<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(AMENDMENT NO. 1)
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.
--------------------------------------------------------
(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
--------------------------------------------------------------------
(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/A
INDEX
<TABLE>
<CAPTION>
Page
No.
---
<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 6. Exhibits and Reports on Form 8-K...................... 17
SIGNATURE PAGE....................................................... 18
</TABLE>
<PAGE>
PART I FINANCIAL INFORMATION
This amendment to this Form 10-Q is being filed to reflect the Company's
determination to expense in the period incurred certain deferred project start-
up costs which the Company had previously capitalized.
Item 1. Financial Statements
SUNDANCE HOMES, INC.
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 1999 AND SEPTEMBER 30, 1998
(in thousands, except share data)
<TABLE>
<CAPTION>
March 31, September 30,
ASSETS 1999 1998
------ ----------- -------------
(unaudited)
<S> <C> <C>
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
======== ========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
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)........................ (17,298) (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 OPERATIONS FOR
THE THREE AND SIX MONTHS ENDED MARCH 31, 1999 AND 1998
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three months Six months ended
ended March 31, March 31,
---------------- --------------------
1998
1999 1998 1999 (restated)
------- ------- -------- ----------
<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)
------- ------- -------- -------
Net income (loss)....................... $(9,536) $(1,105) $(10,664) $(1,909)
======= ======= ======== =======
Net income (loss) per share (basic and
diluted)............................... $ (1.22) $ (0.14) $ (1.36) $ (0.24)
======= ======= ======== =======
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
FOR THE SIX MONTHS ENDED MARCH 31, 1999 AND 1998
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Six months ended
March 31,
--------------------
1998
1999 (restated)
-------- ----------
<S> <C> <C>
Operating activities:
Net loss................................................ $(10,664) $ (1,909)
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Depreciation and amortization......................... 861 725
Deferred income taxes................................. -- (1,287)
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 taxes receivable............................. -- 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)
-------- --------
Net cash used in investing activities: Property and
equipment, net........................................... (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 from 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 ("Sundance"). 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 Sundance.
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 Sundance'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, Sundance 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 Sundance'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 and transaction costs.
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 six
months ended March 31, 1998 have been revised accordingly.
The effect of this revised reporting is as follows:
<TABLE>
<CAPTION>
Six Months Ended
March 31, 1998
----------------
<S> <C>
Net income (loss) reported.............................. $(4,143)
Effect of currently expensing deferred project start-up
costs in the period incurred........................... 2,234
-------
Net income (loss) as restated........................... $(1,909)
=======
Per share amounts:
Earnings (loss) per share--basic and diluted:
Net income (loss) as reported....................... $ (0.53)
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............................................... $ (0.24)
=======
</TABLE>
4
<PAGE>
SUNDANCE HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 4--Real Estate Inventories
Real estate inventories are summarized as follows (in thousands):
<TABLE>
<CAPTION>
March September 30,
31, 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 Sundance's effective tax rate
of approximately 40%.
During the fiscal year ended September 30, 1998, Sundance'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 by Sundance.
5
<PAGE>
SUNDANCE HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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, Sundance 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 Sundance'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 Sundance 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 Sundance's ability to pay dividends and
maintenance of certain financial ratios. As of September 30, 1998, Sundance
had violated certain covenants, specifically those related to net worth and
net income. On December 1, 1998, Sundance'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, Sundance 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 Sundance 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 Sundance 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 Sundance has been able to raise capital. 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 Sundance
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
Sundance to incur higher interest expenses; and (4) cause Sundance's results
of operation to be impacted negatively. As of March 31, 1999 Sundance 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
Sundance's Plaza 32 project. Sundance, 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 July 15,
1999, that it will receive, net of prorations, expenses and holdbacks,
approximately $50 million in cash for the proposed sale of the assets.
Sundance 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.
6
<PAGE>
SUNDANCE HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Concurrent with the closing of the Centex transaction, Sundance plans to
restructure all of its remaining bank debt. Certain of Sundance's subsidiaries
signed a commitment letter with a bank on June 10, 1999. The letter provides
for a revolving credit facility with principal not to exceed $25.5 million at
any one time. The new credit facility may be drawn on up to an aggregate
principal amount of $60,065,000. The proceeds of the new credit facility will
be used to pay the remaining outstanding balance under the existing Revolving
Credit Loan Agreement following the application of the proceeds of the
proposed sale and to fund a portion of the construction costs on four of its
projects in the Chicago urban area. Sundance will guaranty all obligations
under the new credit facility. The borrowings under the new credit facility
will be secured by the assets of each of the four projects. The commitment
letter is subject to several conditions, including the consummation of the
proposed transaction, and no assurance can be given that Sundance will be able
to meet those conditions. Sundance believes such credit facility will provide
sufficient liquidity for its Chicago urban operations for the foreseeable
future. Sundance is currently in negotiations with several banks regarding an
additional credit facility. Such credit facility is contemplated to be secured
by certain of Sundance's remaining suburban and urban inventory of raw land,
developed lots and completed spec homes.
The anticipated payoff of Sundance's existing bank debt which is
contemplated to occur simultaneously with the closing of the proposed
transaction and the anticipated refinancing would relieve Sundance of the
limitations placed on it in the Forbearance Agreement which relate to its
future operations. No assurances can be given that Sundance 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
Sundance 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
Sundance, 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, Sundance'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.
Unsecured Notes Payable
As part of the public offering and recapitalization of Sundance on July 9,
1993, Sundance issued promissory notes to the Mr. Sanderman which in the
aggregate equaled $4,193,000. The notes are subordinate to Sundance'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 $4,193,000 principal balance
under the notes. Payment of the outstanding principal balances is subject to
certain restrictions under the Loan Agreement
On February 10, 1999, April 27, 1999, and May 12, 1999, Sundance borrowed
$305,263, $155,000, and $254,000, respectively, on an unsecured basis from Mr.
Sanderman. The unsecured demand notes bear interest
7
<PAGE>
SUNDANCE HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 Sundance was not permitted under the Forbearance Agreement.
On April 29, 1999, Sundance 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 Capitol Hill.
Acquisition by Sundance of this property was not allowed under the Forbearance
Agreement.
Note 9--Contingencies
Sundance 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 Sundance's pending development activities. In the event any
such obligations are drawn upon, Sundance 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.
Sundance currently leases 15,500 square feet of office space in Schaumburg,
Illinois where its Suburban Properties Division and Corporate offices are
located. Sundance 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. Sundance also leases certain model homes from an independent third
party under a sale-leaseback agreement.
Additionally, Sundance is involved in various routine legal proceedings,
which Sundance believes to be incidental to the conduct of its business.
Specifically, in November, 1994, a lawsuit was brought against Sundance and
certain directors and employees of Sundance by the Board of Managers of
Parkside on the Green Condominium Association. The complaint seeks damages
against Sundance 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. Sundance 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. Sundance 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 Sundance.
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 and
amended on June 17, 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)%
------ ------ ------ ------
Net income (loss) (28.5)% (4.4)% (18.5)% (4.3)%
======= ====== ======= ======
</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 6. Exhibits and Reports on Form 8-K
(a) Exhibit No. 27.1 - Financial Data Schedule
(b) None
17
<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: June 17, 1999
--------------------------------
Joseph R. Atkin, Vice President
and Chief Financial Officer
18
<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
<INVENTORY> 39,578
<CURRENT-ASSETS> 102,200
<PP&E> 1,866
<DEPRECIATION> 0
<TOTAL-ASSETS> 104,066
<CURRENT-LIABILITIES> 22,499
<BONDS> 71,785
0
0
<COMMON> 78
<OTHER-SE> 26,994
<TOTAL-LIABILITY-AND-EQUITY> 104,066
<SALES> 33,444
<TOTAL-REVENUES> 33,444
<CGS> 32,458
<TOTAL-COSTS> 36,618
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 6,362
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (9,536)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,536)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,536)
<EPS-BASIC> (1.22)
<EPS-DILUTED> 0
</TABLE>
