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 March 31, 1996
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 1-11416
UDC HOMES, INC.
(Exact Name of Registrant as specified in its charter)
Delaware 86-0702254
- - ----------------------- -------------------------------
(State of Organization) (IRS Employer Identification No.)
4812 South Mill Avenue, Tempe, Arizona 85282
- - ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(602) 820-4488
------------------------------
(Registrant's telephone number)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Sections 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
------- -------
Indicate by check mark whether the Registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
YES X NO
------- -------
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date: Common Stock, $0.01 par value,
1,000 shares. See Part II, Item 5 herein.
<PAGE>
2
UDC HOMES, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
Page
----
Part I. Financial Information
Item 1. Financial Statements:
Consolidated Balance Sheets
At March 31, 1996 and September 30, 1995............................ 3
Consolidated Statements of Operations For the three months
ended March 31, 1996, the period from November 14, 1995 to
December 31, 1995, the three and six months ended March 31,
1995 and the period from October 1, 1995 to November 13, 1995....... 5
Consolidated Statements of Cash Flows For the three months
ended March 31, 1996, the period from November 14, 1995 to
December 31, 1995, the six months ended March 31, 1995 and the
period from October 1,
1995 to November 13, 1995........................................... 6
Condensed Notes to Consolidated Financial Statements................ 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................... 20
Part II. Other Information
Item 1. Legal Proceedings................................................... 32
Item 5. Other Information................................................... 35
Item 6. Exhibits and Reports on Form 8-K.................................... 36
Signatures................................................................... 37
<PAGE>
3
<TABLE>
UDC HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<CAPTION>
Reorganized Predecessor
Company Company
----------- ------------
March 31, September 30,
1996 1995
----------- ------------
(Unaudited)
ASSETS
<S> <C> <C>
Housing:
Cash ......................................................................... $ 3,783 $ 4,591
Notes, interest and other receivables ........................................ 2,073 4,193
Housing inventory ............................................................ 139,303 142,947
Land held for development .................................................... 130,022 179,476
Land held for sale ........................................................... 37,959 39,496
Property and equipment, net .................................................. 13,221 13,663
Investments in and receivables from unconsolidated affiliated partnership .... 6,116 5,213
Reorganization value in excess of amounts allocable to identifiable assets ... 23,160 --
Other ........................................................................ 2,533 6,838
-------- --------
358,170 396,417
-------- --------
Builder bonds and mortgage operations:
Interest and other receivables ............................................... 663 736
Mortgage-backed securities and residential mortgages ......................... 22,948 29,366
Other ........................................................................ 421 799
-------- --------
24,032 30,901
-------- --------
Total assets ................................................................... $382,202 $427,318
======== ========
See condensed notes to consolidated financial statements.
</TABLE>
<TABLE>
UDC HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - CONTINUED
(Dollars in thousands)
<CAPTION>
Reorganized Predecessor
Company Company
----------- ------------
March 31, September 30,
1996 1995
----------- ------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Liabilities not subject to compromise:
Housing:
Accounts payable ............................................................. $ 24,465 $ 22,702
Accrued liabilities and expenses ............................................. 41,109 48,640
Notes payable ................................................................ 113,634 144,850
Senior unsecured notes payable ............................................... 70,000 --
Subordinated notes payable ................................................... 45,000 --
--------- ---------
294,208 216,192
--------- ---------
Builder bonds and mortgage operations:
Accrued liabilities and expenses ............................................. 396 366
Collateralized mortgage obligations .......................................... 14,825 17,061
Mortgage lines of credit ..................................................... 6,262 11,389
--------- ---------
21,483 28,816
--------- ---------
Total liabilities not subject to compromise .................................... 315,691 245,008
--------- ---------
Liabilities subject to compromise .............................................. -- 205,264
--------- ---------
Total liabilities .............................................................. 315,691 450,272
--------- ---------
Commitments and contingencies
Stockholders' equity:
Common stock; $.01 par value, 1,000 shares authorized, issued and
outstanding at March 31, 1996 .............................................. -- --
Predecessor preferred stock .................................................. -- 100
Predecessor common stock; 50,000,000 shares authorized,
11,392,059 shares issued and outstanding at September 30, 1995 ............. -- 114
Additional paid in capital ................................................... 78,000 118,390
Accumulated deficit .......................................................... (11,489) (141,558)
--------- ---------
Total stockholders' equity (deficit) ........................................... 66,511 (22,954)
--------- ---------
Total liabilities and stockholders' equity ..................................... $ 382,202 $ 427,318
========= =========
See condensed notes to consolidated financial statements.
</TABLE>
<PAGE>
5
<TABLE>
UDC HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in thousands)
<CAPTION>
Reorganized Company Predecessor Company
----------------------------- ---------------------------------------
Three months Period from Three months Six months Period from
ended November 14 to ended ended October 1 to
March 31, December 31, March 31, March 31, November 13,
1996 1995 1995 1995 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Housing sales revenues .................................. $ 81,845 $ 50,358 $ 98,874 $ 211,268 $ 29,624
Cost of housing sales (including $5.5 million and
$12.7 million of land purchased from affiliated
partnerships for the three months and six months
ended March 31, 1995, respectively) ................... 70,856 45,889 89,477 187,493 27,205
--------- --------- --------- --------- ---------
Gross margin ............................................ 10,989 4,469 9,397 23,775 2,419
--------- --------- --------- --------- ---------
Other expenses (income):
Selling and administrative ............................ 12,226 5,461 14,003 28,927 5,034
Builder bond and mortgage operations, net ............. (214) (22) 475 697 (28)
Interest .............................................. 5,314 3,257 139 139 706
Land write-downs ...................................... -- -- 50,851 50,851 --
Other ................................................. (173) 553 (1,249) (1,834) (103)
--------- --------- --------- --------- ---------
17,153 9,249 64,219 78,780 5,609
--------- --------- --------- --------- ---------
Equity in losses of unconsolidated affiliated
partnerships (including land write-downs of
$11,644 in the three and six months ended
March 31, 1995) ....................................... (334) (211) (12,979) (13,011) --
--------- --------- --------- --------- ---------
Income (loss) from operations before
reorganization items, income taxes, fresh
start reporting
adjustment and extraordinary item ..................... (6,498) (4,991) (67,801) (68,016) (3,190)
Reorganization items .................................... -- -- -- -- (7,051)
Income (loss) before income taxes, fresh start
reporting adjustment and extraordinary item ........... (6,498) (4,991) (67,801) (68,016) (10,241)
Income taxes ............................................ -- -- (26,858) (26,772) --
--------- --------- --------- --------- ---------
Income (loss) before fresh start reporting
adjustment and extraordinary item ..................... (6,498) (4,991) (94,659) (94,788) (10,241)
Fresh start reporting adjustment ...................... -- -- -- -- (14,069)
Extraordinary item - gain on debt discharge ........... -- -- -- -- 50,264
--------- --------- --------- --------- ---------
Net income (loss) ....................................... $ (6,498) $ (4,991) $ (94,659) $ (94,788) $ 25,954
========= ========= ========= ========= =========
See condensed notes to consolidated financial statements
</TABLE>
<TABLE>
UDC HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
<CAPTION>
Reorganized Company Predecessor Company
-------------------------------- -----------------------------
Three months Period from Six Months Period From
ended November 14 to ended October 1, to
March 31, December 31, March 31, November 13,
1996 1995 1995 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ................................ $ (6,498) $ (4,991) $(94,788) $ 25,954
Adjustments to reconcile net income
(loss) to net cash provided by (used in)
operating activities:
Depreciation ................................... 911 609 2,820 439
Amortization ................................... 247 114 797 97
Fresh start reporting adjustment ............... -- -- -- 14,069
Gain on debt discharge ......................... -- -- -- (50,264)
Equity in losses of unconsolidated
affiliated partnerships ...................... 334 211 13,011 --
Land write-downs ............................... -- -- 50,851 --
Income taxes ................................... -- -- 26,772 --
Net change in housing inventory ................ (8,904) 1,774 (7,571) 10,890
Proceeds from sale of land ..................... 9,854 3,000 -- --
Net change in land held for
development .................................. 7,881 (3,170) (6,688) (4,778)
Net change in receivables from
affiliated partnerships ...................... (408) (899) (820) 95
Decrease (increase) in assets:
Notes, interest and other
receivables ................................ 718 792 (337) 259
Other assets ................................. 197 (44) 433 (429)
(Decrease) increase in liabilities:
Accounts payable ............................. 4,661 (1,065) (18,127) (1,833)
Accrued liabilities and expenses ............. 3,266 (13,202) (1,886) 3,525
------- -------- -------- -------
Net cash provided by (used in) operating
activities ....................................... 12,259 (16,871) (35,533) (1,976)
------- -------- -------- -------
See condensed notes to consolidated financial statements.
</TABLE>
<TABLE>
UDC HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(Unaudited)
(Dollars in thousands)
<CAPTION>
Reorganized Company Predecessor Company
-------------------------------- ----------------------------
Three Months Period from Six Months Period from
Ended November 14 to ended October 1 to
March 31, December 31, March 31, November 13,
1996 1995 1995 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cash flows from investing activities:
(Increase) decrease in mortgage-backed securities
and residential mortgages .......................... (716) 847 8,881 6,287
Change in property and equipment ..................... 304 (405) 9,352 (471)
--------- --------- --------- ---------
Net cash provided by (used in) investing activities .... (412) 442 18,233 5,816
--------- --------- --------- ---------
Cash flows from financing activities:
Proceeds from notes payable .......................... 99,766 52,449 321,331 8,637
Payments on notes payable ............................ (118,927) (58,606) (292,256) (11,022)
Proceeds from issuance of subordinated notes ......... 10,000 -- -- 30,000
Proceeds from issuance of common stock ............... -- -- -- 78,000
Payments on senior unsecured notes payable ........... -- -- (3,000) (83,000)
Payments on collateralized mortgage obligations ...... (691) (1,298) (2,288) (247)
Increase (decrease) in mortgage lines of credit ...... 729 (57) (6,847) (5,799)
--------- --------- --------- ---------
Net cash provided by (used in) financing activities .... (9,123) (7,512) 16,940 16,569
--------- --------- --------- ---------
Net increase (decrease) in cash ........................ 2,724 (23,941) (360) 20,409
Cash, beginning of period .............................. 1,059 25,000 1,151 4,591
--------- --------- --------- ---------
Cash, end of period .................................... $ 3,783 $ 1,059 $ 791 $ 25,000
========= ========= ========= =========
Supplemental disclosure of cash flow information:
Cash paid for interest, net of amounts capitalized ... $ 2,170 $ 2,201 $ 935 $ 254
========= ========= ========= =========
Supplemental disclosure of noncash investing and financing activities:
See Note 2 for a discussion of the Company's reorganization under Chapter 11.
See condensed notes to consolidated financial statements.
</TABLE>
<PAGE>
8
UDC HOMES, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. General
The information contained in the following notes to the consolidated
financial statements is condensed from that which would appear in the annual
consolidated financial statements. The consolidated financial statements and
related notes thereto contained in the Annual Report on Form 10-K for the fiscal
year ended September 30, 1995 filed by UDC Homes, Inc. ("UDC" or the "Company")
with the Securities and Exchange Commission should be referred to in conjunction
with these consolidated financial statements. The results of operations for the
interim periods presented are not necessarily indicative of the results to be
expected for the entire year. Certain amounts in the consolidated financial
statements of prior periods have been reclassified to conform to the current
presentation.
The consolidated financial statements included herein are unaudited;
however, they include all adjustments of a normal recurring nature which, in the
opinion of management, are necessary to present fairly the consolidated
financial position, results of operations and cash flows for interim periods.
Because of the adoption of fresh start reporting (Note 2), the March 31, 1996
balance sheet, the statement of operations for the three months ended March 31,
1996, the statement of operations for the period from November 14, 1995 to
December 31, 1995, the statement of cash flows for the three months ended March
31, 1996 and the statement of cash flows for the period from November 14, 1995
to December 31, 1995 have not been prepared on the same basis of accounting and
are not comparable to financial statements for prior dates and periods.
2. Reorganization under Chapter 11 and Fresh Start Reporting
As described in the Company's Annual Report on Form 10-K for the fiscal
year ended September 30, 1995, the Company consummated its plan of
reorganization (the "Plan") on November 14, 1995 (the "Consummation Date").
In accounting for the effects of the Plan, the Company implemented the
"fresh start" reporting principles of American Institute of Certified Public
Accountants Statement of Position 90-7 ("SOP 90-7"), "Financial Reporting by
Entities in Reorganization Under the Bankruptcy Code." Pursuant to SOP 90-7, the
Company implemented fresh start reporting on the Consummation Date because the
fair value of the Company's assets immediately before the Consummation Date was
less than the total of all post-petition liabilities and allowed pre-petition
claims, and holders of the existing voting shares immediately before the
Consummation Date received none of the shares of new Common Stock of the
reorganized Company.
UDC HOMES, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Company's consolidated balance sheet as of March 31, 1996 was
prepared as if the Company became a new reporting entity at the Consummation
Date, and reflects certain reorganization adjustments, including the restatement
of assets and liabilities to approximate fair value and the discharge of certain
outstanding liabilities relating to creditors' claims against the Company. The
statements of operations and the statements of cash flows for the three months
ended March 31, 1996 and the period from November 14, 1995 to December 31, 1995
incorporate the effects of fresh start reporting. However, the statements of
operations for the period from October 1, 1995 to November 13, 1995, the three
months ended March 31, 1995 and the six months ended March 31, 1995, and the
statements of cash flows for the period from October 1, 1995 to November 13,
1995 and the six months ended March 31, 1995 are based on historical cost of the
predecessor Company. Accordingly, the Company has presented statements of
operations and statements of cash flows for the three months ended March 31,
1996, the period from November 14, 1995 to December 31, 1995 and the period from
October 1, 1995 to November 13, 1995, but has not presented a statement of
operations and statement of cash flows for the six months ended March 31, 1996.
A vertical line has been drawn on the accompanying financial statements to
distinguish between the reorganized Company and the predecessor Company.
The reorganization value of the Company's equity was established based
upon the Company's "enterprise value," as determined by the Company. Enterprise
value represents an estimated value of the Company based upon its reorganized
capital structure at the Consummation Date, and was determined to be equal to
the $108.0 million purchase price paid by DMB Residential, LLC ("DMB") to
acquire all of the Company's new shares of Common Stock for $78.0 million and
$30.0 million of new Series C Subordinated Notes. The majority of the Company's
value arises from the Company's housing inventory, land held for development and
land held for sale. The fair value of the Company's housing inventory was
calculated on a house-by-house basis by determining an estimated selling price
for each home and deducting costs to complete, costs of disposal and a
reasonable profit, considering the stage of completion of each home. The fair
value of the Company's land held for development and land held for sale was
generally determined by independent third party appraisals. Although all assets
and liabilities were revalued, no significant adjustments were made to the
Company's other assets and liabilities, as their fair values generally
approximated historical cost at the Consummation Date.
SOP 90-7 requires an allocation of enterprise value in conformity with
the purchase accounting provisions of Accounting Principles Board Opinion No. 16
("APB 16"), "Business Combinations." In applying APB 16, the combined fair value
of the Company's liabilities and equity exceeded the fair value of the Company's
identifiable assets by $22.8 million at the Consummation Date. The statement of
operations for the period from October 1, 1995 to November 13, 1995 contains a
$50.3 million gain on debt discharge relating from consummation of the Plan and
a $14.1 million loss from the fresh start reporting adjustment.
UDC HOMES, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
<TABLE>
The effect of the Plan and the application of SOP 90-7 on the Company's
November 13, 1995 pre-consummation balance sheet is as follows (dollars in
thousands):
<CAPTION>
Consummation of Plan
--------------------
November 13, Capital
1995 Contribution Reorganized
Pre-consummation and Debt Balance
Balance Sheet Discharge Fresh Start Sheet
------------- --------- ----------- ------
<S> <C> <C> <C> <C>
ASSETS
Housing:
Cash............................................. $ -- $ 25,000 (1) $ -- $ 25,000
Notes, interest and other receivables............ 3,779 -- (424) (6) 3,355
Housing inventory................................ 132,057 -- 116 (6) 132,173
Land held for development........................ 184,254 -- (40,507) (6) 143,747
Land held for sale............................... 39,496 -- 2,303 (6) 41,799
Property and equipment, net...................... 13,695 -- 945 (6) 14,640
Investment in and receivables from
unconsolidated affiliated partnership........... 5,118 -- 236 (6) 5,354
Excess of purchase price over fair value of
related net assets acquired..................... -- -- 22,760 (6) 22,760
Other............................................ 7,720 -- (4,187) (6) 3,533
---------- -------- --------- ----------
386,119 25,000 (18,758) 392,361
Builder bonds and mortgage operations............... 24,219 -- 86 (6) 24,305
---------- -------- --------- ----------
Total assets.................................. $ 410,338 $ 25,000 $ (18,672) $ 416,666
========== ======== ========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities not subject to compromise:
Housing:
Accounts payable................................. $ 20,869 $ -- $ -- $ 20,869
Accrued liabilities and expenses................. 52,094 -- (1,090) (6) 51,004
Notes payable.................................... 142,465 -- (3,513) (6) 138,952
Senior unsecured notes payable................... -- 70,000 (2) -- 70,000
Subordinated notes payable....................... -- 35,000 (3) -- 35,000
---------- -------- --------- ----------
215,428 105,000 (4,603) 315,825
Builder bonds and mortgage operations............... 22,841 -- -- 22,841
---------- -------- --------- ----------
Total liabilities not subject to compromise......... 238,269 105,000 (4,603) 338,666
Liabilities subject to compromise................... 205,264 (205,264) (4) -- --
---------- -------- --------- ----------
Total liabilities................................... 443,533 (100,264) (4,603) 338,666
Stockholders' equity (deficit)...................... (33,195) 125,264 (5) (14,069) (7) 78,000
---------- -------- --------- ----------
Total liabilities and stockholders' equity ... $ 410,338 $ 25,000 $ (18,672) $ 416,666
========== ======== ========= ==========
See following page for footnote explanations.
</TABLE>
UDC HOMES, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOOTNOTES
(1) Cash remaining after application of $83.0 million of $108.0 million
purchase price from DMB to the repayment of senior unsecured notes
payable.
(2) Issuance of new senior unsecured notes payable to holders of the
following claims:
Old senior unsecured notes ........................... $ 64,100
Old convertible subordinated notes ................... 5,900
--------
$ 70,000
========
(3) Issuance of new subordinated notes to the following:
DMB .................................................. $ 30,000
Holders of old prime preferred stock ................. 3,000
Holders of old convertible subordinated notes ........ 2,000
--------
$ 35,000
========
(4) Repayment or forgiveness of debt as follows:
Cash paid to holders of old senior unsecured notes.... $ 83,000
New senior unsecured notes and new subordinated notes
issued to holders of old senior unsecured notes
and old convertible subordinated notes.............. 72,000
Forgiveness of remaining debt subject to compromise... 50,264
--------
$205,264
========
(5) Consists of the following:
Issuance of new common stock to DMB................... $ 78,000
Issuance of new subordinated notes to holders of
old prime preferred stock........................... (3,000)
Gain on debt discharge................................ 50,264
--------
$125,264
========
(6) Adjustment of assets and liabilities to fair market value.
(7) Elimination of pre-consummation stockholders' equity accounts and
revaluation of stockholders' equity to reorganization value.
UDC HOMES, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. Accounting Policies
As of the Consummation Date, the Company changed its method of applying
the principles of Statement of Financial Accounting Standards ("SFAS") No. 34,
"Capitalization of Interest Cost," in order to better match the capitalization
of interest with actual construction and development efforts as defined by SFAS
No. 34. In connection with such change, the Company also significantly narrowed
its definition of housing under construction and land under development to
exclude land undergoing only periodic entitlement efforts, the effect of which
is to decrease the amount of interest capitalized and ultimately charged to
expense through cost of sales, and increase interest expense in the period
incurred.
As of the Consummation Date, the Company adopted SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of." SFAS No. 121 requires that long-lived assets be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of the asset may not be recoverable. If the sum of the expected
future cash flows (undiscounted and without interest charges) from an asset to
be held and used is less than the carrying amount of the assets, an impairment
loss must be recognized for the difference between the carrying amount and fair
value. Assets to be disposed of must be valued at the lower of the carrying
amount or fair value less costs to sell. In accordance with the Company's
application of fresh start reporting (Note 2), the Company recorded its assets
at fair value at the Consummation Date. Therefore, the adoption of SFAS No. 121
had no impact on the reorganized Company's consolidated financial statements.
At the Consummation Date, in accordance with the application of fresh
start reporting (Note 2), the Company recorded $22.8 million of reorganization
value in excess of amounts allocable to identifiable assets. Subsequent to the
Consummation Date, upon the resolution of certain contingencies existing at the
Consummation Date, the Company recorded an additional $0.7 million of
reorganization value in excess of amounts allocable to identifiable assets. Such
total amount is amortized on a straight line basis over a period of 25 years.
UDC HOMES, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
At the time of its Chapter 11 filing, the Company announced its
intention to sell its Southeast operations. As of the Consummation Date, the
Company still held land in Georgia as well as land and housing under
construction in North Carolina. The Company established a $3.6 million reserve
at the Consummation Date for any future losses which may result from the
disposal of the Company's assets in the Southeast.
The activity during the three months ended March 31, 1996 and the
period from November 14, 1995 to December 31, 1995 related to the reserve is as
follows (dollars in thousands):
Period from
Three months November 14,
ended 1995 to December
March 31, 1996 31, 1995
-------------- ----------------
Balance at beginning of period ............. $ 3,229 $ 3,586
Revenues from operations of discontinued
operations .............................. 4,689 4,810
Costs and losses from operations of
discontinued operations ................. (5,174) (5,167)
------- -------
Balance at end of period ................... $ 2,744 $ 3,229
======= =======
UDC HOMES, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
<TABLE>
4. Housing Interest
The Company capitalizes certain interest incurred on housing inventory
and land held for development. Such capitalized interest is charged to expense
through cost of housing sales when home sales are closed. The components of
housing interest are as follows (dollars in thousands):
<CAPTION>
Reorganized Company Predecessor Company
----------------------------- ---------------------------------------------
Three Months Period From Three Months Six Months Period From
Ended November 14 to Ended Ended October 1 to
March 31, December 31, March 31, March 31, November 13,
1996 1995 1995 1995 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Interest incurred ............................ $ 7,685 $ 4,399 $11,794 $22,074 $ 3,179
Less: Interest capitalized ................... 2,371 1,142 11,655 21,935 2,473
------- ------- ------- ------- -------
Interest expensed ............................ $ 5,314 $ 3,257 $ 139 $ 139 $ 706
======= ======= ======= ======= =======
Amortization of capitalized
interest included in cost
of sales .................................. $ 1,227 $ 334 $ 5,808 $12,844 $ 1,117
======= ======= ======= ======= =======
</TABLE>
Interest on pre-petition unsecured debt was suspended during the
Company's bankruptcy case. Had the accrual of interest not been suspended,
interest incurred and interest expense for the period from October 1, 1995 to
November 13, 1995 would have increased by approximately $3.0 million and
$300,000, respectively.
As of the Consummation Date, the Company changed its method of
application of capitalization of interest (Note 3).
UDC HOMES, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
5. Debt Covenants
In connection with the application of fresh start reporting as of the
Consummation Date, reorganization value in excess of amounts allocable to
identifiable assets was determined to be approximately $22.8 million. The debt
covenants related to the Company's borrowing arrangements were negotiated prior
to the determination of such amount and were based on the assumption that such
amount, when finally determined, would be substantially lower than $22.8
million. As a result, as of the Consummation Date and subsequent thereto, the
Company was in violation of the tangible net worth and debt to tangible net
worth covenants of such borrowing arrangements. In addition, from February 21,
1996 through March 14, 1996, the Company was in violation of certain minimum
available liquidity covenants. In response, the Company has requested that the
subject lenders waive the violations and agree to a modification of the debt
covenants, and on March 15, 1996, DMB invested $10 million in the Company in
exchange for a new 14.5% Series D Subordinated Note. Issuance of the new note,
waiver of the violations and modification of the debt covenants require the
approval of the subject lenders of the Company. The Company has received the
verbal approval of such lenders, subject to final documentation.
6. Contingencies and Legal Matters
Certain of the Company's excess liability insurance carriers have
asserted that their policies do not provide coverage or indemnification for
certain lawsuits in which the Company is a defendant because the policies,
relating to the period between April 1, 1985 and April 1, 1988, neither "follow
the form" of the primary policies nor contain "broad form" coverage. The
carriers have expressly reserved their rights with respect to the defense of the
lawsuits. In addition, in connection with the settlement of certain claims, one
of the Company's excess liability insurance carriers has reserved its right to
be reimbursed amounts paid in settlement in the amount of $275,000. On July 8,
1994 the Company filed a lawsuit in the Maricopa County, Arizona Superior Court
(Case No. CV 94-10637) against Mann & Smith, Inc., its insurance agent, and
Cooney, Rikard & Curtin, Inc., its insurance broker, seeking special damages in
the amount of $275,000, general and special damages up to the limits of the
excess liability insurance policies, attorneys' fees and costs. The defendants
filed separate answers denying any liability to the Company. In addition, one
defendant filed a cross-complaint against the other defendant, and the Company
filed a motion to bifurcate the liability and damage issues. On March 7, 1996
the parties filed a stipulation for dismissal without prejudice wherein the
Company retained the right to refile the case through September 1, 1997, after
an assessment of potential exposure and damages. On March 11, 1996 the case was
dismissed without prejudice.
UDC HOMES, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
On September 24, 1992, the Mariners Pointe Homeowners Association (the
"Association") filed a lawsuit against the Company in the United States District
Court for the District of South Carolina, Florence Division (Civil Action No.
4:92-3097-22), alleging that numerous construction/design defects exist at the
Company's Mariners Pointe project in South Carolina. The complaint included five
separate causes of action: breach of contract, breach of implied warranties of
workmanship, negligence, strict tort and unfair trade practices. In addition to
actual damages, the plaintiff's actions in tort and unfair trade practices
sought to recover either punitive damages or treble actual damages plus
attorneys' fees. The plaintiff's alleged actual damages were $4,775,835. The
Company signed a Settlement Agreement and Release on February 16, 1996 wherein
the Company (and the other parties involved in the suit) agreed to pay the
Association (and certain other parties) the sum of $1,850,000, of which the
Company paid a net amount of $440,725.
On June 5, 1995, June 14, 1995 and October 25, 1995, three lawsuits,
entitled Michael A. Isco v. Richard C. Kraemer et al. (Case No. CV95-08941),
Larry Alexander et al. v. Arthur Andersen LLP et al. (Case No. CV95-09509), and
Crandon Capital Partners v. Kraemer, et al. (Case No. CV95-17785), respectively
(collectively, the "Arizona Actions"), were filed in Maricopa County, Arizona
Superior Court on behalf of purported classes of former shareholders of the
Company against, among others, certain current and former officers and directors
of the Company, who may be entitled to indemnification from the Company, as well
as the Company's independent public accountants, Arthur Andersen LLP. The
Company is not a named defendant in any of these complaints. Subsequently, the
Arizona Actions were consolidated. The complaints seek, among other things,
unspecified money damages and contain allegations which include violations of
Arizona securities laws, fraud, negligent misrepresentation, breach of fiduciary
duty, negligence and gross negligence. The Plan provided for the discharge of
all claims asserted in such class action lawsuits as against the Company, and
the holders of such claims received no distributions on account of such claims.
The Company could, however, be required to indemnify certain of the
director/officer defendants if such defendants incur expenses or liability and
seek indemnification. The Plan provides that certain indemnification obligations
of the Company, including those to the director/officer defendants in the
Arizona Actions, survive consummation of the Plan. Pursuant to Article XI of the
By-laws of the Company then in effect (the "Defense Provision"), the Company is
required to "pay the expenses [of directors and officers] incurred in defending
any proceeding in advance of its final disposition, provided, however, that the
payment of expenses incurred ... in advance of the final disposition of the
proceeding shall be made only upon receipt of an undertaking by the director or
officer to repay all amounts advanced if it should be ultimately determined that
the director or officer is not entitled to be indemnified." With respect
UDC HOMES, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
to the advancement of defense costs, the Company and National Union Fire
Insurance Company of Pittsburgh, Pa. ("National Union"), the issuer of the
Company's primary directors and officers insurance and Company reimbursement
policy, agreed, among other things, that (i) National Union would advance all
reasonable and necessary defense costs incurred by most of the covered
defendants in the Arizona Actions during the pendency of the Chapter 11
proceeding, (ii) upon consummation of a reorganization plan, the Company would
repay an amount up to $1.5 million of defense costs actually advanced by
National Union, (iii) the Company would not be obligated to repay an amount
greater than $1.5 million of advanced defense costs, and (iv) National Union
would have no duty to defend.
Counsel for the plaintiffs, the Company, the issuers of the Company's
directors and officers insurance and Company reimbursement policies and most of
the director/officer defendants have engaged in settlement discussions in
respect of the Arizona Actions. DMB and its counsel were also involved in such
settlement discussions. As a result of these settlement discussions, an
agreement (the "Settlement Agreement") was reached pursuant to which the
plaintiffs and the director/officer defendants agreed to settle and compromise
the Arizona Actions in their entirety, as such actions relate to the
director/officer defendants and the Company, in exchange for, among other
things, $12.75 million. The Settlement Agreement was filed with the Maricopa
County, Arizona Superior Court on January 19, 1996; that Court now must
determine whether, after notice to class members, to approve the Settlement
Agreement and to enter a bar order against the non-settling defendants. Of such
amount, up to $1.5 million (the self-insured retention under the Company's
applicable directors and officers insurance policies) will be funded by the
Company. Certain issuers of the Company's directors and officers insurance
policies, together with the Company, have agreed to fund the balance of the
settlement. Such settlement is subject to certain conditions, including the
entry of a final, non-appealable judgment by the Maricopa County, Arizona
Superior Court. In connection with such settlement and issues discussed between
the Company and DMB concerning the consummation of the Stock Purchase Agreement,
the director/officer defendants have agreed to limit their aggregate claim for
indemnification arising out of the Arizona Actions in certain circumstances to
$12 million above the following: (A) the balance of the Company's self-insured
retention under applicable insurance policies and (B) applicable insurance held
by the Company with respect to the Arizona Actions. The Company does not believe
that any obligations under its By-laws will exceed its coverage under its
directors and officers insurance policies.
UDC HOMES, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The parties filed a joint request that the Court preliminarily approve
the settlement, promptly approve the form of notice to be provided to the class,
order that the class be given notice, and set a final settlement hearing date.
Arthur Andersen LLP filed an objection to the joint request, but later withdrew
its objection to the order that the class be given notice. On April 5, 1996, the
Court entered an order that the class be given notice of the settlement and an
opportunity to object or "opt out". However, the plaintiffs have subsequently
sought to modify the proposed settlement to eliminate any release of potential
claims they might have against the Company's prior independent public
accountants, Coopers & Lybrand. The notice to the class was to be mailed to the
individual class members on or before May 17, 1996. A hearing is scheduled for
September 6, 1996 to approve the final settlement and to rule on the petition
for entry of a good faith/bar order.
The Company was a defendant in a lawsuit which included four causes of
action: negligent misrepresentation, unfair business practices, negligence and
fraud. The complaint was filed on September 28, 1994 in the Contra Costa County,
California Superior Court (Case No. 94-04160) and is entitled Kerry P. Salisbury
and Joan J. Salisbury; Robert A. Borg and Margo M. Borg; David G. Mooers and
Yvonne E. Mooers; David L. Fulk and Susan K. Fulk; Veronica J. Agramont and
Ramiro L. Agramont v. UDC Homes, Inc., UDC Mortgage Corporation, UDC-Universal
Development L.P., Universal Development Corporation, UDC- Universal Development,
Inc., The Hammond Company; The Mortgage Bankers; The Cal-Bay Mortgage Group; and
George Cardas. The plaintiffs are five married couples who alleged that the
Company, UDC Mortgage Corporation ("UDC Mortgage"), the Company's broker, George
Cardas, and two unrelated lenders conspired to qualify buyers/borrowers,
including the plaintiffs, to purchase homes in the Company's Laurel Ridge
project despite such parties' alleged inability to afford the homes by failing
to disclose the nature and extent of the buyers/borrowers tax and special
assessment district obligations and by creating insufficient impound accounts.
The plaintiffs sought general and special damages, punitive damages, restitution
and attorneys' fees and costs, all in unspecified amounts. In addition, two
plaintiffs sought rescission of their purchase contracts. Upon notification of
the Company's bankruptcy case, the court issued a stay of all further
proceedings against the Company, while litigation against the lender defendants
and Mr. Cardas continued and summary judgment motions were filed. Mr. Cardas
settled with the plaintiffs and the Company has reimbursed him in accordance
with indemnification provisions of the Company's By-laws. On March 8, 1996, UDC
Mortgage and the plaintiffs reached a settlement wherein UDC Mortgage agreed to
pay the plaintiffs Borgs and Mooers the sum of $12,000 and to vacate the
previously awarded judgment against the other plaintiffs, and the
UDC HOMES, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
plaintiffs agreed to a dismissal with prejudice of the entire action by all
plaintiffs against UDC Mortgage. In addition, the parties agreed to a mutual
release of claims and to bear their own court costs and attorneys' fees.
Plaintiffs' case against the Company was dismissed with prejudice on April 15,
1996, and Plaintiffs' case against UDC Mortgage was dismissed with prejudice on
April 18, 1996.
The Company is also involved in various legal proceedings
which generally represent ordinary routine litigation incident to its business,
some of which are covered in whole or in part by insurance.
<PAGE>
20
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Introduction
On November 14, 1995, the Company consummated its plan of
reorganization and emerged from its Chapter 11 bankruptcy proceeding as a new
reporting entity. As a result, the Company's results of operations for the six
months ended March 31, 1996 presented in the accompanying financial statements
are divided into pre- and post-reorganization periods. The following discussion
and analysis of the Company's operations compares the three and six months ended
March 31, 1996 with the three and six months ended March 31, 1995, and does not
distinguish between pre- and post-reorganization periods.
Additionally, the following discussion and analysis of the Company's
operations includes only the Company's continuing operations in Arizona and
California. The Company is liquidating all remaining assets of its Southeast
operations, and management believes that discussion of such operations is no
longer material to obtain an understanding the Company's continuing operations.
Results of Operations
Comparison of three and six months ended March 31, 1996 and 1995
The following discusses the significant revenue, cost and expense
trends experienced by the Company, comparing the three and six month periods
ended March 31, 1996 with the three and six month periods ended March 31, 1995.
<TABLE>
Revenues
The following table presents comparative housing revenues by region
(exclusive of the Company's Southeast operations; dollars in thousands).
<CAPTION>
Three Months Ended March 31, Six Months Ended March 31,
---------------------------------------------------- -------------------------------------------------
Dollar/Unit Percentage Dollar/Unit Percentage
Increase Increase Increase Increase
1996 1995 (Decrease) (Decrease) 1996 1995 (Decrease) (Decrease)
---- ---- ---------- ---------- ---- ---- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Arizona:
Dollars ............ $ 62,162 $ 60,782 $ 1,380 2.3% $109,209 $118,906 $ (9,697) (8.2%)
Units closed ....... 334 326 8 2.5% 570 649 (79) (12.2%)
Average price ...... $ 186 $ 186 $ 0 0.0% $ 192 $ 183 $ 9 4.9%
California:
Dollars ............ $ 19,683 $ 23,045 $ (3,362) (14.6%) $ 47,495 $ 55,748 $ (8,253) (14.8%)
Units closed ....... 84 104 (20) (19.2%) 178 241 (63) (26.1%)
Average price ...... $ 234 $ 222 $ 12 5.4% $ 267 $ 231 $ 36 15.6%
Company total:
Dollars ............ $ 81,845 $ 83,827 $ (1,982) (2.4%) $156,704 $174,654 $(17,950) (10.3%)
Units closed ....... 418 430 (12) (2.8%) 748 890 (142) (16.0%)
Average price ...... $ 196 $ 195 $ 1 0.5% $ 209 $ 196 $ 13 6.6%
</TABLE>
In the quarter ended March 31, 1996, the Company experienced slight
decreases in housing revenues and units closed, and an increase in average sales
prices as compared to the corresponding quarter in 1995. The Company believes
that closings in California in the quarter ended March 31, 1996 were adversely
affected by restrictions on the Company's ability to purchase lots during the
pendency of its bankruptcy case. Such restrictions delayed the commencement of
construction of homes and delayed closings which otherwise would have been
expected to occur during the quarter. Additionally, the Company believes that
closings in California were adversely affected by lingering effects on customer
confidence arising from the Company's Chapter 11 case. The increases in average
sales prices were primarily due to price increases in both regions and the
introduction of new, higher-priced projects in California, offset by changes in
the mix of product types closed in Arizona.
In the six months ended March 31, 1996, the Company experienced a
decrease in housing revenues and units closed, and an increase in average sales
prices as compared to the corresponding period in 1995. Closings in the six
months ended March 31, 1996 were adversely affected by restrictions on the
Company's ability to purchase lots during the pendency of its bankruptcy case.
Such restrictions delayed the commencement of construction of homes and delayed
closings which otherwise would have been expected to occur during the period,
particularly during the quarter ended December 31, 1995. Further, the Company
believes that such delays adversely affected sales and the Company's
cancellation rate during the bankruptcy. The increases in average sales prices
were primarily due to price increases in both regions and the introduction of
new, higher priced projects in California.
<TABLE>
The following table presents the family and retirement components of
housing revenues by region (exclusive of the Company's Southeast operations;
dollars in thousands).
<CAPTION>
Three Months Ended March 31, Six Months Ended March 31,
----------------------------------------------- ---------------------------------------------
1996 1995 1996 1995
---------------------- --------------------- --------------------- --------------------
% of % of % of % of
Dollars Total Dollars Total Dollars Total Dollars Total
------- ----- ------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Family revenues:
Arizona ................... $ 50,045 61.1% $ 49,273 58.8% $ 89,836 57.3% $ 95,429 54.6%
California ................ 13,585 16.6% 18,741 22.4% 29,242 18.7% 40,810 23.4%
-------- ----- -------- ----- -------- ----- -------- -----
Total ..................... 63,630 77.7% 68,014 81.1% 119,078 76.0% 136,239 78.0%
-------- ----- -------- ----- -------- ----- -------- -----
Retirement revenues:
Arizona ................... 12,117 14.8% 11,509 13.7% 19,373 12.4% 23,477 13.4%
California ................ 6,098 7.5% 4,304 5.1% 18,253 11.6% 14,938 8.6%
-------- ----- -------- ----- -------- ----- -------- -----
Total ..................... 18,215 22.3% 15,813 18.9% 37,626 24.0% 38,415 22.0%
-------- ----- -------- ----- -------- ----- -------- -----
Company total ............... $ 81,845 100.0% $ 83,827 100.0% $156,704 100.0% $174,654 100.0%
======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
During the quarter and six months ended March 31, 1996, the Company
experienced a percentage decrease in family revenues and a corresponding
increase in retirement revenues. The decrease in family revenues was primarily
due to reduced closings of the Company's California family projects and
increased revenues from the Company's California retirement projects. The
increase in California retirement revenues was due to a change in the mix of
product types closed at the Company's California retirement communities.
<TABLE>
Net orders:
The following table presents comparative net orders by region (exclusive of
the Company's Southeast operations; dollars in thousands).
<CAPTION>
Three Months Ended March 31, Six Months Ended March 31,
------------------------------------------------------ ----------------------------------------------------
Dollar/Unit Percentage Dollar/Unit Percentage
Increase Increase Increase Increase
1996 1995 (Decrease) (Decrease) 1996 1995 (Decrease) (Decrease)
---- ---- ---------- ---------- ---- ---- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Arizona:
Dollars ............ $ 88,676 $ 84,012 $ 4,664 5.6% $149,278 $139,677 $ 9,601 6.9%
Units ordered ...... 481 439 42 9.6% 808 748 60 8.0%
Average price ...... $ 184 $ 191 $ (7) (3.7%) $ 185 $ 187 $ (2) (1.1%)
California:
Dollars ............ $ 36,733 $ 44,018 $ (7,285) (16.6%) $ 56,576 $ 67,180 $(10,604) (15.8%)
Units ordered ...... 144 172 (28) (16.3%) 219 258 (39) (15.1%)
Average price ...... $ 255 $ 256 $ (1) (0.4%) $ 258 $ 260 $ (2) (0.8%)
Company total:
Dollars ............ $125,409 $128,030 $ (2,621) (2.0%) $205,854 $206,857 ($ 1,003) (0.5%)
Units ordered ...... 625 611 14 2.3% 1,027 1,006 21 2.1%
Average price ...... $ 201 $ 210 $ (9) (4.3%) $ 200 $ 206 $ (6) (2.9%)
</TABLE>
Net orders represents the aggregate dollar value and number of homes
for which the Company has received purchase deposits and signed sales contracts
during the period, net of cancellations. In the quarter and six months ended
March 31, 1996, the Company experienced an increase in net orders in Arizona and
a decrease in net orders in California. The Company believes that the increase
in net orders in Arizona was due to continued strong home buyer demand in the
Phoenix area, and improved confidence in the Company's financial strength
following consummation of its Chapter 11 case. The Company believes that the
decrease in net orders in California was due to a lack of inventory availability
arising from restrictions on the Company's ability to purchase lots during its
Chapter 11 case and lingering effects on customer confidence arising from the
Company's Chapter 11 case. The decrease in average sales prices in both regions
was primarily due to changes in the mix of product types sold.
<TABLE>
Net sales backlog:
Net sales backlog represents the aggregate dollar value and number of
homes ordered, net of cancellations, pending delivery, for which the Company has
received purchase deposits and signed sales contracts. The following table
presents comparative net sales backlog by region at March 31, 1996 and 1995
(exclusive of the Company's Southeast operations; dollars in thousands).
<CAPTION>
Dollar/Unit Percentage
Increase Increase
1996 1995 (Decrease) (Decrease)
---- ---- ---------- ----------
<S> <C> <C> <C> <C>
Arizona:
Dollars ................................. $162,281 $143,805 $ 18,476 12.8%
Units in backlog ........................ 877 748 129 17.2%
Average sales price ..................... $ 185 $ 192 $ (7) (3.6%)
California:
Dollars ................................. $ 57,895 $ 65,991 $ (8,096) (12.3%)
Units in backlog ........................ 218 235 (17) (7.2%)
Average sales price ..................... $ 266 $ 281 $ (15) (5.3%)
Total:
Dollars ................................. $220,176 $209,796 $ 10,380 4.9%
Units in backlog ........................ 1,095 983 112 11.4%
Average sales price ..................... $ 201 $ 213 $ (12) (5.6%)
</TABLE>
Cancellations as a percentage of gross sales contracts written were 26%
and 28% for the quarters ended March 31, 1996 and 1995, respectively. Generally,
canceled sales contracts are replaced with new sales contracts within a
relatively short time period after cancellation. The Company believes that the
inability of home buyers to sell their current homes or to qualify for mortgages
historically have been the primary causes of cancellations. The Company also
believes that cancellations are sometimes attributable to buyers' personal or
employment-related changes in circumstances. Except in instances where
substantial expenditures on buyer options have been made by the Company in
construction, the Company generally has released canceling buyers from their
contracts at minimal or no cost.
The increase in units in backlog in Arizona was due primarily to strong
net sales in the six months ended March 31, 1996 arising from continued strong
home buyer demand in the Phoenix area and improved confidence in the Company's
financial strength following consummation of its Chapter 11 case. The change in
units in backlog in California was not significant. The decreases in average
sales price in backlog in Arizona and California were primarily the result of
changes in the mix of product types in backlog.
<TABLE>
Gross margins
The following table presents comparative gross margins by region
(exclusive of the Company's Southeast operations; dollars in thousands).
<CAPTION>
Three Months Ended March 31, Six Months Ended March 31,
----------------------------------------------- -------------------------------------------------
1996 1995 1996 1995
---------------------- --------------------- --------------------- -----------------------
Dollars % Dollars % Dollars % Dollars %
------- --- ------- --- ------- --- ------- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Arizona .................... $ 9,461 15.2% $ 8,456 13.9% $14,157 13.0% $17,840 15.0%
California ................. 1,528 7.8% 411 1.8% 3,720 7.8% 4,333 7.8%
------- ------- ------- -------
Company Total .............. $10,989 13.4% $ 8,867 10.6% $17,877 11.4% $22,173 12.7%
======= ======= ======= =======
</TABLE>
Fresh start reporting requires that the purchase accounting principles
of APB 16 be followed in the valuation of the reorganized Company's balance
sheet as of the Consummation Date (the "Opening Balance Sheet"). APB 16 requires
that the basis assigned to purchased inventories include a portion of the profit
which would otherwise have been recognized upon the closing of the related home
sale, consistent with the concept that the earnings process occurs throughout
the construction process. The further construction is complete on a given home,
the more profit is capitalized in the Opening Balance Sheet. Accordingly,
margins on homes held at the Consummation Date and closed in the earlier fiscal
periods after the application of purchase accounting will generally be depressed
relative to homes closed later in the fiscal year. Further, all homes under
construction as of the Consummation Date will generally have margins less than
those on homes on which construction began after the Consummation Date. The
impact of purchased profit on gross margin is partially offset by the
elimination of capitalized interest in inventory in the Opening Balance Sheet
and less interest being capitalized as a result of the change in the Company's
method of applying the capitalization of interest principles of SFAS No. 34 to
housing inventory discussed in Note 3 to the accompanying consolidated financial
statements.
The Company's gross margins increased in the quarter ended March 31,
1996 from the corresponding period in the prior year primarily due to the
revaluation of the Company's housing inventory and land held for development to
fair value at the Consummation Date, which resulted in lower land basis and
higher gross margins, and the effect of reduced interest capitalization and
corresponding absorption as discussed above. Such higher gross margins were
offset by the amortization of approximately $3.1 million of purchased profit.
Additionally, gross margin in California in 1995 was negatively impacted by
significant warranty costs resulting from defective materials supplied by
certain subcontractors and the Company's decision to reduce sales prices and
liquidate remaining inventory in certain close-out subdivisions.
The Company's gross margins decreased in the six months ended March 31,
1996 from the corresponding period in the prior year primarily as a result of
the amortization of $6.6 million of purchased profit, offset by lower land basis
resulting from the revaluation of the Company's housing inventory and land held
for development at the Consummation Date. Further, the Company believes that
margins were adversely affected by price reductions enacted during the summer
months of 1995 to entice buyers who may have been hesitant to purchase a UDC
home because of its Chapter 11 filing.
<TABLE>
Selling and administrative expenses
The following table presents selling and administrative expenses for
the three and six month periods ended March 31, 1996 and 1995 (exclusive of the
Company's Southeast operations and $7.1 million of reorganization items; dollars
in thousands).
<CAPTION>
Three Months Six Months
Ended Ended
March 31, March 31,
------------------------- ------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Selling and administrative expenses:
Variable component.............................. $ 3,457 $ 3,718 $ 6,457 $ 7,543
Fixed component................................. 8,769 7,805 16,264 16,029
---------- ---------- ---------- ---------
Total selling and
administrative expenses..................... $ 12,226 $ 11,523 $ 22,721 $ 23,572
========== ========== ========== =========
As a percentage of total sales:
Variable component.............................. 4.2% 4.4% 4.1% 4.3%
Fixed component................................. 10.7% 9.3% 10.4% 9.2%
---------- ---------- ---------- ---------
Total selling and
administrative expenses..................... 14.9% 13.7% 14.5% 13.5%
========== ========== ========== =========
</TABLE>
The variable component of selling and administrative expenses
represents sales commissions, depreciation of model furnishings and closing
costs. The change in variable selling and administrative expenses as a
percentage of housing sales was not significant.
The fixed component of selling and administrative expenses represents
all other selling and administrative expenses which primarily do not vary with
housing sales volume. In the quarter and six months ended March 31, 1996, fixed
selling and administrative expenses in total dollars increased primarily due to
compensation-related costs arising from severance payments due to the Company's
former president and certain other former executive officers, partially offset
by an overall reduction in overhead costs.
<TABLE>
Liquidity and Capital Resources
The Company's capital resources are primarily invested in its housing
inventory, land held for development and land held for sale. The following table
presents the regional components of housing inventory, land held for development
and land held for sale (dollars in thousands):
<CAPTION>
March 31, September 30, Increase
1996 1995 (Decrease)
---- ---- ----------
<S> <C> <C> <C>
Housing inventory:
Arizona ......................................... $ 83,312 $ 70,245 $ 13,067
California ...................................... 55,552 59,732 (4,180)
Southeast ....................................... 439 12,970 (12,531)
-------- -------- --------
Company total .......................... $139,303 $142,947 $ (3,644)
======== ======== ========
Land held for development:
Arizona ......................................... $ 87,772 $ 97,825 $(10,053)
California ...................................... 42,250 81,651 (39,401)
-------- -------- --------
Company total .......................... $130,022 $179,476 $(49,454)
======== ======== ========
Land held for sale:
Arizona ......................................... $ 23,011 $ 21,198 $ 1,813
California ...................................... 11,104 2,638 8,466
Southeast ....................................... 3,844 15,660 (11,816)
-------- -------- --------
Company total .......................... $ 37,959 $ 39,496 $ (1,537)
======== ======== ========
</TABLE>
Land held for development at March 31, 1996 reflects a write-down to fair
value as of the Consummation Date of $40.5 million, resulting from the Company's
adoption of fresh start reporting. Land held for sale reflects a writeup to fair
value of $2.3 million as of the Consummation Date, transfers from land held for
development of $8.2 million subsequent to the Consummation Date and sales with a
basis of $12.0 million subsequent to the Consummation Date. The fair value of
housing inventory approximated its book value at the Consummation Date.
At March 31, 1996, the Company finances its home building, land development
and mortgage operations as discussed below:
Construction and Acquisition and Development Financing - The Company's
largest credit facility is a $150 million facility with a group of banks, $120
million of which is a revolving facility and an aggregate of $30 million of
which is available pursuant to five separate term facilities. The revolving
facility is available for both construction and acquisition and development ("A
& D") activities in Arizona and California, with the amount available for A & D
activities limited to a maximum of $37.5 million. The revolving facility accrues
interest at prime plus 1.0% or, at the Company's option, LIBOR plus 3.25%,
payable monthly. If certain performance standards are met, including ratios of
debt to tangible net worth, interest coverage and liquidity, the revolving
facility will accrue interest at a rate as low as prime plus 0.5% or, at the
Company's option, LIBOR plus 2.75%. The revolving facility matures on March 31,
1999, but the commitment amount decreases by $25 million per quarter commencing
February 1, 1998 (the "Conversion Date") and the facility ceases to revolve six
months prior to the maturity date. On the Conversion Date, the interest rate on
the revolving facility increases to prime plus 1.5% or, at the Company's option,
LIBOR plus 3.50%. Following the Conversion Date, no new A & D projects will be
permitted, and no new unit starts will be allowed after 12 months following the
Conversion Date. The revolving facility requires payment of quarterly commitment
fees ranging from 0.5% per annum of the commitment amount to 1.0% per annum of
the commitment amount payable quarterly in advance and unused commitment fees
equal to 0.25% per annum of the average unused commitment amount payable
quarterly in arrears. In addition, the revolving facility requires payment of
syndication and agency fees. The term facilities initially accrue interest at
prime plus 2.0%, payable monthly. However, the interest rate with respect to
$18.5 million principal amount of the term loans will increase retroactively for
the duration of such facilities to 15% per annum if the average loan-to-value
ratio with respect to such facilities has not been reduced to 60% prior to May
13, 1996, and such ratio was 87% as of March 31, 1996. The Company is currently
in discussions with the banks regarding an extension of the date by which the
loan-to-value ratio must be reduced to 60%. The Company anticipates that an
extension will be granted through June 30, 1996 in contemplation of an asset
sale transaction which, if consummated, will reduce the loan-to-value ratio
below 60%, such that the interest rate on the loans will not increase
retroactively. The term facilities require quarterly principal reductions and
mature, with respect to $11.5 million of principal, on September 30, 1997 and,
with respect to $18.5 million of principal, on September 30, 1998. Each term
facility requires payment of release prices upon the sale of assets securing
such facility. The term loans include a 1.0% per annum commitment fee payable
annually in advance and, in some circumstances, agency and syndication fees. In
addition, the term facilities for $18.5 million of principal require payment of
exit fees at maturity ranging from 1.0% to 2.0%, depending upon the average
loan-to-value ratio of such facilities at certain dates. The revolving and term
facilities are secured by portions of the Company's (and its consolidated
entities') housing inventory, land held for development and land held for sale.
As of March 31, 1996, $20.8 million was outstanding under the term facilities
and $60.8 million was outstanding under the revolving facility.
The Company also has a $55.5 million credit facility consisting of a
$12.5 million construction facility for homes at Westbrook Village ("WBV"), a
$10.8 million WBV A & D facility, a $20.0 million general construction facility
and a $12.2 million term facility. The $12.2 million term facility accrues
interest at prime plus 2.0%, payable monthly together with principal payments of
$254,000 through September 1, 1996 and $339,000 from October 1, 1996 through
maturity on October 31, 1997. In addition, the $12.2 million term facility
requires payment quarterly of a loan fee of 2% per annum of the outstanding
principal amount. The $12.2 million term facility is secured by various portions
of the Company's land held for development. The $12.5 million WBV construction
facility and the $10.8 million WBV A & D facility accrue interest at prime plus
1.5% (with the construction facility reducing to prime plus 1.25% on October 1,
1996 if certain conditions are met), payable monthly. Additionally, (i) a loan
fee of 1% per annum of $12.5 million is payable quarterly (with the loan fee
reducing to 0.75% on October 1, 1996 if certain conditions are met) on the $12.5
million WBV construction facility and (ii) a loan fee of 1% per annum of $10.8
million is payable quarterly on the $10.8 million WBV A & D facility through
April 1, 1996 and a loan fee of 1% per annum of the maximum committed amount of
the WBV A & D facility as of July 1, 1996 is payable quarterly for the period
from July 1, 1996 through June 30, 1997. The $10.8 million WBV A & D facility
matures on July 1, 1997 and the $12.5 million WBV construction facility matures
on January 1, 1998. The facilities are secured by WBV housing inventory and land
held for development. The $20.0 million general construction facility accrues
interest at prime plus 1.5% (reducing to prime plus 1.25% on October 1, 1996 if
certain conditions are met), payable monthly. Additionally, a commitment fee of
1% per annum of $20.0 million is payable quarterly (reducing to 0.75% on October
1, 1996 if certain conditions are met). Also, a non-use fee of 1/24 of 1% of the
amount by which the outstanding balance is less than $10.0 million is due
monthly beginning March 25, 1996. The $20.0 million general construction
facility matures on November 7, 1996, with two one year extensions available if
certain conditions are met. Any advances under this loan will be secured by
portions of the Company's housing inventory. As of March 31, 1996, $5.4 million
was outstanding under the WBV construction facility, $1.2 million was
outstanding under the WBV A & D facility, and $2.3 million was outstanding under
the term facility. No amounts were outstanding under the general construction
facility.
The construction and A & D facilities described above contain various
covenants, including but not limited to, covenants regarding: (i) encumbrances;
(ii) minimum available liquidity; (iii) maximum total debt to tangible net
worth; (iv) minimum tangible net worth; (v) minimum cumulative net cash flow to
total debt service; (vi) minimum ratio of earnings before interest, taxes,
depreciation and amortization to interest paid; (vii) restrictions on mergers,
consolidations and acquisitions; (viii) restrictions on asset sales; and (ix)
restrictions on incurrence of additional indebtedness. Among other things, such
covenants may limit the Company's ability to obtain additional financing when
needed and on terms acceptable to the Company. Further, the availability of
funds under the revolving facilities is dependent upon compliance with such
covenants, certain loan-to-value ratios stated in each facility and the levels
of pre-sold and speculative construction. Accordingly, all of the committed
credit may not be available to the Company at any particular time. Any inability
of the Company to obtain financing when needed in amounts or on terms favorable
to the Company could have a material adverse effect on the Company's business,
operating results and financial condition.
As discussed in the section entitled "Debt Covenants" in Item 1. above,
the Company was in violation of the tangible net worth and debt to tangible net
worth covenants of the above-described facilities as of and subsequent to the
Consummation Date. In addition, from February 21, 1996 to March 14, 1996, the
Company was in violation of certain minimum available liquidity covenants. In
response, the Company has requested that the subject lenders waive the
violations and agree to a modification of the debt covenants, and on March 15,
1996, DMB invested $10 million in the Company in exchange for a new 14.5% Series
D Subordinated Note. Issuance of the new note, waiver of the violations and
modification of the debt covenants require approval of the subject lenders of
the Company. The Company has received the verbal approval of such lenders,
subject to final documentation.
Other Secured Borrowings - In addition to the credit facilities
described above, the Company has various notes outstanding collateralized
primarily by land held for development. The notes bear interest at rates ranging
from prime plus 0.25% to prime plus 2.0% and are due at various dates. At March
31, 1996, $23.1 million was outstanding under these notes.
New Series A and B Senior Notes and New Series C Subordinated Notes -
Upon consummation of the Plan, the Company issued: (1) the new Series A Senior
Notes in a principal amount of $60 million; (2) the new Series B Senior Notes in
a principal amount of $10 million; and (3) the new Series C Subordinated Notes
in a principal amount of $35 million, $30 million of which were issued to DMB in
exchange for a portion of its $108 million investment. Interest on the new
Senior Notes accrues at a rate of 12.5% per annum, commencing September 1, 1995,
and is payable semi-annually beginning May 1, 1996. Both series of new Senior
Notes mature on May 1, 2000. The new Series B Senior Notes further require
prepayments from the proceeds of certain asset sales in excess of $10 million,
subject to certain limitations related to the Company's new construction and
acquisition and development financing. Both series of new Senior Notes contain
numerous covenants which may, among other things, limit the Company's ability to
obtain additional financing when needed and on terms acceptable to the Company.
Interest on the new Series C Subordinated Notes accrues at the rate of
14.5% per annum and is payable semi-annually beginning November 1, 1996. The new
Series C Subordinated Notes mature November 1, 2000. The payment of interest in
cash on the new Series C Subordinated Notes is restricted by certain limitations
related to the Company's construction and acquisition and development financing.
New Series D Subordinated Note - On March 15, 1996, DMB invested $10
million in the Company in exchange for a $10 million new Series D Subordinated
Note. The terms for the new Series D Subordinated Note are identical to the
terms for the new Series C Subordinated Notes discussed above, except that
payments on the new Series D Subordinated Note are subordinate to payments on
the new Series C Subordinated Notes. Issuance of the new Series D Subordinated
Note is subject to the approval of certain secured lenders of the Company. The
Company has received the verbal approval of such lenders, subject only to final
documentation.
New Common Stock - In connection with the consummation of the Plan, the
Company sold all 1,000 of the authorized shares of new Common Stock of the
reorganized Company, par value $0.01 per share, to DMB. DMB then issued a
purchase option to AEW Partners, L.P. ("AEW") which, as amended, gave AEW the
right to purchase 500 of the common shares owned by DMB, $15 million of the new
Series C Subordinated Notes issued to DMB, $5 million of the new Series D
Subordinated Note issued to DMB and 50% of the general partner interest held by
a DMB affiliate in WBV for an aggregate purchase price of $61.25 million, plus
interest (as defined). On April 21, 1996, AEW notified DMB that it elected to
exercise the option, and the purchase by Eastrich No. 184, LLC (as to all
interests except the WBV interest) and Eastrich No. 185, LLC (as to the WBV
interest), as assignees of AEW, pursuant to the exercise of the option was
completed on May 6, 1996.
Mortgage Debt - The Company finances its mortgage operations with a $10
million committed revolving credit facility which matures on June 30, 1996. The
Company is currently negotiating an extension of the facility, and anticipates
that the facility will be extended beyond its June 30, 1996 maturity date. This
facility is secured by residential mortgages originated in the closing of the
Company's residential home sales. At March 31, 1996, $6.3 million was available
and outstanding under this facility. The Company's collateralized mortgage
obligations are non-recourse and are secured by mortgage backed securities
issued by FNMA, GNMA and FHLMC. These obligations mature as their corresponding
mortgage backed securities mature.
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
The statements contained herein which are not historical facts may
constitute "forward- looking statements" within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, and are subject to the safe harbors created
thereby. These forward-looking statements involve risks and uncertainties,
including, but not limited to, the Company's success in negotiating an agreement
with its lenders to cure the violation of the tangible net worth, debt to
tangible net worth and minimum available liquidity covenants in the Company's
credit facilities and to prevent a retroactive increase in the interest rate
charged under certain loans, and the Company's success in extending its mortgage
debt facility beyond its June 30, 1996 maturity date. In addition, the Company's
business, operations and financial condition are subject to substantial risks
which are described in the Company's reports and statements filed from time to
time with the Securities and Exchange Commission. These reports and statements
include the Company's Annual Report on Form 10-K for the year ended September
30, 1995.
<PAGE>
32
Part II. Other Information
Item 1. Legal proceedings
Certain of the Company's excess liability insurance carriers have
asserted that their policies do not provide coverage or indemnification
for certain lawsuits in which the Company is a defendant because the
policies, relating to the period between April 1, 1985 and April 1,
1988, neither "follow the form" of the primary policies nor contain
"broad form" coverage. The carriers have expressly reserved their
rights with respect to the defense of the lawsuits. In addition, in
connection with the settlement of certain claims, one of the Company's
excess liability insurance carriers has reserved its right to be
reimbursed amounts paid in settlement in the amount of $275,000. On
July 8, 1994 the Company filed a lawsuit in the Maricopa County,
Arizona Superior Court (Case No. CV 94- 10637) against Mann & Smith,
Inc., its insurance agent, and Cooney, Rikard & Curtin, Inc., its
insurance broker, seeking special damages in the amount of $275,000,
general and special damages up to the limits of the excess liability
insurance policies, attorneys' fees and costs. The defendants filed
separate answers denying any liability to the Company. In addition, one
defendant filed a cross-complaint against the other defendant, and the
Company filed a motion to bifurcate the liability and damage issues. On
March 7, 1996 the parties filed a stipulation for dismissal without
prejudice wherein the Company retained the right to refile the case up
to and including September 1, 1997, after an assessment of potential
exposure and damages. On March 11, 1996 the case was dismissed without
prejudice.
On September 24, 1992, the Mariners Pointe Homeowners Association (the
"Association") filed a lawsuit against the Company in the United States
District Court for the District of South Carolina, Florence Division
(Civil Action No. 4:92-3097-22), alleging that numerous
construction/design defects exist at the Company's Mariners Pointe
project in South Carolina. The complaint included five separate causes
of action: breach of contract, breach of implied warranties of
workmanship, negligence, strict tort and unfair trade practices. In
addition to actual damages, the plaintiff's actions in tort and unfair
trade practices sought to recover either punitive damages or treble
actual damages plus attorneys' fees. The plaintiff's alleged actual
damages were $4,775,835. The Company signed a Settlement Agreement and
Release on February 16, 1996 wherein the Company (and the other parties
involved in the suit) agreed to pay the Association (and certain other
parties) the sum of $1,850,000, of which the Company paid a net amount
of $440,725.
On June 5, 1995, June 14, 1995 and October 25, 1995, three lawsuits,
entitled Michael A. Isco v. Richard C. Kraemer et al. (Case No.
CV95-08941), Larry Alexander et al. V. Arthur Andersen LLP et al. (Case
No. CV95-09509), and Crandon Capital Partners v. Kraemer, et al. (Case
No. CV95-17785), respectively (collectively, the "Arizona Actions"),
were filed in Maricopa County, Arizona Superior Court on behalf of
purported classes of former shareholders of the Company against, among
others, certain current and former officers and directors of the
Company, who may be entitled to indemnification from the Company, as
well as the Company's independent public accountants, Arthur Andersen
LLP. The Company is not a named defendant in any of these complaints.
Subsequently, the Arizona Actions were consolidated. The complaints
seek, among other things, unspecified money damages and contain
allegations which include violations of Arizona securities laws, fraud,
negligent misrepresentation, breach of fiduciary duty, negligence and
gross negligence. The Plan provided for the discharge of all claims
asserted in such class action lawsuits as against the Company, and the
holders of such claims received no distributions on account of such
claims.
The Company could, however, be required to indemnify certain of the
director/officer defendants if such defendants incur expenses or
liability and seek indemnification. The Plan provides that certain
indemnification obligations of the Company, including those to the
director/officer defendants in the Arizona Actions, survive
consummation of the Plan. Pursuant to Article XI of the Bylaws of the
Company then in effect (the "Defense Provision"), the Company is
required to "pay the expenses [of directors and officers] incurred in
defending any proceeding in advance of its final disposition, provided,
however, that the payment of expenses incurred ... in advance of the
final disposition of the proceeding shall be made only upon receipt of
an undertaking by the director or officer to repay all amounts advanced
if it should be ultimately determined that the director or officer is
not entitled to be indemnified." With respect to the advancement of
defense costs, the Company and National Union Fire Insurance Company of
Pittsburgh, Pa. ("National Union"), the issuer of the Company's primary
directors and officers insurance and Company reimbursement policy,
agreed, among other things, that (i) National Union would advance all
reasonable and necessary defense costs incurred by most of the covered
defendants in the Arizona Actions during the pendency of the Chapter 11
proceeding, (ii) upon consummation of a reorganization plan, the
Company would repay an amount up to $1.5 million of defense costs
actually advanced by National Union, (iii) the Company would not be
obligated to repay an amount greater than $1.5 million of advanced
defense costs, and (iv) National Union would have no duty to defend.
Counsel for the plaintiffs, the Company, the issuers of the Company's
directors and officers insurance and Company reimbursement policies and
most of the director/officer defendants have engaged in settlement
discussions in respect of the Arizona Actions. DMB and its counsel were
also involved in such settlement discussions. As a result of these
settlement discussions, an agreement (the "Settlement Agreement") was
reached pursuant to which the plaintiffs and the director/officer
defendants agreed to settle and compromise the Arizona Actions in their
entirety, as such actions relate to the director/officer defendants and
the Company, in exchange for, among other things, $12.75 million. The
Settlement Agreement was filed with the Maricopa County, Arizona
Superior Court on January 19, 1996; that Court now must determine
whether, after notice to class members, to approve the Settlement
Agreement and to enter a bar order against the non-settling defendants.
Of such amount, up to $1.5 million (the self-insured retention under
the Company's applicable directors and officers insurance policies)
will be funded by the Company. Certain issuers of the Company's
directors and officers insurance policies, together with the Company,
have agreed to fund the balance of the settlement. Such settlement is
subject to certain conditions, including the entry of a final,
non-appealable judgment by the Maricopa County, Arizona Superior Court.
In connection with such settlement and issues discussed between the
Company and DMB concerning the consummation of the Stock Purchase
Agreement, the director/officer defendants have agreed to limit their
aggregate claim for indemnification arising out of the Arizona Actions
in certain circumstances to $12 million above the following: (A) the
balance of the Company's self-insured retention under applicable
insurance policies and (B) applicable insurance held by the Company
with respect to the Arizona Actions. The Company does not believe that
any obligations under its By-laws will exceed its coverage under its
directors and officers insurance policies.
The parties filed a joint request that the Court preliminarily approve
the settlement, promptly approve the form of notice to be provided to
the class, order that the class be given notice, and set a final
settlement hearing date. Arthur Andersen LLP filed an objection to the
joint request, but later withdrew its objection to the order that the
class be given notice. On April 5, 1996, the Court entered an order
that the class be given notice of the settlement and an opportunity to
object or "opt out". However, the plaintiffs have subsequently sought
to modify the proposed settlement to eliminate any release of potential
claims they might have against the Company's prior independent public
accountants, Coopers and Lybrand. The notice to the class was to be
mailed to the individual class members on or before May 17, 1996. A
hearing is scheduled for September 6, 1996 to approve the final
settlement and to rule on the petition for entry of a good faith/bar
order.
The Company was a defendant in a lawsuit which included four causes of
action: negligent misrepresentation, unfair business practices,
negligence and fraud. The complaint was filed on September 28, 1994 in
the Contra Costa County, California Superior Court (Case No. 94-04160)
and is entitled Kerry P. Salisbury and Joan J. Salisbury; Robert A.
Borg and Margo M. Borg; David G. Mooers and Yvonne E. Mooers; David L.
Fulk and Susan K. Fulk; Veronica J. Agramont and Ramiro L. Agramont v.
UDC Homes, Inc., UDC Mortgage Corporation, UDC-Universal Development
L.P., Universal Development Corporation, UDC- Universal Development,
Inc., The Hammond Company; The Mortgage Bankers; The Cal-Bay Mortgage
Group; and George Cardas. The plaintiffs are five married couples who
alleged that the Company, UDC Mortgage Corporation ("UDC Mortgage"),
the Company's broker, George Cardas, and two unrelated lenders
conspired to qualify buyers/borrowers, including the plaintiffs, to
purchase homes in the Company's Laurel Ridge project despite such
parties' alleged inability to afford the homes by failing to disclose
the nature and extent of the buyers/borrowers tax and special
assessment district obligations and by creating insufficient impound
accounts. The plaintiffs sought general and special damages, punitive
damages, restitution and attorneys' fees and costs, all in unspecified
amounts. In addition, two plaintiffs sought rescission of their
purchase contracts. Upon notification of the Bankruptcy Case, the court
issued a stay of all further proceedings against the Company, while
litigation against the lender defendants and Mr. Cardas continued and
summary judgment motions were filed. Mr. Cardas settled with the
plaintiffs and the Company has reimbursed him in accordance with
indemnification provisions of the Company's By-laws. On March 8, 1996,
UDC Mortgage and the plaintiffs reached a settlement wherein UDC
Mortgage agreed to pay the plaintiffs Borgs and Mooers the sum of
$12,000 and to vacate the previously awarded judgment against the other
plaintiffs, and the plaintiffs agreed to a dismissal with prejudice of
the entire action by all plaintiffs against UDC Mortgage. In addition,
the parties agreed to a mutual release of claims and to bear their own
court costs and attorneys' fees. Plaintiffs' case against the Company
was dismissed with prejudice on April 15, 1996, and Plaintiffs' case
against UDC Mortgage was dismissed with prejudice on April 18, 1996.
The Company is also involved in various legal proceedings which
generally represent ordinary routine litigation incident to its
business, some of which are covered in whole or in part by insurance.
In the Company's opinion, none of the pending litigation will have a
material adverse effect upon the Company's financial position or
results of operations.
<PAGE>
35
Item 5. Other Information
As a result of the May 6, 1996 closing of the purchase by Eastrich No.
184, LLC from DMB described in Part I, Item 2 above, the Company has
two record owners of its Common Stock.
In connection with its Chapter 11 filing, the Company agreed to use its
reasonable best efforts to maintain its status as a reporting company
under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), for so long as the new Series A Senior Notes and the new Series
B Senior Notes remain outstanding. Pursuant to such obligation, the
Company has been seeking to obtain the listing of the new Series A
Senior Notes and the new Series B Senior Notes for trading on a
national securities exchange pursuant to Section 12(b) of the Exchange
Act or, if the Company is unable to secure such a listing of these
Notes, the Company will file a registration statement on Form 10
pursuant to Section 12(g) of the Exchange Act.
<PAGE>
36
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits
10.1 Stockholders Agreement dated May 6, 1996 by and among
DMB, Eastrich No. 184, LLC and the Company.
10.2 Employment Termination Agreement dated March 11, 1996 by
and between the Company and Richard C. Kraemer.
(b) Reports on Form 8-K
1. The Company filed a report on Form 8-K dated March 21,
1996 regarding the resignation of its president and chief
executive officer, a $10 million investment by DMB, and
the extension of a purchase option granted by DMB to AEW.
No financial statements were filed as a part of the
report.
<PAGE>
37
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.
UDC HOMES, INC.
-----------------------------------------
(Registrant)
May 15, 1996 By: /s/ Jacques C. Lazard
- - -------------- --------------------------------------
Date Jacques C. Lazard
Executive Vice President and
Chief Financial Officer
UDC HOMES, INC.
STOCKHOLDERS AGREEMENT
THIS STOCKHOLDERS AGREEMENT ("Agreement") is made and entered into as
of the 6th day of May, 1996, by and among DMB RESIDENTIAL L.L.C., an Arizona
limited liability company ("DMB"), EASTRICH NO. 184, LLC, a Delaware limited
liability company ("AEW"), and UDC HOMES, INC., a Delaware corporation (the
"Company"). DMB and AEW, together with their permitted successors and assigns,
are sometimes referred to herein individually as "Stockholder" and collectively
as "Stockholders."
W I T N E S S E T H:
WHEREAS, DMB and AEW are the owners of all of the issued and
outstanding common stock ("Shares") of the Company as follows:
Name No. of Shares
---- -------------
DMB 500 Shares
AEW 500 Shares
WHEREAS, DMB and AEW are owners of Series C Subordinated Notes (the
"Series C Notes") issued by the Company as follows:
Name Principal Amount of Notes
---- -------------------------
DMB $15,000,000
AEW $15,000,000
WHEREAS, DMB and AEW have each made advances to the Company in the
amount of $5,000,000, pursuant to which the Company has agreed, to the extent
permitted by its creditors, to issue to each of DMB and AEW $5,000,000 of Series
D Subordinated Notes (the "Series D Notes") or, if not so permitted, to reflect
such amounts as additional paid-in capital with respect to the Shares.
WHEREAS, the parties hereto desire to promote their interests and the
interests of the Company by imposing certain restrictions and obligations on the
Stockholders, the Company and the Shares.
NOW, THEREFORE, in consideration of the foregoing premises and mutual
covenants hereinafter contained, and for other good and lawful consideration,
the receipt and sufficiency of which are hereby acknowledged, the parties agree
as follows:
ARTICLE 1
RESTRICTIONS ON TRANSFER; TAKE-ALONG RIGHTS
1.1 Shares Subject to Restrictions. All capital stock of the Company
hereafter owned by any Stockholder shall be subject to all the terms and
conditions of Articles 1, 2 and 6 hereof and for all purposes shall be deemed
"Shares" thereunder.
1.2 Transfer Restrictions. Other than as expressly permitted by this
Agreement, no Stockholder shall transfer, or permit the transfer of, all or any
part of its Shares, or any interest therein, whether legal or beneficial, now
owned or hereafter acquired by such Stockholder without the advance written
consent of the other Stockholder; provided, however, that the foregoing shall
not be deemed to limit or restrict any transfer, direct or indirect, of either
the Shares or any interest in DMB or AEW provided that: (i) the Shares continue
to be controlled and beneficially owned by a single entity (the "AEW
Shareholder" or the "DMB Shareholder," as the context requires) which is
majority owned and controlled by the present owners of DMB or AEW, as the case
may be, and (ii) any permitted transferee of the Shares agrees to be bound to
the terms of this Agreement in which case any such permitted transferee shall
for all purposes be deemed to be a "Stockholder" hereunder. Any attempted
transaction not in compliance with this Section 1.2 shall be void. As used in
this Agreement, the verb "transfer," in whatever form, number or tense, shall
mean, as the case may be, to pledge, encumber or in any manner use as
collateral, to transfer, sell or otherwise dispose of, or suffer disposition or
encumbrance, voluntarily or involuntarily.
1.3 Permitted Transfers. Commencing on the third anniversary date
hereof and unless and until such restrictions may be terminated pursuant to
Section 1.5, a Stockholder may sell its Shares free of the limitations of
Section 1.2 provided that such Shares are first offered to the other Stockholder
pursuant to Article 2. Any attempted transaction not in compliance with this
Section 1.3 shall be void.
1.4 Fifth Year Take-Along Rights. At any time after the fifth
anniversary of the date of this Agreement, if a Stockholder desires to sell its
Shares other than as permitted by Section 1.2, such Stockholder may exercise the
take-along rights provided in this Section 1.4. The Stockholder shall first
offer its Shares to the other Stockholder in accordance with the provisions of
Article 2; provided, however, that the Selling Stockholder (as defined in
Section 2.1.1) shall include in its Offering Notice pursuant to Section 2.1.1 a
statement that it intends to exercise its take-along rights pursuant to this
Section 1.4 if the Offered Shares (as defined in Section 2.1.1) are not acquired
by the Optionee (as defined in Section 2.1.1) as provided in Article 2. In the
event the Optionee does not elect to acquire all of the Offered Shares pursuant
to Article 2 and the Selling Stockholder notifies the Optionee in writing within
ten days of the offer period provided in Section 2.2.1 that it is exercising its
take-along rights pursuant to this Section 1.4, the Optionee shall be deemed to
have elected to join the Selling Stockholder in selling all of its Shares to a
Proposed Purchaser (as defined in Section 2.4) as hereinafter provided. The
Selling Stockholder may transfer all, but not less than all, of the Offered
Shares to a Proposed Purchaser at a price (the "Actual Price") that is no less
than the Share Price, no later than the two hundred and seventieth day following
the last day of the last option period provided for herein. The other
Stockholder shall: (i) join the Selling Stockholder in transferring its Shares
to the Proposed Purchaser, (ii) receive the Actual Price for such its Shares,
and (iii) be entitled to transfer its Shares to the Proposed Purchaser on the
same terms and conditions as the Selling Stockholder. Each Stockholder agrees to
execute, acknowledge and deliver such documents as may be required to transfer
its Shares pursuant to this Section 1.4.
1.5 Termination of Transfer Restrictions, Right of First Offer and
Take-Along Rights. The transfer restrictions, right of first offer and
take-along rights set forth in Sections 1.2, 1.3 and 1.4 shall terminate upon
the closing of an initial public offering of equity securities of the Company to
the general public (an "IPO") that is effected pursuant to a registration
statement filed with, and declared effective by, the Securities and Exchange
Commission under the Securities Act of 1933, as amended (the "Securities Act").
ARTICLE 2
RIGHT OF FIRST OFFER
2.1 Offering Notice; Involuntary Transfer Date; Fair Market Value. For
the period set forth in Section 1.3, each Stockholder hereby covenants that it
will not transfer any Shares, or any interest therein, whether legal or
beneficial, other than as permitted by Section 1.2 without first offering to
transfer the same to the other Stockholder as hereinafter provided:
2.1.1 Offering Notice. Any Stockholder (the "Selling
Stockholder") desiring to transfer the Shares which it owns shall,
prior to transferring the same, offer in writing to transfer all of
such Shares to the other Stockholder ("Optionee"). The offer (the
"Offering Notice") shall identify the number of Shares owned by the
Selling Stockholder (the "Offered Shares") and shall set forth the per
share consideration (the "Share Price") for which the Selling
Stockholder intends to sell the Offered Shares, which shall be
determined by the Selling Stockholder in its sole discretion.
2.1.2 Involuntary Transfer Date. Any Stockholder who becomes
aware that there is a reasonable possibility that Shares held by such
Stockholder may be transferred involuntarily in the reasonably
foreseeable future shall provide written notice to the Company and the
other Stockholder describing in reasonable detail the known
circumstances concerning the possible transfer and thereafter keep the
Company and the other Stockholder reasonably informed with respect to
the potential transfer. The date upon which an involuntary transfer
becomes effective shall be an "Involuntary Transfer Date" for purposes
of this Agreement. In the event of the occurrence of an Involuntary
Transfer Date, any person or entity who receives Shares as a result of
the transfer that occurred on the Involuntary Transfer Date shall be
deemed to be a "Selling Stockholder" for purposes of this Agreement,
such Shares shall be deemed to be "Offered Shares", and upon receipt of
notice of such event, the Company shall send written notice of such
event identifying the number of Shares and the interest therein held by
the Selling Stockholder to the Optionee, and such notice shall be
deemed to be an "Offering Notice." Such Optionee shall have the right
to purchase such Offered Shares pursuant to this Article 2 at their
then Fair Market Value as determined in accordance with Section 2.1.3,
which shall be deemed to be the "Share Price".
2.1.3 Fair Market Value. The "Fair Market Value" of the
Offered Shares shall be the single value negotiated by and agreeable to
the Selling Stockholder (or its representative) and the Optionee. If a
Fair Market Value cannot be agreed upon in writing within fifteen days
after the receipt of the Offering Notice by the Optionee, the Fair
Market Value shall be determined by an independent third-party
appraiser, who shall be reasonably qualified to conduct and perform an
appraisal of the Offered Shares. The appraiser shall be selected as
follows: the Selling Stockholder and the Optionee shall each select one
appraiser and the two appraisers so selected shall select the appraiser
to determine the Fair Market Value of the Offered Shares. The appraiser
so selected shall complete its appraisal within forty-five days of its
appointment. The determination of the appraiser shall be binding on the
Selling Stockholder and the Optionee. The fees and expenses associated
with such appraisal shall be paid by the Selling Stockholder. Upon
written notice of the determination of Fair Market Value to the Selling
Stockholder and the Optionee, which shall constitute an "Offering
Notice", the Optionee shall have the period set forth in Section 2.2.1
to determine whether to acquire the Offered Shares.
2.2 Options to Purchase.
2.2.1 Option. The Optionee shall have an option, continuing
for a period of ninety days, beginning with the day following receipt
of the Offering Notice to acquire, at the Share Price, the Offered
Shares. The Optionee may acquire all, but not less than all, of the
Offered Shares. If the Optionee desires to acquire the Offered Shares,
the Optionee shall deliver to the Selling Stockholder (with a copy to
the Secretary of the Company) within said forty-five day period a
written election so to acquire the Offered Shares.
2.2.2 Failure to Exercise Option. If an Optionee does not give
timely notice of its election to exercise any option under this Section
2.2, such Optionee shall be deemed to have elected not to exercise that
option.
2.3 Election to Acquire All Offered Shares. If pursuant to this
Agreement, the Optionee elects to acquire all the Offered Shares, the Optionee
shall be obligated to consummate its election to acquire the Offered Shares no
later than the ninetieth day following the last day of the option period
provided for herein. The price to acquire each Offered Share shall be the Share
Price, which shall be paid by the Optionee to the Selling Stockholder no later
than the ninetieth day following the last day of the option period provided
herein. The Offered Shares so acquired shall for all purposes remain subject to
this Agreement and shall have such preemptive, registration and other rights as
are set forth herein.
2.4 Failure to Acquire All Offered Shares. If pursuant to this
Agreement, the Optionee does not elect to acquire all the Offered Shares, the
Selling Stockholder may transfer all, but not less than all, of the Offered
Shares to a third party (the "Proposed Purchaser") at a per share price that is
no less than the Share Price, no later than the two hundred and seventieth day
following the last day of the option period provided for herein. The Offered
Shares shall for all purposes remain subject to Articles 1 and 2 hereof and the
Proposed Purchaser (including any person taking the Shares as collateral
pursuant to a pledge or other encumbrance) shall, upon completion of the
transaction, immediately be deemed a Stockholder for purposes of Articles 1 and
2. The Proposed Purchaser shall execute and deliver all documents reasonably
necessary to effectuate the provisions of this Section 2.4, including without
limitation this Agreement. If the transaction with the Proposed Purchaser is not
consummated by such two hundred and seventieth day, then all the provisions of
this Agreement shall be deemed to apply again to the Offered Shares.
ARTICLE 3
REGISTRATION RIGHTS
3.1 Demand Rights. If either the AEW Shareholder or the DMB Shareholder
(the "Initiating Holder") requests that the Company register Shares (such Shares
are referred to in this Article 3 as the "Registrable Securities"), the Company
will use its best efforts to effect the registration of such Registrable
Securities pursuant to the Securities Act and such blue sky and other state
securities laws as such Initiating Holder shall request (collectively, the
"Securities Laws"); provided, however, that the Company shall not be obligated
to effect any such registration of Registrable Securities hereunder: (i) unless
such Registrable Securities shall have an aggregate offering price to the public
of not less than $50,000,000 (prior to underwriters' commissions and offering
expenses), or, if less, shall consist of the balance of such Initiating Holder's
Shares, (ii) until the third anniversary of the date of this Agreement and (iii)
unless it obtains the consent of the Stockholders as required by Section 6.1.
3.2 Notice of Registration. Upon receipt of notice from the Initiating
Holder pursuant to Section 3.1, the Company shall promptly attempt to obtain the
Stockholder consent required by Section 6.1. Once the Company has obtained the
Stockholder consent required by Section 6.1, the Company shall promptly give
written notice of such request (together with a list of the jurisdictions in
which the Company intends to attempt to qualify such securities under applicable
state securities laws) to the other Stockholder as soon as practicable and,
subject to the limitations of this Article 3, use its best efforts to effect the
registration under the Securities Laws of all such Registrable Securities that
the Initiating Holder request to register, together with all of the Shares,
which shall be considered "Registrable Securities" for purposes of this Article
3, of any other Stockholder that so requests registration by notice to the
Company which is given within thirty days after the notice from the Company
described above; provided, however, that the Company shall have no liability to
any person if, after exercising its best efforts, the registration statement is
not declared or ordered effective under the Securities Laws. In effecting such
registration, the Company shall execute an undertaking to file required
post-effective amendments and shall use its best efforts to permit and
facilitate the sale of the Registrable Securities in compliance with the
Securities Laws and rules and regulations promulgated thereunder. If the
offering undertaken pursuant to the notice required by this Section 3.1 is not
consummated within one hundred and eighty days, then all the provisions of this
Agreement shall be deemed to apply again to the Registrable Securities.
3.3 Underwriting. If the Initiating Holder intends to distribute the
Registrable Securities covered by its request by means of an underwriting, it
shall so advise the Company as a part of its request made pursuant to Section
3.1 and the Company shall include such information in the written notice
referred to in Section 3.2. In such event, the right of the other Stockholder to
include its Registrable Securities in such registration shall be conditioned
upon such Stockholder's participation in such underwriting and the inclusion of
such Stockholder's Registrable Securities in the underwriting (unless otherwise
mutually agreed by the Initiating Holder, the underwriter, the Company and such
Stockholder) to the extent provided herein.
3.4 Underwriting Agreement. Each Stockholder proposing to distribute
its Registrable Securities through such underwriting and the Company (together
with the Other Stockholders as provided in Section 3.6) shall enter into an
underwriting agreement in customary form with the representative of the
underwriter or underwriters selected for such underwriting by the Initiating
Holder and reasonably acceptable to the Company. No Stockholder shall be
required to make any representations or warranties to the Company or the
underwriter other than those relating to such Stockholder, its Registrable
Securities and its intended method of distribution and information about such
Stockholder provided by such Stockholder for use in any registration statement.
If any Stockholder that wishes to have its Registrable Securities registered
disapproves of the terms of the underwriting, such Stockholder may elect to
withdraw therefrom by written notice to the Company, the underwriter and the
Initiating Holder of its disapproval of the terms of the underwriting within ten
days of notice of the terms of the underwriting from the Company or the
underwriter. The Registrable Securities so withdrawn shall also be withdrawn
from the registration.
3.5 Limitation on Demand Registration. The Company shall not be
required to effect more than one registration under Section 3.1 during any
twelve-month period from any Initiating Holder (provided that any registration
that does not become effective shall not be counted as one of the demand
registrations) and shall not be obligated to effect a registration: (i) during
the one hundred eighty-day period commencing with the effective date of the
Company's initial public offering, (ii) if it delivers notice to the
Stockholders within thirty days of any registration request of its intent to
file a registration statement for an initial public offering within ninety days,
or (iii) if the Initiating Holder may sell, in a single transaction, all Shares
owned by it pursuant to the provisions of Rule 144 of the Securities Act.
3.6 Rights of Company and Other Stockholders. The Company and any other
stockholders of the Company entitled to participate in such registration
otherwise than pursuant to this Agreement (the "Other Stockholders"), may
participate in such registration, provided that the Company and any such Other
Stockholders agree to sell any shares being registered on their behalf on the
same basis as provided in any underwriting agreement to which the Stockholders
are a party. Notwithstanding the foregoing, without the advance written consent
of each Stockholder, the Company shall not grant registration rights to any
person or entity that are equal to or superior to the rights granted to the
Stockholders hereunder.
3.7 Reduction of Registered Securities. If the managing underwriter of
any offering undertaken pursuant to Section 3.1 advises that the registration of
the number of shares of Registrable Securities, together with the common stock
sought to be registered by the Company and any Other Stockholders entitled to
participate in such registration, if any, in its opinion will have a material
adverse impact on the offering (including without limitation causing the
proceeds or the price per share the Initiating Holder will derive from such
registration to be reduced or causing the number of securities to be registered
to be too large a number to be reasonable sold), the number of securities sought
to be registered shall be reduced as follows:
(i) the number of shares of common stock sought to be
registered by the Company and any Other Stockholders shall be reduced pro rata,
to the extent necessary to reduce the offering to the number of shares
recommended by the managing underwriter (the "Recommended Number"); and
(ii) if the reduction provided for in clause (i) above does
not reduce the number of securities to be registered to the Recommended Number,
then the number of shares of Registrable Securities held by the Stockholders
shall be reduced pro rata to the extent necessary to reduce the number of
securities to be registered to the Recommended Number.
3.8 Notice by Company. Anything herein to the contrary notwithstanding,
if the Company shall furnish notice to the Initiating Holder that in the good
faith judgment of the Board of Directors of the Company, it would be seriously
detrimental to the Company and its stockholders for such registration statement
to be filed on or before the date filing would be required and it is therefore
essential to defer the filing of such registration statement, the Company shall
have the right to defer such for a period of not more than ninety days after
receipt of the request from the Initiating Holder; provided, however, that the
Company may not make such certification more than once in any twelve-month
period.
3.9 Piggy-Back Registration Rights. If the Company proposes to register
common stock under the Securities Laws in a public offering solely for cash
(other than a registration on Form S-8 or Form S-4, or any successor form to
either such form or pursuant to Section 3.1), the Company shall, at such time,
promptly give each Stockholder written notice of such registration together with
a list of the jurisdictions in which the Company intends to attempt to qualify
such securities under applicable state securities laws. Upon the written request
of any Stockholder given within fifteen days after receipt of such written
notice from the Company, the Company shall use its best efforts to cause to be
registered under the Securities Act all of the Shares that each such Stockholder
has requested to be registered, which shall be deemed to be "Registrable
Securities" for purposes of this Section 3.9. If the managing underwriter of any
offering undertaken pursuant to this Section 3.9 advises that the registration
of the number of shares of Registrable Securities, together with the common
stock sought to be registered by the Company and any Other Stockholders entitled
to participate in such registration, if any, in its opinion will have a material
adverse impact on the offering (including without limitation causing the
proceeds or the price per share the Company will derive from such registration
to be reduced or causing the number of securities to be registered to be too
large a number to be reasonably sold), the number of securities sought to be
registered shall be reduced as follows:
(i) the number of shares of common stock sought to be
registered by the Other Stockholders that have exercised piggy-back
registration rights shall be reduced pro rata, to the extent necessary
to reduce the number of securities to be registered to the Recommended
Number; and
(ii) if the reduction provided for in clause (i) above does
not reduce the number of securities to be registered to the Recommended
Number, then the number of shares of Registerable Securities shall be
reduced pro rata to the extent necessary to reduce the number of
securities to the Recommended Number.
3.10 S-3 Registrations. For a period of three years from the date that
the Company has completed an IPO and provided that Form S-3 (or a successor to
such form) is available to the Company, if a Stockholder so requests and subject
to the provisions of Section 6.1, the Company shall register such Shares on Form
S-3 pursuant to the provisions of this Article 3; provided, however, that each
Stockholder shall be entitled to no more than two registrations on Form S-3 per
year and any such registered offering shall be for gross offering proceeds of
not less than $1,000,000.
3.11 Registration Expenses. All registration expenses (exclusive of
underwriting discounts and commissions) incurred in connection with any
registration, qualification or compliance pursuant to this Article 3 shall be
borne by the Company.
3.12 Registration Procedure. In the case of each registration effected
by the Company pursuant to this Article 3, the Company will keep each
participating Stockholder advised in writing as to the completion thereof and
will, at its expense: (i) keep such registration effective for a period of
ninety days or until the Stockholders have completed the distribution described
in the registration statement relating thereto, whichever first occurs, and (ii)
furnish such number of prospectuses and other documents incident thereto as a
Stockholder from time to time may reasonably request.
3.13 Stand-off Agreement. Each Stockholder hereby agrees that it will
not, to the extent requested by the Company and an underwriter of common stock
(or other securities) of the Company, sell or otherwise transfer or dispose of
any Shares during the one hundred and eighty-day period (or such shorter period
agreed to by the managing underwriter for such offering, if any) following the
effective date of a registration statement relating to an IPO; provided,
however, that such agreement shall only be applicable if all officers, directors
and holders of more than five percent of the Company's common stock are
similarly bound. In order to enforce the foregoing covenant, the Company may
impose stop-transfer instructions with respect to the Shares until the end of
such one hundred and eighty-day period.
3.14 Filing of Reports. The Company will, from and after such time as
the Company may have any class of its securities registered pursuant to Section
12 of the Securities Exchange Act of 1934, as amended (the "Exchange Act") or it
may have become subject to Section 15(d) thereof, file in a timely manner such
reports as are required to be filed by it with the Securities and Exchange
Commission so that Rule 144 under the Securities Act will be available to the
Stockholders of the Company in the event they are able to take advantage of the
provisions of such rule.
3.15 Indemnification. If any Shares are included in a registration
statement under this Agreement:
3.15.1 Indemnification of Stockholders. To the extent
permitted by law, the Company will indemnify and hold harmless each
Stockholder, the officers, directors, partners and general partners of
each Stockholder, any underwriter (as defined in the Securities Act)
for such Stockholder and each person, if any, who controls such
Stockholder or underwriter within the meaning of the Securities Act or
the Exchange Act (collectively, the "Company Indemnified Parties")
against any losses, claims, damages, or liabilities (joint or several)
to which they or any of them may become subject under the Securities
Act, the Exchange Act or any other federal or state law, insofar as
such losses, claims, damages, or liabilities (or actions in respect
thereof) arise from or are based upon any of the following statements,
omissions or violations (collectively a "Violation"): (i) any untrue
statement or alleged untrue statement of a material fact contained in
such registration statement, including any preliminary prospectus or
final prospectus contained therein or any amendments or supplements
thereto; (ii) 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; or (iii) any violation or alleged
violation by the Company of the Securities Act, the Exchange Act, any
state securities law or any rule or regulation promulgated under the
Securities Act, the Exchange Act or any state securities law; and the
Company will reimburse such Company Indemnified Parties for any legal
or other expenses reasonably incurred by them in connection with
investigating or defending any such loss, claim, damage, liability or
action; provided, however, that the indemnity agreement contained in
this Section 3.15.1 shall not apply to amounts paid in settlement of
any such loss, claim, damage, liability or action if such settlement is
effected without the consent of the Company (which consent shall not be
unreasonably withheld), nor shall the Company be liable in any such
case for any such loss, claim, damage, liability, or action to the
extent that it arises from or is based upon a Violation which occurs in
reliance upon and in conformity with written information furnished
expressly for use in connection with such registration by any such
Company Indemnified Parties.
3.15.2 Indemnification of Company and Other Selling
Stockholders. To the extent permitted by law, each Stockholder will
indemnify and hold harmless the Company, each of its directors, each of
its officers who have signed the registration statement, each person,
if any, who controls the Company within the meaning of the Securities
Act, any underwriter (within the meaning of the Securities Act) for the
Company, any person who controls such underwriter, and any other person
or entity selling securities in such registration statement (the "Other
Selling Stockholders") or any of such Other Selling Stockholders'
directors, officers, partners, general partners or any person who
controls such Other Selling Stockholders (collectively, the
"Stockholder Indemnified Parties") against any losses, claims, damages
or liabilities (joint or several) to which any such Stockholder
Indemnified Parties may become subject, under the Securities Act, the
Exchange Act or any other federal or state law, insofar as such losses,
claims, damages or liabilities (or actions in respect thereto) arise
from or are based upon any Violation, in each case to the extent (and
only to the extent) that such Violation occurs in reliance upon and in
conformity with written information furnished by such Stockholder in
connection with such registration; and such Stockholder will reimburse
any legal or other expenses reasonably incurred by any Stockholder
Indemnified Parties in connection with investigating or defending any
such loss, claim, damage, liability, or action; provided, however, that
the indemnity agreement contained in this Section 3.15.2 shall not
apply to amounts paid in settlement of any such loss, claim, damage,
liability or action if such settlement is effected without the consent
of such Stockholder, which consent shall not be unreasonably withheld.
3.15.3 Indemnification Procedure. Promptly after receipt by
any party entitled to indemnification under this Article 3 (an
"Indemnified Party") of notice of the commencement of any action
(including any governmental action), such Indemnified Party will, if a
claim in respect thereof is to be made under this Article 3 against any
party required to indemnify such Indemnified Party (an "Indemnifying
Party") notify the Indemnifying Party in writing of the commencement
thereof and the Indemnifying Party shall have the right to participate
in, and, to the extent the Indemnifying Party so desires, jointly with
any other Indemnifying Party similarly noticed, to assume the defense
thereof with counsel mutually satisfactory to the parties; provided,
however, that an Indemnified Party shall have the right to retain its
own counsel, with the fees and expenses to be paid by the Indemnifying
Party, if representation of such Indemnified Party by the counsel
retained by the Indemnifying Party would be inappropriate due to actual
or potential differing interests between such Indemnified Party and any
other party represented by such counsel in such proceeding. The failure
to notify an Indemnifying Party within a reasonable time of the
commencement of any such action, to the extent prejudicial to its
ability to defend such action, shall relieve such Indemnifying Party of
any liability to the Indemnified Party under this Article 3, but the
omission to so notify the Indemnifying Party will not relieve it of any
liability that it may have to any Indemnified Party otherwise than
under this Article 3.
ARTICLE 4
PREEMPTIVE RIGHT
4.1 Grant of Preemptive Right. Except as set forth in Section 4.5, the
Company hereby grants each Stockholder the right to purchase, pro rata, all or
any part of New Securities (as defined in Section 4.2) that the Company may,
from time to time after the date hereof, propose to sell and issue. A pro rata
share, for purposes of this right, is the ratio that the sum of the number of
Shares then held by each such Stockholder (including any shares of common stock
issuable to such Stockholder upon conversion or exchange of any securities or
pursuant to any option, warrant or similar right) bears to the sum of the total
number of shares of common stock of the Company then outstanding (calculated on
a fully diluted basis, including any shares of common stock issuable upon
conversion or exchange of any securities or pursuant to option, warrant or
similar right).
4.2 New Securities. Except as set forth below, "New Securities" shall
mean any shares of capital stock of the Company, whether common or preferred and
whether now authorized or not, and rights, options or warrants to purchase
shares of capital stock of the Company, and securities of any type whatsoever
that are, or may become, convertible into shares of capital stock or that are
combined in units with capital stock. Notwithstanding the foregoing, "New
Securities" does not include: (i) securities offered to the public generally
pursuant to a registration statement under the Securities Act, (ii) stock issued
pursuant to any rights or agreements, including without limitation convertible
securities, options and warrants, provided that the preemptive right established
by this Article 4 shall apply with respect to the initial sale or grant by the
Company of such rights or agreements, (iii) stock issued in connection with any
stock split, stock dividend or recapitalization by the Company, or (iv) stock
issued to executive management of the Company pursuant to a written plan.
4.3 Notice of Issuance. In the event the Company proposes to undertake
an issuance of New Securities, it shall give each Stockholder written notice of
its intention, describing the type of New Securities and the price and terms
upon which the Company proposes to issue the same. Each Stockholder shall have
twenty days from the date of receipt of any such notice to agree to purchase up
to its pro rata share of such New Securities for the price and upon the terms
specified in the notice by giving written notice to the Company and stating
therein the quantity of New Securities to be purchased.
4.4 Exercise of Right. If any Stockholder fails to exercise its
preemptive rights within said twenty-day period, the Company shall have no more
than sixty days thereafter to sell or enter into an agreement (pursuant to which
the sale of New Securities covered thereby shall be closed, if at all, within
thirty days from the date of said agreement) to sell the New Securities not
elected to be purchased by the Stockholders at the price and upon terms no more
favorable to the purchasers of such securities than specified in the Company's
notice. If the Company has not sold the New Securities or entered into an
agreement to sell the New Securities as provided above, the Company shall not
thereafter issue or sell any New Securities without first offering such
securities in the manner provided herein. Any attempted transfer not in
compliance with this Section 4.4 shall be void.
4.5 Termination of Preemptive Right. The preemptive right granted under
this Agreement shall terminate upon the closing of an IPO.
ARTICLE 5
BOARD REPRESENTATION
5.1 Voting Agreement. Until the first to occur of: (i) the date the
Company has closed an IPO or (ii) the date that is ten years from the date of
this Agreement, the Stockholders agree as follows:
5.1.1 Number of Directors. To cause the Board of Directors of
the Company to consist of no more than nine members, which shall
consist of three persons nominated by the AEW Shareholder (the "AEW
Nominees"), three persons nominated by the DMB Shareholder (the "DMB
Nominees") and, subject to Section 5.1.5, three persons nominated by
the mutual agreement of the AEW Nominees and the DMB Nominees (the
"Joint Nominees").
5.1.2 Chairman of the Board. The Chairman of the Board shall
be elected by the Board of Directors at the initial meeting of the
Board of Directors and shall serve for a two-year term commencing from
the date of such initial meeting. The Chairman of the Board appointed
at the initial meeting of the Board of Directors of the Company shall
be a DMB Nominee. Upon the expiration of the two-year term of the
Chairman of the Board appointed at the initial meeting of the Board of
Directors, the Chairman of the Board shall be an AEW Nominee who shall
serve for a two-year term. Thereafter, the Chairman of the Board
position shall rotate every two years between a DMB Nominee and an AEW
Nominee. In the event a Chairman of the Board ceases to be the Chairman
of the Board for any reason before his or her term expires, the Board
of Directors shall appoint another director to fill the remaining term
of such Chairman of the Board, provided that the successor Chairman of
the Board shall be a DMB Nominee or an AEW Nominee consistent with the
status of the Chairman of the Board who did not serve his or her entire
term.
5.1.3 Voting Obligations of DMB. The DMB Shareholder agrees:
(i) to vote or cause to be voted all Shares owned by it or for which it
holds a valid proxy for the election of the AEW Nominees to the
Company's Board of Directors, (ii) that in the event a director that
was an AEW Nominee ceases to be a director for any reason before his or
her term expires, to vote all Shares owned by it or for which it holds
a valid proxy in favor of such other person as shall be nominated by
AEW to replace such director and (iii) to vote all Shares owned by it
or for which it has a valid proxy in a manner and to take all other
actions with respect thereto (including, without limitation, calling
special meetings of stockholders, and executing and delivering written
consents) to effect the provisions of this Article 5.
5.1.4 Voting Obligations of AEW. The AEW Shareholder agrees:
(i) to vote or cause to be voted all Shares owned by it or for which it
holds a valid proxy for the election of the DMB Nominees to the
Company's Board of Directors, (ii) that in the event a director that
was an DMB Nominee ceases to be a director for any reason before his or
her term expires, to vote all Shares owned by it or for which it holds
a valid proxy in favor of such other person as shall be nominated by
DMB to replace such director and (iii) to vote all Shares owned by it
or for which it holds a valid proxy in a manner and to take all other
actions with respect thereto (including, without limitation, calling
special meetings of stockholders and executing and delivering written
consents) to effect the provisions of this Article 5.
5.1.5 Stockholder Approval. Notwithstanding the foregoing, the
advance written consent or unanimous vote of both the DMB Shareholder
and the AEW Shareholder shall be required for: (i) all Joint Nominees
elected to the Board of Directors, (ii) the filling of all vacancies on
the Board of Directors, (iii) the appointment of a Chairman of the
Board and (iv) the selection of the Company's Chief Executive Officer.
ARTICLE 6
STOCKHOLDER APPROVAL
6.1 Actions Requiring Stockholder Approval. Until the date the Company
has closed an IPO, the Company shall not, without first obtaining the written
consent of both the DMB Shareholder and the AEW Shareholder: (i) issue any
shares of capital stock of the Company or securities convertible or exchangeable
into shares of the Company's capital stock, except capital stock or securities
issued to executive management of the Company pursuant to a written plan
approved by action of the Board of Directors, (ii) register any equity or debt
securities of the Company pursuant to the Securities Act or any state securities
laws, (iii) register any Shares upon a request made in accordance with the
provisions of Article 3 hereof, (iv) merge or consolidate with or into any other
corporation or entity, (v) sell all or substantially all of the assets of the
Company, (vi) redeem, repurchase or otherwise acquire any shares of capital
stock or other securities of the Company, (vii) undertake any plan of
reorganization or recapitalization or combine or reclassify the capital stock of
the Company, (viii) liquidate or dissolve, or (ix) file a petition in bankruptcy
or any other law relating to insolvency, reorganization or readjustment of debt.
6.2 Buy/Sell Option. If either the Company or either Shareholder shall
request the written consent of the DMB Shareholder and the AEW Shareholder to
any of the actions set forth in Section 6.1(iii)-(ix), and one Stockholder (the
"Consenting Stockholder") gives such consent but the other Stockholder (the
"Non-Consenting Stockholder") does not so consent (such situation is hereinafter
referred to as a "Deadlock Event"), then the Consenting Stockholder and the
Non-Consenting Stockholder shall each have the right to initiate the following
buy/sell option:
6.2.1 Company Notice; Buy/Sell Notice. Within ten days of the
occurrence of a Deadlock Event, the Company shall give written notice
(the "Company Notice") to the Consenting Stockholder and the
Non-Consenting Stockholder of the occurrence of such Deadlock Event.
Each of the Consenting Stockholder and the Non-Consenting Stockholder
shall have an option, continuing for a period of ninety days, beginning
with the day following receipt of the Company Notice by both the
Consenting and Non-Consenting Stockholders to exercise its buy/sell
rights pursuant to this Section 6.2. If the Consenting or
Non-Consenting Stockholder desires to exercise its buy/sell rights
under this Section 6.2, such Consenting or Non-Consenting Stockholder
(the "Notifying Stockholder") shall send written notice ("Buy/Sell
Notice") to the other Stockholder as the case may be (the "Notified
Stockholder"), which shall set forth the number of Shares held by such
Notifying Stockholder (the "Specified Shares") and the per share price
(the "Selling Price") at which the Specified Shares may be transferred,
which shall be determined by the Notifying Stockholder in its sole
discretion. The Specified Shares shall include all Shares held by the
Notifying Stockholder. In the event both the Consenting Stockholder and
the Non-Consenting Stockholder attempt to exercise their buy/sell
rights under this Section 6.2.1, the operative Buy/Sell Notice shall be
the first notice received by a Notified Stockholder.
6.2.2 Notified Stockholder's Option. The Notified Stockholder
shall have an option, continuing for a period of ninety days beginning
with the day following receipt of the Buy/Sell Notice to elect: (i) to
acquire all, but not less than all, of the Specified Shares at the per
share Selling Price and on the terms set forth in the Buy/Sell Notice,
or (ii) to sell all, but not less than all, of the Shares then held by
such Notified Stockholder to the Notifying Stockholder at the per share
Selling Price and on the terms set forth in the Buy/Sell Notice. The
Notified Stockholder must select one of the two foregoing options
within such ninety day period and shall notify the Notifying
Stockholder of the option it has selected prior to the expiration of
such ninety day period. If the Notified Stockholder fails to notify the
Notifying Stockholder of its selection prior to the expiration of such
ninety day period, the Notified Stockholder shall be deemed to have
elected to sell its Shares to the Notifying Stockholder at the per
share Selling Price.
6.2.3 Transfer of Shares. Upon the determination of which
Stockholder is to sell its Shares under this Section 6.2, both
Stockholders shall thereupon take all action as may be required or
necessary to effectuate the transfer of such Shares to the purchasing
Stockholder pursuant to the terms set forth in this Section 6.2 as
promptly as practicable, but in no event later than sixty (60) days
thereafter.
ARTICLE 7
NOTES
7.1 No Purchase of Series A, B, C or D Notes. Each Stockholder agrees
that, without the advance written consent of the other Stockholder, it will not
purchase or otherwise acquire an interest in the Company's Series A Unsecured
Notes, Series B Unsecured Notes, Series C Notes or Series D Notes (if any).
7.2 Enforcement of Series C Notes and Series D Notes. Each Stockholder
agrees that, without the advance written consent of the other Stockholder, it
will (i) not declare the Series C Notes or the Series D Notes (if any) in
default, (ii) notify the Company of any default under the Series C Notes or the
Series D Notes (if any), or (iii) take any action, legal or otherwise, to
collect any principal, interest or other amounts due on the Series C Notes or
Series D Notes (if any).
7.3 Disproportionate Payment of Series C Notes or Series D Notes. The
Company agrees that any payments of principal or interest it makes on the Series
C Notes or the Series D Notes (if any) to the Stockholders will be made to each
of the Stockholders in proportion to the respective principal amounts of such
Series C Notes and Series D Notes (if any), as applicable, then held by each of
them. If a payment is made to a Stockholder that violates the provisions of this
Section 7.3, the Stockholder who receives such payment shall hold it in trust
for the other Stockholder and pay it over the other Stockholder as soon as
practicable after receipt of such payment.
7.4 Transfers. Each Stockholder agrees that it will not transfer any
Series C Notes or Series D Notes (if any) unless the transferee of such Series C
Notes or Series D Notes agrees to be bound to the provisions of Sections 7.2 and
7.3.
7.5 Expiration. The provisions of this Article 7 shall expire on the
first to occur of (i) the date the Company has closed an IPO or (ii) the date
that either Stockholder ceases to own an interest in the Series C Notes, the
Series D Notes (if any) or the Shares.
ARTICLE 8
MISCELLANEOUS
8.1 Stockholder Information. UDC agrees to provide to each Stockholder
promptly upon the receipt of its written request, any information reasonably
requested regarding the business or operations of UDC. The provisions of this
Section 8.1 shall terminate upon the closing of an IPO.
8.2 Endorsement of Shares. Upon the execution of this Agreement, the
certificates representing the Shares shall be surrendered to the Secretary of
the Company and endorsed as follows:
The shares of stock represented by this certificate are subject to a
Stockholders Agreement to which the Company is a party, and none of
such shares, or any interest therein, shall be transferred, pledged,
encumbered or otherwise disposed of except as provided in such
Agreement. A copy of the Stockholders Agreement is on file in the
office of the Company and will be made available for inspection to any
properly interested person without charge within five days after the
Company's receipt of a written request.
8.3 Filing of Agreement. A copy of this Agreement, together with any
amendments hereto shall remain on file with the Secretary of the Company and
shall be available for inspection by any properly interested person without
charge within five days after the Company's receipt of a written request
therefor.
8.4 Assignment. This Agreement may not be assigned by any party hereto
except to a permitted assignee of the Shares. Any attempt to assign in violation
of this provision shall be void. This Agreement shall be binding upon, inure to
the benefit of and be enforceable by the parties respective successors and
permitted assigns.
8.5 Amendment. This Agreement may only be amended by a written
agreement approved by the Company and the Stockholders. Any agreement so
approved shall be executed by the Company and the Stockholders and filed with
the Secretary of the Company.
8.6 Entire Agreement. This Agreement constitutes the entire agreement
among the parties with respect to the subject matter hereof and supersedes all
other prior agreements and understandings, both written and oral, between the
parties with respect to the subject matter hereof.
8.7 Severability. In the case any one or more of the provisions
contained in this Agreement shall, for any reason, be held to be invalid,
illegal, or unenforceable in any respect, all other provisions hereof shall
nevertheless remain in full force and effect so long as the economic or legal
substance of the transactions contemplated hereby is not affected in a manner
materially adverse to any of the parties.
8.8 Notices. All notices, requests, claims, demands, and other
communications hereunder shall be in writing and shall be given (and shall be
deemed to have been duly given and received upon actual receipt or refusal) by
hand delivery or by registered or certified mail (postage prepaid, return
receipt requested) to the respective parties as follows:
If to DMB:
DMB Residential L.L.C.
4201 North 24th Street, Suite 120
Phoenix, Arizona 85016
Attention: Drew M. Brown
with a copy to:
Fennemore Craig, P.C.
Two N. Central, Suite 2200
Phoenix, Arizona 85004
Attention: Karen McConnell
If to AEW:
Eastrich No. 184, LLC
225 Franklin Street
Boston, Massachusetts 02110
Attention: Thomas H. Nolan, Jr. and J. Grant Monahon
with a copy to:
Squire, Sanders & Dempsey
40 North Central, Suite 2700
Phoenix, Arizona 85004-4440
Attention: Christopher D. Johnson
If to the Company:
UDC Homes, Inc.
4812 South Mill Avenue
Tempe, Arizona 85282
Attention: Robert Coltin
8.9 Counterparts. This Agreement may be executed and delivered
(including by facsimile transmission) in any number of counterparts, all such
counterparts shall be deemed to constitute one and the same instrument, and each
of said counterparts shall be deemed an original hereof.
8.10 Waiver. Failure of any party to exercise any right or option
arising out of a breach of this Agreement shall not be deemed a waiver of any
right or option with respect to any subsequent or different breach, or the
continuance of any existing breach.
8.11 Captions. Captions and section headings used herein are for
convenience only and are not a part of this Agreement and shall not be deemed to
limit or alter any provisions hereof.
8.12 Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of Delaware.
8.13 Attorneys' Fees. In the event suit is brought by any party to this
Agreement to enforce the terms of the Agreement or to collect any money due
hereunder, the prevailing party shall be entitled to recover, in addition to any
other remedy, reimbursement for reasonable attorneys' fees, court costs, costs
of investigation and other related expenses incurred in connection therewith.
8.14 Further Assurances. Each Stockholder agrees to execute and deliver
any further or additional instruments and to perform any acts which may become
reasonably necessary in order to effectuate and carry out the purposes of this
Agreement, including without limitation any amendments to the Certificate of
Incorporation or Bylaws of the Company that are necessary or reasonably
appropriate to effect the purposes of this Agreement.
8.15 Equitable Remedies. Each Stockholder agrees that monetary damages
for any breach of the provisions of this Agreement may be inadequate and that
each Stockholder shall be entitled to injunctive and other equitable relief in
addition to any other remedy such Stockholder may have under this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day, month and year first written above.
DMB RESIDENTIAL, L.L.C.
an Arizona limited liability company
By: DMB Associates, Inc.
By: /s/ Timothy A. Kaehr
-----------------------------------
Name:Timothy A. Kaehr
------------------------------
Title:Executive Vice President
-----------------------------
EASTRICH NO. 184, LLC
a Delaware limited liability company
By: /s/ Thomas H. Nolan, Jr.
-----------------------------------
Name:Thomas H. Nolan, Jr.
------------------------------
Title: Authorized Signatory
-----------------------------
UDC HOMES, INC.
a Delaware corporation
By: /s/ Jacques C. Lazard
-----------------------------------
Name:Jacques C. Lazard
------------------------------
Title:Executive Vice President/CFO
-----------------------------
EMPLOYMENT TERMINATION AGREEMENT
THIS EMPLOYMENT TERMINATION AGREEMENT ("Agreement") is entered
into this 11th day of March, 1996 by and between UDC HOMES, INC., a Delaware
corporation (the "Company"), and RICHARD C. KRAEMER ("Kraemer").
WHEREAS, the Company and Kraemer are parties to that certain
Employment Agreement, dated as of September 15, 1995 (the "Employment
Agreement");
WHEREAS, Kraemer recently informed the Company of his desire to
resign as an officer and director of the Company effective immediately and to
terminate his employment with the Company effective June 30, 1996 (the
"Termination Date");
WHEREAS, the Company has requested Kraemer to provide, and
Kraemer has agreed to provide, advisory and consultative services to the Company
from the Termination Date through December 31, 1996; and
WHEREAS, the Company and Kraemer are entering into this
Agreement in order, among other things, (i) to set forth their mutual agreement
as to the terms and conditions of Kraemer's employment by the Company during the
period beginning on the date hereof and ending on the Termination Date (the
"Transition Period"), (ii) to set forth their mutual agreement as to the
payments and other benefits to be paid or provided to Kraemer in connection with
or arising out of the termination of his employment with the Company, (iii) to
set forth their mutual agreement as to the terms and conditions under which
Kraemer will provide advisory and consultative services to the Company from the
Termination Date through December 31, 1996 (the "Advisory Period"), (iv) to
terminate the Employment Agreement except as provided in this Agreement and (v)
to fully and completely settle and compromise any and all disputes,
controversies, claims and causes of action of any kind whatsoever arising out of
or in connection with the relationship of, and any and all transactions or
dealings between, Kraemer and the Company prior to the date hereof.
NOW, THEREFORE, for and in consideration of the premises and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties (intending to be legally bound) hereby covenant
and agree as follows:
1. Termination of Employment Agreement; Continued Employment
Hereunder. Except as otherwise provided in this Agreement, the Employment
Agreement is hereby terminated and neither Kraemer nor the Company shall have
any further rights or obligations thereunder. The Company agrees to continue
Kraemer's employment with the Company during the Transition Period and Kraemer
agrees to remain in the employment of the Company during the Transition Period,
in each case on the terms and conditions set forth in this Agreement.
2. Duties and Compensation During Transition Period. (a) During
the Transition Period:
(i) Kraemer shall remain in the employment of the Company in
accordance with the provisions of this Agreement and shall have only
those duties and responsibilities (commensurate with his employment under
the Employment Agreement) as from time to time may be reasonably assigned
to him by Drew M. Brown;
(ii) the Company shall pay to Kraemer a monthly salary of
$29,166.66, payable in semi-monthly amounts of $14,588.33;
(iii) the "Daily Reductions" shall continue to be made under
that certain Promissory Note of Kraemer dated September 15, 1995 and
payable to order of the Company in the original principal sum of
$502,600.27 (the "Promissory Note"), the same as if Kraemer remained
employed by the Company pursuant to the terms of the Employment Agreement
at all times during the Transition Period;
(iv) the Company shall provide Kraemer with reasonable part-time
secretarial assistance;
(v) until March 31, 1996, Kraemer shall be entitled to an
automobile allowance of $500 per month, plus repair, insurance,
maintenance and operating expenses;
(vi) Kraemer shall not be required to keep regular office hours;
and
(vii) Kraemer shall not be entitled to any compensation or
employment benefits except as provided in this Agreement.
(b) The Company's obligation to pay the compensation described
in clauses (ii) and (iii) of paragraph (a) above shall not be affected by any
termination, during the Transition Period, of Kraemer's employment under this
Agreement by the Company for any reason.
(c) The Company agrees to reimburse Kraemer for all expenses
reasonably incurred by him during the Transition Period in the performance of
the duties and responsibilities described in paragraph (a)(i) above. Requests
for reimbursement shall be accompanied by appropriate documentation.
3. Duties and Compensation During Advisory Period. (a) During
the Advisory Period:
(i) Kraemer, acting as an independent contractor and not as an
employee, shall render to the Company such services of an advisory or
consultative nature as the chairman of the Board of Directors of the
Company may reasonably request from time to time so that the Company may
continue to have the benefit of Kraemer's experience and knowledge of the
business and affairs of the Company;
(ii) Kraemer shall not be required (A) to devote all or any
substantial portion of his business time to Company affairs, (B) to
travel outside the greater Phoenix metropolitan area or (C) to spend time
at Company offices except to the extent necessary to diligently and
efficiently perform the tasks assigned to him;
(iii) the "Daily Reductions" shall continue to be made under the
Promissory Note, the same as if Kraemer remained employed by the Company
pursuant to the terms of the Employment Agreement at all times during the
Advisory Period;
(iv) Kraemer shall not be an employee of the Company and,
accordingly, shall not accrue any vacation benefits or participate in the
Annual Incentive Plan or the Long- term Incentive Plan (as such terms are
defined in the Employment Agreement); and
(v) the Company shall provide Kraemer with reasonable part-time
secretarial assistance.
(b) The "Daily Reductions" described in paragraph (a)(iii) above
shall not be affected by any termination of Kraemer's services under this
Section 3 for any reason.
(c) The Company agrees to reimburse Kraemer for all expenses
reasonably incurred by him during the Advisory Period in the performance
of services described in paragraph (a)(i) above. Requests for
reimbursement shall be accompanied by appropriate documentation.
4. Resignation as Director and Officer. Kraemer hereby resigns
as a director and officer of the Company and all of its subsidiaries, in each
case effective as of the date of this Agreement.
5. Severance Payment. The Company shall pay to Kraemer a cash
severance payment in the amount of $1,400,000, payable in six installments as
follows:
Date Amount
---- ------
August 1, 1996 $ 30,000
September 1, 1996 30,000
October 1, 1996 30,000
November 1, 1996 30,000
December 1, 1996 30,000
January 1, 1997 1,250,000
Such severance payment shall be in lieu of, and is not in addition to, (i) any
severance payment due or which may become due to Kraemer under Article IV of the
Employment Agreement, (ii) any amounts due to Kraemer under the Annual Incentive
Plan, (iii) any amounts or equity participation due to Kraemer under the
Long-term Incentive Plan and (iv) any other amounts due to Kraemer under the
Employment Agreement except as expressly provided in this Agreement.
7. Confidential Information and Non-Competition. (a) Article V
of the Employment Agreement shall remain in full force and effect in accordance
with its terms notwithstanding the termination of the Employment Agreement
pursuant hereto; provided, however, that, anything herein or in the Employment
Agreement to the contrary notwithstanding, Section 5.2 of the Employment
Agreement shall automatically terminate on December 31, 1996 and, accordingly,
shall have no force or effect after such date.
(b) Prior to January 1, 1999, Kraemer will not, whether for his
own account or for the account of any other person, (i) solicit, endeavor to
entice or induce any employee of the Company to terminate his employment with
the Company in order to accept employment elsewhere or (ii) hire any employee of
the Company.
8. Insurance Benefits. (a) The Company agrees that it will
continue paying the insurance premiums described in Section 3.6 of the
Employment Agreement until March 31, 1996.
(b) The Company agrees that, until December 31, 1999, it will
cause Kraemer and Kraemer's eligible dependents to be continuously covered by
and to continuously participate in, to the fullest extent allowable under the
terms thereof, all health insurance plans and programs that may be offered to
the senior executive officers of the Company so that Kraemer and his eligible
dependents will receive, at all times prior to December 31, 1999, the same
benefits under such plans and programs as they would have been entitled to
receive had Kraemer remained a senior executive officer of the Company;
provided, however, that (i) Kraemer shall reimburse the Company for all premiums
attributable to Kraemer's participation in such plans and programs after March
31, 1997, (ii) nothing herein shall prejudice Kraemer's rights and privileges
under COBRA and (iii) nothing herein shall preclude the Company from giving
notices to Kraemer as required by COBRA.
9. Promissory Note. The Company acknowledges and agrees that the
Promissory Note shall automatically be canceled and discharged on January 1,
1997 and that after such date neither Kraemer nor any other person shall have
further obligation or liability whatsoever on or with respect to the Promissory
Note or the indebtedness evidenced thereby.
10. Reimbursement of Legal Expenses. The Company agrees to
reimburse Kraemer for all reasonable legal fees and expenses (not to exceed
$2,000) that Kraemer may incur in connection with the negotiation, preparation
and execution of this Agreement.
11. Public Announcement, Etc. (a) Neither party shall make any
press release or public announcement regarding this Agreement or the contents
hereof without the prior approval (which shall not be unreasonably withheld) of
the other party.
(b) Each of the parties acknowledge that the confidentiality of
this Agreement is of paramount concern to the other party. Accordingly, neither
party shall disclose any of the terms of this Agreement to any third party,
whether or not inquiry is made as to the existence of this Agreement or the
terms hereof. Nothing in this Agreement shall prohibit either party from
disclosing any information as required by law or legal process or in connection
with the enforcement of this Agreement or any litigation relating thereto.
Moreover, nothing in this Agreement shall prohibit either party from disclosing
information to such party's relatives, directors, officers, employees,
accountants, attorneys and other representatives on a need-to- know basis.
12. Release by Company. (a) Subject to paragraph (b) below, the
Company hereby unconditionally and irrevocably releases, remises, acquits and
forever discharges Kraemer from any and all debts, demands, claims, causes of
action, suits, charges, damages, obligations and liabilities of every kind and
nature whatsoever and whether known or unknown, both at law (whether common law,
statutory or otherwise) and in equity, (collectively, "Claims") which the
Company has, ever had or might have, directly or indirectly, against Kraemer
arising, in whole or in part, from a state of facts extant on the date hereof or
in any way relating to matters occurring prior to the date hereof, including
(without limitation):
(i) Claims (whether known or unknown) with respect to, arising
out of or relating to, (A) any and all transactions or dealings between
the Company and Kraemer, (B) Kraemer's service as, and any and all
actions taken or omitted by Kraemer in his capacity as, an employee,
officer or director of the Company, (C) any breach or alleged breach of
the Employment Agreement by Kraemer or (D) the termination of Kraemer's
employment with the Company or any of the events or circumstances leading
to, surrounding or resulting (in whole or in part) in such termination,
(E) any breach or alleged breach of any duty to the Company, its
stockholders or any other person (whether arising under statute, common
law or contract); and
(ii) Claims (whether known or unknown) for recovery of
attorneys' fees, defamation, libel, slander and any other contract and
tort claims under state of federal law which are now existing, presently
known or hereafter discovered that could be raised by the Company.
The Company agrees that it will not institute any lawsuit against Kraemer based,
in whole or in part, on any Claim referred to above. It is specifically
understood and agreed, however, that the foregoing release and agreement shall
not affect the Company's right to enforce this Agreement in accordance with its
terms.
(b) The compromise, settlement and release set forth in
paragraph (a) above shall not apply to any action taken or omitted by Kraemer
prior to the date hereof which:
(i) is not known to DMB Associates, Inc. ("DMB") on the
date hereof; and
(ii) (A) constitutes a breach of Kraemer's fiduciary duty of
loyalty, as a director, to the Company or its
stockholders, (B) was not taken in good faith or
involves intentional misconduct or a knowing violation
of law or (C) resulted in a transaction from which
Kraemer derived an improper personal benefit.
For purposes of clause (i) above, facts, circumstances and other information
shall be deemed known to DMB if such facts, circumstances or other information
are known to (x) any of DMB's stockholders, directors, officers or employees,
(y) any directors, officers or employees of any subsidiary of DMB or (z) any
person acting as an agent or attorney of DMB or any of its subsidiaries with
respect to any matter involving the Company.
(c) The Company acknowledges that (i) it has read this Agreement
and fully understands it to be a full and complete compromise, settlement and
release of the Claims referred to in paragraph (a) above, (ii) it has entered
into this Agreement of its own free will and accord without reliance on any
representation, warranty or assurance of any kind or character and (iii) no oral
understandings, statements, promises or inducements (express or implied)
contrary to the terms of this Agreement exist.
13. Release by Kraemer. (a) Kraemer hereby unconditionally and
irrevocably releases, remises, acquits and forever discharges the Company and
its former, present or future stockholders, directors, officers, employees,
agents and attorneys and all persons acting by, through, under or in concert
with the Company (collectively, the "Company Releasees") from any and all Claims
which Kraemer has, ever had or might have, directly or indirectly, against the
Company Releasees (or any of them) arising, in whole or in part, from a state of
facts extant on the date hereof or in any way relating to matters occurring
prior to the date hereof, including (without limitation):
(i) Claims (whether known or unknown) with respect to, arising
out of or relating to, (A) any and all transactions or dealings between
the Company and Kraemer, (B) Kraemer's service as an employee, officer or
director of the Company, (C) the termination of Kraemer's employment with
the Company or any of the events or circumstances leading to, surrounding
or resulting (in whole or in part) in such termination, (D) any breach or
alleged breach of the Employment Agreement by the Company, (E) any
wrongful discharge or employment discrimination under common law, the
Arizona Civil Rights Act or Title VII of the Civil Rights of 1964, as
amended, (F) any age discrimination under the Arizona Civil Rights Act or
the Age Discrimination in Employment Act of 1967 (29.U.S.C ss. 626) as
amended, (G) any intentional or negligence infliction of emotional
distress or any nonpayment of wages, bonuses, vacation pay or any other
compensation as defined by A.R.S. ss. 23-351 et seq., (H) any breach of
the implied covenant of good faith and fair dealing and (I) any tortious
interference with employment relationships; and
(ii) Claims (whether known or unknown) for benefits, claims for
recovery of attorneys' fees, defamation, libel, slander and any other
contract and tort claims under state of federal law.
Kraemer agrees that he will not institute any lawsuit against the Company
Releasees (or any of them) based, in whole or in part, on any Claim referred to
in this paragraph (a). It is specifically understood and agreed, however, that
the foregoing release and agreement shall not affect (i) Kraemer's right to
enforce this Agreement in accordance with its terms or (ii) Kraemer's rights to
indemnification under the Company's charter or bylaws or under any separate
written agreement between Kraemer and the Company.
(b) Kraemer represents and warrants to the Company that he has
not filed any legal proceedings against the Company or any administrative
complains/charges with any state of federal agencies arising out of his
employment or resignation of employment by the Company.
(c) Kraemer acknowledges that (i) he has read this Agreement and
fully understands it to be binding and enforceable and a full and complete
compromise, settlement and release of the Claims referred to paragraph (a) and
(b) above, (ii) he has entered into this Agreement on advice of legal counsel
and of his own free will and accord without reliance on any representation,
warranty or assurance of any kind or character, (iii) no oral understandings,
statements, promises or inducements (express or implied) contrary to the terms
of this Agreement exist and (iv) he does not consider himself to be in a
disparate bargaining position relative to the Company with respect to the
matters covered by this Agreement.
14. Tax Withholdings. The Company shall be entitled to withhold
from all payments hereunder all applicable taxes (federal, state or other) which
it is required to withhold therefrom.
15. Non-disparagement. The Company agrees that it will not make
any statements which are intended to disparage, discredit or injure the
reputation of Kraemer. Kraemer agrees that he will not make any statements which
are intended to disparage, discredit or injure the reputation of the Company or
any other Company Releasee.
16. Return of Company Property, etc. (a) Kraemer shall execute
and deliver such documents and take all other actions as the Company may request
from time to time in order to effect the transfer and delivery to the Company on
the Termination Date of any Company assets in the possession of Kraemer or held
in his name, including (without limitation) credit cards, travel authority
cards, parking cards and identification badges.
(b) Except as provided herein with respect to the Promissory
Note, all loans or advances made to Kraemer by the Company shall be settled and
paid on or before the Termination Date.
17. No Right of Set-Off; No Mitigation. (a) The Company's
obligations to make payments to Kraemer hereunder shall not be affected by any
set-off, counterclaim, recoupment, defense or other claim, right or action that
the Company may have against Kraemer.
(b) The provisions of this Agreement are not intended to, nor
shall they be construed to, require that Kraemer mitigate the amount of any
payment provided for in this Agreement by seeking or accepting other employment,
nor shall the amount of any payment provided for in this Agreement be reduced by
any compensation earned by Kraemer as a result of employment by another employer
or otherwise.
18. Indemnification. Nothing in this Agreement is intended to,
and no provision of this Agreement shall be construed so as to, (i) terminate,
reduce, impair or expand in any respect the right of Kraemer to be indemnified
by the Company, nor the obligation of the Company to indemnify Kraemer, under
and in accordance with the articles of incorporation and bylaws of the Company
(in each case, as in effect on the date hereof) with respect to claims arising
(in whole or in part) from a state of facts extant on the date hereof or
relating to matters occurring prior to the date hereof, regardless of when such
claims may arise or be asserted or (ii) terminate, reduce, impair or expand in
any respect any right or protection afforded to Kraemer under paragraph (4) of
Article Fifth of the Company's Restated Certificate of Incorporation.
19. Non-Admission; Revocation. (a) By entering into this
Agreement, neither party admits to any liability or wrongdoing whatsoever with
respect to the other party.
(b) Kraemer acknowledges that he has been given the opportunity
to consider settling with the Company in accordance with terms of this Agreement
for 21 days preceding his execution of this Agreement. Kraemer understands and
acknowledges that (i) he may revoke this Agreement within seven days of the te
he executes it and (ii) if this Agreement is not revoked within such seven-day
period, this Agreement will be effective and enforceable. Kraemer agrees, in the
event he revokes this Agreement as aforesaid, that the Employment Agreement
shall be fully and completely reinstated and that he will return to the Company
all of the cash consideration that has been actually paid to him by the Company
under this Agreement, if any.
20. Dispute Resolution. In the event a dispute shall arise
between the parties as to whether the provisions of this Agreement have been
complied with, the parties agree to resolve such dispute in accordance with the
provisions set forth in Article VI of the Employment Agreement, which provisions
are hereby incorporated in this Agreement as if set forth herein in their
entirety.
21. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF ARIZONA WITHOUT GIVING
EFFECT TO THE CONFLICT OF LAW PROVISIONS THEREOF.
22. Successors and Assigns. This Agreement shall be binding
upon, be enforceable against and enure to the benefit of (a) the Company and its
successors and assigns and (b) Kraemer and his heirs, legal representatives and
assigns.
23. Severability. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or enforceability of
any other provisions of this Agreement, which shall remain in full force and
effect.
24. Amendments and Waivers. No provision of this Agreement may
be modified, waived or discharged unless such modification, waiver or discharge
is agreed to in writing and signed by Kraemer and one or more officers of the
Company.
25. Counterparts. This Agreement may be executed in any number
of identical counterparts, each of which shall be deemed an original for all
purposes.
26. Interpretation. The Section headings herein are for
convenience only and shall not affect the construction hereof. The words
"herein", "hereof" and "hereunder" and other words of similar import refer to
this Agreement as a whole and not to any particular Section or other
subdivision. No provision of this Agreement shall be construed against either
party solely because that party (or its legal representative) drafted such
provision.
27. Entire Agreement; etc. This Agreement and the Employment
Agreement constitute the entire agreement between the Company and Kraemer
relating to the matters covered hereby and thereby and may not be contradicted
by evidence of prior, contemporaneous or subsequent oral agreements of the
parties. The parties acknowledge that this Agreement terminates the Employment
Agreement except as otherwise provided herein. In the event of a conflict or
inconsistency between the provisions of the Employment Agreement and the
provisions of this Agreement, the provisions of this Agreement shall govern and
control.
28. Further Assurances. Each party agrees, from time to time, to
do and perform any and all acts and to execute any and all further instruments
required or reasonably requested by the other party more fully to effect and
carry out the intent and purposes of this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as
of the date first above written.
UDC HOMES, INC.
By: /s/ Drew M. Brown
---------------------------------------
Printed Name: Drew M. Brown
/s/ Richard C. Kraemer
--------------------------------------------
Richard C. Kraemer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
MARCH 31, 1996 CONSOLIDATED FINANCIAL STATEMENTS OF UDC HOMES, INC. AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<CIK> 890326
<NAME> UDC HOMES, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> MAR-31-1996
<CASH> 3783
<SECURITIES> 0
<RECEIVABLES> 2073
<ALLOWANCES> 0
<INVENTORY> 139303
<CURRENT-ASSETS> 0
<PP&E> 13878
<DEPRECIATION> 657
<TOTAL-ASSETS> 382202
<CURRENT-LIABILITIES> 0
<BONDS> 249721
0
0
<COMMON> 0
<OTHER-SE> 66261
<TOTAL-LIABILITY-AND-EQUITY> 382202
<SALES> 161827
<TOTAL-REVENUES> 161827
<CGS> 143950
<TOTAL-COSTS> 143950
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9277
<INCOME-PRETAX> (35799)
<INCOME-TAX> 0
<INCOME-CONTINUING> (35799)
<DISCONTINUED> 0
<EXTRAORDINARY> 50264
<CHANGES> 0
<NET-INCOME> 14465
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
