<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the Quarterly Period Ended: March 31, 1999
Commission File Number: 0-21900
-----------------
SUNDANCE HOMES, INC.
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(Exact name of registrant as specified in its charter)
Illinois 36-3111764
------------------------------- ----------------------------
(State or other jurisdiction of (IRS Employer Identification
incorporation or organization) Number)
150 West Center Court, Schaumburg, Illinois 60195
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (847) 255-5555
Indicate by check mark whether the registrant 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).
Yes X No _____
-----
Indicate by check mark whether the registrant has been subject to such filing
requirements for the past 90 days.
Yes X No _______
------
At May 20, 1999, there were 7,824,113 shares outstanding of the registrant's
Common Stock ($0.01 par value).
<PAGE>
SUNDANCE HOMES, INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page
No.
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<S> <C>
PART I FINANCIAL IN FORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
March 31, 1999 (unaudited) and September 30, 1998 1
Consolidated Statements of Operations (unaudited) -
three and six months ended March 31, 1999
and 1998......................................... 2
Consolidated Statements of Cash Flows (unaudited) -
six months ended March 31, 1999 and 1998......... 3
Notes to Consolidated Financial Statements............ 4-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............. 9-16
PART II OTHER INFORMATION
Item 1. Legal Proceedings..................................... 17
Item 4. Submission of Matters to a Vote of Security Holders... 17
Item 5. Other Information..................................... 17
Item 6. Exhibits and Reports on Form 8-K...................... 17
SIGNATURE PAGE....................................................... 18
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SUNDANCE HOMES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
March 31, September 30,
1999 1998
-------------- -----------------
(unaudited)
<S> <C> <C>
ASSETS
- ------
Cash and cash equivalents $ 2,131 $ 1,947
Real estate inventories 39,578 102,088
Assets held for sale, net of reserve 58,392 -
Prepaid expenses and other assets 2,099 2,227
Property and equipment, net 1,866 4,988
-------------- -----------------
Total assets $ 104,066 $ 111,250
============== =================
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Accounts payable and accrued construction liabilities $ 16,705 $ 23,026
Other accrued expenses 2,679 2,386
Customer deposits 3,115 3,464
Notes payable 64,787 55,249
Notes payable to Principal Shareholder 2,500 2,500
Subordinated notes payable to Principal Shareholder 4,498 4,193
-------------- -----------------
Total liabilities 94,284 90,818
-------------- -----------------
Minority interest - -
-------------- -----------------
Commitments and contingencies - -
-------------- -----------------
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,
7,816,866 shares issued and outstanding 78 78
Additional paid-in capital 26,994 26,980
Retained earnings (deficit) (17,290) (6,626)
-------------- -----------------
Total shareholders' equity 9,782 20,432
-------------- -----------------
Total liabilities and shareholders' equity $ 104,066 $ 111,250
============== =================
</TABLE>
The accompanying notes are an integral part of these financial statements.
1
<PAGE>
SUNDANCE HOMES, INC.
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
March 31, March 31,
------------------------ -------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Residential sales $ 33,444 $ 25,059 $ 56,245 $ 44,480
Land and building sales - - 1,300 -
-------- -------- --------- --------
Total sales 33,444 25,059 57,545 44,480
Cost of residential sales 32,458 23,306 53,599 41,283
Cost of land and building sales - - 622 -
-------- -------- --------- --------
Total cost of sales 32,458 23,306 54,221 41,283
-------- -------- --------- --------
Gross profit 986 1,753 3,324 3,197
Reduction in carrying value of assets held for sale 6,362 - 6,362 -
Selling expenses 2,965 2,387 5,321 4,047
General and administrative expenses 1,195 1,206 2,305 2,330
-------- -------- --------- --------
Income (loss) before provision (benefit)
for income taxes (9,536) (1,840) (10,664) (3,180)
Provision (benefit) for income taxes - (735) - (1,271)
-------- -------- --------- --------
Income (loss) before cumulative effect
of change in accounting policy $ (9,536) $ (1,105) $ (10,664) $ (1,909)
Cumulative effect of change in accounting
policy, net of related tax effect - - - (2,234)
-------- -------- --------- --------
Net income (loss) $ (9,536) $ (1,105) $ (10,664) $ (4,143)
======== ======== ========= ========
Net income (loss) per share $ (1.22) $ (0.14) $ (1.36) $ (0.53)
======== ======== ========= ========
Weighted average number
of shares outstanding 7,816 7,808 7,816 7,808
======== ======== ========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
SUNDANCE HOMES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Six months ended March 31,
--------------------------------
1999 1998
---- ----
<S> <C> <C>
Operating activities:
Net loss $ (10,664) $ (4,143)
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Depreciation and amortization 861 725
Deferred income taxes 947
Reduction in carrying value of assets 6,362 -
Minority interest - (10)
Changes in operating assets and liabilities:
Real estate inventories 1,447 (16,751)
Prepaid expenses and other assets (551) (299)
Income tax receivables - 565
Accounts payable and accrued construction liabilities (6,321) (2,609)
Other accrued expenses (257) 386
Customer deposits (349) 539
------------ ------------
Net cash provided by (used for) operating activities (9,472) (20,650)
------------ ------------
Investing activities:
Property and equipment, net (201) (1,198)
------------ ------------
Net cash provided by (used for) investing activities (201) (1,198)
------------ ------------
Financing activities:
Borrowings under notes payable 60,871 62,884
Repayments of notes payable (51,333) (41,396)
Borrowings under notes payable to Principal Shareholder 305 -
Proceeds of stock options exercised 14 1
------------ ------------
Net cash provided by (used for) financing activities 9,857 21,489
------------ ------------
Net increase (decrease) in cash and cash equivalents 184 (359)
Cash and cash equivalents:
Beginning of period 1,947 4,615
------------ ------------
End of period $ 2,131 $ 4,256
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
SUNDANCE HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - PRINCIPLES OF CONSOLIDATION
- ------------------------------------
The accompanying interim consolidated financial statements include the accounts
of Sundance Homes, Inc. and its subsidiaries ("the Company"). These financial
statements are unaudited, but in the opinion of management contain all
adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the financial condition and results of operations of the Company.
The interim consolidated financial statements should be read in conjunction with
the consolidated financial statements and notes thereto for the year ended
September 30, 1998 included in the Company's Annual Report on Form 10-K, as
filed with the Securities and Exchange Commission on January 13, 1999.
The results of operations for the three months ended March 31, 1999 are not
necessarily indicative of the results to be expected for the entire fiscal year.
NOTE 2 - ASSETS HELD FOR SALE AND RESERVE FOR REDUCTION IN CARRYING VALUE.
- --------------------------------------------------------------------------
During the quarter ended March 31, 1999, the Company recorded a $6.4 million
reserve to reflect the reduction in carrying value of certain assets. The
provision is related to the pending sale of the Company's Suburban Assets to
Centex Homes, Inc. See Note 7 - Notes Payable. The reduction in carrying value
totaled approximately $6.4 million and has been recorded as a charge to income
under the caption `Reduction in carrying value of assets held for sale' in the
Consolidated Statements of Operations. The charge includes the reduction in
carrying value of real estate inventory held for sale, transaction costs and
other costs associated with the pending sale.
Real estate inventories in progress are carried at cost unless facts and
circumstances indicate that the carrying value of the underlying projects may be
impaired. Impairment is determined by comparing the estimated future cash flows
(undiscounted) from an individual project to its carrying value. If such cash
flows are less than the project's carrying value, the carrying value of the
project is written down to its fair value. Completed homes held for sale are
carried at the lower of cost or fair value, less selling costs, and are
evaluated on a project basis. Cost includes capitalized costs, such as interest
and construction related overhead and salaries, which are allocated
proportionately to projects being developed.
NOTE 3 - CHANGE IN ACCOUNTING POLICY
- -------------------------------------
Effective October 1, 1997 the Company adopted Statement of Position (SOP) No 98-
5, Reporting on the Costs of Start-up Activities and Organization Costs. Cost of
start up activities and organization costs are expensed as incurred. The
cumulative effect of this change in accounting decreased net assets at October
1, 1997 by $2,234,000, or $0.29 per share, net of the related tax effect of
$1,490,000.
4
<PAGE>
NOTE 4 - REAL ESTATE INVENTORIES
- --------------------------------
Real estate inventories are summarized as follows (in thousands):
<TABLE>
<CAPTION>
March 31, September 30,
1999 1998
<S> <C> <C>
Work-in-process:
Land and land development $ 35,783 $ 46,852
Suburban inventory 11,144 14,096
Urban construction inventory 42,304 34,814
Completed homes:
Models 1,587 2,292
Speculative homes 9,823 4,034
--------------- ------------------
$ 100,641 $ 102,088
Assets held for sale (61,063) -
--------------- ------------------
$ 39,578 $ 102,088
=============== ==================
</TABLE>
Model homes are constructed to help market a development and include 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.
NOTE 5 - PROPERTY AND EQUIPMENT
- -------------------------------
Property and equipment are summarized as follows (in thousands):
<TABLE>
<CAPTION>
March 31, September 30,
1999 1998
-------------- ------------------
<S> <C> <C>
Model home upgrades and furnishings $ 8,359 $ 8,047
Equipment and furniture 3,032 3,028
Vehicles 177 270
Leasehold improvements 456 476
-------------- ------------------
12,024 11,821
Accumulated depreciation (7,696) (6,833)
Assets held for sale (2,462) -
-------------- ------------------
$ 1,866 $ 4,988
============== ==================
</TABLE>
NOTE 6 - INCOME TAXES
- ---------------------
The provision for income taxes for the three and six months ended March 31, 1998
and 1999 reflects management's estimate of the Company's effective tax rate of
approximately 40%.
During the fiscal year ended September 30, 1998, the Company's net deferred tax
asset was reserved through the establishment of a tax valuation allowance.
During the three and six months ended March 31, 1999, an additional valuation
allowance of $3.8 million and $4.3 million, respectively, was recorded upon
consideration of the recent operating results and related uncertainty
associated with realization of the tax benefit of the net operating loss
carryforward, which is ultimately dependent upon the generation of future
earnings of the Company.
5
<PAGE>
NOTE 7 - NOTES PAYABLE
- ----------------------
Notes and mortgages payable are summarized as follows (in thousands):
<TABLE>
<CAPTION>
March 31, September 30,
1999 1998
------------------- --------------------
<S> <C> <C>
Revolving line of credit $63,810 $53,682
Notes payable to land sellers 977 1,567
------------------- --------------------
$64,787 $55,249
=================== ====================
</TABLE>
On April 30, 1998, the Company entered into a new $80 million Revolving Credit
Loan Agreement (the "Loan Agreement") with LaSalle National Bank, American
National Bank and Trust Company of Chicago and BankBoston, NA (collectively,
"the lenders"), which replaced the Company's previous credit loan agreement
which had provided for a $60 million line of credit. The three banks participate
in the $80 million facility as follows: LaSalle National Bank, $35 million;
American National Bank and Trust Company of Chicago, $25 million; and
BankBoston, NA $20 million. The borrowings are secured by the real estate assets
of the Company with certain exceptions and are subject to certain customary
fees. 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, 1998, the Company had violated
certain covenants, specifically those related to net worth and net income. On
December 1, 1998, the Company's Lenders declared a "default" under the Loan
Agreement and the outstanding balance of the loan was due and payable, subject
to the satisfactory modification of the Loan Agreement.
On January 14, 1999, the Company and its Lenders entered into a Forbearance and
Loan Modification Agreement (the "Forbearance Agreement") effective as of
December 15, 1998. The covenants and limitations in the Forbearance Agreement
waive the existing defaults and require the Company to liquidate assets through
an orderly process using all proceeds to reduce outstanding bank debt. The
Forbearance Agreement set certain specific limitations on any new acquisitions
by the Company and also absolved the Lenders of their commitment and obligation
to fund the project known as Plaza 32 in Chicago, Illinois. Furthermore, the
Forbearance Agreement increased the interest rate from prime plus .75% to prime
plus 3.0% which is significantly higher than the historical rates at which the
Company has been able to acquire funds. Finally, the Forebearance Agreement
imposed certain financial penalties if certain revised covenants are not met in
the future and changes the maturity date to January 3, 2000.
The overall combined effect of these limitations will, during the period of time
in which the Forbearance Agreement is in effect, (1) prevent the Company from
any future expansion; (2) limit liquidity as all proceeds resulting from the
sale of assets are required to be used to reduce bank debt; (3) cause the
Company to incur higher interest expenses; and (4) cause the Company's results
of operation to be impacted negatively. As of March 31, 1999 the Company had
violated certain covenants of the Forbearance Agreement including those related
to net worth, net income, reduction in the outstanding loan amount, maximum
principal balance of loan and the failure to repay loans related to the
Company's Plaza 32 project. The Company, in order to address its liquidity
issues, entered into a Sales and Purchase Agreement with Centex Homes on April
2, 1999, as amended, May 11, 1999 which provides for
6
<PAGE>
the sale of substantially all of the assets of its suburban housing operations.
The Company estimates, if the proposed transaction with Centex Homes is
consummated on or before June 30, 1999, that it will receive, net of prorations,
expenses and holdbacks, approximately $50 million in cash for the proposed sale
of the assets. The Company intends to use the proceeds from the sale, net of the
amount necessary to pay its subcontractors for the work in progress which will
have been completed and invoiced as of the closing date of the transaction on
those homes which are to be sold to Centex Homes (estimated to be between $5
million and $10 million), to repay a substantial portion of its outstanding
indebtedness under the revolving credit loan agreement.
Concurrent with the closing of the Centex transaction, the Company plans to
restructure all of its remaining bank debt. The Company is currently negotiating
with various possible lenders to secure two separate lines of credit which will
together provide adequate funds to repay all remaining bank debt and provide
adequate working capital for the ongoing operations of the Company.
The anticipated payoff of the Company's existing bank debt which is contemplated
to occur simultaneously with the closing of the proposed transaction and the
anticipated refinancing would relieve the Company of the limitations placed on
it in the Forbearance Agreement which relate to its future operations. No
assurances can be given that the Company will be able to restructure the
existing debt and thereby be relieved of the limitations of the Forbearance
Agreement.
Notes payable to land sellers are non-interest bearing and are repaid through
application of agreed upon amounts from the proceeds of individual home sale
closings.
NOTE 8 - SUBORDINATED NOTES AND NOTES PAYABLE TO PRINCIPAL SHAREHOLDER
- ----------------------------------------------------------------------
The Company entered into certain financing agreements with the Principal
Shareholder as described below:
Secured Note Payable
On May 1, 1998, Erie Center Lofts, Inc., a wholly owned subsidiary of the
Company, entered into a $2.5 million Secured Subordinated Promissory Note with a
maturity date of June 30, 1999, and an interest rate of 20% with Maurice
Sanderman, the Company's Chairman and principal shareholder. Currently and at
March 31, 1999, there was $2.5 million in principal outstanding under the Note.
The note is secured by a junior mortgage on the property commonly known as Erie
Tower located at 421 West Erie Street in Chicago, Illinois. Principal payments
under this note may only be paid out of net sales proceeds from the sale of
units within Erie Tower only after all advances made under the New Loan
Agreement related to the Erie Tower project have been repaid.
7
<PAGE>
Unsecured Notes Payable
As part of the public offering and recapitalization of the Company on July 9,
1993, the Company issued promissory notes to Mr. Sanderman which in the
aggregate equaled $4,193,000. The notes are subordinate to the Company's bank
indebtedness, bear interest at 7 1/2% per annum, compounded daily, and
originally matured in two equal annual installments on the first and second
anniversaries of the offering. The maturity date of the notes is February 1,
2000. Currently and at March 31, 1999, there was a $4.193 million principal
balance under the note. Payment of the outstanding principal balance is subject
to certain restrictions under the Loan Agreement.
On February 10, 1999, April 27, 1999, and May 12, 1999, the Company borrowed
$305,263, $155,000, and $254,000, respectively, on an unsecured basis from Mr.
Sanderman. The unsecured demand notes bear interest at a rate of prime plus
3%. These funds were used to pay general contracting services related to the
construction of certain improvements on real estate located at 3232 North
Halsted, Chicago, Illinois known as Plaza 32, since payment by the Company was
not permitted under the Forbearance Agreement.
On April 29, 1999, the Company borrowed $710,915 on an unsecured basis from Mr.
Sanderman. The unsecured demand note bears interest at a rate of prime plus 3%.
These funds were used to acquire the property located at 313-15 South Des
Plaines, Chicago, Illinois which is a part of the project called Capital Hill.
Acquisition by the Company of this property was not allowed under the
Forbearance and Loan Modification Agreement.
NOTE 9 - 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 March 31, 1999, there were approximately
$5.9 million in performance or maintenance bonds and approximately $3.8 million
of letters of credit outstanding for such purposes. There have been no such
draws during the quarters ended March 31, 1999 or March 31, 1998.
The Company currently leases 15,500 square feet of office space in Schaumburg,
Illinois where its Suburban Properties Division and Corporate offices are
located. The Company also leases approximately 3,000 square feet of office space
in Chicago, Illinois, where the Chicago Urban Properties Division is located.
Certain equipment is also currently leased under non-cancelable operating
leases. The Company also leases certain model homes from an independent third
party under a sale-leaseback agreement.
8
<PAGE>
Additionally, the Company is involved in various routine legal proceedings,
which the Company believes to be incidental to the conduct of its business.
Specifically, 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 $4.8 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 of the project are underway. 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.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Except for historical information, matters discussed in this Form 10-Q contain
forward looking information and reflect the Company's current expectations
regarding the future results of operations, performance and achievement of the
Company based on currently available information. The Company has identified
these "forward looking" statements by words such as "believes", "estimates",
"should", "could", "expects", "anticipates", and similar expressions. These
statements involve known and unknown risks and uncertainties that may cause
Sundance's actual results or outcomes to be materially different from those
anticipated and discussed herein. Important factors that Sundance believes might
cause such differences include: (1) concentration of Sundance's assets into the
Chicago urban housing market; (2) changes in interest rates and the availability
of mortgage financing; (3) Sundance's substantial leverage and the restrictions
imposed on Sundance under its existing debt instruments; (4) the seasonal nature
of the residential construction business; (5) changes in general economic and
market conditions; (6) changes in costs and availability of material, supplies
and labor; (7) general competitive conditions; (8) the availability of capital;
(9) the inability of Sundance to satisfy the minimum maintenance requirements
for the continued listing of its shares of common stock on the Nasdaq National
Market; and (10) those specific risks that are discussed in the Risk Factors
detailed in Sundance's filings with the Securities and Exchange Commission.
The following discussion of the Company's results of operations and financial
condition should be read in conjunction with the consolidated interim financial
statements of the Company and the notes thereto contained herein, as well as the
Company's Annual Report on Form 10-K for the year ended September 30, 1998, as
filed with the Securities and Exchange Commission on January 13, 1999.
Overview
The Company experienced increased revenues for the quarter ended March 31, 1999,
as compared to the quarter ended March 31, 1998 and the average sales price per
home closed increased by
9
<PAGE>
$27,000 from $183,000 in the quarter ended March 31, 1998 to $210,000 in the
quarter ended March 31, 1999. The primary reason for the increase in the average
sales price was deliveries in the Company's Chicago Urban Properties division's
Erie Tower project which closed 54 units during the quarter at an average price
of $243,000 per unit. Residential sales, which are recognized upon the closing
and delivery of homes, increased $8.3 million or 33.1% to $33.4 million, for the
quarter ended March 31, 1999, as compared to $25.1 million for the quarter ended
March 31, 1998. The Company delivered 159 homes during the quarter ended March
31, 1999 compared to 137 in the quarter ended March 31, 1998.
Gross profit as a percent of sales was 2.9% for the quarter ended March 31,
1999, compared to 7.0% for the same period in 1998.
The aggregate value of sales in backlog as of March 31, 1999 increased by 21% or
$13.7 million to $79.0 million representing 388 homes at an average sales price
of $203,700 compared to $65.3 million representing 326 homes at an average sales
price of $200,320 as of March 31, 1998.
URBAN DEVELOPMENT. The Company's wholly-owned subsidiary, Chicago Urban
Properties, Inc., closed out the St. Paul Townhome, Michigan Avenue Loft and
Erie Loft projects during the quarter ended March 31, 1999. The following is the
status of certain of the Company's other Chicago developments:
Erie Centre Tower, a new-construction high-rise (124 units) in the rapidly
growing River North area, sold 23 units in the quarter. The project is
approximately 90% sold, with only 16 units remaining to be sold. During the
quarter, 53 condominium units were delivered, along with two retail units. The
remainder of the units are expected to be delivered by the end of 1999.
ArtHouse Lofts and Capitol Hill Lofts, both located in the West Loop area, are
over 85% sold. ArtHouse, a 26-unit loft development, has only one loft remaining
for sale. All 26 deliveries are expected to occur during the fourth quarter of
Fiscal 1999. Capitol Hill, a 90-unit loft development entered into 14 new
contracts during the second quarter of Fiscal 1999, and has only 14 loft units
remaining for sale. The first deliveries are scheduled for Fall 1999.
Plaza 32, a 130-unit condominium project in the Lakeview area entered into five
new contracts in the quarter. The project is over 60% sold, and construction has
just begun.
SUBURBAN COMMUNITIES. During the quarter ended March 31, 1999, the Company's
Suburban Properties division delivered 93 homes. During this quarter ended March
31, 1999, the Company negotiated for the sale of substantially all of the
operating assets of its suburban communities. The Company, subsequent to the end
of the quarter, entered into a Sales and Purchase Agreement and expects to close
the proposed sale prior to the end of its third fiscal quarter.
Sutton on the Lake in Lake County entered into 41 new contracts and delivered 20
homes. Bellchase, a community of single family and attached single family homes
in Lake in the Hills, Illinois entered into 25 new contracts and delivered 16
homes. The Suburban division's newest communities, Walnut Pointe in Bolingbrook,
Cedar Creek in Matteson, and Broken Arrow in Lockport combined for 36 new
contracts and 44 deliveries. In total, the Suburban division entered into 130
new contracts in the quarter ended March 31, 1999 compared to 127 during the
same period last year.
The Company's custom and semi-custom home division, Rembrandt Homes, delivered 9
homes in the quarter and entered into 9 new contracts as well.
10
<PAGE>
Results of Operations
The following table sets forth, for the three and six months ended March 31,
1999 and March 31, 1998, the percentage of the Company's total sales represented
by each income statement line item presented.
<TABLE>
<CAPTION>
Three months ended Six months ended
March 31, March 31,
-------------------- ------------------
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Residential sales 100.0% 100.0% 97.7% 100.0%
Land sales - % - % 2.3% - %
Total sales 100.0% 100.0% 100.0% 100.0%
Cost of residential sales 97.1% 93.0% 93.1% 92.8%
Cost of land sales - % - % 1.1% - %
------ ------ ------ ------
Total cost of sales 97.1% 93.0% 94.2% 92.8%
------ ------ ------ ------
Gross profit 2.9% 7.0% 5.8% 7.2%
Reduction in carrying-value of assets held for sale 19.0% - % 11.1% - %
Selling expenses 8.9% 9.5% 9.2% 9.1%
General and administrative expenses 3.6% 4.8% 4.0% 5.2%
------ ------ ------ ------
Income (loss) before provision (benefit) for income taxes (28.5)% (7.3)% (18.5)% (7.1)%
Provision (benefit) for income taxes - % (2.9)% - % (2.9)%
------ ------ ------ ------
Income (loss) before cumulative effect of change in accounting policy (28.5)% (4.4)% (18.5)% (4.3)%
Cumulative effect of change in accounting policy, net of related tax effect - % - % - % (5.0)%
------ ------ ------ ------
Net income (loss) (28.5)% (4.4)% (18.5)% (9.3)%
======= ====== ======= ======
</TABLE>
RESIDENTIAL SALES. Sales, which are recognized upon the closing and delivery
of homes increased $8.3 million or 33.5% to $33.4 million, for the three months
ended March 31, 1999 as compared to $25.1 million for the three months ended
March 31, 1998. The Company also experienced increased sales revenue for the six
months ended March 31, 1999 as compared to the comparable period in 1998. Sales
revenue increased $11.7 million or 26.2% from $44.5 for the six months ended
March 31, 1998 to $56.2 million for the six months ended March 31, 1999. This
increase for the quarter ended March 31, 1999 was primarily due to the increase
in homes closed from 137 during the three months ended March 31, 1998 to 159 in
the three months ended March 31, 1999, which resulted primarily from closings at
the Company's Erie Tower project under the Company's urban division. The average
sales price per homes closed increased by $27,000 or 14.7% to $210,000 in the
quarter ended March 31, 1999 from $183,000 in the quarter ended March 31, 1998.
COST OF RESIDENTIAL SALES. Cost of sales, as a percentage of revenues,
increased by 4.1 percentage points to 97.1% of sales for the quarter ended March
31, 1999 as compared to 93.0% for the quarter ended March 31, 1998. Cost of
residential sales, as a percentage of revenues, increased by .3 percentage
points to 93.1% for the six months ended March 31, 1999 as compared to 92.8% for
the
11
<PAGE>
six months ended March 31, 1998. Total cost of sales increased by $9.2 million
from $23.3 million in the quarter ended March 31, 1998 to $32.5 million in the
quarter ended March 31, 1999. The primary reason for the dollar increase was the
increased number of deliveries during the quarter and the six month period ended
March 31, 1999.
GROSS PROFIT. Gross profit as a percentage of sales decreased to 2.9% for the
quarter ended March 31, 1999 compared to 7.0% for the same period in 1998. Gross
profit as a percentage of sales decreased to 5.8% for the six months ended
March 31, 1999 compared to 7.2% for the same period in 1998. These decreases are
primarily attributable to increased costs in the Company's suburban division.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling expenses as a percentage
of sales decreased by 0.6 percentage points from 9.5% of sales for the quarter
ended March 31, 1998 to 8.9% of sales for the quarter ended March 31, 1999.
Selling expenses as a percentage of sales increased by 0.1 percentage points
from 9.1% of sales for the six months ended March 31, 1998 to 9.2% of sales for
the six months ended March 31, 1999. The decrease in selling expenses for the
quarter ended March 31, 1999, as a percentage of revenues, was primarily a
result of the increased sales during the quarter with no corresponding increase
in associated fixed costs.
Actual selling expenses increased by $0.6 million from $2.4 million during the
quarter ended March 31, 1998 to $3.0 million for the quarter ended March 31,
1999 and increased by $1.3 million from $4.0 million during the six months ended
March 31, 1998 to $5.3 million for the six months ended March 31, 1999. This
increase, for the quarter and six months ended March 31, 1999, resulted
primarily from increased variable costs associated with increased deliveries.
General and administrative expenses remained relatively flat for the three
months ended March 31, 1999 compared to the three months ended March 31, 1998
and for the six months ended March 31, 1999, compared to the six months ended
March 31, 1998. As a percentage of sales, general and administrative expenses
decreased by 1.2 percentage point from 4.8% of sales for the quarter ended
March 31, 1998 to 3.6% of sales for the quarter ended March 31, 1999. As a
percentage of sales, general and administrative expenses decreased from 5.2% of
sales for the six months ended March 31, 1998 to 4.0% of sales for the six
months ended March 31, 1999. These decreases are primarily a result of the
increased sales volume for the quarter and six months ended March 31, 1999.
Income Taxes
The provision for income taxes for the three and six months ended March 31, 1998
and 1999 reflects management's estimate of the Company's effective tax rate of
approximately 40%. During the fiscal year ended September 30, 1998, the
Company's net deferred tax asset was reserved through the establishment of a tax
valuation allowance. During the three and six months ended March 31, 1999, an
additional valuation allowance of $3.8 million and $4.3 million, respectively,
was recorded upon consideration of the recent operating results and related
uncertainty associated with realization of the tax benefit of the net operating
loss carryforward, which is ultimately dependent upon the generation of future
earnings of the Company.
Seasonality and Variability in Quarterly Results
The Company has experienced, and expects to continue to experience, significant
seasonal and quarterly variability in residential sales and net income.
Year 2000 Compliance
The Year 2000 or "Y2K" issue is the result of many legacy computer programs
using a two digit format, as opposed to a four digit format, to indicate the
year. Many computer systems will not be able to interpret dates beyond the year
1999, which could cause a system failure or other errors, leading to disruptions
in operations. In 1997, the Company developed a three phase plan to address this
issue.
12
<PAGE>
Phase I of the plan, which began during the fiscal year ended September 30,
1998, is the identification of all the systems, services and key operating
infrastructures where the Company has exposure. Phase I was completed in
February of 1999. Phase II is the development and implementation of the
necessary steps to bring the systems, services and infrastructures into
compliance, including upgrading non-compliant currently installed applications.
Phase II was significantly completed in the spring of 1999, with the exception
of bringing infrastructure equipment into compliance. Phase III, which began in
April of 1999, is scheduled to be completed in mid to late 1999. This Phase
includes the testing and acceptance of each modification necessary to the
systems, service and infrastructure components identified in Phase I and
implemented in Phase II and includes the testing of, and the employee training
on, the recently installed upgraded applications. The Company has identified
four major areas of focus necessary to ensure successful Y2K compliance. These
are: (1) its integrated suite of accounting, costing and job control
applications, (2) all custom developed enhancements to the base suite, (3) all
operating infrastructure components including, but not limited to various
operating systems, personal computers and their associated software tools, along
with other hardware and software necessary for the operation of the business and
(4) third party relationships and their respective Y2K readiness.
The Company's currently installed packaged core accounting, costing and job
control applications were upgraded in the spring of 1999 and are believed to be
Y2K compliant. The package upgrade included a corresponding upgrade of the
custom developed enhancements. The operating infrastructure components, which
require modifications, are currently underway and do not directly impact the
upgrade of any other system. The Company has identified approximately 50
significant suppliers and other third party relationships which number reflects
the closing of the proposed sale of substantially all of the suburban assets to
Centex Homes. The Company is finalizing an inquiry letter to send to each of
these identified parties, which seeks responses indicating compliance or plans
to be compliant by the year 2000. The Company plans to send the letters during
the summer of 1999.
The Company has identified the potential for 1,000 man hours of project-related
work to achieve compliance. The Company has hired outside consulting resources
to help facilitate the timely completion of the projects identified. Y2K
specific costs incurred to date have not been significant. Estimated future
costs will range from approximately $50,000-$150,000 and are scheduled to be
incurred during the last half of fiscal 1999.
A formal contingency plan has not been prepared at this time. At present, the
Company does not have a contingency plan related to a worst-case scenario
because the scope of internal compliance is relatively small and the Company
believes very achievable prior to December 31, 1999. Preparation of a
contingency plan will, however, begin in the late summer of 1999 after the Y2K
specific releases of the Company's main software have been tested and the
Company has received responses to its letters of inquiry sent to its third party
relationships. The contingency plan will address specific issues, if any,
identified during such testing and raised by such responses.
13
<PAGE>
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 and
building acquisition and development requirements, and in lesser part to the
Company's net income. Net cash used for operating activities for the six months
ended March 31, 1999 decreased by approximately $11.1 million to $9.5 million
compared to net cash used for operating activities of $20.6 million in the six
months ended March 31, 1998. The decrease is primarily due to the slower growth
in real estate inventory levels and a reduction in accounts payable and accrued
construction liabilities.
On April 30, 1998, the Company entered into a new $80 million Revolving Credit
Loan Agreement (the "Loan Agreement") with LaSalle National Bank, American
National Bank and Trust Company of Chicago and BankBoston, NA (collectively,
"the lenders"), which replaced the Company's previous credit loan agreement
which had provided for a $60 million line of credit. The three banks participate
in the $80 million facility as follows: LaSalle National Bank, $35 million;
American National Bank and Trust Company of Chicago, $25 million; and
BankBoston, NA $20 million. The borrowings are secured by the real estate assets
of the Company with certain exceptions and are subject to certain customary
fees. 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, 1998, the Company had violated
certain covenants, specifically those related to net worth and net income. On
December 1, 1998, the Company's Lenders declared a "default" under the Loan
Agreement and the outstanding balance of the loan was due and payable, subject
to the satisfactory modification of the Loan Agreement.
On January 14, 1999, the Company and its Lenders entered into a Forbearance and
Loan Modification Agreement (the "Forbearance Agreement") effective as of
December 15, 1998. The covenants and limitations in the Forbearance Agreement
waive the existing defaults and require the Company to liquidate assets through
an orderly process using all proceeds to reduce outstanding bank debt. The
Forbearance Agreement set certain specific limitations on any new acquisitions
by the Company and also absolved the Lenders of their commitment and obligation
to fund the project known as Plaza 32 in Chicago, Illinois. Furthermore, the
Forbearance Agreement increased the interest rate from prime plus .75% to prime
plus 3.0% which is significantly higher than the historical rates at which the
Company has been able to acquire funds. Finally the Forbearance Agreement
imposed certain financial penalties if certain revised covenants are not met in
the future and changed the maturity date to January 3, 2000.
The overall combined effect of these limitations will, during the period of time
in which the Forbearance Agreement is in effect, (1) prevent the Company from
any future expansion; (2) limit liquidity as all proceeds resulting from the
sale of assets are required to be used to reduce bank debt; (3) cause the
Company to incur higher interest expenses; and (4) cause the Company's results
of operation to be impacted negatively. As of March 31, 1999 the Company had
violated certain covenants of the Forbearance Agreement including those related
to net worth, net income, reduction in the outstanding loan amount, maximum
principal balance of loan and the failure to repay loans related to the
Company's Plaza 32 project. The Company, in order to address its liquidity
issues, entered into a Sales and Purchase Agreement with Centex Homes on April
2, 1999, as amended, which provides for the sale of substantially all of the
assets of its suburban housing operations. The Company estimates, if the
proposed transaction with Centex Homes is consummated on or before June 30,
14
<PAGE>
1999, that it will receive, net of prorations, expenses and holdback,
approximately $50 million in cash for the proposed sale of the assets. The
Company intends to use the proceeds from the sale, net of the amount necessary
to pay its subcontractors for the work in progress which will have been
completed and invoiced as of the closing date of the transaction on those homes
which are to be sold to Centex Homes (estimated to be between $5 million and $10
million), to repay a substantial portion of its outstanding indebtedness under
the revolving credit loan agreement.
Concurrent with the closing of the Centex transaction, the Company plans to
restructure all of its remaining bank debt. The Company is currently negotiating
with various possible lenders to secure two separate lines of credit which will
together provide adequate funds to repay all remaining bank debt and provide
adequate working capital for the ongoing operations of the Company.
The anticipated payoff of the Company's existing bank debt which is contemplated
to occur simultaneously with the closing of the proposed transaction and the
anticipated refinancing would relieve the Company of the limitations placed on
it in the Forbearance Agreement which relate to its future operations. No
assurances can be given that the Company will be able to restructure the
existing debt and thereby be relieved of the limitations of the Forbearance
Agreement.
The Company believes that if it is able to restructure its current bank debt
with the new anticipated funding sources that this will provide adequate
liquidity and working capital for its future operations.
Notes payable to land sellers are non-interest bearing and are repaid through
application of agreed upon amounts from the proceeds of individual home sale
closings.
The Company entered into certain financing agreements with the Principal
Shareholder as described below:
Secured Note Payable
On May 1, 1998, Erie Center Lofts, Inc., a wholly owned subsidiary of the
Company, entered into a $2.5 million Secured Subordinated Promissory Note with a
maturity date of June 30, 1999, and an interest rate of 20% with Maurice
Sanderman, the Company's Chairman and principal shareholder. Currently and at
March 31, 1999 there was a $2.5 million principal balance under the Note. The
note is secured by a junior mortgage on the property commonly known as Erie
Tower located at 421 West Erie Street in Chicago, Illinois. Principal payments
under this note may only be paid out of net sales proceeds from the sale of
units within Erie Tower only after all advances made under the New Loan
Agreement related to the Erie Tower project have been repaid.
Unsecured Notes Payable
As part of the public offering and recapitalization of the Company on July 9,
1993, the Company issued promissory notes to Mr. Sanderman which in the
aggregate equaled $4,193,000. The notes are subordinate to the Company's bank
indebtedness, bear interest at 7 1/2% per annum, compounded daily, and
originally matured in two equal annual installments on the first and second
anniversaries of the offering. The maturity date of the notes is February 1,
2000. Currently and at March 31, 1999 there was a $4.193 million principal
balance under the Note. Payment of the outstanding principal balance is subject
to
15
<PAGE>
certain restrictions under the Loan Agreement.
On February 10, 1999, April 27, 1999 and May 12, 1999, the Company borrowed
$305,263, 155,000, and 254,000, respectively, on an unsecured basis from Mr.
Sanderman. The unsecured demand notes bear interest at a rate of prime plus 3%.
These funds were used to pay general contracting services related to the
construction of certain improvements on real estate located at 3232 North
Halsted, Chicago, Illinois known as Plaza 32, since payment by the Company was
not permitted under the Forbearance Agreement.
On April 29, 1999, the Company borrowed $710,915 on an unsecured basis from Mr.
Sanderman. The unsecured demand note bears interest at a rate of prime plus 3%.
These funds were used to acquire the property located at 313-15 South Des
Plaines, Chicago, Illinois which is a part of the project called Capital Hill.
Acquisition by the Company of this property was not allowed under the
Forbearance and Loan Modification Agreement.
16
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is involved in various routine legal proceedings
incidental to the conduct of its business. 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
The Company's Annual Meeting of Shareholders was held on March 3,
1999. As described in the Company's Proxy Statement Dated February 2,
1999, one matter was submitted to a vote of security holders for the
election of two directors as Class II directors of the Company.
In the election of directors, each holder of Common Stock was entitled
to vote the number of shares owned by such shareholder for as many
persons as there were directors to be elected (in this case two
directors), or to cumulate such votes and give one candidate as many
votes as equaled the number of directors being elected (in this case
two directors) multiplied by the number of such shares or to
distribute such cumulative votes in any proportion among any number of
candidates. Nominees who received the greatest number of votes, up to
the number of directors to be elected, were elected.
The following summarizes the results of the shareholder vote:
<TABLE>
<CAPTION>
Votes in Votes Authority Broker Non-
Name of Director Nominee Favor Opposed Abstentions Withheld Votes
------------------------ ----- ------- ----------- -------- -----
<S> <C> <C> <C> <C> <C>
Class II
(Terms expire in 2002)
Dennis Bookshester 6,981,524 - - 27,410 -
Thomas Small 6,981,524 - - 27,410 -
</TABLE>
Item 5. Other Information
On May 13, 1999, the Company was notified that The Nasdaq Stock Market
("Nasdaq") will delist the Common Stock from trading on the Nasdaq National
Market on August 14, 1999 if the common stock does not maintain a minimum bid
price of at least $1.00 per share and the Company does not maintain a market
value of public float greater than $5 million for 10 consecutive trading days
prior to August 12, 1999. The Company may appeal this decision.
Item 6. Exhibits and Reports on Form 8-K
Exhibit No. 10.1 - Unsecured Demand Note dated February 10, 1999
issued to Maurice Sanderman
Exhibit No. 10.2 - Unsecured Demand Note dated 4/27/99 issued to
Maurice Sanderman
Exhibit No. 10.3 - Unsecured Demand Note dated 4/30/99 issued to
Maurice Sanderman
Exhibit No. 10.4 - Unsecured Demand Note dated 5/12/99 issued to
Maurice Sanderman
Exhibit No. 27.1 - Financial Data Schedule
17
<PAGE>
SIGNATURE PAGE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SUNDANCE HOMES, INC.
By: /S/ Joseph R. Atkin Date: May 24, 1999
--------------------------------
Joseph R. Atkin, Vice President
and Chief Financial Officer
18
<PAGE>
Exhibit Index
Exhibits
Exhibit No. 10.1 - Unsecured Demand Note dated February 10, 1999
issued to Maurice Sanderman
Exhibit No. 10.2 - Unsecured Demand Note dated 4/27/99 issued to
Maurice Sanderman
Exhibit No. 10.3 - Unsecured Demand Note dated 4/30/99 issued to
Maurice Sanderman
Exhibit No. 10.4 - Unsecured Demand Note dated 5/12/99 issued to
Maurice Sanderman
Exhibit No. 27.1 - Financial Data Schedule
17
<PAGE>
DEMAND NOTE
-----------
$305,263.00 February 10, 1999
R E C I T A L S:
WHEREAS, Marathon Center, Inc., an Illinois Corporation ("Maker") has
entered into negotiations with Paul H. Schwendener, Inc. ("Contractor") for the
provision by Contractor of general contracting services relative to the
construction of certain improvements on real estate located at 3232 North
Halsted, Chicago, Illinois ("Property"); and
WHEREAS, Maker is the owner of the Property; and
WHEREAS, at the request and direction of Maker, Maurice Sanderman
("Lender") has this date disbursed directly to Contractor, for the benefit of
Maker, the sum of this Note, as a payment for services rendered by Contractor
for the Property pursuant to the request for payment attached hereto as Exhibit
A and as evidenced by the payment by Maker to Contractor attached hereto as
Exhibit B.
FOR VALUE RECEIVED, Maker promises to pay to the order of Lender, the
principal sum of Three Hundred Five Thousand Two Hundred Sixty Three and No/100
Dollars ($305,263.00) and interest beginning this date, on the balance of
principal remaining from time to time unpaid at the rate of interest equivalent
to the "Prime Rate" as determined from time to time by LaSalle National Bank as
its prime rate, plus three percent (3.0%).
All payments on account of this indebtedness evidenced by this Note shall
be applied first to accrued and unpaid interest on the unpaid principal balance
and the remainder to principal.
Any payments of principal or interest not paid when demand is made shall
bear interest at the rate of the lesser of the Prime Rate, as determined above,
plus 5%, or the maximum rate of interest permitted to be charged in the State of
Illinois. Payments of both principal and interest shall be made as Lender
directs.
All parties hereto severally waive presentment for payment, notice of
dishonor and protest.
Marathon Center, Inc.
By: /s/ Joseph R. Atkin
----------------------------
Its: Vice President
----------------------------
<PAGE>
DEMAND NOTE
$155,000.00 April 27, 1999
R E C I T A L S:
WHEREAS, Marathon Center, Inc., an Illinois Corporation ("Maker") has
entered into negotiations with Paul H. Schwendener, Inc. ("Contractor") for the
provision by Contractor of general contracting services relative to the
construction of certain improvements on real estate located at 3232 North
Halsted, Chicago, Illinois ("Property"); and
WHEREAS, Maker is the owner of the Property; and
WHEREAS, at the request and direction of Maker, Maurice Sanderman
("Lender") has this date made available to the Maker the sum of this Note,
enabling Maker to pay for various services rendered for the Property pursuant to
Exhibit B attached hereto.
FOR VALUE RECEIVED, Maker promises to pay to the order of Lender, the
principal sum of One Hundred Fifty Five Thousand and No/100 Dollars
($155,000.00) and interest beginning this date, on the balance of principal
remaining from time to time unpaid at the rate of interest equivalent to the
"Prime Rate" ad determined from time to time by LaSalle National Bank as its
prime rate, plus three percent (3.0%).
All payments on account of this indebtedness evidenced by this Note shall
be applied first to accrued and unpaid interest on the unpaid principal balance
and the remainder to principal.
Any payments of principal or interest not paid when demand is made shall
bear interest at the rate of the lesser of the Prime Rate, as determined above,
plus 5%, or the maximum rate of interest permitted to be charged in the State of
Illinois. Payments of both principal and interest shall be made as Lender
directs.
All parties hereto severally waive presentment for payment, notice of
dishonor and protest.
Marathon Center, Inc.
By: /s/ Joseph R. Atkin
----------------------------
Its: Vice President
----------------------------
<PAGE>
PROMISSORY NOTE
---------------
$710,914.63 Chicago, Illinois
April 30, 1999
FOR VALUE RECEIVED, Capital Hill Lofts, Inc., an Illinois corporation
("Maker), hereby promises to pay to the order of Maurice Sanderman ("Payee"),
whose mailing address is 880 Great Elm, Highland Park, Illinois 60035, or such
other place as Payee may from time to time designate, in the manner hereinafter
provided, the principal sum of SEVEN HUNDRED TEN THOUSAND NINE HUNDRED FOURTEEN
AND 63/000 DOLLARS ($710,914.63), in lawful money of the United States of
America, together with interest at Prime Rate, as hereinafter defined, plus
three percent (3%) per annum ("Interest Rate") from the date hereof on the
balance of principal remaining from time to time unpaid, as follows:
(i) All of the unpaid principal balance outstanding hereunder, and
any unpaid interest accrued thereon, and all other sums which may
be due and owing shall be due and payable, if not sooner paid, on
September 30, 1999 (Maturity Date").
Interest shall be calculated hereunder on the basis of a 360-day year.
The Prime Rate shall be the Prime Rate of Interest published from time to
time in the Money and Investing section of the Wall Street Journal. Changes in
the rate of interest to be charged hereunder shall take effect immediately upon
the publication of any change in the Prime Rate.
Maker, at its option, may prepay the entire balance of principal and
interest then remaining unpaid hereon without premium, provided that Maker
notifies Payee of its intent to prepay this Note on any such date by written
notice delivered to Payee prior to the prepayment date.
If Maker fails to pay any of the principal or interest or other charge due
hereunder in accordance with the terms and conditions contained herein, then, in
lieu of, or in addition to, any other right or remedy then available under this
Note, Payee shall have the right and option, without further notice, to
implement, as of and from the date of default, the "Default Rate" (as
hereinafter defined) to the entire principal balance outstanding under the Note
and all accrued interest thereon. For purposes of this Note, the "Default Rate"
shall mean the Prime Rate plus six percent (6%) per annum, unless prohibited by
applicable law, in which event the Default Rate shall be set at the highest rate
permitted by applicable law.
Maker, for itself and its successors and assigns hereby forever waives
presentment, protest and demand, notice of protest, demand, dishonor and non-
payment of this Note, and all other notices in connection with the delivery,
acceptance, performance, default or enforcement of the payment of this Note, and
waives and renounces all rights to the benefits of any statute of limitations
and any moratorium now provided or which may hereby be provided by any federal
of state statute or decisions, including, but not limited to, exemptions
provided or allowed under the Bankruptcy Code against the enforcement and
collection of the obligations evidenced by this Note, and any and all
amendments, substitutions, extensions, renewals, increases, and modifications
hereof.
<PAGE>
Maker agrees to pay all costs and expenses of collection and enforcement of this
Note when incurred, including Payee's attorneys' fees and legal and court costs,
including any incurred on appeal or in connection with bankruptcy or insolvency,
whether or not any lawsuit or proceeding is ever filed with respect hereto. No
extensions of time of the payment of this Note or any installment hereof or any
other modification, amendment or forbearance made by agreement with any person
now or hereafter liable for the payment of this Note shall operate to release,
discharge, modify, change or affect the liability of any co-maker or any other
person with regard to this Note, either in whole or in part.
No failure on the part of Payee or any holder hereof to exercise any right
or remedy hereunder, whether before or after the occurrence of a default, shall
constitute a waiver thereof, and no waiver of any part default shall constitute
a waiver of any future default or of any other default. No failure to demand
payment of the debt evidenced hereby by reason of default hereunder, or
acceptance of any past due amount, or extension granted from time to time shall
be construed to be a waiver of the right to: (i) insist upon prompt payment
thereafter; (ii) impose the Default Rate retroactively or prospectively, or
(iii) impose late payment charges; nor shall such failure by deemed to be a
novation of this Note, a reinstatement of the debt evidenced hereby, a waiver of
any other right, or be construed so as to preclude the exercise of any right
which Payee or any holder hereof may have, whether by the laws of the State of
Illinois, by agreement, or otherwise, and none of the foregoing shall operate to
release, change, or affect the liability of Maker, and Maker hereby expressly
waives the benefit of any statute or rule of law or equity which would produce a
result contrary to or in conflict with the foregoing. This Note may not be
modified or amended orally, but only by an agreement in writing signed by the
party against whom such agreement is sought to be enforced.
The parties hereto intend and believe that each provision in this Note
comports with all applicable local, state and federal laws and judicial
decisions. However, if any provisions, provision, or portion of any provision in
this Note is found by a court of competent jurisdiction to be in violation of
any applicable local, state or federal ordinance, statute, law, or
administrative or judicial decision, or public policy, and if such court would
declare such portion, provision or provisions of this Note to be illegal,
invalid, unlawful, void or unenforceable as written, then it is the intent of
all parties hereto that such portion, provision or provisions shall be given
force and effect to the fullest possible extent that they are legal, valid and
enforceable, and the remainder of this Note shall be construed as if such
illegal, invalid, unlawful, void or unenforceable portion, provision or
provisions were severable and not contained therein, and the rights, obligations
and interest of Maker and the holder hereof under the remainder of this Note
shall continue in full force and effect.
This Note shall inure to the benefit of Payee and its successors and
assigns and shall be binding upon the undersigned and its successors and
assigns. As used herein, the term "Payee" shall mean and include the successors
and assigns of the identified payee and the holder or holders of this Note from
time to time.
Maker acknowledges and agrees that (i) this Note and the rights and
obligations of all parties hereunder shall be governed by and construed under
the laws of the State of Illinois; (ii) the obligation evidenced by this Note is
an exempted transaction under the Truth-in-Lending Act, 15 U.S.C. (S) 1601, et.
Seq.; (iii) said obligation constitutes a "business loan" which comes within the
purview of 815 ILCS 205/4(1)(c) (1933); and (iv) the proceeds of the loan
evidenced by this Note will not be used for the purchase of registered equity
securities within the purview of Regulation "G" issued by the Board of Governors
of the Federal Reserve System.
<PAGE>
The obligations of the Maker of this Note shall be direct and primary, and
when the context or construction of the terms of this Note so require, all words
used in the singular herein shall be deemed to have been used in the plural and
the masculine shall include the feminine and neuter.
EXECUTED AND DELIVERED as of the 30th day of April, 1999.
CAPITAL HILL LOFTS, INC.
By: /s/ Joseph R. Atkin
----------------------------
Name:
----------------------------
Title: Vice President
----------------------------
3
<PAGE>
DEMAND NOTE
$254,000.00 May 12, 1999
R E C I T A L S:
WHEREAS, Marathon Center, Inc., an Illinois Corporation ("Maker") has
entered into negotiations with Paul H. Schwendener, Inc. ("Contractor") for the
provision by Contractor of general contracting services relative to the
construction of certain improvements on real estate located at 3232 North
Halsted, Chicago, Illinois ("Property"); and
WHEREAS, Maker is the owner of the Property; and
WHEREAS, at the request and direction of Maker, Maurice Sanderman
("Lender") has this date made available to the Maker the sum of this Note,
enabling Maker to pay for various services rendered for the Property pursuant to
Exhibit B attached hereto.
FOR VALUE RECEIVED, Maker promises to pay to the order of Lender, the
principal sum of Two Hundred Fifty-Four Thousand and No/100 Dollars
($254,000.00) and interest beginning this date, on the balance of principal
remaining from time to time unpaid at the rate of interest equivalent to the
"Prime Rate" ad determined from time to time by LaSalle National Bank as its
prime rate, plus three percent (3.0%).
All payments on account of this indebtedness evidenced by this Note shall
be applied first to accrued and unpaid interest on the unpaid principal balance
and the remainder to principal.
Any payments of principal or interest not paid when demand is made shall
bear interest at the rate of the lesser of the Prime Rate, as determined above,
plus 5%, or the maximum rate of interest permitted to be charged in the State of
Illinois. Payments of both principal and interest shall be made as Lender
directs.
All parties hereto severally waive presentment for payment, notice of
dishonor and protest.
Marathon Center, Inc.
By: /s/ Joseph R. Atkin
----------------------------
Its: Vice President
---------------------------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 2,131
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
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0
0
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</TABLE>
