<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 6, 1997
REGISTRATION NO. 333-33965
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
UNITED HOMES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
ILLINOIS 1520 36-3978181
(State or other jurisdiction (Primary Standard Industrial (I.R.S.Employer
of incorporation or Classification Code Number) Identification
organization) Number)
</TABLE>
DAVID L. FELTMAN
VICE PRESIDENT, GENERAL COUNSEL
2100 GOLF ROAD, SUITE 110
ROLLING MEADOWS, ILLINOIS 60008
(847) 427-2450
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
--------------------------
WITH COPIES TO:
MICHAEL J. CHOATE, ESQ. DANIEL A. YARANO, ESQ.
Shefsky & Froelich Ltd. Fredrikson & Byron, P.A.
444 North Michigan Avenue 1100 International Center
Suite 2500 900 Second Avenue South
Chicago, Illinois 60611 Suite 1100
(312) 836-4066 Minneapolis, Minnesota 55402-3397
(612) 347-7149
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
FROM TIME TO TIME AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
--------------------------
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: /X/
--------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED BE REGISTERED PER DEBENTURE OFFERING PRICE(1) FEE(3)
<S> <C> <C> <C> <C>
11% Mandatory Redemption Debentures due March
15, 2005(2)................................. 7,106 $1,000 $7,160,000 $2,170
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) of the Securities Act of 1933.
(2) Includes $999,775 in aggregate principal amount of Debentures which may be
purchased by the Underwriter to cover over-allotments, if any.
(3) The Registrant previously paid a filing fee of $1,819 and $303 in connection
with the filing of its Registration Statement on Form S-1 (File Number
333-33965) as filed on August 19, 1997 and Amendment Number One as filed on
October 21, 1997.
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THE REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
UNITED HOMES, INC.
CROSS REFERENCE SHEET SHOWING LOCATION IN THE PROSPECTUS OF
INFORMATION REQUIRED BY ITEM 501(B) OF REGULATION S-K
<TABLE>
<CAPTION>
ITEM LOCATION IN PROSPECTUS
- ---------------------------------------------------------------- -----------------------------------------------------
<C> <S> <C>
1. Forepart of Registration Statement and Outside Front
Cover Page of Prospectus........................... Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus......................................... Outside Front Cover page; Outside Back Cover Page;
Additional Information
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges.......................... Outside Front Cover Page; Prospectus Summary; Risk
Factors
4. Use of Proceeds...................................... Prospectus Summary, Use of Proceeds
5. Determination of Offering Price...................... *
6. Dilution............................................. *
7. Selling Security Holders............................. *
8. Plan of Distribution................................. Outside Front Cover Page; Underwriting
9. Description of Securities to be Registered........... Prospectus Summary; Dividend Policy; Description of
Securities
10. Interest of Named Experts and Counsel................ *
11. Information with Respect to Registrant............... Prospectus Summary; Risk Factors; Use of Proceeds;
Capitalization; Selected Consolidated Financial
Data; Management's Discussion and Analysis of
Financial Condition and Results of Operations;
Business; Management; Security Ownership of Certain
Benefical Owners and Management; Certain
Transactions
12. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities..................... *
</TABLE>
- ------------------------
* Not Applicable
i
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED NOVEMBER 6, 1997
[UNITED LOGO]
UNITED HOMES, INC.
11% MANDATORY REDEMPTION DEBENTURES DUE MARCH 15, 2005
---------------------
United Homes, Inc. ("United") is hereby offering on a "best effort" basis a
minimum of 3,050 debentures, approximately $3,000,000, (the "Minimum Amount")
and a maximum amount of 6,091 debentures, approximately $6,000,000, (the
"Maximum Amount") of its 11% Mandatory Redemption Debentures which will mature
on March 15, 2005 (the "Debentures"). See "Use of Proceeds." If the Minimum
Amount is not sold within 60 days of the date of this Prospectus, the Offering
will terminate at the end of such period, otherwise, the Offering will terminate
no later than six months from the date of this Prospectus.
Interest on the Debentures will accrue from their date of original issuance
(the date the Minimum Amount is sold) or with respect to Debentures issued after
March 15, 1998, from March 15, 1998. Interest will be payable quarterly on
December 15, March 15, June 15 and September 15 of each year, commencing on
March 15, 1998. The Debentures initially will be issued in registered principal
amounts of $1,000 each, or any integral multiple thereof.
United must redeem a portion of the Debentures on or before September 15,
1999. Commencing on or before September 15, 1999 and on each September 15th and
March 15th thereafter, United will pay the Trustee on each redemption date
sufficient cash to redeem $83,333 for each $1,000,000 registered principal
amount of Debentures sold by United. The Debentures are redeemable, at United's
option, in whole or in part, upon at least 30 days' notice, at any time
beginning December 15, 1997 at the redemption prices set forth herein plus
accrued interest to the date of redemption. The Debentures to be redeemed will
be selected by the Trustee by lot or other similar method.
The Debentures will be unsecured obligations of United and will rank equally
and ratably with all other unsecured indebtedness of United. The Debentures are
not guaranteed by, or otherwise an obligation of, any of United's subsidiaries.
As of June 30, 1997, United and its operating subsidiaries had a total of
approximately $84.0 million of outstanding liabilities, including approximately
$70.3 million of secured indebtedness and approximately $13.0 million of
indebtedness incurred by the Subsidiaries. See "Risk Factors--Lack of
Collateral." The Indenture governing the Debentures does not limit the amount of
secured indebtedness United or its Subsidiaries may incur.
--------------------------
AN INVESTMENT IN THE DEBENTURES INVOLVES A HIGH DEGREE OF RISK. THERE IS NO
EXISTING PUBLIC MARKET FOR THE DEBENTURES AND THERE CAN BE NO
ASSURANCE THAT A PUBLIC MARKET WILL DEVELOP. SEE
"RISK FACTORS" BEGINNING ON PAGE 8.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL
OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING
DISCOUNT AND NET PROCEEDS TO
PRICE TO PUBLIC(1) COMMISSIONS(2) COMPANY(2)(3)
<S> <C> <C> <C>
PER DEBENTURE.................................................. $985 7.0% $916
MINIMUM AMOUNT (3,050 DEBENTURES).............................. $3,004,250 7.0% $2,793,953
MAXIMUM AMOUNT (6,091 DEBENTURES)(4)........................... $5,999,635 7.0% $5,579,661
</TABLE>
(1) Each Debenture will be offered at 98.5% of the registered principal amount
plus accrued interest from the Closing Date of the Minimum Amount or, with
respect to Debentures sold after March 15, 1998, from March 15, 1998. See
"Underwriting."
(2) The Company has granted the Underwriter the exclusive right to sell the
Debentures on a "best efforts" basis for a period of six months, unless
terminated earlier. The Company has agreed to pay the Underwriter an
Underwriting Discount and Commission equal to 7%, a management fee equal to
2%, and a non-accountable expense allowance equal to 1% of the total Price
to Public and to reimburse the underwriter for accountable expenses up to
$120,000. The Company has agreed to indemnify the Underwriter against
certain civil liabilities, including liabilities under the Securities Act of
1933, as amended. See "Underwriting."
(3) The "Net Proceeds to Company" in each case reflects the total Price to
Public reduced by all Underwriting Discount and Commissions, but before
deducting management fees as well as accountable and non-accountable expense
allowances described in note (2) above and other expenses of the offering
payable by the Company which other expenses are estimated at approximately
$188,000.
(4) The Company has granted the Underwriter an option to purchase up to an
additional 1,015 Debentures, approximately $1,000,000, on the same terms and
conditions as the Debentures offered hereby, solely to cover
over-allotments. If all of the Debentures are purchased, including the
additional Debentures, the total Underwriting Discount and Commissions,
management fees, and the non-accountable and accountable expenses will be
approximately $490,000, $140,000, $70,000 and $140,000, respectively.
------------------------------
MILLER & SCHROEDER FINANCIAL, INC.
The date of this Prospectus is ________________ , 1997.
<PAGE>
MAPS
MAPS INDICATE THE LOCATION OF THE COMPANY'S
DEVELOPMENTS IN ARIZONA, ILLINOIS AND MICHIGAN.
Map 1. ILLINOIS. The map depicts the Chicago Area with the location of the
Company's developments marked with a star. Additionally, the map contains
a picture of homes in the Woodmere development located in Illinois.
Map 2. WESTERN MICHIGAN. The map depicts the Grand Rapids Area with close-ups
of the locations of the Company's developments. Additionally, the map
contains a picture of the interior of a home.
Map 3. ARIZONA. The map depicts the greater Phoenix Area with locations of the
Company's developments marked with a star. Additionally the map contains
a picture of a home in the Altezza development located in Phoenix,
Arizona.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE DEBENTURES.
SPECIFICALLY, THE UNDERWRITER MAY OVER-ALLOT IN CONNECTION WITH THIS OFFERING
AND MAY BID FOR AND PURCHASE SHARES OF THE DEBENTURES IN THE OPEN MARKET. IN
ADDITION, THE UNDERWRITER AND SELLING GROUP MEMBERS MAY ENGAGE IN PASSIVE MARKET
MAKING. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED IN THIS
PROSPECTUS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MORE DETAILED
INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO,
APPEARING ELSEWHERE IN THIS PROSPECTUS. AS USED HEREIN, THE "COMPANY" MEANS
UNITED HOMES, INC. ("UNITED"), AND UNITED'S WHOLLY-OWNED SUBSIDIARIES UNITED
HOMES OF ILLINOIS, INC.; UNITED HOMES OF MICHIGAN, INC.; AND UNITED HOMES, INC.,
AN ARIZONA CORPORATION (INDIVIDUALLY, A "SUBSIDIARY," COLLECTIVELY THE
"SUBSIDIARIES") AND THE FOLLOWING PARTNERSHIPS IN WHICH UNITED OR THE
SUBSIDIARIES OWN CONTROLLING INTERESTS IN EITHER AS GENERAL OR LIMITED PARTNERS:
WILLIAMS GLEN LIMITED PARTNERSHIP, THE HIDDEN SPRINGS REAL ESTATE LIMITED
PARTNERSHIP, UNITED/RBG XII L.P. AND THE UNITED LINDSAY EAST VALLEY LIMITED
PARTNERSHIP. UNITED WAS FORMED IN 1994 TO CARRY ON THE HOMEBUILDING ACTIVITIES
OF UNITED'S PARENT CORPORATION UNITED DEVELOPMENT MANAGEMENT COMPANY (THE
"PARENT"). UNITED IS A WHOLLY-OWNED SUBSIDIARY OF THE PARENT. STATISTICAL AND
OTHER INFORMATION CONTAINED HEREIN REGARDING THE COMPANY'S HOMEBUILDING
ACTIVITIES INCLUDE THE HOMEBUILDING ACTIVITIES OF THE PARENT SINCE 1982. THE
DATA INCLUDED HEREIN ASSUMES THAT THE UNDERWRITER'S OVER-ALLOTMENT OPTION IS NOT
EXERCISED.
THE COMPANY
The Company is a fully-integrated land development and homebuilding company
operating in the Chicago, Phoenix and western Michigan markets and since 1982
has developed over 7,300 lots and has built and closed over 6,100 homes. The
Company acquires undeveloped land and develops it into finished lots for
residential subdivisions, and periodically options or purchases finished lots
from third parties, primarily for the construction and sale of homes. The
Company maintains an inventory of potential home sites (lots) by controlling
undeveloped and developed land through options, contingent purchase agreements,
joint ventures, partnerships and other contractual relationships with landowners
("Acquisition Agreements"). The Company believes that this strategy allows it to
control sites for future development and at the same time maximize use of its
available capital. For the nine months ended June 30, 1997, the Company closed
on the sale of 280 homes generating approximately $51.0 million in revenue from
housing and land sales as compared to 205 homes generating approximately $35.0
million in revenue from housing and land sales for the nine months ended June
30, 1996. As of June 30, 1997, the Company had contracts to sell an additional
425 homes and a current inventory of 739 lots on which the Company anticipates
developing and selling 739 homes. Additionally, as of the date of this
Prospectus, the Company controlled, under the Acquisition Agreements, seven
parcels of land on which it had completed its due diligence for future
development of homes.
Prices for the Company's homes, including the lot, range from $110,000 to
$400,000 per home. During the first nine months of fiscal 1997, the average
price for a home sold by the Company was approximately $179,000. The Company
markets its products to entry-level, first and second move-up, and empty-nest
buyers by emphasizing the community atmosphere of its residential subdivisions,
as well as those characteristics that the Company believes that its homes
possess: desirable designs, quality construction and competitive prices.
United, which is an Illinois corporation, has its principal office at 2100
Golf Road, Suite 110, Rolling Meadows, Illinois 60008. Its telephone number is
847-427-2450.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Securities Offered................ A minimum of 3,050 Debentures, approximately $3,000,000,
(the "Minimum Amount") and up to 6,091 Debentures,
approximately $6,000,000, (the "Maximum Amount") of 11%
Mandatory Redemption Debentures, due March 15, 2005 to
be issued pursuant to an Indenture (the "Indenture")
between the Company and National City Bank of
Minneapolis (the "Trustee") only in fully registered
form in registered principal amounts of $1,000 each, or
any integral multiple thereof. See "Description of
Securities."
Interest Payment Dates............ Interest will accrue from the date of original issuance
or, with respect to Debentures issued after March 15,
1998, from March 15, 1998. Interest will be payable
quarterly on December 15, March 15, June 15 and
September 15 of each year ("Interest Payment Date"),
commencing on March 15, 1998.
Mandatory Redemptions............. The Debentures will be subject to mandatory redemption
beginning September 15, 1999. On or before September 15,
1999 and on each September 15 and March 15 thereafter
through September 15, 2004, United will pay to the
Trustee cash sufficient to redeem $83,333 for each
$1,000,000 registered principal amount of Debentures
sold by United. On or before March 15, 2005, United will
pay to the Trustee cash sufficient to redeem all
remaining outstanding Debentures. Debentures to be
redeemed will be selected by the Trustee by lot or other
similar method. See "Description of
Securities--Mandatory Redemption."
Optional Redemptions.............. United may, at its option, redeem Debentures on any
Interest Payment Date in minimum aggregate principal
amounts of $100,000 at a price equal to the principal
amount plus accrued interest and a premium. If an
optional redemption occurs on or before September 15,
1998, United must pay a 5% premium. After this date, the
premium due on optional redemption will decline at the
rate of 1% per year, with no premium due after September
15, 2002. United may, at its option, elect to have any
optional redemption payment applied to the next
mandatory redemption payment or payments. See
"Description of Securities--Optional Redemption."
Rank.............................. The Debentures will be unsecured obligations of United
and will rank equally and ratably with all other
unsecured indebtedness of United. The Debentures are not
guaranteed by, or otherwise an obligation of, any
Subsidiary. As of June 30, 1997, the Company had total
outstanding liabilities of $84.0 million (including
$70.3 million of secured indebtedness) and approximately
$13.0 million of indebtedness incurred by the
Subsidiaries. See "Risk Factors--Lack of Collateral."
The Indenture governing the Debentures does not limit
the amount of secured indebtedness United or its
Subsidiaries may incur.
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
Use of Proceeds................... United intends to use the net proceeds from the sale of
the Debentures, estimated to be approximately $5,091,677
assuming sale of the Maximum Amount, first to repay
indebtedness incurred in connection with land
acquisitions or working capital loans ($2,600,000) and
second to repay indebtedness outstanding under its
Construction Lines as defined herein ($2,482,000).
Amounts repaid on these Construction Lines may be
reborrowed for land acquisition, land development,
construction of homes, and for working capital. See "Use
of Proceeds."
Certain Covenants................. United has agreed to comply with certain financial
covenants as set forth in the Indenture. See
"Description of Securities."
</TABLE>
RISK FACTORS
An investment in the Debentures involves certain risks. See "Risk Factors"
for a discussion of factors that investors should carefully consider before
purchasing any of the Debentures offered hereby.
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(DOLLARS IN THOUSANDS)
The following summary of the Company's consolidated financial information
should be read in conjunction with the Consolidated Financial Statements,
including the notes thereto, appearing elsewhere
in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS FISCAL YEAR
ENDED JUNE 30, ENDED SEPTEMBER 30,
-------------------- -------------------------------
1997 1996 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues............................................... $ 51,608 $ 34,991 $ 65,117 $ 44,349 $ 32,886
Gross Profit........................................... $ 3,477 $ 3,692 $ 4,623 $ 4,282 $ 3,659
Operating Income....................................... $ 1,575 $ 1,406 $ 1,785 $ 1,512 $ 1,169
Investor's Share of Income in Majority Owned Land
Development and Housing Partnerships................. $ (465) $ (375) $ (735) $ (70) --
--------- --------- --------- --------- ---------
Income before Income Taxes............................. $ 1,110 $ 1,031 $ 1,050 $ 1,442 $ 1,169
--------- --------- --------- --------- ---------
OTHER DATA:
Number of Homes and Lots Closed........................ 310(3) 205 378 267 174
Average Selling Price per Home......................... $ 179 $ 169 $ 171 $ 163 $ 185
--------- --------- --------- --------- ---------
Ratio of Earnings to Fixed Charges(1)...................... (4) 1.06 (4) 1.14 2.45
Ratio of Earnings to Adjusted Fixed Charges(2)............. 5.65 60.35 13.12 27.14 34.54
</TABLE>
- ------------------------------
(1) In calculating the ratio of earnings to fixed charges, earnings consist of
income before minority interests, income tax and fixed charges, less
capitalized interest, plus the interest component included in cost of sales.
Fixed charges consist of interest expended and capitalized and amortization
of debt service costs. The interest factor implicit in rent expense is not
significant.
(2) Represents the ratio of the amount of fixed charges actually funded from the
Company's earnings. In calculating this ratio the amount of interest charges
which are funded from the Company's various lines of credit through draws on
these lines is excluded from fixed charges. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources" below.
(3) Includes the sale of 30 lots at an average price of $46,000 per lot.
(4) Earnings were inadequate to cover fixed charges by approximately $209,000
for the year ended September 30, 1996 and by approximately $1,893,000 for
the nine months ended June 30, 1997. See "Risk Factors--Substantial
Leverage, Reliance on Financing and No Assurance of Availability of Credit"
and "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
6
<PAGE>
<TABLE>
<CAPTION>
AS OF
JUNE 30, 1997 AS OF
---------------------- SEPTEMBER 30,
AS -------------------------------
SELECTED BALANCE SHEET DATA: ADJUSTED(6) ACTUAL 1996 1995 1994
----------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Housing Inventories...................... $ 80,420 $ 80,420 $ 54,588 $ 28,796 $ 21,143
Total Assets............................. $ 95,367(7) $ 94,819 $ 69,931 $ 34,365 $ 26,779
Total Liabilities (excluding
Debentures)............................ $ 81,101 $ 83,557 $ 58,699 $ 22,909 $ 18,825
Debentures............................... $ 3,004 -- -- -- --
Investor's Equity in Majority-Owned
Projects(5)............................ $ 1,467 $ 1,467 $ 2,165 $ 3,037 $ 400
Stockholder's Equity..................... $ 9,795 $ 9,795 $ 9,067 $ 8,419 $ 7,554
</TABLE>
- ------------------------------
(5) Represents the equity of investors in projects, a majority of which
interests are owned by the Company.
(6) Adjusted to give effect to the sale of the Minimum Amount and the
application of the net proceeds as of June 30, 1997. See "Use of Proceeds"
and "Underwriting."
(7) The increase includes the costs of the offering estimated at an aggregate of
$548,511 (assuming the sale of the Minimum Amount). These costs are paid
currently but are capitalized and amortized over the life of the Debentures.
7
<PAGE>
RISK FACTORS
THE DEBENTURES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. IN ADDITION TO
THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, PROSPECTIVE INVESTORS SHOULD
CONSIDER CAREFULLY THE FOLLOWING RISK FACTORS BEFORE PURCHASING THE DEBENTURES.
SUBSTANTIAL LEVERAGE, RELIANCE ON FINANCING AND NO ASSURANCE OF AVAILABILITY OF
CREDIT
The land development and homebuilding business is capital intensive. The
Company typically finances the acquisition of land parcels and the costs
associated with development of the parcels (such as entitlement activities and
construction of streets and sewers) by drawing on its A&D Lines (as defined
herein), including the Residential Line II which can be used solely to fund
acquisition and development activity such as sewer and roadway construction.
Under the agreements governing the A&D Lines, the Company may generally draw up
to 75-80% of the value of the land and improvements (based on an as-built
appraisal) to fund acquisition and development costs. Based on the outstanding
balance of the A&D Lines at the end of each month, an interest charge is either
paid by the Company if the particular loan does not have an interest reserve or
is funded through an additional draw on the loan. As of June 30, 1997, and
September 30, 1996, the Company had total indebtedness of approximately $24.3
million and $22.1 million, respectively, outstanding on its A&D Lines, including
$10.9 million and $4.0 million, respectively, on the Residential Line II ($10.8
million as of the date of this Prospectus). As of June 30, 1997 and September
30, 1996, the Company had funded interest charges of approximately $2.2 million
and $1.9 million associated with these lines, including $0.3 million and $0.5
million, respectively, on the Residential Line II through additional draws on
such line. Additional interest charges of approximately $619,000 associated with
other A&D Lines that do not have interest reserves or permit additional draws to
fund the interest and approximately $285,000 associated with corporate level
debt were incurred and paid by the Company from earnings.
Once construction of a home commences, the Company is able to draw on the
Heller Line and the Residential Line I to finance the costs associated with
constructing a home and preparing a lot for delivery and the home for sale to
the end purchaser. As noted herein, the Company typically does not commence
construction of a home until a buyer executes a purchase contract. See
"Business--Inventory Management" below. As of June 30, 1997 and September 30,
1996, the Company had total indebtedness of approximately $38.1 million and
$16.5 million, respectively, outstanding on these two lines ($5.8 million and
$23.7 million as of the date of this Prospectus) and had incurred interest
charges of approximately $2.5 million and $1.7 million associated with these
lines, all of which was funded by additional draws allowable on these lines.
The amount of indebtedness incurred with respect to any particular project
is based on the purchase price of the land and the costs of constructing and
selling homes on the land. These estimates are based on, among other things,
demand for housing in the Company's market areas which the Company then factors
into its analysis of the number of homes that it believes may be constructed and
the rate in which these homes may be sold to end-purchasers. However, from time
to time the Company will sell improved lots without constructing a home thereon.
There can be no assurance that the Company's estimate of the demand for housing
in the market area or more particularly the rate at which these houses can be
sold will prove correct. Differences in projected and actual demand may cause
the Company to incur additional holding costs associated with land which is
being improved for the construction of homes.
Upon closing of a home sale, the Company utilizes all of the net closing
proceeds (including the Company's profit) from the sale of the home to reduce
indebtedness under the relevant A&D Line as well as the Heller Line or
Residential Line I as the case may be. Thus, the amount of indebtedness
outstanding on these lines fluctuates based on the number of parcels and homes
under development or construction at any one time and the rate at which the
Company closes on homes under contract for sale. During the fiscal year ended
September 30, 1996 and the nine months ended June 30, 1997, the Company made
principal
8
<PAGE>
reductions of approximately $59.8 million and $40.9 million, respectively on
these lines. As of September 30, 1997, the Company had approximately $6.5
million available for borrowing under all of its credit facilities.
As of June 30, 1997, the Company had a total of $84.0 million of outstanding
liabilities, including $70.3 million of secured indebtedness and approximately
$13.0 million of indebtedness incurred by the Subsidiaries. The Indenture
governing the Debentures does not limit the amount of secured indebtedness
United or its Subsidiaries may incur. Although the Company has been able to draw
on its various lines to finance substantially all of its fixed charges, there
can be no assurance that it will have sufficient resources to fund these charges
if it were unable to draw on its lines or does not have sufficient interest
reserves. Earnings were inadequate to cover fixed charges by approximately
$209,000 and $1,893,000 for the fiscal year ended September 30, 1996, and the
nine months ended June 30, 1997, respectively. However, such earnings were
sufficient to cover these charges when adjusted to reflect the interest charges
funded by draws on the lines. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources"
and "Selected Consolidated Financial Data" below. Although the Company believes
that internally generated funds, the net proceeds from the Debentures and the
Company's available borrowings under its credit facilities will be sufficient to
meet its reasonably anticipated needs for working capital and fixed charges
including debt service on the Debentures, there can be no assurance that these
sources will be sufficient. If the Company does not realize net proceeds equal
to at least $2,600,000, it will be unable to pay down indebtedness bearing
interest at rates higher than the Debentures and will be unable to create
additional borrowing capacity under its Construction Lines.
The Company's ability to meet its debt service obligations is dependent upon
the future performance of the Company, which, in turn, is subject to general
economic conditions as to financial, competitive, business and other factors,
including factors beyond the Company's control. The level of the Company's
leverage could restrict its flexibility in responding to changing business and
economic conditions. If the Company is at any time unable to generate sufficient
cash flow from operations or borrow under its existing credit facilities to
service its debt, it may be required to seek refinancing for all or a portion of
that debt or to obtain additional financing. There can be no assurance that
additional financing, either in the form of equity or debt, will be available on
terms and conditions acceptable to the Company, if at all. Further, any
additional debt financing may rank senior in right of payment to the Debentures.
The Indenture imposes limitations on the Company's ability to declare and pay
dividends or make other payments to the Parent. See "Description of
Securities--Restrictive Covenants--Limitation on Restricted
Payments;--Limitation on Transactions with Affiliates;--Limitation on Dividends
and Other Payment Restrictions Affecting a Subsidiary."
FRAUDULENT CONVEYANCE
Under applicable provisions of the United States Bankruptcy Code or
comparable provisions of state fraudulent transfer or conveyance law, if the
Company, at the time it issued the Debentures: (i) incurred the indebtedness
with the intent to hinder, delay or defraud creditors; or (ii) (a) received less
than reasonably equivalent value or fair consideration for the issuance of the
Debentures; and (b) (I) was insolvent at the time of the incurrence, (II) was
rendered insolvent by reason of the incurrence, (III) was engaged or was about
to engage in a business or transaction for which the assets remaining with the
Company constituted unreasonably small capital to carry on its business or (IV)
intended to incur, or believed that it would incur, debts beyond its ability to
pay such debts as they mature, then, in each such case, a court of competent
jurisdiction could avoid, in whole or in part, the Debentures or, in the
alternative, subordinate the Debentures to existing and future indebtedness of
the Company. The measure of insolvency for purposes of the foregoing would vary
depending upon the law applied in each case. Generally, the Company would be
considered insolvent if the sum of its debts, including contingent liabilities
was greater than all of its assets at fair valuation or if the present fair
saleable value of its assets
9
<PAGE>
was less than the amount that would be required to pay the probable liability on
its existing debts, including contingent liabilities, as they become absolute
and matured.
The Company believes that, for purposes of the United States Bankruptcy Code
and state fraudulent transfer or conveyance laws, the Debentures will be issued
without the intent to hinder, delay or defraud creditors and for proper purposes
and in good faith, that the Company will receive fair consideration in exchange
for the Debentures, and that the Company, after the issuance of the Debentures
and the application of proceeds therefrom, will be solvent, with sufficient
capital for carrying on its business and will be able to pay its debts as they
mature. Accordingly, the Company believes that these provisions of the
Bankruptcy Code and the state fraudulent transfer or conveyance laws will not be
triggered by the issuance of the Debentures.
LACK OF COLLATERAL
United's obligations under the Indenture are not secured by any of its
assets. As of June 30, 1997, the Company had a total of approximately $84.0
million of outstanding liabilities, including approximately $70.3 million of
secured indebtedness and approximately $13.0 million of indebtedness incurred by
the Subsidiaries. Creditors who have a security interest in a particular asset
have a right ranking ahead of the holders of the Debentures with respect to that
asset. Further, United's homebuilding operations are conducted entirely through
the Subsidiaries. Accordingly, United derives its operating income and cash flow
from the Subsidiaries, and relies on the Subsidiaries to generate the funds
necessary to meet its obligations, including its obligations to pay principal
and interest on the Debentures. The ability of the Subsidiaries to pay dividends
or otherwise make payments to United is subject to, among other things,
applicable state law and restrictions imposed on the Subsidiaries by their
respective creditors. The Indenture will not limit the ability of the
Subsidiaries to incur additional restrictions in the future. Further, the right
of United to participate in the assets of any Subsidiary (and thus the ability
of the holders of the Debentures to benefit indirectly from these assets) is
generally subject to the prior claims of creditors, including trade creditors,
of that Subsidiary except to the extent that United is recognized as a creditor
of such Subsidiary. In this latter case, United's claims would still be
subordinate to any secured creditors of that Subsidiary. The Debentures,
therefore, will be structurally subordinated to creditors, including trade
creditors of the Subsidiaries.
In the event of the dissolution, winding up, liquidation or bankruptcy of
United, the holders of the Debentures will not be entitled to receive any
payment until the holders of secured indebtedness receive payment or
distributions in respect of the assets collateralizing their debt. Upon the
occurrence of any payment default on secured indebtedness, proceeds from the
assets collateralizing the secured indebtedness which is in default may not be
used to satisfy United's obligations on the Debentures. The Indenture does not
limit the amount of secured indebtedness that United or its Subsidiaries may
incur. Amounts drawn by United on the A&D Lines are typically secured by the
parcel for which the funds are being drawn. As described above, United is
typically permitted to make draws on the A&D Lines up to 75-80% of the value of
the parcel (on an as-built basis). Reductions in the value of these parcels
would limit the amount of proceeds United could draw to fund acquisition and
development expenses which could have a material adverse effect on the Company's
results of operations and financial condition since revenues would likely
decrease and projects would likely be delayed.
INTEREST RATES; MORTGAGE FINANCING
In general, the demand for housing is influenced in large part by the
availability of mortgage financing and the ability of prospective purchasers to
finance home purchases since virtually all purchasers of the Company's homes
finance their acquisitions through third-party lenders. Increases in interest
rates generally reduce the demand for, and affordability of, mortgage financing
and therefore the demand for the Company's homes. Increases in interest rates
would have a material adverse affect on the Company's results of operations and
financial condition.
10
<PAGE>
CYCLICAL ECONOMIC CONDITIONS
The homebuilding industry is cyclical in nature and is significantly
affected by changes in national and local economic and other conditions, such as
employment levels, availability of financing, interest rates, consumer
confidence and housing demand. Sales of new homes are also affected by market
conditions for resale homes and rental properties. Certain of the markets in
which the Company operates have at times in the past experienced significant
declines in housing demand and there can no assurance that these declines will
not occur in the future. Homebuilders such as the Company also incur substantial
risk due to the fluctuating market value of land, building lots, and housing
inventories. Additionally, the carrying cost of the Company's inventory can be
significant and can result in losses in poorly performing projects or markets.
Homebuilders are also subject to various other risks which may cause
fluctuations in operating results such as competitive over building, shortage of
desirable land with municipal services, availability and cost of materials and
labor, construction delays, cost overruns, weather conditions, government
regulation, availability of adequate financing, changes in mortgage interest
rates and real estate taxes as well as other governmental fees.
FLUCTUATIONS IN OPERATING RESULTS/IMPACT ON FUTURE OPERATIONS
The Company's operating results fluctuate from time to time based on factors
not entirely within the Company's control. These factors include, among others:
(i) the timing of home closings and land sales; (ii) the Company's ability to
acquire additional land or options thereon on acceptable terms; (iii) the
condition of the real estate market and the general economy in the Company's
markets as well as other markets into which the Company may expand; (iv) the
cyclical nature of the home building industry and changes in prevailing interest
rates and availability of mortgage financing; and (v) cost of material and labor
and delays in construction schedules. The Company's gross margins also are
affected by the location and type of lot, as well as the design of the
particular home sold. Negative fluctuations in operating results may have an
adverse effect on the Company's future results and financial condition. As noted
above, the Company utilizes the net proceeds from home sales to repay
indebtedness on its lines of credit. Amounts repaid on these lines are then
available to be "reborrowed" to fund future acquisition, development and
construction activities. A slowing or reduction in home sales from those
projected or anticipated by the Company would have an adverse impact on the
Company's ability to fund future activities since it would have less capital in
the form of additional borrowing capacity available to finance acquisition,
development and construction activity.
RESTRICTIONS IMPOSED BY TERMS OF INDENTURE
The Indenture will restrict United and the Subsidiaries from, among other
things, incurring additional indebtedness, paying excessive dividends or making
certain other restricted payments or investments to the Parent, consummating
certain asset sales, entering into certain transactions with affiliates,
incurring liens, or merging or consolidating with any other person or selling,
assigning, transferring, conveying or otherwise disposing of all of
substantially all of their respective assets. See "Description of Securities--
Restrictive Covenants." The Indenture will also impose limitations on United's
ability to restrict the ability of its Subsidiaries to pay dividends or make
certain payments to United or any of the Subsidiaries. In addition, the
Indenture will require United to maintain specified financial ratios and satisfy
certain financial tests. United's ability to meet these ratios and tests may be
affected by events beyond its control, and there can be no assurance that the
United will meet these tests. The Indenture does not, however, prohibit United
from entering new markets and United may elect to utilize a portion of the
proceeds from the Debentures to fund expansion into new markets. See
"Description of Securities"
NEED TO ACQUIRE LAND FOR FUTURE DEVELOPMENT
The Company's ability to generate revenues in the future depends, in part,
on its ability to acquire or otherwise control an inventory of undeveloped land
while efficiently deploying its available capital.
11
<PAGE>
Although the Company attempts to minimize the amount of capital invested in land
parcels, the Company's inventory of land may, from time to time, exceed the
demand for the Company's products thus limiting the capital available for
additional land acquisition. In pursuing its development activities, the Company
may invest significant amounts of capital to acquire and maintain control of
undeveloped land as well as to apply for regulatory approvals prior to
determining whether the Company will actually develop the land. There can be no
assurance that such land will be developed on acceptable terms and conditions,
if at all, or that the Company will have adequate capital to compete with third
parties in acquiring land. See "Business--Operating Strategy" and
"Business--Land Development."
EXTENSIVE REGULATIONS AND ENVIRONMENTAL FACTORS
The homebuilding industry in general, and the Company in particular, is
subject to extensive and complex laws and regulations which cover, among other
things, zoning and density requirements, design and building permits, building
materials, environmental and health issues, advertising and consumer credit,
development, homebuilding and sales activities. These laws and regulations
impact the time required to obtain approvals necessary to begin home
construction and can adversely impact the time between the initial control of
land, commencement of development and completion of construction. The Company is
also subject to a variety of environmental laws and regulations which can affect
its business and its homebuilding projects. The particular environmental laws
and regulations which apply to any given homebuilding site vary greatly
depending on the site's location, environmental condition, present and former
uses of the site as well as adjoining properties. These laws and regulations may
result in additional delays, may cause the Company to incur substantial
compliance and other costs, and may prohibit or severely restrict homebuilding
activity in certain environmentally sensitive areas. See "Business--Governmental
Regulation."
In addition, the Company is subject to laws and regulations governing the
type of materials used in constructing its homes and imposing liability on the
Company for personal injury and worker's compensation claims. Although the
Company maintains insurance against the liability for personal injury and
worker's compensation claims, there can be no assurance that this coverage will
be adequate.
RELIANCE ON SUBCONTRACTORS
With the exception of field supervisors, the Company does not employ its own
development or construction personnel. Instead, the Company depends on
subcontractors and other independent contractors to complete its land
development and home construction activities. There can be no assurances that
the Company will continue to be able to contract for the services of
subcontractors necessary to complete such land development and construction on
reasonable terms, if at all. See "Business--Home Design and Construction."
RELIANCE ON KEY PERSONNEL
The Company relies upon certain key management employees, including United's
Chairman, Virgil W. Owings, and President, Edward F. Havlik. The loss of either
individual's services could have a material adverse effect on the Company's
results of operations and financial condition. The Company believes that its
future success will depend on its ability to retain key members of management
and to attract experienced management in the future. There can be no assurance
that it will be able to do so. The Company does not carry, and will not likely
obtain any key man life insurance on these individuals nor has it entered into
contracts with any of these individuals. See "Management."
COMPETITION
The homebuilding industry is highly competitive and fragmented. Homebuilders
compete for desirable properties, financing, raw materials and skilled labor.
The Company competes for residential sales with
12
<PAGE>
other homebuilders, individual resales of existing homes, available rental
housing and, to a lesser extent, resales of condominiums. The Company's
competitors include a number of large national and regional homebuilding
companies (Chicago and Phoenix markets) and small local homebuilding companies
(in all of the Company's markets), some of which may have greater financial
resources, easier access to capital markets or lower costs than the Company.
CONFLICTS OF INTEREST
From time to time the Company may enter into transactions with affiliates
including the Parent or its shareholders as well as the Company's officers and
directors. Although the Indenture will impose limitations on the Company's
ability to engage in certain of these transactions, there can be no assurance
that these transactions will be on terms and conditions similar to those that
may be available with a third party. Such transactions with affiliates may have
an unfavorable impact on the Company's results of operation and financial
condition. See "Description of Securities" and "Certain Transactions" below.
NO PUBLIC MARKET FOR THE DEBENTURES
There is no existing public market for the Debentures, and there can be no
assurance that one will develop or, if a market does develop, that it will
provide sufficient liquidity or will continue in existence until maturity of the
Debentures. Even if a market develops, there can be no assurance that a holder
of the Debentures will be able to sell Debentures on acceptable terms and
conditions, if at all. To the extent that a market develops, future trading
prices of the Debentures will depend on many factors, including, among other
things, prevailing interest rates, the Company's operating results, competitive
factors and the market for similar securities which is subject to numerous
factors, including but not limited to fluctuating interest rates. The Company
does not intend to list the Debentures on any securities exchange or to seek to
have the Debentures authorized for quotation on Nasdaq.
BEST EFFORTS OFFERING
The Debentures are being underwritten by the Underwriter on a "best efforts"
basis whereby the Underwriter is required to use its best efforts to sell the
Debentures on behalf of the Company. If all of the
Debentures are not sold during the six months following the date of this
Prospectus, the Company may not have sufficient funds available from its own
resources and from the proceeds of the Debentures already sold to complete all
of its objectives. The amount of proceeds actually raised by the Company may
affect the Company's future capital requirements. See "Use of Proceeds",
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources," and "Underwriting."
13
<PAGE>
USE OF PROCEEDS
The net proceeds from sale of the Debentures are estimated to be
approximately $5,091,677 if the Maximum Amount is sold and approximately
$2,455,739 if only the Minimum Amount is sold. The Company will utilize the net
proceeds first to repay indebtedness incurred by the Company in connection with
land acquisition (the "Land Indebtedness") and, second, to repay a portion of
the debt outstanding under the Heller Line and the Residential Line I (each as
defined herein, collectively the "Construction Lines"). If only the Minimum
Amount is sold, the Company will utilize the net proceeds to repay a portion of
the Land Indebtedness.
Because the Debentures are being sold by the Underwriter on a "best efforts"
basis, no assurance can be given as to the amount of Debentures that will be
sold or as to the amount of net proceeds which will be available to the Company
as a result of this offering. The amount of proceeds actually raised may affect
the Company's future capital requirements. See "Risk Factors--Best Efforts
Offering" and "Underwriting."
The table below sets forth information concerning the estimated use of
proceeds assuming the sale of the Minimum Amount and the Maximum Amount.
<TABLE>
<CAPTION>
ASSUMING SALE OF THE ASSUMING SALE OF THE
MINIMUM AMOUNT MAXIMUM AMOUNT
(3,050 DEBENTURES) (6,091 DEBENTURES)
------------------------------- -------------------------------
PERCENTAGE OF PERCENTAGE OF
AMOUNT GROSS PROCEEDS AMOUNT GROSS PROCEEDS
------------ ----------------- ------------ -----------------
<S> <C> <C> <C> <C>
Gross Proceeds....................................... $ 3,004,250 100% $ 5,999,635 100%
Underwriting Discount and Commissions................ 210,298 7% 419,975 7%
Management Fee....................................... 60,085 2% 119,993 2%
Non-Accountable Expense Allowance.................... 30,043 1% 59,997 1%
Accountable Expense Allowance........................ 60,085 2% 119,993 2%
Other Expenses....................................... 188,000 6% 188,000 3%
Total Expenses....................................... 548,511 18% 907,958 15%
------------ ------------
Proceeds Available to the Company.................... $ 2,455,739 82% $ 5,091,677 85%
------------ ------------
------------ ------------
</TABLE>
The Company will require approximately $2,600,000 to fully repay the Land
Indebtedness. This indebtedness bears interest at an annual rate of 25% and
matures in February and August, 1999. Amounts in excess of $2,600,000, including
any proceeds received from exercise of the over-allotment option, will be
allocated equally to repay indebtedness owed by the Company on the Heller Line
and the Residential Line I.
Draws on the Heller Line bear interest at a variable rate equal to the
General Electric Capital Corporation Composite Commercial Paper Rate (as defined
in the loan agreement) plus 3.75% per annum (9.4% as of June 30, 1997). Draws on
the Heller Line which are outstanding on May 31, 1998 automatically convert to a
term loan maturing on May 31, 1999. Draws under Residential Line I bear interest
at a variable rate equal to prime plus 1.25% per annum (9.75% as of June 30,
1997). Residential Line I matures on March 14, 2001. As of the date of this
Prospectus, a total of $5.8 million and $23.7 million was outstanding on the
Heller Line and the Residential Line I, respectively. The Company is in
compliance with the terms of the credit agreements governing this indebtedness.
The Company may re-borrow amounts repaid under either line for general corporate
purposes including land acquisition, land development, construction of homes and
for working capital. See "Management's Discussion and Analysis and Results of
Operations and Financial Condition--Financial Condition and Liquidity."
14
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company at June 30, 1997, and as adjusted to give effect to the sale of the
Minimum Amount and the application of the net proceeds.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
-------------------------------
AS ADJUSTED
(ASSUMING SALE OF
ACTUAL THE MINIMUM AMOUNT)
--------- --------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Indebtedness:
Debt due within one year................................... $ 8,899 $ 8,999
Debt due after one year (excluding Debentures)............. $ 61,394 $ 58,938
Debentures................................................. -- $ 3,004
--------- -------
Total indebtedness......................................... $ 70,293 $ 70,941
Total stockholder's equity................................... $ 9,795 $ 9,795
--------- -------
Total capitalization......................................... $ 80,088 $ 80,736
</TABLE>
15
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data as of September 30, 1996
and 1995 and for each of the three years in the period ended September 30, 1996
has been derived from the Company's consolidated financial statements audited by
Ernst & Young LLP, independent auditors, whose report with respect thereto is
included elsewhere in this Prospectus. The selected consolidated financial data
as of September 30, 1994, 1993 and 1992 and for each of the two years in the
period ended September 30, 1993, has been derived from audited financial
statements. The selected consolidated financial data for the nine months ended
June 30, 1997 and 1996 are derived from unaudited financial statements but, in
the opinion of management, includes adjustments, all of which are of a normal
recurring nature, necessary for a fair presentation. The results of operations
for the nine months ended June 30, 1997 may not be indicative of the results to
be expected for the year ending September 30, 1997. The following selected
consolidated financial data should be read in conjunction with the consolidated
financial statements, including the notes thereto, set forth elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED JUNE
30, YEAR ENDED SEPTEMBER 30,
---------------------- ----------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED STATEMENT OF INCOME DATA:
Revenues................................ $ 51,608 $ 34,991 $ 65,117 $ 44,349 $ 32,886 $ 24,896 $ 35,011
Cost of Sales........................... $ (48,131) $ (31,299) $ (60,494) $ (40,067) $ (29,227) $ (19,674) $ (28,523)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Gross Profit............................ $ 3,477 $ 3,692 $ 4,623 $ 4,282 $ 3,659 $ 5,222 $ 6,488
Operating Expenses...................... $ (1,902) $ (2,286) $ (2,838) $ (2,770) $ (2,490) $ (2,607) $ (4,473)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before Investors Share of Income
in Majority Owned Land Development and
Housing Partnerships.................. $ 1,575 $ 1,406 $ 1,785 $ 1,512 $ 1,169 $ 2,615 $ 2,015
Investor's Share of Income in Majority
Owned Land Development and Housing
Partnerships.......................... $ (465) $ (375) $ (735) $ (70) -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before Income Taxes.............. $ 1,110 $ 1,031 $ 1,050 $ 1,442 $ 1,169 $ 2,615 $ 2,015
Income Taxes............................ $ (382) $ (401) $ (401) $ (577) $ (468) $ (1,046) $ (826)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net Income.............................. $ 728 $ 630 $ 649 $ 865 $ 701 $ 1,569 $ 1,189
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
OTHER DATA:
Number of Homes and Lots Closed......... 310(4) 205 378 267 174 110 146
Average Selling Price per Home.......... $ 179 $ 169 $ 171 $ 163 $ 185 $ 224 $ 233
---------- ---------- ---------- ---------- ---------- ---------- ----------
Ratio of Earnings to Fixed Charges(1)... (3) 1.06 (3) 1.14 2.45 7.28 5.48
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
Ratio of Earnings to Adjusted Fixed
Charges(2)............................ 5.65 60.35 13.12 27.14 34.54 31.92 14.46
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
</TABLE>
- ------------------------------
(1) In calculating the ratio of earnings to fixed charges, earnings consist of
income before minority interests, income tax and fixed charges, less
capitalized interest, plus the interest component included in cost of sales.
Fixed charges consist of interest expended and capitalized and amortization
of debt service costs. The interest factor implicit in rent expense is not
significant.
(2) Represents the ratio of the amount of fixed charges actually funded from the
Company's earnings. In calculating this ratio, the amount of interest
charges which are funded from the Company's various lines of credit through
draws on these lines is excluded from fixed charges. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" below.
(3) Earnings were inadequate to cover fixed charges by approximately $209,000
for the year ended September 30, 1996 and by approximately $1,893,000 for
the nine months ended June 30, 1997 respectively. See "Risk
Factors--Substantial Leverage, Reliance on Financing and No Assurance of
Availability of Credit" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
(4) Includes the sale of 30 lots at an average price of $46,000 per lot.
16
<PAGE>
<TABLE>
<CAPTION>
AS OF JUNE 30, AS OF SEPTEMBER 30,
-------------------- -----------------------------------------------------
SELECTED BALANCE SHEET DATA: 1997 1996 1996 1995 1994 1993 1992
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Inventories............... $ 80,420 $ 52,827 $ 54,588 $ 28,796 $ 21,143 $ 12,506 $ 9,157
Total Assets.............. $ 94,819 $ 60,615 $ 69,931 $ 34,365 $ 26,779 $ 21,216 $ 15,310
Debt Due after One Year... $ 61,394 $ 40,139 $ 37,692 $ 16,507 $ 7,250 $ 7,196 $ 3,323
Total Liabilities......... $ 83,557 $ 48,865 $ 58,699 $ 22,909 $ 18,825 $ 13,718 $ 7,302
Investor's Equity in
Majority-Owned
Projects(5)............. $ 1,467 $ 2,702 $ 2,165 $ 3,037 $ 400 -- --
Stockholders' Equity...... $ 9,795 $ 9,048 $ 9,067 $ 8,419 $ 7,554 $ 7,498 $ 8,008
</TABLE>
- ------------------------
(5) Represents the equity of investors in projects, a majority of which
interests are owned by the Company.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following analysis of the Company's consolidated financial condition and
results of operations as of September 30, 1995 and 1996, for the years ended
September 30, 1994, 1995, and 1996 and for the nine months ended June 30, 1996
and 1997 should be read in conjunction with the Company's Consolidated Financial
Statements, including the notes thereto, and other information presented
elsewhere in this Prospectus.
GENERAL
The Company generates revenue from the interrelated activities of land
acquisition, development and homebuilding. The Company generally enters into a
purchase agreement with a potential home buyer prior to commencing construction,
except where the home is being constructed on a speculative basis or to be used
as a model home. As of June 30, 1997, the Company had 430 homes built or under
construction, 425 of which were under contract for sale. The number of homes
under construction prior to execution of sales contracts tends to vary by season
reflecting the fact that weather conditions in the Chicago and western Michigan
markets necessitate starting foundation construction in the fall and early
winter months prior to executing purchase agreements to ensure available
inventory for winter sales and spring closings. The Company does not recognize a
sale for accounting purposes until the sale of a home or lot is closed. The time
period from execution of a purchase agreement to the closing of the sale of a
home generally ranges from six to nine months. See "Business-Land Acquisition."
RESULTS OF OPERATIONS
NINE MONTHS ENDED JUNE 30, 1997 AND 1996. Revenues from housing and land
sales increased approximately $17.0 million or 49% for the nine months ended
June 30, 1997, compared to an increase from approximately $34.5 million to
approximately $51.5 million for the same period in 1996. The increase in revenue
resulted from both an increase in the volume of homes and lots closed during the
period and the sale of twenty-two model homes to Model Homes L.L.C. which
produced approximately $4.6 million in additional revenue and resulted in a gain
of approximately $766,000. See "Certain Transactions." During this time period,
the Company closed on the sale of 280 homes and lots at an average selling price
of $179,000 compared to 205 closings at an average selling price of $169,000 in
the same period in 1996. The Company believes that the volume increase reflected
an increase in demand for the Company's homes and lots and an increase in the
number of housing starts. Further, although the Company increased the average
selling price of a home by 5% on all its products, the increase was offset by a
change in the mix of homes closed in 1997 (lower priced homes) compared to 1996.
Finally, the average selling price of a home was positively impacted by sales of
"higher priced" homes made to affiliates which sales averaged approximately
$211,000 per home.
Direct construction costs, including amortization of capitalized interest
and real estate taxes, increased during the nine-month period ended June 30,
1997 from approximately $28 million to approximately $42 million as compared to
the same period in 1996. The increase in these costs resulted mainly from
increases in the number of homes constructed, sold and closed during the period
as compared to the same period in 1996 and a corresponding increase in the
expense incurred related to interest and real estate taxes previously
capitalized. As a percentage of housing and land sales revenue, however, direct
construction costs declined from 81.4% during the nine months ended June 30,
1996 to 80.9% during the nine months ended June 30, 1997. Other costs and
expenses, however, increased from approximately $5.5 million for the nine months
ended June 30, 1996 to approximately $8.3 million for the nine months ended June
30, 1997. The increase in these costs and expenses was due to the increase in
the number of homes closed between the two periods which resulted in additional
selling and general administrative costs. Income after adjusting for minority
interests in company controlled land development and housing partnerships and
income taxes increased from approximately $630,000 for the nine months ended
June 30,
18
<PAGE>
1996 to approximately $728,000 for the nine months ended June 30, 1997. Total
earnings, which reflects net income before minority interests and income taxes
adjusted for the amount of interest expense during the period, increased to
$3,500,442 for the nine months ended June 30, 1997 from $2,380,808 for the nine
months ended June 30, 1996. Total fixed charges which means all interest
charges, whether expensed or capitalized also increased to $5,393,865 for the
nine months ended June 30, 1997 from $2,241,106 for the nine months ended June
30, 1996. Of this amount, a total of approximately $4.7 million was funded from
draws on the Company's lines of credit with the remaining amount being funded
from the Company's earnings. The increase in fixed charges reflects the increase
in the number of homes constructed and sold during the period, as well as
increases in the Company's inventory of homes under construction, but whose
sales are not closed. These charges are amortized at the time of closing.
Earnings were inadequate to cover fixed charges for the nine months ended June
30, 1997 by approximately $1.89 million. Management believes that the Company
has adequate capital to cover these fixed charges, since not all fixed charges
require funding from earnings. In particular, a substantial portion of these
fixed charges are funded through additional draws on the Company's lines of
credit if permitted by the relevant loan agreement. See "Risk
Factors--Substantial Leverage, Reliance on Financing and No Assurance of
Availability of Credit." On an adjusted basis giving effect to fixed charges
funded through draws on the Company's lines of credit, the Company's earnings
exceeded these adjusted fixed charges by 5.65 times for the nine months ended
June 30, 1997 and by 60.35 times for the nine months ended June 30, 1996.
YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994. Revenue from housing and
land sales for the fiscal years ended September 30, 1996, 1995 and 1994 was
approximately $64.7 million, $43.4 million and $32.2 million, respectively.
Total revenues were approximately $65.1 million, $44.3 million and $32.8
million, respectively, when adding in revenue from the Company's share of net
income from minority owned land development housing partnerships, as well as
management fees. The total number of homes sold and closed for the fiscal year
ended September 30, 1996, 1995 and 1994 was 378 homes, 267 homes and lots and
174 homes, respectively. The Company believes that the increases in the volume
of homes closed when comparing 1995 to 1994 and 1996 to 1995 was caused in part
by increases in demand for new residential housing resulting from decreases in
long-term mortgage interest rates, and in the case of 1995 compared to 1994,
increases in the Company's inventory of land available for development which
translated into the construction and sale of more homes in 1995. The average
selling price of a home closed in 1996 also increased from $163,000 in 1995 to
$171,000 in 1996. In contrast, the average selling price for a home closed
during fiscal year 1995 decreased from $185,000 for fiscal year 1994 to
$163,000. The Company believes that the increase in the average selling price of
homes closed in 1996 when compared to 1995 resulted from changes in the mix of
homes closed during 1996 (higher priced homes), which also accounted for the
decline in average selling price during fiscal year 1995 when compared to fiscal
year 1994 (lower priced homes).
Direct construction costs, including amortization of capitalized interest
and real estate taxes for the year ended September 30, 1996, 1995 and 1994 was
approximately $53.7 million, $36.3 million and $26.3 million, respectively. The
year-to-year increases were generally the result of increases in the number of
homes constructed, sold and closed during 1995 when compared to 1994 and during
1996 when compared to 1995. As a percentage of housing and land sales revenue,
direct construction and costs increased to 83.6% for fiscal year 1995 when
compared to 81.6% for fiscal year 1994 and then declined to 83% for fiscal year
ended 1996 when compared to fiscal year 1995. Other costs and expenses for the
year ended September 1996, 1995 and 1994 were approximately $9.5 million, $6.5
million and $5.4 million, respectively. The increase in these expenses resulted
mainly from an increase in the number of active projects, as well as increases
in advertising costs associated with these projects. Net income was $648,627 in
1996 compared to $864,939 in 1995. Total earnings for the fiscal years ended
September 30, 1996, 1995 and 1994 were $3,751,766, $2,171,289 and $1,889,538
respectively. Fixed charges for these periods were $3,960,336, $1,904,939 and
$771,379. A total of approximately $3.6 million, $1.8 million and $717,000 was
funded from draws on the Company's lines of credit with the remaining amount
being funded by the Company from earnings. The increase in these charges from
period to period reflects an increase in the inventory of
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<PAGE>
homes under construction, but whose sales had not closed. For example, as of
September 30, 1996, the Company had housing inventories of approximately $54.8
million compared to approximately $28.7 million as of September 30, 1995.
Earnings were inadequate to cover fixed charges by approximately $209,000 for
the fiscal year ended September 30, 1996, but exceeded fixed charges by 1.14
times and 2.45 times for the fiscal years ended September 30, 1995 and 1994,
respectively. On an adjusted basis giving effect to fixed charges funded through
draws on the Company's lines of credit as described above, the Company's
earnings exceeded these adjusted fixed charges by 13.12, 27.13 and 34.54 times,
respectively. See "Risk Factors--Substantial Leverage, Reliance on Financing and
No Assurance of Availability of Credit."
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents balance at June 30, 1997 and
September 30, 1996 was approximately $1.1 million and $824,000, respectively. As
described below, the increase in cash and cash equivalents was attributable to
an increase in cash flow from financing activities of approximately $20.9
million and offset by net cash used in operating activities of approximately
$20.6 million.
The Company typically finances the acquisition of land parcels and the costs
associated with initial development of the parcels (such as entitlement
activities and construction of streets and sewers) by drawing on various
acquisition and development lines of credit (the "A&D Lines"), including a $25
million line of credit from Residential Funding Corp. which can be used solely
to fund acquisition and development activity, such as sewer and roadway
construction (the "Residential Line II"). Under the agreements governing the A&D
Lines, the Company may generally draw up to 75-80% of the value of the land and
improvements (based on an as-built appraisal) to fund acquisition and
development costs. Based on the outstanding balance of the A&D Lines at the end
of each month, an interest charge is either paid by the Company if the
particular loan does not have an interest reserve or is funded through an
additional draw on the loan. As of June 30, 1997 and September 30, 1996, the
Company had total indebtedness of approximately $24.3 million and $22.1 million,
respectively, outstanding on its A&D Lines, including $10.9 million on the
Residential Line II. As of these dates, the Company had funded interest charges
of approximately $2.2 million and $1.9 million, respectively, associated with
these lines, including $0.3 million and $0.5 million, respectively, on the
Residential Line II, through additional draws on such line. Additional interest
charges of approximately $619,000 associated with other A&D Lines that do not
have interest reserves or permit additional draws to fund the interest and
approximately $285,000 associated with corporate level debt were incurred and
paid by the Company from earnings.
Once construction of a home commences, the Company is able to draw on two
lines of credit, a $25 million facility with Heller Financial (the "Heller
Line") and a second line in the amount of $25 million from Residential Funding
Corp. (the "Residential Line I," collectively with the "Residential Line II,"
the "Residential Lines") to finance the costs associated with constructing a
home and preparing a lot for delivery and the home for sale to the end
purchaser. As noted herein, the Company typically does not commence construction
of a home until a buyer executes a purchase contract. See "Business--Inventory
Management" above. As of June 30, 1997 and September 30, 1996, the Company had
total indebtedness of approximately $38.1 million and $16.5 million,
respectively, outstanding on these two lines and had incurred interest charges
of approximately $2.5 million and $1.7 million associated with these lines, all
of which were funded by additional draws allowable on these lines.
The amount of indebtedness incurred with respect to any particular project
is based on the purchase price of the land, the estimated costs of
infrastructure activities and the costs of constructing and selling homes on the
land. These estimated costs are based on, among other things, demand for housing
in the Company's market areas which the Company then factors into its analysis
of the number of homes that it believes may be constructed and the rate in which
these homes may be sold to end-purchasers. However, from time to time the
Company will sell improved lots without constructing a home thereon. See "Risk
Factors--Substantial Leverage, Reliance on Financing and No Assurance of
Availability of Credit" above.
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<PAGE>
Upon closing of a home sale, the Company utilizes all of the net closing
proceeds (including the Company's profit) from the sale of the home to reduce
the indebtedness under the relevant A&D Line as well as the Heller Line or
Residential Line I as the case may be. Thus, the amount of indebtedness
outstanding on these lines fluctuates based on the number of parcels and homes
under development or construction at any one time and the rate at which the
Company closes on homes under contract for sale. During the fiscal year ended
September 30, 1996 and the nine months ended June 30, 1997, the Company made
principal reductions of approximately $59.8 million and $40.9 million,
respectively, on these lines. As of September 30, 1997, the Company had
approximately $6.5 million available for borrowing under its credit facilities.
Draws on the Heller Line bear interest at a variable rate equal to the General
Electric Capital Corporation Composite Commercial Paper Rate plus 3.75% per
annum (9.4% as of June 30, 1997). Draws on the Heller Line which are outstanding
on May 31, 1998 automatically convert to a term loan maturing on May 31, 1999.
Draws under the Residential Lines bear interest at a variable rate equal to
prime plus 1.25% per annum (9.75% as of June 30, 1997). Residential Line I
matures on March 14, 2001. From time to time, the Company also incurs
indebtedness secured by specific projects for specific acquisition and
development activities. As of June 30, 1997, the Company had approximately $21.3
million of this indebtedness outstanding, all of which was secured by certain of
the Company's assets. This indebtedness generally matures between 1997 and 2000
and bears interest at a rate of approximately 9.75% per annum as of June 30,
1997.
Finally, the Company also generates additional working capital by selling,
and then leasing back, certain of its model homes to Model Homes, L.L.C. ("Model
Homes"), a company controlled by family members of certain of the Company's
directors and shareholders. See "Certain Transactions." Under this arrangement,
the Company sells certain of its model homes to Model Homes at a price equal to
the appraised value of the completed home and then leases the completed home
from Model Homes. As part of the sale, Model Homes typically assumes
indebtedness secured by the particular model home. The net proceeds after debt
assumption, typically 25% of the purchase price, are paid to the Company in cash
(15%) and an interest bearing demand note. See "Certain Transactions." As of
June 30, 1997, the Company had a $600,000 note from Model Homes in respect of
these sales. This demand note bears interest at a rate of 10% per annum. The
Company believes this arrangement allows it to increase its available capital by
reducing the amount of capital committed to model homes which typically are the
last homes sold at the Company's developments.
The Company believes that the capital available under the lines of credit
described above, project specific indebtedness and cashflow from the sale of
model homes, internally generated funds and the proceeds from this offering,
will be sufficient to meet the Company's reasonably anticipated needs for
working capital and liquidity. If these amounts prove insufficient, however, the
Company would likely have to raise additional capital (debt or equity or both)
from third parties. There can be no assurance that additional capital, either in
the form of equity or debt, will be available on terms and conditions acceptable
to the Company, if at all. Further, any additional debt capital may rank senior
in right of payment to the Debentures. The Indentures impose limitations on the
Company's ability to declare and pay dividends or make other payments to the
Parent. See "Description of Securities--Restrictive Covenants--Limitation on
Restricted Payments;--Limitation on Transactions with Affiliates;--Limitation on
Dividends and Other Payment Restrictions Affecting a Subsidiary."
CASH FLOWS FROM OPERATING ACTIVITIES. The Company's operating activities
utilized cash in both the year ended September 30, 1996 and the nine months
ended June 30, 1997. The Company utilized approximately $29.5 million in cash in
operating activities during the year ended September 30, 1996. This cash was
used primarily to increase the Company's housing inventories (approximately $26
million) and to increase land held for future development (approximately $8.0
million) and was offset by an increase in the Company's accounts payable
(approximately $4.0 million). Similarly, for the nine months ended June 30,
1997, the Company utilized approximately $20.6 million in cash from operating
activities. This cash was utilized primarily to increase the Company's inventory
of housing (approximately $26 million) and was offset by an
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<PAGE>
increase in the Company's accounts payable (approximately $2.3 million). In each
case, the increase in the Company's accounts payable reflects an increase in
amounts owed to vendors and other subcontractors reflecting an increase in the
number of homes being constructed by the Company.
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES. The Company's financing
activities provided the bulk of the Company's cashflow in both the fiscal year
ended September 30, 1996, as well as the nine months ended June 30, 1997. During
the fiscal year ended September 30, 1996, net cash provided by financing
activities was approximately $29 million comprised almost entirely of proceeds
from development loans and other notes payable of approximately $99.5 million
offset by repayments on development loans and other notes payable of
approximately $68.8 million. For the nine months ended June 30, 1997, financing
activities provided the Company with net cash of approximately $20.9 million
comprised of the proceeds from development loans and other notes payable of
approximately $93.4 million offset by repayments on development loans and other
notes payable of approximately $71.3 million. The increase in borrowing activity
in each time period reflects increases in the amount of funds necessary to
finance the Company's construction and development activities as reflected by
increases in the number of homes constructed and sold by the Company in each
period when compared to the prior comparable period. These borrowings are
typically repaid from the proceeds of housing or lot sales and then reborrowed
by the Company to fund construction costs. Thus, borrowings on the Company's
lines of credit (described above) fluctuate significantly based on the level of
the Company's activities.
CASH FLOWS FROM INVESTING ACTIVITIES. Net cash provided by or used for
investing activities was not significant for the nine months ended June 30, 1997
or for the fiscal year ended September 30, 1996.
INFLATION AND THE EFFECTS OF CHANGING PRICES. Real estate and residential
housing prices are affected by inflation, which can cause increases in the price
of land, raw materials and subcontracted labor. Historically, the Company has
been able to increase the price of its housing products to cover these costs.
Interest rate fluctuations also affect gross profit margins by increasing or
decreasing financing costs for land, construction and operations. The Company
believes that product demand and sales are impacted by mortgage interest rates.
The Company benefited from low mortgage interest rates from 1994 through early
1995 and then again from mid-year 1995 through 1997. If rates increase potential
customers may be discouraged from purchasing a home due to the increased cost,
decrease in buying power and possible difficulty in qualifying for a mortgage.
Seasonality is generally not a significant factor in the Company's operations,
in part because homes can be constructed and sold year-round, particularly in
the Phoenix Area.
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<PAGE>
BUSINESS
The Company is a fully integrated land development and homebuilding company
operating in the Chicago, Phoenix and western Michigan markets and since 1982
has developed over 7,300 lots and has built and closed over 6,100 homes. The
Company acquires undeveloped land and develops it into finished lots for
residential subdivisions and periodically options or purchases finished lots
from third parties primarily for the construction and sale of homes. The Company
maintains an inventory of potential home sites (lots) by controlling undeveloped
and developed land through the use of the Acquisition Agreements. The Company
believes that this strategy allows it to control sites for future development
and at the same time maximize the use of its available capital. See "--Land
Acquisition" below. For the nine months ended June 30, 1997, the Company closed
on the sale of 280 homes and lots generating approximately $51.6 million in
revenue from housing and land sales as compared to 205 homes and lots generating
approximately $35.0 million in revenue from housing and land sales for the nine
months ended June 30, 1996. As of June 30, 1997, the Company had contracts to
sell an additional 425 homes and a current inventory of 739 lots on which the
Company anticipates developing and selling 739 homes. Additionally, as of the
date of this Prospectus the Company controlled, through Acquisition Agreements
seven parcels of land on which it had completed its due diligence for future
development of homes. See "Land Acquisition" below.
Prices for the Company's homes (including the lot) range from $110,000 to
$400,000 per home. During the first nine months of fiscal 1997, the average
price for a home sold by the Company was approximately $179,000. The Company
markets its products to entry level, first and second move-up, and empty-nest
buyers by emphasizing the community atmosphere of its residential subdivisions,
as well as those characteristics that the Company believes its homes possess:
desirable designs, quality construction, and competitive prices.
The table below summarizes the number of closings for the last three fiscal
years and the interim periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JUNE 30, YEAR ENDED SEPTEMBER 30,
-------------------- -------------------------------
1997 1996 1996 1995 1994
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSAND)
<S> <C> <C> <C> <C> <C>
Homes and Lots Closed...................................... 310(1) 205 378 267 174
Average Selling Price of Homes............................. $ 179 $ 169 $ 171 $ 163 $ 185
Total Dollar Volume of Closed Homes........................ $ 50,192 $ 34,567 $ 64,749 $ 43,448 $ 32,231
</TABLE>
- ------------------------------
(1) Includes the sale of 30 lots at an average price of $46,000 per lot.
United, which is an Illinois corporation, was formed in 1994 when the Parent
transferred ownership of the Subsidiaries to United in return for all of the
outstanding stock of United. United and the Subsidiaries own controlling general
partner and limited partner interests in the Williams Glen Limited Partnership,
The Hidden Springs Real Estate Limited Partnership, United/RBG XII L.P. and the
United Lindsay East Valley Limited Partnership. United also has a
non-controlling interest in the United Development Bristolwood Limited
Partnership. United's principal place of business is located at 2100 Golf Road,
Suite 110, Rolling Meadows, Illinois 60008, and its telephone number is (847)
427-2450.
OPERATING STRATEGY
The Company seeks to locate and control property for development while
minimizing the amount of direct capital investment. The Company seeks to
minimize its financial exposure by carefully monitoring and controlling the
costs of designing, building and selling its homes and by carefully managing its
inventory of undeveloped land, developed lots and unsold homes. The Company
attempts to achieve this goal by maintaining its inventory of homesites, lots,
undeveloped and developed land by using Acquisition
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<PAGE>
Agreements. Generally, the Company attempts to develop homes in areas with
limited competition and before purchasing any property employs an independent
marketing consultant to analyze the real estate market in which the property is
located. The Company seeks to control construction costs by requiring firm bids
from its subcontractors and approval of all payments and change orders by the
Company's construction supervisor.
The Company's product mix includes both single family and multifamily home
designs. The Company uses competitive market analysis, focus groups and research
in an effort to define and develop each product line to suit the needs of each
particular market. Each home design is periodically updated in order to reflect
changing market and customer needs and demand.
The Company sells its homes through commissioned employees who work from
sales offices located at each project or, in certain cases, outside brokers. The
Company markets its homes through a combination of newspaper, radio and
television advertisements, direct mail, directional signage, special promotions,
the Internet and referrals both from homebuyers and brokers. The Company has
developed uniform corporate brochures and promotional pieces to create cost
efficiencies and to promote uniformity in the use of the Company's name,
identity and vision.
The Company monitors customer satisfaction through an annual survey
conducted by independent third parties, through post-closing customer
satisfaction surveys and through sample surveys of individuals who did not
purchase a home from the Company.
MARKETS/PRODUCT
CHICAGO METROPOLITAN AREA. The Company believes that the Chicago
metropolitan area which essentially consists of Cook, DuPage, Lake, McHenry,
Will and Kane counties (the "Chicago Area") offers significant opportunities for
expansion. The economy in this area has exhibited growth in recent years due in
part to the diversification of employment opportunities which has led to an
increase in employment, population and housing starts. According to the U.S.
Department of Commerce, annual building permits issued for single-family
residential units in the Chicago Area have increased from approximately 17,726
in 1991 to approximately 24,597 in 1996.
The Chicago Area was ranked 88th in the nation by the National Association
of Homebuilders ("NAHB") in population growth during the time period 1986-1995.
According to Claritas Inc., the population of the Chicago Area is projected to
grow to approximately 7,769,033, up from the 1990 census figures of
approximately 7,410,858 and is projected to rise to approximately 7,995,867
people by 2002. The unemployment rate in the Chicago CMSA (which includes the
Chicago Area plus the Gary Indiana; Kankakee, Illinois; and Kenosha, Wisconsin
PMSA's) has declined from 5.0% in December, 1995 to 4.4% as of December, 1996.
From 1990-1996, approximately 260,600 new jobs were created in the Chicago Area
with projected increases of approximately 62,000 new jobs in 1997. The median
annual household income of the Chicago Area is estimated at approximately
$45,792 for 1997 and approximately 33% of the population is between the ages of
25 and 44, which the Company believes are favorable indicators of a good supply
of potential customers in various stages of the home buying cycle.
United's subsidiary, United Homes of Illinois, Inc. was ranked among the top
twenty homebuilders for calendar year 1996 and the first half of calendar year
1997. For the first nine months ended June 30, 1997 the Company sold 372 homes,
including lot sales, in the Chicago Area and is currently constructing homes in
Antioch, Algonquin, Crystal Lake, Cary, Vernon Hills, Waukegan, Darien, and
Tinley Park. Prices for the Company's Chicago Area homes range from $110,000 to
$400,000. Of these sales, a total of 41 homes and 30 lots were closed during the
time period.
PHOENIX. The Company believes that the City of Phoenix and the surrounding
metropolitan area (the "Phoenix Area") offers significant growth opportunities.
The Phoenix Area economy has exhibited growth in recent years due in part to the
high technology industry which has led to an increase in employment,
24
<PAGE>
population and housing starts. Annual building permits issued for single-family
residential units in the Phoenix MSA have increased from approximately 10,909 in
1990 to approximately 28,583 in the Phoenix-Mesa MSA in 1995.
The Phoenix Area was ranked 12th in the nation by the NAHB in population
growth during the time period 1986-1995. According to Claritas, Inc., the
population of the Phoenix Area is projected to grow to approximately 2,815,051,
up from the 1990 census figures of approximately 2,238,480 and is projected to
rise to approximately 3,232,179 by 2002. The unemployment rate in the
Phoenix-Mesa MSA (which includes Maricopa and Pinal counties) has declined from
4.8% in 1993 to 3.1% as of December, 1996. From 1990-1996 approximately 300,000
new jobs were created in the Phoenix Area. The median annual household income of
the Phoenix Area is approximately $37,583 and approximately 32% of the
population is between the ages of 25 and 44, which the Company believes will
assure a good supply of potential customers in various stages of the home buying
cycle.
United's subsidiary, United Homes, Inc., an Arizona corporation, has
operated in the Phoenix Area since 1984. For the first nine months ended June
30, 1997 the Company sold 72 homes in the Phoenix Area. Prices for the Company's
homes in this market range from $110,000 to $400,000.
WESTERN MICHIGAN The Company conducts its homebuilding operations in
Western Michigan primarily in a 60 mile radius of Grand Rapids, Michigan which
includes Holland and Kalamazoo Michigan (the "Grand Rapids Area"). The Company
believes the Grand Rapids MSA (comprised of Grand Rapids, Holland and Muskegon)
offers opportunities for expansion. United believes that the Grand Rapids Area
economy has exhibited growth in recent years due in part to the continued
expansion and addition of New York Stock Exchange listed businesses located
within the area/region and continued recognition by these businesses of a
skilled workforce which has led to an increase in employment, population and
housing starts. Annual building permits issued for single-family residential
units in the Grand Rapids MSA have increased from approximately 3,957 in 1990 to
approximately 6,117 in 1996.
The Grand Rapids Area was ranked 54th in the nation by the NAHB for
population growth during the time period 1986-1995. According to the U.S. Census
Bureau the 1996 population of the Grand Rapids MSA was approximately 1,015,099,
up from the 1990 census figures of approximately 941,776 and is projected to
increase to approximately 1,052,300 by 2000. The unemployment rate in the Grand
Rapids Area has declined from 6.2% in 1990 to 3.4% as of December 1996.
Approximately 72,000 new jobs were created in the Grand Rapids Area between 1990
and 1996. The median annual household income of the Grand Rapids Area is
projected to be approximately $47,400 in 1997 and approximately 33% of the
population is between the ages of 25 and 44, which the Company believes are
favorable indicators of a good supply of potential customers in various stages
of the home buying cycle.
United's subsidiary, United Homes of Michigan, Inc., is the second largest
homebuilder in the Grand Rapids Area based on homes closed. United Homes of
Michigan, Inc. is currently exploring expanding its operations into Lansing, Ann
Arbor and Detroit, Michigan, as well as Indianapolis, Indiana. The Company
generally sells single family homes to move-up buyers with prices generally
averaging $154,000 in this market which is below the market average of $165,000.
For the first nine months ended June 30, 1997, the Company sold 66 homes in the
Grand Rapids Area.
LAND ACQUISITION
A significant factor influencing the Company's results of operation and
financial condition is its ability to acquire land for future home sites on
acceptable terms and conditions. The Company has developed procedures for, and
employs management specialized in, site acquisition and development. The Company
attempts to develop homes in areas with limited competition and before entering
into an acquisition arrangement generally employs an independent marketing
consultant to perform a market analysis.
25
<PAGE>
The Company attempts to minimize the amount of capital invested in
undeveloped land by entering into agreements containing contingencies allowing
the Company extended periods of time to conduct its due diligence review prior
to the actual purchase of the land. The Company uses this review period to
obtain necessary development approvals from government units and to evaluate the
feasibility and profitability of the project. The Company also investigates
other factors affecting the feasibility of the project, including:
<TABLE>
<C> <S> <C> <C>
-- topography -- archeological site status
-- geology, soils and grading -- regulatory processing and approval
schedule
-- traffic, transportation and access -- financing alternatives
-- market research -- hazards, including noise and pollution
-- environmental issues -- economic feasibility
</TABLE>
Occasionally, the Company acquires control of land through joint ventures
and other contractual relationships with third-party landowners. Under these
arrangements, the Company generally is employed as an agent to zone and develop
the property and build and sell homes for the ventures. The Company is typically
required to meet certain criteria relating to cost control and absorption rates.
The landowner generally subordinates his or her interest in the land to a
mortgage securing the development financing typically provided by a third party.
As lots are sold, the landowner shares in the profits on the finished lots. This
approach allows the landowner to maximize the profit to be made on the sale of
the land and enables the Company to control a site which it might not otherwise
have been able to control. The arrangement also enables the Company to
participate in the lot profit, while retaining the profit from the construction
of the homes on the site. Affiliates of the Company may be participants in these
arrangements. See "Certain Transactions."
Periodically, the Company uses Acquisition Agreements to control finished
lots developed by third parties. The Company believes that this approach allows
it to control and market a large number of finished lots with minimal capital
investment and limited development risk. Generally, under these agreements, the
Company can continue to control these finished lots as long as the Company
purchases a specified number of lots within a predetermined time period. The
Company attempts to ultimately build its homes on lots developed by the Company,
although the Company occasionally builds homes on lots developed by third
parties. During the fiscal year ended September 30, 1996, approximately 80% of
the homes sold by the Company were built on lots developed by the Company. This
falls within the Company's goal of 70-85% which was set at that level since
homes built on land developed by third parties result in lower profit margins to
the Company.
As of the date of this Prospectus, the Company controlled, through
Acquisition Agreements, seven parcels of land for future development of homes.
The acquisition of any particular parcel is subject to numerous conditions such
as receipt by the Company of satisfactory environmental reports, engineering
studies, surveys, favorable zoning determinations and acceptable financing.
Below is a summary of the principal terms and conditions of these agreements.
There can be no assurance that the Company will complete the acquisitions on the
terms and conditions set forth below, if at all.
1. GREGG'S LANDING: Contract to purchase approximately ten acres in Vernon
Hills, Illinois for approximately $2.5 million from an unaffiliated third party.
The Company must exercise its right of purchase no later than 30 days after the
developer receives final water permits. Purchase of the parcel is contingent on
the Company obtaining zoning and other governmental approvals to permit the
development of 45 units.
2. ANTIOCH: Contract to purchase 162 acres in Antioch, Illinois for
approximately $3.7 million from an unaffiliated third party. The Company must
exercise its right of purchase no later than November 1998.
26
<PAGE>
Purchase of the parcel is contingent on the Company obtaining zoning and other
governmental approvals to permit the development of 280 units.
3. DARIEN: Contract to purchase 16 acres in Darien, Illinois for
approximately $2.2 million from an unaffiliated third party. The Company must
exercise its option to purchase the property by April 30, 1998. Purchase of the
parcel is contingent on the Company obtaining zoning and other governmental
approvals to permit the development of 78 units.
4. ROSS: Contract to purchase 86 acres in unincorporated Lake County,
Illinois for approximately $1.5 million from an unaffiliated third party. The
Company must exercise its option to purchase the property no later than April
1998. Purchase of the parcel is contingent on the Company obtaining zoning and
other governmental approvals to permit the development of 63 units.
5. SIERRA VISTA: Contract to purchase 120 acres in Sierra Vista, Arizona
for approximately $1.4 million from an unaffiliated third party. The Company
must exercise its option to purchase the property by November 30, 1997. Purchase
of the parcel is contingent on the Company obtaining zoning and other
governmental approvals to permit the development of 90 units.
6. CLARENDON HILLS: Contract to purchase 6.8 acres in Clarendon Hills,
Illinois for approximately $650,000 from an unaffiliated third party. The
Company must exercise its right to purchase no later than December 31, 1997.
Purchase of the parcel is contingent on the Company obtaining zoning and other
governmental approvals to permit the development of 33 units.
7. BAYBERRY (GREENBROOKE): Contract to purchase ten acres in Wyoming,
Michigan for approximately $230,000 from an affiliated third party. The Company
must exercise its right to purchase no later than December 1998. Purchase of the
parcel is contingent on the Company obtaining zoning and other governmental
approvals to permit development of 52 units. See "Certain Transactions."
The following table summarizes the Company's inventory of homes sold, but
not yet closed, the current lot inventory, lots available for future development
and completed homes as of June 30, 1997:
<TABLE>
<CAPTION>
LOTS AVAILABLE
CURRENT LOT FOR FUTURE COMPLETED
HOMES SOLD BUT NOT CLOSED(1) INVENTORY(2) DEVELOPMENT(3) HOMES(4) TOTAL
------------------------------- --------------- ----------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
ILLINOIS...................... 280 381 3,076 5,622 9,034
MICHIGAN...................... 84 168 148 278 977
ARIZONA....................... 61 190 90 246 613
--- --- ----- ----- ---------
TOTAL......................... 425 739 3,314 6,146 10,624
</TABLE>
- ------------------------------
(1) Represent homes subject to a purchase agreement which have not yet closed
(sales backlog). Revenue is not recognized until the time of closing. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
(2) Represents lots owned by the Company that are available for home
construction which have not been sold. The Company typically constructs and
sells one home on a lot.
(3) Represents undeveloped land that the Company either owns or controls through
Acquisition Agreements. There can be no assurance that the Company will
actually develop the number of lots set forth in this chart. In addition, as
noted herein there can be no assurance that the Company will purchase the
land controlled through Acquisition Agreements.
(4) Represents homes that have been closed by the Company and the Parent since
the Parent's inception.
LAND DEVELOPMENT
Land development consists principally of two activities: (i) obtaining
necessary governmental approvals, including zoning, density and plat approvals;
and (ii) preparing the land for construction of homes, including grading,
installing streets, curbs, sewers, utilities and land clearing. The Company
engages engineers to prepare plat drawings and architects to prepare home plans
and, along with employees of the Company, to pursue the necessary governmental
approvals. Once the required preliminary approvals are
27
<PAGE>
obtained, the Company retains subcontractors to perform the land improvements.
The Company may begin land development prior to obtaining final plat approval.
Additionally, the Company may obtain final plat approval for only a portion of a
given project and develop the project in phases. Once these initial activities
are complete, the site is ready for home construction.
Once the Company acquires control of undeveloped land, it commences the
process of obtaining zoning and other government approvals necessary for the
proposed development. This process is generally completed in one to three years.
During this phase, the Company estimates the cost of developing the entire
parcel to determine whether finished lots can be profitably sold and updates its
market studies to determine both the level of competition from other land
developers and builders and projected lot absorption rates. Further, the Company
determines the availability of utilities, surveys, tests soil conditions on the
site and performs the required environmental reviews. Upon receipt of final
governmental approvals, the Company will usually complete its purchase of the
land and begin site development. If at any time during the zoning and approval
process, however, it appears that development costs will be too great for the
market, or that the approval process is not progressing satisfactorily, the
Company will cease the zoning and approval process and sell or abandon its
interest in the land. The Company may, nevertheless, incur pre-development costs
ranging from approximately $50,000 to $250,000 per parcel during the approval
process prior to determining whether it can, or will develop the land. The
Company has generally been successful in obtaining the necessary zoning and
governmental approvals.
During the site development stage, the land is developed into finished lots.
This process generally involves, among other things, grading the land and
installing sanitary and storm sewers, water mains, curbs, gutters and streets.
The Company believes that creating a successful subdivision distinguishable from
that of its competitors requires creating a distinctive neighborhood environment
which fosters a sense of community. The Company focuses on a number of factors
in an effort to create this feeling: a street and lot configuration that it
believes arrives at the best balance of installation and construction costs and
the esthetics of the subdivision; the location, design, landscaping and creation
of the entrance; and the creation of common amenities, such as children's play
areas, tennis courts, swimming pools, basketball courts, gazebos and community
open spaces, such as hiking trails.
HOME DESIGN AND CONSTRUCTION
The Company builds its homes from a variety of standard plans designed by
national and local architectural firms. These standard plans allow for moderate
customizing by the customer and are reviewed on a regular basis to ensure
desirability, practicality and competitive edge. Additional input on new home
designs is provided by focus groups consisting of individuals who have purchased
homes in the last six months in approximately the same price range as that of
the new designs. In addition, the Company utilizes a number of marketing
consultants in cities across the United States having similar climate and
housing construction techniques. The Company periodically consults with these
marketing consultants to determine the type of houses being sold in other
markets. The Company also sends employees to study new home ideas in other
market areas usually two or three times a year.
The Company acts as its own general contractor at each project but, except
for employing field supervisors, does not employ construction or trade
personnel. Subcontractors are selected through a competitive bidding process
which the Company believes limits its financial exposure. The Company seeks to
control construction costs by requiring a construction supervisor, employed by
the Company, to approve all payments and change orders.
28
<PAGE>
The purchase price for a standard house ranges from approximately $110,000
to $400,000 per home with the average selling price of a home being
approximately $179,000 with square footage ranging from 900 to 3800 square feet
of finished space. Included within the purchase price of each home is a one/two
year construction warranty and a ten year structural warranty which the Company
purchases from Home Warranty Corporation, an entity unaffiliated with the
Company. Purchasers can select from various base floor plan and elevation
combinations, as well as customize their homes with a selection of changes,
features and upgrades. Some typical features of the Company's floor plans,
depending on the development, are:
- vaulted or higher-than-average ceilings and large decorative windows to
admit natural light;
- two story entries which offer a sight line through the house;
incorporation of columns, arches, bridges, niches and wall cutouts,
formal and informal stairways and other design features;
- basements, most with windows or outside entries;
- two and three car garages.
In addition, purchasers can choose, at additional cost, optional amenities
such as different front elevations for the house, bay windows, decks, cabinets,
upgraded carpets and floor coverings, fireplaces, lighting fixtures, appliances
and hardware. To insure proper communication between the customer and the
construction supervisors, as well as to minimize costs associated with
revisions, the Company conducts two "walk throughs": the first before the
drywall is installed so as to easily allow any modifications necessary and the
second immediately prior to closing.
CUSTOMER SERVICE
The Company places tremendous emphasis on providing a high level of customer
service. The Company attempts to maintain personal contact with its customers
from their first meeting with the sales representative, through the construction
process and after the closing. This relationship begins when the customer first
visits one of the Company's model homes and selects a house plan. The Company
emphasizes customer service by making it a topic at meetings with the
construction, sales, and marketing personnel, as well as by making it an
important part of the annual sales training program in which all the sales
representatives participate. The Company's sales representatives service the
customers' needs until the customers' final plans have been approved for
construction. Once approval for construction has been obtained, a construction
coordinator is assigned to the customer. The construction coordinators are
responsible for addressing any of the customers' concerns, changes, service and
warranty work and are available to talk with customers at any time during the
Company's normal business hours.
The Company has also developed a system to educate its customers on the
process of building a home. This system is designed to establish the sequence
and timing of events during the process of building and servicing a customer's
home. The Company monitors these procedures on a weekly basis, and customers are
automatically sent progress letters at various points during the process.
COST CONTROL
The Company seeks to control costs at each phase of the development. To
control construction costs, the Company seeks to achieve the most efficient
design for each home product. After completing the schematic plan of a home, the
Company's construction department and the purchasing department review the plan
to ensure the home is designed to minimize both labor and material costs. The
sales department also reviews the plan to ensure that amenities designed into
the home will create value for the home buyer. The plan is then sent to an
outside structural engineer who reviews the structural integrity of the plan and
makes recommendations where necessary. Additionally, the plan is sent to a truss
manufacturer, electrical consultant and a cabinet maker for additional input and
recommendations. The Company then reviews these recommendations and, if
appropriate, incorporates them into the final plan. Along with the design
29
<PAGE>
department, the construction and purchasing departments also review the final
plan and officially approve it for use by the Company. The purchasing and
construction departments may seek input from suppliers and subcontractors on
ways to improve on the design of the home. Once the plan is completed, the
purchasing and construction departments seek bids from local subcontractors and
suppliers, although the Company has arranged and is continually attempting to
increase direct purchase relationships with national vendors in order to provide
certain items at a lower price.
Once the home plans are completed, they are sent to the estimating
department, which, using a computerized estimating system, determines the exact
quantities and cost of materials needed to build the home. This estimated cost
is then verified with individual cost quotes or bids from each subcontractor or
supplier. A detailed budget for the home is then input into a computerized
purchase order system which enables the Company to monitor all of its costs and
variances from the original budget. Variances from the original budget for the
home are generally recorded and input into the system as they occur. This allows
the Company to view on a daily basis any variance on homes under construction.
Management of the Company normally meets weekly to review variances to determine
the cause and to establish procedures to eliminate them in the future.
The Company also uses its management information system to monitor and
trigger payments to its suppliers and subcontractors. Unless there is an
approved variance purchase order or approved change order that has been entered
into the system, only originally budgeted amounts are paid to the suppliers and
subcontractors. By using this system over a period of time, the Company believes
it can determine the most cost efficient way for it to produce its homes. The
Company also monitors its gross margin on each home at four different points in
order to determine how the actual margin compares to the budget: (i) when the
purchase agreement is signed by the Company; (ii) after the budget is placed in
the computerized purchase order system; (iii) when the sale closes; and (iv)
approximately forty-five days after the sale closes and all outstanding invoices
have been reviewed and entered into the purchase order system.
INVENTORY MANAGEMENT
The Company believes that most of the risk in the homebuilding industry is
related to excessive inventory, including undeveloped land, finished lots and
completed but unsold homes. The Company attempts to reduce the amount of capital
committed to land by continuously monitoring its undeveloped and finished lot
inventory. The Company seeks to purchase land through Acquisition Agreements,
which the Company believes reduce the amount of capital invested at any one time
and permit the Company to terminate or postpone the ultimate purchase of land
that it does not need. The Company attempts to limit its exposure to an excess
inventory of completed houses by: (i) generally not starting construction of a
home until execution of a purchase agreement, receipt of satisfactory earnest
money, receipt by the home buyer of a preliminary mortgage commitment and
removal of all contingencies; and (ii) controlling the number of finished homes
held as speculation homes on a project-by-project basis and monitoring weekly
the sales progress of each subdivision.
As of June 30, 1997, the Company had 430 homes built or under construction
to be sold or held as inventory and located in seventeen different subdivisions
and in various stages of the construction process. A total of 425 of these homes
were under contract to be sold. The Company rarely holds houses in inventory
after completing construction, with the exception of model homes which are
typically sold to Model Homes and then leased back. Homes in inventory not
subject to a purchase contract are generally marketed to transferee home buyers
or buyers who can not wait for the construction cycle to be completed.
Transferee buyers have traditionally represented a small portion of the
Company's sales. A transferee buyer typically requires delivery of a new house
within 30 to 60 days. The number of homes held in inventory will vary seasonally
and with changes in the local and national economy.
30
<PAGE>
COMPETITION
The homebuilding industry is highly competitive and fragmented. Homebuilders
compete for desirable properties, financing, raw materials and skilled labor.
The Company competes for residential sales with other homebuilders, resales of
existing homes, available rental housing, and, to a lesser extent, resales of
condominiums. The Company's competitors include a large number of national and
regional homebuilding companies (Chicago and Phoenix markets) and small local
homebuilding companies (in all of the Company's markets), some of which may have
greater financial resources, easier access to working capital or lower capital
costs than the Company.
EMPLOYEES
As of June 30, 1997, the Company employed 130 full-time employees,
including, executive and office personnel as well as, construction
superintendents. The Company's employees are not covered by a collective
bargaining agreement and the Company believes its relations with its employees
are good.
GOVERNMENTAL REGULATION
The Company's business is subject to regulation by a variety of state and
federal laws and regulations relating to, among other things, advertising,
collection of state sales and use taxes and product safety. The Company's
development activities are also affected by local zoning ordinances, building
codes and other municipal laws as well as federal, state and municipal
environmental and conservation laws. While the Company believes it is presently
in material compliance with these regulations, in the event that it should be
determined that the Company is not in compliance with all such laws and
regulations, the Company could become subject to cease and desist orders,
injunctive proceedings, civil fines and other penalties.
ENVIRONMENTAL AND LEGAL PROCEEDINGS
The Company currently is not subject to any environmental litigation or
administrative proceedings. The Company is not currently involved in any legal
proceedings other than those arising in the ordinary course of business.
The Company believes that its potential liability for environmental concerns
can arise in one of two contexts: (i) liability could arise with respect to
substances that are in, under or on land which the Company intends to acquire;
or (ii) liability could arise in connection with how the Company intends to
develop the land. With respect to a substance in, under or on land for which the
Company could face environmental liability, the Company performs a Phase I
environmental audit prior to acquiring the land. If the audit uncovers any
environmental hazards on the land, the Company would not exercise the option
unless the hazard could be corrected at a reasonable cost. With respect to
liabilities in connection with a planned development, the Company obtains the
federal and state permits necessary for building and development before it
exercises the options. If a planned development is not permissible under
environmental laws, the Company will not exercise the option.
31
<PAGE>
MANAGEMENT
The current executive officers, directors and managers of United are as
follows:
<TABLE>
<CAPTION>
NAME AGE TITLE
- ------------------------------------------------------------ --- ----------------------------------------------
<S> <C> <C>
Virgil W. Owings............................................ 62 Chairman of the Board
Edward F. Havlik............................................ 53 President and Director
Laurie H. Bulson............................................ 29 Vice President and Director
Timothy S. Owings........................................... 36 Vice President and Director
William J. Crock, Jr........................................ 49 Executive Vice President, Chief Financial
Officer, Secretary/Treasurer
David L. Feltman............................................ 37 Vice President/General Counsel
</TABLE>
VIRGIL OWINGS, CHAIRMAN OF THE BOARD OF DIRECTORS. Mr. Owings has served as
the Chief Executive Officer of the Parent since 1982 and as United's Chairman of
the Board since its inception in 1994. Prior thereto, Mr. Owings was Chief
Financial Officer of Urban Investment Company. He holds a B.S. degree from the
University of Missouri and an MBA from the University of Chicago and is a C.P.A.
Mr. Owings is the father of Timothy Owings.
EDWARD F. HAVLIK, PRESIDENT AND DIRECTOR. Mr. Havlik has served as the
Chairman of the Board of the Parent since 1982 and as United's President since
its inception in 1994. Mr. Havlik has more than twenty-three years of experience
building and developing homes with an emphasis on marketing, forward planning
and negotiations. Mr. Havlik holds a B.A. in marketing from Northern Michigan
University and an honorary Doctor of Letters from Jordan College. Mr. Havlik is
scheduled to become President of the Illinois Homebuilders Association in 1998.
Mr. Havlik is the father of Laurie Bulson.
LAURIE H. BULSON, VICE PRESIDENT AND DIRECTOR. Ms. Bulson has been employed
by the Company or its Parent since 1988. In addition to her current
responsibilities, she has also served as Director of Sales and Marketing for
United Homes Michigan, Inc. and Vice President of Marketing of United Homes of
Illinois, Inc. Ms. Bulson has a B.S. degree in Business and Marketing from
Indiana University. Ms. Bulson is the daughter of Mr. Havlik.
TIM S. OWINGS, VICE PRESIDENT AND DIRECTOR, PRESIDENT UNITED HOMES, INC., AN
ARIZONA CORPORATION. Mr. Owings has been employed by the Company or its Parent
since 1984. Prior thereto, he was Director of Research for Home Data
Corporation, Chicago. Mr. Owings is President of United Homes, Inc., an Arizona
corporation and has a degree in Business Administration/Marketing from Western
Illinois University and is a licensed Real Estate Broker in Arizona. Mr. Owings
is the son of Virgil Owings.
WILLIAM J. CROCK, JR., EXECUTIVE VICE PRESIDENT/CHIEF FINANCIAL OFFICER. Mr.
Crock has served as Chief Financial Officer of United and its Parent since 1990.
Prior thereto, he was Chief Lending Officer of Skokie Federal Savings and Loan
from 1986 to 1990, Vice President of Finance for Joseph Freed & Associates from
1983 to 1986 and an audit manager for Touche Ross & Company from 1969 to 1983.
Mr. Crock has a B.S. from Bradley University, Peoria, Illinois and is a C.P.A.
DAVID L. FELTMAN, VICE PRESIDENT/GENERAL COUNSEL. Mr. Feltman joined United
in 1996. From 1988 to 1989 Mr. Feltman was associated with, and from 1990 to
1995 a partner with, Shefsky & Froelich Ltd. practicing in the Real Estate
Department. In 1981 he received a B.S. in Accounting, and in 1984 he received a
J.D. degree, both from the University of Illinois. Mr. Feltman is also a C.P.A.
In addition, the following are the chief officers of the Subsidiaries:
BRUCE C. BROWN, PRESIDENT, UNITED HOMES OF MICHIGAN, INC. Mr. Brown has been
with United Homes of Michigan, Inc. since 1986. Prior to that he was President
and Chief Executive Officer of Square Real Estate, Inc. in Grand Rapids. Mr.
Brown has served as City Manager, Kalamazoo, Michigan and Director
32
<PAGE>
of Planning/Economic Development, Indianapolis, Indiana. Mr. Brown holds B.S.
and M.B.A. degrees from Michigan State University and is a licensed real estate
broker in the State of Michigan.
NEVILLE ALPERSTEIN, PRESIDENT OF UNITED HOMES OF ILLINOIS, INC. Mr.
Alperstein joined United Homes of Illinois, Inc. in 1996. Prior to that, he
spent over fifteen years with Pulte Home Corporation. Mr. Alperstein holds a
B.S. in Construction Engineering as well as an M.B.A. from the University of
Michigan.
The officers of the Company are elected annually and serve at the discretion
of the Board of Directors. None of the Company's officers is employed pursuant
to a written employment contract.
SUMMARY COMPENSATION TABLE
The following table sets forth information with respect to those persons
who: (i) served as the chief executive officer of United during the fiscal year
ended September 30, 1997; and (ii) were the most highly compensated executive
officers of United at September 30, 1997, whose total annual salary and bonus
exceeded $100,000 for the year.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
---------------
AWARDS
---------------
ANNUAL COMPENSATION
---------------------------------------------------------------- (G)
(F) SECURITIES
(E) RESTRICTED UNDERLYING
(A) (B) (C) (D) OTHER ANNUAL STOCK OPTIONS/
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION($) AWARDS SARS(#)
- ---------------------------- --------- --------- ------------- --------------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Virgil W. Owings ........... 1997 325,000 -- -- -- -- -- -- -- -- -- --
Chairman 1996 325,000 --
1995 325,000 --
Edward F. Havlik ........... 1997 368,750 -- -- -- -- -- -- -- -- -- --
President 1996 325,000 --
1995 325,000 --
Neville Alperstein ......... 1997 146,616 -- -- -- --
President of United Homes 1996 -- -- -- -- --
of Illinois, Inc. 1995 -- -- -- -- --
William J. Crock, Jr. ...... 1997 125,000 -- -- -- -- -- -- -- -- -- --
Executive Vice President 1996 125,000 --
1995 117,000 --
David L. Feltman ........... 1997 125,000 -- -- -- --
Vice President General 1996 -- -- -- -- --
Counsel 1995 -- -- -- -- --
Bruce C. Brown ............. 1997 120,000 -- -- -- --
President United Homes of 1996 120,000 -- -- -- --
Michigan, Inc. 1995 120,000 -- -- -- --
Timothy S. Owings .......... 1997 100,000 -- -- -- -- -- -- -- -- -- --
Vice President 1996 100,000 --
1995 100,000 --
<CAPTION>
PAYOUTS
------------------------------------
(H) (I)
(A) LTIP ALL OTHER
NAME AND PRINCIPAL POSITION PAYOUTS($) COMPENSATION($)(1)
- ---------------------------- --------------- -------------------
<S> <C> <C>
Virgil W. Owings ........... -- -- -- --
Chairman 11,450
15,609
Edward F. Havlik ........... -- -- -- --
President 11,450
15,609
Neville Alperstein ......... -- --
President of United Homes -- --
of Illinois, Inc. -- --
William J. Crock, Jr. ...... -- -- -- --
Executive Vice President 9,535
10,432
David L. Feltman ........... -- --
Vice President General -- --
Counsel -- --
Bruce C. Brown ............. -- --
President United Homes of -- 9,125
Michigan, Inc. -- 12,106
Timothy S. Owings .......... -- -- -- --
Vice President 7,643
5,300
</TABLE>
- ------------------------------
(1) Reflects the value of shares in the Parent issued to the individual under
Parent's Employee Stock Ownership Plan ("ESOP"). The ESOP was terminated
effective March 30, 1997 and no awards have been made as of the date of this
Prospectus for the year ended September 30, 1997. Awards under the ESOP were
based on the individual's length of service with the Company and his or her
compensation level.
33
<PAGE>
United has recently established a bonus plan which enables all employees of
United to receive up to twenty-five percent (25%) of their annual base salary
plus an additional one quarter of one percent (.25%) for each year that the
individual has been employed by United if the Company achieves its budget for
that particular year. In particular, at the beginning of each fiscal year, the
Company's managers develop budgets for their respective operations. These
budgets are then approved by the Company's board of directors. If the Company is
successful in meeting or exceeding the budget, then the various employees are
eligible for bonuses. The determination of bonus payments is made in the
December following the end of the previous fiscal year following receipt and
review by the board of the Company's audited financial statements for the prior
year.
34
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
United is a wholly-owned subsidiary of the Parent, which owns 100% of the
issued and outstanding common stock of United. Control of United is directed by
the shareholders of the Parent. The following table sets forth certain
information regarding the ownership of the Parent's common stock as of November
6, 1997 by each person who is known to beneficially own more than 5% of the
Parent's common stock, by each of the Directors and executive officers of
United, and by all Directors and executive officers of United as a group.
<TABLE>
<CAPTION>
PERCENT OF
NAMES AND ADDRESS NUMBER OF SHARES CLASS
OF BENEFICIAL OWNER(1) BENEFICIALLY OWNED OUTSTANDING
- --------------------------------------------------------------------------- --------------------- ---------------
<S> <C> <C>
Edward F. Havlik (2) ...................................................... 37,455 48%
2100 Gold Road
Suite 110
Rolling Meadows, IL60008
Virgil Owings (3) ......................................................... 38,516 49%
3260 North Hayden
Suite 102
Scottsdale, AZ85251
Timothy S. Owings (4) ..................................................... 652 *
3260 North Hayden
Suite 102
Scottsdale, AZ85251
Laurie Bulson (5) ......................................................... 499 *
2100 Golf Road
Suite 110
Rolling Meadows, IL60008
Bruce C. Brown (7) ........................................................ 940 1.19%
4525 Broadmoor
Grand Rapids, MI 49512
William J. Crock, Jr. (6) ................................................. 730 *
2100 Golf Road
Suite 110
Rolling Meadows, IL60008
David L. Feltman .......................................................... __ __
2100 Golf Road
Suite 110
Rolling Meadows, IL60008
Officers and Directors of United .......................................... 77,852 98.81%
as a Group (Six Persons)
</TABLE>
- ------------------------
* Less than 1%
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission, and generally includes voting power
and/or investment power with respect to securities. Shares of common stock
which a person has the right to acquire within 60 days of November 6, 1997,
are deemed outstanding for computing the percentage of the person possessing
such right but are not deemed outstanding for computing the percentage of
any other person. Unless otherwise indicated, the Company believes that each
person named or included in the table has sole voting and investment power
with respect to the shares of common stock set forth opposite his or her
name.
(2) Mr. Havlik owns his interest in United through his interest in the Parent.
Mr. Havlik owns 17,500 shares and Mr. Havlik's wife Nancy owns 17,500
shares.
35
<PAGE>
(3) Mr. Owings owns his interest in United through his interest in the Parent.
Includes 17,500 shares of common stock held in a trust of which Ruth Goodwin
(Mr. Owings daughter), Timothy Owings and Todd Owings serve as trustee and
of which Mr. Owings has disclaimed beneficial ownership; 17,500 shares of
common stock held by the Barbara M. Owings Irrevocable Trust (the "Owings
Family Trust"); and 3,516 shares of common stock held by the Plan.
(4) Mr. Timothy Owings owns his interests in United through his interest in the
Parent. Mr. Owings does not directly own any shares of the Parent's common
stock. He indirectly owns 652 shares held for Mr. Owings' benefit by the
Plan and has a 33% interest in the Owings Family Trust which for these
purposes are fully attributable to Mr. Virgil Owings.
(5) Ms. Bulson owns her interest in United through her interest in the Parent.
Ms. Bulson does not directly own any shares of the Parent's common stock.
She indirectly owns 499 shares held for Ms. Bulson's benefit by the Plan.
(6) Mr. Crock owns his interest in United through his interest in the Parent.
Mr. Crock does not directly own any shares of the Parent's common stock. He
indirectly owns 730 shares held for Mr. Crock's benefit by the Plan.
(7) Mr. Brown owns his interest in United through his interest in the Parent.
Mr. Brown does not directly own any shares of the Parent's common stock. He
indirectly owns 940 shares held for Mr. Brown's benefit by the Plan.
CERTAIN TRANSACTIONS
The Company and Nancy I. Havlik ("N. Havlik"), wife of United's president,
are each limited partners with 24.5% interests in United Development Bristolwood
Limited Partnership ("Bristolwood"). The general partner of Bristolwood, which
has a 1% interest, is owned 50% by Edward Havlik, the president of the Company,
and 50% by a third party not affiliated with the Company. Bristolwood sold to
United 48 lots for $22,000 per lot and 142 lots for $28,000 per lot, of which
$784,000 remains unpaid. The purchase price under the agreement was based on the
parties agreement on fair market value for the lots. Neither party relied on
third party appraisals.
The Owings Family Trust and the Nancy I. Havlik Trust ("Havlik Trust"), each
an affiliate of a director of the Company, each pledged a $300,000 letter of
credit as security for a loan obtained by the Company in September of 1996.
United in turn executed a $300,000 promissory note in favor of each of the
Owings Trust and the Havlik Trust, which notes bear interest at the rate of 1%
per month. No principal becomes due unless the lender draws on the letters of
credit. There have been no draws to date.
During fiscal year 1995, the Company sold four (4) model homes for an
aggregate price of $650,000 to an affiliate of Messrs. Havlik and Owings. The
sale and subsequent purchase was based on the fair market value of the homes as
determined by comparable home costs. The Company repurchased the model homes for
an aggregate price of $600,000 in fiscal year 1996.
The Company sells certain of its model homes to Model Homes, L.L.C., an
Illinois limited liability company which has as its members two corporations
controlled by the Havlik and Owings families. On March 30, 1997, Model Homes,
L.L.C., purchased twenty-two model homes valued at $4,661,500 from the Company.
The sale resulted in a gain to the Company of approximately $766,000. The
purchase price in this and similar transactions was the "appraised value" of the
model homes. The "appraised value" is determined based on selling prices for
comparable homes in the development. In this and other similar transactions, the
purchase price was paid by (a) assumption of debt secured by the model home in
the amount of approximately 75% of its appraisal value, (b) cash (approximately
15% of appraised value), and (c) a note (approximately 10% of the appraised
value) which bears interest at 10% per annum. All model homes sold to Model
Homes, L.L.C., including the twenty-two homes sold in this transaction, are then
leased back to the Company pursuant to a month to month triple net lease
including payments of base rent equal to satisfaction of the assumed debt
service and a return of 15% on the cash paid at acquisition. The Company
believes that these transactions are completed on terms substantially similar,
or more favorable to the Company, than would be available through independent
model home purchasers.
On May 1, 1994, the Parent executed a Real Estate Purchase Agreement with
Greenbrooke Associates, Ltd. ("Greenbrooke"), a Michigan corporation. Edward
Havlik and Virgil Owings each own 16 2/3% of Greenbrooke. The Purchase Agreement
was for the sale of 142 unimproved single family lot sites from Greenbrooke for
$12,000 per lot plus interest at the rate of 8% per annum (subsequently
increased to $13,000 per lot plus interest by amendment to the Purchase
Agreement). The Parent assigned the Purchase Agreement to United Homes of
Michigan, Inc. in May of 1994. As of June 30, 1997 United Homes of
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Michigan, Inc. was obligated to pay Greenbrooke $369,000 (inclusive of interest)
for lots to be improved with single family residences and $143,000 (inclusive of
interest) for lots to be improved with condominiums. The sale price and
subsequent increase were determined based upon the parties agreement of the fair
market value of the lots, without reliance on independent appraisals.
On February 1, 1996 United Homes of Michigan, Inc., executed a $100,000
promissory note in favor of Landrover Properties, L.L.C., a Michigan limited
liability company, 60% of which is owned by the Havlik Trust. The note bears
interest at 25% per annum and is paid with closing proceeds from the sale of
units at the Woodside Green subdivision in Michigan. As of June 30, 1997 the
balance of the note was $94,500.
N. Havlik owns a 15.16% interest in approximately 86 acres of land in
Kalamazoo, Michigan which was sold in fiscal year 1995 to United Homes of
Michigan, Inc. The sale contract requires payment of $422,600 (inclusive of
interest) on March 2, 1997, which amount was paid and an additional $422,600
(inclusive of interest accruing at 8% per annum) to be made to N. Havlik on
March 2, 1998 and March 2, 1999. The sales price was based upon the parties
agreement of the fair market value of the property, without reliance on
independent appraisals.
DR Development, Inc. a corporation owned by the Havlik Trust and the Owings
Trust loaned the Company $200,000 in September of 1993, ("Loan 1") and $182,000
on August 5, 1994 ("Loan 2"). Loan 1 and Loan 2 are each evidenced by a
promissory note ("Note 1" and "Note 2" respectively). Note 1 bears interest at
10% per annum. Note 2 provides that $364,000 inclusive of interest is due on
maturity, which is December 31, 1997. As of June 30, 1997 $384,000 is owed in
aggregate on Note 1 and Note 2.
Odyssey Limited Partnership, an entity owned 25% by each of N. Havlik, and
the children of Edward and N. Havlik, in the aggregate and Barbara Owings, wife
of Virgil Owings and the children of Virgil and Barbara Owings, in the
aggregate, is indebted to the Company in the aggregate principal amount of
$558,133 for prior management of certain property known as Odyssey Club. This
indebtedness is unsecured and is to be repaid from the sale of units, if any, at
the Odyssey Club.
Greenbrooke Associates Ltd., in which Edward Havlik and Virgil Owings each
own a 16 2/3% interest, loaned the Company $250,000 in February, 1997. The
obligation is evidenced by a demand note which bears interest at the annual rate
of prime plus 1% (9.75% as of September 30, 1997).
From time to time, the Company has advanced monies to Parent to pay
obligations of Parent. Such advances have resulted in a payable to the Company,
evidenced by a promissory note, which as of June 30, 1997 was $3,526,086. This
promissory note bears interest at the prime rate (8.75% as of September 30,
1997).
Messrs. Havlik and Owings have each guaranteed certain indebtedness of the
Company and its subsidiaries in the past. As of June 30, 1997 these guarantees
are for approximately $15,000,000 of debt, in the aggregate.
The Indenture will restrict United and each Subsidiary from engaging,
conducting or entering into any transaction or series of transactions with or
for the benefit of any Affiliate or Subsidiary of United or any holder of 5% or
more of any class of capital stock of United, except in good faith and on terms
that are, in the aggregate, no less favorable to United or such Subsidiary, as
the case may be, than those that could have been obtained in a comparable
transaction on an arms-length basis from a person not an Affiliate of United or
such Subsidiary. See "Description of Securities--Limitation on Transactions with
Affiliates; Affiliate Loans."
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DESCRIPTION OF SECURITIES
GENERAL
The Debentures will be issued under an Indenture (the "Indenture"), dated as
of November , 1997 between United and the Trustee. A copy of the form of the
Indenture is filed as an exhibit to the Registration Statement of which this
Prospectus is a part. The following statements are summaries of certain
provisions of the Indenture and are subject to and qualified in their entirety
by reference to all of the provisions of the Indenture, including the
definitions therein of certain terms herein.
The Debentures offered by United under the Indenture will be limited to
$7,000,000 aggregate principal amount (assuming exercise of the over-allotment
option). The Debentures will mature March 15, 2005, unless redeemed earlier.
Interest on the Debentures will accrue at an annual rate of 11%. Interest is
payable quarterly on the 15th day of each calendar quarter (each a "Interest
Payment Date") beginning on March 15, 1998 to the person in whose name the
Debenture is registered, at the close of business on the Regular Record Date
which is the 15th day of the calendar month next preceding each Interest Payment
Date.
Principal, premium, if any, and interest will be payable, and the Debentures
will be exchangeable and transfers thereof will be registered, at the office or
agency to be maintained by United in St. Paul or Minneapolis, Minnesota.
Initially, United's office will be the office of the Trustee in Minneapolis,
Minnesota.
The Debentures will be issued only in registered form, without a coupon, in
denominations of $1,000 each and any integral multiple of $1,000. The Debentures
are transferable and transfers will be registered without charge thereof, but
United may require payment of a sum sufficient to cover any tax or other
governmental charge payable in connection therewith. Holders may transfer the
Debentures by surrendering them for transfer at the office of the Trustee.
COLLATERAL AND RANKING
The Debentures will be unsecured obligations of United. In the event of the
dissolution, winding up, liquidation or bankruptcy of United, the holders of the
Debentures will not be entitled to receive any payment until the holders of
secured indebtedness receive payment or distributions in respect of the assets
collateralizing their debt. Upon the occurrence of any payment default on
secured indebtedness, proceeds from the assets collateralizing the secured
indebtedness which is in default may not be used to satisfy United's obligations
on the Debentures. As of June 30, 1997, the Company had approximately $84.0
million of outstanding liabilities, including approximately $70.3 million of
secured indebtedness and approximately $13.0 million of indebtedness incurred by
the Subsidiaries. See "Risk Factors--Lack of Collateral." The Indenture does not
limit the amount of secured indebtedness that United or its Subsidiaries may
incur.
REDEMPTION
MANDATORY REDEMPTION. The Debentures will be subject to mandatory
redemption. On September 15, 1999 and on each March 15 and September 15
thereafter through September 15, 2004, United will pay to the Trustee cash
sufficient to redeem, on each redemption date, up to $83,333 for each $1,000,000
worth of Debentures sold by United. On or before March 15, 2005, United will pay
to the Trustee cash sufficient to redeem all remaining outstanding Debentures.
The Debentures will be redeemed in whole, but not in part, and will be selected
by the Trustee by lot or in any manner deemed proper by the Trustee.
OPTIONAL REDEMPTION. The Debentures will be subject to redemption at the
option of United, in whole or in part, from time to time, commencing on December
15, 1997, upon not less than 30 days' nor more than 60 days' notice mailed to
the holders thereof, at the Redemption Prices established for the Debentures,
together in each case, with interest accrued to the date fixed for redemption
(subject to the
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right of a holder on the Regular Record Date for an interest payment to receive
such interest). The Redemption Prices for the debentures (expressed as a
percentage of the principal amount) shall be as follows for Debentures redeemed
in the 12-month periods beginning December 15 of each of the following years:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ---------------------------------------------------------------------------------- -----------
<S> <C>
1997.............................................................................. 105%
1998.............................................................................. 104%
1999.............................................................................. 103%
2000.............................................................................. 102%
2001.............................................................................. 101%
2002 and thereafter............................................................... 100%
</TABLE>
United may elect to redeem less than all of the Debentures. If United elects
to redeem less than all of the Debentures, the Trustee will select which
Debentures to redeem by lot or any similar method which is deemed fair and
appropriate.
DEFINITIONS
"Consolidated Net Income" means, with respect to any person for any period,
the aggregate of the net income of such person and its Subsidiaries for such
period, on a Consolidated basis, determined in accordance with GAAP, provided
that extraordinary gains and losses (determined in accordance with GAAP) shall
be excluded.
"Adjusted Total Liabilities" means Total Liabilities less non-interest
bearing trade payables, non-interest bearing accrued construction costs and
deposits from home buyers.
"Consolidated Tangible Net Worth" means, with respect to any person at any
date of determination, the Consolidated stockholders' equity represented by the
shares of such person's capitalized stock (other than Disqualified Stock)
outstanding at such date, as determined on a Consolidated basis in accordance
with GAAP less any portion of such stockholders' equity attributable to
intangible assets as determined in accordance with GAAP.
"Adjusted Consolidated Tangible Net Worth" means with respect to any person
at any date of determination, such person's Consolidated Tangible Net Worth less
any loans to affiliates (other than subsidiaries).
"Indebtedness" means, with respect to any person at any date, without
duplication, all items of indebtedness which, in accordance with GAAP, would be
included in determining total liabilities as shown on the liabilities side of a
balance sheet of such person at such date, and in addition includes: (i)
Guaranties by such person; (ii) all Capitalized Lease Obligations of such
person; and (iii) all indebtedness secured by any mortgage, lien, pledge, charge
or encumbrances upon property owned by such person, whether or not the
indebtedness so secured has been assumed by such person. For the purpose of
computing the "Indebtedness" of any person, the following will be excluded: (i)
any particular Indebtedness to the extent that, upon or prior to the maturity
thereof, there will have been deposited with the proper depository in trust the
necessary funds, securities, or evidences of such Indebtedness, if permitted by
the instrument creating such Indebtedness, for the payment, redemption, or
satisfaction of such Indebtedness, and thereafter such funds and evidences of
Indebtedness so deposited shall not be included in any computation of the assets
of such person; and (ii) Indebtedness of a Restricted Subsidiary of such person,
which is not guaranteed by such person.
"Restricted Payment" means: (i) the declaration of payment for any dividend
or any other distribution on the capital stock of United or any Subsidiary of
United or any payment made to the direct or indirect holders (in their
capacities as such) of the capital stock of United or any Subsidiary of United
(other than
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(x) dividends or distributions payable solely in capital stock or in options,
warrants or other rights to purchase capital stock, and (y) in the case of any
Subsidiary of United, dividends or distributions payable to United or to a
Subsidiary of United); or (ii) the purchase, redemption or other acquisition or
retirement for value of any capital stock of United or any Subsidiary. If a
Restricted Payment is made in other than cash, the value of any such payment
shall be determined in good faith by the Board of Directors, whose determination
shall be conclusive and evidenced by a Company Resolution to be filed with the
Trustee. For purposes of this definition, "Restricted Payment" shall not
include: (a) payments made in the form of United's common stock; or (b)
purchases of common stock of a Wholly-Owned Subsidiary of United that is not a
Restricted Subsidiary.
MODIFICATION OF THE INDENTURE
With the consent of the holders of not less than two-thirds in aggregate
principal amount of the Debentures then outstanding, the Trustee and United may
execute a supplemental Indenture to add provisions to, or change in any manner
or eliminate any provisions of, the Indenture or modify in any manner the rights
of the holders of the Debentures, provided that, without the consent of the
holder of each outstanding Debenture so affected, no such supplemental Indenture
and no such amendment will: (i) change the maturity date of the principal or
interest rate payable on any Debenture, or reduce the principal amount thereof
or the rate of interest thereon or any premium payable upon the redemption
thereof; (ii) reduce the percentage of the holders of the Debentures whose
consent is required for the authorization of any such supplemental Indenture; or
(iii) modify any provisions of Section 513, 902 or 1012 of the Indenture, except
to increase any such percentage or to provide that certain other provisions of
the Indenture cannot be waived or modified without the consent of the holder of
each outstanding Debenture.
RESTRICTIVE COVENANTS
LIMITATION ON ADDITIONAL INDEBTEDNESS. The Indenture will restrict United
and each Subsidiary from incurring additional Indebtedness, except for: (i)
Indebtedness under the Debentures and the Indenture; (ii) Indebtedness
outstanding on the original issue date of the Debentures and disclosed to the
Trustee; (iii) Indebtedness that immediately after giving pro forma effect to
the incurrence thereof, does not cause the ratio of Adjusted Total Liabilities
to Consolidated Tangible Net Worth to exceed 7:1; and (iv) with certain
limitations, any deferrals, renewals, extensions, or modifications to
Indebtedness incurred under clause (ii) or (iii) above.
LIMITATION ON RESTRICTED PAYMENTS. The Indenture will restrict United and
each Subsidiary from making any Restricted Payments, provided however, the
Company may make S-Corp tax dividends, if at the time of such action no Event of
Default exists or results therefrom after giving effect to such dividend and
provided further, the Company may make Restricted Payments: (i) if at the time
of such action no Event of Default exits or would result therefrom; (ii) if at
the time, upon giving effect to such Restricted Payment, United could incur at
least $1.00 of Indebtedness pursuant to the provisions of the Indenture limiting
additional Indebtedness; and (iii) if, immediately after giving effect to such
Restricted Payment, the aggregate of all Restricted Payments declared or made
from the date of the Indenture, through and including the date of such
Restricted Payment (the "Base Period") does not exceed the sum of 50% of
Consolidated Net Income (or in the event Consolidated Net Income is a deficit,
minus 100% of such deficit) during the Base Period and 100% of the aggregate net
proceeds received by United from the issue or sale during the Base Period of
capital stock of United.
LIMITATION ON TRANSACTIONS WITH AFFILIATES; AFFILIATE LOANS. The Indenture
will restrict United and each Subsidiary from engaging, conducting or entering
into any transaction or series of transactions with or for the benefit of any
Affiliate or Subsidiary of United or any holder of 5% or more of any class of
Capital Stock of United (each an "Affiliate Transaction"), except in good faith
and on terms that are, in the aggregate, no less favorable to United or such
Subsidiary, as the case may be, than those that could have
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been obtained in a comparable transaction on an arms-length basis from a person
not an Affiliate of United or such Subsidiary. Any loans to the Company or any
Subsidiary from any Affiliate, incurred after the Issue Date, whether by
deferrals, renewals, extensions, replacements, refinancings, refundings,
amendments, modifications, supplements, or the like, shall be unsecured and
pari-passu to the Debentures; provided however that: (i) if an Event of Default
occurs and notice is provided to the Company pursuant to Section 502 of the
Indenture; (ii) the Company fails to make any payment of principal or interest
in a timely manner, without giving effect to any cure periods or notice
requirements; or (iii) the Tangible Net Worth of the Company shall fall below
the minimum Tangible Net Worth required under the Indenture; the Company shall
not make any payment of principal, interest or any other payment in any form on
such loans, nor shall any Affiliate making any such loans have the right to
receive any such payment, until the Debentures have been paid in full or the
default has been cured. In addition, upon the occurrence of any bankruptcy,
reorganization or similar proceeding, the Company shall not make any payment of
principal, interest or any other payment in any form on such loans, nor shall
any Affiliate making any such loans have the right to receive any such payment,
until the Debentures have paid in full. The Company covenants and agrees that it
will notify every Affiliate who makes a loan to the Company, after the Issue
Date, of the Company's agreement under Section 1009, and the Company shall
obtain an agreement from every Affiliate making a loan to the Company, after the
Issue Date, to the effect that such Affiliate agrees, upon the occurrence of a
bankruptcy, reorganization or similar event, that the Affiliate shall be
prohibited from receiving any payments with respect to such loan whether
principal or interest, until the Debentures have been indefensibly paid in full
in form and substance satisfactory to the Trustee and counsel to the Trustee.
LIMITATION ON DIVIDENDS AND OTHER PAYMENT RESTRICTIONS AFFECTING A
SUBSIDIARY. The Indenture will restrict United and each Subsidiary from,
directly or indirectly, creating or otherwise causing or suffering to exist or
become effective or entering into any agreement with any person that would
restrict the ability of any Subsidiary of United to: (i) pay dividends, in cash
or otherwise, or make any other distributions on its capital stock or any other
interest or participation in, or measured by, its profits owned by United or a
Subsidiary of United; (ii) make any loans or advances to, or pay any
Indebtedness owed to, United or any Subsidiary of United; or (iii) transfer any
of its properties or assets to United or to any Subsidiary of United, except, in
each case, for such encumbrances or restrictions existing under or contemplated
by or by reason of: (a) the Debentures or the Indenture; (b) any restrictions
existing under agreements in effect on the date the Debentures are issued; and
(c) any restrictions existing under any agreement that refinances or replaces an
agreement containing a restriction permitted by clause (a) or (b) above,
provided that the terms and conditions of such restrictions are not materially
less favorable in the aggregate to the Debenture holders than those under or
pursuant to the agreement being replaced or the agreement evidencing the
Indebtedness being refinanced or replaced.
NET WORTH. The Indenture will require United to keep and maintain, at all
times during the term of the Debentures Adjusted Consolidated Tangible Net
Worth, determined as of the last day of each quarter, at an amount not less than
six million dollars ($6,000,000) plus 50% of positive Consolidated Net Income
earned after September 30, 1997. Compliance with this covenant shall be measured
on the last day of March, June, September and December of each year, and the
Indenture requires United to provide Adjusted Consolidated Tangible Net Worth as
of each quarter within 45 days of each calendar quarter except December 31 for
which United shall have 90 days to provide the calculation. In the event of any
non-compliance with this covenant, the Indenture will require United deliver to
the Trustee a certificate from United's independent public accountants as to
subsequent compliance to cure any such default.
LIMITATIONS ON COMPENSATION. The Indenture will restrict United from: (i)
paying salary compensation (excluding bonuses or other performance based or
incentive compensation) to Edward F. Havlik in excess of $500,000 in any
calendar year; (ii) paying salary compensation (excluding bonuses or other
performance based or incentive compensation) to Virgil W. Owings in excess of
$325,000 in any calendar year; (iii) paying or permitting any Subsidiary to pay
compensation to any other employee in excess of amounts paid to similar
employees by other reputable persons engaged in the same or similar business and
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similarly situated. The Indenture will also restrict United and any Subsidiary
from paying bonuses or other performance based or incentive compensation to
Edward F. Havlik in excess of $125,000 in any calendar year or to Virgil W.
Owings in excess of $81,250 in any calendar year.
LIMITATIONS ON INVESTMENTS. The Indenture will restrict United and each
Subsidiary from acquiring for value, making, having or holding any Investments,
except: (i) investments existing on the date of this Agreement; (ii) property to
be used in the ordinary course of business consistent with past practice; (iii)
current assets arising from the sale of goods and services in the ordinary
course of business; (iv) investments in readily marketable direct obligations
issued or guaranteed by the United States or any agency thereof and supported by
the full faith and credit of the United State; (v) certificates of deposit or
bankers' acceptances issued by any commercial bank organized under the laws of
the United States or any State thereof which has combined capital and surplus of
at least $100,000,000; (vi) commercial paper given the highest rating by a
nationally recognized rating service and maturing not more than one year from
the date of acquisition thereof.
ADDITIONAL LIENS; NEGATIVE PLEDGES. The Indenture will restrict United and
each Subsidiary from creating, incurring, assuming or suffering to exist any
lien, or entering into, or making any commitment to enter into, any arrangement
for the acquisition of any property through conditional sale, lease-purchase or
other title retention agreements, with respect to any property now owned or
hereafter acquired by United or a Subsidiary, except: (i) liens existing on the
date the Debentures are originally issued and disclosed in United's audited
financial statements; (ii) deposits or pledges which secure payment of workers'
compensation, unemployment insurance, old age pensions or other social security
obligations, in the ordinary course of business of United or a Subsidiary; (iii)
liens for taxes, fees, assessments and governmental charges not delinquent or to
the extent that payment therefor shall not at the time be required to be made in
accordance with the provisions of the Indenture; (iv) liens of carriers,
warehousemen, mechanics and materialmen, and other like liens arising in the
ordinary course of business, for sums not due or to the extent that payment
therefor shall not at the time be required to be made in accordance with the
provision of the Indenture; (v) liens incurred or deposits or pledges made or
given in connection with, or to secure payment of, indemnity, performance or
other similar bonds; (vi) encumbrances in the nature of zoning restrictions,
easements and rights or restrictions of record on the use of real property and
landlord's liens under leases on the premises rented, which do not materially
detract from the value of such property or impair the use thereof in the
business of United or a Subsidiary; (vii) the interest of any lessor under any
capitalized lease entered into after the date the Debentures are issued or
purchase money liens on property acquired after such date; provided, that: (a)
the Indebtedness secured thereby is otherwise permitted by the Indenture; and
(b) such liens are limited to the property acquired and do not secure
Indebtedness other than the related capitalized lease obligations or the
purchase price of such property.
Further, the Indenture will restrict United and each Subsidiary from,
entering into any agreement, bond, note or other instrument with or for the
benefit of any person other than the Debenture Holders which would: (i) prohibit
United or such Subsidiary from granting, or otherwise limit the ability of
United or such Subsidiary to grant, to the Debenture Holders any lien on any
assets or properties of United or such Subsidiary; or (ii) require United or
such Subsidiary to grant a lien to any other person if United or such Subsidiary
grants any lien to the Debenture Holders.
CONSOLIDATION, MERGER, TRANSFER OR LEASE. Under the Indenture, United may
not consolidate with, or merge with or into, or transfer all or substantially
all of its assets in one transaction or a series of related transactions, to
another person unless: (i) the successor entity is an entity organized and
existing under the laws of the United States or any state thereof or the
District of Columbia and shall expressly assume the payment of principal and
interest on all the Debentures and performance of every covenant of the
Indenture on the part of the Company; (ii) immediately after giving effect to
such transaction: (a) no Event of Default shall have occurred and be continuing;
(b) the net worth of the successor corporation is not less than the Adjusted
Consolidated Tangible Net Worth equal to or greater than the amount required of
the
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Company; (c) the Company has an Adjusted Consolidated Tangible Net Worth equal
to or greater than the Adjusted Consolidated Tangible Net Worth immediately
before giving effect to the Transaction; and (d) the successor corporation is
able to incur at least one dollar of additional Indebtedness; and (iii) in the
case of a consolidation or merger between United and UDMC, all Indebtedness of
UMDC from any Affiliate or incurred by UDMC for the benefit of an Affiliate
shall be unsecured and PARI PASSU to the Debentures, provided however: (i) if an
Event of Default occurs and notice is provided to the Company; or (ii) the
Company fails to make any payment of principal or interest; or (iii) if the
Company fails to maintain the required minimum Adjusted Consolidated Tangible
Net Worth, the Company shall not make any payment of principal or interest until
the Event of Default has been cured or payment of principal or interest has been
made. The Company will obtain an agreement from every Affiliate or other person
loaning money to UDMC for the benefit of Affiliate that upon the occurrence of a
bankruptcy, reorganization or similar event, such Affiliate or person shall be
prohibited from receiving any payment with respect to any Indebtedness until the
Debentures have been indefensibly paid in full. See "--Restrictive
Covenants--Limitation on Additional Indebtedness" above.
EVENTS OF DEFAULT
The following acts constitute Events of Default under the Indenture: (i)
default in the payment of any interest upon any Debenture when it becomes due
and payable and continuance of such default for a period of 15 days; (ii)
default in the payment of the principal of or premium, if any, on any Debenture
at its maturity; (iii) the breach of covenants of United in the Indenture
including covenants relating to limitations on Restricted Payments, compensation
and Net Worth; (iv) with certain limited exceptions, a default under any bond,
debenture, note or other evidence of Indebtedness of United or any Subsidiary
evidencing any indebtedness in excess of $100,000 of United or any Subsidiary
now or hereafter outstanding shall happen and continue and the holders of such
indebtedness shall have the right to accelerate the maturity of such
indebtedness; (v) a decree or order of a court of competent jurisdiction shall
have been entered, either: (a) adjudging United or any Subsidiary a bankrupt or
insolvent; (b) approving a petition seeking reorganization of United or any
Subsidiary under the Bankruptcy Act or any other similar applicable federal or
state law; (c) appointing a receiver, liquidator, assignee, trustee,
sequestrator or other similar official of United or any Subsidiary or of any
substantial part of its property, or (d) ordering the winding up or liquidation
of its affairs, and the continuance of any such order unstayed and in effect for
a period of sixty (60) consecutive days; (vi) the commencement by United or any
Subsidiary of a voluntary case under federal bankruptcy law or any other
applicable federal or state bankruptcy, insolvency, or other similar law, or the
consent by it to the institution of bankruptcy or insolvency proceedings against
it, or the filing by it of a petition or answer or consent seeking
reorganization or relief under federal bankruptcy law or any other applicable
federal or state law, or the consent by it to the filing of such petition or to
the appointment of a receiver, liquidator, assignee, trustee, sequestrator or
similar official of United or any Subsidiary or of any substantial part of it
property, or the making by it of an assignment for the benefit of creditors, or
the admission by it in writing of its inability to pay its debts generally as
they become due, or the taking of corporate action by United or any Subsidiary
in furtherance of any such action; or (vii) the rendering of a final judgment or
judgments (not subject to appeal) for the payment of money against United or any
Subsidiary not fully insured against in an aggregate amount in excess of
$250,000 by a court or courts of competent jurisdiction, which judgment or
judgments remain unsatisfied for a period of 30 days after the right to appeal
all such judgments has expired or otherwise terminated.
In each and every such case, so long as an Event of Default has not have
been remedied and the principal of all the Debentures shall not have already
become due and payable, then either the Trustee or the holders of not less than
twenty-five percent (25%), in aggregate principal amount of the Debentures then
outstanding, by notice in writing to United (and to the Trustee if given by the
Subordinated Note Holders) may declare the principal of all the Debentures then
outstanding to be due and payable immediately.
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THE TRUSTEE
Upon the occurrence and during the continuance of any Event of Default, the
Trustee is required to apply only the degree of care and skill in fulfilling its
obligations as a prudent person would exercise or use in the circumstances in
the conduct of such person's own affairs. The Trustee is not liable for any
error of judgment made in good faith and will not be liable with respect to any
action taken or omitted to be taken in good faith in accordance with the
direction of the holders of a majority in aggregate principal amount of the
Debentures at the time outstanding, relating to the time, method and place of
conducting any proceeding for any remedy available to the Trustee, or of
exercising any trust or power conferred upon the Trustee, under the Indenture.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
Under presently existing provisions of the Internal Revenue Code of 1986, as
amended (the "Code"), Treasury Regulations promulgated thereunder, applicable
judicial decisions and administrative rulings, all of which are subject to
change, which changes may be applied on a retroactive basis, the federal income
tax consequences described below may arise in connection with this Offering. The
discussion is limited to holders for whom the Debentures are "capital assets"
(generally, properly held for investment) within the meaning of Section 1221 of
the Code. The foregoing does not discuss all of the tax consequences that may be
relevant to a holder (a "Holder") of a Debenture in light of a Holder's
particular circumstances or to Holders subject to special rules, such as certain
former citizens or long-term residents of the United States, financial
institutions, insurance companies, dealers in securities or foreign currencies
or United States holders whose functional currency is not the U.S. dollar. Due
to the complexity of the Code, the following statements are merely statements of
general tax principles and likely tax consequences to the extent presently
determinable, and such statements may not be authoritative in individual cases
or where special rules or elections may apply. Investors should consult their
own tax advisors concerning the Offering. Investors should also consult with
their own tax advisors as to the tax treatment arising from the application of
foreign, state, and local tax laws and regulations.
DEBENTURES
GENERAL
As a general rule, interest paid or accrued on the Debentures, as well as
market discount and original issue discount ("OID"), if any, will be treated as
ordinary income to the Holders. A Holder using the accrual method of accounting
for federal income tax purposes is required to include interest paid or accrued
thereon in ordinary income as such interest accrues, while a Holder using the
cash receipts and disbursements method of accounting for federal income tax
purposes must include such interest in ordinary income when payments are
received (or made available for receipt) by such Holder, except to the extent
there is OID. Generally, principal payments on the Debentures will be treated as
return of capital to the extent of a Holder's basis therein, subject to the
application of the OID rules.
ORIGINAL ISSUE DISCOUNT
The Debentures will be deemed to be issued with OID within the meaning of
Section 1273(a)(1) of the Code if the "stated redemption price at maturity"
exceeds the "issue price" of the Debentures. Under the OID Regulations, if the
difference between the stated redemption price at maturity and its issue price
is less than a DE MINIMIS amount (I.E., 1/4 of 1 percent of the principal amount
multiplied by the number of complete years to maturity from the issue date), the
Debenture will not be considered as having been issued with OID. For this
purpose, the issue price of the Debenture is the first price to the public at
which a substantial amount of the Debentures is sold for money which is expected
to be the Price to Public and the stated redemption price at maturity of the
Debenture is its principal amount. United States Holders will generally include
the DE MINIMIS OID in income, as capital gain, as principal payments are made on
the Debentures or the Debentures are sold. As an alternative, a United States
Holder may also make an
44
<PAGE>
election to include in gross income all interest that accrues on a Debenture
(including DE MINIMIS OID) in accordance with a constant yield method based on
the compounding of interest. On the other hand, if the OID on the Debentures is
more than DE MINIMIS, a United States Holder would be required to include the
OID in income for United States federal income tax purposes as it accrues, in
accordance with a constant yield method based on a compounding of interest and
in advance of the receipt of the cash payments attributable to such income.
Because the Company believes that the average "issue price" of the
Debentures with the shortest maturity is not less than $15 per Debenture, the
test described above will be satisfied and the Company will take the position
that there is no original issue discount with respect to all of the Debentures.
However, if the amount of OID is greater than $17.50 per Debenture, each Holder
will be required to include on his tax return as ordinary income, in addition to
the amount of interest received in the amount of cash, a portion of OID on the
Debentures so as to provide a constant yield to maturity. Although under certain
circumstances the Debentures are subject to optional redemption by the Company
for an amount in excess of their principal amount, the Company believes that
based on the OID Regulations, this excess need not be considered when
determining the Debentures' stated redemption price at maturity. In addition,
although certain Debentures selected by lot will be subject to mandatory
redemption, the Company believes that the OID Regulations allow it to disregard
such redemption feature in determining the number of years until maturity, and
hence the de minimis exception should be applicable. Please note that while the
Company intends to take the positions discussed above, the OID Regulations have
not been subject to extensive judicial or administrative interpretation, and
therefore there can be no assurance that these positions will be respected.
If the Debentures are determined to be issued with OID, a Holder must
generally include the OID in ordinary gross income for federal income tax
purposes as it accrues in advance of the receipt of any cash attributable to
such income. The amount of OID, if any, required to be included in a
Debentureholder's ordinary gross income for federal income tax purposes in any
taxable year will accrue on a daily basis under a constant-yield method that
takes into account the compounding of interest. One effect of this method is
that a relatively smaller portion of the OID is included in income in the
earlier years and a relatively larger portion in later years, although in each
event, the amount of income will exceed the cash received.
MARKET DISCOUNT
The Debentures, whether or not issued with OID, will be subject to the
"market discount rules" of Section 1276 of the Code if the principal amount of
the Debenture exceeds the Holder's tax basis (I.E., its purchase price). In
general, these rules provide that if the Holder purchases a Debenture from any
person other than the Company at a discount from the sum of its original issue
price plus any accrued OID, and thereafter recognizes gain upon a sale,
exchange, redemption or maturity of the Debenture, the lesser of such gain or
the accrued market discount will be taxed as ordinary interest income.
Generally, the accrued market discount will be the total market discount on a
Debenture multiplied by a fraction, the numerator of which is the number of days
the Holder held the Debenture and the denominator of which is the number of days
from the date the Holder acquired the Debenture until its maturity date. The
Holder may elect, however, to determine accrued market discount under a
constant-yield method.
Limitations imposed by the Code which are intended to match deductions with
the taxation of income may defer deductions for interest on indebtedness
incurred or continued, or short-sale expenses incurred, to purchase or carry a
Debenture with accrued market discount. A Holder of a Debenture may elect to
include market discount in gross income as it accrues and, if he makes such an
election, is exempt from this rule. The adjusted basis of a Debenture subject to
such election will be increased to reflect market discount included in gross
income, thereby reducing any gain or increasing any loss on a sale or taxable
disposition.
45
<PAGE>
PREMIUM
A Holder who purchases the Debenture following its original issuance will be
entitled to a reduction in the amount of OID required to be included in the
Holder's income if the Holder purchases such note with "Acquisition Premium." An
acquisition premium will be deemed to arise if the Debenture is purchased for a
price less than or equal to the stated redemption price at maturity but greater
than the adjusted issue price of the Debenture. In such event, the acquisition
premium is equal to the amount by which the purchase price of the Debenture
exceeds the adjusted issue price thereof, which is equal to the original issue
price increased by the amount of OID previously includable in the gross income
of any prior Holder thereof. The amount of the reduction to which a subsequent
Holder of the Debenture may be entitled in any given year is equal to a
fraction, the numerator of which is the amount of the acquisition premium and
the denominator of which is the excess of the sum of all amounts payable on the
Debenture, other than payments of qualified stated interest over the adjusted
issue price of the Debenture. Subsequent Holders should consult their own tax
advisors regarding the amount of any acquisition premium and reduction with
respect to their Debentures.
In general, if there is no OID, and a Holder purchased at an amount in
excess of the amount payable upon maturity, such excess will be treated as
"amortizable bond premium." In such case, a Holder may elect, under Section 171
of the Code, to deduct the amortizable bond premium as it accrues under a
constant-yield method that is similar to the method used for the accrual of
original issue discount. The Holder's tax basis in the Debenture then decreases
by the amount of the amortizable bond premium deducted. An election under
Section 171 of the Code is available only if a Debenture is held as a capital
asset. Holders should consult with their own tax advisors regarding special
rules that apply for determining the amount of, and method for amortizing, bond
premium with respect to the Debentures that may be redeemed prior to maturity.
SALE, REDEMPTION AND/OR MATURITY OF DEBENTURES
The Holder of a Debenture will recognize gain or loss on the sale,
redemption or maturity of all or part of a Debenture equal to the difference
between the amount realized from the sale and the seller's adjusted basis in the
Debenture or the ratable portion thereof. Such adjusted basis generally will
equal the cost of the Debenture to the Holder, increased by an OID included in
the Holder's ordinary gross income with respect to the Debenture and reduced by
any principal payments on the Debenture previously received by the Holder and
any amortizable bond premium deducted by the Holder. Except as discussed with
respect to market discount or to the extent cash received is attributable to
accrued interest, any gain or loss recognized upon a sale, exchange, retirement
or other disposition of a Debenture will be capital gain, if the Debenture is
held as a capital asset.
If, however, it is determined that on the date of issue of the Debentures
the Company intends to redeem all or any portion of the Debentures prior to
their stated maturity, within the meaning of Section 1271(a)(2)(A) of the Code,
any gain realized upon a sale, exchange, redemption, retirement or other
disposition of the Debentures would be considered ordinary income, to the extent
it does not exceed the unrecognized portion of the OID, if any, with respect to
the Debentures. It is uncertain how this rule will be applied to the Debentures
since the provisions regarding manditory or optional redemption may, be
considered evidence of an intention at the time the Debentures were issued to
call them before the stated maturity thereof. However, so long as the "de
minimis exception" described above applies there will not be OID and hence,
these consequences will not occur.
WITHHOLDING TAXES AND REPORTING REQUIREMENTS
Interest payments, original issue discount and cash proceeds of a sale,
exchange or redemption of the Debentures will be reported to the extent required
by the Code to the holders thereof and the Internal Revenue Service. Such
amounts will ordinarily not be subject to withholding of United States federal
income tax. However, a backup withholding tax at a rate of 31% may be required
by reason of the events
46
<PAGE>
specified by Section 3406 of the Code and regulations promulgated thereunder,
which include failure of a holder to supply the Company or its agent with such
holder's taxpayer identification number. Such withholding, such as a foreign
corporation, if such person fails to document properly its status as an exempt
recipient. Foreign persons should consult with their own tax advisors as to the
United States withholding tax, if any, applicable to their particular
circumstances.
OTHER TAX CONSEQUENCES
Investors are advised to consult their own tax advisors with respect to any
state or local income, franchise, personal property or other tax consequences
arising out of their ownership of Debentures, including the potential
application of the OID provision, as discussed above.
THE DISCUSSION OF CERTAIN FEDERAL INCOME TAX CONSEQUENCES SET FORTH ABOVE IS
INCLUDED FOR GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON
AN INVESTOR'S PARTICULAR TAX SITUATION. INVESTORS SHOULD CONSULT THEIR OWN TAX
ADVISORS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP
AND DISPOSITION OF DEBENTURES, INCLUDING THE TAX CONSEQUENCES UNDER STATE,
LOCAL, FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN FEDERAL
OR OTHER TAX LAWS.
47
<PAGE>
UNDERWRITING
Miller & Schroeder Financial, Inc. (the "Underwriter") has entered into an
Underwriting Agreement with the Company pursuant to which the Underwriter,
subject to certain terms and conditions, will purchase and underwrite the sale
of the Debentures to the public on a "best efforts basis." The Underwriting
Agreement provides that the Underwriter will act as the Company's exclusive
underwriter for a period of six months from the date of this Prospectus.
The Underwriting Agreement further provides that the Company will offer for
sale a minimum of 3,050 Debentures, approximately $3,000,000, (the "Minimum
Amount") and a maximum of 6,091 Debentures, approximately $6,000,000, (the
"Maximum Amount") of the Debentures to the Underwriter for sale by the
Underwriter to the public. The Underwriter is not obligated to purchase any of
the Debentures, but if the Underwriter does purchase any Debentures, it must
purchase at least the Minimum Amount. If the Underwriter does purchase the
Minimum Amount, it is not obligated to purchase any additional Debentures. In
the event that the Minimum Amount is not sold, the Underwriting Agreement shall
terminate within 60 days from the date of the this Prospectus.
The Company has been advised by the Underwriter that the Underwriter
proposes to offer the Debentures to the public at the Price to Public set forth
on the cover page of this Prospectus, plus accrued interest, and to selected
dealers at such price less a concession of $50.00 per Debenture. Interest on the
Debentures will accrue from their date of original issuance (the date the
Minimum Amount is purchased) or with respect to any Debentures sold after March
15, 1998, from March 15, 1998. The Underwriter does not intend to confirm sales
to any account over which it has discretionary authority.
The Company has granted the Underwriter an over-allotment option,
exercisable at any time prior to the Termination Date to purchase up to an
additional 1,015 Debentures, approximately $1,000,000 at the Price to Public,
plus accrued interest, less the underwriting discounts and commissions,
management fees and expense reimbursements and allowances set forth on the cover
page of this Prospectus. The over-allotment option may be exercised for fewer
than all of the Debentures subject to the option. The Underwriter may exercise
this option to cover over-allotments, if any, made in connection with the sale
of the Debentures offered hereby. If purchased, the additional Debentures will
be sold by the Underwriter on the same terms as those on which the Debentures
are being offered.
The Company has agreed to sell the Debentures to the Underwriter at the
Price to Public less a 7% underwriting discount and commission, plus accrued
interest. The Company has agreed to pay the Underwriter a management fee equal
to 2% of the total Price to Public, a non-accountable expense allowance equal to
1% of the total Price to Public, including any Debentures purchased pursuant to
the over-allotment option, if exercised, and to reimburse the Underwriter for
accountable expenses (up to $120,000 or up to $140,000 if the over-allotment
option is exercised in full).
In the Underwriting Agreement, the Company and the Underwriter have agreed
to indemnify each other against certain liabilities under the Securities Act of
1933, or to contribute to payments which the Underwriter may be required to make
in respect thereof. Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers or persons
controlling the Company pursuant to such indemnification provisions, the Company
has been advised that the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is
therefore unenforceable.
The Company will use its best efforts to qualify or register the Debentures
for sale in "non-issuer" transactions, or obtain exemptions from the application
of the securities laws of those states designated by the Underwriter, to permit
marketmaking transactions and secondary trading of the Debentures in the
designated states. The Company will use its best efforts to comply with the
applicable state securities laws and to continue such qualification,
registration or exemption for so long as the Debentures remain outstanding.
48
<PAGE>
In order to facilitate the offering of the Debentures, the Underwriter may
engage in transactions that stabilize, maintain or otherwise affect the price of
the Debentures. Specifically, the Underwriter may over-allot the Debentures in
connection with the offering, creating a short position in the Debentures for
its own account. In addition, to cover over-allotments or to stabilize the price
of the Debentures, the Underwriter may bid for, and purchase, Debentures in the
open market if one develops. The Underwriter may also reclaim selling
concessions allowed to a dealer for distributing the Debentures in the offering,
if the Underwriter repurchases previously distributed Debentures in transactions
to cover its short positions, in stabilization transactions or otherwise.
Finally, the Underwriter may bid for, and purchase, Debentures in market making
transactions and impose penalty bids. These activities may otherwise prevail.
The Underwriter is not required to engage in these activities and may end any of
these activities at any time.
The obligations of the Underwriter to act as underwriter in connection with
the purchase and sale of the Debentures contemplated by this Prospectus and to
purchase the Debentures against payment therefor, are subject to certain typical
conditions precedent within the control of the Company contained in Underwriting
Agreement, as of the date of this Prospectus and as of each closing, including:
(i) the accuracy of the representations and warranties of the Company contained
in the Underwriting Agreement; (ii) the performance by the Company and its
obligations thereunder, (iii) the delivery by the Company of certain
certificates; (iv) the delivery to the Underwriter of an opinion of counsel to
the Company and related bring-down certificates; and (v) the delivery to the
Underwriter of a letter of the independent accountants for the Company, and
related bring-down certificates.
The foregoing is a summary of the material provisions of the Underwriting
Agreement. Copies of such documents have been filed as exhibits to the
Registration Statement of which this Prospectus is a part.
LEGAL MATTERS
Certain legal matters in connection with the issuance and sale of the
Debentures will be passed upon for the Company by Shefsky & Froelich Ltd.,
Chicago, Illinois. Fredrikson & Byron, P.A. is acting as counsel for the
Underwriter in connection with certain legal matters relating to the securities
offered hereby.
EXPERTS
The consolidated financial statements of United Homes, Inc. as of September
30, 1996 and 1995 and for each of the three years in the period ended September
30, 1996 and the financial statements of United Development Bristolwood Limited
Partnership as of September 30, 1995 and for the year then ended, appearing in
the Prospectus and Registration Statement, have been audited by Ernst & Young
LLP, independent auditors, as set forth in their report thereon appearing
elsewhere herein, and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
49
<PAGE>
ADDITIONAL INFORMATION
The Company has filed a Registration Statement on Form S-1 under the
Securities Act of 1933, as amended, with respect to the Debentures offered
hereby. For purposes hereof, the term "Registration Statement" means the
original Registration Statement and any and all amendments thereto. This
Prospectus does not contain all of the information set forth in the Registration
Statement and the schedules and exhibits thereto, to which reference hereby is
made, as permitted by the rules and regulations of the Commission. The material
terms of certain material agreements to which the Company is party are
summarized in this Prospectus, but these summaries do not purport to be complete
nor qualified in their entirety by reference to the relevant agreements which
are filed as exhibits to the Registration Statement of which this Prospectus is
a part. Any interested party may inspect the Registration Statement and its
exhibits, without charge, at the Public Reference Room at 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the public reference facilities maintained
by the Commission at its regional offices located at The Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661-2511, and at Seven
World Trade Center, Suite 1300, New York, New York 10048. The Commission also
maintains a site on the World Wide Web at http:\\www.sec.gov that contains
reports, proxy and other information statements and other information regarding
registrants that file electronically with the Commission.
50
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
UNITED HOMES, INC.
ANNUAL FINANCIAL STATEMENTS
Report of Independent Auditors............................................................................. F-2
Consolidated Balance Sheets as of September 30, 1996 and 1995.............................................. F-3
Consolidated Statements of Income for the years ended September 30, 1996, 1995, and 1994................... F-4
Consoldidated Statements of Changes in Stockholder's Equity for the years ended
September 30, 1996, 1995, and 1994....................................................................... F-5
Consolidated Statements of Cash Flows for the years ended September 30,
1996, 1995, and 1994..................................................................................... F-6
Notes to the Consolidated Financial Statements............................................................. F-7
INTERIM FINANCIAL STATEMENTS (UNAUDITED)
Condensed Consolidated Balance Sheet as of June 30, 1997................................................... F-14
Condensed Consolidated Statements of Income for the nine months ended June 30, 1997 and 1996............... F-15
Consolidated Statement of Changes in Stockholder's Equity for the nine months ended June 30, 1997.......... F-16
Condensed Consolidated Statements of Cash Flow for the nine months ended June 30, 1997 and 1996............ F-17
Notes to Condensed Consolidated Interim Financial Statements............................................... F-18
UNITED DEVELOPMENT BRISTOLWOOD LIMITED PARTNERSHIP
ANNUAL FINANCIAL STATEMENTS
Report of Independent Auditors............................................................................. F-20
Balance Sheets as of September 30, 1996 (unaudited) and 1995............................................... F-21
Statements of Income for the years ended September 30, 1996 (unaudited), 1995, and 1994 (unaudited)........ F-22
Statements of Changes in Partners' Capital for the years ended September 30, 1996 (unaudited), 1995, and
1994 (unaudited)......................................................................................... F-23
Statements of Cash Flows for the years ended September 30, 1996 (unaudited), 1995, and 1994 (unaudited).... F-24
Notes to the Financial Statements.......................................................................... F-25
INTERIM FINANCIAL STATEMENTS (UNAUDITED)
Balance Sheet as of June 30, 1997.......................................................................... F-28
Statements of Income for the nine months ended June 30, 1997 and 1996...................................... F-29
Statement of Changes in Partners' Capital for the nine months ended June 30, 1997.......................... F-30
Statements of Cash Flows for the nine months ended June 30, 1997 and 1996.................................. F-31
Notes to Interim Financial Statements...................................................................... F-32
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
United Development Management Company
We have audited the accompanying consolidated balance sheets of United
Homes, Inc., a wholly owned subsidiary of United Development Management Company,
as of September 30, 1996 and 1995, and the related consolidated statements of
income, changes in stockholder's equity, and cash flows for each of the three
years in the period ended September 30, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of United Homes,
Inc. at September 30, 1996 and 1995, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
September 30, 1996, in conformity with generally accepted accounting principles.
Ernst & Young LLP
Chicago, Illinois
December 12, 1996,
except for Note 6(1), as to which the date is
March 25, 1997
F-2
<PAGE>
UNITED HOMES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------
1996 1995
------------- -------------
<S> <C> <C>
ASSETS
Cash and cash equivalents...................................... $ 824,162 $ 1,103,216
Closing proceeds in transit.................................... 322,281 506,424
Due from managed properties (net of allowance of $100,000 in
1996 and 1995)............................................... 516,508 386,953
Contract fees receivable....................................... 80,182 184,905
Housing inventories............................................ 54,588,044 28,796,061
Land held for future development............................... 8,258,741
Investment in real estate partnership.......................... 485,274 507,041
Due from Parent:
Construction advances........................................ 1,564,176 1,552,493
Advances in excess of income taxes payable................... 1,931,121
Due from affiliates............................................ 263,306 11,157
Note receivable................................................ 340,000
Deposits....................................................... 400,710 76,005
Other.......................................................... 696,374 900,258
------------- -------------
Total assets................................................... $ 69,930,879 $ 34,364,513
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Construction draws in process.................................. $ 1,059,437 $ 1,735,073
Accounts payable............................................... 5,629,497 1,692,752
Accrued costs on closed sales.................................. 2,796,202 798,721
Accrued liabilities............................................ 316,989 669,100
Deposits from home buyers...................................... 758,401 621,696
Development loans and other notes payable...................... 48,138,856 17,391,862
------------- -------------
Total liabilities.............................................. 58,699,382 22,909,204
Investors' equity in majority-owned land development and
housing partnerships......................................... 2,164,111 3,036,550
Stockholder's equity:
Common stock, $.01 par value; 1,000,000 shares authorized;
1,000 shares issued and outstanding........................ 100 100
Additional paid-in capital..................................... 3,900 3,900
Retained earnings.............................................. 9,063,386 8,414,759
------------- -------------
Total stockholder's equity..................................... 9,067,386 8,418,759
------------- -------------
Total liabilities and stockholder's equity..................... $ 69,930,879 $ 34,364,513
------------- -------------
------------- -------------
</TABLE>
See accompanying notes.
F-3
<PAGE>
UNITED HOMES, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------------------
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
REVENUES
Housing and land sales (378 units, 267 units, and 174 units in 1996,
1995, and 1994, respectively)..................................... $ 64,749,166 $ 43,448,117 $ 32,230,783
Share of net income from minority-owned land development and housing
partnership....................................................... 156,233 376,904 215,887
Management fees..................................................... 212,021 524,470 438,935
------------- ------------- -------------
65,117,420 44,349,491 32,885,605
COST OF SALES
Direct construction costs, including amortization of capitalized
interest and real estate taxes of $2,031,442, $868,213, and
$605,607 in 1996, 1995, and 1994, respectively.................... 53,787,863 36,345,524 26,306,536
Amortization of capitalized project costs........................... 6,706,639 3,722,184 2,919,807
------------- ------------- -------------
Gross profit........................................................ 4,622,918 4,281,783 3,659,262
Other costs and expenses
Administrative...................................................... 2,818,552 2,700,221 2,459,352
Interest, net of interest income of $38,971, $10,184, and $23,653 in
1996, 1995, and 1994, respectively................................ 19,811 69,814 31,059
------------- ------------- -------------
2,838,363 2,770,035 2,490,411
------------- ------------- -------------
Income before investors' share of income in majority-owned land
development and housing partnerships.............................. 1,784,555 1,511,748 1,168,851
Investors' share of income in majority-owned land development and
housing partnerships.............................................. 734,597 70,250
------------- ------------- -------------
Income before income taxes.......................................... 1,049,958 1,441,498 1,168,851
Income taxes........................................................ 401,331 576,559 467,541
------------- ------------- -------------
Net income.......................................................... $ 648,627 $ 864,939 $ 701,310
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See accompanying notes.
F-4
<PAGE>
UNITED HOMES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
YEARS ENDED SEPTEMBER 30, 1996, 1995, AND 1994
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS
----------- ----------- ------------
<S> <C> <C> <C>
Balance at October 1, 1993................................................... $ 100 $ 3,900 $ 7,493,571
Net distributions to Parent.................................................. (645,061)
Net income................................................................... 701,310
----- ----------- ------------
Balance at September 30, 1994................................................ 100 3,900 7,549,820
Net income................................................................... 864,939
----- ----------- ------------
Balance at September 30, 1995................................................ 100 3,900 8,414,759
Net income................................................................... 648,627
----- ----------- ------------
Balance at September 30, 1996................................................ $ 100 $ 3,900 $ 9,063,386
----- ----------- ------------
----- ----------- ------------
</TABLE>
See accompanying notes.
F-5
<PAGE>
UNITED HOMES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------------------
1996 1995 1994
-------------- -------------- --------------
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net income....................................................... $ 648,627 $ 864,939 $ 701,310
Adjustments to reconcile net income to net cash used in operating
activities:
Share of net income from real estate partnership............. (156,233) (376,904) (215,887)
Investors' share of equity in majority-owned land development
and housing partnerships................................... 734,597 70,250
Bad debt expense............................................. 100,000
Changes in operating assets and liabilities:
(Increase) decrease in closing proceeds in transit......... 184,143 (320,232) (186,192)
Decrease in contract fees receivable....................... 104,723 257,180 8,390
Increase in housing inventories............................ (25,791,983) (7,993,243) (8,636,394)
(Increase) decrease in land held for future development.... (7,918,741) 265,852 2,251,989
(Increase) decrease in due from Parent..................... (1,942,804) (2,393,390) 467,541
Increase in due from affiliates............................ (252,149) (158,499) (497,719)
(Increase) decrease in deposits............................ (324,705) (76,005) 28,183
(Increase) decrease in other assets........................ 203,884 (153,852) (367,717)
Decrease in construction draws in process.................. (675,636) (1,118,825) (312,557)
Increase in accounts payable............................... 3,936,745 1,189,859 242,091
Increase (decrease) in accrued costs
on closed sales.......................................... 1,997,481 33,463 (964,374)
Increase (decrease) in accrued liabilities................. (352,111) (3,775,518) 4,018,816
Increase (decrease) in deposits from home buyers........... 136,705 (119,028) 173,913
-------------- -------------- --------------
Net cash used in operating activities............................ (29,467,457) (13,703,953) (3,288,607)
CASH FLOW FROM INVESTING ACTIVITIES
(Increase) decrease in due from managed properties............... (129,555) 2,313,047 (800,000)
Distributions from real estate partnership investment............ 178,000 140,500 390,250
-------------- -------------- --------------
Net cash provided by (used in) investing activities.............. 48,445 2,453,547 (409,750)
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from development loans and other
notes payable.................................................. 99,565,025 56,411,522 21,544,883
Repayments of development loans and other
notes payable.................................................. (68,818,031) (47,532,783) (20,227,480)
Contributions from investors in majority-owned land development
and housing partnerships....................................... 150,000 3,056,300 400,000
Distributions to investors in majority-owned land development and
housing partnerships........................................... (1,757,036) (490,000)
-------------- -------------- --------------
Net cash provided by financing activities........................ 29,139,958 11,445,039 1,717,403
-------------- -------------- --------------
Increase (decrease) in cash and cash equivalents................. (279,054) 194,633 (1,980,954)
Cash and cash equivalents at beginning of year................... 1,103,216 908,583 2,889,537
-------------- -------------- --------------
Cash and cash equivalents at end of year......................... $ 824,162 $ 1,103,216 $ 908,583
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
See accompanying notes.
F-6
<PAGE>
UNITED HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
In 1994, United Development Management Company (the Parent), transferred
ownership of its wholly owned subsidiaries, United Homes of Illinois, Inc.,
United Homes of Arizona, Inc., and United Homes of Michigan, Inc. to a newly
formed, wholly owned subsidiary, United Homes, Inc. (UHI). UHI and its
subsidiaries own controlling general partner and limited partner interests in
the following partnerships which are included in the consolidated financial
statements: Williams Glen Limited Partnership, The Hidden Springs Real Estate
Limited Partnership, United/RBG XII L.P., and the United Lindsay East Valley
Limited Partnership (collectively, the Majority-Owned Partnerships). The
accompanying consolidated financial statements include the accounts of UHI, its
wholly owned subsidiaries, and Majority-Owned Partnerships. In addition, UHI has
a noncontroling 24.875% ownership interest in United Development Bristolwood
Limited Partnership (UDB), which is presented as an investment in real estate
partnership and is accounted for using the equity method.
UHI, its wholly owned subsidiaries, Majority-Owned Partnerships, and UDB
(collectively, the Company) are engaged in the ownership, development,
construction, and sale of residential real estate, with operations in Illinois,
Arizona, and Michigan. UHI also provides development and construction management
services to an unconsolidated affiliated partnership and to third parties.
Aggregate unit closings and revenues associated with the Company's direct sales
were as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30 CLOSINGS REVENUES
- ----------------------- ----------- -------------
<S> <C> <C>
1996................... 378 $ 64,749,166
1995................... 267 43,448,117
1994................... 174 32,230,783
</TABLE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Revenues from housing and land sales are recognized in the period in which
title passes and cash is received.
HOUSING INVENTORIES AND LAND HELD FOR FUTURE DEVELOPMENT
Housing inventories and land held for future development are stated at cost,
which is not in excess of net realizable value. Housing inventories include all
direct costs of land under development, construction, plus financing and other
carrying costs incurred during the period of development. Capitalized project
costs, including construction administration, legal fees, and various office
costs that relate to land development housing construction, are capitalized and
allocated to the parcels to which these costs relate.
CASH EQUIVALENTS
Cash equivalents consist of highly liquid investments with a maturity of
three months or less, when purchased.
F-7
<PAGE>
UNITED HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Company and its Parent file a consolidated federal income tax return.
Income tax expense is reflected in the accompanying consolidated financial
statements as if the Company filed its income tax returns separately from its
Parent.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
RECLASSIFICATIONS
Certain amounts in the 1995 and 1994 consolidated financial statements have
been reclassified to conform with the 1996 presentation. Such reclassifications
had no effect on the Company's previously reported financial position or results
of operations.
3. HOUSING INVENTORIES
Housing inventories consisted of the following:
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Land under development, including site development
costs.............................................. $ 27,231,981 $ 14,963,625
Direct construction costs............................ 14,228,576 6,404,016
Capitalized project costs............................ 10,918,232 7,163,020
Land held for sale................................... 2,209,255 265,400
------------- -------------
$ 54,588,044 $ 28,796,061
------------- -------------
------------- -------------
</TABLE>
In the normal course of business, title to homes passes upon completion of
construction and, consequently, the Company's housing inventories do not
generally include homes held for sale.
F-8
<PAGE>
UNITED HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENT IN REAL ESTATE PARTNERSHIP
The following is a summary of the Company's investment in real estate
partnership at September 30, 1996 and 1995:
<TABLE>
<CAPTION>
INVESTEE CONDENSED FINANCIAL
INFORMATION
TYPE OF INVESTMENT -------------------------------
PARTNERSHIP PERCENT CARRYING SHARE OF NET
NAME INTEREST OWNERSHIP AMOUNT INCOME ASSETS LIABILITIES INCOME
- -------------------------------------------- ----------- ----------- ----------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1996:
United Development Bristolwood Limited
Partnership(1)............................ Limited... 24.875% $ 485,274 $ 156,233 $3,414,208 $1,974,404 $ 463,623
Balance at September 30, 1995:
United Development Bristolwood Limited
Partnership(1)............................ Limited... 24.875% $ 507,041 $ 376,904 $4,747,525 $3,160,277 $1,515,190
</TABLE>
- ------------------------------
Note (1): During 1996, 1995, and 1994, the Company acquired $2,184,700,
$1,444,000 and $396,000, respectively, of improved lots from UDB.
Note (2): During 1994, the Company's share of income relating to its 24.875%
investment in UDB was $215,887.
F-9
<PAGE>
UNITED HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. NOTE RECEIVABLE
During 1995, the Company sold a parcel of land for its carrying value of
$1,000,000 and received cash and a $340,000 note receivable, collateralized by
the parcel. The note bore interest at 8% with principal and interest due March
1, 1996. In 1996, the Company exercised an option to reacquire the parcel for a
purchase price of $1,456,281. The note receivable and unpaid interest was
applied toward the purchase price.
6. DEVELOPMENT LOANS AND OTHER NOTES PAYABLE
Development loans and other notes payable consist of the following:
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
GE Capital revolving credit agreement(1)....................... $ 16,519,114 $ 10,656,345
Land development and construction(2)........................... 31,560,190 6,679,627
Installment and other(3)....................................... 59,552 55,890
------------- -------------
$ 48,138,856 $ 17,391,862
------------- -------------
------------- -------------
</TABLE>
- ------------------------
(1) On May 30, 1995, the Company entered into a revolving credit agreement with
GE Capital Corporation (GECC) which matures May 31, 1998. At September 30,
1996, the maximum principal outstanding under the credit agreement is
$25,000,000, with a lending base subject to the number of housing units
under construction. The credit agreement bears interest at the GECC
composite commercial rate, as defined, plus 3.75% (9.23% at September 30,
1996), which is added monthly to the unpaid balance. Outstanding principal
and interest are repaid from proceeds of home sales. The credit agreement
includes various operating and financial covenants with which the Company
must be in compliance as a condition for continuation of construction draw
funding.
(2) The Company has development loans with various financial institutions for
the purpose of financing land acquisition, development, and construction
improvements that mature from 1997 to 2026. The loans bear interest at fixed
rates ranging primarily from 8% to 10.5%, as well as variable rates ranging
from prime plus 1% to prime plus 2%, and include various restrictions
concerning use and timing of borrowings.
Interest is added to the outstanding principal monthly, and unpaid principal
and interest are repaid from proceeds of home sales. These loans include
$1,376,002 and $550,409 at September 30, 1996 and 1995, respectively, due to
affiliates of the principal stockholders of the Parent. The loans to
affiliates mature in 2000 and bear interest at fixed rates ranging primarily
from 8% to 10% per annum.
(3) The Company has various installment and other loans maturing from 1997 to
2000, and bearing interest at fixed rates ranging from 5.9% to 10%. The
notes are repayable in monthly installments including principal and
interest.
In addition, the Company, its Parent, and a principal stockholder of the
Parent have guaranteed the repayment of amounts due under certain loan
agreements on behalf of United Development Bristolwood Limited Partnership in
the amount of $1,000,000 at September 30, 1996 that matures on July 16, 1997.
F-10
<PAGE>
UNITED HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. DEVELOPMENT LOANS AND OTHER NOTES PAYABLE (CONTINUED)
The aggregate amounts of all debt maturities are as follows:
<TABLE>
<CAPTION>
YEAR ENDING SEPTEMBER 30, AMOUNT
- ------------------------------------------------------------------------------- -------------
<S> <C>
1997........................................................................... $ 10,447,013
1998........................................................................... 22,397,527
1999........................................................................... 11,027,545
2000........................................................................... 1,541,015
2001........................................................................... 67,992
Thereafter..................................................................... 2,657,764
-------------
$ 48,138,856
-------------
-------------
</TABLE>
Substantially all of the Company's housing inventories and land held for
sale are pledged as collateral to secure repayment of indebtedness.
During the years ended September 30, 1996, 1995, and 1994, the Company
incurred and paid interest on development loans and other notes payable of
$3,960,336, $1,904,939, and $771,379, respectively, of which $3,901,554,
$1,824,941, and $716,667 was capitalized, respectively.
7. INCOME TAXES
The Company's income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
----------- ----------- ----------
<S> <C> <C> <C>
Year ended September 30, 1996:
U.S. Federal........................................... $ 323,082 $ 33,181 $ 356,263
State.................................................. 40,870 4,198 45,068
----------- ----------- ----------
$ 363,952 $ 37,379 $ 401,331
----------- ----------- ----------
----------- ----------- ----------
Year ended September 30, 1995:
U.S. Federal........................................... $ (212,146) $ 677,820 $ 465,674
State.................................................. (50,515) 161,400 110,885
----------- ----------- ----------
$ (262,661) $ 839,220 $ 576,559
----------- ----------- ----------
----------- ----------- ----------
Year ended September 30, 1994:
U.S. Federal........................................... $ 666,695 $ (289,066) $ 377,629
State.................................................. 158,738 (68,826) 89,912
----------- ----------- ----------
$ 825,433 $ (357,892) $ 467,541
----------- ----------- ----------
----------- ----------- ----------
</TABLE>
F-11
<PAGE>
UNITED HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES (CONTINUED)
Income tax expense differs from the amounts computed by applying the U.S.
federal income tax rate of 35 percent as a result of the following:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Computed "expected" tax expense.......................... $ 367,485 $ 504,524 $ 409,098
Increase (reduction) in income taxes resulting from:
State income taxes, net of federal income tax
benefit.............................................. 29,294 72,075 58,443
Other, net............................................. 4,552 (40)
---------- ---------- ----------
Total.................................................... $ 401,331 $ 576,559 $ 467,541
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The Company's deferred tax liabilities of $836,305 and $798,926 at September
30, 1996 and 1995, respectively, arose primarily from differences in the
carrying value of housing inventories for financial statement and income tax
purposes related to the capitalization of certain operating expenses.
8. RELATED PARTY TRANSACTIONS
Substantially all of the receivables from managed properties and due from
affiliates at September 30, 1996 and 1995, relate to costs incurred for
development of housing projects and temporary advances to entities in which
either the Parent or the two principal stockholders of the Parent are the
general partners. The amounts due from managed properties and from affiliates
are non-interest-bearing and are payable from proceeds from sales of certain
housing units.
During 1995, the Company sold four model homes for an aggregate sales price
of $650,000 to an affiliate of the principal stockholders of the Parent. In
1996, the Company repurchased the four model homes from the affiliate for an
aggregate purchase price of $600,000.
In 1995, the Company purchased 25 lots from a limited partnership in which
the principal stockholders of the Parent have a 33% limited partnership interest
for $550,000. During 1996, the Company purchased an additional 58 lots from the
affiliate for $799,000. The Company is obligated to purchase an additional 89
lots at a price of $13,000 per lot through 1999 (see Note 10).
9. FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures About Fair
Value of Financial Instruments" (SFAS No. 107) requires disclosures of the fair
value of certain financial instruments for which it is practicable to estimate.
Value is defined by SFAS No. 107 as the amount at which the instrument could be
exchanged in a current transaction between willing parties, other than in a
forced or liquidation sale.
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
CASH AND CASH EQUIVALENTS
The carrying amount of cash and cash equivalents reported in the balance
sheet approximates its fair value.
F-12
<PAGE>
UNITED HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
DEVELOPMENT LOANS AND OTHER NOTES PAYABLE
The carrying amount of the Company's development loans and other notes
payable approximates fair value based on the current borrowing rate for similar
types of borrowing arrangements.
10. COMMITMENTS, CONTINGENCIES, AND OTHER MATTERS
Letters of credit and bonds approximating $10.1 million at September 30,
1996, have been issued on behalf of the Company to guarantee the completion of
certain improvements associated with various properties under agreements with
municipalities in which the Company is constructing homes. At September 30,
1996, the Company has pledged cash of approximately $265,000 as collateral for
these letters of credit.
The Company has committed to acquire various parcels of improved and
unimproved land through 1999 as follows:
<TABLE>
<CAPTION>
YEAR ENDING SEPTEMBER 30, AMOUNT
- -------------------------------------------------------------------------------- ------------
<S> <C>
1997............................................................................ $ 2,939,575
1998............................................................................ 1,711,000
1999............................................................................ 1,087,000
2000............................................................................ 407,625
------------
$ 6,145,200
------------
------------
</TABLE>
As collateral for mortgage loans of affiliates of the Parent, the Parent
pledged a certain parcel of the Company's land held for future development with
a carrying value approximating $1,191,000. The two principal stockholders of the
Parent have agreed to indemnify the Company in the event that the Company may
incur any loss. This indemnity is supported by the Parent's two principal
stockholders' pledge of certain personally owned assets to the Parent.
F-13
<PAGE>
UNITED HOMES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 1997
(UNAUDITED)
<TABLE>
<S> <C>
ASSETS
Cash and cash equivalents...................................................... $1,145,234
Housing inventories............................................................ 80,420,503
Land held for future development............................................... 6,791,185
Investment in real estate partnership.......................................... 485,274
Due from Parent................................................................ 2,926,086
Note receivable--affiliate..................................................... 1,200,982
Other.......................................................................... 1,849,692
----------
Total assets................................................................... $94,818,956
----------
----------
LIABILITIES AND STOCKHOLDER'S EQUITY
Accounts payable and accrued liabilities....................................... $11,844,062
Deposits from home buyers...................................................... 1,419,319
Development loans and other notes payable...................................... 70,293,116
----------
Total liabilities.............................................................. 83,556,497
Investors' equity in majority-owned land development and housing
partnerships................................................................. 1,467,210
Stockholder's equity........................................................... 9,795,249
----------
Total liabilities and stockholder's equity..................................... $94,818,956
----------
----------
</TABLE>
See accompanying notes.
F-14
<PAGE>
UNITED HOMES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED JUNE 30,
----------------------------
1997 1996
------------- -------------
<S> <C> <C>
REVENUES
Housing and land sales (280 units in 1997 and 205 units in 1996)................... $ 46,910,479 $ 34,566,505
Housing sales--affiliate (22 units in 1997)........................................ 4,661,500
Other.............................................................................. 36,084 424,667
------------- -------------
51,608,063 34,991,172
COST OF SALES
Direct construction costs, including amortization of capitalized interest and real
estate taxes of $2,077,453 in 1997 and $1,113,364 in 1996........................ 41,753,434 28,063,353
Amortization of capitalized project costs.......................................... 6,378,109 3,235,999
------------- -------------
Gross profit 3,476,520 3,691,820
Other costs and expenses........................................................... 1,901,279 2,286,324
------------- -------------
Income before investors' share of income in majority-owned land development and
housing partnerships............................................................. 1,575,241 1,405,496
Investors' share of income in majority-owned land development and housing
partnerships..................................................................... 464,946 374,691
------------- -------------
Income before income taxes......................................................... 1,110,295 1,030,805
Income taxes....................................................................... 382,432 401,181
------------- -------------
Net income......................................................................... $ 727,863 $ 629,624
------------- -------------
------------- -------------
</TABLE>
See accompanying notes.
F-15
<PAGE>
UNITED HOMES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
NINE MONTHS ENDED JUNE 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS
----------- ----------- ------------
<S> <C> <C> <C>
Balance at October 1, 1996................................................... $ 100 $ 3,900 $ 9,063,386
Net income................................................................... 727,863
----- ----------- ------------
Balance at June 30, 1997..................................................... $ 100 $ 3,900 $ 9,791,249
----- ----------- ------------
----- ----------- ------------
</TABLE>
See accompanying notes.
F-16
<PAGE>
UNITED HOMES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED JUNE 30,
------------------------------
1997 1996
-------------- --------------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net income........................................................................ $ 727,863 $ 629,624
Adjustments to reconcile net income to net cash used in operating activities:
Share of net income from real estate partnership................................ (294,000)
Investors' share of equity in majority-owned land development and housing
partnership................................................................... 464,946 374,691
Changes in operating assets and liabilities:
Increase in housing inventories............................................... (25,832,459) (24,405,187)
(Increase) decrease in land held for future development....................... 1,467,556 (680,357)
(Increase) decrease in due from Parent........................................ 569,211 (2,157,221)
Increase in notes receivable.................................................. (1,200,982)
Decrease in other assets...................................................... 207,988 578,175
Increase in deposits from home buyers......................................... 660,918 577,916
Increase in accounts payable and accrued liabilities.......................... 2,305,243 631,011
-------------- --------------
Net cash used in operating activities............................................. (20,629,716) (24,745,348)
CASH FLOW FROM INVESTING ACTIVITIES
Increase in due from managed properties........................................... (41,625) (113,222)
Distributions from real estate partnership investment............................. 178,000
-------------- --------------
Net cash (used in) provided by investing activities............................... (41,625) 64,778
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from development loans and other notes payable........................... 93,474,338 74,673,769
Repayments of development loans and other notes payable........................... (71,320,078) (50,059,771)
Distribution to investors in majority-owned land development and housing
partnerships.................................................................... (1,161,847) (334,859)
-------------- --------------
Net cash provided by financing activities......................................... 20,992,413 24,279,139
-------------- --------------
Increase (decrease) in cash and cash equivalents.................................. 321,072 (401,431)
Cash and cash equivalents at beginning of period.................................. 824,162 1,103,216
-------------- --------------
Cash and cash equivalents at end of period........................................ $ 1,145,234 $ 701,785
-------------- --------------
-------------- --------------
</TABLE>
See accompanying notes.
F-17
<PAGE>
UNITED HOMES, INC.
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying condensed consolidated interim financial statements do not
include all information and footnotes necessary for a fair presentation of
financial position, results of operations and cash flows in conformity with
generally accepted accounting principles. These interim statements should be
read in conjunction with the Company's audited financial statements included
elsewhere herein as certain footnote disclosures which substantially duplicate
those contained in such audited financial statements have been omitted from
these condensed interim financial statements. In the opinion of management, the
interim financial statements contain all adjustments (which are normal and
recurring) necessary for a fair statement of financial results for the interim
periods.
2. HOUSING INVENTORIES
Housing inventories consisted of the following at June 30, 1997:
<TABLE>
<S> <C>
Land under development, including site development costs....... $39,380,899
Direct construction costs...................................... 19,704,552
Capitalized project costs...................................... 18,613,886
Land held for sale............................................. 2,721,166
----------
$80,420,503
----------
----------
</TABLE>
Effective October 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121 (SFAS No. 121), "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
Under SFAS No. 121, housing inventories are stated at cost, unless a
subdivision is determined to be impaired, in which case the impaired inventories
are written down to fair value. Writedowns of impaired inventories to fair value
are recorded as adjustments to the cost basis of the respective inventory. Land
held for sale is stated at the lower of cost or fair market value. The adoption
of SFAS No. 121 had no effect on the Company's financial position or results of
operations.
3. INVESTMENT IN REAL ESTATE PARTNERSHIP
The following is a summary of the Company's investment in real estate
partnership at June 30, 1997:
<TABLE>
<CAPTION>
INVESTEE CONDENSED FINANCIAL
INFORMATION
TYPE OF INVESTMENT ---------------------------------
PARTNERSHIP PERCENT CARRYING SHARE OF NET
NAME INTEREST OWNERSHIP AMOUNT INCOME ASSETS LIABILITIES INCOME
- ------------------------------- ----------- ----------- ----------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1997:
United Development
Bristolwood Limited
Partnership(1)............. Limited 24.875% $ 485,274 $ -- $2,022,244 $ 509,560 $ --
</TABLE>
- ------------------------------
Note (1): During the nine months ended June 30, 1997 and 1996, the Company
acquired $1,092,000 and $532,000, respectively, of improved lots from
UDB.
Note (2): During the nine months ended June 30, 1996, the Company's share of
income relating to its 24.875% investment in UDB was $294,000.
F-18
<PAGE>
UNITED HOMES, INC.
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
4. NOTE RECEIVABLE
During 1997, the Company sold 22 model homes for $4,661,500 to an affiliate
controlled by the shareholders of the Parent. The Company received cash in the
amount of $600,000 and a promissory note (which is full recourse to the
affiliate) in the amount of $565,375 bearing interest at 10% per annum. In
addition, the affiliate assumed the debt requirements on the existing loans
secured by the models in the amount of $3,496,125 (fully relieving the Company
of such obligation). Concurrent with the sale, the Company entered into a lease
agreement with the affiliate to lease the model homes on a month-to-month basis.
The Company recorded a gain on the sale of the models of $766,526.
5. DEVELOPMENT LOANS AND OTHER NOTES PAYABLE
In January 1997, the Company entered into a revolving credit agreement with
Heller Financial Services which matures May 1999 and replaced the Company's
previous credit facility with GE Capital Corporation. At June 30, 1997, the
maximum principal outstanding under the credit agreement is $25,000,000 subject
to the maximum number of housing units under construction. The credit agreement
bears interest at the Commercial Paper Rate, as defined, plus 3.75% (9.4% at
June 30, 1997), which is added monthly to the unpaid balance. Outstanding
principal and interest on the construction base are repaid from proceeds of home
sales. The credit agreement provides various operating and financial covenants
with which the Company must be in compliance as a condition for continuation of
construction draw funding. The outstanding principal balance at June 30, 1997 is
$16,992,959.
In March 1997, the Company entered into a revolving credit agreement with
Residential Funding Corporation which matures March 2000. At June 30, 1997, the
maximum principal outstanding under the credit agreement is $50,000,000, with a
land acquisition and development loan amount not to exceed $25,000,000 and a
construction loan not to exceed $40,000,000 subject to a minimum loan amount of
$10,000,000 on the land acquisition and development facility. Amounts borrowed
under the credit agreement bear interest at the prime rate plus 1.25% (9.75% at
June 30, 1997) which is added monthly to the unpaid balance. Outstanding
principal and interest on the land acquisition and development loan are repaid
based on agreed upon release prices. Outstanding principal and interest on the
construction base are repaid from proceeds of home sales. The credit agreement
provides various operating and financial covenants with which the Company must
be in compliance as a condition for continuation of construction draw funding.
The outstanding principal balance at June 30, 1997 is $21,083,160.
F-19
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
United Development Management Company
We have audited the accompanying balance sheet of United Development
Bristolwood Limited Partnership (the Partnership) as of September 30, 1995 and
the related consolidated statement of income, changes in partners' capital, and
cash flows for the year then ended. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of United Development
Bristolwood Limited Partnership at September 30, 1995, and the results of its
operations and its cash flows for the year then ended, in conformity with
generally accepted accounting principles.
Ernst & Young LLP
Chicago, Illinois
October 15, 1997
F-20
<PAGE>
UNITED DEVELOPMENT BRISTOLWOOD LIMITED PARTNERSHIP
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------------
1995
1996 ------------
------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash.................................................................................. $ 274,083 $ 715,083
Closing proceeds in transit........................................................... 140,000 212,000
Land under development................................................................ 2,632,718 3,491,442
Due from affiliates................................................................... 362,165 325,000
Other................................................................................. 5,242 4,000
------------ ------------
Total assets........................................................................ $ 3,414,208 $ 4,747,525
------------ ------------
------------ ------------
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable...................................................................... $ -- $ 383,265
Due to partner........................................................................ -- 336,538
Due to affiliates..................................................................... -- 18,750
Development loans and other notes payable............................................. 1,974,404 2,421,724
------------ ------------
Total liabilities................................................................... 1,974,404 3,160,277
Partners' capital..................................................................... 1,439,804 1,587,248
------------ ------------
Total liabilities and partners' capital............................................. $ 3,414,208 $ 4,747,525
------------ ------------
------------ ------------
</TABLE>
See accompanying notes.
F-21
<PAGE>
UNITED DEVELOPMENT BRISTOLWOOD LIMITED PARTNERSHIP
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------------
1995
1996 ------------ 1994
------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
REVENUES
Improved land sales..................................................... $ 65,000 $ 5,036,400 $ 4,805,535
Improved land sales to affiliates....................................... 2,184,700 1,769,000 396,000
------------ ------------ ------------
2,249,700 6,805,400 5,201,535
Cost of sales........................................................... 1,766,109 5,231,716 4,233,144
------------ ------------ ------------
Gross profit 483,591 1,573,684 968,391
Administrative and other expense........................................ 19,968 58,494 100,704
------------ ------------ ------------
Net income.............................................................. $ 463,623 $ 1,515,190 $ 867,687
------------ ------------ ------------
------------ ------------ ------------
Net income allocated to General Partner................................. $ 2,318 $ 7,576 $ 4,338
------------ ------------ ------------
------------ ------------ ------------
Net income allocated to Limited Partners................................ $ 461,305 $ 1,507,614 $ 863,349
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See accompanying notes.
F-22
<PAGE>
UNITED DEVELOPMENT BRISTOLWOOD LIMITED PARTNERSHIP
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
YEARS ENDED SEPTEMBER 30, 1996 (UNAUDITED), 1995, AND 1994 (UNAUDITED)
<TABLE>
<CAPTION>
GENERAL LIMITED
PARTNER PARTNERS TOTAL
--------- ------------- -------------
<S> <C> <C> <C>
Balance at October 1, 1993............................................... $ 8,906 $ 1,772,307 $ 1,781,213
Distributions............................................................ (7,718) (1,535,982) (1,543,700)
Net income............................................................... 4,338 863,349 867,687
--------- ------------- -------------
Balance at September 30, 1994............................................ 5,526 1,099,674 1,105,200
Distributions............................................................ (5,166) (1,027,976) (1,033,142)
Net income............................................................... 7,576 1,507,614 1,515,190
--------- ------------- -------------
Balance at September 30, 1995............................................ 7,936 1,579,312 1,587,248
Distributions............................................................ (3,055) (608,012) (611,067)
Net income............................................................... 2,318 461,305 463,623
--------- ------------- -------------
Balance at September 30, 1996............................................ $ 7,199 $ 1,432,605 $ 1,439,804
--------- ------------- -------------
--------- ------------- -------------
</TABLE>
See accompanying notes.
F-23
<PAGE>
UNITED DEVELOPMENT BRISTOLWOOD LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------------------
1995 1994
------------- -------------
1996 (UNAUDITED)
-------------
(UNAUDITED)
<S> <C> <C> <C>
Cash flow from operating activities
Net income........................................................... $ 463,623 $ 1,515,190 $ 867,687
Adjustments to reconcile net income to net cash provided by operating
activities:
Changes in operating assets and liabilities:
(Increase) decrease in closing proceeds in transit............... 72,000 (189,175) (22,825)
Decrease in land under development............................... 858,724 2,240,948 1,186,120
Increase in due from affiliates.................................. (37,165) (325,000)
(Increase) decrease in other assets.............................. (1,242) (4,000) 130,000
Increase (decrease) in accounts payable.......................... (383,265) 376,357 (37,592)
------------- ------------- -------------
Net cash provided by operating activities............................ 972,675 3,614,320 2,123,390
Cash flow from financing activities
Proceeds from development loans and other notes payable.............. 456,342 2,318,113 3,278,283
Repayments of development loans and other notes payable.............. (903,662) (4,826,044) (3,685,084)
Increase (decrease) in due to partner................................ (336,538) 336,538
Increase (decrease) in due to affiliates............................. (18,750) 18,750
Distributions to partners............................................ (611,067) (1,033,142) (1,543,700)
------------- ------------- -------------
Net cash used in financing activities................................ (1,413,675) (3,185,785) (1,950,501)
------------- ------------- -------------
Increase (decrease) in cash.......................................... (441,000) 428,535 172,889
Cash at beginning of year............................................ 715,083 286,548 113,659
------------- ------------- -------------
Cash at end of year.................................................. $ 274,083 $ 715,083 $ 286,548
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See accompanying notes.
F-24
<PAGE>
UNITED DEVELOPMENT BRISTOLWOOD LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
In 1993, United Development Bristolwood Limited Partnership, an Illinois
limited partnership (the Partnership) was formed to acquire, own, develop, and
sell approximately 196 improved single-family lots and 190 improved townhome
lots in Tinley Park, Illinois. Bristolwood Development Corporation contributed
$1,000 to the Partnership for a 0.5% general partner interest in the
Partnership. Four limited partners each contributed $399,750 for 24.875% limited
partner interests in the Partnership.
The Partnership agreement provides that profits and losses will be allocated
to the partners generally in proportion to their capital contributions to the
Partnership. Available cash flow is distributable to the partners in accordance
with their capital contributions to the Partnership.
The financial statements as of September 30, 1996 and the year then ended
and for the year ended September 30, 1994 and the related footnote disclosures
are unaudited. In the opinion of management, such financial statements reflect
all adjustments necessary for a fair presentation. All such adjustments are of a
normal and recurring nature.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Revenues from improved lot sales are recognized in the period in which title
passes and cash is received.
LAND UNDER DEVELOPMENT
Land under development is stated at cost, which is not in excess of net
realizable value. Land under development includes all direct costs of the land
and site improvements constructed, plus financing and other carrying costs
incurred during the period of development. Capitalized project costs, including
interest and construction administration costs that relate to land development,
are capitalized and are allocated to lots to which they relate.
INCOME TAXES
The Partnership pays no income taxes, and the income or loss from the
Partnership is includable on the respective income tax returns of the partners.
The bases of the assets and liabilities is the same for income tax and financial
reporting purposes.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
F-25
<PAGE>
UNITED DEVELOPMENT BRISTOLWOOD LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. LAND UNDER DEVELOPMENT
Land under development consisted of the following:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Direct land costs, including site development
costs................................................. $ 1,680,440 $ 2,606,375
Capitalized project costs............................... 952,278 885,067
------------ ------------
$ 2,632,718 $ 3,491,442
------------ ------------
------------ ------------
</TABLE>
4. DEVELOPMENT LOANS AND OTHER NOTES PAYABLE
Development loans and other notes payable consist of the following:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Site improvement loan (1)............................... $ 1,000,000 $ 970,542
Land acquisition loans (2).............................. 974,404 1,451,182
------------ ------------
$ 1,974,404 $ 2,421,724
------------ ------------
------------ ------------
</TABLE>
(1) In 1993, the Partnership entered into a loan agreement to borrow up to
$3,000,000 for the development of the improved lots. The loan was to
mature on July 15, 1995. The loan bears interest at the prime rate plus
2% (10.25% and 10.75% at September 30, 1996 and 1995, respectively),
which is added monthly to the loan balance. Outstanding principal and
interest are repaid from proceeds of improved lot sales. In 1995, the
maturity date on the loan was extended to July 15, 1998.
(2) In connection with the purchase of the unimproved lots in 1993, the
Partnership issued two promissory notes to the seller (collectively, the
Notes) totaling $3,970,532 which are to mature on March 19, 1998. The
Notes bear interest at an effective interest rate of the prime rate plus
2%. Outstanding principal and interest are repaid from the proceeds of
improved lot sales ($21,778 per single-family lot at the closing of each
sale after the 61st lot sold and $9,100 per townhome lot at the closing
of each sale after the 48th lot sold).
Substantially all of the Partnership's land under development is pledged as
collateral to secure repayment of indebtedness.
During the years ended September 30, 1996, 1995, and 1994, the Partnership
incurred and paid interest on development loans and other notes payable of
$245,902, $508,372, and $400,043, respectively, all of which was capitalized by
the Partnership.
5. RELATED PARTY TRANSACTIONS
During the years ended September 30, 1996, 1995, and 1994, the Partnership
sold townhome lots to a limited partner of the Partnership totaling $2,184,700,
$1,444,000, and $396,000, respectively. During the year ended September 30,
1995, the limited partner advanced $336,538 to the Partnership which is included
in due to partner at September 30, 1995. The amount was subsequently repaid in
1996 through the sale of townhome lots to the limited partner.
F-26
<PAGE>
UNITED DEVELOPMENT BRISTOLWOOD LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. RELATED PARTY TRANSACTIONS (CONTINUED)
During 1995, Partnership sold 5 single-family lots to an affiliate of
another limited partner of the Partnership for $325,000. The receivable from the
sale of $325,000 is non-interest bearing and unsecured and is included in due
from affiliates at September 30, 1996 and 1995.
Certain construction activity of the Partnership is performed by an
affiliate of the general partner. At September 30, 1995, accounts payable
includes $382,135 due to the affiliate for such activities.
6. FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures About Fair
Value of Financial Instruments" (SFAS No. 107) requires disclosures of the fair
value of certain financial instruments for which it is practicable to estimate.
Value is defined by SFAS No. 107 as the amount at which the instrument could be
exchanged in a current transaction between willing parties, other than in a
forced or liquidation sale.
The following methods and assumptions were used by the Partnership in
estimating its fair value disclosures for financial instruments:
CASH
The carrying amount of cash reported in the balance sheet approximates
its fair value.
DEVELOPMENT LOANS AND OTHER NOTES PAYABLE
The carrying amount of the Partnership's variable rate development loans
and other notes payable approximates fair value based on the current
borrowing rate for similar types of borrowing arrangements.
7. COMMITMENTS, CONTINGENCIES, AND OTHER MATTERS
Letters of credit approximating $459,180 at September 30, 1996 and 1995,
have been issued on behalf of the Partnership to guarantee the completion of
certain improvements associated with development of the property with the
municipality in which the Partnership is developing lots.
F-27
<PAGE>
UNITED DEVELOPMENT BRISTOLWOOD LIMITED PARTNERSHIP
BALANCE SHEET
JUNE 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS
- --------------------------------------------------------------------------------
<S> <C>
Cash............................................................................ $ 293,675
Closing proceeds in transit..................................................... 112,000
Land under development.......................................................... 935,661
Due from affiliates............................................................. 669,323
Other........................................................................... 11,585
----------
Total assets.................................................................. $2,022,244
----------
----------
LIABILITIES AND PARTNERS' CAPITAL
Development loans and other notes payable....................................... $ 509,560
----------
Total liabilities............................................................. 509,560
Partners' capital............................................................... 1,512,684
----------
Total liabilities and partners' capital....................................... $2,022,244
----------
----------
</TABLE>
SEE ACCOMPANYING NOTES.
F-28
<PAGE>
UNITED DEVELOPMENT BRISTOLWOOD LIMITED PARTNERSHIP
STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED JUNE 30
----------------------------
1997 1996
------------- -------------
<S> <C> <C>
REVENUES
Improved land sales................................................................. $ 1,268,300 $ 476,000
Improved land sales to affiliates................................................... 1,092,000 532,000
------------- -------------
2,360,300 1,008,000
Cost of sales....................................................................... 2,349,787 670,513
------------- -------------
Gross profit........................................................................ 10,513 337,487
Administrative and other expense.................................................... 10,513 17,696
------------- -------------
Net income.......................................................................... $ - $ 319,791
------------- -------------
------------- -------------
Net income allocated to General Partner............................................. $ - $ 318,192
------------- -------------
------------- -------------
Net income allocated to Limited Partners............................................ $ - $ 1,599
------------- -------------
------------- -------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-29
<PAGE>
UNITED DEVELOPMENT BRISTOLWOOD LIMITED PARTNERSHIP
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
NINE MONTHS ENDED JUNE 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
GENERAL LIMITED
PARTNER PARTNERS TOTAL
----------- ------------ ------------
<S> <C> <C> <C>
Balance at October 1, 1996.................................................. $ 7,199 $ 1,432,605 $ 1,439,804
Contributions............................................................... 72,880 72,880
----------- ------------ ------------
Balance at June 30, 1997.................................................... $ 7,199 $ 1,505,485 $ 1,512,684
----------- ------------ ------------
----------- ------------ ------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-30
<PAGE>
UNITED DEVELOPMENT BRISTOLWOOD LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOW
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED JUNE
30
-----------------------
1997 1996
----------- ----------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net income.............................................................................. $ - $ 319,791
Adjustments to reconcile net income to net cash provided by operating activities:
Changes in operating assets and liabilities:
Decrease in closing proceeds in transit............................................. 28,000 212,000
Decrease in land under development.................................................. 1,697,057 130,350
(Increase) decrease in due from affiliates.......................................... (307,158) 299,535
Increase in other assets............................................................ (6,343) (162)
Decrease in accounts payable........................................................ (377,962)
----------- ----------
Net cash provided by operating activities 1,411,556 583,552
CASH FLOW FROM FINANCING ACTIVITIES
Net (repayments of) proceeds from development loans and other notes payable............. (1,464,844) 310,742
Decrease in due to Partner.............................................................. (336,538)
Decrease in due to affiliates........................................................... (18,750)
Contributions from partners............................................................. 72,880
Distributions to partners............................................................... (566,099)
----------- ----------
Net cash used in financing activities................................................... (1,391,964) (610,645)
----------- ----------
Increase (decrease) in cash............................................................. 19,592 (27,093)
Cash at beginning of period 274,083 715,083
----------- ----------
Cash at end of period................................................................... $ 293,675 $ 687,990
----------- ----------
----------- ----------
</TABLE>
SEE ACCOMPANYING NOTES.
F-31
<PAGE>
UNITED DEVELOPMENT BRISTOLWOOD LIMITED PARTNERSHIP
NOTES TO INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying interim financial statements do not include all information
and footnotes necessary for a fair presentation of financial position, results
of operations and cash flows in conformity with generally accepted accounting
principles. These interim statements should be read in conjunction with the
Partnership's audited financial statements included elsewhere herein as certain
footnote disclosures which substantially duplicate those contained in such
audited financial statements have been omitted from these interim financial
statements. In the opinion of management, the interim financial statements
contain all adjustments (which are normal and recurring) necessary for a fair
statement of financial results for the interim periods.
2. LAND UNDER DEVELOPMENT
Land under development consisted of the following at June 30, 1997:
<TABLE>
<CAPTION>
Direct land costs, including site development costs.................... $ 775,837
<S> <C>
Capitalized project costs.............................................. 159,824
---------
$ 935,661
---------
---------
</TABLE>
Effective October 1, 1996, the Partnership adopted Statement of Financial
Accounting Standards No. 121 (SFAS No. 121), "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
Under SFAS No. 121, land under development is stated at cost, unless lots are
determined to be impaired, in which case the lots are written down to fair
value. Writedowns of impaired lots to fair value are recorded as adjustments to
the cost basis of the respective lots. The adoption of SFAS No. 121 had no
effect on the Partnership's financial position or results of operations.
3. DEVELOPMENT LOANS AND OTHER NOTES PAYABLE
During the nine months ended June 30, 1997 and 1996, the Partnership
incurred and paid interest on development loans and other notes payable of
$96,630 and $101,382, respectively, all of which was capitalized by the
Partnership.
4. RELATED PARTY TRANSACTIONS
During the nine months ended June 30, 1997 and 1996, the Partnership sold
townhome lots to a limited partner of the Partnership totaling $1,092,000 and
$532,000, respectively.
During 1995, the Partnership sold 5 single-family lots to an affiliate of
another limited partner of the Partnership for $325,000. The receivable from
these sales of $325,000 is non-interest bearing and unsecured and is included in
due from affiliates at June 30, 1997.
Certain construction activity of the Partnership is performed by an
affiliate of the general partner. At June 30, 1997, construction activities were
substantially complete and no amounts were owed to the affiliate.
5. COMMITMENTS, CONTINGENCIES, AND OTHER MATTERS
Letters of credit approximating $459,180 at June 30, 1997 have been issued
on behalf of the Partnership to guarantee the completion of certain improvements
associated with development of the property with the municipality in which the
Partnership is developing lots.
F-32
<PAGE>
PHOTOGRAPHS
[PHOTO1] [PHOTO2]
A "Verde" plan home in the Company's A two-story single-family home built
Altezza development located in by the Company.
Phoenix, Arizona.
[PHOTO3] [PHOTO4]
A townhouse built by the Company. A two-story single-family home built
by the Company.
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, OR ANY OF THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR
SOLICITATION OF AN OFFER TO BUY THE SHARES BY ANYONE IN ANY JURISDICTION IN
WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON
MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO
WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL CREATE ANY IMPLICATION THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS
DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 8
Use of Proceeds........................................................... 14
Capitalization............................................................ 15
Selected Consolidated Financial Data...................................... 16
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 18
Business.................................................................. 23
Management................................................................ 32
Security Ownership of Certain Beneficial Owners and Management............ 35
Certain Transactions...................................................... 36
Description of Securities................................................. 38
Certain Federal Income Tax Considerations................................. 44
Underwriting.............................................................. 48
Legal Matters............................................................. 49
Experts................................................................... 49
Additional Information.................................................... 50
Financial Statements...................................................... F-1
</TABLE>
------------------------
UNTIL , 1997 ( DAYS AFTER THE DATE HEREOF), ALL DEALERS EFFECTING
TRANSACTIONS IN THE DEBENTURES, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
[UNITED LOGO]
UNITED HOMES, INC.
11% MANDATORY REDEMPTION
DEBENTURES
---------------------
PROSPECTUS
---------------------
MILLER & SCHROEDER FINANCIAL, INC.
_________ __, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
<TABLE>
<S> <C>
SEC registration fee.............................................. $ 2,170
NASD filing fee................................................... 1,216
Accounting fees and expenses...................................... 20,000*
Legal fees and expenses........................................... 90,000*
Blue Sky fees and expenses (including counsel fees)............... 10,000*
Printing and engraving expenses................................... 50,000*
Miscellaneous expenses............................................ 14,614*
---------
Total......................................................... $ 188,000*
---------
---------
</TABLE>
- ------------------------
* estimated
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Section 8.75 of the Illinois Business Corporation Act of 1983, as amended
(the "Act"), authorizes indemnification of directors, officers, employees and
agents of United; allows the advancement of costs of defending against
litigation; and permits companies incorporated in Illinois to purchase insurance
on behalf of directors, officers, employees and agents against liabilities
whether or not in the circumstances such companies would have the power to
indemnify against such liabilities under the provisions of the statute. United's
Articles of Incorporation provides for indemnification of United's officers and
directors to the fullest extent permitted by Section 8.75 of the Act.
Section 2.10 of the Act authorizes corporations to limit or eliminate the
personal liability of directors and officers to corporations and their
shareholders for monetary damages for breach of directors' fiduciary duty of
care. The duty of care requires that, when acting on behalf of the corporation,
directors must exercise an informed business judgment based on all material
information reasonably available to them. Absent the limitations authorized by
the Illinois statute, directors could be accountable to corporations and their
shareholders for monetary damages for conduct that does not satisfy their duty
of care. Although the statute does not change directors' duty of care, it
enables corporations to limit available relief to equitable remedies such as
injunction or rescission. United's Articles of Incorporation limits the
liability of United's directors, officers or shareholders to the fullest extent
permitted by the Illinois statute. The inclusion of this provision in the
Articles of Incorporation may have the effect of reducing the likelihood of
derivative litigation against directors and may discourage or deter shareholders
or management from bringing a lawsuit against directors for breach of their duty
of care, even though such an action, if successful, might otherwise have
benefitted United and its shareholders.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In connection with the formation of United, on September 21, 1994, United
Development Management Company purchased 1,000 shares of the Company's common
stock for an aggregate price of $1,000 and a contribution of all of the
outstanding stock of the Subsidiaries (as defined in the Prospectus). No sales
commission or other consideration was paid in connection with such sale, which
was effective without registration under the Securities Act of 1933, as amended
(the "Act"), in reliance upon the exemption from registration under Section 4(2)
of the Act.
II-1
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENTS
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ --------------------------------------------------------------------------
<C> <C> <S>
1.1 -- Form of Underwriting Agreement
1.2 -- Engagement Letter between Miller & Schroeder Financial, Inc. and United
Homes, Inc. dated June 30, 1997(2)
1.3 -- Form of Selected Dealer Agreement
3.1 -- Articles of Incorporation of United Homes, Inc.(1)
3.2 -- Bylaws of United Homes, Inc.(1)
4.1 -- Specimen Debenture (filed as part of Exhibit 4.2)(2)
4.2 -- Form of Indenture(2)
5.1 -- Opinion of Shefsky & Froelich Ltd. regarding the legality of the
Debentures being registered
10.1 -- Revolving Credit Agreement between Genel Company, Inc. and United Homes,
Inc. dated May 30, 1995(1)
10.2 -- Loan Agreement between Residential Funding Corporation and United Homes,
Inc., United Homes of Illinois, Inc., United Homes of Michigan, Inc. and
United Homes, Inc., an Arizona corporation dated March 14, 1997(1)
10.3 -- Loan Agreement between Residential Funding Corporation and United Homes,
Inc., United Homes of Illinois, Inc., United Homes of Michigan, Inc. and
United Homes, Inc., an Arizona corporation dated May 28, 1996(1)
10.4 -- Supplement to Loan Agreement between Residential Funding Corporation and
United Homes, Inc., United Homes of Illinois, Inc., United Homes of
Michigan, Inc. and United Homes, Inc., an Arizona corporation dated
October 3, 1996(1)
10.5 -- Supplement to Loan Agreement between Residential Funding Corporation and
United Homes, Inc., United Homes of Illinois, Inc., United Homes of
Michigan, Inc. and United Homes, Inc., an Arizona corporation dated
August 21, 1996(1)
10.6 -- Supplement to Loan Agreement between Residential Funding Corporation and
United Homes, Inc., United Homes of Illinois, Inc., United Homes of
Michigan, Inc. and United Homes, Inc., an Arizona corporation dated
February 3, 1997(1)
10.7 -- Loan Agreement between United-Darien Limited Partnership, United
Development Management Company, United Homes, Inc., United Homes of
Illinois, Inc., Edward Havlik and Virgil Owings and First Bank National
Association dated March 5, 1996(1)
10.8 -- Lease and Sales Listing Agreement by and between Model Homes, L.L.C and
United Homes, Inc. Dated March 30, 1997(2)
12.1 -- Statements regarding computation of ratios(2)
21.1 -- List of Subsidiaries of United Homes, Inc.(2)
23.1 -- Consent of Shefsky & Froelich Ltd. (filed as part of Exhibit 5.1)
23.2 -- Consent of Ernst & Young LLP
24.1 -- Power of Attorney(1)
27.1 -- Financial Data Schedule(1)
</TABLE>
- ------------------------
(1) Filed previously on August 19, 1997.
(2) Filed previously on October 21, 1997.
II-2
<PAGE>
(b) Financial Statements
<TABLE>
<C> <S>
UNITED HOMES, INC.
ANNUAL FINANCIAL STATEMENTS:
Report of Independent Auditors;
Consolidated Balance Sheets as of September 30, 1996 and 1995;
Consolidated Statements of Income for the years ended September 30, 1996,
1995 and 1994;
Consolidated Statements of Changes in Stockholder's Equity for the years
ended September 30, 1996, 1995 and 1994;
Consolidated Statements of Cash Flows for the years ended September 30,
1996, 1995 and 1994; and
Notes to the Consolidated Financial Statements for the years ended
September 30, 1996, 1995 and 1994.
INTERIM FINANCIAL STATEMENTS (UNAUDITED):
Condensed Consolidated Balance Sheet as of June 30, 1997;
Condensed Consolidated Statements of Income for the nine months ended June
30, 1997 and 1996;
Consolidated Statement of Changes in Stockholder's Equity for the nine
months ended June 30, 1997;
Condensed Consolidated Statements of Cash Flows for the nine months ended
June 30, 1997 and 1996;
Notes to the Condensed Consolidated Interim Financial Statements.
UNITED DEVELOPMENT BRISTOLWOOD LIMITED PARTNERSHIP
ANNUAL FINANCIAL STATEMENTS:
Report of Independent Auditors;
Balance Sheets as of September 30, 1996 (unaudited) and 1995;
Statements of Income for the years ended September 30, 1996 (unaudited),
1995, and 1994 (unaudited);
Statements of Changes in Partners' Capital for the years ended September
30, 1996 (unaudited), 1995, and 1994 (unaudited);
Statements of Cash Flows for the years ended September 30, 1996
(unaudited), 1995, and 1994 (unaudited); and
Notes to the Financial Statements;
INTERIM FINANCIAL STATEMENTS
Balance Sheet as of June 30, 1997;
Statements of Income for the nine months ended June 30, 1997 and 1996;
Statement of Changes in Partners' Capital for the nine months ended June
30, 1997;
Statements of Cash Flows for the nine months ended June 30, 1997 and 1996;
Notes to Interim Financial Statements;
</TABLE>
All schedules for which provision is made in the applicable accounting
regulations of the Commission are not required under the applicable
instructions, are inapplicable, or the information is included in the combined
financial statements or notes thereto included in the Prospectus and therefore
have been omitted.
II-3
<PAGE>
ITEM 17. UNDERTAKINGS
The Registrant undertakes:
A. To file, during any period in which offers of sales are being made, a
post-effective amendment to this Registration Statement:
(i) to file any prospectuses required by Section 10(a)(3) of the
Securities Act of 1933, as amended (the "Act").
(ii) to reflect in the Prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set
forth in the Registration Statement.
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement
or any material change to such information in the Registration
Statement.
B. That for the purpose of determining any liability under the Act,
each such post-effective amendment may be deemed to be a new registration
statement relating to the securities offered therein and the offering of
such securities at that time shall be deemed to be the initial bona fide
offering thereof.
C. To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
D. Insofar as indemnification for liabilities arising under the Act may
be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment
by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
E. For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be a part of this Registration
Statement as of the time it was declared effective.
F. For purposes of determining liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 2 to the Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized in the
City of Rolling Meadows, State of Illinois, on November 6, 1997.
<TABLE>
<S> <C> <C>
UNITED HOMES, INC.
By: /s/ EDWARD HAVLIK
-----------------------------------------
Edward Havlik
Title: PRESIDENT
</TABLE>
II-5
<PAGE>
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 2 to the Registration Statement has been signed by the following
persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
*
- ------------------------------ Chairman of the Board and November 6, 1997
Virgil Owings Director
* President and Director
- ------------------------------ (Principal Executive November 6, 1997
Edward Havlik Officer)
Executive Vice President,
Chief Financial Officer,
/S/ WILLIAM J. CROCK, JR. Secretary and Treasurer
- ------------------------------ (Principal Financial November 6, 1997
William J. Crock, Jr. Officer and Principal
Accounting Officer)
*
- ------------------------------ Vice President and November 6, 1997
Timothy Owings Director
*
- ------------------------------ Vice President and November 6, 1997
Laurie Bulson Director
William J. Crock, Jr., the undersigned attorney-in-fact, by signing his name
below, does hereby sign this Amendment No. 2 to the Registration Statement on
behalf of the above-indicated Officers and Directors of United Homes, Inc.
(constituting all the Directors) pursuant to powers of attorney executed by such
persons and heretofore filed with the Securities and Exchange Commission.
<TABLE>
<S> <C> <C>
/s/ WILLIAM J. CROCK, JR.
-------------------------------------------
William J. Crock, Jr.
*By: AS ATTORNEY-IN-FACT
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ --------------------------------------------------------------------------
<C> <C> <S>
1.1 -- Form of Underwriting Agreement
1.2 -- Engagement Letter between Miller & Schroeder Financial, Inc. and United
Homes, Inc. dated June 30, 1997(2)
1.3 -- Form of Selected Dealer Agreement
3.1 -- Articles of Incorporation of United Homes, Inc.(1)
3.2 -- Bylaws of United Homes, Inc.(1)
4.1 -- Specimen Debenture (filed as part of Exhibit 4.2)(2)
4.2 -- Form of Indenture(2)
5.1 -- Opinion of Shefsky & Froelich Ltd. regarding the legality of the
Debentures being registered
10.1 -- Revolving Credit Agreement between Genel Company, Inc. and United Homes,
Inc. dated May 30, 1995(1)
10.2 -- Loan Agreement between Residential Funding Corporation and United Homes,
Inc., United Homes of Illinois, Inc., United Homes of Michigan, Inc. and
United Homes, Inc., an Arizona corporation dated March 14, 1997(1)
10.3 -- Loan Agreement between Residential Funding Corporation and United Homes,
Inc., United Homes of Illinois, Inc., United Homes of Michigan, Inc. and
United Homes, Inc., an Arizona corporation dated May 28, 1996(1)
10.4 -- Supplement to Loan Agreement between Residential Funding Corporation and
United Homes, Inc., United Homes of Illinois, Inc., United Homes of
Michigan, Inc. and United Homes, Inc., an Arizona corporation dated
October 3, 1996(1)
10.5 -- Supplement to Loan Agreement between Residential Funding Corporation and
United Homes, Inc., United Homes of Illinois, Inc., United Homes of
Michigan, Inc. and United Homes, Inc., an Arizona corporation dated
August 21, 1996(1)
10.6 -- Supplement to Loan Agreement between Residential Funding Corporation and
United Homes, Inc., United Homes of Illinois, Inc., United Homes of
Michigan, Inc. and United Homes, Inc., an Arizona corporation dated
February 3, 1997(1)
10.7 -- Loan Agreement between United-Darien Limited Partnership, United
Development Management Company, United Homes, Inc., United Homes of
Illinois, Inc., Edward Havlik and Virgil Owings and First Bank National
Association dated March 5, 1996(1)
10.8 -- Lease and Sales Listing Agreement by and between Model Homes, L.L.C and
United Homes, Inc. Dated March 30, 1997(2)
12.1 -- Statements regarding computation of ratios(2)
21.1 -- List of Subsidiaries of United Homes, Inc.(2)
23.1 -- Consent of Shefsky & Froelich Ltd. (filed as part of Exhibit 5.1)
23.2 -- Consent of Ernst & Young LLP
24.1 -- Power of Attorney(1)
27.1 -- Financial Data Schedule(1)
</TABLE>
- ------------------------
(1) Filed previously on August 19, 1997.
(2) Filed previously on October 21, 1997.
<PAGE>
MANDATORY REDEMPTION DEBENTURES
MINIMUM: $3,050 Debentures
MAXIMUM: $6,091 Debentures
UNDERWRITING AGREEMENT
November ___, 1997
Miller & Schroeder Financial, Inc.
Pillsbury Center
220 South Sixth Street, Suite 300
Minneapolis, MN 55440-0789
Ladies and Gentlemen:
1. INTRODUCTION. United Homes, Inc., an Illinois corporation (the
"Company") proposes to issue and sell to the public a minimum of 3,050 (the
"Minimum") and up to 6,091 (the "Maximum") of its $1,000 denomination
Mandatory Redemption Debentures, as described in the Registration Statement
referred to below. Such Minimum and Maximum number of its Mandatory
Debentures are collectively referred to in this Agreement as the "Original
Debentures." The Company also proposes to issue and sell to the public up to
an additional 1,015 of such Mandatory Redemption Debentures. Such
additional number of its Mandatory Redemption Debentures are referred to in
this Agreement as the "Option Debentures." The Original Debentures and
Option Debentures are referred to in this Agreement as the "Debentures."
The Debentures are to be issued under an indenture, dated as of
November ___, 1997, (the "Indenture") between the Company and National City
Bank of Minneapolis as trustee (the "Trustee"). The Company hereby confirms
its agreement with Miller & Schroeder Financial, Inc., as underwriter
(referred to as "you" or as the "Underwriter"), to offer the Debentures on a
"best efforts" basis, upon the terms and conditions herein. The Debentures
are more fully described in the Registration Statement and Prospectus
hereinafter described.
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby
represents and warrants to, and agrees with, the Underwriter that:
(a) The Company has prepared and filed with the Securities and Exchange
Commission (the "Commission") a Registration Statement on Form S-1
(Commission File No. 333-33965) with respect to the Debentures including
one or more forms of Preliminary Prospectus in conformity with the
requirements of the Securities Act of 1933, as amended, and the rules and
regulations of the Commission thereunder (collectively referred to as the
"Act") in the form heretofore delivered to you; one or more amendments to
such Registration Statement have been prepared and filed and the Company
may prepare and file additional amendments. If the Company has elected
not to rely on Rule 430A, the Company has prepared and will promptly file
an amendment to the Registration Statement and an amended prospectus
(provided the Underwriter has consented to such filing). If the Company
has elected to rely on Rule 430A, it will prepare and timely file a
prospectus pursuant to Rule 424(b) that discloses the information
previously omitted from the prospectus in reliance upon Rule 430A.
Copies of such Registration Statement and each pre-effective amendment
thereto, and each related preliminary
1
<PAGE>
prospectus have been delivered by the Company to the Underwriter. Such
Registration Statement, as amended, or supplemented, including all
prospectuses included as a part thereof, financial schedules, exhibits,
the information (if any) deemed to be a part thereof pursuant to Rules
430A and 434 under the Act and any Registration Statement filed pursuant
to Rule 462 under the Act, is herein referred to as the "Registration
Statement." The term "Prospectus" as used herein shall mean the final
prospectus, as amended or supplemented, included as part of the
Registration Statement filed with the Commission when it becomes
effective; provided, however, that if a prospectus is filed by the
Company pursuant to Rule 434 under the Act, the term "Prospectus" as used
herein shall mean the prospectus so filed pursuant to Rules 424(b) and
430A and the term sheet so filed pursuant to Rule 434. The term
"Preliminary Prospectus" as used herein means any prospectus, amended or
supplemented; used prior to the Effective Date (as defined herein) and
included as part of the Registration Statement, including any prospectus
filed with the Commission pursuant to Rule 424(b).
(b) The Commission has not issued any order preventing or suspending
the use of any Preliminary Prospectus nor have any proceedings been
instituted for that purpose nor are any such proceedings threatened.
Each Preliminary Prospectus, at the time of filing or use, complied with
the requirements of the Act.
(c) As of the Effective Date or as of the filing date (or delivery to
the Underwriters) of any subsequent amendment or supplement, as the case
may be, and at all times subsequent thereto up to and including the Final
Closing Date (as hereinafter defined): (i) the Registration Statement and
Prospectus contain and will contain all statements which are required to
be stated therein by the Act and will comply in all respects with the
Act; and (ii) neither the Registration Statement nor the
Prospectus includes or will, at any time up to and including the Final
Closing Date, include any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to
make the statements therein, in the light of the circumstances under
which they were made, not misleading, provided however, that none of the
representations and warranties contained in this subsection 1(c) shall
apply to statements in, or omissions from, the Registration Statement,
Preliminary Prospectus, Prospectus, or any amendment thereof, or
supplement thereto, which are based upon and conform to written
information furnished to the Company by the Underwriter, as identified in
Section 13 herein, specifically for use in the preparation of the
Registration Statement, Preliminary Prospectus or the Prospectus, or any
amendments or supplements thereto.
(d) On or promptly after the Effective Date, the Company will prepare
and file a final Prospectus pursuant to Rule 424(b) that discloses the
information previously omitted in reliance upon Rule 430A. The
Prospectus, as amended or supplemented from time to time, shall comply in
all material respects with the requirements of the Act and with the Trust
Indenture Act.
(e) No stop order suspending the effectiveness of the Registration
Statement has been issued and no proceeding for that purpose has been
initiated or threatened by the Commission.
(f) The consolidated financial statements of the Company, including the
related notes, included in the Registration Statement and in the
Prospectus fairly present, on the basis stated
2
<PAGE>
therein, the consolidated financial position, results of operations, cash
flows and changes in shareholders' equity of the Company and its
consolidated Subsidiaries at the dates and for the periods to which they
relate. Such financial statements and related notes have been prepared
in accordance with generally accepted accounting principles consistently
applied, except as otherwise stated therein, throughout the periods
involved and comply in all respects with the requirements of the Act.
The selected financial information set forth in the Prospectus is fairly
presented and prepared on a basis consistent with such audited
consolidated financial statements and the books of the Company included
in the Registration Statement. The supporting schedules included in the
Registration Statement present fairly the information required to be
stated therein. No other financial statements or schedules are required
to be included in the Registration Statement or Prospectus.
(g) Ernst & Young, LLP, who have examined the financial statements and
who have expressed their opinions with respect to the audited
consolidated financial statements and schedules included in the
Registration Statement and filed with the Commission as part of the
Registration Statement and the Prospectus, are independent public
accountants as required by the Act.
(h) The Company and its wholly-owned subsidiaries, United Homes of
Illinois, Inc., an Illinois corporation, United Homes, Inc., an Arizona
corporation, and United Homes of Michigan, Inc., a Michigan corporation
(individually a "Subsidiary" and collectively the "Subsidiaries") are,
and at each Closing Date will be, duly organized and validly existing and
in good standing under the laws of their respective states of
incorporation, with full power and authority (corporate and other) to
own, lease and operate their properties and conduct their business as
currently carried on and contemplated and described in the Registration
Statement and Prospectus. No proceeding has been instituted in any such
jurisdiction revoking, limiting or curtailing or seeking to revoke, limit
or curtail such qualification. The Company and Subsidiaries are
conducting their respective businesses so as to comply in all respects
with applicable federal, state and local statute, ordinances, rules and
regulations except for such matters which either individually or in
the aggregate do not have a material adverse effect on the Company's
condition (financial, loss of key personnel or otherwise), business,
properties, assets, results of operations (present or prospective) or
net worth. The Company and Subsidiaries hold all licenses, franchises,
grants, authorizations, approvals, easements, consents, orders,
certificates and permits from state, federal and other regulatory
authorities necessary for the conduct of their business as
described in the Registration Statement except for such licenses,
franchises, grants, approvals, easements, consents, orders, certificates
and permits that the Company or any Subsidiary may fail to possess that
individually or in the aggregate do not have a material adverse effect on
the Company's or any Subsidiary's business or financial condition, or
has obtained waivers from any such applicable requirements from the
appropriate state, federal or other regulatory authority. No proceeding
has been instituted (or to the Company's knowledge threatened) in any
such jurisdiction, revoking, limiting or curtailing, or seeking to
revoke, limit or curtail, such power and authority or qualification.
(i) The Company and its Subsidiaries, are, and will be on each Closing
Date, duly qualified to do business as a foreign corporation in good
standing in each jurisdiction in which the character and location of its
assets or its business (existing or as contemplated by the
3
<PAGE>
Prospectus) requires such qualification, other than in jurisdictions in
which the failure to so qualify would not have a material adverse effect
on the business of the Company or any Subsidiary. No proceeding has
been instituted in any such jurisdiction revoking, limiting or curtailing
or seeking to revoke, limit or curtail such qualification.
(j) Copies of the Company's and Subsidiaries' Articles of Incorporation
and bylaws, as amended to date, have been provided to Underwriter's
counsel, and since July 1, 1997 neither has been subsequently amended or
restated as of the date of this Agreement. There has not been and at
each Closing Date shall not have been any change in the Company's
Articles of Incorporation or bylaws from those filed as exhibits to
the Registration Statement. Neither the Company nor any
Subsidiary is in violation of its Articles of Incorporation, bylaws or
other governing instruments; or in default (nor with the giving of notice
or the passage of time or both would be in default) under the A&D Lines,
the Heller Line or Residential Line I (as such lines are defined in the
Prospectus, collectively herein, the "Lines" and individually, a "Line").
Neither the Company nor any Subsidiary is in default (nor with the
giving of notice or the passage of time or both would be in default)
in the performance of any obligation, agreement or condition contained
in any contract or any bond, debenture, note, indentured loan agreement
or other evidence of indebtedness or any loan agreement, contract or
joint venture agreement of the Company and Subsidiaries or other
instrument, other than the Lines, to which they are subject or by
which any of their property or assets are subject, except for defaults
that individually or in the aggregate do not have a material adverse
effect on the Company's or any Subsidiary's business or financial
condition.
(k) Subsequent to the respective dates as of which information is given
in the Registration Statement and Prospectus and, except in each case as
described in or contemplated by the Registration Statement and
Prospectus, prior to the Final Closing Date: (i) the Company and its
Subsidiaries have not incurred, and will not have incurred, any
liabilities or obligations, direct or contingent, or entered into any
transactions, not in the ordinary course of business; (ii) the Company
and its Subsidiaries have not and will not have paid or declared any
dividends or other distributions on its capital stock; (iii) there has
not been and will not have been any material change in the capital stock
or outstanding short term or long term debt, including any capitalized
lease obligation, of the Company and its Subsidiaries (except for change
resulting from draws on the Lines in the ordinary course of business
and as set forth in the Prospectus), or any issuance of options,
warrants, convertible securities, or other rights to purchase the
capital stock of the Company and its Subsidiaries or any material
adverse change or a development involving a change in or affecting the
condition (financial or otherwise), business, key personnel, properties,
assets, results of operations (present or prospective), or net worth of
the Company and its Subsidiaries; (iv) the Company and its Subsidiaries
have not sustained any material loss or damage to their properties or
material interference with their businesses, whether or not insured; and
(v) there has not been and will not have been any event which constitutes
an "Event of Default" under the provisions of the Indenture without
regard to any notice requirements with respect thereto contained in the
Indenture.
(l) Except as accurately described in the Prospectus, there is no
action, suit or proceeding to which the Company and its Subsidiaries are
a party, or of which any property of the Company and its Subsidiaries are
subject pending before or brought by any court or governmental agency or
body or any arbitrator (domestic or foreign) which might adversely affect
the consummation of the transactions contemplated by this Agreement or
repayment of the Debentures; nor to the knowledge of the Company or
any Subsidiary is any such action, suit or proceeding threatened which,
if adversely determined, would, individually or in the aggregate, have a
material adverse effect on the condition (financial or otherwise),
business, properties, assets, results of operations (present or
prospective) of the Company or any Subsidiary.
4
<PAGE>
(m) There are no contracts or other documents of the Company and its
Subsidiaries are required to be described or referred to in the
Registration Statement or Prospectus or required by the Act to be filed
as exhibits to the Registration Statement which have not been described
or referred to therein or filed or incorporated by reference as required.
All contracts described in the Registration Statement or Prospectus or
filed as exhibits thereto are in full force and effect as of the date of
the Prospectus and through the Final Closing Date. All descriptions of
such contracts and documents in the Prospectus, required to be described,
are correct in all material respects. The Company and its Subsidiaries
are not in breach of or default under any of such contracts nor is the
Company and its Subsidiaries in default with respect to any provision of
any lease, loan agreement, franchise, license, permit or other
contractual obligation to which it is a party or by which it may be bound
or to which any of the property or assets of the Company and its
Subsidiaries are subject, except for defaults that individually or in
the aggregate do not have a material adverse effect on the Company's or
any Subsidiary's business or financial condition. There does not exist
any fact which constitutes an event of default as defined in such
documents or which, with giving of notice or lapse of time or both,
would constitute such an event of default.
(n) The Company has full power and authority to execute and deliver
this Agreement, the Indenture and the Debentures and to perform its
obligations hereunder and thereunder. This Agreement has been duly and
validly authorized, executed and delivered by the Company and constitutes
a valid, legal and binding obligation of the Company enforceable in
accordance with its terms, except as enforceability thereof may be
limited by bankruptcy, insolvency, moratorium or other similar laws or
equitable principals affecting the enforcement of creditors' rights
generally and except as rights to indemnify hereunder may be limited by
applicable securities laws, including the Act. No consent, approval,
authorization, order, registration, filing, qualification, license, or
permit of or with any court or any public, governmental or regulatory
agency or body having jurisdiction over the Company or its properties or
assets, is required (i) for the execution, delivery and performance of
this Agreement, (ii) for the execution, delivery and performance by the
Company under the Indenture and the Debentures; or (iii) the consummation
of the transactions contemplated hereby and thereby, including the
issuance, sale and delivery of the Debentures except the registration
under the Act of the Debentures, the qualification of the Indenture under
the Trust Indenture Act (if necessary), and such consents, approvals,
authorizations, orders, registrations, filings, qualifications, licenses,
and permits as may be required under state securities or blue sky laws
or pursuant to the rules of the National Association of Securities
Dealers, Inc. in connection with the offer and sale of the Debentures
by the Underwriter.
(o) The Company has the power and authority to execute and deliver the
Indenture and to carry out the terms thereof, and has the power to
authorize, issue and sell the Debentures on the terms and conditions set
forth in this Agreement and the Indenture. The Indenture has been duly
and validly authorized, executed and delivered by the Company, is in
substantially the form filed as an exhibit to the Registration
Statement, complies with the Trust Indenture Act and constitutes a
valid and legally binding obligation of the Company enforceable against
the Company in accordance with its terms, except as enforceability
thereof may be limited by bankruptcy, insolvency, moratorium or other
similar laws or equitable principals affecting the enforcement of
creditors' rights generally and except as rights to indemnify hereunder
may be limited by applicable securities laws, including the Act. The
Indenture conforms to the descriptions
5
<PAGE>
thereof contained in the Registration Statement and the Prospectus. The
Indenture is not required to be qualified under the Trust Indenture Act
of 1939, as amended.
(p) The Debentures have been duly and validly authorized and, when
authenticated by the Trustee and issued, delivered and sold in accordance
with this Agreement and the Indenture, will have been duly and validly
executed, authenticated, issued and delivered and will constitute valid
and legally binding obligations of the Company entitled to the benefits
provided by the Indenture and enforceable against the Company in
accordance with their terms. The Debentures will be issued free and
clear of all liens, encumbrances, claims, security interests,
restrictions on transfer and other defects of title. The Debentures
conform to the descriptions thereof contained in the Registration
Statement and the Prospectus. The Certificates for the Debentures are in
due and proper form as provided for in the Indenture.
(q) The execution, delivery and performance of this Agreement, the
Indenture and the Debentures, and the consummation of the transactions
contemplated herein and therein, will not conflict with, or constitute a
breach of, or default under or with the giving of notice or the passage
of time or both would so constitute a breach or default, or result in the
creation or imposition or acceleration of any lien, charge or encumbrance
upon any property or assets of the Company or any Subsidiary pursuant to:
(i) any bond, debenture, note, contract, lease, license, indenture,
mortgage, deed of trust, voting trust agreement, loan agreement, joint
venture, or other agreement, evidence of indebtedness or instrument to
which the Company and Subsidiary are a party, or by which they may be
bound or to which any of the properties or assets of the Company and
Subsidiaries are subject; (ii) the Company's and any Subsidiaries'
Articles of Incorporation, bylaws, or other governing documents, as
amended; or (iii) any law, order, rule, regulation, writ, injunction or
decree of any government, governmental agency, court, or arbitrator
having jurisdiction over the Company's and its Subsidiaries' properties.
No event has occurred and condition exists which upon the passage of time
or the giving of notice, would constitute such an event of default under
any such instrument or agreement. No consent, approval, authorization or
other order of any court, regulatory body, administrative agency, other
governmental body or any self-regulatory agency having jurisdiction over
the Company or any Subsidiary and their property or assets is required
for the execution and delivery and performance of this Agreement, the
Indenture or the Debentures or the consummation of the transactions and
performance contemplated herein or therein or in the Prospectus, except
such as will be or have been obtained under the Act and except as may be
required under applicable blue sky laws or the rules and regulations of
the National Association of Securities Dealers, Inc.
(r) All of the issued and outstanding shares of capital stock of the
Company and Subsidiaries are duly authorized and validly issued, full
paid and nonassessable; have been issued in compliance with all federal
and state securities laws; were not issued in violation of, or subject to
any preemptive rights or other rights to subscribe for or purchase
securities; and the holders thereof are not subject to personal liability
by reason of being such holders. All the issued and outstanding capital
stock of the Company is owned, free and clear of any security interests,
lien or restriction by United Development Management Company. Neither
the Company nor Subsidiaries have any outstanding options or warrants
for the issuance of capital stock. Except as provided on Schedule 2(r)
attached hereto, the
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Company owns, free and clear of any security interest, lien or
restriction, all the issued and outstanding capital stock of the
Subsidiaries. The authorized and issued indebtedness of the
Company and Subsidiaries is correctly set forth in the Prospectus, as of
the dates indicated. Except as described in the Prospectus, there are no
outstanding loans or advances or guarantees of Indebtedness by the
Company and Subsidiaries to or for the benefit of any of the officers,
directors or affiliates of the Company required to be described in the
Prospectus pursuant to the Act.
(s) The capitalization of the Company as set forth in the Prospectus
was as so described on the date as of which it is set forth therein; and
will be as so described on each Closing Date (except as it may change as
a result of draws on the Lines in the ordinary course of business and
as set forth in the Prospectus). There are no other classes of stock,
authorized or outstanding, except as described therein.
(t) The statistical information in the Prospectus which is derived from
the Company's financial or other records has been accurately derived
therefrom and, as set forth, is not in conflict with other information
known to the Company.
(u) All descriptions in the Registration Statement or Prospectus of
statutes, regulations, legal or governmental proceedings, the Indenture,
the Debentures, or other contracts or other documents are accurate in all
material respects and fairly present the information shown.
(v) The Company is not in violation of any law, order, rule,
regulation, writ, injunction, or decree of any governmental authority or
court, domestic or foreign, or arbitrator which violation would have a
material adverse effect on the condition (financial or otherwise),
business, properties, results of operations (present or
prospective), assets or net worth of the Company.
(w) The Company holds all, and is operating in compliance with all,
franchises, grants, authorizations, licenses, registrations, approvals,
permits, easements, consents, certificates and orders of any government
or self-regulatory body (domestic and foreign) required for the conduct
of its business or as described in the Prospectus (collectively the
"Licenses"), except for failures to obtain and non-compliances that
individually or in the aggregate do not have a material adverse effect
on the Company's or any Subsidiary's business or financial condition,
and all the Licenses are valid and in full force and effect and will be
valid and in full force and effect through the Final Closing Date.
(x) The Company and Subsidiaries have good and marketable title (in fee
simple as to real property) to all real and personal properties and
assets described in the Prospectus and the financial statements as owned
by them, free and clear of all security interests, liens, charges,
encumbrances, restrictions or defects except those arising in the
ordinary course of business in the development of lots and construction
of homes as reflected in the financial statements included in the
Prospectus or under the Lines and which do not have a material adverse
effect on the Company's and Subsidiaries' use of such property or the
conduct of their business.
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<PAGE>
(y) Except as disclosed in the Prospectus, the Company holds valid and
enforceable leases for the properties (real and personal) described in
the Prospectus as leased by it; the Company is not in default (or with
the giving of notice or the passage of time or both would be in default)
in respect to any of such leases, and no claim of any sort has been
asserted by anyone adverse to the rights of the Company and Subsidiaries
as lessee under any such lease or questioning its right to continued use
and possession of any of the leased properties under any such lease.
(z) To the best of the Company's knowledge, the Company and
Subsidiaries own or possess adequate rights to use all patents, patent
applications, patent rights, licenses, inventions, technology,
proprietary rights, trademarks, trademark applications, service marks,
trade names, trademark registrations, service mark registrations,
copyrights, and other proprietary rights or information used in or
necessary for the conduct of its present or intended business to the
extent material to the Company's and Subsidiaries' business. Except as
stated in the Registration Statement and Prospectus, to the best of the
Company's knowledge, the Company and Subsidiaries are not in violation
of, nor has the Company received any notice of any claim of infringement
or violation of the rights of other with regard to any patents, patent
applications, patent rights, licenses, inventions, technology,
proprietary rights, trademarks, trademark applications, service marks,
trade names, trademark registrations, service mark registrations,
copyrights, and other proprietary rights or information.
(aa) All United States federal income tax returns required by law to be
filed by or on behalf of the Company and the Subsidiaries have been filed
and all taxes shown by such returns or otherwise assessed which are due
and payable as of or prior to the date hereof have been paid, except
taxes which are being contested in good faith and as to which adequate
reserves have been provided in order to comply with GAAP. All other tax
returns that are required to have been filed by or on behalf of the
Company and the Subsidiaries pursuant to applicable foreign, state, local
or other law have been filed, and the Company and the Subsidiaries have
paid all taxes due as of or prior to the date hereof pursuant to such
returns or pursuant to any assessment received by them, except for such
taxes, if any, as are being contested in good faith and as to which
adequate reserves have been provided. The charges, accruals and
reserves on the books of the Company and the Subsidiaries,
consolidated, in respect of any income and corporation tax liability (or
for any payments to be made in respect of any tax sharing agreements or
arrangements) for any years not finally determined are adequate to meet
any assessments or reassessments for additional income tax for any years
not finally determined.
(bb) The Company has not distributed and will not distribute any
prospectus or any other offering material in connection with the offering
and sale of the Debentures other than the Preliminary Prospectus or the
Prospectus or other materials permitted by the Act to be distributed by
the Company and consented to by the Underwriter.
(cc) Other than the subsidiaries of the Company listed in Exhibit 21 to
the Registration Statement, the Company owns no capital stock or other
equity or ownership or proprietary interest in any corporation,
partnership, limited liability company, association, trust or other
entity and is not affiliated (as that term is defined under the Act) with
any other company or
8
<PAGE>
business entity except as explicitly stated in the Prospectus. The
Company is not owned or controlled, directly or indirectly, by any
corporation, association or other entity.
(dd) The Company maintains a system of internal accounting controls
sufficient to provide that:
(i) transactions are executed in accordance with management's
general or specific authorization;
(ii) transactions are recorded as necessary to permit preparation
of financial statements in conformity with generally accepted
accounting principles and to maintain accountability for assets;
(iii) access to assets is permitted only in accordance with
management's general or specific authorization; and
(iv) the recorded accountability for assets is compared with
existing assets at reasonable intervals and appropriate action is
taken with respect to any differences.
(ee) The Company and Subsidiaries maintain insurance of the types and in
amounts which are adequate for their businesses.
(ff) No organized labor dispute with the employees of the Company or
any Subsidiary exists, or are imminent. To the best of Company's or
any Subsidiary's knowledge, no officer of the Company or any Subsidiary
presently intends to leave the Company or any Subsidiary.
(gg) The Company is not an "investment company" within the meaning of
such term as defined in the Investment Company Act of 1940, as amended,
and will conduct its business in such a manner as to not become an
investment company as so defined.
(hh) Neither the Company nor any employee or agent of the Company has
made any payment of funds of the Company or received or retained funds in
violation of any law, rule or regulation on behalf of the Company or
any Subsidiary.
(ii) The Company has not engaged any "finder" with respect to the
transactions contemplated by this Agreement and there is no outstanding
claim for services in the nature of a "finder's fee" with respect to such
financing; and the Company agrees to indemnify and hold
9
<PAGE>
the Underwriters harmless from and against any claims, losses, judgments
or expenses resulting from any finder's fees payable in connection
herewith.
(jj) There are no outstanding loans or advances or guarantees of
indebtedness by the Company to or for the benefit of any of the officers
or directors of the Company or any of the members of the families of any
of them except as are described in the Prospectus.
(kk) The Company, after giving effect to the execution, delivery and
performance of this Agreement, the Indenture, and the Debentures and the
consummation of the transactions contemplated hereby and thereby will not
be:
(i) insolvent;
(ii) left with unreasonably small capital with which to engage in
its business; or
(iii) incurring debts beyond its ability to pay such debts as they
mature.
(ll) Neither the filing of the Registration Statement nor the offering
or sale of the Debentures by the Company as contemplated by this
Agreement gives rise to any rights, of or relating to the co-sale or
registration of any securities of the Company, nor do any security
holders of the Company have any right to demand that the Company register
their securities, in either case other than those which have been waived
or satisfied.
(mm) The Company has not taken and will not take, directly or
indirectly, any action designed to cause or result in or which has
constituted or which constitute the stabilization or manipulation of the
price of any outstanding securities of the Company (including the
Debentures) to facilitate the sale or resale of the Debentures.
(nn) On each Closing Date all transfer or other taxes, if any (other
than income taxes), which are required to be paid in connection with the
sale or transfer of the Debentures will have been fully paid or provided
for by the Company and all laws imposing such taxes will have been fully
complied with.
(oo) Any certificate signed by any officer of the Company and delivered
to the Underwriter or to counsel for the Underwriter shall be deemed a
representation and warranty by the Company to the Underwriter as to
matters covered thereby.
(pp) Each acceptance by the Company of an offer for the purchase of
Debentures and each issuance of Debentures shall be deemed an affirmation
of the Company that the representations and warranties contained herein
are true and correct at the time of such acceptance or of such issuance,
in each case as though expressly made at that time.
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<PAGE>
3. PURCHASE AND SALE:
(a) On the basis of representations, warranties and agreements herein
contained and subject to the terms and conditions herein set forth, the
Company agrees to issue and sell to the Underwriter at least the Minimum
number (approximately $3,000,000) and up to the Maximum number
(approximately, $6,000,000) of the Original Debentures at the Price to
Public set forth on the cover page of the Prospectus, less an
underwriting discount and commission equal to 7%, plus accrued interest.
Interest will accrue from the date of original issuance (the Closing
Date of the Minimum) or with respect to any Debentures purchased after
March 15, 1998, from March 15, 1998. The Underwriter will solicit
indications of interest from the public for the Original Debentures and
will purchase from the Company the approximate amount of Original
Debentures for which the Underwriter has accepted indications of
interest. The Underwriter is not obligated to purchase any of the
Original Debentures, but if the Underwriter does purchase any of the
Original Debentures it must purchase at least the Minimum. Even if the
Underwriter purchases the Minimum, it is not obligated to purchase any
additional Debentures. In the event the Underwriter, for whatever
reason, fails to purchase the Minimum within 60 days of the date hereof,
this Agreement will automatically terminate. The Company can only sell
Debentures to the Underwriter during the term of this Agreement.
(b) On the basis of the representations and warranties herein
contained, but subject to the terms and conditions herein set forth, the
Company hereby grants an option to the Underwriter to purchase the
Option Debentures at the same purchase price as the Original Debentures
for use in covering overallotments made by the Underwriter in the sale
and distribution of the Original Debentures. The Option granted
hereunder may be exercised at any time after the Effective Date (as
defined in Section 6(a) hereof) and prior to the Termination Date upon
notice (confirmed in writing) by the Underwriter to the Company setting
forth the aggregate amount of Option Debentures as to which the
Underwriter is exercising the option and the date on which such Option
Debentures are to be delivered. The option granted hereby may be
cancelled by the Underwriter as to the Option Debentures for which the
option is unexercised at any time prior to the Termination Date upon
notice to the Company.
(c) The Underwriter will offer and solicit indications of interest for
the Debentures, as soon as the Underwriter deems practicable after the
Registration Statement becomes effective, subject to the terms and
conditions of this Agreement and in accordance with the Prospectus. The
Underwriter will offer and sell directly to the public the Debentures
the Underwriter has purchased from the Company, if any, as soon as the
Underwriter deems practicable, subject to the terms and conditions of
this Agreement and in accordance with the Prospectus, at the Price to
Public set forth on the cover page of the Prospectus, plus accrued
interest from the original issuance date of the Debentures (the Closing
Date of the Minimum) or, with respect to Debentures sold after March 15,
1998, from March 15, 1998. The Underwriter may appoint dealers
("Selected Dealers") which are members in good standing of the
National Association of Securities Dealers, Inc. (the "NASD") to offer
and sell the Debentures and, subject to compliance with applicable rules
and regulations of the NASD, may reallow concessions to such Selected
Dealers from the public offering price of the Debentures in such amount
as the Underwriter may deem appropriate. The Underwriter will furnish
the Company with such information about the distribution arrangements as
may be necessary for inclusion in the Registration Statement. It is
understood that the public offering price and concessions may vary
after the initial public offering. The Underwriter shall offer and sell
the Debentures only in jurisdictions in which the offering of Debentures
has been duly registered or qualified, or is exempt from registration or
qualification, and shall take reasonable measures to effect compliance
with applicable state and local securities laws.
(d) You shall be required to take and pay for only such Debentures as
you commit to purchase by written confirmation, subject in each case to
applicable closing conditions as herein set forth.
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<PAGE>
4. DELIVERY AND PAYMENT. On the basis of the representations,
warranties and agreements, but subject to the terms and conditions set forth
in this Agreement, payment of the purchase price for, and delivery of, the
Debentures sold as contemplated hereunder shall be made as follows:
(a) You shall promptly confirm to the Company the dollar amount of the
Debentures which you intend to purchase. The first closing shall be
held on the third full business day after the date of your confirmation
for purchase of the Minimum. Thereafter, monthly closings will be held
on such date on or after the second to last business day of each month
as agreed upon by the Underwriter and the Company, commencing the month
in which the first closing occurs and through month after month of the
Termination Date. Provided the Minimum has been sold, closings may be
held more often upon receipt by the Company of a confirmation from the
Underwriter of its intent to purchase the Debentures. The date of each
closing is referred to herein as a "Closing Date" and the last closing
hereunder is referred to herein as the "Final Closing Date". Unless
otherwise agreed by the Underwriter and the Company, each closing will
take place at the offices of Fredrikson & Byron, P.A., at 10:00 a.m.,
on the date of such closing.
(b) The certificates for the Debentures to be delivered at each
Closing Date will be in definitive form, in such denominations and
registered in such names as the Underwriter may request and will be made
available for inspection and packaging at the Underwriter's offices or
at such other place as designated by you at 10:00 a.m., Minneapolis
time, on the second full business day prior to each Closing Date.
(c) Upon closing of the sale by the Company of any Debentures, you
shall receive in addition to the 7% underwriting discount and commission
provided in Section 3(a): (i) a management fee equal to two percent
(2%) of the aggregate dollar amount sold; (ii) a non-accountable expense
allowance equal to one percent (1%) of the aggregate dollar amount sold;
and (iii) reimbursement for your accountable expenses referred to in
paragraph 5(q) (not to exceed two percent (2%) of the aggregate dollar
amount of Debentures sold).
(d) On each Closing Date, you shall remit to the Company against
delivery to you or your designated agent, the purchase price for the
Debentures you have purchased from the Company. Such purchase price may
be remitted to the Company net of the commissions referred to in
paragraph 3(a) and management fees and the accountable expenses and
non-accountable expense allowance referred to in paragraph 4(c).
Appropriate instructions for the registration of the Debentures and
authentication and delivery thereof pursuant to the Indenture, which
instructions shall include the names, addresses and social security or
tax identification numbers of the registered holders and the principal
amounts of the Debentures. The Company shall have instructed the Trustee
to accept instructions for the registration of the Debentures directly
from you, and copies of such instructions shall be given to the Company
at the same time they are furnished to the Trustee.
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<PAGE>
5. COVENANTS OF THE COMPANY. The Company covenants and agrees with
the Underwriter that:
(a) The Company will use its best efforts to cause the Registration
Statement to become effective (if it has not already been declared
effective) as promptly as possible and will not at any time, whether
before or after the Effective Date, file any amendment to the
Registration Statement or supplement to the Prospectus of which you shall
not previously have been advised and furnished with a copy a reasonable
time prior to the proposed filing or to which you or your counsel shall
object or which is not in compliance with the Act. If at any time prior
to the Termination Date, any event shall occur which in the professional
judgment of counsel to the Company or of counsel to the Underwriter would
cause the Registration
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<PAGE>
Statement or the Prospectus to include an untrue statement of a material
fact or omit to state a material fact required to make the statements
made, in light of the circumstances under which they were made, not
misleading or otherwise requires an amendment to the Registration
Statement or supplement to the Prospectus, the Company will prepare and
file with the Commission any amendments to the Registration Statement or
supplements to the Prospectus which may be necessary and will cause the
same to become effective as soon as practicable, subject to the
provisions of the prior sentence. The Company will make all filings of
the Prospectus required under the Act.
(b) As soon as the Company is advised or obtains knowledge thereof, the
Company will advise you of any requests made by the Commission (or any
state securities or Blue Sky authority) for amending the Registration
Statement, (or any state securities or Blue Sky authority) of any stop
order suspending the effectiveness of the Registration Statement or of
any order preventing or suspending the use of any Preliminary Prospectus
or the Prospectus or of the institution of any proceedings for that
purpose and will use its best efforts to prevent the issuance of any such
order and, if any such order is issued, will use its best efforts to
obtain the lifting thereof as promptly as possible. The Company will
also promptly comply with any requests for additional information.
(c) The Company will furnish to you copies of the Registration
Statement, including exhibits, all amendments thereto (including pre-
effective and post-effective), each Preliminary Prospectus, the
Prospectus and any supplements thereto, in each case as soon as available
and in such reasonable quantities as you may, from time to time, request.
(d) The Company consents to the use, in accordance with the provisions
of the Securities Act and of the securities or Blue Sky laws of the
jurisdictions in which the Debentures are offered by the Underwriter or
by Selected Dealers, prior to the Effective Date, of each Preliminary
Prospectus furnished by the Company
(e) The Company will continue to use its best efforts to register or
qualify the Debentures for sale by the Underwriter and any Selected
Dealers under the securities or Blue Sky laws of such jurisdictions as
you may request and will file such consents to service of process or
other documents as may be necessary in order to effect such registration
or qualification; provided, however, that in no event shall the Company
be obligated to qualify to do business in any jurisdiction where it is
not now so qualified or to take any action which would subject it to the
service of process in suits, other than those arising out of the offering
or sale of the Debentures or subject itself to taxation, in any
jurisdiction where it is not now so subject. In each jurisdiction where
any of the Debentures shall have been registered or qualified as provided
above, the Company will continue such registrations or qualifications in
effect for so long as may be required for purposes of the distribution of
the Debentures and shall file such statements and reports as are or may
be required by the laws of such jurisdiction to continue such
qualification in effect for so long as there are Debentures outstanding.
The Company will notify the Underwriter immediately of, and confirm in
writing, the suspension of qualification of the Debentures or threat of
such action in any jurisdiction. The Company will use its best efforts
to qualify or register the Debentures for sale in nonissuer transactions
under (or obtain exemptions from the application of) securities laws of
such states designated by the Underwriter (and thereby permit market and
making transactions and secondary trading of the Debentures in such
states); and will comply with such securities laws and will continue such
qualifications, registrations and exemptions in effect for so long as the
Debentures remain outstanding.
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<PAGE>
(f) If at any time during the period that the delivery of a Prospectus
relating to the Debentures is required under the Act, any event occurs as
a result of which the Prospectus, as then amended or supplemented, would
include any untrue statement of a material fact or omit to state a
material fact necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading, or if it is
necessary at any time to amend or supplement the Prospectus to comply
with the Act, the Company promptly will notify you thereof and will
prepare and file with the Commission at its own expense an amendment or
supplement which will correct such statement or omission or effect such
compliance, subject to the requirements of advice and objection contained
in the first sentence of paragraph a.
(g) As soon as practicable (but in no event later than 90 days after
the Effective Date) the Company will make generally available to its
security holders, including Debenture holders, and furnish to
you, an earnings statement of the Company covering the period of 12
months beginning not later than the first day of the next fiscal quarter
following the Effective Date of the Registration Statement which will
satisfy the requirements of Section 11(a) or Rule 158 of the Act and
which need not be certified by independent public accountants.
(h) During a period of five years from the Effective Date, the Company
will, as soon as practicable, deliver to the Underwriter, without need
of request:
(i) Copies of each report (financial or other) or proxy
solicitation material mailed to security holders of the Company;
(ii) After the end of each of the first three fiscal quarters, a
copy of the statement of income of the Company for such quarter and
a copy of the balance sheet of the Company as of the end of such
quarter all in reasonable detail and certified by its principal
financial or accounting officer or, in the alternative, a report on
Form 10-Q or 10-QSB, as filed with the Commission;
(iii) After the end of each fiscal year, a balance sheet of the
Company as of the end of such fiscal year, together with statements
of income, changes in cash flows and stockholders' equity for such
fiscal year, in reasonable detail and accompanied by a copy of the
certificate or report thereon of the independent certified public
accountants or, in the alternative, a report on Form 10-K or
Form 10-KSB for such fiscal year; and
(iv) Copies of any reports and financial statements furnished to
or filed with the Commission or any national securities exchange or
Nasdaq.
(i) The Company will file with the Commission in a timely manner all
reports on Form SR required by Rule 463 and will furnish to you copies of
any such reports as soon as practicable after the filing period.
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<PAGE>
(j) During the period that the Company is required to furnish reports
pursuant to paragraph h above, the Company will notify you promptly of
the commencement of any litigation or proceedings against the Company or
any of its officers.
(k) The Company will apply the net proceeds from the sale of the
Debentures in the manner set forth under the caption "Use of Proceeds" in
the Prospectus.
(l) The Company shall cooperate with the Underwriter and its counsel in
connection with their investigation of the Company and related matters
and shall furnish to the Underwriter or its counsel all such information
and documents as may be requested.
(m) The Company agrees that from the date of its execution of this
Agreement to the Final Closing Date, it will issue press releases, make
public statements and respond to inquiries of the press and securities
analysts only (i) in accordance with its obligations under the Securities
Exchange Act of 1934, as amended, after conferring with its counsel or
(ii) after conferring with its counsel and with the consent of the
Underwriter.
(n) The Company will not claim the benefit of any usury laws against
any holders of the Debentures.
(o) The Company will provide the Underwriter with copies of
certificates and supporting documentation furnished to the Trustee
pursuant to the Indenture or otherwise.
(p) Continue to appoint its current auditors or any replacement firm of
auditors acceptable to you to audit its financial statements, provided
that you shall not unreasonably withhold your consent to a replacement.
(q) The Company will pay, in addition to the Underwriter commission
and discount referred to in paragraph 3(a) and management fee,
accountable expenses and non-accountable expense allowance (as described
in paragraph 4(c) hereof), upon the closing of the sale of any of the
Debentures, unless otherwise limited by this Agreement, all other
expenses related to the subject matter of this Agreement including: (i)
all expenses incident to the issuance and delivery of the Debentures;
(ii) the first $20,000 of the expenses charged by Merrill Corporation,
as financial printer, for services rendered in connection with the
offering described in the Prospectus and one-half of the expenses
charged for printing Preliminary Prospectuses; (iii) all expenses
incident to the preparation, filing, delivery and qualification of the
Indenture and any amendments, supplements or submissions related thereto;
(iv) all Commission, National Association of Securities Dealers, Inc.
("NASD") and state securities or Blue Sky filing fees and all fees and
expenses of legal counsel for the Underwriter incurred in registering
the Debentures for sale under the securities or blue sky laws of such
states as the Underwriter may designate; and (v) the cost of all
certificates representing the Debentures; (vi) the fees and expenses of
the Trustee and paying agent under the Indenture; (vii) the cost of
preparing two leather bound volumes of all documents (Closing Books)
related to the offering to be delivered to the Underwriter; (viii) the
fees and expenses of the Company's independent accounts, including the
cost of "cold comfort" review; and (ix) the fees and expenses of legal
counsel for the Company.
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Whether or not the transactions contemplated hereunder are consummated,
the Company shall reimburse the Underwriter for all its costs, fees and
expenses incurred in connection with the performance of the Underwriter's
obligations hereunder, including, without limiting the generality of the
foregoing, (i) all fees and expenses of legal counsel for the Underwriter
incurred in preparing the Registration Statement, Indenture and this
Agreement and in connection with review of the Underwriter's compensation
by the NASD; (ii) all costs and expenses incurred by the Underwriter in
connection with the preparation, filing and distribution of the
Registration Statement, each preliminary prospectus and the Prospectus
(including all exhibits and financial statements) and all amendments and
supplements thereto; (iii) all advertising, marketing and sales expenses
incurred in connection with the sale of the Debentures; and (iv) any and
all expenses of the Underwriter in connection with this Agreement and the
sale of the Debentures, provided that the Company shall not be
obligated to reimburse the Underwriter for accountable expenses in excess
of $120,000 ($140,000 in the event all the Debentures are sold).
Notwithstanding the obligations of the Company to reimburse the
Underwriter for its expenses pursuant to the first paragraph of this
subsection 5(q), in the event that the Underwriter fails to perform
its obligations under this Agreement, through no fault of the Company or
any third party not affiliated with the Underwriter, the Company shall
only be obligated to reimburse the Underwriter for its expenses up to
$75,000. The Underwriter acknowledges that it has received $25,000 from
the Company as an advance against the Company's expense reimbursement
obligations.
(r) The Company and Subsidiaries will maintain through the Final
Closing Date insurance of the types and in amounts which are adequate
for their businesses.
6. CONDITIONS OF THE UNDERWRITER'S OBLIGATIONS. The obligations of
the Underwriter and the closing and sale of the Debentures as contemplated
herein shall be subject to the accuracy of the representations and warranties of
the Company herein as of the date hereof, the Effective Date, and each Closing
Date, to the accuracy of the statements of the Company's officers made pursuant
to the provisions hereof, or otherwise, to the performance by the Company of its
covenants and agreements hereunder, and to the following additional conditions.
(a) The Registration Statement shall have become effective not later
than 4:30 p.m. Minneapolis, Minnesota time on the date of this Agreement
or such later time and date as shall have been consented to by you
(referred to herein as the "Effective Date") and all filings required by
Rule 424 and/or Rule 430A under the Act shall have been timely made; no
stop orders suspending the effectiveness of the Registration Statement
shall have been issued and no proceedings for that purpose shall have
been instituted or threatened or shall be contemplated by the Commission
or by any blue sky or state securities authority; and all requests of the
Commission or blue sky or state securities authorities for additional
information (to be included in the Registration Statement or Prospectus
or a supplement thereto or otherwise) shall have been complied with to
your satisfaction.
(b) You shall not have advised the Company that the Registration
Statement or the Prospectus or any amendment or any supplement thereto
contains an untrue statement of material fact or omits to state a
material fact which is required to be stated therein or is necessary to
make the statements therein not misleading.
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(c) You and your counsel shall have been furnished with such documents
and information as you or they may have requested.
(d) You shall have received the opinion of Shefsky & Froelich, Ltd.,
legal counsel for the Company, dated as of each Closing Date, in the form
attached hereto as Exhibit A.
(e) At the time of execution of this Agreement and also at each Closing
Date, you shall have received from Ernst & Young, LLP, a letter or
letters, dated the date of delivery thereof, stating that they are
independent public accountants with respect to the Company within the
meaning of the Act and that:
(i) In their opinion, the financial statements included in the
Registration Statement and Prospectus and reported on therein by
them comply as to form in all material respects with the applicable
accounting requirements of the Act;
(ii) On the basis of a limited review (but not an examination in
accordance with generally accepted auditing standards) consisting
of a reading of the unaudited financial statements included in the
Registration Statement and Prospectus (if any) and the latest
available interim financial statements of the Company subsequent
thereto; a reading of the minutes of the board of directors and
shareholders of the Company subsequent thereto; and inquiries of
officials of the Company responsible for financial and accounting
matters and such other inquiries and procedures as may be specified
in such letter and agreed upon by you, nothing has come to their
attention that causes them to believe that:
a) The unaudited financial statements included in the
Registration Statement and Prospectus, if any, do not
comply as to form in all material respects with the
applicable accounting requirements of the Act or that such
financial statements are not fairly presented in conformity
with generally accepted accounting principles applied on a
basis consistent with that of the audited financial
statements included in the Registration Statement and
Prospectus;
b) As of a specified date not more than five days prior
to the date of this Agreement or each Closing Date, as
applicable, there have been any changes in the capital
stock, increases in long term or short term debt, decreases
in total accounts receivable, or total inventories of the
Company or any increase in liabilities or decreases in net
current assets or stockholders' equity of the Company, in
each case, as compared with amounts shown in the most recent
balance sheet included in the Prospectus except, in each
case, for changes, decreases or increases, as appropriate,
which the Prospectus discloses have occurred or may occur or
which are described in such letter; and
c) For the period from the date of the most recent
balance sheet included therein to such specified date, there
was any decrease, as compared with the corresponding period
of the previous year, in net revenues or any decrease in
income from operations or net income or in primary or fully-
diluted per share
18
<PAGE>
amounts of net income except, in each case, for such
decreases which the Prospectus discloses have occurred or
may occur or which are described in such letter.
(iii) In addition to the examination referred to in their report
included in the Prospectus and the limited procedures, inspection
of minute books, inquiries and other procedures referred to in
clause (ii) above, they have carried out certain specified
procedures requested by you, not constituting an audit in
accordance with generally accepted auditing standards with respect
to certain amounts, percentages and other financial information
which are derived from the accounting records and other financial
and statistical data of the Company which appear in the Prospectus
and which are specified by you and have compared certain of such
amounts, percentages and financial information with the accounting
records and other appropriate data of the Company and have found
them to be in agreement.
In the event that the letters to be delivered pursuant to
this subparagraph (e) shall set forth any changes, increases or
decreases, it shall be a further condition to the Underwriter's
obligation that you, in your sole discretion, shall have
determined, after discussion with officers of the Company
responsible for financial and accounting matters and with Ernst &
Young, LLP, that such changes, increases or decreases as set forth
in such letters do not reflect a material adverse change in the
capital stock, short-term or long-term debt, net assets, net
current assets, total accounts receivable, total inventories or
stockholders' equity of the Company as compared with the amount
shown in the most recent balance sheet of the Company included in
the Prospectus or material adverse change in revenues or the total
or per share amounts of net income (loss).
(f) On each Closing Date, you shall have received a certificate, dated
such date, of the President and the Chief Financial Officer of the
Company to the effect that:
(i) The representations and warranties of the Company in this
Agreement are true and correct as if made on and as of such date
and the Company has performed all obligations and satisfied all
conditions on its part to be performed or satisfied at or prior to
such date;
(ii) The Commission has not issued any order suspending the
effectiveness of the Registration Statement and no proceedings for
that purpose have been instituted or are pending or threatened
under the Act;
(iii) The Registration Statement and the Prospectus and, if any,
each amendment and each supplement thereto contain all statements
and information required to be included therein and neither the
Registration Statement nor the Prospectus nor any amendment nor any
supplement thereto includes any untrue statement of a material fact
or misstates any material fact required to be stated therein or
necessary to make the statements therein not misleading and since
the Effective Date, there has occurred no event required to be set
forth in an amendment to the Registration Statement or supplement
to the Prospectus which has not been so set forth.
19
<PAGE>
(iv) Subsequent to the respective dates as of which information
is given in the Registration Statement and Prospectus and prior to
the date of such certificate, and except as set forth or
contemplated in the Registration Statement or the Prospectus:
(A) the Company has not incurred, except in the ordinary course of
business, any lease obligations or any direct or contingent
liabilities or commitments, (B) the Company has not entered into
any transaction other than in the ordinary course of business,
(C) the Company has not paid or declared any dividends or other
distributions on its capital stock, (D) there has not been any
change in the capital stock or any material adverse change,
increase or decrease in the short-term or long-term debt, total
accounts receivable, total inventories, net assets, net current
assets or stockholders' equity of the Company or any material
adverse change in or affecting the condition (financial or
otherwise), business, key personnel, properties, assets, results of
operations (present or prospective), or net worth of the Company
and (E) no legal or governmental proceeding affecting the Company
or the transactions contemplated hereby has been instituted or,
to the Company's knowledge, threatened;
(v) Subsequent to the respective dates as of which information
is given in the Registration Statement and the Prospectus, the
conduct of the business and operations of the Company has not,
except as otherwise stated therein, been materially interfered with
by strike, fire, flood, hurricane, accident, or other calamity
(whether or not insured) or by any court, arbitrator or
governmental action, order or decree and, except as otherwise
expressly stated therein, the properties of the Company have not
sustained any material loss or damage (whether or not insured) as a
result of any such occurrence; and
(vi) Attachment A to the certificate is a complete and
accurate description of all transactions between the Company and
its Subsidiaries and their affiliates, and Attachment B to the
certificate is a complete and accurate description of all
outstanding indebtedness of the Company and its Subsidiaries as of
the date of this Agreement.
(vii) No Event of Default, as defined in the Indenture, has
occurred nor with the giving of notice or passage of time or both
will occur.
(g) The Company shall have filed a Form 8(a) with the Commission and
shall be registered under the Securities Exchange Act of 1934, as
amended.
(h) The Debentures shall have been qualified for sale under the Blue
Sky laws of such states and in such amounts as shall have been specified
by the Underwriter.
(i) Subsequent to the execution and delivery of this Agreement, there
shall not have occurred:
(i) Any change or development involving a prospective change in
or affecting particularly the business or properties of the Company
which in the judgment of the Managing Underwriters materially
impairs the investment quality of the Debentures;
20
<PAGE>
(ii) Any banking moratorium;
(iii) Any outbreak or escalation of major hostilities in which
the United States is involved, any declaration of war by Congress
or any other substantial national or international calamity or
emergency if, in the judgment of the Underwriter, the effect of any
such outbreak, escalation, declaration, calamity or emergency makes
it impractical or inadvisable to proceed with completion of the
sale of and payment for the Debentures;
(iv) Any material adverse change in existing financial, political
or economic conditions in the United States or elsewhere which
change, in your opinion, has materially and adversely affected the
market for the Debentures or other securities of the Company or the
prospects for the Company, its business or its properties; or
(v) Any substantial loss to the Company by strike, fire, flood,
accident or other calamity of such a character as to interfere
materially with the conduct of the business and operations of the
Company regardless of whether such loss shall have been insured.
All such opinions, certificates, letters and documents shall
be in compliance with the provisions hereof only if they are
satisfactory in form and substance to you and to your counsel. If
any of the conditions specified in this section shall not have been
fulfilled when and as required by this Agreement, this Agreement
and all obligations of the Underwriter hereunder may be canceled
at, or at any time prior to, the applicable Closing Date by you.
Any such cancellation shall be without liability of the
Underwriter to the Company and shall be in writing or by telegraph
or telephone and confirmed in writing. The Managing Underwriters
may waive in writing the nonperformance by the Company of any one
or more of the foregoing conditions or extend the time for
performance of such conditions. Each such waiver shall be
applicable only to the item to which it relates and the closing to
which it relates and no waiver or series of waivers shall be deemed
to have waived any condition at any time other than the condition
at the time explicitly waived.
(j) You shall have received a lender's certificate, in form
satisfactory to Underwriter's counsel, from each lender of a Line.
7. INDEMNIFICATION.
The Company will indemnify and hold harmless the Underwriter, each
officer and director of the Underwriter and each person, if any, who controls
such Underwriter within the meaning of the Act, against any loss, claim, damage
or liability, joint or several, to which the Underwriter, such officer or
director of the Underwriter, or such controlling person may become subject under
the Act or otherwise, insofar as such loss, claim, damage or liability (or
action in respect thereof) arises out of or is based upon any untrue statement
or alleged untrue statement of any material fact contained in the Registration
Statement, any Preliminary Prospectus, the Prospectus, or any amendment or
supplement
21
<PAGE>
thereto, or arises out of or is based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, and will reimburse each Underwriter, each
officer and director of each Underwriter, and each such controlling person for
any legal or other expenses incurred by such Underwriter, such officer or
director of such Underwriter, or such controlling person in connection with
investigating or defending any such loss, claim, damage, liability or action.
The Company shall reimburse the Underwriters for any legal or other reasonable
expenses incurred by the Underwriters in connection with investigating or
defending against or appearing as a third party witness in connection with any
such loss, claim, damage, liability or action notwithstanding the possibility
that the payments for such expenses might later be held to be improper in which
case the person receiving them shall promptly refund them. Notwithstanding the
foregoing covenant of indemnity, the Company shall not be liable in any such
case to the extent that any such loss, claim, damage or liability arises out of
or is based upon any untrue statement or alleged untrue statement or omission or
alleged omission made in the Registration Statement, the Preliminary Prospectus,
the Prospectus or such amendment or such supplement in reliance upon and in
conformity with written information furnished to the Company by you specifically
for use therein, or in any application or other statement executed by you filed
in any jurisdiction in order to qualify the Debentures under, or exempt the
Debentures or the sale thereof from qualification under, the securities or blue
sky laws of such jurisdiction (collectively, the Underwriter Information).
This indemnity agreement will be in addition to any liability which the Company
may otherwise have.
(a) The Underwriters will indemnify and hold harmless the Company, each
of its directors, each of its officers who signed the Registration
Statement, and each person, if any, who controls the Company within the
meaning of the Act, against any loss, claim, damage or liability to which
the Company or any such director, officer, or controlling person may
become subject, under the Act or otherwise, insofar as such loss, claim,
damage or liability (or action in respect thereof) arises out of or is
based upon any untrue statement or alleged untrue statement of any
material fact contained in the Registration Statement, any Preliminary
Prospectus, the Prospectus, or any amendment or supplement thereto, or
arises out of or is based upon the omission or the alleged omission to
state therein a material fact required to be stated therein or necessary
to make the statements therein not misleading, in each case to the
extent, but only to the extent, that such untrue statement or alleged
untrue statement or omission or alleged omission was made in reliance
upon and in conformity with the Underwriter Information, and will
reimburse any legal or other expenses reasonably incurred by the
Company or any such director, officer, or controlling person in
connection with investigating or defending any such loss, claim, damage,
liability or action. This indemnity agreement will be in addition to any
liability which the Underwriters may otherwise have.
(b) Promptly after receipt by any party under this Section 7 of notice
of the commencement of any action, such party will, if a claim for
indemnity in respect thereof is to be made against another party (the
"Indemnifying Party") under this Section 7, notify the Indemnifying Party
in writing of the commencement thereof and shall make available all
pleadings and all other documents served related thereto, upon request.
The omission so to notify the Indemnifying Party will not relieve it
from any liability under this Section 7 as to the particular item for
which indemnification is then being sought, unless such omission so to
notify prejudices the indemnifying party's ability to defend such action.
In case any such action is brought against any party, and such party
notifies the Indemnifying Party of the commencement thereof,
the Indemnifying Party will be entitled to participate therein with the
notifying party and any other Indemnifying
22
<PAGE>
Party similarly notified, and, to the extent that it may wish, jointly
with any other Indemnifying Party similarly notified, to assume the
defense thereof, with counsel satisfactory to the notifying party;
provided, however, if the defendants in any such action include both the
indemnified party and the Indemnifying Party and the indemnified party
shall have reasonably concluded that there may be legal defense(s)
available to it and/or other indemnified parties which are different from
or additional to those available to the Indemnifying Party, the
indemnified party or parties shall have the right to select separate
counsel to assume the indemnified party's (or parties') defense and to
otherwise participate in the defense of such action on behalf of such
indemnified party or parties. Upon receipt of notice from the
Indemnifying Party to such indemnified party of its election so to assume
the defense of such action and approval by the indemnified party of
counsel, the Indemnifying Party will not be liable to such indemnified
party under this Section 7 for any legal or other expenses subsequently
incurred by such indemnified party in connection with the defense thereof
unless: (i) the indemnified party shall have employed such counsel in
accordance with the provisions of the next preceding sentence (it being
understood, however, that the Indemnifying Party shall not be liable for
the expenses of more than one separate counsel representing all the
indemnified parties under this Section 7 who are parties to such action);
(ii) the Indemnifying Party shall not have employed counsel satisfactory
to the indemnified party to represent the indemnified party within a
reasonable time after notice of commencement of the action; or (iii) the
Indemnifying Party has authorized the employment of counsel for the
indemnified party at the expense of the Indemnifying Party.
(c) An Indemnifying Party shall not be liable for settlement of any
such action effected without its written consent but if settled with the
written consent of the Indemnifying Party, or if there be a final
judgment for the plaintiff in any such action, the Indemnifying Party
agrees to indemnify and hold harmless each indemnified party from and
against any loss or liability by reason of such settlement or judgment.
(d) The indemnity agreements contained in this Section 7 and the
representations, warranties, agreements, covenants, indemnities and the
statements of the Company and its officers set forth in or made pursuant
to this Agreement shall remain operative and in full force and effect,
regardless of: (i) any investigation made by or on behalf of the
Underwriters or any director or officer or person controlling the
Underwriters or by or on behalf of the Company or any director or officer
or person who controls the Company; (ii) acceptance of any Debentures and
payment therefor hereunder; and (iii) any termination of this Agreement.
A successor of an Underwriter or of the Company or any person controlling
an Underwriter or the Company, or any officer or director of the Company,
as the case may be, shall be entitled to the benefits of the indemnity
and reimbursement agreements contained in this Section 7.
8. CONTRIBUTION.
(a) If the indemnification provided for in Section 7 is unavailable to
or insufficient to hold harmless an indemnified party under subsections
(a) or (b) thereof, then each indemnifying party shall contribute to the
amount paid or payable by such indemnified party as a result of the
losses, claims, damages, or liabilities referred to in subsections (a) or
(b) of Section 7 above, (i) in such proportion as is appropriate to
reflect the relative benefits received by the Company on the one hand and
the Underwriter on the other hand from the offering of the Debentures, or
(ii) if the allocation provided by clause (i) above is not permitted by
applicable law, then in such
23
<PAGE>
proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of the
Company on the one hand and the Underwriter on the other hand in
connection with the statements or omissions that resulted in such losses,
claims, damages or liabilities, as well as any other relevant equitable
considerations. The relative fault shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a
material fact or the omission or alleged omission to state a material
fact relates to information supplied by the Company or the Underwriter
and the parties' relative intent, knowledge, access to information, and
opportunity to correct or prevent such untrue statement or omission. The
Company and the Underwriters agree that it would not be just and
equitable if contributions pursuant to this subsection (a) were to be
determined by pro rata allocation or by any other method of allocation
which does not take account of the equitable considerations referred to
in the first sentence of this subsection (a). The amount paid by an
indemnified party as a result of the losses, claims, damages or
liabilities referred to in the first sentence of this subsection (a)
shall be deemed to include any legal or other expenses reasonably
incurred by such indemnified party in connection with investigating or
defending against any action or claim which is the subject of this
subsection (a). No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Act) shall be entitled to
contribution from any person who is not guilty of such fraudulent
misrepresentation.
(b) The obligations of the Company under this Section 8 shall be in
addition to any liability which the Company may otherwise have and shall
extend, upon the same terms and conditions, to each officer or director
of an Underwriter and each person, if any, who controls an Underwriter
within the meaning of the Act; and each Underwriter's obligations under
this Section 8 shall be in addition to any liability that the Underwriter
may otherwise have and shall extend upon the same terms and conditions to
each director of the Company, to each officer of the Company who has
signed the Registration Statement and to each person, if any, who
controls the Company within the meaning of the Act.
(c) The obligations of the Company pursuant to this Section 8 shall
survive any termination of this Agreement.
9. REPRESENTATIONS AND AGREEMENTS TO SURVIVE. The respective
indemnities, agreements, representations, warranties, covenants or other
statements of the Company as set forth in or made pursuant to this Agreement and
the indemnity and contribution agreements of the Compay and the Underwriter
contined in Sections 7 and 8, respectively, shall survive and remain in full
force and effect regardless of any (i) investigation made by or on behalf of any
party or any of its directors, officers, or controlling persons; (ii) delivery
of and payment for the Debentures; (iii) the Final Closing Date; and (iv) any
successor of the Company and the Underwriter or any controlling person, officer
or director thereof, as the case may be, shall be entitled to the benefits
thereof.
24
<PAGE>
10. EFFECTIVE DATE AND TERMINATION.
(a) This Agreement shall become effective at 10:00 a.m. Minneapolis
time, on the day which you shall commence selling the Original Debentures
to the public, or at such earlier time as the Underwriter shall release
the Debentures for sale to the public. You shall notify the Company
immediately after you have taken any action which causes this Agreement
to become effective. Until this Agreement is effective, it may be
withdrawn by the Company or by you by giving notice as hereinafter
provided, except that the provisions of 5(q) and Sections 6 and 7 shall
at all times be effective. For purposes of this Agreement, the
commencement of the sale of the Debentures shall mean the time of the
release by the Underwriter for publication of the first newspaper
advertisement which is subsequently published related to the Debentures,
or the time of the first mailing of copies of the Prospectus related to
the Debentures which are subsequently delivered, whichever shall first
occur. This Agreement shall, nevertheless become effective at such time
earlier than the time specified above, after the Effective Date; as the
Underwriter may determine by notice to the Company.
(b) Unless the Minimum has been purchased by the Underwriter, this
Agreement shall automatically terminate 60 days from the date hereof.
Otherwise, this Agreement shall automatically terminate at the expiration
of six months from the date hereof unless earlier terminated by the
Underwriter by notice to the Company in the event that the Company shall
have failed or been unable to comply with any of the terms, conditions,
or provisions of this Agreement on the part of the Company to be
performed, complied with or fulfilled (including but not limited to
those specified in Sections 2, 4, 5 and 6 hereof) within the respective
times provided for on each Closing Date, unless compliance therewith or
performance or satisfaction thereof shall have been expressly waived by
the Underwriter in writing (the "Termination Date"), except that Sections
5, 7, 8 and 9 shall at all times be effective and bind all the Parties.
In addition, this Agreement may be terminated on or at any time prior to
the first Closing Date by agreement of the parties or by the Underwriter,
by written or telegraphic notice to the Company, if there shall have
occurred:
(i) Any change or development involving a prospective change in
or affecting particularly the business or properties of the Company
which in the judgment of the Underwriter materially impairs the
investment quality of the Debentures;
(ii) Any banking moratorium;
(iii) Any outbreak or escalation of major hostilities in which
the United States is involved, any declaration of war by Congress
or any other substantial national or international calamity or
emergency if, in the judgment of the Underwriter, the effect of any
such outbreak, escalation, declaration, calamity or emergency makes
it impractical or inadvisable to proceed with completion of the
sale of and payment for the Debentures;
25
<PAGE>
(iv) Any material adverse change in existing financial, political
or economic conditions in the United States or elsewhere which
change, in your opinion, has materially and adversely affected the
market for the Debentures or other securities of the Company or the
prospects for the Company, its business or its properties; or
(v) Any substantial loss to the Company by strike, fire, flood,
accident or other calamity of such a character as to interfere
materially with the conduct of the business and operations of the
Company regardless of whether such loss shall have been insured.
(c) Termination of this Agreement pursuant to this Section 10 shall be
without liability of any party to any other party other than as provided
in Sections 5(a), 7 and 8 hereof.
11. NOTICES. All communications hereunder will be in writing and, if
sent to the Underwriter, will be mailed, delivered or telegraphed and confirmed
to the Underwriter at Miller & Schroeder Financial, Inc., 220 South Sixth
Street, Suite 300, Minneapolis, Minnesota 55402, Attention: Theodore G. Glasrud,
Corporate Capital Group, with a copy to Fredrikson & Byron, P.A., 1100
International Centre, 900 Second Avenue South, Minneapolis, MN 55402, Attention
Daniel Yarano; or, if sent to the Company, will be mailed, delivered or
telegraphed and confirmed to it at United Homes, Inc., 2100 Golf Road, Suite
110, Rolling Meadows, IL 60008-4220, Attention David L. Feltman, with a copy
to Shefsky & Froelich Ltd., 444 North Michigan Avenue, Chicago, IL 60611,
attention Michael Choate or to such other address of which a party hereto
shall notify the other party hereto pursuant to this paragraph.
12. SUCCESSORS. This Agreement shall inure to the benefit of and be
binding upon the Underwriter, the Company, and their successors and legal
representatives, and nothing in this Agreement is intended or shall be construed
to give any other person any legal or equitable right, remedy or claim under or
in respect of this Agreement or any provision herein contained, this Agreement
and all conditions and provisions hereof being intended to be and being for the
sole and exclusive benefit of such persons and for the benefit of no other
person, except that the representations and warranties of the Company contained
in this Agreement shall also be for the benefit of any person or persons who
control the Underwriters within the meaning of Section 15 of the Act. No
purchaser of Units will be deemed a successor because of such purchase.
13. INFORMATION FURNISHED BY THE UNDERWRITER. The statements set forth
in the last paragraph on the cover page, the stabilization ledgered on the
inside front cover and the statements under the caption "Underwriting" in any
Preliminary Prospectus and in the Prospectus constitute the only written
information furnished by, or on behalf of, the Underwriter specifically for use
with reference to the Underwriter referred to in Section 2(c) and Sections 7
and 8 hereof.
14. GOVERNING LAW. This Agreement shall be governed by, and construed
in accordance with the substantive laws of the State of Minnesota without regard
to its choice of laws provisions.
15. COUNTERPARTS. This Agreement may be signed in any number of
counterparts and all such counterparts taken together shall constitute the
single Agreement of the parties.
16. AMENDMENT. This Agreement may be amended upon written agreement
between the Managing Underwriter and the Company.
26
<PAGE>
17. MISCELLANEOUS. Your rights and obligations hereunder shall not be
assignable without the written consent of the Company.
18. TIME. The Company and the Underwriter agree that time shall be of
the essence with respect to this Agreement and the performance and completion of
the terms, conditions and provisions set forth and contemplated herein.
19. HEADINGS. The headings and captions used in this Agreement are for
convenience only and shall not affect the meaning of the provison thereof.
Very truly yours,
UNITED HOMES, INC.
By:
-------------------------
Its:
-------------------------
The foregoing is agreed to and accepted
this _____ day of ___________, 1997.
- ------------------------------------------
Miller & Schroeder Financial, Inc.
<PAGE>
MINIMUM: $3,000,000
MAXIMUM: $6,000,000
UNITED HOMES, INC.
11% MANDATORY REDEMEPTION DEBENTURES
DUE MARCH 15, 2005
SELECTED DEALER AGREEMENT
, 1997
Ladies and Gentlemen:
Registration under the Securities Act of 1933, as amended, (the "1933 Act")
of this issue, described in the enclosed Prospectus, has become effective. The
Underwriter is offering certain of the Debentures for purchase as principal by a
selected list of dealers (herein collectively referred to as "Selected
Dealers").
Public Offering Price: As set forth in the Prospectus.
Selected Dealers Concession: $50.00 per Debenture, payable as set forth
below.
Confirmation of Orders: All orders are subject to confirmation and
allotment by us. We reserve the right to
reject any order, or to allot less than the
amount applied for.
<PAGE>
Delivery and Payment: At the office of Miller & Schroeder Financial,
Inc., Pillsbury Center, P.O. Box 789,
Minneapolis, Minnesota 55402, at such time
and on such day as we may advise you. Payment
is to be made at the public offering price,
less the Selected Dealers concession, by a
certified or official bank check payable to
the order of Miller & Schroeder
Financial, Inc., in Clearing House funds
against delivery of certificates. If you are
a member of, or clear through a member of,
the Depository Trust Company (the "DTC"), we
may, in our discretion, make delivery through
the facilities of the DTC.
Dealings During Life of this
Agreement: Debentures ordered by Selected Dealers,
when confirmed by us, may be immediately
reoffered to the public in conformity
with the terms of offering set forth in the
Prospectus.
Termination of this Agreement: This Agreement shall terminate at 5:00 P.M.,
Minneapolis time, six months from the date
hereof unless extended in our discretion for
a period or periods not to exceed in the
aggregate of 30 days; but we may terminate
this Agreement whether or not extended, at any
time without prior notice.
These Debentures are offered by us for delivery when, as, and if issued to
and accepted by us and subject to the terms hereof, to our right at any time to
vary the offering price, concessions and terms of the offering and to withdraw,
cancel, or modify this offer without notice.
You are not authorized to act as agent for us or otherwise act in our
behalf in offering these Debentures to the public or otherwise, or to give any
information or to make any representation not contained in the Prospectus.
Nothing herein contained will constitute the Selected Dealers and us a
partnership, association, or other separate entity, but you shall be
responsible for your share of any liability or expense based on any claim to the
contrary. We shall not be under any liability to you, except for obligations
expressly assumed in this Agreement,
<PAGE>
and no obligations on our part shall be implied hereby or inferred herefrom,
but nothing in this paragraph shall be deemed to relieve us of any liability
imposed under the 1933 Act.
By your acceptance hereof, you agree: (1) to take up and pay for the
Debentures ordered by and confirmed to you; (2) in reoffering the same, to
comply with the terms of this Agreement; (3) upon our request, to advise us of
the amount of Debentures purchased from us remaining and unsold by you and to
resell to us such number of unsold Debentures as we may request at the public
offering price less the amount of the Selected Dealers concession; (4) that you
will not offer or sell the Debentures in any jurisdiction except those with
respect to which we have advised you that such offers or sales will be
permissible under the state securities or Blue Sky laws of the respective
jurisdictions (notwithstanding any information furnished or any action taken in
connection therewith, we shall have no obligation or responsibility with respect
to the registration or qualification of the Debentures in any jurisdiction or
the right of any Selected Dealer to sell or advertise them therein) and that in
the event that you sell any Debentures in jurisdictions where the Debentures
have not been registered or qualified you will accept sole responsibility for
any curative measures with respect to, or liability arising from, such sales;
(5) that you will not engage in stabilizing the price of the Debentures or,
until completion of your participation in the distribution, in bidding for or
purchasing or attempting to induce others to purchase, directly or indirectly,
any of the Debentures; and (6) notwithstanding the termination of this
Agreement, to bear your proper proportion of any tax, liability or other claims
in connection herewith imposed at any time against you alone, with other
Selected Dealers, or with the Underwriter, and a like Share of any expenses of
resisting such claims.
It is assumed that Debentures sold by you will be effectively placed for
investment. You agree to pay us upon demand an amount equal to the Selected
Dealers concession as to any Debentures purchased by you hereunder which, prior
to the termination of this Agreement, we may Purchase or contract to purchase
for our account or which may be delivered against purchase contracts made prior
to the termination of this Agreement and, in addition, we may charge you with
any broker's commission and transfer tax paid in connection with such purchase
or contract to purchase. Certificates for Debentures delivered on such
repurchases need not be the identical certificates originally purchased.
You, by your confirmation below, represent that neither you nor any of your
directors, officers, partners, "persons associated with" you (as defined in the
Bylaws of the NASD) nor, to your knowledge, any "related person" (as defined by
the NASD) has participated or intend to participate in any transaction or
dealing (including with the Company) as to which documents or information are
required to be filed with the NASD pursuant to such Rules and as to which such
documents or information have not been so filed in a timely manner; and that the
Company is not an "affiliate" of yours, nor is any director, officer or holder
of five percent (5%) or more of the voting securities of the
<PAGE>
Company a "Person associated with" you (as such terms are defined in the
Bylaws of the NASD).
You agree that you will not sell to any account over which you exercise
discretionary authority any of the Debentures which you purchase.
On becoming a Selected Dealer, and in offering and selling the Debentures,
you agree to comply with all the applicable requirements of the 1933 Act and the
rules and regulations thereunder, and any applicable state securities laws.
You confirm that you are familiar with Rule 15c2-8 under the Securities
Exchange Act of 1934 (the "1934 Act") relating to the distribution of
Preliminary and final prospectuses for securities of an issuer (whether or not
the issuer is subject to the reporting requirements of Section 13 or 15(d) of
the 1934 Act) and confirm that you have complied and will comply therewith. You
confirm that you are in compliance with Rule 15c3-1 under the 1934 Act and the
Securities and Exchange Commission's uniform net capital rules thereunder, and
you will continue to be in compliance during your participation in this
offering.
You represent that you are either (1) a member in good standing of the NASD
who agrees to comply with all applicable rules of the NASD, including without
limitation, the NASD's Interpretation with Respect to Free Riding and
Withholding and Rules 2730, 2740, 2420, and 2750 of the NASD's Conduct Rules; or
(2) a foreign dealer not eligible for membership in the NASD who hereby agrees
to make no sales within the United States, its territories, or its possessions,
nor to persons who are citizens thereof or residents therein, and in making
other sales to comply with the NASD Interpretation mentioned above and Rules
2730, 2740 and 2750 of the NASD's Conduct Rules as if you were an NASD member
and to comply with Rule 2420 of the Conduct Rules as that Rule applies to a
nonmember foreign dealer.
Very truly yours,
MILLER & SCHROEDER FINANCIAL, INC.
By:
Its:
<PAGE>
ACCEPTANCE
We confirm our agreement to purchase Debentures of the above
issue subject to all the terms and conditions set forth in the Agreement. We
acknowledge receipt of the Prospectus and no other statements, written or oral.
We further state that in purchasing the Debentures we have relied upon the
Prospectus and upon no other statement whatsoever, written or oral.
Dated: , 1997
Print corporate name or firm name of selected dealer
Signature of authorized official or partner
Print name of person signing
Print title of person signing
Address:
<PAGE>
EXHIBIT 5.1
[S&F LETTERHEAD]
023099-00001
November 6, 1997
United Homes, Inc.
2100 Golf Road
Suite 110
Rolling Meadows, IL 60008
Re: UNITED HOMES, INC. OFFERING OF 11% MANDATORY REDEMPTION DEBENTURES
Ladies and Gentlemen:
We have acted as special securities counsel to United Homes, Inc., an
Illinois Corporation (the "Company"), in connection with the preparation and
filing of the registration statement on Form S-1, Reg. No. 333-33965 (the
"Registration Statement"), with the Securities and Exchange Commission (the
"Commission") under the Securities Act of 1933, as amended (the "Act") and the
prospectus contained therein with respect to the public offering of up to
$7,000,000 of the Company's 11% Mandatory Redemption Debentures due March 15,
2005, (the "Debentures"). Of the Debentures being offered, 1,106 Debentures are
being registered pursuant to an over-allotment option to the underwriter Miller
& Schroeder Financial, Inc. (the "Underwriter"). In connection with the
registration of the Debentures, you have requested our opinion with respect to
the matters set forth below.
In connection with delivering this opinion to you, as special securities
counsel to the Company we have examined originals or copies, certified or
otherwise identified to our satisfaction, of: (i) the Underwriting Agreement,
substantially in the form of the agreement as filed as an exhibit to the
Registration Statement on November 6, 1997 (the "Underwriting Agreement"), by
and between the Company and Miller & Schroeder Financial, Inc. (the
"Underwriter"); (ii) certificates of public officials and other officers or
representatives of the Company; (iii) the Articles of Incorporation and Bylaws
of the Company and each subsidiary; (iv) the Identure substantially in the form
of the agreement as filed as an exhibit to the Registration Statement on
November 6, 1997 (the "Indenture"); and (v) such other documents, certificates,
records or provisions of law as we have deemed necessary for the purpose of
rendering these opinions. Capitalized terms used but not otherwise expressly
defined herein shall have the same meanings as set forth in the Underwriting
Agreement.
In rendering the opinions expressed below, we have assumed that: (i) except
with respect to documents executed by officers of the Company that all
signatures, appearing in all documents, are valid and genuine; (ii) the
documents shown to us are complete and no modifications to any thereof exist;
(iii) the documents submitted to us as certified or photostatic copies of
original documents conform to the original documents; (iv) the originals of
certified or photostatic copies are authentic; (v) the representations and
warranties as to factual matters made by the Company and its officers and other
representatives and contained in Section 2 of the Underwriting Agreement and in
the various officer's certificates delivered either to the Underwriter or to us
on the Closing Date are true and complete; and (vi) each party, other than the
Company, that has executed or will execute a document to which the Company, is a
signatory has all requisite power and authority and has taken all necessary
action to duly and validly execute and deliver such document and to perform the
transactions contemplated thereby and such party's
<PAGE>
obligations thereunder are its legal, valid and binding obligations, enforceable
against such party in accordance with their respective terms.
We are admitted to the practice of law only in the State of Illinois and,
accordingly, we do not purport to the experts on the laws of any other
jurisdiction nor do we express an opinion as to the laws of jurisdictions other
than the laws of the State of Illinois and the federal law of the United States
of America, all as currently in effect. In limitation of the foregoing, we
express no opinion as to: (i) federal and state environmental and land use laws
and regulations; and (ii) expect as otherwise stated herein, the compliance or
noncompliance with state securities laws, rules and regulations or with the
antifraud provisions of state and federal laws, rules and regulations concerning
the issuance of securities.
This opinion is governed, and shall be interpreted in accordance with, the
Legal Opinion Accord (the "Accordance") of the American Bar Association Section
of Business Law (1991). As a consequence, except as otherwise stated in this
opinion, it is subject to a number of qualifications, exceptions, definitions,
limitations on coverage, and other limitations, all as more particularly
described in the Accord, and this opinion should be read in conjunction
therewith. In addition, this opinion is subject to: (i) the effect of
bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium or
other similar laws now or hereafter in effect relating to or affecting the
rights and remedies of creditors; (ii) the effect of general principles of
equity (regardless of whether enforcement is sought in a proceeding at law or in
equity) and the discretion of the court before which any proceeding therefor may
be brought; and (iii) the unenforceability under certain circumstances under law
or court decisions of agreements providing for the indemnification of or
contribution to a party with respect to a liability where such indemnification
or contribution is contrary to public policy.
On the basis of, and in reliance upon, the foregoing, and subject to the
qualifications contained herein, we are of the opinion that the Debentures have
been duly authorized for issuance and sale, and, when issued and delivered by
the Company pursuant to the Underwriting Agreement against payment of the
consideration set forth therein, will be validly issued, fully-paid and
nonassessable.
We hereby consent to your filing this opinion as an exhibit to the
Registration Statement and to the reference to our firm contained under the
heading "Legal Matters."
This opinion is rendered only to you and is solely for your benefit in
connection with the transactions covered hereby. This opinion may not be relied
upon by you for any other purpose or furnished, or quoted to, or relied upon by
any other person, firm or corporation for any purpose without our prior express
written consent.
Respectfully submitted,
/s/ SHEFSKY & FROELICH
- --------------------------------------------------------------------------------
SHEFSKY & FROELICH LTD.
S&F/gm
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Selected
Consolidated Financial Data" and "Experts" and to the use of our reports
dated December 12, 1996, except for Note 6(1), as to which the date is
March 25, 1997, with respect to the consolidated financial statements of
United Homes, Inc. as of September 30, 1996 and 1995 and for each of the
three years in the period ended September 30, 1996, and dated October 15,
1997 with respect to the financial statements of United Development
Bristolwood Limited Partnership as of September 30, 1995 and for the year
then ended, in the Registration Statement (Form S-1) and related Prospectus
of United Homes, Inc. for the registration of $7,000,000 of Debentures due
March 15, 2005.
Ernst & Young LLP
Chicago, Illinois
November 6, 1997
