<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
---------------------------------------------------------------
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
[ ] TRANSITION REPORT UNDER 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
(Issuer's telephone number)
Not Applicable
(Former name, former address and former fiscal year if changed since last
report)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 ____
---
The number of shares outstanding of each of the issuer's classes of common
equity on June 30, 1999 was as follows:
Class of Common Stock Shares Outstanding
--------------------- ------------------
$.01 par value 2,210,073
Transitional Small Business Disclosure Format:
YES X NO ____
---
- --------------------------------------------------------------------------------
<PAGE>
INCO HOMES CORPORATION
INDEX
<TABLE>
<CAPTION>
Page No.
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 1999 (Unaudited) and
December 31, 1998................................................. 3
Consolidated Statements of Operations (Unaudited) for the Three
Months Ended March 31, 1999 and 1998.............................. 4
Consolidated Statements of Cash Flows (Unaudited) for the Three
Months Ended March 31, 1999 and 1998.............................. 5
Notes to Consolidated Financial Statements (Unaudited)............ 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................... 11
PART II. OTHER INFORMATION................................................. 21
SIGNATURES.................................................................. 22
</TABLE>
2
<PAGE>
INCO HOMES CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Dollars in thousands, except share data) March 31, December 31,
------------------------------------------------
1999 1998
---- ----
<S> <C> <C>
ASSETS
Cash $ 219 $ 712
Real estate inventories 30,148 30,238
Other assets 971 1,056
--------------------- --------------------
Total assets $ 31,338 $ 32,006
===================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities $ 5,664 $ 7,500
Notes payable 23,598 23,044
Line of credit 1,118 768
Notes to stockholders 2,898 2,649
--------------------- --------------------
Total liabilities $ 33,278 $ 33,961
Minority partners' investment in consolidated partnerships 435 254
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; 2,210,073 and 2,104,052 shares issued
and outstanding for 1999 and 1998 22 21
Additional paid in capital 43,536 43,301
Deficit (48,274) (47,871)
--------------------- --------------------
Total stockholders' equity (2,376) (2,209)
--------------------- --------------------
Total liabilities and stockholders' equity $ 31,338 $ 32,006
===================== ====================
</TABLE>
See accompanying notes to financial statements
3
<PAGE>
INCO HOMES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
(Dollars in thousands, except per share data) March 31,
--------------------------------------------------
1999 1998
---- ----
<S> <C> <C>
Revenue from home sales $ 6,663 $ 4,284
Revenue from fee projects 216
Revenue from land and lot sales 200
---------------- ----------------
7,079 4,284
---------------- ----------------
Cost of homes sold 6,104 4,210
---------------- ----------------
Gross profit 975 74
---------------- ----------------
Selling and marketing expenses 711 748
General and administrative expenses 538 475
---------------- ----------------
1,249 1,223
---------------- ----------------
Operating loss (274) (1,149)
Other income 15 3
---------------- ----------------
Loss before minority partners' share
and provision for income taxes (259) (1,146)
Minority partners' share 181 (4)
---------------- ----------------
Loss before provision for income taxes (440) (1,142)
Provision for income taxes - -
---------------- ----------------
Loss before extraordinary item (440) (1,142)
Extraordinary item 37
---------------- ----------------
Net Loss (403) (1142)
Cumulative preferred stock requirement (58) (64)
---------------- ----------------
Net loss available to common stockholders $ (461) $ (1,206)
---------------- ----------------
Basic and diluted net loss per common share
Loss before extraordinary item $ (0.23) $ (0.68)
Extraordinary Item 0.02
---------------- ----------------
Net loss per common share $ (0.21) $ (0.68)
================ ================
Weighted average number of common shares
outstanding 2,167,064 1,776,992
========= =========
</TABLE>
See accompanying notes to financial statements
4
<PAGE>
INCO HOMES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
---------------------------------------------------
(Dollars in thousands) 1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (403) $ (1,142)
Adjustment to reconcile net loss to net cash provided by (used in)
operating activities:
Extraordinary item 37
Minority partners' share 181 (4)
Decrease (increase) in real estate inventories 90 (1,617)
Decrease in other assets 85 221
(Decrease) increase in accounts payable and accrued liabilities (2,074) 263
---------------- ---------------
Net cash used in operating activities (2,084) (2,279)
---------------- ---------------
Cash flow from financing activities:
Proceeds from notes payable secured by real estate 6,350
Repayments on notes payable secured by real estate 554 (4,424)
Proceeds from line of credit 350
Repayments on line of credit (83)
Proceeds from notes to stockholder 249
Repayments to minority partners (50)
Proceeds from sale of common stock 50
Net cash provided by financing activities 1,153 1,843
-------------- ---------------
Net decrease in cash and cash equivalents (931) (436)
Cash and cash equivalents at beginning of year 712 736
-------------- ---------------
Cash and cash equivalents at end of period $ (219) $ 300
=============== ===============
</TABLE>
5
<PAGE>
INCO HOMES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Supplemental schedule of non-cash activities
[1] In the first quarter of 1999 the Company issued 35,826 shares of Company
common stock to certain of the Company's current and former directors as
payment in full of an aggregate of $97,500 in unpaid director fees owed to
these individuals.
[2] Additionally, in the first quarter of 1999 the Company issued 70,195 shares
of Company common stock to two of its vendors in satisfaction of accounts
payable to them in the total amount of $175,488.
[3] In the first quarter of 1988, the Company issued 42,546 shares of Common
Stock to creditors in exchange for relieving the Company of $72,500 of
accounts payable.
6
<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
Item 310(b) of Regulation S-B. 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, for the year ended
December 31, 1998. The accompanying unaudited 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.
The Company has incurred net operating losses which have significantly
impacted its working capital levels and its ability to pay its obligations.
Management's current business plan reflects that, in addition to future
profits, sales of real estate inventories provide cash flow to the Company
to help meet operating requirements. During 1999, the Company will also
need to extend the maturity dates of certain notes payable and to raise
capital for acquisitions of additional land for future projects and working
capital needs. Management's plans and anticipated results are dependent on
future events and economic market conditions which are inherently
uncertain. No assurances can be given that anticipated cash flows from
operations and the Company's ability to borrow from various sources will be
sufficient to fund all of its planned expenditures. 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 their
investing 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 effect on the Company's business, financial condition and
results of operations. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
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, 1999 and 1998, the Company incurred
$30,000 and $80,000, respectively, in model home design fees and $0 and
$22,500, respectively, as reimbursement for the cost of the model home
furnishings with Nancy Orman Interiors ("NOI"). NOI is owned by Nancy
Norris, the wife of Ira C. Norris, the Company's Chairman and Chief
Executive Officer.
7
<PAGE>
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 March 31, 1999 is a loan with a balance of
$529,000 from HRIP, secured by one of the Company's projects in Fontana,
California.
Thomas A. Hantges, a director and stockholder of the Company, owns
approximately 67% of both USA Commercial Mortgage Company ("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 cumulative amounts totaling $15,150,000 and
$12,240,000 through March 31, 1999 and 1998, respectively. USA has earned
cumulative fees for these loans for quarters ended March 31, 1999 and 1998
totaling $1,157,000 and $1,088,000, respectively, of which $948,000 and
$879,000, respectively, 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 these loans ranged 12.25% to
15.25% in 1999 and from 12.25% to 20.25% in 1998. The outstanding balance
of these loans at March 31, 1999 and 1998 was $5,351,000 and $8,080,000,
respectively.
In February 1999, the Company entered into an Agency Agreement with USA.
Pursuant to the Agency Agreement, upon completion of a proposed merger with
American Communities, Inc., USA was to receive a 10-year option to purchase
250,000 shares of Common Stock of the Company for $2.00 per share. In
addition, USA was to receive certain registration rights with respect to
the optioned shares. If the Company's stockholders did not approve the
stock options and registration rights, USA was to receive, upon completion
of the American merger, the sum of $600,000 payable $200,000 within two
business days of approval of the merger by the Company's stockholders, and
$50,000 quarterly thereafter. The proposed merger with American was
terminated in June 1999.
Subsequent to March 31, 1999, the Company sold 53 finished lots and 4
completed models to USA Investors II, LLC, whose manager is USA Commercial
Mortgage. USA Commercial Mortgage is controlled by Thomas Hantges, who is
a member of the Company's Board of Directors. The property was sold for
cash consideration of $50,000 and the assumption of approximately $1.7
million of debt and trade accounts payable, including existing debt to USA
Mortgage of approximately $1.1 million. The debt assumed is estimated
based upon current outstanding obligations minus proforma debt paydowns
from the closing of 12 units under construction. The Company is also
entitled to additional consideration of $100,000 payable from the profits
upon the sale of these properties by USA Investors II, LLC. As of December
31, 1998, the Company wrote down additional capitalized costs totaling
$974,000 attributable to these lots. These costs would have been charged
to cost of sales in the normal course of business as each house was sold
had the lots been built out.
One of the owners of Overland Opportunity Fund, LLC ("Overland"), which
owned 9.0% of the Company's outstanding Common Stock at June 30, 1999, is
an affiliate of three entities with which the Company has signed
Development and Marketing Agreements. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
NOTE 3 - NOTES TO STOCKHOLDERS
On December 2, 1998, the Norris Living Trust advanced $40,000 to the
Company to be repaid within 12 months at an interest rate of 10.0% per
annum. In addition, on December 4, 1998, the Norris Living Trust advanced
an additional $285,000 at an interest rate of 10.0% per annum to the
Company in connection with the closing of a $16.5 million construction loan
on the Company's Mockingbird Canyon Estates project. The note is for a 12-
month period, with an interest rate of 10.0% per annum, which will accrue
and be due along with the principal on December 2, 1999. Subsequent to
December 31, 1998, the Norris Living Trust advanced an additional $200,000
to the Company to be repaid within 12 months at an interest rate of 10.0%
per annum. The Company has pledged a security interest in its Mockingbird
Canyon Estates project to the Norris Living Trust as security for the
repayment of the notes.
On December 11, 1998, the stockholders of the Company approved the issuance
of a warrant to purchase 200,000 shares of Common Stock to Ira C. Norris in
connection with the extension of a $1,000,000 non-revolving line of credit
made by Mr. Norris on July 15, 1998 through the living trust he created for
the
8
<PAGE>
benefit of himself and his family (the "Norris Living Trust") to the
Company's wholly owned subsidiary Huntington Homes LLC. The $1,000,000
non-revolving line of credit bears interest at a variable interest rate, of
which the initial interest rate was 10.0% per annum. The note securing the
line of credit is due and payable in full by July 2, 1999. At March 31,
1999, the note had no accrued interest. In accordance with SFAS 123, the
Company has recorded the value of this warrant issued as issuance costs and
will amortize the cost over the extension period of the line.
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. 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 of $100
per share per annum payable quarterly from available working capital. An
unsecured note to the Norris Living Trust, bearing interest at 10%,
evidences the balance of indebtedness not converted in the amount of
approximately $122,000. The note was due in December 1998 and has been
extended until December 23, 1999. The balance owing under this note at
March 31, 1999 was $137,000, which includes accrued interest of
approximately $15,000.
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 2000. The
balance owing under this note at March 31, 1999 was $588,000, which
includes accrued interest of approximately $88,000.
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, is a beneficiary and trustee of this
trust. The note bears interest at 15%, was due in 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. A request for extension has been sent to the lender. The
balance owing under this note at March 31, 1999 was $632,000, which
includes accrued interest of approximately $132,000.
NOTE 4 - NET LOSS PER COMMON SHARE
Loss per share for the three months ended March 31, 1999 and 1998 is
calculated as follows:
<TABLE>
<CAPTION>
(Dollars in thousands, except per For the Three Months
share data) Ended March 31,
------------------------------------
1999 1998
-------------- --------------
<S> <C> <C>
Net loss $ 433 $ 1,142
Cumulative preferred dividends 58 64
-------------- --------------
Net loss to common shareholders $ 491 $ 1,206
============== ==============
Weighted average number of common
shares outstanding 2,167,064 1,776,992
Basic and diluted loss per share $ 0.23 $ 0.68
Dilutive potential common shares 55,445 80,509
</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.
9
<PAGE>
NOTE 5 - STOCKHOLDERS' EQUITY
The decrease in stockholders' equity from December 31, 1998 to March 31,
1999, 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, 1998 2,340 $2,340 2,104,052 $43,322 $(47,871) ($2,209)
Common stock issued -- -- 106,021 236 -- 236
Net loss -- -- -- -- (403) (403)
-----------------------------------------------------------------
Balance - March 31, 1999 2,340 $2,340 2,210,073 43,536 $(48,274) $ (2,376)
=================================================================
</TABLE>
Common Stock was issued in the quarter ended March 31, 1999 in various
private transactions with sales prices totaling $272,988. Pursuant to
these transactions, (i) the Company issued an aggregate of 35,826 shares of
Company Common Stock to certain of the Company's current and former
directors as payment in full of an aggregate of $97,500 in unpaid director
fees owed by the Company to such individuals; and (ii) the Company issued
an aggregate of 70,195 shares of Company Common Stock to two of its vendors
in satisfaction of indebtedness to them in the total amount of $175,488.
NOTE 6 - 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 a result of the limited amount of available working capital,
relationships with certain of its subcontractors have weakened due to the
Company's inability to pay all of its subcontractors and their suppliers on
a current basis. Numerous subcontractors, suppliers and general creditors
are pursuing further legal action, including the initiation of lawsuits.
As of March 31, 1999, nine of these claims, totaling approximately
$565,000, have been perfected as judgments against the Company. The
Company has or intends to negotiate payment arrangements, as appropriate,
in an effort to settle these claims. 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. Additionally, the Company has
received various complaints regarding alleged construction defects at four
of its projects. The Company believes that the claims made against it are
without merit and has tendered all of these claims to its product liability
insurers who have accepted defense subject to reservation of rights. The
Company believes that these claims will not have a material adverse effect
on the Company's business.
10
<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, 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 Company believes that the
depressed economic and real estate conditions in Southern California over the
last several years had adversely affected its results of operations, most
particularly in the high desert region of San Bernardino County. The Company
now believes that the economy in the inland empire has improved significantly.
The Company has experienced improved sales in recent months, sales prices have
been increased and incentives offered to prospective purchasers have decreased.
Management hopes that the improved conditions will continue but there can be no
assurance that they will.
Results of Operations - 1999 vs. 1998
Revenue from Home Sales, including Fee Projects
Revenue from home sales increased to $6,663,000 during the three months ended
March 31, 1999, from $4,284,000 during the three months ended March 31, 1998,
representing an increase of $2,379,000 or 55.5%. The Company closed 49 homes at
an average sales price of $136,000 during the three months ended March 31, 1999
compared to 32 homes closed at an average sales price of $133,900 during the
three months ended March 31, 1998, a 53% increase in closings and a 1.6%
increase in average sales price. The home sales from fee project jobs during
1999 was $2,824,000. The total number of sales closed was 26. The Company
earned $216,000 in fees from these projects. The increase in revenue and
average sales price during the three months ended March 31, 1999 is attributable
to the majority of closings occurring in the Company's higher priced
subdivisions.
The following table sets forth, for the periods indicated, the number of homes
closed by the Company:
<TABLE>
<CAPTION>
Homes Closed for the
Quarter Ended March 31,
---------------------------------
1999 1998
-------------- --------------
<S> <C> <C>
High Desert of San Bernardino and Los Angeles Counties 21 15
Inland San Bernardino and Riverside Counties 28 17
-------------- --------------
Subtotal, Owned Projects 49 32
Projects Built for a Fee (See Liquidity and Capital Resources) 26 --
-------------- --------------
Total Combined Closings 75 32
============== ==============
</TABLE>
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, 1999 was $6,104,000, an
increase of $1,894,000, or 45.0%, from $4,210,000 during the three months ended
March 31, 1998. Cost of homes sold as a percentage of
11
<PAGE>
revenue decreased to 91.6% for the three months ended March 31, 1999 from 98.3%
for the same period in 1998. The decrease in cost of homes sold as a percentage
of revenue for the first quarter of 1999 is primarily the result of increased
sales prices.
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.
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 $324,000 and $306,000 for the three months ended March 31,
1999 and 1998, respectively, an increase of 5.9%. Selling expenses as a
percentage of revenue were 4.6% and 7.1% for the three months ended March 31,
1999 and 1998, respectively. The decrease in selling expenses as a percentage
of revenue is primarily due to reduced payroll expense for the Company's
internal sales force and lower total commissions paid to independent real estate
brokers.
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 $387,000 and $442,000 for the quarters ended March 31,
1999 and 1998, respectively, representing a decrease of 12.4%. As a percentage
of revenue, marketing expenses were 5.5% and 10.3% for the three months ended
March 31, 1999 and 1998, respectively. The decrease in marketing costs is a
result of less advertising dollars being spent and an increase in the demand for
housing.
During both the first quarter of 1999 and 1998, the Company was delivering homes
from six projects. In the first quarter of 1999 and 1998 the Company had no
grand openings.
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 $538,000 and $475,000 for the three
months ended March 31, 1999 and 1998, respectively, an increase of 12.0%. As a
percentage of revenue, general and administrative expenses were 7.6% and 11.1%
for the three months ended March 31, 1999 and 1998, respectively. The increase
in the dollar amount of general and administrative expenses primarily reflects
an increase in payments made to outside consultants, increased legal expense and
additional miscellaneous employee expenses.
Other Income
Other income includes interest earned on cash balances related to certain
projects and miscellaneous income. Other income was $15,000 and $3,000 for the
three months ended March 31, 1999 and 1998, 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.
12
<PAGE>
The minority partners' share of profits (losses) was $181,000 and ($4,000) for
the three months ended March 31, 1999 and 1998, respectively.
Provision for Income Taxes
At December 31, 1998, the Company had net operating loss carryforwards for
federal income tax purposes of $32,341,000 that are available to offset future
federal taxable income. Generally accepted accounting principles require that a
deferred tax asset be recognized for net operating loss carryforwards and
deductible temporary differences, and for management to reduce the deferred tax
asset by a valuation allowance to the extent that management believes that it is
more likely than not that some portion or all of the deferred tax asset will not
be realized. As of December 31, 1997, the Company had recorded a gross deferred
tax asset of $11,198,000 and a valuation allowance of $8,998,000. Management
believed that future taxable income would be sufficient to realize the tax
benefit reflected by the net deferred tax asset of $2.2 million. The Company
continued to incur operating losses in 1998 in spite of improving residential
real estate market conditions, leading management to conclude that it is more
likely than not that the net deferred tax asset of $2.2 million will not be
realized. Accordingly, management increased the valuation allowance to reduce
the net deferred tax asset to zero and reflected this increase in the valuation
allowance, totaling $2.2 million, as the provision for income taxes for the year
ended December 31, 1998.
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
portion 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:
<TABLE>
<CAPTION>
March 31,
----------------------------------------------------------------
Backlog Gross Revenue
------------------------------ ------------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
High Desert of San Bernardino
and Los Angeles Counties 29 32 $ 3,558,000 $ 3,753,000
Inland San Bernardino and
Riverside Counties 61 43 9,471,000 7,056,000
Projects Built for a Fee (See
Liquidity and Capital
Resources) 43 5 5,600,000 573,000
------------ ------------ ----------- -----------
Total Number of Homes 133 80
============ ============
Aggregate Sales Value $18,629,000 $11,382,000
=========== ===========
Average Sales Price $ 140,100 $ 142,300
=========== ===========
</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's backlog increased 66% to 133 homes at March 31, 1999 from 80 homes
at March 31, 1998. The aggregate sales value of the units in backlog increased
by $7,247,000 or 63.7%, due to the increase in number of homes under sales
contracts. The average sales price of homes in backlog decreased by $2,200 or
1.5% due to a change in the mix of homes offered for sale.
13
<PAGE>
Included in the "Aggregate Sales Value" of the backlog is the value of the homes
which are being built for a fee and only the fee will represent revenue that
will eventually be recognized in the Company operating statement. No assurances
can be given that homes in backlog will result in actual closings because
cancellations vary from period to period.
Net Orders
Net orders, including the fee projects, 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 Quarter Ended March 31,
------------------------------------
1999 1998
---------------- ----------------
<S> <C> <C>
High Desert of San Bernardino and Los
Angeles Counties 11 25
Inland San Bernardino and Riverside
Counties 12 39
Projects Built for a Fee (See Liquidity
and Capital Resources) 21 5
---------------- ----------------
Total 44 69
================ ================
</TABLE>
Net new orders decreased to 44 homes from 69 homes for the quarters ended March
31, 1999 and 1998, respectively, a decrease of 36%. The Company believes that
the decrease in net orders is attributable the increase in the Company's backlog
which resulted in a decrease of homes available for sale during the quarter.
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.
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.
14
<PAGE>
Year 2000 Issue
The Year 2000 ("Y2K") issue is a general term used to describe the complications
that may arise from the use of existing computer hardware and software designed
by applicable manufacturers without consideration for the upcoming change in the
century. If not corrected, software programs with this embedded problem may
cause computer systems to fail or to miscalculate data.
With respect to the Y2K issue, the Company has undertaken a project to replace
and/or convert portions of its existing computer operating systems to ensure
they will function properly with respect to dates in the year 2000 and
thereafter. The Company has also formed a Y2K project team to direct the
company-wide efforts to ensure Y2K compliance. The Y2K project team is
responsible to assure proper planning, sufficient resources, contemporaneous
monitoring, proper certification and timely completion of the year 2000
projects. The Company's Y2K project encompass its information technology
systems as well as its non-information technology systems, such as systems
embedded in its office equipment and facilities.
State of Y2K Readiness
The scope of the Company's Y2K compliance effort has been defined to include six
distinct projects. Two of the six projects address areas of greatest business
risk and require the greatest technical effort and, therefore, have been given
the highest priority. These two high priority projects are the conversion and
upgrade of the Company's accounting information systems and the upgrade of the
Company's primary computer network and personal computers. Of these two high
priority projects, as of March 30, 1999, the accounting information systems
conversion has been implemented, the Company replaced all of its older personal
computers with current models and the upgrade of the Company's primary computer
network file server will be remediated by August 1, 1999.
The remaining four projects that comprise the balance of the Company's Y2K
compliance effort present a lower business risk and require less technical
effort to complete. These projects are identified as follows: upgrade of the
Company's telephone and voice mail systems; certification of Y2K readiness or
upgrade of the Company's fax machines, copiers, miscellaneous equipment and
office facilities; and verification that material third-party suppliers to the
Company are Y2K compliant. These three projects are in various stages of
assessment and/or remediation. The sixth project is comprised of the Company's
contingency plan in the event problems are encountered as the year 2000 begins.
This project is in the assessment stage and is expected to be completed by
September 30, 1999.
As noted, two of the six projects that comprise the Company's Y2K compliance
effort involve verification that the third parties with which the Company has a
material relationship are Y2K compliant. The Company is currently in various
stages of assessment with respect to these third-party verification projects.
As part of these projects, the Company's relationships with suppliers,
subcontractors, financial institutions and other third parties are being
examined to determine the status of their Y2K issue efforts as related to the
Company's operations. As a general matter, the Company is vulnerable to its
suppliers' inability to remedy their own Y2K issues. Furthermore, the Company
relies on financial institutions, government agencies (particularly for FHA/VA
financing, zoning, building permits and related matters), utility companies,
telecommunication service companies and other service providers outside of its
control. There is no assurance that such third parties will not suffer a Y2K
business disruption and it is conceivable that such failures could, in turn,
have a material adverse effect on the Company's liquidity, financial condition
or results of operations.
Costs of Addressing Y2K Issues
The total cost of all of the Company's projects associated with its Y2K plan is
currently estimated to be approximately $50,000; however, some projects
mentioned above involve conversions and upgrades that were not solely
necessitated to meet Y2K concerns and would have been undertaken regardless of
Y2K exposure. It is not possible to determine the portion of that amount which
is specifically attributable to Y2K compliance efforts. The Company believes
that the total costs incurred to specifically address the Y2K issue will not
have a material impact on the Company's liquidity, financial condition or
results of operations, for any year in the reasonably foreseeable future. The
schedule for the successful completion of the Company's Y2K project and the
estimated costs are based upon certain assumptions by
15
<PAGE>
management regarding future events, including the continued availability of
qualified resources to implement the project and the costs of such resources.
Risks Presented by Y2K Issues
The Company's failure to resolve a material Y2K issue could result in the
interruption in, or failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations. Although the Company considers its exposure to the Y2K
issue risks from third-party suppliers as generally low, due to the uncertainty
of the Y2K readiness of third party suppliers, the Company is unable to
determine at this time the consequences of a Y2K failure. In addition, the
Company could be materially impacted by the widespread economic or financial
market disruption by Y2K computer system failures at government agencies on
which the Company is dependent for lending, zoning, building permits and related
matters. Possible risks of Y2K failure could include, among other things,
delays or errors with respect to payments, third-party delivery of materials and
government approvals. The Company's Y2K project is expected to significantly
reduce the Company's level of uncertainty and exposure to the Y2K issue and, in
particular, its vulnerability to the Y2K compliance of material third parties.
To date, the Company has not identified any operating systems, either of its own
or of a third-party supplier, that present a material risk of not being Y2K
ready or for which a suitable alternative cannot be implemented.
Contingency Plan
The Company's Y2K project calls for a Y2K-specific contingency plan to be
developed. This plan is in the assessment stage and is expected to be completed
by September 30, 1999.
Management currently anticipates that its operating systems will be Y2K
compliant well before January 1, 2000, and that its third party verification and
overall contingency plans should enable it to mitigate third-party disruptions
to its business which are of short duration or geographically localized. At the
present time, management believes that the Y2K issue will not have a material
adverse effect on the Company's liquidity, financial condition or results of
operations.
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.
As a result of the limited amount of the Company's available working capital,
relationships with certain of its subcontractors have weakened due to the
Company's inability to pay all of its subcontractors and their suppliers on a
current basis. Numerous subcontractors, suppliers and general creditors are
pursuing further legal action, including the initiation of lawsuits. As of
March 31, 999, nine of these claims, totaling approximately $565,000, have been
perfected as judgments against the Company. The Company has or intends to
negotiate payment arrangements, as appropriate, in an effort to settle these
claims. 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.
In April 1999, the Company entered into a Merger Agreement with American
Communities ("American"), a privately held Las Vegas builder of entry level and
move up single family homes. From April through early June, the Company devoted
significant time and resources to this proposed transaction which, in addition
to the merger with American, included a requirement that American obtain a $3
million line of credit or alternative financing which would be available to the
Company after the closing. The Company expected that this financing would be
available to it to address its short and long-term working capital needs.
However, the proposed transactions with American were terminated in June 1999
and the Company has been forced to seek financing from alternative sources.
16
<PAGE>
The Company has incurred net operating losses which have significantly impacted
its working capital levels and its ability to pay its obligations. Management's
current business plan reflects that, in addition to future profits, sales of
real estate inventories provide cash flow to the Company to help meet operating
requirements. During 1999, the Company will also need to extend the maturity
dates of certain notes payable and to raise capital for acquisitions of
additional land for future projects and working capital needs. Management's
plans and anticipated results are dependent on future events and economic market
conditions which are inherently uncertain. No assurances can be given that
anticipated cash flows from operations and the Company's ability to borrow from
various sources will be sufficient to fund all of its planned expenditures. 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 their investing 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 will be impaired, and the Company will not be able to
conduct operations as presently anticipated. This would have a material adverse
effect 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, subordinated debt, 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, as discussed in more detail below. The
Company is currently also exploring alternative methods of financing.
Management believes that existing cash and capital resources, including cash
flow from operations, will be insufficient to fund the Company's cash
requirements at the Company's presently anticipated level of operations without
additional funds from outside sources. No assurances can be given that any
funds will be available from such financial sources, or that they will be
available on terms favorable to the Company. If adequate funds are not
available from those other sources, there are substantial doubts about the
Company's ability to continue as a going concern and fund its ongoing
operations.
In February 1999, the Company concluded a private offering (the "Offering") of
Subordinated Investment Notes ("Investment Notes') bearing interest at the rate
of 15% per annum. The Investment Notes have an 18 month maturity date and no
prepayment penalty. The face value of each Investment Note is $10,000. As of
March 31, 1999, total outstanding bond indebtedness related to this offering was
$19,000. 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.
Thomas A. Hantges, a director and stockholder of the Company, owns approximately
67% of both USA Commercial Mortgage Company ("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 cumulative amounts totaling $15,150,000 and $12,240,000 through March 31,
1999 and 1998, respectively. USA has earned cumulative fees for these loans for
quarters ended March 31, 1999 and 1998 totaling $1,157,000 and $1,088,000,
respectively, of which $948,000 and $879,000, respectively, 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
these loans ranged 12.25% to 15.25% in 1999 and from 12.25% to 20.25% in 1998.
The outstanding balance of these loans at March 31, 1999 and 1998 was $5,351,000
and $8,080,000, respectively.
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 option to periodically repurchase portions of the property, subject to
annual minimum repurchase thresholds, for the development of single-family
homes. If the Company failed to repurchase the minimum number of lots in any
year, the option would terminate. Because of an election by the Company not to
acquire any lots under this option agreement and the failure to pay the
prerequisite real estate taxes, the Company was notified that its rights to
acquire these lots had been terminated.
17
<PAGE>
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. 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. An unsecured note to the Norris Living Trust, bearing
interest at 10%, evidences the balance of indebtedness not converted in the
amount of approximately $122,000. The note was due in December 1998 and has been
extended until December 23, 1999. The balance owing under this note at March 31,
1999 was $137,000, which includes accrued interest of approximately $15,000.
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 2000. The balance owing under
this note at March 31, 1999 was $588,000, which includes accrued interest of
approximately $88,000.
On December 2, 1998, the Norris Living Trust advanced $40,000 to the Company to
be repaid within 12 months at an interest rate of 10.0% per annum. In addition,
on December 4, 1998, the Norris Living Trust advanced an additional $285,000 at
an interest rate of 10.0% per annum to the Company in connection with the
closing of a $16.5 million construction loan on the Company's Mockingbird Canyon
Estates project. The note is for a 12-month period, with an interest rate of
10.0% per annum, which will accrue and be due along with the principal on
December 2, 1999. Subsequent to December 31, 1998, the Norris Living Trust
advanced an additional $200,000 to the Company to be repaid within 12 months at
an interest rate of 10.0% per annum. The Company has pledged a security
interest in its Mockingbird Canyon Estates project to the Norris Living Trust as
security for the repayment of the notes.
Additionally, on December 11, 1998, the stockholders of the Company approved the
issuance of a three year warrant to purchase 200,000 shares of Common Stock, at
the purchase price of $2.625 per share, to Ira C. Norris in connection with the
extension of a $1,000,000 non-revolving line of credit made by Mr. Norris on
July 15, 1998 through the living trust he created for the benefit of himself and
his family (the "Norris Living Trust") to the Company's wholly owned subsidiary
Huntington Homes LLC. The $1,000,000 non-revolving line of credit bears
interest at a variable interest rate, of which the initial interest rate was
10.0% per annum. The note securing the line of credit is due and payable in
full by July 2, 1999. At March 31, 1999, the note had no accrued interest.
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, is a beneficiary and trustee of this trust. The note
bears interest at 15%, was due in 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. A
request for extension has been sent to the lender. The balance owing under this
note at March 31, 1999 was $632,000, which includes accrued interest of
approximately $132,000.
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.
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. Under this agreement, i) all financing and
bonding is the responsibility of the third party; ii) the Company is to receive
compensation in the form of development fees and design center profits totaling
approximately 8.0% of the gross sales price of the homes; and iii) the Company
is to assume the home warranty costs for which it will be paid $750 per house.
Subsequent to December 31, 1998, the Company entered into three Development and
Marketing Agreements with three entities affiliated with the Overland Group and
Mr. Fred Liao, to develop, construct, and market 79 lots owned by the
18
<PAGE>
one entity in Palmdale, California and 56 and 29 lots owned by two other
entities in Rancho Cucamonga, California. Under these agreements, i) all
financing and bonding is the responsibility of each entity; ii) the Company will
receive compensation in the form of development fees and sales commissions
totaling approximately 4.0% of the gross sales price of the homes; iii) the
Company will receive all profits generated from buyer upgrades via the design
center and iv) all home warranty costs are to be borne by each entity. The
Overland Group and Mr. Liao are affiliates of Overland Opportunity Fund, LLC
("Overland"), which owned 9.0% of the Company's outstanding Common Stock at June
30, 1999.
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, which 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, 1999, the Company had land seller
indebtedness outstanding of $1,325,000.
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 March 31, 1999,
aggregate borrowings of $23,221,000 were outstanding under these facilities and
$18,466,000 was available for further qualified project finance borrowing.
Interest rates on these loans range from 7.65% to 15.25%, with the weighted
average being 11.53%.
The Company has unsecured revolving lines of credit of $1,000,000 and $250,000
with commercial banks that bear interest at the prime rate plus 1.0% and prime
rate plus 2.0%. The net outstanding balance under these lines of credit at
March 31, 1999 was $1,118,000. With regard to the $1,000,000 line of credit, 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 Company repays the
lender weekly from net escrow closing proceeds. With regard to the $250,000
credit line, the Company submits a loan request for project costs incurred prior
to obtaining a construction loan. The line is repaid when the construction loan
records. The Company is reimbursed for the project costs previously paid.
In December 1997, the Company restructured a secured line of credit with an
outstanding principal balance of $2,891,000 from a commercial bank, which had
become due. Pursuant to a series of agreements, the bank's note was purchased
for $1,750,000 by a group of lenders ("new lender") provided by USA. The bank
forgave accrued interest of $92,000 and canceled its rights under a warrant to
purchase 41,667 shares of the Company's Common Stock that was issued to the bank
pursuant to an agreement made in June 1996 extending and modifying the line of
credit. The resulting obligation of the Company to the new lender is $2,350,000,
which includes the $1,750,000 paid to the bank, fees earned by USA, an interest
reserve and a payoff made by the new lender to an unrelated commercial bank of
another loan to the Company. The loan is secured by undeveloped land owed by
the Company in Victorville and Palmdale, California and by an assignment of the
Company's rights under the Eagle Ranch repurchase option agreement previously
described. Since the land in Palmdale was owned by Palmdale Vistas Housing
Developments, Ltd. ("Palmdale Vistas"), in which the Company was the managing
general partner and had a 51.3% interest, the new lender required the
dissolution of Palmdale Vistas pursuant to an Agreement signed by the partners
of Palmdale Vistas. The limited partners of Palmdale Vistas, which include a
former director of the Company, received title to a 17 acre undeveloped
commercial site owned by Palmdale Vistas. The Company, as general partner of
Palmdale Vistas, received title to the balance of the partnership assets
consisting of three completed model homes, 11 completed homes for sale, and
approximately 180 unimproved residential lots. Additionally, the Company has
agreed to repay the bank the $1,141,000 principal amount not paid by the new
lender when it purchased the bank's note. This payment is unsecured, non-
interest bearing and payable from 15% of profits earned annually by the Company
commencing with the fiscal year ending December 31, 1999. Certain non-
operational changes in the Company's net worth in excess of $3,500,000 and
certain changes in control of the Company will also require additional payments
to the bank.
19
<PAGE>
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. Additionally, in June 1997, pursuant to a separate
Agreement with this same commercial bank, $2,647,000 was accepted as payment in
full on matured loans with balances totaling $3,494,000 secured by the Company's
Eagle Ranch project in the high desert of San Bernardino County. The Company
repaid the bank from the following sources: (i) the sale in June 1997,
previously described, of the majority of the Eagle Ranch project for $2,400,000
to a group of investors provided by USA Real Estate, (ii) a new loan from a
third party lender in the amount of $580,000 and (iii) other Company funds.
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 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.
20
<PAGE>
INCO HOMES CORPORATION
PART II. OTHER INFORMATION
Item 1. Not Applicable
Item 2. Recent Sales of Unregistered Securities
In the first quarter of 1999, the Company issued an aggregate of 35,826
shares of Company Common Stock to certain of the Company's current and
former directors as payment in full of an aggregate of $97,500 in unpaid
director fees owed by the Company to such individuals. Additionally, the
Company issued an aggregate of 70,195 shares of Company Common Stock to
two of its vendors in satisfaction of indebtedness to them in the total
amount of $175,488.
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 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.
Items 3 through 5. Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K. There were no reports on Form 8-K for the
three months ended March 31, 1999.
21
<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: July 28, 1999 By: /s/ Ira C. Norris
---------------------------------
IRA C. NORRIS
Chairman of the Board, President
and Chief Executive Officer
Date: July 28, 1999 By: /s/ David A. Fogg
---------------------------------
DAVID A. FOGG
Chief Operating Officer and
Chief Financial Officer
22
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<INCOME-TAX> 0
<INCOME-CONTINUING> (440)
<DISCONTINUED> 0
<EXTRAORDINARY> 37
<CHANGES> 0
<NET-INCOME> (403)
<EPS-BASIC> (0.23)
<EPS-DILUTED> (0.23)
</TABLE>
