<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: June 30, 1999
Commission File Number: 0-21900
-----------------
SUNDANCE HOMES, INC.
----------------------------
(Exact name of registrant as specified in its charter)
Illinois 36-3111764
- ------------------------------ ----------------------------
(State or other jurisdiction of (IRS Employer Identification
incorporation or organization) Number)
70 East Lake Street, Chicago, Illinois 60601
----------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (312) 782-7100
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 August 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.
-----
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
June 30, 1999 (unaudited) and September 30, 1998............ 1
Consolidated Statements of Operations (unaudited) -
three and nine months ended June 30, 1999 and 1998.......... 2
Consolidated Statements of Cash Flows (unaudited) -
nine months ended June 30, 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...................... 8-13
PART II OTHER INFORMATION
Item 1. Legal Proceedings............................................ 14
Item 5. Other Information............................................ 14
Item 6. Exhibits and Reports on Form 8-K............................. 14
SIGNATURE PAGE............................................................. 15
EXHIBIT INDEX.............................................................. 16
</TABLE>
<PAGE>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
SUNDANCE HOMES, INC.
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1999 AND SEPTEMBER 30, 1998
(in thousands, except share data)
<TABLE>
<CAPTION>
June 30, September 30, 1998
1999
----------- ------------------
(unaudited) (as restated)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 1,019 $ 1,947
Real estate inventories 38,218 102,088
Assets held for sale, net of reserve 52,476 --
Prepaid expenses and other assets 1,869 2,227
Property and equipment, net 1,225 4,988
-------- --------
Total assets $ 94,807 $111,250
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued construction liabilities $ 15,562 $ 23,026
Other accrued expenses 3,471 2,386
Customer deposits 2,888 3,464
Notes payable 57,554 55,249
Notes payable to Principal Shareholder 3,925 2,500
Subordinated notes payable to Principal Shareholder 4,193 4,193
-------- --------
Total liabilities 87,593 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 78 78
authorized, 7,824,113 shares issued and outstanding
Additional paid-in capital 26,994 26,980
Retained earnings (deficit) (19,858) (6,626)
--------- ---------
Total shareholders equity 7,214 20,432
-------- --------
Total liabilities and shareholders' equity $ 94,807 $ 11,250
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
1
<PAGE>
SUNDANCE HOMES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS FOR
THE THREE AND NINE MONTHS ENDED JUNE 30, 1999 AND 1998
(unaudited)
(in thousands, except share data)
<TABLE>
<CAPTION>
Three months ended Nine months ended
June 30, June 30,
---------------------------- ------------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
(as restated) (as restated)
<S> <C> <C> <C> <C>
Residential sales $26,748 $35,019 $ 82,993 $ 79,498
Land and building sales - 6,950 1,300 6,950
------- ------- --------- --------
Total sales 26,748 41,969 84,293 86,448
Cost of residential sales 24,688 32,160 78,288 73,442
Cost of land and building sales - 5,898 622 5,898
------- ------- --------- --------
Total cost of sales 24,688 38,058 78,910 79,340
------- ------- --------- --------
Gross profit 2,060 3,911 5,383 7,108
Reduction in carrying value of assets held for
sale 472 - 6,834 -
Selling expenses 2,074 2,575 7,395 6,622
General and administrative expenses 2,082 977 4,386 3,307
------- ------- --------- --------
Income (loss) before provision (benefit)
for income taxes (2,568) 359 (13,232) (2,821)
Provision (benefit) for income taxes - 144 - (1,127)
------- ------- --------- --------
Net income (loss) $(2,568) $ 215 $ (13,232) $ (1,694)
------- ------- --------- --------
Net income (loss) per share $(0.33) $ 0.03 $ (1.69) $ (0.22)
------- ------- --------- --------
Weighted average number of shares
outstanding 7,820 7,808 7,818 7,808
======= ======= ========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
SUNDANCE HOMES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JUNE 30, 1999 AND 1998
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Nine months ended June 30,
---------------------------
1999 1998
------------- -------------
Operating activities: (as restated)
<S> <C> <C>
Net loss $(13,232) $ (3,928)
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Depreciation and amortization 1,289 1,555
Deferred income taxes 1,090
Reduction in carrying value of assets 6,834 --
Minority interest -- (10)
Changes in operating assets and liabilities:
Real estate inventories 8,168 (25,621)
Prepaid expenses and other assets (20) (1,137)
Income tax receivables -- 565
Accounts payable and accrued construction (7,464) (10,456)
liabilities
Other accrued expenses 596 74
Customer deposits (576) 1,006
------------- -------------
Net cash provided by (used for) operating activities (4,405) (36,862)
------------- -------------
Investing activities:
Property and equipment, net (267) (2,306)
------------- -------------
Net cash provided by (used for) investing activities (267) (2,306)
------------- -------------
Financing activities:
Borrowings under notes payable 76,699 113,998
Repayments of notes payable (74,394) (79,849)
Borrowings under notes payable to Principal 1,425 5,479
Shareholder
Repayments of notes payable to Principal Shareholder -- (2,979)
Proceeds of stock options exercised 14 3
------------- -------------
Net cash provided by (used for) financing activities 3,744 36,652
------------- -------------
Net increase (decrease in cash and cash equivalents) (928) (2,516)
Cash and cash equivalents:
Beginning of period 1,947 4,615
------------- -------------
End of period $ 1,019 $ 2,099
============= =============
</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 and
amended on June 17, 1999.
The results of operations for the nine months ended June 30, 1999 are not
necessarily indicative of the results to be expected for the entire fiscal year.
Note 2 - Assets Held for Sale and Related Reserve for Reduction in Carrying
Value.
During the quarter ended March 31, 1999, the Company recorded a $6.4 million
reserve to reflect the estimated reduction in carrying value of certain assets.
An additional reserve of $.4 million was recorded in the quarter ending June 30,
1999 to reflect the actual results of the sale of the Company's Suburban Assets
to Centex Homes, Inc. which closed on July 12, 1999. See Note 7 - Notes Payable.
The reductions in carrying value total $6.8 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 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 - Restatement
Prior to October 1, 1997, the Company capitalized certain costs incurred prior
to the sale of the initial residence in each development as deferred project
start-up costs on the basis that such costs were required to commence sales. On
October 1, 1997, as part of the adoption of Statement of Position (SOP) 98-5,
Reporting on the Cost of Start-Up Activities and Organization Costs, the Company
wrote off these costs as deferred project start-up costs. However, upon
subsequent review the Company determined to expense such costs in the period
incurred and the quarterly financial statements for the nine months ended June
30, 1998 have been revised accordingly.
4
<PAGE>
The effect of this revised reporting is as follows:
<TABLE>
<CAPTION>
Nine Months
Ended
June 30, 1998
--------------
<S> <C>
Net income (loss) reported $(3,928)
Effect of currently expensing deferred project start-up costs in the period incurred 2,234
-------
Net income (loss) as restated $(1,694)
=======
Per share amounts:
Earnings (loss) per share - basic diluted:
Net income (loss) as reported $ (0.50)
Effect of currently expensing deferred project start-up costs in
the period incurred 0.29
-------
Net income (loss) per share - basic and diluted as restated $ (0.21)
=======
</TABLE>
Note 4 - Real Estate Inventories
Real estate inventories are summarized as follows (in thousands):
<TABLE>
<CAPTION>
June 30, September 30,
1999 1998
--------- -------------
<S> <C> <C>
Work-in-process:
Land and land development $ 41,149 $ 46,852
Suburban inventory 10,773 14,096
Urban construction inventory 32,553 34,814
Completed homes:
Models 1,859 2,292
Speculative homes 7,586 4,034
-------- --------
Assets Held for Sale $(55,702)
-------- --------
$ 38,218 $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.
5
<PAGE>
NOTE 5 - PROPERTY AND EQUIPMENT
- -------------------------------
Property and equipment are summarized as follows (in thousands):
<TABLE>
<CAPTION>
June 30, September 30,
1999 1998
---------- -------------
<S> <C> <C>
Model home upgrades and furnishings $ 8,430 $ 8,047
Equipment and furniture 3,043 3,028
Vehicles 177 270
Leasehold improvements 456 476
------- -------
12,306 11,821
Accumulated depreciation (8,140) (6,833)
Assets Held for Sale (2,741) --
------- -------
$ 1,225 $ 4,988
======= =======
</TABLE>
NOTE 6 - INCOME TAXES
- ----------------------
The provision for income taxes for the three and nine months ended June 30, 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 nine months ended June 30, 1999, an additional valuation
allowance of $1.0 million and $5.3 million, respectively, was recorded based
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.
NOTE 7 - NOTES PAYABLE
- ----------------------
Notes and mortgages payable are summarized as follows (in thousands):
<TABLE>
<CAPTION>
June 30, September 30,
1999 1998
-------- -------------
<S> <C> <C>
Revolving line of credit $56,639 $53,682
Notes payable to land sellers 915 1,567
------- -------
$57,554 $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").
On December 1, 1998, the Company's Lenders declared a "default" under the Loan
Agreement and declared the outstanding balance of the loan 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 waived the
existing defaults and required the Company to liquidate assets through an
orderly process using all proceeds to reduce outstanding bank debt and placed
further restrictions and burdens on the Company.
In part, to address its liquidity issues, the Company entered into a Sales and
Purchase Agreement with Centex Homes (the Centex Agreement") which was
consummated on July 12, 1999. The proceeds of the sale together with the
proceeds received from two new credit agreements (described below) enabled the
Company to repay its outstanding indebtedness under the Loan Agreement
concurrent with the closing of the Centex Transaction.
6
<PAGE>
Concurrent with the closing of the Centex transaction the Company entered into a
new loan agreement with LaSalle Bank, N.A. (the "Credit Agreement") which
provided for a $5,000,000 line of credit to be used for general working capital
with up to $850,000 of availability for letters of credit. Available borrowings
under the Credit Agreement are reduced by the amount of letters of credit
outstanding. The loan bears interest at "prime" or LIBOR plus 250 basis points.
The terms of the Credit Agreement include certain customary representations and
covenants. The loan is secured by certain real estate assets and is guaranteed
by Maurice Sanderman, the Company's Chairman and principal shareholder. The loan
matures on July 7, 2001 but may be prepaid without penalty. As of August 12,
1999 there was $4.4 million borrowed under the Credit Agreement (which was
primarily used to pay outstanding payables) and $0.5 million in letters of
credit were outstanding.
Concurrent with the closing of the Centex transaction the Company entered into a
construction loan agreement with Corus Bank, N.A. (the "Construction Loan
Agreement") in the amount of $60,065,000 at the rate of prime plus one percent.
A portion of the proceeds of the Construction Loan was used to pay off the
Company's outstanding indebtedness under the Loan Agreement and will be used to
pay for the completion of the four urban projects currently in production. The
borrowings, which cannot exceed $25,500,000 at any one time, will be secured by
the assets of each of the four projects. The terms of the Construction Loan
Agreement include certain customary representations and covenants. As of August
20, 1999 the Company had outstanding borrowings of $22.0 million under the
Construction Loan Agreement. Proceeds from the sale of units in each project
will be used to repay outstanding amounts under the loan.
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 has certain financing agreements with the Principal Shareholder as
described below:
Secured Note Payable
On April 29, 1999, the Company borrowed $710,915 on a secured basis from Maurice
Sanderman, the Company's Chairman and principal shareholder. The secured demand
note was 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. This note was repaid in full on July 12,
1999.
On July 29, 1999, the Company borrowed $1.2 million at the rate of prime plus 3%
from Mr. Sanderman. The proceeds of this loan were used to pay certain
outstanding payables. This loan was secured by the Company's rights under the
Centex Agreement including the Company's rights, if any, in the $2,000,000
holdback held by Centex, which holdback may be used by Centex to reimburse
itself for warranty claims.
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 June 30, 1999, there was a $4.193 million principal
balance under the note. Payment of the outstanding principal balances are
subject to certain restrictions under the Construction Loan Agreement.
On May 1, 1998, Erie Center Lofts, Inc., a wholly owned subsidiary of the
Company, entered into a $2.5 million unsecured Subordinated Promissory Note with
a maturity date of February 1, 2000, and an interest rate of 20% with Mr.
Sanderman. Currently and at June 30, 1999 there was a $2.5 million principal
balance under this note.
7
<PAGE>
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, on July 15, 1999 these loans were
repaid in full.
NOTE 9 - CONTINGENCIES
- ----------------------
The Company is frequently required, in connection with the development of its
projects, to obtain performance or other maintenance bonds of 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 June 30, 1999, there were approximately
$5.4 million in performance or maintenance bonds and approximately $3.4 million
of letters of credit outstanding for such purposes. There have been no such
draws during the quarters ended June 30, 1999 or June 30, 1998.
The Company leases approximately 3,000 square feet of office space in Chicago,
Illinois. Certain equipment is also currently leased under non-cancelable
operating leases.
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;
and (9) those specific tasks 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 and
amended on June 17, 1999.
8
<PAGE>
Overview
The Company experienced decreased revenues for the quarter ended June 30, 1999,
as compared to the quarter ended June 30, 1998. The average sales price per home
closed increased by $29,000 from $188,000 for the quarter ended June 30, 1998 to
$217,000 for the quarter ended June 30, 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 34 units during the
quarter at an average price of $276,500 per unit. Residential sales, which are
recognized upon the closing and delivery of homes, decreased $8.3 million or
23.6% to $26.7 million, for the quarter ended June 30, 1999, as compared to
$35.0 million for the quarter ended June 30, 1998. The Company delivered 123
homes during the quarter ended June 30, 1999 compared to 186 in the quarter
ended June 30, 1998. The decrease in the number of homes delivered was primarily
due to the Company's fucus to close the Sales and Purchase Agreement with Centex
Homes. See "Suburban Communities."
Gross profit as a percent of sales was 7.7% for the quarter ended June 30, 1999,
compared to 9.3% for the same period in 1998.
Urban Development. The Company's wholly-owned subsidiary, Chicago Urban
Properties, Inc., continued delivering finished units at Erie Tower during the
quarter as well as continued construction on its other three urban projects. The
following is the status of the Company's Chicago developments:
Erie Centre Tower, a new-construction high-rise (124 units) in the rapidly
growing River North area, sold 9 units in the quarter. The project is
approximately 95% sold, with 7 units remaining to be sold. During the quarter,
34 units were delivered. 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 two lofts remaining for
sale. All 26 deliveries are expected to occur in 1999. Capitol Hill, a 90-unit
loft development took 14 new contracts during the second quarter of Fiscal 1999,
and has 12 loft units remaining for sale. The first deliveries are scheduled for
early in 2000.
Plaza 32, a 130-unit condominium project in the Lakeview area took two new
contracts in the quarter. The project is over 60% sold, and construction has
begun. First deliveries are expected in Fall 2000.
Suburban Communities. During the quarter ended June 30, 1999, the Company's
Suburban Properties division delivered 78 homes and its custom and semi-custom
home division, Rembrandt Homes, delivered 11 homes. During the quarter ended
June 30, 1999, the Company entered into a Sales and Purchase Agreement for the
sale of substantially all of the operating assets of its suburban communities.
The transaction closed on July 12, 1999.
9
<PAGE>
Results of Operations
The following table sets forth, for the three and nine months ended June 30,
1999 and June 30, 1998, the percentage of the Company's total sales represented
by each income statement line item presented.
<TABLE>
<CAPTION>
Three months
ended Nine Months Ended
June 30, June 30,
--------------- --------------------
1999 1998 1999 1998
------ ------ -------- ---------
<S> <C> <C> <C> <C>
Residential Sales 100.0% 83.4% 98.5% 92.0%
Land Sales -- 16.6 1.5 8.0
----- ----- ----- -----
Total Sales 100.0 100.0 100.0 100.0
Cost of Residential Sales 92.3 76.6 92.9 85.0
Cost of Land Sales -- 14.1 0.7 6.8
----- ----- ----- -----
Total cost of sales 92.3 90.7 93.6 91.8
----- ----- ----- -----
Gross profit 7.7 9.3 6.4 8.2
Reduction in carrying-value of assets held for sale 1.8 -- 8.1 --
Selling expenses 7.8 6.1 8.8 7.7
General and administrative expenses 7.8 2.3 5.2 3.8
----- ----- ----- -----
Income (loss) before provision (benefit) for income (9.6) 0.9 (15.7) (3.3)
taxes
Provision (benefit) for income taxes -- 0.3 - (1.3)
----- ----- ----- -----
Net income (loss) (9.6)% 0.5% (15.7)% (2.0)%
===== ===== ===== ======
</TABLE>
Residential Sales. Sales, which are recognized upon the closing and delivery
of homes, decreased $8.3 million or 23.6% to $26.7 million, for the three months
ended June 30, 1999 as compared to $35.0 million for the three months ended June
30, 1998. The Company experienced increased sales revenue for the nine months
ended June 30, 1999 as compared to the comparable period in 1998. Sales revenue
increased $3.5 million or 4.4% from $79.5 for the nine months ended June 30,
1998 to $83.0 for the nine months ended June 30, 1999. This decrease for the
quarter ended June 30, 1999 was primarily due to the decrease in homes closed
from 186 during the three months ended June 30, 1998 to 123 in the three months
ended June 30, 1999.
Cost of Residential Sales and Cost of Total Sales. Cost of residential sales,
as a percentage of revenues, increased by 0.5 percentage points to 92.3% of
sales for the quarter ended June 30, 1999 as compared to 91.8% for the quarter
ended June 30, 1998. Cost of residential sales, as a percentage of revenues,
increased by 1.9 percentage points to 94.3% for the nine months ended June 30,
1999 as compared to 92.4% for the nine months ended June 30, 1998. Total cost of
sales decreased by $13.4 million from $38.1 million for the quarter ended June
30, 1998 to $24.7 million in the quarter ended June 30, 1999. The primary reason
for this decrease was the decreased number of deliveries during the quarter
ended June 30, 1999.
Gross Profit. Gross profit as a percentage of sales decreased to 7.7% for the
quarter ended June 30, 1999 compared to 9.3% for the same period in 1998. Gross
profit as a percentage of sales decreased to 6.4% for the nine months ended June
30, 1999 compared to 8.2% 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 increased by 1.7 percentage points from 6.1% of sales for the quarter
ended June 30, 1998 to 7.8% of sales for the quarter ended June 30, 1999.
Selling expenses as a percentage of sales increased by 1.1 percentage points
from 7.7% sales for the nine months ended June 30, 1998 to 8.8% of sales for the
nine months ended June 30, 1999. The increase in selling expenses for the
quarter ended June 30, 1999, as a percentage of revenues, was primarily a result
of decreased sales during the quarter with no corresponding decrease in fixed
cost.
Actual selling expenses decreased by $0.5 million from $2.6 million during the
quarter ended June 30, 1998 to $2.1 million for the quarter ended June 30, 1999
and increased by $0.8 million from $6.6 million during the nine months ended
June 30, 1998 to $7.4 million for the nine months ended June 30, 1999.
10
<PAGE>
General and administrative expenses for the three months ended June 30, 1999
increased by $1.1 million compared to the three months ended June 30, 1998. As a
percentage of sales, general and administrative expenses increased by 5.5
percentage points from 2.3% of sales for the quarter ended June 30, 1998 to 7.8%
of sales for the quarter ended June 30, 1999. As a percentage of sales, general
and administrative expenses increased from 3.8% of sales for the nine months
ended June 30, 1998 to 5.2% of sales for the nine months ended June 30, 1999.
These increases are primarily a result of employee severance pay related to the
Centex Transaction.
Income Taxes
The provision for income taxes for the three and nine months ended June 30, 1999
and 1998 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 nine months ended June 30, 1999, an
additional valuation allowance of $1.0 million and $5.3 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.
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 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 has identified the potential for 200 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 $10,000-$50,000 and are scheduled to be
incurred in 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 worse-case scenario
because the scope of internal compliance is relatively small
11
<PAGE>
and the Company believes achievable prior to December 31, 1999. Preparation of a
contingency plan will, however, begin in the late 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.
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 nine months
ended June 30, 1999 decreased by approximately $32.5 million to $4.4 million
compared to net cash used for operating activities of $36.9 million in the nine
months ended June 30, 1998. The decrease is primarily due to the decrease 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").
On December 1, 1998, the Company's Lenders declared a "default" under the Loan
Agreement and declared the outstanding balance of the loan 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 and placed further
restrictions and burdens on the Company.
In part, to address its liquidity issues, the Company entered into a Sales and
Purchase Agreement with Centex Homes (the "Centex Agreement") which was
consummated on July 12, 1999. The proceeds of the sale together with the
proceeds received from two new credit agreements (described below) enabled the
Company to repay its outstanding indebtedness under the Loan Agreement
concurrent with the closing of the Centex Transaction.
Concurrent with the closing of the Centex transaction the Company entered into a
new loan agreement with LaSalle Bank, N.A. (the "Credit Agreement") which
provided for a $5,000,000 line of credit to be used for general working capital
with up to $850,000 of availability for letters of credit. Available borrowings
under the Credit Agreement are reduced by the amount of letters of credit
outstanding. The loan bears interest at "prime" or LIBOR plus 250 basis points.
The terms of the Credit Agreement include certain customary representations and
covenants. The loan is secured by certain real estate assets and is guaranteed
by Maurice Sanderman, the Company's Chairman and principal shareholder. The loan
matures on July 7, 2001 but may be prepaid without penalty. As of August 20,
1999 there was $4.4 million borrowed under the Credit Agreement (which was
primarily used to pay outstanding payables) and $0.5 million in letters of
credit were outstanding.
Concurrent with the closing of the Centex transaction the Company entered into a
construction loan agreement with Corus Bank, N.A. (the "Construction Loan
Agreement") in the amount of $60,065,000 at the rate of prime plus one. A
portion of the proceeds of the Construction Loan was used to pay off the
Company's outstanding indebtedness under the Loan Agreement and will be used to
pay for the completion of the four urban projects currently in production. The
borrowings, which cannot exceed $25,500,000 at any one time, will be secured by
the assets of each of the four projects. The terms of the Construction Loan
Agreement include certain customary representations and covenants. As of August
20, 1999 the Company had outstanding borrowings of $22.0 million under the
Construction Loan Agreement. Proceeds from the sale of units in each project
will be used to repay outstanding amounts under the loan.
12
<PAGE>
On August 16, 1999, the Company announced that The Nasdaq Stock Market
("Nasdaq") had delisted the Common Stock for trading on the Nasdaq National
Market due to the Company's current inability to meet the minimum bid and market
value of public float requirements for continued listing. The Company's Common
Stock is now traded on the Over the Counter Bulletin Board which will adversely
effect the Company's ability to seek additional financing in the public markets.
The Company in order to finance new properties for development will need to find
additional sources of financing or continue to borrow money from Maurice
Sanderman, the Company's Chairman and principal shareholder. If the Company is
unable to locate additional sources of financing or Mr. Sanderman ceases to make
loans to the Company, the Company will not be able to start new projects and be
forced to liquidate its remaining assets through the sale of its current
projects. There can be no assurances that the Company will be able to obtain
such additional financing on acceptable terms or at all.
The Company has certain financing agreements with the Principal Shareholder as
described below:
Secured Note Payable
On April 29, 1999, the Company borrowed $710,915 on a secured basis from Maurice
Sanderman, the Company's Chairman and principal shareholder. The secured demand
note was 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. This note was repaid on July 12, 1999.
On July 29, 1999, the Company borrowed $1.2 million at the rate of prime plus 3%
from Mr. Sanderman. The proceeds of this loan were used to pay certain
outstanding payables. This loan was secured by the Company's rights under the
Centex Agreement including the Company's rights, if any, in the $2,000,000
holdback held by Centex, which holdback may be used by Centex to reimburse
itself for warranty claims.
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 June 30, 1999 there was a $4.193 million principal
balance outstanding under the Note. Payment of the outstanding principal
balances are subject to certain restrictions under the Credit Agreement and the
Construction Loan Agreement.
On May 1, 1998, Erie Center Lofts, Inc., a wholly owned subsidiary of the
Company, entered into a $2.5 million unsecured Subordinated Promissory Note with
a maturity date of February 1, 2000, and an interest rate of 20% with Mr.
Sanderman. Currently and at June 30, 1999 there was a $2.5 million principal
balance under this note.
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. On July 15, 1999, these loans
were repaid in full.
13
<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 5. Other Information
On August 16, 1999, the Company announced that The Nasdaq Stock Market
("Nasdaq") had delisted the Common Stock for trading on the Nasdaq
National Market due to the Company's current inability to meet the
minimum bid and market value of public float requirements for
continued listing. The Company's Common Stock is now traded on the
Over the Counter Bulletin Board which will adversely effect the
Company's ability to seek additional financing in the public markets.
Item 6. Exhibits and Reports on Form 8-K
Exhibit 27.1 - Financial Data Schedule
Reports On Form 8-K - on April 9, 1999 the Company files a report on
Form 8-K disclosing that the Company had entered into a Sales and
Purchase Agreement with Centaex Homes on April 5, 1999.
14
<PAGE>
SIGNATURE PAGE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this amendment to this report to be signed on its
behalf by the undersigned thereunto duly authorized.
SUNDANCE HOMES, INC.
By: /s/ Joseph R. Atkin Date: August 23, 1999
--------------------------------
Joseph R. Atkin, Vice President
and Chief Financial Officer
15
<PAGE>
EXHIBIT INDEX
Exhibit 27.1 - Financial Data Schedule
16
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<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
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