FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the fiscal year ended September 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
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III this Form 10-K or any amendment
to this Form 10-K. X
---
The aggregate market value of the Registrant's Common Stock held by
non-affiliates as of November 1, 1997 was $0.00 as all such stock is held by
affiliates. As of November 1, 1997, the Registrant had 1,000 shares of Common
Stock outstanding.
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
--- ---
Documents incorporated by reference: None
<PAGE>
UDC HOMES, INC.
FORM 10-K ANNUAL REPORT
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1997
TABLE OF CONTENTS
Page
PART I
Item 1. Business..............................................................2
Item 2. Properties...........................................................11
Item 3. Legal Proceedings....................................................12
Item 4. Submission of Matters to a Vote of Security Holders..................12
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters..............................................................13
Item 6. Selected Financial Data..............................................14
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................16
Item 8. Financial Statements and Supplementary Data..........................28
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.................................................29
PART III
Item 10. Directors and Executive Officers of the Registrant...................30
Item 11. Executive Compensation...............................................32
Item 12. Security Ownership of Certain Beneficial Owners and Management.......36
Item 13. Certain Relationships and Related Transactions.......................37
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K....39
i
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PART I
Item 1. Business
- ------- --------
General
UDC Homes, Inc. and its subsidiaries ("UDC" or the "Company") designs,
builds and markets single family attached and detached homes primarily for
move-up family and retirement home buyers in Arizona and California. The Company
builds most of its move-up family homes and all of its retirement homes in
master-planned communities on sites selected for their attractive locations
which provide home buyers with amenities such as recreational facilities and
parks.
The Company has extensive experience in the homebuilding business,
having built and closed more than 30,350 homes since its formation in 1968. As
of September 30, 1997, the Company was developing and/or marketing for sale
housing products in 35 different subdivisions in Arizona and California. In the
fiscal year ended September 30, 1997 ("fiscal 1997"), UDC closed 1,854 homes at
an average sales price of $205,000 compared to 1,951 homes at an average sales
price of $206,000 in the fiscal year ended September 30, 1996 ("fiscal 1996").
The fiscal 1997 closings resulted in $380.7 million in housing revenues. During
fiscal 1997, the Company received 2,042 net sales orders, representing an
aggregate sales value of $421.3 million, an increase of 7% from the aggregate
sales value achieved in fiscal 1996. At September 30, 1997, the Company had a
sales backlog (represented by signed contracts with deposits from buyers) of 951
sold homes, representing an aggregate sales value of $204.4 million and a 27%
increase from the sales value of the Company's backlog at September 30, 1996.
UDC seeks to be a leading homebuilder in each of the geographic markets
in which it operates. The Company's Arizona operations, which are located
principally in the Phoenix metropolitan area, generated 68% of the Company's
revenues in fiscal 1997. In the metropolitan Phoenix market, the second largest
housing market in the United States based upon single family housing permits
issued in calendar year 1996, UDC was the fourth largest homebuilder based on
housing permits issued. For calendar year 1997, the metropolitan Phoenix area is
expected to retain its number two national ranking and the Company expects to be
the third largest homebuilder in the Phoenix metropolitan area based on permits
issued. The Company's California operations are located in the southern
California markets of Los Angeles and San Diego and the San Francisco Bay area
of northern California. In the San Francisco Bay area, the Company has targeted
a market niche consisting of retirement home buyers seeking gate-guarded golf
course communities. California operations accounted for 32% of the Company's
fiscal 1997 revenues. The Company's geographic concentration and limited number
of projects may make the Company vulnerable to regional economic downturns or
other adverse project-specific matters.
2
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During fiscal year 1995, the Company decided to discontinue its
operations in the Southeast markets of North Carolina, Florida and Georgia (the
"Southeast Operations"). The Company has liquidated all remaining assets of its
Southeast Operations. Unless otherwise noted, the information presented in this
Form 10-K describes only the Company's continuing operations located in Arizona
and California.
The Company commenced proceedings under Chapter 11 of the United States
Bankruptcy Code on May 17, 1995 in order to restructure its indebtedness and
other liabilities. The Company's plan of reorganization (the "Plan") was
confirmed on October 3, 1995 by the United States Bankruptcy Court for the
District of Delaware and was consummated on November 14, 1995. Pursuant to a
stock purchase agreement (the "Stock Purchase Agreement") dated May 16, 1995
between the Company and DMB Property Ventures Limited Partnership ("DMBLP"), on
November 14, 1995 ("Acquisition Date") DMB Residential L.L.C. ("DMB"), an
affiliate of DMBLP, purchased from the Company (the "Acquisition") for an
aggregate purchase price of $108 million all of the new common stock of the
Company (the "Common Stock") and $30 million in principal amount of Series C
Subordinated Notes. On the Acquisition Date, the Company also issued, pursuant
to the Plan, $70 million aggregate principal amount of 12.5% Series A Senior
Notes due 2000 (the "Series A Senior Notes") and 12.5% Series B Senior Notes due
2000 (the "Series B Senior Notes"). The Series A Senior Notes and the Series B
Senior Notes are referred to collectively as the "Senior Notes". On March 15,
1996, the Company issued $10 million principal amount of 14.5% Series D
Subordinated Notes to DMB.
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 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. The operations of WBV are conducted pursuant to a joint venture agreement
in which the Company and affiliates of DMB and AEW own 77.5%, 11.25% and 11.25%
equity interests, respectively.
During fiscal 1997 DMB and AEW invested $17.5 million each in the
Company in exchange for additional Series D Subordinated Notes and $5 million
each in additional capital contributions.
The Housing Industry
The housing industry has historically been a cyclical industry driven
by numerous factors beyond the control of market participants, such as general
economic conditions, inflation rates and the cost and availability of financing.
In addition, the homebuilding business is subject to numerous inherent risks
such as adverse local and national real estate
3
<PAGE>
market conditions, supply of and demand for particular types of properties,
changing environmental, zoning and other governmental regulation, the level of
real estate taxes, changes in federal tax laws, the cost of materials and labor,
availability of financing, the need to expend significant amounts of capital on
communities before significant revenues are generated, overbuilding, increased
competition and changes in interest rates.
UDC's Markets
UDC currently focuses on providing homes primarily for two demographic
markets: move-up family buyers and retirees. By developing within master-planned
communities designed specifically for these population markets, the Company has
targeted what it believes to be among the fastest growing home buyer markets.
UDC's sales in its family market, which is comprised primarily of move-up homes,
accounted in fiscal 1997 for approximately 74% of the Company's revenues. In the
family market, UDC offers homes which range in size from 1,410 to 3,850 square
feet with base sales prices which range from $115,000 to $453,000. UDC's sales
in the retirement market accounted in fiscal 1997 for approximately 26% of the
Company's revenues. In the retirement market, UDC offers homes which range in
size from 1,363 to 3,340 square feet with base sales prices which range from
$105,000 to $625,000. The Company believes that its strategy of concentrating on
the move-up family and retirement home buyer is consistent with national
demographic trends projected by the U.S. Department of Commerce-Bureau of the
Census, which indicate that the portion of the population age 45 and over, which
constitute the principal purchasers of the Company's move-up family and
retirement homes, will grow at a greater rate than the general population
through 2003 and will control a disproportionate amount of the nation's
disposable income.
4
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The total number of homes closed by the Company (excluding Southeast
operations) for each of the years ended September 30, 1993 through 1997 are set
forth in the following table.
Homes Closed - Units
---------------------------------------------------
Years Ended September 30,
---------------------------------------------------
1997 1996 1995 1994 1993
----- ----- ----- ----- -----
Family:
Arizona ................ 989 1,117 1,071 1,194 1,253
California ............. 379 344 349 514 352
----- ----- ----- ----- -----
Family Total .............. 1,368 1,461 1,420 1,708 1,605
----- ----- ----- ----- -----
Retirement:
Arizona ................ 371 327 314 427 420
California ............. 115 163 110 127 165
----- ----- ----- ----- -----
Retirement Total .......... 486 490 424 554 585
----- ----- ----- ----- -----
Family and Retirement Total 1,854 1,951 1,844 2,262 2,190
===== ===== ===== ===== =====
The following table reflects the percentage of UDC revenues from
housing sales for the prior five years.
Housing Revenues
---------------------------------------------------
Years Ended September 30,
---------------------------------------------------
1997 1996 1995 1994 1993
----- ----- ----- ----- -----
Family:
Arizona ................. 50% 54% 56% 49% 55%
California .............. 24 25 24 27 21
--- --- --- --- ---
Family Total ............... 74% 79% 80% 76% 76%
--- --- --- --- ---
Retirement:
Arizona ................. 18% 14% 14% 16% 17%
California .............. 8 7 6 8 7
--- --- --- --- ---
Retirement Total ............ 26% 21% 20% 24% 24%
--- --- --- --- ---
100% 100% 100% 100% 100%
=== === === === ===
5
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Family
Arizona - UDC currently sells primarily move-up homes in 20 communities
geographically dispersed in each of the Phoenix metropolitan area's strongest
housing markets. UDC builds detached stucco homes with tile roofs which range in
size from 1,410 to 3,850 square feet, with base sales prices from $115,000 to
$331,000. UDC builds in both selected individual subdivisions and in
master-planned communities that offer various amenities including championship
golf courses, tennis courts, parks and scenic views.
California - In San Diego and Los Angeles, the Company is primarily
selling detached and attached move-up family homes in the counties of Riverside,
Orange and San Diego. In San Diego, the Company is currently selling homes in
six communities with homes ranging in size from 1,412 to 3,340 square feet, with
base sales prices from $133,000 to $453,000. In Los Angeles, the Company is
currently selling homes in two communities with homes ranging in size from 1,756
to 2,467 square feet, with base sales prices from $158,000 to $248,000.
Retirement
Arizona - UDC has sold retirement homes in its two current major
retirement communities, Westbrook Village and MountainBrook Village, since 1982
and 1989, respectively. At these communities, which together consist of six
active subdivisions, UDC builds detached and attached stucco homes with tile
roofs ranging in size from 1,363 to 2,578 square feet, with base sales prices
from $105,000 to $216,000. At both communities, retirement home buyers have
access to social and recreational amenities, including championship golf
courses, tennis courts, recreational centers and scenic views. Westbrook Village
is expected to have approximately 3,800 homes (263 homesites were remaining at
September 30, 1997) and 7,000 residents upon completion, and MountainBrook
Village is expected to have approximately 1,700 homes (817 homesites were
remaining at September 30, 1997) and 3,000 residents upon completion.
California - UDC entered the northern California market in 1984 with
the acquisition of two age-restricted master-planned retirement communities,
Rossmoor in Walnut Creek and The Villages in San Jose. These communities offer
24-hour gated security features and a full range of amenities for their home
buyers, including championship golf courses, tennis courts, recreational centers
and scenic views. UDC builds attached and detached stucco homes with tile roofs
in these communities ranging in size from 1,629 to 3,340 square feet, with base
sales prices from $280,000 to $625,000. Rossmoor is expected ultimately to
provide housing for more than 10,000 residents in 7,000 homes (298 homesites
were remaining at September 30, 1997). The Villages, a 1,200-acre master-planned
community, is expected to provide housing for more than 5,000 residents in 3,000
homes (239 homesites were remaining at September 30, 1997) upon completion.
6
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Mortgage Related Operations
Through May 31, 1997, the Company's mortgage banking operations were
exclusively conducted through its indirect, wholly-owned subsidiary, UDC
Mortgage Corporation ("UDC Mortgage Corp."). Effective June 1, 1997, the Company
entered into 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 profits and losses, will be split 50/50. UDC
Mortgage Corp. is currently winding down its operations but will continue to
operate until all mortgage loans in process prior to the formation of the joint
venture have been originated and sold (anticipated to be during the first fiscal
quarter of 1998).
UDC Mortgage serves an important role in the Company's sale of its
homes by assisting purchasers in obtaining financing to purchase their homes.
During fiscal 1997, approximately 98% of the Company's home buyers purchased
their home with the assistance of mortgage financing and approximately 66% of
home buyers who financed their housing purchases did so through UDC Mortgage or
UDC Mortgage Corp; the average loan amount for mortgages orginated by these
entities during fiscal 1997 was approximately $151,000. As a mortgage banker,
UDC Mortgage underwrites its mortgages to comply with secondary market mortgage
underwriting standards. Accordingly, its loan criteria are consistent with those
of traditional mortgage lenders in its respective markets. Based upon UDC
Mortgage's continued eligibility to participate in federally sponsored secondary
mortgage market programs, the Company believes that home purchasers obtaining
mortgage financing through UDC Mortgage are as credit-worthy as those who apply
for mortgages through traditional lenders and that it offers mortgages on terms
and eligibility equivalent to that offered by traditional lenders. The Company's
policy is to qualify its subdivisions for FNMA and/or Federal Housing
Administration/Veterans Administration ("FHA/VA") financing, where appropriate.
7
<PAGE>
Land Inventory
The following table describes the number of homesites available for
future development and sale (excludes units in backlog, speculative units and
model homes) at September 30, 1997 by location:
UDC Land Joint
Owned Options Ventures Total
--------------------------------------
Family:
Arizona ............... 1,938 91 -- 2,029
California ............ 30 567 -- 597
----- ----- ----- -----
Family Total .............. 1,968 658 -- 2,626
----- ----- ----- -----
Retirement:
Arizona ............... 703 -- 116 819
California ............ 503 -- -- 503
----- ----- ----- -----
Retirement Total .......... 1,206 -- 116 1,322
----- ----- ----- -----
Family and Retirement Total 3,174 658 116 3,948
===== ===== ===== =====
The Company has entered into land option agreements with certain
entities (including affiliates of DMB and AEW) which have available sources of
capital. These entities acquire land and grant purchase options to the Company.
At September 30, 1997, the Company had land option agreements with affiliated
entities which enable the Company to purchase up to 541 lots. The Company also
has entered into option agreements with unrelated parties which enable the
Company to purchase up to 117 lots. The Company believes that lot prices and
other monetary provisions under these agreements with affiliated entities
approximated fair value at the date the agreements were entered into. The
Company is actively pursuing the acquisition of land to maintain or increase its
lot inventory levels in each of its operating divisions. There can be no
assurance that the Company will be successful in acquiring land on acceptable
terms or in a timely manner.
Since May 6, 1996, the Company's Westbrook Village operations have been
conducted under a joint venture agreement in which UDC and affiliates of DMB and
AEW own 77.5%, 11.25% and 11.25% equity interests, respectively.
8
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Sales Activities
At September 30, 1997, the Company had a sales backlog (represented by
signed contracts with deposits from buyers) of $204.4 million comprised of 951
housing units. At September 30, 1996, the Company had a sales backlog of $161.1
million representing 762 units. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Net Sales Backlog".
A sale becomes part of backlog upon the Company's receipt of a signed
contract and a deposit. However, UDC's sales strategy and marketing program,
which provide buyers the right to cancel their purchase contracts based upon
specified contingencies, contemplates a certain amount of contract
cancellations. The percentage of gross sales contracts which were canceled was
approximately 27% in fiscal 1997 and 31% in fiscal 1996. Generally, canceled
sales contracts are replaced with new sales contracts within a relatively short
time after cancellation. The Company believes that the inability of home buyers
to sell their existing homes or to qualify for mortgages historically have been
the primary causes of cancellations. The Company also believes that
cancellations are sometimes attributable to changes in buyers' personal or
employment-related 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. In
connection with the Company's marketing to prospective buyers, the Company
accepts sales contracts where the buyers retain the right to cancel their
purchases subject to certain contingencies, including the sale of the buyers'
existing homes and/or qualification for financing. Although this approach
results in an increased number of cancellations, the Company believes that the
strategy increases the overall number of homes sold and closed.
Management expects that substantially all units included in backlog as
of September 30, 1997 will close and result in revenues to the Company during
fiscal 1998, either under the sales contract in backlog or a subsequent sale of
the home to a different buyer. See "Business - Competition and Market Factors."
9
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Construction
The Company functions as its own general contractor. At all stages of
production, the Company's management personnel and on-site superintendents
coordinate the activities of subcontractors, consultants and suppliers and
subject their work to quality, cost and production time controls. Consulting
firms are engaged to assist in project planning. Independent subcontractors, who
are generally selected on a competitive basis, are employed to perform all of
the site development and construction work at the Company's communities. UDC
contracts for prescribed periods with qualified subcontractors to construct
homes on a fixed cost basis.
Construction time for the Company's homes depends on the time of year,
local labor situations, availability of materials and supplies and other
factors. Construction of homes is generally completed within four to six months
after construction commences. Although the construction of homes is generally
tied to home sales orders to minimize the costs and risk of completed but unsold
inventory, some construction may commence prior to UDC's receipt of a purchase
contract in order to maintain an inventory for quick delivery or to continue the
construction sequence. At September 30, 1997, there were 283 housing units
(excluding model homes) at various stages of construction for which a purchase
contract was not in effect.
The Company provides all home buyers standardized warranties subject to
specified limitations. The Company's experience has been that the majority of
warranty claims are made within the six-month period following the close of the
home sale.
Competition and Market Factors
The residential housing industry is highly competitive. UDC competes in
each of its markets with numerous housing producers including regional, national
and small custom homebuilders, as well as with the resale of existing housing.
UDC's housing products compete on the basis of quality, price, design, location,
reputation and amenities. In certain markets and at times when housing demand is
high, UDC also competes with other homebuilders in the hiring of subcontractors.
Further, UDC competes with other homebuilders, some of which have greater
financial resources than UDC, in the acquisition of land and financing. In each
of the markets for its operations, UDC believes that there is ample room for
growth. The overall market for new housing has historically been cyclical and
UDC's business is affected by changes in overall as well as local market
conditions.
UDC's business focus is on the customer and UDC makes customer
satisfaction a key goal. UDC's organization and its compensation programs are
structured to promote this goal. UDC projects and reinforces its image as a
quality homebuilder that stands behind its products.
There can be no assurance that an increase in competition from existing
competitors or the entry of new competitors will not have a material adverse
effect on the Company's business, operating results and financial condition.
There can be no assurance that the Company will be able to compete successfully
in the future with existing or new competitors.
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Governmental Regulation and Environmental Considerations
The Company's business is subject to extensive federal, state and local
regulatory requirements and the broad discretion that governmental agencies have
in administering those requirements, all of which can prevent, delay, or
significantly increase the cost of the Company's developments. Numerous
governmental approvals and permits are required throughout the development
process, and no assurance can be given as to the receipt (or timing of receipt)
of such approvals or permits. Further, third parties can file lawsuits
challenging approvals or permits received, which may cause substantial
uncertainties and material delays for projects involved and, if successful,
could result in approvals or permits being voided. The Company is not currently
experiencing any significant delays in obtaining such approvals or permits.
The Company's business is subject to a variety of environmental laws
applicable to owners of real estate. Before acquiring a property, the Company
obtains an environmental study for soil contamination and other conditions for
which remediation may be required. The Company has been advised that certain
environmental contamination exists at one of its southern California projects
and has recorded a reserve for estimated remediation costs. Subject to the
foregoing, the Company believes that its property is generally in compliance
with existing environmental laws and regulations. However, the Company cannot
predict the nature, scope or effect of legislation or regulatory requirements
that could be imposed or how existing or future laws or regulations will be
administered or interpreted with respect to conditions or activities to which
they have not previously been applied. Compliance with more stringent laws or
regulations, as well as more vigorous enforcement policies of regulatory
agencies, could require substantial expenditures by the Company and could
adversely affect its financial condition and results of operations.
Employees
At November 1, 1997, the Company and its subsidiaries employed 376
persons, including corporate staff, sales personnel, construction personnel and
mortgage staff. None of the Company's employees is covered by a collective
bargaining agreement and the Company believes that its employee relations are
good. Certain of UDC's subcontractors employ workers who are represented by
labor unions. Such subcontractors have not experienced any significant work
stoppages or slowdowns to date at the Company's developments.
Item 2. Properties
- ------- ----------
UDC's business is administered from its executive offices in
Scottsdale, Arizona and three regional offices. These locations are general
business offices which are leased by the Company and the Company does not
require specialized quarters for its operations.
11
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Item 3. 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.
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.
Item 4. Submission of Matters to a Vote of Security Holders
- ---- -- ---------------------------------------------------
No matter was submitted to a vote of the Company's security holders
during the fourth quarter of the fiscal year covered by this report.
12
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PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
- ------- --------------------------------------------------------------
Matters
-------
There is currently no established public trading market for the
Company's Common Stock. No market is expected to develop in the near term since,
as of November 1, 1997, the Company had only two record owners of its Common
Stock.
The Company has not paid dividends on its common equity in any of its
last three fiscal years. Certain provisions of the Company's indentures and debt
agreements materially restrict the Company's ability to pay dividends on the
Common Stock. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
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Item 6. Selected Financial Data
- ------- -----------------------
The following table sets forth selected consolidated financial
information regarding the results of operations and financial position of the
Company for each of the five years ended September 30, 1993 through 1997
(including operations which have been discontinued in the Southeastern United
States). The consolidated financial information has been derived from the
Company's consolidated financial statements. This information should be read in
conjunction with the consolidated financial statements and notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," included elsewhere herein.
SELECTED CONSOLIDATED FINANCIAL DATA
(Dollars in Thousands)
<TABLE>
<CAPTION>
Successor
Company Predecessor Company
---------------------------- -----------------------------------------------------------
Twelve Period Period Twelve Twelve Twelve
Month from from Month Month Month
Period November 14, October 1, Period Period Period
Ended 1995 to to Ended Ended Ended
September 30, September 30, November 13, September 30, September 30, September 30,
1997 1996 1995 1995 1994 1993
------------- ------------- ------------ ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF
OPERATIONS DATA:
Housing sales $ 380,661 $ 387,455 $ 29,624 $ 444,815 $ 508,800 $ 482,343
Housing gross margin 57,776 49,021 2,354 45,990 65,861 53,618
(Loss) income before extraordinary items (18,411) (62,217) (10,241) (134,774) (22,783) 5,038
Net (loss) income (1) (18,411) (62,217) 25,954 (134,774) (22,783) 5,038
OPERATING DATA:
New sales orders (dollars) (2) $ 421,255 $ 362,300 $ 31,373 $ 408,109 $ 540,473 $ 454,308
New sales orders (units) (2) 2,042 1,755 165 2,034 2,796 2,564
Home closings (units) 1,854 1,886 140 2,238 2,713 2,822
Average revenue per home closing $ 205 $ 206 $ 212 $ 199 $ 188 $ 171
Dollar amount of homes under contract
at period-end (backlog) $ 204,394 $ 161,110 $ 185,148 $ 181,838 $ 218,927 $ 180,897
Homes (units) under contract at
period-end (backlog) 951 762 893 868 1,072 990
</TABLE>
<TABLE>
<CAPTION>
September 30, September 30,
-------------------------- -----------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets $ 313,439 $ 296,343 $ 436,425 $ 583,250 $ 590,995
========= ========= ========= ========= =========
Debt:
Notes payable $ 63,990 $ 73,062 $ 153,957 $ 154,636 $ 121,605
Senior and subordinated notes payable 165,108 120,262 -- 191,406 194,811
Liabilities subject to compromise (3) -- -- 205,264 -- --
Collateralized mortgage obligations
and mortgage lines of credit 1,378 6,299 28,450 33,836 61,612
--------- --------- --------- --------- ---------
Total debt $ 230,476 $ 199,623 $ 387,671 $ 379,878 $ 378,028
========= ========= ========= ========= =========
Total stockholders' equity (deficit) $ 7,372 $ 15,783 $ (22,954) $ 111,820 $ 134,603
========= ========= ========= ========= =========
</TABLE>
14
<PAGE>
(1) Net loss for the period from November 14, 1995 to September 30, 1996
includes a non-cash loss from impairment of certain real estate
inventories and goodwill in the amount of $42.8 million which was recorded
in accordance with Statement of Financial Accounting Standards ("SFAS")
No. 121. Net loss for the periods ended September 30, 1995 and 1994
includes land write-downs of $67.2 million and $24.1 million,
respectively. Net loss for the period from November 14, 1995 to September
30, 1996, the period from October 1, to November 13, 1995 and the period
ended September 30, 1995 includes $6.6 million, $7.1 million and $15.4
million, respectively, of reorganization items (primarily professional
fees and severance payments). Net (loss) income for the periods ended
September 30, 1995, 1994 and 1993 includes income tax expense of $26.8
million, $3.4 million and $3.3 million, respectively.
(2) Home sales orders are net of cancellations received during the applicable
period. Revenue from the sale of homes is recognized at the time risk of
ownership is transferred, which occurs at the close of the home sale.
(3) Fiscal 1995 includes $168 million of unsecured senior notes payable, $20.4
million of convertible subordinated notes payable and $16.9 million of
accrued interest as liabilities subject to compromise at September 30,
1995 as a result of the Company's Chapter 11 filing.
15
<PAGE>
Item 7. 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. 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 all
remaining assets of its Southeast operations, and management believes that
discussion of such operations is no longer material to obtain an understanding
of the Company's operations.
Revenues
The following table presents comparative fiscal 1997, 1996 and 1995
housing revenues, deliveries and average sales prices (dollars in thousands):
1997 1996 1995
---- ---- ----
Arizona and California:
Family revenue .................. $ 283,499 $ 315,604 $ 294,665
Retirement revenue .............. $ 97,162 $ 86,229 $ 73,086
Units delivered ................. 1,854 1,951 1,844
Average sales price ............. $ 205 $ 206 $ 199
Change from prior year .......... (5.3)% 9.3% (12.9)%
Change due to volume ........ (5.0)% 5.8% (18.5)%
Change due to average sales price (.3)% 3.5% 5.6%
Southeast:
Family revenue .................. $ -- $ 14,625 $ 56,151
Retirement revenue .............. $ -- $ 621 $ 20,913
Units delivered ................. -- 75 394
Average sales price ............. $ -- $ 203 $ 196
The decrease in volume in fiscal 1997 compared to fiscal 1996 resulted
from the closeout of several subdivisions in the Arizona and southern California
regions in the first and second quarters of fiscal 1997 and the resulting lack
of homesites available for sale. In the third and fourth fiscal quarters of 1997
the Company opened fourteen new subdivisions in the Family divisions of Arizona
and southern California which has increased net orders in fiscal 1997.
The increase in volume in fiscal 1996 compared to fiscal 1995 resulted
from improved sales in each market during the fiscal year. The increase in
average sales price in fiscal 1996 compared to fiscal 1995 was primarily the
result of higher sales prices in California due to changes in the mix of product
types sold. In addition, the Company believes that its fiscal 1995 closings were
adversely affected by home buyer concerns about the Company's financial
condition and restrictions on the Company's ability to finance construction
during its Chapter 11 proceedings (the "Chapter 11 Case").
16
<PAGE>
Net Orders
The following table presents comparative fiscal 1997, 1996 and 1995 net
orders by market and region (dollars in thousands):
1997 1996 1995
---- ---- ----
Family:
Arizona:
Dollars ........... $232,256 $211,318 $214,221
Units ordered ..... 1,109 1,061 1,086
Average sales price $ 209 $ 199 $ 197
California:
Dollars ........... $ 99,096 $ 73,852 $ 59,155
Units ordered ..... 442 314 264
Average sales price $ 224 $ 235 $ 224
Retirement:
Arizona:
Dollars ........... $ 66,539 $ 56,735 $ 43,176
Units ordered ..... 418 373 289
Average sales price $ 159 $ 152 $ 149
California:
Dollars ........... $ 23,364 $ 47,323 $ 44,831
Units ordered ..... 73 149 154
Average sales price $ 320 $ 318 $ 291
Southeast:
Dollars ........... $ -- $ 4,445 $ 46,726
Units ordered ..... -- 23 241
Average sales price $ -- $ 193 $ 194
Company Total:
Dollars ........... $421,255 $393,673 $408,109
Units ordered ..... 2,042 1,920 2,034
Average sales price $ 206 $ 205 $ 201
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. Total net orders increased in fiscal
1997 compared to fiscal 1996 due to the economic strength of the Phoenix and
southern California markets and an increase in the number of homesites available
for sale in the Arizona and California regions of the Family Division due to the
opening of new subdivisions as previously discussed. Net orders decreased in the
California region of the Retirement Division in fiscal 1997 compared to fiscal
1996 due to delays in obtaining certain approvals on two parcels of land
consisting of 298 lots. As of September 30, 1997, the needed approval had been
obtained and land development activities have commenced.
17
<PAGE>
The Company believes that relatively low interest rates and the
economic strength of the Phoenix market and improvement in the California
economy resulted in new orders increasing in fiscal 1996 compared to fiscal
1995. Additionally, the Company completed its reorganization and therefore was
able to alleviate home buyer concerns about the Company's ability to complete
construction of homes and subdivisions and honor its post-sales warranty
obligations.
18
<PAGE>
Net Sales Backlog
Net sales backlog represents the aggregate dollar value and number of
homes ordered, net of cancellations, pending delivery at September 30, for which
the Company had received purchase deposits and signed sales contracts. The
following table presents comparative fiscal 1997, 1996 and 1995 net sales
backlog by market and region (dollars in thousands):
1997 1996 1995
---- ---- ----
Family:
Arizona:
Dollars ........... $129,510 $ 94,992 $103,651
Units in backlog .. 587 466 522
Average sales price $ 221 $ 204 $ 199
California:
Dollars ........... $ 29,837 $ 14,732 $ 21,197
Units in backlog .. 126 63 93
Average sales price $ 237 $ 234 $ 228
Retirement:
Arizona:
Dollars ........... $ 33,878 $ 25,891 $ 18,645
Units in backlog .. 210 163 117
Average sales price $ 161 $ 159 $ 159
California:
Dollars ........... $ 11,169 $ 25,495 $ 27,616
Units in backlog .. 28 70 84
Average sales price $ 399 $ 364 $ 329
Southeast:
Dollars ........... $ -- $ -- $ 10,729
Units in backlog .. -- -- 52
Average sales price $ -- $ -- $ 206
Company Total:
Dollars ........... $204,394 $161,110 $181,838
Units in backlog .. 951 762 868
Average sales price $ 215 $ 211 $ 209
The increase in the aggregate dollar value and the number of homes in
backlog at September 30, 1997 compared to September 30, 1996 resulted from
increased unit net sales in the Family Division and increased average sales
prices in all divisions and regions. The decrease in the units and dollars in
backlog at September 30, 1997 compared to September 30, 1996 in the California
region of the Retirement Division resulted from decreased sales caused by the
delays in obtaining approvals as previously discussed. The decrease in backlog
at September 30, 1996 compared to September 30, 1995 resulted from fewer homes
available for sale in the California region as a result of the Company's
inability to acquire land for homesites during its Chapter 11 Case.
19
<PAGE>
Gross Margins, Selling and Administrative Expenses and Interest, Net
The following table presents comparative fiscal 1997, 1996 and 1995
information related to gross margins, selling and administrative expenses
("S&A") and interest, net for home building for the years ending September 30
(dollars in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------------------------ ------------------------ ------------------------
Dollars Percent Dollars Percent Dollars Percent
<S> <C> <C> <C> <C> <C> <C>
Revenue from
housing sales .............................. $ 380,661 100.0% $ 417,079 100.0% $ 444,815 100.0%
Cost of housing sales ........................ 322,885 84.8 365,704 87.7 398,825 89.7
--------- ----- --------- ----- --------- -----
Gross margin ................................. 57,776 15.2 51,375 12.3 45,990 10.3
S&A expenses (including
cost of Company
reorganization) ............................ 62,951 16.5 62,424 14.9 74,651 16.7
--------- ----- --------- ----- --------- -----
Operating loss from
home building .............................. (5,175) (1.3) (11,049) (2.6) (28,661) (6.4)
Interest, net ................................ (15,107) (4.0) (17,455) (4.2) (6,161) (1.4)
--------- ----- --------- ----- --------- -----
Pre-tax loss from
home building .............................. $ (20,282) (5.3)% $ (28,504) (6.8)% $ (34,822) (7.8)%
========= ===== ========= ===== ========= =====
</TABLE>
Gross margins increased during fiscal 1997 compared to fiscal 1996
primarily due to decreased amortization of purchased profit, which was recorded
as a result of the Acquisition. Purchased profit amortization included in gross
margin was $11.2 million in fiscal 1996 and $1.5 million in fiscal 1997.
Additionally, margins were favorably impacted in fiscal 1997 due to reduced
direct construction costs incurred as a result of more competitive bids on
construction contracts and lower levels of change orders.
Gross margins increased during fiscal 1996 compared to fiscal 1995
primarily due to the revaluation of the Company's housing inventory and land
inventory to fair values at the Acquisition Date and the effect of reduced
interest capitalization, both of which resulted in lower land basis and higher
gross margins. These higher gross margins were offset by the amortization of
approximately $11.2 million of purchased profit.
20
<PAGE>
The following table presents the components of selling and
administrative expenses in dollars and as a percentage of revenues from housing
sales (including Southeast Operations) (dollars in thousands):
<TABLE>
<CAPTION>
Years ended September 30,
---------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Selling and administrative expenses:
Variable components ................................. $ 23,394 $ 22,168 $ 28,114
Fixed components .................................... 39,557 26,630 31,099
Cost of Company reorganization ...................... -- 13,626 15,438
--------- --------- ---------
Total selling and administrative expenses .............. $ 62,951 $ 62,424 $ 74,651
========= ========= =========
As a percentage of revenues from housing sales:
Variable components ................................. 6.1% 5.3% 6.3%
Fixed components .................................... 10.4 6.4 7.0
Cost of Company reorganization ...................... -- 3.2 3.4
--------- --------- ---------
Total selling and administrative expenses .............. 16.5% 14.9% 16.7%
========= ========= =========
</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 in fiscal 1997 compared to fiscal 1996 due to increases
in model furniture amortization, including a $1.1 million charge for the closure
of a large model complex, and increases in sales commissions paid to the
Company's sales agents as well as increases in commissions paid to third party
sales agents. Sales commissions paid to third party sales agents may fluctuate
from period to period as not all of the Companys' home buyers use the services
of third party sales agents. Variable selling and administrative expenses as a
percentage of housing sales decreased in fiscal 1996 compared to fiscal 1995 due
to decreases in advertising expenditures and commissions paid to third party
sales agents.
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
fiscal 1997 compared to fiscal 1996 primarily due to increases in warranty and
settlement costs incurred, including additional costs incurred related to the
Company's departure from the Southeast market. The Company also incurred an
increase in professional fees, including fees paid to architects for new product
design; fees paid to professional search and EDP systems consultants as well as
fees paid to attorneys handling customer service claims and settlements on
behalf of the Company. Additionally, the Company incurred an increase in office
related expenses as a result of the relocation of the Company's corporate
headquarters and two regional offices. During fiscal 1997, the Company estimates
the total amount of nonrecurring fixed selling and administrative expenses to be
approximately $6.7 million.
21
<PAGE>
The Company capitalizes certain interest costs for its home building
operations and includes such capitalized interest in cost of home sales when the
related units are delivered. Total interest incurred by the Company's home
building operations was $28,184,000, $31,035,000, and $34,041,000 in fiscal
1997, 1996 and 1995, respectively. Interest, net for home building, was
$15,107,000, $17,455,000, and $6,161,000 in fiscal 1997, 1996 and 1995,
respectively. Interest incurred decreased in fiscal 1997 compared to fiscal 1996
as a result of lower average debt levels. Interest, net decreased in fiscal 1997
compared to fiscal 1996 due to lower average debt levels and increased
development activities which resulted in higher interest capitalization.
Interest incurred decreased in fiscal 1996 compared to fiscal 1995 as a result
of a reduction in debt levels upon the Company's emergence from its Chapter 11
Case. Interest, net increased in fiscal 1996 due to the Company changing its
method of applying SFAS No. 34 in order to better match the capitalization of
interest with actual construction and development efforts.
Loss From Asset Impairment
At September 30, 1996, the Company's management reviewed the status of
the Company's operations, and concluded that the Company's long-term assets may
be impaired. In accordance with SFAS No. 121, the Company tested its long-term
assets held, including allocated goodwill, for recoverability and determined
that an impairment loss of $42.8 million should be recognized. The impairment
loss was comprised of $3.5 million and $4.2 million applicable to land inventory
and land held for sale, respectively, located in Phoenix and Northern California
and $35.1 million applicable to goodwill.
In an effort to improve its liquidity, in the second quarter of fiscal
1995 the Company announced its intention to actively market its Southeast
homebuilding operations which were under-performing in relation to management's
expectations. In connection with its restructuring (and related Chapter 11
Case), in May 1995 the Company also began marketing two residential projects in
California for bulk sale along with certain commercial and mixed-use real estate
parcels in Arizona not previously identified for sale. As a result of these
decisions, the Company wrote down the carrying amounts of such projects and
parcels to the amounts expected to be realized from their immediate sale,
reduced for costs to be incurred prior to and in connection with such sales. The
total charge to operations in fiscal 1995 resulting from such write-downs was
$67.2 million ($47.5 million in the Southeast, $9.8 million in California and
$9.9 million in Arizona).
Mortgage Operations
Through May 31, 1997, the Company's mortgage banking operations were
exclusively conducted through its indirect, wholly-owned subsidiary, UDC
Mortgage Corporation ("UDC Mortgage Corp."). Effective June 1, 1997, the Company
entered into 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 profits and losses will be split 50/50. The
22
<PAGE>
Company's investment in this joint venture is being accounted for using the
equity method of accounting. At September 30, 1997, the Company's investment was
approximately $166,000. UDC Mortgage Corp. is currently winding down its
operations but will continue to operate until all mortgage loans in process
prior to the formation of the joint venture have been originated and sold
(anticipated to be during the first fiscal quarter of 1998).
The following table presents operating information for UDC Mortgage Corp.
and the Company's equity in the operations of UDC Mortgage for the years
indicated (dollars in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Number of loans originated -UDC Mortgage Corp. .......... 658 895 725
Number of loans originated -UDC Mortgage ................ 125 -- --
UDC Mortgage Corp
Revenues .............................................. $ 2,141 $ 2,665 $ 1,764
General and administrative expenses ................... 1,237 1,840 2,193
------- ------- -------
Operating income from mortgage banking ................ 904 825 (429)
Interest - net ........................................ (81) (233) (65)
------- ------- -------
Pre-tax profit (loss) from UDC Mortgage Corp. ......... 985 1,058 (364)
Equity in operations of UDC Mortgage (June 1, 1997 to
September 30, 1997) .................................. 82 -- --
------- ------- -------
Pre-tax profit (loss) from mortgage operations .......... $ 1,067 $ 1,058 $ (364)
======= ======= =======
</TABLE>
Revenues and general and administrative expenses from mortgage banking
decreased in fiscal 1997 compared to fiscal 1996 as a result of the operations
being conducted through the joint venture and a decrease in mortgage
originations related to the decrease in closings recorded by the Company.
General and administrative expenses decreased in fiscal 1996 compared to fiscal
1995 primarily as a result of the elimination of UDC Mortgage Corp.'s goodwill
based on purchase accounting principles resulting in a reduction in amortization
expense and additionally, a reduction in legal fees paid. These decreases in
fiscal 1996 were partially offset by an increase in salary expense (relating to
severance payments to employees due to the Company entering the joint venture
agreement) and an increase in foreclosure expense.
Liquidity and Capital Resources
The Company's financing needs depend primarily upon sales volume, asset
turnover, land acquisitions and 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.
23
<PAGE>
In fiscal 1996 and 1997, the Company completed asset sale transactions
in which it sold to DMB/AEW Land Holdings One, LLC, an affiliate of DMB and AEW,
for cash $28.6 million and $25.5 million, respectively, of land at the Company's
cost which the Company had previously designated as land held for sale. Proceeds
from the sales were used to retire four of the Company's term loan facilities,
reduce the loan-to-value ratio to 60% on one other term loan facility, and
reduce the outstanding balance on the Company's principal revolving credit
facility. These sales also created additional acquisition and development fund
availability under the Company's principal revolving credit facility. The
Company entered into a management agreement with the DMB/AEW affiliate pursuant
to which the Company received a fixed monthly fee through September 30, 1997 for
the management and marketing of the assets to third party buyers in addition to
commissions upon the sale of assets. For the year ended September 30, 1997, the
Company earned $75,000 in management fees and $557,000 in commissions pursuant
to this agreement.
The Company has entered into option agreements with DMB/AEW Land
Holdings Two, LLC ("Land Holdings Two"), an affiliate of DMB and AEW, which
provide for the purchase of lots in southern California. As of September 30,
1997, the Company had land option agreements with Land Holdings Two to purchase
up to 533 lots.
At September 30, 1997, the Company finances its home building, 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 then 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. 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 September 30, 1997, $53.2 million was outstanding and an additional $27.2
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 September 30, 1997, $5.8 million was
outstanding under these facilities.
24
<PAGE>
The construction and A&D facilities described above contain capital
distribution restrictions and 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 ratio of earnings before interest, taxes, depreciation and amortization
("EBITDA") to interest incurred; (vi) restrictions on mergers, consolidations
and acquisitions; (vii) restrictions on asset sales; and (viii) 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 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 the prime rate to 10% and are due at various dates through fiscal 2001. At
September 30, 1997, $4.9 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 (collectively, the "Senior Notes").
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 and A&D facilities. Upon the consummation of the next
qualifying asset sale, as defined, the Company will be required to make an offer
to repurchase all or a portion of the outstanding $10 million principal amount
of Series B Senior Notes, plus accrued and unpaid interest. 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, May 1, 1997
and November 1, 1997 payments of interest were paid in-kind in additional Series
C Subordinated Notes. In fiscal 1997, DMB acquired an additional $2 million
principal amount of Series C Subordinated Notes from existing note holders. At
November 1, 1997, the principal amount of the Series C Subordinated Notes
outstanding was approximately $45.9 million.
25
<PAGE>
On March 15, 1996, DMB invested $10 million in the Company in exchange
for $10 million principal amount of 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 invested $17.5
million each in the Company in exchange for additional Series D Subordinated
Notes. The November 1, 1996, May 1, 1997 and November 1, 1997 payments of
interest were paid in-kind in additional Series D Subordinated Notes. At
November 1, 1997, the principal amount of the Series D Subordinated Notes
outstanding was approximately $50.3 million.
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, 1996, the
Company received additional capital contributions of $5 million each from DMB
and AEW.
Mortgage Debt - UDC Mortgage Corp. finances its mortgage operations
with a $10 million revolving credit facility which originally matured on October
30, 1997. Subsequent to September 30, 1997, the commitment amount was reduced to
$3.0 million and the maturity was extended to December 31, 1997. This facility
is secured by residential mortgages originated in the closing of the Company's
residential home sales. At September 30, 1997, approximately $1.4 million was
outstanding under the facility. The Company will not extend the maturity of this
facility as all ongoing mortgage related operations will be conducted through
the joint venture. See "Business Mortgage Related Operations."
Inflation
The homebuilding industry is 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
retirement home buyers 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.
26
<PAGE>
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 home buyers as a result of its Chapter 11 Case, the impact that the
Company's limited sources of capital might have on its ability to compete with
better capitalized companies for the acquisition of land, the effect of interest
rates on demand for the Company's homes and the cost of its 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.
27
<PAGE>
Item 8. Financial Statements and Supplementary Data
- ------- -------------------------------------------
1A. Financial Statements
The following financial statements, together with the reports of
independent public accountants thereon, are included as follows:
Page Number
-----------
UDC HOMES, INC. AND SUBSIDIARIES
Reports of Independent Public Accountants ...............F - 1, F - 1a,
Consolidated Balance Sheets as of September 30, 1997 and 1996 ....F - 2
Consolidated Statements of Operations for the Twelve Month
Period Ended September 30, 1997, the Period from November
14, 1995 to September 30, 1996, the Period from October 1,
1995 to November 13, 1995 and the Twelve Month Period Ended
September 30, 1995 .............................................F - 3
Consolidated Statements of Changes in Stockholders' Equity
(Deficit) for the Twelve Month Period Ended September 30,
1997, the Period from November 14, 1995 to September 30,
1996, the Period from October 1, 1995 to November 13, 1995
and the Twelve Month Period Ended September 30, 1995 ...........F - 4
Consolidated Statements of Cash Flows for the Twelve Month
Period Ended September 30, 1997, the Period from November
14, 1995 to September 30, 1996, the Period from October 1,
1995 to November 13, 1995 and the Twelve Month Period Ended
September 30, 1995 .............................................F - 5
Notes to Consolidated Financial Statements .......................F - 6
2A. Financial Statement Schedules of UDC Homes, Inc. and Subsidiaries
No schedules have been filed because they are not required or the
information is included elsewhere in the financial statements or notes thereto.
28
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
UDC Homes, Inc.
Scottsdale, Arizona
We have audited the accompanying consolidated balance sheets of UDC Homes, Inc.
and subsidiaries as of September 30, 1997 and 1996, and the related consolidated
statements of operations, stockholders' equity (deficit), and cash flows for the
year ended September 30, 1997 and the period from November 14, 1995 (date of
acquisition) through September 30, 1996 ("Successor Company financial
statements"). We have also audited the consolidated statements of operations,
stockholders' equity and cash flows of the Predecessor Company under Fresh Start
reporting for the period from October 1, 1995 through November 13, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 1 to the financial statements, on October 3, 1995, the
Bankruptcy Court entered an order confirming the plan of reorganization which
became effective after the close of business on November 13, 1995. Accordingly,
the accompanying financial statements for the period from October 1, 1995
through November 13, 1995 have been prepared in conformity with AICPA Statement
of Position 90-7, Financial Reporting for Entities in Reorganization Under the
Bankruptcy Code, for the Successor Company as a new entity with assets,
liabilities, and a capital structure having carrying values not comparable with
prior periods as described in Note 2.
In our opinion, the Successor Company financial statements referred to above
present fairly, in all material respects, the financial position of UDC Homes,
Inc. and subsidiaries as September 30, 1997 and 1996, and the results of their
operations and their cash flows for the year ended September 30, 1997 and the
period from November 14, 1995 through September 30, 1996 in conformity with
generally accepted accounting principles. Further, in our opinion, the
Predecessor Company financial statements under Fresh Start reporting referred to
above present fairly, in all material respects, the results of operations and
cash flows of the Predecessor Company for the period from October 1, 1995
through November 13, 1995 in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Phoenix, Arizona
November 7, 1997
F - 1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To UDC Homes, Inc.:
We have audited the accompanying consolidated statements of operations, changes
in stockholders' equity (deficit) and cash flows for the year ended September
30, 1995 of UDC Homes, Inc. (a Delaware corporation) and subsidiaries. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
As described more fully in Note 2 to the accompanying financial statements, on
May 17, 1995, the Company filed a voluntary petition for relief under Chapter 11
of the U.S. Bankruptcy Code and was operating its business as
debtor-in-possession under the supervision of the Bankruptcy Court. The
Company's plan of reorganization was confirmed on October 3, 1995, and the plan
was consummated on November 14, 1995, upon the DMB purchase described in Note 2.
Consummation of the plan of reorganization materially changed certain amounts
recorded in the September 30, 1995, consolidated balance sheet (not presented
herein).
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of UDC Homes,
Inc. and subsidiaries for the year ended September 30, 1995, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Phoenix, Arizona,
December 6, 1995.
F - 1a
<PAGE>
UDC HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 1997 1996
----------- -----------
(In thousands)
<S> <C> <C>
HOMEBUILDING :
Cash and cash equivalents $ 8,871 $ 3,556
Receivables 1,930 985
Housing inventory 133,798 122,311
Land inventory 150,164 115,286
Land held for sale 6,830 28,332
Property and equipment - net 4,214 3,654
Goodwill 3,366 3,545
Other assets 2,593 8,303
--------- ---------
Total homebuilding assets 311,766 285,972
--------- ---------
MORTGAGE BANKING :
Residential mortgages 1,663 10,248
Other assets 10 123
--------- ---------
Total mortgage assets 1,673 10,371
--------- ---------
TOTAL $ 313,439 $ 296,343
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
HOMEBUILDING :
Accounts payable $ 22,228 $ 19,371
Accrued interest 4,239 7,175
Accrued liabilities and expenses 45,396 49,635
Notes payable 63,990 73,062
Senior unsecured notes payable 70,000 70,000
Subordinated notes payable ($90,921 and $44,628, respectively,
due to related parties) 95,108 50,262
--------- ---------
Total homebuilding liabilities 300,961 269,505
--------- ---------
MORTGAGE BANKING :
Mortgage line of credit 1,378 6,299
Accrued liabilities and expenses 47 308
--------- ---------
Total mortgage liabilities 1,425 6,607
--------- ---------
Total liabilities 302,386 276,112
--------- ---------
MINORITY INTERESTS 3,681 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 (80,628) (62,217)
--------- ---------
Total stockholders' equity 7,372 15,783
--------- ---------
TOTAL $ 313,439 $ 296,343
========= =========
</TABLE>
See notes to consolidated financial statements
F - 2
<PAGE>
UDC HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Successor
Company Predecessor Company
------------------------------- -------------------------------
Twelve Period Period Twelve
Month from from Month
Period November 14, October 1, Period
Ended 1995 to 1995 to Ended
September 30, September 30, November 13, September 30,
1997 1996 1995 1995
------------- ------------- ------------- --------------
(In thousands)
<S> <C> <C> <C> <C>
REVENUES:
Housing sales $ 380,661 $ 387,455 $ 29,624 $ 444,815
Mortgage and finance operations - net 1,067 1,011 28 (583)
Land sales - net 1,105 -- -- --
--------- --------- --------- ---------
Total revenues 382,833 388,466 29,652 444,232
--------- --------- --------- ---------
COSTS AND EXPENSES:
Homebuilding:
Cost of housing sales 322,885 338,434 27,270 398,825
Selling and administrative expenses 62,951 43,829 4,969 59,213
Loss from asset impairment -- 42,815 -- 67,177
Interest - net 5,313 11,625 568 6,161
Interest on subordinated notes 9,794 5,262 -- --
Other - net 301 2,143 35 5,373
Cost of Company reorganization -- 6,575 7,051 15,438
--------- --------- --------- ---------
Total costs and expenses 401,244 450,683 39,893 552,187
--------- --------- --------- ---------
LOSS BEFORE INCOME TAXES
AND EXTRAORDINARY ITEMS (18,411) (62,217) (10,241) (107,955)
INCOME TAXES -- -- -- 26,819
--------- --------- --------- ---------
LOSS BEFORE EXTRAORDINARY
ITEMS (18,411) (62,217) (10,241) (134,774)
EXTRAORDINARY ITEMS:
Gain on debt discharge -- -- 50,264 --
Fresh Start reporting adjustment -- -- (14,069) --
--------- --------- --------- ---------
NET (LOSS) INCOME $ (18,411) $ (62,217) $ 25,954 $(134,774)
========= ========= ========= =========
</TABLE>
See notes to consolidated financial statements.
F - 3
<PAGE>
UDC HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY(DEFICIT)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Total
Preferred Common Additional Retained Stockholders'
Stockholders' Stockholders' Paid-In Earnings Equity
Equity Equity Capital (Deficit) (Deficit)
--------------- --------------- ------------ ------------ ---------------
(In thousands)
<S> <C> <C> <C> <C> <C>
BALANCE, OCTOBER 1, 1994 $ 94 $ 114 $ 116,650 $ (5,038) $ 111,820
Preferred stock in-kind dividends 6 -- 1,740 (1,746) --
Net loss -- -- -- (134,774) (134,774)
--------- --------- --------- --------- ---------
BALANCE, SEPTEMBER 30, 1995 100 114 118,390 (141,558) (22,954)
Issuance of subordinated notes (93) -- (2,907) -- (3,000)
Cancellation of common and
preferred stock (7) (114) (115,483) 115,604 --
Net income -- -- -- 25,954 25,954
--------- --------- --------- --------- ---------
PREDECESSOR COMPANY
BALANCE, NOVEMBER 13, 1995 -- -- -- -- --
Common stock issued for cash -- -- 78,000 -- 78,000
Net loss -- -- -- (62,217) (62,217)
--------- --------- --------- --------- ---------
SUCCESSOR COMPANY BALANCE,
SEPTEMBER 30, 1996 -- -- 78,000 (62,217) 15,783
Capital contribution -- -- 10,000 -- 10,000
Net loss -- -- -- (18,411) (18,411)
--------- --------- --------- --------- ---------
BALANCE, SEPTEMBER 30, 1997 $ -- $ -- $ 88,000 $ (80,628) $ 7,372
========= ========= ========= ========= =========
</TABLE>
See notes to consolidated financial statements.
F - 4
<PAGE>
UDC HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Successor
Company Predecessor Company
-------------------------------- -------------------------------
Twelve Period Period Twelve
Month from from Month
Period November 14, October 1, Period
Ended 1995 to 1995 to Ended
September 30, September 30, November 13, September 30,
1997 1996 1995 1995
-------------------------------- -------------- ---------------
(in thousands)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net (loss) income $ (18,411) $ (62,217) $ 25,954 $(134,774)
Adjustments to reconcile net (loss) income to net cash
provided by (used in) operating activities:
Depreciation and amortization 6,576 5,810 536 7,274
Fresh Start reporting adjustment -- -- 14,069 --
Gain on debt discharge -- -- (50,264) --
Equity in losses of unconsolidated affiliated partnerships -- 1,172 -- 223
Loss from asset impairment -- 42,815 -- 67,177
Income taxes -- -- -- 26,772
Changes in assets and liabilities:
Receivables (945) 2,884 259 1,070
Other assets 5,822 (2,515) (1,015) 1,233
Housing inventory (17,129) 17,690 10,890 146,848
Land inventory and land held for sale (13,376) 42,634 4,328 (112,517)
Receivables from affiliated partnerships -- 3,081 95 22,571
Accounts payable 2,857 (12,845) (2,963) (28,363)
Accrued liabilities and expenses 1,643 6,687 4,655 24,117
--------- --------- --------- ---------
Net cash (used in) provided by operating activities (32,963) 45,196 6,544 21,631
--------- --------- --------- ---------
INVESTING ACTIVITIES:
Decrease in residential mortgages
and mortgage-backed securities 8,585 12,728 6,390 4,898
Net additions to property and equipment (1,314) (3,437) 13 (2,404)
--------- --------- --------- ---------
Net cash provided by investing activities 7,271 9,291 6,403 2,494
--------- --------- --------- ---------
FINANCING ACTIVITIES:
Decrease in notes payable (9,072) (75,088) (11,492) (12,299)
Proceeds from issuance of subordinated notes payable 35,000 15,262 30,000 --
Proceeds from issuance of common stock -- -- 78,000 --
Capital contributions 10,000 -- -- --
Payment of liabilities subject to compromise -- -- (83,000) (3,000)
Payments on collateralized mortgage obligations -- (16,814) (247) (3,592)
(Decrease) increase in mortgage line of credit (4,921) 709 (5,799) (1,794)
--------- --------- --------- ---------
Net cash provided by (used in) financing activities 31,007 (75,931) 7,462 (20,685)
--------- --------- --------- ---------
NET INCREASE (DECREASE) IN CASH 5,315 (21,444) 20,409 3,440
CASH, BEGINNING OF PERIOD 3,556 25,000 4,591 1,151
--------- --------- --------- ---------
CASH, END OF PERIOD $ 8,871 $ 3,556 $ 25,000 $ 4,591
========= ========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION - Cash paid for interest, net of amounts
capitalized $ 8,249 $ 8,171 $ 254 $ 5,221
========= ========= ========= =========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Additional debt and land inventory due to consolidation
of partnership $ -- $ 7,067 $ -- $ --
========= ========= ========= =========
</TABLE>
See notes to consolidated financial statements
F - 5
<PAGE>
UDC HOMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1997, 1996, AND 1995
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
The Company designs, builds and markets single family attached and
detached homes primarily for move-up family and retirement home buyers.
The Company has historically operated in Arizona, California and the
Southeast (Florida, Georgia and North Carolina); however, the Company
ceased operations in the Southeast and has sold its Southeast assets. The
following table reflects the percentage of UDC revenues from housing sales
by market and geographic regions (excluding Southeast operations):
Housing Revenues
------------------------------
Years Ended September 30,
------------------------------
1997 1996 1995
---- ---- ----
Family:
Arizona .......................... 50% 54% 56%
California ....................... 24 25 24
--- --- ---
Family Total ........................ 74% 79% 80%
--- --- ---
Retirement:
Arizona .......................... 18% 14% 14%
California ....................... 8 7 6
--- --- ---
Retirement Total .................... 26% 21% 20%
--- --- ---
100% 100% 100%
=== === ===
Through May 31, 1997, the Company's mortgage banking operations were
exclusively conducted through its indirect, wholly-owned subsidiary, UDC
Mortgage Corporation ("UDC Mortgage Corp."). Effective June 1, 1997, the
Company entered into 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 profits and losses
will be split 50/50. The Company's investment in this joint venture is
being accounted for using the equity method of accounting. At September
30, 1997, the Company's investment was approximately $166,000 and is
included in other homebuilding assets in the accompanying consolidated
balance sheets. UDC Mortgage Corp. is currently winding down its
operations but will continue to operate until all mortgage loans in
process prior to the formation of the joint venture have been originated
and sold (anticipated to be during the first fiscal quarter of 1998).
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, which is more fully described in
Note 2, DMB Property Ventures Limited Partnership ("DMBLP") entered into
an agreement to acquire 100% of the equity (the "Acquisition") of the
company that emerged from
F - 6
<PAGE>
Bankruptcy Proceedings (the "Predecessor Company under Fresh Start
reporting"). 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") ("Successor Company"). Accordingly,
the statements of operations and the statements of cash flows for the year
ended September 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 Successor Company on the
Acquisition Cost Basis from November 14, 1995 to September 30, 1996 (the
"Company"). Financial statements for the year ended September 30, 1995 are
those previously issued by the Predecessor Company.
The following are the accounting policies utilized in the preparation of
these financial statements:
a. Principles of Consolidation - 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 joint ventures are recorded using
the equity method of accounting.
b. Housing inventory includes housing construction costs and related
land acquisition, land development and other costs (principally
capitalized interest and overhead) for homes under construction.
Inventory is carried at the lower of cost (specific identification)
or estimated net realizable value ("NRV"). NRV is the price
obtainable in the future reduced by disposal and future development
and holding costs, without provision for future profit and without
discounting future cash receipts to present value. In estimating
NRV, the underlying assumptions reflect the intent to dispose of the
Company's real estate assets in an orderly process on an ongoing
basis in the normal course of the Company's homebuilding operations.
c. Land Inventory - Land acquisition, land development and other costs
(principally capitalized interest) are accumulated by specific area
and allocated on a parcel-by-parcel basis within the respective
area. The areas are carried at the lower of cost or, prior to 1996,
NRV on an ongoing basis. Beginning in 1996, the areas are carried at
the lower of cost or fair value less cost to sell (to the extent an
asset is impaired, the asset is written down to its fair value).
Upon commencement of housing construction, allocated land costs are
transferred to housing inventory on a lot-by-lot basis.
d. Land Held for Sale - Properties which are currently marketed for
sale have been segregated on the accompanying consolidated balance
sheets as land held for sale. Debt related to such properties has
been included in notes payable on the accompanying consolidated
balance sheets. Losses attributable to the holding and operation of
such properties are expensed as incurred. The properties are carried
at the lower of cost or, prior to 1996, NRV on an ongoing basis.
Beginning in 1996, the properties are carried at the lower of cost
or fair value less cost to sell (to the extent an asset is impaired,
the asset is written down to its fair value).
e. Property and equipment are carried at cost, net of accumulated
depreciation. Depreciation of property and equipment is calculated
using the straight-line method over the estimated useful lives of
the assets which range from 2 to 40 years. Maintenance and repairs
are charged against operations in the year incurred and major
additions to property and equipment are capitalized. When assets are
retired or otherwise disposed of, the related costs and accumulated
depreciation are removed from the appropriate accounts and the
resulting gain or loss is included in results of operations.
F - 7
<PAGE>
f. Cash and Cash Equivalents - Cash equivalents include amounts with
initial maturities of less than 90 days.
g. Goodwill, which represents the excess of the Acquisition Cost Basis
over the fair value of net assets acquired, is being amortized on a
straight-line basis over 25 years (Note 5).
h. Income Taxes - Income taxes are accounted for using Statement of
Financial Accounting Standards ("SFAS") No. 109, Accounting for
Income Taxes, which requires an asset and liability method. Under
this tax basis, assets and liabilities are measured using the
enacted tax rates.
i. Sales Recognition - Income from housing sales is recognized in
accordance with SFAS No. 66, Accounting for Sales of Real Estate,
when the homes are delivered and title passes to the new homeowners.
Revenues from the sale of other real estate are recognized when a
significant down payment is received, the earnings process is
complete, and the collection of any remaining receivables is
reasonably assured.
j. Mortgage Banking Fee Recognition - Loan origination fees are
recognized as income upon the closing of the related home sale.
k. Use of Estimates - The preparation of financial statements in
accordance with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, disclosures of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reported periods. Actual results could differ from those
estimates.
l. SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of - As of the Acquisition
Date, the Company adopted SFAS No. 121, which 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 reporting on the Acquisition Cost Basis
(Note 2), the Company recorded its assets at fair value at the
Acquisition Date. Therefore, at the date of adoption, SFAS No. 121
had no impact on the Company's consolidated financial statements. As
required by SFAS No. 121, after the adoption date, long-lived assets
will be reviewed for impairment at financial statement dates (Note
5).
m. In June 1997, the Financial Accounting Standards Board issued SFAS
No. 131, Disclosures about Segments of an Enterprise and Related
Information. SFAS No. 131 establishes standards for the way that
public enterprises report information about operating segments in
annual financial statements and requires that those enterprises
report selected information about operating segments in interim
financial reports to shareholders. It also establishes standards for
disclosures about products and services, geographic areas and major
customers. This statement is effective for fiscal years beginning
after December 15, 1997. The Company is in the process of evaluating
the impact of implementing the provisions of this statement.
n. Reclassifications - Certain reclassifications have been made to the
1996 and 1995 amounts in the consolidated financial statements to
conform to the 1997 presentation.
F - 8
<PAGE>
2. BANKRUPTCY PROCEEDINGS AND ACQUISITION BY DMB
On May 17, 1995, the Predecessor Company filed a voluntary petition for
reorganization under Chapter 11 of the United States Bankruptcy Code (the
"Bankruptcy Code") in the United States Bankruptcy Court for the District
of Delaware (the "Bankruptcy Court"). On October 3, 1995, the Bankruptcy
Court entered an order confirming the Predecessor Company's second amended
reorganization plan dated as of August 3, 1995, as amended by an addendum
dated as of August 31, 1995, and as further amended by such order (the
"Plan"). On November 14, 1995, the Plan was substantially consummated and,
pursuant to a stock purchase agreement dated as of May 16, 1995 with
DMBLP, DMB made a cash investment of $108,000,000 in the Company in
exchange for 1,000 shares of common stock representing 100% of the
Successor Company's equity and $30,000,000 of subordinated notes of the
Successor Company.
Pursuant to the Plan, holders of the Predecessor Company's Senior Notes
received $83,000,000 in cash and $64,100,000 principal amount of unsecured
senior notes ("Senior Notes") in satisfaction of existing obligations to
such holders. Pursuant to the Plan, holders of the Predecessor Company's
Convertible Subordinated Notes received $5,900,000 of Senior Notes and
$2,000,000 of subordinated notes ("Series C Subordinated Notes") of the
Successor Company. Under the Plan, holders of other allowed secured and
unsecured claims generally were paid in full and substantially all
executory contracts and unexpired leases were assumed. Holders of the
Predecessor Company's Prime Preferred Stock received trust certificates
representing a pro rata interest in $3,000,000 principal amount of Series
C Subordinated Notes of the Successor Company. Holders of the Predecessor
Company's Series A Preferred Stock, Series B Preferred Stock and Common
Stock did not receive any consideration for their claims or interest and
their shares were canceled.
As of September 30, 1995, and during the bankruptcy case through November
13, 1995, the Predecessor Company managed its business as a
debtor-in-possession, subject to the provisions of the Bankruptcy Code and
control and supervision of the Bankruptcy Court. Therefore, the
Predecessor Company accounted for all transactions related to the
bankruptcy case in accordance with American Institute of Certified Public
Accountants Statement of Position 90-7 ("SOP 90-7"), Financial Reporting
by Entities in Reorganization Under the Bankruptcy Code. Accordingly,
liabilities which were subject to compromise in the bankruptcy case were
segregated on the September 30, 1995 consolidated balance sheet and were
recorded at the amounts that were allowed on known claims rather than the
amounts those claims received under the Plan. In accordance with SOP 90-7,
no interest was accrued on pre-petition, unsecured debt.
Pursuant to the provisions of the Bankruptcy Code, all attempts at
collection or enforcement of the Predecessor Company's liabilities as of
May 17, 1995 were automatically stayed upon the Chapter 11 filing, and
interest on unsecured, pre-petition obligations of the Company ceased to
accrue as of such date.
The Acquisition Cost Basis, as explained above, reflects the November 14,
1995 acquisition of the Company by DMB under which it acquired 1,000
shares of common stock and $30,000,000 principal amount of Series C
Subordinated Notes for $108,000,000 cash. The excess of this cost over the
fair value of net assets acquired was $40,036,000 which was allocated to
goodwill. The majority of the fair value of net assets arises from the
Company's housing and land inventories 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 inventory and land held for sale was generally
determined by independent third party
F - 9
<PAGE>
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.
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 Plan. In
addition, a Fresh Start reporting adjustment of $14,069,000 was recorded.
The cost of company reorganization of $13,626,000 and $15,438,000 in
fiscal 1996 and 1995, respectively, is comprised primarily of professional
fees and costs related to employee severance agreements.
3. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No. 107,
Disclosures About Fair Value of Financial Instruments. The estimated fair
value amounts have been determined by the Company at September 30, 1997
and 1996 using available market information and valuation methodologies
described below. Considerable judgment is required in interpreting market
data to develop the estimates of fair value. Accordingly, the estimates
presented below may not be indicative of the amounts that the Company
could realize in a current market exchange. The use of different market
assumptions or valuation methodologies could have a material effect on the
estimated fair value amounts.
The carrying values of cash and cash equivalents, receivables, accounts
payable, accrued interest, and accrued liabilities and expenses
approximate fair values due to the short-term maturities of these
instruments.
Residential mortgages are stated at the lower of cost or market which
approximates fair value.
The carrying amounts of the other notes payable and the mortgage line of
credit approximate fair value because the majority of these instruments
have variable interest rates based on the prime rate and LIBOR.
At September 30, 1997 and 1996, the estimated fair value of the senior and
subordinated notes payable was $152,592,000 and $106,208,000,
respectively.
4. DEBT
At September 30, notes payable consisted of the following:
1997 1996
----------- -----------
(In thousands)
Revolving credit facility $53,229 $34,165
Westbrook Village facility 5,845 4,266
Transoccidental note -- 13,011
Other 4,916 21,620
------- -------
Total notes payable $63,990 $73,062
======= =======
F - 10
<PAGE>
Revolving Credit Facility - 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. 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 September 30, 1997, approximately $27.2
million was available under the new facility.
Westbrook Village Facility - 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.
The construction and A&D facilities described above contain capital
distribution restrictions and 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 ratio of earnings before interest, taxes, depreciation and amortization
("EBITDA") to interest incurred; (vi) restrictions on mergers, consolidations
and acquisitions; (vii) restrictions on asset sales; and (viii) 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 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.
The Transoccidental Note represents a mortgage note related to a
development in Phoenix. Such note bears interest at 10.25% due quarterly. The
note was paid off in September 1997.
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 the prime rate to 10% and are due at various dates through fiscal 2001. At
September 30, 1997, $4.9 million was outstanding under these notes.
Senior Unsecured Notes Payable - 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
F - 11
<PAGE>
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 and A&D facilities. Upon the consummation of the next
qualifying asset sale, as defined, the Company will be required to make an offer
to repurchase all or a portion of the outstanding $10 million principal amount
of Series B Senior Notes, plus accrued and unpaid interest. 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 Payable - At September 30, subordinated notes
consist of the following:
1997 1996
--------- ---------
(In thousands)
Series C Subordinated Notes $35,000 $35,000
Series D Subordinated Notes 45,000 10,000
Interest paid-in-kind in additional C and D Notes 9,688 --
Interest to be paid-in-kind 5,420 5,262
------- -------
Total $95,108 $50,262
======= =======
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 new
facility. The November 1, 1996, May 1, 1997 and November 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, May 1, 1997 and November 1, 1997 payments of interest were paid in-kind
in additional Series D Subordinated Notes.
Mortgage Debt - UDC Mortgage Corp. finances its mortgage operations
with a $10 million revolving credit facility which originally matured on October
30, 1997. Subsequent to September 30, 1997, the commitment amount was reduced to
$3.0 million and the maturity was extended to December 31, 1997. This facility
is secured by residential mortgages originated in the closing of the Company's
residential home sales. The Company will not extend the maturity of this
facility as all ongoing mortgage related operations will be conducted through
UDC Mortgage.
F - 12
<PAGE>
Debt maturities for the five years ending September 30 are as follows:
(In thousands)
1998 $64,281
1999 361
2000 70,396
2001 95,438
2002 --
-------
Total $ 230,476
=======
5. ASSET IMPAIRMENT
1996 - At September 30, 1996, the Company concluded that, on the basis of
1996 operating losses and projected 1997 operating losses, its long-term
assets may not be recoverable. In accordance with SFAS No. 121, the
Company tested its long-term assets currently held, including allocated
goodwill, for recoverability and determined that an impairment loss of
$42,815,000 should be recognized. The impairment loss was comprised of
$3,527,000 and $4,151,000 applicable to land inventory and land held for
sale, respectively, located in Phoenix and Northern California and
$35,137,000 applicable to goodwill. Therefore, the goodwill balance of
$38,682,000 (net of accumulated amortization of $1,354,000) was written
down to $3,545,000 at September 30, 1996. Fair value of land inventory was
determined based upon an evaluation of comparable market prices and the
present value of estimated realizable values of such property. Fair value
of property held for sale was based upon estimated sales prices less
selling costs and the fair value of mortgage assets was estimated to be
net carrying values.
1995 - In an effort to improve its liquidity, the Predecessor Company
announced in the second quarter of fiscal 1995 its intention to actively
market its Southeast homebuilding operations which had been
under-performing in relation to management's expectations. In connection
with the Bankruptcy Proceedings, in May 1995, the Predecessor Company also
identified two residential projects in California and certain commercial
and mixed-use real estate parcels in Arizona to actively market for sale.
As a result of these decisions, in 1995 the Predecessor Company wrote down
the carrying amounts of the projects and parcels referred to above to the
amounts expected to be realized from their immediate sale, reduced for
costs to be incurred prior to and in connection with such sales. The
write-downs included the immediate amortization of all deferred costs
associated with the Predecessor Company's Southeast operations. In
addition, based on new information, the Predecessor Company revised
downward its estimate of proceeds to be received from certain parcels
identified for sale in the year ended September 30, 1994, based on efforts
to accelerate the sale of those parcels. The total charge to operations in
the year ended September 30, 1995 resulting from such write-downs was
$67,177,000.
6. COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company enters into certain
contracts and commitments for real estate development and construction.
Certain of these contracts relate to options to purchase land under which
the Company would lose cash deposits if such options were not exercised.
The Company is obligated under various operating leases through fiscal
2007. Total rental expense under operating leases was $1,350,000,
$1,200,000 and $1,200,000 in fiscal 1997, 1996 and 1995, respectively.
Included in rental expense in fiscal 1996 and 1995 is $593,000 and
$551,000, respectively, paid to entities among whose principals were
certain former officers of the Company.
F - 13
<PAGE>
Aggregate minimum rentals under noncancellable operating leases for the
next five years ending September 30 and thereafter are as follows:
(In thousands)
1998 $1,094
1999 1,101
2000 944
2001 813
2002 719
Thereafter 2,342
-------
$ 7,013
=======
During 1995, three lawsuits were filed against certain former officers and
directors of the Predecessor Company alleging violation of securities
laws, fraud and negligence. A settlement has been reached, which has
received approval from the Arizona Superior Court, under which the Company
was obligated for the $1,500,000 deductible under its directors and
officers policies. Such amount was paid in December 1995. In addition, the
Company paid $250,000 on behalf of DMB. The Company does not believe that
any other obligations to officers and directors under its bylaws will
exceed its coverage under its officers and directors insurance policies.
The Company is a defendant in 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.
7. RELATED PARTIES
As explained in Note 2, on November 14, 1995 DMB acquired 1,000 shares
(100%) of the Company's common stock. At that time DMB issued a purchase
option to AEW to acquire 500 of such shares. On May 6, 1996, AEW exercised
its option and acquired 500 shares of common stock. As a result, the
Company is now 50% owned by DMB and 50% owned by AEW. Transactions between
DMB and AEW and the Company during fiscal 1996 and 1997 are as follows:
1. Prior to the Acquisition by DMB, the Company had option agreements
with DMB under which the Company acquired lots in certain of its
subdivisions. During fiscal 1996 and 1997, the Company paid DMB
$9,780,000 and $5,322,000, respectively, for the purchase of lots
under such options. At September 30, 1997, all lots had been
acquired under these pre-acquisition option agreements. Further, DMB
paid the Company $2,727,400 during fiscal 1996 for infrastructure
and other work on property subject to those option agreements.
Subsequent to the Acquisition, the Company has entered into new
option agreements with DMB and DMB/AEW Land Holdings Two, LLC ("Land
Holdings Two") , an affiliate of DMB and AEW. During fiscal 1997,
the Company paid these affiliates $16,205,000 under these new option
agreements. Additionally, during fiscal 1997 the Company has paid or
accrued $297,000 in property taxes on lots under option with
affiliates. The Company believes that lot prices and other monetary
provisions under these agreements approximated fair value at the
date the agreements were entered into.
F - 14
<PAGE>
2. During fiscal 1996 and 1997, DMB/AEW Land Holdings One, LLC ("Land
Holdings One"), an affiliate of DMB and AEW, acquired from the
Company approximately $28,607,000 and $25,519,000, respectively, of
land held for sale at the Company's cost, which the Company believes
approximated the fair value of such land. The Company continues to
market the land purchased by Land Holdings One in exchange for a
management fee and commissions. For the year ended September 30,
1997, the Company earned $75,000 in management fees and $557,000 in
commissions pursuant to this agreement.
3. During fiscal 1997, DMB and AEW invested $17,500,000 each in the
Company in exchange for additional Series D Subordinated Notes. At
September 30, 1997 and 1996, AEW and DMB collectively owned
approximately $85,741,000 and $40,000,000 principal amount of the
Subordinated Notes, respectively. Interest expense of $9,300,000 and
$4,600,000 on the Subordinated Notes held by AEW and DMB was
recorded in fiscal 1997 and 1996, respectively.
4. Affiliates of DMB and AEW collectively own 22.5% of Westbrook
Village Venture, one of the Company's Arizona retirement operations.
5. On December 31, 1996, the Company received additional capital
contributions of $5,000,000 each from DMB and AEW.
6. In July 1997, the Company entered into a four year lease with an
affiliate of AEW to house the Company's Diamond Bar, California
regional operations.
8. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at September 30:
1997 1996
-----------------------
(In thousands)
Office furniture and equipment $2,097 $ 907
Sewer plant 2,930 2,930
Other 36 29
------ ------
Total 5,063 3,866
Less accumulated depreciation 849 212
------ ------
Property and equipment - net $4,214 $3,654
====== ======
F - 15
<PAGE>
9. ACCRUED LIABILITIES AND EXPENSES
Accrued liabilities and expenses consist of the following at September 30:
1997 1996
--------- ---------
(In thousands)
Accrued construction costs $21,748 $18,797
Accrued warranty costs 2,874 1,918
Accrued compensation 3,833 6,531
Restructuring reserves -- 6,050
Other 16,941 16,339
------- -------
Total $45,396 $49,635
======= =======
At September 30, 1996, accrued compensation includes severance accruals
and restructuring reserves include fees relating to the Bankruptcy
Proceedings and costs to exit the southeast market.
10. INCOME TAXES
The components of deferred taxes are as follows at September 30:
1997 1996
---------- ----------
(In thousands)
Differences between financial reporting and
tax basis of housing and land inventories $ 32,708 $ 39,797
Differences between financial reporting and tax
basis in affiliated land bank partnerships 9,216 6,315
Net operating loss carryforward 45,544 32,991
Other - net 5,802 7,453
-------- --------
Total 93,270 86,556
Valuation allowance (93,270) (86,556)
-------- --------
Total deferred taxes $ -- $ --
======== ========
During 1995, the Predecessor Company increased its valuation allowance to
reduce the balance of its net deferred tax asset to zero, in recognition
of the uncertainties surrounding its restructuring and statutory
limitations which may affect the Company's ability to utilize its net
operating losses and built-in losses resulting from the change in control
which took place upon DMB's acquisition of the Company on November 14,
1995.
The acquisition of the Company by DMB on November 14, 1995 constitutes a
change in control for income tax purposes. The Company will be limited in
the utilization of its net operating loss carryovers and net built-in
losses that existed at the time of the change in control. The limitation
on utilization is approximately $4.5 million per year. The carryovers and
the net built-in losses subject to the limitation are approximately $130
million.
F - 16
<PAGE>
The Company has approximately $110 million of net operating loss
carryovers at September 30, 1997 (including approximately $45 million
subject to the limitation described above). The following table summarizes
the approximate federal carryovers and built-in losses, and their
expiration dates:
Year of
(In thousands) Expiration
Pre-change net operating loss $45,000 2007 - 2012
Post-change net operating loss $65,000 2011 - 2012
Net built-in loss $85,000 2018 - 2020
The following is a reconciliation of income taxes at the federal statutory
rate with income taxes recorded by the Company for the years ended
September 30:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
(In thousands)
<S> <C> <C> <C>
Computed income tax benefit at statutory rate $ (6,444) $(12,692) $(36,705)
State income tax benefit (884) (1,741) (6,369)
Fresh Start accounting adjustment and
reorganization costs 476 (14,437) --
Goodwill amortization and write-off 72 4,873 --
Other 66 2,852 --
Increase in deferred tax asset valuation allowance 6,714 21,145 69,893
-------- -------- --------
Total taxes $ -- $ -- $ 26,819
======== ======== ========
</TABLE>
11. HOUSING INTEREST
Housing interest incurred is capitalized and expensed through cost of
housing sales, as it relates to housing and land inventories. The
components of housing interest are as follows for the years ended
September 30:
<TABLE>
<CAPTION>
Successor Company Predecessor Company
------------------------ ------------------------
1997 1996 1996 1995
---------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C>
Interest costs incurred $ 28,184 $ 27,856 $ 3,179 $ 34,041
Less interest capitalized (12,934) (9,845) (2,473) (26,846)
-------- -------- -------- --------
Interest expensed $ 15,250 $ 18,011 $ 706 $ 7,195
======== ======== ======== ========
Amortization of capitalized interest
included in cost of sales $ 9,222 $ 5,461 $ 1,117 $ 28,550
======== ======== ======== ========
Interest income $ 143 $ 1,124 $ 138 $ 1,034
======== ======== ======== ========
</TABLE>
F - 17
<PAGE>
As of the Acquisition Date, the Company changed its method of applying the
principles of 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 discussed in Note 2, interest on pre-petition, unsecured debt was
suspended subsequent to the commencement of the Bankruptcy Proceedings.
Had the accrual of interest not been suspended, interest incurred and
interest expense for the year ended September 30, 1995 would have
increased by approximately $9,200,000 and $1,000,000, respectively.
12. EMPLOYEE BENEFIT PLANS
On November 14, 1995, upon the Company's acquisition by DMB, holders of
options to purchase the Predecessor Company's common stock did not receive
any consideration for their claims or interests and their options were
canceled.
Employees Savings and Investment Plan - Substantially all employees of the
Company are eligible to participate in an employee savings and investment
plan which, pursuant to Section 401(k) of the Internal Revenue Code,
permits deferral of a portion of their income into trusteed investments in
third-party managed investment funds. Matching contributions from the
Company to the plan amounted to approximately $418,000, $285,000 and
$284,000 in the years ended September 30, 1997, 1996 and 1995,
respectively.
Profit Sharing Plan - Prior to January 1, 1997 all full-time employees of
the Company were eligible to participate in a qualified trusteed profit
sharing plan. Effective January 1, 1997, this plan was consolidated with
the Employees Savings and Investment Plan. Contributions to the plan,
which are related to the prior year, were made at the discretion of the
Company's board of directors and amounted to $227,000 for the year ended
September 30, 1995.
F - 18
<PAGE>
13. QUARTERLY RESULTS OF OPERATIONS (Unaudited)
The unaudited quarterly results of operations are as follows for the years ended
September 30, 1997 and 1996:
<TABLE>
<CAPTION>
The Company
--------------------------------------------------------------
Quarter Ended
--------------------------------------------------------------
December 31, March 31, June 30, September 30,
-------------- ----------- ----------- ---------------
(In thousands)
<S> <C> <C> <C> <C>
Year ended September 30, 1997:
Housing sales $ 80,705 $ 84,926 $ 98,757 $ 116,273
Gross margin 11,775 13,068 14,243 18,689
Net loss (3,560) (4,744) 6,134 (3,973)
</TABLE>
<TABLE>
<CAPTION>
Predecessor
Company The Company
--------------- -----------------------------------------------------------------
Quarter Ended
---------------------------------------------------------------------------------
December 31, March 31, June 30, September 30,
------------------------------ ----------- ----------- ---------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Year ended
September 30, 1996:
Housing sales $ 29,624 $ 50,358 $ 81,845 $ 116,148 $ 139,104
Gross margin 2,354 3,462 8,777 13,958 22,824
Net loss before extraordinary items (10,241) (4,991) (6,498) (2,671) (48,057)
Net income (loss) 25,954(1) (4,991) (6,498) (2,671) (48,057)(2)
</TABLE>
(1) Includes gain of $50,264 arising from gain on debt discharge and a
charge of $14,069 due to Fresh Start reporting adjustments (Note 2).
(2) Includes charge of $42,815 from asset impairment (Note 5).
* * * * * *
F - 19
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting
- ------- --------------------------------------------------------------
and Financial Disclosure
------------------------
There were no changes or disagreements during fiscal 1997.
29
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
- -------- --------------------------------------------------
Directors of the Company hold office until the next annual meeting of
stockholders and until their successors are elected and qualified, or until
their earlier resignation or removal. All officers are appointed by and serve at
the discretion of the Board of Directors. There are no family relationships
among any directors or officers of the Company.
The following table sets forth the names, ages and positions of the
directors and executive officers of the Company as of November 1, 1997. A
summary of the background and experience of each of these individuals is set
forth after the table.
<TABLE>
<CAPTION>
Name Age Position(s) with Company
- ---- --- ------------------------
<S> <C> <C>
Garth R. Wieger 39 Chief Executive Officer, President and Director
Dean Bloxom 36 President, UDC Mortgage Corp.
Kenda B. Gonzales 40 Senior Executive Vice President and Chief Financial Officer
James J. Grogan 43 Senior Executive Vice President
Jay D. Johnson 38 Executive Vice President and Chief Information Officer
Drew M. Brown 48 Director, Chairman
Joseph F. Azrack 50 Director
Bennett Dorrance 51 Director
Gadi Kaufmann 42 Director
James L. McCabe 54 Director
Thomas H. Nolan, Jr. 40 Director
Mark Sklar 49 Director
</TABLE>
Mr. Wieger has been President and Chief Executive Officer of the
Company since May 1996. Prior to joining the Company, Mr. Wieger was the
President of the Arizona Division of Shea Homes from 1991. Prior to 1991, Mr.
Wieger was employed by Continental Homes Holding Corp. as Vice President of Land
Acquisition and Development.
Mr. Bloxom has been President of UDC Mortgage Corp. since August 1996.
Prior to joining UDC Mortgage Corp., Mr. Bloxom was Regional Builder Sales
Manager for Directors/Norwest Mortgage for more than five years. His
responsibilities included managing production of mortgage products for
homebuilders.
Ms. Gonzales has been Senior Executive Vice President and Chief
Financial Officer of the Company since July 1996. Prior to joining the Company,
Ms. Gonzales served as Senior Vice President and Chief Financial Officer of
Continental Homes Holding Corp. for 11 years.
Mr. Grogan has been Senior Executive Vice President of the Company
since July 1996. Prior to joining the Company, Mr. Grogan was the Managing
Attorney of Gallagher & Kennedy, a Phoenix, Arizona law firm, for more than five
years.
30
<PAGE>
Mr. Johnson has been Executive Vice President and Chief Information
Officer of the Company since June 1996. Prior to joining the Company, Mr.
Johnson worked for 12 years in the quick service restaurant business with 10
years at Taco Bell and most recently two years at Arby's Inc. Mr. Johnson served
in a variety of positions within these organizations.
Mr. Brown has been a Director since November 1995. Since 1984, Mr.
Brown has served as President of DMB Associates, an investment and real estate
development company. Mr. Brown also serves as a director of Bank One, Arizona,
N.A. and Royal Grip, Inc., a manufacturer of golf grips and accessories.
Mr. Azrack has been a Director since June 1996. Mr. Azrack is the
President and Chief Executive Officer of AEW, a real estate investment and asset
management company for institutional investors. He joined AEW in 1983 and has
over twenty years of experience in the real estate investment industry. Mr.
Azrack serves as a Partnership Committee member of the Taubman Realty Group
Limited Partnership.
Mr. Dorrance has been a Director since November 1995. Mr. Dorrance has
been a private investor and Chairman and Managing Director of DMB Associates, an
investment and real estate development company, for more than five years. Mr.
Dorrance also has served as the Vice Chairman of Campbell Soup Company since
November 1993 and serves as a director of Banc One Corporation.
Mr. Kaufmann has been a Director since November 1995. He is the
Managing Director of Robert Charles Lesser & Co., a California-based real estate
advisory firm, having joined that firm in 1979.
Mr. McCabe has been a Director since November 1995. Mr. McCabe has been
the President of McCabe Capital Managers, a registered advisory firm, since
1982.
Mr. Nolan has been a Director since June 1996. Mr. Nolan is a Managing
Director of AEW and also serves as a Director of Portfolio Management for AEW.
He joined AEW in 1984 and has responsibility for AEW's high-yield equity
investment portfolios. Mr. Nolan also serves as a director of Bedford Property
Investors, Inc.
Mr. Sklar has been a Director since January 1996. Mr. Sklar has been a
Managing Director of DMB Associates, an investment and real estate development
company, for more than five years.
Board Meetings and Committees
Regular meetings of the Board of Directors of the Company are conducted
quarterly. From time to time special meetings of the Board of Directors are
conducted as required. During fiscal 1997, the Board of Directors held five
meetings. All directors attended more than 80% of the meetings of the Board of
Directors and committees on which they serve. Directors are reimbursed for
out-of-pocket expenses incurred by them in connection with their attendance at
Board and committee meetings. Non-employee members of the Board are paid $3,000
per meeting attended. The Board of Directors has established an Audit Committee
and a Compensation Committee.
The Audit Committee is composed of Messrs. Kaufmann, Nolan and McCabe.
The function of the Audit Committee is to recommend to the Board the appointment
of the independent public accountants and to review the scope and results of the
annual audit engagement. In fiscal 1997, no Audit Committee meetings were held.
The Compensation Committee is composed of Messrs. Azrack and Dorrance.
The function of the Compensation Committee is to establish the amount and form
of compensation for the Executive Officers and to monitor compensation of the
other executives of the Company. In fiscal 1997, one Compensation Committee
meeting was held.
31
<PAGE>
Item 11. Executive Compensation
- -------- ----------------------
The following table sets forth information concerning the compensation
for services in all capacities to the Company for the fiscal years ended
September 30, 1997, 1996 and 1995, of the Chief Executive Officer of the Company
and the other four most highly compensated executive officers of the Company
(collectively, the "Named Officers").
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
---------------------------------------------------------------------------
Name and Principal Position Other Annual All Other
Year Salary Bonus Compensation(1) Compensation
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Garth R. Wieger 1997 285,000 461,000 -- --
Chief Executive Officer and 1996 117,000 283,000 -- --
President(2) 1995 -- -- -- --
Dean Bloxom 1997 112,500 166,500 -- --
President UDC Mortgage Corp. (3) 1996 23,942 23,000 -- --
1995 -- -- -- --
Kenda B. Gonzales 1997 175,000 158,000 -- --
Senior Executive Vice President 1996 40,497 130,000 -- --
and Chief Financial Officer(4) 1995 -- -- -- --
James J. Grogan 1997 175,000 158,000 -- --
Senior Executive Vice 1996 39,151 75,000 -- --
President(5) 1995 -- -- -- --
Jay D. Johnson 1997 142,000 50,000 -- --
Executive Vice President and 1996 47,335 33,000 -- --
Chief Information Officer (6) 1995 -- -- -- --
</TABLE>
(1) Other annual compensation is not included in the table for any Named
Officer for any year in which the aggregate amount of such compensation
does not exceed the lesser of $50,000 or 10% of the total annual salary
and bonus for that year as reported herein.
(2) Mr. Wieger has served as Chief Executive Officer and President of the
Company since May 1996; he did not serve in any other capacity for the
Company prior to such date.
(3) Mr. Bloxom has served as President of UDC Mortgage Corp. since August
1996; he did not serve in any other capacity for the Company prior to
such date.
(4) Ms. Gonzales has served as Senior Executive Vice President and Chief
Financial Officer of the Company since July 1996; she did not serve in
any other capacity for the Company prior to such date.
32
<PAGE>
(5) Mr. Grogan has served as Senior Executive Vice President of the Company
since July 1996; he did not serve in any other capacity for the Company
prior to such date.
(6) Mr. Johnson has served as Executive Vice President and Chief
Information Officer of the Company since June 1996; he did not serve in
any other capacity for the Company prior to such date.
Employment Contracts, Termination of Employment and Change-in-Control Agreements
The Company has no employment agreements or agreements with respect to
"change in control" of the Company with any of the Named Officers, except for
individually negotiated letter agreements entered into when each Named Officer
joined UDC related to minimum bonuses and other allowances to be paid in fiscal
1996 and 1997.
The Company and its former Chief Executive Officer and President, Mr.
Richard C. Kraemer, entered into a written employment agreement (the "Kraemer
Employment Agreement") effective November 14, 1995 which continued Mr. Kraemer's
employment with the Company. The term of the Kraemer Employment Agreement was
three years with automatic one year extensions unless terminated. Mr. Kraemer's
employment agreement was terminated in March 1996 and the Company paid Mr.
Kraemer $60,000 in severance payments and forgave indebtedness of $174,690 in
connection therewith in fiscal 1996. Mr. Kraemer received an additional
$1,340,000 in severance payments and $315,408 of debt forgiveness in fiscal
1997; these amounts were included in the accruals established at the Acquisition
Date.
Board Compensation Committee Report on Executive Compensation; Compensation
Committee Interlocks and Insider Participation
The Compensation Committee of the Board of Directors is comprised of
Messrs. Azrack and Dorrance. The Committee is responsible for establishing the
compensation levels for the Named Officers and for reviewing and monitoring, but
not approving, compensation to other executives of the company.
Set forth below is a report of the Committee addressing UDC's
compensation policies for fiscal 1997 as they affected the Named Officers.
Overall Policy
The key elements of UDC's executive compensation program consist of
base salary, annual bonus and long-term incentive opportunities. The program is
intended to enable UDC to attract, motivate and retain senior management by
providing a fully competitive total compensation package based on both
individual and corporate performance, taking into account both annual and
long-term performance goals, and recognizing individual initiative and
achievements.
33
<PAGE>
Annual Compensation
Annual total compensation for senior management consists of base salary
and potential for annual bonus payments.
Base salary for the Named Officers for 1997 was paid pursuant to
individually negotiated letter agreements entered into when each Named Officer
joined UDC. A substantial portion of the annual bonus payment for each Named
Officer for fiscal 1997 was paid pursuant to these contracts, although the
Compensation Committee elected to augment such bonuses with the potential for
awards under the Company's new incentive compensation program, described below.
Incentive Compensation Plan
The Compensation Committee approved an incentive compensation plan (the
"Incentive Compensation Plan") in February 1997. The purposes of the Incentive
Compensation Plan are to encourage key executives to: (1) focus on building
efficient and high quality homes while providing extraordinary service for UDC's
customers, developing an experienced and highly skilled home building team of
professionals, and developing strong relationships with the most efficient,
productive and competent trade contractors; (2) create consistent goals at every
level within the company so that everyone makes decisions as if they were
long-term owners; and (3) provide flexibility to the Division Presidents and key
managers to work within the market conditions that prevail locally.
The Incentive Compensation Plan incorporates both the short-and the
long-term incentive aspects of UDC's executive compensation program.
The long-term incentive aspects of the Plan provide for cash
compensation to be paid to eligible executives (which would include the Named
Officers) based on a valuation of the Company beginning on October 1, 2001, or,
if earlier, a material change in control, as defined. The value of the Company
will be calculated by a compensation consultant selected by the Compensation
Committee based upon the market multiple of comparable home builders. The market
multiple will be applied to the average net income for the current and prior
year through 2003. At the end of each fiscal year the compensation pool will be
calculated with one-third of the pool paid in cash at the end of each fiscal
year to eligible participants still serving the Company.
The short-term aspect of the Plan provides for annual cash bonus
payments to be made to eligible executives (including, for fiscal 1997, each of
the Named Officers) and key employees based on the achievement of stated goals
and performance measures, both at the divisional level and for the Company as a
whole. As noted above, a substantial portion of the bonus payments made to the
Named Officers for fiscal 1997 were paid pursuant to individually negotiated
letter agreements. However, the Compensation Committee approved the inclusion of
the Named Officers in the annual bonus plan for 1997 to enable them to achieve
additional bonus payments if certain performance measures (i.e. net sales per
employee, cycle time improvement, home buyer survey
34
<PAGE>
satisfaction results, fixed general and administrative costs as a percent of
revenue, etc.) were achieved. The performance measures are calculated at the
corporate level as well as at the divisional level. To the extent the divisional
goals are achieved, the bonus payments made to the Named Officers is increased.
It is expected that the Named Officers similarly will participate in the annual
bonus plan for fiscal 1998.
At a meeting of the Compensation Committee held on November 17, 1997,
the Committee approved the 1997 annual bonus payments for executives and
employees under the Incentive Compensation Plan.
Joe Azrack
Bennett Dorrance
35
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
- -------- --------------------------------------------------------------
The following table sets forth certain information regarding the
Company's outstanding shares of Common Stock beneficially owned as of November
1, 1997 by (i) each person who is known by the Company to beneficially own more
than 5% of the outstanding shares of Common Stock, (ii) each director of the
Company, (iii) each Named Officer, and (iv) directors and executive officers of
the Company as a group.
<TABLE>
<CAPTION>
Amount and
Nature of
Name and Address of 5% Stockholders, Beneficial
Names of Directors and Officers (1) Ownership(2) Percentage(2)
- ----------------------------------- ------------ -------------
<S> <C> <C>
DMB Residential L.L.C. 500 50%
4201 North 24th Street, Suite 120
Phoenix, Arizona 85016
AEW Partners, L.P. 500 50
225 Franklin Street
Boston, Massachusetts 02110
Garth R. Wieger 0 0
Dean Bloxon 0 0
Kenda B. Gonzales 0 0
James J. Grogan 0 0
Jay D. Johnson 0 0
Drew M. Brown 500(3) 50
Joseph F. Azrack 0 0
Bennett Dorrance 500(3) 50
Gadi Kaufmann 0 0
James L. McCabe 0 0
Thomas H. Nolan, Jr. 0 0
Mark Sklar 500(3) 50
All directors and executive officers as a group (12 persons) 500 50
</TABLE>
- --------------------------------
(1) Except as set forth below, the address for each beneficial owner is c/o
UDC Homes, Inc., 6710 N. Scottsdale Road, Scottsdale, Arizona 85253.
(2) Unless otherwise indicated, all parties have both exclusive voting and
investing power or hold shares in joint tenancy with their spouses.
(3) Includes 500 shares of Common Stock owned by DMB, of which Messrs.
Brown and Sklar and a company controlled by Mr. Dorrance and trusts for
the benefit of his children are members.
36
<PAGE>
Item 13. Certain Relationships and Related Transactions
- -------- ----------------------------------------------
Prior to the Acquisition by DMB, the Company had option agreements with
DMB under which the Company acquired lots in certain of its subdivisions. During
fiscal 1996 and 1997, the Company paid DMB $9,780,000 and $5,322,000,
respectively, for the purchase of lots under such options. At September 30,
1997, all lots had been acquired under these pre-acquisition option agreements.
Further, DMB paid the Company $2,727,400 during fiscal 1996 for infrastructure
and other work on property subject to option agreements. Subsequent to the
Acquisition, the Company has entered into new option agreements with DMB and
DMB/AEW Land Holdings Two, LLC ("Land Holdings Two"), an affiliate of DMB and
AEW. During fiscal 1997, the Company paid these affiliates $16,205,000 under
these new option agreements. Additionally, during fiscal 1997 the Company has
paid or accrued $297,000 in property taxes on lots under option with affiliates.
The Company believes that lot prices under these agreements approximated fair
value at the date the agreements were entered into.
During fiscal 1996 and 1997, DMB/AEW Land Holdings One, LLC ("Land
Holdings One"), an affiliate of DMB and AEW, acquired approximately $28,607,000
and $25,519,000, respectively, of land held for sale at the Company's cost,
which the Company believed to approximate the fair value of such land. The
Company continues to market the land purchased by Land Holdings One in exchange
for a management fee and commissions. For the year ended September 30, 1997, the
Company earned $75,000 in management fees and $557,000 in commissions pursuant
to this agreement.
During fiscal 1997, DMB and AEW invested $17,500,000 each in the
Company in exchange for additional Series D Subordinated Notes. Interest expense
of $9,300,000 and $4,600,000 on the Subordinated Notes held by AEW and DMB was
recorded in fiscal 1997 and 1996, respectively. At September 30, 1997 and 1996,
AEW and DMB collectively owned approximately $85,741,000 and $40,000,000
principal amount of the Subordinated Notes, respectively.
Affiliates of DMB and AEW collectively own 22.5% of Westbrook Village
Venture, one of the Company's Arizona retirement operations.
On December 31, 1996, the Company received additional capital
contributions of $5,000,000 each from DMB and AEW.
During fiscal 1997 and 1996, the Company made payments of $22,000 and
$142,000, respectively, to Robert Charles Lesser & Co. for strategic planning
and market analysis. Mr. Kaufmann, a Director of the Company, is Managing
Director of Robert Charles Lesser & Co.
In July 1997, the Company entered into a four year lease with an
affiliate of AEW to house the Company's Diamond Bar, California regional
operations.
In 1983, the Predecessor Company organized Mill & Ellis Office Limited
Partnership, an Arizona limited partnership ("Mill & Ellis"), and in 1987
organized ME II Limited Partnership, an Arizona limited partnership ("ME II"),
each of which owns one of the Company's two executive office buildings and
leases these buildings to the Company. During fiscal 1996, Mr.
37
<PAGE>
Kraemer owned 24% of Mill & Ellis and 15% of ME II, and UDC Advisory Services
Inc., a wholly owned subsidiary of the Company, having purchased interests
previously owned by certain former employees of the Company, owned 25% of ME II.
On June 25, 1996, Mr. Kraemer assigned his interest in Mill & Ellis and ME II to
the Company. The total equity contributions to these limited partnerships were
$261,667. The land and construction costs of the two buildings totaled
approximately $2.4 million. In 1993, the Predecessor Company entered into a
lease for one of the buildings for approximately $235,700 per year for 14,518
square feet and a lease initially for approximately $244,000 per year for 14,775
square feet for the second building. Each of these leases contained a five-year
lease extension terminating in June 1998.
In November 1995, in consideration of certain financial accommodations
afforded the Company by Bank of America Arizona ("B of A"), the Company and Mill
& Ellis agreed in favor of B of A that during the term of the lease, rent
payments are payable from the Company to Mill & Ellis in the amount of $241,308
per year (or $20,109 per month) plus all Direct Expenses (as defined) in excess
of $58,072 per year (or $4,839 per month). Similarly, the Company and ME II
agreed in favor of B of A that during the term of the lease, rent payments are
payable from the Company to ME II in the amount of $304,268 per year (or $25,355
per month) plus all Direct Expenses in excess of $59,100 per year (or $4,925 per
month). In December 1996, Mill & Ellis and ME II (which the Company controlled)
sold these buildings to a third party. The Company relocated its operations from
these buildings in January 1997.
38
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
- -------- --------------------------------------------------------------
8-K
---
(a) The following documents are filed as part of this report:
1. Financial Statements (See Index to Financial Statements
located in Item 8 of this report);
2. Financial Statement Schedules (See Index to Financial
Statements located in Item 8 of this report); and
3. Exhibits required by Securities and Exchange Commission
Regulation S-K, Item 601 are listed below.
Exhibit
Number Description of Document
- ------ -----------------------
4.1(1) $7,783,886 aggregate principal amount of Series C Subordinated
Notes due 2000. Terms identical to previously issued Series C
Notes.
4.2(2) $36,904,122 aggregate principal amount of Series D
Subordinated Notes due 2000. Terms identical to previously
issued Series D Notes.
10.1(3) Lease Agreement dated November 5, 1996 between Scottsdale
Spectrum LLC and the Company.
10.2(4) Amended and Restated UDC Master Revolving Line of Credit Loan
Agreement (borrowing base) dated April 30, 1997, among Bank
One, Arizona, NA ("BOAZ"), Guaranty Federal Bank,
F.S.B.("Guaranty"), Wells Fargo Bank, National Association
("WFB"), Bank of America National Trust and Savings
Association ("BofA"), Norwest Bank Arizona, National
Association ("Norwest") and the Company.
10.3(4) Amended and Restated Promissory Note dated April 30, 1997 by
the Company in favor of BOAZ in the principal amount of
$60,000,000.
10.4(4) Amended and Restated Promissory Note dated April 30, 1997 by
the Company in favor of Guaranty in the principal amount of
$30,000,000.
10.5(4) Amended and Restated Promissory Note dated April 30, 1997 by
the Company in favor of WFB in the principal amount of
$40,000,000.
10.6(4) Promissory Note dated April 30, 1997 by the Company in favor
of BofA in the principal amount of $30,000,000.
39
<PAGE>
10.7(4) Promissory Note dated April 30, 1997 by the Company in favor
of Norwest in the principal amount of $10,000,000.
27 Financial Data Schedule
Footnotes:
- ---------
(1) Incorporated by reference from the Company's Annual Report on
Form 10-K for the fiscal year ended September 30, 1995.
(2) Incorporated by reference from the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1996.
(3) Incorporated by reference from the Company's Quarterly Report
on Form 10-Q for the quarter ended December 31, 1996.
(4) Incorporated by reference from the Company's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1997.
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 September 30, 1997.
40
<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: December 22, 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.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Garth R. Wieger President, Chief Executive December 22, 1997
- ------------------------------------ Officer and Director
Garth R. Wieger (Principal Executive officer)
/s/ Kenda B. Gonzales Senior Executive Vice President December 22, 1997
- ------------------------------------ and Chief Financial Officer
Kenda B. Gonzales (Principal Financial and Accounting Officer)
/s/ Drew M. Brown Director, Chairman December 22, 1997
- ------------------------------------
Drew M. Brown
/s/ Joseph F. Azrack Director December 22, 1997
- ------------------------------------
Joseph F. Azrack
/s/ Bennett Dorrance Director December 22, 1997
- ------------------------------------
Bennett Dorrance
/s/ Gadi Kaufmann Director December 22, 1997
- ------------------------------------
Gadi Kaufmann
/s/ James L. McCabe Director December 22, 1997
- ------------------------------------
James L McCabe
/s/ Thomas H. Nolan, Jr. Director December 22, 1997
- ------------------------------------
Thomas H. Nolan, Jr.
/s/ Mark Sklar Director December 22, 1997
- ------------------------------------
Mark Sklar
</TABLE>
41
Exhibit 21
LIST OF SUBSIDIARIES
--------------------
1. The Company holds 100% of the outstanding capital stock of:
MountainBrook Village Company ("MBV Co.") (Arizona)
UDC Advisory Services, Inc. ("Advisory") (Illinois)
UDC Corporation ("UDCC") (Delaware)
UDC Homes Construction, Inc. (Arizona)
2. The Company holds 77.5% of the partnership interest of:
Westbrook Village Venture (Arizona)
3. MBV Co. holds 100% of the outstanding capital stock of:
Gold Canyon Sewer Company (Arizona)
4. UDCC holds 100% of the outstanding capital stock of:
UDC Mortgage Corporation (Arizona)
5. The Company holds a 50% interest in:
UDC Mortgage, a general partnership
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S.Dollars
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 8,871
<SECURITIES> 0
<RECEIVABLES> 1,930
<ALLOWANCES> 0
<INVENTORY> 290,792
<CURRENT-ASSETS> 0
<PP&E> 4,214
<DEPRECIATION> 0
<TOTAL-ASSETS> 313,439
<CURRENT-LIABILITIES> 0
<BONDS> 230,476
0
0
<COMMON> 0
<OTHER-SE> 7,372
<TOTAL-LIABILITY-AND-EQUITY> 313,439
<SALES> 380,661
<TOTAL-REVENUES> 382,833
<CGS> 322,885
<TOTAL-COSTS> 386,137
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,107
<INCOME-PRETAX> (18,411)
<INCOME-TAX> 0
<INCOME-CONTINUING> (18,411)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (18,411)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
