10-K

SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 205549 FORM 10K [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from________to_________ Commission File No. 33-55254-18 AFFORDABLE HOMES OF AMERICA, INC. (Exact name of Registrant as specified in its charter) NEVADA 86-0853511 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) identification number) 4505 W. Hacienda Ave. Unit I-1 Las Vegas, Nevada 89118 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (702) 579-4888 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: NONE Indicated by check mark whether the registrant (1) has filed all report required to filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [x] yes []no Indicated by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form 10-K. [x] Indicated the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. Class Outstanding as of June, 1999 $.001 PAR VALUE CLASS A COMMON STOCK 17,549,402 $.001 PAR VALUE Class A Convertible Preferred Stock 657,144 $.001 PAR VALUE Class B Convertible Preferred Stock 100,000 DOCUMENTS INCORPORATED BY REFERENCE None Item 1. Business On March 17, 1999, Kowtow, Inc. received 100% of the common stock of Affordable Homes of America, Inc. in a merger. Additionally, Kowtow, Inc. issued 4,000,000 shares of common stock to SCS Enterprises, Inc. Trust, the sole shareholder of Affordable Homes of America, Inc. On the same date the company accepted the resignation of Krista Nielson and Sasha Belliston as Officers and Directors of the Company and elected Merle Ferguson as President, CEO and Chairman of the Board of Directors. The Company also elected Susan Donohue as Secretary and as a member of the Board of Directors. The Company changed its name to Affordable Homes of America, Inc. on March 19, 1999 and obtained a new CUSIP number -000826G106 - and a new trading symbol -AHOA. The Company restructured its common stock with a two for one forward split effective March 31, 1999. Affordable Homes of America maintains its principle offices at 4505 W. Hacienda Ave., Unit I-1, Las Vegas, Nevada 89118. Affordable Homes of America, Inc. is in the business of building homes for low income and first time home buyers. Founded in 1997, the focus of Affordable Homes of America is to develop and build homes for sale in the United States and international locations with little or no timber products. The Company's methods are patented and are being implemented this year. There are three methods for new home construction. These include: * In-line Framing - A new method of construction that reduces the amount of wood used by one third. This reduces the cost of lumber used in construction, and thereby reduces the overall cost of the home. * Foam-Panelized Construction - This method of construction uses foam slabs covered with panels and strengthened with internal trusses. This allows for increased insulation and quick construction. * Z Mix - A cementitious product that combines diatomaceous earth and used tires to create a lightweight building material that reduces the time and the cost for constructing a house. The Company currently holds the patent on Z Mix. All three methods (i) reduce the amount of wood used in building the average home, and (ii) reduce the time and cost needed to construct the average home. Recent company research has shown that more Americans ages 25 to 45 would prefer to purchase homes rather than rent. To make this option viable, the Company's homes are financed 100% by lending institutions and the monthly payments are comparable to the expense of renting. Additionally, older Americans are more inclined to move into homes that are less expensive, due to their retirement status and reduced monthly income. The Company is finishing the certification procedures necessary to sell its Z Mix products in the US. Once complete, the Company will begin sales and distribution of its products in US and international locations. The Company has been approached by several international entities to establish factories to supply Z Mix for construction. To date Affordable Homes has made five (5) acquisitions: (a) On April 7, 1999, Affordable Homes acquired Kampen and Associates, Inc., the owner of an option to purchase 485 acres of land located in Pierce County, Washington. (b) On April 27, 1999, Affordable Homes acquired M.P.Hall Enterprises, Inc., owner of a site near McCord Air Force Base and Ft. Lewis Army Base in Lakewood, Washington, upon which Affordable Homes plans to construct a Ramada Inn (c) On April 28, 1999, Affordable Homes merged with Composite Industries of America Inc. the owner of a patent covering a construction material known as "Z Mix". Z Mix is a cementitious building material and can be used in a two step construction method instead of cement, dry wall or lumber. Affordable Homes believes Z Mix will enable it to build better quality homes at a lower price than if other products were used. (d) On June 28, 1999, acquired a 50% interest in a real estate development in Pierce County, Washington, known as the Heartland Homes Estates. Affordable Homes is currently developing this project, which is the construction and sale of homes, with the other 50% owner. (e) On June 28, 1999 Affordable Homes also acquired Big Mountain Construction Company which holds the exclusive right to build all the houses for the Heartland Homes development. The development is planned for the construction of 136 homes, each on an individual site. Kampen and Associates, Inc. The acquisition of Kampen and Associates, Inc. was accomplished by the issuance of convertible preferred shares with a strike price of $3.50 per share. The total purchase price paid for Kampen was $7,000,000. This was paid by the issuance of convertible stock and assumption of debt slightly in excess of $5,000,000. Kampen is a real estate development company located in the Seattle area. At the present time the Seattle area is experiencing rapid growth in the construction and sale of single family homes. Kampen owns a project which consist of 575 lots on one of the prime building sites in the Seattle area. The Kampen site has an MAI appraisal of $8,000,000 "as is". On June 24, 1999, Affordable Homes of America, Inc. placed its wholly owned subsidiary, Kampen and Associates, Inc. in Chapter 11 pursuant to the federal bankruptcy act. Although payments to the first mortgage holder are current. Affordable has not been successful in restructuring Kampen's debt to the second mortgage. However, Affordable believes it will be able to successfully reorganize Kampen on a basis satisfactory to all including the first mortgage holder. M. P. Hall Enterprises, Inc. The acquisition of M. P. Hall Enterprises was accomplished by the issuance of convertible preferred shares at a strike price of $5.50 per share. The total purchase price of M. P. Hall was $500,000. By agreement, once the strike price is reached 20,000 shares per quarter can be sold in the public market. Affordable has assumed the debt in the amount of $375,000. M.P. Hall assets consists of a motel site located near the front gates of Mc. Cord and Ft. Lewis Base. The site is appraised for $930,000 "as is". Affordable plans to build a 55 unit Ramada Inn on the site. All plans and permits have been approved and sewer and water hook-up have been paid. Application has been made for the construction and development loan. Construction is expected to take 6 months to complete. The estimate gross revenues are $879,285.00 per year. Composite Industries of America, Inc. The acquisition of Composite Industries of America, Inc. was accomplished by exchanging one share of Affordable's common stock for two shares of Composite's common stock. All stock issued by Affordable pursuant to this acquisition is restricted. Affordable is the surviving entity. Affordable pursuant to the merger, now owns the patents formerly owned by Composite. The patents cover a construction material call "Z Mix". Z Mix is a building material lighter than cement that can be used in home construction instead of cement, lumber or dry wall. The patented construction material is a lightweight cementitious insulating mixture with a high compression strength and thermal resistance values up to 30 to 40 times that of standard concrete. It is fire proof, insect proof, has excellent acoustical properties and is easy to clean up. Z Mix can be used for wall and roof panels and can easily by pumped for walls and floors. Z Mix makes a well insulated cost effective floor that has a slight give to it. Z Mix is excellent for gymnasium floors. This material is used for residential, light commercial and agricultural building. The composition has the unique property of being able to absorb contaminated or hazardous materials, especially petroleum based contaminants and is especially useful in cleaning up and controlling contaminants in underground storage tanks, especially in abandoned or closed service stations. Affordable also acquired the plans for a "World Home" and a "US Home" made from this material. These plans have been certified by Larson Engineering, Inc. as earthquake resistant in all four seismic regions in the world. Larson Engineering, Inc. also certified that houses built from these materials are able to withstand hurricane winds up to 150 mph. Affordable believes that use of Z Mix will permit it to construct lower cost housing at substantial less that the present cost for such housing. Z Mix can also be used in the manufacturing of utility poles, railroad ties and pallets with substantial savings in the manufacturing cost of these items. Affordable believes that the use of Z Mix will broaden its market and increase its profitability. Heartland Homes Estates. The Company purchased a 50% interest in Heartland Homes Estates by acquiring a 25% interest in the housing developments project from 2 owners: (a) Affordable acquired 100% of Realty Center, Inc. for Class A Convertible Preferred Stock in the amount of 114,286 shares. This stock is convertible at $3.50 per share, which makes the purchase price $400,000.00 Realty Center owned 25% of the project known as Heartland Homes. (b) Affordable also acquired an additional 25% of Heartland Homes from Thomas Lief for 114, 286 shares of Class A Convertible Preferred Stock for a purchase price of $400,000.00 This brought the total of Affordable's ownership in Heartland Homes to 50%. Heartland is a 136 home site development in the Seattle-Tacoma area in Washington. Four models are on site now and final approval to sell houses is expected very shortly. Affordable expects this project to sell out very quickly. Big Mountain Construction Company, Inc. The Company acquired Big Mountain Construction Company, Inc. for $500,000 paid in restrictive common stock in the amount of 215,983 shares. Big Mountain maintains the building contractor license and has the exclusive right to construct Heartland Homes. An MAI appraisal was made for the Centennial Bank, Tacoma, Washington, the prospective bank lender for the Heartland Homes project. The appraisal value of the property prior to the removal of the Designated Forrest Land (DFL) classification was $880,000.00 After removal of the DFL classification and when the lots are ready to be sold but without any house construction being done the appraisal value was set at $4,900,000.00 Heartland Homes falls within the area boundaries of the Farm Home Loan Program. This program is a subsidy that allows buyers to purchase a home and subsidizes their monthly payment to be in line with their income. What this does is allow the buyer who could not normally afford to purchase in this price range, to qualify for a home purchase. In addition with the master appraisals being complete and at least $10,000 higher than the asking price, the qualifying factor under a VA type loan is favorably changed for the buyer. These changes will allow buyers to use up to $10,000 to pay off short term loans and roll them into their new home loan, thereby qualifying for a higher loan amount. The impact of this financing feature on Heartland is very positive. It will allow first time homebuyers to qualify much easier and with no money down. This will give Affordable Homes the ability to qualify more home buyers and close more loans than originally anticipated. Affordable believes this to be a big edge over the competition. Where a buyer won't be able to qualify in other neighborhoods, he will in the Heartland Homes project. The Company's business is not seasonal although during some snow storms on site construction generally does not take place unless indoors. The Company uses no special raw materials and the materials it does use are available from numerous suppliers throughout the United States. The Company is not computer dependent and does not anticipate any Y-2K problems any time prior to the year 2000. ITEM 2 PROPERTIES The Company owns no properties other than as set forth in Item 1. The Company leases its offices located at 4505 W. Hacienda Ave. Unit I-1, Las Vegas, Nevada 89118 at an annual rent of $7092.00 The expiration date of the lease is July 31, 1999. ITEM 3 LEGAL PROCEEDINGS There is no pending or threatened litigation or other legal proceedings, material or otherwise, nor any claims or assessments with respect to Affordable Homes of America, Inc. at the present time. ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to the Company security holders for a vote during the fiscal year ending June 30, 1999. ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock is trading on the NASD Electronic Bulletin Board under the symbol "AHOA". The stock has traded between $4.25 per share and $2.625 per share. There are approximately 890 record holders of the Company's common stock. The Company has not previously declared or paid any dividends on its common stock and does not anticipate declaring any dividends in the foreseeable future ITEM 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION Affordable Homes of America, Inc. is a real estate development company in the development stage focusing on building homes for low-income and first- time home buyers. There are 5,000,000 families in the United States that spend 50% of their income on rent. This does not leave them sufficient funds for buying the basic family needs of medicine, education, decent transportation and the like. Because of Affordable Home's specialized construction techniques i.e. in-line framing, foam-panelized construction and Z Mix construction the Company believes it will bring the ability to purchase a home within the reach of this 5,000,000 family market and other potential home buyers whose financial resources would not otherwise enable them to purchase a home. Affordable Homes has also designed a "World Home" which is a smaller building, for marketing abroad. Preliminary discussions in South America, Europe, and the Philippines have indicated widespread acceptance of the World Home in those areas. In order to finance the marketing of the World Home and also to implement Affordable Homes' low income and first time home buyer program nationwide, Affordable Homes has made certain acquisitions for near term cash requirements. For a description of these acquisitions see Item 1 Business herein. The first acquisition to be developed is the Heartland Homes real estate development project of 136 homes. Bank financing has been arranged for this project which means that when all permits are received by Affordable Homes, construction can begin. In addition, Affordable Homes has applied for a five year loan in the amount of $15,000,000 from Euro Federal Bank NV which is located in Amsterdam. While the proceeds of the loan are not necessary for the implementation of Affordable Homes building program, the receipt of such funds would greatly accelerate the program. There can be no assurance that the Company will receive the proceeds of this loan nor can there be any assurances that the Company will be able to complete construction of homes and the Ramada Inn on the properties it acquired. ITEM 6A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company has no market risk sensitive instruments or market risk exposures. ITEM 7 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Index to Financial Statements and Financial Statement Schedules appearing on page F-1 through F-26 of this Form 10-K. ITEM 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable ITEM 9 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following table shows the positions held by the Company's officers and directors. The directors were appointed and will serve until the next annual meeting of the Company's stockholders, and until their successors have been elected and have qualified. The officers were appointed to their positions, and continue in such positions at the discretion of the directors. NAME AGE POSITION Merle Ferguson 53 President, CEO and Chairman of the Board Frank C. Calmes 53 Chief Financial Officer, Vice Chairman James E. Pratt 66 General Counsel, Secretary and Director Susan Donohue 47 Treasurer, Assistant Secretary, Director Dr. William T. Anton 52 Vice President of International Operations Randy Vozka 36 Vice President of Research ,Development Merle Ferguson founded Affordable Homes of America, Inc. in 1997 and is the President, CEO and Chairman of the Board of Directors. Prior to starting Affordable Homes Mr. Ferguson spent 22 years in the construction industry as a developer and builder. Mr. Ferguson built commercial and residential buildings in California, Oregon and Washington. Mr. Ferguson is currently managing the construction of 136 homes located near Tacoma, Washington. These are being constructed using Affordable's In-line framing method. Mr. Ferguson attended Yakima Valley College in Washington State with a focus in forestry. He honorably served his country with the United States Marine Corps from 1966 to 1970. This included two tours in Vietnam. For the past 7 years, Mr. Ferguson has been researching new construction products used to reduce deforestation. Some of the construction methods under development by Affordable Homes of America use no timber products. Frank C. Calmes is the Chief Financial Officer, Vice Chairman and director of the Company. He is also the President of First Equity Capital Corporation, a privately held investment banking corporation. During the past 14 years Mr. Calmes has worked mainly in the investment banking industry. He was Vice-President in charge of business development of Britannia Capital, Ltd. And President and CEO of Calco Marine, Inc. Mr. Calmes background also includes positions at Westinghouse Credit Corporation, where he worked in business development and management, and at CIT Corporation where he worked in the credit and collections department and the leasing equipment and financing accounts receivables department. Mr. Calmes honorably served his country with United States Air Force, where he achieved the rank of Sergeant. He received a Bachelor of Science degree from Louisiana State University in New Orleans with a major in Accounting. James E. Pratt is the Secretary, General Counsel and a Director of the Company. Mr. Pratt has specialized in investment banking law, including: preparation of registration statements, private placements, public offerings, filings with the SEC, NYSE, NASDAQ, and state Blue Sky authorities; limited partnerships, reverse mergers, mergers and acquisitions, joint ventures, assets purchases, spin-offs, buyouts and corporate reorganizations. He is also an experienced litigator. During his career, Mr. Pratt has been associated with and been a partner of various New York City law firms and was general counsel and a partner in the investment banking and brokerage firm of Van Alstyne Noel & Co. where he worked from 1967 until 1973. Mr. Pratt's clients have been mostly small, emerging, growth companies seeking venture capital and a public market for their securities. Mr. Pratt received a B. A. from Yale in 1955 and an L.L.B from Harvard Law School in 1959. Susan Donohue is the Treasurer, Assistant Secretary and a Director of the Company. She was one of the two founders of Zawada Technologies, Inc. At Zawada Technologies she worked directly with Joseph Zawada on the research of the Z Mix product. Zawada Technologies merged with Composite Industries, Inc. Ms. Donohue joined Affordable Homes when Composite merged with Affordable Homes of America, Inc. Prior to Zawada Technologies, Susan worked with Waukesha Bearings in Wisconsin as the Senior Buyer starting in 1989. Ms. Donohue attended the University of Wisconsin at Stevens Point with a focus in sociology and psychology. Additionally, she attended North Central Technical College for certification as an Account Clerk, and also attended Cardinal Stritch College of Madison, where she majored in Business Administration. Dr. William T. Anton joined Affordable Homes of America, Inc. in 1999 as Vice President of International Operations when Composite Industries of America, Inc. merged with Affordable Homes in April 1999. Prior to the merger he was President of Composite Industries of America, Inc. Prior to working for Composite Industries of America, Inc., Dr Anton was President of World Technologies Associates, Inc. - a consulting firm for management, telecommunications, internet and computer systems integration. The company managed international projects in Argentina, Congo, Germany, Ivory Coast, Mali, Burkina Faso, Portugal, Russia, Romania and Turkey. Dr. Anton was a Professor of Management and Marketing at Schiller University in Heidelberg, Germany, from 1992 to 1994, where he held the titles of Director, Master of International Management Degree Program and Chairman of the Graduate School Committee. Dr. Anton also provided consultant services to KONEX Global Corporation. This included consulting for management on communications, computer systems, training and marketing. At KONEX, he also provided services and equipment to support Desert Storm allies. With an extensive military career, Dr. Anton served his country as Battalion Commander held numerous command and staff positions in Europe, Asia and South America. Dr. Anton is a Vietnam veteran. Dr. Anton earned his Doctorate from George Washington University in Human Resource Development and Management Science, his Master degree from North Carolina State University, and his Bachelor of Science degree from the University of Nebraska. Randy Vozka joined Affordable Homes of America, Inc. in 1999 as Vice President of Research and Development when Composite Industries of America, Inc. merged with Affordable Homes in April, 1999. He worked to complete the engineering studies on the different uses of the Z Mix products that Joseph Zawada started. Prior to joining Composite Industries, Mr. Vozka was President of Vozka Exteriors from 1986 until 1999 He has over 12 years of experience in the management of real estate development projects including all stages of construction, including bidding, contract creation, planning, managing, subcontractors, heavy equipment operations, and managing P&L ITEM 10 EXECUTIVE COMPENSATION The Company pays no salaries to its officers and directors except that Susan Donohue receives a monthly salary of $2000. On June 11, 1999 the Company issued 75,000 shares of its common stock pursuant to S-8 Registration Statement to James E. Pratt, Esq., the Secretary , General Counsel and a Director of the Company for legal services rendered and to be rendered and for out of pocket expenses necessarily incurred on behalf of the Company. On June 11, 1999 The Company issued 325,000 shares of its common stock pursuant to a S-8 Registration Statement to First Equity Capital Corp. for consulting work in assisting the company in the area of business development. Frank C. Calmes is the President of First Equity Capital Corp. The consulting work included evaluating the acquisitions and mergers that have taken place as well as the evaluation and rejection of various potential acquisitions, conferring on a daily basis with the Company and travel on behalf of the Company, including travel to South America and Canada. First Equity Capital Corp. spends 90% of its time on the Company business. Dr. William T. Anton is paid $3,000 monthly for foreign travel and is reimbursed for his travel expenses on behalf of the Company. Dr. Anton has traveled extensively in Europe in order to market the World Home in various countries, which includes Turkey, and Bulgaria On March 22, 1999 options were granted pursuant to the Company's Incentive Stock Option Plan as follows: Option Grants in Last Fiscal Yea Percentage of Total Number of Granted to Grant Securities Employees Exercise of Date Underlying in Fiscal Base Price Expiration Present Name Options Year (S/SH) Date Value Merle Ferguson 1,500,000 21% 500,000 5-22-04 -0- @$.25 500,000@$.50 500,000@50% of prevailing Bid price at time of exercise Frank C. Calmes 2,500,000 36% 500,000@$.25 5-22-04 -0- 500,000@$.50 500,000@50% 500,000@60% 500,000@70% of the prevailing Bid price at time of exercise James E. Pratt 2,500,000 36% 500,000@$.25 5-22-04 -0- 500,000@$.50 500,000@50% 500,000@60% 500,000@70% of the prevailing Bid price at time of exercise Susan Donohue 500,000 7% 100,000@$.25 5-22-09 -0- 100,000@$.50 100,000@50% 100,000@60% 100,000@70% of the prevailing Bid price at time of exercise None of the options have been exercised. There are no agreements or understandings with respect to the amount of remuneration that officers and directors are expected to receive in the future. Management takes no salaries from the Company and does not anticipate receiving any salaries in the foreseeable future. No present prediction or representation can be made as to the compensation or other remuneration which may ultimately be paid to the Company's management. There are no plans, proposals, arrangements or understandings with respect to the sale of additional securities to affiliates, current shareholders or others. ITEM 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth, as of June 30, 1999, information regarding the beneficial ownership of shares by each person known by the Company to own five percent or more of the outstanding shares, by each of the directors and by the officers and directors as a group. Amount of Name and address beneficial Percent Title of class of beneficial owner ownership of class Common Stock Merle Ferguson c/o SCS Trust 8,000,000 45.5% 8452 Boseck #285 Las Vegas, Nevada 89128 Common Stock Frank Calmes 13760 Highway 190 743,000 04.23% Covington, La. 70433 Common Stock James E. Pratt 411,000 02.34% 195 Kildare Road Garden City, N.Y. 11520 Common Stock Susan Donohue 40,000 0.39% 8452 Boseck #285 Las Vegas, Nevada 89128 Common Stock Randy Vozka 99,500 0.56% 4800 Hwy 8 Beltline Rhinelinder, WI. 54501 All Officers and Directors as a Group 9,293,500 53.11% ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS No officer, director, nominee for election as a director, or associates of such officer, director or nominee is or has been in debt to the Company during the last fiscal year. ITEM 13 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K Financial Statements and Financial Statement Schedules. Financial Statements June 30, 1999 - December 31, 1998, - 1997 Report on Form 8-k Reports in form 8-k were filed on March 30, 1999, March 31, 1999, April 15,1999, and May 3, 1999 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. AFFORDABLE HOMES OF AMERICA, INC. Date: December 21, 1999 By: /s/ Merle Ferguson Merle Ferguson, President, CEO and Director Date: December 21, 1999 By: /s/ James E. Pratt James E. Pratt, Secretary and General Counsel AFFORDABLE HOMES OF AMERICA, INC. AND SUBSIDIARIES (a development stage company) CONSOLIDATED FINANCIAL STATEMENTS and REPORT OF INDEPENDENT AUDITORS FROM THE DATE OF INCEPTION TO JUNE 30, 1999 and 1998 REPORT OF INDEPENDENT AUDITORS Board of Directors and Stockholders Affordable Homes of America, Inc. and Subsidiaries: We have audited the accompanying consolidated balance sheets of Affordable Homes of America, Inc. and Subsidiaries (a development stage company) as of June 30, 1998 and 1999, the related consolidated statements of operations, changes in stockholders' equity (deficit) and cash flows for the periods from inception (February 10, 1997) to June 30, 1998 and 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated 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 consolidated financial statements referred to above, present fairly, in all material respects, the consolidated financial position of Affordable Homes of America, Inc. and subsidiaries as of June 30, 1998 and 1999 and the results of their consolidated operations and their cash flows for the period from inception (February 10, 1997) to June 30, 1998 and 1999 in conformity with generally accepted accounting principles. Garden City, New York September 30, 1999 AFFORDABLE HOMES OF AMERICA, INC. and SUBSIDIARIES (a development stage company) CONSOLIDATED BALANCE SHEETS JUNE 30,1998 and 1999 ASSETS 1998 1999 ---------------- ----------------- Cash in banks $ - $ 192,398 Employee advances - 45,600 Other receivables - 9,000 Advances - 224,140 Investment in joint venture - 800,000 Land and land development costs - 7,676,736 Capitalized interest expense - 487,041 Machinery & equipment - at Cost, less accumulated Depreciation of $ -0- and $47,466 as of June 30, 1998 and 1999, respectively - 108,285 Patents - at cost, less Accumulated amortization of $ -0- and $39,431 as of June 30, 1998 and 1999 respectively - 354,882 Goodwill - 408,197 ----------------- ----------------- TOTAL ASSETS $ - $ 10,306,279 ================= ================= THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS AFFORDABLE HOMES OF AMERICA, INC. and SUBSIDIARIES (a development stage company) CONSOLIDATED BALANCE SHEETS JUNE 30,1998 and 1999 LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1999 LIABILITIES Accounts payable $ - $ 42,676 Accrued expenses 15,000 22,277 Accrued interest payable - 206,667 Notes payable - 2,217,937 Loans and advances from Related parties - 235,287 Land purchase options - 3,415,000 ----------- ----------- TOTAL LIABILITIES 15,000 6,139,844 ----------- ----------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY (DEFICIT) Convertible preferred stock classes A And B ($.001 par value, 5,000,000 Shares of each class authorized, 657,144 and 100,000 of class A and B issued and outstanding, respectively) - 757 Additional paid-in capital - 4,374,345 Common stock ($.001 par value 100,000,000 shares authorized, 17,549,402 shares issued and Outstanding as of June 30, 1999 2,000,000 shares issued and Outstanding as of June 30, 1998) 2,000 17,549 Deficit accumulated during the Development stage (17,000) 226,216) ----------- ------------ Total Stockholders, Equity (Deficit) (15,000) 4,166,435 ----------- ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 0 $10,306,279 =========== ============ THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS AFFORDABLE HOMES OF AMERICA, INC. and SUBSIDIARIES (a development stage company) CONSOLIDATED STATEMENTS OF OPERATIONS DURING THE DEVELOPMENT STAGE CUMULATIVE FROM INCEPTION (February 10, 1997) TO JUNE 30,1998 and 1999 Cumulative from Inception to 1998 1999 June 30, 1999 ----------- ---------- --------------- Administrative expenses $15,000 $211,116 $228,116 Cumulative (Loss) From operations (15,000) (211,116) (228,116) ----------- ---------- --------------- Other income and expense Interest and other income - 4,750 4,750 (Loss) on disposition of equipment - (2,850) (2,850) ----------- ---------- --------------- Total other income And expense - 1,900 1,900 ----------- ---------- --------------- Net (loss) before Income taxes (15,000) (209,216) (226,216) Provision for income taxes - - - ----------- ---------- --------------- Net (loss) $(15,000) $(209,216) $(226,216) =========== ========== =============== Net (loss) per common share $(.01) $(.04) $(.06) =========== ========== =============== Weighted average number of Shares outstanding 2,000,000 5,165,202 3,582,601 =========== ========== =============== THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS AFFORDABLE HOMES OF AMERICA, INC. and SUBSIDIARIES (a development stage company) CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) CUMULATIVE FROM INCEPTION (February 10, 1997) TO JUNE 30,1998 Preferred Preferred Deficit Stock Stock Accumulat Total Common Stock A .001 Par B .001 Par Additio ed Stockholde .001 Par value value value nal During rs' Paid-in the Equity Capital Developme (Deficit) nt Stage Initial issuance of Common stock as restated to account for 2 for 1 Stock split dated March 19, 2,000,000 $2,000 $ 2,000 1999 Net loss prior to Developmen t stage Activity (2,000) (2,000) Net loss during the Developmen t stage Through (15,000) (15,000) June 30, 1998 --------- ------ ---- ---- ------ ------ ------- --------- ---------- Closing balance - June30 2,000,000 $2,000 - $- - $- $- $(17,000) $(15,000) 1998 ========= ====== ==== ====== ====== ====== ======= ========= ========== The accompanying notes are an integral part of these statements AFFORDABLE HOMES OF AMERICA, INC. and SUBSIDIARIES (a development stage company) CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) CUMULATIVE FROM INCEPTION (February 10, 1997) TO JUNE 30,1999 Preferred Preferred Deficit Stock Stock Accumul Total Common Stock A .001 Par B .001 Par Additional ated Stock .001 Par value value value Paid-in During holde Capital the rs' Develop Equit ment y Stage (Defi cit) Shares Amount Shares Amoun Shares Amoun t t ------- ------ ------ ----- ------ ----- ---------- ------- ----- Opening balance- July 1, 2,000,000 $2,000 - $- - $- $- $(17,00 $(15, 1998 0) 000) Issuance of common stock in exchange for 100% of the common stock of Affordabl e-Nevada on March 4,000,000 4,000 (4,000) 17,1999 Common stock split on a 2 for 1 basis on March 4,000,000 4,000 (4,000) 19,1999 Issuance of common stock to founders on March 18, 1999 250,000 250 (250) Issuance of Preferred A Stock in the acquisiti on of 100% of the common Stock of Kampen and Associate s, Inc. on April 14, 428,572 429 1,510,657 1,511 1999 ,086 (Continued) The accompanying notes are an integral part of these statements AFFORDABLE HOMES OF AMERICA, INC. and SUBSIDIARIES (a development stage company) CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) CUMULATIVE FROM INCEPTION (February 10, 1997) TO JUNE 30,1999 Preferred Stock Preferred Def A .001 Par Stock ici Total Common Stock value B .001 Par Additional t Stockholde .001 Par value value Paid-in Acc rs' Capital umu Equity lat (Deficit) ed Dur ing the Dev elo pme nt Sta ge Shares Amoun Shares Amount Shares Amo t unt ------- ----- ------ ------ ------ --- ------ -- ------- Issuance of common stock in the merger trans- Action with Composit e Industri es, Inc. on April 6,514,270 6,514 1,560,059 1,566,573 15, 1999 Issuance of Preferre d B Stock in the acquisit ion of 100% of the common Stock of M.P. Hall Enterpri ses, Inc on April 100,000 100 549,900 550,000 27, 1999 Issuance of restrict ed Common stock in the Acquisit ion of Big Mountain Construc tion Company, Inc. on June 215, 980 216 524,904 525,120 28, 1999. Issuance of common stock In the acquisit ion of 100% of the common stock of Realty Center, Inc. and 25% interest in the Heartlan d Homes Joint Venture on June 228,572 228 799,772 800,000 28, 1999. (Continued) The accompanying notes are an integral part of these statements AFFORDABLE HOMES OF AMERICA, INC. and SUBSIDIARIES (a development stage company) CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) CUMULATIVE FROM INCEPTION (February 10, 1997) TO JUNE 30,1999 Preferred Preferred Deficit Stock Stock Accumulate Total Common Stock A .001 Par B .001 Par Additional d Stockholde .001 Par value value value Paid-in During thers Equity Capital Developmen(Deficit) t Stage Shares Amount Shares Amou Shares Amou nt nt ------- ------ ------ ---- ------ ---- ---------- ------------------ Issua nce of commo n stock for servi ces rende red on 569,149 569 38,462 39,031 May 24, 1999. Recla ssifi catio n of Retai ned defic it for (595,710) (595,710) Compa nies acqui red Expen ses incur red in conne ction with (5,449) (5,449) Publi c offer ing Net loss durin g the Devel opmen t stage the year (209,216) (209,216) ended June 30, 1999 --------- ------ ------- ---- ------ ---- ---------- ---------- ---------- Closi ng balan ce- June 17,549,402 $17,549 657,144 $657 100,000 $100 $4,374,345 $(226,216) $4,166,435 30, 1999 ========= ======= ======= ==== ======= ==== ========== ========== ========== The accompanying notes are an integral part of these statements AFFORDABLE HOMES OF AMERICA, INC. and SUBSIDIARIES (a development stage company) CONSOLIDATED STATEMENTS OF CASH FLOWS CUMULATIVE FROM INCEPTION (February 10, 1997) TO JUNE 30, 1998 and 1999 Cumulative From Inception to June 30, 1998 1999 1999 CASH FLOWS FROM OPERATING ACTIVITIES; Consolidated net (loss) from Development stage operations $(15,000) $(209,216) $(226,216) ADJUSTMENTS TO RECONCILE NET LOSS FROM DEVELOPMENT STAGE OPERATIONS TO CASH USED IN OPERATING ACTIVITIES Depreciation and amortization 15,317 15,317 Stock issued for services 39,031 39,031 (Increase) decrease in assets: Increase (decrease) in liabilities: Accrued expenses 15,000 7,277 22,277 Accrued interest payable - 20,666 20,666 ------------ ----------- ---------- Total Adjustments 15,000 82,291 97,291 ------------ ----------- ---------- Net cash (used in) operations 0 (126,925) (128,925) ------------ ----------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Equipment acquisitions - (57,671) (57,671) Net cash (used in) Investing activities - (57,671) (57,671) ------------ ----------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Advances to and capitalization of Subsidiaries 386,994 388,994 Payments of land purchase option - (10,000) (10,000) ------------ ----------- ---------- Net cash from financing activities - 376,994 378,978 ------------ ----------- ---------- Net Increase in Cash in banks - 192,398 192,398 ------------ ----------- ---------- Cash in banks Beginning of period - - - ------------ ----------- ---------- Cash in banks End of period - $192,398 $192,398 ============ =========== ========== Supplemental Disclosure of cash flow information: Cash Paid during the year for Interest expense $- $- $- ============ ============ ============= Income taxes $- $- $- ============ ============ ============= THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS AFFORDABLE HOMES OF AMERICA, INC. and SUBSIDIARIES (a development stage company) CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) CUMULATIVE FROM INCEPTION (February 10, 1997) TO JUNE 30, 1998 and 1999 NON-CASH INVESTING AND FINANCING TRANSACTIONS In January of 1998, Composite Industries of America, Inc. issued 370,000 shares of common stock in exchange for patent rights amounting to $370,000, and 15,534 shares of common stock for machinery and equipment amounting to $15,534. In April of 1998, the company issued 4,039 shares of common stock in exchange for equipment amounting to $4,039. On April 14, 1999, the company issued 428,572 shares of Class A Convertible Preferred Stock valued at $1,500,000 to acquire Kampen and Associates, Inc. On April 15, 1999, the company issued 13,028,539 shares of Common Stock to acquire Composite Industries, Inc. valued at $1,566,573. On April 27, 1999, the company issued 100,000 shares of Class B Preferred Stock to acquire M.P. Hall Enterprises, Inc. valued at $525,120. On May 24, 1999, the company issued 550,000 shares of Common Stock for services rendered to the company valued at $30,000. On June 23, 1999, the company issued 19,149 shares of Common Stock for consulting services rendered to the company valued at $9,575. On June 28, 1999, the company issued 215,983 of restricted Common Stock valued at $2.43 per share to acquire Big Mountain Construction Company, Inc. On June 28, 1999, Affordable purchased 100% of the Common Stock of Realty Center, Inc. for 228,572 shares of Preferred Class A Stock valued at $3.50 per share ($800,000). THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS AFFORDABLE HOMES OF AMERICA, INC. and SUBSIDIARIES (a development stage company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998 and 1999 NOTE 1 - General and Summary of Significant Accounting Policies (A) - Nature of Business Affordable Homes of America, Inc. (Affordable-Nevada), was incorporated under the laws of the state of Nevada on February 10, 1997. On March 17, 1999, Affordable-Nevada was merged into Kowtow, Inc., a nonoperating public shell corporation, through exchange of 80% of the issued and outstanding shares of Kowtow's common stock for 100% of the outstanding common stock of Affordable. Kowtow, a Utah corporation, was incorporated on March 7, 1986. Kowtow's legal name was changed to Affordable Homes of America, Inc., (Affordable). The acquisition is considered to be a capital transaction, in substance equivalent to the issuance of stock by Affordable-Nevada for the net monetary assets of Kowtow, accompanied by a recapitalization of Affordable. Common stock and additional paid in capital have been restated to reflect the recapitalization for all periods presented. Affordable is a development stage company primarily in the business of land development and the construction of residential houses. In addition, on April 15, 1999, Composite Industries, Inc. (Composite) was merged into Affordable. Composite, also a development stage company is in the process of developing and commercializing a compound to be used in the construction process referred to as Z-MIX. In addition to Composite, the company's operations include four wholly owned subsidiaries: * Kampen and Associates, Inc. owns 485 acres of land located in Pierce County, Washington. Kampen intends to construct 575 residential units on the property; * M.P. Hall Enterprises, Inc. owns property also located in Pierce County, Washington. M.P. Hall intends to construct a 55 unit motel on the site; * Big Mountain Construction Company, Inc. is a general building contractor; AFFORDABLE HOMES OF AMERICA, INC. and SUBSIDIARIES (a development stage company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998 and 1999 NOTE 1 - General and Summary of Significant Accounting Policies (continued) (A) -Nature of Business (continued) * Realty Center, Inc. owns a 50% interest in a joint venture to develop a residential home site known as Heartland Homes. The project is located in Seattle, Washington. Affordable's corporate headquarters are located in Las Vegas, Nevada. (B) -Consolidated Net (Loss) per Common Share Consolidated net (loss) per common share is computed on the basis of the weighted average number of common shares outstanding during the period. The 1998 loss per share was restated to give retroactive effect for the 2 for 1 stock split effective 3/19/99. Only the weighted average number of shares of common stock outstanding was used to compute basic loss per share for the period from inception to June 30, 1999 as there were no stock options, warrants, or other common stock equivalents during this period. (C) -Cash and Cash Equivalents Affordable considers all highly liquid debt instruments purchased with a maturity of 90 days or less to be cash equivalents for financial statement purposes. (D) -Income Taxes No income taxes were provided since the Affordable incurred a loss during the development stage, no income taxes were provided. Normally, taxes are provided on all revenue and expense items included in the Consolidated Statements of Operations, regardless of the period in which such items are recognized for income tax purposes, except for items representing a permanent difference between pretax accounting income and taxable income. AFFORDABLE HOMES OF AMERICA, INC. and SUBSIDIARIES (a development stage company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998 and 1999 NOTE 1 -General and Summary of Significant Accounting Policies (continued) (E) -Depreciation Affordable depreciates equipment, vehicles and machinery on a straight-line basis over five to seven years for financial reporting purposes. (F) -Patents Affordable amortizes its patent rights on a straight-line basis over 10 years. (G) -Use of Estimates In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the 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. (H) -Basis of Presentation The accompanying consolidated balance sheet and related statements of operations and deficit accumulated during the development stage, stockholders' equity and cash flows includes the accounts of Affordable Homes of America, Inc., Kampen and Associates, Inc., M.P. Hall Enterprises, Inc., Big Mountain Construction Company, Inc., Realty Center, Inc. and Composite Industries of America, Inc. as of June 30, 1999 and for the periods from their dates of acquisition or merger to June 30, 1999. The accompanying balance sheet and related statements of operations and deficit accumulated during the development stage, stockholders' equity and cash flows includes the accounts of Affordable Homes of America, Inc. as of and for the year ended June 30, 1998 and for the period then ended. Significant intercompany transactions or balances as of and for the periods ended June 30, 1999 and 1998 have been eliminated. AFFORDABLE HOMES OF AMERICA, INC. and SUBSIDIARIES (a development stage company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998 and 1999 Note 2 -Acquisition of Subsidiaries Kampen and Associates, Inc. - Effective April 14, 1999, Affordable purchased 100% of the common stock of Kampen and Associates, Inc. for 428,572 convertible Class A preferred shares of Affordable valued at $3.50 per share for a total purchase price of $1,500,000. The cost basis of the net assets acquired was increased by $1,511,086 to reflect the purchase price of the company. The acquisition was treated as a purchase for financial reporting purposes. No goodwill was recognized in the transaction. Kampen filed for protection under Chapter 11 of the U.S. Bankruptcy Code on June 24, 1999. See Note 13. Composite Industries, Inc. - Composite Industries was merged into Affordable under an agreement and plan of merger dated April 15, 1999. The agreement called for the conversion of 100% of the issued and outstanding shares of Composite in exchange for Affordable common stock at the rate of two shares of Composite for each share of Affordable. As of the effective date, there were 13,028,539 common shares Composite outstanding. The acquisition was treated as a purchase for financial reporting purposes. M.P. Hall Enterprises, Inc. - Effective April 27, 1999, Affordable purchased 100% of the common stock of M.P. Hall Enterprises, Inc. for 100,000 convertible Class B preferred shares of Affordable valued at $5.50 per share for a total purchase price of $550,000. The cost basis of the net assets acquired was increased by $550,000 to reflect the purchase price of the company. The acquisition was treated as a purchase for financial reporting purposes. No goodwill was recognized in the transaction. Big Mountain Construction Company, Inc. - Effective June 28, 1999, Affordable purchased 100% of the common and preferred stock of Big Mountain Construction Company, Inc. for 215,983 restrictive common shares of Affordable valued at $2.43 per share for a total purchase price of $525,120. The acquisition was treated as a purchase for financial reporting purposes. Goodwill in the amount of $408,197 was recognized in the transaction. Goodwill will be amortized on a straight-line basis over seven years commencing July 1, 1999. AFFORDABLE HOMES OF AMERICA, INC. and SUBSIDIARIES (a development stage company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS JUNE 30,1998 and 1999 Note 2 - Acquisition of Subsidiaries (continued) Realty Center, Inc. - Effective June 28, 1999, Affordable purchased 100% of the common stock of Realty Center, Inc. for 114,286 convertible Class A preferred shares of Affordable valued at $3.50 per share for a total purchase price of $400,000. Realty Center's assets consist of a 25% joint venture interest in a real estate development project known as Heartland Homes. Further, Affordable acquired an additional 25% interest in Heartland Homes directly by issuing an additional 114,286 shares of convertible Class A preferred stock. Immediately after Affordable's acquisition of Realty Center, Affordable transferred it's 25% interest in Heartland into Realty Center. The acquisition was treated as a purchase for financial reporting purposes. No goodwill was recognized in the transaction. Allocation of the purchase price for each of the transactions follows: Kampen and M.P. Hall Big Mountain Realty Total all Associates Enterprise Construction Center Companies , Inc. s Inc Company, Inc. Inc. ---------- ---------- ------------ ------- ----------- Assets Cash $0 $0 $9,858 $0 $9,858 Employee and Other 54,600 54,600 advances Land, develop- Ment and cap- Italized Interest 6,668,676 885,252 516,703 8,070,631 costs Equipment 57,720 57,720 (net) Investment in Joint 800,000 800,000 Venture Goodwill 408,197 408,197 ---------- ---------- ------------ ------- ----------- Total $6,668,676 $885,252 $1,047,078 $800,00 $9,401,006 0 ========== ========== ============ ======= =========== Liabilities Assumed and Equity Liabilities Assumed $5,157,590 $335,252 $521,958 $0 $6,014,800 Convertible Preferred Stock 429 100 229 758 Common Stock Additional paid in capital 1,510,657 549,900 524,904 779,771 3,385,232 ---------- -------- ---------- -------- ---------- Total $6,668,676 $885,252 $1,047,078 $800,000 $9,401,006 ========== ======== ========== ======== ========== AFFORDABLE HOMES OF AMERICA, INC. and SUBSIDIARIES (a development stage company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS JUNE 30,1998 and 1999 Note 2 -Acquisition of Subsidiaries (continued) AFFORDABLE HOMES OF AMERICA, INC. (A Development Stage Company) Pro forma Statements of Operations and Deficit accumulated during the development stage Cumulative from inception (March 21, 1996) June 30, to June 30, 1999 1996 1997 1998 1999 Revenues: Interest $24,595 $- $- $3,142 $21,453 income ------------- -------- ------- -------- -------- Expenses: Research and Development 14,640 - - - 14,460 costs General and 578,347 - - 277,423 300,924 Administrative Depreciation and Amortization 199,550 3,202 64,939 70,870 60,539 Loss on disposition of equipment 2,850 - - - 2,850 ------------- -------- ------- -------- -------- Total expenses 795,387 3,202 64,939 348,293 378,953 ------------- -------- ------- -------- -------- Net (loss) $(770,792) $(3,202) $(64,939) $(345,151) $(357,500) ============= ======== ========= ========== ========== (Loss) per Common share $(.22) $(NIL) $(.03) $(.17) $(.07) ============= ======== ========= ========== ========== Shares used in Computing loss per Share amounts 3,582,601 2,000,00 2,000,000 2,000,000 5,165,202 0 ============= ======== ========= ========== ========== AFFORDABLE HOMES OF AMERICA, INC. and SUBSIDIARIES (a development stage company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998 and 1999 Note 3 - Advances Affordable, through Composite Industries, Inc. had from time to time, advanced funds to Omega International, Inc., an unrelated company in the business of developing products for the construction industry. Composite advanced the funds totaling $224,140 through June 30, 1999 which included principal of $205,000 and accrued interest receivable of $19,140 and funds totaling $183,000 through June 30, 1998 which included principal of $180,000 and accrued interest receivable of $3,000 in an effort to assist Omega in further developing its products. The notes are unsecured, due upon demand, and bear interest at 8% per annum. Interest income was recorded in the amounts of $16,140 and $3,000 for the years ended June 30, 1999 and 1998 respectively. Management is in the process of negotiating the acquisition of Omega and intends to offset a portion of the purchase price of the company by these advances. Composite's financial statements as of June 30, 1998 reflected this advance as a current asset in the amount of $183,000. The proforma consolidated balance sheet as of June 30, 1998 includes a restatement of this asset to be consistent with that of June 30, 1999. Note 4 - Machinery and Equipment Machinery and equipment consists of the following as of June 30, 1999: Machinery $ 84,640 Office Equipment 13,639 Vehicles 57,472 155,751 Less: Accumulated depreciation ( 47,466) Total $108,285 Depreciation expense was incurred in the amount of $7,106 for the year ended June 30, 1999 and is included in general and administrative expense. AFFORDABLE HOMES OF AMERICA, INC. and SUBSIDIARIES (a development stage company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998 and 1999 NOTE 5 - Income Taxes Affordable accounts for income taxes on the liability method, as provided by Statement of Financial Accounting Standards 109, Accounting for Income Taxes (SFAS 109). At June 30, 1999 and 1998 no income taxes were provided. There were no differing methods of reporting income for tax purposes as compared to financial reporting purposes. There was no net deferred income tax provision for the years ended June 30, 1999 and 1998. Deferred tax assets and liabilities consist of the following: 1999 1998 Deferred tax assets- Net operating loss carryovers $226,216 $ 17,000 Valuation allowance 226,216 17,000 $- - ======== ======= Deferred tax liabilities- $- $- ======== ======= The valuation allowances provided for the periods are based on management's valuation of the likelihood of realization. Affordable incurred net operating losses of $226,216 available to offset future income for financial reporting purposes expiring in 2019. AFFORDABLE HOMES OF AMERICA, INC. and SUBSIDIARIES (a development stage company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998 and 1999 NOTE 6 - Loans and Notes Payable The following schedule summarizes loans and notes payable by subsidiary as of June 30, 1999: Kampen and Associates, Inc. Cascade Land Depository described in Note 8 $ 1,550,000 Big Mountain Construction Company, Inc. $33,000 equipment loan dated May 20, 1999 secured by excavating equipment payable at $1,664 per month including interest at 20.9% per annum with the final installment due on May 20, 2001 30,216 Construction loan dated August 11, 1998 secured by land and property with monthly payments on an interest only basis and principal due November 16, 1999 including extension at prime + 2%, currently 10% 302,470 M.P. Hall Enterprises, Inc. Promissory note dated March 17, 1999 secured by land and property with monthly payments on an interest only basis and principal due on March 17, 2000. Interest is payable at 14% per annum 335,252 Total 2,217,937 Less current maturities 2,202,779 Long-term portion $ 15,159 Aggregate annual schedule maturities of long-term debt at June 30, 1999 are as follows: June 30, 1999 $2,202,779 June 30, 2000 15,159 Total $2,217,937 AFFORDABLE HOMES OF AMERICA, INC. and SUBSIDIARIES (a development stage company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998 and 1999 NOTE 7 - Land Purchase and Options On June 12, 1996, Kampen and Associates, Inc. agreed to purchase 485 acres of land located in Pierce County, Washington from Maytel Partnership. The total purchase price of $4,000,000 and is financed through an option payment agreement. Payments under this agreement are due at various stages and are not subject to interest. The payment terms and conditions of the agreement are summarized as follows: * An initial payment of $15,000 was paid upon the execution of the agreement; * Under an alternative agreement selected by Kampen, a payment of $250,000 was paid on July 31, 1996; * Payments of $5,000 are due on the 1st day of each month commencing July 1, 1996. Kampen has the option of defaulting on these payments whereby the land would revert to the seller; * At the point where residential units are completed and sold, Kampen will remit to the seller $7,000 at the closing of each unit until the balance is paid in full. The remaining balance on these option payments is $3,415,000 of which $60,000 is currently due as of June 30, 1999. NOTE 8 - Loan from Cascade Land Depository On June 12, 1996, Kampen and Associates, Inc. negotiated a loan in the amount of $1,550,000 from the Shoalwater Bay Indian Tribe, doing business as Cascade Land Depository. The purpose of the loan was to finance a portion of the purchase price of land described in Note 7 and other related costs. The note was due and payable on May 1, 1998 with a stated interest rate of 8% per annum. Interest is due and payable in six month intervals on November 1 and May of each year. The loan is currently in default with interest payable from November 1, 1997. The unpaid interest has accumulated to $206,667 as of June 30, 1999. See Note 13. AFFORDABLE HOMES OF AMERICA, INC. and SUBSIDIARIES (a development stage company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998 and 1999 NOTE 9 - Related Party Transactions The company had entered in to consulting agreements with certain members of the Company's Board of Directors and stockholders to provide services on various strategic and business issues. The agreements were for one year in duration and expired on July 1, 1999 (except one which expires on October 15, 1999). The agreements are renewable at the discretion of the company and are presently under review. Total fees paid for such services by the Company either in stock or cash during the year ended June 30, 1999 were $234,000 and are included in consulting fees in the statement of operations. Management believes the transactions were at arm's length. The President and Chief Executive Officer has from time to time advanced funds to Affordable or one of its subsidiaries to assist with working capital requirements. As of June 30, 1999, such funds advanced to the company amounted to $182,186. In addition, the joint venture construction project known as Heartland Homes advanced $53,101 to Big Mountain Construction Company, Inc. These advances are non interest bearing and are short-term in nature. NOTE 10 -Concentration of Credit Risk - Cash The Company maintains its cash balances at financial institutions located in Nevada and Montana. At times, the balance may exceed federally insured limits of $100,000. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash on deposit. The fair market value of this financial instrument approximates cost. The fair market value of these balances approximate book value. AFFORDABLE HOMES OF AMERICA, INC. and SUBSIDIARIES (a development stage company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998 and 1999 NOTE 11 - Patents Affordable through its merger with Composite Industries of America, Inc. holds the exclusive rights to produce Z-MIX, a cementitious composite developed and acquired from Zawada Industries in October 1997. On July 21, 1998, Composite was issued the patent rights for this product. A second patent relating to improvements to the product was issued on December 22, 1998. Costs incurred through June 30, 1999 to develop and obtain the patents rights amounted to $394,313 of which $370,000 was attributable to the issuance of common stock. Amortization of $8,211 was charged during the year ended June 30, 1999 and is included general and administrative expenses. Note 12 - Commitments In January 1999, Affordable entered into an agreement to lease their current facility located in Las Vegas, Nevada. The lease term is for six months beginning February 1, 1999 at the rate of $591 per month plus additional charges for common area operating maintenance. There is an option to extend the lease on a month-to-month basis at 115% of the current monthly rent. Total lease commitments are as follows: Year ended Amount June 30, 2000 $ 591 Total $ 591 AFFORDABLE HOMES OF AMERICA, INC. and SUBSIDIARIES (a development stage company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998 and 1999 Note 13 - Chapter 11 Bankruptcy Petition On May 21, 1999, Kampen & Associates, Inc. was served with a notice of foreclosure as a consequence of its default in its loan obligation to Shoalwater Bay Indian Tribe d/b/a/ Cascade Land Depository. See Note 8. As a result of this action by Cascade, Kampen filed for protection under the provisions of Chapter 11 of U.S. Bankruptcy Code on June 24, 1999. Under these provisions, Kampen is protected from collection actions by its creditors until it can be implement a plan of reorganization. The total liabilities owed by Kampen to third parties amounts to $5,218,807 as of June 30, 1999. NOTE 14 - Industry Segment Information Affordable has three major business segments all related to the building and construction industry: general contracting, product sales and development and land development. During 1998, Affordable adopted Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS 131). The adoption of SFAS 131 requires the presentation of descriptive information about reportable segments which is consistent with that made available to the management of Affordable to assess performance. As a result of this change, the company now reports segment performance on an after-tax basis. In determining the net income of each segment of the company effective tax rates are determined for each business segment. AFFORDABLE HOMES OF AMERICA, INC. and SUBSIDIARIES (a development stage company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS JUNE 30,1998 and 1999 Note 14 - Industry Segment Information (continued) Product Land and General Sales and Building Inte Contracting Development Development r- Total segm ent - --------------------------------------------------------------------------- June 30, 1998 Sales $ $- $- $- $- $- Operating (loss) (15,000) - - - (15,000) Net interest - - - - - (LOSS) on Disposition of Equipment Pretax (loss) (15,000) - - - (15,000) Net (loss) (15,000) - - - (15,000) Assets - - - - - Depreciation & Amortization - - - - - Additions to long- lived assets - - - - - Product Land and General Sales and Building Inte Contracting Development Development r- Total segm ent - --------------------------------------------------------------------------- - June 30, 1999 Sales $ $- $- $- $- $- Operating (loss) (73,604) (98,788) (38,724) - (211,116) Net interest - 4,750 - - 4,750 (Loss) on disposition of Equipment - (2,850) - - (2,850) Pretax (loss) (73,604) (96,888) (38,724) - (209,216) Net (loss) (73,604) (96,888) (38,724) - (209,216) Assets 1,224,728 629,587 8,451,964 - 10,306,279 Depreciation & Amortization - 15,317 - - 15,317 Additions to long- Lived assets 57,720 65,942 - - 123,662 AFFORDABLE HOMES OF AMERICA, INC. and SUBSIDIARIES (a development stage company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998 and 1999 NOTE 15 - Stockholders' Equity Affordable has authorized the issuance of 100,000,000 shares of $.001 par common stock. At June 30, 1999 and 1998, the company had issued 17,549,402 and 2,000,000 shares, respectively. The company is also authorized to issue two classes of convertible preferred stock; Class A and Class B. Each share of Class A preferred is convertible to common stock at $3.50 per share. Class B preferred stock is convertible to common stock at $5.50 per share. Each class of preferred stock is authorized at 5,000,000 shares. At June 30, 1999, 657,144 shares of Class A convertible preferred stock and 100,000 of Class B convertible preferred stock were issued. NOTE 16 - Year 2000 Compliance The Year 2000 Issue arises because many computerized systems use two digits rather than four to identify a year. Date-sensitive systems may recognize the Year 2000 as 1900 or some other date, resulting in possible errors when information-using year 2000 dates is processed. In addition, similar problems may arise in some systems which use certain dates in 1999 to represent something other than a date. The effects of the Year 2000 issue may be experienced before, on, or after January 1, 2000, and, if not addressed, the impact on operations and financial reporting may range from minor errors to significant systems failure which could affect an entities ability to conduct normal business operations. It is not possible to be certain that all aspects of the Year 2000 issue affecting Affordable including those related to the efforts of customers, suppliers, or other third parties, will be fully resolved. Generally, costs associated with the Year 2000 issue are being expensed as incurred. NOTE 17- Subsequent Events Affordable is currently negotiating a bank line of credit for $15,000,000 to accommodate future business expansion and provide working capital for the company. AFFORDABLE HOMES OF AMERICA, INC. and SUBSIDIARIES (a development stage company) INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998 and 1999 PAGE Report of Independent Auditors 1 Consolidated balance sheets as of June 30, 1998 and 1999 2-3 Consolidated statements of operations during the development stage cumulative from inception (February 10, 1997) to June 30, 1998 and 1999 4 Consolidated statements of changes in stockholders' equity (deficit) cumulative from inception (February 10, 1997) to June 30, 1998 and 1999 5-8 Consolidated statements of cash flows during the development stage cumulative from inception (February 10, 1997) to June 30, 1998 and 1999 9-10 Notes to the Consolidated Financial Statements 11-25

EX-27

 

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