Annual Report (Form 10-K), fiscal year 1993

Item 1. Business
Starrett Housing Corporation was organized in New York in 1922. Through its subsidiary Levitt Corporation ("Levitt"), the Company engages in the construction and sale of single-family homes and garden apartments in the United States and Puerto Rico. See "Levitt Corporation." Over the years Starrett and its subsidiaries have constructed a wide range of office, industrial, public and institutional buildings, among the most notable being the Empire State Building, the AT&T World Headquarters, Citicorp Center, Chemical Bank World Headquarters and the New York State Javits Convention Center, and many well-known residential communities and developments, including Starrett City, Manhattan Park at Roosevelt Island and Trump Tower in New York City. The Company today is actively engaged in various construction, development, management and related businesses. See "Starrett's Construction Activities," "Development Activities" and "Management and Rental Services."
Unless the context otherwise requires, references to the "Company," the "Registrant" or "Starrett" include Starrett Housing Corporation and/or one or more of its subsidiaries.
Levitt Corporation
Levitt's operations include sale of single family detached homes and garden apartments, development of rental apartments, mortgage banking and the development and management of senior citizen health and congregate care facilities.
Housing
Levitt's residential housing operations are concentrated in Florida and Puerto Rico. In Puerto Rico, Levitt believes it is the largest home builder and has been active on the island since 1960. Florida operations were started in 1978 and are currently conducted on Florida's southeast and southwest coasts.
During 1993, several new sites were acquired in Florida which were opened or are scheduled for opening for sales in 1994. Although these projects are in the beginning phase of marketing, there has been a strong initial response from home-buyers to these new subdivisions. During 1994, Levitt expects an increase in sales resulting from these new subdivisions in Florida. Additionally, as the older projects are being completed, contracts are being entered into for new sites.
Levitt has concentrated its significant Puerto Rican homebuilding activities in the greater San Juan area. In recent years, Puerto Rico operations have provided the majority of revenue and profits for Levitt. Levitt has a major development called Encantada and other subdivisions in the San Juan metropolitan area.
Encantada is a planned unit development located in a suburb of San Juan with excellent access to schools, shopping and business centers.
Encantada is planned for 2,600 homes of which more than 1,300 homes have been contracted for sale with over 1,000 deliveries as of February 28, 1994. Both single family homes and garden apartments are offered for sale at various prices in the community. The Company believes that Encantada's success can be attributed to the quality of the community, quality of the housing and the family lifestyle provided. With approximately 1,300 more homes to be sold, Encantada, together with the region's other projects, is expected to continue as an important source of revenues and profits for the Company.
With the new Florida developments being introduced during 1994, Levitt's domestic operations are expected to be profitable and Puerto Rico should maintain its level of profitability.
Levitt's performance in 1993 reflects the finalization of its program involving the disposition of high cost land in Virginia, New York and New Jersey as these areas were phased out. The disposition of land by selling and constructing homes at reduced prices resulted in a loss or minimal profit, but accelerated the receipt of cash from such dispositions. The disposition program has been virtually completed in 1993.
Levitt's business is affected by other issues such as housing affordability, increased land costs, legislative growth restrictions, sewer and water moratoriums, possible changes in the Internal Revenue Code, including changes in Section 936 of the Internal Revenue Code relating to the taxability of corporations doing business in Puerto Rico, and increasing infrastructure demands.
Levitt's backlog of homes contracted for sale at December 31, 1993 was $32,320,000 compared to $33,765,000 at December 31, 1992. Backlog consists of units which are under sales contract but where title has not yet passed, and comprises completed and uncompleted houses as well as houses where construction has not yet begun.
The following table sets forth information concerning homes contracted for sale (net of cancellations during each period), housing units delivered (construction completed and title passed), and backlog:
The Company's backlog at February 28, 1994 increased significantly from the amount at December 31, 1993 and February 28, 1993. This increase is attributable to the higher level of sales experienced in the Company's new projects in Florida and Puerto Rico.
The backlog as of February 28, 1994 includes 23 units under contract with a contract value of $3,500,000 relating to a joint venture in which the Company has a 50% interest.
After the initial contract has been received, contracts for the sale of houses may be canceled at or prior to closing for various reasons, including failure of the buyer to make the remainder of the required contract deposit or qualify for mortgage financing and default by the buyer. Levitt retains the buyer's deposit only if cancellation results from default by the buyer, except in Puerto Rico where under local law Levitt can retain only a portion of the deposit. When computing homes contracted for sale and backlog, Levitt makes no deduction for future cancellations, but nets cancellations as they occur against sales contracts. Levitt generally estimates that of the sales contracts entered into by buyers, approximately 65% have historically resulted in delivered homes. Contracts of sale are not recorded as revenues until the houses have been completed and title delivered.
Levitt generally builds subdivisions on undeveloped suburban land having access to water and sewer services, although it does occasionally purchase fully developed land. Development plans must be approved by local authorities, which may take two years or more
after the signing of a purchase contract. See "Regulation of the Company's Activities," page 8.
Levitt provides home purchasers with warranties against construction defects for a period of up to two years from the date of purchase. In Puerto Rico there is a statutory warranty for certain construction defects which appear generally within ten years after completion.
Rental Apartment Development
In 1991, Levitt, in joint venture with an established apartment developer, constructed its first apartment project in Florida. This 224 unit apartment complex was completed and sold in 1992 to an institutional investor at a substantial profit. The Company and the joint venture partner have completed a second complex and have contracted to sell it to an institutional investor at a profit in 1994. A third development with Levitt's joint venture partner is scheduled to begin in the second quarter of 1994 and a fourth project is projected to begin in the last quarter of 1994.
Levitt's current policy is to develop, lease and sell the apartment projects and not hold them for investment. The apartment development program is an integral part of Levitt's business and is anticipated to provide it with a continuous source of income. It is the Company's plan to develop at least one or more apartment projects each year.
Mortgage Banking
Levitt Mortgage Corp. ("Mortgage") is a full service mortgage lender that processes and originates loans in Puerto Rico and processes mortgage loans domestically. Mortgage is a designated approved direct endorser of FHA loans in Puerto Rico but does not service loans.
In Puerto Rico, Mortgage also acts as a mortgage banker for third parties and processes and issues the mortgages it underwrites. These mortgages are sold to investors in accordance with firm purchase commitments with the investors. Mortgages are solicited through four offices in the San Juan area. Mortgage is the fifth largest mortgage banker in Puerto Rico.
Health Care Facilities and Management
Levitt Care Corporation ("Care") develops and manages adult congregate care ("ACLF") and assisted living facilities ("AL"). In 1987, the Company developed Northpark, a 376 unit ACLF in Hollywood, Florida. The facility was sold in 1989, and Care continues to manage it. Care is seeking to acquire existing ACLFs and AL facilities to rehabilitate and market them on a profitable basis and to develop sites for AL complexes.
The facilities provide the resident, on a rental basis, meal service, weekly cleaning of the residents apartment, social activities and scheduled transportation to doctors'
offices, shopping and cultural events. The rental cost of an apartment, is based on the size of the unit and the level of service required by the resident. In addition to the independent level of care in Northpark, an assisted living facility is available to the residents. This facility serves those individuals that require a greater level of care; such as assistance with bathing, dressing and eating.
Management believes that the growing elderly population will increase the need for ACLF and AL facilities. Therefore, Care is seeking opportunities to expand in these areas.
Development Activities
In its development activities, the Company's services, in addition to those of a construction manager or general contractor, may include initial planning and development, acquisition of the property, arranging for financing and ownership of the project typically through general or limited partnerships, and providing management, consulting and related services. The Company anticipates marketing its development projects to investors or other purchasers, based principally on cash flow, capital appreciation and other non-tax considerations, and may in some instances retain ownership of such projects. In connection with its sale of projects, the Company may provide guarantees of completion and cash flow for varying periods. The Company has focused its development efforts in the areas of rental housing and projects sponsored by municipalities.
The Company is proceeding with certain development projects. While the Company has generally been successful in developing such projects, these projects are in differing stages of development, and there can be no assurance that any particular project will be completed.
Ownership of Partnership Interests
The Company reviews from time to time projects in which it acts as a general partner or in which it has an equity interest (which for the most part have a low income tenancy subsidized in whole or in part by government-assistance programs) to determine the possibility of refinancing, resyndicating, selling, converting to condominiums, or co-oping such projects to obtain fees and other economic benefits.
The Company has three projects located on the Upper West Side of Manhattan, in which it has a 50% residual partnership interest, with respect to which the Company has made application for incentives under the Low Income Housing Preservation and Resident Homeownership Act ("LIHPRHA"). LIHPRHA provides owners of certain federally subsidized projects with financial incentives in return for their agreement to continue the use of a project as affordable housing in lieu of converting the project to fair-market rentals or ownership. The financial incentives are designed to provide an owner with the approximate economic equivalent of what an owner would have received had the project discontinued its low income use and converted to a market rate rental or ownership, based upon an appraisal valuation and underwriting process set forth in the statute regulations and HUD guidelines.
In May 1992, the Company commenced processing the first of its projects with the United States Department of Housing and Urban Development ("HUD"). On April 28, 1993, HUD provided the Partnership with a Value Determination Letter establishing a substantial value for the project, and in August and October 1993 HUD provided technical comments on the Plan of Action necessary to complete the processing. HUD has notified the Company that it is reversing its prior Value Determination and consequently will require the Partnership to reprocess the project, using a different formula for valuation, presently being developed by HUD. Under HUD's revised formula, the project may have a substantially diminished value. The Company disagrees with the reversal of HUD's prior Value Determination position, has so notified HUD and discussions are in process regarding this matter. In light of the foregoing, the amount of cash proceeds and profits, if any, the Company could receive for its 50% residual interest in the project as well as the time required to complete the processing is uncertain. The revised HUD position also affects processing under LIHPRHA for the two similar projects in which the Company owns a 50% residual interest located on the Upper West Side of Manhattan. If sustained, the revised HUD position will affect all New York projects of a similar nature.
Starrett's Construction Activities
Through its HRH Construction Corporation subsidiary ("HRH"), the Company primarily acts as construction manager in the construction of institutional, office and residential projects, most of which are located in the New York Metropolitan area. HRH builds projects either as a construction manager on a cost plus fee basis or a general contractor in which case it assumes the construction risk. The construction management and general contracting fees and other income earned by HRH during 1993, 1992 and 1991 were $4,000,000, $5,396,000 and $8,117,000, respectively. See "Segment Information," page 8.
As a result of the economic slowdown, HRH has focused its activities on institutional construction and construction funded by City, State and Federal governments and is seeking to diversify into new areas of construction, all of which are subject to intense competition.
In the case of projects where HRH acts as general contractor rather than construction manager (which has included projects in which the Company acts as a developer or has an ownership interest), the Company is required from time to time, as is customary in projects of this kind, to furnish payment and performance bonds assuring payment to subcontractors. The Company believes its bonding capacity is adequate for both present and projected requirements. The aggregate amount of bonds or other security the Company can obtain at any one time is dependent upon its overall financial strength.
HRH's estimated backlog of fees for development work and uncompleted construction in connection with construction projects, including fees for projects where development work has begun but contracts have not yet been executed, was $8,151,000 at December 31, 1993 as compared to $8,158,000 and $9,409,000 at the end of 1992 and 1991, respectively. HRH is actively seeking to increase its backlog of business, particularly in the governmental and institutional sectors.
Management and Rental Services
Grenadier Realty Corp. ("Grenadier") is licensed in New York, New Jersey and Connecticut and manages many different properties with rental, condominium and cooperative residential units, commercial and retail space, and garage parking. Grenadier provides a full range of real estate management services, including on-site administration, accounting, security, maintenance, procurement, capital budgeting and owner and tenant communication programs to private owners and to governmental and institutional property owners as well as banks and thrift institutions. Grenadier operates two power plants and provides technical services for the development of energy conservation programs. In addition, Grenadier provides technical support for the implementation and operation of reliable, cost-effective electrical and mechanical building systems. Grenadier also designs security systems and provides security services to a variety of residential, commercial and industrial clients.
Regulation of the Company's Activities
The development business and home building industry in which the Company is engaged have, in the last several years, become subject to increased environmental, building, land use, zoning and sales regulations administered by various federal, state and local authorities, which affect construction activities as well as sales activities and other dealings with customers. Additionally, sewer moratoriums have been imposed from time to time in Puerto Rico which have caused delays in the delivery of homes to customers. The Company must obtain for its development and housing activities the approval of numerous governmental authorities which often have wide discretion in such matters. Changes in local circumstances or applicable law may necessitate applications for additional approvals or the modification of existing approvals. Compliance with these regulations has extended the time required to market projects by prolonging the time between the initiation of projects and the commencement and completion of construction. The Company is currently in various stages of securing governmental approvals for its development and homebuilding projects. Delay or inability to obtain all required approvals for a project could have a materially adverse effect on the marketability or profitability of such a project.
Segment Information
The Company's operations consist of (i) the development, management and ownership of real estate properties; (ii) the single-family home and garden apartment business conducted through its Levitt subsidiary; and (iii) the supplying of construction services through its HRH subsidiary. The Company groups its business into these three segments. The following table sets forth the Company's revenues and operating profit attributable to the respective segments of its operations for each of the years 1991 through 1993, and the identifiable assets attributable to the respective segments as at the end of each of those years:
Operating profit is comprised of revenues less operating expenses. In computing operating profit, general corporate expenses and income taxes have not been deducted.
There were no individual customers from which the Company derived 10% or more of its revenues in 1991, 1992 or 1993.
Competition
The construction, development and home building industries in all of the areas in which the Company operates are highly competitive, and the Company competes with major concerns as well as with smaller contractors or builders, some of whom have greater financial resources than the Company.
Raw Materials and Equipment
Substantially all the materials used by the Company in projects now under construction, including fixtures, appliances and systems, are readily available from many sources. The Company has from time to time experienced some shortages, delays and increased costs in connection with material shortages and increases in material prices but the Company does not believe the effect to have been significant.
Employees--Labor Relations
The Company directly employed, at December 31, 1993, a total of approximately 1,100 persons. The Company considers that it has satisfactory relations with the unions whose members it employs.
Item 2.



Item 2. Properties
The Company leases 25,000 square feet of space for its corporate offices and its main office for the construction management business, HRH, located at 909 Third Avenue in New York City. The lease for such space, which it occupied in 1973, expires in 1997. The Company also maintains a mobile field office at each of its construction sites.
Levitt leases approximately 5,700 square feet of office space which it uses for its executive office and main office for its Florida homebuilding operation in Boca Raton, Florida, and also leases office space in San Juan, Puerto Rico.
Item 3.

Item 3. Legal Proceedings
The Company is involved in litigation and claims incident to the normal conduct of its business. Management believes that such litigation and claims will not have a materially adverse effect on the Company's business operations.
Item 4.

Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
Executive Officers of the Company
The following table sets forth the names and ages of all executive officers of the Company, the positions and offices with the Company held by each such person, and the period during which each such person has served as an executive officer.
The term of office of each executive officer continues until the first meeting of the Board of Directors of the Company following the next annual meeting of shareholders, and until the election and qualification of such officer's successor. There is no family relationship between the executive officers listed above, or between such executive officers and directors. All of the executive officers except Paul Milstein have been principally engaged in his present employment for more than five years. Mr. Milstein became Chairman on January 1, 1994, and for more than five years has been active as a real estate developer and investor.
PART II
Item 5.

Item 5. Market for the Company's Common Equity and Related Stockholder Matters
On March 16, 1994, there were 792 record holders of the Company's common stock and approximately 1,500 additional persons whose shares of Common Stock were held in street name. Such common stock is listed on the American Stock Exchange, which is the principal market on which such stock is traded. High and low sales prices on the American Stock Exchange for the Company's common stock during the last two years have been as follows:
The Company paid an extraordinary dividend of $.25 per share in 1992. While the directors will consider the payment of dividends in 1994, at this time it is not anticipated that the Company will pay dividends on its common stock.
Item 6.

Item 6. Selected Financial Data
Starrett Housing Corporation and Subsidiaries
Item 7.

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
1993 Compared to 1992
During the year ended December 31, 1993 the Company had income from operations of $2,140,000 ($.34 per share) compared to $284,000 ($.04 per share) for the year ended December 31, 1992. In addition, during the year ended December 31, 1992, the Company reported an extraordinary gain net of tax of $824,000 and an accounting change of $1,287,000 or $.13 and $.20 per share, respectively, which when combined with the income from operations increased net income to $2,395,000 ($.37 per share). Earnings per share were based on average shares outstanding of 6,356,000 and 6,417,000 in 1993 and 1992, respectively.
The Company's revenues increased $10,327,000 compared with the similar period in 1992. This increase was primarily attributable to an increase in revenues from the Company's Levitt division resulting from an increase in the number of houses delivered in the Company's Puerto Rico region. The increase in revenues from Levitt was offset by a decrease in revenues in the Company's development and construction management divisions in 1993. In 1992 revenues also included Levitt's Joint Venture share of the gain on the sale of a rental apartment project. Levitt's backlog of homes contracted for sale at December 31, 1993 was $32,320,000 compared to $33,765,000 at December 31, 1992. The backlog at February 28, 1994 was $63,179,000 as compared to $42,943,000 at February 28, 1993.
General and administrative expenses (which were reduced for all divisions other than Grenadier which showed an overhead increase for the year) declined by $3,044,000 in 1993 following a $2,200,000 reduction in 1992 as a result of continuing cost reduction programs. Interest expense decreased by $655,000 for 1993 as compared to 1992 primarily as a result of both a decrease in borrowings and a decline in interest rates.
Levitt's interest, real estate taxes and sales costs incurred with certain properties are capitalized in order to achieve better matching of costs with revenues. The Company's interest incurred on loans was $3,893,000 in 1993 and $5,964,000 in 1992, of which $2,959,000 in 1993 and $4,150,000 in 1992 was capitalized by Levitt in its operations. Levitt amortized capitalized interest of $5,802,000 in 1993 and $5,177,000 in 1992 to construction and related costs.
HRH's estimated backlog of fees for development work and uncompleted construction in connection with construction projects, including fees for projects where development work has begun but contracts have not yet been executed, was $8,151,000 at December 31, 1993 as compared to $8,158,000 and $9,409,000 at the end of 1992 and 1991, respectively. HRH is actively seeking to increase its backlog of business, particularly in the governmental and institutional sectors, while at the same time continuing to reduce its overhead (overhead was reduced 21%, 25% and 20% in 1993, 1992 and 1991, respectively) to reflect the lower level of business activity.
Grenadier continued its steady profitability in 1993 and has expanded its management services to private owners and institutional property owners as well as banks and thrift institutions.
The Company has three projects located on the Upper West Side of Manhattan, in which it has a 50% residual partnership interest, with respect to which the Company has made application for incentives under the Low Income Housing Preservation and Resident Homeownership Act ("LIHPRHA"). On April 28, 1993, HUD provided the Partnership with a Value Determination Letter for the first of its projects establishing a substantial value for the project, and in August and October 1993 HUD provided technical comments on the Plan of Action necessary to complete the processing. HUD has notified the Company that it is reversing its prior Value Determination and consequently will require the Partnership to reprocess the project, using a different formula for valuation, presently being developed by HUD. Under HUD's revised formula, the project may have a substantially diminished value. The Company disagrees with the reversal of HUD's prior Value Determination position, has so notified HUD and discussions are in process regarding this matter. In light of the foregoing, the amount of cash proceeds and profits, if any, the Company could receive for its 50% residual interest in the project as well as the time required to complete the processing is uncertain. The revised HUD position also affects processing under LIHPRHA for the two similar projects in which the Company owns a 50% residual interest located on the Upper West Side of Manhattan. If sustained, the revised HUD position will affect all New York projects of a similar nature. See "Business - Ownership of Partnership Interests," page 6.
1992 Compared to 1991
During the year ended December 31, 1992 the Company had net income of $2,395,000 ($.37 per share) as compared with $1,384,000 ($.21 per share) in 1991. The accounting change and the extraordinary item described below added $1,287,000 and $824,000 or $.20 and $.13 per share, respectively, to net income for the year ended December 31, 1992. Earnings per share were based on average shares outstanding of 6,417,000 for 1992 and 6,495,000 for 1991.
Effective January 1, 1992, the Company adopted Statement of Financial Accounting Standards No. 109 - Accounting for Income Taxes, which requires the Company to adjust deferred taxes for the temporary differences between the tax bases of its assets and liabilities and the amounts reported in the financial statements at enacted statutory tax rates.
In September 1992, the Company repurchased a $2,600,000 outstanding mortgage loan (including accrued interest) for approximately $1,300,000, including transaction costs. The extraordinary gain, net of income tax effect, was $824,000.
In October 1992, Roosevelt Island Associates ("RIA"), a partnership in which a Company subsidiary is one of several partners, defaulted on its mortgage payment obligations to the New York City Housing Development Corporation. The default was cured on January 15, 1993, by RIA entering into a bond refunding transaction with respect to its FHA insured $157,500,000 mortgage loan. This transaction resulted in an interest rate reduction to approximately 6.66%, from a prior rate of approximately 9.7%. The refinancing reduced RIA's debt service by $4,200,000 annually, thereby substantially reducing RIA's operating deficits which the Company, as a joint venture partner, has a continuing obligation to fund. As part of the refunding transaction, the Company provided cash flow guarantees to the investor partner.
HRH reported a small profit for 1992. Its fee backlog decreased to $8,158,000 at December 31, 1992 as compared with $9,409,000 at the end of 1991.
The Company's development activities also contributed to profits during 1992 with the recognition of $1,000,000 of income from its Livingston Plaza project, and the successful development, construction and sale by its Levitt division of a rental apartment project to a major institutional investor at a $1,800,000 profit.
Grenadier continued its steady profitability in 1992. Grenadier is now providing management services to private owners and to institutional property owners as well as banks and thrift institutions.
The Company's Levitt subsidiary reported income before taxes for 1992 of $864,000 as compared with a loss before taxes of $4,575,000 in 1991. The income in 1992 was before giving effect to the extraordinary gain on the repurchase of debt or the accounting change previously described. Sales in Puerto Rico increased to $48,616,000 for the year compared with $35,598,000 in 1991 and Levitt's company-wide backlog was $33,765,000 at December 31, 1992 compared with $27,043,000 for 1991. Domestically, Levitt's profitability was adversely affected by slow sales in certain of its projects. Levitt continued with its aggressive land disposition program, and in 1993 largely completed the liquidation of certain of its domestic land positions by selling and building homes at reduced prices. As a result of this program, in 1992 the Company increased its non-cash reserve by $1,810,000 to reduce the carrying value of its real estate inventory to its estimated net realizable value.
Revenues increased $766,000 for the year 1992 compared with the similar period in 1991 as a result of an increase in revenues from Levitt of $10,327,000, offset principally by a decrease in revenues recognized upon the completion of a large project, Livingston Plaza in 1991, which was built and sold to The New York City Transit Authority, as well as a decrease in revenues of the Company's HRH division.
General and administrative expenses (which were reduced for all divisions other than Grenadier which showed an overhead increase for the year) were reduced $2,200,000 in 1992 following a $3,000,000 reduction in 1991 as a result of continuing cost reduction programs. Interest expense decreased by $1,000,000 for 1992 as compared to 1991 primarily as a result of both a decrease in borrowings and a decline in interest rates.
Levitt's interest, real estate taxes and sales costs incurred with certain properties are capitalized in order to achieve better matching of costs with revenues. The Company's interest incurred on loans was $5,964,000 in 1992 and $8,264,000 in 1991, of which $4,150,000 in 1992 and $5,314,000 in 1991 was capitalized by Levitt in its operations. Levitt amortized capitalized interest of $5,177,000 in 1992 and $4,909,000 in 1991 to construction and related costs.
Cash Flow and Liquidity
While the Company presently has various banking relationships, it does not have any formal lines of credit other than in connection with its Levitt subsidiary as described below.
Levitt's business and earnings are substantially dependent on its ability to obtain financing on acceptable terms for it's activities. The Company has a $18,400,000 balance on a term loan, previously a revolving credit loan which was converted to a term loan in November 1991. As of December 31, 1993, the loan agreement provides for semi-annual principal payments of $1,000,000 in January and July in 1994 and 1995, a $3,000,000 payment in January 1996, a $1,000,000 payment in July 1996, a $3,000,000 payment in January 1997 and a final payment of $7,400,000 in July 1997.
Levitt's Puerto Rico operations are partially financed by an unsecured $15,000,000 revolving credit facility with a Puerto Rico bank. As a result of greater than anticipated house sales in Levitt's Puerto Rico Encantada planned community in 1992 and a resultant increase in capital needed to complete such homes, Levitt obtained a short-term secured loan for $6,000,000 in June 1992. This facility was repaid in full in March 1993. In September 1993, the Puerto Rico mortgage branch operations entered into a $3,000,000 revolving credit agreement, with a Puerto Rico bank to finance the warehousing of mortgage note receivables originated by the mortgage operation. As of December 31, 1993, no amount was outstanding on its warehousing line of credit.
Levitt also finances the acquisition of property for its operations on deferred payment terms provided by sellers of such property. Levitt anticipates that funds generated by operations, together with its existing credit relationships, will provide it with adequate financial resources to satisfy its operating needs and to meet its anticipated capital requirements for new projects.
The timing of introducing Levitt's new projects to the market, weather conditions in certain of Levitt's regions, and traditional periods of greater customer activity have tended to create seasonal trends in Levitt's residential home building activities. Historically, the number of homes delivered has been greater in the second half of the calendar year.
Net Operating Loss Carryforwards
At December 31, 1993 the Company had net tax operating loss carryforwards which can be utilized against future taxable income of approximately $12,957,000 expiring in 2001 through 2008. Under current tax laws, if the aggregate voting stock owned by the Company's 5% shareholders increases over the lowest percentage owned by such shareholders during a three-year period by an amount exceeding 50% of Starrett's total voting stock, then Starrett's utilization of the net tax operating loss carryforwards could be limited to an amount per year equal to the market value of all Starrett equity securities multiplied by an adjusted federal long-term interest rate. In general, all non-5% shareholders are treated as a single 5% shareholder for the purpose of such calculations. Such an ownership change might be caused by sales of shares by the Company's shareholders, repurchases of shares by the Company, certain reorganizations, or certain other transactions.
Inflation
The Company believes that inflation has not had a material adverse effect upon its construction, development and management business. Levitt has from time to time been
adversely affected by high interest costs and increases in material and labor costs which it has not been able to pass through entirely to home purchasers.
Item 8.


Item 8. Consolidated Financial Statements and Supplementary Data
See "Table of Contents to Consolidated Financial Statements and Financial Statement Schedules," page 19.
Item 9.

Item 9. Disagreements on Accounting and Financial Disclosure
None
PART III
The information called for by Items 10, 11, 12 and 13 is incorporated herein by reference from the following portions of the definitive proxy statement to be filed by the Company in connection with its 1994 Meeting of Shareholders.
Item Incorporated from
Item 10.



Item 10. Directors and Executive "Election of Directors" Officers of the Company
Item 11.

Item 11. Executive Compensation "Compensation and Certain Transactions"
Item 12.

Item 12. Security Ownership of "Information as to Certain Beneficial Stock Ownership" Owners and Management
Item 13.

Item 13. Certain Relationships "Compensation and and Related Transactions Certain Transactions"
PART IV
Item 13. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) See the accompanying Table of Contents to Consolidated Financial Statements and Schedules and the accompanying Exhibit Index.
(b) Reports on Form 8-K: The Registrant did not file any report on Form 8-K during the quarter ended December 31, 1993.
TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
Financial Statement Schedules, other than that listed above, are omitted because of the absence of the conditions under which they are required, or because the information required therein is set forth in the financial statements or the notes thereto.
[DELOITTE & TOUCHE LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders of Starrett Housing Corporation
We have audited the consolidated financial statements and the related financial statement schedule of Starrett Housing Corporation and consolidated subsidiaries, listed in the foregoing table of contents. These consolidated financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule 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 consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company and its consolidated subsidiaries at December 31, 1993 and 1992 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1993 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.
As discussed in note 6, the Company changed its method of accounting for income taxes effective January 1, 1992 to conform with Statement of Financial Accounting Standard No. 109.
Deloitte & Touche
March 21, 1994
STARRETT HOUSING CORPORATION AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED FINANCIAL POSITION December 31, 1993 and 1992 (In Thousands)
See Notes to Consolidated Financial Statements
STARRETT HOUSING CORPORATION AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED OPERATIONS For the Years Ended December 31, 1993, 1992 and 1991 (In Thousands Except Per Share Data)
See Notes to Consolidated Financial Statements
STARRETT HOUSING CORPORATION AND SUBSIDIARIES STATEMENTS OF STOCKHOLDERS' EQUITY For the Years Ended December 31, 1993, 1992 and 1991 (In Thousands Except Share Data)
See Notes to Consolidated Financial Statements
STARRETT HOUSING CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 1993, 1992 and 1991 (In Thousands)
See Notes to Consolidated Financial Statements
STARRETT HOUSING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Principles of Consolidation:
The consolidated financial statements include the accounts of Starrett Housing Corporation (the "Company") and all of its subsidiaries. Intercompany accounts and transactions have been eliminated in the consolidated financial statements.
B. Recognition of Income:
The Company follows the percentage-of-completion method of recording revenues and related costs from construction contracts using the cost-to-cost method and provides currently for estimated losses on uncompleted contracts. Profits relating to sales of limited partnership interests and development fees are recognized on the percentage-of-completion method and full accrual method as appropriate.
Revenue from the sale of real estate in which the Company has a continuing involvement is recognized in accordance with Statement of Financial Accounting Standards No. 66. Reflected in the deferred revenues account is that portion of the profit from the sale which is required to be deferred under the provisions of such Statement.
Revenues from house sales and all related costs and expenses are recognized upon passage of title to the buyer and receipt of an adequate down payment.
Revenues from cost-plus fee contracts are recognized on the basis of costs incurred during the period plus the fee earned.
C. Inventory of Real Estate:
Inventory of real estate is stated at the lower of cost or estimated net realizable value. Cost includes direct acquisition, development and construction costs, interest and other indirect construction costs. Estimated net realizable value is defined as an estimate of sales proceeds less all estimated costs of carrying, completing and disposing of the property. Interest is capitalized at the effective interest rates paid on borrowings for interest costs incurred on real estate inventory components during the preconstruction and planning stage and the periods that projects are under development. Capitalization of interest is discontinued if development ceases at a project.
Land and improvement costs are allocated based on a method that approximates the relative sales value method. Construction costs are charged to individual homesites based on specific identification.
D. Land Held for Investment:
Land parcels in which the Company has no formal plans to develop or sell are classified as land held for investment. Land held for investment is carried at cost. Land parcels previously included in inventory of real estate and reclassified to land held for investment are valued at the lower of their acquisition cost or fair value at the time of transfer. The carrying value of land held for investment is evaluated for other than temporary declines in value. For the years 1993 and 1992, no adjustments for other than temporary declines were necessary.
E. Rental and Other Property and Equipment:
Rental and other property and equipment are carried at cost less accumulated depreciation and are depreciated using the straight-line method over the estimated useful lives of the assets which range from three to fifty years. Expenditures for maintenance and repairs are charged to expense as incurred. Costs of major renewals and betterments which extend useful lives are capitalized.
F. Capitalized Costs:
Mortgage interest, real estate taxes, and sales costs incurred in connection with certain properties are capitalized in order to achieve better matching of costs with revenues. Interest incurred on loans was $3,893,000 in 1993, $5,964,000 in 1992 and $8,264,000 in 1991, of which $2,959,000 in 1993, $4,150,000 in 1992 and $5,314,000 in 1991 was capitalized. Amortization of capitalized interest of $5,802,000 in 1993, $5,177,000 in 1992 and $4,909,000 in 1991 was charged to construction costs.
Certain tangible costs incurred that are used directly throughout the selling period to aid in the sale of units, such as model furnishings and decorations, sales office furnishings and facilities, exhibits, displays and signage, are capitalized as deferred selling costs and amortized over the number of units to be delivered. Costs incurred during the initial and due diligence phases of a project, such as land deposits and studies, are capitalized as preacquisition costs. The unrecovered preacquisition costs are written off in the period the Company abandons development of the project.
G. Income Taxes:
The Company adopted SFAS No. 109, "Accounting for Income Taxes," effective January 1, 1992. The Company has reported the change in accounting for income taxes as a cumulative effect of a change in accounting method. Prior year amounts have not been restated (Note 6).
H. Investments in Partnerships:
Investments in partnerships in which the Company does not have a controlling interest are accounted for at cost and investments in a partnership in
which the Company does have a controlling interest is accounted for on the equity method.
I. Cash and Cash Equivalents:
The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents.
J. Reclassifications:
Certain prior year amounts have been reclassified in the financial statements and segment information to conform with the 1993 presentation.
2. RECEIVABLES
Receivables are summarized as follows:
It is expected that the receivables at December 31, 1993 as set forth above will be collected as follows: $15,198,000 in 1994, $1,610,000 in 1995, $46,000 in 1996, $51,000 in 1997, $56,000 in 1998 and $5,763,000 thereafter. At December 31, 1993, approximately $2,201,000 ($5,400,000 at December 31, 1992) of these mortgage notes receivable have been pooled into GNMA certificates which are guaranteed by the United States Government. The Company has pledged the mortgage notes as collateral to borrow funds from institutions at interest rates lower than those earned on the mortgage notes receivable and as collateral for GNMA matched payment serial notes (Note 7). The remaining mortgage notes receivable have been originated by the Company under firm commitments for sale to various third parties.
The mortgage notes receivable, which result primarily from sales of homes in Puerto Rico, are payable in monthly installments and earn interest at stated interest rates which ranged from 7.5 to 12% in 1993 and 1992.
3. INVENTORY OF REAL ESTATE
Inventory of real estate is summarized as follows:
Due to the decline in demand for housing and the resultant weak real estate markets in New York, New Jersey, Virginia-Washington, D.C. and certain projects in Florida, the Company in 1990, implemented aggressive home sales programs to reduce land positions and thereby generate cash which can be used to invest in better yielding opportunities. The Company liquidated these land positions by selling and building homes at reduced prices. Due to the continuation of this program, the Company in 1992 increased the noncash reserve to reduce the net carrying value of inventory of real estate to its estimated net realizable value by $1,810,000. At December 31, 1993, the balance of these reserves is $725,000 (at December 31, 1992 - $2,289,000) and has been recorded as an allowance to reduce the inventory of land and land development costs.
4. RENTAL AND OTHER PROPERTY AND EQUIPMENT
Rental and other property and equipment are summarized as follows:
Rental properties consisted of two self storage mini-warehouse facilities which were sold for cash during 1993.
5. OTHER ASSETS
Other assets are summarized as follows:
6. INCOME TAXES
The Company and its domestic subsidiaries file a consolidated federal income tax return. The provision for income taxes consists of the following:
Deferred income taxes result from temporary differences in the recognition of revenue and expense for tax and financial reporting purposes. The sources of these differences are primarily tax losses from limited partnerships, recognition of fee income, non-cash valuation reserves on land inventory and capitalization of interest and overhead.
At December 31, 1993 the Company had a net tax operating loss carryforward, which can be utilized against future taxable income, of approximately $12,957,000 expiring in 2001 through 2008. There is no net operating loss carryforward for financial statement reporting purposes.
Cash payments for income taxes during the years ended December 31, 1993, 1992 and 1991 were $2,251,000, $1,143,000 and $2,405,000, respectively.
The effective tax rate was different from the statutory Federal tax rate for the following reasons:
In February 1992, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 109 - Accounting for Income Taxes ("SFAS 109"). SFAS 109 requires the Company to recognize deferred taxes for the temporary differences between the tax bases of its assets and liabilities and the amounts reported in the financial statements at enacted statutory tax rates.
The Company adopted SFAS 109 as of January 1, 1992. The cumulative effect of this change is reported separately in the Statement of Consolidated Operations for the Year Ended December 31, 1992. The tax effect of each type of temporary difference that gave rise to the Company's deferred tax liability is as follows:
Total deferred tax assets and liabilities were $11,709,000 and $15,817,000, respectively, at December 31, 1993 and $10,188,000 and $15,870,000, respectively, at December 31, 1992. No valuation allowance was required for deferred tax assets.
7. DEBT
Notes, mortgages payable and long-term obligations are summarized as follows:
(A) On December 31, 1990, the Company redeemed all of American Financial Corporation's $5.81 cumulative convertible preferred stock and issued six equal subordinated promissory notes in the aggregate principal amount of
$8,800,000, maturing 1992 through 1997. The notes bear simple interest at the rate of 15% per annum. In January 1994 the third promissory note in the amount of $1,466,667 was paid. In connection with the redemption of its preferred stock, the Company also had a $4,379,000 note payable to ITT Corporation at December 31, 1992 which was paid in January 1993.
(B) The Company has a balance of $18,400,000 under an unsecured bank credit facility. The terms of the agreement require the Company to maintain certain financial ratios, and restrict the payment of cash dividends under certain conditions. This facility was converted from an unsecured revolving credit loan to an unsecured term loan as of November 1991. The term loan as of December 31, 1993 which was originally $28,000,000 provides for semi-annual principal payments in January and July of $1,000,000 in 1994 and 1995, then $3,000,000 in January 1996, $1,000,000 in July 1996, $3,000,000 in January 1997 and a final payment of $7,400,000 in July 1997.
(C) In June 1992, the Company amended its unsecured $15,000,000 revolving credit agreement with its Puerto Rico bank to increase the facility $6,000,000 to $21,000,000 and extended the maturity to March 1993. The additional $6,000,000 facility is secured by certain developed and undeveloped lots. At December 31, 1992, $15,000,000 and $1,436,000 were outstanding on the unsecured and secured portions of the credit facility, respectively. As of March 1993, the secured portion of the facility was repaid. In April 1993, the Company renewed the unsecured revolving portion of the credit facility for an additional three years. The agreement provides for revolving loans up to $15,000,000. Terms of the agreement require the Company's subsidiary to maintain certain financial ratios and restrict the payment of cash dividends under certain circumstances.
(D) On December 31, 1993, the Company had loans totalling $2,201,000 (secured by a pledge of GNMA certificates in the same amount) through the issuance of long-term debentures by a subsidiary of a non-profit community development corporation in Puerto Rico. Both the short-term loans and debentures, which are secured by mortgage notes receivable pooled into GNMA certificates, bear interest at rates lower than the interest rates on such mortgage receivables.
(E) In September 1992, the Company repurchased a $2,600,000 mortgage loan (including accrued interest) for approximately $1,300,000, including transaction costs. The Company recorded an extraordinary gain of $824,000 net of income taxes of $490,000.
In September 1993, the Company's Puerto Rico mortgage branch operations entered into a $3,000,000 revolving credit agreement with a Puerto Rico bank to finance the warehousing of mortgage note receivables originated by the mortgage operation. As of December 31, 1993, no amount was outstanding on this warehousing line of credit.
Notes and mortgages payable were collateralized by land inventory, land held for investment, rental properties and mortgage notes receivable with net
carrying values aggregating $28,415,000 and $43,333,000 at December 31, 1993 and 1992, respectively.
Debt obligations are scheduled to mature as follows: $6,496,000 in 1994, $4,207,000 in 1995, $20,513,000 in 1996, $14,287,000 in 1997, $56,000 in 1998 and $1,970,000 thereafter. Certain mortgage notes contain provisions for reducing the principal as individual homes are sold by the Company.
Interest paid (net of amounts capitalized) for the years ended December 31, 1993, 1992 and 1991 was $1,362,000, $1,923,000 and $4,509,000, respectively.
As of December 31, 1993, the Company had outstanding letters of credit totalling approximately $1,175,000 on which there are service charges ranging from 0.5% to 1% on the outstanding balances. The Company also had outstanding financial security bonds in the amount of $7,443,000 securing various obligations.
8. PENSION PLAN
The Company and its subsidiaries have a noncontributory defined benefit pension plan (the "Plan") covering employees not represented by a union. The benefits are based on years of service and the employees' compensation over the last five years.
Effective July 31, 1992, the Board of Directors amended the Plan to freeze accrued benefits for all participants. The Company will continue to fund the Plan as required, including any interest at the assumed average rate of return on Plan assets.
As of December 31, 1993, the plan held fixed income securities, life insurance policies and short-term investments. Assumed average future rate of return on Plan assets was 8% for the years ended December 31, 1993 and 1992, and the projected benefit obligation was based on a 7.75% and 8% assumed discount rate at December 31, 1993 and 1992, respectively, and a 5% assumed long-term rate of compensation increase.
The total pension plan cost was $880,000 in 1991. The components of net periodic pension (benefit) cost for the years ended December 31, 1993 and 1992 are as follows:
The following table sets forth the Plan's funded status as of December 31, 1993 and 1992:
In accordance with Statement of Financial Accounting Standards No. 87, "Employers' Accounting for Pensions," an additional minimum pension liability, representing the excess of accumulated benefits over plan assets and accrued pension costs, was recognized at December 31, 1993. A corresponding amount, net of income tax benefit, was recorded as a separate reduction to stockholders' equity.
The Company does not provide postretirement or postemployment benefits other than pensions to employees. Therefore, SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" and SFAS No. 112, "Employers' Accounting for Postemployment Benefits" have no impact on the Company's financial statements.
9. SEGMENT INFORMATION
The Company's operations consist of (i) the development, management and ownership of real estate properties; (ii) the single-family home and garden apartment business conducted through its Levitt subsidiary; and (iii) the supplying of construction services through its HRH subsidiary. The Company groups its business into these three segments. The following table sets forth the Company's revenues and operating profit attributable to the respective segments of its operations for each of the years 1991 through 1993, and the identifiable assets attributable to the respective segments as at the end of each of those years:
(1) Operating profit is comprised of revenues less operating expenses. In computing operating profit, general corporate expenses and income taxes have not been deducted.
(2) There were no customers from which the Company derived more than 10% of its revenues in 1993, 1992 or 1991.
10. COMMITMENTS AND CONTINGENCIES
Roosevelt Island Associates ("RIA"), a partnership in which a Company subsidiary is one of several partners, has provided guaranteed payments to the investor partner. The Company's share of such guarantees was $250,000 for 1993 and $465,000 for 1994 and approximately $100,000 each year until 2005, which will be paid by the Company if project cash flow is insufficient to cover these amounts. In connection with this project, the Company also provided cash flow guarantees from which it will be released if the project achieves a certain cash flow level over a specified period of time.
The Company is also jointly and severally liable for $3,225,000 of a loan made in connection with a mini-warehouse facility in which it has an ownership interest.
The Company's Levitt subsidiary provides for estimated warranty costs when homes are sold and continuously monitors its warranty exposure and service program.
Rent expense for the years ended December 31, 1993, 1992 and 1991 was $1,004,000, $1,042,000 and $1,225,000, respectively. At December 31, 1993 the Company and its subsidiaries are committed under long-term leases expiring at various dates through 1998. The minimum rentals are $923,000 in 1994, $896,000 in 1995, $804,000 in 1996, $161,000 in 1997, and $102,000 in 1998, or an aggregate of $2,886,000.
The Company is involved in litigation and claims incident to the normal conduct of its business. Management believes that such litigation and claims will not have a materially adverse effect on the Company's consolidated financial position or results of operations.
11. QUARTERLY FINANCIAL DATA (Unaudited)
The quarterly financial data are set forth below (dollars in thousands, except per share amounts):
(A) Includes the effect of $1,810,000 in non-cash reserves to reduce the carrying value of land to its estimated net realizable value.
Certain quarterly amounts have been reclassified to conform with the annual presentation.
Schedule III STARRETT HOUSING CORPORATION (Parent Company Only) CONDENSED STATEMENTS OF FINANCIAL POSITION December 31, 1993 and 1992 (In Thousands)
STARRETT HOUSING CORPORATION (Parent Company Only) CONDENSED STATEMENTS OF OPERATIONS For the Years Ended December 31, 1993, 1992 and 1991 (In Thousands)
Schedule III STARRETT HOUSING CORPORATION (Parent Company Only) CONDENSED STATEMENTS OF CASH FLOWS (In Thousands)
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.
STARRETT HOUSING CORPORATION
Date: March 21, 1994 BY /s/ Paul Milstein -------------------------------- Paul Milstein Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Date: March 21, 1994 By /s/ Paul Milstein -------------------------------- Paul Milstein, Principal Director
Date: March 21, 1994 By /s/ Lewis A. Weinfeld -------------------------------- Lewis A. Weinfeld, Principal Financial and Accounting Officer
Date: March 21, 1994 By /s/ Henry Benach -------------------------------- Henry Benach, Director
STARRETT HOUSING CORPORATION
EXHIBITS
DECEMBER 31, 1993
COMMISSION FILE NUMBER 1-6736 STARRETT HOUSING CORPORATION EXHIBIT INDEX