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, 1996
[ ] 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.)
4812 South Mill Avenue, Tempe, Arizona 85282
(Address of principal executive offices) (Zip Code)
Registrant's 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 December 27, 1996 was $0.00 as all such stock is held by
affiliates. As of December 27, 1996, 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
1
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UDC HOMES, INC. AND SUBSIDIARIES
FORM 10-K ANNUAL REPORT
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1996
TABLE OF CONTENTS
Page
PART I
Item 1. Business.............................................................1
Item 2. Properties..........................................................11
Item 3. Legal Proceedings...................................................11
Item 4. Submission of Matters to a Vote of Security Holders.................13
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.............................................................14
Item 6. Selected Financial Data.............................................14
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations...........................................17
Item 8. Financial Statements and Supplementary Data.........................27
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................................28
PART III
Item 10. Directors and Executive Officers of the Registrant..................29
Item 11. Executive Compensation..............................................31
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.
During the quarter ended March 31, 1995, the Company decided to
discontinue its operations in the Southeast markets of North Carolina, Florida
and Georgia. Subsequent to that time, the Company has been liquidating 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"), DMB
Residential L.L.C. ("DMB"), an affiliate of DMBLP on November 14, 1995
("Acquisition Date") purchased from the Company (the "Equity Purchase") 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. The Company used $83 million of the proceeds from the Equity
Purchase to repay a portion of the claims of certain unsecured creditors under
the Plan. The balance of the cash payments required by the Plan have been and
will continue to be funded from cash-on-hand, cash flow from operations and the
Company's financing facilities. For additional information, see Notes 1 and 2 to
Consolidated Financial Statements.
On the Acquisition Date, the Company also issued pursuant to the Plan
$70 million 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. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources - Subordinated Notes".
<PAGE>
On May 6, 1996, pursuant to an option agreement between DMB and AEW
Partners, L.P. ("AEW"), Eastrich No. 184 LLC (as to all interests except the
Westbrook Village Joint Venture ("WBV"), and Eastrich No. 185, LLC (as to the
WBV interest), as assignees of AEW, acquired from DMB 500 shares of the Common
Stock owned by DMB, $15 million principal amount of the Series C Subordinated
Notes owned by DMB, $5 million principal amount of the Series D Subordinated
Notes owned by DMB and 50% of the general partner interest held by a DMB
affiliate in WBV. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
The Plan effected a recapitalization of the Company and did not result
in a reduction in the scope or any other major restructuring of the Company's
operations. During the pendency of the Chapter 11 proceeding, the Company
continued its home building operations in the ordinary course in its housing
markets. The Company believes that it maintained, throughout the proceedings,
its relationship with its customers, subcontractors and suppliers and the
confidence of its employees.
At September 30, 1996, the Company's management reviewed the status of
the Company's operations, including: (1) 1996 operating losses, which losses are
anticipated to continue into fiscal 1997; (2) the Company's overhead structure,
which will require an expansion of current volume in order to generate adequate
operating margins; (3) lenders' waivers of covenant violations which have been
required due to the Company's inability to meet operating projections; and (4)
additional capital contributions required in fiscal 1996 and anticipated to be
required in fiscal 1997 in order for the Company to have adequate liquidity.
Based on this review, management 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 is 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.
UDC seeks to be a leading homebuilder in each of the 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 the
fiscal year ended September 30, 1996 ("fiscal 1996"). In the metropolitan
Phoenix market, the second largest housing market in the United States based
upon single family housing permits issued in calendar year 1995, UDC was the
fifth largest homebuilder based on housing permits issued. For calendar year
1996, the Company expects to be the fourth 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 immediate San
Francisco Bay Area of northern California, the Company has targeted a market
niche consisting of active adult home buyers seeking gate guarded golf course
communities. California operations accounted for 32% of the Company's fiscal
1996 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
<PAGE>
The Company has extensive experience in the homebuilding business,
having built and closed more than 28,500 homes since its formation in 1968. In
fiscal 1996, UDC closed 1,951 homes at an average sales price of $206,000
compared to 1,844 homes at an average sales price of $199,000 in the fiscal year
ended September 30, 1995 ("fiscal 1995"). The fiscal 1996 closings resulted in
$401.8 million in housing revenues, a 9% increase from housing revenues for
fiscal 1995. At September 30, 1996, the Company had a backlog of 762 sold homes,
representing an aggregate sales value of $161.1 million and a 5.8% decrease from
the sales value of the Company's backlog at September 30, 1995.
As of September 30, 1996, the Company was developing and/or marketing
for sale housing products in 43 different subdivisions in Arizona and
California. During fiscal 1996, the Company received 1,897 net sales orders,
representing an aggregate sales value of $389.2 million, an increase of 7.7%
from the aggregate sales value achieved in fiscal 1995. New home construction is
generally tied to a sales order being received, which is generally accompanied
by a deposit which varies in size relative to the price of the home, options
requested and the Company's ability to remarket the constructed home if the
buyer fails to close. Upon completion of construction and receipt of the
remaining purchase price, the home is transferred to the buyer and the
transaction is recorded as a sale. See "Business - Sales Activities."
UDC currently focuses on providing homes primarily for two demographic
markets: move-up family buyers and retirees. By developing 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 1996 for approximately 79% of the Company's revenues. In the
family market, UDC offers homes which range in size from 1,342 to 3,861 square
feet with base prices which range from $90,490 to $323,990. UDC's sales in the
retirement market accounted in fiscal 1996 for approximately 21% of the
Company's revenues. In the retirement market, UDC offers homes which range in
size from 1,354 to 3,021 square feet with base prices which range from $99,900
to $385,900. The Company believes that its strategy of concentrating on move-up
and retirement homes 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 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.
The Company also arranges mortgage financing for customers who choose
to finance their home purchases. In fiscal 1996, the Company arranged such
financing for 39% of its customers who financed their home purchases. This
mortgage origination activity enhances the Company's ability to market and close
its homes. UDC's mortgage activities, which are conducted through UDC Mortgage
Corporation ("UDC Mortgage"), an indirect, wholly-owned subsidiary of the
Company, consist solely of arranging financing, primarily for the Company's home
buyers, and selling those mortgages through national financial institutions such
as the Federal National Mortgage Association ("FNMA") and the Federal Home Loan
Mortgage
3
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Corporation ("FHLMC"). UDC currently sells the servicing rights to the mortgages
which it originates to third parties. In December 1996, the Company entered into
a joint venture agreement with Norwest Mortgage. The joint venture will provide
mortgage related services to the Company when regulatory approval is obtained.
Regulatory approval is projected to be completed in February 1997. See "Business
- - UDC Mortgage Related Operations."
The Housing Industry
Home builders, including the Company, have historically experienced
periodic cycles 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 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
The total number of homes closed by the Company in Arizona and
California for each of the 12-month periods ended September 30, 1992 through
1996 are set forth in the following table.
<TABLE>
<CAPTION>
Years Ended September 30,
---------------------------------------------------------------------------------------
1992 1993 1994 1995 1996
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Arizona......... 1,301 1,673 1,621 1,385 1,444
California...... 353 517 641 459 507
----- ----- ----- ----- -----
TOTAL........... 1,654 2,190 2,262 1,844 1,951
===== ===== ===== ===== =====
</TABLE>
Arizona - Metropolitan Phoenix is UDC's largest market, and
historically has generated greater than 65% of its housing revenues. UDC
commenced homebuilding activities in the Phoenix retirement market in 1975 and
expanded into the move-up family market in 1980. Single family housing starts in
Phoenix were 28,543 in calendar year 1995, and are expected to be approximately
29,000 for calendar year 1996. For calendar year 1995, Phoenix was the nation's
second largest housing market measured by housing starts and Phoenix is
projected to have retained this position in calendar year 1996.
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 total six subdivisions, UDC builds
detached and attached stucco homes with tile roofs ranging in size from 1,354 to
2,578 square feet, with base sales prices from $99,900 to $212,990. At both
communities, active adult home buyers have access to social and recreational
4
<PAGE>
amenities, including championship golf courses, tennis courts, recreational
centers and scenic views. Westbrook Village is expected to have approximately
3,800 homes (505 homesites were remaining at September 30, 1996) and 7,000
residents upon completion, and MountainBrook Village is expected to have
approximately 1,700 homes (1,026 homesites were remaining at September 30, 1996)
and 3,000 residents upon completion.
In Phoenix, UDC currently sells primarily move-up homes in 24
communities geographically dispersed in each of the Phoenix metropolitan area's
strongest housing markets. UDC builds detached stucco homes with tile roofs in
the Phoenix metropolitan area. These homes range in size from 1,354 to 3,861
square feet, with base sales prices from $90,490 to $323,990. 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 - The Company sells homes in three California markets: a
predominantly retirement home market in northern California and two
predominantly family home markets in San Diego and Los Angeles. The Company
acquired land for its first California community in north San Diego County in
1980, and expanded into northern California in 1984 with the acquisition of two
age-restricted master-planned retirement communities, Rossmoor in Walnut Creek
and The Villages in San Jose.
Both Northern California 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 retirement homes ranging in size from 2,032 to 3,021 square feet,
with base sales prices from $189,900 to $385,900 at The Villages and Rossmoor.
Rossmoor is expected ultimately to provide housing for more than 10,000
residents in 7,000 homes (326 homesites were remaining at September 30, 1996).
The Villages, a 1,200-acre master-planned community, is expected to provide
housing for more than 5,000 residents in 3,000 homes (285 homesites were
remaining at September 30, 1996) upon completion. In fiscal 1996, approximately
12% of the Company's revenues from continuing operations were generated from
northern California.
In San Diego and Los Angeles, the Company is currently selling detached
and attached move-up family homes in the counties of Riverside, San Bernadino,
Orange and San Diego. In San Diego, the Company builds in two communities with
homes ranging in size from 2,485 to 3,025 square feet, with base sales prices
from $271,990 to $306,990. In Los Angeles, the Company builds in seven
communities with homes ranging in size from 1,342 to 3,073 square feet, with
base sales prices from $133,990 to $296,990. In fiscal 1996, approximately 20%
of the Company's revenues from continuing operations were generated from
southern California.
UDC Mortgage Related Operations
UDC Mortgage is a wholly-owned subsidiary of UDC Corporation, which in turn
is a wholly-owned subsidiary of UDC. UDC Mortgage serves an important role in
the Company's sale of its homes by assisting purchasers in obtaining financing
when necessary to purchase their
5
<PAGE>
homes. During fiscal 1996,approximately 84% of the Company's home buyers
purchased their home with the assistance of mortgage financing and approximately
39% of home buyers who financed their housing purchases did so through UDC
Mortgage. UDC Mortgage's average loan amount during 1996 was approximately
$155,000. 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.
The mortgage loans are originated by UDC Mortgage at prevailing market
interest rates and normally are sold by UDC Mortgage into the secondary market
when UDC Mortgage issues an interest rate commitment to the buyer or immediately
following the loan closing (where there is no interest rate commitment).
Accordingly, UDC Mortgage limits its risk of interest fluctuations prior to the
sale of the mortgage in the secondary market.
In December 1996, the Company entered into a joint venture agreement
with Norwest Mortgage whereby the joint venture will provide mortgage related
services to the Company's home buyers. The joint venture, which is expected to
be operational by February 1997, will allow the Company access to the technology
and mortgage programs of one of the largest mortgage bankers in the United
States.
Land Inventory
The following table describes the number of homesites at September 30,
1996 by location:
<TABLE>
<CAPTION>
Affiliated
UDC Land Bank Land Joint
Owned Partnerships Options Ventures Total
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Family:
Arizona..................... 1,874 -- 1,578 -- 3,452
California.................. 290 -- 119 -- 409
----- ---- ----- ----- -----
Family Total................... 2,164 -- 1,697 -- 3,861
----- ---- ----- ----- -----
Retirement:
Arizona..................... 92 -- 88 1,351 1,531
California.................. 561 50 -- -- 611
----- ---- ----- ----- -----
Retirement Total............... 653 50 88 1,351 2,142
----- ---- ----- ----- -----
Family and Retirement Total 2,817 50 1,785 1,351 6,003
===== ==== ===== ===== =====
</TABLE>
6
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Between 1977 and 1988, UDC established affiliated land bank
partnerships ("Affiliated Land Bank Partnerships") (which historically were not
consolidated for financial reporting purposes) to enable it to obtain control
over land inventory for future development. These partnerships acquired land
inventory at the direction of the Company and held that land inventory subject
to options granted to the Company to purchase the property at formula prices.
During a time when the prices of land inventory were increasing and the
availability of land suitable for development by the Company was decreasing, the
Company believed that such affiliated partnerships were useful in stabilizing
land inventory costs and availability. No such affiliated partnerships have been
formed since 1988 and the Company does not anticipate forming additional
affiliated land bank partnerships in the foreseeable future. More recently, the
Company has acquired control of land through direct purchases of land from land
holders. UDC Advisory Services, Inc. ("UDC Advisory"), a wholly-owned subsidiary
of UDC which has no substantial assets other than its investment in the
Affiliated Land Bank Partnerships, is the general partner of each of the
Affiliated Land Bank Partnerships. Limited partner investors in the Affiliated
Land Bank Partnerships, who made their investments separate from any
relationship to or investment in UDC, provided funds to allow these Affiliated
Land Bank Partnerships to acquire property subject to formula price purchase
rights.
At September 30, 1996, there were four existing Affiliated Land Bank
Partnerships, Sunbelt Properties Limited Partnership ("New Sunbelt"), Terra
California Limited Partnership ("Terra"), Sunrise Limited Partnership
("Sunrise"), and Sunbelt Properties, Ltd. ("Old Sunbelt"). Subsequent to
September 30, 1996, UDC purchased the remaining interest in New Sunbelt and
dissolved the partnership. On November 14, 1996, the limited partners of Terra
agreed to a proposal that resulted in the dissolution of the partnership on
January 2, 1997. On December 11, 1996, a proposal was sent to the limited
partners of Sunrise that, if approved, would result in the dissolution of the
partnership. UDC is negotiating a proposal with the limited partners of Old
Sunbelt that would result in the assignment of UDC Advisory's interest in the
partnership to the limited partners.
The Company has also entered into land option agreements with entities
(including DMB LP) having available sources of capital. These entities acquire
land and grant purchase options to the Company.
At September 30, 1996, the Company's Arizona retirement operations were
conducted under the following joint venture agreements: Westbrook Village
Venture (a joint venture in which UDC and an affiliate of DMB and AEW owned 75%
and 25% equity interests, respectively) and MountainBrook Village Joint Venture
(a joint venture in which UDC owns a 50% equity interest). On December 6, 1996,
UDC purchased the remaining equity interest in MountainBrook Village Joint
Venture and dissolved the partnership.
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Sales Activities
At September 30, 1996, the Company had sales backlog represented by
signed contracts with deposits from buyers of $161.1 million comprised of 762
housing units. At September 30, 1995, the Company had sales backlog represented
by signed contracts with deposits from buyers of $171.1 million representing 816
units.
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. In the Company's continuing operations, the percentage of gross
sales contracts which were canceled was approximately 31% in fiscal 1996 and 37%
in fiscal 1995. The Company believes that the higher cancellation rate in fiscal
1995 was primarily attributable to home buyer concerns about the Company's
ability to complete construction of homes and subdivisions in a timely manner
and to honor its post-sale warranty obligations as a result of its Chapter 11
Case. 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 buyers'
personal or employment-related changes in circumstances.
Except in instances where substantial expenditures on buyer options
have been made by the Company in construction, the Company generally has
released canceling buyers from their contracts at minimal or no cost. In
connection with the Company's marketing to move-up 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, 1996 will close and result in revenues to the Company during
fiscal 1997, either under the sales contract in backlog or a subsequent sale of
the home to a different buyer. See "Business - Competition and Market Factors."
The following table sets forth information regarding the Company's
closings for the prior five years by (i) the geographical locations of the
Company's operations, and (ii) family and retirement sales.
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<TABLE>
<CAPTION>
Homes Closed - Units
----------------------------------------------------
Years Ended September 30,
----------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Family:
Arizona......................................... 938 1,253 1,194 1,071 1,117
California...................................... 211 352 514 349 344
----- ----- ----- ----- -----
Family Total....................................... 1,149 1,605 1,708 1,420 1,461
----- ----- ----- ----- -----
Retirement:
Arizona......................................... 363 420 427 314 327
California...................................... 142 165 127 110 163
----- ----- ----- ----- -----
Retirement Total................................... 505 585 554 424 490
----- ----- ----- ----- -----
Family and Retirement Total........................ 1,654 2,190 2,262 1,844 1,951
===== ===== ===== ===== =====
</TABLE>
The following table reflects the percentage of UDC revenues from home
sales for the prior five years by (i) the geographical locations of UDC's
operations, and (ii) family and retirement sales.
<TABLE>
<CAPTION>
Housing Revenues
-----------------------------------------------------------
Years Ended September 30,
-----------------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Location:
Arizona................................... 72% 72% 65% 70% 68%
California................................ 28 28 35 30 32
--- --- --- --- ---
Total........................................ 100% 100% 100% 100% 100%
=== === === === ===
Type of Development:
Family.................................... 74% 76% 76% 80% 79%
Retirement................................ 26 24 24 20 21
--- --- --- --- ---
Total........................................ 100% 100% 100% 100% 100%
=== === === === ===
</TABLE>
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
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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, 1996, there were 242 housing units
(excluding model homes) for which a purchase contract was not in effect and
homes were under construction.
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 continuing operations, UDC believes that there is ample
room for growth. The market for new housing has historically been cyclical and
UDC's business is affected by changes in that market.
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.
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, make
uneconomic 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.
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<PAGE>
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 December 23, 1996, the Company and its subsidiaries employed
approximately 444 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 excellent. 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 Tempe,
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. See "Certain Relationships and Related
Transactions."
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.
Although the Company is not a defendant in the Arizona Actions, the Company
could nevertheless be required to indemnify certain of the Director/Officer
Defendants in the
11
<PAGE>
Arizona Actions in the event that such defendants incur expenses or liability
and seek indemnification from the Company. With respect to the advancement of
defense costs, the Company and National Union Fire Insurance Company of
Pittsburgh, PA. ("National Union"), the issuer of the Company's primary
directors' and officers' insurance and Company reimbursement policy, agreed,
among other things, that (i) National Union would advance all reasonable and
necessary defense costs incurred by most of the covered defendants in the
Arizona Actions during the pendency of the Company's bankruptcy proceeding, (ii)
upon consummation of a reorganization plan, the Company would repay up to $1.5
million of defense costs actually advanced by National Union, (iii) the Company
would not be obligated to repay an amount greater than $1.5 million of advanced
defense costs and (iv) National Union would have no duty to defend.
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, 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 was filed with the Court on January 19, 1996
and after amendment was primarily approved by the Court. The Court now must
determine whether, after notice to class members, to approve the Settlement
Agreement and to enter a bar order designed to limit the ability of non-settling
defendants to seek contributions, indemnification, equitable apportionment or
similar equitable remedies from the Company or the Director/Officer Defendants..
The Court approved the form of notice to be provided to the class, ordered that
the class be given notice, and set a final settlement hearing date for February
14, 1997. Notice to the class and proofs of claim have been mailed and the class
members have until January 31, 1997, to opt out of or object to the settlement.
UDC Homes, Inc. v. Mann & Smith, Inc. and Cooney, Rikard & Curtin, Inc.
- - This case was pending in Arizona Superior Court, Maricopa County (Case No.
CV94-10637). In connection with several lawsuits in which the Company was a
defendant and for which the primary policy limits had been exhausted, the excess
liability insurance carriers to whom the defense of the actions was tendered
asserted that their policies did not provide coverage or indemnification for
such lawsuits because the policies neither "follow the form" of the primary
policies nor contain "broad form" coverage. The carriers expressly reserved
their rights with respect to the defense of the lawsuits. In addition, in
connection with the settlement of certain claims, one of the Company's excess
liability insurance carriers reserved its right to be reimbursed $275,000 paid
in settlement for the same reasons. On July 8, 1994, the Company filed a
complaint against the Company's insurance agent and its insurance broker. The
complaint, as amended, alleged that from April 1, 1985 through April 1, 1988,
the commercial umbrella liability policies procured by the defendants for the
Company failed to either "follow
12
<PAGE>
the form" of the primary liability polices procured by the defendants for the
Company for those years or contain "broad form" general liability coverage. The
complaint sought special damages in the amount of $275,000, general and special
damages up to the limits of the excess liability insurance policies, attorneys'
fees and costs. The defendants filed separate answers denying any liability to
the Company, Mann & Smith, Inc. filed a crosscomplaint against Cooney, Rikard &
Curtin, Inc. and the Company filed a motion to bifurcate the liability and
damage issues. On March 7, 1996, the parties filed a stipulation for dismissal
without prejudice wherein the Company retained the right to refile the case up
to and including September 1, 1997, after an assessment of potential exposure
and damages. On March 11, 1996, the case was dismissed without prejudice.
Shadow Moss Homeowners Association Inc. v. UDC-Universal Development,
L.P., dba UDC Homes Limited Partnership, Course View Properties, Inc., Newman
Bower Architects, James M. Taylor, and Mulvaney Builders and Associates - This
case, which was filed on March 5, 1993, is currently pending in the Horry
County, South Carolina Court of Common Pleas. The plaintiff alleges that
numerous construction/design defects exist at the Company's Shadow Moss
condominium project in North Myrtle Beach, South Carolina. The complaint alleges
breach of contract, breach of implied warranties, negligence, strict tort
liability and unfair trade practices. The plaintiff seeks $2,500,000 in actual
and consequential damages, punitive damages, costs and attorneys' fees and
treble the actual damages as a result of the unfair trade practices claim. The
Company is unable at this time to determine the likelihood of an unfavorable
outcome or the amount or range of potential loss, if any. CIGNA Insurance
Company is defending the Company under a reservation of rights.
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 during the fourth quarter of the fiscal year
covered by this report to a vote of the Company's security holders.
13
<PAGE>
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 assurance can be given as to whether any such market
will develop or, if one does develop, as to the price at which such securities
will trade. As of December 27, 1996, the Company had two record owners of its
Common Stock.
The Company has not paid dividends on its common equity in either of
its last two 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."
Item 6. Selected Financial Data
- ------- -----------------------
As of September 30, 1992, the Company's predecessor, UDC - Universal
Development L.P. ("UDC L.P."), converted from limited partnership to corporate
form and commenced operations as UDC Homes, Inc. The following table sets forth
selected consolidated financial information regarding the financial position of
the Company and UDC L.P. for each of the five years ended September 30, 1992
through 1996 (including Southeast operations). The consolidated financial
information has been derived from UDC L.P.' s and 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.
14
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(Dollars in Thousands)
<TABLE>
<CAPTION>
Successor
Company Predecessor Company
----------- -----------------------------------------------------------------------------
Period Period Twelve Twelve Twelve Twelve
from from Month Month Month Month
November 14, October 1, Period Period Period Period
1995 to to Ended Ended Ended Ended
September 30, November 13, September 30, September 30, September 30, September 30
1996 1995 1995 1994 1993 1992
(As Restated)(1)
------------- ------------ ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF
OPERATIONS DATA:
Housing sales $ 387,455 $ 29,624 $ 444,815 $ 508,800 $ 482,343 $ 370,069
Housing gross margin 46,829 2,354 40,807 65,861 53,618 41,958
(Loss) income before extraordinary gain (62,217) (10,241) (134,774) (22,783) 5,038 4,603
Net (loss) income (2) (62,217) 25,954 (134,774) (22,783) 5,038 4,603
OPERATING DATA:
New sales orders (dollars) (3) $ 362,300 $ 31,372 $ 408,109 $ 540,473 $ 454,308 $ 413,558
New sales orders (units) 1,755 165 2,034 2,796 2,564 2,423
Home closings (units) 1,886 140 2,238 2,713 2,822 2,212
Average revenue per home closing $ 206 $ 212 $ 199 $ 188 $ 171 $ 167
Dollar amount of homes under contract
at period-end (backlog) $ 161,110 $ 185,148 $ 181,838 $ 218,927 $ 180,897 $ 209,522
Homes (units) under contract at
period-end (backlog) 762 893 868 1,072 990 1,248
September 30, September 30,
------------- ------------ ------------- ------------- -------------
1996 1995 1994 1993 1992
------------- ------------ ------------- ------------- -------------
BALANCE SHEET DATA:
Total assets $ 296,343 $ 436,425 $ 583,250 $ 590,995 $ 568,358
========= ========= ========= ========= =========
Debt:
Notes payable $ 73,062 $ 153,957 $ 154,636 $ 121,605 $ 201,191
Senior and subordinated debt 120,262 -- 191,406 194,811 91,663
Liabilities subject to compromise (4) -- 205,264 -- -- --
Collateralized mortgage obligations
and mortgage lines of credit 6,299 28,450 33,836 61,612 97,237
--------- --------- --------- --------- ---------
Total debt $ 199,623 $ 387,671 $ 379,878 $ 378,028 $ 390,091
========= ========= ========= ========= =========
Redeemable preferred stock $ -- $ -- $ -- $ -- $ 2,870
========= ========= ========= ========= =========
Total stockholders' equity (deficit) $ 15,783 $ (22,954) $ 111,820 $ 134,603 $ 124,194
========= ========= ========= ========= =========
</TABLE>
(1) The Company changed its fiscal year-end from December 31 to September 30
in connection with the conversion from partnership to corporate form in
September 1992.
(2) Net loss for the period from November 14, 1995 to September 30, 1996
includes a noncash 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) income for the periods ended September 30, 1995, 1994 and
1992 includes land write-downs of $67.2 million, $24.1 million and $30.7
million, respectively. Net loss for the period
15
<PAGE>
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. Net income for the period ended September 30, 1992 includes
an income tax benefit of $33.5 million.
(3) 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.
(4) 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 on liabilities subject to compromise at September 30,
1995 as a result of the Company's Chapter 11 filing.
16
<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 is liquidating all
remaining assets of its Southeast operations, and management believes that
discussion of such operations is no longer material to obtain an understanding
of the Company's operations.
Revenues
The following table presents comparative fiscal 1996, 1995 and 1994
housing revenues, deliveries and average sales price:
1996 1995 1994
---- ---- ----
Arizona and California:
Family revenue (000s) ............... $ 315,604 $ 294,665 $ 329,979
Retirement revenue (000s) ........... $ 86,229 $ 73,086 $ 92,287
Units delivered ..................... 1,951 1,844 2,262
Average sales price ................. $ 205,963 $ 199,431 $ 186,678
Change from prior year .............. 9.3% (12.9)%
Change due to volume ................ 5.8% (18.5)%
Change due to average sales price ... 3.5% 5.6%
Southeast:
Family revenue (000s) ............... $ 14,625 $ 56,151 $ 59,548
Retirement revenue (000s) ........... $ 621 $ 20,913 $ 26,986
Units delivered ..................... 75 394 451
Average sales price ................. $ 203,280 $ 195,594 $ 191,871
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 was primarily the result of higher sales
prices in California due to changes in the mix of product types sold. The
Company experienced decreases in housing revenues and units closed, and an
increase in average sales prices, during fiscal 1995 as compared to fiscal 1994.
The decrease in units closed was consistent with an overall decrease in closings
for the homebuilding industry, which the Company believes was largely the result
of higher mortgage interest rates during the first six months of fiscal 1995. In
addition, the Company believes that its 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"). The 1995 increases in average sales prices were primarily
due to price increases
17
<PAGE>
implemented in the first quarter of fiscal 1995, the introduction of new,
higher-priced projects in California and changes in the mix of product types
sold.
Net Orders
The following table presents comparative fiscal 1996, 1995 and 1994 net
orders by region (dollars in thousands):
1996 1995 1994
---- ---- ----
Arizona:
Dollars ......................... $268,053 $257,397 $292,951
Units ordered ................... 1,434 1,375 1,656
Average sales price ............. $ 187 $ 187 $ 177
California:
Dollars ......................... $121,175 $103,986 $152,625
Units ordered ................... 463 418 653
Average sales price ............. $ 262 $ 249 $ 234
Southeast:
Dollars ......................... $ 4,445 $ 46,726 $ 94,897
Units ordered ................... 23 241 487
Average sales price ............. $ 193 $ 194 $ 195
Company total:
Dollars ......................... $393,673 $408,109 $540,473
Units ordered ................... 1,920 2,034 2,796
Average sales price ............. $ 205 $ 201 $ 193
Net orders represents the aggregate dollar value and number of homes
for which the Company has received purchase deposits and signed sales contracts
during the period, net of cancellations.
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. The Company experienced decreases in net orders and increases in
average sales prices during fiscal 1995 as compared to fiscal 1994. The decrease
in net orders is consistent with an overall decrease in orders for the
homebuilding industry, which the Company believes was largely the result of
higher mortgage interest rates during the first six months of fiscal 1995.
Additionally, as a result of its Chapter 11 Case, the Company believes that the
decrease was partially attributable to home buyer concerns about the Company's
ability to complete construction of homes and subdivisions in a timely manner
and to honor its post-sale warranty obligations. The
18
<PAGE>
1995 increases in average sales prices in Arizona and California were due to
price increases implemented in the first quarter of fiscal 1995 and the
introduction of new projects in California with higher sales prices, offset by
price reductions implemented in the third fiscal quarter of 1995 to entice
potential home buyers who may have been hesitant to purchase a UDC home because
of the Chapter 11 Case.
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 1996, 1995 and 1994 net sales
backlog by region (dollars in thousands):
1996 1995 1994
---- ---- ----
Arizona:
Dollars ........................ $120,883 $122,296 $123,154
Units in backlog ............... 629 639 649
Average sales price ............ $ 192 $ 191 $ 190
California:
Dollars ........................ $ 40,227 $ 48,813 $ 54,670
Units in backlog ............... 133 177 218
Average sales price ............ $ 302 $ 276 $ 251
Southeast:
Dollars ........................ $ -- $ 10,729 $ 41,103
Units in backlog ............... -- 52 205
Average sales price ............ $ -- $ 206 $ 201
Company total:
Dollars ........................ $161,110 $181,838 $218,927
Units in backlog ............... 762 868 1,072
Average sales price ............ $ 211 $ 209 $ 204
The decrease in backlog at September 30, 1996 resulted from fewer homes
available for sale in California as a result of the Company's inability to
acquire land for homesites during its Chapter 11 Case. The Company experienced
decreases in backlog during fiscal 1995 compared to fiscal 1994 primarily due to
reduced net orders and continued closings of units in backlog. Further,
difficulty in obtaining financing for new construction starts during the Chapter
11 Case delayed construction of many homes, resulting in lower levels of
inventory under construction at September 30, 1995.
19
<PAGE>
Gross Margins, Selling and Administrative Expenses and Interest, Net
The following table presents comparative fiscal 1996, 1995 and 1994
information related to the cost of housing sales, selling and administrative
expenses ("S&A") and interest, net for home building (dollars in thousands):
<TABLE>
<CAPTION>
Years Ending September 30,
-----------------------------------------------------------------------
1996 1995 1994
------------------------ ----------------------- ----------------------
Dollars Percent Dollars Percent Dollars Percent
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Revenue from
housing sales ............................. $ 417,079 100.0 % $ 444,815 100.0 % $ 508,800 100.0 %
Cost of housing sales ....................... 367,896 88.2 404,008 90.8 442,939 87.1
--------- ----- --------- ----- --------- -----
Gross margin ................................ 49,183 11.8 40,807 9.2 65,861 12.9
S&A expenses (including
cost of Company
reorganizations) .......................... 60,232 14.4 69,468 15.6 57,684 11.3
--------- ----- --------- ----- --------- -----
Operating income (loss) from
home building ............................. (11,049) (2.6) (28,661) (6.4) 8,177 1.6
Interest, net ............................... 17,455 4.2 6,161 1.4 (983) (0.2)
--------- ----- --------- ----- --------- -----
Pre-tax (loss) income from
home building ............................. $ (28,504) (6.8)% $ (34,822) (7.8) % $ 9,160 1.8 %
========= ===== ========= ===== ========= =====
</TABLE>
Generally Accepted Accounting Principles require that the purchase
accounting principles of APB No. 16 be applied in the valuation of the
reorganized Company's balance sheet as of the Acquisition Date (the "Opening
Balance Sheet"). APB No. 16 requires that the basis assigned to purchased
inventories include a portion of the profit ("Purchased Profit") which would
otherwise have been recognized upon the closing of the related home sale,
consistent with the concept that the earnings process occurs throughout the
construction process. The further the construction process has been completed on
a given home, the more profit is capitalized in the Opening Balance Sheet.
Accordingly, as a result of the application of purchase accounting margins on
homes held at the Acquisition Date and closed in subsequent fiscal periods will
generally be depressed relative to prior periods and relative to homes not held
at the Acquisition Date and closed later in the fiscal year. Further, all homes
under construction as of the Acquisition Date will generally have margins less
than those on homes on which construction began after the Acquisition Date. The
impact of Purchased Profit on gross margin is partially offset by the
elimination of capitalized interest in inventory in the Opening Balance Sheet as
well as by less interest being capitalized as a result of the change in the
Company's method of applying the capitalization of interest principles of SFAS
No. 34 to housing inventory discussed in Note 12 to the accompanying financial
statements.
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, which resulted in lower land
basis and higher gross margins, and the effect of
20
<PAGE>
reduced interest capitalization and corresponding absorption. These higher gross
margins were offset by the amortization of approximately $11.2 million of
Purchased Profit. Gross margins before housing land write-downs decreased during
fiscal 1995 as compared to fiscal 1994 largely due to the spreading of interest
and other fixed indirect construction costs over a reduced number of home
closings, price reductions implemented to close a number of homes in
substantially complete but unsold inventory and price reductions implemented to
entice potential home buyers who may have been hesitant to purchase a UDC home
because of the Chapter 11 Case. The decline in gross margin percentage also was
due in part to excessive warranty costs, which the Company believes resulted
from numerous requests for warranty work from homeowners concerned about the
Company's ability to meet its future warranty obligations as a result of the
Chapter 11 Case and, in one southern California division, defective materials
supplied by certain subcontractors.
The following table presents selling and administrative expenses
(dollars in thousands):
<TABLE>
<CAPTION>
Years ended September 30,
----------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Selling and administrative expenses:
Variable components ........................ $ 16,468 $ 19,253 $21,283
Fixed components ........................... 30,138 34,777 36,401
Cost of company reorganizations ............ 13,626 15,438 --
--------- --------- -------
Total selling and administrative expenses ..... $ 60,232 $ 69,468 $57,684
========= ========= =======
As a percentage of revenues from housing sales:
Variable components ........................ 4.0% 4.4% 4.2%
Fixed components ........................... 7.2 7.8 7.1
Cost of company reorganizations ............ 3.2 3.4 0.0
--------- --------- -------
Total selling and administrative expenses ..... 14.4% 15.6% 11.3%
========= ========= =======
</TABLE>
The variable component of selling and administrative expenses includes
sales commissions, model furniture amortization and closing costs. Variable
selling and administrative expenses as a percentage of housing sales decreased
in fiscal 1996 as compared to fiscal 1995 due to a decrease in sales commissions
paid to third party sales agents. Variable selling and administrative expenses
as a percentage of housing sales increased in fiscal 1995 as compared to fiscal
1994 due to higher average sales commissions resulting from changes in the mix
of product types sold and increased sales 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 decreased in
fiscal 1996 as compared to fiscal 1995 primarily due to
21
<PAGE>
reductions in salaries and advertising expenses arising from the Company's
continuing efforts to reduce costs partially offset by goodwill amortization.
Additionally, valuation adjustments were recorded on certain assets of the
Company based on purchase accounting principles resulting in a reduction in
amortization of these assets. Fixed selling and administrative expenses
decreased in fiscal 1995 as compared to fiscal 1994 primarily due to reductions
in salaries, legal and other miscellaneous expenses arising from the Company's
efforts to reduce costs.
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. Accordingly, total interest incurred by the
Company's home building operations was $31,035,000, $34,041,000 and $36,335,000
in fiscal 1996, 1995 and 1994, respectively. Interest, net for home building,
was $17,455,000, $6,161,000 and $(983,000) in fiscal 1996, 1995 and 1994,
respectively. Interest incurred decreased in fiscal 1996 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, including: (1) 1996 operating losses, which losses are
anticipated to continue into fiscal 1997; (2) the Company's overhead structure,
which will require an expansion of current volume in order to generate adequate
operating margins; (3) lenders' waivers of covenant violations which have been
required due to the Company's inability to meet operating projections; and (4)
additional capital contributions required in fiscal 1996 and anticipated to be
required in fiscal 1997 in order for the Company to have adequate liquidity.
Based on this review, management 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 is 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
write-downs included the immediate amortization of all deferred costs associated
with the Company's Southeast operations. In addition, based on new information,
the Company revised downward its estimate of proceeds to be received from
certain parcels
22
<PAGE>
identified for sale in fiscal 1994 based on efforts to accelerate the sale of
those parcels and the effect of the Chapter 11 Case on offers received. 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
The Company's mortgage banking operations are conducted through its
wholly-owned subsidiary UDC Mortgage. The following table presents operating
information for the Company's mortgage banking operations (excluding finance
operations) (dollars in thousands):
1996 1995 1994
---- ---- ----
Number of loans originated .................... 895 725 1,127
Revenues ...................................... $ 2,665 $ 1,764 $ 3,185
General and administrative expenses ........... 1,840 2,193 2,827
-------- -------- ---------
Operating income from mortgage banking ........ 825 (429) 358
Interest - net ................................ (233) (65) (234)
-------- -------- ---------
Pre-tax profit from mortgage banking .......... $ 1,058 $ (364) $ 592
======== ======== =========
Revenues from mortgage banking increased in fiscal 1996 primarily as a
result of higher servicing release premiums received on the sale of servicing
and an increase in mortgage originations related to the increase 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's goodwill based on purchase accounting principles resulting in a
reduction in amortization expense and additionally, a reduction in legal fees
paid. These decreases 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. Revenues and
general and administrative expenses from mortgage banking decreased in fiscal
1995 compared to fiscal 1994 primarily as a result of the adverse impact the
Company's Chapter 11 Case had on unit closings.
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.
In fiscal 1996 and on November 7, 1996, the Company completed asset
sale transactions
23
<PAGE>
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 assets the Company
had previously designated as land held for sale. Proceeds from the sales were
used to retire four of the Company's term facilities, reduce the loan-to-value
ratio to 60% on one other term facility, and reduce the outstanding balance on
the Company's principle revolving facility. These sales also created additional
acquisition and development fund availability under the Company's principle
revolving credit facility. The Company has entered into a management agreement
with the DMB/AEW affiliate pursuant to which the Company will receive a fixed
monthly fee for the management and marketing of the assets to third party
buyers. To the extent the cash proceeds from the sale of the property to a third
party exceeds certain thresholds, the Company will participate in excess
profits.
At September 30, 1996, the Company finances its home building, land
development and mortgage operations as discussed below:
Construction and Acquisition and Development Financing - The Company's
largest credit facility is a $150 million revolving facility with a group of
banks. The 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 a maximum of $37.5 million. The facility
accrues interest at prime plus 1% or, at the Company's option, LIBOR plus 3.25%,
payable monthly, and requires payment of 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 facility is
secured by portions of the Company's housing inventory and land held for
development and matures on March 31, 1999. At September 30, 1996, $34.2 million
was outstanding under the facility.
Additionally, the Company has a $23.3 million revolving construction
and A&D facility for Westbrook Village ("WBV"). The WBV facility includes a
$12.5 million construction facility and a $10.8 million A&D facility. These
facilities accrue interest at prime plus 1.5%, payable monthly, require payment
of a commitment fee of 1% per annum and are secured by WBV housing inventory and
land held for development. The A&D facility matures on July 1, 1997, and the
construction facility matures on January 1, 1998. At September 30, 1996, $4.3
million was outstanding under the construction facility and no amounts were
outstanding under the A&D facility.
The construction and A& D facilities described above contain various
covenants, including but not limited to, covenants regarding: (i) encumbrances;
(ii) minimum available liquidity; (iii) maximum total debt to tangible net
worth; (iv) minimum tangible net worth; (v) minimum cumulative net cash flow to
total debt service; (vi) minimum ratio of earnings before interest, taxes,
depreciation and amortization ("EBITDA") to interest paid; (vii) restrictions on
mergers, consolidations and acquisitions; (viii) restrictions on asset sales;
and (ix) restrictions on incurrence of additional indebtedness. Among other
things, such covenants may limit the Company's ability to obtain additional
financing when needed and on terms acceptable to the Company. Further, the
availability of funds under the revolving facilities is
24
<PAGE>
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.
As a result of applying purchase accounting at the Acquisition Date,
costs in excess of amounts allocable to identifiable assets was determined to be
an amount greater than contemplated under the debt covenants which were
negotiated prior to the determination of such amounts. As a result, as of the
Acquisition Date and subsequent thereto, the Company was in violation of the
tangible net worth and debt to tangible net worth covenants. Additionally, the
Company was in violation of certain minimum available liquidity covenants from
February 21, 1996 through March 14, 1996. In response, the Company and the
lenders agreed to a waiver of the violations and a modification of the debt
covenants, and on March 15, 1996, DMB invested $10 million in the Company in
exchange for 14.5% Series D Subordinated Notes. In addition, at September 30,
1996, the Company was in violation of the tangible net worth, debt to tangible
net worth, cumulative net cash flow to debt service and EBITDA to interest paid
covenants. On December 23, 1996, waivers of the covenant violations were
obtained.
Other Secured Borrowings - In addition to the credit facilities
described above, the Company has various notes outstanding collateralized
primarily by land held for development. The notes bear interest at rates ranging
from 9.5% to 15% and are due at various dates. At September 30, 1996, $34.6
million was outstanding under these notes.
Senior Unsecured Notes - On the Acquisition Date, the Company issued
Series A Senior Notes in a principal amount of $60 million and Series B Senior
Notes in a principal amount of $10 million. Interest on the Senior Notes accrues
at a rate of 12.5% per annum, commencing September 1, 1995, and is payable
semi-annually beginning May 1, 1996. 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 new construction and acquisition and development
financing. 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 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 beginning November 1, 1996. The Series C
Subordinated Notes mature November 1, 2000. The payment of interest in cash on
the Series C Subordinated Notes is restricted by certain limitations related to
the Company's construction and acquisition and development financing. On May 6,
1996, Eastrich No. 184, LLC acquired $15 million of the Series C Subordinated
Notes from DMB. The November 1, 1996 payment of interest was paid in-kind in
additional Series C Subordinated Notes.
25
<PAGE>
On March 15, 1996, DMB invested $10 million in the Company in exchange
for $10 million Series D Subordinated Notes. The terms for the Series D
Subordinated Notes are identical to the terms for 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. The November 1, 1996 payment of interest was paid in-kind in
additional Series D Subordinated Notes.
Common Stock - In connection with the consummation of the 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 notified DMB that it elected to exercise the option, and the
purchase by Eastrich No. 184, LLC (as to all interests except the WBV interest)
and Eastrich No. 185, LLC (as to the WBV interest), as assignees of AEW,
pursuant to the exercise of the option was completed on May 6, 1996.
Mortgage Debt - The Company finances its mortgage operations with a $10
million committed revolving credit facility which matures on August 30, 1997.
This facility is secured by residential mortgages originated in the closing of
the Company's residential home sales. At September 30, 1996, $6.3 million was
outstanding under the facility.
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
active adult 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.
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.
26
<PAGE>
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 effect of interest
rates on demand for the Company's homes, 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.
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:
<TABLE>
<CAPTION>
Page Number
-----------
UDC HOMES, INC. AND SUBSIDIARIES
<S> <C>
Reports of Independent Public Accountants..................................................F - 1, F-1a
Consolidated Balance Sheets as of September 30, 1996 and 1995....................................F - 2
Consolidated Statements of Operations for the Periods Ended
September 30, 1996, November 13, 1995, September 30, 1995 and 1994.............................F - 3
Consolidated Statements of Changes in Stockholders' Equity (Deficit)
for the Periods Ended September 30, 1996, November 13, 1995,
September 30, 1995 and 1994....................................................................F - 4
Consolidated Statements of Cash Flows for the Periods Ended
September 30, 1996, November 13, 1995, September 30, 1995 and 1994.............................F - 5
Notes to Consolidated Financial Statements.......................................................F - 6
</TABLE>
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.
27
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
UDC Homes, Inc.
Tempe, Arizona
We have audited the accompanying consolidated balance sheet of UDC Homes, Inc.
and subsidiaries as of September 30, 1996, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the period
from November 14, (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 of 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 at September 30, 1996, and the results of their operations
and their cash flows for the period of 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
October 1, 1995 through November 13, 1995 in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
Phoenix, Arizona
December 23, 1996
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To UDC Homes, Inc.:
We have audited the accompanying consolidated balance sheet of UDC Homes, Inc.
(a Delaware corporation) and subsidiaries as of September 30, 1995, and the
related consolidated statements of operations, changes in stockholders' equity
(deficit) and cash flows for the two years in the period ended September 30,
1995. 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 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 accompanying September 30, 1995, consolidated balance sheet.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of UDC Homes, Inc. and
subsidiaries as of September 30, 1995, and the results of their operations and
their cash flows for the two years in the period 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, 1996 AND 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Successor Predecessor
Company Company
----------- -----------
ASSETS 1996 1995
----------- -----------
(In thousands)
<S> <C> <C>
HOMEBUILDING:
Cash and cash equivalents $ 2,782 $ 4,591
Receivables 985 4,193
Housing inventory 116,555 142,947
Land inventory 115,286 179,476
Land held for sale 28,332 48,603
Property and equipment - net 13,216 11,286
Investments in and receivables from unconsolidated affiliated partnerships -- 5,213
Goodwill 3,545 --
Other assets 4,497 9,215
--------- ---------
Total homebuilding assets 285,198 405,524
--------- ---------
MORTGAGE BANKING:
Residential mortgages 10,248 11,951
Mortgage-backed securities -- 17,415
Other assets 897 1,535
--------- ---------
Total mortgage assets 11,145 30,901
--------- ---------
TOTAL $ 296,343 $ 436,425
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
HOMEBUILDING:
Accounts payable $ 35,079 $ 35,179
Accrued interest 17,478 23,863
Accrued liabilities and expenses 23,624 7,657
Notes payable 73,062 153,957
Senior unsecured notes payable 70,000 --
Subordinated notes payable ($44,628 due to related parties) 50,262 --
--------- ---------
Total homebuilding liabilities 269,505 220,656
--------- ---------
MORTGAGE BANKING:
Mortgage line of credit 6,299 11,389
Collateralized mortgage obligations -- 17,061
Accrued liabilities and expenses 308 366
--------- ---------
Total mortgage liabilities 6,607 28,816
--------- ---------
Total liabilities not subject to compromise 276,112 249,472
--------- ---------
LIABILITIES SUBJECT TO COMPROMISE -- 205,264
--------- ---------
Total liabilities 276,112 454,736
--------- ---------
MINORITY INTERESTS 4,448 4,643
--------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, $.01 par value - authorized, 1,000 shares; issued and
outstanding at September 30, 1996 -- --
Predecessor preferred stock -- 100
Predecessor common stock, authorized, 50,000,000 shares; issued and
outstanding, 11,392,059 at September 30, 1995 -- 114
Additional paid-in capital 78,000 118,390
Accumulated deficit (62,217) (141,558)
--------- ---------
Total stockholders' equity (deficit) 15,783 (22,954)
--------- ---------
TOTAL $ 296,343 $ 436,425
========= =========
</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
-------------- ----------------------------------------------
Period Period Twelve Twelve
from from Month Month
November 14, October 1, Period Period
1995 to to Ended Ended
September 30, November 13, September 30, September 30,
1996 1995 1995 1994
-------------- -------------- --------------- -------------
(In thousands)
<S> <C> <C> <C> <C>
REVENUES:
Housing sales $ 387,455 $ 29,624 $ 444,815 $ 508,800
Mortgage and finance operations 3,042 305 2,154 3,981
Other -- -- 1,026 1,370
--------- --------- --------- ---------
Total revenues 390,497 29,929 447,995 514,151
--------- --------- --------- ---------
COSTS AND EXPENSES:
Homebuilding:
Cost of housing sales 340,626 27,270 404,008 442,939
Selling and administrative expenses 41,637 4,969 54,030 57,684
Loss from asset impairment 42,815 -- 67,177 17,099
Interest - net 16,887 568 6,161 (983)
Other 971 35 6,176 5,111
Mortgage and finance operations:
General and administrative expenses 2,037 277 2,602 3,048
Interest - net (6) -- 135 134
Equity in losses of unconsolidated
partnerships 1,172 -- 223 8,502
Cost of company reorganizations 6,575 7,051 15,438 --
--------- --------- --------- ---------
Total costs and expenses 452,714 40,170 555,950 533,534
--------- --------- --------- ---------
LOSS BEFORE INCOME TAXES
AND EXTRAORDINARY ITEMS (62,217) (10,241) (107,955) (19,383)
INCOME TAXES -- -- 26,819 3,400
--------- --------- --------- ---------
LOSS BEFORE EXTRAORDINARY
ITEMS (62,217) (10,241) (134,774) (22,783)
EXTRAORDINARY ITEMS:
Gain on debt discharge -- 50,264 -- --
Fresh start reporting adjustment -- (14,069) -- --
--------- --------- --------- ---------
NET (LOSS) INCOME $ (62,217) $ 25,954 $(134,774) $ (22,783)
========= ========= ========= =========
</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>
PREDECESSOR COMPANY
BALANCE, OCTOBER 1, 1993 $ 83 $ 114 $ 106,369 $ 28,037 $ 134,603
Preferred stock in-kind dividends 11 -- 10,281 (10,292) --
Net loss -- -- -- (22,783) (22,783)
--------- --------- --------- --------- ---------
BALANCE, SEPTEMBER 30, 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
========= ========= ========= ========= =========
</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
------------- -----------------------------------------
Period Period Twelve Twelve
from from Month Month
November 14, October 1, Period Period
1995 to to Ended Ended
September 30, November 13, September 30, September 30,
1996 1995 1995 1994
------------- ------------ ------------- -------------
(In thousands)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net (loss) income $ (62,217) $ 25,954 $(134,774) $ (22,783)
Adjustments to reconcile net (loss) income to net cash
provided by (used in) operating activities:
Depreciation and amortization 5,810 536 7,274 7,405
Fresh start reporting adjustment -- 14,069 -- --
Gain on debt discharge -- (50,264) -- --
Equity in losses of unconsolidated affiliated partnerships 1,172 -- 223 8,502
Loss from asset impairment 42,815 -- 67,177 17,099
Income taxes -- -- 26,772 3,400
Changes in assets and liabilities:
Receivables 2,884 259 1,070 4,872
Other assets 517 (1,015) 1,233 3,437
Housing inventory 17,690 10,890 146,848 40,188
Land inventory and land held for sale 42,634 4,328 (112,517) (107,278)
Receivables from affiliated partnerships 3,081 95 22,571 7,725
Accounts payable 2,863 (2,963) (28,363) 11,042
Accrued liabilities and expenses (9,021) 4,655 24,117 2,146
--------- --------- --------- ---------
Net cash provided by (used in) operating activities 48,228 6,544 21,631 (24,245)
--------- --------- --------- ---------
INVESTING ACTIVITIES:
Decrease in mortgage-backed securities 12,728 6,390 4,898 26,872
Net additions to property and equipment (7,243) 13 (2,404) (3,977)
--------- --------- --------- ---------
Net cash provided by investing activities 5,485 6,403 2,494 22,895
--------- --------- --------- ---------
FINANCING ACTIVITIES:
(Decrease) increase in notes payable to financial institutions (75,088) (11,492) (12,299) 33,031
Proceeds from issuance of subordinated notes 15,262 30,000 -- --
Proceeds from issuance of common stock -- 78,000 -- --
Payment of liabilities subject to compromise -- (83,000) (3,000) (4,000)
Payments on collateralized mortgage obligations (16,814) (247) (3,592) (17,862)
Decrease in mortgage line of credit 709 (5,799) (1,794) (9,914)
--------- --------- --------- ---------
Net cash (used in) provided by financing activities (75,931) 7,462 (20,685) 1,255
--------- --------- --------- ---------
NET (DECREASE) INCREASE IN CASH (22,218) 20,409 3,440 (95)
CASH, BEGINNING OF PERIOD 25,000 4,591 1,151 1,246
--------- --------- --------- ---------
CASH, END OF PERIOD $ 2,782 $ 25,000 $ 4,591 $ 1,151
========= ========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION - Cash paid for interest, net of amounts
capitalized $ 8,171 $ 254 $ 5,221 $ 2,755
========= ========= ========= =========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Additional debt and land inventory due to consolidation
of partnership $ 7,067 $ -- $ -- $ --
========= ========= ========= =========
See Note 2 for a discussion of the Company's
reorganization under Chapter 11
</TABLE>
See notes to consolidated financial statements.
F - 5
<PAGE>
UDC HOMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIODS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
On May 17, 1995, UDC Homes, Inc. (the "Predecessor Company") filed a
voluntary petition for reorganization under Chapter 11 of the United
States Bankruptcy Code (the "Bankruptcy Proceedings"). On October 3, 1995,
the Predecessor Company's reorganization plan, as amended (the
"Reorganization Plan"), was approved by the United States Bankruptcy
Court. Under the Reorganization Plan, 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 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 years ended
September 30, 1994 and 1995 are those previously issued by the Predecessor
Company.
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 or is currently marketing
its Southeast assets. The percentage of housing revenues in each of these
geographic regions was as follows:
1996 1995 1994
Arizona 65% 58% 54%
California 31% 25% 29%
Southeast 4% 17% 17%
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 affiliated partnerships 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 property taxes) for homes under
construction. The 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.
F-6
<PAGE>
c. Land Inventory - Land acquisition, land development and other costs
(principally capitalized interest and property taxes) 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 (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. Assets Held for Sale - Properties which are currently marketed for
sale have been segregated on the accompanying consolidated balance
sheets as assets 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.
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. 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. 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 the 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 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 in accordance with SFAS Nos. 65 and 91.
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. Adoption of 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
F-7
<PAGE>
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. Reclassifications - Certain reclassifications have been made to the
1995 and 1994 amounts in the consolidated financial statements to
conform to the 1996 presentation.
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 has 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 are
segregated on the September 30, 1995 consolidated balance sheet and are
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.
F-8
<PAGE>
Liabilities subject to compromise consisted of the following at September
30:
1995
(In thousands)
Senior notes $ 168,000
Convertible subordinated notes 20,406
Accrued interest 16,858
----------
Total $ 205,264
==========
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 has been 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 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 reorganizations 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, 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, accrued liabilities and expenses and mortgage
lines of credit approximate fair values due to the short-term maturities
of these instruments.
F-9
<PAGE>
Residential mortgages and mortgage-backed securities are stated at the
lower of cost or market which approximates fair value.
At September 30, 1996, the carrying amounts of the other notes payable
approximate fair value because the majority of the notes payable have
variable interest rates based on the prime rate.
At September 30, 1996, the estimated fair value of the senior and
subordinated notes payable was $106,208,000.
4. DEBT
At September 30, notes payable consisted of the following:
1996 1995
(In thousands)
Revolving credit facility $ 34,165 $ --
Westbrook Village facility 4,266 --
Transoccidental note 13,011 --
Other 21,620 --
Debtor-in-possession notes payable -- 101,362
Pre-petition notes payable -- 52,595
--------- ----------
Total notes payable $ 73,062 $ 153,957
========= ==========
Revolving Credit Facility - The Company's largest credit facility is a
$150,000,000 revolving facility with a group of banks. The facility is
available for both construction and acquisition and development ("A&D")
activities in Arizona and California, with the amount available for A&D
activities limited to a maximum of $37,500,000. Interest is due monthly at
prime (8.25% at September 30, 1996) plus 1% or, at the Company's option,
LIBOR (5.4% at September 30, 1996) plus 3.25% and requires payment of 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. At September 30, 1996, the unused portion
of the credit facility was approximately $35,458,000 based on availability
under the borrowing base. The facility is secured by portions of the
Company's housing inventory and property in course of development and
matures on March 31, 1999.
Westbrook Village Facility - The Company has a $23,300,000 construction
and A&D facility consisting of a $12,500,000 construction facility and a
$10,800,000 A&D facility for Westbrook Village ("WBV"). Interest is due
monthly at prime (8.25% at September 30, 1996) plus 1.5% and requires
payment of a commitment fee of 1% per annum. The facilities are secured by
WBV housing inventory and land held for development. At September 30,
1996, there was no additional availability for these facilities under the
borrowing base. The A&D facility matures on July 1, 1997, and the
construction facility matures on January 1, 1998.
The construction and A&D facilities described above contain various
covenants, including but not limited to, covenants regarding: (i)
encumbrances; (ii) minimum available liquidity; (iii) maximum total debt
to tangible net worth; (iv) minimum tangible net worth; (v) minimum
cumulative net cash flow to total debt service; (vi) minimum ratio of
EBITDA to interest paid; (vii) restrictions on mergers, consolidations and
acquisitions; (viii) restrictions on asset sales; and (ix) restrictions on
incurrence of additional indebtedness. Among other things, such covenants
may limit the Company's ability to obtain additional financing when needed
and on terms acceptable to the Company.
F-10
<PAGE>
As result of applying purchase accounting at the Acquisition Date, costs
in excess of amounts allocable to identifiable assets was determined to be
an amount greater than contemplated under the debt covenants which were
negotiated prior to the determination of such amounts. As a result, as of
the Acquisition Date and subsequent thereto, the Company was in violation
of the tangible net worth and debt to tangible net worth covenants and
certain minimum available liquidity covenants from February 21, 1996
through March 14, 1996. In response, the Company and the lenders agreed to
a waiver of the violations and a modification of the debt covenants, and
on March 15, 1996, DMB invested $10,000,000 in the Company in exchange for
a 14.5% Series D Subordinated Notes. In addition, at September 30, 1996,
the Company was in violation of the tangible net worth, debt to tangible
net worth, cumulative net cash flow to debt service and EBITDA to interest
paid covenants. On December 23, 1996, waivers of the covenant violations
were obtained.
The Transoccidental Note represents a mortgage note related to a
development in Phoenix. Such note bears interest at 10.25% due quarterly
plus a profit participation based upon revenues in excess of defined costs
and is due through 2002.
Other Secured Borrowings - In addition to the credit facilities described
above, the Company has various notes outstanding, collateralized primarily
by land held for development. The notes bear interest at rates ranging
from 9.5% to 15% and are due at various dates through 2001.
Senior Unsecured Notes - On the Acquisition Date, the Company issued
Series A Senior Notes in a principal amount of $60,000,000 and Series B
Senior Notes in a principal amount of $10,000,000 (collectively, the
"Senior Notes"). Interest on the Senior Notes accrues at a rate of 12.5%
per annum, commencing September 1, 1995, and is payable semi-annually
beginning May 1, 1996. The 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 $10,000,000, subject to certain limitations
related to the Company's construction and acquisition and development
financing. 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 - At September 30, 1996 subordinated notes consist of
the following:
(In thousands)
Series C Subordinated Notes $ 35,000
Series D Subordinated Notes 10,000
Interest to be paid-in-kind 5,262
---------
Total $ 50,262
=========
On the Acquisition Date, the Company issued Series C Subordinated Notes in
a principal amount of $35,000,000. Interest on the Series C Subordinated
Notes accrues at the rate of 14.5% per annum and is payable semi-annually
beginning November 1, 1996. The Series C Subordinated Notes mature
November 1, 2000. The payment of interest in cash on the Series C
Subordinated Notes is restricted by certain limitations related to the
Company's construction and acquisition and development financing. The
November 1, 1996 payment of interest was paid in-kind in additional Series
C Subordinated Notes.
On March 15, 1996, DMB invested $10,000,000 in the Company in exchange for
a $10,000,000 principal amount Series D Subordinated Notes. The terms for
the Series D Subordinated Notes are identical to the terms for 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. The November 1, 1996 payment of interest was paid
in-kind in additional Series D Subordinated Notes.
F-11
<PAGE>
The mortgage line of credit ("MLC") consists of a $10,000,000 revolving
credit facility ($6,299,000 outstanding at September 30, 1996) with
interest at prime (8.25% at September 30, 1996) plus .25%. The MLC is
secured by residential mortgages receivable originated in the closing of
the Company's residential home sales and matures on August 31, 1997. In
December 1996, the Company entered into a joint venture agreement with
Norwest Mortgage whereby the joint venture will provide mortgage services
to the Company's home buyers. The joint venture is expected to be
operational by February 1997. Collateralized mortgage obligations ("CMOs")
are collateralized by mortgage-backed securities issued by FNMA, GNMA and
FHLMC and residential mortgages receivable. During fiscal 1996, the
Company sold its remaining interests in the CMOs for a loss of
approximately $200,000.
Debt maturities for the five years ending September 30 are as follows:
(In thousands)
1997 $ 71,019
1998 3,178
1999 276
2000 70,276
2001 50,848
Thereafter 4,026
----------
Total $ 199,623
==========
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 is 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 and 1994 - 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
F-12
<PAGE>
ended September 30, 1995 resulting from such write-downs was $67,177,000.
In 1994, the Predecessor Company elected to market for sale certain
non-residential properties which had previously been held for future
development in the normal course of business. As a result, the Predecessor
Company wrote down the properties to their net realizable value and
recorded losses of $17,099,000 and an additional $6,974,000 on investments
in partnerships.
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 or abandon assets if such options were not
exercised.
The Company is obligated under various operating leases through 2007.
Total rental expense under such operating leases was $1,200,000,
$1,200,000 and $1,400,000 in fiscal 1996, 1995 and 1994, respectively.
Included in rental expense in fiscal 1996, 1995 and 1994 is $593,000,
$551,000 and $658,000, respectively, paid to entities among whose
principals were certain former officers of the Company.
Aggregate minimum rentals under noncancellable operating leases for the
next five years ending September 30 are as follows:
(In thousands)
1997 $ 1,006
1998 959
1999 861
2000 627
2001 550
During 1995, three lawsuits were filed against certain former officers and
directors of the Predecessor Company alleging violation of securities
laws, fraud and negligence. These former directors and officers may be
entitled to indemnification by the Company. A settlement has been
proposed, which has received preliminary approval from the Arizona
Superior Court, under which the Company is 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 several lawsuits that arise from or are
related to the conduct of the Company's business. The Company does not
believe that the ultimate resolution of these cases will materially effect
the financial position, results of operations or cash flows of the
Company.
Minority interest at September 30, 1996 includes $1,270,000 that will be
payable to the Predecessor Company's former chairman in connection with
the acquisition of his 1% profit interest in a fully consolidated joint
venture.
F-13
<PAGE>
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 1996 are as follows:
1. Prior to its acquisition by DMB, the Company had option agreements
with DMB under which the Company acquires lots in certain of its
subdivisions. During 1996, the Company paid DMB $9,780,000 under
such options. Further, DMB paid the Company $2,727,400 during fiscal
1996 for infrastructure and other work on property subject to option
agreements. The Company believes that lot prices under these
agreements approximated fair value at the date the agreements were
entered into.
2. During fiscal 1996 and on November 7, 1996, a partnership between
DMB and AEW ("DMB/AEW Partnership") acquired approximately
$28,607,000 and $25,519,000, respectively, of land at the Company's
cost, which is believed to approximate the fair value of such land.
The Company continues to market the land purchased by the DMB/AEW
Partnership in exchange for a $150,000 management fee and
commissions. To the extent the cash proceeds from the sale of the
property to a third party exceeds certain thresholds, the Company
will participate in excess profits. Additionally, the Company will
receive additional proceeds from a parcel of such land if certain
lot zoning changes can be obtained.
3. At September 30, 1996 AEW and DMB each owned $15,000,000 and
$5,000,000 principal amount of the Series C and Series D
Subordinated Notes, respectively. Interest expense of $4,628,000 on
the Subordinated Notes held by AEW and DMB was recorded in fiscal
1996. Subsequent to September 30, 1996, DMB acquired an additional
$2,000,000 principal amount of Series C Subordinated Notes.
4. An affiliate of DMB and AEW owns 25% of Westbrook Village Venture
one of the Company's Arizona retirement operations.
Other - At September 30, 1994, the Predecessor Company was owed $4,400,000
by UDC Key Employee Investment Limited Partnership ("UDC KEILP"). The
funds were advanced by the Predecessor Company and used by UDC KEILP to
make principal and interest payments on bank debt incurred to purchase
shares of the Predecessor Company's Common Stock in 1988 from the
Predecessor Company's former Chairman. The shares were held by UDC KEILP
as an incentive for certain executive officers of the Company, the limited
partners of UDC KEILP, to remain in the employ of the Predecessor Company.
The advances were to be repaid from the proceeds to be received from the
eventual sale of the shares of Common Stock, after repayment of the bank
debt for which such shares served as collateral. As a result of the
significant decline in the market price of the Predecessor Company's
Common Stock in 1994, the Predecessor Company recorded a reserve of
approximately $4,600,000 in 1994 to reduce the carrying amount of its
receivable from UDC KEILP to the amount the Predecessor Company believed
would be due the bank if the shares were sold at then-current prices and
used to partially repay debt of UDC KEILP which was guaranteed by the
Predecessor Company. In 1995, as a result of the Predecessor Company's
Chapter 11 filing and imminent cancellation of its Common Stock without
payment of any consideration, the Predecessor Company recorded an
additional reserve of approximately $838,000. The amounts are included in
other expenses in the accompanying consolidated statements of operations.
As part of the Plan, the Predecessor Company repaid the bank debt of UDC
KEILP.
F-14
<PAGE>
8. RECEIVABLES
Receivables consist of the following at September 30:
1996 1995
------- -------
(In thousands)
Notes receivable - employees $ -- $ 584
Notes receivable - other 940 727
Escrow funds due from home sales 45 2,882
------ ------
Total $ 985 $4,193
====== ======
9. PROPERTY AND EQUIPMENT
Property and equipment are as follows at September 30:
1996 1995
------- -------
(In thousands)
Model furnishings and sales offices $ 8,521 $15,064
Golf courses 3,823 30
Office furniture and equipment 907 3,893
Sewer plant 2,930 3,036
Other 29 386
------- -------
Total 16,210 22,409
Less accumulated depreciation 2,994 11,123
------- -------
Property and equipment - net $13,216 $11,286
======= =======
10. ACCURED LIABILITIES AND EXPENSES
Accrued liabilities and expenses consist of the following at September 30:
1996 1995
-------- --------
(In thousands)
Accrued compensation $ 6,531 $ 1,231
Accrued warranty 6,507 1,984
Restructuring reserves 6,050 --
Other 4,536 4,442
-------- -------
Total $23,624 $ 7,657
======= =======
At September 30, 1996 accrued compensation includes severance accruals and
restructuring reserves include fees from the bankruptcy proceedings and
costs to exit the southeast market.
F-15
<PAGE>
11. INCOME TAXES
The components of deferred taxes are as follows at September 30:
<TABLE>
<CAPTION>
1996 1995
---------------------
(In thousands)
<S> <C> <C>
Differences between financial reporting and tax basis of housing
and land inventories $ 39,797 $ 24,797
Differences between financial reporting and tax basis in
affiliated land bank partnerships 6,315 13,774
Net operating loss carryforward 32,991 24,004
Other - net 7,453 2,836
-------- --------
Total 86,556 65,411
Valuation allowance (86,556) (65,411)
-------- --------
Total deferred taxes $ -- $ --
======== ========
</TABLE>
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 $162
million.
The Company has approximately $83 million of net operating loss carryovers
at September 30, 1996 (including approximately $30 million subject to the
limitation described above).
The following table summarizes the approximate carryovers and built-in
losses, and their expiration dates:
Year of
(In thousands) Expiration
Pre-change net operating loss $ 30,000 2007 - 2011
Post-change net operating loss $ 53,000 2011
Net built-in loss $132,000 2011 - 2015
F-16
<PAGE>
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>
1996 1995 1994
-------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Computed income tax benefit at statutory rate $(12,692) $(36,705) $ (6,590)
State income tax benefit (1,741) (6,369) (1,144)
Fresh start accounting adjustment and
reorganization costs (14,437) -- --
Goodwill amortization and write-off 4,873 -- --
Other 2,852 -- --
Increase in deferred tax asset valuation allowance 21,145 69,893 11,134
-------- -------- --------
Total taxes $ -- $ 26,819 $ 3,400
======== ======== ========
</TABLE>
12. HOUSING INTEREST
Property taxes and housing interest incurred are capitalized and expensed
through cost of housing sales, as they relate to housing and land
inventories. The components of housing interest are as follows for the
years ended September 30:
<TABLE>
<CAPTION>
The
Company Predecessor Company
--------- ----------------------------------
1996 1996 1995 1994
--------- ----------- ----------- -----------
(In thousands)
<S> <C> <C> <C> <C>
Interest costs incurred $ 27,856 $ 3,179 $ 34,041 $ 36,335
Less interest capitalized (9,845) (2,473) (26,846) (36,335)
-------- -------- -------- --------
Interest expensed $ 18,011 $ 706 $ 7,195 $ --
======== ======== ======== ========
Amortization of capitalized interest
included in cost of sales $ 5,461 $ 1,117 $ 28,550 $ 28,371
======== ======== ======== ========
Interest income $ 1,124 $ 138 $ 1,034 $ 983
======== ======== ======== ========
</TABLE>
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.
F-17
<PAGE>
13. 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 $285,000, $284,000 and
$335,000 in the years ended September 30, 1996, 1995 and 1994,
respectively.
Profit Sharing Plan - All full-time employees of the Company are eligible
to participate in a qualified trusteed profit sharing plan. Contributions
to the plan, which are related to the prior year, are made at the
discretion of the Company's board of directors and amounted to $0,
$227,000 and $300,000 for the years ended September 30, 1996, 1995 and
1994, respectively. Effective January 1, 1997, this plan will be
consolidated with the Employees Savings and Investment Plan.
14. QUARTERLY RESULTS OF OPERATIONS (Unaudited)
The unaudited quarterly results of operations are as follows for the years
ended September 30, 1996 and 1995:
<TABLE>
<CAPTION>
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 2,914 8,229 13,410 22,276
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)
Predecessor Company
-----------------------------------------------------------
Quarter Ended
-----------------------------------------------------------
December 31, March 31, June 30, September 30,
------------- ----------- ---------- -------------
(In thousands)
Year ended September 30, 1995:
Housing sales $ 112,394 $ 98,874 $ 111,984 $ 121,563
Gross margin 14,378 9,397 8,153 8,879
Net loss (129) (94,659)(3) (13,034) (26,952)
</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).
(3) See Note 11 for an explanation of a write-off of the Company's net
deferred tax asset.
* * * * * *
F-18
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
- ------- ---------------------------------------------------------------
Financial Disclosure
--------------------
On September 3, 1996, the Company dismissed its former independent
accountants, Arthur Andersen LLP ("Andersen") and engaged Deloitte & Touche LLP,
as independent accountants.
The reports of Andersen on the financial statements of the Company for
fiscal 1995 and fiscal 1994 did not contain an adverse opinion or disclaimer of
opinion, nor were such reports qualified or modified as to uncertainty, audit
scope, or accounting principles except for the report dated October 20, 1995
related to the audit of the Company's August 31, 1995 consolidated balance
sheet. The balance sheet was prepared assuming that the Company would continue
as a going concern. The appropriateness of using the going concern basis was
dependent upon, among other things, consummation of the plan of reorganization
as confirmed by the Bankruptcy Court, success of future operations and the
Company's ability to meet its obligations as they became due. The report of
Andersen stated there was uncertainty with respect to certain litigation claims
and the appropriateness of using the going concern assumption because of factors
which raised substantial doubt about the ability of the Company to continue as a
going concern.
During fiscal 1995 and fiscal 1994 and each subsequent interim period
preceding the dismissal, the Company believes there were no disagreements with
Andersen on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which disagreements, if
not satisfactorily resolved, would have caused them to make reference in
connection with their reports to the subject matter of the disagreements.
Andersen has informed the Company that the following two items, in Andersen's
opinion, did constitute disagreements:
With respect to a contingent interest arrangement for one of the Company's
debt instruments, the Company inquired whether such contingent interest
could be recorded when due. Andersen believed that the contingent interest
should be recorded as each house was sold on an estimated basis. This
issue was resolved through the recording by the Company of an
approximately $1 million adjustment in connection with fiscal year ended
September 30, 1995, for which Form 10-K was filed on December 28, 1995.
Neither the Company's Audit Committee nor its Board of Directors discussed
this matter with Andersen.
In connection with the Company's bankruptcy proceeding, the Company
inquired whether it would be able to continue to carry on its balance
sheet the deferred tax assets of approximately $26.9 million as a result
of likely debt forgiveness and related income under the reorganization
plan then being formulated. Andersen could find no support for continuing
to carry this asset. Andersen and the Company's Board of Directors agreed
to increase the valuation allowance to reduce the balance of the net
deferred tax asset to zero at March 31, 1995.
The decision to change accountants was recommended by the Audit
Committee of the Board of Directors of the Company. The Company's Board of
Directors approved the decision to change independent accountants.
28
<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 December 27, 1996. A
summary of the background and experience of each of these individuals is set
forth after the table.
Name Age Position(s) with Company
- ---- --- ------------------------
Garth R. Wieger 38 Chief Executive Officer, President and
Director
Dean Bloxom 35 President UDC Mortgage
Kenda B. Gonzales 39 Senior Executive Vice President and
Chief Financial Officer
James J. Grogan 42 Senior Executive Vice President
Jay D. Johnson 37 Executive Vice President and Chief
Information Officer
Drew M. Brown 47 Director, Chairman
Joseph F. Azrack 49 Director
Bennett Dorrance 50 Director
Gadi Kaufmann 41 Director
James L. McCabe 53 Director
Thomas H. Nolan, Jr. 39 Director
Mark Sklar 48 Director
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 since August 1996. Prior
to joining UDC Mortgage, 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.
29
<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 also serves as a director of Evans Withycombe Residential, Inc., a
multi-family housing real estate investment trust.
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 Director
of Portfolio Management for AEW. He joined AEW in 1984 and has responsibility
for AEW's high-yield equity investment portfolios.
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. 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
30
<PAGE>
Compensation Committee is composed of Messrs. Azrack and Dorrance.
Directors are reimbursed for out-of-pocket expenses incurred by them in
connection with attendance at Board and committee meetings. No compensation is
currently paid to directors for their service; the Board is considering
establishing compensation to be paid to the non-employee members of the Board.
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, 1996, 1995 and 1994, of the Chief Executive Officer of the Company
and the other four most highly compensated executive officers of the Company
(collectively, the "Named Officers"), and for the Company's former Chief
Executive Officer.
<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 1996 117,000 283,000 -- --
Chief Executive Officer and 1995 -- -- -- --
President(2) 1994 -- -- -- --
Dean Bloxom 1996 23,942 23,000 -- --
President UDC Mortgage(3) 1995 -- -- -- --
1994 -- -- -- --
Kenda B. Gonzales 1996 40,497 130,000 -- --
Senior Executive Vice President 1995 -- -- -- --
and Chief Financial Officer(4) 1994 -- -- -- --
James J. Grogan 1996 39,151 75,000 -- --
Senior Executive Vice 1995 -- -- -- --
President(5) 1994 -- -- -- --
Jay D. Johnson 1996 47,335 33,000 -- --
Executive Vice President and 1995 -- -- -- --
Chief Information Officer (6) 1994 -- -- -- --
Richard C. Kraemer 1996 314,723 292,206 269,103(7) --
Chief Executive Officer and 1995 570,194 -- 283,209(8) --
President(9) 1994 522,635 -- 279,840(10) --
</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.
31
<PAGE>
(3) Mr. Bloxom has served as President of UDC Mortgage 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.
(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.
(7) Includes a $3,750 car allowance, a $4,515 Company contribution to the
Savings and Investment Plan, a $644 Company contribution to the Profit
Sharing Plan, $25,504 of reimbursements for financial planning, life
insurance and automobile expenses, $174,690 of forgiveness of
indebtedness and $60,000 in severance payments. See "Executive
Compensation - Employment Contracts, Termination of Employment and
Change-in Control Agreements."
(8) Includes a $4,200 car allowance, a $4,620 Company contribution to the
Savings and Investment Plan, a $3,199 Company contribution to the
Profit Sharing Plan, $38,590 of reimbursement for financial planning,
life insurance and automobile expenses, and $232,600 of forgiveness of
indebtedness. See "Executive Compensation - Employment Contracts,
Termination of Employment and Change-in-Control Agreements."
(9) Mr. Kraemer served as Chief Executive Officer and President of the
Company from October 1985 to March 1996. He is no longer employed by
the Company.
(10) Includes a $4,200 car allowance, a $4,500 Company contribution to the
Savings and Investment Plan, a $5,632 Company contribution to the
Profit Sharing Plan, $32,908 of reimbursement for financial planning,
life insurance and automobile expenses, and $232,600 of forgiveness of
indebtedness. See "Executive Compensation - Employment Contracts,
Termination of Employment and Change-in-Control Agreements."
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 who are
currently officers of the Company.
The Company and Mr. 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 base salary under the Kraemer Employment Agreement was
$350,000,
32
<PAGE>
and the Company agreed to pay Mr. Kraemer an automobile allowance of not less
than $500 per month and automobile expenses; pay the premiums on certain life
insurance policies; and reimburse certain professional fees in an amount of up
to $20,000 per year.
In addition, the Company agreed to adopt an annual incentive bonus plan
for Mr. Kraemer based upon the Company's financial performance for each fiscal
year, pursuant to which Mr. Kraemer could achieve a bonus of up to 150% of his
base salary. The Company also agreed to adopt a long-term incentive compensation
plan pursuant to which executive officers of the Company (including Mr. Kraemer)
had the opportunity to earn additional cash compensation and/or equity
participation in the Company based on the extent to which the internal rate of
return earned by the Company's stockholders on their total capital investment
over a specified period commencing on November 14, 1995 exceeded 12% per annum.
The aggregate bonus could have been up to 15% of the Company's total profit in
excess of such base return. Mr. Kraemer was entitled to receive 50% of all
bonuses awarded under the long-term incentive plan.
If Mr. Kraemer's employment terminated for any reason other than death,
the Company agreed to pay to Mr. Kraemer a lump sum amount equal to 200% of the
sum of (i) the base salary in effect on the termination date plus (ii) an agreed
annual bonus under his annual incentive plan for the fiscal year which included
the termination date equal to 100% of such base salary. In the event of
termination because of Mr. Kraemer's disability, this severance payment would be
reduced by any amount payable to Mr. Kraemer under disability insurance policies
maintained by the Company for him.
The Kraemer Employment Agreement continued the Company's obligation
under a previous agreement to pay to Mr. Kraemer a "Stay-on Bonus" of 50% of his
base salary following substantial consummation of the reorganization Plan.
Accordingly, the Company paid Mr. Kraemer a "Stay-on Bonus" of $292,206 in
December 1995.
Pursuant to a prior employment agreement with Mr. Kraemer, the Company
made a revolving loan (the "Kraemer Loan") to Mr. Kraemer in the amount of
$2,010,000 with annual interest at the rate of 8.57% on the unpaid balance.
Since October 1, 1994, the largest amount of the Kraemer Loan outstanding was
$657,235. The principal of the Kraemer Loan was due December 31, 1996, but was
reduced by $637.26 per day (and included as compensation) for each day after
January 1, 1991 on which Mr. Kraemer remained employed with the Company. If
there were not sufficient amounts due to the Company to accommodate such daily
reduction, such amounts were to be paid to Mr. Kraemer. The terms of the loan
were revised on May 1, 1995, and a new promissory note (the "New Kraemer Note")
in the principal amount of $561,258.37 was issued by Mr. Kraemer to evidence the
loan as revised. The New Kraemer Note required that interest on the New Kraemer
Note continue at an annual rate of 8.57%; the principal maturity was extended to
April 30, 1998, with principal reductions continuing at $637.26 for each day on
which Mr. Kraemer remained in the employ of the Company. The New Kraemer Note
provides that Mr. Kraemer shall not be personally liable for any amounts due
thereunder unless Mr. Kraemer's employment is terminated by Mr. Kraemer for any
reason other
33
<PAGE>
than Good Reason (as defined in the prior employment agreement) or by the
Company for Misconduct (as defined in the prior employment agreement). 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 will receive an additional
$1,340,000 in severance payments and $315,408 of debt forgiveness in fiscal 1997
such amounts were included in the accruals established at the Acquisition Date.
Other Severance Agreements - In contemplation of the Company's
negotiations to sell all or a portion of the Company, in addition to the
agreements with Mr. Kraemer, the Company entered into severance agreements (the
"Severance Agreements") with certain individuals, including executive officers,
whose continued employment management believed was important to the Company's
continued operations. Under the Severance Agreements (and the agreements with
Mr. Kraemer discussed above), the Company would have been required to pay
aggregate severance benefits of approximately $7 million if all employees who
had Severance Agreements terminated employment for any reason (other than death)
within six months following a change in control.
Pursuant to the terms of the Stock Purchase Agreement with DMB, the
severance agreements were amended (as amended, the "Amended Severance
Agreements"). The Amended Severance Agreements generally provide to the
employees the benefits described below in the case of a termination of
employment (a) on the part of the Company for reason other than Cause (as
defined in the agreement) and (b) on the part of the employee for voluntary
termination of employment for Good Reason (as defined in the agreement), for a
one year period after a Change in Control (as defined in the agreement), or,
under certain circumstances, if the employee has been terminated by the Company
within six months prior to a Change in Control. A Change in Control includes,
among other things, the commencement of a bankruptcy proceeding followed by the
confirmation and substantial consummation of a plan of reorganization (which
occurred on November 14, 1995).
Upon satisfaction of the conditions specified above, the employee was
entitled to receive from the Company in a single payment an amount equal to such
employee's annual base salary in effect at termination plus a target bonus
ranging from 10% to 25% of the employee's base salary. The aggregate amount of
such payments would be the same under the Amended Severance Agreements as under
the Prior Severance Agreements. The amount of any other severance payment
actually paid to any employee under any separate agreement between such employee
and the Company would be deducted from the Company's payment under the Amended
Severance Agreements. The Amended Severance Agreements also required that
regular employee insurance benefits continue to be provided for a period of one
year.
If any severance payments are made, a portion of such payments may
constitute an "excess parachute payment," as defined in Section 280G of the
Internal Revenue Code of 1986, as amended (the "Tax Code"), and would not be
deductible by the Company for federal income tax purposes.
34
<PAGE>
The Amended Severance Agreements also provided for "Stay-On Bonuses"
for each of the employee parties who continued his or her employment through the
substantial Consummation of the Plan. The amount of the Stay-On Bonuses is
generally 25% of the employee's base salary, with one employee entitled to 41%
of the employee's base salary. The Company has paid an aggregate of $1,068,126
in Stay-On Bonuses to date (including the Stay-On Bonus paid to Mr. Kraemer).
Board Compensation Committee Report on Executive Compensation; Compensation
Committee Interlocks and Insider Participation
The Compensation Committee of the Board of Directors was established on
June 6, 1996. The Compensation Committee did not function with respect to
compensation matters for fiscal 1996.
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 December
27, 1996 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
Richard C. Kraemer 0 0
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., 4812 South Mill Avenue, Tempe, Arizona 85282.
(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
- -------- ----------------------------------------------
During fiscal 1995, but prior to the acquisition by DMB of all of the
Company's Common Stock, the Company sold land containing 188 lots to DMB LP, an
affiliate of DMB, and in connection therewith acquired options from DMB LP to
repurchase the 188 lots. The purchase price for the property paid by DMB LP to
the Company was $1,880,139. The Company paid no independent consideration for
the option rights as the appraised value of the property exceeded the purchase
price paid by DMB LP. During fiscal 1996, the Company acquired from DMB LP 234
lots pursuant to option rights for an aggregate amount of $9,780,000. Further,
DMB paid the Company $2,727,400 during fiscal 1996 for infrastructure and other
work on property subject to option agreements. These option agreements were
entered into before DMB purchased the Company's Common Stock and at a time when
no DMB associate was on the Board of Directors. The Company believes that the
terms of these option agreements were determined by arm's length negotiations.
During fiscal 1996 and on November 7, 1996, a partnership between DMB
and AEW ("DMB/AEW Partnership") acquired approximately $28,607,000 and
$25,519,000, respectively, of land at the Company's cost, which is believed to
approximate the fair value of such land based upon appraisals obtained at the
Acquisition Date. The Company continues to market the land purchased by the
DMB/AEW Partnership in exchange for a $150,000 management fee and commissions.
To the extent the cash proceeds from the sale of the property to a third party
exceeds certain thresholds, the Company will participate in excess profits.
Additionally, the Company will receive additional proceeds from a parcel of such
land if certain lot zoning changes can be obtained.
At September 30, 1996, AEW and DMB each owned $15,000,000 and
$5,000,000 principal amount of the Series C and Series D Subordinated Notes,
respectively. Interest expense of $4,628,000 on the Subordinated Notes held by
AEW and DMB was recorded in fiscal 1996. Subsequent to September 30, 1996, DMB
acquired an additional $2,000,000 principal amount of Series C Subordinated
Notes.
An affiliate of DMB and AEW owns 25% of Westbrook Village Venture one
of the Company's Arizona retirement operations.
During fiscal 1996, the Company made payments of $142,000 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 1983, the 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. Kraemer owned 24% of Mill &
Ellis and 15% of ME II, and UDC Advisory, having purchased interests previously
owned by certain former employees of the Company, owned 25% of ME II. On June
37
<PAGE>
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 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 will relocate its operations
from these buildings in January 1997.
Mr. Kraemer is an officer, director and a 25% stockholder in a
corporation which is a commercial designer and fabricator for trade show
exhibits, residential sales offices, custom signage, restaurant interiors and
other commercial displays. This company has provided interior design and
decorating services to the Company for its model homes, sales offices and master
planned community clubhouses. This company charges a design fee and adds a
normal and customary commercial markup for furnishings and fixtures that it
orders for installation on behalf of its customers. The Company made payments to
this company of approximately $96,000 during the fiscal year ended September 30,
1996. The Company believes, based upon its review of alternative suppliers, that
these transactions were entered into on a competitive basis.
Mr. Kraemer is an officer, director and a 33% stockholder in a
corporation which provides travel services to the Company consisting primarily
of the sale of airline tickets for corporate business travel. The Company made
payments to this company of approximately $29,000 during the fiscal year ended
September 30, 1996. The Company believes, based upon its review of alternative
suppliers, that these transactions were entered into on a competitive basis.
Considering the relationships between the Company and its affiliates,
except as described in the first paragraph of this Item 13, negotiations between
and among such persons may be considered not to have been at arm's-length.
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
- ------ -----------------------
(3)
3.1 Restated Certificate of Incorporation
(3)
3.2 Restated By-Laws
(3)
4.1 Indenture dated as of November 14, 1995 relating to the
12-1/2% Series A Senior Notes due 2000
(3)
4.2 Indenture dated as of November 14, 1995 relating to the
12-1/2% Series B Senior Notes due 2000
(3)
4.3 Indenture dated as of November 14, 1995 relating to the
14-1/2% Series C Subordinated Notes due 2000
(3)
4.4 Declaration and Agreement of Trust -- UDC Homes Series C
Subordinated Note Trust, dated as of November 14, 1995
(5)
4.6 Form of 14-1/2% Series D Subordinated Note due 2000 and dated
March 15, 1996 and addendum and amendment thereto dated July
24, 1996
(3)
10.1(a) UDC Master Revolving Line of Credit (Borrowing Base) Loan
Agreement dated November 8, 1995 between Bank One, Arizona,
NA, ("BOAZ") Bankers Trust Company ("Bankers Trust"), First
Interstate Bank of California ("FICAL") and the Company
(5)
10.1(b) Second Amendment to the UDC Master Revolving Line of Credit
(Borrowing Base) Loan Agreement dated June 30, 1996 between
BOAZ, Bankers Trust,
39
<PAGE>
FICAL, The First National Bank of Boston ("BkB"), Wells Fargo
Realty Advisors Funding, Incorporated ("Wells Fargo"),
Guaranty Federal Bank, F.S.B. ("Guaranty Federal") and the
Company
10.1(c) Third Amendment to the UDC Master Revolving Line of Credit
(Borrowing Base) Loan Agreement dated December 23, 1996
between BOAZ, Bankers Trust, Wells Fargo Bank, National
Association ("WFB") (formerly FICAL), BkB, Wells Fargo,
Guaranty Federal and the Company
(3)
10.2(a) Third Restated Revolving Line of Credit Construction Loan
Agreement dated November 6, 1995 among Westbrook Village
Venture ("WVV"), the Company and Bank of America Arizona
("BofA")
(5)
10.2(b) Letter Agreement dated June 14, 1996 modifying the Third
Restated Revolving Line of Credit Agreement among WVV, the
Company and BofA
(3)
10.3(a) Third Restated Acquisition and Development Loan Agreement
dated November 6, 1995 among WVV, the Company and BofA
(5)
10.3(b) Letter Agreement dated June 14, 1996 modifying the Third
Restated Acquisition and Development Loan Agreement among WVV,
the Company and BofA
(3)
10.4(a) Master Term Loan Agreement dated November 6, 1995 between the
Company, Bank of America Illinois and Bank of America National
Trust & Savings Association
(5)
10.4(b) Letter Agreement dated June 14, 1996 modifying the Master Term
Loan Agreement between the Company, Bank of America Illinois
and Bank of America National Trust & Savings Association
(3)
10.5 Term Loan Agreement (Terra) dated November 6, 1995 between
Terra California Limited Partnership, the Company and Bank of
America Illinois
(4)
10.6 Stockholders Agreement dated May 6, 1996 by and among DMB,
Eastrich No. 184, LLC and the Company
(3)
10.7 Lease Agreement dated December 20, 1983 between Mill & Ellis
Office Limited Partnership and the Company, as amended
(3)
10.8 Mill & Ellis Letter Agreement dated November 6, 1995
(3)
10.9 Lease Agreement dated August 21, 1987 between ME II Limited
Partnership and the Company, as amended
40
<PAGE>
(3)
10.10 ME II Letter Agreement dated November 6, 1995
(2)
10.11 Loan Origination and Lending Services Agreement between UDC
Mortgage Corporation and the Company
(1)
10.12 Restatement UDC Savings and Investment Plan, as amended
(1)
10.13 Employees' Profit Sharing Plan and Trust, as amended
(6)
16 Arthur Andersen LLP letter dated September 11, 1996
21 Subsidiaries of the Company
27 Financial Data Schedule
(3)
99.1 Second Amended Disclosure Statement with Respect to Second
Amended Reorganization Plan of UDC Homes, Inc. dated August 3,
1995 (including the following exhibits thereto: Second Amended
Reorganization Plan, Stock Purchase Agreement, and Amendment
to Stock Purchase Agreement)
(3)
99.2 Addendum to Second Amended Disclosure Statement with Respect
to Second Amended Reorganization Plan of UDC Homes, Inc. dated
August 31, 1995 (including the following exhibits thereto:
Addendum to Second Amended Plan of Reorganization and Second
Amendment to Stock Purchase Agreement)
(1) Incorporated by reference from the Company's Annual Report on
Form 10-K for the fiscal year ended September 30, 1994
(2) Incorporated by reference from the Company's Registration
Statement on Form S-14 (No. 2-98040) or amendments thereto
(3) Incorporated by reference from the Company's Annual Report on
Form 10-K for the fiscal year ended September 30, 1995
(4) Incorporated by reference from the Company's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1996
(5) Incorporated by reference from the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1996
(6) Incorporated by reference from the Company's Report on Form
8-K dated September 3, 1996
41
<PAGE>
All other exhibits are omitted as the information required is inapplicable.
(b) The Company filed a report on Form 8-K dated September 3, 1996
regarding the Company's dismissal of its former independent
accountants, Arthur Andersen LLP and the engaging of Deloitte
& Touche LLP as independent accountants.
42
<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 27, 1996 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 27, 1996
- --------------------------- Officer and Director
Garth R. Wieger (Principal Executive Officer)
/s/ Kenda B. Gonzales Senior Executive Vice President December 27, 1996
- --------------------------- and Chief Financial Officer
Kenda B. Gonzales (Principal Financial and
Accounting Officer)
/s/ Drew M. Brown Director, Chairman December 27, 1996
- ---------------------------
Drew M. Brown
/s/ Joseph F. Azrack Director December 27, 1996
- ---------------------------
Joseph F. Azrack
/s/ Bennett Dorrance Director December 27, 1996
- ---------------------------
Bennett Dorrance
/s/ Gadi Kaufmann Director December 27, 1996
- ---------------------------
Gadi Kaufmann
/s/ James L. McCabe Director December 27, 1996
- ---------------------------
James L McCabe
/s/ Thomas H. Nolan, Jr. Director December 27, 1996
- ---------------------------
Thomas H. Nolan, Jr.
/s/ Mark Sklar Director December 27, 1996
- ---------------------------
Mark Sklar
</TABLE>
43
THIRD AMENDMENT
TO
UDC MASTER REVOLVING LINE OF CREDIT (BORROWING BASE)
LOAN AGREEMENT
This THIRD AMENDMENT TO UDC MASTER REVOLVING LINE OF CREDIT (BORROWING
BASE) LOAN AGREEMENT (the "Third Amendment"), dated as of December 23, 1996, is
made and entered into by and between UDC HOMES, INC., a Delaware corporation
("Borrower"); BANK ONE, ARIZONA, NA, a national banking association ("BOAZ");
BANKERS TRUST COMPANY, a New York banking corporation ("Bankers Trust"); WELLS
FARGO BANK, NATIONAL ASSOCIATION, a national banking association, successor by
merger to First Interstate Bank of California, a banking corporation organized
and existing under the laws of California ("WFB"); THE FIRST NATIONAL BANK OF
BOSTON, a national banking association ("BkB"); WELLS FARGO REALTY ADVISORS
FUNDING, INCORPORATED, a Colorado corporation ("Wells Fargo"); and GUARANTY
FEDERAL BANK, F.S.B., a federal savings bank ("Guaranty Federal").
RECITALS:
A. Borrower, BOAZ, Bankers Trust, WFB, BkB, Wells Fargo, and Guaranty
Federal are parties to the UDC Master Revolving Line of Credit (Borrowing Base)
Loan Agreement, dated November 8, 1995 (the "Original Revolving Loan
Agreement"). BkB became a party to the Original Revolving Loan Agreement
pursuant to an Assignment and Acceptance, dated November 30, 1995, between BkB
and Bankers Trust. Wells Fargo became a party to the Original Revolving Loan
Agreement pursuant to an Assignment and Acceptance, dated December 5, 1995,
between Bankers Trust and Wells Fargo. Guaranty Federal became a party to the
Original Revolving Loan Agreement pursuant to an Assignment and Acceptance,
dated December 14, 1995, between Bankers Trust and Guaranty Federal and pursuant
to an Assignment and Acceptance, dated December 14, 1995, between BOAZ and
Guaranty Federal. As of December 14, 1995, Borrower, the Administrative Agent,
the Co-Agents, and the Banks entered into a First Amendment to UDC Master
Revolving Line of Credit (Borrowing Base) Loan Agreement (the "First
Amendment"). As of May 1, 1996, Borrower, the Administrative Agent, the
Co-Agents, and the Banks entered into a Second Amendment to UDC Master Revolving
Line of Credit (Borrowing Base) Loan Agreement (the "Second Amendment"). The
Original Revolving Loan Agreement, as amended by the First Amendment and the
Second Amendment, is referred to in this Third Amendment as the "Revolving Loan
Agreement". Capitalized terms used in this Third Amendment and not defined in
this Third Amendment have the meanings ascribed to them in the Revolving Loan
Agreement.
B. Borrower has requested modifications to certain provisions of the
Revolving Loan Agreement and waivers of certain covenants in the Revolving Loan
Agreement. The Administrative Agent, the Co-Agents, and the Banks are willing to
agree to the modifications and waivers provided in this Third Amendment, on the
terms and conditions set forth in this Third Amendment.
AGREEMENT:
NOW THEREFORE, For good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Borrower, the Administrative
Agent, the Co-Agents, and the Banks agree as follows:
<PAGE>
1. Waivers.
(a) The Administrative Agent, the Co-Agents, and the Banks
waive compliance by Borrower with the following Financial Covenants as
of September 30, 1996:
(i) The Maximum Total Debt to Tangible Net Worth
Covenant of Section 6.22.3 of the Revolving Loan Agreement;
(ii) The Minimum Tangible Net Worth Covenant of
Section 6.22.4 of the Revolving Loan Agreement;
(iii) The Debt Service Coverage Covenant of Section
6.22.5 of the Revolving Loan Agreement as of September 30,
1996; and
(iv) The Interest Coverage Covenant of Section 6.22.6
of the Revolving Loan Agreement as of September 30, 1996.
(b) The foregoing waivers shall relate only to the Financial
Covenants referred to above and only as of the date stated. Nothing
contained herein shall waive compliance with any other provisions of
the Loan Documents or with respect to any other date or period. Nothing
contained herein shall obligate Administrative Agent, Co-Agents or the
Banks to grant any additional waivers to Borrower.
2. Amendment.
(a) Section 3.7.5(h) of the Revolving Loan Agreement is amended in
its entirety to read as follows:
"Unit Completion Percentage" means, for any Unit, the lesser
of (i) the current percentage of construction completed as reflected in
each Borrowing Base Report, based upon the ratio of (A) costs already
incurred and paid for by Borrower for material and labor actually
incorporated into such Unit pursuant to the Unit Budget (other than the
Unit Lot Cost), to (B) the Unit Budget; and (ii) the applicable
percentages set forth in the Construction Draw Schedules set forth on
Exhibit 3.7.5(h), based on the stage of completion of the particular
Unit; provided, however, that prior to March 1, 1997, Unit Completion
Percentages will be determined without regard to this clause (ii) but
shall instead be in increments of 5%.
(b) Section 3.7.5(e)(v) of the Revolving Loan Agreement is amended
in its entirety to read as follows:
(v) With respect to each A&D Land Project, the lesser of (A)
60% of the A&D Project Appraised Value (A&D Project Appraised Values
being determined as set forth in Section 3.10) for that A&D Project, or
(B) 60% of the A&D Project Cost for that A&D Project; provided,
however, that if the A&D Project for which the Maximum Allowed Advance
is being determined for purposes of this clause (v), and for the
purposes of clause (vi) and clause (vii) below, consists of more than
125 lots, then the percentages in this clause (v) and the percentages
in clause (vi) and clause (vii) will each be reduced by subtracting 5%
from the stated percentages; provided further, that if an A&D Land
Project consists of Existing A&D Entitled Land Collateral or of the
MountainBrook Village Collateral added pursuant to Section 3.4.4 and
is, on the following adjustment dates, still entitled to be included as
Eligible Collateral, then on the first day of the 13th
2
<PAGE>
Calendar Month following the A&D Eligibility Date for such A&D Land
Project and on the first day of each 6th Calendar Month thereafter, the
percentages set forth in this clause (v) (as adjusted pursuant to the
first proviso in this clause (v), if applicable) will be reduced on
each such day by subtracting 5% from the percentage that otherwise
would apply; provided further that with respect to any A&D Land
Project, A&D Development Project and A&D Finished Lot Project first
included as Eligible Collateral after November 1, 1996, the percentages
that would otherwise be applicable pursuant to this clause (v) or
pursuant to clause (vi) or clause (vii) shall be further reduced on
March 1, 1997 by five percent (5%) from the percentage that would
otherwise apply (after giving effect to the adjustments pursuant to the
first and second provisos of this sentence).
3. Extension of Eligibility for Certain Existing A&D Entitled Land.
Notwithstanding the provisions of Section 3.4.1 of the Revolving Loan Agreement,
the A&D Land Projects consisting of the Existing A&D Entitled Land described on
Exhibit 3.2.5(k) of the Revolving Loan Agreement as the Villages-Hidalgo project
and the Villages-Del Lago project shall be entitled to be included as Eligible
Collateral (as A&D Land Projects) from November 1, 1996 through February 28,
1997.
4. Inducements to the Banks. As additional consideration and inducement
to the Administrative Agent, the Co-Agents, and the Banks to grant the waivers
and modifications set forth in this Third Amendment and to agree to the other
terms of this Third Amendment, with knowledge that the Administrative Agent, the
Co-Agents, and the Banks would not enter into this Third Amendment but for the
provisions of this Paragraph 4:
(a) Borrower represents and warrants to the Administrative
Agent, the Co-Agents, and the Banks that:
(i) All Obligations under the Revolving Loan
Agreement (as amended by this Third Amendment) and the Loan
Documents are and continue to be valid, binding and
enforceable obligations of Borrower, enforceable in accordance
with their terms, and are and continue to be secured by the
Collateral;
(ii) All of the representations and warranties set
forth in the Revolving Loan Agreement (as amended by this
Third Amendment) and the other Loan Documents continue to be
true and correct as of the date hereof;
(iii) With respect to the Revolving Loan Agreement
(as amended hereby), all property and interests (including,
without limitation, property and interests that constitute
Eligible Collateral and property and interests that are not
included in the Eligible Collateral) encumbered under any
Deeds of Trust constitute, and shall continue to be, first
priority liens and collateral security for all of the
Obligations, and the value of such Collateral is and has at
all times been, in the aggregate, greater than the amount of
the Obligations;
(iv) Borrower has no defense, setoff, claim or
counterclaim against the Administrative Agent, the Co-Agents,
or the Banks in regard to its obligations under the Revolving
Loan Agreement, as amended by this Third Amendment, any other
Loan Document, any document, instrument, transaction, act or
omission arising out of or related to the Obligations, the
Revolving Loan Agreement (as amended by this Third Amendment),
or any other obligation to the Banks, the Administrative Agent
or the Co-Agents, or any of them.
3
<PAGE>
(b) Borrower and all guarantors fully, finally, and forever
release and discharge the Administrative Agent, the Co-Agents, and the
Banks, and their respective successors, assigns, directors, officers,
employees, agents, and representatives from any and all actions, causes
of action, claims, debts, demands, liabilities, obligations, and suits,
of whatever kind or nature, in law or equity of Borrower or any of the
guarantors whether now known or unknown: (i) in respect of the loan
made pursuant to the Revolving Credit Agreement (as amended hereby) or
the acts or omissions of the Administrative Agent, the Co-Agents,
and/or the Banks, or any of them, in respect thereto and (ii) arising
from events occurring prior to the execution and delivery of this Third
Amendment by Borrower.
(c) In connection with the releases and waivers contained
herein, Borrower and each guarantor hereby expressly waive any and all
rights and benefits conferred upon it by the provisions of Section 1542
of the California Civil Code (or similar provisions of any other
applicable law) which provides:
"A general release does not extend to claims which
the creditor does not know or suspect to exist in his favor at
the time of executing the release, which if known by him must
have materially affected his settlement with the debtor."
Borrower and each guarantor have been advised by their legal counsel,
or Borrower and each guarantor have made a reasoned and fully informed
decision not to be so represented by counsel, and understand and
acknowledge the significance and consequences of this release and of
this specific waiver of Section 1542, and Borrower and each guarantor
expressly consent that the releases contained herein shall be given
full force and effect according to each and all of its express terms
and provisions including those relating to unknown and unsuspected
claims, demands and causes of action, if any, as well as those relating
to any other claims, demands and causes of action hereinabove
specified. The foregoing shall not be deemed to be an agreement by the
Administrative Agent, the Co-Agents or the Banks that California law is
the governing law under the Loan Documents.
5. Ratification. As modified by this Third Amendment, the Revolving
Loan Agreement is ratified and confirmed and continues in full force and effect.
6. Counterpart Execution. This Third Amendment may be executed in one
or more counterparts, each of which will be deemed an original and all of which
together will constitute one and the same document. Signature pages may be
detached from the counterparts and attached to a single copy of this Third
Amendment to physically form one document. Telecopied signature pages will be
acceptable, provided originally signed signature pages are provided to each of
the other parties by overnight courier.
7. Integration. This Third Amendment shall constitute one of the Loan
Documents, and the Loan Documents, together with this Third Amendment, contain
the complete understanding and agreement of Borrower, the Administrative Agent,
the Co-Agents and the Banks with respect to the transactions contemplated by the
Revolving Loan Agreement (except as between the Administrative Agent, the Co-
Agents and the Banks with respect to matters set forth in the
Agency/Participation Agreement) and supersede all prior representations,
warranties, agreements, arrangements, understandings, and negotiations,
including the Loan Commitment.
4
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Third
Amendment.
BORROWER: UDC HOMES, INC.,
a Delaware corporation
By: /s/ Kenda B. Gonzales
--------------------------------
Name: Kenda B. Gonzales
------------------------------
Title: Sr. Exec. VP
-----------------------------
BOAZ: BANK ONE, ARIZONA, NA, a national banking
association, individually as a Bank and in
its capacity as the Administrative Agent and
as one of the Co-Agents
By: /s/ Rhonda R. Williams
--------------------------------
Name: Rhonda R. Williams
------------------------------
Title: Vice President
-----------------------------
BANKERS TRUST: BANKERS TRUST COMPANY, a New York banking
corporation, individually as a Bank and in
its capacity as one of the Co-Agents
By: /s/ A.B.U. Johnson
-------------------------------
Name: A.B.U. Johnson
-----------------------------
Title: M.D.
----------------------------
WFB: WELLS FARGO BANK, NATIONAL ASSOCIATION, a
national banking association, successor by
merger to First Interstate Bank of
California, a banking corporation organized
and existing under the laws of California
By: /s/ John W. McKinny
------------------------------
Name: John W. McKinny
----------------------------
Title: Vice President
---------------------------
5
<PAGE>
BkB: THE FIRST NATIONAL BANK OF BOSTON,
a national banking association
By: /s/ Nicholas Whiting
------------------------------
Name: Nicholas Whiting
----------------------------
Title: Vice President
---------------------------
WELLS FARGO: WELLS FARGO REALTY ADVISORS FUNDING,
INCORPORATED, a Colorado corporation
By WELLS FARGO REAL ESTATE GROUP,
a California corporation, as agent
By: /s/ John W. McKinny
------------------------
Name: John W. McKinny
----------------------
Title: Vice President
---------------------
GUARANTY FEDERAL: GUARANTY FEDERAL BANK, F.S.B.,
a federal savings bank
By: /s/ Richard V. Thompson
-----------------------------
Name: Richard V. Thompson
---------------------------
Title: Vice President
--------------------------
6
<PAGE>
CONSENT
-------
The undersigned consent and agree to the foregoing. The undersigned
represent and warrant to Administrative Agent, Co-Agents and Banks that all of
the representations and warranties of the undersigned set forth in the Loan
Documents continue to be true and correct as of the date hereof. The undersigned
ratify and confirm all of their agreements and obligations pursuant to and in
connection with the Loan Documents. The undersigned hereby join in the release
and other provisions contained in the foregoing Third Amendment and agree to be
bound by all of the provisions thereof, and the undersigned otherwise fully,
finally and forever release and discharge Administrative Agent, Co-Agents and
Banks and their respective successors, assigns, directors, officers, employees,
agents and representatives from any and all actions, causes of actions, claims,
debts, demands, liabilities, obligations and suits, of whatever nature, in law
or equity of the undersigned, whether now known or unknown to the undersigned,
(i) in respect of the loans made pursuant to the Revolving Credit Agreement (as
amended by the foregoing Third amendment) or the acts or omissions of
Administrative Agent, the Co-Agents, and/or Banks, or any of them, in respect
thereto and (ii) arising from events occurring prior to the execution and
delivery of this Consent.
UDC HOMES CONSTRUCTION, INC.,
an Arizona corporation
By: /s/ Kenda B. Gonzales
---------------------------------
Its: Sr. Exec. V.P.
--------------------------------
UDC ADVISORY SERVICES, INC.,
an Illinois corporation
By: /s/ Kenda B. Gonzales
---------------------------------
Its: Sr. Exec. V.P.
--------------------------------
UDC MORTGAGE ACCEPTANCE
CORPORATION, an Arizona corporation
By: /s/ Kenda B. Gonzales
---------------------------------
Its: Sr. Exec. V.P.
--------------------------------
UDC MORTGAGE FINANCE GENERAL
PARTNERSHIP, an Arizona general partnership
By: UDC Homes, Inc., a Delaware corporation,
General Partner
By: /s/ Kenda B. Gonzales
---------------------------------
Its: Sr. Exec. V.P.
--------------------------------
7
<PAGE>
ABERDEEN SERVICES, INC.,
a Florida Corporation
By: /s/ Kenda B. Gonzales
---------------------------------
Its: Sr. Exec. V.P.
--------------------------------
UDC HOMES OF GEORGIA, INC.,
a Georgia corporation
By: /s/ Kenda B. Gonzales
---------------------------------
Its: Sr. Exec. V.P.
--------------------------------
REA ACQUISITION CORPORATION,
an Arizona corporation
By: /s/ Kenda B. Gonzales
---------------------------------
Its: Sr. Exec. V.P.
--------------------------------
MOUNTAINBROOK VILLAGE COMPANY,
an Arizona corporation
By: /s/ Kenda B. Gonzales
---------------------------------
Its: Sr. Exec. V.P.
--------------------------------
MBV GOLF COURSE, INC.,
an Illinois corporation
By: /s/ Kenda B. Gonzales
---------------------------------
Its: Sr. Exec. V.P.
--------------------------------
8
LIST OF SUBSIDIARIES Exhibit 21
--------------------
1. The Company holds 100% of the outstanding capital stock of:
Aberdeen Services, Inc. (Florida)
MountainBrook Village Company ("MBV Co.") (Arizona)
UDC Advisory Services, Inc. ("Advisory") (Illinois)
UDC Corporation ("UDCC") (Delaware)
UDC Homes Construction, Inc. (Arizona)
UDC Homes of Georgia, Inc. (Georgia)
2. The Company holds 75% of the partnership interest of:
Westbrook Village Venture (Arizona)
3. MBV Co. holds 99% of the partnership interest of:
MountainBrook Village Joint Venture ("MBV JV") (Arizona)
4. MBV JV holds 100% of the outstanding capital stock of:
Gold Canyon Sewer Company (Arizona)
5. UDCC holds 100% of the outstanding capital stock of:
UDC Mortgage Corporation (Arizona)
MBV Golf Course, Inc. (Illinois)
6. Advisory holds a percentage of the partnership interest of:
Sunrise Limited Partnership (Illinois)
Terra California Limited Partnership (Illinois)
Sunbelt Properties, Ltd. (Illinois)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<CASH> 2,782
<SECURITIES> 0
<RECEIVABLES> 985
<ALLOWANCES> 0
<INVENTORY> 260,173
<CURRENT-ASSETS> 0
<PP&E> 13,216
<DEPRECIATION> 0
<TOTAL-ASSETS> 296,343
<CURRENT-LIABILITIES> 0
<BONDS> 196,623
0
0
<COMMON> 0
<OTHER-SE> 15,783
<TOTAL-LIABILITY-AND-EQUITY> 296,343
<SALES> 417,079
<TOTAL-REVENUES> 420,426
<CGS> 367,896
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,449
<INCOME-PRETAX> (72,458)
<INCOME-TAX> 0
<INCOME-CONTINUING> (72,458)
<DISCONTINUED> 0
<EXTRAORDINARY> 36,195
<CHANGES> 0
<NET-INCOME> (36,263)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
