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 June 30, 1997
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the transition period from to ______ to _____.
Commission File Number 1-11416
UDC HOMES, INC.
(Exact name of Registrant as specified in its charter)
Delaware 86-0702254
(State of Incorporation) (I.R.S. Employer Identification No.)
6710 North Scottsdale Road, Scottsdale, Arizona 85253
(Current address of principal executive offices) (Zip Code)
Registrant's current telephone number, including area code: (602) 627-3000
4812 S. Mill Avenue, Tempe, Arizona 85282
(Former address of principal executive offices) (Zip Code)
Registrant's former telephone number, including area code: (602) 820-4488
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
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: As of August 12, 1997 - Common
Stock, $0.01 par value, 1,000 shares.
1
<PAGE>
UDC HOMES, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
Page
----
PART I - Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
June 30, 1997 and September 30, 1996........................... 3
Consolidated Statements of Operations
For the three months ended June 30, 1997 and 1996,
the nine months ended June 30, 1997, the period from
October 1, 1995 to November 13, 1995,
and the period from November 14, 1995 to June 30, 1996......... 4
Consolidated Statements of Cash Flows
For the nine months ended June 30, 1997, the period from
October 1, 1995 to November 13, 1995,
and the period from November 14, 1995 to June 30, 1996......... 5
Condensed Notes to Consolidated Financial Statements.............. 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................... 9
PART II - Other Information
Item 1. Legal Proceedings................................................ 17
Item 6. Exhibits and Reports on Form 8-K................................. 19
Signatures ................................................................. 20
2
<PAGE>
UDC HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - UNAUDITED
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30, September 30,
1997 1996
--------- ----------
(In thousands)
<S> <C> <C>
ASSETS
HOMEBUILDING
Cash and cash equivalents $ 2,041 $ 2,782
Receivables 1,624 985
Housing inventory 129,953 116,555
Land inventory 145,558 115,286
Land held for sale 6,053 28,332
Property and equipment - net 9,847 13,216
Goodwill 3,411 3,545
Other assets 2,579 4,497
--------- ---------
Total homebuilding assets 301,066 285,198
--------- ---------
MORTGAGE BANKING
Residential mortgages 2,688 10,248
Other assets -- 897
--------- ---------
Total mortgage assets 2,688 11,145
--------- ---------
TOTAL $ 303,754 $ 296,343
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
HOMEBUILDING
Accounts payable $ 37,045 $ 35,079
Accrued interest 10,916 17,478
Accrued liabilities and expenses 16,518 23,624
Notes payable 60,165 73,062
Senior unsecured notes payable 70,000 70,000
Subordinated notes payable ($87,813 and $44,628, respectively,
due to related parties) 91,857 50,262
--------- ---------
Total homebuilding liabilities 286,501 269,505
--------- ---------
MORTGAGE BANKING
Mortgage line of credit 2,505 6,299
Accrued liabilities and expenses 96 308
--------- ---------
Total mortgage liabilities 2,601 6,607
--------- ---------
Total liabilities 289,102 276,112
--------- ---------
MINORITY INTEREST 3,307 4,448
--------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common Stock, $.01 par value, 1,000 shares
authorized, issued and outstanding -- --
Additional paid-in capital 88,000 78,000
Accumulated deficit (76,655) (62,217)
--------- ---------
Total stockholders' equity 11,345 15,783
--------- ---------
TOTAL $ 303,754 $ 296,343
========= =========
</TABLE>
See Condensed Notes to Consolidated Financial Statements.
3
<PAGE>
UDC HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Predecessor
Successor Company Company
------------------------------------------------- -----------
Period from Period from
Three Months Ended Nine Months November 14, October 1,
June 30, Ended to to
--------------------- June 30, June 30, November 13,
1997 1996 1997 1996 1995
--------- --------- -------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C>
REVENUES
Housing sales $ 98,757 $ 116,148 $ 264,388 $ 248,351 $ 29,624
Mortgage and finance operations, net 325 614 780 850 28
Other 718 14 1,388 -- --
--------- --------- --------- --------- ---------
Total revenues 99,800 116,776 266,556 249,201 29,652
--------- --------- --------- --------- ---------
COSTS AND EXPENSES
Homebuilding
Cost of housing sales 84,515 102,088 225,303 221,892 27,270
Selling and administrative expenses 17,356 11,154 44,361 25,782 4,969
Interest, net 3,943 5,850 11,033 14,421 568
Other 121 -- 297 366 35
Equity in losses of unconsolidated partnerships -- 355 -- 900 --
Cost of company reorganization -- -- -- -- 7,051
--------- --------- --------- --------- ---------
Total costs and expenses 105,935 119,447 280,994 263,361 39,893
--------- --------- --------- --------- ---------
LOSS BEFORE INCOME TAXES
AND EXTRAORDINARY ITEMS (6,135) (2,671) (14,438) (14,160) (10,241)
INCOME TAXES -- -- -- -- --
--------- --------- --------- --------- ---------
LOSS BEFORE EXTRAORDINARY ITEMS (6,135) (2,671) (14,438) (14,160) (10,241)
EXTRAORDINARY ITEMS
Gain on debt discharge -- -- -- -- 50,264
Fresh start reporting adjustment -- -- -- -- (14,069)
--------- --------- --------- --------- ---------
NET (LOSS) INCOME $ (6,135) $ (2,671) $ (14,438) $ (14,160) $ 25,954
========= ========= ========= ========= =========
</TABLE>
See Condensed Notes to Consolidated Financial Statements
4
<PAGE>
UDC HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Predecessor
Successor Company Company
---------------------------- --------------
Period from Period from
Nine Months November 14, October 1,
Ended to to
June 30, June 30, November 13,
1997 1996 1995
----------- ----------- --------------
( In thousands )
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net (loss) income $(14,438) $(14,160) $ 25,954
Adjustments to reconcile net (loss) income to
net cash (used in) provided by operating activities:
Depreciation and amortization 687 3,347 536
Minority Interest (1,141) -- --
Fresh start reporting adjustment -- -- 14,069
Gain on debt discharge -- -- (50,264)
Equity in losses of unconsolidated partnerships -- 900 --
Changes in assets and liabilities:
Receivables (639) 1,909 259
Other assets 2,815 (260) (1,015)
Housing inventory (13,372) (22,763) 10,890
Land inventory and land held for sale (4,381) 45,926 4,328
Receivables from affiliated partnerships -- 1,620 95
Accounts payable 1,966 38 (2,963)
Accrued liabilities and expenses (7,285) 8,278 4,655
-------- -------- --------
Net cash (used in ) provided by operating activities (35,788) 24,835 6,544
-------- -------- --------
INVESTING ACTIVITIES:
Decrease in mortgage-backed securities and residential mortgages 7,560 2,134 6,390
Additions to property and equipment (822) (2,487) 13
-------- -------- --------
Net cash provided by investing activities 6,738 (353) 6,403
-------- -------- --------
FINANCING ACTIVITIES:
Capital contribution 10,000 -- --
Decrease in notes payable to financial institutions (12,897) (50,017) (11,492)
Proceeds from issuance of subordinated notes 35,000 10,000 30,000
Proceeds from issuance of common stock -- -- 78,000
Payment of liabilities subject to compromise -- -- (83,000)
Payments on collateralized mortgage obligations -- (3,185) (247)
Decrease in mortgage line of credit (3,794) (1,661) (5,799)
-------- -------- --------
Net cash provided by (used in) financing activities 28,309 (44,863) 7,462
-------- -------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (741) (20,381) 20,409
CASH AND CASH EQUIVALENTS, BEGINNING OF THE PERIOD 2,782 25,000 4,591
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF THE PERIOD $ 2,041 $ 4,619 $ 25,000
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest, net of amounts capitalized $ 11,053 $ 12,542 $ 254
======== ======== ========
</TABLE>
See Condensed Notes to Consolidated Financial Statements.
5
<PAGE>
UDC HOMES, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
On May 17, 1995, UDC Homes, Inc. (the "Predecessor Company") filed a
voluntary petition for reorganization under Chapter 11 of the United States
Bankruptcy Code (the "Bankruptcy Proceedings"). On October 3, 1995, the
Predecessor Company's reorganization plan, as amended (the "Reorganization
Plan"), was approved by the United States Bankruptcy Court. Under the
Reorganization Plan, DMB Property Ventures Limited Partnership ("DMBLP")
entered into an agreement to acquire 100% of the equity (the "Acquisition")
of the company that emerged from the Bankruptcy Proceedings (the
"Company"). On November 14, 1995 ("Acquisition Date"), DMB Residential LLC
("DMB"), an affiliate of DMBLP, completed the Acquisition and, as of that
date, the financial statements of the Company reflect the cost of DMB's
acquisition of the Company, utilizing the purchase method of accounting
("Acquisition Cost Basis"). Accordingly, the statements of operations and
the statements of cash flows for the nine months ended June 30, 1996
reflect the operations of the Predecessor Company under fresh start
reporting for the period from October 1, 1995 to November 13, 1995, and the
accounts of the Company on the Acquisition Cost Basis from November 14,
1995 to June 30, 1996.
On May 6, 1996, pursuant to an option agreement between DMB and AEW
Partners, L.P. ("AEW"), Eastrich No. 184 LLC (as to all interests except
the Westbrook Village Joint Venture ("WBV")) and Eastrich No. 185, LLC (as
to the WBV interest), as assignees of AEW, acquired from DMB 500 shares of
the Common Stock owned by DMB, $15 million principal amount of the Series C
Subordinated Notes owned by DMB, $5 million principal amount of the Series
D Subordinated Notes owned by DMB and 50% of the general partner interest
held by a DMB affiliate in WBV. As a result of the above, the Company is
50% owned by DMB and 50% owned by AEW.
The statement of operations for the period from October 1, 1995 to
November 13, 1995 contains a $50,264,000 gain on debt discharge arising
from reorganization of the Predecessor Company under the Reorganization
Plan. In addition, a fresh start reporting adjustment of $14,069,000 was
recorded for the same period. The cost of company reorganization for the
period from October 1, 1995 to November 13, 1995 of $7,051,000 is comprised
primarily of professional fees and costs related to employee severance
agreements.
The consolidated financial statements include the accounts of UDC
Homes, Inc. and all of its majority-owned subsidiaries, joint ventures and
partnerships. All material intercompany balances and transactions have been
eliminated in consolidation. Investments in unconsolidated partnerships and
joint ventures are recorded using the equity method of accounting.
The consolidated financial statements and related notes thereto
contained in the Annual Report on Form 10-K for the fiscal year ended
September 30, 1996, filed by UDC Homes, Inc. with the Securities and
Exchange Commission, should be read in conjunction with these
6
<PAGE>
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 of the Company for the interim period.
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards (SFAS) No. 130 on "Reporting Comprehensive
Income". SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997 and changes the reporting of certain items currently in
the equity section of the balance sheet. The Company is currently
evaluating what impact this standard will have on its financial statements.
2. NOTES PAYABLE
Notes payable consist of the following (in thousands):
June 30, September 30,
1997 1996
------------- --------------
Revolving Credit Facility $ 48,948 $ 34,165
Westbrook Village Facility 5,409 4,266
Transoccidental Note 448 13,011
Other 5,360 21,620
------------- --------------
$ 60,165 $ 73,062
============= ==============
Effective April 30, 1997, the Company entered into a $170 million (the
"commitment amount") revolving credit facility with a group of banks (the
"new facility"). The new facility replaced the Company's existing $150
million revolving credit facility (the "old facility"). The new facility is
available for both construction and acquisition and development ("A&D")
activities in Arizona and California. The amount available for A&D
activities is limited to the lesser of (a) 37.5% of the commitment amount
or (b) $63,750,000, as adjusted for various sublimits, as defined. The new
facility accrues interest at prime plus 1% or, at the Company's option,
LIBOR plus 3.25%, payable monthly, and requires a commitment fee of 1% per
annum of the commitment amount, an unused commitment fee of .25% per annum
of the average unused commitment amount, and syndication and agency fees.
Subsequent to July 1, 1997, the interest rate and commitment fee may be
reduced if the Company meets certain financial ratios. The new facility is
secured by portions of the Company's housing and land inventory and matures
on September 30, 1999. At June 30, 1997, $48.9 million was outstanding and
$31.3 million was available under the new facility.
7
<PAGE>
3. HOUSING INTEREST
Housing interest incurred is capitalized and expensed through cost of
housing sales, as they relate to housing and land inventories. The
components of housing interest are as follows (in thousands):
Three Months Ended Nine Months Ended
June 30, June 30,
--------------- -----------------
1997 1996 1997 1996
------- ------- -------- --------
Interest costs incurred $ 8,467 $ 8,555 $ 21,695 $ 23,817
Less: interest capitalized 4,524 2,705 10,662 8,828
------- ------- -------- --------
Interest expensed, net $ 3,943 $ 5,850 $ 11,033 $ 14,989
======= ======= ======== ========
Amortization of capitalized interest
included in cost of housing sales $ 2,333 $ 2,473 $ 6,618 $ 5,151
======= ======= ======== ========
Interest on pre-petition, unsecured debt was suspended on the
commencement of the Bankruptcy Proceedings. Had the accrual of interest not
been suspended, interest incurred and interest expensed for the period from
October 1, 1995 to November 13, 1995 would have increased by approximately
$3,000,000 and $300,000, respectively.
4. CONTINGENCIES AND LEGAL MATTERS
During 1995, three lawsuits were filed against certain former officers
and directors of the Predecessor Company alleging violation of securities
laws, fraud and negligence. These former directors and officers may be
entitled to indemnification by the Company. A $12.75 million settlement has
been approved by the Arizona Superior Court, under which the Company has
paid $1,500,000, representing the self-insured retention under its
directors and officers policies. In addition, the Company paid $250,000 on
behalf of DMB. Certain of the Company's officers and directors insurance
policy issuers, together with the Company's insurance carriers, have agreed
to fund the balance of the settlement. The Company does not believe that
any other obligations to officers and directors will exceed its coverage
under its officers and directors insurance policies.
The Company is a defendant in several lawsuits that arise from or are
related to the conduct of the Company's business. The Company does not
believe that the ultimate resolution of these cases will materially affect
the financial position, results of operations or cash flows of the Company.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- ------- ----------------------------------------------------------------------
of Operations
-------------
Introduction
On November 14, 1995, the Company consummated its Reorganization Plan and
emerged from its Bankruptcy Proceedings as a new reporting entity. The following
discussion and analysis of the Company's operations includes only the Company's
continuing operations in Arizona and California except as otherwise indicated.
The Company has liquidated substantially all remaining assets of its Southeast
operations, and management believes that discussion of such operations is not
material to an understanding of the Company's operations.
Revenues
The following table presents comparative housing revenues, deliveries and
average sales price for the periods indicated:
Three Months Ended Nine Months Ended
June 30, June 30,
-------------------- --------------------
1997 1996 1997 1996
--------- --------- --------- ---------
Arizona and California:
Family revenue (000s)............... $ 75,815 $ 93,800 $192,794 $ 213,006
Retirement revenue (000s)........... $ 22,942 $ 22,348 $ 71,594 $ 59,846
Units delivered..................... 486 572 1,285 1,294
Average sales price................. $203,200 $203,000 $205,800 $ 210,900
Change from prior year.............. (15.0)% 20.3% (3.0)% .5%
Change due to volume................ (15.0)% 22.5% (.7)% (4.6)%
Change due to average sales price... - (2.2)% (2.3)% 5.1%
Southeast:
Housing revenue (000s).............. - - - $ 5,123
Units delivered..................... - - - 26
Average sales price................. - - - $ 197,000
The decrease in units delivered for the quarter ended June 30, 1997
compared to the quarter ended June 30, 1996 resulted from decreased deliveries
in Arizona and California. The decrease in average sales price for the nine
months ended June 30, 1997 compared to the prior period resulted from changes in
the mix of product types sold.
9
<PAGE>
Net Orders
The following table presents comparative net orders by region for the
periods indicated (dollars in thousands):
Three Months Ended Nine Months Ended
June 30, June 30,
---------------------- -----------------------
1997 1996 1997 1996
---------- ---------- ---------- -----------
Arizona:
Dollars...................... $70,246 $65,232 $225,481 $214,510
Units ordered................ 343 353 1,163 1,161
Average sales price.......... $ 205 $ 185 $ 194 $ 185
California:
Dollars...................... $45,040 $33,739 $ 94,244 $ 90,315
Units ordered................ 202 125 397 344
Average sales price.......... $ 223 $ 270 $ 237 $ 263
Southeast:
Dollars...................... - - - $ 3,993
Units ordered................ - - - 21
Average sales price.......... - - - $ 190
Company total:
Dollars...................... $115,286 $ 98,971 $319,725 $308,818
Units ordered................ 545 478 1,560 1,526
Average sales price.......... $ 212 $ 207 $ 205 $ 202
Net orders represent 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. The decrease in the average sales price
in California was due to changes in the mix of product types sold and fewer
orders in northern California which have higher sales prices.
10
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Backlog
Backlog represents homes pending delivery, for which the Company has
received purchase deposits and signed sales contracts. The following table
presents comparative backlog by region (dollars in thousands):
June 30,
------------------------
1997 1996
----------- -----------
Arizona:
Dollars..................... $164,013 $150,038
Units....................... 818 801
Average sales price......... $ 201 $ 187
California:
Dollars..................... $ 55,809 $ 55,669
Units....................... 220 200
Average sales price......... $ 254 $ 278
Company total:
Dollars..................... $219,822 $205,707
Units....................... 1,038 1,001
Average sales price......... $ 212 $ 206
Gross Margins, Selling and Administrative Expenses and Interest, Net
The following table presents comparative information related to gross
margins, selling and administrative expenses ("S&A") and interest, net for
homebuilding for the periods indicated (dollars in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
------------------------------------ ------------------------------------
1997 1996 1997 1996
----------------- ----------------- ----------------- -----------------
Dollars % Dollars % Dollars % Dollars %
--------- ------ --------- ------ --------- ------ --------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue from housing sales $ 98,757 100.0% $ 116,148 100.0% $ 264,388 100.0% $ 277,975 100.0%
Cost of housing sales 84,515 85.6% 102,088 87.9% 225,303 85.2% 249,162 89.6%
-------- ----- --------- ----- --------- ----- --------- -----
Gross margin 14,242 14.4% 14,060 12.1% 39,085 14.8% 28,813 10.4%
S & A expenses (including
reorganization costs) 17,356 17.6% 11,154 9.6% 44,361 16.8% 37,802 13.6%
-------- ----- --------- ----- --------- ----- --------- -----
Operating (loss) income
from homebuilding (3,114) (3.2%) 2,906 2.5% (5,276) (2.0%) (8,989) (3.2%)
Interest, net (3,943) (4.0%) (5,850) (5.0%) (11,033) (4.2%) (14,989) (5.4%)
-------- ----- --------- ----- --------- ----- --------- -----
Pre-tax (loss) from homebuilding $ (7,057) (7.2%) $ (2,944) (2.5%) $ (16,309) (6.2%) $ (23,978) (8.6%)
======== ===== ========= ===== ========= ===== ========= =====
</TABLE>
11
<PAGE>
Gross margins increased during fiscal 1997 compared to fiscal 1996
primarily due to reduced amortization of purchased profit , which was recorded
as a result of the Acquisition, from $1.8 million and $8.4 million for the three
and nine months ended June 30, 1996 , respectively, to $.4 million and $1.2
million for the three and nine months ended June 30, 1997, respectively.
Additionally, margins were artificially low during the first nine months of
fiscal 1996 due to price reductions enacted during calendar 1995 to entice
buyers who may have been hesitant to purchase a UDC home because of its
Bankruptcy Proceedings.
The following table presents the components of selling and administrative
expenses for the periods indicated (dollars in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
---------------------- -----------------------
1997 1996 1997 1996
---------- --------- ---------- -----------
<S> <C> <C> <C> <C>
Selling and administrative expenses:
Variable components.......................... $ 7,064 $ 5,930 $ 16,638 $ 15,031
Fixed components............................. 10,292 5,224 27,723 15,720
Cost of company reorganizations.............. - - - 7,051
---------- --------- ---------- -----------
Total selling and administrative expenses: $ 17,356 $ 11,154 $ 44,361 $ 37,802
========== ========= ========== ===========
As a percentage of revenues from housing sales:
Variable components.......................... 7.2% 5.1% 6.3% 5.4%
Fixed components............................. 10.4% 4.5% 10.5% 5.7%
Cost of company reorganizations.............. - - - 2.5%
---------- --------- ---------- -----------
Total selling and administrative expenses: 17.6% 9.6% 16.8% 13.6%
========== ========= ========== ===========
</TABLE>
The variable component of selling and administrative expenses includes
sales commissions, advertising, model maintenance and model furniture
amortization. Variable selling and administrative expenses as a percentage of
housing sales increased for the three and nine month periods in fiscal 1997
compared to the same periods in fiscal 1996 due to increases in model
maintenance and model furniture amortization.
The fixed component of selling and administrative expenses includes all
other selling and administrative expenses which generally do not vary with
housing sales volume. Fixed selling and administrative expenses increased in the
three and nine month periods in fiscal 1997 compared to the same periods in
fiscal 1996 primarily due to increased customer service, settlement costs and
increased professional fees. Additionally, the Company has experienced increased
information systems consulting expenditures as well as increased office related
expenses.
12
<PAGE>
Mortgage Operations
Through May 31, 1997 the Company's mortgage banking operations were
exclusively conducted through its wholly-owned subsidiary, UDC Mortgage, Inc.
Effective June 1, 1997, the Company formed a joint venture with Norwest
Ventures, Inc. (entitled UDC Mortgage) through which all future mortgage banking
operations of the Company will be conducted. The joint venture agreement
provides that all capital contributions and distributions as well as all profit
and loss distributions be split 50/50. The Company's investment in this joint
venture is being accounted for using the equity method of accounting. At June
30, 1997, the Company's investment was approximately $126,000 and is included in
prepaids and other assets in the accompanying consolidated balance sheets.
UDC Mortgage, Inc. is currently winding down its operations but will
continue to operate until all mortgage loans in process at June 1, 1997 have
been originated and sold. The following table presents operating information for
UDC Mortgage, Inc. for the periods indicated (dollars in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
---------------------- ---------------------
1997 1996 1997 1996
--------- --------- --------- ----------
<S> <C> <C> <C> <C>
Number of loans originated................. 186 247 526 598
Revenues................................... $ 607 $ 986 $1,699 $ 2,237
General and administrative expenses........ 295 522 997 1,543
--------- --------- --------- ----------
Operating income from mortgage banking..... 312 464 702 694
Interest, net.............................. 13 150 78 184
--------- --------- --------- ----------
Pre-tax profit from mortgage banking....... $ 325 $ 614 $ 780 $ 878
========= ========= ========= ==========
</TABLE>
General and administrative expenses decreased in fiscal 1997 compared to
fiscal 1996 primarily as a result of the relief of excess reserves and accruals
and a reduction in legal fees paid. Additionally, staff and overhead levels have
decreased in anticipation of the close out of operations.
Liquidity and Capital Resources
The Company's financing needs depend primarily upon sales volume, asset
turnover, land acquisitions and housing inventory balances. The Company has
financed, and expects to continue to finance, its working capital needs through
funds generated by operations, borrowings and capital contributions by AEW and
DMB. Funds for future land acquisitions and construction costs are expected to
be provided primarily by cash flows from operations, future borrowings as
permitted under the Company's loan agreements and capital contributions by AEW
and DMB. The Company believes that amounts generated from operations, additional
borrowings and capital contributions will provide funds adequate to finance its
homebuilding activities and meet its debt service requirements.
On November 7, 1996, the Company completed an asset sale transaction in
which it sold to DMB/AEW Land Holdings One, LLC, an affiliate of DMB and AEW,
for cash, $25.5 million of assets the Company had previously designated as land
held for sale. Proceeds from the sale were used to reduce the outstanding
balance on the Company's old credit facility. This sale also created additional
acquisition and development fund availability under the Company's old credit
13
<PAGE>
facility. The Company entered into a management agreement with the DMB/AEW
affiliate pursuant to which the Company received a fixed monthly fee for the
management and marketing of the land to third party buyers. Through June 30,
1997, the Company has earned approximately $496,000 in fees pursuant to this
agreement. To the extent the cash proceeds from the sale of the property to a
third party exceeds certain thresholds, the Company will participate in excess
profits.
The Company has entered into option agreements with DMB/AEW Land Holdings Two,
LLC, an affiliate of DMB and AEW, which provide for the purchase of up to 805
lots in Arizona and Southern California. As of June 30, 1997, the Company had
purchased 211 lots pursuant to the terms of the option agreements.
The Company finances its homebuilding, land development and mortgage operations
as discussed below:
Construction and Acquisition and Development Financing - Effective April
30, 1997, the Company entered into a $170 million (the "commitment amount")
revolving credit facility with a group of banks (the "new facility"). The new
facility replaced the Company's existing $150 million revolving facility (the
"old facility"). The new facility is available for both construction and
acquisition and development ("A&D") activities in Arizona and California. The
amount available for A&D activities is limited to the lesser of (a) 37.5% of the
commitment amount or (b) $63,750,000, as adjusted for various sublimits, as
defined. The new facility accrues interest at prime plus 1% or, at the Company's
option, LIBOR plus 3.25%, payable monthly, and requires a commitment fee of 1%
per annum of the commitment amount, an unused commitment fee of .25% per annum
of the average unused commitment amount, and syndication and agency fees.
Subsequent to July 1, 1997, the interest rate and commitment fee may be reduced
if the Company meets certain financial ratios. The new facility is secured by
portions of the Company's housing and land inventory and matures on September
30, 1999. At June 30, 1997, $48.9 million was outstanding and $31.3 million was
available under the new facility.
Additionally, the Company has a revolving construction and A&D facility, as
amended on June 28, 1997, for Westbrook Village ("WBV") which consists of an
$8.0 million construction facility and a $2.728 million A&D facility. These
facilities accrue interest at prime plus 1%, payable monthly, require payment of
a commitment fee of 1% per annum and are secured by WBV housing and land
inventory. The A&D facility matures on March 31, 1998 and the construction
facility matures on January 1, 1999. At June 30, 1997, $5.4 million was
outstanding and $4.3 million was available under these facilities.
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 ("EBITDA") 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
14
<PAGE>
of pre-sold and speculative construction. Accordingly, all of the committed
credit may not be available to the Company at a 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.
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 9.5% to
15% and are due at various dates. At June 30, 1997, $5.8 million was outstanding
under these notes.
Senior Unsecured Notes - On the Acquisition Date, the Company issued Series
A Senior Notes in a principal amount of $60 million and Series B Senior Notes in
a principal amount of $10 million. Interest on the Senior Notes accrues at a
rate of 12.5% per annum and is payable semi-annually. Both series of Senior
Notes mature on May 1, 2000. The 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 construction A&D
facilities. The 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.
Subordinated Notes - On the Acquisition Date, the Company issued Series C
Subordinated Notes in a principal amount of $35 million ($30 million of which
were issued to DMB in connection with its acquisition of the equity of the
Company). Interest on the Series C Subordinated Notes accrues at the rate of
14.5% per annum and is payable semi-annually. The Series C Subordinated Notes
mature November 1, 2000. On May 6, 1996, Eastrich No. 184, LLC acquired $15
million of the Series C Subordinated Notes from DMB. The payment of interest in
cash on the Series C Subordinated Notes is restricted by certain covenants in
the Company's construction and A&D facilities. The November 1, 1996 and May 1,
1997 payments of interest were paid in-kind in additional Series C Subordinated
Notes.
On March 15, 1996, DMB invested $10 million in the Company in exchange for
$10 million Series D Subordinated Notes. The terms of the Series D Subordinated
Notes are identical to the terms of the Series C Subordinated Notes discussed
above, except that payments on the Series D Subordinated Notes are subordinate
to payments on the Series C Subordinated Notes. On May 6, 1996, Eastrich No.
184, LLC acquired $5 million of the Series D Subordinated Notes from DMB. During
fiscal 1997, DMB and AEW have invested $17.5 million each in the Company in
exchange for additional Series D Subordinated Notes. The November 1, 1996 and
May 1, 1997 payments of interest were paid in-kind in additional Series D
Subordinated Notes.
Common Stock - In connection with the consummation of the Reorganization
Plan, the Company sold all 1,000 of the authorized shares of Common Stock of the
reorganized Company, par value $.01 per share, to DMB. DMB then entered into an
option agreement with AEW which, as amended, gave AEW the right to purchase 500
shares of the Common Stock owned by DMB, $15 million of the Series C
Subordinated Notes issued to DMB, $5 million of the Series D Subordinated Notes
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. On April
21, 1996, AEW exercised its option, and, on May 6, 1996, 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 December 31,
15
<PAGE>
1996, the Company received additional capital contributions of $5,000,000 each
from DMB and AEW.
Mortgage Debt - The Company finances its mortgage operations with a $10
million revolving credit facility which matures on August 30, 1997. This
facility is secured by residential mortgages originated in the closing of the
Company's residential home sales. At June 30, 1997, approximately $2.5 million
was outstanding under the facility.
Inflation
The homebuilding industry is significantly affected by movements in
interest rates. Due to its highly leveraged condition, the Company is more
sensitive than less leveraged companies to increases in interest rates which
affect the cost of the Company's borrowings and impact the Company's margins and
profitability. Further, the Company may have difficulty expanding its operations
when opportunities are available or securing financing during a downturn in the
homebuilding market. While the Company believes that the move-up family and
active adult homebuyers to whom the Company provides housing have been less
sensitive to increasing interest rates than the industry as a whole, the
Company's business is nonetheless affected. Residential homebuilding companies,
including the Company, can be adversely affected by inflation through higher
mortgage rates and increased costs for materials and subcontractors, resulting
in higher prices, both of which adversely affect buyer demand. Management
believes that the impact of inflation on its revenues and costs has not been
material.
Changes in interest rates have several impacts on the Company's
homebuilding operations. Higher interest rates will increase the carrying costs
of inventory, thereby increasing costs of housing sales and decreasing gross
margins. Generally, higher interest rates tend to create a reduction in consumer
demand and reduce the consumer's ability to qualify for mortgage financing.
Correspondingly, lower interest rates will decrease the carrying costs of
inventory, thereby decreasing costs of housing sales and increasing gross
margins. Generally, lower interest rates tend to increase consumer demand and
the consumers' ability to qualify for mortgage financing.
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 overcoming negative perceptions on the
part of homebuyers as a result of its Bankruptcy Proceedings, the effect of
interest rates on demand for the Company's homes, the ability to finance the
purchase of additional property and the effect of various loan covenants on the
Company's ability to expand operations, and fluctuating margins as a result of
product mix and other factors. 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.
16
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
- ------- -----------------
The Arizona Actions - On June 5, 1995, June 14, 1995 and October 25,
1995, lawsuits were filed on behalf of a purported class of present and
former shareholders of the Company in the Superior Court of the State of
Arizona in and for Maricopa County (the "Court") against, among others,
certain former officers and directors of the Company (the "Director/Officer
Defendants"), entitled Michael A. Isco v. Richard C. Kraemer, et al. (Case
No. CV 95-08941), Larry Alexander et al. v. Arthur Andersen LLP, et al.
(Case No. CV 95-09509), and Crandon Capital Partners v. Kraemer, et al.,
respectively (collectively, the "Arizona Actions"). Subsequently, the
Arizona Actions were consolidated. The Arizona Actions seek, among other
things, unspecified money damages and contain allegations which include
violations of Arizona securities law, fraud, negligent misrepresentation,
breach of fiduciary duty, negligence and gross negligence. The Company is
not a named defendant in these lawsuits. Further, the Company's
Reorganization Plan provided for the discharge of claims asserted in class
action lawsuits against the Company. However, the Company could be required
to indemnify certain of the Director/Officer Defendants if such defendants
incur expenses or liability in the Arizona Actions and seek
indemnification. In connection with the settlement described below, the
Director/Officer Defendants agreed to limit their aggregate claim for
indemnification in certain circumstances.
An agreement (the "Settlement Agreement") was previously 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. Of such amount, $1.5
million, which represents the self-insured retention under the Company's
applicable directors' and officers' insurance policies, has been paid by
the Company. In addition, the Company paid $250,000 on behalf of DMB.
Certain issuers of the Company's directors' and officers' insurance
policies, together with the Company's insurance carriers, have agreed to
fund the balance of the settlement. The Company does not believe that its
remaining obligations to directors and officers will exceed its insurance
coverage. The Settlement Agreement and any amendments thereto were approved
by the Court at a final settlement hearing held on February 14, 1997. The
Court's decision is being appealed by Arthur Andersen LLP.
Shadow Moss Homeowners Association Inc. v. UDC-Universal Development,
L.P., dba UDC Homes Limited Partnership, Course View Properties, Inc.,
Newman Bower Architects, James M. Taylor, and Mulvaney Builders and
Associates - This case, which was filed on March 5, 1993, is currently
pending in the Horry County, South Carolina Court of Common Pleas. The
plaintiff alleges that numerous construction/design defects exist at the
Company's Shadow Moss condominium project in North Myrtle Beach, South
Carolina. The complaint alleges breach of contract, breach of implied
warranties, negligence, strict tort liability and unfair trade practices.
The plaintiff initially sought $2,500,000 in actual and consequential
damages, punitive damages, costs and attorneys' fees and treble the actual
damages as a
17
<PAGE>
result of the unfair trade practices claim; however, the plaintiffs now
estimate the damages to be in the $300,000 to $550,000 range. CIGNA
Insurance Company and Aetna Casualty and Surety Company are each defending
the Company under a reservation of rights. Subsequent to June 30, 1997,
this matter was settled for approximately $375,000, of which approximately
$80,000 will be funded by the Company.
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 matters will have a
material adverse effect upon the Company's financial position, results of
operations or cash flows.
18
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
- ------- --------------------------------
Exhibit
Number Description of Document
- ------ -----------------------
4.1 $7,783,886 aggregate principal amount of Series C Subordinated
Notes due 2000. Terms identical to previously issued Series C
Notes, incorporated by reference from the Company's annual
report on Form 10-K for the fiscal year ended September 30,
1995.
4.2 $36,904,122 aggregate principal amount of Series D
Subordinated Notes due 2000. Terms identical to previously
issued Series D Notes, incorporated by reference from the
Company's quarterly report on Form 10-Q for the quarter ended
June 30, 1996.
27 Financial Data Schedule
All other exhibits are omitted as the information required is inapplicable.
(b) There were no reports on Form 8-K filed during the three
months ended June 30, 1997.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: August 14, 1997 UDC HOMES, INC.
By: /s/ Garth R. Wieger
-----------------------------------------
Garth R. Wieger, Chief Executive Officer,
President and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Garth R. Wieger President, Chief Executive August 14, 1997
- -------------------------- Officer and Director
Garth R. Wieger (Principal Executive Officer)
/s/ Kenda B. Gonzales Senior Executive Vice President August 14, 1997
- -------------------------- and Chief Financial Officer
Kenda B. Gonzales (Principal Financial and Accounting Officer)
/s/ Andrew S. Beams Vice President and August 14, 1997
- -------------------------- Corporate Controller
Andrew S. Beams
20
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