Item 1. Business
The Company
Sundance Homes, Inc. (the "Company") is a builder of single family homes in the Chicago metropolitan area and condominiums in the Chicago urban market. Prior to September 1996, the Company primarily was a builder of affordably priced, single-family detached and attached homes in the Chicago metropolitan area. In September 1996, the Company entered the urban real estate market with the introduction of two condominium-loft conversion projects in Chicago. In 1997 the Company increased its presence in the Chicago urban market with the addition of two more condominium- loft conversion projects; a mid-rise condominium apartment project and a 23-story high-rise condominium apartment project. In addition, the Company is the mortgagee in possession of a 28 story office building conversion project in Chicago. Also in 1997, the Company expanded its custom home division, Rembrandt Homes, by acquiring the rights to 135 partially developed lots in Vernon Hills, Illinois, upon which the Company plans to market and build custom homes in the $300,000 - 500,000 price range. The Company strives to deliver superior value to both its entry- level and move-up buyers by pricing its homes competitively while consistently providing innovative designs and high-quality products. The Company typically offers one or more diverse product lines of single-family, detached and attached homes within each suburban project, with a variety of front elevations and architectural designs that complement each other and create a sense of community within the project.
The Chicago metropolitan area, which includes Cook County and the five surrounding counties (McHenry, Lake, DuPage, Kane and Will Counties, commonly referred to as the "collar counties"), is the third largest metropolitan area in the United States. Management believes that housing demand in these areas is strong in large part due to their proximity to concentrated job markets which have developed along major highways to the north, northwest, southwest and west of Chicago.
The Chicago urban market, includes the Loop area, South Loop, West Loop, New East Side, River North, Streeterville and the Gold Coast. Extensive development is taking place in other areas near the traditional Loop boundaries. These include the areas between Roosevelt and Cermak, and Halsted west to the United Center, and as far north as 5800 along the Ravenswood corridor. Management believes that housing demand in this market is strong due to the high rents in the markets, job growth in the downtown area, the long commute times to and from the city from the suburbs and the numerous amenities available in the Chicago downtown area to prospective home buyers.
The Company currently has 24 communities in various stages of planning and development and an additional four properties under contract or option. At September 30, 1997, the Company had 247 homes subject to pending sales contracts. The Company currently owns or controls sufficient land and buildings for the development of approximately 2,320 housing units and is evaluating or negotiating for the purchase of additional land and buildings, most of which is unentitled, for the possible development of approximately 1,700 additional housing units.
The Company is currently operating three divisions: Sundance Suburban Properties; Rembrandt Homes; and Chicago Urban Properties. The Sundance Suburban Division focuses on affordably priced entry-level and first time move-up houses primarily in the collar counties surrounding Chicago. The Rembrandt Division focuses on the semi-custom and custom market primarily in the north and northwest Chicago suburban counties. The Chicago Urban Properties Division focuses primarily on loft-conversion, townhome and new construction mid and high-rise apartment condominiums in the City of Chicago. The Company believes that the division structure allows each operating entity to provide a focused insight into the markets, competition, subcontractor pricing, and consumer tastes in which it operates. Each division operating team is responsible for the product development, sales and marketing, home construction and customer service aspects of their projects. Corporate office support is provided for broad marketing and promotional strategic decisions, accounting, finance, and information systems.
Business Strategy
The Company's home building strategy consists of the following key elements:
Value Pricing and Commitment to Quality. The Company strives to deliver superior value to its home buyers by pricing its homes competitively while consistently providing innovative designs and high-quality products. The Company's commitment to quality construction is a cornerstone of its business strategy. The Company acts as general contractor for each of its projects and requires that its subcontractors and suppliers use high quality, durable materials in the construction of its homes. The project manager for each project is responsible for ensuring that each home in the project meets the Company's standards for workmanship and materials.
Growth-Oriented Markets. The Company focuses its home-building in certain communities in the suburbs of Chicago where management believes that land acquisition costs have remained relatively low and demand for entry level and first time move-up homes is strong. The Company's current and planned projects are located in Cook, DuPage, Kane, Kendall, Lake and McHenry Counties. In September 1996, the Company expanded this market focus to include the Chicago urban market, particularly the downtown Chicago area and the neighborhoods adjacent to downtown. Demographic shifts in the housing market combined with the diverse and stable economic environment in Chicago have translated into population increases in and around the downtown area. New homes built in Chicago during the first three quarters of 1997 were 2,075, an increase of 49% over the first three quarters of 1996. The Company will continue to evaluate extending its home-building activities to other areas as opportunities consistent with the Company's strategy arise.
Innovative Design and Effective Marketing. The Company continuously monitors the home design and feature preferences of home buyers in its markets and uses this market research in its effort to provide innovative, space-efficient and desirable architectural designs and home amenities. In each project, the Company creates and maintains a series of model homes representing the home plans offered. The Company believes that the effective use of a variety of model homes plays an integral role in marketing the competitive advantages of its home design to prospective buyers.
Property Acquisition and Development. The Company strives to minimize its overall property costs and the risks associated with the development of unentitled property by, whenever possible, using options and other financing arrangements that allow the Company to control property through the entitlement process, but defer the payment for such property until the entitlement process has been completed and the Company is prepared to commence construction. The Company has substantial experience in obtaining the entitlements necessary to develop residential and urban properties. In addition, the Company will occasionally purchase entitled property to the extent that the price and terms of such purchase are believed by the Company to be advantageous.
Cost Control. The Company controls the cost of developing its projects by: (i) seeking to purchase property at a low cost per unit; (ii) using its position as a leading homebuilder in its markets to obtain favorable pricing on construction materials and labor from its subcontractors; (iii) adhering to strict construction schedules and closely monitoring the physical progress and costs of construction with the use of a computerized tracking system; and (iv) striving to achieve rapid inventory turnover by pricing its homes at competitive levels and entering into sales contracts for a majority of its homes prior to commencement of construction.
Summary of Residential Projects
Property Acquisition and Development
The Company selects property for acquisition and development based upon a variety of factors, including: (i) financial and legal review as to the feasibility of the proposed project, including projected profitability; (ii) demographic and marketing studies; (iii) competition within the area of the proposed project; (iv) proximity to concentrated job markets, quality of school districts and local traffic corridors; (v) infrastructure requirements for grading, drainage, utilities and streets; and (vi) management's judgment as to the real estate market, economic trends and the Company's experience in a particular area. The development approach for the Company's suburban developments varies from its urban projects due to the nature of the acquired property.
Suburban Development. The Company seeks to minimize its overall land costs and the risks associated with developing unentitled land by, whenever possible, using options and other financing arrangements that allow the Company to control land through the entitlement process but defer the payment for such land until the entitlement process has been completed and the Company is prepared to commence construction. The Company has generally found long-time landowners to be more willing than speculators or developers to defer payment and closing, thereby providing low or no-cost financing to the Company through the entitlement process. The Company strives to negotiate land purchase contracts that allow the Company to purchase portions of a parcel as close as possible to the commencement of construction.
After control of a parcel of unentitled land has been obtained, the Company prepares preliminary and final plans for each project, providing for infrastructure, neighborhoods, wetland preservation, educational and other public facilities, as well as open space. Once preliminary plans have been prepared, the Company must obtain numerous governmental approvals, licenses, permits and agreements, commonly referred to as "entitlements," before it can commence development and construction. For a description of the entitlement process, see "-Government Regulation and Environmental Controls." In the Chicago metropolitan area, obtaining the many necessary entitlements for large residential developments is an extended process which generally takes one to two years and can involve a number of different governmental jurisdictions and agencies and considerable expense. No assurance can be given, however, that the Company will be able to obtain entitlements within originally projected time frames. Unless and until the requisite entitlements are received, a homebuilder generally does not have any rights to develop a project.
The Company has occasionally used partnerships, where such arrangements were advantageous, to acquire the land from the seller or where such arrangements appeared to be otherwise economically advantageous to the Company. The Company will continue to consider partnerships and other financing arrangements with landowners or other third parties.
In addition, the Company may purchase entitled land to the extent that the price and terms of such purchase are believed by the Company to permit development within acceptable profitability levels. Through the purchase of entitled or fully developed lots, the Company can reduce the amount of financial or market risks inherent in the development process.
Sales of land and lots have not previously had a significant impact on the Company's financial results. However, the Company will maintain the flexibility to sell land and lots to take advantage of market opportunities that may exist.
Urban Development. The Company is developing two different products in the downtown Chicago market. For the majority of the Company's urban development, the Company targets for acquisition former or current manufacturing buildings which are suitable for the conversion to residential loft-condominiums or construction of townhomes. The Company is also targeting for acquisition parcels for use in developing multi-story apartment condominiums. Typically, any building on a parcel of this type would be torn down prior to new construction beginning. Each of the factors outlined in the acquisition process above is performed on these sites, including assessing the Company's ability to obtain appropriate entitlements and zoning. Other factors evaluated are the Company's ability to provide adequate parking capacity and access to public transportation, commercial centers, and various City of Chicago amenities.
Prior to acquisition, the Company prepares architectural drawings, performs environmental testing and assessments, reviews zoning and entitlement requirements, and prepares feasibility studies based on projected absorption and estimated construction costs. The Company has been able to start initial construction activities soon after acquisition and will typically open for sale within six months after acquisition as the evaluation and zoning period is much shorter than for suburban developments.
Home and Community Design
The Company continuously engages in market research in an effort to ensure that its home designs and features address the preferences of potential home buyers. The Company closely monitors new trends in the industry, while carefully tracking the design features chosen by buyers of its homes as well as those offered by competitors in its markets. In addition, the Company conducts focus groups, exit interviews at its model home sites, telephone surveys and demographic studies in an effort to produce the most desirable architectural designs and home amenities available in a particular price range. The Company's marketing and design staff develop the detailed standards and specifications for each new product line and then work closely with one of a select number of unaffiliated architectural firms to produce a product line that delivers the home designs and features preferred by the target home buyers.
Within each suburban project, the Company seeks to create a sense of community through the use of cul-de-sacs, landscaping and a variety of front elevations and architectural designs that complement each other. The Company also seeks to create continuity within each suburban project by coordinating the exterior colors and trim of neighboring homes. The product lines offered in both suburban and urban projects depend upon many factors including the housing alternatives generally available in the area, the needs of the target home buyers for such project and the Company's cost per unit in the project.
Construction
The Company typically acts as the general contractor for the development and construction of its projects, employing project managers who supervise the land development and construction within each project. Typically, the Company relies on two project superintendents to supervise construction for each product line within a project. The "rough" superintendent is responsible for each home within a product line from excavation until the drywall is in place. The "trim" superintendent is then responsible for each home within the product line until the home is delivered to the buyer. Generally, each project superintendent coordinates the activities of the subcontractors, suppliers and building inspectors and is responsible for ensuring that the homes conform to the Company's quality control standards.
The Company also acts as general contractor for its urban project developments. The Company employs a project construction manager who typically supervises one or more building conversions, and a construction superintendent who supervises all phases of construction for a particular building. The length of time of construction process is expected to vary due to the amount of demolition, environmental, or other construction requirements. Additionally, occupancy requirements typically specify completion of an entire phase prior to the initial closings, and as such will usually result in an approximate nine to twelve month construction cycle.
Subcontractors typically are retained on a project-by-project basis to complete construction at a fixed price per model for a varying term, usually six months to one year. Agreements with the Company's subcontractors are generally entered into after competitive bidding among competing subcontractors. The Company negotiates price and volume discounts with manufacturers and suppliers on behalf of subcontractors to take advantage of its volume of production. Management believes that this strategy has given the Company an advantage in producing quality homes at the lowest possible cost. The Company typically obtains price guarantees from manufacturers and material suppliers, but makes no long-term purchase commitments to material suppliers on behalf of subcontractors.
Materials used in the construction of the Company's homes are available from a number of sources, but material prices may fluctuate due to various factors, including supply and demand imbalances. In light of such fluctuation, the Company continues to evaluate various alternative sources of materials such as using metal frames and engineered lumber (i.e., soft woods in laminated form) instead of construction lumber for certain purposes. Construction labor has generally been available to the Company, but the home-building industry has in the past experienced occasional shortages of skilled labor in certain markets. Although there is presently an adequate supply of labor and materials for the Company's projects, it is possible that future shortages of skilled workers and/or materials may occur.
For suburban developments, the Company generally clusters the homes sold within a project, which management believes creates efficiencies in land development and construction and improves customer satisfaction by reducing the number of vacant lots surrounding a completed home. The Company typically completes the construction of a suburban home within four months from commencement of construction, although the construction schedule for a home depends in large part on the time of year, availability of labor, materials and supplies and other factors. In the Chicago urban market, the completion time of each project typically ranges from nine months to eighteen months depending upon the size and number of apartment or loft units per project.
The Company has historically provided a one year limited warranty of workmanship and materials and a two year limited warranty on the working systems for each of its homes. Beginning in 1995, the Company expanded its warranty policy to include a ten year limited warranty against certain structural defects. Historically, the Company has not incurred any significant financial costs relating to any warranty claims or defects in construction (see Item 3. Legal Proceedings).
Marketing and Sales
The Company attracts initial interest in its projects through a comprehensive advertising program using media such as newspapers, direct mail, and billboards. In addition, the Company has a buyer referral program in which buyers of the Company's homes receive referral fees for introducing new buyers to the Company. The Company believes that it has a reputation for developing high quality homes in the Chicago metropolitan area which helps generate interest in each new project.
The Company believes that the effective use of model homes plays an integral role in demonstrating the competitive advantages of its home designs and features to prospective home buyers. The Company has an exclusive relationship with an award winning interior designer who is responsible for creating and maintaining attractive model homes for each product line.
The Company's objective is to enter into sales contracts for all of its homes in advance of construction, thereby greatly reducing the risk of unsold inventory. The sales contracts for its homes generally provide for mortgage approval within a specified period. The Company attempts to minimize cancellations by requiring a nonrefundable cash deposit of approximately 5% to 10% of the purchase price for buyers using conventional financing and by training its sales force to assess the qualification of potential home buyers. A network database available to sales personnel provides information as to the qualifying criteria for certain lenders, thus allowing sales personnel to assess a customer's ability to qualify for a mortgage at the time the customer is selecting a model and options.
A majority of the Company's homes are sold by full-time, commissioned employees who typically work from sales offices (open seven days a week) located within each project. Additionally, the Company sells homes through independent brokers. Employees assist prospective buyers throughout the home buying process by providing them with information from a network database (developed by the Company) on the available product lines, pricing, options and upgrades, mortgage financing (including qualifying criteria), warranties and construction. This database also contains a complete listing of the Company's home buyers and can produce detailed demographic information on the residents of a project. The concentration of the Company's developments within the Chicago metropolitan area makes it possible for the Company to retain sales employees for a long- term, rather than on a project-by-project basis, which management believes results in reduced training costs and a more knowledgeable and motivated sales force.
The Company has experienced, and expects to continue to experience, significant seasonality and quarter to quarter variability in residential sales and net income. Generally, the receipt of sales contracts is highest during the first six months of the calendar year. Related closings typically peak in the July through September period as homes contracted for sale earlier in the year are delivered. Management believes that this seasonality reflects the tendency of home buyers to shop for a new home in the Spring with the goal of closing in the Fall or Winter as well as the scheduling of construction to accommodate seasonal weather conditions (see Note 11. Quarterly Results of Operations in the Footnotes to Consolidated Financial Statements).
Backlog
The Company's homes are generally offered for sale in advance of their construction. Substantially all of the Company's home sales during 1997 were sold pursuant to standard sales contracts entered into prior to commencement of construction. The Company's standard sales contracts generally require the customer to make an earnest money deposit upon signing. This deposit may range from a nominal amount for an FHA or VA financed purchase, to 5% to 10% of the purchase price for a buyer using conventional financing. Upon execution of the contract and receipt of the deposit, the home sale is included in backlog. The Company recognizes revenue on residential sales at closing, when title to the home has passed to the buyer.
The Company's backlog at any particular date is subject to substantial variation and is dependent upon several factors, including the number of homes then available for sale and the length of time necessary to complete the closing of home sales subject to pending contracts. The Company anticipates that the closing of most of the sales of homes in backlog as of September 30, 1997 will occur in fiscal 1998. However, no assurances can be given that homes in backlog will result in actual closings. The aggregate sales value of backlog increased approximately $12 million from September 30, 1996 to September 30, 1997 due primarily to the Company's entrance into the Chicago urban market. The aggregate sales value of backlog decreased approximately $17 million from September 30, 1995 to September 30, 1996 as efficiencies in the Company's construction process resulted in an ability to close more homes in a shorter time period in fiscal 1996.
Customer Financing
Substantially all home buyers utilize long-term mortgage financing to purchase a home. Lenders generally make loans only to borrowers who earn three to four times the total amount of the mortgage payment plus insurance and property taxes. As a result, economic conditions, increases in unemployment or high mortgage interest rates can eliminate a substantial number of potential home buyers from the market. Although mortgage financing for qualified home buyers was readily available during the year ended September 30, 1997, there can be no assurance that affordable mortgage financing will remain available to the Company's customers in the future.
FHA and VA financing generally enable home buyers to purchase homes with lower down payments than the down payments required through conventional financing, allowing a purchaser to borrow from 90% to 95% of the value of the home. The Company believes that when conventional lending rates are higher, the availability of FHA and VA financing broadens the group of potential purchasers for the Company's homes. If conventional rates increase substantially, the Company expects this percentage of buyers applying for FHA or VA approval to increase. As of September 30, 1997, the FHA financing limit for a one unit residence was $153,000.
Competition and Market Factors
The home-building industry is a highly competitive and fragmented market. The Company competes for residential sales with national, regional and local developers and homebuilders, individual resales of existing homes and condominiums, and available rental housing. The Company also competes for the acquisition of undeveloped land on which to build homes. Sales of homes and land at deeply discounted prices by competitors, lenders and similar institutions in the markets where the Company operates could have a material adverse effect on the Company. The Company is one of the leading developers of affordable homes in the Chicago metropolitan area, and believes it competes favorably as a result of price, its development expertise, its knowledge of the local real estate market and governmental permitting and approval process, and its favorable reputation in the Chicago metropolitan area home-building industry.
The Chicago urban market is less fragmented then the suburban market. While there are fewer competitors active in the market, the number is quickly growing. Management believes that the Company competes favorably with the competition as a result of its early entry into the market, development expertise, product design, location and the size and scope of its operations.
The home-building industry is cyclical and affected by consumer confidence levels and prevailing economic conditions in general and by job availability and interest rate levels in particular. A variety of other factors affect the home-building industry and demand for new homes, including changes in costs associated with home ownership such as increases in property taxes and energy costs, changes in consumer preferences, demographic trends and the availability of and changes in mortgage financing programs.
Government Regulation and Environmental Controls
Generally, the Company must obtain numerous government approvals, licenses, permits and agreements, referred to as "entitlements," before it can commence development and construction. Through options and other financing arrangements, the Company typically controls unentitled land during the entitlement process and only purchases the land after the planning and zoning process is complete. However, obtaining the many necessary entitlements for residential developments in the Chicago metropolitan area is an extended process which generally takes one to two years and can involve a number of different governmental jurisdictions and agencies and considerable expense. No assurance can be given that the Company will be able to obtain entitlements in such time frame in the future. The Company generally does not have any rights to develop a project until after it has received all required entitlements. Several governmental authorities in the Chicago metropolitan area have imposed fees as a means of defraying the cost of providing certain governmental services to developing areas, or have required developers to donate land to the municipality or to make certain off-site land improvements. Certain permits and approvals will be required to complete the residential developments currently being planned by the Company. The ability of the Company to obtain necessary approvals and permits for these projects is often beyond the Company's control and could restrict or prevent the development of otherwise desirable property. The length of time necessary to obtain permits and approvals increases the carrying costs of unimproved property acquired for the purpose of development and construction. In addition, the continued effectiveness of permits already granted is subject to factors such as changes in policies, rules and regulations and their interpretation and application.
The Company is also subject to a variety of federal, state and local statutes, ordinances, rules and regulations concerning protection of health and the environment. These laws may result in delays, cause the Company to incur substantial compliance costs and prohibit or severely restrict development in certain environmentally sensitive regions or areas. Prior to purchasing a parcel of land, the Company evaluates such land for the presence of hazardous or toxic materials, wastes or substances. To date, the Company has not experienced any material delays as a result of these laws and the Company's operations have not been materially affected by the presence or potential presence of such materials.
Bonds and Other Obligations
The Company is frequently required, in connection with the development of its projects, to obtain performance or maintenance bonds or letters of credit in lieu thereof. The amount of such obligations outstanding at any time varies in accordance with the Company's pending development activities. In the event any such obligations are drawn upon, the Company would be obligated to reimburse the issuing surety company or bank. At September 30, 1997, there were approximately $9.6 million in performance or maintenance bonds and approximately $9.2 million in letters of credit outstanding for such purposes (see Management's Discussion and Analysis of Financial Condition and Results of Operations- Liquidity and Capital Resources).
Employees
As of September 30, 1997, the Company employed 140 persons, 56 of whom were involved in project management, land development, production, contract management and contract administration, 38 of whom were sales and marketing personnel, and 46 of whom were executive, accounting, systems and administrative personnel. Although none of the Company's employees are covered by collective bargaining agreements, many of the subcontractors and suppliers which the Company engages are represented by labor unions or are subject to collective bargaining arrangements. The Company believes that its relations with its employees, subcontractors and suppliers are good.
Item 2.
Item 2. Properties
The Company currently occupies approximately 25,000 square feet of office space for its corporate headquarters in Schaumburg, Illinois. The lease for this office space began on October 1, 1994 and terminates on March 31, 1998. The Company is currently arranging to relocate its corporate office effective April 1, 1998.
Item 3.
Item 3. Legal Proceedings
The Company is involved in various routine legal proceedings incidental to the conduct of its business.
In November, 1994, a lawsuit was brought against the Company and certain directors and employees of the Company by the Board of Managers of Parkside on the Green Condominium Association. The complaint seeks damages against the Company for alleged construction defects in the approximate amount of $1.6 million, together with punitive damages against the named individuals for alleged breach of fiduciary duty. The Company has assumed the defense of this lawsuit on behalf of the individual defendants. The lawsuit is in the discovery process and various inspections are underway. The Company is defending the lawsuit vigorously.
Management believes that none of these legal proceedings will have a material adverse impact on the financial condition or results of operations of the Company.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during the Company's fiscal quarter ended September 30, 1997.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's Common Stock has been quoted on the Nasdaq Stock Market's National Market (the "National Market") under the symbol SUNH since July 9, 1993.
The closing price of the Company's Common Stock as reported on the National Market on December 22, 1997 was $1.5625 per share. As of December 18, 1997, there were 43 holders of record of the Company's Common Stock.
Dividends
The Company intends to retain its future earnings to finance the continuing development of its business. Accordingly, the Company does not anticipate paying any cash dividends on its Common Stock in the foreseeable future. The payment of any future dividends will be at the discretion of the Company's Board of Directors and will depend upon, among other things, future earnings, the success of the Company's development activities, capital requirements, restrictions in financing arrangements, the general financial condition of the Company and general business conditions. At present, the Company's ability to pay dividends is restricted to 50% of consolidated net income for the preceding fiscal year provided the Company is not in default of any provisions of the Loan Agreement (as defined hereafter, see "Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources").
Item 6.
Item 6. Selected Consolidated Financial Data
The following selected consolidated financial and operating data of the Company are qualified by reference to and should be read in conjunction with the Consolidated Financial Statements and Notes thereto and other financial data included elsewhere herein. The data set forth below (except for the pro forma statement of income data) as of and for the years ended September 30, 1997 and 1996, the nine months ended September 30, 1995 and the years ended December 31, 1994, and 1993 have been derived from the Company's audited consolidated financial statements. Consolidated balance sheets at September 30, 1997 and September 30, 1996 and the related consolidated statements of income, changes in shareholders' equity, and cash flows for the years ended September 30, 1997 and 1996 and the nine months ended September 30, 1995 and notes thereto appear elsewhere herein. These historical results are not necessarily indicative of the results to be expected in the future (see "Management's Discussion and Analysis of Financial Condition and Results of Operations").
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
General
In 1995, the Company changed its fiscal year end from December 31 to September 30. The Company's discussion regarding the Results of Operations compares the years ended September 30, 1997 and 1996 and the unaudited year ended September 30, 1995.
Results of Operations
Year Ended September 30, 1997 Compared to the Year Ended September 30, 1996
Residential sales, which are recognized upon the selling and closing of homes, decreased $12.2 million to $108.7 million for the year ended September 30, 1997, a decrease of 10.1% over the twelve months ended September 30, 1996. The decrease was primarily due to an overall decline in the suburban housing market of approximately 10%. The average sales price of home sales closed decreased slightly from $172,500 in fiscal 1996 to $171,000 in fiscal 1997.
There were 686 net new sales orders for the year ended September 30, 1997 representing an increase of 10%, or 62 orders, over the fiscal 1996 total of 624. The Company attributes the increase primarily to the expansion of its market place to include the Chicago urban market.
Cost of sales includes land acquisition costs, development costs, construction costs and direct overhead, job oversight supervision, customer service, warranty costs, interest and property taxes. Cost of sales decreased $10.3 million to $96.8 million in fiscal 1997 primarily as a result of lower sales volume. Cost of sales as a percent of revenues was 89.0% in fiscal 1997 compared to 88.5% of sales revenue in fiscal 1996.
Selling expenses include advertising, sales commissions, payroll, amortization of the costs of non-permanent upgrades to convert standard homes to model homes (draperies, wall-hangings, decor items) and maintenance of model homes. Certain expenses, such as sales commissions and amortization of model home upgrades, are derived from sales prices or the number of home sales closed and thus remain relatively constant as a percentage of residential sales. Other expenses, such as advertising costs and model home maintenance, may be significantly influenced in any given period by the number of grand openings or special promotions and the number of projects operating in that period. Costs associated with upgrading standard homes to model homes are capitalized and expensed as related home sales are closed, while most other selling expenses are expensed as incurred.
Selling expenses increased by $1.6 million from $7.0 million in fiscal 1996 to $8.6 million in fiscal 1997. As a percent of sales, selling expenses increased from 5.8% in the twelve months ended September 30, 1996, to 7.9% in the twelve months ended September 30, 1997. This increase is primarily due to increased marketing activities for several projects which will not deliver closed units and homes until fiscal 1998 and additional costs incurred due to the decision by the Company to use commissioned brokers.
General and administrative expenses decreased by $639,000 in the year ended September 30, 1997 compared to the year ended September 30, 1996. As a percent of sales, these expenses remained substantially unchanged. These costs have decreased due to the Company's continued efforts to reduce such expenses.
The Company is the general partner, with a 75.0% partnership interest, in the Sundance-Kaco Limited Partnership, an Illinois limited partnership. Also participating in the partnership is one limited partner, Kaco, Inc, which is entitled to 25.0% of all profits from the Spring Lake Farm South project. The limited partner's share of losses for 1997 was $131,000. Pursuant to the provisions of the partnership agreement, limited partner distributions of $161,000 were paid during 1997.
The benefit for income taxes was $234,000 in fiscal 1997. The Company recognized an income tax provision of approximately $824,000 for fiscal 1996. The effective tax rate for both fiscal 1997 and 1996 was approximately 40%.
Year Ended September 30, 1996 Compared to the Twelve Months Ended September 30, 1995
Residential sales increased $13.8 million to $120.9 million for the year ended September 30, 1996, an increase of 12.9% over the twelve months ended September 30, 1995. The increase was primarily due to an increase in the number of deliveries in the year from 631 in the 1995 period to 701 in the 1996 period. Additionally, the average sales price of home sales closed increased from $169,800 in fiscal 1995 to $172,500 in fiscal 1996.
There were 624 net new sales orders for the year ended September 30, 1996 representing an increase of 91%, or 298 orders, from the comparable 1995 period total of 326. The Company attributes the increase to the offering of a simplified and economical product line to the first-time home buyer at three developments which accounted for approximately 50% of new orders and 30% of home closings in fiscal 1996.
Cost of sales increased $8.9 million to $107 million in fiscal 1996. Cost of sales as a percent of revenues was 88.5% in fiscal 1996 compared to 91.6% of sales revenue for the 1995 period, excluding the reduction in carrying value of real estate assets of $3.7 million (see discussion related to the reduction in real estate assets in the comparative nine month periods below). The increase in gross profit as a percent of sales of 3.1 percentage points (exclusive of the 1995 adjustment to real estate inventories) primarily resulted from reductions in direct construction costs as a percentage of sales due to the product standardization initiatives begun during the year combined with reductions in field overhead expense.
Selling expenses increased by $0.2 million to $7.0 million in fiscal 1996. As a percent of sales, selling expenses decreased from 6.3% in the twelve months ended September 30, 1995, to 5.8% in fiscal 1996. The decrease as a percent of sales revenue is due primarily to the reduced number of model homes, which resulted in reduced carrying costs.
General and administrative expenses decreased nominally in the year ended September 30, 1996 compared to the comparable 1995 period. As a percent of sales, general and administrative expense decreased from 4.7% to 4.1%.
The Company is the general partner, with a 75.0% partnership interest, in the Sundance-Kaco Limited Partnership, an Illinois limited partnership. Also participating in the partnership is one limited partner, Kaco, Inc, which is entitled to 25.0% of all profits from the Spring Lake Farm South project. The limited partner's share of profits for 1996 was $117,000. Pursuant to the provisions of the partnership agreement, limited partner contributions of $73,000 were received and distributions of $345,000 were paid during 1996.
The provision for income taxes was $824,000 in fiscal 1996. The Company recognized an income tax benefit of approximately $2.7 million for the twelve months ended September 30, 1995. The effective tax rate for fiscal 1996 and 1995 was approximately 40%.
Inflation
The Company, as well as the home-building industry in general, may be adversely affected during periods of high inflation, primarily because of higher land acquisition, land development and construction costs. In addition, higher mortgage interest rates may significantly affect the affordability of permanent mortgage financing to prospective purchasers. Inflation also increases the Company's interest costs and the cost of labor and materials. The Company attempts to pass through to its buyers any increases in its costs through increased selling prices. Inflation did not have a material impact on fiscal 1997 or 1996 results. In 1995, delays experienced in obtaining required permits resulted in increased construction costs on the fixed price homeowner contracts which made up the Company's sales backlog. These increased costs, in turn, contributed to the decline in profit margins in both the 1995 and 1994 periods. The Company's project development schedule was changed in 1995 to ensure that communities are not open for sale as early in the development process as in the past which should minimize the potential for delays after the opening and thus the likelihood of delays in delivery once the house is sold. Despite such efforts, if the Company were to experience similar delays, no assurance can be given that inflation would not have a material adverse impact.
Liquidity and Capital Resources
Net cash provided by or used for operating activities varies from period to period, due primarily to the Company's houseline inventory activity, land acquisition and development requirements, and in lesser part to the Company's net income. Net cash used for operations in fiscal 1997 was $7.9 million, primarily due to the build-up of inventory and deferred start-up costs on projects for which there were no closings in fiscal 1997.
On February 7, 1997 the Company entered into an Amended and Restated Revolving Credit Loan Agreement (the "Loan Agreement"), with two banks that replaced the previous financing arrangements with the banks. The Loan Agreement provides a $60.0 million line of credit. The borrowings are secured by the real estate assets of the Company, with certain exceptions. Borrowings under the Loan Agreement bear interest at LIBOR plus 275 basis points for borrowings up to $40 million, and prime plus .5% for borrowings in excess of $40 million, plus certain customary fees. The Loan Agreement is scheduled to mature on February 1, 1999. Available borrowings under the Loan Agreement are reduced by the amount of letters of credit outstanding. The Loan Agreement includes certain customary representations and covenants, including restrictions on the Company's ability to pay dividends and maintenance of certain financial ratios. As of September 30, 1997, the Company had violated certain covenants as set forth in the Loan Agreement, including those related to the Company's corporate reorganization, projects exceeding three stories, and certain financial covenants, specifically, those related to net worth and net income. The Company believes that it will be able to either cure these defaults and events of default or revise the terms of the Loan Agreement or negotiate a replacement facility, but there can be no assurance of such cure, revised agreement or replacement facility. Failure by the Company to cure these defaults, revise the terms of the Loan Agreement or negotiate a replacement facility on a timely basis could have a material adverse effect on the Company's operations. The subordinated notes payable to the Principal Shareholder, as well as any interest thereto, are not allowed to be repaid until all defaults are cured and certain minimum net worth levels are maintained. As of December 15, 1997, the Company was negotiating with its banks in order to provide adequate funding for the expansion of its Chicago Urban Division including the construction of a 23- story high rise which would include 6 floors of parking and 17 floors of residential condominium apartments. There can be no assurances that the Company will be able to secure such financing on acceptable terms.
As of September 30, 1997, the Company had borrowed $30.8 million under the Loan Agreement and had $9.2 million of outstanding letters of credit, leaving $20.0 million as available for future borrowings. The Company believes that the current facility (as revised or replaced with a similar facility) together with its cash flow from operations will be sufficient to fund projected near term requirements and any relevant market opportunities as well as its plans to expand its inventory of developed land.
Item 8.
Item 8. Financial Statements and Supplementary Data
The response to this item is submitted as a separate section of this report beginning on page.
Item 9.
Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
Information with respect to the directors and officers of the Company is hereby incorporated herein by reference to the sections, "Election of Directors-Nominees," "-Other Directors" and "Executive Officers," in the Company's Proxy Statement which is expected to be filed with the Securities and Exchange Commission (the "Commission") in definitive form no later than January 28, 1998.
Information with respect to required Section 16(a) disclosure is hereby incorporated herein by reference to the section "Executive Officers'-Compliance with Section 16(a) of The Securities Exchange Act of 1934," in the Company's Proxy Statement which is expected to be filed with the Commission in definitive form no later than January 28, 1998.
Item 11.
Item 11. Executive Compensation
Information with respect to executive compensation is hereby incorporated herein by reference to the sections, "Election of Directors", "Compensation of Directors", and "Executive Compensation," in the Company's Proxy Statement which is expected to be filed with the Commission in definitive form no later than January 28, 1998.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information with respect to security ownership of certain beneficial owners and management is hereby incorporated herein by reference to the section "Security Ownership of Principal Shareholders and Management," in the Company's Proxy Statement which is expected to be filed with the Commission in definitive form no later than January 28, 1998.
Item 13.
Item 13. Certain Relationships and Related Transactions
Information with respect to certain relationships and related transactions is hereby incorporated herein by reference to the section "Certain Transactions," in the Company's Proxy Statement which is expected to be filed with the Commission in definitive form no later than January 28, 1998.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) and (2)The response to this portion of Item 14 is submitted as a separate section of this report beginning on page.
All other schedules have been omitted because they are inapplicable, not required, or the information is included elsewhere in the consolidated financial statements or notes thereto.
(3) Exhibits: The response to this Item is incorporated by reference to Item 14(c) below.
(b) No report on Form 8-K was filed by the Company during the last quarter of the period covered by this report.
(c) The exhibits listed below are filed with this report or incorporated by reference, as set forth below. The Company will furnish to any shareholder, upon written request, any of the exhibits listed below upon payment by such shareholder of the Company's reasonable expenses in furnishing any such exhibit.
Exhibit Number Document Description 3.1 a Amended and Restated Articles of Incorporation of the Registrant 3.2 a Amended and Restated Bylaws of the Registrant 4.1 c Specimen stock certificate representing Common Stock 4.2 f Second Amended and Restated Revolving Credit Loan Agreement dated February 7, 1997 4.3 First Amendment to Second Amended and Restated Revolving Credit Loan Agreement dated April 11, 1997 10.1 b The Sundance Homes, Inc. 1993 Stock Incentive Plan 10.2 b The Sundance Homes, Inc. 1993 Directors' Option Plan 10.3 b Profit Sharing and Savings Plan 10.4 b Form of Tax Indemnification Agreement 10.5 b Form of Director's Indemnification Agreement 10.6 b Form of Dividend Note 10.8 c Lease Agreement between the Company and The Mutual Life Insurance Company of New York 10.10 e Employment Letter for Jon Tilkemeier, dated September 10, 1996 10.11 e Employment Letter for Joseph Atkin, dated November 27, 1996 10.12 d First Amendment to the Sundance Homes, Inc. Stock Incentive Plan 10.13 d First Amendment to the Sundance Homes, Inc. Directors' Stock Option Plan 21.0 List of Subsidiaries 23.1 Consent of Price Waterhouse LLP 27.1 Financial Data Schedule
a Incorporated by reference to the Company's Registration Statement on Form S-8, Registration No. 33-96546. b Incorporated by reference to the Company's Registration Statement on Form S-1, Registration Statement No. 33-60988. c Incorporated by reference to the Company's Annual Report on Form 10-K for the period ended December 31, 1994. d Incorporated by reference to the Company's Registration Statement on Form S-8, Registration No. 333-11087 e Incorporated by reference to the Company's Annual Report on Form 10-K for the period ended September 30, 1996. f Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the period ended December 31, 1996.
(d) The response to this Item is incorporated by reference to Item 14(a)(2).
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this amendment to be signed on its behalf by the undersigned, thereunto duly authorized, on the 23rd day of December, 1997.
SUNDANCE HOMES, INC.
By: /s/ Maurice Sanderman Maurice Sanderman, Chariman of the Board and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
SUNDANCE HOMES, INC. ITEM 8, ITEM 14(a) (1) and (2) INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Accountants
Consolidated Balance Sheets as of September 30, 1997 and September 30, 1996
Consolidated Statements of Income for the Year Ended September 30, 1997, the Year Ended September 30, 1996 and the Nine Months Ended September 30, 1995
Consolidated Statements of Changes in Shareholders' Equity for the Year Ended September 30, 1997, the Year Ended September 30, 1996 and the Nine Months Ended September 30, 1995
Consolidated Statements of Cash Flows for the Year Ended September 30, 1997, the Year Ended September 30, 1996 and the Nine Months Ended September 30, 1995
Notes to Consolidated Financial Statements
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Sundance Homes, Inc.
In our opinion, the consolidated financial statements listed in the index appearing on page, present fairly, in all material respects, the financial position of Sundance Homes, Inc. and its subsidiaries at September 30, 1997 and 1996, and the results of their operations and their cash flows for the years ended September 30, 1997 and 1996 and the nine months ended September 30, 1995, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP Chicago, Illinois December 15, 1997
SUNDANCE HOMES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
Note 1 - Summary of Significant Accounting Policies:
Nature of business
Sundance Homes, Inc. is engaged in the development of land and construction of attached and detached single-family homes and urban residential buildings in the Chicago metropolitan area.
Year End Change
In January 1995, the Board of Directors of the Company (as defined hereafter) adopted a resolution providing that the date for the end of the fiscal year of the Company be changed from December 31 to September 30. As a result, the period ending September 30, 1995 contains nine months of operations.
Principles of consolidation
The consolidated financial statements include the accounts of Sundance Homes, Inc., its wholly-owned subsidiaries (the "Company") and its investment in a majority-owned limited partnership. All significant intercompany accounts and transactions have been eliminated in consolidation.
Revenue recognition
Residential sales are recognized at closing when title to the home has passed to the buyer. The Company's homes are generally offered for sale in advance of their construction. To date, most of the Company's homes have been sold pursuant to standard sales contracts entered into prior to commencement of construction. The Company's standard sales contracts generally require the customer to make an earnest money deposit. This deposit may range from a nominal amount for an FHA or VA financed purchase to 5% to 10% of the purchase price for a buyer using conventional financing.
Real estate inventories and cost of sales
Real estate inventories are carried at cost, which is less than estimated net realizable value, and include land, land development, direct and certain indirect construction costs, interest and real estate taxes.
At the time of revenue recognition, cost of sales is charged with the actual construction costs incurred and any estimate to complete, plus an allocation of the total estimated cost of land and land development, interest, real estate taxes and any other capitalizable common costs based on the relative sales value method of accounting.
The Company generally provides a one year limited warranty of workmanship and materials and a two year limited warranty on the working systems for each of its homes. Accordingly, a warranty reserve, based on the Company's historical experience, is provided as residential sales are closed; this reserve is reduced by the cost of subsequent work performed.
Deferred project start-up costs
Deferred project start-up costs include forward planning, architectural design costs, and other miscellaneous costs, other than normal period expenses, incurred prior to a project's first closing. Such amounts are capitalized as incurred and charged to cost of sales as related home sales are closed.
Interest capitalization
Interest and related debt issuance costs are capitalized to qualifying real estate inventories as incurred, in accordance with Statement of Financial Accounting Standards (SFAS) No. 34, "Capitalization of Interest Cost", and charged to cost of sales as revenue from residential sales is recognized.
Property and equipment
Property and equipment are carried at cost less accumulated depreciation and are depreciated using straight line and accelerated methods over the estimated useful lives of the assets, except for model home upgrades and furnishings which are amortized as related home sales in a development are closed. Significant additions and improvements are capitalized, while expenditures for maintenance and repairs are charged to operations as incurred. The cost and accumulated depreciation of property and equipment sold or retired are removed from the respective accounts and the resultant gains or losses, if any, are included in current operations.
Advertising costs
The Company attracts initial interest in its projects through a comprehensive advertising program using media such as newspapers, direct mail, telemarketing, billboards and, to a lesser extent, radio and television. Advertising costs, which are expensed as incurred, aggregated approximately $2.9 million, $1.9 million and $1.1 million during the years ended September 30, 1997 and 1996 and the nine months ended September 30, 1995, respectively.
Income taxes
Deferred income taxes are determined under the asset and liability method in accordance with SFAS No. 109 "Accounting for Income Taxes". Under SFAS No. 109, deferred income taxes arise from temporary differences between the income tax basis of assets and liabilities and their reported amounts in the consolidated financial statements.
Cash and equivalents
For purposes of reporting cash flows, the Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.
Use of estimates
The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the year then ended. Actual results could differ from those estimates.
Note 2 - Real Estate Inventories:
Completed homes include models constructed to help market a development and allocations of land and development and other allocable costs. Speculative homes represent non-model homes which are substantially complete and are not subject to a sales contract.
During the second quarter of 1995, the Company recorded a $3.7 million reserve to reflect the reduction in carrying value of certain real estate inventories. The reduction included an adjustment of $2.9 million (before income taxes) related to management's decision not to continue development of certain property which the Company owns. The Company had chosen not to develop this property as it identified more relevant development opportunities which were consistent with the Company's long-term market strategy. Also contributing to the loss for the period was the write-off of capitalized costs related to certain product lines which were discontinued.
A reserve is provided as a charge against earnings when the carrying amount of any of the Company's investments exceeds it's net realizable value. Net realizable value represents the expected selling price a property will bring in the open market reduced by (a) the estimated cost to complete and improve such property to the condition expected in determining the selling price, (b) disposition costs, and (c) estimated costs to hold the property to the point of sale, including interest carrying costs and other net cash flow requirements of the project.
Note 3 - Property and Equipment:
Note 4 - Notes and Mortgages Payable:
On February 7, 1997 the Company entered into an Amended and Restated Revolving Credit Loan Agreement (the "Loan Agreement"), with two banks that replaced the previous financing arrangements with the banks. The Loan Agreement provides a $60.0 million line of credit. The borrowings are secured by the real estate assets of the Company, with certain exceptions. Borrowings under the Loan Agreement bear interest at LIBOR plus 275 basis points for borrowings up to $40 million, and prime plus .5% for borrowings in excess of $40 million, plus certain customary fees. The Loan Agreement is scheduled to mature on February 1, 1999. Available borrowings under the Loan Agreement are reduced by the amount of letters of credit outstanding. The Loan Agreement includes certain customary representations and covenants, including restrictions on the Company's ability to pay dividends and maintenance of certain financial ratios. As of September 30, 1997, the Company had violated certain covenants as set forth in the Loan Agreement, including those related to the Company's corporate reorganization, projects exceeding three stories, and certain financial covenants, specifically, those related to net worth and net income. The Company believes that it will be able to either cure these defaults and events of default or revise the terms of the Loan Agreement or negotiate a replacement facility, but there can be no assurance of such cure, revised agreement or replacement facility. Failure by the Company to cure these defaults, revise the terms of the Loan Agreement or negotiate a replacement facility on a timely basis could have a material adverse effect on the Company's operations. The subordinated notes payable to the Principal Shareholder, as well as any interest thereto, are not allowed to be repaid until all defaults are cured and certain minimum net worth levels are maintained. As of December 15, 1997, the Company was negotiating with its banks in order to provide adequate funding for the expansion of its Chicago Urban Division including the construction of a 23- story high rise which would include 6 floors of parking and 17 floors of residential condominium apartments. There can be no assurances that the Company will be able to secure such financing on acceptable terms.
As of September 30, 1997, the Company had borrowed $30.8 million under the Loan Agreement and had $9.2 million of outstanding letters of credit, leaving $20.0 million as available for future borrowings. The Company believes that the current facility (as revised or replaced with a similar facility) together with its cash flow from operations will be sufficient to fund projected near term requirements and any relevant market opportunities as well as its plans to expand its inventory of developed land. Notes payable to land sellers bear interest at annual rates ranging from zero to prime plus three quarters of one percent and are normally repaid through application of agreed upon amounts from the proceeds of individual home sale closings.
Interest and related debt issuance costs incurred, all of which were capitalized, during the year ended September 30, 1997, the year ended September 30, 1996 and the nine months ended September 30, 1995, aggregated approximately $4.5 million, $3.5 million and $3.8 million, respectively.
Note 5 - Subordinated Notes Payable
Prior to the Company completing the public offering on July 9, 1993, the Company was recapitalized and reorganized into a parent- subsidiary structure, thereby terminating its S Corporation status. The Company declared aggregate distributions of S Corporation earnings to its Principal Shareholder in an aggregate amount such that beginning shareholders' equity as a C Corporation would be $5 million. During the twelve months ended December 31, 1993, such distributions aggregated $9.1 million, of which $4.9 million was paid out of available cash, while the remaining $4.2 million was paid in the form of promissory notes, which are subordinate to the Company's bank indebtedness, bear interest at 7.5% which compounds daily and originally matured in two equal annual installments on the first and second anniversaries of the offering. On September 30, 1997, the maturity date of the notes was extended to September 30, 1998. Payment of the annual installments is subject to certain restrictions under the Company's Revolving Credit Loan Agreement (see Note 4 - Notes and Mortgages Payable).
Note 6 - Income Taxes:
The Company has entered into a tax indemnification agreement with the Principal Shareholder of the Company which provides for, among other things, the indemnification of the Principal Shareholder for any losses or liabilities with respect to any additional taxes (including interest, penalties and legal fees) resulting from the Company's operations during the period in which it was an S Corporation.
Note 7 - Minority Interest:
During 1993, one of the Company's subsidiaries, acting as general partner with a 75% ownership interest, entered into a limited partnership with a land seller. Under the terms of this limited partnership agreement, the Company purchased the land from the seller for approximately $1.4 million, payable over the term of the agreement as home sales are closed. This partnership began closing homes in March, 1994.
The income(loss) from the limited partnership's operations is allocated to the general and limited partner based upon their relative ownership interests. Distributions with respect thereto are paid as outlined in the agreements.
Note 8 - Stock Incentive and Directors Option Plans:
Stock Incentive Plan The Board of Directors and shareholders adopted the Sundance Homes, Inc. Stock Incentive Plan (the "Stock Incentive Plan"), effective as of April 7, 1993. The purpose of the Stock Incentive Plan is to enable officers and key employees of the Company to participate in the Company's future and to enable the Company to attract and retain these persons by offering them proprietary interests in the Company. The Stock Incentive Plan is administered by the Company's compensation committee and authorizes the issuance of up to 625,000 shares of common stock pursuant to the grant or exercise of stock options, stock appreciation rights, restricted stock or deferred stock.
Prior to the offering in July 1993, the Company granted stock options under the Stock Incentive Plan to certain of its employees who were not previously shareholders of the Company to purchase up to 250,000 shares of common stock in the aggregate for a purchase price per share equal to the initial public offering price. Options granted to these officers will vest 25% per year for four years, and will expire after ten years.
As of September 30, 1997, options for 92,625 shares were exercisable.
Directors Option Plan
Outside Directors are granted options to acquire 5,000 shares of Common Stock on each of: (1) the date on which a person is first elected as a Director, (2) the date of the first annual meeting of shareholders held subsequent to such person's election and, (3) the date of each succeeding annual meeting of shareholders after which such person is still serving as a director (with a limit of options to acquire a total of 25,000 shares to be granted to any Outside Director). All options granted under the Directors' Plan are exercisable on the one year anniversary date of the grant and, at a price per share equal to the closing price of the Common Stock as reported on the Nasdaq National Market on the date of grant or, if the market is closed on such date, the next business day. Once granted, options may not be canceled.
As of September 30, 1997, options for 55,000 shares were exercisable.
Note 9 - Employee Benefit Plan:
The Company maintains a contributory profit sharing plan established pursuant to the provisions of Section 401(k) of the Internal Revenue Code which provides retirement benefits for eligible employees of the Company and its subsidiaries. The Company may make annual discretionary contributions to the plan. There were no discretionary contributions during the years ended September 30, 1997and 1996 and the nine months ended September 30, 1995.
Note 10 - Commitments and Contingencies:
The Company is frequently required, in connection with the development of its projects, to obtain performance or other maintenance bonds or letters of credit in lieu thereof. The amount of such obligations outstanding at any time varies in connection with the Company's pending development activities. In the event any such obligations are drawn upon, the Company would be obligated to reimburse the issuing surety company or bank. At September 30, 1997, there were approximately $9.6 million in performance or maintenance bonds and approximately $9.2 million of letters of credit outstanding for such purposes.
The Company currently leases its office space under a 5-year renewable lease. Through September 1994, the Company leased office space under cancelable month-to-month leases. Certain equipment is also currently leased under non-cancelable operating leases. Rent expense under such leases aggregated $436,000, $380,000 and $506,000 during the years ended September 30, 1997 and 1996 and the nine months ended September 30, 1995, respectively.
The Company is involved in various routine legal proceedings incidental to the conduct of its business. Specifically, a lawsuit has been brought against the Company and certain directors and employees of the Company by the Board of Managers of Parkside on the Green Condominium Association. The complaint seeks damages against the Company for alleged construction defects in the approximate amount of $1.6 million, together with punitive damages against the named individuals for alleged breach of fiduciary duty. The Company has assumed the defense of this lawsuit on behalf of the individual defendants. The Company is defending the lawsuit vigorously. Management believes that none of these legal proceedings will have a material adverse impact on the financial condition or results of operations of the Company.
Note 11 - Quarterly Results Of Operation (unaudited):