio of the annual interest rate over the
number of days in a year (366 during leap years), multiplied by the outstanding
principal balance, multiplied by the actual number of days the principal balance
is outstanding. Borrower will pay Lender at Lender's address shown above or at
such other place as Lender may designate in writing. Unless otherwise agreed or
required by applicable law, payments will be applied first to accrued unpaid
interest, then to principal, and any remaining amount to any unpaid collection
costs and late charges.
VARIABLE INTEREST RATE. The interest rate on this Note is subject to change from
time to time based on changes in an index which is the Business Bank of
California Base Rate (the "Index"). The Index is not necessarily the lowest rate
charged by Lender on its loans and is set by Lender in its sole discretion. If
the Index becomes unavailable during the term of this loan, Lender may designate
a substitute index after notifying Borrower. Lender will tell Borrower the
current Index rate upon Borrower's request. Borrower understands that Lender may
make loans based on other rates as well. The interest rate change will not occur
more often than each day. The Index currently Is 8.500% per annum. The interest
rate to be applied to the unpaid principal balance of this Note will be at a
rate of 1.500 percentage points over the Index, resulting in an initial rate of
10.000% per annum. NOTICE: Under no circumstances will the interest rate on this
Note be more than the maximum rate allowed by applicable law.
PREPAYMENT; MINIMUM INTEREST CHARGE. Borrower agrees that all loan fees and
other prepaid finance charges are earned fully as of the date of the loan and
will not be subject to refund upon early payment (whether voluntary or as a
result of default), except as otherwise required by law. In any event, even upon
full prepayment of this Note, Borrower understands that Lender is entitled to a
minimum interest charge of $50.00. Other than Borrower's obligation to pay any
minimum interest charge, Borrower may pay without penalty all or a portion of
the amount owed earlier than it is due. Early payments will not, unless agreed
to by Lender in writing, relieve Borrower of Borrower's obligation to continue
to make payments of accrued unpaid interest. Rather, they will reduce the
principal balance due.
<PAGE>
LATE CHARGE. If a payment is 10 days or more late, Borrower will be charged
5.000% of the regularly scheduled payment or $10.00, whichever is greater.
DEFAULT. Borrower will be in default if any of the following happens: (a)
Borrower fails to make any payment when due. (b) Borrower breaks any promise
Borrower has made to Lender, or Borrower fails to comply with or to perform when
due any other term, obligation, covenant, or condition contained in this Note or
any agreement related to this Note, or in any other agreement or loan Borrower
has with Lender. (c) Any representation or statement made or furnished to Lender
by Borrower or on Borrower's behalf is false or misleading in any material
respect either now or at the time made or furnished. (d) Borrower becomes
insolvent, a receiver is appointed for any part of Borrower's property, Borrower
makes an assignment for the benefit of creditors, or any proceeding is commenced
either by Borrower or against Borrower under any bankruptcy or insolvency laws.
(e) Any creditor tries to take any of Borrower's property on or in which Lender
has a lien or security interest. This includes a garnishment of any of
Borrower's accounts with Lender. (f) Any of the events described in this default
section occurs with respect to any guarantor of this Note. (g) A material
adverse change occurs in Borrower's financial condition, or Lender believes the
prospect of payment or performance of the indebtedness is impaired. (h) Lender
in good faith deems itself insecure.
If any default, other than a default in payment, is curable and if Borrower has
not been given a notice of a breach of the same provision of this Note within
the preceding twelve (12) months, it may be cured (and no event of default will
have occurred) if Borrower, after receiving written notice from Lender demanding
cure of such default: (a) cures the default within fifteen (15) days; or (b) if
the cure requires more than fifteen (15) days, immediately initiates steps which
Lender deems in Lender's sole discretion to be sufficient to cure the default
and thereafter continues and completes all reasonable and necessary steps
sufficient to produce compliance as soon as reasonably practical.
LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal
balance on this Note and all accrued unpaid interest immediately due, without
notice, and then Borrower will pay that amount. Upon Borrower's failure to pay
all amounts declared due pursuant to this section, including failure to pay upon
final maturity, Lender, at its option, may also, if permitted under applicable
law, increase the variable interest rate on this Note to 6.500 percentage points
over the Index. Lender may hire or pay someone else to help collect this Note if
Borrower does not pay. Borrower also will pay Lender that amount. This includes,
subject to any limits under applicable law, Lenders attorneys' fees and Lender's
legal expenses whether or not there is a lawsuit, including attorneys' fees and
legal expenses for bankruptcy proceedings (including efforts to modify or vacate
any automatic stay or injunction), appeals, and any anticipated post-judgment
collection services. Borrower also will pay any court costs, in addition to all
other sums provided by law. This Note has been delivered to Lender and accepted
by Lender in the State of California. If there is a lawsuit, Borrower agrees
upon Lender's request to submit to the jurisdiction of the courts of RIVERSIDE
County, the State of California. This Note shall be governed by and construed in
accordance with the laws of the State of California.
DISHONORED ITEM FEE. Borrower will pay a fee to Lender of $25.00 if Borrower
makes a payment on Borrower's loan and the check or preauthorized charge with
which Borrower pays is later dishonored.
RIGHT OF SETOFF. Borrower grants to Lender a contractual security interest in,
and hereby assigns, conveys, delivers, pledges, and transfers to Lender all
Borrower's right, title and interest in and to, Borrower's accounts with Lender
(whether checking, savings, or some other account), including without limitation
all accounts held jointly with someone else and all accounts Borrower may open
in the future, excluding however all IRA and Keogh accounts, and all trust
accounts for which the grant of a security interest would be prohibited by law.
Borrower authorizes Lender, to the extent permitted by applicable law, to charge
or setoff all sums owing on this Note against any and all such accounts.
LINE OF CREDIT. This Note evidences a straight line of credit. Once the total
amount of principal has been advanced, Borrower is not entitled to further loan
advances. Advances under this Note may be requested orally by Borrower or by an
authorized person. Lender may, but need not, require
<PAGE>
07-15-1998 PROMISSORY NOTE
Loan No 06096 (Continued)
that all oral requests be confirmed in writing. All communications,
instructions, or directions by telephone or otherwise to Lender are to be
directed to Lender's office shown above. The following party or parties are
authorized to request advances under the line of credit until Lender receives
from Borrower at Lenders address shown above written notice of revocation of
their authority: Ira Norris, Trustee; and Nancy Norris, Trustee. Borrower agrees
to be liable for all sums either: (a) advanced in accordance with the
instructions of an authorized person or (b) credited to any of Borrower's
accounts with Lender. The unpaid principal balance owing on this Note at any
time may be evidenced by endorsements on this Note or by Lender's internal
records, including daily computer print-outs. Lender will have no obligation to
advance funds under this Note if: (a) Borrower or any guarantor is in default
under the terms of this Note or any agreement that Borrower or any guarantor has
with Lender, including any agreement made in connection with the signing of this
Note; (b) Borrower or any guarantor ceases doing business or is insolvent; (c)
any guarantor seeks, claims or otherwise attempts to limit, modify or revoke
such guarantor's guarantee of this Note or any other loan with Lender; (d)
Borrower has applied funds provided pursuant to this Note for purposes other
than those authorized by Lender; or (e) Lender in good faith deems itself
insecure under this Note or any other agreement between Lender and Borrower.
LATE CHARGE PROVISION. Notwithstanding the rights of the holder hereof to the
paragraph entitled "DEFAULT", the holder hereof shall have a right to charge and
the borrower agrees to pay a late charge of five percent (5.00%) of any
outstanding principal balance not paid at maturity, with a minimum payment of
$10.00 and/or a maximum payment of $100.00.
GENERAL PROVISIONS. Lender may delay or forgo enforcing any of its rights or
remedies under this Note without losing them. Borrower and any other person who
signs, guarantees or endorses this Note, to the extent allowed by law, waive any
applicable statute of limitations, presentment, demand for payment, protest and
notice of dishonor. Upon any change in the terms of this Note, and unless
otherwise expressly stated in writing, no party who signs this Note, whether as
maker, guarantor, accommodation maker or endorser, shall be released from
liability. All such parties agree that Lender may renew or extend (repeatedly
and for any length of time) this loan, or release any party or guarantor or
collateral; or impair, fail to realize upon or perfect Lender's security
interest in the collateral; and take any other action deemed necessary by Lender
without the consent of or notice to anyone. All such parties also agree that
Lender may modify this loan without the consent of or notice to anyone other
than the party with whom the modification is made. The obligations under this
Note are joint and several.
TRUSTEE'S LIABILITY. The Borrower under this Note is The Norris Living Trust
Amended March 26,1995. This Note is executed by IRA NORRIS and NANCY NORRIS, not
personally but as Trustees, in the exercise of the power and authority conferred
upon and vested in IRA NORRIS and NANCY NORRIS as such Trustees, and is payable
by IRA NORRIS and NANCY NORRIS only out of the assets of the Trust described
above or from any collateral for this loan. This limitation, however, shall in
no way modify or discharge the personal liability of any guarantor, co-borrower,
or cosigner of this Note.
PRIOR TO SIGNING THIS NOTE, EACH BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS
OF THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS AND THE ATTACHED
NOTICE TO COSIGNER. EACH BORROWER AGREES TO THE TERMS OF THE NOTE AND
ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE NOTE.
BORROWER:
X /s/ Ira Norris
----------------------
IRA NORRIS, as Trustee for the Norris Living Trust Amended March 26, 1995
X /s/ Nancy Norris
------------------------
NANCY NORRIS, as Trustee for the Norris Living Trust Amended March 26, 1995
<PAGE>
EXHIBIT 10.2
MODIFICATION OF SECURED
PROMISSORY NOTE
THIS MODIFICATION OF NOTE (the "Modification Agreement") is entered into as of
the 26th day of June, 1998, by and between INCO HOMES CORPORATION, a Delaware
corporation, hereinafter called "Borrower", and IRA C. NORRIS, Trustee, Norris
Living Trust, hereinafter called "Lender".
RECITALS
A. On June 26, 1997, Borrower, did make, execute and deliver a Promissory Note
Variable Rate to Lender, in the original amount of $500,000.00 ("Note")
secured by two (2) Deeds of Trust and Assignment of Rents executed by
Borrower, in favor of Lender, of even date therewith that (1) recorded on
June 26, 1997, under Instrument No. 97-0227139, in the Office of the County
Recorder of San Bernardino County, State of California and (2) recorded on
June 30, 1997, under Instrument No. 97-970591, in the Office of the County
Recorder of Los Angeles County, State of California ("Deeds of Trust").
B. The Note evidences a loan (the "Loan") which was made to the Borrower by the
Lender pursuant to a Secured Promissory Note dated June 26, 1997 between
Lender and Borrower.
C. The Borrower now has requested and Lender has agreed to further modify the
terms and provisions of said Note as set forth herein.
TERMS AND CONDITIONS
NOW, THEREFORE, for valuable consideration and the mutual promises and
agreements hereinafter contained, Lender and Borrower hereby further amend the
terms and provisions of said Note as follows:
A. The Note is hereby amended and modified as follows:
1. The "Maturity Date" in the Note is amended to read June 26, 1999.
It is specifically agreed by the parties hereto that this Modification Agreement
shall not affect or impair any other covenant or condition of the Note and Deeds
of Trust herein referred to. The Borrower hereby accepts the foregoing terms
and, in consideration thereof, does hereby agree to pay the said indebtedness
represented by said Note according to the terms thereof as hereby modified and
amended. Borrower further warrants that full legal title to the property
legally described in the aforementioned Deeds of Trust is at the date indicated
below, vested in said Borrower free from any lien or encumbrance other that
those approved by Lender and taxes and/or assessments not at this time
delinquent.
IN WITNESS WHEREOF, the parties hereto have executed this instrument as of the
30th day of July 1998.
- ---- ----
LENDER: BORROWER:
Ira C. Norris, Trustee Inco Homes Corporation
Norris Living Trust a Delaware corporation
By: /s/ Ira C. Norris By: /s/ David A. Fogg
----------------- -----------------
Ira C. Norris David A. Fogg
<PAGE>
EXHIBIT 10.3
MODIFICATION OF SECURED
PROMISSORY NOTE
THIS MODIFICATION OF NOTE (the "Modification Agreement") is entered into as of
the 26th day of June, 1998, by and between INCO HOMES CORPORATION, a Delaware
corporation, hereinafter called "Borrower", and Ronald L. Neeley and Lucille A.
Neeley, Co-Trustees under the Neeley Revocable Family Trust Dated September 15,
1981, as amended, hereinafter called "Lender".
RECITALS
A. On June 26, 1997, Borrower, did make, execute and deliver a Promissory Note
Variable Rate to Lender, in the original amount of $500,000.00 ("Note")
secured by two (2) Deeds of Trust and Assignment of Rents executed by
Borrower, in favor of Lender, of even date therewith that (1) recorded on
June 26, 1997, under Instrument No.970227138, in the Office of the County
Recorder of San Bernardino County, State of California and (2) recorded on
June 30, 1997, under Instrument No. 97-970592, in the Office of the County
Recorder of Los Angeles County, State of California ("Deeds of Trust").
B. The Note evidences a loan (the "Loan") which was made to the Borrower by the
Lender pursuant to a Secured Promissory Note dated June 26, 1997 between
Lender and Borrower.
C. The Borrower now has requested and Lender has agreed to further modify the
terms and provisions of said Note as set forth herein.
TERMS AND CONDITIONS
NOW, THEREFORE, for valuable consideration and the mutual promises and
agreements hereinafter contained, Lender and Borrower hereby further amend the
terms and provisions of said Note as follows:
A. The Note is hereby amended and modified as follows:
1. The "Maturity Date" in the Note is amended to read June 26, 1999.
It is specifically agreed by the parties hereto that this Modification Agreement
shall not affect or impair any other covenant or condition of the Note and Deeds
of Trust herein referred to. The Borrower hereby accepts the foregoing terms
and, in consideration thereof, does hereby agree to pay the said indebtedness
represented by said Note according to the terms thereof as hereby modified and
amended. Borrower further warrants that full legal title to the property
legally described in the aforementioned Deeds of Trust is at the date indicated
below, vested in said Borrower free from any lien or encumbrance other that
those approved by Lender and taxes and/or assessments not at this time
delinquent.
IN WITNESS WHEREOF, the parties hereto have executed this instrument as of the
8th day of August, 1998.
- ---- ------
LENDER: BORROWER:
Ronald L. Neeley and Lucille A. Neeley, Co-Trustees Inco Homes Corporation
under the Neeley Revocable Family Trust a Delaware corporation
Dated September 15, 1981, as amended
By: /s/ Ronald L. Neeley By: /s/ David A. Fogg
-------------------- -----------------
Ronald L. Neeley David A. Fogg
<TABLE> <S> <C>
<PAGE>
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<CIK> 0000897432
<NAME> INCO HOMES CORPORATION
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<CASH> 215
<SECURITIES> 0
<RECEIVABLES> 0
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<INVENTORY> 27,723
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 30,819
<CURRENT-LIABILITIES> 6,473
<BONDS> 0
0
0
<COMMON> 21
<OTHER-SE> 2,180
<TOTAL-LIABILITY-AND-EQUITY> 30,819
<SALES> 9,120
<TOTAL-REVENUES> 9,120
<CGS> 8,492
<TOTAL-COSTS> 8,492
<OTHER-EXPENSES> 0
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<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (527)
<INCOME-TAX> 0
<INCOME-CONTINUING> (527)
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<CHANGES> 0
<NET-INCOME> (527)
<EPS-PRIMARY> (0.27)
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