SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended: September 30, 1997
Commission File Number 0-21900
SUNDANCE HOMES, INC.
(Exact name of registrant as specified in its charter)
Illinois 36-3111764
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
1375 E. Woodfield Road, Suite 600, Schaumburg, Illinois 60173
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (847) 255-5555
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K (229.405 of this chapter)
is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-
K or any amendment to this Form 10-K. [X]
On December 22, 1997, the aggregate market value of the voting
stock held by non-affiliates of the registrant, based on the
closing sale price of the registrant's Common Stock as quoted on
the Nasdaq Stock Market's National Market, was approximately
$1,784,297. (For purposes of calculating this amount only
directors, executive officers, and beneficial owners of 5% or
more of the Common Stock of the registrant have been deemed
affiliates).
Number of shares of the registrant's outstanding Common Stock at
December 22, 1997: 7,807,000
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for its Annual
Meeting of Shareholders, scheduled to be held on March 25, 1998,
are incorporated by reference into Part III of this Report.
<PAGE>
SUNDANCE HOMES, INC.
FORM 10-K
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 12
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 12
Item 6. Selected Consolidated Financial Data 13
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 8. Financial Statements and Supplementary Data 18
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 18
PART III
Item 10. Directors and Executive Officers of the Registrant 19
Item 11. Executive Compensation 19
Item 12. Security Ownership of Certain Beneficial Owners
and Management 19
Item 13. Certain Relationships and Related Transactions 19
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 20
SIGNATURES 21
<PAGE>
PART I
Item 1. Business
The Company
Sundance Homes, Inc. (the "Company") is a builder of single
family homes in the Chicago metropolitan area and condominiums in
the Chicago urban market. Prior to September 1996, the Company
primarily was a builder of affordably priced, single-family
detached and attached homes in the Chicago metropolitan area. In
September 1996, the Company entered the urban real estate market
with the introduction of two condominium-loft conversion projects
in Chicago. In 1997 the Company increased its presence in the
Chicago urban market with the addition of two more condominium-
loft conversion projects; a mid-rise condominium apartment
project and a 23-story high-rise condominium apartment project.
In addition, the Company is the mortgagee in possession of a 28
story office building conversion project in Chicago. Also in
1997, the Company expanded its custom home division, Rembrandt
Homes, by acquiring the rights to 135 partially developed lots in
Vernon Hills, Illinois, upon which the Company plans to market
and build custom homes in the $300,000 - 500,000 price range.
The Company strives to deliver superior value to both its entry-
level and move-up buyers by pricing its homes competitively while
consistently providing innovative designs and high-quality
products. The Company typically offers one or more diverse
product lines of single-family, detached and attached homes
within each suburban project, with a variety of front elevations
and architectural designs that complement each other and create a
sense of community within the project.
The Chicago metropolitan area, which includes Cook County and the
five surrounding counties (McHenry, Lake, DuPage, Kane and Will
Counties, commonly referred to as the "collar counties"), is the
third largest metropolitan area in the United States. Management
believes that housing demand in these areas is strong in large
part due to their proximity to concentrated job markets which
have developed along major highways to the north, northwest,
southwest and west of Chicago.
The Chicago urban market, includes the Loop area, South Loop,
West Loop, New East Side, River North, Streeterville and the Gold
Coast. Extensive development is taking place in other areas near
the traditional Loop boundaries. These include the areas between
Roosevelt and Cermak, and Halsted west to the United Center, and
as far north as 5800 along the Ravenswood corridor. Management
believes that housing demand in this market is strong due to the
high rents in the markets, job growth in the downtown area, the
long commute times to and from the city from the suburbs and the
numerous amenities available in the Chicago downtown area to
prospective home buyers.
The Company currently has 24 communities in various stages of
planning and development and an additional four properties under
contract or option. At September 30, 1997, the Company had 247
homes subject to pending sales contracts. The Company currently
owns or controls sufficient land and buildings for the
development of approximately 2,320 housing units and is
evaluating or negotiating for the purchase of additional land and
buildings, most of which is unentitled, for the possible
development of approximately 1,700 additional housing units.
The Company is currently operating three divisions: Sundance
Suburban Properties; Rembrandt Homes; and Chicago Urban
Properties. The Sundance Suburban Division focuses on affordably
priced entry-level and first time move-up houses primarily in the
collar counties surrounding Chicago. The Rembrandt Division
focuses on the semi-custom and custom market primarily in the
north and northwest Chicago suburban counties. The Chicago Urban
Properties Division focuses primarily on loft-conversion,
townhome and new construction mid and high-rise apartment
condominiums in the City of Chicago. The Company believes that
the division structure allows each operating entity to provide a
focused insight into the markets, competition, subcontractor
pricing, and consumer tastes in which it operates. Each
division operating team is responsible for the product
development, sales and marketing, home construction and customer
service aspects of their projects. Corporate office support is
provided for broad marketing and promotional strategic decisions,
accounting, finance, and information systems.
<PAGE>
Business Strategy
The Company's home building strategy consists of the following
key elements:
Value Pricing and Commitment to Quality. The Company strives to
deliver superior value to its home buyers by pricing its homes
competitively while consistently providing innovative designs and
high-quality products. The Company's commitment to quality
construction is a cornerstone of its business strategy. The
Company acts as general contractor for each of its projects and
requires that its subcontractors and suppliers use high quality,
durable materials in the construction of its homes. The project
manager for each project is responsible for ensuring that each
home in the project meets the Company's standards for workmanship
and materials.
Growth-Oriented Markets. The Company focuses its home-building
in certain communities in the suburbs of Chicago where management
believes that land acquisition costs have remained relatively low
and demand for entry level and first time move-up homes is
strong. The Company's current and planned projects are located in
Cook, DuPage, Kane, Kendall, Lake and McHenry Counties. In
September 1996, the Company expanded this market focus to include
the Chicago urban market, particularly the downtown Chicago area
and the neighborhoods adjacent to downtown. Demographic shifts
in the housing market combined with the diverse and stable
economic environment in Chicago have translated into population
increases in and around the downtown area. New homes built in
Chicago during the first three quarters of 1997 were 2,075, an
increase of 49% over the first three quarters of 1996. The
Company will continue to evaluate extending its home-building
activities to other areas as opportunities consistent with the
Company's strategy arise.
Innovative Design and Effective Marketing. The Company
continuously monitors the home design and feature preferences of
home buyers in its markets and uses this market research in its
effort to provide innovative, space-efficient and desirable
architectural designs and home amenities. In each project, the
Company creates and maintains a series of model homes
representing the home plans offered. The Company believes that
the effective use of a variety of model homes plays an integral
role in marketing the competitive advantages of its home design
to prospective buyers.
Property Acquisition and Development. The Company strives to
minimize its overall property costs and the risks associated with
the development of unentitled property by, whenever possible,
using options and other financing arrangements that allow the
Company to control property through the entitlement process, but
defer the payment for such property until the entitlement process
has been completed and the Company is prepared to commence
construction. The Company has substantial experience in
obtaining the entitlements necessary to develop residential and
urban properties. In addition, the Company will occasionally
purchase entitled property to the extent that the price and terms
of such purchase are believed by the Company to be advantageous.
Cost Control. The Company controls the cost of developing its
projects by: (i) seeking to purchase property at a low cost per
unit; (ii) using its position as a leading homebuilder in its
markets to obtain favorable pricing on construction materials and
labor from its subcontractors; (iii) adhering to strict
construction schedules and closely monitoring the physical
progress and costs of construction with the use of a computerized
tracking system; and (iv) striving to achieve rapid inventory
turnover by pricing its homes at competitive levels and entering
into sales contracts for a majority of its homes prior to
commencement of construction.
<PAGE>
Summary of Residential Projects
<TABLE>
Since 1983, the Company has closed sales of approximately 5,500
homes and has completed 23 projects in the Chicago metropolitan
area. As of September 30, 1997, the Company had not completed
any projects in the Chicago urban market. The following presents
information relating to the Company's completed projects in the
Chicago metropolitan area as of September 30, 1997.
<CAPTION>
Total Number Average
Project County Year Completed of Homes Sales Price
<S> <C> <C> <C> <C>
The Orchards (Lake Zurich) Lake 1984 72 $116,000
Woodridge Center DuPage 1984 18 81,000
Newport Trail DuPage 1985 22 116,000
The Orchards (Carol Stream) DuPage 1985 48 81,000
Woodale of Bartlett DuPage 1985 76 116,000
Spring Valley DuPage 1986 88 126,000
University Heights DuPage 1986 196 122,000
Amber Lakes DuPage 1987 283 86,000
Pine Ridge South DuPage 1987 135 96,000
Timber Lakes Estates Lake 1987 66 181,000
Chestnut Place Cook 1989 20 130,000
Pine Ridge DuPage 1989 220 120,000
Woodglen Village DuPage 1989 63 132,000
Sussex Square Cook 1990 159 109,000
Hampton Woods McHenry 1991 78 180,000
Arbor Ridge DuPage 1992 79 247,000
Heritage At Stratford DuPage 1992 99 237,000
Parkside on the Green Cook 1992 308 167,000
Victoria Woods McHenry 1993 116 231,000
River's Edge Kane 1995 22 205,000
Lake in the Woods DuPage 1995 34 247,000
Spring Lake Farm McHenry 1995 432 148,000
Wildflower DuPage 1997 251 199,000
Various model homes and odd lots -- -- 119 254,000
</TABLE>
<PAGE>
<TABLE>
The following presents information relating to the Company's
current and planned projects as of September 30, 1997.
<CAPTION>
Estimated
Homes at
Initial Closing Completion Homes Homes Homes in Sales
Project Location (Fiscal Quarter) (1) Closed Remaining Backlog(2) Price Ranges (3)
<S> <C> <C> <C> <C> <C> <C> <C>
Country Walk Round Lake Beach, 3rd Qtr. 1992 780 755 25 4 $114,000-160,000
Lake County
Ravinia Woods Gurnee, 4th Qtr. 1993 373 371 2 0 $150,000-199,000
Lake County
Spring Lake Farm Lake in the Hills, 1st Qtr. 1994 279 278 1 0 $111,990-205,990
South (4) McHenry County
Heartland Meadow Elgin/South Elgin, 4th Qtr. 1994 685 550 135 12 $ 94,990-168,990
Kane County
Bellchase Lake in the Hills, 2nd Qtr. 1995 578 233 345 17 $117,990-182,990
McHenry County
Sutton on the Lake Round Lake Beach, 4th Qtr. 1996 481 106 375 26 $113,990-160,000
Lake County
Cherry Hill Schaumburg, 3rd Qtr. 1997 29 21 8 4 $185,000-277,000
Cook County
McCarty's Mill Aurora, Kane County 4th Qtr. 1997 111 11 100 8 $118,000-139,000
Georgian Court Addison, Cook County 47 0 47 6 $130,500-210,000
Hometown Square Oswego, Kane County 75 0 75 3 $136,990-163,990
Walnut Pointe(5) Bolingbrook, Will County 166 0 166 0 $120,000-150,000
Cedar Creek Matteson, Cook County 146 0 146 0 $120,000-160,000
Properties Under Sundance Suburban 1,670 0 1,670 0
Contract (6)
Conservancy Gurnee, Lake County 2nd Qtr. 1995 131 88 43 3 $226,990-254,990
Deloraine Palatine, Cook County 3rd Qtr 1996 23 22 1 1 $310,000-342,000
Gregg's Landing Vernon Hills, Lake County 135 0 135 12 $359,000-431,000
Lakeside Estates Palatine, Cook County 2 0 2 0 $385,000-475,000
St. Paul Lofts Chicago, Cook County 3rd Qtr. 1997 85 73 12 9 $ 84,900-264,600
Erie Center Lofts Chicago, Cook County 4th Qtr. 1997 109 22 87 71 $ 92,900-399,900
Michigan Ave Lofts Chicago, Cook County 60 0 60 42 $140,535-198,650
Erie Tower Chicago, Cook County 128 0 128 29 $134,000-489,000
Sangamon Lofts (5) Chicago, Cook County 48 0 48 0 $ 89,000-246,000
Marathon Terrace(5) Chicago, Cook County 132 0 132 0 $137,000-305,000
201 N. Wells (5) Chicago, Cook County 165 0 165 0 $ 65,000-330,000
625 W. Jackson (5) Chicago, Cook County 90 0 90 0 $102,000-302,000
Properties Under Chicago, Cook County 60 0 60 0
Contract (6)
Total: 6,588 2,530 4,058 247
<FN>
(1) The estimated number of homes to be built at completion
is subject to change and there can be no assurance that the Company
will build these homes.
(2) Homes in backlog refer to homes subject to pending sales
contracts that, as of September 30, 1997, had not closed and there
can be no assurance that closings of such homes will occur.
(3) Reflects base price, excluding any lot premiums and buyer-
selected options, which vary from project to project.
(4) This property includes 80 acres (279 units) owned by The
Sundance-Kaco Limited Partnership. The Company is the general
partner of the Sundance-Kaco Limited Partnership, with a 75%
interest in such partnership. The Sundance-Kaco Limited
Partnership also holds an option for the purchase of an additional
200 acres (approximately 400 lots).
(5) The Company has preliminarily agreed to final terms on
these locations and intends to acquire the property in fiscal 1998.
The Company is scheduled to open for sale in these communities
during fiscal 1998.
(6) The Company does not currently have an estimate as to
when an initial closing will occur.
</FN>
</TABLE>
<PAGE>
Property Acquisition and Development
The Company selects property for acquisition and development
based upon a variety of factors, including: (i) financial and
legal review as to the feasibility of the proposed project,
including projected profitability; (ii) demographic and marketing
studies; (iii) competition within the area of the proposed
project; (iv) proximity to concentrated job markets, quality of
school districts and local traffic corridors; (v) infrastructure
requirements for grading, drainage, utilities and streets; and
(vi) management's judgment as to the real estate market, economic
trends and the Company's experience in a particular area. The
development approach for the Company's suburban developments
varies from its urban projects due to the nature of the acquired
property.
Suburban Development. The Company seeks to minimize its overall
land costs and the risks associated with developing unentitled
land by, whenever possible, using options and other financing
arrangements that allow the Company to control land through the
entitlement process but defer the payment for such land until the
entitlement process has been completed and the Company is
prepared to commence construction. The Company has generally
found long-time landowners to be more willing than speculators or
developers to defer payment and closing, thereby providing low or
no-cost financing to the Company through the entitlement process.
The Company strives to negotiate land purchase contracts that
allow the Company to purchase portions of a parcel as close as
possible to the commencement of construction.
After control of a parcel of unentitled land has been obtained,
the Company prepares preliminary and final plans for each
project, providing for infrastructure, neighborhoods, wetland
preservation, educational and other public facilities, as well as
open space. Once preliminary plans have been prepared, the
Company must obtain numerous governmental approvals, licenses,
permits and agreements, commonly referred to as "entitlements,"
before it can commence development and construction. For a
description of the entitlement process, see "-Government
Regulation and Environmental Controls." In the Chicago
metropolitan area, obtaining the many necessary entitlements for
large residential developments is an extended process which
generally takes one to two years and can involve a number of
different governmental jurisdictions and agencies and
considerable expense. No assurance can be given, however, that
the Company will be able to obtain entitlements within originally
projected time frames. Unless and until the requisite
entitlements are received, a homebuilder generally does not have
any rights to develop a project.
The Company has occasionally used partnerships, where such
arrangements were advantageous, to acquire the land from the
seller or where such arrangements appeared to be otherwise
economically advantageous to the Company. The Company will
continue to consider partnerships and other financing
arrangements with landowners or other third parties.
In addition, the Company may purchase entitled land to the extent
that the price and terms of such purchase are believed by the
Company to permit development within acceptable profitability
levels. Through the purchase of entitled or fully developed
lots, the Company can reduce the amount of financial or market
risks inherent in the development process.
Sales of land and lots have not previously had a significant
impact on the Company's financial results. However, the Company
will maintain the flexibility to sell land and lots to take
advantage of market opportunities that may exist.
Urban Development. The Company is developing two different
products in the downtown Chicago market. For the majority of the
Company's urban development, the Company targets for acquisition
former or current manufacturing buildings which are suitable for
the conversion to residential loft-condominiums or construction
of townhomes. The Company is also targeting for acquisition
parcels for use in developing multi-story apartment condominiums.
Typically, any building on a parcel of this type would be torn
down prior to new construction beginning. Each of the factors
outlined in the acquisition process above is performed on these
sites, including assessing the Company's ability to obtain
appropriate entitlements and zoning. Other factors evaluated
are the Company's ability to provide adequate parking capacity
and access to public transportation, commercial centers, and
various City of Chicago amenities.
<PAGE>
Prior to acquisition, the Company prepares architectural
drawings, performs environmental testing and assessments, reviews
zoning and entitlement requirements, and prepares feasibility
studies based on projected absorption and estimated construction
costs. The Company has been able to start initial construction
activities soon after acquisition and will typically open for
sale within six months after acquisition as the evaluation and
zoning period is much shorter than for suburban developments.
Home and Community Design
The Company continuously engages in market research in an effort
to ensure that its home designs and features address the
preferences of potential home buyers. The Company closely
monitors new trends in the industry, while carefully tracking the
design features chosen by buyers of its homes as well as those
offered by competitors in its markets. In addition, the Company
conducts focus groups, exit interviews at its model home sites,
telephone surveys and demographic studies in an effort to produce
the most desirable architectural designs and home amenities
available in a particular price range. The Company's marketing
and design staff develop the detailed standards and
specifications for each new product line and then work closely
with one of a select number of unaffiliated architectural firms
to produce a product line that delivers the home designs and
features preferred by the target home buyers.
Within each suburban project, the Company seeks to create a sense
of community through the use of cul-de-sacs, landscaping and a
variety of front elevations and architectural designs that
complement each other. The Company also seeks to create
continuity within each suburban project by coordinating the
exterior colors and trim of neighboring homes. The product lines
offered in both suburban and urban projects depend upon many
factors including the housing alternatives generally available in
the area, the needs of the target home buyers for such project
and the Company's cost per unit in the project.
Construction
The Company typically acts as the general contractor for the
development and construction of its projects, employing project
managers who supervise the land development and construction
within each project. Typically, the Company relies on two
project superintendents to supervise construction for each
product line within a project. The "rough" superintendent is
responsible for each home within a product line from excavation
until the drywall is in place. The "trim" superintendent is then
responsible for each home within the product line until the home
is delivered to the buyer. Generally, each project
superintendent coordinates the activities of the subcontractors,
suppliers and building inspectors and is responsible for ensuring
that the homes conform to the Company's quality control
standards.
The Company also acts as general contractor for its urban project
developments. The Company employs a project construction manager
who typically supervises one or more building conversions, and a
construction superintendent who supervises all phases of
construction for a particular building. The length of time of
construction process is expected to vary due to the amount of
demolition, environmental, or other construction requirements.
Additionally, occupancy requirements typically specify completion
of an entire phase prior to the initial closings, and as such
will usually result in an approximate nine to twelve month
construction cycle.
Subcontractors typically are retained on a project-by-project
basis to complete construction at a fixed price per model for a
varying term, usually six months to one year. Agreements with
the Company's subcontractors are generally entered into after
competitive bidding among competing subcontractors. The Company
negotiates price and volume discounts with manufacturers and
suppliers on behalf of subcontractors to take advantage of its
volume of production. Management believes that this strategy has
given the Company an advantage in producing quality homes at the
lowest possible cost. The Company typically obtains price
guarantees from manufacturers and material suppliers, but makes
no long-term purchase commitments to material suppliers on behalf
of subcontractors.
<PAGE>
Materials used in the construction of the Company's homes are
available from a number of sources, but material prices may
fluctuate due to various factors, including supply and demand
imbalances. In light of such fluctuation, the Company continues
to evaluate various alternative sources of materials such as
using metal frames and engineered lumber (i.e., soft woods in
laminated form) instead of construction lumber for certain
purposes. Construction labor has generally been available to the
Company, but the home-building industry has in the past
experienced occasional shortages of skilled labor in certain
markets. Although there is presently an adequate supply of labor
and materials for the Company's projects, it is possible that
future shortages of skilled workers and/or materials may occur.
For suburban developments, the Company generally clusters the
homes sold within a project, which management believes creates
efficiencies in land development and construction and improves
customer satisfaction by reducing the number of vacant lots
surrounding a completed home. The Company typically completes
the construction of a suburban home within four months from
commencement of construction, although the construction schedule
for a home depends in large part on the time of year,
availability of labor, materials and supplies and other factors.
In the Chicago urban market, the completion time of each project
typically ranges from nine months to eighteen months depending
upon the size and number of apartment or loft units per project.
The Company has historically provided a one year limited warranty
of workmanship and materials and a two year limited warranty on
the working systems for each of its homes. Beginning in 1995,
the Company expanded its warranty policy to include a ten year
limited warranty against certain structural defects.
Historically, the Company has not incurred any significant
financial costs relating to any warranty claims or defects in
construction (see Item 3. Legal Proceedings).
Marketing and Sales
The Company attracts initial interest in its projects through a
comprehensive advertising program using media such as newspapers,
direct mail, and billboards. In addition, the Company has a
buyer referral program in which buyers of the Company's homes
receive referral fees for introducing new buyers to the Company.
The Company believes that it has a reputation for developing high
quality homes in the Chicago metropolitan area which helps
generate interest in each new project.
The Company believes that the effective use of model homes plays
an integral role in demonstrating the competitive advantages of
its home designs and features to prospective home buyers. The
Company has an exclusive relationship with an award winning
interior designer who is responsible for creating and maintaining
attractive model homes for each product line.
The Company's objective is to enter into sales contracts for all
of its homes in advance of construction, thereby greatly reducing
the risk of unsold inventory. The sales contracts for its homes
generally provide for mortgage approval within a specified
period. The Company attempts to minimize cancellations by
requiring a nonrefundable cash deposit of approximately 5% to 10%
of the purchase price for buyers using conventional financing and
by training its sales force to assess the qualification of
potential home buyers. A network database available to sales
personnel provides information as to the qualifying criteria for
certain lenders, thus allowing sales personnel to assess a
customer's ability to qualify for a mortgage at the time the
customer is selecting a model and options.
A majority of the Company's homes are sold by full-time,
commissioned employees who typically work from sales offices
(open seven days a week) located within each project.
Additionally, the Company sells homes through independent
brokers. Employees assist prospective buyers throughout the home
buying process by providing them with information from a network
database (developed by the Company) on the available product
lines, pricing, options and upgrades, mortgage financing
(including qualifying criteria), warranties and construction.
This database also contains a complete listing of the Company's
home buyers and can produce detailed demographic information on
the residents of a project. The concentration of the Company's
developments within the Chicago metropolitan area makes it
possible for the Company to retain sales employees for a long-
term, rather than on a project-by-project basis, which management
believes results in reduced training costs and a more
knowledgeable and motivated sales force.
<PAGE>
The Company has experienced, and expects to continue to
experience, significant seasonality and quarter to quarter
variability in residential sales and net income. Generally, the
receipt of sales contracts is highest during the first six months
of the calendar year. Related closings typically peak in the
July through September period as homes contracted for sale
earlier in the year are delivered. Management believes that this
seasonality reflects the tendency of home buyers to shop for a
new home in the Spring with the goal of closing in the Fall or
Winter as well as the scheduling of construction to accommodate
seasonal weather conditions (see Note 11. Quarterly Results of
Operations in the Footnotes to Consolidated Financial
Statements).
Backlog
The Company's homes are generally offered for sale in advance of
their construction. Substantially all of the Company's home
sales during 1997 were sold pursuant to standard sales contracts
entered into prior to commencement of construction. The
Company's standard sales contracts generally require the customer
to make an earnest money deposit upon signing. This deposit may
range from a nominal amount for an FHA or VA financed purchase,
to 5% to 10% of the purchase price for a buyer using conventional
financing. Upon execution of the contract and receipt of the
deposit, the home sale is included in backlog. The Company
recognizes revenue on residential sales at closing, when title to
the home has passed to the buyer.
<TABLE>
The following table provides certain backlog information for the
twelve month periods presented:
<CAPTION>
September 30,
1997 1996 1995
(dollars in thousands)
<S> <C> <C> <C>
Number of home sales closed during the 636 701 631
twelve month period
Lots/units owned an available for 1,920 1,717 3,113
development
Number of lots/units under contract 2,331 3,032 824
Backlog 247 197 274
Average sales price in backlog $183 $168 $183
Aggregate sales value in backlog $45,228 $33,193 $50,232
</TABLE>
The Company's backlog at any particular date is subject to
substantial variation and is dependent upon several factors,
including the number of homes then available for sale and the
length of time necessary to complete the closing of home sales
subject to pending contracts. The Company anticipates that the
closing of most of the sales of homes in backlog as of September
30, 1997 will occur in fiscal 1998. However, no assurances can
be given that homes in backlog will result in actual closings.
The aggregate sales value of backlog increased approximately $12
million from September 30, 1996 to September 30, 1997 due
primarily to the Company's entrance into the Chicago urban
market. The aggregate sales value of backlog decreased
approximately $17 million from September 30, 1995 to September
30, 1996 as efficiencies in the Company's construction process
resulted in an ability to close more homes in a shorter time
period in fiscal 1996.
<PAGE>
Customer Financing
Substantially all home buyers utilize long-term mortgage
financing to purchase a home. Lenders generally make loans only
to borrowers who earn three to four times the total amount of the
mortgage payment plus insurance and property taxes. As a result,
economic conditions, increases in unemployment or high mortgage
interest rates can eliminate a substantial number of potential
home buyers from the market. Although mortgage financing for
qualified home buyers was readily available during the year ended
September 30, 1997, there can be no assurance that affordable
mortgage financing will remain available to the Company's
customers in the future.
FHA and VA financing generally enable home buyers to purchase
homes with lower down payments than the down payments required
through conventional financing, allowing a purchaser to borrow
from 90% to 95% of the value of the home. The Company believes
that when conventional lending rates are higher, the availability
of FHA and VA financing broadens the group of potential
purchasers for the Company's homes. If conventional rates
increase substantially, the Company expects this percentage of
buyers applying for FHA or VA approval to increase. As of
September 30, 1997, the FHA financing limit for a one unit
residence was $153,000.
Competition and Market Factors
The home-building industry is a highly competitive and fragmented
market. The Company competes for residential sales with
national, regional and local developers and homebuilders,
individual resales of existing homes and condominiums, and
available rental housing. The Company also competes for the
acquisition of undeveloped land on which to build homes. Sales
of homes and land at deeply discounted prices by competitors,
lenders and similar institutions in the markets where the Company
operates could have a material adverse effect on the Company.
The Company is one of the leading developers of affordable homes
in the Chicago metropolitan area, and believes it competes
favorably as a result of price, its development expertise, its
knowledge of the local real estate market and governmental
permitting and approval process, and its favorable reputation in
the Chicago metropolitan area home-building industry.
The Chicago urban market is less fragmented then the suburban
market. While there are fewer competitors active in the market,
the number is quickly growing. Management believes that the
Company competes favorably with the competition as a result of
its early entry into the market, development expertise, product
design, location and the size and scope of its operations.
The home-building industry is cyclical and affected by consumer
confidence levels and prevailing economic conditions in general
and by job availability and interest rate levels in particular.
A variety of other factors affect the home-building industry and
demand for new homes, including changes in costs associated with
home ownership such as increases in property taxes and energy
costs, changes in consumer preferences, demographic trends and
the availability of and changes in mortgage financing programs.
Government Regulation and Environmental Controls
Generally, the Company must obtain numerous government approvals,
licenses, permits and agreements, referred to as "entitlements,"
before it can commence development and construction. Through
options and other financing arrangements, the Company typically
controls unentitled land during the entitlement process and only
purchases the land after the planning and zoning process is
complete. However, obtaining the many necessary entitlements for
residential developments in the Chicago metropolitan area is an
extended process which generally takes one to two years and can
involve a number of different governmental jurisdictions and
agencies and considerable expense. No assurance can be given
that the Company will be able to obtain entitlements in such time
frame in the future. The Company generally does not have any
rights to develop a project until after it has received all
required entitlements. Several governmental authorities in the
Chicago metropolitan area have imposed fees as a means of
defraying the cost of providing certain governmental services to
developing areas, or have required developers to donate land to
the municipality or to make certain off-site land improvements.
Certain permits and approvals will be required to complete the
residential developments currently being planned by the Company.
The ability of the Company to obtain necessary approvals and
permits for these projects is often beyond the Company's control
and could restrict or prevent the development of otherwise
desirable property. The length of time necessary to obtain
permits and approvals increases the carrying costs of unimproved
property acquired for the purpose of development and
construction. In addition, the continued effectiveness of
permits already granted is subject to factors such as changes in
policies, rules and regulations and their interpretation and
application.
<PAGE>
The Company is also subject to a variety of federal, state and
local statutes, ordinances, rules and regulations concerning
protection of health and the environment. These laws may result
in delays, cause the Company to incur substantial compliance
costs and prohibit or severely restrict development in certain
environmentally sensitive regions or areas. Prior to purchasing
a parcel of land, the Company evaluates such land for the
presence of hazardous or toxic materials, wastes or substances.
To date, the Company has not experienced any material delays as a
result of these laws and the Company's operations have not been
materially affected by the presence or potential presence of such
materials.
Bonds and Other Obligations
The Company is frequently required, in connection with the
development of its projects, to obtain performance or maintenance
bonds or letters of credit in lieu thereof. The amount of such
obligations outstanding at any time varies in accordance with the
Company's pending development activities. In the event any such
obligations are drawn upon, the Company would be obligated to
reimburse the issuing surety company or bank. At September 30,
1997, there were approximately $9.6 million in performance or
maintenance bonds and approximately $9.2 million in letters of
credit outstanding for such purposes (see Management's Discussion
and Analysis of Financial Condition and Results of Operations-
Liquidity and Capital Resources).
Employees
As of September 30, 1997, the Company employed 140 persons, 56 of
whom were involved in project management, land development,
production, contract management and contract administration, 38
of whom were sales and marketing personnel, and 46 of whom were
executive, accounting, systems and administrative personnel.
Although none of the Company's employees are covered by
collective bargaining agreements, many of the subcontractors and
suppliers which the Company engages are represented by labor
unions or are subject to collective bargaining arrangements. The
Company believes that its relations with its employees,
subcontractors and suppliers are good.
Item 2. Properties
The Company currently occupies approximately 25,000 square feet
of office space for its corporate headquarters in Schaumburg,
Illinois. The lease for this office space began on October 1,
1994 and terminates on March 31, 1998. The Company is currently
arranging to relocate its corporate office effective April 1,
1998.
Item 3. Legal Proceedings
The Company is involved in various routine legal proceedings
incidental to the conduct of its business.
In November, 1994, a lawsuit was brought against the Company and
certain directors and employees of the Company by the Board of
Managers of Parkside on the Green Condominium Association. The
complaint seeks damages against the Company for alleged
construction defects in the approximate amount of $1.6 million,
together with punitive damages against the named individuals for
alleged breach of fiduciary duty. The Company has assumed the
defense of this lawsuit on behalf of the individual defendants.
The lawsuit is in the discovery process and various inspections
are underway. The Company is defending the lawsuit vigorously.
<PAGE>
Management believes that none of these legal proceedings will
have a material adverse impact on the financial condition or
results of operations of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders
during the Company's fiscal quarter ended September 30, 1997.
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
The Company's Common Stock has been quoted on the Nasdaq Stock
Market's National Market (the "National Market") under the symbol
SUNH since July 9, 1993.
<TABLE>
The following table shows the high and low closing prices for the
Common Stock for the periods indicated as reported by the
National Market:
<CAPTION>
HIGH LOW
<S> <C> <C>
Fiscal 1997
Quarter ended September 30, 1997 $2.010 $1.500
Quarter ended June 30, 1997 2.375 1.750
Quarter ended March 31, 1997 3.125 2.250
Quarter ended December 31, 1996 4.000 2.250
Fiscal 1996
Quarter ended September 30, 1996 $4.000 $1.125
Quarter ended June 30, 1996 2.250 1.375
Quarter ended March 31, 1996 2.250 1.563
Quarter ended December 31, 1995 2.875 1.563
</TABLE>
The closing price of the Company's Common Stock as reported on
the National Market on December 22, 1997 was $1.5625 per share.
As of December 18, 1997, there were 43 holders of record of the
Company's Common Stock.
Dividends
The Company intends to retain its future earnings to finance the
continuing development of its business. Accordingly, the Company
does not anticipate paying any cash dividends on its Common Stock
in the foreseeable future. The payment of any future dividends
will be at the discretion of the Company's Board of Directors and
will depend upon, among other things, future earnings, the
success of the Company's development activities, capital
requirements, restrictions in financing arrangements, the general
financial condition of the Company and general business
conditions. At present, the Company's ability to pay dividends
is restricted to 50% of consolidated net income for the preceding
fiscal year provided the Company is not in default of any
provisions of the Loan Agreement (as defined hereafter, see
"Management's Discussion and Analysis of Financial Condition and
Results of Operations-Liquidity and Capital Resources").
<PAGE>
Item 6. Selected Consolidated Financial Data
The following selected consolidated financial and operating data
of the Company are qualified by reference to and should be read
in conjunction with the Consolidated Financial Statements and
Notes thereto and other financial data included elsewhere herein.
The data set forth below (except for the pro forma statement of
income data) as of and for the years ended September 30, 1997 and
1996, the nine months ended September 30, 1995 and the years
ended December 31, 1994, and 1993 have been derived from the
Company's audited consolidated financial statements.
Consolidated balance sheets at September 30, 1997 and September
30, 1996 and the related consolidated statements of income,
changes in shareholders' equity, and cash flows for the years
ended September 30, 1997 and 1996 and the nine months ended
September 30, 1995 and notes thereto appear elsewhere herein.
These historical results are not necessarily indicative of the
results to be expected in the future (see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations").
<TABLE>
Nine
Statement of Income Data: Year ended Year ended Months ended Year ended Year ended
September 30, September 30, September 30, December 31, December 31,
1997 1996 1995 1994 1993
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Residential Sales (1) $108,743 $120,948 $63,811 $118,659 $77,764
Income (loss) before minority interest and (715) 2,176 (7,051) 3,643 8,035
and provision for income taxes (2)
Net income (loss) (350) 1,235 (4,216) 1,930 5,090
Net income (loss) per share ($0.04) $0.16 ($0.54) $0.25
Pro Forma Statement of Income Data: (3)
Net income $4,709
Net income per share 0.76
Balance Sheet Data: September 30, September 30, September 30, December 31, December 31,
1997 1996 1995 1994 1993
(in thousands)
Real estate inventories $80,787 $76,101 $86,434 $86,721 $65,370
Total assets 94,548 86,406 98,880 98,907 81,057
Notes and mortgages payable 33,087 23,027 42,787 34,280 26,873
Minority interest (2) (182) 111 266 1,049 (64)
Shareholders' equity 28,043 28,393 27,153 31,369 29,439
<FN>
(1)Residential sales are recognized at closing, when title to the home has passed to
the buyer (see Note 1 of the Notes to Consolidated Financial
Statements).
(2)The Company is the General Partner of The Sundance-Kaco Limited Partnership, with
a 75% interest in said partnership. Under the terms of the
partnership agreement, the limited partner is entitled to 25%
of all profits of the partnership and will receive cash
distributions. Through 1993, the Company was the general
partner of The Victoria Woods Limited Partnership, with a
50.1% interest in such partnership. Under the terms of the
partnership agreement, the limited partner was entitled to
49.9% of all profits of the partnership and received cash
distributions.
(3)The pro forma statement of income data are based on historical net income,
as adjusted to reflect a provision for income taxes, as if the
Company had been a C Corporation since inception (see Note 2 of
the Notes to Consolidated Financial Statements).
</FN>
</TABLE>
<PAGE>
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
General
In 1995, the Company changed its fiscal year end from December 31
to September 30. The Company's discussion regarding the Results
of Operations compares the years ended September 30, 1997 and
1996 and the unaudited year ended September 30, 1995.
Results of Operations
<TABLE>
The following tables set forth the percentage of the Company's
residential sales represented by each income statement line
presented and certain other information regarding the Company's
operations for the periods indicated.
<CAPTION>
Year ended September 30,
1997 1996 1995
<S> <C> <C> <C>
Residential sales 100.0% 100.0% 100.0%
Cost of sales 89.0 88.5 91.6
Reduction in carrying value of real estate - - 3.4
assets
Gross profit 11.0 11.5 5.0
Selling expenses 7.9 5.8 6.3
General and administrative expenses 4.0 4.1 4.7
Other (income) expense, net (0.2) (0.2) 0.2
Income (loss) before minority interest and (0.7) 1.8 (6.2)
provision for income taxes
Minority interest (0.1) 0.1 -
Provision (benefit) for income taxes (0.2) 0.7 (2.5)
Net income (loss) (0.4%) 1.0% (3.7%)
New orders (net) 686 624 326
Homes closed-units 636 701 631
Average selling price-homes closed $171,000 $172,500 $169,800
</TABLE>
<PAGE>
Year Ended September 30, 1997 Compared to the Year Ended
September 30, 1996
Residential sales, which are recognized upon the selling and
closing of homes, decreased $12.2 million to $108.7 million for
the year ended September 30, 1997, a decrease of 10.1% over the
twelve months ended September 30, 1996. The decrease was
primarily due to an overall decline in the suburban housing
market of approximately 10%. The average sales price of home
sales closed decreased slightly from $172,500 in fiscal 1996 to
$171,000 in fiscal 1997.
There were 686 net new sales orders for the year ended September
30, 1997 representing an increase of 10%, or 62 orders, over the
fiscal 1996 total of 624. The Company attributes the increase
primarily to the expansion of its market place to include the
Chicago urban market.
Cost of sales includes land acquisition costs, development costs,
construction costs and direct overhead, job oversight
supervision, customer service, warranty costs, interest and
property taxes. Cost of sales decreased $10.3 million to $96.8
million in fiscal 1997 primarily as a result of lower sales
volume. Cost of sales as a percent of revenues was 89.0% in
fiscal 1997 compared to 88.5% of sales revenue in fiscal 1996.
Selling expenses include advertising, sales commissions,
payroll, amortization of the costs of non-permanent upgrades to
convert standard homes to model homes (draperies, wall-hangings,
decor items) and maintenance of model homes. Certain expenses,
such as sales commissions and amortization of model home
upgrades, are derived from sales prices or the number of home
sales closed and thus remain relatively constant as a percentage
of residential sales. Other expenses, such as advertising costs
and model home maintenance, may be significantly influenced in
any given period by the number of grand openings or special
promotions and the number of projects operating in that period.
Costs associated with upgrading standard homes to model homes are
capitalized and expensed as related home sales are closed, while
most other selling expenses are expensed as incurred.
Selling expenses increased by $1.6 million from $7.0 million in
fiscal 1996 to $8.6 million in fiscal 1997. As a percent of
sales, selling expenses increased from 5.8% in the twelve months
ended September 30, 1996, to 7.9% in the twelve months ended
September 30, 1997. This increase is primarily due to increased
marketing activities for several projects which will not deliver
closed units and homes until fiscal 1998 and additional costs
incurred due to the decision by the Company to use commissioned
brokers.
General and administrative expenses decreased by $639,000 in the
year ended September 30, 1997 compared to the year ended
September 30, 1996. As a percent of sales, these expenses
remained substantially unchanged. These costs have decreased due
to the Company's continued efforts to reduce such expenses.
The Company is the general partner, with a 75.0% partnership
interest, in the Sundance-Kaco Limited Partnership, an Illinois
limited partnership. Also participating in the partnership is
one limited partner, Kaco, Inc, which is entitled to 25.0% of
all profits from the Spring Lake Farm South project. The limited
partner's share of losses for 1997 was $131,000. Pursuant to the
provisions of the partnership agreement, limited partner
distributions of $161,000 were paid during 1997.
The benefit for income taxes was $234,000 in fiscal 1997. The
Company recognized an income tax provision of approximately
$824,000 for fiscal 1996. The effective tax rate for both fiscal
1997 and 1996 was approximately 40%.
<PAGE>
Year Ended September 30, 1996 Compared to the Twelve Months Ended
September 30, 1995
Residential sales increased $13.8 million to $120.9 million for
the year ended September 30, 1996, an increase of 12.9% over the
twelve months ended September 30, 1995. The increase was
primarily due to an increase in the number of deliveries in the
year from 631 in the 1995 period to 701 in the 1996 period.
Additionally, the average sales price of home sales closed
increased from $169,800 in fiscal 1995 to $172,500 in fiscal
1996.
There were 624 net new sales orders for the year ended September
30, 1996 representing an increase of 91%, or 298 orders, from the
comparable 1995 period total of 326. The Company attributes the
increase to the offering of a simplified and economical product
line to the first-time home buyer at three developments which
accounted for approximately 50% of new orders and 30% of home
closings in fiscal 1996.
Cost of sales increased $8.9 million to $107 million in fiscal
1996. Cost of sales as a percent of revenues was 88.5% in fiscal
1996 compared to 91.6% of sales revenue for the 1995 period,
excluding the reduction in carrying value of real estate assets
of $3.7 million (see discussion related to the reduction in real
estate assets in the comparative nine month periods below). The
increase in gross profit as a percent of sales of 3.1 percentage
points (exclusive of the 1995 adjustment to real estate
inventories) primarily resulted from reductions in direct
construction costs as a percentage of sales due to the product
standardization initiatives begun during the year combined with
reductions in field overhead expense.
Selling expenses increased by $0.2 million to $7.0 million in
fiscal 1996. As a percent of sales, selling expenses decreased
from 6.3% in the twelve months ended September 30, 1995, to 5.8%
in fiscal 1996. The decrease as a percent of sales revenue is due
primarily to the reduced number of model homes, which resulted in
reduced carrying costs.
General and administrative expenses decreased nominally in the
year ended September 30, 1996 compared to the comparable 1995
period. As a percent of sales, general and administrative
expense decreased from 4.7% to 4.1%.
The Company is the general partner, with a 75.0% partnership
interest, in the Sundance-Kaco Limited Partnership, an Illinois
limited partnership. Also participating in the partnership is
one limited partner, Kaco, Inc, which is entitled to 25.0% of
all profits from the Spring Lake Farm South project. The limited
partner's share of profits for 1996 was $117,000. Pursuant to
the provisions of the partnership agreement, limited partner
contributions of $73,000 were received and distributions of
$345,000 were paid during 1996.
The provision for income taxes was $824,000 in fiscal 1996. The
Company recognized an income tax benefit of approximately
$2.7 million for the twelve months ended September 30, 1995. The
effective tax rate for fiscal 1996 and 1995 was approximately
40%.
<PAGE>
Inflation
The Company, as well as the home-building industry in general,
may be adversely affected during periods of high inflation,
primarily because of higher land acquisition, land development
and construction costs. In addition, higher mortgage interest
rates may significantly affect the affordability of permanent
mortgage financing to prospective purchasers. Inflation also
increases the Company's interest costs and the cost of labor and
materials. The Company attempts to pass through to its buyers
any increases in its costs through increased selling prices.
Inflation did not have a material impact on fiscal 1997 or 1996
results. In 1995, delays experienced in obtaining required
permits resulted in increased construction costs on the fixed
price homeowner contracts which made up the Company's sales
backlog. These increased costs, in turn, contributed to the
decline in profit margins in both the 1995 and 1994 periods. The
Company's project development schedule was changed in 1995 to
ensure that communities are not open for sale as early in the
development process as in the past which should minimize the
potential for delays after the opening and thus the likelihood of
delays in delivery once the house is sold. Despite such efforts,
if the Company were to experience similar delays, no assurance
can be given that inflation would not have a material adverse
impact.
Liquidity and Capital Resources
Net cash provided by or used for operating activities varies from
period to period, due primarily to the Company's houseline
inventory activity, land acquisition and development
requirements, and in lesser part to the Company's net income.
Net cash used for operations in fiscal 1997 was $7.9 million,
primarily due to the build-up of inventory and deferred start-up
costs on projects for which there were no closings in fiscal
1997.
On February 7, 1997 the Company entered into an Amended and
Restated Revolving Credit Loan Agreement (the "Loan Agreement"),
with two banks that replaced the previous financing arrangements
with the banks. The Loan Agreement provides a $60.0 million line
of credit. The borrowings are secured by the real estate assets
of the Company, with certain exceptions. Borrowings under the
Loan Agreement bear interest at LIBOR plus 275 basis points for
borrowings up to $40 million, and prime plus .5% for borrowings in
excess of $40 million, plus certain customary fees. The Loan
Agreement is scheduled to mature on February 1, 1999. Available
borrowings under the Loan Agreement are reduced by the amount of
letters of credit outstanding. The Loan Agreement includes
certain customary representations and covenants, including
restrictions on the Company's ability to pay dividends and
maintenance of certain financial ratios. As of September 30,
1997, the Company had violated certain covenants as set forth in
the Loan Agreement, including those related to the Company's
corporate reorganization, projects exceeding three stories, and
certain financial covenants, specifically, those related to net
worth and net income. The Company believes that it will be able
to either cure these defaults and events of default or revise the
terms of the Loan Agreement or negotiate a replacement facility,
but there can be no assurance of such cure, revised agreement or
replacement facility. Failure by the Company to cure these
defaults, revise the terms of the Loan Agreement or negotiate a
replacement facility on a timely basis could have a material
adverse effect on the Company's operations. The subordinated
notes payable to the Principal Shareholder, as well as any
interest thereto, are not allowed to be repaid until all defaults
are cured and certain minimum net worth levels are maintained.
As of December 15, 1997, the Company was negotiating with its
banks in order to provide adequate funding for the expansion of
its Chicago Urban Division including the construction of a 23-
story high rise which would include 6 floors of parking and 17
floors of residential condominium apartments. There can be no
assurances that the Company will be able to secure such financing
on acceptable terms.
As of September 30, 1997, the Company had borrowed $30.8 million
under the Loan Agreement and had $9.2 million of outstanding
letters of credit, leaving $20.0 million as available for future
borrowings. The Company believes that the current facility (as
revised or replaced with a similar facility) together with its
cash flow from operations will be sufficient to fund projected
near term requirements and any relevant market opportunities as
well as its plans to expand its inventory of developed land.
<PAGE>
Item 8. Financial Statements and Supplementary Data
The response to this item is submitted as a separate section of
this report beginning on page F-1.
Item 9.Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
None.
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
Information with respect to the directors and officers of the
Company is hereby incorporated herein by reference to the
sections, "Election of Directors-Nominees," "-Other Directors"
and "Executive Officers," in the Company's Proxy Statement which
is expected to be filed with the Securities and Exchange
Commission (the "Commission") in definitive form no later than
January 28, 1998.
Information with respect to required Section 16(a) disclosure is
hereby incorporated herein by reference to the section "Executive
Officers'-Compliance with Section 16(a) of The Securities
Exchange Act of 1934," in the Company's Proxy Statement which is
expected to be filed with the Commission in definitive form no
later than January 28, 1998.
Item 11. Executive Compensation
Information with respect to executive compensation is hereby
incorporated herein by reference to the sections, "Election of
Directors", "Compensation of Directors", and "Executive
Compensation," in the Company's Proxy Statement which is expected
to be filed with the Commission in definitive form no later than
January 28, 1998.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
Information with respect to security ownership of certain
beneficial owners and management is hereby incorporated herein by
reference to the section "Security Ownership of Principal
Shareholders and Management," in the Company's Proxy Statement
which is expected to be filed with the Commission in definitive
form no later than January 28, 1998.
Item 13. Certain Relationships and Related Transactions
Information with respect to certain relationships and related
transactions is hereby incorporated herein by reference to the
section "Certain Transactions," in the Company's Proxy Statement
which is expected to be filed with the Commission in definitive
form no later than January 28, 1998.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K
(a) (1) and (2)The response to this portion of Item 14 is submitted as a
separate section of this report beginning on page F-1.
All other schedules have been omitted because they are
inapplicable, not required, or the information is included
elsewhere in the consolidated financial statements or notes
thereto.
(3) Exhibits: The response to this Item is incorporated by reference
to Item 14(c) below.
(b) No report on Form 8-K was filed by the Company during the
last quarter of the period covered by this report.
(c) The exhibits listed below are filed with this report or
incorporated by reference, as set forth below. The Company
will furnish to any shareholder, upon written request, any
of the exhibits listed below upon payment by such
shareholder of the Company's reasonable expenses in
furnishing any such exhibit.
Exhibit
Number Document Description
3.1 a Amended and Restated Articles of Incorporation of the Registrant
3.2 a Amended and Restated Bylaws of the Registrant
4.1 c Specimen stock certificate representing Common Stock
4.2 f Second Amended and Restated Revolving Credit Loan Agreement dated
February 7, 1997
4.3 First Amendment to Second Amended and Restated Revolving Credit
Loan Agreement dated April 11, 1997
10.1 b The Sundance Homes, Inc. 1993 Stock Incentive Plan
10.2 b The Sundance Homes, Inc. 1993 Directors' Option Plan
10.3 b Profit Sharing and Savings Plan
10.4 b Form of Tax Indemnification Agreement
10.5 b Form of Director's Indemnification Agreement
10.6 b Form of Dividend Note
10.8 c Lease Agreement between the Company and The Mutual Life Insurance
Company of New York
10.10 e Employment Letter for Jon Tilkemeier, dated September 10, 1996
10.11 e Employment Letter for Joseph Atkin, dated November 27, 1996
10.12 d First Amendment to the Sundance Homes, Inc. Stock Incentive Plan
10.13 d First Amendment to the Sundance Homes, Inc. Directors' Stock
Option Plan
21.0 List of Subsidiaries
23.1 Consent of Price Waterhouse LLP
27.1 Financial Data Schedule
a Incorporated by reference to the Company's
Registration Statement on Form S-8, Registration No.
33-96546.
b Incorporated by reference to the Company's
Registration Statement on Form S-1, Registration
Statement No. 33-60988.
c Incorporated by reference to the Company's
Annual Report on Form 10-K for the period ended
December 31, 1994.
d Incorporated by reference to the Company's
Registration Statement on Form S-8, Registration No.
333-11087
e Incorporated by reference to the Company's
Annual Report on Form 10-K for the period ended
September 30, 1996.
f Incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the period ended
December 31, 1996.
(d) The response to this Item is incorporated by reference to
Item 14(a)(2).
<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 amendment to be signed on its behalf by the undersigned,
thereunto duly authorized, on the 23rd day of December, 1997.
SUNDANCE HOMES, INC.
By: /s/ Maurice Sanderman
Maurice Sanderman, Chariman of the Board and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the date
indicated.
<TABLE>
Signature Title Date
<S> <C> <C>
Chairman of the Board and Chief December 23, 1997
/s/ Maurice Sanderman Executive Officer
Maurice Sanderman (Principal Executive Officer)
Vice-President and Chief December 23, 1997
/s/ Joseph Atkin Financial Officer
Joseph Atkin (Principal Financial and
Accounting Officer)
/s/ Dennis Bookshester Director December 23, 1997
Dennis Bookshester
/s/ Charles Engles Director December 23, 1997
Charles Engles
/s/ Gerald Ginsburg Director December 23, 1997
Gerald Ginsburg
</TABLE>
<PAGE>
SUNDANCE HOMES, INC.
ITEM 8, ITEM 14(a) (1) and (2)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Accountants F-2
Consolidated Balance Sheets as of September 30, 1997 and
September 30, 1996 F-3
Consolidated Statements of Income for the Year Ended September 30,
1997, the Year Ended September 30, 1996 and the Nine Months
Ended September 30, 1995 F-4
Consolidated Statements of Changes in Shareholders' Equity for
the Year Ended September 30, 1997, the Year Ended September 30,
1996 and the Nine Months Ended September 30, 1995 F-5
Consolidated Statements of Cash Flows for the Year Ended
September 30, 1997, the Year Ended September 30, 1996 and the
Nine Months Ended September 30, 1995 F-6
Notes to Consolidated Financial Statements F-7
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Sundance Homes, Inc.
In our opinion, the consolidated financial statements listed in
the index appearing on page F-1, present fairly, in all material
respects, the financial position of Sundance Homes, Inc. and its
subsidiaries at September 30, 1997 and 1996, and the results of
their operations and their cash flows for the years ended
September 30, 1997 and 1996 and the nine months ended September
30, 1995, in conformity with generally accepted accounting
principles. 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 of these statements in accordance with
generally accepted auditing standards which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed
above.
/s/ Price Waterhouse LLP
Chicago, Illinois
December 15, 1997
<PAGE>
<TABLE>
SUNDANCE HOMES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<CAPTION>
September 30, September 30,
1997 1996
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 4,615 $ 4,501
Real estate inventories 80,787 76,101
Prepaid expenses and other assets 1,566 751
Deferred income taxes receivable - 461
Property and equipment, net 3,289 2,520
Deferred project start-up costs 3,726 2,072
Income tax receivable 565 -
TOTAL ASSETS $ 94,548 $ 86,406
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued construction costs $ 23,711 $ 23,067
Other accrued expenses 1,976 6,182
Customer deposits 2,116 1,433
Notes and mortgages payable 33,087 23,027
Deferred income taxes payable 1,604 -
Subordinated notes payable 4,193 4,193
Total liabilities 66,687 57,902
Minority interest (182) 111
Shareholders' equity:
Preferred stock, $0.01 par value, 1,000,000 shares
authorized, none issued or outstanding - -
Common stock, $0.01 par value, 20,000,000 shares
authorized; 7,807,000 shares issued 78 78
Additional paid-in capital 26,977 26,977
Retained earnings 988 1,338
Total shareholders' equity 28,043 28,393
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 94,548 $ 86,406
<FN>
The accompanying notes are an integral part of these financila statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
SUNDANCE HOMES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
<CAPTION>
Nine months
Year ended Year ended ended
September 30, September 30, September 30,
1997 1996 1995
<S> <C> <C> <C>
Residential sales $ 108,743 $ 120,948 $ 63,811
Cost of sales 96,793 107,057 58,852
Reduction in carrying value of real
estate assets - - 3,657
Gross profit 11,950 13,891 1,302
Selling expenses 8,629 6,968 4,915
General and administrative expenses 4,301 4,940 3,370
Other (income) expense, net (265) (193) 68
Income (loss) before minority interest
and provision (benefit) for income taxes (715) 2,176 (7,051)
Minority interest (131) 117 (24)
Income (loss) before provision (benefit)
for income taxes (584) 2,059 (7,027)
Provision (benefit) for income taxes (234) 824 (2,811)
Net income (loss) $ (350) $ 1,235 $(4,216)
Net income (loss) per share ($0.04) $0.16 ($0.54)
Weighted average number
of shares outstanding 7,807 7,806 7,805
<FN>
The accompanying notes are an integral part of these financial statments.
</FN>
</TABLE>
<PAGE>
<TABLE>
SUNDANCE HOMES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands)
<CAPTION>
Common Stock Additional
Paid-In Retained
Shares Amount Capital Earnings Total
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994 7,805 $ 78 $ 26,972 $ 4,319 $ 31,369
Net loss - - - (4,216) (4,216)
Balance at September 30, 1995 7,805 78 26,972 103 27,153
Exercise of stock options 2 - 5 - 5
Net income - - - 1,235 1,235
Balance at September 30, 1996 7,807 78 26,977 1,338 28,393
Net loss - - - (350) (350)
Balance at September 30, 1997 7,807 $ 78 $ 26,977 $ 988 $ 28,043
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
SUNDANCE HOMES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<CAPTION>
Nine months
Year ended Year ended ended
September 30, September 30, September 30,
1997 1996 1995
<S> <C> <C> <C>
Operating activities:
Net income (loss) $ (350) $ 1,235 $ (4,216)
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Depreciation and amortization 1,109 848 569
Reduction in carrying value of real estate assets - - 3,657
Minority interest (131) 117 (24)
Deferred income taxes 2,065 (461) (1,023)
Changes in operating assets and liabilities:
Real estate inventories (4,686) 10,333 (2,878)
Prepaid expenses and other assets (815) 278 (148)
Income tax receivable (565) 1,964 (1,964)
Deferred project start up costs (1,654) 628 626
Accounts payable and accrued construction cos ts 644 6,551 (3,737)
Other accrued expenses (4,206) 866 1,333
Customer deposits 683 (1,216) (108)
Net cash (used for) provided by operating activities (7,906) 21,143 (7,913)
Investing activities:
Property and equipment, net (1,878) (1,292) (244)
Exercise of stock options - (5) -
Net cash used for investing activities (1,878) (1,297) (244)
Financing activities:
Borrowings under line of credit 111,275 99,392 69,750
Repayments of line of credit (99,682) (115,691) (58,199)
Borrowings under notes payable 650 1,340 535
Repayments of notes payable (2,183) (4,801) (3,579)
Contributions from minority interest - 73 111
Distributions to minority interest (162) (345) (870)
Net cash provided by (used for) financing activities 9,898 (20,032) 7,748
Net increase (decrease) in cash and cash equivalents 114 (186) (409)
Cash and cash equivalents:
Beginning of period 4,501 4,687 5,096
End of period $ 4,615 $ 4,501 $ 4,687
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
<PAGE>
SUNDANCE HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
Note 1 - Summary of Significant Accounting Policies:
Nature of business
Sundance Homes, Inc. is engaged in the development of land and
construction of attached and detached single-family homes and
urban residential buildings in the Chicago metropolitan area.
Year End Change
In January 1995, the Board of Directors of the Company (as
defined hereafter) adopted a resolution providing that the date
for the end of the fiscal year of the Company be changed from
December 31 to September 30. As a result, the period ending
September 30, 1995 contains nine months of operations.
Principles of consolidation
The consolidated financial statements include the accounts of
Sundance Homes, Inc., its wholly-owned subsidiaries (the
"Company") and its investment in a majority-owned limited
partnership. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Revenue recognition
Residential sales are recognized at closing when title to the
home has passed to the buyer. The Company's homes are generally
offered for sale in advance of their construction. To date, most
of the Company's homes have been sold pursuant to standard sales
contracts entered into prior to commencement of construction.
The Company's standard sales contracts generally require the
customer to make an earnest money deposit. This deposit may
range from a nominal amount for an FHA or VA financed purchase to
5% to 10% of the purchase price for a buyer using conventional
financing.
Real estate inventories and cost of sales
Real estate inventories are carried at cost, which is less than
estimated net realizable value, and include land, land
development, direct and certain indirect construction costs,
interest and real estate taxes.
At the time of revenue recognition, cost of sales is charged with
the actual construction costs incurred and any estimate to
complete, plus an allocation of the total estimated cost of land
and land development, interest, real estate taxes and any other
capitalizable common costs based on the relative sales value
method of accounting.
The Company generally provides a one year limited warranty of
workmanship and materials and a two year limited warranty on the
working systems for each of its homes. Accordingly, a warranty
reserve, based on the Company's historical experience, is
provided as residential sales are closed; this reserve is reduced
by the cost of subsequent work performed.
<PAGE>
Deferred project start-up costs
Deferred project start-up costs include forward planning,
architectural design costs, and other miscellaneous costs, other
than normal period expenses, incurred prior to a project's first
closing. Such amounts are capitalized as incurred and charged to
cost of sales as related home sales are closed.
Interest capitalization
Interest and related debt issuance costs are capitalized to
qualifying real estate inventories as incurred, in accordance
with Statement of Financial Accounting Standards (SFAS) No. 34,
"Capitalization of Interest Cost", and charged to cost of sales
as revenue from residential sales is recognized.
Property and equipment
Property and equipment are carried at cost less accumulated
depreciation and are depreciated using straight line and
accelerated methods over the estimated useful lives of the
assets, except for model home upgrades and furnishings which are
amortized as related home sales in a development are closed.
Significant additions and improvements are capitalized, while
expenditures for maintenance and repairs are charged to
operations as incurred. The cost and accumulated depreciation of
property and equipment sold or retired are removed from the
respective accounts and the resultant gains or losses, if any,
are included in current operations.
Advertising costs
The Company attracts initial interest in its projects through a
comprehensive advertising program using media such as newspapers,
direct mail, telemarketing, billboards and, to a lesser extent,
radio and television. Advertising costs, which are expensed as
incurred, aggregated approximately $2.9 million, $1.9 million and
$1.1 million during the years ended September 30, 1997 and 1996
and the nine months ended September 30, 1995, respectively.
Income taxes
Deferred income taxes are determined under the asset and
liability method in accordance with SFAS No. 109 "Accounting for
Income Taxes". Under SFAS No. 109, deferred income taxes arise
from temporary differences between the income tax basis of assets
and liabilities and their reported amounts in the consolidated
financial statements.
<PAGE>
Cash and equivalents
For purposes of reporting cash flows, the Company considers all
highly liquid investments with an original maturity of three
months or less to be cash equivalents.
<TABLE>
Supplemental disclosures of cash flow information are as follows
(in thousands):
<CAPTION>
Year ended Year ended Nine months ended
September 30, September 30, September 30,
1997 1996 1995
<S> <C> <C> <C>
Cash paid for:
Interest $ 5,975 $ 3,536 $ 3,096
Income taxes 75 - 150
</TABLE>
Use of estimates
The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosures of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the year then
ended. Actual results could differ from those estimates.
Note 2 - Real Estate Inventories:
<TABLE>
Real estate inventories are summarized as follows (in thousands):
<CAPTION>
September 30, September 30,
1997 1996
<S> <C> <C>
Work-in-process:
Land and land development $ 38,337 $ 49,382
Construction inventory 33,948 18,761
Completed homes:
Models 7,590 6,493
Speculative homes 912 1,465
$ 80,787 $ 76,101
</TABLE>
Completed homes include models constructed to help market a
development and allocations of land and development and other
allocable costs. Speculative homes represent non-model homes which
are substantially complete and are not subject to a sales contract.
<PAGE>
<TABLE>
Capitalized interest is included in real estate inventories as
follows (in thousands):
<CAPTION>
Year Ended Year Ended Nine Months Ended
September 30, 1997 September 30, 1996 September 30, 1995
<S> <C> <C> <C>
Interest capitalized, beginning of period $ 5,427 $ 5,418 $ 3,255
Interest incurred and capitalized 4,534 3,581 3,839
Interest amortized to cost of sales (3,314) (3,572) (1,676)
Interest capitalized, end of period $ 6,647 $ 5,427 $ 5,418
</TABLE>
During the second quarter of 1995, the Company recorded a $3.7
million reserve to reflect the reduction in carrying value of
certain real estate inventories. The reduction included an
adjustment of $2.9 million (before income taxes) related to
management's decision not to continue development of certain
property which the Company owns. The Company had chosen not to
develop this property as it identified more relevant development
opportunities which were consistent with the Company's long-term
market strategy. Also contributing to the loss for the period
was the write-off of capitalized costs related to certain product
lines which were discontinued.
A reserve is provided as a charge against earnings when the
carrying amount of any of the Company's investments exceeds it's
net realizable value. Net realizable value represents the
expected selling price a property will bring in the open market
reduced by (a) the estimated cost to complete and improve such
property to the condition expected in determining the selling
price, (b) disposition costs, and (c) estimated costs to hold the
property to the point of sale, including interest carrying costs
and other net cash flow requirements of the project.
Note 3 - Property and Equipment:
<TABLE>
Property and equipment are summarized as follows (in thousands):
<CAPTION>
September 30, September 30,
1997 1996
<S> <C> <C>
Model home upgrades and furnishings $ 4,307 $ 2,941
Equipment and furniture 3,147 2,740
Vehicles 379 402
Leasehold improvements 52 41
7,885 6,124
Accumulated depreciation 4,596 3,604
$ 3,289 $ 2,520
</TABLE>
<PAGE>
Note 4 - Notes and Mortgages Payable:
<TABLE>
Notes and mortgages payable are summarized as follows (in
thousands):
<CAPTION>
September 30, September 30,
1997 1996
<S> <C> <C>
Revolving line of credit $ 30,818 $ 19,225
Notes payable to land sellers 2,269 3,802
$33,087 $ 23,027
</TABLE>
On February 7, 1997 the Company entered into an Amended and
Restated Revolving Credit Loan Agreement (the "Loan Agreement"),
with two banks that replaced the previous financing arrangements
with the banks. The Loan Agreement provides a $60.0 million line
of credit. The borrowings are secured by the real estate assets
of the Company, with certain exceptions. Borrowings under the
Loan Agreement bear interest at LIBOR plus 275 basis points for
borrowings up to $40 million, and prime plus .5% for borrowings in
excess of $40 million, plus certain customary fees. The Loan
Agreement is scheduled to mature on February 1, 1999. Available
borrowings under the Loan Agreement are reduced by the amount of
letters of credit outstanding. The Loan Agreement includes
certain customary representations and covenants, including
restrictions on the Company's ability to pay dividends and
maintenance of certain financial ratios. As of September 30,
1997, the Company had violated certain covenants as set forth in
the Loan Agreement, including those related to the Company's
corporate reorganization, projects exceeding three stories, and
certain financial covenants, specifically, those related to net
worth and net income. The Company believes that it will be able
to either cure these defaults and events of default or revise the
terms of the Loan Agreement or negotiate a replacement facility,
but there can be no assurance of such cure, revised agreement or
replacement facility. Failure by the Company to cure these
defaults, revise the terms of the Loan Agreement or negotiate a
replacement facility on a timely basis could have a material
adverse effect on the Company's operations. The subordinated
notes payable to the Principal Shareholder, as well as any
interest thereto, are not allowed to be repaid until all defaults
are cured and certain minimum net worth levels are maintained.
As of December 15, 1997, the Company was negotiating with its
banks in order to provide adequate funding for the expansion of
its Chicago Urban Division including the construction of a 23-
story high rise which would include 6 floors of parking and 17
floors of residential condominium apartments. There can be no
assurances that the Company will be able to secure such financing
on acceptable terms.
As of September 30, 1997, the Company had borrowed $30.8 million
under the Loan Agreement and had $9.2 million of outstanding
letters of credit, leaving $20.0 million as available for future
borrowings. The Company believes that the current facility (as
revised or replaced with a similar facility) together with its
cash flow from operations will be sufficient to fund projected
near term requirements and any relevant market opportunities as
well as its plans to expand its inventory of developed land.
Notes payable to land sellers bear interest at annual rates
ranging from zero to prime plus three quarters of one percent and
are normally repaid through application of agreed upon amounts
from the proceeds of individual home sale closings.
<PAGE>
<TABLE>
Maturities of notes and mortgages payable in future periods are
as follows (in thousands):
<CAPTION>
Year ending
September 30,
<S> <C>
1998................... 1,114
1999................... 31,226
2000................... 408
2001................... 339
$33,087
</TABLE>
Interest and related debt issuance costs incurred, all of which
were capitalized, during the year ended September 30, 1997, the
year ended September 30, 1996 and the nine months ended September
30, 1995, aggregated approximately $4.5 million, $3.5 million and
$3.8 million, respectively.
Note 5 - Subordinated Notes Payable
Prior to the Company completing the public offering on July 9,
1993, the Company was recapitalized and reorganized into a parent-
subsidiary structure, thereby terminating its S Corporation
status. The Company declared aggregate distributions of S
Corporation earnings to its Principal Shareholder in an aggregate
amount such that beginning shareholders' equity as a C
Corporation would be $5 million. During the twelve months ended
December 31, 1993, such distributions aggregated $9.1 million, of
which $4.9 million was paid out of available cash, while the
remaining $4.2 million was paid in the form of promissory notes,
which are subordinate to the Company's bank indebtedness, bear
interest at 7.5% which compounds daily and originally matured in
two equal annual installments on the first and second
anniversaries of the offering. On September 30, 1997, the
maturity date of the notes was extended to September 30, 1998.
Payment of the annual installments is subject to certain
restrictions under the Company's Revolving Credit Loan Agreement
(see Note 4 - Notes and Mortgages Payable).
Note 6 - Income Taxes:
<TABLE>
The provision (benefit) for income taxes was as follows (in
thousands):
<CAPTION>
Year Ended Year Ended Nine Months Ended
September 30, 1997 September 30, 1996 September 30, 1995
<S> <C> <C> <C>
Current
Federal - $105 ($1,521)
State - 35 (267)
- 140 (1,788)
Deferred
Federal (199) 563 (869)
State (35) 121 (154)
(234) 684 (1,023)
Total ($234) $824 ($2,811)
</TABLE>
<PAGE>
<TABLE>
Reconciliations of the statutory Federal income tax rate of 34%
to the effective income tax rate are as follows (in thousands):
<CAPTION>
Year Ended Year Ended Nine Months Ended
September 30, 1997 September 30, 1996 September 30, 1995
<S> <C> <C> <C>
Income taxes at the Federal (206) $700 ($2,390)
statutory rate
State income taxes, net of (23) 150 (279)
Federal benefit
Other (5) (26) (142)
Total ($234) $824 ($2,811)
</TABLE>
<TABLE>
The consolidated balance sheets included the following deferred
tax (assets) or deferred tax liabilities:
<CAPTION>
September 30, September 30, September 30,
1997 1996 1995
<S> <C> <C> <C>
Deferred project start-up costs 1,538 $843 $1,017
Real estate inventories 1,723 (1,378) (1,008)
Partnership book to tax differences - 176 268
Accrued expenses (274) (266) (159)
Depreciation of property and equipment 117 164 61
Tax carryforward items (1,500) - -
Other - - 22
$1,604 ($461) $201
</TABLE>
The Company has entered into a tax indemnification agreement with
the Principal Shareholder of the Company which provides for,
among other things, the indemnification of the Principal
Shareholder for any losses or liabilities with respect to any
additional taxes (including interest, penalties and legal fees)
resulting from the Company's operations during the period in
which it was an S Corporation.
Note 7 - Minority Interest:
During 1993, one of the Company's subsidiaries, acting as general
partner with a 75% ownership interest, entered into a limited
partnership with a land seller. Under the terms of this limited
partnership agreement, the Company purchased the land from the
seller for approximately $1.4 million, payable over the term of
the agreement as home sales are closed. This partnership began
closing homes in March, 1994.
The income(loss) from the limited partnership's operations is
allocated to the general and limited partner based upon their
relative ownership interests. Distributions with respect thereto
are paid as outlined in the agreements.
<PAGE>
<TABLE>
A reconciliation of the minority interest balance as presented in
the Consolidated Balance Sheets is as follows (in thousands):
<CAPTION>
<S> <C>
Minority interest in net assets at December 31, 1994 $1,049
Contributions 111
Limited partner's interest in 1995 net loss of the partnership (24)
Distributions during 1995 (870)
Minority interest in net assets at September 30, 1995 $266
Contributions 73
Limited partner's interest in 1996 net income of the partnership 117
Distributions during 1996 (345)
Minority interest in net assets at September 30, 1996 $111
Contributions -
Limited partner's interest in 1997 net loss of the partnership (131)
Distributions during 1997 (162)
Minority interest in net assets at September 30, 1997 ($182)
</TABLE>
Note 8 - Stock Incentive and Directors Option Plans:
Stock Incentive Plan
The Board of Directors and shareholders adopted the Sundance
Homes, Inc. Stock Incentive Plan (the "Stock Incentive Plan"),
effective as of April 7, 1993. The purpose of the Stock
Incentive Plan is to enable officers and key employees of the
Company to participate in the Company's future and to enable the
Company to attract and retain these persons by offering them
proprietary interests in the Company. The Stock Incentive Plan
is administered by the Company's compensation committee and
authorizes the issuance of up to 625,000 shares of common stock
pursuant to the grant or exercise of stock options, stock
appreciation rights, restricted stock or deferred stock.
Prior to the offering in July 1993, the Company granted stock
options under the Stock Incentive Plan to certain of its
employees who were not previously shareholders of the Company to
purchase up to 250,000 shares of common stock in the aggregate
for a purchase price per share equal to the initial public
offering price. Options granted to these officers will vest 25%
per year for four years, and will expire after ten years.
As of September 30, 1997, options for 92,625 shares were
exercisable.
<PAGE>
<TABLE>
A summary of changes in stock options outstanding is as follows:
<CAPTION>
Options Option price
(per share)
<S> <C> <C>
Opening Balance 43,500 $7.25-11.25
1995
Granted 208,500 $2.375-3.25
Terminated (145,500) $2.375-3.25
Balance of 1995 Issued Shares 63,000 $2.375-3.25
1996
Granted 111,500 $1.625-3.625
Terminated (22,500) $1.625
Balance of 1996 Issued Shares 89,000 $1.625-3.625
1997
Granted 172,500 $2.25-3.0625
Terminated (37,500) $2.625-3.0625
Balance of 1997 Issued Shares 135,000 $2.25-3.0625
Total Outstanding Granted Shares 330,500 $1.625-11.25
</TABLE>
Directors Option Plan
Outside Directors are granted options to acquire 5,000 shares of
Common Stock on each of: (1) the date on which a person is first
elected as a Director, (2) the date of the first annual meeting
of shareholders held subsequent to such person's election and,
(3) the date of each succeeding annual meeting of shareholders
after which such person is still serving as a director (with a
limit of options to acquire a total of 25,000 shares to be
granted to any Outside Director). All options granted under the
Directors' Plan are exercisable on the one year anniversary date
of the grant and, at a price per share equal to the closing price
of the Common Stock as reported on the Nasdaq National Market on
the date of grant or, if the market is closed on such date, the
next business day. Once granted, options may not be canceled.
<TABLE>
A summary of changes in stock options granted is as follows :
<CAPTION>
Options Option price
Granted (per share)
<S> <C> <C>
Opening Balance 20,000 $7.25-10.00
1995 20,000 $2.625-3.375
1996 15,000 $2.00
1997 15,000 $2.625
Total Outstanding Granted Shares 70,000 $2.00-10.00
</TABLE>
As of September 30, 1997, options for 55,000 shares were
exercisable.
<PAGE>
Note 9 - Employee Benefit Plan:
The Company maintains a contributory profit sharing plan
established pursuant to the provisions of Section 401(k) of the
Internal Revenue Code which provides retirement benefits for
eligible employees of the Company and its subsidiaries. The
Company may make annual discretionary contributions to the plan.
There were no discretionary contributions during the years ended
September 30, 1997and 1996 and the nine months ended September
30, 1995.
Note 10 - Commitments and Contingencies:
The Company is frequently required, in connection with the
development of its projects, to obtain performance or other
maintenance bonds or letters of credit in lieu thereof. The
amount of such obligations outstanding at any time varies in
connection with the Company's pending development activities. In
the event any such obligations are drawn upon, the Company would
be obligated to reimburse the issuing surety company or bank. At
September 30, 1997, there were approximately $9.6 million in
performance or maintenance bonds and approximately $9.2 million
of letters of credit outstanding for such purposes.
The Company currently leases its office space under a 5-year
renewable lease. Through September 1994, the Company leased
office space under cancelable month-to-month leases. Certain
equipment is also currently leased under non-cancelable operating
leases. Rent expense under such leases aggregated $436,000,
$380,000 and $506,000 during the years ended September 30, 1997
and 1996 and the nine months ended September 30, 1995,
respectively.
The Company is involved in various routine legal proceedings
incidental to the conduct of its business. Specifically, a
lawsuit has been brought against the Company and certain
directors and employees of the Company by the Board of Managers
of Parkside on the Green Condominium Association. The complaint
seeks damages against the Company for alleged construction
defects in the approximate amount of $1.6 million, together with
punitive damages against the named individuals for alleged breach
of fiduciary duty. The Company has assumed the defense of this
lawsuit on behalf of the individual defendants. The Company is
defending the lawsuit vigorously. Management believes that none
of these legal proceedings will have a material adverse impact on
the financial condition or results of operations of the Company.
<PAGE>
Note 11 - Quarterly Results Of Operation (unaudited):
<TABLE>
The following table reflects the results of operations for the
Company during the four quarters of 1997 and 1996 (dollars in
thousands):
<CAPTION>
Sept. 30, June 30, Mar. 31, Dec. 31, Sept. 30, June 30, Mar. 31, Dec. 31,
1997 1997 1997 1996 1996 1996 1996 1995
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Residential Sales $47,161 $23,739 $15,131 $22,712 $40,653 $28,016 $19,831 $32,448
Number of home
sales closed 274 140 91 131 240 162 114 185
Gross profit 6,832 2,736 632 1,750 5,835 3,340 1,712 3,004
Income (loss) before
minority interest and
provision for income
taxes 2,859 33 (2,664) (943) 2,423 749 (1,442) 446
Net income (loss) 1,807 22 (1,604) (575) 1,424 444 (873) 240
</TABLE>
First Amendment to Second Amended and Restated Revolving Credit
Loan Agreement
THIS FIRST AMENDMENT ("Amendment") to Second Amended and
Restated Revolving Credit Loan Agreement is made as of the 11th
day of April, 1997 by and among SUNDANCE HOMES, INC., an Illinois
corporation ("Sundance"), SUNDANCE HOLDINGS, INC., an Illinois
corporation ("Holdings"), SLIH DEVELOPMENT, INC., an Illinois
corporation ("SLIH"), SRLB DEVELOPMENT, INC., an Illinois
corporation ("SRLB"), SAR DEVELOPMENT, INC., an Illinois
corporation ("SAR"), OLYMPIA DEVELOPMENT COMPANY, an Illinois
corporation ("Olympia"), CHICAGO URBAN PROPERTIES, INC., an
Illinois corporation ("CUP"), REMBRANDT HOMES, INC., an Illinois
corporation ("Rembrandt"), and BANK ONE, WISCONSIN, a Wisconsin
banking corporation, and LASALLE NATIONAL BANK, a national
banking association ("LaSalle"), (each individually a "Lender"
and collectively the "Lenders") and LaSalle as agent for the
Lenders ("Agent").
RECITALS:
A. Sundance, Holdings, SLIH, SRLB, SAR, Olympia, CUP and
Rembrandt as "Borrowers", entered into that certain Second
Amended and Restated a Revolving Credit Loan Agreement dated as
of February 7, 1997 ("Agreement") with Lenders and Agent.
Capitalized terms not otherwise defined herein shall have the
meaning given such terms in the Agreement.
B. The Agreement provided a $60,000,000.00 secured revolving
line of credit to be made available by the Lenders to the
Borrowers.
C. Borrowers, Lenders and the Agent desire to modify the
Agreement so as to increase the amount of the Aggregate Revolving
Credit Commitment with respect to which the Borrowers may elect
to apply Adjusted LIBOR.
NOW, THEREFORE, in consideration of the mutual agreements
herein contained, Borrowers, Lenders and Agent hereby agree to
the terms and conditions contained herein.
1. Conflict or Inconsistency. In the event of any conflict or
inconsistency between the provisions of this Amendment and the
provisions of the Agreement, the provisions of this Amendment
shall control. Any capitalized term herein shall have the
meaning ascribed to it in the Agreement, unless defined
differently in this Amendment.
2. Interest on Loans. The first grammatical paragraph of
Section 2.7 of the Agreement is hereby deleted in its entirety
and replaced by the following:
2.7 Interest Rate Options. Subject to all of the terms and
conditions of this Agreement, portions of the principal
indebtedness evidenced by the Note (all of the indebtedness
evidenced by the Note bearing interest at the same rate for the
same period of time being hereinafter referred to as a "Portion")
may, at the option of Sundance (which is acting on behalf of the
Borrowers pursuant to Section 2.23 hereof), bear interest with
reference to the Prime Rate (the " Prime Rate Portion") and
Portions may be converted from time to time from one basis to the
other. Notwithstanding anything contained herein to the
contrary, at no time may the Loans constituting the LIBOR
Portions exceed Forty Million Dollars ($40,000,000.00) in the
aggregate. All of the indebtedness evidenced by the Note which
bears interest with reference to a particular Adjusted LIBOR for
a particular Interest Period shall constitute a single LIBOR
Portion of the Note. Anything contained herein to the contrary
notwithstanding, the obligation of the Lenders to create,
continue or effect by conversion of any LIBOR Portion shall be
conditioned upon the fact that at the time no Default or Event of
Default shall have occurred and be continuing. The Borrowers
hereby jointly and severally promise to pay interest on each
Portion at the rates and times specified in this Article II.
<PAGE>
3. Representations and Warranties. Each Borrower hereby
remakes each and every representation and warranty contained in
the Agreement.
4. Waivers. Nothing herein contained shall impair the
Agreement or any document or instrument executed in respect
thereto in any way nor alter, waive, annul, vary nor affect any
provision, condition or covenant therein contained except as
expressly herein provided nor affect or impair any right or
remedy of the Lenders and/or Agent, it being the intention of the
parties hereto that the terms and provisions of the Agreement and
such other documents shall continue in full force and effect
except as expressly modified in connection herewith.
5. Confirmation of Agreement. Except as modified in this
Amendment, Borrowers, Lenders and Agent hereby ratify and
reconfirm each and every provision of the Agreement, and agree
that all references to the "Agreement" shall hereinafter be
deemed to refer to the Agreement as modified by this Amendment.
6. Counterparts. This Amendment may be executed in any
number of counterparts, each of which shall be deemed an
original, but all of which together shall constitute one and the
same instrument.
IN WITNESS WHEREOF, the parties hereto, by their officers
thereunto duly authorized, have executed and delivered this
Agreement as of the date first above written.
SUNDANCE HOMES, INC., an
Illinois corporation
By: \s\ Joseph Atkin
Title: Vice President
SLIH DEVELOPMENT, INC., an
Illinois corporation
By: \s\ Joseph Atkin
Title: Vice President
SRLB DEVELOPMENT, INC., an
Illinois corporation
By: \s\ Joseph Atkin
Title: Vice President
<PAGE>
SAR DEVELOPMENT, INC., an
Illinois corporation
By: \s\ Joseph Atkin
Title: Vice President
SUNDANCE HOLDINGS, INC., an
Illinois corporation
By: \s\ Joseph Atkin
Title: Vice President
OLYMPIA DEVELOPMENT COMPANY,
an Illinois corporation
By: \s\ Joseph Atkin
Title: Vice President
CHICAGO URBAN PROPERTIES,
INC., an Illinois corporation
By: \s\ Joseph Atkin
Title: Vice President
REMBRANDT HOMES, INC., an
Illinois corporation
By: \s\ Joseph Atkin
Title: Vice President
BANK ONE, WISCONSIN, a
Wisconsin banking corporation
By: \s\ Brett P. Stone
Title: Vice President
LASALLE NATIONAL BANK, a
national banking association,
individually and in its
capacity as Agent
By: \s\ Kent Knebelkamp
Title: Vice President
Ownership of Operating Subsidiaries
Name of Corporation
Sundance Homes, Inc.
Rembrandt Homes, Inc.
Sundance Suburban Properties, Inc.
SAR Development, Inc.
SRLB Development, Inc.
Hometown Development, Inc.
McCarty's Mill Development, Inc.
Sutton Development, Inc.
Georgian Ct. Development, Inc.
Heartland Meadows Development, Inc.
Chicago Urban Properties, Inc.
Lake-Wells Management, Inc.
1515 South Michigan Lofts, Inc.
Erie Center Tower, Inc.
Erie Center Lofts, Inc.
Sangamon Lofts, Inc.
Marathon Center, Inc.
Matteson Development, Inc.
Walnut Point Development, Inc.
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the
Registration Statement on Form S-8 (#333-11087) of our report
dated December 23, 1997, which appears on page F-2 of the
Sundance Homes, Inc. Form 10-K for the year ended September 30,
1997.
/S/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
CHICAGO, IL
DECEMBER 23, 1997
SUNDANCE HOMES, INC.
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