-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QOdgmfDTF7PtauR8dOR2zHvD6sHt8t0T8mpdA9WGTv44rkrE/73xcBFRmKwh4osT MXWiQ76e+uaveq/81dcxSQ== 0000915350-00-000014.txt : 20001218 0000915350-00-000014.hdr.sgml : 20001218 ACCESSION NUMBER: 0000915350-00-000014 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20001031 FILED AS OF DATE: 20001215 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FORECAST GROUP LP CENTRAL INDEX KEY: 0000915350 STANDARD INDUSTRIAL CLASSIFICATION: GEN BUILDING CONTRACTORS - RESIDENTIAL BUILDINGS [1520] IRS NUMBER: 330582072 STATE OF INCORPORATION: CA FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 033-72106 FILM NUMBER: 789482 BUSINESS ADDRESS: STREET 1: 10670 CIVIC CENTER DR CITY: RANCHO CUCAMONGA STATE: CA ZIP: 91730 BUSINESS PHONE: 9099877788 10-K 1 0001.txt SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the year ended October 31, 2000 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OR 1934 For the transition period from N/A Commission File Number: 33-72106 THE FORECAST GROUP "Registered Tradename", L.P. and FORECAST "Registered Tradename" CAPITAL CORPORATION (Exact Name of Registrants as specified in their charter) California 33-0582072 California 33-0582077 (State of Organization) (IRS Employer Identification Number) 10670 Civic Center Drive, Rancho Cucamonga, California, 91730 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code(909)987-7788 Securities Registered Pursuant to Section 12(b) of the Act: Title of Each Class Name of Each Exchange on Which Registered - ------------------- ----------------------------------------- 11 3/8% Senior Notes None Due 2000 Securities Registered Pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO There was no voting stock held by nonaffiliates of the Registrant at December 14, 2000. At December 14, 2000 Forecast "Registered Tradename" Capital Corporation had 2,500 shares of Common stock outstanding. PART I ITEM 1 - BUSINESS General The Forecast Group "Registered Tradename", L.P., ("Forecast" "Registered Tradename" or the "Company") currently designs, builds and sells affordably-priced single family detached homes primarily to entry-level and first time move-up buyers in California. The Company operates in two distinct geographic regions (Northern California and Southern California), and is a leading homebuilder in its targeted submarkets (based on the number of homes closed) with operations throughout most major metropolitan areas and employment centers within these markets. In September 1999, the Company sold nearly all of its lots in Phoenix, Arizona to a national homebuilder. The Company is presently developing a 245 lot community in Phoenix, Arizona and is scheduled to commence new home sales in that market in early 2001. The Company is the successor to the residential real estate development business founded in 1971 by Mr. James P. Previti, the Chairman of the Board and President of the general partner of The Forecast Group "Registered Tradename" L.P. From 1971 through 1989, the Company's operations were focused on the Southern California regions known as the Inland Empire and Antelope Valley. In 1989, the Company expanded operations into the Sacramento Valley region of Northern California. Further diversification and expansion occurred in 1995 when the Company expanded into northern San Diego County. Since 1976, the Company has closed more that 15,970 homes, including 1,610 homes during the fiscal year ended October 31, 2000. The financial and operational expectations the Company has set out in this filing, for periods extending beyond October 31, 2000, are not actual results, nor guaranteed results. Rather, they are assumptions that are based upon preliminary estimates garnered from factors that the Company's management believes to be reasonable at the time of this filing. The homebuilding industry is extremely competitive, with pricing being determined by a wide variety of factors, including the availability of land and the state of the economy in any one or more regions in which the Company builds. In addition, to any of the factors set out in this filing which could present an operational and/or financial risk to the Company, there are economic, competitive, governmental and other factors which could also affect any or all of the forward-looking statements contained in this filing. Geographic Markets The Company's operations service the metropolitan areas surrounding Los Angeles, Orange County, San Diego, San Francisco and Sacramento, California. The Company believes that each of these areas represents an attractive homebuilding market with significant growth opportunities, and that its geographic diversity provides a greater balance for the Company's earnings, thereby reducing the Company's exposure to potentially adverse economic conditions in any one geographic area. Diversity was a factor for the Company deciding to re-enter the Phoenix, Arizona market. The Company also believes that each of its local operations is well established in its respective markets and that it has developed a reputation for building superior quality homes at competitive prices. The Company maintains the flexibility to tailor its product mix within a given market depending upon market conditions. Operating Strategy The Company believes that its history of building high quality entry-level and first-time move-up homes in California and its conservative operating strategy, have enabled the Company to successfully weather cyclical downturns and position the Company to capitalize on the improving California market. The Company's strategy has been to (i) select markets that exhibit favorable demographic trends for the construction and sale of affordably-priced, single family detached homes in the entrylevel and first-time move-up market segment, (ii) provide its customers with quality homes which reflects a superior value in comparison to the prices of competitor's homes, and (iii) employ an operating strategy designed to reduce the risks and costs inherent in the homebuilding business, while also maximizing its return on investment capital in relation to such risks. Key elements of the Company's operating strategy include the following: Geographic Diversity and Growth Markets. The Company competes in a variety of geographical markets and attempts to react quickly to allocate capital to those markets which it believes provide attractive growth characteristics and opportunities for superior returns. The majority of the Company's markets have experienced significant population and employment growth in recent years. The Company strives to maintain a strong competitive position in all of its submarkets and generally is among the top single family homebuilders in its submarkets. The Company, through its full time in-house research and marketing staff, and through the selective use of thirdparty sources, regularly conducts market research and demographics analyses of both its existing and potential markets to predict the depth and breadth of demand for affordably-priced houses. Based on its current market research, the Company believes that it has opportunities to expand in its existing markets and has identified several new geographic markets, which possess attractive characteristics well-suited to the Company's homebuilding practices. Focus on Entry-level and First-Time Move-up Home Buyers. Throughout its history the Company has primarily focused on entry-level and first time move-up home buyers because it believes they represent the largest segment of the homebuilding market, and also during cyclical downturns are the least affected segment in terms of a reduction in the demand for homes. Also, this segment includes first-time home buyers whose home purchases are not dependent on the sale of an existing home. Affordably- priced homes generally qualify for FHA/VA financing and other state sponsored home buying financing programs, which permit lower down payments and in some instances may provide lower interest rates, thereby expanding the Company's customer base. In select markets, the Company entered into the second-time move up segment. The decision to build in the second-time move up market is predicated on superior demand and unique demographic trends in specific submarkets, and is undertaken with an eye to minimizing the Company's overall operating and financial risks. Commitment to Customer Satisfaction. The Company is committed to providing customer satisfaction through quality construction and customer service. Throughout the Company's markets, customer satisfaction surveys indicate that more than 98% of those customers who purchased homes from the Company in 2000 were satisfied with their purchase and would recommend a home built by the Company to a friend. The Company believes that its long history of providing high quality affordably-priced homes has resulted in many referral sales. Build a Standardized Product that can be Constructed Quickly, Efficiently and Cost Effectively. Each product line built by the Company has several different elevations and floorplans, but essentially consists of standardized features that allow relatively quick, cost effective construction. Each product line is periodically value engineered to identify potential cost savings. Experienced Management and Decentralized Operations. The Company's senior corporate officers and division presidents are highly-experienced and average over 20 years in the homebuilding business. Mr. James P. Previti, Chairman of the Board and President of the general partner of The Forecast Group "Registered Tradename", L.P., founded the Company's predecessors in 1971 and has played a prominent role in the California Building Industry Association. Each division is run by a local division president, who has in-depth familiarity with the geographic area within which the division operates, and who supervises area and district managers with specific profit and loss responsibilities in their designated areas. Use of Sophisticated Management Information Systems. The Company employs an accounting and information system used by many of the top homebuilders in the country to track costs and construction activities in multiple communities. The Company, on a real-time basis, can analyze production costs, status of pending sales and inventory levels, lot premiums, homes in escrow, homes closed and profit margins both for the Company as a whole, for each individual community and for each individual lot within each community. This system allows the Company to closely monitor and control its level of completed but unsold homes, detect trends early so it can more effectively deploy capital and resources to respond to such trends and then adjust its production capacity accordingly. Conservative Land Policy. The Company seeks to maximize its return on capital employed by limiting its investment in land and by focusing on inventory turnover. To implement this strategy and to reduce the risks associated with investment in land, the Company's land acquisition process is controlled through a formal corporate land approval committee to help ensure that transactions meet the Company's standards for financial performance and risk. In the ordinary course of its homebuilding business, the Company utilizes both direct acquisition and a variety of option contracts to control the number of lots it maintains in inventory for use in the sale and construction of homes. The choice of which methodology is used is dependent on which vehicle the Company deems to be more advantageous given the Company's profit objectives, return on investment, and local market conditions. The Company also generally seeks to close escrow on land only after all of the necessary entitlements are received, thereby allowing construction to commence within a relatively short time period thereafter. By doing this, the Company is generally able to maintain inventories of land that are expected to be developed within two to three years or less in an effort to match land costs with current market prices for finished homes. Maintain Strict Cost Controls. The Company believes that maintaining stringent cost controls is a key factor in improving profitability. The Company controls costs and reduces risk by: (i) generally purchasing land that is already entitled for residential development; (ii) managing the construction process to maintain low levels of unsold inventory and maximize inventory turnover; (iii) utilizing high quality durable building materials and standardized design plans; (iv) utilizing experienced subcontractors, especially those with which the Company has long-standing relationships; and (v) using its competitive advantage in its submarkets to obtain volume discounts on construction materials and favorable pricing from subcontractors. Require Home Buyers to Pre-Qualify Financially Prior to Approving a Sales Contract. Prior to entering into a sales contract with a prospective home buyer, the Company seeks to have the mortgage company, typically its Forecast "Registered Tradename" Home Mortgage, LLC ("Forecast Mortgage") affiliate, confirm that the home buyer has the apparent ability to qualify for the purchase of the home. Management believes this pre-sale qualifying procedure results in sales that are more likely to close, thereby reducing the cancellation rate. Summary of Residential Projects The following table presents information relating to the Company's markets and communities in which construction is either in progress or in the planning process. All homes are single-family detached. As of October 31, 2000, the Company owned 3,755 lots available for future home closings and had another 7,103 building lots under its control through executed acquisition contracts. - ------------------------------------------------------------- No. of Bldg. Bldg. Total Sales Active Lots Lots Bldg. Backlog Sales Market Communities Owned Under Lots as of Backlog Contract Avail. 10/31/00 Value (1) (2) (3) - ---------------------------------------------------------------- Southern California 10 2,211 4,200 6,411 132 $28,223,005 Northern 11 1,299 2,753 4,052 248 $55,724,815 California Arizona - 245 150 395 - - - ---------------------------------------------------------------- 21 3,755 7,103 10,858 380 $83,947,820 ================================================================
(1) Building lots under contract include lots the Company has the right to acquire under option provisions in certain acquisition contracts; thus, there can be no assurance the Company will actually acquire these lots. (2) Sales backlog refers to sales contracts that have not yet closed. There can be no assurance that closings of homes will occur. (3) Reflects base price, including any lot premiums and buyer selected options, which vary from community to community. Land Acquisition The Company initiates projects in markets that it believes will exhibit satisfactory sales absorption rates at or above its investment targets for its projected number of new homes. The Company selects markets characterized by their proximity to urban areas that have convenient access to local and regional commuter corridors. The Company's homes are predominately located within commuting distance to major employment centers. Additional factors the Company considers before purchasing land for the development of a new home community include: proximity to existing developed areas; population growth patterns; availability and quality of existing public services such as water, gas, electricity, sewers and schools; employment growth rates; the perceived sales absorption rates for new housing; transportation availability; the estimated costs of development; and the proximity of competing homebuilders. The general policy of the Company is to complete a purchase of land only after it has conducted a thorough feasibility study at no financial risk to the Company, and when it can reasonably project commencement of development and construction within a specified period of time. Closing of the land purchase is, therefore, generally made contingent upon satisfaction of conditions relating to the property and to the Company's ability to obtain all requisite entitlements from governmental agencies within a certain period of time. The Company customarily acquires unimproved or improved land zoned for residential use which appears suitable for the construction of the number of homes the Company believes fits with its projected sales absorption rates and expected demand within that market. The Company has the capability to purchase and develop unentitled land, but in doing so acts to minimize the risks associated with such land by generally conditioning the closing on the attainment of all necessary entitlements. "Entitled" land is generally defined as land that has received all necessary land use approvals for residential development from the appropriate state, county and local governments, including any required tract maps and subdivision approvals. Although the Company's profitability is affected by changing land prices, the Company attempts to minimize this risk by acquiring land under terms that meet its operating schedules and selling excess lots to other builders who do not compete at the same price point as the Company. The Company has also utilized rolling options and phased land purchases in order to control larger amounts of land without the attendant financing and carrying costs. The amount of land purchased by the Company has fluctuated substantially from period to period based on when entitlements were obtained, prices, availability of financing, existing land inventory, projected demand for homes and other factors. In general, the Company's practice is to have a land inventory, either owned or under contract, equal to approximately four years of planned operations. As of October 31, 2000 the Company owned 3,755 lots, which the Company believes is adequate for approximately 20 months of operations at current sales absorption levels. In addition, the Company controls approximately 7,103 lots under binding and non-binding agreements which provide the Company with the option to purchase such lots in the event that the Company's targeted markets continue to exhibit increased sales absorption levels. These lots controlled by the Company would allow for an additional 38 months of operations based on increased sales absorption levels. Construction The Company acts as the general contractor for The construction of its communities. Virtually all construction work for the Company is performed by subcontractors. The Company's employees supervise the construction of each community, coordinate the activities of subcontractors and suppliers, subject their work to quality and cost controls and assure compliance with zoning and building codes. The Company's subcontractors follow design plans prepared by architects who are retained by the Company and whose designs are geared to the local market. Subcontractors typically are retained on a phase-byphase basis to complete construction at a fixed price. During its history, the Company has established long-term relationships with a number of subcontractors, and sometimes negotiates price and volume discounts with manufacturers and suppliers on behalf of subcontractors in order to take advantage of its volume of production. The Company is not dependent to any material extent upon the services of any one subcontractor and believes that, if necessary, it can generally retain sufficient qualified subcontractors for each aspect of construction. The Company believes that conducting its operations in this manner enables it not only to readily and efficiently adapt to changes in housing demand, but also to avoid fixed costs associated with retaining construction personnel. Sales, Marketing and Research The Company makes extensive use of advertising and other promotional activities, including newspaper and magazine advertisements, brochures, direct mail and the placement of strategically located sign boards in the immediate areas of its communities. The Company's major media advertising is done regionally. Because the Company usually offers multiple communities within a single market area, it is able to utilize multiple community advertising that highlights all Company developments within that same market. The Company normally builds, decorates, furnishes and landscapes model homes for each community and maintains on site sales offices, which typically are open seven days a week. The Company believes that model homes play a particularly important role in the Company's marketing efforts. Consequently, the Company expends a significant effort in creating an attractive atmosphere at its model homes. Interior decorations vary among the Company's models and are carefully selected based upon the lifestyles of targeted buyers. Structural changes in design from the model homes are not generally permitted, but home buyers may select various other optional construction and design amenities, including floor coverings. The Company sells nearly all of its homes through Company sales representatives, who typically work from the sales offices located at the model homes used in each subdivision or in on-site sales trailers. The sales representatives are paid by the Company on commission. To a lesser extent, the Company also uses independent cooperative brokers to assist in selling its homes. Company representatives are available to assist prospective buyers by providing them with floor plans, price information and tours of model homes and by assisting them with the selection of options. Sales representatives attend periodic meetings at which they are provided information regarding other products in the area, the variety of financing programs available, construction schedules and marketing and advertising plans. The Company believes this effort results in a more motivated sales force and higher absorption rate. Customer Financing The Company offers its customers mortgage financing through Forecast "Registered Tradename" Home Mortgage. Forecast "Registered Tradename" Home Mortgage is owned 50% by Wells Fargo Home Mortgage, formally known as Norwest, Inc. (a nationally recognized mortgage banker; "Wells Fargo") and 50% by Inland Counties Mortgage, LLC, a California limited liability company ("Inland Counties Mortgage"). The Forecast Group "Registered Tradename", L.P., owns a 98% share of Inland Counties Mortgage. Forecast "Registered Tradename" Corporation (a limited partner of The Forecast Group "Registered Tradename", L.P.) owns the other 2%. Through Forecast "Registered Tradename" Home Mortgage, the Company seeks to assist its home buyers in obtaining financing by offering to qualified buyers the variety of financing options offered by Wells Fargo, and by making and processing the loans in a timely and professional manner. Customer Service and Relations Each purchaser of a home from the Company is given an information booklet describing area amenities and services, such as schools, health services and emergency services. The Company's Warranty Service Manual identifies the appliances, fixtures and heating/cooling and other systems installed in the house, and provides information on warranties, maintenance and manufacturer information. The Company believes that these practices reinforce the home buyer's sense of moving into a community. After closing, the Company continues to communicate its image through a variety of marketing techniques that are designed to enhance the buying experiences of the home buyer. Customer Warranties The Company provides one year limited warranties on purchases of its homes and by doing so seeks to ensure that the Company will have any deficiencies that arise due to faulty workmanship, defective materials, or significant construction flaws in the structural components of the home or in the lot on which the home is located, corrected. The warranty does not, however, include items that are covered by manufacturer's warranties (such as appliances and air conditioning) or items that are not installed by employees or contractors of the Company (such as flooring installed by an outside contractor employed by the homeowner). Statutory requirements in the states in which the Company does business may grant rights to home buyers in addition to those provided by the Company. California law establishes a ten-year statutory period and Arizona an eight-year statutory period during which a home buyer may request the Company to repair any latent defects in the architectural design or actual construction of their home. The Company generally maintains reserves with respect to units previously sold for the purpose of covering estimated future warranty expenditures, and maintains insurance coverage to minimize the impact any claims for latent defects would otherwise have upon the Company. Competition and Market Factors The homebuilding industry is highly competitive, with numerous other developers and homebuilders competing for desirable properties, financing, raw materials and skilled labor. The Company competes with national, regional and local builders, many of whom have greater financial resources than the Company. Moreover, sales of homes and land by competitors at deeply discounted prices or with substantial customer incentives could have a material adverse effect on the Company. The Company competes primarily on the basis of quality, price, design, service and location. The Company believes that its primary competitive strength has been its consistent ability to offer quality homes at affordable prices. The homebuilding industry is cyclical and significantly affected by consumer confidence levels, interest rates, employment trends and other prevailing economic conditions. A variety of other factors affect the homebuilding industry and demand for new homes, including consumer preferences, demographic trends, availability of mortgage financing and costs associated with home ownership such as property taxes, assessments and homeowner association fees. Government Regulation and Environmental Matters The housing industry is subject to increasing environmental, building, zoning and real estate regulations that are imposed by various federal, state and local authorities. Such regulations affect homebuilding by specifying, among other things, the type and quality of building material that must be used, certain aspects of land use and building design, as well as the manner in which homebuilders, such as the Company, may conduct their sales activities and other dealings with their home buyers. In developing a community, the Company must obtain the approval of numerous governmental authorities regarding such matters as permitted land uses, housing density, the installation of utility services (such as water, sewer, gas, electricity, telephone and cable television), and the dedication of acreage for open space, parks, schools and other community purposes. Furthermore, changes in prevailing local circumstances or applicable laws, may require additional approvals, or modifications of approvals previously obtained. Environmental laws may cause the Company to incur substantial compliance, mitigation and other costs, may restrict or prohibit development in certain areas and may delay completion of the Company's communities. As a result, the Company engages outside professional consultants to evaluate any land prior to its purchase by the Company. Although environmental laws have not had a material adverse effect on the Company to date, and management is not currently aware of any environmental compliance issues that are expected to have a material adverse effect on the Company, no assurance can be given that such laws will not have a material adverse effect on the Company's operations in the future. Employees As of October 31, 2000, the Company employed approximately 264 persons, including corporate staff and other personnel involved in sales, construction and customer service. Although none of the Company's employees are covered by collective bargaining agreements, some of the subcontractors and suppliers engaged by the Company are represented by labor unions or are subject to collective bargaining agreements. The Company believes that relations with its employees, subcontractors and suppliers are good. ITEM 2 - PROPERTIES The principal executive offices of the Company are located at 10670 Civic Center Drive, Rancho Cucamonga, California 91730. The telephone number is (909) 987-7788. The Company leases approximately 15,500 square feet of office space for its corporate headquarters in Rancho Cucamonga and approximately 11,807 square feet of office space in Sacramento, California. The Company's corporate headquarters and Sacramento office are leased from affiliates of Mr. Previti. See "Item 13 Certain Relationships and Related Transactions". During the current fiscal year, the Company opened four modular satellite offices for each geographic region in Southern California, which has enhanced its management presence in each area of operation. ITEM 3 - LEGAL PROCEEDINGS The Company is subject to routine litigation incidental to its business. In the opinion of management, the resolution of such claims will not have a material adverse effect on the operating results or financial position of the Company. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders during the Company's fiscal year ended October 31, 2000. ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The registrant's common equity has not been registered pursuant to Section 12(b) of the Act and is not traded. ITEM 6 - SELECTED CONSOLIDATED FINANCIAL DATA The following selected consolidated financial data (except operating and other data) are derived from the consolidated financial statements of the Company, which have been audited by Ernst & Young LLP, independent auditors. The selected consolidated financial data should be read in conjunction with the consolidated financial statements, related notes, and other financial information included herein. - ------------------------------------------------------------ Year Ended October 31 ------------------------------------ Note: $ are in 2000 1999 1998 1997 1996 thousands - ------------------------------------------------------------- Operating Data: - --------------- Homes Delivered: Number of Homes Delivered 1,610 1,531 1,228 901 1,006 ----- ----- ----- --- ----- Average Price of Homes Delivered $203.5 $183.3 $161.3 $147.1 $140.8 Sales Backlog (1): Number of Homes in Sales Backlog 380 246 233 289 165 --- --- --- --- --- Aggregate Value of Homes in Sales Backlog $83,948 $48,471 $38,179 $44,707 $22,659 Average Price of Homes in Sales Backlog $220.9 $197.0 $163.9 $154.7 $137.3 Statement of Operations Data: - ----------------- Homebuilding Revenues $327,617 $280,644 $198,074 $132,518 $141,652 Cost of Homes Sold 259,218 228,859 164,335 112,278 117,702 Land Sales Revenue 5,000 42,271 999 0 0 Cost of Land Sold 5,000 40,958 999 0 0 Selling & Marketing Exp. 16,820 17,165 14,384 13,929 15,215 General & Admin. Exp. 21,361 16,064 11,397 7,397 7,006 Provision for Losses on Real Estate Inventory 0 0 0 6,635 0 Other Operating Costs 1,362 223 202 726 3 - ----------------------------------------------------------------- Operating Income (Loss) 28,856 19,646 7,756 (8,447) 1,726 Interest Income 965 682 455 395 274 Interest Expense 0 0 264 0 0 Other Income 396 1,247 2,500 156 14 - ----------------------------------------------------------------- Income (Loss) before Income Taxes and Extraordinary Gain 30,217 21,575 10,447 (7,896) 2,014 - ----------------------------------------------------------------- Extraordinary Gain on Extinguishment of Senior Notes 0 0 34 1,634 1,876 - ----------------------------------------------------------------- Net Income (Loss) $30,217 $21,575 $10,481 ($6,262) $3,890 ================================================================= Balance Sheet Data: - ------------------- Real Estate Inventory $142,768 $110,800 $84,152 $71,012 $80,760 Total Assets 186,333 146,918 113,908 91,582 102,186 Debt 67,253 64,738 60,059 56,053 60,195 Net Partners' Equity 81,200 52,718 31,143 20,662 26,924 Other Data: - ----------- Gross Margin % 20.9% 18.5% 17.0% 15.3% 16.9% EBITDA (2) $39,411 $30,178 $19,018 $7,434 $9,453 Interest Incurred(3) $9,877 $10,193 $7,123 $7,076 $7,884 Coverage Ratio (4) 4.0 3.0 2.7 1.1 1.2 Debt to Equity Ratio (5) 0.8 1.2 1.9 2.7 2.2
(1) "Backlog" represents the number of homes subject to sales contracts executed by buyers with respect to specific lots and the aggregate dollar value of such sales contracts outstanding at the end of the period. (2) "EBITDA" means earnings before interest(including previously capitalized interest included in cost of sales), income taxes, depreciation and amortization, and has been computed on a basis consistent with the terms of the Indenture. EBITDA is not intended to represent cash flow or any other measure of performance in accordance with generally accepted accounting principles. (3) Interest incurred includes all interest incurred during the respective period, whether expensed or capitalized, and has been computed on a basis consistent with the terms of the Indenture. (4) "Coverage Ratio" means the ratio of EBITDA to Interest Incurred as calculated in accordance with the definition of such term in the Indenture. (5) "Debt-to-Equity Ratio" means the ratio of all outstanding Debt to Net Worth (Partners' Equity) as calculated in accordance with the definition of such term in the Indenture. ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company's results of operations for any period are affected by a number of factors including the number of communities under construction, the length of the development cycle of its communities, product mix, weather, availability of financing, costs of materials and economic conditions in the areas in which the Company operates. Product mix (both product line and size of home) has a substantial effect on the average sales price of homes and gross margin from home sales because smaller homes generally have lower sales prices and gross margins than larger homes. The average sales price of homes from period to period fluctuates based on product line, home size, geographic mix and changes in the market price of housing. The Company's results of operations reflect the cyclical nature of the homebuilding industry and the Company's historical focus on the Southern California housing market. Following approximately seven years of a regional economic downturn, those markets in which the Company operates began to see a recovery in the fourth quarter of 1997 which has continued throughout fiscal year 2000. During the fourth quarter of fiscal year 1999, the Company sold all of its owned land in Arizona to a national homebuilder. The total lots sold were 774. During the fourth quarter of fiscal 2000, the Company exercised an option to purchase 245 lots in Phoenix, Arizona. The building of this community will begin in fiscal year 2001. The Company continues to provide warranty work for previously closed homes in that market area, through a third party vendor. The following table sets forth certain information by geographic region for the fiscal years 2000, 1999 and 1998. This table excludes land sales revenue and cost of land sold. For the Year Ended October 31 - -------------------------------------------------------------- Note: $ are in thousands 2000 1999 1998 - -------------------------------------------------------------- Number of Homes Delivered: - ----------------- Southern California 807 711 539 Northern California 803 665 503 Arizona - 155 186 ---------------------------- Total 1,610 1,531 1,228 ============================ Housing Sales: - -------------- Southern California $157,878 $123,626 $84,433 Northern California 169,739 135,864 84,413 Arizona - 21,154 29,228 ------------------------------ Total $327,617 $280,644 $198,074 =============================== Gross Profit: - ------------- Southern California $28,431 $20,134 $16,477 Northern California 40,370 27,927 12,892 Arizona (402) 3,724 4,370 ------------------------------ Total $68,399 $51,785 $33,739 ============================== Gross Profit Margin: - -------------------- Southern California 18.0% 16.3% 19.5% Northern California 23.8% 20.6% 15.3% Arizona - 17.6% 15.0% ----------------------------- Total 20.9% 18.5% 17.0% =============================
During the fiscal year ended October 31, 2000, the Company reported home building revenues of $327.6 million and net income of $30.2 million, on closings of 1,610 homes, all of which were records. Based on the continued economic reports of increasing job formation and low unemployment, management believes that consumer confidence and homebuying in its market segment will continue to be strong over the next few years. Seasonality The traditional annual operating cycle for the Company generally starts with fewer customer orders from October through December, followed by stronger customer orders from January through June and moderate orders from June through September. Because home deliveries usually trail customer orders by up to 120 days, the Company's revenues typically are lowest in its first and second fiscal quarters due to seasonally slow customer orders in the immediately preceding fiscal quarters. Historically, the majority of the Company's revenues come in its third and fourth quarters, as contracts for home sales entered into in its second and third fiscal quarters are closed. Backlog The Company's backlog at October 31, 2000 and 1999, respectively, were 380 homes with an average sales price of $220,915 and 246 homes with an average sales price of $197,000. Results of Operations A comparative summary of operating results for fiscal years 2000, 1999 and 1998 is presented in the following table: For the Year Ended October 31 ------------------------------- 2000 1999 1998 ------------------------------- Amounts as a Percentage of Revenues: ----------------------- Homebuilding Revenues 100.0% 100.0% 100.0% Cost of Homes Sold 79.1% 81.5% 83.0% ----- ----- ----- Gross Profit 20.9% 18.5% 17.0% ----- ----- ----- Operating Expenses: Selling & Marketing Exp. 5.1% 6.1% 7.3% General & Admin. Exp. 6.5% 5.7% 5.8% Other Operating Costs 0.4% 0.1% 0.1% ---- ---- ---- Total Operating Expenses 12.1% 11.9% 13.1% ---- ---- ---- Operating Income 8.8% 6.5% 3.9% ==== ==== ==== Average per Home Closed ($): - ---------------------------- Homebuilding Revenues $203,489 $183,308 $161,298 Cost of Homes Sold 161,005 149,483 133,823 ------- ------- -------- Gross Profit 42,484 33,825 27,475 ------- ------- -------- Operating Expenses: Selling & Marketing Exp. 10,447 11,212 11,713 General & Admin. Exp. 13,268 10,492 9,281 ------ ------- ------ Total Operating Expenses 23,715 21,704 20,994 ------- ------- ------ Operating Income $18,769 (1) 12,121 (1) 6,481 (1) ======= ====== ====== Other Data: - ----------- Number of Homes Closed 1,610 1,531 1,228 Number of Homes Sold 1,744 1,544 1,172 Number of Homes in Sales Backlog 380 246 233 Aggregate Value of Sales Backlog ($ millions) $83.9 $48.5 $38.2
(1) Calculation does not include Other Operating Costs for fiscal years ended October 31, 2000, 1999 and 1998, respectively. Fiscal 2000 Compared to Fiscal 1999 Housing revenues for the fiscal year ended October 2000 were a Company record $327.6 million, representing an increase of $46.9 million or 16.7% from the fiscal year ended October 1999. The revenues for fiscal year 2000 represent 1,610 closings, an increase of 79 closings or 5.2% over fiscal year 1999. The increase reflects the continued strengthening of the California housing market, which resulted in increased absorption rates and overall sales in the Company's submarkets. The average sales price of the homes closed during fiscal 2000 was $203,489 as compared to $183,308 for the same period a year ago, representing an increase of 11.0%. The increase in average sales price is due primarily to increasing prices in high demand communities and no closings in Arizona, which had an average sales price of $136,481 in fiscal year 1999. Gross profit from housing sales was $68.4 million for the fiscal year ended October 31, 2000, an increase of $16.6 million or 32.1%, from fiscal year ended October 31, 1999. Gross profit per home increased to $42,484 from $33,824 representing a 25.6% increase over the comparable period in 1999. Gross profit margin for fiscal year ended October 31, 2000 was 20.9% as compared to 18.5% a year ago. The increase in gross profit and gross margin was due primarily to a higher concentration of sales in our higher sales priced communities in the Northern California Division and having no closings in Arizona, which had a gross profit per home of $24,024 and a gross margin of 17.6% in fiscal year 1999. During the year ended October 31, 1999, the Company sold and subsequently leased back 71 model homes and recorded sales of $13,729,000 and gross profit of $2,354,000. There were no similar transactions in fiscal year 2000. During the fiscal year ended October 31, 2000, the Company had land sales of $5.0 million, to a related party, and no gain or loss was recorded from the sale. During the fiscal year ended October 31, 1999, the Company had land sales of $42.3 million, which resulted in a net gain from land sales of $1.3 million. The fiscal year 1999 land sales included the sale of the Company's Arizona real estate holdings for approximately $33.5 million and a net gain of $1.8 million. For the fiscal year ended October 31, 2000, the Company's interest incurred decreased $316,000 or 3.1% as compared to fiscal year ended October 31, 1999. This decrease is a result of higher liquidity produced through higher gross margins achieved from home closings, which reduced the dependence on bank debt as compared to a year ago. The Company's interest amortized to cost of homes sold (as a percentage of revenue) decreased to 2.7% for the fiscal year ended October 31, 2000, from 2.9% for the same period a year ago. This decrease is attributable to increased rates of capital turnover, thereby resulting in lower capitalized interest costs. Selling and marketing expenses decreased $345,000 or 2.0% during the fiscal year ended October 31, 2000 as compared to the fiscal year ended October 31, 1999. This decrease is attributable to maintaining cost controls on monthly selling and marketing costs. Selling and marketing, as a percentage of revenue, decreased to 5.1% from 6.1% for the comparable period in 1999. This decrease, as a percentage of revenue, is attributable to both the higher closing volume and the reduction in sales incentives necessary to achieve desirable absorption rates. General and administrative expenses increased $5.3 million during the fiscal year ended October 31, 2000, as compared to the fiscal year ended October 31, 1999. The $5.3 million increase is attributable to an increase in the number of employees in the Company which was necessary to facilitate the Company's continued expansion and active investigation of new land acquisition opportunities in order to achieve the Company's three-year business plan, an increase in the bonuses paid to the Company's employees due to the record profits realized and increased expenditures associated with the Company's commitment to provide state-of-the art training to its employees. Net income for the fiscal year ended October 31, 2000 increased 40.1% to $30.2 million, as compared to net income of $21.6 million in the fiscal year ended October 31, 1999 due primarily to the overall improvement of market conditions and the continued commitment to reduce costs. Fiscal 1999 Compared to Fiscal 1998 Housing revenues for the fiscal year ended October 1999 were $280.6 million, representing an increase of $82.6 million or 41.7% from the fiscal year ended October 1998. The revenues for fiscal year 1999 represent 1,531 closings, an increase of 303 closings or 24.7% over fiscal year 1998. The increase reflects a strengthening California housing market which resulted in increased absorption rates and overall sales in the Company's submarkets. The average sales price of the homes closed during fiscal 1999 was $183,308 as compared to $161,298 for the same period a year ago, representing an increase of 13.6%. The increase in average sales price is due primarily to increases in sales prices in each of the Company's strongest submarkets and the increase in the percentage of closings in the Northern California Division as compared to the Company's overall number of closings. Gross profit from housing sales was $51.8 million for the fiscal year ended October 31, 1999, an increase of $18.0 million or 53.5%, from fiscal year ended October 31, 1998. Gross profit per home increased to $33,825 from $27,475 representing a 23.1% increase over the comparable period in 1998. Gross profit margin for fiscal year ended October 31, 1999 was 18.5% as compared to 17.0% a year ago. The increase in gross margin was due primarily to year-over-year 34.5% higher gross margins in the community closings in the Northern California Division, and increased prices and lower costs in certain of the Company's submarkets resulting from greater demand. The lower costs were mainly a function of increasing inventory turnover and minimizing standing inventory. During the year ended October 31, 1999, the Company sold and subsequently leased back 71 model homes and recorded sales of $13,729,000 and gross profit of $2,354,000. There were no similar transactions in the prior year. During the fiscal year ended October 31, 1999, the Company had land sales of $42.3 million, which resulted in a net gain from land sales of $1.3 million. Land sales included the sale of the Company's Arizona real estate holdings for approximately $33.5 million and a net gain of $1.8 million. For the fiscal year ended October 31, 1999, the Company's interest incurred increased $3.1 million or 43.1% as compared to fiscal year ended October 31, 1998. This increase is a result of increased construction volume offset by pricing modifications in the Company's loan terms. The Company's interest amortized to cost of homes sold (as a percentage of revenue) decreased to 2.9% for the fiscal year ended October 31, 1999, from 4.0% for the same period a year ago. This decrease is directly attributable to increased absorption rates, which produced increased rates of turnover resulting in lower capitalized interest costs. Selling and marketing expenses increased by $2.8 million or 19.3% during the fiscal year ended October 31, 1999 as compared to the fiscal year ended October 31, 1998. This increase is directly attributable to the higher volume of closings during the period. Selling and marketing, as a percentage of revenue, decreased to 6.1% from 7.3% for the comparable period in 1998. This decrease, as a percentage of revenue, is attributable to both the higher closing volume and the reduction in sales incentives necessary to achieve desirable absorption rates. General and administrative expenses increased $4.7 million during the fiscal year ended October 31, 1999, as compared to the fiscal year ended October 31, 1998. The $4.7 million increase is attributable to an increase in the number of employees in the Company which was necessary to facilitate the Company's continued expansion and active investigation of new land acquisition opportunities, as well as an increase in management bonuses that resulted from the improved profitability of the Company. However, general and administrative expenses, as a percentage of revenue decreased to 5.7% for the fiscal year ended October 31, 1999 from 5.8% for the fiscal year ended October 31, 1998. Income before extraordinary gain was $21.6 million during the fiscal year ended October 31, 1999, as compared to a net income before extraordinary gain of $10.4 million for the fiscal year ended October 31, 1998, which is representative of the overall improvement of market conditions in those areas in which the Company operates. Extraordinary gain for the fiscal year ended October 31, 1998 was $34,000 related to the Company's repurchase of a portion of its 11 3/8% Senior Notes having an aggregate outstanding principal amount of $9.4 million. There were no extraordinary gains for the fiscal year ended October 31, 1999. Net income for the fiscal year ended October 31, 1999 was $21.6 million, as compared to net income of $10.5 million in the fiscal year ended October 31, 1998 due primarily to the factors discussed above. Liquidity and Capital Resources The residential real estate development business is inherently capital intensive. Significant cash expenditures are typically needed to acquire and develop land, construct homes and establish marketing programs for periods of time in advance of revenue realization. The Company generally finances its operations with secured borrowings from commercial banks, financial institutions (and, at times, private investors), unsecured borrowings in the public market, and with available cash flow from operations. The Company's financing needs depend primarily upon sales volume, asset turnover and land acquisition. When liquidating inventory through home closings, the Company generates cash. When building inventory, the Company uses substantial amounts of cash obtained through borrowings, cash flow from operations, and partners' contributions to capital. The Company has had adequate liquidity throughout its operating history, despite recessionary periods. At certain times during the past few years the Company has repurchased a portion of its 11 3/8% Senior Notes on the open market at prices below par, subsequently retired a large majority of such repurchased notes, and then reported the resultant income as extraordinary gain in the Company's consolidated financial statements. At times, these debt repurchases were utilized to cure certain unsatisfied minimum net worth covenant requirements set out in the Indenture for the 11 3/8% Senior Notes. At October 31, 2000, the Company had commitments for $114.2 million under several revolving credit facilities with commercial banks and financial institutions of which $39.1 million was outstanding. In addition, at October 31, 2000, the Company had community specific facilities capable of providing aggregate funding of $2.7 million of which $2.7 million was outstanding. Borrowings under the credit facilities are secured by liens on specific real property owned by the Company, and carry varying levels of recourse against the Company. The Company also utilizes unsecured borrowing lines from time to time to meet its operational needs and objectives. The unsecured borrowing lines have commitments of $4.2 million, of which $2.2 was outstanding as of October 31, 2000. On October 31, 2000, the aggregate outstanding principal balance under the Company's credit facilities was $44.0 million and the amount of such debt that is recourse to the Company was $14.8 million. To date, the Company has been able to obtain acceptable land acquisition and construction financing. Consistent with an industry trend, certain lenders require increased amounts of cash invested in a project by borrowers in connection with both new loans and the extension of existing loans. The Company currently intends to continue utilizing conventional bank financing for land acquisition and construction financing, and under its present credit facilities is required to use its own cash to fund a portion of the total development and acquisition costs in order to obtain that financing. In the past, the Company had failed to meet the debt-to-equity and debt coverage ratios that are set forth in the Indenture governing the 11 3/8% Senior Notes, thereby resulting in the Company being restricted in its ability to incur recourse indebtedness. In prior years, to overcome this limitation, and assist the Company in meeting its liquidity needs, Mr. Previti and/or the Previti Family Trust guaranteed a portion of the Company's indebtedness. As of October 31, 2000 and 1999 the Company met both its debt-to- equity and debt coverage ratio tests, thereby permitting it to incur more than $15 million of recourse debt. Despite this present ability to incur additional recourse debt, there is no assurance that the Company will continue to meet these ratio tests, and if not, that Mr. Previti and/or the Trust will be willing to guarantee such indebtedness. The Company considers its current relationship with its lenders to be good. In February 1994, the Company issued $50 million in Senior Notes through a public debt offering. During the fiscal year ended October 1998, the Company repurchased a portion of its Senior Notes having an aggregate outstanding principal amount of $9,375,000 in the open market. Net of allocable issuance costs, the resultant income of $34,000 is reported as an extraordinary gain in the Company's consolidated financial statements for the fiscal year ended October 31, 1998. No repurchases occurred in fiscal year 2000 or 1999. As of October 31, 2000, the Company has repurchased and retired a total of $23,400,000 of the Senior Notes and the remaining $26,600,000 have not been retired, including $6,900,000 which were repurchased and are being held in the Company's name. The notes are due on December 15, 2000, with interest at the rate of 11 3/8% per annum payable semi-annually on June 15 and December 15 of each year. On December 13, 2000, the Company retired all of its remaining outstanding Senior Notes relating to the $50 million of Senior notes obtained in 1994, by utilizing existing revolving credit facilities and operating cash flow. There can be no assurance that the impact of market conditions affecting the demand for homes or the availability of debt financing will not adversely affect the Company's future needs for capital. However, the Company expects that available capital resources will be sufficient to meet its normal operating requirements over the near term. Impact of Year 2000 In prior years, the Company discussed the nature and progress of its plans to become Year 2000 ready. In late 1999, the Company completed its remediation and testing of systems. As a result of those planning and implementation efforts, the Company did not experience any significant disruption in mission critical information technology and non-information technology systems. In addition, the Company did not have significant expenses during 2000 in connection with any material problems resulting from Year 2000 issues, whether with its products, its internal systems, or the products and services of third parties. The Company continues to monitor its mission critical computer applications and those of its suppliers and vendors to ensure that any latent Year 2000 matters that may arise are addressed promptly. ITEM 7A - QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK The Company's market risks related to financial instruments as defined in the Market Risk Disclosure Rules issued by the Securities and Exchange Commission are considered to be immaterial. ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See the index to the consolidated financial statements, Report of Independent Auditors and the Consolidated Financial Statements, which appear beginning on page F-1 of this report and are incorporated herein by reference. ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Forecast "Registered Tradename" is a limited partnership and has no officer or directors. The sole general partner of Forecast "Registered Tradename" is Forecast "Registered Tradename" Homes, Inc. ("FHI"). FHI manages the business and affairs of Forecast "Registered Tradename". Capital is a wholly-owned subsidiary of Forecast "Registered Tradename". The directors and executive officers of FHI and Capital are as follows: Name Age Position - ----------------- ----- -------------------------- James P. Previti* 54 Chairman of the Board, Chief Executive Officer and President Frank Glankler 50 Executive Vice President, Chief Operating Officer Larry R. Day 51 Executive Vice President, Chief Legal Officer and Secretary Richard B. Munkvold 35 Senior Vice President, Financial Operations and Principal Accounting Officer Jack Firestone*** 79 Director Steven Fowlkes* 46 Director Peter T. Healy 49 Director Leo Previti** 47 Director * Member of the Compensation Committee ** Member of Audit Committee *** Mr. Firestone retired from the Board on November 1, 2000 and was subsequently replaced with Mr. Jim Ellis. James P. Previti is the founder and organizer of the predecessor of the Company. Mr. Previti has held the position of Chairman of the Board, Chief Executive Officer and President of each of the predecessor entities to the Company since their formation and has controlled the management of the business of the Company since 1976. Mr. Previti is the Chairman of the Board, Chief Executive Officer and President of Forecast Commercial Real Estate Services, Inc. and Inland Empire Personnel ("IEP"), each of which are affiliates of the Company. Frank Glankler has served as a Senior Vice President and Chief Operating Officer since January 1996, after returning to the company in July 1995 as Vice President of Operations. Effective August 1, 1998, Mr. Glankler was elected to the position of Operating Committee member of Forecast Home Mortgage, the Company's mortgage affiliate. From July 1992 until October 1993 he served as President of the Company's Arizona Division, and from October 1993 until July 1995, Mr. Glankler was President of MFR Holdings. Mr. Glankler has over 17 years in the homebuilding industry, including previous senior management positions with U.S. Home Corporation. Mr. Glankler was the former Chairman of the Arizona division of U.S. Home Corporation, responsible for operations in Phoenix, Tucson and New Mexico. Positions held by Mr. Glankler at U.S. Home include President of the Louisiana, North Houston, East Houston and South Houston divisions, respectively. He is former board member of the Southern Arizona Homebuilders Association and holds a Class B Arizona Contractors License and an Arizona Real Estate License. Larry R. Day joined the Company's predecessor as Vice President and General Counsel in December 1992 and now holds the position of Chief Legal Officer and Executive Vice President. He was elected to FHI's and Capital's boards of directors in November 1993 and served in that capacity until January 1996. Since March 1993, Mr. Day has also supervised the Company's human resources, payroll and risk management departments. From 1989 to 1992, Mr. Day was in private practice specializing in real estate finance and transactional matters. From 1988 to 1989, Mr. Day was a Director, Vice President and General Counsel of Guardian Savings and Loan. From 1985 to 1988, Mr. Day was Director of Real Estate Legal Services for Taco Bell Corporation. Prior to that, Mr. Day served 6 years as Vice President of Corporate and Special Real Estate with First Interstate Bank. Mr. Day is admitted to practice law in the States of California and Vermont, and is a licensed California real estate broker. Richard B. Munkvold joined the Company in 1995 as a Division Controller of both the Southern California and Arizona Divisions and now holds the position of Senior Vice President of Financial Operations. Mr. Munkvold is responsible for capital procurement, external financial reporting, internal financial controls, and the Information Technology Department. Prior to joining the Company, Mr. Munkvold held several financial positions with the Ryland Group from 1989 through 1995 and last served as Ryland Group's West Region Financial Analyst. Jack Firestone, a private investor, became a Director of the Company in January 1996. As of November 1, 2000, Jack Firestone, retired from the Board of Directors for the Company. Steven K. Fowlkes became a Director of the Company in January 1996. Mr. Fowlkes is President and Chief Operating Officer of R.W. Selby & Company, Inc., a real estate investment and management firm in Los Angeles, California. Peter T. Healy became a Director of the Company in January 1996. Mr. Healy is a Senior Partner with the law firm of O'Melveny & Myers LLP in their San Francisco, California office. Leo Previti became a Director of the Company in January 1996. Mr. Previti has been an attorney with the firm of Brown, Michael & Carroll in Atlantic City, New Jersey since 1996 and prior thereto was Associate Counsel of International Game Technology. Leo Previti is also a Certified Public Accountant and is the brother of James P. Previti. Jim Ellis became a Director of the Company in November of 2000. Since 1997, Mr. Ellis has held the position of Associate Professor with the USC Marshall School of Business, in the Department of Marketing. Prior to 1997, Mr. Ellis was the CEO of Ports O"Call in Pasadena, and has held executive marketing positions with retailers Miller's Outpost and The Broadway Department Stores. Mr. Ellis holds an MBA from Harvard Business School and an undergraduate degree from the University of New Mexico. The Board of Directors of FHI is elected annually by Mr. Previti, the sole shareholder of FHI. Officers are elected annually by the Board of Directors and serve at the discretion of the Board of Directors. The Board of Directors of Capital is elected annually by FHI on behalf of Forecast "Registered Tradename" as the sole shareholder of Capital. Officers are elected annually by the Board of Directors and serve at the discretion of the Board of Directors. The Boards of Directors of FHI and Capital meet three or four times per year on a quarterly basis. The Boards of Directors of FHI and Capital each have an Audit Committee of which Mr. Leo Previti is a member. The Board of Directors of FHI has a Compensation Committee of which Mr. Steven Fowlkes is a member. ITEM 11 - EXECUTIVE COMPENSATION The following table sets forth certain information with respect to the compensation earned by the Chief Executive Officer and each of the other most highly paid executive officers of FHI and Capital (pursuant to Regulation S-K, Item 402, of the Securities Act of 1933, Securities Exchange Act of 1934 and Energy Policy and Conservation Act of 1975) whose total compensation for services rendered during fiscal2000 exceeded $100,000 (collectively, the "Named Executive Officers"): Summary Compensation Table - --------------------------------------------------------------- Annual Compensation ---------------------------- Name Principal Position Salary Bonus All Other Compensation - ---------------------------------------------------------------- James P. Previti Chairman of the Board/Chief Executive Officer/ President $250,000 $1,706,674 $0 Frank Glankler Executive Vice President/Chief Operating Officer 240,000 1,004,670 7,200 Larry Day Executive Vice President/Chief Legal Officer/ Secretary 200,000 341,335 7,200 Larry Young Northern Division - President 180,000 871,616 7,200 James Rex Southern Division - President 165,000 348,109 7,200 Richard Munkvold Sr. Vice President, Financial Operations/ Principal Accounting Officer 120,000 341,335 3,600
Forecast "Registered Tradename" and Mr. Previti are parties to an employment agreement whereby Mr. Previti's annual compensation is $250,000 plus a quarterly bonus of up to five percent of the pretax consolidated net income of the Company. The Indenture allows amendments to such employment agreement, and the renewal for successive periods of one year, at the discretion of the Board of Directors. The new contract extends through October 31, 2001. The following table sets forth, as of November 1, 2000, the beneficial ownership of the partnership interests in Forecast "Registered Tradename" by (a) each of the directors of GP and Capital, (b) the directors and officers of FHI and Capital as a group, and (c) each person known to the Company to own beneficially more than 5% of Forecast "Registered Tradename"'s limited partnership interests or general partnership interests. % of Profits/ Type of Losses/ % of Name of Beneficial Owner[1] Interest Capital Class - ----------------------------------------------------------- James P. Previti [2] General Partner 100.00% 100.00% James P. Previti [3] Limited Partner 100.00% 100.00% All directors and officers as a group (9 persons) [2] General Partner 100.00% 100.00% All directors and officers as a group (9 persons) [3] Limited Partner 100.00% 100.00% Forecast Homes, Inc. General Partner 1.00% 100.00% Forecast Corporation Limited Partner 56.28% 56.85% Forecast Mortgage Corporation Limited Partner 1.04% 1.05% Forecast Development, L.P. Limited Partner 25.01% 25.26% Inland Empire Personnel, Inc. Limited Partner 16.67% 16.84%
[1] The address of each beneficial owner is: 10670 Civic Center Drive, Rancho Cucamonga, California 91730. [2] Reflects beneficial ownership resulting from status as sole trustor and trustee of the Trust, which owns all of the outstanding interests in each of the current limited partners of Forecast "Registered Tradename". [3] Reflects beneficial ownership resulting from status as sole trustor and trustee of the Trust, which owns all of the outstanding equity interests in each of the current limited partners of Forecast "Registered Tadename". ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Relationships Among Mr. Previti, the Trust and the Company The Company was formed in 1993 in connection with a reorganization of the homebuilding businesses owned by the James Previti Family Trust (the "Trust"). Forecast "Registered Tradename" is the successor to substantially all the assets and known liabilities of the residential real estate development business of the Trust's affiliates. The Trust is a living, revocable trust with James Previti as the sole trustor and trustee. Transactions With Affiliates In 1994, the Board of Directors of FHI resolved that it would be in the Company's best long-term interests to seek the assistance of Mr. James Previti, the Company's President and Chief Executive Officer, in acquiring the Company's 11 3/8% Senior Notes on the open market, if he could acquire them at a favorable discount from their stated face value. At the same time, the Board of Directors of FHI agreed that the Company would repurchase the notes from Mr. Previti at his cost basis, plus interest, at such time as the Company had sufficient financial resources. Acting upon this authorization, Mr. Previti did acquire $20.4 million of the 11 3/8% Senior Notes all of which were repurchased and retired prior to October 31, 1999. The Company believes that these transactions were on terms at least as favorable to the Company as a comparable transaction made on an arm's length basis between unaffiliated parties. From time to time, the Trust and/or Mr. Previti have guaranteed indebtedness of the Company in order to enable the Company to obtain financing on more favorable terms than would otherwise be available. There can be no assurances that the Trust and/or Mr. Previti will continue to provide such guarantees in the future. In 1993, Mr. Previti contributed two undeveloped parcels of real property in Bullhead City, Arizona zoned for multi-family use, to the Company. In May 1995, the Company sold one of these parcels to Previti Realty Fund in exchange for a note for $641,000 secured by the parcel. Previti Realty Fund developed the parcel as part of an adjacent existing multi-family operating property bringing the total units in that operating property to 204. The remaining parcel of undeveloped property held by the Company has a current book value of $1.6 million. Previti Realty Fund and the Company intend to sell both the operating property owned by Previti Realty Fund together with the undeveloped parcel owned by the Company. Land Acquisitions From Affiliates In the fiscal year ended October 31, 2000, the Company purchased 167 lots in Corona, California from entities owned or controlled by James P. Previti with acquisition prices totaling $6.7 million, which was equal to their book value. Over the next 24 months, the Company anticipates purchasing another 2,268 lots, from related entities, located in Corona, Victorville, Rancho Cucamonga, Folsom and Elk Grove, California. As of October 31, 2000, deposits toward the purchase of the 2,268 lots totaled $9.4 million. Receivables From Affiliates During the fiscal year ended October 31, 2000, Accounts Receivables from Related Parties increased by $7.2 million. The increase primarily relates from the Company making four new loans to related parties. The first note is a $5.0 million unsecured note receivable, relating to the sale by the Company of 296 lots in Hemet, California to Forecast Corporation, a limited partner in the Company. This note is due August 31, 2003 and bears interest at 10.0%. The sale was recorded at cost and no gain or loss was recorded on the sale. The second is a $1,125,000 unsecured, note receivable from an affiliated entity in which Mr. Previti is a 50% owner. This note is due March 30, 2001 and bears interest at 10.0%. The third is a $500,000 unsecured, note receivable from an affiliated entity in which Mr. Previti is a 100% owner. This note is due December 31, 2000 and bears interest at 10.0%. The fourth note is a $300,000 unsecured note receivable from Mr. Previti. This note is due December 31, 2000 and bears interest at the rate of 10.0%. Management Services The Company entered into management service agreements with several affiliates as a part of the above described reorganization in 1993. The agreements obligate the Company to provide certain executive management, legal, tax, accounting, human resources, payroll, environmental, risk management, treasury and management information services to these affiliates, in exchange for a fixed management fee specified in the agreement. In fiscal year 2000, the Company charged $27,675 in net management fees to affiliates. Transactions with Mortgage Banking Company - Forecast "Registered Tradename" Home Mortgage LLC During fiscal year 1998, the Company entered into negotiations with Norwest for the purpose of forming a broaderbased mortgage services entity that would be better able to attract and fulfill the mortgage needs of the Company's home buyers, increase the Company's cash flow from its mortgage business and take advantage of the standardization in the mortgage industry. As of January 16, 1998, the Company began to send its home buyers to Norwest for all of its mortgage needs. At the same time, Norwest and the Company applied to conduct business as "Forecast "Registered Tradename" Home Mortgage LLC" ("Forecast Mortgage"), a joint venture owned in equal shares by Norwest and Inland Counties Mortgage. The Forecast Group "Registered Tradename", L.P., owns a 98% share of Inland Counties Mortgage. Forecast "Registered Tradename" Corporation owns the other 2%. In July 1999, Wells Fargo purchased Norwest and continues (through Wells Fargo Home Mortgage)to be a partner in Forecast "Registered Tradename" Home Mortgage, LLC. Forecast Mortgage provides the Company with the ability to control the mortgage processing and funding of the loans its home buyers obtained in their dealings with the Company, and has provided the Company (through the consolidation of Inland Counties with the Company) with income for fiscal year 2000 of $595,000, generated through the origination of those mortgage loans to its home buyers. Insurance Brokerage Services IEI, an affiliate of the Company that is owned by the Trust, is a licensed insurance broker that does business as Inland Southern Insurance Services, Inc. ("ISIS"). The Company purchases various insurance policies through ISIS. Such purchases are made on terms at least as favorable to the Company as could be obtained through an unaffiliated insurance broker. In addition, ISIS markets various forms of insurance to the Company's home buyers. The vast majority of the business of ISIS consists of home buyers referred by the Company. The Company receives no referral fee from ISIS for such referrals or providing its customer lists. The Company purchases other insurance through independent insurance brokers under an arrangement whereby ISIS receives a commission as a co-broker on the insurance sold. ISIS performs no services for the Company in obtaining the insurance and no portion of such commission is rebated to the Company as a referral fee. The Company believes that the aggregate cost of the insurance coverage purchased pursuant to this arrangement is no greater than the cost that would have been charged in an arms length transaction with an unaffiliated party. Office Leases The Company leases from Previti Realty Fund, approximately 15,500 square feet of office space in Rancho Cucamonga for its corporate and Southern California headquarters and approximately 11,807 in Sacramento. The Company presently pays $24,650 triple net per month to lease its corporate headquarters and $16,179 full service per month for its Sacramento office. "Triple Net" provisions require the Company to pay insurance, taxes and operating expenses on the building while "Full Service" provisions include such expenses in the monthly rent. The terms and conditions of such leases, including rent payments by the Company thereunder, are believed by the Company to be equivalent to such as would be available on an arm's length, fair market value basis. Aircraft Charter From time to time the Company charters aircraft from JP Air Charter, Inc., an affiliate of the Company. In fiscal 2000 the Company paid that affiliate $48,823. All such charter services are provided on terms equivalent to those offered to unaffiliated third parties. Loan Payable From time to time, Mr. Firestone, a former director of the Company, has made non-recourse loans to the Company to partially fund the acquisition of specific communities. Those loans bear interest at the rate of 10% per annum and are repaid at maturity. As of October 31, 2000 the Company was obligated to Mr. Firestone for $1,709,000 by way of such loans. The loans were made on terms commensurate with those generally available for similar loans. PART IV ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8 - K (a) (1) and (a) (2) Financial Statements and Financial Statement Schedules The response to this portion of Item 14 is submitted as a separate section of this report beginning on page F-1. All other schedules are not applicable or not required and accordingly have been omitted. (a) (3) Exhibits Exhibit Description - ------- ----------- No. - ---- 1.1 Limited Partnership Agreement of The Forecast Group "Registered Tradename", L.P. effective as of September 30, 1993 by and among Forecast "Registered Tradename" Homes, Inc., Forecast "Registered Tradename" Mortgage Corporation, Forecast "Registered Tradename" Corporation, Inland Empire Personnel Inc. and Forecast "Registered Tradename" Development, L.P. 1.2 Articles of Incorporation of Forecast "Registered Tradename" Capital Corporation. 1.3 Bylaws of Forecast "Registered Tradename" Capital Corporation. 2.1 Form of Indenture by and among The Forecast Group "Registered Tradename", L.P., Forecast "Registered Tradename" Capital Corporation and United States Trust Company of New York, as Trustee. 2.2 Specimen of Note. 3.1 Employment Agreement by and between The Forecast Group "Registered Tradename", L.P. and James P. Previti dated as of November 1, 1993. 4.1 Subsidiaries of the Registrant. _________ Each of the foregoing exhibits was filed as part of the Company's Form S1 and Amendments thereto dated November 24, 1993, January 18, 1994, February 7, 1994 and February 11, 1994 and are incorporated herein by reference. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THE FORECAST GROUP By: FORECAST "Registered "Registered Tradename", L.P. Tradename" CAPITAL CORPORATION. By: FORECAST "Registered By: /s/ James P. Previti Tradename" HOMES, INC. ------------------- A California corporation President its General Partner By: /s/ James P. Previti -------------------- President Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THE FORECAST GROUP "Registered Tradename", L.P., by FORECAST "Registered Tradename" HOMES, INC., General Partner: Name Title Date -------------- --------------------- ----------------- /s/ James P. Previti ---------------- James P. Previti Chairman of the Board, December 14, 2000 President, Principal Executive Officer /s/ Richard B. Munkvold ------------------- Richard B. Munkvold Senior Vice President, December 14, 2000 Financial Operations, Principal Accounting Officer FORECAST "Registered Tradename" CAPITAL CORPORATION: Name Title Date --------------- ---------------------- ---------------- /s/ James P. Previti ---------------- James P. Previti Chairman of the Board, December 14, 2000 President, Principal Executive Officer /s/ Richard B. Munkvold ------------------- Richard B. Munkvold Senior Vice President, December 14, 2000 Financial Operations, Principal Accounting Officer REPORT OF INDEPENDENT AUDITORS Board of Directors The Forecast Group "Registered Tradename", L.P. We have audited the accompanying consolidated balance sheets of The Forecast Group "Registered Tradename", L.P. and subsidiaries (the "Company") as of October 31, 2000 and 1999, and the related consolidated statements of income and partners' equity, and cash flows for each of the three years in the period ended October 31, 2000. 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 in accordance with auditing standards generally accepted in the United States. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of The Forecast Group "Registered Tradename", L.P. and subsidiaries at October 31, 2000 and 1999, and the consolidated results of their operations and their cash flows for each of the three years in the period ended October 31, 2000, in conformity with accounting principles generally accepted in the United States. ERNST & YOUNG LLP San Diego, California December 4, 2000, except for Note 10, as to which the date is December 14, 2000 The Forecast Group "Registered Tradename", L.P. Consolidated Balance Sheets (Amounts in 000's) October 31 ---------------------- 2000 1999 ----------------------- Assets: - ------- Cash and Cash Equivalents $26,607 $22,594 Accounts Receivable 809 4,298 Accounts and Notes Receivable, Related Parties 14,149 6,905 Real Estate Inventory 142,768 110,800 Property and Equipment, Net 435 551 Other Assets 1,565 1,770 -------- ------- Total Assets $186,333 $146,918 ======== ======== Liabilities & Partners' Equity: - ------------------------------- Accounts Payable $31,382 $25,455 Accrued Expenses 6,498 4,007 Notes Payable: Senior Notes at 11 3/8% due December 2000 19,700 19,700 Collateralized by Real Estate Inventory 44,028 40,932 Other Notes Payable 3,525 4,106 ------- ------- Total Notes Payable 67,253 64,738 ------- ------- Total Liabilities 105,133 94,200 Commitments and Contingencies (Note 9) Partners' Equity 81,200 53,018 Less: Capital Notes Receivable From Partners - (300) ------- ------ Net Partners' Equity 81,200 52,718 ------- ------ Total Liabilities & Partners' Equity $186,333 $146,918 ======== ========
[FN] See notes to consolidated financial statements. The Forecast Group "Registered Tradename", L.P. Consolidated Statements of Income and Partner's Equity (Amount in 000's) For the Year Ended October 31 ----------------------------- 2000 1999 1998 ------------------------------ Homebuilding Revenues $327,617 $280,644 $198,074 Cost of Homes Sold 259,218 228,859 164,335 -------- -------- -------- Gross Profit 68,399 51,785 33,739 -------- -------- -------- Land Sales Revenues 5,000 42,271 999 Cost of Land Sold 5,000 40,958 999 -------- -------- -------- Gain on Land Sales, net - 1,313 - -------- -------- -------- Operating Expenses: - ------------------- Selling & Marketing Exp. 16,820 17,165 14,384 General & Admin. Exp. 21,361 16,064 11,397 Other Operating Costs 1,362 223 202 ------- ------ ------ Total Operating Expenses 39,543 33,452 25,983 ------- ------ ------ Operating Income 28,856 19,646 7,756 Other Income (Expenses): - ----------------------- Interest Income 965 682 455 Interest Expense - - (264) Other Income and Expenses 396 1,247 2,500 ----- ----- ----- Total Other Income (Exp.) 1,361 1,929 2,691 ----- ----- ----- Income before Extraordinary Gain 30,217 21,575 10,447 Extraordinary Gain on Extinguishment of Senior Notes - - 34 ------- ------- ------- Net Income $30,217 $21,575 $10,481 ======= ======= ======= Partners' Equity at Beginning of Year $53,018 $31,443 $21,426 Capital Distributions, net (2,035) - (464) Net Income 30,217 21,575 10,481 ------- ------- ------- Subtotal 81,200 53,018 31,443 Less: Capital Notes Receivable from Partners - (300) (300) ------- ------- ------ Net Partners' Equity at End of Year $81,200 $52,718 $31,143 ======= ======= =======
[FN] See notes to consolidated financial statements. The Forecast Group "Registered Tradename", L.P. Consolidated Statements of Cash Flows (Amount in 000's) For the year Ended October 31 ----------------------------- 2000 1999 1998 ----------------------------- Operating Activities: - --------------------- Net Income $30,217 $21,575 $10,481 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities Extraordinary Gain on Extinguishment of Senior Notes - - (34) Depreciation on Property and Equipment 295 389 442 Loss (Gain) on Sale of Property and Equipment 8 63 (11) Gain on Land Sale - 1,313 - Other Operating Costs 1,362 223 202 Equity Income of Unconsolidated Joint Venture (595) (564) (588) Decrease (Increase) in Accounts Receivable 3,489 (2,889) (834) Increase in Real Estate Inventory (33,330) (28,184) (13,342) Decrease (Increase) in Other Assets 408 (901) 1,176 Increase in Accounts Payable and Accrued Expenses 8,418 6,756 7,839 ------ ----- ------ Net Cash Provided By (Used For) Operating Activities 10,272 (2,219) 5,331 ------ ----- ------ Investing Activities: - --------------------- Contribution to Joint Venture (5) (7) (100) Distribution from Joint Venture 397 795 180 Additions to Property and Equipment (216) (369) (359) Proceeds from Sale of Property and Equipment 29 - 330 ------ ---- ----- Net Cash Provided by Investing Activities 205 419 51 ------ ---- ----- Financing Activities: - -------------------- Capital Distributions (2,035) - - Payment received on Capital Notes Receivable from Partner 300 - - Retirement of Senior Notes at 11 3/8% due December 2000 - - (9,179) (Increase) Decrease in Accounts and Notes Receivable, Related Parties (7,244) 3,522 (6,941) Proceeds from Notes Payable, Collateralized by Real Estate 219,694 220,310 125,691 Proceeds from Notes Payable, Other 319 322 5,636 Principal Payments on Notes Payable, Collateralized by Real Estate (216,598) (214,914)(117,133) Principal Payments on Notes Payable, Other (900) (1,039) (813) ------- ------- ------- Net Cash (Used For) Provided By Financing Activities (6,464) 8,201 (2,739) ------- ------- ------- Increase in Cash and Cash Equivalents 4,013 6,401 2,643 Cash and Cash Equivalents at Beginning of Year 22,594 16,193 13,550 ------ ------- ------ Cash and Cash Equivalents at End of Year $26,607 $22,594 $16,193 ======= ======= =======
[FN] See notes to consolidated financial statements. THE FORECAST GROUP "Registered Tradename", L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OCTOBER 31, 2000 1. Basis of Presentation The Forecast Group "Registered Tradename", L.P. is a California limited partnership (the "Company") which was formed in October 1993 to be the successor to substantially all the assets and liabilities of the single-family residential real estate development business of the James Previti Family Trust (the "Trust") and its affiliates. The Trust is a living, revocable trust with James Previti as Trustor. The Company's sole general partner is Forecast "Registered Tradename" Homes, Inc. "FHI"), a California corporation, which owns a 1% interest in the profits, losses and capital of the Company. Forecast "Registered Tradename" Capital Corporation ("Capital") is a California corporation and a wholly-owned subsidiary of the Company that was formed in 1993 solely to facilitate the offering of 11 3/8% Senior Notes due in December 2000. 2. Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts of the Company and it's majority-owned entities engaged in single-family residential real estate development and related businesses. All significant intercompany accounts and transactions have been eliminated in consolidation. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that effect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates significantly in the near term. Cash and Cash Equivalents Cash and cash equivalents include unrestricted deposit accounts at financial institutions, unrestricted certificates of deposit with a maturity of less than 90 days and certain funds not yet remitted and held in trust by escrow companies on homes which have closed escrow. These escrow funds are generally received within one to three days after the close of escrow. Real Estate Inventory and Recognition of Revenue Real estate inventory consists of single-family residential projects and land held for future development of single-family communities and property zoned for multi-family and commercial use. Interest and property taxes are capitalized to inventories during periods of development and construction. In accordance with FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" (Statement 121), when events or circumstances indicate that an impairment to an asset to be held and used might exist, the expected future undiscounted cash flows from the affected asset or group of assets must be estimated and compared to the carrying value of the asset or group of assets. If the sum of the estimated future undiscounted cash flows, excluding interest charges, is less than the carrying value of the assets, an impairment loss must be recorded. The impairment loss is measured by comparing the estimated fair value of the assets with their carrying amount. Statement 121 also requires that long-lived assets that are held for disposal be reported at the lower of the assets' carrying amount or fair value less costs of disposal. On an ongoing basis, management analyzes future undiscounted cash flows for all real estate projects where impairment indicators are present. Based upon such analysis, no provision for impairment loss was recorded for the years ended October 31, 2000, 1999 and 1998. Estimated fair value represents the estimated amount at which an asset could be bought or sold by willing parties in a current transaction. The estimation process involved in the determination of fair value requires estimates as to future events and conditions. Such future events and conditions include economic, political and market conditions, the costs to complete development, as well as the availability of suitable financing to fund development and construction activities, and the repayment or refinancing of existing indebtedness. As the amount and timing of the realization of cash flows from the Company's real estate projects is dependent upon such future uncertain events and conditions, the ultimate realization may be materially different from amounts presently estimated in determining fair value. Sales of single-family residences and other real estate are generally recognized when title is conveyed to the buyer at close of escrow and other conditions for profit recognition have been met. Selling expenses include escrow charges, commissions, sales incentives, advertising, promotions, and the cost of model home center operation and maintenance. These expenses are generally charged to operations as incurred. Cost of homes sold include direct and allocated costs for land and construction including an estimate for future warranty costs. The Company allocates the cost of land, common area development, production overhead, capitalized sales center costs, interest, and property taxes to homes within a particular community on a pro-rata basis which approximates relative value of the property. Property and Equipment Property and equipment, consisting primarily of vehicles and office furniture and equipment, is stated at cost. Depreciation is provided using the straight-line method over the estimated useful lives of three to seven years. Investment in Joint Venture The Company accounts for its 50% ownership interest in Forecast "Registered Tradename" Home Mortgage, LLC under the equity method of accounting. Warranties The Company provides one-year limited warranties to purchasers of its homes. Statutory requirements in the states in which the Company does business may grant rights to home buyers in addition to those provided by the Company. Estimated warranty costs are accrued at the time of sale of the homes. Senior Note Offering Costs Included in Other Assets as of October 31, 2000 and 1999 are costs associated with the issuance of Senior Notes in the amount of $24,000 and $167,000 (which are reflected net of accumulated amortization of $1,572,000 and $1,429,000, respectively). The Company is amortizing these costs over seven years and classifies the amortization as additional interest incurred. Income Taxes The Company, as a partnership, is not subject to federal and state income taxes since the results of its operations will be allocated to the partners for inclusion in their respective income tax returns. Effect of New Accounting Standards Effective November 1, 2000, the Company will adopt SFAS NO. 133, Accounting for Derivative Instruments and Hedging Activities. The adoption of SFAS No. 133 is not anticipated to have an impact on the Company's results of operations or financial conditions as the Company holds no derivative financial instruments and does not currently invest in derivative investments or engage in hedging activities. 3. Accounts and Notes Receivable, Related Parties Accounts and notes receivable, related parties, consist of the following: October 31, ------------------- 2000 1999 ------------------- Unsecured Note receivable from Forecast Corporation $5,000,000 - Receivable from Previti Realty Fund 3,326,000 $2,746,000 Receivables from other affiliates, net 1,356,000 1,278,000 Note receivable from Corona Country Club Estates, unsecured 1,125,000 - Note receivable from Mr. Previti, collateralized by a partnership interestin River Road Ventures 1,083,000 1,083,000 Note receivable from Newport Murrieta Land Co., secured by real property in Flagstaff, Arizona 657,000 657,000 Note receivable from Previti Realty Fund secured by real property in Mohave County, Arizona 641,000 641,000 Note receivable from Previti Realty Fund, unsecured 500,000 - Management fees from Affiliates 161,000 500,000 Note receivable from Mr. Previti, unsecured 300,000 - ----------- ---------- Total $14,149,000 $6,905,000 =========== ==========
As of October 31, 2000, accounts and notes receivable from related parties, includes a note receivable from an entity in which Mr. Previti is the 100% owner in the amount of $5,000,000 relating to the sale by the Company of 296 lots in Hemet, California. This note is due August 31, 2003 and bears interest at the rate of 10.0%. The receivable from an entity in which Mr. Previti is the 100% owner in the amount of $3,326,000 relates to costs incurred by the Company, on behalf of the affiliate, for certain development activities on real property in Northern California. The receivables from other affiliates are primarily advances, which totaled $1,356,000 as of October 31, 2000. The unsecured note receivable from an entity in which Mr. Previti is a 50% owner in the amount of $1,125,000 is due March 30, 2001 and bears interest at 10.0%. As of October 31, 2000 and 1999, amounts receivable from related parties include a promissory note from Mr. Previti in the amount of $1,083,000. The note, which is secured by Forecast "Registered Tradename" Mortgage Corporation's partnership interest in River Road Ventures (a California general partnership), is due December 31, 2000 and bears interest at 10.5% per annum. As of October 31, 2000 and 1999, amounts receivable from related parties also includes $657,000 due on a note with an original face amount of $844,000 that is due December 31, 2000, and is secured by real property in Flagstaff, Arizona. In 1993, Mr. Previti contributed two undeveloped parcels of real property in Bullhead City, Arizona zoned for multi-family use to the Company. In May 1995, the Company sold one of these parcels to an affiliated entity in which Mr. Previti owns a 100% interest, and took back a note receivable of $641,000 secured by the parcel. The affiliated entity developed the parcel as part of an adjacent existing multi-family operating property bringing the total units in that operating property to 204. The remaining parcel of undeveloped property is currently carried on the Company's books at an amount of $1.6 million. Mr. Previti and the Company now intend to sell both the operating property owned by the affiliated entity together with the undeveloped parcel owned by the Company. In conjunction with this anticipated sale Mr. Previti has executed a pledge of his shareholder interest in the net proceeds from the intended sale of the combined properties to ensure the Company will receive the current book value for its undeveloped property. The $500,000 unsecured note receivable is from an affiliated entity in which Mr. Previti is the 100% owner. This note is due December 31, 2000 and bears interest at 10.0%. The $300,000 unsecured note receivable is from Mr. Previti. This note is due December 31, 2000 and bears interest at the rate of 10.0%. For further discussion regarding these and other transactions with affiliates, see Note 6. 4. Real Estate Inventory and Related Notes Payable Real estate inventory and related notes payable consist of the following: October 31, 2000 -------------------------------- Real Estate Notes Payable Inventory --------------------------------- Land Held for Development $3,232,000 $- Residential Projects in Process 132,961,000 44,028,000 Model Homes 6,575,000 - ------------ ----------- Total $142,768,000 $44,028,000 ============ =========== October 31, 1999 ------------------------------- Real Estate Notes Payable Inventory -------------------------------- Land Held for Development $9,000,000 $- Residential Projects in Process 100,720,000 40,932,000 Model Homes 1,080,000 - ------------- ----------- Total $110,800,000 $40,932,000 ============= ===========
During the year ended October 31, 1999, the Company sold and subsequently leased back 71 model homes for a sales price of $13,729,000 and gross profit of $2,354,000. The sales and related profit were recorded in accordance with Statement of Financial Accounting Standard No. 98 "Accounting for Leases". Notes payable secured by real estate inventory bear interest at rates ranging from the three month LIBOR rate (6.62% at October 31, 2000) plus 2.10% to prime rate (9.50% at October 31, 2000) plus 1.0%. The interest rate on $22.9 million of the loans outstanding at October 31, 2000 which bear interest at the LIBOR rate plus 2.10% will increase to the prime rate plus .5% if the Company fails to maintain average deposits with the lender of $10 million. At October 31, 2000, the Company's cash balance with this LIBOR lender was in excess of $26.6 million. Principal payments on notes payable collateralized by real estate held for development and sale are generally due within eighteen months. Notes payable collateralized by residential developments that are in process are generally repaid as units in the related communities are closed. At October 31, 2000, the Company had commitments for $114.2 million under several revolving credit facilities with commercial banks and financial institutions of which $39.1 million was outstanding. In addition, at October 31, 2000, the Company had community specific facilities capable of providing aggregate funding of $2.7 million of which $2.7 million was outstanding. Borrowings under the credit facilities are secured by liens on specific real property owned by the Company, and carry varying levels of recourse against the Company. The Company also utilizes unsecured borrowing lines from time to time to meet its operational needs and objectives. The unsecured borrowing lines have commitments of $4.2 million, of which $2.2 was outstanding as of October 31, 2000. On October 31, 2000, the aggregate outstanding principal balance under the Company's credit facilities was $44.0 million and the amount of such debt that is recourse to the Company was $14.8 million. Approximately $0, and $10,638,000 of the notes payable outstanding as October 31, 2000 and 1999, respectively, were guaranteed by Mr. Previti. The following summarizes the components of interest expense for all notes payable: For the Year Ended October 31 -------------------------------------- 2000 1999 1998 -------------------------------------- Interest Incurred and Capitalized $9,877,000 $10,193,000 $6,859,000 Interest Incurred and Expensed - - 264,000 ---------- ----------- ---------- Total Interest Incurred $9,877,000 $10,193,000 $7,123,000 ========== =========== ========== Capitalized Interest Amortized to Cost of Homes Sold $8,899,000 $8,214,000 $7,865,000 Interest Paid $9,877,000 $10,193,000 $7,529,000
The carrying amounts reported above for notes payable secured by real estate approximate their fair value based upon the indebtedness having short term maturities and variable interest rates. 5. 11 3/8% Senior Notes Due December 2000 In February 1994, the Company issued $50,000,000 in 11 3/8% Senior Notes through a public debt offering. At October 31, 2000 Senior Notes with a face value of $19,700,000 are held in names of investors other than the Company. The notes are joint and several senior obligations of the Company and Forecast Capital "Registered Tradename" Corporation ("Capital"), with interest only payments due semi-annually on June 15 and December 15 of each year. The notes are senior unsecured obligations of the Company and rank pari passu in right of payment with all senior indebtedness of the Company. The fair value of the Company's Senior Notes, held in the names of investors other than the Company, is approximately $19,700,000 based on the market price as of October 31, 2000. The Indenture governing the Senior Notes permits the Company to incur up to $15 million in recourse debt in addition to the $50 million of Senior Notes, and to incur additional recourse debt beyond this $15 million limitation if the Company maintains certain debt-to-equity and debt coverage ratios. As of October 31, 2000, the Company met the interest coverage and debt- to-equity ratios, thereby permitting the Company to incur additional recourse debt above the $15 million limit. Notwithstanding the ability to incur recourse debt in excess of $15 million at October 31, 2000, the Company only had outstanding approximately $14.8 million of recourse debt. In addition, the Company is not precluded from incurring additional debt on a non- recourse debt basis, without regard to any interest or debt coverage ratios. The Indenture also requires that the Company maintain a minimum net worth of $25 million. If the Company's net worth at the end of each of any two consecutive fiscal quarters (Trigger Dates) is less than $25 million, the Company is then required to make an offer("Net Worth Offer") to all Senior Note holders to acquire, on a pro rata basis, Senior Notes in the aggregate principal amount of $5 million at a purchase price of 100% of the principal amount plus accrued interest ("Net Worth Offer"). The Company may credit against any such Net Worth Offer, the principal amount of Senior Notes previously acquired by the Company. During the year ended October 31, 1998 the Company repurchased a portion of its Senior Notes having an aggregate outstanding principal amount of $9,375,000 in the open market. No repurchases occurred in fiscal year 2000 or 1999. As of October 31, 2000, the Company has repurchased and retired a total of $23,400,000 of the Senior Notes and the remaining $26,600,000 have not been retired, including $6,900,000 which were repurchased and are being held in the Company's name. The notes are due on December 15, 2000, with interest at the rate of 11 3/8% per annum payable semi-annually on June 15 and December 15 of each year. On December 13, 2000, the Company retired all of its remaining outstanding Senior Notes relating to the $50 million of Senior Notes obtained in 1994, by utilizing existing revolving credit facilities and operating cash flow. 6. Related Party Transactions The Company leases its corporate offices and certain of its operating division offices from Mr. Previti or partnerships in which Mr. Previti maintains at least a 50% ownership. These leases are generally noncancelable and have expiration dates ranging through 2004. Payments under these leases were $486,000, $401,000 and $346,000 for the fiscal years ended October 31, 2000, 1999 and 1998, respectively. See Note 9 of Notes to Consolidated Financial Statements for aggregate operating lease commitments of the Company. Through January 15, 1998 mortgages for certain of the Company's customers were provided by Rancho Mortgage "Registered Tradename" Corporation ("Rancho Mortgage"), a corporation in which Mr. Previti is the sole stockholder. During the normal course of business, the Company had entered into certain transactions with Rancho Mortgage "Registered Tradename" for loan commitments under various governmental programs to facilitate its customers ability to obtain financing. Commitment fees paid to Rancho Mortgage "Registered tradename" were approximately $502,000 for the fiscal year ended October 31, 1998. As of January 16, 1998 the Company ceased doing business with Rancho Mortgage "Registered Tradename" and started a business relationship with Norwest, Inc. (a nationally recognized mortgage banker, "Norwest"). On August 1, 1998 the Company (through its limited partnership interest in Inland Counties Mortgage, LLC ["Inland Counties"], an affiliated entity of the Company) entered into a joint venture with Norwest under the name Forecast "Registered Tradename" Home Mortgage, LLC ("Forecast Mortgage"). This new entity provides the Company with the ability to influence the mortgage processing and funding of the loans its home buyers obtained in their dealings with the Company, and has provided the Company (through the consolidation of Inland Counties with the Company) with previously unavailable income generated through the origination of those mortgage loans to its home buyers. The Company expects that Forecast "Registered Tradename" Mortgage will be able to capture a greater percentage of its home buyers than had its prior mortgage provider due to the vastly larger mortgage products a company like Norwest is able to offer. During fiscal year 2000, Wells Fargo purchased Norwest and continued (through Wells Fargo Home Mortgage) to be a partner in Forecast "Registered Tradename" Home Mortgage, LLC. During the years ended October 31, 2000, 1999 and 1998, the Company recognized $595,000 $564,000 and $588,000 of income from this joint venture. The Company has entered into management services Agreements with several affiliates, whereby the Company provides certain executive management, real estate development, legal, tax, accounting, human resources, environmental, risk management, treasury and management information services to these affiliates, in exchange for a fixed management fee. The Company charged $28,000, $1,178,000 and $1,781,000 in net management fees to affiliates under these agreements for the fiscal years ended October 31, 2000, 1999 and 1998, respectively. Included in the management fees earned in the fiscal year ended October 31, 1998 is a $1,100,000 fee earned by the Company from an affiliated entity in which Mr. Previti owns a 50% interest, for development related rights, licensing and services associated with certain real property in Southern California. The Company has management fee receivables from affiliates of $161,000 and $500,000 as of October 31, 2000 and 1999, respectively. Through the fiscal year ended October 31, 2000, the Company incurred $8.6 million in site development costs on real property in Northern California, on behalf of an affiliated entity in which Mr. Previti is the 100% owner. The Company has been reimbursed from the sale of Community Facilities District bonds totaling $7.1 million, which leaves $1.5 million remaining to be received from the City of Folsom. In the fiscal year ended October 31, 2000, the Company purchased 167 lots in Corona, California from entities owned or controlled by James P. Previti totaling $6.7 million, which was equal to their book value. Over the next 24 months, the Company anticipates purchasing another 2,268 lots located in Corona, Victorville, Rancho Cucamonga, Folsom and Elk Grove, California from related parties. As of October 31, 2000, deposits toward the purchase of the 2,268 lots totaled $9.4 million. In May 1995, the Company sold, to an affiliate, a parcel of land located in Bullhead City, Arizona that was approved for the construction of 68 apartment units. The sales price of $641,000 represented 105% of the book value of the parcel as of the sale date, as was required by the Company's Indenture. As consideration for the sale, the Company accepted a note receivable of $641,000 from Previti Realty Fund, which remains outstanding as of October 31, 2000, and is secured by the property. From time to time, Mr. Firestone, a member of the Board of Directors, has made non-recourse loans to the Company. These loans bear interest at the rate of 10% per annum and are repaid at maturity. As of October 31, 2000 and 1999, the Company was obligated to Mr. Firestone for $1,709,000 and $487,000, respectively. In March 1996, the Company sold a 8.1 acre parcel of land located in Murietta, California, at its book value, to a corporation controlled by Mr. Previti for total consideration of approximately $2.5 million consisting of a note payable to the Company for $844,000 and the assumption by the buyer of $1,679,000 of indebtedness related to the parcel sold. No gain or loss was recognized on the sale. As of October 31, 2000, the principal balance of that note was $657,000. In August 2000, the Company sold 296 lots in Hemet, California, at its book value, to a corporation owned 100% by Mr. Previti for a total consideration of $5 million in the form of an unsecured note due in August 2003. No gain or loss was recognized on the sale. During fiscal year 2000, the Company wrote-off $500,000 of uncollectible receivables from affiliates. From time to time the Company charters aircraft from JP Air Charter, Inc., an affiliate of the Company. During the years ended October 31, 2000, 1999 and 1998, the Company paid the affiliate $48,823, $52,398 and $47,858, respectively. For further discussion of these and other transactions with affiliates see Note 3 of Notes to Consolidated Financial Statements. 7. Extraordinary Item During the year ended October 31, 1998, the Company repurchased a portion of its Senior Notes having an aggregate face value of $9,375,000. The Senior Notes were purchased from Mr. Previti in the open market. Net of allocable issuance costs, the resultant income of $34,000 is reported as an extraordinary gain in the Company's financial statements for the year ended 1998. As of October 31, 2000, affiliates of the Company did not control any additional Senior Notes. 8. Profit Sharing and Pension Plans In fiscal 1995, the Company adopted a non-contributory 401(k) plan covering substantially all employees. In fiscal 1997, the Company adopted a qualified matching program relating to employees' contribution to their 401(k) plans, and created an obligation for the Company to contribute 25% of any employee's contribution to the 401(k) plan, up to the first 6% of any one employees' contribution. In fiscal year 2000, the Company modified its employer matching funds, to equal 100% of the first 3% of any employee's contribution to their 401(k) account. Participating employees vest in the Company's matching contribution over a five (5) year period, at 20% per year. During 2000, 1999 and 1998, the Company paid $142,000, $95,000 and $30,000, respectively, to employees' accounts as a result of this program. 9. Commitments and Contingencies COMMITMENTS The Company leases office facilities under noncancelable operating leases expiring in 2000 and 2004. Aggregate rental costs incurred under such leases were $583,000, $401,000 and $496,000 for the years ended October 31, 2000, 1999 and 1998, respectively. Future minimum annual rental payments of $237,000 and $140,000 for its Corporate Office are due during 2001 and 2002, respectively. Future minimum annual rental payments of $141,000, $144,000, $146,000 and $99,000 for its Sacramento office are due during 2001, 2002, 2003 and 2004, respectively. Future minimum annual rental payments of $38,000, $17,000 and $14,000 for its four satellite offices in Southern California are due during 2001, 2002 and 2003, respectively. See Note 6 of Notes to Consolidated Financial Statements for further discussion regarding leases with affiliates. CONTINGENCIES The Company is subject to routine litigation incidental to its business. In the opinion of management, the resolution of such claims will not have a material adverse effect on the operating results or financial position of the Company. In addition to the routine litigation, the Company's contingent liabilities include warranty obligations and other disputes arising from construction and sales of single family homes in the ordinary course of business. In the opinion of management, adequate reserves have been provided for warranty obligations and ultimate outcome of any disputes on these other matters will not have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. 10. Subsequent Event On December 13, 2000, the Company retired all of its remaining $26,600,000 of outstanding Senior Notes relating to the $50 million of Senior Notes obtained in 1994, by utilizing existing revolving credit facilities and operating cash flow. REPORT OF INDEPENDENT AUDITORS Board of Directors Forecast "Registered Tradename" Capital Corporation We have audited the accompanying balance sheets of Forecast "Registered Tradename" Capital Corporation (the "Company") as of October 31, 2000 and 1999 and the related statements of operations and shareholders' deficit, and cash flows for each of the three years in the period ended October 31, 2000. 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 in accordance with auditing standards generally accepted in the United States. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Forecast "Registered Tradename" Capital Corporation at October 31, 2000 and 1999, and the results of its operations and its cash flows for each of the three years in the period ended October 31, 2000, in conformity with accounting principles generally accepted in the United States. ERNST & YOUNG LLP San Diego, California December 4, 2000 Forecast "Registered Tradename" Capital Corporation Balance Sheets October 31 ----------------- 2000 1999 ----------------- Assets: Cash $500 $800 ---- ---- Total Assets $500 $800 ==== ==== Liabilities & Shareholders' Deficit: Accounts Payable $300 $300 Accounts Payable, Related Parties 7,300 6,400 ------ ------ Total Liabilities $7,600 $6,700 ------ ------ Common Stock, $1.00 par value: Authorized 10,000 shares Issued and Outstanding 2,500 shares 2,500 2,500 Accumulated Deficit (9,600) (8,400) ----- ----- Total Shareholders' Deficit (7,100) (5,900) ----- ----- Total Liabilities & Shareholders' Deficit $500 $800 ===== =====
[FN] See notes to financial statements. Forecast "Registered Tradename" Capital Corporation Statements of Operations and Shareholders' Deficit For the Year Ended October 31 ----------------------------- 2000 1999 1998 ----------------------------- General & Administrative Expenses $400 $500 $200 Income Tax Expense 800 800 800 ------ ------ ------ Net Loss ($1,200) ($1,300) ($1,000) ====== ====== ====== Shareholders' Deficit at Beginning of Year ($5,900) ($4,600) ($3,600) Net Loss ($1,200) ($1,300) ($1,000) ------ ------ ------ Shareholders' Deficit at End of Year ($7,100) ($5,900) ($4,600) ====== ====== ======
[FN] See notes to financial statements. Forecast "Registered Tradename" Capital Corporation Statements of Cash Flows For the year Ended October 31 ----------------------------- 2000 1999 1998 ----------------------------- Net Loss ($1,200) ($1,300) ($1,000) Increase in Accounts Payable, Related Parties 900 2,000 1,000 ------ ------ ------ Increase (Decrease) in Cash and Cash Equivalents ($300) $700 $0 Cash and Cash Equivalents at Beginning of Year 800 100 100 ------ ------ ----- Cash and Cash Equivalents at End of Year $500 $800 $100 ====== ====== ====
[FN] See notes to financial statements. FORECAST "Registered Tradename" CAPITAL CORPORATION NOTES TO FINANCIAL STATEMENTS October 31, 2000 1. Organization and Operations Forecast "Registered Tradename" Capital Corporation (the "Company") was incorporated in California on September 20, 1993, and was formed solely for the purpose of serving as an Issuer of the Senior Notes for The Forecast Group "Registered Tradename", L.P. The authorized capital stock of the Company consists of 10,000 shares of common stock with a par value of $1.00 per share. The Company is a wholly-owned subsidiary of The Forecast Group "Registered Tradename", L.P., a California limited partnership that is engaged in the residential real estate development business. The Company is financially dependent on The Forecast Group "Registered Tradename", L.P. to fund its continuing operations. 2. Income Taxes The Company is a "C" Corporation for federal and state income tax reporting purposes, and accounts for income taxes in accordance with Financial Accounting Standards Board Statement No. 109 "Accounting for Income Taxes." EX-27 2 0002.txt
5 12-MOS OCT-31-2000 OCT-31-2000 26607000 0 14958000 0 142768000 186333000 435000 295000 186333000 37880000 19700000 0 0 0 0 186333000 327617000 332617000 259218000 303761000 (1361000) 0 0 30217000 30217000 30217000 0 0 0 30217000 0 0
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