ITEM 1. BUSINESS
GENERAL DESCRIPTION
International American Homes, Inc. (the "Company") was incorporated under the laws of the State of Delaware on April 27, 1983. The Company, through its subsidiaries, Porten Sullivan Corporation and Suarez Housing Corporation, designs, builds, and sells single-family homes and townhomes and develops finished building lots, primarily in middle income communities. The Company currently conducts its building and developing activities in suburban residential areas in the Maryland and Virginia suburbs of Metropolitan Washington, D.C. and in Greater Tampa, Florida.
On April 16, 1990, the Company and certain of its wholly-owned subsidiaries filed voluntary petitions for relief under Chapter 11, Title 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of New Jersey (the "Bankruptcy Court"). On August 12, 1992, the Bankruptcy Court entered an order confirming the Company's Plan of Reorganization (the "Plan" or "Plan of Reorganization"). Pursuant to the Plan, the Company has completed the initial distribution to creditors by paying $4,149,000 in cash and by issuing 2,043,296 shares of the Company's common stock to the creditors through March 31, 1997. See Note 1, "The Company" and Note 7, "Commitments and Contingencies" in Notes to Consolidated Financial Statements of the Company appearing elsewhere in this report.
FINANCING ARRANGEMENTS
The Company, through its subsidiaries, obtains financing from commercial banks for a portion of the cost of acquiring finished building lots and undeveloped land and for most of the costs of the construction of homes. This financing is generally available for homes that are subject to a contract of sale and also for a limited number of homes in advance of sale. The Company's loan commitments as well as current banking regulations limit the portion of each home that can be financed to approximately 75% of its value. Since the Company uses its own capital resources to fund those costs that cannot be financed, the Company's future growth will be limited by the amount of such resources. As a result of the use of these financing arrangements, the Company is currently, and expects to continue to be, highly leveraged. All of the Company's financing arrangements are secured by the related real estate inventory.
Management believes that the Company currently has adequate financing and liquidity to meet its financial obligations and will be able to fund the acquisition and construction of inventory to support modest growth. However, there is no assurance that financing will be available to the Company in the future. In addition, homebuilding is a cyclical industry with economic conditions having a substantial impact on operating performance.
MARKETS
During the three fiscal years ended March 31, 1997, the Company built and delivered 1,142 homes realizing $172,486,000 in revenues. The following tables summarize, by market area, the Company's sales revenues and number of homes delivered, respectively, for its last three fiscal years.
Home Sales Revenue (Dollars in thousands)
Year Ended March 31, ---------------------------
1997 1996 1995 ------- ------- ------- MARKET AREA
Metropolitan Washington, D.C $25,874 $23,657 $19,559
Greater Tampa, Florida 40,282 32,326 30,788 ------- ------- -------
Total $66,156 $55,983 $50,347 ======= ======= =======
Number of Homes Delivered
Year Ended March 31, ---------------------------
1997 1996 1995 ------- ------- -------
MARKET AREA
Metropolitan Washington, D.C 123 112 87
Greater Tampa, Florida 309 257 254 ------- ------- -------
Total 432 369 341 ======= ======= =======
The Company is currently offering single-family homes and townhomes in 18 communities at prices ranging from $96,000 to $278,000. Purchasers of the Company's homes include both entry-level and move-up buyers. The average sales price of the homes delivered in the year ended March 31, 1997 was $ 153,000.
LAND ACQUISITION AND DEVELOPMENT
The Company generally acquires finished building lots under contracts which spread the acquisition of those lots over a period of time that roughly coincides with the estimated time required for the sale of the homes on those lots. At March 31, 1997 the Company had commitments to purchase 744 finished building lots at a total purchase price of approximately $27,021,000 over a four-year period. These commitments assure a continuing supply of finished building lots in the near future. Substantial deposits will be forfeited if the Company is unable to satisfy these commitments.
During the year ended March 31, 1996, the Company purchased a parcel of land in Greater Tampa, Florida containing approximately 360 developed and undeveloped lots. At March 31, 1997, the Company had developed 109 of those lots into finished building lots and delivered a substantial number of homes on those lots. The Company is not engaged in any other land development activities.
SUBCONTRACTORS AND SUPPLIERS
The Company constructs homes utilizing subcontractors who operate under the supervision of the Company's staff. The subcontracts are generally fixed-price, short-term agreements. Building materials and subcontractors are readily available in the areas where the Company constructs its homes. Although the Company believes that no relationship with any particular supplier or subcontractor is material to its operations, the Company purchases substantially all of its requirements for lumber and certain other building material products for the homes that it builds in Greater Tampa, Florida from one supplier. The Company does not believe that this relationship results in any significant risk to the Company. Refer to Item 11 (Compensation Committee Interlocks and Insider Participation).
WARRANTIES
The Company provides warranties to all of its customers. The Company provides a written ten-year warranty through independent warranty programs which insure performance by the Company. The warranties cover major structural defects for ten years, limited structural and mechanical defects for one to two years, and all defects for one year.
SEASONAL NATURE OF BUSINESS
Due to its geographic and product mix, the Company's operations taken as a whole are not seasonal in nature.
BACKLOG
As of March 31, 1997 and 1996, the Company had a backlog of signed contracts for 151 homes with aggregate sales prices of $25,908,000 (including $5,424,000 of contingent contracts) and 142 homes with aggregate sales prices of $25,138,000 (including $8,460,000 of contingent contracts), respectively. The Company anticipates that substantially all the homes in backlog at March 31, 1997 will be delivered by December 31, 1997.
SALES AND MARKETING
The Company generally sells its homes through its own sales personnel who work in on-site model homes. Sales personnel are compensated through a combination of salary and commission. A significant portion of those sales are initiated by independent real estate brokers who are compensated on a commission basis.
The Company advertises in local and regional newspapers and publications and provides prospective purchasers with illustrated brochures and floor plans. The Company's customers may select custom options to be incorporated into their homes at additional cost.
The Company requires a cash deposit from purchasers at the time a contract of sale is executed. Such deposits are held in trust, escrow, or segregated bank accounts. Purchasers are permitted to cancel their contract and receive a refund of their deposit under certain limited circumstances including their inability to obtain permanent mortgage financing or to sell their existing home. For the years ended March 31, 1997, 1996 and 1995, the Company experienced cancellation rates of 21%, 19%, and 29%, respectively.
Although the Company attempts to limit its inventory of unsold homes, it may commence construction of homes prior to obtaining sales contracts. The Company frequently discounts the purchase price of homes or provides various options and other sales incentives to purchasers.
CUSTOMER FINANCING
The Company assists customers in arranging permanent mortgage financing by providing information regarding potential mortgage lenders. There currently is an adequate supply of competitively priced permanent mortgages available from unrelated sources to satisfy the needs of homebuyers.
Prior to 1987, the Company originated mortgages (secured by the homes it built and sold) for certain of its subsidiaries through its wholly-owned mortgage subsidiaries and assembled them into pools against which collateralized mortgage obligation bonds were issued or such mortgages were sold in the open market. Most of such mortgage loan repayments are insured by the U.S. Department of Housing and Urban Development or the Federal Housing Administration ("FHA"), or guaranteed by the Veterans' Administration ("VA").
The Company receives in cash, at closing, the full sales price for its homes, less any financing subsidies, deposits, closing costs, and loan repayments.
COMPETITION
The homebuilding industry is highly competitive and fragmented. The Company competes in the geographic areas in which it operates with numerous residential construction companies ranging from small local builders to large regional and national builders. The Company's competitors include: Pulte Corporation, Centex Corporation, U.S. Home Corporation, Lennar Corporation, M.D.C. Holdings, Inc., NVR, Inc., and Washington Homes, Inc. The national builders and many of the local and regional companies have higher sales and greater financial resources than the Company. The Company considers all homes, whether offered for sale or rent (including apartment and condominium housing), to be competitive with its homes in each local market in which the Company operates. The Company competes primarily on the basis of quality, location, price, design, and reputation in each local market.
REGULATION
The Company's business is affected by various local, state, and Federal statutes, ordinances, rules, and regulations concerning zoning, building design and construction, home sales, environmental protection, and other matters. Changes in governmental regulations may adversely affect the Company's business.
Many of the homes built by the Company are approved for FHA or VA financing. Where required, all construction is inspected by local government inspectors and, on FHA and VA approved homes, by FHA or VA building inspectors.
EMPLOYEES
The Company employed 53 persons as of March 31, 1997 of whom 3 were executive officers, 19 were sales personnel, 14 were administrative and clerical personnel and 17 were involved in construction and supervision of construction. The Company believes its employee relations are satisfactory.
ITEM 2.
ITEM 2. PROPERTIES
As of March 31, 1997, the Company occupied leased office facilities in Lanham, Maryland and in Tampa, Florida totaling approximately 8,420 square feet. See Note 7 in Notes to Consolidated Financial Statements of the Company appearing elsewhere in this report.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
On April 16, 1990, the Company and certain of its wholly-owned subsidiaries filed voluntary petitions for relief under Chapter 11, Title 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of New Jersey (the "Bankruptcy Court"). On August 12, 1992, the Bankruptcy Court entered an order confirming the Company's Plan of Reorganization (the "Plan" or "Plan of Reorganization").
The Company is involved from time to time in other litigation arising in the ordinary course of business which is not expected to have a material adverse effect on the Company's financial position or its results of operations.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of shareholders during the fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
At the 1994 Annual Meeting of Stockholders, which was held on September 13, 1994, the stockholders approved a proposal to adopt certain amendments (the "Amendments"), to the Company's Restated Certificate of Incorporation (i) to effect a 1-for-10 reverse stock split of the Company's issued and outstanding common stock (the "Reverse Stock Split"), and (ii) to change the number of authorized shares of common stock from 30 million to 10 million. The Amendments did not change the par value of the common stock which remained at $.01 per share. The Amendments became effective on May 31, 1995 with the filing of a Certificate of Amendment with the Secretary of State of Delaware. The effect of the Reverse Stock Split has been retroactively reflected in this report.
Shares of the Company's common stock are traded in the over-the-counter market. The trading symbol is "IAHM".
The following table sets forth the range of high and low bid prices, as adjusted for the Reverse Stock Split, for the periods indicated as reported by the National Quotation Bureau (which reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not necessarily represent actual transactions). HIGH LOW ------ ----- CALENDAR YEAR 1995 First Quarter $ 1.40 $ .35 Second Quarter 1.75 1.50 Third Quarter 1.88 .25 Fourth Quarter .88 .31
CALENDAR YEAR 1996 First Quarter 1.00 .38 Second Quarter 1.56 .94 Third Quarter 1.38 1.13 Fourth Quarter 1.81 .81
CALENDAR YEAR 1997 First Quarter 1.63 1.19
As of June 1, 1997, there were 2,595 stockholders of record.
The Company has never declared or paid any cash dividends. In addition, the payment of dividends is not permitted under the Plan of Reorganization during the six (6) year period ending August 13, 1998. The Plan also provides that after August 12, 1998, the Company may not pay any cash dividends to stockholders until it has first paid an additional $1,250,000 to the creditors.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
Selected Consolidated Statements of Operations (1) (Dollars in thousands)
Selected Consolidated Statements of Operations (1)
Selected Consolidated Balance Sheet Data (1) (Dollars in thousands)
________________________________________________
(1) In conjunction with the reorganization, the Company adopted fresh start reporting pursuant to which all assets and assumed liabilities are restated to reflect their reorganization value which approximates their fair value at the date of reorganization. Accordingly, the Selected Consolidated Statements of Operations for the period August 13, 1992 through March 31, 1997 and the Selected Consolidated Balance Sheet Data as of August 12, 1992, March 31, 1993, March 31, 1994, March 31, 1995, March 31, 1996 and March 31, 1997 are not comparable to the related statements for any prior period and as of any prior date.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
International American Homes' Management's Discussion and Analysis of Financial Condition and Results of Operations contains statements that may be considered forward looking. These statements contain a number of risks and uncertainties as discussed herein and in the Company's reports filed with the Securities and Exchange Commission that could cause actual results to differ materially.
LIQUIDITY AND CAPITAL RESOURCES
The Company, through its subsidiaries, obtains financing from commercial banks for a portion of the cost of acquiring finished building lots and for most of the costs of the construction of homes. This financing is generally available for homes that are subject to a contract of sale and also for a limited number of homes in advance of sale. The Company's loan commitments as well as current banking regulations generally limit the portion of each home that can be financed to approximately 75% of its value. Since the Company must use its own capital resources to fund those costs that cannot be financed, the Company's future growth will be limited by the amount of such resources. As a result of the use of these financing arrangements, the Company is currently, and expects to continue to be, highly leveraged.
The Company's subsidiaries currently have financing agreements in the aggregate amount of $38,219,000 with commercial banks located in the areas in which the subsidiaries operate. The terms of these financing agreements vary, are each for one year or more from their date of origination (with expiration dates ranging from May 1997 to October 1998), are generally guaranteed by the Company, and are all secured by the related real estate inventory. The Company's Chairman and President has personally guaranteed certain of these obligations in the aggregate maximum amount of $13,969,000, at a fee of one percent of the amount guaranteed, not to exceed $80,000 per year. At March 31, 1997, the outstanding principal amount of loans guaranteed by the Company's Chairman and President was $3,772,000.
The Company generally acquires finished building lots under contracts which spread the acquisition of such lots over a period of time that roughly coincides with the estimated time required for the sale of homes on those lots. At March 31, 1997, the Company had commitments to purchase 744 finished building lots at a total purchase price of approximately $27,021,000 over a four-year period. These commitments assure a continuing supply of finished building lots in the near future. Substantial deposits will be forfeited if the Company is unable to satisfy these commitments.
During the year ended March 31, 1996, the Company purchased a parcel of land in Greater Tampa, Florida containing approximately 360 developed and undeveloped lots. At March 31, 1997, the Company had developed 109 of those lots into finished building lots and delivered a substantial number of homes on those lots. The Company obtained financing from a commercial bank to fund a portion of the cost of acquiring and developing the land.
The Company's short-term liquidity and its ability to operate over the short-term are reasonably assured by the financing agreements in place, by the Company's backlog of sales contracts, and by the commitments to acquire finished building lots. The Company's long-term liquidity is not affected by any material capital expenditures but would be impacted by the inability to renew certain of
the financing agreements when they mature. The strength of the housing markets in the areas where the Company operates and the ability of the Company to maintain a continued supply of finished building lots will also affect the Company's long-term liquidity. Management believes that the Company currently has adequate financing and liquidity to meet its financial obligations and will be able to fund the acquisition and construction of inventory to support modest growth. However, there is no assurance that such financing will be available to the Company in the future.
The Plan does not permit the subsidiaries of the Company to pay any dividends to the Company. The Plan further prohibits the Company and its subsidiaries from acquiring debt securities from or loaning or advancing any money to any other party except in the ordinary course of business. These restrictions are effective until August 12, 1998 and by their nature require the Company's subsidiaries to be self-sufficient. From time to time, a subsidiary of the Company makes a purchase of land or finished building lots from or on behalf of another subsidiary and later resells that land to the latter on terms that will assure that the accommodation purchaser recovers its costs. While such transactions can temporarily affect the cash flow of each of the participating subsidiaries, they do not impact the overall cash flow of the Company. The Plan further provides for the payment of distributions to the creditors equal to 50 percent of excess cash flows (as defined by the Plan), if any, generated by the Company's subsidiaries for the periods ending June 30, 1993 through June 30, 1998. Any such payment of 50 percent of the excess cash flow would be funded from the excess cash flow generated. Despite these requirements and restrictions, management believes that the Company and each of its subsidiaries currently have adequate liquidity to meet their financial obligations. However, there is no assurance that these requirements and restrictions will not have an impact on the future liquidity of the Company or its subsidiaries.
The housing market in Metropolitan Washington has become increasingly competitive. The rate of absorption in substantially all areas within the market has decreased while the number of projects has increased. An overall reduction in gross margins and increased selling expenses have resulted in a significant operating loss in the Metropolitan Washington subsidiary. The Company has made changes in key management and in the way certain operations are conducted. Although management believes that such changes will have a positive effect on operations in the future, there can be no assurance that these changes will have the desired positive effect or how long adverse market conditions will continue in Metropolitan Washington.
RESULTS OF OPERATIONS
The following tables sets forth certain information with respect to homes delivered and homes sold during the periods presented (dollars in thousands).
Year Ended March 31, ------------------------------- 1997 1996 1995 ------- ------- ------- Homes delivered Units 432 369 341 Home sales revenue $66,156 $55,983 $50,347 Average sales price $ 153.1 $ 151.7 $ 147.6 Homes sold Units 441 390 351 Sales value $66,730 $60,096 $53,891 Average sales price $ 151.3 $ 154.0 $ 153.5
The increase in home sales revenues for the year ended March 31, 1997 compared to the year ended March 31, 1996 and the increase in home sales revenues for the year ended March 31, 1996 compared to the year ended March 31, 1995 both result from a combination of an increase in the number of units delivered and an increase in the average sales price of the units delivered. The increase in the number of units delivered for the year ended March 31, 1997 compared to the year ended March 31, 1996 is due primarily to a substantial increase in the number of units delivered in Greater Tampa, Florida. The increase in the number of units delivered for the year ended March 31, 1996 compared to the year ended March 31, 1995 is due to the opening of new communities primarily in Metropolitan Washington, D.C. The increase in the average price of units delivered for the year ended March 31, 1997 compared to the year ended March 31, 1996 is due primarily to increased sales prices in Greater Tampa, Florida. The increase in the average price of the units delivered for the year ended March 31, 1996 compared to the year ended March 31, 1995 is due primarily to increased sales prices in Greater Tampa, Florida and a greater percentage of deliveries in Metropolitan Washington, D.C. where the average sales price is higher than in Greater Tampa, Florida.
The Company realized an increase in the number of homes sold during the year ended March 31, 1997 compared to the year ended March 31, 1996 and an increase during the year ended March 31, 1996 compared to the year ended March 31, 1995. The increase in the number of homes sold during the year ended March 31, 1997 compared to the year ended March 31, 1996 results from a substantial increase in the number of homes sold in Greater Tampa, Florida. The increase in the number of homes sold during the year ended March 31, 1996 compared to the year ended March 31, 1995 is attributable to an increase in the number of communities in which the company builds homes and a greater number of sales in each community.
The decrease in the average sales price of the homes sold during the year ended March 31, 1997 compared with the prior year is attributable to a greater proportion of sales coming from Greater Tampa, Florida where the average sales price is lower combined with a reduction in the average sales price in Metropolitan Washington, D.C. resulting from competitive factors and the sale of lower priced townhome product. The increase in the average sales price of the
homes sold during the year ended March 31, 1996 compared with the prior year is attributable to higher sales prices in Greater Tampa, Florida which were partially offset by lower prices in Metropolitan Washington, D.C., where the average sales price decreased due to the introduction of a lower priced townhome product.
The following tables sets forth certain information with respect to homes sold under contract but not delivered ("Backlog") at the dates shown (dollars in thousands).
Year Ended March 31, ------------------------------ 1997 1996 1995 ------- ------- ------- Backlog Units 151 142 121 Sales value $25,908 $25,138 $21,025 Average sales price $ 171.6 $ 177.0 $ 173.8
The Backlog at March 31, 1997, 1996, and 1995 includes $5,424,000, $8,460,000, and $3,353,000 of contingent contracts, respectively.
From March 31, 1995 to March 31, 1997 the Company realized an annual increase in the number of its backlog of sales contracts. This increase is attributable to a greater number of communities in which the company builds homes as well as an increase in the number of sales per community in Greater Tampa, Florida which offset the decrease in the number of sales per community in Metropolitan Washington, D.C..
The average sales price of the backlog of sales contracts decreased from March 31, 1996 to March 31, 1997 primarily as a result of a greater proportion of the backlog coming from Greater Tampa, Florida where the average sales prices are lower than in Metropolitan Washington, D.C.. From March 31, 1995 to March 31, 1996 the company realized an increase in the average sales price of the contracted backlog. This increase is attributable to a greater percentage of the backlog coming from Metropolitan, Washington, D.C. where the average sales price is substantially higher than in Greater Tampa, Florida.
YEAR ENDED MARCH 31, 1997 COMPARED TO THE YEAR ENDED MARCH 31, 1996.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain information regarding the Company's operations (dollars in thousands).
While gross profit increased for the year ended March 31, 1997 compared to the year ended March 31, 1996, gross profit as a percentage of home sales revenue decreased from 13.5% to 12.8%. This percentage decrease results primarily from the comparative increase in all direct and indirect construction costs. These cost increases could not be fully recouped through higher sales prices due to strong competition in the markets where the Company operates.
Selling, general and administrative expenses for the year ended March 31, 1997 increased when compared with the prior comparable period but decreased as a percentage of the related home sales revenue. The increase in selling, general and administrative expense is due to the increase in home sales revenue and higher total selling and marketing expenses. The percentage decrease in selling, general and administrative expenses is due to general and administrative expenses being absorbed over a larger number of units delivered partially offset by higher per unit selling and marketing expenses.
The change in pre-tax profit for the year ended March 31, 1997 compared to the year ended March 31, 1996 is a reflection of the changes in gross profit and in selling, general, and administrative expenses as discussed above.
Uncertain local economic conditions in all areas where the Company operates may adversely affect sales of new homes and the level of gross profit. The Company is unable to predict the extent to which such factors will adversely affect the Company's operations in the future.
The housing market in Metropolitan Washington has become increasingly competitive. The rate of absorption in substantially all areas within the market has decreased while the number of projects have increased. An overall reduction in gross margins and increased selling expenses have resulted in a significant loss in the Metropolitan Washington subsidiary. The Company has made changes in key management and in the way certain operations are conducted. Although management believes that such changes will have a positive effect on operations in the future, there can be no assurance that these changes will have the desired effect or how long adverse market conditions will continue in Metropolitan Washington.
See "Fresh Start Reporting" appearing under Note 2, "Summary of Significant Accounting Policies" in Notes to Consolidated Financial Statements of the Company appearing elsewhere in this report.
INTEREST AND OTHER INCOME
Interest and other income includes $483,000 and $647,000 and interest expense includes $471,000 and $623,000 for the years ended March 31, 1997 and March 31, 1996, respectively, from wholly-owned finance subsidiaries established in prior years to sell collateralized mortgage obligations through participation in various multi-builder bond programs.
INCOME TAXES
The provision for income taxes for the year ended March 31, 1997 of $280,000 includes federal and state income taxes at statutory rates. The provision for income taxes of $60,000 for the year ended March 31, 1996 is for state income tax only as a provision for federal income tax was not required for the year ended March 31, 1996, due to the utilization of net operating loss carryforwards.
YEAR ENDED MARCH 31, 1996 COMPARED TO THE YEAR ENDED MARCH 31, 1995.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain information regarding the Company's operations (dollars in thousands).
While gross profit increased for the year ended March 31, 1996 compared to the year ended March 31, 1995, gross profit as a percentage of home sales revenue decreased from 13.7% to 13.5%. This percentage decrease results primarily from the comparative increase in developed lot costs from period to period as well as increases in other construction costs. These costs increases could not be recouped through higher sales prices due to strong competition in the markets where the Company operates.
Selling, general and administrative expenses for the year ended March 31, 1996 increased when compared with the prior comparable period and increased as a percentage of the related home sales revenue. These increases are due to the increase in sales and are also due to an increase in the fixed components of selling, general and administrative expenses.
The change in pre-tax profit for the year ended March 31, 1996 compared to the year ended March 31, 1995 is a reflection of the changes in gross profit and in selling, general, and administrative expenses as discussed above.
Uncertain local economic conditions in the areas where the Company operates adversely affected sales of new homes and the level of gross profit.
See "Fresh Start Reporting" appearing under Note 2, "Summary of Significant Accounting Policies" in Notes to Consolidated Financial Statements of the Company appearing elsewhere in this report.
INTEREST AND OTHER INCOME
Interest and other income includes $647,000 and $791,000 and interest expense includes $623,000 and $752,000 for the years ended March 31, 1996 and March 31, 1995, respectively, from wholly-owned finance subsidiaries established in prior years to sell collateralized mortgage obligations through participation in various multi-builder bond programs.
INCOME TAXES
The provisions for income taxes for the years ended March 31, 1996 and 1995 of $60,000 and $72,000, respectively, are for state income taxes and were provided for at the statutory rates. Provisions for federal income taxes were not required for the years ended March 31, 1996 and 1995 due to the utilization of net operating loss carryforwards, however, the Company expects to incur federal income tax liability at statutory rates in the future.
INFLATION AND BUSINESS CYCLES
General economic conditions in the United States, and particularly the impact of inflation, availability of funds, and other factors on interest rates, affect both the Company's sales and its costs. Inflation can have a long-term impact on the Company because increasing costs of land, materials, and labor result in higher sales prices of its homes. In addition, increases in interest rates on permanent mortgages generally result in reduced sales rates. The Company's business is also affected by local economic conditions, such as unemployment rates and housing demand in the markets in which it builds homes. Homebuilding is a cyclical industry in which economic conditions have a substantial impact on operating performance.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required under this item is incorporated herein by reference to the information provided at Pages through of this report.
ITEM 9.
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ELECTION OF DIRECTORS
On April 16, 1990, the Company and certain of its wholly-owned subsidiaries filed voluntary petitions for relief under Chapter 11, Title 11 of the United States Code in the United States Bankruptcy Court for the District of New Jersey (the "Bankruptcy Court"). On August 12, 1992, the Bankruptcy Court entered an order confirming the Company's Plan of Reorganization (the "Plan" or "Plan of Reorganization"). The Plan became effective on August 27, 1992 (the "Effective Date").
The Plan stipulates how the Board of Directors is to be structured during the six-year period beginning on the Effective Date. The Plan provides that during that six-year period, the Board of Directors shall consist of (i) the Presidents of Suarez Housing Corporation and Porten Sullivan Corporation, the principal subsidiaries of the Company; (ii) four directors to be appointed by the Creditors Committees; and (iii) three directors to be elected by the stockholders. Four directors were appointed by the Creditors Committees in 1992. Three directors were elected by the stockholders at the 1995 Annual Meeting, one of whom, Mr. Philip T. Mercer, resigned as a director on November 20, 1995. Mr. James G. Farr was elected by the stockholders at 1996 annual meeting to serve the remaining two years of Mr. Mercer's term or until his successor is elected and qualified at the following Annual Meeting. Mr. Robert I. Antle became a member of the Board of Directors in December 1996 when he was appointed acting President of Porten Sullivan Corporation . He replaced Mr. Kenneth W. Carlson .
DIRECTORS CONTINUING IN OFFICE
The following table sets forth, as to each director continuing in office, such director's name, his age, the year in which he was first elected a director of the Company, his principal occupation during the past five years and certain other directorships, if any, held by him. All executive officers are also Directors.
THE BOARD OF DIRECTORS AND ITS COMMITTEES
The Board of Directors has an Executive Committee which has the authority to review and approve all land acquisitions by the Company's subsidiaries and all guarantees by the Company of loans to the Company's subsidiaries. Members of the Executive Committee are Mr. Suarez, Mr. Antle, Mr. Cotanda, Mr. Davis, and Mr. Everett.
The Board of Directors has an Audit Committee which reviews the Company's internal controls, accounting policies, financial reporting, and the scope and results of the audit engagement. It meets with appropriate Company financial personnel and independent auditors in connection with these reviews. The Committee also recommends to the Board the appointment of the independent auditors. Members of the Audit Committee are Mr. Gibney, Mr. Aiken, and Mr. Davis.
The Board of Directors has a Compensation Committee which makes recommendations to the Board of Directors regarding the amount of and form of compensation awarded to the executive officers of the Company and to other employees of the Company whose annual salaries exceed $75,000 per year. The Compensation Committee also administers the Company's Non-Qualified Stock Option Plan. Members of the Compensation Committee are Mr. Cotanda, Mr. Davis, and Mr. Everett.
The Board of Directors has a Nominating Committee which recommends to the Board of Directors candidates for election as directors and will consider nominations by stockholders submitted in writing to the Chairman of the Board of Directors. Members of the Nominating Committee are Mr. Suarez, Mr. Antle, and Mr. Cotanda.
The Board of Directors has a Conflicts of Interest Committee which approves transactions involving any actual or potential conflict of interest between the Company and any officer, director, employee, or agent. Members of the Conflicts of Interest Committee are Mr. Prol and Mr. Gibney.
Five meetings of the Board of Directors were held during the fiscal year ended March 31, 1997. All of the Directors attended at least 75% of those meetings. Two meetings of the Audit Committe and one meeting each of the Compensation Committee and Nominating Committee were held during the fiscal year ended March 31, 1997.
DIRECTOR COMPENSATION
Directors who are employees of the Company receive no additional remuneration for their services as directors. Non-employee directors -- those directors not entitled to receive any salary from the Company or its subsidiaries -- receive for each Board or committee meeting attended, a fee of $1,500 and reasonable travel and other out-of-pocket expenses incurred. See "Executive Compensation -- Compensation Committee Interlocks and Insider Participation" for information regarding the consulting agreement and the Participation Agreement between the Company and Mr. Peter A. Davis.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth a summary of annual and long-term compensation paid by the Company during the fiscal years ended March 31, 1997, 1996, and 1995 to the Chief Executive Officer of the Company and to the other executive officers of the Company whose total compensation for the fiscal year ended March 31, 1997 was in excess of $100,000.
Summary Compensation Table (1)
(1) The columns designated for the reporting of other annual compensation, restricted stock awards, long-term incentive plan payouts, and long-term compensation awards have been omitted because no compensation of a type required to be reported under such columns was paid to the named executive officers during the period covered by the table. The Company does not grant stock appreciation rights of any kind.
(2) Upon the confirmation of the Plan of Reorganization on August 12, 1992, Suarez Housing Corporation entered into an employment agreement with Robert J. Suarez. See "Employment Agreements" below. Subsequently, in September 1992, Mr. Suarez and Mr. Antle were appointed to their positions as Chairman and President, and as Vice President and Secretary, of the Company, respectively. Mr. Antle was subsequently elevated to the position of Executive Vice President, Treasurer and Chief Financial Officer. Accordingly, the compensation appearing on the table above represents all compensation received by the named executive officers from Suarez Housing Corporation during the fiscal years ended March 31, 1997, 1996, and 1995. The named executive officers do not receive compensation directly from the Company.
(3) No longer employed by the Company.
STOCK OPTIONS
During the fiscal year ended March 31, 1997 a stock option was granted to Robert J. Suarez in the amount of 100,000 shares. The exercise price of $1.3125 was the fair market value on the date the option was granted.
The following table sets forth certain information with respect to the named executive officers concerning the exercise of stock options during the fiscal year ended March 31, 1997 and the value of unexercised stock options held as of March 31, 1997.
Aggregated Option Exercises in Fiscal Year 1997 and Year-End Option Values
(1) The fair market value of the Common Stock at the Company's fiscal year end, March 31, 1997, was $ 1 3/16 per share based upon the last trade price as reported by Bloomberg Financial Services.
EMPLOYMENT AGREEMENT
In accordance with the terms of the Plan, the Company entered into an employment agreement with Robert J. Suarez. The employment agreement was approved by the Bankruptcy Court as part of the Plan and became effective as of the date of confirmation of the Plan, August 12, 1992. Mr. Suarez is currently employed by the Company as Chairman and President. He is also employed by Suarez Housing Corporation as Chairman and President. The employment agreement originally was to expire on August 12, 1995 and was extended by the Board in June 1995 for three additional years, subject to certain modifications, so that it now expires on August 12, 1998. The employment agreement provides for base compensation during the initial three-year term of $250,000 per annum to be adjusted annually in accordance with changes in the Consumer Price Index ("CPI"). At August 12, 1993 the base compensation was adjusted to $257,500 per annum, and at August 12, 1994 the base compensation was adjusted to $264,710 per annum. Mr. Suarez' base compensation was increased to $290,000 on August 12, 1995 and to $299,820 on August 12, 1996 and hereafter will be adjusted annually in accordance with changes in the CPI. The employment agreement can be terminated at any time for cause, without any further payment. If the employment agreement is terminated without cause, Mr. Suarez shall be entitled to additional compensation equal to six months' pay. The employment agreement, as extended, provides that in the event Mr. Suarez' employment agreement is not renewed on substantially the same terms and conditions, the Company will pay Mr. Suarez six months' base compensation in return for his consulting services during such period. Mr. Suarez agreed, for a number of months (such number of months to coincide with the number of months of termination or non-renewal benefit) after any termination of his employment, not to engage in any business enterprise involving the sale and/or construction of residential housing in direct competition with the Company. Mr. Suarez also agreed, for one year after any termination of his employment, not to induce any employee of the Company to render any services, absent the Company's prior written approval, to or for any person or entity in direct competition with the Company's then existing construction activities.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Dionel Cotanda, a member of the Compensation Committee of the Board of Directors, is President, Chief Executive Officer, and Director of Robbins Engineering, Inc. and Vice President and Director of Robbins Manufacturing Company. During the year ended March 31, 1997, Robbins Engineering, Inc. and
Robbins Manufacturing Company sold engineering services, metal plate connected wood trusses, lumber, and related building material products in the amount of approximately $ 3,240,000 to Suarez Housing Corporation.
Mr. Robert E. Everett, a member of the Compensation Committee of the Board of Directors, is Executive Vice President of McCrea Equipment Company, Inc. During the year ended March 31, 1997, McCrea Equipment Company sold heating, ventilating and air conditioning systems in the amount of approximately $671,000 to Porten Sullivan Corporation.
Mr. Peter A. Davis, a member of the Compensation Committee of the Board of Directors, has served as a consultant to the Company since November 1992. The Company entered into a one-year consulting agreement with Mr. Davis commencing November 1, 1992. This agreement was subsequently renewed under similar terms and conditions for four additional one-year terms which expire on November 1, 1997. The agreement provides for Mr. Davis to assist the Company in a broad range of areas. Mr. Davis receives compensation at the rate of $1,000 per day with a minimum compensation of $42,000 per year. During the fiscal year ended March 31, 1997, the Company paid $39,000 to Mr. Davis for his consulting services.
Mr. Peter A. Davis entered into a Participation Agreement with Suarez Housing Corporation for the construction and sale of custom homes in Martin County, Florida. Suarez Housing Corporation will own the property acquired and provide administrative support services. Mr. Davis will manage construction and sales activities. The parties have agreed to equally fund capital contributions as required. Profits or losses will be shared equally. Mr. Davis agreed to fund the construction costs for the initial home and received reimbursement on such funds advanced at the monthly effective rate paid on bank borrowings by Suarez Housing Corporation. Construction and delivery of the initial home was completed in February 1997. An initial payment of $27,500 was made in March 1997 in accordance with the profit sharing formula in the Participation Agreement.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP BY CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the ownership of the Common Stock as of March 31, 1997 held by (i) each director of the Company, and each executive officer whose name appears in the Summary Compensation Table below, and all directors, nominees for director, and executive officers as a group and (ii) each person who is known by the Company to be the beneficial owner of more than five percent (5%) of the issued and outstanding shares of Common Stock. Except as noted, the individuals named in the table have sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by them:
* Less than one percent (1%).
(1) Includes 3,333 shares of Common Stock which each director has the right to acquire within sixty (60) days through the exercise of options. Such shares are deemed to be outstanding for the purpose of computing the percentage of class beneficially owned by each of those directors, but not for the purpose of computing the percentage of class beneficially owned by any other person.
(2) Includes 1,666 shares of Common Stock which each director has the right to acquire within sixty (60) days through the exercise of options. Such shares are deemed to be outstanding for the purpose of computing the percentage of class beneficially owned by each of those directors, but not for the purpose of computing the percentage of class beneficially owned by any other person.
(3) Includes 2,500 shares of Common Stock which Mr. Antle has the right to acquire within sixty (60) days through the exercise of options. Such shares are deemed to be outstanding for the purpose of computing the percentage of class beneficially owned by Mr. Antle, but not for the purpose of computing the percentage of class beneficially owned by any other person.
(4) Includes 24,164 shares of Common Stock which current officers and directors have the right to acquire within sixty (60) days through the exercise of options. Such shares are deemed to be outstanding for the purpose of computing the percentage of class beneficially owned by the directors and executive officers as a group, but not for the purpose of computing the percentage of class beneficially owned by any other group.
(5) Mr Ronald I. Heller filed a form 13D on December 9, 1996 disclosing ownership of 197,683 shares. Mr Heller is not affiliated with the company or its subsidiaries in any capacity. At March 31, 1997, Mr. Heller reported ownership of 201,572 shares.
(6) Does not include 104,873 shares held by Ina J. Davis for which any beneficial interest is disclaimed.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Effective January 1994, Mr. Suarez agreed to personally guarantee certain bank loans for Suarez Housing Corporation. At March 31, 1997, the maximum aggregate principal amount of loans eligible for the guarantee was $13,969,000, and the outstanding principal amount of the loans guaranteed at March 31, 1997 was $3,772,000. The Company has agreed to indemnify Mr. Suarez in the event that this personal guarantee is called upon, and to the extent that Mr. Suarez makes any payments on account of the guarantees, he will succeed to the secured interests of the party to whom the payment is made. The Board of Directors has granted additional compensation to Mr. Suarez in consideration for his personal guarantees. The additional compensation is equal to one percent (1%) per annum of the maximum aggregate principal amount of loans that could be guaranteed. Mr. Suarez has voluntarily limited such compensation to $80,000 per year. During the fiscal year ended March 31, 1997, the Company paid $80,000 to Mr. Suarez in consideration for his personal guarantees.
During the fiscal year ended March 31, 1997, Suarez Housing Corporation paid $764,000 for twenty-eight finished building lots that it purchased from a partnership in which Mr. Suarez is a one-third partner and in which the brother of Mr. Suarez is a one-third partner. Such purchase was in the normal course of business and was at a price based on an independent appraisal.
Mr. James G. Farr, a Director, is the sole stockholder and President and Chief Executive Officer of Paramount Title Corporation. During the year ended March 31, 1997, Paramount Title Corporation provided settlement and title insurance services for substantially all the homes sold by Suarez Housing Corporation.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
GENERAL
The Compensation Committee administers the Company's executive compensation program and makes specific recommendations to the Board of Directors regarding the amount and form of compensation awarded to the executive officers of the Company and to other employees of the Company whose annual salaries exceed $75,000 per year. The Compensation Committee also administers the Company's Non-Qualified Stock Option Plan. The Compensation Committee is composed of three non-employee directors. See "The Board and its Committees."
The Company's executive compensation program is intended to enable the Company to attract, retain and motivate highly qualified executives for the Company and to create an incentive to increase stockholder value. This policy is implemented through the payment of salaries and bonuses and the granting of stock options.
COMPENSATION OF THE CHIEF EXECUTIVE OFFICER
In accordance with the terms of the Plan, on August 12, 1992 Suarez Housing Corporation entered into an employment agreement with Robert J. Suarez pursuant to which he serves as Chairman and President of Suarez Housing Corporation. See "Executive Compensation -- Employment Agreements". This employment agreement, which was approved by the Bankruptcy Court, governed the terms of Mr. Suarez' employment including his compensation and covered the period from August 12, 1992 through August 12, 1995, at which time Mr. Suarez' annual salary was $262,006. On June 22, 1995, the Compensation Committee recommended and the Board of Directors approved a three-year renewal of Mr. Suarez' employment agreement with an annual salary of $290,000 subject to annual CPI adjustments. Factors that were considered in making this recommendation included the performance of the Company and the compensation received by Chief Executive Officers of comparable companies. The market value of the Company's stock was not a factor considered in determining the Chief Executive Officer's compensation. All of Mr. Suarez' compensation is received from Suarez Housing Corporation. He does not receive any compensation directly from the Company. During the fiscal year ended March 31, 1997 a stock option was granted to Robert J. Suarez in the amount of 100,000 shares. The exercise price of $1.3125 was the fair market value on the date the option was granted.
COMPENSATION OF OTHER EXECUTIVE OFFICERS
The Compensation Committee made recommendations regarding the compensation of the Company's other executive officers. In those instances Mr. Suarez, the Chairman and President, who was recognized to be most familiar with the individual employees, made recommendations to the Committee as to the amount of the proposed remuneration. Factors considered with respect to each component of compensation were subjective, such as perceptions of the Company's and the individual's performance and any changes or planned changes in functional responsibility. Also considered were the prevailing levels of compensation within the markets where the Company operates. The market value of the Company's stock was not a factor considered in setting executive officer compensation.
Members of the Compensation Committee:
Dionel Cotanda Peter A. Davis Robert E. Everett
STOCK PERFORMANCE GRAPH
The following graph compares, on a cumulative basis, the yearly percentage change during the five years ended March 31, 1997 in (i) the total stockholder return on Common Stock of the Company with (ii) the total return on the Standard & Poor's 500 Index and with (iii) the total return on the Standard & Poor's Homebuilding Group Index. Such yearly percentage change has been measured by dividing (i) the sum of (a) the amount of dividends for the measurement periods, assuming dividend reinvestment, and (b) the price per share at the end of the measurement period less the price per share at the beginning of the measurement period, by (ii) the price per share at the beginning of the measurement period. The price of each unit has been set at $100 on March 31, 1992 for preparation of the graph.
[GRAPHIC OMITTED]
The first period shown on the graph (left of the double vertical bar) is from March 31, 1992 to August 12, 1992 and includes the shares of Common Stock that were outstanding and traded prior to the date of confirmation of the Company's Plan of Reorganization. Pursuant to the provisions of the Plan of Reorganization, 2,043,296 shares of Common Stock have been issued to creditors since August 12, 1992.
The second period shown on the graph (right of the double vertical bar) is from August 12, 1992 to March 31, 1997 and includes 2,784,395 shares of Common Stock.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS. The following consolidated financial statements are filed as part of this Annual Report on Form 10-K. (All other schedules are omitted as the required information is inapplicable, or the information is presented in the financial statements and related notes thereto):
Exhibit NUMBER
2.1 - Second Amended Disclosure Statement dated as of June 29, 1992 and Third Amended Joint Plan of Reorganization dated June 29, 1992 (incorporated by reference to Exhibit 2.4 to Annual Report on Form 10-K for the fiscal year ended March 31, 1993).
2.2 - Fourth Amended Joint Plan of Reorganization dated November 17, 1992 (incorporated by reference to Exhibit 2.5 to Annual Report on Form 10-K for the fiscal year ended March 31, 1993).
3.1(a) - Restated Certificate of Incorporation of Registrant (incorporated by reference to Exhibit 4 to Quarterly Report on Form 10-Q for the quarter ended September 30, 1989).
3.1(b) - Certificate of Amendment to the Restated Certificate of Incorporation of Registrant dated September 8, 1994 (incorporated by reference to Exhibit 3.1(b) to Annual Report on Form 10-K for the fiscal year ended March 31, 1995).
3.1(c) - Certificate of Amendment to the Restated Certificate of Incorporation of Registrant dated May 22, 1995 (incorporated by reference to Exhibit 3.1(c) to Annual Report on Form 10-K for the fiscal year ended March 31, 1995).
3.2 - By-laws of Registrant (incorporated by reference to Exhibit 3.2 to Annual Report on Form 10-K for the fiscal year ended March 31, 1989).
10.1 - Key Employee Agreement dated August 12, 1992 of Robert J. Suarez (incorporated by reference to Exhibit 10.17 to Annual Report on Form 10-K for the fiscal year ended March 31, 1993).
10.2 - Non-Qualified Stock Option Agreement dated August 12, 1992 between Robert J. Suarez and the Registrant (incorporated by reference to Exhibit 10.19 to Annual Report on Form 10-K for the fiscal year ended March 31, 1993).
10.3 - Guaranty dated as of January 20, 1993 by Robert J. Suarez to First Florida Bank, N.A. (incorporated by reference to Exhibit 10.23 to Annual Report on Form 10-K for the fiscal year ended March 31, 1993).
10.4 - Indemnity Agreement dated as of January 20, 1993 by Suarez Housing Corporation, the Registrant, and Robert J. Suarez to and for the benefit of First Florida Bank, N.A. (incorporated by reference to Exhibit 10.24 to Annual Report on Form 10-K for the fiscal year ended March 31, 1993).
10.5 - Mortgage Modification Agreement dated as of October 7, 1994 by and between Barnett Bank of Tampa and Suarez Housing Corporation (incorporated by reference to Exhibit 10.6 to Annual Report on Form 10-K for the fiscal year ended March 31, 1995).
10.6 - Consulting Agreement dated as of November 1, 1993 between Peter Davis and the Registrant (incorporated by reference to Exhibit 10.1 to Quarterly Report on Form 10-Q for the quarter ended December 31, 1993).
10.7 - Amended and Restated Master Loan Agreement dated as of November 17, 1995 between Nations Bank of Florida, N.A. and Suarez Housing Corporation (filed therewith).
10.8 - Second Amendment to Amended and Restated Loan Agreement and Partial Release of Guaranty Agreement dated as of October 30, 1995 by and between Barnett Bank of Tampa and Suarez Housing Corporation (filed therewith).
21 - List of subsidiaries of the registrant (incorporated by reference to Exhibit 21 to Annual Report on Form 10-K for the fiscal year ended March 31, 1994).
27 - Financial Data Schedule (filed herewith).
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: June 27, 1997 INTERNATIONAL AMERICAN HOMES, INC.
By: /S/ ROBERT J. SUAREZ ----------------------------- Robert J. Suarez Chairman of the Board of Directors and President (Principal Executive Officer)
By: /S/ ROBERT I. ANTLE ----------------------------- Robert I. Antle Executive Vice President, Secretary, Treasurer, and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
SIGNATURE TITLE DATE --------- ----- ----
/S/ ROBERT J. SUAREZ Chairman of the Board of Robert J. Suarez Directors and President June 27, 1997
/S/ ROBERT I. ANTLE Robert I. Antle Executive Vice President June 27, 1997 and Director /S/ WILLIAM D. AIKEN William D. Aiken Director June 27, 1997
/S/ DIONEL COTANDA Dionel Cotanda Director June 27, 1997
/S/ PETER A. DAVIS Peter A. Davis Director June 27, 1997
/S/ ROBERT E. EVERETT Robert E. Everett Director June 27, 1997
/S/ JAMES G. FARR James G. Farr Director June 27, 1997
/S/ BRIAN GIBNEY Brian Gibney Director June 27, 1997
/S/ JEFFREY D. PROL Jeffrey D. Prol Director June 27, 1997
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of International American Homes, Inc.:
We have audited the accompanying consolidated balance sheets of International American Homes, Inc. (a Delaware corporation) and subsidiaries as of March 31, 1997 and 1996, and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for the three years ended March 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of International American Homes, Inc. and subsidiaries as of March 31, 1997 and 1996, and the results of their operations and their cash flows for the three years ended March 31, 1997, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Washington, D.C. May 30, 1997
Item 14(a) Financial Statements
INTERNATIONAL AMERICAN HOMES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands)
The accompanying notes to consolidated financial statements are an integral part of these balance sheets.
INTERNATIONAL AMERICAN HOMES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
The accompanying notes to consolidated financial statements are an integral part of these balance sheets.
INTERNATIONAL AMERICAN HOMES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands, except per share amounts)
The accompanying notes to consolidated financial statements are an integral part of these statements.
INTERNATIONAL AMERICAN HOMES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Dollars in thousands)
The accompanying notes to consolidated financial statements are an integral part of these statements.
INTERNATIONAL AMERICAN HOMES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands)
The accompanying notes to consolidated financial statements are an integral part of these statements.
INTERNATIONAL AMERICAN HOMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 1997 AND 1996
NOTE 1 - THE COMPANY
International American Homes, Inc. (the "Company") was incorporated under the laws of the State of Delaware on April 27, 1983. The Company, through its subsidiaries, designs, builds, and sells single-family homes and townhomes and develops building lots. The Company currently conducts its building activities in Metropolitan Washington, D.C. and Florida.
On April 16, 1990, the Company and certain of its wholly-owned subsidiaries filed voluntary petitions for relief under Chapter 11, Title 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of New Jersey (the "Bankruptcy Court"). On August 12, 1992, the Bankruptcy Court entered an order confirming the Company's Plan of Reorganization (the "Plan" or "Plan of Reorganization").
Pursuant to the Plan, the Company made cash distributions to creditors of $4,149,000 through March 31, 1997. In addition, the Company issued 2,043,296 shares of the Company's common stock to the creditors. The issuance of the stock to the creditors resulted in the dilution of existing shareholders to 25 percent of the common stock outstanding.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of International American Homes, Inc. and all wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated.
REVENUE RECOGNITION
Revenues from sales are recognized at the time of closing, i.e., when a sufficient down payment has been made; financing has been arranged with a third party lender; title, possession and other attributes of ownership have been transferred to the buyer; and the Company is not obligated to perform significant additional activities after the sale.
REAL ESTATE INVENTORY
Real estate inventory is carried at the lower of cost or net realizable value. Net realizable value is defined as the estimated proceeds upon disposition less all future costs to complete and expected costs to sell. Construction costs are accumulated during the period of construction and charged to cost of sales under specific identification methods. Land and land development costs are charged to
cost of sales under specific identification methods or are amortized to cost of sales based upon the number of homes to be constructed in each community.
Interest costs related to projects in progress are capitalized during the construction period and charged to cost of sales as the related inventories are sold (see Note 5).
Land option costs are capitalized when incurred and either included as part of the purchase price when the land is acquired or charged to operations to the extent of any unrecoverable amount when the Company determines it will not exercise the option.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, receivables, mortgage notes and loans payable, accounts payable and accrued liabilities, and customer deposits approximate fair value due to the short-term maturities of these instruments.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
DEPRECIATION
Depreciation is computed on the straight-line method for all depreciable assets. Estimated useful lives range from two to five years. Maintenance and repairs are charged to expense as incurred. Major renewals and improvements are capitalized and depreciated over their estimated useful lives.
PER SHARE DATA
Net income per share is based upon the weighted average number of common shares outstanding during each period, as adjusted for the Reverse Stock Split. Primary and fully diluted earnings per share data is not presented as the effect of common stock equivalents is not material.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company generally considers all highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents.
NEW ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". This statement established financial and accounting reporting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill related to those assets to be held and used, and for long lived assets and certain identifiable intangibles to be disposed of. This statement is effective for financial statements with fiscal years beginning after December 15, 1995, although earlier application is encouraged. The Company adopted SFAS No. 121 on April 1, 1996. The impact of this statement to its financial statements is not material.
During the first quarter of 1997, the Financial Accounting Standards Board issued SFAS No.128, "Earnings per Share", and SFAS No. 129, "Disclosure of information about Capital Structure". SFAS No. 128 simplifies the standards for computing earnings per share ("EPS") , and makes them more comparable to international EPS standards. This statement replaces primary EPS with basic EPS and fully diluted EPS with diluted EPS and requires additional disclosures. This statement is effective for both interim and annual periods for financial statements ending after December 15, 1997. Pro forma basic EPS for the Company for the year ended March 31, 1997 would be $0.24 and proforma diluted EPS for the year ended March 31, 1997 would be $0.23.
SFAS No. 129 requires all entities to provide capital structure disclosures previously required by APB Opinion No. 15 and applies to entities that issue any securities other than ordinary common stock. This statement is effective for financial statements for periods ending after December 15, 1997. The Company believes the adoption of this statement will have no impact to current financial statement disclosures.
FRESH START REPORTING
The American Institute of Certified Public Accountants issued Statement of Position ("SOP") 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code". Pursuant to the guidance provided by SOP 90-7, the Company adopted fresh start reporting as of August 12, 1992, and all assets and liabilities were restated to reflect their reorganization value which approximated their fair value at the date of reorganization. Due to these adjustments combined with adjustments to write down real estate inventory which were recorded in prior periods, cost of home sales was $266,000 lower for the year ended March 31, 1995, than it would have been had it been based on previously recorded cost, and no different for the years ended March 31, 1997 and 1996.
RECLASSIFICATIONS
Certain amounts in the fiscal year 1996 consolidated financial statements have been reclassified to conform with the fiscal year 1995 presentation.
NOTE 3 - REAL ESTATE INVENTORY
Real estate inventory consists of the following (in thousands):
From time to time as part of the normal operations of the business, the subsidiaries of the Company have bought lots or land which the other subsidiary of the Company was obligated to buy from a third party seller or which the other subsidiary of the Company owned. Such transactions were at prices approximating fair market value and were not material to the financial statements taken as a whole.
NOTE 4 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following (in thousands):
Accounts payable and accrued liabilities as of March 31, 1997 and March 31, 1996, include liabilities of approximately $42,000 and $49,000, respectively, which represent cash to be distributed to the creditors pursuant to the Plan of Reorganization and accrued expenses related to the bankruptcy. The accrued estimated future cash distribution to creditors is an estimate of future cash distributions to creditors as defined by the Plan of Reorganization.
NOTE 5 - MORTGAGE NOTES AND LOANS PAYABLE
Mortgage notes and loans payable consist of the following (in thousands):
The weighted average principal amount outstanding during the year ended March 31, 1997 was $13,775,000. The maximum principal amount outstanding during the year ended March 31, 1997 was $13,967,000. The weighted average interest rate during the year ended March 31, 1997 was 9.12%. The weighted average interest rate at March 31, 1997 was 9.38%. The prime rate of interest at March 31, 1997 was 8.50%.
Acquisition and construction loans payable at March 31, 1997 are due as follows (in thousands):
Year Ending March 31, 1998 $13,637 Year Ending March 31, 1999 330 ============= Total $13,967 =============
The acquisition and construction loans payable are principally payable from sales proceeds, generally provide for extensions, and are all secured by real estate inventory. As of March 31, 1997, the Company had $24,252,000 of undrawn commitments for additional construction and land acquisition financing. Interest on the acquisition and construction loans payable is payable monthly.
The company capitalized interest of $1,373,000, $1,150,000 and $770,000 for the years ended March 31, 1997, 1996 and 1995, respectively.
NOTE 6 - INCOME TAXES
The Company has adopted SFAS No. 109, "Accounting for Income Taxes". SFAS No. 109 is an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. In estimating future tax consequences, SFAS No. 109 generally considers all expected future events other than enactments of changes in the tax law or rates.
The income tax provision consists of the following (in thousands):
The provision for income taxes at an effective rate of 30% differs from the Federal statutory corporate tax rate as follows (in thousands):
Temporary differences and carryforwards which give rise to a significant portion of deferred tax assets and liabilities for March 31, 1997 and 1996 are as follows (in thousands):
At March 31, 1997, the Company had Federal income tax loss carryforwards of approximately $1,550,000 that become available at approximately $150,000 per year through 2008. The Company has provided a valuation allowance on the net deferred tax assets which primarily results from the restricted use of net operating loss carryforwards.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
At March 31, 1997, the Company had commitments to purchase 744 finished building lots, providing for an aggregate purchase price of approximately $27,021,000 over a four year period. Substantial deposits will be forfeited if the Company is unable to satisfy these commitments.
Suarez Housing Corporation, a subsidiary of the Company, has an employment agreement with the Company's Chairman and President expiring August 12, 1998, currently providing for base compensation of $290,000 per annum.
At March 31, 1997, the Company had open letters of credit and guarantees totaling approximately $910,000 to secure performance obligations.
The Company currently occupies office space and leases model home furniture under operating lease agreements expiring at various dates through fiscal year 2000. The Company also leases storage space on a month to month basis. The combined rental expense incurred under these leases was $299,000, $275,000, and $215,000 for the years ended March 31, 1997, 1996, and 1995, respectively. The future minimum rental payments under these operating leases as of March 31, 1997 are as follows:
Year Ending March 31, 1998 $306,000 Year Ending March 31, 1999 187,000 Year Ending March 31, 2000 28,000 ================ Total $521,000 ================
The Plan of Reorganization provides for distributions equal to 50 percent of future cash flows (as defined in the Plan), if any, for the periods ending June 30, 1993 through June 30, 1998. The Company has calculated the cash flow (as defined in the Plan) for the period ended June 30, 1996 and has determined that there was no excess cash flow (as defined in the Plan) for that period and accordingly no distribution to creditors was required. Based on the Company's projections, it is anticipated that there will be no excess cash flow (as defined in the Plan) for the period ending June 30, 1997 and accordingly no distribution to creditors is expected to be required. During the year ended March 31, 1993, the Company estimated the initial liability for these potential distributions in the amount of $1,322,000 and such amount is included in Accounts Payable and Accrued Liabilities on the accompanying consolidated balance sheets.
Under the Company's Plan of Reorganization, the payment of dividends is not permitted during the six-year period beginning August 13, 1992. The Plan also provides that after August 12, 1998, the Company may not pay any cash dividends to stockholders until it has first paid an additional $1,250,000 to its creditors.
The Company's Plan of Reorganization does not permit the subsidiaries of the Company to pay any dividends to the parent company. The Plan further restricts the Company and its subsidiaries from acquiring debt securities from or loaning or advancing any money to any other party except in the ordinary course of business. The net assets at March 31, 1997 of the Company's two subsidiaries are as follows (in thousands):
Net Assets at March 31, 1997 (Unaudited) ---------------- Porten Sullivan Corporation $2,194 Suarez Housing Corporation 4,200
The Company is involved from time to time in litigation arising in the ordinary course of business, none of which is expected to have a material adverse effect on the Company's financial position or the results of operations.
NOTE 8 - COMMON STOCK AND STOCK OPTIONS
At the 1994 Annual Meeting of Stockholders, which was held on September 13, 1994, the stockholders approved a proposal to adopt certain amendments to the Company's Restated Certificate of Incorporation (i) to effect a 1-for-10 reverse stock split of the Company's issued and outstanding common stock and (ii) to change the number of authorized shares of common stock from 30 million to 10 million. The Amendments did not change the par value of the common stock, which remained at $.01 per share. The Amendments became effective on May 31, 1995 with the filing of a Certificate of Amendment with the Secretary of State of Delaware on May 31, 1995. The effect of the Reverse Stock Split has been retroactively reflected in the statements for all periods presented.
On February 13, 1997, an option for 100,000 shares of common stock at a purchase price of $1.31 per share was granted to the Chairman and President of the Company. The exercise price equals the market price on the date of grant. The option is exercisable over a four year period commencing one year after the date granted on a cumulative basis of 10%, 30%, 60% and 100%, respectively, for each year subsequent to the grant date. All shares must be purchased by February 12, 2007.
The Company has a Non-Qualified Stock Option Plan for which 150,000 shares of common stock have been reserved for issuance under this plan. All grants of options pursuant to this plan must be approved by the Board of Directors and the exercise price equals the market price at the date of grant. On February 9, 1993, pursuant to this plan, certain key employees of the Company were granted options to purchase 11,000 shares of common stock. These options are exercisable 100% currently. All of the shares must be purchased by February 9, 1998. In addition, on November 9, 1993, pursuant to this plan, the Company's former Executive Vice President, who retired on May 12, 1995, was granted options to purchase 10,000 shares of common stock. These options were exercised in full on May 12, 1996. 129,000 shares remain available to be issued pursuant to the Non-Qualified Stock Option Plan.
At the 1995 Annual Meeting of Stockholders, which was held on September 12, 1995, the stockholders approved a proposal to adopt a Non-Employee Directors Stock Option Plan. Pursuant to the Non-Employee Directors Stock Option Plan, options to purchase 5,000 shares of common stock were granted to each of the Company's non-employee Directors. Four Directors received options to purchase 5,000 shares each in June 1995, two Directors received options to purchase 5,000 shares each in September 1995 and one Director received an option to purchase 5,000 shares in September 1996 upon election as a Director. These options are exercisable 33% one year from the date of grant, 33% two years from the date of grant, and 34% three years from the date of grant. All options expire 5 years from the date of grant. All options granted must be approved by the Board of Directors and exercise price equals market at the date of grant.
A summary of the status of the Company's stock option plans and options granted at March 31, 1995, 1996, and 1997 and changes during the years then ended is presented in the table and narrative below:
The 145,000 options outstanding at March 31, 1997 have exercise prices between $0.50 and $1.81, with a weighted average exercise price of $1.30 and a weighted average remaining contractual life of 7.72 years. 29,800 of these options are exercisable with a weighted average exercise price of $1.19.
The fair value of each option grant is estimated on the date of grant using the Black- Scholes option pricing model with the following weighted average assumptions used for grants in fiscal years 1997 and 1996, respectively: risk-free rates of return of 6.42% and 6.00%; expected dividend yields of 0.00% and 0.00%; expected lives of 9.76 years and 5.00 years, and expected volatility of 153.45% and 153.45%.
The Company accounts for these plans under APB Opinion No. 25, under which no compensation cost has been recognized. Had the compensation cost for these plans been determined consistent with SFAS No. 123, the company's net income and earnings per share would have been reduced to the following pro forma amounts:
1997 1996 -------- -------- Net Income: As Reported $650,000 $943,000 Pro Forma 582,000 917,000
Net income per share: As Reported $0.24 $0.35 Pro Forma $0.21 $0.34
Because the SFAS No. 123 method of accounting has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years.
NOTE 9 - CONDENSED FINANCIAL STATEMENTS OF CONSOLIDATED FINANCE SUBSIDIARIES
The Company's wholly-owned finance subsidiaries were established to sell collateralized mortgage obligations through participation in various multi-builder bond programs. In these sales, which last occurred in 1987, the Company originated and pooled mortgage loans which were then pledged as collateral for bonds payable. The interest rates on the mortgage loans which comprise the collateral for bonds payable, roughly equate with the interest rates on the related bonds payable.
Condensed financial information is as follows (in thousands):
Condensed Statements of Income (Unaudited)
Year Ended March 31, ---------------------------------------- 1997 1996 1995 --------- --------- ----------
Revenues $ 483 $ 647 $ 791 ========= ========= ========== Income before income taxes $ 12 $ 17 $ 22 ========= ========= ==========
NOTE 10 - RELATED PARTY TRANSACTIONS
The Company's Chairman and President has personally guaranteed bank loans in the aggregate maximum amount of $13,969,000 for Suarez Housing Corporation, a subsidiary of the Company, at a fee of one percent of the amount guaranteed, not to exceed $80,000 per year. At March 31, 1997, the outstanding principal amount of loans guaranteed by the Company's Chairman and President was $3,772,000. The Company has agreed to indemnify the President and Chairman in the event that this personal guarantee is called.
The Chairman and President of the Company is a one third partner in a partnership from which the Company bought 28 finished building lots during the year ended March 31, 1997 for $764,000, a price which approximates fair market value.
A member of the Board of Directors is Vice President and a Director of a company which during the year ended March 31, 1997 sold lumber and certain other building material products in the amount of approximately $3,240,000 to Suarez Housing Corporation, a subsidiary of the Company. Suarez Housing Corporation purchases all of its requirements for those products from this company.
Another member of the Board of Directors is Executive Vice President of a company which during the year ended March 31, 1997 sold heating, ventilating and air conditioning systems in the amount of approximately $671,000 to Porten Sullivan Corporation, a subsidiary of the Company. Porten Sullivan Corporation purchases all of its requirements for heating, ventilating and air conditioning systems from this company.
Mr. Peter A. Davis, a member of the Compensation Committee of the Board of Directors, has served as a consultant to the Company since November 1992. The Company entered into a one-year consulting agreement with Mr. Davis commencing November 1, 1992. This agreement was subsequently renewed under similar terms and conditions for four additional one-year terms which expire on November 1, 1997. The agreement provides for Mr. Davis to assist the Company in a broad range of areas. Mr. Davis receives compensation at the rate of $1,000 per day with a minimum compensation of $42,000 per year. During the fiscal year ended March 31, 1997, the Company paid $39,000 to Mr. Davis for his consulting services.
Mr. Peter A. Davis entered into a Participation Agreement with Suarez Housing Corporation for the construction and sale of custom homes in Martin County, Florida. Suarez Housing Corporation will own the property acquired and provide administrative support services. Mr. Davis will manage construction and sales activities. The parties have agreed to equally fund capital contributions as required. Profits or losses will be shared equally. Mr. Davis agreed to fund the construction costs for the initial home and received reimbursement on such funds advanced at the monthly effective rate paid on bank borrowings by Suarez Housing Corporation. Construction and delivery of the initial home was completed in February 1997. An initial payment of $27,500 was made in March 1997 in accordance with the profit sharing formula in the Participation Agreement.
Mr. James G. Farr, a Director, is the sole stockholder and President and Chief Executive Officer of Paramount Title Corporation. During the year ended March 31, 1997, Paramount Title Corporation provided settlement and title insurance services for substantially all the homes sold by Suarez Housing Corporation.