<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-23347
UNITED HOMES, INC.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Illinois 36-3978181
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2100 Golf Road, Rolling Meadows, IL 60008
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code (847) 427-2450
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
11% Mandatory Redemption Debentures
Due March 15, 2005
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X. NO .
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TABLE OF CONTENTS
PAGE
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PART I - FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . 1
Item 1. Financial Statements. . . . . . . . . . . . . . . . . . . . . 1
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . 2
Item 3. Quantitative and Qualitative Disclosure About
Market Risk.. . . . . . . . . . . . . . . . . . . . . . . . . 9
PART II - OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . 9
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . 9
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . 9
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . .11
Item 4. Submission of Matters to a Vote of Security Holders . . . . .11
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . .11
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . .11
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
i
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UNITED HOMES, INC.
CONSENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
1
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United Homes, Inc.
Index to Condensed Consolidated Interim Financial Statements
(UNAUDITED)
PAGE
Condensed Consolidated Balance Sheets as of December 31, 1997
(unaudited) and September 30, 1997 (audited). . . . . . . . . . F-2
Condensed Consolidated Statements of Income for the three months
ended December 31, 1997 and 1996 (unaudited). . . . . . . . . . F-3
Condensed Consolidated Statements of Stockholder's Equity for the
three months ended December 31, 1997 (unaudited) and the
year ended September 30, 1997 (audited) . . . . . . . . . . . . F-4
Condensed Consolidated Statements of Cash Flows for the three
months ended December 31, 1997 and 1996 (unaudited) . . . . . . F-5
Notes to the Condensed Consolidated Financial Statements
(unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . F-6
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted.
F-1
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United Homes, Inc.
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1997
(UNAUDITED) (AUDITED)
----------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 1,135,984 $ 1,105,368
Housing inventories 79,930,988 71,232,760
Land held for future development 2,571,447 2,352,502
Investment in real estate partnership 541,243 541,243
Due from Parent 3,448,131 4,159,383
Notes receivable 3,700,722 3,902,000
Other 3,395,901 1,817,366
----------------------------
Total assets $94,724,416 $85,110,622
----------------------------
----------------------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Accounts payable and accrued liabilities $16,991,647 $19,300,714
Deferred income 1,264,371
Deposits from home buyers 745,267 963,233
Development loans and other notes 56,546,616 52,360,936
payable
Mandatory redemption debentures 7,106,000
----------------------------
Total liabilities 81,389,530 73,889,254
Investors' equity in majority-owned land
development and housing partnerships 1,406,979 1,435,379
Stockholder's equity 11,927,907 9,785,989
----------------------------
Total liabilities and stockholder's equity $94,724,416 $85,110,622
----------------------------
----------------------------
SEE ACCOMPANYING NOTES.
</TABLE>
F-2
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United Homes, Inc.
Condensed Consolidated Statements of Income
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
1997 1996
----------------------------
<S> <C> <C>
REVENUES
Housing and land sales (172 units in
1998 and 71 units in 1997) $22,827,676 $11,816,118
Recognition of deferred income 1,264,371
Other 6,093 19,151
----------------------------
24,098,140 11,835,269
COST OF SALES
Housing costs, including amortization of
capitalized interest and real estate
taxes of $935,116 in 1998 and $248,577 19,663,800 9,467,588
in 1997
Amortization of capitalized project costs 2,144,185 1,568,514
----------------------------
Profit 2,290,155 799,167
Other costs and expenses 682,584 447,986
Income before investors share of income
in majority-owned land development and 1,607,0571 351,181
housing partnerships
Investors' share of income in majority-
owned land development and housing
partnerships 58,635 89,371
----------------------------
Income before income taxes 1,548,936 261,810
Income taxes 607,016 109,915
----------------------------
Net income $ 941,920 $ 151,895
----------------------------
----------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-3
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United Homes, Inc.
Condensed Consolidated Statements of Stockholder's Equity
THREE MONTHS ENDED DECEMBER 31, 1997 AND THE YEAR ENDED SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS
-----------------------------------
<S> <C> <C> <C>
Balance at September 30, 1996 $100 $ 3,900 $ 9,063,386
Net income 718,603
-----------------------------------
Balance at September 30, 1997 100 3,900 9,781,989
Net income 941,920
Capital contribution 1,200,000
-----------------------------------
Balance at December 31, 1997 $100 $1,203,900 $10,723,909
-----------------------------------
-----------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-4
<PAGE>
United Homes, Inc.
Consolidated Statements of Cash Flows
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED DECEMBER 31,
1997 1996
-------------------------------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net income $ 941,920 $ 151,895
Adjustments to reconcile net income to
net cash used in operating activities:
Investors' share of equity in majority owned
land development and housing partnerships 58,635 89,371
Changes in operating assets and liabilities:
(Increase) in housing inventories (8,698,228) (12,502,601)
(Increase) decrease in land held for (218,945) 4,855,404
future development
Decrease in due from Parent 711,252 602,860
Decrease in notes receivables 201,278
(Increase) in other assets (330,185) (2,781,229)
(Decrease) increase in accounts payable (2,309,067) 1,354,659
and accrued liabilities
Decrease in deferred income (1,264,371) -
(Decrease) increase in deposits from home
buyers (217,966) 222,170
-------------------------------
Net cash used in operating activities (11,125,67) (8,007,471)
CASH FLOW FROM INVESTING ACTIVITIES
(Increase) decrease in due from managed
properties (6,128) 516,508
-------------------------------
Net cash provided by investing activities (6,128) 516,508
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from development loans and other 39,572,635 15,698,755
notes payable
Repayments of development loans and other (35,386,955) (7,913,280)
notes payable
Net proceeds from mandatory redemption 5,863,776
debentures
Contributions from investors in majority-
owned land development and housing partnerships 295,600
Distributions to investors in majority-owned land
development and housing partnerships (382,635) (320,891)
Change in capitalization 1,200,000
-------------------------------
Net cash provided by financing activities 11,162,421 7,464,584
-------------------------------
Increase (decrease) in cash and cash 30,611 (26,379)
equivalents
Cash and cash equivalents at beginning of
year 1,105,368 1,146,443
-------------------------------
Cash and cash equivalents at end of year $ 1,135,984 $ 1,120,064
-------------------------------
-------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-5
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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
incorporated by reference to the Company's September 30, 1997 financial
statements filed on form 10K 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:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1997
----------------------------
<S> <C> <C>
Land under development, including
site development costs $34,136,237 $32,509,293
Direct construction costs 20,620,669 17,573,716
Capitalized project costs 22,573,314 16,993,716
Land held for sale 2,600,768 4,156,035
----------------------------
$79,930,988 $71,232,760
----------------------------
----------------------------
</TABLE>
F-6
<PAGE>
United Homes, Inc.
Notes to Condensed Consolidated Interim Financial Statements (continued)
(UNAUDITED)
3. NOTES RECEIVABLE FROM AFFILIATES
During the quarter ended December 31, 1997, the affiliated interests in the sale
of 22 model homes, in the sale of undeveloped property and in the assignment of
contract rights to acquire property were sold to non-affiliated parties. The
deferred gain relating to these transactions was recognized in the quarter.
4. MANDATORY REDEMPTION DEBENTURES
During the first quarter of fiscal 1998, the Company sold 1,015 mandatory
redemption debentures with a par value of $1,000 per debenture at a price of
$985. The gross proceeds from the offering totaled $6,999,410. Offering
expenses totaled $1,135,694. The debentures are due March 15, 2005 and bear
interest at 11%. Interest is payable quarterly commencing in March, 1998. The
debentures are to be redeemed semi-annually commencing in September, 1999 in
amounts of $592,164.
5. ADDITIONAL PAID-IN CAPITAL
In December, 1997, the Parent Company, United Development Management Company,
contributed commercial and residential real property with a fair value of
$1,200,000. This property is currently classified as inventory and is held for
sale at values in excess of the amounts contributed.
F-7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
Certain statements in this Report that are not historical facts
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995, Section 27A of the Securities Act
of 1933, a amended (the "Securities Act") and Section 21E of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Discussions
containing such forward-looking statements may be found in the material set
forth hereunder as well as within this Report generally. In addition, when
used in this Report, the words "believes," "intends," "anticipates,"
"expects" and similar expressions are intended to identify forward-looking
statements. Such statements are subject to a number of risks and
uncertainties described in more detail under "Factors Affecting the Company's
Business." Actual results could differ materially from those projected in
the forward-looking statements as a result of the factors set forth in this
Report. The Company undertakes no obligation to publicly release the result
of any revisions to these forward-looking statements that may be made to
reflect any future events or circumstances.
The following analysis of the Company's consolidated financial condition
and results of operations as of December 31, 1997 and September 30, 1997 and
for the three months ended December 31, 1997 and 1996 should be read in
conjunction with the Company's Consolidated Financial Statements, including
the notes thereto, and other information included elsewhere in this Report.
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 December 31, 1997, the Company had
420 homes built or under construction (including winter foundations), of
which 231 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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1997 AND 1996. Revenues from housing
and land sales increased approximately $10.0 million or 93% for the three
months ended December 31, 1997, compared to an increase from approximately
$11.8 million to approximately $22.8 million for the same period in 1996.
The increase in revenue resulted from an increase in the volume of homes and
lots closed during the period. During this time period, the Company closed
on the sale of 133 homes and 39 lots at an average selling price for homes of
$159,300 compared to 71 home closings at an average selling price for homes
of $166,400 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, the average home price
decreased by less than 5% between the periods. This decrease in average
selling prices was a
2
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result of a change in the mix of homes closed in 1997 (lower priced homes)
compared to 1996. The Company also recognized income totalling approximately
$1.2 million during the quarter ended December 31, 1997. Recognition of this
income had been deferred from previous quarters since it was generated from a
sale transaction with affiliates. During the quarter ended December 31,
1997, all entities affiliated with United Homes, Inc. sold those interests to
unrelated third parties. Thus, the Company believes that recognition of the
income from the sale transaction is appropriate.
Housing costs, including amortization of capitalized interest and real
estate taxes, increased during the three month period ended December 31, 1997
from approximately $9.5 million to approximately $19.7 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
expense incurred related to interest and real estate taxes previously
capitalized. As a percentage of housing and land sales revenue, however,
housing costs increased from 80.0% during the three months ended December 31,
1996 to 86.1% during the three months ended December 31, 1997. This increase
was also caused by the change in the mix of homes (lower-priced) sold during
the quarter ended December 31, 1997 as compared to the quarter ended December
31, 1996. Other costs and expenses also increased from approximately $.5
million for the three months ended December 31, 1996 to approximately $.7
million for the three months ended December 31, 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 partnership, and income taxes
increased from approximately $.3 million for the three months ended December
31, 1996 to approximately $1.5 million for the three months ended December
31, 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 $.9 million for the three months ended December 31,
1997 from $.2 million for the three months ended December 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents balance at December 31, 1997 and
September 30, 1997 was approximately $1.1 million at each period. 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 December 31, 1997, and
September 30, 1997, the Company had total indebtedness of approximately $19.5
million and $19.3 million, respectively, outstanding on its A&D Lines,
including $13.8 million and $10.7 million, respectively, on the Residential
Line II.
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
3
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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. As of December 31, 1997 and September 30, 1997, the
Company had total indebtedness of approximately $33.5 million and $29.6
million, respectively, outstanding on these two 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 at 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.
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 quarters
ended December 31, 1997 and 1996, the Company made principal reductions of
approximately $35.4 and $7.9 million, respectively, on these lines. As of
February 2, 1998, the Company had approximately $2.1 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 (9.53% as of February 2,
1998). 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 February 2, 1998). The Residential Lines each
mature 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
December 31, 1997 and September 30, 1997, the Company had approximately $5.7
million and $7.8 million, respectively, of this indebtedness outstanding, all
of which was secured by certain of the Company's assets. The indebtedness
outstanding as of December 31, 1997 generally matures between 1997 and 2000
and bears interest at a rate of approximately 9.75% per annum.
On December 22, 1997 the Company completed the sale of approximately
$7.1 million of Debentures. The Company realized net proceeds of
approximately $5.9 million. The net proceeds were utilized to repay
indebtedness aggregating approximately $2.6 million with the remainder
applied to reduce the Heller Line (defined below). For additional
information about the offering, see item (c) of "Changes in Securities" below.
The Company believes that the capital available under the lines of
credit described herein, project specific indebtedness and cash flow from the
sale of model homes, internally generated funds and the proceeds from
offering of the Debentures will be sufficient to meet the Company's
reasonably anticipated needs for working capital and liquidity for the
foreseeable future. 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.
4
<PAGE>
CASH FLOWS FROM OPERATING ACTIVITIES. The Company's operating
activities utilized cash during the quarters ended December 31, 1997 and 1996
of approximately $11.2 million and $8.0 million, respectively. The Company
utilized cash flow generated during the quarters ended December 31, 1997 and
1996 to increase the Company's housing inventories ($8.7 million and $12.5
million) and to increase and (decrease) land held for future development
(approximately $.2 million and $4.8 million) offset by a (decrease ) and
increase in the Company's accounts payable (approximately ($2.3) million and
$1.4 million). In 1997, the decrease in the Company's accounts payable
reflects a decrease in amounts owed to vendors and other subcontractors
offset by an increase in the number of homes being constructed by the
Company. In 1996, the increase in accounts payable resulted from an increase
(compared to the same period in 1995) 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 during the quarters
ended December 31, 1997 and 1996. Net cash provided by financing activities
during these periods was approximately $4.3 million and $7.5 million. In
each case, the bulk of the proceeds were comprised almost entirely of
proceeds from development loans and other notes payable of approximately
$39.6 million and $15.7 million, respectively, offset by repayments on
development loans and other notes payable of approximately $35.4 million and
$7.9 million, respectively. 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 quarters ended December 31,
1997 or 1996.
INFLATION AND SEASONALITY. 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 in 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 and, in part, due to the Company's winter
foundation program which allows it to maintain available inventory for winter
sales and spring closings. A particularly harsh winter in the Midwest could,
however, limit the Company's winter foundation program, thus impacting sales
and closings the following spring in an adverse manner..
YEAR 2000. In the year 2000, many existing computer programs that use
only two digits (rather than four) to identify a year in the date field could
fail or create erroneous results if not corrected. This computer program
flaw is expected to affect virtually all companies and organizations. The
Company cannot quantify the potential costs and uncertainties associated with
this computer program flaw at this time, but does not anticipate that the
effect of this computer program flaw on the operations of the Company will be
significant.
5
<PAGE>
However, the Company may be required to spend time and monetary resources
addressing any necessary computer program changes.
FACTORS AFFECTING THE COMPANY'S BUSINESS PLAN
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 December 31, 1997, the Company had total
indebtedness of approximately $19.5 million outstanding on its A&D Lines,
including $13.8 million, on the Residential Line II. 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 of December 31, 1997, the Company had total indebtedness of approximately
$33.5 million outstanding on these two 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 quarter ended
December 31, 1997, the Company made principal reductions of approximately
$35.4 million on these lines. As of December 31, 1997, the Company had
approximately $6.5 million available for borrowing under all of its credit
facilities.
As of December 31, 1997, the Company had a total of $81.4 million of
outstanding liabilities, including $56.5 million of secured indebtedness.
Although the Company believes that internally generated funds, the net
proceeds from the sale of 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 for the foreseeable future, there can be no
assurance that these sources will be sufficient. 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
6
<PAGE>
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.
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.
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 entered into
between the Company and the trustee for the holders of the Debentures restricts
United and the Subsidiaries from, among other things, incurring additional
indebtedness, paying excessive dividends or making certain other restricted
payments
7
<PAGE>
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. The Indenture also imposes 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 and requires 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.
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. 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.
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.
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.
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
8
<PAGE>
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.
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, 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. 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
The Company does not engage in trading currencies or in any hedging
activities.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is currently 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.
ITEM 2. CHANGES IN SECURITIES
(a) not applicable
(b) not applicable
(c) On November 14, 1997, the Company's registration statement on Form
S-1, File No. 333-33965, was declared effective, and the Company
commenced the offering of 11% Mandatory Redemption Debentures due
March 15, 2005 (the "Debentures").
Miller & Schroeder Financial, Inc. served as the underwriter (the
"Underwriter") of the offering which was conducted on a "best-efforts"
basis. The Company registered an aggregate of 7,106 Debentures for sale at
a maximum offering price of $1,000 per Debenture or $7,160,000 maximum
aggregate offering price. This amount included a total of 1,015 Debentures
issuable upon
9
<PAGE>
exercise by the Underwriter of an option to purchase such additional
Debentures (the "Underwriter Option"). The Debentures were offered to
the public at a price equal to $985 per Debenture. The Company sold all
of the Debentures, including the Debentures covered by the Underwriter
Option and completed the offering on December 22, 1997. The gross
proceeds from the offering totaled $6,999,410.
From the effective date of the registration statement, the Company
incurred the following expenses in connection with the issuance and
distribution of the Debentures:
<TABLE>
<CAPTION>
DESCRIPTION AMOUNT
-------------- ------------
($)
<S> <C>
Underwriting Discounts and
Commissions 489,958.70
Management Fee to Underwriter 139,988.20
Non-accountable expense allowance
to Underwriter 69,994.10
Reimbursable expenses of
Underwriter 120,000.00
Registration and filing fees 2,170.00
Legal fees and expenses 115,000.00
Blue Sky fees and expenses
(including counsel fees) 33,582.63
Printing and engraving expense 60,000.00
Accounting 70,000.00
Miscellaneous expenses 35,000.00
---------------
Total $ 1,135,693.63
---------------
---------------
</TABLE>
None of the expenses set forth above were paid, directly or
indirectly, to the Company's directors or officers or to persons owing ten
percent (10%) or more of any class of the Company's equity securities or to
the affiliates of the Company nor, except as described above, were any such
payments made directly or indirectly to others.
The net offering proceeds realized by the Company after paying all of
the expenses described above was $5,863,716.37. The net proceeds were
utilized to repay indebtedness aggregating approximately $2.6 million and
incurred in connection with land acquisitions with the remainder applied to
reduce the Heller Line (defined below).
10
<PAGE>
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
not applicable
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit Index
(b) No reports on Form 8-K were filed during the quarter
11
<PAGE>
SIGNATURES
PURSUANT to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNITED HOMES, INC.
By: /s/ Edward Havlik Date: February 12, 1998
----------------------------------
Edward Havlik
President
By: /s/ William J. Crock, Jr. Date: February 12, 1998
----------------------------------
William J. Crock, Jr.
Executive Vice President,
Chief Financial Officer,
Secretary and Treasurer
(Principal Financial Officer
and Principal Accounting
Officer).
12
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
<S> <C>
EXHIBIT DESCRIPTION
------- -----------
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)
4.2-- Form of Indenture (4)
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
H a vlik 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)
10.9-- Development and Marketing Agreement by and between
Mirage, L.L.C. and United Homes, Inc. dated September 22,
1997(3)
10.10-- Development and Marketing Agreement by and between United
Round Lake Land Development, L.L.C. and United Homes,
Inc. dated September 30, 1997(3)
10.11-- Real Estate Purchase Agreement by and between Greenbrooke
A s sociates, Ltd. and United Development Management
Company dated May 1, 1994(3)
10.12-- Real Estate Sale Contract by and between United Round
Lake Land Development, L.L.C. and United Homes, Inc.
dated September 22, 1997(3)
10.13-- Assignment of Contract by and between Mirage, L.L.C. and
United Homes, Inc. dated September 22, 1997(3)
27.1 -- Financial Data Schedule*
</TABLE>
- ------------------------------
* Filed herewith
(1) Incorporated by reference from the Registrant's Registration Statement on
Form S-1, File No. 333-33965, filed August 19, 1997.
(2) Incorporated by reference from Amendment Number One to the Registrant's
Registration Statement on Form S-1, File No. 333-33965, filed October 21,
1997.
(3) Incorporated by reference from Amendment Number Three to the Registrant's
Registration Statement on Form S-1, File No. 333-33965, filed November 14,
1997.
(4) Incorporated by reference from Company's Annual Report on Form 10-K, filed
February 11, 1998.
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
CONDENSED CONSOLIDATED BALANCE SHEETS AND THE CONDENSED CONSOLIDATED STATEMENTS
OF INCOME AS OF DECEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,136
<SECURITIES> 0
<RECEIVABLES> 7,149
<ALLOWANCES> 0
<INVENTORY> 79,931
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 94,724
<CURRENT-LIABILITIES> 16,992
<BONDS> 63,653
0
0
<COMMON> 1,204
<OTHER-SE> 10,724
<TOTAL-LIABILITY-AND-EQUITY> 94,724
<SALES> 22,828
<TOTAL-REVENUES> 24,098
<CGS> 21,808
<TOTAL-COSTS> 21,808
<OTHER-EXPENSES> 683
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,549
<INCOME-TAX> 607
<INCOME-CONTINUING> 942
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 942
<EPS-PRIMARY> 941.92
<EPS-DILUTED> 941.92
</TABLE>
